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https://www.courtlistener.com/api/rest/v3/opinions/8490415/ | JUDGMENT CONCERNING STATE WARRANTS
JOHN C. AKARD, Bankruptcy Judge.
The Missionary Baptist Foundation of America and related entities filed for relief under Chapter 11 of the Bankruptcy Code on October 15, 1980. Shortly thereafter, Robert B. Wilson was appointed Trustee-in-Bankruptcy.
The Trustee brought an action against the First National Bank at Lubbock, Texas (Bank) alleging invalid financial arrangements, preferential payments, postpetition transfers, fraudulent conveyances, and the like. In October, 1984, the matter was heard before the Honorable Bill H. Brister, the prior Judge of this Court. His Memorandum and Order of February 25, 1985 was affirmed in all respects by the Honorable Halbert 0. Woodward, Chief United States District Judge, on June 18, 1985. The matter was appealed to the United States Court of Appeals for the Fifth Circuit which, on August 11, 1986, affirmed in part, reversed in part and remanded. . Wilson v. First National Bank, Lubbock, Texas, (In the Matter of Missionary Baptist Foundation of America, Inc.), 796 F.2d 752 (5th Cir., 1986). The Fifth Circuit’s mandate remanding this matter to the District Court was issued on September 29, 1986. By Order dated October 2, 1986, the Honorable Halbert 0. Woodward, Chief United States District Judge, referred this matter to the Bankruptcy Court for compliance with the mandate of the United States Court of Appeals for the Fifth Circuit.
The Fifth Circuit determined that warrants issued by the State of Texas in the amount of $52,097.53 which were acquired by the Bank on October 15, 1980, were property of the estate and must be returned to the estate pursuant to 11 U.S.C. § 549. The District Court (and thus, this Court as a unit of the District Court) was directed to enter judgment in the Trustee’s favor for the $52,097.53 collected on the warrants. Missionary Baptist, supra, at 764.
Since the matter concerning the warrants is a separate and distinct issue, a final judgment with respect to the warrants may be entered. See Fed.R.Civ.P. 54(b).
By Memorandum of Opinion Concerning Interest of even date herewith, this Court has determined that the Trustee is entitled to interest from October 1,1982, at the rate of 10.41% per annum and that the interest should compound on September 30 of each year commencing September 30, 1983.
It is therefore ORDERED that:
1. Robert B. Wilson, Trustee-in-Bankruptcy for Missionary Baptist Foundation of America, Inc., have and recover, of and from the First National Bank at Lubbock, Texas the sum of $52,097.53, together with interest on said sum at the rate of 10.41% per annum from October 1, 1982. Such interest shall compound on September 30, 1983 and on the 30th day of September of each year thereafter until paid. Such interest shall be computed on a daily rate to the date of payment. The Trustee shall have all writs and processes necessary for the collection of said judgment.
2. The matter of Court costs shall be determined at another time in these proceedings. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490416/ | MEMORANDUM OPINION
JOHN E. RYAN, Bankruptcy Judge.
On November 25, 1986, a hearing was held on debtor’s motion for summary judgment (the “Motion”). Previously, debtor had filed a complaint to compel turnover of property specifying that the net proceeds from a motocross event held at the Los Angeles Memorial Coliseum were property of the estate and recoverable under Section 542 of the Bankruptcy Code. Mickey Thompson and Thompson Entertainment Corp. (collectively “Thompson”) served a writ of execution on the Los Angeles Memorial Coliseum Commission (the “Commission”) on May 19,1986 and June 24,1986 to levy on the net proceeds. In its complaint debtor contends that the June 24 levy is voidable as a preferential transfer under Section 547 of the Bankruptcy Code. At the hearing on the Motion, I requested further briefing on (1) the appropriate method for levying and (2) the possibility of a 100% distribution to creditors which would defeat the preference allegation. Subsequent to the hearing, debtor’s counsel stipulated that a 100% distribution to creditors was probable. Accordingly, debt- or withdrew its preference argument and in lieu thereof argued that the levies were invalid because Thompson failed to comply with appropriate California law.
The issues before me are: (1) does debtor have to amend its complaint to raise a new legal theory to invalidate the levies; and (2) were the levies made in accordance with *558California law so that Thompson has a valid security interest in the net proceeds.
STATEMENT OF FACTS
The revelant, material facts are not in dispute. On May 7, 1986, Thompson obtained a judgment against debtor and its President, Michael F. Goodwin, (“Goodwin”) for approximately $600,000. On May 19, 1986, Thompson served a writ of execution, notice of levy, and memorandum of garnishee on the Commission. Previously, Debtor and the Commission had entered into a License and Operating Agreement (the “License Agreement”) to permit debt- or to hold the Coors Superbowl of Motocross on June 7, 1986 at the Los Angeles Coliseum (the “Event”). Under the terms of the License Agreement, the Commission was to collect and deposit the gate proceeds into the Los Angeles Memorial Coliseum Commission Licensee Trust Account (the “Trust Account”), retain from the gate proceeds its license fee and costs and payments to third parties and remit the net proceeds to debtor.
The event occurred as scheduled on June 7, 1986. On July 14, 1986, the Commission interpleaded net proceeds of approximately $456,000 with the Los Angeles County Superior Court. On June 24, 1986, Thompson again levied on the Commission for the net proceeds from the Event. On September 19, 1986, debtor filed its bankruptcy petition under Chapter 11. Shortly thereafter, debtor filed this adversary proceeding seeking a turnover of the net proceeds.
DISCUSSION
Rule 56 of the Federal Rules of Civil Procedure is applicable to this adversary proceeding through Bankruptcy Rule 7056. Summary judgment shall be rendered if there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. The moving party has the burden of persuasion. Aronsen v. Zellerbach, 662 F.2d 584, 591 (9th Cir.1981); Jablon v. Dean Witter & Co., 614 F.2d 677, 682 (9th Cir.1980); In re Acorn Investments, 8 B.R. 506, 508 (Bankr.S.D.Ca.1981). All facts and inferences are to be construed most favorably for the party against whom judgment is sought. Marks v. United States, 578 F.2d 261, 262 (9th Cir.1978); Mutual Fund Investors v. Putnam Management Co., 553 F.2d 620, 624 (9th Cir.1977); In re Zupancic, 38 B.R. 754, 757 (9th Cir. BAP 1984).
The purpose of the summary judgment procedure is to “pierce allegations of fact” in the pleadings and grant relief by summary judgment if there are no genuine issues of fact to be tried. Engl v. Aetna Life Ins. Co., 139 F.2d 469, 472 (2nd Cir.1943). This is an important tool which, if properly used, can eliminate unnecessary trials and reduce litigation expenses. Mintz v. Mathers Fund, Inc., 463 F.2d 495, 498 (7th Cir.1972).
I will first address the adequacy of the complaint. Although Thompson did not object to the sufficiency of the complaint, he did contend that debtor waived its right to assert § 708.750 of the California Code of Civil Procedure because debtor did not raise the issue in debtor’s pleadings, motion for summary judgment, reply brief or oral argument.
To address this issue, it is important to review the history of this proceeding. In its complaint, debtor (1) requested a turnover of the net proceeds, (2) contended that the net proceeds were property of the estate under § 541(a) of the Bankruptcy Code and that it had a right to use the net proceeds pursuant to § 363 of the Bankruptcy Code, and (3) asserted that the June 24 levy was a preferential transfer under § 547 of the Bankruptcy Code. In its motion for summary judgment, debtor stressed the preferential nature of the June 24 levy. Thompson in its opposition brief to debtor’s motion for summary judgment claimed that the May 19 levy was valid and established its security interest before any preference period. Thompson further indicated that the June 24 levy was filed for “insurance” purposes only.
In its reply brief, debtor stated that the May 19 levy was invalid because Thompson failed to comply with applicable California *559law. Thompson followed the procedure for levying on an account receivable (§ 700.-170, California Code of Civil Procedure). Debtor argued that the obligation of the Commission under the License Agreement was not an account receiveable. It viewed the arrangement as a deposit account for the benefit of debtor which requires a different procedure under § 700.160 of the California Code of Civil Procedure. In addition, debtor claimed that Thompson failed to comply with § 708.750 of the California Code of Civil Procedure, which governs any levy on a public entity. Accordingly, the June 24 levy was an attempt to correct a defect in the May 19 levy.
At the hearing on the Motion, the issue of § 708.750 was not raised. I requested additional briefing as previously indicated. Thompson filed its supplemental memorandum contending that the May 19 levy was valid since if the obligation was not an account receivable, it was certainly a general intangible and the same levying procedure applies. Debtor filed its supplemental memorandum (1) withdrawing its preference argument, (2) reaffirming its position that the trust account was a deposit account requiring compliance with § 700.160, and (3) forcefully contending that Thompson’s failure to comply with § 708.750 rendered the levies invalid regardless of whether the net proceeds are construed as an account receivable or deposit account.
Thompson requested additional time to reply to debtor’s supplemental memorandum in order to respond to the § 708.750 argument. I granted Thompson’s request and Thompson filed its reply memorandum contending that the § 708.750 issue was newly raised and should be deemed waived. Thompson further argued that if the court should deem the issue properly raised, § 708.750 was designed to protect governmental entities and debtor should not be able to avoid the levies by asserting the rights of the Commission.
As previously demonstrated, the § 708.750 argument was initially raised, albeit peripherally, in debtor’s reply brief to Thompson’s opposition to the motion. Although it was not argued at the hearing, Thompson was on notice that this was a potential argument for invalidating the levies. Thompson does not cite any case authority for its waiver theory. In my view, the complaint is sufficient. Debtor requested a turnover of property to the estate. Debtor cited § 541(a) in its complaint to support its position that the net proceeds were property of the estate. Debtor further claimed that the net proceeds were property that the debtor may use, sell or lease under § 363. This is sufficient pleading for a turnover of property under § 542 of the Bankruptcy Code. The complaint gives Thompson sufficient notice. As stated in Conley v. Gibson, 355 U.S. 41, 46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80, 85 (1957) “[t]he Rules require ... ‘a short and plain statement of a claim’ that will give the defendant fair notice of what the plaintiff’s claim is and the grounds upon which it rests”. Id. at 47, 78 S.Ct. at 103.
Courts construe pleadings liberally so as to do substantial justice. Lynn v. Sheet Metal Workers’ Intern. Ass’n, 804 F.2d 1472, (9th Cir.1986). Generally, the Federal Rules, within fairly broad limits, permit a party to shift his position before or at trial without amendment and to seek relief justified by the evidence. 2A J. Moore & J. Lucas, Moore’s Federal Practice ¶ 8.14 at 8-90 (2nd Fed.1983). The reason for this is the liberal discovery and pretrial devices which eliminate surprise so that facts are developed and legal theories formulated for trial. The complaint essentially serves as a notice device. Moore, supra, ¶ 8.13 at 8-70.
Thompson was aware of the § 708.-750 argument prior to the hearing. In addition, I granted additional time to Thompson to brief the issue. Accordingly, I find that debtor’s complaint is sufficient and there is no waiver of the § 708.750 argument by debtor or prejudice to Thompson in having me give appropriate weight to this contention.
I spent considerable time on the § 708.750 issue because it is dispositive of *560this Motion. Section 708.750 is part of Article 8 which is entitled “Collection of Judgment Where Judgment Debtor is Creditor of Public Entity”. Article 8 is applicable to this proceeding since the Commission is a public entity. A public entity is defined in § 708.710 as “the state, county, city, district, public authority, public agency, and any other political subdivision in the state.” (Emphasis added). The License Agreement states that the Commission is a public agency. Thompson does not contend otherwise. Section 708.720(a) states that , “if a public entity owes money to the judgment debtor, the obligation of the public entity must be applied to the satisfaction of the money judgment against the judgment debtor only in the manner provided by (1) this article....” (Emphasis added). Certainly, the Commission has an obligation to pay the net proceeds to debtor under the License Agreement. Thompson has a money judgment against debtor and is seeking to obtain satisfaction by levying on the obligation of the Commission to pay the net proceeds to debtor. Section 708.720 further provides that Article 8 is the exclusive method available to a judgment creditor seeking this kind of remedy.
Section 708.750 states that where the judgment debtor is a public agency other than a state agency, the judgment creditor “shall file the abstract or certified copy of judgment and the affidavit with the auditor of the public agency, or if there is no auditor, with the official whose duty corresponds to that of the auditor.” The Commission is a public entity other than a state agency. In his declaration Mr. J.R. White, Chief Accountant for the Commission, states that he is the person with whom a judgment creditor should file the papers in accordance with § 708.750 and he was not served.
Article 8 is the exclusive procedure when levying on an obligation owing from a public entity to a judgment debtor. Section 708.780(a) provides that the filing of the papers in accordance with Article 8 creates a lien on the obligation. As the Law Revision Commission comments to § 708.780 indicate, the lien is created upon the filing with the public entity under § 708.750. This result is consistent with previous decisions under the former law (§ 710) which equated filing with -a levy. See McDaniel v. City etc. of San Francisco, 259 Cal. App.2d 356, 361, 66 Cal.Rptr. 384 (1968); Dept. of Water & Power v. Inyo Chem. Co., 16 Cal.2d 744, 751-53, 108, 108 P.2d 410 (1940). As the court stated in McDaniel, “Code of Civil Procedure, § 710 establishes a procedure for enforcing money judgments against a debtor to whom money is owed by the state or political subdivision thereof.” Supra, 259 Cal.App.2d at 361, 66 Cal.Rptr. 384.
Thompson contends that Article 8 is meant to protect the Commission and not the debtor. Thompson further argues that its levy on the net proceeds under a writ of execution created a valid lien. I disagree. The California legislature created Article 8 as the exclusive mechanism for levying in this situation. Just because it was designed to relieve governmental units from potential liability for wrongful payment does not excuse Thompson from compliance. To have a proper levy, the provisions of Article 8 must be satisfied. Thompson’s levies were not made in accordance with Article 8. Therefore, I find that the levies are invalid. Accordingly, Thompson does not have a security interest in the net proceeds.
Separate findings of fact and conclusions of law with respect to this ruling are unnecessary. The within memorandum opinion shall constitute my findings of fact and conclusions of law. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490418/ | *679FINDINGS OF FACT, CONCLUSIONS OF LAW AND ORDER RE: MOTION TO SET ASIDE ORDER GRANTING RELIEF FROM AUTOMATIC STAY
JON J. CHINEN, Bankruptcy Judge.
Debtors’ motion to set aside order granting relief from the automatic stay to creditor, Bancorp Finance of Hawaii, Inc. (“Ban-corp”) came on for hearing before the undersigned Judge on December 10, 1986. Carolyn E. Hayashi appeared on behalf of Creditor Bancorp and Edward C. Kemper appeared on behalf of Debtors. The court, having heard the testimony of witnesses, having considered the records and files herein and the memoranda and affidavits filed herein, and having considered the argument of counsel, now enters the following Findings of Facts, Conclusions of Law and Order re: Motion to Set Aside Order Granting Relief.
FINDINGS OF FACT
1. The Debtors are the lessees of Kua-loa Ranch of certain beachfront real property located at 49-583 Kamehameha Highway, Kaneohe, Hawaii 96744 (“Property”). At the time of the hearing, there were four years remaining on the lease with Kualoa Ranch.
2. In consideration of a loan made to them by Bancorp, Debtors made, executed, and delivered to Bancorp a Mortgage Note (“Note”) dated January 13, 1984, in the principal sum of $95,000.00 with interest at the rate of 15.39% per annum.
3. As part of the same loan transaction and in order to secure the payment to Ban-corp of the sum and interest set forth in the Note, Debtors made, executed and delivered to Bancorp a Mortgage, Security Agreement and Financial Statement (“Mortgage”) dated January 13, 1984 covering the Property and recorded in the Bureau of Conveyances of the State of Hawaii in Liber 17595 at Page 584, naming Debtors as Mortgagors and Bancorp as Mortgagee.
4. The Mortgage is a valid first mortgage lien on the Debtors’ leasehold interest in the Property, subject to any real property taxes which may be presently due and owing. Bancorp is the owner and holder of the Mortgage and the Note.
5. Bancorp was not able to establish at the hearing the exact amount owing by the Debtors. A witness called by Bancorp had no knowledge as to the exact amount of debt owing.
6. On November 14, 1986, Debtors attempted to make an interest payment in the amount of $1,000.00. However, Bancorp refused to apply the payment to the interest until December 10, 1986, when this court ordered the Debtors to make interest payments until the court made its ruling on this motion. On December 10, 1986, Ban-corp applied the November 14, 1986 payment to the interest due and owing under the Note and Mortgage. On December 12, 1986, Debtors, again made another interest payment in the amount of $1,147.00, and Bancorp, in accordance with the court’s oral ruling of December 10, 1986, applied said payment to the interest due and owing under the terms of the Note and Mortgage.
7. Under the terms of the Note, the entire unpaid principal balance, together with accrued interest was due and payable on January 17, 1986. As of October 3, 1986, there was due and owing pursuant to the Note and Mortgage the principal sum of $95,000.00 plus interest. Interest continues to accrue at the rate of approximately $37.73972 per day.
8. The Property is owned by Kualoa Ranch, Inc. (“Kualoa”) and, the lease will expire in four years, on December 31,1990. Kualoa will neither renegotiate the lease nor voluntarily sell its fee simple interests in the property.
9. Based on a value analysis of the Debtors’ leasehold interest in the Property, Richard Yoshimura (“Yoshimura”), Bank of Hawaii’s Chief Appraiser, valued the leasehold interest as of December 3, 1986 at approximately $15,500.00.
10. Yoshimura acknowledged that he was not aware of § 516-70(b) of the Hawaii Revised Statutes which requires the *680landlord at the termination of the lease to either extend the lease for another thirty years, or buy the improvements. A 1983 appraisal indicates the value of the improvements to be $51,584.00. In addition, on the issue of value, the testimony indicated that Kualoa Ranch had offered $140,-000.00 to the Debtors for the Property pri- or to becoming aware of Bancorp’s move to foreclose on the Property. Upon becoming aware of such action, Kualoa Ranch then offered $45,000.00 for the leasehold interest.
11. When Yoshimura was informed of the possibility of a condemnation of the fee on behalf of the Debtors, he acknowledged that the value of the Property could be much higher.
12. The evidence further shows that there was an appraisal made in 1983 which estimated the value of the property to be $145,000.00. And the 1983 appraisal indicated that the assessed value of the property was $148,000.00.
13. Kualoa has been involved in fee conversions/condemnation proceedings over other properties owned by it, and its policy is to contest any condemnation proceeding commenced against any of its properties.
14. As stated by both Laurel Mahoney, Corporate Assistance Secretary of Kualoa, and Tom Watts, one of the attorneys for the Debtors, previous condemnation proceedings commenced against property owned by Kualoa have taken at least five to six years to attain final determination.
15. On December 29, 1986, the Hawaii Housing Authority sent a letter to the Debtors informing them that their application to condemn the leased fee interest in the Property, pursuant to Chapter 516 of the Hawaii Revised Statutes, was denied.
16. As a result of the Hawaii Housing Authority’s failure or refusal to accept their application, Debtors have brought an action against the Hawaii Housing Authority and the lessor, Kualoa, in the First Circuit Court of the State of Hawaii to compel the Hawaii Housing Authority to accept their application and to proceed with the requested condemnation proceeding.
17. Other lessees in the Kualoa beach side area have also petitioned the Hawaii Housing Authority to condemn the property under the Land Reform Act, Chapter 516 of the Hawaii Revised Statutes.
18. Since it is a beachfront property, the Property’s value would be greatly enhanced by the availability of the fee.
19. There is another lien on the property held by the Small Business Administration (“SBA”). However, the SBA was willing to compromise that claim for $10,000.00 before Bancorp moved to foreclose on the Property.
CONCLUSIONS OF LAW
1. The court has jurisdiction over the parties and the claim.
2. 11 U.S.C. § 362(d) states:
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; or
(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.
3. 11 U.S.C. § 362(g) states:
(g) In any hearing under subsection (d) or (e) of this section concerning relief from the stay of any act under subsection (a) of this section—
(1) the party requesting such relief has the burden of proof on the issue of the debtor’s equity in property; and
(2) the party opposing such relief has the burden of proof on all other issues.
*6814. Bancorp has the burden of showing that Debtors have no equity in the Property, and Debtors have the burden of showing that Bancorp is adequately protected, and that the Property is necessary for an effective reorganization. See e.g. In re Development, Inc., 36 B.R. 998 (Bkrtcy.Hawaii 1984).
5. Although Yoshimura is the only appraiser who has testified, the court cannot give full credence to his valuation. First, he was not aware of Section 516-70(b) of the Hawaii Revised Statutes, which requires the landlord to either extend the lease for another thirty years or to buy the improvements. Second, when he was informed that there was the possibility of a condemnation of the fee on behalf of the Debtors under Chapter 516 of the Hawaii Revised Statutes, Yoshimura acknowledged that the market value of the Property could be much higher than $15,500.00. Third, Yoshimura failed to explain the difference in valuation of $145,000.00 in 1983 and his $15,500.00 in 1986.
6. Based on the possibility of a condemnation of the fee of the Property on behalf of Debtors, the court finds the market value of the Property to be at least $130,000.00. The total amount of debt being approximately $100,000.00, the court finds that there is sufficient equity in the property to provide adequate protection to Bancorp, especially in light of the monthly interest payments being made to Bancorp.
7. The court is, however, concerned about the time required in a condemnation proceeding. Therefore, the court will require that another hearing on this matter be held within three months to determine the status of the condemnation proceeding. In the meantime, the court orders the Debtors to continue paying the interest due on the mortgage to Bancorp until the next hearing. Further, the Debtors are directed to submit a disclosure statement and plan of reorganization within 45 days of the date of entry of this order.
8. Meanwhile, the court orders that the automatic stay continue in this proceeding until the next hearing on this matter.
IT IS HEREBY ORDERED, ADJUDGED AND DECREED that the Order Granting Motion for Relief from Automatic Stay filed November 13, 1986 is hereby vacated.
IT IS FURTHER ORDERED, ADJUDGED AND DECREED that Bancorp’s Motion for Relief from Automatic Stay shall be and is hereby denied.
IT IS FURTHER ORDERED, ADJUDGED AND DECREED that the Debtors shall file a disclosure statement and plan of reorganization within 45 days of the entry of this order.
IT IS FURTHER ORDERED, ADJUDGED AND DECREED that the Debtors shall appear before the undersigned judge on Friday, April 17, 1987 at 9:00 a.m. to advise this court as to the status of the Condemnation proceeding. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490419/ | MEMORANDUM OF DECISION
RE: APPLICATION OF CONNECTICUT NATIONAL BANK FOR PARTIAL PAYMENT OF SECURED CLAIM
ROBERT L. KRECHEVSKY, Chief Judge.
At issue in this proceeding is the right of Connecticut National Bank (CNB) to be paid from funds it garnisheed prepetition. No evidentiary hearing has been held, the parties having presented the matter on legal arguments based upon the case file and submitted exhibits.
I.
Florence Irene Bowers, the debtor, filed a chapter 13 petition on October 3, 1985, without schedules or a plan. The chapter 13 trustee, on November 6,1985, moved for dismissal of the case on the grounds of the debtor’s unreasonable delay and failure to file a plan. The trustee did not pursue the motion when the debtor, on November 21, 1985, filed schedules and a plan. The schedules are confusing and incomplete but disclose real property (the residence) valued at $160,000.00. The debtor claims to have total secured debt of $251,096.22, and total unsecured debt of $55,000.00. She scheduled as exempt household goods valued at $1,500.00, jewelry and sports equipment worth $500.00, a wardrobe of $500.00, and a $100.00 checking account. The debt- or’s plan, on which a confirmation hearing has yet to be held, provides for thirty-six monthly payments of $600.00 to the trustee. The only creditor for whom the plan apparently provides payment is Hartford National Bank and Trust Company, the predecessor to CNB. As to one CNB claim, the plan provides:
2. From the payments so received, the : trustee shall make disbursements as follows:
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(d) The following lien claims [sic] shall be deemed to be unsecured by virtue of 11 U.S.C. § 522(f)1 or § 506(a). Lien of $75,000.00 held by Hartford National Bank.
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4. OTHER: The debtor owes a disputed debt to Hartford National Bank involving a promissory note, mortgage all of which [sic] were the subject of a Superior Court and Appellate Courtdedsions [sic]. Hartford National Bank obtained a garnishment on the proceeds of a settlement being held by attorneys Moller, Horton & Feinberg [sic]. The sum of money garnished is approxi-metly [sic] $17,000.00. Debtor claims her exemption under 11 U.S.C. *824§ 522(d)(5)2 of $3,750.00 in said fund. Debtor shall pay to Hartford National Bank the difference between the garnished amount and debtors [sic] statutory exemption which is approximately $13,250.00. Debtor proposes to pay an additional amount of $12,500.00 to Hartford National Bank on it’s [sic] unsecured portion of its claim. Said payment shall be made in monthly installments of $600.00.
On March 6, 1986, CNB, the trustee, and the debtor submitted a stipulation to the court seeking a court order that the monies ($17,506.80) garnisheed prepetition by CNB and held by Moller, Horton & Fineberg be transferred to debtor’s counsel to be held in an interest-bearing account pending further order of the court. The stipulation provided that all rights of the parties, including the debtor’s “claim [to] her bankruptcy exemption, if any,” would be transferred to such account. The court entered the requested order.
CNB commenced the present contested matter on October 14,1986, by an “application” {cf. Bankr.R. 9013, 9014) requesting that the court order debtor’s counsel to pay over the full amount of the escrow to CNB, based upon CNB’s valid garnishment of said sum, CNB’s filed proof of claim showing a debt of $70,912.42, and debtor’s schedules and plan listing CNB as a creditor with a $75,000.00 claim. The debtor, on December 1,1986, filed both an objection to CNB’s proof of claim, stating that the debt- or was not indebted to CNB, and a motion to avoid CNB’s judicial lien because it “impairs the debtor-plaintiff’s $4,050.00 [sic] exemption in said item of personal property.” The parties did not request a hearing on the debtor’s motion, presumably on the basis that resolution of this pending proceeding may render the motion moot.
II.
The debtor and CNB address two issues in their memoranda of law: (1) whether a prior state-court judgment has conclusively determined the validity of CNB’s claim, and (2) whether the debtor’s chapter 13 case allows her to claim the judicial lien avoidance benefits of § 522(f). The first issue arises out of the following background disclosed by the exhibits filed in the proceeding.
A.
CNB, in 1980, brought a mortgage foreclosure action against the debtor’s residence in state court. The trial court granted judgment to the debtor on the complaint and on her counterclaim for cancellation of CNB’s mortgage. CNB appealed the judgment to the Connecticut Appellate Court, which found error in part by the trial court. Hartford National Bank and Trust Company v. Bowers, 3 Conn.App. 656, 491 A.2d 431 (1985). The appellate court opinion sets forth the pertinent facts.
On November 1, 1978, Florence Bowers executed a demand note for $50,000 in favor of the plaintiff. Bowers then reduced the sum due to $40,000 and, on April 23, 1980, she executed a replacement demand note for the reduced amount. This renewal note was secured by a mortgage on her property. Approximately eight days later, the plaintiff demanded full payment of the note and, in September 1980, instituted this action for foreclosure of its mortgage.
The plaintiff alleged that the demand was made because it had discovered that its mortgage was the third on the property rather than the second as it had been led to believe. Bowers responded that no such misrepresentation had been made but that, in fact, the demand was made to bring pressure to bear on her husband in unrelated business dealings he had with the plaintiff.
The trial court found that the plaintiff had initiated the note renewal negotiations, that it had no security for its original note and that the mortgage it took in *825connection with the renewal was accepted without any title search on its part. The court further found that there was no misrepresentation by Bowers and that, “as part of the complete transaction, the parties also agreed that the plaintiff would not make demand for payment as permitted by the note so long as the defendant complied with the plaintiffs repayment schedule.” That schedule was never prepared as the bank made demand almost immediately. Thus, the court held that “there was a failure of consideration on the part of the plaintiff as to the complete transaction, and that the plaintiff has not proved a legal basis for its complaint.”
With regard to the defendant’s counterclaim, the court ruled “upon the defendant’s counterclaim, the judgment of the court is that defendant’s mortgage to the plaintiff is hereby cancelled and declared to be null and void.”
3 Conn.App. at 658-59, 491 A.2d 431. The appellate court concluded:
Since the plaintiff did not live up to its end of the bargain, it was not unreasonable for the trial court to cancel the mortgage. Although in the present case the trial court’s award was unusual, it cannot be said that it was an abuse of discretion. We, therefore, conclude that the court did not err in its award on the defendant’s counterclaim.
There is no dispute, however, as to the validity of the note in the principal amount of $40,000 due by the defendant thereunder. Consequently, the court erred in failing to render judgment for the plaintiff on the note in that amount.
Id. at 660-61, 491 A.2d 431. On June 7, 1985, the Connecticut Supreme Court denied the debtor’s petition for certification to appeal from the appellate court.
The debtor claims that the appellate court was patently wrong in declaring the $40,000 replacement note valid. She requests this court “to exercise its equitable powers and determine for itself the merits of this matter.” Debtor’s memorandum at 4. She cites Pepper v. Litton, 308 U.S. 295, 308, 60 S.Ct. 238, 246, 84 L.Ed. 281 (1939), for the proposition that the bankruptcy court has “the power to sift the circumstances surrounding any claim to see that injustice or unfairness is not done in administration of the bankruptcy] estate.”
The debtor’s position on this issue is mer-itless. The doctrine of res judicata bars reconsideration of the validity of the note. “[A] judgment on the merits in a prior suit bars a second suit involving the same parties ... based on the same cause of action.” Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326 n. 5, 99 S.Ct. 645, 649 n. 5, 58 L.Ed.2d 552 (1979). This principle applies in bankruptcy courts.
[W]e are aware of no principle of law or equity which sanctions the rejection by a federal court of the salutary principle of res judicata, which is founded upon the generally recognized public policy that there must be some end to litigation and that when one appears in court to present his case, is fully heard, and the contested issue is decided against him, he may not later renew the litigation in another court.
Heiser v. Woodruff, 327 U.S. 726, 733, 66 S.Ct. 853, 856, 90 L.Ed. 970 (1946); cf. Brown v. Felsen, 442 U.S. 127, 99 S.Ct. 2205, 60 L.Ed.2d 767 (1979) (bankruptcy court may refuse to apply doctrine of res judicata when issue of dischargeability was not previously considered). The debtor, having been fully heard by the Connecticut courts, may not, by reason of a chapter 13 filing, relitigate her differences with CNB. The state-court proceedings between the debtor and CNB did not involve any scheme to defraud creditors and did not implicate any principles of bankruptcy law or administration. The doctrine of Pepper v. Litton does not apply in the present matter.
B.
The debtor next contends that if the CNB claim is found valid, she is entitled to assert exemption rights in the garnisheed funds. Although as previously recited, the debtor did not assert an exemption in these *826monies in her schedules, it is apparent from the provisions in her plan and the § 522(f) motion that she inadvertently failed to amend her schedules to claim this exemption. The court will treat the schedules as if properly amended.
The right of a debtor utilizing chapter 13 to claim exemption benefits seems, at first sight, anomalous. “The historical purpose of exemptions ... is to protect a debtor from creditors by permitting him to retain the basic necessities of life so that after his creditors have levied on or received all nonexempt property, the debtor will not be left destitute and a public charge.” Warren v. Toff (In re Taff), 10 Bankr. 101, 106 (Bankr.D.Conn.1981). In a chapter 13 case, however, a debtor normally retains all her property in return for her voluntarily using her future earnings to pay creditors at least what each creditor would have received if the debtor’s estate were liquidated under chapter 7.3 CNB contends that the only use of the Bankruptcy Code exemption provisions is to determine whether each creditor is so treated in a confirmed chapter 13 plan and that the provisions of § 522(f) are not available to a chapter 13 debtor. A few early bankruptcy court decisions so held, finding § 522(f) inconsistent with chapter 13. Morgan v. Household Fin. Corp. (In re Morgan), 18 Bankr. 17 (Bankr.D.Del.1981); Aycock v. Heritage Bank (In re Aycock), 15 Bankr. 728 (Bankr.E.D.N.C.1981).
The overwhelming majority of courts, which this court now joins, have permitted chapter 13 debtors to utilize § 522(f). Hall v. Finance One of Ga., Inc. (In re Hall), 752 F.2d 582 (11th Cir.1985), and cases cited therein; Transouth Fin. Corp. v. Paris, 26 Bankr. 184 (W.D.Tenn.1982); Baldwin v. Avco Fin. Serv., 22 Bankr. 507 (D.Del.1982); Anderson v. Dayton Plumbing Supply Co. (In re Anderson), 57 Bankr. 953 (Bankr.S.D.Ohio 1986). Chapter 13 debtors who have paid their judicial lien creditors at least what they would have received in chapter 7 would be unfairly discriminated against if they could not avoid such judicial liens. In effect, debtors in chapter 13 cases are not claiming exemptions. They are claiming the benefit of avoiding judicial liens as if they had claimed exemptions as chapter 7 debtors. Hall v. Finance One of Ga., Inc., supra, at 590; Baldwin v. Avco Fin. Serv., supra, at 509-10; Blake v. Ledan (In re Blake), 38 Bankr. 604, 607-08 (Bankr.E.D.N.Y.1984).
11 U.S.C. § 1325(a). "... the court shall confirm a plan if—
(4) The value, as of the effective date of the plan, of property to be distributed under the plan on account of each allowed unsecured claim is not less than the amount that would be paid on such claim if the estate of the debtor were liquidated under chapter 7 of this title on such date
This conclusion does not mean that the debtor may take advantage of the benefits of § 522(f) at this stage of her case. Her chapter 13 plan has not been confirmed, let alone consummated. Chapter 13 is a purely voluntary chapter, and a debtor unilaterally may dismiss the case at any time. A creditor’s judicial lien, accordingly, should be avoidable under § 522(f) only after the creditor has received what it is entitled to under a confirmed plan.
III.
In view of the foregoing, I hold that CNB is currently entitled to that portion of the monies originally deposited in escrow with debtor’s counsel that exceeds $4,050.00, plus applicable interest. The balance of monies shall remain in escrow pending further order of this court. It is
SO ORDERED.
. That section provides in part:
Notwithstanding any waiver of exemptions, the debtor may avoid the fixing of a lien on an interest of the debtor in property to the extent that such lien impairs an exemption to which the debtor would have been entitled under subsection (b) of this section, if such lien is—
(1) a judicial lien....
. Section 522(d)(5) authorizes an exemption of "[tlhe debtor’s interest in any property, not to exceed in value $400 plus up to $3,750.00 of any unused amount of the [homestead] exemption
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. 11 V.S.C. § 1306(b). "Except as provided in a confirmed plan or order confirming a plan, the debtor shall remain in possession of all property of the estate.” | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490420/ | ORDER OVERRULING OBJECTION TO CONFIRMATION
B.J. SELLERS, Bankruptcy Judge.
This matter is before the Court upon an objection to confirmation of the Chapter 13 plan proposed by Marjorie Helen Welch. The objection, filed on behalf of Roger L. Welch, ex-husband of the debtor, was heard by the Court.
The debtor has proposed a Chapter 13 plan which provides, in part, for graduated payments to the Chapter 13 Trustee over a period of 56 months for a dividend to allowed unsecured claimants estimated to be between 45 and 74%. Uncertainty exists as to the actual dividend because of pending disputes relating to certain claims against the debtor and because of unresolved pending litigation to which the debtor is a party for which any recoveries are to be contributed to the plan. The debtor’s plan is also *6to be partly funded by proceeds received from the sale of five (5) firearms, appraised at an approximate value of $900.00.
As the basis for his objection to confirmation of the proposed plan, Roger Welch asserts an ownership interest in the firearms the debtor proposes to sell, and challenges the debtor’s good faith in proposing to sell property in which he allegedly has an interest.
The Court notes that Roger Welch and Marjorie Helen Welch were husband and wife from 1969 to 1986. The five firearms in question were acquired during that marriage, either by purchase or by inheritance. In the Agreed Judgment Entry of Divorce entered by the Court of Common Pleas of Franklin County on April 9, 1986, in which Roger Welch was plaintiff and the debtor was the defendant, that Court, in part 4 therein, denominated Division of Assets (F) ordered the following:
Household Furnishings, Goods and Effects. It is further agreed and therefore ORDERED, ADJUDGED and DECREED that Defendant shall be awarded all right, title and interest in the household furnishings, goods and effects located at 2800 Marigold Avenue, Columbus, Ohio, with the exception of the following items which shall be and remain the sole property of the Plaintiff: Sears stereo and record and tape collection; living room end tables and lamps; antique glass coffee table; antique organ stool; afghan made by grandmother; Mitsubishi VCR and VCR tapes; all of Plaintiff’s personal belongings including clothing and jewelry; Plaintiff’s musical equipment including amplifier and guitar; liquor bar equipment; children’s personal belongings; children’s bedroom dressers including vanity and desk in Michelle’s room; Michelle’s bicycle; all hand tools except for a few common house tools that the Defendant may keep; two (2) black and white portable television sets; good china which was gift from Plaintiff’s mother; Plaintiff’s books; some towels and washcloths; Plaintiff’s fishing equipment; stuffed bird and stuffed squirrel; Plaintiff’s typewriter; and large and brown suitcases.
The parties agree that none of the exceptions to the general grant of household furnishings, goods and effects are applicable to the firearms in question. Roger Welch’s testimony at the hearing, however, indicated his belief that the parties never intended for the debtor to retain “his guns”. He further testified that he purchased the firearms with his own funds except for two which were inherited from his father. The debtor, on the other hand, testified that disposition of the firearms was never specifically discussed between the parties.
The Court finds that Roger Welch has failed to establish sufficient legal grounds for his asserted ownership of the firearms in question. The divorce decree is clear in its award of all household furnishings, goods and effects to the debtor, and none of the specifically excluded property encompasses the firearms the debtor proposes to sell. That Roger Welch supplied the funds to purchase the guns or that two of them were brought into the marriage by inheritance is only one relevant factor which is not determinative of the propriety of the award to the debtor of those items of personalty. See Sanzenbacher v. Sanzenbacher, 3 Ohio App.3d 180, 444 N.E.2d 454 (1981). Therefore, this Court finds that the weapons are properly the property of the debtor and that the Common Pleas Court’s judgment so determining is not subject to this Court’s redetermination in this proceeding. Scholler v. Scholler, 10 Ohio St.3d 98, 462 N.E.2d 158 (1984). Should Roger Welch wish to regain ownership of the firearms, he may wish to consider an appropriate purchase when they are offered for sale.
Based upon the foregoing, Roger Welch’s objection to the confirmation of the debtor’s Chapter 13 plan is hereby overruled, and the Court will proceed to enter an order confirming the debtor’s proposed Chapter 13 plan.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490422/ | MEMORANDUM OPINION
STEWART ROSE, Chief Judge.
This adversary was filed to determine the dischargeability of a debt. The debt- or’s corporation (“Crown”) sold certain accounts to the creditor (“GMA”) at a discount. GMA took a security interest in the receivables. GMA’s officer testified that the only notification given to account debtors was a change of the post office box for remitting payments. Certain payments were nonetheless sent to Crown and never found their way to GMA’s coffers. No evidence was presented to indicate that the debtor acted to divert payments made by the account debtors prior to receipt by Crown. Nor was it shown that the debtor took for his own personal use monies trace*78able to payments on the accounts sold to GMA. The debtor signed as personal guarantor of one of the contracts with GMA.
The creditor now seeks to have the debt resulting from these transactions declared non-dischargeable as “willful and malicious injury by the debtor to another entity or to the property of another entity.” 11 U.S.C. § 523(a)(6) (1982).1 The creditor asserts that the debtor’s failure to turn over the amounts paid on the accounts constitutes a conversion or willful and malicious injury to property. Two issues are thus presented: (1) whether the facts state a claim of conversion and (2) whether Debt- or’s conduct was willful and malicious.
Sales of accounts are secured transactions governed by the U.C.C. N.M.S.A. 1978 § 55-9-102 (Orig.Pamp. & Supp.1986). Under the U.C.C., Crown’s receipt and deposit of the payments were proper. Account debtors may continue making payments to the debtor unless notified of the assignment and of the fact that payments are to be sent to the assignee (creditor). N.M.S.A. § 55-9-318. By the creditor’s own testimony, notification of the assignment was intentionally not given to account debtors. Therefore, only one of the two statutory requirements was met.
Furthermore, Crown had the right to deposit the received payments, subject to the contractual obligation to “hold them separate ... upon an express trust”2 for the creditor. It is well settled that “trust” language in financing transactions such as this does not create a technical trust, and thus no fiduciary duty falls on the debtor, see Davis v. Aetna Acceptance Co., 293 U.S. 328, 55 S.Ct. 151, 79 L.Ed. 393 (1934), In re Clifton, 32 B.R. 666 (Bankr.D.N.M.1983). The debtor’s failure to abide by the “trust” provisions of the sales contracts, without more, does not constitute wrongfulness as required for conversion, see Evans v. Mortgage Investment Co. of El Paso, Texas, 84 N.M. 732, 507 P.2d 793 (Ct.App.1973). Only the subsequent nonpayment may constitute breach or conversion.
In bankruptcy, numerous cases discuss whether the failure to turn over payments to a financing creditor may except a debt from discharge. In re Tester, 62 B.R. 486 (Bankr.W.D.Va.1986), In re Holtz, 62 B.R. 782 (Bankr.N.D.Iowa 1986), In re Vandrovec, 61 B.R. 191 (Bankr.D.N.D.1986), In re Egan, 52 B.R. 501 (Bankr.D.Minn.1985), In re Eisner, 35 B.R. 86 (Bankr.N.D.Ohio 1983). Several cases conclude that a debt resulting from such conduct may be nondischargeable. Holtz, supra, Eisner, supra, In re Beaseley, 62 B.R. 653, 15 C.B.C.2d 166 (Bankr.W.D.Mo.1986). “Exceptions to discharge are construed narrowly, and the burden ... is on the party opposing discharge.” In re Black, 787 F.2d 503, 505 (10th Cir.1986). The primary inquiry looks at the debtor’s conduct and the disposition of the funds as evidence of aggravating circumstances. Holtz, Eisner, and see In re Clifton, 32 B.R. 666 (Bankr.D.N.M.1983). Willfulness and maliciousness must be proven by clear and convincing evidence. In re Phillips, 804 F.2d 930 (6th Cir.1986), McCelvey v. Fulgham (In re Fulgham), 70 B.R. 168, 170 (Bankr.D.N.M.1986).
The dispositive question then is whether the creditor has made a clear and convincing showing that the debtor acted willfully and maliciously. The testimony at trial fell far short of such a showing. The relevant evidence was that the debtor went to the creditor’s office to discuss the problem; the debtor did pay part of the debt with corporate checks; the debtor gave a security interest in personal assets to protect the creditor; the debtor was not managing the business during much of the time in question; and except in one instance the debtor *79did not personally control disposition of payments received. Such facts do not indicate maliciousness or willfulness.
The conclusion derived from the aboye is that, even if debtor’s conduct constituted a technical conversion of the creditor’s property, the required elements of Section 523(a)(6) were not proven.
The foregoing constitutes findings of fact and conclusions of law.
Counsel shall submit for entry a form of judgment:
. Although the complaint and amended complaint refer only to 11 U.S.C. § 523(a)(2), the pre-trial process, including the creditor’s Motion for Summary Judgment, cast the issue in terms of conversion under § 523(a)(6).
. Paragraph 4 of Contract for Sale of Accounts Receivable and Contract Rights and Security Agreement, Plaintiff’s exhibit 1. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490424/ | MEMORANDUM DECISION
A. JAY CRISTOL, Bankruptcy Judge.
This dispute arises by way of a Motion for Protective Order filed by NCNB NATIONAL BANK OF FLORIDA (“NCNB”). The NCNB Motion for Protective Order (“NCNB Motion”) was filed in this Court in response to the issuance by the Clerk of this Court of a Subpoena to Witness issued on September 23, 1986. This Subpoena was served on NCNB by FINCORA, LTD., CFC CAPITAL CORPORATION, and COMMONWEALTH FINANCIAL CORPORATION (collectively referred to hereafter as “CFC”). The discovery sought by CFC from NCNB relates to an Adversary Proceeding currently pending before the United States Bankruptcy Court for the Southern District of New York, under Case No.: 86-10004 (CB) styled In re D.T. Industries, Inc.
CFC requested any and all documents relating to loans by NCNB to D.T. INDUSTRIES, including documents concerning two principals of D.T., Rose & Leon Ten-enbaum, and a related third-party, Benny Tenenbaum.
Counsel for the Tenenbaums argues that the issuance of a Subpoena by the Clerk of this Court is improper because the Clerk was without jurisdiction to do so and thus this Court is consequently without jurisdiction to determine the issues brought forth by NCNB’s Motion for Protective Order. Counsel for the Tenenbaums suggests that the proper court to issue the Subpoena would have been the Bankruptcy Court for the Southern District of New York, where the Adversary Proceeding at issue is currently pending.
Counsel for CFC argues that the Subpoena was properly issued by the Clerk of this Court pursuant to Rule 45(d) of the Federal Rules of Civil Procedure. Counsel for NCNB is before this Court as a neutral party seeking only the direction of this Court with respect to the production of the documents demanded by the Subpoena to Witness.
Rule 45 of the Federal Rules of Civil Procedure provides the proper procedure for the issuance of subpoenas for the taking of depositions and production of documents. That Rule provides that effective proof of service of a notice of taking deposition is sufficient authorization for the issuance of a subpoena by the Clerk of the District Court where the deposition is to be taken. Rule 45 therefore implies that one wishing to take a deposition need only comply with the appropriate rules for noticing such depositions in order to obtain a subpoena from any of the districts within the country. This implication has been reduced to a general rule. “The scheme of Rule 45 therefore permits a litigant to ob-*237tam a deposition subpoena in any district court of the United States regardless of where the principal litigation is pending, a discovery opportunity well established and often alluded to in the opinions of the Federal Court.” In re Guthrie, 733 F.2d 634 (4th Cir.1984); see also, Ariel v. Jones, 693 F.2d 1058, 1060 n. 2 (11th Cir.1982).
Although the Guthrie case cited above discusses Rule 45 in its 1984 form, the 1986 amended version of Rule 45 has not been changed in such a way as to alter the substantive observations of the court in Guthrie.1
The purpose of Rule 45(d)’s allowance of service of a subpoena in the taking of a deposition in a District other than the District in which the main action is pending, is the accommodation of witnesses from being inconvenienced by being required to travel unnecessarily long distances to attend depositions. In re Guthrie, at 638. Further support for the Rule set forth in Guthrie appears at 4 J. Moore and J. Lucas, Moore’s Federal Practice, ¶ 26.83[5] (2nd Ed.1983).
THEREFORE, I find that the issuance of the Subpoena by the Clerk of this Court, notwithstanding the fact that the Adversary Proceeding is pending before the Bankruptcy Court for the Southern District of Florida, is a proper exercise of this Court’s jurisdiction. Consequently, this Court also has jurisdiction to determine the issues arising from the Motion for Protective Order filed by NCNB and the Court will consider and address those issues in a separate Order.
. The Committee Note to the proposed Amendment to Rule 45(d), written in 1983, suggests that the proposed amendment to Rule 45, which was eventually adopted and incorporated in the Rules in 1985, was intended only to eliminate the imperfect and often times ambiguous distinction between "residents" and "non-residents" as defined and regulated by the prior Rule 45(b). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490425/ | MEMORANDUM DECISION ON MOTIONS FOR SUMMARY JUDGMENT
A. JAY CRISTOL, Bankruptcy Judge.
On August 13, 1986, Plaintiff, Arrow Air (“Arrow”), filed its two count Complaint against Defendant, United Airlines (“United”). Plaintiff’s Amended Complaint was filed August 26, 1986. Count I sought the refund of overpayments made by Arrow to United for which no services were provided under the parties’ Ground Services Agreement No. 49789. Count II sought injunc-tive relief against United’s actions in violation of 11 U.S.C. § 362(a)(6) and (a)(7). Arrow also filed an Emergency Motion for Temporary Restraining Order which was granted ex parte. The Court nevertheless required a hearing be held within seven days. At the hearing held August 20, 1986, this Court converted the Temporary Restraining Order to a Temporary Injunction pending the final resolution of this matter.
On October 29, 1986, the parties submitted their Pretrial Stipulation of Undisputed Facts and Issues of Law. There being no remaining issues of fact, no trial was set in this matter. Instead, the parties submitted Motions for Summary Judgment, on which hearings were held on December 16, 1986.
I. The Undisputed Facts
1. United and Arrow at various times in 1982 and thereafter, entered into several ground services agreements at airports in New York, Philadelphia, and Orlando pursuant to which United provided services and materials to Arrow.
2. Pursuant to the terms of these several agreements, a letter of credit was initial*246ly issued by Standard Chartered Bank, PLC in the amount of $120,000 with United as the beneficiary to secure the payment of Arrow’s obligations under the several agreements. The term of this letter of credit was extended and the amount eventually decreased to $50,000. The letter of credit expires on January 17, 1987.
3. One of these agreements, Ground Service Agreement No. 49789 at JFK International Airport, as amended by the parties, also provided for payment by Arrow of a monthly minimum charge of $155,000 if the value of services actually rendered by United to Arrow did not exceed that amount. However, the Agreement does not provide that this amount becomes due on the first day of each month and previous invoices did not bill this amount on a prospective basis, but rather at month’s end.
4. United furnished services and materials to Arrow pursuant to the agreement on at least two occasions as late as February, 1986, but no services were provided after February 11, 1986, the date on which Arrow’s Chapter 11 case was commenced.
5. On February 11, 1986, Arrow filed a Petition under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Florida.
6. On February 11, 1986, Arrow suspended its entire passenger operation on a system-wide basis. As a result, no services were provided by United to Arrow after February 11, 1986.
7. After the filing of Arrow’s Chapter 11 Petition, and without leave of this Court, United improperly invoiced Arrow for services which had been provided pre-petition. These invoices were dated February 13, 1986, February 26, 1986, March 10, 1986, March 12, 1986, March 13, 1986, and April 18, 1986.
8. On April 15, 1986, upon Arrow’s motion, this Court entered an Order Approving Rejection of the parties’ Ground Services Agreement No. 49789.
9. On or about July 16, 1986, United notified Arrow of its intent to draw against the $50,000 letter of credit for allegedly outstanding invoices totalling $30,576.23. This was again accomplished without leave of court and in violation of 11 U.S.C. § 362(a).
10. On August 13, 1986, Arrow filed this adversary proceeding to enjoin United’s wrongful attempt to draw down the letter of credit.
11. United has presented invoices for pre-petition services and charges pursuant to the several agreements totalling $206,-865.08.
12. These invoices included the amount of $121,695.85, the amount allegedly necessary to reach the monthly minimum charge for services at JFK International Airport in February, 1986, pursuant to the agreement covering that airport.
13. Arrow had made prepayments pursuant to the agreement and is entitled to a credit in the amount of $175,468.85. Arrow is entitled to an additional credit of $820.00 as an unapplied cash credit.
14. The amount to which United claims it is entitled to under the letter of credit and in accordance with the Agreement is derived from the invoices of $206,865.08, less Arrow’s prepayment of $175,468.85 and Arrow’s credit of $820.00 for a total of $30,576.23.
15. Arrow is further entitled to an interline credit in the amount of $22,870.68, and to a credit of $372.46 representing a credit from Arrow’s Denver account.
16. United is also entitled to $81,729.24 representing payments due for ATP cards issued by United.
17. Additionally, United is entitled to $418.10 representing an offset of Apollo debits and credits.
18. Offsetting these debits and credits, and granting United its pro rata share of the monthly minimum charge for eleven days of service in February, $60,892.86, rather then the entire monthly minimum balance of $121,695.85, the net result is that Arrow has a net credit of $4,625.70.
19. At no time, even to this date, did United obtain a modification of the auto*247matic stay of 11 U.S.C. § 362(a) prior to sending its notice to Arrow that there would be a drawdown on the letter of credit, nor prior to the sending of the six post-petition invoices for pre-petition services.
II. Conclusions of Law
1. This Court has jurisdiction to enjoin United’s actions in violation of the automatic stay, including any actions effectuating the drawing down of the $50,000 letter of credit.
2. With respect to United’s claim that it is entitled to the entire monthly minimum charge, the Court does not agree. The contract does not specify that the entire monthly minimum accrues on the first day of each month. Moreover, this appears not to be the case since the minimum charges were not billed at the beginning of each month on a prospective basis but rather retroactively at month’s end. Moreover, the affidavit of United’s representative, Ron Hanson, is undisputed in its description of the monthly minimum .as being calculated at the end of each month.
3. In support of its argument that United is entitled to the full monthly minimum charge, United has proffered two decisions; both of which are distinguishable from the instant case and therefore do not persuade the Court to agree with United’s position. The first ease, In re Community Medical Center, 623 F.2d 864 (3d Cir.1980), is inapplicable to the instant case because its holding it based on the application of New Jersey law. Moreover, the case involves a Chapter XI proceeding under the how repealed 1898 Bankruptcy Act and is therefore not authoritative in an action arising under the Bankruptcy Code.
4. The second decision to which United points for support, In re California Steel Co., 24 B.R. 185, 10 B.C.D. 512 (Bankr.N.D.Ill.1982) is also not authoritative in the present factual situation. The decision dealt with the debtor’s ability to avoid a claim for monthly minimum charges absent a proper rejection of the executory contract. The debtor had to decide to accept all of the burdens and services such a contract carried, or to stop all services under the contract at the date of the petition. In California Steel, supra, the acceptances of post-petition services resulted in debtor’s liability for the corresponding minimum charges.
5. In the instant case, it is undisputed that no services were provided by United to Arrow after the February 11, 1986 filing date. Therefore, United cannot recover the monthly minimum charge for the entire month of February. However, United is entitled to its pro rata share of the $155,-000 monthly minimum for the eleven (11) days of service which were made available to Arrow. Therefore, United is entitled to recover monthly minimum charges of $60,-892.86.
6. Under the parties’ agreement, only certain charges would be credited against the monthly minimum. During February 1 through February 11, 1986, Arrow accumulated charges of $33,304.15 which are properly credited against the pro rated monthly minimum of $60,892.86 resulting in an additional credit to Arrow. There remains the amount of $27,588.71, which is a credit to United. Therefore, in light of all the credits due United, Arrow is entitled to a judgment in its favor of $4,625.70.
7. This executory contract was properly rejected by Arrow and under controlling bankruptcy law, the rejection is deemed to be a breach of the contract occurring immediately before the filing of the petition. 11 U.S.C. § 502(g); International Brotherhood of Teamsters, et al. v. IML Freight, Inc., 789 F.2d 1460 (10th Cir.1986); In re Steiner, 50 B.R. 181 (Bankr.N.D. Ohio 1985); In re Cardinal Export Corp., 30 B.R. 682 (Bankr.E.D.N.Y.1983); In re Commercial Freight Inc. of Indiana, 27 B.R. 293 (Bankr.S.D.Ind.1983). Additionally, United has not pled nor proven any actual damages suffered as a result of Arrow’s breach. No such allegation appears as a defense (setoff) or as a counterclaim of any kind. The burden of such proof is on United, and therefore it is not entitled to the full $121,695.85 amount for which no services were provided to Arrow *248pre- or post-petition, but may only recover $60,892.86. In re Peninsula Gunite, Inc., 24 B.R. 593 (Bankr. 9th Cir.1982); In re Standard Furniture Co., 3 B.R. 527 (Bankr.S.D.Cal.1980).
8. United’s post-petition actions to collect its claim against Arrow were all performed without leave of court and may be in violation of the automatic stay of 11 U.S.C. § 362(a) and may therefore be void and of no effect. United failed to respond to this argument and the cases cited by Arrow are persuasive on this issue. In re Fasgo, Inc., 58 B.R. 99 (Bankr.E.D.Pa.1986); In re Van Riper, 25 B.R. 972 (Bankr.W.D.Wis.1982); In re Hill, 19 B.R. 375 (Bankr.N.D.Tex.1982).
9. United has attempted to stress to the Court its inability to affect the relationship between United and Standard Chartered Bank, PLC. This is not disputed by Arrow. However, the actions by United were violative of 11 U.S.C. § 362(a)(6) and (a)(7), and so were of such a nature as to be properly enjoined by this Court under its powers pursuant to 11 U.S.C. § 105(a).
10. The Court concludes that there is no genuine issue of material fact remaining to be decided by this Court, and that Arrow is entitled to a judgment in its favor as a matter of law. The Court will enter a separate judgment for damages in the amount of $4,625.70, and enjoining United from taking any action to collect the debts which were the subject of this action from Plaintiff, Arrow, including any agent, representative, or employee thereof and further enjoining any action to draw under the letter of credit issued by Standard Chartered Bank, PLC. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490427/ | MEMORANDUM OPINION AND DECISION
DAVID E. RUSSELL, Bankruptcy Judge.
Introduction
These two cases represent yet another skirmish in the continuing battle between Social Security beneficiaries and state welfare agencies over the rights to payments from the Social Security Administration (SSA). The fact pattern and issues before the Court are the same as those in Vazquez, Guerrero and Compton, 42 B.R. 609 (Bankr.E.D.Pa.1984) (Vazquez I) which was reversed by the District Court, with the reversal being affirmed upon further appeal in Vazquez, Guerrero and Compton, 788 F.2d 130 (3rd Cir.1986) (Vazquez III).
Statement of Facts
Both petitions in bankruptcy were filed on May 21, 1985. Prior thereto the debtors had applied for Supplementary Security Income (SSI) under Title XVI of the Social Security Act, 42 U.S.C. §§ 1381, et seq. While waiting for their applications to be processed, the debtors applied for the more immediately available General Assistance benefits (GA) from the Sacramento County Welfare Department (SCWD). At SCWD’s request, the debtors executed form SSP 14, the last one being executed by debtor Dias on October 17, 1984. The original of each executed form was sent to the SSA.
After the petitions were filed, the Appeals Council of the SSA approved the debtors’ eligibility for SSI following remand by the United States District Court for the Eastern District of California. Thereafter, and in the following sequential order, SCWD received the debtors’ first SSI checks directly from the SSA, deducted the claimed amounts of GA benefits previously paid to the debtors ($5,674.50 in the *426case of Dias and $5,964.00 in the case of Williams), remitted the differences to the debtors ($4,297.33 and $3,996.30, respectively), the debtors were granted their discharges, the cases were closed and then reopened upon the debtors’ applications to file complaints to determine the discharge-ability of the SCWD debts, the debtors filed their complaints, and SCWD filed its answers.
SCWD was the only creditor listed on both of the debtors’ schedules; on A-3 as unsecured. SCWD did not file a claim nor otherwise participate in either of the bankruptcy cases until it was served with the debtors’ complaints. The SSI benefits were claimed as exempt by both debtors.
The debtors have now filed motions for summary judgment, requesting a determination that their debts to SCWD are discharged and requesting orders requiring SCWD to pay over the withheld SSI benefits to them, as was done in Vazquez I. Because the issues and the essential facts are the same, the motions were consolidated for hearing and decision.
Discussion
The key problem in these SSI cases is the proper characterization of the transaction that occurred when the debtors executed form SSP 14 and the executed original was mailed by SCWD to the SSA. Once the nature of that transaction is correctly understood, the proper decision is easily reached by the application of general bankruptcy law. The two essential elements of the transaction are the subject matter and the intention of the parties. The SSI benefits are the subject matter of the transaction. Like all Social Security benefits, they are federal funds created by Congress for the benefit of a limited class of natural persons, the distribution of' which is strictly limited to the intended beneficiaries.1 The SSA administers the Social Security program and distributes the SSI benefits under the aegis of the Secretary of Health, Education and Welfare.
The written agreement as set forth' in form SSP 14 2 is the best evidence as to the intent of the parties. That form, and form PA 176-S discussed in the Vazquez cases, are essentially the same, and both were obviously drafted to comply with the regulations set forth at 20 C.F.R. § 416.1910.3 That section of the Federal Regulations was promulgated by the Secretary of Health, Education and Welfare under the *427authority of 42 U.S.C. § 1383(g)(4), which specifies the agreement that a state must have with the SSA in order to receive the SSI benefits directly from the SSA. Thus, form SSP 14 is really an agreement between three parties, the debtor-SSI beneficiary, SCWD and SSA.
Since the subject matter of the subject transaction is a federally created fund and the intent of the three parties to the transaction is evidenced by a federally mandated form, the transaction cannot be analyzed without considering the federal policy and Congressional intent underlying that fund and that form. An excellent analysis of Congressional intent and federal policy for the purpose of our analysis is set forth in the case of Moore v. Colautti, 483 F.Supp. 357 (E.D.Pa.1979).
One of the major problems of the SSI program was the deleterious effect on the impecunious beneficiaries of the time lag between the application for benefits and the first benefit check. Although the general proscription against the assignment of Social Security benefits contained in 42 U.S.C. § 407 was specifically incorporated in the SSI program by 42 U.S.C. § 1383(d)(1), the SSA and state welfare agencies cooperated to help solve the time gap problem by permitting the states to collect SSI benefits directly from the SSI beneficiaries. Under this cooperative plan, the states would provide its locally derived funds to SSI applicants until they received their first SSI benefit check. Since the initial check included retroactive benefits, the states could usually recoup their limited welfare funds paid to the SSI beneficiaries during the gap period directly from those beneficiaries. However, the case of Philpott v. Essex County Welfare Board, 409 U.S. 413, 93 S.Ct. 590, 34 L.Ed.2d 608 (1973) directly held that the states were barred, like all others, by the anti-assignment provisions of 42 U.S.C. § 407. Congress responded in 1974 by enacting the Interim Assistance Reimbursement Program (IAR) 42 U.S.C. § 1383(g). Subpara-graph (1) of that section specifically excepts the IAR program from the anti-assignment prohibition. See Moore v. Colautti, supra, pp. 362-64.
The primary reason for the IAR program was to encourage the states to provide interim assistance to SSI applicants during the gap period. It also promoted the efficient use of the limited federal and state funds for the relief of one of the most needy group of citizens while preventing that group from “double-dipping” into both funds. As the program was developed, the interim assistance provided by the states was treated as a loan by the states to the SSI applicants. Such loans would be repaid to the states by sending the first large SSI check directly to the state agency which would deduct the payments made during the gap period (the loan) from the check and remit the difference to the SSI beneficiary. Moore v. Colautti, supra, pp. 362-64.
With the foregoing background, the intent of the three parties to the SSP 14 agreement becomes quite clear. In simple contract terms, the SSI beneficiary assigned the appropriate portion of his rights in the SSI benefits to SCWD as security for the GA benefits advanced to him by SCWD during the gap period. Furthermore, the assignment was made not only with the knowledge of, but also with the encouragement of, the SSA as obligor of the SSI benefits, thus obviating the potential problems of a partial assignment of a contractual obligation and lack of notice to the obli-gor.
Long before the advent of the Social Security Act or Uniform Commercial Code (UCC) courts had recognized the nature of the right of SCWD in the SSI benefits. Such a right is known as an equitable lien, which is generally defined as an equitable right to have a fund or specific property applied in whole or in part to a particular debt, or merely a charge on property for the purpose of security. (51 Am.Jur.2d, Liens § 22.) The elements of an equitable lien, all of which are satisfied by the subject transaction, are that there be a debt or obligation owing by one person to another, a res to which the obligation attaches, that *428the res can be identified or described with reasonable certainty, and an intent that the property serve as security for the payment of the debt or obligation. (51 Am.Jur.2d, supra, § 24.) Equitable liens have been recognized even when the property is not yet owned by the party making the contract, 51 Am.Jur.2d, supra, § 26, or when the obligation secured by the lien consists of future advances, 51 Am.Jur.2d, supra, § 33.
Neither the UCC nor the advent of bankruptcy should alter the relationships between the parties. First of all, federal law rather than state law should control the question of how a state welfare agency perfects its rights in federal funds. (See Vazquez III, p. 134 and ftnt. 4.) SCWD clearly complied with the federally mandated provisions of 42 U.S.C. § 1383(g)(4) and 20 C.F.R. § 416.1910.4 Secondly, because of 42 U.S.C. § 407, there are no competing creditors that need to be notified of SCWD’s security interest in the SSI benefits and therefore the UCC’s concept of perfection by notice is not applicable to the transaction in question. Thirdly, the provisions of 42 U.S.C. § 407 defeats the “strong arm” provisions of 11 U.S.C. § 544, which is the primary means of avoiding equitable liens by the bankruptcy trustee. (See, e.g., In re Pirsig Farms, Inc., 46 B.R. 237 (D.Minn.1985)). Finally, in weighing the policy of the Bankruptcy Code in providing a “fresh start” for debtors against the conflicting policies of the IAR program in efficiently utilizing limited welfare funds, providing much-needed assistance to SSI recipients during the gap period and, at the same time, limiting “double dipping,” the scales are definitely weighted against the Bankruptcy Code policy.5
While this Court agrees with the Vazquez III court that federal law determines the nature of the transaction between the parties and that the state welfare agencies are entitled to retain the appropriate amount of the SSI benefits received from the SSA, it does not agree with the conclusion of that court that no debt existed between the debtors and the state welfare agencies that could be discharged in bankruptcy (Vazquez III, at page 134). There is no indication in either form PA 176 K6 used in the Vazquez cases or form SSP 147 used in the cases before this Court that the intention of the parties was to substitute the SSA for the debtors as the obligor to the state welfare agencies.8 Clearly, SCWD, at least, did not intend to give up its rights to collect from the debtor the GA benefits it paid to them under California law,9 particularly if it were ultimately determined by the SSA that the debtors were not eligible for SSI benefits. Since a debt- or creditor relationship existed at the time the petitions were filed herein, such obligations, not being an exception to discharge as provided in 11 U.S.C. § 523, were discharged under the provisions of 11 U.S.C. § 727(b).
In conclusion, the transactions between the debtors and SCWD were assignments 10 creating “perfected” equitable liens in the SSI benefits. As such, the SCWD liens are immune from the trustee’s avoiding powers. Since the debtors’ rights to avoid liens under 11 U.S.C. § 522(h) are derivative from those of the trustee, the debtors are also unable to avoid the liens. *429Although the debtors’ obligations to SCWD are discharged, the liens pass unaffected through the bankruptcy proceedings, 11 U.S.C. § 506(d). Partial summary judgment is granted to the debtors declaring their debts to SCWD to be discharged. The debtors’ requests for orders requiring SCWD to turn over the withheld SSI benefits are denied. This memorandum opinion shall constitute findings of fact and conclusions of law. Counsel for SCWD shall prepare and submit judgments consistent with this opinion.
. 42 U.S.C., § 407, which applies to all Social Security benefits, including SSI benefits, states in pertinent part:
"Section 407. Assignment. The right of any person to any future payment under this sub-chapter shall not be transferable or assignable, at law or in equity, and none of the moneys paid or payable or rights existing under this subchapter shall be subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law.”
. Form SSP-14 provides, in relevant part:
I,_declare that I have applied for the Supplemental Security Income/State Supplementary Program (SSI/SSP) with the Social Security Administration Office located in the County of Sacramento on_
This authorization is signed with a full understanding of the following: In consideration of the Interim Assistance paid to me, or on my behalf, by the County of Sacramento, I hereby authorize the Social Security Administration to make the first payment of SSI/SSP benefits to which I am determined eligible to the County of Sacramento. I further authorize the County to deduct from such payment the amount of Interim Assistance paid to me, or on my behalf, from the initial month of' SSI/SSP eligibility or date of Interim Assistance application, whichever is later.
I understand that the County, after making the authorized deduction, will within ten working days from receipt of the benefit check, pay the balance, if any, to me.
It is further understood that in the event of disagreement, I shall have the right to a hearing from the State with respect to the amount deducted by the County from my initial SSI/SSP payment. The request for hearing-must be filed with the State within 90 days of the date the County notifies me of the apportionment which has been made.
Signature of Interim Assistance Applicant
Address: _
Eligibility Worker Signature: _
Social Security Number of Applicant: _
Case Number, if Applicable: _
.See Vazquez III, footnotes 3 and 6.
. Sending the original of Form SSP-14 to the SSA is also analogous to filing a U.C.C.-1 Form with the appropriate state officer to perfect a security interest under the U.C.C.
. It seems clear that the debtors in the cases at bar, by listing SCWD as their only creditor and subsequently seeking a return of the SSI funds, filed bankruptcy for the sole purpose of "double-dipping" into the GA welfare fund of the County of Sacramento;
. Vazquez III, ftnt. 6.
. Endnote 2, supra.
. Such a transaction is perhaps best characterized as a novation.
. See, generally, California Welfare and Institutions Code, § 17403, which authorizes SCWD to collect paid GA benefits from after acquired property and income of the recipients.
. Accord, In re Trejo, 44 B.R. 539 (Bankr.E.D.Ca.1984), Vazquez III. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490429/ | *675MEMORANDUM OPINION AND ORDER
ROBERT L. SPEER, Bankruptcy Judge.
This cause comes before the Court for Trial on the Complaint To Avoid Preferential Transfers filed by the Plaintiff in the above entitled action. The parties have agreed that the disposition of this case is, by operation of law, dependent upon the outcome in Hunter v. Babcock (In re Babcock Dairy Co. of Ohio, Inc.) 70 B.R. 657 (Bkcy.N.D.Ohio 1986). Pursuant to that agreement, the Court consolidated, for purposes of Trial this case with Case No. 85-0225. At Trial, the parties had the opportunity to present any evidence and arguments they wished the Court to consider relative to the merits of this case. The Court has reviewed the evidence, the arguments, and the entire record in this action. Based upon that review and for the following reasons the Court finds that judgment should be entered for the Defendant.
FACTS
Although this case proceeded to Trial, the majority of facts do not appear to be in serious dispute. The Debtor in the underlying bankruptcy proceeding is an Ohio corporation which, prior to the filing of the Order of Relief, was engaged in the retail dairy business. The Plaintiff in this case is the Trustee in that Chapter 7 proceeding. The Defendant in this case is the son of Wayne H. Babcock. Prior to September 8, 1980, Wayne H. Babcock (hereinafter Bab-cock) was the principal officer of the Debt- or’s business. Although Babcock was also the principal operator of and shareholder in the Debtor-corporation, it appears that other immediate family members, including the Defendant, were minority shareholders.
At some time during 1953, Robert B. Koder (hereinafter Koder) began his employment with the Debtor. Although it appears he started as a general employee, he eventually became involved in the management of the business. In 1970, he became the Executive Vice-President of the corporation. At some time later he became the General Manager. The evidence indicates that during his employment with the Debtor and as a result of his progression in the company, Koder became a close personal friend of Babcock.
At some time during the latter part of the 1970’s, Babcock initiated efforts to sell the business. Ultimately, an agreement was struck between Babcock and Koder, whereby Koder would become the sole independent owner of the Debtor. This agreement was executed on or about September 8, 1980. As a part of that agreement, Koder became a minority shareholder in the corporation. The remaining shareholders, including Babcock, agreed to sell their shares of stock to the corporation. The entire purchase price for these shares was approximately $1,090,500.00. In return for these shares the Debtor agreed to pay $200,000.00 to the sellers at the time of closing. In addition, Koder, as an agent of the Debtor, executed promissory notes to the sellers for their requisite share of the unpaid purchase price. These notes were to be paid by the Debtor in monthly installments for a period of 120 months. As security for these notes the transferred shares of the corporation were placed in escrow pending completion of the promissory obligations. The provisions of the escrow arrangement provided for the reis-suance of the shares to the sellers in the event of the Debtor’s default on the notes. The record indicates that the Debtor made monthly payments to the sellers up until the time the Order For Relief was entered by this Court.
In addition to providing for a change in the Debtor’s ownership, the contract of sale included certain terms regarding Bab-cock’s continued participation in the corporation’s affairs. Under these additional terms, Babcock became an employee of the Debtor corporation. Although the nature and title of his position was never clearly defined, it appears that this “employment contract” required him to perform specific functions. Included in these functions was the retention of Babcock’s position as Chairman of the Debtor’s Board of Di*676rectors. While it appears that Babcock was willing to fulfill any other tasks which might be assigned to him, the evidence reflects that Koder did not expect to strictly enforce Babcock’s responsibilities under the employment agreement. As compensation for his “services”, Babcock was paid a salary and was provided with substantially the same personal benefits as he enjoyed during his ownership of the corporation. Additionally, he was allowed to occupy his former office space and could maintain the same number of hours as he observed prior to the sale.
The evidence reflects that Babcock’s activities under this contract consisted primarily of reviewing the Company’s accounts receivable, general pubh'c relations work, and solicitation of business for the Debtor. It also appears that Babcock, during his working hours, engaged in a variety of personal activities which were unrelated to the Debtor’s business. It does not appear that those “duties” undertaken by Babcock for the business consumed a considerable amount of the time which he spent on the business premises. In addition, it also does not appear that Babcock’s position on the Board of Directors entailed any significant degree of involvement with the Debtor’s affairs. In that regard, the evidence reflects that Babcock was elected to the Board of Directors at the shareholder meetings which were conducted in 1980 and 1981. However, Babcock was not elected as a director in any subsequent year. There was some testimony which suggested that these “shareholder meetings” and “shareholder elections” were carried out in form only, and that the documents reflecting these meetings were prepared solely for the purpose of satisfying state statutory requirements.
A review of the evidence reflects that Babcock was afforded many liberties regarding his ability to involve himself in the Company’s business. However, it also reflects that he had little or no authority to establish or enforce corporate policy. Specifically, the testimony indicates that he could not sign the Debtor’s checks, could not hire or dismiss employees, and could not issue directives involving any significant corporate decisions. The evidence reflects that the employees understood the ramifications of the sale of the business to Koder, and that they regarded Koder as the person to whom they answered. While it appears that the employees afforded Babcock a considerable degree of respect as the result of his prior ownership, it is evident that this respect did not equate itself with authority over the Debtor’s business.
On April 11, 1984, an involuntary Chapter 7 Petition was filed against the Debtor. On April 17, 1984, the Debtor consented to the entry of an Order of Relief. Shortly thereafter, this Court appointed the Trustee for the purpose of liquidating the Debt- or’s estate. In an effort to collect assets for the estate, the Trustee filed the above entitled adversary action. In this case, the Trustee alleges that the monthly payments made to the Defendant by the Debtor on the promissory notes were preferential transfers under the provisions of 11 U.S.C. Section 547(b). Specifically, it is alleged that Babcock was an insider of the Debtor under the provisions of 11 U.S.C. § 101(25). If he is found to be an insider, then the Defendant in this case will, under 11 U.S.C. § 101(25)(B)(vi), also be an insider. As a result of this insider standing, it is alleged that the payments made by the Debtor to the Defendant on the promissory notes during the one year period prior to the filing of the petition are subject to avoidance under 11 U.S.C. § 547(b). It should be noted that the Defendant has voluntarily surrendered to the Trustee all amounts which were paid by the Debtor during the ninety day period which preceded the filing of the petition. The purpose of this action is solely to return to the estate those amounts which were paid to the Defendant during the one year pre-petition period, exclusive of the ninety day period.
In contending that Babcock was an insider of the Debtor, the Trustee asserts that Babcock was a director of the Debtor at the time the petition was filed. He also alleges that Babcock was a person who *677exercised sufficient authority and control over the Debtor so as to be found to be an insider under 11 U.S.C. § 101(25)(B)(iii). Finally, he alleges that because of the close personal relationship which existed between Babcock and Koder, Koder should be found to be a relative of Babcock for purposes of this proceeding. The Defendant summarily opposes the Trustee’s contentions, arguing that Babcock was merely an employee of the Debtor, and that all meaningful control of the Debtor’s affairs was transferred in the sale to Koder. It should be noted that the parties to this action have agreed that all other elements of an action under 11 U.S.C. § 547(b) have been satisfied, and that the sole remaining question is whether or not Babcock was an insider of the Debtor at the time the petition was filed.
LAW
Prior to the enactment of the Bankruptcy Amendments and Federal Judgeship Act of 1984, P.L. 98-353, the provisions of 11 U.S.C. § 101(25) stated in pertinent part:
(25) “insider” includes—
(B) if the debtor is a corporation—
(i) director of the debtor;
(ii) officer of the debtor;
(iii) person in control of the debtor;
(vi) relative of a general partner, director, officer, or person in control of the debtor;
The pre-amendment version of 11 U.S.C. § 547(b) stated in pertinent part:
(b) ... the trustee may avoid any transfer of property of the debtor ...
(1) to or for the benefit of the 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—
(B) between 90 days and one year before the date of the filing of the petition, if such creditor, at the time of such transfer—
(i) was an insider; and
(ii) had reasonable cause to believe the debtor was insolvent at the time of such transfer;
(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 pre-amendment versions of these statutes are applicable in this adversary proceeding, inasmuch as the underlying Chapter 7 case was filed prior to the effective date of the amendments. See, P.L. 98-353 § 553(a).
Under these sections, a trustee may avoid the transfer of an interest of the debtor in property which was made between ninety days and one year preceeding the filing of the debtor’s petition if 1) the transfer was made to a creditor on account of an antecedent debt, 2) the transfer was made while the debtor was insolvent, 3) the creditor was an insider of the debtor within the contemplation of 11 U.S.C. § 101(25), 4) the insider had reasonable cause to believe the debtor was insolvent at the time of the transfer, and 5) the transfer enabled the creditor to receive more than would have been received in a Chapter 7 liquidation had the transfer not been made. Hunter v. Pool Pals Manufacturing, Inc. (In re Benson), 57 B.R. 226 (Bkcy.N.D.Ohio 1986).
It is well established that the term insider is not necessarily confined to those entities set forth in 11 U.S.C. § 101(25). Hunter v. Pool Pals Manufacturing, Inc., supra. Rather, an insider may be any person or entity whose relationship with the debtor is sufficiently close so as to subject the relationship to careful scrutiny. Lingley v. Stuart Shaines, Inc. (In re Acme-Dunham Incorporated), 50 B.R. 734 (D.Me.1985). However, under the provisions of 11 U.S.C. § 101(25), any person that is a director of a corporate debtor, or any person which exercises control of a *678corporate debtor is automatically considered to be an insider under 11 U.S.C. § 101(25)(B)(iii). It does not appear that a standard has been established for determining the degree to which a person must control a debtor before he is considered to be an insider. However, it does appear that the person or entity must have a least a controlling interest in the debtor, Louisiana Industrial Coatings, Inc. v. Pertuit (In re Louisiana Industrial Coatings, Inc.) 31 B.R. 688 (Bkcy.E.D.La.1983), or that the person must exercise sufficient authority over the debtor so as to unqualifi-ably dictate corporate policy and the disposition of corporate assets. See, Bergquist v. First National Bank of St. Paul (In re American Lumber Co.), 5 B.R. 470 (D.Minn.1980). It is insufficient that the alleged insider had only a superior bargaining position in a contractual relationship with the Debtor. Schick Oil & Gas, Inc. v. Federal Deposit Insurance Corp. (In re Schick Oil & Gas, Inc.), 35 B.R. 282 (Bkcy.W.D.Okla.1983).
At trial, the Court dismissed the Trustee’s insider allegations which were founded upon the relationship between Babcock and Koder. The provisions of 11 U.S.C. § 101(25)(B)(vi) clearly state that to be an insider, the person must be a relative of a director or officer of the debtor. There was no evidence presented at trial which indicated that Koder was, within three degrees, a member of the Babcock family. Furthermore, the Trustee has not presented this Court with any persuasive authority which would allow a close personal friendship to be characterized as a family relationship for purposes of 11 U.S.C. § 101(25)(B)(vi). Although the Trustee has argued that the decision in Loftis v. Minar (Matter of Montanino), 15 B.R. 307 (Bkcy.D.N.J.1981) permits such an interpretation, the facts of that case are sufficiently divergent from those in the present action so as to render the decision in that case inapplicable. Accordingly, for the foregoing reasons, the Trustee was not entitled to prevail on that assertion.
With regard to the contention that Bab-cock was a director of the corporation, a review of the evidence reflects that at the time the business was sold to Koder, Bab-cock was contractually entitled to be the Chairman of the Debtor’s Board of Directors. The minutes of the meetings of shareholders for 1980 and 1981 indicate that Babcock was elected to that position for those respective years. However, a review of the minutes for the meetings which were “held” in 1982 and 1983 finds that Babcock was not elected to a position on the Board. Furthermore, a review of the evidence presented at trial finds nothing which suggests that Babcock served in any capacity which is customarily associated with either a director or an officer of a corporation.
The provisions of Ohio Revised Code § 1701.57 state in pertinent part:
(A) Unless the articles or the regulations provide for a different term (which may not exceed three years from the date of his election and until his successor is elected), each director shall hold office until the next annual meeting of the shareholders and until his successor is elected, or until his earlier resignation, removal from office, or death.
These provisions limit the terms of directors to one year from their time of initial election. Based upon the operation of this statute, it would appear that Babcock’s term as Chairman of the Board of Directors expired as of the close of the 1982 shareholders meeting, notwithstanding the provision of his employment contract. Furthermore, even if the statute did not, in and of itself, terminate Babcock’s reign as Chairman of the Board, the corporate records reflect that he did not hold that office subsequent to the 1982 election. As a result, this Court cannot conclude that he was a director of the corporation at the time the petition was filed. In addition, the evidence does not demonstrate that Bab-cock performed any of the functions which might be expected of either an officer or director of the corporation. Accordingly, it must also be concluded that the Trustee is not entitled to a de facto finding that Bab-cock served in those capacities. In light of *679those conclusions, the Trustee cannot prevail in his contention that Babcock was, under 11 U.S.C. § 101(25)(B)(i) or (ii), an insider of the corporation.
Finally, the Court must consider the question of whether or not Babcock was a person in control of the debtor. A review of the evidence finds that he was employed by the Debtor under a contract of employment. Although the contract specifically enumerates the duties to be performed by Babcock, the testimony indicated that he was not expected to totally fulfill any duties which might be assigned. The testimony also indicated that he reviewed the Debtor’s accounts receiveable and conducted work that related to the Debtor’s customers. This evidence suggests that Bab-cock served more in the capacity as an advisor to the Debtor than as a person with specifically assigned tasks. Such a position would naturally result from the fact that Babcock was familiar with the Debt- or’s customers and could be of benefit to the company in that regard. However, it does not appear that this position enabled Babcock to make any dispositive corporate decisions. The evidence indicates that the employees understood Koder to be both the owner of the business and the person to whom they would answer regarding business decisions. Specifically, the testimony indicated that Koder’s approval was required for payments out of the corporate accounts, that Koder dictated corporate policy as to purchases of capital, and that Koder was the final authority over matters involving employees. There is no evidence which indicates that Babcock could, subsequent to the sale, command authority over any corporate affair.
In the absence of evidence which demonstrates Babcock’s participation in the corporation’s management, this Court cannot find that he had any meaningful control of the Debtor. The evidence reflects that he had no authority to dispose of corporate assets, nor did he prevail in any decisions regarding the operation of the Debtor’s business. The evidence clearly indicates Babcock was merely an employee of the Debtor who was the beneficiary of a favorable employment contract. With the exception of offering advice to the company regarding its accounts receiveable and exercising his ability to solicit customers for the business, the evidence indicates that Bab-cock had no meaningful control over any corporate affair. Without such control, this Court cannot conclude that Babcock was an insider within the contemplation of 11 U.S.C. § 101(25)(B)(iii). Since he cannot be found to be an insider, the amounts paid to him during the nine months period prior to the ninety days preceding the filing of the petition are not recoverable under 11 U.S.C. § 547(b). Furthermore, since Bab-cock cannot be found to be an insider, the Defendant in this case cannot, under 11 U.S.C. § 101(25)(B)(iv), be considered as an insider of the Debtor. Without such standing, the amounts paid by the Debtor to the Defendant during the nine months preceding the ninety day pre-petition period are not recoverable under 11 U.S.C. § 547(b). Therefore, it must be concluded that the Complaint in this case should be dismissed.
In reaching these conclusions the Court has considered all the evidence and arguments of counsel, regardless of whether or not they are specifically referred to in this Opinion.
It is ORDERED that the Complaint in this case be, and is hereby, DISMISSED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490431/ | MEMORANDUM OPINION
JAMES G. MIXON, Bankruptcy Judge.
On September 11, 1984, Ronald E. Curtis d/b/a Curtis Communications filed a voluntary petition for relief under the provisions of chapter 11. Hon. Charles W. Baker was employed as counsel for the estate but withdrew because he discovered the existence of the appearance of a conflict of interest. On October 19, 1984, Hon. Robert J. Brown was authorized by this Court to represent the estate.
Mr. Brown has now applied for approval of a final award of compensation pursuant to 11 U.S.C. § 330. This Court was asked to review Mr. Brown’s total fee request including the awards of interim compensation which have already been authorized. The total amount of fees requested is apparently for the sum of $143,427.64 which includes a $90,000.00 performance bonus.
This proceeding is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A). The following constitutes the Court’s findings of fact and conclusions of law as required by Bankruptcy Rule of Procedure 7052.
The burden of proof as to the reasonableness of requested compensation is that of the applicant. In re Crutcher Transfer Line, Inc., 20 B.R. 705 (Bkrtcy.W.D.Ky.1982). In re Werth, 32 B.R. 442 (Bkrtcy.D.Colo.1983); Matter of Liberal Market, Inc., 24 B.R. 653 (Bkrtcy.Ohio 1982). In addition to any objection voiced by a party in interest, the court has an independent duty to investigate the reasonableness of compensation. Bankruptcy Rule of Procedure 2016(a); In re Thomas, Inc., 43 B.R. 510 (Bkrtcy.D.Mass.1984); In re Bolton, 43 B.R. 598 (Bkrtcy.E.D.N.Y.1984).
Compensation in bankruptcy cases is governed by 11 U.S.C. § 330 which provides generally that after notice and a hearing, the court may award to an attorney employed under 11 U.S.C. § 1103 reasonable compensation for actual and necessary services rendered by the attorney based upon the time, the nature, the extent and the value of the services and the cost of comparable services in cases other than bankruptcy.
Many courts, including this Court, have adopted the enumerated factors in Johnson v. Georgia Hwy. Express, Inc., 488 F.2d 714 (5th Cir.1974) for considering fee applications. The elements are:
1. Novelty and difficulty of the question;
2. The skill required to perform the legal service properly;
3. The experience, reputation and ability of the attorneys;
4. Customary fee;
5. Whether the fee is fixed or contingent;
6. The preclusion of other employment by the attorney due to acceptance of the case;
7. The amount involved and the results obtained;
8. Time limitations imposed by the client or circumstances;
9. The undesirability of the case;
10. The nature and length of the professional relationship with the client;
11. Awards in similar cases; and
12. Time and labor required.
In re Werth, 32 B.R. at 442; In re Global International Airways Corp., 38 B.R. 440 (Bkrtcy.W.D.Mo.1984); In re Garnas, 40 B.R. 140 (Bkrtcy.D.N.D.1984); See also Hensley v. Eckerhart, 461 U.S. 424, 103 S.Ct. 1933, 76 L.Ed.2d 40 (1983); Blum v. Stenson, 465 U.S. 886, 104 S.Ct. 1541, 79 L.Ed.2d 891 (1984); Cleverly v. Western Electric Co., 594 F.2d 638 (8th Cir.1979).
Six requests for interim compensation have been filed in this case by Mr. Brown and his firm. Orders were entered in regard to each application except for the fee application filed August 9, 1985, which was withdrawn. These orders were prepared *714by Mr. Brown, except for an order entered January 9, 1986, which was prepared by this Court based on an inaccurate application filed by Mr. Brown on November 18, 1985. The billing statements and the orders are as follows:
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The various billing statements for compensation are inaccurate because they misstate amounts of previous awards of interim compensation approved by the Court and because the totals requested on some applications do not correspond with the attached itemizations of services. Some charges are duplicated from prior applications. Mr. Brown’s testimony in a previous interim fee request hearing was also incorrect regarding compensation previously received.
The statement dated July 31, 1985, and thirteen days of the statement dated February 19, 1986, are duplicated by the statement dated November 13, 1985. The statement dated February 19, 1986, requests a total expense charge for that billing period of $1,111.68 although the expense itemization actually totals $81.34.
On November 18, 1985, Mr. Brown filed an “Application for Attorneys’ Fees” for the November 13, 1985, billing statement in which he requested a total fee of $124,-027.18. This request included a request for a performance bonus of $90,000.00 plus expenses of $1,063.18. The November 18, 1985, application recited that Mr. Brown had previously obtained approval for fees totaling $35,638.12, and orders had been obtained authorizing the payment of $32,-638.12. A hearing was conducted on Mr. Brown’s request on December 20, 1985. At the time of the hearing the debtor was deceased. The debtor’s daughter, Carla Curtis, filed an objection to the application. The Court, after considering the application, denied the request for a performance bonus of $90,000.00. The fee of $34,989.02 plus expenses of $1,134.12 was awarded on the premise that it was the final compensation in the case.
On February 19, 1986, Mr. Brown filed another fee application in which he sought an award of an additional $6,272.22. An order was entered on March 21, 1986, approving the entire request of February 19, 1986. There were no objections filed to this request. Mr. Brown inexplicably filed a notice of appeal from this order, and the case was docketed in the district court. For reasons not relevant to this opinion, the parties agreed that the district court should remand the matter to this Court to hear an objection to the February 19, 1986, application by Carla Curtis. At the hearing on the February 19, 1986, application, Mr. Brown requested that since this was his final fee request, this Court should consider the appropriateness of all of the interim fee requests, including the request for a performance bonus.
Carla Curtis objected to any fee and expense award in excess of the $36,123.14 which this Court awarded after the December 20, 1985, hearing and which was represented by Mr. Brown to be a final request of itemized charges. She also strenuously objected to the request for a performance bonus.
A review of the fee application in light of the history of this case, the fee standards *715of Johnson, and the admonition of the Supreme Court regarding the award of performance bonuses is necessary. See Pennsylvania v. Delaware Valley Citizens’ Council, - U.S. -, 106 S.Ct. 3088, 92 L.Ed.2d 439 (1986).
HISTORY OF CASE
The debtor’s bankruptcy schedules listed assets of $3,500,000.00 and liabilities of $1,294,273.57. The debtor’s most valuable asset was a radio broadcasting business known as KLAZ am/fm radio. After the case was filed, Mr. Curtis, owner of KLAZ, suffered a disabling stroke and subsequently died. Mr. Curtis owned substantial life insurance policies which were pledged to the Union National Bank. The amount of these policies exceeded $1,000,-000.00 and the proceeds of the life insurance which came into existence during the administration of the estate were used to satisfy Union National Bank’s claim.
During the time of Mr. Curtis’ illness, Mr. Brown and members of the Curtis family made decisions which kept the business operating while trying to effect a sale of the business. During a period after Mr. Curtis’ death, Mr. Brown was representing the estate as attorney without a client because there was no debtor-in-possession or trustee. A trustee was appointed on the Court’s own motion so that someone might be authorized to be the representative of the bankrupt estate which survived Mr. Curtis’ death.
On December 20, 1985, an order was entered approving the sale of the radio station. As a result of the sale, the trustee received $1,476,631.80 in cash according to the confirmed plan of reorganization. The plan indicates the existence of claims totaling $1,026,354.24, including Mr. Brown’s disputed claim of $90,000.00. The liquidating plan of reorganization proposes to pay all allowed claims in full and to distribute the surplus to Carla Curtis.
Other counsel have been compensated from the estate. The debtor’s initial attorney, Mr. Charles W. Baker, was paid the sum of $7,400.00 fees and $443.03 expenses, and the law firm of Kateen & Naf-talin was paid $6,869.38 for services performed during the administration of the estate. The trustee was also awarded interim fees totaling $9,533.04 to date.
THE JOHNSON FACTORS
The case did not involve any novel or difficult questions of law. There was no substantial litigation. The file reflects that only two motions for relief from the automatic stay were filed; both were settled without a hearing.
The case did require special skill in completing the sale of the radio station, but substantial expertise for this task was provided by special counsel. Mr. Brown and his firm were not the draftsmen of the contract of sale of the radio station and did not procure the purchaser. Mr. Brown and his firm did not prepare the bankruptcy petition and schedules and did not prepare the plan of reorganization which was confirmed. Mr. Brown’s firm spent a considerable amount of time in negotiating and conferring with one another and did prepare a proposed plan and disclosure statement which was never submitted for a vote.
Mr. Brown and the members of his firm are experienced bankruptcy practitioners. Mr. Brown and Mr. Kubicek account for most of the time spent on the case for which compensation is now requested. The hourly rate charges of $120.00 per hour for Mr. Brown and $80.00 for Mr. Kubicek are within the customary range of fees charged in this area for similar legal services. Mr. Brown’s rate of $120.00 per hour is one of the highest hourly rates which is routinely approved by this Court.
There was nothing about the case that would cause a preclusion of other employment. The value of the property involved was substantial. It was represented primarily by one unit of property, a radio broadcasting business, and after Mr. Curtis died, life insurance proceeds. The number of creditors was substantial. There was significant creditor pressure from Union *716National Bank early in the case. When Mr. Curtis died and the life insurance proceeds were used to satisfy its claim, the pressure dissipated. The result obtained will be the payment of all creditors in full and a substantial surplus distributed to the debtor’s daughter. The result was directly related to the success or failure to sell the radio broadcasting business. There was some time limitation imposed on counsel in closing the broadcasting business. There was no evidence that this case was an undesirable case for the bankruptcy practitioner. There was no evidence of any representation of the debtor by Mr. Brown prior to the bankruptcy filing. Awards by this Court in cases requiring similar amounts of time and labor are generally much lower than the total fee request here.
Counsel for a debtor-in-possession has a responsibility to keep costs to the estate at a minimum. In re Werth, 32 B.R. at 442; Arlan’s Dept. Stores, Inc., 462 F.Supp. 1255 (S.D.N.Y.1978), aff'd, 615 F.2d 925 (2nd Cir.1979); In re Lafayette Radio Electronics Corp., 16 B.R. 360 (Bkrtcy.E.D.N.Y.1982). In this case there are certain charges which are clearly non-compensable. Those itemized charges which are duplications will be disallowed. On occasion the itemization is not specific enough to properly identify the services rendered and these charges will be disallowed. In re Werth, 32 B.R. at 442. Another deficiency in the itemizations is the grouping of several services performed into one billing entry. Counsel should not group all tasks performed in one day into a single billing. Each type of service should be listed with the corresponding specific time allotment so that the reasonableness of the service and value of the service to the estate may be determined. In re Bishop, 32 B.R. 302 (Bkrtcy.D.R.I.1983). The itemization includes services regarding counsel’s fee applications. Time charged for letters, conferences, agreements, and phone calls regarding fee applications is not compensable. In re Holthoff, 58 B.R. 216, 14 C.B.C.2d 620 (Bkrtcy.E.D.Ark.1985). The entry on July 12, 1985, is for an unreasonable amount of time reviewing the Court’s calendar.
The following charges are disallowed for the reasons in parenthesis:
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*717STATEMENT DATED JULY 31, 1985
The statement dated July 31, 1985, will be disallowed in its entirety because the statement is entirely duplicated by other statements.
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*718[[Image here]]
$90,000.00 PERFORMANCE BONUS
In addition to the fees to be awarded based on counsel’s hourly rate, the application seeks a performance bonus of $90,-000.00.
Carla Curtis testified that Mr. Brown agreed to represent her father on the basis of $120.00 per hour for his services and $80.00 per hour for associates in the firm and that at those rates she expected competent professional services. Mr. Brown does not dispute this agreement to represent Mr. Curtis at those hourly charges. Mr. Brown asserts that he advised the Curtises that fees were subject to the Court’s approval and could be reduced or increased.
On August 9, 1985, Mr. Brown filed an application which included a request for an additional $33,000.00 as a performance bonus. Mr. Brown recalled that the request for the performance bonus “upset Mr. Curtis” and that Mr. Brown withdrew the application at Mr. Curtis’ request. After Mr. Curtis died leaving over $1,000,000.00 in life insurance proceeds, and after the radio broadcasting business was sold, it became obvious that a substantial surplus would exist. Mr. Brown filed a new request for a performance bonus which was almost three times as great as the first performance bonus request. Mr. Brown did not even discuss with the surviving members of the Curtis family his intention to request an additional $90,000.00 before he filed his application. Mr. Brown expresses no reservation about reneging on his original agreement to perform legal services at a specified hourly rate and asserts that the results of this case were so successful he should receive the additional award.
The Supreme Court of the United States has admonished that, “[a] strong presumption that the lodestar figure — the product of reasonable hours times a reasonable rate — represents a ‘reasonable’ fee....” Pennsylvania v. Delaware Valley Citizens’ Council, 106 S.Ct. at 3098. Sometimes an attorney’s performance in a bankruptcy case warrants a performance bonus; however, no exemplary performance exists here. The surplus in this case is due substantially to Mr. Curtis’ untimely death which created over $1,000,000.00 cash in life insurance proceeds which were used to pay creditors.
To demand an additional fee of $90,-000.00 in this case is an example of overreaching by an attorney and is clearly unwarranted. It is unsettling to observe members of the bar dealing with a client in such an unprofessional fashion. An attorney’s word should be his bond. The facts in this case represent the classic nightmare for a child of a deceased person. Mr. Curtis’ daughter finds herself in the clutches of an attorney who clearly places his financial interest above the interests of the estate of his deceased client. Carla Curtis was required to procure the services of separate counsel to protect her interests in her deceased father’s estate from the very attorney her father employed to represent him in his legal difficulties.
A different situation exists where a client agrees that an attorney’s performance is so uniquely successful that a bonus is warranted. Here, Carla Curtis strenuously objects to the request because it is a breach of Mr. Brown’s agreement with her father regarding fees. The $90,000.00 request for a performance bonus is denied.
CONCLUSION
Counsel is awarded a final attorney fee and expense reimbursement as follows:1
Statement Dated October 81, 1984: $ 2,220.00
Statement Dated February 28,1985: 7,195.96
Statement Dated November 13,1985: 33,583.18
Statement Dated February 19,1986: 5,681.34
Total $48,680.48
Counsel has submitted to the Court information indicating the receipt of fees and *719expenses totaling $54,427.64. Counsel shall reimburse the estate the excess fees in the sum of $5,747.16 within thirty days from the date of this memorandum opinion and judgment of this same date. A separate judgment will be issued pursuant to Bankruptcy Rule of Procedure 7052.
IT IS SO ORDERED.
JUDGMENT
Based upon the findings of fact and conclusions of law contained in a memorandum opinion of this same date, it is
ORDERED that R.J. Brown, P.A., is awarded a final attorney fee and expense reimbursement as follows:
Statement Dated October 31,1984: $ 2,220.00
Statement Dated February 28,1985: 7,195.96
Statement Dated November 13,1985: 33,583.18
Statement Dated February 19,1986: 5,681.34
Total $48,680.48
Counsel has submitted to the Court information indicating the receipt of fees and expenses totaling $54,427.64. Counsel shall reimburse the estate the excess fees in the sum of $5,747.16 within thirty days from the date of this judgment.
IT IS SO ORDERED.
. These calculations were determined by totaling the itemization for each statement submitted by Mr. Brown and subtracting the disallowed charges. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490432/ | MEMORANDUM OPINION AND ORDER
RICHARD L. SPEER, Bankruptcy Judge.
This cause comes before the Court upon the Motion For Summary Judgment filed by the Plaintiff in the above entitled adversary action. The parties have filed their arguments relative to the merits of this Motion and have had the opportunity to respond to the arguments made by opposing counsel. The Court has reviewed those arguments, the evidence, and the entire record in this case. Based upon that review and for the following reasons the Court finds that the Motion For Summary Judgment should be granted in part and denied in part.
FACTS
The facts in this case, to the extent they have been developed, do not appear to be in serious dispute. The Debtor in the underlying bankruptcy proceeding filed his voluntary Chapter 11 Petition with this Court on March 12, 1982. On March 19, 1984, this Court entered an Order confirming the *721Debtor’s Plan of Reorganization. During the pendency of the Debtor’s post-confirmation reorganization efforts, it appears that the Debtor entered into an oral contract with the Plaintiff, whereby the Debt- or would farm approximately 322 acres of land owned by the Plaintiff. Under the agreement, 115 acres would be planted with com. The remaining acreage would be planted with soybeans. In return for the right to work this land, the parties agreed that the Plaintiff would be entitled to either one-half of each crop grown on this land or one-half of the proceeds therefrom.
