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https://www.courtlistener.com/api/rest/v3/opinions/8491013/ | ORDER
GEORGE B. NIELSEN, Jr., Bankruptcy Judge.
The debtor, pursuant to §§ 144 and 455(b)(1) of the Judicial Code, seeks my recusal from his case due to bias and prejudice. See 28 U.S.C. §§ 144, 455(b)(1). Before discussing his concerns, it is important to establish the scope of the inquiry required.
I
Both statutes require recusal only if the perceived bias and prejudice stem from an extra-judicial source, not from conduct or rulings made in the case itself. Toth v. Trans World Airlines, 862 F.2d 1381, 1388 (9th Cir.1988); Hasbrouck v. Texaco, 830 F.2d 1513, 1524 (9th Cir.1987); United States v. Sibla, 624 F.2d 864, 869 (9th Cir.1980). A party cannot attack the judge’s impartiality on the basis of information or belief acquired by the court while acting in its judicial capacity. Noli v. C.I.R., 860 F.2d 1521, 1527 (9th Cir.1988), citing United States v. Frias-Ramirez, 670 F.2d 849, 853 n. 6 (9th Cir.), cert. denied, 459 U.S. 842, 103 S.Ct. 94, 74 L.Ed.2d 86 (1982).
*252Bias or prejudice is disqualifying only if it is an attitude, a fair-minded person could not set aside while judging a case. An animus more active and deep-rooted than mere disapproval is required. Matter of Yagman, 796 F.2d 1165, 1182 (9th Cir.1986); United States v. Conforte, 624 F.2d 869, 881 (9th Cir.), cert. denied, 449 U.S. 1012, 101 S.Ct. 568, 66 L.Ed.2d 470 (1980).
Although the substantive test is identical for both statutes, their procedural requirements are different. Under § 144, the challenged judge reviews the affidavit for legal sufficiency and timeliness, but not for truth. If the court finds the motion both timely and sufficient on its face, the matter is transferred to another court for hearing on the merits. See Arizona Past & Future Foundation v. Lewis, 722 F.2d 1423, 1430 (9th Cir.1983).
Thus, it is not error for the challenged judge to review the affidavit’s legal sufficiency. Moreover, since the inquiry is addressed to sufficiency, not truth, no hearing is required. Toth, supra, 862 F.2d at 1388; United States v. Azhocar, 581 F.2d 735, 738 (9th Cir.1978), cert. denied, 440 U.S. 907, 99 S.Ct. 1213, 59 L.Ed.2d 454 (1979).
By contrast, § 455 is self-enforcing; there is no provision for review by another judge. Upon reflection, if the sitting judge is aware of recusal grounds, the court is required to withdraw. If not, recusal is denied. See generally United States v. Sibla, supra, 624 F.2d at 867-68.
Under § 144, either a timely motion must be filed or good cause shown for the failure to timely move. Palila v. Hawaii Department of Land & Natural Resources, 852 F.2d 1106, 1110 n. 7 (9th Cir. 1988); United States v. Branco, 798 F.2d 1302, 1304 (9th Cir.1986). It is unclear in this Circuit whether a § 455 claim must be timely. Palila, 852 F.2d at 1110, n. 7, citing cases.
II
It is first appropriate to review debtor’s complaints under the procedures of § 455. Upon reflection, I hold no bias or prejudice toward debtor, nor am I aware of any basis upon which my impartiality in this case could reasonably be questioned.
Ill
Next, it is necessary to examine debtor’s affidavit for legal sufficiency and timeliness.
A
Movant first alleged the Court permitted Attorney Nussbaum to be a witness in this case on May 24, 1984 and February 26, 1985, in violation of the Professional Disciplinary Rules. Affidavit at 1-2.
An evidentiary hearing was conducted on May 24, 1984, on the request of secured creditor Magna Mortgage Corporation for relief from the automatic stay. See Contested Matter File A at Docket A-30a. Creditor’s Attorney Nussbaum was allowed to testify as a witness, against the overruled objections of debtor’s Attorney Wort-man. The subject or extent of this testimony is reflected neither in the minute entry nor in debtor’s recusal motion. Supra. Nor did debtor obtain a transcript. After receipt of other testimony and witnesses, the hearing was continued.
Ultimately, the creditor’s success in Contested Matter A was appealed by debtor to the Bankruptcy Appellate Panel as BAP No. 86-1280. That Court dismissed debt- or’s appeal for failure to prosecute on March 5, 1987.
The record further reflects an evidentia-ry hearing was- conducted on February 26, 1985, on the request of secured creditor J. David Land, et al., for relief from the automatic stay. See Contested Matter B at Docket B-35. There is no indication creditor’s Attorney Nussbaum testified. If he did, the subject or extent of his testimony is reflected neither in the minutes nor in debtor’s recusal motion. Again, debtor did not order a transcript.
Ultimately, the creditor’s motion in Contested Matter B was dismissed on October 23, 1987. Docket B-52.
*253I conclude that the evidentiary rulings I made in two matters before me, one of which was unsuccessfully appealed by debtor and the other in which the adverse party was unsuccessful at the trial level, do not, on their face, establish bias and prejudice against debtor.
B
Second, debtor alleges the Court allowed former counsel to represent debtor without compliance with the disclosure requirements of 11 U.S.C. § 329 and Rule 2014, F.Br.R. Debtor further alleges non-service upon him of his counsel’s fee applications of October 23, 1984, January 10, 1985 and September 17, 1986, in the absence of written agreement between himself and counsel. Movant also complains the Court barred him from representing himself on February 11, 1985, in regard to certain issues, including his counsel’s fee application. Affidavit at 2-3.
A fee application of debtor’s counsel filed September 17, 1986, is located at Administrative Docket 146. A fee application of October 23, 1984, is filed in the Contested Matter A file at Docket A-66 and and supplemented on January 30, 1985 at Docket A-86.
As the contested matter applications make clear, the attorney’s fee was sought against creditor Magna Mortgage, not debtor, based on alleged violations of Federal Truth in Lending Laws (“TILA”). 15 U.S.C. § 1640(a)(3). See Docket A-86 at 3. Accordingly, the creditor, not debtor, objected to them on November 2, 1984. Docket A-72. See also Dockets A-74 (response of debtor’s counsel) and A-76 (objector’s reply). Following a February 12, 1985 decision finding creditor violations of TILA, the Court imposed an attorney’s fee award of $13,104 and costs of $275.90 against creditor James D. Land, successor in interest to Magna Mortgage, on March 5, 1985. Docket A-91 at 6.
As to the September 17, 1986 fee application, debtor’s counsel was admonished at a December 5, 1986 hearing that no fees could be paid without the Trustee’s certification there were sufficient estate monies to pay all administrative claims equally. Docket 152. It appears no such certification has been made and counsel is awaiting a hearing on the Trustee’s proposed distribution, to which debtor has objected. Dockets 160-62.
If counsel failed to notice debtor of his fee application as required, that is unfortunate, but hardly evidence the Court is prejudiced against debtor. In point of fact, debtor is now aware of the applications and free to object to them. However, to the extent counsel’s administrative fee application is decreased, the excess monies flow to creditors, not debtor. 11 U.S.C. § 507(a)(1), (2).
Likewise, assuming arguendo counsel has violated disclosure requirements in his transactions with debtor, interim fee approval can be reconsidered while the case remains open. In re Callister, 673 F.2d 305, 306-07 (10th Cir.1982). As previously noted, any recovery of fees would go to the creditors, not debtor.
For purposes of § 144 review, I do not consider the truth of the allegations, merely their legal sufficiency. Regardless, it is troubling to receive debtor’s allegations in an August 23, 1989 recusal motion of non-receipt of fee applications when debtor acknowledged receipt in Open Court on April 25, 1985 of the January 30, 1985 application. See Transcript of April 25, 1985 at 4, Docket 54; see also Docket A-111.
The record reflects an expedited hearing on February 11, 1985 concerned a discovery dispute in Contested Matter B, not a fee application. Docket B-28. Debtor was represented by his chosen counsel. Supra. There is no indication he sought to represent himself at that hearing. Assuming he did, denial of that request does not, on its face, appear prejudicial against debt- or. Further, as previously noted, the creditor’s request in Contested Matter B was ultimately denied.
In summary, any deficiencies in the attorney fee application process for interim awards are hardly prejudicial as the court can reconsider any awards until the case is closed. The record reflects the Jan*254uary 30, 1985 fee application was discussed with Mr. Jansen in Open Court on April 25, 1985. See Docket A-111. During the same time period, debtor was mounting an appeal in Contested Matter A. Docket A-95. On June 5, 1985, he filed his designation of record and issues on appeal, which presumably required him to review the record. Docket A-115. None of the alleged irregularities with the interim fee applications were listed by debtor. On March 28, 1986, debtor filed a designation of record for a separate appeal, again presumably requiring him to review the record. Administrative Docket 130. None of the alleged irregularities with the interim fee applications were designated.
In short, debtor’s alleged ignorance of his counsel’s fee application sought against a creditor, not debtor, is hardly prejudicial. If his counsel failed to notice debtor of the interim administrative fee application or did not comply with disclosure requirements, this is not evidence the court is prejudiced against debtor, and can be reconsidered. Upon reconsideration, if the application is reduced, this will increase the creditors’ dividend.
C
Next, movant alleges he was told by Attorney Nussbaum of an appointment with the Court on April 25, 1985, and that debtor observed counsel entering Chambers on that date. Based on this, debtor alleges bias and prejudice based on an ex parte contact. Supra, at 253.
The Court is well aware of its obligation to avoid such contact. Rule 9003, F.Br.R. A similar restriction is imposed on lawyers. Canon 7, EC7-35, Disciplinary Rule 7-110(B). Although allegedly aware of this incident since April of 1985, debtor did not raise it in his unsuccessful appeals of May 21, 1985, Docket A-112; June 3, 1985, Administrative Docket 42, June 28, 1985, Administrative Docket 50; February 4, 1986, Administrative Docket 96; March 17, 1986, Administrative Docket 122; or March 28, 1986, Docket 132. Nor does he allege he requested and was refused admittance to the meeting.
On its face, the allegation makes an unwarranted assumption: the fact that creditor’s Attorney Nussbaum claimed to have an appointment with the Court as indication the Court and counsel discussed the Jansen case. Accordingly, assuming ar-guendo counsel did have an appointment with the Court—a circumstance which I frankly cannot recall—this does not on its face establish an ex parte contact. Lawyers are allowed to meet with judges.
D
Finally, debtor complains that in September or October of 1985, following a hearing, the Court met with Attorneys Wort-man and Loy, that an appointment with the Court was mentioned and that the Court met with these counsel concerning the case, as another ex parte communication. Supra, at 252-253.
I can again find nothing in the record or in my memory to establish that such a meeting actually occurred.1
Regardless, since my duty is to review the charge for legal sufficiency and timeliness, not for truth, I will assume such a meeting occurred with debtor’s former counsel. Given the fact debtor alleged he learned of the meetings by personal observation four years ago, Affidavit at 4-5, his failure to object either before this Court or in one of his appeals is deemed untimely delay without good cause. Nilsson, Robbins, et al. v. Louisiana Hydrolec, 854 F.2d 1538, 1548 (9th Cir.1988) (recusal motion filed 2½ years after case began is untimely); United States v. Studley, 783 F.2d 934, 939 (9th Cir.1986) (recusal motion filed weeks after trial presumptively untimely); United States v. Hurd, 549 F.2d 118, 119 (9th Cir.1977) (motion filed on fifth day of trial “much too late”).
*255IV
In summary, upon reflection, I hold no bias or prejudice toward debtor, nor am I aware of any basis on which my impartiality might reasonably be questioned. 28 U.S.C. § 455. Upon review of debtor’s affidavit, I find it to lack legal sufficiency and further find it to be untimely without good cause. 28 U.S.C. § 144. Accordingly, recusal is refused.
. Assuming arguendo the ex parte hearing actually occurred, but was a settlement conference, there would be no basis for disqualification. Matter of Georgia Paneling Supply, 581 F.2d 520, 522 (5th Cir.1978); United States v. Conservation Chemical Co., 106 F.R.D. 210, 234 (W.D.Mo.1985); Lazofsky v. Sommerset Bus Co., 389 F.Supp. 1041, 1044 (E.D.N.Y.1975). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491014/ | MEMORANDUM OPINION
RICHARD T. FORD, Bankruptcy Judge.
INTRODUCTION
ENERGREY ENTERPRISES, INC., Plaintiff, (hereinafter referred to as “EN-ERGREY”) initiated its original action in State Court. After OAK CREEK ENERGY SYSTEMS, INC. (hereinafter referred to as “SYSTEMS”) and OAK CREEK ENERGY FARMS, LTD. (hereinafter referred to as “FARMS”) filed their Petition for protection under Chapter 11 of the Bankruptcy Code, ENERGREY removed its State Court action to the Bankruptcy Court. Philip A. Gasteier and appeared as attorney for ENERGREY ENTERPRISES, INC.; Leslie A. Cohen and David A. Neale appeared as attorneys for the Trustee, Gary H. Goldstick. There was no appearance for DEAN BECKETT OR STEVE CUMMINGS, Defendants in this action. By agreement of counsel for ENERGREY and the Chapter 11 Trustee for SYSTEMS and FARMS, the second and third issue to be tried and argued are the amount of claim to be allowed in favor of ENER-GREY and whether or not there exists a Mechanic’s Lien on the alleged work of improvements, including the turbines. On April 3, 1989, 99 B.R. 36, a decision was given that ENERGREY’s Mechanic’s Lien on real property had been lost through foreclosure. Evidence was taken, briefs were submitted, and arguments were made before the Court, commencing at 10:00 a.m. on May 11, 1989.
FINDINGS OF FACT
1. OAK CREEK ENERGY FARMS, LTD. is a limited partnership composed of OAK CREEK ENERGY SYSTEMS, INC. as a general partner and DEAN BECKETT and STEVE CUMMINGS as limited partners.
2. OAK CREEK ENERGY SYSTEMS, INC. is a California corporation. The stock is owned by DEAN BECKETT and STEVE CUMMINGS.
3. For whatever reason, the above entities were formed, and assuming it to be a legal reason, they are two separate entities.
4. FARMS owned real property known as Oak Creek Farms. This real property is located in Tehachapi, California.
5. FARMS leased the subject real property to SYSTEMS.
6. ENERGREY contracted in writing with the Lessee of the real property, to wit: SYSTEMS, to build cement foundations for wind turbines.
*2687. ENERGREY performed their contract, and SYSTEMS was billed approximately $1,200,000. They paid about $720,-000, leaving a balance of close to $483,-880.00, plus interest and attorney fees.
8. ENERGREY filed its notice claiming a Mechanic’s Lien against SYSTEMS’ property, filed their lawsuit to foreclose, filed an Amended Notice and Complaint to insert as a Defendant FARMS (the owner of the real property). At this point, the Mechanic’s Lien foreclosure action was transferred from State Court to Bankruptcy Court. The effect of the above facts is somewhat in dispute, but it is not necessary to decide these issues at this time.
9. Both FARMS and SYSTEMS filed a Chapter 11 Petition in the above-entitled court on February 24, 1987, a date prior to the above action being transferred from State Court to Bankruptcy Court.
10. The real property owned by FARMS was subject to a Deed of Trust eventually acquired by the Nottingham Group. The real property was subject to other liens, Deeds of Trust and the alleged lien of ENERGREY. For purposes of this decision, it will be assumed that ENERGREY’s Mechanic’s Lien against FARMS was perfected. (The Trustee claims that the lien was filed after 90 days from completion of the work. Energrey denies this allegation.)
11. At an early date in the bankruptcy proceedings, the Nottingham Group filed its Motion/Complaint for relief from the automatic stay so they could foreclose on the real property. ENERGREY objected. The hearing was continued several times, but eventually the Nottingham Group and the Debtor-in-Possession, SYSTEMS, entered into a stipulation approving the Court’s granting relief from stay. This action was consented to by the Creditors’ Committee (turbine owners) and others and was in contravention of the objection of ENERGREY. The Court then approved the stipulation. At this point in time, no Trustee had been appointed. SYSTEMS was acting as a Debtor-in-Possession pursuant to the Bankruptcy Code provisions that came into effect as a result of the Chapter 11 filings on February 24, 1987.
12. At some point in time it was agreed (except by ENERGREY) that, pursuant to the Power of Sale provisions in its Deed of Trust on the real property, the Nottingham Group would foreclose. They would then, by a separate document, lease the property to SYSTEMS, Debtor-in-Possession. The Lease also contained an option to purchase by the Debtor-in-Possession or its successor. The effect of the foreclosure, lease and option would be to cutoff the junior liens and mortgages, including ENER-GREY’S.
13. The foreclosure was accomplished and the Lease became effective. No one appeared at the foreclosure sale to overbid the Nottingham Group’s obligation although all parties, including ENERGREY, had prior notice of the foreclosure sale date and place.
14. Gary H. Goldstick was appointed Chapter 11 Trustee for FARMS and SYSTEMS on May 10, 1988.
15. The Court finds that ENERGREY did not contract with FARMS to place grout around the base of the towers covering the exposed portion of the bolts and threaded rods. As a result, the Court finds that the Trustee is not entitled to a set-off of $33,600.00.
16. The Court finds that it was the intent of the owners of the towers and related machinery to keep said property as personal property and not fixtures permanently attached to the real property.
17. The Court finds that the cement foundations installed by ENERGREY on FARMS’ land were fixtures attached to the real property.
DISCUSSION
The issues before the Court are here as a result of an agreement with both counsel, with the approval of the Court, and are as follows:
1. What is amount of the claim owing to ENERGREY? It is the understanding of the undersigned that arguments regarding amount and validity of pre- and post-petition interest and attorney fees will be reserved for further argument.
*2692. Does ENERGREY’s Mechanic’s Lien attach to the foundations, towers, and other related items separate and apart from the real property?
As to the first issue, the Trustee does not dispute the claim of ENERGREY in an amount of $483,880.00. There is some dispute as to pre-petition interest, post-petition interest, and attorney fees, and that matter will be settled at a later date. The Trustee does allege that they are entitled to a set-off in the sum of $33,600.00. This figure represents the cost to grout 140 towers. As grounds for the set-off, the Trustee alleges that ENERGREY did not perform its contract, which by its terms incorporates plans and specifications prepared by Patrick and Henderson. Those plans and specifications provide in the notes for how the concrete foundations are to be constructed. The notes do not mention grout. The pictures above the notes on the plans, pages one and three, show that the exposed part of the bolts at the threaded rods should be grouted. Page five of Exhibit A does show in the drawing that the exposed bolt and threaded rods are to have a two inch cover of dry pack or grout to be completed after the towers are installed and the levelling and adjustments have been completed. The testimony of an owner and an employee of ENERGREY was that the principals of SYSTEMS did not require grouting, and that ENER-GREY was not to include a cost in their contract for grouting. There was testimony that ENERGREY had not grouted other towers of this type. Section 1856 of the Code of Civil Procedure for the State of California was amended in 1978 to allow for clarity in the admissibility of extrinsic evidence to explain the meaning of a written contract. That section at paragraph (a) states:
“Terms set forth in a writing intended by the parties as a final expression of their agreement with respect to such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement.”
Paragraph (c) under Section 1856 states:
“The terms set forth in a writing described in subdivision (a) may be explained or supplemented by course of dealing or usage of trade or by course of performance.”
Paragraph (g) states:
“This section does not exclude other evidence of the circumstances under which the agreement was made or to which it relates, as defined in section 1860, or to explain an extrinsic ambiguity or otherwise interpret the terms of the agreement, or to establish illegality or fraud.”
It seems clear to the Court that the “course of performance” by the principals of OAK CREEK SYSTEMS and OAK CREEK FARMS was to not require grouting. The Court finds that it was the intent of ENER-GREY and SYSTEMS, through its officers and management, not to require grouting as a part of their contract, and, as a result, there will be no allowance for any offset for ENERGREY’s failure to grout.
The second issue must be analyzed in two parts. The first part is whether or not the towers, the motor, the blades, and related items are personal property or real property and how “work of improvement” fits into the picture. By way of background, at some point in time DEAN BECKETT and STEVE CUMMINGS saw an opportunity to turn some barren hills located in the Tehachapi mountains into a wind park. They saw an opportunity to sell wind towers to various investors. The electricity could be sold, and the owners would receive an income and be allowed to take a large tax deduction. In order to complete the project, SYSTEMS hired EN-ERGREY to lay a cement foundation in the ground, after which the towers would be installed, the lines laid, and hopefully the wind would be converted into electricity to be sold to the power company. Towers were owned by a mixture of people, partnerships, joint ventures, and corporations. There is no evidence before the Court that these towers were intended to be works of improvement or fixtures permanently affixed and installed; no evidence they were to remain upon one cement block foundation, never to be repaired by being disassembled, and were to be taxed as a part of *270the real property. In fact, to the contrary, the evidence indicates that the towers would, if necessary, be moved to a different location to gain a better advantage in the wind. It was certainly implied that the towers would be removed or dismantled for repair situations. The evidence indicates that the towers were taxed as personal property from the beginning. ENER-GREY failed to carry its burden of proof showing that these towers were to become “fixtures” when they were bolted to the cement foundation. This requires a finding that they were not fixtures and that they were personal property. It is equally clear that the cement foundations poured into the ground were fixtures attached to, and became a permanent part of, the real property.
This Court has already ruled that, because of a foreclosure on the Nottingham property, ENERGREY’s Mechanic’s Lien on real property was wiped out, and they have no security interest in the real property, which would of course mean the foundations.
ENERGREY argues that there can be a separate lien, separate and apart from the real property, on something called “works of improvement.” They cite California Civil Code section 3128, which provides as follows:
“The liens provided for in this chapter shall attach to the work of improvement and the land on which it is situated together with a convenient space about the same or so much as may be required for the convenient use and occupation thereof, if at the commencement of the work or of the furnishing of the materials for the same, the land belonged to the person who caused such work of improvement to be constructed, but if such person owned less than a fee simple estate in such land then only his interest therein is subject to such lien, except as provided in Section 3129.”
Section 3106 of the California Civil Code defines work of improvement as follows:
“ ‘Work of improvement' includes but is not restricted to the construction, alteration, addition to, or repair, in whole or in part, of any building, wharf, bridge, ditch, flume, aqueduct, well, tunnel, fence, machinery, railroad, or road, the seeding, sodding, or planting of any lot or tract of land for landscaping purposes, the filling, leveling, or grading of any lot or tract of land, the demolition of buildings, and the removal of buildings. Except as otherwise provided in this title, ‘work of improvement’ means the entire structure or scheme of improvements as a whole.”
In his argument, Mr. Gasteier states that his clients’ Mechanic’s Lien attaches to the work of improvement. He quotes Section 3128, California Civil Code. What he neglects to do is read the entire sentence, which states: “The liens provided for in this chapter (Article 5 Property Subject to Mechanic’s Liens) shall attach to the work of improvement and the land on which it is situated together with a convenient space ...” The section does not say “work of improvement or the land.” It states in the conjunctive that the lien attaches to the “work of improvement and the land.” As Ms. Cohen stated in her oral argument, “The concept of a lien attaching to a work of improvement appears in the cases, including the eases cited by Mr. Gasteier, to enable the lien to attach to that portion of the real property that is found to constitute the work of improvement.” As Mr. Marsh stated in his book entitled California Mechanic’s Lien Law Handbook, section 4.15 at page 37, “An item of personal property is subject to a mechanic’s lien only if the installed chattels have been metamorphosed into fixtures attached to the realty, and have thus become a part of the realty itself.” In other words, personal property cannot be subject to a mechanic’s lien. It is only when personal property becomes a fixture, which may or may not be a work of improvement, on a parcel of real property that it becomes subject to the mechanic’s lien.
The issue in its narrowest sense is that personal property can never be a work of improvement under California Civil Code 3106 but a fixture can be a work of improvement. As to whether or not it is *271personal property or a fixture is a matter of fact to be determined by the trial judge. This was set forth in the Ninth Circuit Court of Appeals Case entitled Abrenilla, et al., v. China Insurance Company, et al., 870 F.2d 548 (1989).
CONCLUSIONS OF LAW
On or about May 10, 1989, ENERGREY filed its claim for $483,880.00, plus pre- and post-petition interest and attorney fees. The Trustee alleges an offset of $33,600.00 based upon certain provisions of the written contract identified as Exhibit “A.” The Court has concluded that, because of the past practices of FARMS and because of an ambiguity in various pages of the written plans, it was necessary to look to extrinsic evidence as allowed by California Code of Civil Procedure section 1856. The evidence is clear and uncontradicted that ENERGREY’s contract with FARMS did not include grouting the base of the towers. As a result, ENERGREY is entitled to a claim, unsecured, in the sum of $483,-880.00, plus allowable interest and attorney fees that are either agreed upon by the parties or proven at a subsequent proceeding.
California Civil Code section 3128 provides that a Mechanic’s Lien attaches to the work of improvement and the land on which it is situated together with a convenient space about the same, or so much as may be required for convenient use and occupation thereof. A work of improvement is defined by California Civil Code section 3106 in part as construction, alteration, addition to, or repair, in whole or in part, of any building, wharf, bridge, ditch, flume, aqueduct, well, tunnel, fence, machinery, railroad, or road, et cetera. The Ninth Circuit, in the case of Abrenilla, et al., v. China Insurance Company, et al., supra, states that it is a question of fact to be decided by the trial judge as to whether or not an item is a fixture and thus a part of the real property or personal property. California Civil Code section 663 says anything that is not real property is personal property.
The Court concludes that the towers, motors, machinery, and related articles are personal property. Since personal property is not subject to a Mechanic’s Lien, ENER-GREY has no security interest in those items.
ENERGREY did have an interest in the foundations, which the Court finds to be fixtures attached to the real property, but that interest was lost as a result of the Nottingham foreclosure, at least in regard to those foundations covered by that foreclosure proceeding.
JUDGMENT
Based upon the accompanying findings of fact, discussion, and conclusions of law, the Court finds that ENERGREY has a valid claim, unsecured, in the sum of $483,-880.00, plus allowable interest and attorney fees that are either to be agreed upon by the parties or proven at a subsequent hearing. The Trustee is not entitled to any set-off of $33,600.00 or any other sum.
IT IS FURTHER ORDERED, ADJUDGED, AND DECREED that ENER-GREY’s Mechanic’s Lien, considered valid for purposes of this Decision, does not attach to the towers, motors, blades, and related items situated on what has been described as the Nottingham Property, as these items are found to be personal property. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491015/ | CLARIFICATION OF ORDER ENTERED AUGUST 3, 1989
JAMES E. RYAN, Bankruptcy Judge.
On this 23rd day of October, 1989, a Motion for New Trial (to Reconsider and Partially Vacate and Correct Order of August 3, 1989) and Brief in Support thereof filed by Farm Credit Bank of Wichita (FCB) (Docket Entry No. 261) with a Response to the Motion by the Debtor (Docket Entry No. 265) and Supplemental Response by the Debtor (Docket Entry No. 267), with a Reply to the Response by FCB (Docket Entry No. 282), a Second Supplemental Response to Motion to Reconsider filed by the Debtor (Docket Entry No. 281), with a Reply to the Second Supplemental Response by FCB (Docket Entry No. 283), and a Third Supplemental Response filed by the Debtor (Docket Entry No. 285), with a Reply to the Third Supplemental Response by FCB (Docket Entry No. 286) came before this Court for consideration.
In addition, a Motion to Lease Property filed by the Debtor (Docket Entry No. 277) with a Response to the Motion by FCB (Docket Entry No. 284) is consolidated herein for consideration and resolution.
After an extensive review and consideration of the Motions and the numerous responses and replies thereto, this Court does hereby find that substantial justification has been shown to warrant reconsideration and clarification of the Order this Court entered on August 3, 1989. 102 B.R. 822. However, such reconsideration shall be limited to the extent and nature of the lien on proceeds derived from oil and gas production purportedly held by FCB.
As a result, we hereby enter the following Statement of Facts and Conclusions of Law in conformity with B.R. 7052 in this core proceeding:
STATEMENT OF ISSUES
The pleadings give rise to three issues:
(a) Whether the language of the mortgage between FCB and the Debtor is void under the applicable Oklahoma statutes;
(b) Whether the lien of FCB is rescued by the remedies available under Oklahoma law and the Bankruptcy Code;
(c) Whether the Debtor may enter into an oil and gas lease on certain property considering the language of the FCB mortgage.
STATEMENT OF FACTS
Prior to 1979, the Debtor, as owner of the fee estate of certain real property entered into a mortgage with FCB. The mortgage stated that “mortgagor hereby transfers, assigns, sets over and conveys to mortgagee all rents, royalties, bonuses and delay monies that may from time to time become due and payable under any oil and gas or other mineral lease of any kind now existing, or that may hereafter come into existence, ...”
FCB seeks to have this Court reconsider its position in the August 3, 1989 Order whereby FCB was found to have an incho*344ate lien upon the proceeds derived from oil and gas production from beneath the subject property. FCB contends that it properly perfected its lien on said oil and gas proceeds by the filing on October 12, 1988 of a Notice of Interest in Rents, etc. and Perfection of Interest in Rents, etc.
The Debtor asserts that the lien held by FCB as to proceeds derived from the granting of an oil and gas lease is an inchoate lien requiring default before the lien may be considered choate. As such, the Debtor contends that the language of the mortgage assigning these rents and profits is void as a matter of Oklahoma law effective at the time the mortgages were arrived at between the parties.
Additionally, the Debtor seeks relief from this Court to subordinate the FCB mortgage as to the proceeds derived from mineral production. Debtor has an opportunity to grant an oil and gas lease upon the subject property which would result in a lease bonus to be paid this estate, and should production be achieved by the development of the lease, said lease provides for mineral royalty payments. The Debtor further requests that the Court grant to FCB a replacement lien against 100% of the bonus and royalty interests to be received under the lease until FCB has received the full value of its interest, which would appear to be in contradiction of the Debtor’s position regarding FCB’s lien. The Debtor seeks an Order from this Court requiring FCB to subordinate its lien on the proceeds from the mineral estate in favor of the new lessee.
CONCLUSIONS OF LAW
A. Prior to 1979, any assignment of rents or profits without employing appropriate legal process was considered void under Oklahoma law. This arose from the applicable statutes at the time which stated “notwithstanding an agreement to the contrary, a lien or a contract for a lien transfers no title to the property subject to the lien.” Okla.Stat.Ann. tit. 42, § 10. Further, “all contracts for the forfeiture of property subject to the lien, in satisfaction of the obligation secured thereby, and all contracts in restraint of the right of redemption from a lien, are void ...” Okla. Stat.Ann. tit. 42, § 11. The status of the law was later changed in 1979 with the passage of Okla.Stat.Ann. tit. 46, § 4 which allowed these encumbrances. However, since the mortgages between the parties were entered into prior to 1979 in the case at bar, the provisions of § 10 and § 11 shall be applicable in this case.
B. The seminal cases interpreting the above referenced Oklahoma statutes while effective were Rives v. Mincks Hotel Company, et al., 167 Okl. 500, 30 P.2d 911 (Okla.S.Ct.1934) and Hart v. Bingman, et al., 171 Okl. 429, 43 P.2d 447 (Okla.S.Ct.1935). These cases reasoned that Oklahoma is a lien theory state and “under the mortgage lien theory prevailing in our state and in many other states, it appears to be well settled law that a mortgaging of real property gives no right to the mortgagee to have applied towards the payment of the mortgage debt the rents or income of the mortgaged property; this, manifestly, because the mortgage is nothing more than a lien upon the property to secure payment of the mortgage debt, and in no sense a conveyance entitling the mortgagee to possession or enjoyment of the property as owner.” Rives, supra 30 P.2d at p. 914. The right to collect the rents and profits from the property mortgaged “remains in the mortgagor until he is deprived of possession in the manner provided by law and this notwithstanding the fact that the mortgage may pledge the rents and profits.” Further, “the prevailing rule (in Oklahoma) is that if a mortgagee desires to avail himself of the right to rents and profits pledged by mortgage under real estate without the right of immediate possession of the land, he must claim them by invoking the aid of a Court of equity for the appointment of a receiver to take possession of the rents and profits.” (parenthetical information added by Court) Rives, supra 30 P.2d at p. 914. Thus, the crucial factor in allowing the collection of rents by the mortgagee is the effective dispossession of the mortgagor of the mortgaged property.
*345In the instant case, proceeds derived from oil and gas production are indeed “profits,” being the incidents of production from the mineral estate and thus, the reasoning found in Rives and Hart is applicable to the case at bar.
C. FCB essentially admits in its Brief in support of its Motion for New Trial that the provision which purports to convey or assign an interest in oil and gas proceeds to FCB is void as a matter of law by stating “whether or not a default exists, FCB has always been entitled to effectuate the assignment provisions by notifying production purchasers and obtain direct payment of the oil and gas proceeds.” (FCB’s Brief at p. 3). This would imply that FCB could have obtained the proceeds from oil and gas production without the employment of legal process. This necessarily voids the assignment.
However, FCB’s language does not necessarily coincide with its actions. FCB commenced an action to foreclose on its interests in the surface and mineral estate in order to enforce its lien. This is the required legal process necessary for perfection of its purported lien, and Oklahoma law effective at the time of the conception of the mortgage allows such legal process to validate the assignment.
D. We must now apply these rules of law under the Oklahoma statutes to the bankruptcy scenario since State law governs the property rights of the parties in a bankruptcy action. Butner v. U.S., 440 U.S. 48, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979).
As stated in the Rives’ decision, dispossession of the Debtor is necessary for FCB to be properly perfected and to properly execute and levy on the proceeds from oil and gas production. Obviously, FCB was stayed from completing perfection, i.e., proceeding with the foreclosure action and possibly obtaining the appointment of a Receiver, by the filing of the Bankruptcy Petition. However, the Bankruptcy Code provides that “the rights and powers of a trustee (debtor-in-possession) ... are subject to any generally applicable law that permits perfection of an interest in property to be effective against an entity that acquires rights in such property before the date of such perfection. If such law requires seizure of such property or commencement of an action to accomplish such perfection, and such property has not been seized or such action has not been commenced before the date of the filing of the petition, such interest in such property shall be perfected by notice within the time fixed by such law for such seizure or commencement.” 11 U.S.C. § 546(b) (parenthetical information added by Court). This allows the filing of a notice in the case to serve as a substitution for a foreclosure action to properly perfect the lien of the creditor.
Since FCB filed a Notice pursuant to this section of the Bankruptcy Code, completing perfection of its security interest in the subject oil and gas proceeds, that lien is now valid and enforceable. The contract provision as written cannot be considered to be an immediate assignment of oil and gas proceeds without legal process. FCB had instituted foreclosure proceedings pri- or to the filing of bankruptcy and thus had begun the proper avenues available to it to perfect and foreclose on its interest in the proceeds. Thus, FCB had performed all that it could to protect its interests and perfect its lien. As such, FCB is entitled to a lien on the entire production amount since the filing of the § 546(b) Notice. The Debtor must therefore provide for the protection of this lien in his Plan of Reorganization for compliance with 11 U.S.C. § 1129(b) to be found.
FCB relies heavily upon the case of Virginia Beach Federal Savings & Loan Association v. Wood, 97 B.R. 71 (Bankr.N.D.Okla.1988) in support of its position and an extensive amount of briefing was done on the issue as to whether FCB would be entitled to a Receiver. Since the sole issue in this case today is the level of protection which must be afforded FCB in the Debt- or’s Plan of Reorganization in order to maintain FCB’s lien, and not an issue regarding cash collateral as was involved in Virginia Beach, this Court will not enter into this speculative and highly questionable analysis.
*346E. The final issue which this Court must address is whether the Debtor’s Motion to Lease is proper and meritorious. The Debtor owned the fee title to the subject real property at the time the mortgage was contemplated. As such, the Debtor had the ability to mortgage the surface estate and the mineral estate. Unquestionably, PCB’s mortgage encumbers the surface estate. With regard to the mineral estate, FCB encumbers the incidents of production from the mineral estate represented by “rents, royalties, bonuses and delay monies.” Implicit in this language of assignment is a subordination by FCB whereby the Debtor possesses the authority to grant an oil and gas lease on the mineral estate. However, the proceeds derived therefrom are encumbered by the FCB mortgage. It would be against logic and common sense to interpret that FCB intended through its mortgage to encumber the proceeds from oil and gas production while not allowing the Debtor to lease the mineral estate and allow such production to take place. Any income derived from the mineral estate, whether it be a lease bonus or production royalties, is entirely for the benefit of FCB and thus, any objection FCB might have to this authority to lease would be somewhat foolhardy.
Since this is the opinion of this Court, a subordination agreement from FCB is unnecessary and thus, the Motion of the Debtor is academic.
IT IS THEREFORE THE ORDER AND DECISION OF THIS COURT that FCB possesses a validly perfected security interest in the oil and gas proceeds since the filing of the Notice of such on October 12, 1988, and as such, must be fully protected pursuant to 11 U.S.C. § 1129 in any contemplated Plan of Reorganization by the Debtor.
IT IS FURTHER ORDERED that the Debtor’s Motion to Lease is moot by the decision rendered by this Court herein-above.
IT IS FURTHER ORDERED that the Debtor submit a Second Amended Plan of Reorganization in compliance with the recent Orders of this Court resolving all outstanding issues, no later than November 6, 1989. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491017/ | ALEXANDER L. PASKAY, Chief Judge.
ORDER ON FEDERAL DEPOSIT INSURANCE CORPORATION’S MOTION FOR RELIEF FROM AUTOMATIC STAY, ALTERNATIVE MOTION FOR ADEQUATE PROTECTION, MOTION FOR SEQUESTRATION OF RENTS AND PROFITS and MOTION TO PROHIBIT DEBTOR’S USE OF CASH COLLATERAL
THIS is a Chapter 11 case and the matters under consideration are several Motions filed by the Federal Deposit Insurance Corporation (FDIC): 1) Motion for Relief from Automatic Stay; 2) Alternative Motion for Adequate Protection; 3) Motion for Sequestration of Rents and Profits; *354and, 4) Motion to Prohibit Debtor’s Use of Cash Collateral. The relief sought by the FDIC is based on the contention that there is no equity in the properties owned by this Debtor and the properties are not needed for an effective reorganization based on § 362(d)(2) of the Bankruptcy Code. In addition, the FDIC also seeks relief from the automatic stay pursuant to § 362(d)(1) for “cause” based on the allegation that the FDIC lacks adequate protection. In light of the fact that the parties agreed that the Debtor has no equity in the properties involved, this Court scheduled a final evidentiary hearing on the limited issue of whether or not the properties owned by the Debtors are, in fact, needed for an effective reorganization.
The facts as established at the evidentia-ry hearing, together with the facts as they appear from the record which are relevant, are as follows:
Richardson Group, Inc., is a Florida corporation and the owner and operator of two office buildings located in the city of Sarasota, Florida. One of the properties referred to is located at 1266 First Street and is an office building on which currently there is due and owing to the FDIC, the holder of a first mortgage:
1) Principal $676,205.37
2) Interest at Note rate * 1 (variable) from 10/01/86 through 2/16/89 (date foreclosure complaint served on Debt- or) 161,935.20
3) Interest at Note default rate (25%) from 2/16/89 through above date (per diem after above date = $463.15) 76,419.75
SUBTOTAL $914,560.32
OTHER EXPENSES
1) UCC Search Expenses 28.75
2) Title Search Expenses 185.00
3) Attorneys’ Fees Incurred 800.00
TOTAL $915,574.07
The only other property owned by this corporation is the property located at 205 North Orange Avenue:
1) Principal $759,853.10.
The property on 1266 First Street currently has a 100% occupancy and the property on 205 North Orange is at 70% occupancy. It is conceded by the Debtor that neither of the properties generated sufficient income in the past, nor do they at present service the mortgage debt after meeting the operating expenses of the two buildings. The fact of the matter is that it is conceded that the president of the corporation, who is the sole stockholder of the Debtor had to infuse $100,000 of his own funds in the years 1987 and $150,000 in 1988 in order to maintain these properties. It is also conceded that Southeast Bank holds a second mortgage covering both properties in which there is a current balance of $629,000.00. The Debtor contends however, that Southeast will release its mortgage on the properties based on the Debtor’s good personal financial history. It should be noted, however, that no representative of Southeast Bank was present at the hearing and that no evidence was presented to support this contention. According to the testimony of the president of the Debtor, the market in Sarasota for office buildings is saturated and is very soft and will remain soft for the next two to five years. The Debtor will default again on the mortgages. The potential viability of these properties is based on the contention that if given time, hopefully the Debtor will be able to increase the rent to $15 per square foot. This proposition is clearly contradicted by the testimony of the president of the Debtor himself, who indicated, as noted earlier, that the market will remain soft for the next two to five years during which time the current rent is $10 per square foot. Thus, clearly, there will be a steady shortfall every year or at least during the majority of the remaining years of these two mortgages, both of which will mature on January 3, 1995. To service the mortgage covering the building at 1266 First Street, which generates a gross income at this time of 100% occupancy, there is testimony that it requires approximately $2,000 a month to meet the operating expenses of this building, thus leaving a net *355income of approximately $5,424.75 representing an operating shortfall of approximately in excess of $1,465.79, or approximately $17,500 a year on this building alone. To further illustrate this dismal picture, the Debtor will need to generate $9,187.38 each month to pay the current contractual obligation, not a default rate and to pay the past due interest which has accrued since November 7, 1987. As to the mortgage on the building at 205 North Orange Avenue, the testimony indicated that at a 70% occupancy rate, the gross income is $5,877.41 with $2,000.00 expenses, which equals $3,877.41, representing a monthly shortfall of $3,865.53 or $46,-386.36 annually.
At the time the Debtor filed its Petition for Relief under Chapter 11, the properties already were involved in a foreclosure and the Petition was filed two days before a scheduled hearing on a Motion for Summary Judgment in the foreclosure action.
The schedule filed by this Debtor indicates that this controversy is basically a two-party dispute. Excluding the insiders, the total unsecured obligations of this Debtor and excluding current ongoing bills such as bills for utilities and telephone service are less than $15,000. In spite of this overwhelming evidence, it is the Debt- or’s contention that it should be permitted to attempt to achieve reorganization, citing, In re Grand Sports, Inc., 86 B.R. 971 (N.D. Ind.1988).
It is ironic indeed that in that ease the Motion to Lift the Stay was granted, but the Debtor relies on some general language in that ease to the effect that it should be given at least one opportunity to obtain confirmation of its Plan of Reorganization. Generally speaking, this Court is inclined to follow the approach taken by Grand Sports. However, this Court is satisfied that while the Debtor may be able to obtain the necessary vote of the class of unsecured creditors, it is very doubtful that the FDIC will ever vote for this Plan. Counsel for the Debtor indicated that he may attempt to use the cramdown provision of § 1129(b) in the event he is unable to get the affirmative vote from the FDIC forgetting, however, that if he is successful, the FDIC will be the largest unsecured creditor who would effectively control the vote in the unsecured class.
The President of the Debtor indicates that he is willing to put in $100,000 personal funds to meet the current shortfall and continue to make the adequate protection payments to infuse an additional $100,000 during the year 1990. As to the source of these funds, it is indicated that he hopes to be able to sell one of his properties. There is no evidence presented that he has a contract or will have a contract in the near future. As a back-up proposition, the President of the Debtor indicated that he has an interest in real estate close to $10,000,000 which, if necessary, could be used as collateral for refinancing the property and from the refinancing to secure the funds necessary to meet the shortfall of the income derived from these two buildings, an event which will no doubt occur. When queried by the Court as to why on earth he is going to keep on putting all these funds into these two buildings which appear to be lacking total economic viability, he indicated that he wants to maintain his reputation and integrity as a real estate developer in the community and to escape the stigma of having lost a property through foreclosure. While this certainly could be a laudable goal in a vacuum, it certainly is not the basis to maintain a corporate cripple under the shield and protection of the -bankruptcy court. In re Southwest Enterprises, Inc., 261 F.Supp. 721 (W.D.Ark.1967). The logic of this proposition is hardly apparent when one considers the fact that these properties already are in foreclosure. It is odd indeed that the fact that the Debtor sought refuge in the bankruptcy court is not deemed to have a negative impact on his reputation. In addition, it is a well-settled rule that the purpose of reorganization is to prevent a sinking corporation from drowning, but it was not the purpose of Congress to place crutches under corporate cripples. See also In re Breeding Motor Freight Lines, Inc., 172 F.2d 416 (10th Cir.1949), where the court stated that despite the debtor’s sincerity, the court was not required to retain on its *356docket a proceeding for reorganization which is nothing more than a visionary or economically an impractical scheme.
It is clear that the sole purpose of this Chapter 11 case is to prevent the loss of these properties through foreclosure, this is hardly a justification to permit this debt- or to languish in the bankruptcy court any longer, hoping without basis that Judgment Day will never come. In re Albany Partners, 749 F.2d 670 (11th Cir.1984).
Based on the foregoing, this Court is satisfied that more than ample evidence in this record indicates that the Debtor has no equity in the two properties and they are not needed for effective reorganization. For the reasons stated, therefore, it is
ORDERED, ADJUDGED AND DECREED that the Motion for Relief from Stay be, and the same is hereby, granted and the automatic stay be, and the same is hereby, lifted, and FDIC be, and the same is hereby, authorized to go ahead with the foreclosure action necessary.
DONE AND ORDERED.
. * Under the terms of the notes, the interest rates were as follows for the following years:
1985= 13.5%
1986= 9.5%
1987 = 8.875%
1988 = 8.875%
1989 = 11.89% | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491018/ | FINDINGS OF FACT, CONCLUSIONS OF LAW AND MEMORANDUM OPINION
THOMAS E. BAYNES, Jr., Bankruptcy Judge.
THE MATTERS under consideration in this adversary proceeding are 1) the Second Amended Complaint for Turnover filed by Plaintiff, Roy Loudermilk, (Trustee), against Defendant, Levine, Hirseh, Segall & Northcutt, P.A., and 2) Defendant’s counterclaim. The Court reviewed the record, received testimony, heard argument of counsel, and finds as follows:
Paul W. Pattie (Debtor) was married to Thelma A. Pattie (ex-wife). A Florida state court entered a final judgment dissolving their marriage on April 9, 1986, Case No. CA 84-3583. Paragraphs 5 and 6 of the Final Judgment of Dissolution of Marriage state,
5. In order to effect equitable distribution, and as lump sum alimony, Respondent, PAUL W. PATTIE, shall pay to Petitioner, THELMA A. PATTIE, the sum of Two Hundred Fifty Thousand and no/100ths ($250,000.00) Dollars. This award of lump sum alimony shall not effect the interest of the parties in any real property which is titled in joint names, but is intended to represent all of Wife’s interest in any jointly owned tangible and intangible property not currently possessed by Petitioner, THELMA A. PATTIE.
6. All tangible personal property currently possessed by either party is to be owned by that party.
Apparently, the Final Judgment prompted property disputes since two motions for reconsideration were heard by the state court on January 23, 1987 and October 30, 1987.
At the January 23, 1987 hearing on the motion for reconsideration, counsel for ex-wife and the Debtor were prepared to settle all issues and read their stipulation onto the record. The stipulation was extremely detailed as to alimony, child custody, and property settlement. Counsel told the state court they “agreed in principle, now we just need to work on the mechanics.” Ex-wife and the Debtor were put under oath and stated they heard the terms and agreed to be bound by the settlement.
During the Debtor’s marriage in 1983, he and his ex-wife purchased a Nuveen Series 370 bond and a municipal bond fund. The bond certificate was titled in both their names as joint tenants. The Final Judgment dissolving their marriage made no reference to the bond. The Debtor, however, was examined about the bond at the final hearing. At the first hearing on the motion for reconsideration, no reference was made to the bond. Prior to that hearing, and as a result of settlement discussions, the Debtor and his ex-wife allowed the bond to be liquidated.
*372Ex-wife, her counsel, Lesley J. Friedsam, a former associate of Plaintiff, the Debtor, and Debtor's counsel executed letters to U.S. Trust Co. of New York. The letters directed U.S. Trust Co. of New York to liquidate the bond and bond fund and disburse the proceeds to the Defendant to be held in trust for the Debtor and the ex-wife. In executing the letters, the Debt- or’s state court counsel sent a cover letter dated April 29, 1987 to the Defendant reaffirming the proceeds would be deposited into the Defendant’s trust account and not disbursed until the total settlement between the ex-spouses has been consummated and closed. After the closing, $65,-000.00 was to be disbursed for the benefit of the ex-wife and the balance to the Debt- or. The settlement closing was scheduled for July 23, 1987 but never took place.
The settlement agreement as articulated at the state court hearing was never committed to paper. On October 2, 1987, the Debtor’s state court counsel wrote the Defendant demanding the funds held in escrow be returned to the Debtor’s counsel since it is apparent there is no settlement. The Defendant’s counsel refused to turnover the escrowed funds.
