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https://www.courtlistener.com/api/rest/v3/opinions/8488406/ | STATE OF LOUISIANA
COURT OF APPEAL, FIRST CIRCUIT
STATE OF LOUISIANA NO. 2022 KW 1018
VERSUS
WILL H. JACKSON NOVEMBER 21, 2022
In Re: Will H. Jackson, applying for supervisory writs, 21st
Judicial District Court, Parish of Tangipahoa, No.
46,627.
BEFORE: THERIOT, CHUTZ, AND HESTER, JJ.
WRIT DENIED.
MRT
WRC
CHH
COURT OF APPEAL, FIRST CIRCUIT
aca)
DEPUTY CLERK OF COURT
FOR THE COURT | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488407/ | STATE OF LOUISIANA
COURT OF APPEAL, FIRST CIRCUIT
STATE OF LOUISIANA NO. 2022 KW 0968
VERSUS
RIGOBERTO F. VENTURA NOVEMBER 21, 2022
In Re: Rigoberto F. Ventura, applying for supervisory writs,
22nd Judicial District Court, Parish of St. Tammany,
No. 513715.
BEFORE : THERIOT, CHUTZ, AND HESTER, JJ.
WRIT DENIED.
MRT
WRC
CHH
COURT OF APPEAL, FIRST CIRCUIT
ASL)
DEPUTY CLERK OF COURT
FOR THE COURT | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488417/ | STATE OF LOUISIANA
COURT OF APPEAL, FIRST CIRCUIT
MARITZA RUBIO NO. 2022 CW 0921
VERSUS
ALLSTATE INSURANCE; STATE
FARM MUTUAL AUTOMOBILE
INSURANCE COMPANY; SYLVIA M.
CHAMPAGNE; JUSTINE P.
ARMSTRONG
CONSOLIDATED WITH
OLGA MEJIA
VERSUS
ALLSTATE INSURANCE; STATE
FARM MUTUAL AUTOMOBILE
INSURANCE COMPANY; SYLVIA M.
CHAMPAGNE; JUSTINE P.
ARMSTRONG
CONSOLIDATED WITH
LISSETTE MENENDEZ
VERSUS
STATE FARM MUTUAL AUTOMOBILE
INSURANCE COMPANY, ET AL
CONSOLIDATED WITH
JUSTINE P. ARMSTRONG
VERSUS
SYLVIA M. CHAMPAGNE & STATE NOVEMBER 21, 2022
FARM MUTUAL AUTOMOBILE
INSURANCE COMPANY
In Re: Olga Mejia and Maritza Rubio, applying for supervisory
writs, 23rd Judicial District Court, Parish of
Ascension, No. 130652 c/w 130654 c/w 130607 c/w
126046.
BEFORE : THERIOT, CHUTZ, AND HESTER, JJ.
WRIT DENIED.
MRT
WRC
CHH
COURT OF APPEAL, FIRST CIRCUIT
ASW)
DEPUTY CLERK OF COURT
FOR THE COURT | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494540/ | DAVID R. DUNCAN, Bankruptcy Judge.
Gary T. Fischbach (“Plaintiff’) and Centers for Medicare and Medicaid Services, Palmetto Government Benefits Administrators, LLC (“Defendants”) filed Motions for Summary Judgment on November 28, *2602011. Responses were filed on December 8, 2011. The Complaint in this adversary-proceeding, filed on April 4, 2011, requests damages for violation of the discharge injunction and an injunction from further collection attempts on the part of Defendants. After considering the Motions, the Court now makes the following Findings of Fact and Conclusions of Law.
FINDINGS OF FACT
Plaintiff filed for chapter 7 relief on April 22, 2010. Plaintiff is a physician in Aiken, South Carolina. At the time of his bankruptcy filing, Plaintiff owned and operated a family medical practice, which originally operated as a sole proprietorship, and beginning in 1999, operated as a limited liability company. In June 1999, Plaintiff became a participating supplier for Medicare beneficiaries through a Medicare Participating Physician/Supplier Agreement. The agreement provided that it would be renewed automatically every twelve months absent some active termination by either party to the agreement; thus, the agreement remained in effect at all times relevant in this matter.
In October 2009, Plaintiff received notice that certain services Plaintiff had provided to Medicare beneficiaries were deemed not medically necessary and that as a result, Plaintiff had received overpayment of $397,453.46 for such services. Plaintiff attempted to appeal this decision in December 2009 by sending explanation and supporting documentation to Defendants. Defendants notified Plaintiff in January 2010 that the previous determination that Plaintiff had been overpaid would stand and that Defendants would begin collecting the overpayment within sixty (60) days. Plaintiff did not attempt to further appeal this decision.
In March 2010, Defendants notified Plaintiff that the Medicare claims he had submitted were insufficient to cover the outstanding balance of the overpayment, that the outstanding balance was actually $410,600.80, and that the balance would be referred to the Department of Treasury’s Debt Collection Center. Plaintiff filed his chapter 7 case approximately a month later.
Plaintiff received his chapter 7 discharge on July 30, 2010. Defendants subsequently continued to withhold payments to Plaintiff for services he rendered to Medicare beneficiaries until Plaintiffs medical practice ceased operation. This adversary proceeding was commenced on April 4, 2011, alleging that Defendants violated the discharge injunction and seeking an injunction to prevent Defendants from withholding any further payments or attempting to collect any further amounts from Plaintiff.
CONCLUSIONS OF LAW
I. Summary Judgment Standard
Pursuant to Rule 7056 of the Federal Rules of Bankruptcy Procedure, Rule 56 of the Federal Rules of Civil Procedure governs summary judgment in adversary proceedings. In re Rigoroso, 453 B.R. 612, 614 (Bankr.D.S.C.2011). Fed.R.Civ.P. 56(a) states, “The court shall grant summary judgment 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.” “[T]he mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986) (emphasis original). Only factual disputes which could potentially affect the end result of the suit *261should cause a motion for summary judgment to be denied; “irrelevant or unnecessary” factual disputes will not preclude the entry of summary judgment. Id. at 248, 106 S.Ct. 2505. A dispute relating to a material fact is “genuine” if “the evidence is such that a reasonable jury could return a verdict for the nonmoving party.” Id.
A court determining whether summary judgment should be granted should look to multiple sources, including the pleadings, discovery responses, depositions, and affidavits, if any. Rigoroso, 458 B.R. at 614 (quoting In re Proveaux, No. 07-05384-JW, slip op., at 5 (Bankr.D.S.C. Mar. 81, 2008)). The court should view the facts and any reasonable inferences “ ‘in the light most favorable to the nonmoving party.’ ” Rigoroso, 453 B.R. at 614 (quoting United Rentals, Inc. v. Angell, 592 F.3d 525, 530 (4th Cir.2010)). Once the movant has presented sufficient evidence to support its summary judgment motion, the burden shifts to the nonmoving party to show that there are genuine issues of material fact. Emmett v. Johnson, 532 F.3d 291, 297 (4th Cir.2008). The nonmovant cannot “rest upon mere allegations or denials of his pleading, but ‘must come forward with specific facts showing that there is a genuine issue for trial.’ ” Id. at 297 (quoting Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-88, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986)). Here, the parties agree that no issues of fact for trial exist and therefore, the only issues are issues of law.
II. Effect of Discharge
At the conclusion of an individual debtor’s chapter 7 case, the debtor ordinarily receives a chapter 7 discharge which, with a few exceptions, “discharges the debtor from all debts that arose before the date of the order for relief.” 11 U.S.C. § 727(b). The term “debt” is defined in the Bankruptcy Code as “liability on a claim.” 11 U.S.C. § 101(12). “Claim”, as used in the definition of “debt”, is defined as:
(A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or
(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.
11 U.S.C. § 101(5). The discharge operates as an injunction and prevents creditors from seeking to recover from the debtor personally. 11 U.S.C. § 524(a)(2).
The purpose of the discharge is to provide the “honest but unfortunate debt- or” with a fresh start and a “ ‘new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of pre-existing debt.’ ” Local Loan Co. v. Hunt, 292 U.S. 234, 244-45, 54 S.Ct. 695, 78 L.Ed. 1230 (1934) (citing Stellwagen v. Clum, 245 U.S. 605, 617, 38 S.Ct. 215, 62 L.Ed. 507 (1918); Hanover Nat'l Bank v. Moyses, 186 U.S. 181, 22 S.Ct. 857, 46 L.Ed. 1113 (1902); Gilbert v. Shouse, 61 F.2d 398, 399 (5th Cir.1932); Hardie v. Swafford Bros. Dry Goods Co., 165 F. 588, 591 (5th Cir.1908); Barton Bros. v. Texas Produce Co., 136 F. 355, 357 (8th Cir.1905); Swarts v. Fourth Nat’l Bank, 117 F. 1, 3 (8th Cir.1902); United States v. Hammond, 104 F. 862, 863 (6th Cir.1900)). See also Lines v. Frederick, 400 U.S. 18, 19, 91 S.Ct. 113, 27 L.Ed.2d 124 (1970) (quoting Local Loan Co. v. Hunt, 292 U.S. 234, 244-45, 54 S.Ct. 695, 78 L.Ed. 1230 (1934)). “The various *262provisions of the Bankruptcy Act were adopted in the light of that view and are to be construed when reasonably possible in harmony with it so as to effectuate the general purpose and policy of the act.” Local Loan Co., 292 U.S. at 245, 54 S.Ct. 695. A court can enforce the discharge injunction and can hold a creditor in contempt for violating the discharge injunction. In re Dendy, 396 B.R. 171, 178 (Bankr.D.S.C.2008).
III. Recoupment and Setoff
This case turns on the nature of the obligation between the parties and the effect of the discharge on that relationship. The parties categorize the nature of the obligation between the parties as either recoupment or setoff. Recoupment and setoff are two separate and distinct concepts. The main distinction is “whether the debt owed the creditor ... arose out of the ‘same transaction’ as the debt the creditor owes the debtor.” In re Holyoke Nursing Home, Inc., 372 F.3d 1, 3 (1st Cir.2004). See also In re Georgetown Steel Co., LLC, 318 B.R. 313, 325 (Bankr.D.S.C.2004) (citing Black’s Law Dictionary (5th ed.1979)). The doctrine of setoff allows a creditor to offset a debt it owes to a debtor against a debt owed to it by the debtor arising from a different transaction. In re Univ. Med. Ctr., 973 F.2d 1065, 1079 (3d Cir.1992). 11 U.S.C. § 553 addresses set-off and provides that a creditor cannot set off a pre-petition claim against a post-petition debt it owes to the debtor. 11 U.S.C. § 553; Univ. Med. Ctr., 973 F.2d at 1079. Recoupment “ ‘is the setting up of a demand arising from the same transaction as the plaintiffs claim or cause of action, strictly for the purpose of abatement or reduction of such claim.’ ” Univ. Med. Ctr., 973 F.2d at 1079 (quoting 4 Collier on Bankruptcy ¶ 553.03) (emphasis original). Recoupment is not subject to the same limitations as setoff; therefore, if the creditor’s claim arises out of the same transaction as the debt owed to the debtor, re-coupment is permissible. Id. at 1080. The automatic stay does not apply to re-coupment, and it is not prohibited by the discharge injunction. In re Powell, 284 B.R. 573, 576 (Bankr.D.Md.2002). The justification for allowing recoupment in bankruptcy without limitations similar to those set forth in section 553 is that if the parties’ claims against each other arise out of the same transaction, they are essentially defenses rather than mutual obligations and therefore, applying setoff limitations would be inequitable. Univ. Med. Ctr., 973 F.2d at 1079-80 (quoting Lee v. Schweiker, 739 F.2d 870, 875 (3d Cir.1984)). “In the bankruptcy context, re-coupment has often been applied where the relevant claims arise out of a single contract ‘that provide[s] for advance payments based on estimates of what ultimately would be owed, subject to later correction.’ ” Id. at 1080 (quoting In re B & L Oil Co., 782 F.2d 155, 157 (10th Cir.1986)) (alteration original).
In discussing recoupment and setoff, several courts have addressed what constitutes a single transaction and have defined “transaction” differently. Two primary tests have developed: the “logical relationship” test and the “integrated transaction” test. The “logical relationship” test, used by the Ninth Circuit, is the less strict of the two standards and allows for a series of occurrences to be part of the same transaction, depending on the occurrences’ logical relationship. Georgetown Steel, 318 B.R. at 330. The Third Circuit, which utilizes the “integrated transaction” test, has stated, “For the purposes of re-coupment, a mere logical relationship is not enough: the ‘fact that the same two parties are involved, and that a similar subject matter gave rise to both claims, ... does not mean that the two arose from *263the “same transaction.” ’ ” Univ. Med. Ctr., 973 F.2d at 1081 (quoting Lee v. Schweiker, 739 F.2d 870, 875 (3d Cir.1984)). Instead, “both debts must arise out of a single integrated transaction so that it would be inequitable for the debtor to enjoy the benefits of that transaction without also meeting its obligations.” Id. The Fourth Circuit has not explicitly ruled on the issue; however, bankruptcy courts in the Fourth Circuit suggest that the Fourth Circuit has implicitly endorsed the stricter, integrated transaction test. See Georgetown Steel, 318 B.R. at 331; In re Camellia Food Stores, Inc., 287 B.R. 52, 61 (Bankr.E.D.Va.2002) (“While it appears the Fourth Circuit has ... not adopted the logical relationship test, the integrated transaction test or some other test, the Fourth Circuit Court of Appeals nonetheless does offers [sic] guidance in interpreting the same transaction by continuing to define recoupment as claims arising out of the same contract.”) (citing Federal Deposit Ins. Corp. v. Marine Midland Realty Credit Corp., 17 F.3d 715, 722 (4th Cir.1994); First Nat'l Bank of Louisville v. Master Auto Serv. Corp., 693 F.2d 308, 310 n. 1 (4th Cir.1982)).
There are four appellate court decisions and several district and bankruptcy court decisions concerning recoupment of Medicare or Medicaid payments in the context of a bankruptcy case. Those courts which have addressed the issue do not agree on the proper resolution. Several courts, however, have found that recoupment of Medicare or Medicaid overpay-ments during a bankruptcy ease is proper. In In re Holyoke Nursing Home, Inc., 372 F.3d 1 (1st Cir.2004), the First Circuit allowed post-petition recoupment of pre-petition Medicare overpayments. Holyoke Nursing Home was a chapter 11 debtor who was a participant in the Medicare Reimbursement Program. Id. at 2. Under the program, Holyoke received periodic reimbursement for services which it provided to Medicare patients. Id. These payments were subject to annual audits, in which the reasonableness of the cost of the services was examined. Id. In 2000, it was determined that Holyoke had received overpayments totaling $373,639 in 1997 and 1998 and as a result, portions were deducted from Holyoke’s future reimbursement payments. Id. at 3. Holyoke then filed a chapter 11 petition and commenced an adversary proceeding, alleging that pre-petition deductions constituted preferential transfers and that post-petition deductions violated Holyoke’s automatic stay. Id.
The First Circuit first stated that the primary consideration was whether the original payments and the recoupment of the overpayments were part of the same transaction, such that the withholding of portions of payments made to Holyoke constituted recoupment rather than setoff. Id. The court recognized the lack of statutory guidance on the issue, and acknowledged that courts of appeals are split on the issue. Id. at 4. The court discussed the Third Circuit’s decision in University Medical Center, which found that payments made in different years were for different medical services and therefore constituted different transactions. Id. The court then addressed the conclusion reached by several other courts, including the DC Circuit and the Ninth Circuit, that recovery of previous overpayments constituted part of the same transaction as the original payments. Id. (“These courts note that subsection 1395g(a) does not compartmentalize [the Health Care Financing Administration (‘HCFA’) ]’s liability for provider services into a year-to-year determination, but that it expressly defines and modifies HCFA’s liability for the provider’s current cost-year services as the provider costs incurred in that year *264‘with necessary adjustments on account of previously made overpayments or underpayments.’ ”). The court stated, “[T]he interpretation favored by the District of Columbia Circuit and the Ninth Circuit has been embraced by the overwhelming majority of district and bankruptcy courts nationwide which have ruled to date.” Id. For these reasons, the court held that the withholding of overpayments previously made to Holyoke was in the nature of recoupment and that it was not a preferential transfer or violation of the automatic stay. Id.
The Third Circuit reached a contrary decision in University Medical Center. In that ease, the debtor, a “general care hospital,” provided services to Medicare beneficiaries and received reimbursement pursuant to a standard Medicare provider agreement. Univ. Med. Ctr., 973 F.2d at 1069-70. The debtor filed a chapter 11 petition in January 1988, and one week after the filing, the debtor was notified that it had been overpaid for Medicare services it provided in 1985. Id. at 1070. The debtor was informed that withholding of future payments would begin immediately unless repayment was made or a long-term repayment schedule was established. Id. The debtor entered into a long-term repayment schedule with Blue Cross of Greater Philadelphia, its fiscal intermediary; however, it failed to provide certain documentation which Blue Cross required, and the debtor was notified that payments would again be withheld. Id. at 1070-71. A total of $312,000 was withheld from payments to the debtor post-petition. Id. at 1071. The debtor commenced an adversary proceeding, alleging that Blue Cross violated the automatic stay by withholding funds and requesting turnover and an award of attorneys’ fees and costs. Id. The Third Circuit found that the payments made to the debtor in 1985 were for services separate and distinct from those provided in 1988, the payments from which Blue Cross was withholding. Id. at 1081-82. The court stated:
The relationship between HHS and a Medicare provider entails transactions that last over an extended period. However, each of these transactions begins with services rendered by the provider to a Medicare patient, includes payment to the provider, and concludes with HHS’s recovery of any overpayment. Recovery of the 1985 overpayment, therefore, is the final act of the transactions that began in 1985. [The debtor’s] 1988 post-petition services were the beginning of transactions that would stretch into the future, but they were not part of the 1985 transactions. To conclude that these claims arose from the same transaction for the purposes of equitable recoupment would be to contort that doctrine beyond any justification for its creation. We conclude that the Department’s post-petition withholding of the amount previously overpaid to [the debtor] cannot be considered as equitable recoupment.
Id. at 1081-82.
Some bankruptcy courts in this Circuit have stated that the Fourth Circuit has implicitly endorsed the test and rationale adopted by the Third Circuit in University Medical Center. In In re Camellia Food Stores, Inc., 287 B.R. 52, 61 (Bankr.E.D.Va.2002), the court stated that it was “likely” that the Fourth Circuit would apply the integrated transaction test. See also Georgetown Steel, 318 B.R. at 330 (stating that the Fourth Circuit has not explicitly adopted either test but that it affirmed a Virginia bankruptcy case which applied the integrated transaction test). The court reached this conclusion based on the fact that the Fourth Circuit affirmed the bankruptcy court’s holding in In re Thompson, 92 F.3d 1182 (4th Cir.*2651996) (unpublished table decision). Thompson involved the attempted recoupment from a retired police officer’s retirement benefits of previous overpayments of disability benefits. Thompson, 92 F.3d at *1. In its opinion, the bankruptcy court held that no right to recoup existed because the disability overpayments and the retirement benefits did not arise from the same transaction and set forth detailed reasoning supporting its conclusion. In re Thompson, 182 B.R. 140 (Bankr.E.D.Va.1995). The bankruptcy court first pointed to the fact that Thompson’s right to receive disability benefits was based on need and that he was required to periodically submit to medical examinations in order to continue receiving those benefits. Id. at 149. The court stated that each medical examination marked the beginning of a new and separate transaction with respect to Thompson’s disability benefits. Id. The court then discussed the differences between Thompson’s disability payments and his retirement benefits. Id. The court pointed out that the eligibility criteria for these two types of benefits differed significantly, as Thompson was required to submit to medical examinations and demonstrate need in order to receive disability payments, but merely had to complete 25 years of service as a police officer to be entitled to retirement benefits. Id. The court found that based on this difference, the benefits constituted separate transactions and therefore recoupment was not permissible. Id. On appeal, Thompson challenged several aspects of the bankruptcy court’s opinion. Id. at *2. The Fourth Circuit referred to the bankruptcy court’s opinion and determined that no error was committed by the district court in affirming the bankruptcy court’s opinion. Id.
Despite the fact that some courts believe the Fourth Circuit would apply the test endorsed by the Third Circuit, other courts in this Circuit have agreed with the First Circuit’s decision in Holyoke. See Ravenwood Healthcare, Inc. v. State, No. MJG-06-3059, 2007 WL 1657421, at *5, *6 (D.Md.2007) (finding, in a case involving Medicaid payments, that “pre-petition and post-petition payments amount to one transaction [and] thus, ... recoupment is appropriate” and that the distinction between Medicaid and Medicare is irrelevant for purposes of such a determination); In re Dist. Mem’l Hosp. of Sw. North Carolina, Inc., 297 B.R. 451, 455-56 (Bankr.W.D.N.C.2002) (“[T]his court finds that the distinctive Medicare and Medicaid systems of estimated payments and later adjustments do constitute a single transaction for recoupment purposes. Such an exchange of funds may stretch over an extended period of time, reflecting a continuous balancing process between the parties. Nevertheless, Congress has indicated that a hospital provider’s stream of services is to be considered one transaction for the purposes of any claim the government has against the provider. This relationship is not analogous to multiple, separate equipment purchases from a single supplier— which are clearly separate transactions. Instead, the [relationship] is ... by agreement and by practical operation—one continuous transaction.”). But see In re Colonial Health Investors, LLC, No. 00-51124, 2001 WL 34388127 (Bankr.W.D.N.C.2001) (agreeing with the result in University Medical Center and finding that Medicaid payments for each year are separate and distinct transactions); In re Quality Link-Bertie, LP, No. 00-51125, 2001 WL 34388128 (Bankr.W.D.N.C.2001) (agreeing with the decision in University Medical Center and distinguishing the D.C. Circuit’s opinion in United States v. Consumer Health Servs. of Am., Inc., 108 F.3d 390 (D.C.Cir.1997), which allowed recoupment, *266because it involved Medicare, not Medicaid, as involved in Quality Link-Bertie).
While the Medicare cases discussed above do not deal with recoupment in a violation of discharge injunction proceeding, courts have discussed the doctrine of recoupment in a violation of discharge injunction proceeding in other contexts. Courts have generally held that the discharge injunction does not apply to prohibit recoupment. Powell, 284 B.R. at 576 (Bankr.D.Md.2002) (citing Thompson v. Bd. of Trs. of the Fairfax Co. Police Officers Ret. Sys. (In re Thompson), 182 B.R. 140, 146 (Bankr.E.D.Va.1995)). In Powell, the debtor received through her employer certain health benefits under a group benefits plan (“Fund”). Id. at 574. After she was injured in a car accident, the debtor received advanced funds from the Fund, which the debtor was required to reimburse if she received recovery from another source. Id. at 575. If the debtor failed to repay the funds she received, the plan’s terms were that the amount advanced could be recovered by offsetting the advanced amount against any future payments. Id. The debtor later received settlement funds from a third party as a result of the accident, but failed to reimburse the Fund. Id. She subsequently filed bankruptcy. Id. After the debtor received her discharge, the Fund withheld benefits the debtor was entitled to receive under the plan and offset them against the amount owed for reimbursement. Id. The debtor brought an adversary proceeding against the Fund, alleging violation of the discharge injunction. Id. The court granted summary judgment for the Fund. Id. at 579. The court found that the withholding of benefits constituted recoupment, stating that because there was a single contract between the parties for the single purpose of providing health benefits to the debtor, “[njeither the passage of less than 2 years from when Debtor’s obligation to repay arose to the recoupment nor the intervention of the automatic stay [sic] [or] Debt- or’s discharge in bankruptcy alters or breaks the singleness of the transaction.” Id. at 579.
Several courts have found in the context of veterans’ benefit overpayments that re-coupment is permissible and does not violate the discharge injunction. In In re Snodgrass, 244 B.R. 353 (Bankr.W.D.Va.2000), which Plaintiff discusses in his Motion, the court found that the Department of Veteran Affairs (“VA”) could recoup a special separation benefit from the debtor by withholding a portion of his disability compensation payments. When he separated from the military, the debtor received a special separation benefit, and was subsequently granted disability compensation by the VA. Id. at 354. The VA then notified the debtor that it would begin recouping the separation benefit previously paid by withholding a portion of the debtor’s disability benefits. Id. The debt- or subsequently filed his chapter 7 petition. Id. After the VA continued to withhold a portion of the disability benefits, the debtor filed an adversary proceeding alleging that the VA had violated the discharge injunction. Id. The court relied on In re Boyd, 223 B.R. 536 (Bankr.E.D.Ark.1998) and simply stated, “The facts of Boyd are substantially similar, if not identical, to the facts in the case at bar. The analysis in Boyd of the law is applicable to the case at bar. In granting the motion for summary judgment in favor of the VA, this court adopts the reasoning and holding in Boyd.” Id. at 355.
Boyd, relied on by the court in Snod-grass and also discussed at length in Plaintiffs Motion, involved nearly identical facts. The court in Boyd cited 10 U.S.C. § 1174(h)(2), which allows the United States to recoup separation pay from future disability benefits. Boyd, 223 B.R. at *267537. The court reasoned that despite the government’s ability to recoup payments from the debtor, the debtor did not owe a debt to the government and the government could therefore not sue the debtor as a result of the overpayment. Id. The court then stated, “Although few courts have addressed this issue, the decisions are clear and uniform. Since the statutory directive to recoup the readjustment pay is not a debt or claim, there is no debt to discharge under Bankruptcy Code section 727 and the United States is entitled to recoup the readjustment pay.” Id. (citing United States Dep’t of Veterans Affairs v. Keisler (In re Keisler), 176 B.R. 605 (Bankr.M.D.Fla.1994); Newman v. Veterans Admin., 35 B.R. 97 (Bankr.W.D.N.Y. 1983); Dwyer v. United States, 26 B.R. 366 (Bankr.S.D.Ohio 1982)). See also In re Beaumont, 586 F.3d 776 (10th Cir.2009) (finding that recoupment of VA disability benefits based on a change in the debtor’s income after the debtor received a substantial inheritance did not violate the automatic stay or discharge injunction).
Courts have also found recoupment permissible in a variety of other contexts. See In re Jones, 289 B.R. 188 (Bankr.M.D.Fla.2002) (finding that the State Patrol could properly recoup disability over-payments made to former state trooper without violating the debtors’ discharge injunction); In re Sigman, 270 B.R. 858 (Bankr.S.D.Ohio 2001) (finding recoupment by health insurance company of overpay-ments due to the debtor’s receipt of Social Security benefits was permissible and not a violation of the discharge injunction); Brown v. Gen. Motors Corp., 152 B.R. 935 (W.D.Wis.1993) (holding that General Motors Employee Pension Plan could recoup payments made to the debtor based on the debtor’s receipt of social security disability benefits and provision in pension plan stating that certain benefits would cease upon receipt of social security).
In his Motion, Plaintiff presents several arguments. Plaintiff first discusses Snod-grass and Boyd at length and then argues that because the Medicare Act, unlike the applicable law in Snodgrass and Boyd, authorizes Defendants to pursue collection actions against Plaintiff in the event Plaintiff does not repay the overpayment, those cases are distinguishable from the present case and other cases involving Medicare. Plaintiff also discusses the First, Ninth, and DC Circuits’ holdings in favor of the allowance of recoupment, but contends that these holdings only apply to “providers” rather than “suppliers.”1 Plaintiff contends that because he is a “supplier”, he is paid in a different manner from “providers” and therefore, recoupment is not applicable and the Court of Appeals cases approving of recoupment are distinguishable from the present case.
Defendants’ Motion and Objection to PlaintifPs Motion argue that Medicare re-coupment is not limited by bankruptcy and is a fundamental element of the Medicare payment system. Defendants contend that the withholdings which occurred in the present case are clearly within the scope of the recoupment permitted under Medicare law and states that Plaintiff “grossly misreads the Medicare statute” in an attempt to argue that the withholding did not constitute recoupment. Defendants’ Objection to Plaintiff’s Motion, *268docket #37, at 8. Defendants point out that they are not attempting to assert a claim for payment through recoupment but rather simply making an adjustment to account for previous overpayments. Defendants argue that the recoupment authorized in the Medicare Act applies to both providers and suppliers and therefore the distinction is immaterial.
Plaintiff construes the Medicare Act too narrowly. The Medicare Act’s provision for offsetting overpayment is broad and clearly evidences Congress’s intention to allow recoupment from all Medicare participants, including both providers and suppliers. Congress intended that Medicare participants be reimbursed quickly for services which they provide, and in order to accomplish that goal, a constant balancing between reimbursements and overpayments occurs. For this reason, recoupment is a necessary and intended piece of the Medicare payment system for both suppliers and providers. This Court finds it proper to give effect to Congress’s intent and policies to permit recoupment in the circumstances of this case.
The Court therefore agrees with and will adopt the reasoning and holdings in the opinions of the First, Ninth, and DC Circuits and the majority of other courts addressing this issue. The Third Circuit’s approach is too narrow and difficult to apply and undermines the purpose and policies of the Medicare system. The Third Circuit’s opinion in University Medical Center has also been heavily criticized by other courts. As stated above, Congress clearly expressed the intention to allow recoupment of overpayments from both providers and suppliers, and University Medical Center does not give sufficient deference to that intent.
While some courts in this Circuit have speculated that the Fourth Circuit, if addressing the issue, would apply the integrated transaction test used by the Third Circuit in University Medical Center, those courts’ conclusions are based on an unpublished opinion, in which the Fourth Circuit affirmed a decision concerning two clearly separate transactions involving disability and retirement benefits. The situation in Thompson was markedly dissimilar to the present case. Thompson involved two separate types of benefits which were awarded based on different eligibility criteria. Here, the payments from which Defendants sought recoupment were the same form of payments as the previous overpayments and arose from the same Medicare reimbursement agreement as the previous overpayments. The payments and subsequent recoupment between Plaintiff and Defendants were an ongoing, continuous balancing occurring under a single contract and constituted a single transaction. Defendants’ recoupment from Plaintiff was not a violation of Plaintiffs discharge injunction and further, Defendants are not enjoined from recouping future payments to Plaintiff, if any, under the parties’ Medicare Participating Physician/Supplier Agreement.2
CONCLUSION
For the reasons set forth above, Defendants’ Motion for Summary Judgment is granted and Plaintiffs Motion for Summary Judgment is denied. No violation of the discharge injunction occurred, and there is no basis to enjoin Defendants from *269future recoupment in compliance with the Medicare Act.
AND IT IS SO ORDERED.
. 42 U.S.C. § 1395x(d) defines a "supplier” as "unless the context otherwise requires, a physician or other practitioner, a facility, or other entity (other than a provider of services) that furnishes items or services under this subchapter.” A "provider of services” is defined as "a hospital, critical access hospital, skilled nursing facility, comprehensive outpatient rehabilitation facility, home health agency, hospice program, or, for purposes of section 1395f(g) and section 1395n(e) of this title, a fund.” 42 U.S.C. § 1395x(u).
. Although the issue is not before the Court, the Court notes that to the extent the debt is not recoverable under Medicare law, no contention was made by Defendants that any debt Plaintiff owed to Defendants was not discharged in his chapter 7 case. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494541/ | MEMORANDUM OPINION
BARBARA J. HOUSER, Bankruptcy Judge.
The Court tried this adversary proceeding (the “Adversary”) on November 7-8, 2011. Plaintiff, Anjum A. Farooqi (“Faro-oqi”), is an individual residing in Irving, Texas, who moved to Texas from New *301York City with the hope of purchasing a Salad Bowl Cafe. Defendant, Michael David Carroll (“Carroll”), is an individual residing in Irving, Texas, who filed for relief under chapter 13 of the Bankruptcy Code on February 14, 2011. At the relevant times, Carroll was chairman, chief executive officer, president and chief financial officer of the Salad Bowl Franchise Corporation and an owner and officer of its parent company, The Salad Bowl, Inc. In the Adversary, Farooqi seeks to (i) liquidate his claims against Carroll, and (ii) have his claims determined to be nondis-chargeable in Carroll’s bankruptcy case.
An issue arose at trial which had not been briefed by the parties. Thus, post-trial briefs were required, the last of which was submitted on November 23, 2011, after which the Court took the Adversary under advisement. For the reasons explained more fully below, the Court has authority to hear and determine the claims asserted in the Adversary pursuant to 28 U.S.C. §§ 1334 and 157(b). See infra at pp. 15-22. The Court may enter a final judgment and a monetary judgment in the Adversary. Morrison v. W. Builders of Amarillo (In re Morrison), 555 F.3d 473, 479-80 (5th Cir.2009). This Memorandum Opinion contains the Court’s findings of fact and conclusions of law pursuant to Federal Rules of Bankruptcy Procedure 7051 and 9014.
I. FACTUAL AND PROCEDURAL BACKGROUND
A. Initial Meeting and Negotiations
At some point prior to the summer of 2009, Farooqi began to tire of life in New York City and of his job in the food service division of a local hospital. Farooqi visited his sister in Dallas in the late summer of 2009 in order to look for a new career opportunity. Ideally, Farooqi wanted to purchase a restaurant given his background in food service.1 While here, Faro-oqi contacted a business broker named Peggy Miller (“Miller”) about purchasing a restaurant franchise or some other existing restaurant.2 Farooqi also contacted a loan broker named Ana Marshall (“Marshall”), who was to assist him with obtaining financing for any restaurant that he might choose to purchase. Miller introduced Farooqi to Carroll, who, as noted previously, was the chairman, chief executive officer, president, and chief financial officer of the Salad Bowl Franchise Corporation (“Franchise Corporation”), a wholly-owned subsidiary3 of The Salad Bowl, Inc. (“Inc.”) (Franchise Corporation and Inc. will be collectively referred to herein as *302the “Salad Bowl Entities”).4 Carroll had listed a Salad Bowl Café located at 4000 N. MacArthur, Suite 122, Irving, Texas as a franchise location that was for sale (the “Las Colinas Salad Bowl”).
After being introduced by Miller, Faroo-qi and Carroll began to discuss the possibility of Farooqi purchasing the Las Coli-nas Salad Bowl. On September 25, 2009, Carroll sent Farooqi a Franchise Disclosure Document, dated June 5, 2009, containing information about (i) Franchise Corporation, and (ii) Carroll’s personal bankruptcy filing in 2006.5 See Defendant’s Exhibit 2 (the “Franchise Disclosure Document”). The Franchise Disclosure Document contained no reference to any litigation against Carroll or the Salad Bowl Entities. In fact, the Franchise Disclosure Document stated that there was no such litigation. See Defendant’s Exhibit 2, p. 3.
On or about September 28, 2009, Faroo-qi attended a meeting with Carroll, Marshall and Leith Caddell (“Caddell”),6 an employee of the Salad Bowl Entities to discuss the details of Farooqi’s possible purchase of the Las Colinas Salad Bowl. Specifically, Farooqi wanted to know (i) what other assets would be sold to him in addition to the franchise itself, (ii) the types of training generally provided by the Salad Bowl Entities to its franchisees, and (iii) other details related to the purchase of the Las Colinas Salad Bowl.7 Farooqi asked Marshall to attend the meeting with him because he considered Marshall to be his “right hand person” and was heavily reliant on Marshall to read and interpret any legal documents that might be required. Farooqi testified that he was relying on Marshall because he had no real experience in the negotiation of a business deal or with franchise documentation. In short, Farooqi admitted that he was very inexperienced and unsophisticated in these types of business transactions.8 At that meeting a purchase price of $150,000 was agreed upon for the Las Colinas Salad Bowl.
The parties met again the following day to finalize their proposed transaction. At that time Farooqi was asked to sign a 30-day option to purchase agreement with Inc. (the “Option Agreement”). See Plaintiffs Exhibit l.9 However, Farooqi was concerned about the form of the Option Agreement as proposed by Carroll and Inc.10 As a result of his concerns, the Op*303tion Agreement was amended to include what the parties called an option-out provision (the “Opt-Out Provision”), which would allow Farooqi to receive a return of his $25,000 if he could not obtain financing or if Inc. was unable to provide requested information, which information was needed for final approval of Farooqi’s loan application.11 Farooqi, Caddell and Marshall all testified that the Opt-Out Provision was added to the Option Agreement in order to provide extra assurances to Farooqi, who was concerned about being able to obtain a $150,000 loan and close on his purchase of the Las Colinas Salad Bowl within the 30-day window otherwise provided in the Option Agreement.12 Farooqi and Carroll agreed that Farooqi would pay $25,000 at the time of the signing of the Option Agreement (as amended to include the Opt-Out Provision), which payment would represent the franchise fee for the Las Colinas Salad Bowl and would ultimately be applied towards the $150,000 purchase price for the Las Colinas Salad Bowl if Farooqi proceeded to close on his purchase of that restaurant.
Farooqi testified that he understood and considered the $25,000 to be part of the purchase price of the franchise itself, rather than a separate fee for the Option Agreement.13 Farooqi also testified that he understood the Option Agreement to limit Carroll’s ability to sell the Las Coli-nas Salad Bowl to another party for at least 30 days while Farooqi secured his loan, rather than limiting Farooqi’s ability to purchase the Las Colinas Salad Bowl.14
B. Execution of the Option Agreement and Post-Option Period Communications
According to Farooqi, Marshall and Caddell, after repeated assurances from Carroll that the 30-day period in the Option Agreement would not apply to the Opt-Out Provision and that Inc. would provide all financial information requested by Farooqi, Farooqi agreed to enter into the Option Agreement.15 Farooqi and Carroll executed the Option Agreement (as amended to include the Opt-Out Provision) on September 30, 2009 at a Kinko’s store near Carroll’s office. After signing the Option Agreement, Farooqi handed Carroll a check for $2,500 instead of $25,000. The error was discovered and Farooqi wired $25,000 to Carroll a few days later.16 Farooqi obtained these funds from his mother; he did not have $25,000 on his own with which to make this payment.
Marshall testified that (i) she had been researching financing options for Farooqi during September 2009; (ii) she encountered some difficulties obtaining a financing package, as Farooqi had only an aver*304age credit score; (iii) most commercial lenders structured their loan packages in far larger dollar amounts than Farooqi was interested in borrowing;17 (iv) based upon her research, New England Commercial seemed like Farooqi’s best financing option, (v) while Farooqi was “pre-approved” for a loan with New England Commercial in late September 2009, that “pre-approval” did not guarantee that Fa-rooqi would receive final approval for a loan; (vi) final approval of Farooqi’s loan with New England Commercial was still contingent on the provision of detailed financial information about the Salad Bowl Entities; and (vii) Farooqi paid a $4,500 fee to New England Commercial as a loan-processing fee.18 According to Marshall’s testimony, some of the information requested by New England Commercial was not usually requested by commercial lenders, but New England Commercial was requiring the information here because (i) the Salad Bowl Entities were a fairly new franchise operation, and (ii) Farooqi did not have previous experience running a franchise restaurant.19
Immediately after the Option Agreement was signed, Marshall began requesting information from Carroll in order to complete Farooqi’s loan application with New England Commercial.20 Marshall testified that she repeatedly requested a variety of information from Carroll; information that was never provided despite Carroll’s repeated assurances that he would provide any and all information requested.21 In fact, Farooqi testified that Carroll often complained to him about Marshall’s requests and questioned why Carroll was being asked to provide the requested information.22 Finally, on October 30, 2009, the last day of the option period, Carroll sent Marshall another copy of the Franchise Disclosure Document, which Carroll had previously provided to Farooqi on September 25, 2009.23 Despite Carroll’s repeated assurances before the Option Agreement was signed that all requested information would be provided, no additional documents (or information) were provided to Farooqi or Marshall during the 30-day option period.
Farooqi testified that Carroll never informed him that the Option Agreement *305had expired or that Farooqi would no longer be allowed to opt-out of the Option Agreement and obtain a refund of his $25,000.24 In fact, Farooqi and Carroll continued to discuss Farooqi’s purchase of the Las Colinas Salad Bowl and Marshall continued to request information from Carroll to complete Farooqi’s loan application. Farooqi testified that he did not attempt to exercise the Opt-Out Provision during the 30-day period stated in the Option Agreement because (i) he believed he could opt-out at any time (as Carroll had repeatedly told him prior to the signing of the Option Agreement) if his financing was not approved or if Inc. failed to provide requested information, and (ii) he still wanted to purchase the Las Colinas Salad Bowl if he could obtain financing.25 Farooqi also testified that throughout November and December 2009 he still believed he would be purchasing the Las Colinas Salad Bowl upon final approval of his loan.26
In January 2010, Farooqi quit his job in New York City and prepared to move part of his family to Texas in anticipation of his purchase of the Las Colinas Salad Bowl.27 Farooqi and Carroll continued to discuss the purchase of the Las Colinas Salad Bowl, and Marshall continued to request financial information to submit to New England Commercial. On January 20, 2010, Carroll sent Marshall an amended Franchise Disclosure Document dated December 29, 2009, which disclosed, for the first time, a lawsuit filed against Carroll, among others, by Mike and Kim Hinshaw in state district court in Travis County, Texas (the “Hinshaw Lawsuit”).28 Defendant’s Exhibit 3.
At trial, Carroll ultimately admitted that he only provided “some” of the information requested by Marshall in order to complete Farooqi’s loan application.29
C. Farooqi’s Loan Application is Denied and the Relationship Sours
On or about February 1, 2010, while en route to Texas, Farooqi received a call from Marshall telling him that his loan had been denied by New England Commercial.30 Marshall had just received the denial information from New England Commercial. Farooqi immediately informed Carroll that his loan had been denied. Fa-rooqi testified that he was very upset about the denial of his loan.31
Notwithstanding the denial of his loan, Carroll and Farooqi continued to discuss a potential purchase of the Las Colinas Salad Bowl, although Farooqi testified that he was too discouraged to apply for another loan for such a purchase at that time.32 Farooqi and Carroll also discussed other potential Salad Bowl locations that Farooqi could purchase, including a new location that could be built-out in the same building as the Salad Bowl Entities’ corporate offices.33 Farooqi, however, was only interested in the Las Colinas Salad Bowl and was not interested in entering into negotia*306tions for other locations, particularly for a brand-new location.34 Moreover, Farooqi testified that in late-February or early-March, 2010, Carroll offered to seller-finance Farooqi’s purchase of another Salad Bowl Café.35 Again, Farooqi indicated that he was not interested in purchasing a different Salad Bowl Café.36
Sometime after Farooqi informed Carroll that his loan application had been denied, Carroll told Farooqi that the 30-day option period had expired and a refund of the $25,000 franchise fee was no longer available.37 Farooqi was taken aback by this information because it was inconsistent with what he had been told by Carroll prior to the signing of the Option Agreement.38 Farooqi testified that Carroll later recanted and said that the money was in an escrow account and that he and Farooqi could discuss a refund.39
In late February or early March 2010, Farooqi asked Carroll to refund his $25,000 franchise fee. Carroll initially testified at trial that he refused to return Farooqi’s money because he needed to discuss returning the fee with counsel for the Salad Bowl Entities.40 The next day Carroll revised his testimony, however, stating that he had been willing to return Faroo-qi’s money if Farooqi appeared in person at the Salad Bowl Entities’ offices to sign non-compete and non-disclosure agreements.41 Carroll was unable to credibly explain why Farooqi needed to come to the Salad Bowl Entities’ offices in person to sign these documents instead of Carroll simply sending the documents to Farooqi for execution and return. Carroll testified that he wanted the non-compete and nondisclosure documents signed because of the length of time the negotiations with Farooqi had run, the amount of corporate information that had been disclosed to Fa-rooqi and Marshall, and the fact that a friend of Farooqi’s, Ali Choudhry, had worked at the Las Colinas Salad Bowl for several months and had been privy to confidential information while there.42
*307In contrast, Farooqi testified that he was never told by Carroll that if he signed some documents he could get his money back. Moreover, Farooqi testified that he would have been happy to sign whatever Carroll needed in order to obtain the return of his money.43
By March 2010, Farooqi had been unemployed for almost two months and was faced with an ever-growing number of unpaid bills. In order to obtain money to pay his various bills and expenses, Farooqi took out a $15,000 personal loan from BBVA Compass Bank.44 Farooqi was introduced to the loan officers at BBVA by Carroll, who had a personal relationship with the bank manager.45 However, Faro-oqi testified that the loan obtained from BBVA was solely for his personal expenses and was not intended to fund the purchase of another Salad Bowl Café.46 Carroll did not co-sign the loan or provide any personal or corporate information to BBVA in support of the loan47
After almost a year of asking Carroll for a refund without receiving one, Farooqi filed a lawsuit in state court.48 Once Carroll filed for protection under the Bankruptcy Code, Farooqi filed the Adversary.
B. Witness Credibility
While Farooqi is naive and relatively unsophisticated in business matters, he was a credible witness at trial. While there were some inconsistencies in his testimony, those inconsistencies were not material to the outcome of this dispute and are explained by the passage of time and fading memories. Moreover, much of Fa-rooqi’s testimony on key issues was corroborated by the testimony of other credible witnesses who were subpoenaed by Farooqi to testify at trial, including Marshall and Caddell.49
*308In contrast, Carroll was not a credible witness. He (i) was often evasive in answering questions, (ii) sweated profusely while on the witness stand, and (iii) generally seemed quite uncomfortable as a witness. Carroll’s testimony was often inconsistent with the overwhelming weight of the evidence and was frequently directly contradicted by the testimony of every other witness at trial. And, as noted previously, certain of Carroll’s testimony changed during the course of the trial. When called as an adverse witness on the first day of trial, Carroll testified that he didn’t return Farooqi’s money because he needed to first discuss the refund with counsel for the Salad Bowl Entities.50 Then, the next day, Carroll testified in response to his counsel’s questions that he would have returned Farooqi’s money if Farooqi had just come to the Salad Bowl Entities’ offices to sign certain non-compete and non-disclosure documents, which Farooqi testified he was never told he needed to do.51
With regard to this specific testimony, the Court believes Farooqi, not Carroll. Farooqi was never told that he could get his money back by signing non-compete and non-disclosure documents. It is clear to the Court that if he had been so told, he would have signed them in order to get his $25,000 back. Based on the credible evidence at trial, Carroll told Farooqi that Farooqi couldn’t get his money back because it was too late, the Option Agreement had expired. With regard to other conflicting testimony between Carroll and Farooqi, the Court generally finds Faroo-qi’s testimony credible and the testimony of Carroll not credible.
II. LEGAL ANALYSIS
Farooqi seeks a monetary judgment against Carroll for fraudulent inducement, fraud,52 and violations of the Texas Decep*309tive Trade Practice Act (“DTPA”). Faroo-qi seeks damages for his economic losses and mental anguish, as well as exemplary damages for fraudulent inducement and treble damages as allowed by the DTPA. Finally, Farooqi seeks a determination that any damages awarded are nondis-chargeable in Carroll’s bankruptcy case under section 523(a)(2)(A) of the Bankruptcy Code.
From the Court’s perspective, the Court must first consider whether Farooqi is entitled to a judgment against either or both of the Salad Bowl Entities on his claims of fraudulent inducement and/or violations of the DTPA. There is little doubt from the evidence that Carroll was dealing with Fa-rooqi as an officer of one or both of the Salad Bowl Entities, not in his individual capacity. Second, if Farooqi is entitled to a judgment against one or both of the Salad Bowl Entities, the Court must consider whether Carroll can be held personally liable for that judgment. Finally, if Carroll can be held personally liable, the Court must consider whether that debt is dischargeable in Carroll’s bankruptcy case.
However, before reaching these questions, the Court must consider a threshold issue relating to this Court’s authority to hear and finally determine Farooqi’s claims against Carroll, to which we now turn.
A. Can this Court Hear and Finally Determine the Claims in the Adversary?
Carroll has questioned this Court’s “subject matter jurisdiction” over the Adversary as a result of the Supreme Court’s recent decision in Stern v. Marshall, — U.S.-, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). From this Court’s perspective, Stem does not implicate the grant of subject matter jurisdiction over bankruptcy cases and proceedings arising in the bankruptcy case, under the Bankruptcy Code (like the Adversary) or related to the bankruptcy case under 28 U.S.C. § 1334. That subject matter jurisdiction is, and has been since 1984, vested in the United States District Court for the Northern District of Texas under 28 U.S.C. § 1334. Then, under 28 U.S.C. § 151, Congress granted bankruptcy courts the power to “exercise” certain “authority conferred” upon the district courts by title 28, but bankruptcy courts were not granted their own independent subject matter jurisdiction over bankruptcy cases and proceedings. Congress also provided further procedures in 28 U.S.C. § 157 pursuant to which the district court may refer bankruptcy cases and proceedings to the bankruptcy courts for either final determination or proposed findings and conclusions. So, as relevant here, this Court exercises authority with respect to Carroll’s underlying chapter 13 bankruptcy case and the Adversary pursuant to a standing order of reference adopted in this District on August 3, 1984.
From this Court’s perspective, Stem simply clarified bankruptcy courts’ constitutional power, not their subject matter *310jurisdiction. The Court in Stem discussed this critical distinction at length, 131 S.Ct. at 2606-08, and expressly clarified that 28 U.S.C. § 157 is not jurisdictional. Id. at 2607. (“Section 157 allocates the authority to enter final judgment between the bankruptcy court and the district court. That allocation does not implicate questions of subject matter jurisdiction.”). So, while Carroll has couched his arguments as an attack on the subject matter jurisdiction of this Court, that argument is premised upon an inaccurate reading of Stem. The district court clearly has subject matter jurisdiction over the Adversary. Nothing in Stem has changed that or challenged the propriety of that; rather, Stem specifically addresses the Constitutional authority of this Court, as an Article I tribunal, to hear and finally determine a debtor’s common-law counterclaim to a proof of claim filed against the bankruptcy estate. Further discussion of Stem will be helpful to put the decision in its proper context.
In Stem, the Supreme Court held that a bankruptcy court, as an Article I tribunal, may not constitutionally enter a final judgment over a debtor’s counterclaim that would not necessarily be resolved by the resolution of the debtor’s objection to the claimant’s proof of claim. Id. at 2618. According to the Supreme Court, although “public rights” disputes may be decided by non-Article III tribunals, public rights disputes must involve rights “integrally related to a particular federal government action.” Id. at 2613. The debtor’s counterclaim in Stem did not constitute a “public rights” dispute. Id. at 2614. Thus, according to the Supreme Court, entering a final judgment with respect to the debtor’s counterclaim, which would not have been decided by the allowance of the claimant’s proof of claim, would be an impermissible exercise of the judicial power of the United States by a non-Article III tribunal. Id. at 2615. This was so notwithstanding the fact that (i) the relevant statute—28 U.S.C. § 157(b)(1)—expressly authorized the bankruptcy judge to “hear and determine ... all core proceedings ... arising in a case under title 11,” that were referred to it by the district court under 28 U.S.C. § 157(a), and (ii) “counterclaims by the estate against persons filing claims against the estate” are expressly defined to be a “core proceeding.” 28 U.S.C. § 157(b)(2)(C). While Chief Justice Roberts stated in his majority opinion that the Stem holding was quite narrow and would have a limited practical impact,53 many lower courts and commentators are struggling to understand its broader implications, if any. See, e.g., Jonathan Azoff and Thomas Szaniawski, Stern v. Marshall and the Limits of Consent, 30 Am. Bankr.L.J. 28 (2011); Ralph Brubaker, Article Ill’s Bleak House (Part II): The Constitutional Limits of Bankruptcy Judges’ Core Jurisdiction, 31 No. 9 BANKR.L. LetteR 1 (2011); In re Extended Stay, Inc., No. 09-13764-JMP, *3112011 WL 5532258 (S.D.N.Y. Nov. 10, 2011); In re Davis, No. 05-15794-GWE, 2011 WL 5429095 (Bankr.W.D.Tenn. Oct. 5, 2011); In re Teleservices Group, Inc., 456 B.R. 318 (Bankr.W.D.Mich.2011).
With this background in mind, the Court will address Carroll’s arguments about its lack of “subject matter jurisdiction” or, as properly framed by this Court, its alleged Constitutional inability to hear and finally determine the claims asserted in the Adversary. The focal point of Carroll’s argument is on Farooqi’s failure to file a proof of claim in Carroll’s underlying chapter 13 bankruptcy case before the bar date for the filing of such claims. According to Carroll, that failure to file a proof of claim somehow divests this Court of its “subject matter jurisdiction.” There are several problems with this argument.
First, as just discussed, Stem is not a subject matter jurisdiction ease. If anything, Carroll should be questioning this Court’s Constitutional authority to hear and finally determine the state law claims asserted in the Adversary.
Second, while Farooqi did not file a formal proof of claim in Carroll’s bankruptcy case prior to the bar date, he did file the Adversary in which he seeks to both liquidate his claim and hold Carroll responsible for that claim. Under clear Fifth Circuit precedent, Farooqi’s filing of the Adversary constitutes an informal proof of claim, which gives him the right to participate in distributions from Carroll’s bankruptcy estate. In Nikoloutsos v. Nikoloutsos (In re Nikoloutsos), 199 F.3d 233 (5th Cir.2000), the court adopted a 5-part test to determine what qualifies as an informal proof of claim, following the decisions of several sister circuits. Specifically, the Fifth Circuit stated that “to qualify as an informal proof of claim: (1) the claim must be in writing; (2) the writing must contain a demand by the creditor on the debtor’s estate; (3) the writing must evidence an intent to hold the debtor liable for such debt; (4) the writing must be filed with the bankruptcy court; and (5) based upon the facts of the case, allowance of the claim must be equitable under the circumstances.” Id. at 236. Each of these elements is established here. The Adversary complaint is in writing; it contains a demand by Farooqi on Carroll and his estate; it evidences an intent to hold Carroll liable for Farooqi’s debt; it was filed with this Court prior to the expiration of the bar date; and, as explained in the balance of this Memorandum Opinion, allowance of Farooqi’s claim is equitable under the circumstances. While the allowance of Faro-oqi’s claim could have diluted distributions to Carroll’s other unsecured creditors, Carroll’s confirmed chapter 13 plan does not propose any distributions to unsecured creditors. Moreover, even if other unsecured creditors were diluted by the allowance of Farooqi’s claim, Farooqi is entitled to his share of the estate while Carroll’s bankruptcy case is pending and, if Farooqi is successful here in having his debt excepted from Carroll’s discharge, Farooqi will be entitled to pursue Carroll following the conclusion of the bankruptcy case in order to collect any unpaid balance. Accordingly, the Court finds that Farooqi timely filed an informal proof of claim in Carroll’s bankruptcy case and, to the extent that Farooqi’s alleged failure to file a proof of claim is somehow an impediment to this Court’s authority to hear and finally determine the Adversary, the Court concludes that Carroll’s objection is without merit.
Finally, Stem does not implicate this Court’s authority to hear and finally determine whether a creditor’s claim is excepted from a debtor’s discharge by 11 U.S.C. § 523(a)(2), even if the Court is required to first liquidate the creditor’s *312claim in that process. In analyzing this argument and the claims at issue in the Adversary, the Court notes that there are two distinct issues. First, is a debt owed to Farooqi based upon the state law claims he asserts against Carroll for fraudulent inducement and DTPA violations? Second, if a debt is owed, is that debt excepted from Carroll’s discharge under 11 U.S.C. § 523(a)(2)(A)?
Taking the second issue first, there can be little doubt that this Court, as an Article I tribunal, has the Constitutional authority to hear and finally determine what claims are non-dischargeable in a bankruptcy case. Determining the scope of the debtor’s discharge is a fundamental part of the bankruptcy process. As noted by the court in Sanders v. Muhs (In re Muhs), 2011 WL 3421546 (Bankr.S.D.Tex. Aug. 2, 2011), “[t]he Bankruptcy Code is a public scheme for restructuring debtor-creditor relations, necessarily including the ‘exercise of exclusive jurisdiction over all of the debtor’s property, the equitable distribution of that property among the debtor’s creditors, and the ultimate discharge that gives the debtor a ‘fresh start’ by releasing him, her, or it from further liability for old debts.’ ” Id. at *1 (citing Central Va. Cmty. College v. Katz, 546 U.S. 356, 363-64, 126 S.Ct. 990, 163 L.Ed.2d 945 (2006)). Congress clearly envisioned that bankruptcy courts would hear and determine all core proceedings, 28 U.S.C. § 157(b)(1), which include, as relevant here, “determinations as to the dischargeability of particular debts.” 28 U.S.C. § 157(b)(2)(I). The Supreme Court has never held that bankruptcy courts are without Constitutional authority to hear and finally determine whether a debt is dischargeable in bankruptcy. In fact, the Supreme Court’s decision in Stem clearly implied that bankruptcy courts have such authority when it concluded that bankruptcy courts had the Constitutional authority to decide even state law counterclaims to filed proofs of claim if the counterclaim would necessarily be decided through the claims allowance process. Stem, 131 S.Ct. at 2618.
So, the question becomes, does the analysis of Constitutional authority change if the bankruptcy court must first liquidate the claim? For the reasons explained below, this Court concludes it does not.
First, under Thomas v. Union Carbide Agricultural Products Co., 473 U.S. 568, 593, 105 S.Ct. 3325, 87 L.Ed.2d 409 (1985), a right closely integrated into a public regulatory scheme may be resolved by a non-Article III tribunal. This is the so-called “public rights exception” discussed by the Supreme Court in Stem. There is no question that liquidating Farooqi’s state law claims against Carroll is “closely integrated” into the Bankruptcy Code. Farooqi needs an allowed claim in order to participate in distributions from Carroll’s bankruptcy estate. Moreover, Farooqi needs an allowed claim in order for this Court to determine if that claim is dischargeable in Carroll’s chapter 13 bankruptcy case.
Second, the Fifth Circuit has already determined that this Court has the authority to enter a judgment on an unliq-uidated claim when determining the dis-chargeability of that debt in a bankruptcy case. In In re Morrison, 555 F.3d 473, 478-79 (5th Cir.2009), the Fifth Circuit held that a bankruptcy court has the authority to liquidate a state law claim and enter a monetary judgment against a debt- or when deciding if that claim/judgment is non-dischargeable in a debtor’s bankruptcy case. In deciding this question, the Fifth Circuit followed several other circuit courts that had concluded that bankruptcy courts had the power to enter a judgment in exactly this manner. See, e.g., Cowen v. Kennedy (In re Kennedy), 108 F.3d 1015, 1017-18 (9th Cir.1997); Longo v. McLaren *313(In re McLaren), 3 F.3d 958, 965-66 (6th Cir.1993); Abramowitz v. Palmer, 999 F.2d 1274 (8th Cir.1993); N.I.S. Corp. v. Hallaban (In re Hallaban), 936 F.2d 1496, 1508 (7th Cir.1991). As the court in Christian v. Kim (In re Kim), 2011 WL 2708985 at *2 (Bankr.W.D.Tex. July 11, 2011) noted: “[t]he defendant overreads [Sierra] and its application to this proceeding. Even if the defendant were right, however, the court would be compelled to follow existing Fifth Circuit precedent as set out in Morrison ... as this court cannot ignore (much less ‘overrule’) existing binding circuit precedent, even if that precedent is thought to be inconsistent with a later decision by the Supreme Court. Only the circuit itself can overrule its own precedents.” Like the Kim court, until the Fifth Circuit overrules Morrison, this Court will rely upon Morrison for its authority to liquidate Farooqi’s state law claims against Carroll and enter a judgment on such claims.
Finally, at least one other court has come to the same conclusion—i.e., that Stem does not hold, directly or indirectly, that an Article I tribunal is without the Constitutional authority to liquidate a creditor’s claim against a debtor through entry of a final dollar judgment and then determine whether that judgment , is dis-chargeable in the debtor’s bankruptcy case. See, e.g., Dragisic v. Boricich (In re Boricich), 2011 WL 5579062 at *1 (Bankr.N.D.Ill. Nov. 15, 2011) (“Stem left intact the authority of a bankruptcy judge to fully adjudge a creditor’s claim. In this case, the claim was an adversary proceeding against debtor to bar dischargeability of a debt due to Plaintiff. Therefore, the authority to enter a final dollar judgment as part of the adjudication of nondis-chargeability, as recognized in Haliaban,54 was not impaired by Stem ”).
For all of these reasons, this Court concludes that it has the Constitutional authority to (i) liquidate Farooqi’s state law claims against Carroll through the entry of a money judgment following trial, and (ii) determine whether that judgment is non-dischargeable in Carroll’s chapter 13 bankruptcy case.
B. Was Farooqi Fraudulently Induced into Entering Into the Option Agreement?
Before turning to a discussion of the merits of Farooqi’s fraudulent inducement claim against Carroll,55 the Court must address a threshold issue raised by Carroll’s counsel regarding whether Farooqi pled this claim with sufficient specificity in order to take it to trial. Carroll’s counsel argued vigorously that Farooqi had not adequately pled this claim such that a trial of it was appropriate. Moreover, Carroll’s counsel made it clear that the claim was not being tried by consent.
1. Did Farooqi Adequately Plead His Fraudulent Inducement Claim?
Carroll’s counsel argued that because Farooqi’s claims are based on fraud, they must meet the heightened pleading standard under Fed.R.Civ.P. 9(b). There is no question that Fed.R.Civ.P. 9(b) requires particularity when pleading fraud or mistake. See Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1954, 173 L.Ed.2d 868 (2009). Courts have held that mere con-clusory allegations of fraud are insufficient to meet the heightened standard of Fed. *314R.Civ.P. 9(b). See generally Keith v. Stoelting, Inc., 915 F.2d 996 (5th Cir.1990); Tucker v. Nat’l Linen Serv. Corp., 200 F.2d 858 (5th Cir.1953).
In Keith, the Fifth Circuit noted that “at a minimum, [particularity] requires that the plaintiff allege the time, place and contents of the alleged misrepresentation, as well as the identity of the person making them.” Keith, 915 F.2d at 999. In In re Compaq Securities Litigation, 848 F.Supp. 1307, 1310 (S.D.Tex.1993), the court stated that “[s]ince Rule 9(b) is to be read in conjunction with Rule 8’s general notice pleading requirement that pleadings contain a ‘short and plain statement of the claim,’ it can be satisfied as long as the complaint contains information concerning the ‘time, place, and nature of fraudulent behavior and defendant’s relationship thereto.’ ” Similarly, the Seventh Circuit has held that “Rule 9(b) does not require that the complaint explain the plaintiff’s theory of the case, but only that it state the misrepresentation, omission, or other action or inaction that plaintiff claims was fraudulent.” Midwest Commerce Banking v. Elkhart City Centre, 4 F.3d 521, 523 (7th Cir.1993) (citation omitted).
Here, the Court is satisfied that Farooqi’s complaint sets forth specific misrepresentations that allegedly were made, and gives enough of a narrow time frame (the dates surrounding the negotiations of the Option Agreement) for Carroll to be aware of what Farooqi was complaining about. While Farooqi’s complaint (in either the original or amended versions) is not artfully drafted,56 paragraphs 20 and 21 of the Second Amended Complaint state that “Defendant obtained funds from Plaintiff by false pretenses, false representations, or actual fraud. Defendant is liable to Plaintiff for fraudulent inducement of the option to purchase contract.” Moreover, in paragraph 26 of the Second Amended Complaint, admittedly during a discussion of Farooqi’s DTPA claims, Fa-rooqi alleges the following facts: “Defendant represented that the ‘Option Out’ in the Option Agreement was a rescission provision. Defendant did so to induce Plaintiff to sign the Option Agreement and pay the $25,000 ‘consideration.’ Defendant has failed to return Plaintiffs option payment.” From this Court’s perspective, a reading of the Second Amended Complaint in its entirety adequately articulates the basis for Farooqi’s fraudulent inducement claim, as well as the facts necessary to support that claim.
Further, it is well established in the Fifth Circuit that a Joint Pre-Trial Order signed by the Court supersedes the pleadings in the case, in terms of determining the issues before the Court at the time of trial. Mid-Continent Casualty Co. v. Eland Energy, Inc., 2011 WL 2417158 at *38 (N.D.Tex. June 14, 2011) (citing E.E.O.C v. Serv. Temps, Inc., 2010 WL 5108733 at *3 (N.D.Tex. Dec. 9, 2010)) (“[t]he joint pretrial order supersedes all pleadings and governs the issues and evidence to be presented at trial.”)57 The *315Mid-Continent court further noted that “a party has presented an issue in the trial court if that party has raised it in either the pleadings or the pretrial order, or if the parties have tried the issue by consent.” Id. at 538 (citing Portis v. First Nat’l Bank of New Albany, 34 F.3d 325, 331 (5th Cir.1994)).
Here, the Joint Pre-Trial Order was signed by both parties and entered by the Court on October 26, 2011, almost two weeks before the trial commenced. Docket #36. The parties had ample time to finalize their trial preparation based on the facts and claims contained therein. Listed under contested issues of fact in the Joint Pre-Trial Order were the following:
(20) Whether Carroll made false representations to Farooqi that he would provide full and prompt franchise disclosures. (21) Whether Carroll made false representations to Farooqi that the option out provision of the Option Agreement was not limited to 30 days. (22) Whether Carroll made representations with the fraudulent intention to induce Farooqi into signing the Option Agreement and paying $25,000 to Carroll and the Salad Bowl Franchise Corp.
Id. The Joint Pre-Trial Order also listed dates and time frames when the purchase of a franchise was discussed, when documents were sent to Farooqi, the nature of the alleged misrepresentations, and that Carroll made the misrepresentations. If the Second Amended Complaint was at all deficient, any deficiency was cured in the Joint Pre-Trial Order.
While Carroll did object in the Joint Pre-Trial Order to any statement of facts that he deemed to be outside of the pleadings, Joint Pre-Trial Order, p. 2, the Court concludes that when the pleadings are considered along with the Joint Pre-Trial Order, Carroll was sufficiently on notice of the fraudulent inducement claim Farooqi intended to pursue against him at trial. In Thrift v. Hubbard, 44 F.3d 348 (5th Cir. 1995), Thrift argued that the Hubbards, who were both defendants and cross-plaintiffs, should not have been entitled to a recovery at trial on several of their causes of action because those causes of action were not pled. The Fifth Circuit noted that, as is true here, there could be no implication of consent based on the numerous objections made by Thrift, including an objection in the pre-trial order to the pleadings, which were perceived by Thrift to be defective. The Fifth Circuit noted that because the claim was raised in the pre-trial order, “even if objected to, Thrift cannot, and indeed did not, argue that admission of evidence on this issue caused any surprise.” Thrift, 44 F.3d at 356 n.12. The Fifth Circuit also observed that a party’s pleadings need not specify in detail every possible theory of recovery but need only plead sufficiently to give the defendant fair notice of the claim and the facts upon which it rests. Id. at 356. Finally, in determining that the trial court had not abused its discretion in determining that both claims were sufficiently pled, the Fifth Circuit stated that “while it is arguable whether the pleadings adequately distinguished between two causes of action, the pretrial order clearly identified both *316‘business’ and ‘contractual’ relationships.” Id, at 357.
For these reasons, the Court concludes that Farooqi’s fraudulent inducement claim against Carroll was sufficiently pled to give Carroll fair notice of this claim and the facts upon which it rests.
2. Has Farooqi Established the Elements of a Fraudulent Inducement Claim?
A fraudulent inducement claim arises when a party is induced to enter into an agreement through fraud or misrepresentation. A claim for fraudulent inducement shares the same elements as a simple fraud claim, Amouri v. Southwest Toyota, Inc., 20 S.W.3d 165, 168 (Tex.App.-Texarkana 2000); DeSantis v. Wackenhut Corp., 793 S.W.2d 670, 688 (Tex.1990), which are: (1) that a material misrepresentation was made that was false; (2) that was either known to be false when made or was asserted without knowledge of its truth; (3) that was intended to be acted on; (4) that was relied on; and (5) that caused injury. Amouri, 20 S.W.3d at 168-69; Formosa Plastics Corp. USA v. Presidio Engineers & Contractors, Inc., 960 S.W.2d 41, 47 (Tex.1998).
a. Two Material Misrepresentations Were Made
A misrepresentation is a false statement of fact or a promise of some future performance made with the intent not to perform. Eagle Properties, Ltd. v. Scharbauer, 807 S.W.2d 714, 723 (Tex.1990); Trenholm v. Ratcliff, 646 S.W.2d 927, 930 (Tex.1983). To be a “material” misrepresentation, the statement must have induced Farooqi to enter into a transaction that he would not have entered into but for the representations. See, e.g., Reservoir Sys., Inc. v. TGS-NOPEC Geophysical Co., L.P., 335 S.W.3d 297, 305 (Tex.App.-Houston [14th Dist.] 2010); Am. Med. Int’l v. Giurintano, 821 S.W.2d 331, 338 (Tex-App.-Houston [14th Dist.] 1991).
Here, the alleged misrepresentations are (i) Carroll’s statements about his willingness to provide full and prompt disclosure of all information necessary for Farooqi to obtain financing for his purchase of the Las Colinas Salad Bowl, and (ii) Carroll’s statements that the Opt-Out Provision of the Option Agreement was not limited in time to the 30-days otherwise provided for in the Option Agreement. Based on the credible evidence presented at trial, the Court concludes that each of these statements was a misrepresentation and each of these misrepresentations was material.58
Farooqi, Caddell and Marshall all testified that Carroll repeatedly represented to Farooqi that Inc. would provide any and all information necessary for Farooqi to obtain financing for his purchase of the Las Colinas Salad Bowl. Inc., acting through Carroll, did not provide the requested information. In fact, no documents were produced until the last day of the option period and what was produced on that date was a document Farooqi had been given before the Option Agreement was ever signed&emdash;i.e., the Financial Disclosure Document. There is no question based upon the evidence introduced at trial that Farooqi would not have signed the Option Agreement without this material misrepresentation by Carroll.
Farooqi and Caddell also testified that Carroll repeatedly represented to Farooqi that the Opt-Out Provision of the Option Agreement was not limited to 30 days. *317Rather, according to Farooqi and Caddell, Carroll assured Farooqi repeatedly that Farooqi could opt-out of the Option Agreement at any time if either of two conditions was not satisfied: (i) that Inc. failed to provide information requested by Farooqi, or (ii) that Farooqi’s loan application was denied. The record is clear that Farooqi was very concerned about the 30-day time period otherwise provided for in the Option Agreement. In particular, Farooqi was concerned that his loan application could not be approved within a 30-day time frame.59 In fact, Marshall testified that 30 days was an extremely short period of time in which to obtain approval of a commercial loan. Farooqi and Caddell also testified that Carroll told Farooqi repeatedly not to worry about the 30-day period otherwise provided in the Option Agreement because the Opt-Out Provision would be unlimited in duration and would allow Farooqi to receive a refund at any time if one of the above conditions was satisfied.60 Given Farooqi’s stated concerns about the length of the option period and Marshall’s view that a commercial loan could not be approved in 30 days, the Court is satisfied that Farooqi would not have signed the Option Agreement without this material misrepresentation by Carroll.
Accordingly, the first element of a fraudulent inducement claim has been proven with respect to the Misrepresentations.
b. The Misrepresentations Were Known to be False When Made
With respect to the Misrepresentations, the Court finds, based on its review of the credible evidence, that Carroll made the Misrepresentations with knowledge of their falsity. First, Carroll knew at the time he made the representation about producing needed information that he would not do so. As the testimony at trial established, Marshall began requesting information immediately. Despite repeated continuing assurances by Carroll that he would produce the requested information, not a single new document was produced during the 30-day option period. While Carroll’s failure to provide the requested information, by itself, is insufficient evidence of his intent not to perform, that failure is a fact that can be considered with other circumstantial evidence to establish intent. Spoljaric v. Percival Tours, Inc., 708 S.W.2d 432, 434-35 (Tex.1986).
Here, Caddell testified that the Salad Bowl Entities were having financial difficulties. Caddell testified that he was managing cash on a daily basis—reducing food orders at certain locations and negotiating with vendors to keep supplies in the restaurants.61 Based on this largely unrefut-ed testimony, it is clear that the Salad Bowl Entities needed cash to continue their operations. Farooqi was expressing doubts about signing the Option Agreement, which meant that no funds would be forthcoming. It appears that Carroll said what he needed to say to get Farooqi to sign the Option Agreement irrespective of the truth of his statements. In short, from the Court’s perspective, Carroll lured Fa-rooqi in with the promise of returning his *318$25,000 at any time if Farooqi didn’t get the documents he needed or his financing wasn’t approved. Carroll got what he wanted and needed—Farooqi’s money. Whether Farooqi got what he wanted— ie., the Las Colinas Salad Bowl—wasn’t a particular concern of Carroll’s.
Moreover, the Court finds, based upon its review of the credible evidence, that Carroll knew that he wouldn’t return Fa-rooqi’s money even if one or both of the conditions was satisfied. Once again, the fact that this representation by Carroll was false when it was made is evidenced, at least in part, by Carroll’s subsequent conduct. Based upon the circumstances found above, the Court finds that Carroll acted with fraudulent intent. Farooqi testified that he would not have signed the Option Agreement prior to his financing being approved without repeated assurances from Carroll that (i) Farooqi would be provided with any and all information required to complete his loan application, and (ii) Farooqi could opt out of the Option Agreement at any time and receive a return of his money if his financing wasn’t approved. Instead, when Farooqi asked for a return of his $25,000 after his loan application was denied by New England Commercial, Carroll initially told Farooqi that it was too late to request a return of those funds because the Option Agreement had expired.
Further evidence of Carroll’s fraudulent intent was shown by Carroll’s past dealings with other prospective franchisees. For example, Caddell testified that Carroll attempted to sell a Salad Bowl Café in Roanoke, Texas to Joe Leszko (“Leszko”) in the spring of 2009. According to Cad-dell, Leszko paid Carroll $12,000 for the option to purchase that Salad Bowl Café. When Leszko was unable to obtain his financing, Carroll repeatedly promised that he would return Leszko’s money. However, Carroll never returned the $12,000.62 Moreover, about that same time, Carroll attempted to sell the Las Colinas Salad Bowl to Tim Grosse (“Grosse”). Grosse paid $25,000 for a 30-day option to purchase. Grosse too was unable to obtain financing and timely sent an option cancellation letter to Carroll. Despite numerous promises by Carroll to return the $25,000 to Grosse, Carroll finally returned Grosse’s money in July 2010— over a year later—and only after Grosse hired a lawyer to represent him in connection with the dispute.63 The Court is persuaded that Carroll had a pattern and habit of making false promises to potential franchisees about his willingness to return their monies if they couldn’t obtain financing to proceed with their purchases.
*319Accordingly, the second element of a fraudulent inducement claim has been proven with respect to the Misrepresentations.
c. The Misrepresentation were intended to be relied upon
With respect to each of the statements discussed above, the Court finds that Carroll made the Misrepresentations with the intent that Farooqi rely upon them, so as to induce Farooqi to sign the Option Agreement and pay Inc. a $25,000 franchise fee. As noted previously, Farooqi was concerned about his ability to obtain final loan approval within the 30-day time period provided by the initial draft of the Option Agreement. In an effort to convince Farooqi to go ahead and sign the Option Agreement, Carroll represented that he would cooperate fully in Farooqi’s efforts to obtain financing by providing the information Farooqi needed to get his loan approved and, when Farooqi continued to express concerns over the 30-day time period provided in the Option Agreement, Carroll added the Opt-Out Provision, which he assured Farooqi would allow Fa-rooqi to get a refund of his monies at any time if (i) Carroll (acting on behalf of Inc.) failed to provide requested information, or (ii) Farooqi’s loan application was denied. On this record, there is no question that Carroll intended that Farooqi rely upon the Misrepresentations.
d. Farooqi relied upon the Misrepresentations
To prevail here, Farooqi must show that he actually relied on the Misrepresentations and that he was justified in doing so. Grant Thornton LLP v. Prospect High Income Fund, 314 S.W.3d 913, 923 (Tex.2010). Based upon the credible evidence at trial, the Court finds that Fa-rooqi actually relied on the Misrepresentations.
As noted previously, Farooqi is not particularly well educated or sophisticated. In fact, he comes across as a very nice, but naive, individual. Farooqi had never negotiated to purchase a business before and he relied heavily on others to assist him. For example, Farooqi wanted Marshall to come to his meetings with Carroll because he viewed her as his “financial advisor,” when she was really just a loan broker.64 It is clear that Farooqi liked and trusted Carroll, who, from the Court’s perspective, took advantage of Farooqi’s lack of experience and sophistication.65
For Farooqi’s reliance to be justified, he is not required to show that he acted reasonably in relying on the Misrepresentations. Lewis v. Bank of Am. NA, 343 F.3d 540, 546 (5th Cir.2003). However, Farooqi cannot recover if he blindly relied on misrepresentations that would have been obviously false given a cursory investigation. Id. But, “it is only where, under the circumstances, the facts should be apparent to one of [plaintiffs] knowledge and intelligence from a cursory glance, or he has discovered something which should serve as a warning that he is being deceived, that he is required to make *320an investigation of his own.” Field v. Mans, 516 U.S. 59, 71, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995) (citation omitted).
Here, as just noted, Farooqi was an unsophisticated and naive purchaser, with no meaningful and/or relevant business experience. There is no evidence to suggest that Farooqi should have known that he was being misled by Carroll. Thus, even though Farooqi took the Misrepresentations at face value, Farooqi’s reliance on the Misrepresentations was justified given his lack of knowledge and experience and his general lack of sophistication. Moreover, given Carroll’s and Caddell’s failure to disclose the Hinshaw Lawsuit prior to the signing of the Option Agreement, there were no “red flags” readily apparent that required Farooqi to make a further investigation.
Accordingly, the Court finds that Faroo-qi was justified in his rebanee on the Misrepresentations.
e. The Misrepresentations caused injury
The credible evidence at trial clearly established that Farooqi would never have signed the Option Agreement if he had known that the Misrepresentations were false. Moreover, that evidence clearly established that Farooqi was injured as a result of his reliance on the Misrepresentations.
Farooqi seeks to recover the following alleged damages: (i) $25,000 for the franchise fee; (ii) $4,500 for the loan processing fee with New England Commercial; (iii) $17,500 for lost wages between February and June, 2010; (iv) $6,114 in moving expenses; (v) $25,000 for mental anguish; and (vi) $200,000 in punitive damages under § 41.008 of the Texas Civil Practice and Remedies Code. The goal of direct measures of damages is to make the plaintiff whole. Henry S. Miller Co. v. Bynum, 836 S.W.2d 160, 162 (Tex.1992). In order to recover actual or compensatory damages, Farooqi must prove that he suffered an actual loss due to Carroll’s wrongful conduct. R.G. McClung Cotton Co. v. Cotton Concentration Co., 479 S.W.2d 733, 737 (Tex.Civ.App.Dallas 1972). Farooqi must show the extent of any injury he sustained and the amount of the damage sustained. Eberley v. First Nat’l Bank of Stanton, 272 S.W.2d 532, 538 (Tex.Civ.App.1954). Or, as stated by the Texas Supreme Court in Arthur Andersen & Co. v. Perry Equipment Corp., 945 S.W.2d 812, 816 (Tex.1997), “[d]irect damages are the necessary and usual result of the defendant’s wrongful act; they flow naturally and necessarily from the wrong. Direct damages compensate the plaintiff for the loss that is conclusively presumed to have been foreseen by the defendant from his wrongful act.” When measuring direct or actual damages, the issue is not what Farooqi would have gained had Carroll’s representations been true, but what Farooqi lost by being deceived. George v. Hesse, 100 Tex. 44, 93 S.W. 107, 107-08 (1906).
The Perry Equipment court went on explain consequential damages: “[consequential damages, on the other hand, result naturally, but not necessarily from the defendant’s wrongful acts. Under the common law, consequential damages need not be the usual result of the wrong, but must be foreseeable,66 and *321must be directly traceable to the wrongful act and result from it.... If damages are too remote, too uncertain, or purely conjectural, they cannot be recovered.” 945 S.W.2d at 816. See also Stuart v. Bayless, 964 S.W.2d 920, 921 (Tex.1998) (“Consequential damages are those damages that ‘result naturally, but not necessarily, from the defendant’s wrongful acts.’ They are not recoverable unless the parties contemplated at the time they made the contract that such damages would be a probable result of the breach. Thus, to be recoverable, consequential damages must be foreseeable and directly traceable to the wrongful act and result from it.”); Airborne Freight Corp., Inc. v. C.R. Lee Enters., Inc., 847 S.W.2d 289, 295 (Tex.App.1993) (“[T]he plaintiff is entitled to recover ‘special’ or ‘consequential’ damages shown to be the proximate result of the misrepresentation. Consequential damages, unlike general damages, are not presumed to be the necessary and usual result of the wrong. Plaintiff must therefore plead and prove them separately, and they must be premised upon a finding that they proximately resulted from the wrongful conduct of the defendant.”); Playboy Enters., Inc. v. Editorial Caballero, S.A. de C.V., 202 S.W.3d 250, 271 (Tex.App.-Corpus Christi 2006) (citing Formosa Plastics, 960 S.W.2d at 49 and holding that consequential damages that are foreseeable and directly traceable to the fraud, and which result from the fraud, are recoverable).
Finally, in Formosa Plastics Corp. v. Presidio Engineers and Contractors, 960 S.W.2d 41, 47 (Tex.1998), the Texas Supreme Court held that fraudulent in~ ducement claims, even those related to contracts, sounded in tort and were eligible for exemplary damages even if the damages sustained by the plaintiff were purely economic.
With these legal principals firmly in mind, the Court finds that Farooqi was damaged by his reliance on the Misrepresentations. However, not all of Farooqi’s requested damages are recoverable here as will be explained below.
Farooqi’s direct damages are limited to (i) the $25,000 Farooqi paid to Inc. under the Option Agreement, and (ii) the $4,500 Farooqi paid to New England Commercial as a loan application fee. These damages “flow naturally and necessarily from the wrong” in that Farooqi would not have signed the Option Agreement or applied for a loan for his purchase of the Las Colinas Salad Bowl had Carroll not made the Misrepresentations. These are the amounts Farooqi lost by being deceived by Carroll.
Certain other damages sought by Farooqi are consequential damages&emdash;ie., (i) the $17,500 of lost wages between February and June, 2010, and (ii) the $6,114 in moving expenses. The Court concludes that these damages are not recoverable because they were not foreseeable or directly traceable to Carroll’s wrongful acts. The wrongful acts here are the Misrepresentations, which related only to Farooqi’s ability to opt-out of the Option Agreement and get his $25,000 back. The Misrepresentations did not guarantee Farooqi that he would be successful in purchasing the Las Colinas Salad Bowl. Farooqi’s decision to quit his job in New York City and move to Texas when he did were decisions he made independent of his reliance on the
*322Misrepresentations, which only assured him that he could get his $25,000 back if, among other things, his loan application was not approved. In other words, Carroll should not be charged with decisions Faro-oqi made unrelated to the Misrepresentations; it wasn’t reasonable to expect Faro-oqi to quit his job and move to Texas when he had not even been approved for a loan and his purchase of the Las Colinas Salad Bowl was far from certain. Or, in the words of the Restatement, looking back from Farooqi’s alleged damages to Carroll’s wrongful conduct, it appears to this Court “highly extraordinary that [the Misrepresentations] should have brought about the harm.” Restatement (Second) of ToRTS: Foreseeability of Harm or Manner of Its OCCURRENCE § 435 (1965).
Farooqi also seeks to recover damages of $25,000 for his mental anguish. In order to recover mental anguish damages in Texas, a plaintiff is required to show proof of feeling depressed, confused, frightened, angry or scared or show changes in physical appearance and demeanor. Higginbotham v. Allwaste, Inc., 889 S.W.2d 411, 417 (Tex.App.-Houston [14th Dist.] 1994). In Phar-Mor, Inc. v. Chavira, 853 S.W.2d 710, 712 (Tex.App.Houston [1st Dist.] 1993), the court held that "[m]ental anguish is defined as intense pain of body or mind or a high degree of mental suffering. Mental anguish is something more than mere worry, anxiety, vexation or anger. It is more than disappointment, resentment or embarrassment."
Here, Farooqi testified that he was embarrassed as a result of his loan being denied because he was forced to go on food stamps.67 No other evidence of mental anguish was presented, such as inability to work, insomnia, physical manifestations of pain or stress or visits to a doctor. Because mere embarrassment is not a sufficient basis for a recovery of mental anguish damages, the Court concludes that Farooqi has not met his burden with regard to his alleged mental anguish damages.
Finally, Farooqi seeks to recover exemplary damages under section 41.008 of the TEX. Cw. PRAC. & REM.CODE. That section provides a formula limiting the amount of exemplary damages that may be awarded and Drovides:
(b) Exemplary damages awarded against a defendant may not exceed an amount equal to the greater of:
(1)(A) two times the amount of economic damages; plus
(B) an amount equal to any noneconomic damages ... not to exceed $750,000; or
(2) $200,000.
Tex. Civ. Prac. & Rem.Code Ann. § 41.008 (West 2009). Farooqi seeks damages of $200,000 under this section.
In turn, section 41.003 sets forth the standard for recovering exemplary damages and provides, in relevant part, that: “(a) ... exemplary damages may be awarded only if the claimant proves by clear and convincing evidence that the harm with respect to which the claimant seeks recovery of exemplary damages results from: (1) fraud.... ” Tex. Civ. Prac. & Rem.Code Ann. § 41.008(a) (West 2003). Finally, “[i]n determining the amount of exemplary damages, the trier of fact shall consider evidence, if any, relating to: (1) the nature of the wrong; (2) the character of the conduct involved; (3) the degree of *323culpability of the wrongdoer; (4) the situation and sensibilities of the parties concerned; (5) the extent to which such conduct offends a public sense of justice and propriety; and (6) the net worth of the defendant.” Tex. Crv. PRAC. & Rem.Code Ann. § 41.011(a) (West 2008).
Based upon its review of the credible evidence, the Court finds that Farooqi has satisfied the statutory requirements necessary for an award of exemplary damages. He has proven, by clear and convincing evidence, that the harm for which he seeks a recovery of exemplary damages resulted from Carroll’s fraud. Thus, Farooqi is entitled to an award of exemplary damages. The only remaining question is the amount of exemplary damages the Court should award.
Here, the “wrong” is Carroll’s fraudulent inducement of Farooqi’s execution of the Option Agreement by making the Misrepresentations (and Carroll’s taking of Farooqi’s $25,000 knowing that he would not return the funds to Farooqi even if the conditions to the return were satisfied). In making the Misrepresentations, Carroll took advantage of someone he knew to be naive and unsophisticated and who he knew trusted him. Carroll was completely culpable and there was no credible evidence presented at trial that mitigated his conduct. Carroll’s conduct offends a public sense of justice and propriety. However, Carroll has filed for relief under chapter 13 of the Bankruptcy Code and has a modest net worth based upon the information contained in his bankruptcy schedules. Moreover, according to Carroll, the Salad Bowl Entities are now defunct,68 which is corroborated by the value that he placed on his shares of Inc. in his schedules.69 This last factor mitigates against the Court awarding the maximum in punitive damages. After carefully considering each of these factors, the Court will award Farooqi exemplary damages of two times the amount of his economic damages ($29,500) or $59,000.
For all of these reasons, the Court concludes that Farooqi has proven his fraudulent inducement claim against Inc., the entity on whose behalf Carroll was acting when he negotiated the Option Agreement, and has proven his entitlement to a recovery of $88,500 on this claim, comprised of Farooqi’s economic damages of $29,500 and exemplary damages of $59,000.
C. Is Farooqi entitled to a judgment for violations of the DTPA?
Farooqi also alleges that Carroll violated the DTPA,70 specifically sections 17.46(b)(12) and 17.46(b)(24). Proving a violation of the DTPA requires a plaintiff to meet a three-part test. First, the plaintiff must be a consumer. Second, the defendant must have committed, among other things, a “laundry-list” violation under section 17.46(b) on which the plaintiff detrimentally relied. Third, the wrongful act must be a producing cause of the plaintiffs economic or mental anguish damages. Doe v. Boys Clubs of Greater Dallas, Inc., 907 S.W.2d 472, 478 (Tex.1995); Wall v. *324Parkway Chevrolet, Inc., 176 S.W.3d 98, 105 (Tex.App.-Houston [1st Dist.] 2004). Farooqi also seeks treble damages for any sums awarded as a result of the DTPA violations as provided for in Tex. Bus. & Com.Code Ann. § 17.50 (West 2005).71 The Court will analyze these issues in turn.
1. Is Farooqi a consumer as that term is defined under the DTPA?
Under Texas law it is clear that “only a consumer has standing to maintain a private cause of action.... ” Flenniken v. Longview Bank & Trust Co., 661 S.W.2d 705, 706 (Tex.1983). See also Knight v. Int’l Harvester Credit Corp., 627 S.W.2d 382, 388 (Tex.1982); Cameron v. Terrell & Garrett, Inc., 618 S.W.2d 535, 538 (Tex.1981); Riverside Nat’l Bank v. Lewis, 603 S.W.2d 169, 173 (Tex.1980). The DTPA excludes wholly intangible property rights because intangibles do not qualify as goods or services. “The statutory definition of ‘goods’ indicates an obvious legislative intent to exclude the purchase of intangibles from the scope of the DTPA.” Hand v. Dean Witter Reynolds, Inc., 889 S.W.2d 483, 497 (Tex.App.-Houston [14th Dist.] 1994, writ denied); Moody Nat’l Bank v. Texas City Development Ltd., 46 S.W.3d 373, 379-80 (Tex.App.-Houston [1st Dist.] 2001); Lukasik v. San Antonio Blue Haven Pools, 21 S.W.3d 394, 402-03 (Tex. App.-San Antonio 2000, no. pet.).
The DTPA itself defines “consumer” as “an individual ... who seeks or acquires by purchase or lease, any goods or services .... ” Tex. Bus. & Com.Code Ann. § 17.45(4) (West 2007). Accordingly, in order to be a “consumer,” Farooqi must have been seeking to purchase or lease a good or service. In turn, the DTPA defines a “good” as “tangible chattels or real property purchased or leased for use,” while a “service” is defined as “work, labor, or service purchased or leased for use, including services furnished in connection with the sale or repair of goods.” Tex. Bus. & Com.Code Ann. §§ 17.45(1) and (2) (West 2007).
Thus, to determine if Farooqi was a “consumer,” this Court must determine what, exactly, Farooqi was seeking to acquire. If Farooqi’s central objective in his transaction with the Salad Bowl Entities and Carroll was the acquisition of goods or services, then Farooqi will be a “consumer,” thereby satisfying the first statutory element. Flenniken, 661 S.W.2d at 705. If, however, Farooqi’s central objective was merely the exchange of intangibles without seeking a good or service, then Farooqi would not qualify as a “consumer,” and no claim under the DTPA would lie. Riverside Nat’l Bank, 603 S.W.2d 169 at 175.
Texas courts have held that the objective of any transaction must be examined from the perspective of the plaintiff. Flenniken, 661 S.W.2d at 707; see also Knight, 627 S.W.2d at 389 (“Knight’s objective in the transaction was *325the purchase of a dump truck. The financing arranged with IHCC was merely the means of making that purchase.... [T]here was a single transaction—the sale of a truck on an installment basis”); Martin v. Lou Poliquin Enters., Inc., 696 S.W.2d 180, 184 (Tex.App.-Houston [14th Dist.] 1985) (citing La Sara Grain Co. v. First Nat’l Bank of Mercedes, 673 S.W.2d 558, 567 (Tex.1984)) (“The Texas Supreme Court recently indicated that a person’s ‘objective’ is of paramount importance in determining DTPA consumer status”). Further, it is not Farooqi’s contractual relationship with Carroll that is determinative, but rather Farooqi’s relationship to the transaction at issue. “A plaintiff establishes his standing as a consumer in terms of his relationship to the transaction, not by a contractual relationship with the defendant. The only requirement is that the goods or services sought or acquired by the consumer form the basis of his complaint.” Flenniken, 661 S.W.2d at 707; see also Cameron v. Terrell & Garrett, Inc., 618 S.W.2d 535, 541 (Tex.1981) (“Consumer is defined in section 17.45(4) only in terms of a person’s relationship to a transaction in goods or services. It does not purport to define a consumer in terms of a person’s relationship to the party he is suing”).
Carroll argues that Farooqi is not a “consumer” under the DTPA because in the complained-of transaction Farooqi merely sought to acquire an option to purchase the Las Colinas Salad Bowl. In Carroll’s mind, the Option Agreement, not the purchase of the Las Colinas Salad Bowl itself, was the transaction. And, according to Carroll, an option to purchase is considered an intangible in Texas because it merely grants a right and is not a good or service under the DTPA. Hand, 889 S.W.2d at 497-98. Therefore, according to Carroll, if the transaction at issue involved the purchase of an option and not the purchase of a franchise (or some other good or service), Farooqi is not a “consumer” under the DTPA.
Conversely, however, if Farooqi was seeking to acquire, among other things, a Salad Bowl franchise in his transaction with the Salad Bowl Entities and Carroll, he would be a “consumer” under the DTPA. Texas Cookie Co. v. Hendricks & Peralta, 747 S.W.2d 873, 876-77 (Tex.App.Corpus Christi 1988, writ denied). As the court in Wheeler v. Box, 671 S.W.2d 75, 78-79 (Tex.App.-Dallas 1984, writ refd n.r.e.) held, “[although the [franchise] itself was an intangible, it encompassed both tangible personal property and services purchased for use in the function of the business. Indeed, we would have to adopt a very narrow and strained interpretation to conclude that the Boxes purchased neither tangible goods nor services.”
Based upon its review of the credible evidence, the Court finds that Farooqi’s objective from the outset of his relationship with the Salad Bowl Entities and Carroll was to acquire a Salad Bowl franchise; specifically, the Las Colinas Salad Bowl. Farooqi’s objective was not to acquire just an option to purchase.
Moreover, important differences can be drawn between Hand, the primary case relied upon by Carroll, and this case. The contract at issue in Hand was an option contract for oil futures. The purchaser of the oil futures was seeking the right involved with a commodities option contract; that is, the right to buy something in the future at a set price. Generally speaking, the goal of options contracts is not to acquire the underlying good, but rather to acquire the right to purchase that good. It is the right, or option itself, that is valuable whether or not the purchaser actually wanted the oil. Here, however, Fa-rooqi was not seeking the right to buy a *326franchise; he was interested in purchasing an actual franchise. A right to purchase a franchise does not carry the same inherent value as a right to purchase oil or other commodities at a set price. It seems disingenuous to suggest otherwise.
Finally, there is a line of cases in Texas, including the Flenniken case, which has held that where a plaintiff enters into an intangible contract with the end goal of acquiring a good or service, that plaintiff can be considered a consumer under the DTPA even though the contract was for an intangible. Texas courts have held that when a plaintiff has claims arising from a transaction where the ultimate objective of the transaction is the purchase of a good or service, a claim concerning the transaction also concerns the good or service for the purposes of the DTPA. See, e.g., Texas Cookie, 747 S.W.2d at 876-77 (finding that when eligible services were clearly an objective of a transaction that otherwise involved the acquisition of an intangible, the transaction at issue was covered under the DTPA). In the Flenniken case, the plaintiffs entered into a contract with a bank and exchanged intangibles. The bank accepted a note and an assignment of a mechanic’s lien in return for financing the acquisition of a home. The Texas Supreme Court held that the plaintiffs were consumers under the DTPA because “from the Flennikens’ perspective, there was only one transaction: the purchase of a house. The financing scheme Easterwood arranged with the bank was merely his means of making a sale ... the Flennikens did not seek to borrow money; they sought to acquire a house. The house thus forms the basis of their complaint.” Flenniken, 661 S.W.2d at 707-08. In Knight v. International Harvester Credit Corp., the Texas Supreme Court overturned an appellate decision determining that the plaintiff was not a consumer because the sole basis for the complaint was the extension of credit for the purchase of a vehicle. Knight, 627 S.W.2d at 388. The Knight court held that the transaction needed to be viewed more broadly as a number of separate violations connected with the sale of a truck, which was clearly a good, even if each individual transaction may not have directly involved the good. The plaintiff had complained of a provision in the retail assignment contract that allegedly violated the DTPA. The Knight court held that the plaintiff had asserted a proper claim under the DTPA because the violations were connected with the sale of a good. Id. at 388-89.
Similar to the plaintiffs in Flenniken, Farooqi’s ultimate objective in entering into the Option Agreement was the purchase of goods and services—i.e., the Las Colinas Salad Bowl, which included a franchise, a real property lease, equipment, and services from one or both of the Salad Bowl Entities as franchisor. Similar to the plaintiff in Knight, Farooqi’s DTPA claims arose from a document signed while entering into a transaction connected to the sale or purchase of an eligible good or service. Farooqi testified that he understood the Option Agreement to mean only that Carroll would hold the Las Colinas Salad Bowl for him while he obtained a commercial loan to fund the remainder of the agreed upon purchase price. Farooqi and Carroll had negotiated a total purchase price for the Las Colinas Salad Bowl, and Farooqi frequently referred to the $25,000 option payment as a franchise fee or a down payment.72 Farooqi did not understand the Option Agreement to limit *327his ability to purchase the Las Colinas Salad Bowl and Farooqi believed that he was still on the way to purchasing it long after the Option Agreement had expired. Farooqi does not seem to have understood the Option Agreement to have been anything other than a step along the way to the achievement of his ultimate goal—ie., the purchase of the Las Colinas Salad Bowl. Farooqi envisioned a multi-step process—ie., Farooqi would make a $25,000 payment during the Option Period, with Carroll providing the needed information about the franchise operation to assist Fa-rooqi in obtaining his loan for the balance of the purchase price. Then, once Farooqi obtained his loan, the parties would sign the final sale contract and consummate the purchase/sale transaction. Thus, when considering the evidence to ascertain Faro-oqi’s objective, it is clear that his objective was, and remained, throughout his dealings with the Salad Bowl Entities and Carroll, the purchase of the Las Colinas Salad Bowl.
For all of these reasons, the Court concludes that Farooqi was a consumer under the DTPA.
2. Has a “laundry list” violation occurred?
a. Tex. Bus. & Com.Code § 17.46(b)(12)
Section 17.46(a) of the DTPA provides that “false, misleading, or deceptive acts or practices in the conduct of any trade or commerce are hereby declared unlawful and are subject to action by the consumer protection division.... ” Subsection (b) then goes on to define certain specific acts as “false, misleading, or deceptive” including “representing that an agreement confers or involves rights, remedies, or obligations which it does not have or involve, or which are prohibited by law.” Tex. Bus. & Com.Code Ann. § 17.46(b)(12) (West 2007).
While analyzing Farooqi’s fraudulent inducement claim, the Court found that Carroll made the Misrepresentations, one of which was misrepresenting the duration of the Opt-Out Provision. Specifically, and as noted previously, Carroll repeatedly assured Farooqi that the Opt-Out Provision of the Option Agreement would permit Farooqi to receive a return of his $25,000 at any time, notwithstanding the 30-day limitation contained in the Option Agreement, if one of two conditions was satisfied: (i) Inc., acting through Carroll, did not provide requested information, or (ii) Farooqi’s loan application was denied. See supra pp. 4-8. Texas courts have held that oral misrepresentations concerning the terms of a written contract are actionable under the DTPA. See, e.g., Best v. Ryan Auto Group, Inc., 786 S.W.2d 670, 671-72 (Tex.1990).
The Court also found, in the context of analyzing Farooqi’s fraudulent inducement claim, that Farooqi actually and justifiably relied on the Misrepresentations, one of which was misrepresenting the duration of the Opt-Out Provision, when he signed the Option Agreement. See supra pp. 31-33. Thus, detrimental reliance has also been established.
Accordingly, Farooqi has established a claim under § 17.46(b)(12) of the DTPA.
b. Tex. Bus. & Com.Code § 17.46(b) (24)
Section 17.46(b)(24) sets forth another of the specific acts defined as “false, misleading or deceptive;” specifically, “failing to disclose information concerning goods or services which was known at the time of the transaction if such failure to disclose such information was intended to induce the consumer into a transaction into which the consumer would not have entered had the information been disclosed.” Here, Farooqi complains of Carroll’s fail*328ure to disclose the Hinshaw Lawsuit filed against Carroll, Caddell, and Mark Gan-gler by the Hinshaws on September 9, 2009 in state district court in Travis County, Texas shortly before Farooqi began his negotiations over a possible purchase of the Las Colinas Salad Bowl.
In the Hinshaw Lawsuit, Carroll, Cad-dell and Gangler were sued for allegedly making fraudulent misrepresentations in connection with a Salad Bowl transaction. Specifically, the Hinshaws asked for, among other things, declaratory relief that any agreements made by them had been rescinded, are void and ordering a return of approximately $122,000 paid by the Hin-shaws. Plaintiffs Exhibit 2. According to Farooqi, if he had known about the Hin-shaw Lawsuit, he would not have done business with Carroll and the Salad Bowl Entities.73 And, as noted previously, on September 25, 2009, Carroll provided Fa-rooqi with a copy of the Franchise Disclosure Document dated June 5, 2009. That document specifically represented that there was “no litigation required to be disclosed.” Defendant’s Exhibit 2, p. 3. Of course, when that document was provided to Farooqi it was out of date, as the Hin-shaw Lawsuit was pending and was not disclosed.
As a preliminary inquiry, this Court must determine whether Carroll had a duty to disclose the Hinshaw Lawsuit. When there is a duty to disclose information, silence is considered to be the equivalent of a false representation regarding the missing information. Myre v. Meletio, 307 S.W.3d 839, 843 (Tex.App.-Dallas 2010). A duty to disclose exists (i) when one voluntarily discloses information, the whole truth must be disclosed; (ii) when one makes a representation, new information must be disclosed when that new information makes the earlier representation misleading or untrue; and (iii) when one makes a partial disclosure and that disclosure conveys a false impression. Brown & Brown of Tex., Inc. v. Omni Metals, Inc., 317 S.W.3d 361, 384 (Tex.App-Houston [1st Dist.] 2010).
Here, Carroll clearly had a duty to disclose the Hinshaw Lawsuit to Farooqi. In the Financial Disclosure Document Carroll represented that no litigation was pending, which therefore obligated him to disclose the entire truth about pending litigation once the Hinshaw Lawsuit was filed.
Based upon the credible evidence at trial, the Court concludes that Carroll failed to disclose the existence of the Hinshaw Lawsuit because he was concerned that if the Hinshaws’ allegations were disclosed, it would cause Farooqi to walk away from any business dealings with him and the Salad Bowl Entities. In other words, the Court finds that Carroll failed to disclose the Hinshaw Lawsuit in order to induce Farooqi to (i) move forward with his intended purchase of the Las Colinas Salad Bowl, (ii) sign the Option Agreement, and (iii) pay the $25,000 franchise fee called for in the Option Agreement.
The Court is also satisfied that if Carroll had disclosed the Hinshaw Lawsuit, Faro-oqi would have refused to proceed forward with his attempt to purchase the Las Coli-nas Salad Bowl as he testified at trial.74 Thus, detrimental reliance has also been established.
Accordingly, Farooqi has established a claim under § 17.46(b)(24) of the DTPA.
3. Were the violations a producing cause of Farooqi’s economic damages or mental anguish?
Within the meaning of the DTPA, a “producing cause” of an injury is *329an efficient, exciting or contributing cause that in the natural sequence of events produces injuries or damages. Ibarra v. Nat’l Construction Rentals, Inc., 199 S.W.3d 32, 35 (Tex.App.-San Antonio 2006). “Producing cause requires that the act be both a cause in fact and a substantial factor in causing the plaintiffs injuries.” Id.; Brown v. Bank of Galveston, Nat. Ass’n, 963 S.W.2d 511, 514 (Tex.1998).
Based upon the credible evidence at trial, the Court finds that Carroll’s misrepresentation about the duration of the Opt-Out Provision was a producing cause of damage to Farooqi, in that this misrepresentation was both a cause in fact and a substantial factor in causing at least a portion of Farooqi’s damages, as will be explained below. Moreover, the Court finds that Carroll’s failure to disclose the Hinshaw Lawsuit was a producing cause of at least a portion of Farooqi’s damages too.
4. What damages, if any, is Farooqi entitled to recover for the DTPA violations?
Farooqi seeks to recover the following alleged damages: (i) $25,000 for the franchise fee; (ii) $4,500 for the loan processing fee to New England Commercial; (iii) $17,500 for lost wages between February and June, 2010; (iv) $6,114 in moving expenses; (v) $25,000 for mental anguish; and (vi) $234,342 in multiple damages under the DTPA. The Court has already liquidated Farooqi’s economic damages in connection with its analysis of Farooqi’s fraudulent inducement claim and awarded him $29,500. See supra pp. 33-39. Those remain Farooqi’s economic damages under the DTPA since under the DTPA, “economic damages” are defined as “compensatory damages for pecuniary loss, including costs of repair and replacement. The term does not include exemplary damages or damages for physical pain and mental anguish.... ” Tex. Bus. & Com.Code Ann. § 17.45(11) (West 2007). Moreover, Faro-oqi’s consequential and mental anguish damages under the DTPA suffer from the same flaws discussed in connection with Farooqi’s fraudulent inducement claim.75 See supra pp. 36-37. That leaves only Farooqi’s request for multiple damages under the DTPA.
Section 17.50(b) sets forth the measure of damages for claims under the DTPA, specifically claims under subsection (b) of § 17.46. It provides:
[i]n a suit filed under this section, each consumer who prevails may obtain: (1) the amount of economic damages found by the trier of fact. If the trier of fact finds that the conduct of the defendant was committed knowingly, the consumer may also recover damages for mental anguish, as found by the trier of fact, and the trier of fact may award not more than three times the amount of economic damages; or if the trier of fact finds the conduct was committed intentionally, the consumer may recover damages for mental anguish, as found by the trier of fact, and the trier of fact may award not more than three times the amount of damages for mental anguish and economic damages.
Tex. Bus. & Com.Code Ann. § 17.50(b)(1) (West 2005). The Texas Supreme Court has held that the maximum amount of damages for a knowing violation of the *330DTPA is three times the actual damages. Jim Walter Homes, Inc. v. Valencia, 690 S.W.2d 239 (Tex.1985). “Knowingly” is defined in the DTPA as
actual awareness, at the time of the act or practice complained of, of the falsity, deception, or unfairness of the act or practice giving rise to the consumer’s claim ... but actual awareness may be inferred where objective manifestations indicate that a person acted with actual awareness.
Tex. Bus. & Com.Code ANN. § 17.45(9) (West 2007). Moreover, the DTPA defines “intentionally” as
actual awareness of the falsity, deception, or unfairness of the act or practice ... coupled with the specific intent that the consumer act in detrimental reliance on the falsity or deception or in detrimental ignorance of the unfairness. Intention may be inferred from objective manifestations that indicate that the person acted intentionally or from facts showing that the defendant acted with flagrant disregard of prudent and fair business practices to the extent that the defendant should be treated as having acted intentionally.
Tex. Bus. & Com.Code Ann. § 17.45(13) (West 2007).
This Court has already found that Carroll, acting on behalf of Inc., made the Misrepresentations while aware of their falsity and with the intent that Farooqi act in detrimental reliance on them. See supra pp. 28-31. Moreover, the Court finds that Carroll failed to disclose the Hinshaw Lawsuit knowing that by failing to disclose it he was deceiving Farooqi with the intent that Farooqi rely upon his deception. Because Carroll acted intentionally, treble damages are available here. When Faroo-qi’s economic damages of $29,500 are trebled under the DTPA, the total amount of his recoverable damages is $88,500.76
For all of these reasons, the Court concludes that Farooqi has proven his DTPA claim against Inc., the entity on whose behalf Carroll was acting when he negotiated the Option Agreement, and has proven his entitlement to a recovery of $88,500 on this claim, comprised of a trebling of Farooqi’s economic damages of $29,500.
D. Is Carroll personally liable for the Misrepresentations he made as an officer of Inc.?
Farooqi has not pled any claims based on alter ego or piercing the corporate veil. Therefore, in order for Farooqi to recover here, he must be able to hold Carroll personally liable for any of the Misrepresentations Carroll made as an officer of Inc. With respect to Farooqi’s fraudulent inducement claim, the law of agency allows Farooqi to hold Carroll personally liable for his damages despite Fa-rooqi’s failure to plead any claims of alter ego or veil piercing. Under Texas law, “[a] corporation’s agent is personally liable for his own fraudulent or tortuous acts, even when acting within the course and scope of his employment.” Sanchez v. Mulvaney, 274 S.W.3d 708, 712 (Tex.App.San Antonio 2008); see Miller v. Keyser, 90 S.W.3d 712, 717 (Tex.2002); Ward Family Foundation v. Arnette (In re Arnette), 454 B.R. 663, 697 (Bankr.N.D.Tex. *3312011) (“The law is well-settled that a corporate agent can be held individually liable for fraudulent statements or knowing misrepresentations even when they are made in the capacity of a representative of the corporation.”) (citing Gore v. Scotland Golf, Inc., 136 S.W.3d 26, 32 (Tex.App.-San Antonio 2003)). When a plaintiff has brought an action seeking to hold an agent personally liable for his own fraudulent acts, no piercing of the corporate veil is required. Sanchez, 274 S.W.3d at 712.
With respect to Farooqi’s DTPA claims, the result is the same. In Miller v. Keyser, 90 S.W.3d 712 (Tex.2002), the Texas Supreme Court held that because the DTPA allows a consumer to bring suit against “any person,” an agent for a disclosed principal may be held personally liable for the misrepresentations he makes when acting within the scope of his employment. The Miller court noted that “[i]n Weitzel we concluded that when corporate officers make affirmative misrepresentations in connection with the sale of a home, the agents are personally liable under the DTPA even though they were acting on behalf of the corporation. Liability attaches because the officers themselves made the misrepresentations,” id. at 717 (emphasis in original), “[ajgents are personally liable for their own torts. There is no basis for concluding differently based on the claims brought under the DTPA. Accordingly, we hold that an agent may be held personally liable for his own violations of the DTPA.” Id. at 718 (citations omitted).
For these reasons, Carroll is personally liable for the damages caused by the Misrepresentations as liquidated above. See supra at pp. 33-39 and 49-51.
E. Is Farooqi entitled to a judgment of nondischargeability on his state law claims?
Farooqi bears the burden of proving, by a preponderance of the evidence, that the debts at issue are excepted from Carroll’s discharge under section 523(a)(2)(A) of the Bankruptcy Code. Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991); In re Acosta, 406 F.3d 367, 372 (5th Cir.2005). Section 523(a)(2) provides that “a discharge under section 727 ... does not discharge an individual debtor from any debt 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.” 11 U.S.C. § 523(a)(2)(A). As this Court noted in In re Amette, 454 B.R. at 698, “[although the general purpose of the Bankruptcy Code is to provide debtors with a fresh start, ‘section 523(a)(2)(A) is not designed to protect debtors; rather it is designed to protect the victims of fraud.’ ” (citations omitted).
In In re Acosta, the Fifth Circuit set forth a five-part test for determining nondischargeability under section 523(a)(2)(A). In order for a debt to be nondischargeable under that section, Faro-oqi must show that: (i) Carroll made a representation; (ii) Carroll knew the representation was false; (iii) Carroll made the representation with the intention to deceive Farooqi; (iv) Farooqi actually and justifiably relied on the representation; and (v) Farooqi sustained losses as a proximate result of his reliance. 406 F.3d at 372. See also RecoverEdge, L.P. v. Pentecost, 44 F.3d 1284, 1293 (5th Cir.1995).
Here, Farooqi has established the elements of his fraudulent inducement claim. As this Court previously found: (i) Inc., acting through Carroll, made the Misrepresentations, which induced Farooqi to sign the Option Agreement; (ii) Carroll was aware the Misrepresentations were *332false when he made them; (in) Ine., acting through Carroll, intended for Farooqi to rely on the Misrepresentations; (iv) Faro-oqi actually relied on the Misrepresentations and was justified in relying on them; and (v) Farooqi was injured by his reliance and sustained losses as a proximate result of his reliance. See supra pp. 26-39. And, as the Court concluded previously, Carroll is personally liable for this fraud. See supra pp. 51-52.
Accordingly, the elements of section 523(a)(2)(A) have been satisfied regarding Farooqi’s fraudulent inducement claim. The testimony at trial clearly established that Farooqi was damaged in the amount of $88,500 as a result of Carroll’s fraud, which debt is nondischargeable under section 523(a)(2)(A) of the Bankruptcy Code.
Farooqi’s section 17.46(b)(12) DTPA claim is based on the same conduct as the fraudulent inducement claim. Inc., acting through Carroll, represented that the OpNOut Provision in the Option Agreement conferred or involved rights, remedies, or obligations which it did not have or involve; specifically, that the OpL-Out Provision would allow Farooqi to receive a refund of his $25,000 if either of two conditions was satisfied. Carroll intentionally or knowingly made the representation and Farooqi relied on that representation when signing the Option Agreement. Fa-rooqi was injured as a result of Carroll’s representations about the rights conferred or involved. See supra pp. 45-46. And, as the Court concluded previously, Carroll is personally liable for this DTPA violation. See supra pp. 51-52.
Accordingly, the elements of section 523(a)(2)(A) have been satisfied regarding this DTPA claim. The testimony at trial clearly established that Farooqi was damaged in the amount of $88,500 as a result of Carroll’s DTPA violation, which debt is nondischargeable under section 523(a)(2)(A) of the Bankruptcy Code. See Cohen v. de la Cruz, 523 U.S. 213, 223,118 S.Ct. 1212, 140 L.Ed.2d 341 (1998) (“ ‘Any debt ... for money, property, services, or ... credit, to the extent obtained by’ fraud encompasses any liability arising from money, property, etc., that is fraudulently obtained, including treble damages ... ”).
In his section 17.46(b)(24) claim, Farooqi alleges that Carroll failed to disclose the Hinshaw Lawsuit. While the Court has concluded that Farooqi proved his DTPA claim under § 17.46(b)(24), Fa-rooqi sought to have this claim declared nondischargeable under the wrong provision of the Bankruptcy Code. As noted previously, the Franchise Disclosure Document and the statements contained therein are statements of the financial condition of an insider of Carroll and, as such, those damages would only be nondischargeable under section 523(a)(2)(B) of the Bankruptcy Code, which claim was not pled. See supra n. 52. Accordingly, any damages owing to Farooqi for Carroll’s violation of section 17.46(b)(24) are dischargeable in Carroll’s chapter 13 bankruptcy case.
III. CONCLUSION
Farooqi has proven the following claims against Inc.: (i) fraudulent inducement, with actual and exemplary damages of $88,500; and (ii) violation of § 17.46(b)(12) and § 17.46(b)(24) of the DTPA, with actual and exemplary damages of $88,500. Farooqi has also proven that Carroll is personally liable for Farooqi’s damages. Because Texas law forbids double recovery,77 Farooqi can only recover once for his $88,500 of damages.
*333Finally, Farooqi has proven that his now liquidated claim against Carroll for (i) fraudulent inducement, and (ii) Carroll’s violation of section 17.46(b)(12) of the DTPA is nondischargeable under section 523(a)(2)(A) of the Bankruptcy Code. However, Farooqi’s claim that Carroll violated section 17.46(b)(24) of the DTPA is dis-chargeable in Carroll’s chapter 13 case due to Farooqi’s failure to plead nondischarge-ability under the correct subsection of section 523(a)(2).
A judgment consistent with this Memorandum Opinion will be entered separately.
. Audio Recording: Trial of Farooqi v. Carroll, held in the Bankruptcy Court for the Northern District of Texas (Nov. 7-8, 2011); Testimony of Farooqi, Nov. 7, 2011 at 9:31 a.m. (on file with the Bankruptcy Court) (hereinafter "Trial Record”).
. The trial testimony is unclear as to whether Farooqi made two trips to Dallas or just one before moving here early in 2010. It is possible that Farooqi came to Dallas to visit his sister and look for opportunities, returned to New York and then returned to Dallas in September to look in earnest. Alternatively, it is also possible that there was a single trip during which he visited his sister, made the decision that he wanted to move here if the right opportunity could be found and then began meeting with Miller, Marshall, and Carroll about the Las Colinas Salad Bowl. Whether there was one trip or two is immaterial to the substance of the Court's decision and analysis.
.Carroll testified that the Franchise Corporation was a wholly-owned subsidiary of Inc. However, based on the remainder of Carroll's testimony it is unclear whether Franchise Corporation was actually a wholly-owned subsidiary of Inc. or whether the two entities were simply closely related. Again, this is immaterial to the substance of the Court’s decision and analysis.
. Trial Record: Testimony of Farooqi, Nov. 7, 2011 at 9:31 a.m.
. Trial Record: Testimony of Marshall, Nov. 7, 2011 at 4:15-16 p.m.
. There is some disagreement between the witnesses at trial as to whether Carroll was present in person for this meeting, or whether he was on a speaker-phone. There is also disagreement between the witnesses as to the exact date of the meeting. Again, this disagreement is not material to the Court's decision or analysis.
. Trial Record: Testimony of Farooqi, Nov. 7, 2011 at 9:37 a.m.
. Id. at 9:38-39 a.m.
. Inc. is defined in the Option Agreement as the "Owner.” However, when Carroll executed the Option Agreement his signature block does not indicate that he was signing the document as an officer of Inc. It is fair to say that the Option Agreement is not artfully drafted, as neither party had a lawyer involved in preparing the documentation. Carroll apparently drafted the Option Agreement himself. However, the Court is satisfied when looking at the document as a whole and after considering the trial testimony that Carroll was acting as an officer of Inc. when he negotiated with Farooqi and when he signed the Option Agreement.
. Trial Record: Testimony of Farooqi, Nov. 7, 2011 at 9:44 a.m.; Testimony of Caddell, Nov. 7, 2011 at 3:17-18 p.m.
. Trial Record: Testimony of Carroll, Nov. 7, 2011 at 1:43-44 p.m.
. Trial Record: Testimony of Farooqi, Nov. 7, 2011 at 9:44 a.m.; Testimony of Caddell, Nov. 7, 2011 at 3:19 p.m.; Testimony of Marshall, Nov. 7, 2011 at 4:10 p.m., 4:13-14 p.m. and 5:18 p.m.
. Trial Record: Testimony of Farooqi, Nov. 7, 2011 at 10:25 a.m.
. Id. at 9:43-44 p.m.
. Id. at 9:44-45 a.m.; Testimony of Marshall, Nov. 7, 2011 at 4:12-14 p.m. and 5:18 p.m.; Testimony of Caddell, Nov. 7, 2011 at 3:20 p.m.
.Farooqi testified that he wrote $2,500 on the first check. Carroll testified that Farooqi had correctly written $25,000 in the box on the check, but had written “twenty thousand” on the line, and so the bank would not accept the check. Irrespective of whose recollection is more accurate, both parties agree that once the mistake was discovered, Farooqi wired the correct sum from New York City. Trial Record: Testimony of Farooqi, Nov. 7, 2011 at 9:46 a.m.; Testimony of Carroll, Nov. 8, 2011 at 11:49-50 a.m.
. Marshall testified that most loan packages were for amounts closer to $800,000. Faroo-qi was only interested in borrowing the minimum amount needed to purchase the Las Colinas Salad Bowl with a small amount left over for unexpected expenses, or around $150,000. Trial Record: Testimony of Marshall, Nov. 7, 2011 at 4:00-01 p.m. and 4:02-04 p.m.
. Farooqi testified that he gave the money for the loan application to Marshall to pay to New England Commercial. However, Marshall testified that she never received any money from Farooqi to pay to New England Commercial. Rather, according to Marshall, Farooqi sent the money directly to New England Commercial. Again, this discrepancy is of no real consequence here as it is clear that the loan application fee was paid. Trial Record: Testimony of Farooqi, Nov. 7, 2011 at 9:50 a.m.; Testimony of Marshall, Nov. 7, 2011 at 4:53-54 p.m.
. Specifically, Marshall testified that New England Commercial was interested in the Salad Bowl Entities and requested information regarding their operations and stability. According to Marshall, New England Commercial was more interested in the Salad Bowl Entities as franchisor than they were in Farooqi as proposed franchisee. Trial Record: Testimony of Marshall, Nov. 7, 2011 at 4:03-04 p.m.
. Id. at 4:20 p.m.
. Id. at 4:21-22 p.m.; 4:27-28 p.m.; 4:35 p.m. and 5:19 p.m.
. Trial Record: Testimony of Farooqi, Nov. 7, 2011 at 9:46-47 a.m.
. Trial Record: Testimony of Marshall, Nov. 7, 2011 at 4:27-28 p.m.
. Trial Record: Testimony of Farooqi, Nov. 7, 2011 at 9:49-50 a.m.
. Id. at 9:50 a.m.
. Id.
. Id. at 9:51-52 a.m.
. The Hinshaw Lawsuit is discussed further infra at p. 46-47.
. Trial Record: Testimony of Carroll, Nov. 8, 2011 at 11:52 a.m.
. Trial Record: Testimony of Farooqi, Nov. 7, 2011 at 9:53 a.m.
. Id. at 9:53-55 a.m.
. Id. at 11:15 a.m.
.Id. at 9:57 a.m.
. Id. at 9:58 a.m.
. It is unclear from the evidence presented at trial if the Salad Bowl Entities had the capital necessary to provide seller-financing for Farooqi's purchase of another location. Trial Record: Testimony of Caddell, Nov. 7, 2011 at 2:50-53 p.m. and 2:58-59 p.m.
. Trial Record: Testimony of Farooqi, Nov. 7, 2011 at 9:58-59.
. Id. at 9:56 a.m.
. Id. at 9:56 a.m.
. Id. at 9:57 a.m. Caddell testified that Carroll had told other potential franchisees that their franchise fees would be placed in an escrow account, despite the fact that no escrow account existed and the money was deposited directly into the operating accounts of Franchise Corporation and/or Inc. Trial Record: Testimony of Caddell, Nov. 7, 2011 at 2:54-56 p.m. Specifically, Caddell testified that Carroll had made similar representations to Tim Grosse and Joe Leszko, who each encountered significant difficulties in obtaining refunds of their franchise fees from Carroll when they elected not to go forward with their respective transactions. Id. at 3:06-08 p.m. and 3:09-11 p.m.
. Trial Record: Testimony of Carroll, Nov. 7, 2011 at 1:39 p.m. Caddell testified, however, that Carroll informed him that Farooqi was not entitled to a refund because the "time frame had passed.” Trial Record: Testimony of Caddell, Nov. 7, 2011 at 3:20 p.m. Farooqi testified that Carroll first told him that he could not receive a refund because his 30 days were up. Trial Record: Testimony of Farooqi, Nov. 7, 2011 at 9:56-57 a.m.
. Trial Record: Testimony of Carroll, Nov. 8, 2011 at 12:51-53 p.m. and 2:40 p.m.
. Id. at 2:41-42 p.m. While negotiating for the purchase of the Las Colinas Salad Bowl, Farooqi visited the Las Colinas Salad Bowl with a friend from New York who made the trip to Dallas with him, Ali Choudhry. Faroo-qi and Choudhry sat in the parking lot at the *307Las Colinas Salad Bowl to watch customer traffic in and around the location before the Option Agreement was signed. Ultimately, at Farooqi's request, Carroll agreed to employ Choudhry at the Las Colinas Salad Bowl so that Choudhry could monitor the restaurant’s operations and report back to Farooqi about those operations. Based in part on Chou-dhry’s reports, Farooqi remained interested in purchasing the Las Colinas Salad Bowl for the many months that Farooqi attempted to move forward with the purchase. Trial Record: Testimony of Farooqi, Nov. 7, 2011 at 10:11-12 a.m.
. Trial Record: Testimony of Farooqi, Nov. 8, 2011 at 2:47 p.m.
. Trial Record: Testimony of Farooqi, Nov. 7, 2011 at 9:59 a.m.
. Id. at 9:59-10:00 a.m.
. Id.
. Id. at 10:00 a.m.
. The Legal Clinic at Southern Methodist University School of Law represented Farooqi in the state court action. No copy of the state court complaint was introduced at trial. Carroll testified that he was unaware of any lawsuit filed by Farooqi in state court. After being shown a letter sent to his bankruptcy counsel referencing the suit, and a record issued on January 13, 2011, which referenced the state court suit, Carroll admitted that his statement that he was unaware of Farooqi's state court action was untrue. Trial Record: Testimony of Carroll, Nov. 8, 2011 at 12:24-34 p.m. Because no documents related to the state court action were admitted, this Court is unaware of the exact claims raised in that action or the disposition of that suit.
.Carroll’s counsel made much of the fact that Marshall couldn't tick off a detailed listing of all of the financial information Carroll had failed to provide to her at trial. Trial Record: Testimony of Marshall, Nov. 7, 2011 at 5:01 p.m. While that’s true, the Court is satisfied that information was requested of Carroll that he failed to provide. What that information was is not particularly relevant to this dispute. Moreover, as Marshall noted, she was subpoenaed to testify at trial and had not reviewed her records from several years ago in any detail in order to prepare for her testimony. Id. at 4:51 p.m.
Carroll’s counsel also attacked Caddell’s credibility as a witness due to the "falling *308out” Carroll and Caddell had when Caddell left the employ of the Salad Bowl Entities. Trial Record: Closing Argument of Carroll's Counsel, Nov. 8, 2011 at 3:29-30 p.m. Caddell testified that he and Carroll had been good friends (in fact he had been in Carroll’s wedding party), but that he left the employ of the Salad Bowl Entities because Carroll refused to pay Caddell's attorney fees incurred during the Hinshaw Lawsuit, after promising to do so. Trial Record: Testimony of Caddell, Nov. 7, 2011 at 3:23-24 p.m. Notwithstanding this attack and the fact that the Court may not like Caddell’s business ethics much either (as he sat in the room with Farooqi while Carroll made false misrepresentations to Farooqi that Caddell knew were false and said nothing after Caddell had been sued by the Hinshaws for alleged false misrepresentations), the Court found Caddell’s trial testimony to be credible. He was relaxed on the witness stand, made eye contact with the Court when answering questions and seemed forthcoming even about events that implicated his own possible misconduct.
.Trial Record: Testimony of Carroll, Nov. 7, 2011 at 1:39 p.m. Caddell testified, however, that Carroll informed him that Farooqi was not entitled to a refund because the “time frame had passed.” Trial Record: Testimony of Caddell, Nov. 7, 2011 at 3:20 p.m. Farooqi testified that Carroll first told him that he could not receive a refund because his 30 days were up. Trial Record: Testimony of Farooqi, Nov. 7, 2011 at 9:56-57 a.m.
. Trial Record: Testimony of Farooqi, Nov. 8, 2011 at 2:47 p.m. Caddell testified about the financial difficulties facing the Salad Bowl Entities at some length. Trial Record: Testimony of Caddell, Nov. 7, 2011 at 2:50-53 p.m. In particular, the Salad Bowl Entities still owed Grosse his franchise fee and the Hinshaw Lawsuit settled in the late spring or early summer of 2010 for a sizeable sum. Trial Record: Testimony of Carroll, Nov. 8, 2011 at 12:10 p.m. and 12:47-49 p.m.
. The Court will not analyze Farooqi's fraud claim in any detail because even if Farooqi prevails on this claim, it is dischargeable in Carroll's bankruptcy case due to Farooqi’s failure to ask that it be excepted from Carroll’s discharge under the correct subsection of the Bankruptcy Code. Farooqi sought to have his fraud claim liquidated and declared *309nondischargeable under section 523(a)(2)(A) of the Bankruptcy Code. However, the proper claim of nondischargeability lies under section 523(a)(2)(B), as will be briefly explained below. See infra pp. 52-55. Farooqi's fraud claim relates to Carroll’s failure to disclose the Hinshaw Lawsuit in the Financial Disclosure Document provided to Farooqi on September 25, 2009. The Financial Disclosure Document is a written statement respecting the financial condition of the Salad Bowl Entities, who are insiders of Carroll. Accordingly, any debt obtained by use of the Financial Disclosure Document would not be excepted from Carroll’s discharge under section 523(a)(2)(A), but would be excepted under section 523(a)(2)(B). Farooqi failed to plead such a claim; and thus, any fraud judgment obtained by Farooqi here would be discharge-able in Carroll’s bankruptcy case.
. Specifically, in response to arguments that the decision would "create significant delays and impose additional costs on the bankruptcy process,” the Chief Justice wrote that the Court did not believe that "removal of counterclaims such as Vickie’s from core bankruptcy jurisdiction meaningfully changes the division of labor in the current statute; we agree with the United States that the question presented here is a narrow’ one.” 131 S.Ct. at 2619-20. The opinion went on to explain why it was important to adhere strictly to Article Ill's requirements even if the decision in this case "does not change all that much.” Id. at 2620. And the concluding paragraph of the opinion stated the "one isolated respect” in which the Count concluded that the Bankruptcy Act of 1984 exceeded the limitations of Article III—i.e., ”[t]he bankruptcy court below lacked the constitutional authority to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor's proof of claim.” Id.
. Like the Fifth Circuit held in Morrison, the Seventh Circuit held in Hallaban that a bankruptcy court could enter a final dollar judgment against a debtor as part of a nondis-chargeability action.
. While Carroll was the "actor,” as noted previously, he was acting as an officer of Inc. when negotiating with Farooqi with respect to the Option Agreement.
. The Court notes that Farooqi is represented here by the Legal Clinic at Southern Methodist University School of Law. While the clinic students are supervised by a licensed attorney, it is clear that much of the work is actually student work product. Nevertheless, the complaint must be tested as vigorously as if Farooqi was paying his lawyers for their time, instead of being represented pro bono.
. See also, Maxam, Ltd. v. Lane, 51 Fed.Appx. 929, 2002 WL 31415291 at *3 (5th Cir.2002) ("A party can preserve an issue by making the argument in its pleadings, identifying it in the joint pretrial order, or trying it by consent.”); Branch-Hines v. Hebert, 939 F.2d 1311, 1319 (5th Cir.1991) ("It is a well-settled rule that a joint pretrial order signed by both parties supersedes all pleadings and *315governs the issues and evidence to be presented at trial ..."); Flannery v. Carroll, 676 F.2d 126, 129 (5th Cir.1982) ("The claims, issues, and evidence are limited by the [pretrial] order and the course of the trial is thereby narrowed to expedite the proceeding.”); Krisher v. Xerox Corp., 102 F.Supp.2d 715, 718 (N.D.Tex.1999) ("It is a well-settled rule that a joint pretrial order signed by both parties supersedes all pleadings and governs the issues and evidence to be presented at trial.”) (Citing McGehee v. Certainteed Corp., 101 F.3d 1078, 1080 (5th Cir.1996)).
. Hereinafter, the Court will refer to these two statements collectively as the "Misrepresentations.”
. Trial Record, Testimony of Farooqi, Nov. 7, 2011 at 9:44 a.m.; Testimony of Caddell, Nov. 7, 2011 at 3:19-20 p.m.; Testimony of Marshall, Nov. 7, 2011 at 4:10 p.m., 4:13-14 p.m. and 5:18 p.m.
. Trial Record, Testimony of Farooqi, Nov. 7, 2011 at 9:44 a.m.; Testimony of Caddell, Nov. 7, 2011 at 3:19-20 p.m.; Testimony of Marshall, Nov. 7, 2011 at 4:10 p.m., 4:13-14 p.m. and 5:18 p.m.
.Trial Record, Testimony of Caddell, Nov. 7, 2011 at 2:50-53 p.m. and 2:58-59 p.m.
. Carroll testified that he never told Leszko that he would return the funds and that Lesz-ko never asked for a return of his funds. Trial Record: Testimony of Carroll, Nov. 7, 2011 at 12:10-12:11 p.m. and 2:17-18 p.m. However, according to Caddell, Leszko asked for his money back on multiple occasions, Carroll promised to return the money and Carroll never returned the money. According to Caddell, Carroll stated that Leszko needed to sign a variety of paperwork in order to obtain a refund and Leszko never provided said documents. Trial Record: Testimony of Caddell, Nov. 7, 2011 at 3:05-07 p.m.
. Caddell testified that Carroll also misrepresented to Leszko, Grosse and Farooqi that their funds would be held in an escrow account during the option period so that the funds could easily be returned to them if necessary. Trial Record: Testimony of Cad-dell, Nov. 7, 2011 at 2:54-56 p.m., 3:06-08 p.m. and 3:09-11 p.m. However, according to Caddell, neither Salad Bowl Entity had an escrow account. Rather, Caddell testified that the funds were immediately deposited into a business operating account and spent, due to significant cash flow problems being experienced by the Salad Bowl Entities at that time. Trial Record: Testimony of Cad-dell, Nov. 7, 2011 at 2:54-56 p.m.
. When she was asked if she was Farooqi’s “financial advisor” by Carroll's counsel, Marshall appeared surprised and taken aback. She quickly clarified that she was simply his loan broker. Trial Record: Testimony of Marshall, Nov. 7, 2011 at 5:02 p.m.
. After everything that has happened to him as a result of Carroll's conduct, when Carroll’s attorney asked Farooqi on cross examination if Farooqi believed that Carroll was "basically a good guy,” Farooqi responded “yes.” Trial Record: Testimony of Farooqi, Nov. 8, 2011 at 2:46 p.m. Although Carroll’s counsel presumably intended that this question show the Court that Carroll was, in fact, a good guy, it simply reconfirmed the Court’s impression that Farooqi was a trusting and incredibly naive person.
. Included in Topic 1, Chapter 16 of the Restatement 2nd of Torts is Title B: "Rules Which Determine the Responsibility of a Negligent Actor for Harm Which His Conduct is a Substantial Factor in Producing.” This Title explains foreseeability as follows: "(1) If the actor’s conduct is a substantial factor in bringing about harm to another, the fact that the actor neither foresaw nor should have foreseen the extent of the harm or the manner *321in which it occurred does not prevent him from being liable. (2) The actor’s conduct may be held not to be a legal cause of harm to another where after the event and looking back from the harm to the actor’s negligent conduct, it appears to the court highly extraordinarily that it should have brought about the harm.” Restatement (Second) of Torts: Foreseeability of Harm or Manner of Its Occurrence § 435 (1965).
. Trial Record: Testimony of Farooqi, Nov. 7, 2011 at 9:59 a.m. Farooqi also testified that he was "disheartened.” Id.
. Trial Record: Testimony of Carroll, Nov. 8, 2011 at 12:12-13 p.m. Carroll testified that the Salad Bowl Entities filed for relief under chapter 7 of the Bankruptcy Code in the spring of 2011.
. In his bankruptcy schedules, Carroll lists the total value of his stock and interests in the Salad Bowl Entities at $500. Carroll lists the value of his partnership agreement in the Salad Bowl Entities at $0. The total value of the assets listed by Carroll in his schedules amounts to $373,920.85 as compared to $359,740.24 in liabilities. In re Michael Carroll, Case No. 11—31005—bjh13, Docket # 16.
.As noted previously, while Carroll was the “actor,” he was acting on behalf of Inc. when negotiating the Option Agreement.
. Section 17.50 of the Tex. Bus. & Com.Code is the specific provision that allows a consumer to maintain an action under the DTPA. Section 17.50 provides as follows:
(a) A consumer may maintain an action where any of the following constitute a producing cause of economic damages or damages for mental anguish:
(1) The use or employment by any person of a false, misleading, or deceptive act or practice that is:
(A) Specifically enumerated in a subdivision of Subsection (b) of Section 17.46 of this subchapter; and
(B) Relied on by a consumer to the consumer's detriment
Section 17.50 goes on to define the damages measure available to consumers for violations of the DTPA.
. Carroll also frequently referred to the $25,000 in the same way, indicating to the Court that both parties perceived the Option Agreement as a step along the way to Farooqi purchasing the Las Colinas Salad Bowl, assuming Farooqi's loan was approved.
. Trial Record: Testimony of Farooqi, Nov. 7, 2011 at 9:52-53 a.m.
. Id.
. See Serv. Corp. Int’l v. Aragon, 268 S.W.3d 112, 119 (Tex.App.-Eastland 2008) (applying the same standard this Court used in determining mental anguish damages for Farooqi’s fraudulent inducement claim in the context of a DTPA claim) ("Mental anguish requires more than mere worry, anxiety, vexation, embarrassment, or anger. Instead, a plaintiff must show a high degree of mental pain or distress”).
. See Jim Walter Homes, 690 S.W.2d at 241-42 (holding that language in the DTPA limiting damages to "not more than three times the amount of economic damages” meant literally that. In other words, to calculate treble damages under the DTPA, courts should simply multiply the economic damages awarded by three, rather than multiplying the economic damages by three to calculate a punitive damages measure and then adding back in the economic damages, which would result in a quadrupling of the economic damages).
. Waite Hill Servs., Inc. v. World Class Metal Works, Inc., 959 S.W.2d 182, 184 (Tex.1998) ("A party is generally entitled to sue and to seek damages on alternative theories.... A *333party is not entitled to a double recovery ...”); Birchfieid v. Texarkana Mem. Hosp., 747 S.W.2d 361, 367 (Tex.1987); Foley v. Parlier, 68 S.W.3d 870, 882 (Tex.App.-Ft. Worth 2002, no pet.). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494542/ | MEMORANDUM-OPINION
JOAN A. LLOYD, Bankruptcy Judge.
This matter came before the Court for trial on the Complaint of Plaintiff, Presidential Bank, FSB (“Presidential”) against Defendant Ravi Parekh (“Parekh”). The Court considered the testimony of the witnesses, Mark Flener, Laura Ross and Pa-rekh, the documentary evidence submitted and arguments of counsel for the parties. For the following reasons, the Court will enter Judgment in favor of Presidential in the amount of $39,262.36 on its Complaint against Parekh.
LEGAL ANALYSIS
On or about July 28, 2011, Presidential filed a Complaint for Money Damages (“Contempt of Court”) against Parekh. Presidential is the secured creditor of Debtor Girson’s Enterprises, Inc. (“Debt- or”) and Parekh was the president of the Debtor. Presidential received relief from the automatic stay on certain property known as The Hampton Inn operated by Debtor on April 29, 2011. The property was foreclosed upon by Presidential and Presidential successfully bid on the property at the foreclosure sale.
The Debtor is indebted to Presidential on a promissory note executed on January 8, 2006, by Parekh. The debt is secured by The Hampton Inn and all rents derived from Debtor’s operation of the hotel. Presidential’s lien is properly perfected in accordance with Kentucky law.
On November 3, 2010, Debtor filed its Voluntary Petition seeking relief under Chapter 11 of the United States Bankruptcy Code. Debtor continued to operate its business, specifically The Hampton Inn, as Debtor-in-Possession. Presidential’s cash collateral was maintained in two bank accounts, one with Franklin Bank & Trust and one with U.S. Bank. The Bank had electronic access to both bank accounts. The Debtor continued to use Presidential’s cash collateral without its consent until Presidential filed a Motion to Prohibit Debtor’s Use of Cash Collateral on November 15, 2010.
On December 16, 2010, an Interim Agreed Order allowing Debtor’s use of cash collateral in accordance with the terms of a budget was entered by the Court. The Order allowed use of cash collateral, with Presidential’s consent, until January 31, 2011. Debtor moved to extend the Order allowing use of cash collateral and Presidential objected. Presidential then filed a motion for stay relief to proceed against its collateral. On February 3, 2011, the Court denied the Debtor’s motion and granted Presidential’s motion.
The Hampton Inn property was sold at foreclosure on April 29, 2011.
Presidential alleges that in violation of the Court’s cash collateral Order, Parekh failed to pay Presidential cash of $46,929 which included $31,929 received from hotel operations for November 2011 and monthly adequate protection payment of $15,000 for January 2011. Presidential also contends despite two email demands to Debt- or’s attorney to stop using its cash collateral, Parekh used cash of $129,655.62 out of the U.S. Bank account and $487,690.65 from the Franklin Bank account in violation of the Court’s Order. Presidential claims damages of $275,608.47 plus attorneys’ fees and costs.
In support of its case in chief, Presidential called Debtor’s attorney, Mark Flener, the assistant manager of The Hampton Inn, Laura Ross, and Parekh as witnesses. Presidential had no other witnesses, nor did it have an authorized representative *335present at the trial, any signed affidavits or certified discovery responses in support of its Complaint.
Parekh testified that English is his second language and that he did not understand the meaning of the term “cash collateral.” He also testified that he continued to operate the Hampton Inn without objection from Presidential and was never notified by Presidential to stop using cash from the business. Presidential never made demand for Debtor to cease using its cash collateral or its operation of the hotel. In fact, Presidential and Parekh continued to negotiate Parekh’s operation of the hotel until late March 2011. Only then did Presidential demand that Parekh turn over actual possession of the hotel and its cash collateral.
Parekh testified that of the 147 checks he wrote on the U.S. Bank and Franklin Bank and Trust bank accounts, all but $39,262.36, were used to pay business expenses in connection with operating The Hampton Inn. This testimony was un-rebutted by Presidential. Other than this admission by Parekh, Presidential did not submit any admissible evidence in support of any other damages Presidential may have incurred as a result of Parekh’s alleged unauthorized use of its cash collateral. Presidential had the burden to prove its claim of civil contempt by clear and convincing evidence of any actual loss. In re Etch-Art, Inc., 48 B.R. 143, (Bankr.D.R.I.1985). The Court cannot make any further findings on damages without any admissible evidence other than Parekh’s admission to his unauthorized use of $39,262.35.
Accordingly, Judgment in favor of Presidential in the amount of $39,262.36 will be entered against Parekh on its Complaint.
CONCLUSION
For all of the above reasons, the Court will entered Judgment in favor if the Plaintiff Presidential Bank, FSB and against Defendant Ravi Parekh in the amount of $39,262.36.
JUDGMENT
Pursuant to the Memorandum-Opinion entered this date and incorporated herein by reference,
IT IS HEREBY ORDERED, ADJUDGED AND DECREED that Plaintiff Presidential Bank, FSB is entitled to Judgment in its favor on its Complaint against Defendant Ravi Parekh in the amount of $39,262.36.
This is a final and appealable Judgment. There is no just reason for delay. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494544/ | AMENDED MEMORANDUM DECISION REGARDING OBJECTION TO LEGAL FEES AND PROOF OF CLAIM
W. RICHARD LEE, Bankruptcy Judge.
In this contested matter, the parties have asked the court to determine the amount of legal fees that can be recovered pursuant to 11 U.S.C. § 506(b)1 by Fresno-Madera Production Credit Association (“PCA”) for work performed in connection with this bankruptcy case. PCA is a fully secured creditor and is entitled by contract to recover reasonable attorney’s fees as part of its claim. PCA has filed an amended proof of claim requesting attorney’s fees incurred through February 10, 2011, in the amount of $53,384.50.2 The court deems the Debtors’ objection to those fees to also be an objection to PCA’s amended claim. Based upon a prior stipulation of the parties, only $23,300 of PCA’s attorney’s fees, those for legal services performed after September 30, 2010, are now *413in dispute. For the reasons stated below, the Debtors’ objection will be overruled. PCA’s legal fees will be allowed in full.
This memorandum contains the court’s findings of fact and conclusions of law required by Federal Rule of Civil Procedure 52(a), made applicable to this contested matter by Federal Rule of Bankruptcy Procedure 7052. The bankruptcy court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334 and 11 U.S.C. § 1225 and General Orders 182 and 330 of the U.S. District Court for the Eastern District of California. This is a core proceeding as defined in 28 U.S.C. §§ 157(b)(2)(A) &(B).
Background and Findings of Fact.
This bankruptcy was filed under chapter 12 on August 26, 2010. The debtors, Francisco and Maria Parreira are dairymen (the “Debtors”). PCA is their largest secured creditor. On the petition date, PCA was owed approximately $550,833.3 The debt to PCA was secured by a first priority lien against the Debtors’ personal property, including the dairy herd and the milk checks. Based on the Debtors’ schedules, the dairy herd had a value of $778,800 and the milk checks, including the retains, had a value of $78,627. There is no dispute that the debt to PCA was fully secured by a substantial margin.
After extensive negotiations, in early October 2010, the Debtors and PCA entered into a written agreement entitled “Stipulation For Order Re Agreed Financing, Heifer Swap, Use of Collateral, Valuation of Collateral and Plan Treatment” (the “October Stipulation”—filed on October 19, 2010). It provided, inter alia, a comprehensive facility for the treatment of PCA’s secured claim in a chapter 12 plan. The Debtors confirmed a consensual chapter 12 plan by order dated February 25, 2011 (the “Plan”). A copy of the October Stipulation was attached to and incorporated into the Plan to memorialize the treatment of PCA’s claim.
At the time the Plan was confirmed, the parties could not agree on the amount of attorney’s fees that PCA could recover as part of its claim. However, the parties did agree in the October Stipulation that the attorney’s fees incurred by PCA through September 30, 2010, were reasonable in the amount of $30,084.50. (October Stipulation, ¶ 5(B).) According to PCA’s billing records, PCA’s actual legal expenses through September 30, 2010, were $30,084.50, the exact amount agreed to in the October Stipulation.
The billing records for PCA’s legal fees are attached to PCA’s amended proof of claim (the “Billing Records”). Overall, PCA incurred legal fees in connection with this bankruptcy case, from August 17, 2010, through February 10, 2011, in the amount of $53,384.50, representing 179 hours of attorney and paralegal time. The amount of those fees for legal work performed after September 30, 2010, the fees in dispute here, is $23,300, representing 78.1 hours of attorney and paralegal time (the “Disputed Fees”). Of that time, 15.1 hours at a cost of $4,300, was devoted just to this fee dispute (see discussion below).
Issue Presented.
The Debtors initially objected to the total amount of PCA’s fees on the grounds that the fees are excessive and unreasonable. While the Debtors do not deny PCA’s right to procure any level of legal service it deems to be appropriate, they do dispute PCA’s right to recover those fees from the Debtors to the extent that the *414level of legal service was unnecessary and unreasonable. However, at oral argument, Debtors’ counsel acknowledged that the Debtors are bound by the October Stipulation and are now precluded from objecting to PCA’s legal fees incurred through September 30, 2010. The issue therefore is how much of PCA’s post-September 30th legal fees, the Disputed Fees, should be awarded for inclusion in PCA’s claim.
Analysis and Conclusions of Law.
The Reasonable and Necessary Standard. The Debtors contend that PCA’s attorneys failed to exercise prudent billing judgment and essentially “over-lawyered” this case under the circumstances. Those circumstances include the facts that (1) PCA was significantly oversecured at all times by the dairy herd and the milk checks, and (2) the case was relatively straightforward and uncontroversial.4 With regard to the first issue, there appears in retrospect to be no dispute that PCA was at all times well collateralized, even though the value of that collateral was always susceptible to decline. Resolution of the second issue is more difficult because the Debtors objected to PCA’s entire claim for legal fees, not just the Disputed Fees, and because the Debtors offer few specifics for the court to rule on. Neither party presented a comprehensive “task” analysis to show how the Disputed Fees should be allocated to different categories of work.
When bankruptcy courts are asked to review the legal fees incurred by a professional person employed to work in a case under § 327, the process begins with reference to the Bankruptcy Code which offers a statutory framework for analyzing the fees. The Code mandates that professional fees must be actual, necessary and reasonable.5 Here, PCA does not seek to recover its fees under § 330 because its *415attorneys did not work for the bankruptcy estate. As the holder of a fully secured claim, PCA seeks to recover its attorney’s fees under the authority of § 506(b).6 Section 506(b) also incorporates the “reasonableness” test. In determining reasonableness under § 506(b), the bankruptcy court does not look to state law, but rather makes an independent evaluation under federal law. See In re 268 Ltd., 789 F.2d 674, 676-77 (9th Cir.1986). Because all professional fees awarded in a bankruptcy case are effectively paid from assets of the bankruptcy estate and because both Code sections use the term “reasonable,” the court may apply to its § 506(b) analysis the same principles and case law that govern the award of fees under § 330. See In re Segovia (unpublished), 2008 WL 8462967 (9th Cir. BA 2008).
The concept of reasonableness when applied to a body of legal work invokes a combination of objective and subjective inquiries. Objectively, the court must be persuaded that the legal work performed in a particular case was consistent with the kind of legal service which a similarly situated creditor might require. The court must also determine that the value of the legal services is consistent with the cost of similar legal services for similar work. Subjectively, the court must inquire whether the professionals exercised prudent billing judgment in the decisions that were made to engage the legal services, the way the work was assigned, and the manner in which it was actually performed. The Ninth Circuit B.A.P. discussed the “reasonableness” factor in this context, stating:
Reasonableness embodies a range of human conduct. The key determinant is whether the creditor incurred expenses and fees that fall within the scope of the fees provision in the agreement, and took the kinds of actions that similarly situated creditors might reasonably conclude should be taken, or whether such actions and fees were so clearly outside the range as to be deemed unreasonable. The bankruptcy court should inquire whether, considering all relevant factors including duplication, the creditor reasonably believed that the services employed were necessary to protect his interests in the debtor’s property.
In re Dalessio, 74 B.R. 721, 723 (9th Cir. BAP 1987) (citing In re Carey, 8 B.R. 1000, 1004 (Bankr.S.D.Cal.1981)).
Under § 506(b), the court has broad discretion in determining the amount of attorney’s fees and in reviewing the fees for potential abuse of right. Dal-essio, 74 B.R. at 724 (citing In re Fitzsimmons, 51 B.R. 600 (9th Cir. BAP 1985)). An oversecured creditor has the burden of proving the reasonableness of its fee claim under § 506(b). In re Atwood, 293 B.R. 227, 233 (9th Cir. BAP 2003). If applying for attorney’s fees under § 506(b), the “attorney ... bears the burden of proving the reasonableness of those fees, which can only be done by presentation of carefully detailed applications and supporting documentation.” Dalessio, 74 B.R. at 724 (citing In re Meade Land & Dev. Co., 577 F.2d 858, 860 (3d Cir.1978)).
The purpose of the reasonableness limitation of § 506(b) ... is to prevent overreaching or collusive use of fee arrangements. A court should not reward a *416creditor whose overly aggressive attorney harasses and opposes the debtor at every stage of the bankruptcy proceeding, nor should an oversecured creditor be given a blank check to incur fees and costs which will automatically be reimbursed out of its collateral.
Id. at 723 (citation omitted).
Valuing the Legal Services, the Lodestar Approach. In the Ninth Circuit, the customary method for determining the reasonableness of attorney’s fees is the “lodestar” calculation. Morales v. City of San Rafael, 96 F.3d 359, 363 (9th Cir.1996), amended, 108 F.3d 981 (9th Cir.1997). Several courts have also applied the lodestar method in determining the reasonableness of fees requested under § 506(b). See, e.g., In re Coy Farms, Inc., 417 B.R. 17, 22 (Bankr.N.D.Ohio 2009); In re Nixon, 400 B.R. 27, 38 (Bankr.E.D.Pa.2008); In re 900 Corp., 327 B.R. 585, 593-94 (Bankr.N.D.Tex.2005). But see Unsecured Creditors’ Comm. v. Puget Sound Plywood, Inc., 924 F.2d 955, 961 (9th Cir.1991) (concluding that bankruptcy court’s use of an alternative formula rather than the lodestar method for § 506(b) purposes was not abuse of discretion).
“The ‘lodestar’ is calculated by multiplying the number of hours the prevailing party reasonably expended on the litigation by a reasonable hourly rate.” Morales, 96 F.3d at 363 (citation omitted). “This calculation provides an objective basis on which to make an initial estimate of the value of a lawyer’s services.” Hensley v. Eckerhart, 461 U.S. 424, 433, 103 S.Ct. 1933, 76 L.Ed.2d 40 (1983). A compensation award based on the lodestar is a presumptively reasonable fee. In re Manoa Fin. Co., 853 F.2d 687, 691 (9th Cir.1988).
In rare or exceptional instances, if the court determines that the lodestar figure is unreasonably low or high, it may adjust the figure upward or downward based on factors enumerated in Kerr v. Screen Extras Guild, Inc., 526 F.2d 67 (9th Cir.1975). Morales, 96 F.3d at 363-64. The original Kerr factors include:
(1) the time and labor required,
(2) the novelty and difficulty of the questions involved,
(3) the skill requisite to perform the legal service properly,
(4) the preclusion of other employment by the attorney due to acceptance of the case,
(5) the customary fee,
(6) whether the fee is fixed or contingent,
(7) time limitations imposed by the client or the circumstances,
(8) the amount involved and the results obtained,
(9) the experience, reputation, and ability of the attorneys,
(10) the “undesirability” of the case,
(11) the nature and length of the professional relationship with the client, and
(12) awards in similar cases.
Kerr, 526 F.2d at 70 (citing Johnson v. Ga. Highway Express, Inc., 488 F.2d 714 (5th Cir.1974)).
However, some of the Kerr factors have been subsumed as a matter of law within the initial lodestar calculation and should be taken into account in either the reasonable hours component or reasonable hourly rate component. Morales, 96 F.3d at 363-64 & nn. 8-9. These include (1) the novelty and complexity of the issues, Jordan v. Multnomah County, 815 F.2d 1258, 1262 n. 6 (9th Cir.1987) (citing Blum v. Stenson, 465 U.S. 886, 898-900, 104 S.Ct. 1541, 79 L.Ed.2d 891 (1984)); (2) the special skill and experience of counsel, id.; (3) the quality of representation, id.; (4) the results obtained, id.; and (5) the contingent nature of the fee agreement, City of Bur*417lington v. Dague, 505 U.S. 557, 565-67, 112 S.Ct. 2638, 120 L.Ed.2d 449 (1992). These subsumed factors may not act as independent bases for adjustments to the lodestar figure. Miller v. Los Angeles County Bd. of Educ., 827 F.2d 617, 620 n. 4 (9th Cir.1987).
Given the two-step “lodestar” approach, the court has considerable discretion in determining the reasonableness of attorney’s fees. Gates v. Deukmejian, 987 F.2d 1392, 1398 (9th Cir.1992). It is appropriate for the court to have this discretion “in view of the [court’s] superior understanding of the litigation and the desirability of avoiding frequent appellate review of what essentially are factual matters.” Hensley, 461 U.S. at 437, 103 S.Ct. 1933.
However, even with this discretion, “[i]t remains important ... for the [court] to provide a concise but clear explanation of its reason for the fee award.” Id. Further, the court must “articulate with sufficient clarity the manner in which it makes its determination.” Chalmers v. City of Los Angeles, 796 F.2d 1205, 1211 (9th Cir.1986) (citation omitted), amended, 808 F.2d 1373 (9th Cir.1987). This does not require the court to include detailed calculations, but “something more than a bald, unsupported amount is necessary. While the [court] need not set forth in exhaustive detail the method of calculating an attorney’s fee award, at the very least [it] must set forth the number of hours compensated and the hourly rate applied.” Id. at 1211 n. 3. When the fees awarded differ substantially from the fees requested, however, then an explanation as to how the court arrived at its figure is necessary. Domingo v. New England Fish Co., 727 F.2d 1429, 1447 (9th Cir.1984), modified, 742 F.2d 520 (9th Cir.1984).
Application of the Lodestar to This Case. The first step in the “lodestar” process, the “reasonable hours” analysis, requires the court to determine if the attorneys exercised prudent billing judgment in the performance of their duties to the client. Prudent billing judgment is an essential part of the lodestar analysis. Unless the court is satisfied that the attorneys were prudent and made a good faith effort to perform their work efficiently, then the court cannot apply the lodestar presumption to any of their fees. On the “billing judgment” issue, the Supreme Court has commented,
The [court] ... should exclude from this initial fee calculation hours that were not “reasonably expended.” Cases may be overstaffed, and the skill and experience of lawyers vary widely. Counsel for the [party requesting attorney’s fees] should make a good faith effort to exclude from a fee request hours that are excessive, redundant, or otherwise unnecessary, just as a lawyer in private practice ethically is obligated to exclude such hours from his fee submission. In the private sector, “billing judgment” is an important component in fee setting. It is no less important here. Hours that are not properly billed to one’s client also are not properly billed to one’s adversary pursuant to statutory authority.
Hensley, 461 U.S. at 434, 103 S.Ct. 1933 (citations and internal quotation marks omitted, emphasis in original).
It is not sufficient for the fee applicant to simply represent that all of the time claimed was usefully spent, and the court should not uncritically accept these representations. Jordan, 815 F.2d at 1263 n. 8 (citation omitted). Instead, the fee applicant must show that the time spent was reasonably necessary and that counsel made a good faith effort to exclude exces*418sive, redundant, or unnecessary hours. Id. (citation omitted).
In this case, the court began its “reasonable hours” analysis of the Disputed Fees by first reviewing the docket to assess the length and relative complexity of the case. The court then looked to the Billing Records to determine (1) what services PCA’s attorneys actually performed and (2) whether they provided those services in a “prudent” manner. From the docket, this does not appear to have been a difficult case. At the same time, the docket does not suggest that PCA engaged in any frivolous or unnecessary legal antics. The bankruptcy was filed on August 26, 2010. The hearing at which the court approved the Debtors’ Plan, with some modifications, was held 119 days later on December 22, 2010. By that time, the Debtors and PCA had essentially resolved their differences as reflected in the October Stipulation. On December 8, 2010, PCA filed a three-page “conditional” non-opposition to confirmation of the Plan. Even though the Plan included the October Stipulation, PCA’s conditional non-opposition sought to address several provisions that PCA felt were unclear or ambiguous in the Plan. The complete docket in this case, from the filing of the petition to the date of the hearing on this objection includes 181 entries. The number of docket entries after September 30, 2010, is 103. Other than the conditional non-opposition referred to above, nothing from PCA appears on the docket after September 30, 2010, until the pleadings it filed in response to this objection. There were no motions for relief from the automatic stay or contested matters that required an evidentiary hearing.
A review of the Billing Records reveals the “rest of the story,” the activities that are not readily apparent from the docket. Billing entries after September 30, 2010, reflect a significant amount of activity related to, inter alia, completion of the October Stipulation, negotiation and editing of the Plan, editing of the proposed confirmation order, preparation of PCA’s proof of claim, and this fee objection. The Debtors argue that some of this effort was extraordinary, but both sides point to the other as the cause of any “unnecessary” work. The trial court, with only the Billing Records and its personal understanding of the case, cannot assign “fault” for allegedly excessive fees incurred in the Plan confirmation process without, at a minimum, an eviden-tiary hearing. The cost of further litigation over the Disputed Fees would certainly be counter productive and would not justify any possible benefit which might flow therefrom.
The Billing Records do not suggest that PCA’s attorneys engaged in any legal activities after September 30, 2010, that were not reasonably focused on the achievement of a common goal, confirmation of a successful reorganization Plan for the Debtors’ dairy operation. As this court has observed of other creditors in similar eases, PCA did not force unnecessary objections to the use of cash collateral, it did not seek to shut down the dairy operation through prosecution of a stay relief motion, and it did not seek to leverage its bargaining position by interjecting inappropriate threats to the Debtors’ discharge.
Finally, the Billing Records do not suggest that PCA’s attorneys ignored their duty to act prudently. All of the time was billed in 1/10 hour increments. Virtually all of the Disputed Fees were generated by two attorneys, René Lastreto, II, Esq., and Craig B. Fry, Esq. While Mr. Lastreto assumed an oversight and review roll, most of the work was delegated to Mr. Fry, who carried the “laboring oar” at a significantly lower billing rate ($800 per hour). The attorneys’ billing strategy af*419ter September 30, 2010, does not appear to be any different from the billing strategy employed before that date and the Debtors have already stipulated that those fees were reasonable. There was virtually no duplication of effort. The few inter-office conferences were relatively short in duration. Many of the entries for inter-office conferences were billed at “no-charge.” Many of the “conferences” were billed by only one attorney with no corresponding billing entry from the other participants.
The Debtors object to the fact that PCA’s attorneys spent 15.1 hours, at a cost of $4,300 (by the Debtors’ calculation), devoted to this fee dispute. The Debtors do not detail which specific billing entries warrant scrutiny, so the court cannot respond to this objection except in general terms. The Debtors instigated this fee dispute after PCA declined to reduce its fees to an amount offered by the Debtors. It would be completely arbitrary for this court to simply decree how much the defense of a fee dispute should cost. As stated above, PCA’s attorneys did exercise prudent billing judgment in their handling of the case. As a general rule, the professional time spent in the presentation of a fee application is necessary and reasonable and eligible for compensation from the estate. See generally In re Nucorp Energy, Inc., 764 F.2d 655 (9th Cir.1985) (fees incurred by debtor’s counsel for preparation of its fee application in compliance with § 329(a) and Fed. R. Bankr.P. 2016 is compensable under § 330).
The Debtors rely heavily on the language in the Dalessio decision to support their request for reduction of PCA’s legal fees. While the general principles stated in Dalessio are sound, the case itself is distinguishable by its egregious facts. The creditor in Dalessio was substantially ov-erseeured and adequately protected by an interest in real property. Dalessio, 74 B.R. at 723. The creditor ultimately recovered from a sale of the property the full amount of its principal, interest, prepetition late charges and advances to the holder of the senior lien. Id. The attorney’s fees at issue were fees the creditor incurred to aggressively and unnecessarily prosecute an adversary proceeding for relief from the automatic stay and an objection to the debtor’s disclosure statement. Id. at 722. Based on the inherent nature of the collateral, and the level of adequate protection for the secured claim, the court held that all of the requested attorney’s fees and costs may not be warranted under § 506(b) and remanded the matter to the bankruptcy court for further factual findings. Id. at 724.
Here, PCA’s collateral consisted of dairy cows and milk checks, both of which are inherently perishable and easily subject to diminution or loss if not monitored and protected. Milk checks must be spent on operating expenses, some of which may not be appropriate. Dairy cows can be easily transported, sold or rendered useless if not properly fed and cared for. Unlike the real-property-secured mortgagee in Dalessio, PCA required the services of counsel to deal with cash collateral issues and transactions involving a partial sale of the dairy herd. Unlike Dalessio, PCA was not paid in full from an early liquidation of its collateral. Instead, it had to participate actively in the Plan confirmation process. The Plan contemplates that PCA will be paid overtime, with revenues generated through ongoing operations of the dairy, and PCA must necessarily share some of the risk associated with that. By the inherent nature of PCA’s collateral, it was not unreasonable that PCA took an active role in this case. The 78.1 hours that comprise the Disputed Fees do not appear to be unreasonable and unnecessary under those circumstances. *420The court is persuaded that PCA’s attorneys exercised prudent billing judgment in their handling of the case.
Turning now to the second “lodestar” factor, the court must determine if PCA’s legal services were billed at a reasonable hourly rate. The “reasonable hourly rate” is determined by reference to the prevailing market rates in the relevant community. Blum, 465 U.S. at 895, 104 S.Ct. 1541. The relevant community is generally the forum in which the court sits. Barjon v. Dalton, 132 F.3d 496, 500 (9th Cir.1997) (citation omitted). However, the court may consider rates outside of the forum “if local counsel was unavailable, either because they are unwilling or unable to perform because they lack the degree of experience, expertise, or specialization required to handle properly the case.” Id. (citation and internal quotation marks omitted). After defining the relevant community, the court determines the reasonable hourly rate in that community. The standard is the “rate prevailing in the community for similar work performed by attorneys of comparable skill, experience, and reputation.” Id. at 502 (citation and internal quotation marks omitted).
The fee applicant has the burden of “producing] satisfactory evidence— in addition to the attorney’s own affidavits—that the requested rates are in line with those prevailing in the community for similar services by lawyers of reasonably comparable skill, experience and reputation.” Blum, 465 U.S. at 895 n. 11, 104 S.Ct. 1541. Affidavits of the attorney and other attorneys regarding prevailing fees in the community, as well as rate determinations in other similar cases, are satisfactory evidence of the prevailing market rate. United Steelworkers of Am. v. Phelps Dodge Corp., 896 F.2d 403, 407 (9th Cir.1990).
With regard to the hourly rates billed for PCA’s legal work, the court finds nothing unreasonable about this component of the lodestar. Neither party introduced any evidence of the prevailing rate for legal services in this community. At the same time, neither party has raised any objection to the hourly rates billed by the attorneys and paralegals on either side of this case. The court notes that the hourly rate of PCA’s lead attorney (René Lástrete, II, Esq., at $350 per hour) was substantially less than the hourly rate of the Debtors’ lead attorney (Riley C. Walter, Esq., at $395 per hour). This case is located in Central California, as are the law firms that performed all of the legal work for both the Debtors and PCA. Both law firms employ competent experienced attorneys who regularly appear in this court representing similar clients in similar kinds of cases. The hourly rates billed by the professionals on both sides of this case appear to be in line with the level of skill required in this kind of case and the customary fee for comparable legal service in this community.
Conclusion.
Based on the foregoing, the court finds and concludes that the legal fees incurred by PCA after September 30, 2010, were necessary and reasonable under the circumstances. Accordingly, PCA’s fees will be allowed in full as reflected in its amended proof of claim. The Debtors’ objection will be overruled.
. Unless otherwise indicated, all bankruptcy, chapter, code section and rule references are to the Bankruptcy Code, 11 U.S.C. §§ 101— 1330, and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9036, as enacted and promulgated after October 17, 2005, Pub.L. 109-8, Apr. 20, 2005, 119 Stat. 23.
. PCA’s billing records are attached to its amended proof of claim filed on February 10, 2011. PCA did not request reimbursement of any hard costs.
. This amount includes principal and interest as reflected in PCA’s first proof of claim filed on December 17, 2010. It does not include attorney’s fees and does not reflect adjustments and credits agreed to by the parties in the plan confirmation process.
. The Debtors also argue that PCA acted inequitably with regard to the handling of their loan, interrupted the flow of milk checks, and unnecessarily forced the Debtors to seek bankruptcy protection in the first place. That argument is not properly raised in the context of this post-confirmation dispute and has not been considered by the court.
. Professional compensation for persons employed to work for the bankruptcy estate is governed by § 330(a) which provides in pertinent part:
(a)(1) After notice to the parties in interest and the United States Trustee and a hearing, ... the court may award ... a professional person employed under section 327 or 1103—
(A) reasonable compensation for actual, necessary services rendered by the ... professional person, or attorney ...; and
(B) reimbursement for actual, necessary expenses.
(2) The court may, on its own motion or on the motion of ... any other party in interest, award compensation that is less than the amount of compensation that is requested.
(3) In determining the amount of reasonable compensation to be awarded to ... a professional person, the court shall consider the nature, the extent, and the value of such services, taking into account all relevant factors, including—■
(A) the time spent on such services;
(B) the rates charged for such services;
(C) whether the services were necessary to the administration of, or beneficial at the time at which the service was rendered toward the completion of, a case under this title;
(D) whether the services were performed within a reasonable amount of time commensurate with the complexity, importance, and nature of the problem, issue, or task addressed;
(E) with respect to a professional person, whether the person is board certified or otherwise has demonstrated skill and experience in the bankruptcy field; and
(F) whether the compensation is reasonable based on the customary compensation charged by comparably skilled practitioners in cases other than cases under this title.
. 11 U.S.C. § 506(b) provides:
To the extent that an allowed secured claim is secured by property the value of which, after any recovery under subsection (c) of this section, is greater than the amount of such claim, there shall be allowed to the holder of such claim, interest on such claim, and any reasonable fees, costs, or charges provided for under the agreement or State statute under which such claim arose. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494545/ | ORDER ON INTERNAL REVENUE SERVICE’S MOTION TO DISMISS THE INTERPLEADER
LEWIS M. KILLIAN, JR., Bankruptcy Judge.
THIS MATTER came before the Court on Defendant Internal Revenue Service’s Motion to Dismiss the interpleader brought by the Sterling Mets, L.P. (the “Mets”). The Mets have named the Internal Revenue Service as a party in the interpleader, asserting that its sovereign immunity is waived pursuant to 28 U.S.C. § 2410(a)(5). After the hearing on December 13, 2011, additional briefs were requested from the parties on questions pertaining to sovereign immunity and subject matter jurisdiction. Having considered the arguments of the parties and the record in this case, I conclude that the Court has jurisdiction over the interpleader and the Internal Revenue Service’s Motion to Dismiss is denied.
BACKGROUND
This matter arises from an adversary proceeding initiated by the Chapter 7 *446Trustee (“Trustee”) in the bankruptcy case of Charisse Ann Strawberry. The Trustee’s amended complaint named Darryl Strawberry, the Mets, and the Internal Revenue Service (the “IRS”) as defendants. The Trustee brought the complaint asserting Charisse Strawberry is entitled to a portion of the monthly deferred compensation payments Darryl Strawberry receives from the Mets pursuant to a Uniform Player’s Contract (“UPC”). The UPC was entered into by and between the Mets and Darryl Strawberry on March 12, 1985. Under the UPC, Darryl Strawberry receives $8,891.82 as monthly deferred compensation payments for a total of thirty years. The Trustee asserts Charisse Strawberry is entitled to $800,000 from the deferred compensation funds pursuant to a Stipulated Qualified Domestic Relations Order (“QDRO”) that was entered on November 3, 2006 in the Circuit Court of the Thirteenth Judicial Circuit, in and for Hillsborough County, Florida. However, the IRS had already issued a Notice of Levy to the Mets on the deferred compensation funds back in 2000. The IRS holds a lien against the compensation funds in the amount of $542,572.64 for Darryl Strawberry’s federal income tax liabilities. Faced with the competing claims on the deferred compensation funds from the Trustee, the IRS and Darryl Strawberry, the Mets filed this crossclaim for inter-pleader. The Mets seek for the Court to determine the priority of the various claims to ensure their proper distribution and to discharge the Mets from any further liability to the parties with respect to deferred compensation funds.
The Court was prepared to dismiss this interpleader based on an agreement by the Trustee and the Mets on the merits, conceding the IRS holds a superior levy on the disputed compensation funds. Nevertheless, the IRS pursued the Motion to Dismiss based on jurisdiction, arguing this Court lacks subject matter jurisdiction to enter such an order because the IRS has not waived its sovereign immunity.
DISCUSSION
Federal Rule of Bankruptcy Procedure 7022 governs interpleader actions in adversary proceedings. The Rule provides, in part, “[p]ersons with claims that may expose a plaintiff to double or multiple liability may be joined as defendants and required to interplead.” Fed. R. Bankr.P. 7022(a)(1). The Mets have initiated the interpleader in order to ensure that the disputed deferred compensation funds are given to those that are properly entitled to it and to ensure that they are protected from further liability. The federal interpleader statute provides for this relief. 28 U.S.C. § 2361 (allowing a district court to enter an order restraining all claimants in an interpleader action from “instituting or prosecuting any proceeding in any State or United States court affecting the property, instrument or obligation involved in the interpleader action until further order of the court ...” Such district court shall hear and determine the case, and may discharge the plaintiff from further liability ...). Although the federal interpleader statute and the federal rules of bankruptcy procedure allow a party to interplead, a federal court cannot reach the merits of any dispute until it confirms its own subject matter jurisdiction. See Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83, 94, 118 S.Ct. 1003, 140 L.Ed.2d 210 (1998). The gravamen of the IRS’ Motion is that the United States has not waived sovereign immunity for this type of action, and therefore, this Court lacks subject matter jurisdiction.
It is well settled that one cannot sue the United States unless Congress has expressly provided its statutory consent. *447United States v. Dalm, 494 U.S. 596, 608, 110 S.Ct. 1361, 108 L.Ed.2d 548 (1990). Unless it waives its sovereign immunity, the United States may not be required to interplead. Kentucky ex rel United Pac. Ins. Co. v. Laurel County, 805 F.2d 628, 636 (6th Cir.1986) (quoting 7 C. Wright, A. Miller, & M. Kane, Federal Practice and Procedure § 1721, at 654 (2d ed.1986)); AmSouth Bank v. Miss. Chem. Corp., 465 F.Supp.2d 1206, 1209 (D.N.M.2006) (noting “the general statute permitting interpleader, 28 U.S.C. § 1335, is not itself a waiver of sovereign immunity”). Title 28 U.S.C. § 2410(a)(5) provides for a waiver of sovereign immunity in an interpleader action to property or funds on which the United States has a mortgage or other lien. The IRS argues that Section 2410(a)(5) does not apply to this action for three reasons: 1) the IRS contends Section 2410 only allows interpleader actions against the United States in state court or in federal district court, not bankruptcy court; 2) the plaintiff in an interpleader action must face a legitimate threat of multiple liability, which the IRS asserts does not exist in this action because 26 U.S.C. § 6332(e) shields a recipient of an internal revenue levy from liability if the recipient complies; and 3) this action is time-barred under 28 U.S.C. § 2401(a) which requires any complaint against the United States to be filed within six years after the right of action first accrues.
The Mets’ counterclaim for inter-pleader was prudent under the circumstances and this Court has jurisdiction over the matter as it is “related to” the bankruptcy proceeding. The Trustee named the Mets as defendants in the initial complaint. The Mets contend they have no interest in the disputed funds, and because they are presented -with competing claims, an action for interpleader is appropriate. The jurisdiction of this Court is determined and limited by statute. Title 28 U.S.C. § 1334(b) provides that “district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11.” 28 U.S.C. § 1334(b). District courts can refer to bankruptcy judges “any or all proceedings arising under title 11 or arising in or related to a case under title 11” as has been done in all bankruptcy courts. 28 U.S.C. § 157(a). Bankruptcy courts have jurisdiction in all matters “related to” bankruptcy. Walker v. The Cadle Co. (In re Walker), 51 F.3d 562, 569 (5th Cir.1995). A matter is “related to” bankruptcy when the outcome of the matter could conceivably have any effect on the estate being administered in bankruptcy. In re J.F. Naylor and Co., Inc., 67 B.R. 184, 189-90 (Bankr.M.D.La.1986). If it were determined that the Trustee is entitled to any of the deferred compensation funds and has priority in the distribution of the funds, the money would become property of the estate for distribution to creditors. Thus, this interpleader action is clearly related to the bankruptcy case and this Court has jurisdiction.
The IRS’ contention that the in-terpleader must be dismissed because the Mets do not risk exposure to multiple liability is also unavailing. The IRS asserts that 26 U.S.C. § 6332(e) forecloses the possibility of double or multiple liability for the Mets. Specifically, double or multiple liability is barred, in the IRS’ view, because Section 6332(e) shields from liability to the delinquent taxpayer, any person in possession of property subject to a levy if said person surrenders such property. However, courts have repeatedly ruled Section 6332(e) is not relevant to the issue of whether an interpleader action may be brought. Kurland v. United States, 919 *448F.Supp. 419, 422 (M.D.Fla.1996) addressed the issue head-on:
Title 26 U.S.C. § 6832(e) may provide a shield against liability to those honoring federal tax liens; however, that is insufficient to override the purpose behind the interpleader rule and statute. First Interstate Bank of Oregon v. United States, 891 F.Supp. 543 (D.Or.1995). In-terpleader gives the disinterested party the ability to bow out, leaving the actual parties with real interests at stake to litigate their claims. See id.; New York Life Ins. Co. v. Connecticut Dev. Auth., 700 F.2d 91, 96 (2nd Cir.1983).
In a recent unpublished decision, a district court ruled that the interpleader plaintiff was entitled to attorney’s fees and costs despite claims that the interpleader action was unnecessary because the plaintiff could have been protected from liability by turning over the money to the government. Pro-Steel Bldgs., Inc. v. United States, No. 4:09CV512(RH), 2011 WL 4073716 (N.D.Fla. May 16, 2011). The court held that the test is whether an interpleader action was filed in good faith and that the protection afforded by 26 U.S.C. § 6332(e) is not absolute. Id. This echoes the court in First Interstate Bank of Oregon, which held:
[T]he right to interpleader is not incumbent upon a stakeholder showing that it is in jeopardy of multiple liability, as well as multiple litigation. Instead, ‘[a] stakeholder acting in good faith, may maintain a suit in interpleader to avoid the vexation and expense of resisting adverse claims, even though he believes only one of them is meritorious.’
First Interstate Bank of Oregon, N.A. v. United States, 891 F.Supp. 543 (D.Or.1995). If the protection under 26 U.S.C. § 6332(e) is not absolute and the right to interplead is a good faith inquiry, the IRS’ reliance on Section 6332(e) to argue for dismissal of this interpleader is flawed. The Mets, as the stakeholder, filed this interpleader in good faith to ensure proper distribution of the disputed funds. Without the interpleader, the Mets not only face a threat of multiple liability to the Defendants but also the threat of having to litigate this matter in more than one proceeding. “It is a fundamental principle of interpleader that its office is not so much to protect a party against double liability as against double vexation in respect of one liability.” Nat’l Fire Ins. Co. v. Sanders, 38 F.2d 212, 214 (5th Cir.1930).
The IRS’ argument that this inter-pleader is time barred by 28 U.S.C. § 2401(a), which requires that actions against the United States be filed within six years after the cause of action first accrues, ignores the purpose of this litigation. The Mets are not disputing the validity of the internal revenue’s levy; rather, they simply seek for this Court to determine the priority of the competing claims. The Mets were first served with the IRS levy in 2000. If the Mets were disputing the levy itself, under 28 U.S.C. § 2401(a), the time to bring the action would have already expired. However, the parties in this interpleader action agree that the IRS holds a first priority levy on the funds. See Stipulated Order, ECF No. 156 (The stipulated agreement between the Mets and the Trustee provides, “[t]he IRS’ Levy is superior to any person’s claim to the Disputed Funds”). Thus, because the Mets are not disputing the validity of the IRS’ claims, the date the Mets were first served with the internal revenue levy is not relevant and the time limit imposed by 28 U.S.C. § 2401(a) does not apply.
Similarly, in its Motion to Dismiss, the IRS also argues the Anti-Injunction Act, 26 U.S.C. § 7421, defeats this inter-pleader as it prohibits suits that restrain *449the assessment or collection of any tax. The same reasoning that prevents 28 U.S.C. § 2410 from applying to this action also thwarts the application of the Anti-Injunction Act. The Mets are not seeking to restrain the assessment or collection of any tax and they are not attempting to litigate the underlying merits of the IRS’ claim. As the court ruled in First Interstate, “this interpleader action is not a suit designed to obstruct the United States in its ability to assess or call taxes; nor will this action hinder the United States in its efforts to assess or collect taxes.” First Interstate, 891 F.Supp. at 548. The court further ruled that to the extent the government holds a valid claim to the funds, the court’s resolution of the claims “will facilitate the ability of the United States to collect any taxes which might be owing.” Id. In the instant case, this Court has already ordered the Mets to pay the IRS until Darryl Strawberry’s federal income tax liabilities are satisfied in full. See Order, ECF No. 166. This interpleader action does not restrain the United States’ ability to assess or collect taxes and therefore, the IRS’ use of the Anti-Injunction Act is misplaced.