Pursuant to this agreement, the Debtor grew the required amounts of each grain. However, the record is unclear as to the chain of possession which occurred after the grains were harvested. It appears that all of the corn was taken to the Debtor’s storage facilities. It also appears that while the soybeans were initially taken to the Plaintiff’s facilities, they were ultimately transferred to the Debtor’s bins. The record further indicates that at the time these grains were taken to the respective facilities, they were co-mingled with other grain being held by each of the parties. In addition, the record indicates that at the time the grains were harvested, no measurement was made to determine the amounts yielded from the Plaintiff’s property. Although the Debtor provided the Plaintiff with an estimate of the amounts of grain he was holding for the Plaintiff, it does not appear that a precise measurement was ever accomplished.
At some time in November of 1984, the Debtor applied for financing with the Defendants, Mid-American National Bank & Trust Co. (hereinafter Mid-Am), and Luck-ey Farmers, Inc. (hereinafter Luckey). It appears that this application was intended to provide for the Debtor’s 1985 operations. As a part of the application process, Mid-Am made an estimate of the amounts of grain being held in the Debtor’s facilities. This estimate included all grains being held by the Debtor, including those belonging to the Plaintiff. Although the record is unclear, it appears that Mid-Am was, at the time the estimate was made, apprised of the fact that some of the grain in the Debtor’s facility was owned by the Plaintiff. It should be noted that the record appears to reflect that the Debtor had obtained financing from both Defendants in the past, and that he was currently indebted to those Defendants for that prior financing.
In December of 1984, the Debtor, as a part of the apparent financing arrangement which had been reached with the other Defendants, caused the grain in his bins to be transported to Luckey for sale on the open market. The record is unclear as to the identity of those persons who participated in the transportation of this grain. However, it appears that the participants included the Debtor, several of his relatives, and employees from Luckey. The record reflects that this grain was sold on the market and that the proceeds of sale were ultimately divided between both Mid-Am and Luckey. It further appears that these proceeds were applied to the Debtor’s prior indebtedness with each of the respective Defendants. Although it appears that this sale of grain included the amounts being held by the Debtor on behalf of the Plaintiff, it is unclear whether or not the Debtor retained any grain subsequent to the transfer to Luckey.
At some time during the aforementioned transactions, the Plaintiff, unbeknownst to the Debtor, entered into a contract with another grain contractor for the sale of the Plaintiff’s share of grain. This contract included the grain which was being held by the Debtor for the Plaintiff. After learning of the Debtor’s transfer to Luckey, the Plaintiff was required to abrogate his contract with the other contractor through the payment of liquidated damages. The record indicates that the Plaintiff neither consented to the Debtor’s transfer to Luck-ey nor received any of the proceeds therefrom.
In an effort to recover the value of his grain, the Plaintiff initiated an action in the Wood County Court of Common Pleas *722against the Debtor, Mid-Am, and Luckey. In this action, the Plaintiff alleged that the Debtor’s unauthorized transfer of grain to Luckey constituted a conversion of the Plaintiff’s property. He also alleged that Mid-Am’s and Luckey’s participation in the disposition of grain subjects them to conversion liability. However, on October 1, 1985, the Debtor converted his Chapter 11 case to a proceeding under Chapter 7. Shortly thereafter, the Debtor removed the Plaintiff’s State Court action to this Court. It should be noted that the notice to creditors mailed subsequent to the Debtor’s conversion established December 30, 1985, as the last day on which to file complaints to determine dischargeability or to object to the Debtor’s discharge. It should also be noted that the Plaintiff has filed a post-conversion claim in the Debtor’s case for the amount of Twenty-five Thousand Six Hundred Twenty-one and 98/100 Dollars ($25,-621.98). As reflected on the record, the Plaintiff asserts that this claim is entitled to priority.
In response to the filing of the adversary action, the Debtor filed Cross-Claims (captioned as a Third-Party Complaint), against Mid-Am and Luckey for: 1) contribution in the Plaintiff's conversion action, 2) equitable subordination, and 3) lien avoidance. On January 31, 1986, Luckey filed a Cross-Claim against the Debtor seeking both a denial of the Debtor’s discharge and a determination of dischargeability as to its debt. Mid-Am filed a Cross-Claim (captioned as a Counterclaim) against the Debt- or, wherein it is alleged that the Debtor’s action against Mid-Am is without any legal or factual basis.
The Motion presently before the Court seeks a summary adjudication in this adversary proceeding. In support of this Motion, the Plaintiff argues that there is sufficient deposition testimony, answers to interrogatories, and uncontested exhibits to establish all required elements of an action for conversion. The Debtor opposes the Motion, arguing that there are numerous matters of fact which remain in dispute. It is argued that the existence of these disputes precludes the availability of summary judgment.
LAW
The provisions of Federal Rule of Civil Procedure 56, as made applicable by Bankruptcy Rule 7056, state in pertinent part:
The judgment sought shall be rendered forthwith 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.
Under this rule, the Court may grant summary judgment in an action if the record establishes that there are no questions of material fact and that a party is entitled to judgment as a matter of law. Hartwig Poultry, Inc. v. C.W. Service (In re Hartwig Poultry, Inc.), 57 B.R. 236 (Bkcy.N.D.Ohio 1986).
The provisions of 11 U.S.C. § 101(4) state in pertinent part:
(4) “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.
The provisions of 11 U.S.C. § 348(a) state in pertinent part:
(a) Conversion of a case from a case under one chapter of this title ... to a case under another chapter of this title constitutes an order for relief under the chapter to which the case is converted ... does not effect a change in the date of the filing of the petition, the commencement of the case, or the order for relief.
Under these provisions, the conversion of a case from a Chapter 11 to Chapter 7 constitutes an order for relief as of the date of conversion. Any claims which arose during the pendency of the Chapter 11 proceeding become claims against the Chapter 7 estate. 5 Collier on Bankruptcy 15th *723§ 1112.03(6). While such claims are not necessarily entitled to an administrative priority, Matter of Jartran, Inc., 732 F.2d 584 (7th Cir.1984), In re Crouthmel Potato Chip Co., 52 B.R. 960 (E.D.Pa.1985), they are claims which, nevertheless, must be asserted against the debtor’s estate.
The provisions of 11 U.S.C. § 362(a) state in pertinent part:
(a) ... a petition filed under section 301, 302, or 303 of this title ... operates as a stay, applicable to all entities, of— (1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title ... or to recover a claim against the debtor that arose before the commencement of the case under this title ...
(3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate;
(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 ...
(6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title ...
Under this provision, any entity with a claim which arose prior to the Order For Relief may not prosecute an action against the debtor to collect on the pre-relief claim. See, 2 Collier on Bankruptcy 15th § 362.-04(1).
I
In the present case, it is evident that the events which gave rise to the Plaintiffs Complaint occurred during the pendency of the Debtor’s Chapter 11 case, but prior to the conversion of that case to a proceeding under Chapter 7. As an initial matter, it is likely that the continued prosecution of this case constitutes a violation of the automatic stay which was imposed with the Order of Relief entered at the time of the case’s conversion. However, as a substantive matter, the Court notes that regardless of whether or not the Plaintiff's action against the Debtor is found to be meritorious, the Plaintiff will, as a result of the case, only have a claim against the Debtor for the value of the allegedly converted grain. That claim must be asserted against the Debtor’s Chapter 7 estate and cannot be prosecuted as an action against the Debtor individually. See, 11 U.S.C. § 362(a). Therefore, completing litigation in this case will not have any legal or practical benefit for either the Plaintiff or the administration of the estate. While it is recognized that the issues raised in this action may again be raised in a hearing relative to the validity of the Plaintiff’s claim, such matters are not properly nor presently before the Court. See, Bankruptcy Rule 3007. Since the Complaint in this case, as against the Debtor, only seeks a judgment for the conversion of property, and since the requested relief is not available to the Plaintiff outside of any distribution which might be made from the Debt- or’s estate, it must be concluded that the Plaintiff’s cause of action against the Debt- or fails to state a claim upon which the requested relief can be granted. Accordingly, it must also be concluded that this entitles the Debtor to judgment as a matter of law.
With regard to the actions in the Plaintiff's Complaint against Mid-Am and Luckey, it is evident that this dispute does not involve any party which is before the Court under the jurisdiction of Title 11. As a result of the fact that these actions have no continued nexus to the administration of the Debtor’s case, they are no longer related proceedings within the contemplation of any statue which might otherwise confer jurisdiction to this Court. The question of whether or not Luckey or Mid-Am are liable for their participation in the Debtor’s alleged conversion is a matter which addresses issues of state law and which may *724be adequately litigated in State Court. Therefore, there is no necessity for this Court to stretch its specific grant of jurisdiction so as to serve as a forum for a simple dispute between creditors. See, United States v. Farmers State Bank of Leed, North Dakota (In re Alexander), 49 B.R. 733 (Bkcy.D.N.D.1985). Accordingly, this action should also be dismissed.
Turning to the causes of action set forth in the Debtor’s Cross-Claim, it is evident that the first cause of action seeks indemnification from Luekey and Mid-Am in the event the Debtor is found liable to the Plaintiff for conversion. However, for the reasons previously stated, the Plaintiff is not entitled to prosecute the conversion allegations. Without that action, the potential for indemnifiable damages no longer exists. Since the dismissal of the Plaintiff’s action against the Debtor will dissolve any indemnification liability which may have existed, the Debtor’s first cause fails to state a claim upon which relief could be granted. Therefore, the absence of such a claim entitles Mid-Am and Luck-ey to judgment as a matter of law on the Debtor’s first Cross-Claim.
The second and third causes set forth in the Debtor’s Cross-Claim appear to allege that the claims of Luekey and Mid-Am should be subordinated to the claims of other creditors. With the exception of the allegation that these entities were insiders of the Debtor, the grounds for these allegations are substantially unclear. Since the provisions of 11 U.S.C. § 510 allow for the subordination of claims based upon the existence of certain equitable considerations, the Debtor must be afforded the opportunity to litigate any claims which might entitle him to the relief available under that section. However, because there is insufficient evidence presently before the Court which establishes, as matter of law, the Debtor’s right to the requested relief, summary judgment cannot be granted at this point in the proceedings.
Ill
The Court must next consider the Cross-Claim filed by Mid-Am against the Debtor. Although the precise nature of this action is unclear, it appears to be an action sounding in tort for misuse of process. While it is doubtful that such an action may be brought as a counterclaim to the action which is allegedly abusive, it is evident Mid-Am’s cause is not presently supported by sufficient evidence so as to enable this Court to conclude that there are no questions of material fact relative to this Cross-Claim. Accordingly, it must be concluded that summary judgment is not yet available in this action.
IV
Finally, the Court must consider the Cross-Claims filed by Luekey against the Debtor. In those actions, it is asserted that the Debtor’s discharge should be denied, and that the debt owed to Luekey should not be found dischargeable. A review of the facts finds that the Order for Relief in the Debtor’s Chapter 7 case was entered as of the conversion on October 1, 1985. As was previously indicated, December 30, 1985, was established as the last day on which to file actions to deny a discharge and seek a determination as to the dischargeability of a debt. Luckey’s Cross-Claim was filed on January 31, 1986.
While the events which gave rise to the assertions set forth in Luckey’s Cross-Claim occurred in the same transaction as the Plaintiff’s Complaint and the Debtor’s Cross-Claim, it is well settled that the similarity in transactions does not exempt a creditor from the time requirements for filing complaints under either 11 U.S.C. § 523(a) or 727(a). Actions to oppose a debtor’s discharge and to determine the dischargeability of a debt are not compulsory counterclaims which relate back to the filing of the original complaint. This results from the fact that the grounds upon which such complaints may be filed exist prior to the expiration of the time allotted for bringing these actions. Therefore, a creditor which becomes involved in an adversary proceeding with a debtor cannot file a counterclaim or cross-claim against the debtor to object to the discharge or to *725determine the dischargeability of a debt if the time for filing such actions has already expired. See, Crabtree v. Haladye (In Re Crabtree), 14 B.R. 601 (Bkcy.N.D.Ohio 1981). Since, in the present case, Luckey’s Cross-Claim is of the type which has been precluded by the passing of the time , periods set forth in the applicable Bankruptcy Rules, see, Bankruptcy Rules 4004, and 4007, it must be concluded that these Cross-Claims are precluded by the statute of limitations. Accordingly, the Debtor is entitled to judgment as a matter of law.
In reaching these conclusions, the Court has considered all the evidence and arguments of counsel, regardless of whether or not they are specifically referred to in this Opinion.
It is ORDERED that the Motion For Summary Judgment be GRANTED in part and DENIED in part.
It is FURTHER ORDERED that the Complaint filed by the Plaintiff be, and is hereby, DISMISSED.
It is FURTHER ORDERED that the Debtor’s First Cross-Claim be, and is hereby, DISMISSED.
It is FURTHER ORDERED that the Cross-Claims filed by Luckey Farmers, Inc., be, and are hereby, DISMISSED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490433/ | MEMORANDUM OPINION AND ORDER
RICHARD L. SPEER, Bankruptcy Judge.
This cause comes before the Court upon the Motion For Partial Summary Judgment filed by the Plaintiff in the above entitled adversary action. Although the Defendants have filed an Answer in this case, they have not opposed the Motion presently before the Court. The Court has reviewed the Motion as well as the entire record in this case. Based upon that review and for the following reasons the Court finds that the Motion should be granted.
FACTS
The facts in this case do not appear to be in serious dispute. The Plaintiff in this case is the Trustee for the liquidation of the Debtor-brokerage. The Defendants are persons who received funds from the assets of the brokerage prior to the initiation of liquidation proceedings on February 5, 1983.
In the years prior to the Debtor’s liquidation, the managing partner of the brokerage, Edward P. Wolfram, Jr., carried out an unlawful course of conduct, whereby he diverted assets of the brokerage to his own purposes. See, In re Bell & Beckwith, 50 B.R. 422 (Bkcy.N.D.Ohio 1985). The record indicates that these purposes included several transfers to the Defendants in this case. Although it appears that some of these transfers were made to the Defendants as compensation for services performed, it also appears that some of these transfers were either loans or gifts.
While the Complaint in this case addresses all transfers allegedly made by Wolfram to the Defendants, the Motion presently before the Court seeks judgment only with regard to one particular transfer. As to that transfer, the record indicates that on or about May 3, 1982, a transfer was made from a customer account belonging to Zula Wolfram, the wife of Edward P. Wolfram, Jr., to the Defendants. The amount of this transfer was Seventy-four Thousand Five *727Hundred and no/100 Dollars ($74,500.00). It appears that a check was drawn on the Debtor’s account and was negotiated at the National Bank of Loring APB, Maine, by the Defendants. The evidence indicates that about the same time as this transfer was made, a similar amount was debited from Zula Wolfram’s customer account at the Debtor/brokerage. It further appears that these funds were withdrawn from the depository bank by the Defendants and were used to purchase a house in Limestone, Maine, from parties who are otherwise unrelated to this proceeding.
In asserting the causes of action set forth in the Complaint, the Trustee contends that the funds transferred to the Defendants should be avoided as both fraudulent conveyances and as preferential transfers. He also contends that these funds are part of a constructive trust which should be imposed over any assets diverted by Wolfram from the Debtor. As has already been indicated, the Motion presently before the Court seeks judgment against the Defendants regarding the May 3, 1982, transfer of Seventy-four Thousand Five Hundred and no/100 Dollars ($74,-500.00).
In support of his Motion, the Trustee offers the admissions and answers given by the Defendants during discovery proceedings. In those answers, the Defendants admit that the transfer was made, that no consideration was exchanged for the transfer, and that the funds in question were used to purchase the property described in the Complaint. In further support of the Motion, the Trustee has offered an affidavit from an agent of the Securities and Exchange Commission. In that affidavit, the affiant sets forth facts which demonstrate both Wolfram’s fraud and the insolvency of the debtor. As has been indicated, the Defendants have not opposed this Motion.
LAW
The provisions of 11 U.S.C. § 548(a) state in pertinent part:
(a) The trustee may avoid any transfer of an interest of the debtor in property, or any obligation incurred by the debtor, that was made or incurred on or within one year before the date of the filing of the petition, if the debtor voluntarily or involuntarily—
(1) made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made or such obligation was incurred, indebted; or
(2)(A) received less than a reasonably equivalent value in exchange for such transfer or obligation; and
(B)(i) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation;
Under these provisions, a trustee may avoid any transfer of assets which was made with the intent to defraud its creditors, McGraw v. Allen (In re Bell & Beckwith), 64 B.R. 620 (Bkcy.N.D.Ohio 1986), or was made by the debtor while insolvent and which did not result in a return to the debtor of reasonably equivalent value. McGraw v. Bressler (In re Bell & Beckwith), 44 B.R. 656 (Bkcy.N.D.Ohio 1984). If such a transfer is avoided, a trustee may recover the value of the transfer from the initial transferee or from any immediate or mediate transferee of the initial transferee. See, 11 U.S.C. § 550(a). However, a trustee may not recover from one other than the initial transferee if the property was taken by the subsequent transferee for value, in good faith, and without knowledge of the avoidability of the transfer. See, 11 U.S.C. § 550(b).
At the outset of its analysis, the Court notes that this action is but one of many which have arisen out of the Debtor’s liquidation. As has been noted, this liquidation was the result of a fraudulent course of conduct carried out by the managing partner of the Debtor over a period of approximately ten years. This Court *728has found in prior proceedings that any funds transferred by either Edward P. Wolfram, Jr. or Zula Wolfram during this period were the products of this fraudulent scheme. Accordingly, this Court has found that such transfers were made with the intent to defraud the creditors of the brokerage. See, McGraw v. Allen, supra. Inasmuch as the Defendants have admitted to receiving the funds in question from Zula Wolfram within one year prior to the initiation of the Debtor’s liquidation, it must be concluded that the May 3, 1982, transfer of Seventy-four Thousand Five Hundred and no/100 Dollars ($74,500.00) is avoidable under the provisions of 11 U.S.C. § 548(a)(1).
A further review of the facts in this case finds that the Defendants have admitted that they did not return to Zula Wolfram any consideration for the May 3, 1982, transfer. While it has been suggested that this transfer may have been a loan to the Defendants, no promissory note or other instrument has been presented. Furthermore, from both the affidavit of the Securities and Exchange Commission’s agent and this Court’s prior involvement in this case, it is evident that the Debtor was insolvent at the time of the transfer. Based upon these facts, it must be concluded that the transfer in question is also avoidable under the provisions of 11 U.S.C. § 548(a)(2)(A) and (B)(i). As a result of the avoidability of these transfers, it must also be concluded that the Trustee is entitled to recover from the Defendants, under the provisions of 11 U.S.C. § 550(a), the value of this transfer.
In addition to the avoidance of the transfer, the Trustee seeks the imposition of a constructive trust over the real estate purchased by the Defendants with the funds in question. A constructive trust may be imposed where a person has obtained property which cannot, in equity and good conscience, be retained as against the party actually entitled to the property. 53 Ohio Jur.2d Trusts § 88. However, inasmuch as an action to impose a constructive trust is an in rem proceeding, there must be some specific property to which the trust can attach. 53 Ohio Jur.2d Trusts § 90.
In the present case, the Trustee has presented evidence which demonstrates the chain of possession between Wolfram’s wrongful diversion to the purchase of the real estate by the Defendants. As a result, this real estate can be considered as the property over which a constructive trust can be created. Since this Court has held that the funds used to purchase this property were wrongfully diverted from the Debtor, such a constructive trust will be imposed over the property or its proceeds for the benefit of the Debtor’s creditors. This trust will be in the form of a lien against the property in the amount of the avoided transfer. However, if the Defendants independently, and without use of or reliance upon the property, satisfy the judgment which has been imposed under the provisions of Title 11, then the trust will be dissolved and the lien will terminate.
In reaching these conclusions the Court has considered all the evidence and arguments of counsel, regardless of whether or not they are specifically referred to in this Opinion.
It is ORDERED that the Trustee’s Motion For Partial Summary Judgment be, and is hereby, GRANTED.
It is FURTHER ORDERED that judgment be, and is hereby, entered for the Trustee in the amount of Seventy-four Thousand Five Hundred Dollars and no/100 ($74,500.00).
It is FURTHER ORDERED that a constructive trust be, and is hereby, created over the real estate owned by the Defendants in Limestone, Maine.
It is FURTHER ORDERED that a lien in the amount of Seventy-four Thousand Five Hundred and no/100 Dollars ($74,500.00) be, and is hereby, created in favor of the Trustee over the Defendants’ real estate in Limestone, Maine. However, the creation of this lien is made dependent upon the Trustee’s compliance with any applicable law in the State of Maine which addresses *729the validity, creation, perfection, or enforcement of such liens.
It is FURTHER ORDERED that a continued Pre-Trial conference on the remaining actions in this case be, and is hereby, set for Thursday, February 12, 1987, at 11:30 o’clock A.M., in Courtroom No. 2, United States Courthouse, 1716 Spielbusch Avenue, Toledo, Ohio. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490435/ | MEMORANDUM OPINION AND ORDER
RICHARD L. SPEER, Bankruptcy Judge.
This cause comes before the Court upon the Motion For Summary Judgment filed by the Plaintiff against the Defendant Target Industries (hereinafter Target). The parties have filed their arguments relative to the merits of this Motion and have had the opportunity to respond to the arguments made by opposing counsel. The Court has reviewed those arguments as well as the entire record in this case. Based upon that review and for the following reasons the Court finds that Summary Judgment should be entered for the Plaintiff.
FACTS
The facts in this case do not appear to be in serious dispute. On or about July 20, 1982, the Debtor-In-Possession ordered certain products from Target. ' Although the exact nature of these items is unclear, it appears that it included some plastic products which were used in the Debtor-In-Possession’s operations. It also appears that the items were shipped to the Debtor-In-Possession, and that an invoice for the shipment was issued on or about July 23, 1982. Target admits that the items were received by the Debtor-In-Possession on July 26, 1982.
On or about August 20,1982, the Debtor-In-Possession issued a check to Target in the amount of $10,039.68. This instrument was issued as payment for the July 23, 1982 shipment of merchandise. While Target admits that it received the Debtor-In-Possession’s check on or about September 6,1982, the evidence reflects that the check was not paid by the drawee bank until September 13, 1982.
The Debtor-In-Possession filed its voluntary Chapter 11 Petition with this Court on October 19, 1982. In an effort to collect assets for the estate, the Debtor-In-Possession filed the above entitled adversary action. In this action, the Debtor-In-Possession alleges that the payment made to Target was an avoidable preferential transfer under the provisions of 11 U.S.C. § 547(b).
The Motion presently before the Court seeks a summary adjudication of this adversary action. In support of this Motion, the Debtor-In-Possession has offered copies of Target’s invoice and the check which was issued to Target in payment of the invoice. It has also offered the affidavit of counsel for the Debtor-In-Possession, wherein he avers to the fact that as of the filing of the Motion the Debtor-In-Possession had approximately $35,002.86 in assets. A review of the Debtor-In-Posses*750sion’s schedules finds that at the time the petition was filed the Debtor-In-Possession had approximately $1,888,000.00 in unsecured obligations, $2,666,000.00 in secured obligations, and $4,100,000.00 in total assets.
In opposition to the Motion, Target has argued that the obligation should not be considered as- owing until thirty days subsequent to the issuance of the invoice. This argument is based on the fact that the invoice bore a statement that payment on the invoice was due thirty days after its issuance. Target has also argued that the date on which the Debtor-In-Possession tendered the check should be considered the date on which a transfer occured. As a result of these arguments, Target contends that certain defenses available under the provisions of 11 U.S.C. § 547 are applicable.
LAW
Prior to the enactment of the Bankruptcy Amendments and Federal Judgeship Act of 1984, P.L. 98-353, the provisions of 11 U.S.C. Section 547 stated in pertinent part:
(b) ... the trustee may avoid any transfer of property of the debtor—
(1) to or for the benefit of the 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.
(c) The trustee may not avoid under this section a transfer—
(1) to the extent that such transfer was—
(A) intended by the debtor and the creditor to or for whose benefit such transfer was made to be a contemporaneous exchange for new value given to the debt- or; and
(B) in fact a substantially contemporaneous exchange;
(2) to the extent that such transfer was—
(A) in payment of a debt incurred in the ordinary course of business or financial affairs of the debtor and the transferee;
(B) made not later than 45 days after such debt was incurred;
(C) made in the ordinary course of business or financial affairs of the debtor and the transferee; and
(D) made according to ordinary business terms.
The pre-amendment version of that section is applicable to this adversary proceeding, inasmuch as the Chapter 11 case was filed prior to the effective date of the amendments. See, P.L. 98-353 Section 553(a).
Under these provisions, a trustee or a debtor-in-possession, see, 11 U.S.C. Section 1107, may avoid the transfer of an interest of the debtor in property which was made to a creditor on account of an antecedent debt within ninety days prior to the petition if the debtor was insolvent at the time of the transfer and if the transfer enables the creditor to receive more than they would have received in a Chapter 7 proceeding had the transfer not been made. Allison v. First Nat. Bank & Trust Co. (In re Damon), 34 B.R. 626 (Bkcy.D.Kan.1983).
A trustee can not avoid a transfer which was intended by the debtor, and which was, in fact, a contemporaneous exchange for new value. Ray v. Security Mutual Finance Corp. (In re Arnett), 731 F.2d 358 (6th Cir.1984). The most determinative factor in assessing whether or not a transfer was a contemporaneous exchange is the intent of the parties to create such an exchange. McClendon v. Cal-Wood Door (In re Wadsworth Bldg. Components, Ins.), 711 F.2d 122 (9th Cir.1983). A trustee may also not avoid any transfer to the *751extent it was payment of an ordinary business expense which was incurred within forty-five (45) days prior to the time the transfer was made. Quinn v. TTI Distribution Corp. (In re Moran Air Cargo, Inc.), 30 B.R. 406 (Bkcy.R.I.1983). It is generally held that when a transfer to a creditor is accomplished by check, the transfer does not occur until the check is honored by the drawee bank. See, Harris v. Harbin Lumber Co. of Royston, Inc. (Matter of Ellison), 31 B.R. 545 (Bkcy.M.D.Ga.1983). Hartwig Poultry, Inc. v. American Eagle Poultry, Inc. (In re Hartwig Poultry, Inc.), 56 B.R. 332 (Bkcy.N.D.Ohio 1985).
A party is entitled to a summary adjudication if they can demonstrate that there are no genuine issues as to any material fact and that they are entitled to judgment as a matter of law. See, Bankruptcy Rule 7056, Federal Rules of Civil Procedure 56. However, a plaintiff must be able to demonstrate all elements of a cause of action in order to prevail. See, Chalmers v. Benson (In re Benson), 33 B.R. 572 (Bkcy.N.D.Ohio 1983), Simmons v. Landon (In re Landon), 37 B.R. 568 (Bkcy.N.D.Ohio 1984).
A review of the facts finds that the Debtor-In-Possession issued a check to Target and that Target negotiated this check on account of its invoice to the Debt- or-In-Possession. This transfer and negotiation constitutes a transfer of property of the Debtor for purposes of 11 U.S.C. § 547(b). See, Hartwig Poultry, Inc. v. American Eagle Poultry, Inc., supra. The facts also indicate that the debt which was created by Target’s shipment of goods served as the basis for the Debtor-In-Possession’s payment. Although the debt arose at the time goods were shipped, the Debtor did not tender payment until September 6, 1982. As a result, the debt for which payment was made was an antecedent debt. See, Hartwig Poultry, Inc. v. C.W. Service (In re Hartwig Poultry, Inc.), 56 B.R. 320 (Bkcy.N.D.Ohio 1985).
A further review of the facts finds that the execution of the check, its delivery to Target, and, the negotiation of the check at the drawee bank are all events which oc-cured within ninety days prior to the filing of the Debtor-In-Possession’s petition. It also finds that the check was honored by the drawee bank fifty-two days after the date the invoice was issued. It appears that the date of the invoice was the date on which the goods were shipped to the Debt- or-In-Possession. In addition to these facts, the provisions of 11 U.S.C. § 547(f) provide that the Debtor-In-Possession is presumed to be insolvent during the ninety day pre-filing period. In light of these facts, it must be concluded that the elements set forth in 11 U.S.C. § 547(b)(1), (b)(2), (b)(3), and (b)(4)(A) have been adequately demonstrated for purposes of this action.
The only element which remains to be established is that addressed by 11 U.S.C. § 547(b)(5). Under this section, the trustee must be able to show that the creditor received more as a result of the transfer than would have been received in a Chapter 7 liquidation had the transfer not been made. A review of the Debtor-In-Possession’s schedules finds that the Debtor-In-Possession was insolvent, see, 11 U.S.C. § 101(26), at the time the petition was filed. As has been indicated in prior decisions in this case, see, Hartwig Poultry, Inc. v. C.W. Service, supra, after the deduction of secured property and secured claims, the Debtor-In-Possession had approximately $1,800,000.00 in unsecured obligations, and $170,000.00 in available assets. After payment of expenses, this would result in less than a ten percent dividend to unsecured creditors. The affidavit offered in support of the present Motion indicates that the return will be significantly less than it might have been on the date the petition was filed. Since the transfer in question enabled Target to receive one hundred percent of the amount owed by the Debtor-In-Possession, and since Target would have participated in the estate as a general unsecured creditor, it must be concluded that Target received more as a result of the Debtor-In-Possession’s transfer than it *752would have received in a Chapter 7 liquidation had the transfer not been made. Accordingly, the provisions set forth in 11 U.S.C. § 547(b)(5) have been satisfied. Inasmuch as the establishment of this element completes the requirements for the avoiding of a transfer under 11 U.S.C. § 547(b), it must also be concluded that there is not question of material fact as to the avoidability of the transfer, and that the Debtor-In-Possession is entitled to judgment as a matter .of law.
The Defendant has argued that the payment of this obligation falls within the exception to avoidability set forth in 11 U.S.C. § 547(c)(2). In that provision, any payment made in the ordinary course of business and made within forty-five days after the debt was incurred is not avoidable under § 547(b). Although the evidence indicates that the debt to Target was incurred in the ordinary course of business, it is also evident that payment was not made within the forty-five day period. In computing that period, the date on which the debt was incurred must first be established. As has been indicated, the debt is considered to be incurred on the date the Debtor becomes obligated to the Defendant. See, Hartwig Poultry, Inc. v. C.W. Services, supra. Despite the fact the invoice stated that payment was due thirty days after its issuance on July 23, 1982, this statement is not sufficient so as to preclude the Defendant’s ability to enforce the obligation prior to the expiration of that time. Such a preclusion does not appear to be part of the contract which existed between the parties. Furthermore, since the transfer of property to the Debt- or-In-Possession is the event which actually gives rise to the Debtor-In-Possession’s liability, the date on which that transfer occurs is the date upon which the obligation actually arose.
As for the Debtor-In-Possession’s transfer to the Defendant, the evidence indicates that this transfer took place fifty-two days after the shipment of goods to the Debtor-In-Possession. As has been previously indicated, when payment is made by check, a transfer occurs only upon the negotiation of the check by the drawee bank. The fact that the Debtor-In-Possession issued a check against its account and delivered the check to Target does not divest the Debtor-In-Possession of its ability to exercise dominion over the funds in its accounts. Since the monies in the Debtor-In-Possession’s account is the property which is actually transferred, the date on which they are transferred must be the focus of the inquiry. Until the funds have been debited from the account, there has not been a sufficient divestiture of control over those funds for purposes of 11 U.S.C. § 547(b) and (c)(2). Because, in the present case, the negotiation by the drawee bank did not happen until after the forty-five day period expired, the defense offered by 11 U.S.C. § 547(c)(2) is not available.
The Defendant has also argued that the avoidability of the transfer is subject to the exception set forth in 11 U.S.C. § 547(c)(1). In that provision, any transfer which was intended by the parties as a contemporaneous exchange of new value and which was, in fact, a substantially contemporaneous exchange is not avoidable under 11 U.S.C. § 547(b). In the present case, there is nothing in the record which demonstrates the intent of the parties relative to the question of whether or not a contemporaneous exchange was intended. However, even if such evidence could be shown, the forty-five day period which had elapsed between the creation of the debt and the deliverance of the check is too protracted a period for a contemporaneous exchange. As a result, it must be considered to have been an antecedent debt. See, Foreman Industries, Inc. v. Broadway Sand & Gravel (Matter of Foreman Industries, Inc.), 59 B.R. 145 (S.D.Ohio 1986). Accordingly, the exception under 11 U.S.C. § 547(c)(1) is not applicable in this action.
In reaching these conclusions the Court has considered all the evidence and arguments of counsel, regardless of whether or not they are specifically referred to in this Opinion.
*753It is ORDERED that the Motion For Summary Judgment be, and is hereby, GRANTED.
It is FURTHER ORDERED that the transfer be, and is hereby, AVOIDED.
It is FURTHER ORDERED that judgment be, and is hereby, entered against Target Industries in the amount of Ten Thousand Thirty-nine and 68/100 Dollars ($10,039.68). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490436/ | MEMORANDUM DECISION AND ORDER DENYING MOTIONS FOR SUMMARY JUDGMENT AND DISMISSAL
FRANCIS G. CONRAD, Bankruptcy Judge.
The debtor filed a complaint to avoid the State’s claim to his Supplemental Social Security Income (SSI) payment. Relying principally on the Eleventh Amendment to the U.S. Constitution, Vermont moved for summary judgment and dismissal. We deny the State’s motions because the Bankruptcy Code waives Vermont’s sovereign immunity and the complaint states a cause of action.
Anderson, a citizen of Vermont, received public assistance from Vermont while awaiting a determination of his eligibility for Social Security benefits. In exchange for the State’s assistance, Anderson assigned his rights in the benefits to Vermont. By January 13, 1986, Anderson owed Vermont $7,760.79. A United States Treasury check for $9,636.88 of benefits was delivered to Vermont on January 16, 1986. Anderson filed a chapter 7 petition on January 21, 1986, listing the Vermont Department of Social Welfare as an estimated and unperfected creditor for $10,-000.00.
Allegedly unaware of the bankruptcy petition, Vermont issued a check for $1,876.09 to Anderson on January 22, 1986. Asserting an interest in the U.S. Treasury check received on January 16, 1986, Vermont de*761posited it to its account on February 14, 1986.
The State moves to dismiss Anderson’s complaint to avoid a lien for failure to state a claim upon which relief can be granted, F.R.Civ.P. 12(b)(6), and for summary judgment under F.R.Civ.P. 56. To support its motion, Vermont urges us to construe Vermont Statute, 33 VSA § 2575,1 as prohibiting Anderson’s adversary proceeding. As an additional ground, the State asserts its constitutional rights under the Eleventh Amendment to the United States Constitution.2
We are unable to make any sense out of Vermont’s Fed.R.Civ.P. Rule 12(b)(6) motion. For support, they direct us to a Vermont statute, 33 VSA § 2575,3 which exempts public assistance from alienation and indicate that it is applicable to them. As additional support for their argument, they cite 11 U.S.C. § 523(a)(10) to stand for the proposition that they, as a creditor, have the right to exempt property of the bankruptcy estate. Their exemption argument is so preposterous and without any foundation in the law that we dismiss it without further discussion.
Vermont’s second ground for dismissal asks that we review the plaintiff’s claim for relief as one barred by the Eleventh Amendment of the United States Constitution. They request dismissal under F.R.Civ.P. 56. The ground is more appropriately categorized as a F.R.Civ.P. 12(b)(2) motion and we decide Vermont’s motion in that procedural posture.
By its terms the Eleventh Amendment prohibits suits in Federal Court commenced or prosecuted by one of the United States, by citizens of another State, or by citizens or subjects of any foreign State. The Supreme Court has decided, however, that the policy behind the Eleventh Amendment, namely state sovereignty, prevents a Federal Court from entertaining a suit brought against a state by its own citizens. Hans v. Louisiana, 134 U.S. 1, 10 S.Ct. 504, 33 L.Ed. 842 (1890). Because the Eleventh Amendment is an “exemplification” of the doctrine of Sovereign immunity, we understand how Vermont has confused what we perceive is a sovereign immunity defense with one lying within the Eleventh Amendment to the United States Constitution.
It is a correct statement of the law that absent its consent, a state may not be sued in a Federal Court. Pennhurst State School & Hospital v. Halderman, 465 U.S. 89, 104 S.Ct. 900, 79 L.Ed.2d 67 (1984).
If, as Anderson argues, there is a waiver of sovereign immunity, we must look elsewhere for it. On the issue at hand, Vermont’s law contains no waiver of its sovereign immunity. By virtue of Article 1, § 8, clause 4 of the United States Constitution, the states have granted Congress the power to waive sovereign immunity to suit if it (Congress) does so expressly by clear language that the immunity was swept away or through clear implication drawn from legislative consideration or legislative history. Quern v. Jordan, 440 U.S. 332, 99 S.Ct. 1139, 59 L.Ed. 358 (1970).
Congress has exercised its plenary power by enacting section 1064 of the *762Bankruptcy Code. The section states that when a governmental unit has asserted a claim against an estate, it has waived its immunity to all other claims arising out of the same transaction. Connecticut Performing Arts Foundation v. Brown, 47 B.R. 911, 916 (Bkrtcy.D.C.1985). The legislative history of § 106 shows clearly the express waiver required by the Quern Court. During consideration of a limited version of 106, the legislative history explained the provision as follows:
Section 106 provides for a limited waiver of sovereign immunity.... Congress does not ... have the power to waive sovereign immunity completely with respect to claims of a bankrupt estate against a State, though it may exercise its bankruptcy power through the supremacy clause to prevent or prohibit State action that is contrary to bankruptcy policy.
There is, however, a limited change in the result from the result that would prevail in the absence of bankruptcy ... First, the filing of a proof of claim against the estate by the governmental unit is a waiver by that governmental unit of sovereign immunity with respect to compulsory counter claims, as defined in the Federal Rules of Civil Procedure, that is, counter-claims arising out of the same transaction or occurrence.
H.R.Rep. No. 595, 95th Cong., 1st Sess. 317 (1977); S.Rep. No. 989, 95th Cong., 2d Sess. 29 (1978); U.S.Code Cong. & Admin.News 1978, pp. 5787, 5815, 6274. See In re Adirondack Ry. Corp., 28 B.R. 251, 10 B.C.D. 256 (Bkrtcy.N.D.N.Y.1983); Matter of Willington Convalescent Home, Inc., 39 B.R. 781, 11 B.C.D. 1039; Bankr.L.Rep. para. 69863, 10 C.B.C.2d 850 (Bkrtcy.D.Conn.1984).
Sections 106(a) and (b) were too limited for Congressional purposes. The Conference Committee added 106(c) to extend the waiver of sovereign immunity beyond those cases where the state filed a proof of claim against the bankruptcy estate. With regard to § 106(c), Congress states:
The provision indicates that the use of the term “creditor,” “entity,” or “governmental unit in title 11 applies to governmental units notwithstanding any assertion of sovereign immunity and that an order of the court binds governmental units. The provision is included to comply with the requirement in case law that an express waiver of sovereign immunity is required in order to be effective. Section 106(c) codifies In re Gwilliam, 519 F.2d 407 (9th Cir., 1975), and In re Dolard, 519 F.2d 282 (9th Cir., 1975), permitting the bankruptcy court to determine the amount and dischargeability of tax liabilities owing by the debtor or the estate prior to or during a bankruptcy case whether or not the governmental unit to which such tax liabilities are owed filed a proof of claim. Except as provided in sections 106(a) and (b), subsection (c) is not limited to those issues, but permits the bankruptcy court to bind governmental units on other matters as well. For example, section 106(c) permits a trustee or debtor in possession to assert avoiding powers under title 11 against a governmental unit; contrary language in the House report to H.R. 8200 is thereby overruled.
124 Cong.Rec.H. 11091 (Sept. 28, 1978) (remarks of Rep. Edwards); S. 17407 (Oct. 6, 1978) (remarks of Sen. DeConcini). See Matter of Willington Convalescent Home, Inc., supra at 788-9. From this report, the Willington Court found a clear legislative intent that a State be responsible to a bankruptcy estate for monetary damages in specific situations. Willington, supra, at 788. The determination of liability under a welfare benefits assignment within the context of a lien avoidance adversary proceeding is conceptually similar to a tax liability determination. Accordingly we hold that Congress has expressly waived Vermont’s sovereign immunity in this area. Our holding at this juncture is sufficient to decide the motion. But to ensure completeness, we discuss the other arguments raised by the State in its motion.
*763In the Willington case, Connecticut overpaid the debtor estate pursuant to a medicaid agreement and sought to recover the damages. The State never filed a proof of claim and asserted sovereign immunity to prevent the Bankruptcy Court from binding Connecticut to a judgment. Willington, supra, at 784. The Court noted that through the legislative history and the statute’s plain meaning it clearly affirmed Congress’ intent that Connecticut may be sued under 106(c). Congress, however, did not determine where the liability could be enforced. Willington, supra, at 789. Citing 28 USC § 1471(b), the Willington Court found that all civil proceedings arising in or related to cases under title 11 are the exclusive jurisdiction of the District Courts. Congress made no mention of special proceedings against States. The statute indicates a potent legislative intent that the estate should profit from having all of its litigation heard in a single federal forum. Compare 28 USC § 1334.5 Therefore, not only had Congress waived Connecticut’s common law sovereign immunity, but clearly intended that the waiver be enforced in the Federal Courts. Willington, supra, at 789. We concur with the Willington Court and hold that the State’s interest in any of Anderson’s SSI benefits must be determined by us as provided under 28 USC § 1334(b).
Connecticut’s final argument in the Willington case, the converse of this proceeding, rested on the contractual agreement with the debtor that gave the State the right to recoup unintended overpayment for past services from amounts due for later services. The contractual agreement arose pre-petition. The services from which Connecticut attempted a recoupment arose post-petition. The Court found that recoupment required that the debtor’s right to recovery and the State’s right to payment originate in the same contract and correlate to the same subject matter. Since neither requirement was fulfilled, the Court characterized Connecticut’s assertion as a “right to set off a prepetition claim against the debtor against a postpetition obligation to the debtor,” and thus unenforceable in bankruptcy. Willington, supra, at 792.
In this proceeding Vermont is asserting its rights to the SSI check under the January 14, 1983, agreement with the debtor. The agreement and debt were pre-petition. The deposit of the check occurred post-petition. Since the right to the SSI benefits relates to the agreement and the post-petition deposit to the bankrupt’s estate, the State is exerting, not a recoupment, but rather a setoff.
A post-petition setoff is within the jurisdiction of this Court to decide. See 11 USC § 553.6 Vermont’s setoff action coupled with its sovereign immunity post-petition defense strikes us as the use of sovereign immunity as a sword and not as the shield it was intended to be. Such use of sovereign immunity contravenes the stated intent of § 106 to prohibit State action that is contrary to bankruptcy policy. See Notes of the Committee on the Judiciary, Senate Report No. 95-989, supra.
Absent the broad reaches of § 106(c), Vermont’s assertion of Eleventh Amendment immunity is also not applicable to this proceeding. Relying primarily on *764Hutto v. Finney, 437 U.S. 678, 98 S.Ct. 2565, 57 L.Ed.2d 522 (1978), and its progeny, to support its Eleventh Amendment rights, the State asserts that Anderson’s adversary proceeding is a raid on the State’s coffers. In Hutto, the Court recognized that retroactive monetary relief is indeed a violation of a state’s Eleventh Amendment rights, but prospective relief is not. 437 U.S. 678, at 690, 98 S.Ct. 2565, at 2573. In addressing the issue of an award of attorney’s fees against the State, the Court determined that the cost of compliance was “ ‘ancillary’ to the prospective order enforcing federal law ... The line between retroactive and prospective relief cannot be so rigid that it defeats the effective enforcement of prospective relief.” Hutto, supra, at 690, 98 S.Ct. at 2573.
Vermont attempts to distinguish the Hutto decision by arguing that because it has already deposited and recorded the receipt of the SSI check, releasing the funds to Anderson would be retroactive relief. We disagree.
As the attorney’s fees in Hutto were ancillary to enforcement of prospective relief, so is the return of the disputed funds ancillary to the prospective relief awarded a debtor by a discharge in bankruptcy. Under these circumstances, physical possession of the funds does not resolve whether release of the funds is retroactive or prospective relief. The determining factor is, instead, legal entitlement, a matter for decision upon trial. Until actual ownership of the funds in the State’s possession is determined, avoidance of the lien cannot be characterized as retroactive relief. Therefore, without a clear determination of possession, Vermont’s Eleventh Amendment immunity to retroactive relief, had it not been waived, is not implicated. See M. Jones, Suits Against a State Under the Bankruptcy Code for Retrospective Monetary Relief, 91 Com.L.J. 278 (Spring 1986). Now, Therefore,
It is ORDERED that Vermont’s motions for Summary Judgment and Dismissal are DENIED, and it is FURTHER ORDERED that a Pre-Trial Conference shall be held at the Federal Court House in Montpelier, Vermont.
. 33 VSA § 2575 states: "All rights to, and all moneys or orders granted to persons as assistance shall he inalienable by assignment, transfer, attachment, trustee process, execution or otherwise. In the case of bankruptcy the assistance shall not pass to or through a trustee or other person acting on behalf of creditors.”
. The Eleventh Amendment provides: "The Judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by Citizens of another State, or by Citizens or subjects of any Foreign State.”
. See footnote 1, supra.
.11 USC § 106 provides: "(a) A government unit is deemed to have waived sovereign immunity with respect to any claim against such governmental unit that is property of the estate and that arose out of the same transaction or occurrence out of which such government unit’s claim arose, (b) There shall be offset against an allowed claim or interest of a governmental unit any claim against such governmental unit that is property of the estate, (c) Except as provided in subsections (a) and (b) of this section and notwithstanding any assertion of sovereign immunity—(1) a provision of this title that contains "creditor”, “entity”, or "governmental unit” applies to governmental units; and (2) a deter*762mination by the court of an issue arising under such a provision binds governmental units.”
. 28 USC § 1334 provides: "(a) Except as provided in subsection (b) of this section, the district courts shall have original and exclusive jurisdiction of all cases under title 11. (b) Notwithstanding any Act of Congress that confers exclusive jurisdiction on a court or courts other than the district courts, the district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11 or arising in or related to cases under title 11 ... (d) The district court in which a case under title 11 is commenced or is pending shall have exclusive jurisdiction of all of the property, wherever located, of the debtor as of the commencement of such case, and of property of the estate.”
. 11 USC § 553 provides: "(a) Except as otherwise provided in this section and in sections 362 and 363 of this title, this title does not affect the rights of a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case under this title against a claim of such creditor against the debtor that arose before the commencement of the case ...” | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490438/ | ORDER ON MOTION TO DISMISS COMPLAINT FILED BY PROPERTY MANAGEMENT AND INVESTMENTS, INC.
ALEXANDER L. PASKAY, Chief Judge.
THIS IS a Chapter 7 liquidation case, and the matter under consideration is a Motion to Dismiss the Complaint filed by Property Management Investments, Inc. (PMI). The Motion is filed by the lawfirm of Johnson, Blakely, Pope, Bokor & Ruppel, P.A. (Johnson, Blakely), and the remaining Defendants named in the Complaint and challenges the legal sufficiency of the Complaint and contends that it fails to state the claim for which relief can be granted, therefore, it should be dismissed. Ordinarily the disposition of such a motion would not present any difficulty because the legal sufficiency of the Complaint would be determined as a matter of law by considering only the allegations set forth in the Complaint. However, this is an unusual case for the following reasons.
The original Complaint filed on August 28, 1986, sought injunctive relief against the named Defendants for violation of the automatic stay. The claim was based on § 362(h) of the Bankruptcy Code, which now permits:
(h) 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.
Shortly after filing the Complaint counsel for the Plaintiff filed a motion and sought *913a temporary restraining order prohibiting the Defendants from proceeding with the hearing scheduled in the state court in which the Defendants sought to tax costs against PMI. The motion was filed by the Defendants after the jury returned an adverse verdict to the Plaintiff and in favor of the Defendants. In the absence of this Court the district court considered the Motion for Temporary Restraining Order and on September 12, 1986, entered an order denying the Motion without prejudice. On September 19, 1986, the Plaintiff filed a Motion for Leave to Appeal the order of September 12, 1986 and also filed a Notice of Appeal. On September 29, 1986, the Defendants filed a Motion to Strike the Notice of Appeal and an Answer and Memorandum in opposition to the Motion for Leave to Appeal.
It appears that in the interim the state court proceeded with the Defendants’ Motion and entered a cost judgment in favor of the Defendants and against the Debtor’s estate for $16,131.66 and reserved jurisdiction for any further cost assessments. On September 19, 1986, PMI filed a Motion to Reconsider the order which denied the Motion for Temporary Restraining Order and renewed its Motion for a Temporary Restraining Order and also filed a Motion for Contempt for violation of the automatic stay and sought again a declaration that the cost judgment is null and void. On November 8 this Court transmitted to the district court the Defendants’ Motion to Strike the Notice of Appeal. On December 5, 1986, the district court granted the Motion to Strike the Notice of Appeal. On December 11, 1986, this Court entered an Order, 67 B.R. 889 (Bkrtcy.M.D.Fla.), on the Renewed Motion for Temporary Restraining Order and the Motion for Contempt in which PMI sought the imposition of sanctions for the alleged violation of the automatic stay by the Defendants and also injunctive relief prohibiting the Defendants from proceeding any further with their attempts to obtain additional cost judgments or to enforce their cost judgment.
In the December 11 Order this Court after having recited the relevant facts concluded that as a matter of law that the automatic stay did not apply to the post judgment proceedings in the state court and, therefore, the Plaintiff, PMI, is not entitled to any of the relief it seeks, including imposition of sanctions pursuant to § 862(h). On December 21, 1986, this Court denied the Motion for Rehearing of the December 11 Order. On December 19 PMI filed a Motion for Leave to Appeal and also a Notice of Appeal which appeal and motion are currently pending in the district court. On January 9, 1987, this Court entered an Order, 69 B.R. 310 (Bkrtcy.M.D.Fla.), on the Motion for Attorney Fees filed by the Defendants and granted the Motion and imposed a sanction on counsel for PMI in the amount of $750. PMI promptly filed a Motion for Rehearing and for Entry of an Order Ex Parte and the Motion for Reconsideration of the Motion for Attorney Fees.
On January 20, 1987, the district court also entered an order and denied PMI’s Motion for Relief to Appeal. On January 20 PMI renewed its Motion for Leave to Appeal, which was addressed to this Court’s order of January 9, 1987, and also filed a Notice of Appeal. The Notice of Appeal addressed to the January 9, 1987, order was transmitted to the district court where it is currently pending and awaiting disposition. In the meantime, PMI also filed a motion and sought leave to appeal not only the January 9, 1987, Order but also the Order of January 23, 1987.
The procedural background of this present controversy is, of course, complicated by the unsettled status of the appeal, which at first blush might indicate that since there is an appeal pending in district court, this Court lacks the power to consider the Motion to Dismiss. A close examination of the applicable case law indicates to the contrary. While it is true that the filing of a timely Notice of Appeal ordinarily divests the trial court with further jurisdiction, an appeal from an interlocutory order granting or denying a preliminary injunctive relief does not strip the trial court of jurisdiction to proceed with the controversy on its merits. Thomas v. *914Board of Education, Granville Central School District, 607 F.2d 1043 (2nd Cir.1979) This being the case, this Court is satisfied that this Court does not lack the power to consider the Motion to Dismiss the Complaint filed by the defendants who seek a dismissal of the Complaint on the basis that the Complaint fails to state a cause of action, a contention which has already been favorably ruled upon by this Court by the December 11, 1986, Order. In this Order this Court held that the automatic stay did not apply to any of the proceedings in the state court. For this reason the Defendants could not be held to be in violation of the same, therefore, PMI is not entitled to any injunctive relief. It is intimated, although not articulated in the Complaint as written by PMI, that if the Defendants are permitted to proceed, and seek additional cost judgment and more importantly, attempt to execute the judgment they already obtained on the property of the estate, it would be an impermissible interference with this Court’s jurisdiction over property of the estate and this should not be permitted; therefore, PMI is entitled to the injunctive relief it seeks. While such relief may be available to PMI, not by this Complaint, the validity of which is challenged by the Motion under consideration.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the Motion to Dismiss the Complaint filed by the Defendants be, and the same is hereby, granted and the Complaint of PMI, Adversary Number 86-0397 be, and the same is hereby, dismissed without prejudice to the rights of PMI to seek what other relief it might consider to be appropriate and which counsel for PMI believes in good faith that PMI is entitled to obtain. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490556/ | ORDER OF CIVIL CONTEMPT
A. JAY CRISTOL, Bankruptcy Judge.
This cause came on to be heard on July 28, 1987, upon the motion of debtor to hold a secured creditor, Fleet Mortgage Corporation, in contempt of court for willful violation, pursuant to 11 U.S.C. § 362.
It is undisputed that Fleet Mortgage Corporation filed a mortgage foreclosure action in Circuit Court against debtor after the filing of debtor’s petition for relief and without knowledge thereof. This action though a nullity and a technical violation of 11 U.S.C. § 362, does not constitute contempt. Thereafter, upon learning of the *952filing of the debtor’s petition in Bankruptcy Court, Fleet Mortgage Corporation refused to dismiss the foreclosure action. It is this act that the court finds to be a willful violation of the automatic stay. Fleet Mortgage Corporation is found in civil contempt of this court. Therefore, it is
ORDERED as follows:
1. The secured creditor, Fleet Mortgage Corporation, is found in civil contempt for failure to dismiss a suit to foreclose debt- or’s mortgage (Case No. 87-21618, in the Circuit Court of the Eleventh Judicial Circuit of Florida) after having received notice of this court’s automatic stay.
2. Fleet Mortgage Corporation is fined $25,000.
3. The appropriate agent of Fleet Mortgage Corporation responsible for the contempt shall be confined in a Federal prison for a period of ten (10) days.
4. The above penalties for contempt may be purged by a dismissal of the foreclosure suit, without prejudice within forty-eight (48) hours.
5. Fleet Mortgage Corporation shall take all steps necessary to reflect this order and remove the Notice of Lis Pendens filed in the mortgage foreclosure suit from the public records.
6. The debtor shall recover the attorney’s fees as incurred in this cause, the amount to be determined by evidentiary hearing. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490558/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW
A. JAY CRISTOL, Bankruptcy Judge.
THIS CAUSE came before the Court on March 25, 1987, May 6, 1987 and July 22, 1987 for evidentiary hearings to determine the dollar value of GENERAL MOTORS CORPORATION’S (hereinafter “GM”) collateral in accordance with the Final Judgment entered by this court on June 9, 1986 and the Court has been fully advised in the premises.
The Court has determined the following facts from the evidence presented:
1. The analysis presented by GM traces to GLENFED FINANCIAL CORPORATION (hereinafter “GLENFED”) receivables collected in the amount of $131,916.83 due to sales of GM parts by the debtor.
2. The total amount of $131,916.83 is to be reduced by $41,630.55. This lesser amount represents collections which predate the last check from the debtor to GM.
CONCLUSIONS OF LAW
This case involved a great deal of time, effort, and preparation for all the litigants and the Court. In determining the amount of this Judgment the Court has carefully addressed several issues.
GM presented a very thorough and detailed analysis of the collections of proceeds by GLENFED. This analysis covered the period from November of 1984 through June of 1985 and presented clear and convincing evidence that GLENFED received $131,916.83 which was directly attributable to the sales of GM parts by the debtor.
*958GLENFED FINANCIAL CORP. argues that Fla.Stat. § 679.306(4)(d) limits the interest of GM to proceeds received within 10 days prior to the filing of the bankruptcy petition. The argument is based on the fact that proceeds of GM’s collateral were deposited into an account containing funds other than the proceeds of GM's collateral, creating a commingled account under Fla. Stat. § 679.306(4)(d). The perfected security interest in proceeds in a commingled account is “limited to an amount not greater than the amount of any cash proceeds received by the Debtor within ten days before the institution of the insolvency proceedings....” Fla.Stat. § 679.306(4)(d)(2). GLENFED FINANCIAL CORP. cited authority from several jurisdictions supporting its position. The Court rejects the argument of GLENFED FINANCIAL CORP. and finds the operational statute to be Fla. Stat. § 679.306(4)(a).
The “Statement of Accounts Receivable” and the “Loan and Security Agreement” in evidence establish that proceeds from the sales of merchandise were deposited by GLENFED in a separate deposit account containing only proceeds. The checks received by the debtor were express mailed every day to GLENFED for deposit into this account. Initially, then, GM is thus entitled to the total amount of the proceeds which were traced to the sales of their product up to the amount of their proof of claim. This is in accordance with Fla.Stat. § 679.306(4)(a).
GLENFED FINANCIAL CORP. also argues that, as a matter of law, if the account balance of a customer of the Debtor is not reconciled to zero prior to the time at which payments made by the customer are claimed to be on account of specific invoices and collateral, the claimed payments cannot be attributed to an invoice that comes after a prior outstanding balance. GLENFED FINANCIAL CORP. additionally argues that when there remains a balance unpaid by the customer of the Debtor that is greater than the amount of payments claimed, and such balance cannot be attributed to collateral other than that for which proceeds are claimed, the proceeds claimed have not been sufficiently traced.
These arguments cannot withstand the scrutiny of the evidence presented. For example, during the hearing on July 22, 1987 the Court examined in detail the tracing presented by GM for the account of Hallett Pontiac in the amount of $3,043.05. This is one of the accounts GLENFED argues should be disregarded because it was not reconciled to zero. The Court finds that the payment amount of $5,478.16 is the exact total of 36 separate invoices all of various amounts. If any other invoices are compiled, the payment would not equal this exact amount. The Court is convinced that this establishes that the customer was paying the 36 invoices with its check. Further, GM established that of this $5,478.16 deposited by GLENFED, $3,043.05 was directly attributable to the sales of GM parts. This is only one example of the complete and thorough analysis presented.
GLENFED FINANCIAL CORP. also argues that it did not retain and use all of the proceeds sought by GENERAL MOTORS CORP. and should be liable only for the amount actually received by GLENFED FINANCIAL CORP. Under the Loan Agreements between GLENFED and the Debtor, once the Debtor’s collections were deposited in an account held by GLENFED FINANCIAL CORP., GLENFED FINANCIAL CORP. immediately re-advanced 75 percent of the collections, reducing the loan amount by the remaining 75 percent. The Debtor, according to GLENFED, retained 75 percent of the proceeds to fund its business operations. Such advances continued until a point in April, 1985. GLENFED FINANCIAL CORP. received only 25 percent of the proceeds until such time as the advances stopped, and can be liable only for 25 percent of the proceeds. The Court did not accept the argument of GLENFED FINANCIAL CORP.
All of the proceeds traced were deposited by GLENFED. Clearly GLENFED had the use of these funds. GM also responds that there was no evidence presented as to the amount of any percentage of read-vancements. Counsel for GM offered to proffer the further testimony of Ms. Char-lock to establish that this arrangement was *959not for 75 percent and payments were made by GLENFED to others besides the debtor. The Court does not have to hear testimony on this issue as it finds that GLENFED deposited these funds into their separate account and thereafter used them for their own benefit as they had planned. If GLENFED chose by contract to read-vance these funds it did so at the risk of another secured party’s claim. GLENFED cannot by its own conduct avoid the rightful claims of a secured party.
Finally, GLENFED asserts that GM received payment for all of its inventory shipped to the Debtor through January. To support this, GLENFED attached to its “Post Trial Memorandum of Facts and Law” a check supplied by counsel for GM as representing the last payment from the Debtor to GM, dated February 27, 1985 from Miami Parts and Spring to AC Delco. GLENFED urges that the accompanying memo identifies the payment to be on account of all past due amounts through January 31, 1985. GM therefore has received full payment for all AC Delco inventory in the hands of the Debtor through January 31, 1987. The amounts claimed by GM must be reduced by $12,904.37 claimed for November and December, 1984 and January, 1985, and further reduced by February payments received on account of AC Delco parts received from the Debtor in January, 1985, or $28,726.18 received in the month of February. Therefore, GLENFED concludes that the claim of GM should be reduced by $41,630.55.
GM argues in response that there was no evidence presented as to which invoices this check paid. Further GM again offered to proffer the testimony of Ms. Charlock to establish that this payment on its face was a “past due amount” per a February 5, 1985 statement. Therefore, the check attached to the memorandum may have been paying invoices before the analysis of GM began. At the very least, the draft may not have paid invoices for January. Also, GM argued that the check is from the Barnett Bank in Naples and should not affect the security interest traced to GLENFED’s separate account.
The Court agrees with GLENFED on this final issue and reduces the amount traced by GM by $41,630.55.
The total amount of the judgment in favor of GM has been established at $90,-286.28. The Court reserve* jurisdiction for the taxation of costs, interest and attorneys’ fees if appropriate. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490439/ | DECISION AND ORDER ON MOTION FOR LEAVE TO AMEND
BURTON PERLMAN, Bankruptcy Judge.
Plaintiff, trustee in the related bankruptcy case, filed this suit against defendant to recover a preference. The suit was originally filed June 24, 1985. The complaint alleges that defendant was an insider, and that various transfers occurred within one year before the date of the filing of the petition in bankruptcy, and these transfers should be set aside. Defendant filed an answer to the complaint. A pretrial conference was held September 20, 1985. The file reflects no further activity until, on February 26, 1987, plaintiff filed a motion for leave to file an amended complaint.
The amended complaint adds some factual allegations regarding the preference claim. Where it significantly departs from the original complaint appears to be in paragraph 14 which says:
Any claim by the Defendant against the estate of the Debtor based upon monies allegedly owed by the Debtor to the Defendant arising from the Purchase Agreement and promissory note described in Paragraphs 8 and 9 would be disallowed, or would be subordinated to the claims of other creditors of the Debt- or, pursuant to 11 U.S.C. Sec. 510.
The significance of this paragraph appears to be that it introduces an objection to the allowance of any claim which defendant might file in the case or, alternatively, to request that any such claim be subordinated to the claims of other creditors. It is difficult to understand what the plaintiff has in mind in this amendment, for it does not add another cause of action to the complaint, but appears to be introducing an objection to a claim which defendant may be asserting against the estate (though there is no allegation in the complaint that defendant has filed a proof of claim in the case).
Defendant opposes the motion for leave to amend, contending that such amendment is barred by the statute of limitations against the exercise by trustee of various avoiding powers as stated at 11 U.S.C. § 546. That statute prohibits initiation of an action by a trustee more than two years after his appointment. We do not find this ground for objection useful, for the new material in the amended complaint does not constitute the kind of action which is subject to the statute of limitations of 11 U.S.C. § 546.
The objection to filing the amended complaint is, however, sustained. The original complaint requires no amendment in order to make out plaintiff’s cause of action with respect to the recovery of a preference. The new material in the amended complaint is in the nature of an objection to a claim, and it is inappropriate, certainly at this late date, to inject entirely new considerations into this long-delayed adversary proceeding.
So Ordered. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490442/ | MEMORANDUM OPINION AND ORDER
RICHARD L. SPEER, Bankruptcy Judge.
This cause comes before the Court upon the Motion to Dismiss filed by the Defendant in the above entitled adversary action. The parties have filed their arguments relative to the merits of this Motion and have had the opportunity to respond to the arguments made by opposing counsel. The Court has reviewed those arguments as well as the entire record in this case. Based upon that review and for the following reasons the Court finds that the Motion to Dismiss should be denied.
FACTS
The facts in this case do not appear to be in dispute. The Defendant-Debtor filed his voluntary Chapter 7 Petition with this Court on March 14, 1986. In the notice which was sent to creditors, this Court established Monday, June 23, 1986, as the last day for the filing of Complaints objecting to the Debtors’ discharge. On June 17, 1986, the Plaintiff’s counsel mailed to this *31Court the Complaint in this case from his office in Marion, Ohio. It was received by the Clerk of this Court on or about June 19, 1986. However, it appears that the Plaintiff neglected to include with the Complaint the case “cover sheet” or the requisite filing fee. The Clerk’s Office telephoned Plaintiff’s counsel and advised him of these omissions.
On the same day as he was notified, Plaintiff’s counsel deposited in the mail the cover sheet and a check for the filing fee. He also included in this correspondence a Motion for extension of time in which to file the Complaint. The record indicates that the cover sheet, filing fee, and Motion were received in the Clerk’s Office on or about June 23, 1986. However, on that same day Plaintiff’s counsel received in the mail at his office the unfiled Complaint. The Court, on June 25, 1986, denied the Plaintiff’s Motion for extension of time. Nevertheless, the Plaintiff filed the Complaint on June 26, 1986. In this action, the Plaintiff seeks a denial of the Debtors’ discharge under the provisions of 11 U.S.C. § 727.
In the Motion presently before the Court, the Debtors seek a dismissal of this adversary proceeding. As grounds for this Motion, the Debtors assert that the Complaint was filed subsequent to the expiration of the period allowed for filing such actions. In opposing this Motion, the Plaintiff argues that the deficiencies in the filing of this case had been corrected prior to the expiration of the filing period, and that the case would have been timely filed had not the Clerk of this Court returned the Complaint to his office. They argue that such circumstances constitute excuseable neglect which should excuse his otherwise tardy initiation of this case.
LAW
The provisions of Bankruptcy Rule 4004 state in pertinent part:
(a) Time for filing complaint objecting to discharge; notice of time fixed. In a chapter 7 liquidation case a complaint objecting to the debtor’s discharge under § 727(a) of the Code shall be filed not later than 60 days following the first date set for the meeting of creditors held pursuant to § 341(a).
Federal Rule of Civil Procedure 3, as made applicable by Bankruptcy Rule 7003, states:
A civil action is commenced by filing a complaint with the court.
The provisions of Bankruptcy Rule 9006 state in pertinent part:
(b) Enlargement.
(1) In general. Except as provided in paragraphs (2) and (3) of this subdivision, when an act is required or allowed to be done at or within a specified period by these rules or by a notice given thereunder or by order of court, the court for cause shown may at any time in its discretion ... on motion made after the expiration of the specified period permit the act to be done where the failure to act was the result of excusable neglect.
It is well established that the provisions of Bankruptcy Rule 4004 operate as a statute of limitations for the filing of actions to deny a debtor a discharge. See, Miners & Merchants Bank & Trust Co. v. Mullins (In re Mullins), 55 B.R. 618 (Bkcy.W.D.Va. 1985). However, a party may obtain an extension of that time subsequent to its expiration if it can show that the failure to timely comply was the result of excuseable neglect. In re Nowacki, 39 B.R. 35 (Bkcy. N.D.Ohio 1984). Although a party, when filing such actions close to the time limitation, assumes the risk of any defects in the filing process, see, Holtgrieve v. Lowther (In re Lowther), 33 B.R. 586 (Bkcy.N.D. Ohio 1983), the circumstances of each case must be reviewed on their own merit. Household Finance Corp. v. Abrams (In re Abrams), 35 B.R. 485 (Bkcy.N.D.Ohio 1983).
In the present case, the facts indicate that the Plaintiff had delivered to the Clerk’s Office a Complaint objecting to the Debtors’ discharge. It was delivered four (4) days prior to lapse of the filing limitation period. Pursuant to Federal Rule of Civil Procedure 3, this act was, in and of itself, sufficient to commence the action. While the absence of a cover sheet and the *32filing fee placed into question the validity of the case’s filing, they were not, under the rules, sufficiently defective so as to permit the Clerk to refuse to accept the Complaint for filing. Such deficiencies could be addressed by the Court at a later time. Since the filing of a complaint is only required to commence a case, the Clerk’s refusal to accept the Complaint was an act which should not be held against the Plaintiff in this particular case. This is made especially apparent in light of the fact that the Plaintiff corrected the deficiencies in ample time to allow a proper filing of the case prior to the expiration of the filing period. Therefore, it must be concluded that the failure to timely file the Complaint was the result of excuseable neglect. Accordingly, the Motion To Dismiss should be denied.
As has been previously stated, a plaintiff bears the responsibility for insuring that a case is properly filed. Incumbent in that responsibility is the need to apprise himself of and comply with the actions required by the rules of procedure. Any defects which surface in a case filed near the statutory deadline cannot normally be characterized as excuseable neglect, inasmuch as the correction of such defects prior to the deadline will preclude any assertion that the case was not timely filed. However, since counsel for the Plaintiff affected corrective measures which, but for the actions of the Clerk, would have enabled the case to be timely submitted, it must be concluded that the filing of this case subsequent to the deadline is permissible in this case.
In reaching these conclusions the Court has considered all the evidence and arguments of counsel, regardless of whether or not they are specifically referred to in this Opinion.
It is ORDERED that the Debtors’ Motion To Dismiss be, and is hereby, DENIED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490443/ | FINDINGS OF FACT, CONCLUSIONS OF LAW, AND MEMORANDUM OPINION
ALEXANDER L. PASKAY, Chief Judge.
THE MATTER under consideration in this Chapter 11 adversary proceeding is a Second Amended Complaint for Breach of Contracts, filed by Trah Enterprises, Inc., the Debtor in the above-captioned case (Trah). Trah seeks to recover damages for injuries it allegedly sustained by the breach of certain contracts entered into with Lin-der Industrial Machinery Company, the Defendant (Linder). Trah alleges that Linder made certain warranties and representations about the condition of equipment Trah purchased from Linder, that Trah relied on these warranties in purchasing the equipment, that Linder breached these warranties, and that Trah has suffered injuries for loss of use of the equipment, cost of replacement equipment, and cost of repair. The relevant facts as they appear from the record established at the final evidentiary hearing are as follows:
Trah is a Florida corporation which is engaged in the business of excavation and land clearing. Linder is a Florida corporation which leases, sells, and repairs heavy equipment used in excavation and land clearing. In June 1983, Peter Hartley, the sole officer and director of Trah (Hartley), who was at that time doing business as El Jobean Shell, entered into an agreement to lease with an option to purchase a used 1976 dragline from Linder. In a separate document, Hartley also agreed to lease *45with an option to purchase a used 125C loader. Hartley leased the dragline and loader until May 18, 1984, when he exercised his option and purchased both pieces of equipment from Linder. Hartley assigned his interest in both of these pieces of equipment to Trah in June 1985.
In March 1984 Hartley executed a lease on behalf of Trah to lease a bulldozer from Linder. Trah purchased the bulldozer from Linder in October 1984. During the lease of the equipment Hartley experienced numerous problems with the equipment which required repair and/or replacement of various parts. Some of the problems were quite serious and required that the machinery be removed from the job sites. Inasmuch as Hartley had not committed to purchase the equipment and the equipment was still in Linder’s rental fleet, most of the repair was done by Linder or by a subcontractor of Linder’s with an understanding that if Hartley decided to exercise his option at a later time the purchase price would be increased to reflect the cost of the repairs.
Trah alleges that Linder represented that the equipment was being completely rebuilt and would be like new, and it was because of that representation that Hartley and Trah decided to purchase the equipment. Linder asserts that although it is true that the dragline had recently been repaired and the loader was being repaired when Hart-ley exercised his option to purchase, Linder did not represent that the repairs would make the equipment like new, nor did Lin-der extend any warranty on the equipment. Furthermore, Linder asserts that the sales were consumated after Hartley and Trah had used the equipment for several months and had full knowledge of the condition of all the equipment at purchase.
A seller can create an express warranty by making an affirmation of fact or promise which relates to the goods and becomes part of the basis of the bargain. Fla.Stat. § 672.313(l)(a). In order for Trah to prevail in this action, Trah must prove with clear and convincing evidence that as a part of the contracts for sale of the equipment, Linder warranted that the equipment had been rebuilt or promised to rebuild the equipment. Trah must also show that Trah relied on these promises and representations in entering into the contract.
After careful consideration of the testimony and documentary evidence presented in this cause, this Court is satisfied that Linder did not at any time falsely represent the condition of the equipment at the time of the purchase, nor did Linder warrant the condition of the equipment. While there may have been a misunderstanding as to the extent of repairs that were to be done on the equipment, Hartley had ample opportunity to inspect the equipment and did, in fact, use the equipment extensively prior to purchase. This inspection and extensive use of the equipment would make any reliance on Linder’s alleged representations unreliable, and Trah’s knowledge of the condition of the equipment would negate the existence of any express warranty. See, Royal Typewriter Company v. Xerographies Supplies, 719 F.2d 1092 (11 Cir.1983).
Furthermore, Linder presented substantial evidence that the problems with the equipment were a result of Trah’s misuse and inadequate maintenance of the equipment. Even if Linder had warranted that the equipment was rebuilt or like new, an assumption not supported by this record, there is no evidence that the problems with the equipment arose as a breach of this alleged warranty. In fact, there was competent evidence submitted that the problems arose as a result of Trah’s misuse of the equipment.
Based on the foregoing, this Court is satisfied that Trah has failed to prove with clear and convincing evidence that Linder warranted the equipment prior to purchase or made false representations as to the equipment prior to purchase. Because there was no warranty, none could be breached, and therefore, the Complaint shall be dismissed with prejudice.
A separate final judgment shall be entered in accordance with the foregoing. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490444/ | MEMORANDUM OPINION AND ORDER
HELEN S. BALICK, Bankruptcy Judge.
Madison M. Gray has moved for summary judgment on his objection to proof of claim filed by Gene A. Murray. Summary judgment is available in contested bankruptcy matters when there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law by virtue of Bankruptcy Rules 12-62, 914 and 756.
Gray’s objection alleges four bases for disallowance of Murray’s claim:
1. The proof of claim was not timely filed.
2. The claim is barred by the Statute of Limitations.
3. The failure to pay withholding tax for the last quarter of 1974 was solely the fault of Murray.
4. The unpaid withholding tax liability was not a liability covered by the purported agreement between Gray and Murray dated October 10, 1975.
The undisputed facts are as follows: Madison Gray and his wife, now deceased, filed a voluntary petition under Chapter XII of the Bankruptcy Act on March 20, 1978. The court set a bar date of August 31, 1978 for filing proofs of claims. Gene *47Murray had not been scheduled as a creditor on Gray’s bankruptcy schedules and did not receive a copy of the notice of first meeting of creditors which also contained the bar date. Gray within one month of filing his bankruptcy petition spoke with and informed Murray that he had filed a bankruptcy petition (uncontradicted affidavit of Gray dated October 4, 1985). Murray filed a proof of claim in the amount of $35,618.75 plus interest on October 10,1984 (claim no. 63). The stated basis for the claim is an assessment against Murray by the Internal Revenue Service of a 100% penalty for unpaid withholding taxes of the Sea Scape Motel for the period beginning September 1977. Gray’s objection was filed July 2, 1985. On August 15, Murray filed an amended basis for proof of claim stating that the penalty is for unpaid withholding taxes of the Sea Scape Motel for the period ending December 1974.
The record demonstrates that there is no dispute concerning facts necessary to a resolution of the first ground of the objection. That issue is whether the notice given by Gray is sufficient to bar Murray’s late-filed claim under the Bankruptcy Act of 1898, as amended.
Given the facts of Gray’s uncontradicted affidavit and the long-standing relationship of the parties, which is evident throughout the record, the court finds that Murray had actual knowledge of Gray’s bankruptcy filing in time to prove his claim and to avail himself of an equal opportunity with other creditors to participate in the administration of the estate. The notice to Murray and his resultant knowledge of the petition is sufficient to satisfy the provisions of the Bankruptcy Act. See 1A Collier on Bankruptcy If 17.23[5] (14th ed. 1978).
With regard to whether Murray’s claim was provable, § 63a(8) of the Bankruptcy Act provides that “contingent debts and contingent contractual liabilities” are claims which are provable in bankruptcy. A contingent claim has been defined as “one as to which it remains uncertain, at the time of the filing of the petition in bankruptcy, whether or not the bankrupt will ever become liable to pay it”. In re Serignese, 214 F.Supp. 917, 920 (D.Conn. 1963), quoting In re Munsie, 32 F.2d 304 (D.Conn.1929), rev’d 33 F.2d 79 (2nd Cir. 1929).
Upon default in payment of the withholding taxes, Murray became personally liable. This liability was subject to the contingency of whether Gray would ultimately be responsible for the payment of the taxes. Thus, the tax liability was a “contingent debt” within the provisions of § 63a(8) of the Bankruptcy Act. The amount of the Internal Revenue Service’s claim was ascertainable at all times and it was in fact assessed against Murray approximately one month after Gray’s bankruptcy filing. The provisions of § 57d of the Bankruptcy Act are applicable since the debt was capable of liquidation without undue delay. Murray had the duty to file a proof of claim for the amount of the withholding taxes due plus interest prior to the bar date, and his failure to do so is not excusable.
The law is well settled in this Circuit that time limitations for filing proofs of claim are to be strictly construed. In re Pigott, 684 F.2d 239 (3rd Cir.1982). As stated in Pigott, even when the equities have weighed strongly in favor of extending the time period, the court has consistently upheld the strict time limits. See Pigott, 684 F.2d at 243.
Bankruptcy Rule 12-33 does provide that the court may, at any time while a case is pending, permit the filing of a proof of claim for taxes owing to the United States at the time of the filing of the petition which had not been assessed prior to the date of confirmation of the plan, but which are assessed within one year after the petition filing date. Here, the taxes were not assessed against Gray, but were assessed against Murray approximately one month after the filing of Gray’s petition in bankruptcy. Even assuming ar-guendo that Bankruptcy Rule 12-33 is applicable to this post-petition tax claim, this court will not extend the bar date more than six years. To grant such a long extension of time would be an injustice. An efficient system of bankruptcy administra*48tion depends upon promptness in the filing of proofs of claim. 3 Collier on Bankruptcy ¶ 57.27[1] (14th ed. 1978).
In light of the strictly construed time-limitations for filing claims, the other issues are not pertinent to this court’s determination that Gene A. Murray’s proof of claim no. 63 is DISALLOWED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490445/ | FINDINGS OF FACT, CONCLUSIONS OF LAW AND MEMORANDUM OPINION
ALEXANDER L. PASKAY, Chief Judge.
THE MATTER under consideration in this Chapter 7 adversary proceeding is a claim for relief asserted by the Trustee in a Complaint filed to Determine the Validity of Lien and to Allow Lien, If Any, To Attach to Proceeds of Sale (sic). In spite of the somewhat confusing title of the Complaint, what the Trustee seeks is an authorization from this Court to sell assets of the estate with the proviso that all liens shall attach to the proceeds of the sale and are to be satisfied to the extent they are found to be valid. The Trustee also seeks to have the lien claimed by Paul E. Dick-man, d/b/a Dickman Investments (Dick-man), the Defendant named in this adversary proceeding, invalidated, and to cut off Dickman’s claimed ownership in all personal property claimed by the Trustee to be property of the estate. Prior to the trial Dickman conceded that he has no lien on any of the properties involved in this controversy but contends, however, that he owns certain specific personal properties which the Trustee is attempting to sell, therefore he objects to the proposed sale.
In due course, Dickman filed his answer coupled with a counterclaim in which he seeks a money judgment against the Trustee based on the alleged conversion of his property by the Trustee and the negligence of the Trustee in removing the properties of the estate from the premises owned by Dickman. Based on the issues presented for consideration, it is evident that the initial issue to be resolved is the ownership of the properties located on the premises operated by the Debtors as a restaurant, the properties sought to be sold by the Trustee free and clear of all claims of Dickman. The relevant facts as they appear from the record, and as established at the final evi-dentiary hearing are as follows:
In late summer of 1981, the Debtors and Paul R. Dickman, Edward L. Dickman, and Glen K. Dickman executed a document entitled “Fisherman Restaurant Proposal” (Defendant’s Exh. # 1). This proposal outlined an agreement between the Debtors and the Dickmans. According to this proposed agreement, the Dickmans were to purchase the Fisherman Restaurant from Walter Sudbury, a Chapter 7 trustee in bankruptcy, who had acquired the property when the former owners of the property, the Debtors, filed a petition for relief under Chapter 7 of the Bankruptcy Code. Under this proposal, the Dickmans were to make certain repairs to the restaurant premises, and then lease the premises to the Debtors. The agreement called for a $2,000 per month payment of rent plus 10% of the net profit. The Debtors agreed to be responsible for all repairs, insurance, and taxes on the real property involved in the proposed transaction. The proposal included an op*50tion permitting the Debtors to purchase the restaurant after 5 years for the sum of $176,000.
On September 1, 1981, Sharon Simicich, one of the Debtors, entered into a formal lease with Dickman. Under this lease Ms. Simicich agreed to lease from Dickman “The Fisherman Restaurant”, located in Hillsborough County, Florida, for a term of 5 years at the rate of $2,000 per month, and to pay for all insurance, taxes, and maintenance on the restaurant. Ms. Simi-cich immediately took possession of the premises and began operating a restaurant under the trade name of “Sharon’s Surf and Turf.”
At the time Ms. Simicich took possession of the premises, there were numerous items of personal property in the restaurant that had been left there by the previous operators of the restaurant. These items of personal property were listed on an inventory prepared by Walter Sudbury, the Trustee of the Chapter 7 estate who later sold the property to the Dickmans. Dickman attached this inventory to his Proofs of Claim filed in this case (Plaintiffs Exh. #3 and #5). The lease was silent as to personal property on the premises, and it is without dispute that no portion of the rent was allocated as a purchase price to the personal property; the lease was a package deal and Ms. Simicich was leasing the real property from Dickman together with the personal property located on the premises.
Although Ms. Simicich admits that there was some personal property on the premises when she took possession, Simicich disputes that all of the items listed on the inventory that was attached to the Dick-man Proofs of Claim were on the premises when she took over. In addition, Ms. Simi-cich asserts that much of the personal property was either replaced or updated during her tenancy, and some of the property was completely discarded.
On the other hand, Mr. Hudson, an agent of Dickman, testified that the inventory attached to the Dickman Proofs of Claim was an accurate account of the personal property on the premises when Ms. Simi-cich took possession of the property; that the Dickmans expected to get back everything that was on the original inventory except for some coolers which were discarded with the consent of Hudson. Hudson claims that he personally checked the inventory when the Dickmans purchased the restaurant and crossed out any item that was not on the premises. These are the facts as they appear from the record established at the final evidentiary hearing, based on which this Court is to resolve the initial issue, i.e. the ownership of the personal properties located on the restaurant premises.
First, it is well established that before a trustee can sell any property, he must establish that the Debtor has a cognizable legal or equitable ownership interest in the property at the commencement of the case. 11 U.S.C. §§ 363, 541. It is the Trustee’s contention that Dickman either gave or loaned the items of personal property in dispute to Ms. Simicich. There is no evidentiary support for this proposition in this record. The testimony of the parties directly involved in the transaction clearly indicates that the items of personal property were, if not expressly certainly by implication, included in the lease between Dick-man as lessor and Ms. Simicich as the tenant. Although there was no formal documentation concerning the lease of the personal property, this Court is satisfied that both Dickman and Ms. Simicich clearly intended that the chattels located on the premises were to be leased together with the real property, and no ownership interest in these chattels ever intended to pass to Ms. Simicich. From all this it follows that the chattels never became property of the estate when the Debtors filed their petition under Chapter 7, consequently the Trustee has no right to sell them.
The Trustee concedes, as he must, that there is no evidence in this record to support the proposition that Ms. Simicich purchased any of the items of personal property from Dickman. Notwithstanding, the Trustee seeks to strip Dickman of his ownership interest in the personal property involved by alleging that Dickman “loaned” *51the property to Ms. Simicich and by virtue of Fla.Stat. § 726.09 Dickman has lost his rights in the property. Fla.Stat. § 726.09 reads as follows:
When any loan of goods and chattels shall be pretended to have been made to any person with whom or those claiming under him, possession shall have remained for the space of two years without demand and pursued by due process of law on the part of the pretended lender, or where any reservation or limitation shall be pretended to have been made of a use or property by way of condition, reversion, remainder or otherwise in goods and chattels, and the possession thereof shall have remained in another as aforesaid, the same shall be taken, as to the creditors and purchasers of the persons aforesaid so remaining in possession, to be fraudulent within this chapter, and the absolute property shall be with the possession, unless such loan, reservation or limitation of use or property were declared by will or deed in writing proved and recorded.
The Trustee’s reliance on this Statute is misplaced because Fla.Stat. § 726.09 does not apply to leases of tangible personal property. In re Ludlum Enterprises, Inc., 510 F.2d 996 (5th Cir.1975). Inasmuch as this Court is satisfied that the property was not a loan but was, in fact, part of the lease transaction, the Trustee cannot cut off Dickman’s interest by relying on Fla.Stat. § 726.09.
The Trustee further attempts to cut off Dickman’s ownership interest in the personal property by urging that because Dickman failed to assert his claimed ownership in the property before it was removed, he is now estopped from claiming this interest. This argument is equally without merit. First of all, it is not true that Dick-man failed to assert his claimed ownership in the property. Dickman attached an inventory of personal property and a lease to his Proofs of Claim. While Dickman did not actually state in the Proof of Claim that he owned some of the personal property on the premises, the lease accompanied by a personal property inventory suggested that Dickman leased personal property to Ms. Simicich as well as the real property. Even though one of the Proofs of Claim claimed a lien interest in the “debtors property located in The Fisherman Restaurant” (Plaintiff’s Exh. # 5), the fact that Dick-man claimed a lien on Ms. Simicich’s property does not necessarily compel the inference that all items of property located on the premises belongs to Ms. Simicich nor does it imply that Dickman has abandoned his own property. Dickman has done nothing to waive his ownership of the personal property, and he is not now estopped from claiming it.
Moreover, even if Dickman failed initially to assert his ownership interest in the items of personal property, the doctrine of estoppel could not be invoked to divest him of title and create title in Ms. Simicich. See Blackburn v. Florida West Coast Land & Development Co., 109 So.2d 413 (Fla. 2d DCA 1959). Additionally, the doctrine of estoppel is the basis for a defense and not the basis for affirmative relief. Estoppel is “properly used as a shield, not a sword.” Waterman Memorial Hospital Association, Inc. v. Division of Retirement, 424 So.2d 57, 60 (Fla. 1st DCA 1982). See, also, Kerivan v. Fogal, 156 Fla. 92, 22 So.2d 584 (1945); Raymond v. Halifax Hospital Medical Center, 466 So.2d 253 (Fla. 5th DCA 1985).
This conclusion leads to the practical problem of determining what items of personal property belong to Dickman and, thus, are not properties of the estate, and which items were owned by Ms. Simicich and, thus are properties of the estate which the Trustee may sell. Ms. Simicich testified that she was not aware of the existence of an inventory of personal property when she took possession of the premises. Although she concedes there were fixtures and equipment already on the premises when she took possession of the restaurant, she denies that all the items on the list were on the premises. On the other hand, Mr. Hudson testified that he personally checked the inventory against the chattels on the premises, and actually marked through any item not present. This testi*52mony is not necessarily contradictory, but only shows that Mr. Hudson had a written record of chattels on the premises of which Ms. Simicich was not aware, while Ms. Si-micich was relying on her memory to account for the personal property. Based on the foregoing, this Court is satisfied that the inventory attached to Dickman’s Proofs of Claim is an accurate list of the personal property on the premises at the time Ms. Simicich took possession, thus they are owned by Dickman and they are not properties of the estate. The Trustee may not sell any items which appear on the inventory list attached to the Proofs of Claim.
There is one additional problem which must be solved. During her tenancy, Ms. Simicich discarded and replaced several items which belonged to Dickman, and made major repairs to others. Dickman claims a right to the replacement chattels on the basis that Ms. Simicich never sought nor was given permission to throw away any of the chattels except for some coolers. The Trustee asserts that Ms. Simicich purchased the replacement chattels, and has a cognizable ownership interest in the property, and therefore the property is property of the estate. The Trustee further asserts that the repairs done to much of the equipment were so substantial as to render them new items in which Dickman has no interest.
It is clear that Ms. Simicich and Dickman did not have any agreement as to the repair and replacement of the personal property on the premises. Absent such an agreement, Dickman cannot claim ownership of the replacement items, although Dickman has a claim for damages for the loss of the personal property that Ms. Simi-cich discarded, regardless of whether she replaced it. Also, without an agreement to the contrary, the Trustee cannot assert ownership of any of the chattels or equipment repaired by Ms. Simicich, regardless of the extent of repair. In sum, the Trustee may not sell any item of personal property which appeared on the inventory attached to Dickman’s Proofs of Claim, not even those items to which Ms. Simicich made substantial repairs. The Trustee may sell only those items of personal property which were actually acquired by Simi-cich during her tenancy.
Dickman has counterclaimed against the Trustee for damages to the real property which occurred when the personal property was removed. The Court took evidence as to the prosecution of the counterclaim, but the Trustee’s defense of this counterclaim and Dickman’s rebuttal remains to be tried. The continued evidentiary hearing in this matter is set for April 4, 1987, at 9:00 a.m.
A separate partial final judgment shall be entered in accordance with the foregoing. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490446/ | MEMORANDUM OPINION AND ORDER
RICHARD L. SPEER, Bankruptcy Judge.
This cause comes before the Court upon the Application of Cline Brothers Roofing, Inc. (hereinafter Cline) for Payment of Administrative Expense and the Trustee’s Objection thereto. The parties have agreed that this dispute involves solely issues of law and that the Court may resolve this dispute based solely upon the arguments of counsel. Pursuant to that agreement, the parties have submitted their arguments and have had the opportunity to respond to the arguments made by opposing counsel. The Court has reviewed those arguments as well as the entire record in this case. Based upon that review and for the following reasons, the Court finds that the Applicant should be granted an administrative expense.
FACTS
The facts in this case do not appear to be in dispute. The Debtor filed its voluntary Chapter 11 Petition with this Court on August 3, 1984. During the pendency of that proceeding, the Debtor contracted with the Applicant for the repair of a roof. This roof was located on a building being leased by the Debtor from a party who is otherwise unrelated to these proceedings. Although the Applicant completed the requested work, it does not appear that it has been paid. Since the completion of the work, the Debtor’s case was converted to a proceeding under Chapter 7.
The Application presently before the Court seeks to have the claim for roof repairs assigned an administrative priority for purposes of distribution in the Chapter 7 case. In asserting this Application, the Applicant contends that its efforts were necessary for the preservation of estate property, and that it benefitted the estate to the extent that it preserved the habitability of the building being occupied by the Debtor. The Trustee opposes this Application, arguing that because the building was being leased by the Debtor, the repairs benefitted the lessor rather than the Debt- or. Since the determination that a claim is entitled to an administrative priority is based upon the requirement that the claim arise from an obligation incurred for the benefit of the estate, the Trustee argues that the roof repair did not directly benefit the estate.
LAW
The provisions of 11 U.S.C. § 503(b) state in pertinent part:
(b) After notice and a hearing, there shall be allowed administrative expenses, other than claims allowed under section 502(f) of this title ...
Under this provision, any claim arising as an expense incurred for the preservation of estate property, or which is necessarily incurred as a part of a Debtor’s effort to reorganize while under the auspices of a Chapter 11 proceeding, is entitled to receive an administrative claim for purposes *60of distribution under 11 U.S.C. §§ 507 and 726.
In the present case, the facts indicate that Cline repaired the roof at the request of the Debtor during the pendency of the Chapter 11 proceeding. In performing the repairs, Cline extended value to the Debtor which would not have been extended had the request not been made. While the terms of the lease relative to the responsibility for making repairs to the premises are not clear, it is evident that the repairs were required in order to preserve the in-habitability of the building for the Debtor’s purposes. Accordingly, the repairs can be characterized as necessary and beneficial to the Debtor’s estate. Since such expenses are, under 11 U.S.C. § 503(b) accorded an administrative expense priority, it must be concluded that Cline’s claim should be so classified.
The Trustee has argued that the repairs were made to property which was owned by someone other than the Debtor. Accordingly, he argues that such repairs inure to the benefit of the owner rather than the Debtor, thereby serving as no benefit to the estate of the Debtor. However, as has been indicated, the terms of the lease regarding the party responsible for making repairs is not clear. If the Debtor was responsible, then there would be no question as to Cline’s entitlement to an administrative priority. The obligation would have been incurred pursuant to the Debtor’s legal duty to maintain the premises during its occupancy. If, however, the lessor was responsible, then the fact that the Debtor undertook those repairs does not negate their necessity. Under either circumstance, the character of the expense meets the requirements of 11 U.S.C. § 503(b) for an administrative priority.
This is not to say that the Debtor has no recourse against the lessor. The Debtor, having made the repairs, would be entitled to compensation from the lessor for the price of Cline’s services. This right to compensation, if it exists, would be an asset of the estate which could be pursued by the Trustee for the benefit of creditors. However, in light of the foregoing considerations, it must be concluded that regardless of whether or not the Debtor owned the property in question, the work performed by Cline was a cost and expense necessarily incurred in the preservation of the estate. Accordingly, the claim therefore is entitled to an administrative priority. It must also be concluded that the Trustee’s arguments to the contrary are without merit.
In reaching these conclusions the Court has considered all the evidence and arguments of counsel, regardless of whether or not they are specifically referred to in this Opinion.
It is ORDERED that the Motion For Payment of Administrative Expense filed by Cline Brothers Roofing, Inc. be, and is hereby, GRANTED.
It is FURTHER ORDERED that the Trustee’s Objection To The Motion For Payment of Administrative Expense be, and is hereby, OVERRULED.
It is FURTHER ORDERED that Cline Brothers Roofing, Inc. be, and is hereby, allowed an administrative claim in the amount of Twelve Thousand Five Hundred and no/100 Dollars ($12,500.00). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490447/ | ORDER ON GERALD COURINGTON AND LOUISE COURINGTON’S THIRD MOTION FOR ADEQUATE PROTECTION OR FOR RELIEF FROM STAY
ALEXANDER L. PASKAY, Chief Judge.
THE MATTER under consideration is a Third Motion for Adequate Protection or for Relief From Stay filed by Gerald Cour-ington and Louise Courington (Couring-tons), creditors in the above-captioned case. The Couringtons’ First Motion for Relief From Stay was sought to be settled by the parties, but this Court disapproved the proposed settlement. The Second Motion for Relief From Stay was denied without prejudice because of insufficient service of process. In due course, this Court held a final evidentiary hearing on Couringtons’ Third Motion for Adequate Protection or for Relief From Stay. The facts relevant and germane to a resolution of this controversy, as they appear from the record, are as follows:
Gerald Courington (Courington), at the time relevant, was the sole stockholder of Omni Contracting Company, Inc. (Omni), the Debtor in the above-captioned case. On September 5, 1985, Courington sold 1200 shares of common stock, fifteen (15) shares of Omni common stock to Sybol Reid and 1,185 shares of common stock back to Omni (Exh. # 5). Courington testified that he received $50,000.00 as a cash downpayment, a $200,000.00 promissory note (Exh. # 1), and a $100,000.00 promissory note (Exh. # 2). Courington testified that the intended purchase price was $400,-000.00, however, there is no evidence in this record to support the claim of an additional $50,000.00 of consideration agreed *108upon. The security interest was properly perfected by recordation of the UCC-1 Financing Statement (Exh. #4). In December of 1985, Courington received a $50,-000.00 down payment and an additional $35,000.00 in March of 1986.
Shortly after the sale of the controlling interest in Omni, disputes arose between the parties. In order to resolve the disputes, additional documents were executed on April 11, 1986, which modified the September 5, 1985 transaction. The “Amended Sale and Purchase of Corporate Stock Agreement” (Exh. # 5) restated the purchase price to be $395,000.00 for the common stock purchased by Omni from Cour-ington and an additional $5,000.00 for fifteen (15) shares of Omni common stock purchased by Sybol Reid from Courington. The Amended Agreement provides for the purchase of the Sybol Reid shares by a payment of $5,000.00 in cash at closing and for the purchase of the redemption shares of Omni common stock by delivery of a $350,000.00 promissory note (Exh. # 6), and payment of $45,000.00 in cash at closing. In fact, two promissory notes were executed; one in the principal amount of $350,-000.00 (Exh. # 6) and the other in the principal amount of $5,669.27 (Exh.# 7). It is without dispute that no cash downpayment of $45,000.00 was ever made. The Amended Agreement (Exh. # 5) recited that a principal reduction payment of $50,000.00 was to be made on or before December 31, 1985, and an additional $35,000.00 principal reduction on or before April 11, 1986.
There is disagreement between the parties as to the amount of the purchase price and the outstanding balance owed to Cour-ington. This Court, however, is satisfied from the documents executed on April 11, 1986, that the Omni stock purchase was redrafted as a $400,000.00 transaction, toward which the original $50,000.00 paid in September of 1985, was credited against the $45,000.00 cash payment required at closing, the $50,000.00 paid in December of 1985 was credited toward the payment required in the Amended Agreement to be made on December 31, 1985, and the $35,-000.00 paid in March of 1986 was credited toward the payment required in the Amended Agreement to be made on or before April 11, 1986. Thus, $135,000.00 in principal was paid by Omni to Courington which left a principal balance owing to Courington after April 11, 1986 of $265,-000.00.
This leaves for consideration the amount of interest which has accrued on the unpaid balance in order to compute the total amount of indebtedness owed to Couring-ton by Omni. Pursuant to the Amended Agreement (Exh. # 5), interest accrued at the rate of ten percent (10%) from April 1, 1986, at which time the principal indebtedness was $265,000.00. The principal and interest as of the final evidentiary hearing on January 24, 1987 totaled $280,707.40. This sum is computed as follows:
Total Principal Indebtedness: $400,000.00
(i) September payment (50,000.00)
(ii) December payment (50,000.00)
(iii) March payment (35,000.00)
Total Outstanding Principal: $265,000.00
Interest on Debt: 21,707.40
Adequate Protection Payments: (6,000.00)
Total Indebtedness: $280,707.40
The per diem interest is accruing at the rate of ten percent (10%) on a principal indebtedness of $265,000.00, or in other words, at the rate of $72.60 per day.
As noted earlier, the unpaid portion of the purchase price in the sum of $265,-000.00 was secured by virtue of an Amended Security Agreement (Exh. # 8) and perfected by a UCC-1 Financing Statement (Exh. #9). The Security Agreement encumbered the collateral enumerated in the original security agreement of September 5, 1985 (Exh. # 3), and expanded the collateral description to include the following:
All accounts, contract rights, chattel paper, instruments, and other rights to receive payment of moneys, now existing or hereafter acquired by the Debtor (hereinafter referred to as the “Receivables”) and all other contract rights, general intangibles and other intangible property of any kind, now owned or hereafter acquired by the Debtor (hereinafter referred to as “Contract Rights”) including without limitation (sic) its rights under the Sale of Assets Agreement. In *109addition to the grant of the security interest herein, the Debtor hereby assigns the Receivables and Contract Rights to the Secured Party.
This Court has previously conducted three evidentiary hearings concerning Omni’s right to use cash collateral and the appropriate adequate protection for the Couringtons if Omni was authorized to use the proceeds of its accounts receivable. After two hearings on these matters, this Court entered on December 4, 1986, its Order Authorizing Use of Cash Collateral and authorized Omni to use the cash collateral provided it furnishes the following adequate protection to the Couringtons:
(1) Periodic payments of $3,000.00 per month:
(2) A post-petition security interest in favor of the Couringtons, in Omni’s accounts receivable to the extent and in such amount as such security interest existed at the time of filing the Chapter 11 Petition.
At the January 24 hearing, a specified list of equipment from a UCC-1 Financing Statement executed by Omni in favor of the Couringtons was introduced into evidence (Exh. # 10). The present matter for consideration is Omni’s right to use the equipment on which the Couringtons have a security interest, and if authorized what would be the proper measure of adequate protection of the interest of the Couring-tons in the collateral.
The sole question with regard to adequate protection is whether the $3,000.00 monthly adequate protection being paid by Omni sufficiently protects the Couringtons’ security interest in the equipment.
The record in this matter is at best inconclusive on the amount of depreciation on the equipment in question. Mr. Nanz, expert for Courington, testified as to rates of depreciation of the equipment, however this Court finds his estimation unpersuasive. The rate of depreciation on the equipment claimed by this witness was based on the proposition that this is the rate lessors use when they compute the rent for similar equipment. This Court is satisfied this is not the proper rate of depreciation. Mr. Reid, expert for Omni, testified that the equipment would not depreciate at all with proper maintenance. While the testimony on the proper rate of depreciation leaves much to be desired, this Court finds the testimony of Mr. Reid to be more reliable than that of Mr. Nanz.