The Debtor filed a Petition for Relief under Chapter 7 of the Bankruptcy Code on March 17, 1988. He listed on Schedule B-2 the Nuveen bond as an asset. The Trustee demanded return of the bond proceeds but the Defendant refused the demand. The Complaint for Turnover of Estate Property which is the subject of this adversary proceeding was filed on December 2, 1988. The Defendant counterclaimed for specific performance of the settlement agreement, a determination that the bond proceeds are not property of the estate but rather property belonging to the ex-wife; and that the Defendant has a valid enforceable charging lien against the funds.
The Trustee contends the Final Judgment encompasses all of the marital assets of the Debtor and his ex-wife. Pursuant to the divorce decree, the Debtor contends as possessor he was the owner of the Nuveen bond and municipal bond fund. Due to the post-judgment dispute regarding the marital assets, the Debtor entered into settlement negotiations. As a showing of good faith, the Debtor authorized the bond proceeds to be placed in escrow conditioned upon the closing of the settlement. Since the settlement never took place, the Trustee contends the entire amount of the proceeds is property of the estate and should be returned to the Debtor.
The Defendant contends the Final Judgment does not encompass the bonds since neither the Final Judgment nor the state court pleadings mention this marital asset. When disputes arose regarding specific marital assets, the Debtor and his ex-wife entered into settlement negotiations. The Defendant contends that a settlement was reached and the bond proceeds placed in escrow are part of the settlement and belong to the Debtor’s ex-wife. Even if the Court finds there was no post-judgment settlement, the Defendant contends the ex-wife still holds a vested interest as a tenant in common in one half of the proceeds. Further, the Defendant asserts a charging lien on the bond proceeds.
The first issue posed by the Defendant is the Final Judgment of Dissolution does not contemplate the transfer or division of the Nuveen bond because the divorce case pleadings do not include the bond. Therefore, the state court did not have jurisdiction to deal with the Nuveen bond. The bond was held as joint tenants prior to the divorce, and therefore it is now. owned as tenants in common by the Debtor with his ex-wife. The Defendant acknowledges if the act of the state court in Paragraph 6 of the Final Judgment of Dissolution has the effect of giving the bond to the husband/Debtor and such a determination was mere error rather than being jurisdictional, then the judgment awarding the bond is controlling.
While the bankruptcy court jurisdiction has been known for wide inquiries into state court judicial determinations, see, Garafano v. Trustees of the Amalgamated Insurance Fund (In re Garafano), 99 B.R. 624 (Bankr.E.D.Pa.1989), it is quite clear this Court must give full faith and credit to *373state court judgments. Title 28 U.S.C. § 1738. As the Supreme Court of the United States noted in Rose v. Rose, 481 U.S. 619, 107 S.Ct. 2029, 95 L.Ed.2d 599 (1987), federal courts should not enter into state domestic relations matters unless it is clear federal law would preempt or that such state law would severely affect federal preempted issues. See also, Burch v. Burch (In the Matter of Burch), 100 B.R. 585 (Bankr.M.D.Fla.1989). Assuming the Defendant is correct that the issue of the Nuveen bond was not contemplated anywhere in the divorce proceedings, there is authority to suggest the state court was without jurisdiction to make such determination. See, Faust v. Faust, 505 So.2d 606 (Fla. 1st DCA 1987); Leonard v. Leonard, 414 So.2d 554 (Fla. 2nd DCA 1982). However, the bond was brought up during the protracted litigation prior to the Final Judgment of Dissolution and the Final Judgment of Dissolution did contemplate the transfer of all personal property held by both the husband/Debtor and his ex-wife. There was no appeal of the Final Judgment of Dissolution nor was the Paragraph 6 allocation challenged during the various motions for reconsideration or at the settlement hearing. The Defendant’s objection at this stage of the proceedings ignores the law of the case. The- Court finds the bond was at issue during the proceedings; that the parties and the state court knew of the existence of the bond; that the Final Judgment of Dissolution contemplates its allocation between the parties; and there is no ambiguity associated with the terms of the Final Judgment of Dissolution.1
This Court would note there is some question of standing upon the part of the Defendant to raise the issue of ownership of the bond as such a determination may have an effect on the rights of the ex-wife who is not a party to this action. The Trustee did not join her as a Defendant in the lawsuit and the Defendant, while alleging to be an agent of the ex-wife in its counterclaim for specific performance and charging lien, does not bring her within the bounds of this Court’s jurisdiction. Therefore, the ruling of this Court must be limited to the dispute between the Trustee and the Defendant. Such a determination, albeit enlightening to others, cannot bind the ex-wife.2
SETTLEMENT
From the facts emanating at trial and the associated documents and briefs presented to the Court, it is quite clear that while these parties attempted a settlement and sought to present it to the state court as “semi-complete”, there was never a meeting of the minds. The hearing transcript associated with the settlement before the state court clearly shows each party was hedging its bets as they knew the settlement was precarious and could not take place without a final written document. The law is quite clear such unstable agreements are not settlements and cannot bind either party. Dania Jai-Alai Palace, Inc. v. Sykes, 495 So.2d 859 (Fla. 4th DCA 1986); Robbie v. City of Miami, 469 So.2d 1384 (Fla.1985).
CHARGING LIEN
There is no doubt a charging lien of an attorney is accepted by Florida and federal law.3 However, in light of the fact the Defendant was holding these particular funds in trust as an escrow agent awaiting final settlement, it cannot throw off the cloak of its fiduciary responsibility in order *374to obtain an undue advantage for itself. The Florida Bar v. Bratton, 413 So.2d 754 (Fla.1982); Fla. Bar Integration Rule, Art. 11, Rule 11.02(4). Further, this Court finds from the evidence the Defendant failed to establish its charging lien in accordance with Florida law. Sinclair v. Baucom, 428 So.2d 1383 (Fla.1983).
Accordingly, it is
ORDERED, ADJUDGED AND DECREED this Court finds the proceeds from the Nuveen bond and municipal bond fund plus any accumulated interest is property of the estate and the law firm of Levine, Kirsch, Segall & Northcutt, P.A. does not have a charging lien on those funds and they shall be turned over to the Trustee in an amount equal to the proceeds received from the sale of the Nuveen bond and municipal bond fund plus all accumulated interest. It is further
ORDERED, ADJUDGED AND DECREED the decision of this Court in no way affects the rights, titles, and interest of the ex-wife, Thelma A. Pattie, in these proceeds nor does this Court determine in anyway the dischargeability of any rights associated in the final judgment of dissolution or its amendments as between the Debtor and his ex-wife.
DONE AND ORDERED.
. See, Harrell v. Sharp (In re Harrell), 754 F.2d 902 (11th Cir.1985). This Court, in reviewing the Petition of Dissolution filed by the wife and the answer by the husband/Debtor, notes the pleadings in the divorce action requested equitable distribution of jointly held personal property.
. Another problem with the procedure in this case deals with the fact the Trustee filed a motion for leave to file a second amended complaint which was granted and the Defendant was required to file its answer. No answer was filed, however, it is quite clear from the parties’ trial memorandum they are both proceeding on the Second Amended Complaint with the previous answer, defenses, counterclaims, and trial memorandum binding the parties.
.See, Mones v. Smith, 486 So.2d 559 (Fla.1986); In re Banks, 94 B.R. 772 (Bankr.M.D.Fla.1989). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491051/ | ORDER ON TRUSTEE’S OBJECTION TO SECURED CLAIM OF BRAUN AND MAY REALTY, INC.
A. JAY CRISTOL, Bankruptcy Judge.
This cause was brought on to be heard at a hearing on September 18, 1989. The trustee and Braun and May Realty, Inc., have agreed that the judgment dated October 15, 1987, is a secured claim. The parties dispute whether the Amended Final Judgment dated November 19, 1987, which awarded the fees and costs, is secured or whether it constitutes a preference because a certified copy was recorded within 90 days of the filing of the petition.
The Final Judgment was based on a brokerage commission on a written contract which provides for the award of reasonable attorney’s fees. The Final Judgment expressly reserved jurisdiction to award fees and costs. The recovery of attorney’s fees is ancillary to the claim of damages and can only be recovered after determination of the prevailing party. Cheek v. McGowan Electric Supply, 511 So.2d 977 (Fla. 1987).
Florida Law has recognized as follows: Where property is subject to the lien of a claim on which a Judgment is subsequently rendered, the lien of the judgment relates back to the inception of the prior lien.
McClellan v. Solomon, (1887) 23 Fla. 437, 2 So. 825; Fla.Jur. 2d “Judgments and Decrees” Section 197. McClellan held that a judgment lien relates back to the date of levy on a writ of attachment. Also see Stockton v. National Bank, 45 Fla. 590, 34 So. 897 (1903). Similarly, a judgment for foreclosure sets the amount of the lien, but the lien itself is based on the date of the recording of the mortgage. A mortgage creates a lien even though the amount owed including fees is judicially determined after the recording of the mortgage.
In re Hogg, 76 B.R. 735 (Bkrtcy.D.S.D. 1987) recognized that an appellate determination that the amount of a previous judgment should be increased is not a transfer. According to the Court:
The appellate court in the instant case only determined what was actually due and owing the bank on the trial date.
id, pg. 743.
There is no principled difference between Hogg and the present case. In this case, judgment was entered more than 90 days prior to the filing of the petition. The Court later entered its “Amended Final Judgment”, which increased the amount of the original judgment. The increase in the judgment does not constitute a preference.
The trustee’s objection is hereby denied.
DONE and ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491052/ | MEMORANDUM ORDER ON TRUSTEE’S OBJECTION TO CLAIMS OF SEYMOUR KESSLER
A. JAY CRISTOL, Bankruptcy Judge.
THIS CAUSE, having come before this Court on October 25, 1989 upon the Trustee’s objections to the general unsecured claims filed by Seymour KESSLER, and having considered the arguments provided by counsel for Mr. KESSLER in his letter of November 3, 1989, together with the Trustee’s Memorandum, and having heard the evidence presented, this Court does hereby make findings of fact and conclusions of law and enters its order as follows:
Jurisdiction is vested in this Court pursuant to 28 U.S.C. Sections 1334(b), 157(a) and (b), and the District Court’s general order of reference. This is a core proceeding, as defined by 28 U.S.C. Section 157(b)(2)(B), in which this Court is authorized to hear and determine all matters related to this case. The Trustee’s objection to Mr. KESSLER’S claims were made pursuant to Bankruptcy Rule 3007.
The within captioned Debtor filed Chapter 7 proceedings on December 15, 1988. Its principal, and sole stockholder, is the claimant Seymour KESSLER (hereinafter CLAIMANT), who has filed claims number 19 and 20. Both claims are in the amount of $185,859.16 each, and are admitted by the CLAIMANT to be duplications of the same claim. As a result, this Court is disallowing claim number 20 filed by CLAIMANT, and will treat his claims as one claim in the following discussion. The basis of his claim is alleged loans advanced to the Debtor.
At the hearing on the Trustee’s Objection to Claims, the CLAIMANT presented the Debtor’s 1987 and 1988 financial statements to the COURT as written evidence of the CLAIMANT’S claim. As a result of the discussion that followed, this COURT posed an issue — whether these financial statements are sufficient to toll the statute of limitations or otherwise take this action outside of its scope? The parties were directed to present memorandums in support of their positions on the issues raised by this COURT’S inquiry.
At said hearing, it was also decided to categorize these loans into two groups: (1) more recent loans, made within the last five years (within the current limitations *518period), and supported by documentation acceptable to the Trustee, and (2) older loans made in 1979 for the purpose of capitalization of the Debtor, and not supported by sufficient documentation.
With respect to category (1) loans, the CLAIMANT has provided copies of 22 checks, payable to various entities by the CLAIMANT. In addition, based upon the 1987 financial statement, there appears to be no dispute that the limitations period for category (1) loans should be extended back to December 31, 1983 for undocumented loans (four years prior to the 1987 financial statement), or to December 31, 1982 for documented loans (five years prior to the 1987 financial statement). This extension of category (1) loans is based upon the decision set forth in Whale Harbor Spa, Inc. v. Wood, 266 F.2d 953, 954 (5th Cir. 1959), which is discussed more fully below.
As a result of these checks and the above extension applicable to category (1) loans, the amount of $12,537.77 is no longer disputed by the Trustee. This Court will allow Mr. KESSLER’S claim in that amount. However, the Trustee continues to object to three of the checks dated in 1982, checks numbered 154, 200, & 208. Said objection is based upon the Trustee’s assertion that the applicable statute of limitations had expired for these loans, for the same reasons it had expired for the 1979 loans. This Court agrees with the Trustee on this point and includes two of the three alleged loans represented by these checks in its discussion of category (2) loans. The third check, number 200, in the amount of $14,-000.00 does not constitute evidence of a loan to the corporation. It is a check from CLAIMANT payable to the CLAIMANT— not to the Debtor or one of its creditors. As a result, this portion of CLAIMANT’S claim must be disallowed.
In support of that portion of CLAIMANT’S claim relating to category (2) loans, the CLAIMANT has offered copies of the Debtor’s unaudited financial statements for the years 1987 and 1988, prepared by an independent accountant, who is not an employee of the Debtor. These financial statements are accompanied by a cover letter, signed by the preparer, which states that the attached financial statements are the representation of management. The financial statements are otherwise unsigned. These two financial statements disclose a long term shareholder loan, approximately equal to the amount of CLAIMANT’S claim. However, no creditor of the Debtor was ever shown these financial statements, or otherwise made aware of the Debtor’s alleged obligation to its principal.
The Trustee asserts that these disputed category (2) loans are nevertheless barred by the Statute of Limitations set forth in FLA.STAT. Section 95.11(3)(k), which provides:
Actions other than for recovery of real property shall be commenced as follows:
(3) Within four years.—
(k) A legal or equitable action on a contract, obligation, or liability not founded on a written instrument ...
The CLAIMANT in this case has testified that a promissory note or written loan agreement was never executed for the 1979 loans. As a result, the four year limitations period set forth above applies to CLAIMANT’S alleged 1979 loans. Assuming arguendo that the 1982 checks presented by the CLAIMANT are sufficient documentary evidence of a loan, they fall under the five year limitations period set forth in FLA.STAT. Section 95.11(2).
There is no question that both limitation periods have expired in this case. Approximately 10 years have expired between the time of the 1979 loans, and the filing of CLAIMANT’S claims herein. In addition, over 6 years have expired subsequent to the 1982 loans, wherein a five year limitations period applies.
However, the CLAIMANT asserts that the 1987 and 1988 financial statements restart the limitations clock on the otherwise barred debts. In support of this assertion, the CLAIMANT cites the general rule that the acknowledgment of a debt or obligation on a financial statement during the limitations period is sufficient to interrupt and restart the clock. Whale Harbor *519Spa, Inc. v. Wood, 266 F.2d 953, 954 (5th Cir.1959); Sebastian Enterprises, Inc. v. Florida First National Bank at Vero Beach, 345 So.2d 827, 828 (Fla. 4th DCA 1977).
However, the rule set forth in the above eases, including Whale Harbor, applies only to acknowledgment of debts, made during the running of the limitations period. Id. The effect of a balance sheet or oral acknowledgement of a debt, made after the limitations period has expired, is not within the scope of those decisions. As a general rule, such a fact pattern falls under a different statutory section.
In this case, FLA.STAT. Section 95.04 is controlling, because the alleged acknowledgment of CLAIMANT’S 1979 and 1982 loans occurred after the four and five year limitation periods had expired (8 and 5 + years). FLA.STAT. Section 95.04 provides:
An acknowledgment of, or promise to pay, a debt barred by a statute of limitations must be in writing and signed by the person sought to be charged. (Emphasis added).
Under this Section, there appears to be no Florida cases wherein a barred debt was acknowledged for the first time in a financial statement, after the limitations period had expired. However, the lack of cases with this fact pattern is easily understandable. Under normal business conditions, most corporations do not wait 8 to 9 years after incurring a debt, before they begin to report it on the company’s financial statements.
Moreover, the requirements of FLA. STAT. Section 95.04, applicable to this case, have not been met by the CLAIMANT. The signature of an independent accountant on the cover letter to the financial statements is not “signed by the party to be charged” as required by FLA.STAT. Section 95.04. In this case, the accountant is not the party to be charged, nor does he have any authority whatsoever to bind the company to the repayment of an otherwise barred debt. Only a person with authority to bind the company can acknowledge an otherwise barred debt. See, Rickenbach v. Noecker Shipbuilding Co., 66 N.J.Super. 580, 169 A.2d 730 (1961) (Financial statements prepared and signed by accountant were not “signed by the party to be charged” so as to acknowledge an otherwise barred debt, because accountant did not have the authority to bind the corporation to a contractual debt).
In addition the financial statements in question are not a sufficient contractual acknowledgement of the debt, otherwise barred by the statute of limitations. As a general rule, a promise to pay a barred debt must be unconditional, and indicate a willingness to pay. Cosio v. Guerra, 67 Fla. 331, 65 So. 5, 6 (1914); Johnson v. Harrison Hardware & Furniture Co., 119 Fla. 470, 160 So. 878, 879 (1935); Coker v. Phillips, 89 Fla. 283, 103 So. 612, 614 (1925); Knowles Bros. Agency v. Larkin, 132 Fla. 667, 181 So. 896, 897 (1938). Moreover, the new promise must stand or fall upon its own terms, i.e. it must be an enforceable contract in and of itself. Id. The new promise must be clear and definite in its terms, and forms the basis of the new cause of action. Id; see also, Wassil v. Gilmour, 465 So.2d 566, 568 (Fla. 3rd DCA 1985). In this case, the financial statements are not enforceable contracts, especially when the principal of the company is promising to repay to himself an alleged loan therein.
In accordance with the above findings of fact and conclusions of law, this Court enters its Order as follows:
1. That claim number 9, filed by Seymour KESSLER, 21719 Arriba Real, #E, Boca Raton, FI 33433, and C/o Jefferey A. Sarrow, 8211 W. Broward Blvd., Suite 350, Plantation, FI 33324, is allowed as a general unsecured claim in the amount of $12,-537.77, and any amount in excess thereof is stricken.
2. That claim number 20 is stricken as a duplicate.
DONE and ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491053/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW
A. JAY CRISTOL, Bankruptcy Judge.
THIS MATTER having come before the Court for non-jury trial on Wednesday, May 24, 1989, with continuations on Wednesday, May 31, 1989, and Thursday, November 30, 1989; and with the Court having heard argument of Counsel, having reviewed and considered the law and the evidence presented, having conducted a “view” of the premises, and being otherwise fully advised in the premises, does make the following findings of fact and conclusions of law:
I. FINDINGS OF FACT
A. Jurisdiction.
1. Associated Air Services, Inc., is a Florida corporation, conducting business as a Fixed Base Operation at the Fort Lauder-dale-Hollywood International Airport, in Broward County, Florida, which is within the Southern District of Florida.
2. Associated Air Services, Inc., is presently conducting operations as debtor in possession, under the protection of Chapter II, of the United States Bankruptcy Code, in the United States Bankruptcy Court, Southern District of Florida, and this action was brought under Part VII of the Bankruptcy Rules as an adversary action to establish through declaratory judgment an appropriate lease amount under a lease extension agreement between the debtor and Broward County.
B. Declaratory Judgment.
1. Associated Air Services, Inc., owns and holds a lease (hereinafter referred to as the “original lease”) on property owned by the Defendant, Broward County, being made the 27th day of December, 1966. (Plaintiff’s Exhibit 1).
*5212. The lease term under the original lease was 20 years, commencing on the 1st day of January, 1967, and was to expire on the 31st day of December, 1986.
3. The leased premises comprise approximately 23.264 acres, located on the southern boundary of the Port Lauderdale-Hollywood International Airport, and the parties contemplated Plaintiffs predecessors construction of facilities including Airplane hangars, shops and offices, pavements, and utilities.
4. The leased premises have been the principal place of Plaintiff/debtor’s business, or that of Plaintiffs predecessor, from the date of commencement, through the present.
5. On the 19th day of November, 1968, Broward County, as lessor, and Plaintiffs predecessor, as lessee, entered into a “Lease Option Agreement,” permitting lessee the option to extend the “original lease” for an additional 10 years, beginning January 1, 1987. (Plaintiffs Exhibit 2).
6. Plaintiff has rightfully exercised its option for the 10-year lease extension.
7. Paragraph la of the Lease Extension Agreement provides in part, “At the original expiration date of the Lease, rentals are to be paid by Lessee on all improvements which exist at the time of execution of this Lease Option Agreement. Rental rates shall be established by the County at the beginning of this extended period of the Lease ...”
8. No rental rate for the lease extension period was set by the county prior to the expiration of the lease. (Testimony of Jack Lee).
9. In early 1987, Mr. Jack Lee, as Airport Property Manager for the Broward County Aviation Department, upon the instruction of his superiors, notified Associated Air that the new lease amount would be $360,000 per year. That amount was computed as 12% of the appraised amount from the McGary Appraisal. (Testimony of Jack Lee).
10. Associated Air rejected the lease amount as unreasonable, and refused to pay same. (Testimony of Charles Hiett, Jack Lee).
11. On April 22, 1987, Jack Lee revised the rental rate, and presented proposed rental of $66,865 for 19.3 acres of developed property, including all of the improvements, office buildings, hangers, utilities and ramp facilities, etc. An additional $43,-560 was proposed for the remaining undeveloped approximately four (4) acres. This lease amount was officially set forth by letter from Mr. Lee dated January 11,1988. (Defendant’s Exhibits 4 & 16).
12. Associated Air rejected the revised rental as being unreasonable in light of the other leases on the airport, and commenced this declaratory judgment action.
13. The property which is the subject of this litigation is airport property that was deeded to Broward County by the United States Government, under a conditional deed agreement, and is an airport for which Broward County receives substantial developmental assistance. The Court takes judicial notice that the requirements for the continuation of the original deed, and the acceptance of funds for development require that the airport remain open for public access in the National Airspace Program that there be no discrimination among users. Further, the County must comply with all applicable Federal laws, regulations, executive orders, policies, guidelines and requirements as they relate to the application, acceptance and use of Federal funds. The Airport and Airway Improvement Act of 1982 requires the submission of certain assurances on the part of the public agency sponsor, seeking the funds. (Testimony of Herbert Godfrey, and 49 U.S.C.App. 1301, et seq., 49 U.S.C.App. 2201, et seq.).
14. The court has been presented with a number of leases on the airport, explanations as to the operations of each lease holder, the circumstances of the lease, and the lease terms. The court finds that it is necessary to consider comparisons of similar tenants and usage.
15. Associated Air Services, Inc., is a full service Fixed Base Operation, providing services to general aviation, including tie down parking space, fuel, oil, hanger *522space, etc. Associated Air occupies facilities that were constructed in the late 1960’s, which remain substantially in their original condition. Associated Air is operating under a 10 year lease extension, granted as a result of the construction of substantial improvements to the property.
16. Only two of the other properties at the airport occupy what the Court considers the same or similar position as Associated Air Services. Those properties have been referred to as Walker’s a/k/a Sheltair North, and the Thomas Boy property. Both the Sheltair North and Boy properties were granted 10 year lease extensions within the last 24 months. Both properties occupy older existing buildings, and both cater to general aviation aircraft. The other properties presented were dissimilar either in use, facility age, location, the fact that they were new leases, or a combination of these factors.
17. Jack Lee has testified as airport property manager that lease amounts are to be based upon an equal percentage of appraised value. Based upon the varying conditions of the properties, ranging from undeveloped raw land to exclusive use fuel storage facilities, to new and modern buildings, and further based upon the great range of rental rates, the court finds that the County has not, in the past, used a fixed and identifiable measure for the establishment of rents.
18. The Court has heard testimony from the Director of Planning for the Bro-ward County Aviation Department, Mr. Ray Lumbomski, that immediately prior to the exercising of the lease option by Associated Air, the County was making major changes to the Airport Master Plan which materially impacted upon the allowable use of the Associated Air property. In fact, under the proposed changes to the master plan, the property occupied by Associated Air would completely change in use, for the purpose of constructing a noise abatement berm, and Associated would be required to vacate the premises. The Court finds that in attempting to set the lease rental rate under the extension by the county, the county has not dealt with Associated Air in good faith and fairness, and has apparently attempted to use economic coercion to cause Associated to vacate its rights under the “lease option agreement”.
19. The Court has viewed the properties of Sheltair North and Thomas Boy, and finds them to be similar to the property of Associated Air, if not, in fact more elegant.
20. The appraised values of the properties which the court finds similarly situated in facility, use and lease extension are as follows:
i. Sheltair — 12.43 Acres Ten Year Lease Extension — April 1989 Rental (Per Annum) — $41,865.83
= 1.44% of Appraised Value (2.9 Million) ii. Thomas Boy — 18.23 Acres
Ten Year Lease Extension' — January 1988
Rental (Per Annum) — $53,158.37
= 1.51% of Appraised Value (3.5 Million)
21. Applying the percentages of appraised value formula per the other similarly situated, the rental on Associated Air’s parcel would be $43,200 to $45,300.
22. Broward County has disagreed with the net rental figures suggested by the plaintiff for the Thomas Boy property. It is the county’s position that the Boy rental rate is set at a higher figure, with certain credits. The court finds this position to be incredible in light of the evidence. On June 21, 1988, the county entered into a lease extension with Thomas Boy for the straight lease amount of $66,094.95. (See Plaintiff’s Exhibit 30B). Less than two months later, on the 30th of August, 1988, the county entered an Amendment to the lease extension agreement, setting the lease rental rate at $98,436.40, with certain credits, reducing the actual amount to be paid by Thomas Boy to $53,158.37. (See Plaintiff’s Exhibit 30A). The court finds that Plaintiff’s position, that the reduction in the rental rate for Thomas Boy, and the method of using the offsets, is another example of the County’s attempt to obfuscate the actual rentals being paid at the airport to facilitate a policy of non-standard rental settings.
23. Plaintiff has also presented credible evidence regarding the leasing of other airport property, including what has been referenced as the General Aviation Federal *523Inspection Facility (GAFIS). This Court has listened to testimony about the procedure used for the letting of the GAFIS facility. The Court is of the opinion that the procedure used was nothing short of outrageous, and should be the subject of a Grand Jury investigation. The Court further finds that because of the irregularities in the placing of the lease, the GAFIS does not represent a fair market rental value for the property, and concludes that the people of Broward County have been taken to the cleaners once, and it would be inappropriate to penalize them for the prior apparent questionable deeds of the administration.
24. The court further finds that the nature of the leasehold of Associated Air has been changed and restricted by certain actions of the county, reducing the desirability of the property to the Plaintiff and the Plaintiffs business. These changes include the relocation of perimeter road, causing Plaintiff to be required to use a State Highway, with it’s restrictions on use, as opposed to using a county road for servicing off-site customers; The relocation of the Customs facility from directly across the southern runway, to a private location on the west side of the airport; the relocation of the building restriction line for future construction and expansion, and a general emphasis in the reduction of the numbers of General Aviation aircraft utilizing the airport.
25. The Court recognizes that Associated Air asserts more claims against the County than have been entertained in these proceedings. Recognizing that the establishment of the lease rate is an issue which affects the continuation of the business of the debtor, the court has entertained this action for declaratory judgment solely on the rental rate. The court has specifically not addressed any issue other than the specific setting of the appropriate rental rate for this parcel of property. The court leaves for a different forum any claims for money damages, restrictions of use, loss of peaceful possession, or any other issues that may be presented by the Plaintiff.
II. CONCLUSIONS OF LAW
1. Under the implied conditions of the contract (lease) between the parties, Broward County owes an affirmative duty of good faith to Associated Air Services, Inc., in the establishment of a “reasonable” rental rate for the leased premises. The terms and conditions of the “original lease” and “lease option agreement” demonstrate a duty of economic non-discrimination.
2. Under the conditions of the deed of trust, from the United States Government to Broward County, as well as the Assurances for Airport and Planning Agency Sponsors entered into by the county as a condition for the acceptance of federal funding for the improvement of the airport, Broward County has an affirmative duty not to discriminate against any person or entity on the airport premises. More specifically, under Part V, Sub-paragraph “C”, titled Sponsor Certification, Paragraph 22, “Economic Nondiscrimination”, “c”, “Each fixed-based operator at any airport owned by the sponsor shall be subject to the same rates, fees, rentals, and other charges as are uniformly applicable to all other fixed-based operators making the same or similar uses of such airport and utilizing the same or similar facilities.”
3. Broward County has violated its duty in the proposed setting of the rental rate, both at the original $360,000 figure, as well as the revised proposed $110,000 amount.
4. Absent an agreement of the parties, this court has the power to establish an appropriate and fair rental rate.
5. The best measure of the appropriate rental for the subject property is a comparison to the two lease extension agreements of Thomas Boy and Sheltair North. Applying the same percentage of appraised value, and recognizing that the property of the Plaintiff is considered by the court to be less desirable in location, and less elegant in facility, the court sets the rate at $45,300 per year for ten years, commencing on January 1, 1987.
IT IS THEREUPON ORDERED AND ADJUDGED that: this Court shall enter its Final Declaratory Judgment not inconsistent with the foregoing.
DONE AND ORDERED.
*524FINAL DECLARATORY JUDGMENT
THIS MATTER having come before the Court after non-jury trial; and with the Court having previously issued its Findings of Fact and Conclusions of Law, and being otherwise fully advised in the premises, it is thereupon
ORDERED AND ADJUDGED that: declaratory judgment in favor of Plaintiff, Associated Air Services, Inc., and against Defendant, Broward County, be entered and the annual rental rate for the lease agreement between the parties dated the 27th day of December, 1966, and the Lease Option Agreement, dated the 19th day of November, 1968, be hereby set and established as $45,300 per annum, retroactive to January 1, 1987, and continuing throughout the ten-year term thereof.
IT IS FURTHER ORDERED AND ADJUDGED that: the Court retains jurisdiction to tax costs in favor of Associated Air Services, Inc., upon proper motion to the court.
DONE AND ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491054/ | MEMORANDUM OPINION
JAMES E. YACOS, Bankruptcy Judge.
This chapter 11 adversary proceeding involves a complaint filed by the trustee against the defendants for turnover of property, trustee “strong-arm” recapture, fraudulent conveyances, preferential transfers, and equitable subordination. Defendants Atlantic Battery Co., Inc., Bruce Mi-gell and Tilton Trust have moved for summary judgment on all counts primarily on the grounds of res judicata. This opinion *545decides the res judicata issue. This Court has jurisdiction under 28 U.S.C. § 157(b)(2)(E), (F), (H), and (0), and the general reference order dated February 1, 1985 by the U.S.District Court for the District of New Hampshire. This matter came on for a hearing on August 1, 1989, and I then took the matter under submission.
STATEMENT OF FACTS
1. On February 24, 1987, an involuntary petition was filed against debtor Surrette Storage Battery, Inc. Surrette was a Massachusetts corporation in the business of manufacturing and selling lead acid storage batteries until it sold most of its assets on November 28, 1986 to Atlantic Battery Co., Inc. Surrette’s principal place of business was Northfield, New Hampshire.
2. Clark Neill was the President of Sur-rette until the November 28, 1986 sale. Then, he became a consultant of Atlantic until December 31, 1987.
3. Atlantic is a Massachusetts corporation in the business of manufacturing and selling storage batteries.
4. Bruce Migell is the President of Atlantic. Migell’s family owns all of the stock of Atlantic.
5. Migell is the trustee of Tilton Trust. The beneficiaries of the trust are not a matter of public record.
6. On December 20,1985, Atlantic entered into an agreement with Surrette for capital contributions of up to $100,000 in exchange for 75 percent of the stock of Surrette. Neill and Migell now characterize this as a “stock option” agreement.
7. Between December 20, 1985 and March 1986, Atlantic transferred $100,000 in cash to Surrette, which was originally recorded in the books as a capital contribution.
8. Between December 20, 1985 and November 28, 1986, Atlantic shipped approximately $94,000 worth of batteries to Sur-rette for which Atlantic may not have received payment.
9. Sometime in 1986 the cash paid by Atlantic was changed in the bookkeeping of Surrette from a capital contribution to debt. Neill states this was because Migell decided not to exercise the “stock option.”
10. On October 9, 1986, a mortgage purportedly securing a note of $200,000 was given by Surrette to Atlantic.
11. For several months before the November 28, 1986 sale of assets it is disputed whether Migell exercised any control over the business of Surrette.
12. On November 28, 1986, most of the assets of Surrette were exchanged to Atlantic for an assumption of all secured debt.
a. The secured debt was as follows:
Indian Head Bank $229,399.00
SBA Loans $124,982.00
Revolving Loan $141,661.00
Company Car Loan $ 1,581.00
Atlantic Loan $198,500.00
$696,131.00
b. The first Bill of Sale in the transaction conveyed all accounts receivable, the tradename, and machinery and equipment in exchange for secured indebtedness in the amount of $204,641.79.
c. The second Bill of Sale conveyed all inventory with the exception of that listed in an attached schedule A in exchange for secured indebtedness in the amount of $106,488.77. The percentage of the inventory conveyed is a matter of dispute, but this Court determined in a prior hearing it was 48 percent of Surrette’s total inventory.
d. By a separate agreement, all of Sur-rette’s real estate was transferred to the Tilton Trust by Warranty deed.
e. Migell agreed to indemnify Clark and Joyce Neill for any claims or liability arising out of their personal guarantees of the debt of Surrette to Indian Head Bank and the SBA.
13. The November 28, 1986 transaction did not expressly convey the goodwill or trade secrets of Surrette. However, Neill states he believed the transaction conveyed with it the goodwill.
14. Since the November 28, 1986 transaction, Atlantic has not caused an assignment of Surrette’s tradename and related trade*546marks to be filed with the U.S. Patent and Trademark Office.
15. On May 27, 1987, the prior trustee sued the current defendant under the Bulk Sales Act to avoid the transfer of inventory in the November 28, 1986 transaction. See Adversary No. 87-108. On March 1, 1989, this Court denied the trustee’s motion for summary judgment and granted Atlantic’s motion for summary judgment. On June 2, 1988, this Court denied certain petitioning creditors’ motion to reopen. No appeal was taken of any of these orders.
TRUSTEE’S COMPLAINT
On February 8, 1989, the successor trustee brought a 21 count amended complaint against the named defendant. Count 1 seeks a turnover of the goodwill and trade secrets of Surrette pursuant to § 542(a), which allegedly were not conveyed to Atlantic. Count 2 seeks turnover of the tradename and trademark “Surrette” which allegedly could not be conveyed to Atlantic without the goodwill. Count 3 seeks to obtain the tradename/trademark “Surrette” under § 544(a)(1) because a filing of the transfer to Atlantic has never been made with the U.S. Patent and Trademark Office. Count 4 seeks recovery of the tradename/trademark under § 548(a)(2) because “reasonably equivalent value” was not given for it in the November 28, 1986 transaction. Count 5 seeks recovery of the tradename/trademark under § 547 because the transfer was allegedly made on account of the antecedent debt Surrette owed Atlantic. Count 6 seeks to avoid the mortgage granted Atlantic as a preferential transfer under § 547(b). Count 7 claims the mortgage to Atlantic was a fraudulent transfer under § 548(a)(2). Count 8 claims that the transfer of tangible personalty on November 28, 1986 was a preferential transfer. Count 9 asserts that the sale of inventory was a fraudulent conveyance. Count 10 claims the transfer of the equipment and machinery was a fraudulent conveyance.
Count 11 alleges that the real estate conveyed to Tilton Trust was a fraudulent transfer under § 548(a)(1) because it was made with an intent to defraud creditors. Count 12 claims the real estate transfer is a fraudulent conveyance under § 548(a)(2). Count 13 alleges the transfer of the real estate is voidable under § 544(b) because an unsecured creditor could avoid the transaction under N.H.Rev.Stat.Ann. § 545-A:5(II), which is the state fraudulent transfer law. Count 14 seeks to avoid the transfer of assets under § 548(a)(1) as a transfer of an insider (Atlantic) with the intent to defraud creditors. Count 15 states that the transfer of assets is voidable under § 544(b). Count 16 claims that the indemnity agreement the Neills received is a dividend under Massachusetts law which the creditors should receive under § 544(b).
Count 17 seeks to equitably subordinate Atlantic’s claims pursuant to § 510(c). Count 18 seeks to equitably subordinate the Trust’s claims. Count 19 seeks to equitably subordinate Migell’s claims. Count 20 seeks to equitably subordinate Neill’s claims. Count 21 claims that the proper corporate authority was not obtained for the transfer of assets.
On June 9, 1989 Atlantic, Migell and Til-ton filed a motion for summary judgment. On July 6, 1989, plaintiff filed a cross-motion for partial summary judgment. Specifically, the trustee sought relief under counts 1-3.
THE RES JUDICATA QUESTION
The question before me is whether the trustee’s complaint is barred by res judica-ta against defendants Atlantic, Migell and Tilton Trust because the prior trustee had already attempted to attack the November 28, 1986 transaction and failed. There is no dispute that the first suit was a “final” decision “on the merits”, see Merrimack Street Garage, Inc. v. General Motors Corp., 667 F.Supp. 41 (D.N.H.1987). The dispute in this case is whether the second suit is based on the same underlying facts. The decisive case on this issue is Manego v. Orleans Bd. of Trade, 773 F.2d 1 (1st Cir.1985). In this case, the First Circuit adopted a “transactional” approach to res judicata questions. The Court adopted the *547Restatement (Second) approach which is defined as follows:
(1) When a valid and final judgment rendered in an action extinguishes the plaintiff’s claim pursuant to the rules of merger or bar (see §§ 18, 19), the claim extinguished includes all rights of the plaintiff to remedies against the defendant with respect to all or any part of the transaction, or series of connected transactions, out of which the action arose.
(2) What factual grouping constitutes a “transaction”, and what groupings constitute a “series”, are to be determined pragmatically, giving weight to such considerations as whether the facts are related in time, space, origin, or motivation, whether they form a convenient trial unit, and whether their treatment as a unit conforms to the parties’ expectations or business understanding or usage.
Restatement (Second) of Judgments § 24 (1982).
The Court explained its interpretation of this rule as follows:
... the mere fact that different legal theories are presented in each case does not mean that the same transaction is not behind each.
5¡C >¡5 ^ SH Sfc
Nor does it matter in this case that the named defendants are not identical.
j¡c * * * * %
[T]he focus of a “transactional” analysis is not on whether a second claim could have been brought in a prior suit, but whether the underlying facts of both transactions were the same or substantially similar.
Manego, supra at 6.
A subsequent First Circuit case illustrates the Manego ruling. In Dowd v. Society of St. Colwmbans, 861 F.2d 761 (1st Cir.1988), a priest sued a religious group originally for contract claims concerning medical and financial obligations while doing missionary work. After losing, he sued again alleging that negligence during his employ as a missionary caused a disability. The First Circuit held res judicata applied. The Court reasoned:
In applying res judicata, we have used a transactional approach to evaluate similarity of claims. In effect, we have attempted to determine whether the new complaint grows out of the same transaction or series of connected transactions; in doing so we ascertain whether the underlying facts are related in time, space, origin, or motivation.
Id. at 763.
Applying the transactional analysis to this case, I believe the trustee’s suit is grounded in the same “series of connected transactions” as the prior trustee’s suit. The prior trustee attempted to void one aspect of the November 28, 1986 transaction by bringing a Bulk sales Act complaint. The current trustee attempts to attack elements of the November 28, 1986 deal as well as events since December 20, 1985, like the issuance of a mortgage. Yet, all the events between December 20, 1985 and November 28, 1986 can be viewed as a “series of connected transactions”. The trustee’s own pleading admits this in paragraph 9 of the objection to Atlantic’s Motion for Summary Judgment where it is stated:
The essence of the transactions of November 28, 1986 was the payment of an insider’s trade debt and the return of an insider’s capital contribution before any unsecured creditors were paid.
Indeed, the Restatement states that in determining if a series of connected transactions exists a court must look at “whether they form a convenient trial unit.” Restatement, supra. I believe all the events from December 20, 1985 to November 28, 1986 should have been examined in one trial to understand what happened on November 28, 1986. The fact that the prior trustee did not do so may raise a question of nonfeasance, but should not prejudice the defendants.
CONCLUSION
Plaintiff trustee is barred by res judicata from pursuing its claims against Atlantic, Migell, and Tilton Trust. Summary judg*548ment is granted for these defendants. The summary judgment motion of Clark Neill shall be scheduled for hearing. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491056/ | MEMORANDUM ON TRUSTEE’S MOTION FOR RECONSIDERATION OF ALLOWANCE OF CLAIMS OF INTERNAL REVENUE SERVICE
RICHARD S. STAIR, Jr., Bankruptcy Judge.
On May 25, 1989, the court entered an order denying the trustee’s objections to the allowance of Claims No. 30 and 12 filed in the C.H. Butcher, Jr. and Shirley R. Butcher cases, respectively, by the Internal Revenue Service.1 This order was accom*776panied by a “Memorandum On Trustee’s Objections To Claims Of Internal Revenue Service.”2 On September 21, 1989, the trustee, pursuant to Bankruptcy Code § 502(j) and Bankruptcy Rule 3008, filed a “Motion For Reconsideration Of Allowance Of Claims Of Internal Revenue Service” (Motion).3 The trustee filed a memorandum in support of his Motion; a memorandum opposing the Motion was filed by the United States.
The gist of the trustee’s Motion is that the court’s reliance on the Supreme Court’s decision in Arkansas Best Corp. v. Commissioner of Internal Revenue, 485 U.S. 212, 108 S.Ct. 971, 99 L.Ed.2d 183 (1988), is misplaced. In denying the trustee’s objections, the court in its May 25, 1989 opinion held:
Arkansas Best’s relevance to the instant proceeding is obvious. The debtors claimed the payment of one hundred (100%) percent of the interest on loans incurred to provide funds necessary for the acquisition of bank stock as a business expense. In reliance upon I.R.C. § 163(d), the IRS disallowed the deductions claimed on Schedule C to the debtors’ 1977, 1978 and 1979 income tax returns for the interest payments made on these loans. I.R.C. § 163(d) limits the amount of deductible interest where that interest was incurred for investment purposes. Arkansas Best mandates the treatment of bank stock, such as that purchased by C.H., as a capital asset for tax purposes. Therefore, I.R.C. § 163(d) limits the amount of investment interest which can be properly deducted by the debtors for the three tax years in question.
Following the Supreme Court’s directives in Arkansas Best, this court’s course of action is fixed. The IRS correctly applied I.R.C. § 163(d) in disallowing interest expenses and classifying income claimed on the debtors’ joint income tax returns for the three tax years in question. The Trustee’s objections on this ground must be denied.
100 B.R. at 372-73.
The trustee contends that the court should have gone beyond the holding in Arkansas Best and engaged in a fact-intensive inquiry to determine “whether C.H. Butcher’s activities in the banking industry rose to the level of trade or business such that he would be allowed to deduct interest accrued on the debt financing the purchase of the stock through which he controlled the business.” Memorandum Of Law In Support Of Motion For Reconsideration Of Allowance Of Claims Of Internal Revenue Service, at 32. The trustee argues that the court must make a factual determination of whether Mr. Butcher held the stock acquired in his various Tennessee and Kentucky banks in connection with a trade or business or as an investment.
In its response to the trustee’s Motion, the United States observes that it “now believes that the proper test to be used in determining what constitutes an investment asset, for purposes of Section 163(d) of the Internal Revenue Code, is the ‘substantial investment test’_” Memorandum Of Law In Support Of The Opposition Of The United States Of America To The Trustee’s Motion For Reconsideration Of Allowance Of Claims Of The Internal Revenue Service, at 3. The United States argues, however, that the court’s findings of fact as set forth in its May 25, 1989 opinion clearly establish that C.H. Butcher, Jr., acquired his stock with a “substantial investment intent.” The court agrees.
“The determinative question in the investment/trade or business dichotomy is whether the taxpayer held the property *777with a ‘substantial investment intent.’ The presence or absence of substantial investment intent is a question of fact.” Olson v. Commissioner of Internal Revenue, T.C. Memo 1989-564 (Oct. 19, 1989) (citing Polakis v. Commissioner of Internal Revenue, 91 T.C. 660 (1988); Miller v. Commissioner of Internal Revenue, 70 T.C. 448 (1978)).
The findings of the court as set forth in its May 25, 1989 opinion clearly establish that Mr. Butcher was not in the trade or business of buying and selling banks.4 More specifically the court made the following material findings: that between 1964 and 1983 Mr. Butcher acquired stock in approximately twenty-one banks in Tennessee and Kentucky; that he purchased this stock with a goal of making money from the appreciation in the value of the stock; that he wanted to keep his ownership interest in the banks at a level where his income from the banks, through salaries, director’s fees, dividends, credit life insurance commissions, and the like, would be sufficient to pay the interest expense on the loans taken to acquire the stock; that his ultimate plan was to acquire an ownership interest in, and “control” a network of small banks, and then sell the entire block of banks to a “major company”; and, finally, that he believed he could command a higher price for his bank stocks if they were sold as a whole rather than individually. 100 B.R. at 365.
Clearly, Mr. Butcher’s intent in acquiring his bank stock was to realize a profit through an appreciation in value and subsequent sale. These facts conclusively establish a “substantial investment intent” by C.H. Butcher, Jr.
In its May 25, 1989 opinion, the court observed:
In effect, I.R.C. § 163(d) limits the amount of investment interest an individual may deduct in any given taxable year to $10,000 plus the amount of net investment income received in that year. Investment interest is defined as “interest paid or accrued on indebtedness incurred or continued to purchase or carry property held for investment. I.R.C. § 163(d)(3)(D).
100 B.R. at 369.
Based upon its analysis of Arkansas Best, the court concluded that the Internal Revenue Service correctly applied I.R.C. § 163(d) in disallowing interest expense claimed by the debtors on their joint 1977, 1978, and 1979 tax return as attributable to Mr. Butcher’s trade or business and correctly reclassified that expense as “investment interest.” That conclusion remains unaltered.
Based upon the facts set forth in its May 25, 1989 opinion, the court finds that C.H. Butcher, Jr., acquired and held his bank stock with a “substantial investment intent.” To the extent the May 25, 1989 opinion fails to make a specific finding to this effect, the instant Memorandum supplements and amends the earlier opinion.
The conclusions reached herein do not change or alter the ruling emanating from the court’s May 25, 1989 findings nor is additional proof required to support the conclusions reached in this Memorandum. Code § 502(j) provides that “[a] claim that has been allowed or disallowed may be reconsidered for cause.” 11 U.S.C.A. § 502(j) (West Supp.1989) (emphasis added). Cause does not exist for granting the trustee’s Motion. An appropriate order denying the Motion will be entered.
. One issue raised by the trustee, a determination of the entitlement of the Internal Revenue Service claims to priority status under 11 U.S. C.A. § 507(a)(7)(A) (West Supp.1989), was reserved pending further order of the court.
. This opinion is published in West’s Bankruptcy Reporter, In re Butcher, 100 B.R. 363 (Bankr. E.D.Tenn.1989).
. Code § 502(j) provides: “A claim that has been allowed or disallowed may be reconsidered for cause....” 11 U.S.C.A. § 502(j) (West Supp.1989). Bankruptcy Rule 3008 provides: “A party in interest may move for reconsideration of an order allowing or disallowing a claim against the estate. The court after a hearing on notice shall enter an appropriate order.” Fed.R. Bankr.P. 3008.
. 100 B.R. at 365-66. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491057/ | ORDER
JOHN L. PETERSON, Bankruptcy Judge.
At Butte in said District this 16th day of May, 1988.
In this Chapter 11 case, the Debtors have filed a Motion to Alter or Amend the Order of April 12, 1988, awarding an oversecured creditor, Jean L. King, the sum of $14,-500.00 in attorney fees under Section 506(b) of the Bankruptcy Code. The Order further directed that such sum be paid within 90 days from confirmation. The Debtors’ motion places into issue the hourly rate effectively awarded and the term of payment. In response, King contends that an hourly rate plus other considerations are appropriate in fixing the fee and that the time of payment is consistent with Montana statutory law dealing with award of costs, i.e., Section 71-1-233, M.C.A.
The principal elements applied in award of attorney fees is hours times an hourly rate, which is known as the “lodestar” test. Lindy Bros. Builders, Inc. v. Am. Radiator & Standard Sanitary Corp., 487 F.2d 161 (3rd Cir.1973) (Lindy I), and 540 F.2d 102 (3rd Cir.1976) (Lindy II).
Prior to lodestar, the predominant method of evaluation involved consideration of various factors of which the hourly rate was but one variable. Johnson v. Georgia Highway Express, Inc., 488 F.2d 714, 717-719 (5th Cir.1974), a Title VII matter, is the leading case in this area. It listed twelve factors, the first of which is the time and labor involved. The additional factors are (2) the novelty and difficulty of the problems, (3) the skill required to perform the legal services, (4) preclusion of other employment, (5) customary fees in the type of work involved, (6) whether the fee is fixed or contingent, (7) time limitations composed by the client or the circumstances, (8) the amount involved and the results obtained, (9) experience, reputation and ability of *14counsel, (10) undesirability of the case, (11) nature and length of the professional relationship with the client, and (12) awards in similar cases.