The last argument put forth by the IRS is that a person who receives an internal revenue levy may not delay tax collection by filing an interpleader. The IRS cites an Eleventh Circuit case that held that once a third party receives notice of a levy, it is obligated to surrender the property to the IRS. United States v. Metro. Life Ins., 874 F.2d 1497, 1499 (11th Cir.1989). The two defenses to this requirement are: 1) the third party can show it is not in possession of the taxpayer’s property; or 2) the third party can show that at the time it received the notice of levy, the property was already subject to attachment or execution under judicial process. Id. The IRS asserts that the Mets, having already been served notice of the internal revenue levy, are required to surrender the deferred compensation funds to the IRS. The IRS contends that this interpleader is an attempt to avoid this requirement. The district court in Kurland disagreed with this line of reasoning:
If Plaintiff legitimately and in good faith feared exposure to competing claims to the disputed funds ... Plaintiff should not be subject to suit for failure to turn over the disputed funds to the government, opening himself up to litigation from the other claimants. This is exactly the type of multiple liability inter-pleader was designed to prevent.
Kurland, 919 F.Supp. at 422. The IRS relies on the Supreme Court decision, United States v. Nat’l Bank of Commerce, 472 U.S. 713, 721, 105 S.Ct. 2919, 86 L.Ed.2d 565 (1985), to argue that Kurland was wrongly decided. In the case, the Supreme Court described the need of the government to promptly secure its revenues. The assertion that Kurland was wrongly decided based on this Supreme Court case is unpersuasive. While this Court appreciates the principles justifying a tax levy, it also recognizes the policy behind the interpleader statute that allows a disinterested stakeholder to bow out and avoid “the vexation and expense of possible multiple litigation.” 7 Wright, Miller & Kane, Federal Practice & Procedure: Civil 3d § 1704 (3d ed. 2011). Furthermore, as the Supreme Court has noted, interpleader is a remedial device that is to be applied liberally. State Farm Fire & Cos. Co. v. Tashire, 386 U.S. 523, 533, 87 S.Ct. 1199, 1204, 18 L.Ed.2d 270 (1967).
CONCLUSION
After addressing all the arguments put forward by the IRS in its Motion to Dismiss, I find there is no reason this Court lacks jurisdiction and why 28 *450U.S.C. § 2410 does not waive the United States’ sovereign immunity in this action.1 Prior to 1966, courts questioned the ability to name the United States as a defendant in an interpleader under Section 2410. In 1966, all doubt on the point was resolved when the statute was amended to extend it to interpleader proceedings. “This legislative change represents a potentially significant limitation on the United States’ ability to invoke sovereign immunity in the inter-pleader context.” 7 Wright, Miller & Kane, Federal Practice & Procedure: Civil Bd § 1721 (3d ed.2011). Throughout the interpleader, the parties have made it clear that the IRS holds a first priority levy; there is no prejudice to the United States in allowing this interpleader to be dismissed on the merits. Furthermore, the Mets brought this interpleader in a good faith attempt to resolve the competing claims to the funds it held as a disinterested stakeholder and to enjoin the defendants from bringing any further action against the Mets with regard to these funds. This is exactly the function of federal interpleader and this Court has subject matter jurisdiction to resolve the matter. Accordingly, it is hereby
ORDERED AND ADJUDGED that Defendant Internal Revenue Service’s Motion to Dismiss the Amended Crossclaim for Interpleader of the Sterling Mets, L.P. (Doc. 148) is DENIED.
DONE and ORDERED.
. Although some courts (see Kentucky ex rel. United Pac. Ins. Co. v. Laurel County, 805 F.2d 628, 636 (6th Cir.1986) ruled that 28 U.S.C. § 2410(a)(5) did not apply when an internal revenue levy was at issue because the statute only waives sovereign immunity if the United States holds a "mortgage or other lien,’’ this Court agrees with the ruling in Commerce Bancshares, Inc. v. Lenard, 826 F.Supp. 396, 398 (D.Kan.1993) (holding that "at the time that the government obtains the right to collect tax by levy it acquires a lien on any property owned by the delinquent tax payer.”)). Thus, the existence of a levy implies the existence of a lien. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494546/ | MEMORANDUM OPINION ON CROSS-MOTIONS FOR SUMMARY JUDGMENT
MICHAEL G. WILLIAMSON, Bankruptcy Judge.
The Trustee and the Internal Revenue Service seek a declaration that property previously owned by the Debtor remains property of the estate as a matter of law even though it has been transferred twice—first to Guerrini Family Limited Partnership (“GFLP”) and later to Daer Holdings, LLC (“Daer”)—as part of two court-approved sales in two different bankruptcy cases. They claim both transfers were ineffective because the property was transferred to the Debtor’s nominees: GFLP and Daer. The IRS, which has a federal tax lien on the property, also seeks a declaration that Iberiabank’s mortgage lien—the only other hen on the property— is void as matter of law because Iberia-bank’s predecessor-in-interest recorded the mortgage hen in violation of the automatic stay and had knowledge—either actual or constructive—that the property securing its mortgage was property of the estate.
Daer and Iberiabank, of course, dispute that GFLP and Daer are the Debtor’s nominees. But in any event, Daer and Iberiabank claim the IRS is barred by the doctrines of res judicata and collateral es-toppel from undoing the Court’s prior sale orders. Iberiabank also claims that the automatic stay did not preclude its predecessor from recording its mortgage hen and that its valid mortgage hen is superior to the IRS’s federal tax hen under the Internal Revenue Code.
All of the parties are bound by the Court’s prior sale orders regardless of whether they were a party to—or had notice of—the sale proceeding. That is because bankruptcy sales are final as to the entire world. Nevertheless, the property at issue remains property of the estate subject to administration by the Trustee notwithstanding the transfers because Daer is the Debtor’s nominee, and the Debtor’s estate retains an equitable inter*454est in property held by a debtor’s nominee. The property, however, is subject to Iber-iabank’s mortgage lien, which is superior to the IRS’s federal tax lien under Internal Revenue Code § 6323. The IRS’s federal tax lien, in turn, is entitled to be paid under the priority established in Bankruptcy Code § 724(b).
Factual Background
The Consent Judgment
The Debtor and her husband (Paul Bil-zerian) previously owned a mansion located at 16229 Villareal de Avila, Tampa, Florida. In March 1997, the Debtor and her husband transferred the Villareal mansion to Overseas Holding Limited Partnership (“OHLP”) (the Debtor owned a 100% beneficial interest in OHLP). Nearly four years later, a federal district court in Washington, D.C. appointed a receiver over Bilzerian’s assets to execute on a final judgment the Securities and Exchange Commission had previously obtained against Bilzerian requiring him to disgorge $60 million in illegal profits and accrued interest.1 The receiver claimed that the Villareal mansion was part of Bilzerian’s receivership estate.
The Debtor and OHLP intervened in the D.C. district court action to preserve their alleged interest in the Villareal mansion. Shortly after intervening in that action, the Debtor filed her bankruptcy case in this Court. In order to continue participating in the D.C. district court action, the Debtor was required to, and in fact did, obtain interim stay relief from this Court.2 The parties in the D.C. district court action eventually agreed to a resolution of the dispute over their respective ownership interests in the Villareal mansion.
That agreement provided that (i) the Debtor (or OHLP) and the Bilzerian receivership each owned a 50% interest in the Villareal mansion; and (ii) the Villareal mansion would be sold, with the Debtor (or OHLP) receiving 50% of the sales proceeds and Bilzerian’s receivership estate receiving the remaining 50% of the sales proceeds. The parties entered into a consent agreement memorializing those terms.3 The D.C. district court ultimately entered a final judgment incorporating the terms of the parties’ Consent Agreement.4
On January 25, 2002, this Court entered a final stay relief order. That order specifically provided that the “automatic stay, to the extent applicable, is expressly lifted and annulled to permit the entry of [the Consent Judgment] and the implementation thereof.”5 The IRS received notice of the parties’ joint motion for stay relief,6 the Consent Judgment,7 and the final stay relief order (which incorporated the Consent Judgment).8 The IRS also participated in the D.C. district court action. At no point, however, did the IRS object to the entry of the final stay relief order incorporating the Consent Judgment.
*455
GFLP and the GFLP Sales Contract
For more than a year after entry of the Consent Judgment, the marketing of the Villareal mansion was under the supervision and control of the SEC receiver. Then, on March 31, 2004, the Debtor (as president and general partner of OHLP), with the consent of the SEC receiver, contracted with GFLP to sell the Villareal mansion to GFLP for $2.25 million. GFLP apparently was formed to acquire the Villareal mansion. Its general partner was the Guerrini Corporation, which was controlled by Mary Haire (the Debtor’s next-door neighbor). The Guerrini Corporation owned a 1% interest in GFLP. The remaining 99% interest was owned by the Guerrini Family Corporation, which was controlled by the Debtor’s parents. The Guerrini Family Corporation later purportedly transferred its 99% interest in GFLP to the Keyapaha Family Trust, another entity controlled by the Debtor’s parents.
The Sale Notice
Once the SEC receiver approved the sales contract, the Debtor filed a notice of sale in her bankruptcy case on April 14, 2004.9 The notice of sale, which was served on the IRS, attached a copy of the contract between OHLP and GFLP; however, GFLP’s name was redacted from the contract. The notice also failed to include any date for objecting to the proposed sale. Instead, the notice specifically provided that it was “given for informational purposes” only since the sale of the Villa-real mansion was controlled by the Consent Judgment and this Court’s final stay relief order incorporating the Consent Judgment.10
The Sale to GFLP
In any event, no objections to the sale notice were filed. So the property was sold to GFLP on May 10, 2004. GFLP financed the purchase of the Villareal mansion through SouthTrust Mortgage Corporation. SouthTrust later assigned the mortgage to Wachovia Bank. Mary Haire personally guaranteed the $2.25 million mortgage loan.
The Involuntary Bankruptcy
GFLP originally purchased the Villareal mansion with the intention of selling it after one year. But GFLP claims that the Debtor and Bilzerian interfered with any proposed sale so that they could continue residing at the mansion. Unable to come to any agreement with the Debtor and Bilzerian over the marketing or sale of the mansion, GFLP demanded that they vacate the property. In response, the Key-apaha Family Trust and the Guerrini Family Corporation filed a state court action seeking dissolution of GFLP and sale of the Villareal mansion. The Keyapaha Family Trust requested that the state court appoint Michael Peters as a receiver for the mansion.
The state court declined, instead appointing Maynard Luetgert as receiver. Luetgert held an auction on April 27, 2006, and the successful bidder was Daer. That sale was unable to close, however, because of title insurance issues. Daer later sued to recover its deposit. The state court ultimately entered an order ejecting the Debtor and Bilzerian from the Villareal mansion. One week later, the Keyapaha Company (as trustee for the Keyapaha Family Trust) initiated an involuntary petition against GFLP in this Court.11 GFLP *456consented to the involuntary petition.12
Daer and the Sale Auction
At the time of the involuntary bankruptcy, GFLP’s primary asset was the Villareal mansion. Consequently, three weeks after the involuntary petition was filed, GFLP sought Court approval of proposed bid procedures for the sale of the Villareal mansion.13 On November 22, 2006, the Court entered an order preliminarily approving a “stalking horse contract” and scheduling the sale of the Villareal mansion for December 11, 2006.14 The Court’s November 22 order also established procedures for marketing and auctioning the Villareal mansion. Among those procedures was a requirement that any initial bid for the Villareal mansion exceed the “stalking horse contract” by $200,000.
The sale auction was held on December 11, 2006. And the highest bid—$5.5 million—was submitted by Daer. Daer had been formed over a year earlier by David Slavinsky for the purpose of buying real estate. At the time Daer was formed, Slavinsky was its sole member. Slavinsky later sold his membership interest in Daer to his father-in-law, Michael Peters. Daer was originally managed by Peters and Sla-vinsky. Then, in mid-2010, Scott Rohleder replaced Slavinsky as a managing member. Peters eventually resigned, leaving Rohleder as Daer’s sole managing member.
The Daer Sale Order
On December 15, 2006, the Court entered a final sale order (i) finding, among other things, that Daer acted in “good faith” within the meaning of Bankruptcy Code § 363; and (ii) authorizing GFLP to convey the Villareal mansion to Daer.15 Daer closed on the sale of the Villareal mansion on December 27, 2006. The funds for the $327,000 deposit came from the Puma Foundation, an entity owned by the Debtor. Daer financed the balance of the $5.5 million purchase price through Century Bank. Michael Peters personally guaranteed the loan. Daer granted Century Bank a mortgage on the Villareal mansion to secure its obligation to repay the loan. Daer later executed and delivered to Century Bank a second promissory note in the principal amount of $750,000. Daer also granted Century Bank a second mortgage to secure its obligations under the second promissory note.
Iberiabank’s Acquisition of the Daer Loans
Century Bank later was placed in receivership, and on November 13, 2009, Iberia-bank acquired some of Century Bank’s assets, including the loans to Daer, from the Federal Deposit Insurance Corporation.
The Debtor’s Access and Use of the Villareal Mansion
At the time of the closing of the 2006 sale to Daer, the Debtor and Bilzerian were living at the Villareal mansion. In fact, the Debtor and Bilzerian had continued to reside at the mansion even after it was sold to GFLP. When the mansion was sold to Daer, both the Debtor and Bilzeri-an executed an agreement to vacate the Villareal mansion no later than the closing date. But after the closing, Daer claims it hired the Debtor to continue managing and maintaining the Villareal mansion and permitted her to stay at the Villareal mansion rent free so she could fulfill those responsibilities. The Debtor and her husband have had access to the Villareal man*457sion every day since Daer acquired it. The utility bills for the Villareal mansion remain in the Debtor and Bilzerian’s names. And they both continue to list the Villareal mansion as their address of record on various other bills, including at least one personal credit card.
Procedural Background
On February 28, 2009, the Trustee filed this adversary proceeding seeking (i) a declaration that the Villareal mansion is property of the estate, that it was never transferred to an arms-length purchaser, and that Daer is the Debtor’s alter ego (Counts I, VI, and VIII); (ii) turnover of the Villareal mansion to the Trustee (Counts II and III); (iii) to avoid the transfer of the Villareal mansion (Count IV); (iv) to recover the value of the Villa-real mansion under Bankruptcy Code § 550 (Count V); and (v) to vacate the Court’s prior sale orders based on fraud (Count VII).16 Daer moved to dismiss the Trustee’s adversary complaint.17 Judge Paskay dismissed all of the claims against Daer (all but one of which without prejudice), except the counts seeking a declaration that the Villareal mansion is property of the estate and that Daer is an alter ego of the Debtor (Counts I and VIII).18 The IRS later intervened in this action seeking a declaration that (i) the Villareal mansion is property of the estate and that the transfers of the Villareal mansion to GFLP and Daer were ineffective (Count I); and (ii) Iberiabank’s lien is void (Count II).19
Daer initially moved for summary judgment against the Trustee and IRS on their claims.20 Iberiabank likewise moved for summary judgment on the IRS’s claims.21 The IRS, of course, opposed those motions.22 The Court heard the parties’ summary judgment motions on September 27, 2011 and ultimately took them under advisement at the conclusion of the hearing. Shortly after the September 27 summary judgment hearing, the IRS filed its own summary judgment motion23 Daer and Iberiabank oppose the IRS’s summary judgment motion.24 The Court now has all three summary judgment motions before it.
Issues
The parties have engaged in lengthy discovery and filed hundreds of pages of legal memoranda and thousands of pages of exhibits in support of and opposition to the various summary judgment motions. Notwithstanding all of that, resolution of the respective summary judgment motions comes down to three issues: First, is the IRS bound by the Court’s prior sale orders? Second, are GFLP and Daer the Debtor’s nominees, and if so, does the Villareal mansion remain property of the estate even in light of the prior sale orders? Third, assuming the Villareal mansion remains property of the estate, is Iberiabank’s mortgage lien valid and does it have priority over the IRS’s federal tax lien?
*458Conclusions of Law
This Court has jurisdiction over this adversary proceeding under 28 U.S.C. § 1334. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (E), (F), (H), (K), (M), (N) & (0).
The IRS is Bound by the Court’s Earlier Sale Orders
The parties spend a significant amount of time arguing whether the IRS was party to—or had notice of—either of the Court’s prior sale orders. The IRS, in particular, argues that it was not party to the Consent Judgment in the D.C. district court litigation and that it did not receive adequate notice of either sale. It is undisputed, however, that the IRS received notice of (i) the parties’ joint motion for stay relief;25 (ii) the Consent Judgment in the D.C. district court litigation;26 and (iii) the final stay relief order (which incorporated the Consent Judgment).27
More importantly, it is undisputed that the IRS received notice of the Debtor’s April 14, 2004 sale notice.28 In fact, the IRS’s lead trial counsel in this proceeding conceded that not only did the IRS receive a copy of the April 14 sale notice, but the sale notice was also served on her personally.29 In the end, the IRS’s claim of inadequate notice really boils down to the fact that GFLP’s name was redacted from the sales contract attached to the April 14 sale notice. If that omission was important to the IRS, it could have—indeed it should have'—raised that issue when it received the notice. But it did not.
In any event, the notice issue is not dispositive in this case. To be sure, the IRS is barred by the doctrines of res judicata and collateral estoppel from relit-igating the sale order in the Debtor’s bankruptcy case (or the facts raised in the sale motions) in a separate lawsuit because it had notice of the sale to GFLP. But the IRS is bound by the Court’s prior sale orders (both the sale to GFLP and the sale to Daer) regardless of whether it was a party to—or had notice of—the sale motions.
That is because, as Judge Posner recognized in In re Met-L-Wood Corporation, a proceeding under Bankruptcy Code § 363 is an in rem proceeding.30 An in rem proceeding “transfers property rights, and property rights are rights good against the world, not just against parties to a judgment or persons with notice of the proceeding.”31 As a consequence, the IRS is bound by the Court’s prior sale orders even if it was not a party to—or did not have notice of—the sale proceedings.
That, of course, does not mean the IRS has no avenue for challenging the Court’s prior sale orders. It does; but the sole remedy for challenging those orders is under Federal Rule of Civil Procedure 60(b).32 Rule 60(b) provides six grounds for relief from a final judgment: (i) mistake, inadvertence, surprise, or excusable neglect; (ii) newly discovered evidence; *459(iii) fraud, misrepresentation, or misconduct by an opposing party; (iv) the judgment is void; (v) the judgment has been satisfied, released, or discharged; or (vi) any other reason that justifies relief.33
Motions based on the first three grounds&emdash;mistake or excusable neglect; newly discovered evidence; and fraud&emdash; must be brought within one year after entry of the final judgment or order.34 Because the Trustee’s and IRS’s claims in this action were more than four years after the latest sale order, none of those first three grounds provide a basis for relief. Nor do the fourth (the judgment is void) and fifth (the judgment has been satisfied, released, or discharged) grounds. The sale orders are not void. The only plausible reason they would be is if the IRS lacked notice. But, as discussed above, the IRS concedes it received the April 14, 2004 sale notice. True, it did not receive the sale notice in the GFLP case; however, it had no claim in that case. So the fourth ground provides no basis for relief. And the fifth ground obviously has no application here. That leaves Rule 60(b)’s “catchall” provision.
The only plausible basis for relief from the judgment under the “catch-all” provision is that the Debtor essentially perpetrated a fraud on the Court by orchestrating the transfer of the Villareal mansion to two entities that were, unbeknownst to the Court and creditors, the Debtor’s nominees. Fraud on the court, however, is not a basis for relief under Rule 60(b)’s “catch-all” provision. The “catch-all” only deals with grounds for relief not specifically enumerated in Rule 60(b)(l)-(5).35 And fraud is specifically addressed in Rule 60(b)(3). Besides, the “catch-all” cannot be used to make an end-run around the one-year limitation.36 So the IRS is not entitled to relief under Rule 60(b)’s “catchall” provision based on fraud on the Court.
Another provision in Rule 60&emdash;sub-section (d)&emdash;does provide for relief from a judgment where a party has perpetrated a fraud on the court.37 The problem&emdash;at least from the IRS’s perspective&emdash;is that the Debtor has not perpetrated a fraud on the Court here. Judge Posner addressed this very same issue in In re Met-L-Wood Corporation. There, certain creditors claimed they were entitled to relief from a final sale order under Rule 60(b) because the debtor’s principal orchestrated a secret plan to use a shill bidder to acquire the debtor’s assets and then transfer the profitable portion of those assets back to the debtor’s principal, leaving the unsecured creditors holding the bag.38 Judge Posner observed that the debtor’s principal committed a fraud against the debtor’s creditors by using “his control to walk off with [the debtor’s] principal assets for a song, shucking off the unsecured creditors in the process.”39 But that did not, according to Judge Posner, constitute a fraud on the *460court.40 The same is true in this case.
Ultimately, § 363 sales require finality. Otherwise, trustees or debtors-in-possession would never be able to obtain the maximum value for a debtor’s assets. Accordingly, absent grounds for relief under Rule 60, a final sale order is binding even on those who were not party to&emdash;or did not have notice of-*&emdash;the sale motion. Because no grounds for relief under Rule 60(b) exist, the IRS is bound by the Court’s earlier sale orders.
The Debtor’s Equitable Interest in the Villareal Mansion Remains Property of the Estate
Even though the IRS is bound by the Court’s earlier sale orders, the Vil-lareal mansion may still remain property of the estate. Under Bankruptcy Code § 541, property of the estate includes all of the debtor’s equitable interest in any property. The Eleventh Circuit has recognized that a debtor retains an equitable interest in property held by the debtor’s nominee.41 Consequently, a debtor may legally transfer title to property to a third party, but if that third party is the debtor’s nominee, then the debtor retains an equitable interest in that property, and the debtor’s equitable interest in the property is property of the estate subject to administration by the trustee even though legal title has passed.
Critically, application of the “nominee” theory does not impact the validity of the transfer of legal title to Daer. That transfer was effective. Nor does it somehow undermine the finality of the Court’s earlier sale orders. All of the parties were justified in relying on the sale orders. And parties to a bankruptcy case or other interested persons need not worry that § 363 orders may be undone years down the road. Rather, the unique facts of this case present a discreet legal issue: does a debtor retain an equitable interest in property held by a nominee (even where the nominee acquired legal title by a § 363 sale)&emdash;not whether the transfer to a nominee conveys legal title. The Eleventh Circuit Court of Appeals has already concluded that a debtor does retain an equitable interest in property held by a nominee.
The only question here is whether Daer is the Debtor’s nominee. The “nominee” theory frequently arises in taxpayer cases. And courts in those cases have developed a test for determining whether a corporation is a taxpayer’s nominee.42 For instance, in Shades Ridge Holding Co. v. United States, the Eleventh Circuit identified the following factors for making that determination: (i) the control the taxpayer exercises over the nominee and its assets; (ii) the family relationship, if any, between the taxpayer and the corporate officers; and (iii) the use of corporate funds to pay the taxpayer’s personal expenses.43 The Court concludes that the Shades Ridge test is the appropriate test in this case.
And at first glance, it appears, based on the voluminous filings in this case, that there are a number of disputed material facts under that test. But a closer examination of the record reveals there are a number of undisputed material facts that, *461by themselves, establish that Daer is the Debtor’s nominee as a matter of law under the Shades Ridge test, even viewing all of the remaining facts in the light most favorable to Daer.
First, there is no dispute that the Debt- or exercises dominion and control over Daer’s sole asset: the Villareal mansion. The Debtor lived in the Villareal mansion rent free after it was sold to GFLP. And she continued to reside there rent free at least half of the year (perhaps more) after it was sold to Daer. Daer concedes that the Debtor (along with her husband, mother, and nephew) has had access to the property every day since Daer closed on the sale and that the Debtor’s mother and nephew have each occupied the Villareal mansion six months out of the year since December 2006.44 In fact, the undisputed record evidence is the only occupants of the Villareal mansion between June 2006 and May 2010 were the Debtor, Bilzerian, the Debtor’s mother, the Debtor’s two sons, and the Debtor’s nephew.
Apparently the only time the Debtor and her other family members were not permitted to reside at the mansion is when it is occupied by The Winner’s Circle,45 although even then it is not clear that the Debtor did not also occupy the mansion on those dates. In any event, Daer is only able to identify sixteen days that The Winner’s Circle has occupied the mansion from December 26, 2006 through August 31, 2011.46
Daer claims the Debtor’s use and control over the Villareal mansion does not demonstrate she is a nominee because she is really the property manager for Daer. Of course, that explanation is not particularly credible considering the Debtor does not receive any regular compensation for those services. But the Court need not— and, in fact, does not—assess the credibility of that evidence because whether or not the Debtor is the property manager does not change the fact that she exercises significant dominion and control over Daer’s sole asset. The same was true when the Villareal mansion was titled in GFLP’s name.
Second, there is a close familial relationship between the Debtor, on the one hand, and GFLP and Daer, on the other hand. Daer does not dispute, for instance, that the Debtor’s parents were the principals of the Guerrini Family Corporation (GFLP’s original 99% limited partner) and the Key-apaha Family Trust (later GFLP’s 99% limited partner). Nor does Daer dispute that Keyapaha Family Trust—whose beneficiary is the Debtor’s mother—made a $350,000 capital contribution to Daer in exchange for a 75% ownership interest in Daer less than one week before Daer closed on the sale of the mansion.
Third, there is no dispute that Daer periodically paid the Debtor’s Citiadvan-tage and Discover card accounts from June 2007 through March 2009. Over that time, Daer paid charges totaling $90,569.06. Arguably, though, there is *462record evidence that suggests these payments were to reimburse the Debtor for expenses incurred in her capacity as a property manager. So, unlike the first two factors, the third factor does not conclusively favor a finding that Daer is the Debtor’s nominee.
The third factor, however, is not determinative. The most critical issue is who has substantial control over the property— i.e., the first factor.47 After all, the nominee theory “attempts to discern whether a taxpayer has engaged in a sort of legal fiction ... by placing legal title to the property in the hands of another while, in actuality, retaining all or some of the benefits of being the true owner.”48 Even assuming the last factor does not support the IRS’s nominee theory and that the facts identified in Daer and Iberiabank’s supplemental response49 are in dispute (or that they contradict the IRS’s claims), it nevertheless remains undisputed that the Debtor has retained most of the benefits of being the true owner—in particular, significant dominion and control over the Villa-real mansion.
Indeed, the Debtor and her husband use and occupy the Villareal mansion the same today as they did when they owned it over fifteen years ago. And that fact, coupled with the close relationship between the Debtor and Daer, establishes that Daer is the Debtor’s nominee as a matter of law. Accordingly, the Debtor’s equitable interest in the Villareal mansion remains property of the estate subject to administration by the Trustee.
Iberiabank’s Mortgage Lien is Superior to the IRS’s Federal Tax Lien
The sole issue left for the Court to determine, then, is the validity and priority of any liens on the Villareal mansion. There are really only two liens at issue: Iberiabank’s $5.5 million mortgage lien and the IRS’s federal tax lien on the property. Federal tax liens do not automatically have priority over all other liens.50 Rather, the priority of federal tax liens is, absent a statutory provision to the contrary, ordinarily governed by the common-law principle that “the first in time is the first in right.”51
But here there is a provision to the contrary: Internal Revenue Code § 6323. That section provides that a federal tax lien imposed under § 6321 “shall not be valid as against any purchaser, holder of a security interest, mechanic’s lienor, or judgment lien creditor until notice thereof which the meets the requirements of subsection (f) has been filed by the Secretary.” 52 Since the IRS does not appear to dispute—nor could it—that Iberiabank is the holder of a security interest by virtue of its mortgage liens on the Villareal man*463sion, Internal Revenue Code § 6323 applies here.
The United States Supreme Court has held that under § 6323 a federal tax lien commences no sooner than the filing of a notice under that section; a competing state-law lien—such as Iberiabank’s mortgage lien—comes into existence for purposes of § 6323 when it has been “perfected.”53 There is no dispute in this ease that the IRS had not filed any notice of its tax liens by the time Century Bank recorded its $5.5 million mortgage lien on December 28, 2006 and its $750,000 mortgage lien on March 28, 2008. Accordingly, Iber-iabank’s mortgage lien has priority over the IRS’s federal tax lien under Internal Revenue Code § 6323.
As a consequence, the IRS is left to argue that Iberiabank’s mortgage lien is void for two reasons. First, the IRS claims that Century Bank recorded its mortgage lien in violation of the automatic stay. Second, the IRS claims that for a variety reasons Century Bank knew or should have known that the Villareal mansion was property of the Debtor’s estate.
It is true, as the IRS contends, that Bankruptcy Code § 362(a)(4) prohibits “any act to create, perfect, or enforce any lien against property of the estate.”54 Section 362(b)(24), however, provides that the automatic stay does not apply to any “transfer” that is not avoidable under Bankruptcy Code §§ 544 or 549.55 The IRS appears to concede that the exception under Bankruptcy Code § 362(b)(24) applies if “perfecting” a mortgage lien was a “transfer.” But, according to the IRS, it is not. The IRS claims Bankruptcy Code § 101(54)(A) only defines the “creation” of a lien—rather than the “perfection” of a lien—as a “transfer.”
The IRS’s argument is without merit. Bankruptcy Code § 101(54) “adopts an expansive definition of transfer” that includes “every mode ... of disposing of or parting with property or with an interest in property.”56 The “perfection” of a lien constitutes a “transfer” under Bankruptcy Code § 101(54)’s expansive definition.57 So Iberiabank’s mortgage lien is not void under Bankruptcy Code § 362 unless it can be avoided under Bankruptcy Code § 544 or 549.
Here, the IRS does not advance any argument that Iberiabank’s mortgage lien can be avoided under either section. It is undisputed that Iberiabank’s lien was properly perfected; consequently, it cannot be avoided under Bankruptcy Code § 544, the “strong-arm clause” that allows a trustee to avoid any unperfected security interest. Moreover, there is no dispute that Iberiabank’s lien cannot be avoided under Bankruptcy Code § 549 because Iberiabank is a good-faith purchaser who paid present equivalent value for its mortgage lien without knowledge of the bankruptcy case. Since Iberiabank’s lien cannot be avoided under either Bankruptcy Code § 544 or 549, then the automatic stay did not prohibit Iberiabank from recording that lien. Accordingly, Iberia-bank’s lien is not void for that reason.
*464Nor is it void because Iberiabank was on actual or constructive notice that the Villareal mansion was property of the estate. To begin with, it is undisputed that Iberiabank did not have actual notice that the Villareal mansion was property of the estate. And the D’Oench Duhme doctrine precludes the IRS from imputing constructive knowledge of that fact to Iberiabank in this case. Under the D’Oench Duhme doctrine, the FDIC’s “interest in an asset it acquired from a failed bank could not be diminished by alleged ‘agreements’ not disclosed in the failed bank’s records.”58
The D’Oench Duhme doctrine has since been codified at 12 U.S.C. § 1823(e)(1).59 That section provides that no “agreement” that tends to diminish or defeat the FDIC’s interest in any asset it acquired from a failed institution is valid unless it: (i) is in writing; (ii) was executed by the depository institution and any person claiming an adverse interest to the depository institution; (iii) was approved by the depository institution’s board of directors or loan committee and reflected in the meeting minutes; and (iv) has been maintained continuously as an official record of the depository institution since the agreement’s execution.60 Importantly, the D’Oench Duhme doctrine has been expanded in two critical respects.
First, it has been expanded to “protect entities to whom the FDIC, acting in its capacity as receiver of failed banks, has transferred assets formerly belonging to a failed bank.”61 Second, it has been expanded to preclude a party from relying not only on “agreements, schemes, or arrangements, but on any claim or defense that would tend to deceive banking authorities as to the value of the insolvent bank’s assets.”62 Under this expanded D’Oench Duhme doctrine, Iberiabank’s mortgage lien cannot be invalidated based on Century Bank’s constructive—or, for that matter, actual—knowledge that the Villareal mansion may be property of the estate unless that knowledge is reflected in a written agreement maintained in Century Bank’s records.63 And it is undisputed there is no such writing.
Iberiabank, therefore, has a valid mortgage lien on the Villareal mansion. And that lien is superior to the IRS’s federal tax lien under Internal Revenue Code § 6323 because Iberiabank is the holder of a security interest that was perfected before the IRS filed notice of its tax lien. So where does that leave the IRS? The answer to that question lies in Bankruptcy Code § 724.
Bankruptcy Code § 724 provides a mechanism for subordinating certain tax claims to the payment of certain priority *465claims.64 But it does not affect liens that are junior or senior to the tax lien.65 Specifically, Bankruptcy Code § 724(b) provides that the proceeds from the sale of estate property that secures an allowed claim for unpaid income taxes shall be paid (i) first, to the holder of an allowed claim secured by a lien on the property that is not avoidable and that is senior to the tax lien; (ii) second, to the holders of any allowed priority claims under Bankruptcy Code § 507(a)(l)-(7) (subject to certain exceptions) to the extent of the amount of the allowed tax claim secured by the tax lien; (iii) third, to the holder of such tax lien to the extent that the allowed tax claim secured by the lien exceeds the amount distributed to priority claimants; (iv) fourth, to any holder of an allowed claim secured by a lien on the property that is not avoidable and junior to the tax lien; (v) fifth, to the holder of the tax claim to the extent not already paid; and (vi) sixth, to the estate.66 The IRS is entitled to be paid on its federal tax lien consistent with Bankruptcy Code § 724(b).
Conclusion
For the reasons set forth above, all of the parties are bound by the Court’s prior sale orders. Nevertheless, the Villareal mansion remains property of the estate subject to Iberiabank’s first priority mortgage lien and the IRS’s federal tax lien (which shall be paid under Bankruptcy Code § 724(b)). The Court will enter a separate order on the parties’ cross-motions for summary judgment consistent with this Memorandum Opinion.
. Adv. Doc. Nos. 119-7 & 119-8.
. Doc. Nos. 12 & 14.
. See Consent & Undertakings by Terri L. Steffen, Overseas Holding Limited Partnership, Overseas Holding Co., Bicoastal Holding Co., Loving Spirit Foundation, Puma Foundation, and Paul A. Bilzerian & Terri L. Steffen 1994 Irrevocable Trust (the "Consent Agreement”). Adv. Doc. No. 210-14.
. Adv. Doc. No. 210-13 (the "Consent Judgment”).
. Doc. No. 35.
. Doc. No. 12.
. Adv. Doc. No. 210-13 at p. 2; Adv. Doc. No. 210-20.
. Doc. No. 35.
. Doc. No. 260.
. Doc. 260 at p. 1.
. In re Guerrini Family Limited Partnership, Case No. 8:06-bk-05383-MGW.
. Guerrini Doc. No. 43.
. Guerrini Doc. No. 35.
. Guerrini Doc. No. 117.
. Guerrini Doc. No. 225 at p. 4.
. Adv. Doc. No. 12. The Trustee originally filed this proceeding on February 3, 2009. He later amended his adversary complaint on March 9, 2009. Adv. Doc. No. 12.
. Adv. Doc. No. 33.
. Adv. Doc. No. 44.
. Adv. Doc. No. 168. The IRS originally filed its intervention complaint on February 8, 2011. Adv. Doc. No. 145. The IRS later amended its intervention complaint on April 8,2011. Adv. Doc. No. 168.
. Adv. Doc. Nos. 102 & 201.
. Adv. Doc. No. 225.
. Adv. Doc. Nos. 210 & 238.
. Adv. Doc. No. 267.
. Adv. Doc. Nos. 299, 306 & 434.
. Doc. No. 12.
. Adv. Doc. No. 210-13 at p. 2; Adv. Doc. No. 210-20.
. Doc. No. 35.
. Doc. No. 260.
. Adv. Doc. No. 437 at p. 46, 1.1-p. 50, 1.3.
. Gekas v. Pipin (In re Met-L-Wood Corp.), 861 F.2d 1012, 1017 (7th Cir.1988).
. Id.
. Indeed, numerous courts have recognized that final sale orders can only be set aside under Rule 60(b). See, e.g., In re Met-L-Wood Corp., 861 F.2d at 1018; In re Edwards, 962 F.2d 641, 643 (7th Cir.1992).
. Fed.R.Civ.P. 60(b)(l)-(6).
. Fed.R.Civ.P. 60(c)(1) ("A motion under Rule 60(b) must be made within a reasonable time&emdash;and for reasons (1), (2), and (3) no more than a year after the entry of the judgment or order or the date of the proceeding.”)
. Rule 60(b)(6), by its terms, is limited to "any other reason justifying relief from the operation of the judgment.” Id.
. In re Met-L-Wood Corp., 861 F.2d at 1018.
. Fed.R.Civ.P. 60(d)(3) ("This rule does not limit a court's power to ... set aside a judgment for fraud on the court.”)
. In re Met-L-Wood Corp., 861 F.2d at 1015-16.
. Id. at 1019.
. Id.
. Gurley v. Mills, No. 99-13416, slip op. at 2-4 (11th Cir.2000); In re Gurley, 357 B.R. 868, 872 (Bankr.M.D.Fla.2006) (citing unpublished Eleventh Circuit Court of Appeals decision affirming bankruptcy court's ruling that the debtor retained an equitable interest in property in the hands of the debtor's nominee (his wife)).
. Shades Ridge Holding Co. v. United States, 888 F.2d 725, 728 (11th Cir.1989).
. Id. at 729.
. Adv. Doc. 245-2.
. Between 2008 and 2009, Bilzerian had a relationship with International Investors Group ("IIG”). IIG, in turn, had a relationship with The Winner’s Circle. Bilzerian claims he has not had any relationship with The Winner’s Circle—even indirectly—since May 2010. Deposition Transcript of Paul Bil-zerian, Adv. Doc. No. 431-109 at p. 29, 1.21-p. 30, 1.4 ("In 2008, 2009 and part of 2010—I think those dates are right—I was associated with International Investors Group, IIG, and it had a relationship with The Winner’s Circle. So my relationship with The Winner’s Circle was through IIG during that period of time.”)
.Adv. Doc. 245-2.
. Shades Ridge, 888 F.2d at 728 ("The issue under either state or federal law depends on who has 'active’ or 'substantial’ control.”); United States v. Todd, 2008 WL 2199873, at *3 (M.D.Fla.2008) (citing In re Shades Ridge, 888 F.2d at 728).
. Richards v. United States (In re Richards), 231 B.R. 571, 578 (E.D.Pa.1999).
. Adv. Doc. No. 434.
. United States v. McDermott, 507 U.S. 447, 449, 113 S.Ct. 1526, 1528, 123 L.Ed.2d 128 (1993).
. Id.
. 26 U.S.C. § 6323(a); see also United States v. Weissman, 135 So.2d 235, 237-38 (Fla. 2d DCA 1961) (holding that a lien for taxes is not valid against a "mortgagee,” "pledgee,” "purchaser,” or "judgment creditor,” as those terms are used in their ordinary and accepted senses); Manchester Fed. Sav. & Loan Ass’n v. Emery-Waterhouse Co., 102 N.H. 233, 153 A.2d 918, 921 (1959).
. McDermott, 507 U.S. at 449, 113 S.Ct. at 1528.
. 11U.S.C. § 362(a)(4).
. 11U.S.C. § 362(b)(24).
. Womack v. Houk (In re Bangert), 226 B.R. 892, 898 (Bankr.D.Mont.1998); Malloy v. St. John Med. Ctr. (In re Woodward), 234 B.R. 519, 525 (Bankr.N.D.Okla.1999).
. In re Woodward, 234 B.R. at 525 (citing 2 Collier on Bankruptcy, ¶ 101.54[1] & [2] (15lh ed. rev. 1999)).
. First Union Nat’l Bank of Florida v. Hall, 123 F.3d 1374, 1379 (11th Cir.1997).
. Hall, 123 F.3d at 1379 n. 9.
. 12 U.S.C. § 1823(e)(l)(A)-(D).
. Hall, 123 F.3d at 1379 n. 8.
. Jobin v. Resolution Trust Corp., 160 B.R. 161, 166 (D.Col.1993).
. Jobin, 160 B.R. at 171 (holding that "[e]ven if the Trustee could establish that officers at Old Cap Fed were aware of M & L’s illegal activities, the institution's knowledge of the Ponzi scheme cannot bar the RTC’s defenses under D’Oench Dhume and § 1823 unless it is reflected in a written understanding”); Demakes Enter., Inc. v. FDIC (In re Demakes Enter., Inc.), 143 B.R. 304, 309 (Bankr.D.Mass.1992) (holding that evidence of institution’s inequitable conduct must be based on failed bank’s records to support equitable subordination claim); FDIC v. Figge (In re Figge), 94 B.R. 654, 667-69 (Bankr.C.D.Cal.1988) (holding that evidence that bank president knew of borrowers' scheme to violate federal banking regulations barred under D’Oench).
. 11U.S.C. § 724(b)(l)-(6).
. Id.
. Id. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494547/ | ORDER DENYING MOTION TO ABATE CLAIMS AGAINST NET LOSERS AND JOINDERS THEREIN
RAYMOND B. RAY, Bankruptcy Judge.
THIS MATTER came before the Court on October 31, 2011 and November 28, 2011, upon (i) the Victim-Creditors’ Motion to Abate Claims Against Net Loser Victims (D.E. 2066) (the “Motion to Abate”) filed by Pirulin Group, LLC, Caro Group, LLC, Exito Investment Group, LLC, Marmarser Investment Group, LLC, Network Resources, LLC, New Miami Group, LLC, OPMonies 2, LLC, Platinum Estates, Inc., and Interamerican Holding, LLC, (collectively, “Pirulin Group”),1 (ii) the Official Committee of Unsecured Creditors’ (“Committee”) Joinder in the Motion to Abate (D.E. 2080),2 (iii) the Joinder in the Motion to Abate filed by the Ira So-chet Inter Vivos Revocable Trust and Investors Risk Advantage, LP (D.E. 2137), (iv) the Joinder in the Motion to Abate filed by Emess Capital, LLC (D.E. 2160) (collectively, “Joinders”), the Response in Opposition (“Response”) (D.E. 2163) to the preceding filed by Herbert Stettin (“Stet-tin” or “Trustee”), the Trustee of Roth-stein Rosenfeldt Adler, P.A. (“RRA” or the “Debtor”), (vi) the subsequently filed Join-der in the Motion to Abate filed by Razorback Funding (D.E. 2169), and (vii) the Reply of the Pirulin Group to the Response (D.E. 2384) (the “Pirulin Reply”). The Court took the matter under advisement and required the Trustee, Committee, and Razorback Funding to submit competing proposed orders.3
The Court has considered the Motion to Abate, the Joinders, the Response, the Pi-rulin Reply, the arguments on the record by counsel for the various interested parties, the Notice of Filing of Trustee Lender/Investor Litigation Status Report (D.E. 2344), and the record in the captioned main bankruptcy case as well as the adversary proceedings referenced in footnote *4671 above. For the reasons set forth below, the Court finds and rules that the moving parties (collectively, the “Movants”) have failed to show that they are entitled to the extraordinary relief requested in the Motion to Abate and the Joinders (and the substantively identical motions and join-ders filed in the referenced adversary proceedings) (collectively, the “Abatement Requests”). Accordingly, the Abatement Requests are denied.
I. Background
This proceeding arises from the collapse of the notorious Ponzi scheme orchestrated by Scott Rothstein, one of the owners of Rothstein Rosenfeldt Adler, P.A., the Debtor herein.
Rothstein operated a multi-faceted scheme in which he offered investors the opportunity to purchase settlements. Rothstein claimed that the Debtor represented clients who had agreed to settlements of employment-related claims, such as sexual harassment claims.
Rothstein represented that the settlements were offered for sale because the Debtor’s settling clients needed cash immediately and those clients agreed to accept a discounted settlement amount in exchange for an immediate payment to be funded by the investors.4 In fact, these clients and settlements did not exist. Investors “purchased” those settlements and were supposed to receive periodic distributions over time. As with any Ponzi scheme, it collapsed in the Fall of 2009 when Rothstein could no longer fund payments to investors. Creditors commenced this proceeding on November 10, 2009 with the filing of an involuntary petition under Chapter 11 against Rothstein’s law firm.
The Adversary Proceedings
Commencing in 2009, the Trustee filed numerous adversary proceedings, with many adversaries filed recently in the period shortly before the two-year deadline under 11 U.S.C. § 546(a)(1)(A) for the Trustee to commence certain Chapter 5 actions. The adversary proceedings can be divided into the following general categories: (1) claims against non-investors for alleged preferential transfers under 11 U.S.C. § 547;5 (2) claims against professionals, financial institutions, and others alleged to have liability arising out of the scheme; (3) claims against investors who are “Net Winners”;6 and (4) claims against investors who are “Net Losers.”7
Other Pending Claims and Actions
The Court is cognizant there are other proceedings in which creditors of the Debtor are pursuing civil actions against entities alleged to be culpable for the losses these creditors suffered. Several of these actions are being or will soon be tried. Included among these actions are Coquina Investments v. TD Bank, N.A., Case No. 10-cv-60786-Cooke; Emess Capital, LLC v. Rothstein, et al., Case No. 10-cv-60882-JAL, and Razorback Fund*468ing, LLC, et al. v. Rothstein, et al., Case No. 09-062943-CA-19 (Broward Circuit Court) (the “Razorbaek Funding Case”). The United States also initiated an action for restitution, in United States v. Scott Rothstein, Case No. 10-30661-cr-COHN, and has obtained forfeiture orders.
II. The Abatement Requests
In the Pirulin Group’s Motion to Abate, a group of eight “victims” of the Ponzi scheme seek to stay the Trustee from advancing currently pending litigation against all Net Losers. The Committee and others joined with the Motion. The Movants argue that pending actions against innocent Net Losers should be abated or stayed so that the Trustee can concentrate estate resources on the “most culpable” litigation targets.8
The Court’s primary concern is that the abatement method proposed by the Mov-ants is impractical. Other concerns are with usurping the Trustee’s discretion in favor of interested parties and the lack of authority for granting such extraordinary relief.
A. The Relief Requested is Unfeasible
The Movants suggest that the Trustee should only be precluded from pursuing claims against “innocent” Net Losers. However, the Movants have not defined what constitutes an “innocent” Net Loser and have not advised the Court of the factors to be considered in making that determination. In their proposed order, the Movants suggest that an “innocent” net loser is not an insider. They also suggest that “innocent” parties are those that should not be deemed culpable solely because that party engaged in usurious transactions. The Movants’ assertion is dependent on the assumption that all Net Losers acted in good faith. However the plain language of 11 U.S.C. § 548 and cases interpreting the good faith defense state that the party seeking to assert good faith as a defense has the burden of establishing such good faith. Bayou Superfund, LLC v. WAM Long/Short Fund II, LP (In re Bayou Gp.), 362 B.R. 624, 631 (Bankr.S.D.N.Y.2007).
Moreover, the Movants do not suggest the period of time for which the Trustee’s claims should be abated. The Pirulin Group seeks to abate such lawsuits until all claims against all Net Winners, TD Bank, and Gibraltar Bank are “resolved.” The Pirulin Group offers no definition of the term “resolved” in the Motion to Abate. At. the October 31 hearing, counsel for the Committee, suggested that the relevant lawsuits should be abated until the conclusion of litigation against TD Bank and Gibraltar. (D.E. 2270 at 54-55). The competing order submitted to the Court on behalf of The Pirulin Group and Committee requests abatement “until the earlier of July 1, 2012 or resolution of the Razorback Funding [C]ase at the trial level.” The Razorbaek Funding Case will be tried before a jury in March 2012. Notwithstanding, it is unclear that any such abatement would serve a useful purpose. Cf. TFS Elec. Mfg. Servs., Inc. v. Topsearch Printed Circuits (HK), Ltd. (In re TFS), *4692008 WL 45396, at *1 (D.Ariz. Jan. 2, 2008) (reviving an adversary proceeding “to move forward with further discovery and trial” after the parties’ agreed abatement did not lead to settlement). The Court is simply unwilling to delay the Trustee’s ability to bring closure to various adversary proceedings and this case, pending resolution of other litigation.
Even if the Court were to grant the relief requested in the Abatement Requests, there would have to be some mechanism for the Trustee to except certain Net Loser cases from any abatement. The proposed orders submitted by the Pi-rulin Group and the Committee provide that the Trustee may seek relief from the abatement order “for cause.” But they do not explain the parameters of “cause,” although they do suggest that it is the Trustee’s burden to prove a transferee acted culpably (i.e., in bad faith). Again, the plain language of section 548 provides that establishing good faith is on the party seeking to assert the defense. Further, creating a system in which the Trustee must litigate lifting an abatement order “for cause” prior to continuing with already pending litigation may actually lead to the result the Movants are attempting to avoid—incurring costs associated with litigation.
In the end, it is the Trustee who makes the determination whether to pursue claims. Here, the Movants request that this Court effectively remove from the Trustee one of the key powers entrusted to trustees—the ability to pursue claims on behalf of the estate for the benefit of all creditors. In so doing, the Abatement Requests implicate the power, authority, and judgment of the Trastee. Generally, trustees have broad discretion in determining, in their own business judgment, how best to administer the estates to which they owe a fiduciary duty. See In re Consol. Indus. Corp., 330 B.R. 712, 715 (Bankr.N.D.Ind.2005) (explaining that a “trustee is given a substantial degree of discretion in deciding how best to administer the estate committed to his care and his actions are measured by a business judgment standard”). It has been further recognized that such broad grant of discretion is applicable to the decision of whether and when to pursue litigation on behalf of an estate. See id.; In re Smith, 426 B.R. 435, 441 (Bankr.E.D.N.Y.2010).
The Movants uniformly recognize the right of the Trustee to discharge his fiduciary duties according to his informed business judgment yet they disagree with the Trustee’s decision to pursue various claims against them and other purportedly similarly situated defendants. Interested parties cannot usurp a trustee’s authority to make decisions regarding whether and when to pursue litigation. See Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 8-9, 120 S.Ct. 1942, 147 L.Ed.2d 1 (2000) (recognizing that “generally], section 1109 does not bestow any right to usurp the trustee’s role as representative of the estate with respect to the initiation of certain types of litigation that belong exclusively to the estate”) (internal citations omitted). The reasoning for placing such decisions solely with trustees, removed from the control of creditors, is sound. While often aligned, creditors’ committees and trustees represent different and sometimes conflicting interests. Therefore, while the interests of the unsecured creditors should be considered by the Trustee, they should not, alone, control. See Official Comm. Unsecured Creditors of Grand Eagle Companies, Inc. v. ASEA Brown Boverie, Inc., 313 B.R. 219, 227 (N.D.Ohio2004). Granting the requested relief may also have the ironic result of elevating the Movants’ interests above other fraudulent transfer re*470cipients and trade creditors. Indeed, the requested abatements would effectively create a new class of defendants-self-proclaimed “innocent” Ponzi scheme “victims” who would be entitled to priority treatment over other fraudulent transfer recipients.
Even if the Court were to grant the relief requested in the Abatement Requests, the Trustee has represented that prior to bringing the claims, he made an informed decision. In making that decision, he considered whether each prospective avoidance defendant had sufficient knowledge, either objective or subjective, to place them on inquiry notice of the potential of the fraudulent activity. Therefore, even if the Court were to grant the relief requested by the Movants, it is not clear which specific claims would be abated.
The Committee Joinder and the Committee and Pirulin Group’s proposed orders, further seek to condition the requested abatement of claims on the willingness of a potential litigation target to post “sufficient collateral” to secure the amount of its “net preference claims.” However, the Movants fail to indicate how either the sufficiency of collateral or the “net” preference exposure would be determined. The issue of calculating the “net” preference exposure of a given preference defendant is not necessarily as simple as adding all transfers from RRA to the defendant and subtracting all transfers from the defendant to RRA. As represented to the Court by the Trustee’s counsel, a number of the preference defendants transferred funds to or received transfers from RRA through other affiliated parties, or in amounts representing payments on various unrelated transactions.
Therefore, based on the record before this Court, implementing the Abatement Requests is impractical. Further, the Court will not interfere with the Trustee’s business judgment. If the Movants feel the Trustee is not carrying out his statutory duties then they may file the appropriate motion.
B. The Lack of Authority for the Relief Requested
The Pirulin Group’s Reply and the Piru-lin Group and Committee’s proposed orders cite to several cases, yet the cases do not support or are directly relevant to the relief requested in this matter.
SEC and Other Ponzi Scheme Cases
The Movants also assert that the Trustee in this case should not pursue claims against Net Losers based on positions advanced by the Securities and Exchange Commission (“SEC”) and trustees in other Ponzi scheme cases.
The Movants first point to what they assert is the uniform position of the SEC, that receivers in SEC cases should not seek to avoid transfers to net losers. However, as the Movants recognize, this case is not an SEC receivership case and the Trustee is not bound by or subject to SEC guidelines or protocols. Instead, as the Movants also recognize, the Trustee is guided and governed by the provisions of the Bankruptcy Code.
The Movants also point to certain other Ponzi scheme cases which they contend show that trustees generally do not pursue claims against net losers. For example, the Committee contends that the trustee in the Bernard L. Madoff case is not pursuing claims against innocent net losers. However, as recognized in the article cited by the Pirulin Group regarding the Madoff case (D.E. 2163 at Ex. A), the guidelines for pursuing avoidance actions issued by the trustee in the Madoff case included whether there were facts or circumstances suggesting that the transfer recipient *471lacked good faith. Accordingly, as the Trustee is only seeking the return of principal under fraudulent transfer theories where the facts and circumstances indicate that the party may have lacked good faith, it is not clear that the position of the Trustee in this case is inconsistent with the position of the Madoff trustee.
Further, it is important to note that the RRA case is different from the Madoff case. This case does not involve hundreds of “mom and pop” investors who relied on representations of their registered and licensed securities brokers and received better than average returns on what the investors believed were investments in publically traded securities. This case involves a limited number of generally sophisticated parties who received rates of return commonly over 100% on purportedly pre-suit settlements of employment-related claims.
Therefore, even if these SEC and Ponzi scheme cases were instructive, each case must be evaluated and resolved according to its own merits and based on its own particular facts. Decisions regarding those parties who may be liable to the estate should be based upon a case by case analysis of various factors. It cannot be assumed that the facts pertaining to other cases, and the causes of action those facts may or may not support, are the same as are present in the claims at issue in this case.
III. Conclusion
The Movants have failed to meet their burden in establishing that this Court can or should abate the Trustee’s various claims against Net Losers. The Movants failed to present the Court with terms and conditions for such abatements that are clear or practical. Finally, based on the record, the Court will not curtail the Trustee’s business judgment in making decisions regarding whether and when to pursue litigation. Accordingly, it is,
ORDERED that the Motion to Abate (D.E. 2066), and Joinders thereto (D.E. 2080, 2187, 2160, 2169), and all similar or related motions or joinders filed in the instant case and any of the aforementioned adversary proceedings are DENIED without prejudice.
The Trustee shall upload a simple order denying without prejudice the abatement requests and joinders thereto, in each adversary proceeding referenced in footnote 1. The Trustee shall attach this order as an exhibit to the orders that are filed in each of the referenced adversary proceedings.
.A motion substantially identical to the Motion to Abate was filed in each of the following adversary proceedings commenced by the Trustee against the Motion to Abate movants: Stettin v. Caro Group, LLC, 10-03552-RBR; Stettin v. Exito Investment Group, LLC, 10-03553-RBR; Stettin v. Marmarser Investment, LLC, 10-03554-RBR; Stettin v. Network Resources Investment Group, LLC, 10-03602-RBR; Stettin v. New Miami Group, LLC, 10-03556-RBR; Stettin v. Pirulin Group, LLC, 10-03557-RBR, and Stettin v. OPMonies 2, LLC, 10-03558-RBR. Each of those defendants also filed joinders in the Motion to Abate in the main bankruptcy case (D.E. 2069-74).
. A joinder substantially identical to the Committee Joinder was filed in each of the adversary proceedings listed in footnote 1 above.
. The proposed orders submitted by the Committee, Razorback Funding, and the Pirulin Group are nearly identical.
. The Court is aware that there were variations of the scheme and in the representations made by Rothstein.
. These labels are merely for convenience and do not mitigate against other claims, defenses, or descriptions of these claims.
. "Net Winners” are those investors who are alleged to have received more from the scheme than they invested. See In re Bernard L. Madoff Inv. Secs. LLC, 654 F.3d 229, 236-38 (2d Cir.2011) (affirming use of net investment method).
."Net Losers” are persons who received less in transfers than they invested. See, e.g., Official Cattle Contract Holders Comm. v. Commons, 552 F.2d 1351 (9th Cir.1977). The Court does not make any finding or ruling that a "net loser” requires an identity of interest or ownership or whether and to what extent the “new value” defense may apply.
. The litigation that the Movants seek to abate generally involves similar substantive claims by the Trustee to avoid and recover preferential transfers, avoid and recover actually and constructively fraudulent transfers, and alternatively, for damages for violation of Florida's usury law. The Movants focus their arguments exclusively on the Trustee’s fraudulent transfer claims and ignore the Trustee’s other claims. They do not argue that the Trustee’s preference or usury claims are deficient and do not explain why those claims should be abated. Therefore, the Court will only focus its analysis on the fraudulent transfer claims and deny abatement insofar as the preferential claims and claims under Florida's usury law. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494548/ | ORDER DENYING PLAINTIFFS’ MOTION FOR SUMMARY JUDGMENT AND ORDER AND NOTICE OF STATUS CONFERENCE
ROBERT E. BRIZENDINE, Bankruptcy Judge.
Before the Court is the motion of Plaintiffs named above, filed on June 15, 2011, for summary judgment on their three-count complaint as filed herein against Defendant-Debtor. In the complaint, Plaintiffs seek a determination that a certain indebtedness based on an award as set forth in an order and judgment obtained by Plaintiffs against Debtor, evidently by default after Debtor discontinued his participation in the lawsuit, and entered on March 22, 2010 in the total amount of $83,154.81 in the Supreme Court of the State of New York, County of Suffolk, be excepted from discharge in this Chapter 7 case under the provisions of 11 U.S.C. §§ 523(a)(2)(A), 523(a)(2)(B), and 523(a)(6). Based upon a review of the record, the Court concludes that Plaintiffs’ motion should be denied.
Plaintiffs’ claim arises out of a dispute concerning Debtor’s failure to install a retaining wall on their property in accordance with certain standards and specifications to which the parties agreed and for which Plaintiffs paid Debtor to complete. Among other things, Plaintiffs assert in *481the brief accompanying their motion that Debtor obtained money from them in a fraudulent manner from which malice may be inferred and for which they obtained a judgment on grounds including fraud.1 Plaintiffs refer to and incorporate the factual allegations in their verified complaint filed in New York state court, which sets forth causes of action for breach of contract, fraud, and negligence, and upon which that court entered its order for relief. See Exhibits “1” and “2,” attached to Plaintiffs’ Complaint herein.
Plaintiffs contend that this Court should apply collateral estoppel with respect to the New York litigation in regard to their claim that the indebtedness set forth in their judgment is nondischargeable under the grounds alleged. See Wachtmeister v. Swiesz, 59 Fed.Appx. 428 (2nd Cir.2003); Melendez v. Budget Rent-A-Car, 7 Misc.3d 585, 794 N.Y.S.2d 830 (N.Y.Sup.Ct.2005).2 In the New York litigation, Plaintiffs’ moved for the striking of Debtor’s answer for his failure to cooperate under the terms of a settlement agreement and for other relief. The allegations of Plaintiffs’ complaint were taken as true and served as the basis for entry of judgment in their favor against Debtor by the state court, and pursuant to an Order dated November 16, 2009, the court decided the issue of Debtor’s liability in favor of Plaintiffs. See Court Document, attached as Exhibit “4” to Plaintiffs’ Complaint; Plaintiffs’ Statement Pursuant to LR 56.1(B)(1), ¶¶44—45; Affidavit of James Patrick McCarrick, ¶¶ 25-30. Citing Bush v. Balfour Beatty Bahamas, Ltd., 62F.3d 1319 (11th Cir.1995), Plaintiffs state that Debtor herein had the opportunity to defend himself in the prior litigation but chose not to do so, and the striking of his answer therein as a consequence of same does not prevent the application of issue preclusion in this proceeding.3
In response, Debtor argues that issue preclusion is not warranted in this case for reasons including that the New York judgment was allegedly obtained through coercion and deceit. Further, he claims that the standards for application of this doctrine have not been met in that: (1) the issues are not identical, (2) they were not actually litigated in the New York case, (3) while the issues decided were critical to that judgment, they have no bearing in this proceeding since Debtor’s defenses were not considered, and finally, (4) the standard of proof is different. In connection with the issue of dischargeability, Debtor seeks to put forth contrary evidence on the basis for the state court’s judgment with respect to Plaintiffs’ contention that the wall in question was not properly built. Debtor further avers that *482he could not afford to retain counsel in that proceeding, Plaintiffs did not perform under a settlement agreement, and he could not afford to travel to New York to appear in that matter once he relocated to Georgia. He also contends that he signed the confession of judgment under misleading circumstances. See Response in Opposition, ¶ 18 (Docket No. 56).4 Plaintiffs dispute Debtor’s allegations and contend that he is improperly attempting to re-litigate the basis of the New York judgment in this forum.
Summary judgment may be granted pursuant to Fed.R.Civ.P. 56, applicable herein by and through Fed. R. Bankr.P. 7056, if “there is no genuine issue as to any material fact and ... the moving party is entitled to a judgment as a matter of law.” Fed.R.Civ.P. 56(c). In deciding a motion for summary judgment, the court “is not to weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 2511, 91 L.Ed.2d 202, 212 (1986). Further, all reasonable doubts should be resolved in favor of the non-moving party, and “if reasonable minds could differ on any inferences arising from undisputed facts, summary judgment should be denied.” Twiss v. Kury, 25 F.3d 1551, 1555 (11th Cir.1994), citing Mercantile Bank & Trust Co. v. Fidelity & Deposit Co., 750 F.2d 838, 841 (11th Cir.1985). Presumptions or disputed inferences drawn from a limited factual record cannot support entry of summary judgment under Fed. R. Civ. P. 56(c), applicable herein through Fed. R. Bankr.P. 7056. The court cannot weigh the evidence or choose between competing inferences. See Allen v. Tyson Foods, Inc., 121 F.3d 642, 646 (11th Cir.1997); Raney v. Vinson Guard Service, Inc., 120 F.3d 1192, 1196 (11th Cir.1997).5
As mentioned above, Plaintiffs argue for application of collateral estoppel, also known as issue preclusion, which may be applied in a federal bankruptcy court in dischargeability proceedings under 11 U.S.C. § 523(a). In this case, the Court applies the preclusion rules of the state of New York. See Simmons Masonry, Inc. v. Barton (In re Barton), 272 B.R. 61 (N.D.N.Y.2002); accord Bush v. Balfour, 62 F.3d at 1323 n. 6. Further, in this district, it has been held that preclusive effect must be accorded in a federal bankruptcy proceeding regarding a state court default judgment as would be granted same in a state court in accordance with applicable State law. See Colorado West Transportation, Inc. v. McMahon, 380 B.R. 911, 917-19 (N.D.Ga.2007); see also Lewis v. Lowery (In re Lowery), 440 B.R. 914, 921 (Bankr.N.D.Ga.2010); accord Sterling Factors, Inc. v. Whelan, 245 B.R. 698, 710 (N.D.Ga.2000).
As an initial matter, the Court observes that, as noted above, the subject state court judgment does not specify which portion of the award relates to *483which particular cause of action set forth in Plaintiffs’ verified complaint. This distinction is important because even accepting the factual allegations that supported entry of the default judgment as true, a claim for relief sounding in breach of contract or negligence is not sufficient to supply the necessary factual basis to support a legal determination of nondischargeability under the provisions as pled herein. Moreover, this Court cannot speculate concerning which cause(s) of action the state court was considering in entering its ruling and cannot parcel out a single award.6
Upon review of applicable New York case authority, this Court is not overwhelmingly convinced that New York courts would automatically apply preclusion to a judgment obtained as in the circumstances outlined herein. See Barton, 272 B.R. 61, and cases cited therein.7 On the one hand, this Court must consider the allegations surrounding the entry of a default judgment made by a debtor against whom preclusive effect is.being sought in light of such state law standards. On the other hand, a party litigant who chooses not to offer a defense in a pending law suit, and does not appeal an unfavorable result, may not litigate such issues in this forum hoping for different outcome. While this Court is attendant to matters of due process and the purpose of the bankruptcy discharge, it does not serve as an alternative appellate forum.8
The Court will discuss the effect of New York issue preclusion rules on the counts of Plaintiffs’ complaint that served as the basis for the state court judgment in reverse order. Plaintiffs argue in count III that Debtor’s actions resulted in the infliction of willful malicious injury to their property and constitute grounds for relief under Section 523(a)(6). A willful and malicious injury under Section 523(a)(6) is confined to acts, such as intentional torts, done with an actual intent to cause injury as opposed to acts done intentionally that result in injury. See Kawaauhau v. Geiger, 523 U.S. 57, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998); see also Hope v. Walker (In re Walker), 48 F.3d 1161 (11th Cir.1995). This distinction is important because reckless conduct resulting in injury that evidences an entire want of care or conscious indifference to the consequences is not sufficient under the legal standard established in this exception to discharge. Stated differently, Section 523(a)(6) addresses only those situations in which a debtor desired the injury caused by his conduct. It does not reach a debtor’s failure to meet a duty of care that results in injury to someone else. See generally Herndon v. Brock (In re Brock), 186 B.R. 293 (Bankr.N.D.Ga.1995); Myrick v. Ballard (In re *484Ballard), 186 B.R. 297, 299-301 (Bankr.N.D.Ga.1994).
As discussed in Henderson v. Woolley (In re Woolley), 288 B.R. 294, 301-02 (Bankr.S.D.Ga.2001), whereas Geiger generally narrowed the scope of this provision to “trespassory intentional torts,” the state of mind of a debtor regarding same has been subject to further interpretation in the case law. Reviewing recent decisions on this issue, the court in Woolley examined the Eleventh Circuit precedent in the Walker case and concluded that sufficient evidence of a “debtor’s personal substantial certainty” with regard to the injury resulting from his or her act remains necessary under Section 523(a)(6), as opposed to a purely objective or reasonable person test that risks reinstating the “previously rejected ‘reckless disregard standard.’ ” 288 B.R. at 302; accord Miller v. J.D. Abrams, Inc. (In re Miller), 156 F.3d 598 (5th Cir.1998) (allowing either an objective or a subjective finding to satisfy willful and malicious injury). Thus, with respect to willfulness, it must be shown that a debtor either “acted with the desire to cause” the resulting harm to a targeted person, acted “with knowledge that injury will occur” to such person, or acted in the belief that harm was “substantially certain to result” either through evidence of “subjective motive” regarding same or when “no other plausible inference” can be drawn from the record that the debtor entertained such knowledge. See Woolley, 288 B.R. at 302 (cites omitted).
Applying this analysis to the allegations in the verified state court complaint, specifically with reference to Plaintiffs’ second cause of action for fraud, while those allegations may support an inference of intent to cause willful and malicious injury, this Court concludes that same are not sufficient to constitute a finding that Debtor intended to cause such injury in the manner required under Section 523(a)(6).9 Moreover, as stated above, the judgment does not specify the grounds for its entry in terms of Plaintiffs’ various allegations, which included breach of contract and negligence along with fraud. As such, Plaintiffs’ motion is denied with respect to count III of their complaint herein.
Next, with respect to count II, Plaintiffs contend that Debtor obtained money from them using a writing respecting his financial condition that was materially false on which they relied, such that their claim as represented by the New York judgment should be excepted from discharge under Section 523(a)(2)(B). The Eleventh Circuit Court of Appeals has addressed the correct application of this provision stating as follows:
[A] debt is non-dischargeable in bankruptcy [under this provision] where it was obtained by a writing: (1) that is materially false; (2) respecting the debt- or’s or an insider’s financial condition; (3) on which the creditor to whom the debt is liable for such money, property, services, or credit reasonably relied; and (4) that the debtor caused to be *485made or published with the intent to deceive.
Equitable Bank v. Miller (In re Miller), 39 F.3d 301, 304 (11th Cir.1994). This exception applies to situations in which money, property, services, or new or renewed credit is obtained by a false written financial statement concerning the debtor or an insider. It appears that the -writing upon which Plaintiffs’ relied herein is identified as a typewritten and signed statement attached to their verified complaint as Exhibit “C.” This document, however, is not a financial statement and in fact, makes no representation whatsoever concerning the Debtor’s financial condition. At most, it contains a promise to complete the work as agreed. Because each requirement of Section 523(a)(2)(B) must be met for this exception to apply, the Court concludes summary judgment may not be granted to Plaintiffs on this count.
Finally, regarding count I, Plaintiffs assert that their claim should be excepted from discharge under Section 523(a)(2)(A) because same arises from Debtor’s knowing and fraudulent actions in obtaining money from them. To succeed under this provision, Plaintiffs must show that Debtor committed positive or actual fraud involving moral turpitude or intentional wrongdoing.10 Legal or constructive fraud, which involves an act contrary to a legal or equitable duty that has a tendency to deceive, yet not originating in an actual deceitful design, is insufficient. See Agricredit Acceptance Corp. v. Gosnell (In re Gosnell), 151 B.R. 608, 611 (Bankr.S.D.Fla.1992); see also Burroughs v. Pashi (In re Pashi), 88 B.R 456, 458 (Bankr.N.D.Ga.1988).11 Under Section 523(a)(2)(A), the following must be established: (1) that the Debtor obtained money, property, or credit from Plaintiffs; (2) by false representation, pretense, or fraud knowingly made or committed; (3) with the intent to deceive the Plaintiffs or to induce it to act upon same; (4) upon which Plaintiffs justifiably relied; and (5) which proximately resulted in injury or loss to Plaintiffs. Vann, 67 F.3d 277. Simply stated, this provision targets deceit or artifice arising from a specific intent to mislead, trick, or cheat another person or entity. In addition, intent to deceive may be proven by circumstantial evidence.
While most of these elements appear to be satisfied, again the verified complaint does not specify or allocate what, if any, part of the damages award addresses amounts paid by Plaintiffs to Debtor under the contract as distinguished from compensation for repairs needed for their driveway due to Debtor’s actions. Further, any amount awarded for breach of contract would not come within this exception to dischargeability. Knowingly making a false statement to induce Plaintiffs’ entering into the contract may sug*486gest or imply an intent to deceive, but the fact of such intent is not pled with specificity in the complaint. As stated above, however, such finding may rest on circumstantial evidence. More problematic, again, the complaint may also be construed as supporting damages for breach of contract for the initial payment of Plaintiffs. It may also support the conclusion that the fraudulent misrepresentation portion of the state court award addresses Debtor’s subsequent promise made after work began in connection with finishing the job and the money paid at that time by Plaintiffs, as opposed to finding that Debtor entertained fraudulent intent at the inception of their negotiations. See Verified Complaint. ¶¶ 27-30.
Upon review of the record, the argument of the parties, the evidence presented, and legal authority cited herein, and in light of the unified nature of the state court award and this Court’s inability to allocate it among the various claims for relief sought by Plaintiffs in that litigation, the Court concludes that Plaintiffs are not entitled to summary judgment on the counts of their complaint herein.
In accordance with the foregoing discussion, it is
ORDERED that the motion of Plaintiffs for summary judgment herein be, and the same hereby is, denied.
Upon further review of this matter, it is
FURTHER ORDERED AND NOTICE IS HEREBY GIVEN that a status conference in this adversary proceeding will be held at 1:30 o’clock p.m. on the 16th day of November, 2011, in Courtroom 103, United States Courthouse, 121 Spring Street, S.E., Gainesville, Georgia.
IT IS SO ORDERED.
. The Decision and Order of the New York state court, docketed as a Judgment therein contains an award of damages, grants an order of default but sets forth neither findings of fact nor conclusions of law. Further, it contains no references to portions of the verified complaint or individual prayers for relief in terms of allocating the award with respect to Plaintiffs’ various claims. See Exhibit "1,” attached to Plaintiffs’ Complaint herein. Debtor did not appeal the Judgment.
. As stated by Plaintiffs in their brief, under New York law, issue preclusion bars re litigation of a prior finding of fact when "first, the identical issue necessarily must have been decided in the prior action and he decisive of the present action, and, second, the party to be precluded from relitigating the issue must have had a full and fair opportunity to contest the prior determination.” Melendez, 7 Misc.3d at 588-89, 794 N.Y.S.2d at 833 [cites omitted].
.The circuit court further observed in dicta that the effect of a state court default judgment in a subsequent federal court proceeding may have to be determined in accordance with applicable state preclusion rules, 62 F.3d at 1323 n. 6.
. It does not appear that this confession was ever presented to the state court, and hence was not a basis for its order. See Affidavit of James Patrick McCarrick, ¶ 5.
. Once the party moving for summary judgment has identified those materials demonstrating the absence of a genuine issue of material fact, the non-moving party cannot rest on mere denials or conclusory allegations, but must go beyond die pleadings and designate, through proper evidence, specific facts showing the existence of a genuine issue for trial. See Fed.R.Civ.P. 56(e); see also Matsushita Elec. Ind. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986); Johnson v. Fleet Finance, Inc., 4 F.3d 946, 948-49 (11th Cir.1993); Fitzpatrick v. City of Atlanta, 2 F.3d 1112 (11th Cir.1993).
. In their demand for relief in the complaint, Plaintiffs sought $75,000.00 for breach of contract, $75,000.00 for fraud, and $12,000.00 for negligence. The Order and Judgment of the state court awarded the single amount of $80,600.50, and the Order determining liability may suggest same was based on all counts of the complaint.
. That decision cites, among others, Kaufman v. Eli Lilly & Co., 65 N.Y.2d 449, 492 N.Y.S.2d 584, 482 N.E.2d 63 (N.Y.1985), a case also cited in Plaintiffs’ brief in support, for the proposition that there may be a lack of identity of issues and that an issue is not actually litigated if there is a default. Barton, 272 B.R. at 64.
.By the same logic, while issue preclusion applies regarding findings of fact and this Court refers to state issue preclusion rules regarding same, claim preclusion does not apply herein. Regarding the latter, a federal bankruptcy court must decide the legal issue of whether such facts are sufficient to support the conclusion that the debt in question is subject to an exception to discharge on the grounds as alleged herein.
. It is not clear from the verified complaint in paragraph 33 what specific damage Debtor allegedly intended to result from his conduct. If this allegation is meant to incorporate the damage described in paragraph 17, it still is not clear that the state court found Debtor intended this specific damage to the driveway as opposed to taking the money he received from Plaintiffs to do the work he contracted to do. As a further concern, this Court notes that a page appears to be missing from the copy of the verified complaint as filed herein. The document provided to the Court with the complaint contains consecutive pages numbered 3 and 6, paragraphs 17 to 21, but no explanation of this discrepancy is offered. The page also appears to be missing in the exhibits attached to Plaintiffs' affidavits.
. Section 523(a)(2)(A) provides in pertinent part as follows:
(a) A discharge under section 727 ... 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....
11 U.S.C. § 523(a)(2)(A). These elements must be proven by a preponderance of the evidence. See League v. Graham (In re Graham), 191 B.R. 489, 493 (Bankr.N.D.Ga.1996); accord City Bank & Trust Co. v. Vann (In re Vann), 67 F.3d 277 (11th Cir.1995).
. Reckless disregard for the truth or falsity of a statement can also supply the necessary basis for a determination of nondischargeability under this provision in the proper circumstances. Birmingham Trust Nat’l Bank v. Case, 755 F.2d 1474, 1476 (11th Cir.1985), superseded on other grounds by Pub.L.No. 98-353, 98 Stat. 333 (1984). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494550/ | KORNREICH, Bankruptcy Judge.
Fotis Frank Marmarinos, the debtor, appeals pro se from the bankruptcy court’s order authorizing the chapter 7 trustee to compromise certain claims against Community Credit Union of Lynn. For the reasons set forth below, we DISMISS this appeal as MOOT.
BACKGROUND
The debtor filed a petition for chapter 13 relief in March 2010. The case was subsequently converted to one under chapter 7 and Mark G. DeGiaeomo was appointed trustee.
The debtor owned certain real property encumbered by two mortgages held by the credit union. After the bankruptcy filing, the credit union obtained relief from the automatic stay to foreclose on its second mortgage and was the successful bidder at the foreclosure sale. Thereafter, the debt- or filed a complaint in the state court alleging that the credit union had violated Massachusetts law and breached its duty of good faith in conducting the foreclosure sale. The trustee filed a motion to compromise seeking authority from the bankruptcy court to compromise the claims against the credit union for $20,000. The debtor opposed the motion to compromise, *500asserting Ms belief that the credit union had sold the subject mortgages to Federal National Mortgage Association (“Fannie Mae”). In response, the trustee submitted affidavits of the credit union’s president and CEO, and its counsel, asserting that the promissory notes were never sold to Fannie Mae and that the credit union has always been the holder of the original promissory notes.
After a non-evidentiary hearing, the bankruptcy court issued an order overruling the debtor’s objection and granting the motion to compromise. This appeal followed.
JURISDICTION
The Panel has jurisdiction to hear appeals from: (1) final judgments, orders and decrees; or (2) with leave of court, from certain interlocutory orders. 28 U.S.C. § 158(a); Fleet Data Processing Corp. v. Branch (In re Bank of New England Corp.), 218 B.R. 643, 645 (1st Cir. BAP 1998). Generally, a bankruptcy court’s order approving a settlement or compromise is a final order. See Pawtucket Credit Union v. Haase (In re Haase), 306 B.R. 415, 418 (1st Cir. BAP 2004); Beaulac v. Tomsic (In re Beaulac), 294 B.R. 815, 818 (1st Cir. BAP 2003).
STANDARD OF REVIEW
Appellate courts apply the clearly erroneous standard to findings of fact and de novo review to conclusions of law. See Lessard v. Wilton-Lyndeborough Coop. School Dist., 592 F.3d 267, 269 (1st Cir.2010). Generally, a reviewing court will not overturn a bankruptcy court’s decision to approve a compromise absent a clear showing that the bankruptcy court abused its discretion. See City Sanitation, LLC v. Allied Waste Servs. of Mass., LLC (In re American Cartage, Inc.), 656 F.3d 82, 91 (1st Cir.2011) (citing Ars Brook, LLC v. Jalbert (In re Servisense.com, Inc.), 382 F.3d 68, 71 (1st Cir.2004)); Jeffrey v. Desmond, 70 F.3d 183, 185 (1st Cir.1995).
DISCUSSION
As a preliminary matter, the trustee asserts that this appeal is moot because the compromise has been fully consummated and because the property has been sold to a third party. We agree.
Mootness in bankruptcy appellate proceedings is based on jurisdictional and equitable considerations stemming from the impracticability of fashioning fair and effective judicial relief. Rochman v. Northeast Utils. Serv. Group (In re Public Serv. Co. of New Hampshire), 963 F.2d 469, 471 (1st Cir.1992); Rasparian v. Conley (In re Conley), 369 B.R. 67, 70-71 (1st Cir. BAP 2007). The jurisdictional component relates to the constitutional restriction prohibiting the judiciary from deciding cases in which no effective remedy can be provided. Church of Scientology of Calif. v. U.S., 506 U.S. 9,12, 113 S.Ct. 447, 121 L.Ed.2d 313 (1992). Thus, it is widely recognized that a bankruptcy appeal becomes moot if the appellate court is unable to grant effective relief because of events that occurred during the appeal. See id. The equitable component relates, in part, to pragmatic limitations on appellate jurisdiction over bankruptcy appeals. Hicks, Muse & Co., Inc. v. Brandt (In re Healthco Int’l, Inc.), 136 F.3d 45, 48 (1st Cir.1998); In re Conley, 369 B.R. at 71. An appeal is moot for pragmatic reasons where the order appealed from has been implemented to such a degree that meaningful appellate relief is no longer practicable. Id.
Here, the debtor never sought a stay of the compromise order from either the bankruptcy court or this Panel. Absent a stay, the trustee was entitled to rely on the order and he executed a stipulation of dismissal which was filed in the state court action. The state court then dis*501missed the state court action and closed the case. Thus, the settlement between the trustee and the credit union has been fully consummated. In addition, the trustee submits that the property has been sold to a third party. When a sale has already occurred, the transfer of ownership renders it impossible for the Panel to grant “any effectual relief whatever.” See Church of Scientology, 506 U.S. at 12, 113 S.Ct. 447. The Panel cannot restrain or prevent an action that already occurred. As a result, even if we were to reverse the order, we have no authority to invalidate the sale of the property, nor to order the purchaser to return the property to the debtor.
As a result, even if we were to address the issues the debtor raises in this appeal, we simply cannot fashion any meaningful relief. We cannot compel the state court to revive the state court action and we cannot unwind the sale of the property to a third party. Under these circumstances, we conclude that this appeal is moot and that we lack jurisdiction to decide it.1
CONCLUSION
For the reasons discussed above, this appeal is DISMISSED as MOOT.
. We also conclude that the debtor lacks standing to challenge the bankruptcy court's approval of the compromise. In this circuit, only “persons aggrieved” have standing to appeal an order of the bankruptcy court. See Spenlinhauer v. O’Donnell (In re Spenlinhauer), 261 F.3d 113, 117-18 (1st Cir.2001). A "person aggrieved” is one whose property is diminished, burdens are increased, or rights are impaired by the order on appeal. Id. A chapter 7 debtor qualifies as a “person aggrieved” for purposes of appellate standing only if he can demonstrate either: (1) a reasonable possibility of a surplus if the order on appeal is defeated; or (2) that the appealed order adversely affects his discharge. See Beaulac v. Tomsic (In re Beaulac), 294 B.R. 815, 820-21 (1st Cir. BAP 2003). Although the debtor asserted at oral argument that his pecuniary interest "might be” improved if the Panel were to reverse the order, he has not demonstrated that there is a "reasonable possibility of a surplus” and the record is completely devoid of any evidence on the issue. Thus, the debtor has not met his burden of establishing standing. See Spenlinhauer, 261 F.3d at 118. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494551/ | MEMORANDUM
JOAN N. FEENEY, Bankruptcy Judge.
I. INTRODUCTION
The matters before the Court are 1) the “Defendants Attorney General of Massachusetts and Massachusetts State Retirement Board’s Motion to Dismiss,” and 2) the Motion to Dismiss filed by Marion Haddad (the “Debtor” or the “Defendant”). The Attorney General and the Massachusetts State Retirement Board (individually, the “Attorney General” and the “Retirement Board” and, jointly, the “Commonwealth Defendants”) and the Debtor seek dismissal of the “Adversary Complaint for Declaratory Judgment” filed by Father Joseph Randall and St. Nectar-*503ios Monastery (the “Plaintiffs”) against the Commonwealth Defendants, the Debtor, and The Holy Annunciation Monastery Church of the Golden Hills (the “Annunciation Monastery”). The Plaintiffs oppose the Motions. The Commonwealth Defendants base their motion to dismiss, in part, on the mandatory and discretionary abstention provisions of Title 28 of the United States Code. See 28 U.S.C. § 1334(c)(1) and (c)(2).
The Court heard the Motions to Dismiss on August 10, 2011 and took the matters under advisement. At the hearing, none of the parties requested an evidentiary hearing. Additionally, none of the parties contested the material facts established by the attachments to the Plaintiffs’ Complaint and the attachments to the Commonwealth Defendants’ Motion to Dismiss. Accordingly, the Court shall treat the Motions to Dismiss as a Motion for Summary Judgment. See Fed.R.Civ.P. 12(d), made applicable to this proceeding by Fed. R. Bankr.P. 7012(b).
The issues presented include 1) whether ownership of monies obtained by the Debt- or from the sale of real property owned by the Annunciation Monastery are property of the bankruptcy estate; 2) whether this Court has jurisdiction to consider the prayers for relief set forth in the Plaintiffs’ Complaint, which include a declaratory judgment as to the rightful owner of the funds and an order requiring the Retirement Board to turnover the funds to the Annunciation Monastery, where the Debt- or has received a discharge under 11 U.S.C. § 727 and where the Chapter 7 Trustee has not intervened in the adversary proceeding as a party plaintiff and has filed a Report of No Distribution; and 3) whether, if the Court has jurisdiction, it should abstain from ruling on the motions to dismiss. A predicate to the Court’s determination of the last two issues is whether the Debtor’s interest in retirement funds, which she obtained from the sale of real property owned by the Annunciation Monastery and which now are held by the Retirement Board, is property of the bankruptcy estate. See 11 U.S.C. § 541(a).
II. BACKGROUND1
The Debtor filed a voluntary Chapter 7 petition on August 24, 2011. On September 1, 2011, she filed Schedules A through J. On Schedule C-Property Claimed as Exempt, she claimed an exemption in a Massachusetts Retirement Fund in the sum of $55,000 pursuant to 11 U.S.C. § 522(d)(12).2 She attached to her Schedules a letter from the State Board of Retirement which provided, in pertinent part, the following:
Please be advised the records of this office show your overall total in the state Employees’ Retirement System is $48,761.84 consisting of $8,133.76 in pretax deposit, $40,000 in after tax deposits and $628.02 in pre-tax interest.
The Chapter 7 Trustee conducted the section 341(a) meeting of creditors at its originally scheduled time of September 28, 2010 and continued the meeting to November 2, 2010. The Plaintiffs did not timely file a complaint under 11 U.S.C. § 523(c) or § 727(a) within 60 days of the first scheduled meeting of creditors. See Fed. *504R. Bankr.P. 4004(b) and Fed. R. Bankr.P. 4007(c). Following the initial meeting, the Debtor filed a “Statistical Summary of Certain Liabilities and Related Data (28 U.S.C. § 159),” in which she indicated that her debts were not primarily consumer debts, and her Chapter 7 Individual Debt- or’s Statement of Intention, which contained no information other than a date and was unsigned. The Trustee conducted a further meeting of creditors on November 2, 2011. The Plaintiffs timely filed an Objection to the Debtor’s claimed exemption. See Fed. R. Bankr.P. 4003(b)(1). The Court conducted a hearing with respect to the Plaintiffs’ Objection and continued it generally. Accordingly, the Court has made no determination as to whether the funds which the Debtor has claimed as exempt are property of the estate which can then be exempted from property of the estate pursuant to 11 U.S.C. § 522(d)(12).
On December 1, 2010, the Court granted the Debtor a discharge pursuant to 11 U.S.C. § 727(a). The Chapter 7 Trustee filed a Report of No Distribution on January 24, 2011. The Debtor listed both Father Joseph Randall and St. Nectarios Monastery on Schedule F-Creditors Holding Unsecured Nonpriority Claims as the holders of a disputed claim in the sum of $40,000. She did not list the Annunciation Monastery as a creditor in her Schedules.
III. THE ADVERSARY PROCEEDING
The Plaintiffs filed a Complaint against the Debtor, the Commonwealth Defendants and the Annunciation Monastery on April 18, 2011, seeking a determination that $40,000 in proceeds from the sale of real property located at 211 Bay State Road, Melrose, Massachusetts (the “Property”), formerly owned by the Annunciation Monastery, and currently held by the Massachusetts State Retirement Board, is the property of the Annunciation Monastery and not the property of the Debtor’s bankruptcy estate, as well as an order requiring the Retirement Board to “return the $40,000 deposited by the Debtor into her State Retirement Board account to the Holy Annunciation corporation” and an order requiring the $40,000 to be “held in escrow by the corporation pending execution of the Superior Court judgment by the Plaintiffs.”3 The Plaintiffs and the Commonwealth Defendants attached numerous documents to their filings with the Court with respect to two complaints, one filed by the Plaintiffs in April of 2004 in the Middlesex Superior Court to resolve a dispute as to the ownership of the Property, and the other filed in the Suffolk Superior Court, captioned a “Complaint to Set Aside Fraudulent Conveyance and for Trustee Process.” The documents included the following:
An “Order for Impoundment/Escrow,” dated March 2, 2006, entered by Sandra L. Hardin, Justice of the Superior Court, Department of the Trial Court, Middlesex Division, in which the court ruled as follows:
That all proceeds from the sale of the Monastery building at 211 Bay State Road in Melrose, Mass., under the *505direct or indirect custody or control of the defendants or their agents, shall be held in escrow by the defendants, pending a hearing and further order of the Court;
A Sovereign Bank Check, dated March 3, 2006, in the sum of $40,000 made payable to the Massachusetts State Board of Retirement;
A Complaint to Set Aside Fraudulent Conveyance and for Trustee Process filed by the Plaintiffs in the Suffolk Superior Court, against the Commonwealth Defendants the Debtor, the Annunciation Monastery, and Richard Ca-pana4 on November 19, 2008;
A Final Judgment, dated August 6, 2008, entered by Thayer Fremont-Smith, Justice of the Superior Court, Department of the Trial Court, Middle-sex Division, in favor of the Plaintiffs and against the Debtor and the Annunciation Monastery in the sum of $105,000 plus interest and costs.
The Memorandum of Decision and Order entered on June 10, 2009 by Regina L. Quinlan, Associate Justice of the Suffolk Superior Court, granting the Commonwealth’s Motion to Dismiss the Fraudulent Conveyance Complaint;5
An order, dated August 19, 2010, with respect to the Plaintiffs’ Motion for Summary Judgment, pursuant to which Thomas E. Connolly, Justice of the Suffolk Superior Court, Department of the Trial Court, 1) found that “Ms. Had-dad, in her position as sole officer and director of the Holy Annunciation Monastery Church of the Golden Hills, withdrew $98,771.00 from the Holy Annunciation corporate account, and did not place it into an escrow account as ordered by the court,” 2) ordered the Massachusetts State Retirement Board “to disgorge funds in the amount of $40,000, which were tendered to it by the Defendant Marian [sic] Haddad on March 3, 2006;” 3) ordered the funds to be paid to the Clerk pursuant to Superior Court Rule 22; and 4) ordered the Clerk, upon receipt of the funds, to tender the funds to the Plaintiffs through their attorney of record;
The Plaintiffs’ appeal from the order dismissing the Commonwealth as a defendant in the Fraudulent Conveyance action pending in the Appeals Court.
IV. DISCUSSION
A. Summary Judgment Standard
Pursuant to Fed.R.Civ.P. 12(d), made applicable to this proceeding by Fed. R. Bankr.P. 7012, “[i]f, on a motion under Rule 12(b)(6) or 12(c), matters outside the pleadings are presented to and not excluded by the court, the motion must be treated as one for summary judgment under Rule 56.”6 In Hammond v. JPMC Specialty Mortg. LLC, No. 10-11121-DPW, 2011 WL 1463632 (D.Mass. April 15, 2011), the court articulated the summary judgment standard in the context of a challenge to the validity of a foreclosure sale. The court stated:
*506A movant is entitled to summary judgment “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. Rule Civ. P. 56(a). If the moving party meets this burden, “the opposing party can then defeat the motion by showing that there is a genuine issue of material fact.” Rivera-Colon v. Mills, 635 F.3d 9, [55] 2011 WL 504049, at *2 (1st Cir. Feb. 15, 2011). An issue is genuine “if ‘a reasonable jury could resolve the point in favor of the nonmoving party.’ ” Tropigas de P.R., Inc. v. Certain Underwriters at Lloyd’s of London, 637 F.3d 53, [55] 2011 WL 834072, at *2 (1st Cir. Mar. 11, 2011) (quoting McCarthy v. Nw. Airlines, Inc., 56 F.3d 313, 315 (1st Cir.1995)). A fact is material if “its existence or nonexistence has the potential to change the outcome of the suit.” Borges ex rel. S.M.B.W. v. Serrano-Isern, 605 F.3d 1, 5 (1st Cir.2010).
2011 WL 1463632 at *3. Based upon the submissions of the parties, the Court, as noted above, shall treat the Commonwealth Defendants’ Motion to Dismiss as a Motion for Summary Judgment.
By its terms, the order entered by the Middlesex Superior Court on March 2, 2006 was intended to divest control of the proceeds from the sale of the Property. In In re Pina, 363 B.R. 314 (Bankr.D.Mass.2007), this Court considered whether the debtor held property in a constructive trust for a creditor as a result of a state court order directing the debtor to specifically perform obligations under a Co-Tenancy Agreement. It observed:
The first issue for the Court’s determination is whether the Debtor [Pina] held the equitable interest in the Property in a constructive trust for KAC [the debtor’ co-tenant] at the commencement of the case. In other words, at the time the Debtor filed her bankruptcy petition, had the Property been impressed with a constructive trust in favor of KAC?
The issue arises in the context of 11 U.S.C. § 541(a) and (d) of the Bankruptcy Code. Section 541(a) defines property of the estate, with certain exceptions, as “all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a). “The statutory language evinces congressional intent to include a broad range of property.” City of Springfield v. Ostrander (In re LAN Tamers, Inc.), 329 F.3d 204, 209 (1st Cir.2003), cert. denied, 540 U.S. 1047, 124 S.Ct. 808, 157 L.Ed.2d 695 (2003) (citing United States v. Whiting Pools, Inc., 462 U.S. 198, 204-05, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983)). Section 541(d), in contrast, excludes property in which “the debtor holds, as of the commencement of the case, only legal title and not an equitable interest, such as a mortgage secured by real property, or an interest in such a mortgage, sold by the debtor but as to which the debtor retains legal title to service or supervise the servicing of such mortgage or interest.” ' 11 U.S.C. § 541(d). That section “excludes property from the estate where the bankruptcy entity is only a delivery vehicle and lacks any equitable interest in the property it delivers.” LAN Tamers, Inc., 329 F.3d at 210.
Property and interests in property are determined with reference to state law, in the absence of any controlling federal law. See Barnhill v. Johnson, 503 U.S. 393, 398, 112 S.Ct. 1386, 118 L.Ed.2d 39 (1992); Butner v. United States, 440 U.S. 48, 54-55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979). Section 541(d) “does not authorize bankruptcy courts to recognize a constructive trust based on a creditor’s claim of entitlement to one; rather, section 541(d) only operates to the extent *507that state law has impressed property with a constructive trust prior to its entry into bankruptcy.” Poss v. Morris (In re Morris), 260 F.3d 654, (6th Cir.2001) (citing XL/Datacomp, Inc. v. Wilson (In re Omegas Group, Inc.), 16 F.3d 1443, 1451 (6th Cir.1994)). In Davis v. Cox, 356 F.3d 76, 84 (1st Cir.2004), the United States Court of Appeals for the First Circuit, proceeding narrowly on the remedial theory of constructive trust, recognized the effect of a pre-petition constructive trust under § 541(d). It ruled that under Maine law, a Chapter 13 debtor, Cox, held an exempt IRA account in a constructive trust in favor of his ex-spouse, Davis, by virtue of his misconduct in violating a divorce court’s injunction entered prior to bankruptcy, such that Davis’s interest trumped the debtor’s interest under § 541(d).
In re Pina, 363 B.R. at 322-23 (footnote omitted).
The First Circuit, in Davis v. Cox, 356 F.3d 76 (1st Cir.2004), in the context of a divorce proceeding, also analyzed the effect of a state-court order on funds in escrow accounts. The First Circuit determined that, in addition to holding an individual retirement account subject to a constructive trust for the benefit of his spouse, an order of the probate court directing the placement of funds in escrow served to place those funds in custodia legis, thereby divesting the debtor of legal title to the funds. The First Circuit stated:
The court here appointed the parties’ attorneys to hold certain funds in escrow pending the division of the marital assets. The attorneys were appointed to safeguard the property to prevent Cox [the debtor] from continuing to dissipate the funds in violation of a court order. When the state court directed the attorneys to place the money in escrow accounts and to disburse the money only upon an order of the court, the funds were placed in custodia legis and Cox was divested of legal title of the funds and title passed to the attorneys as officers of the court.
As a result, the funds held in custodia legis did not pass into the bankruptcy estate upon the filing of the bankruptcy petition. As noted by the bankruptcy court, at the commencement of the bankruptcy proceeding, Cox held just a contingent interest to the property held in custodia legis, subject to the divorce court’s disposition of the property. Thus, only Cox’s contingent interest became property of the estate.
Davis v. Cox, 356 F.3d at 93-94. The Court of Appeals added:
Cox contends that the escrow funds could not have been “effectively attached” as the bankruptcy court concluded because the majority of the funds were exempt from attachment under Maine law. As a result, Cox argues, the exempt property in the escrow funds passed unencumbered into the bankruptcy estate when he filed his petition. Cox’s argument is flawed. While under Maine law certain property is exempt from attachment, 14 M.R.S.A. § 4422, the property at issue here was not attached. It is true that the bankruptcy court said the property was “effectively attached” when it was placed in custodia legis, but it was not actually attached. The bankruptcy court was merely analogizing property held in custodia legis for the benefit and protection of an individual to that individual’s attaching of the property in a hypothetical situation to secure a debt. But unlike a mere attachment, the court’s decision to place the property in custodia legis divested *508Cox of legal title and left him with only a contingent right to the property.
Id.
B. Analysis
The Court finds that the order entered by the Superior Court on March 2, 2006 divested the Debtor from all but a mere contingent interest in the impounded funds subject to a further order of the court. The Middlesex Superior Court’s use of the term, “impoundment,” in its escrow order dated March 2, 2006 is significant because it manifested the court’s intent that all proceeds from the sale of the Property be unavailable to the Debtor “pending a hearing and further order of the Court.” Although the order did not have the effect of imposing a constructive trust in favor of the Plaintiffs, it did have the effect of placing the proceeds in custo-dia legis.
Although this Court has been unable to find any Massachusetts cases analogous to Davis v. Cox, the Massachusetts Supreme Judicial Court in Davis v. Mazzuchelli, 238 Mass. 550, 131 N.E. 186 (1921), declared a levy of an execution was “wholly illegal and void” and property in custodia legis was not subject to seizure and execution where a receiver had been appointed. It stated:
“The possession of the receiver being considered the possession of the court, the property in his hands is looked upon as being in custodia legis, and, on that account, it is not to be taken upon any writ of attachment or execution while in his possession. In compliance with this rule it has been decided that the recovery of a judgment against partners after the appointment of a receiver for the benefit of creditors, does not create a lien upon any of the firm property or funds in his hands, and such property or funds cannot be levied upon by execution or reached by garnishment because it is already in custodia legis. So also the owner of a judgment lien upon land in the possession of a receiver cannot levy execution thereon, but must apply to the court in chancery which will protect his interests when making sale or distributing the proceeds of the land.”
238 Mass, at 556, 131 N.E. 186 (citation omitted). The appointment of a receiver and an order directing that funds be held escrow are analogous. See In re Skorich, 332 B.R. 77, 87 (Bankr.D.N.H.2005).
Based upon the undisputed facts in the record, the Court finds that the Debtor was divested of legal title to the funds currently held by the Retirement Board by the March 2, 2006 order of the Middlesex Superior Court and only her contingent interest in those proceeds are property of the Debtor’s bankruptcy estate pursuant to 11 U.S.C. § 541(a).
In Boston Regional Medical Center, Inc. v. Reynolds (In re Boston Regional Med. Center, Inc.), 410 F.3d 100, 105 (1st Cir.2005), the United States Court of Appeals for the First Circuit, in discussing bankruptcy court jurisdiction under 28 U.S.C. § 1334 and, in particular, its “related-to” jurisdiction, stated:
The statutory grant of “related to” jurisdiction is quite broad. Congress deliberately allowed the cession of wide-ranging jurisdiction to the bankruptcy courts to enable them to deal efficiently and effectively with the entire universe of matters connected with bankruptcy estates. See Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir.1984). Thus, bankruptcy courts ordinarily may exercise related to jurisdiction as long as the outcome of the litigation “potentially [could] have some effect on the bankruptcy estate, such as altering debtor’s rights, liabilities, options, or freedom of action, or otherwise have an impact upon *509the handling and administration of the bankrupt estate.” In re G.S.F. Corp., 938 F.2d 1467, 1475 (1st Cir.1991) (quoting In re Smith, 866 F.2d 576, 580 (3d Cir.1989)).
410 F.3d at 105.
Having concluded that the $40,000 in proceeds from the sale of the Property once belonging to the Annunciation Monastery is not part of the bankruptcy estate, the outcome of the adversary proceeding can have no conceivable impact on the Debtor’s bankruptcy estate under Pacor and its progeny, where the Trustee has filed a Report of No Distribution and the Debtor has not claimed an exemption in a contingent interest. Under those circumstances, the Court lacks jurisdiction to declare that the Annunciation Monastery is the rightful owner of the proceeds, although that ruling would appear to have been unequivocally established by Justice Connolly of the Suffolk Superior Court on August 19, 2010. Moreover, the Court cannot order the Retirement Board to disgorge the $40,000 deposited by the Debtor to the Annunciation Monastery as the Plaintiffs request in their Complaint.7 In the alternative, to the extent that the Court has “related-to” jurisdiction, the Court finds that mandatory abstention is warranted and results in dismissal of the adversary proceeding.
Section 28 U.S.C. § 1334(c)(2) provides in relevant part:
Upon timely motion of a party in a proceeding based upon a State law claim or State law cause of action, related to a case under title 11 but not arising under title 11 or arising in a case under title 11, with respect to which an action could not have been commenced in a court of the United States absent jurisdiction under this section, the district court shall abstain from hearing such proceeding if an action is commenced, and can be timely adjudicated, in a State forum of appropriate jurisdiction.
28 U.S.C. § 1334(c)(2). The court in Cambridge Place Mgmt., Inc. v. Morgan Stanley & Co., Inc., No. 10-11376-MNG, 2010 WL 6580503 (D.Mass. Dec. 28, 2010), set forth the standard for mandatory abstention as follows:
Pursuant to 28 U.S.C.A. § 1334(c)(2), a court must abstain from hearing a case before it if the following criteria are met: (1) a timely motion to abstain is filed; (2) the proceeding is based on a state law cause of action; (3) the action does not arise under Title 11 but is merely related to a case under Title 11; (4) the action could not have been commenced in federal court absent jurisdiction under 28 U.S.C.A. § 1334; (5) a state court action has commenced; and (6) can be timely adjudicated.
2010 WL 6580503 at *6 (quoting C & A, S.E. v. Puerto Rico Solid Waste Mgmt. Auth., 369 B.R. 87, 92 (D.P.R.2007), and citing Goya Foods, Inc. v. Ulpiano Unanue-Casal, 164 B.R. 216, 221 (Bankr.D.P.R.1993)). All the criteria enumerated in Cambridge Place Management, Inc. are satisfied in this case. In view of issues arising under 11 U.S.C. § 106, see Central Virginia Community College v. Katz, 546 U.S. 356, 378, 126 S.Ct. 990, 163 L.Ed.2d 945 (2006),8 and the pending appeal, mandatory abstention is warranted.
*510Y. CONCLUSION
In accordance with the foregoing, the Court shall grant the Motion to Dismiss filed by the Commonwealth Defendants and dismiss the Plaintiffs’ Complaint. Having found the $40,000 was in custodia legis as a result of the March 2, 2006 order of the Middlesex Superior Court, those funds are not property of the Debtors’ bankruptcy estate and this Court must abstain from adjudicating ownership and disposition of the funds. The Court shall deny the Debtor’s Motion to Dismiss as moot in view of the decision to abstain. In this regard, the Court observes that the Debtor has received a discharge pursuant to 11 U.S.C. § 727(a), and the Court is not expressing any opinion as to whether any actions taken by the Plaintiffs would or would not violate the discharge injunction imposed by 11 U.S.C. § 524(a)9 or whether the sole remedy available may be one for contempt for violating an order of the Middlesex Superior Court.
. The Court takes judicial notice of the Debt- or’s Schedules and the docket in the Debtor’s Chapter 7 case.
. The Debtor elected the federal exemptions. Section 522(d)(12) provides a federal exemption for "[rjetirement funds to the extent that those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986.” 11 U.S.C. § 522(d)(12).
. The Plaintiffs allege that Father Joseph Randall was a resident monk at the Annunciation Monastery, which was organized as a non-profit religious corporation, and was a director of that corporation since 1983. He allegedly was also made president of the corporation in 1994. The allegations in the complaint are inconsistent as to whether he remained a director through. 2002. The Plaintiffs also allege that the Debtor, in January of 2004, wrongfully filed a Certificate of Change of Directors or Officers of a NonProfit Corporation in which she listed herself as President, Clerk, Treasurer, and sole director of the Annunciation Monastery corporation.
. The Plaintiffs alleged that Robert Capana was the recipient of funds allegedly fraudulently transferred to him by the Debtor.
. The judgment was amended on November 13, 2009 to reflect that the Complaint was dismissed as to the Attorney General, the Massachusetts Division of Public Charities, and the Massachusetts State Retirement Board.
.Federal Rule of Civil Procedure 56 was amended effective December 1, 2010. The substantive standard for summary judgment, however, remained unchanged. See Tropigas de P.R. v. Certain Underwriters at Lloyd’s of London, 637 F.3d 53, 55 n. 5 (1st Cir.2011).
. The Court observes that the issues on appeal as to whether Commonwealth Defendants may be subject to trustee process or injunc-tive relief conceivably could be obviated by the appointment of a special master pursuant to Mass. R. Civ. P. 70 to execute, in the Debtor's name, the documents necessary to withdraw funds from the Retirement Board that were in custodia legis and deliver them to the rightful owner.
. The United States Court of Appeals for the Eleventh Circuit in State of Fla. Dept. of Rev. *510v. Diaz (In re Diaz), 647 F.3d 1073 (11th Cir.2011), explained the Supreme Court’s decision in Katz as follows:
In Katz, a bankruptcy trustee commenced an in personam proceeding against state institutions of higher education in order to avoid and recover alleged preferential transfers made by the debtor to the institutions while the debtor was insolvent. Id. at 360, 546 U.S. 356, 126 S.Ct. 990. The institutions raised state sovereign immunity as a defense. Id. Although the Court's answer to the question whether § 106(a) validly abrogated the institutions’ immunity would have conclusively determined the viability of the “congressional abrogation” theory in bankruptcy, the Court ultimately resolved the case without reaching that question. See id. at 359, 362, 377-79, 546 U.S. 356, 126 S.Ct. 990. Instead, the Court recognized a new theory, which we will refer to as "consent by ratification.”
The "consent by ratification” theory is predicated on the states’ decision when joining the Union to ratify the Bankruptcy Clause, which empowers Congress to establish "uniform Laws on the subject of Bankruptcies throughout the United States.” U.S. Const, art. I, § 8, cl. 4. The Court in Katz explained that "[bjankruptcy jurisdiction, as understood today and at the time of the framing, is principally in rem jurisdiction." 546 U.S. at 369, 126 S.Ct. 990. Nevertheless, the Court continued, "[t]he Framers would have understood that laws 'on the subject of Bankruptcies’ included laws providing, in certain limited respects, far more than simple adjudications of rights in the res.” Id. at 370, 546 U.S. 356, 126 S.Ct. 990. "More generally,” the Court stated, "courts adjudicating disputes concerning bankrupts’ estates historically have had the power to issue ancillary orders enforcing their in rem adjudications.” Id. Therefore, the Court concluded that when the states ratified the Bankruptcy Clause, they "acquiesced in a subordination of whatever sovereign immunity they might otherwise have asserted in proceedings necessary to effectuate the in rem jurisdiction of the bankruptcy courts.” Id. at 378, 546 U.S. 356, 126 S.Ct. 990; see also id. at 373, 546 U.S. 356, 126 S.Ct. 990 ("Insofar as orders ancillary to the bankruptcy courts’ in rem jurisdiction, like orders directing turnover of preferential transfers, implicate States' sovereign immunity from suit, the States agreed in the plan of the Convention not to assert that immunity.”).
Diaz, 647 F.3d at 1083-84. Because the $40,000 is not property of the estate, the Court’s in rem jurisdiction is not implicated.
. Because the funds were to be held in custo-dia legis, to the extent the Debtor failed to abide by an order of the Middlesex Superior Court, she may be in contempt of that court or liable for fraud on the court. This Court, however, makes no determination with respect to any of those issues. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494552/ | MEMORANDUM
JOAN N. FEENEY, Bankruptcy Judge.
I. INTRODUCTION
The matters before the Court are 1) the Application for Attorney Compensation filed by the Law Firm of Grantham Cen-carik, P.C. (“GC”), counsel to the Defendant Kimberly A. Conant (the “Defendant” or the “Debtor”), through which the firm requests compensation for services in the sum of $10,683.75 and reimbursement of expenses in the sum of $45.98 pursuant to 11 U.S.C. § 523(d); 2) the Objection to the Application filed by FIA Card Services, N.A. (the “Plaintiff’) on grounds that the fees requested are unreasonable, that the Defendant failed to mitigate her litigation expenses and that the application includes “block entries,” without specific detail as to the services performed; 3) the Motion to Strike the Objection on grounds that it was not timely filed; and 4) the Plaintiffs Response to the Motion to Strike.
The material facts necessary to resolve the matters are not in dispute. A hearing is unnecessary to resolve the issue of the reasonableness of GC’s fees. Accordingly, the Court makes the following findings of fact and conclusions of law.1
*513II. BACKGROUND
The Debtor filed a voluntary Chapter 7 petition on October 18, 2010. The Plaintiff timely filed the above-captioned adversary proceeding on January 14, 2011, seeking a determination that an alleged debt in the amount of $8,900.00 was nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(A). On February 17, 2011, the Debtor moved to dismiss the Complaint on grounds that it failed to state a cause of action and was intended to intimidate the Debtor into a “quick settlement.” The Plaintiff responded to the Motion to Dismiss, stating “[t]he Complaint has a strong factual basis which establishes a compelling cause of action for credit card fraud under 11 U.S.C. § 523(a)(2)(A) which must be determined on its merits, not on a preliminary motion.” The Plaintiff added: “the strength of the facts and circumstances on which the claim is based shows that this is not a frivolous suit.” One day later, on April 1, 2011, the Plaintiff filed a Request for Leave to Amend its Complaint. Prior to the hearing on her Motion to Dismiss, the Debtor filed an Opposition to the Request for Leave to Amend, in which she referenced Fed.R.Civ.P. 9(b), and noted that the Plaintiff offered nothing but inferences to support of its claim under 11 U.S.C. § 523(a)(2)(A).
The Court heard the Request for Leave to Amend at the same time as the Debtor’s Motion to Dismiss on April 11, 2011. The Court afforded the Plaintiff an opportunity to amend its Complaint; denied the Debt- or’s Motion to Dismiss; and directed the Plaintiff to file an Amended Complaint. On April 29, 2011, the Plaintiff filed its Amended Complaint. The Debtor answered the Amended Complaint three days later, and the Court issued a Pretrial Order on May 13, 2011, establishing August 11, 2011 as the deadline for completion of discovery and September 9, 2011 as the deadline for filing the Joint Pretrial Memorandum.
Following the expiration of the discovery deadline, the Defendant, on September 9, 2011, filed her Motion for Summary Judgment pursuant to Fed. R. Bankr.P. 7056 and [for] Fees and Costs pursuant to 11 U.S.C. § 523(d), in which she asserted, and this Court later found on November 22, 2011, that the Plaintiff did not establish the elements of its claim under § 523(a)(2)(a) and that it was not substantially justified in filing the adversary proceeding because it failed to conduct any discovery or any reasonable inquiry or diligence before doing so. In short, the Debt- or established that the Amended Complaint did not substantially comply with Fed.R.Civ.P. 9(b),2 made applicable to this proceeding by Fed. R. Bankr.P. 7009, and had the hallmarks of a “strike suit” intended to coerce a settlement.3 See Honey *514Dew Assocs., Inc. v. Monaco (In re Monaco), 347 B.R. 454, 458, fn. 3 (Bankr. D.Mass.2006) (citing Natasha, Inc. v. Evita Marine Charters, Inc., 763 F.2d 468, 471 (1st Cir.1985)).
Although the Plaintiff moved for an extension of time within which to file its own motion for summary judgment, it did not file any dispositive motions. It did, however, respond to the Debtor’s Statement of Undisputed Material Facts in which it stated, inter alia,-.
On May 23, 2011, Plaintiffs attorney sent via e-mail a draft Joint Rule 26(f) statement to Defendant’s counsel, and, as indicated in the e-mailed response to Defendant’s counsel the two attorneys discussed the proceeding by phone and finally copies of the checks by which the overdraft Charges were incurred to the Account and signature samples for the Defendant and James F. Bradley were sent to Plaintiffs counsel.
On July 12, 2011, Plaintiffs counsel sent an e-mail to Defendant’s counsel offering to dismiss the proceeding for return of the $250 filing fee.
The Joint Rule 26(f) statement was filed on July 19, 2010 [sic] but it did not include the defense now asserted.
Receipt of the attachments to the e-mail response sent by Defendant’s counsel to the Plaintiffs counsel on May 23, 2011 was the first time Plaintiff had copies of the checks and signature samples which resulted in the questionable account charges.
On May 24, 2010 [sic] Plaintiffs counsel sent an e-mail to Defendant’s counsel indicating that the check signatures looked like the Defendant’s husband’s signature and requested information concerning the Defendant’s marital status, the use of the funds for which the charges were incurred, and information concerning “Mr. Conant’s Chapter 13”,4 Defendant’s counsel did not respond to the request for information in Plaintiffs May 24, 2010 [sic] e-mail.
On July 17, 2011, by e-mail, Plaintiffs counsel stated Plaintiffs willingness to dismiss the proceeding outright with both parties to bear their own fees and costs to which Defendant’s counsel responded that he would convey the offer to his client.
The Plaintiff attached to its Statement a letter dated February 17, 2011 from Debt- or’s counsel, advising the Plaintiff that “[t]his letter constitutes a demand pursuant to Fed.R.Civ.P. 11 to withdraw the adversary complaint against Ms. Conant for the reasons stated in the attached motion to dismiss” and adding “[i]f your client fails to avail itself to the safe harbor provided by Fed.R.Civ.P. 11, please note that we will seek sanctions and legal expenses after the case is dismissed.” Accordingly, the Plaintiff was forewarned that the Defendant considered its Complaint baseless and at least inferentially that discovery was advisable.5
*515In its Objection to the Motion for Summary Judgment, the Plaintiff did not challenge the Defendant’s assertions that it did not conduct any discovery before filing its Complaint or Amended Complaint, relying instead only on inferences from its internal records and the Debtor’s bankruptcy schedules.
On November 22, 2011, this Court granted the Debtor’s Motion for Summary Judgment and ordered her counsel to file a fee application in accordance with Fed. R. Bankr.P.2016 and MLBR 2016-1 by December 22, 2011. It authorized the Plaintiff to file an objection to the Application by January 5, 2012.
III. THE APPLICATION AND OBJECTION
GC seeks total compensation of $10,683.76 for 38.85 hours of work billed at an hourly rate of $275. It seeks reimbursement of $45.98 for expenses. The Plaintiff objects to the Application on the ground that the fees are excessive and the description of services inadequate to assess their reasonableness. It adds that the time spent investigating adversary proceedings filed by FIA Card Services, N.A. in this Court since 2006, approximately 70 adversary proceedings over a five-year period, was “spurious and irrelevant.”
The Plaintiff also argues that the Defendant failed to mitigate litigation expenses, citing Moriarty v. Svec, 233 F.3d 955 (7th Cir.2000), cert. denied, 533 U.S. 930, 121 S.Ct. 2553, 150 L.Ed.2d 720 (2001). In that case, which is not a bankruptcy case, the court stated:
Substantial settlement offers should be considered by the district court as a factor in determining an award of reasonable attorney’s fees, even where Rule 68 does not apply. See Sheppard v. Riverview Nursing Center, Inc., 88 F.3d 1332, 1337 (4th Cir.1996). Attorney’s fees accumulated after a party rejects a substantial offer provide minimal benefit to the prevailing party, and thus a reasonable attorney’s fee may be less than the lodestar calculation. See Marek v. Chesny, 473 U.S. 1, 11, 105 S.Ct. 3012, 87 L.Ed.2d 1 (1985). Determining whether an offer is substantial is left in the first instance to the discretion of the district court. Nevertheless, an offer is substantial if, as in this case, the offered amount appears to be roughly equal to or more than the total damages recovered by the prevailing party. In such circumstances, a district court should reflect on whether to award only a percentage (including zero percent) of the attorney’s fees that were incurred after the date of the settlement offer.
233 F.3d at 967. The Court notes that on July 12, 2011, the Plaintiff offered to dismiss its Amended Complaint upon receipt of $250. The Court finds that that was not a “substantial settlement offer” because at the time the Plaintiff proffered its offer, the Defendant had incurred fees of $2,241.25 and would have had to advance an additional $250, in addition to reimbursing GC for the expenses it had incurred.
GC also seeks to strike the Plaintiffs Objection because it was filed on January 5, 2012 after 4:30 p.m., citing MLBR Appendix 8, Rule 3(c) which provides:
(c) Filing Deadline
A document may be filed at any time, except that:
*516(1) where the Court orders that filing must be completed by a specific date and time, filing a document electronically does not alter the filing deadline for that document; and
(2) where the Court orders that filing must be completed by a specific date but does not specify the time, entry of the document into the ECF System must be completed before 4:30 p.m. Eastern Standard (or Daylight, if applicable) Time in order to be deemed timely filed.
The Plaintiff admitted that it filed its Objection to the Application at 3:59 p.m. Pacific Standard Time, which is 6:59 p.m. Eastern Standard Time. It adds that there is no prejudice to the Debtor or bad faith on its part. The Court agrees.
IV. DISCUSSION
A. Applicable Law
Section 523(d) of the Bankruptcy Code provides:
[i]f a creditor requests a determination of dischargeability of a consumer debt under subsection (a)(2) of this section, and such debt is discharged, the court shall grant judgment in favor of the debtor for the costs of, and a reasonable attorney’s fee for, the proceeding if the court finds that the position of the creditor was not substantially justified, except that the court shall not award such costs and fees if special circumstances would make the award unjust.
11 U.S.C. § 523(d). “The purpose of § 523(d) is to discourage creditors from initiating meritless § 523(a)(2) actions in the hope of obtaining a settlement from an honest debtor anxious to save attorney’s fees.” Congressional Fed. Credit Union v. Pusateri (In re Pusateri), 432 B.R. 181, 197 (Bankr.W.D.N.C.2010) (citing H.R.Rep. No. 595, 95th Cong., 1st Sess. 365 (1977), 1978 U.S.C.C.A.N. 5963, 6320; S.Rep. No. 989, 95th Cong., 2d Sess. 80 (1978), U.S.Code Cong. & Admin.News 1978, pp. 5787, 5865, 5963, 6320). See also People’s Bank v. Poirier (In re Poirier), 214 B.R. 53 (Bankr.D.Conn.1997). In Poi-rier, the court observed:
In enacting Section 523(d) Congress recognized the usual wide disparity in litigation resources possessed by creditors and consumer debtors; a fact that might often be exploited by unscrupulous or reckless creditors. Such creditors may be tempted to bring or continue untenable dischargeability cases simply to “scare up” an installment-type settlement from a cash-poor debtor. Debtors are frequently unable to fund an adequate defense in such cases, and, therefore, may be inclined to agree to the nondischargeability of a debt in a reduced amount rather than fund the current costs of defending the litigation.
214 B.R. at 55-56 (citations omitted). The court in Poirier added:
Notably, by its terms Section 523(d) can require the payment of fees by a creditor irrespective of the creditor’s actual intent in commencing and/or continuing a Section 523(a)(2) action. In other words, a creditor can be liable for fees and costs under Section 528(d) even if it innocently prosecuted a substantially unjustified dischargeability complaint. This is appropriate given the statute’s deterrent purpose and the difficulty of proving intent by direct evidence.
Id. at 56 (emphasis supplied).
According to the court in Pusateri,
a is to be taxed with the debtor’s defense costs and attorney’s fees in a § 523(a)(2) case, five elements must exist:
(1) The creditor filed a nondischarge-ability action under § 523(a)(2);
*517(2) The obligation must concern a consumer debt;
(3) The obligation must be found to be dischargeable;
(4) the complaint must not have been substantially justified; and
(5) the bankruptcy court must be satisfied that there are no special or unique circumstances, which would make the imposition of costs and attorneys’ fees unjust.
Id. (citing First Deposit Nat’l Bank v. Stahl (In re Stahl), 222 B.R. 497, 504 (Bankr.W.D.N.C.1998)).
In Bridgewater Credit Union v. McCarthy (In re McCarthy), 243 B.R. 203, 208 (1st Cir. BAP 2000), the United States Bankruptcy Appellate Panel for the First Circuit made similar observations about the purposes surrounding the enactment of 11 U.S.C. § 523(d). It stated:
Section 523(d) was enacted to discourage creditors from filing § 523(a)(2) complaints without first carefully reviewing the legal and factual bases for their fraud-based nondischargeability claims. Congress was concerned that, absent the meaningful possibility that a successful defending debtor would be awarded his or her fees and costs, unscrupulous or inconsiderate creditors might file iffy actions willy-nilly, betting that their financially strapped consumer debtors would settle to avoid defense costs. The “substantial justification” standard balances legislative solicitude for the honest debt- or’s plight against “the risk that imposing the expense of the debtor’s attorney’s fees and costs on the creditor may chill creditor efforts to have debts that were procured through fraud declared nondischargeable.”
243 B.R. at 208 (citations omitted). It added while the contours of “substantial justification” are inexact and case specific, the burden is on the creditor to establish “(1) a reasonable basis in truth for the facts alleged, (2) a reasonable basis in law for the theory propounded, and (3) a reasonable support in the facts alleged for the legal theory advanced.” Id. It observed that those elements were not inconsistent with a “totality of the circumstances approach and that “[i]t goes without saying that if § 523(d) is to fulfill its purpose, its “substantial justification” provision must set a standard somewhat higher than that set by Federal Rule of Bankruptcy Procedure 9011.” Id. at 209.6
At the November 22, 2011 hearing, the Court determined that the Debtor satisfied her burden of proving the first three elements, and the Plaintiff failed to demonstrate that the action was “substantially justified” or that the “special circumstances” exception applied. The Court noted that the Plaintiff failed to conduct any discovery, and, in particular, it conducted no discovery between the filing of *518its original Complaint and the filing of the Amended Complaint.7 With respect to the attorneys’ fees now at issue:
The congressional purpose behind § 523(d) demands that the debtor be made whole for defending an ill-conceived action, even if the plaintiff dismisses the suit. Otherwise, the debtor’s counsel would go unpaid, and the next time a spurious action is filed against a debtor, the attorney would be unwilling to represent him. The debtor’s reasonable costs pursuing its § 523(d) claim are compensable. 11 U.S.C. § 523(d) (“the court shall grant judgment in favor of the debtor for the costs of, and a reasonable attorney’s fee for, the proceeding ... ”).
In re Pusateri, at 205-06 (footnote omitted).
B. Analysis
The Court, having found that the Plaintiffs Amended Complaint was substantially unjustified, concludes that the Debtor’s attorney, GC, is entitled to fees in the sum of $9,583.75. The Court has an independent obligation to review the Application for reasonableness. Even were the Court to grant the GC’s Motion to Strike the Plaintiffs Objection and ignore the observations made by the Plaintiff about the adequacy of the time entries and the amount of time spent, the Court finds that the time entries lack specificity in a number of instances and the number of hours expended in preparing the Motion for Summary Judgment (24 hours) appears to be somewhat excessive.
While the Motion for Summary Judgment was exemplary, it did contain an erroneous allegation about the Plaintiff and its counsel that was the subject of a Motion to Submit Redacted Motion for Summary Judgment which the Court granted. Additionally, although the Plaintiffs Complaint was deficient and required amendment, and its Amended Complaint was predicated upon only inferences of fraud gleaned from the Debtor’s Schedules and internal account records, the Court finds that had GC conveyed specific information about the Defendant’s defenses to the Complaint to the Plaintiff prior to May 23, 2011, the litigation costs could, in fact, *519have been mitigated. Nevertheless, the Court agrees with the observation made by the court in Pusateri:
It would be too much to suggest that every § 523(d) fee request be less than the original amount in controversy. Where the debt is small, (say $10,000 or less), this could make defense of the action untenable, and thereby thwart the purpose of § 523(d). Rather, the reasonableness determination must be made on a case-by-case basis.
432 B.R. at 208 (citations omitted).
V. CONCLUSION
In accordance with the foregoing, the Court shall enter an order approving attorneys’ fees in the sum of $9,583.75 and costs in the sum of $45.98.
. The Court notes that the Plaintiff has filed a Notice of Appeal from its order of November 22, 2011. Because the Court expressly directed the Debtor to file a fee application pursuant to 11 U.S.C. § 523(d), the Court concludes it is not deprived of jurisdiction to *513determine the amount of fees to which Debtor is entitled.
. According to the court in Sculler v. Rosen (In re Rosen), 151 B.R. 648, 655 (Bankr.E.D.N.Y.1993), "There are three goals satisfied by Fed.R.Civ.P. 9(b): ‘(1) providing a defendant fair notice of plaintiff's claim, to enable preparation of a defense; (2) protecting a defendant from harm to his reputation or goodwill; and (3) reducing the number of strike suits.' ” (citation omitted).
. In her Motion for Summary Judgment, the Debtor stated:
The Plaintiff failed to conduct a 2004 examination prior to the commencement of litigation, and declined to serve any discovery on Ms. Conant after the filing of the first Complaint up until the filing date [of] this motion. The discovery deadline expired on August 11, 2011. Since fraud claims involve the Defendant's state of mind, the Plaintiff should have conducted a minimal amount of discovery so that it may support its allegations of fraudulent intent or representations. This inaction by the Plaintiff is further evidence that this litigation is nothing other than a strike suit.
*514The Debtor also stated that the Plaintiff did not attend the section 341 meeting of creditors.
. Notably, the Plaintiff did not seek discovery in accordance with the Federal Rules of Bankruptcy Procedure. Had it done so, it would have discovered that the Debtor's former husband is James Bradley.
. The Court also notes that the Debtor attached to her Statement of Undisputed Material Facts filed in conjunction with her Motion for Summary Judgment copies of a letter from the Plaintiff dated November 10, 2010 in which the Plaintiff requested discovery "[i]n lieu of [a] Rule 2004 examination and offering the Debtor two alternatives as an alternative to a § 523 action: "1) Stipulation in the sum of $8,900.00; or 2) One time cash settlement in the sum of $7,000.00.” GC responded to the Plaintiff's letter on November 22, 2010, stating that the Debtor disputed *515the allegations and requesting copies of checks, evidence of any cash withdrawals, account statements and documents upon which the Plaintiff was relying in making its demand.
. In McDermott v. FIA Card Servs., N.A. (In re McDermott), No. 10-4085, 2010 WL 4638867 (Bankr.D.Mass. Nov. 8, 2010), the court observed:
Congress intended that awards under § 523(d) be based upon the standard employed in awarding attorney's fees under the Equal Access to Justice Act ("EAJA”). See S.Rep. No. 65, 98th Cong., 1st Sess. 9-10 (1983) ("The Committee, after due consideration, has concluded that amendment to this provision to incorporate the standard for award of attorney’s fees contained in the Equal Access to Justice Act strikes the appropriate balance between protecting the debtor from unreasonable challenges to dischargeability of debts and not deterring creditors from making challenges when it is reasonable to do so.”). See also AT&T Universal Card Services Corp. v. Williams (In re Williams), 224 B.R. 523, 529 (2d Cir. BAP 1998). Indeed, both statutes use virtually identical language in mandating an award of attorney’s fees to the prevailing party.”
Id. at *4.
. In McCarthy, the panel noted:
Bankruptcy procedures provide creditors with "ample opportunity” to investigate the merits of § 523(a)(2) claims before commencing an adversary proceeding. AT&T Universal Card Servs. Corp. v. Grayson (In re Grayson), 199 B.R. 397, 402 (Bankr.W.D.Mo.1996) (noting that creditors may make inquiries at the § 341 meeting of creditors and that they may conduct a pre-suit examination of the debtor pursuant to Federal Rule of Bankruptcy Procedure 2004). See also Mercantile Bank of Illinois v. Williamson (In re Williamson), 181 B.R. 403, 408 (Bankr.W.D.Mo.1995) (citing the creditor's failure to appear at the § 341 meeting and its failure to undertake a Rule 2004 meeting even after the grant of a 60 day extension in which to object to dis-chargeability as factors in the court's determination that the complaint was not "substantially justified”). Of course, it would go too far to say that a creditor must initiate such presuit investigations in every case or face a fees award if it does not prevail. There may be instances when, in view of all relevant circumstances, the creditor may demonstrate substantial justification notwithstanding its failure to take such steps before filing a § 523(a)(2) complaint. See AT&T Universal Card Servs. Corp. v. Duplante (In re Duplante), 215 B.R. 444, 450 n. 17 (9th Cir. BAP 1997) (a split panel reversing the bankruptcy court’s § 523(d) award, finding the plaintiff's reliance on debtor’s schedules and statement of financial affairs sufficient under the circumstances, rejecting a "per se rule requiring all plaintiffs to engage in pre-litigation discovery or attend creditors’ meetings in order to defeat a request for attorney's fees under section 523(d)”).
McCarthy, 243 B.R, at 209 n. 6. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494553/ | MEMORANDUM AND ORDER ON DEFENDANTS’ MOTION FOR SUMMARY JUDGMENT
MELVIN S. HOFFMAN, Bankruptcy Judge.
Before me is the defendants’ motion for summary judgment. The facts underlying this matter are largely undisputed. On February 23, 2006 James and Deborah Alger refinanced the mortgage on their *521home in Pepperell, Massachusetts with a $250,000 loan from Countrywide Home Loans, Inc. On that date Countrywide’s closing attorney, Aleta Manugian, met with the Algers to conduct the loan closing. As part of the closing process, the Algers signed acknowledgment forms attesting to their receiving copies of a notice of right to cancel (the “Notice”). Ms. Manugian provided the Algers with copies of the Notice and other relevant documents in a closing file. Following the closing, the Algers took the closing file home and placed it on a pile of papers they kept between two bureaus in their bedroom. This pile included family photographs, birth certificates, the Algers’ marriage certificate, titles to motor vehicles, and other documents. There, say the Al-gers, the closing file sat unopened until some three-and-a-half years later, in the spring of 2009, when in the course of preparing for their bankruptcy filing, the Al-gers showed the closing file to their attorney. The Algers allege that upon opening it the attorney discovered it contained not four but three Notices.
On September 28, 2009 the Algers notified Countrywide and Mortgage Electronic Registration Systems, Inc. (“MERS”), the named mortgagee under the mortgage securing the Algers’ obligations to Countrywide, of their intention to rescind the loan transaction pursuant to § 10(a) of the Massachusetts Consumer Credit Cost Disclosure Act (“MCCCDA”), Mass. Gen. Laws ch. 140D. Neither Countrywide nor MERS agreed to the rescission.
On December 11, 2009, the Algers filed their petition under chapter 13 of the Bankruptcy Code (11 U.S.C. § 101, et seq.), commencing the main case. They then instituted this adversary proceeding against Countrywide and MERS on a one-count complaint alleging violation of § 10(a) of the MCCCDA. The Algers amended their complaint to include as a co-defendant Bank of New York Mellon in its capacity as trustee of the trust established in connection with the securitization of their loan. Thereafter, the defendants, Countrywide, MERS, and Bank of New York Mellon, filed their joint motion for summary judgment.
Summary judgment is appropriate “if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue of material fact and that the movant is entitled to judgment as a matter of law.” Fed. R.Civ.P. 65(c), made applicable by Fed. R. Bankr.P. 7065. A “genuine” issue is one supported by such evidence that “a reasonable jury, drawing favorable inferences,” could resolve in favor of the nonmoving party. Triangle Trading Co. v. Robroy Indus., Inc., 200 F.3d 1, 2 (1st Cir.1999) (quoting Smith v. F.W. Morse & Co., 76 F.3d 413, 427 (1st Cir.1996)). A fact is “material” if it has “the potential to change the outcome of the suit” under governing law if such fact is found in favor of the nonmovant. McCarthy v. Nw. Airlines, Inc. 56 F.3d 313, 314-15 (1st Cir.1995).
The defendants bear the initial responsibility to inform the court of the basis for their motion and to identify “those portions of the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any,” which they believe demonstrate the absence of a genuine issue of material fact. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). When, as in this case, the Algers have the burden of proof on the underlying complaint, the defendants need do no more than aver an absence of factual support for the Algers’ ease. The burden of production then shifts to the Algers, who, to avoid summary judgment, must establish the existence of at least one question of fact that *522is both “genuine” and “material.” Desmond v. Varrasso, 37 F.3d 760, 763 n. 1 (1st Cir.1994) (citations omitted).
The Algers bring their claim under § 10(a) of the MCCCDA. The MCCCDA was “closely modeled” after the federal Truth in Lending Act (“TILA”). In re Di Vittorio, 670 F.3d 273, 2012 WL 33063, at *7 (1st Cir.2012). As the two acts are “substantially the same in most respects ... federal court decisions with respect to TILA are instructive in construing the parallel provisions of the CCCDA.” In re Cromwell, 461 B.R. 99, 115 (Bankr.D.Mass.2011). Both TILA and the MCCCDA were enacted “to assure a meaningful disclosure of credit terms so that the consumer [would] be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit, and to protect the consumer against inaccurate and unfair credit billing and credit card practices.” 15 U.S.C. § 1601(a); see also In re Cromwell, 461 B.R. at 115.
Under the MCCCDA, consumer borrowers involved in certain credit transactions where the lender acquires a security interest in the borrower’s principal dwelling1 are given a limited right to rescind the transaction:
[T]he obligor shall have the right to rescind the transaction until midnight of the third business day following the consummation of the transaction or the delivery of the information and rescission forms required under this section together with a statement containing the material disclosures required by this chapter, whichever is later, by notifying the creditor, in accordance with regulations of the commissioner, of his intention to do so....
Mass. Gen. Laws ch. 140D, § 10(a). To ensure that a borrower is aware of his right to rescind, § 10(a) requires that the creditor provide to the borrower, “in accordance with the regulations of the commissioner, appropriate forms for the obligor to exercise his right to rescind any transaction subject to this section.” The regulations of the commissioner, 209 CMR § 32.23 (2005), direct the creditor: (i) to “provide a notice that conforms with the model forms in Appendix H of Regulation Z, as appropriate, or a substantially similar notice” 2; and (ii) to “deliver two copies of the notice of the right to rescind to each consumer entitled to rescind.”3 The regulation further provides that “[i]f the required notice or material disclosures are not delivered, the right to rescind shall expire four years after consummation, upon transfer of all the consumer’s interest in the property, or upon the sale of the property, whichever occurs first.”4
The Algers say that Countrywide’s failure to provide them at the loan closing with four copies of the Notice triggered their extended right to rescind under 209 CMR § 32.23(1). The defendants, on the *523other hand, argue that the Algers did in fact receive the correct number of Notices and acknowledged such receipt, but even if they had not received four copies, the extension of the right to rescind beyond three business days was not triggered because they each received at least one Notice.
The parties differ in their interpretation of § 10(a) of the MCCCDA and its corresponding regulations. Defendants rely on a line of cases from the district of Massachusetts, beginning with King v. Long Beach Mortgage Company, holding that an extension of the right to rescind under TILA is not triggered so long as each borrower receive at least one Notice. See 672 F.Supp.2d 238 (D.Mass.2009). In King, Judge Young held that because the Federal Reserve “used the terms ‘notices’ or ‘two copies of the notice’ whenever it wished to convey that more than one notice was required,”5 the use of the singular “notice” in 12 C.F.R. § 226.23(a)(3), the federal analog to 209 CMR § 32.23(l)(c), is indicative of the Federal Reserve’s intent that the delivery of a single notice was sufficient so as not to trigger the extended right to rescind beyond three business days. King, 672 F.Supp.2d at 250. Three subsequent Massachusetts federal district court decisions have, without further elaboration, endorsed the holding in King. See Ferreira v. Mtg. Elec. Reg. Systems, Inc., 794 F.Supp.2d 297 (D.Mass.2011); McKen-na v. Wells Fargo Bank, N.A., 2011 WL 1100160 (D.Mass. March 21, 2011); McDermott v. Mtg. Elec. Reg. Systems, 2010 WL 3895460 (D.Mass. Sept. 30, 2010).
The Algers insist that the Massachusetts district court cases relied on by the defendants are outliers, at odds with court rulings elsewhere and insufficiently attuned to the plain meaning of the statute and regulations.6 They urge me to adopt Judge Hillman’s reasoning in In re Cromwell, 461 B.R. 99 (Bankr.D.Mass.2011), that the statute requires the delivery of multiple Notices per borrower and that the extended right to rescind under the regulation is triggered when two Notices are not provided:
Having reviewed King thoroughly, I must respectfully disagree with Judge Young’s conclusion. Notwithstanding the fact that the regulations provide that “[t]he consumer may exercise the right to rescind until midnight of the third business day following ... delivery of the notice required by 209 CMR 32.23(l)(b),” the statute uses the plural: “the obligor shall have the right to rescind the transaction until midnight of the third business day following ... the delivery of the information and rescission forms required under this section
Id. at 123 (emphasis in original).
Judge Hillman’s analysis in In re Cromwell is compelling. Section 10(a) of *524the MCCCDA requires forms, plural, to be provided by the creditor and the regulation requires two copies and provides an extended right to rescind when the creditor fails to provide proper notice. See also In re Giza, 458 B.R. 16, 25-26 (Bankr.D.Mass.2011) (Boroff, J.). The regulation of the commissioner, 209 CMR § 32.23(l)(c), should be interpreted, if at all possible, in harmony with its companion statute and regulations. See Gustafson v. Alloyd Co., 513 U.S. 561, 575, 115 S.Ct. 1061, 131 L.Ed.2d 1 (1995) (“[A] word is known by the company it keeps.”). The word “notice” in 209 CMR § 32.23(l)(c) is not referring to the Notice form but to the act of giving notice. Proper notice under 209 CMR § 32.23(2)(a) means the delivery of “two copies of the notice of the right to rescind,” to each borrower entitled to rescind which “clearly and conspicuously” disclose the right to rescind and how to exercise that right.
The defendants correctly note that the Court of Appeals for the First Circuit has adopted a “clear and conspicuous standard in place of a rule of hyper-technicality” when it comes to a lender’s disclosing a borrower’s rescission rights. Santos-Rodriguez v. Doral Mortg. Corp., 485 F.3d 12, 16-17 (1st Cir.2007); see also In re Di Vittorio, 2012 WL 33063, at *18. However, this admonition cannot extend to an unambiguous statutory requirement. Strict enforcement of the statute’s multiple-forms requirement and the regulation’s explicit directive that creditors are to deliver two Notices to each borrower is not a trespass into the realm of hyper-technicality circumscribed by the First Circuit. There is a good reason for the two-Notice requirement and that is so a consumer borrower can, with minimal effort or unnecessary delay, exercise the right to rescind by returning one form of the Notice and still have a copy for his records.7 Thus, if Countrywide failed to provide each of the Algers with two Notices of the right to rescind, for a total of four,8 the Algers’ right to rescind would be extended to four years beyond the closing date.
It is undisputed that Mr. and Ms. Alger each signed two forms acknowledging their receipt of the Notice. However, the MCCCDA ascribes limited evi-dentiary weight to such acknowledgments:
Notwithstanding any rule of evidence, written acknowledgment of receipt of any disclosures required under this sub-chapter by a person to whom information, forms, and a statement is required to be given pursuant to this section does no more than create a rebuttable presumption of delivery thereof.
Mass. Gen. Laws ch. 140D, § 10(c). Thus the acknowledgment forms signed by the Algers operate only as a rebuttable presumption that they in fact received the required documents.
Each acknowledgment form that the Algers signed contained the following language: “The undersigned each acknowledge receipt of two copies of NOTICE of RIGHT TO CANCEL and one copy of the Federal Truth in Lending Disclosure Statement.” It is unclear whether the Algers acknowledged that each of them received two copies for a total of four or whether they each acknowledged re*525ceipt of two copies in total. In analyzing the identical acknowledgment language in In re Cromwell, Judge Hillman, too, found the language ambiguous:
The placement of the word “each” before “acknowledge” renders the phrase susceptible to two meanings. First, that the Debtors acknowledged each receiving two copies as the Defendants[ ] assert, or second, that they each acknowledged receipt of a total of two copies as the Debtors suggest. While I understand that Countrywide intended the former as that is what the law required, the average consumer would not have necessarily known that.
461 B.R. at 124. The existence of this ambiguity neutralizes any presumption created by the acknowledgment in favor of delivery of the requisite number of Notices. See id. (resolving the ambiguity “against the drafter of the Acknowledgment such that it did not create a presumption of adequate delivery of a total of four copies”).
In the absence of a presumption of adequate delivery, the burden shifts to the defendants to prove that the Algers each received two copies of the Notice for a total of four for the couple. See id. While the defendants rely on the deposition testimony of Ms. Manugian as evidence of her general practice during closings to establish that the Algers received four copies, the Algers have attested through their affidavits that the first time their loan file was opened after the closing it contained a total of three Notices. The question of how many copies of the Notice the Algers received remains a genuine and material fact in dispute. The defendants’ motion for summary judgment is therefore DENIED.
.Select transactions are exempt from the borrower's right to rescind, including residential mortgage transactions (defined in Mass. Gen.- Laws ch. 140D, § 1), refinancing and consolidation transactions by the same creditor with no new advances, and transactions where the creditor is a state agency. Mass. Gen. Laws ch. 140D, § 10(e); 209 CMR § 32.23(6). There is no dispute that the Al-gers' transaction with Countrywide is subject to the rescission requirements of the MCCCDA.
. 209 CMR § 32.23(2)(b). Regulation Z (12 C.F.R. pt. 226), the federal analog to 209 CMR pt. 32, is an interpretive regulation prescribed by the Federal Reserve Board which governs the disclosure provisions under TILA. In re DiVittorio, 670 F.3d 273, 282-83, 2012 WL 33063, at *7 (1st Cir.2012).
. 209 CMR § 32.23(2)(a).
. 209 CMR § 32.23(l)(c).
. See, e.g., 12 C.F.R. § 226.19(b)(2)(xi) ("The type of information that will be provided in notices of adjustments and the timing of such notices.”). The corresponding regulation set forth by the Massachusetts commissioner is 209 CMR § 32.19(2)(b)(ll).
. See, e.g., Weeden v. Auto Workers Credit Union, Inc., 173 F.3d 857 (6th Cir.1999) (unpublished) (noting “the creditor’s obligation to provide each borrower with two notices of the right to cancel” and "the three-year extension of the right to rescind upon failure to provide these notices"); Briscoe v. Deutsche Bank Nat. Trust Co., 2008 WL 4852977, at *3 (N.D.Ill. Nov.7, 2008) (“A failure to provide two copies of the Notice of the Right to Cancel is grounds for rescission.”); Hanlin v. Ohio Bldrs. & Remodelers, Inc., 212 F.Supp.2d 752, 759-60 (S.D.Ohio 2002) (following Weeden); Cooper v. First Gov't Mtg. & Invest. Corp., 238 F.Supp.2d 50, 64 (D.D.C.2002) (rejecting lender’s argument that "providing one copy of the Notice Form demonstrates substantial compliance with TILA, and therefore is sufficient”).
. Each borrower is entitled to independently exercise his or her right of rescission: "When more than one consumer in a transaction has the right to rescind, the exercise of the right by one consumer shall be effective as to all consumers." 209 CMR § 32.23(l)(d).
. Each consumer who is a party to a transaction is entitled to receive two copies of the Notice: "In a transaction subject to rescission, a creditor shall deliver two copies of the notice of the right to rescind to each consumer entitled to rescind.” 209 CMR 32.23(2)(a) (emphasis added). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494554/ | OPINION AND ORDER
ENRIQUE S. LAMOUTTE, Bankruptcy Judge.
This case is before the court upon the request by Trafon Group, Inc., formerly known as Encinal, Inc. d/b/a Starmeat (hereafter referred to as “Trafon” or “Creditor”) for payment of amounts owed, claiming to be the beneficiary of a statutory trust under the Packers and Stockyards Act of 1921, as amended (“PASA”). The Chapter 7 Trustee (hereinafter referred to as “Trustee”) opposed the request and filed a motion for summary judgment alleging that Trafon failed to comply with certain requirements that must be concurrently satisfied under the PASA provisions, 7 U.S.C. § 196, mainly; (i) Trafon is not a livestock and/or live poultry cash seller in conformity with 7 U.S.C. § 196(b) and § 197(d); and (ii) Trafon failed to preserve its statutory trust due to its lack of notification to the Debtor and to the Secretary of the United States Department of Agriculture within the mandatory time frame (within the thirty day period of the final date established for making payment to the cash seller of livestock) in conformity with 7 U.S.C. §§ 196(b) and 197(d), and 9 C.F.R. § 203.15 (Docket No. 295). Trafon filed its opposition to the Trustee’s motion for summary judgment arguing the following: (i) whether Trafon sold “livestock” as defined under PASA to Debtor is a genuine issue of material fact that precludes the granting of Trustee’s motion for summary judgment; (ii) Trafon preserved its trust under 7 U.S.C. § 228(b), given that this section, “... allows for the parties to effect payment in another manner so long as the parties expressly agree in writing;” (iii) “[i]n the case at hand, the parties agreed that the seller retains a trust claim over the commodities sold until full payment is received. All the invoices at issue specifically stated: ‘[t]he seller of these commodities retains a trust claim over these commodities, all inventories of food or other products derived from these commodities and any receivables or proceeds from the sales of these commodities and any receivables or proceeds from the sales of these commodities until full payment is received;” and (iv) “[cjonsidering that it was stipulated on the invoices that the seller retains a trust claim over the com*528modities sold ‘until full payment is received,’ such provision constitutes an agreement to make payment in another manner. In the present case, the thirty days of the final date for making payment began when the Debtor filed Bankruptcy and Trafon was put on notice that they will not receive payment.” (Docket No. 329). The Trustee filed his reply to Tra-fon’s opposition to the motion for summary judgment (Docket Nos. 332 & 341). For the reasons set forth below the Trustee’s motion for summary judgment is hereby granted.
Facts and Procedural Background
Cooperativa de Consumidores del No-roeste filed a bankruptcy petition under Chapter 7 of the Bankruptcy Code on October 9, 2009. The Debtor included Tra-fon (Star Meat Inc.) in Schedule F (Creditors Holding Unsecured Nonpriority Claims) as an unsecured creditor in the amount of $46,505.80. The Debtor included in line item number four (4) of its Statement of Financial Affairs a lawsuit for collection of money in the state court of Aguadilla (Case No. A1CI2009-00872) in which Trafon Group Corp. H/N/C Star-meat is the plaintiff. On October 19, 2009, the Trustee filed a Notice of Assets and Request for Claims Bar Date informing that there are assets in this case which are expected to result in a dividend to creditors, and requested the Clerk of the Court to set and notice a bar date for filing claims (Docket No. 6). On October 27, 2009, the Clerk of the Court gave notice to creditors informing that assets have been recovered by the Trustee and that creditors must file a proof of claim by January 25, 2010 (Docket No. 11). The 341 meeting of creditors was scheduled for November 4, 2009 and was continued and held on December 1, 2009. The Trustee requested that the case be held open for potential asset recovery (Docket Nos. 4, 23 & 42). On January 29, 2010, Trafon filed proof of claim # 126-1 for an unsecured claim in the amount of $46,456.12 which was incurred from March 27, 2009 to May 13, 2009.
On October 25, 2010, Trafon filed a motion requesting the Trustee to pay the invoices owed. Trafon alleges that it is a PASA trust beneficiary based on the following: (i) that during the period of March 27, 2009 through May 12, 2009 it supplied livestock, livestock products, poultry and poultry products to the Debtor; (ii) on January 29, 2010, Trafon filed a proof of claim in the amount of $46,456.12 for unpaid invoices of which it claims $41,776.33 is protected by PASA, and as a beneficiary of the PASA statutory trust, it has priority over creditors and over lenders to which packers have given a security interest in packer’s inventory and receivables subject to such trust; and (iii) Safeway Stores, Inc. v. Freeman, 369 F.2d 952 (D.C.Cir.1966), recognized that retail stores such as the one debtor operated where meat and meat products are processed for sale are considered “packers” within the meaning of PASA (Docket No. 212).
The Chapter 7 Trustee (hereinafter referred to as “Trustee”) filed on October 26, 2010 his opposition to Trafon’s Motion Requesting Order Instructing the Trustee to Pay PASA Trust Beneficiary presenting the following arguments: (i) the proof of claim filed by Trafon (claim # 126-1) specified that it was an unsecured creditor and it failed to specify that it was protected by the PASA trust; (ii) Trafon is commencing a proceeding pursuant to Fed. R. Bankr.P. 7001(1), (2) and (9), thus these actions must be initiated by an adversary proceeding; (iii) Debtor is not a “packer” as defined by 7 U.S.C. § 1911, and thus Trafon *529does not have a valid PASA trust claim; (iv) Safeway Stores, Inc. v. Freeman, 369 F.2d 952, is distinguishable from the instant case due to the specifics of the operations and processing activities of the Safeway supermarket chains; (v) Trafon fails to describe the actual activity Debtor engaged in which is within the scope of PASA; and (vi) the products Trafon sold to Debtor were already processed when they arrived at Debtor’s stores as evidenced by the invoices (Docket No. 216).
On November 22, 2010, Trafon filed its reply to the Trustee’s opposition to its motion requesting an Order instructing the Trustee to pay it as a PASA trust beneficiary, arguing the following: (i) that pursuant to the case of In re Frosty Morn Meats, Inc., 7 B.R. 988 (Bankr.M.D.Tenn.1980) an adversary proceeding is not required to adjudicate whether Trafon’s claim is protected by a PASA trust; (ii) the Trustee’s emphasis on the case of D & W Food Centers, Inc. v. Block, 786 F.2d 751 (6th Cir.1986) is misguided because that decision was rendered based on the particular facts of that case which are different from the facts in the instant case; (in) the nature of the Debtor’s operation is important to determine whether it is a “packer” under PASA, thus an evidentiary hearing may be necessary for the court to adjudicate whether Debtor is a packer under the PASA provisions; and (iv) Debtor “... engages in the processing of products beyond ‘those needed to prepare them for display’” (Docket No. 216, paragraph #32) since Debtor cuts and repackages the meat and meat products it receives from Trafon (as shown in the photographs enclosed as Exhibits 1-8 in Docket No. 230) into smaller portions for re-sale to third parties (Docket No. 230).
On December 1, 2010, the Trustee filed a motion for leave to file sur-reply and extension of time due to the following: (i) the transactions that give rise to this claim originated when the Debtor was under its original administration which was subsequently substituted by Corporation Publica para la Supervision y Seguro de las Coo-perativas de Puerto Rico (“COSSEC”) in June 2009; and (ii) the Trustee will request the dismissal of this action because the original administrator and COSSEC are not part of this proceeding as required by Fed. R. Civ. Proc. 12 & 19 (Docket No. 235). On December 2, 2010, this court granted the Trustee’s request for a thirty (30) day extension to file his sur-reply to Trafon’s reply to the Trustee’s opposition (Docket No. 239). On December 30, 2010, the Trustee filed its sur-reply arguing the following: (i) an adversary proceeding should be initiated pursuant to Fed. R. Bankr.P. 7001(1), (2) and (9) to obtain a declaratory judgment on the validity of Trafon’s claim regarding the legal existence of the alleged PASA trust; (ii) the factual and legal circumstances in In re Frosty Morn Meats, Inc., 7 B.R. 988 differ significantly from the present case, given that; (a) the adversary proceeding in the case of reference was brought forth as a class action; (b) both parties had stipulated facts and briefs of law regarding the statutory trust and specific amounts for claims under 7 U.S.C. § 196; and (c) a trust had already been established; (in) Trafon fails to describe the actual activity that would place Debtor within the scope of PASA; (iv) Debtor clarifies that no “manufacturing or preparing of meat or *530meat product” was ever carried out within its market facilities; (v) contrary to what Trafon has stated in then- reply, Trustee does not admit that Debtor was engaged in “some processing of the products” (Docket No. 216, paragraph 32). The actual sentence was, “[a]s this Honorable court can notice there was little or no process of the products except for those needed to prepare them for display;” (vi) “... Trafon would cut, pack and deliver the meat straight to each of Debtor’s individual supermarket facilities from which in turn Debtor would sell the meat and meat products solely and directly to consumers, not to other retail stores, market establishments and/or institutions,” contrary to the provisions of 7 U.S.C. § 191(c) which require that a “packer” act as a wholesale broker, dealer or distributor in commerce; (vii) “... Debtor’s operations in no way or form consisted in ‘functions ordinarily carried out by wholesalers.’ Creditor Trafon would cut, weigh, pack and deliver meat, meat products, poultry, and poultry products directly to each of Debtor’s individual supermarket facilities, and such merchandise, if at all altered by Debtor, would be in a minimal manner and solely for purposes of display to their visiting customers who are the ultimate consumers;” (viii) the invoices provided by Trafon evince that the produce sold were not livestock, carcasses or raw products in conformity with the definition of livestock under PASA, 7 U.S.C. § 182(4)2; (ix) the PASA trust applies if the following requirements have been concurrently satisfied: (a) the commodities sold are “livestock” as defined in PASA; (b) the purchaser of the livestock is a “packer” as defined in PASA; (c) the transaction is a cash sale; (d) the cash sellers have not received full payment for their livestock; (e) the packer in question makes average annual purchases of more than $500,000; and (f) the cash sellers have preserved the trust within the required period by giving notice to the packer and by filing that notice with the Secretary of Agriculture; (x) Trafon has failed to provide evidence of compliance with the United States Department of Agriculture’s requirements regarding the issuance of bonds and registration as required by the corresponding regulations, 9 C.F.R. § 201; and (xi) Trafon has failed to provide evidence of the required notice of intent to preserve the statutory trust which should have been filed with the Secretary of Agriculture or with the nearest Packers and Stockyards regional office pursuant to 7 U.S.C. § 196(b)3 (Docket No. 260).
*531On January 18, 2011 a hearing was held in which the court delineated the issues of the instant case as follows: (1) is Trafon a packer as defined by PASA?; (2) if so, was the trust adequately preserved by the required notice?; and (3) if the trust was properly created and preserved, who has the responsibility to pay and preserve the trust? The court also ordered the pretrial to be scheduled for late June or mid July 2011 (Docket No. 270). On March 2, 2011, the pre-trial conference was scheduled for July 29, 2011 (Docket No. 293).
On March 3, 2011, the Trustee filed a motion for summary judgment alleging the following: (i) “... not all packers are subject to the packer trust—only those that have purchased livestock in a cash sale basis are obligated to retain all livestock purchased by them, and all inventories of, or receivables or proceeds from meat, meat food products, or livestock products derived therefrom, for the benefit of all unpaid cash sellers of such livestock;” citing 7 U.S.C. § 196(b); (ii) Trafon is not a livestock and/or live poultry cash seller in conformity with 7 U.S.C. § 196(b) and § 197(d); (iii) all invoices and photographic exhibits filed by Trafon evince that Debtor never purchased “livestock” or “live poultry” as defined by PASA’s statutory trust provisions, namely 7 U.S.C. §§ 182(4), 191(b), (c), 196, thus a PASA trust was never created; (iv) the invoices demonstrate that the merchandise sold to Debtor by Trafon “... was not livestock nor live and/or whole poultry, but chicken legs, chicken thighs, pork chops, sliced hams, grouper fillets, turkey tenderloins, etc., which arrived adequately processed and packaged directly to each of Debtor’s retail supermarket facilities;” (v) even if this court determines that a PASA trust was established, Trafon failed to preserve its trust due to lack of notification to the Debtor and to the Secretary of the United States Department of Agriculture within the mandatory time frame (within the thirty day period of the final date established for making payment to the cash seller of livestock) in conformity with 7 U.S.C. §§ 196(b) and 197(d), and 9 C.F.R. § 203.15; (vi) the last invoice sent to Debt- or was dated May 13, 2009 and payment of the same was due on June 12, 2009, but written notification was provided by Tra-fon to Debtor and to GIPSA’s Eastern Regional Office on November 5, 2009 (Docket No. 295).
On March 17, 2011, Trafon filed a motion requesting an extension of time to file its opposition to the Trustee’s motion for summary judgment due to the complex nature of the subject matter raised by the Trustee in its motion for summary judgment and the extensive legal research the same requires (Docket No. 304). On March 18, 2011, the court granted the motion filed by Trafon requesting an extension of time to file its response to the Trustee’s motion for summary judgment (Docket No. 305). On April 7, 2011, Tra-fon filed its Opposition to the Trustee’s *532Motion for Summary Judgment based upon the following: (i) the Trustee’s allegations of uncontested facts should be denied for failure to comply with Fed. R.Civ.P. 56(b) since he failed to file a separate statement of material facts and many of his alleged uncontested facts are not supported by record citations in conformity with Fed.R.Civ.P. 56(b) and (e) and/or do not reference to the specific page or paragraph of the identified record material supporting the assertion; (ii) case law has recognized that retail stores, such as the one Debtor operated where meat and meat products are processed for sale are considered “packers” pursuant to PASA citing Safeway Stores, Inc. v. Freeman, 369 F.2d 952; United States of America v. Jay Freeman Co., 473 F.Supp. 1265 (E.D.Ark.1979); (iii) “Trustee’s claim that little to no processing of the product has to be done by Debtor, not only has no basis on record, but is clearly controverted by the material facts of this case;” (Docket No. 329, paragraph 36); (iv) an evidentiary hearing is needed to determine how much processing and preparation of the sold items was made by Debtor; (v) whether Trafon sold “livestock” as defined under PASA to Debtor is a genuine issue of material fact that precludes the granting of Trustee’s motion for summary judgment; (vi) “[i]t should be clarified that Trafon’s argument is not that a ‘PASA trust is created anytime meat or meat products are sold to a packer’ as argued by the Defendants in Stanziale, supra, but that most of the products it sold to Debtor fall under the definition of ‘livestock’ under the PASA” (Docket No. 329, paragraph 41); (vii) Trafon preserved its trust under 7 U.S.C. § 228(b), because this section “... allows for the parties to effect payment in another manner so long as the parties expressly agree in writing;” (viii) “[i]n the case at hand, the parties agreed that the seller retains a trust claim over the commodities sold until full payment is received. All the invoices at issue specifically stated: ‘[t]he seller of these commodities retains a trust claim over these commodities, all inventories of food or other products derived from these commodities and any receivables or proceeds from the sales of these commodities until full payment is received” (Docket No. 329, paragraph 44); and (ix) “[cjonsidering that it was stipulated on the invoices that the seller retains a trust claim over the commodities sold ‘until full payment is received’, such provision constitutes an agreement to make payment in another manner. In the present case, the thirty days of the final date for making payment began when Debtor filed Bankruptcy and Trafon was put on notice that they will not receive payment.” (Docket No. 329, paragraph 45).
On April 14, 2011, the Trustee filed a motion for leave to file reply accompanied by his Reply to Trafon’s opposition to the motion for summary judgment (Docket No. 332). The Trustee in the reply brings forth the following arguments: (i) the prompt payment provisions under PASA, 7 U.S.C. § 228(b) permit livestock buyers and sellers to agree, expressly in writing to waive the seller’s right to the next day cash payment for livestock; (ii) if a packer or a live poultry dealer fails to make payments as prescribed under the PASA provisions, the sellers and poultry growers in order to preserve the PASA statutory trust must file a timely written notice to the packer and/or live poultry dealer and with the Secretary of Agriculture, both within thirty (30) days of the final date established for making payment to the cash seller of livestock pursuant to 7 U.S.C. §§ 196(b) and 197(d) and 9 C.F.R. § 203.15; (iii) Trafon, “... pretends to misguide this Honorable Court into considering the disclaimer included in each of the *533Invoices sent to Debtor, as the type of ‘written agreement’ prescribed by the statute under 7 U.S.C. § 228(b) available for parties who wish to change the terms of payment under PASA trust provisions;” and (iv) in the instant case the last invoice sent to Debtor was dated May 13, 2009 and was due on June 12, 2009, given that the same had a “net 30 day” payment term, but written notification was sent on November 5, 2009, almost five (5) months after payment on the last invoice was due (Docket No. 332-1). On May 3, 2011, the court granted the Trustee’s request for leave to file a reply to Trafon’s opposition to his summary judgment (Docket No. 335). Subsequently, on May 10, 2011, the Trustee filed a reply to Trafon’s opposition to his motion for summary judgment which is identical to the one he previously filed on April 14, 2011 (Docket No. 341).
Legal Issues
In the instant case, the following issues are in controversy: (i) whether the Debtor is a “packer” as defined by PASA; (ii) whether the commodities sold to the Debt- or by Trafon are “livestock” as defined by PASA; (iii) whether the transactions that took place between Debtor and Trafon are “cash sales” under PASA; and (iv) whether Trafon, as a cash seller, preserved its trust within the required period by giving notice to the packer and by filing notice with the Secretary of Agriculture both within thirty (30) days of the final date established for making payment to the cash seller of livestock. The Trustee in its motion for summary judgment argues that irrespective of whether Debtor is indeed a “packer” under the PASA provisions, Tra-fon failed to preserve its statutory trust pursuant to 7 U.S.C. §§ 196(b), 197(d) and 9 C.F.R. § 203.15. At this juncture, this court finds that for the first two issues require an evidentiary to determine whether the Debtor is a “packer” and whether the commodities sold to Debtor by Trafon are “livestock” under the PASA provisions. However, the court finds that the last two issues can be adjudicated from the documents presented and from the uncontested material facts. Such adjudication warrants the entry of a decision in favor of the Trustee as a matter of law.
Uncontested Material Facts
1. During the period ranging from March 27, 2009 through May 12, 2009, Trafon, formerly known as Encinal, Inc., d/b/a Starmeat, supplied Debtor with meat, meat products, poultry, and poultry products by delivering said merchandise directly to each of Debtor’s individual supermarket facilities (Docket Nos. 332-1, 341, Claim No. 126).
2. As the meat and poultry products were being shipped, invoices were regularly sent by Trafon to Debtor from March 27, 2009 up until May 13, 2009 (Docket Nos. 332 & 341, Claim No. 126).
3. All invoices at issue specifically stated: “[t]he perishable agricultural or meat commodities listed on this invoice are sold subject to statutory trust authorized by Section 5(C) of the Perishable Agricultural Commodities Act, 1930 (7 USC 499e(e)), or under the Packers and Stockyard Act, (7 USC Sec. 18), as the case may be. The seller of these commodities retains a trust claim over these commodities, all inventories of food or other food products derived from these commodities and any receivables or proceeds from the sales of these commodities until full payment is received.” (Docket No. 332-1 & 341, Claim No. 126).
4. Debtor filed a petition under Chapter 7 of the Bankruptcy Code on October 9, 2009.
5. Trafon sent notices of non-compliance to Debtor and the United States Department of Agriculture on November 5, *5342009, stating to retain a trust claim over all commodities, and inventories derived therefrom, that had been sold to Debtor under the PASA provisions.
6. On January 18, 2010, Trafon sent a letter to the Trustee, through its attorney, claiming to be a cash seller of livestock and therefore a PASA trust beneficiary over all livestock (as well as inventories and receivables derived therefrom) allegedly sold to Debtor (Docket Nos. 332-1 & 341).
7. On January 29,2010, Trafon filed proof of claim No. 126-1 debt incurred from 03/27/2009 to 05/13/2009 in the amount of $46,456.12. Trafon listed the entire amount of the debt as unsecured. (Claims Register, claim no. 126-1).
Standard for Summary Judgment
Rule 56 of the Federal Rules of Civil Procedure, is applicable to this proceeding by Rule 7056 of the Federal Rules of Bankruptcy Procedure, provides that summary judgment should be entered “if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” Fed. R. Bankr.P. 7056; see also, In re Colarusso, 382 F.3d 51 (1st Cir.2004), citing Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).
“The summary-judgment procedure authorized by Rule 56 is a method for promptly disposing of actions in which there is no genuine issue as to any material fact or in which only a question of law is involved.” 10A Wright, Miller & Kane, Federal Practice and Procedure 3d § 2712 at 198. “Rule 56 provides the means by which a party may pierce the allegations in the pleadings and obtain relief by introducing outside evidence showing that there are no fact issues that need to be tried.” Id. at 202-203. Summary judgment is not a substitute for a trial of disputed facts; the court may only determine whether there are issues to be tried, and it is improper if the existence of a material fact is uncertain. Id. at 205-206.
Summary judgment is warranted where, after adequate time for discovery and upon motion, a party fails to make a showing sufficient to establish the existence of an element essential to its case and upon which it carries the burden of proof at trial. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The moving party must “show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(c).
For there to be a “genuine” issue, facts which are supported by substantial evidence must be in dispute thereby requiring deference to the finder of fact. Furthermore, the disputed facts must be “material” or determinative of the outcome of the litigation. Hahn v. Sargent, 523 F.2d 461, 464 (1st Cir.1975), cert. denied, 425 U.S. 904, 96 S.Ct. 1495, 47 L.Ed.2d 754 (1976). When considering a petition for summary judgment, the court must view the evidence in the light most favorable to the nonmoving party. Poller v. Columbia Broadcasting System, Inc., 368 U.S. 464, 473, 82 S.Ct. 486, 7 L.Ed.2d 458 (1962); Daury v. Smith, 842 F.2d 9, 11 (1st Cir.1988).
The moving party invariably bears both the initial as well as the ultimate burden in demonstrating its legal entitlement to summary judgment. Adickes v. Kress & Co., 398 U.S. 144, 157, 90 S.Ct. 1598, 26 L.Ed.2d 142(1970). See also Lopez v. Corporacion Azucarera de Puerto Rico, 938 F.2d 1510, 1516 (1st Cir.1991). It is essential that the moving party explain its reasons for concluding that the record does not contain any genuine issue of material *535fact in addition to making a showing of support for those claims for which it bears the burden of trial. Bias v. Advantage International, Inc., 905 F.2d 1558, 1560-61 (D.C.Cir.1990), cert. denied, 498 U.S. 958, 111 S.Ct. 387, 112 L.Ed.2d 397 (1990).
The moving party cannot prevail if any essential element of its claim or defense requires trial. López, 938 F.2d at 1516. In addition, the moving party is required to demonstrate that there is an absence of evidence supporting the nonmoving party’s case. Celotex, 477 U.S. at 325, 106 S.Ct. 2548. See also, Prokey v. Watkins, 942 F.2d 67, 72 (1st Cir.1991); Daury, 842 F.2d at 11. In its opposition, the nonmov-ing party must show genuine issues of material facts precluding summary judgment; the existence of some factual dispute does not defeat summary judgment. Kennedy v. Josephthal & Co., Inc., 814 F.2d 798, 804 (1st Cir.1987). See also Kauffman v. Puerto Rico Telephone Co., 841 F.2d 1169, 1172 (1st Cir.1988); Hahn, 523 F.2d at 464. A party may not rely upon bare allegations to create a factual dispute but is required to point to specific facts contained in affidavits, depositions and other supporting documents which, if established at trial, could lead to a finding for the nonmoving party. Over the Road Drivers, Inc. v. Transport Insurance Co., 637 F.2d 816, 818 (1st Cir.1980).
The moving party has the burden to establish that it is entitled to summary judgment; no defense is required where an insufficient showing is made. López, 938 F.2d at 1517. The nonmoving party need only oppose a summary judgment motion once the moving party has met its burden. Adickes, 398 U.S. at 159, 90 S.Ct. 1598.
Applicable Law and Analysis
Packers and Stockyards Act of 1921, as amended, 7 U.S.C. § 181 et seq.
PASA was designed to ensure fair and effective competition and fair trade in livestock, meat, and poultry markets. PASA has two basic purposes, namely; (i) to safeguard farmers and ranchers against receiving less than the true market value of their livestock by ensuring prompt payment; and (ii) to protect producers and consumers by prohibiting monopolistic or predatory practices. See Christopher R. Kelley, An Overview of the Packers and Stockyards Act, An Agricultural Law Research Article, (April 2003), at http://www. nationalaglawcenter.org/assets/articles/ kelley_paekers; 10-71 Agricultural Law § 71.08 (2011). PASA aims at insuring the integrity of livestock and poultry marketing transactions.
Section 206(b) of PASA, 7 U.S.C. § 196(b), provides that;
“Livestock, inventories, receivables and proceeds held by packer in trust for benefit of unpaid cash sellers; time limitations; exempt packers; effect of dishonored instruments; preservation of trust benefits by seller. All livestock purchased by a packer in cash sales, and all inventories of, or receivables or proceeds from meat, meat food products, or livestock products derived therefrom, shall be held by such packer in trust for the benefit of all unpaid cash sellers of such livestock until full payment has been received by such unpaid sellers: Provided, That any packer whose average annual purchases do not exceed $500,000 will be exempt from the provisions of this section. Payment shall not be considered to have been made if the seller receives a payment instrument which is dishonored: Provided, That the unpaid seller shall lose the benefit of such trust if, in the event that a payment instrument has not been received, within thirty days of *536the final date for making a payment under section 109 [7 U.S.C.A. § 228b], of this title, or within fifteen business days after the seller has received notice that the payment instrument promptly presented for payment has been dishonored, the seller has not preserved his trust under this subsection. The trust shall be preserved by giving written notice to the packer and by filing such notice with the Secretary.” 7 U.S.C. § 196(b). (Emphasis ours)
Section 206 of PASA limits the application of its statutory trust provisions specifically to transactions in which all of the following conditions are satisfied: (1) the commodities sold are “livestock” pursuant to 7 U.S.C. § 182; (2) the purchaser of the livestock is a packer as defined in 7 U.S.C. § 191; (3) the transaction is a “cash sale”; (4) the cash sellers have not received full payment for them livestock; (5) the packer in question makes average annual purchases of more than $500,000; and (6) the cash sellers have preserved the trust within the required period by giving notice to the packer and by filing that notice with the Secretary of Agriculture. See In re Gotham Provision Co., 669 F.2d 1000, 1004 (5th Cir.1982) (“Where each of these conditions has been satisfied, the packer is required to hold in trust for the benefit of unpaid cash sellers any livestock purchased in cash sales, inventories of meat or other products derived from such livestock, and accounts receivables or proceeds obtained through the sale of these items by the packer”); Stanziale v. Rite Way Meat Packers, Inc. (In re CFP Liquidating Estate), 405 B.R. 694, 696-697 (Bankr.D.Del.2009).
One of the critical issues in the instant case is whether the sale transactions that were generated from March 27, 2009 to May 13, 2009 between Trafon and Debtor are “cash sales” within the PASA provisions. In order for the PASA statutory trust to be created the livestock must be purchased by a packer in “cash sales.” See In re G & L Packing Co., 41 B.R. 903, 914 (N.D.N.Y.) (“The trust created Section 206 of the Packers & Stockyards Act is operative only for ‘livestock purchased by a packer in ‘cash sales’ ”). Section 206(c) of PASA defines a cash sale of livestock as, “... a sale in which the seller does not expressly extend credit to the buyer.” 7 U.S.C. § 196(c).
Section 206 must be read in conjunction with the prompt payment provisions for purchase of livestock under Section 409 of PASA, 7 U.S.C. § 228b,4 which *537require that purchasers of livestock pay the seller the full amount of the purchase price before the close of the next business day following the purchase and transfer of possession of the livestock, or if the transaction is based on a “grade and yield” basis, before the close of the next business day, following the determination of the purchase price. Sellers of livestock may sell to a packer on credit, provided that the parties expressly agree in writing to a credit arrangement in conformity with Section 409(b) of PASA, 7 U.S.C. § 228b(b)5 and 9 C.F.R. § 201.200. Once a seller of livestock has sold (livestock) on credit to a packer, the seller waives the statutory trust protection afforded by PASA. “In essence, § 409 of the Act presumes that all livestock sales are cash sales unless the parties expressly agree in writing to make the transaction a credit sale. Read, in this context, the language of § 206 defining ‘cash sales’ to include all sales where the seller has not expressly extended credit contemplates that unless the parties clearly agree in writing to a credit arrangement, the transaction is a cash sale.” In re Gotham Provision Co., 669 F.2d at 1005. Thus, a packer may purchase livestock on credit, but it must make sure the seller waives its right to prompt payment in writing. Moreover, 9 C.F.R. § 201.200: Sale of livestock to a packer on credit, specifically provides the acknowledgment required if a packer buys livestock on credit; which provides the following:
“(a) No packer whose average annual purchases of livestock exceed $500,000 shall purchase livestock on credit, and no dealer or market agency acting as an agent for such a packer shall purchase livestock on credit, unless: (1) Before purchasing such livestock the packer obtains from the seller a written acknowledgment as follows:
On this date I am entering into a written agreement for the sale of livestock on credit to_, a packer, and I understand that in doing so I will have no rights under the trust provisions of section 206 of the Packers and Stockyards Act, 1921, as amended (7 U.S.C. 196, Pub. L. 94-410), with respect to any such credit sale. The written agreement for such selling on credit
Covers a single sale.
Provides that it will remain in effect until (date).
Provides that it will remain in effect until canceled in writing by either party-
(Omit the provisions not applicable.)
Date_
Signature ___
(2) Such packer retains such acknowledgment, together with all other documents, if any, setting forth the terms of such credit sales on which the purchaser and seller have agreed, and such dealer *538or market agency retains a copy thereof, in his records for such time as is required by any law, or by written notice served on such person by the Administrator, but not less than two calendar years from the date of expiration of the written agreement referred to in such acknowledgment; and
(3) Such seller receives a copy of such acknowledgment.
(b) Purchasing livestock for which payment is to be made by a draft which is not a check, shall constitute purchasing such livestock on credit within the meaning of paragraph (a) of this section. (See also § 201.43(b)(1).)” 9 C.F.R. § 201.200.
Accordingly, the sale of livestock constitutes a “cash sale” unless the seller has signed a credit arrangement in conformity with 9 C.F.R. § 201.200 indicating that the same is a credit sale and, thus, waiving its statutory trust rights. See Hedrick v. S. Bonaccurso & Sons, Inc., 466 F.Supp. 1025, 1032 (E.D.Pa.1978) (“The regulations support the Court’s interpretation of 7 U.S.C. § 228b that nothing but an express agreement in writing can operate as a waiver of the seller’s right to next day cash payment for livestock.”); 10-71 Agricultural Law § 71.08 (“Nothing but an express agreement in writing can operate as a waiver of the seller’s right to next day cash payment for livestock. An implied agreement or a course of dealing which delays in payment have been tolerated by the livestock seller are not sufficient to constitute an extension of credit within the meaning of the Act—only ‘an express agreement in writing’ will suffice”). Any delay in payment or attempt to delay the collection of funds by a packer is considered an “unfair practice” pursuant to 7 U.S.C. § 228b(c).6 In the instant case, neither the Debtor or Trafon have presented as a supporting document in their motion for summary judgment or in its opposition to Debtor’s motion for summary judgment a written acknowledgment by which Trafon expressly acknowledged that it sold on credit to Debtor in conformity with 9 C.F.R. § 201.200. PASA requires that this credit agreement must be disclosed in the records of the buyer of livestock and in the records of the market agency or dealer selling the livestock pursuant to 7 U.S.C. § 228b(b).
In view of the foregoing, this court finds that in the instant case, the invoices with a payment term of “net 30 days” fail to constitute an express extension of credit in conformity with 7 U.S.C. § 228b(b) and 9 C.F.R. § 201.200 because they fail to include the express intention of the parties to enter into a credit agreement and the intention of Trafon to waive the protection of the PASA statutory trust provisions.
PASA was amended in 1987 to protect contract poultry growers under the Poultry Producers Financial Protection Act of 1987. The provisions of the Poultry Producers Financial Protection Act of 1987 are similar to the provisions of PASA that protect livestock sellers. Section 207 of PASA, 7 U.S.C. § 197(b), (c) and (d) is the corresponding provision for the statutory *539trust established for unpaid cash sellers of poultry or poultry growers.7 For unpaid cash sellers or poultry growers a cash sale under Section 207(e) of PASA is defined as, “... a sale in which the seller does not expressly extend credit to the buyer.” 7 U.S.C. § 197(e). Section 207 must be read in conjunction with the prompt payment provisions under Section 410 of PASA, 7 U.S.C. § 228b-l8 which require that full payment is due “before the close of the next business day following the purchase of poultry,” in the case of a cash sale, or before the close of the fifteenth day following the week in which the poultry is slaughtered, in the case of poultry obtained under a poultry growing arrangement. All poultry sales are considered to be cash sales unless there is an express extension of credit by the poultry seller or a growing arrangement contract in place. The court need not adjudicate whether the sales of poultry are considered cash sales pursuant to Sections 207 and 410, 7 U.S.C. §§ 197 & 228b-l, because the parties have not expressed their positions with respect to this particular issue, and may have waived their right to do so.
*540
Requirements for the Preservation of Statutory Trust under PASA
The second issue in the instant case is whether Trafon properly preserved its rights in the assets of the statutory trusts by filing a timely written notice to the packer and/or live poultry dealer and with the Secretary of Agriculture giving notice to the Secretary of Agriculture, both within thirty (30) days of the final date established for making payment to the cash seller of livestock and/or poultry in conformity with 7 U.S.C. §§ 196(b), 197(d) and 9 C.F.R. § 203.15.
Section 206(b) provides in pertinent part;
“[t]hat the unpaid seller shall lose the benefit of such trust if, in the event that a payment instrument has not been received, within thirty days of the final date for making a payment under section 409 [7 U.S.C.A. § 228b], or within fifteen business days after the seller has received notice that the payment instrument promptly presented for payment has been dishonored, the seller has not preserved his trust under this subsection. The trust shall be preserved by giving written notice to the packer and by filing such notice with the Secretary.” 7 U.S.C. § 196(b).
Section 207(d) provides;
“[t]he unpaid cash seller or poultry grower shall lose the benefit of such trust if, in the event that a payment instrument has not been received, within 30 days of the final date for making payment under section 410 [7 USCA § 228b—1], or within 15 business days after the seller or poultry grower has received notice that the payment instrument promptly presented for payment has been dishonored, the seller or poultry grower has not preserved his trust under this section. The trust shall be preserved by giving written notice to the live poultry dealer and by filing such notice with the Secretary.” 7 U.S.C. § 197(d).
The corresponding regulations provide the following;
“Trust benefits under sections 206 and 207 of the Act. (a) Within the times specified under sections 206(b) and 207(d) of the Act, any livestock seller, live poultry seller or grower, to preserve his interest in the statutory trust, must give written notice to the appropriate packer or live poultry dealer and file such notice with the Secretary. One of the ways to satisfy the notification requirement under these provisions is to make certain that notice is given to the packer or live poultry dealer within the prescribed time by letter, mailgram, or telegram stating:
(1) Notification to preserve trust benefits;
(2) Identification of packer or live poultry dealer;
(3) Identification of seller or poultry grower;
(4) Date of the transaction;
(5) Date of seller’s or poultry grower’s receipt of notice that payment instrument has been dishonored (if applicable); and
(6) Amount of money due; and to make certain that a copy of such letter, mailgram, or telegram is filed with a GIPSA Regional Office or with GIPSA, USDA, Washington, DC 20250, within the prescribed time.