The Couringtons seek a minimum of at least $7,500.00 for adequate protection on the equipment only, in addition to the monthly $3,000.00 payments currently being paid by Omni. Mr. Reid testified that prior to the Chapter 11 Petition, Omni was spending from $25,000.00 to $50,000.00 per month on maintenance on the equipment, but these figures also included payments for fuel. Mr. Reid clarified these figures and testified that for straight maintenance, Omni spent $15,000.00 to $20,000.00 pre-pe-tition per month on maintenance. Mr. Reid further testified that currently post-petition Omni spends $8,000.00 to $10,000.00. The post-petition maintenance figures are significantly less than the pre-petition figures.
Based on the foregoing, this Court finds that no additional adequate protection payments shall be required to be paid by Omni at this time to compensate the Couringtons for any alleged dimunition in value of the equipment. It is clear, however, that maintenance of the equipment is necessary both to preserve its usefulness to Omni and to preserve its value to the Couringtons. As a result, in addition to the adequate protection previously ordered by this Court, this Court is satisfied that proper maintenance and proof of insurance on the equipment shall be required as part of the adequate protection for the Couringtons. Furthermore, Omni shall expend a minimum of $15,000.00 for maintenance per month and keep records of the same in order to maintain the level of maintenance performed by Omni pre-petition. Adequate protection shall also include regular monthly inspection of the equipment at pre-determined times by a representative of the Couring-tons in order to provide the Couringtons with a method of verifying that maintenance on the equipment is being properly performed. These periodic monthly inspections shall not interfere with the commer*110cial operations of Omni. The adequate protection fashioned above is without prejudice to additional relief to the Couringtons if the equipment is not properly maintained as ordered by this Court.
At the hearing on January 24, 1987, this Court granted partial relief from the automatic stay, subject to a written order to be entered, and the order was entered on February 2, 1987. The order provided that the automatic stay of § 362 shall remain in effect until further order of this Court. At this time, the Court finds that no further relief from the automatic stay is warranted as to equipment listed on Exhibit # 10.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that Gerald Courington and Louise Courington’s Third Motion for Adequate Protection or for Relief From Stay be, and the same is hereby, granted in part and denied in part. It is further
ORDERED, ADJUDGED AND DECREED that the Motion as it pertains to relief from stay be, and the same is hereby, denied as to all equipment not covered by this Court’s previous order entered on February 2, 1987. It is further
ORDERED, ADJUDGED AND DECREED that the Motion as it pertains to adequate protection be, and the same is hereby, granted and the same is fashioned as follows:
(1) proof of insurance on all equipment covered by Courington's security interest;
(2) minimum monthly maintenance on the equipment in the amount of $15,000.00 together with records of the same; and
(3) periodic monthly inspection of the equipment by a representative of the Cour-ingtons at pre-determined times in order to ensure that proper maintenance is being performed by Omni. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490449/ | *177FINDINGS OF FACT AND CONCLUSIONS OF LAW RE: AMENDED APPLICATION FOR INSTRUCTIONS
JON J. CHINEN, Bankruptcy Judge.
On January 14, 1987, the Distributing Trustee (“Trustee”) filed an Amended Application for Instructions with Respect to Participating Certificate No. GU-9-20. The matter was heard on January 29,1987, at which time Carol Dailey, Esq. represented the Trustee, Linda M. Katsuki, Esq. represented Daiichi Kanko Kaihatsu Co., Ltd. (“Daiichi”) and Richard Kowen, Esq. represented First Hawaiian Bank (“First Hawaiian”). The Trustee took no position, but requested an award of fees.
Based upon the records in this bankruptcy and in the related case of First Hawaiian Bank v. Daiichi Kanko Kaihatsu Co., Ltd., Civil No. 78-0228 (U.S.D.C.Hawaii), the respective memoranda filed, and the arguments of counsel, this Court enters the following Findings of Fact and Conclusions of Law:
FINDINGS OF FACT
1. The Trustee, Cale W. Carson, is seeking instructions as to the proper distribution under Participating Certificate No. GU-9-20 (“Certificate”). Both Daiichi and First Hawaiian claim ownership of the Certificate.
2. The Certificate was issued to First Hawaiian on December 1, 1981, in the principal sum of $207,839.47, without interest thereon, because of three unpaid promissory notes executed by Debtor in favor of First Hawaiian.
3. These three promissory notes are as follows: 1) Note dated January 16, 1975 in the principal sum of $100,000; 2) Note dated March 5, 1975 in the principal sum of $50,000; and 3) Note dated April 24, 1975 in the principal sum of $50,000. Interest on these three notes accrued at the rate of one percent (1%) over the prime rate of First Hawaiian.
4. These three notes were signed by the Debtor and delivered to First Hawaiian pursuant to the terms and conditions of a $200,000 line of credit issued by First Hawaiian to the Debtor. As an express condition of this line of credit, First Hawaiian required and Daiichi provided a corporate Continuing Guaranty dated August 14, 1974, covering all of the advances made under the line of credit to the Debtor. Dai-ichi disputes the Continuing Guaranty.
5. First Hawaiian filed an action in State Court on October 24, 1977 against Daiichi alleging breach of the Continuing Guaranty. The cause of action was removed to the Federal Court (Civil No. 78-0228), and the matter was heard before Judge Samuel P. King on August 7 and 8, 1984.
6. On August 21,1984, Findings of Fact and Conclusions of Law were entered in Civil No. 78-0228, pursuant to which a judgment was entered in favor of First Hawaiian and against Daiichi in the amount of $418,389.51 together with interest, attorneys’ fees, and costs.
7. On December 5, 1984, an Amended Bill of Costs in the amount of $1,451.48 was entered in Civil No. 78-0228. And on December 6, 1984, an Order Granting Motion for Attorneys’ Fees in favor of First Hawaiian in the amount of $49,840.93 was entered. With the Amended Bill of Costs and the award of attorneys’ fees, the total judgment in favor of First Hawaiian against Daiichi was in excess of $469,-000.00.
8. Daiichi appealed from the Findings of Fact and Conclusions of Law and the Judgment entered in Civil No. 78-0228. Prior to oral argument of the appeal, First Hawaiian and Daiichi entered into a settlement whereby Daiichi paid to First Hawaiian the sum of $250,000 and the parties agreed to dismiss the appeal. The settlement negotiations were carried out in Japan, and the settlement agreement is written in Japanese. No official translations of the agreement was offered by either party. It is also unknown as to whether the attorneys for First Hawaiian or the attorney for Daiichi prepared the settlement agreement.
9. Daiichi paid the compromise amount of $250,000 on or about December 17, 1985, and on December 20, 1985, First Hawaiian *178filed a Satisfaction of Judgment in Civil No. 78-0228. This satisfaction was recorded in the Bureau of Conveyances, State of Hawaii, on December 30, 1985.
10. Daiichi claims that, under the terms of the settlement, First Hawaiian was obligated to return the notes and guaranty, but did not because First Hawaiian claimed that it could not find the originals.
11. First Hawaiian retains possession of Participating Certificate No. GU-9-20.
12. To the extent that these Findings of Fact constitute Conclusions of Law, they shall be so considered.
CONCLUSIONS OF LAW
1. This Court has jurisdiction over the parties and over the subject matter.
2. A guaranty of the obligation of another is an absolute undertaking imposing liability on the guarantor immediately upon the default of the principal debtor. International Trust Company, Ltd. v. Suzui, 31 Hawaii 34 (1929). In a subro-gation action, the burden of proof is on the party claiming subrogation to show that it is entitled to such right. First Insurance Co. of Hawaii, Ltd. v. Jackson, 67 Hawaii 165, 681 P.2d 569 (1984).
3. Where there is no express contractual right of subrogation, a guarantor is not entitled to be subrogated to the rights of the creditor until the creditor has been paid in full by the guarantor. State Bank of Streeter v. Nester, 385 N.W.2d 95 (N.D.1986); 73 Am Jr.2d. Subrogation Section 30.
4. In the Continuing Guaranty dated August 14, 1974, Daiichi expressly waived its rights to subrogation. Under the terms and conditions of the Continuing Guaranty executed by Daiichi, Daiichi acknowledged that First Hawaiian had the independent right to bring an action against the guarantors and that the obligations under the Continuing Guaranty were independent of the obligations of the Debtor.
5.Although the evidence tends to establish the proposition that First Hawaiian had agreed to return the Continuing Guaranty and Notes to Daiichi, the evidence does not support a finding that the return of the Certificate to Daiichi was a part of the Settlement Agreement.
6. No demand was made by Daiichi that First Hawaiian surrender the Participating Certificate to Daiichi prior to the time it was learned that a distribution from Debt- or’s estate would become available. The Court can only conclude that, at the time of the negotiation of the settlement, Daiichi did not believe that any distribution would be made on the Certificate, and thus allowed First Hawaiian to retain possession of the Certificate as part of the Settlement Agreement. The Court notes that the Certificate was issued in 1981, and the settlement occurred in 1984. Thus, the existence of the Certificate was, or should have been known, to all parties involved.
7. Inasmuch as First Hawaiian has not assigned, conveyed, transferred or in any other way waived or relinquished its rights under the Certificate, First Hawaiian is entitled to the distribution from the Debtor’s estate.
8. Based on the foregoing, the Court finds that Daiichi is not entitled to be sub-rogated to the rights of First Hawaiian under the Certificate, since Daiichi has failed to prove its rights in the Certificate.
9. The Trustee has also requested that it be awarded the fees and costs incurred in bringing this motion, which is in the nature of an interpleader action. Since the Trustee has no economic interest in the outcome, costs and fees are allowed to the Trustee. See e.g. Schirmer Stevedoring Co. v. Seaboard Stevedoring Corp., 306 F.2d 188 (9th Cir.1962).
10. Upon a review of the timesheets, the Court awards $794.56 in fees to the Trustee out of the funds otherwise payable from the Certificate.
11. To the extent that these Conclusions of Law constitute Findings of Fact, they shall be so considered.
ORDER
The attorneys for the Distributing Trustee are entitled to attorneys’ fees in having *179to bring this Application in the amount of $794.56 out of the funds to be distributed to First Hawaiian Bank as the owners of the Certificate.
A judgment conforming to the above will be signed upon presentment. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490450/ | MEMORANDUM
BRUCE FOX, Bankruptcy Judge:
On October 18, 1986, the Judiciary Appropriation Act of 1987, P.L. 99-500 (“Appropriation Act”) was signed into law.1 Section 407(b) of the Appropriation Act amended 28 U.S.C. § 1930(a)(1) by raising the filing fee for chapter 7 bankruptcies from $60.00 to $90.00. The Appropriation Act took effect immediately. On October 27, 1986, the Bankruptcy Judges, United States Trustees, and Family Farmer Bankruptcy Act of 1986, P.L. 99-554 (Bankruptcy Judges Act) was signed into law. Section 117 of the Bankruptcy Judges Act also amended 28 U.S.C. § 1930(a)(1) to raise the filing fee for chapter 7 cases from $60.00 to $90.00. By its express terms, the Bankruptcy Judges Act did not take effect for thirty days, i.e., until November 26, 1986.
On November 10, 1986, Joseph and Marjorie Dinan filed a joint, voluntary petition under chapter 7 of the Bankruptcy Code. The debtors also filed a motion to allow the payment of filing fees in installments in the total amount of $60.00, rather than $90.00. The thrust of the debtors’ argument is that the two acts have conflicting effective dates for the increase in chapter 7 filing fees, that Congress intended the effective date for the filing fee increase to be November 27, 1986 and that therefore, the filing fee for their petition is only $60.00. The United States, through the Justice Department, has opposed the debtor’s motion.2
The debtors’ argument hinges on the premise that the two statutes are in conflict. The debtor contends that, as a result of this conflict, the Bankruptcy Judges Act, being the later statute, is paramount and it impliedly repealed the immediate effective *196date of the filing fee increase in the Appropriation Act. For the reasons set forth below, however, I am convinced that no such conflict exists between the two statutes and that the later statute did not impliedly repeal the earlier.
Initially, I note that in construing statutes, courts do not favor repeals by implication. E.g., Morton v. Mancari, 417 U.S. 535, 549, 94 S.Ct. 2474, 2482, 41 L.Ed.2d 290 (1974). This maxim applies with special force to laws enacted during the same legislative session. Pullen v. Morgenthau, 73 F.2d 281, 283 (2d Cir.1934). When a conflict between two statutes is asserted, courts attempt, wherever possible, to harmonize and give effect to both statutes. Eg., Watt v. Alaska, 451 U.S. 259, 267, 101 S.Ct. 1673, 1678, 68 L.Ed.2d 80 (1981).
The earlier statute in this case, the Appropriation Act, appears to have been an ordinary revenue enhancement statute, at least with respect to the bankruptcy courts. A proposal to make the funds paid as a result of the increase in bankruptcy filing fees available for the operation of the bankruptcy courts was rejected by Congress. Compare S.Rep. No. 99-425, 99th Cong., 2d Sess. 97 (1986) with H.R.Rep. No. 99-1005, 99th Cong., 2d Sess. 68, 428-29 (1986). Through the Bankruptcy Judges Act, Congress established the United States Trustee System Fund for use in connection with the operation of the United States Trustee Program. Bankruptcy Judges Act § 115. Under this system, a portion of each filing fee is earmarked for the Trustee System Fund along with certain other fees established by the statute. Id.
The debtor argues that because the bankruptcy filing fee increase under the Bankruptcy Judges Act was linked to the United States Trustee System Fund, the delayed effective date of that statute’s fee provision expresses a legislative intent to maintain filing fees at their original level until the effective date of the trustee program. While this argument is not without some plausibility, I conclude that it is not consistent with Congressional intent.
By enacting the Appropriation Act, Congress made the decision to increase revenues by raising filing fees. The only change rendered by the later statute was to earmark a portion of the increased revenues for the Trustee System Fund. While it would make sense for Congress to delay the deposit of monies in the Trustee System Fund until after the trustee program commenced, it does not inexorably follow that Congress also desired to roll back the filing fee increase it had just recently enacted. The essential difference between the two statutes is merely the ultimate destination of the monies produced by the filing fees (i.e., in which government account will the funds be placed). When viewed in this light, it becomes apparent that there is no inherent conflict between the two statutes. As the government argues in its brief, the Bankruptcy Judges Act’s requirement that portions of the increased filing fees be deposited in the Trustee System Fund once the trustee system commences “can be satisfied without abrogating the filing fee provision of the Appropriation Act.” (Government’s brief at 10) (footnote omitted). The harmonious construction of the two statutes set forth above is particularly compelling under the applicable canons of statutory construction.
In short, I conclude that Congress did not intend to repeal or nullify the filing fee increase of the Appropriation Act when it enacted the Bankruptcy Judges Act and I will therefore deny the debtors’ motion insofar as they seek to limit their filing fee obligation to $60.00. An order consistent with this memorandum will be entered.
. Due to a clerical error in printing, the statute was signed into law again on October 30, 1986 and redesignated as P.L. 99-591. See 10 U.S. Code Cong. & Ad.News (December 1986).
. The government opposes the motion only insofar as the debtors seek to pay $60.00 rather than $90.00. The government does not oppose the payment of filing fees in installments. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490452/ | MEMORANDUM
RALPH H. KELLEY, Chief Judge.
The question in this adversary proceeding is whether Security Federal and Warren County Bank perfected their mortgage liens on property belonging to one of the debtors, Josephine G. Hill. The question arises because the deeds of trust were recorded but were not indexed under the name of Josephine G. Hill. They were indexed under the name of her husband, William A. Hill, who joined in the execution of the deeds of trust. The claims of Warren County Bank and the deeds of trust are now owned by the FDIC as liquidator.
The court finds the facts as follows.
Security Federal and The Tubbs Property
By warranty deed dated September 19, 1979, Johnie D. Tubb and wife, Beatrice Tubb, conveyed to Josephine G. Hill a tract of land on Old Shelbyville Road in the first civil district of Warren County, Tennessee.
The affidavit of value in the deed was signed by William A. Hill.
The deed also provides a place to give the name and address of the person responsible for paying the property taxes. “Josephine G. Hill” is typed on the name line, but “Security Federal Savings, McMinnville, Tn” was written on the address lines.
On the same day that the property was conveyed to Mrs. Hill, she and her husband executed a deed of trust to Security Federal to secure a debt. The deed of trust shows the grantors as William A. Hill and wife, Josephine G. Hill. Four attorneys testified at the trial. They agreed that the grantors of the deed of trust should have been Josephine G. Hill, and husband, William A. Hill, since it was Mrs. Hill’s property. Three of the attorneys agreed that it was good practice and usual to require Mr. Hill to join in the deed of trust. The fourth attorney testified that, when the property is a residence, both spouses are usually required to sign a deed even if the property is only in the name of one spouse.
Michael Collier of Warren County Bank testified that the Tubbs property was a residence. He thought it was to be conveyed to both Mr. and Mrs. Hill, but the deed was drawn to Mrs. Hill only. This didn’t bother him, since both Mr. and Mrs. *254Hill signed the deed of trust and the promissory note it secured.
The usual practice in the register’s office of Warren County is to index deeds as follows:
Grantors Index
John Doe & John Smith Doe, John et al. Smith, John et al.
John & Mary Smith Smith, John Mary
William A. Hill, et ux. Josephine G. Hill Hill, William A. et ux.
Josephine G. Hill, et vir., William A. Hill Hill, Josephine G., et vir.
As a result of putting Mr. Hill as the first grantor and indicating that Mrs. Hill was his wife, the deed of trust was recorded only under “Hill, William A., et ux.”
The register’s office also maintains a daily log called the notebook. In doing a title search, it is usually consulted to check for recent deeds that have been submitted for recording but have not been indexed. The notebook for September 19, 1979, contains consecutive entries as follows:
Hour Grantor Grantee
3:35 p.m. Johnie D. Tubb, et ux. Josephine G. Hill
3:36 p.m. William A. Hill, et ux. Security Federal Savings...
In October, 1983, Mr. and Mrs. Hill executed a second deed of trust of the property to Security Federal. It was in the same form as the first deed of trust and was accordingly indexed only under “Hill, William A., et ux.”
Mr. and Mrs. Hill filed the petition in bankruptcy commencing this case on January 17, 1985.
Warren County Bank (FDIC) and The Charles Creek Property
In March, 1973, Thomas L. Pedigo and wife, Naomi Pedigo, conveyed to Josephine G. Hill a tract of land on McMinnville-Short Mountain Road in the first civil district of Warren County. The affidavit of value is signed “Mrs. Josephine G. Hill”. The property is described as “Being on the waters of Charles Creek_” The deed was recorded in book 178 at page 315.
In August, 1978, Mr. and Mrs. Hill executed a deed of trust of the property to Warren County Bank. It was executed by William A. Hill and wife, Josephine G. Hill. It was recorded in deed of trust book 180 at page 83. Following the usual practice, the deed of trust was probably indexed under “Hill, William A. et ux.” but the index page is not in the record.
In September, 1979, Mr. and Mrs. Hill executed a warranty deed to the county apparently for a right of way to make road improvements. It was executed by Josephine G. Hill and husband, William A. Hill. It was recorded on September 14, 1979 and was indexed under “Hill, Josephine G. et vir”. The deed describes the property as being in the first civil district and “Beginning at Josephine Hill’s southeast property line with the north bank of Charles Creek — ” On the second page the property is identified as being included under deeds recorded in book 177 at page 511 and in book 178 at page 315. The deed in book 178 at page 315 is the deed from the Pedi-gos to Mrs. Hill. Attached to the deed are two lien releases, one by Security Federal and one by Warren County Bank. The release by Warren County Bank refers to a deed of trust recorded in book 180 at page 83. This is the August, 1978 deed of trust of the Charles Creek property to Warren County Bank.
In October, 1980 and in December, 1981, Mr. and Mrs. Hill again executed deeds of trust of the Charles Creek property to Warren County Bank. The grantors under the deeds of trust were William A. Hill and wife Josephine G. Hill or Josephine Hill. The deeds of trust were recorded and were indexed under “Hill, William A. et ux”.
Title Searching
Four attorneys testified as to the proper method of doing a title search. Vanessa Henry of Tullahoma, Tennessee testified for the trustee in bankruptcy. She does 200 to 250 title searches per year. Most of this work is done in counties other than Warren County. She estimated that in seven years of practice she had done 50 title searches in Warren County.
She testified that, if she were simply given the deed from the Tubbs to Mrs. Hill, without special instructions or additional information, she would restrict her title search to conveyances indexed under Jo*255sephine Hill or Josephine G. Hill. She would not request additional information. She would not necessarily have noticed that William A. Hill signed the affidavit of value, and if she had, she would not have thought it was especially significant. Likewise, she would not necessarily have noticed that Security Federal was listed as being responsible for property taxes. If she had seen it, she would have looked for a deed of trust indexed under Mrs. Hill’s name. She would not have gone back to the 1979 notebook in which the deed of trust from Mr. and Mrs. Hill to Security Federal was logged in one minute after the deed from the Tubbs to Mrs. Hill. The notebook is used to check for recent transfers that have not yet been indexed.
The right of way deed to the county was not in the chain of title since it was recorded before the deed from the Tubbs to Mrs. Hill was executed and recorded.
Mrs. Henry testified that, if she were given the husband’s name before beginning a title search on property deeded to the wife, she might also search under the husband’s name. Likewise, if she were told that the woman who was the grantee of the deed was married, she might ask for the husband’s name. One financial institution for which she does title searches usually includes the spouse’s name when it requests a search as to property deeded to a married individual.
As to the Pedigo-Charles Creek property, the right of way deed to the county was in the chain of title and would have been found even if the search was restricted to transfers indexed under Josephine Hill or Josephine G. Hill.
Richard McGregor, an attorney who practices in Warren County, testified for the defendants. He testified that whenever he is asked to do a title search of property deeded to one person, he asks his client if the person is or has been married before he begins his search. Whenever a woman is the grantee of a deed, he immediately wants to know if she is married. He has done title searching for FHA for about eight years; its transmittal form shows the name of the spouse and there is a space for previous marriages. If the information isn’t there, he asks for it. If he discovers during a title search that a woman has been married, contrary to his prior information, he will start over again. Doing a title search on property deeded to a woman is generally more work.
As to the deed from the Tubbs to Mrs. Hill, he would have inferred that the William A. Hill who signed the affidavit of value was Mrs. Hill’s husband.
Robert W. Boyd, an attorney who practices in Warren County, also testified for the defendants. He has done a substantial amount of title searching in Warren County. He testified that the failure of the index to give either the wife’s or the husband’s full name in joint transfers creates more work, but everybody knows that’s the way the index is. He tries to get all the information he can about the grantee before he begins a title search. He usually starts with the computerized tax bills. They may show both the husband’s and the wife’s names. He will search under both names from the beginning.
As to the deed from the Tubbs to Mrs. Hill, he would never have searched only under Mrs. Hill’s name, especially since the affidavit of value was signed by William A. Hill and Security Federal was listed as responsible for the taxes.
Keith Smartt is an attorney who also practices in Warren County. He has done a substantial amount of title searching in Warren County. He testified that the right of way deed to the county and the releases would have alerted him to look for a deed of trust of the Charles Creek property, even if it was not indexed under Mrs. Hill’s name.
Discussion
The FDIC must prevail as to the Charles Creek property. The right of way deed to Warren County would have been found from a search only under Josephine Hill or Josephine G. Hill. The right of way deed would have led to the first deed of trust to Warren County Bank. The deed of trust would have given notice of the bank’s lien and would have alerted the title search*256er to look for other transfers indexed under William A. Hill and wife. This should have led to the subsequent deeds of trust to the bank. Under the rule of inquiry notice, a subsequent purchaser or lienor would be oh ■ notice of the deeds of trust to the bank.
Inquiry notice as defined by the Tennessee courts is accurately described as follows:
One dealing with a title who becomes aware of facts or circumstances that would prompt a prudent person to inquire for an explanation, is charged with notice of all that a reasonable inquiry would disclose. The duty to inquire may be triggered by matters coming to the personal attention of the interested party, or record entries he should have searched, whether he did so or not. The duty to inquire extends even further and takes in information with which a diligent purchaser “ought to become acquainted,” such as recitals in the chain of title, whether or not recorded.
T. Sewell, The Tennessee Recording System, 50 Tenn.L.Rev. 1, 46 (1982).
This rule clearly applies. Matters in the record in the chain of title should have led a diligent title searcher to find the deeds of trust to Warren County Bank.
As to Security Federal’s deeds of trust, the question is more difficult, but the court reaches the same conclusion. The deeds of trust should have been found in a diligent title search.
The deed to Mrs. Hill showed on its face that the property tax bills were to be sent to Security Federal. This would indicate to a title searcher that Security Federal probably had a deed of trust executed and recorded the same day as the deed to Mrs. Hill.
A check of the index only under Mrs. Hill’s name would not reveal any such deed of trust. A title searcher could stop at this point on the assumption that the deed of trust either does not exist or is not effective because it was not recorded or was not properly indexed. This conclusion, however, would put the title searcher and his client at great risk based on the title searcher’s questionable legal opinions as to indexing and the requirements of a diligent title search. Compare Maxwell & Stuart, 99 Tenn. 409, 42 S.W. 34 (1897) and Wilkins v. Reed, 156 Tenn. 321, 300 S.W. 588 (1927), discussed in T. Sewell, The Tennessee Recording System, 50 Tenn.L.Rev. 1, 22, & 67 (1982).
When the records clearly indicate that a deed of trust probably exists, a title searcher cannot assume it doesn’t exist or is ineffective simply because it was not indexed under the name of the record owner as it appears in the deed. This is especially true when there is a simple and easy next step that might uncover the deed of trust. In particular, a title searcher should have looked at the notebook for the day on which the deed to Mrs. Hill was submitted. The notebook would have revealed that one minute after the register’s office received the deed to Mrs. Hill it received a deed of trust to Security Federal from William A. Hill and wife. The coincidences would have been too strong to ignore. The index would have to be checked under William A. Hill and wife for the first deed of trust and later deeds of trust. Thus, all of the deeds of trust to Security Federal would be found.
The court could add another coincidence. The name William A. Hill appeared in the deed to Mrs. Hill as the signature in the affidavit of value. The court believes that a title searcher should look at everything in a deed and note what may be important. In this case, the listing of Security Federal certainly could not be ignored. Mr. Hill’s signature in the affidavit of value was less likely to be important, but was probably worth noting. The name of the person who signs the affidavit of value may be clearly unimportant in many cases, such as when the person indicates his or her capacity as attorney, real estate agent, etc. In any event, if the name William A. Hill had been noted from the deed, its appearance in the notebook would have been an added coincidence indicating that the deed of trust was probably executed by him and Mrs. Hill and indexed under his name.
*257The court also believes that a diligent title search must take account of how the indexing system operates in very common situations. A title searcher should know that (1) a person may be married when she acquires property in her name or may marry later and may convey the property jointly with her husband, (2) joint conveyances by a husband and wife may be indexed in Warren County only under the name of the first grantor followed by “et ux.” or “et vir.”, and (3) financial institutions often require that deeds of trust of residential property be executed by both spouses even though the property is deeded only to one. This also means that the title searcher should have some idea of the character of the property, whether it is residential, commercial, farmland, or something else.
It is not too much to ask that a diligent title search be conducted with regard to facts not necessarily found in the notebook, the index, or the recorded instruments. The index is not perfect and complete and probably was not intended to be. It cannot be treated as if it were. A diligent title searcher must use some common sense. This means doing the search with due regard to the facts of life and business and how the register’s office operates. In other words, a diligent title search cannot be limited to the name of a woman who may have been married when or after the property was deeded to her.
This does not mean that an attorney doing a title search must do more than he or she is paid for. The client may be willing to pay only for a limited search. Such cases are probably rare. The attorney should have a clear written understanding in advance if the search is to be limited. The attorney in that case will have the usual problem of explaining the risks apparent from what was found and the added problem of explaining the risks that exist because of the limits on the title search. For the purposes of this case, however, the test of what will be found by a diligent title search does not contemplate a limited search.
What the court has said thus far applies to the trustee’s rights as a bona fide purchaser under Bankruptcy Code § 544(a)(3). 11 U.S.C. § 544(a)(3). Under Tennessee law, his rights as a bona fide purchaser are inferior to the FDIC’s and Security Federal’s deeds of trust.
The trustee also has the rights of a creditor who perfected a judgment lien on the property when the debtors filed their bankruptcy petition. 11 U.S.C. § 544(a)(1). Actual notice or inquiry notice will be held against a bona fide purchaser, but under Tennessee law, an unregistered deed is ineffective against a judgment lien creditor of the grantor, even if it has actual prior notice of the unregistered deed. T. Sewell, The Tennessee Recording System, 50 Tenn. L.Rev. 1, 54-56 (1982). This rule has long been applied, but it makes no difference in this case since the deeds of trust were recorded. The trustee also cannot prevail as a judgment lien creditor.
The court expresses no opinion as to whether the use of et ux. and et vir. satisfies the state law requirements as to the indexing of joint conveyances. As a practical matter, the court suspects that the system is used out of tradition. Surely the register’s office can accommodate the extra work of writing “Smith, John & Mary” or “Smith, Mary & John” rather than “Smith, John et ux.” or “Mary, John et vir.” A state court could later decide that the use of et ux. and et vir. does not satisfy the statutes. In such a case, if inquiry notice would not lead to the deed, the register could be liable for a mistake in indexing. The use of et ux. and et vir. imposes a risk that the register probably does not want to continue.
This memorandum constitutes findings of fact and conclusions of law. Bankruptcy Rule 7052.
ORDER
In accordance with the court’s memorandum opinion of this date, it is ordered that—
Judgment is granted the defendants holding that the liens created by the various deeds of trust in question cannot be avoided by the plaintiff, C. Kenneth Still, *258Trustee, on the ground of improper indexing. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490453/ | ORDER
JAMES E. RYAN, Bankruptcy Judge.
On February 10, 1987, the Application To Require Debtor To Accept or Reject Exec-utory Contract urged by Woolsey Petroleum Corporation (Creditor) and the Response of RICHARD E. PRICE, d/b/a PRICE EXPLORATION CO. (Debtor) thereto were heard after sufficient notice to all interested parties.
No testimony was offered; however, numerous references were made by counsel to the exhibits attached to Creditor’s Application without any objection. At the conclusion of the hearing, a decision was recorded; however, the scope of the decision’s content is in question by counsel. Therefore, and after reflection, it is considered that the Order of February 10,1987 should be struck and is herein set aside.
This Order shall become the final Order of this Court and is intended as a resolution of Creditor’s Application.
Upon the pleadings, exhibits and after review of the file and consideration of the applicable law, the following are the Findings of Fact, Conclusions of Law and Order, pursuant to Bankruptcy Rule 7052, to-wit:
FINDINGS OF FACT
1. This is a “core” proceeding as defined in 28 U.S.C. § 157(b).
2. Debtor’s principal business is the acquisition, development and operation of Oil and Gas Leases.
3. Pre-Petition, Debtor invested in an Oil and Gas Lease (Neilson) owned by Creditor, by approving various letters which constitute a Participation Agreement. The letter of January 10, 1984, at Page 4, Paragraph 12 modified Article VI B. and E. of the Operating Agreement which relate to “Subsequent Operations” on the # 1 Neilson.
4. After the # 1 Neilson was placed into production, the Debtor failed to pay his monthly (lease) operating expenses to Creditor, the approved Operator. Creditor, pursuant to the Operating Agreement, Articles VII B. and XV, has filed its lien upon the future proceeds due Debtor in the amount of $12,565.84 and intends to recoup the pre-Petition indebtedness from future production proceeds.
5. As the # 1 Neilson ceased to continue producing, Creditor has proposed to conduct “Subsequent Operations” by recom-pleting the well in a different formation. Debtor, pre-Petition, in the ordinary course of his business, not only accepted the pro*343posal but has consented to an additional interest in the well in the total sum of $7,275.93.
6. Creditor’s Application is grounded upon the Participation Agreement, the letters, and the Operating Agreement being executory contracts. Albeit, Debtor’s pre-Petition consent must be approved by this Court and Debtor must cure his default of $12,565.84 before he can assume the benefits of the recompletion proposal as well as pay an additional $7,275.93 for the reworking. Debtor does not challenge Creditor’s conclusion that the Participation Agreement and Operating Agreement are exec-utory in nature, but takes issue with the $12,565.84 pre-Petition debt being part of the cure amount that must he paid before Debtor could assume the benefits of the subsequent operations.
CONCLUSIONS OF LAW
A. The Participation Agreement is composed of various letter agreements all of which are necessary to make up a complete offering which became an executed contract upon Debtor paying his share of the # 1 Neilson. The letter between the parties of January 10, 1984 was the initial offer which was conditioned upon Debtor accepting the terms of the specimen Operating Agreement which was attached and modified by Paragraph 12 of the letter specifically relating to Subsequent Operations.
B. The Operating Agreement is divisible into numerous provisions which operate separate and independent of one another, particularly the Subsequent Operation provision (Sub. Opr.) The Sub. Opr. provision as modified provides that upon a proposal to recomplete an existing well a party may consent or forfeit his interest upon commencement of operation. Implicit in the Sub. Opr. provision is the obligation that the person proposing the recompletion is to give all owners a proposal which would describe the reason, the intended work, its anticipated results and the estimated costs. Upon receipt, an owner can knowledgeably consent or forfeit his interest upon and when the recompletion work is begun.
C. An executory contract, generally stated, must have bilateral obligations of such a nature that the failure to perform by either party results in a material breach which excuses performance by the other party. The Sub. Opr. provision in question places an obligation upon the person proposing the recompletion to give notice to the owners. However, there is no affirmative duty on an owner to perform any obligation other than pay money or forfeit; thus no executory contract.
D. As stated, an Operating Agreement is composed of separate and unrelated provisions which are enforceable as such. The pre-Petition failure by Debtor to pay his monthly operating expenses in the sum of $12,565.84 is not related to the Subsequent Operation provisions so as to be a sum that requires cure even if the Subsequent Operations provision was exec-utory in nature — which it is not. The Operating Agreement provides Creditor a remedy — lien and recoupment.
ORDER
THEREFORE, IT IS THE ORDER OF THIS COURT that Creditor’s Application be denied. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490454/ | DECISION ON MOTION FOR SUMMARY JUDGMENT
BURTON PERLMAN, Bankruptcy Judge.
Plaintiffs filed this adversary proceeding to determine whether their lien rights in *482inventory of the debtor have priority over the lien rights of the defendant. Plaintiffs have moved for summary judgment and defendant opposes the motion.
Plaintiffs claim a perfected security interest in inventory of the debtor at debtor’s Pryor, Oklahoma facility, pursuant to duly filed Uniform Commercial Code financing statements dated April 21, 1976. Defendant sets forth no evidence to dispute that plaintiffs have a perfected security interest in the inventory dating from April 21,1976. Defendant asserts, however, that it has a materialman’s lien on the inventory which predates plaintiffs’ lien.
Defendant’s claimed lien arises in the following manner. Defendant and debtor, a manufacturer of fertilizer products, entered into a service agreement dated September 16, 1974, whereby defendant was to supply natural gas to debtor to be used in the production of inventory. Defendant provided natural gas service to the debtor pursuant to this agreement until January 7, 1986.
It is undisputed that on January 7, 1986, defendant filed a verified lien statement against the inventory pursuant to 42 Oklahoma Statute, § 97 and § 98, to secure payment in the amount of $596,766.44 for natural gas service from December 1, 1985 to December 24, 1985. On January 14, 1986, defendant filed another verified lien statement against the inventory to secure payment of $53,550.55 for gas supplied from December 25, 1985 to January 7, 1986. Plaintiffs do not dispute that the liens, as filed, are in compliance with the procedures set forth in the statute.
Only two factual disputes are presented. The first is whether or not the September 16, 1974 service agreement between defendant and debtor was ever terminated. Plaintiffs contend that the gas service agreement was terminated in 1984 and then extended by a second agreement, offering documentary evidence on this motion to support the contention. By an affidavit of its officer, defendant contends that the agreement was never terminated, but only extended or modified by a series of letters.
The second factual dispute surrounds the amount of natural gas used by debtor as heat for the facility as opposed to inventory production. Plaintiffs, through affidavit of debtor’s general manager of the Cherokee Nitrogen Division, contends that 40% of the gas supplied by defendant was used by the debtor for heat. Defendant, by affidavit of its officer, states that 2% of the gas supplied was used for heat.
To prevail on its motion for summary judgment, plaintiffs must meet the statutory criteria set forth in Rule 56 of the Federal Rules of Civil Procedure, made applicable to adversary proceedings in the bankruptcy court by Bankruptcy Rule 7056. Rule 56 reads, in part:
* * * * * *
(c) ... The judgment sought shall be rendered forthwith 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.
* # * * * *
There are disputes of fact in the record before us as we have noted above. Factual disputes do not preclude summary judgment where the issues are not material to a decision. This we find to be the case here. We proceed, therefore, to apply the law to the undisputed facts which are presented.
In issue in this adversary proceeding is whether or not the defendant was an entity which could obtain a lien pursuant to 42 Oklahoma Statute, § 97, and, if so, when that lien was obtained. The statute reads:
§ 97. Lien for labor or materials for production, alteration or repair of personal property — Commencement of lien.
Any person, firm or corporation who furnishes labor, money, material or supplies for the production of, altering or repairs of any personal property at the request of the owner of said property, shall have a lien for the value of his money, labor, material or supplies upon said personal property as provided for in Section 2 of this act. Lien to date from *483commencement of furnishing of labor, money, material or supplies.
§ 98. Filing of statements of lien with clerk — Innocent purchasers.
Any person entitled to a lien under this act shall within sixty (60) days after last furnishing of labor, money, material or supplies for the production of, altering or repairing of said personal property, file in the office of the county clerk of the county in which the property is situated a statement in writing verified by oath, showing the amount of labor, money, material or supplies furnished for the producing of, altering or repairing of said personal property, the name of the person for, and by whom labor, money, material or supplies, was furnished; unless the person entitled to such lien shall file such statement within the time aforesaid, he shall be deemed to have waived his rights thereto; Provided, that the lien provided for in this act shall not attach to any personal property after it has been purchased by an innocent purchaser for value, and has passed into his possession unless the lien shall have been filed with the county clerk of the county before the property was purchased by such purchaser, or he shall have received written notice, from the party entitled to the lien, of his intention to file the same.
Plaintiffs argue that defendant could not obtain a lien in debtor’s inventory. Their thesis is that this statute does not contemplate that a supplier of natural gas which is transformed by a chemical process into fertilizer inventory can obtain a lien on that inventory. Plaintiffs have attached an affidavit by E.L. McCutchen, general manager of the Cherokee Nitrogen Division of the debtor. McCutchen states that generally it would be impossible to specifically attribute any particular portion of two of its products, UAN or ANG, on hand when defendant’s lien filing was made, to gas supplied by the defendant during any particular period of time.
Difficulty in accountability, however, cannot refute the clear wording of the statute which gives the right of a lien to “any person, firm or corporation who furnishes labor, money, material or supplies for the production of, altering or repairing of any personal property ...” We hold that defendant, a supplier of an essential component of debtor’s inventory “furnishes ... supplies for the production of” that inventory and can acquire a lien in that inventory-
Having held that the defendant is an entity which can obtain a lien in debtor’s inventory pursuant to 42 Oklahoma Statute § 97, we must next determine the point from which that lien dates, keeping in mind that a nonpossessory lien obtained prior in time is superior to one obtained later.
The last sentence of § 97 of the Oklahoma Statute states: “lien to date from commencement of furnishing of labor, money, material or supplies.” Defendant asserts that the liens it obtained in January, 1986, should date from the original agreement of September 16, 1974, thereby predating plaintiffs’ lien by about two years. Plaintiffs, to the contrary, argue that the date from which the lien was obtained should be either December 1,1985, the date when the natural gas was supplied for use in the inventory liened, or from the commencement of the most recent contract in April, 1985, both dates being subsequent to the date of plaintiffs’ U.C.C. filing.
We conclude that defendant’s lien dates from the time that natural gas was furnished to produce the specific inventory upon which the lien is claimed. Here, that date is not earlier than December 1, 1985.1 *484Óur conclusion is buttressed by the stated purposes of mechanic’s and artisan’s liens. “The basis for a mechanic’s lien ... lies in the principles of equity and dictates of natural justice. Such laws are based on the equity of paying for work done or materials delivered.” 53 Am.Jur.2d, Mechanic’s Liens, § 2. A statutory materialman’s lien, a lien on personal property as opposed to real property, is derived from common law liens given to artisans and laborers, permitting them to retain possession of an item constructed or repaired until payment is received. 51 Am.Jur.2d, Liens, § 20. The rationale for such a lien for services or materials is that the claimant is entitled to be compensated for labor and materials which have enhanced the value of the property on which the lien is claimed. Id., § 20.
A decision rendered by the Oklahoma Supreme Court supports our reading of the statute here in question.2 In Clark v. Oklahoma Electric Company, 144 Oklahoma 21, 288 P. 935 (1930), the contract between a lien claimant and a debtor was in issue. The contract required that the plaintiff furnish all of the electrical material, equipment, and supplies and labor for the installation of a newspaper plant, and anything else that the newspaper plant might need during the term covered by the contract. The court drew a distinction between two kinds of contracts. The first is one for a particular purpose, such as construction of a building, or the drilling of a well, or the development of a lease. The second is one which continues indefinitely and goes to the ongoing operation of a business. The court stated:
We cannot believe it was the intention of the Legislature, when it passed the lien statutes which govern this case [mechanic’s liens statutes] to cover a situation such as the one here presented, and allow plaintiff under a contract, although it be binding between the parties, to furnish all the necessary material and labor in the operation of a newspaper business, and to furnish the same over a period of many years, and at the end of the period file a lien within four months after the last item is furnished, and thereby preserve its lien as against creditors in good faith for all the period covered by the contract.
The court held that a lien could not be acquired in a newspaper business to which material and labor had been supplied for a period of years merely by making the requisite filing within four months of supplying the last item.
We conclude that the lien obtained by defendant dates from December 1, 1985 as to materials on hand on January 7,1986, and as to the lien filed January 14, 1986, said lien dates from December 24, 1985. Since plaintiffs’ liens predate those of defendant, the plaintiffs’ liens take priority.
. It should be noted that the priority between the statutory lien claimed by defendant and the lien claimed by plaintiffs pursuant to the UCC, Article 9, is not resolved by resorting to the UCC, Article 9. Art. 9 states at § 9-104 (applicable in Oklahoma): "This Article does not apply ... (c) to a lien given by statute or other rule of law for services or materials except as provided in § 9-310 on priority of such liens ...”. Section 9-310 referred to in the above-quoted language deals only with possessory liens, and does not deal with the materials lien here in question. Also, the Oklahoma court in Leger Mill Company, Inc. v. KleenLeen, 563 P.2d 132 (Oklahoma 1977), held that the UCC is inapplicable to non-possessory liens and that the question of statutory liens in relation to secured interest *484under the UCC must be determined by existing statutes and pre-Code case law.
. The Oklahoma mechanic’s lien statute found at 42 Oklahoma 192 states that a lien must be filed within four months after the last item was furnished. This differs from the materialmen’s lien statute which indicates that a lien filed within 60 days dates from when the materials, supplies or labor commenced. However, as seen above, the purposes of both materialmen’s liens and mechanic's liens, as far as their roots in common law, are similar. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490455/ | ORDER DENYING CONFIRMATION AND DISMISSING CASE
THOMAS C. BRITTON, Chief Judge.
A confirmation hearing was held in this chapter 11 case on January 27, 1987. Ruling on confirmation was reserved by an order requiring the debtor to comply with certain requirements not later than February 17 (C.P. No. 43). The debtor states in a motion to dismiss (C.P. No. 44) filed on February 27 that it is unable to comply with the requirement in that order that it file:
“(3) written confirmation by the debtors’ attorney that [the amount to be deposited before confirmation] has been deposited in the attorney’s trust account. The amount to be deposited shall be the total sum necessary to make the first distribution to all creditors in accordance with the plan.”
Notice was given in that Order that if the debtor should fail to comply, this case could be dismissed or converted without further notice.
A condition of confirmation is that this court find that:
“Confirmation of the plan is not likely to be followed by liquidation, or the need for further financial reorganization, of the debtor ...” 11 U.S.C. § 1129(a)(ll).
I cannot make such a finding with respect to the plan of this debtor in view of its inability to meet its very first commitment. Confirmation is denied.
The debtor has requested that this case be dismissed. No other party has requested conversion. Pursuant to the notice previously given, this case is dismissed under 11 U.S.C. § 1112(b)(5). The hearing scheduled for March 24 at 9:30 a.m. on the debtor’s motion to dismiss is not necessary and is removed from the court’s calendar. Dismissal is with prejudice to the filing of any bankruptcy petition by this debtor earlier than one year after this order becomes final. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490456/ | *601MEMORANDUM DECISION
FRANCIS G. CONRAD, Bankruptcy Judge.
NSB has moved under Rules of Bankruptcy Procedure, Rules 7052(b) and 9023, for this Court to alter or amend its September 29, 1986 Decision. From the bench, we ruled that NSB, by virtue of its status as an assignee of an assignment of lease and rents, which was collateral for an obligation of the debtor to NSB, was not entitled to partake of the proceeds from the pending sale of the debtor’s assets. We granted the motion to reconsider and ordered the parties to submit memoranda of law. Because we find that the assignment of the lease and rents does not rise to the level of a security interest in real property, NSB is not entitled to be paid on its promissory note from the proceeds resulting from the sale of debtor’s assets, and accordingly, we reaffirm our September 29, 1986 Order.
On May 11,1983, debtor filed a voluntary petition under Chapter 11. Under Chapter 11, the fate of this historic landmark floundered for the next three years until an Order was entered on July 3,1986, converting the debtor to a case under Chapter 7 of Title 11 of the United States Code.
The trustee acted quickly and moved under 11 U.S.C. § 363(b) to sell all the debt- or’s real and personal property. He obtained consents to sell the property from all the known lienholders. To NSB’s surprise, the trustee did not request their consent to the proposed sale, nor was NSB listed in the motion as a known lienholder.1
At NSB’s request, an expedited hearing for clarification of its status as a lienholder was held on September 29, 1986, the day before the public sale. We treated NSB’s request as an 11 U.S.C. § 5062 motion and ruled that NSB did not have a security interest in the real estate or the future sale proceeds. At the same hearing, on September 29,1986, we approved the sale under 11 U.S.C. § 363(b), and Ordered the proceeds be held in escrow until such time as we determined the validity, extent, and priority of any and all liens. On November 10, 1987, we confirmed the sale of the debtor’s assets to Northeast Hotel Group Inc. We now consider NSB’s motion to alter or amend our September 29, 1986 Bench Decision.
On December 15, 1979, debtor, Tavern Motor Inn, Inc. (Tavern), purchased from Avery Inns of Vermont, Inc. (Avery), the Tavern Motor Inn. NSB was a lessee of Avery for a 17 year term commencing December 18, 1979 and, by virtue of Tavern’s purchase, became a lessee of Tavern.
Prior to Tavern’s purchase of the Tavern Motor Inn, Tavern executed a $100,000.00 promissory note to NSB. The note ex*602pressed that it was secured by a collateral assignment of a lease and rents. An assignment of the lease as collateral for the promissory note was executed by Tavern as assignor and NSB as assignee. The assignment transferred Tavern’s lease with NSB to NSB together with a conditional assignment of the rents, income, and profits from the use and occupation of the lease. NSB recorded the assignment with the Montpelier City Clerk and the Vermont Secretary of State in an effort to perfect its security interest.
Shortly after NSB’s recording, Tavern executed a $1,800,000.00 first mortgage with CTC, and recorded it in the Montpelier City land records. CTC admits that it possessed actual knowledge of NSB’s recorded assignment. In fact, CTC took an assignment of leases from Tavern which expressly excepted NSB’s lease and rental assignment. Tavern also executed a second mortgage to Avery for approximately $700,-000.00. From the facts before us, we don’t know if Avery’s mortgage was recorded, however, it is not necessary to our Decision.
To understand the legal issues, it is imperative that we examine the relevant and material language of the operative loan documents between NSB and Tavern:
The Promissory Note
“... The indebtedness evidenced by this note is secured by a collateral assignment of lease and rents ... is dated December 15, 1980.”;
The Assignment of Lease as Collateral
“Tavern ... hereinafter referred to as “ASSIGNOR” and the Northfield Savings Bank ... hereinafter referred to “ASSIGNEE” ... ASSIGNOR grants, transfers, and assigns to ASSIGNEE ASSIGNOR’S entire interest as Lessor in a certain lease ... dated the 18th day of December, 1979, and by its terms is continual (sic) in full force and effect for a remaining period of 17 years ... ASSIGNOR further grants, transfers, and assigns to ASSIGNEE all rents, income and profits arising from such lease ... from the use and occupation of the premises ..., and at the option of the AS-SIGNEE, from all additional leases ... which may be executed in the future during the term of this assignment ... Until such time as ASSIGNOR may default in payment of the principal interest or other indebtedness secured by the Note ... the ASSIGNOR may collect all rents, income and profits arising under the lease ... and retain the same ... ”; (emphasis ours).
The Loan Agreement
"... As security for the above referenced loan, the Borrowers (Tavern) shall execute a collateral assignment of a lease and the rents it generates ... Said collateral assignment shall be perfected under the Uniform Commercial Code and also shall be filed in the Montpelier City Land Records. Upon default and without notice, the Borrowers (Tavern) agree that the Bank (NSB) pursuant to the collateral assignment of the lease and the rents it generates will pay any rents required by the above referenced lease to the Northfield Savings Bank and credit the Borrowers (Tavern) loan account, in addition to all other remedies it may have under the terms of the promissory note contemplated, the security agreement contemplated and the collateral assignment.” (parentheticals supplied for clarity).
NSB readily admits that it did not seek a first mortgage of the premises because the other lenders, CTC and Avery, were not willing to subordinate their security interests. CTC concedes that its first mortgage is subordinate to NSB’s lease.
NSB claims it is entitled to share in the proceeds from the real estate sale under the following alternative theories:
1. The assignment of rents and profits as security for a debt created an equitable lien in the real property of the assignor;
2. The assignment of the lease and rent constitutes a security interest in real property; and since the note secures not only the assignment of the lease, *603rents, and profits for the balance of the 17 year term but also extends to the length of the debt, then NSB has a reversionary interest in real property from which it is entitled to be accorded lien status as defined in 11 USC § 101(31).3
Chittenden replies:
1. NSB does not have an equitable lien under circumstances where the intention of the parties was only to create a lien on the rents and profits and not the real property itself;
2. NSB’s assignment of lease does not entitle it to a lien on the debtor’s real property because debtor had transferred only the personal property right to receive rent upon default; the debtor’s assignment of the lease and rents to NSB did not transfer the debtor’s reversionary interest, but only the right to collect rent which is a mere personal property interest.
The nature of a creditor’s real and personal property rights in bankruptcy is defined by State law, not Federal law. In re STN Enterprises, Inc., 47 B.R. 315, 318 (Bkrtcy.D.Vt.1985), citing, Butner v. United States, 440 U.S. 48, 54, 99 S.Ct. 914, 917, 59 L.Ed.2d 136 (1979); In re Brass Kettle Restaurant, Inc., 790 F.2d 574, 575 (7th Cir.1986).
The legal effect of the written instruments, i.e., the assignment of lease as collateral, the promissory note, and loan agreement, is determined by the laws of contract. Where the language is clear, the intentions and understanding of the parties must be taken to be that which their agreement declares. H.P. Hood & Sons v. Heins, 124 Vt. 331, 336, 205 A.2d 561 (1964); Stevens v. Cross Abbott Co., 129 Vt. 538, 545, 283 A.2d 249 (1971). “ ‘Where there is no doubt or obscurity, there is no room for construction and the instruments must be given effect according to its terms.’ ” Addison County Automotive, Inc. v. Church, 144 Vt. 553, 559, 481 A.2d 402, [quoting Aiken v. Clark, 117 Vt. 391, 393, 92 A.2d 620, 621 (1952)].
The “loan agreement” unambiguously states that Tavern was to execute the “assignment of lease as collateral” as security for the loan. The collateral was to consist of the lease and rent. Upon default, Tavern agreed under the lease assignment that NSB could pay rent to itself and credit Tavern’s loan obligation to it. Provided the default was not cured, NSB would be entitled to remain in possession for the balance of the leasehold term rent free or, if longer, until the loan obligation was paid.
Having described the effect of the operative documents, we proceed to address NSB’s arguments.
THE EQUITABLE MORTGAGE THEORY
NSB, as the debtor’s lessee/assignee, relies on Allen v. Gates, 73 Vt. 222, 50 A. 1092 (1900), for the proposition that its assignment of the lease and rents created an equitable lien on Tavern’s real estate. Their argument then follows: since they perfected by recording prior to the first and second mortgagees, CTC and Avery, they acquired a security interest that allows them to attach the asset sale proceeds ahead of the first and second mortgagees.
In Allen, the lessee leased an empty lot from the lessor for a term of 5 years. The lessee and the lessor entered into a contract whereby the lessee could construct a building, and, at the end of the rental term, the lessee could remove the building or require the lessor to purchase the building at the lessee’s cost less 20%. Before the term expired, the lessor granted a mortgage to another which was ultimately assigned to a bank. The bank foreclosed and conveyed it to the plaintiff. Prior to the foreclosure, the lessee notified the lessor to buy the building, which the lessor was financially unable to do. The lessee and lessor then agreed that the lessee would collect the rent and remain in possession until the lessee-creditor had realized the *604debt, i.e., the cost less 20% value of the building. The lessee then conveyed his interest by warranty deed to the defendants (buyers) who were enjoined from removing the building. On appeal, the Vermont Supreme Court, after announcing that the lessee’s demand upon the lessor resulted in the building becoming part of the lessor’s real property, held:
It is manifest that the parties intended thereby that Whitney (lessee) should have such rents to apply towards the payment of the debt due him from En-glesby (lessor) for the building; and it was, in effect, an assignment of the rents and profits to Whitney (lessee) as security for the debt, and created an equitable lien on the property in his favor, upon the maxim — Whenever persons agree concerning any particular subject, that a Court of Equity, as against the party himself, and any claiming under him voluntarily or with notice, raises a trust.
Allen v. Gates, 73 Vt. 222, 229, 30, 50 A. 1092 (1900), citing inter alia, Ex Parte Wills, 1 Ves.Jr. 162, 30 Eng.Rep. 281 (1790). (Parentheticals supplied for clarity).
The Court then went on to find the lessee’s assignee (buyer) did not have the right to remove the building, since he no longer owned the building; however, the lessee’s assignee did have a right to have the rents and profits applied toward the payment of the debt and remanded the case to the trial court for an accounting for the sums due the assignee.
Responding to manifest intentions of the original parties, the Allen Court exercised its equitable powers to prevent the lessee’s successor in interest from not realizing the value of the building.
There is no other Vermont case which addresses the circumstances concerning NSB’s status as an equitable mortgagee. Applying Allen to the instant case: neither NSB nor Tavern intended that the assignment of lease and rents would create a lien on the debtor’s real estate that would be sufficient to subordinate the first and second purchase money mortgagees. The intent of the parties was that NSB have adequate assurance of loan payments without restricting Tavern’s obligations to the first and second mortgagees.
Contrary to NSB’s position that the parties’ intention is not relevant and that their secured position should be found as a matter of law, we find that the parties’ intention is indeed relevant and material in deciding whether this court should invoke its equitable jurisdiction:
[Ejquity looks at the final intent and purpose rather than at the form; and if the intent appears to give, or to charge, or to pledge property, real or personal, as a security for an obligation, and the property is so described that the principal thing intended to be given or charged can be sufficiently identified, the lien follows.
4 Pomeroy’s Equity Jurisprudence, § 1237 (5th Ed.1941).
It has been said that an assignment of rents and profits is an odd way of conveying; but it amounts to an equitable lien; and would entitle the assignee ... (to) insist upon a mortgage. Ex Parte Wills, 1 Ves.Jr. 162, 30 Eng.Rep. 281 (1790). In this State, however, before an equitable lien may attach, there must be (1) a debt, duty or obligation owing by one person to another, (2) an identifiable res to which that obligation fastens, and (3) an expressed intention that the res and the parties be so bound. See Hare v. Congregational Society, 76 Vt. 362, 365, 57 A. 964 (1904); 4 Pomeroy’s Equity Jurisprudence, §§ 1235, 1237 (5th Ed.1941); 5 Tiffany’s Real Property, § 1563 (3d Ed.1939). Compare In re Brass Kettle Restaurant, Inc., 790 F.2d 574 (7th Cir.1986).
While it is clear that NSB and Tavern stand in relation of obligee and obligor; that there is an identifiable res to which the obligation fastens; and that the parties intended to be bound, it is equally clear that NSB and Tavern did not intend for the assignment to “fasten” to the real estate or its proceeds, but only to the lease, rents, or profits: “The assignment of a lease for purposes of collateral security vests only a special property in the assignee, while the *605general property and right to redeem remains in the assignor.” Rutland Amus. Co. v. Seward, 127 Vt. 324, 326, 248 A.2d 731 (1968), citing, White River Savings Bank v. Capital Savings Bank and Trust Co., 77 Vt. 123, 128, 59 A. 197 (1904). NSB does not have an equitable lien or mortgage on the debtor’s real property or its proceeds. As the Court in Tromblay v. Dacres, 135 Vt. 335, 339, 376 A.2d 753 (1977) noted:
The doctrine of equitable mortgages does apply to agreements denominated as a “contract for a deed” or, in older usage, “bond for a deed.” ... Since the payments are applied to the purchase obligation as they accumulate, an equity, though perhaps small, comes into being. It is this interest that is referred to as the equitable mortgage interest that requires foreclosure ...
To hold otherwise would render every lease containing a purchase option agreement creating an equitable mortgage situation from the time of notice of intention to exercise it ... This is not the principle behind the equitable mortgage concept. Rather, it rests on the principle of the accumulation of an equitable interest in the property that deserves recognition even without the execution of a formal mortgage instrument.
(citations omitted).
NSB’s interest does not rise to the level of interest described in Tromblay, Id.
THE SECURITY INTEREST IN REAL ESTATE ARGUMENT
In the alternative, NSB argues that the assignment of the lease, rents, and profits created an interest in the real estate, as defined 11 U.S.C. § 101(33).4 As we previously said, real property rights are defined by State law not Federal law. See Butler, supra.
1 V.S.A. § 132 defines “real estate” as: “ ‘Land’, ‘lands’ and ‘real estate’ shall include lands, tenements and hereditaments and all rights thereto and interests therein, and pews or slips in place of public worship shall be treated as real estate.” Mercifully, NSB does not argue that its interest rises to the level of a pew or slip, but rather, their interest acquired from the assignment is an “hereditament.” Since they recorded that interest prior to the first and second mortgagees, CTC and Avery, they must be paid not only from the proceeds but paid first after the administrative expenses. We disagree. The construction and operation of the assignment, from the language and the circumstances of this case, vested in the assignee only a special property, the general property remaining in the assignor. Dieter v. Scott, 110 Vt. 376, 384, 9 A.2d 95 (1939); See also, 51C C.J.S. Landlord & Tenant, § 42(c).
It is elementary property law that a landlord and a tenant possess separate and distinct estates in the demised premises. Berlin Dev. Corp. v. Vt. Struct. Steel, 127 Vt. 367, 371, 250 A.2d 189 (1968).
When the owner of real property leases out his property for a term of years, he carves his prior absolute and unqualified estate into two estates, one in the lessee, the other in himself. For all intents and purposes, the tenant is the absolute owner for the term of the lease, however, the lessor still has an interest in the land. Technically this interest could be called a reversion interest.
2 Powell, The Law of Real Property, § 246[1] (1985).
NSB’s argument that the “assignment of lease as collateral” not only transferred the lease and the rent, upon default, for the balance of the term, but also transferred part of the Tavern’s reversionary interest, either because the amount of the debt may exceed the term or because the assignment could follow a successor lessee, is without merit.
A lessor may sever his right to collect rent to another without affecting the rever-sionary interest in the subject premises:
Likewise, the lessor may by express grant transfer the rent to another while retaining the reversion in himself. Such a grant of the rent separate from the reversion will arise where the lessor as*606signs the lease without any mention of the reversion, since, although the transfer of a reversion will carry with it the rent as an incident, the transfer of the rent cannot carry with it the reversion as an incident.
11 American Law of Property, § 9.45 (Casser Ed.1952); 49 Am.Jur.2d, Landlord and Tenant, §§ 98, 528; Demarest v. Willard, 8 Cowen 206, 209 (N.Y.S.Ct.1828). Nowhere in the assignment between NSB and Tavern do we find one reference to an assignment of Tavern’s reversionary interest.
When Tavern executed the assignment to NSB, NSB acquired, upon default, a mere chose in action for the remaining, if any, unpaid rent, whether it arose from subsequent replacement leases or not.
The construction and circumstances surrounding the operation and intentions of the parties to this assignment reveal that NSB entered the transaction with its eyes wide open. It knew that the first and second mortgagees would not have consented or subjected their security to anything more than a simple assignment from the debtor for NSB’s lease and rent.
NSB can not now be heard to complain that it can not drink from the same well as the first (CTC) or second (Avery) mortgagees.
THE UNIFORM COMMERCIAL CODE THEORY
Although the parties did not expound on whether NSB’s interest falls within the Uniform Commercial Code, 9A V.S.A. §§ 9-102,5 9-104,6 this issue is sufficiently concrete, and not merely hypothetical, for this Court to exercise its judicial power, See Judge v. Diamond, (In re Victor Dye Works, Inc.) 48 B.R. 943, 946-47 (Bkrtcy.E.D.Pa.1985) and decide whether NSB is secured within the meaning of 9A V.S.A., et seq.
The Uniform Commercial Code question confronting us is whether an interest in real estate subsequently employed in a transaction which is intended to create a security interest, 9A Y.S.A. § 1-201(37),7 *607In re Bristol Associates, Inc., 505 F.2d 1056, 1058 (3rd Cir.1974) is within the ambit of 9A V.S.A. § 9, et seq. (Article 9). Whether a lease is intended as security is to be determined by the facts of each case. 9A V.S.A. § 1-201(37); In re Mountain Carpet, 11 B.R. 729 (Bkrtcy.D.Vt.1979).
The operative documents, facts, and the intention of the parties show that the parties intended the lease to be security for Tavern’s loan from NSB. The security interest was to be effected by an assignment of the lease and perfected by its recording.
To understand NSB’s legal interests requires an analysis of the legal relationship between NSB and Tavern. The lease between NSB and Tavern recites the relationship of lessor and lessee between the parties. The assignment of the lease as collateral creates the relationship of secured party and debtor between the parties. Under the lease, possession of the property lies with NSB, but title, or the right to the return of the property (the reversionary interest) on the termination of the lease relationship, remains in Tavern. In the case of the security interest in the lease, the interest held by NSB is the security interest in the lease, namely, to collect rents and profits in the event of default.
As a lessee, NSB holds an interest in real property. That interest is protected by the real property law of this State. As we have already decided, that interest does not rise to the level of a mortgage. What interest it does protect, we need not decide.8 What is clear is that Article 9 does not apply to the lessor/lessee relationship of this proceeding. 9A V.S.A. § 9 — 104(j).
The relationship of secured party and debtor is another matter. We recognize that the cases are divided as to whether Article 9 applies to a pledge of realty paper as collateral. [See White and Summers, UCC (2d Ed.) § 22-6, n. 106 and cases cited therein.] We believe a plain reading of § 9-102, Official Comment 4 to § 9-102 of the UCC, § 9-1040), and § 1-201(37) provides the correct view that Article 9 should apply to facets of transactions using a lease as collateral except those issues that arise when the lessor or lessee is attempting to enforce its rights under the lease. For an analogous situation, See Comment, Security Interests in Notes and Mortgages: Determining Applicable Law, 79 Col.L,Rev. 1414, 1427 (the code should apply to all facets of transactions using mortgages and notes as collateral except those issues that arise when the mortgagee’s creditor is attempting to enforce the mortgage.) See also Siltzer v. North First Bank, 445 So.2d 649, 38 UCCRS 379 (Fla. App. 2d Dist.1984). (Where there is a secured transaction with respect to a real estate mortgage and inventory, real estate law governs the mortgage and Article 9 governs the inventory.)
Where does all this leave NSB? Exactly where they were when they entered this bankruptcy, and with the benefit of their bargain. They are secured to the extent they requested, intended, and bargained to tender onto themselves their own rent for the balance of their leasehold term or until the indebtedness under the note is met, whichever occurs later, no more and no less. Our Decision of September 29, 1986 stands without modification or alteration. Now, Therefore,
It is ORDERED that NSB is not entitled to share in the distribution of the proceeds resulting from the sale of the Tavern, and it is FURTHER ORDERED that the claim *608register be amended m accordance with this Decision.
. At no time during the pendency of the debtor’s Chapter 11 case did any party in interest, including the Tavern, ever question the secured status of NSB. Disclosure Statements and Plans filed with the Court referred to NSB’s claim as secured. Trustee’s motion to sell was the first indication that NSB may not be secured.
. 11 U.S.C. § 506 provides:
(a)An allowed claim of a creditor secured by a lien on property in which the estate has an interest, or that is subject to setoff under section 553 of this title, is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property, or to the extent of the amount subject to setoff, as the case may be, and is an unsecured claim to the extent that the value of such creditor’s interest or the amount to be setoff is less than the amount of such allowed claim. Such value shall be determined in light of the purpose of the valuation and of the proposed distribution or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor’s interest.
(b) 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 under which such claim arose.
(c) The trustee may recover from property securing an allowed secured claim the reasonable, necessary costs and expenses of preserving, or disposing of, such property to the extent of any benefit to the holder of such claim.
(d) To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void, unless—
(1) such claim was disallowed only under section 502(b)(5) or 502(e) of this title; or
(2) such claim is not an allowed secured claim due only to the failure of any entity to file proof of such claim under section 501 of this title.
. 11 U.S.C. § 101(31) renumbered by the 1986 Amendments to § 101(33) states: In this title— "lien” means charge against or interest in property to secure payment of a debt or performance of an obligation.
. See footnote 3, supra.
.9A VSA § 9-102 provides:
(1) Except as otherwise provided ... in section 9-104 on excluded transactions, this article applies so far as concerns any personal property and fixtures within the jurisdiction of this state
(a) to any transaction (regardless of its form) which is intended to create a security interest in personal property or fixtures including goods, documents, instruments, general intangibles, chattel paper or accounts or contract rights; and also
(b) to any sale of accounts contract rights or chattel paper.
(2) This Article applies to security interests created by contract including pledge, assignment, chattel mortgage, chattel trust, trust deed, factor's lien, equipment trust, conditional sale, consignment intended as security. This Article does not apply to statutory liens except as provided in Section 9-310.
(3) The application of this article to a security interest in a secured obligation is not affected by the fact that the obligation is itself secured by a transaction or interest to which this Article does not apply.
Comment 4. An illustration of subsection (3) is as follows:
The owner of Blackacre borrows $10,000 from his neighbor, and secures his note by a mortgage on Blackacre. This Article is not applicable to the creation of the real estate mortgage. However, when the mortgagee in turn pledges this note and mortgage to secure his own obligation to X, this Article is applicable to the security interest thus created in the note and the mortgage. Whether the transfer of the collateral for the note, i.e., the mortgagee's interest in Blackacre, requires further action (such as recording an assignment of the mortgagee’s interest) is left to real estate law. See Section 9-104(j).
. 9A V.S.A. § 9-104(j) provides: This article does not apply (j) ... to the creation or transfer of an interest in or lien on real estate, including a lease or rents thereunder.
Comment 2. ... [T]he Article applies only to security interests in personal property. The exclusion ... of leases and other interests in or liens on real estate by paragraph (j) merely reiterates the limitations on coverage already made explicit in Section 9-102(3). See Comment 4 to that section.
. 9A V.S.A. § 1-201(37) provides, inter alia:
(37) "Security interest” means an interest in personal property or fixtures which secures payment or performance of an obligation ... Unless a lease ... is intended as security, reservation of title thereunder is not a “security interest” ... Whether a lease is intended as security is to be determined by the facts of each case; however,
(a) the inclusion of an option to purchase does not of itself make the lease one intended for security, and
*607(b) an agreement that upon compliance with the terms of the lease shall become or has the option to become the owner of the property for no additional consideration or for a nominal consideration does not make the lease one intended for security.
. Without deciding the real property rights of NSB, we think it is necessary to point out to NSB that the rights of a tenant in possession of real estate, under a lease given prior to the execution of a mortgage on the same premises, are not extinguished by a foreclosure of the mortgage or a sale of the property; the purchaser acquires no greater interest than the mortgagee of landlord had, and both become the landlord of the lessee, see 55 AmJur.2d § 575. Compare Pope v. Henry, 24 Vt. 560 (1852) (a party in possession is notice to a subsequent purchaser or encumbrancer, of whatever title the one in possession may have, whether legal or equitable.) | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490457/ | SUPPLEMENTAL MEMORANDUM OPINION
BENJAMIN E. FRANKLIN, Chief Judge.
This matter came for trial on the plaintiff/debtor-in possession’s complaint for turnover of property on January 9, 1987. The debtor-in-possession, Marvin Gardens Landscapers, Inc., appeared by and through counsel, Rolland Exon and Greg T. Spies. The defendant, E.H. Hall Contractors, Inc., appeared by and through counsel, Gordon Gaebler and Charles E. Fowler, III. This Court heard the evidence and granted judgment in favor of the plaintiff in the amount of $13,862 for retainage and contract extras. This Court ruled against the plaintiff on its $3200 claim for traffic control. In addition, in event of appeal, this Court reserved the right to file supplemental findings of fact and conclusions of law.
On February 13, 1987, the defendant, E.H. Hall Contractors, Inc. and Western Casualty & Surety Co., filed their notice of appeal. This Court is now exercising its right to file supplemental findings of fact and conclusions of law.
FINDINGS OF FACT
Based on the pleadings, the testimony, the exhibits, and the file herein, this Court finds as follows:
1. The Court has jurisdiction over the parties and the subject matter. Venue is proper.
*6122. Debtor, Marvin Gardens Landscapers, Inc., is a corporation organized and existing under the laws of the State of Kansas. The debtor’s principal place of business is in Kansas City, Kansas. The debtor is engaged in the landscaping business. Denis Viscek is the president of the company.
3. Defendant, E.H. Hall Contractors, Inc., is a Kansas corporation maintaining a place of business in Kansas City, Kansas. Ed Hall is the president of the defendant company. The defendant was the general contractor on a project known as the Southwest Trafficway. The owner of the project is the City of Kansas City, Missouri.
4. On August 9, 1985, E.H. Hall Contractors, Inc., the general contractor, and Marvin Gardens Landscapers, Inc., a subcontractor, entered into a contract for landscaping of the medium strip on Southwest Trafficway between 33rd Street and 39th Street. (See plaintiffs Exhibit 4). Marvin Gardens contracted with E.H. Hall Contractors to furnish all materials, labor, equipment and supplies to install 94 Sentry Gin-ko trees on the medium for the price of $370.
5. It is important to note that this was a general contractor/subcontractor relationship. E.H. Hall Contractors had a separate contract with the City of Kansas City, Missouri for the Southwest Trafficway project, including the medium strip. Marvin Gardens worked for E.H. Hall Contractors, not the City.
6. Marvin Gardens ordered the Sentry Ginko trees for the project from Matt Tures Nursery, and placed a $3,446.67 nonrefundable deposit on the order.
7. On or about October 14, 1985, the City contacted E.H. Hall Contractors and requested another price for doing additional work on the medium strip. Apparently, the City determined that several changes must be made in order for trees to survive in the hostile environment of a medium strip on a busy trafficway. The City asked to change the type of tree from Sentry Ginko to Chanticlear Pear, and to change the depth and process of planting which necessitated extra excavation and materials. In addition, the City extended the planting of trees two additional city blocks on the trafficway. In effect, the City asked E.H. Hall Contractors to install a total of 118 trees rather than 94 trees.
8. On October 22, 1985, Ed Hall of E.H. Hall Contractors, informed Denis Viscek of Marvin Gardens, of the changes in the project, and requested a bid for the additional work.
9. By letter of November 7, 1985, from Denis Viscek to Don Newman of E.H. Hall Contractors, Marvin Gardens submitted its bid (see plaintiffs exhibit 2). The letter stated:
As we discussed, our cost for the additional work, including, but not limited co excavation, rock, PVC pipe, topsoil, soil separator, and mulch on the original contract is $251.00 per tree. The cost to do the work complete on the preceding contract is $621.00 per tree. Additionally, because of the change in variety, we are losing our deposit on the Gingkoes; this amounts to $3446.67. This amount needs to be added to the above prices.
If you have any questions, please do not hesitate to call.
10. By letter dated November 13, 1985, from Ed Hall to James R. Batson, Construction Coordinator for the City, general contractor E.H. Hall Contractors informed the City of their change in price per tree for the additional work. The letter stated:
Per your request the price to complete the treewells as detailed on drawing dated 10-14-85 is $720.00 per each in place. This letter supercedes any previous letters concerning treewell price changes. The supplier, Marvin Gardens, also requests that a change order be additionally issued in the amount of $3446.67 which will cover their original non-refundable down payment to the tree supplier.
In addition, the price to remove the existing trees in the treewells between 33rd and 31st and replant per drawing dated 10-14-85 is $720.00 per each. Traffic control in the amount of $6760.00 is an *613additional cost for the 31st to 33rd St. work portion.
It is our understanding that this new tree is to be a Chanticleer Pear tree with a 24" ball. It is further understood that City forces are to remove any grates and existing trees between 33rd and 31st Streets prior to Contractor commencing work.
The $720 cited in the letter includes the following: $370 original contract price per tree with their subcontractor, Marvin Gardens; $251 bid by the subcontractor for the additional work; and the general contractor’s markup. In effect, E.H. Hall Contractors requested at $305 change order price.
11.Sometime later in November of 1985, E.H. Hall Contractors and .their subcontractor, Marvin Gardens, met with the City at the public work’s office to discuss the new price. Ed Hall attended the meeting on behalf of E.H. Hall Contractors. George Eib and Mike Malyn attended on behalf of the City. Denis Viscek, president, and Robert Viscek, vice-president of Marvin Gardens, attended on behalf of the subcontractor, Marvin Gardens, to explain the bid for E.H. Hall Contractors. To simplify matters, Marvin Gardens discussed the price changes as they calculated them, without the general contractor’s markup. As such, the parties discussed the net change of $251 per tree rather than $305 per tree. The Visceks explained that the net changes included $150 per tree for excavation and $101 per tree for PVC pipe and cap, rock soil separator, soil, and installation. Furthermore, the Visceks explained, that on top of the $251 per tree net change, Marvin Gardens would have to be reimbursed $2,446.67, down from $3,446.67, for the lost deposit. Apparently, Matt Tures Nursery would refund $1,000 of the non-refundable deposit. The City did not question the price of $101 per tree for PVC pipe and cap, rock soil separator, soil and installation, and did not question the $2,446.67 loss of deposit. The City did, however, question the $150 per tree for excavation. The City requested that Marvin Gardens refigure the $150 price at 3-inch increments of rock and 3-inch increments of dirt.
12. Marvin Gardens refigured the $150 price for excavation at 3-inch increments of rock and 3-inch increments of dirt, and submitted the changes to E.H. Hall Contractors.
13. E.H. Hall informed the City of the changes.
14. On December 17, 1985, the City and Ed Hall, as president of E.H. Hall Contractors, formally signed a change order for the additional work (see plaintiff’s exhibit 9.) Somehow, however, the City and E.H. Hall Contractors mistakenly left off the additional $101 per tree for PVC pipe and cap, rock soil separator, soil and installation.
15. E.H. Hall Contractors informed Marvin Gardens that the change order was approved by the City, and instructed Marvin Gardens to begin work. At this point, Marvin Gardens and E.H. Hall effectively modified the original contract to include all the changes, including the $101 change.
16. Sometime in February of 1986, Marvin Gardens caught the mistake by examining the company’s January invoice and the January pay estimates from the City.
17. On February 20, 1986, Robert A. Viscek, Vice President of Marvin Gardens, notified Don Newman of E.H. Hall Contractors by letter dated February 20, 1986, of the apparent mistakes (see plaintiff’s exhibit 4).
18. On February 21, 1986, Donald Newman contacted David Teague, Assistant Chief of Construction for the City, of the mistake (see plaintiff’s exhibit 7). The letter stated:
It seems there is a problem of $101.00 being left off the change order price for trees. This has been brought to my attention by our subcontractor, Marvin Gardens Landscapers, Inc. The attached letter from them will explain the problem.
If you have any questions, please call.
19. On March 3, 1986, Charles E. Ows-ley, Assistant City Engineer, responded to Don Newman by letter (Defendant E.H. *614Hall Contractors Exhibit A). The letter stated:
We received your letter of February 21, 1986, with the attached letter from Marvin Gardens about $101.00 being left out of the change order price of the trees. After reviewing that letter, the letters of last November and talking to Mr. Jim Batson, it appears that the parties at the November meeting agreed that the cost of $100.00 for the PYC pipe and cap, rock, soil separator, soil and installation were either included in the original specs for planting the tree or were balanced out by the lower cost of the Chanticlear Pear and the decreased amount of work required to replace the trees between 31st and 33rd Streets. Additional provisions were also made on traffic control at that time, so it would appear that Change Order No. 2 signed by E.H. Hall included all of the cost relating to the items in that change order.
Should you have any questions, please contact Robert E. Norman, P.E., Chief of Construction Inspection at (816) 274-1567.
20. The City’s explanation is completely inadequate. The parties at the November meeting did not agree that the cost of $100 for the PVC pipe and cap, rock, soil separator, soil and installation, were either included in the original specification for planting the trees or were balanced out by the lower cost of the Chanticlear Pear and the decreased amount of work required to replace the trees between 31st and 33rd Streets. The change order did not include all the costs relating to the items on the change order.
21. On March 5, 1986, Ed Hall responded to Denis Viscek by letter which stated:
We are in the process of attempting to learn whether or not the City did in fact leave some money off of a change order. When this is determined we will be in touch with you.
(plaintiffs exhibit 10)
22. On October 31, 1985, Marvin Gardens filed for relief under Chapter 11 of Title 11 of the United States Code.
23.On September 5,1986, the debtor-in-possession filed this adversary complaint under §§ 542 and 1107 against E.H. Hall Contractors, Inc., and Western Casualty & Surety Co. to collect accounts receivables.
CONCLUSIONS OF LAW
The debtor-in-possession, Marvin Gardens Landscapers, Inc., brought this complaint to collect accounts receivable pursuant to sections 542 of the Code. Section 542 states:
(a) Except as provided in subsection (c) or (d) of this section, an entity, other than a custodian, in possession, custody, or control, during the case, of property that the trustee may use, sell, or lease under section 363 of this title, or that the debtor may exempt under section 522 of this title, shall deliver to the trustee, and account for, such property or the value of such property, unless such property is of inconsequential value or benefit to the estate.
First, Marvin Gardens contends that E.H. Hall Contractors, Inc. owes the company $13,072 on the subcontract. This Court agrees.
The parties certainly had a valid written contract on August 9, 1985, for $370 per tree. Furthermore, the evidence clearly showed that the parties modified the written contract to include the changes on the change order plus the $101 inadvertently left off the change order by the defendant or by the City of Kansas City, Missouri. All the correspondence between the parties and all the testimony at trial prove the modification.
Second, Marvin Gardens requests $3,200 for the costs it expended on traffic control on the Southwest project. This Court, however, saw no evidence that E.H. Hall agreed to reimburse Marvin Gardens for traffic control.
The foregoing Memorandum constitutes Findings of Fact and Conclusions of Law as required by Bankruptcy Rule 7052 and Rule 52(a) of the Federal Rules of Civil Procedure. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490459/ | MEMORANDUM OF DECISION ON DEFENDANTS’ MOTIONS FOR JUDGMENT ON THE PLEADINGS, PURSUANT TO F.R.CIV.P. 12(c)
ALAN H.W. SHIFF, Bankruptcy Judge.
The plaintiff, Colonial Bank (“Bank”), has instituted an adversary proceeding in each of the above cases, seeking a determination that debts relating to a personal guaranty and other documents are exempt from discharge pursuant to 11 U.S.C. § 523(a)(2)(A). The defendants (“debtors”) have moved for judgment on the pleadings, pursuant to F.R.Civ.P. 12(c), asserting that acceptance by the Bank of a promissory note and personal guarantees to evidence the obligations created by checking account overdrafts extinguished all claims of fraud based on the overdrafts which might have been otherwise available to the plaintiff.
The complaints allege that for some time prior to December 17,1984, the defendants, in their individual and corporate capacities, knowingly and fraudulently caused the business checking account maintained with the Bank by Norman Leonard Enterprises, Inc. to be substantially overdrawn with the full knowledge that the account did not contain sufficient funds to cover their checks. On December 17, 1984, Norman Leonard Enterprises, Inc. executed a promissory note in favor of the Bank “to evidence and establish a repayment schedule” 1 for the debt created by the overdrafts. The debtors personally guaranteed the promissory note. The parties agree that the note was not intended to constitute payment of the amount of the overdrafts until all sums due thereunder and under related documents were fully repaid, an event which had not yet occurred at the time the debtors commenced bankruptcy proceedings. Each debtor has scheduled the obligation based on the promissory note and guaranty in his bankruptcy petition and maintains that it is dischargeable.
DISCUSSION
In considering a motion for judgment on the pleadings under F.R.Civ.P. Rule 12(c),2 this court is required to accept *753as true all properly pleaded factual allegations of the complaint and may dismiss the action only if it is convinced that “the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.” George C. Frey Ready-Mixed Concrete, Inc. v. Pine Hill Concrete Mix Corp., 554 F.2d 551, 553 (2d Cir.1977), quoting Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957). Furthermore, the record is confined to the pleadings and the court must draw all reasonable inferences in favor of the non-moving party. Falls Riverway Realty v. City of Niagara Falls, 754 F.2d 49, 54 (2d Cir. 1985). A motion for judgment on the pleadings must clearly establish that there are no material issues of fact to be resolved, and that the moving party is entitled to judgment as a matter of law. George C. Frey Ready-Mixed Concrete, Inc. v. Pine Hill Concrete Mix Corp., supra, 554 F.2d at 553.
In order to state a claim for relief under 11 U.S.C. § 523(a)(2)(A), a plaintiff must allege that the debtor obtained “money, property, services, or an extension, renewal or renewal, or refinance of credit by ... false pretenses, a false representation, or actual fraud....” Thus, the issue before the court is whether, as a matter of law, the execution of the promissory note and personal guarantees cancelled the original obligations and the plaintiffs fraud claims so that the debts are dischargeable in bankruptcy.
Under Connecticut common law, unless a promissory note was accepted with the express agreement that it was received as payment for a debt, the underlying obligation was not discharged. See United States for the Use & Benefit of D’Agostino Excavators, Inc. v. Heyward-Robinson Co., Inc., 430 F.2d 1077, 1086 (2d Cir.1970), cert. denied, 400 U.S. 1021, 91 S.Ct. 582, 27 L.Ed.2d 632 (1971) citing, Davidson v. Bridgeport 8 Conn., 472 (1831). This result has not been altered by the adoption of the Uniform Commercial Code. Connecticut General Statutes § 42a-3-802 (U.C.C. § 3-802) provides that unless the parties otherwise agree,
where an instrument, is taken for an underlying obligation ... the obligation is suspended pro tanto until the instrument is due or if it is payable on demand until its presentment. If the instrument is dishonored action may be maintained on either the instrument or the obligation
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Therefore, absent an express agreement to discharge the underlying obligation, a promissory note may simply provide a debt- or with valuable additional time to satisfy an obligation that is otherwise immediately due and payable. See J. White and R. Summers, Handbook of the Law Under the Uniform Commercial Code, § 13-20 (2d ed. 1980). As stated in the Official Comment, § 3-802 was designed to settle conflicts regarding the relationship between an instrument as payment and the obligation for which it is given. As between the original parties, the defenses established by statute or common law on the underlying obligation are preserved under § 3-802. See Progressive Enterprises Group, Inc. v. Nuestro Grafico, Inc., 21 U.C.C.Rep.Serv. 1121, 1123-24 (D.C.Super. 1977).
CONCLUSION
There is a genuine dispute between the Bank and the debtors as to whether the parties entered into a new relationship with new rights evidenced by the promissory note and personal guarantees which would bar the plaintiff from pursuing claims under Code § 523. Accordingly, judgment on the pleadings is not appropriate, and the debtors’ motions are denied.
. Complaint at If 7.
. F.R.Civ.P. 12(c) provides in pertinent part that:
After the pleadings are closed but within such time as not to delay the trial, any party may move for judgment on the pleadings. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490461/ | MEMORANDUM OPINION AND ORDER
DAVID H. COAR, Bankruptcy Judge.
This cause coming on to be heard upon the Motion to Disqualify the law firm of Lord, Bissell & Brook from representing Defendants SHELDON DROBNY and JACK NORTMAN, this motion having been filed by Plaintiff and Trustee, JOEL A. SCHECHTER, represented by JAMES S. GORDON, LTD., and upon the response filed thereto by Defendants, SHELDON DROBNY and JACK NORTMAN, represented by LORD, BISSELL & BROOK, and the Court, having considered the record in this case and the pleadings on file, and having afforded the parties an opportunity to be heard, and having examined the mem-oranda of law filed by the parties in support of their respective positions, and being fully advised in the premises;1
The Court Finds:
1. On June 3, 1980, Debtors COLUMBIA REALTY ASSOCIATES, LTD. [Columbia] and MANUFACTURED HOUSING ASSOCIATES, LTD. [MHA] filed separate petitions for relief under Chapter 11 of the Bankruptcy Code. On October 14, 1980, Debtors’ cases were consolidated for joint administration. On May 27, 1982, Debtors’ Chapter 11 cases were converted to Chapter 7 and a Trustee, Joel A. Schechter, was subsequently appointed.
2. Columbia and MHA were limited partnerships formed under the laws of the State of Illinois. Sheldon Drobny and Jack Nortman were limited partners of both Columbia and MHA. On March 11, 1983, the Trustee filed the above-entitled complaint against Defendants Drobny and Nortman under the Uniform Limited Partnership Act, Ill.Rev.Stat. 106V2 § 50.2 The Trustee alleges that Drobny and Nortman asserted substantial control over the businesses of Columbia and MHA and therefore should *807be liable as general partners. Their control allegedly continued during the period when Columbia and MHA operated as debtors-in-possession.3 Persons who exercise such control are deemed as general partners under Illinois law, despite their designation as special limited partners. Kramer v. McDonald’s System, Inc., (1979) 77 Ill.2d 323, 33 Ill.Dec. 115, 396 N.E.2d 504. The Trustee, therefore, argues that Drobny and Nortman are jointly and severally liable for the debts of Columbia and MHA as general partners. The Trustee seeks to recover from Drobny and Nortman all losses suffered by these estates. In addition, the Trustee insists that Drobny and Nortman be required to pay all claims allowed in these bankruptcy proceedings.
3. Drobny and Nortman are represented by the law firm of Lord, Bissell & Brook [Lord-Bissell]. On March 11, 1986, the Trustee filed a motion seeking to disqualify Lord-Bissell on the grounds that a former partner of that law firm, James A. Chatz, represented Columbia and MHA while they were operating in Chapter 11. The facts surrounding this disqualification issue appear as follows:
A.Lawrence Cooper was the attorney for Debtors at the time of the filing of their Chapter 11 petitions. On October 5, 1981, Mr. Cooper was granted leave to withdraw and an order was entered granting leave to the Debtors to retain James A. Chatz and Dennis E. Quaid of Chatz, Ber-man, Maragos, Haber and Fagel [Chatz-Berman] as their attorneys. On that same date, Messrs. Chatz and Quaid filed their appearances on behalf of Debtors.4
B. On March 16, 1982, Chatz-Berman filed an application to withdraw as counsel for Debtors. The existence of an “irreconcilable conflict with the Debtors-In-Possession concerning the appropriate course of action in these proceedings” was alleged by Chatz-Berman as the principal reason behind its efforts to withdraw as Debtors’ counsel. On May 27, 1982, an order was entered allowing James A. Chatz and Dennis E. Quaid to withdraw their appearances on behalf of Debtors.
C. Subsequent to the withdrawal of Messrs. Chatz and Quaid, James A. Chatz left Chatz-Berman and became a partner and head of the bankruptcy department at Lord-Bissell. The move by Chatz occurred sometime after the withdrawal of Chatz-Berman as counsel for Debtors, May 27, 1982, but prior to the filing of the Trustee’s above-entitled complaint, March 11, 1983.
D. On April 11, 1983, Nick J. DiGiovan-ni, an attorney at Lord-Bissell, filed an appearance on behalf of defendants Drob-ny and Nortman in the adversary proceeding filed by the Trustee.
E. On March 11, 1986, the Trustee filed a disqualification motion asserting that the continued representation of these defendants by Lord-Bissell creates a conflict of interest. The essence of the Trustee’s motion seems to be that inasmuch as the Trustee is seeking to establish that defendants are jointly and severally liable for the debts of Columbia and MHA, the Debtors’ interests and the interests of Drobny and Nortman are adverse. As the representative of former clients of Mr. Chatz, the Trustee objects to his representation of new clients whose interests are adverse to *808those of the estates. The Trustee states that to the extent that it is possible to “waive” or consent to the representation of the defendants by Mr. Chatz, no waiver or consent has occurred. All of this, the Trustee maintains, is in violation of Canons 4, 5 and 9 of ABA Code of Professional Responsibility.
The Trustee also maintains that Chatz should be disqualified under Disciplinary Rule 5-102 of the ABA Code of Professional Responsibility because the Trustee intends to call Chatz as a witness to testify as to the control exerted by Drobny and Nortman during the period when Chatz-Berman represented the debtors-in-possession.
F. It is the position of the Trustee that if Chatz is disqualified from representing Drobny and Nortman, Lord-Bissell is also disqualified because of the “imputed disqualification” rule.5
G. Nick J. DiGiovanni filed an affidavit which states that he is the attorney primarily responsible for the representation of defendants Drobny and Nortman. DiGiov-anni says that while at Lord-Bissell, James Chatz was not involved in Drobny’s and Nortman’s defense in this case. DiGiovan-ni further states that he and James Chatz have never discussed Chatz’s prior representation of Debtors.
H. In rebuttal, Trustee’s counsel has filed a document which purports to be the minutes of a meeting of Debtors’ limited partners held on May 17, 1983 at Lord-Bis-sell. According to the document, Drobny, Nortman, DiGiovanni and Chatz were in attendance at this meeting. The discussion centered around the status of the various lawsuits involving the limited partnership. Involved in that discussion was the Trustee’s action against Drobny and Nortman. In addition, certain pleadings filed by Lord-Bissell on behalf of Drobny and Nortman listed Mr. Chatz as one of the attorneys involved in the proceeding.
I.Subsequent to the filing of the disqualification motion, in April 1986, James Chatz left Lord-Bissell to join another law firm.
The Court Concludes and Further Finds:
1. The Seventh Circuit has adopted the “substantial relationship” test as the standard for disqualification of attorneys who undertake litigation against a former client. Cannon v. U.S. Acoustics Corp., 398 F.Supp. 209, 223-34 (N.D.Ill. 1975) adopted and affirmed, 532 F.2d 1118, 1119 (7th Cir.1976); Westinghouse Electric Corp. v. Kerr-McGee Corp., 580 F.2d 1311, 1322 (7th Cir.1978). Disqualification arises out of concerns for the protection of client confidences and secrets on the one hand, and loyalty to a client and the appearance of disloyalty and impropriety on the other. The substance of these concerns is derived from Canons 4 and 9 of the American Bar Association Code of Professional Responsibility. Briefly stated, the rule is that where an attorney undertakes to represent a client in a matter in which that client’s interests are adverse to the interests of a former client, the attorney is disqualified if the subject matters of the cases are “substantially related.” Whether there is a substantial relationship turns on the possibility, or appearance, “that during the former representation the attorney might have acquired information related to the subject matter of the subsequent representation.” LaSalle Nat. Bank v. County of Lake, 703 F.2d 252, 255 (7th Cir.1983) citing Canon 398 F.Supp. at 223. The moving party need not prove that the attorneys whose conduct is in question actually received confidential information during the course of their former representation. Schloetter v. Railoc of Indiana, Inc., 546 F.2d 706 (7th Cir.1976).
The substantial relationship test has three prongs. First, the trial judge must make a factual reconstruction of the scope of the prior legal representation. Second, it must be determined whether it is reason*809able to infer that the confidential information would have been given to a lawyer representing a client in those matters. Third, it must be determined whether that information is relevant to the issues raised in the litigation pending against the former client. Westinghouse Electric Corp. v. Gulf Oil Corp., 588 F.2d 221, 225 (7th Cir.1978); LaSalle, 703 F.2d at 255, 256.
2. The existence of a substantial relationship gives rise to two presumptions. The first is that the attorney received confidential information during his representation of his former client. Schloetter, 546 F.2d at 710. The second presumption is that the confidential information acquired by the attorney whose change of employment raises the disqualification issue will be imputed to the members of the law firm engaged in the present representation. Novo Terapeutisk Laboratorium, A/S v. Baxter Travenol Laboratories, Inc., 607 F.2d 186 (7th Cir.1979) (en banc). These presumptions, however, can be rebutted. Freeman v. Chicago Musical Instrument Co., 689 F.2d 715 (7th Cir.1982); Novo Terapeutisk, 607 F.2d 186; LaSalle, 703 F.2d 252. The evidence necessary to rebut the first presumption must “clearly and effectively demonstrate that the attorney in question had no knowledge of the information, confidences and/or secrets related by the client in the prior representation.” Schiessle v. Stephens, 717 F.2d 417, 420 (7th Cir.1983), citing Freeman, 689 F.2d at 723. In order to rebut the second presumption which is often referred to as the presumption of shared confidences, it must be shown that “specific institutional mechanisms” were in place which effectively insulated members of the present firm from receiving confidential information brought by the “infected” attorney. Schiessle, 717 F.2d at 421. Courts have considered the following factors in evaluating the effectiveness of the “Chinese Wall” constructed to prevent this flow of confidential information: (1) the likelihood of contact between the “infected” attorney and the specific attorneys responsible for the present representation; (2) the size and structural divisions of the law firm involved; (3) the existence of rules which prevent the “infected” attorney from access to relevant files or other information pertaining to the present litigation or which prevent him from sharing in the fees derived from such litigation. Schiessle, 717 F.2d at 421, citing LaSalle, 703 F.2d at 259. This Court shall proceed to apply these well articulated standards to the case at bar.
3. As to the first prong of the substantial relationship test, there are facts in the record which would enable this Court to reconstruct the scope of Chatz’s prior representation. Chatz was retained to represent Columbia and MHA in a Chapter 11 proceeding.
4. Applying the second prong of the substantial relationship test, the Court finds that it is reasonable to infer from the scope of the representation that confidential information was given to Chatz which would have been given to an attorney representing a debtor in a Chapter 11 proceeding. In representing the Debtors while in Chapter 11, Chatz would necessarily become privy to the Debtors’ financial information and their methods of operating in order to adequately represent them. Undoubtedly, Chatz would have to become familiar with every aspect of Debtors’ businesses including their financial dealings. As the Debtors’ counsel, he would be a key participant in the on-going operation of the partnerships. Chatz knew., of the legal structure of the partnerships. More importantly, he would have to become aware of how these entities actually functioned. The knowledge Chatz acquired while representing the Debtors is directly related to issues raised in the Trustee’s complaint. Activities of Drobny or Nortman which would subject them to liability as general partners (despite their legal designation as special limited partners) would be available to Chatz while representing Debtors. Therefore, the Court finds that the Trustee’s adversary suit and Chatz’s prior representation of Debtors are factually connected. The Court further observes that given the depth of information acquired by an attorney representing a debtor in Chapter 7, 11, 12 or 13, it would be very difficult to establish the lack of a factual connection in *810cases where the debtor’s counsel subsequently represents another party in an adversary proceeding against the debtor. It is not necessary for the Trustee to prove, as Lord-Bissell maintains, that Chatz actually received a particular piece of confidential information since “its receipt will be presumed in circumstances which make it a likely possibility.” LaSalle, 703 F.2d at 256, citing Schloetter, 546 F.2d at 710. Further, it is reasonable to infer that Chatz knew of the Debtors’ financial situations, its legal structures and the acts of its limited and general partners during the period in which he represented the Debtors as debtors-in-possession.
5. Applying the third prong of the substantial relationship test, the Court finds that the information Chatz received while acting as Debtors’ counsel is relevant to the issues raised in the litigation initiated by the Trustee. Lord-Bissell maintains that the Trustee’s adversary suit against Drobny and Nortman does not come within the scope of Chatz’s prior representation of Columbia and MHA. The short length of time during which Chatz represented Debtors (less than one year) does not affect the quality of the information that Chatz is presumed to have received nor does the time which has passed since Chatz represented Debtors (four years) suggest that that information has become stale. There is a presumption that Chatz received confidential information in his prior representation which is relevant to the Trustee’s adversary complaint. The Court concludes that a substantial relationship exists between the subjects of Chatz’s prior representation of Debtors and the Trustee’s adversarial complaint against Drobny and Nortman.
6. Having concluded that a substantial relationship exists between the past and present representation, thereby giving rise to a presumption that confidential information was received during the prior representation, this Court must now determine whether that presumption has been rebutted. Freeman, 689 F.2d at 722, 723. A strict standard of proof is necessary to rebut this presumption, and any doubts regarding the existence of a conflict of interest must ultimately be resolved in favor of disqualification. Westinghouse, 588 F.2d at 225.
In the case at bar, there are no facts in the record which would rebut the presumption that Chatz received confidential information while serving as counsel for Debtors.
7. There is a presumption of shared confidences which arises in this case when Chatz moved to Lord-Bissell and became the head of its bankruptcy department. The confidential information Chatz acquired while representing Debtors will be imputed to the members of the Lord-Bissell law firm. Novo Terapeutisk, 607 F.2d 186. This presumption of shared confidences can be rebutted if Lord-Bissell sufficiently insulated Chatz from the members of the firm responsible for Drobny’s and Nortman’s defense.
To rebut this presumption, Lord-Bis-sell submitted the affidavit of Nick J. Di-Giovanni. This document attempts to rebut the presumption of shared confidences by denying that Chatz was involved in the defense of Nortman and Drobny. The affidavit states that DiGiovanni, “was the attorney primarily responsible for their representation” and that DiGiovanni never discussed with Chatz Chatz’s prior representation of the Debtors. This affidavit alone is insufficient to rebut the presumption of shared confidences. Statements of mere denial such as those made in the DiGiovan-ni affidavit are clearly insufficient to rebut the presumption of shared confidences. The Court also notes that the disqualified attorney in this case, Chatz, has not filed an affidavit. The record in this case shows that Lord-Bissell never established any institutional mechanism which would isolate Chatz from the efforts taken by the firm to defend Drobny and Nortman. Chatz’s name appears on many of the pleadings filed by Lord-Bissell in the Trustee’s lawsuit. From this fact, it is reasonable to assume that Chatz was well aware of this litigation. As head of Lord-Bissell’s bankruptcy department, it is more than likely that Chatz may have had some input in *811directing the defense of Drobny and Nort-man and DiGiovanni’s affidavit without more does not overcome the presumption of shared confidences.6
8. The Court is aware that disqualification is a “drastic measure which courts should hesitate to impose except when absolutely necessary.” Freeman, 689 F.2d at 721. Disqualification is the only remedy which could resolve the apparent conflict of interest present in this case. The Court concludes that Lord-Bissell must be disqualified from the continued representation of Drobny and Nortman in the adversary complaint filed against them by the Trustee based on the above analysis. The impact of the Trustee’s expressed desire to call Chatz as a witness in the pending litigation does not need to be addressed.
9. The fact that Chatz has now left Lord-Bissell is of no import. It would be unreasonable to expect the public or clients who have reposed confidences in a member of a law firm to accept the proposition that the danger of those confidences being used against the client in a closely related matter has entirely dissipated upon the departure of the individual member of the firm. Schloetter, 546 F.2d at 711.
IT IS THEREFORE ORDERED, ADJUDGED AND DECREED that the Trustee’s Motion to Disqualify the law firm of LORD, BISSELL & BROOK from representing Defendants SHELDON DROBNY and JACK NORTMAN in the above-entitled Complaint be, and the same is hereby granted.