Application of the above elements of variables can be difficult, as was articulated in Pennsylvania v. Delaware Valley Citizens’ Council for Clean Air, 478 U.S. 546, 106 S.Ct. 3088, 92 L.Ed.2d 439 (1986) (Delaware I), in which the Supreme Court stated:
“This approach [Johnson'] required trial courts to consider the elements that go into determining the propriety of legal fees and was intended to provide appellate courts with more substantial and objective records on which to review trial court determinations. This mode of analysis, however, was not without its shortcomings. Its major fault was that it gave very little actual guidance to District Courts. Setting attorney’s fees by reference to a series of sometimes subjective factors placed unlimited discretion in trial judges and produced disparate results.” Id. 478 U.S. at 563, 106 S.Ct. at 3097, 92 L.Ed.2d at 455.
Thus, lodestar has been employed with increasing frequency in recent years. In the Ninth Circuit, the transition is illustrated by In re Yermakov, 718 F.2d 1465 (9th Cir.1983), which, while alluding to the various criteria set forth in Johnson, stated “The primary method used to determine a reasonable attorney fee in a bankruptcy case is to multiply the number of hours expended by an hourly rate.” Id. at 1471. As in Yermakov, criteria employed by courts in considering attorney fees in non-bankruptcy settings are now applied in bankruptcy cases. See In re Baldwin-United Corp., 79 B.R. 321 (Bankr.S.D.Ohio 1987); In re Kero-Sun, Inc., 59 B.R., 630, 633-634 (Bankr.D.Conn.1986); In re Jensen-Farley Pictures, Inc., 47 B.R. 557 (Bankr.D.Utah 1985).
Delaware I, supra, considered the propriety of an attorney’s fee award pursuant to Section 304(d) of the Clean Air Act [42 U.S.C. § 7604(d)], which provides that in any action to enforce the Act, the Court may award costs of litigation including a reasonable attorney’s fee. The Delaware I Court stated:
“[In Hensley v. Eckerhart, 461 U.S. 424, 103 S.Ct. 1933, 76 L.Ed.2d 40 (1983) ], We ... adopted a hybrid approach that shared elements of both Johnson and the lodestar method of calculation ...
We further refined our views in Blum v. Stenson, 465 U.S. 886 [104 S.Ct. 1541, 79 L.Ed.2d 891] (1984). Blum restated the proper first step in determining a reasonable attorney’s fee is to multiply ‘the number of hours reasonably expended on the litigation times a reasonable hourly rate’ ...
Blum also limited the factors which a district court may consider in determining whether to make adjustments to the lodestar amount. Expanding on our earlier finding in Hensley that many of the Johnson factors ‘are subsumed within the initial calculation’ of the lodestar, we specifically held in Blum that the ‘novelty [and] complexity of the issues,’ ‘the special skill and experience of counsel,’ the ‘quality of representation,’ and the ‘result obtained’ from the litigation are presumably fully reflected in the lodestar amount, and thus cannot serve as independent bases for increasing the basic fee award. Although upward adjustments of the lodestar figure are still permissible, such modifications are proper only in certain ‘rare’ and ‘exceptional’ cases, supported by both ‘specific evidence’ on the record and detailed findings by the lower courts.
A strong presumption that the lodestar figure — the product of the reasonable hours times a reasonable rate — represents a ‘reasonable’ fee is wholly consistent with the rationale behind the usual fee shifting statute, including the one in the present case.” Id. [478 U.S. at 564-65, 106 S.Ct. at 3098], 92 L.Ed.2d at 455-56.
In Blum v. Stenson, 465 U.S. 886, 104 S.Ct. 1541, 79 L.Ed.2d 891 (1984), the Court held that virtually all of the Johnson elements were subsumed into lodestar except for the factor of contingency. In re Powerine Oil Co., 71 B.R. 767 (9th Cir. BAP 1986), decided prior to Pennsylvania v. *15Delaware Valley Citizens’ Council for Clean Air, 483 U.S. 711, 107 S.Ct. 3078, 97 L.Ed.2d 585 (1987) (Delaware II), affirmed allowance of a substantial increment to the lodestar figure because of a strong element of contingency, despite the absence of a contingent fee agreement as provided for by 11 U.S.C. § 328. In a bankruptcy setting this element can still be applicable, although there may now be reason to reexamine this issue because of Delaware II. This case, by a bare plurality (4 justices), may have folded the remaining unsub-sumed element, that of contingency, into lodestar stating:
“It may be that without the promise of risk enhancement some lawyers will decline to take cases; but we doubt that the bar in general will so often be unable to respond that the goal of the fee-shifting statutes will not be achieved. In any event, risk enhancement involves difficulties in administration and possible inequities to those who must pay attorney’s fees; and in the absence of further legislative guidance, we conclude that multipliers or other enhancement of a reasonable lodestar fee to compensate for assuming the risk of loss is impermissible under the usual fee-shifting statutes.” Id. [483 U.S. at 727, 107 S.Ct. at 3087], 97 L.Ed.2d at 599.
It should be noted, however, that taking into account the four justice dissent and Justice O’Connor’s partial concurrence, it is arguable that the majority of the court has not as yet subsumed the element of contingency into lodestar. The dynamics of this problem are discussed in Matter of Baldwin-United Corp., 79 B.R. 321, 344-346 (Bankr.S.D.Ohio 1987).
Powerine discussed the various Supreme Court cases then applicable, as well as Chalmers v. City of Los Angeles, 796 F.2d 1205 (9th Cir.1986), modified and reh’g denied, 808 F.2d 1373 (9th Cir.1987). Chalmers, following Blum v. Stenson, stated,
“We begin with the Supreme Court admonition that if ‘the claimed rate and number of hours are reasonable, the resulting product is presumed to be the reasonable fee contemplated by section 1988.’ The Supreme Court decision in Blum further holds that an upward adjustment of an award of fees by use of a multiplier is justified only in rare, exceptional circumstances.” Id. at 1215.
Thus the Ninth Circuit clearly subscribes to lodestar. As stated above, this standard is applicable in bankruptcy.
As to the amount of the hourly rate, this Court in Wendy’s of Montana, 111 B.R. 314, 5 Mont.B.R. 453 (Bankr.Mont.1988), adopted the use of the “locality” rule, after specifically noting that the burden of proof in all fee matters is on the applicant. See, Mares v. Credit Bureau of Raton, 801 F.2d 1197 (10th Cir.1986), (It remains counsel’s burden to prove and establish the reasonableness of each dollar, each hour, above zero, and district courts are afforded wide latitude, within proper guidelines of fee-shifting statutes). In Wendy’s, the Court, relying upon testimony of a competent bankruptcy practitioner, fixed the hourly rate at $110.00. The Court further awarded a bonus fee, again based on detailed evidence presented at the hearing on the fee application, due to the “difficulty, complexity, and relatively quick and successful completion of this Chapter 11 reorganization case,”.1
In the case sub-judice, King filed a Proof of Claim for $76,154.13 as the principal amount due on the mortgage which is a first priority lien on real property valued at $110,000.00. King further requested an award of attorney’s fees under Section 506(b) of the Code. King’s objection to the Plan of Reorganization was rejected by the Court, and after confirmation, King’s counsel filed an application for fees which relate to pre-petition and post-petition services. In the application, King’s counsel urges the Court to adopt an element of contingency in the fee award based on a minimum fee schedule of the Western Montana Bar As-*16sociation dealing with mortgage foreclosure actions. The percentage allocation increases the fee request by $3,430.00. The hourly rate is fixed at $80.00 to $90.00 per hour, which is a reasonable per hour charge. King here paid the hourly charges of $9,556.10, leaving a balance due of $336.00. The total hourly based fee is $9,892.10, and costs advanced equal $448.60. The Court awarded a fee of $14,-500.00, which the Debtors contend raises the hourly rate to over $140.00 per hour, being in excess of any reasonable hourly rate submitted by King’s counsel. It appears from the record that King’s claim was never at risk, since there was at all times a sufficient equity cushion in the property to pay the principal, interest and costs of foreclosure.
Upon reconsideration, I conclude none of the element of risk or contingency discussed in Powerine Oil, supra, is present in this case and King’s counsel has proven that the hours expended of about 121.5 hours should be paid at $80.00 to $90.00 per hour. In light of the above legal authorities, I fix a reasonable fee based only on an hourly rate at $10,325.00 plus costs advanced of $448.60.
The Debtor further complains that the payment of the fees cannot be ordered to be paid within 90 days of confirmation, but rather such fee is added to the claim and reamortized over 20 years at 8.5% interest. Contrary to King’s argument, § 506(b) has pre-empted state law governing the availability of attorney’s fees as part of a secured claim. Matter of 268 Ltd, 789 F.2d 674, 675 (9th Cir.1986). 3 Collier on Bankruptcy, H 506.05, pp. 506-41 and 42 (15th Ed.), notes:
“It is important to recognize that section 506(b) provides only for the allowance of post-petition interest, fees, costs and charges as part of a secured claim. It does not require the current payment of such amounts. Entitlement to current payment of such amounts must be grounded elsewhere, such as in the provision of adequate protection or in underlying agreements which are not affected by the subject bankruptcy case.”
Thus, we have a critical distinction, that as to the award of a reasonable fee, state law does not govern, but as to the payment of the fee, state law or the mortgage agreement may control. In this case, the mortgage agreement provides that attorney’s fee shall be allowed upon default and be a “lien under this indenture”. Clearly, the mortgage foreclosure provisions are at odds with § 1129 of the Code. In the confirmed Plan, King’s claim is fixed without regard to the allowance and payment of attorney’s fees, and only the principal and interest are to be amortized over 20 years. The Plan provides that administrative expenses, i.e., any payment for services or costs and expenses in connection with the case, or incident to the case is subject to the approval of the Court as reasonable, and administrative claims will be paid cash equal to the amount of the claim. Thus, I conclude the Plan contemplated payment of King’s allowance of attorney fees in cash, not in deferred cash payments over 20 years.
IT IS ORDERED the motion to amend the award of attorney fees for secured creditor Jean L. King is granted and the fee is set at $10,325.00 plus costs advanced of $448.60, to be paid within 90 days of this Order.
. I recognize that based on Delaware II, supra, a good argument could be made that the amount of the hourly rate fixed by the Court subsumes an award for bonus, but it is also very arguable that an element of contingency, i.e., bonus, is proper under Powerine, supra. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491058/ | ORDER ON ALLEGED DEBTOR’S MOTION'TO DISMISS
LEWIS M. KILLIAN, Jr., Bankruptcy Judge.
On June 13, 1989, Florida Air Conditioners, Inc. (Florida Air), the petitioning creditor, filed an Involuntary Petition for relief under Chapter 7 of the Bankruptcy Code against Robert D. Downie pursuant to 11 U.S.C. § 303(a). The alleged debtor has filed a motion to dismiss based upon the theory that Florida Air’s claim is subject to a bona fide dispute under § 303(b)(1) of the Bankruptcy Code and cannot serve as the basis for the petitioning creditor’s filing of the Involuntary Petition.
The primary issue under consideration is whether the asserted claim of petitioner Florida Air is subject to a bona fide dispute. In order to understand the dispute, the history of the business dealings between Robert Downie and Florida Air is necessary. In April of 1982, Robert Dow-nie began operating a business called Bob Downie Air Conditioning, a sole proprietorship. Robert Downie and his wife, Diana Downie, as principals, signed a credit agreement with Florida Air listing Robert Downie d/b/a Bob Downie Air Conditioning as dealer. The agreement, in part, states “[sjhould the purchaser be a corporation or partnership ... the undersigned ... agree that ... they are personally liable, jointly, and severally with the principal, as guarantor(s) for payment of all indebtedness or liabilities incurred pursuant to this agreement.” (emphasis added)
From April of 1982 to March 3, 1983, Robert Downie operated the business as a sole proprietor. On March 3, 1983, Bob Downie Company, a Florida corporation, was formed. Robert Downie was and still is the president of Bob Downie Company. On November 1, 1983, Bob Downie Company entered into a floor plan finance agreement with Carrier Distribution Credit Corporation (CDCC). Bob Downie Company was supplied ventilating, air conditioning and other equipment by Florida Air on open account through floor plan financing provided by CDCC.
Prior to March 1987, Robert Downie owned 100% of Bob Downie Company. In March of 1987, Robert Downie sold 75% of the company to Oliver Leon Cason, James Mack Farber, and Charles Yount. In June 1987, upon learning that Bob Downie Air Conditioning was now Bob Downie Company and that Robert Downie was no longer controlling shareholder, Florida Air requested and received a new credit agreement with the Bob Downie Company, which included the personal guarantees of Cason, Farber, and Yount. This agreement contained slightly different credit terms than *63the credit agreement signed by Robert and Diana Downie in 1982.
The transactions under scrutiny occurred between March 20, 1987, through July 25, 1988, in which Florida Air sold heating and air conditioning equipment to Bob Downie Company pursuant to financing provided by CDCC. When Bob Downie Company failed to pay CDCC, CDCC exercised its right to cause Florida Air to buy out any obligation owed by Bob Downie Company under the financing arrangement, and assigned the CDCC position to Florida Air. Florida Air brought suit in the Circuit Court for Pinellas County, Florida, Case no: 88-14361-17, and sought recovery of all amounts alleged to be due from Bob Downie Company. The creditor filed a four count complaint. The first three counts are against Bob Downie Company, a Florida corporation. The fourth count is against five alleged guarantors, including the alleged debtor, Robert Downie and his wife, Diana Downie.
After institution of this state court action, Bob Downie Company paid Florida Air $23,423.33 on its open account for goods purchased under the Florida Air credit terms, leaving a balance of $29,778.76 outstanding, plus interest, costs, finance charges and attorneys’ fees. This remaining outstanding balance resulted from Florida Air’s charge repurchase obligation with CDCC. In the state court litigation, both parties moved for summary judgment arguing that no genuine issues exist regarding any material fact. The plaintiff in that action, Florida Air, cancelled the hearing on its motion scheduled for May 19, 1989, and filed its involuntary petition on June 13, 1989.
Under the Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub.L. No. 98-353, 98 Stat. 333, 369 (1984) Congress provided that creditors holding claims in “bona fide dispute” cannot be petitioning creditors. Since the legislative history does not define what constitutes a bona fide dispute, the courts have reached varying results as to when such a dispute exists regarding a particular claim.
The Court agrees with and adopts the test applied in In re Busick, 65 B.R. 630, 637-38 (N.D.Ind.1986), aff’d 831 F.2d 745, 749-50 (7th Cir.1987). The test does not require a decision on the resolution of any dispute, only a determination that the dispute exists. The court need only engage in a limited analysis of the claims at issue in order to determine whether there exists a genuine issue of material fact that bears upon the alleged debtor’s liability, or a meritorious contention as to the application of law to undisputed facts. In re Ramm Industries, Inc., 83 B.R. 815, 822 (Bankr.M.D.Fla.1988); In re General Trading, Inc., 87 B.R. 216, 219 (Bankr.S.D.Fla.1988).
The creditor, Florida Air, argues that it sold goods to Bob Downie Company pursuant to the Florida Air credit agreement and therefore there is no bona fide dispute. Florida Air invoices the dealer, Bob Downie Company, for the goods sold. Florida Air then assigns the invoices to CDCC on a recourse basis. If the dealer (Bob Downie Company) fails to pay CDCC, Florida Air must pay CDCC. CDCC then assigns the delinquent account back to Florida Air for collection.
The alleged debtor argues that the debt upon which Florida Air bases its claim is a debt incurred pursuant to the CDCC financing agreement, not the Florida Air credit agreement on which Florida Air claims Robert Downie’s alleged personal guarantee. The alleged debtor’s position is that Bob Downie Company purchases materials from Florida Air with funds borrowed from CDCC to pay for these goods pursuant to an agreement between the Bob Downie Company and CDCC. The alleged debtor contends that the debt to Florida Air under the credit agreement was extinguished when the payment of $23,423.33 was applied to its open account with Florida Air. Furthermore, the alleged debtor contends that Robert Downie was liable under the Florida Air credit agreement as a principal, not as a guarantor. When Florida Air was notified that it was doing business with Bob Downie Company, a corporation, and that the controlling interest had been transferred from Robert Downie to Cason, Far-ber, and Yount, it secured a new credit *64agreement with the Bob Downie Company which included slightly different credit terms and the personal guarantees of Ca-son, Farber, and Yount. At no time did Florida Air request Robert Downie to guarantee the account of the Bob Downie Company. Robert Downie states that since he gave up day-to-day control of the business he would not have guaranteed the debt of the Bob Downie Company had he been requested to do so.
There are legal issues raised concerning whether the credit agreement signed by Robert Downie covers the debt of the corporation, Bob Downie Company. At the time of the original credit agreement Robert Downie was a principal. There was no corporation in existence and no corporate debt to guarantee. The terms of the credit agreement indicate that if the purchaser is a corporation or a partnership, then the guarantors are personally liable. At the time of the execution of this credit agreement the dealer was listed as Robert D. Downie d/b/a Bob Downie Air Conditioning. It is clear that the purchaser was neither a corporation nor a partnership. When the Bob Downie Company was formed a new credit application, with slightly different credit terms and new principals as guarantors, was signed by Cason, Farber, and Yount.
This fact pattern of the instant case is distinguishable from Frell v. Dumont-Florida, Inc., 114 So.2d 311 (Fla.3rd DCA 1959). In Frell the guarantor was es-topped from claiming the guaranty was rendered ineffective due to one of the partners of the principal-debtor withdrawing from the partnership. In Frell the guarantor participated in the name change, claimed profits in the new firm under the continuing guaranty, and at no time disclaimed responsibility under the guaranty until suit. In the instant case, Robert Downie informed Florida Air of its change from a sole proprietorship to a corporation and Florida Air sought and received a new credit agreement which included the guarantees of the individuals in charge of the day-to-day business operations of the Bob Downie Company.
In Powell Manufacturing Company v. Maria Allbritton, 513 So.2d 1348 (Fla.1st DCA 1987), Maria Allbritton guaranteed the debt of her husband, a sole proprietor. Her husband then formed a partnership with another individual and the Court held that the nature of the principal had changed thereby voiding the personal guarantee. In that case Powell was made aware of the fact that the business had changed from a sole proprietorship to a partnership and continued to do business under the same terms. That case provided a stronger case for the creditor. The wife guaranteed the debt of her husband who was a sole proprietor. Her husband then went into partnership with another individual. The court held that the nature of the principal had changed thereby voiding her guarantee. In the instant case when Florida Air was informed of the change in the structure of the business from a sole proprietorship to a corporation, it secured a new credit agreement with the personal guarantees of Cason, Farber, and Yount as principals and slightly different credit terms. The original principal whose debt allegedly was guaranteed no longer remains liable as a principal. Under the rationale of Allbritton, the debtor makes a meritorious contention that the guarantee is not effective because Robert Downie was the principal, there was no corporate debt.
The alleged debtor also questions whether the debt that Florida Air is suing on was covered by Florida Air Credit agreement. The creditor argues that the debt it is suing on is incurred pursuant to the Florida Air credit agreement. When the dealer purchases the goods directly from Florida Air, Florida Air invoices those goods and then assigns those invoices to CDCC on a recourse basis. If the dealer fails to pay CDCC pursuant to the Floor Plan Agreement between the dealer and CDCC, Florida Air pays off CDCC. The account is then assigned back to Florida Air by CDCC, and the charges reappear on the Florida Air statements pursuant to the Florida Air credit agreement.
The language of the alleged guarantee limits it to credit transactions under the agreement. The alleged debtor argues *65that the charge repurchase obligation from a third party is not equivalent to goods sold on credit. When the Bob Downie Company paid $23,423.33 on its open account with Florida Air the alleged debtor contends that this payment satisfied the debt owed to Florida Air incurred pursuant to that credit agreement. Since Florida Air has a repurchase obligation from CDCC, the alleged debtor argues that the Florida Air credit agreement, which Robert Downie signed as a principal, does not cover the remaining $29,778.33 which represents the charge repurchase obligation of Florida Air to CDCC.
This Court notes that Florida Air is not a party to the Floor Plan Security Agreement between Bob Downie Company and CDCC. The terms of the Floor Plan financing are significantly different than the terms of the Florida Air credit agreement between Florida Air and Robert Downie. Furthermore, the terms of this Floor Plan financing agreement do not contain provisions which allow the indebtedness of the Bob Downie Company to Florida Air to be assigned to CDCC on a recourse basis.
In a case with similar facts, the old Fifth Circuit Court of Appeals, interpreting Florida law, examined a contract by which the guarantor undertook payment of all accounts or other indebtedness arising out of the sale of merchandise by a carpet manufacturer to a purchaser and any other indebtedness “now or hereafter existing” between the manufacturer and the purchaser. The manufacturer agreed to take over resulting accounts receivable assigned from distributors. The Court held that the guaranty covered only indebtedness for carpeting purchased from the manufacturer and did not include accounts assigned to the manufacturer by distributors subsequent to the execution of the agreement. Mohasco Industries, Inc. v. Maxwell Company, Inc., 425 F.2d 436 (5th Cir.1970). Under this rationale, the alleged debtor has raised a contention as to whether the credit agreement between Florida Air and Robert Dow-nie applies to debts incurred to CDCC and then repurchased and assigned back to Florida Air.
Applying the Busick test to the claim of Florida Air, the Court concludes that the involuntary petition is improper since the claim of Florida Air is subject to a bona fide dispute. The evidence shows that Robert Downie and Florida Air have taken divergent positions with regard to the state court litigation and the claims therein and with regard to arguments before this Court on Alleged Debtor’s Motion to Dismiss.
Mr. Downie has raised claims which, objectively considered, demonstrate that meritorious contentions as to the application of law exist under the undisputed facts regarding the alleged debtor’s liability. Having determined that a bona fide dispute exists, this Court need not resolve it in order to dispose of the Involuntary Petition. In re Nar-Jor Enterprises Corp., 6 B.R. 584 (Bankr.S.D.Fla.1980); In re Ramm Industries, Inc., 83 B.R. 815 (Bankr.M.D.Fla.1988); In re General Trading, Inc., 87 B.R. 216 (Bankr.S.D.Fla.1988).
The alleged debtor’s motion to dismiss is granted. The Court reserves jurisdiction to consider the alleged debtor’s motion for sanctions against Nancy and Steven Sobin and to consider any request made pursuant to 11 U.S.C. § 8080.
DONE AND ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491063/ | FINDINGS OF FACT, CONCLUSIONS OF LAW AND MEMORANDUM OPINION
ALEXANDER L. PASKAY, Chief Judge.
THIS is a Chapter 11 reorganization case and the matter under consideration is this Court’s Order Determining Validity, Extent and Priority of Liens entered on March 17, 1989, 98 B.R. 573, which was remanded by the District Court for reconsideration in light of the Supreme Court’s decision in California State Board of Equalization v. Sierra Summit, — U.S. -, 109 S.Ct. 2228, 104 L.Ed.2d 910 (1989). The matter was originally raised by a Complaint filed by Anerinbex, Inc. (Debtor), which sought an order from this Court determining the validity, extent and priority of liens asserted by Commerce Bank of Tampa, C & S National Bank, International Decaffeinated Corporation and State of Florida, Department of Business Regulation, Division of Alcoholic Beverages and Tobacco (Defendants).
On March 17, 1989, this Court entered its Order which determined that the claims under consideration had the following priority.
First priority was accorded to Commerce Bank of Tampa (Commerce), in that Commerce acquired a valid security interest and first perfected its security interest in the wine inventory of the Debtor by virtue of recording the security agreement and UCC-1 on May 1, 1986.
Second in priority was C & S Bank (C & S), which was entitled to priority over International Decaffeinated Corporation’s (IDC) judgment lien.
As to the tax claim of the State of Florida, Department of Regulation, Division of Alcoholic Beverages and Tobacco (State of Florida), this Court held that beverage taxes are not payable upon the liquidation of a wine distributor’s inventory in bankruptcy, citing, In re Cusato Brothers International, Inc., 750 F.2d 887 (11th Cir.1985). This Court held that any claim by the State of Florida pursuant to Chapters 561 and 564 Florida Statutes was invalid. A Final Judgment was entered by this Court on June 22, 1989, consistent with the Order Determining Validity, Extent and Priority of Liens and was amended on June 22, 1989.
On June 30, 1989, the State of Florida filed its Notice of Appeal and the Motion for Stay Pending Appeal and certified the question on appeal as whether the bankruptcy judge erred in determining that by applying Title 28 U.S.C. § 960 to the sale of the Debtor’s inventory of Spanish table wines, that the sale was not subject to the Florida excise tax set forth in Chapters 561 and 564 Florida Statutes.
*577The following facts as previously stipulated to by the parties are relevant and germane to the matter under consideration:
Anerinbex, Inc., the Debtor, was a distributor of commodities, including Spanish table wine, at the time relevant to the matter under consideration. At the time of the filing of its Petition for Relief, the only significant asset of the estate was its inventory of wine. On motion of the Debtor and after notice and hearing, the bankruptcy court entered its Order allowing sale of inventory on September 26, 1988. Thereafter, the wine was sold for the total purchase price of $156,352.69. Subsequent to the State of Florida’s appeal, this Court, after motion and hearing, entered its Order on Motion to Fix Amount of Claims and Allow Distribution and Request for Payment of the Internal Revenue Service on August 9, 1989, which established the secured lien of Commerce, C & S and IDC in the total amount of $198,418.43, with per diem interest accruing thereafter. Based on this Order, there were no funds remaining in the estate to pay the State of Florida. The State of Florida seeks to impose an excise tax upon the proceeds of the sale of the wine. It is undisputed, however, that no taxes were actually collected on the sale of the wine at the time of the sale. In support of its position, the State of Florida relies on the recent Supreme Court decision, California State Board of Equalization v. Sierra Summit, Inc., — U.S. -, 109 S.Ct. 2228, 104 L.Ed.2d 910 (1989), which held that a California use tax may be imposed on the estate, and if it is, such tax ... is an administrative expense of the debtor.... The narrow question before this Court is whether Sierra Summit should be applied retroactively. The State of Florida contends that it should because Sierra Summit was decided before the Final Judgment was entered.
The Supreme Court set out the standards for determining “nonretroactivity” in Chevron Oil Co. v. Huson, 404 U.S. 97, 92 S.Ct. 349, 30 L.Ed.2d 296 (1971). There, the Court listed three factors for “nonretroac-tivity” to be applied:
A)The decision to be applied nonretroac-tively must establish a new principle of law, either by overruling clear past precedent on which litigants may have relied ..., or by deciding an issue of first impression whose resolution was not clearly foreshadowed. ...
B) The court weighs the merits and demerits in each case by looking to the prior history of the rule in question, its purpose and effect, and whether retrospective operation will further or retard its operation; and
C) The court weighs the inequity imposed by retroactive application, for where a decision of this court could produce substantial unequitable results if applied retroactively, there is ample basis in our cases for avoiding the the injustice or hardship by a holding of nonretroactivity.
This Court is of the opinion that the third test as spelled out by Chevron is the appropriate test to apply in this case. A retroactive application of Sierra Summit would produce an inequitable result even though the funds have not yet been distributed. Had the Trustee known at the time of the sale that the State of Florida would be able to tax the proceeds of the sale at a later date, he might have been better off abandoning the wine. The Trustee should be able to rely on the law as it is in effect at the time the case is filed and the sale is held. As the First Circuit in New England Power Co. v. U.S., 693 F.2d 239 (1st Cir. 1982) stated:
Even in case of nonjurisdictional standards, the court is to apply the law in effect at the time it renders its decision, unless doing so would result in manifest injustice ... and such is true even when a case is pending on appeal....
To allow retroactive application of the law would allow the State of Florida to review a sale arguably for the last ten years in order to impose a excise tax against the proceeds.
This Court is satisfied that public policy mandates the prospective application of Sierra Summit in this case and, therefore, the decision entered by this Court on *578March 17, 1989, which determined the validity, extent and priority of liens, shall stand. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491065/ | MEMORANDUM AND DECISION ON COMPLAINT TO AVOID LIEN UNDER CODE § 544(a)(3)
ALAN H.W. SHIFF, Bankruptcy Judge.
The plaintiff trustee in this chapter 7 core proceeding seeks to avoid, under Code *26§ 544(a)(3), a mortgage held by the defendant Union Trust Co.
BACKGROUND
On February 25, 1989, the debtor filed a petition under chapter 7 of the Bankruptcy Code. The debtor’s Schedule B-l listed real property located at 445-453 Maple-wood Avenue, Bridgeport, Connecticut (the “property”) with a value of $500,000.00 and encumbrances of $311,147.02. The debt- or’s Schedule A-2 listed the defendant, Union Trust Co. (“UTC”), as a secured creditor with a claim in the amount of $236,-147.02. On May 2, 1988, UTC filed a proof of claim for $230,000.00 in principal and $13,911.84 in interest secured by a first mortgage on the property (the “mortgage”). The mortgage was dated and recorded in the Bridgeport Land Records on December 22,1986 and provides in relevant part:
To have and to hold the above granted and bargained premises, with the privileges and appurtenances thereof, unto the said Grantee, its successors and assigns forever, to its and their own proper use and behoof. And also the said Grantor does for himself, his heirs, executors, administrators, successors and assigns, covenant with the said Grantee, its successors and assigns, that at and until the ensealing of these presents he is well seized of the premises as a good indefeasible estate in fee simple, and has good right to bargain and sell the same in manner and form as is above written, and that the same is free of all incum-brances whatsoever, except any above mentioned.
and furthermore, the said Grantor does by these presents bind himself and his heirs, executors, administrators, successors and assigns forever, to WARRANT AND DEFEND the above granted and bargained premises to the said Grantee, its successors and assigns, against all claims and demands whatsoever, except any above mentioned.
The condition of this deed is such, that whereas the said Grantor is justly indebted to the said Grantee in the sum of TWO HUNDRED THIRTY THOUSAND AND NO/lOOs ($230,000.00) DOLLARS by his promissory note for that amount of even date herewith, said sum with interest being payable as provided in said note with final maturity on demand.
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Now, therefore, if all agreements here-inabove contained shall be fully performed, and said note paid in all respects according to its tenor, then this deed shall be void, otherwise to remain in full force and effect.
Plaintiffs Exhibit 1. The mortgage was signed by the debtor as grantor over his typed name; the debtor’s signature was witnessed by two persons who signed over their typed names; and James R. DeFonce signed as Commissioner of the Superior Court over his typed name. Id. No grantee was named. The property is described on an attached “Exhibit A”.
The plaintiff filed a complaint on March 27,1989 and the instant amended complaint on April 19, 1989, seeking a judgment declaring UTC’s mortgage invalid under Code § 544(a)(3).1 The plaintiff argues that a mortgage must name both the grantor and the grantee, so that subsequent creditors can inquire about the terms of the obligation. UTC, on the other hand, argues that the mortgage complies with the common law requirement that the nature and amount of the debt be stated and, alternatively, that the mortgage meets the “safe harbor” requirements of Connecticut General Statutes § 49-31b(a).2 As I conclude *27that its mortgage is enforceable under Connecticut common law, it is not necessary to discuss UTC’s “safe harbor” argument.
DISCUSSION
Code § 544(a) provides in part:
The trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by—
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(3) a bona fide purchaser of real property, other than fixtures, from the debtor, against whom applicable law permits such transfer to be perfected, that obtains the status of a bona fide purchaser and has perfected such transfer at the time of the commencement of the case, whether or not such a purchaser exists.
Under § 544(a)(3), a trustee stands in the shoes of a hypothetical bona fide purchaser, which under Connecticut law is defined as “ ‘one who buys property of another without notice that some third party has a right to or interest in such property, and pays a full and fair price for the same ... before he has notice of a claim or interest of such other in the property.’ ” Andretta v. Fox New England Theatres, Inc., 113 Conn. 476, 155 A. 848, 850 (1931) (quoting Alden v. Trubee, 44 Conn. 455, 459 (1877)). Further, under Connecticut law, a bona fide purchaser of real property “without knowledge of existing equities take free of such equities.” Matter of Trotta, 12 B.R. 843, 845 (Bankr.D.Conn.1981).
The Connecticut Supreme Court has held that “the dispositive question in examining the validity of a mortgage is whether it provides ‘reasonable notice’ to third parties of the obligation that is secured. The purpose of such ‘reasonable notice’ is to prevent parties that are not privy to the transaction from being defrauded or misled.” Connecticut Nat’l Bank v. Esposito, 210 Conn. 221, 554 A.2d 735, 738 (1989) (citations omitted). See also Dart & Bogue Co., Inc. v. Slosberg, 202 Conn. 566, 578, 522 A.2d 763 (1987). The mortgage need not recite all of the details of the underlying transaction, and errors and omissions do not affect the validity of the mortgage against third parties if they would not mislead a title searcher as to the true nature of the secured obligation. Dart & Bogue Co., supra, 202 Conn. at 578-79, 522 A.2d 763. “A creditor who wants to know all of the terms of a secured obligation may inquire of the parties themselves, or examine the note or other instrument evidencing the obligation.... The record is the starting point for inquiry, not ... the starting and ending point.” Id. at 580, 522 A.2d 763.
The thrust of the plaintiff’s argument is that the mortgage is silent as to the identity of the grantee, so that a bona fide purchaser could not discover the nature of the encumbrance. I find, however, that the nature of the encumbrance is adequately disclosed in the mortgage deed.
Under Connecticut common law, at a minimum, the nature and the amount of the encumbrance must be disclosed. Esposito, supra, 554 A.2d at 739-40; Dart & Bogue Co., supra, 202 Conn. at 579, 522 A.2d 763. The nature of a debt is determined by factors such as whether it is absolute or contingent, liquidated or unliq-uidated, or an existing liability rather than a future advance. Dart & Bogue Co., supra, 202 Conn. at 579, 522 A.2d 763. The amount is simply the dollar value of the obligation secured. Id.
Connecticut courts have invalidated mortgages which misidentified a future obligation as a debt currently due, a contingent obligation as an absolute obligation, and a promise to perform future services as a promissory note for a sum certain; failed to state the amount of the secured debt; claimed security in excess of the actual amount due; and failed to define the *28nature and maximum amount of future advances purportedly secured. Id. at 580-81, 522 A.2d 763. “In all of these cases, the omission or misstatement in the mortgage obscured the nature or amount of the secured obligation, potentially misleading subsequent lien creditors relying on the record.” Id. at 581, 522 A.2d 763.
There is no such potentially misleading omission or misstatement in the instant case. It is apparent from the face of the instrument that it is a mortgage, securing described real property, which arose out of a demand note for the payment of a liquidated, noncontingent, and existing liability in a specific amount. Underscoring this finding is the fact that the description of the mortgage debt approved in the Dart & Bogue case was essentially identical to the description of the mortgage debt in the instant case.3
Moreover, the plaintiffs argument that the grantee’s name must appear on the mortgage, so that a bona fide purchaser can inquire about the nature and amount of the encumbrance, is flawed. First, it is observed that the plaintiff provides no authority and none was found to support that assertion. But more to the point, the plaintiff has overlooked the fact that the mortgage did identify the debtor as the grantor and the person who took the debtor’s ac-knowledgement as a Commissioner of the Superior Court, so that a subsequent bona fide purchaser could have obtained all relevant information about the mortgage from either source. See Dart & Bogue Co., Inc., 202 Conn. at 580, 522 A.2d 763.
CONCLUSION
The trustee as a hypothetical bona fide purchaser under Code § 544(a)(3) may not avoid the subject mortgage. Accordingly, IT IS ORDERED that judgment enter in favor of the defendant.
. While the complaint does not identify any statutory provision and the amended complaint identifies "11 U.S.C. 540", the plaintiffs memorandum of law identifies § 544(a)(3) as the Code provision under which he is proceeding. Plaintiffs Memorandum of Law at 3.
. Connecticut General Statutes § 49-3 lb(a) provides:
A mortgage deed given to secure payment of a promissory note, which furnishes information from which there can be determined the date, principal amount and maximum term of the note, shall be deemed to give sufficient notice of the nature and amount of the obligation to constitute a valid lien secur*27ing payment of all sums owed under the terms of such note.
Section 49-31b(a) is a safe harbor provision which supplements the common law standards governing the validity of mortgages against subsequent third parties. Dart & Bogue Co., Inc. v. Slosberg, 202 Conn. 566, 578, 522 A.2d 763 (1987).
. The mortgage in Dart & Bogue provided in part:
THE CONDITION OF THIS DEED is such that whereas the Grantor is justly indebted to the Grantee in the amount of ONE MILLION FOUR HUNDRED FIFTY THOUSAND DOLLARS ($1,450,000.00) by virtue of its promissory note of even date with this instrument, by which note, for value received, the Grantor promises to pay to the order of the Grantee said sum with interest at the rate of ten (10) percent per annum from the date of said note, payable upon the unpaid principal balance until fully paid.
Dart & Bogue Co., supra, 202 Conn. at 570 n. 5, 522 A.2d 763. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491066/ | ORDER
JOHN L. PETERSON, Bankruptcy Judge.
In this adversary proceeding, the plaintiff, Edward Roberts1, filed a Complaint against the Debtor/Defendant, Robert Tuma, claiming the debt of $23,526.00 is non-dischargeable under Section 523(a)(6) of the bankruptcy Code. Trial of this matter, after answer, was held on January 8, 1990, with testimony of the plaintiff (by deposition) and the defendant. The matter has now been briefed and is ripe for decision.
The facts are in dispute. At a Super Bowl party in 1984, at a VFW post in Macomb County, Michigan, the plaintiff and defendant became involved in an altercation where the defendant struck the plaintiff in the mouth with his fist, causing plaintiff injury. Plaintiff contends, and I so find, that the assault was unprovoked. The plaintiff was standing near the bar, when the defendant approached him, verbally accosted plaintiff and then, without warning, struck the plaintiff in the face. Before the blow, the defendant stated that he intended to “blast” plaintiff in the face, which defendant then proceeded to accomplish. The defendant admitted at trial that he, in fact, struck the plaintiff, but that it was in self defense. I reject such testimo*324ny and find the defendant was the aggressor at all times in the melee. As a result of the assault, plaintiff, Edward Roberts, received a civil jury award in a Michigan state court in the sum of $23,526.00, which included a jury award of $15,000.00 as damages for personal injury. The Order of judgment states in part that “Robert Turna intentionally struck Plaintiff, Edward Roberts.”
The law in this circuit regarding a non-dischargeable debt under § 523(a)(6) has been recently expressed in In re Strybel, 105 B.R. 22, 23 (9th Cir. BAP 1989), where the court held:
“Title 11 U.S.C. § 523(a)(6) provides:
(a) A discharge under ... this title does not discharge an individual debtor from any debt-
(6) for willful and malicious injury by the debtor to another entity or to the property of another entity.
11 U.S.C. § 523(a)(6). Section 523(a)(6) holds nondischargeable all debts arising from injuries ‘willfully and maliciously’ inflicted on the person or property of another.
The definition of ‘willful’ for the most part is undisputed. The committee notes and the courts have interpreted willful as synonymous with deliberate or intentional. Perkins v. Scharffe, 817 F.2d 392, 393 (6th Cir.1987); In re Franklin, 726 F.2d 606, 610 (10th Cir.1984).
Malicious, on the other hand, is a term that has caused conflict among the courts. Some courts require evidence of specific intent to injure to establish ‘malice’ under § 523(a)(6), while other courts hold that ‘malice’ can be implied from the facts and circumstances of the case. In re Hodges, 4 B.R. 513, 515 (Bankr.W.D.Va.1980); see In re Dean, 79 B.R. 659, 662 (Bankr.N.D.Tex.1987).
The Ninth Circuit has interpreted ‘willful and malicious’ as referring to a wrongful act, done intentionally, which necessarily causes injury and is without just cause or excuse. In re Cecchini, 772 F.2d 1493, 1496 (9th Cir.1985). Under this interpretation the intent to harm or injure may be inferred from the wrongful conduct itself. The Ninth Circuit is among those courts that follow a looser standard by interpreting willful and malicious merely to mean a wrongful act, done intentionally, that necessarily produces harm and is without just cause or excuse.”
In Clark v. Siefke, 61 B.R. 220, 221, 2 Mont.B.R. 215, 217 (Bankr.Mont.1986), this Court held:
“As stated in 3 Collier on Bankruptcy, Sec. 523,16, pp. 523-129/133:
‘The word “willful” means “deliberate or intentional”, a deliberate and intentional act which necessarily leads to injury. Therefore, a wrongful act done intentionally, which necessarily produces a harm and is without just cause or excuse, may constitute a willful and malicious injury.
* * * * * *
Liabilities arising from assault or assault and battery are generally considered as founded upon a willful and are therefore within the exception.’
The above quote was followed in In re Pitner (Smith v. Pitner), 696 F.2d 447 (6th Cir.1982).”
In this present case, the act of striking the plaintiff was clearly intentional, and the defendant does not argue otherwise. I further conclude from the evidence that the act was malicious, since the defendant had a pre-disposition to harm the plaintiff, based on his verbal statement that he intended to “blast” plaintiff in the face. No just cause or excuse has been shown to justify such conduct. Accordingly, the debt of $23,526.00 owing to the plaintiff by the Debtor is non-dischargeable under Section 523(a)(6) of the Code.
IT IS ORDERED the Clerk shall enter judgment in favor of the plaintiff, Edward Roberts, and against the defendant, Robert Lawrence Turna, in the sum of $23,526.00, and such judgment debt is non-dischargea-ble under 11 U.S.C. Section 523(a)(6).
. While the Complaint includes a Jackie Roberts, no testimony or evidence has been introduced to support any allegation of nondis-chargeability as to that plaintiff so that this proceeding is presented for determination only in behalf of Edward Roberts. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491067/ | AMENDED MEMORANDUM AND ORDER
STEPHEN J. COVEY, Bankruptcy Judge.
On December 8, 1986, Ronald L. Farrington d/b/a Farrington Livestock (“Debtor”) filed for relief under Chapter 11 of the Bankruptcy Code. On April 12, 1988, the case was converted to a Chapter 7 proceeding. The United States of America, Department of the Treasury, Internal Revenue Service (“IRS”) first filed a proof of claim on April 20, 1988. An amended claim was filed on August 1, 1988, another on July 29, 1988, and a final proof of claim on *344February 1, 1989. This final claim is the subject of the present litigation and is for income tax due for the year 1982 as follows:
Tax Due $35,087.00
Interest 17,672.20
Penalties 22,051.69
Total $74,810.89
On June 8, 1989, prior to the filing of the final claim the Debtor filed an adversary complaint asking that this Court disallow entirely the claim of the IRS for the reason that the Debtor owed no income tax for the year 1982.
Jurisdiction to hear this matter is granted by 28 U.S.C. § 1334 and this is a core proceeding under 28 U.S.C. § 157. Also § 505 of the Bankruptcy Code expressly grants authority to the Bankruptcy Court to determine the amount of tax claims.
FINDINGS OF FACT
In October of 1980 Debtor purchased a car dealership located in the State of Texas known as Cameron Motors (“Cameron”). His principal purpose in purchasing the business was to increase its car sales, turn it into a profitable business and then sell it for a profit in three years. Debtor provided the business with $105,000.00 as the total initial capital investment and received forty-nine percent (49%) of the stock in return. There was one other stockholder and in exchange for his fifty-one percent (51%) interest he provided the dealership with a Buick franchise, expertise and experience in the automobile business, and further agreed to repurchase the Debtor’s forty-nine percent (49%) interest in three years.1
On four occasions between May and December of 1981, Debtor advanced slightly over $200,000.00 to Cameron. All of these advances were recorded in the company’s books as indebtedness owed to Debtor and interest bearing notes were executed. Debtor received no increased ownership in the company for these advances and at all times believed he would be repaid through the profits or through the resale of his stock.
The business of Cameron was financially unsuccessful and was closed in 1982. None of the advances was repaid by Cameron to the Debtor. On his 1982 income tax return the Debtor declared these advances as bad business debts under 26 U.S.C. § 166 and deducted them from his 1982 earned income.2’3 He only deducted half the amount he advanced to Cameron because in 1982 he was divorced and one-half of the tax loss was given to his ex-wife under the Divorce Decree.
Thereafter IRS determined that the losses were nonbusiness bad debts and could only be deducted as a short-term capital loss and assessed deficiencies for 1982 as reflected in their final claim filed herein. Debtor contends that the advances made to Cameron were loans which were made as a part of his business of promoting businesses for resale and thus were deductible as bad business debts. If th'e Debtor is correct in his contentions, then the entire claim filed by the IRS should be disallowed. If the IRS is correct, then its claim should be allowed in full as finally filed.
The overall question presented is whether the Debtor is entitled to deduct his unre-paid advances to Cameron as bad business debts under 26 U.S.C. § 166. The answer *345requires consideration of two issues: first, whether the advances made to Cameron constitute loans or contributions of capital and, second, if loans, whether they were proximately related to Debtor’s business.
In determining whether the advances made to Cameron were loans or contributions of capital, the intent of the parties is the most important factor to be considered. Also it should be noted that it is perfectly proper for shareholders to make loans to corporations in which they own a substantial amount of stock. See Elliott v. United States, 268 F.Supp. 521 (D.Or.1967) and Los Angeles Ship Building and Dry Dock v. United States, 289 F.2d 222 (9th Cir.1961).
While no one factor is controlling several can be used to determine whether the advances were intended as loans:
(1) the nature of the entries on the corporate books;
(2) the fact that notes were issued; and,
(3) the fact that the one making the advance had reason to believe the money would be repaid with interest by the corporation.
Here the evidence revealed that the advances were entered on the corporate books as debts, not as capital contributions. There was also evidence that interest bearing notes were issued representing the obligations to repay the debts. Additionally, Debtor testified that, at the time he advanced the money, he believed he would be repaid with interest. This belief was reasonable given Debtor’s history with other business ventures as detailed below, Cameron’s adequate initial capitalization, and future plans to increase sales and profits. Moreover, the fact that Debtor did not receive any additional shares as a result of the advances indicates the parties intended a loan rather than a capital contribution. The IRS failed to introduce any evidence to the contrary and thus the Court finds the advances made by Debtor to Cameron were, in fact, loans.
Once it has been established that the advances made were loans rather than capital contributions, it is necessary to show that such loans were proximately related to the Debtor’s trade or business. In order for the activity of lending money to a corporation to fall within the realm of the Debtor’s “trade or business” he must show that he was individually in the business of seeking out, promoting, organizing and financing business ventures and that his activities in loaning money to Cameron were a part of that business. Whipple v. Commissioner of the I.R.S., 373 U.S. 193, 83 S.Ct. 1168, 10 L.Ed.2d 288 (1963); Giblin v. Commissioner of the I.R.S., 227 F.2d 692 (5th Cir.1955); and Elliott v. United States. These Courts have stated that such a determination requires a careful examination of the facts of each case. It is important to keep in mind that there is a fundamental difference between advancing monies to preserve one’s interest in a corporation as a stockholder and advancing monies to make it profitable and ready for resale. In Whipple the Supreme Court rejected the argument that devoting one’s time and energies to the affairs of a corporation is by itself a business. The Court similarly rejected the argument that being a stockholder of one or more corporations constitutes a business. While both may lend support to a finding that one is engaged in the business of dealing in enterprises, neither alone will suffice. Rather the Court said that for a taxpayer to establish a trade or business of promoting, organizing and financing corporations there must be a showing that the return expected to be received is different from that expected to be received by an ordinary shareholder seeking a return on his investment. The Court in Whipple stated as follows:
... The question before us is whether petitioner’s activities in connection with several corporations in which he holds controlling interests can themselves be characterized as a trade or business so as to permit a debt owed by one of the corporations to him to be treated within the general rule of § 23(k)(l) as a “business” rather than a “nonbusiness” bad debt....
*346Whipple, 373 U.S. at 195, 83 S.Ct. at 1170.
... When the only return is that of an investor, the taxpayer has not satisfied his burden of demonstrating that he is engaged in a trade or business since investing is not a trade or business and the return to the taxpayer, though substantially the product of his services, legally arises not from his own trade or business but from that of a corporation ...
Whipple, 373 U.S. at 202, 83 S.Ct. at 1174.
... To be sure, the presence of more than one corporation might lend support to a finding that the taxpayer was engaged in a regular course of promoting corporations for a fee or commission, see Ballantine, Corporations (rev. ed. 1946), 102, or for a profit on their sale, see Giblin v. Commissioner, 227 F.2d 692 (C.A. 5th Cir.), but in such cases there is compensation other than the normal investor’s return, income received directly for his own services rather than indirectly through the corporate enterprise, ...
Whipple, 373 U.S. at 202, 203, 83 S.Ct. at 1174.
The character of the debt for this purpose is not controlled by the circumstances attending its creation or its subsequent acquisition by the taxpayer or by the use to which the borrowed funds are put by the recipient, but is to be determined rather by the relation which the loss resulting from the debt’s becoming worthless bears to the trade or business of the taxpayer. If that relation is a proximate one in the conduct of the trade or business in which the taxpayer is engaged at the time the debt becomes worthless, the debt is not a nonbusiness debt for the purpose of this amendment. H.R.Rep. No. 2333, 77th Cong., 2d Sess. 77; S.Rep. No. 1631, 77th Cong., 2d Sess. 90. Treasury Regulations 118, § 39.23(k)-6(b), adopts substantially this language of the Committee Reports as the test to be applied under § 23(k).