(b) While the above information is desirable, any written notice which informs the packer or live poultry dealer and the Secretary that the packer *541or live poultry dealer has failed to pay is sufficient to meet the above-mentioned statutory requirement if it is given within the prescribed time.” 9 C.F.R. § 203.15
In the instant case, Trafon notified Debtor and the United States Department of Agriculture, Grains Inspection Packers and Stockyards Administration via fax and by certified mail on November 5, 2009. In said letter, Trafon stated the following;
“Under the credit terms between Tra-fon Group, Inc., and Debtor, Trafon Group, Inc., retained a trust claim over all commodities and their inventories derived from the commodities and any receivables or proceeds from the sales of the commodities until full payment was received.
Trafon Group Inc., has requested the Debtor the payment of fifty seven invoices of which forty-three invoices contain commodities and meat products which [ajmount to $43,585.19. As of this date we have not yet received payment. Therefore under the Packers and Stockyards Act, hereinafter PSA U.S.C. Sec. 18, consider this letter our formal complaint.
Enclosed you will find a detailed report which only reflect the invoices that contain meat products and other commodities and their totals. Also enclosed are copies of all the invoiced owed.” (Docket No. 295, Exhibit A).
Trafon’s certified letter was received by Regina Willis on November 12, 2009. The court notes that Trafon’s letter refers to the “credit terms between Trafon Group, Inc., and Debtor” with respect to the alleged statutory trust rights Trafon claims it has under PASA. The court finds that the language making reference to “credit terms” is contrary to the requirement that the transactions have to be “cash sales” in order to be afforded the statutory trust protection under the PASA. The court also notes that more than two (2) years have lapsed since the United States Department of Agriculture received this notice.
Trafon argues that it preserved its trust under 7 U.S.C. § 228(b) due to the following: (i) 7 U.S.C. § 228(b) “... allows for the parties to effect payment in another manner so long as the parties expressly agree in writing;” (ii) “[i]n the case at hand, the parties agreed that the seller retains a trust claim over the commodities sold until full payment is received. All the invoices at issue specifically stated: ‘[t]he seller of these commodities retains a trust claim over these commodities, all inventories of food or other products derived from these commodities and any receivables or proceeds from the sales of these commodities until full payment is received’ ” (Docket No. 329, paragraph 44); and (in) “[c]onsidering that it was stipulated on the invoices that the seller retains a trust claim over the commodities sold ‘until full payment is received’, such provision constitutes an agreement to make payment in another manner.
Trafon alleges that the thirty days of the final date for making payment began when Debtor filed Bankruptcy and Trafon was put on notice that they will not receive payment. (Docket No. 329, paragraph 45). Trafon argues that by disclosing certain language on all of the invoices constitutes by itself (i) an agreement to make payment in another manner, the final date for all the invoices at issue was thirty (30) days after Debtor filed for bankruptcy and; (ii) that such language on the invoice serves to preserve PASA’s statutory trust.
The language on Trafon’s invoice is as follows:
“[t]he perishable agricultural or meat commodities listed on this invoice are sold subject to statutory trust authorized by Section 5(C) of the Perishable Agricultural Commodities Act, 1930 (7 *542U.S.C. 499e(c)), or under the Packers and Stockyards Act, (7 U.S.C. Sec. 18), as the case may be. The seller of these commodities retains a trust claim over these commodities, all inventories of food or other products derived from these commodities and any receivables or proceeds from the sales of these commodities until full payment is received.”
The language on Trafon’s invoice invokes the statutory trust protections under the Perishable Agricultural Commodities Act of 1930, as amended, (hereinafter referred to as “PACA”), 7 U.S.C. § 499a et seq. PACA was amended in 1984 to create a statutory trust over any goods, receivables, or proceeds from perishable agricultural commodities until the buyer makes full payment. 7 U.S.C. § 499e(c). However, if the seller fails to satisfy the statutory trust requirements, the PACA trust will not be perfected. Under PACA, payment is generally due within ten (10) days after shipment is received pursuant to 7 C.F.R. § 46.2(aa)(5)9, but parties may extend the time period for payment up to thirty (30) days without waiving the PACA statutory trust protection. 7 C.F.R. § 46.2(aa)(ll)10 & 7 C.F.R. § 46.46(e)(2). Parties who establish a payment term of thirty (30) days must have a written agreement before entering this transaction and must maintain a copy of this agreement in their records pursuant to 7 C.F.R. § 46.46(e) 11. Moreover, PACA requires that “the times of payment must be disclosed on the invoices, accountings, and other documents relating to the transaction.” 7 C.F.R. § 46.46(e).
PACA was amended in 1995 to allow sellers to preserve their statutory trust benefits on billing statements or invoices by including the language provided *543by 7 U.S.C. § 499e(c)(4)12. However, in-eluding this particular language on the invoices is not enough to preserve the PACA statutory trust benefits. “In order to preserve PACA benefits by including this specified notice, sellers must also (1) be licensed under PACA, 7 U.S.C. § 499e(c)(4); and (2) if the parties have *544expressly agreed in writing to a payment period different than the 10-day period provided by the Regulations, the seller must also include the terms of payment on the invoice” See A.J. Rinella & Co. v. Bartlett (In re Bartlett), 367 B.R. 21, 30 (Bankr.D.Mass.2007); 7 U.S.C. § 499e(c)(3), (4); 7 C.F.R. § 46.46(f)(3)13.
The court notes that all of Trafon’s invoices incorrectly cite to the Packers and Stockyards Act of 1921, as amended, which is 7 U.S.C. § 181 et seq., and not 7 U.S.C. § 18. The language included in the invoices in controversy is the language which the Perishable Agricultural Commodities Act of 1930, as amended, provides to unpaid licensees to preserve the PACA statutory trust pursuant to 7 U.S.C. § 499e(c)(4). PASA does not have a provision similar to the PACA provision, 7 U.S.C. § 499e(c)(4), by which a cash seller must include a particular language in the invoices to preserve the statutory trust. Thus, Trafon’s reliance on the language included in its invoice under PACA is misplaced as to its claim of having a statutory trust under PASA. Moreover, under PACA, 7 U.S.C. § 499e(c)(4) and its pertinent regulations, 7 C.F.R. § 46.46(e) require that for a PACA trust to be perfected, parties that establish a payment term of thirty (30) days must have a written agreement before entering these transactions and must maintain a copy of such agreement and the seller must include the payment terms on the invoice. Consequently, even if the PACA provisions were applicable to the instant case, the statutory trust would not have been perfected because the written agreement entered into by the parties to the transaction has not been provided.
This court finds that the payment term for the invoices in controversy is clearly indicated on each invoice, given that each invoice indicated an invoice date, a payment term of “net 30 days” and the “invoice due” date. The payment term is thirty (30) days from the invoice date and corresponds to the invoice due date, contrary to Trafon’s allegation that the thirty days of the final date for making payment began when Debtor filed Bankruptcy and Trafon was put on notice that they will not receive payment. Thus, the notice mailed to the Secretary was made after the thirty (30) day statutorily required period from the “invoice due” dates of all the invoices. The invoice due dates were from April 26, 2009 to June 12, 2009.
In view of the foregoing, this court concludes that Trafon failed to preserve its alleged statutory trust benefits under PASA, 7 U.S.C. §§ 196(b), 197(d) and 9 C.F.R. § 203.16, because it failed to file a timely written notice to the alleged packer (Debtor) and to the Secretary of the United States Department of Agriculture with*545in the required thirty (30) days of the final payment date included in all the invoices in controversy as the “Invoice Due” date.
Conclusion
The court finds and concludes that the invoices presented to this court with a payment term of “net 30 days” fail to constitute an express extension of credit in conformity with 7 U.S.C. § 228b(b) and 9 C.F.R. § 201.200 because they fail to include the express intention of the parties to enter into a credit agreement and the intention of Trafon to waive the protection of the PASA statutory trust provisions. The court further finds that Trafon failed to preserve its alleged statutory trust benefits pursuant to the PASA provisions, 7 U.S.C. §§ 196(b), 197(d) and 9 C.F.R. § 203.15. Thus, Trafon does not have a statutory trust under 11 U.S.C. § 541(d) which excludes those assets in the trust from the debtor’s estate. The amounts claimed by Trafon in the proof of claim are not subject to a PASA statutory trust.
In view of the foregoing, the Trustee’s motion for summary judgment is hereby GRANTED.
SO ORDERED.
. Section 201 of PASA provides, “[wjhen used in this Act [7 USCA § 181 et seq.] the term *529"packer” means any person engaged in the business (a) of buying livestock in commerce for purposes of slaughter, or (b) manufacturing or preparing meats or meat food products for sale or shipment in commerce, or (c) of marketing meats, meat food products, or livestock products in an unmanufactured form acting as a wholesale broker, dealer, or distributor in commerce.” 7 U.S.C. § 191.
. Section 2 defines "livestock” as, “[t]he term "livestock means cattle, sheep, swine, horses, mules, or goats whether live or dead.” ” 7 U.S.C. § 182(4).
. Section 206 regarding the statutory trust provides,
"(a) Protection of public interest from inadequate financing anangements. It is hereby found that a burden on and obstruction to commerce in livestock is caused by financing arrangements under which packers encumber, give lenders security interest in, or place liens on, livestock purchased by packers in cash sales, or on inventories of or receivables or proceeds from meat, meat food products, or livestock products therefrom, when payment is not made for the livestock and that such arrangements are contrary to the public interest. This section is intended to remedy such burden on and obstruction to commerce in livestock and protect the public interest.
(b) Livestock, inventories, receivables and proceeds held by packer in trust for benefit of unpaid cash sellers; time limitations; exempt packers; effect of dishonored instruments; preseivation of trust benefits by seller. All livestock purchased by a packer in cash sales, and all inventories of, or receivables or proceeds from meat, meat food products, or livestock products derived therefrom, shall be held by such packer in trust for the benefit of all unpaid cash sellers of such livestock until full payment has been received by such unpaid sellers: Provided, That any packer whose average annual purchases do not exceed $500,000 will be *531exempt from the provisions of this section. Payment shall not be considered to have been made if the seller receives a payment instrument which is dishonored: Provided, That the unpaid seller shall lose the benefit of such trust if, in the event that a payment instrument has not been received, within thirty days of the final date for making a payment under section 409 [7 USCA § 228b], or within fifteen business days after the seller has received notice that the payment instrument promptly presented for payment has been dishonored, the seller has not preserved his trust under this subsection. The trust shall be preserved by giving written notice to the packer and by filing such notice with the Secretary.”
(c) Definition of cash sale. For the purpose of this section, a cash sale means a sale in which the seller does not expressly extend credit to the buyer.” 7 U.S.C. § 196.
. Section 409 of PASA provides;
“Prompt payment for purchase of livestock. (a) Full amount of purchase price required; methods of payment. Each packer, market agency, or dealer purchasing livestock shall, before the close of the next business day following the purchase of livestock and transfer of possession thereof, deliver to the seller or his duly authorized representative the full amount of the purchase price: Provided, That each packer, market agency, or dealer purchasing livestock for slaughter shall, before the close of the next business day following purchase of livestock and transfer of possession thereof, actually deliver at the point of transfer of possession to the seller or his duly authorized representative a check or shall wire transfer funds to the seller's account for the full amount of the purchase price; or, in the case of a purchase on a carcass or 'grade and yield’ basis, the purchaser shall make payment by check at the point of transfer of possession or shall wire transfer funds to the seller’s account for the full amount of the purchase price not later than the close of the first business day following determination of the purchase price: Provided further, That if the seller or his duly authorized representative is not present to receive payment at the point of transfer of possession, as herein provided, the packer, market agency or dealer shall wire transfer funds or place a check in the United States mail for the full *537amount of the purchase price, properly addressed to the seller, within the time limits specified in this subsection, such action being deemed compliance with the requirement for prompt payment.” 7 U.S.C. § 228b(a).
. Section 409(b) provides; "Waiver of prompt payment by written agreement; disclosure requirements. Notwithstanding the provisions of subsection (a) of this section and subject to such terms and conditions as the Secretary may prescribe, the parties to the purchase and sale of livestock may expressly agree in writing, before such purchase or sale, to effect payment in a manner other than that required in subsection (a). Any such agreement shall be disclosed in the records of any market agency or dealer selling the livestock, and in the purchaser’s records and on the accounts or other documents issued by the purchaser relating to the transaction.” 7 U.S.C. § 228b(b).
. Section 409(c) provides: "Delay in payment or attempt to delay deemed unfair practice. Any delay or attempt to delay by a market agency, dealer, or packer purchasing livestock, the collection of funds as herein provided, or otherwise for the purpose of or resulting in extending the normal period of payment for such livestock shall be considered an ‘unfair practice’ in violation of this Act [7 USCA § 181 et seq.]. Nothing in this section shall be deemed to limit the meaning of the term 'unfair practice’ as used in this Act [7 USCA § 181 et seq.].
. Section 207 of PASA provides;
"(b) Poultry, inventories, receivables and proceeds held by dealer in trust for benefit of unpaid cash sellers or poultry growers. All poultry obtained by a live poultry dealer, by purchase in cash sales or by poultry growing arrangement, and all inventories of, or receivables or proceeds from such poultry or poultry products derived therefrom, shall be held by such live poultry dealer in trust for the benefit of all unpaid cash sellers or poultry growers of such poultry, until full payment has been received by such unpaid cash sellers or poultry growers, unless such live poultry dealer does not have average annual sales of live poultry, or average annual value of live poultry obtained by purchase or by poultry growing arrangement, in excess of $100,000.” 7 U.S.C. § 197(b). "(c) Effect of dishonored instruments. Payment shall not be considered to have been made if the cash seller or poultry grower receives a payment instrument which is dishonored.” 7 U.S.C. § 197(c).
"(d) Preservation of trust benefit by seller or poultry grower. The unpaid cash seller or poultry grower shall lose the benefit of such trust if, in the event that a payment instrument has not been received, within 30 days of the final date for making payment under section 410 [7 USCA § 228b-l], or within 15 business days after the seller or poultry grower has received notice that the payment instrument promptly presented for payment has been dishonored, the seller or poultry grower has not preserved his trust under this section. The trust shall be preserved by giving written notice to the live poultry dealer and by filing such notice with the Secretary.” 7 U.S.C. § 197(d).
. Section 228b-l of PASA provides;
“Final date for making payment to cash seller or poultry grower.
(a) Delivery of full amount due. Each live poultry dealer obtaining live poultry by purchase in a cash sale shall, before the close of the next business day following the purchase of poultry, and each live poultry dealer obtaining live poultry under a poultry growing arrangement shall, before the close of the fifteenth day following the week in which the poultry is slaughtered, deliver, to the cash seller or poultry grower from whom such live poultry dealer obtains the poultry, the full amount due to such cash seller or poultry grower on account of such poultry.
(b) Delay or attempt to delay collection of funds as “unfair practice.1' Any delay or attempt to delay, by a live poultry dealer which is a party to any such transaction, the collection of funds as herein provided, or otherwise for the purpose of or resulting in extending the normal period of payment for poultry obtained by poultry growing arrangement or purchased in a cash sale, shall be considered an 'unfair practice’ in violation of this Act [7 USCA § 181 et seq.]. Nothing in this section shall be deemed to limit the meaning of the term 'unfair practice' as used in this Act [7 USCA § 181 et seq.].
(c) Definition of cash sale. For the purpose of this section, a cash sale means a sale in which the seller does not expressly extend credit to the buyer.” 7 U.S.C. § 228b-l.
. 7 C.F.R. § 46.2(aa)(5) provides: ''[fjull payment promptly is the term used in the Act in specifying the period of time for making payment without committing a violation of the Act. “Full payment promptly,” for the purpose of determining violations of the Act, means:
(5) Payment for produce purchased by a buyer, within 10 days after the day on which the produce is accepted.” 7 C.F.R. § 46.2(aa)(5).
. 7 C.F.R. § 46.2(aa)(ll) provides in pertinent part: [f)ull payment promptly is the term used in the Act in specifying the period of time for making payment without committing a violation of the Act. “Full payment promptly,” for the purpose of determining violations of the Act, means:
(11) Parties who elect to use different times of payment than those set forth in paragraphs (aa)(l) through (10) of this section must reduce their agreement to writing before entering into the transaction and maintain a copy of the agreement in their records. If they have so agreed, then payment within the agreed upon time shall constitute 'full payment promptly’, Provided, That the party claiming the existence of such an agreement for time of payment shall have the burden of proving it.” 7 C.F.R. § 46.2(aa)(ll).
.7 C.F.R. § 46.46(e) provides: "Prompt payment and eligibility for trust benefits. (1) The times for prompt accounting and prompt payment are set out in § 46.2 (z) and (aa). Parties who elect to use different times for payment must reduce their agreement to writing before entering into the transaction and maintain a copy of their agreement in their records, and the times of payment must be disclosed on invoices, accountings, and other documents relating to the transaction.
(2) The maximum time for payment for a shipment to which a seller, supplier, or agent can agree, prior to the transaction, and still be eligible for benefits under the trust is 30 days after receipt and acceptance of the commodities as defined in § 46.2(dd) and paragraph (a)(1) of this section.
(3) If there is a default in payment as defined in § 46.46(a)(3), the seller, supplier, or agent who has met the eligibility requirements of paragraphs (e)(1) and (2) of this section will not forfeit eligibility under the trust by agreeing in any manner to a schedule for payment of the past due amount or by accepting a partial payment.” 7 C.F.R. § 46.46(e)(1), (2), &(3).
. 7 U.S.C. § 499e(c) provides: "Trust on commodities and sales proceeds for benefit of unpaid suppliers, sellers, or agents; preservation of trust; jurisdiction of courts.
(1) It is hereby found that a burden on commerce in perishable agricultural commodities is caused by financing arrangements under which commission merchants, dealers, or brokers, who have not made payment for perishable agricultural commodities purchased, contracted to be purchased, or otherwise handled by them on behalf of another person, encumber or give lenders a security interest in, such commodities, or on inventories of food or other products derived from such commodities, and any receivables or proceeds from the sale of such commodities or products, and that such arrangements are contrary to the public interest. This subsection is intended to remedy such burden on commerce in perishable agricultural commodities and to protect the public interest.
(2) Perishable agricultural commodities received by a commission merchant, dealer, or broker in all transactions, and all inventories of food or other products derived from perishable agricultural commodities, and any receivables or proceeds from the sale of such commodities or products, shall be held by such commission merchant, dealer, or broker in trust for the benefit of all unpaid suppliers or sellers of such commodities or agents involved in the transaction, until full payment of the sums owing in connection with such transactions has been received by such unpaid suppliers, sellers, or agents. Payment shall not be considered to have been made if the supplier, seller, or agent receives a payment instrument which is dishonored. The provisions of this subsection shall not apply to transactions between a cooperative association, as defined in section 15(a) of the Agricultural Marketing Act (12 U.S.C. 1141j(a)), and its members.
(3) The unpaid supplier, seller, or agent shall lose the benefits of such trust unless such person has given written notice of intent to preserve the benefits of the trust to the commission merchant, dealer, or broker within thirty calendar days (i) after expiration of the time prescribed by which payment must be made, as set forth in regulations issued by the Secretary, (ii) after expiration of such other time by which payment must be made, as the parties have expressly agreed to in writing before entering into the transaction, or (iii) after the time the supplier, seller, or agent has received notice that the payment instrument promptly presented for payment has been dishonored. The written notice to the commission merchant, dealer, or broker shall set forth information in sufficient detail to identify the transaction subject to the trust. When the parties expressly agree to a payment time period different from that established by the Secretary, a copy of any such agreement shall be filed in the records of each party to the transaction and the terms of payment shall be disclosed on invoices, accountings, and other documents relating to the transaction.
(4) In addition to the method of preserving the benefits of the trust specified in paragraph (3), a licensee may use ordinary and usual billing or invoice statements to provide notice of the licensee’s intent to preserve the trust. The bill or invoice statement must include the information required by the last sentence of paragraph (3) and contain on the face of the statement the following:
'The perishable agricultural commodities listed on this invoice are sold subject to the statutory trust authorized by section 5(c) of the Perishable Agricultural Commodities Act, 1930 (7 U.S.C. 499e(c)). The seller of these commodities retains a trust claim over these commodities, all inventories of food or other products derived from these commodities, and any receivables or proceeds from the sale of these commodities until full payment is received.’
(5) The several district courts of the United States are vested with jurisdiction specifically to entertain (i) actions by trust beneficiaries to enforce payment from the trust, and (ii) actions by the Secretary to prevent and restrain dissipation of the trust.” 7 U.S.C. § 499e(c).
. 7 C.F.R. § 46.46(f)(3) provides: "(3) Licensees may choose an alternate method of preserving trust benefits from the requirements described in paragraphs (f)(1) and (2) of this section. Licensees may use their invoice or other billing statement as defined in paragraph (a)(5) of this section, whether in documentary or electronic form, to preserve trust benefits. Alternately, the licensee's invoice or other billing statement, given to the buyer, must contain:
(i) The statement. 'The perishable agricultural commodities listed on this invoice are sold subject to the statutory trust authorized by section 5(c) of the Perishable Agricultural Commodities Act, 1930 (7 U.S.C. 499e(c)). The seller of these commodities retains a trust claim over these commodities, all inventories of food or other products derived from these commodities, and any receivables or proceeds from the sale of these commodities until full payment is received.;’ and
(ii) The terms of payment if they differ from prompt payment set out in section 46.2(z) and (aa) of this part, and the parties have expressly agreed to such terms in writing before the affected transactions occur.” 7 C.F.R. § 46.46(f)(3). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494555/ | MEMORANDUM OF DECISION RE: COMPLAINT FOR DAMAGES PURSUANT TO 11 U.S.C. § 362(k)
LORRAINE MURPHY WEIL, Chief Judge.
The matter before the court is the above-referenced debtor’s (the “Debtor”) Motion [sic] Seeking Relief for Violation of Automatic Stay (ECF No. 1, the “Complaint”).1 The court has jurisdiction over this adversary proceeding as -a core proceeding pursuant to 28 U.S.C. §§ 157(b) and 1334(b) and that certain Order dated September 21, 1984 of the District Court (Daly, J.).2 This memorandum constitutes the findings of fact and conclusions of law required by Rule 7052 of the Federal Rules of Bankruptcy Procedure.
1. FACTS
A. Stipulated Facts
The Debtor and Santander Consumer USA, Inc. (together with its predecessor(s) *548in interest, “Santander”) have stipulated to the following facts. At all times relevant hereto, Santander had a first lien position on the Debtor’s 2006 Dodge Dakota truck (the “Truck”), pursuant to a purchase money loan (the “Loan”). The Debtor’s monthly payments on the Truck were $498.50. As of February 23, 2010, the Debtor was in arrears on the Loan in the amount of $1,582.00. (See ECF No. 28 at 1.)
Santander sent a Notice of Default (the “Letter”) with respect to the Loan to the Debtor’s attorney on February 23, 2010. The Debtor did not bring the Loan current after receipt of the Letter. Santander did not file a Motion for Relief from Stay with respect to the Truck anytime after February 23, 2010. Santander repossessed the Truck on March 23, 2010. The Debtor had personal property (the “Personal Property”) in the Truck at the time it was repossessed. (See ECF No. 28 at 1.)
Santander sent a Notice of Sale to the Debtor on March 23, 2010. Santander sold the Truck in satisfaction3 of the Loan sometime subsequent to March 23, 2010. The Debtor indicated an intent to reaffirm the debt in his Statement of Intention (see Debtor Exh. A, the “Statement of Intention”). Neither party sent the other a proposed reaffirmation agreement at any time relevant hereto. The Debtor did not redeem or surrender the Truck. (See ECF No. 28 at 1-2.)
B. Other Facts
The petition (Case ECF No. 1, the “Petition”) was filed on June 12, 2009. The Loan was not in payment default as of the filing of the Petition. (See ECF No. 29 at 14:3-9 (Debtor’s testimony).) In fact, as of the filing of the Petition, there was a credit (the “Credit”) in the Debtor’s favor in respect of the Loan in the neighborhood of about $2,000.00. (See id. at 36:3-12, 37:3-6 (remarks of Santander’s counsel).) The record does not explain how the Credit arose. The Debtor did not list the Credit as an asset in his bankruptcy schedules. (See Case ECF Nos. 1,115.)
The Statement of Intention did not specify the terms upon which the Debtor proposed to reaffirm the Loan obligation. (See Debtor Exh. A.) The Debtor made no postpetition payments on the Loan but, rather, relied upon the Credit until it was exhausted by Santander’s charges against it in respect of subsequent monthly Loan payments.4 (See ECF No. 29 at 35:22-36:16 (remarks of Santander’s counsel).) The Debtor and Santander did not communicate with each other respecting reaffirmation of the Loan obligation. (See ECF No. 29 at 8:11-14 (Debtor’s testimony); id. at 18:8-17 (statement of Debtor’s counsel).) Santander did not take action with respect to the Truck until issuance of the Letter because Santander believed that it had no state-law right to repossess the Truck until charges for postpetition Loan payments had exhausted the Credit. (See id. at 36:22-37:2 (statement of Santander’s counsel).)5
The Letter (addressed to the Debtor’s counsel apparently from Santander “in *549house”) provided in relevant part as follows:
Let this serve as notice that your client has defaulted on their [sic] direct payments regarding the above referenced account. If the entire past due balance of 1582.00 is not received within 10 days from the date of this letter a Motion to Lift Stay will be filed with the court.
(Debtor Exh. B.) At the Trial (as hereafter defined), the Debtor testified as to his reaction to the Letter and his resulting alleged damages. (See ECF No. 29 at 9:1—12:24 (Debtor’s testimony).)
The notice to creditors issued in this chapter 7 case directed creditors not to file proofs of claim unless subsequently directed to do so. (See Case ECF Nos. 8, 9.) Upon the request of the chapter 7 trustee (the “Trustee”), the Clerk’s Office gave such direction by notice (the “Notice”) dated December 29, 2009. (See Case ECF Nos. 31, 32, 36.) The Notice required that proof of claims be filed on or before March 29, 2000 (the “Bar Date”). (See Case ECF No. 32.) Santander did not file a proof of claim with respect to the Loan in this case either before or after the Bar Date. (See Case Claims Register.) Discharge has not entered yet in this chapter 7 case. (See Case Docket.)
II. THE COMPLAINT AND ANSWER
The Complaint was filed by the Debtor on March 30, 2010. (See ECF No. 1.) The Complaint alleges that Santander committed a willful violation of the automatic stay when it repossessed the Truck without first obtaining relief from stay. The Complaint admits that Santander claims that the stay terminated because the Debtor failed to comply with the Timely Action Clause (as hereafter defined) of 11 U.S.C. § 362(h)(1)(B). However, the Complaint alleges that the Debtor complied with its duties under the Unless Clause (as hereafter defined) of 11 U.S.C. § 362(h)(1)(B) and Santander “refuse[d]” to agree to reaffirmation of the Loan debt on the original contract terms within the purview of Section 362(h)(1)(B). Accordingly, the Complaint alleges, the automatic stay did not terminate pursuant to Section 362(h)(1)(B). The Complaint also asserts the Letter as an equitable estoppel because Santander allegedly “falsely misrepresented its intentions with regards to seeking relief from the stay and the ... [Debtor] reasonably relied upon said statement to his detriment,” (ECF No. 1 ¶ 9). The Complaint seeks actual damages, costs, attorney’s fees, punitive damages and return of the Truck.6
Santander filed its answer to the Complaint on October 25, 2010. (See ECF No. 18, the “Answer”.) The Answer alleges that the automatic stay terminated with respect to the Truck prior to Santander’s repossession because the Debtor failed to comply with its obligations under the Timely Action Clause and failed to satisfy the Unless Clause. The Answer also raises 11 U.S.C. § 521(a)(6) as an affirmative defense. The Answer set forth certain other affirmative defenses. (See ECF No. 18.) The court does not find it necessary to reach or otherwise discuss those other affirmative defenses herein.
A trial (the “Trial”) on the Complaint was held on March 14, 2011. The Debtor testified at the Trial and introduced documentary evidence into the record. References to such exhibits herein are in the following form: “Debtor Exh.-.” No witnesses testified for Santander and San-tander introduced no documentary evidence into the record. A transcript of the Trial appears in the record as ECF No. 29. The parties elected not to file briefs in this *550proceeding but, rather, rested on their respective oral arguments made at the conclusion of the Trial. The court has considered the arguments of counsel and the entire record of this case and adversary proceeding and the matter now is ripe for decision.
III. APPLICABLE LAW
A. 11 U.S.C. § 362(a)
Bankruptcy Code § 362(a) provides in relevant part as follows:
[A]petition filed under section 301 ... of this title ... operates as a stay, applicable to all entities, of—
(5) any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this title; [and]
(6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title....
11 U.S.C.A. § 362(a) (West 2011).
B. 11 U.S.C. § 521
Bankruptcy Code § 521 provides in relevant part as follows:
(a) The debtor shall—
(2) if an individual debtor’s schedule of assets and liabilities includes debts which are secured by property of the estate—
(A) within thirty days after the date of the filing of a petition under chapter 7 of this title or on or before the date of the meeting of creditors, whichever is earlier, or within such additional time as the court, for cause, within such period fixes, the debtor shall file with the clerk a statement of his intention with respect to the retention or surrender of such property and, if applicable, specifying that such property is claimed as exempt, that the debtor intends to redeem such property, or that the debtor intends to reaffirm debts secured by such property;
(B) within 30 days after the first date set for the meeting of creditors under section 341(a), or within such additional time as the court, for cause, within such 30-day period fixes, the debtor shall perform his intention with respect to such property, as specified by subparagraph (A) of this paragraph; and
(C) nothing in subparagraphs (A) and (B) of this paragraph shall alter the debtor’s or the trustee’s rights with regard to such property under this title, except as provided in section 362(h);
(6) in a case under chapter 7 of this title in which the debtor is an individual, not retain possession of personal property as to which a creditor has an allowed claim for the purchase price secured in whole or in part by an interest in such personal property unless the debtor, not later than 45 days after the first meeting of creditors under section 341(a), either—
(A) enters into an agreement with the creditor pursuant to section 524(c) with respect to the claim secured by such property; or
(B) redeems such property from the security interest pursuant to section 722....
If the debtor fails to so act within the 45-day period referred to in paragraph (6), the stay under section 362(a) is terminated with respect to the personal property of the estate or of the debtor *551which is affected, such property shall no longer be property of the estate, and the creditor may take whatever action as to such property as is permitted by applicable nonbankruptcy law, unless the court determines on the motion of the trustee filed before the expiration of such 45-day period, and after notice and a hearing, that such property is of consequential value or benefit to the estate, orders appropriate adequate protection of the creditor’s interest, and orders the debtor to deliver any collateral in the debtor’s possession to the trustee.
(d) If the debtor fails timely to take the action specified in subsection (a)(6) of this section, or in paragraphs (1) and (2) of section 362(h), with respect to property which a lessor or bailor owns and has leased, rented, or bailed to the debtor or as to which a creditor holds a security interest not otherwise voidable under section 522(f), 544, 545, 547, 548, or 549, nothing in this title shall prevent or limit the operation of a provision in the underlying lease or agreement that has the effect of placing the debtor in default under such lease or agreement by reason of the occurrence, pendency, or existence of a proceeding under this title or the insolvency of the debtor. Nothing in this subsection shall be deemed to justify limiting such a provision in any other circumstance.
11 U.S.C.A. § 521 (West 2011). “Courts that have interpreted section 521(a)(6) have focused on the meaning and effect of ‘allowed claim’ and ‘purchase price’ and have reached different conclusions regarding their meaning.” Dumont v. Ford Motor Credit Co. (In re Dumont), 383 B.R. 481, 487 (9th Cir. BAP 2008), aff'd, 581 F.3d 1104 (9th Cir.2009) (footnotes omitted).
C. 11 U.S.C. § 362(h)
Bankruptcy Code § 362(h)7 provides in relevant part:
(1) In a case in which the debtor is an individual, the stay provided by subsection (a) is terminated with respect to personal property of the estate or of the debtor securing in whole or in part a claim, or subject to an unexpired lease, and such personal property shall no longer be property of the estate if the debtor fails within the applicable time set by section 521(a)(2)—
(A) to file timely any statement of intention required under section 521(a)(2) with respect to such personal property or to indicate in such statement that the debtor will either surrender such personal property or retain it and, if retaining such personal property, either redeem such personal property pursuant to section 722, enter into an agreement of the kind specified in section 524(c) applicable to the debt secured by such personal property, or assume such unexpired lease pursuant to section 365(p) if the trustee does not do so, as applicable; and
(B) to take timely the action specified in such statement, as it may be amended before expiration of the period for taking action [the “Timely Action Clause”], unless such statement specifies the debtor’s intention to reaffirm such debt on the original contract terms and the creditor refuses to agree to the reaffirmation on such terms [the “Unless Clause”].
(2) Paragraph (1) does not apply if the court determines, on the motion of *552the trustee filed before the expiration of the applicable time set by section 521(a)(2), after notice and a hearing, that such personal property is of consequential value or benefit to the estate, and orders appropriate adequate protection of the creditor’s interest, and orders the debtor to deliver any collateral in the debtor’s possession to the trustee. If the court does not so determine, the stay provided by subsection (a) shall terminate upon the conclusion of the hearing on the motion.
11 U.S.C.A. § 362(h) (West 2011).8
The Unless Clause itself has two separate requirements: The first requirement is that the Statement of Intention “speciffy] the debtor’s intention to reaffirm such debt on the original contract terms” (11 U.S.C. § 362(h)(1)(B), the “Specificity Requirement”). The second requirement is that “the creditor refusefd] to agree to the reaffirmation on such terms” {id., the “Refusal Requirement”). Both the Specificity Requirement and the Refusal Requirement must be satisfied for the Unless Clause to be satisfied.
If the Timely Action Clause is satisfied, the automatic stay remains in place. See 11 U.S.C. § 362(h)(1)(B). Even if the Timely Action Clause is not satisfied, the automatic stay remains in place if the Unless Clause is satisfied. See id. The Creditor has the burden of proof by a preponderance of the evidence with respect to the debtor’s failure to satisfy the Timely Action Clause. See Speth v. 21st Mortg. Corp. (In re Nulik), No. 08-5257, 2010 WL 5114734 (Bankr.D.Kan. Dec.8, 2010). However, if the creditor successfully carries its burden that the debtor failed to satisfy the Timely Action Clause, then the burden of proof passes back to the debtor to prove satisfaction of the Unless Clause. Cf., e.g., Hill v. Smith, 260 U.S. 592, 595, 43 S.Ct. 219, 67 L.Ed. 419 (1923) (burden of proof in “exception to an exception” context; decided in dischargeability context); Jodoin v. Samayoa (In re Jodoin), 209 B.R. 132 (9th Cir. BAP 1997) (same).
D. 11 U.S.C. § 362(k)
Bankruptcy Code § 362(k) provides in relevant part as follows:
(1) Except as provided in paragraph (2), an individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.
(2) If such violation is based on an action taken by an entity in the good faith belief that subsection (h) applies to the debtor, the recovery under paragraph (1) of this subsection against such entity shall be limited to actual damages.
11 U.S.C.A. § 362(k) (West 2011).
Section 362(k)
does not impose damages for any violation of the automatic stay, but only those that are within its statutory definition, i.e., “deliberate” actions that are “willful”. § 362(h);[9] see also Crysen/Montenay Energy Co. v. Esselen Assoc., Inc., 902 F.2d 1098, 1105 (2d Cir.1990); Salem v. Paroli 260 B.R. 246, 257 (S.D.N.Y.2001), aff'd, 79 Fed.Appx. 455, 456, 2003 WL 22440245 (2d Cir.2003) (applying Crysen, supra, 902 F.2d at *5531104) (“although we find that there was a violation of the automatic stay, we find neither willfulness nor malice in that action, and affirm [the] Judge[’s] order [dismissing the adversary proceeding]”). Thus, the focus of this controversy is narrowed to whether, as Crysen holds, there was a “deliberate act taken ... in violation of a stay, which [the creditor] kn[ew] to be in existence [that] justifies an award of actual damages”. Crysen, supra, 902 F.2d at 1105.
James v. Silver Ridge Condo. Ass’n, Inc. (In re James), 367 B.R. 259, 262 (Bankr.D.Conn.2007) (Shiff, J.) (fifth and sixth alteration added).
If an individual is injured by a willful violation of the automatic stay, he is entitled to “actual damages, including costs and attorneys’ fees, and, in appropriate circumstances ... punitive damages,” 11 U.S.C.A. § 362(k) (West).
When damages are sought under § 362 ... [ (k) ] for violation of the automatic stay, the party seeking damages bears the burden of proof. Lamar v. Mitsubishi Motors Credit of Am., Inc. (In re Lamar), 249 B.R. 822, 825 (Bankr.S.D.Ga.2000).... If the willful violation has a de minimis impact on the debtor, a court may limit damage awards under § 362 ... [ (k) ] to reasonable attorney fees expended. See In re Burrell 1998 WL 411287 (Bankr.E.D.Va.1998) at *6.
Punitive damages are authorized under § 362 ... [ (k) ], but only in “appropriate circumstances.” ... In re Ketelsen, 880 F.2d 990, 993 (8th Cir.1989).
Roche v. Pep Boys, Inc. (In re Roche), 361 B.R. 615, 624 (Bankr.N.D.Ga.2005) (alterations added). The general rule is that a debtor must show that she has suffered actual damages in order to recover punitive damages. See, e.g., In re Prusan, No. 09-49716-CEC, 2010 WL 813778, at *3 (Bankr.E.D.N.Y. Mar. 2, 2010); In re Pulver-Thomas, No. 04-10835, 2005 WL 1595727, at *1 (Bankr.D.Vt. July 1, 2005).10 However, if the violation manifested an arrogant defiance of federal law, courts have assessed punitive damages without regard to any harm suffered by the debtor at least under certain circumstances. See In re Roche, supra at 624 (so noting).
E. Equitable Estoppel
When a claim of equitable estop-pel is made with respect to a federal statute, federal law principles of equitable es-toppel apply. See, e.g., Wall v. Constr. & Gen. Laborers’ Union, Local 230, 224 F.3d 168, 175-76 (2d Cir.2000). The United States Court of Appeals for the Second Circuit has articulated the following principles governing the federal law of equitable estoppel:
The doctrine of equitable estoppel is properly invoked where the enforcement of the rights of one party would work an injustice upon the other party due to the latter’s justifiable reliance upon the former’s words or conduct. See In re Ionosphere Clubs, Inc., 85 F.3d 992, 999 (2d Cir.1996). Under federal law, a party may be estopped from pursuing a claim or defense where: 1) the party to be estopped makes a misrepresentation of fact to the other party with reason to believe that the other party will rely upon it; 2) and the other party reasonably relies upon it; 3) to her detriment. See Heckler v. Community Health Services of Crawford County, Inc., 467 U.S. 51, 59, 104 S.Ct. 2218, 2223, 81 L.Ed.2d *55442 (1984) (citing Restatement (Second) of Torts § 894 (1979)); Buttry v. Gen. Signal Corp., 68 F.3d 1488, 1493 (2d Cir.1995). Whether equitable estoppel applies in a given case is ultimately a question of fact. Bennett v. United States Lines, Inc., 64 F.3d 62, 65 (2d Cir.1995).
Kosakow v. New Rochelle Radiology Assocs., P.C., 274 F.3d 706, 725 (2d Cir.2001). The burden of providing every element of an estoppel is upon the party seeking to set up the estoppel. See Commissioner v. Union Pac. R.R. Co., 86 F.2d 637, 640 (2d Cir.1936).
IV. ANALYSIS
A. Section 362(h)(1)
The Debtor argued at the Trial that the automatic stay applied to the Truck at the time Santander repossessed it because the Debtor had satisfied the Timely Action Clause. Alternatively, the Debtor argued that, even if the Timely Action Clause was not satisfied, the Automatic Stay continued to apply to the Truck because both the Specificity Requirement and the Refusal Requirement had been satisfied. As explained below, the court finds and/or concludes that the Debtor did not comply with either the Timely Action Clause or with the Specificity Requirement. (Accordingly, it is unnecessary for the court to reach the issue of the Refusal Requirement.) The Debtor’s estoppel argument is considered separately below.
1. The Timely Action Clause
It is undisputed that Santander repossessed the Truck without first obtaining relief from stay. That establishes a prima facie case of violation of the automatic stay and, as discussed above, shifts the burden of proof with respect to inapplicability of the automatic stay to Santander. Santander alleges that, as of the time it repossessed the Truck, the automatic stay did not apply to the Truck pursuant to Bankruptcy Code §§ 362(h)(1)(B) and/or 521(a)(6).
It is undisputed that neither party submitted a proposed reaffirmation agreement to the other. The Debtor asserts that it is the creditor’s duty to prepare a proposed reaffirmation agreement and submit it to the debtor. There is some support for that proposition. See Pacific Capital Bancorp, v. Schwass (In re Schwass), 378 B.R. 859, 861 (Bankr.S.D.Cal.2007) (“[I]t appears clear to the Court from a review of the requirements of § 524(c) and (k) that the responsibility for preparing the agreement falls on the secured creditor.”).11 Reasoning from the foregoing, the Debtor argues that, once a debtor satisfies Section 362(h)(1)(A) (the satisfaction of which is uncontested here), he satisfies the “Timely Action Clause” even if he takes no further action but simply waits for the secured creditor to forward (or at least propose) a reaffirmation agreement. For the reasons set forth below, the court rejects that position.
Section 521(a)(2)(A) requires the debtor timely to “file with the clerk a statement of his intention with respect to the retention or surrender of ... [certain of his] property.” Section 521(a)(2)(B) further requires the debtor timely to “perform his intention with respect to such property.” Similarly, Section 362(h)(1)(A) requires the debtor “to file timely any statement of intention required under section 521(a)(2).” Section 362(h)(1)(B) further requires the debtor “to take timely the action specified in such statement.” Taken together, all the foregoing statutory language requires the debtor to take at least some action beyond *555filing his Statement of Intention to satisfy the Timely Action Clause. Admittedly, no such action was taken here. Moreover, the court finds and/or concludes that the existence of the Credit and Santander’s postpetition charges against it do not constitute the requisite action by the Debtor, at least on these facts.
Even if the secured creditor has the duty to prepare/propose the reaffirmation agreement (which the court assumes here but does not decide), that has no relation to satisfaction of the Timely Action Clause. Accord In re Cowgill, No. 08-60285, 2008 WL 4487669 (Bankr.N.D.Ohio Sept.26, 2008).12 Accordingly, unless the Debtor’s estoppel argument changes the result, Santander has established that the Debtor has not satisfied the Timely Action Clause.13
2. The Unless Clause
A court has the duty “to give effect, if possible, to every ... word of a statute....” United States v. Menasche, 348 U.S. 528, 538-39, 75 S.Ct. 513, 99 L.Ed. 615 (1955) (internal quotation marks omitted). Accordingly, the word “specifies” has to have some function in Section 362(h)(1)(B). As noted above, the Statement of Intention did not, on its face, specifically propose to reaffirm the Loan obligation on its original contract terms, nor does the record disclose a timely amendment so doing. At the Trial, counsel for the Debtor argued that the form for the Statement of Intention does not readily adapt to the Specificity Requirement (see ECF No. 29 at 43:7-14 (statement of Debtor’s counsel).) The short answer is that BAPCPA governs the forms; the forms do not govern BAPCPA. Moreover, a Statement of Intention complying with the Specificity Requirement can be prepared in conventional format and then “scanned” into “pdf’ format and electronically filed with the court. Moreover, even if by no other means, the Specificity Requirement may be satisfied by a timely amendment to the Statement of Intention. See Cowgill, 2008 WL 4487669, at *4 (“Thus, in the absence of a filed reaffirmation agreement, a debtor can avoid the termination of the stay by amending the statement of intention to indicate his willingness [to reaffirm the debt on the original contract terms].”). Finally, even if the court were to assume that some timely action by the debtor could be deemed to be an informal amendment to his Statement of Intention sufficient to satisfy the Specificity Requirement (a question the court leaves for another day), the result here would not change. That is because the court finds and/or concludes that the Debt- or’s course of conduct here (including permitting Santander to make the postpetition charges against the Credit) was too ambiguous to be deemed to satisfy the Specificity Requirement even under that theory.
B. Section 521(a)(6)
In light of the court’s decision (subject to the equitable estoppel issue discussed below) for Santander on the Section 362(h)(1)(B) issue, it is unnecessary for the court to consider Santander’s Section 521(a)(6) argument.
C. Equitable Estoppel
With respect to “misrepresentation,” Santander took action (ie., repossession without relief from stay) inconsistent with the Letter (which stated a present intent to seek relief from stay). That establishes a prima facie case that the Letter misrepresented Santander’s *556present intention to seek relief from stay, shifting the burden of production on the issue to Santander. Santander presented no evidence to establish why it did not file a motion for relief from stay.14 Accordingly, the Debtor has proved the “misrepresentation” element of estoppel.
With respect to the Debtor’s reliance, except with respect to the Personal Property the record does not support the Debtor. With respect to loss of use of the Truck, at the Trial counsel for the Debtor suggested that the Debtor would have asserted an “extrinsic” defense to any motion by Santander for relief from stay. (See ECF No. 29 at 42:17-43:3 (remarks of Debtor’s counsel).) However, counsel did not elaborate and, in any event and as noted above, statements of counsel are not evidence. The Debtor also suggested some other possibly relevant items of damage (ie., taxes and insurance), but did not prove them up. (See id. at 11:24-12:1 (testimony of the Debtor).) However, it is a fair inference from the record that, had the Debtor known that the Truck was going to be repossessed without legal process, he would have removed the Personal Property from the Truck. Moreover, such reliance was reasonable under the circumstances and Santander had reason to anticipate that the Debtor would not clean the Truck out until relief from stay was granted. Accordingly, the Debtor has established both Santander’s “reason to believe” and the Debtor’s “reasonable] reli[ance].” The Debtor’s loss of the Personal Property satisfies the “detriment” requirement.15
At the Trial, the Debtor testified that the Personal Property had a value of “a few hundred dollars,” (ECF No. 29 at 11:13-14) (Debtor’s testimony). “A few” means at least more than one. (See The American Heritage College Dictionary 505 (3d ed. 1997) (defining “few” as “[b]eing more than one but indefinitely small in number.”)) Accordingly, the court finds that the Debtor suffered damages with respect to the Personal Property in the amount of $200.00.
D. Attorney’s Fees as an Element of Damages/Punitive Damages
The Debtor has failed to prove up attorney’s fees as an element of Section 362(k) “actual damages.” Accordingly, even if the Debtor were otherwise entitled to that element of damages (an issue which the court reserves for another day), the Debt- or has not proved such an entitlement here. Moreover, the court does not deem this to be a proper case for Section 362(k) punitive damages.
V. CONCLUSION
For the reasons set forth above, the court finds and/or concludes that the automatic stay had ceased to be applicable to *557the Truck prior to the time Santander repossessed it and that no violation of the stay occurred as a result of such repossession. The court also finds and/or concludes that the Debtor’s estoppel claim is availing only with respect to the Personal Property. The court finds that the value of the Personal Property as of the date of Truck repossession was $200.00. Further, the court finds and/or concludes that the Debtor has failed to prove up attorney’s fees as an element of damages and that an award of punitive damages is not appropriate here. Accordingly, judgment shall issue for the Debtor in the amount of $200.00. Counsel for the Debtor shall file and serve on counsel for Santander an itemized application for statutory costs on or before May 16, 2011. Objection to such application, if any, must be filed on or before May 30, 2011.
It is SO ORDERED.
. References herein to the docket of this adversary proceeding appear in the following form: "ECF No.-References herein to the docket of the above-referenced chapter 7 case appear in the following form: "Case ECF No.-."
. That order referred to the "Bankruptcy Judges for this District” "all cases under Title 11, U.S.C., and all proceedings arising under Title 11, U.S.C., or arising in or related to a case under Title 11, U.S.C.”
. The record does not disclose whether such "satisfaction” was a full or partial satisfaction.
. Neither party questions the propriety of the foregoing course of conduct and neither will the court.
.A creditor’s rights under 11 U.S.C. § 362(h) and a creditor's inability to repossess collateral when the debtor is not in payment default are two different issues. Cf. In re Visnicky, 401 B.R. 61 (Bankr.D.R.I. 2009) (termination of stay pursuant to Section 521(a)(6) did not automatically mean that the secured creditor was entitled to repossess the collateral).
. The Debtor has not pursued his demand for return of the Truck.
. Current Section 362(h) was added to the Bankruptcy Code by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA”).
. The Trustee took no such action in this case. For purposes of simplicity, the court treats Sections 362(h) and 521(a) as applying only to proposed reaffirmations (rather than also applying to proposed surrenders and redemp-tions).
. Subsection (h) of Section 362 was redesig-nated as subsection (k) by the BAPCPA.
. Courts are in disagreement as to whether attorneys’ fees incurred in prosecuting the Section 362(k) motion are included in “actual damages.” Compare Sternberg v. Johnston, 595 F.3d 937 (9th Cir.), cert. denied,-U.S. -, 131 S.Ct. 102, 180, 178 L.Ed.2d 29, 42 (2010) (not included) with In re Grine, 439 B.R. 461 (Bankr.N.D.Ohio 2010) (included).
. Because it makes no difference to the result here, the court assumes (but does not decide) that the Schwass rule on that point is correct.
. The court does not reach the issue of whether the secured creditor’s failure to prepare/propose the reaffirmation agreement would satisfy the Refusal Requirement.
. Accordingly, it is unnecessary for the court to consider Santander’s argument that only a debtor’s entry into a relevant reaffirmation agreement satisfies the Timely Action Clause.
. Santander’s counsel suggested at the Trial that the Letter accurately represented Santan-der’s then present intent but that Santander later changed its mind. (See ECF No. 29 at 39:4-10 (remarks of Santander’s counsel).) However, statements of counsel are not evidence (unless they constitute an admission). See, e.g., In re Anthem Communities/RGB, LLC, 267 B.R. 867, 873 (Bankr.D.Colo.2001) (citing cases).
. At the Trial, counsel for Santander suggested that the Debtor had failed to mitigate his damages as to the Personal Property. (See ECF No. 29 at 40:13-41:1 (remarks of San-tander’s counsel).) However, failure to mitigate is an affirmative defense on which San-tander would bear the burden of pleading. See Gupta v. City of Norwalk, No. 3:98CV2153 (AWT), 2007 WL 988692, at *4 n. 1 (D.Conn. Mar.31, 2007) ("Failure to mitigate damages is an affirmative defense and therefore must be pleaded.” (internal quotation marks omitted)). The Answer did not plead failure to mitigate as an affirmative defense. Moreover, at the Trial Santander failed to produce any evidence to support its counsel's statements with respect to failure to mitigate. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494557/ | MEMORANDUM OF OPINION
ALLAN L. GROPPER, Bankruptcy Judge.
Introduction
This decision represents another chapter in the adversary proceeding between debtors Tronox Incorporated and its affiliates1 *609and defendant Anadarko Petroleum Corporation,2 arising out of a spin-off that allegedly led to the bankruptcy of Tronox. Before the Court are competing motions for partial summary judgment as to an alleged cap on the damages that Tronox will be entitled to recover if it succeeds in establishing that the transfer of the assets in the spin-off was an intentional or constructive fraudulent conveyance under 11 U.S.C. § 548 or under 11 U.S.C. § 544(b), which allows an estate representative to assert rights under state law if there remains one unsecured creditor with such rights.3
Anadarko has moved for a ruling that § 550 of the Bankruptcy Code caps Tro-nox’s recovery on its fraudulent transfer claims at the amount of “unpaid creditor claims” in the case; Tronox has moved for a ruling that § 550 imposes no such cap.4 For the reasons that follow, Anadarko’s motion will be denied and Tronox’s opposing motion will be granted, but only in part.
Background
The factual background of this proceeding is set forth in the court’s prior decisions on the defendants’ motions to dismiss. See Tronox Inc. v. Anadarko Petroleum Corp. (In re Tronox Inc.), 429 B.R. 73 (Bankr.S.D.N.Y.2010); Tronox Inc. v. Anadarko Petroleum Corp. (In re Tronox Inc.), 450 B.R. 432 (Bankr.S.D.N.Y.2011). In brief, Tronox filed for chapter 11 relief on January 12, 2009 (the “Petition Date”). The second amended complaint (the “Complaint”) in the instant adversary proceeding alleges that through a multi-stage transaction completed in 2005, Tronox’s predecessor segregated valuable oil and gas exploration and production assets from billions of dollars of environmental, tort, and other liabilities. The Complaint claims that the subsequent spinoff of the “cleansed” oil and gas assets (which were acquired by Anadarko) was an intentional or constructive fraudulent conveyance, which left Tronox insolvent and undercapitalized, beset by massive legacy liabilities.5
*610In the course of Tronox’s chapter 11 proceedings, environmental and tort creditors filed proofs of claim for unliquidated amounts but where quantified totaled more than $6.9 billion. Disclosure Statement, Case No. 09-10156, Dkt. No. 2196, Ex. B at 30. Tronox also had secured debt of $212.8 million under prepetition facilities and unsecured debt estimated at $445.6 million. Id. at 10, 23. The secured debt was refinanced during the chapter 11 case, and was ultimately converted into exit financing. Id. at 23. After months of negotiation, Tronox reached a settlement with the unsecured creditors and environmental and tort creditors that formed the basis of its second amended plan. Id. at 2. The environmental and tort creditors agreed to satisfaction of their claims against Tronox in return for all proceeds from this adversary proceeding against Anadarko, as well certain cash consideration. Id. at 40-42; Plan of Reorganization, Case No. 09-10156, Dkt. No. 2567, Ex. A at Art. IV.C.2, C.4. The agreement of the environmental and tort plaintiffs to take the bulk of their possible recovery in the form of a lawsuit whose outcome was (and is) uncertain made it possible for the debtors to distribute to their other unsecured creditors (the “General Unsecured Creditors”) all of the stock of the reorganized companies, now cleansed of legacy liabilities. The Disclosure Statement estimated that this would provide General Unsecured Creditors with a recovery of 58-78% on their claims. Disclosure Statement at 10 n. 9.6
This settlement agreement formed the “cornerstone” of Tronox’s proposed plan of reorganization. Confirmation Order, Case No. 09-10156, Dkt. No. 2567, at ¶ 37. This Court approved the settlement and confirmed Tronox’s plan on November 30, 2010. Id. at 86. The Plan created a litigation trust to pursue the claims in this adversary proceeding, and although the rights of Tronox are asserted, the environmental and tort creditors are the real parties in interest as plaintiffs, and several appeared through counsel at the hearing on these motions. Anadarko was an active party in interest throughout Tronox’s chapter 11 proceedings and although it did not object to the settlement or confirmation of the Plan, it obtained a provision in the Confirmation Order regarding its rights in this adversary proceeding. The Confirmation Order provides:
All parties reserve the right to make any available arguments, and assert any available claims and available defenses concerning the effect, if any, of the Plan Documents on the determination of liability or measure of damages (including, to the extent relevant, the value of the Tort Claims and the Environmental Claims) in the Anadarko Litigation, including under section 550 of the Bankruptcy Code.
Id. at ¶ 191.7 The Plan also provides that if Anadarko is found liable for a fraudulent *611transfer, any claim under § 502(h) to which it may be entitled can be applied as a direct offset against its liability.8 Plan of Reorganization at Art. III.D.
Now, more than a year after confirmation, the adversary proceeding has proceeded through two motions to dismiss and the completion of discovery. With trial set to begin in May, the parties seek to narrow the issues through cross-motions for partial summary judgment on a limited issue relating to damages. Anadarko asserts that a clause in § 550(a) of the Bankruptcy Code, “for the benefit of the estate,” caps Tronox’s recovery at the amount of unpaid creditor claims and requires an accounting at trial of the amounts that the tort and environmental creditors are owed—or were owed on the Petition Date. Tronox, on the other hand, asserts that the plain language of § 550 and relevant case law impose no such ceiling on its potential recovery.
The amounts at stake are possibly enormous but at this point wholly uncertain. Anadarko asserts that Tronox’s attempted recovery is $15.5 billion—a number that Tronox does not reject—but this amount seems to be based on the gross value of the assets transferred out in 2005 increased to at least the Petition Date and possibly to the present. See Anadarko Opposition at 2; Transcript of Hearing held on 11/29/2011, Case No. 09-01198, Dkt. No. 292, at 26 In. 19—27 In. 3. Ana-darko claims that Tronox seeks a “windfall” of $14 billion by using excerpts from the reports of Tronox’s expert witnesses at trial (if called and qualified) to assert that Tronox’s own experts “concede” that environmental and tort claims as of 2005 were worth no more than $2 billion, a number to be reduced by the roughly $.5 billion already distributed on these claims. Ana-darko Opposition at 2.9 Anadarko cites no authority that it can use excerpts from expert reports that have not been introduced into evidence as an admission of a party, and in the Disclosure Statement Tronox valued the tort and environmental claims in the case as between $1.9-$6.2 billion. Disclosure Statement at 11. The most that can be said at this stage of the litigation is that the value of the oil and gas assets spun off may exceed the unpaid claims of the tort and environmental creditors.
Discussion
Tronox is correct that the “for the benefit of the estate” clause in § 550(a) will not limit its recovery on its fraudulent transfer claims at trial. Once an avoidance action creates some benefit for creditors—as this action already has—§ 550(a) is satisfied and any limits to recovery must be found *612elsewhere in the law. On the other hand, Tronox overstates its case when it asserts that there are no limits on the recovery of a plaintiff in a case such as this other than the value of the fraudulently transferred property. In this case, the appropriate measure of damages, if any, can only be determined after trial of all relevant issues.
A. Legal Standard
Under Rule 56 of the Federal Rules of Civil Procedure (made applicable by Bankruptcy Rule 7056), a party may move for summary judgment “upon all or any part ” of a claim at issue. Fed.R.Civ.P. 56(a), 56(b) (emphasis supplied). A motion for partial summary judgment seeks a pretrial adjudication that certain issues shall be deemed established for the trial of the case. Alberty-Velez v. Corporacion de Puerto Rico, 361 F.3d 1, 6 n. 5 (1st Cir.2004); In re Ciprofloxacin Hydrochloride Antitrust Litigation, 261 F.Supp.2d 188, 231 (E.D.N.Y.2003). Although motions for partial summary judgment are generally disfavored, such motions are permitted where they are conducive to conservation of judicial resources and are of benefit to the parties. Bruschini v. Board of Educ., 911 F.Supp. 104, 106 (S.D.N.Y.1995). Consistent with this purpose, courts have entertained and decided motions for partial summary judgment on the question of damages to narrow the issues before trial. Jewell-Rung Agency, Inc. v. Haddad Org., Ltd., 814 F.Supp. 337, 339-40 (S.D.N.Y.1993) (citing cases); see, e.g., Academic Indus., Inc. v. Untermeyer Mace Partners, Ltd., 1992 WL 73473 (S.D.N.Y. Apr. 1, 1992) (denying on the merits a partial summary judgment motion to limit potential damages to out-of-pocket expenditures); Poultry Health Serv., Inc. v. Moxley, 538 F.Supp. 276 (S.D.Ga.1982) (granting in part and denying in part plaintiffs motion for partial summary judgment on the issue of damages). On the other hand, the resolution of an issue may be so dependent on the facts to be proved at trial that it may be impossible or improvident to attempt to resolve it on a motion for summary judgment. Powell v. Radkins, 506 F.2d 763, 765 (5th Cir.1975), cert. denied, 423 U.S. 873, 96 S.Ct. 140, 46 L.Ed.2d 104 (1975).
In the case at bar, it is fair to conclude on this record that § 550(a) of the Bankruptcy Code does not impose Anadarko’s asserted cap on Tronox’s damages. It is equally clear, however, that the appropriate measure of damages in this case can only be determined after trial, leading to the denial of Tronox’s motion for summary judgment to the extent it seeks a holding that there is no limitation on damages other than the value of the fraudulently conveyed property.
B. Section 550
Fraudulent transfer law generally allows creditors to set aside or “avoid” transactions which improperly deplete a debtor’s assets. Togut v. RBC Dain Correspondent Servs. (In re &.W. Bach & Co.), 435 B.R. 866, 875 (Bankr.S.D.N.Y.2010), citing 5 Collier on Bankruptcy ¶ 548.01 (16th ed. rev. 2010). In bankruptcy, a trustee or a debtor-in-possession armed with the powers of a trustee can avoid a fraudulent transfer under federal law (§ 548 of the Bankruptcy Code) on the ground that the transfer was made “with actual intent to hinder, delay, or defraud” creditors, or on the ground that it was constructively fraudulent, i.e., if the debtor “received less than a reasonably equivalent value in exchange for such transfer” and at the time either (i) was insolvent, (ii) under-capitalized, or (iii) illiquid, or became such as a result of such transfer. 11 U.S.C. § 548(a)(1)(A) and (B).
*613In addition to avoidance powers under § 548, the trustee or debtor-in-possession may also access applicable state law under § 544(b) of the Bankruptcy Code if there still exists one creditor holding an unsecured claim who could pursue the action.10 Since the substantive provisions of state statutes under the Uniform Fraudulent Transfer Act and the earlier Uniform Fraudulent Conveyance Act are largely the same as § 548, a trustee’s rebanee on state fraudulent conveyance provisions may only have the effect of extending the statute of limitations, as the federal limitations period is shorter than the period in most state laws. In the case at bar, most of Tronox’s claims are pursued under § 544(b), accessing the law of Oklahoma, which the parties agree is the applicable state law.11
Once a transfer has been avoided, Bankruptcy Code § 550 provides that the trustee/debtor-in-possession
may recover for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property ...
11 U.S.C. § 550(a). Other parts of section 550 set forth the liability of an initial transferee and a subsequent transferee, defenses of certain transferees, and rights accorded to “good faith transferees,” such as a lien on any increase in value of the fraudulently conveyed property as a result of an “improvement” made after the transfer. The Bankruptcy Code thus separately provides for the avoidance or nubification of a fraudulent conveyance, and the babibty of a transferee. See IBT Intern., Inc. v. Northern (In re Int’l Admin. Servs., Inc.), 408 F.3d 689, 703 (11th Cir.2005).
Anadarko’s motion for summary judgment is largely premised on one clause in § 550(a) providing that the trustee or debtor-in-possession “may recover for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property ...” 11 U.S.C. § 550(a) (emphasis supplied).12 Anadarko contends that this clause imposes an absolute cap on its potential babibty as transferee and that the cap is the aggregate of the claims of the creditors who would be benefited by the litigation—in its formulation, the claims of the environmental and tort claimants who are the plaintiffs in this adversary proceeding.
As an initial matter, Anadarko can find no support for its position in the plain words of the statute. Section 541 of the Bankruptcy Code provides that the “estate” created at the commencement of the case is comprised of, among other things, “all legal or equitable interests of the debt- or in property as of the commencement of the case.” The concept of the estate is not limited to the interest of creditors or a subclass of creditors.
Faithful to the language of the statute, the courts have given a very broad construction to the phrase “benefit of the *614estate.” Benefit for purposes of § 550 includes both direct benefits to the estate (e.g., an increased distribution) and indirect ones (e.g., an increase in the probability of a successful reorganization). See Acequia, Inc. v. Clinton (In re Acequia, Inc.), 34 F.3d 800, 811 (9th Cir.1994), Kipperman, 411 B.R. at 876-77; In re NextWave Personal Communications, Inc., 235 B.R. 305, 308-09 (Bankr.S.D.N.Y.1999). Furthermore, the benefit from an avoidance action can come from an assignment of a cause of action prior to the litigation’s resolution, and need not be obtained at the time of recovery. Mellon Bank v. Dick Corp., 351 F.3d 290, 293 (7th Cir.2003); Kipperman, 411 B.R. at 877-78. As the Seventh Circuit held in Mellon Bank, § 550(a) was satisfied because “the potential to recover funds from preference recipients was put to use for the estate’s benefit” by facilitating the sale of the debt- or:
Having put the prospect of preference recoveries to work for the benefit of all creditors (including the unsecured creditors) ex ante by effectively selling them to the secured creditors in exchange for forbearance—and in the process facilitating a swift sale all around—the bankruptcy judge did not need to use them ex post a second time, for still another benefit to the estate; there was no further benefit to be had.
Mellon Bank, 351 F.3d at 293. In rejecting the argument that proceeds from a litigation trust should be capped at the amount of creditors’ claims, the Court in Kipperman made this very analogy:
When a plan distributes stock and the stock appreciates or depreciates in value, section 1129(b) does not compel the bankruptcy court to reassess whether the party receiving the stock has received too much or not enough value relative to the total value of the party’s claim and the distributions to the other parties. The court finds this analogy helpful.
Kipperman, 411 B.R. at 876.
Once some benefit to the estate is established, the cases do not use the “benefit of the estate” clause in § 550(a) to impose a cap on recovery. Acequia, 34 F.3d at 811; Stalnaker v. DLC, Ltd. (In re DLC, Ltd.), 295 B.R. 593, 606-607 (8th Cir. BAP 2003), aff'd 376 F.3d 819 (8th Cir.2004); In re Sheffield Steel Corp., 320 B.R. 423, 447 (Bankr.N.D.Okla.2004); Kipperman, 411 B.R. at 878; In re FBN Food Services, Inc., No. 93 C 6347,1995 WL 230958, at *3 (N.D.Ill. Apr. 17, 1995); MC Asset Recovery, LLC v. Southern Co., No. 06-CV-0417, 2006 WL 5112612, at *5 n. 11 (N.D.Ga. Dec. 11, 2006). In other words, the “for benefit of the estate” clause in § 550 sets a minimum floor for recovery in an avoidance action-—-at least some benefit to the estate—but does not impose any ceiling on the maximum benefits that can be obtained once that floor has been met. For example, in Acequia, the debtor was permitted to pursue the recovery of fraudulent transfers even though creditors had been paid in full because recovery would benefit the estate by aiding continued performance under the plan. 34 F.3d at 812. This construction of § 550(a)—virtually universal among courts that have substantively considered the issue—reflects § 550’s underlying purpose of restoring the estate to its position prior to the transfer. Id., citing Morris v. Kansas Drywall Supply Co. (In re Classic Drywall, Inc.), 127 B.R. 874, 876 (D.Kan.1991). Indeed, it is significant that § 550 provides that the trustee can recover an avoided transfer “for the benefit of the estate,” not “to the extent of benefit to the estate.” Because Congress used the phrase “to the extent of’ in an earlier clause of § 550(a), albeit in a different context (“to the extent a transfer is avoided”), it is reasonable to *615infer that Congress would have explicitly so provided if it had intended to limit recovery to the extent of benefit of the estate, or as Anadarko would put it, benefit to creditors (or, as here, the environmental and tort subclass of creditors).
Anadarko contends that several (but not all) of the cases cited above involved intentional fraudulent conveyances and are therefore of little precedential value. There is no indication in the decisions, however, that the holdings should be so limited and § 550 applies to all avoided fraudulent conveyances, not just to a subset. Moreover, the Complaint states claims for intentional as well as constructive fraudulent conveyances. See Shapiro v. Wilgus, 287 U.S. 348, 354, 53 S.Ct. 142, 77 L.Ed. 355 (1932) (“A conveyance is illegal if made with an intent to defraud the creditors of the grantor, but equally it is illegal if made with an intent to hinder and delay them.”).
The record in this case establishes that the prospect of recovery in this adversary proceeding has already benefited Tronox’s estate. The liquidation analysis attached to the Disclosure Statement estimated that in a liquidation unsecured creditors would receive no recovery at all. Exhibit E to Disclosure Statement, at 3. The willingness of the environmental and tort claimants to take a relatively small amount of cash and litigation claims that were (and are) uncertain benefited the Tronox estate by providing the General Unsecured Creditors with a stock interest in a company freed of legacy liabilities. It may be questioned whether Tronox would have been able to confirm a plan absent the settlement. Anadarko has implicitly acknowledged that there was some benefit to the estate from the settlement, as demonstrated by the following passage from the transcript of the hearing on this motion:
THE COURT: My point is more limited. My point is simply that the unsecured creditors ... benefited from the fact that the tort and environmental creditors removed their unliquidated claims from the reorganized debtor and agreed to seek recovery elsewhere?
[ANADARKO’S COUNSEL]: They benefited to the extent that the recovery was subject to the limitations of Section 550, I agree.... But, Your Honor, what they’re arguing is that this prospect of recovery was put to work for the benefit of the estate, so therefore, now the sky’s the limit.... I submit to you, that does not suffice for purposes of Section 550.13
Once this benefit was obtained, § 550’s “for the benefit of the estate” requirement was satisfied. Mellon Bank, 351 F.3d at 293; Kipperman, 411 B.R. at 878. Furthermore, in this case, all proceeds of this adversary proceeding are being paid to creditors of Tronox, so recovery will also create a second benefit to the estate.
Anadarko argues that limitation of damages to the claims of the creditor plaintiffs is required because Tronox is principally relying on Oklahoma fraudulent transfer law, incorporated for present purposes through § 544(b) of the Bankruptcy Code. Like many other state fraudulent transfer laws, the Oklahoma statute provides that the creditor in a fraudulent transfer action may not recover more than “the amount necessary to satisfy the creditor’s claim.” 14 This limitation reflects the *616different purposes of a fraudulent transfer proceeding brought under state law by a creditor on behalf of that creditor only, and an action pursued by a bankruptcy estate representative on behalf of the “estate.” Section 544(b) of the Bankruptcy Code adopts the ruling of the Supreme Court in Moore v. Bay, 284 U.S. 4, 52 S.Ct. 3, 76 L.Ed. 133 (1931), where the Court allowed a trustee to avoid a fraudulent transfer without regard to the size of the claim of the creditor whose rights and powers the trustee was asserting, with the rights of the trustee “to be enforced for the benefit of the estate.” Id. at 5, 52 S.Ct. 3; see also 5 Collier on Bankruptcy ¶ 544.07[4] (citing Moore). Because a trustee’s recovery under § 544(b) is governed by § 550, it follows that Congress intended to incorporate Moore’s rule of complete avoidance into § 550. See Stal-naker, 295 B.R. at 606-07; MC Asset Recovery, 2006 WL 5112612, at *4; Barber v. McCord Auto Supply, Inc. (In re Pearson Indus., Inc.), 178 B.R. 753, 756, n. 4 (Bankr.C.D.Ill.1995). Indeed, the absence of any indication that Congress intended to limit the rule of Moore is further evidence against any such proposition. See Cohen v. de la Cruz, 523 U.S. 213, 221, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998) (“We ... will not read the Bankruptcy Code to erode past bankruptcy practice absent a clear indication that Congress intended such a departure.”) (internal quotation omitted).15 Nor is there any basis for the argument that state law is controlling where the recovery in a proceeding under § 544(b) as well as § 548 is controlled by § 550, a federal statute. See BFP v. Resolution Trust Corp., 511 U.S. 531, 546, 114 S.Ct. 1757, 128 L.Ed.2d 556 (1994) (“where the meaning of the Bankruptcy Code’s text is itself clear, its operation is unimpeded by contrary state law”) (internal quotation omitted).
In support of its position, Anadarko relies on cases holding that the avoidance powers of an estate representative cannot be used where creditors cannot possibly benefit from the proceeding. This is an established principle that was applied to efforts to avoid a lien as well as to pursue preference or fraudulent conveyance actions under the former Bankruptcy Act. See, e.g., Vintero Corp. v. Corporacion Venezolana De Fomento (In re Vintero Corp.), 735 F.2d 740 (2d Cir.1984) (lien avoidance proceeding); Whiteford Plastics Co. v. Chase Natl. Bank, 179 F.2d 582 (2d Cir.1950) (prohibiting debtor from commencing an avoidance action that could not benefit creditors). This principle has also been applied in fraudulent conveyance proceedings under the Code, which cannot be maintained where they would only benefit the debtor. Wellman v. Wellman, 933 F.2d 215, 218 (4th Cir.1991), cert. denied, 502 U.S. 925, 112 S.Ct. 339, 116 L.Ed.2d 279 (1991); Adelphia Recovery Trust v. Bank of America, N.A., 390 B.R. 80 (S.D.N.Y.2008) (plaintiff lacked standing to pursue post-confirmation avoidance action because all debtors’ creditors had already been paid in full with interest); In re Calpine Corp., 377 B.R. 808, 812-13 (Bankr.S.D.N.Y.2007). However, the cases that recognize the principle also recognize, virtually without exception, that creditors can benefit from an avoidance proceeding indirectly as well as by a direct monetary recovery. For example, in Aceq-uia, the Court quoted the statement in *617Collier on Bankruptcy that, “in general, the trustee or debtor in possession may not recover the property transferred or its value when the result is to benefit only the debtor rather than the estate.” Acequia, 34 F.3d at 811, quoting Collier on Bankruptcy ¶ 550.02 at 550-6 to 550-7 n. 3 (15th ed. 1994). The Acequia Court nevertheless proceeded to note the breadth with which the term “benefit of the estate” has been construed, and it reversed the decision below that dismissed the avoidance action because the recovery would exceed the amount of unpaid unsecured creditor claims. The Court said, “Courts construe the ‘benefit to the estate’ requirement broadly, permitting recovery under section 550(a) even in cases where distribution to unsecured creditors is fixed by a plan of reorganization and in no way varies with recovery of avoidable transfers.” Id. at 811.
We have not been able to find any case that has accepted Anadarko’s contention that in order for there to be any recovery in an avoidance proceeding, there must be a prior calculation of each creditor’s claim in the case and a limitation of avoidance liability to the deficiency in payment. Any such tie between avoidance recovery and plan distribution would impede a settlement of the type incorporated in Tronox’s plan by refusing to afford a creditor who has taken a litigation risk a prospect of a possible recovery beyond that creditor’s individual damages. It would encourage endless valuation litigation and effectively impose a requirement, not found in the statute, that a judgment in the avoidance action precede plan confirmation. As the Ninth Circuit noted in Acequia, this would undoubtedly require debtors to delay filing plans of reorganization until completing all potential litigation and would violate chapter ll’s policy of facilitating a fast and equitable reorganization. Id. at 808. In this case, it is unclear whether Tronox could have confirmed any plan of reorganization without a settlement with its tort and environmental creditors, leading to the conclusion, as stated above, that the possibility of recovery in this action already has benefited creditors by making Tronox’s plan possible.
The only case Anadarko has cited which arguably supports its position of a recovery cap under § 550(a) is a chapter 7 case decided on “extremely unusual facts.” In re Murphy, 331 B.R. 107, 121 (Bankr.S.D.N.Y.2005). In Murphy, a chapter 7 debtor’s real estate had been legally forfeited to a state taxing authority prepetition based on the debtor’s failure to pay taxes. The debtor sought to avoid the forfeiture as a constructive fraudulent transfer and to recover the $300,000 amount by which the property’s value exceeded the total amount of claims in the case. In rejecting the debtor’s position, the Court held that § 548 and § 550 of the Code should be reconciled with the state’s public interest in penalizing nonpayment of taxes and thus limited avoidance to the extent necessary to pay creditors and administrative claimants in full. Murphy is factually distinguishable because there is no analogous state public policy at issue here. As the Court said in Acequia, complete recovery does not result in a windfall when it restores the estate to the condition it would have been in had the transfer had never occurred. 34 F.3d at 812.
Based on the foregoing, Anadarko’s motion for summary judgment must be denied. On the other hand, Tronox overstates its case when it implies that there is no cap on plaintiffs’ potential recovery other than the value of the property fraudulently transferred. Bankruptcy Code *618§ 550 has several provisions that explicitly limit a plaintiffs recovery, including the right of a good faith transferee to retain the value of any “improvement” to the property after the transfer (less the transferee’s profit) and any increase in value from any improvements. 11 U.S.C. § 550(e).
Beyond the specific limitations in § 550, courts have recognized that the purpose of fraudulent conveyance law is remedial rather than punitive. In re Best Products Co., 168 B.R. 35, 57 (Bankr.S.D.N.Y.1994). Bankruptcy courts have used their equitable powers in appropriate cases to reduce the estate’s recovery by the value of consideration paid by a transferee, even in cases of actual fraud. See Kingsley v. Wetzel, 518 F.3d 874 (11th Cir.2008) (affirming bankruptcy court’s decision to equitably adjust recovery from transferee who committed actual fraud but later repaid funds to estate); compare Nostalgia Network, Inc. v. Lockwood, 315 F.3d 717 (7th Cir.2002) (affirming bankruptcy court’s decision to deny offsets to a transferee in an actual fraud case). Indeed, in one of the few cases that have applied fraudulent conveyance law to a major corporate spin-off, the District Court in ASARCO permitted the defendant to assert the rights of a good faith transferee and to offset the value it provided to the debtor, despite finding the defendant liable for an intentional fraudulent transfer. ASARCO LLC v. Americas Mining Corp., 396 B.R. 278 (S.D.Tex.2008). The Court also noted: “the Bankruptcy Code does not provide for punitive damages.” Id. at 421. The Court’s decision, however, was made after a four-week trial and on the basis of all of the facts of the case.
Even after damages are calculated, other provisions of the Bankruptcy Code may mitigate the liability of the defendant in an avoidance proceeding. Courts have held that even the transferee of an intentional fraudulent conveyance may have a § 502(h) claim for the value of consideration paid after disgorging the transferred property. See Max Sugarman Funeral Home, Inc. v. A.D.B. Investors, 926 F.2d 1248, 1257 (1st Cir.1991); Best Products, 168 B.R. at 58. The application of this or other principles to the calculation of damages in this case will be based on the facts proved at trial, as well as the parties’ contentions on the subject of damages, and it is premature to speculate as to the effect of § 502(h) or other damages provisions in this case. In any event, the existence of limitations on recovery outside of the “for the benefit of the estate” clause in § 550(a) makes speculative Anadarko’s contention that failure to impose its cap will create a multi-billion dollar “windfall” to creditors if they are successful in establishing liability at trial.
Conclusion
For the foregoing reasons, Anadarko’s motion for partial summary judgment is denied and Tronox’s opposing motion is granted in part and denied in part. Either party may settle an appropriate order on five days’ notice.
. For convenience, Tronox Incorporated, Tro-nox Worldwide LLC, Tronox LLC, and the *609Litigation Trust that is their successor in interest in this action as a consequence of their confirmed plan of reorganization are collectively referred to as "Tronox.” A second proceeding based on similar allegations is pending, brought by the United States for the recovery of response costs for environmental cleanups at numerous sites around the country pursuant to the Comprehensive Environmental Response, Compensation, and- Liability Act, as well as for other environmental liabilities to federal agencies. That action was consolidated with the instant adversary proceeding for pretrial purposes; a motion to dismiss by the defendants in that action (the same defendants as here) was stayed pending further order of this Court. A third action against certain lenders to Tronox was settled and dismissed.
.The remaining defendants are Kerr-McGee Corporation and certain affiliates that are subsidiaries of Anadarko Petroleum Corporation. They were the vehicles for the spin-off of assets formerly owned directly or indirectly by Tronox’s predecessors in interest. For convenience, these entities are hereinafter referred to as "Anadarko,” even though Anadar-ko Petroleum Corporation was dismissed as a defendant from this adversaiy proceeding.
. In this case, there is no dispute that the applicable state law is that of Oklahoma, 24 Okla. St. Ann. §§ 116 and 117.
. Although this aspect of procedural posture is not relevant to substance of the matter, Tronox is the movant and Anadarko the cross-movant on these cross-motions for partial summary judgment.
. The Complaint also states a claim for breach of fiduciary duty as a promoter. In prior decisions, the court dismissed Tronox's claims for aiding and abetting a fraudulent conveyance, aiding and abetting breach of fiduciary duty, unjust enrichment, civil conspiracy, equitable subordination, and disal-lowance of claims, although the latter two claims were held subject to renewal in the *610event Anadarko filed a proof of claim. See Tronox, 429 B.R. 73; Tronox, 450 B.R. 432.
. The Plan gave General Unsecured Creditors the opportunity to participate in a rights offering whereby a creditor could elect to pay a certain amount for the right to obtain a greater amount of stock. The disclosure statement estimated that General Unsecured Creditors who participated in the rights offering would obtain a recovery of 78-100% on their claims. Disclosure Statement at 10.
. Because this language reserves the rights of both parties to argue the § 550 issue, the court finds Tronox's argument that the plan conclusively determines the value of the environmental and tort claims at the value of their contingent right to recovery to be as mistaken as Anadarko’s argument that Tronox should now be judicially estopped from arguing the § 550 issue. Cf. Kipperman v. Onex Corp., 411 B.R. 805, 879 (N.D.Ga.2009) (“The court finds that the [Litigation Trust] did not take inconsistent positions here. The amount of *611the Debtors’ potential claims in the disclosure was an estimate.... [Thus] judicial estoppel does not ‘cap’ the Trustee’s recovery.”).
. Section 502(h) of the Code as applicable here provides that if a transferee of a fraudulent transfer has an unsecured claim against the estate after disgorging the transferred property or its value, the claim will be treated as a prepetition claim. See 11 U.S.C. § 502(h); In re Best Products Co., 168 B.R. 35, 58 (Bankr.S.D.N.Y.1994). Because this adversary proceeding will be concluded post-confirmation when the plan consideration may have been wholly distributed, the parties agreed that any § 502(h) claim to which Ana-darko may be entitled could be applied as a direct offset, rather than an independent claim, and that agreement became part of Tronox’s confirmed plan. See Plan of Reorganization at Art. III.D.
. The numbers are hugely variable. See Ana-darko Reply at 33-34: "Plaintiffs’ potential recovery is just as uncertain today as it was at the time of confirmation ... Even the highly inflated amounts set forth in the tort and environmental proofs of claim are at least $8.5 billion less than the amounts Plaintiffs now seek. And those claim amounts are clearly overstated.” (footnotes omitted).
. Section 544(b) authorizes the avoidance of “any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an [allowable] unsecured claim.” 11 U.S.C. § 544(b) (emphasis added).
. No issue has been raised as to the existence of one unsecured creditor who is duly possessed of such a claim.
. There is no dispute that any recovery in this case would be for the value of the physical assets transferred to the Anadarko defendants, rather than recovery of the assets themselves. See Transcript of Hearing on 11/29/2011, Case No. 09-01198, Dkt. No. 292, at 84 In. 22-85 In. 5.
. Transcript of Hearing on 11/29/2011, at 58 In. 18-59 In. 17.
. The Oklahoma fraudulent transfer statute provides, in relevant part, that "to the extent a transfer is voidable in an action by a creditor ..., the creditor may recover judgment for the value of the asset transferred ... or the amount necessary to satisfy the creditor's *616claim, whichever is less.” 24 Okla. St. Ann. § 120 B. (2011).
. The Code's legislative history explicitly states that § 544(b) "follows Moore v. Bay." S.Rep. No. 95-989, at 85 (1978). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494558/ | MEMORANDUM DECISION GRANTING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT
CECELIA G. MORRIS, Bankruptcy Judge.
The plaintiff brings this summary judgment motion seeking a declaratory judgment that it is a secured creditor by virtue of a security agreement having been formed pursuant to New York law. Because the Court finds that the Contract and Purchase Agreement meet all the required elements of a security agreement under the New York Uniform Commercial Code, the Court holds that plaintiff is a secured creditor.
Background
On August 3, 2005, the Defendants purchased a 2005 Skyline Doublewide Ranch manufactured home from Ultimore, Inc. (“Ultimore”) for $151,258.25. See Opp. Ex. B; P’s Stmt Facts ¶2. The closing was held at the office of Bruce Stern, an attorney. See Def. Aff. ¶ 2. A payment of $131,158.25 was made at closing. Opp. Ex. B. According to the contract of sale (the “Contract”), the Seller was to “hold a note for the $20,000.00 remainder for a period of 20 years (240 months) at 9% interest, which will be a monthly payment of $179.95, and amortized with a Promissory Note to compliment this Contract, as an addendum to the Contract.” Opp. Ex. B. Among other things, the Promissory Note provides that “a motor vehicle lien may be filled [sic] against the title of the home” by Ultimore and that Ultimore may repossess the home in the event of the Defendants’ default. Promissory Note ¶ 1, 8.
On April 15, 2011, the Debtors entered into a contract of sale to sell the manufactured home to Mr. and Mrs. Gunning for $100,000. P’s Stmt. Facts ¶ 7; see also Def. Aff. ¶ 11. The Debtors filed chapter 7 on July 11, 2011. P Facts ¶ 1; Voluntary Petition, In re Bucala, (No. 11-36977). The Debtors sold their manufactured home in August 2011. Def. Aff. ¶ 11. The trustee filed his report of no distribution on August 13, 2011. Trustee’s Report, In re Bucala, (No. 11-36977). On August 26, 2011, the Debtors amended their schedules D and F, removing Ulti-more as a secured creditor from schedule D and adding Ultimore as an unsecured creditor to schedule F. P’s Stmt. Facts at ¶ 13; Amended Schedules, In re Bucala, (No. 11-36977). The Debtors received their discharge on December 23, 2011. *629Order of Discharge, In re Bucala, (No. 11-36977).
The Court notes that this sale took place post-petition and pre-discharge, and that $7,000 was paid to as a commission to a real estate broker, Century 21, without permission of this Court. These issues, while potentially serious, are not before the Court at this time.
Ultimore filed this adversary proceeding on September 27, 2011 seeking a declaratory judgment, pursuant to Federal Rule of Bankruptcy Procedure 7001, that it maintains a security interest in the manufactured home. Ultimore also seeks a judgment declaring the debt owed by the Defendants to Ultimore non-dischargeable, pursuant to section 523(a)(6) for willful and malicious injury and 727(a)(2)(B) for transferring property of the estate with the intent to hinder, delay, or defraud creditors.
Defendants filed an answer denying all allegations and asserting the affirmative defense of statute of frauds.
Ultimore moved for summary judgment on its first cause of action: whether Ulti-more is a secured creditor.
Summary of the Law
Summary Judyment Standard
Summary judgment should be granted “where there are no genuine issues of material fact and the movant is entitled to judgment as a matter of law.” Jacobowitz v. The Cadle Co., 309 B.R. 429, 435 (S.D.N.Y.2004); Fed.R.Civ.P. 56(a). The moving party has the initial burden of establishing the absence of any genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) “[T]he court resolves all ambiguities and draws all permissible factual inference against the mov-ant.” Jacobowitz, 309 B.R. at 435.
The nonmoving party should oppose the motion for summary judgment with evidence that is admissible at trial. See Fed. R.Civ.P. 56(e)(1); Crawford v. Dep’t of Investigation, 324 Fed.Appx. 139 (2d Cir.2009) (court affirmed award of summary judgment in favor of defendant, where plaintiff presented testimony from uncorroborated source, as well as “speculation, hearsay and other inadmissible rumor, and conclusory allegations”); Raskin v. The Wyatt Co., 125 F.3d 55 (2d Cir.1997) (court affirmed award of summary judgment in favor of defendant; court noted “only admissible evidence need be considered by the trial court in ruling on a motion for summary judgment,” and rejected an expert report as inadmissible).
“The purpose of a declaratory judgment ‘is to clarify and settle disputed legal relationships and to relieve uncertainty, insecurity and controversy.’” Wachovia Bank Nat’l Ass’n v. Encap Gold Holdings, LLC, 690 F.Supp.2d 311, 327 (S.D.N.Y.2010) (quoting Broadview Chemical Corp. v. Loctite Corp., 474 F.2d 1391, 1393 (2d Cir.1973)).
Whether a “Security Agreement” Exists Pursuant to New York Uniform Commercial Code
Pursuant to New York’s Uniform Commercial Code, a “[sjecured party” is “a person in whose favor a security interest is created or provided for under a security agreement, whether or not any obligation to be secured is outstanding....” N.Y. U.C.C. Law § 9-102(a)(72)(A) (McKinney 2002 & Supp.2011). A “[security agreement” is “an agreement that creates or provides for a security interest.” N.Y. U.C.C. Law § 9-102(a)(73) (McKinney 2002 & Supp.2011).
According to N.Y. U.C.C. section 9-203(b)(3)(A), a security interest attaches to collateral and is enforceable only if “the *630debtor has authenticated a security agreement that provides a description of the collateral....” N.Y. U.C.C. Law § 9-203(b)(3)(A) (McKinney 2002 & Supp. 2011).
Authentication
According to section 9-102(a)(7), “ ‘[a]u-thentieate’ means: (A) to sign; or (B) to execute or otherwise adopt a symbol, or encrypt or similarly process a record in whole or in part, with the present intent of the authenticating person to identify the person and adopt or accept a record.” N.Y. U.C.C. Law § 9-102(a)(7) (McKinney 2002 & Supp.2011).
Section 9-203 does not require that a security agreement be signed by both parties to be enforceable. N.Y. U.C.C. Law § 9-203 (McKinney 2002 & Supp. 2011); In re Wingspread Corp., 107 B.R. 456, 460 (Bankr.S.D.N.Y.1989). The fact that the Defendants signed both the Promissory Note and the Contract is enough to satisfy the authentication requirement.
Description of Collateral
Pursuant to section 9-108(a), “a description of personal or real property is sufficient, whether or not it is specific, if it reasonably identifies what is described.” The Official Comment to this rule states that:
The purpose of requiring a description of the collateral in a security agreement ... is evidentiary. The test of sufficiency of a description ... is that the description do the job assigned to it: make possible the identification of the collateral described. This section rejects any requirement that a description is insufficient unless it is exact and detailed (the so-called “serial number” test).
N.Y. U.C.C. Law § 9-108(a) cmt. 2 (McKinney 2002 & Supp. 2011).
The Promissory Note describes the collateral as “a 28' X 60' 2006 [sic] Skyline Manufactured Home, model 4911-0179-U-A & B.” The Defendants argue that this description is incorrect and that the collateral is “a 2005 Skyline Manufactured Home, Title and Identification No. 49110179UAB.” Def. Response to Stmt. Facts at ¶ 3.
The Contract identifies the manufactured home as a “2005 Skyline 60'x28' NEW Doublewide ranch Three bedrooms, 2 baths, Birchfield # 8696CT Serial# 4911-0179-UBA [sic] Color: Gold vinyl sided, fuly [sic] skirted, white vinyl.” Opp. Ex. A ¶ 1. The Contract refers to the existence of the Promissory Note in paragraph 4b.1 Opp. Ex. A. A court may look to multiple documents to determine whether a valid and enforceable security agreement exists. In King v. Tuxedo Enters., 975 F.Supp. 448, 453 (E.D.N.Y.1997), the court held that a U.C.C. financing statement together with a letter between the parties was sufficient to constitute a security agreement and conditional assignment despite the fact that the document purporting to constitute the assignment did not contain a description of the collateral.
Despite the fact that both the Contract and the Promissory Note are not identical, when the documents are read together, it is obvious that two documents describe the same collateral. The fact that the Contract describes the collateral with the accurate year and refers to the Promissory Note, which contains a description of the collateral with a different year, is enough to satisfy the requirement that a security agreement contain a description of collat*631eral. See N.Y. U.C.C. Law § 9-108(a) (McKinney 2002 & Supp.2011). To deny secured status to Ultimore based upon a typographical error in the description of the collateral “would represent a warrant-less reliance on formalism and violate the general rule that the UCC be ‘liberally construed and applied to promote its underlying purposes and policies.’” In re Numeric Corp., 485 F.2d 1328, 1332 (1st Cir.1973); see also N.Y. U.C.C. § 1-102(1). As the description provided makes it possible to identify the collateral, the description is sufficient.
Security Agreement
For there to be a valid and enforceable security agreement, a formal and separately signed document labeled “security agreement” is not necessary. In re Modafferi 45 B.R. 370, 372 (S.D.N.Y.1985) (citing In re Numeric Corp., 485 F.2d at 1331; General Motors Acceptance Corp. v. Lefevre (In re Lefevre), 27 B.R. 40, 42-43 (Bkrtcy.D.Vt.), aff'd, 38 B.R. 980 (D.Vt.1983)). Rather courts have read several documents together and looked at the surrounding circumstances to find the existence of security agreements. See In re Wingspread Corp., 107 B.R. 456, 461 (Bankr.S.D.N.Y.1989). Almost any combination of documents can be used to prove the existence of a security agreement so long as the documents embody the intention of the parties to create a security interest. White Plains Towing Corp. v. Polizzi Towing Corp., 1991 WL 18154, 1991 U.S. Dist. LEXIS 1494 (S.D.N.Y. Feb. 4,1991).
In In re Numeric, the First Circuit found that a financing statement together with a resolution passed by the debtor’s board of directors authorizing the debtor to grant a security interest in the collateral met the requirements for a security agreement. 485 F.2d at 1328. In In re Bollinger Corp., 614 F.2d 924, 928-29 (3rd Cir.1980), the Third Circuit Court of Appeals upheld a security interest where, in addition to a financing statement, the parties exchanged letters which clarified the pledge of collateral.
In this case, the Defendants signed a “Promissory Note,” which includes an indented paragraph numbered 1 and entitled in bold as “Lien” under a section labeled “Additional Promises and Agreements of the [Borrower.” Mot. SJ Ex. B ¶ 1. That paragraph states that “[t]he borrower hereby agrees a motor vehicle lien may be filled [sic] against the title of the home by the Lender. Borrower can lose the home for failure to keep the promises in this note.” Mot. SJ Ex. BJ 1.
The Defendants argue that this language does not demonstrate an intent to grant a “present security interest” in the collateral because of the use of the word may, which Defendants argue implies a “contingent and future potential interest.” See Def. Br. 3, 4 In re Bucala, (No. 11-36977). The law does not require evidence of a “present security interest” but rather, evidence “of present intent to create a security agreement.” N.Y. U.C.C. Law § 9-102(a)(7) (McKinney 2002 & Supp.2011); In re Modafferi 45 B.R. 370, 373 (S.D.N.Y.1985). The Promissory Note is replete with references to Ulti-more’s status as a secured creditor and when read in full, rather than paragraph by paragraph, the Promissory Note clearly demonstrates the Defendants’ intent to grant Ultimore a security interest in the manufactured home.
The lien is specifically mentioned in two additional paragraphs in the Promissory Note: paragraph number 5 states, “.... Payments made by Lender together with interest at the rate provided in this Note from the date paid until date of repayment shall be added to the Debt and secured by *632the DMV lien; ” and paragraph number 13 states, “Borrower may not sell or convey any equitable interest in the home as long as this note remains unpaid. Lender shall discharge the DMV lien when the note is fully paid.” Mot. SJ Ex. B ¶ 5, 13 (emphasis added).
The Promissory Note also requires that the Borrowers maintain home insurance and assign and deliver the policies to Ulti-more, and prohibits the Defendants from significantly devaluing the property in anyway. See Mot. SJ. Ex. B ¶2, 4. Most significantly, paragraph 8 states that “[i]f Borrower defaults under this Note the Home may be repossessed as provided by law.” See Mot. SJ. Ex. B ¶ 8 (emphasis added).
According to section 9-609 of New York’s Uniform Commercial Code, only a secured party may take possession of collateral. N.Y. U.C.C. Law § 9-609(a)(l) (McKinney 2002 & Supp.2011); see also American Furniture Co., Inc. v. Extebank, 676 F.Supp. 455, 457 (E.D.N.Y.1987) (“After the default, a secured party has the right to take possession of the collateral.”); LNC Investments, Inc. v. First Fidelity Bank, 247 B.R. 38, 43-44 (S.D.N.Y.2000) (discussing the difference between secured and unsecured creditors). The Promissory Note clearly grants Ultimore permission to repossess the Defendants’ manufactured home in the event of default. The Promissory Note and Contract create a security agreement that provides the manufactured home as collateral for Ultimore’s loan.
Failure to Perfect has No Effect on Secured Status
The Defendants argue that Ulti-more’s failure to file a motor vehicle lien or any other perfection document, such as a U.C.C. financing statement, demonstrates that Ultimore never had an interest to protect. Opp. at 4. The recording of a lien has no effect on the granting of a security interest. Section 9-201(a) of New York’s U.C.C. provides that “[e]xcept as otherwise provided in this chapter, a security agreement is effective according to its terms between the parties, against purchasers of the collateral, and against creditors.” N.Y. U.C.C. § 9-201(a) (McKinney 2002 & Supp.2011); see also Wachovia Bank Nat’l Ass’n v. Encap Gold Holdings, LLC, 690 F.Supp.2d 311, 333 (S.D.N.Y.2010) (explaining that section 9-201(a) means that “the secured creditor, even an unperfected secured creditor, has greater rights in its collateral than any other creditor, unless the Code provides otherwise. A creditor without a security interest or a lien has no claim to any specific collateral, and 9-201 gives an unperfected but secured creditor rights superior to the rights of that unsecured creditor.”) (quoting 4 James J. White & Robert S. Summers, Uniform Commercial Code § 33-2 (6th ed.2010)).
The purpose of filing a financing statement is “to put third parties on notice that the secured party who has filed it may have a perfected security interest in the collateral described.” In re Numeric Corp., 485 F.2d 1328, 1331-1332 (1st Cir.1973); see also King v. Tuxedo Enterprises, Inc., 975 F.Supp. 448, 453 (E.D.N.Y. 1997) (explaining same). A motor vehicle lien serves a similar purpose. See General Motors Acceptance Corp. v. Waligora, 24 B.R. 905 (W.D.N.Y.1982). A secured party’s failure to record a lien does not invalidate the security agreement.
Purchase-Money Security Interest
Section 9-102(a)(54)(A) defines a “manufactured home transaction” as “a secured transaction ... that creates a purchase-money security interest in a manufactured home, other than a manufactured home held as inventory.” N.Y. U.C.C. § 9-102(a) (McKinney 2002 & Supp.2011). *633Pursuant to section 9—103(b)(1), “[a] security interest in goods is a purchase-money security interest ... to the extent that the goods are purchase-money collateral with respect to that security interest.” N.Y. U.C.C. § 9—103(b)(1) (McKinney 2002 & Supp.2011).
Having already determined that Contract and Promissory Note granted Ulti-more a security interest in the manufactured home, the Court now finds that Ultimore holds a purchase-money security interest in that home. Failure to perfect that interest does not result in a loss of its secured status. Lashua v. La Duke, 272 A.D.2d 750, 752, 707 N.Y.S.2d 542 (N.Y.App. Div.3d Dep’t 2000) (“Failure to perfect a purchase-money security interest within 20 days from the date of delivery of the collateral does not result in a loss of its 'purchase money’ status.”).
Intent to Grant a Secured Interest
The Defendants make several arguments that they had no knowledge of Ulti-more’s secured interest and were not told that Ultimore would be a secured creditor. They argue that the Contract, Promissory Note and other documents were “presented to [them] in a ‘matter of course’ way.” Def. Aff. ¶4. They even state that “Ulti-more was never identified as the ‘seller’ of the manufactured home,” despite the fact that the Contract signed by them and included as an exhibit to their opposition clearly defines Ultimore, Inc. as “SELLER.” Compare Def. Aff. ¶4 with Opp. Ex. A.
This argument conflicts with other portions of the Defendants’ affidavit, which implies that they believed Ultimore to be secured until they were told by the chapter 13 trustee and their attorneys that Ultimore had not filed its financing statement and was, therefore, not secured. The Defendants originally scheduled Ulti-more as a secured creditor in their bankruptcy petition by virtue its having a motor vehicle lien. Voluntary Petition, In re Bucala, (No. 11-36977). After closing on the sale, the Defendants e-mailed Richard Johnson, President of Ultimore, “to ascertain how much was claimed to be due and owing on the outstanding loan”—despite the fact that the Defendants has already filed their chapter 7 petition and should have been aware of the fact that they would no longer owe any debt to unsecured creditors. See Def. Aff. ¶ 11.
The Defendants allege that they presented documents of sale to the trustee during the 341 meeting and the chapter 7 trustee allegedly advised them that he did not believe that Ultimore was secured.2 Def. Aff. ¶ 16-18. The Defendants “discussed this advice with [their] attorneys, and in reliance thereon, [they] amended the petition to list Ultimore as an unsecured creditor.” Def. Aff. ¶ 16-18. It was only after these conversations that the Debtors amended their schedules and changed Ultimore’s status from secured to unsecured. Def. Aff. ¶ 17.
*634
Trustee May Avoid Unperfected Security Interests
The Defendants argue that an un-perfected security interest is voidable by the trustee as a hypothetical lien creditor pursuant to section 544 of the Bankruptcy Code. The Bankruptcy Code gives a trustee power to “stand[ ] in the shoes of the debtor” and bring claims founded on the rights of the debtor that could have been brought by the debtor prior to the bankruptcy proceeding. Hirsch v. Arthur Andersen & Co., 72 F.3d 1085, 1092 (2d Cir.1995); 11 U.S.C. § 541, 544, 547. Even though the trustee has chosen not to exercise his rights under 544, the Defendants argue that the trustee “effectively exercised his priority” by filing his report of no distribution.
The no asset report is simply that—a report; it is not equivalent to abandonment or to exercising an avoidance power. It is not akin to voiding an unperfected security interest. Nor is it equivalent to abandonment of the asset. Abandonment may only be accomplished as outlined in section 554 of the bankruptcy code.
Scheduled property may be abandoned by the trustee after notice to all creditors and a hearing; or, scheduled property, which is not administered by the trustee, is abandoned by operation of law upon the formal closing of the bankruptcy case. The statute does not mention a trustee’s final report or otherwise authorize a trustee to abandon property solely by filing any document with the bankruptcy court which is not accompanied by notice and a hearing. These notice and hearing requirements serve to protect the trustee, who often must make decisions based on incomplete or less than candid information supplied by debtors, but they serve to protect creditors from improvident, ill-advised or hasty decisions by bankruptcy trustees. These benefits would be eviscerated if a trustee is allowed to abandon property by simply filing a statement with the bankruptcy court of his intent to do so.
In re Beaton, 211 B.R. 755, 758 (Bankr.N.D.Ala.1997). The trustee’s report of no distribution does not prevent a creditor from exercising its rights. It merely indicates the trustee’s opinion that there are no assets available for distribution.
Moreover, the Defendants have not demonstrated standing to pursue such an action on the trustee’s behalf. In a chapter 7 case, a debtor does not have standing to pursue an action even if the trustee has failed to do so “because [the debtor] has no interest in the distribution of assets of the estate.” In re Manshul Constr. Corp., 223 B.R. 428 (Bankr.S.D.N.Y.1998); see also 60 E. 80th St. Equities, Inc. v. Sapir (In re 60 E. 80th St. Equities), 218 F.3d 109 (2d Cir.2000) (“It is well-established that a Chapter 7 debtor is a ‘party in interest’ and has standing to object to a sale of the assets, or otherwise participate in litigation surrounding the assets of the estate, only if there could be a surplus after all creditors’ claims are paid.”) (emphasis added). The trustee’s report makes it more difficult for the Defendants to prove standing, as the trustee has indicated—through the filing of his report—that there is no possibility of a surplus for the Defendants. The trustee’s report of no distribution has no effect on whether Ultimore is secured.
Defendants Argument Concerning Altered Paperwork
The Defendants argue that the Plaintiff is not credible because several documents that were filed with the summary judgment motion were allegedly altered, including a letter dated April 20, 2011 and an invoice dated July 28, 2011. The Court did not rely on these documents in making its determination as to whether or not a *635security agreement exists as they were dated 2011 and therefore are not relevant to the analysis of whether a security agreement was created in 2005.
Conclusion
For the foregoing reasons, summary judgment is granted in favor of Ultimore. Ultimore is a secured creditor for purposes of this chapter 7. Plaintiff is directed to submit an order consistent with this Decision.
. There are two paragraphs numbered 4 in the Contract—the Court is referring to the first paragraph numbered 4.
. Anything that the trustee told the Defendants is hearsay and cannot be used as evidence in the summary judgment proceeding. See Fed.R.Civ.P. 56(e)(1); Crawford v. Dep’t of Investigation, 324 Fed.Appx. 139 (2d Cir.2009) (court affirmed award of summary judgment in favor of defendant, where plaintiff presented testimony from uncorroborated source, as well as "speculation, hearsay and other inadmissible rumor, and conclusory allegations”). “Summary judgment evidentiary requirements are not so lax as to permit a litigant to cram one or two affidavits with hearsay statements and argue that because the out-of-court declarants will eventually testify at trial, their statements as reported by the affiants are admissible for summary judgment purposes.” Action Sec. Service, Inc. v. America Online, Inc., 2005 WL 1529578 at *2 (M.D.Fla. June 28, 2005). Be that as it may, it is for the Court, not the trustee, to determine whether a creditor is secured. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488408/ | STATE OF LOUISIANA
COURT OF APPEAL, FIRST CIRCUIT
STATE OF LOUISIANA NO. 2022 KW 0996
VERSUS
KELTON L. SPANN NOVEMBER 21, 2022
In Re: Kelton L. Spann, applying for supervisory writs, 22nd
Judicial District Court, Parish of Washington, No. 22-
CR5-148855.
BEFORE : THERIOT, CHUTZ, AND HESTER, JJ.
WRIT DENIED.
MRT
WRC
CHH
COURT OF APPEAL, FIRST CIRCUIT
ASn\)
DEPUTY CLERK OF COURT
FOR THE COURT | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488409/ | STATE OF LOUISIANA
COURT OF APPEAL, FIRST CIRCUIT
STATE OF LOUISIANA NO. 2022 KW 1085
VERSUS
KEITH TROSCLAIR NOVEMBER 21, 2022
In Re: Keith Trosclair, applying for supervisory writs, 17th
Judicial District Court, Parish of Lafourche, No.
573126.
BEFORE : THERIOT, CHUTZ, AND HESTER, JJ.
WRIT DENIED.
MRT
WRC
CHH
COURT OF APPEAL, FIRST CIRCUIT
acnJ)
DEPUTY CLERK OF COURT
FOR THE COURT | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488410/ | STATE OF LOUISIANA
COURT OF APPEAL, FIRST CIRCUIT
STATE OF LOUISIANA NO. 2022 KW 1016
VERSUS
HOWARD L. JACKSON NOVEMBER 21, 2022
In Re: Howard L. Jackson, applying for supervisory writs,
18th Judicial District Court, Parish of West Baton
Rouge, No. 83-1004.
BEFORE : THERIOT, CHUTZ, AND HESTER, JJ.
WRIT DENIED.
MRT
WRC
CHH
COURT OF APPEAL, FIRST CIRCUIT
ASnl
DEPUTY CLERK OF COURT
FOR THE COURT | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488411/ | STATE OF LOUISIANA
COURT OF APPEAL, FIRST CIRCUIT
STATE OF LOUISIANA NO. 2022 KW 0966
VERSUS
DENNIS FRANK DICKERSON NOVEMBER 21, 2022
In Re: Dennis Frank Dickerson, applying for supervisory
writs, 22nd Judicial District Court, Parish of St.
Tammany, No. 458871.
BEFORE : THERIOT, CHUTZ, AND HESTER, JJ.
WRIT DENIED.
MRT
WRC
CHH
COURT OF APPEAL, FIRST CIRCUIT
asc)
DEPUTY CLERK OF COURT
FOR THE COURT | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488412/ | STATE OF LOUISIANA
COURT OF APPEAL, FIRST CIRCUIT
STATE OF LOUISIANA NO. 2022 KW 1080
VERSUS
CORNELIUS WILSON NOVEMBER 21, 2022
In Re: Cornelius Wilson, applying for supervisory writs, 19th
Judicial District Court, Parish of East Baton Rouge,
No. 10-12-0480.
BEFORE : THERIOT, CHUTZ, AND HESTER, JJ.
WRIT DENIED.
MRT
WRC
CHH
COURT OF APPEAL, FIRST CIRCUIT
aon
DEPUTY CLERK OF COURT
FOR THE COURT | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488414/ | STATE OF LOUISIANA
COURT OF APPEAL, FIRST CIRCUIT
STATE OF LOUISIANA NO. 2022 KW 1063
VERSUS
CHRISTIAN HENRY NOVEMBER 21, 2022
In Re: Christian Henry, applying for supervisory writs, 22nd
Judicial District Court, Parish of Washington, No. 14-
CR10-127191.
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/8488413/ | STATE OF LOUISIANA
COURT OF APPEAL, FIRST CIRCUIT
STATE OF LOUISIANA NO. 2022 KW 1038
VERSUS
CORNEILOUS WHEELER NOVEMBER 21, 2022
In Re: Corneilous A. Wheeler, applying for supervisory writs,
16th Judicial District Court, Parish of St. Mary, No.
08-177417.
BEFORE : THERIOT, CHUTZ, AND HESTER, JJ.
WRIT DENIED.
MRT
WRC
CHH
COURT OF APPEAL, FIRST CIRCUIT
ace)
DEPUTY CLERK OF COURT
FOR THE COURT | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488415/ | STATE OF LOUISIANA
COURT OF APPEAL, FIRST CIRCUIT
RUSTY LEBLANC NO. 2022 CW 0975
VERSUS
LOUISIANA DEPARTMENT OF
TRANSPORTATION AND
DEVELOPMENT; AND STORMY NOVEMBER 21, 2022
PARFAIT
In Re: State of Louisiana, through the Department of
Transportation and Development and Stormy Parfait,
applying for supervisory writs, 32nd Judicial District
Court, Parish of Terrebonne, No. 189327.
BEFORE : THERIOT, CHUTZ, AND HESTER, JJ.
WRIT DENIED.
MRT
WRC
CHH
COURT OF APPEAL, FIRST CIRCUIT
AS)
DEPUTY CLERK OF COURT
FOR THE COURT | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/9350261/ | Dixon v State of New York (2022 NY Slip Op 07424)
Dixon v State of New York
2022 NY Slip Op 07424
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, WINSLOW, AND BANNISTER, JJ. (Filed Dec. 23, 2022.)
MOTION NO. (664/22) CA 21-01506.
[*1]VALENTINO DIXON, CLAIMANT-APPELLANT,
vSTATE OF NEW YORK, DEFENDANT-RESPONDENT. (CLAIM NO. 135327.)
MEMORANDUM AND ORDER
Motion for reargument or leave to appeal to the Court of Appeals denied. | 01-04-2023 | 12-23-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/9350367/ | Affirmed and Memorandum Opinion filed December 20, 2022.
In The
Fourteenth Court of Appeals
NO. 14-22-00675-CV
IN THE INTEREST OF D.L.C., A CHILD
On Appeal from the 315th District Court
Harris County, Texas
Trial Court Cause No. 2020-01658J
MEMORANDUM OPINION
Mother’s counsel contends that there isn’t a non-frivolous ground to
challenge the trial court’s judgment terminating Mother’s parental rights to the
Child because there is legally and factually sufficient evidence to support at least
one predicate ground for termination, including endangerment under subsection
(E), and that termination is in the Child’s best interest.
The brief meets the requirements of Anders v. California, 386 U.S. 738
(1967), presenting a professional evaluation of the record demonstrating why there
are no arguable grounds to be advanced. See In re D.E.S., 135 S.W.3d 326, 329
(Tex. App.—Houston [14th Dist.] 2004, no pet.) (Anders procedures apply to an
appeal from termination of parental rights). This court and Mother’s counsel
notified Mother that counsel filed an Anders brief, and this court informed her
about how to obtain a copy of the record and her right to file a pro se response.
See id. at 329–30. No pro se response has been filed.
We have reviewed the record and counsel’s brief and agree that there isn’t a
non-frivolous ground to challenge the trial court’s judgment terminating Mother’s
parental rights because the evidence is legally and factually sufficient to support
the trial court’s best-interest finding and the finding that Mother engaged in
conduct that endangered the physical or emotional well-being of the Child under
Section 161.001(b)(1)(E) of the Family Code. Counsel thoroughly analyzed the
sufficiency of the evidence supporting the trial court’s findings. We find no
reversible error in the record. A detailed discussion of this issue would add
nothing to the jurisprudence of the state. See In re D.E.S., 135 S.W.3d at 330.
Accordingly, the trial court’s judgment is affirmed.
PER CURIAM
Panel consists of Chief Justice Christopher and Justices Wise and Hassan.
2 | 01-04-2023 | 12-26-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/9350385/ | COURT OF APPEALS FOR THE
FIRST DISTRICT OF TEXAS AT HOUSTON
ORDER
Appellate case name: City of Lake Jackson v. Adaway
Appellate case number: 01-22-00033-CV
Trial court case number: 95727-CV
Trial court: 239th District Court of Brazoria County
The City of Lake Jackson’s Agreed Motion to Reschedule Oral Argument is granted, and
oral argument is hereby rescheduled to 1:30 p.m. on Monday, January 30, 2023.
It is so ORDERED.
Justice’s signature: /s/ Gordon Goodman
Acting for the Court
Panel consists of Justices Goodman, Hightower, and Guerra.
Date: December 22, 2022 | 01-04-2023 | 12-26-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/9350404/ | Opinion issued December 22, 2022
In The
Court of Appeals
For The
First District of Texas
———————————
NO. 01-21-00494-CR
———————————
THOMAS LEE ALEXANDER, III, Appellant
V.
THE STATE OF TEXAS, Appellee
On Appeal from the 10th District Court
Galveston County, Texas
Trial Court Case No. 19CR2458
MEMORANDUM OPINION
A jury found appellant, Thomas Lee Alexander, III, guilty of the felony
offense of failure to comply with the registration requirements applicable to sex
offenders.1 After finding true the allegations in two enhancement paragraphs that
appellant had twice been previously convicted of felony offenses, the jury assessed
his punishment at confinement for forty years. In three issues, appellant contends
that the evidence is legally insufficient to support his conviction and the trial court
erred in denying his motion for directed verdict and in instructing the jury.
We affirm.
Background
In 1996, appellant was convicted of the felony offense of sexual assault of a
child.2
On October 18, 2019, a Galveston County Grand Jury, in trial court cause
number 19CR2458, issued a true bill of indictment (the “2019 indictment”), alleging
that appellant, on or about May 14, 2019,
while being a person required to register with the local law enforcement
authority in the county where [appellant] resided or intended to reside
for more than seven days, to-wit: Brazoria County, because of a
1
See TEX. CODE CRIM. PROC. ANN. art. 62.102(a), (c).
2
See TEX. PENAL CODE ANN. § 22.011(a)(2). During trial, the trial court admitted
into evidence a “summary” from the Texas Department of Public Safety (“DPS”)
related to appellant, which noted appellant’s 1996 conviction for the felony offense
of sexual assault of a child and his duty to register as a sex offender for the remainder
of his lifetime. See TEX. CODE CRIM. PROC. ANN. arts. 62.001(6)(A) (defining
offense of sexual assault of child as “sexually violent offense”), 62.101(a)(1)
(imposing lifetime duty to register for person with reportable conviction for sexually
violent offense). The duty to register includes a requirement that a sex offender
notify the State of the address where the sex offender resides. See id. art. 62.051(a),
(c)(1–a) (instructing that registration must include “the address at which the person
resides or intends to reside” for more than seven days).
2
reportable conviction for [s]exual [a]ssault of a [c]hild, intentionally or
knowingly fail[ed] to register with the local law enforcement authority
in said county.[3]
Later, on March 16, 2021, a Galveston County Grand Jury issued a true bill
of indictment, in the same trial court cause number (the “2021 reindictment”),
alleging that appellant, on or about May 14, 2019,
while knowing that he was required to register under [Texas Code of
Criminal Procedure] [c]hapter 62 . . . because of a reportable
conviction or reportable adjudication based upon [s]exual [a]ssault [o]f
[a] [c]hild, and while intending to change address, fail[ed] to comply
with a requirement of [c]hapter 62, by failing to report in person not
later than the seventh day before the intended change of address to the
local law enforcement authority designated as [appellant’s] primary
registration authority by [DPS], namely [the] Galveston Police
Department [“(GPD”)] and by failing to report to the community
supervision and corrections department officer supervising [appellant],
namely, Officer R. Pearcy, and by failing to provide the law
enforcement authority and the officer with [appellant’s] anticipated
move date and new address.
The 2021 reindictment also alleged that appellant, on or about May 14, 2019,
while knowing that he was required to register under [Texas Code of
Criminal Procedure [c]hapter 62 . . . because of a reportable conviction
or reportable adjudication based upon [s]exual [a]ssault of a [c]hild, and
while failing to move on or before an anticipated move date or not
moving to a new address previously provided to a law enforcement
authority, fail[ed] to comply with a requirement of [c]hapter 62, by
failing to report to the local law enforcement authority designated as
[appellant’s] primary registration authority by [DPS], namely [the
GPD], and by failing to explain to the law enforcement authority any
3
The 2019 indictment also alleged that previously, on June 25, 2004, appellant was
convicted of the felony offense of failure to comply with the registration
requirements applicable to sex offenders in trial court cause number 0982190 in the
339th district court of Harris County, Texas.
3
change in the anticipated move date and intended residence, and
[appellant] failed to provide this required report within seven days after
the anticipated move date and then at least weekly after that seventh
day, and [appellant] failed to report to the community supervision and
corrections department officer supervising [appellant] at least weekly
during the period in which [appellant] had not moved to the intended
residence.
(Emphasis omitted.) Further, the 2021 reindictment alleged that previously, on
October 5, 2011, appellant was convicted of the felony offense of failure to comply
with the registration requirements applicable to sex offenders in trial court cause
number 1307635 in the 337th district court of Harris County. And on September 14,
2014, appellant was convicted for the felony offense of failure to comply with the
registration requirements applicable to sex offenders in trial court cause number
1415700 in the 183rd district court of Harris County.
At trial, GPD Sergeant S. Papillion testified that in 2017, she was the GPD
sex offender registration compliance officer. Her job was to “make sure that the sex
offenders” within the GPD’s jurisdiction “came in” to her office and “registered” for
the DPS Sex Offender Registry as required by the terms of their status as sex
offenders.
As to the registration process for a sex offender, Sergeant Papillion explained
that an individual subject to the sex offender registry requirements “had to call [her]
office” and schedule an appointment. Sex offenders were required to register either
annually, every ninety days, or every thirty days, depending on the applicable
4
statutory requirements. During Papillion’s appointment with a sex offender, she
“would go over” a written list of the duties imposed on the sex offender by DPS.
She would read each duty with the sex offender and the sex offender would write his
initials by each duty to confirm that he understood it. The sex offender also “had to
provide [his] right thumbprint” on the paperwork. And she would advise the sex
offender that if he did not understand the duty, he should not initial it and let her
know that he did not understand so that she could explain it to him. If the sex
offender confirmed that he understood by writing his initials by each duty, she
“would give [him] a copy, upload a copy into the system, and give [him] a blue card
that [he was] supposed to carry with them at all times.” She “would write [the sex
offender’s] next registration date on there, and [he] would go.”
Sergeant Papillion noted that she had previously met with appellant so that he
could complete the sex offender registration process. While viewing appellant’s
Texas Sex Offender Registration Program Prerelease Notification Form, a copy of
which the trial court admitted into evidence at trial, Papillion explained that
appellant had a “lifetime” duty to register and was required to verify his residence
annually on his birthday. The Texas Sex Offender Registration Program Prerelease
Notification Form stated that Texas Code of Criminal Procedure chapter 62
“required [appellant] to register as a sex offender.” And appellant signed the form,
in October 2016, acknowledging:
5
I am required to register with the local law enforcement authority in any
municipality (chief of police) where I reside or intend to reside for more
than seven days. If my residence is not in a municipality, I must register
with the local law enforcement authority of the county (sheriff) where
I reside or intend to reside for more than seven days. Registration must
be completed not later than the 7th day after the date of arrival in the
municipality or county. The local law enforcement authority or the
centralized registration authority, as designated by a commissioner’s
court in the municipality or county I reside in will be my primary
registration authority.
Appellant also acknowledged that:
Not later than the 7th day before I move to a new residence in this state
or another state, I must report in person to my primary registration
authority . . . and inform that authority and officer of my intended
move. If my new residence is located in this state, not later than the 7th
day after changing address, I must report in person and register with the
local law enforcement authority in the municipality or county where my
new residence is located. If my new residence is located in another
state, not later than the 10th day after the date I arrive in the other state,
I must register with the law enforcement agency that is identified by
[DPS] as the agency designated by that state to receive registration
information. If I do not move to an intended residence, not later than
the 7th day after my anticipated move date, I shall report to my primary
registration authority and to any supervising officer supervising me.
And appellant acknowledged that his “failure to comply with any requirements
imposed” by Texas Code of Criminal Procedure chapter 62 was “a felony offense.”
The Texas Sex Offender Registration Program Prerelease Notification Form
informed appellant that he had to verify his address annually on his birthday for the
remainder of his lifetime.
The trial court also admitted into evidence, during Sergeant Papillion’s
testimony, a copy of appellant’s Texas Department of Public Safety Sex Offender
6
Registration Form, which appellant executed during a visit with Papillion in October
2016. Appellant signed the Texas Department of Public Safety Sex Offender
Registration Form, affirming that he had been “notified and underst[ood]” that he
had “a duty to register as a sex offender in Texas” and that the “failure to abide by
the[] requirements could subject [him] to criminal prosecution, pursuant to Texas
Code of Criminal Procedure chapter 62.” (Emphasis omitted.) The Texas
Department of Public Safety Sex Offender Registration Form informed appellant
that he needed to verify his address annually. Further, on the Texas Department of
Public Safety Sex Offender Registration Form, appellant acknowledged each of his
registration duties, including:
I am required to register with the local law enforcement authority of the
municipality ([c]hief of [p]olice) where I reside or intend to reside for
more than seven days. If my residence is not in a municipality, I must
register with the local law enforcement authority of the county
([s]heriff) where I reside or intend to reside for more than seven days.
Registration must be completed not later than the 7th day after the date
of arrival in the municipality or county. The local law enforcement
authority in the municipality or county I reside in will be my primary
registration authority. The duration of my duty to register is for the
period of time indicat[ed] on this registration form.
Appellant also acknowledged that:
Not later than the 7th day before I move to a new residence in this state
or another state, I must report in person to my primary registration
authority . . . and inform that authority and of my intended move. If my
new residence is located in this state, not later than the 7th day after
changing address, I must report in person and register with the local law
enforcement authority in the municipality or county where my new
residence is located. If my new residence is located in another state,
7
not later than the 10th day after the date I arrive in the other state, I must
register with the law enforcement agency that is identified by [DPS] as
the agency designated by that state to receive registration information.
If I do not move to an intended residence, not later than the 7th day after
my anticipated move date, I shall report to my primary registration
authority and to any supervising officer supervising me.
And appellant acknowledged that his “failure to comply with any requirements
imposed” by Texas Code of Criminal Procedure chapter 62 was “a felony offense.”
Sergeant Papillion noted that in February 2017, appellant made an
appointment with her to tell her that he was moving to Rosharon, Brazoria County,
Texas.
GPD Sergeant R. Pearcy testified that he became the GPD’s sex offender
registration compliance officer in February 2017. Pearcy explained that DPS’s “Sex
Offender Registry Program produces a series of updates and supplemental reports
throughout the year” that provide information about the status of individuals in
Texas who are subject to the sex offender registry requirements. “[T]he
supplemental report comes about once a month.” When a sex “offender is out of
compliance for a period of time, depending on the circumstances,” the supplemental
report will have a notice that such sex offender “has not complied” in a specific
“number of days.”
Sergeant Pearcy further explained that if a sex offender is listed on the
supplemental report as “out of compliance” and the GPD is the sex offender’s
primary registration authority, he will first “check the Galveston County Jail [and]
8
the Texas Department of Criminal Justice to see” if the sex offender has been
incarcerated. Because Texas has 254 counties, Pearcy “can’t reasonably check all”
of them, but he also looks at the five counties surrounding Galveston County, Texas
“to see if [he] can locate [the sex offender] in some kind of incarceration situation.”
If he does not find the sex offender that way, he runs a search through the “criminal
information databases” made available by the Texas Criminal Information Center
(“TCIC”)4 and the National Criminal Information Center (“NCIC”).
According to Sergeant Pearcy, on or about May 7, 2017, he noticed “that
[appellant] was on” DPS’s Sex Offender Registry Program’s supplemental report
“for not being in compliance.” Pearcy first checked with the Brazoria County
Sheriff’s Office but did not locate appellant in Brazoria County. Then, using the
TCIC and NCIC databases, Pearcy “did a complete nationwide search” using
appellant’s name and other “identifiers,” and he “was able to” locate appellant in
Indianapolis, Indiana. Appellant had completed an Indiana Sex Offender
Registration Form on April 10, 2018, indicating that he had resided at a particular
street address in Indianapolis as of June 29, 2017. Pearcy did not learn that appellant
was residing in Indiana until 2019.
4
The TCIC is a “statewide criminal information database used by law enforcement
agencies.” Peacock v. State, 77 S.W.3d 285, 287 (Tex. Crim. App. 2002).
9
Sergeant Pearcy explained that when an individual subject to the sex offender
registry requirements moves from the GPD’s jurisdiction to another location, the sex
offender “has a duty within seven days of that date to report” to the local law
enforcement authority in the new location and register there. “If he is unable to
complete that move” within the seven-day period, the individual must “report back
to the [GPD]” sex offender registration compliance officer to let the officer know
that “[he] didn’t make the move” and to “make [the officer] aware of the
circumstances as to whether” the GPD needed to reinstate him on its registry or
whether he was “looking for another place to live” outside of Galveston County.
The sex offender registration compliance officer then would note the sex offender’s
status in the GPD’s records.
According to Sergeant Pearcy, appellant, on February 9, 2017, told Sergeant
Papillion that he was moving to Rosharon. Thus, he had a duty “within seven days
of that date to report to Rosharon, . . . the Brazoria County Sheriff’s Office” and
“register with them.” If appellant could not complete his move within seven days,
he was required “to report back to” the GPD and let the GPD know that he “didn’t
make the move” or that he “was unable to make the move.” Appellant also failed to
annually report to the GPD in April 2017. It was appellant’s responsibility to set up
an appointment with the GPD and “come in and update his registry file” in April
2017.
10
After the State rested, appellant moved for directed verdict. In his motion,
appellant argued that the evidence showed that his failure to comply with the
registration requirements applicable to sex offenders, if any, occurred in 2017, and
as a result, the 2021 reindictment was invalid because it did not charge an offense
that occurred within the applicable three-year statute of limitations period.5
Appellant also argued that the 2019 indictment did not toll the statute of limitations
period because the 2021 reindictment “charge[d] a different offense” than the 2019
indictment, which had alleged that appellant had “fail[ed] to register with the local
law enforcement authority in” Brazoria County. The trial court denied appellant’s
motion for directed verdict, noting that appellant had not presented “anything” to
show that a reindictment “[wa]s not going to toll the statute” of limitations or that
the 2021 reindictment “d[id]n’t relate back” to the 2019 indictment.
Statute of Limitations
In his first issue, appellant argues that the trial court erred in denying his
motion for directed verdict because “prosecution was barred under the residual three
year statute of limitations.” In his second issue, appellant argues that the evidence
is legally insufficient to support his conviction because the record “affirmatively
5
See TEX. CODE CRIM. PROC. ANN. art. 12.01(8); see also id. art. 62.102(c).
11
establishes that the [2021] [re]indictment upon which [a]ppellant was tried was
barred by [the statute of] limitation[s].”
Because a challenge to a denial of a motion for directed verdict is a challenge
to the legal sufficiency of the evidence to support a conviction, we consider
appellant’s first and second issues together. See Canales v. State, 98 S.W.3d 690,
693 (Tex. Crim. App. 2003); Williams v. State, 582 S.W.3d 692, 700 (Tex. App.—
Houston [1st Dist.] 2019, pet. ref’d). In reviewing whether the evidence is legally
sufficient to support a conviction, we consider all of the evidence in the light most
favorable to the jury’s verdict to determine whether any “rational trier of fact could
have found the essential elements of the crime beyond a reasonable doubt.” Jackson
v. Virginia, 443 U.S. 307, 318–19 (1979); Williams v. State, 235 S.W.3d 742, 750
(Tex. Crim. App. 2007). Our role is that of a due process safeguard, ensuring only
the rationality of the trier of fact’s finding of the elements of the offense beyond a
reasonable doubt. See Moreno v. State, 755 S.W.2d 866, 867 (Tex. Crim. App.
1988); Jeansonne v. State, 624 S.W.3d 78, 91 (Tex. App.—Houston [1st Dist.] 2021,
no pet.). We defer to the responsibility of the fact finder to resolve conflicts fairly
in testimony, weigh the evidence, and draw reasonable inferences from the facts.
Williams, 235 S.W.3d at 750. That said, our duty requires us to “ensure that the
evidence presented actually supports a conclusion that the defendant committed” the
criminal offense of which he is accused. Id.
12
A person commits the offense of failure to comply with the requirements
applicable to sex offenders “if the person is required to register and fails to comply
with any requirement of” Texas Code of Criminal Procedure chapter 62. TEX. CODE
CRIM. PROC. ANN. art. 62.102(a); Robinson v. State, 466 S.W.3d 166, 170 (Tex.
Crim. App. 2015); Harris v. State, 364 S.W.3d 328, 334 (Tex. App.—Houston [1st
Dist.] 2012, no pet.). Chapter 62 requires sex offenders who intend to change
addresses to report to their primary registration authority, not later than seven days
prior to the intended change, and provide their registration authority with their
“anticipated move date and new address.” TEX. CODE CRIM. PROC. ANN. art.
62.055(a). Further, a sex offender must report to the local law enforcement authority
where his new residence is located, not later than seven days after moving or the first
day the local law enforcement authority allows him to report, and provide “proof of
identity and proof of residence.” Id. And, if a sex offender, who reported an
intended address change to his primary registration authority, does not move on or
before the anticipated move date or does not move to the new address provided to
the authority, the sex offender must, not later than seven days after the anticipated
moved date, and “not less than weekly after that seventh day,” report to his primary
registration authority and provide an explanation to the authority regarding any
changes to the anticipated move date and intended residence. See id. art. 62.055(e).
13
Here, appellant does not challenge the legal sufficiency of the evidence as to
the substantive elements of the offense of failure to comply with the requirements
applicable to sex offenders. Instead, he argues only that the trial court erred in
denying his motion for directed verdict and that the evidence is legally insufficient
to support his conviction because the evidence affirmatively established that the
2021 reindictment, on which appellant was tried, alleged conduct that occurred in
2017 and, as a result, the three-year statute of limitations period applicable to the
offense of failure to comply with the requirements applicable to sex offenders barred
his prosecution for that offense. See TEX. CODE CRIM. PROC. ANN. art. 12.01(8)
(three-year statute of limitations applies to felony offenses not listed in Texas Code
of Criminal Procedure article 12.01(1)–(7)), 62.102(c) (offense of failure to comply
with requirements applicable to sex offenders constitutes felony offense).
In determining whether the limitations period has run in this case, we look to
Texas Code of Criminal Procedure article 12.05(b), which provides that “[t]he time
during the pendency of an indictment, information, or complaint shall not be
computed in the period of limitation.” See id. art. 12.05(b). Under article 12.05(b),
“a prior indictment tolls the statute of limitations . . . for a subsequent indictment
when both indictments allege the same conduct, same act, or same transaction.”
Hernandez v. State, 127 S.W.3d 768, 774 (Tex. Crim. App. 2004); see also State v.
West, 632 S.W.3d 908, 912 (Tex. Crim. App. 2021) (“In order for a prior indictment
14
to provide sufficient notice such that the defendant would preserve facts necessary
to defending against the subsequent indictment, the two indictments must involve
the same event.”); Marks v. State, 560 S.W.3d 169, 170 (Tex. Crim. App. 2018).
Thus, whether appellant can prevail on his statute-of-limitations argument depends
on whether the 2019 indictment and the 2021 reindictment allege the same conduct,
same act, or same transaction.
Appellant argues that the 2019 indictment did not toll the applicable statute of
limitations because it charged a different location for the alleged offense—Brazoria
County, and not Galveston County, as alleged in the 2021 reindictment. This
argument relies on appellant’s view that the two indictments charged him with two
distinctly separate events, namely, that the 2019 indictment charged him with a
failure to register in Brazoria County, whereas the 2021 reindictment charged him
with a failure to report his status in Galveston County. But the Texas Court of
Criminal Appeals has held that the failure of a sex offender to report an intended and
then completed change of address is “one crime per move,” meaning that the unit of
prosecution is “one offense for each change of address.” Young v. State, 341 S.W.3d
417, 426 (Tex. Crim. App. 2011). “The focus of the statute is on giving notification
to [the] law enforcement [authority] and not the means by which a sex offender failed
to do so.” Id.; see also Robinson, 466 S.W.3d at 170 (failure to register offense “is
15
a circumstances-of-conduct offense” and gravamen of failure-to-register offense “is
the duty to register”).
Appellant, after expressing his intent to move from Galveston County, had the
duty to register within seven days, whether he moved to Brazoria County, changed
his mind about moving to Brazoria County and remained in Galveston County, or
decided to move to a third location. See TEX. CODE CRIM. PROC. ANN. art. 62.051(a),
(e). Thus, the offense alleged in the 2019 indictment and the offense alleged in the
2021 reindictment are based on the same duty and his failure to register or report a
single change of address. See Robinson, 466 S.W.3d at 171 (“Although all
circumstances-of-conduct offenses naturally contain an additional conduct element,
the conduct itself is not necessarily an additional gravamen.”).
The evidence of appellant’s conduct adduced at trial confirms that the offense
alleged in the 2019 indictment and the offense alleged in the 2021 reindictment
concern the same conduct, act, or transaction. In February 2017, appellant told
Sergeant Papillion of his intent to move to Rosharon. Papillion informed appellant
that “he ha[d] seven days to contact” the local law enforcement authority in Brazoria
County. And she told sex offenders subject to the registration requirements that if
they changed their mind about moving to a new location, they had “seven days, but
[they] ha[d] to contact [her] to let [her] know that [they were] still staying in
Galveston [County], or if [they were] moving elsewhere.” Yet appellant took no
16
action to comply with the registration requirement in the seven days following his
meeting with Papillion. He did not register with local law enforcement in Brazoria
County and made no further contact with the GPD. In 2019, Sergeant Pearcy noticed
that appellant was out of compliance with the Texas sex offender registration
requirements. He searched the TCIC and the NCIC databases for appellant’s
whereabouts and located him in Indianapolis.
Appellant asserts that his appeal is “controlled primarily by” Tita v. State, 267
S.W.3d 33 (Tex. Crim. App. 2008), but he does not explain how Tita applies to his
case, and we find it inapposite. In Tita, the State filed five indictments under five
separate trial court cause numbers, all charging the defendant with aggregated theft
against the same complainant. 267 S.W.3d at 34. The first and second indictments,
filed in March 2005, both charged the defendant with theft of more than $200,000
but the first indictment alleged that the theft occurred between “April 1, 1999, and
continuing through August 30, 2000” and the second indictment alleged that it
occurred “on or about June 1, 1999, and continuing through October 30, 2000.” Id.
The third and fourth indictments, filed in May 2005, charged the defendant with
aggregated theft of more than $100,000, but less than $200,000, but the third
indictment alleged that the offense occurred “on or about April 1, 1999, and
continuing through August 30, 2000,” and the fourth indictment alleged that the
offense occurred “on or about June 1, 1999, and continuing through October 30,
17
2000.” Id. at 34–35. The fifth indictment, filed in July 2006, alleged that the
defendant, “on or about June 28, 1999 and continuing through October 31, 2000,”
“unlawfully appropriated more than $200,000.” Id. at 35.
The defendant filed a pretrial motion to dismiss the fifth indictment, asserting
that the time between the offense alleged and the filing of the fifth indictment was
more than the five-year statute of limitations applicable to the offense and, as a
result, “the prosecution of the offense [wa]s barred by [the statute of] limitations.”
Id. The State responded, stating that the offense alleged in the fifth indictment was
tolled by earlier indictments filed under the other trial court cause numbers, which
were timely filed within the statute of limitations. Id. The trial court denied the
defendant’s motion, and the State brought the defendant to trial under the fifth
indictment. Id. At the close of the evidence, the defendant renewed his
statute-of-limitations complaint in a motion for directed verdict, arguing that he was
entitled to acquittal because the State was barred from prosecuting the case based on
the statute of limitations. Id. at 36. The trial court denied the defendant’s motion.
Id.
On appeal, the defendant challenged the trial court’s denial of his pretrial
motion to dismiss, asserting that the State was required to plead sufficient facts in
the fifth indictment demonstrating that the statute of limitations had been tolled. Id.
at 36–37. The Texas Court of Criminal Appeals observed that it “appeared from the
18
face” of the fifth indictment that prosecution of the defendant under the facts alleged
“was barred by the applicable five-year statute of limitations.” Id. at 38. Thus, under
such circumstances, the court concluded that the State was required to plead in the
fifth indictment that the prior indictments tolled limitations if it wished to avoid the
bar to prosecution.6 Id.
Here, in contrast to Tita, the face of the 2021 reindictment, which was filed
on March 16, 2021 and alleged an offense date of “on or about May 14, 2019,” does
not indicate on its face that the prosecution of appellant was time-barred. See TEX.
CODE CRIM. PROC. ANN. art. 21.02(6) (indictment deemed sufficient if the “time
mentioned” is “some date anterior to the presentment of the indictment and not so
remote that the prosecution of the offense is barred by limitation”); cf. Tita, 267
S.W.3d at 37 (trial court erred in denying defendant’s pretrial motion to dismiss
indictment because “it appeared from the face of the indictment that a prosecution
thereunder was barred” by applicable statute of limitations and State failed to plead
6
The Texas Court of Criminal Appeals remanded the case to the Fourteenth Court of
Appeals for a harm analysis on this issue. Tita v. State, 267 S.W.3d 33, 39 (Tex.
Crim. App. 2008). On remand, the court of appeals held that any error in convicting
the defendant under the faulty indictment was harmless because the lack of tolling
language in the July 2006 indictment “did not deprive [the defendant] of notice of
the conduct or offense for which he was being prosecuted,” did not “impair his
ability to prepare an adequate defense at trial,” and “the inclusion or exclusion of a
tolling paragraph could have no possible impact on future double jeopardy
considerations.” Tita v. State, No. 14-06-00736-CR, 2009 WL 1311813, at *2–3
(Tex. App.—Houston [14th Dist.] 2009, pet. ref’d) (mem. op., not designated for
publication).
19
any tolling facts). Because of this material difference, Tita does not affect our
analysis in this case.
Considering all the evidence in the light most favorable to the jury’s verdict,
we conclude that a rational trier of fact could have found beyond a reasonable doubt
that appellant failed to comply with the registration requirements applicable to sex
offenders in Texas Code of Criminal Procedure chapter 62 and the applicable statute
of limitations did not bar the State from prosecuting appellant for that offense. Thus,
we hold that the trial court did not err in denying appellant’s motion for directed
verdict and the evidence is legally sufficient to support appellant’s conviction.
We overrule appellant’s first and second issues.
Jury Charge Error
In his third issue, appellant argues that the trial court erred in failing to instruct
that “the statute of limitations was not tolled by [defendant’s] absence” from Texas
because “[appellant] left the state before” he was indicted.
A trial court must prepare a jury charge that accurately states the law
applicable to the charged offense. Delgado v. State, 235 S.W.3d 244, 249 (Tex.
Crim. App. 2007). But a trial court has no duty to include an instruction on a
defensive issue—even when it is raised by the evidence—unless the defendant
requests it or objects to its omission. Posey v. State, 966 S.W.2d 57, 59–60, 62 (Tex.
Crim. App. 1998); Flores v. State, 573 S.W.3d 864, 867 (Tex. App.—Houston [1st
20
Dist.] 2019, pet. ref’d). Absent a timely and proper request or objection, the
defendant cannot claim error on appeal based on the trial court’s failure to instruct
the jury on a defensive issue. See Zamora v. State, 411 S.W.3d 504, 513 (Tex. Crim.
App. 2013) (defensive issues “may be forfeited if not preserved at trial”); see also
Mays v. State, 318 S.W.3d 368, 382–83 (Tex. Crim. App. 2010) (“The purpose of
the Posey rule is to prevent a party from ‘sandbagging’ the trial judge by failing to
apprise him, and the opposing party, of what defensive jury instructions the party
wants and why he is entitled to them.”).
The Texas Court of Criminal Appeals has held that the statute of limitations
is a defensive issue. See Proctor v. State, 967 S.W.2d 840, 844 (Tex. Crim. App.
1998); see also Ex parte Heilman, 456 S.W.3d 159, 169 (Tex. Crim. App. 2015)
(reaffirming Proctor and holding that limitations defenses, except those involving
legislative ex post facto violations, are forfeitable rights). Because the record does
not show that appellant requested an instruction on the statute-of- limitations tolling
issue that he raises on appeal, we conclude that the trial court did not err in failing
to submit such an instruction. See Posey, 966 S.W.2d at 62.7
7
Because we find that the trial court did not err in instructing the jury, we need not
conduct a harmless error analysis under Almanza v. State, 686 S.W.2d 157 (Tex.
Crim. App. 1984). See Zamora v. State, 411 S.W.3d 504, 513 (Tex. Crim. App.
2013) (trial court’s sua sponte duty under Almanza to submit charge setting forth
law applicable to case “does not apply to defensive issues, which may be forfeited
if not preserved at trial”); see also TEX. R. APP. P. 47.1.
21
We overrule appellant’s third issue.
Conclusion
We affirm the judgment of the trial court.
Julie Countiss
Justice
Panel consists of Chief Justice Radack and Justices Countiss and Rivas-Molloy.
Do not publish. See TEX. R. APP. P. 47.2.
22 | 01-04-2023 | 12-26-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488420/ | STATE OF LOUISIANA
COURT OF APPEAL, FIRST CIRCUIT
JANIE FAYE BATEMAN BLACKWELL NO. 2022 CW 1143
VERSUS
BLUE FLAME GAS COMPANY OF NOVEMBER 21, 2022
LA, LLC; CHARLES RAY DEDON,
SR., AND LINDA MARIE DEDON
In Re: Blue Flame Gas Company of LA, LLC, Charles Ray Dedon,
Sr., and Linda Marie Dedon, applying for supervisory
writs, 22nd Judicial District Court, Parish of
Washington, No. 117005.
BEFORE : THERIOT, CHUTZ, AND HESTER, JJ.
STAY DENIED; WRIT NOT CONSIDERED. This writ application
failed to include the judgment, in violation of Rule 4-5(6) of
the Uniform Rules of Louisiana Courts of Appeal.
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 relators seek to file a new application with
this court, it must contain all pertinent documentation,
including the missing item noted herein, 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 |
https://www.courtlistener.com/api/rest/v3/opinions/8488421/ | STATE OF LOUISIANA
COURT OF APPEAL, FIRST CIRCUIT
JLM VENTURES, LLC NO. 2022 CW 0941
VERSUS
GRAND PARADISE, LLC, ET AL. NOVEMBER 21, 2022
| Tt
In Re:
The State of Louisiana, through the Department of
Transportation and Development, applying for
supervisory writs, 18th Judicial District Court,
Parish of West Baton Rouge, No. 46011.
BEFORE :
THERIOT, CHUTZ, AND HESTER, JJ.
WRIT DENIED.
MRT
WRC
CHH
COURT OF APPEAL, FIRST CIRCUIT
ASn()
DEPUTY CLERK OF COURT
FOR THE COURT | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488423/ | STATE OF LOUISIANA
COURT OF APPEAL, FIRST CIRCUIT
GERALD PAUL SCHEXNAYDER, UR. NO. 2022 CW 1037
AND KATHRYN SMITH
SCHEXNAY DER
VERSUS
DEREK PAUL MOREAU NOVEMBER 21, 2022
In Re: Derek Paul Moreau, applying for supervisory writs,
18th Judicial District Court, Parish of Pointe Coupee,
No. 49667.
BEFORE : THERIOT, CHUTZ, AND HESTER, JJ.
WRIT DENIED. The criteria set forth in Herlitz
Construction Co., Ince. v. Hotel Investors of New Iberia, Inc.,
396 So.2d 878 (La. 1981) (per curiam), are not met.
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/8488416/ | STATE OF LOUISIANA
COURT OF APPEAL, FIRST CIRCUIT
ROBERT HALL NO. 2022 CW 0925
VERSUS
MEDICAL DIRECTOR; NURSE
ALANA SEAY AND STATE OF
LOUISIANA THROUGH LOUISIANA
DEPARTMENT OF PUBLIC SAFETY
AND CORRECTIONS RAYBURN
CORRECTIONAL CENTER
NOVEMBER 21, 2022
In Re: Robert Hall, applying for supervisory writs, 22nd
Judicial District Court, Parish of Washington, No.
113866.
BEFORE : THERIOT, CHUTZ, AND HESTER, JJ.
WRIT GRANTED WITH ORDER. The district court’s April 19,
2022 judgment granting the exception of lack of subject matter
jurisdiction filed by defendants, the State of Louisiana through
Louisiana Department of Public Safety & Corrections via Rayburn
Correctional Center, Robert Cleveland and Alana Seay, is an
appealable judgment. See La. Code Civ. P. art. 1915(B) (1).
Therefore, the writ is granted for the limited purpose of
remanding the case to the district court with instructions to
grant plaintiff, Robert Hall, an appeal in compliance with La.
Code Civ. P. art. 1915(B)(1) pursuant to the pleading that
notified the district court of plaintiff’s intention to seek
writs. See In re Howard, 541 So.2d 195, 197 (La. 1989) (per
curiam). Additionally, a copy of this court’s order is to be
included in the appellate record.
WRC
CHH
Theriot, J., would not consider the writ. Rule 4-3 of the
Uniform Rules of the Louisiana Courts of Appeal provides that
the return date in civil cases shall not exceed thirty days from
the date of notice of judgment. Notice of the written judgment
was mailed on April 19, 2022, and written notice of intent was
filed on May 24, 2022, which is more than thirty days after
notice of judgment. Accordingly, I find the writ is untimely.
COURT OF APPEAL, FIRST CIRCUIT
as)
DEPUTY CLERK OF COURT
FOR THE COURT | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488422/ | STATE OF LOUISIANA
COURT OF APPEAL, FIRST CIRCUIT
GERALD PAUL SCHEXNAYDER, UR. NO. 2022 CW 1041
AND KATHRYN SMITH
SCHEXNAY DER
VERSUS
DEREK PAUL MOREAU NOVEMBER 21, 2022
In Re: Derek Paul Moreau, applying for supervisory writs,
18th Judicial District Court, Parish of Pointe Coupee,
No. 49667.
BEFORE : THERIOT, CHUTZ, AND HESTER, JJ.
WRIT DENIED. The criteria set forth in Herlitz
Construction Co., Inc. v. Hotel Investors of New Iberia, Inc.,
396 So.2d 878 (La. 1981) (per curiam), are not met.
MRT
WRC
CHH
COURT OF APPEAL, FIRST CIRCUIT
acl
DEPUTY CLERK OF COURT
FOR THE COURT | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488418/ | STATE OF LOUISIANA
COURT OF APPEAL, FIRST CIRCUIT
MARITZA RUBIO NO. 2022 CW 0910
VERSUS
ALLSTATE INSURANCE; STATE FARM
MUTUAL AUTOMOBILE INSURANCE
COMPANY; SYLVIA M. CHAMPAGNE;
JUSTINE P. ARMSTRONG
CONSOLIDATED WITH
OLGA MEJIA
VERSUS
ALLSTATE INSURANCE; STATE FARM
MUTUAL AUTOMOBILE INSURANCE
COMPANY; SYLVIA M. CHAMPAGNE;
JUSTINE P. ARMSTRONG
CONSOLIDATED WITH
LISSETTE MENENDEZ
VERSUS
STATE FARM MUTUAL AUTOMOBILE
INSURANCE COMPANY, ET AL
CONSOLIDATED WITH
JUSTINE P. ARMSTRONG
VERSUS ‘NOVEMBER 21, 2022
SYLVIA M. CHAMPAGNE & STATE FARM
MUTUAL AUTOMOBILE INSURANCE
COMPANY
In Re: Sylvia M. Champagne and State Farm Mutual Automobile
Insurance Company, applying for supervisory writs,
23rd Judicial District Court, Parish of Ascension,
No. 130652 c/w 130654 c/w 130607 c/w 126046.
BEFORE : THERIOT, CHUTZ, AND HESTER, Ju.
WRIT GRANTED IN PART; DENIED IN PART. The writ application
is granted for the sole purpose of striking the portion of the
district court’s June 27, 2022 judgment that reads “because the
sudden emergency doctrine does not apply in this matter.” This
writ application is denied in all other respects.
MRT
WRC
CHH
COURT OF APPEAL, FIRST CIRCUIT
An)
DEPUTY CLERK OF COURT
FOR THE COURT | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488433/ | 11/21/2022
IN THE SUPREME COURT OF THE STATE OF MONTANA Case Number: DA 22-0473
No. DA 22-0473
STATE OF MONTANA,
Plaintiff and Appellee,
v.
PHILIP BRYSON GRIMSHAW,
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 30, 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 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/9350190/ | People v Gessner (2022 NY Slip Op 07413)
People v Gessner
2022 NY Slip Op 07413
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, NEMOYER, AND CURRAN, JJ. (Filed Dec. 23, 2022.)
MOTION NO. (1268/17) KA 17-00637.
[*1]THE PEOPLE OF THE STATE OF NEW YORK, RESPONDENT,
vERIC GESSNER, 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/9350376/ | IN THE COURT OF CRIMINAL APPEALS
OF TEXAS
NO. WR-90,237-03
EX PARTE DEION XAVIER JONES, Applicant
ON APPLICATION FOR A WRIT OF HABEAS CORPUS
CAUSE NO. W15-20892-V(B) IN THE 292ND DISTRICT COURT
FROM DALLAS COUNTY
Per curiam.
ORDER
Applicant pleaded not guilty to aggravated robbery and was sentenced to twenty-five years’
imprisonment. The Fifth Court of Appeals affirmed his conviction. Jones v. State, No. 05-17-
00013-CR (Tex. App.—Dallas Feb. 5, 2018) (not designated for publication). Applicant filed this
application for a writ of habeas corpus in the county of conviction, and the district clerk forwarded
it to this Court. See TEX . CODE CRIM . PROC. art. 11.07.
The Court denied the application without written order on November 16, 2022. After
reconsideration on our own motion, the Court withdraws the previous denial entered in this
application and substitutes this order. TEX. R. APP. P. 79.2(d).
Applicant contends that he has new evidence of his innocence: an unsworn declaration from
2
complainant Jalen Tucker stating that Applicant did not have or point a firearm, Applicant did not
participate in the robbery at all, Applicant was not even present at the scene, and any prior
identification of Applicant was the result of misidentification. On June 27, 2022, the trial court
entered an order designating issue: Whether Applicant’s sole ground of actual innocence meets the
requirements set forth in Herrera v. Collins, 506 U.S. 390 (1993), and its progeny. The district clerk
properly forwarded this application to this Court under Texas Rule of Appellate Procedure
73.4(b)(5). However, the application was forwarded before the trial court made findings of fact and
conclusions of law. We remand this application to the trial court to complete its evidentiary
investigation and make findings of fact and conclusions of law.
The trial court shall make findings of fact and conclusions of law within ninety days from
the date of this order. The district clerk shall then immediately forward to this Court the trial court’s
findings and conclusions and the record developed on remand, including, among other things,
affidavits, motions, objections, proposed findings and conclusions, orders, and transcripts from
hearings and depositions. See TEX . R. APP . P. 73.4(b)(4). Any extensions of time must be requested
by the trial court and obtained from this Court.
Filed: December 21, 2022
Do not publish | 01-04-2023 | 12-26-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/9350382/ | IN THE COURT OF CRIMINAL APPEALS
OF TEXAS
NO. PD-0257-21
DANNA PRESLEY CYR, Appellant
v.
THE STATE OF TEXAS, Appellee
ON STATE’S PETITION FOR DISCRETIONARY REVIEW
FROM THE ELEVENTH COURT OF APPEALS
GAINES COUNTY
MCCLURE, J., delivered the opinion of the Court, in which KELLER, P.J.,
HERVEY, RICHARDSON, and NEWELL, JJ., joined. KEEL, J., concurred. YEARY,
J., filed a dissenting opinion. WALKER and SLAUGHTER, JJ., dissented without
opinion.
OPINION
In late June 2013, Appellant and her husband, Justin Cyr, took their four-
month-old child, J.D., to the emergency room in Lubbock. Upon their arrival,
medical staff quickly discovered J.D. was suffering from life-threatening brain
CYR — 2
hemorrhaging. Physicians were able to save J.D.’s life, but the bleeding resulted in
permanent physical and cognitive dysfunction. The cause of the child’s injuries is
uncontroverted; J.D. was violently assaulted by her father Justin Cyr. Justin was
convicted separately for injury to a child and sentenced to life imprisonment. His
conviction is not at issue.
Appellant was indicted, convicted, and sentenced to fifteen years’
imprisonment for reckless injury to a child by omission. The State sought its general
verdict under two theories: (1) Appellant failed to protect J.D. from Justin, or (2)
Appellant failed to seek reasonable medical care despite her duty to act as J.D.’s
parent.
We granted discretionary review to decide whether Appellant was entitled to
a jury instruction under Texas Penal Code § 6.04(a)’s concurrent causation provision
for acts “clearly insufficient” to cause the proscribed harm. TEX. PENAL CODE §
6.04. Because we find concurrent causation was not raised by the evidence presented
at trial under Texas Penal Code § 22.04(a) and § 6.04(a), we reverse the judgment
of the Eleventh Court of Appeals and affirm the judgment of the trial court.
BACKGROUND
On June 29, 2013, while Appellant was in the kitchen of the family home in
Denver City, Appellant’s husband Justin Cyr began to “choke” and shout expletives
at J.D in the living room. The couple’s older child, E.P., who was five years old at
CYR — 3
the time, testified at trial that Appellant subsequently entered the living room and
instructed Justin to “stop hurting the baby.” 1 Later that night and into the early
morning, Appellant noticed J.D. was experiencing seizure-like symptoms and called
Justin’s mother who was a retired nurse. Justin’s mother advised Appellant to give
J.D. Tylenol and monitor the child. Appellant followed that advice. The next day,
J.D. began to experience seizure-like symptoms again and the couple decided to take
the child to Covenant Hospital in Lubbock, rather than their local hospital just six
miles away. J.D. continued to experience the same symptoms throughout the hour-
long drive to Lubbock. Although Appellant and Justin originally told investigators
they drove to Lubbock because Justin distrusted physicians in Denver City, later
testimony from Appellant’s mother revealed the decision to drive to Lubbock was
made to avoid Child Protective Services (CPS).
When Appellant, Justin, and J.D. arrived at the hospital in Lubbock, medical
personnel quickly realized the child’s injuries resulted from non-accidental abuse.
The hospital contacted CPS and CPS coordinated its investigation with the Lubbock
Police Department.
1
E.P. testified that Justin had choked the baby on other occasions. Additionally, the
couple’s eldest child B.P. testified that she previously witnessed Justin harm J.D. on numerous
occasions when J.D. cried, but was with her maternal grandparents on the date this particular
incident occurred.
CYR — 4
Appellant and Justin were approached by Chief Deputy Patrick Kissick at the
hospital and asked about the circumstances of J.D.’s injury. Both responded that the
child began to experience the seizure-like symptoms after a “hard bowel movement.”
Neither Appellant nor Justin notified Deputy Kissick of the abuse, prior accidents,
falls, or the “popping sound” the child made when she was picked up. 2
Pediatric ophthalmologist Dr. Curt Cockings and pediatrician Dr. Patty
Patterson testified to the severity of the force required to cause such extensive
injuries to J.D and the mechanism of injury. They found that J.D. was shaken
powerfully enough that her brain struck the inside of her skull, causing extensive
subdural hemorrhaging, retinal hemorrhaging, brain swelling, and retinal
detachment. Dr. Cockings concluded the injuries would not have been caused by a
“hard bowel movement,” a short fall, being squeezed, or being struck. Dr. Patterson
further concluded that immediate medical treatment could have reduced the extent
of the damage.3
2
Medical professionals at Covenant Hospital also discovered the child had two broken
ribs and estimated that injury to be about two weeks old at the time she was brought in.
3
Dr. Pankratz, testifying to J.D.’s ongoing medical treatment, estimated J.D.’s
development including speech and fine motor skills to be that of about an 18-month-old to two-
year-old standard despite her chronological age at the time of trial being five-and-a-half years.
She is not expected to progress further than the two-and-a-half-year developmental standard. She
likely will never develop even rudimentary skills such as using the bathroom unassisted or
communicating effectively with caregivers. She has been left legally blind and her life
expectancy has been dramatically reduced. A substantial portion of J.D.’s brain is “dead,” and
will never recover.
CYR — 5
Based on the medical findings, Deputy Kissick obtained an arrest warrant for
both parents. Justin and Appellant were arrested on July 2, 2013. In an interview
after her arrest, Appellant gave a brief statement to police indicating she was
unaware of Justin’s prior domestic violence charges or what would have caused
J.D.’s injuries other than the constipation she previously discussed with Deputy
Kissick. Appellant was charged under Texas Penal Code § 22.04 by two paragraphs.
In the first paragraph, the State alleged Appellant “recklessly, by omission, cause[d]
serious bodily injury” to J.D. when she failed to protect the child from being
“grabbed, squeezed or shaken by Justin Cyr, or by failing to seek reasonable medical
attention” where she had a duty to protect and provide medical care. The second
paragraph differed solely with respect to Justin’s actions, alleging Appellant failed
to protect J.D. from “being struck against a hard surface by Justin,” and subsequently
failed to provide medical care.
At trial, Appellant’s defensive theory pointed a finger at Justin, arguing
Appellant should not be held liable for his actions because, after all, J.D.’s injury
would not have occurred in the absence of Justin’s violent abuse. Appellant further
argued that her failure to procure medical treatment did not worsen J.D.’s injury, nor
was Appellant aware of the risk of injury to the child by virtue of Justin’s presence
in the home.
CYR — 6
Based in part on her argument that she should not be held liable for her failure
to act, Appellant requested a jury instruction on concurrent causation. The trial court
denied the request and, with respect to causation, required the jury to find: “…by
this failure to protect [J.D.] or by this failure to provide medical care to [J.D.]
[Appellant] caused bodily injury to [J.D.].”
Appellant was convicted by a jury and sentenced to fifteen years’
imprisonment in the Institutional Division of the Texas Department of Criminal
Justice.
DIRECT APPEAL
On direct appeal, Appellant raised two grounds for review: (1) the trial court
erred when it refused to instruct the jury on concurrent causation, and (2) the
evidence at trial was legally insufficient to support a conviction under § 22.04 of the
Texas Penal Code.
With respect to her first issue, Appellant argued concurrent causation is a
defensive issue raised by the facts of this case, entitling her to a jury instruction. She
argued, with respect to her failure to prevent the child’s injuries, that she was neither
present nor aware of Justin’s conduct towards the child for purposes of preventing
his harmful act. In response to the State’s theory that Appellant failed to provide
adequate medical care, Appellant argued there was some evidence in the record
indicating the delay in treatment had no adverse effect on J.D.’s injuries. She
CYR — 7
concluded that her burden to provide evidence that her acts alone were clearly
insufficient to cause the harm was satisfied, that Justin’s act alone was clearly
sufficient alone to cause the harm, and therefore the trial court erroneously refused
her request for a jury instruction on concurrent causation.
The Eleventh Court of Appeals agreed and held that Appellant’s entitlement
to an instruction on the issue was predicated on Appellant’s ability to produce some
evidence that her actions, standing alone, were “clearly insufficient” to produce the
harm to J.D. Cyr v. State, 630 S.W.3d 380, 388 (Tex. App.—Eastland 2021). Relying
heavily on its decision in Wright, the court of appeals found “some evidence”
Appellant’s conduct did not cause aggravation of J.D.’s injury and was otherwise
insufficient to cause the resulting injury. Id. (emphasis in original). It found
Appellant entitled to an instruction on concurrent causation. Id.; Wright v. State, 494
S.W.3d 352 (Tex. App.—Eastland 2015, pet. ref’d) (finding failure to obtain medical
care was a concurrent cause with preceding sexual abuse). Under a “some harm”
analysis, the jury’s inability to consider the issue of concurrent causation despite the
defense’s theory of the case, which centered on Justin’s culpability improperly
denied Appellant presentation of her theory of the case. Cyr, 630 S.W.3d at 388. The
appellate court thus sustained Appellant’s first issue, reversing the judgment of the
trial court.
CYR — 8
In addressing Appellant’s second issue, and despite having found “some
evidence” supporting Appellant’s argument that her conduct alone would have been
“clearly insufficient” to cause the harm to J.D., the court of appeals found the
evidence presented at trial sufficient to permit a jury to find both Appellant’s
omissions caused serious bodily injury to J.D. beyond a reasonable doubt. Id. at 390.
STATE’S PETITION AND APPELLANT’S RESPONSE
The State petitioned this Court, arguing concurrent causation is wholly
inapplicable to omission offenses under § 22.04 or otherwise is not raised by the
facts of this case.4 TEX. PENAL CODE § 22.04. The State complains that a concurrent
causation instruction, if offered in omission cases, would operate to absolve
Appellant of liability by virtue of the mere fact her crime was an omission rather
than an act. In response, Appellant argues omission offenses are appropriately
addressed by the reasoning contained in § 6.04 on concurrent causation, as it
prevents a criminal defendant from facing liability where there are several actors and
the defendant’s omissions are “clearly insufficient” to result in the harm. TEX. PENAL
CODE § 6.04(a). Because Appellant points to no evidence relevant to a concurrent-
causation instruction and instead argues alternative cause, we reverse the judgment
of the court of appeals and affirm the judgment of the lower court.
4
Evidentiary sufficiency is not at issue in our review.
CYR — 9
LAW
Standard of Review
We review jury charge error under a two-pronged test, by looking first to
whether the charge is erroneous. Wooten v. State, 400 S.W.3d 601, 606 (Tex. Crim.
App. 2013). Second, we ask whether Appellant was harmed by the error. Wooten,
400 S.W.3d at 606; see Ngo v. State, 175 S.W.3d 738, 744 (Tex. Crim. App. 2005).
Where there was a timely objection, Appellant must show she suffered “some harm.”
Almanza v. State, 686 S.W.2d 157, 171 (Tex. Crim. App. 1985) (op. on reh’g); TEX.
CODE CRIM. PROC. § 36.19. Where there was no timely objection, Appellant must
show she suffered egregious harm, which we determine by considering the jury
charge as a whole, the issues raised by the parties, the evidence at trial, and “anything
else in the record that informs our analysis.” Lozano v. State, 636 S.W.3d 25, 29
(Tex. Crim. App. 2021).
The State contends Appellant is not entitled to an instruction on concurrent
causation by the very nature of injury-to-a-child-by-omission offenses under Texas
Penal Code § 22.04. Inclusion of an instruction on the defensive issue requires the
defendant to demonstrate that there is evidence supporting it. See Hughes v. State,
897 S.W.2d 285, 297 (Tex. Crim. App. 1994) (citing Robbins v. State, 717 S.W.2d
348, 351 (Tex. Crim. App. 1986)); see Shaw v. State, 243 S.W.3d 647, 658 (Tex.
Crim. App. 2007) (“Whether a defense is supported by the evidence is a sufficiency
CYR — 10
question reviewable on appeal as a question of law.”); see also Dyson v. State, 672
S.W.2d 460, 463 (Tex. Crim. App. 1984) (“The issue before this Court is not the
truth of appellant’s testimony, for that is for the jury.”).
Injury to a child by omission, § 22.04
In contrast to the majority of crimes which proscribe an action, an omission is
punished only when there is “a corresponding duty to act.” Billingslea v. State, 780
S.W.2d 271, 274 (Tex. Crim. App. 1989); see Florio v. State, 784 S.W.2d 415 (Tex.
Crim. App. 1990). Chapter 6 of the Texas Penal Code generally denounces criminal
omissions, permitting them only where “a law…provides that the omission is an
offense or otherwise provides that [an individual] has a duty to perform the act.”
TEX. PENAL CODE § 6.01(c). Section 22.04 of the Texas Penal Code is one of those
provisions. By its terms, § 22.04 punishes an individual who “intentionally,
knowingly, or recklessly by omission, causes to a child…serious bodily injury.”
TEX. PENAL CODE § 22.04(a). Injury-to-a-child offenses under § 22.04 are “result-
oriented” and “requir[e] a mental state that relates not to the specific conduct, but to
the result of that conduct.” Williams v. State, 235 S.W.3d 742, 750 (Tex. Crim. App.
2007) (citing Alvarado v. State, 704 S.W.2d 36, 39 (Tex. Crim. App. 1985)).
Thus, to prove injury to a child by omission under § 22.04, the State must
show a person: (1) “intentionally, knowingly, or recklessly,” (2) “by omission,” (3)
CYR — 11
“cause[d] to a child,” (4) “serious bodily injury; serious mental deficiency,
impairment, or injury; or bodily injury.” TEX. PENAL CODE § 22.04(a).
Appellant does not challenge the fact that Justin inflicted serious injury on
J.D. which caused her to suffer irreparable brain damage. Neither does she challenge
the fact she failed to prevent it from occurring and failed to provide reasonable
medical care after the fact. Nor does Appellant contest her duty to act under
§ 22.04(b) as J.D.’s parent. Parents stand in a special relationship to their children
and have statutory duties including providing their children with food, shelter, or
other necessities including medical care and protection from harm. TEX. FAM. CODE
§ 151.001(a)(2–3). The sole remaining issue is Appellant’s entitlement to a jury
instruction on concurrent causation.
Concurrent Causation
The scope of causation under the Texas Penal Code is broad, allowing courts
to find causation where “the result would not have occurred but for [the] conduct,
operating either alone or concurrently with another cause.” TEX. PENAL CODE §
6.04(a).
The breadth of causation under § 6.04 results from the differences between
civil and criminal law. Unlike tort law in which causation functions as a litmus test
for fairness, causation in criminal law is limited by the culpability requirement.
JOSHUA DRESSLER, UNDERSTANDING CRIMINAL LAW 186–87 (8th ed. 2018) (“[T]he
CYR — 12
Model Penal Code treats but-for causation as the exclusive meaning of ‘causation’
in the criminal law. The Code treats matters of ‘proximate causation’ as issues
relating instead to the actor’s culpability.”). We have nonetheless recognized that
such foreseeability limitations exist. Williams v. State, 235 S.W.3d 742, 755, 764
(Tex. Crim. App. 2007) (“The defendant’s conduct must be a direct cause of the
harm suffered.”) (“Obviously some element of foreseeability limits criminal
causation.”).
Further evidencing § 6.04(a)’s breadth, an actor need not be the sole cause of
the harm. Causation is established where the conduct of the defendant is the “but
for” cause “operating alone or concurrently with another cause.” TEX. PENAL CODE
§ 6.04(a); Robbins v. State, 717 S.W.2d 348, 351 (Tex. Crim. App. 1986). “Another
cause” is one in addition to the actor’s conduct, “an agency in addition to the actor.”
Robbins, 717 S.W.2d at 351 n.2 (citing S. Searcy and J. Patterson, Practice
Commentary, V.T.C.A. Penal Code, Sec. 6.04).
Where two or more causes satisfy “but for” causation, a criminal defendant
remains liable if her conduct was either sufficient to have caused the result alone
“regardless of the existence of a concurrent cause,” or both causes “together” were
sufficient to cause the result. Robbins, 717 S.W.2d at 351 (emphasis in original). An
individual’s guilt may not be premised on his conduct being a mere “contributing
factor” without more. Id. To illustrate: Two arsonists each light fire to the same
CYR — 13
house, one on the east side and one on the west side, both of which are independently
sufficient to burn the house to the ground. Neither arsonist is entitled to an instruction
on concurrent causation and both are criminally liable. 5 The same result is reached
if both fires would independently be insufficient to burn the house to the ground, but
the combined force of the east fire and the west fire causes such a result. Only where
the east arsonist can produce evidence that his fire was clearly insufficient to burn
the house to the ground, and the west arsonist’s clearly sufficient acting alone, would
the east arsonist be entitled to an instruction on concurrent causation and potentially
escape liability for the full extent of the damage caused under concurrent causation.
Restated, § 6.04(a) entitles a defendant to an instruction on concurrent
causation when she shows (1) “an agency in addition to the actor” was a “but for”
cause of the result charged, and (2) some evidence demonstrates her conduct is
“clearly insufficient” to cause the harm and the other, concurrent cause is clearly
sufficient to cause the harm. TEX. PENAL CODE § 6.04(a); Robbins, 717 S.W.2d at
351 n.2 (citing S. Searcy and J. Patterson, Practice Commentary, V.T.C.A. Penal
Code, Sec. 6.04); Hughes v. State, 897 S.W.2d 285, 297 (Tex. Crim. App. 1994).
Concurrent causation should not be confused with “alternative caus[ation],”
however. Barnette v. State, 709 S.W.2d 650, 652 (Tex. Crim. App. 1986). Unlike
5
David A. Fischer, Causation in Fact in Omission Cases, 1992 UTAH L. REV. 1335, 1336
(1992) (using a dwelling fire analogy to demonstrate concurrent causation principles).
CYR — 14
concurrent causation, which alleges there was an “agency in addition to the actor”
responsible in whole or in part for the harm, alternative cause is “an entirely different
issue.” Robbins, 717 S.W.2d at 351 n.2 (quoting S. Searcy and J. Patterson, Practice
Commentary, V.T.C.A. Penal Code, Sec. 6.04) (“A concurrent cause is ‘another
cause’ in addition to the actor’s conduct, an “agency in addition to the actor.”);
Barnette v. State, 709 S.W.2d 650, 651 (Tex. Crim. App. 1986) (“It is doubtful
whether that request was sufficient to alert the trial court to the need for a charge on
‘alternative’ cause, an entirely different issue.”). Contrary to concurrent causation,
which does not dispute the culpable act or mental state alleged by the State and
merely blames another for the result, alternative causation “is simply a different
version of the facts, one which negates at least one element of the State’s case.”
Barnette, 709 S.W.2d at 652.
In Barnette, the defendant was tried on three counts: murder, reckless injury
to a child, and negligent injury to a child after her infant son died when he was
burned with hot water. At trial, Barnette argued that the child was left alone and
caused his own injury by turning on the hot water faucet. This fact pattern was
identical to the State’s allegation of reckless injury to a child, however. As a result,
we found no error in the trial court’s “refus[al] to instruct the jury to find appellant
not guilty if they found to be true facts that would prove her guilty of injury to a
child.” Id. at 651.
CYR — 15
Here, Appellant was charged with one count of injury to a child by omission
on two theories: (1) that she failed to protect J.D. from the harm caused by Justin,
and (2) that she failed to provide reasonable medical care once the initial harm
occurred. Both omissions were alleged to have caused or contributed to J.D.’s
injuries, but the jury was permitted to decide guilt on either theory.
ANALYSIS
Appellant was not entitled to a concurrent cause instruction regarding failure to
protect
Applying our framework to the instant case, we must first ask whether
Appellant has shown a concurrent cause exists. TEX. PENAL CODE § 6.04(a). Here,
Appellant argues that the evidence introduced at trial including her absence from the
room where the injury occurred and the children’s uncertainty about Appellant’s
awareness of Justin’s prior abuse of J.D. 6 were facts demonstrating concurrent
causation. These facts do not establish a concurrent cause, however, but are the very
essence of the State’s case. The State alleged that Appellant, aware of a risk of injury
or harm, failed to protect J.D. from the thing likely to cause the harm. Appellant’s
contention that she was ignorant of the abuse on the date of the incident does nothing
to controvert causality, and only points to some evidence, which the jury did not find
6
Evidence introduced at trial also revealed Justin’s criminal record contained other
domestic-violence offenses, including violence against young children.
CYR — 16
persuasive, that she did not possess the requisite mental state in order to be found
guilty of reckless injury to a child. Where she contests an essential element of the
State’s case and does not raise facts sufficient for a concurrent cause instruction, her
argument falls under Barnette’s alternative-causation framework.
The trial court did not err by refusing to give an instruction which would have
asked the jury to acquit Appellant if they found one of the essential elements of the
State’s case, that Justin did in fact injure the child when Appellant failed to protect
her. See Barnette, 709 S.W.2d at 652. Thus, we find Appellant is not arguing
concurrent causation, but only alternative causation under the guise of concurrent
causation. The jury charge clearly demanded a contrary result if it found Appellant
unaware of the circumstances creating a risk of harm to J.D. After all, the very
essence of a recklessness offense is Appellant’s conscious appreciation of a
substantial risk of harm. TEX. PENAL CODE § 6.03(c).
Factually, the harm to J.D. would not have occurred, if, instead of asking that
Justin “stop hurting the baby,” Appellant had removed the children from Justin’s
presence, alerted law enforcement, or otherwise taken action to prevent harm to J.D.7
“But for” Appellant’s failure to act on her duty to protect her child, J.D. would not
have suffered such horrific abuse. Appellant concedes such a failure to protect,
7
The sufficiency of the evidence as to each of these theories was upheld on appeal, so we
need not address them. Cyr, 630 S.W.3d at 380.
CYR — 17
asking only whether she produced some evidence that Justin’s conduct was a
concurrent cause which was independently, sufficiently harmful by virtue of
evidence indicating he abused the child in the living room while she was in the
kitchen and ambiguous evidence regarding whether the children notified Appellant
of the abuse. Her presence in the kitchen is irrelevant to this question; Appellant’s
awareness of the ongoing abuse was provided for in the nature of the offense and is
unrelated to causality insofar as it merely contests mental culpability. To hold
otherwise would undermine the intention of the legislature, permitting criminal
defendants charged with omission to blame another person, thing, or condition, and
leaving Texas Penal Code § 22.04 and § 6.04 bereft of their plain meaning.
Appellant’s position readily lends itself to an analogy with our decision in
Williams. Williams v. State, 235 S.W.3d 742 (Tex. Crim. App. 2007). In Williams,
we expressed distaste for expansive views on causation, fearing that courts would
hold parents liable for any action which led to the child’s harm including “meeting
[the other parent], having an intimate relationship with him, bearing [the
children], . . .and so forth.” Id. at 764. We then recognized “some element of
foreseeability limits criminal causation just as it limits principles of civil ‘proximate
causation.’” Id. (quoting AMERICAN LAW INSTITUTE, MODEL PENAL CODE § 2.03,
Explanatory Note at 265 n.24). Core tenets of civil proximate cause hold a tortfeasor
liable for his acts or omissions when “criminal conduct is a foreseeable result of such
CYR — 18
negligence.” See Travis v. City of Mesquite, 830 S.W.2d 94, 98 (Tex. 1992) (holding
causality often flows from a foreseeability inquiry).
As stressed above, the jury in this case was required to find Justin’s actions a
foreseeable consequence of Appellant’s omission by virtue of the definition of
recklessness. We recognized the same connection in Williams, which primarily
centered on Williams’s culpability with respect to the accident injuring the children,
rather than whether her act of leaving the children with her boyfriend factually
caused the harm to the children. Williams, 235 S.W.3d at 742 (emphasis added). No
party to the Williams case contested the fact that Williams’s actions in leaving the
children with her boyfriend factually caused the harm. Id. at 764. The same is true
in this case; Appellant’s failure to remove the children from a known danger allowed
harm to occur.
The distinction is evident: while Williams could not have foreseen the series
of unfortunate events which led to a dwelling fire killing her children because there
was no evidence suggesting he was “an incompetent caretaker,” an avalanche of
evidence pointed to Appellant’s knowledge of Justin’s ongoing abuse of J.D. when
he was present in the home. 8 Id. at 765. Foreseeability is an implicit requirement for
8
Specifically:
• E.P. testified that Justin violently choked J.D. and shouted expletives at the child.
She testified that the home was an open-concept trailer in which such disturbances could be
heard throughout the home. E.P. further testified that Appellant told Justin to “stop hurting the
baby,” on the night J.D. was injured and that the violence had occurred before.
CYR — 19
causation that criminal law addresses through culpability. See id. at 751
(“Recklessness requires the defendant to actually foresee the risk involved and
consciously decide to ignore it.”). Thus, evidence contesting such foreseeability, as
in Williams, is evidence refuting mens rea. Foreseeability in the instant case was
proven by virtue of the jury’s finding of recklessness, and the sufficiency of the
evidence on that point, having been upheld by the court of appeals, is not before us.
Cyr, 630 S.W.3d at 380. When the State proved the necessary mens rea, it likewise
proved “proximate causation” as that term is used in the civil counterpart to criminal
causation. Henderson v. Kibbe, 431 U.S. 145, 156 (1977) (“A person who is ‘aware
of and consciously disregards’ a substantial risk must also foresee the ultimate harm
that the risk entails.”); JOSHUA DRESSLER, UNDERSTANDING CRIMINAL LAW 186–87
(8th ed. 2018) (“[T]he Model Penal Code treats but-for causation as the exclusive
• B.P. testified she observed violence between Justin and the baby on numerous
occasions, although she was not present on the night in question. B.P. also testified that the home
was an open concept in which noise could easily be detected.
• Medical experts testified that the child had old injuries including broken ribs
which appeared to be about two weeks old and that J.D. would have been exhibiting seizure-like
symptoms immediately after she suffered the head injury.
• Appellant admitted to law enforcement during an interview that she wanted to
take J.D. to the hospital on the night the injury occurred.
• Appellant’s mother Deborah testified that on the morning after the injuries
occurred, Appellant called her and indicated J.D. had suffered a seizure. Deborah told Appellant
to take J.D. to the hospital in Denver City immediately, but Appellant decided to take J.D. to the
hospital in Lubbock instead, even though that hospital was seventy-five miles away.
• Deborah also reported that Appellant revealed to her the real decision to take J.D.
to Lubbock instead of Denver City: Justin wanted to avoid CPS.
Cyr, 630 S.W.3d at 383–85, 390.
CYR — 20
meaning of ‘causation’ in the criminal law. The Code treats matters of ‘proximate
causation’ as issues relating instead to the actor’s culpability.”).
Further, had Williams alleged concurrent causation principles absolved her of
liability by virtue of her boyfriend’s simultaneous acts in inadvertently burning the
home, this Court would be faced with an identical dilemma. Thus, the confusion
confronted in this case extends not only to omission offenses but likewise appears
with respect to a charge involving an affirmative act. The State’s contention that the
conflict in this case is confined to omission cases is therefore unfounded.