. Counsel for the parties appeared before Bankruptcy Judge Edward B. Toles, who has since retired. Upon the suggestion of the parties, Judge Toles took this matter under advisement and his decision was to have been based solely on the pleadings and affidavits filed. In circumstances such as these, and in the absence of an evidentiary hearing before Judge Toles, the undersigned is authorized pursuant to Bankruptcy Rule 9028, and relevant case law, Townsend v. Gray Line Bus Co., 767 F.2d 11 (1st Cir.1985); Whalen v. Ford Motor Credit, 684 F.2d 272 (4th Cir.1982) cert. denied 459 U.S. 910, 103 S.Ct. 216, 74 L.Ed.2d 172 (1982), to render a decision on this motion based on the pleadings and affidavits filed by the parties.
. Ill.Rev.Stat. IO6-V2 § 50 provides as follows:
§ 50. Limitation of liability A limited partner shall not become liable as a general partner unless, in addition to the exercise of his rights and powers as a limited partner, he takes part in the control of the business.
.Listed below are some of the acts allegedly committed by Drobny and Nortman as set forth in the Trustee's adversary complaint.
1. Maintained the primary bank accounts of the partnerships as signatories thereon.
2. Exercised exclusive control of all or substantially all of the funds of the partnerships.
3. Determined which of the obligations of the partnerships were to be paid, at what time and in what amount.
4. Maintained the books of account of the partnerships.
5. Negotiated a modification of the terms of a first mortgage on all of the real estate owned by Columbia with the holder of said mortgage.
6.Rejected a written offer to purchase all of the real estate owned by MHA without submitting said offer to the limited partners as required by the partnership agreement.
.The record indicates that Chatz-Berman filed pleadings on Debtors’ behalf as early as July, 1981. In their application to substitute counsel, Chatz-Berman sought to have their appearance effective as of July 27, 1981; this provision, however, was not contained in the October 5, 1981 order.
. Disciplinary Rule 5-105(d) provides that:
If a lawyer is required to decline employment or to withdraw from employment under a Disciplinary Rule, no partner or associate, or any other lawyer affiliated with him or his firm may accept or continue such employment.
. Examples of effective steps which can be taken to isolate "infected attorneys” were discussed in LaSalle, where it was stated:
The [infected] attorney ... was denied access to relevant files and did not share in the profits or fees derived from the representation in question; discussion of the suit was prohibited in his presence and no members of the firm were permitted to show him any documents relating to the case; and both the disqualified attorney and others in his firm affirmed these facts under oath.
703 F.2d at 259, citing Armstrong v. McAlpin, 625 F.2d 433, 445 (2nd Cir,1980) (en banc), vacated on other grounds, 449 U.S. 1106, 101 S.Ct. 911, 66 L.Ed.2d 835 (1981).
Institutional mechanisms such as these should be in place at the time the disqualifying event occurs. LaSalle, 703 F.2d at 259. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490560/ | RALPH H. KELLEY, Chief Judge.
The question before the court is whether to vacate a default judgment for $113,000 entered against the defendants, Mr. Robertson and Mr. Cole, in favor of the plaintiff, the bankruptcy trustee in the case of Asphalt Paving Contractors Equipment Company (the bankrupt).
The bankrupt filed a bankruptcy liquidation case in December, 1978. C. Kenneth Still was immediately appointed receiver and later was appointed trustee. In March, 1979, Mr. Robertson and Mr. Cole were in the trustee’s office discussing some blueprints for asphalt manufacturing equipment. The trustee or his lawyer warned Mr. Robertson and Mr. Cole that he might sue them to recover as preferential transfers payments they received shortly before the debtor filed its bankruptcy petition.
Mr. Robertson was acquainted with attorney Joe Bean of Winchester, Tennessee, and knew that his brother, attorney Crawford Bean, practiced in Chattanooga. On being threatened with a suit by the trustee, Mr. Robertson and Mr. Cole immediately left and went to attorney Crawford Bean’s office. Crawford Bean was in practice with his sons, Russell Bean and Martin Bean. Mr. Robertson and Mr. Cole explained their problem to Crawford Bean who called in his son, Martin Bean. Crawford Bean requested a fee of $500 with the check to be written to Martin Bean. Mr. Cole wrote a check to Martin Bean for $500. According to Mr. Robertson, this $500 fee was to cover everything. Martin was supposed to keep an eye on the bankruptcy case, do what needed to be done, and let them know what they needed to do. Martin Bean denied this. He understood *986that the $500 was only for an initial investigation and evaluation. He was to determine how serious the trustee was about filing suit, and to try to find two men, Carl Peters and a Mr. Jones. After he did this, he did not consider himself to be representing Mr. Robertson and Mr. Cole. However, he did not specifically tell them that he was no longer representing them.
The trustee filed the preference suit in September, 1980. This was about 18 months after Mr. Robertson and Mr. Cole paid Martin Bean the $500 fee. In the meantime, in July, 1980, Mr. Robertson had appeared at a hearing on an objection to his claim without Martin Bean to represent him. Mr. Robertson testified that whenever he received anything from the court he talked to Martin Bean about taking care of it and appearing at any hearing. He went by Martin Bean’s office on the day of the hearing on the objection to the claim, but Martin Bean was not there. Since he understood that he would not be paid more than $600 on the claim in any event, he decided to go to the hearing himself.
The preference complaint was served by certified mail on Mr. Robertson and Mr. Cole but not Martin Bean. Mr. Robertson and Mr. Cole received the complaint. Martin Bean testified that Mr. Robertson called after receiving the complaint, and he told Mr. Robertson they would have to pay him an additional $2,000 fee to represent them in the preference suit. He didn’t receive the fee and didn’t know if he represented them or not. He didn’t remember expressly telling Mr. Robertson that he would have to be paid the additional fee before he would represent them. Martin Bean’s file contained a letter to Mr. Robertson, dated November 6, 1980, which was after an answer to the complaint was already past due. The letter says:
As I previously mentioned tp you, the fee for representing you and Mr. Cole on the suit filed by the Trustee is two thousand dollars.
I saw Mr. Foster the other day and he wanted to know when an answer would be filed. Therefore, I suggest we file our pleading in the very near future.
In the letter Martin Bean did not specifically say that he did not represent the defendants or would not represent them until after the $2,000 additional fee was paid.
Mr. Robertson testified that he talked to Martin Bean about the complaint and Bean said he would take care of everything. Mr. Robertson denied that Martin Bean requested or said anything about an additional $2,000 fee. Mr. Robertson denied receiving the November, 1980 letter from Martin Bean mentioning the $2,000 fee. He said that Martin Bean never called him or wrote him any letter that he received; Mr. Robertson had to call or go by Mr. Bean’s office.
Mr. Cole testified that the $500 fee was supposed to cover everything. He and Mr. Robertson talked to Martin Bean about everything they received from the court. They “wore out” a car coming to Chattanooga. Martin Bean told them they had plenty of time to answer.
On March 16, 1981, the court entered an order granting the trustee a default judgment against Mr. Robertson and Mr. Cole for failure to answer the complaint. The amount of the judgment was $113,000. Contrary to what the judgment says, the trustee had not previously filed a motion for a default judgment. There also was no hearing on the amount of the judgment.
The default judgment was served on Mr. Robertson and Mr. Cole by certified mail, and they received it. They consulted some lawyers or judges in Alabama about what they should do. They were advised to hire another lawyer. On March 26, 1981, they came to Chattanooga to talk to another lawyer, Josiah Baker. He was hesitant to take the case without talking to Martin Bean, since the defendants thought that Martin Bean represented them. He arranged for Martin Bean and the defendants to meet and suggested that they continue with Martin Bean as their lawyer. They agreed to continue with Martin Bean. According to Mr. Robertson, no additional fee of $2,000 was ever mentioned until he and Mr. Cole had agreed for Martin Bean to represent them after the default. Mr. Bean then said it would cost them $2,000 *987for him to defend them in the preference suit. Mr. Cole wrote Martin Bean a check for $2,000. Mr. Robertson also told Martin Bean that he would send him an explanation of the facts. Martin Bean had not previously requested any information about the facts of the case, and apparently knew very little from what he had been told.
On their way back to Alabama, Mr. Robertson and Mr. Cole worked on Mr. Robertson’s explanation of the the facts. Mr. Robertson had the explanation typed by a stenographer and mailed it to Martin Bean within a few days after their meeting in Chattanooga on March 26, 1981.
On April 2, 1981, Martin Bean filed a motion to set aside the default judgment under Rule 60(b) of the Federal Rules of Civil Procedure. On April 7, 1981, the court entered an order directing the defendants to file affidavits in support of the motion within ten days or the motion would be dismissed. The order was served on the defendants by certified mail and was received by them on or about April 9, 1981. The court twice extended the time to file affidavits. The orders extending the time were submitted by Martin Bean. The last extension expired on June 10, 1981. No affidavits were filed by that time. The court, however, did not enter an order dismissing or denying the motion to set aside the default judgment.
Martin Bean said he got the extensions because he and the defendants had not been able to get together to do the affidavits. He couldn’t remember any problems that kept them from meeting. They simply did not get together. He did not draft affidavits for the defendants to sign, and he did not set up an appointment for them to come in and execute affidavits. He thought Mr. Robertson said something about having an attorney in Alabama draft the affidavits. He read two letters from his file. The first letter to Mr. Robertson, dated April 10, 1981, says:
Enclosed please find a copy of an order" I received from the United States Bankruptcy Court pertaining to the motion to set aside default judgment which I filed on behalf of you and Mr. Cole.
The two of you need to get in touch with me as soon as possible in order to submit notarized affidavits.
The second letter, dated May 26, 1981, says:
Last week Judge Kelley gave us another extension of time in order to file affidavits. This order gives us twenty days from May 21, 1981 to file.
As I mentioned to you over the phone, I’m hoping to get down to Birmingham soon to see some friends, and if so, hopefully the three of us can get together and resolve this matter.
I also talked to Mr. Foster the other day, and in my conversation with him he indicated there was no great rush for a hearing date. However, you need to get in touch with Mr. Cole and let me know something soon, because I can not get the judgment set aside until I get your sworn statement.
According to Martin Bean, he didn’t hear from or try to contact Mr. Robertson after about the beginning of June, 1981. Their conversations just ceased. He was suspended from practice in the bankruptcy court in July, 1982, but didn’t tell the defendants because he hadn’t talked to them in about a year.
Mr. Robertson denied receiving either of the letters from Martin Bean about the need to file the affidavits. He reiterated that Martin Bean never initiated contact. He had to call Martin Bean or go by to see him. He talked to Martin Bean several times after the default judgment was entered. He and Mr. Cole stopped in Chattanooga several times and went by to see Martin Bean or called him. According to Mr. Robertson, Martin Bean always said that everything was all right, and that the explanation that Mr. Robertson had written was all the information he needed. Mr. Robertson admitted receiving the order to file affidavits and testified that he knows what an affidavit is. When asked why he didn’t see to it that the affidavits were filed, since his lawyer couldn’t do it by himself, he explained that his lawyer said *988he had all the information he needed and would get in touch if he needed anything else. He also denied ever saying that he might have another attorney help with the affidavits.
Mr. Cole testified that Mr. Robertson would have told him if he had received the letters from Martin Bean about the affidavits, but Mr. Robertson didn’t mention any such letters to him.
In March, 1983, Mr. Robertson attended the final meeting in the case. He learned that the default judgment had not been set aside. On June 23, 1983, Mr. Robertson and Mr. Cole filed their second motion to set aside the default judgment, along with affidavits stating the basic facts.
Discussion
At the time the default judgment was entered, old Bankruptcy Rules 755 and 924 applied. Unlike present Rule 7055, old Rule 755 did not simply adopt Rule 55 of the Federal Rules of Civil Procedure. Rule 755(a) provided:
Entry and Service of Copy of Judgment. When a judgment is sought against a party in adversary proceedings and such party has, without sufficient excuse, (1) failed to plead or otherwise defend or, (2) having filed a pleading or motion is not ready to proceed with trial on the day set therefor in accordance with these rules, the court upon request therefor shall enter a judgment by default, except as provided hereinafter. If, in order to enable the court to enter judgment or to carry it into effect, it is necessary to take an account or to determine the amount of damages or to establish the truth of any averment by evidence or to make an investigation of any other matter, the court may conduct such hearings as it deems necessary and proper.... Immediately on the entry of judgment by default the court shall serve a copy of the judgment by mail in the manner provided by Rule 705 on the party against whom the judgment is entered. ...
The Advisory Committee Note to Rule 755(a) says in part:
This rule is an adaptation of Rule 55 of the Federal Rules of Civil Procedure. The distinction between the entry of a default under subdivision (a) of the Civil Rule and the entry of a judgment by default under subdivision (b) of the Civil Rule and the provisions in the latter subdivision for a 3-day notice of an application for judgment and for a right of trial by jury have been eliminated from the Bankruptcy Rule as inappropriate and unnecessary in adversary proceedings. No affidavit as to the fact of default or as to the amount due is a prerequisite to the entry of the judgment by default by the court under this rule. There is no right to the entry of a judgment by default, however, against a party whose failure to appear or to be ready for trial is sufficiently excused.... The rule does not contemplate that before entering a judgment by default the court is obliged to make an inquiry into whether the party who has failed to plead or defend or is not ready to proceed with trial has a sufficient excuse....
Collier on Bankruptcy explained the operation of the rule as follows:
In the original version ... there was no provision for service of a copy of the default judgment on the party against whom it was entered. In the 1976 amendments ... this sentence was inserted in order to provide an additional safeguard against the possibility that the original service of the summons and complaint and notice of trial had failed to come to the attention of the defend-ant_ The amendment ... was to provide an additional service by mail so that the party against whom the default judgment was rendered had two opportunities to receive such service; first of the service of the summons, complaint and notice of trial and second, the copy of the default judgment.
When there is a default because the defendant failed to plead or defend or is not ready to proceed, a request is required to be made for the court to enter a default judgment. On such request, *989the court is mandated to make such entry. ...
13 L. King, Collier on Bankruptcy 11755.04 (14th ed. 1977).
The point of these quotations is that Rule 755 did not require that the trustee file a motion for default and serve it on the defendants and have it set for hearing so that they would have notice before the default judgment was entered. The court also was not required to hold a hearing, after notice to the defendants, as to the amount of the judgment. Thus, the failure to give the defendants advance notice that a default judgment might be entered against them does not mean that the judgment should automatically be set aside.
Bankruptcy Rule 755(b) provided:
For good cause shown the court may set aside a judgment by default in accordance with Rule 924.
Rule 924 adopted Rule 60 of the Federal Rules of Civil Procedure with some additions not relevant to this proceeding.
The requirement in Rule 755(b) that good cause be shown for setting aside a default judgment under Rule 924 apparently added nothing to the requirements of Federal Rule 60. Federal Rule 60 sets out the various good causes for relieving a party from a final judgment.
The parties have treated the defendants’ first motion to set aside the default judgment as a motion under Rule 60(b)(1). It provides for relieving a party or his legal representative of a final judgment because of “mistake, inadvertence, surprise, or excusable neglect”.
The defendants would have the court believe that they honestly expected the $500 fee paid to Martin Bean 18 months before the trustee sued them to be the total fee for defending the suit to recover $113,000. The court cannot believe this. The defendants are experienced in the world of business. The court believes that Martin Bean did mention the additional $2,000 fee long before the meeting with the defendants after the default judgment had been rendered. However, Martin Bean could not say that he ever made it clear to the defendants that the $2,000 had to be paid in advance of his doing anything. The defendants could have believed that Martin Bean was representing them but that they owed him $2,000 to be paid in the future. This kind of fee arrangement is common with clients whose ability to pay when the time comes is almost beyond doubt. The court does not know whether the defendants are in that category or not. In any event, the defendants may have been justified in believing that a lawyer who had already been paid $500 for minimal work would represent them in a later, related suit without payment of an additional fee in advance. Giving the defendants the benefit of the doubt, the court concludes that they could justifiably have assumed that Martin Bean began representing them in this suit when they talked to him shortly after they received the complaint and summons. Furthermore, the proof does not show that Martin Bean did anything between then and the default judgment which would have made it clear to the defendants that he did not consider himself to be representing them. This distinguishes the case from cases such as Claeys v. Moldenschardt, 260 Iowa 36, 148 N.W.2d 479 (1967) and In re Aston’s Trust, 245 So.2d 674 (Fla.App.1971).
A defendant’s reasonable mistake in believing a lawyer is representing him does not mean that the defendant’s failure to defend is automatically excusable. The defendant’s own neglect may still be too great to overlook. In early October, the defendants received the complaint and a summons to answer within 30 days. The default judgment was rendered in mid-March. The defendants had to know that during this period Martin Bean had not requested any information for an answer. A person facing a suit for $113,000 should not casually accept the assurances of his lawyer that there is plenty of time to answer, when he knows the lawyer hasn’t done anything toward preparing an answer and the due date has long since passed. The court, however, should not be too quick to saddle a defendant with a large default judgment because he believed his lawyer’s assurances. A person unfamiliar with le*990gal proceedings may be excused for accepting his lawyer’s assurances, in light of the lawyer’s presumed experience and expertise and the common perception that lawsuits move at a glacial pace. The proof did not show that the defendants were familiar enough with legal proceedings to think that the delay in filing an answer was seriously abnormal. Even by the standards of local bankruptcy practice, the time between the answer due date (early November) and the default judgment (mid-March) was not too long a period for the defendants to reasonably rely on Martin Bean’s assurances and not make an independent effort to defend. Furthermore, the defendants did not totally ignore the litigation but talked to or tried to talk to Martin Bean on a regular basis. The defendants’ neglect may have been excusable, so that the original motion to vacate the default judgment would have been granted, if it had been pursued. The defendants’ real problem is their failure to pursue the original motion to set aside the default judgment.
The second motion is based on Rule 60(b)(6). Unlike Rule 60(b)(1), Rule 60(b)(6) allows relief to be granted even though the motion was filed more than a year after the judgment was entered.
Rule 60(b)(6) is a catch-all provision. It allows a party to obtain relief from a final judgment “for any other reason justifying relief”. Use of the word “other” appears to mean that neglect by a party’s attorney cannot be a ground for relief under 60(b)(6) because neglect is covered by 60(b)(1). Nevertheless, the courts have held that gross neglect by an attorney, as opposed to excusable neglect, may justify relief under 60(b)(6). Boughner v. Sec’y of Health, Education & Welfare, 572 F.2d 976 (3d Cir.1978); Jackson v. Washington Monthly Co., 569 F.2d 119 (D.C.Cir.1977); L.P. Steuart, Inc. v. Matthews, 329 F.2d 234 (D.C. Cir.1961). These decisions recognize the tendency of clients to accept their lawyers’ assurances when the lawyers are in fact totally ignoring their cases.
The defendants’ argue that Martin Bean’s gross neglect caused the first motion not to be pursued, and therefore, the first motion should be treated as still viable and should be granted. Essentially the same problem arose in Chang v. Smith, 778 F.2d 83 (1st Cir.1985). In that case the court did not have to consider the argument under Rule 60(b)(6) because it concluded that the earlier motion under Rule 60(b)(1) should be denied anyway. In this case the court must consider the Rule 60(b)(6) argument because the earlier Rule 60(b)(1) motion may have been granted if it had been pursued.
In cases involving an attorney’s gross neglect as a ground for relief under Rule 60(b)(6), the courts generally have held that the client must have been diligent in keeping up with the lawsuit. Inryco, Inc. v. Metropolitan Engineering Co., 708 F.2d 1225 (7th Cir.1983); U.S. v. Cirami, 535 F.2d 736 (2d Cir.1976) and on appeal after remand, 563 F.2d 26 (2d Cir.1977); Ben Sager Chemicals Intern., Inc. v. E. Targosz Co., 560 F.2d 805 (7th Cir.1977).
The defendants knew that they had been ordered to submit affidavits in support of their first motion but they never executed any affidavits. They could easily have set up an appointment with Martin Bean to have the affidavits executed. Representation by a lawyer does not mean that the client must always wait on the lawyer to take the first step toward getting work done. A lot of legal work would probably go unattended if this were a rule.
The defendants would have the court hold that they were sufficiently diligent in light of their reasonable reliance on Martin Bean’s assurances that everything was being taken care of. The court does not believe that Martin Bean ever told the defendants that Mr. Robertson’s written but unsworn narrative of the facts would substitute for their sworn affidavits. It is more likely that he said he could use it to draft an answer. Moreover, the defendants should have known better. Mr. Robertson admitted knowing the difference between an affidavit and a letter. The defendants had already had trouble with Martin Bean not doing what they thought he was supposed to do, but they let two years pass without executing affidavits and with*991out checking with the court to see if the default judgment had been set aside. This inaction appears to have continued long after Martin Bean stopped making assurances about the case. Furthermore, even though the defendants apparently were not overly familiar with legal proceedings, they were businessmen and knew or should have known that they could not let a judgment for $113,000 or a suit for that amount simply linger for years without finding out for themselves what was happening, especially since they already had reason to doubt their lawyer’s ability and he had ceased talking to them. In these circumstances, the defendants’ own lack of diligence cannot be justified on the ground that they reasonably relied on their lawyer’s assurances. Because the defendants were not diligent, gross neglect by their lawyer does not warrant relief under Rule 60(b)(6). Inryco, Inc. v. Metropolitan Engineering Co., 708 F.2d 1225 (7th Cir.1983); Ben Sager Chemicals Intern., Inc. v. E. Targosz & Co., 560 F.2d 805 (7th Cir.1977).
Since relief under the second motion based on Rule 60(b)(6) must be denied, the first motion must also be denied because of the defendant’s failure to pursue it.
There are other facts that the courts consider in determining whether to grant a motion for relief from the judgment.
The court has assumed that the defendants have a meritorious defense. There is evidence in the record, but not recounted in the findings of fact, sufficient to show a meritorious defense under the standard set out United Coin Meter Co. v. Seaboard Coastline Railroad, 705 F.2d 839, 845 (6th Cir.1983).
As to prejudice to the trustee if the judgment is set aside, there was no testimony. The lawyers made representations in open court and argued concerning a missing witness. The witness, David Jones, was the principal in the debtor corporation. The defendants’ lawyer argued that Mr. Jones’ testimony in a Rule 205 examination was sufficient. The trustee’s lawyer disagreed, saying that Mr. Jones’ testimony only hit the highpoints and the questioning was not focused on the particular transactions involved in this lawsuit. The court was left unsure as to when the witness disappeared. The trustee’s lawyer said that he stayed around until the trustee had sold all the property and collected all the money he could. This should have been before the final meeting, which would mean that the witness disappeared between the filing of the first motion and the final meeting. The trustee was prejudiced by the defendants’ failure to pursue the first motion, if this was the true sequence of events. The court, however, need not decide since the defendants' lack of diligence is reason enough to deny both motions.
The court has looked at the defendants closely. They sought free legal advice from a judge and a lawyer in their home state. The court believes their failure to pay their lawyer was simply their way of doing business. Their lack of diligence cannot be excused. The court feels comfortable in denying their motions.
This memorandum constitutes findings of fact and conclusions of law. Bankruptcy Rule 7052. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490562/ | MEMORANDUM
RALPH H. KELLEY, Chief Judge.
The trustee in bankruptcy has moved for partial summary judgment. The main question is a question of law.
*160The defendant, Walker, was building an apartment complex. Walker let a contract to the debtor to do the plumbing work. They agreed that Walker would withhold 10 percent from the payments due the debt- or. Walker withheld 10 percent from what it owed the debtor. Walker did not deposit the money in a separate escrow account. The debtor completed the work, and it passed inspection by the city inspector. Walker, however, did not pay the debtor the remaining 10 percent — the retainage— because it alleges that the debtor failed to do the work properly and it can set off the cost of repairs or damages against the re-tainage.
The trustee argues that under Tennessee law Walker does not have a right of set-off against the retainage, within the meaning of Bankruptcy Code § 553. The foundation of the argument is the oft-repeated rule that set-off means set-off of mutual debts. 4 L. King, Collier on Bankruptcy ¶ 553.04 (15th ed. 1986). According to the trustee, the retainage is not a debt from Walker to the debtor because of Tenn.Code Ann. § 66-11-144. It provides in part:
(a) Whenever, in any contract for the improvement of real property a certain amount or percentage of the contract price is held back by the owner or contractor, that retained amount shall be deposited in a separate escrow account with a third party giving proper security for the performance of their obligation.
(b) As of the time of the deposit of the retained funds, they shall become the sole and separate property of the contractor, subcontractor, materialman, or laborer to whom they are owed.
The trustee argues that subsection (b) makes the retainage the debtor’s property, rather than a debt from Walker to the debtor. Thus, the retainage and Walker’s claims against the debtor are not mutual debts that can be set-off under § 553 and Walker must simply turn the money over to the trustee. 11 U.S.C. § 542.
The first problem with the argument is that Walker did not deposit the money in a separate escrow account. The Tennessee statute says that the retainage becomes the property of the person to whom it is owed when it is deposited in a separate escrow account. The trustee argues that as a matter of equity the court should treat the situation as if the money was in fact deposited to a separate escrow account. For the purpose of argument, the court will assume the trustee is correct and will treat the case as if Walker had deposited the retainage in a separate escrow account.
The Tennessee statute that is the basis of the trustee’s argument goes on to provide:
(c) Upon satisfactory completion of the contract, to be evidenced by a written release by the owner or contractor, all funds accumulated in the escrow account together with any interest thereon shall be paid immediately to the contractor, subcontractor, materialman, or laborer to whom they are owed.
(d) In the event the owner or contractor fails or refuses to execute the release provided in subsection (c), then the contractor, subcontractor, materialman, or laborer shall seek his remedy in a court of proper jurisdiction.
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Tenn.Code Ann. § 66-11-144.
These subsections recognize the true nature of a retainage agreement in a construction contract. The owner retains part of the payments due the contractor to secure the contractor’s satisfactory performance of the contract. The retainage secures payment of damages for the contractor’s failure to do the work satisfactorily. Since satisfactory performance of the contract usually requires the contractor to pay its subcontractors, suppliers, and laborers, the retainage also secures reimbursement of the owner for payments it makes to subcontractors, suppliers and laborers that the contractor fails to pay.
An analysis of decisions involving competing claims to retained proceeds reveals that such funds serve the primary purpose of securing complete contract performance.
Note, 27 Vand.L.Rev. 389, 397 (1974).
*161An owner who retains part of the money due the contractor and deposits it in a separate escrow account makes the deposit in its own name so that it has control of the deposit. Even though the Tennessee statute makes . the deposit the contractor’s property, the owner is not obligated to turn it over to the contractor until the contractor has satisfactorily completed the contract. Tenn.Code Ann. § 66-ll-144(c). If the owner alleges that the contractor did not satisfactorily perform the contract, the contractor’s remedy is to bring suit. Tenn. Code Ann. § 66-ll-144(d). Obviously, the court would not require the owner to surrender the retainage to the contractor before deciding whether it was liable to the owner for breach of the contract. This would amount to rescinding the retainage agreement. The court should order the owner to pay the retainage into court pending a final decision. If the owner prevailed, the court would allow it to recover out of the retainage.
Unfortunately, this does not exactly answer the trustee’s argument. The retain-age can still be the debtor’s property. The set-off would not be a set-off of mutual debts; it would be a recovery by Walker out of the debtor’s property which Walker holds as security for the debtor’s performance of the contract.
This is not the only possible interpretation of a retainage agreement and the resulting escrow deposit, but it appears to be the interpretation adopted by the Tennessee statute, specifically subsection (b) of § 66-11-144. It may be the most practical interpretation. The owner imposes the retainage agreement to secure the contractor’s satisfactory performance of the contract. The statute recognizes this fact, and gives the contractor some protection by requiring the retainage to be escrowed and by making it the contractor’s property. Under a simple retainage agreement and subsection (b) of the Tennessee statute, the traditional rules of set-off and recoupment will not apply because the owner’s debt will already have been paid and the escrow deposit will be the property of the contractor to whom the debt was owed.
This does not mean the trustee prevails on his motion for summary judgment. Walker is not entitled to set-off in the technical sense, but the Tennessee statute makes the escrow deposit collateral in Walker’s control to secure payment of damages for the debtor’s failure to do the work properly. The typical retainage agreement, as interpreted by Tenn.Code Ann. § 66-ll-144(b), is a security agreement that gives the owner a lien on the escrow deposit to secure satisfactory performance of the contract and recovery of damages for unsatisfactory performance. The re-tainage agreement is essentially a pledge agreement under which the retainage is pledged to the owner.
Furthermore, the creation and perfection of a security interest in a deposit account are governed by the common law and not by Article 9 of the Uniform Commercial Code. Tenn.Code Ann. § 47-9-104(a) & 47-9-105(e). Rowland v. American Federal S & L Ass’n, 523 S.W.2d 207 (Tenn.App.1975). See also In re Amco Products, Inc., 17 B.R. 758, 33 UCC Rep. 1093 (Bankr.W.D.Mo.1982); Duncan Box & Lumber Co. v. Applied Energies, Inc., 165 W.Va. 473, 270 S.E.2d 140, 29 UCC Rep. 1731 (1980); Walton v. Piqua State Bank, 204 Kan. 741, 466 P.2d 316, 7 UCC Rep. 1067 (1970). There has been no dispute as to the enforceability of the retainage agreement in this case. 68 Am.Jur.2d, Secured Transactions §§ 54 & 67 (1973).
Assuming the court should treat the case as if Walker made the escrow deposit and assuming the deposit would be the debtor’s property, it would be property in Walker’s control subject to Walker’s lien to secure payment of damages caused by the debt- or’s failure to do the work properly. Walker could not be required to give up the deposit to the debtor, or the trustee as the debtor’s successor, before a decision as to whether the debtor is liable to Walker. See In re Shepherd, 17 B.R. 278, 8 Bankr.Ct.Dec. 864 (Bankr.E.D.Pa.1982) (tenant’s security deposit held by third party).
The court has not found any other decision under Tennessee law that characterizes a retainage agreement as a pledge-type *162security agreement. The court’s reasoning, however, would lead to the same result that Judge Lundin reached in In re Fulghum Constr. Corp., 23 B.R. 147, 9 B.C.D. 772, 7 C.B.C.2d 155 (Bankr.M.D.Tenn.1982) (Waldschmidt v. Columbia Gulf Transmission Co.).
In that case, Columbia retained part of the progress payments due to Fulghum as agreed under the contract. Columbia did not deposit the retained payments to a separate escrow account. When Fulghum filed its bankruptcy petition, it owed a large amount to its suppliers and subcontractors. Rather than pay the retained amount to Fulghum’s bankruptcy trustee, Columbia used it to pay Fulghum’s suppliers and subcontractors. Fulghum’s bankruptcy trustee sought a turnover of the full amount of the retained payments. Judge Lundin treated the retained payments as a debt from Columbia to Fulghum, but held that Columbia had a pre-bankruptcy claim against Fulghum for the amount of Fulg-hum’s debts to its suppliers and subcontractors. These mutual pre-petition debts were set off.
Judge Bare has reached the same result as Judge Lundin in a case involving Kentucky law. In re LaFollette Sheet Metal, Inc., 35 B.R. 634 (Bankr.E.D.Tenn.1983) (Dickenson v. Hacker Bros., Inc.).
Judge Lundin’s reasoning applies to the facts of this case. Since Walker did not segregate the retained payments, the court could treat the retained payments as a debt from Walker to the debtor. Walker could set off against this debt its claims against the debtor. But if the court treats the retained payments as if they were es-crowed and became the debtor’s property, then Walker has a lien on the escrow account that cannot be taken away before deciding whether the debtor is liable to Walker.
This court’s decision is not contrary to the decisions holding that retained funds due to a contractor are not held in trust for the contractor’s suppliers and subcontractors. In re Cedar City Elevator & Refrigerator, 14 B.R. 623 (Bankr.M.D.Tenn.1981) (Noland Co. v. Edmondson); Sequatchie Concrete Service, Inc. v. Cutter Labs., 616 S.W.2d 162 (Tenn.App.1980). The Tennessee statute says that retained and es-crowed funds are the contractor’s property. The court has concluded that they are also subject to the owner's lien to secure performance of the contract. Performance may include payment to the contractor’s subcontractors and suppliers. But this does not make the escrow account a trust for the benefit of the subcontractors and suppliers.
The court concludes that the trustee’s motion for partial summary judgment must be denied.
This memorandum constitutes findings of fact and conclusions of law. Bankruptcy Rule 7052. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490564/ | ORDER AND MEMORANDUM OPINION
LEWIS M. KILLIAN, Jr., Bankruptcy Judge.
THIS MATTER came on to be heard upon the motion for summary judgment filed herein by the defendant, Mark Frederick. The complaint filed by the plaintiff is for a determination of the dischargeability of a debt pursuant to Section 523(a)(2) of the Bankruptcy Code. Upon a review of the record herein and pre-trial stipulation of the parties, the Court makes the following findings of pertinent fact:
On August 12, 1983, defendant purchased a certain parcel of real property located in Destín, Florida from plaintiff. Defendant paid plaintiff $30,000 cash at time of closing and defendant executed a promissory note and first mortgage to plaintiff in the original principal sum of $35,000.
Subsequently on March 22, 1984, plaintiff executed a subordination agreement whereby plaintiff agreed to subordinate her promissory note and mortgage referenced above to a promissory note and first mortgage to be executed by defendant in favor of the First National Bank of Destín (FNB) in the original principal sum of $165,000. On or about April 11, 1984, defendant executed the anticipated promissory note in the original principal sum of $165,000 in favor of FNB and secured said note by a first mortgage on the real property securing plaintiff’s $35,000 promissory note, as expected. Thereafter, on September 14, 1984, defendant executed another promissory note in the original principal sum of $30,000 in favor of FNB, said note secured by a future advance agreement on the first mortgage referred to hereinabove.
On or about May 31, 1985, FNB filed a complaint for breach of its promissory notes and for foreclosure of the mortgage and future advance agreement securing same in the Circuit Court of Okaloosa County, Florida. Plaintiff filed an answer to FNB’s complaint and filed a cross-claim against defendant for breach of the $35,000 promissory note. Upon hearing, plaintiff obtained a final judgment against defendant on the cross-claim referred to above in the total sum of $29,944.68. Plaintiff then executed an assignment of this final judgment to Florida State Bank.
On April 15, 1986, defendant filed a Chapter 7 petition and on August 1, 1986, plaintiff filed her complaint seeking to have the state court final judgment obtained by her against defendant excepted from discharge. The complaint alleges that the final judgment is a “debt for an extension, renewal or a refinancing of credit obtained by a false representation” as defined in 11 U.S.C., § 523(a)(2)(A) or by use of a “written statement which the debtor caused to be made with the intent to deceive” as defined in 11 U.S.C., § 523(a)(2)(B)(iv).
The complaint alleges that the debt- or/defendant induced the creditor/plaintiff herein to subordinate her mortgage to that of FNB by his representations to her that the FNB mortgage would be limited to $165,000. The subsequent loan of $30,000 to the debtor from FNB pursuant to its future advance clause allegedly resulted in a loss of the equity position of the plaintiff. Thus upon the defendant’s default and subsequent foreclosure by FNB and foreclosure sale, the proceeds of sale were insufficient to pay this plaintiff on her subordinated mortgage. The complaint alleges that had the plaintiff not subordinated her mortgage to that of the FNB in reliance on the defendant’s representations that the first mortgage would not exceed $165,000, the plaintiff would have been made whole by the foreclosure sale. The plaintiff contends that the judgment received in state court was the proximate result of the defendant’s refinancing of credit by means of *307the subordination agreement which was obtained by false representations by the debt- or caused to be made with intent to deceive. After denial of a motion to dismiss filed by defendant, the answer, amended answer, and affirmative defenses were filed. On April 17, 1987, plaintiff filed a reply to defendant’s affirmative defenses and on May 7, 1987, defendant filed a motion for summary judgment, said motion the subject of this order and memorandum opinion.
The affirmative defense and motion for summary judgment both posit that the statutory basis for the plaintiff’s claim, § 523(a)(2) requires that the debt, to be deemed non-dischargeable, must arise from an extension, renewal or refinancing of credit obtained by the debtor’s false representations or statement in writing. The motion recites that the creditor/plaintiff’s final judgment was for sums due her from debtor as a result of the promissory note dated August 12, 1983; that although the plaintiff seeks to rely on the subordination agreement dated March 22, 1984, that such is not an “extension, renewal or refinancing of credit” but rather a subordination of collateral for an underlying debt; that the subordination agreement was merely a document which relegated the plaintiff to a second mortgage position to the bank and entailed no alterations whatsoever to the promise to pay evidenced by the unchallenged note and mortgage of August 12, 1983, between the parties.
The affirmative defense and motion for summary judgment also challenge the plaintiff’s standing to sue on a judgment which was assigned to a third party, the Florida State Bank, and assert estoppel. A discussion of these alternate grounds in support of the motion for summary judgment is deemed unnecessary in light of the Court’s following conclusions of law.
The issue before this Court is whether a debtor’s obtaining of a subordination agreement constitutes the act of obtaining money, property, services, or an extension, renewal or refinancing of credit. A thorough review of the law discloses no case where this issue was present. Lacking any authority on point, this Court must strictly construe the language of the Bankruptcy Code with due regard for the spirit thereof.
Clearly the subject subordination agreement does not constitute a “statement in writing ... respecting the debtor’s ... financial condition”, and is therefor not within the ambit of § 523(a)(2)(B). Alternatively the creditor argues that the subordination agreement was obtained by false representations to plaintiff in connection with obtaining a refinancing of credit. Yet the Code states that “a discharge ... does not discharge an individual debtor from any debt for ... refinancing of credit, to the extent obtained, by ... a false representation ...” (Section 523(a)(2)(A), emphasis supplied.) The sole debt in issue here is that incurred in 1983 when these parties executed a promissory note. There was no debt obtained by the debtor which was due this creditor upon the execution of the subordination agreement. The debtor incurred a debt to FNB which was facilitated by the subordination agreement, but nothing more became due the plaintiff herein. The agreement did not constitute a refinancing of credit; it merely enabled the debtor to obtain additional credit from another source. It merely changed the plaintiff’s priority position as to collateral, wholly apart from the acquisition or refinance of debt.
The dischargeability provisions of § 523 must be construed favorably for the debtor so as not to impair the debtor’s fresh start in accord with the spirit of the bankruptcy laws. As stated in In re Hunter, 780 F.2d 1577, 14 B.C.D. 159 (11th Cir.1986):
Because of the very nature and philosophy of the Bankruptcy law the exceptions to dischargeability are to be construed strictly, Gleason v. Thaw, 236 U.S. 558, 35 S.Ct. 287, 59 L.Ed. 717 (1915)....
Such strict construction results in this Court’s conclusion that a creditor’s execution of a subordination agreement does not constitute the debtor’s acquisition of money, property, services, or an extension, renewal, or refinancing of credit under § 523(a)(2). It is accordingly
*308ORDERED AND ADJUDGED that the defendant’s motion for summary judgment be, and it hereby is, granted. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490463/ | MEMORANDUM AND ORDER ON THE LIQUIDATING TRUSTEE’S MOTION FOR SUMMARY JUDGMENT ON THE ISSUE OF INSOLVENCY
CLIVE W. BARE, Bankruptcy Judge.
Relying upon both the statutory presumption of insolvency, 11 U.S.C.A. § 547(f) (West 1979), and affirmative affidavits, plaintiff Thomas E. DuVoisin requests summary judgment on the issue of insolvency in the consolidated preference actions wherein defendants deny the insolvency of the debtor, Southern Industrial Banking Corporation (SIBC), during the ninety-day period preceding the SIBC bankruptcy petition. Certain defendants have moved to strike the affidavits upon which DuVoisin relies. Further, defendants contend that they have profferred affidavits and other documents, which would be admissible in evidence, sufficient to rebut the statutory presumption of insolvency.
Plaintiff DuVoisin is the liquidating trustee of a trust established under the Modified Plan of Reorganization confirmed by the court in the SIBC case. In his capacity as liquidating trustee DuVoisin has filed approximately nine hundred adversary proceedings seeking to recover alleged preferential transfers. Because these proceedings involve several common issues the court consolidated, with some exceptions, the liquidating trustee’s preference actions pursuant to Order No. 199, entered May 23, 1985. Further, pursuant to Order No. 215, the court required the defendants in the consolidated proceedings to file a statement admitting or denying that SIBC was insolvent during the ninety days preceding the date (March 10, 1983) of its bankruptcy petition. The majority of the defendants, including but not limited to those represented by either Wagner & Myers or David Buuck, deny that SIBC was insolvent on each of the ninety days preceding bankruptcy.
On April 22, 1985, prior to consolidation, DuVoisin moved for summary judgment in eight of the preference actions selected as “test cases.” In support of his motions for summary judgment, DuVoisin filed his affidavit, dated April 19, 1985, reciting in part:
Since my appointment as Liquidating Trustee, I and my staff have conducted additional reviews and examinations of the books and records of SIBC with respect to SIBC’s insolvency. Based upon such examination I have determined that SIBC was insolvent on the date the transfer was made to Defendant. Even though SIBC had prepared financial statements indicating its solvency during and prior to the time of the transfer, my investigation has shown that such representations were not correct because SIBC was in fact insolvent. Attached to my Affidavit are adjusted financial statements for SIBC as of December 31, 1981, December 31, 1982, and January 31, 1983, setting forth an accurate reflection of SIBC’s financial condition. Further, at all times between these dates, and at all times prior to March 10, 1983, SIBC was also insolvent.
The adjusted financial statements attached to DuVoisin’s affidavit reflect:
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On June 19, 1985, as an exhibit to his Brief in Support of Motion for Partial Summary Judgment, DuVoisin filed a second affidavit, dated June 18, 1985, stating that he had determined that “SIBC was insolvent at all times in December 1982 and in 1983.” DuVoisin’s adjusted financial statements for SIBC attached to his second affidavit reflect:
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Neither affidavit recites DuVoisin’s qualifications to analyze SIBC’s financial condition. Also, neither affidavit includes attachments identifying the specific SIBC assets devalued by DuVoisin.
On June 20, 1985, defendants represented by Wagner & Myers moved to strike DuVoisin’s affidavit. These defendants contend DuVoisin’s affidavit fails to comply with Bankruptcy Rule 7056 (not made on personal knowledge; does not set forth facts that would be admissible in evidence; and does hot affirmatively show that Du-Voisin is competent to testify to the mat*186ters stated therein). It is further contended that the valuation of assets to determine insolvency requires expert testimony; there is no allegation that DuVoisin is an expert nor is there a statement of his qualifications; and certain adjustments were apparently made because of events occurring subsequent to the alleged preferential transfers.
In opposition to DuVoisin’s affidavit, defendants represented by David Buuck filed an affidavit dated June 19, 1985, of Van Elkins, a certified public accountant. El-kins questions several categories of adjustments made by DuVoisin. He observes that DuVoisin does not aver that his revaluation of SIBC’s assets was made at a fair valuation and states: “Based upon the exhibits and information attached [to DuVoi-sin’s affidavit] and the notes on adjustments to financial statements, it is impossible to determine if SIBC was in fact insolvent on January 31, 1983.”
On July 22, 1985, DuVoisin renewed his motion for summary judgment on the insolvency issue. To support his motion DuVoi-sin filed an affidavit he and Mark J. Miller, his assistant, had jointly executed. The joint affidavit recites the qualifications of both DuVoisin and Miller, a former employee of Irwin A. Deutscher, the trustee in the SIBC bankruptcy case. Further, attachments to the joint affidavit identify each commercial loan devalued by DuVoisin and the amount of the principal adjustment. Through their adjustments to SIBC’s internal report of income alone, DuVoisin and Miller conclude that, as of November 30, 1982, instead of an internally reported net worth of $3,437,000.00 SIBC had a deficit net worth of $3,769,000.00, not including any devaluation of SIBC’s commercial loan credits. According to DuVoisin and Miller a fair valuation of SIBC’s commercial loan portfolio requires subtraction of the following amounts from principal indebtedness:
1981 $ 4,837,662.00
1982 11,052,261.00
Jan. 1983 6,902,815.00
Peb. 1983 1,132,304.00
Mar. 1-10,1983 500,000.00
Total Adjustments $24,425,042.00
In response, defendants filed the joint affidavits of John R. Cooper and Lewis F. Cosby, III, licensed certified public accountants employed by Coopers & Lybrand; the affidavit of James E. Steiner, former president of SIBC; and a second affidavit of Van Elkins.
Cooper and Cosby, both experienced in auditing financial institutions, aver that DuVoisin’s method of evaluating the SIBC commercial loan portfolio does not conform with generally accepted auditing standards; certain adjustments to the reporting of income are irrelevant to the valuation of assets during the preference period; and that in their opinion neither DuVoisin nor Miller produced documents sufficient to support the adjustments to the value of SIBC’s assets.
The affidavit of James E. Steiner, president of SIBC from September 1979 until March 1983, provides in part:
[Bjased upon my personal knowledge of the financial condition of SIBC and the commercial loan portfolio of SIBC in particular, the commercial loans of SIBC identified by Mr. DuVoisin and Mr. Miller in their Affidavits were not worthless, in whole or in part, as of the time they were made and, in fact, had substantial value as of March 10, 1983, and at all times during the 90 days preceding March 10, 1983. These commercial loans were either secured by adequate collateral or, where not fully secured, were secured by guarantees of or made to persons or entities controlled by persons who had, at all times during this period, strong personal financial statements upon which not only SIBC but many other lending institutions relied in making loans to such persons or entities. I have reviewed the loans listed on Exhibit to Mr. DuVoisin’s Affidavit which he states should be written off in full. To the best of my knowledge and belief, many of those loans have in fact been paid, in part or whole, prior to March 10, 1983. In addition, I believe the loan list to be inaccurate in several respects, including the listing of at least one [$947,429.16] loan to C & C Bank of Knox County *187which was never actually made and the fact that, to my personal knowledge, one borrower offered to pay off his loan in full and tendered partial payment to the Trustee and his offer was refused.1
In his second affidavit Elkins states that he randomly selected the files of seven SIBC debtors whose debts were entirely or partially written off. Questioning the adjustment in each file he reviewed, Elkins offers his opinion that no effort was made to evaluate the loans as of March 10, 1983. According to Elkins, although DuVoisin has written off $60,067.63, the full amount of a demand note dated November 19,1980, on the Bill Deatherage account as of December 31, 1981, the file contains a receipt sheet showing payments of $25,963.89 and $201.60 were received from Deatherage. Further, Elkins avers that SIBC’s corporate tax returns for 1982 and 1983 report a net worth of $5,057,421.00 and $4,658,-642.00 respectively. Schedule M-l of the 1982 return reports net earnings of $262,-893.00 for the year ending December 31, 1982.
Defendants also rely upon the deposition of Lewis F. Cosby, III, who questions Du-Voisin’s write off as of January 31,1983, of a $1,775,000.00 loan to C & C Plaza Ltd. According to Cosby: “I didn’t see anything in the file that would support writing that loan off at that point.”2
On March 4, 1986, following re-referral to this court of the consolidated preference actions, DuVoisin filed a supplemental motion for summary judgment on the issue of insolvency.3 Because no affiant has averred that SIBC was solvent, DuVoisin asserts that defendants have not rebutted the statutory presumption of insolvency. Citing Lancaster v. City and County Bank (In re Tuggle Pontiac-Buick-GMC, Inc.), 31 B.R. 49 (Bankr.E.D.Tenn.1983), DuVoisin maintains that defendants cannot rely upon the SIBC internal balance sheets to rebut the presumption of insolvency. DuVoisin further asserts defendants have not refuted his affidavits averring the insolvency of SIBC and that SIBC’s internal balance sheets were false and inaccurate.
On March 27, 1986, defendants represented by Wagner & Myers filed their brief opposing DuVoisin’s supplemental motion for partial summary judgment. These defendants point out a material difference between the devaluation of the commercial loans as of December 31, 1981, in DuVoi-sin’s first (April 19, 1985) affidavit and the joint affidavit of DuVoisin and Miller. The first affidavit reflects a $9,806,257.45 reduction but the attachments to the joint affidavit reflect a much smaller reduction, $4,837,662.46. At his deposition DuVoisin was not able to explain the $5,000,000.00 difference.4 According to Miller, the difference is attributable to postpetition collections and the discovery of the sale to C.H. Butcher, Jr. of loans totaling $5,500,-000.00.5
Additionally, the defendants represented by Wagner & Myers have proffered certain documents submitted postpetition by SIBC’s trustee in bankruptcy, Irwin A. Deutscher, to the Tennessee Department of Financial Institutions in conjunction with renewal applications to operate SIBC as an industrial loan and thrift company. These documents include certificates, dated June 30, 1983, reciting that the net worth of each office or place of business “does now and will exceed the $25,000.00 minimum requirement of paid in capital or capital funds required by T.C.A., Section 45-2004 as of July 1, 1983.” Also, in response to the State’s specific request for a current financial statement, Deutscher forwarded a SIBC balance sheet, dated May 31, 1983, *188prepared from the unaudited books and records of SIBC, reflecting a $4,982,299.01 net worth.
Also, on March 27, 1986, defendants represented by David Buuck filed the affidavit of Stanley C. Roy, a certified public accountant. Roy avers that the 1983 federal tax return, prepared by Peat, Marwick, Mitchell & Co., for “Southern Industrial Banking Corporation ‘A Debtor in Chapter 11 Proceedings’ Thomas E. DuVoisin, Trustee,” reports assets exceeding liabilities in the amount of $4,658,642.00 as of December 31, 1983. It is Roy’s opinion that the 1982 and 1983 SIBC tax returns reflect that SIBC held assets exceeding liabilities for the period January 1, 1982, through December 31, 1983.
Citing Tenn.Code Ann. § 62-1-102 (1982), defendants represented by Buuck also moved to strike the joint affidavit of DuVoisin and Miller since neither is a certified or licensed public accountant. It is contended that the public policy of the State of Tennessee disqualifies both DuVoi-sin and Miller from attesting to the solvency or insolvency of SIBC. It is not necessary for the court to reach that issue.
Bankruptcy Rule 7056 adopts Fed. R.Civ.P. 56 providing for summary judgment “if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show 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.” Though DuVoisin is entitled to a presumption of insolvency, § 547(f), the presumption is not sufficient to sustain a motion for summary judgment where genuine issues of material fact exist. Further, the nature of the documents suggesting solvency in these proceedings (certifications by the SIBC trustee to the State of Tennessee and federal tax returns) distinguish this action from Tuggle, which involved an unverified operating report proven inaccurate at trial.
When ruling on a motion for summary judgment:
[T]he court must construe the evidence in its most favorable light in favor of the party opposing the motion and against the movant. Further, the papers supporting the movant are closely scrutinized, whereas the opponent’s are indulgently treated.
Bohn Aluminum & Brass Corp. v. Storm King Corp., 303 F.2d 425, 427 (6th Cir. 1962) (citation omitted).
Applying this standard, yet assuming arguendo that DuVoisin’s affidavits should not be stricken, patently, genuine issues of material fact preclude summary judgment on the insolvency issue. The value of the SIBC assets at a fair valuation, a quintessential element in the equation to determine insolvency or solvency, is genuinely disputed.
Accordingly, in the adversary proceedings identified in Exhibit A wherein insolvency is disputed, DuVoisin’s motions for summary judgment on the insolvency issue are DENIED.
SO ORDERED.
EXHIBIT A
through 3-84-0188, inclusive 3-84-0180 3-84-0322
3-84-0342 through 3-84-0346, inclusive
3-84-0355 through 3-84-0365, inclusive
3-85-0709 through 3-85-0711, inclusive
3-85-0011 through 3-85-0035, inclusive
3-85-0039 through 3-85-0138, inclusive
3-85-0142 through 3-85-0277, inclusive
3-85-0286 through 3-85-0396, inclusive
3-85-0402 through 3-85-0602, inclusive
3-85-0605 through 3-85-0707, inclusive
3-85-0724 through 3-85-0838, inclusive
3-85-0844 through 3-85-0903, inclusive
3-85-0909 through 3-85-0921, inclusive
3-85-0923 through 3-85-0929, inclusive
3-85-0935 through 3-85-0941, inclusive
3-85-0956
3-85-0960
. Mr. Steiner, indicted for fraud in connection with SIBC subsequent to giving his affidavit, recently asserted his constitutional privilege against self-incrimination in response to all questions at a May 7, 1986, deposition.
. Discovery Deposition of Lewis Franklin Cosby, III at 85 (Sept. 23, 1985).
. On September 23, 1985, the district court withdrew the reference to this court of the consol-72 B.R. — 6 idated preference actions. See 28 U.S.C.A. § 157(d) (West Supp.1986).
. See Discovery Deposition of Thomas E. Du-Voisin at 56-57 (Aug. 14, 1985).
. See Discovery Deposition of Mark Miller at 105-106 (Aug. 13 and 14, 1985). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490465/ | LOREN S. DAHL, Chief Judge.
IT IS HEREBY ORDERED THAT the Memorandum of Opinion and Decision filed on May 8, 1984 and published in 39 B.R. 551 (E.D.Cal.1984) and the Judgment entered thereon on August 24, 1984 in the above-entitled matter are vacated and de-certified and the Complaint herein is dismissed with prejudice. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490467/ | MEMORANDUM DECISION AND ORDER RE: COMPENSATION
JON J. CHINEN, Bankruptcy Judge.
On January 10, 1987, two motions were filed with the Court. The first was an Application of the Law Offices of John A. Chanin (“Applicant”) for Compensation for Services Rendered and For Reimbursement of Costs and Expenses Incurred as Attorney for Debtor (“Application”) for the period from July 17, 1985 up to and including the closing of the estate. Applicant requests the following sums:
1. The sum of $6,708.86, including general excise tax, for services rendered up to and including January 10, 1987.
2. The sum of $210.00 for costs incurred.
3. The sum of $1000.00, including general excise tax and costs, for services to be performed from the filing of the Application until closing of the case.
The second motion was a Motion for Approval of Distribution of NAV, INC. Proceeds and Entry of Order Dismissing Case. In this motion, Debtor requested that the proceeds from NAV, INC. be distributed among the wage claimants, the taxing authorities and the Applicant for its fees and costs and, thereafter, that the case be dismissed.
On January 23, 1987, the United States of America (“United States”) filed its objection to Fee Application of the Law Office of John A. Chanin. The United States contends that Applicant should not be paid for services performed after the entry of the July 12, 1985 Order Re: Dismissal of Case. The United States argues that, had Applicant exercised proper care in performing its duties up to the entry of the July 12, 1985 order, none of the additional controversies would have arisen.
A hearing was held on January 30, 1987 on the Motion to Approve Distribution of proceeds, which included distribution of the compensation requested by Applicant. Present at the hearing were James Agena, Esq., representing Air Cargo Enterprises, Inc. (“Debtor”) and Applicant; Henry O’Neill, Esq., representing the United States, Howard Green, Esq., representing Virginia Farrell, and Wilfredo Tungal, Esq., representing the Department of Labor, State of Hawaii. Also present was Mr. William Klopp.
*291Following the hearing, the court approved certain distributions as set forth in the Order filed on March 5, 1987. However, the matter of Applicant’s request for compensation and reimbursement of costs was taken under advisement so that the Court may review the file and the transcript of the hearing held on May 12, 1986. The Court, having reviewed the file and said transcript, now renders this Memorandum Decision and Order.
FINDINGS OF FACT
1. On January 21, 1985, Debtor, through Applicant, its counsel, filed a Motion to'Dismiss Case. In its Memorandum in support of the Motion to Dismiss, Debtor represented that all of the known assets of Debtor had been converted, sold or liquidated, with the exception of NAV, INC. and that efforts to market NAV, INC. have been fruitless. Debtor, through its counsel, further suggested that:
2. The liquidated assets are to be distributed as follows: Vferd to Applicant, V3rd to the taxing authorities on a pro-rata basis and V3rd to valid post-petition wage claimants on a pro rata basis.
2. NAV, INC. is to be marketed by Applicant. The sale is to be consummated within 3 months of this order, or the property is to abandoned. If sold, the proceeds from NAV, INC. are to be distributed in the manner as above set-forth.
At the hearing on the Motion to Dismiss which was heard on February 15, 1985, a Stipulation To Dismiss Case was executed by Debtor, the Internal Revenue Service (“IRS”), State Department of Taxation and the State Department of Transportation. At the hearing, the City and County of Honolulu (“City & County”) orally objected to the Motion to Dismiss Case, then filed a written objection on February 21, 1985. After a review of the objection by the City & County, the Court allowed its claim for delinquent taxes to be paid on a pro-rata basis with the IRS and the State Department of Taxation, and approved the Dismissal of Case, on condition that NAV, INC. will be sold at auction by Applicant and the net proceeds distributed pursuant to the Order re: Dismissal of Case. And, on July 12, 1985, the Court filed an Order Re: Dismissal of Case.
Pursuant to the order dismissing the case, Applicant published a Notice to Bidders for the sale of NAV, INC. The bid was to be opened, read and awarded on August 16, 1985. However, because of allegation of improper conduct in the bidding process, the original bid was not confirmed. And, on January 16, 1986, the Court issued an Amended Order Concerning the Sale of NAV, INC. wherein the Estate Administrator was authorized to receive sealed bids.
Pursuant to the Amended Order of January 16, 1986, a Second Amended Notice to Bidders was published on February 10, 1986. Thereafter, on March 28, 1986, a hearing was held on the Motion to Confirm Sale filed by Debtor, at which hearing, present were James Agena, Esq. representing Debtor, and Carol Muranaka, Esq. representing the United States of America. Following the hearing, the Court confirmed the sale of NAV, INC., for $4,004.00, with the proceeds from the sale to be held in an interest bearing account, after deduction of the costs of the sale. An Order Confirming Sale of NAV, INC. was filed on April 3, 1986.
On April 21, 1986, Debtor filed a Motion for Instruction, requesting the Court for instructions on the distribution of $9,200.00 in the First Hawaiian Bank in the name of NAV, Inc., generated before the sale of NAV, Inc.
At the hearing held on May 2, 1986, several parties claimed that they were entitled to the $9,200.00. As a result, the Court denied the Motion for Instruction and directed counsel to file an adversary proceeding.
On May 6, 1986, the United States on behalf of the IRS filed a Motion to Vacate Order Confirming Sale of NAV, Inc., alleging that a former employee of NAV, Inc. had disclosed the existence of approximately $37,000.00 in cash and $20,000.00 in accounts receivable which were not known at the time of the hearing on the confirmation *292of the sale. The United States contended that the sale was the result of a mistake and that it was not the intent of the Court to confer a windfall to the purchaser.
A hearing was held on May 12 and 13, 1986, at which hearing, present were James Agena, Esq., representing Debtor, Henry O’Neill, Esq., representing the United States, and Charles Loomis, Esq. representing V. Farrell, the purchaser. At the hearing, a stipulation was entered among counsel present whereby the sale to Farrell was re-confirmed for $4,004.00. The stipulation provided, among others, that V. Farrell would relinquish all claims to the accounts receivable owed to NAV, INC. prior to August 9, 1986 and V. Farrell would also relinquish all claims to the cash which existed in the First Hawaiian Bank Savings Account.
On June 6, 1986, a Motion for Order to Show Cause was filed by the City & County against Debtor and its attorney for failure to make payments pursuant to the Order of Dismissal filed on July 12, 1985. At the hearing held on June 17, 1986, the Order to Show Cause was denied, for it was learned that Debtor’s counsel was awaiting the final claim of IRS for delinquent taxes before making the distribution pursuant to the July 12, 1985 order.
On January 10, 1987, the following motions and application were filed:
1. Motion for Order to Show Cause filed by Debtor against V. Farrell, the purchaser, for failure to turn over the sums in the bank account to Debtor and to execute releases.
2. Application of the Law Offices of John A. Chanin for Compensation for Services Rendered and for Reimbursement of Costs and Expenses.
3. Motion for Approval of Distribution of NAV, INC. Proceeds and Entry of Order Dismissing Case.
On January 23, 1987, an Objection to Fee Application was filed by the United States on behalf of the IRS, wherein it was contended that much of the controversies after July 12, 1985 would not have occurred, if Applicant had properly performed its duties.
At the hearing held on January 28, 1987 on the Order to Show Cause, the Court found that Debtor had performed its obligations under the stipulation of June 5, 1986 regarding the sale of NAV, INC. and directed V. Farrell to perform her obligations within one week from January 28, 1987.
At the hearing held on January 30, 1987 on the Motion for Approval of Distribution of NAV, INC. Proceeds and Entry of Order Dismissing Case, the Court approved the settlement proposed by the parties present, taking under advisement the fee application of the Law Office of John A. Chanin.
This Memorandum Decision and Order deals with the fee application.
CONCLUSIONS OF LAW
The Court has carefully reviewed the files in the case, including the transcript of the hearing held on July 12, 1986, at which hearing Gladys Benham, the former administrative manager of NAV, INC., had testified. At the hearing, Mrs. Benham testified that Applicant was given information concerning NAV, INC.’s checking account, but that Applicant was not aware of the amounts in the savings account. Mrs. Ben-ham further testified that she did not disclose to anyone all of the assets in NAV, INC. because no one had asked her for such information.
The Court finds that, prior to marketing the assets of NAV, INC., Applicant should have thoroughly investigated all of the assets in NAV, INC. to determine its net value. The Court agrees with the United States that, had Applicant exercised due care in performing its duties prior to the Order of July 12, 1985, much of the controversies that followed would not have occurred.
It was incumbent upon Applicant to thoroughly understand the assets of NAV, INC. which were being sold at public auction. It is no excuse to say that an employee did not inform Applicant of the amount in the bank account or the amount of ac*293counts receivable. It is also incumbent upon Applicant to learn of all the liabilities of NAV, INC., including the delinquent taxes. Consequently, the Court denies the fees for all services rendered after July 12, 1985 in connection with any new sale of NAV, INC.
In addition, the Court denies all services rendered by Applicant in connection with the IRS’s efforts to set aside the sale of NAV, INC. because of failure on the part of Applicant to learn of the existence of $37,000.00 in cash and $20,000.00 in accounts receivable. The Court also denies all fees in connection with the Motion for Instructions filed by Debtor.
The Court allows compensation for services on the following matters:
1. Wage claims
2. Claims of different tax authorities.
3. Trade name
4. Form of Bill of Sale
5. Lien problems
6. Release by Farrell
7. OSC filed by the City & County
8. Closing sale with V. Farrell (OSC)
9. Collection of accounts receivable
The time allowed per attorney is as follows:
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Debtor is authorized to pay Applicant $3,020.16 for services rendered, plus reimbursement of expenses in the sum of $210.00.
The sum of $1000.00 requested by Applicant for “services to be performed” until closing of the case is too vague to determine whether said sum is reasonable. When Applicant is able to fully explain the services to be rendered and the time necessary to perform the services until the closing of the case, it may file an Application for final compensation.
Meanwhile, all sums not disbursed are to be retained by Applicant, as counsel for Debtor, in an interest bearing account, until further orders of this Court.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490469/ | ORDER VACATING ORDER COMPELLING PRODUCTION OF DOCUMENTS DATED APRIL 1, 1987, AND GRANTING IN PART THE MOTION TO COMPEL THE PRODUCTION OF DOCUMENTS AND THE CROSS-MOTION FOR PROTECTIVE ORDER
GEORGE L. PROCTOR, Bankruptcy Judge.
Ón March 11, 1987, the Court heard the motion to compel the City of New York to produce documents filed by Louis Lowin, Post-Confirmation Administrator, and the cross-motion of the City of New York for protection from same. After hearing argument of counsel, the Court requested the parties to submit proposed orders and letter memorandum of law.
On April 1, 1987, the Court inadvertently entered the proposed order submitted by Louis Lowin.
Upon consideration of argument and memoranda, the Court makes the following Findings of Fact and Conclusions of Law:
A. Findings of Fact
1. Kadira Elmarsafi, employee of the City of New York, prepared comments as part of an audit of The Securities Group for New York City unincorporated business tax. The comments were prepared prior to the time the City of New York had actual knowledge of this bankruptcy proceeding but within a time frame that the information could be pertinent to the proof of claim of the City of New York.
2. After learning of this bankruptcy proceeding, the City of New York filed a proof of claim which has been objected to by Louis Lowin, trustee, now Post-Confirmation Administrator.
3. Subsequent to the objection to the proof of claim, the Bankruptcy and Assignments Unit, Department of Finance, City of New York, through its agents, Edward Vokes and Abraham Joseph conducted an audit and prepared comments.
4. The comments authored by Kadira Elmarsafi were prepared in the ordinary course of business while the comments authored by Edward Vokes and Abraham Joseph were prepared in anticipation of litigation.
5. The mental impressions, conclusions, and opinions contained in the comments authored by Edward Vokes and Abraham Joseph directly relate to the ongoing litigation.
6. Louis Lowin, Post-Confirmation Administrator, has not shown that he has attempted to obtain the information through less onerous means than production of litigation-related documents by the City of New York.
B. Conclusions of Law
1. The filing of an objection to a proof of claim creates a contested matter to which rules governing adversary proceedings are applicable. B.R. 9014.
2. Rule 26, F.R.Civ.P., and Bankruptcy Rule 7026 dictate the scope and limits of discovery in a contested matter.
3. Material prepared in the ordinary course of business is discoverable if “[t]he information sought appears reasonably calculated to lead to the discovery of admissible evidence.” Rule 26(b)(1), F.R.Civ.P. Cf. Mallinckrodt Chemical Works v. Goldman, Sacks & Co., 58 F.R.D. 348, 353 (S.D.N.Y. 1973).
4. Discovery of documents and other tangible items prepared in “anticipation of trial” however is conditioned upon a showing by the party seeking the discovery that the party “... has substantial need of the materials in the preparation of his case and that he is unable without undue hardship to obtain the substantial equivalent of the materials by other means.” Rule 26(b)(3), F.R.Civ.P.
5. If less onerous means of discovery, e.g. depositions, are available then those avenues should be explored first be*380fore a party is compelled to produce documents pursuant to Rule 26(b)(3), F.R. Civ.P. See Guilford National Bank of Greensboro v. Southern Railway Co., 297 F.2d 921, 927, n. 5 (4th Cir.1982); Detroit Screwmatic Co. v. U.S., 49 F.R.D. 77 (S.D. N.Y. 1970); and Scuderi v. Boston Insurance Co., 34 F.R.D. 463, 467-68 (D.C.Del. 1964).
Accordingly, it is ORDERED:
1. The “Order on Post-Confirmation Administrator’s Motion to Compel Production of Documents and the City of New York’s Cross-Motion for a Protective Order” dated April 1, 1987, is vacated.
2. The motion to compel production of documents is granted as to the comments of Kadira Elmarsafi. The City of New York is directed to produce the comments of Kadira Elmarsafi within thirty (30) days from the date of this Order.
3. The cross-motion for a protective order by the City of New York is granted as to the comments prepared by Edward Yokes and Abraham Joseph subsequent to the filing of the objection to proof of claim. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490470/ | FINDINGS OF FACT, CONCLUSIONS OF LAW AND MEMORANDUM OPINION
ALEXANDER L. PASKAY, Chief Judge.
THIS IS a Chapter 13 case, and the matter under consideration is a Complaint filed *509by Curley Williams and Mary H. Williams, his wife, (Debtors), against the State of Florida, Department of Health and Rehabilitative Services (HRS), and Nyjola Gry-bauskas, an attorney who is an independent contractor for HRS (Ms. Grybauskas). The claim for relief of the Debtors is based on the contention that Ms. Grybauskas acting on behalf of HRS willfully violated the automatic stay imposed by § 362 of the Bankruptcy Code and, therefore, by virtue of § 362(h) they are entitled to recover the actual damages including costs and attorney fees from the Defendants. The relevant facts as they appear from the record established at the final evidentiary hearing are as follows:
On April 16, 1986, the Debtors filed a Petition for Relief under Chapter 13 of the Bankruptcy Code. On April 28, 1986, the Circuit Court for the Sixth Judicial Circuit, Pinellas County, Florida, issued an Order of Arrest and Confinement for Mr. Williams for his failure to make child support payments due to HRS. Pursuant to this Order, on May 8,1986, Curley Williams was arrested and jailed. The arrest order, which was in the nature of a contempt citation, provided that Curley Williams would be released from jail if he purged himself by the payment of $2,000.00.
After Mr. Williams’ arrest, Mrs. Williams, his wife, met with Ms. Grybaus-kas, the attorney who handled Williams’ case on behalf of the HRS, and requested that HRS reduce the purge amount in order to obtain a release of her husband from confinement. Mrs. Williams alleges that at that meeting, which took place either May 13 or May 14, she told Ms. Grybauskas of the pending bankruptcy. On the other hand, Ms. Grybauskas claims that Mary Williams did not inform her of the pending bankruptcy and that she did not learn that the Debtors were in bankruptcy until she was ' served with this Complaint in July 1986. In any event, Ms. Grybauskas agreed to reduce the purge to $1,000.00 and prepared an appropriate order for the signature of the circuit judge. This order was signed on May 15, and Ms. Grybaus-kas delivered the order to the clerk’s office for processing on May 15.
When Ms. Williams learned that the purge had been reduced, she began her efforts to collect the $1,000.00 necessary to release her husband from jail. She contacted her husband’s employer, who agreed to give her $500.00 in lieu of two weeks vacation due her husband, and to loan her an additional $500.00. Ms. Williams paid the $1,000.00 purge, and on May 22 Mr. Williams was released from jail.
The Debtors allege that the Order of Arrest and Confinement was issued on Ms. Grybauskas’ request and that Ms. Gry-bauskas’ actions in obtaining the Order of Arrest and Confinement was a willful violation of the automatic stay imposed by § 362 of the Bankruptcy Code. Their claim against HRS is founded on the allegation that Ms. Grybauskas is an agent of HRS, and as Ms. Grybauskas’ principal, HRS is liable for her conduct. The Debtors assert that pursuant to § 362(h) of the Bankruptcy Code, the Debtors are entitled to recover damages, including costs and attorneys fees, and punitive damages. In order to impose liability pursuant to § 362(h), the Debtors must first establish that the automatic stay of § 362 is applicable to Ms. Grybauskas’ conduct.
Section 362(b)(2) provides that:
The filing of a Petition under section 301, 302, or 303 of this title does not operate as a stay—
(2) under subsection (a) of this sfection, of the collection of alimony, maintenance, or support from property that is not property of the estate.
The Debtors concede that Ms. Grybaus-kas’ act was an act to collect support, but urge that she nonetheless violated the stay by attempting to collect the support from property of the estate. While it is true that in a Chapter 13 case the Debtor’s future earnings are property of the estate, § 1306(a)(2), the fact that the Debtors chose to use future earnings to purge the contempt citation does not mean that Ms. Grybauskas attempted to collect property of the estate. The Order of Arrest and Confinement was in the nature of a contempt citation for nonpayment of child sup*510port obligation, and it was immaterial to Ms. Grybauskas or to HRS where Mr. Williams got the money to purge the contempt. In fact, $500.00 of the money was borrowed and was not property of the estate. Based on the foregoing, this Court is satisfied that § 362 does not apply to the conduct of Ms. Grybauskas, and thus she cannot be found to have acted in violation of § 362.
Even if § 362 did apply, an assumption not supported by this record, the Debtors could not succeed in this action for several reasons. First of all, the Debtors did not establish that Ms. Grybauskas obtained the Order of Arrest and Confinement, which is the act complained of and an essential element in asserting a willful violation of the automatic stay. This element inferred from the evidence that Ms. Gry-bauskas was the person who was able to reduce the purge amount of the order, but at no time did the Debtors establish that Ms. Grybauskas’ actions, in fact, resulted in the issuance of the Order of Arrest and Confinement. Second of all, the Debtors did not establish with clear and convincing evidence that Ms. Grybauskas had notice of the pendency of the bankruptcy case. Neither HRS nor Ms. Grybauskas received official notice from this Court, and Ms. Gry-bauskas disputes that Mrs. Williams informed her of the pendency of the case. At best, the evidence as to notice is at equilibrium, and thus the Debtors did not sustain their burden of proof on this point. Without notice of the pendency of the bankruptcy case, Ms. Grybauskas’ actions cannot be characterized as willful. Since the only theory of liability against HRS is as principal of Ms. Grybauskas, and since Ms. Grybauskas has been found not liable, there is no basis to impose liability on HRS.
Inasmuch as the liability sought to be imposed on HRS is only based on its role as a principal allegedly liable for the violations of its agent, Ms. Grybauskas, and since the Debtors failed to establish a willful violation against Ms. Grybauskas, the Complaint shall be dismissed with prejudice against both Defendants.
A separate final judgment shall be entered in accordance with the foregoing. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490472/ | MEMORANDUM OPINION
L. CHANDLER WATSON, Jr., Bankruptcy Judge.
The above-styled adversary proceeding is before the Court on motions for summary judgment filed by each of the plaintiffs and on a motion of the defendant for release of liens and conditionally, for interpleader. The dispute between the parties is based upon the sum of $39,330.48, which is presently owed by the defendant for its purchase of pipe and materials, as to which sum each of the plaintiffs claims to be entitled. All of the facts relevant to a resolution of this dispute have either been stipulated by the parties or are apparent from the file maintained by the clerk of the court in this proceeding.
Findings of Fact—
Hunter Engineered Plastics, Inc. (Hunter), the debtor in the above-styled case and one of the plaintiffs herein, purchased certain pipe and materials from Winnebago Drainage Systems, Inc. (Winnebago), through two separate transactions, for a total purchase price of $34,049.20. The two invoices reflecting the transactions were dated October 31, 1985, and November 12, 1985, respectively, and the terms of each were “Net Due 30 days”.
Hunter, in turn, sold the pipe and materials to United Pipe Construction Company, Inc. (United), to be used in a construction project at the Jim Beam Distillery in Bullit County, Kentucky, for which United was the general contractor. The sale of the *576pipe and materials by Hunter to United was for a total purchase price of $39,-330.48. The invoices reflecting the transactions were dated November 8, 1985, and November 22, 1985; the terms of each invoice were “Net 30.”
Winnebago shipped the pipe and materials directly to the Jim Beam project site in Kentucky pursuant, apparently, to Hunter’s instructions. On December 26, 1985, United issued a check payable to Hunter in the amount of $39,330.48, representing payment in full for the pipe and materials which it had purchased from Hunter.
Prior to receiving the proceeds of the check from United and prior to paying Winnebago pursuant to the invoices of October 31, 1985, and November 12, 1985, Hunter filed a petition for reorganization under title 11, United States Code, chapter 11. In the schedules accompanying its petition, Hunter listed Winnebago as the holder of an unsecured claim in the amount of $34,-049.20. Apparently in response to Hunter’s chapter 11 petition, United placed a stop payment order on the check issued to Hunter.
Hunter, as debtor-in-possession, initiated the present adversary proceeding by filing a complaint against United, alleging that the sum due, evidenced by the check, constitutes property of the bankruptcy estate and requesting that United be ordered to deliver the sum to Hunter, pursuant to 11 U.S.C. § 542(a) and (b).1
In its answer to Hunter’s complaint, United alleged, inter alia, that Hunter’s failure to pay Winnebago for the pipe and materials which Hunter had sold to United had resulted in the filing by Winnebago of a lien against the real property upon which the Jim Beam project is located, that as a result of said lien, United may be subjected to having to pay twice for the pipe and materials purchased from Hunter, and that applicable state law imposes a trust on the proceeds of the check, with Winnebago being a beneficiary of such trust to the extent of $34,049.20 and with Hunter’s bankruptcy estate being a beneficiary thereof only to the extent of $5,281.28.
On the motion of United, Winnebago was joined as a party plaintiff pursuant to Bankruptcy Rule 7019 and by order of this Court entered on September 16, 1986. Winnebago filed a pleading setting forth a claim against United and a cross-claim against Hunter, requesting that United be required to pay to Winnebago the sum of $34,049.20, and that the Court enter a declaratory judgment against Hunter to the effect that, to the extent of $34,049.20, the account owed by United is not property of the debtor’s estate.
United subsequently filed a pleading styled “Motion for Release of Liens and Conditionally, for Interpleader.” In its motion, United requested that an order be entered requiring that any liens arising from the sale of the pipe attach only to the funds amounting to $39,330.48, which it contends are held by it in a Kentucky statutory trust, and that, upon entry of such an order, United be permitted to interplead these funds, be discharged from further liability, and be dismissed with prejudice from this adversary proceeding.
At a continued pre-trial conference on November 25, 1986, the parties agreed that the material facts are undisputed and that the matter should be submitted to the Court on motions for summary judgment. Each of the plaintiffs subsequently filed such a motion. On January 14, 1987, the parties filed a written stipulation waiving a hearing on the pending motions.
Conclusions by the Court—
Section 541(a)(1) of title 11, United States Code2 provides that the commencement of a case under title 11 creates an estate which is composed, in part, of “all legal or equitable interests of the debtor in property as of the commencement of the case”, regardless of the location of the property *577or who is in possession thereof. However, property to which the debtor holds bare legal title, as opposed to an equitable interest, becomes property of the estate only to the extent of such title.3
In the present case, it is the contention of both United and Winnebago that the account debt owed by United constitutes trust funds in which Hunter’s equitable interest extends only to the sum of $5,281.28. This sum represents the markup by Hunter in the sale of the pipe to United. In support of this position, United and Winnebago cite Ky.Rev.Stat. § 376.-070(1) (1978), which provides, in pertinent part, as follows:
Any contractor ... who builds, repairs or improves the property of another under such circumstances that a mechanic’s or materialmen’s lien may be imposed on the property shall, from the proceeds of any payment received from the owner, pay in full all persons who have furnished material or performed labor on the property.
According to United and Winnebago, by virtue of § 376.070, any funds paid to a contractor by the owner of the property are held in trust by the contractor for the benefit of persons who furnished the material or performed the labor in connection with the project. In further support of this proposition, Winnebago cites Ky.Rev.Stat. § 376.990 (1978), which imposes criminal penalties for violations of § 376.070.
Clearly, the express language of § 376.-070 imposes upon the contractor, under certain circumstances, a duty to pay certain persons from funds received from the property owner. Blanton v. Commonwealth, 562 S.W.2d 90 (Ky.Ct.App.1978). It is equally clear, however, that the statute does not expressly provide that such funds are to be held in trust by the contractor. In re Dave Thomas Co., Inc., 51 B.R. 66 at 69 (Bankr.W.D.Ky.1985). Winnebago concedes the lack of direct statutory support for the trust-fund theory, but argues that a trust should be implied on the basis of §§ 376.070 and 376.990, caselaw interpreting those statutes and statutes of other states that are similar thereto, and equitable principles.
In considering whether or not statutes similar to those at issue in the present case create a trust fund in favor of unpaid laborers and materialmen, courts have reached varying conclusions. See, Cherokee Carpet Mills, Inc. v. Worthen Bank and Trust Co., 262 Ark. 776, 561 S.W.2d 310 (1978), (lien statute imposing criminal penalties upon contractor who fails to discharge liens of laborers and materialmen provides unpaid materialmen with neither a property interest nor a trust-fund interest in funds paid by the owner to the contractor); But see, 78 A.L.R.3d 563, 584 (1977), (citing cases from courts of states which have held that such statutes impose a trust in favor of unpaid laborers and material-men). Apparently, neither the Kentucky Supreme Court nor any other courts of that state have addressed the question of whether § 376.070 creates a trust in favor of laborers and materialmen, as no such case has been cited to or discovered by the Court.
The United States Bankruptcy Court for the Western District of Kentucky has, on several occasions, been faced with the general issue as to whether, under Kentucky law, a contractor or other person who receives funds from the owner holds such funds in trust for the benefit of unpaid laborers and materialmen. In In re D & B Electric, Inc., 4 B.R. 263 (Bankr.W.D.Ky. 1980), prior to the filing of its petition in bankruptcy, the debtor, as electrical subcontractor on two construction contracts, was supplied lighting materials for the projects by Rueff Lighting Company. Although the debtor fell into arrears in its accounts with Rueff, Rueff failed to perfect a lien against the construction sites. Subsequent to the expiration of the statutory period for the filing of a material-men’s lien, Rueff entered into an agreement with the general contractor whereby the latter delivered to Rueff certain checks which were payable jointly to Rueff and D & B and which had been endorsed by D & B; in consideration therefor, Rueff agreed *578to waive its rights to assert a lien. Upon the filing of the debtor’s petition in bankruptcy, the checks remained in Rueff’s possession and had not been endorsed by Rueff. The trustee claimed superior right and title to the proceeds of the checks on the basis of § 70(c) of the Bankruptcy Act. Rueff argued that it had priority to the proceeds by virtue of its waiver of its statutory lien rights. Id. at 265. Bankruptcy Judge Merritt S. Dietz, Jr. found that while Rueff’s alleged “waiver” of its lien rights, which occurred after its statutory right to assert a lien had expired, did not entitle it to a legal or an equitable lien, its status as an unpaid materialman resulted in “the creation of a trust for its benefit of funds in the hands of the general contractors, [which funds] thereby bypass[ed] D & B’s estate entirely.” Id. at 268.
In D & B Electric, the court based its decision on two Sixth Circuit decisions in which the Michigan Builder’s Trust Fund Act, Mich.Comp.Laws Ann. § 570.151 (1967) was interpreted. The Michigan statute, however, expressly imposes a trust, for the benefit of unpaid materialmen, upon funds paid to a contractor by the owner.4 The court in D & B Electric noted the lack of Kentucky common law and direct statutory authority in support of the trustfund theory, but found that a trust should nevertheless be implied from the provisions of Ky.Rev.Stat. §§ 376.070 and 376.990.
On two subsequent occasions, the United States Bankruptcy Court for the Western District of Kentucky held, in effect, that
funds paid to a general contractor by the owner of a construction project are not imposed with a trust for the benefit of unpaid materialmen. In re Dave Thomas Co., Inc., 51 B.R. 66 (Bankr.W.D.Ky.1985); In re Allgeier & Dyer, Inc., 18 B.R. 82, 8 Bankr.Ct.Dec. 1006 (Bankr.W.D.Ky.1982).5 In each of these cases, the Court noted that the decision in D & B Electric was based on the Sixth Circuit’s interpretation of a Michigan statute which expressly provides for the imposition of such a trust, and found D & B Electric to be distinguishable on its facts. In re Dave Thomas, 51 B.R. at 69; In re Allgeier & Dyer, Inc., 18 B.R. at 85. In In re Allgeier & Dyer, Inc., 18 B.R. 82, 8 Bankr.Ct.Dec. 1006 (Bankr.W.D.Ky.1982), the debtor had been engaged, prior to the filing of its bankruptcy petition, as the general contractor of a construction project for the City of Bowling Green, Kentucky, and General Motors Assembly Division. Subsequent to the filing of the debtor’s petition, the trustee filed a complaint requesting the court to determine the rights of certain parties to funds which the court had directed General Motors Assembly Division to transfer to the trustee; the funds at issue represented amounts which the debtor had earned pursuant to the contract prior to the filing of its bankruptcy petition. A large number of unpaid materialmen and subcontractors who had filed mechanic’s liens claimed to be entitled to the funds. The Court held that the applicable Kentucky mechanic's lien statutes6 do not create a trust fund for the benefit of unpaid materialmen and sub*579contractors and that the funds at issue were thus property of the bankruptcy estate.7 Id. at 85.
The court in In re Dave Thomas Co., Inc., 51 B.R. 66 (Bankr.W.D.Ky.1985), was presented with the question as to whether certain accounts receivable owing to the debtor pursuant to a construction contract constituted property of the estate so that a federal tax lien could have attached thereto. The plaintiff, which had supplied materials to the debtor for use in the construction project, argued that, based on D & B Electric, Inc., 4 B.R. 263 (Bankr.W.D.Ky.1980), the accounts receivable were not a part of the bankruptcy estate. Noting that § 376.070 does not expressly create a trust fund for materialmen, the court found the funds at issue to be property of the estate. In re Dave Thomas Co., Inc., 51 B.R. at 69 (Bankr.W.D.Ky.1985).
The question was again considered by Judge Dietz in In re Weedman, 65 B.R. 288 (Bankr.W.D.Ky.1985). In Weedman, the court went one step beyond its decision in D & B Electric, and held that § 376.070 imposes an express trust for the benefit of unpaid materialmen upon funds received by a contractor from the property owner. Id. at 291.
Thus, the judges of the United States Bankruptcy Court for the Western Division of Kentucky disagree as to whether § 376.070 and the lien statutes relative thereto impose a trust upon funds paid to a contractor by the owner of the property. This Court notes that the creation or modification of state law is a matter for the state legislature; in making a determination of questions involving state law, a federal court must apply existing state law. United Parcel Service v. Weben Industries, Inc., 794 F.2d 1005 (5th Cir.1986). When a federal court is presented with the task of interpreting a state statute which the state courts have not addressed, the court must attempt to project the result which the highest court of the state would reach if faced with the question.
In the present case, it is unnecessary for this Court to predict whether the Kentucky Supreme Court would find that § 376.070 imposes a trust fund. Rather, the Court finds that, under existing Kentucky law, Winnebago does not fall within the class of persons to which § 376.070 applies and is thus not entitled to the funds at issue herein.
In support of its motion for summary judgment, the debtor argues that, based on the undisputed facts, Winnebago is not entitled to a materialmen’s lien and, therefore, cannot claim a right to receive payment under § 376.070. Assuming for the sake of argument only, that Winnebago may be properly classified as a material-man in this case, the question becomes whether the duty imposed on a contractor by § 376.070 to pay a particular material-man is conditioned upon that materialman’s having a right, under Kentucky law, to assert a lien against the property. On the basis of Kentucky statutory law as interpreted by the courts of that state, the present Court concludes that the answer to that question is in the affirmative. The Court further concludes that Winnebago is not entitled to a materialmen’s lien on the Jim Beam project site.
Although subsection (1) of § 376.070 obligates a contractor, under circumstances in which a lien may be imposed, to pay all materialmen and laborers from funds received from the owner, by its own terms, the statute is inapplicable, and the duty of the contractor is eliminated, in situations in which the persons entitled to receive such payment have waived their rights to file liens against the property. Ky.Rev.Stat. § 376.070 (3) (1978). The limitation contained in subsection (3) of the statute supports the conclusion that any right which the statute may confer upon laborers and materialmen is conditioned upon such persons’ having a right to assert a lien against the property.
Additionally, the Court of Appeals of Kentucky has stated that § 376.070 requires a contractor to pay a materialman if the situation is such that a lien may be *580imposed upon the property being improved. Henry A. Petter Supply Co. v. Hal Perry Construction Co., 563 S.W.2d 749 (Ct. of Ap.Ky.1978). That same court has also implied that one purpose of § 376.070 is to prevent the owner of the property from being forced to pay twice for improvements to the property due to the assertion of mechanic’s liens. Blanton v. Commonwealth, 562 S.W.2d 90 (Ct. of Ap. Ky.1978). Thus, these statements by the Court of Appeals of Kentucky suggest that the right to assert a lien is a prerequisite to the right of a materialman to require payment from the contractor under § 376.-070(1).
Although Winnebago has cited to the Court no statute entitling it to the lien which it is alleged to have asserted against the Jim Beam project site, Ky.Rev.Stat. § 376.0108 would appear to be the statutory basis of any materialmen’s liens which would arise from the project. Subsection (1) of that statute provides, in pertinent part, that “any person who ... furnishes material for the improvement in any manner of real property ... by contract with or by the written consent of the owner, contractor, subcontractor, architect, or authorized agent, shall have a lien thereon and upon the land upon which the improvements were made.”
The Court has been presented with no evidence that Winnebago shipped the pipe and materials to the construction site under a contract with, or with the written consent of, any person designated in § 376.010. To the contrary, the facts, as stipulated by the parties, are that Winnebago simply sold the pipe and materials to Hunter, which in turn, sold them to United. Winnebago’s contract was with Hunter. Hunter cannot be characterized as a contractor or a subcontractor for purposes of the lien statute, as Hunter's sole connection with the project was in the selling of goods to the contractor. See, Woodson Bend, Inc. v. Masters’ Supply, Inc., 571 S.W.2d 95 at 100 (Ct. of Ap.Ky.1978). Hunter can only be classified as a materialman, furnishing materials to the contractor. The language of § 376.010 is clear as to the class of persons who acquire a lien upon the improvements and the property upon which such improvements are made; Winnebago does not fall within that class. As pointed out by the plaintiff, in 1900, the highest court of the state of Kentucky at that time held that the lien statute at issue herein does not confer lien rights upon one who simply furnishes materials to a material-man. Hightower v. Bailey, 108 Ky. 198, 56 S.W. 147 (Ct. of Ap.Ky.1900).
Based on the foregoing, the Court concludes that the “lien” asserted by Winnebago in connection with the sale of pipe by Hunter to United is a fiction under the law of Kentucky. It was Hunter who was a “materialman” — not Winnebago. As a result, United’s motion for release of liens and conditionally for interpleader, is due to be granted. Having determined that Winnebago has no equitable interest, in the nature of a trust, in the funds at issue herein, the Court concludes that the motion of Winnebago for summary judgment is due to be denied and that the debtor’s motion for summary judgment is due to be granted.
An appropriate order will be entered.
. Subsections (a) and (b) of 11 U.S.C. § 542 require that an entity in possession of certain assets of the estate deliver such assets to the trustee. See also, 11 U.S.C. §§ 1101(1) and 1107(a).
. 11 U.S.C. § 542(a)(1) (1979).
. 11 U.S.C. § 542(d) (1979).
. The Michigan statute provides, in pertinent part, as follows:
In the building construction industry, the building contract fund paid by any person to a contractor or ... to a subcontractor, shall be considered by this act to be a trust fund, for the benefit of the person in making the payment to the contractors, laborers, subcontractors, or materialmen, and a contractor ... shall be considered the trustee of all funds so paid to him for building construction purposes.
Mich.Comp.Laws Ann. § 570.151 (1967).
. In re Dave Thomas Co., Inc. and In re Allgeier & Dyer, Inc. were decided by Bankruptcy Judges William J. Brown and Stewart E. Bland, respectively.
.Ky.Rev.Stat. §§ 376.210 and 376.010 (1978). § 376.010 provides, in pertinent part, as follows:
"(1) Any person who performs labor or furnishes materials for the erection, altering or repairing of a house or other structure ... or for the improvement in any manner of real property ... by contract with, or by the written consent of, the owner, contractor, subcontractor, architect or authorized agent, shall have a lien thereon, and upon the land upon which the improvements were made ... to secure the amount thereof.”
In the present case, any lien to which Winnebago may be entitled would arise from § 376.010.
. The court in In re Allgeier & Dyer, Inc. made no reference to Ky.Rev.Stat. § 376.070.
. See note 6, supra. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490473/ | MEMORANDUM OPINION
GEORGE L. PROCTOR, Bankruptcy Judge.
This cause came before the Court on the complaint of First Federal Savings and Loan Association of Florida (“First Federal”) seeking a declaratory judgment that it had a perfected interest in rent proceeds collected pre and post-petition by AAA Properties of Polk, Inc. (“AAA”). Each of the defendants assert an interest in those proceeds.
Upon consideration'of the evidence, argument of counsel and post-trial memoranda, the Court makes the following findings of fact and conclusions of law.
A. Findings of Fact
1. Debtor, Johnny Parham (“Parham”) owned several parcels of residential real *605estate encumbered by mortgages held by First Federal, Florida Federal Savings and Loan Association (“Florida Federal”), and Richard C. Rodgers (“Rodgers”), as trustee for the Rodgers Reiner & Boyer Pension Trust & Fund. Each of the parcels in question were rental properties and assignment of rents clauses were contained within the mortgages held by First Federal and Florida Federal. Rodgers did not hold a recorded assignment of rent clause but obtained such by a letter from Parham pre-petition.
2. All of the parcels were encumbered by a mortgage held by First Federal. Par-ham defaulted on the underlying promissory notes and First Federal commenced a state court foreclosure proceeding on August 7, 1984. AAA was appointed state court receiver on September 28, 1984, as to all of the parcels except the three parcels on Austin Street. These were excluded because Rodgers was currently in possession, collecting rents and administering the proceeds with the consent of Parham.
3. On January 28, 1985, Parham filed a voluntary petition under 11 U.S.C. Chapter 11. As of that date, AAA had $22,439.92 on hand.
4. During the first two months in Chapter 11, Florida Federal and Rodgers filed motions for relief from the automatic stay in order to foreclose and additionally First Federal filed a motion to prohibit use of cash collateral. Parham, as debtor-in-possession, entered stipulations with each party resulting in Orders of this Court resolving the underlying motion. Each stipulation was virtually identical and provided that the receivers would be discharged and AAA would be rehired by debtor-in-possession to manage the properties and make certain disbursements. The filing of the motion for relief from the automatic stay was the first action taken by Florida Federal to enforce its mortgage terms and right to rents clause.
5. On May 2, 1986, the Chapter 11 proceeding was converted to Chapter 7 and Scott W. Putney was appointed trustee.
6. Between the dates of filing and conversion, AAA collected $109,000 and disbursed all but $15,891.45.
7. As of February 28, 1987, AAA had $58,895.33 on hand. This amount is exclusive of 10 percent of total proceeds collected which AAA claims as its fee and has been placing in escrow subject to approval of this Court. A hearing on the Application for Fees filed by AAA is scheduled for June 24, 1987, at 3:00 p.m.
8. No monies were distributed to the mortgagees during the Chapter 7 proceeding. Of the amount collected, Rodgers claims the net proceeds attributable to the three Austin Street properties, Florida Federal claims $983.37 and First Federal claims the remaining monies. These claims are evidenced by a Stipulation entered into by the parties and filed with the Court on April 10, 1987.
9. Trustee, Scott W. Putney, asserts that 11 U.S.C. §§ 544(a) and 545 afford him an interest in the rent proceeds collected during the Chapter 7 proceeding superior to that of First Federal, Florida Federal, and Rodgers.
B. Conclusions of Law
1. At the time of filing a petition under Title 11, an estate is created which consists of all property to which debtor holds legal or equitable title. 11 U.S.C. § 541(a). If this property is subject to a valid, pre-existing mortgage or other lien under state law, only the equity in the property comes into the estate. See 11 U.S.C. § 541 et seq; see also Butner v. U.S., 440 U.S. 48, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979).
2. Under Florida law, a mortgage merely creates a lien against the land with the title and right of possession remaining in the mortgagor/owner. Carolina Portland Cement Co. v. Baumgartner, 99 Fla. 987, 128 So. 241, 246 (1930). A mortgagee becomes entitled to rents pledged in a mortgage when the mortgagee takes possession of the property either by the consent of the owner or through the appointment of a receiver in a foreclosure proceeding. White v. Anthony Inv. Co., 119 Fla. *606108, 160 So. 881, 882 (1935). See also Carolina Portland Cement, supra; Bomstein v. Somerson, 341 So.2d 1043, 1048 (Fla. 2d DCA 1977).
3. If state law requires a mortgagee to take affirmative action in order to perfect its right to rents and profits, the bankruptcy court cannot change the rights between parties by affording a mortgagee an automatic right to rents and profits upon the filing of a petition in bankruptcy. Butner, supra. The bankruptcy court “... should take whatever steps are necessary to ensure that the mortgagee is afforded in federal bankruptcy court the same protection he would have under state law if no bankruptcy had ensued.” Id. at 56, 99 S.Ct. at 918.
4. First Federal perfected its interest in rents on September 28, 1984, by having a receiver appointed in the state court foreclosure action. Rodgers also perfected his interest in the rents attributable to the three Austin Street properties by going into actual possession of the properties with the mortgagors’ consent. Since both of these creditors had a perfected interest in rents as of the date the petition was filed, their rights to the rental income were established vis-a-vis other creditors. This bankruptcy proceeding cannot be used to divert those monies to other creditors who do not have an interest or a perfected interest in the rents under Florida law. See Butner, supra at 56, 99 S.Ct. at 918; In re Casbeer, 793 F.2d 1436, 1442-43 (5th Cir. 1986); and In re Gaslight Village, Inc., 6 B.R. 871 (Bkrtcy, D.Conn.1980). See also 11 U.S.C. § 522(b).
5. The perfected interest in rents held by First Federal and Rodgers extends to the net rental income collected after the filing of the petition in both the Chapter 11 and Chapter 7 proceedings. See 11 U.S.C. § 552(b); cf In re Casbeer, supra.
6. Since both First Federal and Rodgers held a perfected, enforceable security interest in rents as of the commencement of this case, their security interests cannot be avoided under either 11 U.S.C. § 544 or § 545 for the benefit of general, unsecured creditors. See 11 U.S.C. §§ 544 and 545.
In accordance with the above findings of fact and conclusions of law, a separate final judgment for declaratory relief will be entered. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490474/ | *646ORDER AUTHORIZING IRS TO DIRECT ALLOCATION OF PAYMENTS
WALTER J. KRASNIEWSKI, Bankruptcy Judge.
This matter is before the court upon the proposed findings of facts and conclusions of law and response thereto filed after a pretrial conference was held as the result of an order of the United States District Court reversing an order of this court and remanding this cause for further consideration. Upon review of this cause, the court finds that the Internal Revenue Service should be authorized to allocate the manner in which its tax lien shall be paid.
On December 29, 1983, Debtor filed a voluntary petition under chapter 11 of Title 11, listing the Internal Revenue Service (IRS) on Schedule A-l as a creditor having priority. Debtor listed IRS’ claim as $7,000. IRS subsequently filed a proof of claim on February 17, 1984 for the amount of $7,730.11 and on September 13, 1984 for the amount of $856.13. Although Debtor had filed his petition under chapter 11, he chose to liquidate his estate and on April 8, 1985 filed a complaint to sell certain real property free and clear of liens against several defendants, including the Internal Revenue Service. IRS answered the complaint indicating that no objection to the sale would be made so long as its lien attached to the sale proceeds in the same amount and with the same relative priority as had attached to the real property. The sale was consummated.
Thereafter, Debtor attempted to direct the allocation of the sale proceeds to the claim of IRS, to which IRS objected. This court held that IRS’ objection was not well taken and should be overruled. In re Hineline, 57 B.R. 248 (Bkrtcy.N.D.Ohio 1986). An appeal from that order was taken by IRS. On January 30, 1987, the judgment of this court was reversed and the cause remanded to this court with instructions to consider Debtor’s attempt to direct the allocation of sale proceeds in light of the following factors:
(1)the totality of the pre- and post-bankruptcy facts and circumstances;
(2) the history of the debtor;
(3) the absence or existence of pre-bank-ruptcy collection or “enforced collection measures” of the IRS;
(4) the nature and contents of a chapter 11 plan (e.g. last resort liquidation or reorganization);
(5) the presence, extent and nature of administrative and/or court action;
(6) the presence of pre- or post-bankruptcy agreements between the debtor and the IRS; and
(7) the existence of exceptional or special circumstances or equitable reasons warranting such allocation.
Hineline v. Household Finance Corp., 72 B.R. 642, 644-45 (D.N.D.Ohio 1987) (citing In re B & P Enterprises, Inc., 67 B.R. 179, 183-84 (Bkrtcy.W.D.Tenn.1986)).
The instant proposed findings of facts and conclusions of law were submitted to this court after a pretrial conference. A response to these proposals was filed by Debtor indicating that exception is taken to paragraph 18 of that document for the reason that the above factors reflect a flexible rule for determining who may direct allocation of IRS payments. Specifically paragraph 18 provides:
18. This Court finds that the Debtor has the burden of establishing that all seven of the factors enunciated in paragraph 17 [enumerating the 7 factors above] above, are favorable to the Debt- or, in order that payments to the United States in a Chapter 11 proceeding are to be considered voluntary.
The district court instructed this court to consider Debtor’s attempt to direct allocation of payments in light of the seven factors listed above. Application of the facts to these factors follows.
The circumstances of this bankruptcy case, the first factor, include that Debtor filed a petition under chapter 11 on December 29, 1983, but chose to liquidate, rather than reorganize his estate. As such, he sold the real estate upon which IRS had a lien allowing said lien to attach to the sale proceeds. IRS had filed at least four no*647tices of Federal Tax Lien prior to the commencement of Debtor’s bankruptcy case. IRS also filed two proofs of claim totalling $8,586.24. The pre and post bankruptcy circumstances evidence Debtor’s lack of affirmative action to pay or make arrangements for payment of his tax liabilities.