Whipple, 373 U.S. at 200 n. 9, 83 S.Ct. at 1173 n. 9.
In Giblin, the Court of Appeals stated as follows:
... We recognize the fact that the question whether the activities of a taxpayer constitute carrying on a trade or business is largely one of fact, the solution of which “requires an examination of the facts in each case.” ...
Giblin, 227 F.2d at 697.
... Clearly, on the undisputed facts, Giblin was such a person as was described in the cases we have cited above. On eleven or twelve occasions between 1926 and 1945 he had contributed his time, talent, energy and money to the exploitation of an idea to make money apart from his practice of law....
Giblin, 227 F.2d at 698.
Also in Elliott v. United States, the District Court analyzed the facts carefully and found that the Debtor was engaged in the business of promoting businesses for resale and allowed him to deduct as a bad debt a loan to one of the businesses that was not repaid.
In the instant case the Debtor has, since 1966, participated in numerous business ventures either as an owner or consultant. While his main business efforts and his principal income were derived from oil and cattle businesses all of his other business ventures were bought for the sole purpose of rehabilitating them and then reselling them for a profit. The Debtor never devoted his full time and energies to any one venture and often spent great amounts of time investigating numerous business opportunities. In addition, other than for the oil and cattle business, it was never his intention to keep any of the businesses permanently. In fact, he often had a prospective buyer available at the outset of his involvement.
An examination of the Debtor’s past business ventures provides support for his contention that he was engaged in the business of promoting, organizing and refinancing businesses for resale:
1. A car wash which he and a partner built and developed for resale in 1966. It was sold for a profit in 1971.
*3472. Hill Park Mobile Home purchased in 1966 and sold in 1971 at a profit. He loaned money to help build the park and was repaid with interest.
3. New Ulm State Bank purchased in 1973 and sold in 1979 at a substantial profit.
4. Austin County Real Estate was started in 1972 and sold for a profit in 1983. He made loans at various times to the business, all of which were repaid with interest.
5. Acre Insurance Agency was an existing business purchased in 1979 and sold as a profit in 1981.
6. Shady Acres Day Care Center was built and developed by Debtor and other partners in 1976. He sold it at a profit in 1980.
7. His & Her Fashions was a clothing store that Debtor helped finance in 1976. It became successful and he sold it in 1977.
8. Three Bar Brangus was a cattle operation Debtor became involved with in 1977 and which he sold at a. profit in 1983.
9. Pryor Bowling Alley was an existing business he purchased in 1981. He made various loans to the business and thereafter sold it at a profit in 1983.
10. Shiloh Ranch was purchased in 1980 and sold in 1982. This was the only business sold at a loss. However, at various times while in operation, Debtor loaned the business money which was repaid.
11. International Livestock Performance Center was a corporation in which Debtor became involved in 1981. It was a successful venture and was sold for a profit in 1983.
12. Cameron Motors.
This evidence establishes by a preponderance that Debtor was, in fact, in the business of promoting, organizing and financing businesses for resale. His goals were short term in nature and his dominant purpose was not to earn money as a shareholder from the earnings of the businesses but instead it was to rehabilitate the businesses and resell them at a profit. The Court also finds that his loans to Cameron were a part of this business.
In the year 1982 the Debtor also deducted a loss of $50,000.00 on his income tax return under 26 U.S.C. § 1244. This section of the Internal Revenue Code covers losses incurred by an investor on stock in a small business. It is not disputed in the instant case that the Debtor’s loss on his stock in Cameron Motors for the year 1982 up to $50,000.00 was totally deductible. The IRS, however, contends that by claiming his loss as a stockholder, Debtor is prohibited from taking, a deduction for his bad business debt. The IRS cites no authority for this proposition and this Court finds nothing inconsistent with the Debtor taking a deduction for a loss on his stock in Cameron and at the same time and for the same year claiming business bad debt deductions involving the same corporation.
IT IS THEREFORE ORDERED, ADJUDGED AND DECREED that the claim of the United States of America, Internal Revenue Service filed herein against Ronald L. Farrington’s estate is denied.
. At the time of purchase, the dealership was selling thirty (30) cars a year. Debtor testified he intended to increase the business to thirty (30) cars a month.
. 26 U.S.C. § 166(a)(1) provides: "Wholly worthless debts. — There shall be allowed as a deduction any debt which becomes worthless within the taxable year."
. 26 U.S.C. § 166(d) nonbusiness debts provides: (1)(B) where any nonbusiness debt becomes worthless within the taxable year, the loss resulting therefrom shall be considered a loss from the sale or exchange, during the taxable year, of the capital asset held for not more than 6 months.
(2) Nonbusiness debt defined. — For purposes of paragraph (2), the term ‘nonbusiness debt’ means a debt other than—
(A) a debt created or acquired (as the case may be) in connection with a trade or business of the taxpayer; or
(B) a debt the loss from the worthlessness of which is incurred in the taxpayer’s trade or business. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491069/ | MEMORANDUM AND DECISION ON MOTION FOR SUMMARY JUDGMENT
ALAN H.W. SHIFF, Bankruptcy Judge.
The defendant, First Software Corporation (“FSC”), moves for summary judgment. For the reasons that follow, the motion is denied.
BACKGROUND
On April 19, 1986, FSC filed a petition under chapter 11 in the District of Massachusetts. On February 20, 1987, that court entered an order confirming FSC’s plan of reorganization.
On October 29, 1986, Northeastern Software, Inc. (“Northeastern”) filed a petition under chapter 11 in this court, and on April 23, 1987, the plaintiff (the “trustee”) was appointed chapter 11 trustee. On June 28, 1988, the case was converted to chapter 7, and on July 27, 1988, the trustee was appointed chapter 7 trustee.
On March 27, 1989, the trustee commenced the instant adversary proceeding, which seeks to recover $648,649.42 in allegedly preferential transfers made to FSC. See 11 U.S.C. § 547(b).1 On May 4, 1989, FSC filed the instant motion for summary judgment, arguing that under § 1141(d) the February 20, 1987 confirmation order discharged any debt it may have owed Northeastern.
The trustee responds that Northeastern did not receive notice of the petition, the claims bar date, the confirmation hearing, the order of confirmation, or any other aspect of FSC’s case, so that, notwithstanding the language of § 1141(d), a discharge of its preference claim would violate the due process clause of the Fifth Amendment.2
*389FSC acknowledges that it did not give Northeastern formal notice of any aspect of its case and recognizes a due process exception to § 1141 when a debtor knows of a creditor’s claim but fails to provide that creditor with formal notice of the claims bar date or confirmation hearing date.3 FSC contends, however, that the due process exception to a § 1141(d) discharge is not applicable and a creditor’s claim is discharged under § 1141(d) if (1) a debtor does not know about a creditor’s claim and (2) the creditor has actual knowledge of the debtor’s bankruptcy case. FSC argues that both of those elements are present in this case. FSC points out that Northeastern had not filed or asserted a claim against it prior to the confirmation of its plan and states that it did not know about any Northeastern claim. FSC also contends, on the basis of affidavits of Karen Fitzpatrick and Ronald H. Faulk, Jr., two former employees of FSC, and an unsigned, undated letter written by Ronald Grabowski, a former principal of Northeastern, that Northeastern had actual knowledge of FSC’s bankruptcy prior to the confirmation of its plan.4
The trustee argues that FSC’s analysis did not go far enough. According to the trustee, the due process exception to a § 1141(d) discharge is not applicable only when (1) a debtor does not know about a creditor’s claim, (2) the creditor has actual knowledge of the debtor’s bankruptcy case, and (3) the debtor gives notice of the claims bar date and confirmation hearing date by publication pursuant to a court order. It is conceded by FSC that it did not give notice by publication of its petition, the bar date for filing claims, or its confirmation hearing.
The trustee further argues that even if publication of relevant dates were not required, summary judgment would still not be appropriate because there is a genuine dispute as to whether FSC knew that Northeastern had a preference claim against it prior to the confirmation of FSC’s plan. In support of that argument, the trustee provides evidence5 that prior to FSC’s bankruptcy and up to the confirmation of its plan, Northeastern was one of FSC’s largest accounts receivable debtors; that FSC changed Northeastern’s payment *390terras to require Northeastern to pay by certified check; that a number of those certified checks were subsequently dishonored by the issuing bank; and that FSC knew the date of Northeastern’s bankruptcy because FSC was made a member of the Northeastern creditors’ committee. Thus, the trustee argues, FSC was aware of Northeastern’s deterioriating financial condition within the ninety day preference period and that transfers during that period were subject to a preference claim.
DISCUSSION
Rule 56 Fed.R.Civ.P., made applicable by Bankruptcy Rule 7056, provides 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....
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(e) ... When a motion for summary judgment is made and supported as provided in this rule, an adverse party may not rest upon the mere allegations or denials of the adverse party’s pleading, but the adverse party’s response, by affidavits or as otherwise provided in this rule, must set forth specific facts showing that there is a genuine issue for trial.
In determining whether to grant summary judgment, “the judge’s function is not himself to weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 2511, 91 L.Ed.2d 202 (1986). The moving party has the burden of showing that there is no genuine issue of material fact, and all reasonable inferences are to be drawn and all ambiguities are to be resolved in favor of the non-moving party. Adickes v. S.H. Kress & Co., 398 U.S. 144, 157, 90 S.Ct. 1598, 1608, 26 L.Ed.2d 142 (1970); Katz v. Goodyear Tire and Rubber Co., 737 F.2d 238, 244 (2d Cir.1984). A party opposing a properly supported motion for summary judgment “must offer concrete evidence raising genuine disputes of material fact tending to show that his version of events is more than fanciful ... or, alternatively, must show that the defendant is not entitled to summary judgment as a matter of law.” Johnson v. Carpenter Technology Corp., 723 F.Supp. 180, 182 (D.Conn.1989) (citations omitted). See also Anderson, supra, 477 U.S. at 249, 106 S.Ct. at 2510; First Nat’l Bank of Ariz. v. Cities Serv. Co., 391 U.S. 253, 288-89, 88 S.Ct. 1575, 1592-93, 20 L.Ed.2d 569 (1968). Materiality is determined by applicable substantive law. Anderson, supra, 477 U.S. at 248, 106 S.Ct. at 2510; Zeisler v. Bank of Montreal (In re Grambling), 99 B.R. 515, 517 (Bankr.D.Conn.1989).
The only question decided here is whether there is a genuine issue of fact as to whether FSC knew about Northeastern’s preference claim prior to the February 20, 1987 confirmation of FSC’s plan. Because I find that there is, I need not decide the disputed legal question of what would have constituted adequate notice if FSC did not know about Northeastern’s claim.6
Code § 101(4)(A) defines a claim as “a right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured....” By giving “claim” this “broadest possible definition” Congress intended that “all legal *391obligations of the debtor, no matter how remote or contingent, will be able to be dealt with in the bankruptcy case.” S.Rep. No. 989, 95th Cong., 2d Sess. 22 (1978); H.R.Rep. No. 595, 95th Cong., 1st Sess. 309 (1977), U.S.Code Cong. & Admin.News 1978, pp. 5787, 5808, 6266. Therefore, when a debtor knows that the elements of a potential cause of action against it exist, it should list that cause of action as an unliquidated, contingent claim. See Acevedo v. Van Dorn Plastic Mach. Co. v. Cut Rate Plastic Hanger, Inc., 68 B.R. 495, 499 (Bankr.E.D.N.Y.1986).
In attempting to satisfy its burden of showing that there is no dispute that it did not know about Northeastern’s claim, FSC relies solely on the fact that Northeastern did not file a proof of claim or otherwise make a claim against FSC. The trustee, on the other hand, has introduced exhibits and affidavits describing a pattern of conduct by FSC immediately prior to and after Northeastern filed its petition which raises doubts as to whether FSC knew it had received a preferential transfer from Northeastern, and that Northeastern therefore had a claim against it. The state of FSC’s knowledge of a potential claim by Northeastern, and therefore the question of whether FSC should have given Northeastern formal notice of its confirmation hearing, is in doubt and presents a genuine issue of material fact which must be tried. See Broomall Indus., Inc. v. Data Design Logic Sys., Inc., 786 F.2d 401, 404-05 (Fed.Cir.1986).
CONCLUSION
FSC’s motion for summary judgment is denied, and IT IS SO ORDERED.
. Code § 547(b) provides in part:
[T]he trustee may avoid any transfer of an interest of the debtor in property—
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;
(3) made while the debtor was insolvent;
(4) made—
(A) on or within 90 days before the date of the filing of the petition; or
(B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and
(5) that enables such creditor to receive more than such creditor would receive if—
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by the provisions of this title.
. Code § 1141(d)(1) provides:
Except as otherwise provided in this subsection, in the plan, or in the order confirming the plan, the confirmation of a plan—
(A) discharges the debtor from any debt that arose before the date of such confirmation, and any debt of a kind specified in section 502(g), 502(h), or 502(i) of this title, whether or not—
*389(i) a proof of the claim based on such debt is filed or deemed filed under section 501 of this title;
(ii) such claim is allowed under section 502 of this title; or
(iii) the holder of such claim has accepted the plan....
It is well established, however, that in the absence of adequate notice of a claims bar date or a confirmation hearing, the discharge of a creditor’s claim under § 1141(d) would violate the due process_ clause of the Fifth Amendment. E.g., Spring Valley Farms, Inc. v. Crow (In re Spring Valley Farms, Inc.), 863 F.2d 832, 835 (11th Cir.1989) ("§ 1141 does not discharge the debt of a creditor who was known to an individual corporate debtor and failed to receive notice under Bankruptcy Rule 2002(a)(8), even if the creditor had actual knowledge of the general existence of the bankruptcy proceedings.”); Reliable Electric Co., Inc. v. Olson Constr. Co., 726 F.2d 620, 622-23 (10th Cir.1984) (“[Notwithstanding the language of section 1141, the discharge of a claim without reasonable notice of the confirmation hearing is violative of the fifth amendment to the United States Constitution.”); Talman Home Mortgage Corp. v. El Lago Apartment Venture, 70 B.R. 346, 348-50 (N.D.Ill.1987); Charter Int’l Oil Co. v. Ziegler (In re The Charter Co.), 93 B.R. 281, 285 (Bankr.M.D.Fla.1988).
. Where a debtor knows about a creditor’s claim, it must list that claim in its schedules, Acevedo v. Van Dorn Plastic Mach. Co. v. Cut Rate Plastic Hanger, Inc., 68 B.R. 495, 499 (Bankr.E.D.N.Y.1986); 11 U.S.C. § 521(1), which will result in in the receipt of formal written notice by the creditor. Thus, as FSC admits, the only notice that is adequate where a debtor knows about a creditor’s claim is the formal written notice provided for by Bankruptcy Rule 2002. See, e.g., City of New York v. New York, N.H. & H.R. Co., 344 U.S. 293, 297, 73 S.Ct. 299, 301, 97 L.Ed. 333 (1953) (formal notice is required when debtor knows name, address, and interest of a creditor); Broomall Indus., Inc. v. Data Design Logic Sys., Inc., 786 F.2d 401, 404 (Fed.Cir.1986); Talman Home Mortgage Corp., supra, 70 B.R. at 348-50.
. In their affidavits, Faulk and Fitzpatrick state that on many occasions they discussed the pend-ency of FSC’s bankruptcy with Richard and Ronald Grabowski, two former principals and officers of the debtor. The Grabowski letter mentions the FSC bankruptcy.
. The trustee submitted affidavits and exhibits in support of his objection. See Rule 56(e) Fed.R.Civ.P.
. Courts have disagreed as to what constitutes adequate notice where the debtor does not know about a creditor’s claim and that creditor has actual knowledge of the debtor’s bankruptcy case. Some courts have found that the debtor’s burden is met if it files as complete a schedule of its debts as possible and that it is the creditor’s responsibility to inquire about relevant dates. In re Larsen, 80 B.R. 784, 786-87 (Bankr.E.D.Va.1987); Siouxland Beef Processing Co. v. Knight (In re Siouxland Beef Processing Co.), 55 B.R. 95, 100 (Bankr.N.D.Iowa 1985). Other courts have found that in those circumstances, notice by publication satisfies the requirements of due process. E.g., Hassett v. Weissman (In re O.P.M. Leasing Serv., Inc.), 48 B.R. 824, 831 (S.D.N.Y.1985); In re Production Plating, Inc., 90 B.R. 277, 284-85 (Bankr.E.D.Mich.1988). See also supra note 3. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491070/ | MEMORANDUM OF DECISION DETERMINING EXTENT OF LIEN
FRANCIS G. CONRAD, Bankruptcy Judge.
Trustee sues to determine whether Vermont Federal’s pre-petition perfected security interest in all of Debtor’s equipment, machinery and proceeds reaches a post-petition nonrefundable good faith deposit that was forfeited by a bidder of Debtor’s equipment and machinery at a sale solicited by the Trustee.1 We hold the forfeited good faith deposit belongs to Debtor’s Estate because it is not subject to Vermont Federal’s pre-petition security interest as it is not “proceeds” within Vermont’s Uniform Commercial Code (UCC).
The parties stipulated to all material facts. We pen only those facts necessary for this decision.
Vermont Federal holds a valid pre-petition security interest in all of Debtor’s knitting machinery, equipment and their proceeds (collateral).
Following Debtor’s conversion to a case under Chapter 7, 11 U.S.C. §§ 101 et seq., Trustee obtained authorization to solicit bids for the purchase of the collateral. Trustee accepted a bid of $125,000.00 from a bidder who had tendered the required nonrefundable $11,000.00 deposit (deposit). A closing date was set. The bidder failed to appear at the closing despite Trustee’s extension of time. Upon query by the Trustee, the bidder explained his perception that the market value of the collateral had sharply declined after his bid was submitted. Thus, it was more economical to forfeit his deposit than complete the purchase. Trustee declared the bid in default. The deposit was forfeited. The majority of the collateral was later sold for $94,150.00.
The Trustee sued for a determination under 11 U.S.C. § 506(a)2 and § 552 infra, that Vermont Federal’s valid pre-petition security interest does not extend to the post-petition deposit. Trustee claims the deposit is not “proceeds” within the definition of Vermont’s UCC because the collateral was not “sold, exchanged, collected or otherwise disposed of,” Title 9A Vt.Stat. Ann. § 9-306(1) infra, and if the deposit is not “proceeds,” the deposit is property of Debtor’s Estate under 11 U.S.C. § 541(a),3 concludes Trustee.
Vermont Federal claims the deposit is -theirs despite the fact that the sale was aborted, and offers that no sale, transfer or *466exchange need actually occur under Vermont’s UCC’s § 9-306(1) to make this their “proceeds.” Instead, Vermont Federal argues the deposit constitutes a “constructive disposition” of its collateral and, as such, falls within the § 9-306(l)’s “whatever is received when collateral ... is sold, exchanged, collected or otherwise disposed of.” (Emphasis added). Vermont Federal’s contribution to the parties’ Preliminary Pre-trial Statement proffers:
The bid deposit thus reflected partial consideration for a risk the seller assumed: a sharp decline in the market for knitting equipment (collateral) between the bid date and sale date. In fact, as matters turned out, the payment was not sufficient to compensate for this risk, since the Trustee wound up selling the machinery and equipment (collateral) for less than the bid price minus the $11,000 deposit. In these circumstances, Vermont Federal, as a perfected secured creditor, should be entitled to the deposit amount.
“Preliminary Pre-Trial Statement,” Schedule A, page 3 (parentheticals supplied).
In Bankruptcy, the post-petition effect of a pre-petition security interest is governed by 11 U.S.C. § 552. 11 U.S.C. § 552, Post-petition effect of security interest, provides:
(a) Except as provided in subsection (b) of this section, property acquired by the estate or by the debtor after the commencement of the case is not subject to any lien resulting from any security agreement entered into by the debtor before the commencement of the case.
(b) Except as provided in sections 363, 506(c), 522, 544, 545, 547, and 548 of this title, if the debtor and an entity entered into a security agreement before the commencement of the case and if the security interest created by such security agreement extends to property of the debtor acquired before the commencement of the case and to proceeds, product, offspring, rents, or profits of such property, then such security interest extends to such proceeds, products, offspring, rents, or profits acquired by the estate after the commencement of the case to the extent provided by such security agreement and by applicable nonbankruptcy law, except to any extent that the court, after notice and a hearing and based on the equities of the case, orders otherwise.
Id., (emphasis supplied).
The Senate Report (Reform Act of 1978) of § 552’s Legislative History explains “[sjubsection (b) provides an important exception consistent with the (UCC). If the security agreement4 extends to proceeds ... then the proceeds would continue to be subject to the security interest pursuant to the terms of the security agreement and provisions of applicable law_” S.Rep. No. 989, 95th Cong., 2d Sess. 91 (1978), U.S.Code Cong. & Admin.News 1978, pp. 5787, 5877, reprinted in 4 Norton Bankruptcy Law and Practice, pages 500-501; (footnote ours; brackets supplied).
The House Report (Reform Act of 1978) of § 552’s Legislative History expresses that “proceeds” “is not limited to the technical definition of that term in the UCC, but covers any property into which property subject to the security interest5 is converted.” H.R.Rep. No. 595, 95th Cong., 1st Sess. 376-377 (1977), U.S.Code Cong. & Admin.News 1978, pp. 6332, 6333 reprinted in 4 Norton Bankruptcy Law and Practice, pages 500-501 (emphasis and footnote ours).
While the House Report supra, suggests an expansive definition for the term “pro*467ceeds” that may reach beyond applicable UCC, it also expresses a requirement that the subject property be “converted.” The “American Heritage Dictionary” defines “convert” in part as: “To change into another form, substance, state, or product; transform: convert water into ice.” Id,., (2d Ed.1982) (emphasis in original). Thus, it appears § 552’s Legislative History supports the Trustee’s position that Vermont Federal’s collateral must “change” into another form before it will become “proceeds.”
We continue our inquiry of the definition of “proceeds,” in the context of § 552(b)’s post-petition effect of a pre-petition security interest, under State Law as required by § 552(b)’s “the extent provided by such security agreement and by applicable nonbankruptcy law.” Id., (emphasis ours).
We know that Vermont Federal’s security agreement extends to proceeds. This fact is not in dispute. What remains for our determination is the extent of the exception under § 552(b)’s “applicable non-bankruptcy law.” Our query then is: Does Vermont’s UCC recognize as “proceeds” a forfeited deposit from an aborted Trustee’s sale? Applicable nonbankruptcy law is 9A Vt.Stat.Ann. § 9-306.
9A Vt.Stat.Ann. § 9-306 “‘Proceeds’; secured party’s rights on disposition of collateral,” provides in pertinent parts:
(1) ‘Proceeds’ includes whatever is received when collateral or proceeds is sold, exchanged, collected or otherwise disposed of. The term also includes the account arising when the right to payment is earned under a contract right. Money, checks and the like are ‘cash proceeds’. All other proceeds are ‘non-cash proceeds’.
(2) Except where this article otherwise provides, a security interest continues in collateral notwithstanding sale, exchange or other disposition thereof by the debtor unless his action was authorized by the secured party in the security agreement or otherwise, and also continues in any identifiable proceeds including collateral received by the debtor.
(3)The security interest in proceeds is a continuously perfected security interest if the interest in the original collateral was perfected but it ceases to be a perfected security interest and becomes un-perfected ten days after receipt of the proceeds by the debtor unless
(a) a filed financing statement covering the original collateral also covers proceeds; or
(b) the security interest in the proceeds is perfected before the expiration of the ten day period.
Id., (emphasis supplied).
9A Vt.Stat.Ann. § 9-105(3) Definitions and index of definitions, requires we defer to Vermont’s Article 2 Sales for the definition of “sale” for Article 9 Secured Transactions purposes. 9A Vt.Stat.Ann. § 2-106(1) provides:
(1) ... A ‘sale’ consists in the passing of title from the seller to the buyer for a price (§ 2-401). A ‘present sale’ means a sale which is accomplished by the making of the contract.
Id. See, Cross-Abbott Company v. Howard’s, Inc., 124 Vt. 439, 442, 207 A.2d 134 (1965) (“A sale is a contract whereby the ownership of property is transferred from one person to another for a consideration ... A sale is defined in the Uniform Sales Act, 9 V.S.A. § 1501(b), to be—‘A sale of goods is an agreement whereby the seller transfers the property in goods to the buyer for a consideration called a price.’ ” (citations omitted)).
9A Vt.Stat.Ann. § 2-401 Passing of title; reservation for security; limited application of this section, provides:
Each provision of this article with regard to the rights, obligations and remedies of the seller, the buyer, purchasers or other third parties applies irrespective of title to the goods except where the provisions refers to such title. Insofar as situations are not covered by the other provisions of this article and matters concerning title become material the following rules apply:
(1) Title to goods cannot pass under a contract for sale prior to their identifi*468cation to the contract (§ 2-501), and unless otherwise explicitly agreed the buyer acquires by their identification a special property as limited by this title. Any retention or reservation by the seller of the title (property) in goods shipped or delivered to the buyer is limited in effect to a reservation of a security interest. Subject to these provisions and to the provisions of the article on Secured Transactions (article 9), title to goods passes from the seller to the buyer in any manner and on any conditions explicitly agreed on by the parties.
(2) Unless otherwise explicitly agreed title passes to the buyer at the time and place at which the seller completes his performance with reference to the physical delivery of the goods, despite any reservation of a security interest and even though a document of title is to be delivered at a different time or place....
Id.
In turn, 9A Vt.Stat.Ann. § 2-501, Insurable interest in goods; manner of identification of goods, provides:
(1) The buyer obtains a special property and an insurable interest in goods by identification of existing goods as goods to which the contract refers even though the goods so identified are non-conforming and he has an option to return or reject them. Such identification can be made at any time and in any manner explicitly agreed to by the parties. In the absence of explicit agreement identification occurs
(a) When the contract is made if it is for sale of goods already existing and identified....
(2) The seller retains an insurable interest in goods so long as title to or any security interest in the goods remains in him and where the identification is by the seller alone he may until default or insolvency or notification to the buyer that the identification is final substitute other goods for those identified.
Id.
Anderson has this observation with respect to the UCC's use of the phrase “sold, exchanged, collected or otherwise disposed of:”
§ 9-306:12. Necessity of sale.
In order for the sale provisions of UCC § 9-306 to be operative, it is necessary that there be a transaction with respect to the collateral that is a ‘sale, exchange, collection, or other disposition of the collateral or proceeds.’ Whether there has been a sale for the purpose of Article 9 is determined by the definition of sale in Article 2. The Code (UCC) does not define the term ‘exchange’ and therefore its prior meaning applies under which the difference between it and a sale is ‘purely technical.'
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§ 9-306:13. Definition of Proceeds.
The term ‘proceeds’ is to be given a liberal construction. It includes anything and everything that is received when collateral or proceeds of collateral are sold or disposed of in any way, and goods that are purchased with the original proceeds from the collateral.
9 Anderson on the Uniform Commercial Code, § 9-306:12, pages 142-143 (3d Ed. Supp.1989) (footnotes omitted) (parentheti-cals supplied).
The terms of the Trustee’s “Request for Bids” contained the contractual condition precedent that to be a successful bidder, the bidder must tender a nonrefundable deposit and consummate the transaction by taking physical possession of the goods:
3. All bids must be accompanied by certified funds, equal to 10 per cent of the total amount bid, made payable to the Trustee. To the extent that any particular bid is accepted by the Trustee, the deposit given in connection with it will become nonrefundable, subject only to the Trustee’s ability to convey title, as set forth below. Successful bidders must consummate their transaction, and remove their purchased assets from the Trustee’s custody, at the earlier to occur of 4:00 p.m. on December 8, 1988, or 4:00 p.m. on the date of confirmation of the sale.
*469Parties’ “Stipulation of Facts,” Exhibit A, page 1.
Factually, the intended bidder did not “consummate” the bid because, in addition to the failure of tender of balance due, the collateral was never taken into possession by the bidder nor removed from the Trustee’s custody. A “sale” never occurred within either the meaning of the “Request for Bids,” or within the meaning of Vermont’s UCC.
Lastly, we are asked to treat this aborted transaction and its resultant nonrefundable deposit as within the meaning of 9-306(l)’s “whatever is received when collateral or proceeds ... other disposition.”
Trustee advocates the application of the ejusdem generis doctrine to require “other disposition” must achieve a transfer of property. The Vermont Supreme Court has explained the familiar application of the ejusdem generis doctrine:
The rule of ejusdem generis is frequently applied by the courts in construing an enactment. When words of a statute bearing a specific description are followed by words of more general import, the sense of the adjective first used is applied to the words that follow. The latter words are held to include only those things similar in character to those specifically defined.
Kalakowski v. John A. Russell Corporation, 137 Vt. 219, 224, 401 A.2d 906 (1979) citing, Rutland Cable T.V., Inc. v. City of Rutland, 122 Vt. 1, 4, 163 A.2d 117, 119 (1960).
Anderson has this to say on the application of the ejusdem generis doctrine to “other disposition” in 9-306(1):
The term ‘other disposition’ is not defined by the Code (UCC) but as used in UCC § 9-306 is to be interpreted according to the rule of ejusdem generis and thus refers to a transaction of the same general type as a sale or exchange and must as a minimum effect a transfer of property....
9 Anderson on the Uniform Commercial Code, § 9-306:12, pages 142 (3d Ed.Supp. 1989) (footnote omitted).
We conclude Vermont’s UCC does not extend the term “proceeds” to include a forfeited deposit from an aborted sale because the collateral was not “sold, exchanged, collected or otherwise disposed of.”
We reach this conclusion by the application of the doctrine of ejusdem generis to phrase “otherwise disposed of” in § 9 — 306(l)’s “whatever is received when collateral or proceeds is sold, exchanged, collected or otherwise disposed of.” The application of this doctrine requires there be a transfer or substitution of collateral for other property. See, Weisbart & Co. v. First National Bank of Dalhart, Texas, 568 F.2d 391, 395 (5th Cir.1978) (applied ejusdem generis doctrine to the UCC’s term “other disposition” and held this term must result in a “transfer of property” to be of the same type as a “sale or exchange”). Similarly, Vermont Federal’s collateral was not “converted,” within the meaning of the House Report supra, rather it remained intact.
Upon the failure of the would be bidder to consummate the terms of the bid, no estate property was transferred from Trustee to the intended bidder and thus, there was no disposition or substitution of Vermont’s Federal’s collateral under Vermont’s UCC § 9-306(1).. The deposit belongs to the Debtor’s Estate.
An appropriate Order will be entered.
. The parties agreed and we determine we have jurisdiction to hear this matter under 28 U.S.C. § 1334(b) and the general reference to this Court. It is a 28 U.S.C. § 157(b)(2)(K) core matter. This Memorandum of Decision constitutes findings of facts and conclusions of law under F.R.Civ.P. Rule 52 as made applicable by Rules of Practice and Procedure in Bankruptcy Rule 7052.
. 11 U.S.C. § 506, Determination of secured status, provides in pertinent parts under sub-part (a):
(a) An allowed claim of a creditor secured by a lien on property in which the estate has an interest ... is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property ... and is an unsecured claim to the extent that the value of such creditor’s interest ... 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 disposition 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.
Id.
.11 U.S.C. § 541(a)(1) Property of the estate, provides: (a) The commencement of a case under section 301, 302, or 303 of this title creates an estate. Such estate is comprised of all the following property, wherever located and by whomever held:
(1) Except as provided in subsections (b) and (c)(2) of this section, all legal or equitable interests of the debtor in property as of the commencement of the case.
Id.
. 11 U.S.C. § 101(44) provides: "‘security agreement’ means agreement that creates or provides for a security interest."
. The House Report (Reform Act of 1978) of § 552’s Legislative History suggests the definition of the term "security interest” is not limited to any particular State's UCC, but also "applies to all security interests as defined in section 101 of the bankruptcy code, not only to UCC security interests.” Id. Accord, Senate Report (Reform Act of 1978) ("It applies to all security interests as defined in section 101(37) (presently § 101(45)) of the bankruptcy code, not only to UCC security interests.” S.Rep. No. 989, 95th Cong., 2d Sess. 91 (1978), U.S.Code Cong. & Admin.News 1978, p. 5877). 11 USC § 101(45) provides: " ‘security interest’ means lien created by agreement.” | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491071/ | OPINION
DONALD R. SHARP, Bankruptcy Judge.
This matter comes before the Court on a Complaint by CSR, Inc., (Plaintiff), to de*586termine the dischargeability of its scheduled debt. To the Complaint the Debtor, (Defendant), has filed a Motion to Dismiss under Bankruptcy Rule 7012. The Motion to Dismiss is based on Defendant’s claim that the Complaint to Determine Dis-chargeability is time-barred pursuant to Bankruptcy Rule 4007(c). Defendant has also asked for sanctions against Plaintiff, alleging that the Complaint to Determine Dischargeability is so groundless as to require this Court to award Defendant attorney fees and costs for its having to mount a defense. This Opinion constitutes findings of fact and conclusions of law under Bankruptcy Rule 7052 and disposes of all issues before the Court in this adversary proceeding.
FINDINGS OF FACT
The findings of fact are made in a light most favorable to the Plaintiff CHARLOTTE SMITH REPORTING, (“CSR”), INCORPORATED.
1. On October 27, 1988, Bryan James McGinnis, Jr., (“Debtor”) filed his Original Petition for Relief under Chapter 7 of the Bankruptcy Code, and scheduled CSR, Inc., as a creditor.
2. On October 31, 1988, notice was given of the Court’s Order setting the first date for the meeting of creditors pursuant to 11 U.S.C. § 341(a) as November 23, 1988.
3. The first order established the last day for filing a complaint to determine dis-chargeability of any debt under 11 U.S.C. § 523(c) as sixty (60) days after the first date set for the meeting of creditors pursuant to 11 U.S.C. § 341(a), or January 22, 1989.
4. On November 23, 1988, at the first meeting of creditors, the Trustee announced a conflict of interest and the meeting was adjourned.
5. On December 20, 1988, the Clerk of the Court gave notice of the appointment of a new Trustee and of the rescheduling of the first meeting of creditors to February 6, 1989. The notice rescheduling the first meeting of creditors instructed the parties to “Please Disregard the Notice for the First Meeting of Creditors.... ” Plaintiff received notice on December 20, 1988.
6. The notice of December 20, 1988, was mute as to its effect on the sixty (60) day period in which to file a complaint to determine dischargeability.
7. The notice of December 20, 1988, did not establish a different last day for filing a complaint to determine dischargeability of any debt under 11 U.S.C. § 523(c).
8. On February 24, 1989, approximately thirty-three (33) days after the last date established pursuant to the original notice of the first meeting of creditors for filing a complaint to determine the dischargeability of any debt pursuant to 11 U.S.C. § 523(c), CSR, Inc., filed its Complaint To Determine Dischargeability of Debt in this adversary proceeding under 11 U.S.C. § 523(a)(4).
DISCUSSION AND CONCLUSIONS OF LAW
The time period in which to file a complaint under 11 U.S.C. § 523(c) to determine the dischargeability of a debt is specifically dealt with thru application of Bankruptcy Rule 4007(c) which provides that
“A complaint to determine the discharge-ability of any debt pursuant to § 523(c) 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). The Court shall give all Creditors not less than 30 days notice of the time so fixed in the manner provided in Rule 2002. On motion of any party in interest, after hearing on notice, the Court may for cause extend the time fixed under this subdivision. The motion shall be made before the time has expired.” (emphasis supplied)
The caselaw surrounding Rule 4007(c) indicates that disputes are to be settled by following the plain language of the rule. In re Shelton, 58 B.R. 746 at 749 (Bankr.N.D.Ill.1986) (The time limitations of Rule 4007 and the procedure for extending them are set in stone); In re Leroy, 55 B.R. 666 (Bank.M.D.Penn.1985) (First date set for meeting of creditors and not date meeting is actually held, is date to be used to deter*587mine timeliness of filing complaints objecting to dischargeability of debts); In re Horob, 54 B.R. 693 (Bankr.D.N.D.1985) (Time prescribed by Bankruptcy Rule 4007(c) for filing of complaint requesting dischargeability determination is absolute unless extended by motion made prior to expiration of the 60-day period); In re Reppert, 84 B.R. 37 (Bankr.E.D.Pa.1988) (Sixty-day period for filing complaint to determine dischargeability of debt runs from first day set for creditors’ meeting, rather than from first date such meeting is actually held).
Plaintiff CSR, Inc., while acknowledging the 60 day limitation period of Rule 4007(c) maintains that the December 20,1988 order of the Court giving notice of the second meeting of creditors was vague and misleading in that it contained operative language instructing them to disregard previous notices i.e. the notice for the first meeting of creditors. Plaintiffs position is that by generating a notice instructing the parties to disregard other notices the notice of the first meeting of creditors was rendered nugatory and with it the starting point for the limitations period in which to file complaints to determine dischargeability of a debt. In sum, Plaintiff’s, position is that the 60 day period began to run as of the date set for the rescheduled meeting of creditors. A review of recent caselaw on this topic leaves the Court with the conclusion that Plaintiff’s position is not well-founded.
In 1987 the Fifth Circuit Court of Appeals addressed this same issue in Neeley v. Murchison, 815 F.2d 345 (5th Cir.1987). In Neeley, the Court held that a creditor’s reliance on a blank in the notice of the first meeting of creditors where the date for the first meeting should have been specified, as well as reliance on misinformation from the bankruptcy clerk’s office that no discharge-ability deadline had been set was misplaced. In holding that the time period to file objections to dischargeability of a debt had run the Court suggested that mere knowledge of the filing of a bankruptcy put the onus on the creditor “to protect his rights.” Id. at 347.
The court’s logic was two-fold. First, the court placed strong emphasis on policy considerations. The court was influenced by the language of Bankruptcy Rule of Procedure 9006(b)(3) which explicitly excepted Rule 4007(c) from time enlargements except “to the extent and the conditions stated in [Rule 4007(c) ].” A reading of Rule 4007(c) reveals that time enlargements can only be granted on motion of party before the limitations period has run. The court reasoned that the strict nature of Rule 4007(c) “evince[s] a strong intent that the participants in bankruptcy proceedings be assured that, with the set period of 60 days, they can know which debts are subject to an exception to discharge.” Id. at 346. Second, the Court read 11 U.S.C. § 523(a)(3)(B) as standing for the only exception to the general rule of Rule 4007(c); under 11 U.S.C. § 523(a)(3)(B) a debt is not automatically discharged if the debt was neither listed or scheduled and the creditor had no notice or actual knowledge of the case in time for filing a complaint to determine dischargeability. Since in Neeley the creditor had actual knowledge' of the filing of debtor’s bankruptcy the Court was unwilling to excuse compliance on the part of the creditor with Rule 4007(c). See Matter of Frankina, 29 B.R. 983 (Bankr.E.D.Mich.1983) (Creditor is not excused from compliance with Rule 4007(c) if creditor had actual notice of debtor’s bankruptcy before the 60 day filing period expired).
In the last several years, several' other bankruptcy courts have grappled with this issue. A review of these cases indicates that almost without exception the courts have held that failure to abide by the 60 day limitations period in Rule 4007(c) is not to be excused. In In re Price, 79 B.R. 888 (9th Cir. BAP 1987) the court held that an “unscheduled creditor with actual notice of the bankruptcy must inquire as to the bar date for filing a nondischargeability complaint” or risk discharge of the claim if the bar date runs in the interim. Id. at 891. The court held that “the responsibility to inquire into the deadline for filing a 523(c) complaint is not so burdensome as to outweigh the increasing need for the expeditious judicial administration of bankruptcy *588cases.” Id. at 893. In In re Sam, 94 B.R. 893 (Bankr.W.D.La.1988) the court went one step further in holding that an unscheduled creditor with actual knowledge of debtor’s bankruptcy has a duty of prompt inquiry and investigation in order to protect his interests vis-a-vis any time bar limitations on filing complaints objecting to dischargeability of debts.
Similarly, two 1987 cases dealt with the issue of duplicate time bar notices resulting from venue changes of the bankruptcy case. In In re Lochrie, 78 B.R. 257 (9th Cir. BAP 1987) a time bar notice on a complaint to determine dischargeability was issued both before and after the case was granted a change in venue. Unfortunately, the creditor chose to rely on the time bar period contained in the second notice. In its holding, the Court held that the second time bar notice was erroneously sent out and that the 60 day period had run based on the initial time bar notice. In making its determination the court spoke of the “strong presumption [that should be made] in favor of discharge and a fresh start for the honest debtor.” Id. at 259. Under similar facts, the court in In re Lewis, 71 B.R. 633 (Bankr.N.D.Ill.1987) came to the same conclusion: “The change of venue can not turn back the clock for the objecting creditors. Plaintiffs reliance on the [second] computer notice is unjustified.” While acknowledging that “this result is perhaps harsh, its application in this case is clearly not. The rules are an absolute statute of limitations and must be interpreted as such.” Id. at 636.
In light of the holdings of previous courts on this matter this Court is convinced that the responsibility lay on Plaintiff to determine the period for properly filing the Complaint to Determine Dis-chargeability. A review of the jurisprudence would have made it abundantly clear to Plaintiffs counsel that the only prudent course of action was to file the Complaint or to file a Request for Extension within the first 60 days following the first date set for the meeting of Creditors. The Ninth Circuit in the Matter of Gregory, 705 F.2d 1118 (9th Cir.1983) at page 1123 stated “... whatever is notice enough to excite attention and put the party on his guard and call for inquiry, is notice of everything to which such inquiry may have lead. When a person has sufficient information to lead him to a fact, he shall be deemed to be conversant of it.” The Bankruptcy Appellate Panel of the Ninth Circuit in the Price case cited above quoted from In re Alton, 64 B.R. 221 (Bankr.M.D.Fla.1986) the Alton Court’s language used in rejecting a Creditor’s due process argument and distinguishing Mullane v. Central Hanover Bank and Trust Company, 339 U.S. 306, 70 S.Ct. 652, 94 L.Ed. 865 (1950) states: “It needs no elaborate discussion to point out the obvious, that everyone is supposed to know what the law is and is especially true if a party complaining about the lack of notice is an attorney, who actually was served with a notice of a pendency of the Chapter 11 case. Clearly he was charged with the duty to ascertain the rules which govern the rights of Creditors to assert a claim of fraudulent conduct against the Debtor.”
This Court is left with the conviction that a review of the above jurisprudence by Plaintiff’s attorney upon receipt of the December 20, 1988, notice from the clerk’s office would have required him to either file the Complaint within the ample time that he had left before January 22, 1989, or seek an extension of time within which to file within that same time period. Plaintiff’s apparent interpretation of the second notice as superseding Rule 4007(c) and the clear jurisprudence cited above is unwarranted and is fatal to Plaintiff’s position.
It is the holding of this Court that Plaintiff CSR, Inc., has failed to timely file its complaint to determine dischargeability of its debt from Debtor and that Plaintiff’s complaint should be DISMISSED with prejudice.
In addition to the Motion to Dismiss under Bankruptcy Rule 7012 Defendant has filed a Motion for Sanctions under Bankruptcy Rule 9011. The Motion for Sanctions requests attorney fees and expenses incurred by Debtor in defending a Motion for Relief from Stay which has previously been decided by this Court and attorney *589fees for defending the Complaint to Determine Dischargeability which this Court holds today should be DISMISSED. The Court has examined the Rule 9011 Motion filed by Defendant and finds it to be wholly without merit. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491072/ | OPINION
DONALD R. SHARP, Bankruptcy Judge.
This matter came on for consideration of the Debtor’s Emergency Motion for Valuation of Securities as well as Creditor’s Motion to Lift the Automatic Stay. This Opinion constitutes findings of fact and conclusions of law in accordance with Bankruptcy Rule 7052 and disposes of all the issues presented to this Court in both motions.
Statement of Facts
The basic facts of the case at hand are not in dispute. In 1985, Victor A. King, William H. King and Ray King, (“The Kings”), sold to Steven Harris, (“Debtor”), a business known as Carpenter Francis Pharmacy. The purchase price was $425,-000.00 of which $75,000.00 was paid as a down-payment. To secure the remaining $350,000.00 debt, the Kings took a valid security interest in SDH Enterprises, Inc., the reconstituted corporate entity of Carpenter Francis Pharmacy, Inc. It is undisputed that the Kings have possession of and hold a valid perfected security interest in all of the common stock of SDH Enterprises, Inc. In addition, Debtor gave a personal guarantee of the promissory note *590given by SDH Enterprises, Inc., as part of the purchase price paid to the Kings to acquire from the Kings the corporate stock of Carpenter Francis Pharmacy. It is undisputed that the note is in default and that Debtor has paid neither principal nor interest since July, 1989, on said note.
The contentiousness of this matter results from Debtor’s plans to retire the existing stock of SDH Enterprises, Inc., to the detriment of the Kings and to reissue new stock. This issue is compounded by the fact that the new stock is to be issued to Debtor’s mother, Mildred Harris, for $10,000.00 consideration. The parties could not agree on whether this constituted a sale of the stock for the $10,000.00 or a capital contribution. However, the effect of retirement of the existing stock held as a security by the Kings would be to render the stock worthless and with it their security interest.
Memorandum of Law
Valuation of the assets of reorganized debtors has long been a vexing problem for the courts. One commentator has described the procedure as “A guess compounded by an estimate.” Coogan, Confirmation of a Plan Under the Bankruptcy Code, 32 Case W.Res.L.Rev. 301, 313 (1982).
At the hearing on the Motion for Valuation, the Court heard the testimony of two valuation experts. The first expert, Mr. Robert Bayles, testified for Debtor. Mr. Bayles’ testified that the value of the common stock as it now exists is between $3,000.00 and $5,000.00. He reached this conclusion after examining the tax returns and financial statements of SDH Enterprises, Inc. He opined that it would take a gambler to buy the stock of this insolvent corporation and that any such gambler would be required to invest at least another $10,000.00 plus legal and accounting fees in attempting to make the corporation viable.
Mr. Bayles testified that in coming to his conclusions he analyzed the net worth of the corporation by employing five methods of valuation common to his practice. The first method considered was a net worth multiple formula. To quantify this one would multiply the net worth of the corporation times one and one-half. Mr. Bayles rejected this method because it implicitly quantifies goodwill which is hard to quantify with Chapter 11 debtors. The second method employed was described as multiplying the average net income of the corporation times a factor of seven. Using a five year average of net income Mr. Bayles arrived at an average net income of $15,-611.00. Multiplying this average net income by a factor of seven resulted in a figure of $109,000.00 to which Mr. Bayles added $66,000.00 in outstanding receivables resulting in a total valuation of $175,-000.00. However, Mr. Bayles indicated that he did not believe this was a good system and that he believed that this estimate was too low. The third method employed was to multiply the average of daily sales times 100. He testified that this method was commonly used. Mr. Bayles testified that he used a three year average of daily sales and a daily sales figure of $2,438.00. After multiplying this figure by a multiple of 100 and adding the $66,000.00 in receivables he arrived at a figure approximating $300,000.00. The fourth method employed was to divide annual revenue by a factor of three. This method resulted in a valuation of $293,645.00 to which the $66,000.00 in receivables were added resulting in a total worth of $350,000.00. The fifth method was to add the liquidated value of inventory, fixtures and annual income together. Using a figure of $157,000.00 for inventory, $9,000.00 for fixtures, and $5,343.00 for annual income, resulted in a net worth of $171,000.00 to which a $66,-000.00 receivable was added resulting in a total net worth of $230,000.00.
Over all, Mr. Bayles testified that a figure of between $250,000.00 to $300,000.00 would be more reflective of the net worth of the corporation. When pressed for a more definite figure, Mr. Bayles responded that using a twenty percent capitalization rate, he believed a more reasonable estimate of the value of the corporation was $250,000.00 assuming that no debt existed.
On re-direct, Debtor’s counsel, emphasized that this figure did not reflect a suit*591able discount given the increased strength of competition from discount pharmacies. He also prompted Mr. Bayles to recall that in addition to the debt owed to the Kings there existed an outstanding trade debt of $105,000.00 as well as secured debt of $60,-000.00.
The expert testifying for the Kings was Mr. Dennis McGinnis. Mr. McGinnis qualified as an expert in that he had experience as a business broker and experience in appraisal. He testified that he looked at the assets and liabilities of SDH Enterprises, Inc. as well as the monthly reports, scheduled statement of affairs, tax returns, inventory, financial statements, plan of reorganization and disclosure statement. Mr. McGinnis analyzed the value of SDH Enterprises, Inc. using three methods; two of which he discounted. The first method discounted was the income approach. Mr. McGinnis testified that he did not believe that enough data existed to make a recommendation based on this approach. The second approach, was the market comparable approach. Again, Mr. McGinnis did not feel that there were enough comparable businesses to make a valuation estimate. However, Mr. McGinnis was able to make an estimate using the cost approach. The cost approach is simply a factor of the difference between the value of assets and the liabilities of the corporation. Removing the debt of the Kings resulted in a net worth of $135,507.50. Mr. McGinnis testified that this estimation took into account all debt. Assuming that there was no outstanding debt Mr. McGinnis would value the corporation at $281,407.00.