Our conclusion likewise comports with the reasoning of the American Law
Institute’s Model Penal Code, on which the Texas Penal Code is based. Under the
Model Penal Code, defendants may remain independently liable for their harmful
omissions even where the injury occurs vis-à-vis a third party. JOSHUA DRESSLER,
UNDERSTANDING CRIMINAL LAW 186 (8th ed. 2018) (where a father fails to protect
his child from a violent stranger, the stranger remains liable despite the father’s
failure to protect and the father remains liable despite the stranger’s assault “on the
basis of omission principles”).
Finally, a concurrent causation jury instruction would only serve to confuse
the jury. Trusting a jury to reconcile factual causation and concurrent causation in a
case where the evidence does not support concurrent causes would improperly ask
the jury the same questions the Eleventh Court of Appeals has apparently designated
CYR — 21
“too difficult for lawyers or even for philosophers.” Cyr, 630 S.W.3d at 386 (quoting
Westbrook v. State, 697 S.W.2d 791, 793 (Tex. App.—Dallas 1985, pet. ref’d)).
As a result, we find concurrent causation inapplicable to Appellant’s failure
to prevent J.D.’s injury, as Appellant’s arguments contest culpability, rather than
allege concurrent causes.
Appellant was not entitled to a concurrent cause instruction regarding failure to
provide reasonable medical care
Likewise, Appellant fails to demonstrate that Justin’s act was a concurrent
cause of her failure to provide medical care for J.D.9 Section 22.04(a) is a “result of
conduct” offense; where the allegation is a failure to provide medical care, the result
must flow from that conduct. See Alvarado v. State, 704 S.W.2d 36, 39 (Tex. Crim.
App. 1985) (noting that the injury to a child statute is a result-oriented offense). As
we noted in Jefferson, we do not require jury unanimity regarding the conduct
constituting the “means” in injury to a child cases under § 22.04 where the injury is
nevertheless caused by such act or omission. Jefferson v. State, 189 S.W.3d 305,
311–12 (Tex. Crim. App. 2006). Both means alleged, however, must satisfy the “but-
for” causal connection with the result. See id. at 12 (“A person commits the offense
9
The Eleventh Court of Appeals also found evidence that Appellant’s failure to provide
medical care aggravated or worsened J.D.’s injury. Cyr, 630 S.W.3d at 388. The issue is not
before us.
CYR — 22
of injury to a child if (with a particular culpable mental state) he causes serious
bodily injury to a child by ‘act or omission.’”).
Here, the State alleged that both Appellant’s failure to prevent injury and
failure to provide medical care caused the child’s injuries. Both must have been a
“but-for” cause of the resulting harm, and both are analyzed separately for purposes
of concurrent causation. The fact Justin injured the child at the same time Appellant
failed to prevent the injury does nothing to controvert the causal relationship
between Appellant’s failure to provide medical care and the injury.
Further, because injury-to-a-child offenses are result-oriented, § 22.04
requires the State to prove not only that an individual failed to provide reasonable
medical care, but that doing so caused a separate injury, even if the separate injury
was a worsening of the child’s condition. Dusek v. State, 978 S.W.2d 129, 133 (Tex.
App.—Austin 1998, pet. ref’d) (“[I]t [is] necessary to prove that [the child] suffered
a serious bodily injury because appellant failed to provide him medical care.”).
Therefore, any causal dispute regarding the source of J.D.’s initial injury necessarily
would not apply to the subsequent failure to provide reasonable medical care. The
jury charge correctly required the jury to find a causal relationship between both
proposed means and the resulting, separate injuries.
One concurrent cause present in this case which Appellant could have raised
but did not, centers on Justin’s failure to provide medical care following the initial
CYR — 23
injury. Assuming such a concurrent omission satisfies the first prong of our test
under § 6.04(a), it fails the second requirement which would require Appellant to
show that the concurrent omission was clearly sufficient alone to cause the additional
injury, while hers was clearly insufficient. TEX. PENAL CODE § 6.04(a). Thus, such
an example would merely be a concurrent cause that would not entitle Appellant to
an instruction under § 6.04.
One can imagine alternate scenarios concurrently causing delay in the
provision of medical care, which are neither argued nor present on these facts. The
above is merely a non-exclusive example. Nothing in this opinion should be
construed to hold that a concurrent cause must be identical to the offensive conduct.
As outlined above, to show entitlement to an instruction on concurrent causation, a
defendant need only show (1) an “agency in addition to the actor”
“operat[ed]. . . concurrently” with the offensive conduct, and (2) on its own, was
“clearly sufficient” to produce the result, while the defendant’s conduct was
insufficient. TEX. PENAL CODE § 6.04(a). Robbins, 717 S.W.2d at 351 n.2 (citing S.
Searcy and J. Patterson, Practice Commentary, V.T.C.A. Penal Code, Sec. 6.04).
Appellant has not satisfied this test. She points to no evidence suggesting a
concurrent cause contributed to aggravation of J.D.’s initial injuries, or that a
concurrent cause was otherwise responsible for Appellant’s delay in obtaining
medical care. Appellant misunderstands the result to which the concurrent cause
CYR — 24
must apply and points us to no evidence suggesting the delay in obtaining medical
care was due to some other “agency” for purposes of causation under § 6.04.
CONCLUSION
Section 6.04(a) prescribes a narrow set of circumstances in which a defendant
would be entitled to a concurrent causation instruction, in that is confined to those
circumstances in which “the concurrent cause was clearly sufficient to produce the
result and the conduct of the actor clearly insufficient.” TEX. PENAL CODE § 6.04(a).
Concurrent causation should not be over construed to encompass culpability disputes
appropriately addressed by the essential elements of the crime. Barnette, 709 S.W.2d
at 652. While Appellant characterizes her argument as one involving concurrent
causation, the evidence she produced at trial only provided some evidence contesting
her awareness of Justin’s abuse, rather than some evidence the harm would
inevitably have occurred despite performance of her statutory duty to protect J.D.
As we made clear, the jury has previously decided, and the court of appeals affirmed,
the sufficiency of the evidence as to Appellant’s reckless mental state. Cyr, 630
S.W.3d at 388.
Further, and because this Court is unaware of which theory the jury chose to
support its general guilty verdict, Appellant’s failure to provide reasonable medical
care does not demonstrate a concurrent cause. Because the delay in providing
medical care must also cause injury, even where that injury was a worsening of the
CYR — 25
child’s current condition, the question of causality for that additional injury was
necessarily separate from the initial injury. See Dusek, 978 S.W.2d at 133. Thus,
Appellant is not entitled to a concurrent causation instruction on either theory raised
at trial. We reverse the judgment of the court of appeals and affirm the judgment of
the trial court.
Delivered: December 21, 2022
Publish | 01-04-2023 | 12-26-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/9350377/ | IN THE COURT OF CRIMINAL APPEALS
OF TEXAS
NOS. WR-93,807-01 & WR-93,807-02
EX PARTE ELMO DWAYNE FLOWERS, Applicant
ON APPLICATIONS FOR WRITS OF HABEAS CORPUS
CAUSE NOS. 12-CR-0609-83-1 & 12-CR-0610-83-1
IN THE 56TH DISTRICT COURT
FROM GALVESTON COUNTY
Per curiam. SLAUGHTER , J., filed a dissenting opinion, in which YEARY , J., joined.
ORDER
Applicant pleaded guilty to two charges of aggravated assault with a deadly weapon and was
sentenced to 25 years’ imprisonment in each case. Applicant filed these applications for writs of
habeas corpus in the county of conviction, and the district clerk forwarded them to this Court. See
TEX . CODE CRIM . PROC. art. 11.07.
Applicant contends that his pleas were involuntary because trial counsel failed to inform
Applicant of, and investigate, an alleged victim’s statement disavowing her accusation against
Applicant. Alternatively, if trial counsel did not have notice of this statement, Applicant’s pleas were
2
involuntary because they were the result of a Brady1 violation.
Applicant has alleged facts that, if true, might entitle him to relief. Hill v. Lockhart, 474 U.S.
52 (1985); Brady v. United States, 397 U.S. 742 (1970); Brady, 373 U.S. 83. Accordingly, the record
should be developed. The trial court is the appropriate forum for findings of fact. TEX . CODE CRIM .
PROC. art. 11.07, § 3(d). The trial court shall order trial counsel to respond to Applicant’s claims.
In developing the record, the trial court may use any means set out in Article 11.07, § 3(d).
It appears that Applicant is represented by counsel. If the trial court elects to hold a hearing,
it shall determine if Applicant is represented by counsel, and if not, whether Applicant is indigent.
If Applicant is indigent and wishes to be represented by counsel, the trial court shall appoint an
attorney to represent Applicant at the hearing. See TEX . CODE CRIM . PROC. art. 26.04. If counsel is
appointed or retained, the trial court shall immediately notify this Court of counsel’s name.
The trial court shall make findings of fact and conclusions of law as to whether Applicant’s
pleas were involuntary. The trial court may make any other findings and conclusions that it deems
appropriate in response to Applicant’s claims. Additionally, the trial court shall enter findings
regarding laches. Carrio v. State, 992 S.W.2d 486 (Tex. Crim. App. 1999); Ex parte Perez, 398
S.W.3d 206 (Tex. Crim. App. 2013).2
The trial court shall make findings of fact and conclusions of law within ninety days from
1
Brady v. Maryland, 373 U.S. 83 (1963).
2
Before making this determination, the trial court shall give Applicant the opportunity to
respond and explain his delay. See Ex parte Smith, 444 S.W.3d 661, 670 (Tex. Crim. App. 2014)
(“An applicant must be afforded this opportunity—irrespective of whether the State alleges the
delay disadvantages its own position—before a court recommends or concludes that laches
compels the application’s denial”).
3
the date of this order. The district clerk shall then immediately forward to this Court the trial court’s
findings and conclusions and the record developed on remand, including, among other things,
affidavits, motions, objections, proposed findings and conclusions, orders, and transcripts from
hearings and depositions. See TEX . R. APP . P. 73.4(b)(4). Any extensions of time must be requested
by the trial court and obtained from this Court.
Filed: December 21, 2022
Do not publish | 01-04-2023 | 12-26-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/9350410/ | Opinion issued December 22, 2022
In The
Court of Appeals
For The
First District of Texas
————————————
NO. 01-21-00403-CV
———————————
IN THE GUARDIANSHIP OF SAMANTHA LUGO,
AN INCAPACITATED PERSON
On Appeal from Probate Court No. 4
Harris County, Texas
Trial Court Case No. 382193
MEMORANDUM OPINION ON REHEARING
Appellee, Marissa Garcia, guardian ad litem for Samantha Lugo, an
incapacitated person (“Samantha”), has filed a motion for rehearing of our July 26,
2022 opinion and judgment.1 We grant the motion for rehearing, withdraw our
opinion and judgment of July 26, 2022, and issue this opinion and new judgment in
their stead.
Appellant, Guadalupe Lugo, also known as Tish Lugo (“Tish”), challenges
the trial court’s order denying her bill of review2 to set aside a prior order removing
her as the guardian of the person and estate of her sister, Samantha.3 In two issues,
Tish contends that the trial court erred in denying her bill of review.
We dismiss in part and reverse, render, and remand in part.
Background
Tish was appointed as the guardian of the person and estate of Samantha in
2016. In the order appointing Tish as guardian of Samantha’s person and
Samantha’s estate, the trial court granted Tish “full authority” over Samantha
“except as provided by law.” The order also gave Tish “the right to physical
possession of” Samantha and the right “to establish [Samantha’s] legal domicile.”4
1
See TEX. R. APP. P. 49.1. In her motion for rehearing, Garcia requested that this
Court modify its judgment so that “appellate court costs” are not “taxed” against
her.
2
See TEX. EST. CODE ANN. § 1056.101.
3
Appellees are Regions Bank (the “Bank”), Ginger S. Lott, temporary guardian
pending contest of the person and estate of Samantha, and Garcia, guardian ad litem
for Samantha.
4
See TEX. PROP. CODE ANN. § 1151.051(c)(1).
2
In June 2020, the Bank, the trustee of a trust created for Samantha’s benefit
under Texas Property Code chapter 1425 (the “trust”), filed an application to remove
Tish as the guardian of Samantha’s person and a motion to terminate the
guardianship of the estate of Samantha.6 In its first amended application and motion,
the Bank explained that Samantha, in infancy, “suffered a brain injury which left her
incapacitated for the remainder of her life,” and the settlement of a medical
malpractice lawsuit filed by Samantha’s parents led to the creation of the trust.
The Bank also recounted certain interactions it had with Tish about
Samantha’s guardianship over a couple of years. According to the Bank, Tish
informed it in May 2018 that she intended to build a home for Samantha on an
unimproved tract of land located on Memorial Drive in Houston, Texas (the
“Memorial tract”), property owned by Tish’s and Samantha’s mother (the “mother”).
Tish planned to build a home that “would accommodate [Samantha’s] physical
needs and oversized wheelchair.” At Tish’s request, the Bank “distributed $43,000”
to her from the trust for “architectural plans” and “to pay $25,000 towards the
pouring of a slab for the new residence.” But Tish did not mention the $43,000
5
See id. § 142.001–.010.
6
When the trial court appointed Tish as guardian of Samantha’s estate, it did so to
explore the possibility of converting the trust into a “special needs trust.” See 42
U.S.C. § 1396p(d)(4)(A); see also TEX. EST. CODE ANN. § 1151.051(c)(5).
3
distribution from the trust in her annual guardian’s report on the location, condition,
and well-being of Samantha.7
The Bank objected to Tish’s annual report because it failed to mention the
$43,000 distribution. After Tish amended the report by adding a footnote explaining
that the funds had been distributed to her in her individual capacity to reimburse her
for the use of her own funds to pay “architects, engineers, and builders to develop
plans for housing which could best accommodate [Samantha’s] needs,” the Bank
withdrew its objection, and the trial court approved Tish’s annual report.
The Bank alleged that Tish, in January 2019, asked for “another distribution
from the trust to build” the Memorial tract home. The Bank responded that it would
“need to take a lien against the Memorial tract in an amount equal to the distribution
amount” before it would distribute funds from the trust for that purpose. Tish then
said that the plans to build a home on the Memorial tract “were off” and “she was
moving to Puerto Rico.”
According to the Bank, in April 2019, Tish applied to transfer Samantha’s
guardianship to a foreign jurisdiction, Puerto Rico.8 In her application, Tish
“asserted that it was necessary and in the best interest[] of [Samantha] to move
[Samantha] to Puerto Rico because [Samantha’s] immediate family was moving
7
See TEX. EST. CODE ANN. § 1151.052(b).
8
See id. § 1253.001.
4
there.” In July 2019, Tish asked the Bank to distribute $3,533.40 from the trust to
pay for two tickets for a cruise from Orlando, Florida to San Juan, Puerto Rico so
that Samantha could be transported “to Puerto Rico in the most comfortable way
possible.”
The Bank responded to the request for distribution by asking Tish “whether
arrangements ha[d] been made to establish a permanent residence in Puerto Rico”
and whether she had “started the legal proceedings in Puerto Rico to permanently
move [Samantha’s] guardianship” there. Tish’s trial counsel informed the Bank
“that a residence was being established and that Puerto Rican counsel had been either
retained or consulted regarding filing pleadings necessary to transfer the
guardianship.”
The Bank then filed an application for a temporary restraining order and a
temporary injunction to prevent Tish “from removing [Samantha] from Texas.” The
parties agreed to a temporary injunction, signed by the trial court, in which Tish
agreed not to remove Samantha from Texas until either the trial court granted Tish’s
application to transfer the guardianship to a foreign jurisdiction or the Bank agreed
to dissolve the temporary injunction. After further discussions between the Bank
and Tish, Tish, in March 2020, informed the Bank that “the move to Puerto Rico
was on hold.”
5
As grounds for Tish’s removal as guardian of Samantha’s person, the Bank
asserted that Tish had failed to adequately account for the $43,000 distribution to
her from the trust or to use those funds for their intended purposes and had acted
improperly by “us[ing] [Samantha’s] resources for [her] personal and monetary
benefit.” The Bank also asserted that Tish had been generally “non-compliant”; had
“a history of not listening to [the trial court] or to any person associated with keeping
[Samantha] and her funds safe”; “habitually fail[ed] to file timely reports”; and
“delay[ed] two months before complying with the [trial court’s] order to file an
increased bond.”
Further, the Bank alleged that Tish had “create[d] unnecessary costs and
financial drain on [Samantha’s] finances,” citing her hiring of eight different
attorneys and firing of seven since her appointment as guardian of Samantha’s
person and Samantha’s estate and the friction between Tish and the trust companies,
including the Bank’s two predecessor trustees. The Bank also asserted that removal
of Tish as guardian was in Samantha’s best interest because Tish “never complied”
with the guardian ad litem’s 2016 recommendations to either modify Samantha’s
residence or move her “to a living facility or a home that w[ould] provide a larger
living space for her care.”
6
As grounds for termination of the guardianship of the estate of Samantha, the
Bank asserted that Samantha’s estate had no assets, and there was no need for a
guardianship of the estate of Samantha.
The Bank requested that the trial court remove Tish as the guardian of
Samantha’s person and appoint another person as the guardian of the person of
Samantha. The Bank also requested that the guardianship of the estate of Samantha
be terminated.
In her response to the Bank’s first amended application to remove her as
guardian of Samantha’s person and motion to terminate the guardianship of the
estate of Samantha, Tish requested that the trial court deny the Bank’s application
and motion. Tish noted, as to the $43,000 distribution to her from the trust, that at
the time of the distribution, the Bank had classified it “as a direct reimbursement to
Tish” and had transferred the funds into her personal account. Tish had maintained
the distribution “as an intact fund since it was distributed and bonded for the past
year” that was “intended to pay for [Samantha’s] accommodations in the family’s
new home.” When the Bank objected to the failure to include the $43,000
distribution in Tish’s annual report, Tish “amended her . . . [a]nnual [report] to
explain that the[] funds were distributed to her directly and not the guardianship
estate.” The Bank then withdrew its objection.
7
Tish also acknowledged that in April 2019, she filed an application to transfer
the guardianship to a foreign jurisdiction, in which she sought “to establish
permanent residence for [Samantha] in Puerto Rico,” along with the rest of her
family, “for personal and financial reasons.” According to Tish, tension began to
grow between her and the Bank after she had informed the Bank of her desire to
move to Puerto Rico.
Tish also pointed out that the Bank had recently failed to pay the court-ordered
monthly allowance of $5,000 to the mother, Samantha’s caregiver, for Samantha’s
health, education, support, and maintenance needs. Tish had “covered [those]
expenses directly from her own pocket to ensure that [Samantha’s] needs [were]
being met.”
As to the Bank’s urged reasons for removal of Tish as the guardian of
Samantha’s person, Tish asserted that personal discord between a trustee and a
guardian was not a statutory basis for removal of a guardian. Tish also noted that in
July 2019, the Bank had unequivocally tendered its own resignation as trustee of
Samantha’s trust in anticipation of Samantha’s move to Puerto Rico, and according
to Tish, the Bank “ha[d] acted as resigned trustee since that date.” Tish asserted that
the Bank had failed to plead a proper basis for removal of her as the guardian of
Samantha’s person or for termination of the guardianship of the estate of Samantha.
8
Garcia, Samantha’s guardian ad litem, also filed a response to the Bank’s first
amended application to remove Tish as guardian of Samantha’s person and motion
to terminate the guardianship of the estate of Samantha, asserting that Tish should
be removed as the guardian of Samantha’s person and the guardianship of the estate
of Samantha should be terminated. As to the $43,000 distribution to Tish from the
trust, Garcia noted that the distribution was made for the “construction of a new
home” for Tish, Tish’s family, Samantha, and the mother, but “[t]he home was never
built.” Tish had “decided against building the home” on the Memorial tract and
Tish’s counsel “confirmed that the money [was] sitting in the same account” into
which it was initially deposited and “ha[d] not been used.” But “the money ha[d]
not been returned to the [t]rust.” Yet, according to Garcia, “an agreement to return
the funds” to the trust was “being discussed between the parties.”
Garcia also informed the trial court that the Bank had not paid “any of
[Samantha’s] expenses” for the previous two months. The Bank appeared to be
withholding the funds because it “wanted Tish to agree to a new annual budget.”
When the Bank asked Tish to agree to the new budget, she “suggested . . . that since
there ha[d] been no changes, [the Bank] should be able to continue with the prior
annual budget.” The Bank apparently took that response as a refusal to approve the
proposed annual budget, and it “stopped all payments from that point on.” Garcia
stated that she was displeased with the apparent inability of Tish and the Bank “to
9
cooperate for Samantha’s best interest,” noting that the “toxicity between the two
[parties] ha[d] led to several tens of thousands in legal fees being spent by the trust,
with more to come.”
As to the removal of Tish as the guardian of Samantha’s person, Garcia agreed
that Tish should be removed if she continued to pursue the “move to Puerto Rico.”
Garcia observed that Tish had been planning to move her “entire family” to Puerto
Rico for her own business reasons, and “[w]hile it appear[ed] the move would be a
positive one for Tish’s business,” in Garcia’s opinion, it would “create[] a strain on
[Samantha’s] [g]uardianship.” Garcia was also “concern[ed] about the continued
growth of the [t]rust” and its “sustainability and management” if it were moved to
Puerto Rico because Puerto Rican law recognized only a guardianship of the estate
and did not recognize the form of trust that had been created and maintained for
Samantha under Texas law. Given all those factors, Garcia concluded that it would
be in Samantha’s “best interest to [r]emove Tish” as the guardian of Samantha’s
person and appoint the mother as successor guardian of Samantha’s person.
At the hearing on the Bank’s first amended application to remove Tish as the
guardian of the person of Samantha and motion to terminate the guardianship of the
estate of Samantha, the trial court made clear that it wanted to have the Bank’s
application for removal heard before it addressed any issues about the Bank’s
resignation as trustee. The Bank’s trial counsel informed the trial court that the
10
parties had been “unable to reach a resolution”—apparently as to Tish’s resignation
or removal—and the Bank was “ready to proceed” with argument on its application
for removal. But before proceeding, the trial court gave Tish’s trial counsel
additional time to meet with Tish to continue to try to settle the dispute with the
Bank as to Samantha’s guardianship.
When the hearing resumed, the trial court asked Tish’s trial counsel if an
agreement had been reached. He answered that it had not, but that Tish had
“offer[ed] her resignation as guardian of [Samantha’s] person and estate,”
conditioned on the mother’s appointment as the successor guardian of Samantha’s
person. The trial court asked the Bank whether it accepted Tish’s offer, and the
Bank’s trial counsel responded that while the Bank was “in favor of [Tish’s]
resignation,” it had “some concerns” about having the mother appointed as the
successor guardian of Samantha’s person.
After further discussion, the trial court stated:
We have two steps to do, obviously. One is the removal, either by
agreement or by [c]ourt ruling. And, then, the qualification of anyone
named as successor. So . . . if your client’s position is that her
resignation is conditional and the other parties are not willing to accept
that, then we’re going to start the case now on removal.
Speaking directly to Tish’s trial counsel, the trial court then explained that it “just
need[ed] to find out if [Tish’s] decision to resign [was] unconditional” in order to
11
“move on to the next issue as to whether or not [the] mother [was] suitable to serve”
as guardian of Samantha’s person.
The trial court then allowed Tish’s trial counsel another short break to confer
with Tish. When trial counsel returned, he informed the trial court that Tish still did
not “have an agreement” with the Bank. Counsel asked the trial court if it could
determine whether the mother was qualified to serve as guardian of Samantha’s
person before Tish resigned. The trial court said it would not. It told Tish’s counsel,
“[E]ither you decide to . . . have your client resign, or we’re going to have testimony
regarding the removal.”
After the Bank’s first witness was sworn but before the witness testified,
Tish’s trial counsel interjected, “Your Honor, my client said that she unconditionally
resigns” as the guardian of Samantha’s person and guardian of the estate of
Samantha. The Bank’s trial counsel responded: “We accept that.” And the trial
court stated, “All right. Very good.” Without hearing testimony from any witness
on the removal of Tish as the guardian of Samantha’s person or the termination of
the guardianship of the estate of Samantha, the trial court immediately turned to
consider whether the appointment of the mother as the successor guardian of
Samantha’s person would be in Samantha’s best interest, and it heard testimony from
the mother on that issue.
12
At the close of the hearing, the trial court told the parties that it wanted to have
“two orders” prepared. As to the first order, the trial court asked Tish’s trial counsel
to draft an order for Tish’s resignation as guardian of Samantha’s person and the
estate of Samantha, noting that it understood that she had “resigned, but” explaining
that it wanted “to have that in writing.” As to the second order, the trial court stated
that it believed it also “need[ed] to sign an order actually removing [Tish]” as
guardian of Samantha’s person and the estate of Samantha and that it would “sign
[that] order” after it received Garcia’s “additional report and the proposed order of
resignation.”
Tish’s trial counsel noted that “[t]he resignation as guardian of the estate
require[d] the discharge of the bond,” and he proposed that the discharge be included
in the agreed order closing the guardianship of the estate. And he agreed to “prepare
that as well and submit it to the [trial] [c]ourt.”
Tish’s trial counsel then asked the trial court to confirm his understanding that
he was to draft “an order related to acceptance of the resignation” of the trustee and
an agreed order terminating the guardianship of the estate and discharging the bond.
The trial court asked the parties if they needed an immediate “ruling on [the
mother’s] suitability” to be appointed as the guardian of Samantha’s person and
indicated that it was “ready to make a ruling on that.” Alternatively, the trial court
offered to give the parties “some time to work out the agreements before” it made
13
the ruling. The trial court, in the end, did not rule on the appointment of the mother
as the successor guardian of Samantha’s person. It scheduled a status conference
with the parties for a later date.
On October 20, 2020, three events then happened in the case. First, the mother
filed an agreed motion to continue the status conference previously set by the trial
court, which the trial court granted.
Second, Tish filed her “Resignation of the Guardian of the Person and Estate,”
in which she stated that she was appointed as guardian of the person and the estate
of Samantha in 2016. And effective October 2, 2020, she resigned as guardian of
Samantha’s person and Samantha’s estate. She would “file her verified [f]inal
[a]ccount and [f]inal [r]eport” by October 28, 2020.9 She asked the trial court to
accept her resignation and discharge her and her corporate surety.
Third, the trial court signed an “Order Removing Personal Representative and
Appointing Temporary Guardian of the Person and Estate Pending Contest” (the
“removal order”). In the removal order, the trial court, “on its own motion,” stated
that it was considering the removal of Tish as guardian of the person and guardian
of the estate of Samantha. And it concluded that Tish was “no longer suitable to
serve as guardian.” Thus, it ordered that Tish be “removed as [g]uardian of the
9
See id. §§ 1163.101–.105
14
[p]erson and [e]state of Samantha” and that “the letters . . . issued to her . . . be
surrendered and that all such letters be canceled of record whether delivered or not.”
(Emphasis omitted.) The trial court then determined “that a necessity for a
[g]uardian still exist[ed]” and appointed a “temporary guardian pending contest of
the person and estate of [Samantha].” (Emphasis omitted.)
In May 2021, Tish filed her first amended bill of review seeking withdrawal
of the trial court’s removal order.10 She argued that the removal order “was entered
in error because [she had] resigned as guardian [of Samantha’s person and the estate
of Samantha], and no evidence was heard to support the trial court’s finding on
removal.” Also, the removal order “was plainly inconsistent with what [had]
transpired at the hearing” on the Bank’s first amended application to remove Tish as
the guardian of the person of Samantha and motion to terminate the guardianship of
the estate of Samantha and was “not supported by evidence.” According to Tish, the
reporter’s record from the hearing “show[ed] that [Tish] resigned voluntarily
and . . . no evidence was presented or admitted as to her removal.”
In its objection to Tish’s bill of review, the Bank argued the trial court was
not required to accept Tish’s verbal resignation as guardian of Samantha’s person
and the estate of Samantha tendered through her trial counsel at the hearing. The
10
See id. § 1056.101.
15
trial court also was not required to accept Tish’s written resignation, filed on October
20, 2020, because it did not qualify as a “written application” for resignation under
Texas Estates Code section 1203.001.11 And “[n]o necessity existed that would have
required the [t]rial [c]ourt to accept” Tish’s resignation.
Further, the Bank asserted that the trial court’s records contained sufficient
evidence to support Tish’s removal, namely: (1) her frequent hiring and firing of
attorneys to represent her as guardian of Samantha’s person and the estate of
Samantha; (2) her failure to timely file annual accounts and reports; (3) her attempt
to move Samantha from Texas to Puerto Rico; (4) her unspecified actions which
caused the “removal/resignation and replacement of two trustee companies”; (5) her
failure to modify Samantha’s home as recommended by Garcia, Samantha’s
guardian ad litem; (6) her requests to the Bank to approve approximately $100,000
in attorney’s fees that she had incurred for payment by the trust; and (7) her having
taken $43,000 in trust funds for expenses to build a home on the Memorial tract and
her later returning those funds after acknowledging they had been in her personal
account all along.
11
See id. § 1203.001 (“A guardian of . . . the person who wishes to resign the
guardian’s trust shall file a written application with the court clerk, accompanied by
a verified report containing the information required in the annual report required
under [Texas Estates Code sections 1163.101–.105], showing the condition of the
ward entrusted to the guardian’s care.”).
16
In her reply to the Bank’s objection, Tish argued that the trial court’s removal
order and the Bank’s response did not account for what had occurred at the hearing
on the Bank’s first amended application to remove Tish as the guardian of the person
of Samantha and motion to terminate the guardianship of the estate of Samantha,
because it was “clear from the [reporter’s record] that both [the Bank] and the [trial
court] were satisfied with . . . Tish’s unconditional resignation as guardian [of
Samantha’s person and the estate of Samantha] which was made in open court.” In
particular, she noted that “[a]fter the resignation was made, [the Bank’s] counsel
stated, ‘We accept that,’ and the [trial] [c]ourt stated, ‘All right, very good.’”
The trial court denied Tish’s bill of review without a hearing.
Standard of Review
A bill of review is a separate, independent suit, brought by a party to a former
action, to set aside a final judgment that is no longer subject to a motion for new trial
or appealable. Frost Nat’l Bank v. Fernandez, 315 S.W.3d 494, 504 (Tex. 2010);
Woods v. Kenner, 501 S.W.3d 185, 190 (Tex. App.—Houston [1st Dist.] 2016, no
pet.); see TEX. R. CIV. P. 329b(f). We review a trial court’s ruling on a bill of review
for an abuse of discretion, indulging every presumption in favor of the court’s ruling.
Woods, 501 S.W.3d at 190; Li v. DDX Grp. Inv., LLC, 404 S.W.3d 58, 62 (Tex.
App.—Houston [1st Dist.] 2013, no pet.). A trial court abuses its discretion if it acts
in an unreasonable or arbitrary manner, or without reference to guiding rules and
17
principles. Woods, 501 S.W.3d at 190; Li, 404 S.W.3d at 62. Under the
abuse-of-discretion standard, evidentiary sufficiency issues are not independent
grounds of error, but the sufficiency of the evidence is a relevant factor in
determining whether the trial court abused its discretion. Kubbernus v. ECAL
Partners, Ltd., 574 S.W.3d 444, 486 (Tex. App.—Houston [1st Dist.] 2018, pet.
denied); Vandervlist v. Samara Portfolio Mgmt., LLC, No. 14-16-00044-CV, 2017
WL 3194062, at *6 (Tex. App.—Houston [14th Dist.] July 27, 2017, pet. denied)
(mem. op.); In re Guardianship of Finley, 220 S.W.3d 608, 612 (Tex. App.—
Texarkana 2007, no pet.). A trial court does not abuse its discretion where the record
contains some evidence of a substantial and probative character to support its ruling.
Vandervlist, 2017 WL 3194062, at *6.
Pertinent here, Texas Estates Code section 1056.101 provides:
(a) An interested person, including a ward, may, by a bill of review
filed in the court in which the guardianship proceeding was held, have
an order or judgment rendered by the court revised and corrected on a
showing of error in the order or judgment.
(b) Except as provided by [s]ubsection (c), a bill of review to revise
and correct an order or judgment may not be filed more than two years
after the date of the order or judgment.
TEX. EST. CODE ANN. § 1056.101(a), (b).12
12
The Texas Estates Code similarly provides for bills of review in probate
proceedings. See id. § 55.251.
18
A movant seeking an equitable bill of review must plead and prove (1) a
meritorious defense to the underlying cause of action, (2) which the movant was
prevented from making by the fraud, accident or wrongful act of the opposing party
or official mistake, (3) unmixed with any fault or negligence on her own part. Valdez
v. Hollenbeck, 465 S.W.3d 217, 226–27 (Tex. 2015) (elements of “equitable bill of
review”). But a statutory bill of review13 is not subject to the same limitations or
requirements of an equitable bill of review. Woods, 501 S.W.3d at 191; see also
McDonald v. Carroll, 783 S.W.2d 286, 288 (Tex. App.—Dallas 1989, writ denied).
Instead of the three elements required to prove an equitable bill of review, the
movant seeking a statutory bill of review only needs to show “substantial error” in
the challenged order or judgment. Valdez, 465 S.W.3d at 226–27; Woods, 501
S.W.3d at 191. Such substantial error “need not have appeared on the face of the
record and the movant may prove the error at trial by a preponderance of the
evidence.” Ablon v. Campbell, 457 S.W.3d 604, 609 (Tex. App.—Dallas 2015, pet.
denied). Thus, to prevail on her statutory bill of review, Tish was required to
specifically allege and prove, by a preponderance of the evidence, substantial error
in the removal order.
13
Statutory bills of review exist predominantly in the probate and guardianship
contexts. See Valdez v. Hollenbeck, 465 S.W.3d 217, 226 (Tex. 2015).
19
Bill of Review
In a portion of her first issue14 and in her second issue, Tish argues that the
trial court erred in denying her bill of review because the removal order “removed”
Tish as guardian of Samantha’s person and the estate of Samantha when she actually
resigned as guardian and no evidence supported her removal by the trial court. Tish
also asserts that the removal order should be corrected to reflect that she resigned as
guardian of Samantha’s person and the estate of Samantha.
14
Tish’s first issue is phrased to directly challenge the removal order instead of the
trial court’s order denying Tish’s bill of review. But Tish did not timely appeal the
trial court’s October 20, 2020 removal order, which, in the context of this
guardianship proceeding, constituted a final judgment. In re Webster, No.
05-15-00945-CV, 2015 WL 4722306, at *2 (Tex. App.—Dallas Aug. 10, 2015, orig.
proceeding) (mem. op.) (“Texas law has long recognized that an order removing a
guardian is a final appealable order.”); see, e.g., Stevens v. Douglas, 505 S.W.2d
532, 532 (Tex. 1974) (order setting aside appointment of person as administrator
and reinstating the appointment of prior administrator was decree determining all
issues of law and fact between parties and thus constituted final and appealable
judgment); Pine v. deBlieux, 360 S.W.3d 45, 46–47 & n.1 (Tex. App.—Houston
[1st Dist.] 2011, pet. denied) (order accepting initial administrator’s resignation and
appointing successor administrator was appealable); see generally De Ayala v.
Mackie, 193 S.W.3d 575, 578 (Tex. 2006) (“Probate proceedings are an exception
to the one final judgment rule; in such cases, multiple judgments final for purposes
of appeal can be rendered on certain discrete issues.” (internal quotations omitted)).
Any party “seek[ing] to alter the trial court’s judgment or other appealable order”
must timely file a notice of appeal. See TEX. R. APP. P. 25.1(c). Generally, if a
party fails to timely file a notice of appeal, we have no jurisdiction to address the
merits of that party’s appeal. See TEX. R. APP. P. 25.1(b); In re K.L.L., 506 S.W.3d
558, 560 (Tex. App.—Houston [1st Dist.] 2016, no pet.) (without timely notice of
appeal, appellate court lacks jurisdiction over appeal); Brashear v. Victoria Gardens
of McKinney, L.L.C., 302 S.W.3d 542, 545–46 (Tex. App.—Dallas 2009, no pet.)
(timely filing of notice of appeal is jurisdictional prerequisite). To the extent that
Tish’s first issue directly challenges the trial court’s October 20, 2020 removal
order, we hold that we lack jurisdiction to address that portion of her first issue.
20
The trial court, in its removal order, stated that it was “remov[ing]” Tish as
“[g]uardian of the [p]erson and [e]state of Samantha” because it had determined that
she was “no longer suitable to serve as guardian.” (Emphasis omitted.) A guardian
appointed under Texas guardianship law may be “removed only for some cause
declared by the statute to be a sufficient cause.” Kahn v. Israelson, 62 Tex. 221, 225
(1884); see also Finley, 220 S.W.3d at 612. In other words, the statutory grounds
for removal are exclusive. See In re Guardianship of LaRoe, No. 05-15-01006-CV,
2017 WL 511156, at *12 (Tex. App.—Dallas Feb. 8, 2017, pet. denied) (mem. op.);
Finley, 220 S.W.3d at 612.
Texas Estates Code sections 1203.051 and 1203.052 govern the removal of a
guardian appointed under Texas guardianship law either with or without notice. See
TEX. EST. CODE ANN. §§ 1203.051 (“Removal Without Notice”), 1203.052
(“Removal with Notice”). The trial court’s stated reason for removing Tish as
guardian of Samantha’s person and the estate of Samantha—that Tish was “no
longer suitable to serve as guardian”—is not a statutory ground for removal of a
guardian. See id. §§ 1203.051, 1203.052. And thus, the trial court erred in removing
Tish as the guardian of Samantha’s person and the estate of Samantha because she
was “no longer suitable.”
But a trial court “cannot abuse its discretion if it reaches the right result, even
for the wrong reasons.” Finley, 220 S.W.3d at 612. Accordingly, if the record shows
21
that a statutory ground supports Tish’s removal as the guardian of Samantha’s person
and the estate of Samantha, then there would not be substantial error in the removal
order and the trial court would not have erred in denying Tish’s bill of review.
Under Texas Estates Code section 1203.051, a trial court may remove a
guardian appointed under Texas guardianship law based on certain, more serious,
grounds without notice. See TEX. EST. CODE ANN. § 1203.051(a). To remove a
guardian under Texas Estates Code section 1203.052 though, the trial court must
provide notice to the guardian before her removal. See id. § 1203.052(a), (a-1).
Specifically, Texas Estates Code section 1203.051 allows for the removal of
a guardian appointed under Texas guardianship law, without notice, either on the
court’s own motion or on the motion of an interested person, if the guardian:
(1) neglects to qualify in the manner and time required by law;
(2) fails to return, not later than the 30th day after the date the
guardian qualifies, an inventory of the guardianship estate property and
a list of claims that have come to the guardian’s knowledge, unless that
deadline is extended by court order;
(3) if required, fails to give a new bond within the period prescribed;
(4) is absent from the state for a consecutive period of three or more
months without the court’s permission, or removes from the state;
(5) cannot be served with notices or other processes because:
(A) the guardian’s whereabouts are unknown;
(B) the guardian is eluding service; or
22
(C) the guardian is a nonresident of this state who does not
have a resident agent to accept service of process in any guardianship
proceeding or other matter relating to the guardianship;
(6) subject to [Texas Estates Code] [s]ection 1203.056(a):
(A) has misapplied, embezzled, or removed from the state, or
is about to misapply, embezzle, or remove from the state, any of the
property entrusted to the guardian’s care; or
(B) has engaged in conduct with respect to the ward that would
be considered to be abuse, neglect, or exploitation . . . ; or
(7) has neglected to educate or maintain the ward as liberally as the
means of the ward and the condition of the ward’s estate permit.
Id. § 1203.051(a). Texas Estates Code section 1203.056(a) provides that “[t]he court
may remove a guardian under [s]ection 1203.051(a)(6)(A) or (B) only on the
presentation of clear and convincing evidence given under oath.” Id. § 1203.056(a).
Under Texas Estates Code section 1203.052(a), a court may remove a
guardian with notice, either on the court’s own motion or on the motion of an
interested person, if:
(1) sufficient grounds appear to support a belief that the guardian has
misapplied, embezzled, or removed from the state, or is about to
misapply, embezzle, or remove from the state, any of the property
entrusted to the guardian’s care;
(2) the guardian fails to return any account or report that is required
by law to be made;
(3) the guardian fails to obey a proper order of the court that has
jurisdiction with respect to the performance of the guardian’s duties;
(4) the guardian is proved to have been guilty of gross misconduct
or mismanagement in the performance of the guardian’s duties;
23
(5) the guardian:
(A) becomes incapacitated;
(B) is sentenced to the penitentiary; or
(C) from any other cause, becomes incapable of properly
performing the duties of the guardian’s trust;
(6) the guardian has engaged in conduct with respect to the ward that
would be considered to be abuse, neglect, or exploitation, as those terms
are defined by [s]ection 48.002, Human Resources Code, if engaged in
with respect to an elderly person or person with a disability, as defined
by that section;
(7) the guardian neglects to educate or maintain the ward as liberally
as the means of the ward’s estate and the ward’s ability or condition
permit;
(8) the guardian interferes with the ward’s progress or participation
in programs in the community;
(9) the guardian fails to comply with the requirements of [Texas
Estates Code] [s]ubchapter G, [c]hapter 1104;
(10) the court determines that, because of the dissolution of the joint
guardians’ marriage, the termination of the guardians’ joint
appointment and the continuation of only one of the joint guardians as
the sole guardian is in the best interest of the ward; or
(11) the guardian would be ineligible for appointment as a guardian
under [Texas Estates Code] [s]ubchapter H, [c]hapter 1104.
Id. § 1203.052(a), (a-1). For a court, on its own motion, to remove a guardian based
on one of the grounds provided in section 1203.052(a), the guardian must have been
“notified, by certified mail, return receipt requested, to answer at a time and place
set in the notice.” Id. § 1203.052(a-1).
24
Here, Tish was not notified of or given an opportunity to respond to the trial
court’s sua sponte motion to remove her as guardian of Samantha’s person and the
estate of Samantha before the trial court signed the removal order. As a result, we
consider only whether any of the grounds set forth in Texas Estates Code section
1203.051(a) support her removal without notice.
As to whether Tish “neglect[ed] to qualify” as guardian “in the manner and
time required by law,” the statute for qualification requires a guardian, before the
twenty-first day of an order granting letters of guardianship, to: (1) take an oath or
make a declaration to faithfully discharge her duties and file it with the court; 15
(2) give a bond, if required; (3) “file[] the bond with the clerk”; and (4) “obtain[] the
judge’s approval of the bond.” Id. § 1105.002; see also id. § 1203.051(a)(1). The
record contains a signed oath and an approved bond filed on or before the date of the
trial court’s 2016 order appointing Tish as guardian of Samantha. There is no
evidence showing that the trial court could have removed Tish as guardian because
she “neglect[ed] to qualify” as guardian. See id. § 1203.051(a)(1).
The record also does not show that Tish, while acting as guardian of
Samantha’s person or the estate of Samantha, “fail[ed] to return, not later than the
30th day after the date [she was] qualif[ied], an inventory of the guardianship estate
15
See TEX. EST. CODE ANN. § 1105.051.
25
property and a list of claims that ha[d] come to [her] knowledge.” See id.
§ 1203.051(a)(2). As to whether Tish “fail[ed] to give a new bond within the period
prescribed,” we note that the record shows that Tish was once late in paying an
increase in bond ordered by the trial court, but she ultimately paid the increase, after
which the trial court approved the bond. See id. § 1203.051(a)(3). Thus, there is no
evidence showing that the trial court could have removed Tish as guardian because
she “fail[ed] to return . . . any inventory of the guardianship estate property” or “a
list of claims” or because she “fail[ed] to give a new bond.” See id. § 1203.051(a)(2),
(a)(3).
Further, the record raises no question about Tish’s whereabouts and does not
show that she could not be found. See id. § 1203.051(a)(4) (guardian may be
removed because she “is absent from the state for a consecutive period of three or
more months with the court’s permission, or removes from the state”),
1203.051(a)(5) (guardian may be removed because she could not “be served with
notices of other processes because” her whereabouts were unknown, she was eluding
service, or she was a nonresident of state “who d[id] not have a resident agent to
accept service of process”). Thus, there is no evidence showing that the trial court
could have removed Tish as guardian because she was “absent from the state” or
because she could not “be served with notices of other processes.” See id.
§ 1203.051(a)(4), (a)(5).
26
And as to the ground for removal set forth in Texas Estates Code section
1203.051(a)(6), the trial court could not have relied on that provision to remove Tish
as guardian because it does not apply here. Under section 1203.051(a)(6), the trial
court could only remove a guardian if there had been a “presentation of clear and
convincing evidence given under oath,” and the trial court in this case heard no
evidence at the hearing as to Tish’s removal. See id. §§ 1203.051(a)(6), 1203.056(a)
(“The court may remove a guardian under [s]ection 1203.051(a)(6)(A) or (B) only
on the presentation of clear and convincing evidence given under oath.”). Finally,
nothing in the record suggests that Tish neglected “to educate or maintain
[Samantha] as liberally as the means of [Samantha] and the condition of
[Samantha’s] estate permit[ted].” See id. § 1203.051(a)(7). Thus, there is no
evidence showing that the trial court could have removed Tish as guardian because
she “neglected to educate or maintain” Samantha. See id.
Because none of the statutory grounds under Texas Estates Code section
1203.051(a) support the trial court’s removal of Tish, without notice, as guardian of
Samantha’s person and the estate of Samantha, we conclude that Tish met her burden
to show that the trial court committed substantial error in entering the removal order.
See Woods, 501 S.W.3d at 151 (party seeking statutory bill of review only needs to
show “substantial error” in challenged order or judgment).
27
As to Tish’s request that the removal order reflect her resignation as guardian
of Samantha’s person and the estate of Samantha, the Bank argues that Tish’s
unconditional resignation as guardian at the hearing on the Bank’s first amended
application to remove Tish as guardian of Samantha’s person and motion to
terminate the guardianship of the estate of Samantha was not valid because it was
announced by her trial counsel and because she did not file a written application to
resign as required by Texas Estates Code section 1203.001. See TEX. EST. CODE
ANN. § 1203.001 (“Resignation Application”).
We first note that the announcement of Tish’s unconditional resignation in
open court, followed by the Bank’s acceptance of that resignation, created a valid
agreement between Tish and the Bank under Texas Rule of Civil Procedure 11. See
TEX. R. CIV. P. 11 (agreement is enforceable if it is “in writing, signed and filed with
the papers as part of the record” or “made in open court and entered of record”); see,
e.g., Am. Fisheries, Inc. v. Nat’l Honey, Inc., 585 S.W.3d 491, 501–02 (Tex. App.—
Houston [1st Dist.] 2018, pet. denied) (parties’ agreement to settle case is
enforceable if made in open court and entered of record). And under these
circumstances, a resignation announcement by Tish’s trial counsel was as valid as
one made by Tish. See Gavenda v. Strata Energy, Inc., 705 S.W.2d 690, 693 (Tex.
1986) (declaring “[t]he attorney-client relationship is an agency relationship” and
attorney’s “acts and omissions within the scope of his or her employment are
28
regarded as the client’s acts”); see also Wakefield v. Ayers, No. 01-14-00648-CV,
2016 WL 4536454, *4 (Tex. App.—Houston [1st Dist.] 2016, no pet.) (mem. op.)
(“[A]n attorney may execute an enforceable settlement agreement on his client’s
behalf; and, under such circumstances, a client’s personal signature is not
required.”).
However, the Bank is correct that the trial court was not required to accept
Tish’s resignation as guardian of Samantha’s person and the estate of Samantha. But
the record indicates that the trial court did not oppose it. The trial court stated, “All
right, very good” after the Bank agreed to Tish’s unconditional resignation, and it
turned immediately to the task of selecting a successor guardian for Samantha
without hearing any evidence on the grounds for Tish’s removal as guardian that had
been urged by the Bank. Although the Bank complains that Tish did not file a written
application to resign as guardian of Samantha’s person and the estate of Samantha,
as contemplated by Texas Estates Code section 1203.001, neither the Bank nor the
trial court mentioned the need for an application and the trial court described the
orders that it wanted Tish to prepare to effect Tish’s resignation as guardian of
Samantha’s person and the estate of Samantha and discharge. Given that the Bank
agreed to Tish’s resignation in open court and the trial court voiced its approval and
29
directed Tish to prepare a proposed order for her resignation, an application to resign
was unnecessary.16
The trial court also stated it would need an order to “remove.” But the statute
provides for either resignation or removal of a guardian, not both. Compare TEX.
EST. CODE ANN. §§ 1203.001–.002 (addressing resignation of guardian), with id.
§§ 1203.051–.052 (addressing removal of guardian). Earlier in the hearing, the trial
court told Tish’s trial counsel, “[E]ither you decide to . . . have your client resign, or
we’re going to have testimony regarding the removal.” This statement demonstrates
the trial court’s understanding, consistent with the statute, that resignation and
removal were alternatives.
In asking first for a resignation order, the trial court indicated its agreement
with that disposition. So, in asking next for an order to “remove,” after having
declined to take any evidence on that issue, the trial court appears to have meant that
it would need an order to discharge Tish as guardian.17 See id. § 1203.006
16
Tish was still required to file the annual report required by Texas Estates Code
section 1203.001 before she could be discharged. See id. §§ 1203.001,
1203.002(b); see also id. §§ 1163.001–.052.
17
We also note that the Texas Estates Code section 1203.102 uses “removed” alone
as shorthand for “resigned, removed, or died.” Compare id. § 1203.102(a)
(allowing court to appoint successor guardian “[i]f a guardian resigns, is removed,
or dies”), with id. § 1203.102(b) (“The court may appoint a successor guardian
under this section without citation or notice if the court finds that a necessity exists
for the immediate appointment. Subject to an order of the court, a successor
guardian has the powers and rights of the removed guardian.” (emphasis added)).
30
(requirements for discharge of guardian applying to resign); see also id.
§ 1203.002(b) (addressing discharge of person resigning as guardian). We conclude
that the trial court’s removal order should reflect Tish’s resignation as guardian of
Samantha’s person and the estate of Samantha.
Based on the foregoing, we hold that the trial court erred in denying Tish’s
bill of review.
We sustain a portion of Tish’s first issue and her second issue.
Conclusion
We dismiss for lack of jurisdiction the portion of Tish’s appeal seeking to
directly challenge the trial court’s October 20, 2020 removal order. We reverse the
trial court’s order denying Tish’s bill of review and render judgment granting the
bill of review. We remand the case to the trial court to issue a corrected order that
removes the following portion of the October 20, 2020 removal order:
. . . [C]ame on to be considered by the Court on its own motion,
the removal of GUADALUPE LUGO A/K/A TISH LUGO, Guardian
of the Person and Estate of SAMANTHA LUGO, in the above entitled
and numbered estate and it appearing to the Court that the said guardian
is no longer suitable to serve as guardian.
It is THEREFORE ORDERED, ADJUDGED AND DECREED
that GUADALUPE LUGO A/K/A TISH LUGO is hereby removed as
Guardian of the Person and Estate of SAMANTHA LUGO, and the
letters heretofore issued to her shall be surrendered and that all such
letters be canceled of record whether delivered or not.
31
In place of this language, the trial court’s order shall include a statement accepting
Tish’s resignation as guardian of the person and estate of Samantha, and if all
necessary and compliant reports have been filed, any other provision required to
effect her discharge. We dismiss all pending motions as moot.
Julie Countiss
Justice
Panel consists of Chief Justice Radack and Justices Countiss and Farris.
32 | 01-04-2023 | 12-26-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/9350405/ | Opinion issued December 22, 2022.
In The
Court of Appeals
For The
First District of Texas
————————————
NO. 01-21-00443-CV
———————————
STEVEN J. SMITH, Appellant
V.
MADERA RESIDENTIAL–ROCK CREEK APARTMENTS, IDEAL
TOWING, AND ATK TOWING A/K/A ATK STORAGE, Appellees
On Appeal from the County Civil Court At Law No. 2
Harris County, Texas
Trial Court Case No. 1168220
MEMORANDUM OPINION
Appellant Steven J. Smith appeals the county court at law’s ruling that there
was probable cause to tow his vehicle from the parking lot of his apartment
complex. No record was made of the trial in the county court at law. Smith did not
request a record of the trial, nor did he object to the failure of the court reporter to
make a record. To the extent Smith seeks reversal of the judgment based on the
court reporter’s failure to make a record of the trial, Smith has not preserved error.
Because no record was made, we presume that the trial proceedings support the
county court at law’s judgment. We affirm.
Background
Pursuant to the Texas Towing and Booting Act (the “Act”), see TEX. OCC.
CODE § 2308.001-.505, Smith sued Madera Residential-Rock Creek Apartments,
Ideal Towing, and ATK Towing for the removal of his vehicle without probable
cause. As provided in the Act, Smith requested a hearing in the justice court. That
court conducted a hearing, and after the hearing, the court entered judgment in
Smith’s favor.
Ideal Towing appealed to the Harris County Court at Law No. 2. After a
trial, the county court at law concluded that there was probable cause to tow
Smith’s vehicle and entered a take-nothing judgment against Smith. The court also
entered findings of facts and conclusions of law.
The factual findings included:
• Smith owned a 2011 Hyundai Accent that was towed.
• At the time the vehicle was towed, Smith was a resident of Madera
Residential-Rock Creek Apartments. Pursuant to Smith’s apartment lease, a
vehicle that is inoperable is subject to being towed at its owner’s expense.
2
• On February 5, 2021, Ideal Towing placed a sticker on the vehicle stating
that it appeared to be abandoned and would be towed after three days. At the
time, the vehicle appeared to be in an abandoned/inoperable state with debris
on the windshield, rusted brake disks, and the inspection/registration sticker
having expired in January of 2020.
• On March 18, 2021, the vehicle was in the same condition and, having
received no contrary instructions from the apartment complex, Ideal Towing
towed the vehicle for being abandoned and inoperable.
• The vehicle was delivered to ATK Storage for storage. Smith paid $283.20
in towing and storage fees and had the vehicle towed away from storage
because it was inoperable.
The court made the following conclusions of law:
• Petitioner filed the action pursuant to Chapter 2308, Sub-Chapter J of the
Occupations Code.
• There was probable cause for towing the vehicle because of its inoperable
state and because it was subject to being towed pursuant to Smith’s
apartment lease.
• Smith was not entitled to a refund of his costs for the towing and storage of
his vehicle.
The court entered a take-nothing judgment against Smith. This appeal followed.
3
Construing Smith’s appellate brief liberally, he asserts various arguments in
support of the proposition that the evidence is factually insufficient to support the
county court at law’s judgment. Specifically, he argues that witnesses’ testimony
was false. He also argues for reversal because the court reporter did not make a
record of the trial proceedings in the county court at law. Finally, he complains that
the appellees did not file a motion to set aside the justice court’s ruling before
filing an appeal to the county court of law.
Sufficiency of the Evidence
Smith argues that the evidence was factually insufficient to support the
judgment. Specifically, he complains about the veracity of witnesses’ testimony.
A. Applicable Law
Under chapter 2308, subchapter J of the Texas Towing and Booting Act (the
“Act”) entitled “Rights of Owners and Operators of Stored or Booted Vehicles,” a
party is entitled to a hearing to challenge the towing of a vehicle if the party makes
a proper request for such a hearing. See TEX. OCC. CODE §§ 2308.451–.460; see
also Brazos Valley Roadrunners, LLC v. Niles, No. 10-21-00278-CV, 2022 WL
1789978 at *2 (Tex. App.—Waco June 1, 2022, no pet.) (mem. op.). Section
2308.452 specifically states: “The owner or operator of a vehicle that has been
removed and placed in a vehicle storage facility . . . without the consent of the
owner or operator of the vehicle is entitled to a hearing on whether probable cause
4
existed for the removal and placement . . . .” TEX. OCC. CODE § 2308.452; Wilson
v. H-Town Towing, LLC, No. 01-18-00805-CV, 2019 WL 1388018 at *1 (Tex.
App.—Houston [1st Dist.] Mar. 28, 2019, no pet.) (mem. op.). The hearing is to be
conducted in a justice court having jurisdiction over the precinct from which the
vehicle was towed. See TEX. OCC. CODE § 2308.453(a).
The primary issue at a hearing conducted under Chapter 2308 of the Act is
whether probable cause existed for the removal and placement in a storage facility
of a towed vehicle. TEX. OCC. CODE §§ 2308.451–452. If the court that conducts
the hearing finds there was probable cause for the removal and storage of the
vehicle, the “person who requested the hearing shall pay the costs of the removal
and storage.” Id. § 2308.451(a). Conversely, if the court finds that no probable
cause existed for the removal and storage of the vehicle, “the towing company,
vehicle storage facility, or parking facility owner or law enforcement agency that
authorized the removal shall” pay the costs of removal and storage or reimburse
the owner of the vehicle for removal and storage costs already paid. Id.
§ 2308.451(b). At the conclusion of the hearing, the trial court may award:
(1) court costs and attorney’s fees to the prevailing party; (2) the cost of any
photographs submitted by the vehicle owner or operator who is the prevailing
party; (3) the amount that fees exceeded the permitted amount; and
(4) reimbursement of fees for towing and storage. Id. § 2308.458(e).
5
Section 2308.459 of the Act provides for an appeal from the justice court’s
decision. Id. § 2308.459; Manderscheid v. LAZ Parking of Tex., LLC, 506 S.W.3d
521, 527 (Tex. App.—Houston [1st Dist.] 2015, pet. denied). Appeals from justice
courts are tried de novo in county court. See TEX. R. CIV. P. 506.3.
B. Analysis
Smith complains of the factual sufficiency to support the county court at
law’s conclusion that there was probable cause to tow his vehicle. He questions the
veracity of witnesses’ statements and the effect of those statements on the trial
court’s finding of probable cause. His complaint is based on the evidence and
argument at trial.
Evaluation of the sufficiency of the evidence supporting the trial court’s
judgment requires that we review the evidence, including testimony, submitted
during trial. See, e.g., City of Keller v. Wilson, 168 S.W.3d 802, 810–11, 822 (Tex.
2005) (setting out standard of review); Plas-Tex, Inc. v. U.S. Steel Corp., 772
S.W.2d 442, 445 (Tex. 1989) (in determining factual sufficiency of the evidence,
we must consider all evidence that supports or contradicts factfinder’s
determination). A reporter’s record is necessary to consider Smith’s complaints
regarding the testimony at trial. See Flores v. Aguero, No. 01-18-00807-CV, 2020
WL 625301, at *2 (Tex. App.—Houston [1st Dist.] Feb. 11, 2020, no pet.) (mem.
op.) (declining to review evidentiary basis for trial court’s judgment without
6
reporter’s record). Because it is the appellant’s burden to request the court reporter
to record the proceedings, an appellant waives argument about any exchanges not
recorded, and when there is no reporter’s record made, we assume that the trial
court heard sufficient evidence to make all necessary findings in support of its
judgment. See Nicholson v. Fifth Third Bank, 226 S.W.3d 581, 583 (Tex. App.—
Houston [1st Dist.] 2007, no pet.) (appellant bears burden to request court reporter
to make record of proceedings and bring forward sufficient record to show error
committed by trial court). Moreover, the trial court is the proper trier of fact in a
bench trial. See, e.g., AKIB Constr. Inc. v. Shipwash, 582 S.W.3d 791, 805 (Tex.
App.—Houston [1st Dist.] 2019, no pet.) (trial court’s findings after bench trial
have same weight as jury verdict, and trial court, as finder of fact in bench trial, is
sole judge of witness credibility). We are unable to review Smith’s complaints
regarding sufficiency of the evidence without a full record. We overrule his first
issue.
Court Reporter
Smith argues that the judgment should be reversed because the county court
at law did not have a court reporter present during the trial. Generally, if a party
wants a court reporter to record trial court proceedings, the party must request the
court reporter to do so. See TEX. GOV’T CODE § 52.046(a) (stating court reporter
shall record proceedings “on request”); Johnson v. Freo Tex. LLC, No. 01-15-
7
00398-CV, 2016 WL 2745265, at *3 (Tex. App.—Houston [1st Dist.] May 10,
2016, no pet.) (mem. op.) (stating under section 52.046 of the Government Code,
court reporter is not obligated to record trial proceedings unless party requests);
Nabalek v. Dist. Att’y of Harris Cnty., 290 S.W.3d 222, 231 (Tex. App.—Houston
[14th Dist.] 2005, pet. denied) (same).
The record does not reflect that Smith requested a record be made nor does it
reflect that he brought any objection to the lack of reporter to the trial court’s
attention. See Giles v. Fed. Nat’l Mortg. Ass’n, No. 14-14-00931-CV, 2016 WL
308575, at *1 (Tex. App.—Houston [14th Dist.] Jan. 26, 2016, no pet.) (mem. op.)
(stating objection to lack of reporter’s objection could have been made in writing
and included in clerk’s record). Smith’s failure to comply with the applicable laws
and rules of procedure is not excused because he was proceeding pro se. See
Johnson, 2016 WL 2745265, at *3 (citing Mansfield State Bank v. Cohn, 573
S.W.2d 181, 185 (Tex. 1978)). Smith did not properly request a reporter’s record,
nor did he preserve his complaint that the trial court did not provide one. See TEX.
R. APP. P. 33.1. Accordingly, Smith cannot show error in failure to take a record.
See Nabalek, 290 S.W.3d at 231 (party cannot show error in failure to take record
if party does not demonstrate that it requested court reporter take a record). We
overrule his complaint regarding lack of a court reporter and reporter’s record.
8
Appeal to the County Court at Law
Finally, Smith argues that the appellees failed to file a motion to set aside the
justice court’s order before appealing to the county court at law. Ideal Towing
responds that the Texas Rules of Civil Procedure did not require such a motion.
We agree.
A party may file a motion for new trial no later than 14 days after a
judgment is signed. TEX. R. CIV. P. 505.3(c). A party need not move for new trial
as a prerequisite for appealing the judgment. See id. § 505.3(d) (“Motion Not
Required. Failure to file a [motion for new trial] under this rule does not affect a
party’s right to appeal the underlying judgment.”) A party perfects an appeal from
the justice court to the county court at law by paying a bond, cash deposit, or filing
a statement of inability to pay court costs. See id. § 506.1(h). The case must be
tried de novo in the county court. Id. § 506.3. “A trial de novo is a new trial in
which the entire case is presented as if there has been no previous trial.” Id.
The appellees did not err by appealing the judgment to the county court at
law without first moving for a new trial in the justice court. We overrule Smith’s
third issue.
9
Conclusion
We affirm the judgment of the trial court.
Peter Kelly
Justice
Panel consists of Justices Kelly, Rivas-Molloy, and Guerra.
10 | 01-04-2023 | 12-26-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488424/ | STATE OF LOUISIANA
COURT OF APPEAL, FIRST CIRCUIT
FLORIDA GAS TRANSMISSION NO. 2022 CW 0959
COMPANY, LLC
VERSUS
TEXAS BRINE COMPANY, LLC NOVEMBER 21, 2022
In Re: Texas Brine Company, LLC, applying for supervisory
writs, 23rd Judicial District Court, Parish of
Assumption, No. 34,316.
BEFORE : GUIDRY, THERIOT, AND HESTER, JJ.
WRIT NOT CONSIDERED. In its writ application, relator,
Texas Brine Company, LLC, failed to include the correct signed
judgment (including notice of signing thereof), as contemplated
by the district court during the June 21, 2022 hearing on
respondent, Legacy Vulcan, L.L.C.’s, Motion for Partial Summary
Judgment Regarding Closing and Appraisal Costs, a violation of
Rule 4-5(C)(6) of the Uniform Rules of Louisiana Courts of
Appeal.
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 and 4-9.
Any future filing on the issue presented in this writ
application should include the entire contents of this
application, the missing items as noted above, and all
documentation to support the writ application’s timeliness.
Further, in the event relator elects to file a new application
with this court, the application shall be filed on or before
December 6, 2022 and must contain a copy of this court’s ruling.
JMG
MRT
CHH
COURT OF APPEAL, FIRST CIRCUIT
asd)
DEPUTY CLERK OF COURT
FOR THE COURT | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/9350198/ | People v Burdine (2022 NY Slip Op 07412)
People v Burdine
2022 NY Slip Op 07412
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, NEMOYER, AND BANNISTER, JJ. (Filed Dec. 23, 2022.)
MOTION NO. (32/17) KA 14-00996.
[*1]THE PEOPLE OF THE STATE OF NEW YORK, RESPONDENT,
vROMMEL BURDINE, ALSO KNOWN AS ROMELL BURDINE, 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/9350218/ | Matter of Town of Ogden v Wolf (2022 NY Slip Op 07333)
Matter of Town of Ogden v Wolf
2022 NY Slip Op 07333
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., NEMOYER, CURRAN, BANNISTER, AND MONTOUR, JJ.
773 CA 21-01619
[*1]IN THE MATTER OF TOWN OF OGDEN, PETITIONER-RESPONDENT,
vJEREMY WOLF, RESPONDENT-APPELLANT.
PENBERTHY LAW GROUP LLP, BUFFALO (BRITTANY PENBERTHY OF COUNSEL), FOR RESPONDENT-APPELLANT.
KEITH O'TOOLE, ROCHESTER, FOR PETITIONER-RESPONDENT.
Appeal from an order of the Monroe County Court (Michael L. Dollinger, J.), entered April 24, 2021. The order, inter alia, affirmed that part of an order of the Ogden Town Court determining that respondent's dog was a dangerous dog under Agriculture and Markets Law § 123.
It is hereby ORDERED that said appeal is unanimously dismissed without costs.
Memorandum: Respondent appeals from an order of County Court that, inter alia, affirmed Town Court's determination that the dog was a dangerous dog under Agriculture and Markets Law § 123 and that the victim had sustained serious physical injury when the dog attacked her without justification. We dismiss the appeal as moot because the issues in this case no longer present a live controversy inasmuch as "the dog died during the pendency of this appeal" (Board of Mgrs. of the Cove Club Condominium v Jacobson, 107 AD3d 414, 414 [1st Dept 2013]). We further conclude that the exception to the mootness doctrine does not apply (see generally Matter of Hearst Corp. v Clyne, 50 NY2d 707, 714-715 [1980]).
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/8488430/ | 11/21/2022
IN THE SUPREME COURT OF THE STATE OF MONTANA Case Number: DA 22-0404
No. DA 22-0404
STATE OF MONTANA,
Plaintiff and Appellee,
v.
TYLIN JAMES WEBER,
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 30, 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 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488432/ | 11/21/2022
IN THE SUPREME COURT OF THE STATE OF MONTANA Case Number: DA 22-0378
No. DA 22-0378
STATE OF MONTANA,
Plaintiff and Appellee,
v.
RALPH DEAVILA,
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 30, 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 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488429/ | NOT DESIGNATED FOR PUBLICATION
STATE OF LOUISIANA
COURT OF APPEAL
FIRST CIRCUIT
NO. 2022 CA 0451
COURTNEY D. GRAY AND SHANA M. GRAY
VERSUS
UV LOGISTICS, LLC, D/ B/ A UNITED VISION LOGISTICS, ALBERT
KNIGHT, SR., INDIVIDUALLY AND/ OR D/ B/ A AK TRUCKING, LLC,
DIAMOND TANK RENTALS, INC, ABC INSURANCE COMPANY, DEF
INSURANCE COMPANY, AND GHI INSURANCE COMPANY
Judgment Rendered.
NOV 17 2022
Appealed from the
16th Judicial District Court
In and for the Parish of St. Mary
State of Louisiana
Case No. 128,324, Division C
The Honorable Vincent J. Borne, Judge Presiding
Arthur D. Dupre Counsel for Plaintiffs/ Appellants
Jacob P. Van Wynen Courtney D. Gray and
Metairie, Louisiana Shana M. Gray
Frederic C. Fondren Counsel for Defendants/ Appellees
Charles G. Blaize, Jr. UV Logistics, LLC, d/ b/ a United
Houma, Louisiana Vision Logistics, Albert Knight, Sr.,
and AK Trucking, LLC
BEFORE: THERIOT, CHUTZ, AND RESTER, JJ.
THERIOT, J.
In this suit arising out of injuries sustained in an incident involving a tractor
trailer winch, plaintiffs -appellants, Courtney D. Gray (" Gray") and Shana M. Gray
collectively " the Grays"), appeal the trial court' s July 29, 2021 judgment, finding
Gray was 70% at fault for failure to properly report maintenance issues with the
trailer and in causing the accident and resulting injuries; finding defendant -
appellee, Albert Knight d/ b/ a AK Trucking (" Knight"), was 30% at fault for failing
to maintain his trailers when previously informed there was an issue with the trailer
and its appurtenances; and further finding defendant -appellee, UV Logistics, LLC
d/ b/ a United Vision Logistics (" UVL"), was vicariously liable for the actions of
Knight. For the following reasons, we affirm.
FACTS AND PROCEDURAL HISTORY
Gray undisputedly worked as a truck driver for Knight. An Independent
Contractor Operating Agreement exists between Knight, as contractor, and UVL,
as carrier, whereby Knight provided UVL the use of certain equipment, including
tractors and trailers, along with one or more professional truck drivers and other
incidental transportation -related services.
On April 6, 2014, Gray was using a winch bar to tighten a load on a trailer,
which was being used to haul cutting boxes secured by straps. Gay inserted the
winch bar into the winch and was pushing down on the winch bar. Toward the end
of tensioning the strap, Gray placed two hands on the winch bar and pushed down
in his last attempt to get it tighter. However, the winch allegedly spun and broke,
and the winch bar came up, striking him on the right side of his forehead.
On April 6, 2015, the Grays filed a Petition for Damages, naming UVL,
Albert Knight, Sr., individually and/ or d/ b/ a AK Trucking, LLC, and various
2
insurers as defendants) The Grays asserted defendants' negligence caused Gray' s
injuries and damages.
Trial on the merits was held on June 28- 30, 2021. Ina judgment signed July
29, 2021, the trial court found Gray was " seventy ( 70%) percent at fault for failure
to properly report maintenance issues with the trailer and in causing the accident
and resulting injuries." The trial court found Knight was " thirty (30%) percent at
fault in failing to maintain his trailers when previously informed that there was an
issue with the trailer and its appurtenances" and further found UVL was
vicariously liable for the actions of Albert Knight d/ b/ a AK Trucking, LLC, under
the trucking agreements between the parties." In the judgment, the trial court made
various damage awards to the Grays and noted that said amounts were " to be
reduced by seventy ( 70%) percent for the fault of Courtney Gray."
In written reasons for judgment, the trial court noted Gray testified that,
when he was winching, he had two hands on the bar and his head was over the bar;
thus, the trial court found Gray failed to follow the proper winching procedure
contributing to the cause of his injuries. Additionally, the trial court found Gray
failed to follow the rules on reporting maintenance issues for Department of
Transportation (" DOT"), as well as UVL. The trial court further noted Gray' s
failure to report to his treating physician two accidents, which occurred while he
was recovering from neck surgery and exacerbated his injuries, protracted Gray' s
recovery from the instant injury. The trial court further noted Gray failed to
complete physical therapy and continues to take narcotic pain medication seven
years post -accident, contributing to his failure to obtain gainful employment.
Referencing the findings of Dr. Christopher Cenac, the trial court noted Gray
The Grays also named Diamond Tank Rentals, Inc. (" Diamond") as a defendant, as Gray
allegedly was picking up the load of cutting boxes from Diamond on the date of the incident.
Diamond filled an unopposed motion to dismiss, which the trial court granted on February 23,
2016.
should have had a psychological assessment prior to the surgery to discern if he
would be a successful candidate for the surgery, which has led to Gray having an
opioid addiction. Thus, the trial court outlined in its written reasons that Gray was
seventy ( 70%) percent at fault in causing the accident and resulting injuries for
failure to follow proper safety rules for winching, follow DOT regulations and
mitigating [ sic] his damages," Knight was 30% at fault in failing to maintain his
trailers, and UVL was vicariously liable with Knight.
On August 9, 2021, the Grays filed a motion for new trial, asking that the
trial court reduce Gray' s allocation of fault. On August lb, 2021, UVL and Knight
likewise filed a motion for new trial. On November 29, 2021, the trial court signed
a judgment, denying both motions for new trial.
The Grays appeal the trial court' s July 29, 2021 judgment. In their first and
second assignments of error, taken together, the Grays assert the trial court was
manifestly erroneous and erred in allocating 70% of fault to Gray because there is
no factual basis in the trial record for such an allocation and the trial court record
clearly establishes that such an allocation of fault is manifestly erroneous.
DISCUSSION
The Grays argue the trial court misconstrued Gray' s testimony as to the
placement of his head at the time of the incident, no OSHA standard or regulation
prohibited the use of both hands on the winch bar, and Gray was unaware of any
winch problems to report before the incident. The Grays further argue the trial
court was manifestly erroneous in concluding he failed to mitigate his damages.
Preliminarily, we note that, although the trial court' s written reasons stated
Gray was 70% at fault " in causing the accident and resulting injuries for failure to
follow proper safety rules for winching, follow DOT regulations and mitigating
sic] his damages," the July 29, 2021 judgment from which the Grays appeal does
not include a finding that Gray failed to mitigate his damages. Moreover, neither
4
the reasons nor the judgment state how much ( if any) the various damage awards
were reduced for failure to mitigate damages, and none of the parties have
appealed, asking this court to reduce damages for failure to mitigate. Where there
is a discrepancy between the judgment and the reasons for judgment, the judgment
prevails. Scoggins v. Frederick, 98- 1814, p. 3 ( La. App. 1st Cir. 9124199), 744
So. 2d 676, 680, n. 4, writ denied, 1999- 3557 ( La. 3117100), 756 So. 2d 1141.
Accordingly, as the appealed judgment does not reflect either a finding that Gray
failed to mitigate his damages or a reduction of damages therefor, we find the
judgment prevails, and the issue of failure to mitigate damages is not before this
court.
As to Gray' s comparative fault, La. Civ. Code art. 2323( A) states:
In any action for damages where a person suffers injury, death, or
loss, the degree or percentage of fault of all persons causing or
contributing to the injury, death, or loss shall be determined,
regardless of whether the person is a party to the action or a nonparty,
and regardless of the person' s insolvency, ability to pay, immunity by
statute, including but not limited to the provisions of R.S. 23: 1032, or
that the other person' s identity is not known or reasonably
ascertainable. If a person suffers injury, death, or loss as the result
partly of his own negligence and partly as a result of the fault of
another person or persons, the amount of damages recoverable shall
be reduced in proportion to the degree or percentage of negligence
attributable to the person suffering the injury, death, or loss.
The allocation of fault between comparatively negligent parties is a finding
of fact. Sims v. State Farm Automobile Insurance Co., 98- 1613, p. 2 ( La.
312199), 731 So. 2d 197, 199. The supreme court in Watson v. State Farm Fire
and Casualty Insurance Co., 469 So. 2d 967, 974 ( La. 1985) set forth guidelines
for apportioning fault under the doctrine of comparative negligence, as follows:
In determining the percentages of fault, the trier of fact shall consider
both the nature of the conduct of each party at fault and the extent of
the causal relation between the conduct and the damages claimed.
In assessing the nature of the conduct of the parties, various factors
may influence the degree of fault assigned, including: ( 1) whether the
conduct resulted from inadvertence or involved an awareness of the
danger, ( 2) how great a risk was created by the conduct, ( 3) the
5
significance of what was sought by the conduct, ( 4) the capacities of
the actor, whether superior or inferior, and ( 5) any extenuating
circumstances which might require the actor to proceed in haste,
without proper thought. And, of course, as evidenced by concepts
such as last clear chance, the relationship between the fault/negligent
conduct and the harm to the plaintiff are considerations in determining
the relative fault of the parties.
Like all factual findings, the standard of review of comparative fault
allocations is that of manifest error. Leonard v. Ryan' s Family Steak Houses,
Inc., 2005- 0775, p. 13 ( La. App. 1st Cir. 6/ 21/ 06), 939 So. 2d 401, 410. The
supreme court has announced a two- part test for the reversal of a factfinder' s
determinations: ( 1) the appellate court must find from the record that a reasonable
factual basis does not exist for the finding of the trial court; and ( 2) the appellate
court must further determine that the record establishes that the finding is clearly
wrong ( manifestly erroneous). See Stobart v. State through Department of
Transportation and Development, 617 So. 2d 880, 882 ( La. 1993).
The manifest error standard demands great deference to the fact finder' s
conclusions; for only the fact finder can be aware of the variations in demeanor
and tone of voice that bear so heavily on the listener' s understanding and belief in
what is said. Schexnayder v. Bridges, 2015- 0786, p. 13 ( La. App. 1st Cir.
2126116), 190 So. 3d 764, 773. Where two permissible views of the evidence exist,
the fact finder' s choice between them cannot be manifestly erroneous or clearly
wrong. Id. If an appellate court finds a clearly wrong allocation of fault, the court
should adjust the award, but then only to the extent of lowering or raising it to the
highest or lowest point respectively that is reasonably within the fact finder' s
discretion. Id. at 773- 74.
Trial testimony reflects that, on April 6, 2014, Gray inserted the winch bar
into the winch and was pushing down on the winch bar. Gray testified that he
placed his hand on the trailer to make sure he was balanced and then he came
down with the bar a couple of times. He said he then placed both hands on the bar
6
and was pushing down to get it " extra tight." Bob Tindell (" Tindell"), another
driver who witnessed the incident, testified that Gray' s back was straight, and he
was pushing down with his arms, using a little body weight and his knees for
leverage. Tindell noted Gray was pushing for the last few clicks, which is the end
of tightening a strap when extra tension is needed. However, the winch bar came
back up striking Gray on the right side of his forehead. Gray testified he was
wearing a hard hat, which was knocked off.
Gray attended orientation with UVL twice, on July 19, 2011 and February 5,
2014. Glenn Gary (" Glenn"), a UVL trainer and safety manager, testified at trial
that, in his training class, drivers are taught to face the trailer with the winch bar
off to the right, if they are right-handed.' They are told to then stabilize themselves
on the trailer by grabbing the rub rail and properly tension the bar with the other
hand. Glenn testified "[ t]he driver is responsible for their own safety by their
actions."
A PowerPoint presentation used in UVL' s driver training on load
securement outlined the following: " Use proper body positioning. Keep both feet
firmly planted on the ground and push with your arms and back. Do not put all
your weight over the bar?" Glenn testified the use of the plural word " arms" was a
misspelling, and they " never train for two arms on the bar." Glenn testified the
PowerPoint refers to both the left and right arm ( i.e., whatever arm is used
depending on whether one is left or right-handed) and does not reference two arms
or two hands on the bar at the same time. Glenn agreed the instruction
contemplates a person' s arm and shoulder would be over the bar when the winch
bar is properly being used to produce whatever tension or pressure is needed.
Gray is right-handed.
7
Glenn agreed there can be stylistic variations "[ als long as you follow the
body positioning ... referred to earlier." As to placing a second hand on the bar
toward the end of tightening the strap, Glenn stated the biggest problem with that is
a driver has no way to stabilize himself if something fails. Glenn noted the reason
they tell the driver to place one hand on the trailer is to stabilize themselves if the
bar gives way or the winch gives way or the strap fails and to prevent the driver
from " slamming against the side of the trailer and busting a head." When asked if
it was acceptable procedure and proper for a driver, when tensioning a load, to take
his hand off the trailer for the last two clicks if he stabilizes himself in a sturdy
stance and uses two hands to put the last bit of pressure on the bar, Glenn
responded, " No. ... we don' t train that way." As to body positioning while
winching, Glenn further testified:
Q: And so if you' re standing there like what you demonstrated before,
your arm and your shoulder are over the winch?
A: Yes, they were.
Q: But your body is not, is it, the rest of your body?
A: No.
Q: Your face isn' t?
A: No.
Q: Your torso?
A: I' m looking straight at the winch and watching the winch.
Q: So if you' re facing forward, than that winch is on the side of your
body and you' re pushing it down with your arm, if that winch for
whatever reason pops up, where does it go?
A: There are — if it break, it goes down.
Q: To the ground or right here ( indicating)?
A: Uh-huh.
Q: Not here ( indicating), right?
A: It shouldn' t.
Q: Is that why you teach that?
A: Yes, because there have been injuries where the drivers have
improperly used bars in the past. I' ve seen some pretty nasty injuries
in that. So we' ve had to hammer down on keep your body and face
away from the winch bar. Keep the winch bar off to your right. Most
of these guys are right handed and even left handers, most of them
will do it with the right hand so they can control and keep an eye on
the gear on the left -hand side.
8
In his trial testimony, Stanley Burney (" Burney"), a former contract driver
for UVL who collected Gray' s load after the incident, likewise agreed drivers are
instructed on the proper way to bind down a load and are told not to have their
head or face anywhere near the bar. When asked if he had used two hands to crank
down on the bar, Burney stated he had done so. However, when asked whether the
bar flies up when it breaks, and hits a driver upside the head, Burney responded,
Sometimes if you ain' t careful if you ain' t doing it right."
Additionally, when asked what would happen in the event of a failure within
a winch ( e. g., the pawl fails), Glenn testified that the bar will only come back up if
the person tensioning the bar actually dropped the bar or let go of it; otherwise, it
would remain in the palm of their hand. He maintained the only way the bar is
going to come back up is if the driver releases the tension on the bar; thus, he trains
drivers to have the presence of mind to always hold onto the bar. When asked
whether a driver is expected to hold onto the bar with a sudden surprise of an
upward surge of energy, Glenn explained there is no more energy coming back up
with the bar than the driver is applying directly to it, so it does not surge, create, or
increase energy and further does not increase in the amount of pressure, tension, or
surge. Glenn testified they train the drivers to never let go of the bar until they
know the pawl has been engaged. When asked whether the tension on the strap
would come flying up if the pawl did not catch the gear when a driver cranks down
on the last few clicks, Glenn maintained it was never going to have more pressure
than the driver actually applied himself and does not generate pressure. Glenn
testified that if a driver is surprised, then that means they are not staying focused
on the pressure that is on the bar that they are applying. Glenn agreed a driver
should never be surprised by the amount of tension that is being put on a winch or
strap, as they are putting the pressure on the winch themselves. Per Glenn, the
driver is responsible for their own safety by their actions."
9
In his trial testimony, Gray agreed he was taught to place his left hand on the
truck and use his right hand and shoulder to push down the bar, and Gray further
agreed he was taught to keep his head "[ a] way from the bar." As to the position of
his head at the time of the incident, Gray testified:
Q: What part of your body did the winch bar hit?
A: It hit my head.
Q: Was your head over the bar?
A. My right —the right side of my head. No, sir, my head wasn' t over
the bar.
When asked if any part of Gray' s body, including his head, was over the winch
bar, Tindell responded, " No, sir. No, sir." Nevertheless, in his deposition
introduced into evidence at trial, Charles Prewitt, P. E., the Grays' consulting
engineer, testified:
Q: And so if you' re not leaning your face and head over the bar and
something happens to make the bar pop up, what happens?
A: Well, I don' t know that he had his head and face over the bar. He
had it obviously close enough that it hit him.
Q: You have to be too close to the bar for it to hit you in the forehead,
don' t you?
A: You would have to be close enough to it to hit, yeah. That' s
obvious.
Q: And the point is to not be so close to it so that it hits you in the
head to operate the bar safely; is that correct?
A: Well, that' s the idea, yes.
Q: So if you consider getting too close to it user error, that' s a
possibility in this case; isn' t it?
A: If —
yeah, that' s certainly a possibility. I would — N
( ods head).
MR. VAN WYNEN:
Are you saying in the event of a failure or just normal
operation?
MR. FONDREN:
Either way.
BY MR. FONDREN:
Q: Either way.
A: Like I said, I think it' s — it' s --- yeah, that' s true. He would have
had to have been about the bar for it to hit him. Unless he pulled it
out and hit himself in the head. And I don' t think he did that.
Furthermore, Gray undisputedly had two hands on the winch bar, when the
incident happened, and was pushing the bar down. In his trial testimony, Gray
10
agreed that, as a driver, it was his responsibility to be aware of what he is doing,
the position of his body, and everything else while binding down a load. Gray
agreed that no one can look out for his safety but him.
Glenn further testified that training also covers a driver' s responsibility
relative to completing pre and post -trip logs, which document the pre -trip
inspection and the post -trip inspection. Glenn stated that drivers are instructed
how to complete the log, which is a DOT required document. Glenn testified that a
pre -trip visual inspection may not detect a problem with a winch; however, if the
driver used the winch and had problems with it, then he would be obligated to
indicate this on the post -trip driver' s log. Glenn agreed that his instruction to the
driver doing the training would be that, if issues were not noted, then drivers are
violating company policy and the law. Glenn pointed out that defects must be
documented, even if the truck owner does the repairs.
The Driver' s Daily Log included a section captioned as " Driver' s Daily
3
Vehicle Inspection Report Required by the D. O.T. Safety Regulations —Part 396."
The log directs drivers to " CHECK ANY DEFECTIVE ITEM AND, IF
NECESSARY, GIVE DETAILS UNDER ` REMARKS'." Although the log does
not expressly list winches, it includes " OTHER PARTS AND ACCESSORIES AS
3 49 CFR 396. 11( a)( 2)-( 3) titled " Driver vehicle inspection report( s)" states, in pertinent part:
2) Report content.
i) The report must identify the vehicle and list any defect or deficiency
discovered by or reported to the driver which would affect the safety of
operation of the vehicle or result in its mechanical breakdown....
3) Corrective action.
i) Prior to requiring or permitting a driver to operate a vehicle, every
motor carrier or its agent shall repair any defect or deficiency listed on the
driver vehicle inspection report which would be likely to affect the safety
of operation of the vehicle.
ii) Every motor carrier or its agent shall certify on the driver vehicle
inspection report which lists any defect or deficiency that the defect or
deficiency has been repaired or that repair is unnecessary before the
vehicle is operated again....
11
REQUIRED BY DOT AND/ OR COMPANY POLICY," and the trial witnesses
agreed a defective winch could be noted on the log. Drivers are required to sign
the Driver' s Daily Log, which notes " I HAVE INSPECTED THE ABOVE
EQUIPMENT AND INDICATED ALL NOTICEABLE DEFECTS."
Tindell testified that, prior to the incident, he had been using the trailer at
issue for six months to a year, and he had experienced problems with winches
spinning including the subject winch, which he stated was " skipping and trying to
slow you down." Tindell testified that he told Knight he needed to fix the winches,
as they were worn out, and Knight said he would take care of it. However, Tindell
did not note any of those malfunctions on the daily log, asserting Knight told him
not to do so. Tindell testified Knight told drivers not to write down or make notes
of maintenance and repair issues and told them to give them to him verbally.
When asked to explain why they were not " allowed" to make notations of
maintenance and repairs needed, Tindell stated, "[ W] e would tell Mr. Albert
Knight] about it so he could fix the problem. If we turned it in, United Vision
would shut the truck down and Mr. Knight would not be able to make money from
the truck and neither would I."
Tindell maintained that, if something was not put on the form, then UVL
would not know anything about it, because if they would know about it, they " shut
the truck down." As to whether a defective winch would disqualify a trailer from
service, Tindell testified:
Q: ... if you filled out this document and said a certain winch or
certain winches on Mr. Knight' s trailer had thrown me down and this
was before Mr. Gray' s incident, as far as you know, United Vision
would have gotten that information and either forced the repair of
those things or disqualified the trailer from service, yes?
A: No.
Q: What would they have done?
A: They wouldn' t have done anything because the — if I had wrote -- if
I had wrote winch on there, they shut the truck and trailer down
anyway, but the only thing that would have been written in was that a
12
winch slipped or a winch malfunctioned, that would be it. That' s not
really to them a safety issue.
Q: So if you wrote down winch malfunction, I think you said, they
pull the trailer out of service?
A: They probably would. They might. I don' t know.
However, Gray testified that Tindell never told him about the issue with the
winches on the subject trailer. He stated that, although he had not had problems
with the subject winch, he told Knight about other winches on that trailer that had
given him trouble with the pawls not engaging and looking worn down. Per Gray,
Knight advised he would fix it. Gray agreed he had to turn in daily logs and note
maintenance issues on such. However, Iike Tindell, Gray testified Knight told
them not to mark any maintenance issues or anything wrong with the truck on the
logs; instead, drivers were to let him know and he would take care of it, as the
truck and trailer would be taken " out of service" and " shut ... down." In this
regard, Gray agreed he knowingly signed off on incorrect forms required by DOT
and turned them in to UVL.
At trial, Knight testified that it was not true that he requires drivers to
confront him first verbally with what needs to be fixed before they turn in their
paperwork to UVL, and he further disputed that he told Gray and Tindell not to
write down maintenance and repair problems. However, Knight did not recall
Tindell verbally telling him on multiple occasions, before Gray was hurt, that some
of the winches on the subject trailer were malfunctioning.
Todd Daigle (" Daigle"), UVL' s regional safety manager in April 2014,
testified that he inspected the trailer at issue two weeks before the incident. In his
visual inspection, he saw no issues with the winches, and Gray did not tell him
about any problems with the winches. Daigle testified he never has received
reports or had any problems with Knight keeping his equipment in a state of repair
and safe operation. When asked. what he would do if a driver told him about a
problem that his boss told him not to report, Daigle explained he would go
13
immediately to that item and make sure it actually is out of compliance; once
confirmed it is out of compliance, it would be noted, and the driver would be
instructed to annotate his paperwork and turn it in, holding the owner accountable.
Daigle testified that, if a defect is found, he explains the findings to " the driver or
the owner, whoever ... presented the truck ... and they have to take care of it."
Daigle testified that failing to put things on the logs is breaking the law, and there
are repercussions.
As outlined above, in its July 29, 2021 judgment, the trial court found Gray
was 70% at fault for failing to properly report maintenance issues with the trailer
and for causing the accident and resulting injuries. After a thorough review of the
record and considering the factors set forth in Watson, sura, we find the record
provides a reasonable basis for the trial court' s allocation of fault.
While we cannot say Gray' s failure to report maintenance issues with the
trailer caused his accident, as he testified he had not noted a previous issue with the
subject winch and no evidence reflects how long the trailer would have been taken
out of service to repair other defective winches ( if at all), we find the position of
Gray' s body was a cause of the accident and his injuries. Gray had both hands on
the winch bar at the time of the accident, and the evidence reflects his head was
close enough for the winch bar to hit him. Gray attended UVL orientation twice,
and UVL trains drivers to face the trailer with the winch bar off to the right,
stabilize themselves on the trailer by grabbing the rub rail, and properly tension the
bar with the other hand. UVL training further instructs that the driver' s head
should not be over the bar, and Glenn testified that it is not an acceptable
procedure to use two hands on the winch bar, and they do not train this way.
Gray agreed that, as a driver, it was his responsibility to be aware of what he
is doing, the position of his body, and everything else while binding down a load.
Gray further agreed that no one can look out for his safety but him. Gray admitted
14
he was taught to place his left hand on the truck, use his right hand and shoulder to
push down the bar, and keep his head away from the bar, and we find this
demonstrates awareness of the dangers, especially as he testified he had trouble
with other winches on the trailer. As to the significance of what was sought by
Gray' s conduct in using two hands on the bar, he testified he was using two hands
in order to " push the bar down." However, Glenn testified it was not acceptable
procedure or proper for a driver, when tensioning a load, to take his hand off the
trailer for the last two clicks, even if he stabilizes himself in a sturdy stance and
uses two hands to put the last bit of pressure on the bar. Glenn stated they teach
drivers the forward -facing positioning because there have been " injuries" in the
past. Thus, we find Gray' s conduct herein created a greater risk, and there is no
evidence to suggest extenuating circumstances required Gray to proceed in haste
without proper thought.
As a court of review, our inquiry on appeal is whether the trial court' s
factual findings herein were reasonable and amply supported by the record,
regardless of how we may have weighed the evidence if we were sitting as the trier
of fact. Welch v. London, 2020- 0362 ( La. App. 1st Cir. 12130/ 20), 2020 WL
7768715, * 3 ( unpublished). Moreover, we are also aware that the allocation of
fault is not an exact science, or the search for one precise ratio, but rather an
acceptable range, and any allocation by the fact finder within that range cannot be
clearly wrong. Schexnayder, p. 13, 190 So. 3d at 774. Accordingly, applying the
manifest error standard of review, we find a reasonable factual basis in the record
for the trial court' s application of comparative fault to the facts of this case. We
further find that an allocation of 70% fault to Gray for causing the accident and
resulting injuries was not manifestly erroneous.
15
CONCLUSION
For the reasons set forth herein, the July 29, 2021 judgment of the trial court
is affirmed. Costs of this appeal are assessed to plaintiffs -appellants, Courtney D.
Gray and Shana M. Gray.
AFFIRMED.
16 | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488428/ | STATE OF LOUISIANA
COURT OF APPEAL, FIRST CIRCUIT
MICHAEL HURT, ALSO KNOWN AS NO. 2022 CW 0988
MICHAEL HURTS
VERSUS
STATE OF LOUISIANA THROUGH
THE BOARD OF SUPERVISORS OF
LOUISIANA STATE UNIVERSITY
AND AGRICULTURAL AND
MECHANICAL COLLEGE, ON
BEHALF OF LSU HEALTH SCIENCE
CENTER-NEW ORLEANS, MICHAEL
BARKER, M.D. AND KRESHMEH NOVEMBER 17, 2022
KHOSROWANI, M.D.
In Re: Michael Hurt, applying for supervisory writs, 19th
Judicial District Court, Parish of East Baton Rouge,
No. 713,571.
BEFORE : McCLENDON, WELCH, PENZATO, LANIER, AND WOLFE, JJ.
WRIT GRANTED. The August 11, 2022 judgment granting State
of Louisiana through the Board of Supervisors of Louisiana State
University on behalf of LSU Health Science Center-New Orleans’s
(“the State”) exception of prematurity as to paragraphs 10,
14 (a) (b) (c), and 15(a) (b) is reversed. The State used
plaintiff’s neuroleptic malignant syndrome diagnosis as a
defense at the medical review panel hearing; therefore, the
allegations in the specified paragraphs of plaintiff’s petition
related to an alleged misdiagnosis were necessarily encompassed
in the previous review and findings of the medical review panel.
Thus, the allegations contained in plaintiff’s petition are not
premature. See Coulon v. Endurance Risk Partners, Ine., 2016-
1146 (La. 3/15/17), 221 So.3d 809. Accordingly, State of
Louisiana through the Board of Supervisors of Louisiana State
University on behalf of LSU Health Science Center-New Orleans’s
exception of prematurity is denied.
PMc
JEW
WIL
Penzato and Wolfe, JJ., dissent and would deny the writ
application.
COURT OF APPEAL, FIRST CIRCUIT
AAS nl)
DEPUTY CLERK OF COURT
FOR THE COURT | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494559/ | OPINION1
MARY F. WALRATH, Bankruptcy Judge.
Before the Court is the complaint of Nantahala Capital Partners, LP,2 individually and on behalf of all holders of Litigation Tracking Warrants (the “LTW Holders”) seeking a declaration that they hold debt, not equity, instruments and therefore are entitled to treatment as creditors under any plan of reorganization filed by Washington Mutual, Inc. (“WMI”). After trial and briefing, the Court concludes that judgment in favor of WMI is warranted for the reasons stated below.
1. BACKGROUND
On July 6, 1994, Anchor Savings Bank, FSB (“Anchor”) and Dime Bancorp, Inc. (“Dime”) entered into an agreement to merge. (JX 46.)3 In early 1995, Anchor *659commenced a lawsuit against the federal government alleging breach of contract and taking of property without compensation as a result of the statutory change in treatment of supervisory goodwill that Anchor had previously realized when it acquired certain failing savings and loan associations (the “Anchor Litigation”). (JX 282.) As a result of the merger with Anchor, Dime became entitled to the proceeds, if any, from the Anchor Litigation.
In early 2000, Dime became the subject of a hostile takeover attempt by North Fork Bank. (JX 193 at 19; JX 195 at 21; JX 194 at 19; Tr. 9/12/11 at 63.) In an effort to remain independent, the Dime board of directors obtained an investment from Warburg Pincus for approximately 20% of its equity. (JX 193 at 22; JX 195 at 21, 22, 28-29; Tr. 9/12/11 at 63.) Because that equity infusion did not give sufficient value to the Anchor Litigation, and to provide value to shareholders, the Dime board decided to issue certificates to its existing shareholders representing the value of the Anchor Litigation. (JX 193 at 26-28; JX 195 at 57, 63-64; JX 194 at 33-35, 38-40.) On December 22, 2000, Dime issued Litigation Tracking Warrants (the “LTWs”) to its shareholders pursuant to a Warrant Agreement and Registration Statement. (JXs 1, 6 & 7.)
On June 25, 2001, Dime entered into an agreement to merge with WMI. (JXs 12, 15, 16, 17 & 18.) WMI was a savings and loan holding company, which held, inter alia, all of the stock of Washington Mutual Bank (“WMB”). The LTW Warrant Agreement was modified in Amended and Restated Warrant Agreements dated January 7, 2002, and March 11, 2003, between WMI and Mellon Bank, as warrant agent. (JXs 3 & 4.)4 Pursuant to the Amended Warrant Agreements, WMB was to prosecute and control the Anchor Litigation and, upon receipt of any recovery, the LTW Holders were entitled to receive common stock of WMI with a value representing 85% of the net recovery. (JXs 3 & 4.)
On July 17, 2008, the Court of Federal Claims entered judgment in favor of the plaintiffs in the Anchor Litigation in the amount of $356 million. (JX 283.) Cross appeals were filed. (JXs 284 & 285.) On March 10, 2010, the Court of Appeals for the Federal Circuit affirmed the ruling of the Court of Federal Claims in part and remanded for further determination of damages, suggesting that the damages *660award be increased by $63 million. (JX 278.) The Court of Federal Claims has not ruled yet on the remand.
In the interim, on September 25, 2008, the Office of Thrift Supervision (“OTS”) seized WMB and appointed the Federal Deposit Insurance Corporation (the “FDIC”) as receiver. (JX 102.) Immediately after its appointment as receiver, the FDIC sold substantially all of the assets of WMB to JPMorgan Chase Bank, N.A. (“JPMC”) for approximately $1.8 billion and assumption of certain of WMB’s liabilities. (JX 103.) On September 26, 2008, WMI filed a voluntary petition under chapter 11 of the Bankruptcy Code, together with its affiliate, WMI Investment Corp.
On April 12, 2010, this adversary proceeding was commenced by the filing of a complaint seeking a declaratory judgment relating to the rights of the LTW Holders. On June 16, 2010, WMI filed Omnibus Objections to claims filed by some of the LTW Holders asserting they were really equity interests not claims and/or should be subordinated pursuant to section 510(b). The Court approved a stipulation certifying the adversary as a class action on behalf of all LTW Holders.
On October 29, 2010, WMI filed a motion for summary judgment on the Amended Complaint. The motion was denied on January 7, 2011, because the Court found that there were disputed issues of material fact. Trial was held on September 12-14 and 20, 2011. Post-trial briefs were filed and oral argument was heard on November 23, 2011. The matter is ripe for decision.
II. JURISDICTION
This Court has jurisdiction over this adversary, which is a core proceeding pursuant to 28 U.S.C. §§ 1334 & 157(b)(2)(A), (B), (C), & (O).
III. DISCUSSION
A. Are the LTWs Debt or Equity?
The threshold issue presented in the Amended Complaint is whether the LTWs are debt or equity. WMI in its summary judgment motion argued that the issue could be easily addressed by considering the plain language of the Warrant Agreement, as amended after the merger with Dime, which provides that the LTW Holders are only entitled to WMI common stock. The LTW Holders contended, however, that other provisions of the Warrant Agreement, and subsequent events, demonstrate that they are entitled to receive cash instead of simply stock. (JX 1 at §§ 4.2 & 4.3.) The LTW Holders also argued that WMI (and its board of directors) are required to assure that their rights are protected. (Id. at § 4.2(d).)
In the summary judgment decision, the Court found that there were genuine issues of disputed fact surrounding the intent of the parties and the language of the Warrant Agreements because WMI itself submitted extrinsic evidence regarding the intent of the parties in issuing the LTWs and an expert opinion which referenced similar securities issued by other banks at the time the LTWs were issued. This caused the LTW Holders to seek discovery and the opportunity to present their own expert witness on the relevant issues.
1. Language of the Agreements
The documents issued in connection with the LTWs lend support to WMI’s position that the LTWs were intended to represent equity, not debt, interests. The original and Amended Warrant Agreements and the Registration Statements plainly state that the LTWs are warrants representing the right to purchase shares of common stock. (JX 1 at 1; JX 3 at 1; JX 4 at 1; JX 6 at 1; JX 7 at 1.) The Warrant Agreements also confirm that the Anchor *661Litigation belonged to the bank, not to the LTW Holders. (JX 1 at § 6.3; JX 3 at § 6.3; JX 4 at § 6.3.) Thus, any settlement or judgment paid would go to the bank, not the LTW Holders. (JX 193 at 113.) All of the Warrant Agreements and the Prospectuses confirmed that the LTW Holders would be entitled to exercise the warrant, and receive stock, only upon receipt of a recovery by the bank and regulatory approval allowing the issuance of the stock. (JX 1 at Art. Ill; JX 3 at Art. Ill; JX 4 at Art. Ill; JX 6 at 2-3; JX 7 at 2.)
The LTW Holders contend, however, that under the terms of the Warrant Agreement, their rights changed at the time of the Dime/WMI merger in 2001. As part of the merger, Dime shareholders were entitled to elect to receive their pro rata share of the $1.4 billion in cash and 92.3 million shares of WMI common stock paid for Dime. (JX 17 at 2.)5 As a result of the merger consideration paid to the Dime shareholders, the LTW Holders contend that under section 4.2 of the Warrant Agreement, the LTW Holders are entitled to the same treatment.6
The Court finds that the Warrant Agreements, when considered together with documents issued at the time, are ambiguous. SEC filings state that “Holders of Dime’s litigation tracking warrants will not be affected by the merger, except that, upon any exercise of the litigation tracking warrants in accordance with their terms, holders of litigation tracking warrants will be entitled to receive shares of Washington Mutual common stock instead of Dime common stock on similar terms as prior to the merger.” (JX 19 at 2-3; JX 20 at 2-3.) WMI argues that this meant that only common stock of WMI would be issued to the LTW Holders and that they did not have any right to receive cash. The LTW Holders argue, in contrast, that it simply means that WMI common stock will be substituted for Dime common stock but that their other rights (including the right to receive what the Dime shareholders received, i.e. cash) were preserved.
WMI argues that any ambiguity, however, was clarified by a notice sent to the LTW Holders which expressly stated that they will not be getting the same consideration as the Dime shareholders:
Following the closing of the Merger, each outstanding LTW will entitle its holder to receive, upon exercise of such LTW in accordance with the terms of the Warrant Agreement, shares of Washington Mutual common stock. Under the terms of the Merger Agreement, each share of Dime common stock will be converted into either shares of Washington Mutual common stock or cash, in each case subject to cash/stock election and equalization procedures.
(JX 41.) Again the LTW Holders contend that this just addresses the substitution of WMI stock for Dime stock but nowhere expressly states that the LTW Holders’ right to receive the same consideration as the Dime shareholders was eliminated.
*662The Court finds the documents, and related filings, sufficiently ambiguous to warrant the consideration of other evidence to determine what rights were intended to be conveyed to the LTW Holders.
2. Experts
To clarify the intent of the documents, the parties offered the testimony of expert witnesses on the issue of whether the LTWs were debt or equity instruments,
a. Dr. Chamberlain
WMI’s expert, Dr. Chamberlain, is a Ph.D. economist who served as vice chair and board member of a thrift, as chief economist for the Federal Home Loan Bank Board, and as an equity analyst at Jeffries, Inc. While she was at Jeffries, she analyzed the LTWs when they were issued by Dime and other banks and stated that the market viewed the LTWs as equity issuances, not debt. (Tr. 9/13/11 at 193-95.) She testified that the essential characteristic of a warrant is that it is a derivative security representing a conditional interest in the company’s equity. (Tr. 9/14/11 at 33; JX 233 at 32.) She noted that the LTWs, like typical equity warrants, had an exercise period (up to sixty days after the trigger event) and a set price (the par value of WMI’s stock). (Tr. 9/14/11 at 34.) Even if they did not, however, she felt that was not determinative. (Id at 31-33; JX 137 at 1041; JX 195 at 49-50.)
She compared the LTWs to the Litigation Participation Certificates (the “LPCs”) issued by California Federal Bank and Coast Federal Bank, which entitled their holders to a direct interest in any recovery that those banks might receive in their goodwill litigation. (Tr. 9/13/11 at 196-97.) As a result of the LPC structure, those banks actually transferred their goodwill litigation claim from their balance sheets to a trust or directly to the LPC holders. This structure created two problems according to Dr. Chamberlain. First, the banks lost the value of that asset from their balance sheets and were unable to leverage it to make money. (Tr. 9/13/11 at 209-10.) In addition, the issuance of the LPCs to the shareholders was immediately taxable to the shareholders, making it particularly difficult because any recovery on the goodwill litigation was uncertain and in the future. (Tr. 9/13/11 at 134-35; JX 195 at 48, 53; JX 231 at 5.)
In contrast, Dr. Chamberlain noted that the LTWs allowed Dime (and then WMI) to retain the Anchor Litigation recovery, thereby increasing the value of its assets and ultimately its stock price. (Tr. 9/13/11 at 197; Tr. 9/14/11 at 11.) The LTW structure also would allow Dime (and later WMI) to reinvest those funds to further grow its balance sheet. (Tr. 9/12/11 at 132-34; Tr. 9/13/11 at 197.)
The LTW Holders find fault with the opinion of WMI’s expert for several reasons. First, Dr. Chamberlain had to admit that the LPCs, like the LTWs, were traded on NASDAQ, not rated, treated as equities by brokerage companies, and had been valued in the same manner by her while she was at Jeffries. (Tr. 9/13/11 at 211-14; Tr. 9/14/11 at 149-50; JXs 48, 52, 75 & 78; Tr. 9/12/11 at 80-86; JX 107 at 3-4; JX 37 at 7; JX 80 at 20; JX 81 at 3, 9.) In fact, Dr. Chamberlain testified that LPCs were also equity, although they clearly are not because they are payable in cash not stock. (Tr. 9/14/11 at 142,147-48, 156.)
Second, the LTW Holders criticize Dr. Chamberlain’s conclusion that the LTWs were equity because that was how the market viewed them at the time. (Tr. 9/13/11 at 214; Tr. 9/14/11 at 34, 200; JX 233 at 3, 27-28; JX 110 at 4.) They note that (1) she would not reveal whom she talked to, (2) admitted the investors were *663really concerned only with when the lawsuit would end and what it would pay, and (3) the investors never discussed whether the LTWs were issuable in stock or cash. (Tr. 9/14/11 at 200-06.) Therefore, the LTW Holders contend that those communications do not support her opinion that the LTWs are equity and not debt. Similarly, the LTW Holders found Dr. Chamberlain’s reliance on analysis done by Kevin Starke to be faulty: his analysis was done during the course of this adversary (not at the time the LTWs were issued) and is tainted by the fact that his company is trading on the PIERS (which would be adversely affected if the LTWs are found to be debt). (Tr. 9/14/11 at 224-27; JX 133.)
In addition, the LTW Holders contend that Dr. Chamberlain’s testimony about the tax, accounting, and regulatory features of the LTWs was unconvincing. For example, she admitted that the fact that the litigation proceeds are taxable to WMI does not make the LTWs equity. (Tr. 9/14/11 at 175.) Dr. Chamberlain also had to admit that the risk that regulatory supervision might prevent up-streaming the litigation proceeds to the holding company was equally (if not more) applicable to the LPCs as to the LTWs. (Tr. 9/14/11 at 183-84; JX 9 at 3-4.) Finally, the LTW Holders assert that her analysis of the accounting rules was based on her erroneous conclusion that the LTWs are not liabilities because the obligation has not already arisen, when in fact it arose upon issuance of the LTWs. (Tr. 9/14/11 at 82, 209; JX 233 at ¶ 83 n.88; Tr. 9/12/11 at 111.) They also criticize her changing opinion of the importance of accounting regulations when on cross it became clear that they did not support her conclusion. (Tr. 9/14/11 at 207-12.)
The LTW Holders also dispute Dr. Chamberlain’s conclusion that the LTWs had “equity” risk because there was a delay between the time that they became entitled to a distribution and the time that the stock was actually distributed, during which time their interests were dependent on the vagaries of the market value of the WMI stock. (Tr. 9/13/11 at 217; JX 233 at 22-26.) They note that she never mentioned such a risk at the time she was evaluating the LTWs while an analyst at Jeffries. (Tr. 9/14/11 at 196-98; Tr. 9/12/11 at 84-86; JX 107 at 3-4.)
The LTW Holders also criticized Dr. Chamberlain’s chart comparing the price of WMI’s stock with the price of the LTWs which she said showed their correlation. (JX 163; Tr. 9/14/11 at 21-25.) They note that contrary to her belief that there was no negative news relating to the LTWs during the period from March to September 2008, in fact the Court of Claims in July 2008 reduced the judgment in the Anchor Litigation by $26 million and in September 2008 the United States appealed that judgment and the country was in the midst of a financial crisis causing all the markets to drop. (Tr. 9/20/11 at 94.) Further, they argue that Dr. Chamberlain’s comparison period was too constricted: it started after the LTWs had gone up 300% on news of the positive result of the Anchor Litigation (while WMI’s stock was plummeting) and before November 2008 after which the LTWs went up in value (while WMI’s stock remained in the cellar). (Tr. 9/13/11 at 42; Tr. 9/14/11 at 171-72.)
Finally, the LTW Holders contend that Dr. Chamberlain’s reading of the Warrant Agreements as requiring that the LTWs receive only stock ignores critical language which requires adjustments (specifically in the event there is a merger where cash is given to stockholders, which happened at the time of the Dime/WMI merger). (Tr. 9/14/11 at 98-101, 107-10; JX 233 at ¶ 69; JX 1 at Art. IV.) They also note her con*664tradictory contentions about whether the LTWs had an exercise price or definitive exercise period. (Tr. 9/14/11 at 34; JX 233 at ¶ 78.)
The Court found Dr. Chamberlain’s opinion to be largely unconvincing. Her testimony about how the market treated the LTWs was particularly suspect because it represented only her limited view of the market and apparently the market viewed both the LPCs and the LTWs the same, although they were structured differently. Further, her efforts to find a similarity between the price at which the LTWs were trading and the price at which WMI’s stock was trading was contorted and unconvincing.
b. Barry Levine
The LTW Holders presented the testimony of Barry Levine, who referred to SEC, FASB, and IASB literature to support his opinion that, regardless of their label, the LTWs are in substance liabilities, not equity. (Tr. 9/14/11 at 68-77; JXs 142, 154 & 168.) Levine testified that the LTWs lack the traditional characteristics of equity warrants: they are exercisable for a variable number of shares (depending on the results of the Anchor Litigation), have no strike price, and have no finite period within which they must be exercised. (Tr. 9/12/11 at 70-79; JX 142 at 7, ¶ 12; JX 154 at 4; JX 168 at 32.) Levine opined that the LTWs cannot be seen as equity because their value is completely divorced economically from the value of WMI’s stock (being dependent solely on the value of the Anchor Litigation). (Tr. 9/12/11 at 80-90; JX 232 at 19; JX 80 at 20; JX 37 at 7; JX 107 at 3-4.) In this respect, he analogized them to asset-backed securities. (Tr. 9/12/11 at 131.)
WMI contends that Levine’s analogy of the LTWs to asset-backed securities is erroneous: there was no trust set up into which the Anchor Litigation was transferred and the LTWs were not “a security that is primarily serviced by the cash flows of a discrete pool of receivables or other financial assets ... that by their terms convert into cash within a finite time period” issued by an entity whose activities are “limited to passively owning or holding the pool of assets.” 17 C.F.R. § 229.1101(c)(1) & (2)(ii).
WMI also argues that the LTW Holders’ expert was not an expert. He was not an accountant, but rather was a lawyer who did not practice in any relevant area. He merely reviewed accounting literature and reiterated what the guidelines stated regarding GAAP treatment of warrants. (Tr. 9/12/11 at 57-59, 68-79, 86-88, 93-98, 110-11.) They contend that he ignored all the documents and testimony of the people involved in the creation of the LTWs in reaching his conclusion that the LTWs are debt instruments. They ask the Court to consider these factors in evaluating what weight to give Levine’s testimony. See, e.g., Gen. Elec. Co. v. Joiner, 522 U.S. 136, 146-47, 118 S.Ct. 512, 139 L.Ed.2d 508 (1997) (concluding that trial court did not abuse its discretion in excluding expert report because it found it was based on insufficient data); Dow Chem. Can., Inc. v. HRD Corp., 656 F.Supp.2d 427, 434 (D.Del.2009) (denying motion to strike expert testimony on area in which he was qualified but granting it in areas in which he was not or which required application of the law).
The Court agrees with WMI that Levine’s credentials did not rise to the level of expertise in the areas relevant to this case: the structure of debt or equity instruments, the tax bases for using either, or the proper analysis of them from a bankruptcy perspective. In large part his testimony consisted simply of reading GAAP regulations, without any citation to *665case law or other authority construing them. (Tr. 9/12/11 at 68.) This is particularly unhelpful because an instrument’s treatment under GAAP is not relevant to the question of whether an instrument is debt or equity. See, e.g., In re EBC I, Inc. (f/k/a eToys, Inc.), 380 B.R. 348, 358 (Bankr.D.Del.2008) (“GAAP rules for treating debt as equity and vice versa are not relevant to determining whether they are truly debt or equity.”), aff'd, 382 Fed.Appx. 135 (3d Cir.2010); In re Joshua Slocum, Ltd., 103 B.R. 610, 622-24 (Bankr.E.D.Pa.1989) (holding that redemption value of redeemable stock is not a debt despite its accounting treatment as a liability); Harbinger Cap. Parts. Master Fund I, Ltd. v. Granite Broad. Corp., 906 A.2d 218, 225 (Del.Ch.2006) (holding that FAS150, which treated mandatorily redeemable shares as debt, is immaterial to the issue of whether they really were debt or equity).7
Further, in many significant areas, Levine’s assumption of facts was proven to be erroneous. For example, Levine claimed that equity warrants must have a fixed exercise price though he admitted that the Golden State equity warrant did not. (Tr. 9/12/11 at 162, 167-69; JX 232 at 6, 17.) He also claimed that the LTWs’ anti-dilution provision made them debt not equity while ignoring the fact that equity warrants often contain similar provisions.8 (Tr. 9/12/11 at 158; JX 232 at 18.) Further, contrary to Levine’s opinion, an instrument can be equity even if it has no time within which it must be exercised. See, e.g., R.A. Mackie & Co., L.P. v. Petro-corp Inc., 329 F.Supp.2d 477, 481 (S.D.N.Y.2004) (holding that perpetual warrants with no expiration date were equity nonetheless). Therefore, the Court finds Mr. Levine’s testimony was not convincing.
3. Creators of the LTWs
The testimony of the creators of the LTWs, in contrast, was particularly compelling. Sarkozy, from Credit Suisse First Boston, was the person who created the LTWs in the first place, as an “elegant solution” to the problem of conveying the economic benefit of any recovery on the Anchor Litigation to the Dime shareholders without tax consequences. (JX 195 at 37-38, 44-45, 47-49, 128.) Because the LPCs issued by other banks had conveyed a direct interest in the goodwill litigation, they were taxable on issuance to the shareholders of their respective institutions. (Id. at 127-30.) To avoid the problem of having to pay taxes on phantom income before any recovery was received by the shareholders, Sarkozy developed the LTWs. (Id. at 34-38.) He testified that the key feature of the LTWs was that they conveyed a right to buy stock when the bank received a recovery in the Anchor Litigation (and presumably had a greater value), rather than a direct interest in the recovery itself. (Id. at 38, 45, 48-50, 73, 127-28, 133-34, 155-56, 158.) Because it was structured as a stock warrant, it was not taxable. (Id. at 37-38, 55-56; Tr. 9/13/11 at 135; JX 231 at 4.) Sarkozy’s testimony made clear that the intent of the *666LTWs was to convey to the shareholders only a right to receive stock, not cash; otherwise, there would have been no tax benefit. (JX 195 at 55-56, 128, 133-34, 155-56,158.)
The actual drafter of the instruments, Mitchell Eitel of Sullivan and Cromwell, confirmed that intent: the LTW Holders were entitled only to stock, not to cash. (JX 193 at 30,113-16,121-22.) The LTWs were issued to the Dime shareholders as a dividend so that they (on exercise of the warrant) would have an increased equity interest in the bank commensurate with the increased value resulting from the Anchor Litigation recovery. (Id. at 26-27, 49, 115-17.) The Amended Registration Statement issued in connection with the LTWs contained a tax opinion letter from Sullivan and Cromwell confirming that the “distribution of the LTWs ... should be treated as a tax-free stock dividend.” (JX 7 at 2, 20-21.)
Margaret McQuade, a director of Dime at the time also confirmed this intent: the LTWs entitled the holders only to stock. (JX 194 at 33-34, 55, 65-66, 71, 78, 97, 99, 113-14.) This was particularly important because the board did not want to create a taxable event for the shareholders. (Id. at 55.)
When WMI and Dime merged, the Warrant Agreement was amended in 2002 and 2003 to reflect that the LTWs would be issued in WMI common stock rather than Dime common stock. (JXs 3 & 5.) The person drafting the amendments did not believe that they made any material change to the rights of the LTW Holders under the original Warrant Agreement, other than to substitute WMI stock for Dime stock. (JX 198 at 23-25, 39, 87-88, 93, 122-23.) Sarkozy, who advised Dime during the WMI merger, testified that the merger was not meant to have any impact on the LTWs as warrants for the issuance of common stock, except that after the merger the LTW Holders would be entitled to WMI common stock rather than Dime common stock. (JX 195 at 107.) McQuade stated that while the Dime shareholders were entitled to elect cash or stock as a result of the merger, the LTWs were only entitled to WMI stock. (JX 194 at 65-66, 113-14, 122.) If, as the LTW Holders assert, they were entitled to the right to receive cash instead of stock as a result of the Dime/WMI merger, it would have been a taxable event, causing them to have to pay taxes, even though at that time they would receive nothing because there had been no recovery on the Anchor Litigation. (Tr. 9/13/11 at 131.)
The Court concludes, based on all of the documents and testimony, that the LTWs are equity, not debt. The Bankruptcy Code defines “equity security” to include a “warrant or right, other than a right to convert, to purchase, sell, or subscribe to a share, security, or interest” of a “share in a corporation, whether or not transferable or denominated ‘stock,’ or similar instrument.” 11 U.S.C. § 101(16). See also In re Insilco Techs. Inc., 480 F.3d 212, 218 (3d Cir.2007); Allen v. Levey (In re Allen), 226 B.R. 857, 865 (Bankr.N.D.Ill.1998). Factors which courts consider in determining whether an instrument is equity include whether the holder’s right is guaranteed, the name given to the instrument, the intent of the parties, the presence or absence of a fixed maturity date, the right to enforce payment of principal and interest, the presence or absence of voting rights, and the holder’s priority in payment. The Court finds that consideration of these factors support a finding that the LTWs are equity.
Like stockholders, the LTW Holders’ rights—even to receive stock—are contingent on the financial solvency of the corporation. See, e.g., In re Revco D.S., Inc., *667118 B.R. 468, 474 (Bankr.N.D.Ohio 1990) (holding that rights “to redeem stock are not guaranteed but are dependent on the financial solvency of the corporation”). Further, as found above, both the name given to the instruments and the intent of the parties was that they be convertible into equity. There was no fixed maturity date or right to payment of a fixed amount of principal or interest, suggesting that the LTWs are not debt. In re Color Tile, Nos. 96-76, 2000 WL 152129 (D.Del. Feb. 9, 2000). Finally, though the LTWs had no voting rights, they would have had such rights upon receiving their distribution of common stock. See, e.g., Granite, 906 A.2d at 231 & n. 56 (“Although the right to vote is necessarily a characteristic right of equity, its absence is not fatal to a finding that a security is equity.”). Therefore, the Court concludes based on the language of the documents, the testimony of the drafters of the instruments, the testimony of the director at the time of the issuance, and the contemporaneous press releases and disclosures that the LTWs were equity instruments, entitling the LTW Holders to common stock in Dime (and later in WMI).
Even if the LTW Holders were entitled to receive the same merger consideration as the Dime shareholders received, however, it is undisputed that there was no trigger event (the receipt of funds from the Anchor litigation) mandating that payment, before WMI filed its bankruptcy petition. Where equity instruments share debt-like qualities, such as cash options, courts will not elevate them to the status of debt in the bankruptcy context unless the option was exercised before the bankruptcy petition was filed. See, e.g., Carrieri v. Jobs.com, Inc., 393 F.3d 508, 522 (5th Cir.2004) (holding that “warrants with [cash] redemption provisions ... are equity interests until their expiration (or until the right to receive a cash payment properly matures on or before the petition date).”) (citations omitted); In re Einstein Noah Bagel Corp., 257 B.R. 499, 507 (Bankr.D.Ariz.2000) (holding that put right requiring debtor to purchase claimant’s ownership interests in cash or stock was an equity interest even if “construed to create an obligatory cash payment” because the right to receive cash had not matured before the bankruptcy petition was filed) (citations omitted). Therefore, the Court concludes that the LTWs are equity instruments.
B. Did WMI Breach the Warrant Agreement?
The LTW Holders contend nonetheless that WMI has breached various provisions of the Amended Warrant Agreement under which the LTW Holders are entitled to receive cash or other property instead of simply stock. (JX 4, Art. 4.) They argue, for example, that under section 4.2 of the original Warrant Agreement,9 they were entitled to receive whatever the Dime shareholders received in the merger with WMI, which was a right to elect cash or stock (or at least to receive a combination of both). (JX 1 at § 4.2(a); JX 12 at §§ 2.10 & 2.15; JX 3 at § 4.2; JX 4 at § 4.2; Tr. 9/12/11 at 98-99; Tr. *6689/14/11 at 109-10; JX 195 at 95-97; JX 193 at 142.)
The LTW Holders note that when Golden State merged, resulting in its shareholders receiving a combination of cash and stock, its LTW holders were given the same right when their goodwill litigation was resolved. (JX 61 at 1.) The LTW Holders contend that case law supports their argument that they are entitled to receive cash, as well as stock, and that therefore they must be treated as creditors. See, e.g., Mackie & Co., 329 F.Supp.2d at 503 (holding that, under terms of warrant agreement at issue, warrant holders should “have the opportunity, upon payment of the exercise price, to convert their Warrants—after the merger and at a time of their choosing—into all of the merger consideration offered to [the acquired company’s] shareholders.”); Continental Airlines Corp. v. Am. Gen. Corp., 575 A.2d 1160, 1164, 1168 (Del.1990) (finding that holder of warrants had the right to receive the same merger consideration as other shareholders received based on the contractual rights set forth in the warrant).
WMI argues that any claim that the LTW Holders are entitled to the same consideration as the Dime shareholders received at the time of the merger in 2001 is not supported by the Amended Warrant Agreements, which provide that they are only entitled to WMI stock. WMI contends that to the extent that they breached the original Warrant Agreement by not giving the LTW Holders the merger consideration that the Dime shareholders received, the statute of limitations has run.
The Court finds it unnecessary to decide the statute of limitations argument because even if the LTW Holders have a right under section 4.2(a) to the same merger consideration that the Dime shareholders received, that still does not change their interest from an equity interest to a claim. Even where owners of equity instruments have the right to require that they receive cash rather than stock, courts hold that they are not claims, but are still only equity if the option was not exercised before the bankruptcy petition was filed. See, e.g., Carrieri, 393 F.3d at 522 (holding that warrants with cash redemption provisions are equity interests unless the right to receive a cash payment matured before the petition date); Einstein Noah Bagel, 257 B.R. at 507 (Bankr.D.Ariz.2000) (holding that put right requiring debtor to purchase claimant’s ownership interests in cash or stock was an equity interest because the right to receive cash had not matured before the bankruptcy petition was filed). Therefore, the Court concludes that, even if the LTW Holders had the right to elect cash (or to receive the same percentage in cash as the Dime shareholders did), because that right did not arise before the bankruptcy case was filed, their interests remain only equity interests.
The LTW Holders also argue that WMI has breached the Warrant Agreements because under the Global Settlement Agreement (“GSA”) WMI is selling substantially all its assets to JPMC and has not assured that JPMC will enter into an agreement confirming that the LTW Holders retain their interests in the Anchor Litigation. (Tr. 9/20/11 at 32^2; JX 4 at §§ 1.1, 4.2(d) & 6.3.)10 WMI responds that section *6694.2(d) is not applicable because the GSA is not a Combination under the Amended Warrant Agreement but rather is a global settlement of competing claims of ownership to various assets. (Tr. 9/20/11 at 18-20.)
The Court agrees that the GSA is not a sale of substantially all the assets of WMI. Rather, it settles various disputes between JPMC and WMI as to who owned what assets. In particular, it resolves a dispute as to who owned the Anchor Litigation. Because JPMC acquired WMB, JPMC took the position that it, as the successor to Anchor Bank, owned the Anchor Litigation. Therefore, the Court finds that section 4.2(d) is not applicable.
The LTW Holders finally contend that under section 4.4 of the Amended Warrant Agreement, WMI must assure that the LTW Holders receive the value of the Anchor Litigation.11 WMI responds that the obligation of the board of directors under section 4.4 is permissive only, not mandatory: “the Board may make, without the consent of the Holders, such adjustments.” (JX 4 at § 4.4 (emphasis added).) Therefore, WMI contends that it is not required to make any adjustments to protect the rights of the LTW Holders.
The Court agrees that section 4.4 is permissive, not mandatory, and cannot form the basis for a claim of breach of the Warrant Agreement. This is so particularly where WMI is in a bankruptcy proceeding and is precluded by its fiduciary obligations to the creditors from taking any action to prefer equity holders, such as the LTW Holders. Therefore, the Court concludes that there has been no breach of the Warrant Agreements that would give rise to a claim in this case.
C. Are the LTW Holders’ Claims Subordinated?
Even if the Court were to find that the LTW Holders have a claim for breach of the Warrant Agreement, WMI argues that that claim must be subordinated to the level of the common shareholder interests under section 510(b) of the Code.
The Court agrees with WMI. Section 510(b) provides that “a claim arising from rescissions of a purchase or sale of a security of a debtor ... for damages arising from the purchase or sale of such a security ... shall be subordinated to all claims or interests that are senior to or equal the claim or interest represented by such security, except that if such security is common stock, such claim has the same priority as common stock.” 11 U.S.C. § 510(b). The Code definition of “equity security” includes warrants. Id. at § 101(16)(C). A claim must be subordinated if it “arises from the purchase or sale” of a security or there is “some nexus or causal relationship between the claims and the purchase of the securities.” Baroda Hill Invs., Ltd. v. Telegroup, Inc. (In re Telegroup, Inc.), 281 F.3d 138, 138, 144 (3d Cir.2002) (holding shareholder claims for breach of provision in stock purchase agreement were properly subordinated). See also In re Int’l Wireless Commc’ns *670Holdings, Inc., 257 B.R. 739, 743 (Bankr.D.Del.2001) (subordinating claim arising from debtor’s breach of agreement to repurchase stock for a set amount if it failed to have an initial public offering by a certain date), aff'd, 279 B.R. 463 (D.Del.2002), aff'd, 68 Fed.Appx. 275 (3d Cir.2003); In re Touch Am. Holdings, Inc., 381 B.R. 95, 103-06 (Bankr.D.Del.2008) (subordinating indemnification claims which would not exist but for underlying suit based on purchase of debtor’s stock). In this case, the LTW Holders’ claims are based on breach of the Warrant Agreement pursuant to which they are entitled to receive common stock of WMI. Those claims fit squarely within the purview of section 510(b) and must be subordinated.
The LTW Holders contend that their claims do not arise from the “purchase” or “sale” of a security because the LTWs were distributed to them for no consideration and if anything, they were securities of Dime, not WMI.12
This, however, misses the point. The LTWs are warrants representing the right to receive common stock of WMI once the Anchor Litigation is resolved. The claim which the LTW Holders assert here is that WMI has breached the Warrant Agreement by failing to assure that they receive a specific value (85% of the Anchor Litigation recovery). The only way that the LTW Holders are entitled to receive that value, however, is by exercising their right to acquire common stock of WMI. Thus, their claims clearly relate to a breach of an agreement to acquire stock in WMI and must be subordinated under section 510(b) to the level of common stock.
D. Is the Anchor Litigation PropeHy of the Estate?
The LTW Holders also contend that WMI cannot convey the Anchor Litigation to JPMC as part of the Global Settlement Agreement because 85% of the beneficial interest in that Litigation belongs to the LTW Holders. That interest, they argue, is not property of the estate. 11 U.S.C. § 541(d) (“Property in which the debtor holds, as of the commencement of the case, only legal title and not an equitable interest ... becomes property of the estate ... only to the extent of the debt- or’s legal title to such property, but not to the extent of any equitable interest in such property that the debtor does not hold.”). See also Official Comm. of Unsecured Creditors of the Columbia Gas Transmission Corp. v. Columbia Gas Sys. Inc. (In re Columbia Gas Sys. Inc.), 997 F.2d 1039, 1054 (3d Cir.1993) (stating that “[a] bankruptcy estate includes all property of the debtor, but only to the extent of the debt- or’s equitable interest in such property.”).
Therefore, the LTW Holders seek a declaratory judgment that they are entitled to receive 85% of the Anchor Litigation in cash. They also assert that the imposition of a constructive trust on 85% of the proceeds of the Anchor Litigation is warranted. See, e.g., Simonds v. Simonds, 45 N.Y.2d 233, 242, 408 N.Y.S.2d 359, 380 N.E.2d 189, (N.Y.1978) (holding that unjust enrichment “does not require the performance of any wrongful act by the one enriched. Innocent parties may frequently be unjustly enriched. What is required, generally, is that a party hold property ‘under such circumstances that in equity *671and good conscience he ought not to retain it.’ ”) (quoting Miller v. Schloss, 218 N.Y. 400, 113 N.E. 337, 339 (1916)).
The Court disagrees. As noted above, the Court finds that the LTWs do not entitle the LTW Holders to an interest in the Anchor Litigation itself. They are only entitled to the issuance of common stock in WMI. Therefore, the Court concludes that the Anchor Litigation itself is property of the estate and may be conveyed by WMI to JPMC as part of the GSA pursuant to section 363 of the Bankruptcy Code.
IV. CONCLUSION
For the reasons set forth above, the Court will grant judgment in favor of WMI.
An appropriate order is attached.
.This Opinion constitutes the findings of fact and conclusions of law of the Court pursuant to Rule 7052 of the Federal Rules of Bankruptcy Procedure.
. The Complaint was originally filed by Broadbill Investment Corporation, which has since withdrawn from the suit.
. References to the record are: “JX” are references to the joint exhibits; "Tr. [date] at” are references to the trial transcripts.
. The LTW Holders question the authenticity of the Amended Warrant Agreement dated January 7, 2002, because WMI had no copy in its files, no original signed/dated copy was ever produced, the signature page in the copy produced is out of order and has a footer notation different from the footer on the pages of the Agreement (though it is the same as the footer notation on some, but not all, of the exhibits to the Agreement), there was no evidence that the fully signed agreement was ever delivered, and there was no SEC filing with respect to the execution of the 2002 Agreement while there was one with respect to the 2003 Agreement. (Tr. 9/20/11 at 106; JXs 3, 4 & 29.) The LTW Holders contend, as a result, that the document is not authentic and is, therefore, not admissible. (Fed. R.Evid. 901 & 1002.)
WMI argues that the document is authentic because it has signatures of a representative of both the warrant agent and WMI, original signatures are not required by the Federal Rules of Evidence or the Agreement, the 2002 Agreement is referenced in the 2003 Agreement, and representatives of both parties confirmed its authenticity. (Fed.R.Evid. 1041; JX 3 at § 7.7; JX 5; JX 200 at 7-11, 25-28, 33-35; JX 199 at 57-60.)
The Court concludes that the evidence presented by WMI is sufficient to authenticate the document and, therefore, it will be admitted. See, e.g., McQueeney v. Wilmington Trust 779 F.2d 916, 928 (3d Cir.1985) (holding that “circumstantial evidence may, in principle, suffice to authenticate a document” and that “the burden of proof for authentication is slight”).
. Approximately 76% of Dime shareholders elected to receive stock and only 24% elected to receive cash by the January 4, 2002, deadline. (Tr. 9/14/11 at 52-53.) Dime shareholders who made no election received WMI common stock. (JX 42 at STB07306.) Because there was not enough WMI stock to honor the stock elections, ultimately those who elected stock actually received 11.6% in cash. (JX45.) The issuance of stock was not taxable, but the payment of cash was. (JX 195 at 141.)
. Section 4.2 provides in part that, in the event of a merger, the LTW Holders are entitled to "the number of shares of capital stock or other securities or an amount of property " to the same extent that "one share of Common Stock was exchanged for or converted into as a result of” the merger. (JX 1 at § 4.2(a) (emphasis added).)
. WMI also notes that the GAAP rule upon which the LTW Holders rely, FAS 150, only became effective in May 2003. Nothing changed about the nature of the LTWs that would warrant a finding that they became debt rather than equity after that date.
. For example, the Golden State Five-Year Warrant, which Levine acknowledged was a typical equity warrant, had anti-dilution protections similar to the LTWs. (LX 232 at 18 & n.26; LX 56 at Ex. 4.3, § 2.01.) Further, Glendale Federal Bank FSB also had anti-dilution provisions in its seven-year equity warrants. (JX 56 at Ex. 4.3, § 3.03; JX 56 at Ex. 4.4, § 3.01(e) & (k)).
. Section 4.2(a) provided:
Except as provided in Section 4.2(c) [where shareholders get paid totally in cash, entitling the LTWs to receive cash], the Holders will have the right to receive upon exercise of each Warrant the number of shares of capital stock or other securities or an amount of property equal to the Adjusted Litigation Recovery divided by the Maximum Number of Warrants divided by the aggregate Adjusted Stock Price of the capital stock, other securities or property that 1.1232 shares of Common Stock were exchanged for or converted into as a result of such Combination.
(LX 1 at § 4.2(a).)
. Section 4.2(d) of the Amended Warrant Agreement requires that upon entering into any Combination (which includes a sale of substantially all of its assets), WMI will assure that any successor "will enter into ... an agreement with the Warrant Agent confirming the [LTW] Holders’ rights pursuant to this Section 4.2 and providing for adjustments, which will be as nearly equivalent as may be practicable to the adjustments provided for in this Article.” (JX 4 at §§ 1.1 & 4.2(d).)
. Section 4.4 provides:
If any event occurs as to which the foregoing provisions of this Article IV are not strictly applicable or, if strictly applicable, would not, in the good faith judgment of the Board, fairly and adequately protect the rights of the Holders of the Warrants in accordance with the essential intent and principles of such provisions, then the Board may make, without the consent of the Holders, such adjustments to the terms of this Article IV, in accordance with such essential intent and principles, as will be reasonably necessary, in the good faith opinion of such Board, to protect such purchase rights as aforesaid.
(JX 4 at § 4.4.)
. The LTW Holders also argue that section 510(b) is inapplicable because the LTWs are debt instruments not securities. See, e.g., Official Comm. of Unsecured Creditors v. Am. Cap. Fin. Servs., Inc. (In re Mobile Tool Int’l, Inc.), 306 B.R. 778, 782 (Bankr.D.Del.2004) (holding that section 510(b) is not applicable to debt instruments, even if issued to a shareholder). The Court rejects this argument because, for the reasons stated above, it concludes that the LTWs are equity instruments, not debt. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494560/ | *686Opinion
STEPHEN RASLAVICH, Chief Judge.
Introduction
The Debtor/Plaintiff (Berks) has filed suit against the St. Joseph Regional Health Network, d/b/a St. Joseph Medical Center (St. Joe), Catholic Health Initiatives (CHI) and Bornemann Health Corporation d/b/a Bornemann Psychiatry Associates (Bornemann). The Defendants have filed two separate motions to dismiss for lack of subject matter jurisdiction. Briefs were filed and oral argument was heard with respect to each on December 8, 2011 and January 19, 2012. Both motions will be addressed herein and each will be denied.
Background
Berks was a provider of mental health care services. In March 2008, Berks entered into a Management Services Agreement (MSA) with St. Joe, and Bornemann. See First Amended Complaint, Ex.l. Berks maintains that St. Joe and Borne-mann breached their agreement. So severe were the Defendants’ alleged derelictions under the MSA that Berks was forced to file bankruptcy as a result. Id. ¶ 81. Notwithstanding, Berks confirmed a plan of liquidation which will pay creditors in full and provide for the possibility of a return to equity holders. In the main bankruptcy proceeding, St. Joe filed two Proofs of Claim for unpaid rent. See Case No. 10-10290, Claim ## 43, 44.
Prior to confirmation, Berks filed this adversary proceeding. The First Amended Complaint alleges two counts for breach of contract and two counts demanding turnover of property as a result.1 The Motion maintains that such causes of action are outside this court’s subject matter jurisdiction.
Bankruptcy Court Jurisdiction
The Defendants’ challenge implicates a fundamental part of the federal bankruptcy system: the limited jurisdiction bestowed on bankruptcy courts to adjudicate matters. In re Close, 2003 WL 22697825, at *2 (Bkry.E.D.Pa. Oct. 29, 2003). Title 28 provides, in pertinent part, that “the district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11.” 28 U.S.C. § 1334(b) (emphasis added). District Courts are, therefore, empowered to refer bankruptcy matters to bankruptcy court:
Each district court may provide that any or all cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11 shall be referred to the bankruptcy judges for the district.
28 U.S.C. § 157(a)(emphasis added). The jurisdictional reach of a bankruptcy court is defined as follows:
[bjankruptcy judges may hear and determine all cases under title 11 and all core2 proceedings arising under title 11, *687or arising in a case under title 11, referred under subsection (a) of this section, and may enter appropriate orders and judgments, subject to review under section 158 of this title.
28 U.S.C. § 157(b)(emphasis added). Core proceedings include, but are not limited to—
(A) matters concerning the administration of the estate;
(B) allowance or disallowance of claims against the estate or exemptions from property of the estate, and estimation of claims or interests for the purposes of confirming a plan under chapter 11, 12, or 13 of title 11 but not the liquidation or estimation of contingent or unliquidated personal injury tort or wrongful death claims against the estate for purposes of distribution in a case under title 11;
(C) counterclaims by the estate against persons filing claims against the estate;
(D) orders in respect to obtaining credit;
(E) orders to turn over property of the estate;
(F) proceedings to determine, avoid, or recover preferences;
(G) motions to terminate, annul, or modify the automatic stay;
(H) proceedings to determine, avoid, or recover fraudulent conveyances;
(I) determinations as to the discharge-ability of particular debts;
(J) objections to discharges;
(K) determinations of the validity, extent, or priority of liens;
(L) confirmations of plans;
(M) orders approving the use or lease of property, including the use of cash collateral;
(N) orders approving the sale of property other than property resulting from claims brought by the estate against persons who have not filed claims against the estate;
(O) other proceedings affecting the liquidation of the assets of the estate or the adjustment of the debtor-creditor or the equity security holder relationship, except personal injury tort or wrongful death claims; and
(P) recognition of foreign proceedings and other matters under chapter 15 of title 11.
28 U.S.C. § 157(b)(2) (emphasis added).
A proceeding is classified as “core” under 28 U.S.C. § 157 “if it invokes a substantive right provided by Title 11 or if it is a proceeding that, by its nature, could arise only in the context of a bankruptcy case.” In re Marcus Hook Development Park., Inc., 943 F.2d 261, 267 (3d Cir.1991) (quoting Beard v. Braunstein, 914 F.2d 434, 444 (3d Cir.1990)). Core proceedings represent those disputes so intertwined with the bankruptcy process that Congress has the power under Article I of the Constitution to direct a non-tenured judicial officer (i.e., bankruptcy judge) to render a final determination of their merits. See 1 Norton Bank. L. & Prac. 3d, § 4:65 (2012) (“The word ‘core’ was a shorthand word employed to signify issues and actions that traditionally formed part of the functions performed under federal bankruptcy law”).
Where a matter does not qualify as “core” but yet has some nexus with the bankruptcy case, it may nevertheless be heard by the Bankruptcy Court on a preliminary basis:
A bankruptcy judge may hear a proceeding that is not a core proceeding but that is otherwise related to a case under title 11. In such proceeding, the bank*688ruptcy judge shall submit proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall be entered by the district judge after considering the bankruptcy judge’s proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically objected.
28 U.S.C. § 157(c)(1) (emphasis added).3 The Third Circuit has defined a “non-core” yet “otherwise related” proceeding as one whose:
outcome ... could conceivably have any effect on the estate being administered in bankruptcy.” Pacor v. Higgins, 743 F.2d 984, 994 (3d Cir.1984) (emphasis omitted); see In re Guild, 72 F.3d [1171] at 1180-81 [ (3d Cir.1996) ]. “[T]he proceeding need not necessarily be against the debtor or against the debtor’s property.” In re Guild, 72 F.3d at 1180-81. “ ‘A key word in [this test] is conceivable. Certainty, or even likelihood, is not a requirement. Bankruptcy jurisdiction will exist so long as it is possible that a proceeding may impact on the debtor’s rights, liabilities, options, or freedom of action or the handling and administration of the bankrupt estate.’ ” Id. at 1181 (quoting In re Marcus Hook, 943 F.2d at 264) (emphasis omitted).
Halper v. Halper, 164 F.3d 830, 837 (3d Cir.1999)(footnote omitted). A leading commentator opines:
Civil proceedings encompassed by section 1334(b)’s “related proceedings” are those whose outcome could conceivably have an effect on the bankruptcy estate and that (1) involve causes of action owned by the debtor that became property of a title 11 estate under section 541 (as distinguished from postpetition causes of action, i.e., those that come into existence during the pendency of the bankruptcy case), or (2) are suits between third parties that “in the absence of bankruptcy, could have been brought in a district court or a state court.”
1 Collier on Bankruptcy ¶ 3.01[3][e][ii] (Matthew Bender 16th Ed. revised).
Burden of Proof
Although it is the Defendants’ Motion which is before the Court, the burden of proof is on the Plaintiff. Once challenged, the party asserting subject matter jurisdiction has the burden of proving its existence. 2 Moore’s Federal Practice § 12.30[5] (Matthew Bender 3d Ed.); see Robinson v. Overseas Military Sales Corp., 21 F.3d 502, 507 (2d Cir.1994) (burden of proving jurisdiction is on party asserting it); Boudreau v. United States, 53 F.3d 81, 82 (5th Cir.) cert. denied 516 U.S. 1071, 116 S.Ct. 771, 133 L.Ed.2d 724 (1995) (burden of proof on plaintiff to show court had jurisdiction over claim under Flood Control Act of 1928). In determining whether this burden has been met, the court need not confine its evaluation to the face of the pleadings, but may review or accept any evidence such as affidavits or it may hold an evidentiary hearing. Moore’s supra, § 12.30[3]. In this case, the eviden-tiary burdens is not an unduly problematic issue given that the parties appear to rely on the same evidence; to wit, the MSA, the plan and other documents of record in the main bankruptcy proceeding.
Complaint’s Stated Jurisdictional Basis
It is maintained that this is a “core” proceeding. See First Amended Complaint ¶ 14. Specifically, four bases of “core” jurisdiction are set forth: “(A) mat*689ters concerning the administration of the estate; ... (C) counterclaims by the estate against persons filing claims against the estate; ...(E) orders to turn over property of the estate; and (0) other proceedings affecting the liquidation of the assets of the estate or the adjustment of the debtor-creditor or the equity security holder relationship ...” Id. citing 28 U.S.C. § 157(b)(2)(A), (C), (E) and (0).
Matters of Administration
As the first basis of core jurisdiction, the Complaint relies on subparagraph (A) of § 157(b)(2): matters concerning the administration of the estate. Such matters are said to be those which are unique to bankruptcy cases. See Collier on Bankruptcy ¶ 3.02[3][a], That cannot be said of the Plaintiffs claims. Absent bankruptcy, the claims raised in the adversary proceeding would be typical garden-variety state law litigations. In other words, they are not bankruptcy-specific and, as such, cannot be characterized as core.
Counterclaim to Proof of Claim
The next proffered basis of core jurisdiction alleged is subparagraph (C): a counterclaim to a proof of claim. This refers to the two Proofs of Claim filed by St. Joe for over $1 million in lease rejection damages. Berks filed a separate objection to those claims and neither party argues that the Court would lack jurisdiction over them. The essential question is whether this adversary proceeding constitutes a counterclaim to the St. Joe proofs of claim that is within the jurisdictional confines of sub-paragraph (C).
The Supreme Court has recently considered the jurisdictional scope of subpara-graph (C). It held that bankruptcy courts lack authority to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor’s proof of claim. See Stern v. Marshall, — U.S. -, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011) (holding that 28 U.S.C. § 157(b)(2)(C) is unconstitutional as applied). In Stem, a creditor filed a proof of claim for defamation. In response, the debtor filed a counterclaim for tortious interference with her expectation of an inter vivos gift from her late husband. The Bankruptcy Court treated the counterclaim as core, but the District Court reversed on that point. The Court of Appeals concurred4 with the District Court and explained that to rule otherwise did not comport with the principles of Marathon and Congress’ desire to revise the Bankruptcy Code in a manner consistent with the Constitution. In affirming the Circuit Court, the Supreme Court looked to the cases involving counterclaims based upon the avoiding powers to conclude that such counterclaims are part of the claims allowance process. Although suggesting that ruling on an objection to a claim might implicate counterclaims other than avoidance claims, the High Court found that the counterclaim in that case was not intertwined with the proof of claim.
It is the Debtor’s position that unlike the counterclaim in Stem, the proceeding sub judice will be disposed of when the Court allows (or disallows) the St. Joe claims. Debtor’s Brief 17. In the Court’s view, however, Debtor has the premises reversed. Stern holds that resolving the claim objection must resolve the causes of action in the adversary proceeding for core jurisdiction to exist. That will not occur here. The Proofs of Claim seek unpaid rent; the adversary proceeding demands *690damages for alleged breach of a management agreement. Berk’s demand goes well beyond the claim for unpaid rent. Because there would remain a great deal to be adjudicated after the Proofs of Claim are ruled on, reliance on subparagraph (C) is misplaced.
Turnover
The third basis for core jurisdiction is subparagraph (E): “order to turnover of property to the estate.” Bankruptcy Code § 542 provides, in pertinent part, that “an entity ... in possession, custody or control, during the case of property that the trustee may use, sell, or lease under § 363 of this title ... shall deliver to the trustee, and account for, such property or the value of such property ...” 11 U.S.C. § 542(a). Although Counts III and IV are styled “turnover,” the present posture casts doubt on that characterization.
Examination of the question of whether an action is properly characterized as a turnover proceeding often occurs in connection with a determination of whether a matter is a core or non-core proceeding. See, e.g., Beard v. Braunstein, 914 F.2d 434, 444 (3d Cir.1990); see also In re Asousa Partnership, 264 B.R. 376, 384 (Bankr.E.D.Pa.2001) (“Turnover under 11 U.S.C. § 542 is a remedy available to debtors to obtain what is acknowledged to be property of the bankruptcy estate.”); see also Creative Data Forms, Inc. v. Pennsylvania Minority Business Development Authority (In re Creative Data Forms, Inc.), 41 B.R. 334, 336 (Bankr.E.D.Pa.1984) (“[I]f the debtor does not have the right to possess or use the property at the commencement of the case, a turnover action cannot be a tool to acquire such rights.”), aff'd, 72 B.R. 619 (E.D.Pa.1985), aff'd, 800 F.2d 1132 (3d Cir.1986) (table).
Numerous courts have held that a turnover is not proper where a bona fide dispute exists. See In re Allegheny Health Education and Research Foundation, 233 B.R. 671, 677 (Bankr.W.D.Pa.1999) citing U.S. v. Inslaw, Inc., 932 F.2d 1467, 1472 (D.C.Cir.1991) (“ ‘It is settled law’ that turnover actions under § 542 cannot be used ‘to demand assets whose title is in dispute’ ”) see also In re 2045 Wheatsheaf Associates, 1998 WL 910228 *10 (Bankr.E.D.Pa.) (quoting In re Johnson, 215 B.R. 381, 386 (Bankr.N.D.Ill.1997), to the effect that “[tjurnover under § 542 of the Code ‘is not intended as a remedy to determine disputed rights of parties to property. Rather, it is intended as a remedy to obtain what is acknowledged to be property of the bankruptcy estate.’ ”); In re LiTenda Mortgage Corp., 246 B.R. 185, 195 (Bankr.D.N.J.2000) citing In re CIS Corp., supra, 172 B.R. at 760 (“The terms ‘matured, payable on demand, or payable on order’ create a strong textual inference that an action should be regarded as a turnover only when there is no legitimate dispute over what is owed to the debtor.”); Inre F & L Plumbing & Heating Co., 114 B.R. 370, 376-77 (E.D.N.Y.1990) (explaining that where no set fund exists and other parties may have legal rights to the monies sought, no turnover action lies); In re Ven-Mar Intern., Inc., 166 B.R. 191, 192-93 (Bankr.S.D.Fla.1994) (holding that § 542 does not provide a means to recover property where a dispute exists between the parties); In re Matheney, 138 B.R. 541, 546 (Bankr.S.D.Ohio 1992) (stating that an action is properly characterized as one for turnover when the trustee or debtor in possession is seeking to obtain property of the debtor, not property owed to the debtor); In re Kenston Management Co., 137 B.R. 100, 107 (Bankr.E.D.N.Y.1992) (holding that an action for turnover only exists if the debt has matured and is “specific in its terms as to the amount due and payable”); In re FLR Company, Inc., 58 B.R. 632, 634 (Bankr.*691W.D.Pa.1985) (“Implicit in the bankruptcy context of turnover is the idea that the property being sought is clearly the property of the Debtor but not in the Debtor’s possession. Turnover, 11 U.S.C. § 542, is not the provision of the Code to determine the rights of the parties in legitimate contract disputes.”)
The Third Circuit has explained that a “bona fide dispute” exists only when there is “a genuine issue of material fact that bears upon the debtor’s liability, or a meritorious contention as to the application of law to undisputed facts.” B.D.W. Associates v. Busy Beaver Bldg. Ctrs., 865 F.2d 65, 66 (3d Cir.1989) (adopting standard enunciated in In re Busick, 831 F.2d 745, 746 (7th Cir.1987) which, in turn adopted In re Lough, 57 B.R. 993, 997 (Bankr.E.D.Mich.1986) with gloss: requiring that fact or legal issue in dispute be “substantial”). Applying this definition to the three counts, the Court notes that the Defendants vigorously dispute that they are liable for any monies due. Without belaboring the merits of the question the Court holds simply that no turnover claim exists sufficient to establish core jurisdiction.
Other Proceedings Affecting Liquidation or Debtor/Creditor Relationship
That leaves the fourth and final basis for core jurisdiction offered in the amended complaint: “other proceedings affecting the liquidation of the estate or the debt- or/creditor relationship.” 28 U.S.C. § 157(b)(2)(0). Like subparagraph (A), subparagraph (0) generally assumes a type of proceeding as opposed to a specific statutory grant of core jurisdiction. A leading commentator lists (0) along with (A) as one of the catch-all core jurisdiction provisions. See 1 Collier on Bankruptcy ¶ 3.02[3][e]. Yet, the Third Circuit has cautioned as to the limited application of these two catch-all core provisions:
The apparent broad reading that can be given to 157(b)(2) should be tempered by the Marathon decision.” 781 F.2d at 162. The court held that state law contract claims which do not fall within the specific categories of core proceedings listed in 28 U.S.C. § 157(b)(2)(B)-(N) are non-core, even if they arguably fall within the two “catch-all” provisions of section 157(b)(2)(A) (“matters concerning the administration of the estate”) or section 157(b)(2)(0) (“other proceedings affecting the liquidation of the assets of the estate”). “To hold otherwise would allow the bankruptcy court to enter final judgments that this court has held unconstitutional.” 781 F.2d at 162.
Beard v. Braunstein, 914 F.2d 434, 443-444 (3d Cir.1990). In concurring, Collier notes that the language of subparagraph (0) apparently is “based upon statements in Marathon that the core of the bankruptcy power is the adjustment of debtor-creditor relationships.” To that, it adds that “[a]ny residual problems of misinterpretation must be considered in light of Stern v. Marshall.” See 1 Collier on Bankruptcy ¶ 3.02[3][d][ii]; see also Piombo Corp. v. Castlerock Properties (In re Castlerock Properties), 781 F.2d 159, 162 (9th Cir.1986) (holding that subparagraphs (A) and (0), the catch-all core provisions must be applied narrowly); and Harris v. Wittman (In re Harris), 590 F.3d 730, 739 (9th Cir.2009) (holding that chapter 7 debtor’s removed state court suit against trustee for negligent liquidation of estate was core matter under subparagraph (0)).
This guides the Court to the conclusion that the Complaint is outside subpara-graph (0)’s limits. The claims do not pertain to how the a trustee or debtor in possession is liquidating or administering the estate. Indeed, the dispute occurred outside the bankruptcy context. Neither would it alter a debtor/creditor relation*692ship. The parties status vis-a-vis each other is not one of borrower and lender; rather, they are parties in privity to an agreement which Plaintiff contends has been breached. Nothing in the Complaint seeks to alter the essential character of their relationship as to the other. In sum, none of the four proffered jurisdictional bases supports the Debtor’s claim of core jurisdiction.
Related Jurisdiction
A finding that this matter is not “core” for jurisdiction purposes does not mean, however, that the causes of action are not otherwise related to the bankruptcy case. The Complaint alleges in the alternative that this matter is related to a pending bankruptcy case. First Amended Complaint ¶ 13. The Third Circuit has explained that “[w]ith ‘related to’ jurisdiction, Congress intended to grant bankruptcy courts ‘comprehensive jurisdiction’ so that they could ‘deal efficiently and expeditiously’ with matters connected with the bankruptcy estate.” In re Resorts Intern., Inc., 372 F.3d 154, 163-164 (3d Cir.2004) quoting Celotex Corp. v. Edwards, 514 U.S. 300, 308, 115 S.Ct. 1493, 131 L.Ed.2d 403 (1995) (quoting Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir.1984) overruled on other grounds, Things Remembered, Inc. v. Petrarca, 516 U.S. 124, 116 S.Ct. 494, 133 L.Ed.2d 461 (1995)). That such “connection” must be real cannot be overemphasized; as always, bankruptcy courts have limited jurisdiction. Id.
The test for determining relatedness remains the Third Circuit’s Pacor decision. There, it held that bankruptcy courts have jurisdiction to hear a proceeding if “the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy.” Id. In In re Marcus Hook Dev. Park, Inc., 943 F.2d 261 (1991), the Court of Appeals added the gloss that the term “conceivable” should not be understood to connote “[cjertainty, or even likelihood” that the estate would be affected. Id. at 264. Neither must “the proceeding [] be against the debtor or against the debtor’s property. An action is related to bankruptcy if the outcome could alter the debtor’s rights, liabilities, options, or freedom of action (either positively or negatively) and in any way impacts upon the handling and administration of the bankrupt estate.” Pacor, supra, 743 F.2d at 994. In adopting Pacor, the Supreme Court established the fundamental premise that “bankruptcy courts have no jurisdiction over proceedings that have no effect on the estate of the debtor.” Celotex, 514 U.S. at 308 n. 6, 115 S.Ct. 1493.
Defendants’ Arguments
As to why this litigation cannot affect the bankruptcy estate, the Movants make two arguments. Both arguments are premised on Berks having confirmed a plan. First, they argue that the effect of the confirmation is to vest the litigation solely in Berks. Thus, they conclude, any proceeds from this lawsuit will become property of Berks and not the estate and so will never “affect” it. Defendants’ Motion 4. Second, they argue that Berks amended the complaint after confirmation at a time when this Court no longer had jurisdiction. Id. 10. They assert that the amendment constitutes a new proceeding over which this Court cannot exercise jurisdiction.
At oral argument, Defendants added two new arguments. The first new position was that because Berks sought and obtained a discharge upon confirmation, it became a reorganized debtor into which the litigation vested exclusively. T-18. Like the first argument raised in the first Motion to Dismiss, the Defendants are trying to prove, once again, that the proceeds from the litigation will redound only to *693Berks’ benefit without affecting the estate. The second new argument made at oral argument was limited to defendants CHI and Bornemann: because neither defendant was either a creditor or claimant, the argument goes, there is no jurisdiction over them. T-6.
Effect of Confirmation
As to the first argument, Berks contends that the Defendants misread the Plan. Berks points out that the plan provides that Berks shall continue to exist after confirmation “solely for the purpose of realizing collecting and liquidating the remaining Assets for distribution to classes in order of priority, paying other obligations as set forth therein, and taking all action provided for in the plan.” Berks’ Brief, 7 quoting First Amended Plan, Art. VI(A)(1), VII(K)(4). Berks retains “the exclusive right to prosecute and enforce any and all causes of action.” Id., Art. XII(A). Thus, by its very terms, the plan contemplates Berks’ continued prosecution of this litigation in this forum in order to distribute assets to creditors as well as to equity interest holders. Berks’ Brief 7.
The Court finds the logic of Plaintiffs argument to be convincing. Bankruptcy Code § 1142 charges the a debtor with carrying out the plan as well as any related orders of court. 11 U.S.C. § 1142(a). In short, the debtor is required to consummate the plan. 11 U.S.C. § 1142(b). That entails prosecuting the litigation as the plan provides. The result of that prosecution will likely affect the estate. Should the Debtor prevail, then assets available for distribution might reach equity interests; should the Defendants prevail then the amount owed in back rent might very well change. See Shuman v. Kashkashian (In re Shuman), 277 B.R. 638, 651 (Bkrtcy.E.D.Pa.2001) (stating that a potential increase or decrease in estate property, or potential increase or decrease in liabilities of the estate, is sufficient to confer subject matter jurisdiction over a bankruptcy proceeding). Accordingly, the Court finds that this litigation is, at a minimum, related to the bankruptcy case for jurisdiction purposes.
Amendment Post-Confirmation
Just as the effect of plan confirmation does not divest the Court of jurisdiction, neither does the timing of the amendment. Defendants argue that once amended, a complaint is judged for jurisdictional competence as of the date of the amendment not as of the date of the original filing. Implicit in Defendant’s argument is the premise that the jurisdiction was divested as of confirmation. But the Court has just found supra that confirmation of the plan did not effect a change in subject matter jurisdiction. It exists now as it existed then. But assuming that it was divested, the substance of the amendment is such that it would relate back in time to the original proceeding under F.R.C.P. 15(c)(1)(B).5 The changes to the Complaint consist of dropping one defendant and increasing—albeit substantially— the damages claim.6 However one views it, amending the complaint has not changed the jurisdictional lay of the land.
Discharge Was not Granted
The Court turns to the Defendants’ first argument raised at oral argument; to wit, *694that the granting of a discharge likewise divests the Court of jurisdiction. The Court can find no proof in the record of the very premise upon which the argument proceeds: contrary to Defendants’ contention, the Debtor did not request a discharge as part of confirmation. Indeed, this is a liquidating plan which would not entitle the Debtor to a discharge even if one were sought. See 11 U.S.C. § 1141(d)(3). And, in fact, the Debtor is no longer operating but exists solely for purposes of liquidation of the estate’s assets as discussed, supra. In sum, this argument, too, lacks merit.
Jurisdiction as to CHI and Bornemann
Defendants’ second new argument at the hearing attempts to distinguish two of the defendants from the other. They explain that neither CHI nor Bornemann is, or was, a claimant or creditor of Berks. As such, neither can expect any “distribution” in the bankruptcy. What follows from that, they conclude, is that there is no jurisdiction over them. T-6. This reflects a fundamental misunderstanding of bankruptcy court jurisdiction. It matters not that a defendant is neither a creditor, a claimant, nor even a party in privity with a debtor. What matters for jurisdictional purposes is whether the cause of action against the defendant might conceivably affect the bankruptcy estate. The Court has found supra that the outcome of this litigation will likely in some way affect this bankruptcy estate. That is sufficient for purposes of establishing subject matter jurisdiction.
Summary
The record demonstrates that the claims raised in this adversary proceeding are outside this court’s “core” jurisdiction. They are, however, sufficiently related to the bankruptcy case to otherwise provide a jurisdictional nexus. The motions to dismiss, therefore, will be denied.
An appropriate order follows.
Order
AND Now, upon consideration of the Motions of Defendants St. Joseph Regional Health Network, Catholic Health Initiatives, and Bornemann Health Corporation to dismiss the Adversary proceeding for lack of subject matter jurisdiction pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(h)(3), the Plaintiffs response thereto, the submission of briefs, and after oral argument, it is hereby:
Ordered, that for the reasons set forth in the attached Opinion, the Motions are denied. The Court holds that it has non-core, “related to” jurisdiction over the claims raised in the adversary proceeding.
. It has included CHI as a defendant because CHI is alleged to be the principal of St. Joe. See First Amended Complaint, V 10.
. A term of art, "core” in this context derives from the Supreme Court’s ruling in Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982). There, the High Court held unconstitutional the jurisdictional grants of the Bankruptcy Act of 1978. Specifically, it struck down the provision which authorized Article I bankruptcy courts to hear certain matters that constitutionally could only be heard by courts whose judges are protected by the safeguards in Article III. Id. at 84, 102 S.Ct. at 2878 (bankruptcy courts do not constitutionally have jurisdiction over "claims for breach of contract and misrepresentation, [because they] involve a right created by state law, a right independent and antecedent to the reorganization petition that conferred ju*687risdiction upon the Bankruptcy Court”) (emphasis in original).
. The statute does provide, however, that all parties may consent to the Bankruptcy Court's entry of a final judgment. See 28 U.S.C. § 157(c)(2).
. The Court of Appeals reversed the District Court to the extent that lower court's ruling was found to be precluded by the prior Texas state court jury verdict that was handed down. See In re Marshall, 600 F.3d 1037, 1064 (9th Cir.2010).
. The rule allows an amendment to relate back if it "asserts a claim or defense that arose out of the conduct, transaction or occurrence set out in the original pleading.” It is made applicable to adversary proceedings by B.R. 7015.
. The new damages claim is based primarily upon a lost opportunity which is explained as an alleged expanded inpatient facility contemplated by the parties’ agreement. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494561/ | MEMORANDUM AND ORDER OF COURT
JEFFERY A. DELLER, Bankruptcy Judge.
The matter before the Court is the Amended Reaffirmation Agreement between the Debtor and Reliance Savings Bank, filed in the above-captioned case. Through the Amended Reaffirmation Agreement, the Debtor seeks to reaffirm a debt secured by a 2009 Fleetwood Edge-wood manufactured home, situate on a lot commonly known as 212 Caldwell Road, New Millport, PA (the “Property”). The Amended Reaffirmation Agreement will be denied for the reasons that follow.1
The Debtor filed a voluntary petition for relief under Chapter 7 of Title 11 of the United States Code on April 27, 2011. The Debtor simultaneously filed her schedules of income and expenses. In her schedule I the Debtor lists monthly income of $2,750.62. In her schedule J, the Debt- or lists monthly expenses totaling $2,668.00. These expenses do not include the required monthly payment on the proposed reaffirmed debt of $537.27 secured the Property, resulting in a negative net monthly income of -$454.65. {See Doc. #30).
Under 11 U.S.C. § 524(c) a debtor may reaffirm a debt, thereby ensuring that the debtor’s personal liability for the debt will survive the debtor’s discharge. However, under 11 U.S.C. § 524(m), bankruptcy courts may disapprove a reaffirmation agreement if a presumption of undue hardship arises, and is not successfully rebutted by the debtor to the satisfaction of the court.
*696Under the facts of the instant case, the presumption of undue hardship arises2 because the Debtor’s schedules indicate the Debtor’s inability to make the payments required under the Amended Reaffirmation Agreement. For this reason, the Court conducted a hearing on the Amended Reaffirmation Agreement on January 20, 2012.3
At the hearing, counsel for the Debtor argued that despite the presumption, the Court should approve the Amended Reaffirmation Agreement because the Debtor is seeking to protect the interest of her daughter who is a co-owner of the Property and who supplies the monthly payment amount. (See Audio Recording of Hearing Held in Courtroom D, January 20, 2012 (10:16-10:18 AM)).
The Court does not find the Debtor’s argument to be persuasive. When considering whether to approve a reaffirmation agreement the Court must consider whether the Debtor has successfully rebutted the presumption of undue hardship. See 11 U.S.C. § 524(m)(l). While the Debtor insists that her co-owning daughter will contribute payments, there is nothing of record to indicate that the co-owner is required to or is capable of doing so. In addition, the terms of the Amended Reaffirmation Agreement seek to have the Debtor affirm a payment amount of $537.27 per month over the next twenty-two (22) years. While the interest rate and payment amount seem reasonable, there was no evidence presented as to whether the Debtor (and/or her daughter) will be able to maintain a sufficient level of income over such an extended period of time to repay the reaffirmed debt.
Additionally, from the facts and circumstances presented, consideration of whether the Amended Reaffirmation Agreement is in the best interest of the Debtor helps to inform this Court’s analysis of whether the Debtor has successfully rebutted the presumption of undue hardship. See e.g., In re Hart, 402 B.R. 78, 87 (Bankr.D.Del.2009) (explaining the court’s presumption analysis was “heavily influenced” by whether an agreement is in the debtor’s best interest when considering a request to reaffirm consumer debt secured by real property); In re Laynas, 345 B.R. 505, 515 (Bankr.E.D.Pa.2006) (When considering whether the presumption of undue hardship has been rebutted “nothing in § 524(m)(l) expressly prohibits the court from considering other factors (such as the debtor’s best interest, as under § 524(c)(6)(A)).”).
Reaffirmation of the debt does not appear to provide any benefit to the Debtor. *697The Debtor does not reside in the Property,4 does not maintain any equity in the Property, and Debtor’s counsel was unable to indicate what benefit, if any, the Debtor would derive in exchange for her reaffirmation of the debt. (See Audio Recording of Hearing Held in Courtroom D, January 20, 2012 (10:19-10:21 AM)). While the Debtor’s desire to protect her co-owning daughter’s interest in the Property is understandable, it does not appear to be in the Debtor’s best interest. See In re Hoffman, 358 B.R. 889, 843-44 (Bankr.W.D.Va.2006) (holding that reaffirming an unaffordable debt for the purpose of protecting a co-obligor was not in the debtors’ best interest).
Further, just because this Court will disapprove the Amended Reaffirmation Agreement does not mean that the arrangement between the Debtor, her daughter, and Reliance Savings Bank must be altered in any way. Even though the Debtor’s personal liability on the debt may be discharged, she maintains the absolute right to continue making payments on the debt. See 11 U.S.C. § 524(f). Counsel for Reliance Savings Bank acknowledged that the Debtor and her daughter are current on the mortgage and that Reliance Savings Bank would continue to accept payments from the Debtor’s daughter going forward. (See Audio Recording of Hearing Held in Courtroom D, January 20, 2012 (10:18-10:19 AM)). So long as the Debtor and her co-signor continue to make timely payments, it appears to the Court that Reliance Savings Bank has little incentive to foreclose, and may, in fact, be prevented from doing so.5
In sum, because the Debtor’s payment of the proposed reaffirmed debt would create negative net monthly income and reaffirmation does not appear to be in the best interest of the Debtor, the Debtor has failed to rebut the presumption of undue hardship to the satisfaction of this Court.
WHEREFORE, this 30th day of January, 2012, for the reasons stated above, IT IS HEREBY ORDERED THAT the Amended Reaffirmation Agreement between the Debtor and Reliance Savings Bank, filed in the above-captioned case NOT APPROVED.
. This matter is a core proceeding over which this Court has proper subject-matter jurisdiction. See 28 U.S.C. §§ 157(b)(2)(A), 157(b)(2)(I), 157(b)(2)(0) and 1334(b). This Memorandum and Order of Court constitutes the Court’s findings of fact and conclusions of law pursuant to Fed. R. Bankr.P. 7052.
. While the Debtor acknowledges on the Amended Reaffirmation Agreement Cover Sheet that the presumption of undue hardship arises, the “No Presumption of Undue Hardship” box was checked on the first page of the Amended Reaffirmation Agreement, and counsel to the Debtor did not check the appropriate box under Part IV of the Amended Reaffinnation Agreement indicating that the presumption arises. (See Doc. # 30).
. Even though the presumption of undue hardship may expire after a period of sixty (60) days from the date the reaffirmation agreement was filed (see 11 U.S.C. § 524(m)(l)), this Court finds that presumption is still present in this case. The hearing on the Amended Reaffirmation Agreement was originally scheduled within sixty days of the date it was filed. (See Doc. # 32). However, the hearing was continued several times pursuant to requests by both the Debtor and Reliance Savings bank, each proponents of the Amended Reaffirmation Agreement. (See Doc. # 35, # 40, Audio Recording of Hearing Held in Courtroom D, December 8, 2011 (10:28-10:29 AM)). Further, the Debtor has not amended her schedules I or J, which give rise to the presumption, and no information indicating changed circumstances of any kind was introduced at the hearing.
. In her schedule A, the Debtor lists an interest in two properties. The first is real property commonly known as 122 Caldwell Road, New Millport, PA, which the Debtor claims she owns jointly with her husband and is identified as her residence. (See Doc. # 1, Schedule A). The second is the Property in question.
. Courts within the Third Circuit recognize that despite only three options for treatment of secured collateral outlined in 11 U.S.C. § 521 following the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) amendments, debtors are not precluded from exercising a fourth “pass through” option with regard to real property by remaining current on payments without the need to enter into a reaffirmation agreement. See e.g., In re Law, 421 B.R. 735, 737-38 (Bankr.W.D.Pa.2010), In re Hart, 402 B.R. 78, 82-83 (Bankr.D.Del.2009), In re Baker, 390 B.R. 524, 527-28 (Bankr.D.Del.2008). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494562/ | MEMORANDUM OF DECISION
THOMAS J. CATLIOTA, Bankruptcy Judge.
La Union Center LLC (the “Movant”) seeks dismissal of this Chapter 11 case claiming that debtor Jin Suk Kim Trust (the “Debtor”) is not eligible to file a bankruptcy petition because it is not a “business trust.” The Debtor opposes the dismissal motion. For the reasons set forth herein, the Court concludes that the Debt- or is a “business trust” as that term is *699used in 11 U.S.C. § 101(9)(A)(v) and therefore will deny the motion to dismiss.
FINDINGS OF FACT
On or about January 1, 1993, Jin Heang Chung executed the Irrevocable Trust Agreement (the “Trust Agreement”) thereby creating the Jin Suk Kim Trust (the “Debtor”). Jin Heang Chung was the grantor (the “Grantor” and also referred to at times as “her mother”). The Trust Agreement named Jin Suk Kim, the Grantor’s daughter (“Kim”), as the trustee and life income beneficiary. Kim has been the only person designated as the trustee under the Trust Agreement although, as explained more fully below, Robert Harris signed documents as the “Trustee” for a short period prior to 2009.
The Debtor was established to be a generation skipping trust that allowed the original trust corpus to be passed on to the beneficiaries named by Kim in her will while (supposedly) providing income to Kim, the Grantor’s only child. The facts in the foregoing sentence were established by the testimony of Movant’s expert, Mark Feinberg. The Trust Agreement does not contain a statement of purpose other than to state that the transfer is made for “the uses and purposes” set forth therein, and that the trustee “shall collect the income arising from the principal ... [and] shall dispose of income and principal” in accordance with the Trust Agreement. Ex. 3 at 1. No one, including the Grantor, ever had any discussions with Kim about the purpose of the Debtor or why it was created. No one explained to her the duties or obligations of a trustee, or whether she should operate the Debtor any differently than she operated her other businesses. No evidence was introduced by any party as to who is named in Kim’s will, although it seems quite apparent that it will be Kim’s family members.
Kim, whom the Court found to be entirely credible,1 had no real understanding of why her mother created the Debtor. Further, these matters were not particularly important to her, because her focus has been on building wealth in the Debtor for the benefit of her family as a whole.
The Trust Agreement provided that Kim, the trustee, “shall pay” to herself “all of the net income of the trust....” Ex. 3 at ¶ 2. In addition, Kim also was authorized to pay to herself
such sums from the principal of the trust estate hereunder as the Trustees, in their sole discretion, may deem necessary or advisable for her support and health, or to maintain her in the standard of living to which she has been accustomed.
Id. In fact, Kim never made any distributions of net income or principal to herself (or anyone else, for that matter), instead retaining and reinvesting all profits so as to maximize the value of the Debtor’s assets and enable the Debtor to acquire additional real estate investments, as described herein.2
The Trust Agreement gave Kim, the trustee, broad powers to invest the Debt- *700or’s assets as she saw fit and provided her substantial protection from liability for losses:
[the Trustee is not] limited to the class of investments permitted by any statute, law or rule of court relating to the investment in trust funds, and the Trustee shall not be required to diversify the investments of the trust property except to such extent as they deem advisable. ******
The trustee, while acting in good faith, shall not be liable or held responsible for any loss or depreciation in the value of the trust property resulting from any of the investments or reinvestments made by them.
Trust Agreement, ¶ 6.
Kim has been in the real estate business since 1980, managing and investing in real estate owned directly with her husband, in limited liability companies or in the Debt- or. Kim managed the Debtor the way she managed her other real estate investments. Her goal was to make the best business decisions she could make, after consulting with her mother and husband, in order to maximize the Trust’s profits and the value of its assets. She operated the Debtor as a family real estate enterprise with the intention of maximizing family wealth, and fairly aggressively leveraged the initial real estate investment that was transferred to the Debtor in order to acquire additional real estate investments. Her actions were not reckless by the measure of a real estate investor, and were allowed by the Trust Agreement, but they were not consistent with a fiduciary’s obligation to prudently protect and preserve the res of a trust.
Six years before the Debtor was created, in March 1987, the Grantor, Kim and her husband purchased the Mattapony Shopping Center (the “Mattapony Center”) in Prince George’s County, Maryland—the Grantor acquired a ninety percent interest while Kim and her husband each acquired a five percent interest. Kim managed the Mattapony Center for the Grantor, herself and her husband upon its acquisition in 1987.
Upon the Debtor’s creation, the Grantor transferred into the Debtor her ninety percent interest in the Mattapony Center. Kim and her husband retained their collective ten percent interest in the Mattapony Center, although, as explained below, the economic value of those interests eventually made their way into the Debtor.
Kim continued to manage the Mattapo-ny Center after the Grantor transferred her interest into the Debtor in the same way she managed it before the Debtor was created. Specifically, she discussed proposed actions with her mother and husband and took actions designed to maximize the profit from and value of the asset.
In 1994, Kim purchased on behalf of the Debtor a shopping center in Fredericks-burg, Virginia (the “Fredericksburg Center”) from Carl Silver. She saw an advertisement that stated the Fredericksburg Center could be acquired for $1.9 million with only a $100,000 down payment, and the rents from the center would be sufficient to service the debt. She thought it was a “good deal.” Before she bought it she discussed the acquisition with her mother. The down payment came from retained profits from the Mattapony Center, and the balance of the purchase price was funded by a deed of trust loan from Eagle Bank and a note that the seller took back. Significantly, the seller’s note was secured by a deed of trust against the Mattapony Center. Ex. 5 at 1.
In January 2003, the Debtor, Kim and her husband executed a deed of trust on the Mattapony Center to secure a personal obligation of Kim and her husband to *701Greenpoint Mortgage Funding, Inc. Ex. 7 at 1 (“Borrowers Hiun Ung Kim and Jim Suk Kim owe Lender the aggregate principal sum ... as evidenced by a promissory note from Borrowers Hiun Ung Kim and Jim Suk Kim... .”).
On May 1, 2006, Kim acquired on behalf of the Debtor La Union Mall (“La Union Mall”) in Prince Georges’s County, Maryland for $12,657,000. The transaction was structured as a like-kind exchange under § 1031 of the Internal Revenue Code, pursuant to which the Debtor sold the Mattapony Center and the Fredericks-burg Center through the like-kind exchange mechanism in order to provide the down payment for La Union Mall. In addition to the Debtor’s down payment, the acquisition was financed by a first deed of trust loan in the amount of $9,100,000 from Virginia Commerce Bank, and an approximately $2.3 million second deed of trust loan from KF Funding Company. KH Funding also made an approximately $2 million loan to the Debtor for improvements. Thus, in round numbers, the amount of equity the Debtor used to acquire La Union Mall was approximately $1,300,000 ($12,657,000 minus $9,100,000, from the first deed of trust, minus $2,300,000, from the second deed of trust) and the loan-to-value ratio of the first and second deed of trust loans against the purchase price exceeded 90%. Taking into account the $2 million improvements loan made by KH Funding, the total secured and unsecured debt incurred by the Debtor in the transaction exceeded the purchase price by $700,000.
The deed reflects that La Union Mall is titled solely in the name of the Debtor. It appears from the documents admitted into evidence that 100% of the like-kind exchange proceeds from the Mattapony Center went into the acquisition of La Union Mall. The Court therefore finds that Kim’s and her husband’s five percent interests in the Mattapony Center were used in the Debtor’s acquisition of La Union Mall. Further, notwithstanding that La Union Mall is titled strictly in the Debtor’s name, Kim and her husband are personally obligated on the Virginia Commerce Bank loan, along with the Debtor. Ex. 9 at p. KIM003276.
Prior to the acquisition of La Union Mall, Kim managed the Debtor. When KH Funding made its loan in the La Union Mall transaction, it began to manage the Debtor’s real estate. Robert Harris, an executive with KH Funding, signed documents and took actions on behalf of the Debtor using the title of “Trustee” of the Debtor, but he has never been appointed as trustee. See, e.g., Ex. 21 at 20. In December, 2009, Kim, her husband and the Debtor, as borrowers, entered into a loan modification agreement with Virginia Commerce Bank. Ex. 14. An “integral part” of the loan modification agreement was that the Debtor would terminate KH Funding from doing anything associated with managing the Debtor. Id. at ¶ 13. Mr. Harris no longer signed documents as “Trustee” of the Debtor.
The Debtor directly employs twelve employees, six who provide security for the real estate operations and six who perform maintenance services. The Debtor contracts directly with service providers and tenants at La Union Mall.
The Debtor has no formal board of directors or officers. It was never registered with the state of Maryland as a business trust or a statutory trust. It does not hold a certificate of trust nor does the beneficiary hold a certificate of ownership.