The second factor, the history of the Debtor, reflects IRS’ attempt to levy on Debtor’s property and Debtor’s lack of attention to those levies. The third factor weighs in favor of IRS as IRS attempted pre-bankruptcy collection measures as evidenced by their four notices of Federal Tax Levy. The fourth factor calls for analysis of a chapter 11 plan. Debtor has not filed a plan of reorganization, but instead is liquidating his assets under a chapter 11 petition. The fifth factor regards the IRS’ Notice of Levy as a court action or administrative effort to collect its delinquent taxes and thus weighs in favor of IRS. The sixth factor also favors IRS as Debtor has not entered an agreement regarding payment of his delinquency. The seventh factor is not supported by the facts in this case as Debtor has not shown any exceptional or special circumstances warranting this court’s finding that Debtor may direct allocation of his payments.
Following the district court’s order and applying the factors set forth in In re B & P Enterprises, Inc. to the facts in this case, this court finds that Debtor has not set forth any equitable reasons why Debtor should be allowed to direct allocation of his IRS payments and that the other six factors also weigh in favor of IRS, allowing IRS to direct allocation of Debtor’s payments. The district court having rejected the fashioning of a per se rule in determining if Debtor may direct allocation of his payment, this court finds that, in the instant situation, Debtor has failed to set forth sufficient facts for this court to find he may direct allocation of his IRS payments. Applying the factors set forth by the district court, it is therefore
ORDERED that the Internal Revenue Service be, and it hereby is, authorized to allocate the manner in which its tax lien shall be paid and satisfied. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490475/ | DECISION AND ORDER ON MOTION FOR PRELIMINARY INJUNCTION
BURTON PERLMAN, Bankruptcy Judge.
Plaintiff herein is a Chapter 11 debtor in a related bankruptcy case in this court. Debtor’s business is the operation of an automobile dealership.
In the present complaint, reference is made to a class action state court suit against Fred Hurst, Jr. and other unidentified persons. Hurst is the chief executive officer and president of plaintiff. He and his wife are the sole stockholders of the corporation. The gist of the state court action is to seek redress for alleged violations of the Ohio Consumer Sales Practices Act in connection with the operation of the dealership. The present adversary proceeding invokes 11 U.S.C. § 105 for injunc-tive relief against the continuance of the state court action, it being contended that it would inhibit the proper conduct of the Chapter 11 case. Plaintiff filed a motion for a preliminary injunction. The motion came on for hearing, at which time the testimony of Hurst was taken.
Hurst testified that he spends the majority of his time in connection with the Chapter 11 reorganization.
The legal standards here applicable were recently restated by Judge David S. Porter in In re Baldwin United Corp., 57 B.R. 759, 766 (D.C.S.D.Ohio 1985):
The traditional standards governing preliminary injunctions under Federal Rule of Civil Procedure 65 are applicable for a § 105 injunction. The Sixth Circuit has specified four factors which are particularly important in determining whether a preliminary injunction is proper: “(1) the likelihood of plaintiff’s success on the merits; (2) whether the injunction will save the plaintiff from irreparable injury; (3) whether the injunction would harm others; and (4) whether the public interest would be served by the injunction.” Unsecured Creditors’ Committee of DeLorean Motor Co. v. DeLorean (In re Delorean Motor Co.), 755 F.2d 1223, 1228 (6th Cir.1985). These four factors are to be balanced; they are “not prerequisites that must be met.” Id. at 1229. Nor is any single factor “determinative as to the appropriateness of equitable relief.” Metropolitan Detroit Plumbing & Mechanical Contractors Ass’n v. Department of HEW, 418 F.Supp. 585, 586 (E.D.Mich.1976), quoted with approval in Roth v. Bank of the Commonwealth, 583 F.2d 527, 537-38 (6th Cir. 1978), cert. dismissed, 442 U.S. 925, 99 S.Ct. 2852, 61 L.Ed.2d 292 (1979). These elements were originally devised for situations involving stays of administrative orders, however, and they usually require some adaptation to other types of contexts. C. Wright & A. Miller, 11 Federal Practice & Procedure: Civil § 2948 at 430 (1973).
We find that the requisite criteria for the issuance of a preliminary injunction have been met, and therefore relief will be granted to plaintiff. We find that plaintiff will likely be successful in securing a permanent injunction against the state court litigation, because the carrying on of that litigation will likely result in harm or interference with the bankruptcy case pending *749here. Hurst is presently spending a great deal of time in connection with his Chapter 11 case. To permit the state court litigation against the continuance of which the present injunctive relief is sought, would distract him from that undertaking. The same remarks serve to show the presence of the second requisite element, irreparable injury. See, In re Baldwin United, supra, at p. 768. Thirdly, we are unable to find that the delay in the state court action which will be caused by the issuance of the present injunction will be harmful to defendants. In the state court action, the defendants here seek compensatory relief for past acts. A delay in the state court action while the Chapter 11 issues are being resolved here cannot be seriously prejudicial to defendants. As to the fourth and final element of the test for injunctive relief, the public interest element, we find this to be present in the strong public interest in successful corporate reorganizations. United States v. Whiting Pools, 462 U.S. 198, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983).
Accordingly, plaintiff’s motion for a preliminary injunction is granted, with the following proviso. At the hearing, counsel for defendants argued that a failure to secure discovery as to the identity of certain individuals who had been employed by plaintiff could be prejudicial to its efforts to secure relief in the state courts. We except from the operation of the preliminary injunction here granted, the right of defendants to have discovery limited to identifying the mentioned individuals.
So Ordered. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490476/ | ORDER FOR RELIEF UNDER CHAPTER 7, DENYING CONVERSION TO CHAPTER 11, DENYING TRUSTEE’S MOTION TO DISMISS CASE, OVERRULING REQUESTS FOR SANCTIONS, AND OTHER MATTERS
B.J. SELLERS, Bankruptcy Judge.
This matter is before the Court, upon the debtor’s motion seeking to convert this *18Chapter 13 case to one under Chapter 11 or, in the alternative, consenting to conversion to Chapter 7, and upon the Chapter 13 trustee’s motion seeking to dismiss the case. The requested conversion to Chapter 11 was opposed by Farm Credit Services, East Central Ohio (“Farm Credit”) and John Deere Company (“John Deere”). Along with its opposition John Deere renewed its request for sanctions pursuant to Bankruptcy Rule 9011 and 28 U.S.C. § 1927. The debtor’s motion to convert and the trustee’s motion to dismiss were tried to the Court on November 20, 1986.
The debtor filed this Chapter 13 case on August 7, 1986. That filing, following dismissal of the debtor’s previous Chapter 13 case on April 3, 1986, consisted only of a petition and list of creditors. Immediately thereafter a flurry of filings by John Deere culminated in this Court’s scheduling hearings for October 2, 1986, to consider both the issue of confirmation of any Chapter 13 plan the debtor proposed and John Deere’s motions seeking relief from the automatic stay and dismissal of this case.
At the time set for the confirmation hearing the Chapter 13 trustee indicated that the debtor had failed to appear for his meeting of creditors as required by 11 U.S.C. § 343 and had failed to file either a proposed plan or the required statement of affairs. On that basis the Court denied confirmation for want of prosecution. The Court also proceeded to grant John Deere’s unopposed motion seeking relief from the automatic stay.
In connection with John Deere’s motion to dismiss this case, the debtor represented to the Court, through his attorney and by his own concurrence on the record, that he would be filing his own motion for voluntary dismissal. Based upon that representation John Deere elected to proceed at that time only on the issue of its request for sanctions pursuant to Bankruptcy Rule 9011. That request is also considered in this ruling in conjunction with its renewal and extension in John Deere’s later pleadings.
Subsequent to that October 2nd hearing the debtor obtained new counsel and sought to convert his case to one under Chapter 11 rather than to voluntarily seek dismissal as previously represented. That request, which was followed soon thereafter by the filing of the required bankruptcy schedules, generated opposition from Farm Credit and from John Deere. In its opposition John Deere renewed its request for sanctions pursuant to Bankruptcy Rule 9011 and added a request for sanctions pursuant to 28 U.S.C. § 1927. During this same period, the Chapter 13 trustee requested a dismissal of the case for the debtor’s failure to prosecute his Chapter 13 action. Immediately prior to the November 20th hearing the debtor filed a motion and consent to convert his case to one under Chapter 7 in the event the Court denied his requested conversion to Chapter 11. That alternative relief was not opposed by Farm Credit or John Deere.
For reasons stated on the record at the November 20, 1986 hearing and adopted herein as if restated, the Court finds that the debtor should be granted the right to convert his case to one under another chapter. That right is strongly supported in the legislative history of Chapter 13 and, in certain circumstances, is not subject to waiver. See 11 U.S.C. § 1307(a). However, based upon this debtor’s previous representations on the record on October 2, 1986 that a voluntary dismissal would be forthcoming, his consent to a Chapter 7 conversion, and his testimony at the hearing on his motion to convert which established that any proposed plan of reorganization would be a liquidating one which might not produce any significant distribution to unsecured creditors, that conversion will be permitted only to Chapter 7. While this Court agrees that liquidation by the debtor might be somewhat less costly than liquidation by a trustee in bankruptcy, the benefits in this case, where all assets except possibly the current crops appear to be substantially over-liened, are not sufficient to offset other factors pointing to Chapter 7 liquidation as a more expeditious and fairer result.
With regard to John Deere’s requests for sanctions pursuant to either *19Bankruptcy Rule 9011, which parallels Rule 11 of the Federal Rules of Civil Procedure, or pursuant to 28 U.S.C. § 1927, the Court declines to grant the relief sought. The Court is convinced that both of the debtor’s attorneys acted in good faith and filed documents which they believed represented viable legal options for this debtor. The fact that later assessments of changes in the debtor’s debt structure resulting from substantial payments made to creditors in his first Chapter 13 case caused one attorney to conclude that Chapter 13 relief was not possible under the existing circumstances and caused the second attorney to conclude that Chapter 11 might be a more appropriate remedy, does not demonstrate either bad faith or frivolous action and does not call for sanctions against those attorneys. Additionally, this Court finds no indication of unreasonable or vexatious multiplication of these proceedings by either attorney for the debtor.
Likewise, the Court further finds that the debtor’s behavior in this case does not rise to the level required for the imposition of sanctions. The Court believes this debtor intended to pay his creditors through a process available under bankruptcy law. Indeed, his prior Chapter 13 case resulted in payments of approximately $100,000.00 to creditors. Furthermore, whatever behavior this debtor exhibited in connection with the state court suit initiated by John Deere is not within the purview of this Court at this time and is, therefore, not relevant to the requested relief except as such behavior may relate to the purpose for which the debtor’s second Chapter 13 case was filed. As evidenced by the testimony, the Court finds that restructuring of debt and payment of creditors was the purpose for this filing. That the filing also halted execution by John Deere and that such was obviously a strong factor in the decision to file the Chapter 13 case does not change that result.
Based upon the foregoing, the Court ORDERS that this case be converted to one under Chapter 7 of the Bankruptcy Code. Within fifteen (15) days of the entry of this order, the debtor is further ORDERED to file all schedules and statements required for a Chapter 7 filing which have not previously been filed in this case; and it is further
ORDERED, that John Deere’s requests for sanctions are OVERRULED; and it is further
ORDERED, that the Chapter 13 trustee’s motion to dismiss this case for want of prosecution, John Deere’s motion seeking dismissal of this case, and the debtor’s application to employ an attorney under general retainer are rendered moot by this order. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490477/ | ORDER GRANTING MOTION TO INTERVENE AND ANSWER
B. J. SELLERS, Bankruptcy Judge.
This matter is before the Court upon a Motion to Intervene and Answer and a supplemental memorandum thereto filed on *25behalf of Rubicon Industries, Inc. (“Rubicon”). The duly-appointed Chapter 7 trustee and plaintiff in this adversary proceeding, Larry E. Staats (“Trustee”), filed a memorandum opposing Rubicon’s motion for intervention. For the reasons set forth below, the Court determines that Rubicon should be allowed to intervene and answer in this proceeding.
The Trustee commenced this adversary proceeding on October 16, 1985 seeking to avoid certain transfers of working interests in oil and gas wells made between the debtor, Bethel Resources, Inc., and fifty-nine (59) defendants pursuant to 11 U.S.C. §§ 547 and 548. Rubicon asserts that it is an assignee of certain defendants’ working interests in the oil and gas leases which are the subject of the Trustee’s avoidance action.
Attached to Rubicon’s supplemental memorandum are copies of separately executed assignments of working interests in certain oil and gas leases in favor of Rubicon from thirty-six (36) of the defendants originally named in the Trustee’s complaint. Those assignments apparently took place on various dates in December, 1985, approximately two (2) months after the Trustee initiated this action. None of the purported assignor/defendants have responded to the Trustee’s complaint by answer or otherwise. Accordingly, the Trustee has sought judgment by default against twenty-eight (28) of them.
In light of these assignments and the nature of the Trustee’s action, Rubicon asserts that it is so situated that disposition of the action as proposed may, as a practical matter, impede its ability to protect its interests, and that its interests are not adequately protected by existing parties. Accordingly, Rubicon moves the Court to permit it to intervene as a party-defendant in this action pursuant to Rule 24 of the Federal Rules of Civil Procedure and Bankruptcy Rule 7024.
The Trustee opposes Rubicon’s intervention essentially upon a time-bar argument. The Trustee reasons that, given the default posture against the primary assign- or/defendants, it is now too late to allow Rubicon to intervene in this proceeding as the purported new owner of the working interests.
Fed.R.Civ.P. 24(a)(2), made applicable to this proceeding by Bankruptcy Rule 7024, states in pertinent part:
Upon timely application anyone shall be permitted to intervene in an action * * * (2) when the applicant claims an interest relating to the property or transaction which is the subject of the action and he is so situated that the disposition of the action may as a practical matter impair or impede his ability to protect that interest, unless the applicant’s interest is adequately represented by existing parties.
An application for intervention, whether permissive or as a matter of right, must be made timely. Michigan Association For Retarded Citizens v. Smith, 657 F.2d 102, 105 (6th Cir.1981), citing NAACP v. New York, 413 U.S. 345, 365, 93 S.Ct. 2591, 2603, 37 L.Ed.2d 648 (1973). Timeliness is a matter within the sound discretion of the Court and is a flexible concept that should be determined in light of all the circumstances in a particular case. 3B Moore’s Federal Practice § 4.13 (1985). Among those factors to be considered are:
(1) the point to which the suit had progressed; (2) the purpose for which intervention is sought; (3) the length of time preceding the application for intervention during which the proposed intervenor knew or should have known of his interest in the case; (4) the prejudice to the original parties due to the proposed inter-venor’s failure after he knew or should have known of his interest in the case promptly to apply for intervention; and (5) the existence of unusual circumstances militating against or in favor of intervention.
Michigan Association for Retarded Citizens, 657 F.2d at 105.
In the present case, Rubicon seeks intervention in order to protect its purported ownership interests in the oil and gas leases which are the subject of the Trustee’s avoidance action. Although this litigation has progressed to the point of partial disposition upon motions for default and summa*26ry judgment, no judgments have been rendered on those motions and no pretrial conferences have been held.
As previously mentioned, all of the assignments in the oil and gas leases made in favor of Rubicon occurred in December, 1985, the last taking place on December 27, 1985. Rubicon filed its motion to intervene on January 14, 1986. Thus, only a minimal amount of time lapsed between Rubicon’s purported acquisitions in December, the earliest point in time at which Rubicon could have known of its interest in the pending case, and the date on which it filed its motion to intervene. Under these circumstances, the Court concludes that Rubicon’s motion to intervene was “timely.”
The Court further finds that Rubicon satisfies the three (3) prong test for intervention as of right as set forth in Fed.R.Civ.P. 24(a)(2). First, Rubicon asserts the requisite interest in the property that is the subject matter of the litigation. The Trustee’s complaint seeks recovery of the same working interests in the oil and gas leases in which Rubicon asserts a percentage ownership by way of assignment, and thus, Rubicon meets the requirement that its interest be “a significant protecta-ble interest.” Donaldson v. United States, 400 U.S. 517, 531, 91 S.Ct. 534, 542, 27 L.Ed.2d 580 (1971).
The second prong of the test is whether the disposition of the action as a practical matter may impair or impede Rubicon’s ability to protect that interest. The Triax Company v. TRW, Inc. and Conco, Inc., 724 F.2d 1224, 1227 (6th Cir.1984). Because the Trustee’s action seeks to avoid the transfers of these interests to Rubicon’s assignors, and because the Bankruptcy Code permits, under specific circumstances, recovery from a subsequent transferee, Rubicon may need to assert its applicable defenses to the Trustee’s causes of action in this proceeding. The Court concludes that denial of the motion to intervene could, therefore, impair or impede Rubicon’s ability to protect its interests in the assignments.
The third prong of the test is whether the parties already in the litigation can adequately protect the interests of the proposed intervenor. Triax, 724 F.2d at 1227. Because all parties to this action asserted by Rubicon to be assignors of its interests have defaulted in answer to the Trustee’s complaint, it is clear that such parties have chosen not to protect Rubicon’s asserted interest. Indeed such parties may presently lack motivation to protect interests they no longer hold.
Based upon the foregoing, Rubicon’s motion to intervene is sustained and its proposed answer will be considered as opposition to the relief sought by the Trustee with regard to the working interests it holds. Likewise, Rubicon’s opposition to the Trustee’s motion seeking summary judgment will be considered opposition to judgment against those interests from which Rubicon asserts assignment.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490479/ | ORDER ON MOTION FOR CLARIFICATION OR REHEARING OF ORDER ON APPLICATION FOR ALLOWANCE OF ATTORNEYS’ FEES FOR SEKMAN AVIATION CORP., HOLDER OF STATUTORY LIENS
ALEXANDER L. PASKAY, Chief Judge.
THIS CAUSE came on for consideration upon notice and hearing of a Motion for Clarification or Rehearing of an Order heretofore entered on Application for Allowance of Attorneys’ Fees of Sekman Aviation Corp. The Motion is filed by Prov-incetown-Boston Airline, Inc., the Debtor of the above-captioned Chapter 11 case (Debt- or). The Debtor seeks a reconsideration of this Court’s Order entered on October 30, 1986, in which this Court ruled that Sek-man Aviation Corp. (Sekman) was not entitled to any award of attorneys’ fees under § 506(b) of the Bankruptcy Code because the lien claimed by Sekman was not a consensual lien and Sekman was not entitled to assert any claim for attorney fees pursuant to Fla.Stat. § 85.0.11. Nonetheless, this Court relied on its equitable powers and awarded $15,600.00 in fees and $604.35 in costs to Sekman.
The Debtor has moved for rehearing of the award of attorneys’ fees alleging that *44although it is conceded that the bankruptcy court as a court of equity may exercise its equity jurisdiction under special circumstances, it may not exercise its equitable powers to grant relief which is inconsistent with any specific provision of the Bankruptcy Code. The Debtor asserts that since the Bankruptcy Code contains a specific statutory provision dealing with the fees sought by Sekman, § 506(b), and since Sekman is not entitled to fees pursuant to § 506(b), the Court erred in relying on its equitable powers to award fees to Sekman when Sekman did not qualify for attorneys’ fees under the Bankruptcy Code.
A review of the case law applicable to this issue leads to the conclusion that this Court did, in fact, err in relying on its equitable powers to award attorneys’ fees when there was no statutory basis for such an award. In Johnson v. First National Bank of Montevideo, Minnesota, 719 F.2d 270 (8th Cir.1983), the Eighth Circuit Court of Appeals held that although a bankruptcy court is a court of equity and should apply general principles of equity, the equitable powers of the Court “may only be exercised in a manner which is consistent with the provisions of the Code.” Johnson, supra, at 273. Since the award of attorneys’ fees is governed by specific Code provisions, the bankruptcy court’s sole source of power to award fees is in the Code, and the bankruptcy court cannot rely on its equitable powers to go outside the limits imposed by the provisions of the Code. See, In re United Merchants and Manufacturers, Inc., 674 F.2d 134 (2d Cir.1982); In re Pirsig Farms, 46 B.R. 237 (D.Minn.1985).
Based on the foregoing, this Court is satisfied that it was inappropriate for this Court to invoke its equitable powers to award attorneys’ fees to Sekman when Sekman was not entitled to attorneys’ fees under the applicable provisions of the Bankruptcy Code. Therefore, the Motion for Clarification .or Rehearing should be granted and the Order on Application for Allowance of Attorneys’ Fees should be amended to vacate the award of attorneys’ fees and costs to Sekman Aviation Corp.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the Motion for Clarification or Rehearing of Order on Application for Allowance of Attorneys’ Fees for Sekman Aviation Corp., Holder of Statutory Liens, be, and the same is hereby, granted. It is further
ORDERED, ADJUDGED AND DECREED that the Order on Application for Allowance of Attorneys’ Fees for Sekman Aviation Corp., Holder of Statutory Liens, entered October 30, 1986, be, and the same is hereby, amended to provide that the Objection to Allowance of Attorneys’ Fees be, and the same is hereby, sustained and the Application for Allowance of Attorneys’ Fees for Sekman Aviation Corp., be, and the same is hereby, denied. It is further
ORDERED, ADJUDGED AND DECREED that the award of attorneys’ fees and costs to Sekman’s counsel, Bernard Wexler, be, and the same is hereby, vacated. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490483/ | ORDER ON OBJECTION TO CLAIM OF THE INTERNAL REVENUE SERVICE
ALEXANDER L. PASKAY, Chief Judge.
THIS IS a Chapter 13 case, and the matter under consideration is an Objection to the Claim of the Internal Revenue Service *92(IRS) filed in the amount of $3,819.23, plus interest and penalties. The claim of the IRS is challenged by Rose Marion Voss, the Debtor (Debtor), who claims that the IRS improperly disallowed certain tax deductions which she claimed were charitable contributions on her 1982 and 1983 tax returns. Based on the foregoing she claims that she is not indebted to the IRS in any amount, and therefore, the claim of the IRS should be disallowed. The facts relevant to the issues raised by her objection as appear from the record established at the final evidentiary hearing can be summarized as follows:
In 1982 the Debtor was living in La Jolla, California, and was married to one Sonny Voss, who was an ordained minister of the Universal Life Church of California (ULC). The ULC is a California corporation and maintains its headquarters in Modesto, California. Sonny Voss established a ULC congregation in La Jolla, California. The church was operated out of the residence of the Debtor and Sonny Voss, which was rented and paid for by the congregation who also provided all their living expenses. During the time relevant the Debtor while she resided in California was employed full time by a medical research facility but claims to have provided counseling services in her spare time to troubled youths on behalf of the congregation.
In 1983 the Debtor, who in the meantime divorced Sonny Voss, moved to Nashville, Tennessee, and obtained full-time employment with the Vanderbuilt University Medical Research Facility. Although, as noted, she was no longer married to Sonny Voss, she set up residence with Sonny Voss in Nashville, who again established a congregation of the ULC at the residence where they resided together. Just as in California, the congregation not only furnished rent to the Debtor but also covered all of Sonny Voss’ and the Debtor’s living expenses. The Debtor claims to have rendered on a part-time basis counseling services to young people on behalf of the congregation for which she did not receive, again, just as in California, any monetary formal compensation. During tax year 1982 the Debtor had a gross income of $20,841.00, of which she claims to have contributed $10,420.88 to the La Jolla congregation, which contribution she claimed as a charitable deduction. The Debtor in her 1983 income tax return claimed $5,282.88 as a charitable deduction based on her contribution allegedly made to ULC.
The Debtor’s tax returns for the years 1982 and 1983 were audited by the IRS. As a result of the audit the charitable deductions claimed by her for the respective tax years were disallowed based on the following conclusion: First, according to the Revenue Agent, in order for a contribution to be tax deductible, the organization receiving the contribution must have applied for and obtained tax exempt status pursuant to 26 U.S.C. § 501(c)(3). Neither the La Jolla congregation or the Nashville congregation ever applied for and received tax exempt status. Second, the Debtor failed to offer proof that the monies contributed were ever sent to the ULC headquarters in Modesto, California, the church which had a § 501(c)(3) exemption. Third, the Debtor failed to offer proof that Sonny Voss was, in fact, a representative of the Modesto, California, ULC and authorized to accept charitable contributions on behalf of that church. As a result, the IRS assessed a tax deficiency against the Debtor in the amount of $11,163.05 for 1982, and $556.00 for 1983.
The Debtor contested this assessment. In due course the assessment was reviewed by the IRS review board and later sent to the Appeals Division of the IRS and the assessment was found to be proper on review. Subsequently the IRS issued a statutory notice of deficiency. The proof of claim filed by the IRS is in the amount of $3,819.23 and is based on the taxes due for 1982 and 1983, with interest and penalties.
The Debtor objected to the IRS claim, alleging that the IRS wrongfully disallowed the charitable deduction she claimed for her contributions to the ULC. In support of her objection the Debtor presented receipts of the contributions she claimed to have made the ULC. These receipts (Debt- or’s Exh. # 1 & 2) are ULC Form No. 04, copyright Universal Life Church, Inc., 601 *93Third Street, Modesto, CA 95351, entitled ULC Receipt for Donation and are signed by Sonny Voss, although there is no indication on the receipts of which position, if any, he held with the ULC of the California corporation.
Neither is there anything in this record which warrants the finding that any of these monies were ever sent to the ULC headquarters located in Modesto, California, or that Sonny Voss was, in fact, acting on behalf of the ULC of California and that the funds were used for purposes other than meeting his living expenses and the living expenses of the Debtor.
The precise issues raised by the respective contentions of the parties were considered by the Ninth Circuit in Hall v. Commissioner of Internal Revenue, 729 F.2d 632 (9th Cir.1984), a case which appears to be directly on point. The church involved in Hall was also the Universal Life Church. In that case, the Court of Appeals concluded that exemptions granted to the parent church, i.e., the ULC of Modesto, California, does not automatically carry over to local congregations, and local congregations of the ULC must separately qualify as charitable organizations independent of its parent church before contributions to the local congregation can be tax deductible.
Based on the foregoing, this Court is satisfied that the IRS disallowance of the deductions taken by the Debtor was correct, and the IRS claim should be allowed as filed.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the Objection to overruled, and the claim of the Internal Revenue Service be, and the same is hereby, allowed as filed. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490484/ | ORDER
OF CONVERSION TO CHAPTER 7
BENJAMIN E. FRANKLIN, Bankruptcy Judge.
NOW on this 27th day of April, 1987, the above-entitled cases come on for hearing upon the following:
(1)Debtor’s Disclosure Statement and Plan of Reorganization and Exhibits;
(2) Debtor’s Application for Authority to Compromise Controversy With Highland Park Bank & Trust;
(3) Application, By Creditors’ Committee, for Retention of Vernon L. Jarboe as Counsel for the Creditors’ Committee;
(4) Motion by the United States Trustee to Convert to Chapter 7;
(5) Application of Burger King Corporation for Allowance of Administrative Expenses.
Also, before the Court is the Motion which was filed by Burger King Corporation to Dismiss the above-captioned bankruptcies which Motion was taken under advisement by the Court following the hearing held in the above-entitled cases on March 2 and 3, 1987. The debtor B-K of Kansas appears by and through its attorney Dan E. Turner, and by and through its representative John Wilkinson. The debtor John Wilkinson appears in person and by his attorney Dan E. Turner. The debtor Marianne Anderson Wilkinson appears by her attorney Dan E. Turner. The creditor Burger King Corporation appears by and through it attorneys Andrew C. Hall and Justice B. King. The U.S. Trustee appears by and through Kurt Stohlgren. The creditor Highland Park Bank and Trust appears by and through its attorney James Willard. There are no further appearances.
WHEREUPON, the Court hears argument upon the Motion of the U.S. Trustee to Convert these cases from proceedings under Chapter 11 to proceedings under Chapter 7. Thereafter, the Court announced its decision upon the Motion of the U.S. Trustee to Convert the above-captioned cases, and each of them, from Chapter 11 to Chapter 7, and upon the pending Motion of Burger King Corporation to Dismiss these cases, and ordered that the Motion to Convert of the U.S. Trustee should be granted, and further that although dismissal was not warranted pursuant to the Motion to Dismiss filed by Burger King Corporation conversion of the above-captioned cases from Chapter 11 to Chapter 7 was warranted pursuant to said motion. In this regard the Court specifically finds that these cases should be converted from *97cases under Chapter 11 to cases under Chapter 7 for the following reasons:
(1) These cases have been on file since January of 1985, and no confirmable plan of reorganization has to date been presented to the Court;
(2) From examination of the monthly reports filed by the debtors there appears to be a continuing loss or diminution of the estate;
(3) There is an absence of a reasonable likelihood of rehabilitation of these debtors;
(4) There is an inability on the part of these debtors to effectuate a plan;
(5) There has been unreasonable delay in these cases by the debtors that is prejudicial to the creditors.
For all of the foregoing reasons the Court finds that it is in the best interest of the creditors of the debtors, and the bankruptcy estates herein, to convert these cases from Chapter 11 to Chapter 7.
Thereafter having determined that these cases should be converted from proceedings under Chapter 11 to proceedings under Chapter 7, the Court determines that the remaining matters scheduled to be heard this date are moot:
(1) The hearing upon debtors’ Disclosure Statement;
(2) The hearing upon debtor’s Application for Authority to Compromise Controversy With Highland Park Bank & Trust;
(3) The hearing upon the Application, by Creditors’ Committee, for Retention of Vernon L. Jarboe as Counsel for the Creditors’ Committee; and
(4)The hearing upon the Application of Burger King Corporation for Allow-anee of Administrative Expenses.
IT IS, THEREFORE, ORDERED, ADJUDGED, AND DECREED that the above-captioned cases should be, and hereby are, converted from proceedings under Chapter 11 to proceedings under Chapter 7. It is further determined that the following matters are moot, and for this reason shall not be considered by the Court:
(1) Disclosure Statement;
(2) Burger King Corporation’s Objection to Disclosure Statement;
(3) Highland Park Bank and Trust Company’s Objection to Disclosure Statement and Plan of Reorganization;
(4) Debtor’s Application for Authority to Compromise Controversy With Highland Park Bank & Trust;
(5) Objection of Burger King Corporation to Debtor’s Application for Authority to Compromise Controversy With Highland Park Bank & Trust;
(6) Highland Park Bank’s Reply to Burger King’s Objection to Application for Authority to Compromise Controversy;
(7) Highland Park Bank’s Motion for Continuance and/or Leave to Present Additional Evidence by Deposition;
(8) Application, by Creditors’ Committee, for Retention of Vernon L. Jarboe as Counsel for the Creditors’ Committee;
(9) Application of Burger King Corporation for Allowance of Administrative Expenses;
(10) Highland Park Bank and Trust Company’s Objection to Application of Burger King Corporation for Allowance of Administrative Expenses.
IT IS, FURTHER ORDERED, ADJUDGED AND DECREED that in the event of appeal of this order the Court reserves the right to make further findings of fact and conclusions of law.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490485/ | MEMORANDUM OPINION
THOMAS M. TWARDOWSKI, Bankruptcy Judge.
On January 29, 1987, Reading Tube Corporation, debtor (“debtor”), filed with this court a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code. On February 4, 1987, Meridian Bank, on its own and for Farmers Home Administration, United States Department of Agriculture, and Economic Development Administration, United States Department of Commerce (“bank”) filed a motion for appointment of a trustee pursuant to 11 U.S.C. § 1104. Attendant to that motion is the instant motion to compel the production of documents, also filed by the bank. The debtor opposes the bank’s motion to compel, arguing that the bank’s request is overbroad and includes documents which are “protected from disclosure.”
This court holds that the documents requested by the bank are discoverable. Federal Rule of Civil Procedure 26(b)(1) sets forth the scope of discovery, whether by deposition, written interrogatories or production of documents. This rule provides that discovery may be had relating to a claim or defense of any party “regarding any matter not privileged which is relevant to the subject matter involved in the pending action.” For discovery purposes, relevance is broadly and liberally construed. Hickman v. Taylor, 329 U.S. 495, 67 S.Ct. 385, 91 L.Ed. 451 (1947). Information can be relevant and thus discoverable so long as the information is reasonably calculated to lead to the discovery of admissible evidence. 4 J. Moore, J. Lucas & G. Grotheer, Moore’s Federal Practice, If 26.56 [1] (2d ed. 1984). The test for relevance in the discovery area is an extremely broad one. “It is not too strong to say that a request for discovery should be considered relevant if there is any possibility that the information sought may be relevant to the subject matter of the action.” AM International, Inc. v. Eastman Kodak Co., 100 F.R.D. 255 at 257 (N.D.Ill.*1011981). We, therefore, reject the debtor's contention that the bank’s request is over-broad.
We recognize that there is a public policy which disfavors and discourages the disclosure of income tax returns. Yet, courts have, in appropriate circumstances, found that tax returns are discoverable. Lavin v. A.G. Becker & Co., Inc., 60 F.R.D. 684 (N.D.Ill.1973). Income tax returns may be the best source of complete and competent information as to a party’s income. In such circumstances, the courts have not been hesitant to find that the information sought bears some relevance to the litigation. Eastern Auto Distributors, Inc. v. Peugeot Motors of America, 96 F.R.D. 147 (E.D.Va.1982).
Aside from the issue of relevance, the court must address the issues of confidentiality and privacy. In dealing with a motion which seeks, inter alia, the production of tax returns, the court must carefully balance the privacy interest with a number of other factors including the need for the information, its materiality, and its relevance. DeMasi v. Weiss, 669 F.2d 114, 120 (3d Cir.1982). We find that the documents requested are material to the subject matter of this litigation, are reasonably calculated to lead to the discovery of admissible evidence, and are essential to the disposition of justice. In spite of the confidential nature of some of the documents requested, we find them to be discoverable. In support of our position, we look to a recent decision which granted a motion to compel production of a handwritten diary. Eidukonis v. Southeastern Pennsylvania Transportation Authority, No. 86-5142, slip op. at 5 (E.D.Pa. April 8, 1987) [Available on WESTLAW, DCT database]. In his opinion, Judge Naythons held that pursuant to F.R.Civ.P. 26(b)(1) and in spite of the court’s lack of knowledge of the contents of the personal diary, the diary was relevant and discoverable. We conclude that a diary, by its very nature, is a private record which one might not anticipate “sharing” with others. On the other hand, one might anticipate others viewing tax returns, can-celled checks and/or business records (particularly in a litigation context) and thus expect less privacy. We, therefore, direct the debtor to produce the documents requested. For the aforementioned reasons, the Motion of Meridian Bank to Compel the Production of Documents is granted. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490486/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW
SIDNEY M. WEAVER, Bankruptcy Judge.
THIS CAUSE came on before the Court on March 81, 1987, upon the Trustee’s Complaint for Declaratory Relief to Determine Validity, Extent, and Priority of Interest, and the Court having examined the evidence presented, considered the arguments of counsel, and being otherwise fully advised in the premises, does hereby make the following findings of fact and conclusions of law:
On December 31, 1981, Jartran, Inc., (“Jartran”), Frank B. Hall & Co., Inc., (“Hall”) and James A. Ryder, (“Ryder”) entered into a Consulting Agreement whereby Jartran employed Ryder to serve as a consultant for a period commencing January 1, 1982, and ending December 31, 1991. This Agreement further provided for Hall’s irrevocable and unconditional guaranty of the first five (5) years of base salary and non-competition compensation due to Ryder by Jartran.
On October 17, 1984, Landmark Bank (“Bank”) obtained a Final Judgment against Ryder in the United States District Court for the Southern District of Florida in the amount of $312,205.52. Pursuant to that Judgment, the Bank proceeded with post-judgment collection remedies and caused certain writs of garnishment to be issued by the District Court and served on Jartran.
In early October of 1985, the Bank, Ryder, and Jartran, entered into an Assign*117ment/Security Agreement and Acknowledgment of Assignment (“Assignment Agreement”) wherein the Bank and Ryder agreed to settlement of Ryder’s outstanding liability on their judgment by payment of the total sum of $100,000.00. This revised obligation was secured by a partial assignment of Ryder’s interests in the Consulting Agreement, executed by Ryder and Jartran on December 31, 1981.
On October 7,1985, the Bank, Ryder, and Jartran executed a Stipulation for Payment of Judgment and Dissolution of Writs of Garnishment. This Stipulation incorporated the agreement reached by the parties (as set forth in the Assignment Agreement) and further provided that the Bank would dissolve all writs of garnishment upon the entry of an Order of the Court ratifying the Stipulation, and upon the Bank’s receipt of $15,000.00. The United States District Court ratified and approved the Stipulation for Payment of Judgment and Dissolution of Writs of Garnishment by Order dated October 9, 1985.
On October 24, 1985, the Bank perfected its security interest in the Assignment Agreement by filing the appropriate U.C.C. Form with the Secretary of State.
On January 6, 1986, Ryder filed his Chapter 11 Bankruptcy Petition. During the pendency of the Chapter 11 case, the Debtor in Possession filed suit against Hall, on the guaranty, and recovered $55,-000.00.
The Debtor in Possession also filed a preference action against the Bank for the return of any and all pre-petition payments made to the Bank, which action was denied by this Court.
On January 16,1987, the Chapter 11 case was converted to a case under Chapter 7 and a Chapter 7 Trustee was appointed. At the time of the conversion, $45,000.00 of the funds recovered from Hall remained in the Debtor in Possession Account.
By virtue of this Complaint, the Chapter 7 Trustee has requested this Court to determine the validity, extent and priority of interests claimed by the Bank, the Debtor, and the Chapter 7 Trustee, in the remaining $45,000.00 recovered by the Debtor on the Hall guaranty.
The Debtor contends that these funds constitute recovery on a personal service contract and are therefore, not property of the debtors’ estate. The Bank alleges that it has a perfected security interest in said funds; and the Chapter 7 Trustee asserts that the $45,000.00 recovery is property of the estate, subject to administration by the Trustee.
DEBTOR’S CLAIM TO FUNDS
The Debtor alleges that the funds recovered on the Hall guaranty constitute payment on a personal service contract, and are therefore, not property of the estate.
The Court finds, based upon the evidence presented, that there was no performance requirement on the part of the Debtor, as the guarantor irrevocably and unconditionally insured payment of the Debtor’s compensation, as set forth in the Consulting Agreement.
It is well established that where a contract has been substantially completed before bankruptcy, to the extent that nothing remains but the payment of money, the claim becomes a chose in action which passes to the estate. (See Collier 15th Ed. ¶ 541.09(3); See also In re Malloy, 2 B.R. 674 (Bankr.M.D.Fla.1980); Florance v. Kresge, 93 F.2d 784 (4th Cir.1938); and Hudson v. Wylie, 242 F.2d 435 (9th Cir.1957)). Based upon a thorough evaluation of the evidence and arguments presented, the Court finds that the funds recovered from the Hall guaranty do not constitute a recovery on a personal services contract, but resulted from a chose in action, which accrued to the benefit of the Debtor upon the effective date of the Consulting Agreement. Case law clearly establishes that choses in action which accrue to the Debtor pre-petition, are property of the Debtor’s estate. (See In re Bell & Beckwith), 64 B.R. 144 (Bankr.N.D.Oh.1986); In re Mills, 46 B.R. 525, (Bankr.S.D.Fla.1985); Miller v. Shallowford Community Hospital, Inc., 767 F.2d 1556 (11th Cir.1985); In re Ryerson, 739 F.2d 1423 (9th Cir.1984); In *118the Matter of Raymond Construction Co. of Florida, Inc., 6 B.R. 793 (Bankr.M.D.Fla.1980)).
Accordingly, this Court finds that the Debtor’s claim that the recovery was based on a personal services contract and is therefore not property of the estate is unpersuasive, and contrary to established case law. The Court finds that the funds recovered on the Hall guaranty are derived from a chose in action which accrued to the Debtor’s benefit pre-petition and constitutes property of the Debtor’s estate.
BANK’S CLAIM TO SECURED POSITION IN FUNDS
The Bank asserts a perfected security interest in the funds recovered on the Hall guaranty by virtue of writs of garnishment issued pre-petition on their judgment from the District Court. The Bank claims it was perfected, by virtue of these writs, to the extent of $70,000.00 and subsequently received $35,000.00; leaving the Bank as a perfected secured creditor as to the remaining $35,000.00.
The Bank further contends that should the Debtor in this case be successful and recover the funds, because the funds are determined to be exempt and not property of the estate, then the Bank is entitled to recover the full $45,000.00 due to the Debt- or’s pre-petition execution of the Assignment Agreement and Stipulation.
The resolution of the Bank’s claim involves the careful scrutiny of the dates on which various transactions occurred, relative to the petition filing date. These critical dates are as follows:
DAYS PRIOR TO DATE PETITION DATE ACTIVITY
October 7, 1985 91 days Stipulation for payment of Judgment and Dissolution of Writs of Garnishment executed by the parties.
October 9, 1985 89 days Order on Stipulation entered by Judge of the United States District Court, Writs of Garnishment dissolved
October 24, 1985 74 days Bank’s security interest in Assignment Agreement perfected by U.C.C. filing
The Court finds that there is not a sufficient nexus between the claim asserted by the Bank under the perfected writs of garnishment sufficient to establish a perfected security interest in the funds recovered on the Hall guaranty.
The facts before this Court clearly establish that the Bank voluntarily dissolved the writs of garnishment, and accepted an assignment of proceeds in their stead. After careful analysis of the evidence and arguments presented, the Court finds that at the point in time when the Bank agreed to the dissolution of the perfected writs of garnishment, the Bank became an unsecured creditor to the extent of its interest, as modified, and as set forth in the Assignment Agreement, Stipulation and Order of the Federal District Court. Although the Bank did subsequently perfect its security interest in the Assignment Agreement, said perfection occurred within the ninety (90) day period prior to the Debtor’s petition in bankruptcy, and is therefore avoidable by the Trustee pursuant to 11 U.S.C. § 547. (See Omni Development and Services, Inc., v. Servicios E. Inversiones Solsan (In re Omni Development and Services, Inc.) 31 B.R. 482 (Bankr.S.D.Fla.1983); Still v. Murfreesboro Production Credit Association, (In re Butler), 3 B.R. 182 (Bankr.E.D.Tenn.1980); Weill v. Tennessee Central Credit Union, (In re Kelley) 3 B.R. 651 (Bankr.E.D.Tenn.1980)).
Based upon the evidence and arguments presented, the Court further finds that the debt owed to the Bank was created by the judgment of the District Court entered on October 17, 1984, and constitutes an antecedent debt. The security interest in the Assignment Agreement was perfected solidly within the ninety (90) day period pro*119ceeding the filing of the petition, and cannot be denied to have occurred while the Debtor was insolvent, as provisions of 11 U.S.C. § 547(f) provide a presumption of insolvency during this period, which was not rebutted by the Bank. (See Omni Development, supra at 485). Finally, the perfection of this security interest would clearly enable the Bank, as a perfected secured creditor, to receive substantially more than the Bank can receive as a general unsecured creditor in the Chapter 7 liquidation. (See Omni Development, supra at 485).
For the reasons set forth herein, the Court finds that perfection of the Bank’s security interest is voidable by the Chapter 7 Trustee, and that the Bank has no greater claim to the funds recovered on the Hall guaranty, than any other general unsecured creditor.
This Court is not unmindful that prior to the execution of the Assignment Agreement and Stipulation, the Bank held a valid secured position on various funds by virtue of writs of garnishment, which this Court held to be perfected on the date they were served, and upon which this Court denied the Debtor in Possession’s preference action for the return of the payments received by the Bank. The decision of this Court relating to recovery of the funds paid to the Bank by the Debtor, under a preference action, are not, however, dispos-itive of the Trustee’s right to avoid liens and the perfection of a security interest within the ninety (90) day period prior to bankruptcy, as set forth in 11 U.S.C. § 547.
The Court has previously determined that the Debtor is not entitled to the funds recovered on the Hall guaranty, and therefore, the Bank’s second contention, that the Bank would prevail over the Debtor’s claim, is moot.
CONCLUSION
In summary, for the reasons set forth herein, the Court finds that the recovery of funds on the Hall guaranty, was in the nature of a recovery on a chose in action that accrued to the Debtor’s benefit pre-pe-tition, and therefore constitutes property of the estate. The Court further finds, based upon the evidence and arguments presented, that the Bank voluntarily dissolved its perfected writs of garnishment; that the Trustee may avoid the perfection of the Bank’s security interest in the Assignment Agreement, (as all the elements of 11 U.S.C. § 547(b) have been met); and that the Bank has no greater claims to these funds than a general unsecured creditor of this estate. Accordingly, this Court determines that the funds recovered by the Debtor on the Hall guaranty are property of the Debtor’s estate subject to administration by the Chapter 7 Trustee.
A separate Final Judgment of even date has been entered in conformity herewith. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490488/ | ORDER ON REMAINING MOTIONS FOR SUMMARY JUDGEMENT
JAMES E. YACOS, Bankruptcy Judge.
This adversary proceeding was originally commenced by the debtor-plaintiff in 1984 seeking a determination that the defendants were enjoined pursuant to § 524(a)(2) of the Bankruptcy Code from proceeding further with a state court lawsuit seeking to collect on a judgment debt that arguably had been discharged by the debtor’s bankruptcy proceeding. In a prior decision, the court granted the debtor’s motion for summary judgment on the injunction issue, and determined that the defendants were legally barred from proceeding with their collection action. See In re Slaiby, 50 B.R. 245 (Bankr.D.N.H.1985), affirmed, 57 B.R. 770 (D.N.H.1985).
The court at that time left open for further determination the debtor’s request for additional relief, i.e., damages caused by the asserted civil contempt of the defendants for violating the permanent injunction provided by § 524(a)(2) of the Bankruptcy Code following the entry of an order of discharge.
The discharge order in this case was entered on September 9,1984. It states, as do all such orders under § 727 of the Code, that the debtor “.... is released from all dischargeable debts.... ” The lawsuit in question was commenced in New Hampshire on September 20, 1984. Section 524 provides in pertinent part as follows:
(a) A discharge in a case under this title—
(1) voids any judgment at any time obtained, to the extent that such judgment is a determination of the personal liability of the debtor with respect to any debt discharged under section 727, 944, 1141, 1228, or 1328 of this title, whether or not discharge of such debt is waived;
(2) operates as an injunction against the commencement or continuation of an *444action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived....
This statutory provision does not enjoin efforts to collect nondischarged debts. In re Worthing, 24 B.R. 774, 9 BCD 1135 (Bankr.D.Conn.1982); 3 Collier on Bankruptcy, § 524.01 (15th Ed.1987).
The bone of contention resolved by my prior decision was whether an injunction under § 524 was legally in effect, by virtue of the additional provisions of § 523(a)(3) of the Code, which provides that a debt is not dischargeable in certain circumstances where the creditor does not have actual notice of the proceedings. The basic facts in that regard are set forth in detail in the prior decision and will not be repeated here. They are relevant to the present decision as well.
Cross-motions for summary judgment have been filed by the plaintiff and defendants on the remaining issues as to civil contempt and remedial damages.
PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT
The prior decision did not require this court to make a determination as to whether Dr. and Mrs. Rassman did in fact have actual knowledge of the Slaiby bankruptcy proceeding. Recognizing that, and not having anything in the record to directly show actual knowledge on the part of the Rassmans prior to the commencement of the 1984 civil lawsuit, the plaintiff in his Motion for Summary Judgment resorts instead to the contention that the actual knowledge of the defendants' attorneys can be imputed to the defendants for civil contempt purposes. No case decision so holding, involving civil contempt sanctions imposed upon a defendant not shown to have actual knowledge of the order in question, has been cited by the plaintiff.
It is true that civil contempt orders do not require a showing of willful and malicious intent directed against the court and its orders. In re Lohnes, 26 B.R. 593 (Bankr.D.Conn.1983). However, I can find no case decision that imposes civil contempt sanctions in a case in which it is not shown that the defendant at least knew of the order violated. The defendants here are not their attorneys but are the Rassmans themselves.
Indeed, even in the Lohnes case cited by the plaintiff in this regard, the court commented:
In the instant proceeding, there is no question but that the automatic stay was violated by the foreclosure sale. Dimyan seeks to excuse his action by claiming that he did not intend to violate federal law. Since, however, civil contempt serves a remedial purpose by either coercing a respondent into compliance with the court’s order or compensating the complainant for losses sustained, willfulness in the offending party need not be shown for a finding of contempt. Malcomb v. Jacksonville Paper Co., 336 U.S. 187, 191, 69 S.Ct. 497, 499, 93 L.Ed. 599 (1948); In re Worthing, 24 B.R. 774, 9 B.C.D. 1135 (Bkrtcy.D.Conn.1982). It is sufficient that the “court order violated ‘[is] specific and definite’ ” and that the offending party has knowledge of the court’s order. Fidelity Mortgage Investors v. Camelia Builders, Inc., 550 F.2d 47, 51 (2d Cir.) (citations omitted), cert. denied, 429 U.S. 1093, 97 S.Ct. 1107, 51, L.Ed.2d 540 (1976), reh. denied, 430 U.S. 976, 97 S.Ct. 1670, 52 L.Ed.2d 372 (1977).
The only actual contempt holding cited by the plaintiff is N.L.R.B. v. Sequoia Dist. Counsel Of Carpenters, 568 F.2d 628 (9th Cir.1977). In that case it was clear that the union officials involved had actual knowledge of the order in question — although not its detailed contents. The imputation issue arose only because the officials themselves were not parties to the NLRB’s original enforcement proceeding.
The plaintiff does make some interesting arguments by analogy to malicious prosecution and abusive process cases, but here again the cases cited all involve factual situations in which the defendant had actual knowledge of the key facts leading to the civil contempt charge.
*445Accordingly, since I agree with the defendants that the plaintiffs legal theory supporting his Motion for Summary Judgment is not well founded, and there is a material question of fact as to the actual knowledge of the defendants, the plaintiffs Motion for Summary Judgment must be denied.
DEFENDANTS’ MOTION FOR SUMMARY JUDGMENT
The defendants argue first in support of their Motion for Summary Judgment that they are entitled to judgment since they have put into question the lack of any eyidence showing actual knowledge on the part of the defendants of the bankruptcy proceeding. Since the plaintiff has not responded with any additional affidavits or further discovery in that regard, the defendants contend that they are entitled to summary judgment under the recent decision of the United States Supreme Court construing Rule 56(c) of the Federal Rules of Civil Procedure in Celotex Corporation v. Catrett, Administrix, 477 U.S. -, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) (“Rule 56(c) mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party’s case, and on which that party will bear the burden of proof at trial.”)
I do not believe that the Celotex ruling is applicable in the present case, however, since I believe that the surrounding factual and circumstantial evidence in the record does raise a material question of fact, under the defendants’ actual knowledge theory, which makes that question inappropriate for summary judgment disposition under the defendants’ first legal theory. See In re Slaiby, 50 B.R. 245, 249, fn. 2 (Bankr.D.N.H.1985). Thus, even though the parties have filed cross-motions for summary judgment, the court could deny any summary judgment in this case if that were the defendants’ only legal theory.
The defendants however have another “string to their bow” which I do find persuasive in support of their Motion for Summary Judgment. The defendants argue that the plaintiff’s position is essentially circular in nature. They note that the plaintiff is seeking damages for civil contempt in violation of an order that was not determined to apply to the defendants, i.e., barring them from proceeding in the state courts, until this court’s 1985 decision. Since the alleged contempt involved the filing of the state court lawsuit in September of 1984, the defendants argue that they cannot be held for a knowing violation of a court order at that point.
If this were a simple issue of a violation of the automatic stay initially imposed by operation of law under § 362 of the Bankruptcy Code, upon filing of a bankruptcy proceeding, there could normally be no arguable basis for contending that the filing of the state court lawsuit was not a violation of the stay. Here, however, the more complex interrelationship of §§ 523 and 524 of the Code is involved — following the entry of an order of discharge under § 727 of the Code in a bankruptcy proceeding. The question then resolves itself down to whether it was in fact “arguable” as to whether § 524 imposed a stay upon these defendants. Or, in other words, would it have been clear to the defendants and their nonbankruptcy attorneys that the happenstance letters received by those attorneys in 1981 and 1982 did constitute “actual notice” within the meaning of § 523(a)(3) sufficient to bar the defendants from proceeding in the state courts?
I conclude that the legal effect of these bankruptcy proceedings upon the defendants’ rights, and the existence or nonexistence of a § 524 permanent injunction, was not clear to the defendants and their attorneys prior to the 1984 civil lawsuit filing to the degree that would support any finding of civil contempt and impose an imposition of damages. Cf. In re Worthing, supra, 24 B.R. 774, 9 BCD at 1136-37. The question in the present case was a close one, both factually and legally, and took this court some considerable time to resolve in its 1985 decision.
It is important in evaluating this second contention by the defendants to note that *446this contention would not fail even if the court were to find “actual knowledge” of the bankruptcy had been imparted to the defendants by their attorneys. Taking the record at its strongest from the viewpoint of the plaintiff, as is appropriate in granting a Motion for Summary Judgment against the non-moving party, and assuming that a full trial would lead to a finding that the defendants were advised of the bankruptcy before 1984, there is nothing in this record to contradict the assertions by the attorneys employed by the defendants that they were not experienced in bankruptcy proceedings and that they did believe in good faith- that the tardy notice of the bankruptcy they happened to receive from another creditor’s inquiry-letter left their clients’ rights unaffected by the bankruptcy proceeding.
Presumably the attorneys would have so reported this viewpoint to the defendants, if they had in fact informed them of the bankruptcy proceeding. This returns us on our circular path to square one. Absent a finding that it would have been clearly apparent to the defendants and their attorneys that they were barred from proceeding further against the debtor, notwithstanding the lack of a timely formal notice of the bankruptcy proceedings, there is no basis in this record for a finding that the defendants were guilty of the knowing disobedience of a specific court order which I take to be the prime requisite to support a civil contempt order under the ruling in Worthing and earlier cases.1
In essence, the debtor brought upon himself the need to expend time and effort in resolving the question of the applicability of the section 524 injunction to the defendants by his failure to list them directly with their current Hawaii address in his original bankruptcy schedules. While my prior decision determines that the actual notice received by the defendants’ attorneys was sufficient legally to render defendants’ debts dischargeable, it does not necessarily follow that the defendants should have realized that in September of 1984 when the civil lawsuit was filed. Accordingly, I conclude that the defendants Motion for Summary Judgment is well taken and that the additional relief requested by the plaintiff in this adversary proceeding, should be, and hereby is, denied.
. It is customary to refer to the "court order” when discussing stays in bankruptcy and their violation. It should be noted that there is no "order” entered by the bankruptcy judge in these situations in any normal sense. The stay occurs by operation of law pursuant to §§ 362 and 524 of the Bankruptcy Code. While a knowing violation of a § 362 automatic stay almost always will support civil sanctions, the "knowing" factor is not as cut-and-dried an issue in the § 524 situation. See text above. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490489/ | MEMORANDUM OF OPINION CONCERNING DEBTOR’S OBJECTION TO CLAIM NO. 45
JOHN C. AKARD, Bankruptcy Judge.
On October 3, 1978 Harold L. Perry, an attorney of Oakland, California, filed a Proof of Claim (No. 45 on the Court’s Claim Docket) on behalf of Harold B. DeJulio (DeJulio) and Texas Land Venture, a limited partnership (TLV). The Proof of Claim *516states that Perry is the attorney for DeJu-lio and the members of TLY and that he is authorized to make and file it on their behalf. The claim is based on two matters:
a. A suit in the United States District Court for the Northern District of California, No. C-78-0201, filed by DeJulio and TLV seeking to set aside certain transfers of properties and to have the assets of the Lawler Family Trusts be declared assets of H. Roger Lawler (Lawler).
b. A promissory note in the principal amount of $950,000.00 dated September 28, 1977 executed by George G. Nicoladze as Trustee of the Lawler Family Trusts payable to DeJulio as General Partner of TLV.
By “Order Declaring Alter Ego” dated June 18, 1979, Bankruptcy Judge Dean Gandy declared the Lawler Family Trusts the alter ego of Lawler for all purposes, retroactive to their inception.
The Debtor filed objections to that Proof of Claim. On September 25, 1986, this Court permitted the filing by the Debtor of its Second Amended Objection to Proof of Claim No. 45 and a hearing on that objection was held on December 8, 1986.1 The Second Amended Objection is based on the following grounds:
a. A Summary Judgment in favor of Lawler and his then Trustee-iri-Bank-ruptcy, L.E. Creel, III, was granted on January 23, 1981 by the United States District Court for the Northern District of California in Cause No. C-78-0201 (the suit which was the basis of a portion of the Proof of Claim). The Judgment was affirmed by the United States Court of Appeals for the Ninth Circuit on July 1, 1982 in Cause No. 81-4158.
b. A Summary Judgment cancelling the $950,000.00 note was signed on January 17, 1979 by the Judge of the 141st Judicial District Court of Tar-rant County, Texas in a suit brought by William Robert Lawler, Jr., Trustee of the Lawler Family Trusts against DeJulio and TLV. That decision was affirmed in DeJulio v. Lawler, 593 S.W.2d 837 (Tex.Civ. App.—Fort Worth 1980, writ ref’d n.r.e.).
c. On November 25, 1981, by “Order Sustaining Objections to Late Filings of Declarations by Defendants and Order Granting Summary Judgment,” the 141st Judicial District Court of Tarrant County, Texas in Cause No. 141-47534-78 styled “William Robert Lawler, Jr., Trustee, the Lawler Family Trusts v. Harold B. DeJulio, Individually and as General Partner of Texas Land Venture, a Partnership,” granted a Judgment for the Plaintiff against DeJulio individually, and as General Partner, for $1,230,000.00 together with interest and costs of court. On February 16, 1983, the Superior Court of California for Contra Costa County entered a “Judgment on Sister State Judgment” with respect to the Texas monetary Judgment. Lawler asserts that this matter was appealed and affirmed on February 26, 1986 by the Court of Appeals of the State of California, First Appellate District, Division II, No. A022137. Based on this, Lawler asserts that he is entitled to “a judgment against Harold B. DeJu-lio and the members of the Texas Land Venture in the amount of $1,315,478.18 plus interest at the rate of 7% per annum from February 16, 1982.”2
d. The remaining grounds seek sanctions against DeJulio and the members of TLV.
*517At the hearing on this matter, Lawler pointed to this Court’s letter of June 17, 1986 entitled “Notice of Setting” addressed to Perry, the attorney for Lawler, and other parties which set various matters in this case for hearing in Fort Worth on October 14, 1986. The trial of this matter was continued to December 8, 1986. The notice was sent to Perry at the address stated in Claim No. 45. The records of this Court do not reflect that it was returned.
Lawler’s attorney recited that he had mailed various other matters to Perry at that address and that these items had not been returned. Lawler’s attorney submitted an affidavit from his secretary stating that she had verified the address through a legal directory and telephone directory assistance.
Perry did not appear at either the October 14 or December 8 settings, nor was any appearance made on behalf of DeJulio or TLV. No answer was filed on their behalf.
Objection to Claim
Based on the Judgments of the United States Court of Appeals for the Ninth Circuit and the Texas Court of Civil Appeals, the matters asserted in Claim No. 45 have been resolved adversely to DeJulio and TLV and the claim should in all things be denied.
Claim Against Members of TLV
Lawler’s assertion of a personal judgment against the partners of TLV should be denied for a number of reasons.3
There is no evidence as to the names and addresses of the partners in TLV. As requested by the Court, Lawler submitted a proposed Pretrial Order. In the proposed Pretrial Order under the heading “Statement of Stipulated Facts” is the following: “At the time of the transactions in question, Claimant Texas Land Venture was a general partnership and the members (partners) were and are: ... (a list of 18 names and addresses of persons in the State of California)-” The Court could not approve such a stipulation because of the default by DeJulio and TLV. Lawler presented no partnership agreement, tax return or other evidence of the membership of this partnership. Consequently the Court does not know the names and addresses of the members (partners) of the partnership.
The Proof of Claim states that TLV is a limited partnership. Apparently, at all times during the dealings between the parties, the parties assumed that it was a limited partnership. At hearing, Lawler introduced a Certificate from the Secretary of State of Texas dated September 26, 1986 stating that after a search of the records of that office, that there is no record “on file to indicate that there is a Limited Partnership on file bearing the name of TEXAS LAND VENTURES' ” (emphasis added). The Certificate does not state that there has never been such a limited partnership. It is to be noted that the Proof of Claim was filed October 3, 1978, almost eight years prior to the date of the Certificate and that the name given in the Proof of Claim is Texas Land Venture. Lawler also introduced a Certificate from the County Clerk of Tarrant County, Texas dated September 29, 1986 stating that the name Texas Land Venture did not appear in the assumed name records of that county. From this data, Lawler concludes that TLV was not a properly formed limited pártnership and, thus, the partners are general partners and jointly and severally liable for the debts of the partnership.
Texas Courts have held that the fact that a limited partnership certificate is not filed with the Secretary of State does not necessarily create a general partnership or unlimited liability for the limited partners. Garrett v. Koepke, 569 S.W.2d 568 (Tex.Civ.App.—Dallas 1978, writ ref’d n.r.e.). In Garrett, the Court was reluctant to extend general liability to the limited partners when third parties dealing with *518the limited partnership knew they were dealing with a limited partnership. See also Voudouris v. Walter E. Heller & Co., 560 S.W.2d 202 (Tex.Civ.App.—Houston [1st Dist.] 1977, no writ). The Fifth Circuit Court of Appeals followed Voudouris for the proposition that the failure to file a limited partnership agreement with the Secretary of State did not result in the formation of a general partnership. Laney v. Commissioner of Internal Revenue, 674 F.2d 342 (5th Cir.1982). See also “Partnerships—Bankruptcy Considerations and Recent Cases” by George W. Coleman, 5th Annual Bankruptcy Conference, University of Texas School of Law, 1986.
Lawler assumes that his Judgment of November 25, 1981 is against the partnership. That is not the case. The Judgment is against “HAROLD B. DeJULIO, INDIVIDUALLY AND AS GENERAL PARTNER OF TEXAS LAND VENTURE, A PARTNERSHIP.”
Lawler asserts that service of notice upon Perry, as attorney of record, is sufficient pursuant to Fed.R.Civ.P. 5 which is made applicable to Bankruptcy proceedings by Bankruptcy Rule 7005. Subdivision (b) of Fed.R.Civ.P. 5 states that when service is to be made upon a “party” represented by an attorney, that the service shall be made upon the attorney. The question then is: Are the limited partners of TLV parties to this proceeding as a result of the claim which was filed in this proceeding? Claim No. 45 states that Perry is the attorney for DeJulio and “the members of TEXAS LAND VENTURE, a Limited Partnership filed in the State of California, and I am authorized to make and file this Proof of Claim on behalf of HAROLD B. DeJU-LIO and the members of TEXAS LAND VENTURE, a Limited Partnership.” The claim then discusses the suit by DeJulio and TLV in the United States District Court for the Northern District of California and the $950,000.00 note which is payable to “Harold B. DeJulio, as General Partner of Texas Land Venture, a California Limited Partnership.” Nowhere are the “members” listed. It is obvious from the claim that it is made on behalf of the partnership and not on behalf of the limited partners individually. This Court finds that the filing of the Proof of Claim by Perry does not constitute an entry of appearance in these bankruptcy proceedings by the members (partners) of TLV in their individual capacities. Consequently, they are not “parties” upon whom service may be had by serving Perry. Under Fed.R.Civ.P. 5(a) service on each individual partner is required.
It must be noted that Perry represents both DeJulio, individually and TLV. Although DeJulio, as General Partner of TLV, presumably had authority to employ Perry to represent TLV, he did not have authority to employ Perry to represent the limited partners individually. Certainly the employment to represent a limited partnership does not imply employment to represent the limited partners in their individual capacities.
In any event, this matter smacks of a fundamental lack of due process. Lawler is attempting, in a Texas bankruptcy proceeding, to get a joint and several judgment in excess of $1.3 million against a number of parties residing in California. Lawler gives them no actual notice of these proceedings in any way, shape or form. The judgment is sought by way of an objection to claim which does not in its title give any indication that such a judgment is requested. The body of the objection does not name the parties against whom the judgment is sought and alleges in only the most obtuse way the grounds for such a judgment and the fact that the judgment is being sought.
Claim No. 45 asserts that the Limited Partnership was properly formed under the laws of the State of California. There is no evidence to the contrary. The record before this Court indicates that all action on behalf of TLV was taken by DeJulio. There is no evidence that any of the limited partners ever came to Texas, or that they took any actions in Texas on behalf of the partnership. With the partnership agreement not in evidence, there is no way for this Court to tell whether DeJulio was acting within the scope of his duties as Gener*519al Partner or beyond the scope of his duties as General Partner. Thus the question remains as to whether the partnership has any liability whatsoever. If it does not, then neither would the limited partners.
If the limited partners were to be made parties to this proceeding, it was incumbent on Lawler to do so. It is not necessary for the Court to remind Lawler of this fundamental principle of law, but in the notice of setting dated June 17, 1986, the Court stated:
It is the responsibility of the attorney for [Lawler] ... to determine that the addresses stated above are correct and sufficient to give notice of these hearings to all affected parties. If any of the addresses stated above are not correct or current, or if they are in any way insufficient to give full and proper notice to each and all of the parties involved, it is ... [the attorney’s] ... responsibility to send copies of this letter, with appropriate transmittals in the manner he deems most appropriate, to give full and sufficient notice of these settings to all parties. He shall furnish proof of such service at the hearing.
The notice of setting related to several matters in the Lawler bankruptcy. Perry and Lawler’s attorney were the only persons involved in the instant proceeding to whom the notice was sent as indicated by the addresses stated at the opening of the letter. At the hearing on this matter, Lawler’s attorney presented evidence that he sent additional documentation to Perry; however, no evidence was presented showing notice to the limited partners. The Court could not have sent notice to the limited partners as they were nowhere disclosed in the records of this case and the complaint against them was not made until the Second Amended Objection to Proof of Claim No. 45 which the Court permitted to be filed on September 25, 1986.4
This case was filed under the Bankruptcy Act of 1898. Under § 23 of that Act (former 11 U.S.C. § 46), Bankruptcy Courts had limited jurisdiction over parties who were participants in the bankruptcy process, but almost no jurisdiction over parties who were not participants. The Bankruptcy Court was said to have “summary jurisdiction” to adjudicate all matters relating to the administration of the bankruptcy estate and to property in the Bankruptcy Court’s possession. “Plenary jurisdiction” was the jurisdiction of United States District Courts over actions brought by Receivers or Trustees-in-Bankruptcy (and presumably Debtors-in-Possession) concerning property or claims that were not in the possession of the Bankruptcy Court. 2 Collier on Bankruptcy (14th Edition, 1976) ¶ 23.02. By filing a Proof of Claim, a party submitted himself to the jurisdiction of the Bankruptcy Court for certain purposes in what was customarily called “jurisdiction by ambush.” Collier, supra at ¶ 23.08. The members (partners) of TLV did not file a claim in this proceeding and are not parties to this bankruptcy proceeding; consequently, this Court has no jurisdiction to render a judgment against them.
Claim Against DeJulio
Lawler has already received a Judgment against DeJulio on these matters in the State of Texas and, based upon the Texas Judgment, a Judgment in the State of California. Any Judgment of this Court would be unnecessary and a duplication of the prior judgments.
Sanctions
Lawler has requested sanctions against DeJulio and the members of TLV in the following language:
The filing and continued prosecution of the Proof of Claim by Attorney Harold Perry, Harold B. DeJulio, and the members of the Texas Land Venture is a violation of Fed.R.Civ.P. 11. Under Rule 11, the signature of the attorney consti*520tutes a certificate that to the best of his knowledge, information, and belief formed after reasonable inquiry it is well grounded in fact and is warranted by existing law. Further, it must not be imposed for an improper purpose such as to harass or cause unnecessary delay or needless increase in the cost of litigation. Harold Perry appeared as attorney in the Texas proceedings and, as shown by Exhibit A, was attorney of record in the California proceedings. Harold B. DeJu-lio and the members of the Texas Land Venture have engaged in protracted litigation to avoid collection of the judgment. Continued prosecution of this Proof of Claim is harassing and needlessly increases the cost of litigation. The members of the Texas Land Venture are general partners.
The request for sanctions should also be denied for a number of reasons.
Lawler asks for sanctions against Perry, DeJulio and “the members of” TLV for the “filing and continued prosecution” of the Proof of Claim. For the reasons outlined above, the “members” are not parties to this proceeding.
The Proof of Claim was filed on October 3, 1978. Certainly the documentation attached to the Proof of Claim indicates that Perry, to the best of his knowledge, information and belief, felt that it was well-grounded in fact and warranted by existing law. The Proof of Claim was based upon a matter then pending in the United States District Court for the Northern District of California and a $950,000.00 promissory note which, on its face, was then due. The Summary Judgment hearing on the $950,000.00 note was not held until November 30, 1978. The opinion of the Texas Court of Civil Appeals is dated January 17, 1980, supra. Subsequently, a Motion for Rehearing and Writ of Error to the Texas Supreme Court were filed. The Judgment of the United States District Court for the Northern District of California is dated January 23, 1981 and the af-firmance by the United States Court of Appeals for the Ninth Circuit is dated August 31, 1982. The fact that DeJulio and TLV subsequently lost these on Summary Judgment cannot be used as an assertion that the claim was not filed in good faith on October 3, 1978.
There is no evidence of any “continued prosecution” of the Proof of Claim by Perry, DeJulio or TLV. Indeed, in the normal course of events, a creditor takes no further action after he files a Proof of Claim. Perhaps Lawler feels that DeJulio had some affirmative duty to withdraw the Proof of Claim once he had lost the battles in the United States District Court in California and in the Courts of the State of Texas — but this is not the procedure prescribed under the Bankruptcy Act and by the Bankruptcy Rules. If Lawler feels that a claim is improper, it is incumbent upon Lawler to file an objection to that claim. In this instance, all that was necessary was to file a very simple objection to Claim No. 45, attaching copies of the Final Judgments in the State and Federal Courts. This would have been sufficient to have Claim No. 45 denied in its entirety. Certainly it cannot be said that the failure of DeJulio, Perry and TLV to withdraw Claim No. 45 constitutes “continued prosecution 'of the Proof of Claim” that is “harassing and needlessly increases the cost of litigation.” The increased litigation in this matter has been caused by Lawler, not by DeJulio, Perry or TLV.
Lawler further asserts that DeJulio and members of the TLV “engaged in protracted litigation to avoid collection of the judgment.” The evidence in this proceeding does indicate that DeJulio and TLV (but not “the members”) engaged in litigation and filed appeals. This is not surprising since the issues raised were the validity of a $950,000.00 note and a judgment in excess of $1.3 million. Fed.R.Civ.P. 11 relates to actions then pending before the Federal Court. The sanctions imposed by that Rule are certainly not to be levied for actions taken in other proceedings, be they in State or Federal Courts. If sanctions were appropriate in those other proceedings, Lawler should have asked for them at that time.
*521The process of objecting to claims is a normal proceeding within the Bankruptcy Court and not one which should normally subject the claimant to sanctions if he loses.5
Order accordingly.6
. The hearing was originally scheduled for October 14, 1986, but had to be continued because of the crowded condition of the Court's docket.
. The Texas Judgment of November 25, 1981 provides for 9% interest. The California Judgment on Sister State Judgment is for $1,230,-000.00 principal, $85,392.18 interest and $86.00 costs for a total of $1,315,478.18 which bears interest at 7%. The California Judgment was filed February 16, 1983. In one place it does state “Dated and Entered on Microfilm February 16, 1982,” but in another place it states “Entered on Microfilm February 16, 1983.” The Court concludes that 1983 is the proper date.
. The Court realizes that at the hearing on December 8, 1986 the Court ruled that the Judgment prayed for by Lawler should be granted. Upon more mature consideration and for the reasons stated, the Court withdraws that oral judgment and will enter an Order and Judgment in accordance with this Memorandum.
. The Bankruptcy Act was designed to shield debtors from foreclosure and other actions of their creditors while the debtors reorganize their financial affairs. The Act was also designed to provide an equitable distribution of the debtor’s assets to the creditors. Lawler is making an improper use of the Act by wielding it as a sword in an attempt to get a substantial judgment against unsuspecting California residents.
. It is interesting to note that one of the grounds used by the Texas Court of Civil Appeals in cancelling the $950,000.00 note was that Lawler, as an agent for the Lawler Family Trusts, personally profited to the detriment of the Trusts, which fact was known to DeJulio, supra at 841 and 843. Lawler now seeks to chastise DeJulio for having the audacity to lose that suit; the net effect is that Lawler is trying to profit from his own misdeeds.
. This Memorandum shall constitute Findings of Fact and Conclusions of Law pursuant to Bankruptcy Rule 7052 which is made applicable to Contested Matters by Bankruptcy Rule 9014. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490490/ | OPINION OF THE COURT AND ORDER ON TRUSTEE'S MOTION TO HAVE CASE DISMISSED
L. CHANDLER WATSON, Jr., Bankruptcy Judge.
At Gadsden, Alabama, on April 15, 1987, the above-styled case, commenced under title 11, chapter 12, United States Code, and pending before this Court under said chapter, came on to be heard on a motion by the standing chapter 12 trustee for dismissal of the case. Firstly, the motion asserts that the individual, Olen Moore, has attempted to file a joint petition with a corporation and that the statutory provisions for commencing joint cases (11 United States Code § 302(a)) do not provide for the commencement of a joint case by an individual and a corporation. Secondly, the motion asserts that the debtors have not filed the appropriate schedules and statements required by Bankruptcy Rule 1007, within fifteen days after entry of the order for relief, (sic)
At the hearing, the attorney for the debt- or (debtors?) admitted that nothing more than the chapter 12 petition had been filed, but argued that he understood that nothing else was required to be filed until the chapter 12 plan was filed. The Court advised the debtor’s attorney that the motion to dismiss would be granted unless the debtor remedied the deficiencies in filing under the requirements of Bankruptcy Rule 1007(a)(1).
Prior to the hearing, the debtor’s attorney had filed an “AMENDMENT TO CHAPTER 12 PROCEEDING,” by which Olen Moore purported to strike “Guntersville Greenhouse, Inc.,” as a party to the petition.
On April 20, 1987, the debtor filed a “SCHEDULE A — STATEMENT OF ALL LIABILITIES OF DEBTOR,” listing creditors, their addresses, and the amounts of the debts owed to them. The clerk and the standing chapter 12 trustee apparently have had some discussion as to whether the debtor’s filing of a “Schedule A” has been a sufficient compliance with the Court’s oral directive at the hearing or whether the case is due to be dismissed for the want of a filing by the debtor of a “Statement of Financial Affairs,” Official Form No. 8. This is indicated by a memorandum which, with the file for the ease, has come to the bankruptcy judge for a decision. The Court will address this question aside from any impropriety which may be involved under Bankruptcy Rule 9003.
In the 1986 Bankruptcy Amendments,1 a provision is made for the application of the bankruptcy rules to chapter 12 cases, as follows:
(b) Rules Relating to Chapter 12 of Title 11. — The rules prescribed under section 2075 of title 28, United States Code, and in effect on the date of the enactment of this Act shall apply to cases filed under chapter 12 of title 11, United States Code, to the extent practicable *609and not inconsistent with the amendments made by title II of this Act.2
Bankruptcy Rule 1007(a)(1), referred to by the Court at the hearing, requires that a debtor, in a voluntary case, file with the petition (the pleading whose filing commences the bankruptcy case3) “a list containing the name and address of each creditor” or “a schedule of liabilities or a Chapter 13 Statement.” It is obvious that the debtor’s attorney has belatedly effected a compliance by the debtor with this requirement and avoided the literal condition laid down by the Court for dismissal of the case.
As to whether the Bankruptcy Rules also require a chapter 12 debtor to file a “Statement of Financial Affairs,” the answer is negative. Part (b) of Rule 1007 requires that a “debtor in a chapter 7 liquidation case or chapter 11 reorganization case” file various schedules and statements, including “a statement of financial affairs.” It omits any reference to a chapter 9 debtor, a chapter 13 debtor, and— since the rule preceded chapter 12—a chapter 12 debtor.4
Although the Court may dismiss this case for “unreasonable delay ... by the debtor that is prejudicial to creditors,”5 no specific prejudice has been shown and none has been asserted by any creditor. This case was commenced March 2, 1987, and while some general prejudice to creditors may be inferred from the debtor’s delay in complying with the requirements of Rule 1007(a)(1), some leniency in enforcing correct practice under a new statute does not exceed the Court’s discretion. Because the debtor has now filed a list of creditors, the motion to dismiss will not be granted for his initial failure to file the list.
The other aspect of the trustee’s motion to dismiss was the alleged absurdity of attempting to join as debtors in the chapter 12 petition the individual, Olen Moore, and a corporation. Section 302 of title 11 is the only provision in that title for the filing of a joint bankruptcy petition, and it sanctions only a joint petition for an eligible “individual ... and such individual’s spouse.” It is not necessary to ascertain whether “Guntersville Greenhouse, Inc.,” was intended to be a joint debtor6 or whether that was intended to be a trade name listed in the caption of the petition, since it has been stricken as a petitioner. The motion to dismiss is not due to be granted on the ground of a misjoinder of debtors, but whether the “family farmer” here is in fact the debtor or a corporation is a question which may pose further problems in this case.
Neither the trustee nor the debtor’s attorney has called to the attention of the Court the provisions of section 521 of title 11, which prescribe debtor’s “duties.” In subsection (1), the debtor is required to file a list of creditors and, unless the Court orders otherwise, the following:
(1) a schedule of assets and liabilities;
(2) a schedule of current income and current expenditures; and
(3) a statement of the debtor’s financial affairs.
It now appears from the case- file that the debtor, on May 1, 1987, filed all of the above schedules and statement, as well as the disclosure of compensation paid or promised to the attorney for a debtor.7 If the new petition filed by the debtor on May *6101, 1987, which “prays for relief in accordance with chapter 7 (or chapter 11, or chapter 13) of title 11, United States Code” (sic), may be ignored, an order denying the trustee’s motion to dismiss this case will suffice for present purposes.
ORDER OF THE COURT
The motion to dismiss this case not now being well-taken, it is ORDERED by the Court that the motion is denied and that the clerk mail a copy hereof to the debtor, his attorney, the standing chapter 12 trustee, the bankruptcy administrator, and the creditors, respectively.
. Bankruptcy Judges, United States Trustees, and Family Farmer Bankruptcy Act of 1986, Pub. L. 99-554, § 305(b) (Oct. 27, 1986).
. Id. § 305(b).
. 11 U.S.C. § 301 (1979).
. The chapter 12 “interim rules” which the Advisory Committee on Bankruptcy Rules of the Judicial Conference of the United States has recommended for adoption as local rules, pending formulation and adoption of additions to the Bankruptcy Rules, contains in Rule 12-3 a requirement for the chapter 12 debtor to file a "Chapter 12 Statement” and a "statement of financial affairs.” Memorandum to United States District and Bankruptcy Courts, dated February 5, 1987, from the Honorable Lloyd D. George, United States District Judge, Chairman.
. 11 U.S.C. § 1208(c)(1) (1987).
. The petition was signed twice by Olen Moore—once as president of Guntersville Greenhouse, Inc.
. Required by 11 U.S.C. 329(a) and Bankruptcy Rule 2016(b). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490491/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW
SIDNEY M. WEAVER, Bankruptcy Judge.
THIS CAUSE came on before the Court on March 11, 1987 upon the complaint of Mark S. Krohn, a creditor, against Edwin Tracton, the debtor, seeking an exception to discharge of a state court judgment on a promissory note pursuant to 11 U.S.C. § 523(a)(2)(A) and (a)(6) and the Court having heard the testimony, examined the evidence presented, observed the candor and demeanor of the witnesses, considered the arguments of counsel and being otherwise fully advised in the premises, does hereby make the following Findings of Fact and Conclusions of Law:
On or about December 11,1981 the creditor and the debtor entered into an agreement for the sale of the creditor’s shares of stock in Boulevard Realty Corp. to the debtor. Pursuant to the agreement, the debtor personally guaranteed a promissory note to the creditor. Payment of the promissory note was secured by a security agreement granting the creditor a security interest in the Boulevard Realty Corp. stock. The terms of the promissory note, according to the testimony, called for payments on the note when the corporation accrued net commissions from sales.
Approximately three months subsequent to the transaction the debtor closed Boulevard Realty Corp. and vacated the premises. The debtor testified that the business performed so poorly that he had no alternative but to close it. He was behind on his lease payments and the landlord instructed him to pay the rent or vacate the premises. A letter written by the debtor to the credi*629tor in response to a demand letter informed the creditor of the debtor’s financial difficulties. However, the debtor did not notify the creditor that he was planning to close the business and the creditor only accidentally found the business closed when he drove past it one day. The creditor subsequently obtained a Summary Final Judgment on the promissory note against the debtor in Dade County Circuit Court.
In addition to having a security interest in the Boulevard Realty stock, the creditor had a security interest in the assets of the business, including a lease on the property that housed the business. It appears that at the time of the transaction there was a copy machine, various types of office furniture, a few files, and a plastic display sign on the premises. Upon the creditor’s discovery of the closed business, the creditor requested the return of the copy machine from the debtor. The debtor returned the copy machine as per his request, but none of the other equipment was returned and the precise whereabouts of it is unclear. The creditor contends that the debtor sold the assets, but the evidence does not support his contention. The lease was terminated for lack of payment and the security on the lease was evidently retained by the landlord for payment of back rent.
The creditor argues that the state court judgment should be excepted from discharge because the debtor caused a willful and malicious injury to the property of another entity within the meaning of 11 U.S.C. § 523(a)(6) and that the debtor obtained money or property through false pretenses, false representations or actual fraud within the meaning of 11 U.S.C. § 523(a)(2)(A). Based on the following discussion, the Court finds that the evidence does not support an exception from discharge under either 11 U.S.C. § 523(a)(6) or (a)(2)(A).
11 U.S.C. § 523(a)(6) states that a debtor cannot be discharged from any debt where there was “a willful and malicious injury by the debtor to another entity or to the property of another entity.” If the injury committed by the debtor is a conversion of the creditor’s property, “the debt is nondischargeable in bankruptcy if the conversion was ‘willful and malicious’.” Chrysler Credit Corp. v. Rebhan (In re Rebhan), 45 B.R. 609 (Bankr.S.D.Fla.1985). See also H.R.Rep. No. 595, 95th Cong. 1st Sess. 363 (1977) and S.Rep. No. 989, 95th Cong., 2d Sess. 77-79 (1978), U.S.Code Cong. & Admin.News 1978, p. 5787. In the State of Florida “conversion is an unauthorized act which deprives another of his property permanently or for an indefinite time.” Senfeld v. Bank of Nova Scotia, 450 So.2d 1157, 1161 (Fla.3d DCA 1984). Additionally, “where a person having a right to possession of property makes demand for its return and the property is not relinquished, a conversion has occurred.” Senfeld, 450 So.2d at 1161. However, demand and refusal are not required where conversion can otherwise be shown. Senfeld, 450 So.2d at 1161.
In the case at bar, the creditor demanded that his copy machine be returned and the debtor complied with the request. As to the office furniture, the debtor testified that he did not sell any of it, but held most of it at his home until he was divorced and moved away leaving it in the marital home. The debtor said he would have returned anything the creditor wanted. As to the lease, the debtor defaulted and the landlord took possession of the premises, evidently including the display sign. Based on these facts, there was no conversion by the debtor under Florida law.
However, even if there was a conversion under 11 U.S.C. § 523(a)(6) there is no exception from discharge for a debt if the conversion “occurred without a conscious intent to violate the property rights of another.” In the Matter of Held, 34 B.R. 151 (Bankr.M.D.Fla.1983) affm’d Miller v. Held (In re Held), 734 F.2d 628 (11th Cir.1984). A mere technical conversion is not sufficient to except a debt from discharge, it must be a willful and malicious conversion. See H.R.Rep. No. 595, 95th Cong. 1st Sess. 363 (1977) and S.Rep. No. 989, 95th Cong., 2d Sess. 77-79 (1978). The creditor only proved that some furniture was not returned to the creditor. He did not show demand and refusal or that there *630was an unauthorized sale of assets. The facts simply do not support an exception from discharge for the state court judgment under 11 U.S.C. § 523(a)(6).
The creditor also claims that the state court judgment is nondischargeable under 11 U.S.C. § 523(a)(2)(A) because of the debtor’s intent, at the time he entered into the agreement, not to repay the note and to liquidate the assets of Boulevard Realty Corp. 11 U.S.C. § 523(a)(2)(A) states that a discharge shall not be granted to a debtor for any debt “for money ..., to the extent obtained by false pretenses, a false representation or actual fraud_” The creditor argues that had the debtor not misrepresented his intention to repay the note, he would not have agreed to transfer the stock in Boulevard Realty Corp.
A debt is excepted from discharge because of the debtor’s false representation if the following is shown: “the debtor made a false representation with the purpose and intention of deceiving the creditor; the creditor relied on such representation; his reliance was reasonably founded; and then the creditor sustained a loss as a result of the representation.” In re Hunter, 780 F.2d 1577, 1979 (11th Cir.1986). Additionally, implied fraud is insufficient, but the “debtor must be guilty of positive fraud or fraud in fact, involving moral turpitude or intentional wrong.” Hunter 780 F.2d at 1579.
The evidence presented by the creditor provides no basis for this Court to find, according to the Hunter elements, that the debtor made a misrepresentation as to his intentions to repay the note. The default alone does not prove that the debtor made a false representation at the time he signed the note that he would repay it. According to the unrebutted testimony of the debtor, the note did not require payment until there were sales. Additionally, although the creditor made a demand for payments he felt were due on the note, the debtor replied with set offs he felt were due from the creditor. As to the liquidation of assets, the creditor did not prove any of the assets were ever sold. It appears that the Boulevard Realty Corp. was a failure as a business and the debtor could not repay the note. Bankruptcy protects such debtors from their creditors and affords them a fresh start. Therefore, under the circumstances, the debt cannot be excepted from discharge under 11 U.S.C. § 523(a)(2)(A).
In summary, this Court finds that the state court judgment is not entitled to be excepted from discharge under 11 U.S.C. § 523(a)(6) or (a)(2)(A). A separate Final Judgment of even date has been entered in conformity herewith. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490492/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW ON THE OBJECTION OF RANDALL W. ATKINS, CHARLES D. BARNETT, ORIN E. ATKINS, AND 500 PARK AVENUE ASSOCIATES TO THE AGREEMENT OF COMPROMISE AND SETTLEMENT OF CLAIMS OF THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
GEORGE L. PROCTOR, Bankruptcy Judge.
THIS MATTER came before the Court for hearing on the Objection of Randall W. Atkins, Charles D. Barnett, Orín E. Atkins, and 500 Park Avenue Associates (the “Objectors”) to the Agreement of Compromise and Settlement (the “Settlement”) entered into between Louis Lowin, as Chapter 11 Trustee, now Post-Confirmation Administrator (the “Trustee”) of The Securities Groups, the Monetary Group, The Securities Group 1980, and The Securities Group (“the estates”), and-the Equitable Life Assurance Society of the United States (“The Equitable”). The Settlement, which compromises and settles the claims of The Equitable filed in the above-captioned estates, is basically undisputed.
The Securities Groups (“Groups”), as tenant, entered into an Agreement of Lease dated as of January 1, 1980, with 500 Park Avenue Associates (“Associates”), an Objector herein,1 for the entire tenth and eleventh floors of 500 Park Avenue, New York, New York. On or about April 1, 1981, Groups executed a First Amendment of Lease in which it agreed to lease the entire ninth floor of 500 Park Avenue as well. Subsequently, Associates and The Equitable agreed that The Equitable would purchase and demolish the adjoining Nassau Hotel and construct a mixed use tower on its site, which would be linked floor-for-floor with the existing eleven floors of 500 Park Avenue, thereby substantially increasing the square footage of each floor. On or about September 1, 1981, Groups executed the Second Amendment of Lease, whereby Groups agreed to accept the space to be constructed in the new tower adjoining the existing ninth, tenth and eleventh floors. The Agreement of Lease and the amendments thereto are referred to collectively herein as the “Lease”.
On or about September 29, 1981, The Equitable purchased the building located at 500 Park Avenue and the Nassau Hotel and, in conjunction with that purchase, Associates assigned its rights as landlord under the Lease to The Equitable.
Thereafter, Groups failed to pay rent due and owing to The Equitable under the Lease. (Tr. at p. 86)2 Accordingly, on or about March 13, 1984, The Equitable commenced a lawsuit3 in the Civil Court in the City of New York, seeking a final judgment of eviction as well as an award of rent arrearages. The trial of that action *632commenced on April 19, 1984. The filing of the Groups’ petition for relief on May 24,1984, stayed further proceedings before the Civil Court.
The Equitable then moved before this Court for relief from the stay in order to allow it to proceed to a judgment of eviction in the Civil Court. On August 8, 1984, this Court granted The Equitable’s motion (Tr. at p. 89). The Equitable then returned to the Civil Court where Judge Charles E. Ramos entered a judgment of eviction awarding possession of the premises to The Equitable and rental arrearages in the amount of $1,623,040.63 against Groups.4 (Tr. at p. 89; Tr. Exh. 2).
Subsequently, The Equitable filed proofs of claims in each of the estates in the amount of $16,332,176.18. (Tr. Exh. 8) Those claims reflected the amount due The Equitable for the period from Groups’ initial failure to pay rent through the unexpired term of the Lease and include the judgment awarded by the Civil Court. Also included in that amount was an administrative claim of $890,985.20 for post-petition rent which had not been paid.
This Court held a hearing on June 17, 1986, to consider objections filed by the Trustee to Equitable’s claims. Notice of the hearing was given to all interested parties. None of the Objectors raised any objection to The Equitable’s claims at that time. At that hearing, the Trustee and The Equitable announced the terms of the Settlement, whereby The Equitable reduced its claims in each of the estates to $3,529,-114.39 and acknowledged that the payment of that sum would constitute full payment of all of its claims. (Obj. Exh. 1).
THE OBJECTIONS
Although none of the Objectors, including Associates, the original landlord under the Lease, filed objection to The Equitable’s claims, they have filed Objections to the Settlement. The Objectors raise four objections:
1) Insufficiency of notice;
2) Excessive amount;
3) Multiple claims; and
4) Judicial estoppel.
For the reasons set forth below, the Court has concluded that the Objections should be denied.
DISCUSSION OF THE OBJECTIONS
At the hearing on February 12, 1987, the Court heard the testimony of the Trustee and Robert H. Speer, The Equitable’s Director of Leasing for the New York region. (Tr. at p. 71). Both were called to testify by the Objectors. The Objectors offered no other witnesses.5 The Trustee credibly testified regarding the factors which led him to conclude, based upon his evaluation of the investigation and analysis of his counsel, that the Settlement was fair, reasonable and adequate and in the best interest of the estates. (Tr. at pp. 56, 58-59) The Trustee’s conclusion was based upon four factors:
1) The Equitable had obtained, after a hotly contested trial, a judgment against the Groups in the Civil Court;
2) The Equitable had sustained substantial damages, which it had diligently attempted to mitigate;
3) Litigation to further reduce The Equitable’s claims was likely to be extremely costly and was unlikely to succeed; and
4) The Equitable had agreed that not only would it reduce its unsecured claim but, in addition, it would waive its administrative claim for post-petition rent in the amount of $890,985.20, which, if paid on confirmation as provided by the Bankruptcy Code, would have made confirmation of a plan impossible.
*633Mr. Speer credibly testified with regard to the basis of The Equitable’s claim and the extensive efforts made by The Equitable to mitigate its damages after Groups’ default.6 The Equitable’s efforts to reclaim the space were frustrated by an arcane legal problem. Groups had sublet the most desirable 4,000 square feet (overlooking Park Avenue) of the 16,150 square foot tenth floor of 500 Park Avenue to Temporary Hanseatic, Inc. (“Temporary Hanseatic”). Temporary Hanseatic was also occupying a portion of the ninth floor. Because the tenth and eleventh floors were penetrated by an internal staircase, they were, for all practical purposes, a single unit.
In seeking to reclaim the three floors, The Equitable confronted a classic trap for the unwary New York lessor. Groups purported to tender possession of the ninth, tenth and eleventh floors, however, Temporary Hanseatic failed to join in that tender. (Tr. at pp. 91-93). In Eten v. Luyster, 60 N.Y. 252 (1875), the New York Court of Appeals held that, if a landlord accepts a tenant’s tender of possession without the simultaneous tender by all subtenants, any non-tendering subtenant becomes, by operation of law, a direct tenant of the landlord. New York courts continue to follow the rule of Eten v. Luyster. E.g., Da Costa’s Automotive, Inc. v. Birchwood Plaza Shell, Inc., 106 A.D.2d 484, 482 N.Y.S.2d 832 (2d Dep’t 1984); Precision Dynamics Corp. v. Retailers Representatives, Inc., 120 Misc.2d 180, 181-82, 465 N.Y.S.2d 684 (N.Y.C.Civ.Ct.1983):
The basic rule is that a sublease is dependent on and limited by the terms and conditions of the main lease from which it is carved. A subtenancy may thus be terminated by the expiration of the term of the lessee of a re-entry by the landlord for a condition broken. (Eten v. Luyster, 60 NY 252; Hoffman Brewing Co. v. Wuttge, 234 NY 469 [138 N.E. 411]; Ashton Holding Co. v. Levitt, 191 App Div 91 [180 N.Y.S. 700]; New York Rys. Corp. v. Savoy Assoc., 239 App Div 504 [268 N.Y.S. 181]; Metropolitan Life Ins. Co. v. Hellinger, 264 App Div 7 [284 N.Y.S. 432], affd 272 NY 24 [3 N.E.2d 621]; World of Food v New York World’s Fair 1964-1965 Corp., 22 AD2d 278 [254 N.Y.S.2d 658]; 1 Rasch, New York Landlord & Tenant—Summary Proceedings [2d ed], §§ 234, 246.)
Equally well settled is that when a sublessor voluntarily surrenders his main lease not pursuant to any provision of such lease and same is accepted by the landlord, the subtenant becomes the immediate tenant of the original lessor and the interest and terms of the subtenant continue as if no surrender had been made. (Rhinelander Real Estate Co. v. Cammeyer, 117 Misc 67 [190 N.Y.S. 516]; [App Term, 1st Dept]; Eten v. Luyster, 60 NY 252, supra; Kottler v New York Bargain House, 242 NY 28 [150 N.E. 591]; Ashton Holding Co. v Levitt, supra; Oshinsky v Greenberg, 39 Misc 342 [79 N.Y.S. 853] [App Term]; Harwyn Dress Corp. v International Dress Co., 147 NYS2d 254.)
The effect of a voluntary surrender is equivalent to a transfer of the reversion, the interests of the landlord and tenant merge, and what remains is the landlord’s fee subject to the subtenancy. Such subtenancy remains because the landlord and tenant may not affect the rights of third parties who are not parties to their separate surrender agreement. (Ashton Holding Co. v. Levitt, supra; Eten v Luyster, supra.) (Emphasis added.)
Thus, unless The Equitable could obtain the return of all three floors, it would be stuck with Temporary Hanseatic occupying the most desirable portion of the tenth floor plus part of the ninth floor for the balance of the ten-year lease, thereby rendering the remainder of the tenth floor, the remainder of the tenth-eleventh floor unit and, in all likelihood, the ninth floor unmar*634ketable. To avoid this disastrous result, The Equitable followed the only prudent course, which was to proceed to evict Groups from all three floors, thereby terminating Temporary Hanseatic’s subtenancy. See Precision Dynamics Corp., v. Retailers Representatives, Inc., supra.
The Objectors argue that The Equitable should have accepted Groups’ purported tender of the ninth, tenth and eleventh floors on May 15, 1984, approximately six months before The Equitable was granted a judgment of eviction and entered the premises and should have attempted to re-let the space at that time. This argument ignores the fact that the failure of Temporary Hanseatic to join in the tender rendered Groups purported tender illusory.
That Temporary Hanseatic’s counsel stated that it had no defense to eviction but merely wished to stay issuance of the warrant of eviction is a distinction without a difference. The fact is that Temporary Hanseatic was not agreeing to return the space and The Equitable was not required to wager that Eten v. Luyster would not apply to Temporary Hanseatic’s artfully crafted position. To do so would have been commercially unreasonable and the Court cannot hold that The Equitable was required to take this potentially ruinous risk.7
Upon regaining the premises on October 29, 1984, The Equitable immediately set to reletting the premises. (Tr. at 93-94). Initially The Equitable was successful in renting the ninth floor to Quadraeconomics, Inc. In order to secure that tenant, The Equitable, consistent with prevailing market conditions, granted Quadraeconomics a four month rent abatement and a $250,000 work letter.8 (Tr. at 94-95). The Equitable then agreed to lease the tenth floor to S.J. Warburg, English merchant bankers.9
After securing S.J. Warburg as a tenant, however, Walt Disney Enterprises (“Disney”) expressed an interest in leasing both the 10th and 11th floors. By making special concessions to S.J. Warburg (which are not part of The Equitable’s claim) The Equitable was able to induce S.J. Warburg to move to the seventh floor, thereby freeing the tenth-eleventh floor unit for lease to Disney, which commenced on May 1, 1985. Again, because of market conditions, plus the negotiating skill of Disney’s real estate subsidiary, ARVIDA, The Equitable agreed to a $316,000 work letter and abated eight months rent. (Tr. at p. 96).
After qualification by the Court as an expert witness, Mr. Speer testified that, in his opinion, the Quadraeconomics and Disney leases were commercially reasonable. He also testified that these were the best long or short term opportunities available to The Equitable. (Tr. at pp. 95-96). The Court finds Mr. Speer’s opinion to be credible and, in the absence of any contrary evidence, accepts it.10 Therefore, the Court concludes that The Equitable acted reasonably under the circumstances to mitigate its damages and is entitled to its full claim as limited by 11 U.S.C. § 502(b)(6).11
*635Having concluded that there is no basis for reducing The Equitable’s claim as limited by U.S.C. § 502(b)(6), the Court is compelled to agree with the Trustee’s conclusion that the settlement is in the best interest of the estates. In In re Blair, 538 F.2d 849, 851-52 (9th Cir.1976), which like this case, was a liquidation case, the Ninth Circuit set forth the standard for evaluation this settlement:
When considering whether to approve a compromise in liquidation bankruptcy proceedings, the trustee and bankruptcy judge should weigh the probable costs and benefits. They should consider factors such as the complexity and hazards of litigation, the expense (attorney’s fees and the costs of court and discovery), the time required, and whether disapproval of the compromise would likely result in the wasting of assets.
* * sic * * *
The bankruptcy judge and the district court may, in a case such as this, give weight to the opinions of the trustee, the parties, and their attorneys. The judge and court may consider the principals’ belief that the factors outlined above (and others) have been explored and considered and that the compromise is fair, reasonable, and the wisest course. Consideration should also be given to the principle that the law favors compromise and not litigation for its own sake.
♦ * * * * *
A liquidation bankruptcy is a terminal affair. The bankrupt’s financial affairs are beyond repair. Liquidation is to be accomplished as rapidly as possible consistent with obtaining the best possible realization upon the available assets and without undue waste by needless or fruitless litigation. (Emphasis added.)
See also, Protective Committee For Independent Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 88 S.Ct. 1157, 20 L.Ed.2d 1 (1968); In re Jackson Brewing Co., 624 F.2d 599 (5th Cir.1980).
At the February 12,1987, hearing on this matter, Objectors devoted their entire case in chief to an attempt to: 1) impeach the Trustee’s investigation of the advisability of the settlement; and 2) impeach The Equitable’s claim. No affirmative evidence of any realistic alternative was offered.
Despite full discovery in preparation for the trial, no viable basis for contesting The Equitable’s claim has been presented to the Court. Thus even if, arguendo, the Trustee’s investigation was deficient, which the Court finds is not the case, there is no reason to doubt his conclusion that any litigation of The Equitable’s claim would be costly, time consuming and, in all likelihood, unsuccessful.
Moreover, in agreeing to forego the dubious benefits of litigation, the Trustee was able to obtain a waiver of The Equitable’s administrative claim. Given the fact that The Equitable’s administrative claim, which would have been payable at confirmation, exceeded the cash on hand at confirmation, that waiver made confirmation of the plan possible and clearly establishes that this Settlement is in the best interest of the estates.