When charged with determining the allowed claim of a creditor secured by a lien on property the Court is charged with determining the value “In light of the purpose of the valuation and of the proposed disposition or use of such property.” 11 U.S.C. § 506(a). The commentary in Collier on Bankruptcy suggests that assuming a successful organization the appropriate standard of value is “A value which takes into consideration not only the tangible value of the property but also the earnings to be derived therefrom. On the other hand, if prospects for a successful reorganization appear dim, the value may more appropriately be determined on the basis of the value the holder of the secured claim could obtain for the property upon a disposition after the Debtor’s retention and use has ended.” 3 Collier on Bankruptcy 506.04, 506-28-29 (15th Ed.1989). However, the commentators in Colliers acknowledged that “In the usual instance in which the nature of the Debtor’s prospects are not absolutely clear, the valuation should properly take all material possibilities into consideration and weigh their likelihood in arriving at a value. Thus, it is probably more appropriate to view the varying bases and manner of evaluation as establishing a range of possible values as opposed to a finite set of alternatives.” 3 Collier on Bankruptcy 506.04, 506-29 (15th Ed.1989).
The Court is in agreement with the commentary in Colliers that varying bases and manner of evaluation should be entertained in arriving at a judicially mandated valuation. Having done so, the Court has found that in spite of the parties contentions, the estimates provided by the opposing experts were much more similar than dissimilar. Both parties gave ballpark figures of the corporation’s worth assuming that the Kings’ debt was excluded. Mr. Bayles testified that his estimates ranged from $250,-000.00 to $300,000.00. The Court will assume a mid-point value of $275,000.00. The expert for the Kings, Mr. Dennis McGinnis, testified that excluding the Kings’ debt, the worth of the corporation was $281,407.00. Subtracting the trade debt of $105,000.00 as well as the $60,-000.00 in secured debt from both figures results in a low estimate of $110,000.00 (Debtors’ expert) and a high valuation of $116,407.00 (Kings’ expert).
Based on the testimony by the valuation experts the Court will accept the testimony of Mr. McGinnis as the more credible and hold that the stock of SDH Enterprises, Inc., has a value of $116,407.00, and that the Kings are fully secured to that extent.
MOTION OF VICTOR A. KING, WILLIAM H. KING AND RAY KING TO LIFT STAY
11 U.S.C. § 362 of the automatic stay once imposed by the filing of a Peti*592tion in Bankruptcy, can be lifted only upon a showing of cause or in the alternative, a showing that the Debtor does not have equity in the property and that such property is not necessary to an effective reorganization. In this respect, the Kings have moved for a lifting of the stay based on this second consideration.
It is undisputed by the parties that the Debtor does not have equity in the common stock of SDH Enterprises, Inc. The crucial issue for the determination of the Court is whether such property is necessary to an effective reorganization. The Court recognizes that ownership of the common stock is ownership of SDA Enterprises, Inc.
At the hearing, counsel for the Kings made several attempts to demonstrate that the common stock of SDH Enterprises, Inc., was not necessary to an effective reorganization of Debtor. To wit, there was testimony that Debtor could seek employment elsewhere. However, it is the opinion of the Court that there can be no conclusion other than that SDH Enterprises, Inc., is inextricably entwined with the affairs of the Debtor and thus necessary to an effective reorganization of the Debtor.
In testimony, Mr. King asserted that should he regain control of the stock of SDH Enterprises, Inc., and through it the right to hire and fire, he would terminate Mr. Harris’ employment. While he asserted that Mr. Harris would be able to find suitable employment elsewhere he admitted that he was unaware of any similar pharmaceutical positions open in the Tyler, Texas area. Debtor testified that there were not currently available positions in the Tyler area.
Therefore, it is the conclusion of the Court that possession of the stock of SDH Enterprises, Inc., is necessary to the effective reorganization of Debtor and therefore the Motion to Lift Stay is DENIED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491073/ | *593INTRODUCTION
DONALD R. SHARP, Bankruptcy Judge.
This matter before this Court is a determination of whether a partial repossession of collateral without any subsequent sale or disposition serves as a complete satisfaction of the Creditor’s claim against Debtor as to the remaining collateral. After a review of the dispositive Texas State Law, this Court is of the opinion that it does not.
FACTUAL BACKGROUND
Debtor-in-possession, Miles R. Kardatzke and wife, Juanita R. Kardatzke, were the owners and operators of a chain of Le’ Optitech stores which specialized in the sale of eyeglasses. On March 31, 1987, Debtor and Le’ Optitech, Debtor’s wholly owned corporation, executed a promissory note and security agreement in favor of Trans Exchange Corporation, (“TEC”). The note was executed in connection with the sale of a number of optical stores located in Texas, Oklahoma and Missouri by TEC to Debtors and their corporation. The security agreement created a security interest in the 15 stores and the common stock of Le’ Optitech.
Subsequently, a default occurred in the payment of the installments on the note. In October 1988, TEC, sent notice to Debtors that it was reassuming ownership of all assets pledged to TEC in Odessa and Lubbock, Texas. These assets consisted of one store in Odessa and two stores in Lubbock, Texas. The remaining 12 stores subject to TEC’s security interest were not affected. TEC’s secured proof-of-claim is $233,-108.00. The evidence shows that no credit has been given for the value of the foreclosed stores.
Debtor maintains that the law of the State of Texas dealing with secured transactions holds that a repossession by a creditor without subsequent sale or other disposition extinguishes in toto Debtor’s obligation to said Creditor. Creditor TEC’s response is that a repossession without subsequent disposition serves at best only to dispossess the Creditor of any claim to a deficiency in any of the repossessed stores.
DISCUSSION
State law is controlling in matters dealing with the creation and enforcement of contractual liens on personal property. In Texas, the provisions governing the creation and enforcement of liens (security interests) are contained in Article 9 of the Texas Business and Commerce Code. Specifically, Creditor’s remedies ‘on default are contained in Sections 9.501 thru 9.507. V.T.C.A., Bus. and C. Sec. 9.501-9.507 et seq.
Pursuant to these provisions, upon debt- or default, the secured party may foreclose his security interest by any available judicial procedure or elect non-judicial foreclosure remedies which are governed by Article 9 of the Code. The Creditor has the rights and remedies provided in the above enumerated sections in the security agreement.
Upon repossession, the secured party has two options with regard to the disposal of collateral. First, § 9.504 provides that the secured party may after default sell, lease or otherwise dispose of any or all of the collateral as long as it is done in a commercially reasonable manner. V.T.C.A., Bus. and C. § 9.504. Full compliance with the provisions of this section allow a secured creditor to sue for a deficiency judgment should a deficiency result from the sale. The secured creditor’s second option is to accept the collateral as a full and complete discharge of the Debtor’s obligation. V.T. C.A., Bus. and C. § 9.505. In order to exercise this option on non-consumer goods, the secured creditor is required to give written notice to the Debtor in addition to any other secured party maintaining a security interest in the collateral to be accepted in discharge of the obligation. V.T.C.A., Bus. and C. § 9.505(b). If objection to this proposal is received within 21 days of the original offer, the secured party must comply with § 9.504 and sell the collateral in a commercially reasonably manner. V.T.C.A., Bus. and C. § 9.505(b). However, barring objection, the secured *594party may retain the collateral in complete satisfaction of the Debtor’s obligation.
The leading case addressing the issues before this Court is Tanenbaum v. Economics Laboratory, Inc., 628 S.W.2d 769 (Tex., 1982). In Tanenbaum, the Debtor requested that the secured creditor repossess certain substandard machinery subject to the creditor’s security interest. After repossession of the collateral, creditor later determined that the machinery could not be economically repaired and then sold the machinery for scrap without notice to the Debtor. Soon after, the secured creditor attempted to assess the Debtor with a deficiency.
The Tanenbaum court, in analyzing the relationship between the options presented to creditors pursuant to §§ 9.504 and 9.505 of the Code, determined that failure of the creditor to comply with § 9.504 and sell the collateral in a commercially reasonable manner constituted a de facto election of the remedy under § 9.505. Finding no provision allowing a creditor to sue for a deficiency within § 9.505 the Court held that creditor’s retention of the collateral was a full satisfaction of the indebtedness.
In this matter, Debtor is attempting to extend the holding in Tanenbaum for the proposition that a partial repossession and deemed election of § 9.505 serves to extinguish all claims that the Debtor may have in other collateral still held by Debtor. The Court is not persuaded by that argument. A careful review of the State Court Jurisprudence does not reveal any cases where the courts have been faced with the case of a partial repossession. The Tanenbaum Court and all other courts that have considered this question have been dealing with a repossession of all of the collateral. There is some language in Whirlybirds Leasing v. Aerospatiale Helicopter, Inc., 749 S.W.2d 915 (Tex.App.—Dallas, 1988) which indicates that the Creditor, in attempting to repossess a helicopter received only the hull and not the complete helicopter. The argument of the Creditor was that this constituted an attempted repossession of the collateral since the equipment it repossessed was incomplete and valueless. The Court rejected this argument without any discussion and disposed of the matter as a repossession of the collateral with the context of the opinion clearly indicating that the Court considered it a total repossession. My review of the Texas Jurisprudence convinces me that the state courts of Texas would not extend the Tanenbaum decision to the extent requested by the Debtors in this case. Such an extension would grant the Debtor an unwarranted windfall that there is no equitable or legal argument to support.
If one were to adopt the position that the Tanenbaum rationale applies to a partial repossession, then it would appear that the only relief Debtors would receive in this instance is to effectively convert the claim to an in rem claim against the remaining assets. The election between remedies mandated by §§ 9.504 and 9.505 of the Texas Business and Commerce Code as interpreted by Tanenbaum only deal with whether the Creditor has a right to a deficiency after foreclosure of all of the collateral. Therefore, the most that the Tanenbaum decision can do to assist the Debtor in this case is to prohibit any deficiency after the remainder of the collateral has been foreclosed upon. It seems clear that, under Texas law, the Creditor may at least exercise its lien rights to the collateral through repossession and either keep the collateral or dispose of it for the Creditor’s benefit.
Although the above might very well be a result absent a bankruptcy proceeding we are faced with valuing the proof-of-claim in this proceeding which determines the amount of the secured debt remaining and the amount that the Debtor must pay to the Creditor in order to preserve the assets presently being used in this reorganization proceeding. Although this Court is aware that the Tanenbaum decision overruled the previous line of cases which held that there was a rebuttable presumption that the foreclosed upon property approximated the value of the debt for purposes of determining the amount of the deficiency there is no way to resolve the instant controversy without assigning a value to the assets that have been foreclosed upon. To allow the *595entire debt to stand would create a windfall to the Creditor that is not warranted and, as noted above, to declare the entire debt extinguished would create a windfall to the Debtor that is not warranted. To determine the controversy before the Court a determination of the value of the repossessed collateral seems essential.
This Court would be willing to extend the decision in Tanenbaum to accommodate the Debtor upon a showing by Debtor that the value of the partially repossessed collateral approximated the amount of TEC’s claim. However, this is not the case. The Court found the testimony by TEC’s expert witness as well as the testimony by Debtor as to the value of the collateral to be less than credible. TEC estimated the value of the repossessed Odessa store to be $8,000.00 and the value of the two Lubbock stores to be $4,000.00 and $6,000.00 respectively. On the other hand, Debtor’s testimony that the stores were worth approximately $125,000.00 individually was wholly unsubstantiated.
Finding neither the Debtor’s or TEC’s testimony concerning valuation to be credible, the Court is left with no other alternative but to approximate a value. As previously mentioned, TEC maintains a security interest of $233,108.00 in 15 Le’ Optitech stores. This represents approximately $15,540.53 pro rata per store. Since no testimony was offered as to the unique nature of any of the Le’ Optitech stores, the Court will divide the liability owed to TEC by Debtor by the factor of the 15 stores. The resulting amount of $15,540.53 therefore represents the liability attributable to each individual store; the three repossessed stores having an aggregate liability of $46,621.59.
Therefore, it is the holding of this Court that through deemed election of § 9.505 of the Texas Business and Commerce Code TEC has elected to repossess the three stores in complete satisfaction of the indebtedness owed against those stores. This indebtedness approximates $46,621.59. The Court is unwilling to extend its holding to support Debtor’s contention that an election under § 9.505 serves to extinguish Debtor’s total indebtedness without a showing that the collateral seized approximated the amount of the outstanding indebtedness. Therefore, it is the holding of this Court that Debtor’s objection to the proof-of-claim of TEC is sustained to the extent that TEC has not credited on its proof-of-claim the amount of $46,621.59 to Debtor for the repossession and retention of the three stores in question.
However, to the extent that Debtor objects to TEC’s security interest in the 12 remaining stores subject to a proof-of-claim of $186,487.07 Debtor’s objection is overruled, it is so ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491074/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW ON CROSS-CLAIMS
HAROLD F. WHITE, Bankruptcy Judge.
The trial of the above captioned adversary proceeding was held before this Court on- June 27, 28 and 30, 1989. John Silas Hopkins, III and Donald A. Wochna appeared for Reveo D.S., Inc. (“Reveo”) and Alan R. Lepene, Michael A. Ellis and Charles E. Hallberg appeared for General Computer Corporation (“GCC”). Testimony and evidence were presented to the Court and at the request of the Court the parties submitted proposed findings of fact and conclusions of law. The parties also filed pretrial briefs. Based upon a review of the pleadings submitted, and the evidence presented at the trial this Court makes the following Findings of Fact and Conclusions of Law.
FINDINGS OF FACT
1. This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334(b) and General Order of Reference 84 of the Northern District of Ohio. Venue is proper in this judicial district pursuant to 28 U.S.C. § 1409(a).
2. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A).
3. On July 26 and 28, and October 4 and 5, 1988 Reveo and substantially all of its operating subsidiaries, filed separate chap*633ter 11 petitions pursuant to Section 301 of the Bankruptcy Code. Reveo thereupon continued in the management and operation of its businesses and properties as debtors in possession pursuant to sections 1107 and 1108 of the Bankruptcy Code, 11 U.S.C. §§ 1107, 1108. No trustee or examiner has been appointed in these cases.
4. Reveo is engaged in the operation of approximately 1,900 retail drug stores throughout the United States.
5. On April 17, 1989 the United States of America (“USA”) commenced this adversary proceeding by filing a Complaint inter-pleading Reveo and GCC. (Docket No. 1) The USA delivered to the Court a tax refund check for $403,234.00 made payable to Reveo. The check for $403,234.00 is a tentative refund (the “Refund”) representing the application of GCC’s 1988 net operating loss (“NOL”) to Reveo’s consolidated tax return for fiscal year 1986 (the “Reveo Consolidated Return”). [Complaint paras. 7, 8, 12, (Docket No. 1), Reveo Ex. 1] In the Complaint the USA explained that both Reveo and GCC have made a claim to the Refund and the USA was uncertain as to which claimant the Refund should be remitted. [Complaint, paras. 9-10, (Docket No. 1)] The Refund has been deposited into a special bank account pending the outcome of this adversary proceeding. By Order of this Court, the USA was discharged from any further liabilities as to the interpleaded Refund. (Docket Nos. 7 and 39)
6. Pursuant to a Pre-trial Order (Docket No. 12) GCC and Reveo filed cross-claims setting forth their claims to the Refund.
7. GCC asserts that it is entitled to the Refund and to have the Refund endorsed over to it, because the Refund resulted directly from the carry back of a GCC loss against income solely attributable to GCC. [GCC Cross-Claim, para. 19, (Docket No. 14) ] Reveo asserts that it is entitled to the Refund because Reveo paid the consolidated group’s tax liability (for fiscal year 1986 when GCC was a member of the group) and GCC never reimbursed Reveo for its share of the taxes paid. [Reveo Answer and Cross-Claim, para. 11, (Docket No. 15)]
8. On May 25, 1989, the Court set this adversary proceeding for expedited discovery and an early trial. (Docket No. 12) Trial commenced on June 27, 1989, and continued on June 28 and 30. GCC called as witnesses Anthony Tricarichi, Jr. and Alexander Hamm, partners of Peat Mar-wick Main & Co.; Stephen Gruber, a Reveo vice-president of the Reveo tax department; Robert Carroll Hudson, former chief financial officer of Reveo; and Richard R. Pi-larczyk, president of GCC. Reveo called no witnesses.
9. Prior to March 4, 1986 GCC was a wholly owned subsidiary of Reveo. (Tr. pp. 41-42, 55-56)
10. While it was a wholly owned subsidiary of Reveo, GCC was a member of the Reveo consolidated group (the “Consolidated Group”) for federal income tax purposes. (Reveo Ex. 2)
11. In the latter half of 1985 Reveo decided to sell its majority interest in GCC to the public through an initial public offering of GCC stock (the “IPO”). (GCC Ex. 9; Tr. pp. 41, 389-390)
12. Neither in contemplation of the IPO nor at any other time was there an agreement, written or oral, express or implied, between GCC and Reveo pertaining to the disposition of any tax refund resulting from losses GCC might suffer in the years following the IPO. (Tr. pp. 388-391)
13. At the trial Reveo waived the issue that an implied agreement existed between the parties that any tax refunds would belong to the parent corporation. (Tr. pp. 24-25)
14. The IPO was underwritten by McDonald & Company Securities, Inc. (the “Underwriters”) and became effective on March 4, 1986. (GCC Ex. 1; Tr. p. 42)
15. Prior to March 4, 1986 an intercom-pany account (the “Intercompany Account”) existed between GCC and Reveo which recorded all transactions between the two companies. Not all transactions involved an exchange of cash. (Tr. pp. 42-43)
*63416. The Intercompany Account showed a liability owing from GCC to Reveo as of November 30, 1985 of $3,174,081. (GCC Ex. 2; Tr. p. 55)
17. The amount GCC owed Reveo on the Intercompany Account included, among other items, liabilities for advances from Reveo, declared dividends in amounts equal to GCC’s gross profits on all of its sales to Reveo and Reveo subsidiaries (the “Inter-company Profit”), interest charges, income taxes payable and purchases of supplies, shared services and capital items. Cash disbursements to Reveo reduced the balance of the Intercompany Account. (GCC Ex. 2; Tr. pp. 46-55)
18. All of the Intercompany Profit for fiscal years ended on or prior to June 1, 1985 was returned to Reveo in the form of dividends as shown in the Intercompany Account. For fiscal year ended June 2, 1984 a total of $256,686 of Intercompany Profit was returned to Reveo as dividends and for fiscal year ended June 1, 1985, $499,869 of Intercompany Profit was similarly returned to Reveo. (GCC Ex. 2; Tr. pp. 51-55)
19. While GCC was a member of the Consolidated Group the Intercompany Profit was not recognized by the Consolidated Group as income for federal income tax purposes because the transactions were amongst companies within the same group. (Tr. pp. 51-52) These profits were deferred for federal income tax purposes.
20. The income tax liability incurred by GCC while it was a member of the Consolidated Group was solely due to its earnings on sales other than to Reveo. Although Reveo paid this tax for GCC, the amount of the tax was charged to GCC on the Inter-company Account as income taxes payable and increased the intercompany liability to Reveo. (GCC Ex. 2; Tr. pp. 53-54)
21. In structuring the IPO, the Underwriters determined that the maximum debt which GCC could carry after the IPO would be no more than $1,200,000. (GCC Ex. 9; Tr. pp. 395-396)
22. Consequently, at the time of the IPO, $1,200,000 of the amount owing from GCC to Reveo on the Intercompany Account was reduced to a promissory note (the “Note”) payable to Reveo and the balance of the Intercompany Account was contributed to the capital of GCC. (GCC Ex. 1, pp. 5-6; GCC Ex. 9, pp. 2-3; Tr. pp. 56-57, 391, and 396)
23. The capitalization of the Intercom-pany Account owed by GCC to Reveo contributed to an increase of Revco’s tax basis in its shares of GCC stock. (GCC Ex. 4; Tr. p. 57)
24. The Intercompany Profit at March 4, 1986 was $1,393,976 which, when adjusted for timing and depreciation differences, resulted in earnings and profits for GCC for fiscal year 1986 of $1,359,605, which was then contributed directly to capital of GCC thereby increasing Revco’s basis in its shares of GCC stock. (GCC Ex. 4; Tr. pp. 188-191)
25. As a result of the IPO, Revco’s tax basis in its shares of GCC capital stock increased by $4,703,354, i.e., the contribution to GCC’s capital of the sum of (i) the net outstanding balance of GCC’s undistributed earnings and profits from its fiscal year 1980 through March 3, 1986 of $1,375,263, plus (ii) the outstanding amount payable in the Intercompany Account of $3,328,091. (GCC Ex. 4)
26. When, as part of the IPO, Reveo sold 747,331 of its 1,068,750 shares of GCC capital stock (approximately 70%) for $8,781,627, it realized a gain for federal tax purposes of $5,398,622 ($8,781,627 sales proceeds less $3,383,005 basis in GCC stock). (GCC Ex. 4, p. 2; GCC Ex. 7; Tr. p. 192)
27. Consequently, on March 4, 1986 when Reveo sold the 747,331 shares of its GCC stock Reveo recovered $3,383,005 of its capital investment in GCC — a non-taxable event. (GCC Ex. 4, p. 2; Tr. p. 192)
28. Subsequent to the IPO, Reveo sold the remaining balance of its GCC’s shares. (Tr. p. 198)
29. As a result of the IPO, GCC was no longer a wholly owned subsidiary of Reveo and ceased to be a member of the Consol*635idated Group for tax purposes. (Tr. pp. 55-56)
30. Once GCC ceased to be a member of the Consolidated Group, the deferred Inter-company Profit earned prior to fiscal year 1986 had to be recognized as taxable income in the Reveo Consolidated Return. (Tr. pp. 58 and 74)
31. As a result of recognizing the Inter-company Profit of GCC for all years prior to fiscal year 1986 and through March 3, 1986 (the date prior to the IPO) the taxable income of GCC as reported on the Reveo Consolidated Return was $2,112,010. (GCC Ex. 6; Tr. p. 59)
32. The Reveo Consolidated Return reported consolidated taxable income of $71,-434,868. (Reveo Ex. 2, p. 4) The $71,434,-868 included the $2,112,010 of taxable income of GCC. (Reveo Ex. 2, p. 19; GCC Ex. 6) A total tax was calculated on the Reveo Consolidated Return of $26,355,266.1 (Reveo Ex. 2, p. 4) The $26,355,266 included the tax on the $2,112,010 of taxable income of GCC. (Tr. pp. 229-230) Reveo paid the entire $26,355,266 of the taxes calculated. (Tr. pp. 90, 229-230)
33. Subsequent to March 4, 1986, GCC began reporting and paying income tax separately because it was no longer a member of the Consolidated Group. (Tr. pp. 55-56)
34. GCC suffered the NOL in fiscal year 1988 after it left the Consolidated Group. (GCC Ex. 12, p. 2; GCC Ex. 13, p. 2; Tr. pp. 75 and 222)
35. Upon the filing of its federal income tax return for fiscal year 1988, pursuant to federal income tax laws GCC had the option to carry the NOL backward or forward. (Tr. pp. 80, 262-265, 361-362) GCC was under no constraint or obligation to carry the NOL back to the Reveo Consolidated Return.
36. Under the federal tax laws, having elected a carry back, GCC was required to carry back the NOL first to its third previous tax year, then to its second previous tax year, etc. (Tr. pp. 263-264) GCC's third previous tax year was its June 2, 1985 through March 3, 1986 tax year for which its income was reported on the Reveo Consolidated Return. (Tr. p. 264) Thus, the first $2,112,010 of the NOL was required to be applied to reduce the taxes due on the taxable income of the Reveo Consolidated Group for the Reveo Consolidated Return. (Tr. pp. 264-265) The NOL carry back of $2,112,010 to the Reveo Consolidated Return reduces the amount of taxes due for that year by $971,524.60. This amount is easily calculated: the incremental tax rate for the 1986 tax year was 46% and 46% of $2,112,010 is $971,524.60. (Tr. pp. 243, 264-265)
37. Sometime early in 1989, GCC filed with the Internal Revenue Service a Form 1139 “Corporation Application for Tentative Refund,” (Application for Refund) requesting a tentative refund of $403,234 based on carrying back $2,112,010 of the NOL to the Reveo Consolidated Return. (GCC Ex. 12; Tr. p. 221) GCC elected to carry back the NOL based on the assumption that it would receive a tax refund of $403,234 from the IRS. (Tr. pp. 360-362) GCC concedes that it is not entitled to any portion of the tax refund in excess of $403,-234.00. (Tr. pp. 250-253, 308)
38. By carrying back the NOL, GCC gave Reveo the opportunity to seek a windfall tax refund of $568,291 — the difference of $971,525 less $403,234. (Tr. pp. 299-301) By filing an amended corporate federal income tax return, Form 1120X, Reveo could obtain the balance of the tax refund. (Tr. p. 265)
39. The above opportunity for a tax refund by Reveo arises solely as a result of GCC’s decision to carry back the NOL. An election by GCC to carry forward the NOL would deprive Reveo of the opportunity to seek its tax refund of $568,291. (Tr. p. 311)
*63640. The Reveo Consolidated Return is currently under audit by the IRS. However, testimony by Mr. Steven Gruber, Vice President, Taxes of Reveo, has indicated that the GCC portion of the Reveo Consolidated Return is not currently being questioned by the IRS, nor is there any evidence to suggest that it will be. (Tr. pp. 373-375)
41. Mr. Alexander Hamm, a tax partner in the accounting firm of Peat, Marwick, Main & Co., testified that the likelihood of an IRS audit of either the Reveo Consolidated Return or of GCC’s corporate income tax return for fiscal year 1988 resulting in a change to the amount of the Refund is remote and highly unlikely. Reveo offered no testimony or evidence to contradict the testimony of Mr. Hamm. (Tr. pp. 294-295, 310)
42. At present, there has been no examination of the 1988 GCC income tax return. (Tr. pp. 86-87, 229)
43. The IRS has filed a proof of claim against Reveo in the amount of $100,548,-444.73, of which $30,696,761.00 in taxes and $2,191,632.98 in interest relates to the Rev-eo Consolidated Return. (Reveo Ex. 4; Tr. pp. 383-384)
44. The testimony of Mr. Gruber indicates his belief that the Reveo Consolidated Return (Reveo Ex. 2) accurately reflects in every respect the proper amount of tax due the IRS for the period involved. (Tr. pp. 379-380)
45. The federal tax laws permit the IRS to elect to deal directly with any member of a consolidated group, which, upon such election has full authority to act for itself. See Treas.Reg. § 1.1502-77, the last sentence of which provides:
Notwithstanding the provisions of this paragraph, the district director may, upon notifying the common parent, deal directly with any member of the group in respect of its liability, in which event such member shall have full authority to act for itself.
46. The evidence establishes that all of the intercompany profit on sales from GCC to Reveo was added to the capital, i.e. tax basis, of Revco’s investment in GCC (Tr. pp. 51-55, 72) Further, Note 1 on page 1 of GCC Exhibit 4 which reads “No FIT (i.e. Federal Income Taxes) provision is necessary because the same amount would be contributed to paid in capital and increase the tax basis (a wash)” clearly shows that the tax on such income remains included in the amount capitalized. (Tr. pp. 66-67) Finally, the journal entries submitted as part of GCC Ex. 3 clearly show that the tax computed on the initial calculation of the fiscal year 1986 intercompany profit, i.e. $342,469, was capitalized. No evidence has been presented to question the capitalization of such amounts.
47. If, for any reason, any amount of the Refund is determined by the IRS not to have been due, then Reveo and all other members of the Consolidated Group are severally liable to repay to the IRS any overpayment plus any interest and applicable penalties. (Tr. pp. 241-242) [Treas.Reg. § 1.1502-78(b)(2) ]
48. GCC presently owes Reveo $575,-000.00 on the Note. (Tr. pp. 117-118, 127-129, 155)
ISSUE
WHICH OF THE TWO ENTITIES, REVCO OR GCC, IS ENTITLED. TO RECEIVE THE REFUND?
THE CROSS-CLAIMS
GCC contends that it is entitled to receive the Refund based on the following grounds: 1) Although Reveo initially paid the tax Reveo was fully reimbursed for the payment through the sale of Revco’s GCC stock and its recovery of the tax as part of the tax-free return of its capital investment in the GCC stock; 2) Any refund resulting from the carry back of a net operating loss of a former subsidiary against taxable income attributable to such subsidiary in a prior year when it was a member of its former parent corporation’s consolidated tax group belongs to and is the property of that subsidiary. GCC relies on the following case law for this position Western Dealer Management, Inc. v. England, (In re Bob Richards Chrysler-Plymouth Corp.), 473 F.2d 262 (9th Cir.1973), cert. *637denied, 412 U.S. 919, 93 S.Ct. 2735, 37 L.Ed.2d 145 (1973); Jump v. Manchester Life and Casualty Corp., 579 F.2d 449 (8th Cir.1978); United States v. Bass Financial Corp., et al., No. 83 C 706 (N.D.Ill. May 27, 1983 and April 20, 1984); and, Pentron Industries, Inc. v. Capital Dredge and Dock Corp., et al., Nos. 3140 and 3142 1981 WL 3984 (Court of Appeals, Lorain County, May 20, 1981); and 3) The Refund, although made payable to Reveo, is subject to a constructive trust in favor of GCC and to permit Reveo to receive any portion of the Refund would unjustly enrich Reveo.
Reveo argues that GCC is not entitled to the Refund because: 1) GCC did not pay the tax or reimburse Reveo for paying the tax, and relies on Jump, Bob Richards, and Bass Financial, supra for this position; 2) No constructive trust exists because the Refund was not GCC’s money in the first instance; 3) There is no evidence of an agreement between Reveo and GCC to give GCC any tax refunds; 4) Reveo is entitled to set off any amount due to GCC against the balance of the Note due to Reveo; 5) Reveo is entitled to keep the refund as partial compensation for GCC’s deliberate failure to obtain the balance of the Refund due; and 6) GCC should not be awarded the Refund as long as Reveo and other debtor-members of the Consolidated Group remain contingently liable to repay the Internal Revenue Service.
CONCLUSIONS OF LAW
This Court concludes that GCC has presented persuasive facts and law and is entitled to receive the Refund. The case law relied upon by both GCC and Reveo clearly establishes that the Refund is the property of GCC. The Ninth Circuit Court of Appeals stated in Bob Richards, supra, on page 265:
Absent any differing agreement we feel that a tax refund resulting solely from offsetting the losses of one member of a consolidated filing group against the income of that same member in a prior or subsequent year should inure to the benefit of that member. Allowing the parent to keep any refunds arising solely from a subsidiary’s losses simply because the parent and subsidiary chose a procedural device to facilitate their income tax reporting unjustly enriches the parent.
In Bob Richards the debtor was a wholly owned subsidiary of a parent corporation. A trustee was appointed in the case. The parent corporation did not file bankruptcy and was an unsecured creditor of the debt- or. The parent corporation and debtor filed consolidated federal income tax returns for the years 1965 and 1966. In 1966 the group was entitled to a refund resulting from the carry back of a net operating loss. The entire refund was due to the earnings history of the debtor. Id. at 263.
Although not an issue on appeal, the court discussed the reasons why the refund properly belonged to the trustee. There was no evidence that the debtor or trustee voluntarily assigned its rights to the refund to the parent corporation. The Internal Revenue Code did not compel the conclusion that a tax refund must inure to the benefit of the parent company or the company which sustained the loss that makes the tax refund possible. Id. at 264. The parties had made no agreement concerning the ultimate disposition of the tax refund. Id. at 265. The tax refund was paid to the parent corporation, as sole agent for the consolidated group, in conformance with income tax regulations. The Circuit Court concluded that since there was no agreement that the parent corporation had any right to keep the refund the parent corporation was acting as a “trustee of a specific trust and was under a duty to return the tax refund to the estate of the bankrupt.” Id. at 265.
In United States v. Bass Financial Corp., et al., No. 83 C 706 (N.D.Ill. April 20, 1984) the receiver of a wholly owned subsidiary of Bass Financial Corporation (“Bass”) was allowed to recover the portion of an income tax refund attributable to the offsetting of the subsidiary’s loss against its own prior income. Bass claimed it was entitled to a portion of the refund as it paid for expenses that were the obligation of the subsidiary. The court found Bass *638presented inadequate evidence to demonstrate the expenses were those of the subsidiary and stated that even if Bass could prove it was entitled to reimbursement for payment of the expenses, such claims were “not important to the issue of ownership of the tax refund.” Id. at 5. The court concluded that Bass would be unjustly enriched if it were allowed to assert a claim against the tax refund. Id.
In Jump v. Manchester Life and Casualty Corp., 579 F.2d 449 (8th Cir.1978), the issue on appeal was stated on page 450:
[WJhether an insolvent subsidiary of an affiliated corporate group is entitled to share in a group consolidated federal income tax refund generated largely by the subsidiary’s losses, in an amount larger than the subsidiary’s own income tax payments.
The District Court permitted the subsidiary to recover a portion of the refund up to the amount of taxes it paid for the years in question. The Circuit Court affirmed this judgment but did not address the issue of what type of circumstances entitled a subsidiary to its pro rata portion of a consolidated refund paid to the parent. Id. at 454.
In the matter sub judice Reveo initially paid the tax for fiscal year ended May 31, 1986 but was subsequently reimbursed for the tax paid. (Findings Nos. 20, 32) While Reveo paid the tax liability, the amount of tax allocated to GCC was charged to GCC on the Intercompany Account as income taxes payable and increased GCC’s liability to Reveo. (Finding No. 20) At the time of .the IPO, GCC’s total intercompany liability to Reveo, which included the amount due for federal income taxes, was reduced to the Note payable to Reveo and the balance was contributed to the capital of GCC stock. Revco’s tax basis in its shares of GCC stock was increased by the capitalization of the Intercompany Account. (Findings Nos. 22, 23) Reveo was fully reimbursed for any tax liability paid for GCC by receiving the Note and the proceeds of the sale of GCC stock. (Findings Nos. 22, 25-27) The NOL carried back to the Reveo Consolidated Return is entirely attributable to GCC (Finding No. 34, 36) and the refund amount sought, $403,234.00, is the proportion of income taxes paid by income generated by GCC. (Finding Nos. 31, 36) No express or implied agreement existed between GCC and Reveo regarding the ultimate disposition of any tax refund. (Findings Nos. 12, 13) Based upon these factual findings and an application of the case law authority discussed earlier, it is the conclusion of this Court that GCC is entitled to the Refund.
Revco’s contention that it is entitled to the Refund as partial compensation for GCC’s failure to obtain the balance of the Refund due is unsound. Reveo claims GCC’s action in seeking only the amount of Refund due GCC was inequitable conduct. The court finds no inequitable conduct by GCC. When GCC filed the Application for Refund it sought only the refund which it determined it was entitled to. (Finding No. 37) Reveo has the option to file an amended corporation federal income tax return (Form 1120X) to obtain the balance of the tax refund it claims is due it. (Finding No. 38)
Similarly, Revco’s contention that GCC should not be awarded the Refund as long as Reveo and other debtors are contingently liable to repay the IRS is without merit. Reveo suggests the Refund be held in the Reveo estate, subject to Court order, or returned to the IRS until a final determination that a refund is due. Reveo presents no authority or case law to support this position. GCC cites Bass Financial Corp., supra, wherein the refund check was issued and the Court decision awarding the refund to the subsidiary was rendered while the tax return for the loss year was still subject to examination.
This Court is persuaded by the testimony presented by GCC that the GCC portion of the Reveo Consolidated Return is not currently being questioned nor is there any evidence to suggest that it will be. (Finding No. 40) Alexander Hamm, tax partner of Peat, Marwick, Main & Co., testified that an IRS audit of the Reveo Consolidated Return or GCC’s 1988 return resulting in a change to the amount of the Refund is *639remote and highly unlikely. Reveo did not offer any testimony or evidence to contradict this testimony. (Finding No. 41) Indeed, the evidence establishes that any chance of a change in the Refund amount is slight. The Court will not decline to award the Refund to GCC based on mere speculation that a change in the tax liability may occur sometime in the future.
Reveo further argues that it is entitled to setoff any amount due to GCC against the $575,000 that GCC currently owes to Reveo on the Note. (Finding No. 48) GCC argues that the Refund is not subject to any right of setoff by Reveo as no mutuality of debts exists.
Section 553(a) of the Bankruptcy Code, 11 U.S.C. § 553(a), speaks of the setoff of a “mutual debt” owed by a creditor to the debtor. Mutuality is a requirement for any right of setoff. 4 Collier on Bankruptcy (15th Ed.1989) ¶ 553.04 at 553-17. “The basic test is mutuality, not similarity of obligation — something must be ‘owed’ by both sides.” Id. at 553-18.
When the debt to be setoff arose between the parties acting in differing capacities the requisite “mutuality of the debt” does not exist. As stated in 4 Collier on Bankruptcy (15th ed. 1989) 11 553.04 at 553-21, 22:
In general, where the liability of the one claiming a setoff arises from a fiduciary duty or is in the nature of a trust, the requisite mutuality of debts does not exist, and such person may not set off a debt owing from the debtor against such liability.
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A debtor’s parent corporation, which filed a consolidated tax return and received a tax refund attributable to the debtor’s prepetition operations, holds the refund in trust for the debtor and is not permitted to set off the amount of the refund against its claim.
See, also, Bob Richards, supra, where the parent corporation sought to setoff the tax refund attributable to the subsidiary against the prepetition debt owed it by the subsidiary. The District Court held that no mutuality of debts existed and setoff could not occur. The Circuit Court affirmed this ruling and stated on page 265:
The rationale of this rule is simply that the liability arising from a fiduciary duty is entirely independent of the debt owing from the bankrupt. The trust res is not owing to the bankrupt’s estate but rather is owned by it. Fore Improvement Corp. v. Selig, 278 F.2d 143, 145 (2nd Cir.1960).
In the instant matter, the Refund was made payable to Reveo, but this Court has concluded that the Refund is clearly the property of GCC. Reveo is listed as payee on the check merely as an agent for the Consolidated Group members. Reveo does not “owe” the Refund to GCC. No mutuality exists for a setoff to occur.
Revco’s last argument is that GCC is not entitled to the Refund as there is no evidence of any agreement for GCC to receive any tax refunds subsequent to the IPO. This argument is without merit and is unsupported by case law. The case law cited earlier holds that absent an agreement to the contrary any refund resulting from the carryback of a net operating loss of a former subsidiary against taxable income attributable to the subsidiary in a prior year when it was a member of its former parent corporation’s consolidated tax group belongs to and is the property of that subsidiary. Bob Richards, Jump, Pentron Industries, and Bass Financial, supra. No evidence of any agreement as to disposition of any tax refunds was presented to the Court and Reveo withdrew the argument at the trial. (Finding No. 13) As no agreement contrary to established case law was presented by Reveo, this argument must fail.
This Court concludes that the Refund is the property of GCC and the cross-claim of GCC should be granted. This Court further concludes that the United States of America should be dismissed as a party to this adversary proceeding. A separate Order shall be entered in accordance with *640these Findings of Fact and Conclusions of Law.
. Importantly, there is no evidence to suggest that a formal election was made by the Group with respect to the allocation of tax liability under Treas.Reg. § 1.1552-l(a). Pursuant to Treas.Reg. § 1.1552 — 1(d), the failure to elect a method of tax allocation binds a consolidated group to allocate tax liability in accordance with the method prescribed under Treas.Reg. § 1.1552 — (a)(1), i.e., based upon the relative taxable incomes of the members. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491076/ | DECISION GRANTING SUMMARY JUDGMENT MOTION OP NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY
WILLIAM A. CLARK, Bankruptcy Judge.
This action is brought by the trustee in bankruptcy for the bankruptcy estate of Hazel Lee Martin Worl to recover the face amounts of certain insurance policies issued by the defendant, New England Mutual Life Insurance Company. The policies name William A. Martin (the deceased spouse of the debtor) as the insured and Hazel Martin as the beneficiary. The answer of the defendant asserts that the life insurance policies covering the life of the debtor’s deceased spouse were not in effect upon the death of William A. Martin for the reason that the policies had previously lapsed upon the nonpayment of premiums. Defendant further states that the decedent’s disability did not excuse payment of the life insurance premiums because the decedent did not provide the defendant with proof of continuing disability as required by the policies.
Before the court is a motion of New England Mutual Life Insurance Company for summary judgment pursuant to Bankr.R. 7056 and Fed.R.Civ.P. 56. The court has jurisdiction by virtue of 28 U.S.C. § 1334 and the referral to this court by the standing order of reference in this district. This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(E).
UNDISPUTED FACTS
From an examination of the pleadings, answers to interrogatories, affidavits and exhibits contained in the court file, the court finds the following facts to be undisputed by the parties:
1)On July 1, 1973 Defendant issued a life insurance policy (# 5,272,746) to William A. Martin in the amount of $10,000 (Defendant’s Exhibit B);
2) On July 1, 1974 Defendant issued a life insurance policy (# 5,346,616) to William A. Martin in the amount of $10,000 (Defendant’s Exhibit B and B-l);
3) On July 1, 1975 Defendant issued a life insurance policy (# 5,465,067) to William A. Martin in the amount of $5,000 (Defendant’s Exhibit B and B-2);
4) Hazel Lee Martin, the debtor and spouse of William A. Martin, was the primary beneficiary of each insurance policy;
5) Each of the insurance policies was subject to a “Supplemental Agreement for Waiver of Premiums During Total Disability,” whereby the defendant agreed “to waive payment of premiums falling due on the policy and on all its supplemental agreements after the commencement and during the continuance of disability upon receipt of due proof that such disability is total as defined in this agreement and subject to the terms and conditions herein.” (Defendant’s Exhibits B-l and B-2);
6) In March of 1977 a statement of disability was submitted to Defendant by M.E. Hamilton, M.D. on behalf of William A. Martin. The physician stated that Mr. Martin had angina pectoris and had ceased work because of total disability in December of 1975. With respect to when Mr. Martin could be expected to return to work, Dr. Hamilton checked a box marked “indefinite” rather than indicating a precise date or checking a box marked “never.” (Attachment to Defendant’s Memorandum, Doc. No. 15);
7) Defendant waived the insurance premium payments in 1976 and 1977 (affidavit of Elizabeth Daly);
8) The “Supplemental Agreement for Waiver of Premiums During Total Disability” contains the following provision:
“The Company shall have the right, not oftener than once a year, to require satisfactory proof of continuing total disability. If such proof is not furnished or if at any time it appears that the Insured is no longer totally disabled, no further premium shall be waived.” (Defendant’s Exhibits B-l and B-2);
*6679) Between May 1978 and September 15, 1978 six letters were sent to Mr. Martin by the defendant requesting Mr. Martin and his physician to complete forms as proof of continuing disability so that the premiums could continue to be waived (letters attached to affidavit of Judy Shan);
10) Defendant did not receive proof of continuous disability from Mr. Martin in 1978. Beginning on July 1, 1978, no further premium payments were waived by Defendant and Mr. Martin never made any subsequent premium payments (affidavit of Elizabeth Daly);
11) Each insurance policy also contained an “automatic premium loan” provision whereby unpaid premiums would be advanced as a loan against the policy not to exceed the cash value of the policy (Defendant’s Exhibits B-l and B-2, p. 5);
12) Mr. Martin had elected to be covered by the automatic premium loan provision (Defendant’s Exhibit B-l, p. 6.6; Exhibit B-2 p. 6.7);
13) In accordance with the automatic premium loan provision, Defendant, as of July 1, 1978, began paying the insurance premiums and charged the premiums as loans against Mr. Martin’s policies (affidavit of Elizabeth Daly);
14) Eventually, the payment of premiums by Defendant resulted in loans that equalled the cash surrender value of each policy, so that no further payments were paid by the defendant as loans. This resulted in the defendant considering each policy as lapsed for the non-payment of premiums on the following dates:
Policy # 5,465,067 — lapsed September 11, 1981
Policy # 5,346,616 — lapsed January 1, 1983
Policy # 5,272,746 — lapsed December 10, 1982
(affidavit of Elizabeth Daly);
15) As each policy lapsed, Defendant sent notices to Mr. Martin (affidavit of Elizabeth Daly);
16) Mr. Martin died on January 18, 1985 survived by the debtor.
SUMMARY JUDGMENT
In 1986 the Supreme Court issued three significant opinions with respect to the practice of summary judgment: Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); and Matsushita Electric Industrial Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). “Scholars and courts are in agreement that a 'new era' in summary judgments dawned by virtue of the Court’s opinions in these cases.” Street v. J.C. Bradford and Co., 886 F.2d 1472, 1476 (6th Cir.1989).
On the whole, these decisions reflect a salutary return to the original purpose of summary judgments. Over the years, decisions requiring denial of summary judgment if there was even a suggestion of an issue of fact had tended to emasculate summary judgment as an effective procedural device. Id.
Federal Rule of Civil Procedure 56(c) reads, in part, as follows:
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.
In the Supreme Court’s view,
the plain language of 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. In such a situation there can be “no genuine issue as to any material fact,” since a complete failure of proof concerning an essential element of the nonmov-ing party’s case necessarily renders all other facts immaterial. The moving party is “entitled to judgment as a matter of law” because the nonmoving party has failed to make a sufficient showing on an *668essential element of her case with respect to which she has the burden of proof. Celotex, supra, 477 U.S. at 322-323, 106 S.Ct. at 2552-2553.
Upon filing a motion for summary judgment, the movant always bears the initial burden of informing the trial court of the basis for its motion. The movant must also identify those portions of the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, which the movant believes demonstrate the absence of a genuine issue of material fact. (There is, however, no requirement that the moving party support its motion with affidavits or other similar materials negating the opponent’s claim.) Where the nonmoving party will bear the burden of proof at trial on a dispositive issue, a summary judgment motion may properly be made in reliance solely on the pleadings, depositions, answers to interrogatories, and admissions on file. However, the nonmoving party is required to go beyond the pleadings and by her own affidavits, or by the depositions, answers to interrogatories, and admissions on file, designate specific facts showing that there is a genuine issue for trial. Id.
In short, a movant may challenge the opposing party to “put up or shut up” on a critical issue, and if, after being afforded a sufficient time for discovery, the respondent does not “put up,” summary judgment is proper. Street, supra, 886 F.2d at 1478.
The standard for summary judgment “mirrors the standard for a directed verdict under Federal Rule of Civil Procedure 50(a), which is that the trial judge must direct a verdict if, under the governing law, there can be but one reasonable conclusion as to the verdict.” Liberty Lobby, supra, 477 U.S. at 250, 106 S.Ct. at 2511.
Recently this court’s circuit court of appeals reviewed court decisions and commentary regarding the effect of the three Supreme Court decisions, supra, and concluded that these three decisions establish at least the following principles for “new era” summary judgment practice:
1. Complex cases are not necessarily inappropriate for summary judgment.
2. Cases involving state of mind issues are not necessarily inappropriate for summary judgment.
3. The movant must meet the initial burden of showing “the absence of a genuine issue of material fact” as to an essential element of the non-movant’s case.
4. This burden may be met by pointing out to the court that the respondent, having had sufficient opportunity for discovery, has no evidence to support an essential element of his or her case.
5. A court should apply a federal directed verdict standard in ruling on a motion for summary judgment. The inquiry on a summary judgment motion or a directed verdict motion is the same: “whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law.”
6. As on federal directed verdict motions, the “scintilla rule” applies, i.e. the respondent must adduce more than a scintilla of evidence to overcome the motion.
7. The substantive law governing the case will determine what issues of fact are material, and any heightened burden of proof required by the substantive law for an element of the respondent’s case, such as proof by clear and convincing evidence, must be satisfied by the respondent.
8. The respondent cannot rely on the hope that the trier of fact will disbelieve the movant’s denial of a disputed fact, but must “present affirmative evidence in order to defeat a properly supported motion for summary judgment.”
9. The trial court no longer has the duty to search the entire record to establish that it is bereft of a genuine issue of material fact.
10. The trial court has more discretion than in the “old era” in evaluating the respondent’s evidence. The respondent must “do more than simply show that *669there is some metaphysical doubt as to the material facts.” Further, “[w]here the record taken as a whole could not lead a rational trier of fact to find” for the respondent, the motion should be granted. The trial court has at least some discretion to determine whether the respondent’s claim is “implausible.”
Street, supra, 886 F.2d at 1479-1480 (footnotes omitted).
CONCLUSIONS OF LAW
A review of the undisputed facts, supra, which are primarily established by Defendant’s affidavits and exhibits, leads to the conclusion that Defendant originally waived the payments of life insurance premiums by Mr. Martin, but subsequently ceased waiving such payments because it did not receive proof of Mr. Martin’s continuing disability as required by a “Supplemental Agreement for Waiver of Premiums During Total Disability.” That agreement contains the following provision:
The Company shall have the right, not oftener than once a year, to require satisfactory proof of continuing total disability. If such proof is not furnished or if at any time it appears that the Insured is no longer totally disabled, no further premium shall be waived.