The Debtor commenced this case on March 1, 2011, by filing a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code. The *702Debtor is operating as debtor-in-possession pursuant to 11 U.S.C. §§ 1107 and 1108.
The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1384, 157(a), and Local Rule 402 of the United States District Court for the District of Maryland. This is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(A).
CONCLUSIONS OF LAW
Section 109(d) of the United States Bankruptcy Code3 provides that “[o]nly a ... person that may be a debtor under chapter 7 of this title ... may be a debtor under chapter 11....” 11 U.S.C. § 109(d). The term “person” includes “individual, partnership, and corporation.” 11 U.S.C. § 101(41). The term “corporation” includes a “business trust.” 11 U.S.C. § 101(9)(A)(v). Thus, a “business trust” is eligible under § 109(d) to file a Chapter 11 bankruptcy petition. But a personal, family or testamentary trust&emdash; the primary purpose of which is to provide for the maintenance of the trust beneficiaries&emdash;is not eligible. In re Hurst Trust, No. 97-14562-PM, 1997 WL 412168, *3-4, 1997 Bankr.LEXIS 997, at *9 (Bankr. D.Md. June 19, 1997). Accordingly, the Court must determine whether the Debtor is a business trust as that term is used in § 101(9)(A)(v).
Numerous cases have addressed the issue of what constitutes a business trust under § 101(9)(A)(v). Two circuit courts of appeal have done so, as have a number of bankruptcy courts within the Fourth Circuit. However, no uniform standard has emerged and the Fourth Circuit Court of Appeals has not addressed the issue.
The Sixth Circuit developed the “primary purpose” test to determine whether a trust is a business trust. The test consists of two propositions:
First, “trusts created with the primary purpose of transacting business or carrying on commercial activity for the benefit of investors qualify as business trusts, while trusts designed merely to preserve the trust res for beneficiaries generally are not business trusts,” and second, “the determination is fact-specific, and it is imperative that bankruptcy courts make thorough and specific findings of fact to support their conclusions”&emdash;findings, that is, regarding what was the intention of the parties, and how the trust operated.
In re Kenneth Allen Knight Trust (Knight Trust), 303 F.3d 671, 680 (6th Cir.2002) (internal citations omitted). The court in Knight Trust first concluded that the “definition of business trust properly belongs to federal, rather than state, law,” id. at 679, because to “hold otherwise would result in different results in different states and an entity would be eligible for relief in one state but not another.” Id. (quoting In re Arehart, 52 B.R. 308, 310-11 (Bankr.M.D.Fla.1985)). The court next recognized that a number of court-made definitions of “business trust” exist and “indeed perhaps the only thing all cases have in common is the recognition that they all differ.” Id. In adopting the primary purpose test, the court determined it to be “reasonably clear and workable, and reflects the intent of Congress.” Id. at 680.
The court upheld the bankruptcy court’s determination that the trust was a business trust, relying on the bankruptcy court’s findings that the grantor/trustee treated the trust as he did all the other *703business entities, id. at 674-75, and that the primary purpose of the trust was to transact business for the benefit of the grantor, the investor, and not merely to preserve the trust res for the beneficiaries. Id at 680. In formulating the primary purpose test, the court held that neither transferable certificates of ownership, nor the trust’s business activity being for profit are necessary requirements in determining whether a trust is a business trust. Id. at 676-77.
The Second Circuit in In re Secured Equipment Trust of Eastern Air Lines, Inc. (Secured Equipment), 38 F.3d 86, 89 (2d Cir.1994) determined that a court must analyze several factors to find whether a trust is a business trust, with the first factor being whether the trust has attributes of a corporation. Next, a court must determine whether the trust was created “for the purpose of carrying on some kind of business,” or whether the purpose was “to protect and preserve the res.” Id. Then a court must consider whether the trust engages in business-like activities, although while a trust “must engage in business-like activities to qualify as a business trust, such activity, without more, does not necessarily demonstrate that a trust is a business trust.” Id. Finally, the court must consider whether the trust provides benefits to the beneficiaries, which are not limited to profits. Id. at 90. The “presence or absence of a profit motive [is] influential” in determining the existence of a business trust. Id.
Ultimately, Secured Equipment held that there is no definitive list of characteristics, and that eventually, “each decision is based on a very fact-specific analysis of the trust at issue.” Id. at 89; See also In re Happy Trust Three, 122 Fed.Appx. 527, 528 (2d Cir.2004) (court found that the trust never engaged in business activities, never turned a profit, did not presently and was unlikely to engage in business activities in the future, and was thus not a business trust). Furthermore, even though the Secured Equipment trust qualified as a business trust under New York corporate law because it was an association that operated a business under a written instrument, and the beneficial interests were divided into shares, the court held that its focus must be on the trust documents and the totality of the circumstances, and not solely on whether a trust engages in business activities. Secured Equipment at 91.
Here, looking solely at the Trust Agreement, the matter is not so clear. The Trust Agreement on its face provides for income to Kim for life and allows Kim to determine who would receive the Debt- or’s assets through her will. Trusts that are designed to provide income to a beneficiary for life while preserving the trust res for future beneficiaries “generally” are not business trusts. Knight Trust, at 680. However, the Trust Agreement gives Kim virtually unfettered discretion to invest the Debtor’s assets as she sees fit without regard to any rules of diversification, and insulates her from liability for any actions taken in good faith. It allows Kim to take all assets from the Debtor at any time, in her sole discretion, limited only to the extent advisable “for her support and health, or to maintain her in the standard of living to which she has been accustomed.” Trust Agreement, ¶ 6.
The Movant’s expert’s testimony was not especially probative on the issue. He testified that there are two reasons a party would use a trust, as opposed to a corporate entity. The first often arises in family situations, where there is a concern about the maturity of the beneficiary, and the grantor names an independent trustee to manage the trust property. This reason would be significant under Knight *704Trust if the record establishes that the trustee functions primarily to protect and preserve the res for future beneficiaries. But this reason has little significance here, because the record did not establish that the Debtor was established or is operated for this reason. The second reason is tax planning. It is clear from the expert’s testimony that tax planning was the motivating factor behind the creation of the Debtor. But tax planning alone does not establish whether the trust is created for a business or a profit purpose or to protect and preserve the rest.
No case of which this Court is aware looked solely to the formation document in reaching a determination. The one overriding principle that emerges from the cases is that the determination of whether a trust is a business trust is fact-specific and focuses on the purpose and operations of the trust. Under this broader view, the Court concludes the Debtor is a business trust.
As set forth in the Findings of Fact, from the moment of its inception, Kim managed the Debtor to maximize its profits and the value of its assets in order to enhance the overall wealth of her family. She managed it, and the real estate assets it acquired, the same way she ran her other businesses, without regard to trust principles, including traditional trust principles of prudent, diversified investment and protection of trust res. She did not pay to the income beneficiary (ie., herself) any income from the Debtor, instead reinvesting it to maximize the Debtor’s value. As the following facts establish, Kim used the Debtor’s initial real estate investment in Mattapony Center to acquire additional real estate investments in order to maximize the Debtor’s value. While the Court would not conclude Kim’s actions were reckless, they were not consistent with a fiduciary’s obligation to prudently protect and preserve the res of a trust.
• Kim purchased on behalf of the Debt- or the Fredericksburg Center with a minimal amount of down payment and a traditional deed of trust loan, but also with the seller taking back a note secured by the Mattapony Center.
• Kim secured personal obligations of her and her husband for investment purposes with Debtor’s assets.
® The acquisition of La Union Mall was a highly leveraged transaction, with an initial secured loan-to-value ratio of 90% and total secured and unsecured debt that exceeded the purchase price by $700,000.
• The deed reflects that La Union Mall is titled solely in the name of the Debtor, and it appears that Kim’s and her husband’s five percent interests in the Mattapony Center were used in the Debtor’s acquisition of La Union Mall.
• Kim is and has been personally obligated on a number of the Debtor’s loan obligations, and there would no need for a trustee to guaranty trust obligations if the purpose of the Debt- or was to protect and preserve the trust res.
• Although Kim’s husband has no beneficial interest in the Debtor on the record before the Court, he is personally obligated on a number of the Debtor’s obligations.
The Court concludes that the purpose of the Debtor was to transfer the economic interest of ninety percent of the Mattapo-ny Center to Kim from her mother, in a manner that resulted in tax benefits, but which was intended to allow Kim to continue to manage the Mattapony Center and any other assets the Debtor acquired the same as she operated her other real estate ventures. It also allowed Kim to realize *705the value from the transfer if she chose while continuing to expand her real estate business as she saw fit. The Court concludes the Debtor is a business trust.
Movant cites to this Court’s opinion in In re Mortgage Banking Trust (Nash), 2008 WL 3126186 (Bankr.D.Md.2008), to support its contention that the Debtor is not a business trust. But a comparison of the Nash trust and the Debtor illustrates the importance of the detailed fact-findings required by both the Sixth and Second Circuits as necessary to determine the true purposes and operations of the trust. The Nash trust was established along with several other trusts as part of the grant- or’s marital and estate planning, and its purpose was to “hold certain property, and to provide for the maintenance, care, comfort and support of [the grantor and his] beneficiaries....” Id. at *1. Of critical distinction, the Nash trust, in both its purpose and operation, was intended to protect prudently the trust res for beneficiaries.
Finally, Movant argues that the Debtor does not qualify as a statutory business trust under Maryland law. But this Court adopts the view of Knight Trust that “definition of business trust properly belongs to federal, rather than state, law.” Knight Trust at 679.
CONCLUSION
For the foregoing reasons the Court will deny the motion to dismiss. An order will follow.
. Kim speaks very broken English. Nevertheless she communicates in English well enough that the Court was able to understand her testimony fully.
. In 2006, while KH Funding acted as property manager, it made a distribution to Kim, apparently in her personal capacity as income beneficiary. Kim forgot completely about this distribution and did not recall it at the time of her deposition, but raised it at trial to clarify the record. The Court finds no significance in the fact that there may have been one distribution to Kim in 2006, considering the 18 years existence of the Debtor, and considering the distribution was not made by Kim herself.
. Unless otherwise noted, all statutory references herein are to the Bankruptcy Code, 11 U.S.C. § 101 et seq., as currently in effect. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494563/ | MEMORANDUM OPINION ON TRIAL OF ADVERSARY PROCEEDING
JACQUELINE P. COX, Bankruptcy Judge.
This matter is before the Court after a trial of the adversary complaint filed by Plaintiff Dr. Duncan Dinkha (“Plaintiff’) objecting to the discharge of a debt owed by Defendant Van Shaf (“Shaf’). The Defendant filed for relief under Chapter 7 of the Bankruptcy Code (“Code”) on November 16, 2010 in ease no. 10 bk 51226. He did business under the corporate name V.E.K. Homes, LLC. (“V.E.K.”), a co-debt- or with Shaf regarding a debt owed to the Plaintiff.
The complaint seeks a finding that the debt reflected by a judgment in the amount of $75,000 is not dischargeable under 11 U.S.C. § 523(a)(2)(A) of the Bankruptcy Code (“Code”).
The Debtor has been a real estate developer for many years. He was involved in developing a subdivision in Morton Grove, Illinois (“Morton Grove”) known as Vamst-ed. When Vamsted was developed Morton Grove required the dedication of three lots therein for water retention.
Morton Grove agreed to release the three lots once the neighboring property known as Delanie Farms was developed. Delanie Farms was developed and an alternative water retention project was developed thereon. According to Shaf, Morton Grove was to take title to the alternative water retention project on Dela-nie Farms and allow the development of the three Vamsted lots.-
Morton Grove later refused to agree to be listed as the owner of the water retention project located on Delanie Farms. Shaf sued Morton Grove in 2009; see Case No. 09 CH 51316, Circuit Court of Cook County, Illinois, Chancery Division. On August 30, 2010 a Circuit Court of Cook County, Illinois judge ruled in favor of the Village of Morton Grove, denying Shafs request for specific performance. The opinion therein noted that in a May 7, 2004 letter the Village informed Vamsted that it would prefer not to accept title and that it wished for the entire retention area to *795remain the property, as well as the maintenance responsibility of the homeowners’ association. The court found that the village’s ordinance did not contain an agreement that it could enforce as requested by Shaf.
Shaf sought purchasers to order custom homes on the three lots. Dr. Dinkha signed an agreement for the construction of a custom home on one of the lots in 2006; its price was $895,300.
Defendant Shaf received two earnest money deposits of $89,530.00 each from the Plaintiff toward the purchase of the custom home. The contract required an initial deposit of 10% and a second 10% deposit upon “permit.”
The Defendant claims that the first payment of $89,530 was required by the parties’ agreement, but that the Plaintiff volunteered to make the second $89,530 payment. The Court does not believe that the second payment of $89,530 was paid voluntarily by the Plaintiff. It was requested by the Defendant; he instructed the Plaintiff to give the monies to Realtor Kathy Puljic, his associate.
This is important because the Defendant wants the Court to believe that the Plaintiff knew about the zoning problems and the delay that they entailed. The Court instead believes the Plaintiffs testimony that he made the second earnest money payment because he was told by the Defendant and his associate that if he made a larger down payment he could obtain better financing terms.
The Defendant wants the Court to believe that the Plaintiff should not be allowed to claim that the Defendant fraudulently concealed the zoning problem involved with getting the Village of Morton Grove to finalize its efforts regarding the drainage/water retention project. The Court finds, however, that the Plaintiff has established by a preponderance of the evidence that Shaf had a duty to disclose to the Plaintiff the facts and circumstances surrounding the zoning problem since it impacted when he could expect delivery of the home. The Court finds that the Plaintiff made the second earnest money payment at a time when he should have been told about the issues certain to cause delay, the zoning problem. Shaf had a duty to inform the Plaintiff of the problem when the Plaintiff expressed his desire to occupy the home as soon as possible. The failure to inform, under the circumstances herein, amounts to fraud.
In McClellan v. Cantrell, 217 F.3d 890, 894 (7th Cir.2000) the Seventh Circuit explained that:
Fraud is a generic term, which embraces all the multifarious means which human ingenuity can devise and which are resorted to by one individual to gain an advantage over another by false suggestions or by the suppression of truth. No definite and invariable rule can be laid down as a general proposition defining fraud, and it includes all surprise, trick, cunning, dissembling, and any unfair way by which another is cheated.
McClellan, 217 F.3d at 894 (quoting Stapleton v. Holt, 207 Okla. 443, 250 P.2d 451, 453-54 (1952)).
The Plaintiff herein was cheated. He made it clear that he was in a hurry to occupy the custom home he contracted for while unbeknownst to him, the Defendant was engaged in a lengthy court fight with the Village of Morton Grove over the right to build on the land on which the home *796was to be built. The Defendant’s silence on the issue at that time amounted to fraud. The Defendant testified that he waited for several years to gain the right to build on the land in question. As an experienced contractor he knew that he could not secure the right to build on it soon enough to satisfy the Plaintiff.
Plaintiff Dr. Duncan Dinkha sued Shaf when he became aware of the problem. The parties settled that action with an agreement that Dinkha would be paid $100,000. Some payments were made. A $75,000 judgment was entered against Shaf and V.E.K. when payments due under the settlement agreement were not made. Shaf argues that the judgment based on the settlement agreement is not dischargeable because the subsequent settlement agreement was not based upon fraud.
The Seventh Circuit held in In re West, 22 F.3d 775, 778 (7th Cir.1994) that where the parties expressly agree that a later note substitutes for an old debt based on fraud, discharge of the later debt can be had unless the objecting creditor shows that the settlement/new debt was based on fraud. Shaf s general argument of waiver does not inform the Court whether the settlement agreement became a new debt capable of being discharged independent of the fraudulent nature of the underlying obligation it addressed. The Seventh Circuit found that the bankruptcy court and the district court correctly interpreted and applied its ruling in Maryland Casualty Co. v. Cushing, 171 F.2d 257, 258-59 (7th Cir.1948) where it held that where a note expressly given and received as payment or waiver of an antecedent tort action on agreement should discharge the original obligation and substitute a new one, the original debt is fully satisfied by acceptance of the note.
The parties’ Settlement Agreement is part of Group Exhibit A to the Answer to the adversary complaint. Adversary Complaint 11-00664, dkt. no. 7. At paragraph 5 it states that:
subject to full payment by Shaf and V.E.K., the parties hereto in consideration of the covenants herein contained do hereby remise, release and forever discharge each other, their agents, servants, employees, officers, insurers, successors, heirs and assigns, and each and every one of them, of and from all claims and demands, which the parties now have or may in the future have, arising or growing out of any event or occurrence having taken place prior to the date hereof, including, without limiting the generality of the foregoing, the matters asserted in the Dinkha Litigation. This Release shall inure to the benefit of and be binding upon the heirs, executors, administrators, successors and assigns of the parties.
The release was to be effective upon full payment of $75,000. That amount has not been paid. Shafs waiver argument does not stand.
Count I of the complaint alleges that the Defendant violated 11 U.S.C. § 523(a)(2)(A) which excepts from discharge debts for “money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by, false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition.”
To prevail under section 523(a)(2)(A) a plaintiff must show that
(1) the debtor made the representation;
(2) the time of the representation, the debtor knew it to be false;
*797(8) the debtor made the representation with the intent and purpose of deceiving the plaintiff;
(4) the plaintiff justifiably relied on the representation; and
(5) the plaintiff sustained a loss or damage as the proximate consequence of the representation having been made.
4 Collier On Bankruptcy ¶ 523.08[l][e] (16th ed. 2011).
Shaf told the debtor to make the second 10% down payment installment to obtain better financing terms, falsely, knowing that the second 10% payment was not due until a permit was obtained and that the zoning problems were likely to cause more delay than the Plaintiff anticipated, since the Plaintiff made it clear that he was in a hurry to occupy the premises contracted for. Shaf had a duty to disclose the circumstances of the delay caused by the zoning problems.
On numerous other occasions Shaf told the Plaintiff that the home would be available at points in time when he knew that such was not possible.
In terms of the time of the representation, Shaf knew that the longstanding zoning issue had not been resolved when he failed to inform the Plaintiff about it and instead told him to make the second $89,530 installment to secure better financing terms. Shaf had waited several years for development to be pursued at Delanie Farms so that he could obtain the right to develop the lots in issue. He knew that he could not comply with the Plaintiffs request to occupy the premises as soon as possible.
The Court finds that the representation was made with the intent and purpose of deceiving the Plaintiff. The second installment was not yet due, as the permit had not yet been issued. Instead of producing the permit to get the second payment, Shaf misled the Plaintiff, intending to deceive the Plaintiff by suggesting other reasons for the Plaintiff to make the second 10% payment before it was due.
The Plaintiff justifiably relied on the representation. He reasonably assumed that the initial promise to deliver the home within a year or so was still valid. There is nothing in the record to suggest that the Plaintiff had notice of facts that suggested otherwise.
The Plaintiff lost the two $89,530 payments, for a total of $179,060 as a consequence of the representation made by Shaf.
The Plaintiff prevails on Count. I. He has proven that the Debtor, Defendant Vance Shaf, knew that time was of the essence to the Plaintiff, Dr. Duncan Dink-ha, at a time when Shaf had waited for many years to develop the real estate in issue.
Count II of the complaint alleges that the Defendant violated 11 U.S.C. § 523(a)(4) which excepts from discharge debts for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny. The Plaintiff cannot prevail on this count. He has not shown that Shaf was his fiduciary or that he misappropriated funds. Judgment will be entered in favor of the Defendant, Vance Shaf, on Count II.
Count III of the complaint alleges that the Defendant violated 11 U.S.C. § 523(a)(6) which excepts from discharge debts for wilful and malicious injury by the *798debtor to another entity or to the property of another entity. The Plaintiff alleges that the Defendant’s intent was to cause malicious injury to the Plaintiff by conversion of all of his deposited money. The Plaintiff cannot prevail on this count. The transfers of funds to Shaf were not restricted to certain uses, and were made voluntarily, negating the Plaintiffs assertion that possession of them was obtained wilfully and with a present intent to damage his property. Judgment will be entered in favor of Defendant, Vance Shaf, on Count III.
A separate Judgment Order will be entered | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494565/ | MEMORANDUM DECISION
ROBERT D. MARTIN, Bankruptcy Judge.
Clausen’s and Jenkins’ (the debtors’) schedules, which are attached to their voluntary petitions, are not printed on the Official Forms. While most of the information required by the Official Forms is included in Attorney Doran’s homemade forms, there are some departures in substance and substantial departures in format.
The debtors’ Schedule B omits and significantly changes wording in the type of property column. On the Official Forms, one column of Schedule B reads “Check, savings or other financial accounts, certificates of deposit or shares in banks, savings, and loan thrift, building and loan, and homestead association, or credit unions, brokerage houses or cooperatives.” On Attorney Doran’s forms, that column reads “Check and savings accounts, CD’s or similar accts.” Several column descriptions in Schedule B are omitted, and only property type and a dollar amount is listed. There is no space for description and location of the property, and no space to indicate whether the property is joint or community. It is not clear to the trustee (nor is it *829clear to me) if the dollar values in debtors’ Schedule B are meant to be the same as they would be on the Official Form column heading “Current Value of Debtor’s Interest in Property without Deducting any Secured Claim or Exemption.”
In addition, the schedules include language which seems to expand the exemption rights beyond what is provided for in the Official Forms or the Bankruptcy Code. Schedule C adds the following introduction:
“... Values of property as stated in Schedules A and B are incorporated by reference.
All legal exemptions within the above election are claimed, whether or not enumerated. Some property may be exempt under more than one provision, and the petitioner claim any benefit arising from such alternative exemptions.
Petitioner claims all scheduled assets and all of petitioner’s interest in such assets as exempt. Particularly, and not by the way of limitation, if the Amount Claimed below is equal to or greater than the value of the asset as stated in Schedules A and B; or if it is greater than petitioner’s equity in such asset as shown by Schedules A, B, and D, then the petitioner claims the asset entirely exempt for the purposes of the rule of Taylor v. Freeland & Kronz, 503 U.S. 638, 112 S.Ct. 1644 [118 L.Ed.2d 280] (1992). Values in Schedules A and B are full fair market value (FMV) and 100 percent of FMV. Claims herein for such scheduled value or for net unencumbered value derived therefrom claim each such asset fully exempt pursuant to Schwab v. Reilly, [— U.S. -] 130 S.Ct. 2652 [177 L.Ed.2d 234] (2010).”
The debtors’ schedules also omit some information that the debtors and Attorney Doran have presumably found not to apply to the debtors. On debtors’ Schedule E, a paragraph added by Attorney Doran states: “The following creditors apparently hold priority claims; priority is not hereby conceded.” A paragraph was omitted from debtors’ Schedule E that is usually included on the Official Form: “Only holders of unsecured claims entitled to priority should be listed in this schedule.” All the “check boxes” that normally appear on Official Schedule E (to indicate claims for domestic support obligations, contributions to employee benefit plans, etc.) were omitted from Attorney Doran’s version of Schedule E.
The debtors’ Statement of Financial Affairs (SFA) departs in format from the Official Form, but the departures are not substantive, and the format is generally similar to the Official Form. However, the debtors’ SFA omits the instructions normally included on the Official Forms, such as directives to indicate payments, transfers and the like to minor children, and to list spouse’s financial information if filing under Chapter 12 or 13. Other instructions are also omitted. There are numerous other alterations which surely would change either the meanings of answers required by the Official Forms, or the time required to review the information provided.
In light of the differences in format and substance, the trustee claims that the debtors’ schedules and SFAs do not conform to Fed. R. Bankr.P. 1007(b)(1), and asks this court to strike the nonconforming documents because they are not in compliance with the Official Forms. Other panel trustees from this district filed letters or affidavits in support of the Motion to Strike. Their stated reasons are: the format deviations in debtors’ schedules are *830cumbersome and confusing, making it difficult to determine if the debtors complied with § 521; by omitting language rather than identifying “none” or “not applicable,” the debtors’ signatures upon the pleadings and schedules do not include an attestation to the inapplicability of those sections; debtors’ schedules include language which expands the exemption rights beyond what is provided for in the Official Forms or the Bankruptcy Code; if non-standard forms are allowed, Chapter 7 bankruptcies could eventually become an administrative nightmare.
The debtors assert that their schedules and SFAs are in compliance with the applicable provisions of the Code and Rules, and that the “Official Forms” do not have the force of law. The debtor points specifically to Fed. R. Bankr.P. 9009 in support of his argument, which states that the Official Forms prescribed by the Judicial Conference of the United States shall be observed and used with “alterations as may be appropriate.”
11 U.S.C. § 521(1) lists among the duties of a debtor, the requirement that a debtor “file a list of creditors, and unless the court orders otherwise, a schedule of assets and liabilities, a schedule of current income and current expenditures, and a statement of the debtor’s financial affairs .... ”
Fed. R. Bank. P. 1001 states that “the Bankruptcy Rules and Forms govern procedure in cases under title 11 of the United States Code ... These rules shall be construed to secure the just, speedy, and inexpensive determination of every case and proceeding.”
Fed. R. Bank. P. 1007(b)(1) requires that the debtor “file the following schedules, statements, and other documents, prepared as prescribed by the appropriate Official Forms, if any: (A) schedules of assets and liabilities ...”
While the Official Forms should be used, there is nothing to suggest that the Official Forms have the force and effect of the Bankruptcy Code or Rules. In re Simmons, 237 B.R. 672, 675 (Bkrtcy.N.D.Ill.1999). Rule 1001 refers to the Official Forms and Rule 9009 implements them, nothing gives the forms the same authority as the Rules, (“[ijndeed, one editor’s comment on Rule 1001 carefully explains to the contrary: ‘[U]nlike the Rules, the Official Forms do not require approval either by the Supreme Court or by Congress, and while they should be observed and should be used ... they do not have the force of law.’ ”); see also In re Packham, 126 B.R. 603, 610-11 (Bkrtcy.D.Utah 1991) (citing Norton Bankr.Rules Pamphlet 1997-1998 Edition, p. 3).
While the Official Forms may not have the force of law, bankruptcy courts generally agree that they should be used. On the United States Courts web site “Bankruptcy Forms” page, it clearly says, “Official Bankruptcy Forms must be used to file and take action in bankruptcy cases. Procedural Forms also may be necessary for use during the course of some bankruptcy proceedings.” http://www.useourts. gov/FormsAndFees/Forms/Bankruptcy Forms.aspx.
Bankruptcy Rule 9009 provides: “except as otherwise provided in Rule 3016(d), the Official Forms prescribed by the Judicial Conference of the United States shall be observed and used with alterations as may be appropriate. Forms may be combined and their contents rearranged to permit economies in their use. The Director of the Administrative Office of the United States Courts may issue additional *831forms for use under the Code. The forms shall be construed to be consistent with these rules and the Code.” Fed. R. Bank. P. 9009 (emphasis added).
While substantial compliance is all that is required, the power to depart from the Official Forms is not unlimited. Case law construing Rule 9009 indicates that, while use of the Official Forms is not “entirely and absolutely mandatory,” it is strongly preferred, and substantive deviation from the Official Forms should be rare. This case law focuses on forms other than the bankruptcy petition and schedules. See, e.g., In re Thornburg, 406 B.R. 657, 659 (Bkrtcy.W.D.Pa.2009) (see also In re Rambo Imaging, L.L.P., 2007 WL 3376163 *10 (Bankr.W.D.Tex.2007)) (filings must substantially comply with and conform to Official Forms); In re Binion, 2006 WL 2668464 *2 (Bankr.N.D.Ohio 2006); In re Peterson, 2004 WL 1895201 *3 at n. 17 (Bankr.D.Idaho 2004) (use of Procedural Forms issued by AOUSC, while not strictly required, is highly encouraged).
Bankruptcy Rule 9009 authorizes the combination and rearrangement of Official Forms to permit economies in their use, but bankruptcy courts have not read this rule to give parties a free pass to make whatever changes they want in the Official Forms. Forms may be legally insufficient and unacceptable if they “confuse and confound a streamlined administrative process,” or frustrate “a quick and easy comprehension of the information presented.” See In re Orrison, 343 B.R. 906, 909 (Bankr.N.D.Ind.2006) (citations omitted). Likewise, alterations are unacceptable if the information included is substantially less than the information required by the Official Form. In re Mack, 132 B.R. 484, 485 (Bankr.M.D.Fla.1991) (“In addition to the forms being unsatisfactory as to their form and content, these papers are unsatisfactory as to the manner in which they have been completed”); In re Foodsource, Inc., 130 B.R. 549 (N.D.Cal.1991) (holding that the substitution of an abrogated form as an alteration of the Official Form does not constitute substantial compliance with the Official Form).
The failure to follow an Official Form may warrant action on the part of the court to direct that the offending party comply with more precision. For example, in Orrison, Judge Grant found that the debtor’s rearrangement of the contents of the petition constituted alterations that “confuse and confound a streamlined administrative process,” and required the party to file an amended petition using the Official Forms. In re Orrison, 343 B.R. at 909. In Bell, Judge Shapiro held that placing “entirely exempt” in lieu of the value of property claimed as exempt on Schedule C was inappropriate because it did not provide the trustee with sufficient detail to assess the dollar value to the claimed exemptions. In re Bell, 179 B.R. 129, 131 (Bkrtcy.E.D.Wis.1995). Federal Rule of Bankruptcy Procedure 9009 requires that the Official Forms “shall be observed and used with alterations as may be appropriate,” and what the debtor was proposing was not an appropriate alteration. Id. Judge Shapiro ordered the debt- or to submit an Amended Schedule C. Id. at 131.
In this case, an able and experienced attorney has consistently refused to file schedules on the Official Bankruptcy Forms. His argument that the forms on the Court web site are not “Official Forms” is misplaced. While he is correct *832in stating that the forms on the web site do not have the force of law, Rule 9009 states that “Official Forms prescribed by the Judicial Conference of the United States (indicating the forms found on the official Bankruptcy Court web site) shall be observed and used with alterations as may be appropriate.” The alterations on the debtors’ schedules are not appropriate.
For these reasons, the trustee’s motion to strike the debtors’ schedules in both cases is GRANTED. It may be so ordered. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494566/ | MEMORANDUM DECISION
ROBERT D. MARTIN, Bankruptcy Judge.
The plaintiff trustee seeks turnover of the interest in a trust. The defendant debtor contends that the trust is a “spendthrift trust” and that her interest in it is not part of her bankruptcy estate. A hearing on cross motions for summary judgment was held September 13, 2011. The parties have agreed to the following facts:
*834On April 6, 2000, Shirley McCoy, the debtor’s mother, executed the McCoy Living Trust (“McCoy Trust” or “Trust.”) The debtor is a beneficiary of this Trust, and Kevin McCoy, one of the debtor’s sons, is the sole trustee1 of this Trust.
The relevant language of the Trust is:
Article 13, Section 2. Beneficiary’s Right to Direct Retention of Distributions in Trust
Whenever a distribution is authorized or required to be made by a provision of this Article to a beneficiary, then the beneficiary may direct the Trustee in writing to retain such distribution in trust as follows:
a. The Beneficiary’s Right to Income
The Trustee, during the life time of the beneficiary, shall pay to or apply for the benefit of the beneficiary from time to time and at the beneficiary’s written direction all of the net income from this trust.
b. The Beneficiary’s Right to Withdraw Principal
The Trustee shall pay to or apply for the benefit of the beneficiary such amounts from the principal as the beneficiary may at any time request in writing. No limitation shall be placed on the beneficiary as to either the amount of or reason for such invasion of principal.
Article 13, Section 3. Disposition of Trust Property
All trust property not previously distributed under the terms of this trust shall be maintained in trust for a period not to exceed twenty years after the date of my death and distributed only according to the directions found in this section.
a. Division Into Separate Trusts
The Trustee shall divide the balance of trust property into equal trusts, with one separate trust for each of my children named in this Article.
g. Administration of the Trust share for Julie McCoy
1. Annual Pecuniary Distribution Free of Trust
Beginning the First January 1st after the date of my death, the Trustee shall distribute $20,000.00 to my daughter, Julie McCoy annually free of trust.
Shirley McCoy amended the trust on September 6, 2002, as follows:
SECOND AMENDMENT TO THE
SHIRLEY J McCOY LIVING TRUST
DATED APRIL 6, 2000
This amendment dated September 6, 2002
According to the terms of my living trust dated April 6, 2000, I amend the Agreement as follows: ...
C. Creditor Protection. I amend Article 13, to include a new Section 4, which shall read:
*835Section 4. Creditor Protection.
All payments of income and principal, including withdrawal rights, shall be privileged and may be exercised only by the Trustee at its sole discretion. Distributions under this Article shall not be subject to the claims of any creditor or to legal process and may not be voluntarily or involuntary alienated or encumbered, except by specific Order by a Court of competent jurisdiction for reasons allowed by law. Any such Order shall cite this Section and the law specifically or the Trustee shall deny such forced distribution.
On November 10, 2009, Shirley McCoy died. Pursuant to the terms of the Trust, on January 1, 2010, the debtor received a distribution in the amount of $20,000.00 “free of trust.” Later that year, on October 27, 2010, she filed a voluntary petition under chapter 7. The debtor disclosed her interest in the trust on the bankruptcy schedules as a contingent interest valued at $0. On December 21, 2010, the bankruptcy trustee demanded that the debtor turn over the trust distribution that was available to her as of January 1, 2011. The debtor informed the bankruptcy trustee that she would not be turning over any trust distributions because Kevin McCoy would be exercising his discretion as trustee to withhold trust distributions from her.
The bankruptcy trustee commenced this adversary proceeding on March 3, 2011. In her Motion for Summary Judgment, she argues that she is entitled to an order directing the turnover of the debtor’s share of the trust “as trust payments have become due and payable to the debtor pursuant to the terms of the trust.” The McCoy Trust has a net worth of $1,669,712.00.
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). A bankruptcy trustee has the burden in turnover proceedings to prove by a preponderance of the evidence that the property sought is in fact property of the bankruptcy estate and that the debtor has possession of it. In re Smith, 2011 WL 345865, *1 (Bankr.S.D.Ind. Feb. 2, 2011).
11 U.S.C. § 541 provides that the estate is comprised of “all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1). However, the Code excludes certain interests. 11 U.S.C. § 541(c)(2) provides that “a restriction in the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case under this title.” This means that “spendthrift trusts” and similar interests are excluded from the bankruptcy estate. In re Kedrowski, 284 B.R. 439, 449 (Bankr.W.D.Wis.2002).
The Seventh Circuit Court of Appeals interpreted § 541(c), when applicable, to “take the corpus of each spendthrift trust out of the definition of ‘property of the estate’ of the debtor.” Magill v. Newman, 903 F.2d 1150, 1152 (7th Cir.1990). The court reasoned that a contrary decision would drain the spendthrift trusts of any meaning and ignore the Bankruptcy Code *836provision. Id. The spendthrift trust in Newman provided discretionary distributions of net income or portions of the corpus to Newman until he reached age 50, when the trust would terminate and the trustee would distribute to Newman the assets of the trust estate “absolutely and free from trust.” Id. at 1151. A spendthrift clause prevented Newman from alienating his interest or anticipating his interest in the income or corpus of any trust estate. Id. Newman filed for bankruptcy at age 45. Id. The Court of Appeals concluded that § 541(c)(2) was applicable and Newman’s interest in the trust was not part of his bankruptcy estate. The trust “clearly and effectively directed that the corpus not become a part of the debtor’s estate until he reached age 50 and that the debtor and his creditors be prevented from anticipating the debtor’s interest in the corpus until that time.” Id. at 1152. The court acknowledged that the outcome might be different had the debtor already reached the age of 50. Id. at 1153.
The McCoy Trust provides that upon the settlor’s death, all trust property not previously distributed is to be divided into separate trusts for each of the settlor’s children. Article 13, Section 3(a). The trustee is to distribute $20,000 to each child “annually free of trust” beginning the first January 1st after the settlor’s death. Article 13, Section 3(e)-(g). Each of these separate trusts will terminate 20 years after the settlor’s date of death. See Id. By the Seventh Circuit Court of Appeal’s reasoning in Newman, as long as the spendthrift clause is valid and enforceable under applicable nonbankruptcy law, the debtor’s interest in the corpus does not constitute property of the bankruptcy estate. The annual payments of $20,000.00 are not as straightforward.
[4] What constitutes “property of the estate” is decided by federal law; but the extent of the debtor’s legal or equitable interests in property as of the commencement of the case is determined by state law. In re Mitchell, 423 B.R. 758, 763 (Bankr.E.D.Wis.2009) (quoting Matter of Yonikus, 996 F.2d 866, 869 (7th Cir.1993)). The subject Trust was created in Wisconsin, the debtor resides in Wisconsin, and the parties do not dispute that Wisconsin law applies.
Wisconsin law affirms spendthrift protection for beneficiaries. Wisconsin statute § 701.06(2) provides that “[t]he interest in principal of a beneficiary other than the settlor is not subject to voluntary or involuntary alienation. The interest in principal of such beneficiary cannot be assigned ...” The Creditor Protection Provision under Amended Article 13 seems to conform to this statute.
The spendthrift provision must be “enforceable under applicable nonbank-ruptcy law,” including in this case, Wis. Stat. § 701.06(2). But, otherwise enforceable limitations on transfer of trust funds do not prevent a creditor from gaining a court’s order to turn over trust property that is “due or payable” to a non-settlor beneficiary: “... a judgment creditor, after any payments of principal have become due or payable to the beneficiary pursuant to the terms of the trust, may apply to the court for an order directing the trustee to satisfy the judgment out of any such payments ...” Wis. Stat. § 701.06(2).
The bankruptcy trustee reads “due or payable” to encompass every instance in which the trustee is to make a scheduled payment to the beneficiary. She submits that the Creditor Protection Provision in Amended Article 13, Section 4, does not override the provisions for annual $20,000.00 payments or payments directed *837by the beneficiary, nor does it override the language of Wis. Stat. § 701.06(2). The bankruptcy trustee relies on In re Thomas M. Calaway, Jr., 2000 WL 33950024, (Bankr.W.D.Wis. June 30, 2000), an unpublished decision from this district issued by Judge Utschig.
The debtor interprets “due or payable” to mean that a creditor can seize payments only when they are actually distributed to the beneficiary or when the trustee has no discretion to withhold them. She submits that unlike Calaway, the Trust provisions do not conflict with the statute. No payments are currently “due or payable” because under the Creditor Protection Provision, the trustee has the “sole discretion” to make payments and has chosen to withhold them from the debtor.
Our case is distinguishable from Cala-way. In Calaway, the bankruptcy trustee sought the ultimate distribution of the trust res “at the time a distribution is actually made.” Id. at *1. In this case, the bankruptcy trustee requests the turnover of the debtor’s annual distribution. Judge Utschig concluded that Wis. Stat, § 701.06(2) did not preclude turnover once the debtor was eligible for the ultimate distribution of the trust res. Id. at *3. His conclusion is consistent with Neuman and other interpretations of § 541(c)(2), because a spendthrift clause is no longer effective once a trust terminates. In Cala-way, the court did not order turnover of discretionary income distributions to the beneficiaries. Here, the plaintiff seeks discretionary distributions of the debtor’s share of the trust res.2 Calaivay does not compel a conclusion that the bankruptcy trustee is entitled to any annual distribution.
The debtor is correct that the Creditor Protection Provision gives the trustee discretion to make payments under the trust. The language of the amendment states that “[a]ll payments of income and principal, including withdrawal rights, shall be privileged and may be exercised only by the Trustee at its sole discretion.” Amended Article 13, Section 4. This amendment supersedes the mandatory payment provisions in Article 13. The Wisconsin Supreme Court has held that in construing a trust, as with a will, the language should be construed to give effect to the intention of the settlor. Dei v. Dei (In re Dei Revocable Living Trust), 2004 WI App. 21, *6 (citing Welch v. Welch, 235 Wis. 282, 306-07, 290 N.W. 758 (Wis.1940)). That intention may be ascertained from the language of the instrument, considered in the light of the surrounding circumstances. Id. That rule is elementary in -the construction of trusts not created by will. Welch, 235 Wis. at 307, 293 N.W. 150. The late Ms. McCoy intended the Creditor Protection Provision to give Kevin, as trustee, discretion over “all payments” in the trust, including otherwise mandatory payment provisions and withdrawal rights of the debtor.
If the trustee has the sole discretion to withhold payments of principal to beneficiaries under the Trust, when are they “due or payable” under § 701.06(2)? Is “due or payable” merely a common legal phrase that was adopted in the statute without much consideration? Section 701.06(2) was written in the disjunctive, which seems to suggest either requisite is sufficient. “Due” would seem to require an obligation to pay presently. But if *838“payable” means that the ability to have it paid exists, potential discretionary distributions, even if undeclared, would suffice. But this would lead to a limitless ability of creditors to pursue discretionary payments of the trust res. That is contrary to the statute’s manifest intent. Without any instructive court interpretation of “due or payable” and without a clear meaning to seize upon, bankruptcy courts have looked for the intent of the drafters. For example, in In re Fraley, the court construed “due or payable” to include a lump sum already paid to a debtor in settlement of a worker’s compensation claim, because construing the exemption statute more narrowly would contradict the statute’s intent to protect beneficiaries. In re Fraley, 148 B.R. 635, 637 (Bankr.M.D.Fla.1992).
Because there is no helpful legislative history of Wis. Stat. § 701.06, the statute can only be construed in light of the its apparent purpose. That purpose seems to include different treatments for interest payments, distribution of principal, and protection of self-settled trusts.
The Wisconsin Legislature desired to protect income distributions subject to anti-alienation clauses. Wis. Stat. § 701.06(1) provides as follows:
Spendthrift provisions and rights of creditors or beneficiaries.
(1) A settlor may expressly provide in the creating instrument that the interest in income of a beneficiary other than the settlor is not subject to voluntary or involuntary alienation. The income interest of such beneficiary cannot be assigned and is exempt from claims against the beneficiary until paid over to the beneficiary pursuant to the terms of the trust.
But, the Legislature chose to place substantial limitations on anti-alienation clauses contained in self-settled trusts. Wisconsin Statute § 701.06(6) provides:
(6) Settlor as beneficiary, (a) Notwithstanding any provision in the creating instrument and in addition to the remedies available under subs. (4) and (5) where the settlor is a beneficiary, upon application of a judgment creditor of the settlor, the court may, if the terms of the instrument require or authorize the trustee to make payments of income or principal to or for the benefit of the settlor, order the trustee to satisfy part or all of the judgment out of part or all of the payments of income or principal as they are due, presently or in the future, or which are payable in the trustee’s discretion, to the extent in either case of the settlor’s proportionate contribution to the. trust. Wis. Stat. § 701.06(6) (emphasis added).
This provision is intended essentially to prohibit self-settled spendthrift trusts. See In re Bogue, 240 B.R. 742, 750 (Bankr.E.D.Wis.1999).
The contrast between the language in these two provisions and that of § 701.06(2):
A settlor may expressly provide in the creating instrument that the interest in principal of a beneficiary other than the settlor is not subject to voluntary or involuntary alienation. The interest in principal of such a beneficiary cannot be assigned and is exempt from claims against the beneficiary, but a judgment creditor, after any payments of principal have become due or payable to the beneficiary pursuant to the terms of the trust, may apply to the court for an order directing the trustee to satisfy the judgment out of any such payments and the court in its discretion may issue an order for payment of part or all of the *839judgment. Wis. Stat. § 701.06(2) (emphasis added).
suggests that the legislature intended relatively more spendthrift protection for principal distributions. Judgment creditors may apply for an order to satisfy judgment out of any “payments of principal” that have become “due or payable.” Courts are given flexibility to grant or deny such applications, acknowledging perhaps that certain situations would call for satisfaction of judgment while others would not. Construing this subsection in light of the whole, the phrase “due or payable” was intended to mean mandatory payments under the terms of the trust—those that a beneficiary is entitled to receive, or payments that have been declared by a trustee with discretion to do so.
The subsection is silent as to whether, after an initial principal payment is made to the beneficiary debtor, the protection is lost as to a creditor seeking the court’s aid. However, a Restatement of Trusts asserts that “after income or principal from a spendthrift trust has actually been distributed to a beneficiary, it becomes subject to creditors’ claims.” Restatement, Third, of Trusts § 58 cmt. d (2003). This indicates that generally only payments that have been distributed become subject to the claims of creditors, rather than all subsequent payments of principal that may be distributed. Therefore, even if the debtor received one principal payment, as long as any subsequent payment she is entitled to receive remains in trust, it is still protected. Only payments that the trustee declares he will make or that the debtor actually receives will lose the spendthrift protection. There is no reason to believe that the Wisconsin Legislature sought to depart from this general rule.
In this case, the debtor’s interest in the trust principal is excluded from the bankruptcy estate because the spendthrift clause is “enforceable under applicable nonbankruptcy law.” While Wisconsin law allows judgment creditors to apply for payments of principal notwithstanding a spendthrift clause, no such payments are “due or payable” here. The bankruptcy trustee is not entitled to a turnover of the payments that the trustee has chosen to withhold from the debtor.
For these reasons, the bankruptcy trustee’s motion for summary judgment is DENIED, and the debtor’s motion for summary judgment is GRANTED. It shall be so ordered.
. I refer to the bankruptcy trustee as "bankruptcy trustee,” and the Trust trustee as "Kevin McCoy” or “trustee.”
. By the language of Article 13, Section 3(g), it is not clear that the discretionary distributions are principal or income. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494567/ | RULING ON OBJECTIONS TO CONFIRMATION OF CHAPTER 13 CASES
THAD J. COLLINS, Chief Judge.
These matters are before the Court jointly on the same objections to Debtors’ Chapter 13 Plans. The sole issue was argued before the Court at Debtors’ confirmation hearing and a consolidated telephonic hearing. Debtor Sheryl Anders was represented by Derek Hong of the Hong Law Firm. Debtors Joel B. Grier and Kimberly A. Grier were represented by Janet Hong of the Hong Law Firm. Chapter 13 Trustee Carol Dunbar represented herself. The United States Trustee’s Office was represented by John Schmillen. After hearing the parties’ arguments, the Court took the matters under advisement. This is a core proceeding under 28 U.S.C. § 157(b)(2)(L).
STATEMENT OF THE CASE
The Chapter 13 Trustee, joined in briefing by the United States Trustee, objects to the Chapter 13 Plans of both cases on the same grounds. Debtors in both cases, represented by the same law firm, have refused to sign “Debtor(s)’ Ac-knowledgement Regarding Disposable Income Including Tax Refunds,” (hereafter “Acknowledgement”). A signed Acknowledgment has been a prerequisite to plan *841confirmation in this District for the last several years. Debtors assert that the Supreme Court’s recent decision in Hamilton v. Lanning, — U.S.-, 130 S.Ct. 2464, 177 L.Ed.2d 23 (2010), along with a follow-up decision from this Court interpreting that case, have rendered the Ac-knowledgement an inappropriate and/or unlawful prerequisite to confirmation. The Chapter 13 Trustee, supported by the U.S. Trustee, argues the Acknowl-edgement continues to be valid and should be signed by Debtors before their Chapter 13 Plans can be confirmed. The Court agrees with Debtors and overrules the Objections to Confirmation.
BACKGROUND AND PROCEDURAL HISTORY
On February 18, 2011, Debtor Sheryl Anders (Anders) filed a Chapter 13 Petition and Plan. On March 23, 2011, the Chapter 13 Trustee filed an Objection to Confirmation of the Plan based on some minor deficiencies in the Plan and the fact that Anders had not signed or submitted the Acknowledgement. Before the confirmation hearing on April 29, 2011, Anders and the Chapter 13 Trustee resolved the objections relating to everything other than Debtor’s failure to sign and submit the Acknowledgement.
On February 22, 2011, Debtors Joel and Kimberly Grier (Griers) filed a joint Chapter 13 Petition and Plan. On March 23, 2011, the Chapter 13 Trustee filed an Objection to Confirmation very similar to the one filed in the Anders case. Similar to the Anders case, before the confirmation hearing on April 29, 2011, Griers and the Chapter 13 Trustee resolved all outstanding issues other than Debtors’ failure to sign and submit the Acknowledgement.
The sole issue before the Court is whether Debtors must sign the Acknowl-edgement as a prerequisite to confirmation of their Chapter 13 Plans. Following the confirmation hearings, the Court held one consolidated telephonic argument to specifically address the issue. Counsel for An-ders and the Griers, the Chapter 13 Trustee, and U.S. Trustee all made arguments. The parties have also submitted excellent and extensive briefing on the issue.
The Acknowledgement form used in this District for the last several years states:
The undersigned Debtors in this Chapter 13 understand and acknowledge the following:
1. All tax refunds, economic stimulus tax rebates, employment bonuses, or any other payments received while this case is being administered may constitute disposable income. Debtors agree to submit all such payments to the Trustee pursuant to the confirmed Chapter 13 plan. If any disputes arise, the funds shall be sent to the Chapter 13 Trustee who shall retain such funds until the controversy is resolved by the Court.
2. Debtors acknowledge that NONE of such funds will be spent unless they obtain a Court order specifically authorizing them to do so.
3. Consent by Trustee or Debtors’ attorney does not constitute permission to spend these funds. Such permission requires a Court order.
4. Debtors acknowledge that, if they fail to submit any of the foregoing funds received while this case is being administered without permission of the Court, they may be found to be in violation of a Court order or in default under their confirmed Chapter 13 plan and their Chapter 13 case may be dismissed.
Debtors acknowledge that they understand these requirements and agree to *842abide by these requirements during the administration of their Chapter 13 plan.
Trustee’s Exhibit A.
While Debtors object to the entire Ac-knowledgement, the focus of their arguments has been the paragraph 1 requirement that they submit all tax refunds, economic stimulus tax rebates, employment bonuses, or any other payments received during the plan period to the Chapter 13 Trustee for the benefit of creditors unless or until the Court orders otherwise. Debtors argue this practice is contrary to recent case law from the United States Supreme Court, Hamilton v. Lanning, — U.S.-, 130 S.Ct. 2464, 177 L.Ed.2d 23 (2010), and from this District, In re Moffett, No. 10-03023, slip op. (Bankr. N.D.Iowa, March 31, 2011). Debtors argue those cases establish that some or all of the items listed in the Acknowledgement can no longer be considered projected disposable income. Thus, they argue they should not be required to pay the funds to Trustee as a prerequisite to confirmation. Debtors specifically argue that the recent cases establish that tax refunds cannot be considered projected disposable income. Debtors then reason that the other items listed in the Acknowledgement— economic stimulus tax rebates, employment bonuses, or any other payments received during the case—are similarly not projected disposable income to be paid over to Trustee as a prerequisite to confirmation. In sum, Debtors argue that the Acknowledgement should no longer be required in this District and that their Plans should be confirmed without further requirements.
The Chapter 13 Trustee argues the Ac-knowledgement is an important part of case administration in this District, which has not been overruled or otherwise made inapplicable by recent case law. Trustee provided an extensive history of and background for the Acknowledgement. Case law in this District had established that income tax refunds, bonuses and other income were projected disposable income to be distributed as part of plan payments. The Court allowed debtors to request permission by motion to keep any tax refunds, rebates, bonuses, or other income for personal use. The Court prepared the Ac-knowledgement form to address a number of problems that had arisen under that case law and procedure. There had been a large number of motions and applications to use the “extra” money from all those sources. Many debtors already had spent the money at the time they made the request for authority to use the money. This often left no viable way for debtors to repay the funds by the end of the plan if the Court denied the motion to use the money.
The Acknowledgement has been used for the last couple of years. Trustee notes that the problems addressed by the Ac-knowledgement have diminished significantly during that time. Trustee also notes significant income tax refund and bonus money had been collected and distributed for the benefit of unsecured creditors during that period. Further, Trustee argues that the Acknowledgement is not inconsistent with either Hamilton v. Lanning, or Moffett. Trustee believes her Objections to Confirmation should be sustained and the Plans should not be confirmed until the Acknowledgement is signed.
The U.S. Trustee was present at the confirmation hearings when these issues were first brought to the Court’s attention. The Court asked the U.S. Trustee for comment and input on the issue. The U.S. *843Trustee provided responsive comments, and then later participated in the telephonic argument on the issue and submitted briefing to the Court. The U.S. Trustee’s position is similar to that of the Chapter 13 Trustee. The U.S. Trustee also points out that other Courts have required debtors to turn over tax refunds and other similar forms of income to the trustee in order to prevent abuse and manipulation of their tax withholdings. The U.S. Trustee noted the specific concern was that larger with-holdings would reduce disposable income payable to the plan, and debtors could then recover larger refunds for their own use if the refunds were not treated as disposable income under the plan. The U.S. Trustee offered an alternative acknowledgement for the Court’s consideration to address those problems and concerns. Debtors have resisted the U.S. Trustee’s alternative acknowledgement and note it is not supported by any authority.
CONCLUSIONS OF LAW AND DISCUSSION
While this case presents many difficult and interesting issues that stem from or are related to the Acknowledgement, the main issue—if not the sole issue—here is whether Debtors must sign and submit the Acknowledgement as a prerequisite to Plan confirmation. Debtors have specifically argued that the Acknowledgement improperly provides a per se rule requiring funds that are not projected disposable income to be turned over to Trustee. The Court agrees with Debtors that the Ac-knowledgement language sweeps too broadly after Hamilton v. Lanning, and will no longer be required.
In Hamilton v. Lanning, the Supreme Court decided the meaning of the phrase “projected disposable income.” 130 S.Ct. at 2469-73. The Supreme Court noted that “if an unsecured creditor or bankruptcy trustee objects to confirmation, § 1325(b)(1) requires the debtor to either pay unsecured creditors in full or to pay all ‘projected disposable income’ to be received by debtor during the duration of the plan.” Id. at 2469. The specific issue for the Supreme Court to decide was “how a bankruptcy court should calculate debtors’ ‘projected disposable income’.” Id. There had been a split of an approach in the lower courts. Some courts had adopted a mechanical approach while others adopted the forward-looking approach. Id. The Supreme Court concluded that “the ‘forward looking approach’ is correct.” Id.
The Bankruptcy Code does not define “projected disposable income.” BAPCPA left the term “projected disposable income” undefined, but did specify in some detail how “disposable income” is to be calculated. See Hamilton, 130 S.Ct. at 2469.
“Disposable income” is now defined as the “current monthly income received by the debtor” less amounts reasonably necessary to be expended for the debt- or’s maintenance and support, for qualifying charitable contributions, and for business expenditures.
Hamilton, 130 S.Ct. at 2469 (citing 11 U.S.C. § 1325(b)(2)) (emphasis added).
“Current monthly income,” in turn, is calculated by averaging the debtor’s monthly income during what the parties refer to as the 6-month look-back period, which generally consists of the six full months preceding the filing of the bankruptcy petition.
Hamilton, 130 S.Ct. at 2470 (citing 11 U.S.C. § 101(10A)).
The phrase “amounts reasonably necessary to be expended” in § 1325(b)(2) *844is also newly defined. For a debtor whose income is below the median for his or her State, the phrase includes the full amount needed for “maintenance or support,” see § 1325(b)(2)(A)(i), but for a debtor with income that exceeds the state median, only certain specified expenses are included.
Hamilton, 130 S.Ct. at 2470 (emphasis added).
“When a bankruptcy court calculates a debtor’s projected disposable income, the court may account for changes in a debt- or’s income or expenses that are known or virtually certain at the time of confirmation.” Id. at 2478 (emphasis added). Debtors argue that under Hamilton v. Lanning, a debtor’s tax returns, stimulus rebates, bonuses, or other forms of income covered by the Acknowledgement cannot, as the Acknowledgement suggests, be presumptively treated as projected disposable income. In sum, Debtors argue that these items do not constitute “changes in the debtors’ income or expenses that are known or virtually certain at the time of confirmation.” See id. at 2478. This Court agrees with Debtors on that narrow point.
The “forward-looking” approach adopted by the Supreme Court allows courts to use the six-month look-back period for income and expenses specified in the statute and then adjust it for changes in income or expenses that are “known or virtually certain at the time of confirmation.” Id. It is, by its very nature, a case-by-case approach to determining what constitutes projected disposable income. The Acknowledgement arguably establishes a per se rule or a presumption that is inconsistent with that case-by-case approach. The Acknowledgement appears to identify these tax refunds and related funds as presumptively being projected disposable income. Under Hamilton v. Lanning, such items or funds may only be treated as projected disposable income if they are “known or virtually certain at the time of confirmation.” As such, the Acknowledgement will no longer be required as a prerequisite to confirmation.
This conclusion, however, does not go as far as Debtors suggest or request. They have argued that Hamilton v. Lanning, and the way it was interpreted in this Court’s decision in In re Moffett, demonstrate that tax refunds no longer can be considered projected disposable income. In particular, Debtors argue that the Mof-fett case “clearly and unequivocally established that tax refunds are not known or virtually certain.” Debtor’s Consolidated Brief at page 13. The Court addresses the related issues argued by the parties to provide clarity moving forward. Trustee has reasserted the validity of the long-held view in this District and Circuit that tax returns constitute projected disposable income. See In re Kruse, 406 B.R. 833, 837 (Bankr.N.D.Iowa 2009) (citing Rowley v. Yarnall, 22 F.3d 190, 193 (8th Cir.1994)). Trustee argues nothing has changed or overruled these cases.
The Court concludes that neither Trustee’s nor the Debtors’ arguments are entirely correct on this issue. As noted above, Hamilton v. Lanning establishes a case-by-case analysis that is not subject to the “always” or “never” projected disposable income conclusion the parties argue for here. In some cases, tax refunds may constitute projected disposable income under the applicable test, and in some eases they may not.
The Court disagrees with Debtors that Moffett clearly and unequivocally estab*845lished that tax refunds could never be “known or virtually certain” even to qualify as projected disposable income. As the U.S. Trustee and Chapter 13 Trustee point out, Moffett addressed a very different issue and discussed projected disposable income only in its analysis of that issue. In Moffett, the question was whether the debtors’ proposal to pay 100% of the amount of unsecured claims with property of a value that appeared to be less than 100% certain satisfies 11 U.S.C. § 1325(b)(1)(A). In determining whether sufficient funds were committed to establish a 100% repayment, the Court noted that the analysis is similar to the analysis for feasibility under § 1325(a)(6). Moffett at *3. The standards for feasibility require a level of specificity regarding the funds and debtor’s source to fund the plan. Id. The Court looked to Hamilton v. Lanning for some guidance on the standard to be used to determine if a proposed future funding source was sufficiently established to remove it from the realm of speculation. Id. at *4. In determining “projected disposable income” under § 1325(b)(1)(B), a court may take into account dissipated changes in debtor’s financial condition “that are known or virtually certain at the time of confirmation.” Id. (quoting Hamilton v. Lanning, 130 S.Ct. at 2467-78). The Court noted Hamilton v. Lanning did not address the § 1325(b)(1)(A) issue before the Court in Moffett. The Court used these standards as a guideline in analyzing the somewhat-related question that arose under § 1325(b)(1)(A).
This Court in Moffett, however, did not conclude that tax returns are never known or virtually certain as Debtors suggest in these cases. Instead, the Court noted that the appropriate standard under § 1325(b)(1)(A) requires property of “a value” which contemplates “quantifiable property that can be added together to achieve a 100% dividend.” Id. at *5. To achieve this 100% dividend “means that the property must have distinct monetary worth.” Id. The Court noted “Debtors’ plan does not establish a distinct monetary worth for those possible or even probable future tax returns.” Id. The Court concluded that a statement of the amount of past refunds standing alone is insufficient evidence of a value for future returns. Id. The Court specifically concluded that “[t]he plans proposed a 100% dividend that includes ‘any future tax refunds’ is simply impossible to value without further evidence.” Id. The Court also reiterated that courts should avoid interpretations of the Bankruptcy Code that “would produce the senseless result of denying creditors payments that debtors could easily make.” Id. at *6 (quoting Hamilton v. Lanning). The Court held that debtors failed their burden of showing they proposed a feasible and full 100% payment plan. The Debtors are thus incorrect in asserting that this Court has adopted a rule that clearly and unequivocally establishes that tax refunds are never known or virtually certain and therefore must be excluded from projected disposable income.
The Court has discovered no case decided after Hamilton v. banning that adopts Debtors’ argument that future tax refunds are never projected disposable income. In fact, the limited number of cases addressing the issue since Hamilton v. Lanning appear to disagree with Debtors’ position. In re Skougard, 438 B.R. 738, 741-42 (Bankr.D.Utah 2010) (concluding the tax refund income should be included in calculating projected disposable income); In re Barbutes, 436 B.R. 518, 529-30 (Bankr.M.D.Tenn.2010) (any future tax refunds of debtor had to be considered as projected disposable income and dedicated to the plan).
*846Cases from the Eighth Circuit and this jurisdiction addressing these particular issues appear to be unaffected by Hamilton v. Lanning. In particular, the Eighth Circuit’s decision in Education Assistance Corp. v. Zellner, 827 F.2d 1222 (8th Cir.1987), specifically addressed these tax refund issues and was cited with approval in Hamilton v. Lanning. See 130 S.Ct. at 2470, n. 4. In Zellner, the Eighth Circuit addressed an argument by a creditor objecting to the Chapter 13 plan for, among many other reasons, debtor not including his future tax refunds and salary increases in projected disposable income. Id. at 1226. The Eighth Circuit resolved that objection by turning to the burden of proof. Id. “The creditor objecting under § 1325(b) has, at a minimum, the initial burden of producing satisfactory evidence to support the contention that debtor is not paying all of its disposable income to the plan payments.” Id. (quoted source omitted). The court found the creditor “presented no evidence to support its claim that [debtor] overestimated his expenses and provided insufficient evidence ‘on the likelihood or amount of future raises or tax refunds.’ ” Id. The court concluded, on that particular evidentiary record, that the future raises or tax refunds were “speculative” and would not be included in the court’s determination of projected disposable income. The court then left open the possibility of modification in the future if the creditor has proper supporting evidence or there is a substantial change in debtor’s circumstances. See Id.
In subsequent years, Zellner was cited and adopted in other cases (including cases in this District) addressing the future tax refund and future disposable income issues. The Ninth Circuit B.A.P. cited Zell-ner in discussing this exact issue. In re Heath, 182 B.R. 557, 561 (9th Cir. BAP 1995) (citing Zellner on the burden of a creditor to demonstrate that the tax refund would constitute projected disposable income when debtor is not paying it). The Ninth Circuit B.A.P. then went on to provide the following method for handling issues of proof and the standards for establishing the proof required in this setting:
It would not seem difficult for a Chapter 13 trustee to determine the debtor’s potential for receiving a tax refund during plan years. For example, demonstrating that in prior years the debtor has consistently received a tax refund under similar withholding practices and income levels, would be sufficient to shift the burden to the debtor to show that no tax refund is projected. Such a showing would turn the speculative receipt of a tax refund into a predicted source of income, in compliance with Anderson. The debtor would then have the ultimate burden to show that despite the receipt of refunds in prior years, circumstances during the plan make it unlikely that a refund will be received. If the debtor is overwithholding, the Chapter 13 trustee may object to the plan on the grounds that the plan is not proposed in good faith under Section 1325(a)(3) and the debtor has not committed all disposable income to the plan as required by Section 1325(b)(1)(B).
Heath, 182 B.R. at 561 (cited sources omitted). Heath relied heavily on Anderson v. Satterlee (In re Anderson), 21 F.3d 355, 358 (9th Cir.1994).
In this District, Judge Edmonds’ decision in In re McElroy, 410 B.R. 845 (Bankr.N.D.Iowa 2008) addressed why tax refunds normally should be treated as projected disposable income. Id. at 886-87. Judge Edmonds quoted and relied on Zell-ner and the Ninth Circuit’s Anderson deci*847sion in reaching his conclusions. While Judge Edmonds’ rationale for treating tax refunds as projected disposable income may arguably be slightly qualified by the Supreme Court’s language in Hamilton v. Lanning, it is largely consistent with the principles the Supreme Court adopted.
This is not to say that Hamilton v. Lanning has had no effect on determining whether tax refunds can be treated as projected disposable income. The Supreme Court made clear that the measurement is whether the future refund is, under the record, known or virtually certain to occur. To the extent that this Court and the Eighth Circuit have previously applied a rule that presumptively treats future tax refunds as projected disposable income, they have been modified by the test adopted in Hamilton v. Lanning. See Kruse, 406 B.R. at 837 (citing Rowley, 22 F.3d at 193). In Kruse, this Court concluded that “actual income tax refund[s] received during the term of a Chapter 13 plan are projected disposable income.” 406 B.R. at 837. The Supreme Court’s adoption of the “known or virtually certain” standard and citation of Zellner indicates, at a minimum, there are certain situations where debtors’ future tax refunds are too speculative to constitute projected disposable income.
In Kruse, this Court relied largely upon the Eighth Circuit’s decision in Rowley. In Rowley, the Eighth Circuit held (without citing Zellner) that the similar “Chapter 12 disposable income provision requires a plan to promise to pay the disposable income that is received, not merely what is predicted to be received.” Rowley, 22 F.3d at 193 (cited by Kruse, 406 B.R. at 837). The test adopted in Hamilton v. Lanning for calculating “projected” disposable income shows that it is not equivalent to income actually received during the plan period. It requires “projected”—not actual income to be paid. As such, the holding from Rowley adopting the “actual income received” appears to have been effectively overruled by Hamilton v. Lanning. Other cases relied upon by this Court in Kruse, including the Tenth Circuit ruling in In re Midkiff, 342 F.3d 1194, 1202 n. 4 (10th Cir.2003), also appear to have been at least called into question, if not effectively overruled, by Hamilton v. Lanning. Those cases had adopted a bright line rule that future tax refunds are always projected disposable income. This is inconsistent with the case-by-case analysis inherent in the “forward-looking” approach adopted by the Supreme Court.
The discussion of and authority relating to tax refunds appears to apply to a large degree to the other forms of income identified in the Acknowledgement—stimulus payments, tax rebates, job bonuses, or other increases in payments of income. Zell-ner, for example, addressed both tax refunds and salary increases. 827 F.2d at 1226. In McElroy, Judge Edmonds specifically noted projected disposable income is not “whatever disposable income debtors actually receive during the applicable chapter 13 plan period.” 410 B.R. at 847. He noted that “[s]ection 1325(b)(1)(B) requires only that debtor provide for payment of all projected disposable income as calculated at the time of confirmation, not that debtor will provide all actual disposable income.” Id. (citing Anderson, 21 F.3d at 358). He cited Zellner for the proposition that “future income which is too speculative is not included in projected income.” Id. (citing Zellner, 827 F.2d at 1226). Thus, the stimulus payments, job bonuses, or other tax rebates referred to in the Acknowledgement must be analyzed *848under the “known or virtually certain” standard to determine if they should be paid to the trustee or retained by the debtor.
There is no factual record in the cases here on any of the “future” income issues. Thus, there is no ability to determine if any of those items are “known or virtually certain to exist.” As noted, the only issue directly before the Court is whether the Acknowledgement is still a prerequisite to confirmation. That issue has been resolved.1
Given that there is no longer a presumption or per se rule on future tax refunds or other future income sources, the Court is uncertain whether the Chapter 13 Trustee has any evidence to present about those items in these cases. The Chapter 13 Trustee will be given 14 days from the date the decision is filed to inform the Court whether there are any such arguments here.
WHEREFORE, the Objections to Confirmation of Debtors’ Plans are OVERRULED.
FURTHER, the Chapter 13 Trustee is given 14 days from the date of this decision to inform the Court of any arguments regarding Debtors’ Plans or to submit to the Court a proposed confirmation order confirming each of these Debtors’ Chapter 13 Plans.
. The holding in these cases does not close the door to other procedures—or even new Acknowledgement Forms—that attempt to address some of the concerns giving rise to the adoption of the Acknowledgement. Those concerns were and continue to be: (1) that future funds (like tax refunds) received by debtors could be disposable income to pay over to the Trustee; and (2) debtor spending those funds that are later determined to be disposable income and the potential serious consequences for the debtor. Proactive procedures to avoid these unnecessary disputes and the attendant costs to the parties would be welcomed by the Court. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494569/ | MEMORANDUM OF DECISION
JIM D. PAPPAS, Bankruptcy Judge.
Introduction
The debtors in this case, Gerald Gregory *899Hall and Sandra Hall1 filed a chapter 72 bankruptcy petition on May 18, 2011. Dkt. No. 1. This decision addresses the Amended Objection to Debtors’ Claims of Exemption filed in that case by the chapter 7 trustee Richard Crawforth (“Trustee”). Dkt. No. 24. Debtors responded to this objection on August 8, 2011. Dkt. No. 31. The Court conducted an evidentiary hearing concerning this contested matter on October 18, 2011, and thereafter invited the parties to submit closing briefs. Dkt. No. 59. When the briefing was complete, the objection was deemed under advisement.
The Court has considered the submissions of the parties, the testimony presented, the arguments of counsel, as well as the applicable law. This Memorandum constitutes the Court’s findings of fact, conclusions of law, and decision resolving the issues. Fed. R. Bankr.P. 7052; 9014.
Facts
Prior to his bankruptcy, Hall had been engaged in the business of real estate development for a number of years. His business model usually involved the purchase of parcels of real property, to which he and his business partners would add minimal improvements (such as securing plat approval for the property), then selling the lots to another developer for a profit. Hr’g. Tr., October 18, 2011 (“Tr.”) at 122. It was Hall’s practice to create a separate limited liability corporation for each tract of land acquired by him and his partners. Tr. at 120-21. Although there were many others, the limited liability companies implicated in this case were Colony Homes, LLC; Canterbury Commons, LLC; and S.B. Development, LLC (“SB Dev.”)
Hall’s business was successful when the real estate market was booming. However, when the economy began to sag in 2007, it became significantly more difficult to sell lots. In response, Hall and his partners elected to change their approach; to make the properties they had acquired more saleable, they erected what Hall referred to as “vertical construction” on the lots. Tr. at 125-26. As the Court understands Hall’s testimony and this terminology, this means that Hall’s companies started building houses on the lots they owned. In order to obtain financing for this construction, the companies had to borrow money, and Hall and his business partners were asked to guarantee those loans.
In January 2008, Hall, along with others, executed a personal guarantee with Idaho Independent Bank (“IIB”) for a $1.7 million loan made to SB Dev. Ex. 9. According to the promissory note, SB Dev. was obliged to make monthly payments on the note, with a balloon payment due on November 26, 2008. Id. SB Dev. ultimately defaulted on the IIB loan.
Hall also guaranteed two promissory notes executed by Canterbury Commons in favor of Mountain West Bank (“Mountain West”) in the amounts of $5,000,875 and $1,475,410. Ex. 115. It is unclear when Hall entered into the agreement to personally guarantee the loans, but the loans were originally entered into on June *90028, 2007. Ex. 115. Those loans also eventually went into default.
On May 7, 2008, Hall obtained a personal line of credit from Banner Bank for $500,000. Ex. 3. According to the terms of the Banner Bank note, all amounts were due and payable on April 30, 2009. Id. According to Hall, the proceeds from the Banner Bank Note were used for business purposes, to service the various debts upon which he was obligated. Tr. at 130.
With the economy worsening, and given their heavy debt burden, Debtors made some important decisions concerning their personal finances. On December 9, 2008, less than two weeks after SB Dev. defaulted on the loan to IIB, Debtors sold their home located on Holl Drive in Eagle for $610,000 and received $350,898.17 in cash proceeds from the sale. Ex. 1. Shortly thereafter, they used $95,000 of those proceeds to purchase a smaller home located on Seven Oaks Way in Eagle. Tr. at 21-22. In addition to the making the down payment, Debtors borrowed $210,000 to buy the Seven Oaks house; this loan required monthly payments of $1,518.22. Ex 2. Hall testified that he used the remaining cash from the sale of the Holl Drive home to make an additional capital investment in Colony Homes, as well as to service debts of the other entities. Tr. at 22. He did this in an attempt to generate a revenue stream to service the large amount of debts owed by the companies. Tr. at 22; 126-27. This strategy also reduced the amount of Debtors’ mortgage payments. Tr. at 129.
As of January 2009, Debtors’ personal assets consisted of their home, three residential rental properties on which they owed more than the value of the properties, each with a negative cash-flow, and a single, bare residential lot in which Debtors owned a one-third interest. Tr. at 30-32; 43;152. Their debts exceeded $16 million.
On February 3, 2009, Hall wrote two checks for $7,000 each payable to Debtors’ retirement account at TD AmeriTrade. Ex 2, check nos. 5071, 5072; Tr. at 33. The money to cover those two checks was already in Debtors’ checking account at the time the checks were written. Tr. at 34.
A few days later, on February 9, 2009, Hall entered into an agreement to release one of his partners, Scott Stewart, from Stewart’s personal guarantee of the $1.7 million loan with IIB. Ex. 9. The following day, February 10, 2009, Debtors made their regular monthly mortgage payment of $1,518.22. Ex 2. Later that month, on February 25, 2009, Debtors made an additional $13,674.98 “pre-payment” on their home loan, this amount representing approximately nine months of mortgage payments. Ex. 2; Tr. at 34-35. Hall testified that, at this time, he knew he and his wife would not be able to pay the Banner Bank Note when it came due, and he wanted to ensure that Debtors’ home loan payments were paid in advance. Tr. at 34-35.
On May 1, 2009, Debtors defaulted on the Banner Bank Note. Ex. 3, ¶ 9. On July 10, 2009, Banner Bank sued Debtors in state court; a judgment was eventually entered against them for approximately $500,000 on March 1, 2010. Ex 4.
At some point during 2009, Hall testified that he spoke with his attorney, Mr. Meier, regarding the benefits of filing for bankruptcy, and about pre-bankruptcy exemption planning. Tr. at 50-51. Also during this time, Hall had a conversation with his former partner, Stewart, regarding the purchase of annuities. Tr. at 44-48; Stew*901art referred Hall to Gary Walker, an agent of Lafayette Life Insurance Company.
On October 5, 2009, IIB sent Hall a letter in which it threatened to sue Debtors for breach of Hall’s personal guarantee on the $1.7 million loan. Tr. at 70. On October 29, 2009, Hall wrote himself a check for $50,000 drawn on the Colony Homes bank account. Ex. 6, Check No. 2156. This was done without the knowledge or consent of his partner, Dave Buich. Tr. at 55-56. That same day, Hall unilaterally terminated his ownership interest in, and resigned all of his management authority over, each of the entities in which Dave Buich was also involved. Ex. 5.3
On November 4, 2009, Hall signed an application to purchase Annuity Policy No. 1343 in the amount of $50,000 from Lafayette Life Insurance Company (“2009 Annuity”). Ex. 8. The money to purchase the 2009 Annuity came from the funds Hall removed from the Colony Homes bank account. Ex. 6, Check No. 2156; Ex. 7, Check No. 5169. On their SOFA, Debtors represented that the funds used to purchase the 2009 Annuity were generated from the “proceeds from sale of real property.” Dkt. No. 1, SOFA Question No. 10.
Shortly after purchasing the 2009 Annuity, Hall became employed by McMillen Engineering, at which employment he worked for about one year. Tr. at 149.
On March 1, 2010, the same day Banner Bank obtained a money judgment against Debtors, IIB sued Hall and his business partner, Aaron Doughty, to enforce their guarantees. Ex. 9. A settlement was ultimately reached in that case on June 9, 2010, when Debtors signed an agreement with IIB in which IIB agreed to release Debtors from the guaranty in exchange for their assignment of all of their membership interests, including rights to payment, in all of their business. Ex. 113. As part of the settlement, Debtors executed an Assignment of Distributions, Pledge and Security Agreement, Ex. 113, as well as a Non-Merger Deed in Lieu of Foreclosure on behalf of SB Dev., Ex. 114. These transfers were not disclosed in Debtors’ bankruptcy SOFA. Dkt. No. I.4
Hall continued his ongoing efforts to settle his remaining debts. In July 2010, Debtors executed a Settlement Agreement with Mountain West. Ex. 115. In it, the bank agreed to release Debtors from their guarantee obligations in exchange for delivery of a deed in lieu of foreclosure on the property securing loans from Mountain West to Canterbury Commons. Ex. 115. Hall also agreed to pay Mountain West $5,200. Id. These transfers were likewise not disclosed in Debtors’ SOFA. Dkt. No. 1.
In September or October 2010, Hall was informed by his accountant that Debtors may qualify for a 2009 tax refund for carry-back losses arising from their various business ventures. Tr. at 74. They filed their tax return on October 6, 2010. Ex. 104. In doing so, Debtors were aware that if the Internal Revenue Service (“IRS”) accepted their 2009 tax return as *902filed, they would receive a refund in the amount of $53,135.
On November 24, 2010, the Halls were served with a Second Order for Examination of Defendant by Banner Bank.5 Ex 12. The Order commanded that Hall appear for examination on December 10, 2010, and that he bring with him specific information and documentation concerning Debtors’ finances and assets, including a copy of their 2009 federal tax return. Id. During the debtor’s examination, when Hall was asked by the bank’s attorney for copies of his 2009 tax returns, he indicated that he had not brought copies with him because he had been advised by his attorney to bring only a recent financial statement. Ex. 13 at p. 6. Further, when Hall was asked whether he could think of anyone who owed him money for any reason, he responded in the negative; he did not volunteer any information regarding the potential $53,000 income tax refund. Ex. 13 at p. 28. At the hearing on this matter, Hall clarified that he discussed with his state court counsel, Mr. McColl, whether to bring his 2009 federal tax returns to the examination, but had decided against it as Debtors were unsure whether the Internal Revenue Service would accept the return as filed. Hall followed his counsel’s advice to respond truthfully to the questions asked. As a result, since he was not asked specific questions about the tax refund, in Hall’s opinion, he did not need to volunteer the information.
Debtors continued in their efforts to settle the remaining business debt. On January 19, 2011, Debtors, through counsel, sent offers to both Banner Bank and Washington Trust to settle their debts to each bank for a total of $20,000, to be paid over five years, or via a lump sum payment of $10,000. Exs. 19, 20. Banner Bank apparently rejected the offer within a couple of weeks. Tr. at 178-79.
On February 7, 2011, Debtors received a tax refund check in the amount of $53,135.6 Ex. 14. That same day, they deposited the check in a bank account belonging to Mary Faddis, Hall’s mother-in-law. Id. The following day, February 8, 2011, Faddis purchased a cashier’s check payable to Lafayette Life Insurance Company in the amount of $45,000, which Debtors used to purchase a second annuity from Lafayette Life Insurance Company, Policy No. 3181 (“2011 Annuity”). Exs. 14;15.
On May 18, 2011, Debtors filed their bankruptcy petition. Dkt. No. 1. On schedule B, Debtors disclosed that they owned two annuities with unknown values, as well as four retirement accounts with a combined value of $78,098.60. Id. On their schedule C, Debtors claimed an exemption for 100% of the value of both annuities pursuant to Idaho Code § 41-1836(l)(b). They claimed an exemption in the four retirement accounts pursuant to Idaho Code § 11-604A. Id. In their SOFA, responding to Question 10, Debtors indicated that the 2011 Annuity was funded with “$45,000 from tax refund,” and the 2009 Annuity was funded with “$50,000 from proceeds from sale of real property.” Id.
On July 7, 2011, Trustee timely objected to the Debtors’ claims of exemption in both the annuities and all of the retirement accounts. Trustee alleged that Hall pur*903chased the annuities “with the intent to shelter the funds and to defraud creditors, which does not qualify as a proper purpose pursuant to Idaho Code § 41—1836(l)(b).” Dkt. No. 23. On August 3, 2011, Debtors filed a Reply to Trustee’s Objection to Debtors’ Claims of Exemption, Dkt. No. 31, and requested a hearing, Dkt. No. 32.
Hall submitted to a Rule 2004 examination on August 18, 2011. Dkt. No. 28. Trustee thereafter withdrew his objection to Debtors’ claims of exemption in the retirement accounts. Dkt. No. 48. The Court conducted an evidentiary hearing on Trustee’s objection to Debtors’ claims of exemption as to the two annuities on October 18, 2011. Dkt. No. 59. On the morning of the hearing, Debtors voluntarily withdrew their claim of exemption as to the 2011 Annuity, leaving only the exemption in the 2009 Annuity at issue. Dkt. No. 62.
Discussion
A. Exemption Law
As is well-understood, when a bankruptcy petition is filed, a bankruptcy estate is automatically created, into which flows all legal and equitable interests which Debtors have in property, as of the commencement of the case. § 541(a). The Code permits Debtors to shield certain property from administration by Trustee, through the use of exemptions. § 522(b)(1). While the Code contains a list of property which may be claimed as exempt, it also allows states to opt out of the federal exemption scheme in favor of its own. § 522(b)(3). Idaho has chosen to opt out, and thus debtors in this state may claim only those exemptions allowable under Idaho law, as well as those listed in § 522(b)(3). Idaho Code § 11-609; 11 U.S.C. § 522(b)(3).
As the objecting party, Trustee bears the burden of proving that Debtors’ claim of exemption is not proper. Rule 4003(c). Once the Trustee presents “sufficient evidence to rebut the prima facie validity of the exemption, the burden shifts to a debtor to demonstrate that the exemption is proper.” In re Wilcox, 08.1 IBCR 13, 14 (Bankr.D.Idaho 2008) (quoting In re Hess, 350 B.R. 882, 885 (Bankr.D.Idaho 2005)). In Idaho, exemption statutes are liberally construed in favor of the debtor. In re Moore, 05.3 I.B.C.R. 51, 51 (Bankr.D.Idaho 2005) (citing In re Duman, 00.3 I.B.C.R. 137, 137 (Bankr.D.Idaho 2000)).
Idaho law provides that any annuity payments, or prospective payments, are exempt up to a maximum of $1,250 per month. Idaho Code § 41-1836. The statute provides in relevant part:
The benefits, rights, privileges and options which under any annuity contract heretofore or hereafter issued are due or prospectively due the annuitant, shall not be subject to execution nor shall the annuitant be compelled to exercise any such rights, powers, or options, nor shall creditors be allowed to interfere with or terminate the contract, except:
(a) As to amounts paid for or as premium on any such annuity with intent to defraud creditors, with interest thereon, and of which the creditor has given the insurer written notice at its home office prior to the making of the payments to the annuitant out of which the creditor seeks to recover. Any such notice shall specify the amount claimed or such facts as will enable the insurer to ascertain such amount, and shall set forth such facts as will enable the insurer to ascertain the annuity contract, the annuitant and the payments sought to be avoided on the ground of fraud.
Idaho Code § 41-1836 (emphasis added).
In this case, Trustee argues that the amounts paid by Debtors as the premium *904for the 2009 Annuity7 are not exempt because Debtors intended to defraud their creditors via the purchase.8 This is, necessarily, a factual determination. See Idaho Code § 55-908.
B. Intention to Defraud Creditors
The law tolerates a certain amount of pre-bankruptcy exemption planning. In other words, it is not per se fraudulent for a debtor to convert nonexempt property to exempt property on the eve of a bankruptcy filing. See, e.g., In re Daniel, 771 F.2d 1352, 1858 (9th Cir.1985); In re Ganier, 403 B.R. 79, 84 (Bankr.D.Idaho 2009); Fitzgerald v. Hawkins (In re Hawkins), 91 IBCR 54, 54 (Bankr.D.Idaho 1991).
However, as this Court has noted, “[f]aets matter,” and while the “pre-bankruptcy conversion of non-exempt assets to exempt assets is not per se fraudulent, [ ] neither is it per se proper and insulated from scrutiny and possible avoidance. There is no absolute safe harbor for bankruptcy exemption planning.” In re Ganier, 403 B.R. at 85. Proof of fraudulent intent must be made by a preponderance of the evidence. Gill v. Stern (In re Stem), 345 F.3d 1036, 1043 (9th Cir.2003).
As the annuity exemption statute is one provided by state law, its interpretation is likewise governed by state law. In re Hawkins, 91 IBCR at 54-55. Because direct evidence of fraudulent intent is generally unavailable, Idaho courts have held that its existence “may be inferred from the presence of certain indicia of fraud or ‘badges of fraud.’ ” DBSI/TRI v. v. Bender, 130 Idaho 796, 948 P.2d 151, 162 (1997); see also Idaho Code § 55-913(2) (Idaho’s Uniform Fraudulent Transfer Act provides a nonexhaustive list of factors to consider which evidence an indicia of fraudulent intent). Because of the similarity in the language employed by the Idaho Legislature in both the Uniform Fraudulent Transfer Act and the statute governing the exemption of annuities, as well as both laws’ purposes (ie. protecting creditors from fraudulent conduct by a debtor), the Court in this case is informed by the list of factors provided in Idaho Code § 55-913(2) for guidance in deciding whether so-called “badges of fraud” are present in this case. Those factors direct the Court to consider whether:
(a) The transfer or obligation was to an insider;
(b) The debtor retained possession or control of the property transferred after the transfer;
(c) The transfer or obligation was disclosed or concealed;
(d) Before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit;
(e) The transfer was of substantially all the debtor’s assets;
(f) The debtor [absconded];
(g) The debtor removed or concealed assets;
*905(h) The value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;
(i) The debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;
(j) The transfer occurred shortly before or shortly after a substantial debt was incurred; and
(k) The debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.
Idaho Code § 55-913(2).
Considering those factors in light of the facts surrounding the transfer by Debtors to purchase the 2009 Annuity, it is clear that several badges of fraud are present.
1. Lawsuits.
First, Debtors had been both sued, and threatened with suit, when they purchased the 2009 Annuity. Shortly before his purchase of the 2009 Annuity, Banner Bank had filed an action against Hall to collect the debts he had guaranteed. Hall received IIB’s demand letter only one month prior to the purchase of the annuity. This factor suggests fraud is present under these facts.
2. Transfer of Substantially All Assets.
A second badge of fraud is also evidenced here. Hall’s testimony at the hearing made it clear that, when he purchased the 2011 Annuity, he took what was basically Debtors’ only cash asset, the tax refund, and transferred it beyond the reach of his creditors. To a somewhat lesser degree, the same can be said as to both the purchase of the 2009 Annuity, as well as the distribution of the proceeds from the January 2009 sale of their home.
For the 2009 Annuity, Hall took $50,000 from the Colony Homes bank account, and invested it in the annuity. While Hall considered that money a withdrawal of a portion of his investment in Colony Homes, it is debatable whether Hall had any legal basis to access those funds. He admittedly withdrew the funds without his partner’s knowledge or consent, and moreover, he used this money to purchase the 2009 Annuity, rather than pay his creditors.
Hall’s disbursement of the home sale proceeds is also somewhat equivocal as to this particular badge of fraud. It is true that Debtors sold their home and utilized $95,000 as a down payment on a new home, which equity would certainly be protected under Idaho’s homestead statute. On the other hand, they took the remaining approximately $250,000 and reinvested it into Colony Homes. It was Hall’s testimony that this was done to fund “vertical construction” in the hopes of generating a revenue stream by which he and his partners could service their debts; nevertheless, this act put funds out of creditors’ hands. Moreover, Hall could still access the money, so perhaps it had not been spent on “vertical construction” after all. In sum, Debtors converted less than one third of the sale proceeds to non-exempt assets.
S. Debtors’ Insolvency at the Time of Transfer.
This is a third badge of fraud clearly present in this case. At the time Debtors sold their home in January 2009, as well as *906when they purchased the 2009 Annuity in November, they were directly obligated on the note with Banner Bank, and on their personal guarantees with IIB, Washington Trust and Mountain West, in an amount over $16 million. And, while the exact value of the tracts of land owned by the various companies was not demonstrated at the hearing, it was clear that the value of these properties had markedly declined in relation to their purchase prices, and that no buyers could be found for the properties. Thus, Debtors’ debts were far greater than them assets. Moreover, Debtors were in default on all of their business loans, and thus were not generally paying debts as they came due. The Court finds that Debtors were insolvent at the time the 2009 Annuity was purchased.
Ip. Concealment of the Transfers.
Trustee alleges that Debtors concealed the receipt of the tax refunds as well as made several omissions on their SOFA. The Court agrees that at the judgment debtor’s examination, Hall intentionally decided not to divulge that Debtors had filed a tax return which, if accepted by the Internal Revenue Service, would have entitled Debtors to receive a $53,000 refund.
In addition, Debtors made several omissions on their bankruptcy SOFA. First, they indicated that the 2009 Annuity was funded from the proceeds from the sale of real property, which was, at best, only indirectly true. Second, they did not disclose that they had paid $5,200 to settle with Mountain West. Lastly, they also did not list the settlement with IIB, which included signing an Assignment of Distributions, Pledge and Security Agreement, thus divesting Hall of his interest in SB Dev., among other entities. In sum, because of their failure to disclose these and other transactions, the Court may infer that Debtors were attempting to conceal assets.
Based upon the presence of several badges of fraud in this case, the burden shifts to Debtors to show that the claim of exemption is proper, and that their purchase of the 2009 Annuity was not done with intent to defraud their creditors.
C. Mitigating Factors
[9] Through the evidence and testimony presented, Debtors have attempted to mitigate the fraud evidence presented by Trustee. The Court will briefly review this evidence.
1. Debtors’ Decision to Purchase Annuities.
The evidence shows that Debtors’ choice to convert their cash assets to annuities was not accidental. Hall spoke with others similarly engaged in financially challenged real estate ventures, and learned about asset protection using annuities.
On the other hand, Hall testified credibly that he was unemployed at the time he purchased both the 2009 and 2011 Annuities. Because he had no other reliable source, an annuity would conceivably provide a regular source of income to pay basic expenses, which Hall would otherwise be unable to access to service debt. In this regard, the Court is mindful that Congress drafted the Code to include exemptions in order to facilitate a debtor’s fresh start, and that Debtors ought to be able to make full use of those available exemptions. Cirilli v. Bronk (In re Bronk), 444 B.R. 902, 915 (Bankr.W.D.Wis.2011).
2. Settlement of Business Debt.
The Court also finds credible Hall’s testimony that he sincerely believed in 2009 *907that he could settle most, if not all, his business debts. As it turned out, through lengthy negotiations, Hall was able to extricate himself from many millions of dollars in debt on the personal guarantees he had given to IIB and Mountain West under agreements requiring only a cash payment of $5,200 to Mountain West.
3. Tax Refund.
When it comes to Debtors’ use of the income tax refund to purchase an annuity, as opposed to using the money to settle with Banner Bank, the Court is less convinced about Debtors’ motives. The evidence indicates that, at the time the refund check arrived, Banner Bank held a large money judgment against Debtors and was attempting to collect it. There is no question Hall understood that, if he deposited the refund monies in his personal account, Banner Bank might seize them. The Court believes Debtors’ testimony that their bank would not immediately issue a cashier’s check upon deposit of the tax refund check. However, the Court also perceives that Debtors did not want to let the $53,000 rest in their account for long. Thus, they utilized Hall’s mother-in-law’s bank account to ensure their immediate access to the funds, and the next day they funneled those funds into an exempt asset—the 2011 Annuity.
In response to questioning about why he did not offer the $50,000 from the tax refund to Banner Bank in settlement of the' note, Hall testified he did not believe that $50,000 would buy him a settlement with Banner Bank. Tr. at 167. Therefore, Hall says he invested the money in the 2011 Annuity, and believed he could use the equity in his home to fund a settlement, assuming one could be negotiated. The Court views this explanation for Debtors’ conduct with suspicion.
First, Hall had testified at the Rule 2004 examination that he wanted to use the tax refund monies to settle with the remaining banks; thus, his testimony is inconsistent on this issue. Tr. at 176-77; 178. Second, if settlement was truly Debtors’ aim, why would it make sense to make $50,000 unavailable to fund a settlement by putting it out of reach of both Debtors and their creditors? Doing so not only decreased the amount they could offer in settlement by $50,000, but would also force them to tap the equity in their home to make a deal with the bank.
Hall’s testimony surrounding the nondisclosure of the potential tax refund at the judgment debtor’s exam is believable. While perhaps bad advice, Hall followed the instructions of his counsel in not bringing the 2009 tax return to the examination, even though directed to do so by the state court’s order. Moreover, his counsel gave him verbal directions on how the debtor’s examination would proceed, including explaining that he would be asked directly about the tax refund'. As the questioning proceeded along the lines his counsel had predicted, Hall waited for a question about the amount of his 2009 tax refund. However, the question never came, and so he never provided that information to the bank’s lawyer. While he almost certainly would have been asked questions about the status of any refund had he provided the 2009 return as he was supposed to, the bank’s attorney never asked him about any refund. The Court is satisfied with Hall’s explanation on his failure to volunteer that information.
b. Withdrawal of Colony Homes Funds.
Trustee attempts to make much of the fact that Hall withdrew $50,000 from the *908Colony Homes business without Ms partner, Dave Buich’s knowledge, immediately prior to Hall’s termination of his association with Buich. However, the Court does not view this as a sinister act as does Trustee.
Recall, when Debtors sold their home, they took approximately $200,000 to $250,000 of the proceeds generated from that sale, and invested them into Colony Homes. As time progressed, Hall became disenchanted with Buich as a business partner, and ultimately elected to sever the relationship. Removing himself from that business, Hall sought to recoup a fraction of the home sale proceeds he had infused recently in the venture. The Court believes him when Hall testified that he thought he was “taking back” a share of his investment as he retreated from the business. But regardless of the propriety of that maneuver, legally or otherwise, Trustee’s suggestion that Hall essentially stole operating capital from the business and converted it to his own use is not supported by the evidence.
5. Errors and Omissions on Debtors’ SOFA.
The Court finds the omissions on Debtors’ SOFA to be adequately explained. First, Hall testified credibly that he did not list the $5,200 payment to Mountain West in response to Question 10, because the question asks only for transfers “other than property transferred in the ordinary course of the business,” and Hall felt that this was payment on a business debt. Likewise, he did not list the assignment that he signed in favor of IIB because he believed it to be valueless. While he acknowledged, that the SOFA should be amended to include this transfer, Hall felt it had no bearing on his creditors. While the Court agrees that the SOFA should be amended to include this transfer, the Court also accepts Hall’s explanation and finds nothing sinister afoot with regard to this omission.
Disposition
In determining whether there was intent to defraud, the focus is on the intent of the transferor. Wolkowitz v. Beverly (In re Beverly), 374 B.R. 221, 235 (9th Cir.BAP2007). With regard to the indicia of fraud,
[n]o minimum number of factors tips the scales toward actual intent. A trier of fact is entitled to find actual intent based on the evidence in the case, even if no “badges of fraud” are present. Conversely, specific evidence may negate an inference of fraud notwithstanding the presence of a number of “badges of fraud.”
In re Beverly, 374 B.R. at 236.
The Court considers this to be a very close call. There is no question that Debtors converted non-exempt assets to exempt assets at a time they were in financial peril, facing threats and lawsuits from lenders. In addition, portions of Hall’s testimony have not always been consistent, nor has he been completely forthright about the facts at times.
Nevertheless, the Court finds that Debtors honestly hoped they could settle their debts without the use of the funds they converted to exempt assets. In large part, they did so successfully. As the In re Beverly court noted, “it is difficult to draw the line between legitimate bankruptcy planning and intent to defraud creditors.... ” However, two things are certain: first, there must be evidence beyond the mere timing of the conversion of property from non-exempt to exempt in *909order to show fraud by a debtor; and second, cases finding an intent to defraud typically “involve some combination of large claims of exemption and overtones of overreaching.” 374 B.R. at 245.
Here, with the exception of the 2011 Annuity, it cannot necessarily be said that Debtors converted non-exempt property to exempt property on the eve of bankruptcy. The sale of the home, and the purchase of the 2009 Annuity shortly thereafter using a portion of the proceeds, occurred eighteen months or so before Debtors filed their bankruptcy petition. However, Debtors’ acquisition of the 2011 Annuity was just a few months before the bankruptcy filing.
With regard to a combination of large claims of exemption and overreaching, that is not present here. Recall, at one time, Debtors owed in excess of $15 million in debts. Realistically, nothing they owned by way of personal assets would come even close to paying that amount of debt. Rather, Debtors guaranteed themselves a relatively minimal stream of income through their investments, and then bargained with their biggest playing cards: the parcels of real property.
Conclusion
Though this is a close ease, the Court finds, on balance, that Trustee has not demonstrated by a preponderance of the evidence that Debtors wilfully intended to defraud their creditors by converting nonexempt assets to a potentially exempt annuity in 2009. The Code provides Debtors the right to a financial fresh start, and Debtors actively took advantage of that right.
Trustee’s objection to Debtors’ claim of exemption regarding the 2009 Annuity will be denied by separate order.
. Apparently, Mr. Hall has at times used the names “G. Gregory Hall,” “Gregory Hall,” or "Greg Hall”. In this decision, the Court refers to him as “Hall” individually, and to “Debtors” when referring to both joint debtors collectively.
. Unless otherwise indicated, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and all rule references are to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037.
. Debtors did not disclose this so-called "Termination Agreement” in their Statement of Financial Affairs ("SOFA”) when they filed the bankruptcy case. Dkt. No. 1.
. It is also unclear whether Hall disclosed to IIB that he had previously terminated his ownership and management interest in a number of business entities, although SB Dev. was not one of the listed entities. Ex. 5. Regardless, Hall’s disclosures to IIB are not relevant to the issues at hand.
. Debtors had been ordered to appear at an earlier debtor's examination, but they did not receive notice of that examination, and failed to appear.
. While the check itself is dated February 4, 2011, Hall testified that they actually received the check on February 7, 2011. Tr. at 163.
. Trustee has not questioned whether the 2009 Annuity for purposes of the exemption statute, and the Court expresses no opinion in that regard.
. As can be seen, a determination of whether an annuity contract was purchased with intent to defraud creditors is required as a condition of the to determining the validity of the exemption under the plain language of Idaho Code § 41&emdash;1836(a). Therefore, when an annuity is at issue, it is proper for a trustee rely upon a debtor’s fraudulent intent in connection with an objection to claim of exemption, rather than by some other motion. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494570/ | BRIEF MEMORANDUM AND ORDER SUSTAINING (IN PART) OBIECTION TO CONFIRMATION FILED BY MANUAL MOUTINHO, MARK IV CONSTRUCTION COMPANY, INC. AND MANUAL MOUTINHO, TRUSTEE FOR THE MARK IV CONSTRUCTION COMPANY 401k SAVINGS PLAN
1
LORRAINE MURPHY WEIL, Chief Judge.
WHEREAS, before the court are (a) confirmation of the above-referenced debt- or and debtor-in-possession’s (the “Debt- or”) Seventh Amended Plan of Reorganization (ECF No. 644, the “Plan”) and (b) Manuel Moutinho, Mark IV Construction Company, Inc. and Manuel Moutinho, Trustee for the Mark IV Construction Company 401k Savings Plan collective Notice of Continuing Objection to Confirmation of the Debtor’s Seventh Amended Plan (ECF No. 664, the “Objection”). This memorandum disposes of the Objection only with respect to Manuel Moutin-ho’s (in his trustee’s capacity, the “Secured *2Creditor”) objection with respect to treatment under the Plan of his secured claim (after election pursuant to 11 U.S.C. § 1111(b)(2) (see below), the “Secured Claim”) with respect to 375 Connors Lane, Stratford, Connecticut (the “Property”). (See ECF No. 644 at 4 (definition of Class 14A), 11-12 (treatment of Class 14A as an impaired class of secured claim), collectively, the “Plan Treatment.”);
Jurisdiction and Procedure
WHEREAS, this court has jurisdiction over this matter as a core proceeding under 28 U.S.C. §§ 1334 and 157 and that certain Order dated September 21, 1984 of the District Court for this District (Daly, C.J.).2 This memorandum constitutes the findings of fact and conclusions of law mandated by Rule 7052 of the Federal Rules of Bankruptcy Procedure (made applicable here by Rule 9014 of the Federal Rules of Bankruptcy Procedure);
WHEREAS, the Objection last came on for a hearing on December 21, 2011 with a subsequent on-the-record status conference convened on January 4, 2012. (See ECF No. 697.) At the December 21, 2011 hearing, the Debtor and the Secured Creditor were directed to submit simultaneous briefs with respect to the propriety of the Plan Treatment on or before January 25, 2012. Those briefs have been filed (see ECF Nos. 708, 710) and the matter now is ripe for the adjudication set forth below;
Background
WHEREAS, it is undisputed that, at all times relevant hereto, the Secured Creditor held and holds a mortgage (the “Mortgage”) on the Property. It also is undisputed that, prior to the filing of this case, the debt secured by the Mortgage was “non-recourse” as to the Debtor. The Secured Creditor alleges that, although the debt secured by the mortgage was “non-recourse” as to the Debtor, one or more non-debtor (ie., third) parties (and/or their property, collectively, “Third Parties”) were and are liable on that debt. It is undisputed that the amount of the Mortgage exceeds the value of the Property (ie., a collateral “deficiency” exists);
WHEREAS, the Debtor commenced this case by a petition filed on October 14, 2010. As a result of that filing, 11 U.S.C. § 1111(b)(1)3 provided the Secured Creditor with the option of having its deficiency treated as an unsecured claim (ie., treated as if the Secured Creditor had “recourse” *3against the Debtor). However, the Secured Creditor exercised an election under Section 1111(b)(2) to forego the recourse offered under Section 1111(b)(1) in favor of having its entire allowed claim treated as an allowed secured claim. Compare 11 U.S.C.A. § 1111(b)(2) (West 2012) (“claim is a secured claim to the extent that such claim is allowed”) with 11 U.S.C.A. § 506(a) (West 2012) (“An allowed claim of a creditor secured by a lien on property in which the estate has an interest ... is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property....”);
WHEREAS, the Plan proposes to treat the Secured Claim in relevant part as follows: “If this class claims to be partially unsecured in an amount greater than $50,000 and this class claims to be fully secured and makes election under § 1111(b), the property will be surrendered in full satisfaction and extinguishment of any debt, both unsecured and secured pursuant to mortgage dated March 29, 2006 in the principal amount of $690,000.”4 (ECF No. 644 at 12 (with respect to Claim 14A) (ie., the Plan Treatment).);
WHEREAS, the Secured Creditor has not accepted the Plan (although, allegedly, some other classes have voted to accept the Plan) and objects to the Plan Treatment. Accordingly, (if otherwise confirma-ble) the Plan can be confirmed without the Secured Creditor’s acceptance only if the applicable requirements of 11 U.S.C. § 1129(b) are met as to the Secured Creditor’s claim (ie., a “cramdown” of the Plan over the objection of the Secured Creditor). See id. 5
*4WHEREAS, pursuant to Section 1129(b)(1) a plan confirmed over a class’ objection must be (among other things) “fair and equitable” with respect to that class. See 11 U.S.C. § 1129(b)(1). Assuming that the Plan is otherwise confirm-able, the Debtor argues that the Plan Treatment is “fair and equitable” to the Secured Creditor’s class within the purview of Section 1129(b)(1) because the Plan Treatment provides the Secured Creditor with the “indubitable equivalent” of the Secured Claim. (See 11 U.S.C. § 1129(b)(2)(A)(iii).);
Analysis
WHEREAS, the Secured Creditor’s supporting memorandum of law (ECF No. 708) argues in general terms that the Plan Treatment does not satisfy the requirements of Section 1129(b)(1), but does not specifically address the Debtor’s “indubitable equivalent” argument. The Debtor relies upon Section 1129(b)(2)(A)(iii)’s “indubitable equivalent” standard to satisfy the statutory “fair and equitable” requirement. However, this court cannot confirm the Plan if Section 1129(b) applies and, as a matter of law, the “fair and equitable” requirement of Section 1129(b)(1) has not been met. Cf. United Student Aid Funds, Inc. v. Espinosa, — U.S.-, 130 S.Ct. 1367, 176 L.Ed.2d 158 (2010) (finding that plan unconfirmable as a matter of law may not be confirmed even absent objection). For the reasons set forth below, the court concludes that, as a matter of law, the Plan Treatment does not provide the Secured Creditor with the “indubitable equivalent” of the Secured Claim and (as a result) the “fair and equitable” requirement has not been met with respect to the Secured Claim. Accordingly, the Objection must be sustained on those grounds;
WHEREAS, a majority of courts agree that “abandonment [of the collateral usually followed by foreclosure], or other unqualified transfer of the collateral, to the secured creditor” satisfies the “indubitable equivalent” standard. See, e.g., In re Clarendon Holdings, LLC, No. 11-02479-8-SWH, 2011 WL 5909512, at *2 (Bankr.E.D.N.C. Oct. 19, 2011) (citation and internal quotation marks omitted; emphasis added). See also Jack Friedman, What Courts Do To Secured Creditors in Chapter 11 Cramdown, 14 Cardozo L. Rev. 1495, 1537-39 (1993) (setting forth majority position and also the minority position that a collateral transfer never satisfies the “indubitable equivalent” standard and that only an unconditional abandonment satisfies the “indubitable equivalent” standard in this context). The Debtor urges the majority view. (See ECF No. 710 at 4.) The Secured Creditor takes no position. Accordingly, the court holds, for the purposes of this opinion only, that a transfer of collateral to a “secured creditor” can meet the “indubitable equivalent” standard, but only if the transfer is “unqualified;”
WHEREAS, on its face Section 1129(b) speaks only in terms of “claims” and “in*5terests.” See 11 U.S.C. § 1129(b). It does not speak in terras of “debts.” See id. The term “claim” is defined in 11 U.S.C. § 101(5) as follows:
The term “claim” means—
(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.
11 U.S.C.A. § 101(5) (West 2012). “The term ‘debt’ means liability on a claim.” 11 U.S.C.A. § 101(12) (West 2012);
WHEREAS,
[t]he Code’s definition [of ‘debt’ in terms of ‘claim’] reveals Congress’ intent that the meanings of ‘debt’ and ‘claim’ be coextensive. That interpretation is confirmed by legislative history stating that the terms ‘debt’ and ‘claim’ are coextensive: a creditor has a ‘claim’ against the debtor; the debtor owes a ‘debt’ to the creditor.’
Mazzeo v. United States (In re Mazzeo), 131 F.3d 295, 302 (2d Cir.1997) (alteration in original; citations and internal quotation marks omitted). This court agrees (as it must). However, to say that the terms “claim” and “debt” are “coextensive” means that the two concepts are closely related. It does not mean that the two concepts receive the same treatment under the Bankruptcy Code. In fact, “claims” and “debts” do not receive the same treatment under the Bankruptcy Code. Under the Bankruptcy Code, “claims” are subject to the Bankruptcy Code’s allowance/distribution procedures. See, e.g., 11 U.S.C. §§ 502, 1129(b) (absolute priority rule). But cf. 11 U.S.C. § 1141(c) (discussed below). On the other hand, “debts” are subject to the Bankruptcy Code’s discharge/dischargeability procedures (and sometimes to injunction pursuant to 11 U.S.C. § 105). See, e.g., 11 U.S.C.A. § 1141(d)(1) (“[Cjonfirmation of a plan ... discharges the debtor from any debt....”);
WHEREAS, Section 1129(b)(2)(A) speaks in terms of “claims,” not “debts” and is not ambiguous in any relevant sense. It must be presumed that Congress intended the consequences of its choice of language. See Duncan v. Walker, 533 U.S. 167, 173, 121 S.Ct. 2120, 150 L.Ed.2d 251 (2001) (“[W]here Congress includes particular language in one section of a statute but omits it in another section of the same Act, it is generally presumed that Congress acts intentionally and purposely’in the disparate inclusion or exclusion.” (citation and internal quotation marks omitted)). In fact, Congress knew how to use both terms (ie., “claims” and “debts”) in one section of the Bankruptcy Code when it wanted to. Compare 11 U.S.C. § 1141(c) (use of “claim”) with 11 U.S.C. § 1141(d) (use of “debt”). See also 8 Alan N. Resnick & Henry J. Sommer, Collier on Bankruptcy ¶ § 1141.04[1], at 1141-16 (16 ed. rev. 2010) (“Section 1141(c) may also be read as effecting an in rem discharge of property of the estate that parallels the debtor’s in personam discharge under section 1141(d).”);
WHEREAS, on its face Section 1129(b)(2)(A) states what can be “done” to an unconsenting class of secured claims in a chapter 11 “cramdown;” it does not permit the debtor to “do” anything to the corresponding debt. That is left to operation of law pursuant to Section 1141. See 11 U.S.C. § 1141 (“Effect of confirma*6tion”). Accordingly, in the “indubitable equivalenfi’/collateral transfer context a debtor cannot “do” anything to the corresponding debt in a cramdown context other than (perhaps) to provide for a credit against the debt equal to the value of the surrendered collateral. See Sandy Ridge Dev. Corp. v. Louisiana Nat’l Bank (In re Sandy Ridge Development Corp.), 881 F.2d 1346, 1349 (5th Cir.1989) (approving collateral transfer provision providing “for a credit on the indebtedness to the extent of the value of [the surrendered collateral]”);
WHEREAS, the Disputed Language proposes to convey the Property to the Secured Creditor provided further that such conveyance is “in full satisfaction and extinguishment of any debt” pursuant to the Mortgage (emphasis added). As explained above, that provision is inconsistent with Section 1129(b)(2)(A) which deals only with “claims.” Accordingly, the “full satisfaction and extinguishment” provision of the Plan Treatment imposes an impermissible “qualififcation]” on the proposed collateral transfer. That qualification prevents the Plan Treatment from meeting the “indubitable equivalent” standard. Therefore, the “fair and equitable” requirement of Section 1129(b)(2) has not been met;
Conclusion
NOW, THEREFORE, the Objection is sustained to the extent and for the reasons set forth above, without prejudice to the Debtor’s right further to amend the Plan in a manner consistent with this opinion.6
It is SO ORDERED.
. This Brief Memorandum and Order is issued in lieu of the Bench Ruling previously scheduled for February 8, 2012.
. That order referred to the "Bankruptcy Judges for this District” inter alia "all proceedings arising under Title 11, U.S.C., or arising in ... a case under Title 11, U.S.C....”
. Section 1111(b) provides as follows:
(b)(1)(A) A claim secured by a lien on property of the estate shall be allowed or disallowed under section 502 of this title the same as if the holder of such claim had recourse against the debtor on account of such claim, whether or not such holder has such recourse, unless
(i) the class of which such claim is a part elects, by at least two-thirds in amount and more than half in number of allowed claims of such class, application of paragraph (2) of this subsection; or
(ii) such holder does not have such recourse and such property is sold under section 363 of this title or is to be sold under the plan.
(B) A class of claims may not elect application of paragraph (2) of this subsection if—
(i) the interest on account of such claims of the holders of such claims in such property is of inconsequential value; or
(ii) the holder of a claim of such class has recourse against the debtor on account of such claim and such property is sold under section 363 of this title or is to be sold under the plan.
(2) If such an election is made, then notwithstanding section 506(a) of this title, such claim is a secured claim to the extent that such claim is allowed.
11 U.S.C.A. § 1111(b) (West 2012).
. The italicized portion of the foregoing hereafter is referred to as the “Disputed Language.”
. It is undisputed that the Plan Treatment “impair[s]” the Secured Claim. Section 1129(b) provides as follows:
(b)(1) Notwithstanding section 510(a) of this title, if all of the applicable requirements of subsection (a) of this section other than paragraph (8) are met with respect to a plan, the court, on request of the proponent of the plan, shall confirm the plan notwithstanding the requirements of such paragraph if the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan.
(2) For the purpose of this subsection, the condition that a plan be fair and equitable with respect to a class includes the following requirements:
(A) With respect to a class of secured claims, the plan provides—
(i)(I) that the holders of such claims retain the liens securing such claims, whether the property subject to such liens is retained by the debtor or transferred to another entity, to the extent of the allowed amount of such claims; and
(II) that each holder of a claim of such class receive on account of such claim deferred cash payments totaling at least the allowed amount of such claim, of a value, as of the effective date of the plan, of at least the value of such holder's interest in the estate’s interest in such property:
(ii)for the sale, subject to section 363(k) of this title, of any property that is subject to the liens securing such claims, free and clear of such liens, with such liens to attach to the proceeds of such sale, and the treatment of such liens on proceeds under clause (i) or (iii) of this subpara-graph; or
(iii)for the realization by such holders of the indubitable equivalent of such claims.
(B) With respect to a class of unsecured claims—
(i) the plan provides that each holder of a claim of such class receive or retain on account of such claim property of a value, as of the effective date of the plan, equal to the allowed amount of such claim; or
(ii) the holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property, except that in a case in *4which the debtor is an individual, the debtor may retain property included in the estate under section 1115, subject to the requirements of subsection (a)(14) of this section.
(C) With respect to a class of interests— (i) the plan provides that each holder of an interest of such class receive or retain on account of such interest property of a value, as of the effective date of the plan, equal to the greatest of the allowed amount of any fixed liquidation preference to which such holder is entitled, any fixed redemption price to which such holder is entitled, or the value of such interest; or
(ii) the holder of any interest that is junior to the interests of such class will not receive or retain under the plan on account of such junior interest any property-
11 U.S.C.A. § 1129(b) (West 2012).
. In light of the foregoing disposition, it is unnecessary for the court to consider issues relating to the effect of the Disputed Language upon any rights the Secured Creditor may have against Third Parties. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494571/ | CARL L. BUCKI, Chief Judge.
In this adversary proceeding, the Chapter 7 trustee seeks two forms of relief: first, the avoidance of transfers to the principal of the debtor; and second, the subordination of his claims to the claims of other unsecured creditors. The demand for avoidance speaks to the fine distinctions between a fraudulent conveyance under section 548 of the Bankruptcy Code and a similar cause of action under New York’s version of the Uniform Fraudulent Conveyance Act. The central issues include whether a fraudulent conveyance can arise from payments made on account of secured indebtedness. With regard to the demand for equitable subordination, the parties contest both the basis for relief and the scope of an appropriate remedy.
Northstar Development Corp. is a former owner of the Statler Towers, an architecturally significant landmark in the City of Buffalo, New York. While managing this building, Northstar retained Contract Specialists International, Inc., to provide janitorial services. Northstar owed $88,839.67 to Contract Specialists on August 18, 2006, when Northstar sold the Statler Towers to BSC Development BUF, LLC. Never receiving payment for its outstanding balance, Contract Specialists commenced an action against Northstar in the New York State Supreme Court for Erie County. This action resulted in the entry of judgment on June 29, 2007, for the total sum of $42,288.36, including interest and costs. When Contract Specialists received no satisfaction of the judgment, it commenced a second action against Northstar and its sole shareholder, Gerald A. Buchheit, Jr., to recover the outstanding judgment through the avoidance of allegedly fraudulent transfers to the corporation’s principal. However, on February 21, 2008, before the state court could reach a decision on the fraudulent transfer complaint, Northstar Development Corp. filed a petition for relief under Chapter 7 of the Bankruptcy Code.
On March 26, 2008, the Chapter 7 trustee removed the fraudulent conveyance action to Bankruptcy Court. The trustee has twice amended the complaint, which now seeks to recover the transferred funds for the benefit of all creditors. In its answer, the defendant has asserted a counterclaim seeking the allowance of his claim in the amount of $3,301,989.77. The trustee then filed a reply in which he requests that the defendant’s claim be equitably subordinated to the claims of all other creditors.
The parties stipulated to many of the essential facts, and a trial on the remaining factual disputes was held on May 24 and 25 of 2011. At the conclusion of testimony, the court granted permission to the parties to submit post-trial briefs. Having carefully considered the arguments of counsel, this court now makes the findings of fact and conclusions of law that are incorporated into this opinion.
In its complaint, the trustee seeks to recover distributions totaling $1,001,337.02, together with interest and legal costs. This sum incorporates three categories of payment from the debtor to Gerald A. Buchheit, Jr. The first occurred on August 18, 2006, when Northstar sold the Statler Towers for a stated consideration of $3,500,000. As part of these proceeds, two *11checks totaling $809,419.76 were delivered to Buchheit. The closing statement lists both checks with the notation: “Gerald A. Buchheit — Mtg. Sat.” Consistent with this statement, Buchheit executed two instruments entitled “Discharge of Mortgage.” The first purported to discharge a mortgage given to Buchheit on November 22, 1993, to secure a principal obligation of $1,000,000, together with interest. The second instrument purported to discharge a mortgage that secured an obligation, in the original amount of $1,200,000, that Buchheit had acquired by assignment in 2006.
The second form of disbursement involved the release of $89,401.31 to Gerald A. Buchheit, Jr. on August 23, 2006, from an escrow account holding a deposit that BSC Development BUF, LLC., had paid when it executed the contract to purchase the Statler Towers. At closing, the purchaser received appropriate credit for the full deposit in the amount of $300,000. The transfer of title satisfied the conditions for its release from escrow. Pursuant to Northstar’s instructions, the escrow agent then delivered a portion of this fund to Buchheit.
Thirdly, between March 7, 2006, and February 16, 2007, Buchheit received seven payments totaling $102,515.95, on account of outstanding unsecured obligations. The majority of these funds derived from a refund of real property taxes that the debtor had paid prior to the sale of the Statler Towers. At the start of the trial of the present case, Buch-heit’s counsel reported that his client had agreed to repay this $102,515.95 into the bankruptcy estate. However, he did not concede liability for either interest or legal fees.
The parties have stipulated that North-star was insolvent on the day prior to the closing of its sale of the Statler Towers and at all times thereafter. Gerald Buch-heit was at all relevant times an insider of the debtor. The trustee contends that as an insider, Buchheit cannot qualify as a good-faith recipient of payment. Consequently, in the trustee’s view, all of the transfers were fraudulent and avoidable under the Bankruptcy Code and various provisions of the Debtor and Creditor Law of New York. Buchheit responds that except with respect to funds that he has voluntarily returned to the debtor, the disputed transfers represented payment on account of secured obligations. In as much as the underlying secured obligations were valid, Buchheit believes that the payments represent not a fraudulent conveyance but the satisfaction of an unavoidable obligation.
Discussion
Fraudulent Conveyance Claims
Chapter 5 of the Bankruptcy Code establishes the avoidance powers of a trustee. Chief among these are the power under 11 U.S.C. § 547 to avoid preferences and the power under 11 U.S.C. § 548 to avoid fraudulent conveyances. But when the particular requirements of these sections preclude recovery, trustees may turn to the alternative provision of 11 U.S.C. § 544(b)(1), which permits the advancement of claims that an unsecured creditor could have asserted under applicable state, law.
In the present instance, the trustee possesses no valid claim under either section 547 or section 548 of the Bankruptcy Code. Section 547 allows a trustee to avoid preferential payments made to insiders within one year of the bankruptcy filing. Here, the most recent payment to Buchheit occurred on February 16, 2007, a date that preceded, by more than one year, the bankruptcy filing on February 21, 2008. With respect to an allegedly fraudulent *12conveyance, section 548 allows a trustee to avoid transfers made within two years of bankruptcy and that are either actually or constructively fraudulent. As defined by section 548(a)(1)(B), constructive fraud can arise in any of four circumstances. For example, a constructively fraudulent transfer may occur when, as stipulated in the present instance, a debtor “was insolvent on the date that such transfer was made or such obligation was incurred.” 11 U.S.C. § 548(a)(l)(B)(ii)(I). However, an event of constructive fraud will impose liability only when a debtor receives “less than a reasonably equivalent value in exchange for such transfer or obligation.” 11 U.S.C. § 548(a)(l)(B)(i). Northstar satisfied outstanding obligations of value equal to the payments that Gerald Buchheit received. Consequently, liability under section 548 of the Bankruptcy Code can here arise, if at all, only upon a showing of an actually fraudulent intent.
Pursuant to 11 U.S.C. § 548(a)(1)(A), a trustee may avoid a transfer that the debtor makes “with actual intent to hinder, delay, or defraud” an existing or future creditor. In contrast to the requirements for constructive fraud, an actual intent to hinder, delay, or defraud will compel the avoidance of a transfer even if given in exchange for reasonably equivalent value. However, the trustee carries the burden to show, by a preponderance of evidence, that the debtor effected a transfer with the requisite intent. Here, the trustee fails to sustain that burden. The proof at trial established the existence of a legitimate debt to Buchheit and that Buchheit deferred substantial payment until after a sale of the Statler Towers. Even now, Buchheit remains the largest creditor in this case. For an insolvent debtor, the use of limited resources to pay a particular debt will necessarily limit the ability to pay other obligations. To assure fairness in distribution, section 547 of the Bankruptcy Code allows the recovery of payments made during the applicable preference period. The fraudulent conveyance provisions of section 548 stand apart from the preference law, and serve not as an extension of the preference timetable. Consequently, the fact of an insider payment shows only an intent to pay that insider, and does not by itself establish an intent to hinder, delay, or defraud some other creditor. Rather, to establish a fraudulent conveyance, a trustee must present some other evidence of intent.
In attempting to show an actual intent to hinder, delay or defraud, the trustee presented testimony that an employee of the debtor may have promised that Contract Specialists would be paid in the future. Among experienced business people, such everyday assurances serve to mislead no one. Without funds to pay Contract Specialists at that time, Northstar Development Corp. expressed a mere hope that it would someday achieve an ability to pay. Such representations have no obvious relevance to the issue that this court must decide, namely whether the debtor’s subsequent transfer to Buchheit was made with an actual intent to hinder, delay, or defraud some other creditor. Without more, the trustee fails to sustain his burden of proof. Accordingly, the trustee establishes no basis for imposing liability under section 548 of the Bankruptcy Code.
Pursuant to 11 U.S.C. § 544(b), the trustee may also assert causes of action under Article 10 of the New York Debtor and Creditor Law. Like section 548 of the Bankruptcy Code, the Debtor and Creditor Law allows the avoidance of transfers that satisfy the statutory requirements for either actual or constructive fraud. The nuances of the statute are different, however, and will impose a slightly different standard of liability. Also, Debtor and *13Creditor Law § 276-a allows a trustee to recover legal fees in those instances where the fraudulent conveyance is made and received “with actual intent, as distinguished from intent presumed in law, to hinder, delay or defraud either present or future creditors.”
At least with regard to the present dispute, the standard of actual intent under the New York Fraudulent Conveyance statute is identical to that in section 548 of the Bankruptcy Code. Both Debtor and Creditor Law § 276 and 11 U.S.C. § 548(a)(1)(A) provide, without regard to fairness of consideration, that a trustee may avoid a transfer made with “actual intent” “to hinder, delay, or defraud.” For the same reasons recited in our discussion of liability under section 548, the trustee has failed to sustain his burden to demonstrate actual intent for purposes of section 276. Consequently as well, Buchheit has no liability for the reimbursement of legal fees that the trustee might have incurred to set aside a transfer made with an actual intent to hinder, delay or defraud.
The New York Debtor and Creditor Law applies a standard for constructive fraud that is generally similar to that in section 548 of the Bankruptcy Code, but with subtle differences. Much like the provisions of 11 U.S.C. § 548(a)(l)(B)(ii)(I), for example, Debtor and Creditor Law § 273 states that “[e]very conveyance made ... by a person who is or will be thereby rendered insolvent is fraudulent as to creditors without regard to his actual intent if the conveyance is made ... without a fair consideration.” However, an important distinction involves the concept of consideration. To avoid a constructively fraudulent transfer under section 548 of the Bankruptcy Code, a trustee must show that the debtor “received less than a reasonably equivalent value in exchange for such transfer.” 11 U.S.C. § 548(a)(1)(B)®. On the other hand, to establish a fraudulent conveyance under any of the constructive fraud provisions of the New York State statute (Debtor and Creditor Law §§ 273, 273-a, 274 and 275), the trustee needs only to demonstrate the absence of “a fair consideration.” As defined by Debtor and Creditor Law § 272(a), fair consideration requires not only an exchange for fair equivalent or proportionate value, but also that the transfer be “in good faith.” Even when a debtor receives equivalent value for his transfer, therefore, New York law will allow a bankruptcy trustee to avoid a constructively fraudulent transfer that is made other than in good faith.
Here again, the parties have stipulated to Northstar’s insolvency at the time of nearly all of the payments to Buchheit. As consideration for these payments, Buchheit cancelled an identical amount of indebtedness. Still, with any absence of good faith, the New York Debtor and Creditor Law presumes an absence of fair consideration and will allow the trustee to avoid the transaction.
As a general rule in New York for purposes of fraudulent conveyance law, the payment of an unsecured debt to an insider is deemed to be without good faith, and therefore lacking in fair consideration. In Farm Stores, Inc. v. School Feeding Corp., 64 N.Y.2d 1065, 1066-67, 489 N.Y.S.2d 877, 479 N.E.2d 222 (1985), the Court of Appeals affirmed a judgment avoiding this kind of fraudulent conveyance, “for the reasons stated in the opinion by Justice Moses M. Weinstein.” Writing for a unanimous panel of the Appellate Division, Justice Weinstein held “that preferential transfers to directors, officers and shareholders of insolvent corporations in derogation of the rights of general creditors do not fulfill the good-faith requirement of the Debtor and Creditor Law.” 102 A.D.2d *14249, 254, 477 N.Y.S.2d 374 (1984). Conse- ■ quently, “[t]he shareholders cannot be considered bona fide purchasers for fair consideration who are immune from liability as transferees of fraudulently conveyed property, as the record reveals that they were aware that they were receiving money from [the debtor] when the claims of the general creditors had not been completely paid and, in fact, they consented to such a distribution of the corporate funds.” Id. at 255-56, 477 N.Y.S.2d 374.
Presumably in recognition of the holdings in Farm Stores, Inc. v. School Feeding Corp. and in other similar cases, the defendant’s counsel recommended that Buchheit return the various payments that he had received on account of unsecured obligations. The more contentious issue in the present instance is whether a fraudulent conveyance may also arise from the payment of a secured obligation.
The essence of the decision in Farm Stores, Inc. v. School Feeding Corp. was that New York’s Debtor and Creditor Law allows the avoidance of “preferential transfers to directors, officers and shareholders of insolvent corporations.” 102 A.D.2d at 254, 477 N.Y.S.2d 374. As a general rule, however, no preference occurs upon the payment of a secured debt. For a preference to arise, a creditor must realize some improvement in position. See 11 U.S.C. § 547(c)(5); 5 CollieR on Banic-RuptCY ¶ 547.04[5] (AlaN N. Resnicic & HenRy J. SommeR, eds.-in-chief, 16th ed., 2010). The satisfaction of secured debt causes no improvement of position, in that the transfer represents only an exchange of value for the equivalent release of collateral.
Even if special circumstances could indicate bad faith in the pay-down of secured indebtedness, the present facts suggest only a transfer for fair or equivalent value and in good faith. As the holder of a legitimate secured obligation, Buchheit possessed a first claim against sale proceeds. Because this claim took precedence over unsecured claims, Buchheit had no obligation to release his outstanding liens for other than fair consideration. But no sale of the debtor’s real estate would occur without a release or discharge of the mortgages. Buchheit granted such discharges in the ordinary course of a closing on the sale of the Statler Towers. Indeed, he accepted less than the amount due on the obligations for which the mortgages were given as security. Therefore, with regard to payment on account of mortgages held by Buchheit, the evidence affirmatively shows a level of good faith sufficient to establish a fair consideration for the disputed transaction.
Five days after the sale of the Statler Towers, the debtor’s attorney paid $89,401.31 to Buchheit from funds that he held as part of the purchaser’s initial deposit. The trustee contends that because Buchheit had already released the mortgage discharges at the time of closing, this further payment represented an avoidable distribution on account of unsecured debt. Buchheit responds that the closing operated to release any conditions for the escrow of the deposit, so that its partial distribution to Buchheit can relate back to the closing and the simultaneous discharge of outstanding liens.
Because the discharges contain no recitation of the amount of consideration being applied to either of the outstanding mortgage balances, the court has received no definitive proof regarding the application of the escrow funds that were released to Buchheit. Nonetheless, the mortgages secured a balance of indebtedness greater than the total amount paid to Buchheit at closing and from escrow. All of these payments derived from proceeds from the *15sale of the mortgaged collateral. The timing of the escrow distribution also suggests that it was part of the closing process, in as much as counsel completed payment to Buchheit within only three business days of the transfer of title. For these reasons, the court finds it more probable than not that Buchheit and the debtor intended to apply the escrow on account of the outstanding mortgage balances. Accordingly we must infer an intent to apply the distribution to the secured indebtedness. See Deere & Co. v. Contella (In re Contella), 166 B.R. 26 (Bankr.W.D.N.Y.1994). In any event, the trustee carries the burden to prove the necessary elements of a fraudulent conveyance by a preponderance of evidence. Because the trustee fails to show that the distribution from escrow was anything other than part of the consideration for the discharge of outstanding mortgages, we must view the distribution as a good faith payment on account of a secured debt.
Altogether, the trustee’s complaint seeks to avoid transfers totaling $1,001,337.02. Of this amount, $898,821.07 was paid as consideration for the discharge of two outstanding mortgages, either directly at closing or as a distribution from an escrow released upon closing. As a good faith payment on a legitimate secured obligation, these payments do not constitute a fraudulent conveyance that the trustee can avoid. On the other hand, the New York Debtor and Creditor Law would allow the trustee to avoid the debtor’s preferential payment of unsecured liabilities owed to an insider. Apparently conceding this position, Buchheit has already reimbursed the principal amount of $102,515.95. In addition, however, the trustee may recover interest from the date of demand for repayment to the date that reimbursement was actually received, at a rate set in accord with our holding in CNB International, Inc. v. Kelleker (In re CNB International, Inc.), 393 B.R. 306, 336 (Bankr.W.D.N.Y.2008), aff'd as to this issue, 440 B.R. 31, 46-47 (W.D.N.Y.2010). In the present instance, because this is an action that the trustee removed from state court, the right to interest will relate back to the original demand that Contract Specialists made to Gerald Buchheit.
Although the court will grant judgment for the amount of accrued interest on the principal sum of $102,515.95, the present record provides no indication of either the date of demand or the date of payment. The parties are directed to stipulate to these dates or to an acceptable amount of interest. If unable to reach such agreement, they should inform the court, which will then schedule such further hearings as may be warranted. Judgment for the plaintiff will enter thereafter.
Equitable Subordination
Section 510(c) of the Bankruptcy Code confirms the authority of this court to apply the doctrine of equitable subordination. In relevant part, this section provides that “after notice and a hearing, the court may — (1) under principles of equitable subordination, subordinate for purposes of distribution all or part of an allowed claim to all or part of another allowed claim or all or part of an allowed interest to all or part of another allowed interest.” In United States v. Noland, 517 U.S. 535, 116 S.Ct. 1524, 134 L.Ed.2d 748 (1996), the Supreme Court accepted the position of the Fifth Circuit, “that the application of the doctrine was generally triggered by a showing that the creditor had engaged in ‘some type of inequitable conduct.’” 517 U.S. at 538, 116 S.Ct. 1524, quoting In re Mobile Steel Co., 563 F.2d 692, 700 (1977). Further, subordination requires the satisfaction of two additional conditions: “that the misconduct have ‘resulted in injury to the creditors *16of the bankrupt or conferred an unfair advantage on the claimant,’ and that the subordination ‘not be inconsistent with the provisions of the Bankruptcy Act.’ ” 517 U.S. at 538-39, 116 S.Ct. 1524, quoting In re Mobile Steel Co., 563 F.2d at 700.
The trustee contends that Buchheit acted inequitably in two respects: first, by allowing the debtor to operate with inadequate capitalization; and second, by violating a fiduciary obligation to avoid self-dealing and to safeguard the interests of all creditors. Asserting that such conduct unfairly advanced the interests of Buchheit to the detriment of other unsecured creditors, the trustee seeks a subordination of Buchheit’s claims against the bankruptcy estate. Buchheit denies responsibility for any under capitalization. He argues that his proof of claim properly seeks to recover legitimate loans to the debtor and that he worked continuously and in good faith to advance the development of the Statler Towers.
The parties have stipulated that Gerald A. Buchheit, Jr., is the sole shareholder and principal of the debtor. This insider status compels the court to review his actions with rigorous scrutiny. Pepper v. Litton, 308 U.S. 295, 306, 60 S.Ct. 238, 84 L.Ed. 281 (1939). Nonetheless, the trustee will still carry the initial burden to establish the necessary elements of his cause of action for equitable subordination. “Once the trustee meets this initial burden, the burden then shifts to [the insider] to demonstrate its good faith and the fairness of its conduct.” Fabricators, Inc. v. Technical Fabricators, Inc. (In re Fabricators, Inc.), 926 F.2d 1458, 1465 (5th Cir.1991).
The evidence at trial failed to establish such an inadequacy of capitalization as would compel equitable subordination. Sometimes even a reasonably capitalized enterprise will become insolvent as a consequence of unsustainable losses or adverse events. For this reason, with regard to capitalization, we must measure adequacy not in hindsight, but only through the recreation of a forward looking perspective. The issue is whether the debtor’s capitalization was reasonable at the time that the defendant initiated the enterprise or endeavor that is now the subject of dispute. In re Bentley-Russell, Inc., 201 B.R. 354 (Bankr.W.D.N.Y.1996). Northstar Development Corp. became the owner of the Statler Towers on November 9, 1998, and retained title to the property until its sale to BSC Development BUF, LLC, on August 18, 2006. Thus, its capital sufficed to sustain operations for almost eight years. The testimony established a reasonable expectation that the debtor would sell the Statler Towers for a price sufficient to satisfy all creditors. Indeed, the debtor had previously signed a contract to sell the property for $7,500,000. Unfortunately, the sale did not close and the debtor was ultimately compelled to accept a consideration of only $3,500,000. Had the property sold for the higher amount, however, the debtor would have derived sufficient funds to pay creditors. In the context of these legitimate prospects, we cannot hold that the debtor and its principal operated with inadequate capital.
What compels equitable subordination in this case is not the operation of the debtor’s business, but decisions made after the termination of business activity. As an officer and director of Northstar Development Corp., Gerald Buchheit assumed the role of a fiduciary. In Pepper v. Litton, 308 U.S. 295, 307, 60 S.Ct. 238, 84 L.Ed. 281 (1939), the Supreme Court observed that this “standard of fiduciary obligation is designed for the protection of the entire community of interests in the *17corporation — creditors as well as stockholders.” Indeed, for insolvent debtors, a director’s fiduciary obligation becomes a duty to maximize a fair and equitable distribution among all creditors. In their fiduciary capacities, officers and directors must act even-handedly and in good faith. See Bus. CoRp. Law § 717(a)(McKinney 2003). Thus, officers may not divert unto themselves the opportunities that should fairly inure to the benefit of the corporation’s entire community of interests, which for an insolvent corporation must include every creditor. See HaRRY G. Henn, Law of Corporations, §§ 231-242 (2nd ed. 1970).
The parties have stipulated that Northstar was insolvent on the day prior to the closing of its sale of the Statler Towers on August 18, 2006. Nonetheless, between September 1, 2006 and February 16, 2007, Buchheit caused the debtor to disburse more than $100,000 to himself on account of unsecured obligations. These payments inured exclusively to the benefit of Buchheit, and were not part of a proportional distribution among all unsecured creditors. Thus, they would have constituted a preference under section 547 of the Bankruptcy Code, but for the fact that the debtor delayed the filing of its petition until a date more than one year after Buchheit’s receipt of funds. In at least two respects, therefore, Buchheit violated the fiduciary obligations that he owed to creditors. First, he caused the debtor to distribute its limited cash resources to himself rather than proportionately among all creditors. Second, by causing the debt- or to delay the filing of its bankruptcy petition, Buchheit insulated himself from potential liability on a cause of action that might have inured to the benefit of other creditors to whom he owed a duty of good faith.
In failing to fulfill his fiduciary obligations as a director and officer of North-star Development Corp., the defendant engaged in the type of conduct that would justify the equitable subordination of his claims. Further, this inequitable conduct gave to the defendant an unfair advantage over other creditors who were similarly attempting to recover legitimate claims. The defendant also has suggested no persuasive reason to believe that equitable subordination would here violate any provision of the Bankruptcy Code. Accordingly, pursuant to 11 U.S.C. § 510(c)(1), this court may subordinate “all or part” of the claim of Gerald Buchheit to “all or part” of other allowed claims.
One learned treatise has observed that “a claim should be subordinated only to the extent necessary to offset the harm suffered.” 4 Collier on Bankruptcy, ¶ 510.05[5][a] (Alan N. Resniok & Henry J. Sommer, eds.-in-chief, 16th ed. 2009). In the present instance, Gerald A. Buchheit, Jr., has submitted a proof of claim for $3,219,023.52, a sum which represents more than 95.5 % of all unsecured claims that have been filed to date. Therefore, unless subordinated, the defendant’s claim would realize nearly the entire amount that the trustee might distribute from any recovery on his causes of action against the defendant himself. Equity demands an outcome more fair than any such cyclical regurgitation. In violation of his fiduciary obligations as an officer and director of the corporation, the defendant attempted to secure an advantage over all other creditors. In fairness, these other creditors should now receive a similar advantage over the defendant. Accordingly, with one adjustment, the court will subordinate the defendant’s outstanding claim to all other filed claims. It appears, however, that the defendant’s existing claim does not include a further claim for a distribu*18tion on account of the trustee’s recovery in this adversary proceeding. Any moneys thusly recovered are no longer tainted. The court will, therefore, allow Buchheit to file a supplemental claim for the amount that he will have paid to the trustee. Equitable subordination will not extend to this supplemental claim, so that Buchheit may receive a distribution on its amount proportionately with distributions to other creditors.
Conclusion
The trustee’s complaint asserts eight causes of action to avoid various transfers. For the reasons stated herein, the court will grant judgment to the plaintiff only for the amount of accrued interest from the date of demand to the date of payment of the principal sum of $102,515.95. As to all other demands in the trustee’s complaint, judgment is granted to the defendant. With respect to the counterclaim seeking a declaration allowing an unsecured claim, the court will grant the trustee’s request to equitably subordinate the defendant’s existing claim to all other unsecured claims. Leave is granted to the defendant to file a supplemental claim for the amount of any payment to the trustee. Any such claim will be allowed as a general unsecured without subordination.
The amount of the trustee’s judgment for accrued interest remains undetermined at this time. The parties are directed to stipulate either to an acceptable amount of interest or to the facts needed to calculate the amount of interest. If unable to reach a stipulation, they should inform the court, which will then schedule such further hearings as may be warranted. Final judgment will enter thereafter.
So ordered. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494572/ | MEMORANDUM OPINION AND ORDER
THOMAS P. AGRESTI, Chief Judge.
Before the Court for decision is the Motion for Relief from the Automatic Stay to Pursue RICO Action (“Motion”), Doc. No. 100, filed by the Movants, O’Neal Steel, Inc. (“O’Neal”) and Leeco Steel, LLC (“Leeco”).1 The Motion has been vigorously opposed by the Debtor, Lance Chatkin (“Chatkin”), and the Parties have submitted briefs and presented oral arguments. After careful consideration of the relevant issues, the Court concludes for the reasons stated below that the Motion must be granted with certain limitations.2
FACTUAL AND PROCEDURAL BACKGROUND
Chatkin is the President and majority shareholder of General Purpose Steel, Inc. *57(“GPS”), a company engaged in the sale of steel products. (Chatkin and GPS will sometimes collectively be referred to as “Debtors.”) On January 14, 2011, prior to the filing of the Chatkin and GPS bankruptcies, O’Neal and Leeco filed a civil complaint in the United States District Court for the Northern District of Alabama at C.A. No. 11-00137-KOB (hereinafter referred to as the “RICO Action”3) which is the subject of the Motion. Named as defendants in the RICO Action are Chatkin, GPS, another steel sales company called Worldwide Steel Unlimited, Inc. (“Worldwide”), and an individual named Bruce Adelstein (“Adelstein”). Chatkin and GPS allegedly joined with Adelstein in creating Worldwide in 2009. Chatkin’s Petition at Schedule B indicates he has a 95% share interest in Worldwide, which is described as a “defunct private corporation,” apparently having ceased operations in April 2010. The complaint in the RICO Action sets forth a claim under “RICO” itself (i.e., the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961-1968), as well as Alabama state law causes of action for fraud, misrepresentation, negligence and wantonness, civil conspiracy, and breach of contract and warranty.
According to the allegations in the RICO Action complaint, O’Neal is a “full-line metals service center,” that locates and provides requested standards and grades of steel for its customers. O’Neal alleges that its customers manufacture such quality-sensitive products as U.S. military equipment, railroad freight cars, high lift bucket trucks, and firefighting ladder trucks. Leeco is a subsidiary of O’Neal and is itself a specialty steel supplier. The complaint goes into considerable factual detail in its allegations, but for purposes of the Motion it is not necessary to repeat it all here.
In its essential terms, the RICO Action complaint alleges that since 2009 Movants have bought steel on numerous occasions from Worldwide for the purpose of reselling the steel to customers of the Movants. Worldwide, in turn, obtained the steel from GPS. The purchases by Movants from Worldwide were initiated by purchase orders indicating that the steel must meet certain quality standards established by ASTM International, a widely-recognized organization that develops and publishes technical standards for products and materials, including steel. The complaint further alleges that GPS and Worldwide, through the actions of Chatkin and Adel-stein, engaged in a scheme whereby they would buy low grade steel from various mills and then sell it to Movants, passing it off as higher quality steel through the use of phony or altered “certificates of conformance” and “mill test reports” that were provided to O’Neal and Leeco. For example, in one instance Movants allege they required steel having a “yield strength” of at least 50,000 psi, and purchased steel from Worldwide that was represented as having a yield strength of 52,600 psi. However, subsequent, independent testing revealed an actual yield strength of only 34,500 psi. See Motion, Ex. A. at ¶ 72.
Movants allege that before the fraud was discovered, they had resold large quantities of the steel to their customers, who had in turn incorporated it into various products. Movants claim they have been damaged in a number of ways, in-*58eluding the expense of recalling and testing the products of their customers which had used the inferior steel, providing replacement steel to their customers, settling claims with their customers over the steel, and by a tarnished reputation that the episode has caused. Movants are therefore unsecured creditors of the Debtors, though with unliquidated and disputed claims. See Petition at Schedule F. Mov-ants have not to this point filed proofs of claim.
Chatkin and GPS obtained two extensions of time to answer the complaint in the RICO Action. Then, on March 30, 2011, before they filed an answer or otherwise responded, they each filed a bankruptcy petition in this Court. That filing automatically stayed any further activity in the RICO Action with respect to those two parties, although the case continued as to the other two defendants. On May 18, 2011 an entry of default was made against Adelstein and Worldwide in the RICO Action, but no default judgments have been entered as of yet. Adelstein then filed his own bankruptcy in the Northern District of Ohio on July 13, 2011, staying any further action against him in the RICO Action. See In re Bruce S. Adelstein and Cindy Adelstein, Bankr.N.D. Ohio Case No. 11-16053-pmc, assigned to the Honorable Pat E. Morgenstern-Clarren.
The first activity of O’Neal and Leeco in the Debtors’ bankruptcies was to file adversary proceedings in both cases objecting to discharge. In this case, see Adv. No. 11-2429 which objects to discharge under 11 U.S.C. §§ 528(a)(2)(A), 528(a)(1), 523(a)(6), 727(a)(2), 727(a)(5), and 1111(d)(3). In GPS, see Adv. No. 11-2430 which objects to discharge under 11 U.S.C. §§ 727(a)(1), 727(a)(2), 727(a)(5), and 1111(d)(3). The RICO Action complaint contains allegations which, if proven to be true, would likely be relevant in these two adversary proceedings, particularly Chat-kin. For instance, there are allegations of mail fraud and wire fraud in connection with the sale of the steel, see Motion, Ex. A. at ¶ 105, of a scheme to defraud, id. at ¶ 106, and of fraudulent misrepresentations, id. at ¶ 130.
In Adv. No. 11-2429, Chatkin filed an answer to the complaint, denying most of the key allegations. In Adv. No. 11-2430, GPS has filed a motion to dismiss under Fed.R.Bankr.P. 7012, incorporating Fed.R.Civ.P. 12(b)(6), for failure to state a claim on which relief can be granted. The Court has made known that further action in the two cases would be deferred until the Motion in this case and the similar one in the GPS bankruptcy have been decided, although no formal orders to that effect have been entered in the two adversaries.
The Motion itself was filed approximately two weeks after the filing of the discharge adversaries, on August 31, 2011. The Movants are seeking relief from stay so they may resume the RICO Action against Chatkin and GPS, relying on 11 U.S.C. § 362(d)(1), which permits the Court to grant relief from stay “for cause.”4
Before turning to a discussion of the merits of the Motion, it is important to note a further development in the Adel-stein bankruptcy case that has occurred since the Motion was filed. On October 12, 2011, O’Neal and Leeco filed a similar motion for relief from stay in that case so *59that they could pursue the RICO Action as to Adelstein. That motion was granted on November 17, 2011, but only to allow them to proceed so far as to liquidate their damages against Adelstein. In order to collect or enforce any judgment they may obtain against Adelstein in the RICO Action, O’Neal and Leeco must return to the Northern District of Ohio bankruptcy court.
DISCUSSION
As previously indicated, the Motion has been thoroughly briefed and argued by the Parties. The Parties agree that any decision on the Motion is discretionary with the Court and should be based on application of a “balance of hardship” test, though they obviously disagree as to where that balance ultimately lies.
While the Court routinely considers motions for relief from stay to allow some outside litigation to proceed, such motions usually involve a secured creditor that is seeking to foreclose on, or repossess, collateral. Occasionally a motion for relief from stay is brought by an unsecured creditor pursuing a debtor as a nominal defendant in a case where there is insurance available to provide a defense and indemnify the debtor. The unusual feature of the present case is that the Mov-ants are unsecured creditors and apparently there is no insurance defense or coverage available to the Debtors. The issues then are first, whether there can ever be “cause” for relief in such circumstances, and if so, whether the facts of the present case warrant such relief.
As to the first issue, Section 362(d)(1) does not define “cause,” leaving courts to consider what constitutes cause based on “the totality of circumstances in each particular case.” In re Wilson, 116 F.3d 87, 90 (3d Cir.1997). There is certainly no overt prohibition in the statutory language against granting relief from stay to an unsecured creditor. In fact, as the Wilson court noted, the legislative history behind Section 362(d)(1) contemplates that an unsecured creditor may sometimes be granted relief from stay:
[I]t will often be more appropriate to permit proceedings to continue in their place of origin, when no great prejudice to the bankruptcy estate would result, in order to leave the parties to their chosen forum and to relieve the bankruptcy court from many duties that may be handled elsewhere.
116 F.3d at 91 (quoting S.Rep. No. 95-989 at 50 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5836). Thus, the relief which the Movants seek is at least potentially available, and the question becomes whether the particular facts of this case justify relief from stay.
Before looking at those facts, it will be helpful to consider the general approach taken by other courts when faced with this same type of issue. In that regard, as the Court advised the Parties at the most recent argument on the Motion, it finds In re Chan, 355 B.R. 494 (Bankr.E.D.Pa.2006), to provide a useful summary of the relevant case law, and the Court draws upon it in formulating the approach it will follow here.5
*60As the Chan court noted, the overall “test” that most courts apply in this situation may best be characterized as a “balancing of the harms,” and courts require the demonstration of some “special circumstances” before stay relief will be granted to an unsecured creditor. This special circumstance requirement helps insure that stay relief to unsecured creditors does not become routine, thereby hindering the policy behind the automatic stay of giving the debtor a respite from the time and expense of responding to litigation initiated by creditors. As one court explained:
“Cause” is an intentionally broad and flexible concept which must be determined on a case-by-case basis. Indeed, there are a multitude of reported decisions discussing relief from the stay for “cause,” all of which are fact intensive and generally offer no precise standards to determine when “cause” exists to successfully obtain relief from the stay. A court may consider the policies reflected in the.bankruptcy code, and the interests of the debtor, other creditors and any other interested parties. Unsecured creditors are generally entitled to relief from an automatic stay only in extraordinary circumstances.
355 B.R. at 499 (quoting In re Brown, 311 B.R. 409, 412-13 (E.D.Pa.2004)). Thus, while the decision whether to grant stay relief to an unsecured creditor is discretionary, a bankruptcy court should proceed with caution in this sort of case.
The Chan court also explained that a number of courts have developed lists of factors to be considered as an aid in deciding whether to grant stay relief to an unsecured creditor for cause. See, e.g., In re Granati 271 B.R. 89, 93 (Bankr.E.D.Va.2001) (listing four factors), and In re Sonnax Indus., Inc., 907 F.2d 1280, 1286 (2d Cir.1990) (citing In re Curtis, 40 B.R. 795 (Bankr.D.Utah 1984), and listing a dozen factors). Given the highly fact-specific nature of the inquiry, it is perhaps not surprising that the Court finds the construction of any such list of factors somewhat artificial, and the lists provided in the cited cases include many factors of no relevance here. Nevertheless, there are a number which the Court does believe ought to be considered, directly or in a modified form, in reaching a decision in this case. For instance:
• whether judicial economy will be promoted
• whether the outside litigation will interfere with the bankruptcy case
• whether the litigation will result in a partial or complete resolution of the issues
• the involvement of third-parties
• Whether the estate can be protected by a requirement that creditors only seek to enforce any judgment obtained through the bankruptcy court
• what stage the other litigation has reached
The Court will consider these factors in the overall “balance of harm” inquiry, without handcuffing itself by ignoring other factors it deems relevant, or proceeding as if the decision is one that can be reduced to “score-keeping or bean-counting.” Chan, 355 B.R. at 500 (quoting Kerusa Co., L.L.C. v. W10Z/515 Real Estate Ltd. P’ship, 2004 WL 1048239 (S.D.N.Y.2004)).
Before moving on, the Court must also comment on the proper burden of proof to be applied in this matter. The statute itself provides that in any hearing under Section 362(d) requesting relief from stay, the moving party has the burden of proof on the issue of equity in the debtor’s property but the party opposing such relief has the burden of proof on “all other issues.” See 11 U.S.C. § 362(g). *61The first part of that formulation is not applicable here because the stay relief being sought by O’Neal and Leeco does not concern any property. Does that then mean that the Debtor, having the burden as to all other issues, must prove a lack of cause? Although that approach might follow from a literal reading of the statutory language, it is not the way that courts have applied the statute in actual practice. Instead, courts have placed the burden on the moving party to make an initial prima facie showing of “cause” sufficient to support relief from stay. If the moving party does so, the ultimate burden then shifts to the non-moving party, here the Debtors, to show a lack of cause to grant stay relief. See, e.g., In re White, 410 B.R. 195, 200 (Bankr.W.D.Va.2008) (citing authorities), In re Rocco, 319 B.R. 411, 419 (Bankr.W.D.Pa.2005); B. Russell, Bankruptcy Evidence Manual (2011-2012 Ed.) Rule 301, § 301:44 pp. 275-276.
The Court now turns to the merits of the Motion. If granted relief from stay, the Movants propose to move forward with the RICO Action as against Chatkin and GPS, hoping ultimately to obtain a judgment against them in the Northern District of Alabama, with factual findings and a liquidation of their damage claim against the Debtors. Movants have agreed in advance that they would not make any effort to enforce such judgment in the District Court. Instead through res judicata principles they would rely on the judgment in the proceedings in this Court, presumably to establish the amount of their claim, and to establish that any debt owed to them by the Debtors should be found to be non-disehargeable.6
Movants concede that determinations as to the amount and the dischargeability of their claims could be made in this Court.7 Their argument is that it makes more sense, however, for this Court to in effect defer to the District Court and allow it to take the lead. They make a number of points in that regard. They say that the elements at issue in the RICO Action are very close to the elements at issue in the discharge adversaries and the use of findings from the RICO Action by this Court could be a valuable tool for an efficient and inexpensive resolution of the discharge adversaries.
It is undoubtedly true that if the RICO Action were litigated and findings of fraud were made against the Debtors such findings would likely be conclusive in the discharge adversaries, to a large extent thus saving this Court from having to engage in the fact-finding process itself. The Debtors do not seem to seriously contest that point. Nevertheless, it is far from clear that a deferral to the District Court would on the whole be likely to facilitate an efficient and inexpensive resolution of the dis*62charge adversaries here. The RICO Action is only in its opening stage, as least as concerns Chatkin and GPS, and it could conceivably drag on for a long time before any decision is made, delaying this case in the meantime. Thus, on balance, the Court does not find this point to provide much weight on the issue of cause for relief from the stay.
The Movants also argue that the stay should be lifted to prevent the RICO Action from in effect being split, with the case proceeding as against Worldwide and Adelstein in the District Court, while the same issues are tried in this Court as against the Debtors. They contend that allowing such a split in the litigation would be extremely detrimental to them for several reasons. For one thing, they argue it would mean they have to litigate the same issues in two different courts, resulting in duplicative litigation that would waste the resources of the Parties and the federal court system.
Movants further assert that a split litigation would enable each “set” of defendants to point the finger of blame at the “empty chair,” without the respective court obtaining a full picture. In other words, the Debtors could defend in this Court by attempting to minimize their role in the dealings with Movants and maximizing the role of Adelstein, while he could do the reverse in the RICO Action.8 The contention is that unless one tribunal has all of the defendants before it a full picture will not be presented, and since this Court has no jurisdiction over Adelstein and Worldwide, the matter should perforce be heard by the District Court.
A related, third reason advanced by Movants for strongly disfavoring a split litigation is the very nature of the RICO statute. Movants note that RICO has a very broad jurisdictional reach which permits defendants in different jurisdictions to be “gathered in one forum,” thus preventing a “fragmented situation” such as Movants contend will occur here if they are denied stay relief.
The Court finds this latter group of reasons for lifting the stay to be much more compelling. On an overall view of judicial economy, it does make sense for claims arising from the relationship between Movants, on the one hand, and GPS/Chatkin/Adelstein/Worldwide, on the other hand, to be tried, if possible, in one forum rather than two. Not only would that eliminate the need for two litigations of the same issues, it would also prevent the possibility of inconsistent judicial outcomes, something which is always a concern.
Furthermore, it is clear that one of the policies behind RICO is to enable a plaintiff to bring all members of an alleged RICO conspiracy before a single court in a civil action, as reflected in the.nationwide service of process provision in 18 U.S.C. § 1965(b). See, e.g., Estate of Carvel, ex. rel. Carvel v. Ross, 566 F.Supp.2d 342, 350-51 (D.Del.2008) (once minimum contacts established as to one defendant, Section 1965(b) enables a plaintiff to bring all members of a RICO conspiracy before a single court where ends of justice require). The ends of justice requirement screens *63out situations where all of the defendants would be subject to suit in another jurisdiction. For instance, if all potential defendants were subject to suit in California, and one of them was also subject to suit in New York, a RICO plaintiff could not bring suit in a New York federal court and use the nationwide process provision to bring all of the defendants within that action. The key thus seems to be that RICO was intended to insure that plaintiffs damaged by a conspiracy covered under the statute would have at least one forum available where they could bring all of the alleged conspirators together in a single action. See, e.g., Butcher’s Union Local No. 498, United Food and Commercial Workers v. SDC Investment, Inc., 788 F.2d 535, 539 (9th Cir.1986) (Congress intended the ends of justice provision to enable plaintiffs to bring all members of a nationwide RICO conspiracy before a court in a single trial).
It is clear that the distinguishing and decisive feature in this case is the existence of parties defendant other than the Debtors in the RICO Action. Were it just Chatkin and GPS as defendants in that case, the Court would have little difficulty concluding that they had failed to meet their prima facie burden of showing cause for relief from stay to be granted. Given the very early procedural stage of the RICO Action, and the minimal advantage to be gained by being able at some point to potentially use findings from that court to streamline the dischargeability issues in this Court, there would not have been sufficient evidence to convince the Court that cause had been shown.
Similarly, had the court in the Adelstein bankruptcy denied Movants relief from stay as to the RICO Action, the Court would have had a much easier decision here. In that circumstance, nothing this Court did would change the fact that there was going to be a split litigation — either split three ways if this Court denied relief from stay (between this Court, the Northern District of Ohio Bankruptcy Court, and the Northern District of Alabama), or two ways if this Court granted relief from stay (between the Northern District of Ohio Bankruptcy Court and the Northern District of Alabama). However, since the Adelstein court has already granted relief from stay to the Movants, a similar grant of the Motion here would avoid a split and allow all of the alleged conspirators to be brought before a single court, thus furthering the intent of RICO and preventing the other negative consequences that would flow from a split litigation.
The Court in the Chan case ultimately denied the unsecured creditor’s request for relief from stay to pursue securities fraud litigation which had been commenced pre-petition in the Eastern District of Pennsylvania. However, that outside litigation was a one party-on-one party matter and that fact was an important consideration in the decision. The Chan court somewhat presciently noted that when there are multiple parties involved in the non-bankruptcy litigation, considerations of judicial economy may support the return of the litigation to the other forum. 355 B.R. at 501. This Court agrees, and under the specific facts of the present case, as discussed above, finds that the Movants have shown special circumstances and met their burden of showing prima facie cause under Section 362(d)(1).
That finding does not end matters, it shifts the burden to the Debtors to rebut the prima facie case and in effect show a lack of cause for granting relief from stay. In that regard, the Debtors rely on what they contend will be the additional cost to the bankruptcy estates if they are required to litigate the RICO Action. They argue that such increased *64cost imposes a burden on them which outweighs the burden that the Movants will face if stay relief is denied, thus tipping the balance of harm in their favor.
The Court is certainly sensitive to the cost issue and considers it an appropriate factor for consideration. The problem for the Debtors is that they have presented nothing from which to quantify or even roughly estimate what costs might be involved in defending the RICO Action, and whether and by how much such costs are likely to exceed the cost involved in defending many of the same issues in the discharge adversaries pending in this Court. Instead, Debtors merely throw out the issue of cost with nothing further and apparently expect that will be sufficient to carry the day.
While it does seem intuitively likely there will be some increased cost if stay relief is granted, the Court does not believe it is in a position to conclude that the magnitude of such increase would be sufficient to justify a finding that it outweighs the detriment to the Movants if stay relief is denied. For instance, in In re Glunk, 342 B.R. 717 (Bankr.E.D.Pa.2006) the court stated that it was “not readily apparent” that a defense of a dischargeability adversary proceeding would be “appreciably more economical” for the debtor then the defense of a pending state court action. Id. at 741. The court noted its expectation that the resolution of the discharge issues in the adversary proceeding would itself require a lengthy trial, not some “mini-trial” as the debtor suggested. Likewise, in the present case, if stay relief is denied the same potentially complex issues as in the RICO Action would need to be tried here, and the Court can easily foresee extensive discovery and an involved trial in that matter.
In addition to cost, Counsel for GPS also argued that if relief from stay is granted the Debtors will somehow be foreclosed from litigating the dischargeability of any debt they may owe to Movants. Counsel stated that “I think the foregone conclusion here would be if relief from stay is granted there will be some form of default [in the RICO Action].” Audio Tr. of January 23, 2012 Hearing at 11:33:30. Counsel went on to lament that if such a default were entered against the Debtors in the RICO Action, in his estimation, any possibility of a defense by them in the discharge adversaries in this Court might be “virtually a nullity.” Id. at 11:33:57. Counsel was apparently referring to his view as to the res judicata effect of such default judgment.
It is, of course, for Chatkin, GPS and their attorneys to decide what strategy they will pursue in defending the RICO Action. In deciding this Motion, the Court ordinarily would not speculate as to what the Debtors may choose to do and will not do so here. However, since Counsel raised the issue, in considering the effect of “cost” when weighing the “balance of hardship” factors, the Court finds itself compelled to also consider the consequences of a decision allowing a default judgment to be entered in the RICO Action.
Since the RICO Action is in a sister federal court exercising federal question jurisdiction, it appears the issue preclusion effects in this Court of a judgment entered there would be governed by federal law, not the law of Alabama. See, Peloro v. U.S., 488 F.3d 163, 175, n. 11 (3d Cir.2007). Under federal law, for collateral estoppel to apply: (1) the issue sought to be precluded must be the same as an issue in the prior action; (2) the issue must have been actually litigated in the prior action; (3) the issue must have been determined by a valid final judgment; and, (4) determination of the issue must have been *65essential to the judgment in the prior action. In re Docteroff, 133 F.3d 210, 214 (3d Cir.1997).
As a “general rule” under federal law, any issue raised in a case where a default judgment was entered is not “actually litigated” for purposes of collateral estoppel, and therefore does not bar litigation of the issue in the second federal court. See, In re Masdea, 307 B.R. 466, 473 (Bankr.W.D.Pa.2004). Some caution must be exercised because this general rule applies to a “typical” default judgment where a defendant does not participate because of the inconvenience of the forum selected or the expense of defending the lawsuit. An exception to this general rule exists where the defendant participates extensively in the lawsuit but deliberately prevents a resolution of it and a default judgment is entered against it as a sanction for refusing to comply with valid court orders. Masdea, 307 B.R. at 473, citing Docteroff, 133 F.3d at 215.9
The Court thus concludes that the Debtors have failed to overcome the showing of cause made by the Movants. There is no basis for determining whether there is likely to be an appreciable quantitative difference in cost if relief from stay is granted and an active defense in the RICO Action is made by the Debtors. Furthermore, even if the Debtors choose not to defend the RICO Action because of cost constrictions or for some other reason, options may be available to the Debtors to do so,' while possibly retaining the ability to meaningfully raise relevant issues in this Court without the bar of collateral estop-pel. Since the Movants have made a pri-ma facie showing of the existence of cause for relief from stay, the burden of proof rests with the Debtors. Since the Debtors have failed to preponderantly meet their burden of proof, the Motions must be granted.
AND NOW, this 17th day of February, 2012, for the reasons stated above, it is ORDERED, ADJUDGED and DECREED that,
(1) The Motion for Relief from the Automatic Stay to Pursue RICO Action is GRANTED, subject to the limitation as set forth in Paragraph 2.
(2) The Movants may proceed in the RICO Action, Northern District of Alabama at C.A. No. 11-00137-KOB, only to the point of liquidating their damages and obtaining a judgment against the Debtor. Any attempt to enforce, collect, or otherwise implement such judgment remains subject to the automatic stay provision of 11 U.S.C. § 368(a) and further order of this Court.
(3) On or before March 2, 2012, the Movants shall file an appropriate motion seeking to stay any further activity in the discharge adversary, Adv. No. 11-2429, pending the conclusion of the RICO Action as permitted by this Order. If no such motion is timely filed, the said discharge adversary shall proceed forward notwithstanding the grant of relief from stay as set forth herein.
. An identical motion was filed by the same Movants in the affiliated case of General Pupose Steel, Inc., pending in this Court at No. 11-21907-TPA. See Doc. No. 121 in that case. The issues are the same in both motions and they were briefed and argued together. A separate Order will be issued in the General Purpose Steel case, but this Memorandum Opinion is intended to address the motions in both cases.
. The Court has jurisdiction to decide the Motion pursuant to 28 U.S.C. § 1334. This is a core matter pursuant to 28 U.S.C. § 157(b)(2)(G).
. This is somewhat of a misnomer because, as discussed infra, there are a number of other causes of action pleaded in that complaint as well. Nevertheless, both sides have used this as a short-hand designation for the suit pending in the Northern District of Alabama, and the Court will follow suit.
. The statute provides in relevant part:
(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—
(1) for cause, including the lack of adequate protection of an interest in property of such party in interest;
. Unlike the present case, the Chan decision included as an issue the potential non-discharge of a claim pursuant to 11 U.S.C. § 523(a)(19), which deals with claims arising from the violation of federal securities laws and which some courts have treated as sui generis in that it requires all liability and discharge determinations thereunder to be made in a non-bankruptcy forum. However, after a thorough discussion, the Chan court rejected that view and applied “ordinary principles which guide a bankruptcy court's decision on the subject [of relief from stay to an unsecured creditor]”.
. Movants’ plan, of course, is premised on the assumption that activity in this Court on the discharge adversaries will come to a temporary halt while matters are resolved in the RICO Action, and then restarted if and when the Movants obtain judgments against the Debtors in the District Court. If it were otherwise, a grant of stay relief could lead to active, ongoing parallel litigation in both courts, something all Parties can no doubt agree should be avoided. Movants have not to this point, however, filed a motion asking that the discharge adversaries be stayed.
. Actually, Movants did raise in their filings that the jury trial demand they made in the RICO Action and a Constitutional issue based on the holding in Stern v. Marshall, — U.S. -, 131 S.Ct. 2594, 180 L.Ed.2d 475 (June 23, 2011), serve as impediments to this Court’s ability to make those determinations. Those issues were significantly downplayed, if not outright abandoned, by the Movants at the oral argument on the Motion. In any event, given the decision to grant relief from stay, the Court need not address those issues at this time.
. Movants have identified some instances where they say this sort of thing has already happened. See the GPS Motion to Dismiss in the discharge adversary, Adv. No. 11-2430 at Doc. No. 6 ¶ 8 (complaint fails to set forth a cause of action as to GPS because alleged acts were committed by Adelstein and Worldwide); and Adelstein’s Answer to Complaint in the discharge adversary, Adv. No. 11-1297, filed by Movants in the Adelstein bankruptcy pending in the Northern District of Ohio, Doc. No. 24 ¶21 (characterizing GPS and Chatkin as the responsible parties).
. The Court is, of course, expressing no view whatsoever as to how it would rule in the future as to any question that may come up concerning the res judicata effect of any judgment entered in the RICO Action. Such a decision would depend on facts that have not yet even occurred and would only be made after both sides were given an appropriate opportunity to argue their positions. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494573/ | MEMORANDUM OPINION
WENDELIN I. LIPP, Bankruptcy Judge.
Before the Court is the First and Final Application for Allowance of Fees and Reimbursement of Expenses to Special Counsel for Trustee (the “Fee Application”) and the objections thereto filed by the United States Trustee and Paula Frankel. The Court has reviewed the Fee Application and related objections, and has considered the arguments and testimony presented at the hearing held on October 17, 2011. For the following reasons, Kramon & Graham, P.A. is allowed compensation in the amount of $36,921.00 and reimbursement of expenses in the amount of $2,702.96 for services provided to the Chapter 7 Trustee during the period from May 4, 2010, through April 5, 2011.
I. Background
By way of background, on October 5, 2007, Information Network, Inc. (the “Debtor”) filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code (the “Bankruptcy Proceeding”). On or about October 9, 2007, Roger Schloss-berg was appointed as the Chapter 7 Trustee in the Bankruptcy Proceeding (the “Trustee”). On October 2, 2009, the Trustee filed Adversary Proceeding No. 09-00659 against Paula Frankel (“Frankel”) pursuant to §§ 547 and 550 of the Bankruptcy Code to avoid and recover transfers from the Debtor to Frankel in the amount of $10,600.00 (the “Adversary Proceeding”). On May 11, 2010, the Trustee, concerned that he and his then current counsel may be required to testify as witnesses in the Adversary Proceeding regarding the disqualification of Frankel’s husband from serving as her counsel, filed the Trustee’s Application for Authority to Employ Kevin F. Arthur and Kramon & Graham, P.A. (“K & G”) as special litigation counsel' to the Trustee in the Adversary Proceeding. In his application, the Trustee proposed to employ K & G under a retainer agreement with fees based on K & G’s normal hourly rates. The Court approved the Trustee’s application by Order entered on June 10, 2010 (the “Employment Order”). The Employment Order authorizes the Trustee to employ K & G and provides that the “allowance and payment of fees and expenses shall be subject to further order of this Court.” On June 25, 2010, the Trustee filed a Motion to Substitute K & G for Shapiro Sher Guinot & Sandler (“Shapiro Sher”) as Trustee’s counsel solely in the Adversary Proceeding. The Motion to *68Substitute was granted by Order entered June 29, 2010.
II. The Application and Objections
The Fee Application requests compensation in the amount of $100,571.00, plus reimbursement of out-of-pocket expenses in the amount of $2,702.96, for services provided to the Chapter 7 Trustee during the period from May 4, 2010, through April 5, 2011 (the “Application Period”). In its objection, the United States Trustee relies on In re Taxman Clothing Co., 49 F.3d 310 (7th Cir.1995), in which the United States Court of Appeals for the Seventh Circuit determined that fees incurred by counsel to the Chapter 11 trustee in pursuing a preference claim were not reasonable and necessary, as required by 11 U.S.C. § 330(a)(1). The United States Trustee also argues that K & G breached its fiduciary duty to the bankruptcy estate by incurring excessive fees. The United States Trustee and Frankel both take the position that no fees should be awarded to K & G because their services provided no benefit to the Debtor’s Bankruptcy Estate (the “Estate”). Both parties also assert that former counsel to the Trustee, Shapiro Sher, was awarded fees for the same litigation in the amount of $10,000.00, and the matter settled after protracted litigation for only $7,500.00. Lastly, the objections point out that the complaint initiating the Adversary Proceeding only sought the recovery of $10,600.00.
III. Analysis
Pursuant to 11 U.S.C. § 330, this Court may award to a professional person employed under sections 327 or 1103:
(A) reasonable compensation for actual, necessary services rendered by the trustee, examiner, ombudsman, professional person, or attorney and by any paraprofessional person employed by any such person; and
(B) reimbursement for actual, necessary expenses.
11 U.S.C. § 330. In Pope v. Vu (In re Vu), 366 B.R. 511, 515 (D.Md.2007), the United States District Court for the District of Maryland set forth several factors courts must consider when determining the amount of reasonable compensation to be awarded to professional persons, including “whether the services were necessary to the administration of, or beneficial at the time at which the service was rendered toward the completion of, a case under this title.” In analyzing this factor, the Vu Court noted that “[cjourts have reached different conclusions as to the proper construction of the requirement that attorney’s services benefit the bankruptcy estate under Section 330(a)(3)(C) and (4)(A)(ii)(I).” Id. at 516. Recognizing that this issue has not yet been addressed by the United States Court of Appeals for the Fourth Circuit, the Vu Court adopted the approach taken by the United States Court of Appeals for the Second Circuit, which held that “§ 330 imposes an objective test ‘based upon what services a reasonable lawyer or legal firm would have performed in the same circumstances.’ ” Id. (quoting In re Ames Dep’t. Stores, Inc., 76 F.3d 66, 72 (2d Cir.1996)). The Vu Court held that “[tjhis language unambiguously requires consideration of whether, at the time the services were rendered, a reasonable attorney would have believed that they would benefit the estate, rather than a subsequent consideration of the practical effects actually achieved by an attorney’s services.” Id. at 517.
In addition to finding that the legal services benefitted the bankruptcy estate, bankruptcy courts must also determine the reasonableness of the fees sought. “The burden of proof that ser*69vices were actual and necessary and that the compensation requested is reasonable always rests upon the applicant who seeks the payment of professional fees from a bankruptcy estate, regardless of whether an objection has been filed.” In re Bernard Hill, Inc., 133 B.R. 61, 69 (Bankr. D.Md.1991). To determine reasonableness, applications for compensation are analyzed under a hybrid of the lodestar analysis and a twelve-factor test, which was first expressed in Johnson v. Georgia Highway Express, Inc., 488 F.2d 714 (5th Cir.1974) and adopted by the Fourth Circuit in Barber v. Kimbrell’s, Inc., 577 F.2d 216 (4th Cir.1978). The twelve Johnson factors are:
(1) the time and labor expended;
(2) the novelty and difficulty of the question raised;
(3) the skill required to properly perform the legal services rendered;
(4) the attorney’s opportunity costs in pressing the instant litigation;
(5) the customary fee for like work;
(6) the attorney’s expectations at the outset of the litigation;
(7) the time limitations imposed by the client or circumstances;
(8) the amount in controversy and the results obtained;
(9) the experience, reputation and ability of the attorney;
(10) the undesirability of the case within the legal community in which the suit arose;
(11) the nature and length of the professional relationship between attorney and client; and
(12) attorney’s fees awards in similar cases.
See In re Yu, 366 B.R. at 521. In Anderson v. Morris, the United States Court of Appeals for the Fourth Circuit recognized that the Johnson factors are difficult to quantify because some factors are overlapping, “‘and there is no guidance as to the relative importance of each factor, or indeed, how they are to be applied in a given case.’ ” 658 F.2d 246, 249 (4th Cir.1981) (citing Northcross v. Bd. of Educ. of Memphis City Schools, 611 F.2d 624, 642 (6th Cir.1979)). Accordingly, in Anderson, the Fourth Circuit provided further guidance on application of the Johnson factors:
The Court of Appeals of the Fifth Circuit, progenitor of the Johnson factors, has recognized these problems. It therefore has instructed district courts to first ascertain the nature and extent of the services supplied by the attorney from a statement showing the number of hours worked and an explanation of how these hours were spent. The court should next determine the customary hourly rate of compensation. These are essentially Johnson factors 1 and 5. The court should then multiply the number of hours reasonably expended by the customary hourly rate to determine an initial amount for the fee award. Finally, the court should adjust the fee on the basis of the other factors, briefly explaining how they affected the award. In re First Colonial Corp. of America, 544 F.2d 1291, 1298-1300 (5th Cir.1977). See also Copper Liquor, Inc. v. Adolph Coors Co., 624 F.2d 575, 581-84 (5th Cir.1980). We endorse this manner of applying the Johnson factors.
Id.
In this case, with the exception of the twelfth Johnson factor, the Fee Application contained the required lodestar analysis and discussion of the Johnson factors. To begin, the Court agrees with K & G that factors 7 (time limitations imposed by client or circumstances), 10 (the undesirability of the case) and 11 (the nature and length of the professional relationship with *70the client) have no real application to this proceeding. As for the remaining factors, the Court will follow Anderson’s guidance and start its analysis with factors 1 (time and labor required) and 5 (the customary fee for like work). The Fee Application states that a total of 312.5 hours were spent on this case for a total of $100,571.00. Of that amount, $71,120.00 was incurred by Kevin Arthur at an hourly rate of $350.00 (203.2 total hours).1 The five additional attorneys and/or staff who worked on this matter billed at an hourly rate between $140.00 and $320.00. The Court finds that K & G’s rates, including Mr. Arthur’s reduced rate, comport to the rates charged by other firms similar to K & G.2
As for the number of hours reasonably expended, K & G spent a total of 312.5 hours dedicated to the Adversary Proceeding. The Court has identified a few categories that consumed the bulk of K & G’s time, the first category being the Trustee’s attempt to disqualify Frankel’s counsel. At the hearing held on October 17, 2011 (the “Fee Hearing”), Kevin Arthur testified that he was initially retained to brief the issue of whether David Frankel was disqualified from representing his wife, Paula Frankel, in the Adversary Proceeding. After briefing that issue, the matter was referred to the Attorney Grievance Commission for the State of Maryland for determination. The matter was ultimately resolved in Mr. Frankel’s favor and this Court, at a hearing held on June 22, 2010, denied the Trustee’s Motion for Order Prohibiting Defendant from Appearing Pro Se and Striking. Appearance of David Frankel as Counsel for Defendant. Exhibit 1 admitted into evidence at the Fee Hearing attributes $36,975.00 to the disqualification issue.
Another time-consuming issue concerned this Court’s jurisdiction to conduct a jury trial in the Adversary Proceeding. At the hearing on June 22, 2010, Frankel challenged this Court’s jurisdiction to conduct a jury trial and questioned whether the right to a jury trial had been waived based on the Trustee’s alleged untimely consent. At the June 22, 2010 hearing, Kevin Arthur indicated to this Court that he had certain expertise on jury trial issues and offered to brief the issue. Thereafter, K & G briefed the jury trial issue and reached inconclusive results. Ultimately, this Court relied on its own analysis to determine that the Trustee’s consent to trial by jury was timely. Exhibit 1 admitted into evidence at the Fee Hearing attributes $10,288.00 to the jury trial issue.
A third category of services that occupied a significant portion of K & G’s time is the Trustee’s Motion for Summary Judgment and the Trustee’s Opposition to Frankel’s Cross-Motion for Summary Judgment. Exhibit 1 attributes in excess of $24,600.00 to the cross motions for summary judgment. This Court held a hearing on the cross motions for summary judgment on December 13, 2010. At that hearing, the Court denied the Trustee’s Motion for Summary Judgment, without prejudice, because the Trustee failed to address a necessary element to grant the relief requested. The Trustee was given one week to supplement his motion. However, before this Court was required to *71rule on the Trustee’s Supplemental Motion for Summary Judgment, Assistant United States Trustee Gerard Vetter brokered a settlement resolving the Adversary Proceeding in its entirety.
The Trustee testified in support of the Fee Application at the Fee Hearing. The Trustee testified that the Adversary Proceeding needed to be prosecuted and not abandoned in order to protect his reputation as a trustee who will not settle in the face of a litigious adversary. The objections, on the other hand, ask this Court to deny any compensation to K & G because their services provided no benefit to the Estate. Relying on In re Taxman, the United States Trustee argues that the fees incurred were not reasonable and/or necessary, and that K & G breached its fiduciary duty to the estate. According to Mr. Vetter, and as reflected in the record of this case, the Adversary Proceeding was one of the last adversary proceedings left to be resolved. At the point in time that K & G entered the case, there was no benefit to continuing the litigation because the attorney’s fees and costs would exceed any financial benefit to the estate.
As previously stated, K & G was retained by the Trustee because of its expertise in professional responsibility matters. From the inception of K & G’s retention on May 4, 2010, to the hearing on June 22, 2010, where the Trustee’s disqualification motion was denied, K & G incurred $36,921.00 in fees. The time records attached to the Fee Application reflect that during this time, K & G dealt with the disqualification issue, discovery issues, cross-motions for sanctions, and Frankel’s recusal motion. Applying the objective standard adopted in In re Vu to the circumstances of this case, it is reasonable to assume that had David Frankel been disqualified from representing his wife, the litigious nature of this proceeding may have disappeared and a settlement most likely would have been reached earlier — similar to the other twenty adversary proceedings settled by the Trustee in this case. After the June 22, 2010 hearing when David Frankel was not disqualified, K & G and the Trustee had reason to know, based on the multiple filings in the Adversary Proceeding up to that point, that this case should be immediately settled or abandoned as having no benefit to the Estate. The Trustee’s position that his reputation needed to be upheld was untenable at that stage in the case. The creditors of the Estate should not bear the burden of legal fees that could never be recouped. By June 22, 2010, the legal fees and costs between the two firms was approaching $100,000.00 to collect a maximum recovery of $10,600.00. Accordingly, this Court will not award any fees that were incurred after the June 22, 2010 hearing because any services rendered after that date provided no benefit to the Estate and were not reasonable. As set forth in In re Vu, it is at that point that a reasonable attorney would have believed that further services would provide no benefit to the Estate. In re Vu, 366 B.R. at 517.