The Objectors’ remaining objections need no extensive discussion. Objectors claimed that “[t]he notice of the Settlement Agreement is insufficient, and the opportunity to object is rendered meaningless, in that interested parties are not given any particulars upon which to determine whether the Settlement Agreement is fair, reasonable and adequate and in the best interests of the Debtor’s estates.” Objections at 1-2. The Objector has had full discovery and has demonstrated at trial knowledge of the details of the Settlement. No more notice is required or necessary.
The Objection to The Equitable’s multiple claims was mooted by The Equitable’s agreement in the Settlement to claim no more than $3,529,114.39 in aggregate from all of the estates. In all events, the Objectors claim that “only Groups was a party to the Lease” and that “Equitable’s claim should not be allowed as to each of TSG, TMG and TSG-80,” Objections at 5, is contrary to the facts. The First Amendment of Lease, dated April 1, 1981, and the Second Amendment of Lease, dated September *6361, 1981, recite that the lease was being entered into by “THE SECURITIES GROUPS, a joint venture between The Securities Group, The Monetary Group, and the Securities Group 1980 ... [each] a New York limited partnership ...” Thus, under basic partnership law, each of the estates is individually liable for the obligations of Groups under the Lease.
Finally, with regard to the Objection based upon judicial estoppel, the Objectors are putting the cart before the horse. Nothing was presented at trial which indicated that the monthly rental owed to The Equitable, which resulted from an arms-length transaction, was unreasonable or above prevailing rents for comparable commercial rentals at that time.
The Equitable accepted Groups as a tenant in a 1981 transaction that was arms length as between The Equitable and Associates. The relationship between Associates and Groups between 1979 and 1981 is another matter, and is the subject of a separate dispute between these Objectors and the estates.
It is simply premature to discuss whether the Trustee may argue that a different result pertains in analyzing a transaction between different parties at a different time. Therefore, there is no reason to strike ¶ 5.02 of the Settlement at this time and the Court will leave that matter for another day.
The Court will enter a separate Order in accordance with these Findings of Fact and Conclusions of Law.
ORDER OVERRULING THE OBJECTION OF RANDALL W. ATKINS, CHARLES D. BARNETT, ORIN E. ATKINS, AND 500 PARK AVENUE ASSOCIATES TO THE AGREEMENT OF COMPROMISE AND SETTLEMENT OF CLAIMS OF THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
In accordance with the separately entered Findings of Fact and Conclusions of Law, it is
ORDERED that the objection of Randall W. Atkins, Charles D. Barnett, Orin E. Atkins, and 500 Park Avenue Associates to the agreement of compromise and settlement of the claims of The Equitable Life Assurance Society of the United States is overruled.
. Randall W. Atkins and Orin E. Atkins, also Objectors herein, were General Partners of 500 Park Avenue Associates.
. References to specific pages in the hearing transcript are indicated by the abbreviation Tr. at p.-. References to the hearing exhibits are noted by the abbreviations Tr. Exh._ and Obj. Exh. _.
. The Equitable Life Assurance Society of the United States v. The Securities Groups, Index No. L & T 37140/84.
. Judge Ramos wrote a detailed and thoughtful opinion in which he explained the basis of the judgment he granted.
. The Trustee has moved to dismiss the Objections. Because the Court has concluded, based upon the evidence at trial, that the Objections should be denied, the Trustee’s motion has been superseded.
. Because The Equitable did mitigate its damages, there is no need to determine whether New York requires a landlord to mitigate its damages after a tenant defaults on a commercial lease. Suffice it to say that Becar v. Flues, 64 N.Y. 518 (1876), in which New York’s Court of Appeals held that there is no duty to mitigate, has not been overruled by that Court.
. In light of the Court’s conclusion, it is not necessary to reach The Equitable's contention that the unsworn statements of Temporary Han-seatic’s counsel in another proceeding, which were not subject to cross-examination, are inadmissible hearsay.
. A work letter is an agreement by the landlord to pay for a specified amount of tenant improvements.
. The proposed lease to SJ. Warburg contemplated that SJ. Warburg would initially lease 10,839 of the 16,150 square feet contained in the tenth floor and that it would, in the course of the lease, take the remaining portion of the tenth floor.
. Objectors argue, see Obj. Exh. 14, that The Equitable should bear the burden of the rent abatements and work letters which were required in order to re-let the premises after the Debtors' default. This is contrary to the evidence and is without basis in the Bankruptcy Code. Therefore, the Court need not reach The Equitable’s objection to the admission of Obj. Exh. 14, which is intended to quantify the effect of this argument.
. Objectors also argue that the period of rent allowed under 11 U.S.C. § 502(b)(6)(A)(ii) should commence on May 15, 1984, the date of the filing of the petitions. Because the Court has concluded that The Equitable's rejection of the purported surrender was reasonable, The Equitable’s computation from May 24, 1984 is proper. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490493/ | MEMORANDUM OPINION SUSTAINING OBJECTION TO ALLOWANCE OF PROOF OF CLAIM NO. 73i AS A SECURED CLAIM FILED BY INLAND DIESEL, INC.
LARRY E. KELLY, Bankruptcy Judge.
On the 11th day of December 1986 came on to be considered an Objection to the Allowance of Claim No. 73i as a Secured Claim Filed by Inland Diesel, Inc. The Court, having reviewed the pleadings and evidence, makes the following findings:
FINDINGS OF FACT
Prior to the time and origination and filing of its Chapter 11 case in or about April 26,1982, the Debtor was incorporated and domiciled in the State of Texas, although licensed to do business, and was doing business, in approximately 36 other states.
Specifically, Debtor was doing business in the State of Wisconsin. Prior to April 26, 1982, the Debtor contracted for and delivered a GM tractor, number 32288, serial number THY 73 V 689667 to claimant Inland Diesel of Butler, Wisconsin, for the purpose of making repairs to the tractor. In this connection at the time of the creation of said contract and the delivery of said tractor to Inland Diesel, such tractor was located at Specter’s terminal in Oak Creek, Wisconsin.
Prior to April 26, 1982, claimant Inland Diesel made and completed the repairs to said tractor in Butler, Wisconsin.
Prior to April 26, 1982, Inland Diesel, after completing said repairs to said tractor, surrendered possession of the tractor to the Debtor by returning it to Debtor’s terminal and place of business in Oak Creek, Wisconsin, without having first been paid for its repair work and without having received a check or other order of payment.
On April 26, 1982, the Debtor originated and filed this Chapter 11 case without having made payment to Inland Diesel.
On October 12, 1982, Inland Diesel filed an Amended Proof of Claim alleging that the Chapter 11 estate was liable for payment of its claim, as a secured claim, in the amount of $2,256.43 for the repair work done on Specter’s tractor prior to the Chapter 11.
Further, on or about October 12, 1982, Inland Diesel filed a Motion for Adequate Protection wherein it alleged that it had a lien on the above-described tractor. On January 26, 1983, the Debtor-in-Possession filed its Response to Inland Diesel’s Motion for Adequate Protection, alleging that Inland Diesel had returned the tractor to Specter prior to April 26, 1982. After a hearing, at which time Inland Diesel appeared through its counsel, this Court entered an Order denying Inland Diesel’s Motion for Adequate Protection. The basis for the Court’s holding, as stated in the body of the Court’s Order, is as follows:
“... having determined that the work was apparently accomplished by the Claimant on one (1) GM tractor, # 32288, and that such work was performed prior to the filing of these proceedings, and further that said vehicle was surrendered to the Debtors prior to these proceedings, and as a result of same, the Court is of the opinion that the Motion for Adequate Protection should be denied....”
It also appears to the Court that by subsequent Order of the Court, the tractor in question was sold and the proceeds were escrowed pending further determination of the validity of the security interest claimed by Inland Diesel, made the subject of this proceeding.
DISCUSSION
This Court has determined that it may take judicial notice of the pleadings and orders on file in this bankruptcy case and pursuant to prior proceedings. This Court had previously determined and ruled that Inland Diesel had completed the repairs and returned Specter Red Ball, Inc.’s tractor to it before April 26, 1982, that the repair contract in question was entered *761into, performed and payable in the State of Wisconsin, and that the tractor was returned without payment and without a check or other order of payment. In re Missionary Baptist Foundation of America, 712 F.2d 206, 211 (5th Cir.1983).
The key issue before this Court is whether the law of the State of Texas or of the State of Wisconsin applies. No evidence was presented to this Court with respect to the law of the State of Wisconsin. It would, however, appear to the Court clearly that if this law were known, that the law of the State of Wisconsin would apply. The debt was created between the parties in Wisconsin, the property was located in Wisconsin at all pertinent times, the contract for repairs was entered into in Wisconsin, the work was performed in Wisconsin, the bill was tendered in Wisconsin, and possession of the tractor was returned to the Debtor in the State of Wisconsin. It would appear to this Court that the law of Wisconsin is the law which should be looked at to determine the validity of the claim in question. Vanston Bondholders Protective Committee v. Green, 329 U.S. 156, 67 S.Ct. 237, 243, 91 L.Ed. 162 (1946); specifically, the Supreme Court at 67 S.Ct. page 239 of its Vanston opinion gave the following guidelines to be followed by a bankruptcy court in determining and deciding the proper state law to apply:
"... obligations ... often have significant contacts in many states so that the question of which particular state’s law should measure the obligations seldom lends itself to simple solutions. In- determining which contact is the most significant in a particular transaction, courts can seldom find a complete solution in the mechanical formulae of the conflicts of law. Determination requires the exercise of an informed judgment in the balancing of the interests of the states with the most significant contacts in order best to accommodate the equities among the parties to the policies of those states.”
Further, the Fifth Circuit, in Woods-Tucker Leasing Corporation of Georgia v. Hutcheson-Ingram Development Company, 642 F.2d 744 (5th Cir.1981) relying on Vanston held as follows on the same point:
“Where the transaction has multi-state contacts ..., Vanston continues the determination of which particular state’s law should apply ‘requires the exercise of an informed judgment in the balancing of all of the interests of the states with the most significant contacts in order best to accommodate the equities among the parties to the policies of those states.’ Id., 329 U.S. at 162, 67 S.Ct. at 239.”
It would appear to this Court in light of the fact that no party tendered any evidence as to the law of the State of Wisconsin at the hearing, that the Court must consider the issue of judicial notice. Judicial notice is defined generally as a court’s acceptance of the truth of a matter without formal evidentiary proof. 13 Villanova L.Rev. 528, 530 (1969), “The presently extending concept of judicial notice.”
It is fundamental that one of a judge’s primary functions is to decide what substantive law should be applied to the facts of the case before him. Ordinarily, in the course of the law of the forum, the judge finds the law through judicial notice. Saffold v. McGraw-Edison Co., 566 F.2d 621, 623 (8th Cir.1977) (Federal courts must take judicial notice of the statutory and common law of any state of the union without pleading or proof.) (emphasis added).
Opposing counsel are usually relied upon to call to the court’s attention, by argument or brief, to the controlling legal material. On occasion, a judge may conduct an independent investigation. See, e.g. United States v. Jacobs, 547 F.2d 772 (2d Cir.1976), cert. dismissed, 436 U.S. 31, 98 S.Ct. 1873, 56 L.Ed.2d 53 (1978). In any event, it appears to this Court that no formal evi-dentiary requirements apply, flexibility and informality prevail and the only limitation are those inherent in the adversary system of keeping the other side informed. In the federal courts, proof of sister-state law has customarily been assimilated to proof of domestic law. In the case of Schultz v. *762Tecumseh Products, the Sixth Circuit noted as follows:
“The states of the Union are not foreign to the United States or to its courts. Such courts are required to take judicial notice of the statute and case law of each of the states. (Citation omitted). The law of any state of the Union, whether depending upon statutes or upon judicial opinions is a matter of which the courts of the United States are bound to take judicial notice, without plea or proof.”
Schultz v. Tecumseh Products, 310 F.2d 426, 433. See also Steel Structures, Inc. v. Star Manufacturing Co., 466 F.2d 207, 216 (6th Cir.1972).
Rule 201 is the only evidence rule that deals with judicial notice in federal courts. Its scope is narrow in that it deals only with adjudicative facts. It does not deal with judicial notice of law nor with legislative facts. Therefore, it is apparent that the above principles apply in this Court and this Court should take judicial notice of the law of the State of Wisconsin.
This Court finds, therefore, that the law of Wisconsin relating to possessory mechanic’s liens is to be found in Section 779.41 of the Wisconsin revised statutes and provides in pertinent part as follows:
“(1) Every mechanic and every keeper of a garage or shop, and every employer of a mechanic who transports, makes, alters, repairs or does any work on personal property at the request of the owner or legal possessor of the personal property, has a lien on the personal property for the just and reasonable charges therefor ... and may retain possession of the personal property until the charges are paid.”
The above statute was provided in the post-trial brief in support of the objection to the allowance of the claim filed by Inland Diesel, Inc. and no additional authorities have been submitted by either party. Based upon the appropriateness of taking judicial notice, the Court has made a review and finds no additional law which would otherwise define the lien rights of the mechanic in the State of Wisconsin as applied to the facts of this case.
It would therefore appear that a garageman who surrenders possession of the personal property upon which he asserts a lien, waives and relinquishes any such lien. In Susenbrenner v. Mathews, 48 Wis. 250, 3 N.W. 599 (1879), the Wisconsin Court of Appeals held and explained as follows:
“The essence of a lien, in such cases, is possession. A lien cannot survive possession; and except in case of fraud, and perhaps mistake, such a lien cannot be restored by resumption of possession. A lien is a right to hold possession of another’s property for the satisfaction of some charge attached it it. ' The essence of the right as possession, and whether that possession be of officers of the law or of the person who claims the right of lien, the chattle on which the lien attaches is equally regarded as in the custody of the law. A lien is neither a jus ad rem nor a jus in re, but a simple right of retainer. The voluntary parting with the possession of the goods will amount to a waiver or surrender of a lien; for, as it is a right founded upon possession, it must ordinarily cease when the possession ceases.”
This Court has found no other law which would appear to control and based upon its conclusion that this Court must, when available, apply the law of the state with the most significant contacts, in this instance determined to be the State of Wisconsin, this Court finds that the lien had to be possessory in order to be perfected. As this Court has already found that the possession was voluntarily relinquished pre-pe-tition and no other facts relating to fraud or mistakes having been presented to the Court, this Court is of the opinion that the claim of Inland Diesel, Inc. should be disallowed as a secured claim. It should, however, be allowed in its full amount as an unsecured claim in this case.
An Order in conformity with this Memorandum Opinion will be entered this date. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490494/ | MEMORANDUM OPINION AND ORDER
BENJAMIN E. FRANKLIN, Chief Judge.
This matter came for trial on February 23 and on March 31,1987, on the plaintiff’s, Railway Employees’ Credit Union, complaint to determine dischargeability of debt under section 523(a)(2)(B) and for judgment. The plaintiff appeared through counsel, Dennis E. Mitchell. The debtor-defendant, Nina Lee Centers, appeared through counsel, Patrick S. Bishop.
FINDINGS OF FACT
Based on the testimony, the exhibits, and the stipulations of the parties, this Court finds as follows:
1. The Court has jurisdiction over the parties and the subject matter, and venue is proper.
2. The plaintiff, Railway Employees’ Credit Union (hereinafter “credit union”) is authorized to transact business in Kansas.
3. The debtor/defendant, Nina Lee Centers, is a resident of Fort Scott, Kansas.
4. Prior to February 19, 1985, Centers requested two loan applications from the credit union in order to refinance her automobile and pickup. The credit union mailed her the applications.
5. On February 19, 1985, Centers returned the two applications.
6. On the first application, Centers requested $3,100 in order to refinance her 1981 Volkswagen Rabbit (See plaintiff's exhibit no. 1). On the application, Centers indicated that Commerce Bank of Kansas had a lien on the vehicle in the amount of $3,100 and that she paid $204 per month on the loan.
7. On the second application, Centers requested $4,000 in order to refinance her 1982 Ford Courier pickup (See plaintiff's exhibit no. 2). On the application, Centers indicated that Cox Motor Company held a lien on the vehicle in the amount of $4,000 and that she paid $201 per month on the loan. In addition, Centers indicated that Eastern Kansas Financial Services also held a lien on the vehicle in the amount of $2,000 and that she paid $106 per month on the loan.
8. Juanita Sheehan was the loan officer handling the application for the credit union.
*9519. Upon receipt of the applications, Sheehan verified Centers’ employment and income; verified the amounts owed to each lienholder; verified the fair market value of the vehicles by requiring Centers to obtain an appraisal, and by NADA valuation; obtained a credit report; compared the debts listed on the application to those reported in the credit report; determined Centers’ debt ratio; and submitted all information received and computed to the credit union’s “credit committee” for their review and disposition.
10. The credit committee decided to deny both applications on the basis that they could not loan as much as was needed to pay off the loans with the current lien-holders. On February 26, 1985, the credit union sent Centers a “Statement of Refusal to Grant Loan” for each loan application (See plaintiff's exhibit nos. 7 and 8).
11. Subsequently, Centers and Sheehan discussed the reasons for denial of credit over the telephone. Sheehan indicated that Centers could receive the refinancing if she would reduce the amount owed on the vehicles and reapply for credit.
12. Centers reduced the amount owed to Commerce Bank on the Volkswagen to $2,650 and the amount owed on the pickup to $3,497.
13. On March 21, 1985, Centers submitted a second set of applications.
14. On the first applications, Centers requested $2,650 in order to refinance the 1981 Volkswagen. Centers indicated that Commerce Bank had a lien in the amount of $2,650.
15. On the second application, Centers requested $3,500 in order to refinance the 1982 Ford Courier pickup. Centers indicated that Cox Motor had a lien in the amount of $3,497. As for Eastern Kansas Financial Service, Centers only reported the debt as a “loan” in the amount of $1,900 without indicating their lien on the pickup.
16. Upon receipt of the new application, Sheehan followed the same procedure as she had the first time. She verified Centers’ employment and income; verified the amounts owed to each lienholder listed on the new application; verified the fair market value of the vehicles; obtained a credit report; compared the credit report with the new application; determined Centers’ debt ratio; and submitted all the information to the credit committee.
17. The credit committee approved the loans.
18. On April 15, 1985, Centers executed a promissory note and disclosure statement in the amount of $2,650 at 15% interest with 36 monthly payments of $94.44 commencing May 15, 1985. The note and disclosure statement also contained a security agreement in which Centers granted the credit union a security interest in the 1981 Volkswagen Rabbit (See plaintiff's exhibit no. 13).
19. In addition, Centers executed a second promissory note and disclosure statement in the amount of $3,500 at 15% interest with 36 monthly payments of $124.74 commencing May 15, 1985. The note and disclosure statement also contained a security agreement in which Centers granted the credit union a security interest in the 1982 Ford Courier pickup (See plaintiff's exhibit no. 14).
20. On May 2, 1985, the credit union mailed $2,650 to Commerce to pay off the Rabbit, and mailed $3,500 to Cox Motor Company to pay off the Ford Courier.
21. On May 7, 1985, the credit union received the title for the pickup from Cox Motor Company with a release of their lien. This title noted that Eastern Kansas still held a lien on the pickup.
22. On May 13, 1985, the credit union through its attorney notified Centers. The credit union asked Centers to either pay back the credit union or obtain a release from Eastern Kansas Financial Services. Centers refused to do so.
23. On May 7, 1986, Centers filed a petition for relief under Chapter 7 of Title 11 of the United States Code.
24. On September 3, 1986, the credit union filed a complaint to determine dis-chargeability of debt.
*952CONCLUSIONS OF LAW
The credit union alleges that Centers obtained the refinancing of her vehicles by use of the second set of the false loan applications on March 21, 1985. Whereas, the first set of loan applications on February 19,1985, indicated that Eastern Kansas Financial Services held a lien on the 1982 Ford Courier pickup, the second set of loan applications on March 21, 1985, failed to reveal the lien. Accordingly, the credit union requests this Court to find Centers’ debt nondischargeable under section 523(a)(2)(B).
Under section 523(a)(2)(B), a debtor is not discharged from any debt:
(2) for obtaining money, property, services, or an extension, renewal, or refinance of credit, by—
(B) use of a statement in writing—
(i) that is materially false;
(ii) respecting the debtor’s or an insider’s financial condition;
(iii) on which the creditor to whom the debtor is liable for obtaining such money, property, services, or credit reasonably relied; and
(iv) that the debtor caused to be made or publised with intent to deceive.
The credit union must prove the four elements listed in section 523(a)(2)(B) by clear and convincing evidence. See In re Janes, 51 B.R. 932, 935 (Bankr.D.Kan.1985).
The determination of this case comes down to the third element, reasonable reliance. The provision is explicit that the creditor must not only have relied on a false statement in writing, but the reliance must have been reasonable. 3 Collier on Bankruptcy ¶ 523.09[4] (15th ed. 1987).
This Court finds that the credit union failed to prove it reasonably relied on the second set of loan applications by clear and convincing evidence. The credit union must have or at least should have known of the second lien of Eastern Kansas Financial Services from the first set of loan applications. The first set indicated Eastern Kansas Financial Services’ second lien on the pickup. A creditor’s reliance is unreasonable if the creditor knows at the outset that the information listed on the financial statement is not accurate. See In re Houk, 17 B.R. 192 (Bankr.D.S.D.1982).
The Court notes that the credit union has tried to explain away any prior knowledge of the lien. The loan officer, Juanita Shee-han, testified that she did not recall the Eastern Kansas Financial Services lien at the time of the second set of applications due to the volume business conducted by her each month. Furthermore, she stated she could not review the first set of applications since they were forwarded to the credit committee and not located in the building. Finally, she testified that credit union policies required obtaining a new application with each loan request so as to insure the most current information and to avoid making loan decisions based upon outdated information.
However, under all the circumstances, this Court is not swayed by the credit union’s explanation. The same loan officer, Juanita Sheehan, had reviewed the first applications only one month prior to the second set. Furthermore, she even called Eastern Kansas Financial Services with regard to the first loan application to find the payoff on the pickup. Finally, she kept in contact with Centers on the telephone throughout the intervening month concerning the refinancing. Under all the circumstances, this Court must find that credit union should have known at the outset that the information listed on the second set of applications was inaccurate. Accordingly, this Court finds that Centers’ debt to the credit union is dischargeable.
One further note must be addressed. The credit union in its complaint alleges section 523(a)(2)(A) and section 523(a)(6) counts. This court finds that the above sections do not apply to this case.
IT IS THEREFORE, BY THE COURT, CONSIDERED AND ORDERED That the debt owed by the debtor/defendant, Nina Lee Centers, to the plaintiff, Railway Employees’ Credit Union, be and the same is hereby discharged.
IT IS FURTHER, BY THE COURT, ORDERED That judgment be for the defend*953ant, Nina Lee Centers, and against the plaintiff, Railway Employees’ Credit Union. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490495/ | MEMORANDUM DECISION
JOHN J. HARGROVE, Bankruptcy Judge.
Debtors each claimed a $1,200 exemption in two motor vehicles. The Chapter 7 trustee objected contending that under California Code of Civil Procedure (“C.C.P.”) § 704.010 the debtors are only entitled to exempt the aggregate equity of $1,200 in all motor vehicles.
This court sustains the trustee’s objection.
This court has jurisdiction to hear this matter pursuant to 28 U.S.C. § 1334 and § 157(b)(1) and 28 U.S.C. § 157(b)(2)(B) and General Order No. 312-C of the United States District Court, Southern District of California. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B).
I.
PACTS
Michael and Martha De La Rosa (“debtors”) filed a joint petition under Chapter 7 on November 20, 1986, and filed their Schedule of Liabilities and Assets. In their Schedule of Exempt Property, the debtors claimed $1,200 equity in their 1980 Volvo and $1,200 equity in their 1979 Chevrolet El Camino as exempt pursuant to C.C.P. § 704.010. To reach this result, the debtors assert that since they jointly elected to utilize the general exemption provisions of C.C.P. § 704.010 rather than the California “bankruptcy exemptions” provided by C.C.P. § 703.140, then each debtor is entitled to claim a $1,200 exemption in each vehicle.
II.
DISCUSSION
C.C.P. § 704.010 provides in pertinent part:
§ 704.010. Motor vehicles; equity and ■proceeds of sale or insurance
(a) Any combination of the following is exempt in the amount of one thousand two hundred dollars ($1,200):
(1) The aggregate equity in motor vehicles.
(2) The proceeds of an execution sale of a motor vehicle.
(3) The proceeds of insurance or other indemnification for the loss, damage, or destruction of a motor vehicle.
This case is a case of first impression. There are no California cases interpreting the issue before this court.
In In re Baldwin, 70 B.R. 612 (9th Cir.BAP 1987), the Ninth Circuit Bankruptcy Appellate Panel concluded that:
In enacting Cal.Civ.Proc.Code § 703.130, California effectively opted out of the federal exemption scheme. Simultaneously, the California legislature enacted Cal.Civ.Proc.Code § 703.140. This section allows debtors to choose either the exemptions that state law already provided for judgment debtors or to choose the exemptions contained therein. This section is modelled upon the federal exemptions that it replaced. There is, however, one very significant difference: The California exemption statute does not contain any equivalent to Section 522(m), which allows each joint debtor a separate set of exemptions.
In re Baldwin, supra at 615-616.
The Bankruptcy Appellate Panel in In re Baldwin, supra, further held that C.C.P. § 703.110, “... [ljimits judgment debtors to one exemption per marital unit unless the exemption provision specifically provides otherwise.”
Additionally, of particular import is the California Legislative Committee Comment *65following C.C.P. § 703.110. Specifically, the Comment states:
Legislative Committee Comment — Senate 1983 Amendment
Section 703.110 is amended to add the third sentence to subdivision (a). This new sentence makes clear how the exemption scheme works with respect to married persons. Some exemption provisions specifically provide for a separate exemption for each spouse or provide for an exemption in a greater amount for a married couple. See, e.g., Sections 704.-030 (materials for repair or improvement of dwelling), 704.060 (personal property used in trade, business, or profession), 704.080 (deposit account in which social security payments are directly deposited), 704.090 (inmate’s trust fund), 704.100 (life insurance, endowment, annuity policies). See also Section 704.730(b) (maximum combined homestead exemptions of married couple). Other exemption provisions provide a maximum dollar amount for an exemption applicable to the spouses as a marital unit. For example, under subdivision (a), the maximum exemption for motor vehicles allowed the marital unit under Section 704.010 is an aggregate equity of $1,200, whether one or both spouses are judgment debtors and whether the vehicle or vehicles are community or separate property. The exemption is not doubled where each spouse owns an interest in the motor vehicle. Likewise, the maximum exemption allowed under Section 704.040 for jewelry, heirlooms, and works of art is $2,500 for the marital unit.
Former subdivision (b) of Section 703.-110 is deleted and its substance is continued in new Section 703.115. See the Comment to Section 703.115. [16 Cal.L. Rev.Comm.Reports 2175 (1982); 83 S.J. 3032]. (Emphasis added).
Cal.C.C.P.Ann. § 703.110 (West Supp. 1987)
The Legislative Committee Comment elaborates on the California exemption scheme and clearly indicates that with reference to the exemption provided under C.C.P. § 704.010 as to motor vehicles, the maximum exemption for motor vehicles allowed the marital unit as an aggregate equity of $1,200 in motor vehicles. The Committee Comment is equally clear when it states that, “[t]he exemption is not doubled where each spouse owns an interest in the motor vehicle.” Legislative Committee Comment — Senate 1983 Amendment, supra.
The debtors maintain that although they have filed a joint bankruptcy, they are in fact two separate debtors. In support of this position, thedebtors cite In re Arnold, 33 B.R. 765 (Bankr.E.D.N.Y.1983), and In re Howard, 6 B.R. 220 (Bankr.S.D.Ohio 1980). Needless to say, this court gives no weight whatsoever to bankruptcy court decisions which discuss the New York State and Ohio State exemptions, respectively.
Finally, the plain meaning of C.C.P. § 704.010 supports the trustee’s contention that C.C.P. § 704.010 entitles the debtors in a joint petition to exempt the aggregate equity of $1,200 in all motor vehicles.
This Memorandum Decision constitutes findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052. Counsel for the debtors is directed to file with this court an Order in conformance with this Memorandum Decision within ten (10) days from the date of entry hereof. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490496/ | DECISION AND ORDER ON MOTION IN LIMINE
BURTON PERLMAN, Bankruptcy Judge.
In Adversary 1-86-0104, plaintiff sues to deny defendants a discharge. The com*72plaint is based upon 11 U.S.C. § 727, asserting that defendants knowingly and fraudulently made a false oath, transferred property within one year prior to the filing of the petition, and failed to keep adequate records. There is an additional curious allegation, that within 30 days of the filing of their petition in bankruptcy, defendants “had in their possession and control funds sufficient to pay all debts listed in the schedules.” We are unaware that the last statement provides any basis for relief under § 727.
In Adversary 1-86-0113, the plaintiff is a creditor of defendant/debtors, and such plaintiff also sues to deny the discharge of defendants. The gist of this complaint is that debtors made a false oath or account in violation of 11 U.S.C. § 727(a)(4)(B). The factual allegations supporting this contention are to the effect that debtors received a workers compensation award which they dissipated rather than paying creditors therefrom. In addition, this complaint asserts a violation of 11 U.S.C. § 727(a)(3), based upon allegations that debtors concealed, destroyed, falsified or failed to keep recorded information about their affairs. There is a further contention that there was a violation of § 727(a)(5) in that debtors failed to explain satisfactorily their loss of assets to meet their liabilities. The essential facts alleged to support the foregoing statutory violations are that debtors received the workers compensation award which they wrongfully dissipated, failing to keep records of such dissipation.
Because the evidence in both adversary proceedings is the same, the parties agreed, with the approval of the court, to consolidate the cases for trial.
At a pretrial conference in Adversary 1-86-0104, counsel for defendants indicated that he would file a motion in limine, and has done so, for the following reason. Defendants originally employed attorney Marquette Evans to file the present bankruptcy case. A § 341 meeting of creditors was held, which hearing was continued by the trustee so that the defendants could amend their schedules. Debtors then employed a new attorney, Peter Pandilidis, who filed amended schedules for defendants. A continued § 341 hearing was held. Thereafter, there was a Rule 2004 examination by the trustee, at which time debtors testified as to disbursement of certain funds received in December, 1985, and also that they had consulted attorneys Marquette Evans, Norman Slutsky and Jeffrey Tessel. Plaintiff, at the pretrial conference, said that he planned to call these attorneys as witnesses. The purpose of the present motion in limine was to resolve objections by defendants to such testimony on grounds of attomey/client privilege. The motion came on for hearing after the parties attempted to submit the motion on a stipulation of fact, but were unable to agree upon such stipulation. At the hearing, the question of attomey/client privilege with respect to attorney Tessel was mooted, for plaintiff will not be calling him as a witness.
Marquette Evans
Debtors consulted Evans at the end of January, 1986 with respect to the possibility of filing bankruptcy. They met with Evans three times. Plaintiff does not really contend that Evans was not the attorney for defendants, and concedes that defendants are entitled to an attomey/client privilege with respect to communications between them as to which they are entitled to exclusion by reason of the privilege. Plaintiff says, however, that he wishes to show that attorney Evans had defendants sign their bankruptcy petition in blank, for such an act by debtors is a crime and such conduct is not privileged.
We hold that the exception to privilege sought by plaintiff is unavailable. Such a transaction between attorney and client is clearly within the attomey/client privilege and disclosure of it would be detrimental to the interests of defendants. In any case, the evidence in this respect sought by plaintiff has to do with alleged inappropriate conduct by the attorney, and that is not a relevant consideration in this case.
Norman Slutsky
The question with respect to Slut-sky is whether he and debtors were in an attorney/client relationship. The evidence *73was that in 1978 Slutsky had filed a bankruptcy case for debtors. In 1984, defendant Douglas Slaven had a workers compensation claim. He called Slutsky about it, but Slutsky informed him that he did not do workers compensation work, and he referred him to a specialist in that field. In January, 1986, defendants phoned Slutsky about filing a bankruptcy case. Slutsky told them to make an appointment. Defendants did not do so, but elected to retain another attorney for the present case. It is the position of plaintiff that he is informed that Slutsky told defendants they could not use the proceeds of the workers compensation claim in the manner in which they informed him.
While it is true that ultimately Slutsky did not file the present bankruptcy for defendant, it is perfectly clear from the history of the relationship between them that Slutsky had performed legal services for them and any disclosure of their affairs was made to him by defendants as an attorney. They are entitled to have confidentiality imposed about matters as to which he gave them legal advice. At the time defendants spoke to Slutsky prior to the filing of the present bankruptcy case, they were considering having him file the case for them. Under such circumstances, a privilege exists. In re Baldwin-United Corp., 38 B.R. 802, 804 (Bankr.S.D.Ohio W.D.1984). We note, by the way, the observation of the court in that case, that generally the question of whether the privilege attaches is a question of fact which cannot be decided in the abstract.
We render the present decision despite this axiom. It will, however, be understood to be based upon the field of inquiry as to the attorneys here in question which has been defined for us by the parties.
We resolve the motion in limine by holding that an attorney/client privilege either existed or was thought to be established with respect to both attorneys, and so far as we are informed about particular inquiries proposed to be made by plaintiff, since the privilege has been claimed and not been waived by defendants, plaintiff is precluded from inquiry into such matters. So Ordered. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490497/ | *182DECISION AND ORDER
SARAH SHARER CURLEY, Bankruptcy Judge.
On October 16, 1985, Gene and Janet Heckaman, referred to hereinafter as “Debtors,” filed for bankruptcy relief under Title 11, United States Code, Chapter 7. The Debtors were the principals in a business operation known as Forest Homes Inc., hereinafter referred to as “Forest Homes.” Forest Homes was in the business of selling modular homes for placement on the purchaser’s real property. On or about June, 1985, Forest Homes entered into a purchase agreement with Leo and Atha Shea, hereinafter referred to as the “Sheas,” for the sale of one Alpine Log Cabin Shell Kit for the sum of $27,507 cash. The Sheas paid for the Log Cabin Kit, and Forest Homes filed for bankruptcy. Shortly thereafter, the Debtors filed their own personal bankruptcy. The Sheas never received their Log Cabin Kit.
On December 9, 1985, the Sheas filed an adversary complaint, identified as adversary docket number 85-541-SSC, against the Debtors seeking to have their claim in the amount of $27,507 declared nondis-chargeable pursuant to 11 U.S.C. § 523(a)(2)(A) and (a)(6). The Sheas’ claim against the Debtors arises from the execution of the purchase agreement between the Sheas and Forest Homes and certain oral representations made at the time of execution or shortly thereafter. The Debtors denied liability for the claim on the basis that they were insulated from corporate liabilities incurred by their prior corporate business known as Forest Homes.
After the completion of discovery, the parties filed a joint pretrial order. On October 16 and 20, 1986, the court convened an evidentiary hearing on the merits of the Sheas’ complaint. Following the presentation of evidence, the court took the matter under advisement.
LEGAL ISSUES PRESENTED
I. Whether the debt due and owing to the Sheas should be deemed nondischargeable pursuant to Section 523(a)(2)(A) of the Bankruptcy Code.
II. Whether the debt due and owing to the Sheas should be deemed nondischargeable pursuant to Section 523(a)(6) of the Bankruptcy Code.
DISCUSSION
The evidence adduced at the trial of this matter reflects that the Sheas had investigated the market for quite some time in an effort to purchase a quality, but prefabricated, log cabin to place on their lot in northern Arizona. In fact, on cross-examination, Mr. Shea admitted that he had first examined the Forest Homes cabins in 1984. He and his wife had continued to view log cabin homes as displayed at a number of sites by a number of different parties for the next one and one-half years. It was the intention of the Sheas to retire to the log cabin home. Therefore, the money to be utilized for the purchase of the cabin was to be drawn from the wife’s profit-sharing plan, and both the husband and wife would no longer be employed full time.
On or about June 20, 1985, the Sheas made the decision to return to the model home/sales office of Forest Homes to purchase the prefabricated Log Cabin Kit of said entity. On June 20, the Sheas spoke with Kent Heckaman, the son of the Debtors, and later Gene Heckaman, one of the Debtors, concerning the purchase. The Sheas agreed to purchase the basic “shell kit” of Forest Homes, with the Sheas to undertake all foundation work and the completion of the interior of the log cabin. The Sheas were effectively acquiring a kit that required that Forest Homes order the logs and other necessary pieces for the log cabin, with only limited assembly to be done by Forest Homes. Gene Heckaman advised the Sheas that he would order the logs immediately for the log cabin. He stated that the logs would be delivered, and the Log Cabin Kit completed within three weeks. The Sheas agreed to purchase the Kit in cash, for which they were to receive a discount. The Sheas agreed to pay one-half of the purchase price; to wit, the sum *183of $15,000, as a deposit. At the time, Gene Heckaman advised the Sheas that he had recently acquired the Forest Homes business.
It is undisputed that Gene Heckaman called the Sheas on June 25, 1985, to obtain the balance of the purchase price from the Sheas. Gene Heckaman stated that if the balance of the purchase price were delivered to him immediately in cash, the purchase price of the Log Cabin Kit would be reduced further by as much as $1,000 to $1,500. On June 25, the Sheas did tender in person to Gene Heckaman a second check in the amount of $12,507, the balance of the original purchase price for the Log Cabin Kit.1 Gene Heckaman then advised the Sheas that he would see the Sheas again in three weeks, when the Kit had arrived.
The testimony of Mr. Shea that he believed he was contracting with Gene Hecka-man in his individual capacity, and not as an officer of Forest Homes, was not credible. The purchase agreement was reduced to a writing, which clearly indicated that Forest Homes was the seller, and the two separate checks tendered by the Sheas to purchase the Kit were also made payable to Forest Homes. No evidence was introduced by the Sheas which would indicate that the checks were improperly negotiated by either of the Debtors or by their son.
When Mr. Shea returned to the Forest Homes site subsequently, he saw the bankruptcy notice in the Forest Homes window.2 No money was returned to the Sheas, and the Sheas never received any logs or any part of the Kit.
On May 21, 1985, a corporate resolution of Forest Homes was executed by the Debtors authorizing the filing by the corporation of a petition under Chapter 11 of the Bankruptcy Code. No deadline or time frame was indicated as to the filing of the petition. On June 26, 1985, Forest Homes did file a Chapter 11 petition; and on October 16, 1985, the Debtors filed individual petitions under Chapter 7 of the Bankruptcy Code.
One document introduced into evidence and dated July 16, 1985, concerning the obtainment of post-petition financing by Forest Homes indicated that said corporation had eighteen contracts at the time of the commencement of the Chapter 11 proceedings that it was hoping to assign to a third party for completion. According to the document, the third party was to supply all necessary capital to complete the contracts. It was hoped that the third party would purchase the assets or stock of Forest Homes. The post-petition financing was never approved by the Bankruptcy Court, and the corporate proceedings were converted to proceedings under Chapter 7. The Trustee of Forest Homes, in the orderly administration of the case, subsequently sold all of the assets located on the premises of Forest Homes. It is uncontroverted at the time of the trial in this matter that the Sheas did not at any time attempt in the proceedings of Forest Homes to reclaim all or a part of their Kit.
The gravamen of the Sheas’ case at trial was that there was a duty by Gene Hecka-man or his son to disclose that Forest Homes was experiencing financial problems either on June 20 or June 25, 1985, when the checks were tendered by the Sheas.3 The evidence does not afford any other theory of recovery. The oral representations made by Gene Heckaman and his son could only be described as statements that the business had recently been acquired by the Heckamans and that the *184Log Cabin Kit would be delivered to the Forest Homes site within three weeks of June 25, 1985. These oral representations could arguably be construed as those made by any business on the eve of a Chapter 11 filing to ensure that the business operations remained as normal as possible. In addition, and unfortunately, the Sheas took no action to determine whether or not a Log Cabin Kit was subsequently delivered to the Forest Homes site. It is conceivable, and no evidence was introduced by the Sheas to controvert same, that the Kit was delivered to the Forest Homes site, and perhaps subsequently sold by the trustee of Forest Homes when the proceedings of the corporation were converted to those under Chapter 7.
In reviewing the law concerning a Section 523(a)(2)(A) claim, the Ninth Circuit has previously indicated that a five-part test is to be utilized in determining whether a debt is nondischargeable on the basis that money or property was obtained by false pretenses or false representations. In re Houtman, 568 F.2d 651, 655 (9th Circuit 1978); In re Taylor, 514 F.2d 1370, 1373 (9th Circuit 1975).4
The Sheas must prove by clear and convincing evidence5 the following: 1) The Debtor made the representations; 2) That at the time the Debtor knew they were false; 3) That the Debtor made them with the intention and purpose of deceiving the creditor; 4) That the creditor relied on such representations; 5) That the creditor sustained the alleged loss and damage as the proximate result of the representations having been made. In re Houtman, supra at 655.
The Houtman case does not provide for any affirmative duty to disclose financial difficulty on the eve of a bankruptcy filing. In fact, when this court questioned counsel for the Sheas if there was any case law to support such an affirmative duty to disclose, counsel replied in the negative. As to the Houtman test, this court finds as a matter of law that at the time the representations were made to the Sheas by Gene Heckaman or his son on behalf of Forest Homes, there was no intent to deceive, nor did the Heckamans have actual knowledge of the falsity of the statements, nor were the statements made with a reckless disregard as to the truth or falsity of the statements. This court further finds that there was absolutely no evidence introduced at the time of the trial which would indicate that Janet Heckaman, one of the Debtors herein, made any representations to the Sheas. This court further finds as a matter of law that at the time the statements were made by the Heckamans as to the completion of the Sheas Log Cabin Kit, there was the expectation by Gene Hecka-man that the Kit would be delivered in a timely manner. Moreover, no evidence was introduced by the Sheas that, in fact, the monies were not utilized to purchase the logs and that the logs were not delivered to the Forest Homes site.
Moreover, inasmuch as this is a nondis-chargeability proceeding as to Gene and Janet Heckaman, the Sheas have introduced no evidence which would support a theory that the individual Debtors should be liable for representations made on behalf of a corporate entity.
Based upon the foregoing analysis, this court concludes that concerning the five-part test enunciated in Houtman, the Sheas simply had unreasonable expectations as to the services to be performed by Forest Homes and when those services would be performed, but the Sheas have failed to meet their burden of proof on each and every part of the five-part test.
*185Concerning the claim of the Sheas under Section 523(a)(6) of the Bankruptcy Code, the Sheas must prove by clear and convincing evidence6 that the Sheas sustained damages as a result of the willful and malicious conduct of the Debtors. The Ninth Circuit has previously defined “willful and malicious” as an intentional act which causes injury. In re Cecchini, 772 F.2d 1493 (9th Cir.1985). Normally the claimant must prove a specific intent to injure under such a theory of recovery, unless the injury is the result of a wrongful act (such as conversion), in which case no specific intent need be proven. Cecchi-ni also indicates that the requisite intent may be proven if a reckless disregard by the debtors has been shown. As to this theory of recovery, counsel for the Sheas have produced no authority which would indicate that the principals of a corporate entity, absent some type of legal theory which pierces the corporate veil, should be held responsible for the actions taken by a corporate entity. Although Gene Hecka-man may have acted negligently in receiving the checks tendered by the Sheas on June 20 and June 25, 1985, and had unreasonable expectations about the future viability of Forest Homes, there was no evidence adduced at the time of trial that would indicate that Gene Heckaman, the Debtor herein, acted with reckless disregard, or acted with specific intent to injure the Sheas, or committed a wrongful act, such as conversion. As stated previously, no evidence was introduced at the time of the trial that would indicate that Janet Heckaman in any way interacted with the Sheas, so that the Sheas might have their debts deemed nondischargeable as to her. The Sheas, therefore, have failed to meet their burden of proof with respect to this claim. It is, therefore,
ORDERED that the debts of the Sheas be discharged and that a judgment be entered in this adversary proceeding in favor of the Debtors.
This Decision and Order shall constitute findings of fact and conclusions of law pursuant to Fed.R.Civ.P. 52', as made applicable in bankruptcy proceedings by Rule 7052 of the Rules of Bankruptcy Procedure.
. Since a discount had been promised to the Sheas, it was unclear from the testimony at the time of trial why the Sheas nevertheless tendered the full amount of the balance of the purchase price.
. It is unclear from the testimony of Mr. Shea as to the form and substance of the bankruptcy notice that he viewed. However, inasmuch as Forest Homes did file a Chapter 11 proceeding, this court assumes that what he viewed in the window was notice of said filing by the corporation, and not notice of the filing of the bankruptcy petitions of the Debtors herein.
.At the trial, counsel for the Sheas notified the court that the Sheas would no longer pursue the alter ego theory of recovery, which could potentially find the individual Debtors responsible for the actions of a corporation.
. The Houtman and Taylor cases were decided under Section 17(a)(2) of the Bankruptcy Act of 1898, as amended. However, at least as to the provisions concerning false pretenses and false representations, the provisions are sufficiently analogous under the Bankruptcy Act and the Bankruptcy Code that the Houtman and Taylor decisions should still be accorded stare decisis effect. In re Singleton, 37 B.R. 787 (Bankr.D.Nevada 1984); In re Vanderloos, 64 B.R. 813 (Bankr.D.Montana 1986); In re Burklow, 60 B.R. 728 (Bankr.S.D.California 1986).
. In re Furimsky, 40 B.R. 350 (Bankr.D.Arizona 1984); In re DeRosa, 20 B.R. 307 (Bankr.S.D.N.Y.1982).
. In re Furimsky, 40 B.R. 350 (Bankr.D.Arizona 1984); In re DeRosa, 20 B.R. 307 (Bankr.S.D.N.Y.1982). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490500/ | DECISION AND ORDER
BURTON PERLMAN, Bankruptcy Judge.
Movant filed the present motion to lift thé stay because it is under an order from the Industrial Commission of Ohio to pay debtor the sum of $3,210.00. (Movant is a self-insurer, and the amount in question represents a worker’s compensation award.)
The reason for the present motion is that 11 U.S.C. § 362(a)(7) stays certain setoffs. In its motion, movant presses two points. The first is a request that it be allowed to withhold the payment in question. The second is, that in the event that debtor’s objection to movant’s proof of claim is overruled, then that the award amount be setoff against the amount claimed by mov-ant.
Debtor’s Chapter 13 case was filed June 19, 1986. The order of the Commission directing the payment of $3,210.00 was entered January 23, 1987, subsequent to the filing date. Simultaneously herewith, we have entered Decision and Order regarding debtor’s objection to movant’s claim. Therein, we concluded that movant’s claim should be allowed in the amount of $1,802.00. We regard movant’s present motion very specifically as one seeking the right to setoff this amount, $1,802.00 against the amount owed debtor by mov-ant, $3,210.00. (We note that whatever the outcome here, debtor has provided in her Chapter 13 plan for the payment of mov-ant’s claim.)
The subject of setoff is dealt with in the Bankruptcy Code at 11 U.S.C. § 553. It is there provided in pertinent part:
“Except as otherwise provided in this section and in sections 362 and 363 of this title, this title does not affect any right of a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case under this title against a claim of such creditor against the debtor that arose before the commencement of the case ...”
A reading of this statutory language itself leaves in question whether movant’s claim of setoff is barred by the statute. Specifically it does not appear that we are dealing *271with a mutual debt. Movant’s obligation to debtor is as a self-insurer under the worker’s compensation laws of Ohio. If the award were to be paid by an insurer, it could not be asserted that there was mutuality of debt. It seems to us reasonable that where movant is obliged to make a payment pursuant to an order of the Industrial Commission, that there is the same absence of mutuality of debt. Further, the statutory condition that the debt owing from the creditor to the debtor must have arisen before the commencement of the case, is also not met. Such debt did not arise until the order of the Commission was entered, and that was subsequent to the commencement of the case here.
Our decision denying setoff in the present case is reinforced by In re Rowan, 15 B.R. 834 (Bankr.N.D.Ohio 1981.) That case involved the dischargeability of a debt debtor owed to the Social Security Administration because of an overpayment to the debtor. The court denied the right of set-off, saying that on the date the petition was filed no fund was held by the Social Security Administration against which it could offset the debt owed it. The same reasoning is applicable here.
Movant’s motion to withhold payment of $3,210.00 is overruled, as is its motion to setoff the amount in which its claim has been allowed against that figure.
So Ordered. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490501/ | MEMORANDUM OF OPINION AND ORDER
RANDOLPH BAXTER, Bankruptcy Judge.
This matter is before the Court upon the motion of Robert Whitlow (Debtor) seeking under § 554(b) [11 U.S.C. 554(b) ], abandonment of personal property and an order which, if granted, would restore him to possession of a certain checking account. A hearing was held with due notice having been made upon all parties entitled thereto. In response, Ameritrust Company (Ameri-trust), a judgment creditor, filed its brief in opposition to such relief. Upon examination of the pleadings with supporting documentation,- the following findings are made pursuant to Rule 7052, Bankr.Rules:
I.
Prepetition, Ameritrust obtained a state court judgment against the Debtor in the amount of $1,929.84 and commenced garnishment proceedings to enforce its judgment. In part, the subject of such proceeding was Debtor’s $508.47 on deposit at Bank One of Cleveland. Subsequently, a state court exemption hearing was scheduled to determine , the extent of the Debt- or's exemption interest in this personal checking account containing the $508.47. Before that hearing could be held, the Debtor petitioned and received an order of relief under Chapter 7, which later was converted to the present Chapter 13 case. Herein, the Debtor seeks to have the $508.47 abandoned from his estate and, consequently, have himself restored to possession of the checking account.
In support of his motion for abandonment, the Debtor contends that the amount in his checking account is property of his bankruptcy estate, pursuant to § 1306(a) and (b) [11 U.S.C. 1306(a) and (b) ] and, further, constitutes exempt property pursuant to O.R.C. 2329.66(A)(4)(a) and 2329.-66(A)(17).1 On the other hand, objectant Ameritrust concedes that the funds in the subject checking account should be abandoned, but any abandonment should inure to its benefit and not to the Debtor’s since Ameritrust’s garnishment interest attached to the subject funds prepetition. Ameri-*413trust further asserts that the exemptions which the Debtor presently seeks were not available to him in the non-bankruptcy proceeding which was pending prepetition, and therefore the Debtor possessed no exempti-ble interest at the point in time of filing his petition in bankruptcy. Ameritrust further avers that to the extent the Debtor may have any recognizable interest in the subject account, that interest would be junior to that of Ameritrust.
II.
The issue before the Court is whether the Debtor has an exemptible interest in a garnishment lien which attached prepetition. In deciding this matter, an examination of applicable state law is beneficial. In re Johnson, 53 B.R. 919 (Bankr.N.D.Ill.1985). Specifically, § 2329.66(C)(1) of the Ohio Revised Code [O.R.C. 2329.66(C)(1)] provides, in relevant part:
(C) For purposes of this section, “interest” shall be determined:
(1) In bankruptcy proceedings, as of the date a petition is filed with the bankruptcy court ....
In the matter at bar, Ameritrust obtained a state court judgment against the Debtor in the amount of $1,929.84. To enforce its judgment, Ameritrust caused to be filed an affidavit for garnishment with the Cleveland Municipal Court. As a result, Bank One of Cleveland (Bank One), in addition to several other banks, was served with a Court order and notice of garnishment on November 7, 1986. Bank One is the depository bank for the subject checking account and so acknowledged this fact to the Municipal Court by letter dated November 25, 1986. The Debtor filed his bankruptcy petition on November 14, 1986. These facts are undisputed. From the facts, it is rather apparent that Ameritrust perfected its garnishment lien prior to the Debtor’s bankruptcy petition. The amount on deposit in the subject account is $508.47, which is substantially less than Ameri-trust’s judgment lien against the Debtor (i.e., $1,929.84).
The state exemptions which the Debtor seeks to effect under O.R.C. 2329.-66(A)(4)(a) and (17) were clearly not available to the Debtor until and once he filed his bankruptcy petition. His bankruptcy filing occurred on November 14, 1986, one week after issuance of the garnishment order by the municipal court. As provided above, any exemptible interest is determined in a bankruptcy proceeding as of the petition filing date. O.R.C. 2329.66(C)(1). The effect of Ameritrust’s prior garnishment order left no interest upon which the Debtor could obtain an exemption once he filed his bankruptcy petition, since the amount of the lien exceeds the amount of the subject deposit. See, Section 2716.-13(B) of the Ohio Revised Code [O.R.C. 2716.13(B)]; In re Alpco, 62 B.R. 184 (Bankr.S.D.Ohio 1986). Further, under Ohio law it is well-established that a debtor can exempt only an interest in property which is not subject to any third-party liens. See, In re Spears, 744 F.2d 1225 (6th Cir.1984); In re Pine, 717 F.2d 281, 284 (6th Cir.1983).
Accordingly, there being no objection to the Debtor’s motion to abandon and the Debtor having no exemptible interest in the subject checking account, said motion is granted. Further, Ameritrust’s garnishment does not constitute a voidable preference by reason of the exception set forth at 11 U.S.C. 547(c)(7).
IT IS SO ORDERED.
. "§ 2329.66 Property that a person domiciled in this state may hold exempt [Eff. 12-1-86],
(A) Every person who is domiciled in this state may hold property exempt from execution, garnishment, attachment, or sale to satisfy a judgment or order, as follows:
... (4)(a) The person’s interest, not to exceed four hundred dollars, in cash on hand ... and money on deposit with a bank_ This division applies only in bankruptcy proceedings. ..O.R.C. 2329.66(A)(4)(a).
.. (17) The person’s interest, not to exceed four hundred dollars, in any property, except that this division applies only in bankruptcy proceedings." O.R.C. 2329.66(A)(17)
The Debtor has claimed this property under § 1306 but the Court questions this characterization. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490502/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW
SIDNEY M. WEAVER, Bankruptcy Judge.
This matter came before the Court for trial on April 13, 14 and 23, 1987, on Jet Florida’s Motion for Relief from Award of Attorney’s Fees and its Complaint for an Accounting, for Turnover, and for Further Relief. The Court heard the testimony, examined the evidence presented, observed the candor and demeanor of the witnesses, considered the arguments of counsel, and being otherwise fully advised in the premises, does hereby make the following findings of fact and conclusions of law:
Jet Florida’s Motion and its Complaint relate to an award of attorneys’ fees to Carlton, Fields, Ward, Emmanuel, Smith, Cutler & Kent, P.A. (“Defendant”), as counsel for the debtors and debtors-in-possession in these Chapter 11 cases, and to a sum of money received by Defendant pre-petition which, after allowing for offsets for pre-petition services, totalled $31,-822.06. The Court has jurisdiction to hear the Motion and the issues raised in the Complaint pursuant to 28 U.S.C. § 157(b)(2)(A) and (E).
With respect to the issues raised by the Motion and the first count of the Complaint, the Court finds that the sum of $31,822.06 was property of the debtors’ estates which should be turned over to Jet Florida as the successor to the debtors pursuant to their confirmed plan of reorganization. Defendant admitted that it made a mistake by retaining this property of the estate, which the Court finds to have been intentionally retained without authority. The Court, therefore, in the exercise of its *454discretion to set fees for professionals employed by debtors-in-possession, as a sanction for the retention of the property of the estate, will order a partial disgorgement of the fees awarded and paid to the Defendant in the sum of $50,000, to be paid to Jet Florida. See 11 U.S.C. §§ 329, 330, and 1129 and Bankruptcy Rules 2016 and 2017. The Court finds that it would not be an appropriate remedy to order the disgorgement of the fees paid to Defendant, except as hereinabove stated.
The Court further finds, on the issues raised by the second and third counts of the Complaint, that Jet Florida failed to prove that there have been breaches of fiduciary duty by Defendant to the debtors and also failed to prove its allegations of civil theft under §§ 812.014 and 812.035, Florida Statutes.
The Court finds that Defendant failed to prove the allegations of its first and second counterclaims of intentional interference and civil conspiracy. (The trial of the third counterclaim, for services performed by Defendant to Jet Florida after the confirmation of the plan of reorganization, was severed, and the Court finds that there is no just reason to delay entry of judgment in the matters tried and ruled upon herein and accordingly will enter a final judgment which will provide that the Court retain jurisdiction to resolve the third counterclaim.) In addition, the Court finds that Defendant failed to prove that third-party defendant should be held liable on the allegations of the third-party complaint.
The Court will enter a separate Order on the Motion deeming it moot and a Final Judgment in conformity herewith.
FINAL JUDGMENT
In conformity with the Findings of Fact and Conclusions of Law of even date, it is
ORDERED and ADJUDGED that the plaintiff Jet Florida, Inc. recover of defendant Carlton, Fields, Ward, Emmanuel, Smith, Cutler & Kent, P.A., on the first count of its complaint the sum of $81,-822.06 with interest thereon at the rate of 7.02 percent as provided by law and take nothing on the second and third counts of its complaint, which are dismissed with prejudice; that defendant Carlton, Fields, Ward, Emmanuel, Smith, Cutler & Kent, P.A., take nothing of plaintiff Jet Florida, Inc. on the first and second counts of its counterclaims, which are dismissed with prejudice, and take nothing of third-party defendant John Olson on its third-party complaint, which is dismissed with prejudice; and that plaintiff Jet Florida, Inc., and third-party defendant John Olson recover of the defendant Carlton, Fields, Ward, Emmanuel, Smith, Cutler & Kent, P.A., their costs of action on appropriate motion. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490503/ | ORDER
JOHN L. PETERSON, Bankruptcy Judge.
The Debtors filed motions pursuant to Section 522(f)(2) of the Code seeking to void valid liens of Manhattan State Bank and Household Finance Company in the Debtors’ principal residence and a 1982 Peterbilt truck. Debtors claim exemption in each item under Montana law, asserting, in the case of the truck, that it is exempt as a tool of the trade under Section 25-13-612, M.C.A. The home is claimed as exempt under Montana homestead law, Section 70-32-101, et seq., which is incorporated by reference in Section 25-13-615, M.C.A. Hearing on the motion was held on June 2, 1987, with the Bank represented by counsel in opposition to the motion. A guarantor of the Debtors’ Bank loan also filed objections to motions, and requests sanctions in the form of an award of attorney fees.
The evidence shows the Manhattan Bank holds a valid perfected security interest in the truck and a valid lien through a Deed of Trust on the home. Household Finance holds a second lien on the home to secure repayment of its debt. A declaration of homestead on the home has been filed of record by the Debtors claiming the premises constitutes a homestead for the benefit of the Debtors and their family. The truck was purchased by the Debtors from the Bank and subsequently refinanced. According to the position of the Debtors, the act of refinancing makes this loan a non-purchase money mortgage. The disposition of such issue is not necessary due to the denial of the motion on other grounds. The truck is an over-the-road vehicle used to pull trailers for transportation of goods, and is a licensed truck as that term is defined in Montana motor vehicle statutes. Section 61-1-107, M.C.A., (truck or motor truck means every motor vehicle designed, used, or maintained primarily for transportation of property) and Section 61-1-108, M.C.A. (truck tractor means every motor vehicle designed and ,used primarily for drawing other vehicles and not constructed to carry a load other than a part of the weight of the vehicle and load drawn).
Under Section 522(f)(2) the Debtors may avoid the fixing of a lien which is non-pos-sessory, non-purchase money in any:
“(A) household furnishings, household goods, wearing apparel, appliances, books, animals, crops, musical instruments or jewelry that are held primarily for the personal, family or household use of the debtor or a dependent of the debtor;
(B) implements, professional books, or tools of the trade of the debtor or the trade of a dependent of the debtor;”
As was held in Rainier Equipment Finance, Inc. v. Taylor, 73 B.R. 149, (BAP 9th Cir.1987):
“We believe that a state is free to define exempt property, however if lien encumbered exempt property comes within the avoidance provision of § 522(f) the liens may be avoided.”
Montana has opted-out of the federal exemptions provided in 522(d), Section 31-2-106, M.C.A. (amended 3/25/87), so all exemptions claimed by the debtors must come from state law. However, in the case of consensual liens, which are at issue in this case, only liens against that property listed in 522(f)(2)(A), (B) and (C) which is exempt under Montana law may be avoided. Stated differently, the description of property *499in 522(f)(2) is not only inclusive but exclusive.
In the case of the homestead exemption, Section 522(f)(2)(A) does not include in its language the inclusion of a homestead, or any real property. Rather, that section describes personal property only. Accordingly, a debtor may not avoid the fixing of a consensual (as opposed to a judicial lien on a homestead) even if the lien is non-purchase money and non-possessory. A different result would be obtained if the lien were a judicial lien, for in that case it may be avoided under 522(f)(1). See, e.g., Boyd v. Robinson, 741 F.2d 1112 (8th Cir.1984), aff’g 31 B.R. 591 (D.Minn.1983). Debtors’ final argument that they use their home as an office, and therefore the home is an “implement” of their trade is specious on its face. An implement is an item of personal property. MacDonald v. Mercill, — Mont. —, 714 P.2d 132 (1986).
Turning then to the 1982 Peterbilt truck, this Court held as follows in In re Horton, 76 B.R. 166 (Bankr.Mont.1987):
“The evidence shows that the Van is a typical motor vehicle which has no specialized characteristics which enable the debtor to ply his trade by the use of such vehicle. There is no lien avoidance right to a motor vehicle under Section 522(f). I hold the debtor cannot exempt the Van as a tool of the trade under Section 25-13-612 because the Van is not a tool of the trade. Rather the Van is a motor vehicle to which the debtor is entitled under Section 25-13-617, M.C.A. to a $1,000 exemption. In re Gehnert, 40 St.Rep. 1894 (Bankr.Mont.1983); In re Alloway, 34 B.R. 423 ([Bankr.] D.Or. 1987); In re Trainer, 56 B.R. 21 (Bankr.D.Tex.1985). Courts should be reluctant to exempt motor vehicles as tools of the trade and thus allow lien avoidance under § 522(f). In re Taylor, [73] B.R. [149], 4 Mont.B.R. 347, 351 (BAP 9th Cir.5/11/87).”
Following such reasoning, I hold the truck-tractor in this case fits the Montana exemption statute of Section 25-13-617, which allows that “one truck or automobile of the value of not more than $1,000.00 is exempt * * 1 Accordingly, the Debtors may not avoid the lien of the Bank in the 1982 Peterbilt truck under 522(f)(2)(B).
Sanction requests by the guarantor are not provided for by Section 522 and are therefore not proper.
IT IS ORDERED the motions of the Debtors to avoid liens of Manhattan State Bank and Household Finance Company are denied.
IT IS FURTHER ORDERED the request for sanctions by Lyle Ryen are denied.
. The Debtors claim a $2,000.00 exemption under Section 25-13-617, M.C.A., in a 1986 Subaru. Since the 1982 Peterbilt truck is also subject to the provisions of 25-13-617, the Debtors must surrender one of the vehicles to the Trustee. In re Stanhope, 76 B.R. 165, 166 (Bankr.Mont.1987), holds:
"A debtor may not claim more than one vehicle, nor one vehicle whose equity value exceeds $1,000.00.” | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490512/ | ORDER GRANTING MOTION FOR RELIEF FROM DEFAULT AND FINAL JUDGMENT
GEORGE L. PROCTOR, Bankruptcy Judge.
This matter came before the Court on the motion for relief from default and final judgment filed by defendant, Coaliron Mining Program, a California limited partnership, through certain of its limited partners. Plaintiff objected to the relief requested asserting along with other grounds that the certain limited partners lacked standing to seek relief from the final default judgment under Rule 60(b), F.R.Civ.P. Upon consideration of memorandum and argument of counsel, the Court makes the following findings of fact and conclusions of law.
A. FINDINGS OF FACT
1. On June 6, 1986, plaintiff filed this action against Coaliron Mining Program, a California limited partnership, seeking damages based on defendant’s default on a promissory note executed in favor of Resource Trading Corporation. Plaintiff asserted that the bankruptcy estate held the note as a holder in due course.
2. A summons was issued on June 12, 1986, and served together with a copy of the complaint on George Eadington, Registered Agent, 14131 Yorba Street, Ste. 204, Tustin, California 92680, on June 18, 1986.
3. On August 4, 1986, George Eading-ton resigned as agent upon whom process may be served in California for Coaliron Mining Program, a limited partnership organized under the laws of the State of California and this resignation became part of the official records of the Secretary of State of the State of California on that date.
4. As defendant had failed to file an answer, motion or other defensive pleading, plaintiff filed a motion for default and final judgment on November 12, 1986. The motion was granted and the default and final judgment were entered on November 20, 1986.
5. Defendant, through certain of its limited partners, filed its motion for relief from default and final judgment on March 20, 1987 asserting that it has a meritorious defense based on the terms and conditions of various agreements between Marcon Enterprises, Inc., its subsidiary corporations and defendant.
6. Based on the State of California Certificate of Limited Partnership filed on November 5, 1984, Marcon Enterprises, Inc., is the sole general partner of defendant. This Certificate also states that the term for which defendant is to exist is until December 30, 2030, or until sale of all assets; or removal, retirement, death, withdrawal, resignation, incapacity, bankruptcy, insolvency or dissolution of the sole general partner. See also Articles IV and XII of the Certificate and Agreement of Limited Partnership of Coaliron Mining Program.
7. On November 21, 1984, Marcon Enterprises, Inc., filed a voluntary petition under 11 U.S.C. Chapter 11. This proceeding was subsequently converted to a proceeding under Chapter 7 on November 4, 1985, and plaintiff, Charles Grant, was appointed as trustee.
8. Pursuant to Article VIII of the Certificate and Agreement of Limited Partner*127ship of Coaliron Mining Program, the general partner is responsible for defending any legal proceeding brought against the limited partnership.
9. Pursuant to Article VI, Section 2.1, of the Certificate and Agreement of Limited Partnership of Coaliron Mining Program, each limited partner is “... required to execute and deliver an assumption agreement evidencing such Partner’s unqualified assumption on a full recourse basis of loans extended to the Partnership by the Contract Miner in connection with the anticipated mining operations to be conducted in the Property.” The certain limited partners assert that this provision gives them a direct interest in this action since plaintiff is trying to collect a loan given to the limited partnership.
10. A substantial question exists as to whether defendant was a valid limited partnership under California law as of the date this action was filed or since the date that Marcon Enterprises, Inc., filed its voluntary petition under 11 U.S.C. Chapter 11 on November 21, 1984.
11. It is undisputed however that no action was taken by Marcon Enterprises, Inc., as general partner nor by anyone for the limited partnership to defend this action until the motion for relief from default and final judgment was filed by certain limited partners on March 20, 1987.
12. The limited partners had not as of the time of the hearing on this matter elected a general partner to replace Marcon Enterprises, Inc.
13. Plaintiff asserts that he would be prejudiced if the relief requested was granted because the principal witness he was relying upon to prove this action no longer is willing to testify on his behalf. Accordingly, plaintiff would have to begin from scratch to develop new sources of proof.
14. Although the limited partners may have had an inconsequential interest at the outset of this action, they now have a sufficient interest to establish standing to proceed under Rule 60, F.R.Civ.P., Rule 9024, Rules of Bankruptcy Procedure, since no action was taken by the general partner to defend the limited partnership.
B. CONCLUSIONS OF LAW
1. Rule 60, F.R.Civ.P., Rule 9024, Bankruptcy Rules of Procedure, states:
... On motion and upon such terms as are just, the court may relieve a party or his legal representative from a final judgment, order, or proceeding for the following reasons: (1) mistake, inadvertence, surprise, or excusable neglect; (2) ... (3) fraud, misrepresentation, or other misconduct of an adverse party; (4) the judgment is void; ... or (6) any other reason justifying relief from the operation of the judgment. The motion shall be made within a reasonable time, and for reasons (1), (2), and (3) not more than one year after the judgment, order, or proceeding was entered or taken....
2. When determining whether to set aside a default and final judgment, the Court must consider whether the relief requested would prejudice plaintiff and whether movant has presented a meritorious defense. Medunic v. Lederer, 533 F.2d 891, 893 (3rd Cir.1976). The test however should be liberally construed and any doubt should be resolved in favor of setting aside the default and final judgment so that the case may be decided on its merits. Id.
3. Under California corporation law, the general partner of a limited partnership is the proper party to a proceeding by or against the limited partnership unless the proceeding is “... to enforce a limited partner’s right against or liability to the partnership.” 24A Cal.Corp.Code § 15526 (1949).
4. The courts in California have been faced with the issue of whether § 15526 of the California Corporate Code bars a limited partner from defending an action on behalf of the limited partnership where the general partner of the limited partnership has taken no action to defend the partnership and have resolved the issue in favor of allowing participation by the limited partner. See Kobernich v. Shaw, 70 Cal.App.3d 914, 139 Cal.Rptr. 188 (4th *128Dist.1977); [limited partners not required to sit idly by and watch their investment disappear when general partner does not defend the action]; and Linder v. Vogue Investments, Inc., 239 Cal.App.2d 338, 48 Cal.Rptr. 633 (2d Dist.1966) [§ 15526, California Corporations Code, does not prevent intervention by a limited partner in a proper case]. Cf. Bedolla v. Logan & Frazer, 52 Cal.App.3d 118, 125 Cal.Rptr. 59 (1st Dist.1975) [limited partner may bring an action against the general partner and persons who colluded or conspired with the general partner or the limited partnership in order to enforce the limited partners rights against them]. Admittedly, this matter is slightly different from the California cases in that the certain limited partners in this case took no action prior to the date the final judgment was entered. This is a distinction without significance however and the Court will not elevate form over substance. The Court will exercise its discretion in favor of allowing the defendant to be heard on the merits.
Accordingly, it is ORDERED:
1. Defendant’s motion for relief is granted.
2. Both the default and final judgment entered on November 20, 1986, are set aside.
3. Defendant through its certain limited partners or delegated representative is directed to file an answer or other responsive motion or pleading within thirty (30) days of the date of this Order. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490513/ | *144AMENDED ORDER ON MOTION TO TAX COSTS
ALEXANDER L. PASKAY, Chief Judge.
THIS IS a Chapter 11 case, and the matter under consideration is a Motion to Tax Costs filed by Edward Genevish (Genevish). The Motion is filed in a contested matter which involved a challenge of the claim filed in this Chapter 11 case by Genevish, in which this Court ruled that Genevish has an allowable claim against George Hunt, Inc. (Debtor), the Debtor, albeit, not in the amount which was originally filed. The matter was fully tried, and at the conclusion this Court entered a final judgment in favor of Genevish and against the Debtor. The Motion under consideration seeks to tax costs in favor of Genevish in the following amounts: $350.00, representing the witness fee paid to Dr. Schulak; the cost of the deposition of Dr. Schulak, including the court appointed attendance fee, in the amount of $108.00; the charge of the court reporter for the deposition of the claimant, Genevish, in the amount of $45.16; and the costs of James A. Watson & Associates, an expert who testified, in the amount of $425.00. The Debtor vigorously opposes the imposition of the costs, but especially challenges Genevish’s right to a cost reimbursement for the witness fee of Dr. Schu-lak, the charge of the court reporter for the deposition of Genevish, and the witness fee of James A. Watson & Associates.
The Court heard argument of counsel and considered the record and is of the opinion that while Genevish is entitled to the taxation of costs for the cost of the deposition of Dr. Schulak in the amount of $108.00, he is not entitled to any taxation of costs sought for the witness fee of Dr. Schulak, nor the cost of the deposition of Genevish, and is only entitled to a reduced amount for the cost of the expert who testified, James A. Watson & Associates, for the following reasons:
In the Federal Judicial System fees of witnesses which may be taxed as costs are governed by 28 U.S.C. § 1920 ¶ 3, and 28 U.S.C. § 1821. The fees allowable to witnesses under these statutes are limited to the statutory per diem, mileage, and subsistence allowance where appropriate. There is no distinction made between lay and expert witnesses in the statutes. See Henkel v. Chicago, St. Paul, M. & O.R. Co., 284 U.S. 444, 52 S.Ct. 223, 76 L.Ed. 386 (1932); Jones v. Diamond, 594 F.2d 997 (5th Cir.1979); Kaiser Industries Corp. v. McLouth Steel Corp., 50 F.R.D. 5 (E.D.Mich.1970); 6 Moore’s Federal Practice ¶54.77[5] (2d ed. 1976). In Henkel the Supreme Court stated that the federal district court is without power to allow expert witness fees as a part of the taxable costs, even if under the state court practice such allowance is discretionary and permissible. The Supreme Court concluded that since Congress has made specific provisions as to the amounts properly taxable as witness fees without making any exception concerning the fees of expert witnesses, the allowance which could be made to an expert and is to be taxed is limited to the expert witness fees provided by the statute itself.
This Court is not oblivious to the fact that since 1970 as a result of the mounting volume of civil rights litigations which are largely dependent upon expert testimony, a number of decisions of lower courts allowed charges of experts to be taxed as costs. The precise legal basis for such an allowance is unclear, and courts at times attempted to justify the allowance on the basis that the same is part of the cost of litigation, or in the alternative, on the basis that since the specific statute permitted an award of attorney fees in civil rights cases, such an allowance was permissible as part of the award of the attorney fees based on the Civil Rights Attorney Fees Award Act of 1976, 42 U.S.C. § 1988. These decisions disregarded 28 U.S.C. § 1821 and § 1920, and the holding of Henkel, and justified a taxation of the fees of an expert on the basis that it is part and parcel of the allowance made pursuant to the “language of the statute”, which permitted a reasonable attorney fee. Ramos v. Lamm, (10th Cir.1983) 713 F.2d 546, 559; Jones v. Diamond, (CA 5th 1981) 636 F.2d 1364 (en banc); Wade v. Mississippi Coop. Extension Service, (ND Miss.1974) 64 *145F.R.D. 102; Cf.; Greenhaw v. Lubbock County Beverage Ass’n, (5th Cir.1983) 721 F.2d 1019. It appears from these cases that in the allowance of costs such as fees to experts, the courts have been generally guided by the same policy principles which apply to the award of attorney fees. For instance, the Fifth Circuit Court in the case of Christiansburg Garment Co. v. EEOC, (1978) 434 U.S. 412, 98 S.Ct. 694, 54 L.Ed.2d 648, held that in the absence of showing, the plaintiffs case falls within the standard enunciated by that case, the Court is powerless to tax the fees of expert witnesses as a cost in favor of the prevailing defendants in civil rights cases. Chris-tiansburg Garment involved the question of taxing as costs compensation for expert witnesses, and the court held that unless there is a finding by the court that the suit by the plaintiff was utterly meritless, it is improper to tax costs against the plaintiff and in favor of the defendant in a suit based on the Civil Rights Act of 1984.
Notwithstanding the post-Henkel, supra, decisions, which under certain circumstances justified taxation of fees of an expert, this Court is satisfied that the rule in this Circuit is not in accord with those decisions enunciated. In Kivi v. Nationwide Mutual Insurance Co., 695 F.2d 1285 (11th Cir.1983), the Court of Appeals in this Circuit considering the same question stated that “We need not labor long concerning this issue because it is well settled that expert witness fees cannot be assessed in excess of witness fees provided in § 1821.” Accordingly, the claimant’s request for expert witness fees was limited to the statutory per diem allowance. See also, J.T. Gibbons v. Crawford Fitting Co., 760 F.2d 613 (5th Cir.1985); Baum v. United States, 432 F.2d 85 (5th Cir.1970).
F.R.C.P. § 54(d) provides that “except when express provision therefor is made either in a statute of the United States or in these rules, costs shall be allowed as of course to the prevailing party unless the court otherwise directs ...” Construing this rule in the case of Farmer v. Arabian American Oil Co., (1964) 379 U.S. 227, 85 S.Ct. 411, 13 L.Ed.2d 248, the Supreme Court speaking through Justice Black said
... We do not read [Rule 54(d) ] as giving district judges unrestrained discretion to tax costs to reimburse a winning litigant for every expense he has seen fit to incur in the conduct of his case.... the discretion given district judges to tax costs should be sparingly exercised with reference to expenses not specifically allowed by statute.
Based on the foregoing, this Court is satisfied that notwithstanding the prevailing state court practice urged by counsel to be adopted by this Court, this Court is constrained to follow the Statute and the teaching of Henkel and Farmer v. Arabian American Oil Co., supra, and is satisfied that neither the expert witness fee of Dr. Schulak or James A. Watson & Associates will be properly taxable as costs.
Accordingly, it is
ORDERED,, ADJUDGED AND DECREED that the Motion to Tax Costs be, and the same is hereby, granted in part and denied in part, and a cost judgment shall be entered in favor of Genevish for the amount of $153.16. It is further
ORDERED, ADJUDGED AND DECREED that the balance of the request be, and the same is hereby, denied. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490514/ | ORDER ON PENDING MOTIONS AND PRETRIAL ORDER
JAMES E. YACOS, Bankruptcy Judge,
sitting by designation.
The above-captioned adversary proceedings came before the court on June 9, 1987 at a pretrial conference and for hearing upon numerous pending motions and objections. By virtue of prior orders and rulings of the court the defendants involved in this proceeding had been reduced to those named above.
At the conclusion of the lengthy hearing on June 9th the court dictated into the record its findings and conclusions as to each pending motion. The court had earlier advised counsel that it intended to rule upon all pending motions and objections and would deny generally any pending items not specifically brought forward by counsel before the conclusion of the hearing.
The court hereby incorporates by reference its findings and conclusions dictated into the record, as indicated above, as further supplemented by this order. In case of any inconsistency the specific provisions of this order shall govern. Accordingly, it is
ORDERED, ADJUDGED, and DECREED as follows:
1. The heart of plaintiffs complaint in this adversary proceeding is an attempt to “step-into-the-shoes” of a debtor-in-possession, or a prospective bankruptcy trustee, to recover various disbursements allegedly made improperly from the assets of this estate. Alternatively, plaintiff claims to be acting in its status as a secured creditor asserting wrongful disposition of its collateral.
2. The first contention must fail because plaintiff has no standing to pursue causes of action vested solely in a trustee (or a DIP having the status of a trustee) under applicable bankruptcy law without first obtaining authorization of the bankruptcy court to do so — upon wrongful refusal of the estate fiduciary to pursue such causes. See 4 Collier on Bankruptcy, § 547.21 (15th Ed.1987).
*1473. The second contention likewise is untenable because the record in this case establishes that the plaintiff acquiesced in the liquidation of its collateral under an oral and/or informal letter “agreement” which left open considerable ambiguity as to the actual scope of restriction on the disposition of the proceeds of the liquidation. No attempt was made to obtain a court order approving and spelling out the terms and conditions of such agreement— upon notice to creditors — with a determination that any such understanding as to the liquidation of the estate was in the best interests of creditors generally. Cf. In re J.L. Graphics Corp., 62 B.R. 750 (Bankr.D.N.H.1986), aff’d sub. nom. In re Cross Baking Inc., 818 F.2d 1027 (1st Cir., 1987). Moreover, as to the defendant, Robert Nash, Esquire, the plaintiff failed to request a hearing or object to a duly-noticed application for allowance of fees to said attorney for the debtor-in-possession, which resulted in the entry of the this court’s order of October 20,1986 allowing payment of the fees requested.
4. While improper disbursements by a debtor-in-possession are not to be tolerated, and can be recovered by an appropriate procedure as indicated above, the plaintiff can not in my judgment pursue such recoveries directly in its status as a secured creditor on the record in this case.
5. Notwithstanding the foregoing, the court determines that the following counts of the complaint shall not dismissed, and shall remain open for trial, pending a determination as to the appropriate party to pursue the same as hereinafter provided:
(a) Count One — Against Ray Moore, Nick Moore, and Matt Moore, Defendants.
(b) Count Three — Against Curtis Jensen — Defendant.
6. All other counts of the complaint are dismissed, without leave to amend, together with all cross-claims, counterclaims, and motions and objections pertaining thereto. The motion to intervene by Hermes, Inc., is denied. Any other pending motion in this adversary proceeding that was not specifically raised at the June 9, 1987 hearing, except those pertaining to Counts One and Three, are also hereby denied.
7. The dismissal of Count Two regarding the defendant Robert Nash, Esquire, is with prejudice to the plaintiff as to the contention that the payment of the court-approved fees to Mr. Nash violated a valid and enforceable restriction upon the disposition of collateral, but is without prejudice to any motion in the case-in-chief which the plaintiff, or any other party-in-interest, may wish to make to the court to reconsider the amount of the fees awarded in light of the final outcome of this Chapter 11 proceeding.
8. With regard to Counts One and Three preserved for trial in this adversary proceeding, all parties shall have 30 days within which to file appropriate motions to have a substitute party-plaintiff pursue those counts, whether in Chapter 11 or in a conversion to Chapter 7, and/or to have Bankwest specifically authorized to pursue the same with any recoveries to be held pending further order of court as to their distribution. The court by subsequent pretrial order may set Counts One and Three down for trial in accordance with its ruling on any such motions. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490515/ | ORDER ON OBJECTION TO TRUSTEE’S FINAL ACCOUNTING
JAMES E. YACOS, Bankruptcy Judge.
This case came before the court for hearing on February 10, 1987 on a separate motion by the debtors to withdraw their chapter 13 petition in bankruptcy. The debtors for their own reasons do not wish to have a bankruptcy discharge and seek dismissal of the case even though they apparently have repaid in full all of their creditors. No party objected to the dismissal and the court by separate order has granted the debtors’ motion and ordered that the case be dismissed.
At the same time the debtors filed an objection to the trustee’s final accounting disputing the trustee’s calculations that her statutorily prescribed percentages for fees and expenses should include payments *192relating to the pay-off of a mortgage lien against the debtors’ property. The debtors contend that since these payments were made “outside the plan” the trustee is not entitled to the statutory percentages claimed. The law however is to the contrary. Matter Of Foster, Jr., 670 F.2d 478, 6 CBC2d 285 (5th Cir.1982). No contrary authority in the First Circuit is cited and I find the Foster decision and reasoning persuasive. See also, In re Case, 11 B.R. 843, 4 CBC2d 978 (Bankr.D.Utah, 1981), and the explanation of the unique considerations underlying compensation of a standing chapter 13 trustee, under the pertinent statutes, as set forth by then District Judge Selya in the case of In re Savage, 67 B.R. 700 (D.R.I.1986).
Accordingly, the debtors’ objection to the trustee’s final accounting is hereby denied and the aforesaid final accounting filed by the trustee on June 4, 1986 is hereby approved and this case shall be closed in accordance therewith.
ORDER
This case came on for hearing on February 10, 1987 on the debtors’ Motion To Withdraw A Petition In Bankruptcy for the reason that the debtors do not wish to have a discharge as they have, pursuant to their Chapter 13 Plan, repaid in full all of their creditors, secured and unsecured. No objections to the debtors’ motion were filed. All parties present having been heard, the court hereby orders as follows:
The court hereby grants the debtors’ Motion To Withdraw A Petition In Bankruptcy and this case is dismissed. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490516/ | ORDER ON OBJECTION TO CLAIM OF BANK ONE, COLUMBUS, N.A.
B.J. SELLERS, Bankruptcy Judge.
This matter is before the Court upon an Objection to Claim filed by Chapter 13 debtors Douglas W. and Angela M. Rud-duck. The claim specifically objected to is Claim #3, as amended on November 3, 1986, filed by Bank One, Columbus, N.A. (“Bank One”), in the amount of $10,329.90. That objection was opposed by Bank One and was heard by the Court. By implied agreement of the parties, the debtors’ objection as tried also included opposition to Claim # 15, filed by Bank One on November 3, 1986, in the amount of $1016. For reasons set forth below, the Court sustains the debtors’ objections in part and overrules those objections in part.
The debtors filed a petition under the provisions of Chapter 13 of the Bankruptcy Code on August 26, 1986. Their proposed Chapter 13 plan, as amended, calls for payments of $70.25 per week to the Chapter 13 Trustee, payment in full of all secured and priority unsecured claims and a dividend of 10% to holders of allowed unsecured claims. In connection with confirmation, the debtors objected to certain charges included in claims asserted by Bank One. To the extent those objections challenged assessments for disability and credit life insurance, however, that matter has been resolved between these parties.
The Court makes the following findings of facts. On July 13, 1985 the debtors and Bank One entered into a consumer installment loan contract and security agreement. By that agreement the debtors promised to repay Bank One a principal obligation of $10,112.74 with an initial interest rate of 12.25% in installments of $227.63 every month over a period of 60 months. Total payments over the life of the loan were to be $13,657.80. To secure repayment of that purchase money loan, the debtors granted Bank One a security interest in a 1985 Toyota automobile.
The debtors made payments on the loan in 1985 and 1986 totaling $2,276.30. As of the time the bankruptcy was filed, Bank One calculated its pay-off balance at $9,313.90, representing deductions from the amount financed for payments of $2,276.30, and additions of $1,466.46 for interest and late charges. That net claim of $10,329.90 has been asserted as claim # 3.
The second of Bank One’s contested claims, in the amount of $1016, represents a premium for vehicle insurance for the Toyota which Bank One purchased and now seeks to recover from the debtors.
*304The debtors object to three segments of Bank One’s claims. Specifically they allege that the $68.28 for late fees is unsubstantiated, that the amount of $1,398.18 for interest is incorrectly calculated, and that the $1016 asserted for the insurance premium represents an unauthorized charge.
The Court finds that the debtors failed to introduce any evidence to refute the validity of the late charges. Therefore, that portion of the debtors’ objection is overruled.
The Court further finds that no evidence or opinion was introduced as to any specific amount of interest erroneously claimed by Bank One, and the Court’s examination of the parties’ exhibits does not disclose any apparent error of significant magnitude in this regard. Therefore, except for findings stated below, Bank One’s claim for interest will be allowed as filed, and that portion of the debtors’ objection is, hereby, overruled.
The final aspect of the debtors’ objection to Bank One’s claim relates to the bank’s assertion of entitlement to reimbursement from the debtors for a policy of insurance for the Toyota for which Bank One advanced the premium. It is undisputed that, at all relevant times, the debtors had insurance in force on the Toyota. Through some mistake or error on the part of the debtors’ insurance agent or insurer, however, the wrong entity was designated as the loss payee on that policy. Bank One admitted that its insurance agent was aware that the debtors had purchased a policy which correctly designated Bank One as loss payee for the last six months of the period also covered by the policy purchased by the bank. Bank One, therefore, agreed to reduce its claim by the amount of any rebate attributable to that period of overlap, but found that such rebate would be $264 or only approximately one quarter of the total premium asserted against the debtors. The debtors, on the other hand, challenge the allowance of any portion of that premium.
Consistent with Bank One’s procedures, the debtors were never contacted by the bank regarding the insurance problem. Instead, the debtors received a letter in March, 1985 from Transamerica Premier Insurance Co., stating that Bank One had taken out insurance to protect its collateral and the debtors would be charged for that expense unless other insurance coverage were verified. Upon receipt of that letter, Mrs. Rudduck called Bank One where she was told to contact her own insurance agent regarding the matter. That contact was also made, and the debtors were assured that the insurance was in force and that the misunderstanding would be resolved. Apparently, however, that resolution never occurred.
As authority for its claim of entitlement to reimbursement for the insurance premium, Bank One relies upon the provisions of two paragraphs in its loan and security agreement with the debtors. Those paragraphs state:
SECURITY By signing this Agreement, you give us a security interest in the property you are buying which is described in the Collateral Description section of this Agreement. You agree that you will not sell or lease it without our written consent. You will keep the collateral in good condition and will not use it for any unlawful purpose. You will keep it insured against loss or damage for at least the amount owed to us as described in the Property Insurance paragraph of this Agreement and will furnish us with a copy of the insurance policy naming us as the loss payee. You will pay any taxes due on the property and will advise us in writing if you move or if the property will be kept at some other address.
ADDITIONAL SECURITY INTEREST If we finance any property insurance or credit insurance in connection with this loan, you give us a security interest in any insurance proceeds or refund of premiums, and we may apply such amount to the balance owing on your loan.
Examination of the specific language of the quoted sections, however, does not establish that Bank One is thereby authorized to acquire insurance for its collateral *305and to charge this cost back to the debtors. The cited paragraphs, while requiring the debtors to insure the collateral and to designate Bank One as loss payee, do not represent an agreement by the debtors to be charged for insurance purchased by the bank. While some theory of entitlement to benefit conferred might be appropriately invoked to the extent such purchase actually benefited a debtor, that position is not appropriate, and was not advanced, under the circumstances of this case. Bank One’s collateral was protected at all times, and the duplicative insurance afforded no recognizable benefit to either party. Furthermore, the contract provision for additional security interest, by its language, relates only to proceeds or refunds of premiums for property insurance which was financed in connection with the loan. The loan agreement between these parties, by its terms and disclosures, did not include financing for property insurance. Accordingly, the Court finds that Bank One’s claim for reimbursement for the insurance premium is not enforceable under the agreement and must be disallowed in any claim asserted in this case pursuant to 11 U.S.C. § 502(b)(1).
Based upon the foregoing, the debtors’ objection to Claim # 15, filed by Bank One for reimbursement of an insurance premium in the amount of $1016 shall be, and the same is, hereby, SUSTAINED. The debtors’ objection to late fees and interest charges in Claim # 3, filed by Bank One, is OVERRULED, except that Bank One is ordered, within thirty (30) days after the date of the entry of this order, to reduce its claim of interest in Claim #3 by any amount of that charge which is attributable to interest associated with the financing of the disallowed insurance premium.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490518/ | ORDER
DAVID A. SCHOLL, Bankruptcy Judge.
AND NOW, this 27th day of April, 1987, having noted that the caption of our Order of April 24, 1987, excluded reference to the above two adversarial proceedings, it is hereby
ORDERED that our Order of April 24, 1987, 75 B.R. 346, shall be entered in those proceedings to dispose of the similar Motions in those proceedings and copies of this Order, plus our Order of April 24, 1987, shall be noted on the docket and placed in the record of those proceedings. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490520/ | MEMORANDUM OPINION
JAMES E. YACOS, Bankruptcy Judge.
This adversary proceeding is an attempt by the plaintiff-debtor to nullify certain notes and mortgages involved in a transaction by which he acquired in August of 1984, a restaurant operation known as “Pri-mo’s Restaurant” formerly owned by the defendants. The plaintiff operated the restaurant from September 1, 1984 to August 15, 1985. He ultimately filed his chapter 13 petition in this court on April 9, 1986.
The nub of the dispute is the plaintiff’s contention that he was induced into buying the restaurant for a purchase price of $140,000 on the basis of the defendants’ fraudulent assertions that the gross receipts of the debtor in 1983 were $314,000 when those receipts were only $239,000.
The defendants had listed the restaurant for sale with a broker and the plaintiff was put in touch with the defendants by that means. At the initial meeting between the parties the plaintiff inquired as to the gross business of the restaurant in 1983 and the defendants responded with the $239,000 figure shown in tax forms filed with the Internal Revenue Service for that year. The plaintiff inquired as to whether they really reported all of their cash receipts to the taxing authorities. The defendants responded that in fact they had grossed $314,000 in 1983 but some of the monies were handled “under the table”.
Proceeding on this assertion, without any effort to otherwise check the actual cash receipts of the business, the plaintiff agreed to purchase the same at the $140,-000 price. The parties signed the first sales contract on May 28, 1984, which provided for the defendants taking back a $50,000 purchase money mortgage. The sales contract was however contingent upon the plaintiff getting $70,000 in financing from the Nashua Trust Company before the transaction, which together with other borrowings that the plaintiff intended to make would cover the $140,000 purchase price. The Nashua Trust Company how*571ever would agree to finance only $50,000, so the contract ultimately was renegotiated and a new sales contract was signed on July 23, 1984 for the same $140,000 purchase price but with the defendants taking back a $70,000 purchase money mortgage.
The transaction still could not be consummated because the Nashua Trust Company stated that it required some signed writing giving profit and loss figures for 1983. The financing by Nashua Trust Company was to be guaranteed up to 90% by the Small Business Administration. At this point the plaintiff went to the defendants and indicated this problem and advised that he had to have some signed writing to consummate the deal.
For obvious reasons the defendants were not about to sign any writing in effect confessing to under-reporting of gross income to the tax authorities. Instead, Michael Gatta on his kitchen table listed on a piece of red construction paper income and sales figures for 1983 indicating net income before partners’ draw in the amount of $85,236. For the gross sales figures leading to this calculation he listed $314,860. He refused to sign the paper however and told the plaintiff that the paper was “to go no further than Bingham”. David Bing-ham was the commercial loan officer handling the transaction for Nashua Trust Company.
Notwithstanding the lack of any signature on the tattered piece of red construction paper, the Nashua Trust Company in its wisdom proceeded to close and approve the financing of the transaction. Whether the same complied with pertinent Small Business Administration requirements for guaranteed loans is not an issue before this court. Likewise, the impropriety of alleged under-reporting of income to the taxing authorities by the defendants is not material to the decision of this court. Cf. Kostelnik v. Roberts, 680 S.W.2d 532 (Tex.App.1984). Moreover, it is Falzone, not the Gattas, who is seeking affirmative relief from this court.
The testimony about the various representations back and forth between the plaintiff and the defendants, and the actual circumstances surrounding the creation of the “red construction paper” document referred to above, was highly conflicting. However, I am convinced by a review of the entire evidence in this record, and the testimony and demeanor of the key witnesses on the stand, that the credible evidence clearly establishes the facts as found above regarding those representations and the preparation of the document.
In the purchase transaction the plaintiff put in total cash of his own of only $2,000. The resulting debt service load, together with total operating costs, would require annually approximately $264,000 in gross revenues. Accordingly, such an operation obviously could not be covered from an annual gross of $239,000.
There is no direct independent evidence before the court that the gross receipts for 1983 were not the amount of $314,000 as represented by the defendants. On the stand they denied that the 1980 receipts were anything more than the $239,000 reported to the taxing authorities but I have already found and determined that it is credible that they represented to the plaintiff that they were not reporting all their cash receipts to the taxing authorities and that the true gross receipts for 1983 were the higher amount. The plaintiff did not offer any independent evidence establishing that the gross receipts for 1983 were less than the $314,000 claimed by the defendants in the representation prior to the sale. Of course, in an ordinary situation, the testimony of Michael Gatta on the stand that the actual receipts in 1983 were only $239,000, as reported to the taxing authorities, would normally be conclusive as an admission by a party-defendant. In this highly unique context however the court refuses to give that testimony binding effect and concludes as a factual matter that the plaintiff has failed to prove that the 1983 receipts were not as represented to him by the defendants.
Even if the court were to assume that the 1983 receipts were in fact $239,-000, the plaintiff is still not entitled to recovery on his fraud contention for various reasons. One, it does not appear to *572this court that there is “reasonable reliance” upon a representation made by a party which clearly implies an illegal activity. That very fact should be a clear “red flag” to the party hearing the representation not to rely upon the truthfulness of the representation being made. At a minimum, it should require some independent inquiry and evaluation, of the economic facts being represented, before reasonable reliance could be claimed. Two, the evidence in this record establishes that the downfall of the restaurant operation was attributable to actions by the plaintiff after taking over the operation rather than through any misstatement of prior revenues.
For several months after taking over the operation the plaintiff commented to the defendants during their visits to the restaurant operation that the business was going “fine” and that he was pleased with the operation. The evidence does indicate that after the plaintiff took over there were increasing problems in the business due to deteriorating food quality and poor service to customers. Finally, the plaintiff himself could not, or would not, testify to the total amount of gross cash receipts he received in his conduct of the restaurant operation from September of 1984 to September of 1985. For all this court knows, or can tell from the record, the plaintiffs own gross receipts in the operation could have been $314,000 or more.
I therefore conclude that even if a misrepresentation as to the gross of the business is assumed, the plaintiff has failed to prove either reasonable reliance or reliance to his detriment. The record establishes that his damage occurred from his own mismanagement of the business and also the substantial debt load that he tried to cover in his operation with a minimal $2,000 cash capital investment into the same.
The plaintiff makes several additional contentions for recovery apart from the fraud ground. The lack of “fair consideration” contention does not deserve extended comment since the transaction in question involved a clearly arms-length bargaining transaction between knowledgeable businessmen. The further contention that the defendants’ claim should be equitably subordinated to the business creditors of the plaintiff likewise must fail. There is no threshold showing that at the time of the transaction, in August of 1984, the defendants had any knowledge, or reason to believe, that the business operation being sold would ultimately and inevitably fail leaving unpaid existing trade creditors. Cf. In re A.F. Walker & Sons Company, Inc., 46 B.R. 186 (Bankr.D.N.H.1985). On the contrary, the evidence indicates that the restaurant had been a profitable operation and there was no reason at that time to believe that it would not continue to be so.
The foregoing shall constitute findings of fact and conclusions of law within the provisions of Bankruptcy Rule 7052, and a separate judgment in accordance therewith shall be entered in favor of the defendants. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490521/ | MEMORANDUM OPINION
JAMES G. MIXON, Bankruptcy Judge.
On November 1, 1984, John and Mary Ellen Sanders filed a joint voluntary petition for relief under the provisions of chapter 11. Because of the potential conflict of interest, separate counsel was employed by each of the debtors-in-possession. On May 6, 1985, Mrs. Sanders filed this complaint to set aside First National Bank of Camden, Arkansas' (FNB), mortgage on the South lk of the Southeast lk of Section 36, Township 13 South, Range 19 West, Oua-chita County, Arkansas, and to determine that Mrs. Sanders’ liability on note No. 90-67834 has been discharged.
Other actions were filed by Mrs. Sanders against The Merchants and Planters Bank, Camden, Arkansas, AP 85-183M, AP 85-188M and AP 85-189M, FNB, AP 85-184M and AP 85-187M, and the Stephens Security Bank, AP 85-185M. All of these adversary proceedings were consolidated for trial by agreement. A separate memorandum opinion will be issued in each case.
The proceeding before the Court is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B) and (K). The Court has jurisdiction to enter a final judgment in the case. The following shall constitute the Court’s findings of fact and conclusions of law pursuant to Bankruptcy Rule of Procedure 7052.
Mrs. Sanders was born and raised in Camden. She lived and worked in New Orleans for about six years after graduating from college but has not worked from the time of her marriage to Mr. Sanders in 1968 until after the petition was filed. Mr. and Mrs. Sanders moved to Camden in 1969.
Mrs. Sanders inherited as her separate property substantial amounts of property from her father’s estate. She also acquired separate property from her mother.
*753On April 7, 1982, John Sanders, Inc., Architect, a closely held corporation owned solely by Mr. Sanders, executed a promissory note to FNB in the sum of $50,000.00. The note was signed John Sanders, Inc., Architect, by John Sanders. Mrs. Sanders signed the note as an endorser. The note provided that interest accrued at FNB’s prime rate but in no event less than 12% per annum. The note was due to be repaid in one installment of principal and all accrued interest on demand and if no demand then ninety days from April 7, 1982.
Also, on April 7, 1982, Mr. and Mrs. Sanders executed a mortgage on Mrs. Sanders’ separate property having the following property description:
The South lk of the SEVi of Section 36, Township 13 South, Range 19 West, situated in Ouachita County, Arkansas.
This mortgage was given to secure the repayment of the above stated indebtedness. The mortgage was properly recorded. The mortgage has not been released of record.
Mr. Sanders, on behalf of John Sanders, Inc., Architect, executed an extension agreement on July 6, 1982, extending the due date of the note ninety days from July 6,1982. John Sanders, Inc., Architect, also paid $2,034.24 interest at the time of the execution of the extension. The note was also extended by Mr. Sanders on behalf of John Sanders, Inc., Architect, on October 15, 1982, January 17, 1983, April 14, 1983, August 4, 1983, November 9, 1983, February 7, 1984, and June 11, 1984. Over the period of the various extensions the principal balance was reduced to $39,000.00 and all accrued interest paid. The interest rate was also adjusted upward several times by virtue of the extension agreements. All payments of principal and interest were made by John Sanders, Inc., Architect. At no time was Mrs. Sanders advised that the due date was being extended or the interest rate increased.
I
MRS. SANDERS STATUS AS AN ACCOMMODATION ENDORSER
Both sides have presented arguments on the issue of whether Mrs. Sanders signed the note as an accommodation maker or primary maker.
Ark.Stat.Ann. § 85-3-606(l)(a) (Add. 1961) provides as follows:
(1) The holder discharges any party to the instrument to the extent that without such party’s consent fhe holder (a) without express reservation of rights releases or agrees not to sue any person against whom the party has to the knowledge of the holder a right of recourse or agrees to suspend the right to enforce against such person the instrument or collateral or otherwise discharges such person, except that failure or delay in effecting any required presentment, protest or notice of dishonor with respect to any such person does not discharge any party as to whom presentment, protest or notice of dishonor is effective or unnecessary.