Despite at least six requests by the defendant for Mr. Martin to furnish proof of continuing total disability, the defendant did not receive such proof and, therefore, terminated the waiver of premiums as permitted by the Supplemental Agreement.
Notwithstanding the termination of waiver of premiums, the life insurance contracts remained in effect as a result of Mr. Martin previously selecting to be covered by an “automatic premium loan” provision. In accordance with that provision, Defendant advanced the premium payments as a loan against the cash surrender value of the policies. Once the value of the premium loans equaled the cash surrender values of the respective policies, no further payments were advanced because Mr. Martin never submitted any further premium payments and the policies expired as provided in each life insurance policy:
In case of failure to pay any premium when due or during the period of grace, this Policy shall cease to be in force, except as provided by the Non-Forfeiture Provisions, unless the premium due is paid by accumulated dividends or under the terms of an effective automatic premium loan provision.
Mr. Martin was sent notice by Defendant as the policies lapsed. Plaintiff has cited no legal authority to the court indicating that any of Defendant’s actions were either invalid or improper under Ohio law. “In the absence of legislation the rights of the parties on cancellation of an insurance policy pursuant to its terms are as fixed by the contract as set forth in the policy.” Gibbons v. Kelly, 156 Ohio St. 163, 101 N.E.2d 497 (1951).
Here, the defendant, as movant for summary judgment, must meet the initial burden of showing the absence of a genuine issue of material fact as to an essential element of the non-movant’s case and it may meet that burden by pointing out to the court that the non-movant, having had a sufficient time for discovery, has no evidence to support an essential element of his case. Street, supra, 886 F.2d at 1479. Defendant has asserted that the suit has been filed for over a year and that Plaintiff has put forward no evidence that Mr. Martin was continuously disabled. Therefore, Defendant has carried its initial burden, and Plaintiff must present affirmative evidence in order to defeat Defendant’s properly supported motion for summary judgment.
The Plaintiff-trustee objects to Defendant’s motion for summary judgment on the ground that the only issue in this case is whether Mr. Martin was disabled from the time Defendant originally waived the payment of insurance premiums until his death, and that Defendant is raising a new issue of failure to furnish proof of continuing disability in its motion for summary judgment. Plaintiff’s position is bewildering and insupportable in view of the fact that the issues addressed in Defendant’s motion for summary judgment were prominently set forth in its answer to Plaintiff’s complaint:
*670
Second Defense
7. Each of the policies of insurance under which Plaintiff seeks to recover lapsed for non-payment of premium prior to the death of William A. Martin.
Third Defense
8. Premium payments were not excused because of decedent’s disability as Defendant was not provided with proof of continued disability as required by the policies.
Plaintiffs basic contentions in this case are that Mr. Martin was continuously disabled during all relevant time periods and that by virtue of a letter sent to the debtor by an agent of Defendant the requirement of proof of continued disability was waived by Defendant. On both of these issues Plaintiff would have the burden of proof at trial.
In this case it is clear that the policies lapsed and remained lapsed unless the provisions for forfeiture were subsequently waived by Defendant. “[Fjorfeiture is not favored in the law, and a waiver will be inferred whenever it can reasonably be inferred from the facts.” Miraldi v. Life Insurance Co. of Virginia, 48 Ohio App.2d 278, 356 N.E.2d 1234, 1236 (1971). However, in the instant matter, the issue of whether the defendant waived the requirement of proof of continuous disability is not relevant unless it is first shown that Mr. Martin was in fact disabled during the relevant periods herein. The initial question, therefore, is whether the plaintiff has any evidence to support this essential element of his case.1 The following items bearing on the issue of Mr. Martin’s disability are currently contained in the case file:
1)A document sent to the Rehabilitation Services Commission for the State of Ohio by M.E. Hamilton, M.D. It contains the following diagnosis:
ASHD, angina pectoris, diabetes, hyperli-pidemia, hypothyroidism, cirrhosis, extreme exogenous obesity....
The document is dated May 12, 1976.
2) A “Disability Determination and Transmittal” document from the Department of Health, Education and Welfare which concludes that Mr. Martin has been under a disability since December 1, 1975 and contains the following diagnosis:
Arteriosclerotic heart disease; infarction of the myocardium; diabetes mellitus with hypothyroidism; hyperlipidemia; cirrhosis, type not specified; obesity due to an excess of food.
The transmittal is dated May 14, 1976.
3) A “Disability Attending Physician’s Statement” signed by M.E. Hamilton, M.D. containing the diagnosis of ASHD Angina Pectoris. The statement is dated March 4, 1977.
The obvious problem with respect to Plaintiff’s evidentiary material and his burden of proof is that all of these documents relate to the years 1975-1977. But the defendant does not dispute that Mr. Martin was disabled at that time; indeed, it waived the premium payments for a period of time for that very reason. There is absolutely nothing in the record to indicate the medical status of Mr. Martin from 1977 until the date of his death in 1985. Although, given the nature of Mr. Martin’s disability, it is quite possible that Mr. Martin’s condition never improved, the court is unwilling to make such an inference, particularly when the plaintiff has furnished the court with nothing to even slightly support such an inference.
To preclude the granting of summary judgment to Defendant, Plaintiff must come forward with specific facts showing that there is a genuine issue for trial.
Clearly, mere allegations of a .cause of action may no longer suffice to get a plaintiff’s case to the jury. When con*671fronted with a properly supported motion for summary judgment, the party with the burden of proof at trial is obligated to provide concrete evidence supporting its claims and establishing the existence of a genuine issue of fact. Cloverdale Equipment Co. v. Simon Aerials, Inc., 869 F.2d 934, 937 (6th Cir.1989).
The court finds that the plaintiff has not come forward with the concrete evidence necessary to establish the existence of a genuine issue of fact.
Plaintiffs complaint was filed on June 6, 1988. Since that time there have been three extensions of the court’s original discovery cut-off date. While the court agrees with Plaintiffs assertion that the continuing disability of Mr. Martin is a difficult matter to prove (Doc. 17), at some point the Plaintiff must demonstrate that he has sufficient evidence to go to trial. That time is now. The plaintiff has had adequate time for discovery and has failed to make a showing sufficient to establish the existence of an element essential to his case. The court finds that the record, taken as a whole, reveals but one reasonable conclusion: the life insurance policies issued to Mr. Martin were no longer in effect at the time of his death.
Therefore, summary judgment will be entered against the plaintiff and in favor of the defendant in accordance with Rule 56.
. Even if Plaintiff could successfully demonstrate that Mr. Martin was in fact continuously disabled, Plaintiff has furnished no legal authority for the proposition that disability per se would permit him to recover under the policies. In this court’s opinion, Plaintiff would still have tó establish a legal excuse for Mr. Martin's failure to furnish proof of continuing disability, a waiver by Defendant of this contractual requirement, or furnish sufficient evidence to enable the court to provide equitable relief. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491077/ | ORDER ON MOTION FOR RECONSIDERATION
PETER W. BOWIE, Bankruptcy Judge.
On January 6, 1989 Plaintiff Trembley filed an adversary complaint styled “Complaint to Determine Validity, Priority and Extent of Liens and Other Interests in Property, for Damages and to Determine Dischargeability of Debt, and Demand for Jury Trial.” Named as defendants were the debtors and many others.
The essence of the complaint is that Trembley asserts he was part owner of a piece of property with the debtors. Tremb-ley alleges that the debtors and others forged his name to a quit claim deed transferring his interest in the property to the debtors. Among the other defendants is Walter L. Carpenter who is alleged to have acknowledged the forged signature on the *908quit claim deed in his capacity as a notary public.
The Third Claim in the complaint is asserted directly against Mr. Carpenter for his alleged actions as the notary on the quit claim deed. In addition, Trembley sues Does 46 through 50, who are alleged to be “insurance corporations who had executed their official bonds as surety for Mr. Carpenter. ...”
On February 3, 1989 Trembley filed an amendment to the complaint naming Western Surety Company as Doe 46. On February 6, 1989 Anthony Erbacher, as attorney for Walter Carpenter, filed Carpenter’s verified answer to the complaint. On February 28, 1989 Franklin Geerdes, as attorney for Western Surety Company, filed Western Surety’s answer. In addition, on March 1,1989 Western Surety filed a cross-complaint against Walter Carpenter for reimbursement under California law if Western Surety is held liable on its bond.
On April 4, 1989 Attorney Geerdes, on behalf of his client, Western Surety, filed and served on all parties a document styled “Suggestion of Death upon the Record Under Rule 25(a)(1).” The document asserts that Western Surety is a party to the proceeding, and gives notice that Walter Carpenter died March 12, 1989. A copy of the registered death certificate was attached as an exhibit. The death certificate, in pertinent part, sets out the name, relationship and address of the “informant” as “ROB MOTTA; EXECUTRIX 1520 TYLER AVENUE # 3 SAN DIEGO, CA 92103”.
Subsequently, Mr. Erbacher filed an Amended Answer for Mr. Carpenter, reflecting that Mr. Carpenter was deceased, and conforming the answer to District Court Local Rule 110-7, as this Court had required.
On August 14, 1989 Mr. Geerdes filed a motion on behalf of Western Surety to dismiss Trembley’s Third Claim on the ground that more than 90 days had elapsed from the filing and service of the suggestion of death without any motion for substitution having been made. Western Surety invoked the provisions of Rule 25(a), Fed.R.Civ.P., which is made applicable to bankruptcy proceedings by Bankruptcy Rule 7025. The motion was noticed for hearing for September 15, 1989.
On September 8, 1989 Trembley caused to be filed a document styled “Ex-parte Petition for Leave to Proceed Against Walter L. Carpenter in the Name of the Estate of Walter L. Carpenter on an Insured Claim Pursuant to Probate Code Section 709.1 and Section 721.” On September 15, 1989 the hearing on Western Surety’s motion was held and the motion was granted. On September 18, 1989 this Court denied Trembley’s ex parte motion.
Substantial time elapsed while the order dismissing the third claim was being drafted and circulated among counsel for approval. Ultimately, an order was filed and entered on October 24, 1989. On November 3, 1989 Trembley timely noticed for hearing on December 18 his motion for reconsideration of the order granting the motion to dismiss. The essential premise of the motion for reconsideration was that Trembley believed that the Court had not fully considered his arguments in opposition to the motion because his opposition had been returned to his counsel by the Clerk’s Office because the pleading did not conform to the rules of this district.
The motion for reconsideration was heard on December 18, 1989 and was taken under submission. This Court has jurisdiction of this matter under 28 U.S.C. § 1334 and General Order 312-D of the United States District Court for the Southern District of California. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (O).
The essence of Trembley’s position is that the decision of the United States Court of Appeals for the District of Columbia Circuit in Rende v. Kay, 415 F.2d 983 (1969) “remains controlling on the construction and interpretation of F.R.Civ.P. 25(a)(1). Mr. Geerdes’ suggestion did not trigger the 90-day time period.” In the alternative Trembley asks for an enlargement of time under Rule 6, F.R.Civ.P. in which to seek a substitution for Mr. Carpenter.
*909In this Court’s view, reliance on Rende v. Kay is misplaced. In Rende, suit was filed by plaintiffs Rende against defendant Kay for personal injuries, including those of a minor. Thereafter, Kay died. The attorney Kay had hired to defend the action filed a suggestion of death and gave notice to the plaintiff’s attorney. Seven or eight months later, the attorney hired by Kay “moved in his own name to dismiss the action ...” for failure of plaintiffs to substitute for the decedent. 415 F.2d at 984. The D.C. Circuit quoted the Committee Notes on the 1963 revision to Rule 25. They emphasized one part in particular:
If a party or the representative of the deceased party desires to limit the time within which another may make the motion [to substitute], he may do so by suggesting the death upon the record.
415 F.2d at 985. The court thereafter stated:
Although the attorney for the defendant was retained to “represent” the deceased as his counsel, he is not a person who could be made a party, and is not a “representative of the deceased party” in the sense contemplated by Rule 25(a)(1).
Id. Because Kay’s attorney was neither a party nor a representative of the deceased party, he was not one of the persons permitted by Rule 25 to make a suggestion of death on the record which was sufficient to trigger the 90 day period for bringing a motion to substitute.
On its facts, Rende v. Kay does not apply to the case at bar. In the instant case, the suggestion of death was not filed by Mr. Erbacher, counsel hired by Mr. Carpenter before his death. Instead, the suggestion was filed by Western Surety, a party, through its counsel Mr. Geerdes. As a party, Western Surety is clearly authorized to make the suggestion of death under Rule 25, as even the D.C. Circuit recognized in Rende v. Kay. Al-Jundi v. Rockefeller, 88 F.R.D. 244, 246 (W.D.N.Y.1980); National Equipment Rental v. Whitecraft Unlimited, 75 F.R.D. 507, 510 (E.D.N.Y.1977); In re Klein, 36 B.R. 390, 392-393 (Bankr.E.D.N.Y.1984).
Trembley also argues that Western Surety’s suggestion of death was deficient because it did not include the name and address of the representative of the estate who could be substituted for the decedent. It is true that the court in Rende v. Kay stated:
The Advisory Committee, in outlining that suggestion of death could be made by “the representative of the deceased party” plainly contemplated that the suggestion emanating from the side of the deceased would identify a representative of the estate, such as an executor or administrator, who could be substituted for the deceased as a party_ (Emphasis added.)
415 F.2d at 985. The same court concluded:
No injustice results from the requirement that a suggestion of death identify the representative or successor of an estate who may be substituted as a party for the deceased before Rule 25(a)(1) may be invoked by those who represent or inherit from the deceased. (Emphasis added.)
415 F.2d at 986. To the extent Rende is asserted for the proposition that a suggestion of death must include the identity of the representative of the estate, that ruling only applies when the suggestion of death is filed by the representative or successor of the estate. No such rule binds other parties who may file and serve the suggestion of death, such as Western Surety. Yonofsky v. Wernick, 362 F.Supp. 1005, 1012 (S.D.N.Y.1973). The Court notes, in passing, that the copy of the death certificate served with the suggestion of death contained the name and address of a person identified on that document as executrix.
For the foregoing reasons, this Court concludes that Western Surety is a party competent to file and serve a suggestion of death sufficient to trigger the 90 day period specified in Rule 25, and that Western Surety did so on or about April 4, 1989.
The Court’s consideration is not completed, however, because Trembley asks that the time to move for substitution be enlarged pursuant to Rule 6(b), Fed.R.*910Civ.P., which is applicable in this proceeding by Bankruptcy Rule 9006(b). By the terms of Bankruptcy Rule 9006(b), and because the request to enlarge is made outside the 90 days set forth in Rule 25, the movant must show that “the failure to act was the result of excusable neglect.” Bankruptcy Rule 9006(b)(1); Yonofsky v. Wernick, 362 F.Supp. 1005, 1012 (S.D.N.Y.1973).
Counsel for Trembley states that the reason no action was taken on the April 4, 1989 suggestion of death was that the pleading “was delivered to the undersigned’s co-counsel, and our allocation of the work load is that the undersigned will be responsible for the procedural matters and Mr. Andreos for the trial matters, so the undersigned was not aware of the pleading until now.” Memorandum of Points and Authorities in Opposition to Motion to Dismiss and Motion Alternatively for Extension of Time to Move for Substitution of Parties. The “undersigned” is attorney Robert Rentto.
The face of the complaint indicates it was filed by Robert L. Rentto Professional Law Corporation and George P. Andreos, A.P. L.C. as attorneys for David G. Trembley. Rentto and Andreos share the same street address and the same suite number, but each are shown with different telephone numbers. A similar heading was on the amendment naming Western Surety as Doe 46. The suggestion of death was served listing the names of both attorneys serially, followed by the single address that served them both. Apparently, Mr. Rentto is asserting through his memorandum that Mr. Andreos did not show him the suggestion of death filed and served by Western Surety-
Western Surety made part of the record in support of its motion to dismiss a copy of a letter from Western Surety’s counsel, Mr. Geerdes, to Mr. Rentto. The letter is dated March 16, 1989, four days after Mr. Carpenter’s death, and nineteen days before the suggestion of death was filed and served. The entire three page letter concerns the effect of Mr. Carpenter’s death, which is announced in the opening paragraph. At the bottom of the second page, Mr. Geerdes inquired:
On the practical side, who will open a probate estate so that your Plaintiff’s cause of action might survive, if it does, as against the personal representative of the estate of the decedent?
On page three of the letter, Mr. Geerdes advised Mr. Rentto he was not going to take any discovery at present because “such discovery would be unnecessary/inappropriate unless the Plaintiff undertakes to revive his now dead claim through service upon a personal representative of the decedent’s estate.” Mr. Rentto may not have known of the filing and service of the Rule 25 suggestion of death, although there is no declaration in the record to that effect. Nevertheless, Mr. Rentto clearly knew from the March 16 letter of the death of Mr. Carpenter and Western Surety’s position that either Trembley or the estate had to bring in a representative in order for the claim to survive. See e.g., In re Bell, 92 B.R. 911 (Bankr.E.D.Cal.1988). Yet nothing happened until after Western Surety filed its motion to dismiss, over four months after filing and service of the suggestion of death, and more than five months after Western Surety’s letter to Mr. Rentto. While measuring excusable neglect involves a liberal standard and enlargements of time are favored, this Court cannot conclude on the record before it that the failure of Mr. Rentto or Mr. Andreos to timely move to substitute a representative of Mr. Carpenter’s estate was the result of excusable neglect, particularly inasmuch as Western Surety’s liability on its bond is derived from the liability of Mr. Carpenter, now deceased. Breckenridge v. Mason, 256 Cal.App.2d 121, 130, 64 Cal.Rptr. 201 (Second Dist.1967).
One last issue remains. Trembley asserts that he should be permitted to proceed directly against Western Surety to the limits of its policy pursuant to California Probate Code sections 709, 709.1 and 721. Probate Code section 709 provides in pertinent part:
*911If an action is pending against the decedent at the time of his or her death, the plaintiff shall in like manner file his or her claim as required in other eases. No recovery shall be allowed against decedent’s estate in the action unless proof is made of the filing. If, however, the action which is pending is an action for damages, the decedent was insured therefor, the insurer has accepted the defense of the cause, and an appearance has been made in such action on behalf of the decedent, no claim shall be required except for amounts in excess of or not covered by the insurance. (Emphasis added.)
Section 709.1 provides:
Notwithstanding any other provision of law, the court in which an action described in Section 709 is pending may permit the action to be continued against the defendant in the name of “Estate of (name of decedent), Deceased,” upon petition of the plaintiff, pursuant to the same procedure, and upon the same terms and conditions, as are provided in Section 721 for claims which were not the subject of a pending action at decedent’s death. The procedure of this section is cumulative and does not supersede the procedure provided in subdivision (b) of Section 385 of the Code of Civil Procedure.
As already noted, Trembley did file with this Court on September 8, 1989 a pleading styled “Ex-Parte Petition for Leave to Proceed Against Walter L. Carpenter in the Name of the Estate of Walter L. Carpenter on an Insured Claim Pursuant to Probate Code Section 709.1 and Section 721.” However, as this Court reads Probate Code sections 709 and 709.1, in order for an action to continue under 709.1 by invoking the procedure of section 721, the action must meet the requirements of section 709. That is, the action must be one “for damages, the decedent was insured therefor, the insurer has accepted the defense of the cause, and an appearance has been made in such action on behalf of the decedent....” While Trembley’s suit against Carpenter seeks damages and Carpenter was allegedly insured therefor, there is no showing Western Surety accepted the defense of the cause or arranged for counsel to represent Carpenter and make an appearance for him. Indeed, the contrary is the case, for Western Surety filed its own cross-complaint against Carpenter before he died. Because Trembley’s action against Carpenter does not fall within Probate Code section 709, section 709.1 does not save it.
For all the foregoing reasons, plaintiff’s motion for reconsideration is denied. Counsel for Western Surety shall prepare, serve and lodge a proposed judgment of dismissal in accordance with Bankruptcy Rule 7054(b) within fifteen (15) days after the date of entry of this order.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491079/ | OPINION
DONALD R. SHARP, Bankruptcy Judge.
This matter came on for consideration of the Debtor’s Motion to Avoid the Judicial Lien of Creditor, Nu West Florida, Inc., on her homestead property. Debtor is claiming federal exemptions 11 U.S.C. § 522(d)(1) and is relying on the avoidance power of 11 U.S.C. § 522(f). This opinion constitutes findings of fact and conclusions of law in accordance with Bankruptcy Rule *167052 and disposes of the issues presented to the Court.
Factual Background
The facts of this matter are not materially disputed. Prior to her divorce, Sandra Johnson, (“Debtor”), lived with her husband in a home in Beaumont, Texas, which they claimed as a homestead. During the latter period of her marriage, Debtor became involved in a business venture which ultimately failed. As a direct result of the failure of her business, Debtor breached a rental lease she had executed with Nu West Florida, Inc., (“Creditor”). Creditor successfully sued Debtor for breach of lease and an abstract of judgment was filed on July 14, 1987. It is not disputed that the outstanding judgment exceeds the amount of the Debtor’s claimed exemption.
During this time Debtor’s marriage was failing. In August of 1987 Debtor separated from her husband and moved out of the homestead property. She later filed for divorce and a divorce decree was entered on August 8, 1988. It is uncontroverted that the divorce decree vested Debtor with a one-half (h) real property interest in the property in question.
Debtor does not dispute that she has not lived in the claimed homestead since the time of her separation. She currently lives in an apartment in Beaumont, Texas, and has not established an alternate homestead. At the hearing on this matter, Debtor testified that pursuant to an arrangement with her husband, she agreed that her ex-husband could live in the house and that should he vacate the house that she would then have a right to occupy the home. Since the time of the separation, Debtor’s ex-husband has continuously lived in the home alone.
Debtor further testified that the home had periodically been listed for sale, although at this time it is not currently being listed. Should the home be sold, Debtor is to receive one-half (V2) of the proceeds. Debtor testified that currently her ex-husband is making all of the payments on the house and that upon any sale, the ex-husband will receive credit for one-half of the reduction in the principal of the debt against her interest in the property.
Debtor maintains that she intends to reoccupy the home should her husband vacate. Debtor further maintains that she has at no time intended to abandon the homestead.
Issue of Law
The sole issue before this Court is whether an ex-spouse owning a one-half (¥2) interest in what was marital homestead property can maintain that homestead interest in the absence of actual occupancy by said ex-spouse.
Memorandum of Law
The issue before this Court is a novel one in the interpretation of Texas Homestead Law. Debtor maintains that the divorce decree awarding her a one-half (V2) interest in her marital home concurrently conferred the rights of a homesteader in addition to the homestead rights asserted by her ex-spouse who is currently occupying the home. After a thorough review of Texas constitutional, statutory and case law this Court is of the opinion that Debtor’s contention is unfounded.
Texas courts have held that a homestead exemption was available only to families or to the widows and widowers of families. As a result, in the situation of a divorce, the Courts uniformly held that the homestead of a family consisting only of a husband and wife is terminated by a divorce. Burk Royalty Company v. Riley, 475 S.W.2d 566 (Tex., 1972); Reisberg v. Hubbard, 326 S.W.2d 605 (Tex.Civ.App., 1959) (there being no minor children, divorce destroyed husband’s right to exemption of homestead or its proceeds); Renaldo v. Bank of San Antonio, 630 S.W.2d 638 (Tex., 1982) (a divorced parent’s right to family homestead derived from the relationship to his or her children). However, in 1974, Texas amended its definition of homestead to provide that “a single, adult person” is entitled to assert a homestead claim. Y.T.C.A., Property Code § 41.002(a). The result of that amendment was to allow the homestead character*17ization of property to continue through the divorce if one of the parties to the divorce continued to maintain the property as a homestead. Wierzchula. v. Wierzchula, 623 S.W.2d 730 (Tex.App., 1981). Thus, the Court is faced squarely with the issue of whether two ex-spouses, both with fifty (50%) percent property interest in a home, can each assert homestead rights even though both do not live in the home.
The Texas rules of descent and distribution of homesteads is governed by the Texas Constitution. Vernon’s Ann.Tex. Const. Art. 16, § 52. These rules governing the descent and distribution of homesteads provide that upon the death of a husband or wife the homestead shall descend and vest in a manner similar to the laws of descent and distribution of other real property as governed by Texas law. As is recognized by the Texas Constitution, a surviving spouse may elect to occupy the entire home even in the absence of complete ownership of the home. The interpretive commentary to this constitutional provision suggests that the flavor of the homestead laws is to secure a home to the surviving spouse. Vernon’s Ann.Tex. Const. Art. 16, § 52. This Court is of the opinion that while Debtor through her marriage, could have obtained these rights, the dissolution of her marriage rendered the assertion of these rights unavailable.
It is a settled proposition in Texas state law that real estate which is the homestead of a married couple is subject to division upon divorce. Brunell v. Brunell, 494 S.W.2d 621 (Tex.Civ.App., 1973). The division of the homestead real property in Debtor’s divorce served only to give Debtor a one-half Q/i) interest in the marital home but not as Debtor claims an additional homestead interest. This homestead interest was lost as of the date that Debtor (1) became divorced and (2) ceased to occupy the home.
Since Debtor’s divorce decree and property division agreement were not introduced into evidence, this Court is unable to come to a conclusion as to the legal status of Debtor’s interest in the real property. It is not clear whether Debtor’s interest is an equitable lien reflecting the worth of her homestead and property interest in the marital real estate, (Wierzchula v. Wierzchula, 623 S.W.2d 730 (Tex.Civ.App., 1981); Day v. Day, 610 S.W.2d 195 (Tex. Civ.App., 1980)) or whether she owns a present undivided one-half interest in the marital real estate. However, under the best of circumstances, Debtor’s interest in the marital real estate cannot be extended to the recognition of a homestead interest.
In that the Court finds that Debtor is not able to claim a homestead exemption and concurrently avail herself of the avoidance powers of 11 U.S.C. § 522(f)(1), Debtor’s Motion to Avoid Lien of Nu West Florida, Inc., is DENIED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491080/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW
A. JAY CRISTOL, Bankruptcy Judge.
This cause came on before the Court on May 4, 1989, upon the complaint of The Unsecured Creditors’ Committee, for and on behalf of Arrow Air, Inc., for avoidance of alleged preferential transfers, pursuant to 11 U.S.C. 547(b), and the Court having heard the testimony, examined the evidence, observed the candor and demeanor of the witnesses, considered the argument of counsel, and being otherwise fully advised in the premises, makes the following Findings of Fact and Conclusions of Law:
A. FINDINGS OF FACT
Upon stipulation of the parties, the facts included under Numbers 1 through 13 which follow are accepted as such:
1) This is an adversary proceeding to recover voidable transfers pursuant to 11 U.S.C. 547(b).
2) Jurisdiction is vested in this Court by virtue of 28 U.S.C. 157(b)(1) and (b)(2)(f).
3) Arrow Air, Inc. (from hereinafter, “ARROW”) is the debtor and debtor-in-possession herein, having filed its voluntary petition under Chapter 11 of the Bankruptcy Code on February 11, 1986.
4) The Official Unsecured Creditors’ Committee duly appointed in this case under Sec. 1102 of the Bankruptcy Code is authorized to bring this action for and on behalf of ARROW pursuant to ARROW’S confirmed plan of reorganization under Article 8(d).
5) Airport Aviation Services Corporation (from hereinafter, “AAS”) is a corporation organized under the laws of the Commonwealth of Puerto Rico and doing business in San Juan, Puerto Rico.
6) AAS provided various ground handling services to ARROW at International Airport, San Juan, Puerto Rico. AAS is a creditor of ARROW.
7) ARROW made the following payments by check to AAS within ninety (90) days before ARROW filed its voluntary petition in bankruptcy.
The checks are as follows by the date of the check and the amount:
November 15, 1985 . $17,607.65
December 4, 1985 . 38,294.69
December 22, 1985 . 16,961.08
December 30, 1985 . 15,149.05
January 17, 1986 . 19,878.30
January 20, 1986 . 17,740.96
January 21, 1986 . 16,986.80
January 22, 1986 . 11,850.00
February 3, 1986 . 37,916.00
No more than 19 days elapsed between any of these payments.
8) The checks to AAS from ARROW were sent in payment of invoices which were prepared and sent by AAS to ARROW for the various ground handling services rendered to ARROW at International Airport, San Juan, Puerto Rico.
9) AAS regularly billed ARROW for services rendered. The rates charged were those set forth in Schedule B of the Ground Handling Agreement dated July 22, 1985.
10) All invoices sent by AAS to ARROW provided as follows: “Terms, 30 days net.” The Ground Handling Agreement expressly provided that ARROW was required to pay each bill not later than thirty (30) days from the date thereof. That provision is included in the Ground Handling Agreement, Article 5, Pages 4 and 5.
11) The Ground Handling Agreement further provided that in the event ARROW failed to pay an invoice within thirty (30) *43days, AAS was entitled to charge an additional one-and-a-half percent on the unpaid balance per month. That is found in the Ground Handling Agreement, Article 5, Page 5, Exhibit 6.
12) AAS filed a claim against ARROW’S estate for services rendered and unpaid in the amount of $193,033.67. The Committee has objected to AAS’ claim. Said objection to claim is still pending.
13) All of the payments described in Paragraph 6 herein constitute transfers of the debtor’s funds which were made to or for the benefit of AAS, a creditor, and the transfers were made on or within ninety (90) days before the date of the filing of the petition in bankruptcy by ARROW.
14) The commercial relationship between ARROW and AAS, under which the latter provided ground handling services to the former, commenced in February 1983, and lasted until April 15, 1986.
15) Under said relationship, AAS would bill ARROW every Monday for the services provided during the prior week. Once a month, a statement of account would be submitted to ARROW by AAS.
16) AAS’ bills were to be paid by ARROW within thirty (30) days of the date thereof, but, throughout the relationship, ARROW normally would pay after said term had run and, in many instances, the bills were not paid in full. AAS always credited ARROW’S payments to those invoices shown on the voucher part of ARROW’S cheeks.
17) ARROW’S manner of paying AAS’ bill was in keeping with the common industry practice, which evidenced seasonal variations in payments to AAS.
18) AAS’ collection efforts as regards the ARROW account consisted basically of telephone calls from Mr. Willie Santana, the AAS’ President, to Mr. Pat Di Pietro, ARROW’S Comptroller.
19) However, in February 1985, matters came to a head due to ARROW’S owing AAS $196,369.56. Mr. Santana met, at the time, with ARROW and worked out a payment plan, pursuant to which ARROW was to pay off this debt through four (4) payments, evidenced by four (4) post-dated checks which, subsequently, were not honored by ARROW’S bank.
20) Although ARROW and AAS continued doing business as normal, with ARROW paying AAS’ bills as set forth under Number 16, above, as of July 1985, the above referred $196,369.56 debt was still outstanding. Thus, AAS discontinued all services to ARROW effective July 9, 1985. Services were resumed ten (10) days, thereafter, and ARROW paid the debt referred to herein in full by August 21, 1985. Surely ARROW remembered this. If payments stopped, further service would stop.
21) Effective July 22, 1985, ARROW and AAS entered into a new Ground Handling Agreement, pursuant to which ARROW was still to pay AAS’ bills within thirty (30) days of the date thereof.
22) From the latter date until early October 1985, ARROW paid AAS’ bills, albeit not in full, within thirty (30) days of the date thereof. Nonetheless, from mid-October 1985 until the last payment made by ARROW to AAS, on February 3, 1986, ARROW reverted to its customary conduct of paying AAS’ bill more than thirty (30) days after their date and seldom in full.
23) The payments which plaintiff seeks to avoid were made between November 15, 1985 and February 3, 1986 and the same were credited, as per ARROW’S instructions, to the invoices shown on the voucher part of ARROW’S checks, as was the practice between the parties.
24) In most instances, AAS extended credit to ARROW only after the latter had paid for prior credit.
B. CONCLUSIONS OF LAW
1) “A transfer that would otherwise be considered preferential is insulated from attack by the trustee under Sec. 547(c)(1), if: (i) the preference defendant extended new value to the debtor; (ii) both the defendant and the debtor intended the new value and reciprocal transfer by the debtor to be contemporaneous; (iii) the exchange was in fact contemporaneous.” 4 Collier on *44Bankruptcy, Sec. 574.09, at p. 547-41 (15th Edition).
2) Under Sec. 547(a)(2) of the Bankruptcy Code, “new value” includes in its definition “money’s worth in_ new credit....”
3) “Payment of a debt by means of a check is equivalent to a cash payment.” 124 Cong.Rec. Hll,097 daily ed. Sept. 28, 1978 (remarks of Representative Edwards); 124 Cong.Rec. S17,414 daily ed. Oct. 6,1978 (remarks of Senator DiConcini).
4) As set forth in the legislative history of the amendments to the Code, “no doubt a purchase by the debtor of.... services with a check.... would be insulated by this exception....” Id.
5) “Payment of a check is equivalent to a cash payment unless the check is dishonored. ...” Goger v. Cudahy Foods Co. (In Re Standard Food Services, Inc.), 723 F.2d 820, 821 (11th Cir.1984).
6) In view of the above findings of fact and of the applicable law, we conclude that, by extending credit to ARROW only after the latter had paid for prior credit, AAS was in fact extending new value to its client and that the parties so understood this to be the case and intended the new value (i.e., new credit) and the transfer to be contemporaneous; and that the exchanges were substantially contemporaneous.
FINAL JUDGMENT
In conformity with the Findings of Fact and Conclusions of Law of even date, it is
ORDERED that judgment be entered for defendant and against plaintiff with costs to be taxed by the Clerk.
DONE and ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491082/ | MEMORANDUM OPINION ON MOTION TO REOPEN
LETITIA Z. CLARK, Bankruptcy Judge.
Came on for hearing the Motion of Rainier Financial Services to reopen the bankruptcy case of Debtor, James M. Ellis, to allow it the opportunity to attempt to revoke the Debtor’s discharge and to object to discharge of a debt which it asserts it is owed. The hearing on this Motion concluded July 14, 1988, and post-trial briefs were submitted. After consideration of the pleadings on file in the case, the briefs of counsel and the relevant case law, the court enters the following findings of fact and conclusions of law denying the Motion to Reopen.
To the extent any findings of fact herein are construed to be conclusions of law, they are hereby adopted as such. To the extent any conclusions of law herein are construed to be findings of fact, they are hereby adopted as such.
I. Factual Background
On April 18,1986 James M. Ellis filed his Chapter 7 petition. Rainier Financial Services (“Rainier”), the movant in this proceeding, was listed as an unsecured creditor for a debt owed to it by Ellis on a home mortgage loan. The Debtor received his discharge on September 3, 1986. The final decree was entered on October 31, 1986. Prior to the discharge on July 12, 1986, the Trustee filed his report of no distribution.
On July 30, 1987 Rainier filed the Motion to Reopen which is before the court at this time. Rainier asserts that the case should be reopened so that it can attempt to revoke the Debtor’s discharge and object to the discharge of a specific debt, as yet unliquidated, of which it asserts it was unaware until after the Debtor’s discharge *183was granted. (Rainier asserts that the Debtor, on the other hand, knew of the facts out of which the claim arose but failed to schedule or list the claim.)
Alternatively, Rainier requests that the court determine whether it can proceed in state court as to the dischargeability of the debt.
Rainier asserts that the operative facts out of which its claim arose became known to them in 1986 during the deposition of David Newcomb. Rainier argues that during this deposition it learned that the Debt- or, Ellis, made false representation on an employment verification form submitted to him by Rainier regarding Newcomb in connection with a loan which Rainier made to Newcomb on February 29, 1984. Rainier argues that the representations, made on June 23, 1983, were false and made with intent for Rainier to rely upon them.
Newcomb subsequently defaulted on the loan. Rainier asserts that but for the false representations by Ellis it would have not made the loan to Newcomb and been subsequently damaged by the default.
Ellis argues that the case should not be reopened on the basis that Rainier had actual knowledge of the Debtor’s bankruptcy case. Ellis argues that the failure to schedule a particular debt does not prevent that debt from being discharged so long as the creditor had actual knowledge of the bankruptcy case.
II. Issue
The primary issue before the court is whether the case should be reopened allowing Rainier to move the court to revoke the discharge of the Debtor or to object to the discharge (following liquidation) of this specific debt. An additional issue is whether this court should make a determination of whether a state court can address the issue of the dischargeability of the debt.
III. Discussion and Conclusions of Law
A case may be reopened by a debtor or other party in interest in order to administer assets, accord relief to the debt- or or “for other cause.” 11 U.S.C. § 350, B.R. 5010. The decision to reopen a case is discretionary with the court. Wragg v. Federal Land Bank, 317 U.S. 325, 63 S.Ct. 273, 87 L.Ed. 300 (1943). When the claims upon which the motion to reopen is based are small and the chance of substantial recovery is remote, the motion in most instances should be denied. In re Haker, 411 F.2d 568 (5th Cir.1969).
Generally, a discharge under 11 U.S.C. § 727 discharges an individual debtor from all debts, other than those specified in 11 U.S.C. § 523 which cannot be discharged. 11 U.S.C. § 523(a)(3) provides that an individual debtor will not be discharged from a debt not listed or scheduled, as required in 11 U.S.C. § 521, with the name of the creditor, if known, in time for the creditor to protect its rights, unless the creditor had notice or actual knowledge of the bankruptcy case.
In the case at bar, although the specific claim was not set out by the Debt- or in his schedules, Rainier was listed as a creditor and was on full notice of the bankruptcy proceeding. The rule in this Circuit is set forth in the case of Matter of Adams, 734 F.2d 1094 (5th Cir.1984); and provides that if a debtor lists incorrectly the name and address of a creditor in the required schedules so to cause that creditor not to receive notice, that creditor’s debt has not been duly scheduled and unless the creditor has actual notice of the bankruptcy, the debt is not dischargeable. See, Id. at 1098. Although the Fifth Circuit in Adams was analyzing the old Bankruptcy Act of 1898, the language of Section 17(a)(3) was carried over to the Code in Section 11 U.S.C. § 523(a)(3).
Complete failure of notice was not the situation here. As a result of the listing of the correct address of Rainier on the schedules of the Debtor and the participation of Rainier in the proceedings with regard to the debt scheduled by the Debtor, the court concludes that Rainier had actual knowledge of the bankruptcy case within the meaning of 11 U.S.C. § 523(a)(3). It would be futile to permit this creditor to reopen the case of the Debtor to, in essence, file a late proof of claim, since this creditor was already on the schedules and on notice, *184although it now contests the manner in which Debtor scheduled Rainier’s claim(s). Any leeway for filing late Proofs of Claim is narrowly construed. See, Matter of Robintech, 863 F.2d 393 (5th Cir.1989).
Rainier is in effect seeking a reopening of the Debtor’s no-asset case in order to add to the claims against the Debtor, this believed debt, of which the Debtor may or may not have had knowledge at the time of the filing of his schedules, and for which the Debtor’s liability has yet to be established, all so that Rainier can either attempt to revoke the Debtor’s 1986 discharge or object to the discharge of the same debt, when the deadlines for objecting to discharge have long since passed. This court will not sanction such a use of court time and resources in such a venture and finds insufficient cause to reopen under 11 U.S.C. § 350. In re McQueary, 43 B.R. 948 (Bankr.W.D.Ky.1984).
Movant has indirectly asked whether, on these facts, the debt in question was discharged. Movant has not, however, sought declaratory judgment, nor is the debt in question at present anything other than a perceived wrong, not yet the subject of a judgment or even a complaint. Accordingly, the court does not reach the requested determination of whether the dischargeability of the debt in question may be adjudicated in the state court. The court is precluded from issuing advisory opinions. Korioth v. Briscoe, 523 F.2d 1271 (5th Cir. 1975).
The Motion of Rainier Fiancial Services to reopen this bankruptcy case is denied.
It is so ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491083/ | MEMORANDUM
JOHN C. COOK, Bankruptcy Judge.
This case is before the court upon the trustee’s complaint to avoid an alleged preferential transfer of a security interest in a 1987 Dodge Charger. The defendant disputes the trustee’s contention that the transfer was preferential. Having considered the evidence introduced at the trial of this matter and having considered the arguments of the parties, the court now submits its findings of fact and conclusions of law pursuant to Bankr.R. 7052. This is a core proceeding. 28 U.S.C.A. § 157(b)(2)(F) (West Supp.1989).
I.
On February 4, 1989, the debtors, David Clark and his wife Tanya Renee Clark, traded in their 1980 Ford Escort and purchased a 1987 Dodge Charger from Gary Yeomans Ford (Gary Yeomans). The debtors executed a “Tennessee Vehicle Retail Instalment Contract” and granted Gary Yeomans a security interest in the Dodge to secure payments under the installment contract. The contract and the security agreement were later assigned by Gary Yeomans to Ford Motor Credit Company (Ford Motor).
On February 8,1989, Gary Yeomans sent paperwork to the Blount County clerk’s office to have the debtors’ Dodge titled and registered. The Blount County clerk’s office received the paperwork on February 9, 1989. The paperwork indicated the debtors wished to transfer the license plate from their trade-in vehicle to the Dodge. When the clerk’s office began processing the application, the clerk discovered a problem *228with the license plate transfer because the name on the trade-in vehicle registration (Renee Clark) was different than the name appearing on the paperwork submitted by Gary Yeomans (Tanya R. Clark). At that point, the clerk’s office ceased processing the application for certificate of title and registration on the debtors’ vehicle.
On February 14, 1989, the clerk’s office notified Gary Yeomans’ office by telephone that the paperwork for various title applications could be picked up, including the paperwork on the debtors’ Dodge. A note was made on the debtors’ paperwork that before processing could be completed on the application, an affidavit, known as a “one in the same” form would have to be executed by the debtor.1 Gary Yeomans retrieved the paperwork submitted on the debtors’ vehicle from the clerk’s office on February 17, 1989. As a result, the Blount County clerk’s office did not process or submit a completed application for certificate of title and registration on the debtors’ vehicle.
On or shortly after February 24, 1989, Gary Yeomans submitted similar paperwork on the debtors’ new vehicle to the Knox County clerk. This paperwork did include a “one in the same” form. The Knox County clerk’s office processed and submitted a completed application for certificate of title and registration to the Tennessee Motor Vehicle Division. The application was dated February 28, 1989. A certificate of title was issued for the debtors’ vehicle on April 4, 1989. It noted February 4, 1989, as the date of the security interest.
On April 6, 1989, the debtors filed their petition for relief under chapter 7 of the Bankruptcy Code. On the same date, the plaintiff was appointed chapter 7 trustee in the debtors’ bankruptcy case. Subsequently, the plaintiff filed this action to avoid the lien held by Ford Motor on the debtors’ vehicle, arguing the transfer of the security interest was preferential and avoidable under 11 U.S.C.A. § 547(b) (West 1979 & Supp.1989).
II.
A transfer of a debtor’s interest in property is preferential and avoidable by the trustee if the transfer was made within ninety days of the filing date of the bankruptcy petition and was for the benefit of a creditor on account of an antecedent debt owed by a debtor before such transfer was made and while the debtor was insolvent and which enabled the creditor to receive more than it would receive if the case were in chapter 7 of title 11, the transfer had not been made, and the creditor received payment of its debt to the extent provided by the provisions of title 11. 11 U.S.C.A. § 547(b) (West 1979 & Supp.1989). In this case, the transfer is the security interest granted to Gary Yeomans within ninety days of the debtors’ bankruptcy petition. Because of the presumption of insolvency afforded by § 547(f) of the Code, the debtors were insolvent both at the time of the transfer and on the bankruptcy petition date.2 The insolvency of the debtors on the petition date results in the conclusion that the prepetition transfer of the security interest enabled the creditor to receive more than it would have received if the transfer had not been made and the creditor received payment pursuant to the distribution scheme under chapter 7. See Palmer Clay Products Co. v. Brown, 297 U.S. 227, 56 S.Ct. 450, 80 L.Ed. 655 (1936); Elliott v. Frontier Properties (In re Lewis W. Shurtleff, Inc.), 778 F.2d 1416 (9th Cir. 1985). The disputed issue in this case is whether there was a transfer on account of an antecedent debt. If there was, all of the elements of § 547(b) are satisfied and the trustee would be entitled to avoid the transfer. If not, the trustee loses.
*229The debtors granted a security interest in their new automobile at the time they bought the car on February 4, 1989. Without more, one might conclude the transfer of the security interest was for a contemporaneous debt and not an antecedent debt. Section 547(e)(2), however, changes the ordinary meaning of the word “transfer.” It provides in relevant part:
(2) For the purposes of this section ... a transfer is made—
(A) at the time such transfer takes effect between the transferor and the transferee, if such transfer is perfected at, or within 10 days after, such time;
(B) at the time such transfer is perfected, if such transfer is perfected after such 10 days.
11 U.S.C.A. § 547(e)(2) (West 1979).
Hence, under § 547(e)(2)(B), if perfection of the security interest in the vehicle took place more than ten days after the granting of the security interest, the transfer is deemed to have occurred at the time of perfection and not at the time the security interest was granted. In the instant case, if the perfection of the defendant’s security interest occurred more than ten days from February 4, 1989, the date the debtors incurred the debt on the vehicle and granted the security interest, the date of the transfer of- the security interest would be deemed to be the date of perfection and the transfer would have been for an antecedent debt. Consequently, the court must determine the date the security interest in the automobile was perfected.
Under Tennessee law, perfection of a security interest in a motor vehicle is accomplished by notation of the lien on the vehicle’s certificate of title in accordance with Tennessee certificate of title laws. Tenn.Code Ann. § 47-9-302(3)(b) (Supp. 1988); id. §§ 55-3-125 to 55-3-26 (1988); Apex Oil Co. v. Tims (In re Armstrong), 56 B.R. 781, 786 (W.D.Tenn.1986); In re Wallace, 251 F.Supp. 581 (E.D.Tenn.1966); In re Crosson, 226 F.Supp. 944 (E.D.Tenn. 1963).3 Specifically, Tenn.Code Ann. § 55-3-125 and § 55-3-126(a) address the requirements for perfecting liens on motor vehicles:
No conditional sales contract, chattel mortgage, or other lien or encumbrance or title retention instrument upon a registered vehicle, other than a lien dependent upon possession entered into after March 1, 1951, or a lien of the state for taxes established pursuant to title 67, chapter 1, part 14, shall be valid against the creditors of an owner or subsequent purchasers or encumbrancers, until the requirements of this section and § 55-3-126 have been complied with, unless such creditor, purchaser, or encum-brancer has actual notice of the prior lien.
TenmCode Ann. § 55-3-125 (1988).
(a) Such filing and the notation of the lien or encumbrance upon the certificate of title as provided in chapters 1-6 of this title shall constitute constructive notice of all liens and encumbrances against the vehicle described therein to creditors of the owner, to subsequent purchasers and encumbrancers, except such liens as may be authorized by law dependent upon possession. Constructive notice shall date from the time of first receipt and filing of the request for the notation of the lien or encumbrance upon the certificate of title by either the division or the county clerk acting as agent for the division, as shown by its endorsements thereon.
TenmCode Ann. § 55-3-126(a) (1988).
Gary Yeomans submitted two separate requests for the notation of a lien upon the title to debtors’ automobile. The first request submitted on February 9, 1989, to the Blount County clerk’s office was not processed and did not result in the notation of a lien on the certificate of title. The second request submitted on or shortly after February 24, 1989, to the Knox County clerk’s office was processed and did result *230in the issuance of the certificate of title on April 4, 1989, noting the lien. The second application was dated February 28, 1989. The question presented is whether constructive notice provided for by Tenn.Code Ann. § 56-3-126 dates from the time of the first request for notation of lien made to the Blount County clerk’s office or from the time of the second request for notation of lien made to the Knox County clerk’s office.
Ford Motor argues the Blount County clerk’s office was provided all the information necessary to obtain a certificate of title. Rather than process the application for title, however, the clerk’s office sent the paperwork back to Gary Yeomans because it lacked sufficient information to obtain proper license registration of the vehicle through a transfer of tags from the trade-in vehicle to the new vehicle.
Regardless of whether the Blount County clerk’s office should have processed the application for title, it did not. The application which led to the issuance of a certificate of title in this case was a wholly separate application submitted to and processed by the Knox County clerk’s office.
Tennessee law requires both filing and notation of a lien on an automobile title for perfection of a security interest. Waldsckmidt v. Smith (In re York), 43 B.R. 36 (Bankr.M.D.Tenn.1984). If the filing does not lead to the notation of the lien on the title, perfection does not occur. Even when a properly-submitted application is lost by state officials and the applicant is blameless, perfection will not take place in the absence of a notation of the lien on the title. Id.
In Weill v. United Bank (In re Poteet), 5 B.R. 631 (Bankr.E.D.Tenn.1980), the court had to decide whether constructive notice of a lien on a transfer related back to the date of a first application for title which was rejected because it was not accompanied by a notarized bill of sale and pencil tracing of the trailer’s vehicle identification number, or to the date of a second application that was processed and resulted in the issuance of the title. The court held constructive notice of the lien related back to the second application and not the first.