Now that the Court has determined the initial fee award, it must determine whether that amount warrants a further adjustment after considering the remaining Johnson factors. See Anderson v. Morris, 658 F.2d at 249. As for the second Johnson factor — the novelty and difficulty of the questions involved — this matter involved a $10,600.00 preference action and was one of thirty preference actions commenced by the Trustee in this bankruptcy case. K & G asserts that although this case did not present any particularly novel questions, the case involved a number of difficult issues stemming from the “enormous volume of Frankel’s fil*72ings.... ” This Court agrees that the Adversary Proceeding presented some challenging issues.
The third Johnson factor — the skill required to properly perform the legal services rendered — will be addressed below in the context of the ninth Johnson factor.
With respect to the fourth Johnson factor — the attorney’s opportunity costs in pressing the instant litigation — the Fee Application makes clear that K & G dedicated substantial resources to its representation of the Trustee. The Court, however, has insufficient information to find that K & G’s work on this matter caused it to divert its attention from other potentially remunerative matters.
In addressing the sixth Johnson factor — the attorney’s expectations at the outset of the litigation — K & G states that it expected to be compensated for its work regardless of whether any recovery was obtained for the Trustee. With respect to this factor, the Court notes that K & G was aware that any compensation sought in connection with this matter would be subject to review and approval by this Court. Further, early in its representation of the Trustee, K & G knew that this Court was concerned about the amount of fees incurred in this matter and was assured by the Trustee that he would personally bear the burden of the litigation costs to protect K & G. The Trastee is now asking the Estate to bear that burden.
With respect to the eighth Johnson factor — the amount involved and the results obtained — and as set forth in the Fee Application, the Adversary Proceeding sought to avoid and recover $10,600.00 paid by the Debtor to Frankel during the ninety-day period preceding the Debtor’s bankruptcy filing. The Assistant United States Trustee ultimately brokered an agreement for Frankel to pay $7,500.00 to the Estate in settlement of the Adversary Proceeding.
In addressing the ninth Johnson factor — the experience, reputation and ability of the attorney — the Fee Application states that K & G is highly experienced and qualified in litigation, and that attorney Kevin Arthur has particular experience in litigation relating to ethical matters, which was particularly relevant to this proceeding. The Court has no reason to disagree with this analysis.
The last Johnson factor — attorney’s fees awarded in similar cases — was not discussed in the Fee Application and is not relevant to the unique circumstances of this case.
In sum, the remaining Johnson factors do not warrant a further adjustment of the amount awarded to K & G.
IV. Conclusion
For the reasons set forth herein, K & G is awarded attorney’s fees in the amount of $36,921.00, plus $2,702.96 for the reimbursement of their out-of-pocket expenses incurred in connection with this matter. A separate Order will issue.
. The Fee Application states that Mr. Arthur’s standard hourly rate is $450.00; however, he agreed to bill his time on this matter at $350.00 per hour "because this is the most favorable rate that he is permitted to afford to any client."
. The Court notes that the rates charged by K & G are considerably less than (he rates charged by former counsel to the Trustee, Shapiro Sher, whose fee application reflects a billing range of $175.00 to $470.00 per hour. See Dkt. No. 231. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494574/ | AMENDED1 ORDER ON MOTION TO DISMISS
HELEN E. BURRIS, Bankruptcy Judge.
THIS MATTER came before the Court for hearing pursuant to the Amended Motion to Dismiss filed by Defendant Citi-Mortgage, Inc.2 and Plaintiffs’ Objection thereto.3
I.Background and Relevant Facts
Plaintiffs’ Introduction in the Complaint states that this adversary proceeding is an action to: object to CitiMortgage’s proof of claim; object to CitiMortgage’s Motion for Relief from Stay filed in Plaintiffs’ bankruptcy case4; recover actual, statutory and punitive damages as well as costs and attorney’s fees as a result of CitiMort-gage’s violations of state and federal law including breach of contract, fraud on the court, failure to comply with the Home Affordable Modification Program (“HAMP”) and Home Affordable Refinance Program (“HARP”), violations of the Truth-in-Lending Act (“TILA”), violations of the South Carolina Unfair Trade Practices Act (“SCUTPA”) and the South Carolina Consumer Protection Code (“SCCPC”), and committing the unauthorized practice of law; for injunctive relief to prohibit future violations of the Bankruptcy Code; and for an accounting of all funds CitiMortgage has received from Plaintiffs’ bankruptcy estate on account of the note and mortgage that are the subject of this adversary proceeding.5 Plaintiffs Introduction also states that this action is to determine the secured status of Citi-Mortgage and to recover actual and punitive damage for filing a false and fraudulent proof of claim.6
Plaintiffs organize their twenty-nine (29) page Complaint (plus attachments) into thirteen causes of action, some of which request affirmative relief. Other “causes of action” or portions thereof are actually allegations defending against the enforcement of CitiMortgage’s note, mortgage and the allowance of CitiMortgage’s claim.
CitiMortgage contends that all causes of action should be dismissed pursuant to Fed.R.Civ.P. 12(b)(6).7 CitiMortgage argues that Plaintiffs have not alleged facts that support any relief and more specifical*87ly, that Plaintiffs are precluded from revisiting the issues set forth in much of the Complaint because they contradict the confirmed Chapter 13 plan or present issues arising from the same set of facts that could or should have been raised prior to confirmation. For the reasons discussed below, the Court finds that CitiMortgage’s Motion to Dismiss should be granted in part and denied in part.
A. Plaintiffs’ Allegations8
Plaintiffs executed a Note and Mortgage in favor of The Peoples National Bank (“Peoples”) on May 31, 2002. The principal amount of the Note was $112,000. The Mortgage securing the Note describes the collateral as Plaintiffs’ residence located at 1089 Martin Road, Honea Path, South Carolina in Abbeville County, and it was recorded in record book 13-Z at page 593.9 Section 9 of the Mortgage, titled “Protection of Lender’s Interest in the Property and Rights Under this Security Instrument,” provides that if:
there is a legal proceeding that might significantly affect Lender’s interest in the Property and/or rights under this Security Instrument (such as a proceeding in bankruptcy, probate, for condemnation or forfeiture, for enforcement of a lien which may attain priority of this Security Instrument or to enforce laws or regulations), reasonable or appropriate ... then Lender may do and pay for whatever is reasonable or appropriate to protect Lender’s interest in the Property and rights under this Security Instrument, including protecting and/or assessing the value of the Property, and securing and/or repairing the property. Lender’s actions can include, but are not limited to: ... (b) appearing in court; and (c) paying reasonable attorneys’ fees to protect its interest in the Property and/or rights under this Securing Instrument, including its secured position in a bankruptcy proceeding....
Any amounts disbursed by Lender under this Section 9 shall become additional debt of Borrower secured by this Security Instrument. These amounts shall bear interest at the Note rate from the day of disbursement and shall be payable, with such interest, upon notice from Lender to Borrower requesting payment.10
In addition, under the “Acceleration” section of the Mortgage, the Lender is “entitled to collect all expenses incurred in pursuing the remedies provided in this Section 22, including, but not limited to, reasonable attorneys’ fees and costs of title evidence, all of which shall be additional sums secured by this Security Instrument.” 11
An assignment from Peoples to Mortgage Electronic Registration Systems, Inc. (“MERS”), as nominee for GMAC Mortgage Corporation was recorded in record book 13-Z at Page 607 on June 6, 2002.12 A corrective assignment from Peoples to ABN AMRO Mortgage Group, Inc. (“ABN AMRO”) was also recorded on June 6, 2002, in record book 13-Z at page 607.13 *88There is also an “Allonge to Mortgage Note” signed by an authorized officer for Peoples to ABN AMRO.14
On December 14, 2009, CitiMortgage filed a foreclosure action against Plaintiffs in the Court of Common Pleas for Abbe-ville County.15 The foreclosure complaint alleges that CitiMortgage is the holder of the Note and Mortgage encumbering Plaintiffs’ residence and that the loan is in default and due for June 1, 2009. Before the foreclosure was completed, Plaintiffs filed a voluntary petition for Chapter 13 relief on July 19, 2010.
Plaintiffs’ Chapter 13 plan16, referenced in the Complaint, utilized the form plan approved for use in this district.17 The relevant provisions of Plaintiffs’ amended plan are identical to those set forth in Nix v. Household Fin. Corp. II (In re Nix), C/A No. 10-01103-HB, Adv. Pro. No. 11-80062, slip op. at 3-5, 2012 WL 27667 (Bankr.D.S.C. Jan. 5, 2012).18 However, in the instant proceeding, the proposed plan payments were for $400 per month from Plaintiffs to the Chapter 13 Trustee for a period of thirty-six (36) months, to be distributed to creditors pursuant to terms therein. In addition, the portion of the plan payment distributable to CitiMort-gage for the arrearage on its claim was $264 or more per month.
Prior to confirmation, CitiMortgage filed a proof of claim.19 CitiMortgage’s August 4, 2010, claim indicated that it was a secured claim, attached copies of the note, first mortgage, and allonge to mortgage note referenced above, and indicated an arrearage on the note of $15,107, presented for payment from the trustee, and a principal balance at that time of $96,506.54.20 The attached Arrearage Statement itemized the charges included in CitiMortgage’s claim. Thereafter on August 27, 2010, Plaintiffs filed an amendment to the plan for the purpose of extending the term of the plan to forty-nine (49) months.21 The plan was confirmed without objection on October 6, 2010.22
On March 18, 2011, approximately six (6) months after confirmation, CitiMortgage filed a Motion for Relief from Stay.23 This *89motion asserts that Plaintiffs have not made their post-petition payments in accordance with the terms of the Note, Mortgage, and Chapter 13 plan for the November 1, 2010, payment forward. Accordingly, CitiMortgage claimed that it was entitled to relief from the automatic stay pursuant to 11 U.S.C. § 362(d).24 Plaintiffs filed an Objection to this motion shortly thereafter.25
On March 23, 2011, Plaintiffs amended their Schedule D to indicate that CitiMort-gage’s debt at issue was disputed and to “reserve[ ] their rights to seek redress under any applicable state or federal consumer protection law, by way of vitiation of the lien, damages, setoff or recoupment against the claim at issue, and for costs and attorney fees.”26 Around the same time, Plaintiffs sent CitiMortgage and its attorney of record a Qualified Written Request (“QWR”), pursuant to the Real Estate Settlement Procedures Act (“RES-PA”), 12 U.S.C. § 2605(c).27 Plaintiffs’ QWR asks CitiMortgage to produce certain requested information relating to Plaintiffs’ account.28 Plaintiffs assert that CitiMortgage’s response to their QWR, dated April 12, 2011, was insufficient. Ci-tiMortgage’s response included the production of certain documents29 as well as answers to those questions that CitiMort-gage believed it was obligated to answer under RESPA.
Thereafter, Plaintiffs filed this adversary proceeding on May 4, 2011. In their Complaint, Plaintiffs allege that this Court has jurisdiction over the parties and subject matter of this proceeding pursuant to 28 U.S.C. §§ 157 and 1334. Plaintiffs also claim that this matter is a core proceeding as defined by 28 U.S.C. § 157 and that this is a matter arising in a case under Title ll.30 Defendant has not raised any challenge to those allegations in its Motion.
B. Causes op Action
CitiMortgage’s Motion asserts that Plaintiffs’ pursuit of certain pre-confirmation matters in this adversary proceeding is precluded by confirmation of the plan. The following labeled causes of action (or *90portions thereof) in the Complaint31 are based on pre-confirmation activity: 1) Count I, objection to the proof of claim filed by CitiMortgage and that CitiMort-gage lacks status of “holder ” — as to any challenge that existed pre-confirmation; 2) Count III, violation of 11 U.S.C. §§ 105 and 506 Contempt of Court Order,32 com-plaining of CitiMortgage’s charging and assigning legal fees and expenses to Plaintiffs’ mortgage loan — to the extent that it involves any pre-confirmation acts; 3) Count V, fraud on the court, complaining of CitiMortgage’s representations found in its claim and its assignment of the Note and Mortgage; 4) Count VII, securitization disclosure — to the extent that it questions whether CitiMortgage was the holder of the Note and Mortgage prior to confirmation; 5) Count VIII, failure to comply with HAMP/HARP by not offering Plaintiffs a loan modification prior to initiating the pre-petition foreclosure proceeding; 6) Count XI, SCUTPA — it appears that both pre- and post-confirmation acts may be referenced in this cause of action; 7) Count XII, unauthorized practice of law with regard to CitiMortgage’s preparation of the loan documents presented to Plaintiffs at the closing without the supervision of a South Carolina licensed attorney; and 8) Count XIII, attorney preference— SCCPC, asserting that CitiMortgage did not ascertain prior to closing Plaintiffs’ preference for legal counsel to represent them in the transaction.
The following are also included in the Complaint but do not involve pre-confirmation activity: 1) Count I, objection to the proof of claim filed by CitiMortgage and that CitiMortgage lacks status of “holder ” — to the extent that Plaintiffs challenge any post-confirmation acts, charges, fees, payment application, or transfer of ownership of the Note and Mortgage post-confirmation; 2) Count II, violation of the automatic stay; 3) Count III, violation of 11 U.S.C. §§ 105 and 506 contempt of court order — to the extent that it relates to any post-confirmation expenses, fees, or interest claimed by CitiMortgage; 4) Count TV, breach of contract; 5) Count VI, demand for accounting; 6) Count VII, securitization disclosure — to the extent that it relates to any post-confirmation transfer of interest in Note and Mortgage; 7) Count IX, failure to provide identity of holder of original mortgage note pursuant to Section 1611(f)(2) of TILA and failure to respond to QWR; and possibly 8) Count XI, SCUTPA — to the extent that it involves allegations of post-confirmation conduct.
II. Discussion of Applicable Law
A. Standard Of Review
CitiMortgage has moved for dismissal of the Complaint for failure to state a claim upon which relief can be granted or alternatively, for a judgment on the pleadings in its favor pursuant to Fed.R.Civ.P. 12(c). The standards the Court will apply to review the Rule 12(b)(6) and Rule 12(c) motions are set forth in Nix, Adv. Pro. No. 11-80062, slip op. at 8-9. The Court finds that the pleadings have not closed; therefore, the Court may not consider a judgment on the pleadings under Fed.R.Civ.P. 12(c).33 Instead, the Court will review the *91allegations of the Complaint pursuant to the Rule 12(b)(6) standard.
B. The Preclusive Effect of Plan Confirmation
CitiMortgage’s first argument in support of its Motion asserts that the preclu-sive effects of plan confirmation and res judicata, judicial estoppel, equitable estop-pel, and waiver bar Plaintiffs’ pursuit of all causes of action or challenges in the Complaint arising from conduct or events that took place prior to confirmation of the plan or that existed pre-confirmation. Plaintiffs counter, asserting that the reservation of rights provisions in their confirmed plan specifically contemplate Plaintiffs’ ability to assert these causes of action post-confirmation.
The facts surrounding confirmation of Plaintiffs’ plan in the instant case are parallel to those considered in Nix. Plaintiffs were proponents of a plan explicitly providing that the creditor in question holds a claim secured by Plaintiffs’ principal residence, affirming the continued application of the pre-petition agreement, addressing an acknowledged default, and requiring contractual payments to continue. As a result of the preclusive effects of res judicata and § 1327(a), Plaintiffs may not revisit these issues in this adversary proceeding.
The plan also contained a general reservation of rights identical to the clause discussed in Nix.34 For the reasons discussed in Nix, the Court finds that the blanket reservation of rights in the form plan, without more, is insufficient to defeat creditor CitiMortgage’s assertion of res ju-dicata as a defense to Plaintiffs’ causes of action arising from pre-confirmation activity. Id. at 10-16. Just as in Nix, the language of the confirmed plan and the facts of this case prevent Plaintiffs from challenging CitiMortgage’s claim or asserting causes of action based on pre-confirmation conduct, except for challenges to the allowance of the claim when applying the terms of the pre-petition contract between the parties as modified by the plan and only to the extent that the challenge is not contrary to matters finally determined in this case by confirmation, including disputes that could or should have been raised pre-confirmation arising from the same set of facts.
Considering the preclusive effect of the confirmation order and viewing the allegations of the Complaint in the light most favorable to the Plaintiffs, the Court finds that the following causes of action, based on allegations of pre-confirmation activity, should be dismissed in their entirety: 1) Count V, fraud on the court; 2) Count VIII, failure to comply with HAMPf HARP; 3) Count XII, unauthorized practice of law; and 4) Count XIII, attorney preference — SCCPC.
The following causes of action should be dismissed in part: 1) Count I, objection to the proof of claim filed by CitiMortgage and that CitiMortgage lacks status of “holder” (except as qualified above); 2) Count III, violation of 11 U.S.C. §§ 105 *92and 506 Contempt of Court Order — to the extent that it involves pre-confirmation acts, if any; 3) Count VII, securitization disclosure — to the extent that it is based on allegations of pre-confirmation activity; and 4) Count XI, SCUTPA — to the extent that it involves pre-confirmation conduct.
C. Request to Dismiss Remaining Causes of Action
Plaintiffs’ remaining causes of action challenged by CitiMortgage’s Rule 12(b)(6) Motion on other grounds are: 1) Count I, objection to the proof of claim filed by CitiMortgage and that CitiMortgage lacks status of “holder ” — to the extent that it is based on post-confirmation acts; 2) Count III, violation of 11 U.S.C. §§ 105 and 506 contempt of court order — to the extent that it relates to any post-confirmation expenses, fees, or interest claimed by Citi-Mortgage; 4) Count VI, demand for accounting; I) Count VII, securitization disclosure — to the extent that it relates to any post-confirmation transfer of interest in Note and Mortgage; 5) Count IX, failure to provide identity of holder of original mortgage note pursuant to Section 1611(f)(2) of TILA and failure to respond to QWR; and 6) Count XI, SCUTPA — to the extent that it involves post-confirmation conduct.
1. Objection to Proof of Claim and that Creditor Lacks Status of “holder ”
Regarding Plaintiffs’ remaining cause of action and challenges under the objection to claim heading, the Court cannot find from a review of the Complaint and applicable law that Plaintiffs are precluded from pursing any challenges to allowance of the claim based on any post-confirmation actions of CitiMortgage, unless otherwise discussed herein.
2. 11 U.S.C. §§ 105 and 506, Contempt of Court Order
In this section of the Complaint, Plaintiffs assert the following:
The actions of Defendant in charging post-petition fees and expenses as alleged herein without any prior notice to or approval by the Court constitute willful, intentional, gross and flagrant violations of the provisions of 11 U.S.C. §§ 105(a) and 506(b) and Rule 2016(a) of the Federal Rules of Bankruptcy Procedure. ...
Plaintiffs allege that the conduct of the Defendant in charging and assigning legal fees and expenses to their mortgage loan “before” such fees were approved by this Court and in an amount “in excess” of the fees and expenses typically approved by this Court constitutes actions in contempt and in violation of the Chapter 13 Plan....
Plaintiffs allege that this Court should impose serious and severe sanctions against the Defendant for assessing and charging the Plaintiffs’ loan account with legal fees and charges in excess of the amounts requested and actually approved by this Court.35
CitiMortgage argues that this portion of the Complaint fails to state a viable claim.36
Section 506(b) of the Code allows ov-ersecured creditors to add reasonable post-petition interest, costs, or charges to *93the amount of their secured claim.37 These additions are based on post-petition events “such as the accrual of interest and the incurring of legal expenses that the underlying contract permits the creditor to ‘shift’ to the debtor.” Padilla v. GMAC Mortg. Corp. (In re Padilla), 389 B.R. 409, 438 (Bankr.E.D.Pa.2008).
Some courts have “rel[ied] on 11 U.S.C. § 506(b), Fed. R. Bankr.P.2016 and equitable and due process concerns as the basis for the holding that postpetition legal expenses added to a chapter 13 debtor’s mortgage account must be disclosed and, in the view of some courts, formally allowed.” Id. at 435 (footnote omitted). However, the court in Padilla went on to find that:
Section 506(b) cannot serve as the universal Bankruptcy Code provision for evaluating whether a secured creditor has a duty to give notice and seek court approval before assessing postpetition legal expenses against the debtor’s account because it is not applicable to many, if not most, secured claims that are treated in a plan under § 1322(b)(5).
Id. at 438; see also Patterson v. Homecomings Fin., LLC (In re Patterson), 444 B.R. 564, 569 (Bankr.E.D.Wis.2011) (describing Padilla as the seminal case on whether § 506(b) requires bankruptcy court approval of a mortgage creditor’s post-petition fees).
Section 506(b) is inapplicable to plans utilizing § 1322(b)(5)38 because § 1322(e), by its very terms, trumps the applicability of § 506(b) to these Chapter 13 plans. Id. at 439 (citing In re Thompson, 372 B.R. 860, 863 (Bankr.S.D.Ohio 2007)). Section 1322(e) states that “[notwithstanding ... section[ ] 506(b) ... of this title, if it is proposed in a plan to cure a default, the amount necessary to cure the default shall be determined in accordance with the underlying agreement and applicable nonbankruptcy law.” 11 U.S.C. § 1322(e) (emphasis added). Therefore, the Court concludes that § 1322(e) — not § 506(b) — determines whether CitiMortgage’s act of charging post-petition fees without an application and prior court approval was improper because Plaintiffs utilized § 1322(b)(5) in their plan’s treatment of CitiMortgage’s claim.39 Consequently, the portion of Plaintiffs’ cause of action asserting a violation of § 506(b) cannot survive the Motion and the Court need not address its abilities, if any, under § 105(a) to grant a claim for relief relying on a violation of § 506(b).
*94A remaining portion of Plaintiffs’ cause of action asserts that CitiMortgage’s assessment of post-petition charges also violated Rule 2016(a) of the Federal Rules of Bankruptcy Procedure. Rule 2016(a) requires that “[a]n entity seeking interim or final compensation for services, or reimbursement of necessary expenses, from the estate shall file” a detailed application with the bankruptcy court. Fed. R. Bankr.P. 2016(a).40 The court in Yancey v. Citifinancial, Inc. (In re Yancey), 301 B.R. 861 (Bankr.W.D.Tenn.2003), addressed this exact issue and concluded that Rule 2016(a) did not provide a claim for relief because “[a] private cause of action is a substantive right, not a procedural one, and ... § 105(a) cannot, standing alone, create a private right of action.” Id. at 868. Therefore, Plaintiffs’ action asserting a violation of Rule 2016(a) independently, or in concert with § 105, cannot survive the Motion.
Finally, the Court turns its attention to Plaintiffs’ assertion that CitiMortgage is in contempt of the Chapter 13 plan or this Court’s confirmation order as a result of its addition of post-petition fees and expenses without any prior notice or approval by the Court. Plaintiff has not asserted that any particular plan provision attempted to alter the terms of the contract between the parties on this particular point. Therefore, applying § 1322(e) as is appropriate in this case, the Court must look to the Note and Mortgage attached to and incorporated into the Complaint to determine what was required of CitiMortgage prior to adding post-petition fees to Plaintiffs’ account.41 A review of the terms of the Mortgage does not indicate that Citi-Mortgage has violated its terms on this point.42 Therefore, the post-confirmation portion of the cause of action under the heading Count III, violation of 11 U.S.C. §§ 105 and 506, contempt of court order should be dismissed in its entirety.
3. Demand for Accounting
For the reasons set forth in Nix, the Court finds that Plaintiffs have an adequate remedy at law, precluding the pursuit of this action in equity. Adv. Pro. No. 11-80062, slip op. at 18-19. CitiMort-gage’s alleged misapplication of payments and charges for certain fees serve as the bases for Plaintiffs’ causes of action for violation of the automatic stay and breach of contract causes as well as this claim. Because Plaintiffs seek the same relief in actions at law—-violation of the automatic stay under § 362(k) and breach of contract—and in equity—demand for accounting—the Court concludes that the causes of action based in law are sufficient and, consequently, Plaintiffs are precluded from also asserting a demand for accounting. See id. at 19.
*95
4. Securitization Disclosure
As stated above, to the extent that this cause of action relies on allegations of pre-confirmation acts, it must be dismissed. Any residual portion of this cause of action asserting that CitiMortgage failed to prove it is the holder of the Note and Mortgage by not producing a copy of a pooling and service agreement in response to Plaintiffs’ QWR, and requesting a money judgment, must be dismissed as well.
A “qualified written request” consists of written correspondence from a borrower that identifies the borrower and account at issue, and “includes a statement of the reasons for the belief of the borrower ... that the account is in error or provides sufficient detail to the servicer regarding other information sought by the borrower.” 12 U.S.C. § 2605(e)(1)(B). The QWR must request “information relating to the servicing of [the] loan ...” Id. § 2605(e)(1)(A). RESPA defines “servicing” as:
receiving any scheduled periodic payments from a borrower pursuant to the terms of any loan ... and making the payments of principal and interest and such other payments with respect to the amounts received from the borrower as may be required pursuant to the terms of the loan.
Id. § 2605(i)(3). The request for a copy of a pooling and service agreement does not fall within the meaning of “servicing.” See Griffin v. Am. Home Mortg. Serv., Inc. (In re Griffin), Adv. Pro. No. 10-08361-rdd, 2010 WL 3928610, at *5 (Bankr.S.D.N.Y. Aug. 31, 2010) (finding that the debtors’ request for a copy of the mortgage pooling and servicing agreement in their QWR was outside the “definition of information that -should be responded to in the QWR” because it goes beyond information related to loan servicing and appears to be “sought to assist the debtors, perhaps, in the potential negotiation of the loan and/or challenging the bona fides of the loan as it was originated”).43
Therefore, the Court concludes that the request for a copy of the pooling and servicing agreement and any request relating thereto are outside the scope of inquiry for a QWR. Accordingly, any remaining portion of this cause of action based on these allegations must be dismissed.
5. Failure to Provide Identity of Holder of Original Mortgage Note Pursuant to IS U.S.C. § 1641(F)(2) of TILA and Failure to Respond to QWR
For the reasons set forth in Nix, the Court finds that Plaintiffs’ assertion of damages without any supporting facts as to how they were damaged is insufficient to establish a claim for violation of RES-PA. Adv. Pro. No. 11-80062, slip op. at 19-23. Therefore, even if CitiMortgage did not comply with the RESPA provisions pertaining to QWRs, 12 U.S.C. § 2605, Plaintiffs failed to sufficiently allege that they suffered actual and/or statutory damages resulting from CitiMortgage’s alleged *96RESPA violation. Accordingly, cause exists to dismiss this cause of action.
6. SCUTPA
For the reasons set forth in Nix, the Court finds that Plaintiffs’ recitation of the elements of a SCUTPA claim without providing any factual basis as to what actions undergone by CitiMortgage constitute a violation of SCUTPA is insufficient to establish a claim. Adv. Pro. No. 11-80062, slip op. at 28-24. The Court also questions as a matter of law whether an alleged violation of the automatic stay, in itself, is sufficient to bring a separate claim for violation of SCUTPA. Therefore, the Court finds that Plaintiffs failed to sufficiently allege a claim for violation of SCUTPA. Consequently, cause exists for dismissal of this claim in its entirety.
D. Remaining Claims for Relief Not Addressed in Motion to Dismiss
Plaintiffs assert that confirmation of their Chapter 13 plan created a new and binding contract between themselves and CitiMortgage.44 Plaintiffs claim that Citi-Mortgage breached the specific terms this contract and violated the automatic stay.45 The court notes that CitiMortgage’s Motion did not request dismissal of these causes of action. Therefore, Count II, violation of the automatic stay and Count TV, breach of contract remain for consideration by the Court.
III. Conclusion
For the reasons discussed above, the following causes of action are hereby DISMISSED: 1) Count I, objection to the proof of claim filed by CitiMortgage and that CitiMortgage lacks status of “holder”—as to any causes of action or challenges to the claim resulting from pre-confirmation conduct of CitiMortgage or causes of action Plaintiffs could have asserted pre-confirmation (except as indicated below); 2) Count III, violation of 11 U.S.C. §§ 105 and 506 contempt of court order; 3) Count V, fraud on the court; 4) Count VI, demand for accounting; 5) Count VII, securitization disclosure; 6) Count VIII, failure to comply with HAMP/HARP; 7) Count XI, SCUTPA— to the extent that it involves pre-confirmation conduct; 8) Count XII, unauthorized practice of law; and 9) Count XIII, attorney preference—SCCPC.
Further, Plaintiff shall have fourteen (14) days from entry of this Order to amend the Complaint to cure any pleading deficiencies for the following in a manner consistent with this Order: 1) Count IX, failure to provide identity of holder of original mortgage note pursuant to Section 1611(f)(2) of TILA and failure to respond to QWR; and 2) Count XI, SCUT-PA—to the extent that it relates to any post-confirmation activity. If Plaintiffs fail to do so within that time, these causes of action are also DISMISSED.
Finally, CitiMortgage’s Motion to Dismiss is DENIED as to Count I, objection to the proof of claim filed by CitiMortgage and that CitiMortgage lacks status of “holder”—to the extent that Plaintiffs’ causes of action or challenges are based on post-confirmation conduct of CitiMortgage, or involve challenges to the allowance of the claim when applying the terms of the pre-petition contract between the parties as modified by the plan and only to the extent that the challenge is not contrary to matters finally determined in this case by confirmation, including disputes that could or should have been raised pre-confirmation arising from the same set of facts. Further, because not addressed or chal*97lenged in CitiMortgage’s Motion, the following causes of action remain a part of this adversary proceeding: 1) Count II, violation of the automatic stay; and 2) Count IV, breach of contract.
AND IT IS SO ORDERED.
. This Order corrects a minor error with regard to the details of Plaintiffs’ Chapter 13 plan payments and changes internal references in footnote 41 (previously footnote 40).
. Doc. No. 13, filed July 26, 2011.
. Doc. No. 19, filed Oct. 12, 2011.
. In re Ginn, C/A No. 10-05107-HB (Bankr. D.S.C. July 19, 2010).
. Doc. No. 1 at 1-2, ¶ 1, filed May 4, 2011.
. Id, at 2, ¶¶ 2-3.
. Fed.R.Civ.P. 12(b)(6) is made applicable to this adversary proceeding by Fed. R. Bankr.P. 7012.
. This portion of the Order includes relevant allegations from Plaintiffs’ Complaint and documents attached or referenced therein. (Doc. No. 1).
. Id. at Ex. A & B.
. Id. at Ex. A at 7, § 9 (emphasis added).
. Id. at Ex. A at 12, § 22.
. Id. at Ex. C.
. The assignment from Peoples to ABN AMRO includes the following typed notation: “THIS IS A CORRECTIVE ASSIGNMENT WHICH IS BEING RECORDED TO REPLACE THAT ASSIGNMENT WHICH WAS RECORDED ON BOOK 13-Z AT PAGE 593 ON Jun. 6, 2002. THE MORTGAGEE WAS *88LISTED INCORRECTLY AND IS HEREBY CORRECTED.” Id. at Ex. D.
. Doc. No. 22, C/A No. 10-05017-HB.
. Doc. No. 1 at Ex. G.
. Doc. No. 3, C/A No. 10-05107-HB (filed July 19, 2010).
. See SC LBR 3015-1 (requiring every Chapter 13 debtor to complete the form plan or to file a plan in substantial conformance with the form plan). Alterations to the form plan are permitted as follows:
A. Additions, Modifications, or Deletions: All additions or modification to the Court's form plan ... are highlighted by italics. Deletions are noted as "Not Applicable” or by striking through the deleted provisions. If changes are substantial or if an alternative plan is proposed, a cover sheet that summarizes and identifies the changes shall be file and served herewith.
SC LBR 3015-1, Ex. A, at ¶ 1(A).
. Arguments in the Nix case were heard with this matter and their facts intersect to some degree.
. POC 5-1, C/A No. 10-05107-HB, filed Aug. 4, 2010.
. Id.
. Doc. No. 15, C/A No. 10-05107-HB.
. Doc. No. 19, C/A No. 10-05107-HB.
. Doc. No. 1 at 8, ¶ 33; see also Doc. No. 22, C/A No. 10-05017-HB. The Motion for Relief from Stay was referenced in the Complaint, and it attached copies of the following items: the Note; the Allonge to Mortgage Note; the Mortgage; the Assignment of Mortgage to MERS from The Peoples Bank; and the corrective Assignment of Mortgage to ABN AMRO Mortgage Group from The Peoples Bank.
. Further reference to the Bankruptcy Code, 11 U.S.C. § 101 et seq., will be by section number only.
. Doc. No. 23, C/A No. 10-05017-HB, filed Mar. 23, 2011.
. Doc. No. 1 at 8, ¶ 37.
. Id. at Ex. E.
. Id. Reference is made to the QWR and the full content will not be repeated here, as it included approximately six (6) pages of various questions and requests.
. Id. at Ex. F. CitiMortgage’s response included the following documents:
a. a copy of the Note;
b. a copy of the Mortgage (without Exhibit A, the legal description, attached);
c. a "Consolidated Note Report” dated 04/13/11;
d. a "Payment History Transaction Codes”;
e. a copy of the an Assignment of Mortgage from Peoples to ABN AMRO recorded July 26, 2002 in Book 14-B at Page 637;
f. a copy of an Allonge to Mortgage Note from Peoples to ABN AMRO;
g. a payment ledger for Plaintiffs' account since the filing of the petition (from July 13, 2010, to March 24, 2011);
h. a “Representation of Printed Document” August 21, 2007 letter from ABN AMRO Mortgage to Plaintiffs advising Plaintiffs that CitiMortgage will be the new servicer of their loan effective September 15, 2007;
i. an "Escrow Analysis Cash Flow Statements” dated 04/12/11; and
j. three (3) Work Order Updates from Safeguard Properties for inspections performed January 12, 2011, February 11, 2011 and March 15, 2011
.Id. at 2, ¶¶ 6-7.
. Plaintiffs consented to the dismissal of Count X, Fair Debt Collection Practices Act (''FDCPA'’) and voluntarily withdrew this cause of action. (Doc. No. 19 at 30).
. This cause of action likely applies only to post-confirmation acts, but this is not certain given the incorporation of prior paragraphs of the Complaint into this cause of action.
.The Court notes that CitiMortgage's Motion included various matters outside the scope of the Complaint, including certain portions of Plaintiffs' Schedules and Plaintiffs' *91Objection to the Motion for Relief from Stay in the bankruptcy case. However, the Court did not consider these matters when determining its outcome on the instant Motion. Although these matters may be on the docket of the main bankruptcy case, they are not a part of the instant adversary proceeding and were not admitted into evidence. Therefore, the Court need not convert this motion to dismiss into a motion for summary judgment under Fed.R.Civ.P. 12(d). See McBurney v. Cuccinelli, 616 F.3d 393, 410 (4th Cir.2010).
. Doc. No. 19, C/A No. 10-05107-HB ("Nothing herein is intended to waive or affect adversely any rights of the debtor, the trustee, or party with respect to any causes of action owned by the debtor.”).
. Doc. No. 1 at 15-16, ¶¶ 80-81, 83.
. Any portion of this cause of action that may be based on pre-confirmation events is ended by the preclusive effect of the confirmed plan as discussed above and only the portion of this cause of action based on post-confirmation events remains for discussion here. This issue relates to complaints about the method of assessing the fee or expense, not to the Court's determination of the appropriate amount, which is discussed separately above.
. Section 506(b) provides:
To the extent that an allowed secured claim is secured by property the value of which, after any recovery under subsection (c) of this section, is greater than the amount of such claim, there shall be allowed to the holder of such claim, interest on such claim, and any reasonable fees, costs, or charges provided for under the agreement or State statute under which such claim arose.
11 U.S.C. § 506(b) (2010).
. This provision states that the plan may "provide for the curing of any default within a reasonable time and maintenance of payments while the case is pending on any unsecured claim or secured claim on which the last payment is due after the date on which the final payment under the plan is due ...” 11 U.S.C. § 1322(b)(5).
.But see Fed. R. Bankr.P. 3001(c)(2) (effective Dec. 1, 2011) (setting forth additional requirements for filing a proof of claim in an individual debtor's bankruptcy case and allowing sanctions for non-compliance); see also Fed. R. Bankr.P. 3002.1 (effective Dec. 1, 2011) (requiring additional notices for payment changes, fees, expenses, and charges in Chapter 13 cases "to claims that are (1) secured by a security interest in the debtor’s principal residence, and (2) provided for under § 1322(b)(5) of the Code in debtor's plan”).
.It has been recognized by bankruptcy courts that:
The universal practice is that any professional seeking compensation and reimbursement from the bankruptcy estate for services provided to the estate on behalf of a debtor or a trustee is subject to [Rule 2016(a)]. It is less clear whether a creditor’s attorney or other professional asserting a right to compensation or reimbursement of expenses payable by the estate is also subject to the rule.
Padilla v. GMAC Mortg. Corp. (In re Padilla), 389 B.R. 409, 435 n. 43 (Bankr.E.D.Pa.2008) (citations omitted).
. See supra note 38.
. Sections 9 and 22 specifically allow Citi-Mortgage to apply fees and charges to Plaintiff's account that were incurred in the bankruptcy proceedings or any other proceeding that may have significantly affected its interest in Plaintiffs’ residence. Further, Section 22 of the Mortgage only requires CitiMort-gage to give Plaintiffs notice prior to acceleration following Plaintiffs’ breach of any covenant or agreement in the Mortgage. (Doc. No. 1, Ex. A at 12, §§ 9, 22).
. In support of the claim for an award of damages, Plaintiffs' Complaint alleges that Ci-tiMortgage "failed to produce a copy of any pooling and servicing agreement in response to Plaintiffs' QWR," which is immediately followed by the allegation that CitiMortgage “has failed to prove it is the holder of the Note and Mortgage” and that "Plaintiffs are informed, believe, and allege that their loan may have been sold." Id. at 20-21, ¶¶ 121-23 (emphasis added).
It is also noteworthy that courts have recently held that debtors, who are not a party to or third party beneficiary of a pooling and servicing agreement, lack standing to challenge a mortgage's chain of title based on the terms of the pooling and servicing agreement. See, e.g., Correia v. Deutsche Bank Natl. Trust Co. (In re Correia), 452 B.R. 319 (1st Cir. BAP 2011).
. Id. at 17, ¶ 90.
. Id. at 13-14, ¶¶ 68-75; 16, ¶ 88. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494576/ | OPINION
DAVID W. HOUSTON, III, Bankruptcy Judge.
On consideration before the court is a motion for summary judgment filed by the Mississippi Department of Revenue, Pk/a Mississippi State Tax Commission, (“MDR”); a response to said motion hav*109ing been filed by the plaintiff, Richard C. Weiland, Jr., (“debtor”); and the court, having heard and considered same, hereby finds as follows, to-wit:
I.
The court has jurisdiction of the parties to and the subject matter of this adversary proceeding pursuant to 28 U.S.C. § 1834 and 28 U.S.C. § 157. This is a core proceeding as defined in 28 U.S.C. § 157(b)(2)(D.
II.
The debtor filed for relief pursuant to Chapter 7 of the United States Bankruptcy Code on September 13, 2010. MDR was listed on Schedule D as a creditor holding a secured claim. The debtor’s complaint states that he owes MDR pre-petition taxes, penalties, and interest in the approximate amount of $39,140.00. On October 15, 2009, MDR enrolled lien No. 51811430 for 2002 income taxes in the amount of $25,124.00, and on November 10, 2009, MDR enrolled lien No. 51726658 for 2005 income taxes in the amount of $11,754.72. Therefore, the debtor’s outstanding liability as of the petition date according to MDR was $39,140.00, plus interest at 12% per annum.
The debtor filed his complaint to determine the dischargeability of the 2002 and 2005 taxes asserting that the debts were “dischargeable pursuant to 11 U.S.C. § 523(a)(1)(A), (B), and (C) and/or § 507(a)(3) or § 507(a)(8) and/or other applicable Sections of the bankruptcy code.”1 The complaint is based on the premise that the taxes are dischargeable because they were due more than three years before the date that the debtor’s bankruptcy petition was filed.
To the contrary, MDR asserts that the taxes for these two years are non-dis-chargeable. The debtor’s 2002 income tax return was due April 15, 2003. Pursuant to a certificate furnished by MDR, J. Ed Morgan, the MDR Commissioner of Revenue who is the official custodian of all MDR records, certified that there was no record indicating that a Mississippi income tax return for the 2002 tax year was filed by the debtor. Also, pursuant to an affidavit furnished by MDR, Lisa Chism, the MDR Individual Income Tax Director, advised that MDR’s records reflect that the debtor ultimately filed his 2005 income tax return on June 4, 2007. Ms. Chism further asserted that the latest date allowed for the timely filing of 2005 income tax returns was April 15, 2007. Mississippi taxpayers, such as the debtor, were granted a one year extension to file their 2005 returns from April 15, 2006, because of the effects of Hurricane Katrina.
III.
Summary judgment is properly granted when pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. Bankruptcy Rule 7056; Uniform Local Bankruptcy Rule 18. The court must examine each issue in a light most favorable to the nonmoving party. Anderson v. Liberty Lobby, 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Phillips v. OKC Corp., 812 F.2d 265 (5th Cir.1987); Putman v. Insurance Co. of North America, 673 F.Supp. 171 (N.D.Miss.1987). The moving party must demonstrate to the *110court the basis on which it believes that summary judgment is justified. The non-moving party must then show that a genuine issue of material fact arises as to that issue. Celotex Corporation v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Leonard v. Dixie Well Service & Supply, Inc., 828 F.2d 291 (5th Cir.1987), Putman v. Insurance Co. of North America, 673 F.Supp. 171 (N.D.Miss.1987). An issue is genuine if “there is sufficient evidence favoring the nonmoving party for a fact finder to find for that party.” Phillips, 812 F.2d at 273. A fact is material if it would “affect the outcome of the lawsuit under the governing substantive law.” Phillips, 812 F.2d at 272.
IV.
Mississippi law requires individuals to file their income tax returns by April 15th in the following year after the taxes are due. Miss.Code Ann. § 27-7-41 (1980). Extensions to that deadline may be granted. Miss.Code Ann. § 27-7-50 states in pertinent part:
The Commissioner may grant a reasonable extension of time beyond the statutory due date within which to file any return required by this Chapter when it is shown to the satisfaction of the Commissioner that good cause for such extension exists. The Commissioner may, in his discretion, automatically recognize extensions of time authorized and granted by the Internal Revenue Service for the filing of a tax return.
Miss.Code Ann. § 27-7-50.
Section 523(a)(1)(B) provides as follows: (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—
(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
As a part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”), § 523(a) of the Bankruptcy Code was amended, effective October 17, 2005. It specifically added the following definition of “return” in an unnumbered paragraph inserted immediately after § 523(a)(19), to-wit:
For the purposes of this subsection ‘return’ means a return that satisfies the requirements of applicable non-bankruptcy law (including applicable filing requirements). Such term includes a return prepared pursuant to § 6020(a) of the Internal Revenue Code of 1986, or a similar state or local law, or a written stipulation to a judgement or a final order entered by a non-bankruptcy tribunal, but does not include a return made pursuant to § 6020(b) of the Internal Revenue Code of 1986, or a similar state or local law.
11 U.S.C. § 523(a).
Based on the uncontradicted certificate executed by J. Ed Morgan, which was attached as an exhibit to MDR’s answer, the debtor did not file a tax return for the 2002 tax year. Therefore, the amount owed by the debtor for the 2002 tax year is non-dischargeable pursuant to § 523(a)(1)(B)®.
Pursuant to §§ 27-7-41 and 27-7-50 of Miss.Code Ann., the debtor did not timely file his 2005 Mississippi income tax return that was due on April 15, 2007. *111This is established by the undisputed affidavit of Lisa Chism. While his 2005 tax return was indeed filed, it was over six weeks late. “The definition of ‘return’ in amended § 528(a) means that a late filed” return can not qualify as a return for dischargeability purposes because it does not comply with the “applicable non-bankruptcy law ‘including applicable filing requirements’.” See, Creekmore v. Internal Revenue Service, 401 B.R. 748, 751 (Bankr.N.D.Miss.2008); McCoy v. Miss. State Tax Comm., 3:09-cv-575 (S.D.Miss. February 8, 2011). That part of the debt for the 2005 tax year is non-dischargeable pursuant to § 523(a)(l)(B)(ii), and the last unnumbered paragraph of § 523(a) for the filing of an untimely return.
The court would point out that the debtor’s statements that he is of information and belief that his 2002 state tax return was timely filed, and that extenuating circumstances exist regarding the filing of his 2005 return because of Hurricane Katrina, are insufficient to meet the standard that this court is required to follow in determining whether there are genuine issues of material fact remaining in dispute. The debtor is required to offer some credible evidence rather than unsubstantiated conclusory statements to overcome MDR’s motion for summary judgment, which is supported by sworn documentation.
This court is of the opinion that there are no genuine issues of material fact remaining in dispute in this proceeding. As such, the court concludes that MDR’s motion for summary judgment is well taken.
A separate order will be entered consistent with this opinion to the effect that the tax indebtedness owed by the debtor to MDR is non-dischargeable in the total sum of $39,140.00, plus interest at the rate of 12% per annum.
. Hereinafter, all Code citations will be considered as sections of the U.S. Bankruptcy Code unless specifically designated otherwise. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494577/ | MEMORANDUM OPINION AND ORDER DENYING TOWER LOAN OF MISSISSIPPI, INC.’S MOTION FOR SUMMARY JUDGMENT AND JAVORA STAPLES’ MOTION FOR SUMMARY JUDGMENT
NEIL P. OLACK, Bankruptcy Judge.
There came on for consideration Tower Loan of Mississippi, Inc.’s Motion for Summary Judgment (the “Tower Loan Motion”) (Adv. Dkt. 35)1 and Memorandum Brief in Support of Tower Loan of Mississippi, Inc.’s Motion for Summary Judgment (the “Tower Loan Brief’) (Adv. Dkt. 36) filed by Tower Loan of Mississippi, Inc., d/b/a Tower Loan of Greenville (“Tower Loan”); Javora Staples’ Motion for Summary Judgment (the “Staples Join-der”) (Adv. Dkt. 37) filed by Javora Staples (“Staples”); and Plaintiffs Response to Tower Loan of Mississippi, Inc.’s Motion for Summary Judgment (the “Debtor Response”) (Adv. Dkt. 43) and Plaintiffs Memorandum in Opposition to the Defendants’ Motion for Summary Judgment (the “Debtor Brief’) (Adv. Dkt. 44) filed by the Debtor, Marsha D. Ruffins (“Debtor”), in the above-styled adversary proceeding (the “Adversary”). Also under consideration is Tower Loan of Mississippi, Inc.’s Rebuttal to Plaintiffs Response to Motion for Summary Judgment (Adv. Dkt. 45) filed by Tower Loan. John S. Simpson represents Tower Loan, Nick Crawford represents Staples, and Glenn H. Williams represents the Debtor. Having reviewed the above-referenced pleadings and all the exhibits attached thereto, the Court finds for the reasons set forth below that the Tower Loan Motion and the Staples Joinder are not well taken and should be denied.2
Jurisdiction
This Court has jurisdiction over the subject matter of and the parties to this proceeding. This matter is a core proceeding as defined in 28 U.S.C. § 157(b)(2)(0). Notice of the Tower Loan Motion and the *118Staples Joinder was proper under the circumstances.
Facts
When deciding whether summary judgment is proper, the Court must view the evidence submitted by the parties in the light most favorable to the non-moving party. McPherson v. Rankin, 736 F.2d 175, 178 (5th Cir.1984). Applying this standard, the Court finds the following undisputed material facts:
1.On July 31, 2007, the Debtor executed a promissory note (the “Note”) in the original principal amount of $63,000, secured by two deeds of trust on separate residential properties in Leland, Mississippi, located at 705 E. Third Street (the “Debtor’s Residence”) and at 63 Feltus Drive (the “Debtor’s Family Residence”) (together, the “Subject Properties”). The Note was payable to Tower Loan in monthly installments of $1,050 for a term of 60 months, beginning on September 9, 2007.
2. At two separate foreclosure sales conducted by Tower Loan, the Debtor’s Family Residence sold for $19,922.57 on January 14, 2008, and the Debtor’s Residence sold for $26,184.64 on February 20, 2008, to Tower Loan who was the highest and best bidder. According to a memorandum written by an employee of Tower Loan during the loan application process, the fair market value of the Debtor’s Family Residence was $31,000, and the fair market value of the Debtor’s Residence was $64,000. (Debtor’s Ex. B at Ex. 1).
3. The chart below documents the payments made by the Debtor prior to and after the foreclosure sales of the Subject Properties:
_Pre-Foreclosure Payments Post>-Foreclosure Payments
Subject Properties$5,250$29,343.12
4. After the foreclosure sales, the Debtor and her family continued to occupy the Subject Properties.
5. The Debtor alleges that after the foreclosure sales, she spoke by telephone with Taris Mumford (“Mumford”), the branch manager of Tower Loan in Leland, Mississippi, and that he agreed to re-title or reconvey the Subject Properties to her upon Tower Loan’s receipt of three monthly payments. The Debtor paid $2,700 to Tower Loan on December 12, 2008. (Debtor Ex. B at Ex. 2).3
6. A Lease-Purchase Agreement (the “Lease”) between Tower Loan and the Debtor was dated July 1, 2010,4 but was signed by Tower Loan and not signed by the Debtor. (Debtor Ex. A).
7. The Lease required the Debtor to pay Tower Loan $1,050 per month beginning on June 6, 2010, the same payment as in the Note. The term of the Lease was for 27 months. The Lease contained an “Option to Purchase” provision that granted the Debtor the option to purchase the Subject Properties at a price of $28,350, *119less the aggregate amount of any lease payments paid.
8. According to the Debtor, the Lease does not precisely set forth all of the terms of her oral agreement with Mumford at Tower Loan. (Debtor Brief at 3).
9. Despite the Lease and without the Debtor’s knowledge, Tower Loan sold the properties to Staples in September, 2010, for $28,350, the combined purchase price in the Lease, prior to an adjustment for lease payments paid.
10. The Debtor received a notice to vacate the Subject Properties and was served with a summons for eviction issued by the Justice Court of Washington County, Mississippi.
11. On October 22, 2010, the Debtor filed a voluntary petition for relief under chapter 7 (Dkt. 1).
12. The Debtor initiated this Adversary by filing a Complaint (Adv. Dkt. 1) seeking monetary damages against Tower Loan for breach of a promise to reconvey the Subject Properties and the specific performance of that agreement. The Debtor also seeks injunctive relief prohibiting Tower Loan and Staples from evicting her from the Subject Properties. The Debtor raises four causes of action in her Complaint: (1) breach of contract, (2) wilful breach of contract/bad faith, (3) fraud, and (4) specific performance (the “Causes of Action”).
Discussion
The Court must determine if the facts presented establish the existence of a dispute as to whether Tower Loan made an agreement with the Debtor regarding her continued occupancy and repurchase of the Subject Properties and if so, whether it was memorialized in writing. The resulting legal question raised in the Tower Loan Motion and the Staples Joinder is whether Mississippi’s statute of frauds, Miss.Code Ann. § 15-3-l(c), bars the Causes of Action in toto.
A. Standard of Review
Rule 7056 of the Federal Rules of Bankruptcy Procedure incorporates the summary judgment standard established in Rule 56 of the Federal Rule of Civil Procedure.5 Summary judgment is appropriate under Rule 56(a) when viewing the evidence in the light most favorable to the non-moving party, the pleadings, depositions, answers to interrogatories, and admissions, together with affidavits, if any, show that “there is no genuine issue as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a); see Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).
Defense of a proper summary judgment motion requires more from the non-moving party than mere allegations or denials of her pleadings. Rule 56(e) provides:
If a party fails to properly support an assertion of fact or fails to properly address another party’s assertion of fact as required by Rule 56(c), the court may ... consider the fact undisputed for purposes of the motion....
Fed.R.Civ.P. 56(e)(2). Thus, once the moving party has made its required showing, the non-moving party must go beyond the pleadings and by her own affidavits, depositions, answers to interrogatories, or *120admissions demonstrate specific facts to establish there is a genuine issue for trial. Celotex, 477 U.S. at 324, 106 S.Ct. 2548. Ultimately, the role of this Court is not to weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial. Lujan v. Defenders of Wildlife, 504 U.S. 555, 590, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992), citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
B. Statute of Frauds Defense
Tower Loan contends in the Tower Loan Brief that the undisputed facts show: “(1) that the parties did not, in fact, reach ... an agreement and (2) even if there had been some agreement, it was not reduced to writing and is unenforceable under the statute of frauds.” (Tower Loan Brief at 6). Tower Loan requests that this Court enter a judgment declaring that the statute of frauds bars the Causes of Action, including the Debtor’s fraud claim, as a matter of law.
Generally, a contract need not be memorialized in writing to be enforceable in Mississippi. Putt v. City of Corinth, 579 So.2d 534, 538 (Miss.1991). The statute of frauds, Miss.Code Ann. § 15 — 3—1(c), is an exception to that general rule. Putt, 579 So.2d at 538. The portion of the statute of frauds at issue here states:
An action shall not be brought whereby to charge a defendant or other party: * * *
(c) upon any contract for the sale of lands, tenements, or hereditaments, or the making of any lease thereof for a longer term than one year ... unless, in each of said cases, the promise or agreement upon which such action may be brought, or some memorandum or note thereof, shall be in writing, and signed by the party to be charged therewith or signed by some person by him or her thereunto lawfully authorized in writing.
Miss.Code Ann. § 15 — 3—1(c). In short, the statute of frauds demands that contracts for the purchase of land be evidenced “by some memorandum or note” and “be signed by the party to be charged therewith.” Miss.Code Ann. § 15 — 3—1(c); Gulfport Cotton Oil, Fertilizer & Mfg. Co. v. Reneau, 94 Miss. 904, 48 So. 292, 293 (1909).
Tower Loan argues in the Tower Loan Brief that the statute of frauds requires that the contract itself be in writing, an argument that conflicts with state law and stretches the purpose served by the statute of frauds. The statute of frauds, as its name suggests, prevents fraud by requiring written proof that the parties entered into the transaction, not by requiring proof of a written agreement. Putt, 579 So.2d at 539.
The principal purpose ... is to require the contracting parties to reduce to writing the specific terms of their contract ... and thus to avoid dependence on the imperfect memory of the contracting parties, after the passage of time, as to what they actually agreed to some time in the past.
Sharpsburg Farms, Inc. v. Williams, 363 So.2d 1350, 1354 (Miss.1978).
In an option contract for the sale of land, “some memorandum or note” must include the following essential terms: (1) a description of the property, (2) consideration for the purchase of the property, and (3)the date by which the option must be exercised. Creely v. Hosemann, 910 So.2d 512, 520 (Miss.2005), citing Holifield v. Veterans’ Farm & Home Bd., 218 Miss. 446, 67 So.2d 456 (1953). The writing requirement is not met by receipts evidencing payment of a property’s purchase price. Culpepper v. Chain, 202 Miss. 309, *12132 So.2d 266 (1947). Neither payment of the purchase price nor part performance of the promise is sufficient to take an oral contract for the sale of property out of the statute of frauds. Gulf Refining Co. v. Travis, 201 Miss. 336, 30 So.2d 398, 401 (1947).
Considering all of the evidence presented to this Court, the Court finds that Debtor has succeeded in raising a genuine dispute of material fact as to whether writings exist between herself and Tower Loan evidencing an agreement on mutually-accepted terms to reconvey the Subject Properties to her. In opposition to the Tower Loan Motion, the Debtor relies upon the following writings: (1) checks made payable to Tower Loan (Debtor Ex. B at Exs. 3-6), (2) a receipt of payment dated December 12, 2008, in the amount of $2,700 (Debtor Ex. B at Ex. 2), and (3) the Lease. In Mississippi, checks and receipts are insufficient in and of themselves to comply with the statute of frauds. When combined with the Lease, however, these writings paint a sufficiently definite picture of the parties’ transaction6 for the purposes of the statute of frauds. The Lease provides information missing from the checks and receipt of payment: it includes a legal description of the Subject Properties and sets forth the purchase price and the terms of payment under which the Debtor could chose to repurchase the Subject Properties.
Tower Loan insists that the Lease is immaterial because it lacks the signature of the Debtor. It is Tower Loan, however, and not the Debtor, who is “the party to be charged” within the meaning of the statute of frauds. Reneau, 48 So. 292 at 293. Therefore, the failure of the Debtor to sign the Lease does not render it unenforceable against Tower Loan, the party who signed it. Notwithstanding Tower Loan’s forceful arguments to the contrary, Mississippi’s version of the statute of frauds, which is consistent with most other jurisdictions, does not require that a writing be signed by both the buyer and seller, but only by “the party to be charged.” Reneau, 48 So. at 294.
C. Equitable Estoppel Exception to Statute of Frauds
Tower Loan correctly argues that without an enforceable agreement, there can be no valid cause of action for breach of contract or specific performance for violation of that agreement. Estate of Collins v. Dunn, 233 Miss. 636, 103 So.2d 425 (1958). Tower Loan further argues that without an enforceable agreement, there can be no valid fraud claim. Mississippi courts, however, recognize equitable estoppel as an exception to the statute of frauds. Walker v. U-Haul Co. of Miss., 734 F.2d 1068, 1077 (5th Cir.1984). Simply put, an action for fraud can be maintained to recover damages incurred in reliance on an oral agreement to convey property regardless of whether the statute of frauds would bar specific performance of that agreement. Powell v. Campbell, 912 So.2d 978, 982 (Miss.2005). For example, the Mississippi Supreme Court in Abraham v. Harvey, 245 Miss. 449, 147 So.2d 639 (1962), held that a claim for fraud was actionable, even though the statute of frauds barred the enforcement of an oral promise to convey commercial property, where the buyer had paid a deposit, had remodeled the building, and had made extensive repairs — all in detrimental reliance on that oral promise. Id. at 644.
To prevail on her claim of equitable estoppel in this Adversary, the Debtor must show (1) that she changed her posi*122tion in reliance on the conduct of Tower Loan and (2) that she has suffered to her detriment as a result of her change of position in reliance on Tower Loan’s conduct. Thompson v. Chick-Fil-A, Inc., 923 So.2d 1049 (Miss.Ct.App.2006). Tower Loan asserts in the Tower Loan Brief that “the parties did not, in fact, reach ... an agreement.” (Brief at 6). Therefore, Tower Loan insists that the Debtor’s Causes of Action fail because she cannot show that Tower Loan ever agreed to allow her to repurchase the Subject Properties.
This Court finds that the Debtor has established a genuine dispute for trial regarding Tower Loan’s alleged promise to her. Although the Debtor’s deposition testimony reveals a lack of familiarity with fundamental legal terms regarding the conveyance of property interests and the legal consequences of a foreclosure, her testimony shows that she and Mumford entered into an arrangement of some kind regarding her continued use of, and her payment for, the Subject Properties.
Q. ... What you are saying is that following the foreclosure sale, you struck a deal with Tower Loan to buy back your property, right?
A. It wasn’t struck no deal and no buy back nothing. He just told me to come up with the money and they will put it back in my name. They didn’t say nothing about buying nothing back, whatever, just pay the money — pay what I owe to come up to current and it would come out of foreclosure.
Q. [Do you] have anything in writing that evidences that?
A. Evidence on what?
Q. Your arrangement with Tower Loan regarding them stopping the foreclosure.
A. They don’t never put nothing in writing.
Q. So, your answer is no?
A. All he ever did was talk on the phone. They don’t never put nothing in writing.
Q. The agreement you talked about to buy back the property following the foreclosure, do you have that agreement in writing?
A. I just told you, I don’t have no agreement. Tarus [sic] told me on the phone what I needed to do. I didn’t have no agreement. They don’t never give me no agreement. They just tell me what I need to do to come up to term. I don’t never get no agreement with them.
(Tower Loan Ex. 2 at 28 & 35).
In the Debtor Response, the Debtor submits the deposition of David Wayne Love (“Love”), the district supervisor for the branch office of Tower Loan in Leland, Mississippi, where the transaction in dispute took place. Love admitted in his deposition that the Debtor had formed an agreement with Tower Loan regarding her continued occupancy and repurchase of the properties.
Q. Do you recall any specific agreement or understanding with regard to taking payments on this loan after the foreclosure?
A. Yes.
Q. What was that agreement?
A. She was going to continue to make note and we were going to sell the property back to her with a lease purchase agreement that she agreed to. And, when that agreement was paid out, she would own the property.
Q. That was your understanding?
A. That was the agreement that we made.
*123Q. Payments accepted by Tower Loan with that understanding?
A. Yes. We were going to take payments and she could buy her property back through a lease purchase agreement. That was the understanding we had with her.
Q. But, regardless of the fact no lease purchase agreement was signed by Mrs. Ruffins for whatever reason. There was obviously an agreement in place with Tower Loan continuing to take payments and Marsha Ruffins was continuing to occupy the property?
A. Correct. Far as I know she was.
Q. We can all agree on at least that much, correct?
A. Correct.
Q. The signing of the lease purchase agreement would have memorialized that arrangement, would it not?
A. It would have.
(Debtor Ex. B at 21 & 28). Apparently, in reliance on the promises made by Mumford, the Debtor paid Tower Loan part of the repurchase price. In that regard, Mumford’s supervisor, Love, identified a check written by the Debtor for over $10,000 as payment on the Subject Properties she was repurchasing in accordance with the Lease. (Debtor Ex. B at 24).
Tower Loan relies on the Plaintiffs Response to Requests for Admissions (the “Debtor Admissions”) (Tower Loan Ex. 3), and the Plaintiffs Response to Request for Production of Documents and Things Propounded by Defendant, Tower Loan of Mississippi, Inc. (the “Debtor Responses to Document Requests”) (Tower Loan Ex. 4). The Debtor admitted that no formal written agreement was entered into with Tower Loan, but explained that written evidence existed that memorialized their agreement. The Debtor Admissions are not fatal to her Causes of Action. As explained previously, the statute of frauds does not require a formal written agreement. Her inability to identify a formal written agreement in the Debtor’s Responses to Document Requests is likewise not fatal to her Causes of Action.
Tower Loan also submitted the affidavit of Mumford, the manager of the branch office in Leland, Mississippi. Mumford testified that “[n]o written contract or other written agreement has ever been entered into between Tower Loan and Ms. Ruffins evidencing a proposed sale or retitling of the properties to Ms. Ruffins from the date of the foreclosure actions to the present.” (Tower Loan Ex. 5). Mumford, however, does not mention in his affidavit Love’s prior deposition testimony, much less does he attempt to reconcile Love’s conflicting testimony with his own. At best, the affidavit of Mumford creates a factual dispute for trial.
Conclusion
In conclusion, the Debtor has successfully raised material issues of fact as to the existence of “some memorandum or note” evidencing an agreement between herself and Tower Loan regarding her repurchase of the Subject Properties. The record also establishes a material issue of fact as to whether Tower Loans committed fraud. The Causes of Action are not barred by the statute of frauds. As a result, the Tower Loan Motion and Staples Joinder should be, and are, hereby, denied.
SO ORDERED.
. Citations to the record are as follows: (1) citations to docket entries in this adversary proceeding, Adv. Proc. No. 10-01225-NPO, are cited as "(Adv. Dkt. _)” and (2) citations to docket entries in the main bankruptcy case, Case No. 10-15143-NPO, are cited as "(Dkt_).’’
. This Memorandum Opinion and Order constitutes the Court’s findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52, as made applicable by Federal Rule of Bankruptcy Procedure 7052.
. Exhibits attached to the Tower Loan Motion are cited as "(Tower Loan Ex. _)”, and exhibits attached by the Debtor to the Response are cited as "(Debtor Ex._).” The Debtor attached six exhibits to Exhibit B. Those exhibits are cited as "(Debtor Ex. B at Ex_).”
. Although the date on the Lease is July 1, 2010, Tower Loan contends the date was actually July 1,2009.
. Pursuant to the Rules Enabling Act, 28 U.S.C. § 2072, Rule 56 of the Federal Rules of Civil Procedure was amended, as of December 1, 2010. The amendment did not change the standard for granting summary judgment. See Fed.R.Civ.P. 56 advisory committee’s note to 2010 Amendments ("The standard for granting summary judgment remains unchanged.”).
. This finding is not intended to address the merits of the Causes of Action. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494578/ | OPINION
ARTHUR I. HARRIS, Bankruptcy Judge.
Chapter 7 debtor Kristin E. Gourlay (“Debtor”) instituted an adversary proceeding against Sallie Mae, Inc. (“Sallie Mae”) pursuant to 11 U.S.C. § 523(a)(8) seeking to determine the dischargeability of her student loan. The bankruptcy court entered a default judgment against Sallie Mae, and Sallie Mae filed a motion to set aside the judgment. The bankruptcy court denied Sallie Mae’s motion to set aside the judgment, and Sallie Mae timely appealed the court’s order denying its motion.
I. ISSUE ON APPEAL
The issue presented by this appeal is whether the bankruptcy court abused its discretion in denying Sallie Mae’s motion to set aside a default judgment under Rule *12660(b)(1) of the Federal Rules of Civil Procedure, made applicable to this adversary-proceeding under Federal Rule of Bankruptcy Procedure 9024.
II. JURISDICTION AND STANDARD OF REVIEW
The Bankruptcy Appellate Panel of the Sixth Circuit has jurisdiction to decide this appeal. The United States District Court for the Eastern District of Kentucky has authorized appeals to the Panel, and neither party has timely elected to have this appeal heard by the district court. 28 U.S.C. § 158(b)(6) and (c)(1). A final order of the bankruptcy court may be appealed as of right pursuant to 28 U.S.C. § 158(a)(1). For purposes of appeal, an order is final if it “ends the litigation on the merits and leaves nothing for the court to do but execute the judgment.” Midland Asphalt Corp. v. United States, 489 U.S. 794, 798, 109 S.Ct. 1494, 1497, 103 L.Ed.2d 879 (1989) (citations omitted). “An order denying a motion to set aside a default judgment is a final order.” In re Baskett, 219 B.R. 754, 757 (6th Cir. BAP 1998) (citations omitted).
The granting of relief under Federal Rule of Civil Procedure 60(b) is reviewed for an abuse of discretion. In re Ferro Corp. Derivative Litigation, 511 F.3d 611, 623 (6th Cir.2008) (citations omitted). “A court abuses its discretion when it commits a clear error of judgment, such as applying the incorrect legal standard, misapplying the correct legal standard, or relying upon clearly erroneous findings of fact.” Id. (citations omitted). An abuse of discretion will be found where the reviewing court has a definite and firm conviction that the court below committed a clear error of judgment. PCFS Financial v. Spragin (In re Nowak), 586 F.3d 450, 454 (6th Cir.2009) (citation and internal quotation marks omitted). “The question is not how the reviewing court would have ruled, but rather whether a reasonable person could agree with the bankruptcy court’s decision; if reasonable persons could differ as to the issue, then there is no abuse of discretion.” Id. (citation omitted).
III. FACTS
On May 19, 2011, Debtor instituted an adversary proceeding against Sallie Mae seeking to determine the dischargeability of her student loan under 11 U.S.C. § 523(a)(8). At the time of filing her complaint, Debtor owed Sallie Mae approximately $25,495.06. On May 23, 2011, the bankruptcy court issued a summons, which Debtor’s counsel mailed to Sallie Mae by certified mail on June 6, 2011. On June 8, 2011, “S. Williams,” who Sallie Mae believes is a part-time employee named Steven Williams, signed the certified mail receipt for the summons and complaint. On June 28, 2011, Debtor filed an affidavit of service attesting that the summons, complaint, and order for trial were sent by certified mail to “John (Jack) F. Remondi, President & Chief Operating Officer, Sallie Mae, 12061 Bluemont Way, Reston, VA 20190-5684.” (Adv. Proc. Doc. # 5.)
Under Federal Rule of Bankruptcy Procedure 7012, Sallie Mae’s answer to Debt- or’s complaint was due by June 22, 2011. On June 30, 2011, Debtor filed her Motion for Default Judgment requesting that her student loan debt be discharged. The bankruptcy court rejected Debtor’s original motion for improper service on Sallie Mae. Debtor refiled her Motion for Default Judgment with proper service on July 6, 2011, and the bankruptcy court entered a default judgment against Sallie Mae on July 8, 2011.
On July 26, 2011, Sallie Mae filed its motion to set aside the default judgment, and on August 4, 2011, Debtor filed her objection. After hearing argument, the *127bankruptcy court denied Sallie Mae’s motion and explained its reasoning:
The Court has looked carefully at this record and has reviewed the briefs and the authorities cited by the parties, does find that the complaint in this matter was properly served and that Sallie Mae’s internal processing breakdown is insufficient to overcome the requirements of Rule 60(d) [sic ]. It’s not excusable neglect and the defendant has not shown why it’s not culpable for having not responded to the complaint properly served.
In addition, Rule 60(a) applies to clerical mistakes in the record, not substantive mistakes of the parties, and therefore the Court is going to overrule the motion to set aside the default judgment and would ask Mr. Simms to tender an order in that regard.
(Transcript Page 9, Lines 7-19). On September 20, 2011, the bankruptcy court issued its order denying Sallie Mae’s motion to set aside the default judgment, and on October 4, 2011, Sallie Mae timely filed its notice of appeal.
IV. DISCUSSION
Sallie Mae makes several arguments on appeal as to how the bankruptcy court abused its discretion in denying Sallie Mae’s motion to set aside the default judgment. First, Sallie Mae asserts that, even absent a showing of excusable neglect, the judgment must be set aside because Debt- or’s conclusory allegations in the adversary complaint do not entitle Debtor to a judgment determining that her student loan debts are dischargeable under 11 U.S.C. § 523(a)(8). Second, Sallie Mae asserts that its failure to timely answer Debtor’s complaint was not the result of culpable conduct, that Debtor would not be prejudiced if the default judgment were set aside, and that it had a meritorious defense. Third, Sallie Mae asserts that the judgment must be set aside because Debt- or did not comply with Local Rule 7007-1(a) by failing to notice her motion for a hearing. And fourth, Sallie Mae contends that the summons and complaint were not properly served. For the reasons that follow, the Panel affirms the order of the bankruptcy court.
A. Sallie Mae is past the deadline to have a mistake of law reconsidered under Federal Rule of Civil Procedure 60(b)(1).
Sallie Mae asserts that its failure to answer the complaint did not entitle Debt- or to a default judgment because the complaint contained only a conclusory allegation of nondischargeability under § 523(a)(8). The Sixth Circuit permits reconsideration of a point of law under Rule 60(b)(1) only when relief from judgment is sought within the normal time for taking an appeal. See Barrier v. Beaver, 712 F.2d 231, 234 (6th Cir.1983) (“This Court is persuaded that the better view is to allow reconsideration of a point of law under Rule 60(b)(1) when relief from judgment is sought within the normal time for taking an appeal.”); see also 11 Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 2858 (2d ed. 2011) (in general, relief based on an error of the court is denied when the Rule 60(b)(1) motion is made after the time for appeal has run). Thus, when the normal time for taking an appeal has not expired and a court is faced with a motion to set aside a default judgment, the court remains free to use the “mistake [of law]” language of Rule 60(b)(1), without requiring the mov-ant to demonstrate “excusable neglect.”
While Sallie Mae is correct that a trial court must independently determine whether a plaintiffs well-pleaded allegations entitle the plaintiff to the relief being *128sought, Bills v. Aseltine, 52 F.3d 596, 601 (6th Cir.1995), the time for seeking reconsideration of such a point of law under Rule 60(b)(1) is before the normal time for taking an appeal has expired. In this case, the bankruptcy court entered the default judgment on July 8, 2011. Federal Rule of Bankruptcy Procedure 8002(a) requires that “[t]he notice of appeal shall be filed with the clerk within 14 days of the date of the entry of the judgment....” When Sallie Mae filed its motion to set aside the judgment on July 26, 2011, it was four days past the deadline to appeal. Therefore, Sallie Mae is not entitled to have a purported legal error of the bankruptcy court reconsidered under Rule 60(b)(1).
B. The bankruptcy court did not abuse its discretion in rejecting Sallie Mae’s argument that its failure to timely answer Debtor’s complaint was due to excusable neglect.
Sallie Mae argued before the bankruptcy court that the default judgment against it should be set aside pursuant to Federal Rule of Civil Procedure 60(b)(1) because its failure to timely file an answer was not the result of culpable conduct, Debtor would not be prejudiced if the default judgment was set aside, and it had a meritorious defense. (Adv. Proc. Doc. # 11-1.) The grounds for setting aside a default judgment are set forth in Federal Rule of Civil Procedure 55(c) which is made applicable to bankruptcy proceedings by Federal Rule of Bankruptcy Procedure 7055. Rule 55(c) provides that “[t]he court may set aside an entry of default for good cause, and it may set aside a default judgment under Rule 60(b).” Fed. R. Civ. Proc. 55(c).
It is important to distinguish between an entry of default and a default judgment, because once an entry of default has ripened into a default judgment a stricter standard of review applies for setting aside the default. Dassault Systemes, SA v. Childress, 663 F.3d 832, 839 (6th Cir.2011) (citing O.J. Distrib., Inc. v. Hornell Brewing Co., Inc., 340 F.3d 345, 352 (6th Cir.2003)). Once a default judgment has been entered, as it was here, the bankruptcy court’s discretion to set aside the judgment is “circumscribed by public policy favoring finality of judgments and termination of litigation. Rule 60(b) reflects this public policy by requiring greater specificity from a moving party before a court will set aside a default judgment.” Waifersong, Ltd. Inc. v. Classic Music Vending, 976 F.2d 290, 292 (6th Cir.1992). Federal Rule of Civil Procedure 60(b) provides in pertinent part:
(b) Grounds for Relief from a Final Judgment, Order, or Proceeding.
On motion and just terms, the court may relieve a party or its legal representative from a final judgment, order, or proceeding for the following reasons:
(1) mistake, inadvertence, surprise, or excusable negleet[.]
Fed. R. Civ. Proc. 60(b)(1).
The decision to set aside a default judgment is left to the discretion of the trial judge. However, in United Coin Meter Co. v. Seaboard Coastline R.R., 705 F.2d 839 (6th Cir.1983), the Sixth Circuit set forth three factors which are to be considered under Rule 55(c) and Rule 60(b): (1) whether the plaintiff will be prejudiced; (2) whether the defendant has a meritorious defense; and (3) whether culpable conduct of the defendant led to the default. United Coin Meter, 705 F.2d at 845. Since deciding United Coin Meter, the Sixth Circuit has further explained that while the factors to be considered under Rule 55(c) and Rule 60(b) are similar:
*129[T]he methodology for considering these factors and the weight to be accorded them depends on whether the court is confronted by an entry of default or a default judgment. When asked to set aside an entry of default, a court considers the first factor, defendant’s culpability, in the general context of determining whether a petitioner is deserving of equitable relief. But when it is a judgment the defendant is seeking to avoid, the specific requirements of Rule 60(b) narrow the scope of the court’s equitable inquiry. When relief is sought under Rule 60(b)(1), the culpability factor is framed in terms of “mistake, inadvertence, surprise, or excusable neglect.” Furthermore, while it may be argued that the three factors are to be “balanced” by the court in determining whether to set aside an entry of default, balancing is demonstrably inappropriate when a court initially proceeds, as in the instant case, under Rule 60(b)(1). That is because the rule mandates that a defendant cannot be relieved of a default judgment unless he can demonstrate that his default was the product of mistake, inadvertence, surprise, or excusable neglect. It is only when the defendant can carry this burden that he will be permitted to demonstrate that he can also satisfy the other two factors: the existence of a meritorious defense and the absence of substantial prejudice to the plaintiff should relief be granted.
Manufacturers’ Ind. Relations Ass’n v. East Akron Casting Co., 58 F.3d 204, 209 (6th Cir.1995) (emphasis in original) (quoting Waifersong, Ltd. Inc., 976 F.2d at 292).
Sallie Mae argues that its failure to file a timely answer is not due to culpable conduct, but rather is the result of excusable neglect. In its affidavit in support of its motion to set aside the default judgment, Sallie Mae attests that the office to which Debtor mailed the summons and complaint was in preparation to move to a new location, only one employee was left remaining in the mail room at the time the summons and complaint were signed for, from a policy perspective the mail should have been forwarded to the name that it was addressed to, and again from a policy perspective the complaint should have been forwarded to Sallie Mae’s Bankruptcy Litigation Unit. Sallie Mae asserts in its brief that Debtor’s pleading never reached the responsible individual or department due to the “state of upheaval” that Sallie Mae’s office was in while moving to a new location and its mail room being “understaffed”; hence, it argues that these circumstances make its failure to timely answer the complaint attributable to excusable neglect.
In Jinks v. AlliedSignal, Inc., 250 F.3d 381 (6th Cir.2001), the Sixth Circuit discussed how the interpretation of “excusable neglect” by the Supreme Court in Pioneer Inv. Services Co. v. Brunswick Associates Ltd. Partnership, 507 U.S. 380, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993), would apply to Rule 60(b)(1):
Although Pioneer interpreted “excusable neglect” in the context of Rule 9006(b)(1) of the Federal Rules of Bankruptcy Procedure, the Court analyzed the term as it is used in a variety of federal rules, including Rule 60(b)(1). The Court determined that “neglect” must be given its ordinary meaning, which would include “late filings caused by inadvertence, mistake, or carelessness, as well as by intervening circumstances beyond the party’s control.” Pioneer then counsels that whether the “neglect” was excusable involves an equitable determination that takes into account (1) the danger of prejudice to the other party, (2) the length of delay, (3) its potential impact on judicial proceed*130ings, (4) the reason for the delay, and (5) whether the movant acted in good faith.
More appropriately, Pioneer stands for the proposition that a district court should consider the five factors enumerated above in cases where procedural default has prevented the court from considering the true merits of a party’s claim.
Jinks, 250 F.3d at 386 (internal citations omitted).
In analyzing whether excusable neglect exists for the purposes of a Rule 60(b)(1) motion to set aside a default judgment, the Fifth and Eleventh Circuits have required a showing of minimal internal safeguards designed to make sure that process reaches the appropriate personnel and action is taken. See Sloss Industries Corp. v. Eurisol, 488 F.3d 922, 925 (11th Cir.2007) (“Our Rule 60(b)(1) cases have consistently held that where internal procedural safeguards are missing, a defendant does not have a ‘good reason’ for failing to respond to a complaint.”); Rogers v. Hartford Life and Acc. Ins. Co., 167 F.3d 933, 939 (5th Cir.1999) (affirming a finding of no excusable neglect where a lack of minimum internal safeguards was at least a partial cause of the defendant’s failure to respond); see also Gibbs v. Air Canada, 810 F.2d 1529, 1537 (11th Cir.1987) (“Default that is caused by the movant’s failure to establish minimum procedural safeguards for determining that action in response to a summons and complaint is being taken does not constitute default through excusable neglect.”), cited with approval in Rogers, 167 F.3d at 939; Baez v. S.S. Kresge Co., 518 F.2d 349, 350 (5th Cir.1975) (complaint forwarded by defendant to its counsel and lost in the mail did not constitute excusable neglect because of failure to establish minimum procedural safeguards), cited with approval in Rogers, 167 F.3d at 939. In his concurring opinion in Park Corp. v. Lexington Ins. Co., 812 F.2d 894, 898 (4th Cir.1987), Judge Haynsworth eloquently stated the importance that reasonable internal controls play in determining excusable neglect:
The best of systems sometimes suffers an occasional breakdown. When it does, the neglect should be treated as excusable, but sloppy handling of papers by which legal actions are commenced is inexcusable. In this case, Rule 60(b) relief was properly denied not because of the loss of the papers and not because the loss was unexplained but because [the defendant] made no showing that it had in place reasonable internal controls designed to prevent or discover such losses.
Park Corp., 812 F.2d at 898.
In Owens-Illinois, Inc. v. T & N Ltd., 191 F.R.D. 522 (E.D.Tex.2000), the court found minimal internal procedural safeguards present where the defendant presented evidence that it had a system in place, although not written, which allowed it to respond to over 200,000 lawsuits. Owens-Illinois, Inc., 191 F.R.D. at 527-28. Specifically, the court determined that the evidence presented to the court showed that the mislaid complaint was the result of an isolated human error, rather than a product of a prolonged and systemic failure to establish minimum procedural safeguards: (1) the defendant’s system was reliable because it allowed the defendant to timely answer thousands of complaints each year; (2) ordinarily an employee would have faxed the received complaint to the appropriate attorneys and verified the receipt of the fax; and (3) the procedures were not followed in that particular case because the attorney happened to be in the office on the day in question and took the complaint via hand delivery. Id. at 528. Further, the court noted that “no system *131can provide for every possible contingency, nor does the law require [the defendant] to have a fool-proof system.” Id.
In this case, the bankruptcy court did not abuse its discretion in concluding that Sallie Mae’s actions do not constitute excusable neglect. In contrast with the defendant in Owens-Illinois, Inc.:
• Sallie Mae did not present evidence indicating that it takes special steps to receive and handle important mail.
• Sallie Mae did not present evidence indicating that it takes steps to safeguard the process of transferring important mail once received.
• Sallie Mae attests that from a policy perspective, the mail should have been forwarded to the appropriate person and to its Bankruptcy Litigation Unit; however, Sallie Mae does not articulate what its actual policy is or if it has one.
• The lost complaint appears to be the product of an internal decision to reduce the mail room staff at its principal office to only one part-time employee weeks before the effective date of its move, as communicated to the Kentucky Secretary of State.
In short, it is unclear whether Sallie Mae (1) had no reasonable policy in place to see that important mail was delivered to the appropriate personnel or (2) simply failed to apprise the bankruptcy court of that policy in its Rule 60(b) motion. Either way, the bankruptcy court did not abuse its discretion in rejecting Sallie Mae’s argument that the failure to timely answer Debtor’s complaint was due to excusable neglect.
C. A party in default that has not appeared is not entitled to further notice under Rule 5(a)(2) of the Federal Rules of Civil Procedure.
Sallie Mae asserts that the bankruptcy court abused its discretion in denying its motion to set aside the default judgment because Sallie Mae was denied the procedural protection granted to it by Local Rule 7007-l(a) of Standing Order 09-03 of the United States Bankruptcy Court for the Eastern District of Kentucky. Local Rule 7007-l(a) provides that a motion in an adversary proceeding pending in the Lexington division “shall include a certificate indicating that each party to the motion has been given at least fourteen (14) days’ notice of the hearing on the motion by service of the motion in a manner permitted by Rule [7005] of the Federal Rules of Bankruptcy Procedure.” Sallie Mae argues that it is entitled to relief because Debtor’s motion for default judgment did not contain the certificate required by Local Rule 7007-l(a).
Sallie Mae’s reliance on Local Rule 7007-l(a) is misplaced because the rule is not intended to modify Rule 5 of the Federal Rules of Civil Procedure. Federal Rule of Civil Procedure 5(a)(2), which is made applicable to bankruptcy proceedings by Federal Rule of Bankruptcy Procedure 7005, states in pertinent part that “[n]o service is required on a party who is in default for failing to appear.” Furthermore, it would be inappropriate to interpret Local Rule 7007-l(a) in a manner inconsistent with Rule 5 of the Federal Rules of Civil Procedure. See Fed. R.Civ.P. 83(a)(1) (“A local rule must be consistent with—but not duplicate—federal statutes and rules.... ”); Levitt-Stein v. Citigroup, Inc., 284 Fed.Appx. 114, 117 (5th Cir.2008) (relying on Rule 5(a)(2) to reject argument that lower court abused its discretion in denying defendant’s Rule 60(b) motion where plaintiff did not follow a local rule requiring motions for default judgment to be served by certified mail). While the bankruptcy court did not make an official entry of default on the record, *132the Affidavit of Service filed on June 28, 2011, indicated that Sallie Mae was in default when Debtor moved for a default judgment. Accordingly, Sallie Mae was not entitled to notice of a hearing on Debt- or’s motion for default judgment.
D. Debtor properly served the summons and complaint.
Sallie Mae asserts that it was not properly served because the summons and complaint were addressed to “John (Jack) F. Remondi, President & Chief Operating Officer, 12061 Bluemont Way, Reston, VA 20190-5684,” who actually works at a location different from the one to which the certified mail was sent. Under Federal Rule of Bankruptcy Procedure 7004(b)(3), service may be made “[u]pon a domestic or foreign corporation or upon a partnership or other unincorporated association, by mailing a copy of the summons and complaint to the attention of an officer....” In this case, Debtor addressed the summons and complaint to John Remondi, Chief Operating Officer of Sallie Mae, who certainly qualifies as an “officer” under Federal Rule of Bankruptcy Procedure 7004(b)(3).
Further, there is no provision in the Federal Rules of Bankruptcy Procedure that requires an officer to be served anywhere other than the corporation’s principal office. Kentucky Revised Statute § 14A.6-010(l)(c) requires that “(1) [e]ach entity and each foreign entity authorized to transact business in this Commonwealth shall deliver to the Secretary of State for filing an annual report that sets forth ... (c) [t]he address of its principal office[.]” On the date that Sallie Mae’s mail room employee signed for the certified mail addressed to “12061 Bluemont Way, Reston, VA 20190-5684,” that location was listed in Sallie Mae’s annual report and Statement of Change of Principal Office Address form as its effective principal office. It was Sallie Mae’s internal decision to have its chief operating officer work at a location other than its listed principal address. Accordingly, Debtor properly served the summons and complaint.
V. CONCLUSION
For the foregoing reasons, the order of the bankruptcy court is AFFIRMED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494579/ | MEMORANDUM OPINION AND ORDER ON FIFTH THIRD MORTGAGE COMPANY’S OBJECTION TO THE TRUSTEE’S FINAL REPORT
JOHN E. HOFFMAN, JR., Bankruptcy Judge.
I. Introduction
The matter before the Court has its genesis in a notary public’s failure to certify a debtor’s acknowledgment of her signature on a mortgage, an all-too-common scenario that has resulted in numerous judicial opinions adjudicating the avoidability of mortgages based on so-called blank acknowledgments. But in this case the Chapter 7 trustee, Susan L. Rhiel (“Trustee”), and the holder of the mortgage (“Mortgage”), Fifth Third Mortgage Company (“Fifth Third”), resolved the avoidance issue eonsensually by means of an agreed order, so the Court has no occasion to add to this well-developed body of case law. Instead, this decision addresses the Trustee’s contention that, by failing to file an unsecured proof of claim within 30 days after the agreed order became final, Fifth Third forfeited its right to participate in the distribution that the Trustee will be making to unsecured creditors.
The Court concludes that Fifth Third may receive a dividend. Fifth Third timely filed a secured proof of claim on account of the Mortgage and associated promissory *135note (“Note”) in what was then the Chapter 13 case of Tony Channakhon and Pha-suree Channakhon.1 After the Debtors’ case was converted to Chapter 7, the Trustee commenced an adversary proceeding against Fifth Third and negotiated an agreed order avoiding the Mortgage to the extent it encumbered Phasuree’s one-half interest in the Debtors’ residential real property (“Property”). See Adv. Pro. No. 10-2241, Doc. 27. According to the Trustee, the finality of the agreed order triggered the 30-day period set forth in Rule 3002(c)(3) of the Federal Rules of Bankruptcy Procedure (“Bankruptcy Rule(s)”) for filing unsecured claims that arise from judgments avoiding interests in property and, because Fifth Third failed to file such a claim within the required time, it is barred from receiving a dividend. Fifth Third, however, had already timely filed a secured proof of claim and later, in response to the Trustee’s final report (“Final Report”) (Doc. 143), filed a proper amendment that converted the secured claim into a partially unsecured one. Furthermore, equitable factors favor permitting the amendment. The Court, therefore, holds that Fifth Third may receive a distribution from the funds held by the Trustee.
II. Jurisdiction
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334(b) and the general order of reference entered in this district. This is a core proceeding. 28 U.S.C. § 157(b)(2).
III. Factual and Procedural Background
The Debtors commenced this case on November 3, 2008 by filing a petition for relief under Chapter 13 of the Bankruptcy Code. Because the date established for the meeting of creditors under 11 U.S.C. § 341(a) was December 23, 2008, see Doc. 7, the general deadline for all creditors (except governmental units) to file proofs of claim was March 23, 2009. See id.; Fed. R. Bankr.P. 3002(c) (“In a ... chapter 13 individual’s debt adjustment case, a proof of claim is timely filed if it is filed not later than 90 days after the first date set for the meeting of creditors called under § 341(a) of the Code.... ”). Fifth Third met this deadline when, on November 17, 2008, it filed a secured proof of claim (Claim No. 3-1) in the amount of $151,184.02 on account of the Note and the Mortgage.
Because this matter would not be before the Court if the Debtors’ case had continued in Chapter 13 or if it had become a no-asset Chapter 7, the Court will briefly describe how it developed into an asset case. Although their Chapter 13 plan was confirmed, the Debtors fell behind on their plan payments, resulting in an order (Doc. 43) dismissing the case upon the motion of the Chapter 13 trustee. The Debtors then filed a motion (Doc. 47) requesting that their case be reinstated solely for the purpose of converting it to Chapter 7. The Chapter 13 trustee did not oppose the motion, and the Court entered an agreed order (Doc. 48) providing for the reinstatement and conversion of the case, which occurred on February 23, 2010.
Although a deadline of July 6, 2010 was established for filing proofs of claim in the Debtors’ Chapter 7 case, see Fed. R. Bankr.P. 1019(2)(A) (stating, with exceptions not applicable here, that “[w]hen a ... chapter 13 case has been converted ... to a chapter 7 case_[a] new time period for filing a ... claim ... shall commence under [Bankruptcy Rule] *1363002”), the proof of claim that Fifth Third had filed while the case was pending in Chapter 13 was deemed filed in the Chapter 7 case after conversion. See Fed. R. Bankr.P. 1019(3) (“When a ... chapter 13 case has been converted ... to a chapter 7 case ... [a]ll claims actually filed by a creditor before conversion of the case are deemed filed in the chapter 7 case.”). Accordingly, Fifth Third did not need to file another proof of claim before the new claims bar date, nor did it do so.
It makes no difference whether a creditor has asserted an unsecured claim in a case converted to Chapter 7 if the trustee has no assets to distribute. But the filing of an unsecured proof of claim matters if the case develops into one in which there is property available to be distributed to unsecured creditors. That is what happened here. After partially avoiding the Mortgage by an agreed order entered on March 29, 2011, see Adv. Pro. No. 10-2241, Doc. 27, the Trustee obtained an order authorizing her to sell the Property. One-half of the net sale proceeds were to be paid to Fifth Third on account of the Mortgage to the extent it encumbered Tony’s interest (which was not avoided) and the “remaining net proceeds [were to be] used by the Trustee for payment of allowed administrative and unsecured claims of the estate.” Doc. 137. The order did not include a provision regarding any unsecured claim of Fifth Third that arose upon the partial avoidance of the Mortgage. On July 28, 2011, the Trustee filed a report of sale stating that she had sold the Property for $155,000. See Doc. 141.
Approximately one month later, on August 24, 2011, the Trustee filed the Final Report. Fifth Third filed an objection (“Objection”) (Doc. 147) to the Final Report, and the Trustee filed a response (“Response”) (Doc. 149) to the Objection. On October 20, 2011, Fifth Third filed an amended unsecured proof of claim (Claim No. 3-2) in the amount of $86,827.74 on account of amounts due under the Note.
According to the Final Report, after the payment of administrative expenses relating to the sale of the Property and a payment to Fifth Third on account of the Mortgage to the extent it encumbered Tony’s interest, the Trustee held the sum of $70,358.87. Of this amount, $11,036.87 was earmarked for payment of the Trustee’s fees and expenses, and $24,855.71 was set aside for payment to Rhiel & Associates Co., LPA (“Rhiel & Associates”) for the attorney fees and expenses it incurred in connection with its representation of the Trustee.2 After pay*137ing those amounts to the Trustee and Rhiel & Associates, as well as a $250 adversary filing fee to the Clerk of the Court and certain amounts to the IRS and the City of Columbus on account of their priority tax claims, the Trustee has $31,921.09 available for distribution. The Final Report states that the amount of timely filed general unsecured claims (which did not include Fifth Third’s unsecured claim because it had not yet been filed) is $112,079.95. A distribution of $31,921.09 on unsecured claims totaling $112,079.95 yields a dividend of approximately 28%.3 Because the amount of timely filed unsecured claims exceeds the amount available for distribution, the Final Report states that no payments will be made to the holders of tardily filed unsecured claims.4
The amount of timely filed general unsecured claims set forth in the Final Report does not, of course, include the unsecured claim that Fifth Third filed in response to the report. Adding the $86,827.74 amount of Fifth Third’s unsecured claim to the $112,079.95 in other general unsecured claims results in a total unsecured claims pool of $198,907.69. A distribution of $31,921.09 against unsecured claims totaling $198,907.69 yields a dividend of approximately 16%—less than the approximately 28% distribution that the Final Report would have reflected had the dividend been calculated correctly, but more than the 6.9% dividend that the Final Report actually set forth.
IV. Legal Analysis
A. The Trustee Was Not Obligated to Reclassify Fifth Third’s Secured Claim.
For the reasons explained below, the Court sustains the Objection. It is important to note at the outset, however, that the Court is not holding that the Trustee had the responsibility to reclassify Fifth Third’s secured proof of claim as unsecured. The Court rejects Fifth Third’s contention that the Trustee had such a duty, see Objection at 10-12, and rejects as well Fifth Third’s argument that it did not need to file an amended claim in order to receive a dividend. Id. at 10. It is true that the Trustee’s avoidance of the Mortgage to the extent it encumbered Phasuree’s interest in the Property left Fifth Third holding a partially unsecured claim. But there is a critical distinction between having a claim and filing a proof of claim. In a Chapter 7 case, “[i]f an unsecured creditor wishes to participate in the distribution of the assets of a bankruptcy estate, the creditor must file a timely proof of claim with the bankruptcy court.” PCFS Fin. v. Spragin (In re Nowak), 586 F.3d 450, 454 (6th Cir.2009) (relying on Bankruptcy Rule 3002(a), which states that “[a]n unsecured creditor *138... must file a proof of claim ... for the claim ... to be allowed”). And even if a creditor has filed a secured claim, it nonetheless must file an unsecured proof of claim or amend its secured claim in order to receive a distribution of property of the estate set aside for unsecured creditors. See In re Padget, 119 B.R. 793, 796 (Bankr.D.Colo.1990) (“The Court concludes that an undersecured creditor in a Chapter 7 case who files a claim denoted a secured claim must timely file an amended, or supplemental claim, for its unsecured claim ... if it desires to be treated as an unsecured creditor by the trustee.”).
In Padget, a creditor filed a secured claim in the debtors’ Chapter 7 case prior to the sale of its collateral, but failed to file an amended unsecured proof of claim for the deficiency that resulted from the sale. The trustee filed and gave notice of a final report that provided for no distribution on account of the creditor’s claim. The creditor did not object to the final report. Id. at 799. The court approved the report, and the trustee issued dividend checks to unsecured creditors. Thereafter, the creditor sought reconsideration of the court’s approval of the final report and in so doing-made two arguments: (1) “it did not need to file an amended or supplemental proof of claim to reflect its subsequent status as an unsecured, or undersecured, creditor;” and (2) the trustee was “responsible for examining and ascertaining the legal status of each claimant in the estate and properly distributing the estate’s proceeds to all creditors with unsecured and un-dersecured claims.” Id. at 794. In rejecting these arguments, the Padget court noted that “Bankruptcy Rule 3002 specifically and expressly mandates filing a proof of claim for ‘an unsecured creditor’ if that creditor is to receive a distribution from the Chapter 7 estate[.]” Id. at 797.
The Court agrees with the Padg-et court in this regard. The Trustee’s practice of not distributing property of the estate earmarked for unsecured creditors to a creditor that has not filed an unsecured claim is entirely consistent with the duties imposed on Chapter 7 trustees by § 704 of the Bankruptcy Code, including their duty, “if a purpose would be served, [to] examine proofs of claims and object to the allowance of any claim that is improper.” 11 U.S.C. § 704(a)(5). Notwithstanding Fifth Third’s suggestion to the contrary, see Objection at 10, § 704(a)(5) does not require a Chapter 7 trustee to reclassify a secured claim as unsecured if the only purpose served by the reclassification is a reduction of the distribution to creditors who filed timely unsecured proofs of claim. See Agricredit Corp. v. Harrison (In re Harrison), 987 F.2d 677, 680 (10th Cir.1993) (“As in Padget, the proof of claim here was, on its face, for a secured claim.... The bankruptcy court properly treated the claim as secured.”); Olympic Coast Inv., Inc. v. Crum (In re Wright), 2008 WL 8462954, at *5 (9th Cir. BAP Nov. 3, 2008) (“[W]e ... adopt the persuasive analysis of other courts holding that a trustee does not have to make distributions to an undersecured creditor who did not amend its claim to assert or estimate the unsecured portion.”), aff'd, 329 Fed.Appx. 137 (9th Cir.2009); Padget, 119 B.R. at 798 (“[A] trustee should not, and is not charged with the obligation to, examine a claim with a purpose and view to increasing the claim or improving a claimant’s status over that asserted by other creditors. It is not a trustee’s duty to protect individual creditors against the consequences of failing to file a claim, filing a late claim, filing an insufficient claim, or failing to properly assert a deficiency claim. It is a trustee’s principal duty to object to unsubstantiated, excessive, or un-allowable claims.”). The Court, therefore, *139concludes that the Trustee had no duty to calculate for a partially secured creditor the amount of its unsecured claim.
B. The Effect of Filing an Amended Unsecured Claim.
The calculus changes once the creditor files an amended unsecured proof of claim in a liquidated amount. In that circumstance, the trustee does not need to calculate the amount of the creditor’s unsecured claim in order to make a distribution to it. Here, however, the Trustee contends that Fifth Third is not entitled to a distribution because the unsecured proof of claim it filed in response to the Final Report was untimely. But there is nothing in the Bankruptcy Code or the Bankruptcy Rules that negates an unsecured creditor’s entitlement to a distribution merely because its amended unsecured proof of claim is filed after the trustee files the final report. See In re Spurling, 391 B.R. 783, 789, 790 (Bankr.E.D.Tenn.2008) (“The trustee ... urge[s] the court to promulgate a judicial rule that amendments to proofs of claim must be filed by the time the ... trustee files the final report with the court.... [Njeither the Bankruptcy Code nor any applicable rule of procedure imposes [such] a deadline.... [I]t is up to Congress or the Supreme Court, not this court, to promulgate such a statute or rule.”). Indeed, the Trustee does not really argue otherwise. Rather, the Trustee contends that Fifth Third’s unsecured proof of claim is untimely because it was not filed within the time period prescribed by Bankruptcy Rule 3002(c)(3), which states as follows:
An unsecured claim which arises in favor of an entity or becomes allowable as a result of a judgment may be filed within 30 days after the judgment becomes final[5] if the judgment is for the recovery of money or property from that entity or denies or avoids the entity’s interest in property. If the judgment imposes a liability which is not satisfied, or a duty which is not performed within such period or such further time as the court may permit, the claim shall not be allowed.
Fed. R. Bankr.P. 3002(c)(3).
In assessing the Trustee’s argument, the Court first rejects Fifth Third’s contention that the “permissive wording” of Bankruptcy Rule 3002(c)(3) (i.e., “may be filed within 30 days after the judgment becomes final”), see Objection at 12, means that a creditor holding a claim subject to Bankruptcy Rule 3002(c)(3) may simply choose to file the claim after the expiration of the prescribed time. See Int’l Diamond Exch. Jewelers, Inc., 188 B.R. 386, 391 (Bankr.S.D.Ohio 1995) (“Thirty days means thirty days.”). In International Diamond, the bankruptcy court relied on Taylor v. Freeland & Kronz, 503 U.S. 638, 112 S.Ct. 1644, 118 L.Ed.2d 280 (1992), a Supreme Court decision construing the language of Bankruptcy Rúle 4003(b) (under which parties in interest “may” file objections to the list of property claimed as exempt within 30 days after the conclusion of the meeting of creditors) to mean that “the validity of a claimed exemption could not be contested after the expiration of the 30 day period.” Int’l Diamond, 188 B.R. at 391. Based on Taylor, the bankruptcy court held that, despite Bankruptcy Rule 3002(e)(3)’s use of the word “may,” proofs of claim governed by the rule must be disallowed upon objection by the trus*140tee if they are not filed within the prescribed time. See id6 The Court agrees.
This is true, however, only if the creditor has not already filed a timely secured claim:
While [Bankruptcy] Rule 3002(c)(3) ... permits the filing of a proof of claim to evidence an unsecured claim arising from the avoidance of a lien, such a filing would not appear to be required where, as here, the creditor has already timely filed a proof of claim which is unchallenged by the debtor in every respect except as to its secured status. See Advisory Committee Note (1983) (“Although the claim of a secured creditor may have arisen before the petition, a judgment avoiding the security interest may not have been entered until after the time for filing claims has expired. Under Rule 3002(c)(3) the creditor who did not file a secured claim may nevertheless file an unsecured claim within the time prescribed.”) (emphasis added).
In re Toronto, 165 B.R. 746, 752 n. 4 (Bankr.D.Conn.1994). See also In re Litamar, Inc., 198 B.R. 251, 255 (Bankr.N.D.Ohio 1994) (“This Court does not believe, as the Trustee would assert, that a creditor is required under this rule to file a proof of claim after a judgment is rendered if it had already filed a proof of claim before the judgment was rendered.”); 9 Collier on Bankruptcy ¶ 3002.03[4] n.34 (Alan N. Resnick & Henry J. Sommer eds., 16th ed. rev. 2011) (“If the creditor has already timely filed a claim, Rule 3002(c)(3) does not require that a new claim be filed after entry of a judgment regarding the creditor.”). See also Americredit Fin. Servs. v. Durham (In re Durham), 329 B.R. 899, 902 (Bankr.M.D.Ga.2005) (citing Collier for the proposition that a creditor would not have been subject to the deadline set forth in Bankruptcy Rule 3002(c)(3) if its secured claim had been timely, but holding that it was subject to the deadline given that its secured claim was filed after the general bar date). It is undisputed that Fifth Third’s secured claim was timely filed.
C. Fifth Third Filed a Proper Amended Unsecured Claim.
The critical question, then, is whether the amendment of Fifth Third’s unsecured proof of claim should be permitted. In making this determination, “[t]he threshold inquiry for most courts has been whether the amended proof [of claim] states a brand new claim, in which case it is not allowable as an amendment, or whether the amended claim bears some relationship to the original claim sufficient to escape this disqualification.” In re Milan Steel Fabricators, Inc., 113 B.R. 364, 367 (Bankr.N.D.Ohio 1990). After this initial determination is made, courts consider whether equitable factors favor permitting the amendment, with “[t]he crucial inquiry [being] whether [other creditors] would be unduly prejudiced by the amendment.” Roberts Farms Inc. v. Bultman (In re Roberts Farms Inc.), 980 F.2d 1248, 1251 (9th Cir.1992). In other words, “[c]ourts are guided in making [the] determination [of whether to permit an amendment to a *141proof of claim] by a two-part test.... The first prong ... is ... whether the subsequent claim may be fairly characterized as an amendment of a timely filed claim or [is] in substance a new claim.” In re Parsons, 135 B.R. 283, 284 (Bankr.S.D.Ohio 1991) (citations and internal quotation marks omitted). “The second prong of the test requires the Court to determine whether it would be equitable to permit an amendment.” Id. at 285. See also In re Enron Corp. 298 B.R. 513, 521-522 (Bankr.S.D.N.Y.2003) (When deciding whether to permit an amendment to a proof of claim, a bankruptcy court is guided by a two-prong test. A court must “first look to whether there was timely assertion of a similar claim or demand evidencing an intention to hold the estate liable. If there were such a timely assertion, the court then examines each fact within the case and determines whether it would be equitable to allow the amendment.” (citations and internal quotation marks omitted)).
The Court will address each of these prongs in turn.
1. Whether Fifth Third’s Unsecured Proof of Claim Asserts a New Claim
“Neither the Bankruptcy Code nor Bankruptcy Rules directly address amendment of a proof of claim.” Id. at 521. “[I]n determining whether to permit a post-bar date amendment to a timely-filed proof of claim under the first prong of the two-prong test,” therefore, courts frequently have applied Rule 15(c) of the Federal Rules of Civil Procedure (“Civil Rules(s)”). Id. See also Midland Cogeneration Venture Ltd. P’ship v. Enron Corp. (In re Enron Corp.), 419 F.3d 115, 133 (2d Cir.2005); Gens v. Resolution Trust Corp., 112 F.3d 569, 575 (1st Cir.1997); In re Stavriotis, 977 F.2d 1202, 1204 (7th Cir.1992); Roberts Farms, 980 F.2d at 1251; Spurling, 391 B.R. at 786; In re J.S. II, L.L.C., 389 B.R. 563, 567 (Bankr.N.D.Ill.2008); In re MK Lombard Grp. I, Ltd., 301 B.R. 812, 816 (Bankr.E.D.Pa.2003); In re Blue Diamond Coal Co., 147 B.R. 720, 725 (Bankr.E.D.Tenn.1992), aff'd, 160 B.R. 574 (E.D.Tenn.1993).
Under Civil Rule 15(c) as applied in the context of proofs of claim, an amended proof of claim will relate back to the original and therefore not constitute a new claim if the amendment “arose out of the conduct, transaction, or occurrence set out — or attempted to be set out — in the original [claim].” Fed.R.Civ.P. 15(c)(1)(B). An unsecured claim filed after a successful avoidance action arises out of the same transaction — the one in which the debtor became obligated on the note and mortgage — as the original secured claim. See McAbee v. Isom, 116 F.2d 1001, 1003 (5th Cir.1940) (“Where a creditor has originally proved his claim as a secured one, he may be permitted to amend his proof to make it one for an unsecured claim, particularly where his security has subsequently proven invalid or voidable....”) (citations and internal quotation marks omitted). Cf. Wright, 2008 WL 8462954, at *6 n. 10 (citing Spurting for the proposition that ... [h]ad [the creditor] simply amended its claim to assert ... a deficiency, the amendment could have related back to its original proof of claim and been deemed timely); In re Breaux, 410 B.R. 236, 239 (Bankr.W.D.La.2009) (holding that unsecured deficiency claim relates to and arises out of the same transaction as the original secured claim); Spurling, 391 B.R. at 787-88 (same); In re Delmonte, 237 B.R. 132, 135-36 (Bankr.E.D.Tex.1999) (same); In re Marino, No. 95 B 22465, 1996 WL 691350, at *4 (Bankr.N.D.Ill. Nov. 26, 1996); In re Richard Roberts Lexington *142Assocs., Ltd., 171 B.R. 546, 549 (Bankr.W.D.Va.1994) (same).7
The view that an unsecured claim for amounts due under a note arises out of the same transaction as a secured claim based on that note is consistent with Sixth Circuit law. See Spurling, 391 B.R. at 788 (“The Sixth Circuit considers the underlying transaction or occurrence, within the meaning of [Civil] Rule 15, to be the original transaction between the debtor and the creditor in which the debt was established. The debt is composed of the obligation and the amount due. Other features surrounding the debt, such as whether it is secured or not, are incidental and as to [those features] claims may be amended without incurring the objection that the creditor is erecting a new claim.”) (citing Szatkowski v. Meade Tool & Die Co. (In re Meade Tool & Die Co.), 164 F.2d 228, 230 (6th Cir.1947) and In re Ashland Steel Co., 168 F. 679, 680 (6th Cir.1909)).8 On that basis, the Court concludes that Fifth Third’s original secured claim and its subsequent amended unsecured claim both arose out of the transaction in which the Note was signed. Accordingly, the unsecured proof of claim did not assert a new claim.
The Trustee’s reliance on International Diamond in support of her argument to the contrary is misplaced. In International Diamond, a trade creditor filed an unsecured proof of claim against the Chapter 11 debtor for amounts owed it as of the petition date. Approximately three years later, the bankruptcy court entered a judgment against the trade creditor on a preferential-transfer action. After satisfying the judgment, the trade creditor filed a new proof of claim to increase its unsecured claim by the amount it paid in satisfaction of the judgment. The bankruptcy court granted the unopposed objection to the new proof of claim on the bases that: (1) the claim was not filed within the time *143period set forth in Bankruptcy Rule 3002(c)(3); and (2) the claim could not be considered an amendment of the previously filed proof of claim because a claim for an amount recovered by a trustee in a preference action “arises post-petition as a result of a recovery by the [t]rustee.” Int’l Diamond, 188 B.R. at 390. See also In re Accord Grp., Inc., 211 B.R. 193, 194 (Bankr.E.D.N.C.1997) (disallowing claim filed more than 30 days after judgment in preference action became final even though creditor had previously filed unsecured claim for prepetition amounts owed by the debtor).
This result makes sense in the context faced by the International Diamond court; the trade creditor had no claim against the estate for the amount paid to satisfy the preference judgment until the trustee obtained the judgment. See West v. Freedom Med., Inc. (In re Apex Long Term Acute Care-Katy, L.P.), 2011 WL 6826838, at *11 (Bankr.S.D.Tex. Dec. 28, 2011) (“Once the estate recovers the amount of the transfer, the amount recovered does not offset the defendant’s claim; it increases it. Because the preferential payment was made on account of a valid antecedent debt, the (now unpaid) amount of that debt is added to the defendant’s claim against the estate.”); In re Telesphere Commc’ns, Inc., 179 B.R. 544, 553 (Bankr.N.D.Ill.1994) (“Avoidance of a preference results in a return of transferred property to the estate, but may also result in the defendant asserting a claim that otherwise would have been satisfied by the transferred property.”). Cf. APAC-Virginia, Inc. v. Jenkins Landscaping & Excavating, Inc. (In re Jenkins Landscaping & Excavating, Inc.), 93 B.R. 84, 89 (W.D.Va.1988) (“The Jenkins had no claim against the bankrupt’s estate until the bankruptcy court ordered General to return its fraudulently conveyed property, including the Jenkins’ note, to the estate of JLE.”). By contrast, the partial avoidance of the Mortgage did not give rise to a new claim; instead, it merely rendered a portion of the already existing claim based on the Note an unsecured claim.
2. Whether Equitable Factors Support the Amendment
The other restriction on an amended proof of claim is the requirement that it be equitable to permit the amendment. In evaluating the equities, the Sixth Circuit has considered (in the context of whether a complaint may be ■ amended under Civil Rule 15(c)) factors such as “[u]ndue delay in filing, lack of notice to the opposing party, bad faith by the [filing] party, repeated failure to cure deficiencies by previous amendments, undue prejudice to the opposing party, and futility of amendment[.]” Moross Ltd. P’ship v. Fleckenstein Capital, Inc., 466 F.3d 508, 518-19 (6th Cir.2006) (internal quotation marks omitted). Courts have applied the samé and similar factors in the context of amending proofs of claim. See Stavriotis, 977 F.2d at 1205; In re Xechem Int’l, Inc., 424 B.R. 836, 841 (Bankr.N.D.Ill.2010); Liddle v. Drexel Burnham Lambert Grp., Inc (In re Drexel Burnham Lambert Grp., Inc.), 159 B.R. 420, 425 (S.D.N.Y.1993); Parsons, 135 B.R. at 285.
On balance, the Court concludes that these factors weigh in favor of permitting Fifth Third to receive a distribution on its amended unsecured claim. Although the claim certainly could have been filed sooner than it was, the Court finds no bad faith or undue delay on the part of Fifth Third, which filed its amended claim in response to the Final Report. Fifth Third filed no previous amendments, so there is no repeated failure to cure deficiencies by previous amendments. In addition to unfair prejudice (which is discussed below), notice is “critical ... in determining whether an amendment should be granted.” Miller v. Am. Heavy *144Lift Shipping, 231 F.3d 242, 250 (6th Cir.2000) (internal quotation marks omitted). As previously discussed, the Trustee’s awareness of Fifth Third’s secured proof of claim and the effect that the partial avoidance of the Mortgage would have on the claim did not obligate the Trustee to make a distribution to Fifth Third in the absence of its filing an unsecured claim. The Court, however, finds that the Trustee’s knowledge did provide sufficient notice of the existence of Fifth Third’s unsecured claim for the purpose of determining whether an amendment should be permitted. Cf. McAbee, 116 F.2d at 1008 (“[A] secured claim is always potentially an unsecured one. If the security fails in whole or in part the equity of the case will generally require that recognition be given the unsecured debt. An amendment of the claim is the usual and an orderly way to attain this.”); Richard Roberts, 171 B.R. at 548-49 (“[T]he deficiency claim of Marble Bank arose from the same transaction or occurrence as the timely filed secured claim. Moreover, Marble Bank has given sufficient notice of its claim in the course of the bankruptcy proceeding by timely filing its secured claim.”).
Nor would amendment be futile. Indeed, Fifth Third will receive a dividend on its unsecured claim as a result of the amendment. And that is the rub — other unsecured creditors will receive less if Fifth Third is permitted to amend its claim. As the Trustee points out, the “[allowance of [Fifth Third’s] claim would result in a diminished distribution” to other unsecured creditors. Resp. at 4.
It may well be that a decreased dividend constitutes prejudice to the creditors who otherwise would have received more. See In re Outdoor Sports Headquarters, Inc., 161 B.R. 414, 422 (Bankr.S.D.Ohio 1993) (“[M]ost amendments to proofs of claims brought after the bar date create prejudice to the extent that their allowance will often diminish the amount of the otherwise available distribution.... ”). But a decreased dividend — in and of itself — “does not establish the kind of ‘prejudice’ [that] would preclude amendment” of a creditor’s claim. In re Dietz, 136 B.R. 459, 469 (Bankr.E.D.Mich.1992). See also Gens, 112 F.3d at 575 (“Gens ... suggests simply that allowing the ... amendment prejudices unsecured creditors, who may receive less ... than would have been received were the FDIC claim not allowed. But the standard Gens proposes would preclude virtually any amendment, since it dispenses with the requirement that the debtor or trustee show ‘unfair’ prejudice. [Something more than mere creditor disappointment is required to preclude amendment.”); In re Stoecker, 5 F.3d 1022, 1028 (7th Cir.1993) (“The bankruptcy judge thought there was harm to other creditors because if the bank’s claim is allowed, the entitlements of the unsecured creditors will be cut down. This is a misunderstanding of what it means for an error to be harmful in the sense of ‘prejudicial,’ that is, entitling the person harmed to complain. To say that an error is prejudicial means not that if the error is corrected someone will lose, which is almost always true, but that the error itself imposed a cost, as by misleading someone.”); McAbee, 116 F.2d at 1003 (“Appellant has a provable debt unsecured. Not only has this estate not been closed, but no dividend has yet been paid. To allow her to prove it will be only just to her and will do other creditors no wrong.”) (citations and internal quotation marks omitted); Ashland Steel, 168 F. at 682 (holding that priority creditors were not harmed by other creditors’ amendment of their claims from general unsecured to priority status because, although the objecting priority creditors “may lose the increase in dividends which they would gain by shutting the others out ... the sum of the whole matter is that those creditors are put on the same plane *145with the [objecting creditors], a position to which they are equally entitled unless by some slip, which the law treats as fatal, they have lost it”).
In short, a decreased dividend alone is insufficient to prohibit an amendment because “it is not whether such prejudice exists [that matters], but whether the prejudice is undue or substantial.” Outdoor Sports, 161 B.R. at 422. In Outdoor Sports, the bankruptcy court noted that “substantial or undue prejudice involves an irrevocable change in position or some other detrimental reliance on the status quo.” Outdoor Sports, 161 B.R. at 422 (internal quotation marks omitted).9 There is no evidence of any such irrevocable change in position or detrimental reliance on the part of creditors here.10 The Court, therefore, finds that no undue or substantial prejudice to other creditors will result from Fifth Third’s amendment of its claim. Based on the foregoing, the Court concludes that it would not be inequitable to allow Fifth Third’s amendment to its claim.
V. Conclusion
For the foregoing reasons, the Court sustains the Objection and holds that, to the extent that Fifth Third’s unsecured claim is not otherwise subject to reduction or disallowance, its amended claim is allowed, and it may participate in the pro rata distribution of property that the Trustee will be making to the holders of general unsecured claims.
IT IS SO ORDERED.
. For ease of reference, the Court will refer to the Channakhons individually by first name and collectively as the “Debtors.”
. If the fees for Rhiel & Associates appear to be higher than they might typically have been in a case where a mortgage was avoided by agreement, there are two reasons for this. First, Fifth Third originally opposed the avoidance requested by the Trustee and relented only after the issuance of the Court’s decision in Rhiel v. Huntington Nat’l Bank (In re Phalen), 445 B.R. 830 (Bankr.S.D.Ohio 2011). See Resp. at 2 ("Fifth Third filed its response [to the Trustee’s motion for summary judgment] and the matter was pending ... when the parties were able to reach an agreement following this Court’s decision in [Phalen']."). Second, the Debtors failed to cooperate with — and in fact actively opposed — many of the Trustee’s actions in this case, including her efforts to sell the Property, making it necessary for Rhiel & Associates to file a motion for turnover against the Debtors on behalf of the Trustee (Doc. 115), which the Court granted. See Doc. 121. In any event, Fifth Third did not object to the fees and expenses of either the Trustee or Rhiel & Associates, the Court had no issue with those fees and expenses and no other party in interest filed an objection to the Final Report. Accordingly, on November 22, 2011, the Court entered an agreed order between the Trustee and Fifth Third (Doc. 152) providing that the fees and expenses of the Trustee and Rhiel & Associates would be entitled to immediate payment upon entry of that agreed order.
. The Final Report states that unsecured creditors will receive a dividend of 6.9%. During the hearing on the Final Report, it became apparent that the discrepancy between the 6.9% and 28% dividend was the inadvertent result of an error in calculation and that the correct amount to be distributed to the holders of timely filed unsecured claims is in fact $31,921.09.
. The excusable neglect standard of Bankruptcy Rule 9006(b) that has been used to permit late filings of proofs of claim in Chapter 11 cases does not apply to the late filing of claims in Chapter 7 cases. See Pioneer Inv. Servs. Co. v. Brunswick Assocs. Ltd. P'Ship, 507 U.S. 380, 389, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993) ("The 'excusable neglect’ standard of Rule 9006(b)(1) governs late filings of proofs of claim in Chapter 11 cases but not in Chapter 7 cases.”). Thus, a creditor will receive a distribution on a tardily filed general unsecured claim only if the creditor lacked notice or actual knowledge of the case in tifne to file a timely proof of claim or if assets remain after the payment in full of timely filed general unsecured claims. See 11 U.S.C. § 726(a)(2)(C) & (a)(3).
. "A judgment does not become final for the purpose of starting the 30 day period provided for by paragraph (3) until the time for appeal has expired or, if an appeal is taken, until the appeal has been disposed of.” Fed. R. Bankr.P. 3002(c) Advisory Committee Notes.
. At least one court has held that the deadline for filing a proof of claim subject to Bankruptcy Rule 3002(c)(3) is the general bar date or 30 days after the judgment becomes final, whichever is later. See Rothman v. Mozino (In re Rothman), No. 96-12167, 1997 WL 9994, at *6 (Bankr.E.D.Pa. Jan. 7, 1997) ("[T]he Debtor misreads [Bankruptcy Rule] 3002(c)(3) as shortening the bar date for claims based on judgments. Rather, this Rule merely permissively extends the time for a judgment holder, allowing that such a claim 'may be filed within 30 days after the judgment becomes final’ even if the judgment is entered after the bar date. It does not shorten the bar date for judgment holders.”).
. But see In re McBride, 337 B.R. 451, 460 (Bankr.N.D.N.Y.2006) (holding that a proof of claim that sought to assert an unsecured deficiency claim was a new claim that could not be asserted after the bar date); In re Matthews, 313 B.R. 489, 494 (Bankr.M.D.Fla.2004) ("Secured claims are of an entirely different nature than unsecured claims, notwithstanding that both types of claims may arise from the same transaction — in this case, a loan secured by collateral that is worth less than the debt. Therefore, the attempt to change the status of a claim from secured to unsecured is not considered an amendment, in the traditional sense, that is to be freely allowed.”).
. In Meade Tool, the Sixth Circuit, after concluding that creditors “are not permitted [to amend a claim] where the effect is to substitute an entirely different cause of action after the time for filing claims has expired,” 164 F.2d at 231, held that a creditor who had originally filed a claim as unsecured would be permitted to amend it to assert secured status. Id. at 232. The Sixth Circuit also has held that amending a claim from general unsecured to priority status does not constitute the assertion of a new claim. See Ashland Steel Co., 168 F. at 680 ("[I]t was within the power of the court to allow the claims priority, and give them the preference to which by law they were entitled, notwithstanding no definite claim of the kind had been made during the year. It was not the allowance of a new claim ... but the giving [of] full scope to one already proved. It was essentially the ascertainment of its rank to be regarded in the distribution of the assets.”). The Court recognizes that there is contrary authority. See Highlands Ins. Co. v. Alliance Operating Corp. (In re Alliance Operating Corp.), 60 F.3d 1174, 1175 (5th Cir.1995) ("Amendments to proofs of claim that change the nature of the claim from an unsecured status to a priority status set forth a new claim.”); In re Walls & All, Inc., 127 B.R. 115, 118 (W.D.Pa.1991) ("[W]here a claimant attempts to change the nature of the proof of claim, such amendments are generally disallowed.”); In re Taylor, 280 B.R. 711, 715 (Bankr.S.D.Ala.2001) ("Since Empire is now claiming it is a secured creditor, that makes its claim an entirely new one.”). The Court, however, is bound to follow controlling Sixth Circuit precedent.
. See also In re Cavalier Indus., Inc., No. 99-3173, 2003 WL 716291, at *4 (Bankr.E.D.Pa. Feb. 6, 2003) (“As a general rule unsecured creditors are claimants of equal legal rank entitled only to share pro rata in whatever remains after payment of secured and priority claims.... Here the Trustee has asserted no detrimental reliance by any creditor on a particular percentage but merely that each creditor will receive a smaller dividend by reason of the participation of these additional creditors in the distribution.”) (citation omitted); Dietz, 136 B.R. at 469 ("[T]he type of prejudice which would bar a creditor from amending its proof of claim typically involves an irrevocable change in position or some other detrimental reliance on the status quo.”).
. While there conceivably could be unusual circumstances in which a creditor holding a claim against a Chapter 7 estate detrimentally relies on, or irrevocably changes position based on, a trustee’s final report, nothing in the record suggests that the Court is faced with such a circumstance here. In fact, there is little — if any — possibility that there could have been an irrevocable change in position or detrimental reliance in this particular case given that, even when Fifth Third’s unsecured claim is included in the distribution to unsecured creditors, the dividend is approximately 16% — more than the 6.9% dividend that the Final Report erroneously notified creditors they would be receiving. Indeed, because there is no plan of reorganization or liquidation in a Chapter 7 case, it is unlikely that there will be an irrevocable change in position or detrimental reliance in a Chapter 7 case even when the final report is accurate. By contrast, detrimental reliance and an irrevocable change in position will be more common in Chapter 11 and Chapter 13 cases, especially after confirmation of the plan. See, e.g., In re Winn-Dixie Stores, Inc., 639 F.3d 1053, 1056 (11th Cir.2011) (“Although amendment should be freely granted prior to confirmation ... amendment of a creditor's claim after confirmation of a plan can render a plan infeasible or alter the distribution to other creditors [after they have voted to accept the plan.]”); In re Wilson, 136 B.R. 719, 723 (Bankr.S.D.Ohio 1991) ("The Debtor vehemently opposes allowance of the Supplemental Claim and argues that she has satisfied, in full, her obligations to AVCO under the terms of the Plan. The Plan, contends the debtor, is expected to be completed shortly. Allowance of the Supplemental Claim at this late date would be inequitable given the amount of money she has paid AVCO through the Plan and AVCO’s tardiness in filing its supplement.”). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494580/ | Decision Denying the Chapter 7 Trustee’s Motion for Summary Judgment and Granting Midland Mortgage Company’s Motion for Summary Judgment
GUY R. HUMPHREY, Bankruptcy Judge.
I. Introduction
The Chapter 7 trustee seeks to avoid a mortgage encumbering property of this bankruptcy estate because of the manner *147in which the acknowledgment clause was certified by the notary public. The trustee argues that the certification of the mortgagors’ acknowledgment of their signatures upon the mortgage is not in substantial compliance with Ohio law because the notary’s name is not typed, printed, or stamped on the acknowledgment. The only placement of the notary’s name on the acknowledgment is through an illegible signature. The court finds that the notary’s illegible signature on the acknowledgment is sufficient to comply with Ohio law.
II. Procedural Background
On September 2, 2011 the Chapter 7 trustee, Roger E. Luring (the “Trustee”), filed a complaint to avoid a mortgage held by Midland Mortgage Company (“Midland”) on the debtor’s residence (doc. 1). The complaint seeks to avoid Midland’s mortgage and recover the value of the property for the bankruptcy estate. Midland filed an answer on October 28, 2011 (doc. 14). On December 2, 2011 the Trustee moved for summary judgment against Midland (doc. 27). Midland responded and filed its own motion for summary judgment (doc. 84) and the Trustee responded to that motion (doc. 35). The Trustee originally pled in his complaint that the notarial seal was omitted, but later stipulated that the acknowledgment clause in question does have a notarial seal (doc. 36).
The relevant facts are undisputed. The Debtors, Charles Michael White and Robin Marie White (the “Whites”), own real property located at 606 Second Street in Piqua, Ohio (the “Property”). Midland is the current holder of a loan obligation undertaken by the Whites. The loan is secured by an open-end mortgage the Whites granted which created a lien against the Property in favor of Midland (the “Mortgage”). The Mortgage was recorded in Volume 1283, Page 279 on April 26, 2002 in the records of Miami County, Ohio. The Mortgage was originally held by First Choice Mortgage Corporation prior to the assignment of the secured obligation to Midland. On page 7 of the Mortgage, the Whites executed the Mortgage, and the acknowledgment clause appears immediately below the Whites’ signatures. The acknowledgment clause is as follows:
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*148III. Jurisdiction
This court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. § 1334 and this is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (B), (F), (K) and (0).
IV. Analysis
A Chapter 7 trustee may avoid certain defectively executed mortgages and recover the property or its value for the benefit of the estate’s creditors using the trustee’s “strong arm powers” under Bankruptcy Code § 544.1 See Rieser v. Fifth Third, Mtge. Co. (In re Wahl), 407 B.R. 883, 892-94 (Bankr.S.D.Ohio 2009). A mortgage granted upon Ohio real estate may be avoided by the trustee when the mortgage is not executed in substantial compliance with Ohio law. Noland v. Burns (In re Burns), 435 B.R. 503, 511-12 (Bankr.S.D.Ohio 2010) (discussion of Ohio law regarding defectively executed acknowledgment clauses and the doctrine of substantial compliance). A mortgage not executed in substantial compliance with Ohio law is not entitled to be recorded. Id. at 508. If such a mortgage is recorded, it is treated as though it had not been recorded. Id.
The motions for summary judgment require the court to determine whether the Mortgage’s acknowledgment clause is in substantial compliance with the requirement that the mortgagors’ acknowledgment be certified by a notary public or other proper public official. Absent a definitive ruling from the Supreme Court of Ohio on the issue raised by the parties — in this case whether the illegible signature of the notary is sufficient by itself to comply with Ohio law — this court must make the best prediction of what Ohio’s highest court would do if confronted with this issue. Hazlett v. Chase Home Fin. (In re Nowak), 414 B.R. 269, 275-76 (Bankr.S.D.Ohio 2009).
The Trustee argues the certification was not in substantial compliance because the name of the notary was not printed on the seal or separately printed, typed, or stamped legibly upon the certification as described in Ohio Revised Code § 147.04. Even if a notary’s signature was sufficient, the Trustee further asserts this particular signature is not because it appears to be illegible. Finally, the Trustee states extrinsic evidence cannot be used to prove that the signatory is a notary. Midland argues that all of the issues and arguments raised by the Trustee in this proceeding were addressed adversely to the trustee in the recently reported decision of Stubbins v. BAC Home Loans Servicing, L.P. (In re Sunnafrank), 456 B.R. 885 (Bankr.S.D.Ohio 2011) (Preston, J.) and that its reasoning should be followed.
Ohio Revised Code § 5301.01(A) sets forth the requirements for the proper execution of instruments conveying interests in real estate in Ohio. It states that:
A deed, mortgage, land contract as referred to in division (A)(2)(b) of section 317.08 of the Revised Code, or lease of any interest in real property and a memorandum of trust as described in division (A) of section 5301.255 of the Revised Code shall be signed by the grantor, mortgagor, vendor, or lessor in the case of a deed, mortgage, land contract, or lease or shall be signed by the trustee in the case of a memorandum of trust. The signing shall be acknowledged by the grantor, mortgagor, vendor, or lessor, or by the trustee, before a judge or clerk of a court of record in this state, or a county auditor, county engineer, nota*149ry public, or mayor, who shall certify the acknowledgement and subscribe the official’s name to the certificate of the ac-knowledgement.
As this statute makes clear, the acknowledgment clause must include an execution of the certificate by a proper officer. Id. at 890, citing Mid-American Nat’l Bank & Trust Co. v. Gymnastics Int’l, Inc., 6 Ohio App.3d 11, 451 N.E.2d 1243, 1244 (1982). The individual authorized to certify the acknowledgment must “subscribe” his name to the certificate. Fund Comm’rs of Muskingum County v. Glass, 17 Ohio 542, 544-45 (1848); Sunnafrank, 456 B.R. at 892. Thus, the issue presented in this proceeding relating to the Mortgage is what “subscribe the official’s name to the certificate” means in Ohio Revised Code § 5301.01(A).
The Trustee argues that “subscribe” one’s name in § 5301.01(A) means to print, stamp, or type one’s name on the acknowledgment. There is some support for this position. As the Trustee points out, Ohio Revised Code § 147.04, addressing a notary’s seal, states that: “The name of the notary public may, instead of appearing on the seal, be printed, typewritten, or stamped in legible, printed letters near his signature on each document signed by him.” Thus, the Trustee argues from this statute that the notary’s name must be legibly printed, typed, or stamped on each document which a notary signs and, if not, the notary’s signature is ineffective. As the court pointed out in Sun-nafrank, “subscribe” is sometimes defined as “to write (as one’s name) underneath.” Sunnafrank, 456 B.R. at 893, citing Webster’s Third New International Dictionary 2278 (2002). Thus, the Trustee’s argument that “subscribe” in § 5301.01(A) means to print, type, or stamp the notary’s name on the mortgage is credible.
Midland on the other hand, relying on Sunnafrank, argues that “subscribe” under § 5301.01(A) means “sign” and that the notary did sign the acknowledgment and, therefore, the acknowledgment complies with the acknowledgment certification requirements. Judge Preston in Sunnafrank specifically held that “subscription” is “[t]he act of signing one’s name on a document.” Sunnafrank, 456 B.R. at 893, n. 5, citing Black’s Law Dictionary 1468 (8th ed. 2004).
The court agrees with Judge Preston that the term “subscribe” in § 5301.01(A) references the notary’s affixing of his signature to the acknowledgment. Ohio Revised Code § 5301.01 does not require more than a signature of an authorized officer to certify an acknowledgment clause.
First, while “subscribe” may mean to print or type one’s name underneath one’s signature, it can also mean to sign one’s name. See Sunnafrank, 456 B.R. at 893. In fact, as pointed out in Sunnafrank, “subscription” is defined by Black’s Law Dictionary as “the act of signing one’s name on a document.” Id.
Second, a review of Ohio statutes with similar acknowledgment or certification provisions confirms that the Ohio legislature intended “subscribe” to mean to sign the notary’s signature. Ohio Revised Code § 5311.05(A) concerns condominium declarations and has the closest parallel language to § 5301.01. The statute provides that the notary public or other qualified public official “shall certify the acknowledgment and subscribe the certificate of acknowledgment.” The term subscribe, as used in the similar language of that statute, logically refers to a signature. See also Nowak, 414 B.R. at 275 (In addressing an acknowledgment clause in which the notary signed, but did not have a seal or a separate handwritten, *150printed or typed name of the notary, the court stated that “[t]he trustee does not dispute that.... [the asserted notary] certified and subscribed her name to the Certificate of Acknowledgment.”).
Third, the Ohio Revised Code consistently uses the word subscribe to describe an official’s signing of a document in the exercise of that official’s duties or acts, such as in the giving or taking of an oath, the witnessing of a will, or the certification of an acknowledgment. See, e.g., Ohio Revised Code §§ 1337.12(B) (In addressing the creation of a living will: “Then, each witness shall subscribe the witness’s signature after the signature of the principal.”); 2133.02(B)(1) (similar); 147.03 (“Before entering upon the duties of office, a notary public shall take and subscribe an oath to be endorsed on the notary public’s commission.”); 5919.05 (similar oath language for commissioned officers of the National Guard); and 2107.03 (“The will shall be attested and subscribed in the conscious presence of the testator, by two or more competent witnesses, who saw the testator subscribe, or heard the testator acknowledge the testator’s signature.”). The Supreme Court of Ohio has recognized subscribe to mean signature in official contexts. Office of Disciplinary Counsel v. Bandy, 81 Ohio St.3d 291, 690 N.E.2d 1280, 1281 (1998) (In discussing improper conduct regarding the witnessing of a will, the court stated: “Although respondent claims that his acts were based on a misunderstanding ... by obtaining his secretary’s signature, respondent induced her to subscribe to a false statement.” (emphasis added)). Thus, while § 5301.01 refers to “signing” by the grantor, it uses the term “subscribe” to address the notary or other official completing the acknowledgment certification through the affixing of the official’s signature.
Ohio Revised Code Chapter 147, including § 147.04 cited by the Trustee, addressing notaries’ appointment, duties, qualifications, term of office, and other matters pertaining to notaries’ service, does not require that the name of the notary or other person who certifies the acknowledgment be placed on the acknowledgment other than through the official’s signature. A notary public is authorized to perform “notarial acts.” Ohio Revised Code § 147.51(A). Ohio Revised Code § 147.52(A) then states what is necessary to establish that a notary is authorized to act as a notary:
If a notarial act is performed by any of the persons described in divisions (A) to (D) of section 147.51 ... the signature, rank, or title and serial number, if any, of the person are sufficient proof of the authority of a holder of that rank or title to perform the act. Further proof of his authority is not required.
Ohio Rev.Code § 147.52(A) (emphasis added). Thus, the printing, typing, or stamping of the notary’s name on the acknowledgment is not required to prove the authority of the notary to act.
Additionally, Ohio Revised Code § 147.04, relied upon by the Trustee, addresses the notary seal and does not mandate the name of the individual be located upon the seal, but indicates the name may, instead of appearing on the seal, be printed, typewritten or stamped near the signature. The statute does contemplate the name, apart from the signature, be separately part of the certification. However, once the certification is completed by an individual identified as a notary or other appropriate officer and signed, the court finds it is within substantial compliance with Ohio law. The requirement of the separate name is not contemplated by Ohio Revised Code § 147.52(A), which specifically addresses the authority of the certify*151ing individual. The seal is not mandated for substantial compliance and, therefore, absent a separate legal infirmity, such as the title of the individual not being identified, the certification is, while not in complete compliance with Ohio Revised Code § 147.04, in substantial compliance with Ohio law. See current version of Ohio Revised Code § 5301.071(B)2 (“No instrument conveying real estate, or any interest therein, and of record in the office of the county recorder of the county within this state in which such real estate is situated shall be deemed defective nor shall the validity of such conveyance be affected because ... [t]he officer taking the acknowledgment of such instrument having an official seal did not affix such seal to the certificate of acknowledgment.”); Nowak, 414 B.R. at 279. Section 147.52 and not § 147.04 is the statute addressing the requirements for a notary or other appropriate officer to show his authority. Thus, in unequivocal language, these statutes demonstrate that the authority to certify an acknowledgment clause does not require that the name of the individual be placed upon the certificate other than through the official’s signature.
The certification in question includes both a signature identifying the signatory as a notary public in two places and the phrase “notarial seal.” This is sufficient to substantially comply with § 5301.01(A). Unlike another bankruptcy court decision from this District concerning an inadequate certification, this instrument identifies the individual as a notary. Cf. Nowak, 414 B.R. at 280, citing Johnston’s Lessee v. Haines, 2 Ohio 55 (1825) (a certification of an acknowledgment clause must be performed by an authorized officer and that proof must be provided upon the certification itself). In Nowak, the asserted notary was identified only as a “broker” and a notarial seal was not included as part of the certification. By contrast, in the Mortgage, the seal identifies the individual subscribing the certification as a notary because it states “notary public” in the text and under the notary’s signature. Unlike the requirement that the acknowledgment must be certified by an authorized officer, Ohio case law does not mandate that the individual be identified for substantial compliance. As noted, this requirement is part of the statute addressing the seal requirements and a seal is not required in order for an otherwise acceptable acknowledgment clause to be in substantial compliance with Ohio law. Ohio Revised Code § 5301.071(B). Nowak was not based on the statutory requirement that the seal be complete in all respects, but the longstanding Ohio case and statutory law, which was traced to the present state of Ohio law, states that the title of the authorized individual who certified the acknowledgment clause must be identified. The Mortgage in question properly identified the title of the individual as a notary public and, therefore, does not implicate Nowak.
For all these reasons, the acknowledgement clause was certified by a notary public and the lack of a stamped, printed, or handwritten name upon the seal or near the notary’s signature does not prevent this court from finding the certification substantially complied with Ohio law. The court agrees with the conclusion of Sun-nafrank on this question. 456 B.R. at 893. The court did not consider any extrinsic evidence outside the acknowledgment clause to reach this ruling.3
*152Y. Conclusion
The Trustee’s motion for summary judgment is denied and Midland’s motion for summary judgment is granted. The court will concurrently enter an order consistent with this decision.
IT IS SO ORDERED.
. Unless otherwise noted, all statutory references are to the Bankruptcy Code of 1978, as amended, 11 U.S.C. §§ 101-1532, cited hereinafter in this decision as "§ _".
. Effective March 22, 2012 Ohio Revised Code § 5301.071 included technical changes, but those changes would not have affected this court's interpretation of the statute.
. The Trustee has not provided evidence or even alleged that the acknowledgment clause is not what it purports to be, that is, the product of fraud. In other words, the Trustee *152has argued that the acknowledgment clause certification was not completed in substantial compliance with Ohio law due to the failure to comply with a statutory requirement under Ohio law, not that an individual impersonated a notary public at the closing or fraudulently signed the signature of another. In such an unusual situation where the Trustee, despite the acknowledgment clause, had some reason to question the authority of the notary, the burden may be on the mortgagee. Cf. Ashley v. Wright, 19 Ohio St. 291, 295-96 (1869); Sunnafrank, 456 B.R. at 893. The affidavit of the notary submitted by Midland refutes any such theoretical issue and the Trustee has not disputed those facts. While the court agrees that extrinsic evidence could not be used to cure an otherwise defective acknowledgment clause (See Terlecky v. Chase Home Fin., LLC (In re Sauer), 417 B.R. 523, 535-39 (Bankr.S.D.Ohio 2009)), the court construes the affidavit as merely refuting this possible factual issue that never arose. Thus, the court does not construe the affidavit as curing a defectively executed mortgage — the court finds that the mortgage was executed in substantial compliance with Ohio law without consideration of the notary’s affidavit because the certification is signed and the certification identifies the signatory on the certification as a notary. Nothing more is required. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494581/ | OPINION GRANTING THE BADILLO DEFENDANTS’ MOTION FOR SUMMARY JUDGMENT, AND DENYING THE TRUSTEE’S CROSS-MOTION FOR SUMMARY JUDGMENT
RANDOLPH J. HAINES, Bankruptcy Judge.
This issue here is whether a debtor’s change of the beneficiary designated on a term life insurance policy is a transfer of an interest in property that can be avoided as a fraudulent transfer under Code § 548. The Court concludes that the change of beneficiary cannot be avoided as a fraudulent transfer because applicable Arizona law does not provide designated beneficiaries of term life policies any rights, during the life of the insured, that could amount to a property interest recognized by federal bankruptcy law.
Background Facts
In 1999 Great American Life Insurance Company issued a term life insurance policy on the life of Mrs. Terry Meza. The policy was for a $300,000 death benefit, naming Mrs. Meza’s husband, the current debtor, as the primary beneficiary. Mrs. Meza was diagnosed with terminal cancer about ten years later, in January 2009. On September 5, 2009, Mrs. Meza submitted a change of beneficiary request to .Great American designating her daughter, Anna Badillo, as the primary beneficiary under the policy. Both parties agree Mrs. Meza was the insured and had the authority to change the beneficiary on the policy. On September 23, 2009, Great American Life Insurance Company sent correspondence to Mrs. Meza acknowledging receipt of her change of beneficiary form. Three days later Mrs. Meza passed away. One month later Anna Badillo submitted a claimant’s statement seeking payment of the insurance proceeds under the policy.
Mr. Meza filed this chapter 7 bankruptcy case about a year and a half after his wife passed away. The Chapter 7 Trustee filed an adversary complaint asking Defendant Anna Badillo 1 to disgorge the insurance proceeds that were received through the life insurance policy on the life on her mother, Terry Meza.
The Badillo Defendants filed a motion for summary judgment and the Trustee filed a cross-motion for summary judgment. Following oral argument, the matter has been submitted to the Court.
*154Analysis
The central issue in this case is whether Arizona law recognized such a bundle of rights held by Mr. Meza, as a beneficiary, prior to his wife’s death, that bankruptcy law would regard as “an interest of the debtor in property” that could be the subject of a § 548 fraudulent transfer action. To resolve this question, the court must first determine whether the Debtor, Mr. Meza, had any interest in the term life policy and, if so, whether that interest was transferred (voluntarily or involuntarily) within two years before the petition date.
On the first issue, the Trustee argues that the Debtor, Mr. Meza, was an “owner” of the policy in September, 2009 because even though his wife was the insured, it was community property and Arizona is a community property state. The Trustee also argues that the Debtor’s interest in the policy is demonstrated by the fact that he listed himself as an owner when he jointly signed the beneficiary change form. The Badillo Defendants argue that the policy itself reflected only Mrs. Meza as the owner of the policy, and that the Debtor’s listing of himself as an owner on the beneficiary change form does not make him an owner.
The Arizona Supreme Court has held that prior to the insured’s death, the spouse of an insured “had no community interest in anything of value connected with the term policy except any dividends or unearned premium.”2 On the one hand that does imply that the spouse does have a community property ownership interest in a term life policy, notwithstanding that in Alarcon as is the case here, only one spouse, the insured, “was designated in the life insurance policy as the owner of the policy.”3 But on the other hand the holding is that the ownership interest in the term life policy has no value unless there are dividends or an unearned premium, which is not contended here.
But regardless of whether there is a spouse’s ownership interest in the policy, or its value prior to death, that is not what was transferred here, nor what the Trustee seeks to recover by his avoidance action. The transfer of the ownership of a policy is clearly distinct from the mere change of beneficiary, even when there is no cash surrender value.4 Here, there was no transfer of the ownership of the policy. The community property ownership interest in the policy at issue here was never transferred, and remained with the Debtor until the policy was paid.
So the precise question here is whether the mere change of beneficiary, without a change in ownership of the policy, is a transfer of property. This depends on what bundle of rights the applicable state law recognizes in the named beneficiary. This is because in the absence of any controlling federal law, we must look *155to state law to ascertain what rights exist, and then to federal law to determine whether that bundle of rights is sufficient to be recognized as a property right.5
Under Arizona law, beneficiaries of term-life insurance policies have no vested interest in the policy until the death of the insured. The insured may change his designation of beneficiary at will up until the time of his death. As stated by the Arizona Supreme Court in McLennan, “Under insurance certificates of this nature, the beneficiary has no vested interest in the certificate until the death of the insured member. Up to such time the latter may change his designation of beneficiary at will.”6 McLennan and Doss are unequivocal holdings that Arizona law provides the beneficiary, prior to the insured’s death, has “no vested right which the law protects,” and Arizona courts have not recognized any exceptions to those holdings. And Ninth Circuit law is clear that when state law recognizes no such vested right, bankruptcy law cannot find a property interest to exist, but only a mere expectancy.7
The Trustee argues that a named beneficiary’s interest in a life insurance policy may have some value that the law protects once the insured knows of her impending death. In support of this argument he cites two California cases. In Bryson,8 the California Court of Appeals upheld a fraudulent transfer to recover the death proceeds when the insured changed the beneficiary four months prior to committing suicide. The court reasoned that “the knowledge of impending death removed the element of contingency and gave the policy at the time of its transfer ‘an actual pecuniary value closely approximating its face amount.’ ”9 And then Headon held that the rule of Bryson was not limited to changes of beneficiary made in contemplation of death, because that fact merely “increases the present value of the policy to something approaching its face value.”10 Those California cases, as well as an Indiana case the Trustee cites,11 seem to eliminate the Code’s requirement to find a transfer “of an interest of the debtor in property” as a necessary prerequisite to finding a fraudulent transfer, by stating the only “relevant inquiry is whether the debtor has put some asset beyond the reach of creditors which would have been available to them but for the conveyance.” 12
But while Bryson and Headen are undoubtedly correct that knowledge of impending value increases the market value of a term life policy, the existence of value alone is not determinative of whether state law protects a sufficient bundle of rights to *156be deemed a property interest. While they may imply that California does recognize some vested right in the beneficiary, regardless of knowledge of impending death, that is clearly not the law in Arizona under Alarcon, McLennan and Doss. Without recognition of any vested right in the beneficiary, there is no possibility of a federal court concluding that a property interest exists under state law.
The clear lack of any right in the beneficiary that is protected by law makes this situation entirely distinguishable from the protected right of a legatee, prior to a disclaimer, which some federal law may recognize as constituting a property right even if state law is to the contrary.13 And it is certainly the governing law in the Ninth Circuit, which has held, after Drye, that the “right to channel” by exercising the disclaimer under Arizona law, prior to either the fixing of a federal tax lien or the filing of a bankruptcy petition, “is not a ‘transfer ... of an interest of the debtor in property’ for purposes of § 548.”14 Obviously the legatee’s inheritance had a very definite, fixed value prior to the disclaimer, and yet that mere existence of value and lack of contingency was not sufficient for the Ninth Circuit to find that a property interest existed under Arizona law.
This is also the clear holding of the Ninth Circuit in Harrell,15 where the seniority right to renew a professional basketball season ticket clearly had very substantial value. But because that seniority was not protected by state law it was a mere expectancy, regardless of its value, and not a sufficient bundle of rights to constitute a property interest that could become property of the estate. Under governing Arizona law, the beneficiary’s interest is similarly not protected and therefore a mere expectancy, regardless of how valuable it might become upon knowledge of impending death.
Because the Trustee cannot satisfy his burden of proving that the change of beneficiary constituted a transfer of “an interest of the debtor in property,” the Badillo Defendants’ motion for summary judgment must be granted, and the Trustee’s cross-motion for summary judgment denied. The Badillo Defendants are instructed to lodged a form of judgment consistent herewith.
. The Court notes that the Trustee filed suit against Anna Badillo and John Doe Badillo, husband and wife, as Defendants. In their motion for summary judgment, the Badillo Defendants identify Mr. Badillo as “Alex Ba-dillo.”
. Howard v. Mejia (In re Estate of Alarcon), 149 Ariz.336, 718 P.2d 989, 992 (1986).
. Id. at 990. Accord, Neely v. Neely, 115 Ariz. 47, 563 P.2d 302, 307 (1977) ("When we come to consider the strong presumption that property purchased with community funds remains community property, even though title be taken in the name of the wife alone, we do not think the mere fact that the policies contained provisions giving the insured broad powers, created a gift from the husband to the wife, as a matter of law.... Consideration of the foregoing leads us to conclude that the policies remained community property....”) (internal citation omitted).
. Union Cent. Life Ins. Co. v. Flicker, 101 F.2d 857, 858 & 860 (9th Cir.1939) ("the insured changed the beneficiary in the policy ... and on the following day assigned it 'together with all rights reserved to me as the insured,' " and under California law "an assignment of a policy presents a stronger case as a transfer” than does a mere change of beneficiary).
. Butner v. United States, 440 U.S. 48, 54, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979) ("Congress has generally left the determination of property rights in the assets of a bankrupt’s estate to state law”).
. McLennan v. McLennan, 29 Ariz. 191, 240 P. 339, 340 (1925). Accord, Doss v. Kalas, 94 Ariz. 247, 383 P.2d 169, 172 (1963) ("The beneficiary, during the life of the insured, has no vested right which the law protects and the insured, if the right to name the beneficiary is not irrevocable, may the change the beneficiary without his consent and without notice to him.”).
. In re Harrell, 73 F.3d 218 (9th Cir.1996)
. Bryson v. Manhart, 11 Cal.App.2d 691, 54 P.2d 778 (1936).
. Headen v. Miller, 141 Cal.App.3d 169, 190 Cal.Rptr. 198, 201 (1983), quoting Bryson, supra.
. Headen, 190 Cal.Rptr. at 203.
. In re First Fin. Assocs., Inc., 371 B.R. 877, 893-95 (Bankr.N.D.Ind.2007).
. Headen, 190 Cal.Rptr. at 202.
. E.g., Drye v. United States, 528 U.S. 49, 120 S.Ct. 474, 145 L.Ed.2d 466 (1999).
. Gaughan v. Edward Dittlof Revocable Trust (In re Costas), 555 F.3d 790, 797 (9th Cir.2009).
. In re Harrell, 73 F.3d 218 (9th Cir.1996). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494582/ | MEMORANDUM OF DECISION
TERRY L. MYERS, Chief Judge.
Before the Court is creditors Alamar Ranch, LLC and YTC, LLC’s “Objection to Chapter 9 Case of Boise County and Motion to Dismiss the Case,” Doc. No. 69 (“Motion”).1 The matter was heard by the Court on June 28-30, 2011, and taken under advisement on July 15, 2011, after the submission of post-hearing briefing. This *161Memorandum of Decision constitutes the Court’s findings and conclusions, based on its review of the record, the parties’ arguments, and applicable authorities. See Fed. R. Bankr.P. 7052, 9014.
FACTS
A. Alamar Judgment
Alamar and YTC are Idaho limited liability companies. Boise County (the “County”) is a rural mountain county in the state of Idaho with a population of approximately 7,000. The County’s seat, Idaho City, is located roughly 40 miles northeast of the City of Boise.
On January 8, 2009, Alamar and YTC (hereinafter referred to collectively as “Alamar”) filed a complaint in the United States District Court for the District of Idaho against the County, Case No. 01:09-cv-00004-BLW (“District Court Case”).2 The complaint stemmed from conditions the County had imposed on a Conditional Use Permit requested by Alamar in April 2007 in order to operate a residential treatment facility and private school for at-risk youth on a piece of property located within the County.3 Alamar alleged that the conditions imposed by the County were illegal and discriminatory under the Fair Housing Act, 42 U.S.C. §§ 3601-3619. District Court Case, Doc. No. 1.
The County submitted the Alamar lawsuit to its insurer, the Idaho Counties Risk Management Program (“ICRMP”), and requested that ICRMP defend the lawsuit under the County’s policy. ICRMP denied coverage and refused to defend the lawsuit. The County filed a suit for declaratory relief in Idaho state court, seeking a ruling that ICRMP had a duty to defend the County against the Alamar litigation. The state court eventually rendered summary judgment against the County and in favor of ICRMP. The County appealed the state court’s ruling to the Idaho Supreme Court. That appeal is still pending.
On December 16, 2010, following a nine-day trial, a jury rendered a verdict in Alamar’s favor and against the County for $4,000,000, finding the County had violated the Fair Housing Act. District Court Case, Doc. No. 207. The following day, the District Court entered a Judgment against the County for “the sum of $4,000,000, with interest to accrue at the applicable federal rate.” District Court Case, Doc. No. 210.
On December 30, 2010, Alamar filed a “Bill of Costs” and a “Motion for Attorney Fees and Nontaxable Expenses.” District Court Case, Doc. Nos. 223 (“Cost Bill”) & 224 (“Fee Motion”). Between the Cost Bill and the Fee Motion, Alamar requested an award of $1,236,557.50 for attorney’s fees, $21,692.06 for taxable costs, and $139,864.01 for nontaxable costs. The County objected, asserting that Alamar’s claim for attorney’s fees was excessive and unreasonable, that the claim for nontaxable costs should either be disallowed in total or substantially reduced, and that the taxable costs should also be reduced. District Court Case, Doc. Nos. 228 & 230. The District Court has yet to rule on Alamar’s request for fees and costs.
On January 18, 2011, the County appealed the District Court Judgment to the United States Court of Appeals for the Ninth Circuit. District Court Case, Doc. No. 225.
*162B. Post-Judgment, Pre-Bankruptcy Events
Following entry of the District Court Judgment, Alamar and the County had negotiations concerning payment. On January 26, 2011, legal counsel for the County met with the principals of Alamar, Erik Oaas and Steve Laney, and Alamar’s attorney, Thomas Banducci, to discuss settlement. At that meeting, Banducci indicated that Alamar was interested in further settlement negotiations and requested that the County prepare a settlement offer to propose to Alamar.
The parties met again on February 15. Present at that meeting as legal counsel for the County were Andrew Brassey, Susan Buxton, Michael Moore and Cherese McLain, a County deputy prosecutor. The County was also represented by Jamie Anderson, the County Commission Chair, and Mary Prisco, the County Clerk. Oaas and Laney attended the meeting with Ala-mar’s attorneys, Banducci and Wade Woodard. The County did not make a settlement offer at the meeting. However, Banducci represented that Alamar was willing to accept $5 million (a $400,000 reduction from the $4 million judgment plus $1.4 million in fees and costs Alamar expected to be awarded by the District Court) over time with an interest rate tied to the prime rate of interest. The parties agreed to meet again on February 22 for further discussions.
On February 22 the parties met and the County presented Alamar with a settlement offer, embodied in a letter. See Ex. 204. The County offered to pay Alamar $3.2 million, with no interest accruing, in the following manner: (1) $1.9 million in cash to be paid immediately; (2) forgiveness of $164,000 in past due taxes on real property owned by Alamar’s principals; (3) forgone property taxes of approximately $123,000; (4) all taxes collected from a 3% annual increase in the property tax levy for 10 years, beginning August 15, 2012; and (5) assignment of any proceeds from the County’s lawsuit against ICRMP. However, the letter also provided that if these methods of payment did not generate sufficient funds to satisfy the $3.2 million offer in 10 years, any remaining balance would be forgiven. Id. at 2. The County represented that its offer reflected a “good faith effort” to identify all funds available to pay the Judgment given certain limitations placed on it by the Idaho Constitution and Idaho Code. Id. Attached to the settlement letter as support for the County’s position were several pages of financial documents detailing the County’s actual and projected revenues and expenses for fiscal years 2010 through 2015. See id. at 5-22.
After consulting with legal counsel Ala-mar rejected the offer, and the parties again parted without having reached an agreement.
On February 24, one of Alamar’s attorneys, Wade Woodard, sent a letter to Susan Buxton, legal counsel for the County, advising her that Alamar would consider, in its efforts to collect on the District Court Judgment, any legal authorities she could provide on whether the County’s funds were exempt from execution, a topic that was discussed at the February 22 settlement conference. He also informed Buxton that Alamar was still willing to consider a reasonable offer even though it intended to commence collecting on the Judgment, and threatened that any attempts to hinder Alamar’s collection “could result in additional liability to the County and personal liability to the individuals involved in such efforts.” Ex. 205.
That same day, Woodard also faxed a letter to Andy Brassey, another attorney for the County, stating that “if the County will commit by March 2, 2011, to paying *163the full amount of the judgment on or before March 25, 2011, we will not proceed with efforts to collect the judgment by way of writ of execution (or other authorized procedures).” Ex. 206.
Four days after the letters from Woodard, Alamar filed, on February 28, 2011, an “Application and Declaration for Writ of Execution” with the District Court. Ex. No. 107 (‘Writ”).
C. Bankruptcy
Believing Alamar intended to use the Writ to execute on the County’s accounts, and fearing that such execution would significantly interfere with County operations, the County Board of Commissioners 4 held an executive session during their regularly scheduled County Commissioners’ meeting on February 28, 2011, to discuss the Alamar litigation and Alamar’s impending collection efforts. Upon emerging from the executive session, the Commissioners voted on the record and passed a resolution to have the County file for bankruptcy protection under chapter 9. See Ex. 208.
On March 1, 2011, the County filed a petition for relief under chapter 9, commencing this case. See Ex. 224-1. In its schedules, the County listed total assets of $27,765,617.34, and total liabilities of $7,377,343.79, including the $4 million District Court Judgment and a $1.5 million debt to Banducci Woodard Schwartzman, Alamar’s attorneys in the District Court litigation, which represented the attorney’s fees and costs Alamar had requested from the District Court. Ex. 224-2 at 1, 119— 20.5 The debt for Alamar’s legal fees was designated as contingent, unliquidated, and disputed; the Judgment debt was not.
The County also listed on Schedule F claims for medical indigency payments held by several health care providers reaching back as far as two years that the County had discovered in preparing its bankruptcy schedules. Ex. 224-2 at 121-24.6 Although the exact amount of each *164claim was undetermined, the County estimated the total amount to be approximately $550,000. Id. at 122. The County designated these claims as contingent and unliquidated.
D. County Finances
The County accounts for and reports its receipts and expenditures in various, separate “funds.” The County’s financial reporting is made pursuant to standards promulgated by the governmental accounting standards board (“GASB”). See Idaho Code § 31-1509 (requiring counties to use a system for accounting of receipts, expenditures and reporting that meets the criteria of generally accepted accounting principles (“GAAP”) or the GASB). Accounting for its financial activities in this manner facilitates greater transparency in the reporting process and is intended to allow the County to ensure that its financial activities comply with the restrictions placed on its revenue receipts and the funds into which those receipts are allocated.
The County’s budget for fiscal year 2011 (October 1, 2010 through September 30, 2011) contemplates total expenditures of $9,352,734, allocated amongst various, separate “funds.” Ex. 101. These funds included the Current Expense Fund (also referred to as the “General” Fund), the Justice Fund, the District Court Fund, the Indigent Fund, the Revaluation Fund, the Tort Fund, the Noxious Weeds Fund, the Solid Waste Fund, the Road and Bridge Fund, the Junior College Tuition Fund, the Emergency Communications 911 Fund, two snowmobile grooming funds (one for Idaho City — “Snowmobile IC8-A” — and the other for Garden Valley— “Snowmobile GV8-B”), the Sheriffs Reserves Fund, and the Sheriffs Vessel Fund. Id. To meet the anticipated expenditures in each of these funds, the budget lists cash to be earned forward in each fund from the previous year’s budget, projects revenue from sources other than property taxes (e.g., federal and state grants and programs, payments in lieu of taxes, revenue sharing, fees), and states the remaining amounts that would need to be levied as property taxes to meet the expected expenditures in each fund. Id.
As of March 1, 2011, the County had collected revenues of $6,007,950 and made expenditures of $3,040,595 for fiscal year 2011. See Ex. Ill at 18. With these revenues, less expenditures, and the moneys the County had accumulated over previous years, the County had the following cash balances in its various funds on the date of the bankruptcy filing: General— $1,589,733; Road & Bridge — $1,719,631; Justice — $759,152; District Court— $546,692; Indigent — $647,597; Junior College Tuition — $135,506; Revaluation— $167,429; Solid Waste — $1,554,083; Tort— $26,040; Noxious Weeds — $357,791; Emergency Communications 911— $262,166; Snowmobile IC8-A — $10,449; Snowmobile GV8-B — $1,035; Sheriffs Reserves — $11,941; and Sheriffs Vessel— $111,159. Id.7 In addition to these funds, *165the County had certain “trust accounts” totaling $2,045,383, see Ex. Ill at 18,8 giving the County a total cash balance of $9,945,787 at the time of filing, see Ex. 106 at 3; Ex. Ill at 18.9
Although the County uses funds to account for and report its financial activities, its moneys are actually held in various accounts and investments.10 According to the “Statement of Treasurer’s Cash,” Ex. 106 at 6, prepared by April Hutchings, the County Treasurer,11 as of February 28, 2011, the day before filing, the County’s cash was spread among 11 different accounts. These included an office cash account of $1,000.00, a diversified bond fund of $2,479,620.80, a Wells Fargo treasurer’s general checking account of $402,887.47, a general savings account of $807,987.12, a State of Idaho Local Government Investment Pool account of $1,549,618.34, a Mountain West Bank Business Advantage Money Market account of $225,634.79, a Mountain West Bank certificate of deposit account of $501,077.83, a Mountain West Bank general checking account of $50,000.00, a Mountain West Bank sweep investment account of $2,891,525.65, a U.S. Bank treasurer’s checking account of $8.43, and a general operating investment account of $1,198,046.11. M12 According to Hutchings, of these accounts, the general operating investment account, which is tied up in a Freddie Mac investment with a four-year maturity, is the only one that is illiquid. To access those funds, which were invested in 2010, before the maturity date, the County would be required to pay a $25,000 penalty. The remaining accounts, however, are liquid assets.
Hutchings testified that all of the money coming into the County is initially deposited into the Wells Fargo general checking account, and that checks issued by the County are made on that same account, on which she and Prisco are signors. As Treasurer, Hutchings moves funds she deems to be idle or surplus to other investments or accounts in order to maximize the return on the County’s funds. This also allows her to comply with the statutory requirement that no more than 50% of the County’s cash be held in the same account at any one time. Interest earned on the investment accounts is paid into and *166accounted for in the County Improvement Fund, one of the “trust accounts” identified in the County’s financial records. See Ex. Ill at 18.
When moneys were moved from one account to another or into a particular investment, the County Treasurer generally did not trace from which “funds” those moneys were being drawn for accounting purposes. As a result, moneys from multiple funds were commingled in the investment accounts, making it impossible to accurately determine what “funds” were represented in each account.
E. Postpetition Filings
On June 14, 2011, the County filed a Plan of Reorganization and accompanying Disclosure Statement. Doc. Nos. 92 & 97. The County’s Plan proposes to pay Alamar $500,000 on its claim, relying on the limitation on damages contained in the Idaho Tort Claims Act, Idaho Code §§ 6-901 to - 929. Doc. Nos. 92 at 1-2, 97 at 11-12. It also proposes to pay $550,000 to unidentified medical providers for medical indigen-cy claims, the amount of claims the County estimates should have been paid prepetition but were not. Doc. Nos. 92 at 2, 97 at 11.
DISCUSSION AND DISPOSITION
To be a debtor under chapter 9, an entity must meet the eligibility requirements of § 109(c). That section provides:
An entity may be a debtor under chapter 9 of this title if and only if such entity—
(1) is a municipality;
(2) is specifically authorized, in its capacity as a municipality or by name, to be a debtor under such chapter by State law, or by a governmental officer or organization empowered by State law to authorize such entity to be a debtor under such chapter;
(3) is insolvent;
(4) desires to effect a plan to adjust such debts; and
(5) (A) has obtained the agreement of creditors holding at least a majority in amount of the claims of each class that such entity intends to impair under a plan in a case under such chapter;
(B) has negotiated in good faith with creditors and has failed to obtain the agreement of creditors holding at least a majority in amount of the claims of each class that such entity intends to impair under a plan in a case under such chapter;
(C) is unable to negotiate with creditors because such negotiation is impracticable; or
(D) reasonably believes that a creditor may attempt to obtain a transfer that is avoidable under section 547 of this title.
A chapter 9 petitioner must satisfy each of the mandatory provisions of § 109(c)(1)-(4), and one of the requirements under § 109(c)(5) to be eligible for relief under the Code. Int’l Ass’n of Firefighters, Local 1186 v. City of Vallejo (In re City of Vallejo), 408 B.R. 280, 289 (9th Cir. BAP2009). If a petitioner fails to meet the eligibility requirements of § 109(c), the bankruptcy court must dismiss the petition under § 921(c). Id. (noting that despite the permissive language of § 921(c)—i.e., that the court “may dismiss” a petition if the debtor does not meet the eligibility requirements—courts have construed that statute to require mandatory dismissal of a petition filed by a debtor who fails to satisfy § 109(c)) (citing In re Cnty. of Orange, 183 B.R. 594, 599 (Bankr.C.D.Cal.1995)); see also 6 Collier on Bankruptcy ¶ 921.04[4] (Alan N. Resnick & Henry J. *167Sommer eds., 16th ed. 2011) (hereafter “Collier”).
The burden of establishing eligibility under § 109(c) rests on the debtor. Vallejo, 408 B.R. at 289 (citing In re Valley Health Sys., 383 B.R. 156, 161 (Bankr.C.D.Cal.2008)). In determining whether the debtor has met its burden, the bankruptcy court is to “construe broadly § 109(c)’s eligibility requirements ‘to provide access to relief in furtherance of the Code’s underlying policies.’” Id. (quoting Valley Health Sys., 383 B.R. at 163). Although Alamar has not objected to the County’s eligibility on all aspects of § 109(c), the Court will, for purposes of completeness, address each of the requirements. In doing so, however, the Court takes the question of the County’s insolvency out of turn, considering it last.
A. Boise County is a municipality
“Municipality” is defined by § 101(40) of the Code as a “political subdivision or public agency or instrumentality of a State.” Under Idaho law, the County is a body politic of the state of Idaho. See Idaho Code § 31-601. As a political subdivision of the state, the County qualifies as a municipality for purposes of § 109(c)(1).
B. Boise County is authorized to be a debtor under chapter 9
Idaho Code § 67-3903 authorizes any “taxing district” in the state of Idaho to file a petition under the Bankruptcy Code. “Taxing district” is defined, for purposes of Idaho Code § 67-3903, “to be a ‘taxing district’ as described in chapter IX of an act of Congress entitled ‘An act to establish a uniform system of bankruptcy throughout the United States,’ approved July 1, 1898, as amended.” Idaho Code § 67-3901. Chapter IX of the Federal Bankruptcy Act of 1898, as amended, was repealed with the enactment of the current version of the Bankruptcy Code in 1978. Bankruptcy Reform Act of 1978, Pub.L. No. 95-598, §§ 101 & 401, 92 Stat. 2549 (codified as amended at 11 U.S.C. §§ 101-1532). It described a “taxing district” as any “municipality or other political subdivision of any State, including (but not hereby limiting the generality of the foregoing) any county, city, borough, village, parish, town, or township, unincorporated tax or special assessment district, and any school, drainage, irrigation, reclamation, levee, sewer, or paving, sanitary, port, improvement or other districts.” Bankruptcy Act of 1898, ch. 9, sec. 80(a), 48 Stat. 798 (1934).
The current Bankruptcy Code lacks a definition of “taxing district.” Instead, as noted above, it uses the term “municipality” to describe those entities that may seek relief under chapter 9, provided they are authorized to do so under state law. See § 109(c). This raises questions regarding the interpretation and effect of Idaho Code §§ 67-3901 and -3903. For example, does Idaho Code § 67-3901 continue to incorporate by reference the description of “taxing district” contained in the now-repealed Bankruptcy Act of 1898, does it somehow embrace the definition of “municipality” in the current version of the Code, or is the definition of “taxing district” for purposes of Idaho Code § 67-3903 left open-ended or untethered due to the repeal of the Bankruptcy Act?
For purposes of this case, however, the Court determines such issues need not be addressed. Under both the description of “taxing district” found in the Bankruptcy Act and the definition of “municipality” in the current Code, the County qualifies. Additionally, should there exist any question as to whether either definition may be applied under a technical reading of Idaho *168Code §§ 67-3901 and -3903, the Court concludes that Idaho’s highest court would interpret those state statutes as having been intended to authorize Idaho municipalities such as the County to file a petition under federal bankruptcy law, whatever the version currently in effect.13
Idaho Code § 67-3904 also requires that, before filing the petition, a taxing district adopt a resolution authorizing the filing. Here, the County adopted such a resolution following a public vote by the Board of Commissioners at the February 28, 2011, County Commissioners’ meeting. See Ex. 208.14
The Court concludes that the County was specifically authorized by Idaho law to be a chapter 9 debtor and § 109(c)(2) is satisfied.
C. Boise County has demonstrated the requisite desire to effect a plan to adjust its debts
An entity may be a debtor under chapter 9 only if it “desires to effect a plan to adjust [its] debts.” Section 109(c)(4). No bright-line test exists for determining whether a debtor desires to effect a plan. Vallejo, 408 at 295. The inquiry under § 109(c)(4) is a highly subjective one that may be satisfied with direct and circumstantial evidence. A debtor may prove its desire by attempting to resolve claims, submitting a draft plan of adjustment, or by other evidence customarily offered to demonstrate intent. Id. “The evidence *169needs to show that the ‘purpose of filing of the chapter 9 petition not simply be to buy time or evade creditors.’ ” Id. (quoting 2 Collier ¶ 109.04[3][d]).
The County has shown a desire to effect a plan to adjust its debts. County officials worked at negotiating a settlement with Alamar before filing the petition. The assertions of Commissioners Anderson, Fry, and Day that they view adjustment of Alamar’s claim through bankruptcy as the only viable alternative given Alamar’s escalating collection tactics and their obligation to keep the County operating were credible. Each of the Commissioners testified that they believed the Alamar Judgment was a valid debt that should be paid. The purpose of filing the petition was not to evade Alamar but to find a way to pay the Judgment in a manner that County officials believed would comply with Idaho law and not cripple County operations.
Additionally, the County has continued its attempts to resolve Alamar’s claim postpetition, as evidenced by correspondence between Blair Clark, bankruptcy counsel for the County, and Alamar’s attorneys. See Exs. 215-216, 219-222. And, while the County’s proposed plan treatment of Alamar — i.e., the $500,000 payment on the theory that Alamar’s District Court Judgment should and could be somehow reduced by this Court under the Idaho Tort Claims Act — would likely not pass muster at confirmation (for a number of reasons), submission of the Plan and Disclosure Statement may be considered by the Court as evidence of the County’s desire to ultimately adjust its debts through a plan.
Based on the evidence of record, the Court finds that the County has met its burden under § 109(c)(4) of demonstrating a desire to effect a plan to adjust its debts.
D. For Boise County, further negotiation with Alamar had become impracticable
The next step is to determine whether the County satisfies at least one of the requirements of § 109(c)(5). The County argues that by the time of filing further negotiation with Alamar had become impracticable. Section 109(c)(5)(C) requires the County demonstrate that it “is unable to negotiate with creditors because such negotiation is impracticable.” Whether negotiation with creditors is impracticable is dependent upon the circumstances of the case. Vallejo, 408 B.R. at 298. In the context of § 109(c)(5)(C), negotiation is impracticable where “(though possible) it would cause extreme and unreasonable difficulty.” Id. (quoting Valley Health Sys., 383 B.R. at 163). A petitioner may demonstrate impracticability by the sheer number of its creditors or by its need to file a petition quickly to preserve assets. The need to act quickly to protect the public from harm may also show the impracticability of negotiation. Id.
Here, the County filed its petition to fend off what it perceived to be imminent execution on the County’s accounts. The evidence demonstrates the parties had effectively reached an impasse in their negotiations, and that Alamar, through Woodard’s February 24 letters and its application for the Writ, had demonstrated a sincere intent to promptly execute on its Judgment. The County’s need to preserve its cash assets in order to maintain County operations uninterrupted for the benefit of its residents made further negotiations with Alamar impracticable.
The Court finds that the County has met its burden under § 109(c)(5)(C).
*170E. Boise County had a reasonable belief that Alamar might attempt to obtain a transfer avoidable under § 547
Alternatively, the County contends that it has satisfied § 109(c)(5)(D). Section 109(c)(5)(D) provides that an entity may be a debtor under chapter 9 if it “reasonably believes that a creditor may attempt to obtain a transfer that is avoidable under section 547 of [title 11].” The Court agrees that the County has demonstrated that at the time of filing it reasonably believed Alamar may attempt to obtain a preferential transfer avoidable under § 547.15
As a noted treatise explains, § 109(c)(5)(D) is intended to allow a “municipality to file its petition and obtain the benefits of the automatic stay while it negotiates its plan with creditors, when aggressive creditor action may result in a preferential payment, which by its nature is unfair to other creditors.” 2 Collier ¶ 109.04[3][e][iv]. Such was the case here. Alamar’s increasingly aggressive attempts to collect on its Judgment, including Woodard’s February 24 correspondence and the February 28 Writ application, created a reasonable belief in the County that Ala-mar would obtain a payment that would prevent the County from fulfilling its other financial obligations. Had Alamar successfully utilized its Writ to execute on the County’s accounts, it would have received a transfer of the County’s property on account of the Judgment, an antecedent debt.
The Court finds the County’s concern that it would be unable to withstand execution on the Alamar Judgment and effectively continue operations, and that such execution could constitute a potentially avoidable preference, was reasonable.
One of the elements of a preference is insolvency of the debtor at the time of the transfer. See § 547(b)(3). Here, and as discussed at length infra, insolvency of the County is disputed.16 However, the requirement of § 109(c)(5)(D) focuses on the reasonable belief of the debtor municipality that a creditor may attempt to obtain a preferential transfer. It is thus sufficient that the County reasonably be*171lieved it was insolvent, though it may not have in fact been so.17
The Court therefore concludes that the County satisfies § 109(c)(5)(D).
F. Boise County has not established that it was insolvent on the date of filing
Finally, the Court addresses what has developed, in its view, into the major issue dividing the parties — whether at the time of filing the County was insolvent as required by § 109(c)(3). A municipality is insolvent if it is “(i) generally not paying its debts as they become due unless such debts are the subject of a bona fide dispute; or (ii) unable to pay its debts as they become due.” Section 101(32)(C). The test under § 101(32)(C)(i) involves current, general nonpayment, while the test under § 101(32)(C)(ii) looks to future inability to pay. Hamilton Creek Metro. Dist. v. Bondholders Colo. Bondshares (In re Hamilton Creek Metro. Dist.), 143 F.3d 1381, 1384 (10th Cir.1998). The reference point for the insolvency analysis under both prongs is the petition date. Id. at 1384-85; In re Pierce Cnty. Housing Auth., 414 B.R. 702, 710-11 (Bankr.W.D.Wash.2009). As with other eligibility requirements, the petitioner bears the burden of proving one of the § 101(32)(C) insolvency tests is met. Hamilton Creek, 143 F.3d at 1385 (citing Tim Wargo & Sons, Inc. v. Equitable Life Assurance Soc’y (In re Tim Wargo & Sons), 869 F.2d 1128, 1130 (8th Cir.1989)).
1. Section 101(32)(C)(i)
The County concedes that at the time of filing it was paying its debts as they came due, with the exception of the estimated $550,000 in medical indigency claims it had neglected to process and submit to the Catastrophic Health Care Cost Program. It argues that these unpaid medical indigency claims represent a debt not paid when due, thus rendering the County insolvent under § 101(32)(C)(i). The Court disagrees.
Section 101(32)(C)(i) requires general nonpayment of debts as they become due. The County’s failure to process and pay a single category of claims, which represents only a small portion of its budgeted expenditures, from what appear to be adequate funds does not rise to the level of the general nonpayment contemplated by § 101(32)(C)(i). See In re Town of Westlake, Texas, 211 B.R. 860, 864-65 (Bankr.N.D.Tex.1997) (finding debtor municipality that was current on 76% of its obligations and delinquent on 24% due to a “temporary political dispute over authority to sign checks from admittedly ample funds” was not insolvent by reason of generally not paying its debts as they became due).
The evidence presented shows that the County Indigent Fund contained more than sufficient funds to pay the estimated outstanding medical indigency claims and still cover the projected claims for the remainder of fiscal year 2011. See Ex. Ill at 6. According to the County’s figures, on the petition date there was a cash balance in the Indigent Fund of $647,597. Deducting the $550,000 in purported claims leaves a remaining balance of $97,597. For March and April 2011, the County’s cash flow summary reflects an actual net change of negative $2,569. For the remaining months of fiscal year 2011 (May through September), the County projects a total net change of negative $50,272. Subtracting these numbers from the $97,597 balance results in a positive cash balance of $44,756 in the County’s Indigent Fund *172for fiscal year 2011, even after accounting for the $550,000 allegedly owed for medical indigency claims. See id.
In addition, the Court is not persuaded that the purported $550,000 in medical in-digency payments is in fact “due” for purposes of § 10 l(32)(C)(i). “Due” in this context has been defined as “presently, unconditionally owing and presently enforceable.” Hamilton Creek, 143 F.3d at 1385. Accordingly, evidence of when debts arose and amounts owed by a debtor without evidence of when the amounts are actually payable is insufficient to prove the petitioner is not meeting its debts. Id. (citing by analogy cases interpreting § 303(h)(1)).
Here, the County offered no evidence concerning when the medical indigency payment claims became, or would become, payable. The evidence presented at hearing was that the County is aware of certain applications for medical indigency payments that were not processed, submitted, or paid according to certain statutorily mandated time linés. Per Idaho Code § 31-3511(4), these applications are deemed approved and payment will be made pursuant to the provisions of the medical indigency statute, chapter 35, title 31, Idaho Code, but only at some later date when the precise amounts of the claims have been determined.
Prisco acknowledged in her testimony that the County had not actually been able to determine the amount of the indigency payments because it had yet to receive all of the bills and other documentation for those payments, though it has estimated these claims to be around $550,000. There is no evidence, however, as to when those amounts would actually be determined and the claims made payable. This is consistent with the representations made in Schedule F of the County’s bankruptcy schedules. See Ex. 224-2 at 122.
The Court is thus left with evidence that a debt for medical indigency payments exists, equivocal evidence as to the amount of that debt, and no evidence concerning when the debt was or will be actually payable. Based on this showing, the Court cannot find that the debt is “due” under § 101(32)(C)(i).
2. Section 101(32)(C)(ii)
The County also alleges insolvency under the second prong of § 101(32)(C), claiming it will be unable to pay the Ala-mar Judgment and meet its other expenses for supporting county operations.
The test under § 101(32)(C)(ii) is a prospective one, which requires the petitioner to prove as of the petition date an inability to pay its debts as they become due in its current fiscal year or, based on an adopted budget, in its next fiscal year. In re City of Bridgeport, 129 B.R. 332, 336-38 (Bankr.D.Conn.1991); see also Hamilton Creek, 143 F.3d at 1384-85; Westlake, 211 B.R. at 864-66. This analysis is made on a cash flow, rather than a budget deficit, basis. Hamilton Creek, 143 F.3d at 1386; Pierce Cnty. Housing Auth., 414 B.R. at 711.
Alamar contends that the County’s own financial records show that it has sufficient cash on hand in its various investments and accounts to pay the Judgment and meet the County’s other expenses for the upcoming fiscal year. The County counters that, although it had close to $10 million in cash and investments on the petition date, most of the cash in its accounts are “restricted” by federal and state law to certain uses, which do not include payment of the Alamar Judgment. The Court finds the County’s arguments unpersuasive.