Courts which have considered the question of whether the defenses under Uniform Commercial Code § 3-606 are available only to accommodation parties are divided. Compare Federal Deposit Ins. v. Blue Rock Shopping Center, 766 F.2d 744, 749 (3rd Cir.1985) (§ 3-606 is meant to apply only to parties who act as sureties and to co-makers who sign a note to accommodate the primary obligor and who have a right of recourse against the primary obli-gor) with Bishop v. United Missouri Bank of Carthage, 647 S.W.2d 625, 629 (Mo.App.1983) (plain unambiguous language of statute makes defenses available to any party to the instrument including co-makers). The Supreme Court of Arkansas has held specifically that the defenses under Ark. Stat.Ann. § 85-3-606 (Add. 1961) are available to both makers and accommodation parties. Rushton v. U.M. & M. Credit Corporation, 245 Ark. 703, 434 S.W.2d 81 (1968). Regardless of Mrs. Sanders’ status, under Arkansas law she is entitled to assert the defenses available pursuant to Ark.Stat.Ann. § 85-3-606 (Add. 1961).
II
DISCHARGE OF NOTE LIABILITY
Ark.Stat.Ann. § 85-3-606(l)(a) and (2)(a), (b) and (e) (Add.1961) provide as follows:
*754(1) The holder discharges any party to the instrument to the extent that without such party’s consent the holder
(a)without express reservation of rights releases or agrees not to sue any person against whom the party has to the knowledge of the holder a right of recourse or agrees to suspend the right to enforce against such person the instrument or collateral or otherwise discharges such person, except that failure or delay in effecting any required presentment, protest or notice of dishonor with respect to any such person does not discharge any party as to whom presentment, protest or notice of dishonor is effective or unnecessary.
(2) By express reservation of rights against a party with a right of recourse the holder preserves
(a) all his rights against such party as of the time when the instrument was originally due; and
(b) the right of the party to pay the instrument as of that time; and
(c) all rights of such party to recourse against others.
If the due date of the note is extended without the consent of a party eligible to rely on U.C.C. § 3-606 that party is discharged from liability to the holder of the note. Holcomb State Bank v. Adamson, 107 Ill.App.3d 908, 63 Ill.Dec. 704, 708, 438 N.E.2d 635, 639 (1982); First Nat. Bank of Layton v. Egbert, 663 P.2d 85, 87 (Utah 1983); Varga v. Woods, 381 N.W.2d 247, 252 (S.D.1986).
Mr. Sanders’ note was payable on demand but if no demand was made then the note was due ninety days from April 7, 1982. The due date of the note was extended numerous times by agreements between Mr. Sanders and FNB as recited above.
FNB argues that Mrs. Sanders is deemed to have given her consent to the extension of the due date because of a printed provision in the note which provides as follows:
ENDORSEMENT — SECURED
In consideration of the making at the request of the undersigned of the loan evidenced by the note hereon, the undersigned hereby jointly and severally endorse said note and do guarantee the payment thereof and bind themselves to and with First National Bank of Camden, Arkansas, its successors, endorsers or assigns, for the prompt payment of the said note when due and hereby consent to the terms and conditions of the said note and that the collateral security for the said note may be exchanged for other collateral, or surrendered in whole or in part from time to time, and that the time of payment of said note or of any of the security therefor may be extended, or the rate of interest changed without notice to or further assent from the undersigned, and that the undersigned will remain bound hereon notwithstanding such change, substitution, surrender or extension, (emphasis added).
The proper interpretation of this provision is governed by Ark.Stat.Ann. § 85-3-118(f) (Add.1961). This subsection provides, in part, as follows:
Unless otherwise specified consent to extension authorizes a single extension for not longer than the original period. A consent to extension, expressed in the instrument, is binding on secondary parties and accommodation makers.
Comment 7 of the Official Comments to Ark.Stat.Ann. § 85-3-118 (Add.1961) states, in part, as follows:
Subsection (f): This provision is new. It has reference to such clauses as “The makers and indorsers of this note consent that it may be extended without notice to them.” Such terms usually are inserted to obtain the consent of the in-dorsers and any accommodation maker to extension which might otherwise discharge them under Section 3-606 dealing with impairment of recourse or collateral. An extension in accord with these terms binds secondary parties.
The question presented is the proper interpretation of the “ENDORSEMENT-SE*755CURED” provision. There are three interpretations possible for this provision: (1) the provision cannot reasonably be construed to grant any consent to extension of the due date; (2) the provision can reasonably be construed to grant consent, but because the provision is ambiguous, Ark. Stat.Ann. § 85-3-118 (Add.1961) limits the consent to one extension; or (3) the provision can reasonably be construed to unambiguously grant consent to unlimited extensions.
The determinative language in the note is “the time of payment of said note ... may be extended without notice to or further assent from the undersigned, and that the undersigned will remain bound hereon.” No case construing this precise language has been found. Some note provisions have been construed to constitute consent to unlimited extensions without release of the guarantor. Union Const. Co. v. Bene. Standard Mortg. Inv., 125 Ariz. 433, 610 P.2d 67, 71 (App.1980) (“expressly agree that this note or any payment thereunder may be extended from time to time”); Bay Nat. Bank & Trust Co. v. Mason, 349 So.2d 810, 811 (Fla.App.1977) (“And all endorsers and sureties agree that this note may in whole or in part be extended or renewed after maturity from time to time without notice to them and without release of their liability thereon.”); Brazosport Bank of Texas v. Travis, 617 S.W.2d 729 (Tex.Civ.App.1981) (“any extension or renewal will not affect the liability of any of the co-makers or guarantors”); Carney v. Central Nat. Bank of Greencastle, Indiana, 450 N.E.2d 1034, 1035 (Ind.App.1983) (“that said indebtedness may be compromised or renewed or extended from time to time at an increased rate of interest without notice to me”); Taines v. Capital City First Nat. Bank, 344 So.2d 273, 276 (Fla.App.1977), cert. denied, 355 So.2d 517 (Fla.1978) (“the undersigned also agrees to any extensions or renewals of this note without further notice”).
The “ENDORSEMENT-SECURED” provision grants consent by Mrs. Sanders to extension of the due date but the provision cannot reasonably be construed to unambiguously grant consent to unlimited extensions. There is no language in the “ENDORSEMENT-SECURED” provision such as “the endorser agrees to extensions, extensions from time to time or any extension” which would allow application of interpretation (3). The parties’ intent was made clear in regard to the collateral which could be surrendered “from time to time” but the same is not true as to extension of the due date. Because the extension term is ambiguous, Ark.Stat.Ann. § 85-3-118 (Add.1981) limits the consent of Mrs. Sanders to one extension. Therefore, Mrs. Sanders is discharged from liability on the note because of the execution of numerous extension agreements by Mr. Sanders without Mrs. Sanders’ consent.
III
NOVATION
Mrs. Sanders also argues that the execution of the extension agreement constitutes a novation which releases her on the original note. In order for there to be a novation there must be a clear and definite intention to substitute a new debt for an old debt. Ward v. Worthen Bank & Trust Co., N.A., 284 Ark. 355, 681 S.W.2d 365 (1984); Taines v. Capital City First Nat. Bank, 344 So.2d at 276. There is absolutely no evidence of the intent of FNB to accomplish a novation. This argument is without merit.
IV
RELEASE OF FNB’S MORTGAGE
Mrs. Sanders argues that the mortgage lien should be discharged under common law principles of suretyship. The mortgage given by Mrs. Sanders to secure her husband’s debt is a contract of guaranty. For a contract of guaranty to be valid, there must be consideration. Pacific Industries, Inc. v. Mountain Inn, Inc., 232 F.Supp. 801 (W.D.Ark.1964). The principal contract or loan is sufficient consideration for the guaranty contract if the guaranty was “executed before or contemporaneously with the execution of a primary debt *756obligation.” Pacific Industries, Inc. v. Mountain Inn, 232 F.Supp. at 809. See also In re Farmers’ Co-op of Ark. and Okl., Inc., 43 B.R. 619 (Bkrtcy.W.D.Ark.1984), aff'd, No. 84-2363, slip op. at 1 (W.D.Ark. August 22, 1985), aff'd, Nos. 85-2146 and 85-2198, slip op. at 2 (8th Cir. June 18, 1986). Also a benefit to a party-other than the mortgagor is sufficient consideration to support enforcement of the mortgage. Sims v. First National Bank, Harrison, 267 Ark. 253, 263, 590 S.W.2d 270, 276 (1979); Matter of Rose, 17 B.R. 55, 58 (Bkrtcy.W.D.Ark.1981). A mortgage by a married woman on her separate property to secure her husband's present and future debts is valid and enforceable. Sims v. First National Bank, Harrison, 267 Ark. at 253, 590 S.W.2d at 270.
Since Mrs. Sanders received no compensation to execute the mortgage, she is an uncompensated guarantor and is entitled to have her undertaking strictly construed. She cannot be held liable beyond the strict terms of her contract. Worthen Bank & Trust Co., N.A. v. Utley, 748 F.2d 1269 (8th Cir.1984); National Bank of Eastern Ark. v. Collins, 236 Ark. 822, 826, 370 S.W.2d 91 (1963).
The mortgage states that the property described is security for the April 7, 1982, promissory note in the amount of $50,-000.00. The note was first extended on July 6, 1982, and the interest rate was altered from the prime rate but not less than 12% per annum to 16V2% per annum. On October 15, 1982, another extension was executed and the interest rate was altered to return to the interest rate charged in the original note. Several other extensions were executed but the interest rate was kept at the original rate until the extension of June 11,1984. That extension altered the interest rate to 14% per annum.
An alteration of a principal contract is material if the guarantor is placed in a position of being required to do more than her original undertaking. Vogel v. Simmons First Nat. Bank of Pine Bluff, 15 Ark.Ct.App. 69, 689 S.W.2d 576, 580 (1985). When a material alteration in an obligation is made without the consent of the uncompensated guarantor, the guarantor is discharged from liability. Moore v. First Nat. Bank of Hot Springs, 3 Ark.Ct.App. 146, 623 S.W.2d 530 (1981); Worthen Bank & Trust Co., N.A. v. Utley, 748 F.2d at 1269; In re Farmers’ Co-Op of Ark. and Okl., Inc., 43 B.R. at 619. An increase in the interest rate of the principal debt without the consent of the uncompensated guarantor increases the guarantor’s obligation and, therefore, discharges the guarantor. See In re Stewart, 52 B.R. 281 (Bkrtcy.W.D.N.Y.1985); Miami National Bank v. Fink, 174 So.2d 38 (Fla.App.), cert. denied, 180 So.2d 658 (Fla.1965).
The written terms of the contract of guaranty are contained in the “ENDORSEMENT-SECURED” provision of the note and the mortgage instrument. The mortgage is silent regarding the consent of Mrs. Sanders to a change in the interest rate in the note. The “ENDORSEMENT-SECURED” provision of the note states that “the rate of interest [may be] changed without notice to or further assent from the undersigned.” The previous discussion has already pointed out that this note provision is ambiguous in regard to the extensions of the due date. The “ENDORSEMENT-SECURED” provision is equally ambiguous in regard to the consent to increase the interest rate because it is unclear whether Mrs. Sanders consented to one increase or unlimited increases. This ambiguity could easily have been avoided if FNB had obtained Mrs. Sanders’ written consent to change the interest rate or drafted the guaranty in unambiguous language. Based on the above discussion, the mortgage lien must be released.
V
CONCLUSION
Mrs. Sanders is released from liability on the note, and the mortgage lien on the real property described below in favor of FNB is discharged.
*757SV2 of SE1/* of Section 36, Township 13 South, Range 19 West, situated in Oua-chita County, Arkansas.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490523/ | MEMORANDUM DECISION
THOMAS C. BRITTON, Chief Judge.
The chapter 7 trustee in the two bankruptcies noted above simultaneously filed 26 adversary complaints seeking recovery variously under 11 U.S.C. §§ 547, 548 and 550 of alleged preferential or fraudulent transfers. On the motion of several defendants, I directed that the issue of the debtors’ insolvency, an element in every case, be tried separately on a single record in this particular adversary proceeding.
That trial was held June 11 with the express consent, I believe, of all affected defendants. As of this date, 9 of the 26 original adversary proceedings remain unresolved. This order, then, is applicable to the 9 proceedings and a copy will be docketed in each of the files listed above.
The Principles Governing Evaluation
It is plaintiff’s burden to prove the debt- or’s insolvency at the time of the challenged transfer, § 547(b)(3) and (g) and § 548(a)(2)(B)(i), or that the debtor “became insolvent as a result of such transfer or obligation.”1 As to transfers from the Du-que estate, the relevant dates are between February 23 and May 19, 1983, all within 90 days before his bankruptcy. As to transfers from the estate of Domino Investments, Ltd., an entity owned and controlled by Duque, the relevant dates span the entire year before the date of bankruptcy, May 19, 1983 in both cases.
Insolvency in this context is determined by the balance sheet test:
“ ‘insolvent’ means ... financial condition such that the sum of such entity’s debts is greater than all of such entity’s property, at a fair valuation, exclusive of (i) property transferred, concealed, or removed with intent to hinder, delay, or defraud such entity’s creditors.” § 101(31).
“Fair valuation” for our purposes here is indistinguishable from “fair market value.” It is the:
“estimate of what can be realized out of the assets within a reasonable time either through collection or sale at the regular market value, conceiving the latter as the amount which could be obtained for the property in question within such period by a ‘capable and diligent business man’ from an interested buyer ‘who is willing to purchase under the ordinary selling conditions.’” 2 Collier on Bankruptcy ¶ 101.29[4] n. 60-63 (15th Ed.1987).
The Duque estate included 19 categories of assets ranging from furniture to a Miami bank, of which 12 were his interest in properties in Colombia, and 15 liabilities. The Domino estate was equally complex. The caselaw, particularly under the former Act, is not consistent with respect to the evidence appropriate to a determination of fair value, which suggests that the appropriate evidence depends in part upon a number of circumstances and considerable flexibility is essential, particularly where no jury is involved. The weight to be given particular evidence of course is materially affected by its character. See In re Entertainment Incorporated, 375 F.Supp. 390 (E.D.Va.1974).
The Evidence
Plaintiff offered as an expert witness a CPA and MBA who had spent 1,500 hours over the past three years in reconstructing the financial condition of various entities *832owned and controlled by Duque, four of which were brought into this court by Du-que, including one transferred to the Middle District of Florida. He was assisted by his firm in reviewing all the available records. Most of this time was spent for other parties. The effort was handicapped by Duque’s invocation of the Fifth Amendment (he is now serving a sentence for fraud) and by the general disarray of the records. The testimony of this witness was received under Fed.Evid.Rules 702, 703 and 704.
The witness found that on the relevant dates Duque was insolvent to the extent of at least $39,846,682 during February 1983, when his liabilities ($68,040,482) exceeded his assets ($28,193,800) by that sum. His insolvency increased in March, April and May to a final $78.5 million by the time he filed for bankruptcy.
Similarly, this witness found that Domino throughout the year before bankruptcy was insolvent to the extent of at least $11,197,000 during August 1982 and a maximum of $22.9 million in March 1983.
With the exception of the valuation of Duque’s bank stock, defendants offered no expert to counter either the methodology or the findings of plaintiff’s witness. They have, instead, attacked the witness’ credibility because of the conservative position consistently taken by him in evaluating the assets and liabilities stated by Duque for himself and his four related entities before and when they filed for chapter 11 reorganization in May 1983. However, I believe the witness’ skepticism is justified. The personal balance sheets were prepared when Duque was trying to borrow more money. The bankruptcy schedules were prepared when Duque hoped to win approval of a plan to reorganize his debt. On both occasions he had every reason to overstate his assets and understate his liabilities. Gross errors have since been documented in each respect and no documentation has been found in the intervening four years for a number of the assets he claimed. Duque’s two closest lieutenants have confirmed the unreliability of Duque’s valuations. Duque’s balance sheets were unaudited and deserve the close scrutiny given by this witness.
Defendants have, more persuasively, challenged the witness’ valuation of Du-que’s bank stock and his foreign investments, principally shares in Colombian corporations controlled by his Colombian relatives. These corporations owned Colombian real property.
Duque’s Bank Stock
Defendants’ only witness, a local investment banker, expressed the opinion that Duque’s bank stock was worth two times its book value or $41 million. Du-que’s bank stock was sold in January 1985 after a 19-month intensive effort by Duque and his creditors, which included a number of banks, for $21 million. Although the sale was conducted under the supervision of this court, it was deliberately conducted so as to realize the property’s fair value. Neither defendants’ witness nor their argument has suggested any circumstance that would negate the sale as the best evidence of fair market value. Nor has there been any contention that the value of the property decreased during the interval between the relevant dates and the sale. In fact, both the bank and the market for local bank stock were more attractive when the stock was sold. This sale price does not lose its evidentiary value merely because it occurred in the bankruptcy court. 2 Collier on Bankruptcy 11101.29[4] n. 76 (15th Ed.1987).
The trustee, a retired banker with 27 years experience and recent local experience in the purchase of banks, estimated Duque’s stock to be worth $30 million. Giving full credence to his generous estimate, Duque would still be insolvent by at least $30.8 million. I do not believe the accountant undervalued the bank stock, but if he did, the difference is not significant here.
Defendant’s witness valued at $10 million Duque’s option to buy additional bank stock. I am persuaded by the trustee’s testimony, however, that the option which was at book value had only a nominal value if it had any at all.
*833Duque’s Foreign Investments
Plaintiffs accountant, who did not claim expertise as a real property appraiser and who never viewed the Colombian property, valued Duque’s holdings in that country by using the values in the balance sheets filed with the Chamber of Commerce in that country, making certain adjustments that he has amply justified. There is no reason in this record for me to believe that the values in these documents were understated. The omission of some significant liabilities and the nature of the filing suggests that they were probably overstated.
Defendants have challenged these values by pointing to a telex and a memo from an agent of a creditor bank estimating the value of Duque’s foreign holdings to be as much as $37 million. Plaintiffs have valued these assets at a minimum of $6.1 million. The opinion of the bank agent, whose qualifications are unknown, has never been exposed to cross examination. If the bank relied at all on this report, it surely rues the day for it is one of the major losers in this group of bankruptcies. The opinion of this agent is entitled to little if any weight.
Defendants have also pointed to my finding in January 1984 that Duque had failed to prove his insolvency in an action brought by him to avoid his personal guarantees of the debts of his business entities upon the ground that the guarantees were a fraud on Duque’s creditors. On the basis of the record before me in that adversary proceeding and applying a negative inference against Duque from the quality of the evidence he offered, I rejected his claim of insolvency.
It is neither alleged nor argued here that the plaintiff trustee is bound by that finding. There is no basis, therefore, for me to consider either the evidence or the finding against the plaintiff trustee who was not a party to that action.
On this record, there is no basis to find plaintiffs valuation of Duque’s foreign holdings to be significantly undervalued. Indeed, their location in Colombia and their complete control by persons beyond the reach of our courts make their value questionable for the purposes of the lawsuits before me.
Valuation of Loan Guarantees
Defendants’ have directed considerable criticism at the accountant’s valuation as contingent liabilities of various loan guarantees. They offered no expert, however, to challenge the accountant’s opinion. This is certainly an area in which reasonable judgments may differ, but I see no reason to second guess the accountant’s assessments.
I shall not comment individually as to other assets or liabilities of Duque other than to say that I am not persuaded that the accountant’s judgment has been shown to be unreasonable. In any event, the amounts involved are not critical for our purposes.
Domino’s Insolvency
Defendants’ dispute with the accountant’s assessment of Domino’s condition is more muted but as unpersuasive as their challenge with respect to Duque’s condition. What has already been said also reflects my view of the evidence with respect to Domino. I find the accountant’s judgment reasonable and, once again, the amounts involved are not critical in this instance.
Conclusion
I find that during the relevant times, both Duque and Domino Investments, Ltd., were insolvent.
To avoid unnecessary time and expense, I will delay the entry of any judgment with respect to the issues treated here until the entry of separate judgments in each affected adversary proceeding (including this one). Those judgments will not only incorporate the foregoing conclusion, but the remaining issues unique to each adversary proceeding. At that time, the parties are encouraged to consider the possibility of a stipulation for the joint review of the insolvency issues in the first appeal that raises them, if review is found necessary. This would be as helpful to the district court as *834the parties’ cooperation has been to this court.
In .view of the initiative taken by defendants’ counsel in the presentation of this issue, which substantially reduced the costs of litigation for all parties, each party shall bear its own costs incurred in litigating insolvency notwithstanding the fact that I have resolved that issue in favor of the plaintiff.
. In 87-0189, plaintiff’s count under § 548(a)(1), actual fraud, requires no proof of insolvency. In 87-0206 and 87-0210 insolvency is presumed as to certain counts under § 547(f) or § 553(c), but the presumption is rebuttable. Rule 301, Fed.R.Evid. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490524/ | DECISION DENYING IN PART AND GRANTING IN PART DEFENDANT, TIMOTHY H. DUNLEVY’S MOTION TO DISMISS AND/OR IN THE ALTERNATIVE FOR MORE DEFINITE STATEMENT AND GRANTING TIME TO FILE AN AMENDED COMPLAINT
THOMAS F. WALDRON, Bankruptcy Judge.
This is a case that arises under 28 U.S.C. § 1334(a) and having been referred to this court, the within action is determined to be a core proceeding under 28 U.S.C. § 157(b)(2)(A) and (I), in which the plaintiffs filed a complaint (Doc. 1) to determine the dischargeability of a debt under 11 U.S.C. § 523(a)(2), (4) or (6). Defendant timely filed an answer (Doc. 4), and thereafter filed a Motion To Dismiss And/Or In The Alternative For More Definite Statement (Doc. 5). The plaintiffs filed a Memorandum In Opposition To Motion To Dismiss (Doc. 7).
The defendant’s motion (Doc. 5) seeks to dismiss the complaint because the “[Plaintiffs’ Complaint alleges fraud in several of said counts, however lacks the specificity in pleading said acts as required by The Federal Rules of Civil Procedure Rule 9(b) and Rules of Bankruptcy Procedure Rule 7009,...”.
The defendant is correct in his assertions concerning Count One and a portion of Count Two. Accordingly, the defendant’s Motion To Dismiss will be GRANTED in part unless the plaintiffs amend their complaint as to Count One and a portion of Count Two consistent with this decision. The pleading issues raised by the parties’ motions continue to appear in adversary proceedings in this court and prompt the court to issue this written decision.
1. COUNT ONE
Plaintiffs’ first count is based upon 11 U.S.C. § 523(a)(2)(A) which excepts from discharge any debts of an individual “[F]or 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 *916than a statement respecting the debtor’s or an insider’s financial condition; In support of this claim, plaintiffs’ plead the following:
15. Debtor participated with Fries and others in a scheme to obtain money from plaintiffs Trell, Rieck and Brannon, and property and an extension of credit from Brokers Leasing by false pretenses, false representations, and actual fraud as hereinafter set forth in this Count One and subsequent Counts of this Complaint.
16. Debtor participated in forming the Corporation and Partnerships and gaining investment from plaintiffs and others through the sale of equity securities in the Corporation and Partnerships.
17. Debtor further participated in obtaining the leased restaurant equipment on a credit arrangement from Brokers Leasing.
18. In order to induce plaintiffs to invest money and equipment and to extend credit to the Corporation and Partnerships, debtor fraudulently misrepresented to plaintiffs that the funds and equipment would be used to conduct the business of the Corporation and Partnerships and to provide profits from said business for eventual return to plaintiffs.
19. Debtor’s representations were made falsely and fraudulently and with the intent to deceive plaintiffs.
20. In fact, debtor, Fries and others were involved in other entities and enterprises, the existence of which was withheld from plaintiffs, to which other entities and enterprises plaintiffs’ funds were fraudulently diverted.
21. The equipment provided by Brokers Leasing was also used in the production of income for these other entities and enterprises.
22. Plaintiffs reasonably relied on the representations of debtor to their detriment. (Doc. 1 at 3-4)
This court has previously outlined the requirements for pleading a cause of action under 523(a)(2)(A):
Where, however, fraud is alleged, the concept of notice pleading is refined by a requirement of specificity. Fed.R.Civ.P. 9(b) (Bankr.R. 7009) provides: “In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a plerson may be averred generally.” “To satisfy Fed.R. Civ.P. 9(b), a plaintiff must at a minimum allege the time, place and contents of the misrepresentation(s) upon which he relied.” Bender v. Southland Corporation, 749 F.2d 1205, 1216 (6th Cir.1984). The plaintiff must state with particularity the specific circumstances giving rise to the complaint. Dayco Corporation v. Goodyear Tire & Rubber Company, 523 F.2d 389, 394 (6th Cir.1975). Matter of Schwartzman, 63 B.R. 348, 355 (Bankr.S.D.Ohio 1986). (emphasis supplied)
A review of plaintiffs’ complaint discloses Count One does not contain the information required to state a cause of action under § 523(a)(2)(A) — misrepresentation(s), identity of the party who made the misrepresentation(s), the time and place of the misrepresentation(s), and the consequences of the misrepresentation(s). This is particularly significant in light of the fact that the plaintiffs do not occupy a position similar to that of a recently appointed Trustee in Bankruptcy who was not present during the period the alleged misrepresentation or fraud occurred, nor does the complaint state that the misrepresentation or fraud is demonstrated by the use of a statement in writing — § 523(a)(2)(B). See Schwartzman at 355.
Count One, therefore, will be dismissed, unless it is amended consistent with this decision.
2. COUNT TWO
Plaintiffs’ second count is based on 11 U.S.C. § 523(a)(4) which excepts from discharge any debts of an individual “[F]or fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny; ... ”, In alleging causes of action under this Section, plaintiffs’ plead the following:
*91725. In his role as director of operations of the Corporation and Partnerships, debtor acted in a fiduciary capacity to the plaintiffs.
26. While acting in such fiduciary capacity, debtor committed fraud and defalcation as hereinabove and hereinafter set forth.
27. Debtor failed to cause appropriate accounting procedures to be instituted and failed to render proper accountings to plaintiffs.
28. Debtor converted to his own personal use business profits without properly accounting for them; paid to himself and others unreasonably high salaries for services that were either not performed or performed with an extreme lack of diligence; and withdrew from profits of the business sums of money for unnecessary and unwarranted automobiles, travel, bonuses, and insurance for his own personal use.
29. Debtor knowingly and fraudulently misrepresented to plaintiffs the financial and operational condition of the business.
30. Also during his fiduciary relationship with the Corporation and Partnerships, debtor created and/or purchased with others, enterprises such as T & T Promotions and Ivy Lounge Night Club with profits from the Corporation and Partnerships for his own personal gain.
31. Many of the enterprises created and operated by debtor were created for the purpose of doing business with the Corporation and Partnerships with the intent by debtor to convert business profits to his own personal use and gain, and without disclosure to plaintiffs or other creditor and equity security holders.
32. All such actions by debtor and others were performed with the purpose of creating avenues for personal gain at the expense of the Corporation and Partnerships, and were performed with the intent to deceive plaintiffs.
33. Plaintiffs were, in fact, deceived by these actions of debtor and others, and have suffered great financial detriment. (Doc. 1 at 4-5)
The pleading requirements of 523(a)(4) differ depending upon whether the cause of action alleges fraud or alleges defalcation. When, as in paragraph 29 of the complaint, fraud is alleged, the standards set forth in Schwartzman must be met. When, however, defalcation is alleged, the pleading requirements are not as stringent:
Plaintiffs’ pleading burden with respect to the defalcation claim is much lighter. The term “defalcation” is a broader term than fraud and would include the taking of money entrusted to a fiduciary. Central Hannover Bank and Trust Co. v. Herbst, 93 F.2d 510 (2d Cir.1937). Further, if it is proven that a debtor committed a defalcation with respect to funds held in trust, it is not necessary to prove that the defalcation was intentional. Gonzalles [Gonzales ] v. Raiser Constr. Co., Inc., 22 B.R. 58, 59 (Bankr. 9th Cir.1982). Finally, Fed.R. Civ.P. 9(b) does not require that a defalcation claim be stated with particularity. In re Baker, 66 B.R. 652, 654 (Bankr.D.Nev.1986).
Although a difference exists between the pleading requirements necessary to state a cause of action for fraud as opposed to a cause of action for defalcation, both causes of action require the allegation of a fiduciary relationship:
However, in order to survive defendants’ motion to dismiss, under § 523(a)(4), both of the plaintiffs’ claims of fraud or defalcation must also sufficiently allege that defendants committed the fraud or defalcation while acting in a fiduciary capacity. (citation omitted) Id.
Count Two of plaintiffs’ complaint alleges that the defendant committed acts of fraud and defalcation while acting in a fiduciary capacity “as director of operations of the Corporation and Partnerships, ...” (Doc. 1 at 4, Par. 25).
Paragraphs 6, 7, 8, 10, 11, 12, and 13 of plaintiffs’ complaint set forth the alleged fiduciary relationship between the plaintiffs and the defendant. Accordingly, that portion of Count Two which alleges a cause of action for fraud will be dismissed, unless it is amended consistent with this decision; *918however, since a cause of action for defalcation does not require such specificity, Count Two need not be amended if defalcation is the only cause of action the plaintiffs wish to assert in Count Two.
3. COUNT THREE
Count Three alleges that the defendant committed “embezzlement or larceny” and, therefore, under 523(a)(4) such debts should be excepted from discharge. (Doc. 1 at 6)
In support of this claim, plaintiffs’ plead the following:
36. In addition to all of the above described actions, debtor wrongfully converted to his own personal use goods, food, inventory, products, and monies from the G.D. Ritzy’s stores operated by the Corporation and Partnerships.
37. As an example of such activity, debtor sold ice cream produced by the stores at an Octoberfest celebration in the fall of 1983, without accounting to the stores for the profits from such sale.
38. Such activities constitute embezzlement or larceny from the stores. (Doc. 1 at 5)
“Embezzlement involves the misappropriation of property by a person who comes into possession of the property lawfully or with consent of the true owner, while larceny involves the unlawful taking of property by a person without the owner’s consent. 3 Collier, § 523.14[3], at 523-116.” In re Taylor, 58 B.R. 849, 854 (Bankr.E.D.Va.1986). “Fraudulent intent is the key to a finding of embezzlement or larceny.” Id. Federal Rule of Civil Procedure 9(b) (Bankr.R. 7009) states “Malice, intent, knowledge, and other condition of mind of a person may be averred generally.”. Thus, “The requirement that the circumstances constituting fraud be stated with particularly does not require particularization of allegations of fraudulent intent”. 2A J. Moore, J. Lucas, Moore’s Federal Practice § 9.03[38] (2d ed. 1986).
Accordingly, Count Three of plaintiffs’ complaint need not be amended.
4. COUNT FOUR
Plaintiffs’ fourth count is based upon 11 U.S.C. § 523(a)(6) which excepts from discharge any debts of an individual “[F]or willful and malicious injury by the debtor to another entity or to the property of another entity; ... ”. In support of this claim, plaintiffs repeat their allegations in support of their 523(a)(4) claim and plead the following:
40. Plaintiffs incorporate herein by reference all of the allegations contained in paragraphs 1-39 hereinabove.
41. The above described willful and malicious pillaging and looting of the G.D. Ritzy’s stores operated by the Corporation and Partnerships injured those entities to the point that they could not be salvaged, even with the protection of Chapter 11 of the Bankruptcy Code, and all of said stores closed in October of 1986.
The phrase “willful and malicious” requires an intentional act by the debtor which necessarily produces harm and is without just cause or excuse. Matter of Scharffe, 40 B.R. 942, 944-45 (Bankr.E.D.Mich.1984). Unlike Counts One, Two and Three of plaintiffs’ complaint, Count Four is governed by Rule 8 of the Federal Rules of Civil Procedure (Bankr.R. 7008). Rule 8(a)(2) requires that the pleading contain “[A] short and plain statement of the claim showing that the pleader is entitled to relief, ... ”. “[T]he general test remains constant: does the statement of the claim contain the required elements stated plainly and succintly, and does it give fair notice to the opposite party?” 2A J. Moore, J. Lucas, Moore’s Federal Practice § 8.17.[94] (2d ed. 1986).
Count Four, by incorporating pleadings approved in other counts of this complaint (or amended pleadings consistent with this decision), alleges willful and malicious injury in sufficient detail so that it may be confronted by the defendant and does not require amendment.
While the court does not question either the ability or the good faith of any counsel in this proceeding, nor does the court question the importance of proper pleadings in *919the progress of this proceeding, it should be recognized that this proceeding is not capable of judicial determination until evidence is presented to this court. For that reason, it is important that this proceeding move beyond the pleading stage. The importance of the pleadings to each party should not become more important than the proof that will be ultimately presented.
The Federal Rules of Civil Procedure, as modified in the Bankruptcy Rules applicable in adversary proceedings, while individually addressed to specific issues, constitute an integral structure for the resolution of disputed matters. The initial pleadings provide the entrance to this structure and point out the pathway of the discovery process upon which the parties will travel to reach the arena where the disputed issue is to be resolved. These rules require pleadings in which a movant simply, concisely and directly sets forth allegations sufficient to appraise an adverse party and the court of the nature of the claim to which an adverse party responds in short and plain terms admitting or denying the allegations and informing the movant and the court of all good faith defenses. Fed.R.Civ.P. 8 (Bankr.R. 7008). These rules contemplate neither a complicated nor convoluted pleading or discovery process during the progress of the case. Schwartzman at 356 (emphasis supplied).
Accordingly, the defendant’s Motion To Dismiss is DENIED as to plaintiffs’ second, third and fourth counts as discussed herein, and IS GRANTED as to plaintiffs’ first count and paragraph 29 of the Second Count, unless plaintiffs, within ten (10) days from the date of the entry of the order accompanying this decision, file an amended complaint amending the first count and paragraph 29 of the second count. If the plaintiffs fail to file an amended complaint within the time limits set forth above, the first count and paragraph 29 of the second count shall be dismissed ten (10) days after the entry of the order accompanying this decision. The defendant shall answer or otherwise plead to any amended complaint within ten (10) days after it is filed.
Additionally, that portion of the defendant’s Motion (Doc. 5), requesting that the plaintiffs supply a more definite statement is DENIED. Although the defendant’s separately filed motion to dismiss is not barred by the defendant’s answer, the defendant’s motion for a more definite statement is barred by the defendant’s answer [Bankr.R. 7012, (F.R.C.P. 12(e))]. A request “[F]or a more definite statement, see Rule 12(e), is barred by the filing of an answer. IB Moore § 12.05, at 12-34.”. In re Stephen W Grosse, P.C., 68 B.R. 847, 850 (Bankr.E.D.Pa.1987). Since the defendant filed his answer (Doc. 4) April 27, 1987, his request for a more definite statement (Doc. 5), filed May 5, 1987, is DENIED.
SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490525/ | MEMORANDUM
DAVID A. SCHOLL, Bankruptcy Judge.
Before us is a request by the Debtor to pay its Vice-President, Richard Katz, compensation for collection of accounts receivable on a contingency-fee basis of “twenty (20%) percent of collected accounts receivable after payment of all actual and necessary expenses.” The Debtor’s largest unsecured creditor (and also the principal of a corporation which allegedly owes money to the Debtor), David Cardis, filed an Objection based on three grounds:
1. The request was untimely, per Local Rule 4002.1(e), which requires that, “In order for the above compensation to be paid, the last date on which the notice described below may be mailed is the 45th day after the filing of the petition.” The Chapter 11 petition of the Debtor was filed on January 15, 1986, and this request was not filed until April, 1987.
2. The notice was not sufficiently clear in explaining whether Mr. Katz would be paid a percentage of the gross or net amount collected.
3. The compensation sought is excessive, and the contingency basis is out of sync with In re Meade Land & Development Co., Inc., 527 F.2d 280 (3d Cir.1975).
We should observe that Messrs. Cardis and Katz are former business partners who apparently had a rather stormy falling-out prior to the bankruptcy filing and taxed the resources of our Court for several months in the course of their various attacks and counter-attacks arising out of a sale of a subsidiary of the Debtor, Michael’s Art Bronze, to Mr. Cardis after an in-court bidding contest between them.
We shall grant the Debtor’s request in part, reducing the percentage to ten (10%) percent if litigation is unnecessary and requiring Mr. Katz to submit a report to us in compliance with Meade Land for approv*76al before we shall allow him any compensation.
On June 26, 1987, we issued two decisions on different matters in the same case, In re Crouse Group, Inc., 75 B.R. 553 (Bankr.E.D.Pa.1987), which are both relevant to our disposition here. In the first, we granted, in part, a request of the Debt- or to pay salary, expenses, and rental payments to James G. Crouse, the Chairman and Chief Executive Officer of the Debtor. Because of his failure to present any evidence of the market value of his services, we reduced the salary request for Mr. Crouse of $150,000.00 annually to $100,-000.00 annually. Also, because of his personal debt of $1,500,000.00 to the corporation, we suspended the salary payments pending litigation of an Accounts Receivable action by the Creditors’ Committee of the Debtor against Mr. Crouse. In so doing, we followed, as far as they were applicable, the prior decisions of other judges of this court. E.g., In re Athos Steel & Aluminum Inc., 69 B.R. 515 (Bankr.E.D.Pa.1987) (per FOX, J.); and In re Zerodec Mega Corp., 39 B.R. 932 (Bankr.E.D.Pa.1984) (per TWARDOWSKI, CH. J.)
In the second, we refused to reconsider an Order which, upon a request that we allow compensation on a contingent-fee basis, required special counsel for the Debtor to submit a Meade Land application before receipt of any compensation, although we did not foreclose the possibility that we ultimately would allow compensation on a contingent-fee basis after consideration of such an application.
We are not prepared to reject the Debtor’s request on the basis that it was untimely filed, per Local Rule 4002.1(e), or on the ground that the notice was inadequate. Despite Mr. Katz’s momentary confusion on the point, the notice adequately describes that compensation shall be computed on the net rather than the gross amounts collected pursuant to the arrangement. Further, we believe that the 45-day limit set forth in the Local Rule was intended only to apply to a situation where the Debtor seeks to continue compensation of an individual on the same basis as that person was compensated pre-petition. Even in such circumstances, permission to provide compensation nunc pro tunc may be appropriate. See In re Clinton Centrifuge, Inc., 72 B.R. 900 (Bankr.E.D.Pa.1987). Here, the Debtor is seeking to compensate an officer at a rate totally unlike his pre-petition rate because of developments in collection of accounts which occurred post-petition. In this context, we do not think that the time strictures of Local Rule 4002.1(e) apply.
With respect to the merits of the Debtor’s request, our Order modifies same in two significant respects. First, we shall allow compensation to Mr. Katz only after his filing a report indicating his collection activities and providing us with a description of the tasks performed and time expended similar to that required for counsel seeking compensation out of estate proceeds in Meade Land, which is consistent with Order relevant to special counsel in Crouse Group. Although a salary request made strictly pursuant to Local Rule 4002.-1(e) may be an exception, the general rule is that any “professional person” must comply with Meade Land to obtain compensation pursuant to 11 U.S.C. § 330. See In re American International Airways, Inc., 69 B.R. 396, 399 (Bankr.E.D.Pa.1987). But see In re Windsor Communications Group, Inc., 68 B.R. 1007 (D.C.E.D.Pa. 1986) (debt collectors may not be “professional persons”). In any event, we consider it prudent to examine the fruits of the labors of Mr. Katz, like any party whose compensation we are to regulate, before we award him any payments from the Debt- or’s estate.
As in the Opinion relating to the compensation of James A. Crouse in Crouse Group, we are compelled to award what appears “subjectively reasonable” compensation to Mr. Katz in the absence of evidence regarding the market value of his services. We are, however, applying the contingency fee sought as a cap to the compensation of Mr. Katz. Furthermore, we believe that a ten (10%) percent contingency fee cap is quite adequate for collections which result without resort to litiga*77tion, and thus we will apply the twenty (20%) percent contingency only to those collections in which litigation is necessary. This percentage (and only fifteen (15%) percent for collections effected in litigation) was recently all that was requested, and ultimately approved by us with certain conditions, including compliance with Meade Land, by a Trustee seeking to engage his law firm as his counsel to collect accounts receivable in In re Contemporary Marketing, Inc., Bankr. No. 86-05133S (Bankr.E. D.Pa., Order filed April 24, 1987). These figures seemed quite sufficient to us at the time we entered that Order.
An Order consistent with the foregoing will be entered by us. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490590/ | OPINION, FINDINGS OF FACT, AND CONCLUSIONS OF LAW ON COMPLAINT FOR DECLARATORY JUDGMENT AND COMPLAINT FOR SPECIFIC PERFORMANCE
BARBARA J. SELLERS, Bankruptcy Judge.
This matter is before the Court upon two complaints, consolidated for hearing, arising in the Chapter 11 case of Columbus Plaza, Inc. (“Plaza”). The first complaint, adversary 2-87-0216 filed by Donald R. Kenney (the “Complaint”), seeks a declaratory judgment regarding Kenney’s rights and liabilities under a certain agreement between Kenney and Plaza. The second complaint, adversary 2-87-0217 filed by Plaza (the “Counterclaim”), seeks a judgment compelling Kenney to specifically perform the purchase of certain real and personal property under the terms of that same agreement.
Because of certain time constraints upon Plaza and pursuant to an application, the answer times were reduced, and both complaints were consolidated and tried upon a greatly shortened schedule. By agreement of the parties and pursuant to Federal Rule of Civil Procedure 42 and Bankruptcy Rule 7042, Plaza’s complaint was designated as a counterclaim to Kenney’s complaint. Pursuant to motion, the counterclaim for damages asserted by Plaza in its answer to the complaint was bifurcated from the issues under consideration and was continued for trial at a later time. Nominal defendant Chicago Title Agency of Central Ohio, Inc. (“Chicago”) was not heard in this matter.
The Court has jurisdiction over the Complaint and the Counterclaim pursuant to 28 U.S.C. § 2201, 28 U.S.C. § 1334(b), and the general order of reference entered in this district on July 30, 1984. Both the Complaint and the Counterclaim are proceedings which arose in a case under Title 11 and, therefore, are core proceedings pursuant to 28 U.S.C. § 157 (b)(2)(A), (B), (N) and (O). Both parties further consented to the entry of a final order by this Bankruptcy Judge. The terms of the agreement for which construction is sought provide for the application of Ohio law.
FINDINGS OF FACT
The Court finds the following relevant facts from the testimony and review of the exhibits admitted into evidence.
On May 1, 1987, Plaza filed a Chapter 11 case in the United States Bankruptcy Court for the Southern District of Ohio, Eastern Division.
At the time of that bankruptcy filing, Plaza, under a lease with Hotel Associates, Limited (“HAL”) was the operator of the Sheraton Columbus Plaza Hotel. The hotel, located at 50 North Third Street, Columbus, Ohio, is owned by HAL.
In conjunction with that lease, Plaza, as optionee, and HAL, as optionor, entered into an agreement on September 16, 1982, pursuant to which Plaza could purchase the hotel, all associated personal property and all related permits (the “Premises”) for an agreed-upon price.
Prior to its bankruptcy filing, Plaza had attempted on at least two occasions to locate a buyer for the Premises so that Plaza could exercise its purchase option at what appeared to be a below-market price and resell the Premises to a third party.
On May 20, 1987, following a series of offers and counteroffers dating back to early 1987, Kenney and Michael Tsao, the authorized representative for Plaza, through their attorneys and real estate broker, Don Roberts, entered into a Real Estate and Business Assets Purchase Agreement (the “Agreement”). The Agreement, embodying a negotiated price term, was in a form drafted by Kenney’s attorney and previously considered by Plaza. The essential terms of the Agreement called for Ken-ney to purchase the Premises for $13,500,-000, which included $260,000 to be paid by Plaza to Donald Roberts of the Brown Company as a brokerage commission.
*712Subject to forfeiture upon breach, Ken-ney also deposited the sum of $100,000 with escrow agent Chicago pending completion of the sale. Under the terms of the Agreement, prerequisite to that completion was the approval of this Court, following notice to all parties in interest in the bankruptcy case and hearing upon any objection.
In addition to the normal title evidences, surveys, tax prorations and other like representations and warranties, and to assure that Kenney purchased only the Premises and not Plaza’s businesses, the Agreement obligated Plaza to terminate the business of the hotel prior to conclusion of the sale. Plaza obviously was also obligated first to acquire title to the Premises from HAL.
The Agreement granted Kenney the right to inspect the condition and character of the Premises and to determine, on or before June 15, 1987, that such character and conditions were satisfactory. Absent such satisfaction, Kenney’s $100,000 deposit was to be returned to him, and the Agreement was to be terminated without future obligation or liability for either party. If the inspection contingencies were satisfied or waived, the closing of the sale was to occur within 45 days thereafter.
On May 29, 1987, William Tzagournis, the new president of Plaza, authorized Peter H. Luft, Realtors (“Luft”), as an agent for Plaza, to seek either a backup or primary buyer at a firm price of $15,000,000. Luft’s efforts continued at a diligent pace until June 4, 1987, when such efforts were slowed at the request of Tsao and another officer of Plaza.
Following Kenney’s execution of the Agreement on May 20, 1987, the parties proceeded to take various steps required under its terms. Specifically, the $100,000 deposit was received by Chicago on May 21, 1987, and Kenney took steps to have certain inspections made.
On June 15, 1987, Kenney notified Plaza of his waiver of inspection contingency set forth in Section 11(a) of the Agreement. Shortly thereafter, on June 26, 1987, Plaza filed a motion with this Court seeking authority to assume an executory contract to purchase the Premises and for authority to sell those Premises free and clear of liens. The motion, opposed by BancOhio National Bank and Local 70 of the Hotel and Restaurants Employees’ Union, was first scheduled to be heard on July 21, 1987 and was actually heard on July 30, 1987.
Pursuant to a request from Michael Tsao, on behalf of Plaza, Roberts discussed with Kenney the status of Plaza’s current leases and the operations of the hotel’s garage. In response to those communications, Roberts advised Tsao, by letter dated June 30, 1987, that Kenney would not be assuming any of Plaza’s lease obligations and that the garage must be closed prior to the completion of the sale in accordance with the Agreement.
By letter dated July 2, 1987, and pursuant to Section 6 of the Agreement, the attorney for Kenney notified the attorney for Plaza of certain objections to the title report and survey of the premises. That letter also suggested July 30, 1987 as the last possible closing date which would satisfy the terms of the Agreement.
In addition to the written communications relating to formal steps taken to implement the terms of the Agreement, the attorney for Plaza and the attorney for Kenney had discussions regarding the Agreement on May 27, 1987; June 11, 1987; June 23, 1987; June 25, 1987 and July 15, 1987.
On June 22, 1987, Kenney’s attorney, Roberts, Tsao on behalf of Plaza, and two attorneys for Plaza met. That meeting addressed such issues as title requirements, removal of certain title encumbrances, the projected closing date, the need for details regarding existing leases, copies of existing permits, a listing of personal property, certain wording of the proposed motion seeking authorization to sell the Premises, and the mechanics of the deeding process to preserve certain tax advantages for Kenney. Discussions that day also covered the need to terminate the hotel’s businesses prior to closing, including the termination of tenants and employees, because of concerns with possible sue-*713cession to certain of Plaza’s labor contracts.
In addition to the written contracts previously set forth, telephone contacts between counsel for each party, and the June 22nd meeting, Plaza also by notice, terminated some 80 per cent of its employees, can-celled convention and function bookings for dates after August 1, 1987, terminated certain business leases, cancelled transient patron and group patron bookings, arranged for a transfer of some of its patron business to other hotels, and performed other tasks associated with closing the hotel’s businesses in preparation for the effectuation of the sale to Kenney.
By telephone contact from Kenney’s attorney to Plaza’s attorney on July 17,1987, and by letter to Plaza dated July 21, 1987, the attorney for Kenney communicated Kenney’s withdrawal from the purchase of the Premises. A notice of that withdrawal was also filed with the Bankruptcy Court. The reason given for the withdrawal was that economic projections, based upon information received from an architect and a developer friend, had indicated to Kenney that the combination of health clubs, shops, hotel rooms and residential quarters contemplated by the venture would not be profitable.
On July 22, 1987 Kenney filed the Complaint and Plaza filed the Counterclaim.
No probative evidence exists that Plaza would have been unable to perform or tender performance by the August 1, 1987 closing deadline other than the uncertainty brought about by the required resolution of the issues raised by these adversaries and the Court’s need to rule on Plaza’s motion seeking authority to assume the option contract and sell the Premises.
ISSUES OF LAW
The dispute in these matters arises from two assertions by Kenney. First, he argues that he has no obligation to complete the sale contemplated by the Agreement and that he has the right to return of his deposit because the Agreement had not yet ripened into an enforceable contract. In the alternative, Kenney asserts that because he bargained only for performance in the alternative, his liability is limited to the forfeiture of his $100,000 deposit.
Plaza, on the other hand, asserts that Kenney has breached the Agreement, that it has no adequate remedy at law, and that Kenney should be required to specifically perform the Agreement. Plaza denies that Kenney’s liability can be limited to $100,-000 and argues that the deposit forfeiture clause is either security for performance, which has no effect upon other available rights upon default, or is a liquidated damaged provision which is void as a penalty. Plaza also maintains that Kenney is equitably estopped from denying the enforceability of the Agreement by specific performance, even if certain language is interpreted as precluding such remedy.
For purposes of these adversaries, the relevant portions of the Agreement are Sections 1, 3(b) and (c); 11; 12(i); 24 and 26. These sections state, in relevant part:
§ 1. PURCHASE AND SALE OF THE PREMISES. The Real Property, Personal Property and Assumed Permits are hereinafter collectively referred to as the Premises. It is the intention of the Buyer to buy only the Premises herein set forth and to not buy the Businesses. Therefore, as a condition precedent to Buyer performing, Seller agrees to terminate the Businesses prior to the date of closing.
§ 3. DEPOSIT. The Deposit paid by Buyer to Chicago Title Agency of Central Ohio, Inc ... shall be held by said Escrow Agent in a separate interest-bearing account in accordance with the following terms and conditions. If the purchase and sale of the Premises is ... (b) not consummated as a result of Buyer’s breach under this Agreement, the Deposit, together with any interest earned on the Deposit, shall be paid to Seller as liquidated damages in full settlement of any and all rights or claims which Seller may have against Buyer as a result of such breach by Buyer; (c) not consummated as a result of Seller’s breach of this Agreement, the Deposit, together with any interest earned on the *714Deposit, shall immediately be returned to Buyer without prejudice, however, to any rights or claims Buyer may have against Seller as a result of such breach by Seller.
§ 11. BUYER’S CONTINGENCIES. This Agreement and the obligations of Buyer thereunder are contingent upon the satisfaction or waiver in writing by Buyer of the following contingencies within the time period hereinafter set forth.
(a) Inspection Contingency.
Buyer determining on or before June 15, 1987 that the condition and character of the Premises are acceptable to Buyer. Buyer shall be permitted to make such physical, mechanical, architectural and engineering examinations of the premises as Buyer deems appropriate in order to determine the acceptability of the premises. Seller shall permit Buyer access to the premises so Buyer can make any such examinations. If the contingency set forth above is not satisfied or waived by Buyer in a written notice thereof to Seller within the respective time period set forth in this Section 11, then this Agreement shall automatically terminate. The Deposit, together with any interest earned on the Deposit, shall immediately be returned to Buyer and the parties thereafter shall be relieved of any further obligation or liability thereunder.
§ 12. REPRESENTATIONS AND WARRANTIES OF SELLER. For the purposes of inducing Buyer to enter into this Agreement and to consummate the purchase of the Premises in accordance herewith, Seller represents and warrants to Buyer as to the following:
(i) Corporate Authority. Aside from required Bankruptcy Court approval, Seller has the full right, power and authority to sell and convey the Premises to Buyer as provided in this Agreement and to carry out Seller’s obligations hereunder.
§ 24. ENTIRETY AND AMENDMENTS. This Agreement embodies the entire agreement between the parties and supersedes all prior agreements and understandings of the parties, if any, relating to the Premises. This Agreement may be amended or supplemented only by an instrument in writing executed by the parties against whom enforcement is sought.
§ 26. REMEDIES. The remedies provided in this Agreement with respect to a breach by Seller, shall be cumulative and shall not in any way abridge, modify, or preclude any other right or remedies to which Buyer is entitled, either in law or in equity, including without limitation the right to enforce Seller’s specific performance of this Agreement.
CONCLUSIONS OF LAW
For reasons stated below, the Court finds that the Agreement is an enforceable one, but that specific performance will not be ordered because the Agreement provided for alternative performance such that Kenney’s legal responsibility for failure to conclude the sale is limited to $100,000. Finally, the Court finds no estoppel against Kenney which would change this result.
In support of his assertion that the Agreement is unenforceable because the element of mutuality of obligation is lacking, Kenney maintains that Plaza’s continuing attempts to find substitute or backup buyers for the Premises and the inclusion of the phrase “unless a better offer is received” in Plaza’s Motion for Authority to Sell to Kenney are indicative of Plaza’s belief that it was not, and did not intend to be, bound by the terms of the Agreement. Kenney sees enhancement of his position in the provision of Section 12(i) of the Agreement which subjects Plaza’s authority to enter into the Agreement to the Bankruptcy Court’s approval.
The Court finds that once the inspection contingency in Section 11(a) of the Agreement had been waived, Kenney lost his right to withdraw from the sale process without legal consequences. Plaza’s continuing activities in searching for another Buyer as a backup or a higher bidder do not rise to the level of a breach such that Kenney was excused from performance. *715Whether that result would have differed if Plaza had found another Buyer and had agreed to go forward while Kenney was still progressing to a closing is not before the Court at this time. Despite the current wishes of both parties, such an event did not occur.
Upon Kenney’s waiver of the inspection contingency, the Agreement became binding on both parties as a matured contract. The Agreement’s indication of a requirement for approval by the Bankruptcy Court does not change that result. Disapproval by the Court might well have been a fact which excused the performance by either party, but short of such disapproval, conditioning the seller’s authority upon action by the Court did not change the binding nature of the Agreement between the parties pending Court approval. Provider’s Benefit Life Insurance Company v. Tidewater Group, Inc. (In Re Tidewater Group, Inc.) 8 B.R. 930 (Bankr.N.D.Ga.1981). Indeed, given the explicit language of Section 363(b) of the Bankruptcy Code, once objections to any such sale had been resolved, Court approval may have been in the nature of a comfort order rather than a legal prerequisite.
Having determined that the Agreement is an enforceable and binding contract, the issue remaining is the effect upon Plaza's rights of the language used in Sections 3(b) and 26 of the Agreement once Kenney decided not to purchase the Premises. Specifically, did the parties intend to provide for optional performance by Ken-ney such that either he must purchase the Premises or forfeit his $100,000? Or was the intent merely to provide security for Kenney’s closing of the sale or to estimate damages in the event he breached that duty? That intention determines if Ken-ney’s failure to close the deal was merely the exercise of a bargained-for right or a breach which brings into play legal analysis of a liquidated damages clause. If the clause is one for liquidated damages, which does not necessarily foreclose specific performance, the Court must then examine the validity of the clause under principles applicable to such provisions.
The Court finds that the clause in Section 3(b) of the Agreement, read in conjunction with the retention of claims and rights against Plaza in Section 3(c) and the omission of any remedies for Plaza in Section 26, clearly provides that Kenney was granted a right of alternative performance. He could close the sale or he could limit his liability by forfeiture of his $100,000 deposit.
Although greater clarity in the specific phrasing of Section 3(b) would have been helpful, the phrase is more than merely a liquidated damages provision. The provision provides for a valid alternative performance. Such a provision also precludes the equitable decree of specific performance. Coney v. Commercial National Reality Company, 88 Ill.App.3d 1026, 44 Ill.Dec. 89, 410 N.E.2d 1181 (1980); Landers v. Miller, 27 Ohio Law Reporter 170 (C.P., Hamilton Cty., 1928). The reason for that conclusion, in this Court’s opinion, is that if the alternative performance is bargained for, then the exercise of that bargained-for right is not, as a matter of fact, a breach. Without a breach, specific performance is inappropriate.
The Court finds further that the “rights and claims” fully settled by Kenney by forfeiture of his $100,000 deposit, according to the language in § 3(b) of the Agreement, in their common sense and legal meaning, include any and all equitable remedies. Support for this definition of “rights and claims” as including remedies can be found in Black’s Law Dictionary, § 1-201(36) of the Uniform Commercial Code and § 101(4) of the Bankruptcy Code. Such an expression is more than a liquidated damages provision and acts as an expressed waiver of the right to seek specific performance of this Agreement.
In addition to the Court’s determination that Section 3(b) and (c) and § 26, by their terms, clearly establish a bargained-for alternative performance, extrinsic evidence introduced by the parties and their agents may be considered if the words of the Agreement are not clear and unambiguous or are capable of differing interpretations. Flannery v. Conyers, 69 Ohio App. 546, 44 *716N.E.2d 470 (1942). Such evidence may be used to establish the understanding of the parties as to the questioned terms at the time the contract as executed. Yoder v. Columbus and Southern Ohio Electric Company, 39 Ohio App.2d 113, 316 N.E.2d 477 (1974). Such evidence is not admissible to contradict the terms of the Agreement, however, but to indicate what the parties understood their arrangement to be.
After hearing the testimony of the parties and Roberts, the Court finds that both parties understood that Kenney had a way out at a cost to him of $100,000, with such amount to be deposited and held in escrow pending closing. That finding is buttressed by the following testimony.
Mr. Tsao, the former president of Plaza, indicated that he understood Kenney could walk away with no obligation prior to June 15, 1987 and that Kenney’s $100,000 was at risk once the inspection contingency was waived.
Roberts, who had some relationship to his business associate and sometime client Kenney, but who had been Plaza’s broker-agent in the two previous attempts to sell the Premises, and who was being paid by Plaza to effectuate this deal, had some agency responsibility to Plaza. After June 15, 1987, Kenney told Roberts not to spend his commission because there as much left to do before it would be certain that the sale would close.
Kenney also indicated that he specifically ascertained that Roberts understood that Kenney’s waiver of Section 11(a) of the inspection contingency did not act as a waiver of his protections under Section 3(b) and that Roberts was to reinforce that with Tsao. Roberts may not have passed that on to Plaza, as he should have, but that failure cannot be attributed to Kenney, who believed Roberts was acting as Plaza’s agent in this matter.
At the time Kenney’s attorney Davis communicated to Plaza’s attorney Schla-chet, that Kenney was withdrawing from the purchase, Davis also communicated a new offer of $50,000 from Kenney to Plaza for a 30-day extension of the closing date to attempt to work out an alternative business venture to purchase the Premises. Such an offer would be consistent with an interpretation of alternative performance in the nature of an option.
Other testimony indicated that Kenney had rejected an earlier form of the Agreement which had specifically reserved all rights, claims and remedies of Plaza against Kenney. Kenney made it clear from the beginning that his ability to limit his liability, if he decided not to close the sale, was a crucial and critical term of any deal.
Tsao’s notes on the back of the first draft of the Agreement, which contains the same language in Sections 3(b) and 26 as does the final version, indicated that he saw this provision as an option for Kenney, at least as first proposed.
In summary, the Court finds that the evidence clearly indicates that Kenney had the alternative of closing the sale and paying the purchase price or forfeiting his $100,000. The phrase in Section 3(b), taken as a whole and construed with the omission of any remedies for Plaza in Section 26, considered with or without the extrinsic evidence, is intended to foreclose any action against Kenney, other than retention of the deposit by Plaza, if Kenney chose not to close the sale. This interpretation effectively establishes an alternative performance option for Kenney and means that his failure to close is but a bargained-for right. Even though the Agreement might have been more carefully drafted, the Court finds that the words themselves are sufficient to evidence the understanding of the parties.
The Court believes that Plaza knew what deal it was making. Although it may have hoped that Kenney’s draft of Section 3(b) could be defeated if tested, Plaza knew at the time it entered into the Agreement what the arrangement was. The terms were not particularly advantageous for Plaza and put Plaza in an almost untenable bind. But Plaza undoubtedly felt it had little choice and needed any deal with an acceptable price term if it was to have any hope of working out of its financial problems and reorganizing for the benefit of its *717creditors. That its hard deal did not include provision for “home free” time during the close-down phase, and that the sale was not consummated cannot be laid fully at Mr. Kenney’s feet.
The Court, wish as it may, cannot make Kenney the savior of this debtor. Although this Court has many and extensive powers to vary contractual terms to facilitate the reorganization process, and may approve or disapprove contracts with third parties for concerns relevant to the estate, that power does not extend to remaking or altering the terms of arms-length post-petition contracts entered into by a debtor-in-possession operating its own business under the protection of this Court.
Having found that the Agreement is an enforceable contract which provided, as an exclusive alternative performance, for the forfeiture of Kenney’s $100,000 deposit, the Court finally must consider Plaza’s argument that equitable estoppel nevertheless prevents Kenney from opposing specific performance.
Establishment of equitablé estoppel in Ohio requires a representation by words, acts or silence, which communicates a fact or state of affairs in a misleading way, and which induces actual reasonable good faith reliance by the other party. First Federal Savings and Loan v. Perry’s Landings, Inc., 11 Ohio App.3d 135, 463 N.E.2d 636 (1983). The theory, however, appropriately only is used as a shield to limit otherwise unavoidable losses, and may not be available as a sword. First Federal, 11 Ohio App.3d at 144, 436 N.E.2d 636.
The Court finds that no communication occurred in this matter which could be taken as a representation within the meaning of estoppel. Kenney proceeded toward closing in good faith and communicated his change of mind soon after the economic facts became known to him. If his silence or acts were taken as representation by Plaza, such inferences and reliance were not reasonable under the terms of the Agreement, given Kenney’s failure to waive the protections of Section 3(b) and the Agreement's requirements for closing the business of the hotel.
It is apparent to the Court that whatever misunderstandings occurred in his matter were intensified by the fact that the parties themselves communicated very little with each other, but rather spoke through their various agents. Indeed an explicit representation from Kenney might have delayed greatly Plaza’s actions and, thereby, decreased its damages. No evidence of misrepresentation sufficient to establish an es-toppel defense has been shown, however.
Consistent with the foregoing, judgment will be granted and entered in favor of Kenney as requested by Count Two of his complaint in adversary 2-87-0216. Judgment will be granted in favor of Plaza on Count One of Kenney’s complaint in adversary 2-87-0216. Judgment will be granted in favor of Kenney on Plaza’s complaint seeking specific performance in adversary 2-87-0217. Plaza’s counterclaim asserted in response to Kenney’s complaint in adversary 2-87-0217 is, hereby, rendered moot.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490592/ | MEMORANDUM
RICHARD S. STAIR, Jr., Bankruptcy Judge.
At issue is whether the maker of a note with a claim against the original payee can set off that claim against an assignee where the original payee filed bankruptcy before notice of the assignment was given to the maker. Contending that plaintiff is not a holder in due course, defendant, the maker of the note, insists plaintiff holds the note subject to all defenses which would be available in an action on a simple contract. Tenn. Code Ann. § 47-3-306(b) (1979). Plaintiff concedes he is not a holder in due course but insists an absence of mutual obligations precludes setoff. Alternatively, plaintiff contends setoff is not permitted, because during the ninety-day period preceding the bankruptcy of the original payee defendant incurred an indebtedness to the original payee, insolvent at the time, for the purpose of obtaining a right of setoff. 11 U.S.C.A. § 553(a)(3) (West 1979).
I
Plaintiff James R. Martin is the trustee in bankruptcy for C.H. Butcher, Jr. On September 9, 1985, plaintiff filed his complaint seeking judgment on a promissory note, together with interest and attorney fees, which he holds by assignment. The payee of the note is Southern Industrial Banking Corporation (SIBC). Defendant Victor Defenderfer1 admits he executed the note held by plaintiff. However, insisting he is entitled to set off an investment certificate issued to him by SIBC, defendant denies that plaintiff is entitled to any recovery.
This is not a core proceeding. 28 U.S. C.A. § 157(b) (West Supp.1987). However, the parties have consented to the entry of judgment by this court. 28 U.S.C.A. § 157(c)(2) (West Supp.1987).
The facts have been stipulated:
(1) On January 24, 1983, defendant executed a promissory note payable to SIBC in the amount of $23,364.21. The promissory note was payable in full on June 12, 1983, with interest.
(2) On January 24, 1983, defendant also executed a security agreement in favor of SIBC pledging investment certificate No. 043492, issued by SIBC in the principal amount of $23,245.47, as security for the promissory note. The investment certificate, dated December 12, 1982, matured on June 12, 1983, with interest.
*743(3) On February 15,1983, SIBC transferred, sold, and assigned to C.H. Butcher, Jr. the promissory note and the security agreement, along with numerous other notes and assets, all pursuant to a Master Loan Purchase Agreement.
(4) The defendant received no notice of the transfer, sale, and assignment of the promissory note and security agreement from SIBC to Butcher.
(5) On March 7, 1983, Butcher sold, assigned, and transferred the promissory note and security agreement to the Union County Bank, along with various other assets.
(6) On March 10, 1983, SIBC filed a voluntary Chapter 11 petition for reorganization.
(7) On April 15, 1983, defendant was notified by Union County Bank of the assignment and transfer of the promissory note to Union County Bank.
(8) On June 24,1983, an involuntary petition was filed against Butcher pursuant to 11 U.S.C. § 303. An order for relief was entered July 15, 1983.
(9) On February 10, 1984, pursuant to a joint application for compromise and settlement, this court entered an order approving the transfer of the promissory note and security agreement from Union County Bank to the plaintiff, as trustee for the bankruptcy estate of Butcher.
(10) On the date of the transfer of the promissory note and security agreement from Butcher to the Union County Bank, Butcher was insolvent.
(11) Butcher was a director of SIBC when it filed its petition in bankruptcy.
(12) The certificate of deposit which defendant pledged as security for the promissory note was purchased by defendant on December 12, 1982, and was the result of a “roll-over” of previous certificates of deposit owned by defendant, which certificates were originally purchased on or before July 1, 1982. On numerous other occasions the defendant had borrowed money from SIBC and secured such borrowings using SIBC investment certificates. The borrowing represented by the promissory note occurred in the normal course of defendant’s personal financial transactions and was specifically utilized to enable certain of defendant’s family members to purchase residential housing.
(13)The total amount due under the promissory note as of its maturity date was $23,364.21. The promissory note bears interest at the rate of eighteen (18) percent per annum after default and provides for the payment of reasonable attorneys’ fees incurred in its collection.
II
Plaintiff concedes he does not have the rights of a holder in due course. Tenn. Code Ann. § 47-3-306 (1979) enacts in part:
Rights of one not holder in due course. —Unless he has the rights of a holder in due course any person takes the instrument subject to:
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(b) all defenses of any party which would be available in an action on a simple contract; and
Defendant contends setoff is clearly a defense to a simple contract action and that plaintiff, a mere holder of the defendant’s note, is subject to defendant’s setoff rights against SIBC. According to plaintiff, defendant has a claim against SIBC but he is indebted to plaintiff as trustee of the C.H. Butcher, Jr. estate; hence, setoff is not permissible due to a lack of mutual obligations. Defendant agrees his claim is against SIBC, but he insists his debt (evidenced by his note) is also owed to SIBC.
Olsen-Frankman Livestock Mktg. Serv., Inc. v. Citizens Nat’l Bank, 605 F.2d 1082 (8th Cir.1979), involved an action by a livestock commission company against a bank for damages for fraudulent misrepresentation of a cattle seller’s financial condition. The livestock company (obligor) contended that but for the false representation of the bank it could have stopped payment on two checks to the insolvent seller (obligee), held by the bank (assignee-holder), and set off a previous debt of its seller. The court of *744appeals held that under Minnesota law an obligor on a negotiable instrument may set off an existing obligation owed to the obli-gor by the obligee on the instrument as against a holder not in due course. The opinion recites in part:
Under the [Minnesota] setoff statute, the transfer of a negotiable instrument to one not a holder in due course occurs “ * * * without prejudice to any set-off or defense existing at the time or before notice of the assignment[.]”
Olsen-Frankman Livestock Mktg. Serv., 605 F.2d at 1087. Contra Bank Of Wyandotte v. Woodrow, 394 F.Supp. 550, 556 (W.D.Mo.1975) (obligation arising from collateral transactions between parties to an instrument may not be set off against holder not in due course).
The law of Tennessee is the applicable law in this adversary proceeding. The parties have not cited and the court’s research has not disclosed any decision on point involving Tenn. Code Ann. § 47-3-306(b) (1979).
As a general rule, an assignee of a chose in action takes the same subject to all defenses available against the assignor at the time of the assignment. Breedlove v. Stump, 11 Tenn. (3 Yer.) 257 (1830). See also Ahrens & Ott Mfg. v. George Moore & Sons, 131 Tenn. 191, 174 S.W. 270 (1915) (assignee of non-negotiable instrument holds subject to setoff and counterclaims of obligor). This adversary proceeding, however, involves an unendorsed negotiable instrument past due when acquired by plaintiff.
In Gatewood v. Denton, 40 Tenn. (3 Head) 380 (1859), the court sustained a setoff defense against the assignee of a promissory note. The “due from date” note, dated September 13, 1854, was executed by Henry Gatewood in favor of Benjamin Gatewood. Thereafter, but prior to assignment of the note, Benjamin Gate-wood became indebted to Henry Gatewood in an amount exceeding the note amount. When the assignee brought suit to enforce the note, Henry Gatewood asserted a set-off defense based on his claim against Benjamin Gatewood (assignor of the demand note). The court’s opinion recites in part:
[T]he right of set-off ... was fixed and complete, in the defendant [Henry Gate-wood], previous to and at the time of the assignment of the note, and could not have been resisted by the original party — the assignor [Benjamin Gatewood]. And this is all that is requisite to entitle the defendant [Henry Gatewood] to a set-off against the plaintiff [Denton], who, by taking the note after it was due, holds it subject to every equitable de-fence that might be set up against the payee [Benjamin Gatewood].
Gatewood v. Denton, 40 Tenn. (3 Head) at 382.
In reaching this conclusion, the Gate-wood court relied upon former section 2918 of the Tennessee Code, which permitted a defendant to plead by way of setoff or cross action “any equities between the defendant and the original party under whom the plaintiff claims, which by law have attached to the demand in the plaintiff’s hands, and for which the defendant would be entitled to a recovery against the original party.” This provision remained in the Tennessee Code until repealed in 1972, after the effective date (January 1, 1971) of Tenn.R.Civ.P. 13 permitting counterclaims and cross-claims.2
Less than ten years later, the Tennessee Supreme Court held that section 2918 does not permit the setoff of a separate demand against a joint demand. Turbeville v. Broach, 45 Tenn. (4 Cold.) 270 (1868). Discussing the Gatewood decision, the court stated:
“This construction of the statute [section 2918], we think, is carrying the doctrine of set-off to its utmost limits....” Turbeville v. Broach, 45 Tenn. (4 Cold.) at 272.3
In Landis v. White Bros., 127 Tenn. 504, 152 S.W. 1031 (1913), a transferee of three *745promissory notes transferred without endorsement sought to enforce payment of the notes. The obligors refused to pay because the consideration for their notes (certain jewelry) proved to be worthless. Under the Negotiable Instruments Law the transferee of the notes transferred without endorsement acquired such title as his transferor enjoyed. Because the obligor’s defense against the transferor of the notes was equally good against the transferee without endorsement, enforcement of the notes was denied. See also Doughty—Stevens Co. v. Greene County Union Bank, 172 Tenn. 323, 112 S.W.2d 13 (1938) (certificate of deposit subject to issuer’s setoff rights where transferee of certificate of deposit had notice of setoff rights prior to valid endorsement of certificate).
In Nolan Bros. Lumber Co. v. Dudley Lumber Co., 128 Tenn. 11, 156 S.W. 465 (1913), the court held that an assignee of an account receivable was subject to the account debtor’s setoff rights against the insolvent assignor. Nolan Bros. Lumber Company was insolvent when it executed its promissory note to Dudley Lumber. Prior to the note’s maturity date, Dudley discounted the note to, and endorsed the same in favor of, a Michigan bank. Thereafter, Nolan Bros, sold lumber to Dudley on a credit basis; Nolan Bros, assigned its account receivable from Dudley to a Tennessee bank, which gave notice of the assignment. When Nolan Bros, defaulted on its note to Dudley, under its obligation as an endorser, Dudley reacquired the note from the Michigan bank. When the account receivable came due Dudley set off the amount of the Nolan Bros.’ note indebtedness; Dudley tendered the difference between the account and the note to the assignee Tennessee bank. The bank declined to accept Dudley’s payment and sued for the full amount owing on the account. Allowing the setoff, the court noted: “We have not here an effort to set off a demand purchased or acquired after the assignment, but the enforcement of a right that antedated the assignment.” Nolan Bros. Lumber Co. v. Dudley Lumber Co., 128 Tenn. at 17, 156 S.W. at 467. See also Nashville Trust Co. v. Fourth Nat’l Bank, 91 Tenn. 336, 354, 18 S.W. 822, 826 (1892) (insolvency is a good ground for equitable setoff even though the indebtedness on one side is not due).
As previously noted, plaintiff does not have the rights of a holder in due course. His rights are limited to those of a holder holding an unendorsed note, past due when acquired by him subsequent to the SIBC bankruptcy filing. Plaintiff holds the note subject to any setoff right of the defendant. Tenn. Code Ann. § 47-3-306(b) (1979); Nolan Bros. Lumber Co. v. Dudley Lumber Co., 128 Tenn. 111, 156 S.W. 465 (1913); Landis v. White Bros., 127 Tenn. 504, 152 S.W. 1031 (1913). The question remains whether setoff is permitted under 11 U.S.C.A. § 553 (West 1979).4
Ill
Section 553 of Title 11 of the United States Code enacts in relevant part:
*746Setoff
(a) Except as otherwise provided in this section and in sections 362 and 363 of this title, this title does not affect any right of a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case under this title against a claim of such creditor against the debtor that arose before the commencement of the case, except to the extent that—
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(3) the debt owed to the debtor by such creditor was incurred by such creditor—
(A) after 90 days before the date of the filing of the petition;
(B) while the debtor was insolvent; and
(C) for the purpose of obtaining a right of setoff against the debtor.
11 U.S.C.A. § 553 (West 1979).
Contrary to plaintiffs contention this adversary proceeding involves mutual obligations. Defendant is indebted on a pre-petition promissory note payable to SIBC, and he has a prepetition claim against SIBC based on his investment certificate.
Defendant’s debt to the debtor (SIBC) was incurred on January 24, 1983, after ninety (90) days before the SIBC petition filing date. Since defendant concedes SIBC was insolvent when he incurred his debt to SIBC, the only issue is whether he incurred the debt for the purpose of obtaining a right of setoff against SIBC. § 553(a)(3)(C).
Bankruptcy Judge Clive W. Bare, speaking for this court, has previously considered the statutory phrase “for the purpose of obtaining a right of setoff” found in § 553(a)(3)(C):
Under the former Bankruptcy Act, a creditor could not set off claims against the bankrupt acquired by the creditor “with a view to such use and with knowledge or notice that such bankrupt was insolvent or had committed an act of bankruptcy.” 11 U.S.C.A. § 108(b) (repealed 1978). The Bankruptcy Code modifies this limitation
to apply to a claim acquired within three months before the case at a time when the debtor was insolvent, without regard to knowledge or notice of insolvency on the part of the creditor, and adds a phrase, codifying case law, to expand the ... limitation to the situation where a creditor incurs a debt to the debtor rather than merely acquires a claim.
H.R.Rep. No. 595, 95th Cong., 1st Sess. 185, reprinted in 1978 U.S.Code Cong. & Ad.News 5787, 5963, 6145.
Section 553(a)(3) does not require, then, any showing that the creditor knew that the debtor was insolvent when the creditor incurred the debt to the debtor. Rather, the determinative inquiry is only whether the creditor, at the time of incurring the debt to the debtor, intended to apply that debt to offset the debtor’s debt to the creditor.
DuVoisin v. Foster (In re Southern Indus. Banking Corp.), 48 B.R. 306, 309 (Bankr.E.D.Tenn.1985), aff'd, 809 F.2d 329 (6th Cir.1987) (emphasis added).
In DuVoisin v. Foster, six weeks before the maturity date of his investment certificates, defendant Foster borrowed $470,-000.00 from SIBC and executed his promissory note. Foster’s note was scheduled to come due on the same date his investment certificates were to mature. Foster assigned his investment certificates to SIBC to secure the short-term loan. SIBC filed its bankruptcy petition twelve days prior to the due date of Foster’s loan. Thereafter, Foster tendered a check for $14,956.02, the difference between his note debt and the face value of his investment certificates with interest, in full satisfaction of his $470,000.00 promissory note. Declining to set off the investment certificates, the SIBC trustee returned Foster’s check. Foster denied any personal knowledge of SIBC’s financial difficulty at the time he took out the $470,000.00 loan. He testified that he borrowed the funds to pay another loan debt coming due at the time of the SIBC loan. However, Foster admitted in his answer that “it was his intention upon *747maturity of the promissory note and the investment certificates to apply the proceeds of such investment certificates to the amount then payable to Southern Industrial Banking Corporation_” Acknowledging this admission, the Sixth Circuit Court of Appeals affirmed Judge Bare’s decision disallowing the setoff:
We conclude that it was not clearly erroneous to infer from the above facts, taking into account particularly the timing of the loan request and Mr. Foster’s sophistication in the banking business, that Mr. Foster purposely intended to set off the bank’s debt to him by arranging the loan [from SIBC]....
DuVoisin v. Foster, 809 F.2d at 332.
Plaintiff insists the conclusion that defendant incurred his debt to SIBC for the purpose of obtaining a setoff is inescapable. Defendant contends the only evidence of his purpose established in the record is found in the parties’ stipulation that he incurred the debt in the normal course of his business “to enable certain of defendant’s family members to purchase residential housing.”
Section 553(a)(3) is designed “to prevent a creditor from intentionally incurring a debt to the debtor within the 90 day period in order to obtain a greater proportion of repayment of debts owed to the creditor than other creditors of its class.” Arctic Enter., Inc. v. Devine Harley Davidson Sales (In re Arctic Enter., Inc.), 21 B.R. 215, 217 (Bankr.D.Minn.1982). Unlike DuVoisin v. Foster, there is no admission of defendant’s intention when he borrowed money from, and executed his $23,364.21 note in favor of, SIBC. Further, an intention at the time of the loan to set off is not established in the present record. This court declines to presume such intent solely from the parties’ stipulation.
Accordingly, § 553(a)(3)(C) is not a bar to defendant’s setoff of his SIBC investment certificate against his note to SIBC.
This Memorandum constitutes findings of fact and conclusions of law. Fed.R. Bankr.P. 7052.
. Defendant's name is incorrectly spelled in the caption of the complaint.
. See Tenn. Code Ann. § 20-1001(4) (Bobbs Merrill 1955 & Supp. 1979) (repealed 1972).
. Cf. Catron v. Cross, 50 Tenn. (3 Heisk.) 584 (1871), an action to enforce an equitable setoff. Catron was one of three judgment debtors on a judgment in favor of Nolen, who assigned the judgment for a valuable consideration to Cross. Notice of the assignment was given to Catron. When an execution issued Catron filed a bill to *745enjoin the execution on the ground that Nolen, the judgment-creditor assignor, was insolvent at the time of the assignment, and indebted to him. The court refused to permit Catron to set off his claims against Nolen as against Cross, an assignee for a valuable consideration. The court said that Gatewood and section 2918 had no application to the relief sought by Catron. The opinion provides in part:
We think the claim of complainant should be repelled in this case, on the principle that the party had purchased bona fide, for valuable consideration, was a holder of the judgment, with no notice of any equities — the judgment remaining in full force and effect at the time — and, therefore no active relief should be granted in a court of equity against him.
Catron v. Cross, 50 Tenn. (3 Heisk.) at 587.
. Cf. Valentine v. Bank of Commerce (In re Southern Indus. Banking Corp.), 63 B.R. 331 (Bankr.E.D.Tenn.1986) (obligors on note to SIBC failed to prove allegation that their note was sold prior to SIBC’s bankruptcy filing for the purpose of defeating their setoff rights based on an investment certificate). In Valentine, this court said: "On the SIBC bankruptcy petition date plaintiffs were not entitled to setoff their claim against SIBC, based on the $100,000.00 investment certificate, against their note indebtedness because FTB [First Tennessee Bank], not SIBC, held their note.” 63 B.R. at 335. It is not apparent from the opinion whether First Tennessee Bank had the rights of a holder in due course. In any event, the statement is dictum. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490593/ | MEMORANDUM AND ORDER ON PLAINTIFFS’ JOINT MOTION TO DISMISS THE COUNTERCLAIM FILED BY MEL KATZ
RICHARD S. STAIR, Jr., Bankruptcy Judge.
On December 10, 1986, plaintiffs filed their complaint seeking the turnover of proceeds from certain United States Treasury notes, which they contend are property of the Butcher and/or Crabtree estates. On the same date, plaintiffs also filed their “Motion For Temporary Restraining Order And For Preliminary Injunction.” Plaintiffs’ motion, supported by the affidavit of plaintiff James R. Martin, Trustee, recites that defendant Union Chelsea National Bank holds the proceeds at issue; that the Bank holds these proceeds as collateral for a loan to Samuel Fortson; that through individuals whose identities are presently unknown Butcher and/or Crabtree gave possession of the Treasury notes to defendant Mel Katz, who deposited the Treasury notes with the Bank as security for Fort-son’s loan; and that Fortson’s loan is due December 22, 1986, and if payment is not received the Bank will offset the collateral against the loan balance.
On December 10,1986, this court entered a “Temporary Restraining Order And Show Cause Order” restraining the Bank from applying the Treasury note proceeds to any loan held by the Bank and requiring the Bank to place the disputed proceeds in an interest-bearing account. After a hearing on December 18, 1986, the court converted its temporary restraining order to a preliminary injunction. Although the Bank responded to the show cause order and was represented at the hearing on plaintiffs’ request for a preliminary injunction, defendant Katz did not respond to the show cause order and was not represented at the December 18, 1986 hearing.
Katz contends plaintiffs wrongfully obtained the temporary restraining order and the preliminary injunction prohibiting the Bank from applying the Treasury note proceeds to the Fortson loan, which he personally guaranteed, and that as a result of the preliminary injunction he is liable to pay the Fortson loan together with interest in the amount of $5,162.50 accrued through March 30, 1987, plus any additional interest. Katz counterclaims against plaintiffs for any part of the Fortson debt he may be required to pay.
On August 18, 1987, plaintiffs filed their motion to dismiss the Katz counterclaim. Plaintiffs contend the counterclaim fails to state a claim upon which relief may be granted and that Katz is estopped due to his failure to oppose plaintiffs’ request for injunctive relief.
Bankruptcy Rule 7065 provides for the application of Fed.R.Civ.P. 65 in adversary proceedings “except that a temporary restraining order or preliminary injunction may be issued on application of a ... trustee ... without compliance with Rule 65(c).” Fed.R.Civ.P. 65(c) requires an applicant for a restraining order or a preliminary injunc*749tion to furnish security to compensate any party wrongfully enjoined or restrained. No defendant requested, nor did the court require, the posting of security when the preliminary injunction was entered.
Generally, no recovery is permitted where a party is wrongfully enjoined in the absence of a bond or other form of security. Note, Recovery For Wrongful Interlocutory Injunctions Under Rule 65(c), 99 Harv.L.Rev. 828, 832 (1986). The Supreme Court so held in Russell v. Farley, 105 U.S. (15 Otto) 433, 26 L.Ed. 1060 (1881). See also Meyers v. Block, 120 U.S. 206, 211, 7 S.Ct. 525, 527, 30 L.Ed. 642 (1887) (unless he can establish a case of malicious prosecution a party wrongfully enjoined can recover nothing but costs in the absence of a bond). Although a panel from the Tenth Circuit Court of Appeals concluded Fed.R. Civ.P. 65(c) creates a cause of action on behalf of a party wrongfully enjoined and that recovery is possible even in the absence of a bond, Monroe Div., Litton Business Systems v. DeBari, 562 F.2d 30 (10th Cir.1977), the Supreme Court recently reiterated the rule announced in Russell. “A party injured by the issuance of an injunction later determined to be erroneous has no action for damages in the absence of a bond.” W.R. Grace and Co. v. Local Union 759, 461 U.S. 757, 770 n. 14, 103 S.Ct. 2177, 2185 n. 14, 76 L.Ed.2d 298 (1983). Accord Ladner v. First Mississippi Nat’l Bank, 799 F.2d 1023, 1026 (5th Cir.1986); Buddy Systems, Inc. v. Exer-Genie, Inc., 545 F.2d 1164, 1167 (9th Cir.1976), cert. denied, 431 U.S. 903, 97 S.Ct. 1694, 52 L.Ed.2d 387 (1977).
While the court is empathetic with defendant Katz, it is bound by decisions of the Supreme Court. Because no security was posted in conjunction with the issuance of the preliminary injunction, in the absence of malicious prosecution, which is not alleged, defendant Katz cannot recover from the plaintiffs, assuming arguendo that the preliminary injunction was wrongfully obtained. Accordingly, “Plaintiffs’ Joint Motion To Dismiss The Counterclaim Filed By Mel Katz” is granted. Defendant Katz’s counterclaim is dismissed.
SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490594/ | MEMORANDUM OPINION AND ORDER
RE: MOTION TO DISMISS CHAPTER 13 PETITION AND FOR RELIEF FROM AUTOMATIC STAY
WILLIAM HOUSTON BROWN, Bankruptcy Judge.
This cause is before the Court on the Motion to Dismiss the Debtor’s Chapter 13 *758Petition and for Relief from the Automatic Stay filed by Jones Furniture Company (Jones). At issue is whether this Debtor is precluded from Chapter 13 relief by the language of 11 U.S.C. § 109(g)(1). The following constitute findings of fact and conclusions of law in accordance with Bankruptcy Rule 7052.
The record reflects that this Debtor incurred an obligation to Jones during an earlier Chapter 13 case, initiated in 1980. The obligation was incurred post-petition with the Court’s permission and therefore was not discharged along with her other debts upon completion of that plan on June 17, 1986.
The record further reflects that the Debtor filed her original 1987 Chapter 13 Petition on March 23rd. The first meeting of creditors was scheduled for April 21, 1987. The Debtor failed to appear at the first meeting and, as is customary with the Clerk’s Office, a “Final Order Continuing section 341(a) Meeting of Creditors” was entered continuing the meeting until May 5, 1987. The Debtor failed to appear at this meeting as well and her case was dismissed on May 19, 1987.
According to the Debtor’s testimony, she was hospitalized for five (5) days with “heart problems” during the latter part of April. Upon release from the hospital she resided at her mother’s home for several days of recuperation. No one notified her attorney of her illness. When she finally returned to her own residence, she discovered that she had been mailed a copy of the Order dismissing her case.
Subsequently, on September 14, 1987, the Debtor filed her present Chapter 13 Petition through another attorney.
Jones Furniture Co. (Jones) asserts that the dismissal of the Debtor’s initial Chapter 13 case was the result of the Debtor’s failure to properly prosecute her case within the meaning of 11 U.S.C. section 109(g)(1). Thus, according to Jones, she should not be permitted to proceed with her present case.
Section 109(g)(1) provides in pertinent part:
(g) Notwithstanding any other provision of this section, no individual ... may be a debtor under this title who has been a debtor in a case pending under this title at any time in the preceding 180 days if—
(1) the case was dismissed by the court for willful failure of the debtor to abide by orders of the court, or to appear before the court in proper prosecution of the case; ....
The instant facts viewed in light of the above language present questions of whether the word “willful” found in section 109(g)(1) applies to the Debtor’s appearance “before the court in proper prosection of the case” as well as “failure to abide by orders of the court” and, if so, whether this Debtor’s failure to attend the scheduled meeting of creditors was “willful” within the meaning of the statute.
The Court shall first consider the applicability of “willful” to both clauses of section 109(g)(1). Section 109(g)(1) (originally section 109(f)) was enacted as part of the Bankruptcy Amendments and Federal Judgeship Act of 1984. Its central purpose was to curb abusive repetitive filings by individual debtors. See, Sen.Rep. No. 98-65, Committee on the Judiciary, 98th Cong. 1st Sess. 74,103 (April 26, 1983); In re Fulton, 52 B.R. 627 at 630, 632 (Bankr.D.Utah 1985); In re Patel, 48 B.R. 418 at 419 (Bankr.M.D.Ala.1985). Therefore, although there is no legislative history with regard to the question of whether the word “willful” found at section 109(g)(1) is applicable to both clauses, it is unreasonable to suppose that Congress meant to restrict the eligibility of debtors whose cases were dismissed pursuant to either clause, through no fault of their own. In re Fulton, supra at p. 632. This is particularly true in light of the Bankruptcy Code’s fundamental policy of promoting a fresh start for honest debtors. As such, it is this Court’s conclusion that section 109(g)(1) precludes refiling by debtors within 180 days for either willful failure to abide by orders of the court or willful failure to *759appear before the court in proper prosecution of the case.
As reasoned by the Fulton court:
it would not comport with good sense to impose two separate standards: a “willful” standard, involving intent, for failure to abide by orders of the court and a “strict liability” standard, in which intent does not matter, for failure to appear before the court. Such a construction would create an incongruity in the statute that is inconsistent with its underlying purpose.
Id.
Turning next to the question of whether the Debtor’s failure to appear at the scheduled meetings of creditors was “willful,” the Court must interpret “willful” within the meaning of section 109(g)(1). Unfortunately, Congress has provided no specific interpretation in the Code or legislative history. However, it is apparently the consensus of the courts considering the matter that, as it is used here, the term “willful” must be given its “traditional, customary meaning.” Moreover this traditional meaning requires at a minimum “deliberate” behavior. See, In re Ellis, 48 B.R. 178 at 179 (Bankr.E.D.N.Y.1985); In re Nelkovski, 46 B.R. 542 at 544 (Bankr.N.D.Ill.1985); In re Fulton, supra at 633.
As discussed above, the reason for dismissal of the Debtor’s initial Chapter 13 case was her failure to appear at the scheduled meetings of creditors. The evidence at the hearing on this matter reflects that her failure to appear was due to her hospitalization. There is simply no evidence that her failure to appear was deliberate. Consequently, the Court cannot find that the Debtor’s initial case was dismissed for her “willful” failure to abide by orders of the court, or to appear before the court in proper prosecution of the case. Therefore, section 109(g)(1) does not preclude the Debtor from continuing her present Chapter 13 case. As such, it follows that the automatic stay shall remain in effect as to this Debtor’s property and the garnished funds should be remitted to the Chapter 13 Trustee.
With respect to the obligation owed Jones Furniture Company, it is clear from the statements of counsel and proof presented at the hearing that this obligation was incurred post-petition in the Chapter 13 case filed by this Debtor in 1980. Realizing that the instant proceeding does not involve confirmation of the Debtor’s proposed plan, the Court will reserve any ruling on the proposed repayment of the Debtor’s obligation to Jones. However, as indicated at the hearing, the Court is concerned that the scheduled amount due on this prior post-petition obligation is $2,000.00 and the pían proposes to repay only the current value of the collateral or $1,000.00 via $100.00 monthly payments to the Trustee while the Debtor’s schedules reflect approximately $320.00 more in monthly income than monthly expenses.
As to the present issue of the Debtor’s Chapter 13 eligibility pursuant to section 109(g), the Court holds, based on the above findings of fact and conclusions of law, that the Debtor is eligible to continue with her Chapter 13 case.
In light of the above, IT IS HEREBY ORDERED that the Motion of Jones Furniture Company to dismiss the Chapter 13 Petition or for relief from the stay as to the garnished funds is denied. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491339/ | ORDER DENYING MOTION FOR DEFAULT JUDGMENT
MARY D. SCOTT, Bankruptcy Judge.
Now before the Court is a Motion for Default Judgment filed by the Trustee, Charles Darwin Davidson, in the above styled adversary proceeding. The Debt- or/Defendant, Thomas Clawson Bacon, has objected to the Trustee’s Motion for Default Judgment. Arnold and Mechilina Bouma, Plaintiffs in adversary proceeding No. 90-4188, have also filed a Response in which they support the Trustee in his Motion. The Trustee is represented by counsel, Thomas W. Carroll, II, Esq. The Defendant is represented by counsel, Carey E. Basham, Esq. The Boumas are represented by counsel, Judy Simmons Henry, Esq.
I. FACTS
On April 15, 1991, Trustee filed the present adversary proceeding. Debtor was given until May 20, 1991 to respond or object to the Trustee’s Complaint. On April 24, 1991, the Trustee moved to consolidate the present adversary proceeding, No. 91-4048 with adversary proceeding No. 90-4188, for trial purposes. The Court thereafter consolidated these two proceedings for trial purposes only. As of June 13,1991, Defendant has failed to answer or respond in the present proceeding, No. 91-4048. Consequently, the Trustee filed this Motion for Default Judgment.
In his June 17, 1991 Response to the Trustee’s Motion for Default Judgment, Defendant alleges that the causes of action in proceeding No. 91-4048 and proceeding No. 90-4188 arise from substantially the same allegations, and involve common questions of law and fact. Defendant contends that because of the substantial similarity of these two adversary proceedings, and their having been consolidated for trial, his answer in proceeding No. 90-4188 should apply in proceeding No. 91-4048. Thus, Defendant argues that the Trustee is not entitled to a Default Judgment because Defendant filed an answer in the present proceeding by virtue of the answer which he filed in proceeding No. 90-4188.
II. DISCUSSION
A. The Law
Federal Rule of Civil Procedure 55 governs Default Judgments, and applies in ad*112versary proceedings in the bankruptcy courts through Bankruptcy Rule 7055. Generally, bankruptcy courts have taken a conservative approach, and have refrained from granting default judgment motions. This has been especially true when the party against whom the default judgment would lie is the debtor in the bankruptcy case.
A moving party is not entitled to a default judgment as of right. In re Howell Enterprises, Inc., 99 B.R. 413, 415 (Bankr.E.D.Ark.1989). Whether to grant a default judgment requires the exercise of “sound judicial discretion” by the court. Id. at 415. Further, a hearing on the merits is favored by the courts and the underlying policies of the Federal Rules of Civil Procedure; and thus to grant a default judgment is a harsh measure appropriate only in extreme circumstances. Id. When confronted with this decision, courts should weigh whether:
1. the amount of money potentially involved is substantial;
2. the default is largely technical;
3. the plaintiff had been substantially prejudiced by the delay involved;
4. the grounds for default are clearly established or are in doubt; and
5. material issues of fact or issues of substantial public importance are in question.
Id. Moreover, a court may consider whether the default was caused by a good faith mistake or excusable neglect, the harshness of the default judgment’s effect, and whether the court thinks it later will be obliged to set aside the default on defendant’s motion. Id.; see 10 C. Wright, A. Miller, M. Kane, Federal Practice and Procedure at 423-27.
B. Application
Applying the factors enumerated by the In re Howell Enterprises court, this Court finds that the Default Judgment in the present proceeding should be denied; and thus the debtor will be granted an additional opportunity to respond. In the present proceeding, the Defendant/Debtor mistakenly believed that his answer in proceeding No. 90-4188 applied to the present matter after the two proceedings were consolidated for trial. This default is largely technical because Defendant did answer in the earlier proceeding.
Further, proceeding No. 90-4188 would remain unresolved and on the Court’s docket, and the causes of action in both these proceedings arise out of the same events, and involve common questions of law and fact. Denial of the Trustee’s Motion will not create additional litigation, or delay the final resolution of this Objection to debtor’s discharge. Therefore, the Court finds, in the interest of equity and judicial economy, that the better course to pursue is to deny the Trustee’s Motion for Default Judgment.
Moreover, the present default occurred as a result of the Defendant’s misunderstanding of the significance of the two proceedings having been consolidated for trial purposes only. The Court finds this to be a good faith mistake on the Defendant’s part. In addition, the Court finds that granting the default Motion at this time would be a harsh and unjust judgment against the debtor.
III. CONCLUSION
In the interests of equity, fairness and judicial economy, the Trustees’ Motion for Default Judgment is denied. Also, Defendant should be permitted to file his answer in the present adversary proceeding, No. 91-4048, so that both proceedings may go forward toward a final resolution.
Accordingly, for the foregoing reasons, it is hereby
ORDERED that Plaintiff’s Motion for Default Judgment is denied, and Defendant has fifteen (15) days from the entry of this Order to file an answer in adversary proceeding No. 91-4048.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491340/ | ORDER GRANTING DEBTOR’S MOTION TO REJECT EXECUTORY CONTRACT AND DIRECTING DEFENDANT TO TIMELY FILE CLAIM FOR DAMAGES PURSUANT TO 11 U.S.C. § 502(g)
MARY D. SCOTT, Bankruptcy Judge.
This adversary proceeding was commenced when the debtor terminated the employment of Everett Attebury and filed a Motion seeking a Declaratory Judgment that the debtor had cause to terminate Mr. Attebury’s employment because he breached his fiduciary duties to the company. Alternatively, the debtor is seeking approval for the rejection of the employment contract pursuant to Bankruptcy Code section 365. The matter came on for trial March 19, 1991. Mr. Attebury also filed a separate Motion to Assume Executory Contract and, by agreement of the parties, this Motion was considered at the same time.
This Court has jurisdiction over this proceeding pursuant to 28 U.S.C. §§ 1334(a) and 157(a). Moreover, the Court finds that this is a “core proceeding” within the meaning of 28 U.S.C. § 157(b)(1) as exemplified in 28 U.S.C. § 157(b)(2)(0).
At the conclusion of the debtor’s case-in-chief the Court found that Mr. Attebury did not breach his fiduciary duties to the company and granted his Motion to Dismiss debtor’s Complaint for a Declaratory Judgment that his employment was terminated for cause. The Court now considers *117the debtor’s alternate request to reject Mr. Attebury’s Employment Agreement pursuant to section 365 of the Bankruptcy Code as well as Mr. Attebury’s request that the debtor assume his Employment Agreement. The parties presented testimony and requested an opportunity to submit post-trial briefs. Those briefs have now been filed, and the matter was taken under submission June 25, 1991.
FACTS
Mr. Attebury was the owner of Crown Convenience Stores, Inc. (“Crown”), the forerunner to the debtor, Jr. Food Mart of Arkansas, Inc. (“Jr. Food Mart”). In February 1985, Mr. Attebury sold all of his capital stock in Crown to Dr. William T. Paine, the present owner of the debtor.1 At the time of the sale, Crown (now Jr. Food Mart) entered into a separate Employment Agreement with Mr. Attebury. (Plaintiff’s Ex. 1). Under the terms of the Employment Agreement, Mr. Attebury was to be paid a salary of $5,000 per month, plus a two percent (2%) annual increase over the 10-year term of the contract. He would continue as President to “assist in the management of day-to-day operations of the Corporation’s business.” Mr. Atte-bury’s precise duties, however, could be “extended or curtailed by the Corporation from time to time.” (Para. 4, Employment Agreement, Plaintiff’s Ex. 1).
After Mr. Attebury sold his Crown shares, Dr. Paine continued to operate the convenience store franchises under the Crown name. Ultimately the name was changed to Jr. Food Mart of Arkansas, Inc. (Deposition testimony of Howard V. Blair, Defendant’s Ex. 5). Mr. Blair, President and Chief Operating Officer of Jr. Food Marts of America, Inc.2, which authorizes and sells convenience store franchises, testified that Mr. Attebury from 1974/75 expanded the operations to include in excess of ninety stores. Jr. Food Mart of Arkansas, Inc., the debtor, now operates “68 to 70 stores”. (Deposition testimony of Howard Blair, p. 5, Defendant’s Ex. 5).3 Mr. Blair’s testimony also revealed that his company’s franchise agreements were initially signed by Mr. Attebury, personally, then with Crown and finally with Jr. Food Marts of Arkansas, Inc. when the name was changed. He also testified that Mr. Attebury gave his personal guarantee on the performance of the franchise agreements as well as the store leases, and that he is still liable as well as “technically, the approved franchisee.” (Deposition of Mr. Blair, p. 9, Defendant’s Ex. 5). The franchise documents were never changed or assigned after Mr. Attebury sold his business to Dr. Paine.
Neither the testimony nor the documents reveal the history of how and when Jr. Food Mart succeeded to the rights and/or liabilities of Crown Convenience Stores, Inc., but this fact is not in dispute as evidenced by the parties’ arguments which assume the succession and are limited to the relationship between Mr. Attebury and the debtor. The Court, therefore, does not consider this gap in the history of the debt- or to be a deterrent to its decision.