In this case, the application of Gary Yeomans for title and registration filed with the Blount County clerk was insufficient as originally submitted. The document required by the clerk’s office to complete the processing of the application was never submitted by Gary Yeomans. The Blount County clerk’s office never submitted a completed application for title to the Tennessee Motor Vehicle Division.
A second application for title and registration was submitted in proper form to the Knox County clerk’s office. From this application, a Tennessee certificate of title was issued which properly noted Ford Motor’s security interest in the debtors’ vehicle. Consistent with In re Poteet, this court determines that the security interest held by Ford Motor was not perfected until the application for certificate of title was submitted by Gary Yeomans to the Knox County clerk’s office. Since the date of the Knox County application was February 28, 1989, Ford Motor’s security interest was perfected more than ten days after it was granted. See 11 U.S.C.A. § 547(e)(2)(B) (West 1979). Therefore, the security interest was received on account of an antecedent debt under § 547(b). Id. § 547(b)(2).
Notwithstanding the above analysis, Ford Motor seeks to retain its security interest through the use of this court’s equitable powers. Again, Ford Motor points out the problem with processing the debtors’ application arose from the transfer of license plates and not from the information necessary to title the vehicle.
The court is not persuaded by Ford Motor’s argument. The principle purpose of having liens noted on certificates of title is to provide third parties with notice that others claim an interest in the debtors’ property. Aside from the fact that no title ever issued from the Blount County application, Ford Motor has not shown that third parties inquiring as to liens on the debtors’ automobile would have discovered Ford Motor’s security interest from the original application for title. See In re Poteet, 5 B.R. at 635. As noted above, *231Tennessee law is clear that the filing of an application for a certificate of title alone is not sufficient to perfect a security interest. See Waldschmidt v. Smith (In re York), 43 B.R. 36 (Bankr.M.D.Tenn.1984); Coble Systems v. Coors of the Cumberland (In re Coors of the Cumberland), 19 B.R. 313, 320 (Bankr.M.D.Tenn.1982). Thus, the act by Gary Yeomans of submitting information to the Blount County clerk’s office to obtain a certificate of title was legally insufficient to perfect Ford Motor’s security interest.
Upon this court’s finding that Ford Motor received a security interest in the debtors’ automobile on account of an antecedent debt, and there being no dispute as to the other elements of a preferential transfer being present in this case, the court determines that the security interest held by Ford Motor in the debtors’ automobile was a preferential transfer as defined by 11 U.S.C.A. § 547(b). Accordingly, a judgment will enter in favor of the plaintiff.
. A "one in the same” form is simply an affidavit used to show that name changes or variations in the same person’s name actually refer to one person.
. Section 547(f) of the Code reads:
(f) For the purposes of this section, the debtor is presumed to have been insolvent on and during the 90 days immediately preceding the date of the filing of the petition.
11 U.S.C.A. § 547(f) (West 1979).
. This method of perfection applies to all security interests in motor vehicles except security interests in vehicles classified as inventory or security interests whose existence depends exclusively upon possession, i.e., an artisan’s lien. Waldschmidt v. Associates Commercial Corp. (In re Groves), 64 B.R. 329, 330 n. 3 (Bankr.M.D. Tenn.1986). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491085/ | ORDER ON MOTION (OR PETITION) FOR VOLUNTARY WITHDRAWAL OR DISMISSAL OF PETITION FOR RELIEF VOLUNTARILY FILED UNDER CHAPTER 11 OF THE BANKRUPTCY CODE FOR THE PURPOSE OF TERMINATING CASE AND RENEWED MOTION TO DISMISS
ALEXANDER L. PASKAY, Chief Judge.
THIS is the third Chapter 11 case commenced by the Mandalay Shores Cooperative Housing Association, Inc. (MSCHA), and the matters under consideration are two Motions. The first is filed by MSCHA and is entitled “Motion (or Petition) for Voluntary Withdrawal or Dismissal of Petition for Relief Voluntarily Filed under Chapter 11 of the Bankruptcy Code for the Purpose of Terminating Case”. The second is a Renewed Motion to Dismiss this Chapter 11 case filed by Elizabeth M. Cannon (Cannon) and Ralph Meyer (Meyer). The Motion filed by MSCHA presents a unique twist in that the Debtor who sought relief in the bankruptcy court three times under Chapter 11 now urges that its third Chapter 11 should be dismissed because it was filed in bad faith, because of the continuing loss or diminution of assets of the estate, and because of the total absence of the likelihood of rehabilitation. In addition, MSCHA also urges that it is unable to effectuate a plan of reorganization, there are delays which are prejudicial to the creditors, and the Chapter 11 should be dismissed because of the Debtor’s failure to file a reorganization plan within the time fixed by the Court.
The Renewed Motion to Dismiss filed by Cannon and Meyer urges a dismissal on the basis that the second Chapter 11 case filed by MSCHA in the Northern District of Illinois was dismissed with prejudice. Accordingly, this third Chapter 11 case, In re Mandalay Shores Co-op. Housing Ass’n, Inc., 63 B.R. 842 (M.D.Ill.1986), is a legal nullity and cannot be maintained by this Debtor, according to Cannon and Meyer.
In order to put the Motions under consideration in proper focus, it should be helpful to highlight both the problems which beset *441MSCHA from the outset and the underlying cause for its inability to achieve rehabilitation. It should be noted that rehabilitation would have been nothing more than a disposition of the only asset of MSCHA, monies on deposit in an Illinois bank which were collected by MSCHA from MSCHA members. It should be also helpful to state the reasons why this Court permitted MSCHA to remain under the protective umbrella of this Court for so long, and the concern which prompted this Court to go to an extra length to allow MSCHA to initially maintain the first and then this third Chapter 11 case.
MSCHA is an association organized under Fla.Stat. § 617.01 as a non-profit corporation. MSCHA was formed by the tenants of an apartment complex known as Mandalay Shores. The complex, which is located in Clearwater Beach, Florida, was owned by Housing and Urban Development (HUD), an agency of the U.S. Government, when the first Chapter 11 case was filed.
The record reveals that MSCHA was originally formed for the singular purpose of acquiring Mandalay Shores from HUD to prevent HUD from selling the complex to a private entrepreneur who most likely would convert Mandalay Shores into a condominium operation. Specifically, the tenants, most of whom were senior citizens, were told by the MSCHA organizers that the sale by HUD to a private developer would result in the loss of their very advantageous leases, even if the complex was not converted into a condominium project. Inasmuch as most of the retiree-tenants were not in the financial position to either purchase a condominium unit in the event of conversion or to pay an increased rent, their fear was well-founded and understandable. Faced with these frightening prospects, it is not surprising that the tenants of Mandalay Shores were anxious to join forces at the urging of the promoters, who initially promised the tenants that their combined efforts and resources would assure the preservation of their tranquil life, free of fear of losing their well-established residences and free of anxiety over their future. Thus it is not surprising that the management of the newly formed organization, MSCHA, had no difficulty in collecting over $1 million from the tenants to achieve the announced goal of MSCHA.
Initially, it appeared that MSCHA might have been able to achieve its goal. However, in spite of the vigorous, albeit unsuccessful, attempts, first on an administrative level and then in the various courts, MSCHA never had a chance to succeed, simply because HUD refused to consider MSCHA as a qualified purchaser of Mandalay Shores.
As noted earlier, MSCHA collected over $1 million from its members. Each member paid approximately $3,200 and obtained a receipt evidencing the amounts paid. Some of the receipts stated that in the event MSCHA's attempts to purchase Mandalay Shores proved unsuccessful, members may request a refund of their contribution or a general meeting of all members of MSCHA would be called to decide by a majority vote the next step to be taken by MSCHA concerning the future course of action to be pursued by MSCHA.
It appears that at the meeting, from which the members who had demanded back their contributions were excluded, the management of MSCHA changed the bylaws of MSCHA, and those in attendance, that is, the group loyal to the management, decided that they would attempt to purchase some similar apartment complex for the purpose of making available to the members suitable living facilities at reasonable prices.
As noted, several of the members demanded the return of their funds since they did not desire to participate in any further attempts by the management to acquire any property other than Mandalay Shores. Some of the members received refunds. However, the management decided not to honor any further requests for refunds and declared that members who demanded refunds were no longer members in good standing and lost their right to participate in the affairs of MSCHA. At this time, several of the dissident members instituted an action in the Circuit Court for Pinellas County and sought to recover not only *442their contributions, but also sought punitive damages based on alleged fraud by the management. The Plaintiffs in the state court action also applied for and obtained the appointment of a receiver. However, the imposition of receivership turned out to be meaningless inasmuch as the only assets of MSCHA, the funds collected from the members, were on deposit in the Northern District of Illinois and the receiver never acquired control of the funds.
When all efforts of MSCHA’s management to purchase Mandalay Shores failed, and it was faced with the receivership imposed by the state court, MSCHA filed its first voluntary Petition for Relief under Chapter 11 in this Court on April 3, 1981. In spite of repeated attempts by MSCHA to produce a viable plan of reorganization, all its efforts failed and certain disgruntled former members sought repeatedly to have a dismissal of the Chapter 11 case, or in the alternative to convert the Chapter 11 case to a Chapter 7 liquidation case.
In due course, the Motion to Dismiss was heard. The Court considered all the alternatives and concluded that while this case was facially ripe for conversion, it could not be done without MSCHA’s consent, because MSCHA was “a non-monied, non-business, non-commercial” corporation and as such its case could not be converted absent consent to a Chapter 7 liquidation case by virtue of § 1112(c) of the Bankruptcy Code. Based on this, this Court entered an Order and granted the Motion to dismiss the Chapter 11 case, but suspended the effectiveness of the Order for 20 days in order to allow parties of interest in the alternative to seek an appointment of the trustee pursuant to § 1104, who might then be able to propose a confirmable plan of reorganization.
Notwithstanding the entry of the Order of Dismissal, it appears that the Chapter 11 case remained alive and this Court entered several additional Orders, all of which dealt primarily with the unsuccessful attempts by MSCHA to acquire suitable housing for the loyal members of MSCHA, provided none of the funds of the estate were used for that purpose. When everything failed, this Court ultimately dismissed with finality the first Chapter 11 case on October 25, 1985. The Order of Dismissal provided that all administrative expenses incurred during the pendency of the case would be considered by this Court, and no funds would be returned to MSCHA until this Court entered final orders on all applications for allowance filed by the numerous professionals involved in that Chapter 11 case. Although MSCHA filed a Motion for Rehearing on the Order of Dismissal, the Motion was denied on November 13, 1985, and the first Chapter 11 case, No. 81-0547 was dismissed.
While the first Chapter 11 case was still technically pending in this Court, MSCHA filed its second voluntary Petition for Relief under Chapter 11 in the Northern District of Illinois. The counsel for the dissenting members wasted no time and immediately sought a dismissal of this second Chapter 11 case on the basis that it was filed in bad faith because the sole purpose of this second Chapter 11 case was to defeat the lawful claims of members who demanded a refund of their contributions.
In due course, the bankruptcy court in the Northern District of Illinois heard the Motion to Dismiss and concluded that the second Petition was nothing more than abuse of the judicial process and was filed in bad faith. The Court entered an Order which dismissed the Chapter 11 case “with prejudice” on December 19,1985 (generally unpublished).
MSCHA promptly filed a Notice of Appeal. The district court on appeal concluded that MSCHA was not an economic entity with the ability to obtain a reorganization in any real economic sense. The court held that Judge Eisen’s Order dismissing the second Chapter 11 with prejudice was correct, and therefore affirmed the Order of Dismissal with prejudice on July 30, 1986, 63 B.R. 842. While the appeal was still pending in the district court, MSCHA filed its third Petition for Relief under Chapter 11 on March 31,1986, in this court. In this present Chapter 11 case, the Debtor again unsuccessfully attempted to obtain confirmation of any plan of reorganization. In *443the interim, because of misconduct of management based on management’s inappropriate business involvements, this Court granted the Motion filed by parties of interest and appointed a Trustee. The Trustee has yet to file a Disclosure Statement or Plan of Reorganization.
Before considering the Motions filed by MSCHA, Cannon and Meyer, it is appropriate to comment on the reasons why did this Court permit MSCHA to remain under the protection of this Court for so long. When MSCHA filed its original Petition for Relief under Chapter 11, this Court had serious misgivings that it was a proper candidate for relief under this Chapter. Notwithstanding, this Court permitted MSCHA to attempt to reorganize for one reason, and one reason only, to assure that the funds collected by MSCHA were used only for the purpose for which he intended that it would be used, i.e., the acquisition of Mandalay Shores by MSCHA. This Court’s serious concern about the elderly members and their welfare was the primary reason not to dismiss the initial Chapter 11 case. By denying the Motion to Dismiss the first case, this Court was motivated by its desire to assure that the monies members contributed to MSCHA would not be squandered by management in the event the case was dismissed and not because of this Court’s conviction that MSCHA was a proper candidate for reorganization under Chapter 11 of the Bankruptcy Code. It is this Court’s concern which prevailed all through these cases.
Considering first the Motion filed by MSCHA, who seeks a voluntary withdrawal or, in the alternative, a dismissal of the Petition, it should be noted at the outset that ordinarily MSCHA would be es-topped to urge that its very own Petition for Relief was filed in bad faith, a proposition not wholly without support in these three Chapter 11 cases. MSCHA also urged the dismissal as noted earlier on the basis that 1) Continuing losses or diminution of assets of the estate; 2) a total absence of the likelihood of rehabilitation; 3) that it is unable to effectuate a plan of reorganization; 4) there are prejudicial delays; and, 5) because of MSCHA’s failure to file a reorganization plan within the time fixed by the Court. Considering these propositions seriatim, it is evident that the estate of MSCHA is not suffering any continuing losses or diminution of assets of the estate since the only asset MSCHA has are funds on deposit in a banking institution, which is currently earning interest.
Next, the proposition that there is a total absence of a likelihood of rehabilitation is also a proposition which is academic inasmuch as this is nothing but a total liquidation case, and the only question which remains is how the funds on deposit should be distributed. The contention that MSCHA is unable to effectuate a plan of reorganization, however, is more than amply supported by this record since all attempts to obtain confirmation of several plans never achieved success during the past more than eight years. The difficulty with this proposition is, however, that the management now has been removed and the affairs of MSCHA have been placed in the hands of the Trustee, who would be the only party of interest at this time who could propose a plan of reorganization.
In light of this conclusion just stated, the last proposition urged by MSCHA is also without merit. This ground for dismissal is based on the proposition that the Chapter 11 should be dismissed because of MSCHA’s failure to file a reorganization plan during the time fixed by the Court.
Lastly, MSCHA’s condition should be terminated because the delays which are prejudicial to the creditors are clearly MSCHA’s own doing. It ill behooves MSCHA to urge a dismissal of its own case on these grounds and, therefore, should not be accepted even though it is clear that the delays occurred in these three cases is a gross understatement.
Considering these contentions in toto, this Court is satisfied that MSCHA’s Motion is not supported by this record and cannot be granted on any of the grounds urged by MSCHA with possibly the exception of its initial contention which MSCHA technically is estopped to urge, that the third Chapter 11 case was filed in bad faith, *444a proposition to be discussed below at greater length.
The renewed Motion to Dismiss filed by Cannon and Meyer urges a dismissal on the basis that the second Chapter 11 case was dismissed in the Northern District of Illinois with prejudice, and for this reason, the third Chapter 11 case filed by MSCHA in this Court is a legal nullity and cannot be maintained.
Before considering the Motion to Dismiss by Cannon and Meyer, the following comments are in order. The effect of dismissal of a case under Title 11 is dealt with by § 349 of the Bankruptcy Code.
A plain reading of § 349 clearly permits the Court to dismiss a case under Title 11 with prejudice. Thus, a dismissal with prejudice may operate as a complete bar to refiling of a new petition by a debtor whose case was dismissed with prejudice. It is true that most cases dismissed with prejudice state a time-frame within which the debtor may not seek relief again, In re Damien, 35 B.R. 685 (Bankr.S.D.Fla.1983) (prohibitions to refile earlier than one year after the date of the Order of Dismissal). At times the courts placed a condition for debtor’s right to seek relief again by requiring a specific court approval before a subsequent filing would be accepted and proffered. Sundstrom Mortgage Co., Inc. v. 2218 Bluebird Limited Partnership, 41 B.R. 540 (S.D.Calif.1984). However, there is nothing in the Bankruptcy Code which prevents a dismissal with prejudice, prohibiting a Debtor to ever seek relief again in any Bankruptcy Court. This is especially true when a previous case was dismissed because a Court of competent jurisdiction concluded that a Debtor was not eligible for relief under the Chapter which the Debtor sought relief. Equally, when the case was dismissed because the Court concluded that the petition was filed in bad faith, thus it was appropriate to dismiss the case pursuant to § 1112(b) for “cause.” In these last two instances just described there is hardly any question that, if nothing else, the doctrine of “res judicata” would preclude a Debtor to relitigate the issue of eligibility or the issue of bad faith in a subsequent petition unless the Debtor is able to show radically changed conditions which were not present when the previous case was dismissed.
The second Chapter 11 case of MSCHA was dismissed in the Northern District of Illinois by Judge Eisen on the basis that it was filed in bad faith. It should be noted that the District Court affirming the Order of Dismissal with prejudice entered by Judge Eisen did not base his affirmance on the fact that it was a repeat filing or because it was filed in bad faith, but concluded that the Debtor, whose only assets were its bank deposits, a Debtor which conducted no ongoing business and had no value as a business, did not qualify for relief under Chapter 11. The District Court also held that a conclusion that the Chapter 11 case should be dismissed because the Debtor did not qualify for Chapter 11 relief was a decision on the merits. This being the case, it is evident that the decision on appeal by the District Court did operate as an absolute bar for MSCHA to ever seek the relief under Chapter 11 in any bankruptcy court.
The Eleventh Circuit had occasion recently to consider the effect of repeat filings in the case of In re Saylors, 869 F.2d 1434 (11th Cir.1989). In Saylors, the debtor obtained his discharge in a Chapter 7 case, but before the case was actually closed, the Debtor filed a petition for relief under Chapter 13. The Court of Appeals in Say-lors concluded that a:
... per se rule barring the filing of a Chapter 13 petition during the period at issue [the time after the entry of the discharge but before the filing of the trustee’s final report] would conflict with the purpose of Congress in adopting and designing Chapter 13 plans.
Therefore, the Court in Saylors permitted both cases to proceed.
In the Saylors case the Eleventh Circuit emphasized the fact that the Debtor’s monthly income increased $283.00 between filing of the Chapter 7 case and the filing of the Chapter 13 case which presented a radical change in the financial conditions of the Debtor.
*445The long and troublesome history of this Debtor bears no resemblance to the facts involved in Saylors. There is no doubt that MSCHA’s only asset is still monies on deposit in the bank. MSCHA is still not conducting any ongoing business and had no value as a business over and above the value of the deposits. MSCHA still has no complex debt structure in need of restructuring; it has no secured creditors; the only parties of interest, in addition to its members, those who are still loyal to the management and the dissident members, are administrative claimants by all the professionals who represented MSCHA over the years in its futile efforts to purchase Mandalay Shores or other housing facility. The members of MSCHA, many of whom died years ago, are still in the same legal position they were earlier. The only asset of MSCHA is still the funds collected from the members, and the danger of the dissipation of the funds if the case is dismissed is apparently still a reality. In sum, MSCHA is still in exactly the same position as when it filed its first Chapter 11 and, most notably, when it filed its second Chapter 11 in the Northern District of Illinois where the Court concluded that MSCHA is not the type of Debtor who would qualify for Chapter 11 relief.
As noted earlier, this Court went an extra mile only because it was apprehensive that the members of the Association, especially the so-called members who are declared to be no longer members in good standing would not be able to recover their contributions made for the purpose of acquiring Mandalay Shores. Notwithstanding the foregoing, this Court is now constrained to reconsider its previous position and concludes that the journey of MSCHA has reached the end of the road.
This Court is not unaware that the management of MSCHA has been removed from control of the affairs of MSCHA and the Trustee at this time appointed by the Court is technically in charge of the administration of MSCHA’s estate. The order appointing the Trustee is on appeal. The Trustee has yet to file a Disclosure Statement and Plan of Reorganization. It is very likely that the Trustee would be just as incapable of presenting an acceptable plan which could achieve approval by creditors and reach confirmation by this Court, precisely which was the fate of all of the plans previously filed by MSCHA over the years. In the last analysis, based on the foregoing, it appears that the best course of action at this time is to terminate this third Chapter 11 case and grant the Motion to Dismiss.
One additional comment is warranted. At the time the first Chapter 11 case was filed, there was a suit filed in the Circuit Court in and for Pinellas County on behalf of several members of MSCHA who demanded return of their contribution when it became apparent that MSCHA could not purchase Mandalay Shores from HUD. The Circuit Court action appointed a receiver who technically may still be the receiver. Even if the state court action is no longer open and pending, the parties of interest should be given an opportunity to apply promptly to the Circuit Court either for the resuscitation of the receivership or for the appointment of a new receiver in order to assure that the funds on deposit, the only asset of MSCHA, will be safeguarded and will not be dissipated by the management of MSCHA.
This leaves for consideration the question of whether or not this Court should retain jurisdiction to deal with the numerous pending applications for allowance by professionals and appropriate treatment of administrative claims. This Court is satisfied that it is appropriate that as a condition to the dismissal, this Court shall retain jurisdiction to consider and deal with all unresolved administrative claims and, when allowed, order the Debtor to pay them in full as a condition precedent to the finality of the order of dismissal.
Based on the foregoing, it is
ORDERED, ADJUDGED AND DECREED that the Motion (or Petition) for Voluntary Withdrawal or Dismissal of Petition for Relief Voluntarily Filed under Chapter 11 of the Bankruptcy Code for the Purpose of Terminating Case filed by Mandalay Shores Cooperative Housing Associa*446tion, Inc., filed by Elizabeth M. Cannon and Ralph Meyer be, and the same is hereby, granted and that this Chapter 11 case is dismissed with prejudice for the reasons stated in this opinion. It is further
ORDERED, ADJUDGED AND DECREED that this Court specifically reserves jurisdiction for the limited purpose to consider the disposition of all administrative claims, including applications for allowance by professionals, all of which must be filed not later than thirty (30) days from the date of the entry of this Order. It is further
ORDERED, ADJUDGED AND DECREED that in the interim, the parties may proceed and request the relief deemed to be appropriate either in the pending suit in the Circuit Court in Pinellas County, or in any other appropriate forum.
DONE AND ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491086/ | ORDER ON MOTION FOR RELIEF FROM STAY
ALEXANDER L. PASKAY, Chief Judge.
THIS IS a Chapter 11 case and the matter under consideration is a Motion filed by Florida Federal Savings Bank (Florida Federal) who seeks relief from the automatic stay in order to enforce its claimed interest against certain properties of APF Industries, Inc. (Debtor). Florida Federal seeks relief under Section 362(d)(1) of the Bankruptcy Code by alleging that it lacks adequate protection.
In due course the Debtor filed its response in which it contended that Florida Federal is not entitled to any adequate protection because its protectable interest is limited to the real estate owned by the Debtor, the property encumbered by a properly recorded mortgage, but has no protectable interest in any other collateral it claims because, according to the Debtor, Florida Federal failed to perfect its interest pursuant to Fla.Stat. § 679.9-301 in the other collateral it claims.
At the final evidentiary hearing, the Court heard arguments of counsel for the *447respective parties, considered the record and now finds and concludes as follows:
The obligation owed by the Debtor to Florida Federal is evidenced by three promissory notes. The first, executed on September 14, 1989, was in the original principal sum of $720,000. The current outstanding balance on the note is $598,560 principal and $26,469.88 accrued interest. The interest on this obligation accrues at the daily rate of $188.59. The second note was executed by the Debtor on the same date in the original principal sum of $227,-000. The current outstanding balance on the note is $223,216.67 principal and $10,-129.19 accrued interest. The interest on this obligation accrues at the daily rate of $71.31. The third note was again executed on the same date in the original principal amount of $150,000. The current principal balance on this note is $75,000, together with accrued interest of $3,329.12. The interest on this obligation accrues at the daily rate of $23.96.
It is without dispute that the Debtor is in default on all these obligations (Affidavit of Jack L. Ratcliffe). The Debtor concedes, as it must, that the real estate mortgage granted to Florida Federal is a first mortgage representing a valid, enforceable lien against the real property described in the note and mortgage. The Debtor contends, however, that Florida Federal did not acquire an enforceable valid security interest in any of the personal properties owned by the Debtor for the following reasons:
The Security Agreement executed by the Debtor in conjunction with the execution of the Notes described above is a two page document and purports to grant a security interest in every conceivable personal property ever invented or manufactured in the United States or, as far as it goes, in the entire world (Exhibit B). The document leaves no doubt that the form used was designed to be used in conjunction with loans primarily related to large construction projects. There is hardly any doubt that the Debtor intended to grant a security interest to Florida Federal in everything which is described in Exhibit B of the security agreement. The difficulty arises from the fact, however, and this is the crux of the Debtor’s contention, that the Financing Statement (UCC-1) filed on record described the collateral in which the Debtor granted a security interest as follows:
All items of personal property set forth in Exhibit “B” attached hereto which affect the real property located in Pinel-las County, Florida described in Exhibit “A” attached hereto, as encumbered by that certain Mortgage executed by Debtor, in favor of Secured Party, dated September 14, 1989 and Security Agreement executed by Debtor in favor of Secured Party dated September 14, 1989. (emphasis supplied)
To overcome the obvious, Florida Federal urges first that the description on the Financing Statement is sufficient to alert the reader of the existence of its security interest and if the reader resorts to reading the documents referred to in the Financing Statement (Exhibit # 1) would be able to determine the full extent of the security interest of Florida Federal.
In addition, it is contended by Florida Federal that the reference to the Security Agreement in the Financing Statement is by itself sufficient to give notice as to the extent of the security interest it claims. Therefore, its security interest was properly perfected and, this being the case, it is entitled to adequate protection of its interest and if the Debtor fails to furnish the same, is entitled to obtain relief from the automatic stay.
In support of its position, Florida Federal cites numerous authorities' to the effect that the description of the collateral is sufficient even though it indicates only a general description of the items subject to the security interest. Particularly, Florida Federal relies on the case of In re Stegman, 15 U.C.C.R.S. 225 (F.S.D.Fla.1974) where the District Court for the Southern District held that the secured party’s failure to attach a Schedule A to the Financing Statement which made a reference to Schedule A and it simply described the collateral as equipment was sufficient to comply with the requirement of Fla.Stat. *448§ 679.9-110. The holding of Stegman does correctly represent the law and the interpretation of § 679.9-110 which provides that the description of the collateral is sufficient whether or not it is specific if it reasonably identifies what is described. However, neither Stegman nor the other cases cited by Florida Federal deals with the problem involved in the present instance. In the matter under consideration, the Financing Statement does identify the property which referred to a document which is attached. The Financing Statement contains clear limiting language specifically stating that the personal property described as the collateral is limited to personal property which “affects the real property” located in Pinellas County, Florida described in Exhibit “A”. The searcher of the record cannot help at first blush to conclude that the interest granted was to secure a construction loan, and the collateral was limited to personal properties which affect the real property mortgaged. This conclusion is smply supported by the type of collateral described on page one of Exhibit “B”.
Florida Federal urges, however, that the description in the UCC-1 was sufficient to alert and give notice which in turn should prompt additional search by anyone and the reference in the description of the collateral to the Security Agreement would effectively inform the searcher of the record of its interest in the collateral described on the second page of Exhibit “B”.
In support of its position, the Debtor relies on the case of Matter of H.L. Bennett Co., 588 F.2d 389 (1978) in which the Court of Appeals for the Third Circuit held that a Financing Statement describing the collateral as “all assets as contained in the Security Agreement (installment note) executed even date herewith” failed to comply with the applicable statute of the State of Pennsylvania, the statute which deals with perfection of security interests under the Uniform Commercial Code in the State of Pennsylvania. While this case involved the interpretation of UCC as adopted by the State of Pennsylvania, there is no radical difference between the provisions of Fla. Stat. § 679.102 and the Pennsylvania statute, 12A P.S.Pa. § 9-402(1).
The Debtor’s reliance on H.L. Bennett Co. is misplaced and this Court is satisfied that it furnishes scant, if any, support for the proposition urged by the Debtor. Unlike in Bennett, in the present instance the financing statement not only made a reference to the security agreement but the recordation of the UCC-1 included a copy of the Security Agreement which described and identified not only what was in fact intended to stand as collateral for the obligation owed, but the collateral also which was never really involved in this transaction at all. Thus, even if one considers the limiting language in the financing statement, which apparently limited the collateral to personal property which affects the real property, the additional reference to the Security Agreement clearly furnished sufficient notice to the reader of the extent of the security interest granted to the Bank. This being the case, the Debtor’s attack on the validity of the security interest claimed by Florida Federal must fail and the security interest of Florida Federal is not limited to the real estate but also includes all other assets described on page two of Exhibit B. Accordingly, this Court is satisfied that the Bank is entitled to consideration of its request for adequate protection or, in the alternative, consideration of its Motion for Relief from Stay.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that a preliminary hearing be, and the same is hereby, scheduled before the undersigned on the 21 day of March, 1990 at 3:00 p.m. to consider the relief sought by Florida Federal, including to what extent it is entitled to adequate protection.
DONE AND ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491087/ | ORDER ON OBJECTION TO CLAIMS
ALEXANDER L. PASKAY, Chief Judge.
THIS CAUSE came on for hearing with notice to all parties in interest upon Objections to Claims No. 14 and No. 15 filed by the Debtor in the above-captioned Chapter 11 case. Claim No. 14 was filed by Donald Nelson as an unsecured claim in the amount of $19,000.00 based upon a contract to sell cattle to a business in which the Debtors were involved. Although the alleged debt was not reduced to judgment, an action was pending against the Debtors in the Circuit Court in and for Polk County, Florida, at the time of filing of the Petition. Claim No. 15 was filed by the Sumter County Farmers’ Market as an unsecured claim in the amount of $44,340.00. This claim also alleged liability on a contract to sell cattle to a business in which the Debtors were involved. Again, a suit was pending against the Debtors in the Circuit Court in and for Polk County, Florida, at the time of filing of the Chapter 11 Petition. The Debtor filed Objections to both claims on the basis that the debts are not valid or enforceable against the Debtors. The following facts were established at the final evidentiary hearing which are relevant and germane to the disposition of this cause:
The claims of Donald Nelson and the Sumter County Farmers’ Market arose as a result of the delivery of cattle by the Claimants to a corporation known as International Cattle Co., Inc. (International). *450The corporation was owned entirely by one of the Debtors, C.W. Bailey. Mr. Bailey was engaged in the cattle business for approximately 30 years doing business under various trade names and through several corporations.
Prior to 1977, Michael Tomkow, Dwight L. Crum and Cecil Yates owned and operated a corporation known as Southern Livestock, Inc. (Southern), which was also engaged in the business of buying and selling cattle. Mr. Bailey was not involved in Southern. In 1977, the Packers and Stockyards Administration, United States Department of Agriculture, issued a cease- and-desist order enjoining Southern and “its officers, directors, agents, employee, successors, and assigns, directly or through any corporation or other device, in connection with the operation of the Act (Packers and Stockyards Act of 1921, 42 Stat. 159, 7 U.S.C. §§ 181-229)” from operating in the livestock business unless they met certain conditions. (Exh. No. 1).
Following the entry of the cease-and-desist order, Southern ceased doing business. Later, Mr. Crum approached Mr. Bailey and requested that he act as officer and sole shareholder of a separate corporation known as International. The purpose of International was to carry on some of the business which was previously conducted by Southern. It appears that this was done because none of the principals of Southern would have been permitted to operate the business due to a lack of an equity position as required by the Department of Agriculture. Mr. Bailey made an investment of $500.00 in the corporation and agreed to act as the president and sole shareholder of International. The day-to-day operations of the corporation were turned over to Mr. Tomkow, Mr. Crum and Mr. Yates.
Mr. Crum, Mr. Tomkow and Mr. Yates continued operating the cattle order-buying business which had been previously performed by Southern through International. During the several years which followed, International leased facilities from Southern and paid $2.00 per head for cattle which passed through Southern’s facilities at the rate of 2,000-3,000 cows per week. Mr. Bailey managed International administratively by executing all the corporate documents necessary to maintain the corporation as an active corporation in the livestock business.
By 1980, it was apparent that International was beginning to have some of the same financial difficulties previously suffered by Southern. Notwithstanding, however, International continued to solicit cattle contracts. In November 1981, International closed and ceased doing business. At that time, International was indebted to both Claimants, although some of the debts were repaid through a bond and by settlement with the estate of Mr. Tomkow, who is now deceased. There is still an outstanding balance which is the basis of the claim asserted against these Debtors.
The Complaint filed in the Circuit Court in and for Polk County, Florida attempted to impose liability on International, and further sought to pierce the corporate veil of International in order to impose personal liability on the Debtors as officers and sole shareholders of the corporation. On July 2, 1987, the Debtors filed a Chapter 11 Petition which stayed all proceedings against him in the Circuit Court in and for Polk County, Florida.
The Claimants contend that they are entitled to pierce the corporate veil of International and to impose personal liability at least upon Mr. Bailey because the corporate entity was allegedly utilized to circumvent the mandate of the cease-and-desist order issued by the Department of Agriculture, which enjoined Southern and its agents from operating in the cattle business. They contend that the corporate shield of International was utilized to circumvent the law and, therefore, the corporate entity should be disregarded and the Debtor, Mr. Bailey, should be held personally liable to the debts of International.
In general, one who contracts with a corporation must look to it alone for performance of contracts and, absent certain limited exceptions, shareholders and officers are not liable for any of the obligations of the corporation. The corporation is an entity distinct from its sharehold*451ers, officers and directors, and its debts are not debts of the shareholders, officers or directors. 8 Fl.Jur.2d, § 207 — Business Relationships, In re Vermont Toy Works, Inc., 82 B.R. 258 (Bankr.D.Vt.1987); In re Lee, 87 B.R. 697 (Bankr.M.D.Fla.1988).
It is undisputed that International observed all of the requisite corporate formalities and maintained its corporate status in good standing with the Secretary of State of Florida and filed the appropriate federal and state income tax returns. Mr. Bailey never made any loans to International, nor did he borrow any money from the corporation. In fact, he engaged in no transactions with the corporation, other than merely handling administrative functions in his capacity as president.
However, it is well established that the fiction of the corporate entity cannot be used as a means of evading the law. State Board of Funeral Directors and Embalmers v. Cooksey, 155 Fla. 761, 21 So.2d 542 (1945); Gilbert v. Doris R. Corp., 111 So.2d 682 (Fla.App.D.3, 1959). In such a case, the corporate entity may be disregarded and the court will impose liability upon the individuals who used the corporation to avoid the loss. Mayer v. Eastwood S. and Co., 122 Fla. 34, 164 So. 684 (1935); Harris Investments Co. v. Hood, 123 Fla. 598, 167 So. 25 (1936); Tiernan v. Sheldon, 191 So.2d 87 (Fla.App.D.4, 1966).
It is clear that International was created to carry on the business of Southern and to avoid the cease-and-desist order which was issued by the Packers and Stockyards Administration, United States Department of Agriculture. Therefore, this Court holds that the corporate entity should be disregarded and that personal liability should be imposed upon the Debtors due to the improper conduct of the Debtors in forming the corporation for the specific intention of circumventing the law.
Based on the foregoing, it is appropriate to enter an order overruling the objection to Claims No. 14 and No. 15, and allowing Claims No. 14 and No. 15 as filed.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the Objections to Claims No. 14 and No. 15 filed by the Debtor be, and the same is hereby, overruled. It is further
ORDERED, ADJUDGED AND DECREED that Claims No. 14 and No. 15 filed by Donald Nelson and the Sumter County Farmers Market be, and the same is hereby, allowed as filed.
DONE AND ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491088/ | FINDINGS OF FACT, CONCLUSIONS OF LAW AND MEMORANDUM OPINION
ALEXANDER L. PASKAY, Chief Judge.
THIS is a Chapter 11 reorganization case and the matter under consideration is an adversary proceeding filed by Florida Precast Concrete, Inc. (Debtor), against the City of Orlando (City), seeking to “compel turnover of property of the estate” [sic] and payment of money due under certain contracts. The claim in Count I of the five-count Complaint is based on an alleged breach of contract by the City and requests an order directing the City to pay the Debt- or all sums remaining due under two construction contracts and change orders. The claim in Count II seeks an order directing the City of Orlando to turn over all sums due under the two agreements pursuant to § 542 of the Bankruptcy Code. The claim in Count III is also based on an alleged breach of contract by the City and seeks payment for services performed post-petition by the Debtor pursuant to the two construction agreements and change orders. The claim in Count IV alleges that the construction work to be performed by the Debtor was delayed and made more difficult by the City; that the insistence and directions of the City to the Debtor which required the Debtor to complete its work within the original time limitations constituted an order to the Debtor to accelerate its work. Based on the foregoing, the Debtor seeks a money judgment for additional costs incurred by the Debtor and *453a reasonable profit for the accelerated work required by the City. The claim in Count V asserts that the City required the Debtor to complete the contract work to a higher degree of completion than was required by the original contract and, therefore, the Debtor claims costs and reasonable profit on account of an “over inspection” by the City of the Debtor’s work.
The City has filed its Answer and also asserted affirmative defenses, along with a five-count Counterclaim. In Count I, the City seeks an order declaring that the re-tainage withheld by the City in the amount of $305,706.67 is not property of the estate and that the City may withhold such retain-age until such time as final completion of the construction project is achieved. The claim in Count II seeks a set-off pursuant to § 553 of the Bankruptcy Code of liquidated damages in the amount of $454,-000.00 against the sums remaining due under the new contracts. The claim in Count III also requests a set-off pursuant to § 553 of the Bankruptcy Code. However, rather than seeking liquidated damages, the City in this Count seeks actual damages in the amount of $514,719.00. The claim in Count IY is a claim for indemnification from the Debtor for damages allegedly caused by the Debtor’s delay in completion of the construction contracts and interference and obstruction of the work of other contractors in the amount of $514,-759.00. Finally, the claim in Count V seeks adequate protection for the City’s interest in a one-year warranty of the work performed by the Debtor.
The facts as established at the final evi-dentiary hearing which are relevant and germane to the disposition of this cause are as follows:
The Debtor is a contractor engaged in the business of the manufacture and erection of architectural precast concrete panels and other concrete pieces used in large commercial construction projects.
On February 8, 1989, the Debtor filed a voluntary Petition for Relief under Chapter 11 of the Bankruptcy Code. Prior to the filing of the Petition, the Debtor entered into two contracts with the City to perform certain work on a project known as “The Orlando Arena”.
The first contract was entered into on March 25,1988. (Debtor’s Exh. P-1). This contract, referred to as “Bid Package 54”, required the Debtor to manufacture and erect certain architectural precast panels to form a portion of the outside skin of the Orlando Arena. In addition, the Debtor was to provide architectural precast pieces formed to fit over poured-in-place concrete. These pieces are used to form a wall which accommodates seating in the outside areas and are known as “seat walls”. The second contract, known as “Bid Package 60” was dated October 17, 1988, and required the Debtor to provide architectural precast concrete stairs (Plaintiff’s Exh. P-2).
The City also contracted with Gilbane Building Company (Gilbane) to act as construction manager for the Orlando Arena Project. The City acted as an owner-builder and contracted with numerous other contractors to build various portions of the Arena Project. Although the names and functions of all of the individual contractors were not put in evidence, it is clear that there was a roofer, a glass block contractor, a contractor to pour the cement for the foundation for the stairs, a contractor to pour concrete in the landscaping area, a sheetrock contractor, and an electrical contractor. It appears that there were approximately thirty contractors involved in the project.
As noted, Gilbane acted as construction manager and the Debtor’s point of contact with the City during construction. The Debtor and the City had very little direct contact during the construction until some time after the opening of the Orlando Arena on January 29,1989, and the Debtor and the City did have substantial contacts during the “close-out” phase of the project in the form of negotiations between Mr. Charles, a consultant employed by the Debtor and Mr. Kotzin, an employee of the City’s Bureau of Construction Management, who acted as a liaison between City Hall and Gilbane.
The Debtor claims that the City owes it unpaid contract balances under both con*454tracts and additional sums for extra work performed pursuant to change orders. The Debtor also claims that the City required the Debtor to perform additional services after substantial completion of the contract to repair damage caused by other contractors on the job.
In opposition, the City asserts that the Debtor is liable for liquidated damages for failure to meet the substantial completion deadline required in Bid Package 54. In addition, the City alleges that the Debtor delayed other contractors in completing their portions of the construction and, therefore, the City was required to pay additional monies to those contractors. Although the City initially asserted that the Debtor was liable for liquidated damages under Bid Package 60, counsel for the City announced in open court that this claim would be withdrawn and that the City would not offer any proof as to that issue.
The original contract price for Bid Package 54 was $2,000,000.00. The City paid $1,782,761.04, leaving a balance due under the original contract of $217,238.96. As to Bid Package 60, the original contract amount was $747,000.00, which was increased by Change Order No. 1 in the amount of $314,000.00, for a total revised contract amount of $1,061,000.00. The City paid $954,900.00 and the remaining balance due is $106,000.00. In addition, the City also required the Debtor to perform additional work to prepare a ramp to receive precast panels and caps. The evidence presented at trial clearly shows that the amount due for performance of this additional work is $4,185.08. (Debtor’s Exh. P-379). The City further requested the Debtor to fabricate four additional precast panels which were not required by the original contract. The Debtor complied and claims an additional sum of $1,876.00 for delivery of these panels.
Under Bid Package 60, the Debtor was also required to perform additional work and provide additional materials not contemplated by the contract in four separate and distinct areas. First, the Debtor was required to add additional grout to be poured-in-place concrete upon which the Debtor was to place the precast panels which would perform the stairs. Preparation of the underlying concrete was the responsibility of another contractor who was not associated with the Debtor. The work of that contractor was significantly out of tolerance and, therefore, the Debtor was required to add additional shims and grout. Furthermore, the Debtor required additional time to perform its work due to the failure of the other contractor to prepare the underlying concrete properly. Bid Package 60 contemplated that the Debtor would place shims and then level the shims to provide a level surface for the precast panels which form the stairs and thereafter, the Debtor was to pump grout between the space of the poured-in-place concrete and the underside of the precast stair panels. The contract contemplated that the space would be approximately one inch. However, the actual gap varied between one inch and five inches and, therefore, required significant additional grout and shims.
Although no change order was executed which authorized payment for this additional work, it is clear from the evidence that the City authorized performance of the additional work at the rate of $418.27 per cubic yard of additional grout times the number of cubic yards actually pumped in excess of the original requirement. The Debtor provided approximately 280 cubic yards of additional grout and claims $117,-040.00 for this additional work.
The Debtor also performed additional work in order to adapt the stairs to a lighting system which the City chose to install after the manufacture of the precast panels for the stairs, and claims $8,970.00 in connection with this extra work. The Debtor also claims to be entitled to $9,450.00 for drilling certain holes in the steps as an extra charge.
The Debtor’s final claim for extra costs pursuant to Bid Package 60 related to “premium time” which the City agreed to reimburse to the Debtor in exchange for an agreement from the Debtor to work overtime to finish the grouting as required for the staircases. This agreement was re-*455fleeted in a letter dated January 4, 1989. (Debtor’s Exh. P-451). During the time period in question, the Arena Project was in a crisis mode in an attempt to meet the opening night deadline of January 29,1989, in order to accommodate a Bill Cosby concert. The Debtor claimed to be entitled to $25,279.64 for the overtime charges which were authorized by the City.
In addition, the Debtor also claims $360,-593.16 for expenses incurred in connection with the project after substantial completion on January 29, 1989.
The Debtor presented the testimony of Mr. Egalite, vice-president of the Debtor, and Mr. Charles, a construction consultant. This claim is related to the clean-up and corrective work which was not caused by the Debtor such as footprints, gum, coke spills, tire marks, etc. It appears that the City chose panels which were light in color which easily stains and discolors. In addition, other contractors continued working on site after substantial completion, performing punch list items and warranty work. The Debtor was required to do additional work which exceeded the punch list work which, of course, was the responsibility of the Debtor. The evidence adduced at trial indicated that the amount which should have been spent by the Debtor to complete punch list items was $100,000.00. The additional sum expended by the Debtor for over-inspection and post-completion work in the amount of $260,593.16 constitutes additional expenses claimed by the Debtor under the contract for additional services performed.
The City has counterclaimed and seeks a set-off in the amount of $1,000.00 per day as liquidated damages based on the proposition that the Debtor failed to complete its work by the contractually fixed completion date. The substantial completion date under the contract was September 20, 1988. Although the City contends that the work was not substantially completed until late April 1989, this Court finds that the work performed by the Debtor was substantially completed on January 29, 1989. Based on the foregoing, the City seeks liquidated damages for 131 days, or $131,000.00 in total. The evidence showed that the construction site became very congested from September 1988 through the substantial completion date of January 29, 1989. Expert testimony indicated that the Debtor and two other contractors were equally responsible for the delays in substantial completion of the project.
Whether the liquidated damages provision of the contract is proper, or whether the provision is a penalty is a question of law. When determining whether the provision is a valid liquidated damages clause or is a penalty, the Court must consider whether or not damages which might be experienced from the breach are readily ascertainable at the time of execution of the contract and, secondly, whether the damages which were provided for are reasonable in light of the actual damages suffered. Hungerford Construction Co., et al v. Florida Citrus Exposition, 410 F.2d 1229 (5th Cir.1969); Pembroke v. Caudill, 160 Fla. 948, 37 So.2d 538 (1948); Hyman v. Cohen, 73 So.2d 393 (Fla.1954). In other words, if the $1,000.00 per day liquidated damages charge is not proportionate to the actual damages suffered, the liquidated damages will be construed as a penalty.
It is without dispute that the damages which the City would have suffered upon breach of the contract were not readily ascertainable at the time of entering into the contract. Furthermore, in light of the size of the construction contract and the heavy schedule of use which was planned for the Orlando Arena facility, it is also clear that a $1,000.00 per day liquidated damages charge is not unreasonable in relation to the damages that might have been expected. Thus, the provision is a valid liquidated damages provision and is fully enforceable.
However, the difficulty lies in determining whether or not the Debtor was responsible for the delay in substantial completion. Based upon the testimony of the various experts, this Court finds that the Debtor was equally responsible, along with two other contractors, for the delay and, *456therefore, the Debtor should be responsible for one third of the liquidated damages stipulated in the contract. Accordingly, the City is entitled to set-off against the amounts due to the Debtor in the amount of $43,666.67.
With respect to the Counterclaim of the City for back charges, the evidence presented by the City at trial did not support any such claim and, therefore, none will be allowed. The final Counterclaim is based upon the City’s assertion that the work has never been completed. However, the Debtor established that the City “signed off” on the punch list and that the City’s representative agreed that the work was, in fact, completed. While testimony differed as to the date of completion, it is the opinion of this Court that the work was substantially completed on the date of the opening of the Orlando Arena, January 29, 1989, and that the remaining Counts of the Counterclaim of the City are without merit and should be dismissed.
A separate Final Judgment will be entered in accordance with the foregoing. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491089/ | FINDINGS OF FACT, CONCLUSIONS OF LAW AND MEMORANDUM OPINION
ALEXANDER L. PASKAY, Chief Judge.
THIS is a Chapter 7 liquidation case, and the matter under consideration is the dis-chargeability vel non of a debt owed by the Defendant, Donald J. Klag (Debtor) to American Investment Bank, N.A. (Bank). The claim of nondischargeability asserted by the Bank is based on Section 523(a)(2)(B) of the Bankruptcy Code. At. trial, the parties have stipulated that all but one of the elements of § 523(a)(2)(B) have been met, *457and the only issue before the Court is whether the Bank reasonably relied on the false financial statement submitted by the Debtor in his application for the renewal of an already outstanding loan. The following facts which are relevant and germane to this issue as appear from the record are as follows:
The Bank engages in an unsecured loan program geared to business executives and professionals whose income is not based upon commissions. The program is marketed to these professionals based on the assumption that they generally have above-average income and do accumulate assets during their professional lives which assures repayment of these types of loans. One feature of the program is its confidential nature. The Bank does not contact the applicant’s neighbors, friends or employers to advise them of the loan request or to verify information received from the applicant. Ordinarily, the Bank will loan up to $50,000 to qualified applicants on an unsecured basis, with a renewal possibility. Repayment of these loans is scheduled between six and sixty months.
The Bank’s loan approval procedure typically involves a review of the applicant’s combined loan application and financial statement, most recent federal income tax return, and a credit report. The applicant’s listing in the current edition of the appropriate national professional directory is also verified, and a phone interview with the applicant is conducted. The process for renewal loans involves the same steps, and also includes an examination of the applicant’s loan payment history with the Bank. A new federal income tax return may or may not be requested at the time a renewal is requested.