First, Prisco testified that the moneys in the so-called “trust accounts” (i.e., the *173County Improvement Fund, the Auditor’s Trust, and the General Trust), totaling $2,045,383, were not restricted as those moneys were comprised primarily of payments in lieu of taxes and interest earnings which had not been appropriated to any particular fund. The County presented no other evidence of restrictions or limitations on these funds.
Second, the County has also failed to convince this Court that it would be unable to utilize the reserves it has accumulated in the General, Road & Bridge, and Solid Waste Funds to pay the Judgment.18
Generally, counties in Idaho are prohibited from making expenditures in excess of their budget appropriations. See Idaho Code § 31-1607. As a means of assuring compliance with this provision, Idaho Code § 31-1607 provides that any expenditures made, liabilities incurred or warrants issued in excess of budget appropriations are the personal liability of the county official making or incurring such liability, expenditure, or issuing such warrant, and are not the liability of the county. See Garrity v. Bd. of Comm’rs of Owyhee Cnty., 54 Idaho 342, 34 P.2d 949, 955 (1934).
There are exceptions, however, to the prohibition of expenditures in excess of a county’s adopted budget. One is for expenditures made upon an order of a court of competent jurisdiction. Another is for certain emergencies enumerated in the Idaho Code. Id. Such emergencies include those
caused by fire, flood, explosion, storm, epidemic, riot or insurrection, or for the immediate preservation of order or of public health or for the restoration to a condition of usefulness of public property, the usefulness of which has been destroyed by accident, or for the relief of a stricken community overtaken by a calamity, or the settlement of approved claims for personal injuries or property damages, exclusive of claims arising from the operation of any public utility owned by the county, or to meet mandatory expenditures required by law, or the investigation and/or prosecution of crime, punishable by death or life imprisonment, when the board [of county commissioners] has reason to believe such crime has been committed in its county.
Idaho Code § 31-1608 (emphasis added). These exceptions allow a county to meet emergency expenses not anticipated by its annual budget. See Garrity, 34 P.2d at 955; Lloyd Corp. v. Bannock Cnty., 53 Idaho 478, 25 P.2d 217, 219-20 (1933).19
*174All expenditures made under Idaho Code § 31-1608 are to be paid from moneys on hand in the county treasury in the fund properly chargeable with such expenditures. If there are insufficient moneys available in the treasury to pay warrants for any such expenditures, then those warrants must be registered and bear interest.20 Idaho Code § 31-1608. Until a warrant redemption levy is established, the county treasurer is to identify ways of redeeming warrants, including short term borrowing from other county funds at market interest rates and interim financing from local financial institutions. Idaho Code § 31-1507. The total amount of emergency warrants issued, registered and unpaid, during the current fiscal year are included in the annual budget submitted to the board of county commissioners by the county clerk,21 and the board must include in their appropriations for the ensuing fiscal year an amount equal to the total of such registered and unpaid warrants. Idaho Code § 31-1608.
If there is inadequate levy authority available in the obligated fund to redeem the outstanding warrants in the next fiscal year a warrant redemption fund must be established to redeem warrants. Idaho Const, art. VII, § 15; Idaho Code § 31-1507. To fund the redemption of warrants, the county is required to establish a warrant redemption levy, with a maximum levy of two-tenths of one percent (.2%) of the market value for assessment purposes of all taxable property in the county. Idaho Code § 63-806(1). In addition to the warrant redemption levy, all money in the county treasury on October 1 for the county current expense (general) fund, county road fund, county bridge fund or any other fund which is no longer needed for current expenses must be transferred to the warrant redemption fund by resolution of the county commissioners. Idaho Code § 63-806(2).22
*175These provisions of the Idaho Code, among others, are part of a well-planned county financial program, enacted by the Legislature “to give the several counties of the state a balanced budget, in order that expenditures shall not exceed revenues.” Garrity, 34 P.2d at 955.23 To that end county boards of commissioners are enjoined to make sufficient levies to meet appropriations and permitted, when necessary, to meet certain emergency expenses not anticipated by the budget. To further assure a balanced budget, ample provisions are made for expeditiously satisfying any residual indebtedness accrued in making such expenditures through the use of a county’s levy authority and the transfer of funds not needed to meet current expenses. See id.
The Court is not persuaded the County is unable to pay the Alamar Judgment under this system. The County admits the Judgment is “a mandatory expenditure required by law” under Idaho Code § 31-1608. See Memorandum of Boise County in Opposition to Motion to Dismiss, Doc. No. 96, at 10.24 Yet it asserts, relying on Lloyd Corp. v. Bannock Cnty., that Idaho Code § 31-1608 does not authorize the Commissioners to incur indebtedness or make expenditures in excess of the County’s income for the year in order to satisfy the Judgment because such authorization would violate Idaho Constitution, article VIII, § 3, which places limitations on a county’s expenditures. Idaho Constitution, article VIII, § 3, provides, in relevant part:
No county, city, board of education, or school district, or other subdivision of the state, shall incur any indebtedness, or liability, in any manner, or for any purpose, exceeding in that year, the income and revenue provided for it for such year, without the assent of two-*176thirds of the qualified electors thereof voting at an election to be held for that purpose, nor unless, before or at the time of incurring such indebtedness, provisions shall be made for the collection of an annual tax sufficient to pay the interest on such indebtedness as it falls due, and also to constitute a sinking fund for the payment of the principal thereof, within thirty years from the time of contracting the same. Any indebtedness or liability incurred contrary to this provision shall be void: Provided, that this section shall not be construed to apply to the ordinary and necessary expenses authorized by the general laws of the state.
The Court reads Lloyd differently.
In Lloyd, a taxpayer of Bannock County commenced a proceeding to procure a writ prohibiting the county from issuing bonds to fund $347,548.06 of warrant indebtedness. 25 P.2d at 217. Some of the warrants sought to be refunded were emergency warrants issued pursuant to Idaho Code § 30-1208 (1932) — a precursor to Idaho Code § 31-1608.25 Id. at 219. A trial resulted in a judgment against the taxpayer and confirmation of the county’s authorizing the issuance of the bonds. Id. at 217-18.
On appeal, the taxpayer argued that Idaho Code § 30-1208, which authorized the expenditure of moneys in excess of the county’s budget and the issuance of emergency warrants to meet those expenditures, violated Idaho Constitution, article VIII, § 3. Id. at 219. In rejecting the taxpayer’s argument, the Court determined that the issuance of refunding bonds for the purpose of retiring the warrant indebtedness itself did not create an indebtedness or liability prohibited by Idaho Constitution, article VIII, § 3, because it merely changed the form of evidence of an already existing indebtedness. Id. at 220 (citing Butler v. City of Lewiston, 11 Idaho 393, 83 P. 234 (1905); Veatch v. City of Moscow, 18 Idaho 313, 109 P. 722 (1910); and Sebern v. Cobb, 41 Idaho 386, 238 P. 1023 (1925)); see also Hickey v. City of Nampa, 22 Idaho 41, 124 P. 280, 281-82 (1912) (concluding that issuance of bonds to fund pre-existing warrant indebtedness did not create “any new indebtedness, but was rather the changing of the form of indebtedness, or paying an ordinary debt already incurred”).
Accordingly, the court examined whether the initial emergency expenditures paid through the use of warrants were “ordinary and necessary expenses” under the “proviso clause” of article VIII, § 3, of the Idaho Constitution.26 Ultimately, it held in Lloyd that the expenditures in excess of the county’s budget made to meet emergent circumstances under Idaho Code § 30-1208 were- not prohibited by the Idaho Constitution given those expenditures qualified as “ordinary and necessary expenses authorized by the general laws of the state.” Id. at 219-20 (citing Thomas v. Glindeman, 33 Idaho 394, 195 P. 92 (1921)).
The Idaho Supreme Court engaged in a similar analysis in Butler v. City of Lewiston, a decision entered nearly 30 years prior to Lloyd. There, the court was tasked with determining the legality of the *177issuance of bonds to pay warrant indebtedness, amounting to $62,500, accrued on account of city officer and employee salaries, a $10,000 judgment, and other municipal expenses. Butler, 83 P. at 235. The court was presented with the question of whether issuance of the bonds was prohibited by article VIII, § 3, of the Idaho Constitution. Id. at 237. Consistent with Lloyd, the court first concluded that the bonds themselves would not increase the legal indebtedness of the city, but simply change the form of existing indebtedness from warrant to bond. Id. at 238. It then proceeded to determine whether the warrant indebtedness arose from ordinary and necessary expenses authorized by the general laws of the state, such that it did not violate the Idaho Constitution. The court concluded that the judgment against the city, as well as the other expenses, were ordinary and necessary expenses covered by the proviso clause. Id.27
In summary, the Court reads Lloyd and Butler as standing for three propositions of importance here, which when combined refute the County’s contention that the Idaho Constitution prohibits it from using registered warrants to satisfy the Alamar Judgment. First, merely changing the form of evidence of an already existing indebtedness or liability does not run afoul of Idaho Constitution, article VIII, § 3. Second, a county may issue registered warrants to meet expenditures, exceeding the county’s revenue for the year, occasioned by emergencies described in Idaho Code § 31-1608 (formerly Idaho Code § 30-1208) without violating the Idaho Constitution, provided such expenditures are “ordinary and necessary.” See also City of Pocatello v. Peterson, 93 Idaho 774, 473 P.2d 644, 647 (1970) (“The proviso to Article 8, § 3 requires both that the expenditure be authorized by the general laws of the state and that it be an ordinary and necessary one.”). And third, an expenditure to satisfy a tort judgment qualifies as an ordinary and necessary expense.
The Court questions whether an analysis under Idaho Constitution, article VIII, § 3 is required in the first instance. As indicated by Butler and Lloyd, merely changing the form of an already existing indebtedness or liability does not implicate Idaho Constitution, article VIII, § 3. Consequently, any application of article VIII, § 3, must be to the initial indebtedness or liability. Here, that liability takes the form of a federal judgment.
The language of article VIII, § 3, provides limitations on the powers of the state and its political subdivisions. It does not, however, limit the powers of a federal district court to order and impose judgment on a municipality of the state. The Idaho legislature has acknowledged as much by providing an exception to the prohibition on outlays in excess of budget appropriations for expenditures made “upon an order of a court of competent jurisdiction.” Idaho Code § 31-1607; see also McNeel v. Canyon Cnty., 76 Idaho 74, 277 P.2d 554, 557 (1955) (concluding that the exception for court orders in Idaho Code § 31-1607 “indicates that the budget law was not intended to control the courts”). Therefore, any use by the County of registered warrants to change its pre-existing judgment liability to warrant indebtedness would not be violative of the Idaho Constitution.28
*178Alternatively, even if article VIII, § 3, of the Idaho Constitution applies to payment of the Judgment, the Court concludes, from the evidence and arguments of the parties here, that the Alamar Judgment, like the tort judgment at issue in Butler;29 is an “ordinary and necessary” expense of the County for purposes of the proviso clause.30
An expense is “ordinary ‘if in the ordinary course of municipal business, or the maintenance of municipal property, it may be and is likely to become necessary.’ ” City of Boise v. Frazier, 143 Idaho 1, 137 P.3d 388, 391 (2006). Expenses may be “ordinary” and yet only occur at infrequent intervals. Hickey, 124 P. at 281. Idaho law grants counties the power to sue and be sued. Idaho Code § 31-604. It is reasonable to conclude then that paying judgments arising from lawsuits against a county is consistent with “the ordinary course of municipal business” in operating the county and is a type of expense that “may be and is likely to become necessary.”
An expense is “necessary” under Idaho Constitution article VIII, § 3, if there is “a necessity for making the expenditure at or during such year.” City of Idaho Falls v. Fuhriman, 149 Idaho 574, 237 P.3d 1200, 1204 (2010). Necessary expenditures typically involve “immediate or emergency expenses, such as those involving public safety, or expenses the government entity in question was legally obligated to perform promptly.” Frazier, 137 P.3d at 391. The Alamar Judgment, a judgment issued by a federal court, represents a liability the County is legally obligated to perform promptly. Id. at 392, 394 (citing with approval Butler, 83 P. at 234, 238). Indeed, it is the urgency of the obligation to pay the Judgment under law, according to the County, that forced it into filing bankruptcy.
The County further contends that Idaho Code § 31-1508 generally prohibits the transfer of any money from one fund to another, and Idaho Code § 40-709(7) restricts the use of certain road funds. However, those sections provide for exceptions when specifically otherwise permitted by law. The requirement of Idaho Code § 63-806(2) that a county transfer to the warrant redemption fund all money in the county treasury no longer needed and, in particular, all money to the credit of the county road fund, appears to fall within these exceptions.
The County further argues that the use of registered warrants would be insuffi-*179dent due to the 3% limit on levy increases imposed by Idaho Code § 63-802.31 However, the 3% levy limit only impacts the amount of property taxes the County may levy to fund a warrant redemption fund; it does not restrict the amount of surplus funds the County can transfer from other funds, including the General Fund, Road & Bridge Fund, and Solid Waste Fund, to redeem outstanding warrants. As discussed infra, the evidence demonstrates there are sufficient surplus moneys in these other funds to fund any warrant indebtedness incurred to pay the Alamar Judgment, without having to exceed the levy limits for the warrant redemption fund (.2%) or the overall levy limit (3%).32
In short, the County has not convinced the Court of legal impediments to the issuance of registered warrants, the creation of a warrant redemption fund, and the transfer, at the appropriate time under the statute, of the surplus moneys in the General, Road & Bridge, and Solid Waste funds as a means to pay the Alamar Judgment.33 Nor has the County established a factual impediment to such an approach.
*180The evidence establishes that the County has sufficient surplus moneys to satisfy the Alamar Judgment and continue operations. According to the County’s cash flow summaries, the General Fund will have a cash balance of $1,087,659 at the end of fiscal year 2011, and a projected net cash flow of negative $45,125 for fiscal year 2012, thus leaving $1,042,534 which will not be needed to cover expenses in fiscal year 2012 and could be transferred into a warrant redemption fund on October 1, 2011. See Exs. Ill at 1,112 at 1.
The Road & Bridge Fund will have an ending cash balance for fiscal year 2011 of $1,239,999. Ex. Ill at 2. The County projects a positive net cash flow of $249,196 in the Road & Bridge Fund for fiscal year 2012, Ex. 112 at 2, making the entire $1,239,999 available on October 1 for transfer into a warrant redemption fund as it will not be needed to meet expenses in the upcoming year.
Lastly, the County represents that the Solid Waste Fund will have an ending cash balance of $1,127,128 for fiscal year 2011. Ex. Ill at 9. Projections for fiscal year 2012 show a positive net cash flow of $18,758. The County, however, asserts that it is required by the Environmental Protection Agency and federal regulations to set aside and maintain approximately $297,000 in its Solid Waste fund for costs of closing the County landfill, including any corrective action that may be required. After deducting the $297,000, there nevertheless remains $830,128 that would not be needed for current expenses and that could also be contributed to a warrant redemption fund on October 1, 2011.
When added together, these excess funds total $3,112,661. Based on the County’s own projections, these moneys would not be needed to meet expenses for the remainder of the current fiscal year or for fiscal year 2012. The County has not carried its burden of establishing that it is prohibited from accessing these various funds to satisfy warrants that could be used to pay the Alamar Judgment. Combining the $2,045,383 immediately available in the County’s “trust accounts” with these excess moneys in the General, Road & Bridge, and Solid Waste Funds yields $5,158,044, more than enough to pay Ala-mar’s Judgment.
For the reasons stated above, the Court finds that the County has not established it was insolvent under § 101 (32)(C)(ii).
CONCLUSION
The Court finds Alamar’s objection to be well taken. The County did not meet its burden of proving it was insolvent under § 109(c)(3) and, therefore, is ineligible to be a debtor under chapter 9. Alamar’s Motion, Doc. No. 69, will be granted and the County’s chapter 9 case will be dismissed pursuant to § 921(c).34
*181Counsel for Alamar shall submit an order in accordance with this Decision.
. Unless otherwise indicated, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and all rule references are to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037.
. The Court takes judicial notice of the files and records in the District Court Case. Additionally, the Court takes judicial notice of the filings of record in the County's bankruptcy case. See Fed.R.Evid. 201.
. YTC owned the property on which the treatment facility was to be built.
. The Board of Commissioners is composed of three members — Jamie Anderson, Terry Day, and Robert Fry. Not one of the current commissioners was in office at the time of the events that gave rise to the underlying Alamar District Court Case. Day has been in office the longest, having served as commissioner just over four years. He was in office when the Alamar litigation was filed in District Court. Anderson has served for approximately two and one-half years. Fry was only recently elected in November 2010, though he had served as a commissioner previously in the 1980’s. He took office in January 2011, after the Alamar Judgment had been entered. Like Fry, Maty Prisco, the Clerk (who also serves as ex officio auditor and recorder and ex officio clerk to the Board of County Commissioners) was elected in November and took office in January.
. While the County listed Banducci Woodard Schwartzman as the creditor holding the claim to $1.5 million in legal fees, see Ex. 224-2 at 120, technically it is Alamar that requested the award of its fees and costs. Thus, any such award by the District Court would presumably be in favor of Alamar itself, not its attorneys.
.The County is a participant in the Catastrophic Health Care Cost Program, which provides financial assistance to medically indigent residents who are not eligible for medicaid or medicare benefits. See Idaho Code §§ 56-209Í, 31-3517. Under this program, the County is required to pay for necessary medical services for its medically indigent residents, as approved by the County Commissioners, at a contracted reimbursement rate up to the total sum of $11,000 per resident in any consecutive 12-month period. Idaho Code § 31-3503(1). Costs exceeding $11,000 are paid by the Catastrophic Health Care Cost Program, see Idaho Code § 31— 3503A(1), which is funded by the state of Idaho through the Catastrophic Health Care Cost Account, see Idaho Code § 57-813. If a county fails to act upon an application within certain times set forth in Idaho Code §§ 31-3501 to -3519, the application will be deemed approved and payment made as provided by *164the statute. Idaho Code § 31-3511(4). Pris-co, who as County Clerk is responsible for initially reviewing and investigating applications for medical indigency payments, see Idaho Code §§ 31-3504 to -3505A, testified that consequences for failing to act on such applications may include the inability to first determine whether applicants would qualify for medicaid or medicare assistance, loss of the contracted reimbursement rate, and the County having to pay costs exceeding $11,000.
. Although Exhibits 106 and 111 also included an East Boise County Ambulance Fund containing $161,619, Prisco testified that the East Boise County Ambulance District was its own separate taxing authority, and that the County handled the Ambulance District's *165funds merely to aid the Ambulance District in administering those funds.
. At the hearing, Prisco explained that although labeled as “trust accounts,” these accounts did not truly satisfy the elements of a trust. They contained, in large part, payments from the federal government in lieu of property taxes as well as interest earnings.
. Because Exhibits 106 and 111 included the East Boise County Ambulance Fund, see note 8 supra, the total reflected in those exhibits was actually $10,107,406.
. Idaho law authorizes and empowers a county treasurer to invest "surplus or idle funds” of the county in certain enumerated investments and accounts, with the interest received from such investments being paid into the county's general fund, unless otherwise provided by law. Idaho Code §§ 57-127, 67-1210. "Surplus or idle funds” are defined as the "excess of available moneys in the public treasury, including the reasonably anticipated revenues, over and above the reasonably anticipated expenditures chargeable to those moneys, taking into account the dates at which such revenues and expenditures may be expected to occur, the charges of expenses to revenues being done in such a manner as to produce the maximum amount of excess.” Idaho Code § 57-131.
. Hutchings began serving as the County Treasurer in November 2009 when she replaced the previous treasurer who retired. At the time, she had been working as deputy treasurer. She was then elected County Treasurer in November 2010.
. These several account balances totaled $10,107,406.54 as of February 28, 2011. See Ex. 106.
. See In re McMurdie, 448 B.R. 826, 829 (Bankr.D.Idaho 2010) (“When interpreting state law, this Court is bound by the decisions of the state’s highest court. When state law is unsettled or has not directly addressed an issue, this Court 'must predict how the highest state court would decide the issue.’ ”) (citing In re Sterling Mining Co., 415 B.R. 762, 767-68 (Bankr.D.Idaho 2009)).
First, the Idaho statutory reference was never changed after the Bankruptcy Act's repeal and replacement by the Bankruptcy Code in 1978. This would appear to be a matter of legislative oversight. Nothing suggests the state intended to de-authorize municipalities {nee taxing districts) from eligibility to file after 1978.
Second, the term "taxing district” is defined elsewhere in the Idaho Code. Idaho Code § 63-201(28) defines "taxing district” as "any entity or unit with the statutory authority to levy a property tax.” Under Idaho Code § 31-604 the County has the power to levy and collect property taxes and thus qualifies as a “taxing district” under this definition. Admittedly, by its terms application of Idaho Code § 63-201, including subsection (28), is limited to chapters 1 through 23 of the Idaho Revenue and Taxation Code, title 63, Idaho Code. This limitation, combined with Idaho Code § 67-3901's explicit reference to the Bankruptcy Act, militates against looking to Idaho Code § 63-201(28) to determine whether the County is a “taxing district” for purposes of Idaho Code § 67-3903. See State v. Yzaguirre, 144 Idaho 471, 163 P.3d 1183, 1189 (2007) ("Legislative definitions of terms included within a statute control and dictate the meaning of those terms as used in the statute. Statutoiy definitions provided in one act do not apply 'for all purposes and in all contexts but generally only establish what they mean where they appear in that same act.’ ”) (citations omitted). However, the Court may still consider the definition of “taxing district” contained in Idaho Code § 63-201(28) as guidance in predicting how the Idaho Supreme Court would interpret the term "taxing district” as used in Idaho Code §§ 67-3901 and -3903. See McMurdie, 448 B.R. at 829. ("In order to [predict how the highest state court would decide an issue], the Court may review decisions from the state court, decisions from other jurisdictions, statutes, treatises, and restatements for guidance.”) (citing Spear v. Wells Fargo Bank, N.A. (In re Bartoni-Corsi Produce, Inc.), 130 F.3d 857, 861 (9th Cir.1997)).
. To the extent Alamar suggests that use of the executive session procedure prior to the vote on the resolution to file was somehow improper and rendered the County ineligible to file for chapter 9 relief under Idaho law, it has not identified any authority supporting such a position, nor has this Court located independently any such authority.
. .Under § 547(b) of the Code,
a trustee may avoid any transfer of an interest of the debtor in property—
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;
(3) made while the debtor was insolvent;
(4) made—
(A)on or within 90 days before the date of the filing of the petition;
(5) that enables such creditor to receive more than such creditor would receive if—
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by the provisions of this title.
The term "transfer” is defined by § 101(54)(D) as “each mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing or parting with— (i) property; or (ii) an interest in property.”
. Insolvency, for purposes of § 547(b)(3), is defined in § 101(32). That section provides, for most debtors, a balance sheet test. See § 101 (3 2) (A) (defining insolvency as a "financial condition such that the sum of [the debt- or's] debts is greater than all of [the debtor’s] property, at a fair valuation, exclusive of” certain exempted or fraudulently transferred property); Arrow Elecs., Inc. v. Justus (In re Kaypro), 218 F.3d 1070, 1076 (9th Cir.2000). However, for a municipality, a different definition is provided. See § 101(32)(C), discussed infra.
. It is further noted that § 547(f) provides, for preference purposes, a presumption of insolvency during the 90 days immediately preceding the petition.
. To the extent the County has asserted legal restrictions on its use of funds to pay the Alamar Judgment, this Court is obligated to consider those arguments in the context of its insolvency analysis. In doing so, the Court is appreciative of the divergent positions taken on the legal issues presented by the parties and their respective counsel, including those with considerable experience and expertise in this area. It is also cognizant of the complexity and uncertainty attendant to this field of law, exacerbated, according to some commentators, by the recent Idaho Supreme Court decisions in City of Boise v. Frazier, 143 Idaho 1, 137 P.3d 388 (2006), and City of Idaho Falls v. Fuhriman, 149 Idaho 574, 237 P.3d 1200 (2010). See generally S.C. Danielle Quade, Not to Build: City of Boise v. Frazier Further Restricts Local Governments’ Ability to Finance Public Projects, 43 Idaho L.Rev. 329 (2007); Daniel Dansie, "Urgency" and “Uncertainty" are the Keywords for Local Governments After Frazier and Fuhriman, The Advocate, Feb. 2011, at 16-18. Mindful thereof, the Court addresses the parties’ legal arguments for the limited purpose of determining whether the County has met its burden of establishing that it is in fact unable to meet its debts as they come due, interpreting applicable Idaho municipal law as it predicts the Idaho Supreme Court would. See note 13 supra.
. Before making emergency expenditures, the board of county commissioners must *174adopt, by the unanimous vote of the commissioners, a resolution “stating the facts constituting the emergency and entering the same upon their minutes.” Idaho Code § 31-1608.
. A "warrant” is “an order drawn by the board of county commissioners directing the county treasurer to pay a specified amount to a person named or to the bearer.” A "registered warrant” is “a warrant drawn on a fund which has insufficient funds to pay it.” Idaho Code § 31-1510.
. For the County, the annual budgeting process, which is set by statute, begins in April. In May, each department or agency head submits a revenue and expense budget worksheet to the County Clerk, detailing probable revenues from sources other than taxation and all estimated expenditures. See Idaho Code § 31-1602. Using those worksheets, the Clerk prepares and submits to the Board of Commissioners a suggested budget showing the complete financial program of the County for the ensuing fiscal year. See Idaho Code §§ 31-1603 and -1604. A public hearing on the budget is held sometime in August, where at any taxpayer may appear and be heard on any part of the tentative budget. Upon conclusion of the hearing, the County Commissioners adopt a final budget. See Idaho Code § 31-1605. Per statute, the budget must be finalized on or before the Tuesday following the first Monday in September of each year. Id. The County’s projections for fiscal year 2012 (beginning October 1, 2011) referred to in this Decision are based on estimates gathered by Prisco, the County Clerk, through this budgeting process.
.Idaho Constitution article VII, § 15, provides, in relevant part:
[The legislature] shall also provide that whenever any county shall have any warrants outstanding and unpaid, for the payment of which there are no funds in the county treasury, the county commissioners, in addition to other taxes provided by law, shall levy a special tax, not to exceed ten mills on the dollar, of taxable property, as shown by the last preceding assessment, for the creation of a special fund for the redemption of said warrants; and after the levy of such special tax, all warrants issued *175before such levy, shall be paid exclusively out of said fund. All moneys in the county treasury at the end of each fiscal year, not needed for current expenses, shall be transferred to said redemption fund.
Idaho Code § 63-806, in turn, states:
(1) Upon the same property and for the same year the county commissioners shall levy a property tax for the redemption of outstanding county warrants issued prior to the first day of October in said year, to be collected and paid into the county treasury and apportioned to the county warrant redemption fund, which levy shall be sufficient for the redemption of all outstanding county warrants, unless the amount of outstanding warrants exceeds the amount that would be raised by a levy of two-tenths of one percent (.2%) of the market value for assessment purposes on all taxable property in the county, in which case the county commissioners shall annually levy a property tax of two-tenths of one percent (.2%) of the market value for assessment purposes on all taxable property in the county for the redemption of such outstanding warrants. (2) All property taxes levied in any year for the county current expense fund, county road fund and county bridge fund and collected on or after the first day of January in the succeeding year and any property tax levied for any purpose and which is no longer needed for such purpose when collected must be paid into the county treasury and apportioned to the county warrant redemption fund, except as otherwise provided by law. All money in the county treasury on the first day of October to the credit of the county current expense fund, county road fund, county bridge fund or any other fund which is no longer needed must be transferred to the county warrant redemption fund upon the books of the county auditor and county treasurer by resolution of the county commissioners entered upon the records of the proceedings.
. Article VII, § 15, of the Idaho Constitution also charges the Idaho Legislature with providing, by law, “a system of county finance, as shall cause the business of the several counties to be conducted on a cash basis.”
. Additionally, Prisco, the County Clerk, and Commissioners Anderson, Day, and Fry acknowledged during testimony that the County had a legal obligation to pay the Alamar Judgment.
. The language of Idaho Code § 30-1208 effective in 1933, the year Lloyd was decided, is virtually identical to that contained today in Idaho Code § 31-1608. See Idaho Code § 30-1208 (1932).
. The language in Idaho Constitution article VIII, § 3, providing that the requirements and limitations of that section do not apply to "ordinary and necessary expenses authorized by the general laws of the state” is commonly referred to as the “proviso clause.” See Fuhriman, 237 P.3d at 1203.
. The court specifically found that the payment of the judgment, “obtained by reason of a defective sidewalk in said city,” was a necessary expense. Butler, 83 P. at 238.
. Under this rationale, an argument could also be made that the County could have paid the judgment through the issuance of bonds, thereby exchanging the judgment liability for *178the refunding bonds, another form of indebtedness. See Veatch, 109 P. at 723 (citing with approval Geer v. Bd. of Com’rs of Ouray Cnty., 97 F. 435 (8th Cir.1899), wherein the court concluded that the exchange of judgments against a county for its refunding bonds merely changed the form of the obligation and therefore did not violate the Colorado Constitution).
. An action for discrimination under the Fair Housing Act, such as the one brought by Alamar against the County, is, in effect, a tort action. Meyer v. Holley, 537 U.S. 280, 285, 123 S.Ct. 824, 154 L.Ed.2d 753 (2003).
. At hearing, the parties explored the concept of judicial confirmation in the context of determining whether the Alamar Judgment was an "ordinary and necessary” expense for purposes of the Idaho Constitution. Judicial confirmation is a process by which a municipality or political subdivision such as the County may seek confirmation from a state district court that a particular expense is ordinary and necessary. See Idaho Code §§ 7-1304 to -1313. Such a process, like any other judicial proceeding, can be time consuming and expensive. While the Commissioners and legal counsel discussed judicial confirmation in their consideration of the County's options for financing the Judgment, there is no indication that it was ever seriously pursued.
. Idaho Code § 63-802 provides, in pertinent part:
[N]o taxing district shall certify a budget request for an amount of property tax revenues to finance an annual budget that exceeds the greater of paragraphs (a) through (i) of this subsection inclusive:
(a) The dollar amount of property taxes certified for its annual budget for any one (1) of the three (3) tax years preceding the current tax year, whichever is greater, for the past tax year, which amount may be increased by a growth factor of not to exceed three (3%) plus the amount of revenue calculated as described in this subsection.
. Buxton, an attorney experienced in the area of municipal finance law who was retained by the County in January 2011 to examine possible methods for paying the Judgment, testified that her concern with the use of registered warrants was that, based on the then, still-developing picture of the County's financial status, the cash available to the County was inadequate to fund the warrants after exhausting the County’s levy authority under the Idaho Code. Recall that Prisco, who became County Clerk in January, had only been in office close to a month at the time she was reviewing the County’s finances with Buxton in the context of negotiations with Alamar. Yet she testified that it was not until April, after the petition was filed, that she felt confident about the financial information she was able to provide the Commissioners and legal counsel for the County. As discussed in more detail infra, the evidence presented at trial concerning the County's finances, which was compiled and generated in April and, according to Prisco, represented the most complete picture of the County’s finances, indicates that there was sufficient cash on hand in the County’s accounts to fund the warrant indebtedness, without even having to exercise additional levy authority.
.In addition to the County's arguments, the Court has carefully considered Garrity, in which the Idaho Supreme Court held that a warrant redemption fund may not be converted into a "current expense fund” for the payment of current ordinary and necessary expenses of county government. 34 P.2d at 953. Upon a close reading, Garrity is distinguishable from the facts in this case. There, the county commissioners had budgeted $38,048.02 for the warrant redemption fund for the fiscal year. Id. at 950. Sometime thereafter, the county incurred certain ordinary and necessary expenses over and above the expenses for which warrants had been issued, amounting to some $4,085.95. Id. at 950-51. The incoming board denied claims for these expenses as they would have been in excess of the total anticipated revenues. The claimants appealed the board’s decision to the district court and then, after losing there, to the Idaho Supreme Court. Id. at 951. The court was presented with question of whether the county's warrant redemption fund could be used to pay the claimants. It concluded that they could not because the warrant redemption fund, under Idaho law, was to be used exclusively for the redemption of warrants outstanding at the time the warrant redemption levy was made, and the expenses at issue were incurred post-levy. Id. at 952-53. The court rejected the notion that the *180warrant redemption fund could be converted into a "current expense fund” for payment of ordinary and necessary expenses of the county. Id. at 953.
This case is not plagued with the problems addressed in Garrity. The County currently does not have a warrant redemption fund. It may issue warrants in order to pay the Ala-mar Judgment, and thereafter establish and fund a warrant redemption fund through its levy authority and the transfer of surplus moneys from other funds, which may then be used to satisfy outstanding warrants. In this manner the County may simply avail itself of the "ample provisions” made in the Idaho County Budget Law for meeting emergency expenses. See id. at 955.
. Because the Court concludes the County, having failed to show it is insolvent under § 109(c)(3), is ineligible to be a chapter 9 debtor, it need not, and does not, address Alamar's claim that the County’s petition should be dismissed under § 921(c) because it was not filed in good faith. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494584/ | NUGENT, Bankruptcy Judge.
First National Bank of Durango (the “Bank”) appeals a bankruptcy court order confirming Reson Lee Woods and Shaun K. Woods’ Corrected Amended Chapter 12 Plan. The Bank argues that the bankruptcy court erred when it found that the Woods were family farmers, when it confirmed their proposed treatment of its secured claims, and when it denied the Bank’s application to add some of its attorneys’ fees and costs to its claim. After careful consideration of these issues, we AFFIRM.
I. Factual Background
The Woods have farmed hay and raised and boarded horses near Ignacio, Colorado since 1999. Before that, they ranched and sold real estate in Florida. In 2007, they purchased the tract of farm land that presently secures the Bank’s claim with a purchase money mortgage loan from Pine River Valley Bank. By the time they decided to build their home on that tract in 2008, their lending officer had gone to work in Durango for the Bank. He referred them to another officer who proposed to make a construction loan for the house and told the Woods that, barring changed circumstances, the Bank would make them a permanent loan when construction was complete. On April 15, 2008, the parties executed a Construction Loan Agreement, and the Woods signed a promissory note in the amount of $480,000.00 with a maturity date of October 15, 2009.1 Approximately $284,000.00 of that loan was used to pay off the Pine River purchase money loan.2 When it made the construction loan, the Bank also approved the Woods for a $482,000.00 permanent loan that would bear interest at an adjustable rate, be amortized over thirty years, and be payable with a balloon payment due in five years.3
But when the home was completed in 2009, the Bank balked. A dispute over whether the Bank had actually committed to the permanent financing developed, but appeared resolved in the fall of 2009 when the Bank proposed to lend the Woods enough to pay off the construction loan at 5.25% interest per annum, to be repaid in monthly payments amortized over thirty years with a balloon payment of all remaining principal and interest due in seven years. Before this loan could close, the Bank balked again, tendering a series of progressively less favorable loan proposals to the Woods. The Bank blamed its hesitancy on the Woods’ alleged lack of creditworthiness. Eventually the Woods sued the Bank in state court and the Bank foreclosed the construction mortgage. The looming sale of the house and land prompted the Woods to file their Chapter 12 case.
The Woods live on the farm at Ignacio (the “Property”). They raise hay and board horses there. They rent other hay ground. Their office and farm headquar*201ters are located in the home built with the proceeds of the Bank’s loan. If the Bank’s principal and interest claim of approximately $503,000 (without the attorneys’ fees) is included in their farm debts, over half their debt is attributable to farming.
The Woods initially proposed a plan that provided for the Bank to be repaid at 5% fixed interest in monthly payments amortized over forty years and payable in full in twenty years. After the first confirmation hearing in May of 2011, the bankruptcy court sustained the Bank’s objection to that treatment, not least because the Woods’ plan did not specify that the Bank would retain its lien, but overruled its other objections.4 The Woods filed an Amended Plan, followed by a Corrected Amended Plan that proposed the same treatment that the Bank had offered in 2009, with the added feature that they would receive a forty-day grace period for payments twice a year. After a further confirmation hearing in August of 2011, the bankruptcy court confirmed the Corrected Amended Plan (the “Plan”), but struck the forty-day grace provision.
Based upon the detailed cash flow information and three-year income projection that the Woods and their farm financial expert witness presented, the bankruptcy court found that the Woods could make the payments they proposed. After hearing the testimony of the Woods’ and the Bank’s appraisers, the bankruptcy court concluded that the Woods’ land and water rights were worth $750,000. At the August hearing, for the first time, the Bank asked for additional attorneys’ fees and expenses that would have increased its allowed claim by more than $78,000. The Bank asserted that it had incurred these fees and expenses in enforcing its claim in bankruptcy, but the bankruptcy court did not allow this portion of the Bank’s claim because the Bank “presented no evidence as to the makeup [and] reasonableness of these collection costs and expenses.”5 After the bankruptcy court issued its order on August 22, 2011, the Bank appealed.
II. Appellate Jurisdiction and Standards of Review
We have jurisdiction of this appeal.6 The Bank raises a number of issues, but we focus on these. We consider whether the Woods are “family farmers” as defined in § 101(18); whether their proposed treatment of the Bank’s claim comports with the standards of § 1225(a)(5)(B)(ii); whether their plan is feasible; and whether the Bank should have been granted its attorneys’ fees. We review factual findings for clear error and legal conclusions de novo.7 Matters of discretion are reviewed for abuse of discretion.8
*202With these familiar tools at hand, we review the bankruptcy court’s interpretation of § 101(18) afresh, as we do its interpretation and application of § 1225(a)(5).9 The bankruptcy court’s findings of fact that relate to the role of the Woods’ home in their operation, their means of making their plan payments, and the determination of an appropriate discount rate are afforded substantial deference and are reviewed for clear error.10 The bankruptcy court’s approval of the term of repayment of the Bank’s claim and its evidentiary rulings are matters of discretion.11 Finally, the bankruptcy court’s attorneys’ fees rulings are reviewed de novo,12
III. Discussion
A. The Bank’s loan “arises out of a farming operation” and must be counted as farm debt.
Only family farmers or fishermen may seek Chapter 12 relief. Section 101(18)(A) defines a “family farmer” as (1) an individual engaged in farming; (2) who has aggregate debt less than $3,792 million; (3) whose debt consists of more than 50 percent of debt arising out of his farming operation “excluding a debt for the principal residence of such individual or such individual and spouse unless such debt arises out of a farming operation;” and (4) who received more than 50 percent of his income from farming in the taxable year preceding the year of the petition’s filing.13 The bankruptcy court held that *203the Bank’s claim arose from the Woods’ farming operation even though it is secured by their homestead. The court concluded that the debtors proved their house is an integral part of their operation. The Bank objected to the inclusion of the construction portion of the loan as part of the debt that arose from the operation because § 101(18)(A) requires exclusion of a debt incurred solely to build the farmer’s residence from the calculation. Were the construction portion of the Bank’s loan to be excluded, the Woods would not qualify as family farmers because less than 50% of their debt would arise from their farming operation. The bankruptcy court was correct.
Section 101(18)(A) excludes a “debt for the principal residence” of the family farmer unless such debt arises out of a farming operation. According to the Bank, the fact that the debtors’ farming operation predated the house proves that the house is not integral to the farming operation. We disagree. The fact that the Woods farmed the tract before building their home does not mean that the cost of constructing it did not “arise out of a farming operation.”
New courts have considered when a debt “arises out of a farming operation.” 14 The majority of those that have focused on the purpose of the debt — whether it was incurred and the proceeds used for the farming operation.15 The Bank urges us to adopt a but-for test that only recognizes as farm debt those loans or other credits without which there would be no farming operation. We think the better approach is found in In re Saunders, where the court concluded that “to ‘arise out of a farming operation’ the purpose of a debt must have some connection to the debtor’s farming activity.” 16 This broader test is more consistent with the plain language of § 101(18)(a). Even the cases that espouse the but-for approach focus on whether the questioned debt is “interwoven with” or “related to” the farming operation.17 We suggest that the residential exclusion, like the income requirement, was aimed at preventing debtors from avoiding the more onerous limitations on restructuring residential debt found in other chapters by relying on a “hobby farm,” rather than at actual farmers who live on their farms.
The bankruptcy court found that the Woods’ farmhouse was an integral part of the farm operation because the farm’s books, and records are maintained in an office there and the farmhouse’s proximity *204to the rest of the operation allowed the Woods to take care of their livestock and irrigation system. Ample evidence supports these findings.18 Because the farmhouse is connected to the Woods’ farming activities, including the construction portion of the loan in the farm debt calculation was proper.
B. The Woods’ treatment of the Bank’s claim meets the requirements of § 1225(a)(5).
Section 1225(a)(5) sets out the requirements for confirming a debtor’s proposed treatment of an allowed secured claim. When the creditor objects to that treatment, the debtor must show that the creditor will retain its lien in the security and receive property, usually payments, with a value that is equal to the amount of the creditor’s allowed secured claim on the effective date of the plan. This requires the bankruptcy court to determine the amount of the creditor’s allowed secured claim and whether the proposed payment stream has a present value that is equal to the allowed secured claim.
1. The Bank’s claim, is fully secured in the amount of $508,045.76 plus interest accruing up to the value of the Bank’s security, or $750,000.
The parties do not dispute the bankruptcy court’s finding that the Bank’s claim, including accrued interest and costs, but excluding some of the Bank’s attorneys’ fees, is $503,045.76, subject to the further accrual of interest. The Bank challenges the bankruptcy court’s conclusion that the tract and the house are worth $750,000 because the Bank’s appraiser valued it at $600,000. The Bank argues that the bankruptcy court was influenced by two earlier appraisals found in the Bank’s file which were admitted in the Woods’ case over the Bank’s objection. Section 506(a) provides that a secured claim shall be allowed to the extent of the value of the collateral that secures it. In this case, the Bank’s secured claim should be allowed in full because the value of the land and farmhouse, whether it is $600,000 or $750,000, exceeds the amount the Bank is owed. Accordingly, § 506(b) permits the Bank to collect accruing postpetition interest and, to the extent properly proven, attorneys’ fees and expenses, up to $750,000.
We see no reason to assign clear error to the bankruptcy court’s value findings. Nor do we see that the Bank’s evidentiary objection matters. Even if it did, the Bank’s argument that these pre-petition appraisals are not admissible under Rule 702 of the Federal Rules of Evidence fails because the bankruptcy court admitted these pre-petition appraisals not as expert evidence, but as party opponent admissions under Rule 801(d)(2)(D). The bankruptcy court admitted these exhibits, contained in the Bank’s file, as admissions by the Bank of the value of the Property on each reports’ respective date for the purpose of impeaching the Bank’s appraiser’s valuation of the Property as of the petition date.19 Federal Rule of Evidence 801(d)(2)(D) excludes from the definition of hearsay an admission by a party opponent that is a statement made by an agent or servant concerning a matter within the scope of the agency and made during the *205existence of the relationship. Because these pre-petition appraisals meet Rule 801(d)(2)(D), we cannot say the decision to admit them was an abuse of discretion.20 Even if it was, the error was harmless because there was ample additional evidence to support the bankruptcy court’s factual finding that the Property was worth $750,000.21
2. The proposed interest rate is sufficient to return to the Bank the value of its allowed secured claim as § 1225(a)(5) requires.
Relying on the Supreme Court’s plurality opinion in Till v. SCS Credit Corp.,22 the Bank objected that the proposed discount rate did not reflect the market rate for like loans, nor did it include sufficient compensation for the risk to which the Bank was subjected under the Plan. For those reasons, the Bank argued that the Woods’ plan did not provide for the distribution of property having a value equal to the allowed amount of the Bank’s claim as of the effective date of the plan as § 1225(a)(5)(B)(ii) requires.23 But the bankruptcy court held that because the Bank had proposed very similar terms in 2009 and the Woods had accepted them, this rate amounted to a contract rate that sufficed under Tenth Circuit authority in In re Hardzog.24 The bankruptcy court pointed out that this loan was a “hybrid”— neither a conventional home mortgage nor a conventional agribusiness loan that might be secured by land, equipment, livestock, or crops. Although the bankruptcy court declined to decide whether Till trumps Hardzog, we conclude that Till’s formula-based approach applies in Chapter 12 and we find no clear error in the bankruptcy court’s conclusion that an appropriate risk factor in this case is 200 basis points plus the then-applicable prime rate of 3.25%, or 5.25%.
In Hardzog, the Tenth Circuit reversed a bankruptcy court’s holding that a Chapter 12 debtor need only pay a discount rate based upon the lender’s cost of funds. As in this case, the Hardzogs’ farm ground was worth more than they owed their lender. The bankruptcy court had determined what it cost the lender to obtain money to lend, enhanced that by a risk factor, and concluded that, rather than the contract rate of 12.5%, the lender was only entitled to collect 10% interest. The Tenth Circuit specifically concluded that “[a] ‘cost of funds’ approach is not susceptible of accurate determination without complex problems of proof and may not result in fairness.” 25 Commenting that judges are “neither bankers nor lenders and do not have the expertise to set interest rates,” the Circuit noted that lenders consider what the competition charges in the market, the economic conditions, the collateral’s value, and other factors in setting an appropriate rate.26 In other words, the Hardzog court embraced the “market rate” approach and held that “in the absence of special circumstances, such as the market rate being higher than the contract *206rate, Bankruptcy Courts should use the current market rate of interest used for similar loans in the region.”27 The court suggested that this rate would be “easily susceptible” of determination after a hearing where each side could produce evidence of the current loan market. The court supported its conclusion with the comment that a Chapter 12 plan treatment is similar to a new loan to the debtor that should bear interest at a rate similar loans in the market would bear. Thus, for many years, courts in this Circuit have applied the “market rate” approach unless the parties had agreed on a lower contract rate before the petition date.
In 2004, the United States Supreme Court entered the interest rate discussion with Till.28 In a split decision, the high court held that a secured creditor in a Chapter 13 case was entitled to receive a discount rate equal to the national prime rate plus a risk adjustment — a formula-based approach. Section 1325(a)(5) is virtually identical in language to § 1225(a)(5), making Till’s reasoning applicable here. Our review of Till convinces us that it effectively overrules Hardzog and that the formulaic approach must be taken in evaluating whether a secured creditor’s treatment in a Chapter 12 plan complies with § 1225(a)(5)(B) and should be confirmed.29
In Till, three justices joined Justice Stevens’ opinion that rejected the use of “coerced loan, presumptive contract rate, and cost of funds approaches.”30 Concluding that each of these approaches “is complicated, imposes significant evidentiary costs, and aims to make each individual creditor whole rather than to ensure the debtor’s payments have the required present value,”31 Justice Stevens preferred beginning with the national prime rate that is widely reported and enhancing it with a risk factor. His opinion noted that the prime rate reflects the financial market’s estimate of what a commercial bank should charge a creditworthy borrower to compensate for opportunity costs, inflation risk, and a slight risk of default.32 Debtors posing a greater default risk should pay a higher rate that is adjusted for “the circumstances of the estate, the nature of the security, and the duration and feasibility of the reorganization plan.”33 The four justices stated that unlike the other approaches, “the formula approach entails a straightforward, familiar, and objective inquiry” that “depends only on the state of financial markets, the circumstances of the bankruptcy estate, and the characteristics of the loan, not on the creditor’s circumstances or its prior interactions with the debtor.”34 A fifth justice, Justice Thomas, concurred in the judgment. In a separate opinion, he questioned whether there was any statutory justification for any risk adjustment, but he concluded that because the rate allowed by the four-justice plurali*207ty opinion was higher than the risk-free prime rate, the creditor was receiving the requisite present value to satisfy § 1325(a)(5).35
Since the plurality opinion in Till expressly disavows the market rate approach adopted by Hardzog, we conclude that Hardzog has been overruled by Till and that the Till rate should be applied in Chapter 12 cases.36 That leaves us to consider the record and ruling on this issue in Till’s light. There was no dispute at trial that the prime rate as of the hearing date was 3.25%, but there was differing testimony about risk. The Woods’ expert witness, a university professor who specializes in agricultural finance, testified that he had reviewed Federal Reserve data that suggested that farmland loans were typically drawing between 4.7% and 5.1% interest.37 He also noted that farmland prices had continually risen in Colorado for several years. He concluded that a mortgage of 5% for a twenty to thirty-year duration, amortized over thirty years, was within the range of prevailing rates for similar loans in the region.38 He testified that he himself had received a 6% twenty-year loan only the prior year from a rural Colorado bank.39
The Bank’s president testified that the Bank only offered loans like this at 6 to 6.5%, fixed for five years.40 Longer-term loans would only be made if they could be sold into the secondary mortgage market and those loans were capped at $127,000.41 The best fixed rate available at his bank to a borrower like the Woods would be between 6.5 and 7%.42 He stated that, based on the Bank’s assessment of the Woods’ payment performance, collateral, and volatility of income stream, he would adjust for risk in this case by adding as much as 3 to 4% to the prime rate for a range of 6.25 to 7.25%.43 The Bank’s expert, a loan officer for Janus Mortgage, stated that he originated loans for Farmer Mac, a government corporation analogous to Freddie Mac, that funds the secondary market for agricultural loans. He testified that he would only make a loan of the sort proposed here for 13 or 14% and that the market would not support the 5.25% rate proposed by the Woods.44
Although the bankruptcy court did not specifically assess and apply the Till factors to this case, it did conclude that a risk adjustment of 2% was appropriate. The evidence supports that conclusion. The evidence that loans at rates between 4.7 and 5.1% were available in the current market, that farmland prices were rising, that the Woods’ plan was feasible, and that the plan proposed a seven-year payout comprised sufficient proof that “the state of financial markets, the circumstances of the bankruptcy estate, and the characteristics of the loan” warranted a *208risk adjustment of 2% over the prime rate of 3.25%.45 Most of this evidence came from the Woods’ expert witness who specifically discussed the financial and land markets, the plan’s feasibility, and the loan’s characteristics. The Bank’s witnesses addressed these topics too, but the bankruptcy court preferred the Woods’ evidence over the Bank’s, and because the bankruptcy judge heard the evidence, we defer to his assessment of its quality and weight. We cannot say that his conclusion approaches clear error when it is supported by evidence in the record.
Even if Hardzog were to survive and be applied here, the result is the same. The record contains evidence that market rates for loans similar to this one range from 4.7% to as much as 7%. And, the loan terms proposed by the Woods precisely mirrored those that the Bank offered them and which they accepted in 2009. While this may not demonstrate the existence of a “contract rate” that triggers the special circumstance exception to the Hardzog rule, there was plenty of evidence to support a finding that the plan proposed a rate that was within market parameters. The bankruptcy court’s interest rate conclusion should therefore be affirmed.
3. The loan term is appropriate and may he confirmed.
In Chapter 12 cases, bankruptcy courts can modify the rights of secured creditors and extend the repayment period for secured claims beyond the life of the plan when appropriate.46 Section 1225 does not specifically address the length of the repayment term that must be provided under the plan. The Bank’s objection rests on the supposed lack of evidence that a seven-year repayment period was either currently available in the market or consistent with current market terms. Yet the market is not the only means by which the bankruptcy court determines the appropriate period of time over which a claim may be paid.
Courts addressing permissible repayment terms for secured creditors have generally been lenient in allowing debtors the maximum time to pay their claims.47 Collier’s comments that “[t]he primary consideration in analyzing the appropriate term for payment of a secured claim is the type of property securing the claim.”48 Courts also consider whether the particular length of time proposed by the debtor is appropriate under the circumstances.49 Many courts have approved plans that amortize claims using a lengthy period, but require a balloon payment in a shorter time.50 When contemplating a *209plan’s repayment period, a court may consider the length of the underlying note and the creditor’s customary repayment periods for similar loans.51
In this case, the Bank’s loan is secured by real estate. Real estate loans often have thirty year terms as evidence by Woods’ expert’s testimony that the typical amortization period on loans secured by real estate was between fifteen and thirty years.52 The Woods intended to repay or refinance the Bank’s claim in seven years. That and the fact that the Bank previously offered a thirty-year amortization with a balloon payment in seven years suggest that the seven-year repayment period was appropriate. Allowing the seven-year repayment term was well within the bounds of permissible choice and was not an abuse of the bankruptcy court’s discretion.
C. There is no clear error in the finding that the debtors’ plan is feasible.
Section 1225(a)(6) requires a Chapter 12 debtor to demonstrate at confirmation that he “will be able to make all payments under the plan and to comply with the plan.” The Woods showed that their cash flow would be positive and that their reserves would increase over the first three years, but the Bank argues that they offered no evidence to demonstrate that they could make the monthly payments in years four through seven of the Plan or the balloon payment in the seventh year. Debtors are required only to provide reasonable assurance, not a guarantee, that they will succeed under the plan. There was sufficient evidence in the record here to support the bankruptcy court’s conclusion that the debtors would be able to make all their payments and comply with the Plan.
Under their plan, the Woods proposed to make seven years of monthly payments and to pay the remaining principal and interest due on the claim at the end of the seventh year. Based on the Woods’ cash flow projections, the bankruptcy court found that the Woods had “the capacity to service the Bank’s restructured loan, meet operating and living expenses, and maintain a sufficiently viable operation to make the seven year balloon payment from operating revenues, refinancing, sale of assets, or some combination of these [and that they] will be able to make the payments under the plan.”53 The Bank argues that because the cash flows only extend for three years, the bankruptcy court was wrong to conclude that the debtors could make the monthly payments beyond the first three years. We disagree.
A plan’s feasibility is a fact-sensitive question. We review the bankruptcy court’s findings for clear error.54 To demonstrate feasibility, a debtor must provide reasonable assurances the plan can be achieved, not guarantee its success.55 Cash flow projections are exactly that— projections. Courts examine whether they are based on valid assumptions to determine the likelihood that they will prove true. Questions about plan feasibility are resolved by giving the debtor the benefit of the doubt when the projections warrant it.56
*210The Woods’ projections showed steadily increasing cash flow each year ($76,419, $134,982, and $171,808) and projected excess cash of over $171,000 by the end of 2013.57 Mr. Dalsted, the Woods’ expert on agricultural economy and farm and ranch management, testified that:
[A]nd my opinion is that this a very doable plan. These farmers have developed a very unique niche market that has only the potential to grow. And they have adequate funds in terms of revenue coming in. And I think they’ve been very reasonable in estimating what their expenses are.58
The bankruptcy court heard extensive evidence about the projections and accepted Dalsted’s conclusions.
Likewise, the record supports the bankruptcy court’s conclusion that the Woods would be able to make the balloon payment due in seven years. Mr. Woods testified that he intended to continue farming operations and that he would be able to make the balloon payment by using farm profits, refinancing the Bank’s loan, or selling off parts of the operation.59 The bankruptcy court concluded that the projections and Dalsted’s testimony provided reasonable assurance that the Woods would have excess cash from their farming operation to reduce or pay off the Bank’s claim. Because there was evidence in the record supporting that conclusion, the bankruptcy court’s finding that the Plan was feasible was not clear error.
D. The Bank offered insufficient support for its request for attorneys’ fees and expenses under § 506(b) and the court did not err in denying them.
Section 506(b) provides that ov-ersecured creditors may recover as a part of their claim fees, costs, or charges provided for under their agreements or applicable non-bankruptcy law to the extent the fees are reasonable.60 The Bank has an allowed secured claim, is oversecured, and the loan documents contained an agreement between the Bank and the Woods allowing payment for fees and expenses. But, because the Bank failed to offer enough detailed evidence to allow the bankruptcy court to evaluate whether the fees sought were reasonable in the circumstances, the bankruptcy court’s refusal to add them to the Bank’s claim must be affirmed.
The bankruptcy court concluded that the Bank failed to present evidence as to the reasonableness of these collection costs and expenses and that the collection costs were a direct result of the Bank’s declining to close on the permanent loan proposal in 2009. The Bank bore the burden of proving the reasonableness of the § 506(b) fees it requested.61 Federal Rule *211of Bankruptcy Procedure 2016 governs § 506(b) claims for attorneys’ fees from the bankruptcy estate.62 That rule requires that the applicant file a detailed statement of the time expended, services rendered, and expenses incurred so that the bankruptcy court can determine whether the requested fees and expenses are reasonable.
At trial, the Bank attempted to admit Exhibit HH, a Loan Balance Summary that referred to total “Expenses Incurred Per Bid” and “Additional Expenses and Fees.”63 The additional expenses included an additional $78,000 in attorneys’ fees and expenses. But because the Bank had refused to supply any supporting documentation, the bankruptcy court declined to admit that portion of the exhibit.64 The Bank president testified that the Bank had paid attorneys’ fees in connection with both pre- and postpetition enforcement efforts against the Woods.65 Without detailed time records, descriptions of tasks performed, or itemization of costs, the bankruptcy court concluded that it could not determine what fees were incurred when. Because the Bank failed to provide any of the information necessary to determine if the services rendered and time expended on each task was reasonable, the record supports the bankruptcy court’s refusal to allow the fees as part of the Bank’s claim.
We likewise reject the Bank’s argument that disallowance of its collection fees and costs was inconsistent with the terms of the Plan which defines an “allowed claim” as one filed under § 501 and to which no objection was filed. The Bank also claims it had no notice that its claim would be challenged at the hearing. First, in the Plan, the Woods “reserve[d] the right to object to what [the Bank] asserts as its Allowed Secured Claim[.]”66 The Plan also stated “[t]he exact amount of this monthly payment shall be determined based upon the amount determined to be [the Bank’s] Allowed Secured Claim as of the date of confirmation of the Plan.”67 One of the Bank’s grounds for objecting to the Plan’s feasibility was that its secured claim continued to grow as accrued interest and costs accumulated.68 The Bank cannot have been surprised that the amount of its allowed secured claim would be an issue at the confirmation hearing. It is more likely that the Woods may have been surprised by the Bank’s demand for an additional $96,283, which was only raised on the day of the August 2011 confirmation hearing without either a formal application or any meaningful itemization of time and expense being filed.
The bankruptcy court did not commit clear error in disallowing the Bank’s claim for attorneys’ fees and collection costs.
IV. Conclusion
We conclude that the bankruptcy court correctly held that the Woods met the farm-debt test. We also conclude that Hardzog has been overruled by Till in the Chapter 12 context, and that an appropriate cramdown interest rate must equal the *212national prime rate enhanced with a risk factor. The facts in this ease support the bankruptcy court’s conclusion that an interest rate of 5.25%, based on a prime rate of 3.25% plus a 2% risk factor, would give the Bank present value for its allowed secured claim as required by Chapter 12. Evidence also exists supporting the bankruptcy court’s determinations as to the repayment period and terms, as well as feasibility. We further conclude the bankruptcy court did not err in disallowing the Bank’s claim for collection costs and attorneys’ fees.
We therefore AFFIRM the bankruptcy court’s order confirming the Woods’ Corrected Amended Chapter 12 Plan.
. Promissory Note and Construction Loan Agreement, in Appellant’s Appendix ("App.”) at 85-93.
. Hearing Transcript ("Tr.”) of May 6, 2011, Testimony of Reson Woods at 52, 11. 9-12, in App. at 287.
.Credit Approval Memorandum dated Apr. 8, 2008, in Supplemental Appendix of Appellees Reson Lee and Shaun K. Woods ("Supp. App.”) at 31.
. These included objections to the debtors’ good faith and the feasibility of the debtors’ plan. As it was not briefed on appeal, the good faith objection has been abandoned.
. Aug. 22, 2011, Oral Ruling Tr. at 316, ll. 24-25, in App. at 1265.
. The Bank timely filed its notice of appeal from the bankruptcy court’s final order and the parties have consented to this Court’s jurisdiction because they have not elected to have the appeal heard by the United States District Court for the District of Colorado. See 28 U.S.C. § 158(b); Fed. R. Bankr.P. 8001(e); Fed. R. Bankr.P. 8002(a); In re Wade, 991 F.2d 402, 406 (7th Cir.1993) (confirmation of a bankruptcy plan is a final, appealable order).
. Pierce v. Underwood, 487 U.S. 552, 558, 108 S.Ct. 2541, 101 L.Ed.2d 490 (1988); see Fed. R. Bankr.P. 8013; Fowler Bros. v. Young (In re Young), 91 F.3d 1367, 1370 (10th Cir.1996).
. Pierce at 558, 108 S.Ct. 2541.
. See Watford v. Fed. Land Bank of Columbia (In re Watford), 898 F.2d 1525, 1527 (11th Cir.1990) (Whether a particular activity conducted by Chapter 12 debtors constitutes a “farming operation” is a legal question subject to de novo review, but issue of whether debtor was engaged in that particular activity is a factual one reviewed for clear error.); In re Yett, 306 B.R. 287, 290 (9th Cir. BAP 2004) (the determination of factors to apply in valuation calculation under § 1225 involves an interpretation of statute that is reviewed de novo, while the application of those factors to a particular case is a question of fact reviewed for clear error, giving substantial deference to the bankruptcy court in making cramdown interest rate determinations).
. In re Nauman, 213 B.R. 355, 358 (9th Cir. BAP 1997) (Whether proposed Chapter 12 plan is sufficiently “feasible” to be confirmed is factual determination reviewed for clear error.); In re Inv. Co. of the Sw., Inc., 341 B.R. 298, 310 (10th Cir. BAP 2006) (a bankruptcy court's determination of whether Chapter 11 plan is feasible is reviewed for clear error); In re Fowler, 903 F.2d 694, 696 (9th Cir.1990) (a bankruptcy court should be accorded substantial deference in making cramdown interest rate determinations).
. In re John Francks Turkey Co., Inc., UT-98-066, 1999 WL 565883, at *2 (10th Cir. BAP Aug.2, 1999) (finding no abuse of discretion in the bankruptcy court’s determination of the appropriate amortization period and length of the repayment terms); U.S. v. McIntosh, 124 F.3d 1330, 1338 (10th Cir.1997) (court’s admission of evidence reviewed for abuse of discretion).
. In re Sun ‘N Fun Waterpark LLC, 408 B.R. 361, 366 (10th Cir. BAP 2009) (conclusion regarding allowance of attorneys’ fees reviewed de novo); Kittel v. First Union Nat’l Bank (In re Kittel), WO-01-094, 2002 WL 924619 (10th Cir. BAP May 8, 2002) (findings regarding amount of attorneys' fees and expenses reviewed for clear error, but conclusion concerning the allowance of fees are reviewed de novo).
. 11 U.S.C. § 101(18)(A). This section defines "family farmer” as:
[an] individual or individual and spouse engaged in a farming operation whose aggregate debts do not exceed $3,544,525 and not less than 50 percent of whose aggregate noncontingent, liquidated debts (excluding a debt for the principal residence of such individual or such individual and spouse unless such debt arises out of a fanning operation), on the date the case is filed, arise out of a farming operation owned or operated by such individual or such individual and spouse, and such individual or such individual and spouse receive from such farming operation more than 50 percent of such individual’s or such individual and spouse’s gross income for—
(i) the taxable year preceding; or
*203(ii) each of the 2d and 3d taxable years preceding!).]
Id. (emphasis added).
. This Court found no case specifically addressing whether construction financing for a debtor's residence on a farm is a debt that "arises out of a farming operation.”
. In re Saunders, 377 B.R. 772, 774 (Bankr.M.D.Ga.2007).
. Id. at 776 and 774-76 (examining In re Kan Corp., 101 B.R. 726, 727 (Bankr.W.D.Okla.1988) (For a debt incurred as a result of loan to "arise out of a farming operations,” the proceeds of the loan must in some way be directly applied to or utilized in the farming operations.); In re Easton, 883 F.2d 630, 636 (8th Cir.1989); In re Marlatt, 116 B.R. 703, 705 (Bankr.D.Neb.1990) (for a debt to arise out of a farming operation, there must be a connection between the debt and the debtor's farming activity); In re Douglass, 77 B.R. 714, 715 (Bankr.W.D.Mo.1987) (it is (or should be) the reason or purpose for which the debt was incurred coupled with the use to which the borrowed funds were put that should be the criteria to determine whether the debt arises out of a farming operation); In re Rinker, 75 B.R. 65, 68 (Bankr.S.D.Iowa 1987); In re Roberts, 78 B.R. 536, 537-38 (Bankr.C.D.Ill.1987), In re Reak, 92 B.R. 804, 806 (Bankr.E.D.Wis.1988) (describing the test applied in Roberts and Rinker as a "but for” test)). See also In re Teolis, 419 B.R. 151 (Bankr.D.R.I.2009).
. See Reak, 92 B.R. at 805-06.
. Tr. of May 6, 2011, Testimony of Reson Woods at 53-54, ll. 17-25, 1-18, in App. at 288-89.
. Tr. of Aug. 8, 2011, Hearing at 248, ll. 7-19, in App. at 1122 ("I have heard the bank’s counsel stipulate that [these appraisals are a] part of the bank's file ... [they're] offered as an admission of the bank’s agent as to value. And I will admit [ ] the appraisals [ ] from the bank's file [] for the purpose of [] impeaching [John Dustin's value of the Property].”).
. See Wright-Simmons v. City of Okla. City, 155 F.3d 1264, 1268 (10th Cir.1998); In re Shapiro, 109 B.R. 127, 135 (Bankr.E.D.Pa.1990) (previous appraisals are in the form of an admission).
. Tr. of Aug. 8, 2011, Testimony of Larry Ashcraft at 54-55, in App. at 928-29.
. Till v. SCS Credit Corp., 541 U.S. 465, 124 S.Ct. 1951, 158 L.Ed.2d 787 (2004).
. See 11 U.S.C. § 1225(a)(5)(B)(ii).
. 901 F.2d 858 (10th Cir.1990).
. Id. at 860.
. Id.
. Id.
. Till v. SCS Credit Corp., 541 U.S. 465, 124 S.Ct. 1951, 158 L.Ed.2d 787 (2004).
. A number of bankruptcy courts have applied Till’s rate in Chapter 12 cases. In re Toso, No. EC-05-1290-PaBuMo, 2007 WL 7540985 (9th Cir. BAP Jan.10, 2007); In re Hudson, Case No. 208-09480, 2011 WL 1004630 (Bankr.M.D.Tenn. Mar. 16, 2011); In re Tamcke, Case No. 09-60833-12, 2010 WL 231751 (Bankr.D.Mont. Jan. 14, 2010); In re Schreiner, Case No. BK09-41014-TLS, 2009 WL 924418 (Bankr.D.Neb. Mar. 30, 2009); In re Torelli, 338 B.R. 390 (Bankr.E.D.Ark.2006).
. Till, 541 U.S. at 477, 124 S.Ct 1951.
. Id.
. Id. at 479, 124 S.Ct. 1951.
. Id.
. Id.
. Id. at 490-91, 124 S.Ct. 1951.
. This decision is expressly limited to Chapter 12 cases. The issue of whether Till's formula approach should apply in Chapter 11 cases is not before us and need not be decided here.
. Tr. of May 10, 2011, Testimony of Norman Dalsted at 270, ll. 15-20, in App. at 561.
. Id. at 271-72, in App. at 562-63.
. Id. at 297, ll. 3-24, in App. at 588.
. Tr. of Aug. 8, 2011, Testimony of Mark Daigle at 158-59, in App. at 1032-33.
. Id. at 159-60, in App. at 1033-34.
. Id. at 161, ll. 12-24, in App. at 1035.
. Id. at 161-64, in App. at 1035-38.
. Tr. of Aug. 8, 2011, Testimony of Robert Larson at 195-97, in App. at 1070-71.
. See Till, 541 U.S. 465, 480, 124 S.Ct. 1951, 158 L.Ed.2d 787 (2004) (noting other courts have generally approved adjustments of 1 to 3%).
. 11 U.S.C. § 1222(b)(2) and (b)(9).
. In re John V. Francks Turkey Co., Inc., UT-98-066, 1999 WL 565993, at *2 (10th Cir. BAP Aug. 2, 1999); 8 Collier on Bankruptcy ¶ 1225.03[4][b], at 1225-16 (Alan N. Resnick & Henry J. Sommer eds, 16th ed. 2010).
. 8 Collier on Bankruptcy ¶ 1225.03[4][b], at 1225-16.
. Id.
. Id. at ¶ 1225.03[4][b][I], at 1225-17 (citing In re Schreiner, Case No. BK09-41014-TLS, 2009 WL 924418 (Bankr.D.Neb. Mar. 30, 2009) (20-year amortization with a 5-year balloon); In re Torelli, 338 B.R. 390 (Bankr.E.D.Ark.2006) (10-year amortization with a 5-year balloon); In re Lockard, 234 B.R. 484 (Bankr.W.D.Mo.1999) (20-year amortization with a 5-year balloon); In re LLL Farms, 111 B.R. 1016 (Bankr.M.D.Ga.1990) (30-year amortization with a 20-year balloon); In re Foster, 79 B.R. 906 (Bankr.D.Mont.1987) (30-year amortization with a 15-year balloon); In re Smith, 78 B.R. 491 (Bankr.N.D.Tex.1987) (30-year amortization with a 20-year balloon)).
. In re Torelli, 338 B.R. at 397.
. Tr. of May 10, 2011, Testimony of Norman Dalsted at 270, ll. 9-12, in App. at 561.
. Tr. of Aug. 22, 2011, Oral Ruling at 320, ll. 6-12, in App. at 1269.
. In re Nauman, 213 B.R. 355, 358 (9th Cir. BAP 1997).
. In re Ames, 973 F.2d 849, 851 (10th Cir.1992).
. In re Hopwood, 124 B.R. 82, 86 (E.D.Mo.1991); In re John V. Francks Turkey Co., Inc., UT-98-066, 1999 WL 565883, at *4 (10th Cir. BAP Aug. 2, 1999).
. Exhibit 2, Woods Farm Monthly Cash Flow Statement and Production Plan, in Supp. App. at 1-7.
. Tr. of May 10, 2011, Testimony of Norman Dalsted at 268, ll. 9-14, in App. at 559.
. Tr. of Aug. 8, 2011, Testimony of Reson Woods at 31-32, in App. at 905-06.
. In re Sun 'N Fun Waterpark LLC, 408 B.R. 361, 366 (10th Cir. BAP 2009). There is no indication that the fees sought in this case were part of a state court judgment as they were in Sun 'N Fun.
. In re Hedstrom Corp., 333 B.R. 815, 821 (Bankr.N.D.Ill.2005); In re Biazo, 314 B.R. 451, 459 (Bankr.D.Kan.2004).
. Hedstrom, 333 B.R. at 822.
. Exhibit HH, Loan Balance Summary as of Aug. 3, 2011, in App. at 1347.
. Tr. of Aug. 8, 2011 Hearing at 153-57, in App. at 1027-31.
. Tr. of Aug. 8, 2011, Testimony of Mark Daigle at 157, ll. 8-25, in App. at 1031.
. Amended Chapter 12 Plan of Organization at 5, ¶ 5.2.4(a), in App. at 187.
. Id. at 4, ¶ 5.2.2(a), in App. at 186.
. The Bank's Objection to Confirmation of Debtors’ Amended Chapter 12 Plan of Reorganization at 6, ¶ 34, in App. at 207. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494585/ | MEMORANDUM OPINION AND ORDER DENYING PLAINTIFF’S SUMMARY JUDGMENT MOTION AND GRANTING JUDGMENT IN FAVOR OF DEFENDANTS
ROBERT D. BERGER, Bankruptcy Judge.
The Trustee sued Defendants Rainstorm, Inc., Stephen J. Davis, Silver Tree Gordon, and Keith Lawyer to avoid a $150,000 transfer as preferential or fraudulent under 11 U.S.C. §§ 547 or 548. The motion for summary judgment is denied because the property at issue never belonged to Debtor or its estate. Judgment shall be entered in favor of Defendants.
Findings of Fact
Before October 17, 2008, Defendants Rainstorm, Inc., Silver Gordon and Stephen Davis owned Debtor Lone Star Pub Operations, LLC. Defendant Keith Lawyer was Rainstorm’s president, and Rainstorm was Lone Star’s managing member. On October 17, Defendants agreed to sell Lone Star to Mary Weingarden for $150,000. The Letter of Agreement between the parties assigned 100 percent of Defendants’ membership interests in Lone Star to Weingarden. Weingarden borrowed the purchase money from Mark McLean. The parties planned for Wein-garden to wire the money directly to Rainstorm, which is in Texas. However, McLean loaned the money to Weingarden in the form of a check drawn on U.S. Bank. McLean required Weingarden’s name be on the check. Lone Star also banked at U.S. Bank. Since sending the check via Federal Express to Texas would further delay the closing, the parties agreed to deposit McLean’s check into Lone Star’s account and then wire the purchase money out of the account to Rainstorm. The check’s deposit into Lone Star’s account and the wire transfer out of Lone Star’s account to Rainstorm both occurred on October 23, 2008. The transfer was overseen by an employee at Western Entertainment Management, Inc., a management company which handled financial reports for both Lone Star and Rainstorm.
Pinnacle TIC, LLC, one of Lone Star’s largest creditors, filed an involuntary bankruptcy petition against Lone Star on July 1, 2009. Pinnacle was Lone Star’s landlord. At the time of the sale, Lone Star owed Pinnacle $34,228.84 for rent.
Conclusions of Law
A. Summary Judgment Standard
Summary judgment is appropriate if the moving party demonstrates there is no genuine issue as to any material fact, and he is entitled to judgment as a matter of law.1 The movant bears the initial burden of proving the absence of controverted *215facts.2 All inferences are to be construed in favor of the nonmoving party.3 Only when reasonable minds could not differ as to the import of the proffered evidence is summary judgment proper.4
Federal courts may enter summary judgment sua sponte in favor of a nonmov-ing party if the losing party is given sufficient notice and an opportunity to come forward with evidence in opposition.5 The court may enter judgment provided there is no dispute of material fact and the losing party had an adequate opportunity to address the issues involved, including adequate time to develop any facts necessary to oppose summary judgment.6 Judgment is still predicated on Rule 56’s standards, even without a formal motion. If the evidence submitted by a party who would not have borne the burden of persuasion at trial establishes the plaintiff lacks evidence supporting an essential element of the claim, the nonmoving party may show he is entitled to judgment.7 If the nonmoving party carries his initial burden, the plaintiff must come forward with specific facts showing a genuine issue for trial.8
Plaintiff moved for summary judgment. The Defendants responded, but did not file a cross-motion for summary judgment. Instead, while defending against Plaintiffs motion, Defendants presented evidence showing Lone Star did not have an equitable interest in the $150,000 and that Lone Star momentarily held the purchase money funds for Rainstorm. Plaintiff was on notice and had sufficient opportunity to show a genuine issue of material fact with respect to ownership of the transferred funds in order to proceed to trial. Plaintiff failed as follows.
B. The Trustee’s Claims
The trustee must prove six elements by the preponderance of the evidence to avoid a preferential transfer: (1) a transfer of the debtor’s property, (2) on account of an antecedent debt, (3) to or for a creditor’s benefit, (4) while the debtor was insolvent, (5) within 90 days prior to bankruptcy (or one year for insiders), (6) which allowed the creditor to receive more than it would if the transfer had not been made and the creditor asserted its claim in a Chapter 7 liquidation.9
Likewise, to avoid a fraudulent transfer the trustee must prove the debtor transferred his assets for less than a reasonably equivalent value and was insolvent, under-capitalized, or unable to pay his debts as they became due at the time of the transfer.10
*216In this case, the first element is dispositive. The threshold requirement for both causes of action is the property transferred must have belonged to the debtor. Avoiding preferential and fraudulent transfers recovers property which would have been available for distribution to creditors but for the transfers.11 If the debtor’s estate is not diminished by the transfer because the debtor did not have an equitable interest in the property, the property is not recoverable under §§ 547 and 548.12
C. The Debtor’s Property
A bankruptcy estate cannot succeed to a greater interest in property than the debtor held prior to bankruptcy. State law determines property ownership.13 Federal bankruptcy law determines the extent to which a property interest becomes estate property.14 Property of the estate includes all legal or equitable interests of the debtor in property as of the commencement of the case.15 Property subject to a trust is not property of the bankruptcy estate.16 The equitable title or interest held by a nondebtor is neither property of the estate under § 541 nor property of the debtor under §§ 547(b) and 548.17
The trustee has the initial burden to prove the debtor had legal title to a bank account and unfettered discretion to pay creditors of its own choosing out of the account.18 Generally, funds in the debtor’s bank account are estate property when the debtor has control over its use, including paying its own creditors.19 Control means the legal right to use the funds.20 Control does not mean the ability to steal the money or use it for personal purposes in breach of duty. Under Kansas law, ownership of funds held in a bank account is not necessarily determined by the name on the account.21 Creditors may not attach the debtor’s account if the debt- or proves the funds do not belong to the debtor.22 The trustee carries his burden by proving the debtor held legal title to the account, and the account consists of commingled trust and personal funds.23 If the trustee carries his burden, the burden shifts to the defendant to show the debtor held only legal title, and the defendant can trace its equitable interest to the specific property at issue. The defendant must establish the original trust relationship by proving his title, identifying the trust fund, *217and where the fund has been mingled with the general property of the debtor, the claimant must sufficiently trace the fund.24 Under Kansas law, an express trust of personal property requires (1) an explicit declaration and intent to create a trust, (2) definite property or subject matter of the trust, and (3) acceptance and handling of subject matter by a trustee.25 An oral trust over personalty is valid under Kansas law.26
D. Analysis
Plaintiff failed to carry his ultimate burden to prove the $150,000 transfer diminished the Debtor’s estate to the detriment of its creditors. Defendants, on the other hand, prove an express trust under Kansas law. Lone Star owned the bank account into which Weingarden deposited $150,000, but Lone Star did not own the purchase money. Lone Star did not control the funds and could not pay its creditors with Weingarden’s deposit. Lone Star did not have a debtor-creditor relationship with Weingarden and received nothing from the deposit, but rather served as a mere conduit for facilitating the transfer of funds from the purchaser to the seller. The Defendants show Lone Star momentarily held legal title to the funds, but Rainstorm was the true owner. The Defendants successfully trace the funds because the money was immediately wired out of Lone Star’s account to Rainstorm. The entire transfer was under the supervision and control of Rainstorm’s agent — not Lone Star’s. Neither Lone Star nor Lawyer had authority to exert control over the deposit except to transfer the funds to Rainstorm. Rainstorm explicitly directed Lone Star to receive the deposit on its behalf because Lone Star banked at the same institution as the purchaser’s lender. The trust property was defined as the $150,000 deposit to be received on a particular day from an identified source. Lone Star accepted the duty and completed its duty by immediately transferring the funds to the equitable owner. Rainstorm then transferred its entire interest in Lone Star to Weingarden. The evidence establishes the $150,000 satisfied Weingarden’s debt to Rainstorm in exchange for the purchase of Lone Star. The transfer did not satisfy any debt between Lone Star and Rainstorm.27
Plaintiff met his initial burden to prove Lone Star held legal title to the bank account and the account contained commingled funds. The burden shifted, and Defendants met their burden to prove ownership of traceable, specific property. Plaintiff does not controvert Defendants’ evidence in this regard. Accordingly, summary judgment in favor of Defendants is proper as a matter of law.
E. Conclusion
For the foregoing reasons, Plaintiffs Motion for Summary Judgment is DENIED. By separate order, judgment shall be entered in favor of Defendants.
IT IS SO ORDERED.
. Fed. R. Bankr.P. 7056.
. Whitesel v. Sengenberger, 222 F.3d 861, 867 (10th Cir.2000); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
. Atlantic Richfield Co. v. Farm Credit Bank of Wichita, 226 F.3d 1138, 1148 (10th Cir.2000).
. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250-51, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
. Celotex Corp. v. Catrett, 477 U.S. 317, 326, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).
. David v. City & County of Denver, 101 F.3d 1344, 1358-59 (10th Cir.1996).
. Sigmon v. CommunityCare HMO, Inc., 234 F.3d 1121, 1125 (10th Cir.2000).
. Spaulding v. United Transp. Union, 279 F.3d 901, 904 (10th Cir.2002) (citing Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986)).
. 11 U.S.C. § 547(b); ABB Vecto Gray, Inc. v. First Nat'l Bank of Bethany, Oklahoma (In re Robinson Bros. Drilling, Inc.), 9 F.3d 871, 874 (10th Cir.1993); 11 U.S.C. § 547(g).
. 11 U.S.C. § 548.
. Begier v. IRS, 496 U.S. 53, 58, 110 S.Ct. 2258, 110 L.Ed.2d 46 (1990).
. Id. at 58-59, 110 S.Ct. 2258.
. Barnhill v. Johnson, 503 U.S. 393, 398, 112 S.Ct. 1386, 118 L.Ed.2d 39 (1992).
. Parks v. FIA Card Svcs., N.A. (In re Marshall), 550 F.3d 1251, 1255 (10th Cir.2008).
. 11 U.S.C. § 541(a)(1).
. 11 U.S.C. § 541(d).
. Begier v. IRS, 496 U.S. at 59, 110 S.Ct. 2258.
. Amdura Nat’l Distrib. Co. v. Amdura Corp. (In re Amdura Corp.), 75 F.3d 1447, 1451 (10th Cir.1996); Southmark Corp. v. Grosz (Matter of Southmark Corp.), 49 F.3d 1111, 1116-17 (5th Cir.1995).
. See, e.g., Matter of Southmark Corp., 49 F.3d at 1116.
. Jenkins v. Chase Home Mortg. Corp. (Matter of Maple Mortg., Inc.), 81 F.3d 592, 596 (5th Cir.1996).
. LSF Franchise REO I, LLC v. Emporia Restaurants, Inc., 283 Kan. 13, 25, 152 P.3d 34 (2007).
. Id.
. In re Amdura, 75 F.3d at 1451; Matter of Southmark Corp., 49 F.3d at 1116.
. Sender v. The Nancy Elizabeth R. Heggland Family Trust (In re Hedged-Investments Assoc., Inc.), 48 F.3d 470, 474 (10th Cir.1995).
. Shumway v. Shumway, 141 Kan. 835, 842, 44 P.2d 247 (1935).
. Wehking v. Wehking, 213 Kan. 551, 553, 516 P.2d 1018 (1973).
.The parties briefed whether an antecedent debt existed between Lone Star and Rainstorm, but Weingarden's purchase money did not satisfy any debt Lone Star may have owed Rainstorm, whether that debt is characterized as a capital contribution or a loan. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494586/ | MEMORANDUM OPINION DENYING JOINT MOTION TO DISMISS
JAMES S. STARZYNSKI, Bankruptcy Judge.
This is an action to determine the priority of Chapter 11 attorney’s fees under 11 U.S.C. § 724(b) as amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”). Plaintiff William F. Davis & Associates, P.C. (“Davis”) represented Debtor prior to this underlying bankruptcy case’s conversion from Chapter 11 to Chapter 7, and is owed $25,127.50 in fees and costs from that representation.- However, Debtor is subject to $1,405,311.88 in secured tax claims and does not have sufficient funds to pay both the tax liens as well as Davis’ attorney fees. Davis argues that its claim has priority over the tax liens under BAPCPA § 724(b). Defendants United States of America on behalf of the Internal Revenue Service and the State of New Mexico, Taxation and Revenue Department (collectively “Defendants”) disagree and have jointly moved to dismiss. For the reasons set forth herein, the Court denies the motion to dismiss.1
Background
This case was initiated with the filing of a chapter 11 petition by the Debtor on July 5, 2007. It was converted to chapter 7 on February 6, 2009. Davis filed a complaint (doc 1) and an amended complaint (doc 4) seeking the referenced relief based on its services rendered during the chapter 11 phase of the case. Defendants answered (doc 8)2 and shortly thereafter filed a Joint Motion to Dismiss the Amended Complaint (“Joint Motion”) (doc 9). At the request of the Court, Defendants supplemented their Joint Motion (doc 13). Davis objected to the Joint Motion (doc 14), to which Defendants replied (doc 18).3
Effect of BAPCPA § 724(b)(2)
The parties present opposing views of the meaning of § 724(b)(2). The BAPCPA version of the statute reads as follows;
*220(b) Property in which the estate has an interest and that is subject to a lien that is not avoidable under this title ... and that secures an allowed claim for a tax, or proceeds of such property, shall be distributed ...
(2) second, to any holder of a claim of a kind specified in section 507(a)(1) (except that such expenses, other than claims for wages, salaries, or commissions that arise after the date of the filing of the petition, shall be limited to expenses incurred under chapter 7 of this title and shall not include expenses incurred under chapter 11 of this title), 507(a)(2), 507(a)(3), 507(a)(4), 507(a)(5), 507(a)(6), or 507(a)(7) of this title, to the extent of the amount of such allowed tax claim that is secured by such tax hen;....
11 U.S.C. § 724(b)(2) (2006). The Bankruptcy Technical Corrections Act of 2010 (“BTCA”), signed into law on December 22, 2010, during this adversary proceeding, made several additional changes to the language of § 724(b)(2). As amended, § 724(b)(2) now reads as follows:
(2) second, to any holder of a claim of a kind specified in section 507(a)(1)(C) or 507(a)(2) (except that such expenses under each such section, other than claims for wages, salaries, or commissions that arise after the date of the filing of the petition, shall be limited to expenses incurred under this chapter and shall not include expenses incurred under chapter 11 of this title), 507(a)(1)(A), 507(a)(1)(B), 507(a)(3), . 507(a)(4), 507(a)(5), 507(a)(6), or 507(a)(7) of this title, to the extent of the amount of such allowed tax claim that is secured by such tax lien;....
11 U.S.C. § 724(b)(2) (2011) (changes italicized).
Davis’ fees are § 507(a)(2) expenses (“administrative expenses allowed under section 503(b)”). Davis therefore argues that the plain meaning of the BAPCPA version of the statute dictates that its attorney’s fees be paid prior to the tax liens.4 Defendants, on the other hand, argue that the BAPCPA version of the statute was erroneously drafted and is widely recognized as such, and that the BTCA version of the statute is the one the Court ought to apply. Under that interpretation, only chapter 7 administrative expenses (and chapter 11 “wages, salaries and commissions”) obtain the benefit of being slotted into the “vacated” position of the subordinated taxes, and thus Davis’ chapter 11 fees would be excluded from payment.
More specifically, Defendants argue that because § 507(a)(1) deals only with domestic support obligations, it makes no sense that the parenthetical phrase immediately following the citation to that section talks about expenses of chapter 7 and 11 cases. Rather, what Congress sought was to address § 503(b)(2) as well, which deals with many of the administrative claims against the estate, and thereby by means of the parenthetical phrase excludes chapter 11 administrative claims5 from the favored payment treatment. And in fact Congress made this amply clear with the BTCA version of the statute. Defendants also cite abundant authority for their position derived from the history of the statutory provisions and from various commentaries.
*221The conundrum created by Congress’ poor drafting is not limited to this statute. Specifically, for example, in Lamie v. U.S. Trustee, 540 U.S. 526, 124 S.Ct. 1023, 157 L.Ed.2d 1024 (2004), the United States Supreme Court interpreted § 330(a)(1), which had been amended in 1994 to delete payment of debtor’s chapter 7 attorney fees as a chapter 7 administrative expense. Id. at 529-530, 124 S.Ct. 1023. The problem arose because the previous version of the statute specifically allowed such a payment, and the 1994 legislation rather clearly deleted the words “or to the debtor’s attorney” from § 330(a)(1) in error (that is, unintentionally). Id. at 530-31, 124 S.Ct. 1023. Faced with that dilemma, the court ruled that the statute be interpreted the way it read, not the way it “should have” read. “The starting point in discerning congressional intent is the existing statutory text.” Id. at 534, 124 S.Ct. 1023 (citing Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 438, 119 S.Ct. 755, 142 L.Ed.2d 881 (1999)). “It is well established that ‘when the statute’s language is plain, the sole function of the courts — at least where the disposition required by the text is not absurd — is to enforce it according to its terms.’ ” Lamie, 540 U.S. at 534, 124 S.Ct. 1023 (quoting Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 6, 120 S.Ct. 1942, 147 L.Ed.2d 1 (2000)(further internal quotations omitted)). While “the statute is awkward ... that does not make it ambiguous.” Id. Thus Lamie requires this Court to interpret the BAPCPA version of the statute literally, and thereby to permit the Davis fees to be paid.
The literal reading of BAPCPA § 724(b)(2) is that the parenthetical only applies to § 507(a)(1) and not § 507(a)(2). Defendant contends that this is an unacceptable interpretation for two reasons: (1) the literal reading is not reasonable and (2) legislative history and secondary sources show that the placement of the parenthetical was clearly a drafting error. The Court will first address the reasonableness of the statute.
Defendants contend that the parenthetical has no meaning if it applies only to § 507(a)(1). The parenthetical creates a distinction between “expenses incurred under chapter 7” and “expenses incurred under chapter 11.” 11 U.S.C. § 724(b)(2) (2006). Defendants argue that § 507(a)(1) covers only domestic support obligations, which are claims and not expenses. Thus, according to Defendants’ reading, under the literal reading, the parenthetical has no meaning. There is no distinction it can create, because there are no expenses in § 507(a)(1) for it to distinguish between. The parenthetical clearly cannot be intended to refer to domestic support obligations.
The flaw with Defendant’s analysis of § 724(b)(2), however, is that domestic support obligations are not the only kind of estate obligation referenced in § 507(a)(1). 11 U.S.C. § 507(a)(1)(C) also includes administrative expenses of the trustee:
(C) If a trustee is appointed or elected under 701, 702, 703, 1104, 1202 or 1302, the administrative expenses of the trustee allowed under paragraphs (1)(A), (2) and (6) of section 503(b) shall be paid before payment of claims under subpar-agraphs (A) and (B), to the extent that the trustee administers assets that are otherwise available for the payment of such claims.
If the parenthetical in BAPCPA § 724(b)(2) is read to apply to § 507(a)(1)(C) claims, the text is rather straightforward, since the trustee certainly may incur expenses under chapters 11 and chapter 7, including the “wages, salaries or commissions” mentioned in the parenthetical. 11 U.S.C. § 724(b)(2). This meaning is supported by the fact that Congress, in *222enacting BTCA, left the parenthetical phrase still applicable to a portion of § 507(a)(1) — specifically, subsection (a)(1)(C). 11 U.S.C. § 724(b)(2) (2011). Thus, pre-BTCA, the § 724(b)(2) parenthetical does have a reasonable meaning, limited though that might be: it makes a distinction between § 507(a)(1)(C) administrative expenses incurred in chapter 7 and those incurred in chapter 11.
Defendants have marshaled lengthy legislative history and secondary sources that rather clearly show that the placement of the parenthetical was a drafting error, and runs directly contrary to Congress’ intention of eliminating the “shocking result” of “extinguishing] the tax lien of a city, a prior perfected property right, and ... redistributing] public revenues to a group of Chapter 11 administrative creditors. ...” Morgan v. K.C. Mach. & Tool Co. (In re K.C. Mach. & Tool Co.), 816 F.2d 238, 248 (6th Cir.1987) (Merritt, Chief Judge, dissenting). However, given the fact that the BAPCPA version of the statute makes sense as it was written, the Court need not address the legislative history or secondary sources. “The language before us expresses Congress’ intent ... with sufficient precision so that reference to legislative history and to pre-Code practice is hardly necessary.” U.S. v. Ron Pair Enter., Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989) (ruling that postpetition interest is permitted on nonconsensual oversecured claims).
That being said, the Court concedes that Defendants and their sources are undoubtedly correct in asserting that Congress did not mean, when it passed BAPCPA, to continue to allow chapter 11 professional expenses to be paid from the funds that would otherwise go to a properly perfected property tax lien. BTCA makes that clear in correcting Congress’ BAPCPA error, and the commentaries reinforce that conclusion. Had this issue arisen some years earlier, the then prevailing standards for statutory interpretation might well have resulted in a conclusion opposite what the Court rules today. See, e.g., Dewsnup v. Timm, 502 U.S. 410, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992):
We conclude that respondents’ alternative position, espoused also by the United States, although not without its difficulty, generally is the better of the several approaches. Therefore, we hold that § 506(d) does not allow petitioner to “strip down” respondents’ lien, because respondents’ claim is secured by a lien and has been fully allowed pursuant to § 502. Were we writing on a clean slate, we might be inclined to agree with petitioner that the words “allowed secured claim” must take the same meaning in § 506(d) as in § 506(a). But, given the ambiguity in the text, we are not convinced that Congress intended to depart from the pre-Code rule that liens pass through bankruptcy unaffected.
Id. at 417, 112 S.Ct. 773. (Footnote omitted.) The Dewsnwp Court went on to add the following:
When Congress amends the bankruptcy laws, it does not write “on a clean slate.” See Emil v. Hanley, 318 U.S. 515, 521, 63 S.Ct. 687, 690-691, 87 L.Ed. 954 (1943). Furthermore, this Court has been reluctant to accept arguments that would interpret the Code, however vague the particular language under consideration might be, to effect a major change in pre-Code practice that is not the subject of at least some discussion in the legislative history. See United Savings Assn. of Texas v. Timbers of Inwood Forest Associates, Ltd., 484 U.S. 365, 380, 108 S.Ct. 626, 634, 98 L.Ed.2d 740 (1988). See also Pennsylvania Dept. of Public Welfare v. Davenport, *223495 U.S. 552, 563, 110 S.Ct. 2126, 2133, 109 L.Ed.2d 588 (1990); United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 244-245, 109 S.Ct. 1026, 1032-1033, 103 L.Ed.2d 290 (1989). Of course, where the language is unambiguous, silence in the legislative history cannot be controlling. But, given the ambiguity here, to attribute to Congress the intention to grant a debtor the broad new remedy against allowed claims to the extent that they become “unsecured” for purposes of § 506(a) without the new remedy’s being mentioned somewhere in the Code itself or in the annals of Congress is not plausible, in our view, and is contrary to basic bankruptcy principles.
Id. at 419-420, 112 S.Ct. 773. See also Midlantic National Bank v. New Jersey Dept. of Environmental Protection, 474 U.S. 494, 507, 106 S.Ct. 755, 88 L.Ed.2d 859 (1986), characterized in Ron Pair Enter., Inc., 489 U.S. at 243, 109 S.Ct. 1026 as holding that section “554(a), which provides that ‘the trustee may abandon any property of the estate that is burdensome to the estate,’ does not give a trustee the authority to violate state health and safety laws by abandoning property containing hazardous wastes.”
In so ruling, the Court sympathizes with those faced with the difficulty of drafting legislation. Creating the text of a statute that accurately states the intention of the drafter (to say nothing of actually solving the problem addressed) while avoiding unintended consequences can be devilishly exacting and tedious. In consequence, courts have developed rules of construction whose general aim is to uphold a statute and discern and implement Congressional intent whenever reasonably possible — that is, to “make it work.” And these rules even apply when the problem arises from fundamental negligence on the part of Congress, such as by hurriedly passing legislation without proofreading it.
But at what point does a court go from the judicial function of interpreting a statute to the legislative function of rewriting a statute, especially when the legislative history upon which a “rewriting” of the statute would be based is rather sketchy. Lamie illustrates that problem in that the majority found the legislative history to be ambiguous, id. at 538-542, 124 S.Ct. 1023, and the concurrence found the legislative history in fact supported the statute as written. Id. at 542-43, 124 S.Ct. 1023.
These uncertainties illustrate the difficulty of relying on legislative history here and the advantage of our determination to rest our holding on the statutory text.
Lamie, at 542, 124 S.Ct. 1023. Once a Court begins to depart from the direct meaning of a given text in a search for what Congress intended (or perhaps should have intended), it quickly becomes difficult and even random where to draw the line between mere interpretation and rewriting the statute. In consequence, a less intrusive and more restrained approach, such as that exhibited in Lamie, seems appropriate. That leads to what the Court concedes is an anomalous result in this instance: an interpretation and application of the statute that honors its literal (and reasonable) wording while almost certainly running contrary to what Congress actually intended when it was rewriting the statute. Defendants reasonably will frown at the result, but they do have a remedy: have Congress change the statute, as it in fact has done in this case.
If Congress enacted into law something different from what it intended, then it should amend the statute to conform it to its intent. “It is beyond our province to rescue Congress from its drafting errors, and to provide for what we might think ... is the preferred result.” *224United States v. Granderson, 511 U.S. 39, 68, 114 S.Ct. 1259, 127 L.Ed.2d 611 (1994) (concurring opinion). This allows both of our branches to adhere to our respected, and respective, constitutional roles. In the meantime, we must determine intent from the statute before us.
Id. at 542, 124 S.Ct. 1023.
It is true in this case that, as Defendants emphasize, one of the sponsors of BTCA made clear his view that BTCA merely “correct[ed] these purely technical errors” and “[i]t is important to highlight on the record that this bill does not, and is not intended to, enact any substantive change to the Bankruptcy Code.” Cong. Rec. H7158 (daily ed. Sept. 28, 2010) (Statement of Rep. Scott). An after-the-fact (indeed, half a decade after the fact) declaration by a sponsor of BTCA interpreting the statute is not a dependable mechanism for statutory interpretation. More to the point, “[i]t is emphatically the province and duty of the judicial department to say what the law is.” Marbury v. Madison, 5 U.S. 137, 1 Cranch 137, 178, 2 L.Ed. 60 (1803).
The disposition required by the text, that Davis be paid for its work prior to payment of the tax liens, is not clearly absurd, and thus this Court finds that BAPCPA § 724(b)(2) did not differentiate between chapter 11 and chapter 7 attorneys fees.
Retroactivity
However, Defendants have done Lamie one better: they have in their support BTCA, which in effect is a clear admission by Congress that it got the statute wrong in the BAPCPA version but is also an attempt to fix the problem after the fact. BTCA does not however suffice to change the result in this case.
The amended language makes clear that the parenthetical does not apply to all of § 507(a)(1), but was rather only to 507(a)(1)(C), and additionally to § 507(a)(2). If the 2010 amendments apply retroactively, then Defendants’ tax liens have priority over Plaintiffs expense, and Davis will not get paid. Thus, whether the 2010 amendments apply retroactively is a dispositive issue in this proceeding.
The Supreme Court dealt with an analogous situation in Landgraf v. USI Film Products, 511 U.S. 244, 114 S.Ct. 1483, 128 L.Ed.2d 229 (1994):
When a case implicates a federal statute enacted after the events in suit, the court’s first task is to determine whether Congress has expressly prescribed the statute’s proper reach. If Congress has done so, of course, there is no need to resort to judicial default rules. When, however, the statute contains no such express command, the court must determine whether the new statute would have retroactive effect.
Id. at 281, 114 S.Ct. 1483. In the instant case, BTCA itself contains neither an effective date, nor any instruction about its application. Pub.L. No. 111-327, Bankruptcy Technical Corrections Act of 2010. Thus, this Court must infer whether the statute has retroactive effect.
Following Landgraf, a statute has retroactive effect when it “impair[s] rights a party possessed when he acted, increase[s] a party’s liability for past conduct, or impose[s] new duties with respect to transactions already completed”. Landgraf, 511 U.S. at 281, 114 S.Ct. 1483.
Applying BTCA would have the effect of “impair[ing] a right a party possessed when he acted” since it would subordinate Davis’ claim to the tax liens and thus prevent the claim from being paid. Landgraf, 511 U.S. at 281, 114 S.Ct. 1483. Thus, applying BTCA would run afoul of the presumption against retroactivity. As *225the Supreme Court instructs, “congressional enactments and administrative rules will not be construed to have retroactive effect unless their language requires this result.” Id. (quoting Bowen v. Georgetown Univ. Hosp., 488 U.S. 204, 208, 109 S.Ct. 468, 102 L.Ed.2d 493 (1988)). The language of BTCA cannot be said to “require” retroactivity. Pub.L. No. 111-327, Bankruptcy Technical Corrections Act of 2010. The acknowledgment of an error and a command to apply the correcting statute retroactively are obviously two different things; BTCA is effectively the former without being the latter.
There is precedent in this district for precisely this result. In In re Meyer, 355 B.R. 837 (Bankr.D.N.M.2006), this Court ruled, based upon the wording of §§ 1325(b) and 707(b), as amended by BAPCPA, that over median income chapter 13 debtors may not take charitable contributions into account in computing their monthly plan payment. As that opinion was being written and issued, Congress amended the statute to change that interpretation, and so the Meyer debtors and the United States Trustee moved the Court to change its decision. In re Meyer, 357 B.R. 635 (Bankr.D.N.M.2006). This Court reviewed the new statute6 and determined that it did not explicitly call for retroactive application. Id. at 637. The Court then ruled as follows:
“Absent manifest injustice or intent to the contrary, the court generally applies the law as it exists when a decision is made.” Branding Iron Motel, Inc. v. Sandlian Equity, Inc. (In re Branding Iron Motel Inc.), 798 F.2d 396, 399 n. 2 (10th Cir.1986). In this case, the Court applied the law as it existed at the time of the decision. If Congress wishes to pass or amend a civil law and make it retroactive, it can do that. See, e.g., Alvarez-Portillo v. Ashcroft, 280 F.3d 858, 863 (8th Cir.2002). However, there is a judicial presumption against retroac-tivity that can only be overcome by a clear expression of congressional intent. Id. The Act contains no language that would make it retroactive. Therefore, there is no ground for reconsideration. If the Act were signed into law and amended to be retroactive, a Motion for Reconsideration might be well taken.
Finally, the Court finds that the Act is an acknowledgment that BAPCPA as originally enacted prevented above-median income debtors from deducting charitable contributions in arriving at their plan payment. Applying the statute as it existed when Debtors filed their petition rather than the way that Congress apparently had intended the statute to read may be harsh. But, “[o]ur unwillingness to soften the import of Congress’ chosen words even if we believe the words lead to a harsh outcome is longstanding.” Lamie v. United States Trustee, 540 U.S. 526, 538, 124 S.Ct. 1023, 157 L.Ed.2d 1024 (2004). This Court should not rewrite the statute as Congress may have intended; rather, it must enforce the law as written.
Id.
Conclusion
It is frequently remarked that “elections have consequences”, and sometimes that is even true.. It is perhaps more often true that the passage of legislation has consequences. That is so in the instance of this statute in its BAPCPA form, although at *226least one of the consequences has been unintended.
For the foregoing reasons, Defendants’ Joint Motion to Dismiss should be denied, as the relief Davis requests is properly available. An order in conformity with this memorandum opinion will issue.
. The Court has subject matter and personal jurisdiction pursuant to 28 U.S.C. §§ 1334 and 157(b); this is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (K); and these are findings of fact and conclusions of law as may be required by Rule 7052 F.R.B.P.
. Exemplifying an eminently utilitarian approach, the Trustee has merely asked for directions on how to distribute the funds (doc 8).
.Davis generated a minor procedural brouhaha when it served the' amended complaint by certified mail rather than merely first class mail. See F.R.B.P. 7004(b)(4) and (6). It then re-served the amended complaint and an alias summons on Defendants by first class mail, and Defendants, in another demonstration of utilitarianism, have ceased their protests on this subject.
. Other than the chapter 7 trustee’s expenses and commissions and Davis’ fees, there are no claims to be paid under §§ 507(a)(l)-(7).
. To be more accurate, there is in effect an exclusion from the exclusion; whereas chapter 11 administrative expenses for the most part may not (now) be paid from the funds that would otherwise go to pay the tax liens, post-petition wages, salaries and commissions may be paid. § 724(b)(2) (parenthetical phrase).
. The legislation was titled the Religious Liberty and Charitable Donation Clarification Act of 2006. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494587/ | MEMORANDUM DECISION
R. KIMBALL MOSIER, Bankruptcy Judge.
This matter is before the Court on the cross-motions for summary judgment filed by Kenneth A. Rushton, the plaintiff and chapter 7 trustee (Trustee) and the defendant, Bank of Utah (Bank). In this adversary proceeding, the Trustee seeks to recover $383,099 in postpetition payments to the Bank. At the time the Bank received the payments, it was a fully secured creditor and the payments to the Bank caused no damage to the estate. Although the Trustee characterizes his claims as a recovery of unauthorized postpetition transfers or turnover of property of the bankruptcy estate transferred to the Bank in violation of the automatic stay, he seeks recovery of the $383,099 free and clear of any secured claim of the Bank. In substance and effect, the Trustee seeks to “strip” the Bank’s lien from the collateral that secured the Bank’s debt at the time of the transfer.
I. JURISDICTION
The Trustee commenced this adversary proceeding pursuant to 11 U.S.C. §§ 362, 542, 549, and 550.1 This is a case arising under title 11 of the United States Code. The parties in this case aver, and this Court finds, that “core” matter jurisdiction rests in this Court under 28 U.S.C. §§ 157(b) and 1334.
II. UNDISPUTED FACTS
C.W. Mining operated a coal mine. In order to finance the acquisition of equipment necessary to conduct its mine operations, C.W. Mining entered into three loan agreements with Bank of Utah. C.W. Mining executed promissory notes (Note(s)) for each loan agreement and each Note had an interest rate in excess of 4.31%. Each Note was secured by various pieces of equipment and included a cross-collater-alization provision such that all of the assets securing any one of the Notes secured all of the Notes, and the Bank’s security interest was properly perfected.
On August 10, 2007, C.W. Mining and the Bank entered into a letter of credit transaction to enable C.W. Mining to obtain an irrevocable standby letter of credit (Letter of Credit) to the Utah Department of Natural Resources Division of Oil, Gas and Mining, and the Office of Surface Mining (DOGM). C.W. Mining caused $362,000 to be deposited with the Bank and the Bank issued a certificate of deposit (CD) in favor of C.W. Mining in the amount of $362,000 with a maturity date of August 10, 2008 and an interest rate of 4.31%. C.W. Mining also executed a promissory note in favor of the Bank in the amount of $362,000 with an interest rate of 6.75% (Letter of Credit Note). C.W. Mining’s obligations under the Letter of Credit Note were secured by an assignment of the CD and included a cross-collateralization provision similar to the prior Notes such that all of the assets securing the Letter of Credit Note secured all of the Notes. The Bank then issued the Letter of Credit to DOGM.
On January 8, 2008, creditors filed an involuntary bankruptcy petition under chapter 11 of the United States Bankruptcy Code against C.W. Mining and on September 26, 2008, the Court entered an *230order granting relief in C.W. Mining’s involuntary bankruptcy proceeding. On November 13, 2008, C.W. Mining’s Chapter 11 bankruptcy proceeding was converted to one under chapter 7 and the Trustee was appointed.
The Bank did not renew the Letter of Credit and on February 19, 2009 effected a transaction (Transaction) involving the CD. The Bank liquidated the CD which had a value of $383,099 and then applied $79,487 to one of the Notes and $303,612 to one of the other Notes. The Bank’s application of the CD proceeds to these two Notes is hereinafter referred to as the “$383,099 Transfer.” The Bank was aware of the C.W. Mining bankruptcy proceeding when it liquidated the CD and applied the proceeds to the Notes.
Not long after the CD was liquidated, the Bank entered into a loan purchase agreement with P.P.M.C., Inc. (PPMC) whereby the Bank assigned all of its interests, in the loans and loan documents between the Bank and the Debtor, to PPMC. The Trustee has now paid PPMC the full principal and interest owing on the claims PPMC purchased from the Bank.
On September 14, 2010, the Trustee commenced this adversary proceeding seeking judgment in the amount of $383,099 under two theories: (1) avoidance of the $383,099 Transfer under § 549 and recovery of $383,099 under § 550(a)(1); and (2) for an order declaring the liquidation of the CD and the $383,099 Transfer void as a violation of the automatic stay under § 362(a) and an order for turnover of $383,099 under § 542.
III. SUMMARY JUDGMENT STANDARD
Summary judgment is appropriate if no genuine issues of material fact exist and the movant is entitled to judgment as a matter of law.2 As the parties do not dispute the facts as stated above (at least for purposes of this motion arid cross-motion), and the issue before the Court is one of legal analysis and application, summary judgment is appropriate.
Whether the Bank willfully violated the § 362(a) automatic stay is disputed. However, this factual dispute is not material to this Court’s decision. For purposes of this decision, the Court views the facts most favorably for the Trustee3 and assumes there was a willful violation of the automatic stay.
IV. ANALYSIS
The Trustee’s complaint asserts two claims for relief. The Trustee’s first claim seeks to avoid the $383,099 Transfer under § 549 and recover $383,099 pursuant to § 550. The second claim avers that the liquidation of the CD is void because it violated § 362(a) and “therefore, the CD has always remained an asset of the bankruptcy estate and, pursuant to § 542, the Trustee is entitled to delivery of $383,-099.”4 Under both claims for relief, without alleging any damages,5 the Trustee attempts to recover a $383,099 payment, free and clear of the Bank’s lien. Such an *231outcome would effectively “strip” the Bank’s lien from its collateral and deprive the Bank of the amount it was legally entitled to at the time of the $383,099 Transfer, simply because the Bank received a postpetition transfer in violation of the automatic stay. The result does not return the parties to the status quo, is unrelated to any damages, is clearly punitive in nature, and creates a windfall for the bankruptcy estate.
A. The Trustee’s § 549 Claim.
In analyzing the Trustee’s § 549 claim, it is critical to recognize that the transfer the Trustee seeks to avoid was a payment to a fully secured creditor in exchange for satisfaction of a portion of a lien. This fact, which the Trustee fails to recognize or ignores, is important when analyzing the consequences of avoiding a transfer to a fully secured creditor. The Trustee does not seek to avoid the Transaction in its entirety. The Trustee seeks to selectively avoid only one side of the Transaction, the payment of $383,099, without avoiding the other side of the Transaction, the satisfaction of the Bank’s lien.
1. A Transfer To A Fully Secured Creditor May Not be Avoided Under § 549 Without Reviving The Secured Creditor’s Lien.
Section 549 endows the Trustee with the power to avoid certain postpetition transfers. To “avoid” means “to make void [or] annul.”6 Courts have consistently held that if a trustee avoids a transfer to a secured creditor under § 549, the parties are returned to the status quo that existed prior to the transfer and the secured creditor’s lien is automatically revived. A number of cases have simply dismissed § 549 actions because the secured creditor’s lien is revived and avoidance is pointless.7 Other cases have limited § 549 avoidance to the amount of equity the debtor had in the property transferred.8 One court, rather gratuitously, avoided a postpetition transfer to a secured creditor but noted that the avoidance would be of little value since the avoided transfer would be sub*232ject to the secured creditor’s lien.9 The one court that did not treat the secured creditor’s lien as automatically revived upon avoidance, nonetheless relied on § 502(h) to revive the secured creditor’s lien.10
The Trustee cites Research-Planning, Inc. v. Segal (In re First Capital Mortgage Loan Corp.)11 as authority for his argument that he may recover property under § 549 without reviving secured claims. Research-Planning involved preference actions brought under § 547 and held that funds the debtor had paid out of trust prior to bankruptcy did not regain their trust status when the bankruptcy trustee recovered them. Research-Planning is distinguishable for at least four reasons: (1) it involved § 547 actions, not a § 549 action; (2) the trustee recovered a payment to an unsecured creditor, not a payment to a fully secured creditor; (3) the party asserting the claim to the recovered funds was not the party from whom the funds were recovered; and (4) the interest in the recovered funds being asserted was a trust interest, not a lien interest.
These distinguishing facts make Research-Planning inapposite to this case. Under § 547, a transfer is not a preference, and may not be recovered by a trustee, if it does not enable the transferee to receive more than it would receive in a case under chapter 7.12 Since a fully secured creditor’s claim would be paid in full in a case under chapter 7, payment of a fully secured creditor’s claim is not a preference and thus not recoverable by the trustee.13 Because a trustee cannot recover payments to fully secured creditors, the issue of whether a secured creditor’s lien attaches to a § 547 recovery from a fully secured creditor never arises. The other cases cited by the Trustee, Bailey v. Big Sky Motors, Ltd. (In re Ogden)14 and In re Overland Park Merchandise Mart Partnership, L.P.,15 which hold that liens do not attach to recoveries under § 547, likewise have no application to the facts of this case.
A similar analysis applies to adversary proceedings brought pursuant to § 548. Under § 548, a transfer is not constructively fraudulent if the debtor receives reasonably equivalent value in exchange for the transfer.16 If a fully secured creditor *233releases its lien in exchange for payment, the fully secured creditor gives value in exchange for the payment and the transfer is not fraudulent.17
The Trustee’s attempt to recover the $388,099 Transfer free and clear of the Bank’s lien is clearly inconsistent with the intent of the Bankruptcy Code. The fact that §§ 547 and 548 do not permit a trustee to avoid payments to fully secured creditors is significant. In addition to §§ 547 and 548, the Bankruptcy Code is replete with provisions that protect properly perfected secured claims.18 It is clear that Congress intended that properly perfected secured claims be protected under the Bankruptcy Code. Consistent with this intent, the Supreme Court has affirmed that a fully secured creditor’s lien may not be stripped from its collateral and valid liens pass through bankruptcy unaffected.19
The Trustee’s reliance on Marathon Petroleum Co., LLC v. Cohen (In re Delco Oil, Inc.)20 is also misplaced. Although Delco Oil involved avoidance of a § 549 transfer, the trustee was not seeking recovery of a transfer to a fully secured creditor. In Delco Oil, the trustee sought to'recover postpetition payments made to a supplier using cash collateral in violation of § 363(c)(2). The payments were made without court approval or the agreement of the secured creditor and were therefore unauthorized postpetition payments recoverable by the trustee. Delco Oil did not address the secured creditor’s lien on the payments recovered by the trustee.21 And while this Court agrees that § 549 does not “provide a harmless error exception”22 to a technically correct claim, avoidance under § 549(a) does not necessarily result in recovery under § 550(a).
2. Section 550(a) Renders The Trustee’s § 549 Claim Meaningless.
“Section 550 of the Code prescribes the measure of the trustee’s recovery” for avoidable transfers.23 “The purpose of § 550(a) is to ‘restore the estate to the financial condition it would have enjoyed if the transfer had not occurred’ and the focus ‘is not on what the transferee gained by the transaction but rather on what the bankruptcy estate lost as a result of the transfer.’ ”24
To the extent a transfer is avoided, § 550 allows the trustee to “recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property.” It is within the court’s discretion to order either recovery *234of the property transferred or its value.25 In the case of Bean the court, citing United States v. Rauer,26 held that the value of the property a trustee is entitled to recover under § 550(a) is the equity in the property transferred.27 In United States v. Rauer, the Tenth Circuit stated that “[a]ny portion of a debtor’s property that is unencumbered by mortgage — the equity — is part of the bankrupt’s estate.”28 Although the court’s statement in Rauer may not technically coincide with the definition of “property of the estate” under § 541, which encompasses property subject to liens,29 the pronouncement is clearly consistent with other sections of the bankruptcy code — specifically §§ 725 and 726.30 Section 725 provides that before final distribution of “property of the estate” the trustee shall dispose of “property in which an entity other than the estate has an interest, such as a lien....”31 Section 726, which directs the distribution of “property of the estate,” makes no provision for distributions to secured creditors. These sections clearly distinguish “property in which an entity other than the estate has an interest” (property which is subject to a lien) from “property of the estate” (property which is not subject to liens). This Court concludes that property that is unencumbered by a mortgage — the equity — is the “value” the Trustee may recover for the benefit of the estate under § 550.
Because the Bank reduced its lien in an amount equal to the payment it received, there was no equity transferred to the Bank and the bankruptcy estate lost no value as a result of the transfer. In this case, to equate the $383,099 Transfer to the “value” the Trustee may recover for the benefit of the estate would not restore the estate to the financial condition it would have enjoyed if the transfer had not occurred but would result in a windfall for the estate and is clearly inconsistent with § 550.32 Section 549 may permit the Trustee to avoid the $383,099 Transfer, but §§ 550 does not permit the Trustee to recover the $383,099 Transfer free and clear of the Bank’s lien.
The Trustee’s approach in this case is similar to the trustee’s approach in Bean and demonstrates a “penological theory” of the Bankruptcy Code, which must be rejected. Although the Trustee’s complaint states a technically correct claim under § 549, avoidance of the $383,099 Transfer would bring $383,099 back into the estate subject to the Bank’s security interest, resulting in zero net benefit to the estate. Because the Bank would be entitled to receive exactly what it would be forced to return through avoidance, granting judgment to the Trustee in this adversary proceeding under § 549 would be meaningless.
B. The Trustee’s § 362(a) Claim.
The automatic stay is “one of the fundamental debtor protections provided by the *235bankruptcy laws”33 and also provides creditor protection by staying actions against property of the estate. Although the automatic stay should be held inviolable, it should not be the basis for expanding the jurisdiction of the bankruptcy court or creating new remedies that are not consistent with the Bankruptcy Code or non-bankruptcy law. In this case, the Trustee asks this Court to liberally apply its powers under § 105 and create a unique remedy, essentially a “lien strip,” for a violation of the automatic stay. This Court concludes that the remedy the Trustee requests pursuant to § 362(a) is unsupportable and contrary to law.
As stated in his complaint, the Trustee’s theory of recovery under § 362(a) is that the Bank be “deemed to still be in possession of the CD” and the Trustee is entitled to “an order of turnover, under § 542, requiring Bank of Utah to deliver to the Trustee the money represented by the CD.” Although the Trustee’s theory of recovery is apparently not based on this Court’s exercise of its civil contempt powers but only a determination that the liquidation of the CD was void, a discussion of bankruptcy court civil contempt powers and the limitations of powers under § 362(a) and § 105(a) is relevant to a determination of the Trustee’s claim under § 362(a).
1. The Court’s Power To Fashion Remedies For Violation Of Automatic Stay Is Circumscribed By The Bankruptcy Code.
Section 362 is a prohibitory statute, not a remedial statute. Although § 362(k) provides a limited remedy for “an individual injured by any willful violation of the stay” to “recover actual damages,” the Bankruptcy Code provides no specific remedy for non-individual debtors or trustees for violations of the automatic stay under § 362(a). Using civil contempt powers under § 105, courts have awarded damages to persons, other than individuals, for injuries arising from violations of the § 362(a) stay. The Tenth Circuit has expressly recognized that bankruptcy courts may exercise civil contempt powers to enforce the § 362(a) stay.34 “While bankruptcy courts do not have inherent civil contempt power, we conclude that Congress has granted them civil contempt power by statute. The statutory authority derives from 11 U.S.C. § 105 and 28 U.S.C. § 157.”35
Exercise of a bankruptcy court’s civil contempt power, including § 362(a) stay violations, must be consistent with the purpose of civil contempt orders and is subject to limitations of the Court’s § 105 powers. “Civil contempt orders serve either or both of two purposes: (1) to compel or coerce obedience of a court order; and (2) to compensate parties for losses resulting from the contemptor’s [sic] noncompliance with a court order.”36 Any sanction for civil contempt, including violations of § 362(a), that this Court imposes must serve one or both of these purposes.
The imposition of civil contempt sanctions must be appropriate under the circumstances and may not be *236punitive.37 “[A] contempt sanction is considered civil if it is remedial, and for the benefit of the complainant. But if it is for criminal contempt the sentence is punitive, to vindicate the authority of the court.”38 Civil contempt sanctions are coercive and the contemnor must be able to purge the contempt by committing an affirmative act to comply with the court order.39 “Criminal contempt is a crime in the ordinary sense and criminal penalties may not be imposed on someone who has not been afforded the protections that the Constitution requires of such criminal proceedings.” 40
Additionally, the bankruptcy court’s civil contempt powers which derive from § 105 must, and only can, be exercised within the confines of the Bankruptcy Code.41 A bankruptcy court’s exercise of its authority under § 105(a) may not contravene or disregard the plain language of a statute.42 “[T]o allow the bankruptcy court, through principles of equity, to grant any more or less than what the clear language of [a statute] mandates would be tantamount to judicial legislation and is something that should be left to Congress, not the courts.”43
The bankruptcy court may not substitute civil contempt sanctions as an award of damages for causes of action that are otherwise recognized in law. The Tenth Circuit “has repeatedly applied the general rule that equitable relief is available only in the absence of adequate remedies at law.”44 A bankruptcy court’s § 105 powers may not be used to create substantive rights and “cannot be exercised contrary to or in excess of the terms of the substantive Code provision being enforced.”45
The foregoing discussion of this Court’s § 105(a) powers and civil contempt powers is relevant, not because the Trustee is asking that the Court exercise its civil contempt powers, but rather, in order to put the Trustee’s claim under § 362(a) in context. If the Trustee were asking this Court to exercise its civil contempt power, it would not be appropriate for this Court to “strip” the Bank of its secured claim for a violation of the automatic stay that caused no injury to the estate. It would be more inappropriate for this Court to effectively “strip” the Bank’s lien based on the Trustee’s poorly articulated claim that because a transfer is “void” under § 362(a), this Court can simply order turnover of an asset that no longer exists.
2. The Trustee Misconstrues The Effect Of Declaring Acts In Violation Of The Automatic Stay Void.
The Trustee’s claim is premised on his argument that “[b]ecause the liqui*237dation of the CD was void, the CD has always remained an asset of this bankruptcy estate. This action, asking for the delivery of the funds in the CD account, is not an action to recover damages.”46 The Trustee does not explain how a determination that an act is “void” allows the Court and parties to ignore events that have transpired. The Trustee’s position is unsupportable for a number of reasons. First, the argument is inconsistent and illogical on its face. The Trustee acknowledges that the CD was liquidated yet argues that it remains. The Trustee also argues that the liquidation of the CD did not occur, but the Bank’s lien has been extinguished. Finally, the Trustee seeks what he characterizes as the “delivery” of $383,099 from an account that does not exist when in fact he seeks recovery of a transfer.
The fallacy in the Trustee’s argument results from his misconstruction of the term “void” in the legal context. The Trustee argues that any act in violation of the stay is void and therefore does not occur. This is not the meaning of “void.” To be void is to be invalid, of no legal force or effect or incapable of being enforced by law. As the Tenth Circuit has explained, “void” does not mean never occurring — it means the law does not recognize the act.
While it is frequently asserted that an illegal bargain is void, meaning thereby, presumably, that the situation is just as if no contract had been made, this is not strictly so. WTiat the courts really have done, in such cases, in the absence of a statute specifying otherwise, is to take the view merely that the judicial machinery is not available for use to one who has participated in an illegal transaction.47
Although the Trustee cites legal authority for the proposition that acts in violation of the stay are void, he cites no legal authority for his proposition that acts in violation of the automatic stay do not occur. The lack of legal authority is not surprising since it takes little imagination to see the absurdity of the argument — a debtor’s cow is transferred in violation of the automatic stay and is eaten. Many cases holding that actions taken in violation of the automatic stay are void appropriately address judicial or administrative proceedings.48 These cases clearly illustrate the meaning of void in the legal context. They do not stand for the proposition that orders or judgments were never entered, but rather orders or judgments entered in violation of the stay have no legal effect. Other cases have held that transfers in violation of the automatic stay are void and ordered the return of the transferred property to compel compliance with § 362(a).49 While those cases clearly stand for the principle that the law does not recognize transfers made in violation of the automatic stay, they do not suggest that a liquidation of property in violation of the automatic stay does not occur or that the liquidated property is somehow restored.
The Trustee also misconstrues the effect of declaring an act void. Declaring *238an act void means that the law does not recognize the act, but it does not, in and of itself, effect a reversal of the act or result in a recovery of an asset.50 The drafters of the Bankruptcy Code recognized that avoiding a transfer does not result in an affirmative recovery. Certain transfers may be avoided, thus rendered void, under §§ 547, 548, and 549, however,, the provisions of § 550 are necessary to enable the trustee to recover transfers that are successfully avoided.51
The fact that declaring an act in violation of the automatic stay void does not eliminate the transaction or return the asset is illustrated in the case of Kalb v. Feuer stein.52 In Kalb, after the debtors had filed a petition under the Bankruptcy Act, the Walworth County Court of Wisconsin proceeded with foreclosure and eviction of the debtors from their farm. The United States Supreme Court held that after the petition was filed in the bankruptcy court the state courts in Wisconsin were deprived of jurisdiction and “the foreclosure, the confirmation of the sale, the execution of the sheriffs deed, the writ of assistance, and the ejection of appellants from their property — to the extent based upon the court’s actions — were all without authority of law.”53 The Supreme Court’s holding that the state court’s actions were void did not reverse the events that had transpired or result in an affirmative recovery. The United States Supreme Court reversed the state court judgments and remanded the cases to the Supreme Court of Wisconsin for further proceedings not inconsistent with the Kalb decision.
Perhaps most problematic for the Trustee is the necessary result of his own interpretation of “void” or “voidness.” If, as the Trustee asserts, the liquidation of the CD was void and the CD has always remained an, asset of this bankruptcy estate, then the Bank’s lien on the CD has always remained. There is no legal or logical basis for the Trustee to argue that the act of liquidating the CD is void but the satisfaction of the Bank’s lien on the CD is not void. The Bank’s lien on the CD was removed because the CD was liquidated, and the proceeds were applied to the debt. If, as the Trustee argues, the CD has always remained an asset of the bankruptcy estate, there are no proceeds to apply to the Bank’s debt, and the Bank’s lien has not been satisfied. Because of the contortions and fictions this Court would have to entertain to grant the Trustee’s sought-for relief, it is clear to this Court that the remedy the Trustee seeks under § 362(a) is in derogation of the Bankruptcy Code and beyond this Court’s powers.
3. The Trustee’s Argument That § 362(a) May Be Used To Recover Transfers Is Inconsistent With His Theory Of “Void” or “Voidness”.
The Trustee “takes issue with the premise that § 549 provides the sole remedy for recovery of transfers which were both ‘unauthorized’ and the result of willful violations of the automatic stay.”54 Initially, *239this Court notes that the Trustee’s argument is inconsistent with his assertion that the CD has always remained an asset of the estate and he is simply seeking a turnover of the asset. The Trustee argues that some courts have invoked § 362(a) in lieu of § 549 to avoid postpetition transfers. The Court is unpersuaded by this argument55 but it is not necessary to address the argument. The argument does not stand for the Trustee’s proposition that transfers in violation of § 362(a) are void and do not occur; it stands for the proposition that transfers in violation of § 362(a) that have occurred may be avoided.
The Trustee also asserts that “[t]he Tenth Circuit, in this very ease, has held that a Court may order return of property, even by motion, when a stay violation is at issue.”56 As discussed above, a court may order return of property to compel compliance with § 362 but such an order is distinguishable from an order granting recovery of the value of property that has been transferred. Further, in this Court’s opinion, the Trustee misconstrues the holding in Standard Indus., Inc. v. Aquila, Inc. The basis for the appeal in Standard Indus., Inc. v. Aquila, Inc. was this Court’s “order (‘contempt order’) holding Standard and COP in civil contempt for violations of the automatic stay and voiding all actions taken by Standard and COP in violation thereof.”57 In addressing Standard and OOP’s argument that this Court exceeded its authority because a bankruptcy court can award only monetary damages when issuing an order of civil contempt, the Tenth Circuit stated:
Because Skinner did not limit the power of a bankruptcy court to awarding just monetary damages in civil contempt orders, we hold that the bankruptcy court did not exceed its authority by voiding the actions taken by Standard and COP in violation of the automatic stay.58
The Tenth Circuit explained that the contempt order merely voided the violations of the automatic stay and did not award equitable relief or make a determination of property interests.
Under Rule 7001, proceedings to recovery money or property; to determine the validity, priority, or extent of a lien or other interest in property; to obtain an injunction or other equitable relief; or to obtain a declaratory judgment relating to any of the foregoing are adversary proceedings.... Standard and COP argue that Aquila was required to seek relief under Rule 7001 because the contempt order granted injunctive and equitable relief, made a determination of property interests, and awarded declaratory relief. We do not read the order so broadly, nor would a reasonable person. The bankruptcy court merely voided the violations of the automatic stay and awarded attorneys’ fees for the cost of pursuing the contempt motion. The relief returned the parties to the status *240quo before Standard and COP violated the automatic stay. It did not, as Standard and COP contend, award injunctive relief, equitable, or declaratory relief or make any determination of property interests.59
It is clear that the Tenth Circuit did not view the contempt order as a determination of a property interest or a judgment to recover property — no reasonable person would. Standard Indus., Inc. v. Aguila, Inc. does not stand for the proposition that declaring an act void results in a recovery of the value of property transferred.
The Trustee’s reliance on Standard Indus., Inc. v. Aquila, Inc. is also misplaced because the central issue in Standard Indus., Inc. v. Aquila, Inc. was the bankruptcy court’s civil contempt power. As discussed above, it may be appropriate for a bankruptcy court to invoke its civil contempt powers and order the contemnor to return property of the estate in its possession, but in the present case, the Trustee does not ask this Court to invoke its civil contempt powers.
4. Section 362(a) Does Not Permit This Court To Strip The Bank’s Lien.
“Any violation of the automatic stay is of great concern to the Court,” but any violation of the automatic stay must be “assessed within the facts of [the] particular case.”60 It is undisputed that the Bank was fully secured and entitled to interest on its secured debt on the date of the $383,099 Transfer. The interest accruing on the secured debt exceeded the interest that would be earned on the CD, and the payment benefited the estate by reducing the principal on the Notes. The Trustee has not alleged that the estate suffered any injury from the liquidation of the CD or that the maintenance of the CD was necessary for any business purpose. The Trustee has affirmatively stated that he is not seeking damages or a recovery of a transfer. The Trustee is asking that this Court declare, by judicial fíat, that the liquidation of the CD and the resulting $383,099 Transfer never occurred but that the Bank’s lien was extinguished. A plaintiff must be able to articulate a cause of action upon which relief may be granted. A conclusory statement of a right to relief is insufficient. Given the facts as alleged by the Trustee, the relief the Trustee seeks under § 362(a) is not only unsupportable and exceeds any authority this Court has under § 362(a) or § 105, but would clearly result in a punitive result that is disproportionate to any actual damages. To grant the Trustee’s requested relief and strip the Bank of its secured status, all pursuant to § 362(a) and § 105, is antithetic to the Bankruptcy Code and impermissibly goes beyond the remedies provided under the Bankruptcy Code and Rules.61 The Court finds that the Trustee has failed to state a cause of action under § 362(a) upon which relief may be granted, and the Trustee’s cause of action under § 362(a) must be dismissed.
C. The Trustee’s § 542(a) Claim.
In his complaint the Trustee has plead his claim under § 542(a) in conjunction with his claim under § 362(a). Claims under § 362(a) and § 542(a) may be related but are not necessarily dependent on each other so the Court will separately address *241the Trustee’s claim under § 542(a). Section 542(a) requires an entity (other than a custodian) holding any property of the debtor that the trustee may use under § 363 to turn that property over to the trustee. Courts are divided on the issue of whether a party must be in current possession of the debtor’s property to be subject to § 542(a). Some courts have held that an entity must have current possession of the property at the time the trustee makes demand for turnover.62 Other courts have held that because an entity must turnover to the trustee “such property or the value of such property” the requirement for turnover under § 542(a) applies if the entity held estate property at any time during the pendency of the bankruptcy case.63 For purposes of this decision this Court assumes that current possession of the estate property is not a prerequisite for § 542(a) to be applicable.
1. The Bank Is Not Subject To Turnover Under § 542(a) Because The CD Was Of Inconsequential Value Or Benefit To The Estate.
The requirement that an entity turnover property to the trustee is excused if the property is of inconsequential value or benefit to the estate.64 Sections 362(d)(2) and 542(a) both allow relief to a creditor if the estate has no equity in the property.65 Section 554(b) also provides that the court may order the trustee to abandon property, and thus provide relief to a creditor, if property of the estate is of inconsequential value and benefit to the estate.
There was no equity in the CD when it was liquidated and it therefore had no value to the estate. The case had been converted to a case under chapter 7 and there would be no benefit to the estate if the Trustee attempted to liquidate and administer the CD. Because the Trustee would have had to pay the Bank an amount equal to the CD, the only purpose for administering the CD would be to increase the Trustee’s commission. This is exactly what 554(b) was intended to avoid. Because the CD had no value or benefit to the estate, the Bank was not required to turnover the CD to the Trustee and is not required to turnover the value of the CD.
2. The Requirement That The Bank’s Secured Interest In The CD Be Adequately Protected Renders The Trustee’s § 542(a) Claim Moot.
The requirement that a party in possession, custody or control of property that a trustee may use under § 363 is not without limitations. “As does all bankruptcy law, § 542(a) modifies the procedural rights available to creditors to protect and satisfy their liens. In effect, § 542(a) grants to the estate a possessory interest in certain property of the debtor that was not held by the debtor at the commencement of reorganization proceedings. The Bankruptcy Code provides secured creditors various rights, including the right to adequate protection, and these rights replace the protection afforded by possession.”66
*242At the time the CD was liquidated and the $883,099 Transfer occurred, the Bank was a fully secured creditor. If this Court were to order the Bank to turn over the CD67 or its value, the Bank would be entitled to adequate protection to ensure payment of $383,099. This result under § 542(a) is similar to the result under § 549 discussed above — the Bank would be entitled to receive payment from the estate in an amount equal to the value of the CD. The fact that the Bank would be entitled to receive exactly what it would be forced to turn over renders turnover pointless and granting judgment to the Trustee under § 542(a) would be meaningless.
V. CONCLUSION
Because the Bank was a fully secured creditor at the time of the $383,099 Transfer, the Bank’s lien would be revived if the $383,009 Transfer were avoided under § 549. As a consequence, there is no value the Trustee may recover for the benefit of the estate under § 550(a). Even if the Court were to order the Bank to pay $383,099 to the Trustee, because the payment is subject to the Bank’s secured claim, it would be a waste of judicial and estate resources to avoid the $383,099 Transfer under § 549 only to return the same amount to the Bank.
Although the § 362(a) automatic stay should be held inviolable and violations of the automatic stay are of great concern to the Court, an award of damages for violation of the automatic stay is circumscribed by the Bankruptcy Code and this Court’s civil contempt powers. This Court may not use its civil contempt powers to strip a secured creditor’s lien simply because the creditor violated the automatic stay or to award a judgment unrelated to any damages. Given the facts pled in this case, the Trustee has failed to state a claim under § 362(a) upon which relief may be granted.
Because there was no equity in the CD and there was no benefit for the Trustee to administer, the CD was of inconsequential value or benefit to the estate and the Bank was not required to turn over the CD to the Trustee. If this Court were to order the Bank to turn over the CD or its value to the Trustee would be required to provide the Bank adequate protection in the amount of the CD. Again, it would be a waste of judicial and estate resources to order the turnover of the $383,099 Transfer under § 542 only to return the same amount to the Bank.
The Court’s conclusions in this case do no violence to §§ 362(a), 542 or 549. If the facts in this case were different, the result may be different. If the liquidation of the CD and the $383,099 Transfer enabled the Bank to receive an amount in excess of its secured claim, there may be an avoidance action under § 549. If the liquidation of the CD and the $383,099 Transfer were a violation of the automatic stay that caused damage to the bankruptcy estate, then an award of damages may be appropriate. If the CD had value and benefit for to the estate, turnover under § 542 may be appropriate. But to “strip” the Bank’s $383,099 lien as a result of a postpetition transfer that caused no injury to the estate is not only inconsistent with the Bankruptcy Code but punitive and inappropriate and will not be ordered by this Court. Accordingly, the Bank’s motion for summary judgment will be granted.
. Unless otherwise noted, all statutory references herein are to title 11 of the United States Code.
. Fed.R.Civ.P. 56(c)(2).
. See Carney v. City of Denver, 534 F.3d 1269, 1273 (10th Cir.2008).
. See Compl. ¶¶ 29 and 30, ECF No. 1; Tr. Combined Reply Mem. Supp. of Tr. Mot. Summ. J. & Mem. Opp’n to Mot. Summ. J. 37, ECF No. 34.
.The Trustee does seek interest of “approximately 3% per year” on his second claim for relief but the Trustee does not characterize the interest he seeks as damages. The Court also notes that the principal amount of the Notes that was paid accrued interest at a higher rate than the CD.
. The Scribner-Bantam English Dictionary 66 (rev. 1980).
. See, e.g., Dave Noake Inc. v. Harold's Garage, Inc. (In re Dave Noake, Inc.), 45 B.R. 555, 557 (Bankr.D.Vt.1984) ("Further, to restore Harold’s to its pre-transaction position would require that Harold’s be restored to the position of a perfected secured creditor holding a presently enforceable lien.”); EEE Commercial Corp. v. Holmes (In re ASI Reactivation, Inc.), 934 F.2d 1315, 1321 (4th Cir.1991) (affirming bankruptcy court’s approval of settlement of § 549 action because "the benefit to the estate of such avoidance has not been demonstrated”); Lowe v. Sheinfeld, Maley & Kay, P.C. (In re Saunders), 155 B.R. 405, 414-15 (Bankr.W.D.Tex.1993) ("If [the transferee] were compelled to turn over these monies to the Trustee, the Trustee would merely return the exact same sum of money back to [the transferee] upon distribution of the estate.”); Weiss v. People Sav. Bank (In re Three Partners, Inc.), 199 B.R. 230, 237 (Bankr.D.Mass.1995) (holding that the trustee was not allowed to recover payments from prepetition collateral because the creditor enjoyed a secured position on the collateral and there was no reason to compel turnover.); Adams v. Hartconn Assocs., Inc. (In re Adams), 212 B.R. 703, 714 (Bankr.D.Mass.1997) (”[N]othing would be achieved by recovering payment to a secured creditor who in any event is entitled to the payment ahead of other creditors.”).
. See McCord v. Agard (In re Bean), 252 F.3d 113, 116 (2d Cir.2001) (holding that § 550 limited the trustee’s recovery to the equity he had already recovered that his § 549 claim was correctly dismissed); Schnittjer v. Burke Constr. Co. (In re Drahn), 405 B.R. 470, 476-77 (Bankr.N.D.Iowa 2009) (finding that $9,912.10 of a $10,762.10 payment to a secured creditor was subject to the creditor's secured claim and awarding judgment for $850.00).
. See Mund v. Heritage Bank, N.A. (In re Willmar Nursing Home), Adv. No. 4-91-14, Case No. 4-89-2921, 1991 WL 172017, *5 (Bankr.D.Minn. Aug. 21, 1991).
. See Fleet Nat’l Bank v. Gray (In re Bankvest Capital Corp.) 375 F.3d 51, 70 (1st Cir.2004) ("[W]e ... conclude that Fleet’s 502(h) claim would have the status of a prepetition secured claim, entitling it to full recovery of the gap proceeds were we to undertake the exercise of avoiding the gap payments.").
. 917 F.2d 424 (10th Cir.1990).
. Section 547(b) states:
Except as provided in subsections (c) and (i) of this section, the trustee may avoid any transfer of an interest of the debtor in property—
(5) that enables such creditor to receive more than such creditor would receive if—
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by the provision of this title.
. Adams, 212 B.R. at 713.
. 314 F.3d 1190 (10th Cir.2002).
. 167 B.R. 647 (Bankr.D.Kan.1994).
. Section 548(a)(l)(B)(i) states:
The trustee may avoid any transfer ... incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily ... re*233ceived less than a reasonably equivalent value in exchange for such transfer or obligation. ...
. See, e.g., Sorenson v. Tire Holdings Ltd. P'ship (In re Vinzant), 108 B.R. 752, 759 (Bankr.D.Kan.1989).
. See §§ 361, 362, 363, 364, 506(b), 506(d), 522(f), 546(b), 547, 548, 554(b) and 1111.
. E.g., Dewsnup v. Timm, 502 U.S. 410, 418, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992); Johnson v. Home State Bank, 501 U.S. 78, 83, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991); Farrey v. Sanderfoot, 500 U.S. 291, 297-99, 111 S.Ct. 1825, 114 L.Ed.2d 337 (1991).
. 599 F.3d 1255 (11th Cir.2010).
. Although not expressly stated it appears that the secured creditor’s claim had been satisfied.
. Id. at 1262.
. Bean, 252 F.3d at 116.
. Rushton v. Drive Fin. Servs. (In re Gardner), Adv. No. 05-2605, Case No. 05-27551, 2007 WL 2915847 at *3 (quoting Weinman v. Fid. Capital Appreciation Fund (In re Integra Realty Resources, Inc.), 354 F.3d 1246, 1266-67 (10th Cir.2004)).
. Rodriguez v. Drive Fin. Servs. L.P. (In re Trout), 609 F.3d 1106, 1113 (10th Cir.2010).
. 963 F.2d 1332 (10th Cir.1992).
. Bean, at 117.
. Rauer, 963 F.2d at 1337.
. United States v. Whiting Pools, Inc., 462 U.S. 198, 207, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983).
. Sections 542(a) and 554 refer to property that is of "inconsequential value” to the estate. Property that is fully encumbered has no value to the estate.
. § 725 (emphasis added).
. See Weinman, 354 F.3d at 1266 ("Section 550(a) is intended to restore the estate to the financial condition it would have enjoyed if the transfer had not occurred.”).
. Midlantic Nat'l Bank v. N.J. Dep’t of Env't Prot., 474 U.S. 494, 503, 106 S.Ct. 755, 88 L.Ed.2d 859 (1986) (citing legislative history).
. See Mtn. Am. Credit Union v. Skinner (In re Skinner), 917 F.2d 444, 447 (10th Cir.1990).
. Id. (acknowledging Plastiras v. Idell (In re Sequoia Auto Brokers, Ltd.), 827 F.2d 1281, 1284 (9th Cir.1987)).
. Id. at 447 n. 2 (quoting Gibbons v. Haddad (In re Haddad), 68 B.R. 944, 952 (Bankr.D.Mass.1987) (correction in original)).
. See id. at 447-48.
. Int'l Union, United Mine Workers of America v. Bagwell, 512 U.S. 821, 827, 114 S.Ct. 2552, 129 L.Ed.2d 642 (1994) (internal quote omitted).
. See id. at 829, 114 S.Ct. 2552.
. Id. at 826, 114 S.Ct. 2552 (internal quote and citations omitted).
. Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206, 108 S.Ct. 963, 99 L.Ed.2d 169 (1988).
. Scrivner v. Mashburn (In re Scrivner), 535 F.3d 1258, 1265 (10th Cir.2008) ("Section 105(a) does not empower courts to create remedies and rights in derogation of the Bankruptcy Code and Rules.”).
. Id. at 1263 (quoting Alderete v. Educ. Credit Mgmt. Corp. (In re Alderete), 412 F.3d 1200, 1207 (10th Cir.2005)).
. Switzer v. Coan, 261 F.3d 985, 991 (10th Cir.2001).
. Paul v. Iglehart (In re Paul), 534 F.3d 1303, 1307 (10th Cir.2008).
. Tr. Combined Reply Mem. Supp. of Xr. Mot. Summ. J. & Mem. Opp’n to Mot. Summ. J. 37, ECF No. 34.
. Sender v. Simon, 84 F.3d 1299, 1308-09 (10th Cir.1996) (citation omitted).
. See, e.g., Goldston v. United States (In re Goldston), 104 F.3d 1198 (10th Cir.1997); Franklin Sav. Ass’n v. Office of Thrift Supervision, 31 F.3d 1020 (10th Cir.1994); Ellis v. Consol. Diesel Elec. Corp., 894 F.2d 371 (10th Cir.1990).
. See, e.g., Johnson v. Smith (In re Johnson), 501 F.3d 1163, 1175 (10th Cir.2007) (ordering creditor to return truck which was repossessed postpetition).
. See Gold v. United States (In re Laines), 352 B.R. 416, 419 n. 2 (Bankr.E.D.Va.2006).
. See § 541(a)(3) (makes no reference to property recoverable under §§ 547, 548 or 549, but includes interests recoverable under § 550 as property of the estate).
. 308 U.S. 433, 60 S.Ct. 343, 84 L.Ed. 370 (1940).
. Id. at 443, 60 S.Ct. 343.
. Tr. Combined Reply Mem. Supp. of Tr. Mot. Summ. J. & Mem. Opp'n to Mot. Summ. J. 40, ECF No. 34.
. Section 549 provides a specific remedy for unauthorized postpetition transfers. Section 105(a) does not allow this Court to create a remedy when the Bankruptcy Code contains a specific remedy for the same conduct. See Scrivner, 535 F.3d at 1265. Because the specific provisions of § 549 provide a remedy for unauthorized postpetition transfers, it is not necessary for courts to create a remedy to carry out the provisions of the Bankruptcy Code or to prevent an abuse of process. Switzer, 261 F.3d at 991 (‘‘[Elquitable relief is available only in the absence of adequate remedies at law.”).
. See Standard Indus., Inc. v. Aquila, Inc. (In re C.W. Mining Co.), 625 F.3d 1240, 1246 (10th Cir.2010).
. Id. at 1243.
. Id. at 1246 (emphasis added).
. Id. at 1246-47 (emphasis added).
. Gordon v. Taylor (In re Taylor), 430 B.R. 305, 316 (Bankr.N.D.Ga.2010).
.See Norwest Bank, 485 U.S. at 206, 108 S.Ct. 963 (“[W]hatever equitable powers remain in the bankruptcy courts must and can only be exercised within the confines of the Bankruptcy Code.”); see also Scrivner, 535 F.3d at 1265.
. See, e.g., Brown v. Pyatt (In re Pyatt), 486 F.3d 423, 429 (8th Cir.2007) (holding that an entity must have possession of the property at the time turnover is demanded to be liable under § 542(a)).
. See, e.g., Beaman v. Vandeventer Black, LLP (In re Shearin), 224 F.3d 353, 356 (4th Cir.2000) (holding that the trustee need only show possession, custody or control at some point during the case).
. Unified People’s Fed. Credit Union v. Yates (In re Yates), 332 B.R. 1, 5 (10th Cir. BAP 2005).
. Id.
. Whiting Pools, Inc., 462 U.S. at 206, 103 S.Ct. 2309 (internal citations omitted).
. The Court notes that the CD is no longer in the Bank’s possession but solely for purpose of this analysis will assume the CD is deemed to exist. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494588/ | ORDER GRANTING DEBTORS’ MOTION TO SET ASIDE DEFAULT JUDGMENT
MARY GRACE DIEHL, Bankruptcy Judge.
The default judgment at issue in this case denies Debtors’ discharges and thus involves the central issue in a Chapter 7 case. While Debtors had retained counsel in the bankruptcy case, originally filed as a Chapter 12 case, that counsel notified Debtors of his intent to withdraw prior to the date on which an answer in this adversary proceeding was due. Debtors failed to timely answer the Complaint. Plaintiff River City Bank (“Plaintiff’) sought the entry of a default by the clerk, and default was entered. Plaintiff then filed a Motion for Default Judgment and scheduled the matter for hearing. (Docket No. 12). The hearing notice, served on the pro se debtors, included a response date of October 28, 2011. Plaintiff then withdrew the notice of hearing two weeks before the response date. Debtors obtained counsel *329and filed a Response to the Motion for Default Judgment (Docket No. 15) and an Answer (Docket No. 16) on October 28, 2011.1 A Default Judgement was entered by the Court on October 28, 2011, and Debtors timely moved to set aside the Default Judgment under Federal Rule of Bankruptcy Procedure 9024, which incorporates Rule 60 of the Federal Rules of Civil Procedure. As set forth in more detail below, Debtors’ motion is granted on the grounds set forth in Rule 60(b).
FACTUAL AND PROCEDURAL HISTORY
Christopher Warren Mathis and Paula Kay Mathis (“Debtors”) filed their petition for relief under Chapter 12 of the Bankruptcy Code on August 2, 2010. After failing to confirm a Chapter 12 plan, and on motion by the Chapter 12 Trustee, the case was converted to Chapter 7 on January 19, 2011. Plaintiff commenced this adversary proceeding by filing a Complaint on April 18, 2011, seeking a denial of Debtors’ discharge under 11 U.S.C. § 727. The certificate of service shows that the complaint and summons were properly served on Debtors and James H. Bone, counsel for Debtors in the underlying bankruptcy case.2 The summons required an answer or motion to be filed on or before May 18, 2011. Mr. Bone never appeared as Debtors’ counsel of record in this adversary proceeding.
On May 23, 2011, Mr. Bone filed a motion to withdraw as counsel of record in Debtors’ underlying bankruptcy case and in the two other adversary proceedings in which he had appeared. Debtors did not oppose or otherwise respond to this motion. Having never appeared as counsel of record in this adversary proceeding, Mr. Bone did not file a motion to withdraw in it. On June 15, 2011, the Court entered an order allowing Mr. Bone to withdraw as Debtors’ counsel of record in the other cases. (Bankruptcy Case No. 10-43028-MGD (Docket No. 181)).
No responsive pleading was timely filed by or on behalf of Debtors to Plaintiffs Complaint. On July 27, 2011, Plaintiff served and filed a request for entry of default, and the clerk of court properly entered default in accordance with Fed. R. Bankr.P. 7055. (Docket No. 8). Though served with Plaintiffs request, Debtors did not respond. When Plaintiff did not file a motion for default judgment, the Court entered an order on September 14, 2011 directing Plaintiff to file a motion for default judgment within 21 days. (Docket No. 10). Plaintiff filed its Motion for Default Judgment on September 28, 2011 and served the motion and a notice of hearing on Debtors. (Docket No. 12). The notice of hearing informed Debtors that a hearing would be held on November 2, 2011 and that Debtors had until October 28, 2011 to respond. (Docket No. 12). Plaintiff withdrew its notice of hearing on October 13, 2011, and the matter was removed from the November 2, 2011 calendar. (Docket No. 13).
At an October 19, 2011 hearing on another adversary proceeding involving Debtors (Abbasi v. Mathis, Adversary Proceeding No. 11-4001-MGD), Debtor C.W. Mathis and counsel for Plaintiff in this case were both present. The Court *330inquired about the status of this ease (i.e., River City Bank v. Mathis) at that hearing. Debtor C.W. Mathis acknowledged service of the Motion for Default Judgment. He also informed the Court of his unsuccessful attempts to hire counsel. Counsel for Plaintiff then informed the Court and Debtors that he had withdrawn the notice of hearing and hearing date for the Motion for Default Judgment.
The Court entered an order granting Plaintiffs Motion for Default Judgment on October 28, 2011, after the time for response had expired under Local Rule 7007-1. (Docket No. 17). (Though signed on October 28, a Friday, this Order was not docketed by the Clerk’s office until Monday, October 31, 2011). An order granting Default Judgment in favor of Plaintiff was entered contemporaneously. (Docket No. 18). Also on October 28, 2011, Debtors filed a Response to Plaintiffs Motion for Default Judgment and an Answer to Plaintiffs Complaint. (Docket Nos. 15, 16). Debtors’ Response and Answer were filed after the close of business on October 28, 2011, after the Court had granted Plaintiffs Motion for Default Judgment.
Then, on November 14, 2011, Debtors filed their Motion To Vacate And Set Aside The Default Judgment And Reconsider The Order Granting Plaintiffs Motion For Default Judgment (“Motion”). (Docket No. 21). Plaintiff filed a Response on November 28, 2011. (Docket No. 22). And Debtors filed an Amended Motion on December 9, 2011. (Docket No. 23).
DISCUSSION OF LAW
Debtors argue that the default judgment should be set aside under Rule 60(b) for excusable neglect or for other reasons justifying relief. Taking into account all the relevant circumstances, Debtors are entitled to have the default judgment set aside for excusable neglect. Setting aside the default judgment serves the strong judicial policy of adjudicating cases on their merits.
A. Debtors are entitled to relief under Federal Rule of Civil Procedure 60(b)
Two competing judicial policies surround default judgments: preserving the finality of judgments and adjudicating cases on their merits. Valdez v. Feltman (In re Worldwide Web Systems, Inc., 328 F.3d 1291, 1295 (11th Cir.2003)). Under the strong judicial policy of adjudicating cases on their merits, courts view default judgments with disfavor. Id. This important policy has been consistently noted by the Eleventh Circuit. Seven Elves, Inc. v. Eskenazi, 635 F.2d 396, 400-403 (5th Cir.1981).3 Though the penalty of default serves to enforce the orderly, efficient administration of judicial proceedings, doing justice in particular cases often requires setting aside a default judgment. Id. at 401; 10A ChaRles Alan Wright et al., Federal Practice And Procedure § 2693 (3d ed. 2011). This is especially so when substantive rights are involved. Id. Whether, under the facts of a particular case, the preference for adjudication on the merits outweighs the need for preservation of finality is left to the sound discretion of the district court. Seven Elves, 635 at 402; Advanced Estimating System, Inc. v. Riney, 77 F.3d 1322, 1325 (11th Cir.1996).
*331Against this backdrop of competing policies, Rule 55(c) of the Federal Rules of Civil Procedure4 provides that a default judgment may be set aside under Rule 60(b). Rule 60(b) of the Federal Rules of Civil Procedure5 provides that relief from a final judgment may be obtained for the following reasons:
(1) mistake, inadvertence, surprise, or excusable neglect;
(2) newly discovered evidence that, with reasonable diligence, could not have been discovered in time to move for a new trial under Rule 59(b);
(3) fraud (whether previously called intrinsic or extrinsic), misrepresentation, or misconduct by an opposing party;
(4) the judgment is void;
(5) the judgment has been satisfied, released or discharged; it is based on an earlier judgment that has been reversed or vacated; or applying it prospectively is no longer equitable; or
(6) any other reason that justifies relief. Fed.R.Civ.P. 60(b).
Debtors’ amended Motion seeks to have the default judgment set aside under Rule 60(b)(1) (mistake, inadvertence, or excusable neglect) or 60(b)(6) (any other reason justifying relief).
The standard for setting aside a default judgment for excusable neglect is “at bottom an equitable one, taking account of all relevant circumstances surrounding the party’s omission.” Pioneer Investment Services Co. v. Brunswick Assoc. Ltd. Partnership, 507 U.S. 380, 395, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993) (ruling that inadvertence, mistake, or carelessness can constitute excusable neglect). Factors considered when making this determination include whether (1) the non-moving party is prejudiced; (2) the length of the delay and its effect on judicial proceedings; (3) the reason for the delay; and (4) whether the moving party acted in good faith. Id. at 395, 113 S.C.t 1489. In applying the Pioneer standard, the Eleventh Circuit has required a movant to show (1) a meritorious defense that might affect the outcome; (2) a lack of prejudice to the nonmoving party; and (3) a good reason for the default. Valdez, 328 F.3d at 1295.
The standard for setting aside a default judgment under Rule 60(b)(6) is a showing of exceptional circumstances. SEC, 241 Fed.Appx. at 662-63. Debtors make no such showing here, as attorney or party negligence in timely filing an answer does not constitute an exceptional showing. Id. (citing Solaroll Shade & Shutter Corp. v. Bio-Energy Systems, Inc., 803 F.2d 1130, 1133 (11th Cir.1993)). Accordingly, the Court moves on to a discussion of the excusable neglect standard only.
1. Debtors have shown a meritorious defense.
To establish a meritorious defense, a general denial of Plaintiffs claims is insufficient. Id. at 664. Debtors must make an affirmative showing of a defense that might affect the outcome. Valdez, 328 F.3d at 1296. Debtors have done that here. In their amended Motion, Debtors included affidavits alleging facts that, if proved to be true at trial, could result in a judgment in their favor.
Before addressing the claims individually, the Court first addresses all claims together as they relate to Debtor *332Paula Kay Mathis (“P.K. Mathis”). All of Plaintiffs claims center on Debtor C.W. Mathis’s alleged actions or representations in relation to the missing cattle. Specific allegations of misconduct by Debtor P.K. Mathis are not patently included. Yet the inclusion of Debtor P.K. Mathis as a defendant is not surprising: the underlying bankruptcy case is a joint case, and both Debtors are signatories on the promissory notes to Plaintiff. But Debtors argue that Debtor P.K. Mathis should be able to contest Plaintiffs claims on the basis that, at the least, her discharge should not be denied. Having alleged that Debtors separated in March 2011 and the cattle were stolen in April 2011, Debtor P.K. Mathis has alleged an additional meritorious defense. Amended Motion, Exh. A & B. If Debtor P.K. Mathis can prove these facts, then she could possibly defeat Plaintiffs claims even if Debtor C.W. Mathis cannot. Thus, these circumstances weigh in favor of allowing Debtor P.K. Mathis to litigate her defenses.
Turning to Plaintiffs first claim, it seeks to deny Debtors’ discharge because Debtors transferred, removed, destroyed, or concealed property of the estate, or allowed such actions to occur. 11 U.S.C. § 727(a)(2)(B). Plaintiffs complaint alleges that Debtors transferred, removed, destroyed, or concealed approximately 500 cattle in Debtors’ possession that went missing from Debtors’ property sometime after February 1, 2011, during the administration of Debtors’ case. Complaint ¶¶ 18-24. Debtors’ affidavits allege that the cattle were stolen off their property, that local and state law enforcement were notified, and that local and state law enforcement have not—to Debtors’ knowledge—conducted a report of the theft. Amended Motion, Exh. A & B. Debtors do not offer extensive evidence to support how a theft of the cattle occurred. Nonetheless, Debtors appeared and alleged facts on the record that could defeat Plaintiffs first claim.
Plaintiffs second claim is that Debtors have concealed, destroyed, mutilated, falsified, or failed to keep or preserve recorded information from which Debtors’ information or business transactions could be ascertained. 11 U.S.C. § 727(a)(3). Plaintiff alleges facts that Debtors concealed, destroyed, or falsified recorded information regarding their business transactions, especially the maintenance and sale of cattle. Complaint ¶¶ 10-21. Based on the facts alleged by Plaintiff, this claim centers on the missing cattle that secured Plaintiffs loan to Debtors. Plaintiff has not given specific instances of missing information or records. Having alleged that no sale of cattle occurred and that the cattle were stolen, Debtors have offered a defense that could defeat Plaintiffs second claim. Amended Motion, Exh. A & B.
Plaintiffs third claim is that Debtors knowingly and fraudulently made a false oath or account. 11 U.S.C. § 727(a)(4)(B). Plaintiff alleged facts that Debtors’ reported 560 cattle on Schedule B, that the cattle have inexplicably disappeared, and that Debtors have not truthfully accounted for the cattle’s disappearance. Complaint ¶¶ 19-21, 24. Debtors have alleged facts that could defeat this claim. Amended Motion, Exh. A & B.
Plaintiffs fourth claim is that Debtors have failed to satisfactorily explain any loss of assets or deficiency of assets to meet Debtors’ liabilities. 11 U.S.C. § 727(a)(5). Plaintiff alleged facts that Debtors’ reported 560 cattle on Schedule B, but that the majority of these cattle are no longer in Debtors’ possession. Complaint ¶¶ 19-21, 24. In their affidavits, Debtors alleged that the cattle were *333stolen and that they contacted local and state law enforcement. Regarding the December 2010 sale of cattle, Debtors alleged that the sale was never held because the buyer backed out due to concerns over Debtors’ bankruptcy. Amended Motion, Exh. A & B. While Debtors have not offered extensive evidence on the canceled sale or the theft of cattle, Debtors have nonetheless alleged facts that, if proved to be true, could defeat this claim. Id.
Plaintiffs fifth claim is that Debtors have refused to obey lawful orders of this Court. 11 U.S.C. § 727(a)(6)(A). Plaintiff has alleged facts that Debtors failed to obey a cash collateral order by not remitting proceeds from the sale of cattle to Plaintiff, or by not otherwise explaining the status of any sales and the assets to be sold. Complaint ¶¶ 13-14. Debtors allege that the only scheduled sale never occurred, which, if true, would be a meritorious defense. Plaintiff has further alleged facts that Debtors failed to obey a January 27, 2011 Order requiring Debtors to cooperate with Plaintiff and its agents in inspecting, inventorying, preserving, or recovering assets in which Plaintiff held a security interest. Complaint ¶ 15. The only facts in Plaintiffs Complaint that support this claim relate to the disappearance of the cattle. Because Debtors alleged facts that the cattle were stolen, Debtors have offered a defense to this claim. Amended Motion, Exh. A & B.
In sum, Debtors filed affidavits on the record alleging facts that, if proved to be true, could lead to a judgment in their favor. Accordingly, Debtors have met the requirement that they set forth a meritorious defense.
2. Plaintiff is not substantially prejudiced.
Prejudice to the nonmoving party does not exist merely because a trial, with its attendant delays and costs, must be held on the merits after the default judgment is set aside. Johnson v. Dayton Elec. Mfg. Co., 140 F.3d 781, 785 (8th Cir.1998). But the absence of prejudice is not sufficient in itself to warrant relief from a default judgment. Valdez, 328 F.3d at 1297. For example, when a party fails to “make even the barest showing of a meritorious defense or to present a good reason for failing to respond,” the absence of prejudice does not automatically tip the scales in favor of the defaulting party. Id. The absence of prejudice must be considered with all other factors. Id.
Here, River City Bank is prejudiced to some extent in the delay in pursuing its § 727 objection to discharge. The delay here is not that a trial will have to be completed. The delay is the six months that passed since Debtors were served with the complaint and their appearance. Because Debtors failed to appear until late October 2011, Plaintiff was unable to complete discovery that would have been helpful in prosecuting its complaint. Debtors have therefore frustrated the efficient administration of the judicial process by delaying the discovery process. Nonetheless, this prejudice to Plaintiff is minor, not substantial. Further, the Court notes that Plaintiff was not in haste to reach a default judgment against Debtors — the Court had to direct Plaintiff to file a motion for default judgment approximately six weeks after default was entered. The prejudice to Plaintiff is therefore minor.
3. Debtors possess a good reason for failing to timely answer the Complaint.
Though they are not without fault, Debtors do possess a good reason for failing to timely answer the Complaint. Debtors’ first reason for failing to timely file an answer is that Mr. Bone allegedly *334agreed to file an answer on their behalf, and he did not do so. Record of hearing on October 19, 2011. While Mr. Bone’s Rule 2016 fee disclosure provides that representation in adversary proceedings is not included under the base legal fee, that does not fully excuse his failure to file an answer. In re Egwim, 291 B.R. 559 (Bankr.N.D.Ga.2003) (holding that debtor’s counsel may not limit scope of representation to exclude adversary proceedings absent special circumstances). But because Mr. Bone appeared and filed answers on behalf of Debtors in the other adversary proceedings, it was not unreasonable for Debtors to believe that Mr. Bone would do so here.
Despite Debtors’ belief that Mr. Bone would file an answer on their behalf, the ultimate responsibility for the default still rests with Debtors. First, the Supreme Court has held that clients are responsible for the actions of their counsel. Raynard, 171 B.R. at 702 (quoting Pioneer, 507 U.S. at 396, 113 S.Ct. 1489). Second, Debtors were notified by letter of Mr. Bone’s intent to withdraw as counsel in all cases on May 3, 2011. And Debtors were notified by Order of this Court that Mr. Bone was allowed to withdraw as counsel on June 15, 2011. By that date, Debtors were on notice that the responsibility for keeping up with deadlines and making appropriate filings in their cases was their own.
Yet Debtors failed to file an answer until approximately six months after the complaint was served and three months after default was entered. Debtors’ second reason for failing to respond timely speaks to this greater failure. Once Debtors knew Mr. Bone did not file an answer, Debtors were unable to hire counsel to file an answer on their behalf. According to Debtors, they could not obtain counsel earlier than October 2011 because they could not find an attorney who would take on their case.
Of course, Debtors could have filed an answer pro se, and some courts have ruled that the failure to answer pro se is not excusable neglect. E.g., In re Belcher, 293 B.R. 265, 268 (Bankr.N.D.Ga.2001). But those pro se parties were generally attorneys representing themselves or were corporations. Id. Or, in some instances, the pro se parties appeared to take advantage of their pro se status to intentionally delay proceedings. E.g., Devenger v. Forant (In re Forant), 2003 WL 22247234, *2-3 (Bankr.D.Vt.2003). And while some courts have found that neglecting to hire counsel is not excusable neglect, those cases generally also involve corporate creditors. E.g., In re Peninsular Oil Corp., 399 B.R. 532, 538 (Bankr.M.D.Fla.2008). This case is distinguishable because Debtors, who are individuals, did not merely neglect to hire counsel in time. And they did not choose to wait to hire counsel until after they were in default. According to Debtor C.W. Mathis’s statements on the record at the October 19, 2011 hearing, Debtors had attempted to obtain legal counsel in three different cities. Debtors’ Motion iterates these same efforts. While Debtors are not without fault in the delay in acquiring counsel, this is not a case where Debtors caused intentional delay or were totally inactive or irresponsible. On the contrary, the circumstances suggest that Debtors encountered, in good faith, difficulty in acquiring legal services.
Debtors also offer a third reason for their failure: the notice of hearing for Plaintiffs motion for default judgment caused Debtors to believe that they had until October 28, 2011 to file a response. Being confused by the notice, however, only explains Debtors’ failure to timely respond to the Motion for Default Judgment. But that failure is important here. *335Had Debtors not relied on the notice, they may have filed a response to the motion for default judgment before a' default.judgment was entered. And though Debtors have tardily appeared, the fact remains that they are now before this Court, with counsel, and are ready to litigate the merits of this case. Given the strong judicial policy of deciding cases on their merits, justice would best be accomplished here by setting aside the default judgment.
4. Other relevant circumstances.
There are other relevant circumstances to consider. First, as noted above, Debt- or’s counsel in the underlying bankruptcy case should not have provided a limited representation that excluded adversary proceedings.6 Although Debtors are responsible for the counsel’s actions, Debtors’ belief that Mr. Bone would file an answer on their behalf was still reasonable, especially given that Mr. Bone had filed answers in the other two adversary proceedings.
Second, as discussed above, Debtor P.K. Mathis has alleged an additional meritorious defense as to her alone. She proffers that she and Debtor C.W. Mathis had separated before the cattle went missing, and that Plaintiffs claims should therefore be directed to C.W. Mathis alone. Because Plaintiffs Complaint does not make specific allegation as to Debtor P.K. Mathis, allowing her to litigate Plaintiffs claims is equitable in these circumstances.
Finally, receiving a discharge is the ultimate goal of bankruptcy. Without a discharge, a consumer debtor is denied the most fundamental benefit of filing a bankruptcy case. Denying this benefit to Debtors by way of a default judgment is a harsh result. Though this harsh result is at times necessary to enforce the orderly administration of cases and the active participation in lawsuits, Debtors have demonstrated that the circumstances here do not warrant such a result. Debtors are now before this Court and prepared to litigate their right to a discharge. Justice is best served by setting aside the Default Judgment and adjudicating this case on the merits.
5. Conclusion
In the unique circumstances of this case, Debtors have shown excusable neglect. First, Debtors allege sufficient reasons for not timely answering the complaint. Debtors believed their counsel of record in their other cases would file an answer. When that did not happen, Debtors proffer that they sought to obtain new counsel, acting in good faith and without the intent to delay these proceedings. And Debtors only barely missed filing a response to the Motion for Default Judgment before a default judgment was entered, further showing their efforts to appear and litigate this case. Second, Debtors set forth potentially meritorious defenses to Plaintiffs claims. Third, the prejudice to Plaintiff in setting aside the default judgment is minor. Consequently, justice would be done in this particular case by allowing the Debtors to litigate Plaintiffs claims in an attempt to avoid the harsh result of their discharge being denied. Accordingly, it is
ORDERED that Debtors’ Motion to Set Aside The Judgment Denying Debtors’ Discharge And For Reconsideration of Order Granting Default Judgment is GRANTED. It is
FURTHER ORDERED that the entry of default and default judgment are VACATED. It is
*336FURTHER ORDERED that the Court will hold a status conference in this case at 9:25 a.m. on February 15, 2012, at 600 East First Street, Room 342, Rome, Georgia 30161. The Court will set the other two adversary proceedings involving Debtors for status conference at the same time and date.
The Clerk of Court shall serve a copy of this Order on Plaintiff, counsel for Plaintiff, Defendants, counsel for Defendants, the Chapter 7 Trustee, and the U.S. Trustee.
. These pleadings were filed electronically and after the close of business on October 28, 2011 and were not available to the Court prior to the entry of its Order Granting Plaintiff's Motion for Default Judgment of the same date.
. Mr. Bone also appeared as counsel of record and filed answers on behalf of Debtors in Abbasi v. Mathis, Adversary Proceeding No. 11-4001-MGD (Docket No. 5) and Vann v. Mathis, Adversary Proceeding No. 11-4017-MGD (Docket No. 5).
. This case is binding in the Eleventh Circuit because it was entered before the former Fifth Circuit Court of Appeals split into the current Fifth and Eleventh Circuits. Bonner v. City of Prichard, Alabama, 661 F.2d 1206, 1207-08 (11th Cir.1981) (holding that orders entered by the Fifth Circuit before close of business on September 30, 1981 are binding in the Eleventh Circuit).
. Rule 55(c) is applicable to this Court pursuant to Federal Rule of Bankruptcy Procedure 7055.
. Rule 60(b) is applicable to this Court pursuant to Federal Rule of Bankruptcy Procedure 9024.
. The presence of special circumstances is an exception to this rule. Nothing in the facts now before the Court suggests special circumstances existed. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494589/ | MEMORANDUM-DECISION AND ORDER
DIANE DAVIS, Bankruptcy Judge.
This matter came before the Court upon a motion by James C. Collins, Esq., Chapter 7 Trustee (“Trustee” or “Plaintiff’) for an order granting him summary judgment on his two-count adversary complaint against Jeanne Angelí (“Defendant”) seeking to exercise his avoidance powers under 11 U.S.C. §§ 544(a)(1) and 547(b) to challenge the security interest of Defendant and consequently recover from Defendant, as an alleged preferential transfer, the net proceeds from the pre-petition auction sale of certain dairy cows formerly belonging to the herd of Richard and Amanda Baker (“Debtors”).1 (See Pl.’s Mot. Summ. J., ECF Adv. No. 13; Trustee’s Compl. for J. Against Def. Jeanne Angelí to Require Turnover of Property of Case and Avoid Preferential Transfer and Compel Turnover of Funds, ECF Adv. No. 1.) For the reasons that follow, the Court finds Trustee’s arguments unpersuasive and holds that Trustee may not avoid Defendant’s perfected security interest.
JURISDICTION
The Court has core jurisdiction over the parties and subject matter of this adversary proceeding pursuant to 28 U.S.C. §§ 1334(b), 157(a), (b)(1), and (b)(2)(H) and (K).
FACTS
As required by Local Bankruptcy Rule 7056-1, Trustee filed his statement of undisputed material facts on July 22, 2011 (the “Statement,” ECF Adv. No. 15), and Defendant filed a response on August 16, 2011 (ECF Adv. No. 17), therein indicating that she was substantially in agreement with the same. Further, in compliance with this Court’s directive at a hearing on the motion held during the Court’s regular motion calendar in Binghamton, New York on August 25, 2011, the parties filed a Stipulation narrowing the dispute to whether Defendant is entitled to retain the proceeds derived from the sale of sixteen cows. (Stipulation ¶¶ 1-2, ECF Adv. No. 20.)
Accordingly, the following recitation sets forth only those facts essential to the Court’s ruling:
*3611. On November 12, 2008, Debtors filed a Chapter 7 petition. (Statement ¶ 1.)
2. Prior to filing for bankruptcy relief, Debtors owned and operated a dairy farm having a herd of approximately ninety cows. (Statement ¶ 3.)
3. On or about September 18, 2008, Debtors engaged Burton Livestock Auction (“Burton Livestock”) to auction eighty cows belonging to their herd. (Statement ¶ 4.)
4. On or about September 18, 2008, Defendant received a check in the amount of $27,764.20 from Burton Livestock representing the net proceeds of twenty-two cows from the auction sale of the Baker herd. (Statement ¶ 5.)
5. Defendant is a creditor in Debtors’ Chapter 7 case, having filed a secured Proof of Claim in the amount of $55,787.54 on January 29, 2009, which was docketed on the Official Claims Register as Claim 7-1 (the “Claim”). This Claim represents the unpaid balance of the purchase price of cows sold by Defendant to Debtors in 2006. (Statement ¶¶ 7, 14.)
6. Although the sale transaction occurred in 2006, it was not until August 10, 2008 that Defendant delivered to Debtors a Bill of Sale. In exchange for said Bill of Sale, Debtors contemporaneously executed and delivered to Defendant a Security Agreement granting a security interest in fifty-eight cows, each identified by name and an ear tag designation (the “2008 Security Agreement”). On August 13, 2008, Defendant filed a UCC-1 Financing Statement (“2008 UCC-1”) containing the same collateral description as that found in the 2008 Security Agreement. (Statement ¶¶ 20-22.)
7. Defendant claims entitlement to nearly all funds received from Burton Livestock on the basis of the 2008 Security Agreement and the 2008 UCC-1. (Statement ¶ 10.)
8. Defendant concedes that two cows for which she was paid by Burton Livestock are not subject to her security interest. (Stipulation ¶ 1.)
9. Trustee concedes that Defendant has a validly perfected security interest by virtue of the 2008 UCC-1 for four cows whose ear tag identification numbers matched those included on the same. (Stipulation ¶ 2.)
10. When Defendant sold the cows to Debtors, she delivered to Debtors a Certificate of Registration (“Certificate”) issued by Holstein Association USA, Inc. for each cow. (Statement ¶¶ 15-16.)
11. Each Certificate obtained by the Trustee in connection with this adversary proceeding includes the name of the cow, identification of Defendant as the former owner, a handwritten vaccination number in the top left corner, and a sketch of the cow showing its distinctive markings on the reverse side. Certain Certificates additionally include a handwritten ear tag identification number in the top right corner. {See Crossmore Aff. in Supp. of Summ. J. ¶ 40, Ex. L, ECF Adv. No. 13.)
12. Mr. Baker kept the Certificates that he obtained from Defendant in a folder and removed certain Certificates from the folder as cows were culled from the herd. (Statement ¶ 17.)
*36213. Mr. Baker delivered the folder with the remaining Certificates to Burton Livestock at the time of auction. (Statement ¶ 18.)
14. Burton Livestock identified the said twenty cows as belonging to Defendant’s account by matching those cows to diagrams contained on the reverse side of the applicable Certificate for each cow. (Statement ¶ 19.)
15. Of the sixteen cows now at the center of this dispute, at the time Debtors turned them over to Burton Livestock for auction, ten did not have ear tags and six had ear tag identification numbers that did not match any of the ear tag identification numbers listed in the 2008 UCC-1. Of those six, only four of those ear tag identification numbers matched ear tag identification numbers on the Certificates. (Stipulation ¶¶ 3-5.)
ARGUMENTS
Trustee acknowledges that if Defendant had a perfected security interest in the sixteen cows at issue ninety-one days prior to Debtors’ bankruptcy filing, then that perfected security interest continued in the sale proceeds distributed to Defendant by Burton Livestock and, consequently, such distribution would not constitute a preference to her. (Pl.’s Mem. in Supp. of Summ. J. 3, ECF Adv. No. 14.) Trustee argues, however, that the collateral description contained in the 2008 UCC-1 was so misleading as to render the 2008 UCC-1 ineffective under New York Uniform Commercial Code Section 9-506(a). (Id. 8 (citing N.Y. U.C.C. § 9-506(a) (Consol. 2011))).
While recognizing that the UCC filing is meant to provide mere inquiry notice to serve as a starting point for further investigation by a third party seeking to distinguish between liened collateral and other, similar goods that the debtor owns (Id. 8 (citing cases)), Trustee’s position is that too much specificity can be fatal where the identification numbers included in the UCC-1 collateral description are substantially at variance with the actual identification numbers affixed to the collateral at a later, controlling date. Citing only case law addressing collateral descriptions for equipment and automobiles, Trustee submits that this “rule of law [regarding mis-identification] is clear.” (Trustee’s Reply Mem. 2, ECF Adv. No. 19.) Applying this rule to the facts at hand, Trustee argues that Defendant’s collateral description is misleading because “[b]y electing to identify the cows through specific ear tag designations, a potential searcher would reasonably conclude that cows with completely non-matching ear tag designations or cows with no ear tags are not intended to be subject to [Defendant’s] security interest.” (Id. 11.) Trustee further contends that Defendant “performed no due diligence as to whether the ear tag information on her [2008] Security Agreement and [2008] UCC-1 matched the facts of the Baker herd as it existed in August of 2008” when the cows were sold by Burton Livestock. (Id. 12.)
Defendant submits that the collateral description utilized in the 2008 UCC-1 is sufficient under New York Uniform Commercial Code § 9-108(a) because it “reasonably identifies what is described” (Cushman Aff. in Opp’n to Mot. Summ. J. ¶ 16, ECF Adv. No. 16 (quoting N.Y. U.C.C. § 9-506(a) (Consol. 2011))), and the identity of the liened collateral is objectively determinable through the well-known method of matching cows to their Certificates (id. ¶ 18).
In reply to Defendant’s reliance upon custom and practice in the dairy farm in*363dustry where it is common to name each cow and the fragility of the ear tag method of identifying a particular cow is well known (id. ¶¶ 14-14), Trustee submits that Defendant has failed to provide authority and he is aware of none that would bind Trustee as a hypothetical lien creditor by the identification information in the Certificates (Trustee’s Reply Mem. 3). Because there is no mention of the Certificates in either the 2008 Security Agreement or the 2008 UCC-1, notwithstanding that the UCC-1 was filed just ninety-one days pri- or to Debtors’ bankruptcy filing, Trustee argues that a hypothetical lien creditor would not be charged with knowing that the Certificates exist or with knowledge of the contents thereof. (Id.) Finally, Trustee asserts that custom and usage may not be used to impose a duty upon a hypothetical lien creditor to contact a debtor or prior creditor in search of documents that are not referenced in the UCC-1. (Id. 4.)
DISCUSSION
Summary judgment is proper if the record “shows that there is no genuine dispute as to any material fact and the mov-ant is entitled to a judgment as a matter of law.” Fed. R. Civ. P. 56(a); Fed. R. Bankr. P. 7056. Further, provided certain procedural protections are complied with, the court may independently grant summary judgment for the nonmovant in the absence of a motion or cross motion. Fed. R. Banks. P. 7056(f)(1).
The substantive law determines which facts are material. “The sufficiency of the description of collateral [at issue here] is, of course, a matter governed by state law.” North Arkansas Med. Center v. Barrett, 1990 WL 364778, *13, 1990 U.S. Dist. LEXIS 19330, *36 (W.D.Ark. May 4, 1990). Trustee’s motion depends upon agreed facts. As recognized by the parties, the only question is whether those facts include a sufficient collateral description so as to properly perfect Defendant’s interest in the sixteen cows and thereby prevent Trustee from exercising his strong-arm power under 11 U.S.C. § 544(a)(1) or his avoidance power under 11 U.S.C. § 547(b). Accordingly, it is clear that one of the two parties is entitled to judgment under the present posture of this adversary proceeding.