The debtor terminated Mr. Attebury’s employment shortly after it filed its Chapter 11 petition on November 5, 1990. (Defendant’s Ex. 1) In the present proceeding, debtor, pursuant to 11 U.S.C. § 365, seeks to reject Mr. Attebury’s Employment Agreement contending that, in its business judgment, rejection of this Agreement will benefit the debtor’s unsecured creditors. Mr. Attebury seeks assumption of this Employment Agreement, contending that re*118jection would be inequitable and unconscionable and the resulting irreparable harm to him would far outweigh any benefit to the bankruptcy estate.
DISCUSSION
Section 365 of the Bankruptcy Code, in relevant part, provides that “the trustee, subject to the court’s approval, may assume or reject any executory contract ... of the debtor.” Pursuant to 11 U.S.C. § 1107(a), a debtor-in-possession has the same rights, powers and duties as a trustee, including the right to reject executory contracts. See In re Constant Care Community Health Center, 99 B.R. 697 (Bankr.D.Md.1989); In re Russell, 60 B.R. 42 (Bankr.W.D.Ar.1985); In re Salem Bank Bldg. Ltd. Partnership, 40 B.R. 574, 575 (Bankr.W.D.Va.1983). There is no dispute that the Attebury employment contract is executory. The only issue remaining is whether or not the Court should grant the debtor’s request to reject this Agreement or deny the request and grant Mr. Attebury’s request to direct the debtor to assume the Employment Agreement.
The Business Judgment Test
Under the Bankruptcy Act of 1898, courts did not approve rejection of an exec-utory contract unless it was “onerous” or “burdensome” to the estate of the debtor. See generally, Silverstein, Rejection of Executory Contracts, 31 Chi.L.Rev. 467, 468-72 (1964). Under the Bankruptcy Code, however, courts have replaced the “burdensome” standard with the “business judgment” test. See In re Midwest Polychem, Ltd., 61 B.R. 559, 562 (Bankr.N.D.Ill.1986); In re Chi-Feng Huang, 23 B.R. 798, 800 (9th Cir.B.A.P.1982) (hereinafter Huang).4
Several courts have concluded, under the business judgment test, that the effect of rejection on the non-debtor party is not a relevant factor. See Borman’s, Inc. v. Allied Supermarkets, Inc., 706 F.2d 187 (6th Cir.) cert. denied 464 U.S. 908, 104 S.Ct. 263, 78 L.Ed.2d 247 (1983); Wheeling-Pittsburgh Steel Corp. v. West Penn Power Co., 72 B.R. 845 (Bankr.W.D.Pa.1987). Other courts have applied the business judgment test and also considered the effect of rejection on the non-debtor party. Even in these cases, however, the primary concern remains; whether rejection would benefit the general unsecured creditors. Polychem, 61 B.R. at 562; In re Meehan, 46 B.R. 96 (Bankr.E.D.N.Y.1985); Huang, 23 B.R. at 800.
The Second Circuit found that the business judgment test requires the court to exercise its discretion fairly in the interests of all who have dealt with the debtor. Control Data Corp. v. Zelman, 602 F.2d 38, 43 (2d Cir.1979). Under this analysis, benefit for the general unsecured creditors notwithstanding, the court may withhold approval where the party whose contract stands to be rejected will likely be damaged disproportionately to any potential benefit to be derived by the general unsecured creditors. See, also, Huang, 23 B.R. at 801. The Huang appellate panel, however, rejected the contention that a motion to reject could be denied merely because of unfairness to the party whose contract is to be rejected, or because of the disappointment of legitimate expectations. Id. at 801-802.
Cases involving employment agreements as executory contracts are rare, but two courts have directly addressed the rejection of an employment contract by a debtor. In In re Instituto Medico Del Norte, Inc., 76 B.R. 14 (Bankr.D.Puerto Rico 1987), the court approved the rejection of the employment contract between the debtor and the doctor who ran its radiology department. The court made multiple findings of fact and concluded that the debtor relied upon reasonable business judgment factors to arrive at its decision to reject the contract. The court approved the rejection of the *119employment agreement primarily because there would be a benefit to the estate. Id. at 16. In In re Constant Care Community Health Center, Inc., 99 B.R. 697 (Bankr.D.Md.1989), the court also deferred to the debtor’s “sound business judgment,” and approved the rejection of an employment contract. The contract provided that one of the doctors was to receive his full salary for a two-year period after the termination of his employment for any cause other than voluntary termination. Id. at 699. Focusing on this contractual provision, the court had little trouble finding that the contract was burdensome to the estate, that it might unduly prejudice unsecured creditors, and that it was in the best interests of the estate to reject the contract. Id. at 702.
Notably, the In re Instituto Medico and In re Constant Care courts both approved rejection of the employment contracts in summary fashion. Neither court considered the adverse impact of the rejection on the respective non-debtor parties.
Under the “strict” business judgment test analysis, the court need only ask if the debtor is saving money by rejecting Mr. Attebury’s employment contract. Jr. Food Mart would save approximately $5,000.00 per month for the remaining term of the 10-year Agreement.5 Testimony by the debtor’s current Chief Executive Officer, Garland Ridenour, indicated that Mr. Atte-bury’s employment with the debtor had annually cost the company from $168,-000.00 to $170,000.00. This figure, however, included the monthly salary, as well as payment of life insurance premiums, auto and health benefits and reimbursement of expenses. Additional testimony revealed that the Employment Agreement per se only covers Mr. Attebury’s monthly salary payment and employment related benefits. (Paragraph 8 of Employment Agreement). Payments for insurance premiums on Mr. Attebury’s life, some $7,000.00 per month, are not part of his Employment Agreement, but represent an obligation of the debtor under the initial Sales Agreement. (Plaintiff’s Ex. 2). The debtor is not seeking to reject this Sales Agreement. Mr. Ridenour, on cross-examination, agreed that the Employment Agreement and Sales Agreement are separate.6
Thus, it appears that by rejecting the Employment Agreement, the debtor would decrease its costs by the sum of Mr. Atte-bury’s salary and employment benefits for approximately the four years remaining under the Agreement. Rejection appears to be a valid exercise of the debtor’s business judgment, and not capricious or one made in bad faith. Consequently, under this “strict” business judgment test analysis, the Court should approve the debtor’s rejection of Mr. Attebury’s employment contract.
Under the “liberal” business judgment test analysis, courts look to the impact upon the party whose contract is sought to be rejected and compare the benefit to be received by the debtor against the harm to the non-debtor party. Initially, any analysis appears to consider the fairness to the non-debtor party. Courts, however, as noted above, have not denied rejection under this test solely because of unfairness to the non-debtor party.
In support of his contention that he will be irreparably harmed, Mr. Attebury argues that at 70 years of age his prospects for comparable employment are not good. Further, he points out that he remains personally liable on the debtor’s Citgo gasoline contracts as well as almost all of the leases *120for Jr. Food Mart locations. Mr. Attebury, however, does not explain how denying the debtor’s request to reject his employment contract would in any way lessen his potential liability under these other contracts.
Mr. Attebury also contends that his expertise in the convenience store business was and is an essential element to the development of the debtor’s business. Mr. Ridenour testified, however, that when he took over as President of the debtor the company was losing money at a tremendously rapid pace and would have been forced to cease operations within a couple of months. In any event, paragraph 4 of the Employment Agreement seems to moot this irreconcilable dispute. It provides that the debtor always had an unlimited right to curtail Mr. Attebury’s duties. The debtor cannot be forced to assign any duties to Mr. Attebury. Mr. Attebury agreed to this term.
Mr. Attebury relies on In re Midwest Polychem, 61 B.R. 559 (Bankr.N.D.Ill.1986) and In re Petur U.S.A. Instrument Co., Inc., 35 B.R. 561 (Bankr.W.D.Wash.1983) in support of his contention that the detrimental effect upon him by the debtor’s rejection of his employment contract is reason for this Court to deny rejection. In Midwest Polychem, 61 B.R. at 559, however, the contract the debtor sought to reject happened to be with another Chapter 11 debtor. The court had to balance the effect of rejection upon both debtors. Likewise in Petur U.S.A., 35 B.R. at 561, the court disallowed rejection, not because of the unfair effect upon the other party, but because the debtor failed to demonstrate a benefit to the estate that would outweigh the potential breach of contract claim against the estate. Neither case involved an employment contract.
Under the circumstances presented in this case, it would be difficult to conclude that continued payments of $5,000 per month plus employment benefits for no work could be anything other than a financial burden to the estate affecting any distribution to unsecured creditors. Further, assumption of an executory contract has the effect of giving expenses and liabilities incurred under the contract administrative expense priority. In re Coast Trading Co., 744 F.2d 686, 692-93 (9th Cir.1984). As such they would receive priority payment in any distribution prior to unsecured creditors. R & O Elevator Co., Inc. v. Harmon, 93 B.R. 667 (D.Minn.1988).
The Court finds that the debtor has met its burden of proof that the general unsecured creditors will be benefited by rejection of Mr. Attebury’s employment contract. Under either interpretation of the business judgment test, the debtor’s decision to reject this executory contract should be approved. Mr. Attebury’s remedy is to file a claim for breach of the rejected Employment Agreement and he will be given an opportunity to do so.
DAMAGES
Pursuant to 11 U.S.C. § 365(g), the rejection of Mr. Attebury’s executory Employment Agreement constitutes a breach of the contract. Such a breach may result in a claim against the estate. Mr. Attebury, pursuant to 11 U.S.C. § 502(g), will be given thirty (30) days from entry of this Order to file a claim. The debtor will be given twenty (20) days thereafter to file any objection it may have to allowance of the claim. If an objection is filed, a hearing will be held by subsequent notice of the Court. If no claim is timely filed, this adversary proceeding will be closed. Likewise, if no timely objection to any claim by Mr. Attebury is filed, the claim will be allowed.
IT IS SO ORDERED.
. Dr. Paine has not filed a separate bankruptcy case.
. Not to be confused with the debtor, Jr. Food Mart of Arkansas, Inc.
. Relevant deposition testimony of Mr. Blair on p. 8 reveals the following:
One of the services we provide is a real estate staff that goes out and finds locations, researches them, analyzes them and secures these properties. We make a commitment to all of our franchise owners, based on their ability to expand, and our real estate staff goes out and finds locations. We secure an option in most instances and then find a developer to develop the property on our terms, execute a lease with them and then we assign the rights of that lease in the form of a Jr. Food Mart store lease contract.
. In special instances, such as the rejection of collective bargaining agreements, a third test is employed, which involves an equitable balancing of the relative benefits and detriments both to the debtor and to the other affected party. Matter of Smith Jones, Inc., 26 B.R. 289, 293 (Bankr.D.Minn.1982). The reason for looking more closely at the relative effects of the rejection of executory collective bargaining contracts is that the court must balance the policy goals of the Bankruptcy Code against those of the National Labor Relations Act.
. Four years and two months, or approximately $250,000.00.
. Testimony revealed that Mr. Attebury and Dr. Paine contemplated an overall financing arrangement to accommodate tax ramifications of the seller financed sale. There was no evidence that rejection of the Employment Agreement affects the debtor’s obligation to pay Mr. Atte-bury’s heirs $2,000,000.00. The life insurance premiums paid by the debtor on Mr. Attebury’s life secure this obligation. Likewise, there was no evidence that rejection of the Employment Agreement affects Dr. Paine’s personal obligation to Mr. Attebury under the Sales Agreement. (Paragraph 2.03(b), Sales Agreement, Plaintiff’s Ex. 2). Dr. Paine is obligated to begin making $5,000.00/month payments for 120 months ($600,000.00) beginning in early 1995. (Paragraph 2.03(b), Sales Agreement, Plaintiff’s Ex. 2). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491341/ | MEMORANDUM OPINION
A. POPE GORDON, Bankruptcy Judge.
Windham Power Lifts, Inc. filed this complaint against the Department of Defense1 to recover $31,264.03 for storing and insuring property of the government for a period of eleven months following the debtor’s petition in bankruptcy.
Trial was held October 24, 1990.2 Many of the facts were undisputed. The remainder are found by the court pursuant to Bankruptcy Rule 7052.
The government awarded Quality Plus Equipment, Inc. a contract to manufacture 234 forklift trucks.3 Quality subcontracted with the debtor to manufacture the forklifts.4
The debtor’s subcontract with Quality incorporated the terms of the government contract5 which, in turn, incorporated applicable provisions of the Federal Acquisition Regulations.
The debtor filed a petition under Chapter 11 in bankruptcy on October 22, 1987 after having manufactured and delivered 97 forklifts.6
On the petition date, the debtor had on hand completed forklifts, forklifts in process, and large quantities of parts and materials for use in forklift production.7
Both the debtor and the government claimed an interest in this property remain*183ing at the debtor’s plant.8
The court entered an order one week after the bankruptcy petition requiring the debtor to segregate, insure, and hold the property subject to further order of the court.9
The government terminated its contract with Quality on April 19, 1988.10 It appears, however, that the subcontract was in default even prior to the debtor’s filing its petition in bankruptcy in October, 1987.
The court entered an order on April 28, 1988 holding that the government held title to the property free of any interest of the debtor.
During the next two and one-half months, the debtor withheld permission to the government to enter the plant to begin removing the property. The debtor spent part of that time in an unsuccessful attempt to renegotiate the Quality contract directly with the government.
The debtor finally allowed the government on July 12, 1988 to send experts to the plant to assess shipment needs.11 The government then began planning for and organizing the removal of the property from the debtor’s premises.
It took the government two months to plan the move. The government spent much of this time negotiating with the debtor by telephone and by mail regarding the dates of the move, the hours of work, the number and names of personnel to be involved in the move, and use of the plant facilities.
The government actually commenced the two-week job of packing and shipping the property on September 13, 1988. The job took thirteen men working seven and one-half hours per day.12
DISCUSSION
Prior to termination of the contract, the debtor was obligated to store and insure the property for the government without charge.13
Therefore, the court must decide whether the debtor may charge the government for storage and insurance costs incurred after termination of the contract and before actual removal of the property.
The court is unable to find any basis in law or equity to support the debtor’s claim.14
The property remained in the debtor’s possession largely through its own actions. Although it took the government two months (from July 13 to September 13, *1841988) to plan the move, planning did begin without undue delay after the July 13,1988 visit to the plant.
It is not surprising that planning and organizing the. move took two months. Removal of such a large quantity of goods presented tremendous and unusual logistical problems.15 In addition, the government spent much of the two-month period negotiating with the debtor regarding details of the move.16 Under the circumstances, the court cannot say that the two-month delay was entirely the fault of the government or that the government acted in bad faith.17
The court concludes that equity is on the side of the government. The evidence does not show that the debtor was required to store the property against its will.18 Additionally, it appears that it was in the best economic interest of the debtor for the government to take delivery of the property at the plant site rather than require the debtor to deliver the property to the government at another site.19 If the debt- or has an equitable claim for compensation, it would be against the contractor Quality.
The debtor argues, without merit, that the order entered at the outset of the case requiring the debtor to segregate, hold, and insure the property bestows validity to its claim. The order was entered prior to termination of the government contract. The contract required the debtor to store the property at the expense of the debtor.20 The order did not purport to change the contract; its purpose was merely to protect the government’s interest in property claimed adversely by the debtor.
The debtor further argues that it has a warehouseman's lien for storage. However, under Alabama law, the debtor is not a warehouseman, because the debtor is not “a person engaged in the business of storing .goods for hire.” See Ala. Code § 7-7-102(l)(h) (1975).
Neither is the debtor a bailee, because the debtor is not a “person who by a warehouse receipt, bill of lading or other document of title acknowledges possession of goods and contracts to deliver them.” See Ala. Code § 7-7-102(l)(a) (1975).
The facts do not support a common law bailment for compensation in that there is no evidence to show that the government and the debtor had an agreement, either express or implied, that some price or compensation would be paid in return for storing the property after termination of the contract. Absent such an agreement, no bailment for compensation arises. See 8 Am.Jur.2d, Bailments § 20.
Judgment for the government will enter separately.
FINAL JUDGMENT
In accordance with the Memorandum Opinion entered this day, it is hereby
*185ORDERED that the plaintiff’s motion for summary judgment is DENIED.
It is further ORDERED that judgment enter in favor of the defendant and that the plaintiff have and recover nothing from the defendant.
. The debtor initially commenced this adversary proceeding by filing a complaint against Quality Plus, Inc. on December 28, 1987. The government was added as a party defendant in January, 1988. Quality then removed a case filed by the debtor in state court. The state court case was consolidated with the instant adversary proceeding.
Quality asserted a counterclaim against the debtor by four counts in its answer. Quality and the debtor then settled their claims against each other, and Quality was dismissed as a party. The sole remaining dispute in this proceeding is the debtor’s claim against the government for the costs of storing and insuring the government’s property.
. The debtor filed a motion for summary judgment on August 20, 1990. The motion is due to be denied.
. This amount was later increased from 234 forklifts to 401 forklifts.
. Quality had no manufacturing capabilities. The debtor was Quality’s only subcontractor.
. The subcontract provided the following:
All terms and conditions of contract number F090603-85-C-0125 apply including but not limited to MIL-I-45208A.
Delivery schedule to be negotiated at a later date.
Progress payments available IAW FAR requirements.
. Under the subcontract, Quality paid the debtor from the progress payments Quality received from the government. The debtor received a total of $4,662,195.98 in this manner.
. The property was described as ranging from "nuts and bolts to sheets of steel” and, of course, the completed and partially completed forklifts. This property was stored throughout the plant, both within and without. According to the debtor, the property occupied a total space of 11,500 square feet. It is undisputed that the debtor purchased the property with a portion of the $4,662,195.98 received from Quality.
. The debtor claimed a security interest lien; the government claimed title free of any lien by the debtor.
. The order dissolved a temporary restraining order entered against the debtor and stated in pertinent part as follows:
B. The debtor, in conjunction with the authorized agent of the United States, is to identify and segregate those forklifts or other items of inventory claimed by the United States, and to hold such items subject to the further order of this court.
C. The debtor is to maintain at all times adequate insurance to protect the United States against casualty loss of those forklifts or other items of inventory identified as above as property claimed by the United States.
. Prior to termination of the contract, the debt- or was obligated to store and insure the property for the government without charge. 48 C.F.R. § 45.612-2, incorporated in the contract, provides as follows:
[T]he expense of storage, including any costs incident to the transportation to and from the storage area, shall normally be borne by the contractor and shall not be charged directly or indirectly to government contracts, unless the contracting officer determines that the storage is for the convenience of the government.
No such determination was made in this case.
. The government estimated that removal of the property from the debtor’s premises would require thirty trucks and 37,419 cubic feet of packaging. The government estimated the property weighed 1,135,020 pounds.
. There was some evidence that the government wanted to work overtime to get the job done more quickly, but the debtor limited the daily hours.
. See n. 10, supra.
. The debtor has provided no statutory authority to support its claim. No contract existed between the government and the debtor, and none can be implied under the facts of this case. Further, the government was not guilty of any tortious conduct under the facts of this case.
. The testimony indicated that it was unusual for the government to undertake movement of such large quantities (about 1,100,000 pounds) of government property from a subcontractor’s plant. Even preparation for the move was time consuming. Arrangements had to be made for obtaining packaging material, equipment, and trucks which would arrive at the site on a given date with the necessary personnel properly instructed. Further, the government had to determine and provide for the ultimate destination and storage of the goods and materials.
. See text, supra, at page 183.
. According to testimony, the government wanted to complete the move as quickly as possible by working overtime; however, the debtor limited the government workday to llA hours at the plant.
. Testimony for the debtor indicated that the debtor needed to use the space occupied by the property for other purposes. Yet, curiously, the debtor did not attempt to minimize the storage space required. The forklifts, parts and materials were left scattered in all parts of the plant, without regard to economy of space. Also, the lack of cooperation in allowing prompt removal of the property after the debtor became aware of the court order vesting title in the government is not consistent with immediate need for the space.
. See 48 C.F.R. § 52.232-16(j)(3)(e)(v) under which the government has the right to require delivery to the government of property to which the government has title under a subcontract if "the subcontractor becomes bankrupt or insolvent.”
. See n. 10, supra. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491342/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW
LEWIS M. KILLIAN, Jr., Bankruptcy Judge.
THIS MATTER came on for trial before this Court on February 13, 1991 and was concluded on March 5, 1991. The then Chapter 11 debtor, St. George Island, Ltd., filed a three count complaint on November 10, 1988, against the defendant, Richard L. Pelham and others. The Court, on March 20, 1989, dismissed Counts I and II. The remaining count is only against Pelham and seeks to avoid a fraudulent transfer pursuant to Bankruptcy Code § 548. Having considered the evidence presented, the arguments of counsel, and the filed memo-randa of law, we make the following findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052.
St. George Island, Ltd. (“SGI”) is a Florida limited partnership that was involved in the business of developing and marketing real estate in Franklin County, Florida. At the time of its Chapter 11 petition, John Stocks was its general partner. Richard Pelham is an individual also involved in the development of real estate. SGI filed for protection under Chapter 11 of the Bankruptcy Code on July 10, 1987. In the years proceeding the filing for bankruptcy, SGI engaged in transactions resulting in assignments of notes and mortgages to other parties including the defendant, Pelham. Two assignments to Pelham occurred on August 7, 1986, less than one year prior to the debtor filing for bankruptcy. It is these assignments that are the subject of this adversary proceeding.
In the transactions leading up to the subject assignments, SGI and High Tide Enterprises, a Florida general partnership, on October 15,1984, entered into a sale and purchase of the Pelican Point subdivision, whereby SGI agreed to sell the property to High Tide for $400,000. Pelican Point is a 23 acre tract of land located in Franklin County, Florida. As consideration for this *198transaction, High Tide executed and delivered to SGI a purchase money note in the amount of $400,000 which was secured by a purchase money mortgage on the real estate (“High Tide Note & Mortgage”). Incorporated into the note and mortgage was a collateral agreement which provided that, upon payment by High Tide to SGI of the sum stipulated to be applicable to each lot in Pelican Point, SGI would release its lien on that lot.
On or about October 25, 1984, High Tide sold Lots 4 and 14 in Pelican Point to Nancy W. Bloom. At closing, Bloom executed and delivered to High Tide a purchase money note and mortgage for each lot (“Bloom Notes & Mortgages”). High Tide then assigned the Bloom Notes & Mortgages to SGI in exchange for SGI’s release of the liens on Lot 4 and 14.
Thereafter, in February, 1985, High Tide obtained a development loan from Sun Bank in the amount of $140,000. This loan was secured by a mortgage on the Pelican Point property, except for lots 4,14 and 26. SGI agreed to subordinate its mortgage on Pelican Point to this mortgage, thereby putting Sun Bank in a first mortgage position on that property.
A month later, in March, 1985, High Tide sold Lot 26 in the subdivision to R. Dwayne Odie and Yean W. Chooi. Odie and Chooi executed and delivered to High Tide a Purchase Money Note and Mortgage (“Odie Note & Mortgage”). High Tide, as in the previous instance, assigned the note and mortgage to SGI in exchange for SGI’s release of lien on Lot 26.
In March 1986, SGI gave to Redden, Mills & Clark (“RMC”), an Alabama law firm, a collateral assignment which conveyed to RMC a portion of SGI’s interest in the High Tide Note & Mortgage as security for a $65,000 promissory note which was simultaneously given to RMC by SGI’s general partner, John R. Stocks.
In August 1986, SGI assigned the High Tide Note & Mortgage to Pelham, subject to the RMC assignment. The result of this assignment placed Pelham in a third mortgage position, after Sun Bank and RMC, with respect to the Pelican Point property. On the same day, SGI also assigned to Pelham SGI's interest in the Bloom Notes & Mortgages and the Odie Note & Mortgage. Those mortgages are first mortgages on the respective properties. It is these assignments which SGI alleges constitute fraudulent transfers.
SGI contends that these assignments were made pursuant to an agreement whereby Pelham would transfer to SGI real property in the Majestic Oaks subdivision, a high priced neighborhood in Tallahassee, Florida, and would build a home on that property that would have a market value of approximately $461,000. Once complete, SGI was to lease the home to Stocks and his wife as their residence. There is no question that Pelham never conveyed the real property to SGI or Stocks. SGI further contends that Pelham never conveyed anything of value in consideration of the assignments. Pelham, on the other hand, asserts that the assignments from SGI were in exchange for the satisfaction of obligations totalling $187,-694 owed by John Stocks to Pelham.
At trial, Pelham introduced a hand written worksheet, which indicates it was prepared on August 14, 1989, listing the obligations which Pelham asserts were satisfied by the assignment of the notes and mortgages. A typed worksheet, prepared on September 11, 1989, introduced by SGI, is similar but clearer than the hand written worksheet. The latter worksheet indicates the dates and outstanding amounts and to what they are attributed as follows:
4-23-86
1270 High Road (7 months @ 375) $2,625.00
2603 & 2607 Clara Kee 1,704.69
Refrigerators 915.84
Maintenance & Repairs 1,372.88
Springhill Warehouse (unpaid rent) 9,756.52
12-31-85
Airplane — John’s % of unpaid expenses and debt service 22,481.25
Engine Replacement ($23,189.68 divided by 2) 11,594.86
Assumption of John R. Stocks/Destin Savings Loan (7/2/86) 125,000.00
Accrued interest from 9/6/85 12,243.15
TOTAL debt extinguished as consideration for High Tide Mortgage Assignments 187J||ilS
*199During the trial SGI put on evidence to refute each of these charges. Its evidence sought to show that neither SGI nor John Stocks are liable for these alleged obligations. Stocks testified that he paid Pel-ham one year in advance for the High Road apartment, that he deeded his interest in the plane to Pelham, and that Pelham assumed the liability on the Destín note. Stocks’ sons and daughter-in-law testified that they lived in the Clara Kee apartments and that John Stocks did not have any responsibility for the apartments. SGI presented further evidence that neither it nor Stocks were responsible for the Spring-hill warehouse, but that Gold Leaf, a related Stocks entity, was the lessee of the warehouse.
But for the worksheets, generated more than nine months after the complaint against him was filed, Pelham did not produce any documentary evidence, such as agreements, notes, billing statements, or ledgers, to show that these obligations existed at the time of the assignments. Additionally, some of these alleged obligations were incurred by parties other than John Stocks. Of the remaining obligations, Stocks hotly contests any obligation he may have. Further, there has been no showing that SGI had any responsibility for these debts.
SGI’s assertion that the assignments were made in contemplation of the building of a home on a lot is butressed by a letter from John Stocks to Richard Pelham, dated January 27, 1987, a mere five months after the assignments. In that letter, Stocks wrote:
My ultimate concern at this point is to obtain an assignment of the above referenced mortgages. As you recall, I assigned these mortgages to you sometime ago in order to effectuate the construction of a house for Faye. Since that time Faye has decided that she no longer is interested in building the house. At the time of the assignment, it was my understanding that in the event the construction of the house did not take place, then you would reassign those mortgages back to me.
There is no evidence to suggest that Pel-ham ever responded to Stocks request.
The weight of the evidence would appear to support SGI’s version of the facts. However, reconciliation of the facts is not necessary to the resolution of this case in view of the legal principles which apply even if Pelham’s version of the facts are accepted in toto.
The issue we must decide is whether any of the facts alleged would establish that SGI received reasonably equivalent consideration for the assignments made to Pel-ham. If sufficient consideration was not received by SGI then the assignments made to Pelham must be avoided. Bankruptcy Code § 548 allows a trustee (or debtor-in-possession) to
Avoid any transfer of an interest of the debtor in a property or any obligation incurred by the debtor, that was made or incurred on or within one year of the filing of the petition, if the debtor voluntarily or involuntarily—
(2)(A) received less than a reasonable equivalent value in exchange for such transfer or obligation; and
(B)(i) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation.
11 U.S.C. § 548(a). The parties have stipulated that the assignment made by SGI to Pelham was within one (1) year of the filing of the petition and that SGI was insolvent on the date of the transfer. However, they do not agree that the debtor received less than reasonable equivalent value in exchange for such transfer. Pel-ham contends that SGI received $187,694 in the form of a satisfaction of obligations of John Stocks and that such satisfaction was reasonably equivalent value for the assignments. However, John Stocks is not the debtor in this case.
Even if we were to accept all Pelham’s allegations as true, he would be required to show that the satisfaction of the debt of John Stocks constituted reasonably equivalent value to SGI. Absent such showing, the transfers must be avoided as fraudu*200lent pursuant to § 548. Pelham asserts that when a party receives, either directly or indirectly, value for a transfer, that party has received a benefit. He contends that the benefit which Stocks’ received constituted either a direct or an indirect benefit to SGI. Therefore, SGI received adequate consideration for the assignments. For support of this proposition, Pelham cites to Johnson v. First National Bank, 81 B.R. 87 (Bankr.N.D.Fla.1987) and Rubin v. Manufacturer’s Hanover Trust Co., 661 F.2d 979 (2nd Cir.1981).
“In general, transfers made solely for the benefit of third parties do not constitute ‘reasonably equivalent value’ for purposes of § 548.” In re Pembroke Development Corp., 124 B.R. 398, 400 (Bkrtcy.S.D.Fla.1991). However, this Court, in Johnson, recognized that “a debtor need not benefit directly in order to receive reasonably equivalent value for a transfer. He may benefit indirectly through benefit to a third person.” Johnson 81 B.R. at 88, citing, Williams Twin City Co., 251 F.2d 678, 681 (9th Cir.1958), Klein v. Tabatchnick, 610 F.2d 1043, 1047 (2nd Cir.1979), Rubin, supra 661 F.2d 979, 991. “If the consideration given to a third person ultimately landed in the debtor’s hands, or if the giving of the consideration to the third person otherwise confers an economic benefit upon the debtor, then the debtor’s net worth has been preserved.” Rubin, Id.
It is Pelham’s argument that when the general partner receives a benefit through forgiveness of debt, the partnership benefits by having a more solvent general partner. He reasons that reduction of the debt owed by Stocks to Pelham had the effect of increasing Stocks’ net worth available to SGI to use to satisfy partnership debt since a general partner is liable for partnership obligations.
The relationship of a general partner and limited partnership, and the effect of a benefit to one or the other, may be compared to that of a corporate parent and a subsidiary, or a 100% shareholder and the corporation. In each case, when there is a benefit to the entity, the controlling party necessarily benefits through the enhancement of the value of the entity.
In Johnson, this Court examined the effect of a benefit to a corporation as it relates to its 100% shareholder. In that case, the shareholders guaranteed a note made by the corporation. As collateral, the shareholders gave the bank a mortgage on their personal residence. When the corporation defaulted on the loan, the bank instituted proceedings to foreclose the mortgage on the shareholder’s residence. Prior to the foreclosure sale, the shareholders filed for protection under Chapter 11 of the Bankruptcy Code. Thereafter, they filed an adversary proceeding seeking to avoid as a fraudulent transfer the mortgage given to the bank on the personal residence.
In that case, we first examined whether the shareholders received reasonably equivalent value in exchange for the transfer of the mortgage on their home. The debtors, the shareholders, argued that they did not receive any value since it was the corporation that received the loan proceeds. We found that a loan to a subsidiary corporation will almost always confer a benefit on the parent or stockholder of the corporation since they are the indirect beneficiaries of anything of value coming to the corporation.
However, in the case at hand, we have a situation where the general partner of the limited partnership may have received the value. The question becomes whether a value to the general partner necessarily confers a benefit on the limited partnership. Following the defendant’s argument, any benefit to a parent, or in this case, a general partner, would flow to the subsidiary, or limited partnership. While it may be possible that the subsidiary does receive a benefit by an action that has benefitted the parent, such benefit cannot be automatically inferred.
In In re Duque Rodriguez, 77 B.R. 944 (Bankr.S.D.Fla.1987), the court examined whether a transfer of $176,410 during the year prior to the debtor’s bankruptcy was avoidable under § 548. There, the debtor corporation made payments to a bank for loans for which the 100% shareholder was *201obligated. The corporation was not obligated either as the borrower of guarantor of the loans. The bank argued that due to the relationship between the principal and the corporation the corporation received a reasonably equivalent value for the transfer. The court cited Rubin and stated that any indirect benefit “must be such that the corporation’s net worth is unaffected by the corporate transfer”. Id. at 946. It went on to find that the transfers made by the corporation for the benefit of its principal were not applied to any debt of any entity related to the corporation and therefore the corporation did not receive any value for such exchange of the payments.
In this case, SGI transferred a $400,000 promissory note and three smaller notes and mortgages to Pelham. There can be no doubt that such transfers reduced the partnership’s net worth. In exchange for this transfer, Pelham contends that he forgave Stocks’ outstanding obligations to him. There has been no allegation, nor any showing, that SGI, in any way, was obligated under Stocks’ alleged debts. If Pelham had obtained a judgment in the amount of the obligations he claims were owed by Stocks, he would not have had any recourse against SGI for those obligations. Further, Stocks January 27, 1987, letter gives strong support to the contention that the assignments were not for the alleged obligations, but were for a house and lot worth approximately $461,000, which were never received.
Pelham contends that Stocks’ testimony at trial acknowledging that a benefit to him benefitted SGI and vice versa shows that the debt forgiveness did benefit SGI. Such a legal conclusion cannot be determined by a witness. The case law is clear that a transfer to a third party must confer an economic benefit on the debtor in order for there to be an exchange of reasonably equivalent value. There has been no showing that the purported satisfaction of Stocks’s alleged obligations economically benefitted SGI. Considering the assignment to Pelham by SGI and the alleged settlement of Stocks debts to Pelham, it is clear that SGI’s net worth has not been “unaffected by the ... transfer.” Therefore, we find that Pelham has failed to show that SGI received any consideration in exchange for the assignments of the notes and mortgages. Absent a showing of any transfer to SGI of value reasonably equivalent to the High Tide note and mortgage and the Bloom and Odie notes, the transfers made from SGI to Pelham must be avoided pursuant to § 548. A separate judgment will be entered forthwith. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490527/ | MEMORANDUM OPINION
HENRY L. HESS, Jr., Chief Judge.
This matter came before the court upon Andersen Dairy’s (Andersen) objection to confirmation of the debtor’s chapter 13 plan. The debtor was represented by Andrew Toth-Fejel and Andersen’s Dairy was represented by Elizabeth A. Trainor, of Tooze, Marshall, Shenker, Holloway & Du-den.
Andersen is a creditor holding an unsecured claim. In addition, the Internal Revenue Service (IRS) and the Oregon Department of Revenue (ODR) hold large secured claims. The debtor’s plan proposes that the claims of the IRS and ODR be satisfied out of the debtor’s non-exempt assets first. Then, the debtor proposes that the IRS and ODR satisfy the remaining claim from the equity in the debtor’s home. If this is done, the debtor’s only asset would be some remaining equity in the homestead which he could totally exempt in a chapter 7 case. This would result in no dividend to creditors holding unsecured claims. Thus, the debtor argues that his plan meets the best interest test of § 1325(a)(4).
*170Andersen objects to the debtor’s proposal. Andersen points out that if the IRS and ODR were required to satisfy their claims from the homestead (which is not exempt from the reach of the IRS and ODR), first there would be sufficient remaining non-exempt assets to return a dividend to unsecured creditors in chapter 7. Therefore, Andersen argues, the debtor’s plan does not meet § 1325(a)(4).
The issue, therefore, is whether the court should order the marshalling of the debt- or’s assets in such a way as to defeat his homestead exemption for the benefit of creditors holding unsecured claims.
The parties admit in their memoranda that marshalling is an equitable doctrine. It is axiomatic that “equity follows the law.” Bank of Marin v. England, 385 U.S. 99, 110, 87 S.Ct. 274, 281, 17 L.Ed.2d 197 (1966) (Harlan, J., dissenting). Thus, where Congress has allowed states to “opt out” of the federal exemption scheme, 11 U.S.C. § 522(b), and the Oregon Legislature has declared that a debtor is entitled to a homestead exemption against claims such as Andersen’s, ORS 23.240, this court feels compelled to conclude that equity mandates the same result.
Accordingly, Andersen’s objection will be overruled and the court will enter an order confirming the debtor’s plan.
This opinion constitutes findings of fact and conclusions of law, in accordance with Bankruptcy Rule 7052. They will not be separately stated. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490528/ | ORDER VACATING ORDER ON MOTION FOR MODIFICATION OF AUTOMATIC STAY AND GRANTING RELIEF FROM AUTOMATIC STAY
ALEXANDER L. PASKAY, Chief Judge.
THIS CAUSE came on for hearing upon a Motion for Rehearing on the Order on the Motion for Modification of Automatic Stay filed by General Electric Credit Corporation (GECC), a creditor in the above-captioned Chapter 11 case. The Motion is addressed to a previous order of this Court which directed the substitute custodian to turn over a certain vessel to the Debtor. Upon reconsideration of the record and arguments of counsel, the Court now finds and concludes as follows:
While it is true that the value of the vessel “Therapy” (described as a 1981 Blue Water, 54 feet in length, hull I.D. No. BT105345M81H) as established by GECC is $140,000.00, that valuation presupposed an ordinary sale in an average market with adequate time for marketing. Considering the evidence presented on the extremely soft market conditions, it is highly questionable whether the vessel could be sold in the current market, as is, for $140,000.00. As it is without dispute that the principal due on the obligation owed to GECC is $120,000.00 together with certain costs and attorney fees, that the current storage charges are $150.00 per month, and that the Debtor currently has no income, this Court is satisfied that due to the Debtor’s nominal equity in the vessel, the soft market conditions, and the Debtor’s lack of income with which to make adequate protection payments, the Order on Motion for Modification of Stay was entered in error, and it is appropriate to vacate that Order and enter an Order Granting GECC’s Motion for Modification of Automatic Stay.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the Order on Motion for Modification of the Automatic Stay entered on May 29, 1987 be, and the same is hereby, vacated. It is further
ORDERED, ADJUDGED AND DECREED that GECC’s Motion for Modification of Automatic Stay be, and the same is hereby, granted. It is further
ORDERED, ADJUDGED AND DECREED that the automatic stay be, and the same is hereby, lifted as to the vessel “Therapy” described above for the sole purpose of allowing movant to obtain an in rem judgment against the property and *208that the movant shall not seek or obtain an in personam judgment against the Debtor. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490529/ | ORDER DENYING RECONSIDERATION
THOMAS C. BRITTON, Chief Judge.
The debtor’s emergency motion for reconsideration (C.P. No. 11) filed April 23, was heard April 27 and 28. The motion is denied.
The motion is addressed to the Order of April 21 granting stay relief to the holder of a deed of trust upon Colorado property.
The motion merely reargues the debtor’s contentions made at the hearing on the motion for stay relief — that there is sufficient equity in the property to adequately protect movant’s claim, in the event that the debtor is unable to refinance this lien through a confirmed plan.
I granted stay relief because I do not believe that a debtor can compel a secured creditor whose lien claim fully matured by its terms, and went into default before bankruptcy and whose judicial sale was blocked by the bankruptcy petition, from being forced to wait at least six months to see if the debtor can satisfy the lien as is the debtor’s intention here. See First Fed. Sav. and Loan Assoc. of the Fla. Keys v. Monroe County Hous. Corp., Inc., No. 82-413 at pp. 6-9 (S.D.Fla. Apr. 1, 1983) (distinguishing between matured and accelerated obligations under 11 U.S.C. § 1124(2)(A)). The fact, which I accept, that the property is worth $1 million and this lien, including interest to date and costs and expenses, presently leaves a cushion of over $100,000 with interest accruing at the rate of $16,666 a month, does not make six months a reasonable time for the prompt cure and satisfaction of a prepetition, fully matured secured lien.
This debtor, which has stated that the maximum sum it could raise in the next two weeks would be $7,000 requires three months to file a plan. Under existing rules and procedures, such a plan could not be confirmed and implemented in less than *212two months after it is filed. This bankruptcy was commenced March 16, more than a month ago.
If the satisfaction of a prepetition matured, secured lien can be delayed under chapter 11, without the creditor’s consent, that delay, I am convinced, must be so brief as to be deemed inconsequential, that is to say, not more than the time it would take the creditor to enforce its lien under available State remedies. A six-month delay is clearly unreasonable in this instance, and this is the shortest interval proposed by the debtor. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490530/ | MEMORANDUM DECISION
THOMAS C. BRITTON, Chief Judge.
The plaintiffs hold a $17,878 judgment against the debtor. They seek exception from discharge for that claim under 11 U.S.C. § 523(a)(2). The debtor has answered. The matter was tried on May 5.
In April 1984 plaintiffs purchased a duplex from the debtor. A real estate agent representing the debtor handled the sale. Plaintiffs dealt solely with the agent. They never had any contact with the debtor until the closing. The closing statement which was signed by plaintiffs contains entries for roof repairs and termite inspection and treatment. It is undisputed that a new roof was installed and that a termite inspection was made prior to the closing. However, plaintiffs allege that the debtor obtained money from them by false representations as to the habitability of the premises by failing to advise them of water damage caused by flooding and termite damage. Plaintiffs have alleged that the foregoing conduct is a “misrepresentation” *214by the debtor entitling plaintiffs to exception from discharge under § 523(a)(2).
The plaintiffs have presented no basis for exception under § 523(a)(2)(B). Their argument is made under § 523(a)(2)(A). It is plaintiffs’ burden under § 523(a)(2)(A) to prove that a misrepresentation was made “with the purpose and intention of deceiving the creditor.” In re Hunter, 780 F.2d 1577, 1579 (11th Cir.1986). Exception from discharge under this subsection requires:
“moral turpitude or intentional wrong; fraud implied in law which may exist without imputation of bad faith or immorality, is insufficient. It must further affirmatively appear that such representations were knowingly and fraudulently made_” 3 Collier on Bankruptcy 11523.08[4] (15th ed. 1987).
The roof repairs and termite treatment were disclosed, and a full opportunity to inspect the premises was available to plaintiffs. The debtor’s attempt to clean up after a flooding was reasonable and done in good faith. It is clear that the foregoing facts do not constitute false pretenses, a false representation, or actual fraud as to this debtor for the purposes of this statutory provision.
The debtor’s responsibility for the statements of the real estate broker with respect to the condition of the premises must rest upon the apparent agency relationship and would require a finding that the debtor either knew or should have known that the agent falsely represented that there was no termite damage. See Walker v. Citizens State Bank of Mo. (In re Walker), 726 F.2d 452, 454 (8th Cir.1984), where the court said:
“Proof that a debtor’s agent obtains money by fraud does not justify the denial of a discharge to the debtor, unless it is accompanied by proof which demonstrates or justifies an inference that the debtor knew or should have known of the fraud....”
I can make no such finding with respect to the. debtor. The limited direct contact that the debtor had with plaintiffs gives no basis to establish that the debtor could anticipate or control what was said by the agent. The debtor was not recklessly indifferent to the agent’s acts and the acts will not be imputed to the debtor.
In 1984, plaintiffs sued the broker, the real estate agency and the debtor in State court for damages, rescisión of the purchase contract and return of the purchase price. A judgment was entered against the debtor for $17,878.
The plaintiffs seek to use this judgment as the predicate for exception from discharge. Plaintiffs have alleged the facts set forth in the State court action and assert that “the judgment was based on fraud”.
No part of the record of the state litigation has been brought to my attention other than the third amended complaint and the judgment. As has already been indicated, there must be proof of actual fraud involving moral turpitude to support exception from discharge, not fraud implied by law. The State court judgment does not furnish a basis for any such finding. See Wright v. Lubinko, 515 F.2d 260, 263 (9th Cir.1975). Although that decision preceded the present Bankruptcy Code, there is no material change in the present statute. 3 Collier on Bankruptcy 11523.08[5] (15th Ed. 1987).
I have not overlooked the case cited by plaintiffs with respect to the duty of a seller of a home to disclose facts materially affecting the value of the property. Johnson v. Davis, 480 So.2d 625 (Fla.1985). However, there is no proof in the record before me of positive fraud as required under the statute.
Plaintiffs have failed to carry their burden. The evidence does not support an exception to discharge under § 523(a)(2). See generally In re Hunter, 780 F.2d 1577 (11th Cir.1986).
As is required by B.R. 9021(a), a separate judgment will be entered dismissing this complaint with prejudice. Costs may be taxed on motion. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490531/ | MEMORANDUM OPINION AND ORDER
HELEN S. BALICK, Bankruptcy Judge.
Sherry L. Jones has claimed property totaling $5,408 as exempt in her Chapter 7 *380bankruptcy case.. The Trustee has objected to this claim contending that 10 Del.C. § 4914 limits the exemption to $5,000. Ms. Jones contends that she is entitled to claim not only $5,000 but also those state exemptions which existed prior to the enactment of § 4914, namely 10 DelC. §§ 3502, 4902 and 4903.
Before the enactment of the present Bankruptcy Act, there was available to a debtor in a Delaware bankruptcy proceeding the exemptions allowable under state laws and federal statutes other than the Bankruptcy Act of 1898, as amended. The Bankruptcy Reform Act of 1978 contains a lengthy list of property available to a debt- or as exempt property under 11 U.S.C. § 522(d). It also provides that a state can “opt out” of that subsection.
In 1981, the Delaware legislature exercised its right under 11 U.S.C. § 522(b)(1) to limit the amount of exemptions an individual debtor could claim from the bankruptcy estate. It amended Subchapter 1, Chapter 49 of title 10 of the Delaware Code by adding a new section as follows:
§ 4914. Exemptions in Bankruptcy and Insolvency
(a) In accordance with Section 522(b) of the Bankruptcy Reform Act of 1978 (11 U.S.C. § 522(b)), in any bankruptcy proceeding, an individual debtor domiciled in Delaware is not authorized or entitled to elect the federal exemptions as set forth in Section 522(d) of the Bankruptcy Reform Act of 1978 (11 U.S.C. § 522(d)) and may exempt only that property from the estate as set forth in subsection (b) of this Section.
(b) In any federal bankruptcy or State insolvency proceeding, an individual debt- or domiciled in Delaware shall be authorized to exempt from the bankruptcy or insolvency estate property having an aggregate fair market value of not more than $5,000.00.
(c) This Section shall apply separately with respect to each debtor in a joint proceeding.
Both Debtor and Trustee rely upon the word “only” in subsection (a) for their respective arguments. Debtor acknowledges that she is prohibited from taking the federal exemptions listed in § 522(d). She argues that she is entitled not only to the $5,000 exemption stated in subsection (b) of § 4914 but also to those exemptions which existed prior to the enactment of § 4914 because the legislature did not expressly repeal the pre-existing law and repeal by implication is not favored. This argument is without merit.
The exemption statutes cited by Debtor specifically deal with property that can be claimed exempt in state execution and attachment proceedings and the statutes are still viable. Before the enactment of § 4914, Delaware had no statute specifically dealing with exemptions available to a bankrupt debtor so any state exemption provision was applicable in a bankruptcy case. See former 11 U.S.C. § 24. Section 4914 was enacted for the specific purpose of overcoming what many legislators thought were the too generous federal exemptions of § 522(d) while at the same time providing for an amount which would not run afoul of the congressional intent of giving a financially distressed debtor in bankruptcy a “fresh start”.
Moreover, the language of the statute is clear and unambiguous. Absent any indication to the contrary, words should be construed according to their usual, ordinary and natural meaning. Moore v. Chrysler Corporation, 233 A.2d 53 (Del.1967); F. Earl McGinnes v. Department of Finance, 377 A.2d 16 (Del.Ch.1977). The word “only” as defined in legal and standard dictionaries equates to exclusive. See Black’s Law Dictionary 1241 (4th ed. 1968); Websters Third New International Dictionary.
Thus, an individual debtor in a Delaware bankruptcy case is not entitled to the § 522(d) list of exemptions but in lieu thereof is permitted to exempt from the bankruptcy estate any property having a fair market value of no more than $5,000. 11 U.S.C. § 522(b)(2)(A); 10 Del.C. § 4914. Since the debtor’s claimed exemptions in excess of $5,000 do not qualify under subsection (b)(2)(B) of § 522 of title 11, she is *381limited to the $5,000 exemption. Trustee’s objection must be sustained. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490532/ | MEMORANDUM OPINION
HAROLD C. ABRAMSON, Bankruptcy Judge.
This proceeding appears to be but one chapter in a long saga of one citizen’s travails with the Internal Revenue Service. The case comes before the Court on the complaint of the Debtor, Phillip Gene Mills, to determine dischargeability. This is a core proceeding in bankruptcy. This memorandum shall constitute findings of fact and conclusions of law.
*595The matter comes before the Court on the cross motions for summary judgment filed by the parties. A hearing was held on June 22, 1987 after which the Court took the matter under advisement. The Debtor has requested in its prayer that the Court declare the tax liens filed against the Debt- or’s property to be void and that the Debt- or’s tax liability be discharged. The United States asks that the Court declare taxes due for the years 1978 to 1981 discharged, taxes due for years 1983 and after non-dis-chargeable, and that the Court abstain from determining the taxes due for the year 1982.
Under Section 523(a)(1)(A) of the Bankruptcy Code, 11 U.S.C., taxes which are entitled to priority of distribution under Sections 507(a)(2) and 507(a)(7) are excepted from discharge. The concern here is with Section 507(a)(7)(A)(i) which specifies that income taxes due for a pre-petition taxable year for which the return was due within three years prior to the bankruptcy petition are entitled to priority payment. This bankruptcy was initiated by the Debtor’s voluntary petition on September 24, 1985. Thus, in this case, federal income taxes due for 1983 and subsequent years are excepted from discharge under Section 523(a)(1)(A). In re Verran, 623 F.2d 477 (6th Cir.1980); In re Resnick, 52 B.R. 90 (Bankr.D.Mass.1985).
The significance of this analysis is made clear by a brief review of the factual background. Most of the facts are set out in the affidavit of the Debtor filed on June 17, 1987, which the Court accepts. At the time this case was commenced, the Internal Revenue Service (“IRS”) had assessed taxes for the years 1978 through 1984. Prior to the filing, the IRS had filed two notices of federal tax lien for the years 1978 through 1981.1 A third tax lien notice, for the tax years 1983 and 1984, was filed on August 26, 1985.
The Debtor had been negotiating with the IRS over a method of payment of this tax liability. The Debtor had agreed to sell his interest in a homestead property located in Denton County, Texas and assign to the IRS the proceeds received beyond payment of costs and prior liens. Subsequent to this agreement but prior to closing the homestead sale, the IRS filed the notice of tax lien for the years 1983 and 1984. The sale was closed as planned and proceeds of $15,077.29 were sent to the IRS. A certificate of discharge of the federal tax lien as to the homestead was issued by the IRS, listing the value of the lien at $15,077.29 and the debt to which the proceeds would be applied as the unpaid taxes from 1978 through 1981. When the Debtor endorsed the check for $15,077.29 over to the IRS, he wrote “applied to years 1985, 1984, 1983, remainder to be applied to previous years....” The Debtor also sent a note to the IRS requesting that the proceeds of the homestead sale be applied to taxes from 1984 first, 1983 second, and the balance to prior years.2
Thus we come to the crux of this adversary proceeding. The IRS applied the $15,-077.29 homestead proceeds to tax debts that would be discharged under Section 523(a)(1)3 instead of applying the proceeds *596to the more recent tax debts that are excepted from discharge, as was requested by the Debtor. The Debtor contends that because the payment of the homestead proceeds. was voluntary, he has a right to direct the application to the most recent taxes and the IRS should have applied the $15,077.29 according to the endorsement on the check and the accompanying note. See Muntwyler v. United States, 703 F.2d 1030 (7th Cir.1983); O’Dell v. United States, 326 F.2d 451 (10th Cir.1964). The IRS argues that it did apply the homestead sale proceeds as directed, only the Debtor attempted to change the agreement after he learned of the assessments for 1984 and 1983, well after the IRS had committed itself to release its tax lien covering the tax years 1978 to 1981. The Court agrees with the IRS.
The IRS may discharge any part of a taxpayer’s property subject to a lien for unpaid taxes when an application for such is made and, inter alia, the IRS receives payment equal to the value of the interest of the United States in the property to be released. The record shows, by citation in the certificate of discharge, that the IRS released the homestead from its lien pursuant to 26 U.S.C. § 6325(b)(2)(A), which provides for such release upon the payment to the IRS of the value of its interest in the subject property. This procedure is detailed in Treasury Regulations found at 26 CFR § 301.6325-1 (4-1-86 ed.) and 26 CFR § 401.6325-1 (4-1-86 ed.), which, to the Court’s reading,4 appear to be aptly described in the opinion in the case of Brittle v. United States, 209 F.Supp. 409, 411 (S.D.Cal.1962):
Briefly stated, under 26 U.S.C.A. § 6325, the person desiring the certificate discharging the Government liens submits to the District Director to whom the assessment is charged a written application requesting that a certificate be issued discharging the property from the federal liens. Petitioner submits detailed statements including the property description, reason for which the discharge is sought, description of all senior encumbrances, proof of the fair market value of the property, and any other information which the applicant believes may have a bearing on the Director’s determination of value. The Director then makes a thorough analysis of the law and facts of the case, checks all material submitted for accuracy, and reaches a determination and informs the applicant of the result. If the applicant is satisfied with the Director’s determination, he pays the amount specified.
This administrative procedure benefits the taxpayer by obviating the need for levy and sale by the IRS and by freeing the property from an encumbrance that could impede its transfer by the taxpayer. The procedure also may make possible realization of a greater recovery to the IRS and reduction of taxpayer liability. The benefits of the procedure authorized by 26 U.S.C. § 6325(b)(2)(A) are reciprocal and *597voluntary as to both parties. Brittle v. United States, supra.
Because the record clearly shows the understanding of the parties was for release of the homestead property in exchange for application of the proceeds of the sale to the unpaid taxes for the years 1978 to 1981,5 the Bankruptcy Court finds that the Debtor’s unilateral attempt to alter that understanding was ineffective. Cf., United States v. Lane, 303 F.2d 1 (5th Cir.1962) (compromise with IRS usually treated as a contract).
Thus, the Bankruptcy Court denies the relief prayed for in the Debtor’s motion for summary judgment on his complaint to determine dischargeability and declares that taxes due for years prior to 1983 are discharged. The Court abstains from determining the Debtor’s tax liability for the year 1982 because the issue is moot as to any further proceedings before this Court. Counsel for IRS is to prepare an appropriate form of order.
. Excluding application of the homestead sale proceeds, the Debtor’s unpaid tax liability is set out in the following table:
Taxable Year Amount Assessment Date Lien Date
1978 $11,015.47 1-04-82 6-22-82
1979 5,760.68 2-15-82 6-22-82
1980 5,925.55 1-04-82 6-22-82
1981 1,806.37 8-30-82 4-25-83
1983 1,077.54 5-06-85 8-26-85
1984 3,391.86 6-17-85 8-26-85
. The Debtor also complains of collection letters received from the IRS regarding taxes owed for 1978 to 1981, the IRS contention that he owes taxes for 1982, and the application of excess taxes withheld from 1986 to the tax debt for 1978. The Court is informed by counsel for the United States that the excess taxes withheld will be re-applied to non-discharged taxes, if any, or refunded. The Debtor’s tax liability for the year 1982 will not be determined by this Court.
. The IRS has conceded that the Debtor will be discharged from his tax debts for the years 1978 through 1981 under Section 523(a)(1). The Court notes, however, that even after application of the $15,077.29 payment there remains a balance due on the taxes for 1978. In the main bankruptcy case the Debtor received his discharge on February 24, 1986. Neither the Debt- or nor the IRS has filed a proof of claim nor has the Debtor requested a determination of secured *596status concerning the tax debts. See In re Brager, 28 B.R. 966 (Bankr.E.D.Pa.1983). Thus, the Court finds that the IRS lien, to the extent unsatisfied, survives despite this bankruptcy being a "no asset” chapter 7 proceeding. See 11 U.S.C. § 506(d); In re Simmons, 765 F.2d 547 (5th Cir. 1985); Matter of Brown, 73 B.R. 740 (Bankr.W.D.Wis.1987); 3 Collier on Bankruptcy, ¶ 506.07 (15th ed. 1987).
. 26 CFR § 301.6325-l(b)(4-l-86 ed.), provides in part:
(2) Part payment; interest of United States valueless — (i) Part payment. The district director may, in his discretion, issue a certificate of discharge of any property subject to a lien imposed under chapter 64 of the Code if there is paid over to him in partial satisfaction of the liability secured by the lien an amount determined by him to be not less than the value of the interest of the United States in the property to be so discharged. In determining the amount to be paid, the district director will take into consideration all the facts and circumstances of the case, including the expenses to which the Government has been put in the matter. In no case shall the amount to be paid be less than the interest of the United States in the property with respect to which to the certificate of discharge is to be issued.
******
(4) Application for certificate of discharge. Any person desiring a certificate of discharge under this paragraph shall submit an application in writing to the district director responsible for collection of the tax. The application shall contain such information as the district director may require.
******
. The Debtor’s application for the certificate of discharge of the homestead property from the tax lien specifically refers to the tax lien filings which list unpaid taxes for the years 1978 to 1981. No reference is made to taxes for any other years. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490534/ | DECISION and ORDER RE AUCTION PURCHASE PRICE
BURTON PERLMAN, Bankruptcy Judge.
At Cincinnati, in said District, on the 5th day of August, 1987.
This Chapter 11 debtor manufactures nitrogen products for fertilizer use at several facilities in the midwest and southwest. One of these facilities, located at Pryor, Oklahoma, consists of a plant and associated pipeline. A time came when it was deemed the proper course for debtor to follow, that the Pryor facility be sold. Authority was sought from the court to conduct an auction sale thereof, and on May 5, 1987 a public auction was held. The plant and pipeline were offered separately and then together. Finding the sale of the plant and pipeline together to be more productive, the sale concluded in that fashion. The property ultimately was bid in for $4.2 million by Cherokee Acquisitions, Inc. (“Cherokee”). The individual acting on behalf of Cherokee at the sale was Howard Farkas. Cherokee here contends that it is entitled to have the property for a purchase price of $4.1 million. A group of lenders of debtor spearheaded by BancAmerica Commercial Corporation (“BACC”), together with debtor, contest the position of Cherokee, and urge the court to hold that the $4.2 million purchase price was valid.
Cherokee’s position for the lower price is based upon the events which occurred at the sale. We find the following to be the facts regarding the sale. At the time of the sale, David Fox, the auctioneer, had two or three assistants who were in the crowd. Their function was to encourage purchasers and to stimulate enthusiasm about the sale. Prior to the opening of bidding, Fox made a statement of the conditions of sale. He said, inter alia:
Ladies and gentlemen, let me review that, specifically, when we start, we will offer the pipeline first. We will get to the high bid. We will reserve that bid. We will then offer the facility separately of the pipeline. When we get to the high bid on that we will reserve that bid. We will then offer the plant facility and the pipeline together as a package as an entirety. When we get to the high bid we will reserve that bid. We will then confer with the proper parties, the bankers, the lawyers, the debtors-in-possession and so forth, make a decision on how to proceed at that point in time. Now, ladies and gentlemen, I will tell you that we are specifically requiring the deposit as stated in an effort to bid on the property, if you wish to place a bid ... (Emphasis supplied.)
(The conditions of sale were also spelled out in a brochure and other materials distributed to prospective bidders prior to the sale. It is understood that to the extent there is a disparity between what the auctioneer says at the time of the sale and the printed material, that stated by the auctioneer at the sale prevails.)
It was an active auction with a substantial number of bidders. In accordance with the announced conditions of sale, the pipeline was offered first separately, and a top bid of $400,000,00 was received. That was reserved. The plant was then offered separately and a top bid in the amount of $3,350,000.00 was received, and that was reserved. The plant and pipeline were then offered together. The bidding proceeded past $3,750,000.00 so that it was apparent that the pipeline and plant together would bring a better price than they would separately. The bidding proceeded to $4,100,-000.00, that bid being made by Farkas for Cherokee. At that point, Farkas believed that he had purchased the plant and pipeline.
What happened then was that Fox, the auctioneer, stepped down and entered a building where he conferred with various individuals. He did not, at the point of retiring, announce that the sale was concluded. Fox then re-entered the scene of the sale and announced that he was reopening the bidding. At that point, another bidder, VanGuard, bid $4,150,000.00. Far-kas then increased his bid to $4,200,000.00. *620The sale was then concluded. Farkas then went with the auctioneer and attorneys and signed the relevant documents for the sale at $4.2 million.
There is a dispute in the evidence as to whether Farkas protested the conduct of the auctioneer in reopening the bidding after he stepped down. Farkas testified that he spoke to one of the auctioneer’s assistants who was circulating in the crowd, and his testimony is corroborated by Jerry Bob Willard, who attended the auction and was bidding on his own behalf at that time. Willard said that Fox’s assistant conferred with Fox, but Fox went on with the bidding without saying anything about the Farkas objection.
After carefully reviewing the evidence constituting this record, and considering the applicable law, we have reached the conclusion that the sale at $4.2 million was valid, and that the position of Cherokee that the sale was concluded at $4.1 is unsound. It really does not matter that Far-kas subjectively believed that he had purchased the property at $4.1 at the time of the interruption in the auction sale. Nor does the dispute as to the fact of whether the auctioneer was advised of an objection to the resumption affect the picture, for the auctioneer would have been justified in disregarding the objection at the time. The reason we say this is that an auctioneer controls the auction sale. The conditions of sale announced at the beginning of the auction govern the proceedings. The auctioneer here announced at the beginning of the sale that there would be an interruption in the bidding — bidders were put on notice that this was a condition of the sale. It is not inconsistent with sound auction practice for there to be such a break in the action. See, Jones v. Tennessee Valley Authority, 334 F.Supp. 739, 742 (D.C.M.D. Fla.1971).
Furthermore, it is not disputed that the auctioneer did not announce that the sale was concluded at the time that he recessed the proceedings — the hammer had not yet fallen. Cherokee, in its evidence, does not contend that the auctioneer announced that the hammer had fallen at that point. There is no dispute between these parties that the sale is not concluded until the hammer falls. On this score, we note that it is not disputed that the auction here in question was of the species of auction known as “with reserve”. That means, that the owner of the property has the right to withdraw the property at any time until completion of the sale. It follows from that premise that there must be an express statement by the auctioneer that the sale is completed before that becomes a fact. In the present case, the auctioneer never said that the sale was completed until after the bid of $4.2 million was made.
In opposing the outcome we announce, Cherokee argues that when the recess was called by the auctioneer, the only options open to the seller were either to accept the last bid, or to withdraw the property from bidding. Cherokee offers no basis in law for this position, and indeed it is without merit. The option followed by the auctioneer following the recess of permitting further bidding was also open to it. Cherokee says that its rights were prejudiced when bidding was reopened because it was not given an opportunity to withdraw its prior bid. This record does not support that position. Events move quickly at auctions, but when that is realized, it is clear that there was an opportunity for Cherokee to withdraw its bid, and that opportunity was reasonable in the context of an auction.
Cherokee and debtor have already closed on the sale of the Pryor facility, subject to a determination by this court whether the sale price was $4.1 or $4.2 million. In the foregoing findings of fact and conclusions of law, we hold that the sale price was $4.2 million.
So Ordered. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490535/ | MEMORANDUM
RICHARD STAIR, Jr., Bankruptcy Judge.
On September 5, 1985, plaintiff1 filed a complaint asserting that two tracts of real estate formerly owned by David A. Crab-tree (debtor) and Brenda B. Crabtree, but conveyed to plaintiff by two separate warranty deeds dated January 3, 1983, and recorded in the office of the Knox County Register of Deeds on March 21, 1983, are property of the estate of David A. Crab-*633tree.2 Plaintiff further contends that a quitclaim deed dated April 4, 1983, from the debtor to Brenda Crabtree is a cloud on its title to the two tracts. Plaintiff requests removal of the cloud on its title to the property.3
Defendant contends the January 3, 1983 deeds to plaintiff bearing her signature are voidable for fraud, lack of consideration, and mutual mistake. According to defendant, she and the debtor intended that she receive the two tracts as part of a property settlement in connection with divorce proceedings in the Knox County Chancery Court.
This is a noncore proceeding. Both plaintiff and defendant have consented to the entry of appropriate orders and judgments by the bankruptcy court. 28 U.S. C.A. § 157(c)(2) (West Supp.1987).
I
The debtor and his former wife, defendant Brenda Crabtree, acquired ownership of the two tracts of real estate in dispute on November 25, 1977. Both tracts are in the Ridgeland Subdivision, Knox County, Tennessee; tract 1 is identified as Lot 23; tract 2 as the 4.89-acre lot. The two lots are more particularly described as follows:
Tract 1
SITUATED in District No. Six (6) of Knox County, Tennessee, and without the corporate limits of the City of Knoxville, and being known and designated as all of Lot 23, Ridgeland Subdivision, as shown by map of record in Map Book 65-S, page 71 in the Register’s Office for Knox County, Tennessee, and to which map specific reference is hereby made for a more particular description.
Tract 2
BEGINNING at an iron pin in the North line of Ridgeland Drive, corner to Lot 23, Ridgeland Subdivision, Unit 1, said pin being located 1368.98 feet Southwest of Walden View Lane; thence, from said beginning point with the line of Ridge-land Drive, South 62 deg. 25 min. West, 18.41 feet to a point; thence, continuing with the line of Ridgeland Drive, South 63 deg. 29 min. West, 6.6 feet to an iron pin, corner to Beeler;’ thence, with the Beeler line, North 26 deg. 31 min. West, 157.12 feet to an iron pin; thence, South 57 deg. 53 min. West, 668.87 feet to an iron pin; thence, North 27 deg. 21 min. West, 347.96 feet to an iron pin in the Southern line of Proffitt; thence, with the Proffitt line, North 65 deg. 29 min. East, 640.63 feet to an iron pin, corner to A.H. Proffitt; thence, North 55 deg. 26 min. East, 50.25 feet to an iron pin; thence, South 27 deg. 45 min. East, 267.-53 feet to an iron pin; thence, South 26 deg. 31 min. East, 156.77 feet to an iron pin, the place of BEGINNING; according to the survey of Batson and Himes, Engineers, dated November 17, 1977.
The debtor and Brenda Crabtree executed two warranty deeds, bearing the date January 3, 1983, transferring their interest as tenants by the entireties in Lot 23 and the 4.89-acre lot to plaintiff.4 The defendant testified that in January, 1983, she and the debtor were contemplating divorce; that she did not discuss with the debtor the transfer of the lots; that she would not have agreed and did not agree to transfer *634her ownership interest in the Ridgeland Subdivision lots to plaintiff; that she did not intentionally and knowingly sign either of the two warranty deeds; that she did not appear before the notary public, Linda S. Bridges, who purportedly acknowledged her signatures; that she did not receive any money or other consideration for the transfer of the Ridgeland Subdivision properties to plaintiff; and that even though the signatures on the two warranty deeds dated January 3, 1983, appear to be hers, she did not know she was executing these deeds.
Brenda Crabtree further testified that after executing a written property settlement agreement on March 25, 1983, she negotiated with the debtor for the exclusive ownership of the two Ridgeland Subdivision lots when it became apparent she would receive only $14,000.00 from the sale of a residence owned by the parties as tenants by the entirety known as 11045 Farragut Hills Boulevard, Concord, Tennessee. Mrs. Crabtree testified this amount was considerably less than she expected to realize from the sale of the Farragut Hills property and that the two Ridge-land Subdivision lots were to compensate her for the loss of anticipated equity in the Farragut Hills property.
The defendant further testified that, in accordance with her agreement with the debtor, David A. Crabtree executed a quitclaim deed on April 4, 1983, in her favor transferring his interest in the two Ridge-land Subdivision lots. This deed contains the following statement: “THIS CONVEYANCE is being made pursuant to the terms and conditions of a Property Settlement Agreement entered into between the parties and incorporated in a Final Decree of Divorce granted in the Chancery Court for Knox County, Tennessee, Docket No. 78312.”5
As has been noted, the January 3, 1983 warranty deeds from the debtor and Brenda Crabtree to plaintiff were recorded in the office of the Knox County Register of Deeds on March 21, 1983. The April 4, 1983 quitclaim deed from the debtor to Brenda Crabtree was recorded on May 20, 1983. Neither the debtor nor Linda S. Bridges, the notary public who purportedly acknowledged the signatures of the debtor and Brenda Crabtree on the two January 3, 1983 warranty deeds, testified at the trial of this proceeding.
II
The entire thrust of defendant’s proof is that the January 3, 1983 warranty deeds to plaintiff are not effective as to her. She contends, however, that both deeds should be rescinded in their entirety and that she should be declared the owner in fee of the two Ridgeland Subdivision lots. Alternatively, defendant asserts that the two lots should be impressed with a constructive trust in her behalf. The court agrees in part.
The record is devoid of any evidence warranting a determination by the court that the January 3, 1983 warranty deeds are for any reason ineffective to transfer the interest of David A. Crabtree in the two Ridgeland Subdivision lots. There is no proof that the debtor did not execute the deeds; that his signature was not properly acknowledged before the notary public; that he did not receive any consideration; or that the deeds were involuntarily executed by him. The fact that the debtor and defendant were contemplating divorce in January, 1983, is not sufficient to avoid the transfer of the debtor’s interest. The evidence does not establish any agreement on the debtor’s part to transfer his interest in the two Ridgeland Subdivision lots to defendant prior to execution of the January 3, 1983 deeds.
The court concludes that the January 3, 1983 warranty deeds were effective to transfer the interest of David A. Crabtree in Lot 23 and the 4.89-acre lot to the plaintiff. Recordation of these deeds in the *635office of the Knox County Register of Deeds on March 21, 1983, provided “notice to all the world” that Crabtree Holding Company, Inc. acquired the interest of David A. Crabtree on January 3, 1983.6 The April 4, 1983 quitclaim deed from the debtor to Brenda Crabtree was ineffective to convey any interest of David A. Crab-tree in the Ridgeland Subdivision lots. The debtor had no interest to convey, his entire interest having been transferred to Crab-tree Holding Company, Inc. on January 3, 1983.
The issue thus confronting the court is whether the January 3, 1983 deeds should be rescinded as to the interest conveyed by the defendant or, alternatively, whether a constructive trust should be imposed upon the interest of Brenda Crabtree in Lot 23 and the 4.89-acre lot. In either event, the defendant can assert no greater than a one-half undivided interest in each lot as a tenant in common with Crabtree Holding Company, Inc.
Ill
The record undisputedly supports Brenda Crabtree’s contention that she did not knowingly execute the two January 3, 1983 warranty deeds; that she did not receive any of the consideration, if any was given, associated with the transfer of the two Ridgeland Subdivision lots to plaintiff; and that she did not appear before the notary public who acknowledged her signatures. There is no proof to the contrary.
Mrs. Crabtree testified that in 1978 she and the debtor offerred the two lots for sale at a combined price of $44,000.00 and that in her opinion the lots had a market value of $55,000.00 — $60,000.00 in January, 1983. Stipulated appraisals of Hop Bailey, Jr., a real estate appraiser, reflect the value of Lot 23 on March 15, 1985, at $10,-000.00 and the value of the 4.89-acre lot on April 16, 1985, at $24,500.00. Craig testified he has an offer to sell the 4.89-acre lot for the sum of $18,375.00. Although Mrs. Crabtree’s assessment of the value of the two lots appears excessive, it is clear these lots are of considerable value today and were of considerable value in January, 1983. There is no proof that either lot is encumbered.
“It is well established that a constructive trust is an appropriate remedy to redress breach of a fiduciary or confidential relationship.” Chisholm v. Western Reserves Oil Co., 655 F.2d 94, 96-97 (6th Cir.1981) (footnote omitted). As is noted by Bankruptcy Judge Paine, acting as Standing Master, in In re Anderson:
Under both federal and Tennessee law, a court may create a constructive trust on behalf of a party if the court determines that “property has been acquired in such circumstances that the holder of the legal title may not in good conscience retain the beneficial interest.” _ As District Court Judge Neese recently observed, constructive trusts are “ ‘judge-created’ trusts which enable a court, without violating all rules of logic, to reach an interest in property belonging to one person yet titled in and held by another.” Gregory v. Binkley, Civil Action No. 3-82-0036, slip op. at 4 (M.D. Tenn. Jan. 27, 1983).
McAllester v. Aldridge (In re Anderson), 30 B.R. 995, 1013 (M.D.Tenn.1983) (citations omitted).
*636Gibson’s Suits In Chancery defines constructive trusts under Tennessee law in the following terms:
Constructive trusts are so called because they are constructed by Courts of Equity in order to satisfy the demands of justice, without reference to any presumable intention of the parties. They include cases: (1) where a person procures the legal title to property in violation of some duty, express or implied, to the true owner; or (2) where title to property is obtained by fraud, duress, or other inequitable means; or (3) where a person makes use of some relation of influence or confidence to obtain the legal title upon more advantageous terms than could otherwise have been obtained; or, (4) where a person acquires property with notice that another is entitled to its benefits. In all such cases, Equity, for the purpose of doing justice in the most efficient manner, constructs a trust out of the transaction, and makes a trustee of the person thus acquiring the title.
Gibson’s Suits In Chancery, § 383, at 361 (6th ed. 1982) (footnotes omitted).
Under the circumstances of the instant proceeding, it would be manifestly unjust for this court to deprive defendant of her interest in the two Ridgeland Subdivision lots. Crabtree Holding Company, Inc. obtained defendant’s interest in these two lots by “inequitable means.” From time to time the debtor presented documents to the defendant and told her to sign them because it was in her best interest. This is apparently what happened in this instance. Mrs. Crabtree was wrongly deprived of her interest in this property and the court cannot justify the perpetuation of this wrong. See Hinton v. Robinson, 61 Tenn.App. 1, 364 S.W.2d 97 (Ct.App.1962) (failure to recall execution does not in and of itself invalidate deed if the deed was grantor’s free act, knowingly and voluntarily made).
Sitting as a court of equity, this court is compelled to impress a constructive trust on an undivided one-half interest in Lot 23 and the 4.89-acre lot for the benefit of defendant. The court thus finds that Crab-tree Holding Company, Inc. holds a one-half undivided interest in Lot 23 and the 4.89-acre Ridgeland Subdivision lots in constructive trust for the benefit of defendant. Plaintiff will be required to execute an appropriate warranty deed conveying defendant’s one-half undivided interest in these two lots to Brenda B. Crabtree. The April 4, 1983 quitclaim deed to both lots from David A. Crabtree to Brenda B. Crab-tree recorded in book 1737, page 339 of the Knox County Register’s Office, is of no force and effect and shall be cancelled.
This memorandum constitutes findings of fact and conclusions of law. Fed.R. Bankr.P. 7052.
. D. Broward Craig, Trustee for the estate of David A. Crabtree (Craig), was the original plaintiff in this proceeding. Conceding subsequent to trial that Crabtree Holding Company, Inc. and David A. Crabtree are two distinct entities, the parties presented the court with an agreed order substituting Crabtree Holding Company, Inc. as plaintiff. This order was entered March 31, 1987, nunc pro tunc for September 5, 1985. The court notes that on July 14, 1983, Crabtree Holding Company, Inc. amended its charter changing its name to Dallas Investments, Inc. This amendment was filed in the office of the Tennessee Secretary of State on July 15, 1983. It thus appears that the proper party in interest is Dallas Investments, Inc. As matters in dispute relate to transfers to Crabtree Holding Company, Inc., the court will not concern itself with this corporate name change.
.Crabtree Holding Company, Inc./Dallas Investments, Inc. is a corporation whose common stock, as an asset of the Crabtree estate, is controlled by Craig. The complaint asserts that the two lots in dispute are assets of the debtor’s estate. The lots are titled to Crabtree Holding Company, Inc. and any benefit realized by the estate will be in the value of the common stock. Conforming plaintiffs pleadings to the evidence, the court deems the complaint amended to request relief on behalf of Crabtree Holding Company, Inc. and not the debtor’s estate. Fed. R.Bankr.P. 7015.
. Plaintiff also originally sought injunctive relief to preserve a sale and damages. The request for an injunction was withdrawn on September 16, 1985; the claim for damages was dismissed during the trial.
. While the circumstances surrounding defendant’s execution of these deeds are in dispute, the signature on each deed purporting to be that of Brenda B. Crabtree is undisputedly the defendant’s. The date the deeds were executed may or may not have been January 3, 1983.
. Neither the March 25, 1983 "Child Custody, Child Support and Property Settlement Agreement” executed by the debtor and Brenda Crab-tree nor the May 20, 1983 Final Decree of divorce entered in the Knox County Chancery Court makes any reference to the two Ridgeland Subdivision lots.
. Tenn.Code Ann. § 66-24-101 (Supp.1986) entitled “Writings eligible for registration,” enacts in material part:
(a) The following writings may be registered:
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(4) All deeds for absolute conveyance of any lands, tenements or hereditaments, or any estate therein;
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Tenn.Code Ann. § 66-26-101 (1982) enacts that all the instruments mentioned in § 66-24-101 “shall have effect between the parties to the same, and their heirs and representatives, without registration; but as to other persons, not having actual notice of them, only from the noting thereof for registration on the books of the register, unless otherwise expressly provided.”
Tenn.Code Ann. § 66-26-102 (1982) entitled "Notice to all the world" provides that: "All of said instruments [mentioned in § 66-24-101] so registered shall be notice to all the world from the time they are noted for registration, as prescribed in § 8-13-108; and shall take effect from said time." (Emphasis added.) | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490565/ | ORDER ON MOTION TO DISMISS
LEWIS M. KILLIAN, Jr., Bankruptcy Judge.
THIS CAUSE was heard on the Motion to Dismiss Petition for Relief Under Chapter 13 filed by Walter T. Parker, Jr., the holder of a mortgage on a parcel of real property owned by the debtor and her husband. The Court, having considered the motion, the pleadings filed in this case and having heard argument of counsel, makes the following findings of fact and conclusions of law.
The debtor filed this Chapter 13 case on March 31, 1987, the same day that a foreclosure sale of the property subject to the mortgage in favor of Mr. Parker was scheduled to be held. The filing of the petition for relief stayed the sale. 11 U.S. C. § 362(a). The debtor did not file her Chapter 13 plan with the petition and on April 27, 1987, this Court ordered the debt- or to show cause why the case should not be dismissed for failure to file a plan within the time prescribed by Bankruptcy Rule 3015. The debtor’s plan was thereafter filed on May 4, 1987. This motion to dismiss was filed on May 22, 1987.
The plan submitted by the debtor proposes nothing more than to attempt to sell the property which was to be sold pursuant to the judgment of foreclosure and to pay Mr. Parker in full from the proceeds of the sale. There are no unsecured debts listed in the schedules and the debtor proposes to leave the other secured creditors unaffected. The plan does not provide for any payments from future earnings and it does *309not provide for any payments to Mr. Parker prior to the sale of the property.
The plan submitted by the debtor does not comply with the provisions of § 1322 of the Bankruptcy Code and thus, would not be confirmed by this Court. It makes no provision for the submission of future earnings or income to the supervision of the trustee. § 1322(a)(1). It is clear that the sole purpose of the plan is to delay and frustrate the efforts of a single secured creditor in the enforcement of his lien rights. There is no provision for making current payments on the debt during the pendency of the case. § 1322(b)(5).
Plans which have as their sole purpose the forstalling of mortgage foreclosures on the debtors residential real property have been held to have been filed in bad faith and not confirmable. Matter of Stein, 36 B.R. 521, (Bkrtcy.M.D.FL 1983); Matter of Gates, 42 B.R. 4 (Bkrtcy.M.D.GA 1983). This Court sees no valid reason for a different rule for non-residential real property. Not all Chapter 13 plans which deal primarily with the adjustment of one or more secured debts should be considered as having been filed in bad faith. However, under the facts of this case, the Court finds that there is no legitimate purpose for the Chapter 13 other than merely to delay a single secured creditor and to make him wait for a sale to be consummated before he receives anything. Accordingly, it is
ORDERED AND ADJUDGED that the motion to dismiss be, and it is hereby granted and this Chapter 13 case be, and it is hereby dismissed. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490566/ | MEMORANDUM OPINION AND ORDER ON CREDITOR’S MOTION TO LIFT STAY
LEWIS M. KILLIAN, Jr., Bankruptcy Judge.
THIS MATTER came on to be heard upon the motion of Craig Hall and Hall & Hall, P.A. (Hall) for relief from the automatic stay of Section 362 of the Bankruptcy Code. Hall seeks relief in order to commence state court litigation against the debtor Kaufman. Hall alleges that on January 13, 1983, Betty Boyette, as guardian for her son, Jonathan R. Boyette, entered into an employment contract with the law firm of the debtor Mark Jay Kaufman, P.A. The Kaufman firm was to represent the Boyettes in a personal injury action. The employment contract provided that the client agreed that associate counsel could be employed at the discretion and expense of the firm. Pursuant to this agreement, the Kaufman firm employed the movant Craig E. Hall of Hall & Hall, P.A. to assist it in handling the Boyette case. Hall represented the interests of Boyette from approximately January 20, 1983, until February 15, 1984, and was to participate in the division of any contingency fee realized under the contractual arrangement based upon a percentage of any recovery made. Hall alleges that sometime between October 1, 1983, and February 15, 1984, Kaufman sought to have Boyette discharge Hall from further representation. He asserts that these actions by the debtor constituted the intentional interference with an advantageous business contractual relationship that Hall had established with Boyette which resulted in Kaufman’s liability to Hall for both compensatory and punitive damages. Hall has previously filed an un-liquidated claim in this Chapter 11 estate for the attorney fees that allegedly would have been earned by him but for such tortious interference by the debtor. The debtor has filed an objection to this claim. Hall’s motion to lift stay seeks authority to liquidate this claim in state court before a jury. Upon this record, argument, and memoranda of counsel, the Court makes the following findings of fact and conclusions of law.
The threshold issue presented to this Court is whether the automatic stay of § 362 is applicable. Hall contends that although the business/contractual relationship was entered into pre-petition, and the purported tortious interference occurred pre-petition, actual damages did not accrue giving rise to the cause of action until post-petition. He asserts that § 362 is therefore inapplicable to this post-petition claim. Yet, § 101(4) defines claim as including contingent, unliquidated rights to payment. All acts giving rise to Hall’s claim occurred pre-petition even though specific damages may not have been ascertainable until post-petition. Upon these purported facts this Court concludes that the instant claim is pre-petition and state court proceedings thereon are thus subject to the automatic stay of § 362. See, In re Peltz, 55 B.R. 336 (Bkrtcy.M.D.FL 1985).
The Court must now determine whether to grant Hall relief from stay to pursue the claim liquidation in a state court jury trial seeking both compensatory and punitive damages. The debtor Kaufman vigorously opposes Hall’s motion on several grounds. Kaufman asserts that Hall subjected himself to the jurisdiction of this Court by filing a proof of claim; that the proof of claim and objection thereto constitute a *311contested matter over which this Court has complete jurisdiction; that, as this matter involves the allowance or disallowance of a claim, it is a core proceeding upon which the Bankruptcy Court can enter a final order; that this Court is statutorily authorized to rule on these matters and should exercise its jurisdiction regardless of whether the creditor may file a lawsuit in state court for tortious interference; and that although a matter may involve issues of state law, that does not deprive this Court of its power to hear and resolve such disputes.
Hall argues that the tortious interference suit which he desires to file in state court is a “non-core” or “related” proceeding. As such, he contends that this Court has no jurisdiction to issue a final order. He asserts that the filing of his proof of claim was a procedural necessity which can not convert this matter from non-core to core. Hall further re-asserts his constitutional right to a jury trial in state court.
This Court deems the parties’ emphasis on the characterization of this matter as core or non-core of little moment in the context of this case. This Court has the “jurisdiction”, “authority”, and “power” to hear proceedings as to allowance or disallowance of all claims. Title 28 U.S.C. § 157(a). The Court has discretion to exercise this power or not. (See, In re Continental Airlines Corp., 64 B.R. 865 (Bkrtcy.S.D.TX 1986)).
Further, as to whether a jury trial of this issue is permissible, this Court recognizes the cases holding that regardless of the characterization of a proceeding as core or non-core, this Court is not prohibited from conducting a jury trial of its own, a solution which Hall would find agreeable. In In re Morse Electric Company, Inc., 47 B.R. 234, 12 B.C.D. 957 (Bkrtcy.N.D.IN 1985), the Court quoted bankruptcy commentator Stanley Bernstein:
... As it now stands, § 1411 is merely declaratory of the right to jury trial or (sic) a limited class of contingent tort claims.... Those claims can only be tried before the district court. One could draw the inference that the Seventh Amendment applied to all legal issues regarding money damages, and that a bankruptcy judge has the implied power to conduct jury trials in all instances except the expressly excluded limited class of contingent tort claims.
(See, also In re Leird Church Furniture Mfg. Co., 61 B.R. 444, 14 B.C.D. 571 (E.D.AK 1986)); In re Smith-Douglas, 43 B.R. 616 (Bkrtcy.E.D.NC 1984), and In re Gibbons Construction, Inc., 46 B.R. 193, 12 B.C.D. 463 (D.C.KY 1984).
Yet in view of the Amendments to the Bankruptcy Rules, prescribed by the U.S. Supreme Court pursuant to 28 U.S.C. § 2075, (effective August 1, 1987), this Court does not concur with the above cases. The Amendments to the Bankruptcy Rules have abrogated Rule 9015. The Committee Note thereto states:
Former section 1480 of title 28 preserved a right to trial by jury in any case or proceeding under title 11 in which jury trial was provided by statute. Rule 9015 provided the procedure for jury trials in bankruptcy courts. Section 1480 was repealed. Section 1411 added by the 1984 amendments affords a jury trial only for personal injury or wrongful death claims, which 28 U.S.C. § 157(b)(5) requires be tried in the district court. Nevertheless, Rule 9015 has been cited as conferring a right to jury trial in other matters before bankruptcy judges. In light of the clear mandate of 28 U.S.C. § 2075 that the “rules shall not abridge, enlarge, or modify any substantive right,” Rule 9015 is abrogated. In the event the courts of appeals or the Supreme Court define a right to jury trial in any bankruptcy matters, a local rule in substantially the form of Rule 9015 can be adopted pending amendment of these rules.
In light of this Court’s aforestated determination that it has jurisdiction of this matter but that it has no authority to conduct a jury trial, the issue presented is whether Hall has shown “cause” pursuant to § 362(d)(1) for the Court to relinquish its jurisdiction and allow this claim to be liquidated in state court before a jury.
*312This Court does not deem this matter to be equitable in nature. The cause of action asserted by the creditor is for alleged tor-tious interference with business relations, a tort. The relief sought is a money judgment which is an action at law. The creditor is entitled to a jury trial in order to liquidate his claim. These facts are deemed sufficient to establish cause for this Court to relinquish its jurisdiction and allow the creditor relief from the automatic stay of § 362. It is accordingly
ORDERED AND ADJUDGED that the motion of Hall for relief from stay be, and it hereby is, granted and the parties are hereby authorized to liquidate the subject claim in a state court tribunal. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490569/ | MEMORANDUM OPINION
MARY DAVIES SCOTT, Bankruptcy Judge.
Now before the court is a Motion to Reopen Case and To Declare Debt owed to Henry and Bemiece Johnson and not listed on the debtors’ petition discharged. The debtors contend in their Motion the debt was inadvertently omitted from their original 1984 petition. The matter came on for hearing October 5, 1987. Separate debtor Sam Woodruff, appeared personally and by counsel, Geoffrey B. Treece, Esq. A Response to this Motion was filed by Henry and Berniece Johnson. They appeared personally and by counsel, Clifford Cole, Esq.
After hearing statements of counsel and testimony the Court concludes that the Motion should be denied. The debtor, Sam Woodruff, testified that he and the John-sons conspired to omit the Johnson debt from his bankruptcy petition filed in February of 1984. Testimony by both this debtor and Mr. Johnson revealed that they entered into a “gentlemen’s agreement” that the debt would not be listed on the bankruptcy petition and the debtor would “eventually” pay the debt to Johnson when he could afford to pay. The Johnsons both testified they did not want their debt listed on the debtors’ 1984 petition and the debtor agreed. The debtors, some Zlk years later, now seek to reopen this case to list the Johnson debt and have it discharged. The Johnsons in response to this motion attempt to raise certain assertions that the debt owed to them by the debtor should be determined to be non-dischargeable under some illusory theory of an oral reaffirmation agreement.
The Court is incredulous that the parties come before it seeking relief and resolution of a dispute over an illegal agreement. This Court will have nothing further to do with the dispute and summarily denies the Motion to reopen the case to declare the debt discharged.
The Court is shocked by the testimony presented by the parties. The debtor has essentially committed a blatant fraud on the Court and has testified to the commission of a bankruptcy crime. 18 U.S.C. § 152. The debtor perjured himself and gave a false oath when he submitted his 1984 bankruptcy petition schedules. Thereon he signed a statement, under oath, that the information contained in the schedules was true and correct.
“The bankruptcy court must be jealous of the Bankruptcy Code’s requirements that debtors file their petitions honestly and in good faith. In fact, Official Bankruptcy Form No. 6 requires the debtor to sign a statement in conformity with 28 U.S.C. § 1746, under penalty of perjury, which provides that the debtor’s statement of assets and liabilities is true and correct to the best of the debtor’s knowledge. In fact, criminal sanctions exist for knowingly and fraudulently making a false oath under Title 11.” In Re Godley, 62 B.R. 258, 262 (Bkrtcy. E.D.Va. 1986).
The Court is obligated under this same title of the U.S. Code and required by law to report to the appropriate U.S. Attorney all *556the facts and circumstances of the case, the names of the witnesses and the offense or offenses believed to have been committed. 18 U.S.C. § 3057(a).
The Court, at the hearing in this matter, may have left the incorrect impression with the parties that it also ruled on the issues raised by the respondents. Rather, the Court declined to consider any other matters before it. If the Court left the impression that it ruled on matters raised in the respondents’ pleadings, then the Court hastens to correct any misimpression. This written opinion will constitute the Court’s final decision.
Accordingly, for the foregoing reasons, it is hereby
ORDERED that the debtors’ Motion to Reopen to Declare a Debt Discharged be and hereby is denied. It is further
ORDERED that the Clerk of the Bankruptcy Court is directed to order a transcript of the proceeding held in this matter on October 5, 1987 and upon receipt of the certified transcript transmit same along with a copy of this Decision and Order as well as all papers contained in the debtors’ file to the U.S. Attorney for the Eastern District of Arkansas.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490570/ | ORDER DENYING MOTION FOR NEW TRIAL
A. POPE GORDON, Bankruptcy Judge.
The trustee filed a timely motion for a new trial in this adversary proceeding. The motion was heard August 18, 1987. Upon consideration of the motion and the arguments and representations of counsel, the court concludes that the judgment of the court should stand except as it may be affected by this order. The decision in this adversary proceeding is augmented in support of this conclusion.
At the hearing the trustee submitted the case of Matter of Alberto, 66 B.R. 132 (Bankr.D.N.J.1985) for consideration in support of his position. Alberto, unlike this case, involved a ship which was property of the estate. The Alberto court held, quite correctly, that the Ship Mortgage Act controls perfection of a ship mortgage against creditors of a mortgagor. The mortgagor in that case was the debtor in bankruptcy, the debtor was in possession of the ship, and the trustee was asserting the rights of creditors against the holder of a mortgage that had not been perfected under the Ship Mortgage Act.
In Alberto the court was concerned with the application of 46 U.S.C. app. § 1012 (1987) and whether the trustee had actual notice of the unrecorded ship mortgage or could be charged with notice. Section 1012 provides in effect that an unrecorded mortgage is valid only against the mortgagor and persons with actual notice of the mortgage.1
Therefore, any knowledge of the mortgage assignment creditors of the mortgagor had at the commencement of the 90-day preference period renders the assignment valid against the trustee and creditors under section 1012. The possession of the chattel papers by the Bank and the lack of possession by the debtor obligates a prospective creditor or transferee to inquire into the Bank’s interest and thereby the creditors and the trustee, as a representative of the creditors, is charged with notice of the mortgage assignment. Thus the Bank is removed from the recording requirements of 46 U.S.C. app. § 1012 (1987).
*612This case does not involve a ship as property of the estate. The property of the estate here is a ship mortgage and mortgage note (chattel paper) in possession of a creditor, the Bank, representing a debt which has been assigned to the creditor as security. The trustee cannot successfully attack the security interest of the Bank because, as held, the transfer of the security interest in the chattel papers was perfected by the Bank outside the 90-day preference period by possession without filing, as permitted by Ala. Code § 7-9-305 (1975). If for some reason the mortgagee never does perfect the ship mortgage lien under the Ship Mortgage Act, the debt owed by the mortgagor to the mortgagee (or assign-ee holding a security interest in the mortgage note) is, nevertheless, an asset on which the assignee of the security interest may rely. Lack of perfection of the mortgage or the assignment may render the ship mortgage vulnerable to creditors or transferees of the mortgagor or mortgagee or may prevent maritime foreclosure (leaving the mortgage note unsecured until the mortgage or assignment is perfected), but the debt remains an obligation of the mortgagor even though unsecured. If the debt is paid, as here, foreclosure of the mortgage obviously becomes unnecessary. Lack of perfection of an assignment of the mortgage, even if that were necessary under section 1012, should not confer a greater right on creditors of the mortgagee than they have to intercept .mortgage payments due to the mortgagee.
Contrary to the argument of the trustee, U.C.C. § 9-302(l)(a) does not require the filing of a financing statement if the collateral is in possession of a secured party. Nor is the holding in this case disharmonious with U.C.C. § 9-302(2).2 Comment 7 of the Official Comments to section 9-302 explains that if the assignment from the seller (in this case, Little, who is also the debtor and mortgagee) to the Bank was intended for security, the Bank must take whatever steps are required for perfection to have protection from the seller’s transferees and creditors. One of the steps which may be taken for such perfection and which is permitted by U.C.C. § 9-305, is continuous possession of the mortgage and mortgage note (chattel paper) by the secured party.
The trustee questions the accuracy of the finding that the Bank had the required continuous possession of the mortgage note. Evidence of such possession is found in the assignment of the mortgage, which instrument recites delivery of the mortgage and note to the Bank. There is no evidence before the court to show lack of delivery or lack of such possession during the critical period beginning the first day of the 90-day preference period and continuing until recording of the mortgage assignment (November 22 to December 5, 1985). The trustee, however, will be permitted to supplement the record with any evidence showing lack of continuous possession. Such a showing would likely change the result of this decision.
The holding in this case is limited to resolution of the single issue of whether there is a voidable preferential transfer of property of the estate. The trustee is not precluded from filing a proceeding to require the Bank to turn over collateral held by the Bank to the extent that the Bank may be oversecured.
Judgment should not be set aside except for substantial reason. Wright and Miller, Federal Practice and Procedures, § 2804 (1973). No substantial reason is made to appear by the trustee. Accordingly, it is
ORDERED that—
1. The motion of the trustee is DENIED except as provided in paragraph 2.
2. Within 30 days from the date of this order, the trustee may supplement the record with respect to possession of the *613chattel paper securing the Bank loan to the debtor. The record may be supplemented, with the consent of the Bank, by affidavit; or upon request of the trustee made within such time, the court will reopen the adversary proceeding for the purpose of taking testimony with respect to such possession. Absent a timely request or supplement to the record, this order shall become final.
. Under 11 U.S.C. § 544, the trustee is a hypothetical judicial lien creditor and a creditor with a writ of execution against property of the debt- or without regard to any knowledge of the trustee or of any creditor. Section 544 is not available to the trustee here, because the use of that section is tied to the status of the security interest on the day the case was filed. The Bank’s lien had been perfected by the date of commencement of the case.
A further reason the trustee could not prevail under section 544 is found in Ala.Code § 6-9-210 (1975), which provides that a judgment is a lien only on property subject to execution, and section 6-9-40(2) which provides that execution may not be levied on choses in action such as a debt represented by a mortgage and mortgage note. See White v. Gibson, 221 Ala. 279, 128 So. 784 (1930).
. U.C.C. § 9-302(2) reads:
If a secured party assigns a perfected security interest, no filing under this article is required in order to continue the perfected status of the security interest against creditors of and transferees from the original debtor.
The ship mortgage was perfected by recording on October 10, 1985. Thus, the mortgage when assigned to the Bank continued to enjoy a perfected status and, as such, protected the Bank (and the debtor) from creditors and transferees of the purchaser of the ship. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8490573/ | DECISION AND ORDER DENYING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT
ARTHUR N. VOTOLATO, Jr., Bankruptcy Judge.*
Heard on May 27 and 28, 1987, on the plaintiff’s motion for summary judgment against the debtor in the above captioned complaint to determine dischargeability.
The pertinent facts are as follows: Plaintiff Hopkins, and Kishel (the debtor), established a partnership (GYROART) in April 1980, 'for the purpose of developing a gyroscopic navigation device for use in aircraft by the United States military. Subsequently, the partners had a falling out, with Hopkins contending that Kishel froze him out of the partnership and converted the partnership assets to his (Kishel’s) own use. As a result, Hopkins filed suit in the California Superior Court alleging, inter alia, fraud, conversion of partnership assets, and breach of fiduciary duty. After a jury trial held on January 14, 15, and 16, 1986, the jury found for Hopkins and assessed $95,000 in general damages, and $200,000 in punitive damages against Kish-el. Judgment was entered on the verdict on May 29, 1986, and the debtor filed his Chapter 7 petition on June 2, 1986.
Plaintiff’s motion for summary judgment originally was based on the record in the state court proceedings, and debtor’s March 1987 deposition. Because of the nature of the state court litigation, Hopkins argues that Kishel is collaterally estopped from relitigating issues, including the fiduciary relationship created by the partnership, which were decided against him in state court. At the instant hearing, plaintiff amended his motion to the effect that he was entitled to summary judgment based on the joint pre-trial order signed by Judge Barr on April 16, 1987. Plaintiff contends that in the April 16 pre-trial order, debtor has admitted sufficient facts to support a conclusion that the debt is non-dischargeable, as a matter of law.
Fed.R.Civ.P. 56(c), made applicable to this adversary proceeding by Bankruptcy Rule 7056, allows us to grant a motion for summary judgment if “there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.” The motion can be based on admissions made in a pre-trial order. See L & E Co. v. U.S.A., 351 F.2d 880, 882 (9th Cir.1965).
The pre-trial order in question consists of sixty-two numbered paragraphs, and deals with the relationship between Kishel and Hopkins, vis-a-vis GYROART. The key point of that relationship involves the question what, if any, fiduciary relationship existed between them. Plaintiff argues that based on the admitted facts, Kishel was his partner, was therefore a fiduciary under California law, and that Kishel breached his fiduciary duty to his partner (Hopkins). Kishel disputes that he was a fiduciary.
The original pre-trial order was prepared by plaintiff’s counsel, in accordance with Local Rule 905. At the pretrial conference before Judge Barr on April 16, 1987, the debtor apparently argued against the inclusion of certain language in the proposed order, with the result that changes were made in paragraphs five and thirteen, and initialed by Judge Barr. As to paragraphs forty-two, forty-four, and forty-seven, Judge Barr marked those items as “disputed” and initialed them also. We feel that the most important part of the order, at least for determining the existence of a fiduciary relationship, is paragraph five which states:
[The state trial court found] Plaintiff and Defendant were, equal partners and co-owners of GYROART from April 17, 1980 until October 1, 1983.
The bracketed portion of paragraph five was added at the April 16 pre-trial conference. The additional wording changed what previously was an unequivocal admis*1012sion of a partnership (and thus one involving a fiduciary relationship), into a statement of what the state court had found. The language change in paragraph thirteen and the matters contained within paragraphs forty-two, forty-four, and forty-seven, marked “disputed” by Judge Barr, indicate that the debtor was disputing the alleged status of Hopkins and Kishel as partners. Still other admissions in the order suggest that a fiduciary relationship actually existed, and that said duty was breached by the debtor. The effect of what is admitted, versus what is disputed, is to render the order not susceptible to summary judgment treatment, in that it contains conflicting language as to issues of material facts. For the purpose of ruling on a motion for summary judgment based on this pre-trial order, there is no way we can say that the agreed facts are “so one-sided that [the plaintiff] must prevail as a matter of law.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 2512, 91 L.Ed.2d 202 (1986).
For the foregoing reasons, and based on the pre-trial order dated April 16, 1987, as amended, the plaintiffs motion for summary judgment is denied.
Of the District of Rhode Island, sitting by designation. | 01-04-2023 | 11-22-2022 |
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