Notwithstanding the prevalence of family farmer filings in the Utica Division, this adversary proceeding raises a question of first impression for this Court: exactly how does one properly perfect a security interest in specific cows? Under New York law, perfection in this instance occurs by filing a financing statement that sufficiently indicates the collateral covered by the security interest. See N.Y. U.C.C. §§ 9-310(a), 9-502(a)(3). A financing statement does so if it provides a description of the collateral pursuant to New York Uniform Commercial Code § 9-108. N.Y. U.C.C. § 9-504. New York Uniform Commercial Code § 9-108 in turn states that a “description of personal ... property is sufficient, whether or not it is specific, it if reasonably identifies what is described” such that the “identity of the collateral is objectively determinable.” N.Y. U.C.C. § 9-108. “[A]s a rule, what is required to be filed as a financing statement is only a simple record providing a limited amount of information.” 95 N.Y. Jur. Secured Transactions § 192 (2011) (citing Official Comment 2 to N.Y. U.C.C. § 9-502). “Generally, a financing statement sufficiently indicates collateral claimed to be covered by if it satisfies the purpose of conditioning perfection on the filing of a financing statement, i.e., if it provides notice that a person may have a security interest in the collateral claimed.” Id. § 212. Thus, the theory underpinning the financing statement is one of inquiry no*364tice, and the test is one of reasonable identification, which this Court must now construe in practice.
Neither the Court nor the parties unearthed New York case law directly on point to address the sufficiency of a collateral description in a financing statement (or a security agreement for that matter) similar to the one utilized by Defendant when the collateral at issue is cows. Because Revised Article 9 has been universally enacted, 1-10 Debtor-Creditor Law § 10.02[l][a] (MB) (2012) (noting that every state has enacted UCC Article 9), the Court has as its starting point reviewed case law from other jurisdictions applying the “reasonably identified” standard in the context of security agreements covering livestock. In Vermont, for example, “it is customary for a creditor taking a security interest in cows to reflect the tag numbers of the animals on the security agreement.” In re Barrup, 37 B.R. 697, 700 (Bankr.D.Vt.1983). In Wisconsin, “cattle described by erroneous ear tag number have been held to be ‘reasonably identified’ in a security agreement description.’ ” United States v. Fullpail Cattle Sales, Inc., 640 F.Supp. 976, (E.D.Wis.1986) (citation omitted) (recognizing that the “reasonably identified” standard is a liberal one). It appears, therefore, that the courts that have considered the sufficiency of descriptions utilizing in whole or in part ear tag identification numbers for the purpose of creating a security interest have found such descriptions to be sufficient. Further, at least one court has found that “[e]attle described by erroneous ear tag number [were] ‘reasonably identified’ in a security agreement description.” Id. (citing In re Reiser, 20 U.C.C. Rep. Serv. 529, 530-31) (W.D. Wis. 1976). Although the question here is one of perfection rather than creation, the Court believes this distinction to be inconsequential since New York Uniform Commercial Code § 9-108 applies to both acts. Further, security agreements are subject to heightened scrutiny and yet courts have recognized the validity and sufficiency of ear tag designations within collateral descriptions therein. The present facts are undeniably more complicated, however, such that it does little good to acknowledge the propriety of Defendant’s practice of using ear tag designations in the first instance. As Trustee has correctly stated, the ear tag designations utilized in the 2008 UCC-1 for the sixteen cows at issue were of absolutely no use of the six cows that had ear tag identification numbers, none of those numbers were a match to the ones contained in the 2008 UCC-1.
Accordingly, the Court’s ruling turns on whether the financing statement was sufficient to alert a hypothetical lien creditor or third party to Defendant’s claim to the sixteen cows. On this point, the Court agrees with Defendant that custom in the farming industry is relevant. The general rule of construction contained in the governing statutory body in fact contemplates the same:
(1) This Act shall be liberally construed and applied to promote its underlying purposes and policies.
(2) Underlying purposes and policies of this Act are:
(a) to simplify, clarify and modernize the law governing commercial transactions;
(b) to permit the continued expansion of commercial practices through custom, usage and agreement of the parties; and
(c) to make uniform the law among various jurisdictions.
N.Y. U.C.C. § 1 — 102(1)—(2) (emphasis added).
*365“A financing statement imposes a duty on third parties to inquire of the parties concerned to learn the identity of specific property covered, and thus to charge the third party with knowledge of whatever facts a reasonable inquiry would have revealed.” Richard C. Tinney, Annotation, Sufficiency of Description of Collateral in Financing Statement Under U.C.C. §§ 9-110 and 9-402, 100 A.L.R. 3d 10 (2011) (citing cases applying New York law); accord, e.g., Allis-Chalmers Credit Corp. v. Bank of Utica, 110 Misc.2d 283, 285, 441 N.Y.S.2d 852 (N.Y.Sup.Ct.1981) (collecting cases). Trustee submits that the collateral in this case was described with such particularity that no further inquiry would have been required of a third party. Given the character of the collateral at issue and the almost certain loss of ear tags, the Court is unconvinced. At a minimum, the third party would have been placed on notice that Defendant claimed a security interest in a certain number of cows. Cows are not fungible; they are identifiable by a number of methods, including ear tag designation, breed, lot number, brand, unique permanent markings, and/or registration certificate.
While Defendant’s use of the ear tag identification numbers was, as of the time of filing, inaccurate, both the Certificates and the UCC-1 included the name of each cow in addition to an ear tag designation. Given this information, Debtors, Defendant, and/or a third party would have been able to readily and easily ascertain which cows were covered by Defendant’s security interest. Burton Livestock, with the aid of the Certificates, did just that by comparing the names on the 2008 UCC-1 to the names and diagrams on the respective Certificate for each cow. Accordingly, Defendant’s 2008 UCC-1 was effective to perfect Defendant’s secured interest in the sixteen cows, irrespective of the erroneous or outdated ear tag designations.
CONCLUSION
Defendant’s 2008 UCC-1 reasonably identified the sixteen cows and the use of erroneous or non-existent ear tag designations was immaterial and, as such, did not render the collateral description contained in the 2008 UCC-1 insufficient or seriously misleading under the circumstances. Thus, Defendant’s security interest is deemed to have been perfected as a matter of law. In light of the same, it cannot be avoided. Based on the foregoing, Trustee’s motion for summary judgment is hereby denied. Further, under the particular facts and circumstances of this case where the parties stipulated to the facts and issue to be decided and Trustee was afforded notice and an opportunity to present his best case, without the need for further evidence, summary judgment is hereby granted in favor of Defendant as to both counts of Trustee’s adversary complaint.
IT IS SO ORDERED.
. Although Trustee's motion references only the 11 U.S.C. § 547(b) claim, which is count two of the adversary complaint, the Court treats the motion as one for summary judgment consistent with its title rather than as one for partial summary judgment because the identical issue is determinative as to both claims, i.e., whether Defendant's financing statement was flawed so as to make Defendant’s interest unenforceable or unperfected under Article 9 of the New York Uniform Commercial Code as of the petition date. Moreover, the parties have narrowly framed the issue before the Court using the hypothetical lien creditor rhetoric of 11 U.S.C. § 544(a)(1). Accordingly, it is appropriate for the Court to consider both causes of action and, in so doing, to wholly decide this adversary proceeding. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494590/ | MEMORANDUM OPINION APPROVING WARN ACT CLASS ACTION SETTLEMENT ON A FINAL BASIS
MARTIN GLENN, Bankruptcy Judge.
The pending motion seeks final approval of a settlement of a WARN Act class action adversary proceeding (the “Motion”). Jared Pinsker (the “Class Representative” or “Plaintiff’) initiated a putative class action adversary proceeding on behalf of himself and other similarly situated former employees (collectively, the “Class” or “Class Members”) of Borders, *373Inc. (the “Debtor”). (ECF Doc. # 2203.)1 The Class Representative and the Debtors in these chapter 11 cases (collectively, the “Parties”) jointly seek final approval of the Settlement and Release Agreement between the Class Members and the Debtors (the “Settlement Agreement” or the “Settlement”),2 including an award of attorneys’ fees for Class Counsel (defined below). Stuart J. Miller, counsel for the Class Members, filed a declaration in further support of the Motion and Settlement Agreement, including final approval of attorneys’ fees (the “Miller Declaration”). (ECF Doc. # 2528.)
On December 20, 2011, the Court held a hearing (the “Preliminary Hearing”) and entered an order (i) preliminarily approving the Settlement, (ii) approving the form and manner of notice; (iii) scheduling a fairness hearing to consider final approval of the Settlement (the “Fairness Hearing”); and (iv) granting related relief (collectively, the “Preliminary Order”). (ECF Doc. # 2372.) The Court set February 16, 2012 as the date for the Fairness Hearing and approved the form of notice that was mailed to members of the Class on December 23, 2011. The opt-out and objection deadline was set for February 6, 2012, and only three opt-outs were received. (Miller Deck ¶ 11.) No objections were filed to the Motion requesting approval of the Settlement Agreement on a final basis.
For the reasons explained below, the Settlement is approved on a final basis, including the award of attorneys’ fees to Class Counsel.
BACKGROUND
On February 16, 2011 (the “Petition Date”), Borders Group, Inc. and certain of its affiliates (the “Debtors”) commenced their chapter 11 bankruptcy cases. (ECF Doc. # 1.) A class action complaint in this adversary proceeding was filed on September 2, 2011 (the “Complaint”). (ECF Doc. 1697.) The Complaint asserted claims under the federal Worker Adjustment and Retraining Notification Act (the “Federal WARN Act”) and the New York State Worker Adjustment and Retraining Notification Act (the “NY WARN Act,” and together with the Federal WARN Act, the ‘WARN Act”) by ordering a plant closing and/or mass layoffs at its Michigan facility on or about July 22, 2011 through August 23, 2011 without providing sixty-days advance notice. The Class Representative also asserted that the Class Members have an administrative priority claim pursuant to section 503 of the Bankruptcy Code. (Compl. ¶ 34.) In late September 2011, the Parties entered into good faith, arm’s length negotiations regarding a resolution of this action.
The federal WARN Act is codified at 29 U.S.C. §§ 2101-2109. In general terms, it requires employers with more than 100 employees to provide sixty calendar days of advance notice of “plant closing” or “mass layoffs” (both terms are defined in section 2101(a)). There are three exceptions to the full sixty-day requirement; however, employers must still provide notice as soon as practicable. The exceptions are: (1) when an employer is actively seeking capital or business and reasonably believes that advance notice would preclude its ability to garner capital or business (known as the “faltering company” exception); (2) unforeseeable business circumstances; and (3) natural disasters. See 29 U.S.C. § 2102(b). When section *3742102 is violated, the employer is liable for damages, including employee back pay and benefits under an employee benefit plan. See id. § 2104.
The Parties contend that there exist significant, complex legal and factual issues regarding the application of the WARN Act to the Debtors and, therefore, to the viability of this action. To avoid extensive and protracted litigation, the Parties have agreed to settle all claims relating to or arising out of this litigation.
The Settlement Agreement provides for certification of a class comprised of all persons who
(i)worked at, or reported to, the Debtors’ Michigan Facility; (ii) suffered an “employment loss,” as that term is defined in 29 U.S.C. § 2101(a)(6) and 20 C.F.R. § 639.3(b)-(c), on, or within thirty days of July 22, 2011 as part of a “plant closing” or “mass layoff,” as those terms are defined in 29 U.S.C. § 2101(a)(2)-(3) and 20 C.F.R. § 639.3(b)-(c), or as the reasonably foreseeable consequence of a “plant closing” or “mass layoff’ occurring on or about July 22, 2011; (iii) meet the definition of “affected employee,” as set forth in 29 U.S.C. § 2101(a)(5) and 20 C.F.R. § 639.3(e); and (iv) do not file a timely request to opt-out of the Class....
(Settlement ¶ 3.)
Additionally, pursuant to the Settlement, the Debtors shall pay $240,000 as follows: (1) $3,000 to the Plaintiff as the class representative; (2) $158,000 to be divided equally among the Class Members;3 and (3) $79,000 in attorneys’ fees to counsel for the Class. (Settlement ¶4, 6-7; Mot. ¶ 26.)
The Settlement Agreement further provides that each Class Member that has not opted-out shall release any and all claims he or she may have against the Debtors. (Settlement ¶ 11.) Moreover, if 5% or more members of the Class decide to opt-out, the Debtors or the Liquidating Trust, as applicable, have the right to declare the Settlement null and void. (Id. ¶ 12.)
DISCUSSION
The Court is familiar with the standards applicable to approval of a settlement in a WARN Act class action, and substantially relies on its prior decision approving a settlement in Wenzel v. Partsearch Techs., Inc. (In re Partsearch Techs., Inc.), 453 B.R. 84 (Bankr.S.D.N.Y.2011).
A. Class Certification and Notice
1. Rule 23(a) of the Federal Rules of Civil Procedure
The Court preliminarily certified the Class for settlement purposes and approved the notice that was sent to all Class Members, advising them of their ability to opt-out of the Settlement (the “Notice”). Based on the following, the Court confirms its prior conclusions.
Class actions in bankruptcy court are governed by Rule 23 of the Federal Rules of Civil Procedure, made applicable to an adversary proceeding by Rule 7023 of the Federal Rules of Bankruptcy Procedure. Rule 23 establishes four prerequisites that must be satisfied in order for a class action proceeding to go forward:
(1) the class is so numerous that joinder of all members is impracticable;
(2) there are questions of law or fact common to the class;
(3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and
*375(4) the representative parties will fairly and adequately protect the interests of the class.
FED.R.Crv.P. 23(a).
The Court may certify a class for settlement purposes only. See In re WorldCom, Inc., 347 B.R. 123, 141 (Bankr.S.D.N.Y.2006) (citing Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 619-22, 117 S.Ct. 2231, 138 L.Ed.2d 689 (1997)). The Court now turns to the requirements of Rule 23 and finds the structure of the Class to be appropriate.
First, as to the numerosity prong, there are 198 former employees comprising the Class. Rule 23(a)(1) does not mandate that joinder must be impossible. Guippone v. BH S & B Holdings LLC, No. 09 Civ. 1029(CM), 2011 WL 1345041, at *4 (S.D.N.Y. Mar. 30, 2011) (citing Grimmer v. Lord, Day & Lord, 937 F.Supp. 255 (S.D.N.Y.1996)). Nor must class action plaintiffs specify the exact size of the class as a prerequisite to satisfying the numerosity requirement. Cortigiano v. Oceanview Manor Home for Adults, 227 F.R.D. 194, 204 (E.D.N.Y.2005). In the Second Circuit, courts presume that join-der is impracticable when the prospective class consists of forty or more members. Robidoux v. Celani, 987 F.2d 931, 935-36 (2d Cir.1993); Guippone, 2011 WL 1345041, at *4; see also 7 A Wright, Miller & Kane, Fed. PRACTICE AND PROCEDURE § 1762 (3d ed. 2005). Here, the Class is sufficiently large to make joinder of each class member impracticable.
With respect to commonality, the Court finds that common questions of law and fact exist between the Class Members. Rule 23(a)(2) does not require that all of the questions of law and fact raised by the dispute must be completely common. See Fed. PRACTICE and Prooedure § 1763. Rather, Rule 23(a)(2) suggests that more than one issue of law or fact must be common to members of the class. See D'Alauro v. GC Servs. Ltd. P’ship, 168 F.R.D. 451, 456 (E.D.N.Y.1996). “Minor factual differences will not preclude class certification if there is a common issue of law.” Monaco v. Stone, 187 F.R.D. 50, 61 (E.D.N.Y.1999).
The commonality requirement is clearly met in this case. The Court would need to adjudicate whether the Class Members were all subjected to the same purported “plant closure” or “mass layoff” as those terms are used in the WARN Act and whether a sufficient number of employees suffered a job loss to trigger the notice requirements under the WARN Act. See 29 U.S.C. §§ 2101-02; N.Y. Lab. Law § 860-b; see also Campbell v. A-P-A Transp. Corp., No. 02-3480(WGB), 2005 WL 3077916, *3-4, 2005 U.S. Dist. LEXIS 28122, at *10 (D.N.J. Nov. 16, 2005) (finding that a proposed class consisting of 527 employees who asserted claims under the WARN Act satisfied the commonality requirement of Rule 23 because the named plaintiff and the proposed class had a common legal question whether the defendant employer complied with the WARN Act’s notice requirements). Moreover, the claims of each Class Member would be subject to the same affirmative defenses that could be raised by the Debtors. Lastly, a question also arises whether each Class Member is entitled to the amount of damages sought.
As to the typicality prong, the Second Circuit has held that “Rule 23(a)(3) is satisfied when each class member’s claim arises from the same course of events, and each class member makes the same legal arguments to prove the defendant’s liability.” In re Drexel Burnham Lambert Group, Inc., 960 F.2d 285, 291 (2d Cir.1992). Here, the Court is satisfied that the typicality requirement has been met. *376All of the Class Members were employees of the Debtor and were subjected to the same course of events that resulted in the termination of their employment. See In re Taylor Bean & Whitaker Mortg. Corp., No. 3:09-bk-07047-JAF, 2010 WL 4025873, at *6 (Bankr.M.D.Fla. Sept. 27, 2010) (finding that the typicality requirement of Rule 23(a)(3) was satisfied because the plaintiff “suffered the same type of injury as the rest of the class” and the debtor defendant’s “alleged failure to comply with the requirements of the WARN Act represent[ed] a single course of conduct with regard to each potential class member”). All Class Members rely on the same facts and legal argument to prove that the Debtors violated the WARN Act.
Lastly, the Plaintiff, as the class representative, fairly and adequately protects the interests of the Class. See Feb.R.CivP. 23(a)(4). What constitutes adequate representation is a question of fact that depends on the circumstances of each case and is within the discretion of the court. See Fed. PRACTICE and ProceduRE § 1765. The named representative must be a member of the class; however, there is no requirement that the representative have express authority from the class members. See id. Class representatives must be of the character to assure the vigorous prosecution of the action so that the members’ rights will be protected, see id. § 1766, and courts may consider the “honesty and trustworthiness of the named plaintiff.” Savino v. Computer Credit Inc., 164 F.3d 81, 87 (2d Cir.1998). Class representatives cannot hold an interest in conflict with the class. Fed. Prao-tice and Prooedure § 1768; see also In re Flight Safety Techs., Inc. Sec. Litig., 231 F.R.D. 124, 128 (D.Conn.2005). It is also important to note that when considering Rule 23(a)(4), courts examine the quality and experience of the class attorneys. See Flight Safety Techs., Inc., 231 F.R.D. at 128.
In this case, it appears that the Plaintiff has diligently prosecuted this action. The Plaintiff engaged counsel to file the instant action before this Court. The Plaintiff does not hold an interest that is adverse to the Class Members. The Plaintiff, like the other Class Members, was a former employee of the Debtors and does not appear to have an ulterior motive for bringing the action. Additionally, Lanke-nau & Miller and The Gardner Firm, PC (“Class Counsel”) are experienced in WARN Act class action litigation. These two firms have handled approximately seventy similar class action suits. (Mot. ¶ 43.) Recently, Class Counsel successfully represented WARN Act plaintiffs before this Court in In re Partsearch Techs., Inc., 453 B.R. 84.
2. Rule 23(b)(3)
In addition to Rule 23(a), the class action must be a type described in Rule 23(b). In this case, the Parties submit that the Class falls under Rule 23(b)(3). Under Rule 23(b)(3), a class action may be maintained if:
(3) the court finds that the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy. The matters pertinent to these findings include:
(A) the class members’ interests in individually controlling the prosecution or defense of separate actions
(B) the extent and nature of any litigation concerning the controversy already begun by or against class members;
*377(C) the desirability or understandability of concentrating the litigation of the claims in the particular forum; and
(D) the likely difficulties in managing a class action.
Fed.R.Civ.P. 23(b)(3).
Here, the Class is suited to proceed as a class under Rule 23(b)(3). For the reasons previously discussed, questions of law or fact common to class members predominate over questions affecting only individual members—namely, all of the Class Members were subject to the same facts surrounding their termination. The Class is also superior to other methods of resolving the controversy because individually adjudicating each of these substantially similar claims would be impractical and consume significant judicial resources. See In re Amaranth Natural Gas Commodities Litig., 269 F.R.D. 366, 386 (S.D.N.Y.2010). Moreover, proceeding individually would likely be impractical for individual members because each holds a relatively small claim. In such circumstances, “the class action device is frequently superior to individual actions.” Seijas v. Republic of Argentina, 606 F.3d 53, 58 (2d Cir.2010).
The factors enumerated in Rule 23(b)(3)(A)-(D) also support certification under that subsection. First, it appears that no Class Member has an interest in individually controlling the prosecution of this case. All Class Members that have not opted-out will simply receive their individual settlement amounts. Second, it does not appear that litigation concerning the WARN Act rights of any Class Member has already begun in a different forum. Third, for the reasons discussed with respect to predominance and superiority, it is desirous to concentrate all of the Class Members’ claims before the Court.4
3. Notice
Rule 23(e)(1) provides that the court “must direct notice in a reasonable manner to all class members who would be bound by the proposal.” Fed.R.Civ.P. 23(e)(1). Rule 23(c)(2)(B) governs notice requirements for Rule 23(b)(3) classes. Pursuant to Rule 23(c)(2)(B), class members are entitled to the best notice that is practicable under the circumstances. Such notice must clearly and concisely state in plain language:
(i) The nature of the action;
(ii) The definition of the class certified;
(iii) The class claims, issues, or defenses;
(iv) That a class member may enter an appearance through an attorney if the member so desires;
(v) That the court will exclude from the class any member who requests exclusion;
(vi) The time and manner for requesting exclusion; and
(vii) The binding effect of a class judgment on members under Rule 23(c)(3).
Fed.R.Civ.P. 23(c)(2)(B).
In terms of the form of notice, “[t]he notice need not be highly specific,” and courts have approved very general descriptions of a proposed settlement under the theory that “notices to class members can practicably contain only a limited amount of information.” In re Paine-Webber Ltd. P’ships Litig., 171 F.R.D. 104, 124 (S.D.N.Y.1997) (internal quotation marks omitted) (quoting Weinberger v. *378Kendrick, 698 F.2d 61, 72 (2d Cir.1982), aff'd, 117 F.3d 721 (2d Cir.1997)). Courts have found notice to be deficient when it does not advise a potential claimant of its recovery. See Initial Pub. Offering Sec. Litig., 243 F.R.D. 79, 94 (S.D.N.Y.2007). In this case, the Notice complies with all of the requirements of Rule 23(c)(2)(B). Importantly, the Notice includes each Class Member’s projected recovery under the Settlement. (Notice ¶ 10.)
As for the manner of notice, due process requires that “notice [be] reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections.” Mullane v. Cent. Hanover Bank & Trust Co., 339 U.S. 306, 314, 70 S.Ct. 652, 94 L.Ed. 865 (1950). Here, the Parties served the Notice on the last known address of each Class Member, as reflected in the Debtors’ records. (Mot. ¶ 56.) The Debtors’ records and the possible use of a national database for returned envelopes are reasonable means of identifying the addresses of the Class Members. Moreover, since the Notice was sent to each Class Member by mail, the Court is satisfied that Class Members received the best notice practicable under Rule 23(c)(2)(B). See Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 175, 94 S.Ct. 2140, 40 L.Ed.2d 732 (1974) (finding that when the names and addresses of class members are easily ascertainable, individual notice by mail is the “best notice practicable” under Rule 23(c)(2)).
B. Approval of the Settlement on a Final Basis
Court review of a proposed class action settlement is subject to a two-step procedure: The settlement must be preliminarily approved and then approved on a final basis following a fairness hearing. See In re Initial Public Offering Sec. Litig., 243 F.R.D. 79, 87 (S.D.N.Y.2007). At the Preliminary Hearing, the Court determined that notice of the Settlement should be sent to all Class Members and a fairness hearing should subsequently take place for the Court to consider approval of the Settlement on a final basis.
For the Settlement to be approved in bankruptcy court, the Settlement must be both proeedurally and substantively fair under Rule 23 and Federal Rule of Bankruptcy Procedure 9019. See WorldCom, 347 B.R. at 143-49. This process requires the Court to assess the fairness of a settlement by examining its terms and the negotiation process leading to settlement. See D’Amato v. Deutsche Bank, 236 F.3d 78, 85 (2d Cir.2001).
1. Procedural Fairness Under Rule 23 and Bankruptcy Rule 9019
Both Rule 23 and Bankruptcy Rule 9019 require the court to assess whether a proposed settlement is free from collusion and inadequate representation. See WorldCom, 347 B.R. at 143. The compromise must be the result of arms-length negotiations among the parties. See Weinberger, 698 F.2d at 74. A “presumption of fairness, adequacy, and reasonableness may attach to a class settlement reached between experienced, capable counsel after meaningful discovery.” Wal-Mart Stores, Inc. v. Visa U.S.A., Inc., 396 F.3d 96, 116 (2d Cir.2005) (citation and internal quotation marks omitted); see PaineWebber, 171 F.R.D. at 125. The record indicates that the Settlement was the process of arms-length negotiations between the parties. As evidenced by the hearings and conferences held before the Court and in the various pleadings, both parties are represented by experienced and capable counsel. The Parties had an opportunity to exchange discovery infor*379mally in order to investigate the strengths and weaknesses of the assertions contained in the Complaint. (Mot. ¶ 51.) The Parties also represented that they worked together to resolve this matter (Mot. ¶ 50) and no party-in-interest has challenged the nature of the parties’ negotiations.
2. Substantive Fairness Under Rule 23
Under Rule 23(e), a class action shall not be dismissed or compromised without the approval of the court. Fed.R.Civ.P. 23(e). Final approval of a settlement under Rule 23(e) requires the court to determine that the settlement is “fair, reasonable and adequate.” Fed.R.Civ.P. 23(e)(2); see also In re Initial Pub. Offering Sec. Litig., 243 F.R.D. 79, 87 (S.D.N.Y.2007). The court “ ‘must make an independent evaluation’ of the adequacy, fairness and reasonableness of a proposed settlement.” Worthington v. CDW Corp., Case No. C-l-03-649, 2006 U.S. Dist. LEXIS 27444, at *9 (S.D.Ohio May 9, 2006) (quoting Malchman v. Davis, 706 F.2d 426, 433 (2d Cir.1983)). In the Second Circuit, the substantive reasonableness of a settlement is determined by application of several factors. See Mba v. World Airways, Inc., 369 Fed.Appx. 194, 197 (2d Cir.2010). These factors are:
(1) the complexity, expense and likely duration of the litigation; (2) the reaction of the class to the settlement; (3) the stage of the proceedings and the amount of discovery completed; (4) the risks of establishing liability; (5) the risks of establishing damages; (6) the risks of maintaining the class through the trial; (7) the ability of the defendants to withstand a greater judgment; (8) the range of reasonableness of the settlement fund in light of the best
possible recovery; [and] (9) the range of reasonableness of the settlement fund to a possible recovery in light of all the attendant risks of litigation.
City of Detroit v. Grinnell Corp., 495 F.2d 448, 463 (2d Cir.1974) (internal citations omitted).
a. The Complexity, Expense and Likely Duration of Litigation
In this case, litigating this matter would no doubt be very costly and would necessitate a trial before the Court. The Settlement provides an expeditious route to recovery for the Class Members. Litigation, by its nature, is also uncertain, and it is understandable for the parties to try to cap their risk exposure. If the Debtors were found liable, it could potentially be subject to a priority claim of close to $1.4 million.5 (Mot. ¶ 34.) The Settlement also caps the Debtors’ liability exposure at 17%. On the other hand, the Class Members would have received nothing if they were not successful. Therefore, it is reasonable for the Class Members “to take the bird in the hand instead of the prospective flock in the bush.” Oppenlander v. Standard Oil Co., 64 F.R.D. 597, 624 (D.Colo.1974).
b. Reaction to the Settlement
The fairness of a proposed settlement can be measured by class reaction. See, e.g., WorldCom, 347 B.R. at 145. For example, “the absence of objectants may itself be taken as evidencing the fairness of a settlement.” Ross v. AH. Robins Co., Inc., 700 F.Supp. 682, 684 (S.D.N.Y.1988); see also Marisol A. v. Giuliani, 185 F.R.D. 152, 162 (S.D.N.Y.1999). Here, only three Class Members opted-out of the Settle*380ment, and no objections to the Settlement were filed.
c.The Stage of the Proceedings and the Amount of Discovery Completed
The purpose of this factor is to assess “the parties’ knowledge and awareness of the relative strength or weakness of each party’s respective arguments and positions. The progression of discovery is a useful proxy through which to measure that knowledge and awareness.” WorldCom, 347 B.R. at 145. Here, the Settlement was reached as a result of extensive negotiations between the parties and after informal discovery was exchanged — giving both sides the ability to adequately assess their chances of succeeding on the merits. (Mot. ¶¶ 33-36.) Furthermore, both sides were represented by capable and experienced counsel; this strengthens the conclusion that the parties had a sufficient opportunity to understand the intricacies of the action.
d.Risks of Prevailing (Establishing Liability, Establishing Damages and Maintaining the Class Through Trial)
Each subcomponent of this factor is addressed independently under Grinnell. 495 F.2d at 463. However, the Second Circuit has combined them to collectively assess the plaintiffs’ risks of prevailing. See Wal-Mart Stores, Inc. v. Visa U.S.A., Inc., 396 F.3d 96, 118 (2d Cir.2005). The Class Members may find it difficult to establish liability because they must both (i) establish that all of the elements of a WARN Act claim are met, and (ii) overcome the Debtors’ affirmative defenses. Given the possible affirmative defenses that the Debtors could raise, even if the action did go to trial and the Class Members established liability, the Class Members may experience difficulty proving significant damages. In other contexts, courts have found overall damages to be minimal despite a class’s success in proving liability. See In re NASDAQ Market-Makers Antitrust Litig., 187 F.R.D. 465, 476 (S.D.N.Y.1998) (antitrust class action); In re Initial Pub. Offering Sec. Litig., 671 F.Supp.2d 467, 482 (S.D.N.Y.2009) (securities class action). Moreover, although the Court has certified the Class on a final basis, it is not completely certain whether the class would remain certified for trial. Since none of the parties have offered evidence demonstrating a risk of class de-certification, the Court finds this factor to be neutral.
e.The Ability of the Defendants to Withstand a Greater Judgment
A settlement’s fairness can also be assessed by examining a defendant’s ability to pay a judgment greater than the amount offered in a settlement. See PaineWebber, 171 F.R.D. at 129. Specifically, “evidence that the defendant will not be able to pay a larger award at trial tends to weigh in favor of approval of a settlement, since the ‘prospect of a bankrupt judgment debtor down at the end of the road does not satisfy anyone involved in the use of class action procedures.’ ” Id. (quoting In re Warner Commc’n Sec. Litig., 618 F.Supp. 735, 746 (S.D.N.Y.1985)). But the fact “that a defendant is able to pay more than it offers in settlement does not, standing alone, indicate that the settlement is unreasonable or inadequate.” PaineWebber, 171 F.R.D. at 129. In the context of an ongoing bankruptcy case, “this factor is of uncertain utility ... as the defendant’s ability to pay more is clearly constrained.” WorldCom, 347 B.R. at 147. Although no parties raised this issue, the Court is not swayed by the proposition that the Debtors could pay more than the settlement amount. As discussed herein, the Settlement is the result *381of good-faith, arms-length negotiations, and the Court will not disrupt the result of those negotiations simply because the Debtors could pay more than the settlement amount.
f. The Range of Reasonableness
The final two Grinnell factors are generally considered together “since both speak to the fairness of the settlement’s terms relative to the possible outcomes of litigation.” Id. at 147-48. The range of reasonableness “recognizes the uncertainties of law and fact in any particular case and the concomitant risks and costs necessarily inherent in taking any litigation to completion.” Neuman v. Stein, 464 F.2d 689, 693 (2d Cir.1972). Moreover, “[d]ollar amounts [in class action settlement agreements] are judged not in comparison with the possible recovery in the best of all possible worlds, but rather in light of the strengths and weaknesses of plaintiffs’ case.” In re Agent Orange Prod. Liab. Litig., 597 F.Supp. 740, 762 (E.D.N.Y.1984) (citations omitted); see also Air Line Pilots Ass’n v. American Nat’l Bank and Trust Co. of Chicago (In re Ionosphere Clubs, Inc.), 156 B.R. 414, 481 (S.D.N.Y.1993) (“The weighing of a claim against compensation cannot be ... exact. Nor should it be, since an exact judicial determination of the values in issue would defeat the purpose of compromising the claim....”). On this point, the Grinnell court observed that “there is no reason, at least in theory, why a satisfactory settlement could not amount to a hundredth or even a thousandth part of a single percent of the potential recovery.” 495 F.2d at 455 n. 2.
In this case, the Court finds that in fight of the circumstances discussed above, the Settlement is reasonable. The Settlement appropriately balances the competing interests of the Class Members and the Debtors. Both parties agreed that “litigation of the issues involved in this litigation poses significant risk to each of the parties and that the Debtors are likely to incur significant legal exposure defending the WARN Act claims.” (Miller Decl. ¶ 8.) The Parties arrived at this determination after exchanging discovery and thoroughly investigating the facts and circumstances alleged in the Complaint. (Id.) When attorneys for both parties to a settlement believe that the agreement is fair, reasonable and adequate, this factor weighs in favor of approval. See Worthington v. CDW Corp., 2006 U.S. Dist. LEXIS 32100, at *12. Moreover, as previously discussed, none of the Class Members objected to the Settlement and only three opted-out. This fact further demonstrates the reasonableness of the Settlement. See Wal-Mart Stores, 396 F.3d at 119. Lastly, the amount paid to Class Members under the Settlement is likewise reasonable because it adequately considers the risks and added costs associated with fully litigating this action, as well as a bankrupt defendant’s ability to pay. (Miller Decl. ¶ 14.) No party-in-interest contends otherwise.
3. Substantive Fairness Under Bankruptcy Rule 9019
The Court is satisfied that the Settlement passes muster under Bankruptcy Rule 9019. A court must determine that a settlement under Bankruptcy Rule 9019 is fair, equitable, and in the best interests of the estate before it may approve a settlement. In re Drexel Burnham, Lambert Group, Inc., 134 B.R. 493, 496 (Bankr.S.D.N.Y.1991) (citing Protective Comm, for Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 424, 88 S.Ct. 1157, 20 L.Ed.2d 1 (1968)). Courts have developed standards to evaluate if a settlement is fair and equi*382table and identified factors for approval of settlements based on the original framework announced in TMT Trailer Ferry, 390 U.S. 414, 88 S.Ct. 1157, 20 L.Ed.2d 1 (1968). See Motorola, Inc. v. Official Comm. of Unsecured Creditors (In re Iridium Operating LLC), 478 F.3d 452, 462 (2d Cir.2007). Those factors are interrelated and require the Court to evaluate: (1) the balance between the litigation’s possibility of success and the settlement’s future benefits; (2) the likelihood of complex and protracted litigation, “with its attendant expense, inconvenience, and delay,” including the difficulty in collecting on the judgment; (3) “the paramount interests of the creditors,” including each affected class’s relative benefits “and the degree to which creditors either do not object to or affirmatively support the proposed settlement”; (4) whether other parties in interest support the settlement; (5) the “competency and experience of counsel” supporting, and “[t]he experience and knowledge of the bankruptcy court judge” reviewing, the settlement; (6) “the nature and breadth of releases to be obtained by officers and directors”; and (7) “the extent to which the settlement is the product of arm’s length bargaining.” In re Iridium Operating LLC, 478 F.3d at 462. The burden is on the settlement proponent to persuade the Court that the settlement is in the best interests of the estate. See 8 NoRton BanKruptoy Law AND Practice 3d § 167:2.
Although the factors articulated in Grinnell do not precisely mirror those enumerated in Iridium Operating, the reasons behind approving the Settlement are also applicable in the Bankruptcy Rule 9019 context. Namely, the Settlement is in the best interests of creditors and the estate because it caps the Debtors’ risk at a relatively low percentage (17%) of their potential total exposure. The Settlement will eliminate additional expenses and uncertainty with respect to litigating this matter. Lastly, since the Debtors’ Plan of Liquidation has already been confirmed and gone effective, this Settlement presents an important step in winding-down the Debtors’ cases.
C. Class Counsel’s Compensation 1. Appointing Class Counsel
Rule 23(g) directs the court to appoint class counsel when it certifies a class. In appointing class counsel, courts must consider the following:
(i) the work counsel has done in identifying or investigating potential claims in the action;
(ii) counsel’s experience in handling class actions, other complex litigation, and the types of claims asserted in the action;
(iii) counsel’s knowledge of the applicable law; and
(iv) the resources that counsel will commit to representing the class.
Fed.R.Civ.P. 23(g)(1)(A). In addition, a court may, among other things, consider any other matter that is pertinent to counsel’s ability to fairly and adequately represent the interests of the class. Id. at 23(g)(l)(B)-(E).
Here, the Court finds that it is appropriate to appoint the Class Counsel. Lankenau & Miller and the Gardner Firm, PC have served as class counsel in numerous WARN Act class actions—a total of seventy between the two of them. Therefore, both firms are capable of handling this matter and are well versed in this area of the law. Moreover, Class Counsel has already invested time in this case by initiating this adversary proceeding and negotiating the Settlement with the Debtors. For these reasons, the Court appoints *383Lankenau & Miller and the Gardner Firm, PC as Class Counsel.
D. Class Counsel’s Requested Fees Are Reasonable
Class Counsel also seeks payment of fees in the amount of one-third of the settlement amount ($79,000), after service fees are paid to the Plaintiff. (Miller Decl. ¶24.) The Plaintiff agreed to this fee structure, and Notice specifically apprised the Class Members of the amount of attorneys’ fees sought. According to the Miller Declaration, Class Counsel has spent over ninety hours prosecuting this case, which would equal approximately $54,285.50 in billable hourly rates. (Miller Decl. ¶ 25.) Further, Class Counsel projects an additional $10,000-$15,000 in hourly fees for future matters. (Id.) Class Counsel also submitted time summary sheets and expense details, which are attached to the Miller Declaration as Exhibit 2.
Class Counsel’s requested fees are reasonable as required by Rule 23(h). See Fed.R.Civ.P. 23(h). In the Second Circuit, courts may employ either the “lodestar” or percentage-of-fund method to calculate attorneys’ fees. Goldberger v. Integrated Res., Inc., 209 F.3d 43, 50 (2d Cir.2000). Under the lodestar method, “hours reasonably expended” are multiplied by a “reasonable hourly rate.” Wal-Mart Stores, 396 F.3d at 121 (citing Goldberger, 209 F.3d at 47). A “multiplier” to the base lodestar amount may be employed to increase the award depending “on factors such as the riskiness of the litigation and the quality of the attorneys.” Id. While the percentage method “more faithfully adheres to market practice,” the lodestar method nonetheless “remains useful ... as a ‘cross check’ on the reasonableness of the requested percentage.” Goldberger, 209 F.3d at 50 (quoting In re General Motors Corp. Pick-Up Truck Fuel Tank Prods. Liab. Litig., 55 F.3d 768, 820 (3d Cir.1995)). In the Second Circuit, the trend is toward use of the percentage method. See Wal-Mart, 396 F.3d at 121. Regardless of which method is employed, the proposed attorneys’ fees must qualify as reasonable according to six factors: “(1) the time and labor expended by counsel; (2) the magnitude and complexities of the litigation; (3) the risk of the litigation ...; (4) the quality of representation; (5) the requested fee in relation to the settlement; and (6) public policy considerations.” Goldberger, 209 F.3d at 50 (citation and internal quotations omitted); see also In re Union Carbide Corp. Consumer Prods. Bus. Sec. Litig., 724 F.Supp. 160, 163 (S.D.N.Y.1989).
Here, Class Counsel is requesting attorneys’ fees in the amount of $79,000, representing one-third of the Settlement amount.6 (Miller Decl. ¶ 24.) As stated, a percentage method may be employed to calculate these fees. The proposed fees satisfy the Goldberger criteria for reasonableness. Class Counsel has expended over ninety hours of work on this matter and has submitted detailed time records showing the precise allocation of time spent on each task. (Miller Decl., Ex. 2.) There is no indication that these time entries are unreasonable. Furthermore, class action litigation under the WARN Act is specialized and complex and the risks of litigation here appear to be significant because of the substantial time and expense required to conduct a trial. Counsel has worked on this case for a significant period of time without any com*384pensation and has satisfied the Goldberger factors, warranting the approval of a 1.45 multiplier. For these reasons, the Court finds that the requested fees are reasonable.
CONCLUSION
For the reasons explained above, the Court approves the Settlement on a final basis. In doing so, the Court confirms its preliminary conclusions that the Notice was appropriate and that certification of the Class complies with the standards of Rule 28(a) and (b)(3). The Settlement is also both procedurally and substantively fair under Rule 23 and Bankruptcy Rule 9019. The requested award of attorneys’ fees and expenses is also reasonable and appropriate in the circumstances. A separate order will be entered approving the Settlement on a final basis.
. Unless otherwise indicated, ECF citations throughout this Opinion refer to the docket in the Debtors’ main case, Case No. 11-10614(MG).
. A copy of the Settlement Agreement was attached to the Motion as Exhibit A.
. According to the Motion, each Class Member will receive $797. (Mot. ¶ 26.)
. The fourth factor enumerated in Rule 23(b)(3)(D)—the difficulties of managing a class action—does not need to be considered when certifying a class for settlement purposes, because "the proposal is that there be no trial.” Amchem, 521 U.S. at 620, 117 S.Ct. 2231; see also WorldCom, 347 B.R. at 142-43.
. The argument for priority status is based on section 507(a)(4) and/or section 507(a)(5) because the possible damages would involve employee wages and benefits. The Court need not and does not resolve this issue.
. Class Counsel incurred approximately $575 in expenses associated with litigating this case. (Miller Decl., Ex. 2.) However, Class Counsel is not seeking separate reimbursement for these expenses. (Id. ¶ 24.) | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488434/ | 11/21/2022
IN THE SUPREME COURT OF THE STATE OF MONTANA Case Number: DA 22-0340
No. DA 22-0340
STATE OF MONTANA,
Plaintiff and Appellee,
v.
MATTHEW SEVERSON,
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 30, 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 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488427/ | STATE OF LOUISIANA
COURT OF APPEAL, FIRST CIRCUIT
MITCHELL MEREDITH AND SARAH NO. 2022 CW 0945
ASHLEY MEREDITH,
INDIVIDUALLY AND ON BEHALF
OF SARAH GRACE MEREDITH
VERSUS
GARRISON PROPERTY AND NOVEMBER 17, 2022
CASUALTY INSURANCE COMPANY
In Re: Garrison Property and Casualty Insurance Company,
applying for supervisory writs, 19th Judicial District
Court, Parish of East Baton Rouge, No. 678153.
BEFORE : HOLDRIDGE, PENZATO, AND LANIER, JJ.
WRIT GRANTED. The district court’s May 31, 2022 judgment
granting the motion for new trial filed by the plaintiffs,
Mitchell Meredith and Sarah Ashley Meredith, individually and on
behalf of Sarah Grace Meredith, is reversed. We find the trial
court abused its discretion in granting the motion for new trial
because the jury’s interpretation of the evidence was fair, and
we cannot say that it was an abuse of the jury’s great
discretion to award zero damages while also finding liability,
especially in light of evidence of payments already received by
the plaintiffs, and the lack of any instruction to the jury
regarding consideration of prior payments. See Davis v. Wal-Mart
Stores, Inc., 2000-0445 (La. 11/28/00), 774 So.2d 84; Lilly v.
Allstate Ins. Co., 577 So.2d 80 (La. App. list Cir. 1990), writ
denied, 578 So.2d 914 (La. 1991); Brumfield v. Spera, 2009-0566
(La. App. lst Cir. 12/23/09), 2009 WL 4982128, n.5
(unpublished), writ denied, 2010-0124 (La. 4/5/10), 31 So.3d
364. Accordingly, the motion for a new trial is denied.
AHP
WIL
Holdridge, J., concurs.
COURT OF APPEAL, FIRST CIRCUIT
ACH)
DEPUTY CLERK OF COURT
FOR THE COURT | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488435/ | 11/21/2022
IN THE SUPREME COURT OF THE STATE OF MONTANA Case Number: DA 22-0474
No. DA 22-0474
STATE OF MONTANA,
Plaintiff and Appellee,
v.
MICHAEL LEE DECELLES,
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 30, 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 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488455/ | Filed 11/21/22
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIRST APPELLATE DISTRICT
DIVISION THREE
THE PEOPLE,
Plaintiff and Respondent, A163474
v. (Solano County
JASMINE MAREZA ZARAZUA, Super. Ct. No. FCR344711)
Defendant and Appellant.
At trial for recklessly evading a peace officer and other offenses, the
prosecutor repeatedly misgendered Jasmine Mareza Zarazua — who
identifies as male — in the presence of the jury. 1 Defense counsel moved for
a mistrial and for a curative admonition on the grounds of prosecutorial
misconduct, but the trial court denied the motion and declined to admonish
the jury. On appeal, Zarazua contends the failure to use masculine pronouns
constituted prosecutorial misconduct which, in the absence of a curative
admonition, was prejudicial.
Parties are to be treated with respect, courtesy, and dignity —
including the use of preferred pronouns. Failure to do so offends the
administration of justice. Nevertheless, given the record here, we conclude
any misconduct was not prejudicial and therefore affirm.
Misgendering is “the assignment of a gender with which a party does
1
not identify, through the misuse of gendered pronouns, titles, names, and
honorifics.” (McNamarah, Misgendering (2021) 109 Cal. L.Rev. 2227, 2232.)
We refer to Zarazua using masculine pronouns.
1
BACKGROUND
In April 2019, a Rio Vista police officer saw Zarazua driving a SUV
with no rear license plate. The officer tried to conduct a traffic stop, but
Zarazua failed to yield. Instead — and while driving with a suspended
license — he led law enforcement officers on a 15-minute pursuit during
which he committed numerous traffic violations. While evading officers,
Zarazua drove into a gated retirement community where he nearly collided
with a truck, spun out of control, and crashed into the bushes. Then he got
out of the SUV and ran from pursuing officers. Eventually, officers arrested
him.
At the time of the offenses — and at the commencement of the
prosecution — Zarazua identified as female. Trial began in July 2021.
During jury selection, defense counsel advised prospective jurors that
prosecution witnesses would “refer to Mr. Zarazua as she. And Mr.
Zarazua . . . no longer identifies as she. Mr. Zarazua identifies [as male] and
prefers the pronoun he.” Counsel asked the jurors to raise their hands if
they had “thought of that already.” Fourteen did so. Then counsel said the
trial court would instruct them not to let bias of any kind — including gender
bias — affect their decision and asked several jurors whether they would
have a “problem” if Zarazua “identifies as he when the officers identified him
as she.” Each juror answered “no.”
After reminding prospective jurors they could not “punish” Zarazua
for his gender identity, the prosecutor asked whether they would give him
a “benefit” because of the gender transition. The jurors indicated they would
not. As jury selection continued, counsel for both parties queried the jurors
on gender identity. Each juror disclaimed feelings of sympathy toward, or
bias against, Zarazua based on his gender transition.
2
At the outset of his brief opening statement — which comprised three
pages of the reporter’s transcript — the prosecutor referred to Zarazua using
masculine pronouns. Thereafter, the prosecutor misgendered Zarazua
several times, prompting defense counsel to object “to the identification of my
client as she. We’ve been identifying him as he this entire time. Mr. Zarazua
does respectfully request to be referred to as he.” The trial court instructed
the prosecutor to “proceed with that in mind,” and the prosecutor remarked,
“That is in mind. It’s not intentional.” The prosecutor resumed his opening
statement, during which he misgendered Zarazua eight additional times.
Defense counsel did not object.
Outside the jury’s presence, defense counsel moved for a mistrial on the
grounds of prosecutorial misconduct. According to defense counsel, the
prosecutor’s failure to use masculine pronouns — irrespective of intent —
belittled and denigrated him and inflamed the jury’s passions, fears, and
prejudices. Counsel lodged an objection “to every instance where Mr.
Zarazua was misgendered” and requested the trial court issue “a curative
admonishment . . . that it is improper to denigrate a defendant.” In
opposition, the prosecutor argued the misgendering was accidental, said he
was “trying to be mindful” of Zarazua’s gender, and noted the defendant
“went as Ms. Zarazua” at the time of the incident. The prosecutor apologized
to Zarazua, but strenuously denied engaging in misconduct, insisting he did
not “denigrate the defendant in terms of inflaming the passions of the jury.”
As the prosecutor explained, “[w]e know the passions of the jury aren’t
inflamed because we talked to all of these jurors about these issues, and they
all said they wouldn’t let the defendant’s gender identity” affect them.
The trial court denied the mistrial motion. It found the misgendering
unintentional and concluded it did not constitute prosecutorial misconduct or
3
inflame “the jury to the extent that a mistrial [was] required.” The court
denied the request for a curative admonition without prejudice and suggested
defense counsel renew the request when the parties discussed jury
instructions. Defense counsel did not renew the request, but the court gave
CALCRIM No. 200, which directed jurors not to let sympathy, prejudice, or
bias — including bias based on Zarazua’s gender identity — affect their
decision.
During initial closing argument, the prosecutor misgendered Zarazua
four times. Defense counsel objected based on prosecutorial misconduct; the
trial court told the prosecutor, “[w]atch . . . your pronouns,” and the
prosecutor apologized. The prosecutor used incorrect pronouns twice during
rebuttal closing; both times, defense counsel objected and the court reminded
the prosecutor to use the correct pronouns. The prosecutor apologized and,
on one occasion, offered to slow down so “that doesn’t happen again.”
After deliberating for fewer than two and a half hours, the jury
convicted Zarazua of all charges: reckless evading a peace officer, resisting
a police officer, hit and run driving resulting in property damage, and driving
with a suspended license. The trial court suspended imposition of sentence,
placed Zarazua on probation, and ordered him to serve jail time.
DISCUSSION
Zarazua contends his convictions must be reversed because the
misgendering constituted prosecutorial misconduct which, in the absence of
a curative admonition, was prejudicial.
We begin by reciting the well-established standards governing
prosecutorial misconduct claims. A prosecutor’s conduct “ ‘violates the
federal Constitution when it comprises a pattern of conduct “so egregious
that it infects the trial with such unfairness as to make the conviction
4
a denial of due process.” [Citation.] But conduct by a prosecutor that does
not render a criminal trial fundamentally unfair is prosecutorial misconduct
under state law only if it involves “ ‘the use of deceptive or reprehensible
methods to attempt to persuade either the court or the jury.’ ” ’ ” (People v.
Rhoades (2019) 8 Cal.5th 393, 418.) Under state law, “bad faith on the
prosecutor’s part is not required.” (People v. Centeno (2014) 60 Cal.4th 659,
666.)
To prevail on a claim of prosecutorial misconduct premised on the
prosecutor’s remarks to the jury, the defendant must show that, in the
context of the argument as a whole and the instructions given to the jury,
“there was ‘a reasonable likelihood the jury understood or applied the
complained-of comments in an improper or erroneous manner. [Citations.]
In conducting this inquiry, we “do not lightly infer” that the jury drew the
most damaging rather than the least damaging meaning from the
prosecutor’s statements.’ ” (People v. Centeno, supra, 60 Cal.4th at p. 667.)
Prosecutorial misconduct may result in reversal under federal law if the error
“was not ‘harmless beyond a reasonable doubt,’ ” and it may result in reversal
“under state law if there was a ‘reasonable likelihood of a more favorable
verdict in the absence of the challenged conduct.’ ” (People v. Rivera (2019)
7 Cal.5th 306, 333–334.)
Presuming the prosecutor’s repeated misgendering of Zarazua
constituted misconduct, it was nevertheless harmless. (People v. Wright
(2021) 12 Cal.5th 419, 444.) 2 During jury selection, defense counsel notified
Though we needn’t decide whether misconduct occurred, we note that
2
because of the unique function prosecutors perform in representing the
interests of — and exercising the power of — the state, they “ ‘are held to an
elevated standard of conduct’ ” (People v. Peoples (2016) 62 Cal.4th 718, 792)
and should use a defendant’s preferred pronouns “out of respect for the
5
prospective jurors that prosecution witnesses might misgender Zarazua, and
counsel for both parties acknowledged his gender identity and exhorted
jurors not to “punish” him for the gender transition, or to let gender bias
influence their decision. The jurors confirmed they could remain impartial.
When the prosecutor misgendered Zarazua during opening and closing
arguments, the prosecutor apologized and acknowledged the mistake. And
the trial court reminded the prosecutor to use correct pronouns and
subsequently instructed the jurors not to let bias of any kind — including
gender identity bias — affect their decision (CALCRIM No. 200). We
presume the jury followed the court’s instructions. (People v. Thompson
(2022) 83 Cal.App.5th 69, 92.) Additionally, the evidence of guilt was
overwhelming and largely uncontested.
Given the voir dire on gender identity, the directive in CALCRIM
No. 200, and the overwhelming evidence of guilt, we conclude the prosecutor’s
failure to use masculine pronouns was “harmless under any standard of
prejudice.” (People v. Smith (2015) 61 Cal.4th 18, 51–52.) There is no
indication the jury interpreted the prosecutor’s failure to use Zarazua’s
correct pronouns “in the most damaging light” (People v. Ramirez (2022)
litigant’s dignity.” (United States v. Varner (5th Cir. 2020) 948 F.3d 250, 260
[dis. opn. of Dennis, J.]; CACI No. 118 [“attorneys and courts should take
affirmative steps to ensure that they are using correct personal pronouns” to
comply with state policy according “intersex, transgender, and nonbinary
people . . . full legal recognition and equal treatment under the law” and to
ensure their “dignity and privacy.”].) Not doing so undermines the
administration of justice, can inject prejudice into proceedings, and can
suggest a defendant is not credible. (McNamarah, Misgendering as
Misconduct (2020) 68 UCLA L.Rev. Disc. 40, 63.) Additionally, to ensure
a litigant is treated with dignity, a trial court can admonish counsel to use
the litigant’s preferred pronouns. (See Cassim v. Allstate Ins. Co. (2004)
33 Cal.4th 780, 795 [one purpose of admonitions “ ‘is to avoid repetition of the
remarks and thus obviate the necessity of a new trial’ ”].)
6
13 Cal.5th 997, 1130) or that the misgendering influenced the verdict.
(Chapman v. California (1967) 386 U.S. 18, 24.) Finally, there is no realistic
possibility Zarazua would have obtained a more favorable result but for the
misgendering. (See People v. Arredondo (2018) 21 Cal.App.5th 493, 502–505
[prosecutor’s “relentless” use of epithets to describe defendants was harmless
as to murder convictions and certain enhancements].)
Zarazua does not persuasively argue otherwise. Instead, he insists
prejudice should be presumed because the trial court did not issue a curative
admonition. This claim is forfeited. “As a general matter, when a trial court
denies a motion without prejudice the matter is forfeited if not renewed.”
(People v. Mills (2010) 48 Cal.4th 158, 170.) Here, the court denied defense
counsel’s request for an admonition without prejudice and suggested counsel
renew the request when it was time to instruct the jury. By failing to do so,
counsel forfeited the argument on appeal. (Id. at p. 170.) We acknowledge
a curative admonition may be most effective at the moment the objectionable
conduct occurs, but when the court denies a request for an admonition
without prejudice, counsel must renew the request and press for a final
ruling. (See People v. Johnson (2018) 6 Cal.5th 541, 586; People v. Brewer
(2000) 81 Cal.App.4th 442, 459.) The argument also fails on the merits. We
decline Zarazua’s invitation to “presume reversible prejudice” in the absence
of a curative admonition or to analogize the misgendering to the use of
“unjustified removal of jurors based on race” in violation of Batson v.
Kentucky (1986) 476 U.S. 79 and People v. Wheeler (1978) 22 Cal.3d 258.
For the reasons discussed above, the court’s refusal to admonish the jury was
not — on this record — prejudicial.
7
Zarazua’s other arguments do not convince us reversal is required.
For example, he asserts the trial court, in denying his mistrial motion,
erroneously focused on whether the misgendering was intentional rather
than on whether it was prejudicial. We disagree. In denying the motion, the
court found the misgendering did not constitute prosecutorial misconduct or
inflame “the jury to the extent that a mistrial [was] required.” Thus, the
court impliedly determined the prosecutor’s failure to use masculine
pronouns was not incurably prejudicial. This conclusion was not an abuse of
discretion. (People v. Phillips (2022) 75 Cal.App.5th 643, 691; People v.
Schultz (2020) 10 Cal.5th 623, 673.)
In closing, we emphasize that we do not condone the prosecutor’s
repeated misgendering of Zarazua. Moreover, we note trial courts have an
obligation to ensure litigants and attorneys are treated with respect,
courtesy, and dignity — including the use of preferred pronouns. When court
proceedings fall short of that, judges should take affirmative steps to address
the issue. Nevertheless, on this record, we conclude the prosecutor’s failure
to use masculine pronouns was not prejudicial. We acknowledge there may
be instances when misgendering is so overt, malicious, and calculating that it
“ ‘ “infects the trial with such unfairness as to make the conviction a denial of
due process.” ’ ” (People v. Rhoades, supra, 8 Cal.5th at p. 418.) But this is
not such a case.
DISPOSITION
The judgment is affirmed.
8
_________________________
Rodríguez, J.
WE CONCUR:
_________________________
Fujisaki, Acting P. J.
_________________________
Petrou, J.
A163474
9
Superior Court of Solano County, Jeffrey C. Kauffman, Judge.
David A. Kaiser, under appointment by the Court of Appeal, for Defendant
and Appellant.
Rob Bonta, Attorney General, Lance E. Winters, Chief Assistant Attorney
General, Jeffrey M. Laurence, Assistant Attorney General, Donna M.
Provenzano and Clarissa Limón, Deputy Attorneys General, for Plaintiff and
Respondent.
10 | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488511/ | COURT OF APPEALS
REBECA C. MARTINEZ FOURTH COURT OF APPEALS DISTRICT MICHAEL A. CRUZ,
CHIEF JUSTICE CADENA-REEVES JUSTICE CENTER CLERK OF COURT
PATRICIA O. ALVAREZ 300 DOLOROSA, SUITE 3200
LUZ ELENA D. CHAPA SAN ANTONIO, TEXAS 78205-3037
IRENE RIOS WWW.TXCOURTS.GOV/4THCOA.ASPX TELEPHONE
BETH WATKINS (210) 335-2635
LIZA A. RODRIGUEZ
LORI I. VALENZUELA FACSIMILE NO.
JUSTICES (210) 335-2762
November 18, 2022
Renee Ramirez Derek Morales
The Law Office of Derek D. Morales, The Law Office of Derek D.
PLLC Morales, PLLC
800 Broadway St 800 Broadway
San Antonio, TX 78215-1517 San Antonio, TX 78215
* DELIVERED VIA E-MAIL * * DELIVERED VIA E-MAIL *
Brett B. Rowe
Evans, Rowe & Holbrook
10101 Reunion Place, Suite 900
San Antonio, TX 78216-4175
* DELIVERED VIA E-MAIL *
RE: Court of Appeals Number: 04-22-00097-CV
Trial Court Case Number: 2020-CI-06670
Style: Sharyn Dacbert 'Cross-Appellee'
v.
Medical Center Ophthalmology Associates, L.L.P. and Michael
Singer 'Cross- Appellants'
Enclosed please find the order which the Honorable Court of Appeals has
issued in reference to the above styled and numbered cause.
If you should have any questions, please do not hesitate to contact me.
Very truly yours,
MICHAEL A. CRUZ, Clerk of Court
______________________
Cecilia Phillips
Deputy Clerk, Ext. 5-3221
cc: Nicki Elgie (DELIVERED VIA E-MAIL)
Ryan G. Anderson (DELIVERED VIA E-MAIL)
Fourth Court of Appeals
San Antonio, Texas
November 18, 2022
No. 04-22-00097-CV
Sharyn DACBERT,
Appellant / Cross-Appellee
v.
MEDICAL CENTER OPHTHALMOLOGY ASSOCIATES, L.L.P. and Michael Singer
Appellees / Cross- Appellants
From the 37th Judicial District Court, Bexar County, Texas
Trial Court No. 2020-CI-06670
Honorable Martha Tanner, Judge Presiding
ORDER
Appellant/cross-appellee’s second motion for an extension of time to file her responsive
brief is granted. The brief is due on or before December 5, 2022. No further extensions will be
granted absent extenuating circumstances.
_________________________________
Liza A. Rodriguez, Justice
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the seal of the said
court on this 18th day of November, 2022.
___________________________________
MICHAEL A. CRUZ, Clerk of Court | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488516/ | Fourth Court of Appeals
San Antonio, Texas
November 18, 2022
No. 04-22-00072-CV
JMI CONTRACTORS, LLC,
Appellant
v.
Jose Manuel MEDELLIN,
Appellee
From the 285th Judicial District Court, Bexar County, Texas
Trial Court No. 2018-CI-05983
Honorable Aaron Haas, Judge Presiding
ORDER
Appellant’s reply brief is due November 21, 2022. On November 17, 2022, appellant
filed a motion requesting a twenty-day extension of time. After consideration, we GRANT the
motion and ORDER appellant to file its reply brief by December 12, 2022.
It is so ORDERED on November 18, 2022.
PER CURIAM
ATTESTED TO: _________________________
MICHAEL A. CRUZ,
CLERK OF COURT | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494591/ | MEMORANDUM OPINION
PETER J. WALSH, Bankruptcy Judge.
This opinion is with regard to Granite Financial Solutions, Inc.’s (“Defendant”) motion to dismiss (the “Motion”) this adversary proceeding. (Doc. # 19.) Defendant filed the Motion challenging this Court’s subject matter jurisdiction pursuant to Fed.R.Civ.P. 12(b)(1).1 For the reasons described below, I will deny the Motion.2
Background
The principal facts in this case are undisputed. In' November 2008, MPC Computers and its subsidiaries (collectively the “Debtors”) filed voluntary petitions under chapter 11 of the Bankruptcy Code, 11 U.S.C. §§ 101 et seq. (Case No. 08-12667 (PJW).) On November 4, 2010, while the bankruptcy case was still pending, Debtors filed this action against Defendant for breach of contract and unjust enrichment. (Doc. #1.) The claims arose from Defendant’s alleged failure to pay for goods shipped by Debtors before the bankruptcy petitions were filed. (Compl. ¶¶ 8-26.)
On March 4, 2011, this Court entered an order (the “Confirmation Order”) confirming Debtors’ Second Amended Plan of Liquidation (the “Plan”). (Case No. 08-12667 (PJW), Docs. # 1218 & 1344.) The Plan provides for the creation of the MPC Liquidating Trust (“Trust,” or as named in the Plan, “Liquidating Trust”) pursuant to an accompanying Liquidating Trust Agreement (“Trust Agreement”). (Case No. OS-12667 (PJW), Doc. # 1341.) Specifically, the Plan “effects a transfer of all of the Debtors’ Assets3 and liabilities into the newly formed Liquidating Trust created *387for the purposes, among others, of making distributions to the Holders of Allowed Claims and Interests, pursuing Causes of Action, and otherwise completing the liquidation of the Estates.” (Plan, at 1.) The Plan further provides that “Debtors and the [Official Committee of Unsecured Creditors] will form the Liquidating Trust to administer certain post-confirmation responsibilities under the Plan, including but not necessarily limited to, those responsibilities associated with the pursuit and collection of Litigation Claims4 [and] Causes of Action.” (Id. at 19.) Also on the effective date, Debtors were to “transfer, assign and deliver to the Liquidating Trust, the Liquidating Trust Assets5 as specified in the Liquidating Trust Agreement.” (Id. at 20.) The Trust Agreement, for its part, provides that “[t]he Debtors hereby transfer, assign, and deliver to the MPC Liquidating Trust all of their right, title, and interest in the Trust Assets to the extent provided for in the Confirmation Order free and clear of any lien, Claim or interest in such property except as provided in the Plan.” (Trust Agreement § 1.1(a).) The Confirmation Order approved the Trust Agreement. (Confirmation Order, at 11-12 ¶¶ 1, 4.)
Additionally, the Confirmation Order provides for the automatic substitution of the Liquidation Trustee (herein “Plaintiff’) as plaintiff in the place of Debtors and/or the Official Committee of Unsecured Creditors “with respect to any and all pending Causes of Action.” (Confirmation Order, at 13 ¶ 6.) Consequently, the caption on this adversary proceeding was changed to: “The Liquidating Trustee of the MPC Computers Liquidating Trust v. Granite Financial Solutions, Inc. d/b/a Granite Data Solutions, Inc.” (Doc. # 12.)
Jurisdiction
A court has jurisdiction to determine whether or not it has subject matter jurisdiction over a proceeding. In re BWI Liquidating Corp., 437 B.R. 160, 163 (Bankr.D.Del.2010) (citing Chicot Cnty. Drainage Dist. v. Baxter State Bank, 308 U.S. 371, 376-77, 60 S.Ct. 317, 84 L.Ed. 329 (1940)).
Standard of Review
A court may treat a motion to dismiss under Rule 12(b)(1) as a facial attack or a factual attack on subject matter jurisdiction. See In re SemCrude, L.P., 428 B.R. 82, 93 (Bankr.D.Del.2010) (citing Gould Elecs. Inc. v. United States, 220 F.3d 169, 176 (3d Cir.2000)). In reviewing a facial attack, which is a challenge to the sufficiency of pleading in the complaint, the court must “ ‘accept all well-pleaded allegations in the complaint as true and view them in the light most favorable to the plaintiff.’ ” Id. (citing In re *388Kaiser Grp. Int’l Inc., 399 F.3d 558, 561 (3d Cir.2005)). The factual attack challenges “the existence of subject matter jurisdiction in fact, quite apart from any pleadings.” Mortensen v. First Fed. Sav. & Loan Ass’n, 549 F.2d 884, 891 (3d Cir.1977). “In reviewing a factual attack, a court may consider evidence outside the pleadings.” Gould, 220 F.3d at 176. It is the plaintiff who bears the burden of proving that jurisdiction exists. Mortensen, 549 F.2d at 891.
Defendant here does not raise a challenge to the sufficiency of Plaintiffs pleadings, but rather attacks the factual grounds for jurisdiction. As Defendant has submitted as exhibits the Plan, the Trust Agreement, and the Confirmation Order, and Plaintiff has had the opportunity to submit his own evidence in response, I will treat this motion as a factual attack.
Discussion
Defendant here makes three arguments in support of dismissal for lack of subject matter jurisdiction. First, Defendant argues that the “Bankruptcy Court’s entry of judgment in this matter would be the unconstitutional exercise of ‘judicial power’ ” since Plaintiffs claims are state law “suits at common law and clearly could exist outside the context of bankruptcy.” (Def.’s Br., at 10.) Defendant cites the recent Supreme Court decision Stern v. Marshall, — U.S. -, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), to bolster its argument. (Id. at 13-18.) Next, Defendant argues that because this action is being adjudicated post-confirmation, this Court does not have jurisdiction over the matter under the standard established in Binder v. Price Waterhouse & Co. LLP (In re Resorts Int’l, Inc.), 372 F.3d 154 (3d Cir.2004). (Id. at 18-21.) Lastly, Defendant asserts that this Court cannot hear the action because Defendant has demanded a jury trial, and such a trial cannot be conducted in this Court. (Id. at 23-25.) I will address each of these arguments in turn.
Applicability of Stern v. Marshall
In his opposition brief to Defendant’s Motion, Plaintiff responds that Stem, upon which Defendant heavily relies, did not address the bankruptcy court’s subject matter jurisdiction, but rather the court’s ability to enter a final, binding judgment in a narrow category of state law actions. (PL’s Opp’n, at 4-7.) I agree with Plaintiff; as the Court itself said in Stem, the holding in that case was a narrow one. Stern, 131 S.Ct. at 2620 (“We do not think the removal of counterclaims such as [the debtor’s] from core bankruptcy jurisdiction meaningfully changes the division of labor in the current statute; we agree with the United States that the question presented here is a ‘narrow one.”).
The narrow question that the Stem Court was asked to determine involved a two-part inquiry: “(1) whether the Bankruptcy Court had the statutory authority under 28 U.S.C. § 157(b) to issue a final judgment on [the debtor’s] counterclaim; and (2) if so, whether conferring that authority on the Bankruptcy Court is constitutional.” Stern, 131 S.Ct. at 2600 (emphasis added). After a lengthy analysis of 28 U.S.C. § 157 and Article III of the Constitution, the Court held that “although the Bankruptcy Court had the statutory authority to enter judgment on [the bankruptcy estate’s state law counterclaim], it lacked the constitutional authority to do so.” Id. at 2601 (emphasis added). In so holding, the Court in no way disturbed the bankruptcy court’s jurisdiction to hear certain matters, which is a separate issue from the court’s power to enter a final judgment.
Section 1334 of title 28 of the United States Code establishes the district court’s bankruptcy jurisdiction. Section 1334 pro*389vides that “the district courts shall have original and exclusive jurisdiction of all cases under title 11” and “shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11.” 28 U.S.C. § 1334(a) & (b) (2005). Section 157 of title 28 permits the district courts to refer to the bankruptcy judges in the district “any and all cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11.” 28 U.S.C. § 157(a).6 Where matters are so referred, a bankruptcy judge “may hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11 ... and may enter appropriate orders and judgments.” 28 U.S.C. § 157(b)(1). Section 157 also provides for the bankruptcy court’s ability to hear — but not render a final judgment in — a proceeding that is non-core but still related to a bankruptcy case:
A bankruptcy judge may hear a proceeding that is not a core proceeding but that is otherwise related to a case under title 11. In such proceeding, the bankruptcy judge shall submit proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall be entered by the district judge after considering the bankruptcy judge’s proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically objected.
28 U.S.C. § 157(c)(1).
The question pondered by the Supreme Court in Stem, whether the bankruptcy judge had the power to enter a final judgment in a state law counterclaim by the estate, is entirely separate from the question of whether a bankruptcy judge has jurisdiction to hear a matter without entering a final judgment. Stern, 131 S.Ct. at 2597 (“Section 157 allocates the authority to enter final judgment between the bankruptcy court and the district court. That allocation does not implicate questions of subject matter jurisdiction.”) (citation omitted). The constitutionality of § 1334, the provision governing bankruptcy jurisdiction, was not at issue in Stem. Burtch v. Huston (In re USDigital, Inc.), Adv. No. 09-50469, 2011 WL 6382551, at *1 (Bankr.D.Del. Dec. 20, 2011) (“Stem in no way limits the bounds of a bankruptcy court’s subject matter jurisdiction. At the very least the bankruptcy court must have ‘related to’ jurisdiction.”); Fairchild Liquidating Trust v. New York (In re Fairchild Corp.), 452 B.R. 525, 530 n. 14 (Bankr.D.Del.2011) (“The issue in Stern v. Marshall was when, under the United States Constitution, the bankruptcy court could enter a final judgment as opposed to proposed findings of fact and conclusions of law in a case where subject matter jurisdiction existed under 28 U.S.C. § 1334(a). As such, Stern v. Marshall is not a case about subject matter jurisdiction.”) (citation omitted); In re Salander O’Reilly Galleries, 453 B.R. 106, 117 (Bankr.S.D.N.Y.2011) (“Nowhere in [N. Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982)], Granfinanciera [S.A v. Nordberg, 492 U.S. 33, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989)], or Stem does the Supreme Court rule that the bankruptcy court may not rule with respect to state law when determining a proof of claim in the bankruptcy, or when deciding a matter directly and conclusively related to the bankruptcy.”). See also Ace Am. Ins. Co. v. DPH Holdings Corp. (In re DPH Holdings Corp.), No. 10-4170-bk, 2011 WL *3905924410, at *1 (2d Cir. Nov. 29, 2011) (“The [defendants] argue that the Bankruptcy Court lacks jurisdiction because the adversary proceeding is not a core or a non-core proceeding. Whether a proceeding is core or non-core is beside the point for determining jurisdiction because ‘[t]hat allocation [of core and non-core] does not implicate questions of subject matter jurisdiction.’ So long as a proceeding is one or the other, the Bankruptcy Court possessed subject-matter jurisdiction.”) (quoting Stem, 131 S.Ct. at 2607); S. Elec. Coil, LLC v. FirstMerit Bank, No. 11 C 6135, 2011 WL 6318963, at *3 (N.D.Ill. Dec. 16, 2011) (“Further, the Stem Court, albeit in dicta, stated that its holding did not preclude the bankruptcy court from hearing counterclaims and proposing findings of fact.”) (citing Stern, 131 S.Ct. at 2620).
Defendant has raised a challenge to this Court’s subject matter jurisdiction, that is, the ability to hear the case at all, quite apart from the ability to enter a final judgment. Defendant’s reliance on Stem is misplaced, as the jurisdictional inquiry is separate from the core/non-core inquiry that the Supreme Court considered in Stem.
This Court’s Related To Jurisdiction
The key inquiry here is whether this Court has at least “related to” jurisdiction under § 1334, or in other words, whether this matter is sufficiently “related to” the Debtors’ bankruptcy case. On this matter, Defendant correctly notes that in the post-confirmation context, the bankruptcy court’s jurisdiction is somewhat narrower than in the pre-confirmation context. (Def.’s Br. at 18-20) (citing In re Resorts Int’l, 372 F.3d 154). I am unpersuaded, however, by Defendant’s application of Resorts and its progeny to the facts in this case.
Resorts addressed the question of whether the bankruptcy court had jurisdiction over a post-confirmation dispute between the estate litigation trustee and the trustee’s accounting firm, Price Water-house. Binder, the litigation trustee, sued Price Waterhouse for malpractice, alleging that Price Waterhouse had made several errors in providing tax and accounting advice to the trustee. 372 F.3d at 158. Price Waterhouse had been retained by the trustee after the plan of the debtor, Resorts International, Inc., had been confirmed. Id. The plan provided for the formation of the litigation trust, and for the transfer of many of the debtor’s assets and several litigation claims to the trust. Id.
In examining the bankruptcy court’s jurisdiction over the malpractice action, the Third Circuit noted first that “[a]fter confirmation of a reorganization plan, retention of bankruptcy jurisdiction may be problematic.” Id. at 164-65. The court stated that the traditional test for whether a bankruptcy court had at least “related to” jurisdiction turned on whether “the dispute creates ‘the logical possibility that the estate will be affected.’” Id. at 165 (quoting In re Federal-Mogul Global, Inc., 300 F.3d 368, 380 (3d Cir.2002)). Where the plan has been confirmed, however, the estate no longer exists, so this test is not to be applied literally. See id. Looking to other cases where jurisdiction was preserved in the post-confirmation context, the Third Circuit held that “the essential inquiry appears to be whether there is a close nexus to the bankruptcy plan or proceeding sufficient to uphold bankruptcy court jurisdiction over the matter.” Id. at 166-67. Where there is a continuing trust, like the litigation trust formed in the Resorts International bankruptcy, “[m]atters that affect the interpretation, implementation, consummation, execution, or administration of the confirmed *391plan will typically have the requisite close nexus.” Id. at 167. The court acknowledged that “[t]o a certain extent, litigation trusts by their nature maintain a close connection to the bankruptcy even after the plan has been confirmed.” Id. The key inquiry, then, is “how close a connection warrants post-confirmation jurisdiction” such that the bankruptcy jurisdiction, intended to be limited by Congress in § 1334, “would not raise the specter of ‘unending jurisdiction’ over continuing trusts.” Id.
Looking to the facts of the adversary action before it, the Third Circuit held that the proceeding “lack[ed] a close nexus to the bankruptcy plan or proceeding and affeet[ed] only matters collateral to the bankruptcy process.” 372 F.3d at 169. Further,
[t]he resolution of these malpractice claims will not affect the estate; it will have only incidental effect on the reorganized debtor; it will not interfere with the implementation of the Reorganization Plan; though it will affect the former creditors as Litigation Trust beneficiaries, they no longer have a close nexus to [the] bankruptcy plan or proceeding because they exchanged their creditor status to attain rights to the litigation claims....
Id. The court also emphasized that “the potential to increase assets of the Litigation Trust and its beneficiaries does not necessarily create a close nexus sufficient to confer ‘related to’ bankruptcy court jurisdiction post-confirmation.” Id. at 170. Finally, while the plan had provided for the retention of bankruptcy jurisdiction over all actions arising from or connected to the trust agreement, the Third Circuit held that “jurisdictional retention plans cannot confer jurisdiction greater than that granted under 28 U.S.C. § 1334 or 28 U.S.C. § 157.” (Id. at 169.) As a result, the bankruptcy court did not have jurisdiction over the malpractice action. See id. at 170-71.
Although Defendant relies heavily on Resorts, I note a key factual distinction. In Resorts, the claim for malpractice arose and the action was commenced after confirmation of the plan. 372 F.3d at 158. In contrast, the action before me was brought initially by Debtors, several months prior to confirmation. As a result, this cause of action belonged to Debtors and was transferred to the Trust under the Plan. (Plan, at 19, 20; Trust Agreement § 1.1.) Moreover, the Plan specifically contemplated the continuation of this and other causes of action:
Except as otherwise provided in the Plan, the Liquidating Trust shall retain all rights on behalf of the Debtors and the Estates to commence and pursue, as appropriate, in any court or other tribunal including, without limitation, in an adversary proceeding filed in one or more of the Debtors’ Chapter 11 Cases, any and all Causes of Action, whether such Causes of Action accrued before or after the Petition Date, including, but not limited to, the actions specified herein.
(Plan, at 29.) Likewise, the Confirmation Order provides that
on the Effective Date, the Liquidating Trustee shall automatically be deemed to be substituted as plaintiff in the place of the Committee and/or the Debtors with respect to any and all pending Causes of Action (the “Pending Litigation”). The Liquidating Trustee shall succeed to all rights, benefits and protections of the Committee and/or the Debtors with respect to all such Pending Litigation and shall have standing after the Effective Date to pursue, compro*392mise and settle all claims asserted in the Pending Litigation.
(Confirmation Order, at 13 ¶ 6.)
The distinction in timing is significant. Noting this factual difference, Plaintiff urges me to reject the “close nexus” test and instead apply the holding of Pacor, Inc. v. Higgins, 743 F.2d 984 (3d Cir.1984) (overruled on other grounds). Pacor stated the oft-cited test for whether a bankruptcy court has “related to” jurisdiction over a proceeding before confirmation: “The usual articulation of the test for determining whether a civil proceeding is related to bankruptcy is whether the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy.” 743 F.2d at 994. Plaintiff argues that since this action arose pre-confirmation, I should apply the Pacor “conceivable effect” test rather than the Resorts “close nexus” test. (PL’s Br., at 9-10.) While I note that the case upon which Plaintiff relies, IT Litig. Trust v. D’Aniello (In re IT Group, Inc.), Civ.A. 04-1268-KAJ, 2005 WL 3050611 (D.Del. Nov. 15, 2005), clearly applies the “close nexus” test even though the cause of action was commenced pre-confirmation7, I agree that the Pacor test is the appropriate test. A later Third Circuit case, Geruschat v. Ernst Young LLP (In re Seven Fields Dev. Corp.), 505 F.3d 237 (3d Cir.2007), clarified the court’s previous position in Resorts:
After our present consideration of Resorts, we are satisfied that the “close nexus” test is applicable to “related to” jurisdiction over any claim or cause of action filed post-confirmation, regardless of when the conduct giving rise to the claim or cause of action occurred. We reach this conclusion because in Resorts, though we were dealing with post-confirmation rather than pre-confirmation conduct, we focused on the point of time in which the cause of action was instituted: whether it was filed in the “post-confirmation stage,” i.e., the “post-confirmation context.”
505 F.3d at 264-65 (emphasis added). Since Seven Fields, this Court has noted the limitation of the Resorts test to actions commenced after confirmation. In re SemCrude, 428 B.R. at 97 (“[Seven Fields and Resorts ] limit application of the ‘close nexus’ test to a ‘claim or cause of action filed post-confirmation.’ ”) (citing Seven Fields, 505 F.3d at 265). Therefore, I will apply the Pacor “conceivable effect” test.
Under Pacor, “[a]n action is related to bankruptcy if the outcome could alter the debtor’s rights, liabilities, options, or freedom of action (either positively or negatively) and which in any way impacts upon the handling and administration of the bankrupt estate.” 743 F.2d at 994. See also In re W.R. Grace & Co., 591 F.3d 164, 172 (3d Cir.2009). In a case applying the Pacor test to a legal malpractice action commenced by the debtor pre-confirmation but prosecuted post-confirmation, the District Court for the District of New Jersey held that the bankruptcy court had “related to” jurisdiction over the proceeding where it was “clearly contemplated in the disclosure statement, in the plan and in various motions.” Jazz Photo Corp. v. Dreier LLP, No. Civ.A. 05-5198DRD, 2005 WL 3542468, at *5 (D.N.J. Dec. 23, 2005).
The action in the case before me meets this standard, as the Plan, Trust Agreement, and Confirmation Order clearly contemplated this proceeding as a *393means of implementing the Plan. Here, in the subsection titled “Means for Implementation of the Plan,” the Plan provides that the Liquidating Trust will be formed “to administer certain post-confirmation responsibilities under the Plan, including ... those responsibilities associated with the pursuit and collection of Litigation Claims, Causes of Action, and the reconciliation and payment of Claims.” (Plan, at 19.) Included in the types of actions that the Trustee is permitted to pursue are “all actual actions or potential actions ... against customers, for Accounts Receivable.” (Id. at 30.) The Trust Agreement further clarifies that the Trust was “created to fulfill the obligations set forth in the Plan and is for the benefit of the Holders of Allowed Claims in Class 4 under the Plan.” (Trust Agreement, at 1.) Moreover, the purpose of the Trust is stated as, inter alia, “pursuing collection on the Litigation Claims and Causes of Action.” (Id. § 3.1.) Plaintiff, as liquidating trustee, was given the power to “prosecute for the benefit of the MPC Liquidating Trust all Claims, rights and Litigation Claims or Causes of Action transferred to the MPC Liquidating Trust whether or not such suits are brought in the name of the MPC Liquidating Trust, the Debtors or otherwise for the benefit of the holders of Beneficial Interests.” (Id. § 5.2.) Likewise, the Confirmation Order provides that “the Liquidating Trustee shall succeed to all rights, benefits and protections of the Committee and/or the Debtors with respect to all ... Pending Litigation.” (Confirmation Order, at 13 ¶ 6.) Finally, Article XII of the Plan specifically provides for the retention of this Court’s jurisdiction over “[a]ll Causes of Action, Avoidance Actions and other suits and adversary proceedings to recover assets of the Liquidating Trust, as successor-in-interest to the Debtors and property of the Estates ... and to adjudicate any and all other Causes of Action, Avoidance Actions, suits, adversary proceedings, motions, applications and contested matters that may be commenced or maintained pursuant to the Chapter 11 Case or this Plan.” (Plan, at 45 ¶ 13.) The Confirmation Order similarly retains jurisdiction over matters “relating to the Cases or the Plan, including, without limitation, all categories specifically set forth in Article XII of the Plan.” (Confirmation Order, at 19 ¶ 20.) It is clear that the adversary action against Defendant — an action for breach of contract and unjust enrichment to recover accounts receivable arising from Defendant’s alleged failure to pay for goods and/or services shipped by Debtors — falls into the specific categories of Pending Litigation and Litigation Claims that are vital to the implementation of the Plan and administration of the Trust. The Trust was established for the purpose of fulfilling the obligations to Debtors’ creditors under the Plan, in part by pursuing causes of action owned by Debtors and transferred to the Trust. The Plan clearly contemplated the maintenance of this action, and thus I hold that it is related to the Debtors’ bankruptcy case under Pacor and subsequent cases.
Even under the heightened “close nexus” test, courts have focused on whether the action at issue was specifically identified in and contemplated by the plan. See, e.g., In re Fairchild Corp., 452 B.R. at 532; In re BWI Liquidating Corp., 437 B.R. at 166; In re EXDS, Inc., 352 B.R. 731, 735-38 (Bankr.D.Del.2006); In re AstroPower Liquidating Trust, 385 B.R. 309, 324-25 (Bankr.D.Del.2005); In re Insilco Techs., 330 B.R. 512, 525 (Bankr.D.Del.2005); In re LGI, Inc., 322 B.R. 95, 102-04 (Bankr.D.N.J.2005). This Court has found *394an insufficient nexus where the plan describes only a broad category of causes of action that encompasses every possible claim8, and has found a close nexus where the plan describes the facts from which the cause of action arose.9 More generally, the AstroPower court held that “where ... the Plan specifically describes an action over which the court had ‘related to’ jurisdiction pre-confirmation and expressly provides for the retention of such jurisdiction to liquidate that claim for the benefit of the estate’s creditors, there is a sufficiently close nexus with the bankruptcy proceeding to support jurisdiction post-confirmation.” Id. at 325.
The language in the Plan, Trust Agreement, and Confirmation Order is sufficiently specific to convey the importance of the action to the implementation of the Plan. The Plan and Confirmation Order specifically provide for the retention of any pending causes of action commenced by Debtors and any actions against customers. The prosecution of these claims is clearly mentioned as a means of implementation, and thus unlike the malpractice claim in Resorts, the action at hand is not a “matter[ ] collateral to the bankruptcy process.” 372 F.3d at 169. Thus, even under the more stringent “close nexus” test, this Court has at least “related to” jurisdiction over this action.
Defendant’s Demand for a Jury Trial
Defendant argues that its Motion should be granted because it has demanded a jury trial, which this Court has no authority to conduct. (Def.’s Br., at 23-25.) Whether Defendant is entitled to a jury trial has no bearing on this Court’s subject matter jurisdiction and thus is irrelevant at this stage of the proceeding. Further, the proper mechanism to address this issue is through a motion to withdraw the reference. I note, however, that where a defendant is entitled to a jury trial, it is the practice of the District Court when addressing a motion to withdraw the reference, to keep proceedings related to the bankruptcy case in this Court until the matter is ready for trial. See, e.g., In re KB Toys, Inc., No. Civ.A. 06-363-KAJ, 2006 WL 1995585, at *1 (D.Del. July 17, 2006); In re Big v. Holding Corp., Civ.A. 01-233(GMS), 2002 WL 1482392, at *5 (D.Del. July 11, 2002).
Conclusion
For the foregoing reasons, I hold that this Court has subject matter jurisdiction over this action and I will accordingly deny Defendant’s Motion to dismiss.
ORDER
For the reasons set forth in the Court’s memorandum opinion of this date, Defendant’s motion (Doc. # 19) to dismiss for *395lack of subject matter jurisdiction is de^ nied.
. Fed.R.Civ.P. 12 is made applicable to this adversary proceeding by Fed. R. Bankr.P. 7012.
. The plaintiff in this case, the Liquidating Trustee of the MPC Liquidation Trust, has also filed a motion to strike an answer filed by Defendant pro se and to request a default judgment for Defendant’s failure to answer. (Doc. #18.) As Defendant has now filed a responsive pleading, i.e. this Motion to dismiss, I consider the motion to strike to be mooted.
.As used in the Plan, the term "Assets” includes "all assets of the Debtors, of any nature whatsoever, including, without limitation, all property of the Estates under and pursuant to Bankruptcy Code § 541; Cash; Causes of Action, including Avoidance Ac*387tions; rights; interests; and property, real and personal, tangible and intangible.” (Plan, at 3 ¶ 10.)
. The Plan defines “Litigation Claims” as "all Avoidance Actions and other Causes of Action of any one or more of the Debtors.” (Plan, at 8 ¶ 76.) "Cause of Action” is defined, without limitation, as "all claims as defined in section 101(5) of the Bankruptcy Code, actions, dios-es in action, causes of action, suits, debts, dues, sums of money, accounts, reckonings, bonds, bills, specialties, covenants, controversies, agreements, promises, variances, trespasses, damages, judgments, third-party claims, counterclaims and cross claims ... of the Debtors, the Debtors in possession and/or the Estates against any Person based on law or equity, including, but not limited to, under the Bankruptcy Code, whether direct, indirect, derivative, or otherwise and whether asserted or unasserted, known or unknown.” (Plan, at 4 ¶ 22.)
. " ‘Liquidating Trust Assets’ means all assets of the Debtors’ Estates that will be transferred, assigned and delivered to the Liquidating Trust as specified in the Liquidating Trust Agreement.” (Plan, at 8 ¶ 74.)
. There is a standing order in this District for the automatic reference of all title 11 proceedings to the bankruptcy judges of this District.
. See IT Group, 2005 WL 3050611, at *7 ("Because this matter affects the implementation, consummation, and execution of the bankruptcy plan, there is a close nexus to the bankruptcy sufficient to satisfy the standard set in Resorts.”) (emphasis added).
. See Insilco, 330 B.R. at 525 (no jurisdiction where plan broadly defined "Rights of Action” as "All actions, causes of action, suits, rights of action ... arising under any theory of law or equity, including, without limitation, the Bankruptcy Code, including the Avoidance Actions and all claims against Creditors or Holders of Interests, parties having dealings, relationships or transactions with or related to the Debtors, any party named or identified in the Schedules or any pleadings filed in the Chapter 11 Cases (including, but not limited to, officers and directors of the Debtors and parties other than the Released Lender parties and Released Employees), in each case held by or in favor of any of the Debtors or their estates whether or not commenced as of the Effective Date, but excluding any of the foregoing which (i) are Released Claims or (ii) related to the recovery of Settlement Proceeds, including the Star Services Litigation and the Tax Refunds.”).
. See AstroPower, 335 B.R. at 324 (jurisdiction where plan provided for the liquidating trust to prosecute "causes of action arising out of or in connection with the Debtor’s sale of stock in” the defendant corporation.). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494592/ | OPINION
ROSEMARY GAMBARDELLA, Bankruptcy Judge.
Matter Before the Court
Before the Court is a Motion filed by joint Chapter 7 Debtors Ronald and Ethel Langman seeking to dismiss the Adversary Complaint of Plaintiff Jenny Berse, Esq., for failure to state a claim upon which relief can be granted, pursuant to Federal Rule of Civil Procedure 12(b)(6) and Federal Rule of Bankruptcy Procedure 7012. Ms. Berse’s Complaint seeks to except from discharge certain attorney’s fees owed to her by co-debtor Ethel Lang-man arising out of legal representation that Ms. Berse provided her in a matrimonial action in New Jersey Superior Court. Her Complaint argues for nondischarge-ability of debts allegedly owed to her pursuant to an Order of the state court issued by Hon. Nancy Sivilli, J.S.C., pursuant to 11 U.S.C. § 523(a)(5) and (a)(15). A hearing was held on June 27, 2011 and this Court reserved decision.
This Court has jurisdiction pursuant to 28 U.S.C. §§ 157 and 1334. This is a core matter pursuant to 28 U.S.C. § 157(b)(2)(I). The following constitutes this Court’s findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052.
Statement of Facts and ProCedural History
I. Background
a. The Divorce Proceeding and Ms. Berse’s Charging Lien
Co-Debtors Ronald and Ethel Langman were married on September 2, 2000. Berse Cert. Ex. B, at 1, ECF No. 5-2. Three children were born of the marriage. In or about 2009, the Langmans initiated divorce proceedings in the Superior Court of New Jersey, Chancery Division: Family Part, Essex County, before the Hon. Nancy Sivilli, J.S.C. (Docket No. FM-07-1401-09). Adv. Compl. ¶ 1, ECF No. 1.
At some point in or prior to March 2010, Ethel Langman retained Jenny Berse, *397Esq., as her matrimonial counsel. Compl. ¶1.
On January 26, 2010, during the pen-dency of the divorce matter, the Debtors listed their marital residence at 35 Hampton Terrace, Livingston, New Jersey, for sale with Coldwell Banker Realtors at a listing price of $495,000.00. Compl. ¶2.
On March 16, 2010, Ms. Berse filed a motion with the Chancery Division seeking to be relieved as counsel and requesting an order for a charging lien for attorney’s fees in the amount of $8,893.60. That same day, March 16, 2010, Ms. Berse sent a bill for her services to Ms. Langman for the same amount. Ms. Berse asserts that her correspondence complied with N.J.S.A. 2A:13-6 and Rule l:20A-6 and included the option to pursue fee arbitration. Id. ¶¶ 3-4.
On March 30, 2010, Ms. Berse received a fax and e-mail from Joanna D. Brick, Esq., notifying her that Ms. Brick had been retained as matrimonial counsel by Ethel Langman. Id. ¶ 5.
On April 19, 2010, Judge Sivilli entered an Order for Ms. Berse to be relieved as counsel and awarding an attorney’s charging lien on her behalf in the amount of $8,893.60 plus interest. The Order stated that Ethel Langman was now a pro se plaintiff. Compl. Ex. 2 ¶ 2. The Order further stated:
Upon the sale of any marital property, including the sale of the marital residence, plaintiffs [Ethel Langman’s] share of the net proceeds from such sale after paying the mortgage and home equity line of credit shall be paid over to Petitioner [Jenny Berse] to be held in escrow pending the outcome of the Fee Arbitration Committee or judicial determination and enforcement of Petitioner’s Charging Lien.
Id. ¶ 6. The Order also stated:
The parties, their fiduciaries, agents and representatives, including any current and succeeding attorneys!,] are hereby restrained from dissipating or otherwise disposing of any proceeds paid to the plaintiff [Ethel Langman] as a result of settlement of judicial determination in the matrimonial matter, pending the outcome of the Fee Arbitration Committee or judicial determination and enforcement of Petitioner’s [Jenny Berse’s] Charging Lien.
Id. ¶ 5.
By separate order dated April 19, 2010, Defendant Ronald L. Langman’s application for counsel fees and sanctions against Ms. Berse was denied by Judge Sivilli.
b. The Marital Settlement Agreement
On April 26, 2010, the Debtors executed a Marital Settlement Agreement. Berse Cert. Ex. B., at 1. That agreement intended to resolve all issues of alimony, child support, distribution of property, payment of debts, all other financial and/or property rights and counsel fees “as well as all other rights, remedies, privileges and obligations arising out of the marital relationship or otherwise.” Article VI of the agreement, titled “Debts & Obligations,” contained a subsection titled “Marital Debt” in which both Ronald and Ethel Langman set their initials to a clause stating:
The parties agree that attorney’s fees Wife incurred with Joanna D. Brick, Esq. and Husband incurred with Adam E. Jacobs, Esq. in connection with their representation of the parties’ divorce proceedings shall not be discharged in bankruptcy.
Id. at 21 ¶ 6.1. An additional clause, handwritten but initialed by both Debtors, states:
Under no circumstances shall Husband’s or Wife’s attorney be permitted to seek *398or obtain counsel fees from Wife [or] Husband for fees incurred in connection with divorce proceedings, except for post-judgment matters.
Id. The parties likewise added and initialed a provision stating: “Parties shall adhere to all directives of their bankruptcy counsel in order to obtain a joint petition being filed prior to the parties’ appearances for the entry of the final judgment of divorce.” Id. at 22. Finally, Article VIII, “Counsel Fees,” provides as follows:
Each party agrees to pay and be responsible for the payment of their own counsel fees and costs incurred in connection with these divorce proceedings. Should an attorney’s lien attach to the parties’ joint assets, the party who incurred said lien shall be responsible therefor and shall indemnify and hold harmless the corresponding party.
Id. at 24 ¶ 8.1.
On May 12, 2010, the Debtors took their marital residence off the market. Compl. ¶ 13 & Ex. 1. They have since stated that the property is currently in foreclosure. Debtors’ Br. ¶ 4, ECF No. 4-1.
c. The Longmans’ Bankruptcy Filing
On May 21, 2010, the Debtors filed a joint petition for relief under Chapter 7 of title 11 of the United States Code (“Bankruptcy Code”). Compl. ¶ 14. A debt of $8,900.00 to Jenny Berse, Esq. was listed on Schedule F, “Creditors Holding Unsecured Nonpriority Claims,” as a debt of the co-debtor Ethel Langman. Pet. at 28, No. 10-25658 (Bankr. D.N.J. May 21, 2010), ECF No. 1.
The Debtors were formally divorced on May 24, 2010, as memorialized in a Dual Judgment of Divorce issued by Judge Siv-illi. Berse Cert., Ex. C.
On May 25, 2010, Benjamin A. Stanziale, Esq. was appointed Chapter 7 Trustee, and on February 15, 2011, the Trustee filed a Report of No Distribution.
II. The Present Adversary Proceeding
a. The Complaint
On September 8, 2010, Ms. Berse filed an Adversary Complaint before this Court seeking a determination that her attorney’s charging lien in the amount of $8,893.60 is a nondischargeable support obligation and/or marital debt pursuant to 11 U.S.C § 523(a)(5) and (a)(15). Compl. ¶ 16. In her Complaint, she cites In re Maddigan, 312 F.3d 589 (2d Cir.2002), for the proposition that an award of legal fees creates a debt that is not dischargeable in bankruptcy. Ms. Berse asserts that 11 U.S.C. § 522(f)(1)(A) permits a debtor to avoid the fixing of a judicial lien, other than a lien that secures a debt of the kind specified in § 523(a)(5) of the Bankruptcy Code. Plaintiff asserts the Debtors were fully aware of the charging lien but did not make reference to it in their bankruptcy filing or file any motion to determine its dischargeability. She also asserts the Debtors failed to avail themselves of their option to try to have the lien avoided pursuant to 11 U.S.C. § 522(f)(1)(A) and knowingly failed to disclose the attorney charging lien. Id. ¶¶ 17-18.
Ms. Berse attached the following Exhibits to the Complaint:
1. A residential real estate listing from the Garden State Multiple Listing Service including the Debtors’ marital home at 35 Hampton Terrace, Livingston, NJ, showing, inter alia, that the home was withdrawn from the market on May 12, 2010. Compl. Ex. 1.
2. A copy of Judge Sivilli’s Order dated April 19, 2010, relieving Ms. Berse as counsel for Ethel Langman and *399granting Ms. Berse an attorney’s charging lien. Compl. Ex. 2.
3. A copy of a second Order signed by Judge Sivilli on April 19, 2010, denying Ronald Langman’s request for fees and sanctions against Jenny Berse. Compl. Ex. 3.
4. A copy of a letter sent from Ms. Berse to Ronald and Ethel Lang-man’s bankruptcy counsel, Mr. San-to Bonanno, Esq. and the Chapter 7 trustee Mr. Benjamin Stanziale, asserting that her attorney’s lien is a nondischargeable “statutory lien” that should be removed from Schedule F (for unsecured nonpriority claims) and advising him that if the debt is not removed, Ms. Berse would file an adversary proceeding. Compl. Ex. 4.
b. Pleadings on the Present Motion to Dismiss
1. The Debtors’ Motion
On September 29, 2010, Debtors Ronald and Ethel Langman filed a Motion to Dismiss the Adversary Complaint. In their Brief, they argue two main points. First, they assert that Ms. Berse’s attorney’s lien is not entitled to an exception from discharge under § 523(a)(5) or (a)(15) because the debt in question is not owed by a debtor to a spouse, former spouse, or child, but is instead a debt owed by one co-debtor to her attorney. The Debtors underline this point by noting that in In re Maddigan, a case cited by Plaintiff, the legal fees held nondischargeable by the court were held to be a debt the debtor owed to his children and was in the nature of support. Debtors’ Br. ¶¶ 2, 5, 6.
Second, the Debtors assert no matrimonial court order has ever required Ronald Langman to pay Ethel Langman’s legal fees. Id. ¶ 2. On the contrary, Debtors note that Judge Sivilli’s Order of April 19, 2010 requires attorneys’ fees to be paid from proceeds of the sale of the marital home. That home, it is asserted by Debtors, has since lost value and is now in foreclosure and fully encumbered with debts to first and second mortgagee-banks. Here, Debtors assert the property has a value of $430,000.00 with Chase Home Finance holding a first mortgage of $361,000.00 and Wells Fargo Bank, N.A. a second lien of $30,000.00. Id. ¶ 4. Debtors assert there will therefore be no closing as envisioned in the court order; sale of the home after closing costs will yield no payment to Debtors and will likely yield too little money to pay any creditors, including Ms. Berse. E. Langman Cert. ¶¶2, 4, ECF No. 4-2.
2. Plaintiff’s Opposition
On October 18, 2010, Ms. Berse filed her Opposition to the Debtors’ Motion to Dismiss, arguing several points in the accompanying brief. Pl.’s Opp’n Br., ECF No. 5-1.
First, Plaintiff argues her attorney’s lien does fall within § 523(a)(5) and (a)(15) because Judge Sivilli’s court order specifically stated that the lien should be paid from any proceeds paid to Ethel Langman. Further, Plaintiff asserts Judge Sivilli’s Order clearly restrained the Debtors from “dissipating or otherwise disposing of any proceeds paid to [Ethel Langman] as a result of settlement or judicial determination in the matrimonial matter.” Pl.’s Opp’n Br. ¶¶ 1-2.
Second, Plaintiff alleges Debtors and their matrimonial attorneys “collaborated” to avoid paying fees due to her. Id. ¶ 3 (identifying those attorneys as Joanna D. Brick, Esq., as counsel for Mrs. Langman, and Adam E. Jacobs, Esq. as counsel for Mr. Langman). Plaintiff argues a debtor’s ability'to avoid a judicial lien pursuant to § 522(f)(1)(A) does not apply to support *400debts specified in § 523(a)(5) and that In re Maddigan makes an award of legal fees nondischargeable. Plaintiff asserts that here, the Debtors were fully aware of the charging lien but made no reference to it in their bankruptcy filing. Plaintiff asserts that these facts suggest that the Debtors knew of the lien and collaborated not to pay it. Id. ¶¶ 4-5.
Third, Plaintiff asserts the Debtors knowingly misrepresented their income, expenses, and assets in the Petition, which they allegedly represented differently in other filings, including in a support order signed June 15, 2009, to which reference was made in the Marital Settlement Agreement. Id. ¶ 6. Specifically, Plaintiff asserts, in relevant part, as follows:
1. Defendant Ronald Langman listed income of $9,583.33 per month on Part II of his Amended Chapter 7 Statements, but actually earns $10,833.33 per month based on three other sources: his 2009 paystubs, his original Schedule I statement, and the Marital Settlement Agreement, Berse Cert. ¶ 14;
2. In Schedules B and C, the Debtors listed as exempt personal property only furniture worth $200.00 and books and CDs worth $150.00, whereas the Marital Settlement Agreement listed high-definition TVs, china, silverware and leather furniture, Berse Cert. ¶¶ 17-18;
3. Debtors listed $400.00 worth of clothing in Schedule J when in fact Ronald Langman is “an attorney in New York and has a full wardrobe of suits, sport jackets, dress pants, dress shirts, ties and shoes ... no doubt valued at significantly higher than $400,” Berse Cert. ¶ 20;
4. Debtors failed to list funds held in an IRA to be distributed to their children in the appropriate Schedule, Berse Cert. ¶ 24; and
5.Credit card debts in the approximate amount of $39,000.00 which were to be divided and paid when the marital home was sold in accordance with the Marital Settlement Agreement, Berse Cert. ¶ 25.
Plaintiff likewise asserts the Debtors had “no intention” of paying their mortgage based on the language of the Marital Settlement Agreement, which stated “[t]he parties anticipate that in light of their bankruptcy petition, the marital residence shall be foreclosed upon. Based on the foregoing, neither party shall have an obligation to continue paying the mortgage and/or HELOC pending foreclosure.” Berse Cert. ¶ 15.
Finally, Plaintiff asserts payment of alimony to Ethel Langman while “[she is permitted] to live in the marital residence rent free” constitutes a further attempt to frustrate and hide the equitable distribution of assets. Berse Cert. ¶ 23, see also Berse Cert. Ex. B (“Marital Settlement Agreement”).
c. The Hearing Held June 27, 2011
On June 27, 2011, this Court conducted a hearing on the Motion to Dismiss. Counsel for the Debtors argued that as no order exists from the Superior Court of New Jersey ordering Ronald Langman to pay the attorney fees of Ethel Langman, the Complaint should be dismissed as to Ronald Langman.
As to Ethel Langman, counsel urged that as Ms. Berse’s claim is a direct claim against her own client, Ethel Langman, the claim does not fall within § 523(a)(5) and § 523(a)(15).
Ms. Berse argued that the Complaint raises allegations of “collusion” and concealment against the Debtors. Berse as*401serts there is evidence of Debtors misrepresenting Ronald Langman’s income by $1,300.00 per month, and misrepresenting monthly mortgage payments as $6,500.00 instead of $3,900.00 per month, in addition to failing to list in the bankruptcy schedules a $9,000.00 IRA held by Ronald Lang-man and the asserted priority statutory attorney’s lien held by Plaintiff. Debtors’ counsel replied that Plaintiffs claim was properly listed in the Debtors’ schedules as a non-priority unsecured claim, which is dischargeable in bankruptcy.
Debtors’ counsel conceded that some of Ms. Berse’s attorney’s fees were attributable to services in pursuit of Ethel Lang-man’s alimony and support claims, in addition to claims for equitable distribution— such as obtaining pendent lite support orders. Debtors’ counsel, however, insisted that such services constituted only a small portion of the services performed by Ms. Berse.
Ms. Berse urged that her attorney’s lien is a priority statutory lien which attached pre-petition on April 19, 2010, and which was properly filed in Trenton, New Jersey. Ms. Berse also argued that Ethel Lang-man got payment in kind — akin to a “settlement” against which Berse’s charging lien should attach- — including that Ms. Langman continues to reside in the residence without paying the mortgage. The Court here notes the Chapter 7 trustee has formally abandoned the estate’s interest in the property at 35 Hampton Terrace, Livingston, New Jersey and issued a Chapter 7 Trustee Report of Non-Distribution in this case.
d. Subsequent Pleadings
1. Debtors’ Letter Brief
On July 13, 2011, Debtors submitted a supplemental letter brief discussing two bankruptcy cases from this district and making several points in response to Ms. Berse’s allegations of collusion and concealment. Debtors’ Letter Br., July 13, 2011, ECF No. 8. First, Debtors cite Clair, Griefer LLP v. Prensky (In re Prensky) (Prensky I), 416 B.R. 406 (Bankr.D.N.J.2009) (Kaplan, J.), affd sub nom. Prensky v. Clair Greifer LLP (Prensky II), 2010 WL 2674039 (D.N.J. June 30, 2010) (Wolfson, J.), asserting that attorney’s fees in that case were held nondischargeable because the fees were effectively “owed to or recoverable by the former spouse or the child of the debtor,” and were merely payable to the firm. Additionally, the court held it was clear that if the debt was found to be dischargeable, the law firm had the right to pursue the non-debtor spouse, their direct client, for unpaid attorneys’ fees. Debtors distinguish Prensky I from the case at bar by noting that the present case concerns a debt owed directly by a co-debtor client to her lawyer. Second, Debtors discuss Sodini & Spina, L.L.C. v. DiBattista (In re DiBattista),1 also from this District, in which Bankruptcy Judge Steckroth dismissed a claim for nondis-chargeability of attorneys’ fees was based on a pre-petition agreement not to discharge a certain debt in bankruptcy, holding that such agreements are against public policy. Debtors’ Letter Br. 1 (citing Mary Pat Gallagher, Lawyer Seeks to Hold Client to Alleged Vow to Pay Fees even if Bankrupt, N.J.L.J., Feb. 1, 2010).
As for Ms. Berse’s allegations of collusion and concealment, Debtors assert that even assuming, arguendo, the allegations were true, they have no bearing on the question of nondischargeability. Finally, Debtors take issue with Ms. Berse’s calculations of their mortgage payment debt, *402asserting that she erred by looking at the Means Test which uses a certain computer program.
2. Ms. Berse’s Letter Reply
On July 25, 2011, Ms. Berse filed a Letter Brief in Response. PI. Letter Br., July 25, 2011, ECF No. 9. In it, Ms. Berse asserts that her attorney’s fees constitute a nondischargeable “domestic support obligation” pursuant to 11 U.S.C. § 101(14A) and § 523(a)(5) as the fees were incurred to secure alimony and child support and that Prensky I supports her claim. She distinguishes the present proceeding from In re DiBattista, noting that here no pre-petition agreement took place. Ms. Berse again asserts that an attorney charging lien is a statutory lien not dischargeable in bankruptcy and reasserts her allegations of collusion and concealment, now explicitly characterizing them as fraud.
S. Debtors’ Second Letter to the Court
On October 12, 2011, Debtors submitted a second supplemental letter bringing a recently decided case to the Court’s attention and asking the Court to consider same. Debtors’ Letter Br., Oct. 12, 2011, ECF No. 10. In it, the Debtors reference Pemini v. Pemini (In re Budd Larner, P.C.), 2011 WL 4483489 (N.J.Super.Ct.App.Div. Sept. 29, 2011) (per cu-riam), which found an attorney charging lien unenforceable by a husband’s attorneys against a former marital residence owned formerly by the parties. The Debtors argue that this decision has a direct impact on the immediate matter and asked the Court to consider that case in making its decision.
L Ms. Berse’s Second Letter Reply to the Court
On February 2, 2012, Ms. Berse submitted her response to the Debtors’ second letter to the Court. PI. Letter Br., Feb. 2, 2012, ECF No. 11. In it, she distinguished Pernini v. Pernini from the immediate case as well as addressing its precedential value in this Court. She additionally reiterated her claims that the Debtors were less than honest in their bankruptcy filing, both in their reported indebtedness and also in their intention. Ms. Berse claimed the Debtors settled their divorce and filed for bankruptcy in part in collusion to hide money and assets rather than satisfying the attorney’s charging lien.
Legal Standards
I. Standard for a Motion to Dismiss
Federal Rule of Civil Procedure 8(a), made applicable in bankruptcy court by Federal Rule of Bankruptcy Procedure 7008, requires that a “pleading that states a claim for relief must contain:
(1) a short and plain statement of the grounds for the court’s jurisdiction, unless the court already has jurisdiction and the claim needs no new jurisdictional support;
(2) a short and plain statement of the claim showing that the pleader is entitled to relief; and
(3) a demand for the relief sought, which may include relief in the alternative or different types of relief.”
Fed. R. Civ. P. 8(a); Fed. R. Bankr.P. 7008.
Parties seeking to dismiss a complaint for failure to state a claim may do so on motion pursuant to Federal Rule of Civil Procedure 12(b)(6), which is made applicable in bankruptcy court by Federal Rule of Bankruptcy Procedure 7012. Fed.R.Civ.P. 12(b)(6); Fed. R. Bankr.P. 7012.
When considering a motion to dismiss, a court must accept all well-pleaded allegations in the complaint as true, view them in the light most favorable to the plaintiff, and determine whether, under any reasonable reading of the complaint, the plaintiff may be entitled to relief. Phillips v. Cnty. *403of Allegheny, 515 F.3d 224, 231 (3d Cir.2008). To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to state a claim for relief that is plausible on its face. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 1973, 167 L.Ed.2d 929 (2007); Fowler v. UPMC Shady side, 578 F.3d 203, 210 (3d Cir.2009). “A claim has facial plausibility when the pleaded factual content allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 663, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (citing Twombly, 550 U.S. at 556, 127 S.Ct. 1955).
The United States Supreme Court has set forth a two-step analysis for adjudicating a motion to dismiss. Iqbal, 129 S.Ct. at 1949-50. First, a court should identify and reject labels, conclusory allegations, and formulaic recitation of the elements of a cause of action. Second, a court must draw on its judicial experience and common sense to determine whether the factual content of a complaint plausibly gives rise to an entitlement to relief. The court must infer more than the mere possibility of misconduct. Id. This does not impose a “probability requirement” at the pleading stage, but requires a showing of “enough facts to raise a reasonable expectation that discovery will reveal evidence of the necessary element.” Phillips, 515 F.3d at 234 (quoting Twombly, 550 U.S. at 556, 127 S.Ct. 1955).
In deciding motions to dismiss under Rule 12(b)(6), courts generally consider only the allegations in the complaint, exhibits attached to the complaint, matters of public record, and documents that form the basis of the claim. In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1426 (3d Cir.1997). A court may also take judicial notice of a prior judicial opinion. McTeman v. City of York, 577 F.3d 521, 526 (3d Cir.2009); Buck v. Hampton Twp. Sch. Dist., 452 F.3d 256, 260 (3d Cir.2006).
II. Standard for Nondischargeability of Matrimonial Obligations Under 11 U.S.C. § 523(a)(5) and (a)(15)
a. The General Standard
The United States Supreme Court has held that the primary purpose of the Bankruptcy Code is to provide a “fresh start” to the “honest but unfortunate debtor.” Grogan v. Garner, 498 U.S. 279, 286-87, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). As a result, in a trial on the merits, the creditor bears the burden of proving that a debt is nondischargeable under § 523(a) under a preponderance of the evidence standard, and “exceptions to discharge are strictly construed against creditors and liberally construed in favor of debtors.” Ins. Co. of Am. v. Cohn (In re Cohn), 54 F.3d 1108, 1113 (3d Cir.1995); see also Grogan, 498 U.S. at 287-88, 111 S.Ct. 654.2
1. Section 523(a)(5)
Section 523(a)(5) of the Bankruptcy Code provides an exception from discharge for any debt for a “domestic support obligation.” 11 U.S.C. § 523(a)(5). “Domestic support obligation” is defined in § 101(14A) as a debt 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
*404(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. § 101Q4A).
Thus, the elements that must be satisfied for a domestic support obligation to arise are as follows: (i) the payee of the obligation must be either a governmental unit or a person with a particular relationship to the debtor or a child of the debtor; (ii) the nature of the obligation must be support; (iii) the source of the obligation must be an agreement, court order, or other determination; and
(iv)the assignment status of the obligation must be consistent with paragraph (D).
In re Anthony, 453 B.R. 782, 786 (Bankr.D.N.J.2011) (Kaplan, J.). The amendments made by the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), Pub.L. No. 109-08, 119 Stat. 23, “did not alter [this] standard for determining whether an obligation is in the nature of support.” Id. (citing Taylor v. Taylor (In re Taylor), 455 B.R. 799, 804-05 (Bankr.D.N.M.2011)).
“Whether something is actually in the nature of support is [therefore] a question of federal bankruptcy law, and not state law.... Courts have held that the ‘label applied to the obligation by the [state] court or the parties is not necessarily controlling for Bankruptcy Code purposes.’ ” LaVergne v. LaVergne (In re LaVergne), 2011 WL 1878093, at *2 (Bankr.D.N.J. May 17, 2011) (Ferguson, J.) (quoting Werthen v. Werthen (In re Werthen), 329 F.3d 269, 272-74 (1st Cir.2003)).
The Third Circuit Court of Appeals has noted that
whether an obligation is in the nature of alimony, maintenance or support, as distinguished from a property settlement, depends on a finding as to the intent of the parties at the time of the settlement agreement.... That intent can best be found by examining three principal indicators .... First, the court must examine the language and substance of the agreement in the context of surrounding circumstances, using extrinsic evidence if necessary.... [Second, the court must examine] the parties’ financial circumstances at the time of the settlement. ... Third, the court should examine the function served by the obligation at the time of the divorce or settlement. An obligation that serves to maintain daily necessities such as food, housing and transportation is indicative of a debt intended to be in the nature of support.
Gianakas v. Gianakas (In re Gianakas), 917 F.2d 759, 762-63 (3d Cir.1990).
*405
2. Section 523(a)(15)
Section 523(a)(15) applies to non-support obligations arising out of a divorce or separation, excepting from discharge any debt
to a spouse, former spouse, or child of the debtor and not of the kind described in paragraph (5) that is incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record, or a determination made in accordance with State or territorial law by a governmental unit[.]
11 U.S.C. § 523(a)(15). This provision has been read to encompass a range of matrimonial debts, including obligations arising out of property settlement agreements and equitable distribution judgments. In re Clouse, 446 B.R. 690, 707 n. 58 (Bankr.E.D.Pa.2010) (Fehling, J.) (holding that nondischargeability claims for equitable distribution debts must be brought under § 523(a)(15), not (a)(5), as equitable distribution is not included in the definition of “domestic support obligation” under § 101(14A)); accord Lawrence v. Lawrence (In re Lawrence), 237 B.R. 61, 83, 86-87 (Bankr.D.N.J.1999) (Stripp, J.).
b. Changes Brought About by BAPC-PA, as Interpreted in this District
The current statutory language of § 101Q4A), § 523(a)(5) and § 523(a)(15) is the result of amendments enacted as part of the BAPCPA amendments. Courts have found that BAPCPA produced two significant changes in the law governing the nondischargeability of matrimonial debts.
1. Expanded Applicability of § 523(a) (15)
First, BAPCPA eliminated two balancing tests that had formerly provided debtors with defenses to nondischargeability for non-support debts based on (1) whether the debtor would be able to pay the debt and (2) whether discharging the debt would result in a benefit to the debtor that would outweigh the detrimental consequences to the former spouse or child. Gilman v. Golio (In re Golio), 393 B.R. 56, 61 (Bankr.E.D.N.Y.2008) (Eisenberg, J.). The elimination of these defenses was intended to reflect Congress’s strong policy in favor of protecting ex-spouses and children and to cover any matrimonial debts that “should not justifiably be discharged.” In re LaVergne, supra, at *3 (citing, inter alia, In re Crosswhite, supra).
As a practical consequence, it is now no longer necessary for bankruptcy courts to determine the exact extent to which a state court matrimonial judgment constitutes a “domestic support obligation” if the plaintiff can demonstrate that the judgment would be nondischargeable in any event under § 523(a)(15) as a debt that is (1) owed to “a spouse, former spouse, or child of the debtor” and that was (2) “incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record.” In re Golio, 393 B.R. at 62; see also Prensky II, supra, at *8 (affirming the bankruptcy court’s finding that a debt incurred in a divorce decree was nondis-chargeable under (a)(15) irrespective of whether it was a “domestic support obligation”); Tarone v. Tarone (In re Tarone), 434 B.R. 41, 49 (Bankr.E.D.N.Y.2010) (Craig, C.J.) (“[Ujnder BAPCPA, all debts owed to a spouse, former spouse, or child of a debtor are nondischargeable if incurred in the course of a divorce proceeding, notwithstanding the debtor’s ability to pay the debt or the relative benefits and detriments to the parties.”); Monastra v. Monastra (In re Monastra), 2010 WL 3937354 (Bankr.E.D.Pa. Oct.6, 2010) (Frank, J.) (citing Tarone, supra) (finding *406counsel fees awarded to a non-debtor spouse by matrimonial court order nondis-chargeable under § 523(a)(15) whether or not they are domestic support obligations under (a)(5)). As Judge Eisenberg noted in Golio,
In individual Chapter 7 and 11 cases, the distinction between a domestic support obligation and other types of obligations arising out of a marital relationship is of no practical consequence in determining the dischargeability of the debt.... The enactment of subsection 523(a)(15), and the increase in the scope of the discharge exception effected by the 2005 amendments, expresses Congress’s recognition that the economic protection of dependent spouses and children under state law is no longer accomplished solely through the traditional mechanism of support and alimony payments.... Property settlement arrangements are often “important components of the protection afforded individuals who, during the marriage, depended on the debtor for their economic well-being.”
In re Golio, 393 B.R. at 61 (citing Collier on Bankruptcy ¶ 523.21 (Alan N. Resnick & Henry J. Sommer, eds. 15th ed. rev.)).
2. Expansion of Standing for Third Parties
Another result of the new statutory framework under BAPCPA is that third parties now have greater standing to bring nondischargeability claims for divorce-related debts under both § 523(a)(5) and (a)(15). Before the passage of BAPC-PA, courts in this Circuit and many others had already broadly interpreted § 523(a)(5) to provide an exception from discharge for certain debts to third parties, such as law firms, when the debts were incurred by the spouse, ex-spouse, or child of the debtor in furtherance of domestic support obligations, on the principle that “dischargeability must be determined by the substance of the liability rather than its form.” Falk & Siemer, LLP v. Maddigan (In re Maddigan), 312 F.3d 589, 593 (2d Cir.2002) (citing Pauley v. Spong (In re Spong), 661 F.2d 6, 9 (2d Cir.1981)) (holding that “[t]he fact that the debt is payable to a third party (here, [a law firm]) does not prevent classification of that debt as being owed to Maddigan’s child”); see Allen v. Eisenberg (In re Eisenberg), 18 B.R. 1001, 1003 (Bankr.E.D.N.Y.1982) (Párete, J.) (“The apparent intent and purpose of 11 U.S.C. § 523(a)(5) is to prevent a debtor from discharging his responsibilities to an ex-spouse or children, even to the extent that such support was in the form of a debt to be paid to a third party.”); see also In re Papi supra, 427 B.R. at 462 (citing, inter alia, In re Maddigan, 312 F.3d at 597) (noting that “a majority of courts have held nondischargeable under Section 523(a)(5) awards of attorney’s fees incurred by a spouse, former spouse, or child in dissolution or support litigation, notwithstanding a provision for direct payment to the attorney”); Romeo v. Romeo (In re Romeo), 16 B.R. 531, 536 (Bankr.D.N.J.1981) (DeVito, J.) (“Legal fees and costs expended by defendant spouse for enforcement of the nondiseharged/nondis-chargeable debts are similarly held to be nondischargeable”).
Post-BAPCPA, in Prensky I, Judge Kaplan applied this same principle of “substance over form” to an (a)(15) claim, holding the intent of the BAPCPA amendments was to “increase the scope of the discharge exception effected by the 2005 amendments and not limit the protection to ... spouses, former spouses and children of the debtor.” Prensky I, 416 B.R. at 410 (granting standing to a former spouse’s law firm under (a)(15) to recover legal fees from the debtor, pursuant to an order of the matrimonial court, whose ex*407plicitly stated purpose was to “level the playing field” for the benefit of the less moneyed wife and penalize the debtor husband for failing to abide by numerous matrimonial court orders, including pendente lite support orders as well as the terms of the divorce judgment itself).
On appeal, Judge Wolfson affirmed the Bankruptcy Court’s decision. The District Court held that since courts were no longer required to evaluate the debtor’s ability to pay as a factor in a § 523(a)(15) analysis, the focus is primarily the nature of the indebtedness. Prensky II, supra, at *4-6. Relying on In re Golio, supra, 393 B.R. 56, Judge Wolfson upheld the Bankruptcy Court’s determination of nondischargeability pursuant to § 523(a)(15), supporting the “substance over form” approach and finding that even though the indebtedness was made payable to a third party, the divorce decree had created a debt, fully enforceable as a judgment of the domestic relations court, and thus the debt was incurred at the time of the divorce and nondischargeable pursuant to § 523(a)(15). Id. at *8. The District Court went further and held that “even if the Bankruptcy Court had characterized the [indebtedness] as a § 523(a)(5) domestic support obligation, the same outcome would result,” despite the debtor’s argument that the indebtedness was not in the “nature of support” because it was not so characterized in the divorce court’s decree. Judge Wolf-son rejected that argument, citing § 101(14A)(B) and holding that the substance of the divorce court’s decision, which contained references to “the less monied spouse” and its intent to level the playing field, created a nondischargeable domestic support obligation pursuant to § 523(a)(5). Id. at *8-9.
In other Circuits, courts have interpreted the language of § 523(a)(5) and (a)(15) more narrowly, both pre- and post-BAPC-PA, and have not expressly adhered to the equitable doctrine of “substance over form” that guides decisions in this Circuit. For an incisive review of the three divergent lines of authority governing bankruptcy courts’ varying treatment of § 523(a)(5) cases involving domestic support obligations payable directly to third parties such as law firms, both pre- and post-BAPCPA, see Kassicieh v. Battisti (In re Kassicieh), 425 B.R. 467, 471-81 (Bankr.S.D.Ohio 2010).3 See also Leo, Warren, Rosenfield, Katcher, Hibbs & Windsor, P.C. v. Brooks (In re Brooks), 371 B.R. 761, 766 (Bankr.N.D.Tex.2007) (holding the BAPCPA amendments “unambiguously limited the parties to whom a non-dischargeable divorce-related debt may be owed under section 523(a)(15)” to the “spouse, former spouse, or child of the debtor”).
Judge Kaplan, in Prensky I, noted the difference between the facts before it and the Brooks case:
*408In Brooks, the law firm sued the debtor and the former spouse for fees during the pendency of a divorce action. The court awarded fees to the law firm, payable by each party, thereby making the debt at issue there “recoverable by” only the law firm. The debt was not awarded or owed to either spouse but rather payable and owed by each of them to the law firm. Clearly, under those circumstances, the fees were not of the kind owed to a “spouse, former spouse or child of the debtor.” This stands in marked contrast to the facts in the case at bar, where the matrimonial court expressly ruled that could fees were being awarded to Ms. Prensky to “level the playing field.” Accordingly, this Court is neither bound nor persuaded by the Brooks case.
416 B.R. at 410.
Analysis and Opinion of Law
I. The § 523(a)(5) Claim
Here, the parties have stipulated that at least some of Ms. Berse’s legal fees are attributable to services rendered in furtherance of alimony, maintenance, or support. In the hearing held before this Court on June 27, 2011, counsel for the Debtors expressly declined to contest Ms. Berse’s assertion that at least a small portion of her fees were for negotiations over the terms of pendente lite support orders.
However, the threshold standard for nondischargeability of domestic support obligations under the Bankruptcy Code, as outlined in § 101(14A), requires that the debt be “owed to or recoverable by a spouse, former spouse, or child of the debtor or such child’s parent, legal guardian, or responsible relative; or a governmental unit.” § 101(14A)(A). Ms. Lang-man’s debt to Ms. Berse does not meet this requirement. First, it is a debt that was incurred by Ms. Langman in furtherance of her own maintenance or support (or for that of her own children). Second, pursuant to Judge Sivilli’s Order establishing the lien, the debt is owed to or recoverable by Ms. Berse alone, not Ms. Langman or her children.
Without meeting this threshold requirement, the debt to Ms. Berse simply cannot fall within the scope of the revised statute, whose goal was to protect the interests of spouses and children who had relied on the debtor for their well-being during the course of the marriage. See Golio, supra, 393 B.R. at 61. The debt owed to Ms. Berse is not a debt that was ever owed by a debtor to his or her former spouse or child: it is simply a legal bill, owed by one co-Debtor spouse to her own attorney. Even when the statute is interpreted broadly under the Prensky cases’ adoption of the equitable “substance over form” principle, the Plaintiffs claim for nondis-chargeability under § 523(a)(5) must fail as a matter of law and the Motion to Dismiss is granted as to that claim.
II. The § 523(a) (15) Claim
The Plaintiff faces a similar obstacle in her claim brought under § 523(a)(15). As a threshold matter, she must demonstrate that her non-support-related legal fees are a “debt to a spouse, former spouse, or child of the debtor.” § 523(a)(15). As with the support-related debts, Plaintiff has failed to demonstrate this. The non-support-related component of the debt, like the support-related component, was in fact incurred by Ms. Langman herself, and the debt is owed to Ms. Berse alone, not to Ms. Langman or her children.
Judge Sivilli’s Order of April 19, 2010 granting the charging lien stated specifically, in paragraph 6, that payment of the lien should be drawn from Ethel Lang-*409man’s share of the proceeds from the sale of the marital residence. The Order did not require Ronald Langman to pay any portion of the lien, and the Order was not issued to impose any penalty or sanction against him (unlike in Prensky) or with any stated purpose of providing economic support to Ethel Langman. As a result, the non-support-related component of the lien cannot reasonably be viewed as falling within the purview of Congress’s intent, in passing the BAPCPA amendments, to provide expanded protection to spouses who relied on bankrupt debtors for their economic protection during the marriage.4
The Langmans have expressly agreed to handle their legal fees separately from one another. A handwritten and initialed clause added to paragraph 6.1 of the Marital Settlement Agreement specifically states that
Under no circumstances shall Husband’s or Wife’s attorney be permitted to seek or obtain counsel fees from Wife [or] Husband for fees incurred in connection with divorce proceedings, except for post-judgment matters.
Article VIII of the same Agreement, titled “Counsel Fees,” specifically states,
Each party agrees to pay and be responsible for the payment of their own counsel fees and costs incurred in connection with these divorce proceedings. Should an attorney’s lien attach to the parties’ joint assets, the party who incurred said lien shall be responsible therefor and shall indemnify and hold harmless the corresponding party.
Given these stipulations, and given the plain language of the Code and of Judge Sivilli’s Order granting the lien, this Court finds that the debt in question is a pre-petition claim against the Debtor for legal services rendered to her by her own attorney, which does not fall within the purview of § 523(a)(15), even when viewed broadly, in accordance with Prensky, under the principle of “substance over form” to promote Congress’s intent. Accordingly, the Motion to Dismiss the Adversary Proceeding is granted as to this claim.
III. Plaintiffs Other Allegations
As for Ms. Berse’s allegations of fraudulent collusion and concealment of assets, the Court notes that she has not brought a claim for nondischargeability under § 523(a)(2), (a)(4) or (a)(6) or sought denial of discharge under § 727(a). This Court will refrain from issuing a ruling on claims not brought before it. Nor does this Opinion address the issue of whether or not Ms. Berse’s attorney charging lien should be enforced herein — and so characterized as a secured or priority claim rather than an unsecured non-priority debt. That can only be determined by a separate motion and/or proceeding to be filed by Ms. Berse before this Court.
ConClusion
The Debtors’ Motion to Dismiss Adversary Proceeding 10-2160(RG) is GRANT*410ED. An order shall be submitted in accordance with this Decision.
. Ch. 7 Case No. 09-19165, Adv. No. 09-02104 (Bankr. D.N.J. Oct. 13, 2009), appeal dismissed Case No. CV-10-00044 (D.N.J. July 14, 2010) (Hayden, J.).
. This policy of safeguarding the debtor “is tempered, however, when the debt at issue arises from a divorce or separation agreement. ... The § 523(a)(5) and (a)(15) exceptions from discharge are thus construed more liberally than other Section 523 exceptions.” Prensky II, 2010 WL 2674039, at *3 (citing In re Crosswhite, 148 F.3d 879, 881 (7th Cir.1998)); see also Aldrich v. Papi (In re Papi), 427 B.R. 457, 461 (Bankr.N.D.Ill.2010).
. The three lines of authority discussed in Kassicieh are: (1) decisions strictly adhering to the "plain meaning of the code” and finding support debts payable directly to third parties to be outside the scope of § 101(14A) and therefore fully dischargeable; (2) decisions "declining to follow the plain meaning of the statute” and holding that dischargeability turns on whether the debt is in substance a support debt even if in form it is not; and (3) decisions creating a “limited exception to the plain-meaning rule” allowing exception to discharge only for debts to third parties to which the debtor’s spouse or ex-spouse, or a parent of the debtor's child, is jointly liable along with the third party. As implied above, cases in the Third Circuit — as well as in the Second Circuit — have consistently adhered to the second line of authority, which grants bankruptcy courts the broadest equitable discretion in granting exceptions to discharge based on a preference for "substance over form.” See, e.g., Prensky I, supra.
. The Court did, pursuant to the Debtors’ request in their Second Letter, consider the recently decided Pemini case. It finds, however, the Pemini decision to have limited relevance to this case. In Pemini, the N.J. Superior Court, Appellate Division was determining whether a charging lien levied by an attorney against his former client, who was embroiled in a divorce proceeding at that time, could attach to the husband-client's interest in the marital residence. The court found that the lien could not attach because based on the language of the Lien Act (N.J.S.A. 2A:13-5), a charging lien may only attach to the proceeds awarded in the attorney’s client’s favor, and there were no such proceeds awarded the husband-client. Pernmini, 2011 WL 4483489, at *4-5. This case, unlike Pemini, turns on the threshold issue of whether the Bankruptcy Code provision applies, meaning the Perini court's determination of whether a charging lien may attach is largely irrelevant here. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494594/ | ORDER
DAVID R. DUNCAN, Bankruptcy Judge.
City Loft Hotel, LLC (“CLH”) and City Loft, LLC (“City Loft”) (collectively, “Debtors”) filed Motions for Substantive Consolidation (“Consolidation Motions”), seeking merger of the two bankruptcy estates, on December 19, 2011, and Bank of the Ozarks (“Bank”) filed an Objection to the Consolidation Motions on January 6, 2012. The Court previously ordered the joint administration of the two bankruptcy cases under the CLH case number in an Order entered November 16, 2011. Bank filed a Motion for Relief from Stay (“Stay Motion”), a Motion to Prohibit Use of Cash Collateral (“Cash Collateral Motion”), and a Motion to Designate the Case as a Single Asset Real Estate Case (“SARE Motion”) on November 22, 2011. Bank is a creditor of City Loft, and Bank’s Motions therefore relate to the City Loft bankruptcy case. Debtors filed Objections to Bank’s Motions on December 6, 2011. Finally, an Application for Compensation (“Application”) was filed by counsel for Debtors on November 22, 2011, and Bank filed an Objection to that Application on December 12, 2011. Hearings were held on January 24, 2012. The Court denied the Consolidation Motions and took the remaining matters under advisement. The Court now makes the following Findings of Fact and Conclusions of Law.
FINDINGS OF FACT
The property that is the subject of these bankruptcy cases is a 23 room boutique hotel located in downtown Beaufort, South Carolina. The hotel was originally constructed in the 1960s and operated as Lord Carteret Motel and later as a Red Carpet Inn. In late 2006, Matthew McAlhaney, the principal of both City Loft and CLH, determined that he wanted to purchase the property and re-develop the building into condominiums which could be purchased for residential or vacation use. In 2007, Mr. McAlhaney formed City Loft, and City Loft obtained an acquisition and development loan in the amount of $3,910,000 from Woodlands Bank. City Loft purchased the hotel for $2,000,000 and began the condominium conversion process. The loan from Woodlands Bank to City Loft is secured by a mortgage on the hotel property and an assignment of rents. In April 2008, CLH was formed as an operating entity to facilitate the rental of condominium units whose owners chose to rent them as vacation rentals.
Due to construction issues and the worsening economy, Mr. McAlhaney revised his plan and decided to develop the building into a boutique hotel rather than a condominium complex. At that time, a number of condominium units were under contract, and the purchasers had paid deposits of ten percent of the sales price. Finishing construction and resolving the *431issue of the units under contract required additional funding, which Mr. McAlhaney obtained. Mr. McAlhaney testified that he added eight percent interest to the amount of the deposits he received from the condominium unit contracts and refunded about seventy percent of the total amount to the purchasers. The hotel opened in September 2009. CLH has managed and carried out all business operations, beginning with preparation in spring 2009 for the opening of the hotel. City Loft remains the owner of the property, but otherwise has no business operations. There is no formal agreement for CLH’s operation of the property, and Mr. McAlhaney did not articulate a reason for the existence of two entities in the context of the hotel operation that evolved from the failed condominium conversion.
In addition to the 23 hotel rooms, located on the real property owned by City Loft are a coffee shop called City Java and a fitness center. City Java is owned by Mr. McAlhaney and his wife; it is not owned by or otherwise connected to City Loft or CLH. City Java serves the public and also provides food for the hotel’s room service offerings. From March 2010 to March 2011, the fitness center was leased by a third party. Mr. McAlhaney testified that from March 2011 until very recently, a personal trainer paid to use the facility for his personal training sessions. Guests of the hotel have access to the fitness center during their stay. Additionally, memberships for use of the fitness center are available to, and are held by, local residents, although it was not clear from the evidence presented at the hearing how many residents currently hold memberships to the facility. No evidence was presented regarding whether memberships are still available for purchase or whether those residents holding memberships had purchased their memberships during the period the center was leased by a third party. Mr. McAlhaney testified that membership fees, as well as the payments from the personal trainer who used the facility, are collected and retained by CLH.
Three appraisals were recently performed on the property. The first was performed by Mark Peterson for Bank in November 2010 and found that the value of the property, not including furniture, fixtures, and equipment (“FF & E”), was $2,480,000. The second appraisal was performed in November 2011 by Anton Seda-lik, an associate employed by Mark Peterson. That appraisal found the value of the property without FF & E to be $2,750,000. The final appraisal was prepared for Debtors by James Martin. That appraisal, completed in January 2012, found the value of the property to be $1,950,000.
Mark Peterson and James Martin both hold an MAI designation.1 Both appraisers testified at the hearing regarding the methodology used to arrive at the values stated in their appraisals. The methodologies used by the appraisers were substantially similar; both appraisers used the income approach to determine the value of the property, as hotel and motel appraisals for on-going operations present unique issues which render a sales comparison approach often unreliable. The difference in the values arrived at by Mr. Peterson and Mr. Martin appears to be primarily due to the average daily room rate the appraisers used to calculate the hotel’s projected income. Mr. Martin used an average daily rate of $130. In the 2011 appraisal, Mr. Peterson testified that his firm used an average daily rate of $145, resulting in a substantially higher appraisal value than *432Mr. Martin’s appraisal. Evidence presented by Debtors indicated that the hotel’s actual average daily rate during 2010 and 2011, calculated by month, ranged between $108 and $160.
Bank’s financial expert, William Hickman, a CPA, prepared a report and testified at the hearing regarding CLH’s financial circumstances. Mr. Hickman’s report, prepared using the monthly operating reports filed by CLH for October, November, and December 2011, shows cash profit before debt service payments of $14,290, $12,666, and $4,406, respectively. These amounts are insufficient to make principal and interest payments on a first mortgage on the property, assuming a $2,200,000 principal amount2 and an interest rate which Mr. Hickman testified was typical in the current market. On cross-examination, Mr. Hickman was questioned about the projected net income figures in the November 2011 appraisal prepared by Mr. Sedalik. Mr. Sedalik’s appraisal projected net income for the period from December 1, 2011 to November 30, 2012 of $211,936. Mr. Hickman conceded that this amount, if realized, would be sufficient to make debt service payments on a loan in the amount of $1,800,000 to $2,000,000.
Mr. Hickman also testified regarding CLH’s financial affairs in 2010. Mr. Hickman testified that during 2010, CLH had a net loss every month, and the total loss for 2010 was $298,765. Mr. Hickman also testified that during 2010 CLH’s accounts payable increased from $223,150 to $499,260, indicating that CLH was unable to pay its bills. Finally, Mr. Hickman testified that based on the current market and Debtors’ financial situation, Debtors would likely not be able to obtain financing at all, and in no case would Debtors be able to refinance more than 80 percent of the appraised value of the property.
In July 2010, Woodlands Bank was closed by the Federal Deposit Insurance Corporation (FDIC), and its assets were taken into receivership by the FDIC. Bank purchased many of the Woodlands Bank assets from the FDIC, including City Loft’s loan. In November 2009, City Loft defaulted on the loan and Woodlands Bank proceeded with legal action against City Loft. A foreclosure action was filed by Woodlands Bank. Later, after the loan was acquired by Bank, Bank filed a motion in the foreclosure proceeding for the appointment of a receiver. The bankruptcy petitions stayed the foreclosure proceeding.
CONCLUSIONS OF LAW
I. Substantive Consolidation
City Loft and CLH argue that the respective bankruptcy estates should be substantively consolidated because “(i) the Debtors conducted their administrative, operational and financial affairs and business through CLH, such that the Debtors collectively constituted one entity factually and legally; (ii) Matthew McAlhaney, individually and through Gladstone Group, LLC, a wholly owned related company, is the sole beneficial owner of both Debtors; (iii) the Debtors relied upon a network of intercompany transactions which may not be reflected [sic] Debtors’ books and records; and (iv) the primary asset of [City Loft] is real property located at 301 Car-teret Street in Beaufort, South Carolina, upon which is situated the hotel building in which CLH operates.” Motion to Consoli*433date Case 11-06127-dd with Associated Case(s) 11-06160, docket # 48, pg 2. Bank responds that the cases should not be substantively consolidated because there are two distinct sets of creditors and because it would be “significantly harmed” if the cases were combined. Bank argues that City Loft and CLH seek to substantively consolidate their bankruptcy cases in order to avoid a possible fraudulent transfer issue based on the fact that the income generated by the property owned by City Loft is collected and maintained by CLH.
Substantive consolidation is an equitable remedy, and the Court has broad discretion under 11 U.S.C. § 105 to determine whether substantive consolidation is appropriate. In re Gyro-Trac (USA), Inc., 441 B.R. 470, 487 (Bankr.D.S.C.2010) (citing 2 Collier on Bankruptcy ¶ 105.09[d][2] (16th ed. 2010)); In re Derivium Capital, LLC, 880 B.R. 407, 426 (Bankr.D.S.C.2006). This Court has previously adopted the test set forth in In re Augie/Restivo Baking Co., 860 F.2d 515, 518 (2d Cir.1988) to determine whether to substantively consolidate bankruptcy estates. That test provides that substantive consolidation is appropriate “1) [if] creditors dealt with the entities as a single economic unit and did not rely on separate identities in extending credit or 2) when the affairs of the debtor are so entangled that consolidation will benefit all creditors.” Gyro-Trac, 441 B.R. at 487 (quoting In re Derivium Capital, LLC, 380 B.R. 429, 441-42 (Bankr.D.S.C.2006)). Substantive consolidation can significantly affect creditors’ rights in a bankruptcy case; as a result, it should be used sparingly and should not be granted simply for purposes of procedural convenience. Id. (citing In re Augie/Restivo Baking Co., 860 F.2d 515, 518 (2d Cir.1988)). Regardless of the standard used by the Court to evaluate substantive consolidation, “the bankruptcy court [must] make extensive evidentiary findings before determining the consolidation issue.” In re Peramco Int’l, Inc., 242 B.R. 313, 317 (E.D.Va.2000), rev’d on other grounds, 3 Fed.Appx. 38 (4th Cir.2001).
City Loft and CLH did not satisfy their burden of establishing that substantive consolidation of the bankruptcy estates is appropriate. While Mr. McAlha-ney is the principal of both Debtors, the entities were formed at different times for different purposes and have distinct and separate creditors. Evidence presented by Bank established that it dealt solely with City Loft when extending financing, and until CLH filed bankruptcy, Bank was not even aware that CLH existed. The creditors of CLH deal only with CLH and look to it for payment of the operating expenses of the hotel, as they have done from the hotel’s inception. City Loft has no business operations. City Loft’s creditors are bank, certain mezzanine investors who funded redevelopment costs, and any residual claims arising from the condominium unit contracts. While the Consolidation Motion states that there were numerous “intercompany transactions” not reflected on either entity’s books or records, no evidence was presented to the Court that there were any such transactions. Neither element of the Augie/Restivo test has been met. The Motions for Substantive Consolidation are denied.
II. Single Asset Real Estate
Bank argues that City Loft’s case is a single asset real estate case because its sole asset is a single piece of real property. “Single asset real estate” is defined in 11 U.S.C. § 101(51B) as:
real property constituting a single property or project, other than residential real property with fewer than 4 residential units, which generates substantially *434all of the gross income of a debtor who is not a family farmer and on which no substantial business is being conducted by a debtor other than the business of operating the real property and activities incidental thereto.
City Loft’s bankruptcy case is a single asset real estate case. City Loft’s only assets are the real property on which the hotel is located and the hotel itself. No business is actually conducted by City Loft. It does not operate the hotel or the other businesses on the property and does not, at present, receive any income. The absence of income does not preclude a case from being a single asset real estate case, despite the fact that a part of the test for the determination is that the real property “generates substantially all of the gross income of a debtor....” 11 U.S.C. § 101(51B). City Loft is the owner of the property and is entitled to either the income produced by the hotel or some other return from the operation of the hotel. If this were not the case, every single asset real estate debtor could defeat the provisions of the Bankruptcy Code simply by forming a business entity to receive all of the income produced by the property. City Loft’s case is a single asset real estate case. Bank’s SARE Motion is granted.
III. Use of Cash Collateral
Bank’s Cash Collateral Motion requests that the Court prohibit the further use of cash collateral and deny any request by Debtors for the use of cash collateral, although neither debtor has made such a request. Cash collateral use is governed by section 363 of the Bankruptcy Code. Section 363(b)(1) provides that a debtor in possession may “use, sell, or lease, other than in the ordinary course of business, property of the estate.” Section 363(c)(1) provides that the debtor in possession can use property of the estate in the ordinary course of business without notice or a hearing; however, section 363(c)(2) provides that the debtor in possession cannot use, sell, or lease cash collateral under section 363(c)(1) unless: “(A) each entity that has an interest in such cash collateral consents; or (B) the court, after notice and a hearing, authorizes such use, sale, or lease in accordance with the provisions of this section.”
While CLH operates the hotel and receives all revenue generated by the hotel, there is no agreement with City Loft for that operation. City Loft is the owner of the real property and the building located on the real property. Because Bank has a lien on the property and an assignment of rents, the revenue generated by the property is Bank’s cash collateral. This result cannot be circumvented by the formation of an additional entity and the diversion of income from City Loft without any agreement. Bank has not consented to any use of cash collateral, and neither City Loft nor CLH has requested that the Court authorize use of cash collateral. Neither of the requirements of section 363(c)(2) have been met. Debtors are prohibited from any further use of Bank’s cash collateral.
IV. Motion for Relief from Stay
Bank seeks relief from stay under section 362(d)(1) and section 362(d)(2). Those subsections provide:
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—
(1) for cause, including the lack of adequate protection of an interest in property of such party in interest;
*435(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.
Bank argues that it is entitled to relief from stay for cause under section 362(d)(1) due to City Loft’s “failure to provide adequate protection payments, the failure to seek court approval for the use of cash collateral and the apparent fraudulent conveyance of the income from City Loft, LLC to City Loft Hotel, LLC without reasonable equivalent value.” Motion for Relief from Stay, docket # 27, pg 4. Bank argues that it is further entitled to stay relief under section 362(d)(2) because no party disputes that there is no equity in the property, because City Loft generates no income, and because even if the income of CLH could be considered, that income is insufficient to fund a plan of reorganization.
The Court finds that Bank is entitled to relief from stay under section 362(d)(2). There is no equity in the property. The total owed to Bank at the date of the bankruptcy filing was $4,242,965.72, and City Loft’s schedules list the value of the property at $2,500,000. Three appraisals on the property have been completed since November 2010, and the highest appraisal value was $2,750,000. The most recent appraisal, prepared in January 2012 for Debtors, appraised the property at $1,950,000. Clearly, City Loft has no equity in the property.
As to the second element of the two-step test under section 362(d)(2), the United States Supreme Court has stated:
What this requires is not merely a showing that if there is conceivably to be an effective reorganization, this property will be needed for it; but that the property is essential for an effective reorganization that is in prospect. This means ... there must be “a reasonable possibility of a successful reorganization within a reasonable time.”
United Sav. Ass’n of Texas v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365, 375-76, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988) (quoting In re Timbers of Inwood Forest Assocs., Ltd., 808 F.2d 363, 370, nn.12, 13 (5th Cir.1987)) (emphasis original).
Here, City Loft owns the real property and the building in which the hotel and businesses are located, but does not manage any of the operations and does not receive any income from them. While City Loft would ordinarily be entitled to income generated by the property, as discussed above, it does not actually receive any income. Without income or operations, City Loft will be unable to implement any plan of reorganization. Since City Loft does not have the ability to successfully reorganize, the property is not necessary to its reorganization. Bank is entitled to relief from stay under section 362(d)(2).
Bank is also entitled to relief from stay under section 362(d)(1). Bank presented evidence at the hearing that no payments have been made to it in 26 months. While Mr. McAlhaney testified that he had attempted on numerous occasions to make payments through CLH, the financial data presented at the hearing showed that the income generated by CLH is not sufficient to make adequate debt service payments. Additionally, while some evidence was presented by Debtors that the hotel’s number of reservations and therefore the hotel’s income was increasing, it is not clear how much the hotel’s income will continue to increase over time, if at all. There was also testimony that the property value is rising. While rising property value can in *436some circumstances adequately protect a creditor’s lien, the rise in value in this case is offset by the fact that the Bank’s cash collateral is disappearing. Since Bank has a lien on the cash collateral and it is being dissipated, Bank’s interest is not adequately protected. The Court finds that cause for relief from stay has been established under section 362(d)(1). Bank is entitled to relief from stay under section 362(d)(1) and section 362(d)(2). The stay is lifted to permit Bank to resume its foreclosure and seek the appointment of a receiver.
Y. Application for Compensation
The final matter before the Court is an Application for Compensation filed by counsel for Debtors. The Application requests authorization for attorney fees in the amount of $10,128 and expenses in the amount of $1,171.84. Bank filed an objection to the Application; however, the objection relates solely to the payment of the fees from the Bank’s cash collateral. The Court finds that the fees requested in the Application are reasonable and should be approved. However, based on the Court’s ruling regarding the use of cash collateral, Debtors are not permitted to use cash collateral to pay the fees.
CONCLUSION
For the reasons set forth above, City Loft and CLH’s Motions for Substantive Consolidation are denied. Bank’s Motion to Designate Case as Single Asset Real Estate Case is granted, and City Loft’s bankruptcy case will be designated as a single asset real estate case going forward. Bank’s Motion to Prohibit Use of Cash Collateral is granted, and Debtors are prohibited from further use of cash collateral. Bank is entitled to relief from stay under section 362(d)(1) and (d)(2), and Bank’s Motion for Relief from Stay is granted. The compensation requested by counsel is approved, but cash collateral may not be used to pay the fees.
AND IT IS SO ORDERED.
. An MAI designation is a professional designation awarded by the Appraisal Institute to appraisers meeting certain education and experience requirements.
. Mr. Hickman used $2,200,000 because that amount is 80 percent of the appraisal value of the property, based on the appraisal completed by Mr. Sedalik in November 2011. As explained below, Mr. Hickman testified that the maximum amount of financing CLH would be able to obtain in the current financial market would be 80 percent of the appraised value of the property. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488439/ | 11/21/2022
IN THE SUPREME COURT OF THE STATE OF MONTANA Case Number: DA 22-0543
No. DA 22-0543
STATE OF MONTANA,
Plaintiff and Appellee,
v.
JUSTIN GUY ZENO SHAWN WOLF MASON,
Defendant and Appellant.
GRANT
Pursuant to authority granted under Mont. R. App. P. 26(1), the
Appellant is given an extension of time until December 30, 2022, to
prepare, file, and serve the Appellant’s opening brief.
Electronically signed by:
Bowen Greenwood
Clerk of the Supreme Court
November 21 2022 | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488440/ | 11/21/2022
IN THE SUPREME COURT OF THE STATE OF MONTANA Case Number: DA 22-0325
No. DA 22-0325
STATE OF MONTANA,
Plaintiff and Appellee,
v.
JOSHUA RICHARD LARSON,
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 30, 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 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488442/ | 11/21/2022
IN THE SUPREME COURT OF THE STATE OF MONTANA Case Number: DA 22-0089
No. DA 22-0089
IN THE MATTER OF:
H.R.,
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 December 30, 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 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488441/ | 11/21/2022
IN THE SUPREME COURT OF THE STATE OF MONTANA Case Number: DA 22-0478
No. DA 22-0478
STATE OF MONTANA,
Plaintiff and Appellee,
v.
JOSIAH BRACKETT,
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 30, 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 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488443/ | 11/21/2022
IN THE SUPREME COURT OF THE STATE OF MONTANA Case Number: DA 22-0150
No. DA 22-0150
STATE OF MONTANA,
Plaintiff and Appellee,
v.
CODY EATON,
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 30, 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 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488444/ | 11/21/2022
IN THE SUPREME COURT OF THE STATE OF MONTANA Case Number: DA 22-0402
No. DA 22-0402
STATE OF MONTANA,
Plaintiff and Appellee,
v.
ADRIAN ABELARDO GARCIA,
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 January 3, 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 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488445/ | 11/21/2022
IN THE SUPREME COURT OF THE STATE OF MONTANA Case Number: DA 22-0274
Supreme Court Cause No. 22-0274
RONALD R. OBERLANDER,
Third-Party Plaintiff, Third-Party
Counterdefendant, and Appellant, ORDER GRANTING
vs. APPELLANT’S MOTION FOR
EXTENSION OF TIME TO
JACQUES HENNEQUIN, et al., FILE REPLY BRIEF
Third-Party Defendants, Third-Party
Counterclaimants, and Appellees.
Upon consideration of the unopposed motion seeking an extension of time
filed by Third-Party Plaintiff/Third-Party Counterdefendant/Appellant Ronald R.
Oberlander (“Oberlander”) and for good cause, the motion is GRANTED.
Oberlander’s reply brief may be filed on or before December 28, 2022.
ELECTRONICALLY SIGNED AND DATED BELOW
Electronically signed by:
Mike McGrath
Chief Justice, Montana Supreme Court
November 21 2022 | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488446/ | 11/21/2022
IN THE SUPREME COURT OF THE STATE OF MONTANA Case Number: DA 22-0134
No. DA 22-0134
IN THE MATTER OF:
O.L.K.,
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 30, 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 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488452/ | Case: 21-51165 Document: 00516552864 Page: 1 Date Filed: 11/21/2022
United States Court of Appeals
for the Fifth Circuit
United States Court of Appeals
Fifth Circuit
No. 21-51165
FILED
November 21, 2022
Cruz E. Sanchez, Lyle W. Cayce
Clerk
Plaintiff—Appellant,
versus
Sergeant Galvan; Officer Escamilla; Officer Casillos;
Officer Carrasco; Corporal Payne; Officer LeBlanc;
Officer Burrowls; Officer Grissom; Nurse Jessica
Allen; Corporal Garcia,
Defendants—Appellees.
Appeal from the United States District Court
for the Western District of Texas
USDC No. 7:21-CV-43
Before Higginbotham, Duncan, and Wilson, Circuit Judges.
Per Curiam:*
Cruz E. Sanchez, Texas prisoner # 2351055, requests leave to proceed
in forma pauperis (IFP) in his appeal of the district court’s grant of summary
judgment and dismissal with prejudice of his 42 U.S.C. § 1983 complaint. He
*
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: 21-51165 Document: 00516552864 Page: 2 Date Filed: 11/21/2022
No. 21-51165
also requests appointment of counsel. To proceed IFP, Sanchez must
demonstrate financial eligibility and a nonfrivolous issue for appeal. See
Carson v. Polley, 689 F.2d 562, 586 (5th Cir. 1982). We review a district
court’s summary-judgment dismissal de novo. See Hernandez v. Yellow
Transp., Inc., 670 F.3d 644, 650 (5th Cir. 2012).
The district court summarized Sanchez’s claims as follows: excessive
use of force; failure to provide meals appropriate for Sanchez’s medical
condition; failure to prevent Sanchez’s suicide attempt; misplacing or
stealing personal property; retaliation against Sanchez due to his numerous
grievances by changing his meal plan, requesting that he be handcuffed and
shackled while going to medical appointments, and instituting disciplinary
proceedings against him; supervisory liability; and harassment and physical
and mental abuse. On appeal, Sanchez largely fails to mention the district
court’s reasons for granting summary judgment and dismissing the instant
case. To the extent that Sanchez failed to identify any error in the district
court’s analysis, he has abandoned any challenge he might have raised
regarding the decision. See Yohey v. Collins, 985 F.2d 222, 224-25 (5th Cir.
1993); Brinkmann v. Dallas Cnty. Deputy Sheriff Abner, 813 F.2d 744, 748 (5th
Cir. 1987).
As to Sanchez’s claims of harassment, threats, and retaliation, he does
not explain how the alleged acts violated his constitutional rights. See
Calhoun v. Hargrove, 312 F.3d 730, 734 (5th Cir. 2002); Jones v. Greninger,
188 F.3d 322, 324-25 (5th Cir. 1999); Siglar v. Hightower, 112 F.3d 191, 193
(5th Cir. 1997); McFadden v. Lucas, 713 F.2d 143, 146 (5th Cir. 1983). To the
extent that he argues the district court prevented him from conducting
discovery, Sanchez does not explain how additional discovery would have
created a genuine issue of material fact. See Adams v. Travelers Indem. Co. of
Conn., 465 F.3d 156, 162 (5th Cir. 2006).
2
Case: 21-51165 Document: 00516552864 Page: 3 Date Filed: 11/21/2022
No. 21-51165
Because Sanchez has not demonstrated that his appeal involves “legal
points arguable on their merits,” his motion to proceed IFP is DENIED,
and his appeal is DISMISSED as frivolous. Howard v. King, 707 F.2d 215,
220 (5th Cir. 1983) (internal quotation marks and citation omitted); see Baugh
v. Taylor, 117 F.3d 197, 202 n.24 (5th Cir. 1997); 5th Cir. R. 42.2. His
motion for appointment of counsel is DENIED as moot.
The dismissal of this appeal as frivolous counts as a “strike” under 28
U.S.C. § 1915(g). See Coleman v. Tollefson, 575 U.S. 532, 537-39 (2015).
Sanchez is WARNED that if he accumulates three strikes, he will not be
able to proceed IFP in any civil action or appeal filed while he is incarcerated
or detained in any facility unless he is under imminent danger of serious
physical injury. See § 1915(g).
3 | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488448/ | Case: 22-10518 Document: 00516553298 Page: 1 Date Filed: 11/21/2022
United States Court of Appeals
for the Fifth Circuit
United States Court of Appeals
Fifth Circuit
No. 22-10518
Summary Calendar FILED
November 21, 2022
Lyle W. Cayce
United States of America, Clerk
Plaintiff—Appellee,
versus
Marcos D. Thomason,
Defendant—Appellant.
Appeal from the United States District Court
for the Northern District of Texas
USDC No. 3:11-CR-250-25
Before King, Higginson, and Willett, Circuit Judges.
Per Curiam:*
The Federal Public Defender appointed to represent Marcos D.
Thomason has moved for leave to withdraw and has filed a brief in
accordance with Anders v. California, 386 U.S. 738 (1967), and United States
v. Flores, 632 F.3d 229 (5th Cir. 2011). Thomason has filed a response. We
*
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: 22-10518 Document: 00516553298 Page: 2 Date Filed: 11/21/2022
No. 22-10518
have reviewed counsel’s brief and the relevant portions of the record
reflected therein, as well as Thomason’s response. We concur with
counsel’s assessment that the appeal presents no nonfrivolous issue for
appellate review. Accordingly, counsel’s motion for leave to withdraw is
GRANTED, counsel is excused from further responsibilities herein, and
the appeal is DISMISSED. See 5th Cir. R. 42.2.
2 | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488447/ | Case: 22-40090 Document: 00516553129 Page: 1 Date Filed: 11/21/2022
United States Court of Appeals
for the Fifth Circuit
United States Court of Appeals
Fifth Circuit
No. 22-40090 FILED
Summary Calendar November 21, 2022
Lyle W. Cayce
Clerk
United States of America,
Plaintiff—Appellee,
versus
Veronica Vela,
Defendant—Appellant.
Appeal from the United States District Court
for the Southern District of Texas
USDC No. 7:15-CR-760-1
Before Davis, Smith, and Dennis, Circuit Judges.
Per Curiam:*
In 2016, Veronica Vela pleaded guilty to conspiracy to commit health
care fraud, in violation of 18 U.S.C. § 1349, and was ultimately sentenced, in
February 2022, to 87 months of imprisonment, followed by a three-year term
*
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: 22-40090 Document: 00516553129 Page: 2 Date Filed: 11/21/2022
No. 22-40090
of supervised release. She was also ordered to pay $3,505,886.25 in
restitution.
As her sole issue on appeal,1 Vela argues that the district court erred
in denying her seventeenth motion to continue sentencing. She asserts that
she needed more time to locate and secure her expert witness, certified public
accountant Josefina Mireles, who had prepared a report challenging the
Government’s loss amount calculation. Vela argues that because Mireles’s
testimony was critical regarding loss amount, the court’s refusal to give her
more time to locate her expert witness effectively deprived her of
a meaningful defense at sentencing.
We review the denial of a motion for a continuance for an abuse of
discretion that seriously prejudices the defendant.2 When reviewing a denial
of a continuance, we consider the totality of the circumstances, including: (1)
“the amount of time available,” (2) “the defendant’s role in shortening the
time needed,” (3) “the likelihood of prejudice from denial,” (4) “the
availability of discovery from the prosecution,” (5) “the complexity of the
case,” (6) “the adequacy of the defense actually provided at trial,” and (7)
“the experience of the attorney with the accused.”3
1
Vela briefs no argument challenging the district court’s loss amount finding, nor
does she challenge the offense level or restitution calculations which were based on that
finding, and she has therefore abandoned any such challenge. See United States v. Scroggins,
599 F.3d 433, 446-47 (5th Cir. 2010); Beasley v. McCotter, 798 F.2d 116, 118 (5th Cir. 1986)
(per curiam).
2
See United States v. Stalnaker, 571 F.3d 428, 439 (5th Cir. 2009) (applying
standard to a district court’s denial of a trial continuance); United States v. Peden, 891 F.2d
514, 519 (5th Cir. 1989) (applying standard to a district court’s denial of a sentencing
continuance).
3
Stalnaker, 571 F.3d at 439.
2
Case: 22-40090 Document: 00516553129 Page: 3 Date Filed: 11/21/2022
No. 22-40090
As an initial matter, Vela wholly fails to address or challenge the
reasons the district court gave for denying a continuance, which included that
the case had been pending for almost seven years, that sentencing had been
reset too many times at Vela’s request, and that, although she sought to
secure Mireles as a witness, she gave no explanation regarding what efforts,
if any, she had made to locate Mireles. Vela has therefore abandoned any
such challenge.4
Even had Vela briefed such argument, it would be unavailing. Under
the totality of the circumstances, the district court’s decision not to grant
Vela a seventeenth continuance was neither arbitrary nor capricious.
Significantly, Vela had been granted sixteen previous continuances,
including a continuance to enable her to locate Mireles. Moreover, Vela had
five years to prepare for sentencing, including more than three years with her
most recent counsel and with the benefit of Mireles’s report. 5 Finally, Vela
offered no reasons explaining what efforts, much less diligent efforts, had
been made to locate Mireles, why they were unsuccessful, or why another
continuance would cause her to succeed in locating Mireles or securing her
testimony at sentencing.6
Vela’s claim additionally fails for lack of serious or compelling
prejudice. Vela does not and cannot demonstrate how the denial of her
motion for a continuance prejudiced her case when the court considered the
4
See Scroggins, 599 F.3d at 446-47; Beasley, 798 F.2d at 118.
5
See Stalnaker, 571 F.3d at 439; United States v. Messervey, 317 F.3d 457, 462 (5th
Cir. 2002) (finding the district court did not abuse its discretion in denying defendant a
fifth continuance).
6
See United States v. Shaw, 920 F.2d 1225, 1230 (5th Cir. 1991) (holding that the
district court did not abuse its discretion in denying defendant’s motion for a continuance
based upon the unavailability of a witness).
3
Case: 22-40090 Document: 00516553129 Page: 4 Date Filed: 11/21/2022
No. 22-40090
expert report despite Mireles’s failure to testify in person. As the district
court explained at sentencing, because it considered the report but found it
to be unreliable, any testimony Mireles would have offered in support of the
report would have made no difference to the outcome of Vela’s sentence. 7
Vela has not demonstrated an abuse of discretion on the district
court’s part.8 Accordingly, the district court’s judgment is AFFIRMED.
7
Id. at 1231.
8
See Stalnaker, 571 F.3d at 439.
4 | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488454/ | Case: 21-40720 Document: 00516552661 Page: 1 Date Filed: 11/21/2022
United States Court of Appeals
for the Fifth Circuit United States Court of Appeals
Fifth Circuit
FILED
November 21, 2022
No. 21-40720 Lyle W. Cayce
Clerk
Damonie Earl, individually and on behalf of all others
similarly situated; Linda Rugg, individually and on behalf
of all others similarly situated; Alesa Beck,
individually and on behalf of all others similarly
situated; Timothy Blakey, Jr.; Stephanie Blakey;
Marisa Thompson, individually and on behalf of all others
similarly situated; Muhammad Muddasir Khan; John
Rogers, individually and on behalf of all others similarly
situated; Valerie Mortz-Rogers, individually and on
behalf of all others similarly situated; James LaMorte;
Brett Noble, individually and on behalf of all others
similarly situated; Ruben Castro, individually and on
behalf of all others similarly situated; Fritz Ringling,
individually and on behalf of all others similarly
situated; Litaun Lewis, individually and on behalf of all
others similarly situated; Lance Hogue, Jr.,
individually and on behalf of all others similarly situated,
Plaintiffs—Appellees,
versus
The Boeing Company; Southwest Airlines Company,
Defendants—Appellants.
Case: 21-40720 Document: 00516552661 Page: 2 Date Filed: 11/21/2022
No. 21-40720
Appeal from the United States District Court
for the Eastern District of Texas
USDC No. 4:19-CV-507
Before Smith, Duncan, and Oldham, Circuit Judges.
Andrew S. Oldham, Circuit Judge:
The plaintiffs in this class-action lawsuit allege that Boeing and
Southwest Airlines defrauded them by, among other things, concealing a
serious safety defect in the Boeing 737 MAX 8 aircraft. The district court
certified four classes encompassing those who purchased or reimbursed
approximately 200 million airline tickets for flights that were flown or could
have been flown on a MAX 8. But plaintiffs have not plausibly alleged that
any class member suffered either physical or economic injury from Boeing’s
and Southwest’s alleged fraud. Plaintiffs therefore lack Article III standing.
We reverse and remand with instructions to dismiss for want of jurisdiction.
I.
A.
This is an interlocutory appeal of a district court order granting
plaintiffs’ motion for class certification. Plaintiffs seek to recover under
RICO for alleged fraud by Boeing and Southwest Airlines in connection with
the certification and marketing of the Boeing 737 MAX 8 aircraft.
We provide only a brief summary of the alleged fraud because the
particulars are largely irrelevant to the dispositive legal issues in this appeal.
According to plaintiffs, defendants have a unique and “symbiotic” business
relationship. As part of that relationship, Southwest only flies variants of the
Boeing 737 aircraft. When Boeing announced the new MAX 8 variant in 2011,
Southwest was the launch customer.
2
Case: 21-40720 Document: 00516552661 Page: 3 Date Filed: 11/21/2022
No. 21-40720
Plaintiffs allege that behind the scenes, Southwest aggressively
pressured Boeing to deliver the MAX 8 without requiring pilots to undergo
significant additional training. Southwest wanted Boeing to convince the
Federal Aviation Administration (“FAA”) that the MAX 8 and a previous
737 variant—the 737 NG—were so similar that pilots did not need to
complete new flight-simulator training for the MAX 8. Instead, a short course
on an iPad or computer would be sufficient. This abbreviated training
program is called “Level B pilot training.”
The defendants’ effort to ensure Level B pilot training encountered
various difficulties. Most relevant here, Boeing’s decision to place more
powerful engines closer to the fuselage and farther forward on the aircraft (to
enhance fuel efficiency) meant that the MAX 8 handled differently from the
737 NG. So Boeing added the “Maneuvering Characteristics Augmentation
System” (“MCAS”) to the MAX 8. MCAS automatically adjusted the trim
of the aircraft to make the MAX 8 mimic the handling and flight behavior of
the 737 NG.
Plaintiffs allege that defendants omitted references to MCAS in flight
crew documentation and misled the FAA about the significance and
operation of MCAS. Defendants also coordinated communications to the
public and the press to minimize public concern about the MAX 8. Boeing
succeeded in getting Level B training approval for the MAX 8 and began
delivering MAX 8 aircraft to Southwest and American Airlines. Throughout
the class period (August 2017 to March 2019), MAX 8 aircraft made up at
most 34 of over 700 planes in Southwest’s fleet, and 28 of over 1,500 planes
in American’s fleet.
During Lion Air Flight 610 on October 29, 2018, a faulty Angle-of-
Attack sensor on a MAX 8 fed incorrect information to the flight computer.
MCAS took control of the plane and improperly pushed the nose down. The
3
Case: 21-40720 Document: 00516552661 Page: 4 Date Filed: 11/21/2022
No. 21-40720
plane crashed, killing everyone on board. On March 10, 2019, another MAX
8 flight—Ethiopian Airlines Flight 302—suffered the same fate. After this
second crash, the MAX 8 was grounded worldwide.
B.
The eleven named plaintiffs filed suit in July 2019. They sought to
represent everyone who purchased a ticket for air travel on Southwest or
American Airlines 1 between August 29, 2017, and March 13, 2019 (the
“Class Period”). They alleged the class overpaid for plane tickets: “The
actual prices of the tickets that were purchased as a result of the
misrepresentations by Southwest and Boeing about the safety of the MAX 8
and MAX Series Aircraft were significantly higher than the value of those
tickets, which for many, if not most, passengers was zero.”
The airlines moved to dismiss, arguing, among other things, that
plaintiffs lacked Article III standing. The district court dismissed plaintiffs’
claims for lack of standing to the extent they alleged that “if Plaintiffs had
known the MAX 8 was fatally defective, Plaintiffs would never have
purchased a ticket, so Plaintiffs want their money back.” The court held that
because this theory sought to recover for a risk of physical injury that did not
materialize as to any plaintiff, it was akin to the “no-injury products liability
claim” that we held insufficient to support standing in Rivera v. Wyeth-Ayerst
Laboratories, 283 F.3d 315 (5th Cir. 2002).
1
Plaintiffs included American Airlines ticket purchasers as proposed class
members because, as they put it, “[t]he same Boeing-Southwest conspiracy that caused
passengers to fly on a MAX 8 on Southwest Airlines . . . proximately caused passengers to
fly on other airlines that flew the MAX 8, such as American Airlines (when they would not
have done so but for the Boeing-Southwest conspiracy, which hid safety issues with the
airplane).”
4
Case: 21-40720 Document: 00516552661 Page: 5 Date Filed: 11/21/2022
No. 21-40720
The district court then held, however, that plaintiffs pleaded an
economic injury in fact sufficient to support standing. Specifically, plaintiffs
alleged that defendants’ fraudulent actions allowed Southwest and American
to overcharge plaintiffs for their tickets. Absent a fraudulent scheme to
conceal the MAX 8’s safety defects, demand for tickets on routes flying the
MAX 8 would have decreased, along with the price of those tickets. So, the
theory goes, plaintiffs paid a fraud-induced overcharge at the time they
bought their tickets, and they have Article III standing to recover the amount
of that overcharge. The district court held that plaintiffs could proceed on
this theory of Article III injury and this theory only.
Plaintiffs next moved for class certification. The district court granted
the motion and certified four classes covering nearly 200 million ticket
purchases. Defendants petitioned us for permission to appeal the class
certification decision. See Fed. R. Civ. P. 23(f). We granted it. Defendants
then moved us to stay district court proceedings pending the outcome of this
appeal. We granted that motion too. Earl v. Boeing Co., 21 F.4th 895, 897 (5th
Cir. 2021).
II.
We start, as always, with jurisdiction. “Though rule 23(f) allows a
party to appeal only the issue of class certification, standing is an inherent
prerequisite to the class certification inquiry. Accordingly, standing may—
indeed must—be addressed even under the limits of a rule 23(f) appeal.”
Rivera, 283 F.3d at 319 (quotation omitted). Article III standing is a question
of law that we review de novo. Ibid.
Article III of the United States Constitution limits the judicial power
to “Cases” and “Controversies.” U.S. Const. art. III, § 2; see Cranor v. 5
Star Nutrition, LLC, 998 F.3d 686, 689 (5th Cir. 2021). Because of that
limitation, any party invoking the judicial power must establish the
5
Case: 21-40720 Document: 00516552661 Page: 6 Date Filed: 11/21/2022
No. 21-40720
“irreducible constitutional minimum of standing.” Lujan v. Defs. of Wildlife,
504 U.S. 555, 560 (1992). Article III standing requires three elements: (1) an
“injury in fact” that is (2) “fairly traceable” to the “conduct complained
of” and that is (3) likely redressable by a favorable court decision. Id. at 560–
61 (quotation omitted); see also TransUnion LLC v. Ramirez, 141 S. Ct. 2190,
2203 (2021).
The dispute in this case concerns injury in fact. As the Supreme Court
has repeatedly instructed, standing requires a claim of injury that is
“concrete, particularized, and actual or imminent.” TransUnion, 141 S. Ct.
at 2203; see also Spokeo, Inc. v. Robins, 578 U.S. 330, 339 (2016). That means
a claimed injury must be real—“it must actually exist.” Spokeo, 578 U.S. at
340. And it must not be “too speculative for Article III purposes.” Clapper v.
Amnesty Int’l, USA, 568 U.S. 398, 409 (2013) (quotation omitted).
Plaintiffs contend that defendants fraudulently concealed defects in
the MAX 8 that threatened passengers with a serious risk of physical injury
or death. But no plaintiff alleges that he has suffered or will suffer any
physical injury as a result of defendants’ fraud. To the contrary, plaintiffs
expressly disclaim any recovery for physical injury.
Instead, the complaint asserts plaintiffs “were harmed and suffered
actual damages” because the ticket prices they paid “were significantly
higher than the value of those tickets, which for many, if not most, passengers
was zero.” As the district court observed, there are two ways to understand
this alleged injury. The first and perhaps most straightforward reading is that
plaintiffs were allegedly harmed because defendants’ fraud induced them to
buy tickets they never would have bought otherwise. The second way to
understand this allegation is that plaintiffs were harmed because defendants’
fraud allowed Southwest and American Airlines to set higher fares for
plaintiffs’ tickets than they could or would have done absent the fraud.
6
Case: 21-40720 Document: 00516552661 Page: 7 Date Filed: 11/21/2022
No. 21-40720
Everyone now agrees the first theory of injury cannot support Article
III standing under our decision in Rivera. That case involved a class action by
plaintiffs who had been prescribed and taken an allegedly defective painkiller.
283 F.3d at 317. The Rivera plaintiffs alleged the painkiller was defective
because of a risk of liver damage. Id. at 319–20. But even though other
customers had been injured, the risk of liver damage had not materialized as
to any plaintiff, and the painkiller had worked as advertised in every other
respect. Id. at 319. We held that plaintiffs had “asserted no concrete injury”
because they “paid for an effective pain killer, and [they] received just that.”
Id. at 320–21.
Plaintiffs therefore fall back to their second theory—what we’ll call
the “overcharge-by-fraud” theory. This theory seeks to recover for a
purported economic injury rather than any risk of physical injury.
Specifically, plaintiffs claim that if the public had known about defendants’
fraudulent scheme, demand for tickets on routes flying the MAX 8 would
have dropped, so the airlines would have been forced to lower fares and
plaintiffs would have paid less for their tickets. Defendants’ fraud thus
allowed them to inflate demand for tickets on MAX 8 routes and overcharge
their customers.
Plaintiffs have attempted to show that they suffered this sort of
economic injury through the report and testimony of their principal expert,
Professor Greg Allenby. Professor Allenby used conjoint analysis—a survey-
based technique—to show that demand for flights on MAX 8 aircraft would
have lessened if the public had known the information about the MCAS
defect that was allegedly concealed by defendants’ fraud. He conducted his
analysis as follows: First, he surveyed respondents about several hypothetical
flight options they could choose, given variables including the number of
stops, type of aircraft, and price. Second, Allenby showed respondents a
short video with a message about the MAX 8’s MCAS defect. Third, Allenby
7
Case: 21-40720 Document: 00516552661 Page: 8 Date Filed: 11/21/2022
No. 21-40720
again asked respondents to choose between hypothetical flight options, some
of which were scheduled on MAX 8 flights, and some of which were not.
Unsurprisingly, respondents showed less willingness to fly on MAX 8 flights
after watching a video discussing the MCAS defect.
Notwithstanding this conjoint study, plaintiffs’ theory of injury rests
on two unsupportable inferences. See Ashcroft v. Igbal, 556 U.S. 662, 678
(2009) (“[A] complaint must contain sufficient factual matter . . . to state a
claim to relief that is plausible on its face. 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.”
(quotation omitted)). First, plaintiffs assume that if there was widespread
public knowledge during the class period of the MCAS defect, Southwest and
American Airlines would have continued offering the same MAX 8 flights—
but with a price discount to compensate for the heightened risk that
passengers would die. But the facts don’t support this inference. See id. at
682. The more plausible inference is that Southwest and American would
have offered zero MAX 8 flights until the defect could be fixed. And on this
latter, more obvious inference, ticket fares would have likely gone up because
the airlines’ usable fleets would have been smaller in the meantime. (In other
words, the airlines’ supply of seats would have gone down, demand would
have stayed the same, and prices would have risen as a result.)
Second, plaintiffs assume the FAA would have permitted airlines to
fly the MAX 8 even with full knowledge of the MCAS defect. This inference
is even more implausible than the first. That’s because in reality, after the
public learned the full extent of the risk caused by the MCAS defect,
regulators worldwide grounded the MAX 8. The FAA, for example,
grounded the MAX 8 for 20 months. So in all likelihood, if the FAA had
learned the full extent of the MCAS defect sooner—which plaintiffs contend
would have happened absent defendants’ alleged fraud—then the MAX 8
8
Case: 21-40720 Document: 00516552661 Page: 9 Date Filed: 11/21/2022
No. 21-40720
would have been pulled from plaintiffs’ routes. But again, that would have
caused ticket prices to go up, not down, because of the reduced aircraft
supply in Southwest’s and American’s fleets.
Plaintiffs do not contest any of this. Instead, when pressed at oral
argument, plaintiffs’ counsel contended that rejecting their theory of
standing would imperil all sorts of fraud litigation. That’s because it’s always
the case that in a hypothetical world where the fraud didn’t happen, anyone
injured by the fraud would have been better off. See Oral Argument at 31:50.
But that misses the point. In an ordinary fraud lawsuit—a pyramid scheme,
for example—there are identifiable victims who lost money that wouldn’t
have been lost in a counterfactual world without the fraudulent scheme. See,
e.g., Torres v. S.G.E. Mgmt., LLC, 838 F.3d 629, 634 (5th Cir. 2016) (en banc)
(suit by plaintiffs who lost money participating in a pyramid scheme). By
contrast, the plaintiffs in this suit have not plausibly alleged that they’re any
worse off financially because defendants’ fraud allowed Southwest and
American Airlines to keep flying the MAX 8 during the class period. If
anything, plaintiffs are likely better off financially. If the MCAS defect had
been widely exposed earlier, the MAX 8 flights plaintiffs chose would have
been unavailable and they’d have had to take different, more expensive (or
otherwise less desirable) flights instead.
In sum, plaintiffs have not plausibly alleged any concrete injury. See
Spokeo, 578 U.S. at 340. They concededly have suffered no physical harm.
They have offered no plausible theory of economic harm. At bottom,
plaintiffs complain of a past risk of physical injury to which they were
allegedly exposed because of defendants’ fraud. But because that risk never
materialized, plaintiffs have suffered no injury in fact and lack Article III
standing. Their case therefore must be dismissed.
9
Case: 21-40720 Document: 00516552661 Page: 10 Date Filed: 11/21/2022
No. 21-40720
* * *
The district court’s class certification order is REVERSED, and the
case is REMANDED with instructions to DISMISS the case for lack of
jurisdiction.
10 | 01-04-2023 | 11-22-2022 |
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