At the time relevant, the Debtor, a dentist by profession, had been practicing as a sole practitioner in Pinellas County, Florida since 1976. In March 1985, the Debtor responded to the Bank’s advertisement in “The Journal of the American Dental Association” by completing and submitting to the Bank a combined loan application and financial statement and a copy of his 1983 federal income tax return, the most recent return available. (Plaintiff's Exh. No. 1). On the application, the Debtor stated that his net income was $100,000, and he placed the value of his dental practice at $175,000. As was also required, he stated his profession to be a dentist and provided the address and phone number of both his home and business. The Debtor applied for a six-month balloon loan in the amount of $50,000.
It is undisputed that the Bank approved a six-month loan to the Debtor in the principal amount of $30,000, and issued a check in that amount to the Debtor after receiving a promissory note signed by the Debtor and his wife. It is also undisputed that after six months, the Debtor requested and the Bank agreed to a renewal of the loan for another six-month term. The Debtor and his wife subsequently executed a new promissory note. When the loan became due in May, and again in December of 1986, the Bank again agreed to a renewal of the loan for an additional six months. At each renewal the Debtor and his wife signed a new promissory note. While the Debtor paid all accrued interest when each note was renewed, he was not required to pay anything on the principal, and paid none.
In June 1987, the Debtor again sought a renewal for the fourth time. He completed his second loan application and financial statement and submitted it to the Bank, along with a copy of his 1985 federal income tax return. (Plaintiff’s Exh. No. 4). The Bank again verified the Debtor’s listing in the American Dental Association’s membership directory, and obtained a credit report on the Debtor. (Defendant’s Exh. No. 3) This report revealed approximately $96,000 in debts that the Debtor did not report on his original loan application.
A loan officer of the Bank telephoned the Debtor at his home to discuss the renewal request and the previously undisclosed debt, and to verify the Debtor’s home and office telephone numbers. It is undisputed that the Debtor verified his home number, but he refused to verify his office number, purportedly because he did not want to be called at his office regarding this loan. *458The Debtor also told the loan officer that he still had an income of $100,000 per year, and he confirmed that the value of his dental practice remained at $175,000. At trial, the Debtor admitted that when he submitted his second financial statement, contrary to the information provided on the statement, the value of his dental practice was far below $175,000, and the fact of the matter is that he was no longer practicing his profession as a dentist, but was selling real estate on commission, and his income was far less than $100,000 per year as stated on the application.
Because of the Debtor’s previously unlisted debt in the amount of $96,000, the Bank refused to renew the loan. Instead, the Debtor was offered an opportunity to pay the entire $30,000 over 60 months, or to make a principal reduction of $10,000 and pay the $20,000 balance over six months. The Debtor chose to have the loan renewed for 60 months, and the Debt- or and his wife executed a new promissory note.
When the Debtor failed to make the installment payment on this new promissory note, the Bank filed suit against the Debtor and his wife to collect the obligation represented by the note. Soon thereafter, the Debtor and his wife filed a Petition for Relief under Chapter 11 of the Bankruptcy Code, and the Bank filed this adversary proceeding to have the Debtor’s debt declared nondischargeable pursuant to § 523(a)(2)(B).
Section 523(a)(2)(B) provides in part that a debt for renewal of credit is not dis-chargeable if it was obtained by the use of a materially false written statement regarding the debtor’s financial condition which the debtor caused to be published with intent to deceive, and on which the creditor reasonably relied. As was noted earlier, the parties in this case have stipulated that all of the elements of § 523(a)(2)(B) have been met except for that of reasonable reliance. Therefore, the only issue to be resolved is whether or not the Bank reasonably relied on the Debtor’s materially false statement.
It is well established that the basic purpose of all bankruptcy legislation has been in the past and still is to give the debtor a new opportunity in life and a clear field for future efforts, unhampered by the pressure and discouragement of pre-exist-ing debt. Local Loan Co. v. Hunt, 292 U.S. 234, 54 S.Ct. 695, 78 L.Ed. 1230 (1934); Lines v. Frederick, 400 U.S. 18, 91 S.Ct. 113, 27 L.Ed.2d 124 (1970). The discharge provision of the Bankruptcy Code was also designed by Congress to enable the debtor to obtain a fresh start, free from obligations and responsibilities attendant to previous business misfortunes. In keeping with this policy, exceptions to discharge are strictly construed against the creditor and construed liberally in favor of the debtors. In the Matter of Bonanza Import and Export, Inc., 43 B.R. 577 (Bankr.S.D.Fla. 1984).
The quantum of proof required to sustain a claim of nondischargeability is far from clear. The Code itself is silent as to the burden of proof necessary to establish an exception to the discharge under § 523(a). Both appellate and bankruptcy courts are split as to whether or not the standard is clear and convincing evidence or merely a preponderance of the evidence. There are six circuits which held that the burden of proof for fraud under § 523(a) of the Bankruptcy Code is clear and convincing evidence. Chrysler Credit Corp. v. Rebhan, 842 F.2d 1257, 1262 (11th Cir. 1988); Combs v. Richardson, 838 F.2d 112, 116 (4th Cir.1988); Matter of Van Horne, 823 F.2d 1285, 1287 (8th Cir.1987); In re Phillips, 804 F.2d 930, 932 (6th Cir.1986); In re Black, 787 F.2d 503, 505 (10th Cir. 1986); In re Hunter, 780 F.2d 1577, 1579 (11th Cir.1986); In re Kimzey, 761 F.2d 421, 423-24 (7th Cir.1985). Only the Fourth Circuit has adopted the preponderance of the evidence standard. Combs v. Richardson, supra. The latest pronouncement is the decision of the Eighth Circuit in the case of In re Garner, 881 F.2d 579 (8th Cir.1989) where the Court of Appeals, having considered extensively the case law covering this subject, concluded that they still adhere to the majority rule and require a clear and convincing standard before a *459claim of nondischargeability can be sustained under § 523(a)(2), citing, Matter of Van Horne, supra. It should be noted that the Supreme Court currently has under consideration this issue in the case of Grogan v. Garner, Dkt. No. 89-1149, page 31,102, petition for cert, pending. Pending a resolution of this issue by the Supreme Court, this Court is satisfied that the well-reasoned opinion joining or accepting the majority approach is more persuasive and based on the foregoing, this Court is satisfied that the claim of nondischargeability under § 523(a)(2)(A) or (B) cannot be sustained unless the proof presented is clear and convincing.
In the present instance, the Bank granted an unsecured loan to the Debtor in the amount of $30,000. It is without doubt, as noted earlier, that the loan policy of the Bank to offer an unsecured loan to a prospective borrower and to grant or not to grant the loan is determined by the professional standing of the prospective borrower and its income and value of the professional’s practice, in this instance the Debtor’s dental practice. There is hardly any question that the Bank renewed this loan three times based on the Debtor’s original loan application and his financial statement. It was not until the Debtor requested the fourth renewal and the credit check revealed a previously undisclosed liability in the amount of $97,000 that the Bank refused to renew the loan under the previous terms. Instead, the Bank offered a long term repayment plan to the Debtor, ostensibly still relying on the professional status of the Debtor. Most importantly, the Bank failed to verify whether the Debtor was still a practicing dentist or engaged in some other type of endeavor which, according to the Bank’s policy, would not have qualified him for the unsecured loan at all. In sum, the proof presented by the Debtor leads to the conclusion that the Bank relied on the original loan application when the short-term six-month loan was converted into a long-term pay-out and that such reliance would have been clearly inconsistent with the prudent business practice of any lending institution. See, In re Jones, 3 B.R. 410 (W.D.Va.1980); In the Matter of Eb-bin, 32 B.R. 936 (S.D.N.Y.1983); In re Patch, 24 B.R. 563 (D.C.M.D.1982). See also, Zaretsky, “The Fraud Exception to Discharge under The New Bankruptcy Code”, 53 Am.B.L.J. 253, 261-62 (1979), cited in In re Ebbin, at 942.
Based on this record, this Court is satisfied that the claim of nondischargeability asserted by the Bank cannot be sustained.
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/8491091/ | ORDER ON MOTION FOR SUMMARY JUDGMENT ON TRUSTEE’S OBJECTION TO CLAIM OF CREDITORS ORIOL ACCELUS, et al
ALEXANDER L. PASKAY, Chief Judge.
THIS is a Chapter 11 case and the matter under consideration is a Motion for Summary Judgment filed by Florida Rural Services, Inc. (Rural Services), on behalf of 65 migrant farm workers (Movants) who were employed by Fulwood Enterprises, Inc. (Debtor), in the fall of 1980. The Motion is filed in a contested matter originally commenced by the Trustee who filed an Objection to the Movants’ proof of claim. It is the contention of Rural Services that they are entitled to a determination as a matter of law that Claim No. 50 should be allowed as filed in that there are no genuine issues of material fact which are in dispute and that the Movants are entitled to judgment as a matter of law. The following undisputed facts are relevant and germane to the disposition of this cause:
The Debtor filed a voluntary Chapter 11 Petition on April 27, 1982. Rural Services filed a proof of claim on June 28, 1982, entitled, “Proof of Multiple Claims” on behalf of the Movants as their agent and asserted claims on their behalf in three separate categories. The first category represents a claim for back wages for each of the 65 Movants in the total amount of $3,986.50, based upon the statutory minimum wage in effect at the time of the Movants’ employment. On September 18, 1989, this Court entered an Order granting the Motion for Summary Judgment with respect to the claim for back wages and allowed the claim in the total amount of $3,986.50. A claim is also asserted for an undetermined sum of money for violations of the Movants’ civil rights pursuant to the Fair Labor Standards Act (FLSA). Determination of the amount of this portion of the claim is dependent upon the resolution of a civil action filed in the District Court in the Middle District of Florida.
Finally, the Movants allege that they are entitled to statutory damages in the amount of $65,000.00 for two intentional violations of the Farm Labor Contractor Registration Act (FLORA) for the 65 Mov-ants. The Movants allege that there is no genuine issue of material fact with respect to the FLSA claims’ and that they are entitled to judgment in their favor as a matter of law pursuant to Bankruptcy Rule 7056.
As to the claim for statutory damages, FLORA provides only that aggrieved farm workers bringing civil suits may be awarded actual damages, or $500.00 in statutory damages. The Eleventh Circuit Court of Appeals has recognized that the award of damages is discretionary with the court upon a finding of an intentional violation of the Act. Washington v. Miller, 721 F.2d 797 (11th Cir.1983). The Bankruptcy Code disfavors the allowance of claims which are punitive or exemplary in nature because, in effect, these claims are assessed against innocent third parties, i.e., creditors of the debtor. The only evidence before this Court upon which the Court may determine whether or not an intentional violation of the Act occurred is the depositions of certain migrant farm workers. The undisputed evidence as established through the depositions indicates that a number of violations of FLCRA occurred during the period in question.
*463First, FLCRA requires that a farm labor contractor be registered pursuant to 7 U.S.C. § 2043(c). It appears that Milot Ma-tayer was the farm labor contractor who was in charge of the workers, and that neither he nor his three foremen were licensed pursuant to FLCRA. Second, FLCRA requires the employer to exhibit a certificate of registration pursuant to 7 U.S.C. § 2045(a). The evidence shows that such registration certificate was not exhibited. Third, disclosure of the terms and conditions of employment to the employees is required by 7 U.S.C. § 2045(b). However, it is also clear from the depositions that the terms and conditions of their employment were not disclosed as required by the Act. In addition, 7 U.S.C. § 2045(d) requires the posting of the terms and conditions of occupancy for the housing provided. The evidence shows that this provision of the Act was disregarded as well. Further, the Debtor did not provide the workers with an itemized early earning statement as required by 7 U.S.C. § 2045(e). In addition, the Debtor failed to keep payroll records which show for each worker total earnings in each payroll period as required by 7 U.S.C. § 2045(e).
Based on the foregoing, it is clear, and this Court finds, that an intentional violation of FLCRA was committed by the Debt- or with respect to each of the 65 Movants. Accordingly, a discretionary award of $500.00 per Movant shall be allowed for a total of $32,500.00.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the Motion for Summary Judgment as to the claim for statutory damages for intentional violations of FLCRA be, and the same is hereby, granted, and Claim No. 50 entitled, “Proof of Multiple Claims” filed June 28, 1982, be, and the same is hereby, allowed in the total amount of $32,500.00 for intentional violations of FLCRA for the 65 Movants.
DONE AND ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491092/ | OPINION
WILLIAM F. TUOHEY, Bankruptcy Judge.
The matter before the court is an adversary proceeding initiated by Carmen J. Maggio, the plaintiff herein and trustee (“Trustee”) of Oliver’s Stores, Inc. (“Oliver’s” or the “Debtor”) to recover an alleged preferential transfer from the defendant, Manufacturers Hanover Trust Company (“MHT Co.”), pursuant to 11 U.S.C. § 547(b) and § 550. The court possesses jurisdiction over this “core proceeding” pursuant to 28 U.S.C. § 157. Based upon a a joint stipulation of facts entered into by the parties, the court makes the following findings of fact and conclusions of law.
FINDINGS OF FACT
The following findings of fact were agreed to by the parties in a formal written stipulation of facts filed August 18, 1989:
1. Manufacturers Hanover Trust Company (“MHT Co.”) is a commercial bank. Since 1905 MHT Co. and its predecessors have lent funds to customers in the ordinary course of the bank's business.
2. Oliver’s Stores, Inc. (“Oliver’s”), which was known as Mandie Lynn, Inc. until 1985, was an expanding chain of discount retail stores engaged in the sale of children’s and adults’ clothing since 1983. Between 1983 and March 1987, Oliver’s grew from a chain of two stores to one of 34 stores. In February 1986, Oliver’s became a public company through an initial public offering of its stock at a price of $6.00 per share. The proceeds of the initial public offering amounted to $7,215,000.00.
3. Beginning in 1984 and continuing for approximately three years thereafter, MHT Co. provided Oliver’s with a variety of loans and lines of credit. Prior to 1984 Oliver’s had obtained credit from Valley National Bank and Midlantic National Bank/North (“Midlantic”). In addition to the credit facilities provided by MHT Co., the Franklin Corporation, another lender, provided unsecured financing subordinated to bank and trade debt.
4. At all times throughout the course of the banking relationship between MHT Co. and Oliver’s, Oliver’s, as is common for a company engaged in an expanding retail clothing business, required funds for operations and for growth. As a result, MHT Co. provided Oliver’s with various credit facilities.
5. On March 5, 1987, Oliver’s filed a voluntary petition for reorganization under chapter 11 of the Bankruptcy Code. Carmen J. Maggio was appointed the trustee of Oliver’s on September 29, 1987 and com*673menced the above-captioned adversary proceeding on April 19, 1988. Subsequently, .in June 1988, the bankruptcy action was converted to a chapter 7 proceeding. Mr. Maggio has continued to act as the trustee.
6. On or about April 11, 1984, MHT Co. replaced Valley National Bank as Oliver’s lender, providing an initial line of credit (the “initial line”) in the amount of $4,000,-000.00 to Oliver’s. Prior thereto and as a condition of MHT Co.’s granting such line of credit, Oliver’s obtained $1,250,000.00 in unsecured financing from the Franklin Corporation, of which amount fifty percent was subordinated to bank and trade debt. Joseph Wolfer (“Wolfer”), the chairman of the board and a co-founder of Oliver’s, personally guaranteed the “initial line.”
7. The $4,000,000.00 initial line, which was payable on demand, had a maturity date of June 30, 1985. MHT Co. renewed the initial line to June 30, 1986, and increased the line to $4,500,000.00 on or about July 23, 1985. Oliver’s paid MHT Co.’s reference rate (the “reference rate”) plus one percent as interest on the initial line. The initial line was fully repaid on February 19, 1986, the date on which Oliver’s initial public offering was funded.
8. Subsequent to providing the initial line, MHT Co. made a term loan (the “initial term loan”) to Oliver’s in the amount of $2,000,000.00 on or about November 14, 1984, at an interest rate of the reference rate plus one and one-half percent. The initial term loan was to be paid over a period of four years with the last payment due on December 30, 1988. Oliver’s made principal payments of $62,500.00 each on or about April 1, 1985, July 1, 1985 and September 30, 1985. In view of the imminent initial public offering of Oliver’s stock, MHT Co. consented to Oliver’s making the December 30, 1985 principal payment on the initial term loan on or about February 19, 1986, at which time Oliver’s repaid the outstanding balance of $1,812,500.00 from the proceeds of the initial public offering. The initial term loan was personally guaranteed by Wolfer and Nadler.
9. MHT Co. also made a demand loan (the “demand loan”) to Oliver’s in the amount of $500,000.00 on or about January 13.1986 at an interest rate of the reference rate plus three percent. As contemplated, Oliver’s repaid this loan in full on or about February 19,1986 from the proceeds of the initial public offering. This demand loan was personally guaranteed by Wolfer and Nadler.
10. Concurrent with the repayment of the initial line, initial term loan and demand loan, MHT Co. made a term loan to Oliver’s in the amount of $3,500,000.00 at an interest rate of the reference rate plus one and one-half percent (the “new term loan”). The new term loan was to be repaid over a period of four years with the final payment due on December 31, 1986. The new term loan was not personally guaranteed by Wolfer or Nadler.
11. Subsequent to the initial public offering, MHT Co. also provided a $3,000,-000.00 line of credit to Oliver’s on February 28.1986 at an interest rate of the reference rate plus one percent (the “new line”). The new line was payable on demand and due to expire on March 2, 1987. The new line was not personally guaranteed by Wolfer or Nadler.
12. In late June or early July 1986, Oliver’s requested additional credit from MHT Co. On July 28,1986, MHT Co. provided to Oliver’s a further $3,000,000.00 line of credit, which is the subject of this litigation (“the July 1986 line”).
13. Pursuant to the terms of the promissory note evidencing the July 1986 line, full repayment of the July 1986 line was due on January 1, 1987. Because January 1, 1987 was New Year’s Day and a legal holiday, applicable law provided that the July 1986 line became due on January 2, 1987, which was a Friday.
14. Oliver’s paid interest at a rate of the reference rate plus one percent on the July 1986 line, the same rate paid on the initial line and new line.
15. Oliver’s paid interest on the July 1986 line on a monthly basis, as it did on the initial line and new line.
*67416. The notes evidencing the initial line, new line and July 1986 line all contained identical events of default clauses.
17. The July 1986 line, like all of Oliver’s other obligations to MHT Co., was unsecured.
18. The terms of the July 1986 line were similar to both the terms of MHT Co.'s other lines to Oliver's and the terms of other short term loans that MHT Co. regularly made in its banking business.
19. The note evidencing the July 1986 line was a standard note form used at MHT Co. for borrowers the size of Oliver’s.
20. The terms of the July 1986 line and note evidencing that line of credit were similar to the terms used by other banking institutions with respect to lines of credit extended to other retailers the size of Oliver’s.
21. Like the other credit facilities approved by MHT Co. for Oliver’s after the initial public offering, the July 1986 line was not personally guaranteed by Wolfer or Nadler. Prior to extending the July 1986 line, Oliver’s and MHT Co. verbally agreed that the July 1986 line would be extended beyond January 1, 1987 if Wolfer and Nadler guaranteed the obligation. Neither Wolfer nor Nadler ever guaranteed the July 1986 line, however.
22. At the time the July 1986 line was extended, MHT Co. considered it a temporary extension of credit that would be repaid from the proceeds of a secondary stock offering or a convertible subordinated private placement, along with funds generated by Oliver’s year end cash flow. To the extent the July 1986 line was not repaid from cash flow, MHT Co. contemplated that it would be replaced by either equity financing, debt financing in the form of a private placement, or a long term loan.
23. At the time the July 1986 line was issued, MHT Co. considered Oliver’s to have a promising future outlook.
24. At the time the July 1986 line was issued, Oliver’s stock was trading at approximately $12.00.
25. In or about October 1986, Oliver’s requested from MHT Co. a temporary increase in its line of credit in the amount of $2,500,000.00 to $3,000,000.00 for the purpose of financing additional store openings and building up holiday inventory. MHT Co. determined that it was not in its interest for it to extend Oliver’s additional credit at that time and rejected this request. Until the rejection of this request, MHT Co. had not rejected any of Oliver’s requests for credit.
26. By October 1986, Oliver’s stock was trading at approximately $7.00. Average prices for stock of discount clothing retailers had fallen since July 1986.
27. In December 1986, MHT Co. was concerned about Oliver’s ability to make timely repayment of the July 1986 line, and when Oliver’s requested that MHT Co. extend the maturity date of the July 1986 line, MHT Co. declined. Thereafter, Oliver’s indicated that it might seek additional financing from another bank in order to pay MHT Co.
28. In early 1984, prior to the time Oliver’s began its banking relationship with MHT Co., Oliver's had obtained credit from Midlantic. Midlantic also had bid on the credit facility ultimately provided to Oliver’s by MHT Co. in 1984. As of early November 1986, a $50,000.00 letter of credit from Midlantic to Oliver’s was outstanding (the “Midlantic letter of credit”).
29. In early November 1986, Oliver’s approached Midlantic seeking additional credit. As a result, Midlantic approved a $3,000,000.00 loan for Oliver’s in December 1986 (the “Midlantic loan”).
30. Specifically, Midlantic extended $3,000,000.00 to Oliver’s of which $50,-000.00 was used to satisfy the Midlantic letter of credit. The remaining $2,950,-000.00 was evidenced by a time note dated December 22, 1986 (the “time note”). The time note had a maturity date of March 23, 1987.
31. The time note was funded on December 22, 1986 when $2,950,000.00 was credited to Oliver’s checking account number 132-01264-9 maintained at Midlantic. At the time the time note was funded, Midlantic and Oliver’s contemplated that it *675would be repaid from an offering of subordinated debentures.
32. From conversations with MHT Co. and Oliver’s, Paula Mandell, the Midlantic loan officer who was primarily responsible for the Midlantic loan, was aware that an MHT Co. line was to become due in the near future, but she did not know exactly when any of the MHT Co. lines of credit were to mature.
33. Midlantic approved the Midlantic loan based on an express understanding that the proceeds would be utilized to reduce a line of credit with MHT Co. from $6,000,000.00 to $3,000,000.00.
34. Based on conversations with Wol-fer, Mandell had no doubt whatsoever that Oliver’s would use the funds to reduce a line of credit at MHT Co. by the amount of $3,000,000.00. Midlantic approved the Mid-lantic loan without placing any restrictions or conditions on the use of the proceeds. Subsequent to funding the loan on December 22, 1986, Midlantic did not take any action to restrict Oliver’s use of the proceeds of the Midlantic loan.
35. Midlantic informed MHT Co. of the pendency of the Midlantic loan negotiations. However, MHT Co. had no agreement with Midlantic or Oliver’s that the Midlantic loan would be used to repay the July 1986 line.
36. Between December 23, 1986 and January 5, 1987, Wolfer advised Mandell that he did not immediately pay MHT Co. the proceeds of the Midlantic loan because he was looking for some assurance from MHT Co. that MHT Co. would extend additional credit in the future if the line of credit was repaid.
37. On or about December 29,1986, Oliver’s issued a check in the amount of $2,949,000.00 from its Midlantic checking account number 132-01264-9, payable to Oliver’s Stores, Inc., and deposited the proceeds of that check into Oliver’s interest bearing investor savings account 131-01264-9 also maintained at Midlantic (the “investor account”).
38. On Friday, January 2, 1987, MHT Co.’s headquarters office, where Oliver’s accounts were administered, operated from 9:00 a.m. until 3:00 p.m. on a limited basis with a skeleton staff due to the fact that it was a holiday weekend. Joseph Powers, the MHT Co. vice president with primary responsibility for the Oliver’s credit relationship, was vacationing in Connecticut on January 2, 1987.
39. Oliver’s was also open for business on January 2, 1987, but operated with a skeleton staff since employees had the option of taking as a holiday either Friday, November 28, 1986 (the day after Thanksgiving) or Friday, January 2, 1987 (the day after New Year’s Day). Stephen Lee, the financial vice president of Oliver’s who served as a day-to-day contact with MHT Co., was vacationing in Florida on January 2, 1987. The parties have been unable to determine whether Nadler or Wolfer were present at Oliver’s on January 2, 1987.
40. On January 2,1987, MHT Co.’s New Jersey Division, which was the unit of MHT Co. involved in the relationship with Oliver’s charged the account of one customer in the approximate amount of $1,000,000.00 in payment of an unsecured loan extended by MHT Co. to that customer.
41. At the start of the business day on January 5, 1987, approximately $4,000,-000.00 was on hand in the investor account.
42. MHT Co. did not charge or attempt to charge any Oliver’s account on January 2,1987. On Monday, January 5,1987, Mid-lantic wired $3,000,010.00 from the investor account to Oliver’s operating account number 134-0-64624 at MHT Co. As authorized, MHT Co. then charged Oliver’s operating account $3,000,000 in full repayment of the July 1986 line.
43. At no time on January 2, 1987 was the sum of $3,000,000 available in Oliver’s operating account number 134-0-64624 or any other account maintained by Oliver’s at MHT Co.
44. In the past, Oliver’s operating account at MHT Co. had been charged for each payment of principal and interest made by Oliver’s to MHT Co. for the various loans and lines of credit provided by *676MHT Co. to Oliver’s. Payment by charge to a customer’s account is typical within the banking industry and is commonly the way in which retailers of the size of Oliver’s repay bank debt.
45. MHT Co. did not charge Oliver’s any penalty for its repayment of the July 1986 Line on January 5, 1987, and interest at the original borrowing rate of the reference rate plus one percent was paid by Oliver’s through January 5, 1987.
46. When MHT Co. loans are due on the Friday following a major national holiday, such loans are often repaid on the following business day and no penalty is charged by MHT Co.
47. At the time the $3,000,000.00 payment in issue was made to MHT Co., Oliver’s was “insolvent,” as that phrase is used in 11 U.S.C. § 547(b)(3) and defined in 11 U.S.C. § 101(31).
48. The $3,000,000 payment enabled MHT Co. to receive more than it would receive if the above-captioned case were a casé under chapter 7 of the Bankruptcy Code, the payment had not been made, and MHT Co. received payment of its debt to the extent provided by the provisions of the Bankruptcy Code.
49. The $3,000,000 payment was made according to “ordinary business terms,” as that phrase is used in 11 U.S.C. § 547(c)(2)(C).
50. It is further stipulated and agreed by and among the parties, by their attorneys, that, notwithstanding the foregoing, MHT Co. in no way agrees that the $3,000,-000 payment was a “transfer of an interest of the debtor in property,” as that phrase is used in 11 U.S.C. § 547(b).
CONCLUSIONS OF LAW
The plaintiff in the within action, the trustee, seeks to have a $3,000,000 payment from the debtor, Oliver’s, to MHT Co. avoided as a preferential transfer pursuant to 11 U.S.C. § 547.1
Pursuant to § 547(g), the trustee has the burden of proving the five elements of a preference action under § 547(b). See, In re Jefferson Mortgage Company, 25 B.R. 963 (Bankr.D.N.J.1982); In re Philadelphia Light Supply Company, 33 B.R. 734 (Bankr.E.D.Pa.1983); In re Sbraga, 27 B.R. 199 (Bankr.M.D.Pa.1982). This includes the requirement that the payment in question be a “transfer of an interest of the debtor in property.” 11 U.S.C. § 547(b); 11 U.S.C. § 547(g); In re Belme, 79 B.R. 355, 358 (Bankr.S.D. Ohio 1987); In re H & A Const. Co., 65 B.R. 213, 214 (Bankr.D.Mass.1986).
The court finds that the five elements of an avoidable preferential transfer are present here, but there is one crucial requirement which must first be satisfied. The trustee must demonstrate that the $3,000,000 funded by Midlantic to Oliver’s became “an interest of the debtor in property” as is contemplated by Section 547(b).
In determining whether the property or interest transferred belongs to the debtor, courts have considered whether the transfer diminished or depleted the debtor’s assets generally available to unsecured creditors. See, Coral Petroleum, Inc. v. Banque Paribas-London, 797 F.2d 1351, 1356 (5th Cir.1986); In re Sun Railings, Inc., 5 B.R. 538, 539 (Bankr.S.D.Fla.1980). The proposition that an estate is not diminished by transfers which do not deplete or diminish the estate has become known as the judicially created “earmarking doctrine.” *677See, In re Hartley, 825 F.2d 1067, 1069 (6th Cir.1987). The earmarking doctrine has been commented upon by Collier’s on Bankruptcy 11547.03 at 547-26 (15th Ed.) as follows:
In cases where a third person makes a loan to a debtor specifically to enable him to satisfy the claim of a designated creditor, the proceeds never became part of the debtor’s assets, and therefore no preference is created. The rule is the same regardless of whether the proceeds of the loan are transferred directly by the lender to the creditor or are paid to the debtor with the understanding that they will be paid to the creditor in satisfaction of his claim, so long as such proceeds are clearly “earmarked”. (Emphasis added.)
The thrust of the trustee’s argument against application of the earmarking doctrine is essentially twofold: first, the trustee alleges that the funding from Midlantic to Oliver’s was not clearly earmarked to MHT Co. Secondly, the trustee asserts that the debtor retained custody and control over the Midlantic funds for fourteen days, violating the underlying principles of the doctrine.
The court finds that there is sufficient evidence to support a finding that the Midlantic loan was clearly earmarked to MHT Co. The stipulated record indicates that the Midlantic Loan was approved by Midlantic based upon an “express understanding” with Oliver’s that the proceeds would be used to reduce a line of credit with MHT Co. by the amount of $3,000,000 in the near future. (See stipulation of facts, ¶¶ 32-34).2 This understanding was based upon conversations between Joseph Wolfer, the chairman of the board of Oliver’s, and Paula Mandell, the Midlantic loan officer primarily responsible for the Midlantic loan to Oliver’s. (Id. ¶¶ 6, 32-34.) The record also indicates that Mandell had “no doubt whatsoever that Oliver’s would use the funds to reduce a line of credit at MHT Co. by the amount of $3,000,000.” (Id. 1134.)
All the preceding facts persuade the court that there was an express understanding, albeit verbal, between the parties, and that the Midlantic loan was, in fact, “earmarked” for repaying MHT Co. The trustee asserts that there was no agreement between Midlantic and Oliver’s as to use of the Midlantic loan. (See plaintiff’s trial brief, p. 32). In view of the facts cited supra, which were stipulated to by the parties, the trustee’s argument fails.
The trustee properly cites In re Bohlen Enterprises Ltd., 859 F.2d 561, 566 (8th Cir.1988) as the test many courts implement to determine whether or not the earmarking doctrine should be applied. The Bohlen Court summarized one of the alternative tests as follows:
(1) the existence of an agreement between the new lender and the debtor that the new funds will be used to pay a specified antecedent debt,
(2) performance of that agreement according to its terms, and
(3) the transaction viewed as a whole (including the transfer in of the new funds and the transfer out to the old creditor) does not result in any diminution of the estate.
Bohlen at 566.
Under this test, the court finds, through the stipulation of facts, that MHT Co. satisfied all tiers of the aforementioned test. Therefore, the court finds that the January 5,1987 payment to MHT Co. by Oliver’s did not diminish or deplete the debtor’s estate because the Midlantic loan funds were directly “earmarked” for payment to MHT Co. See, e.g., In re Hartley, 825 F.2d at 1070; Coral Petroleum, Inc., 797 F.2d at 1356; Grubb v. General Contract Purchase Corp., 18 F.Supp. 680, 682 (S.D.N.Y. 1937), aff'd, 94 F.2d 70 (2nd Cir.1938). In essence, one creditor has stepped into the shoes of another and the estate has not been depleted or diminished.
*678The trustee’s second assertion is that the debtor violated the underlying principles of the “earmarking doctrine” by retaining custody and control over the Mid-lantic loan proceeds from the period of December 22, 1986 through January 5, 1987. The trustee contends that the cases relied upon by MHT Co. emphasized that the extent of the debtor’s control over the disputed funds in fact determines whether the transfer depletes the debtor’s estate. See, Coral Petroleum, Inc., 797 F.2d at 1356.
The court finds the trustee’s position in this matter distinguishable under the attendant circumstances. The United States District Court for the District of New Jersey has upheld the earmarking defense where, as here, funds were advanced by a third party to the debtor rather than paid directly to the creditor. See, In re Henry C. Reusch & Co., 44 F.Supp. 677, 680 (D.N. J.1942).3
The court finds that the debtor’s holding of the Midlantic loan funds in the interest bearing checking account number 132-01264-9 at Midlantic for the fourteen day period, of which only six were accepted business days, was warranted under the circumstances and does not undermine MHT Co.’s position that the Midlantic loan was “earmarked.”4
It has been stipulated between the parties that at the start of the business day of January 5, 1987, approximately $4,000,-000.00 was on hand in Oliver’s account number 132-01264-9, of which $3,000,-000.00 was from the Midlantic loan proceeds. (Stipulation of facts, II41.) The court determines that the fact that the $3,000,000.00 loan was placed in Oliver’s investor account at Midlantic with other funds does not by and of itself defeat the earmarking doctrine. It was still the “express understanding” between the parties that the Midlantic loan proceeds would be used to repay the MHT Co. July 1986 line. Further, as noted in Bohlen, supra, Oliver’s performed as represented and did, in fact, repay MHT Co.
Since the court finds that the Midlantic loan was “earmarked” for MHT Co., a preference action cannot be maintained by the plaintiff since there was no “transfer of an interest of the debtor in property” as is required by 11 U.S.C. § 547(b).
For the aforesaid reasons, judgment is entered in favor of defendant, Manufacturers Hanover Trust Co., and the within complaint is dismissed with prejudice and without costs.
. Section 547(b) provides:
(b) Except as provided in subsection (c) of this section, the trustee may avoid any transfer of an interest of the debtor in property—
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;
(3) made while the debtor was insolvent;
(4) made—
(A)on or within 90 days before the date of the filing of the petition; or
(B)between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and
(5)that enables such creditor to receive more than such creditor would receive if—
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by the provisions of this title.
. The parties have also stipulated that Midlantic did not restrict Oliver’s use of the Midlantic loan proceeds. Stipulation of facts ¶ 34. However, the court finds that, in light of the "express understanding” between Midlantic and Oliver’s, the trustee must introduce other evidence to meet his burden of establishing that the Midlantic loan was not clearly earmarked, thus rendering the payment in issue a "transfer of an interest of the debtor in property ...” as required by 11 U.S.C. § 547(b). See 11 U.S.C. § 547(g).
. While In re Henry C. Reusch & Co. was decided under the Bankruptcy Act, such cases are relevant in analyzing § 547 of the Bankruptcy Code. As noted by the Sixth Circuit in addressing the earmarking defense, because both statutes require that the property or interest in property transferred be the debtor's, “cases concerning that issue under the old Act are relevant to the new Code.” In re Hartley, 825 F.2d 1067, 1070 n. 4 (6th Cir.1987).
. The court finds persuasive the fact that the July, 1986 loan was not due until January 2, 1987. The fact that Oliver’s was able to obtain financing from Midlantic to repay MHT Co. in advance should not deprive Oliver’s from receiving the substantial interest on the funds for that period. The payment not being made on January 2 but on January 5, the next business day, appears to be warranted under the circumstances also, since January 2 was a holiday for many, including the major parties in both Oliver’s and MHT Co. Stipulation of facts, ¶¶ 38-39. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491093/ | MEMORANDUM OPINION AND ORDER
RICHARD L. SPEER, Bankruptcy Judge.
This cause comes before the Court on the Trustee’s Motion to Strike Seventh Defense and For Summary Judgment on Defendant John E. Thompson’s Counterclaim. The Defendant, John E. Thompson, has filed a Memorandum in Opposition to Plaintiff’s *859Motion to Strike and Motion for Summary-Judgment. The Trustee and the Securities Investor Protection Corporation have filed a Reply Memoranda in response to the Defendant’s Motion in Opposition. The Court has reviewed the written arguments of counsel, as well as the entire record in this case. Based on that review, and for the following reasons, the Court finds that the Defendant’s Seventh Defense should be stricken and the Trustee’s Motion for Summary Judgment on the Defendant’s Counterclaim should be granted.
FACTS
The facts in this case do not appear to be in dispute. The Plaintiff in this action is the Trustee for the liquidation of the Debt- or in the underlying bankruptcy proceeding. Bell & Beckwith, the Debtor, was a stock brokerage located in Toledo, Ohio. The brokerage operated as a partnership and was managed by Edward P. Wolfram, Jr., (hereinafter “Mr. Wolfram”). Starting in approximately 1973, Mr. Wolfram began systematically diverting cash and securities held by the brokerage in customer margin accounts. Mr. Wolfram’s fraud was discovered by a Securities & Exchange Commission examiner in 1983.
In June of 1975, John E. Thompson became a general partner in Bell & Beckwith. At the time the fraud of Mr. Wolfram was discovered, Mr. Thompson was still a general partner. See, John E. Thompson’s Answer and Counterclaim, II112; Affidavit of Patrick A. McGraw, Trustee, (October 26, 1987), Exhibit 1 (Certificate of Limited Partnership on file with the Lucas County Recorder on February 5, 1983). Moreover, Mr. Thompson’s name appeared on the letterhead of Bell & Beckwith. See, Affidavit of Trustee, ¶ 7, and Exhibit 8.
One of Mr. Thompson’s duties as a partner in Bell & Beckwith was to execute and submit Financial and Operational Combined Uniform Single Reports (hereinafter “FOCUS Reports”) to the Securities and Exchange Commission (hereinafter “SEC”) certifying that the brokerage had sufficient “net capital” to comply with the requirements set forth in the Securities and Exchange Act of 1934. See, Affidavit of Trustee, ¶ 5, and Exhibits 2-6. (“Net Capital” is a reserve fund that brokers and dealers are required to maintain by Securities and Exchange Act Rule.)
On April 12, 1985, John E. Thompson filed an Answer and Counterclaim to the Trustee’s Complaint against the partners. In his Answer, Mr. Thompson asserted that he had been induced to become a partner of Bell & Beckwith on the basis of false, misleading and fraudulent financial information provided to him by Bell & Beckwith, as a result of the malfeasance of Mr. Wolfram, and he was therefore entitled to rescind his partnership agreement with Bell & Beckwith ab initio. See, Answer of Defendant, John E. Thompson, Seventh Defense, at 13. In his Counterclaim, Mr. Thompson requests that the Court allow him to rescind the partnership contract, and hold that it was void ab initio. He also seeks to have the Trustee’s Complaint against him dismissed, because he is not liable for the debts of the partnership. Costs, expenses, and attorneys’ fees are also sought by the Defendant.
With his Memorandum in Opposition to Plaintiff’s Motion to Strike and Motion for Summary Judgment, Defendant Thompson filed an Affidavit which states he did not learn the date that Mr. Wolfram commenced his fraudulent activities until June of 1985. See, Affidavit of John E. Thompson, 4, at 2. He further avers that if he had known of the defalcations of Edward P. Wolfram, Jr., he would not have become a partner in Bell & Beckwith. Id., 5 at 2.
LAW
The Trustee’s Complaint seeks a judgment against the partners of Bell & Beck-with based on Bankruptcy Code section 723(a) and Ohio partnership law, O.R.C. §§ 1775.01 et seq. The issue before the Court is whether John E. Thompson’s Seventh Defense and Counterclaim should be stricken pursuant to the Trustee’s Motion. The Court will address each of the arguments in opposition to the Motion for Summary Judgment.
*860Ohio has adopted the Uniform Partnership Act (hereinafter “UPA”). The Defendant seeks to rescind the partnership agreement under O.R.C. 1775.38, (UPA § 39) which states:
1775.38 Rights of partner rescinding partnership contract for fraud
Where a partnership contract is rescinded on the ground of the fraud or misrepresentation of one of the parties thereto, the party entitled to rescind is, without prejudice to any other right, entitled:
(A) To a lien on, or right of retention of, the surplus of the partnership property after satisfying the partnership liabilities to third persons for any sum of money paid by him for the purchase of an interest in the partnership and for any capital or advances contributed by him;
(B) To stand, after all liabilities to third persons have been satisfied, in the place of the creditors of the partnership for any payments made by him in respect of the partnership liabilities;
(C) To be indemnified by the person guilty of the fraud or making the representation against all debts and liabilities of the partnership.
In support of his Seventh Defense, Mr. Thompson asserts that O.R.C. § 1775.38 does not provide that a partner rescinding for fraud is to be held individually liable to the third-party creditors of the partnership. Instead, the Defendant argues that rescission renders the partnership agreement void ab initio, with no liability attaching to a partner who was fraudulently induced to enter the partnership agreement. In support of this contention, the Defendant cites Oteri v. Scalzo, 145 U.S. 578, 588, 12 S.Ct. 895, 898, 36 L.Ed. 824, 827 (1892); Hanes v. Giambrone, 14 Ohio App.3d 400, 471 N.E.2d 801 (1984) and Note, Partnership-Creditor’s Rights-Liability of a Partner Fraudulently Induced to Enter into the Partnership Agreement, 11 Vand.L.R. 942, 944-945 (1958). The Plaintiff contends that Mr. Thompson is liable for the debts of the partnership and cannot rescind the partnership agreement ab initio. The Trustee cites Van Andel v. Smith, 248 F.2d 915 (10th Cir.1957) and Securities and Exchange Commission v. duPont, Hornsey & Company, 204 F.Supp. 944 (D.Mass.1967).
While some courts characterize a partnership agreement procured by fraud as “void”, other courts term it “voidable”. In either case, the result remains the same. In addition to the Supreme Court’s decision in Oteri, supra, a number of other courts have held that when a defrauded partner is permitted to rescind the partnership agreement, it has the effect of voiding the contract ab initio. See, e.g., Knapp v. First National Bank & Trust Co., 154 F.2d 395, 398 (10th Cir.1946); Volpe v. Schlobohm, 614 S.W.2d 615, 618 (Tex.Civ.App.1981); Solomont v. Polk Development Co., 245 Cal.App.2d 488, 54 Cal.Rptr. 22, 27 (1966); Weltman v. Kaye, 167, Cal.App.2d 607, 615, 334 P.2d 917, 920 (1959); Long v. Newlin, 144 Cal.App.2d 509, 512, 301 P.2d 271, 273 (1956); See also, 2 Z. Cavitch, Business Organizations § 20.06[2] at 20-43 (1989); 68 C.J.S. Partnership § 13 at 423.
However, even if the Bell & Beckwith partnership agreement were held to be void ab initio based on the Defendant’s Counterclaim for rescission, it would not affect Mr. Thompson’s liability to third-party creditors. Van Andel v. Smith, 248 F.2d 915, 918 (10th Cir.1957); Securities and Exchange Commission v. duPont, Homsey & Company, 204 F.Supp. 944, 946 (D.Mass.1962), rev’d on other grounds, Legate v. Mahoney, 334 F.2d 704 (1st Cir. 1964), reconsidered, 348 F.2d 164 (1st Cir. 1965); Volpe v. Schlobohm, 614 S.W.2d 615, 618 (Tex.Civ.App. 1981); Weltman v. Kaye, 167 Cal.App.2d 607, 614, 334 P.2d 917, 920 (1959); Long v. Newlin, 144 Cal. App.2d 509, 512, 301 P.2d 271, 273 (1956); 2 Z. Cavitch, Business Organizations § 20.06[2] at 20-43 (1989); 1 R. Rowley, Rowley on Partnership § 39.0(C) at 753 (2nd ed. 1960); 2 J. Barrett & E. Seago, Partners and Partnership Law and Taxation Ch. 8, § 3.5 (1965 Cumulative Supplement at 5); A. Bromberg, Crane and Bromberg on Partnership § 85 at 487 (1968); J. Crane, Handbook on the Law of Partnership Ch. 8, § 85 at 458 (1952); 59A Am.Jur.2d, Partnership § 904 at 683.
*861The general rule has been summarized in Cavitch’s Business Organizations, supra:
When a partner is fraudulently induced to enter into a partnership agreement, he may bring an action for rescission of the contract. The effect of a rescission is to void the contract ab ini-tio. As between the parties, it is as though a partnership never existed, but as to third persons who have dealt with the firm, the plaintiff is liable since he had held himself out as a member of the partnership prior to rescission.
2 Z. Cavitch, Business Organizations § 20.06[2] at 20-43 (1989).
Thus, assuming, arguendo, that rescission is proper under the facts in this case, it provides the Defendant no legal protection from his liability for the debts of the partnership. Consequently, rescission being a matter affecting only the relationship between the partners, any action to rescind the partnership agreement may not necessarily be properly brought before this Court.
The Defendant’s theory based on comments in Hanes v. Giambrone, 14 Ohio App.3d 400, 471 N.E.2d 801 (1984) does not support a different result. Under O.R.C. § 1775.04, to the extent that the Uniform Partnership Act does not provide otherwise, the rules of law and equity govern. See, O.R.C. § 1775.04; Hanes v. Giambrone, 14 Ohio App. at 405, 471 N.E.2d at 807; Staszak v. Romanik, 690 F.2d 578, 583 (6th Cir.1982). As the Hanes court notes, the UPA does not expressly authorize rescission for fraud. However, it does appear to assume the availability of this remedy by providing certain consequences when a partnership is rescinded on the grounds of fraud. See, Hanes v. Giambrone, 14 Ohio App. at 405, 471 N.E.2d at 807; see also, 59A Am.Jur.2d, Partnership § 871 at 666; A. Bromberg, Crane and Bromberg on Partnership Ch. 8, § 85 at 486 n. 19 (1968). It appears to be the Defendant’s position that reference to the older common law right to rescind a partnership agreement for fraud would allow him to escape liability. This is because under older pre-UPA case law, the partnership agreement becomes void ab initio as to creditors, and not simply void as between the parties to the agreement.
Pursuant to Erie Railroad v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938), in deciding issues founded upon state common law, federal courts should look to the decisions of the state’s highest court. If the state’s highest court has not spoken to the question in controversy, a federal court must discern how the state’s highest court would respond if confronted with the question. Hartford Fire Ins. v. Lawrence, Dykes, Goodenberger, 740 F.2d 1362, 1365 (6th Cir.1984); A & M Records, Inc. v. M.V.C. Dist. Corp., 574 F.2d 312, 314 (6th Cir.1978); In re Stone, 52 B.R. 305, 306 (Bankr.W.D.Ky.1985); In re Sexton, 16 B.R. 240, 242 (Bankr.D.Tenn. 1981). To date, no Ohio court appears to have addressed the issue of a rescinding partner’s liability to third-party creditors.
Initially, the Court finds that the authorities previously cited as supporting the Plaintiff’s position would be found persuasive by the Ohio Supreme Court. See, O.R.C. § 1775.03(D); 13 O.Jur.3d. Business Relationships § 927 at 45. However, if, as the Defendant appears to assert, only older common law cases can be considered in determining Mr. Thompson’s liability to creditors as a fraudulently induced partner, his position must still be rejected. A review of older case law reflects that fraudulently induced partners have always been liable to creditors, and have not been able to avoid liability by electing to rescind. See, Grossman v. Lewis, 226 Mass. 163, 166-167, 115 N.E. 236, 238 (1917); Ohio Well Supply Co. v. Metcalf, 174 Mo.App. 555, 559, 160 S.W. 897, 898 (1913); Perry v. Hale, 143 Mass. 540, 542, 10 N.E. 174, 177 (1887); Richards v. Todd, 127 Mass. 167, 173 (1879); Hynes v. Stewart & Owens, 49 Ky. (10 B.Mon.) 429, 433 (1850); W. Wharton, Story on Partnership § 232 at 370-371 n. 1 (7th ed. 1881); C. Bates,1 The Law of Partnership § 595 at 629 (1888); see also, W. Lindley, Lindley on Partnership, *862Book III, Ch. X, § 5(3) at 585 n. L (10th ed. 1935) (citing English cases holding a fraudulently induced partner is liable to all creditors of the firm.) Accordingly, the Defendant cannot avoid liability to creditors based on any right to rescind found in partnership law’s common law history.
It should also be noted that the Defendant’s right to rescind the partnership agreement is very questionable. As the Hanes court states: “Where the execution of an instrument is procured by fraud in the inducement or consideration, it is voidable, and may be rescinded before the rights of third parties have intervened.” Hanes v. Giambrone, 14 Ohio App.3d at 406, 471 N.E.2d at 808 (emphasis added). In the case at bar, the rights of third parties have intervened. Another obstacle to rescission is the futility of attempting to adjust the equities between the innocent partners. Edward P. Wolfram, Jr. is the only partner guilty of fraud. He is incarcerated and financially unable to indemnify the other partners against the debts of the partnership. With the large balance owed to creditors, it would appear to be a “vain act” for a state court to void the contract between the partners and attempt to place the Defendant in the position he would have been in if he had not entered into the partnership agreement.
Laches may also prevent rescission. To be entitled to rescission, the defrauded party must act promptly upon the discovery of the fraud. Hanes v. Giambrone, 14 Ohio App.3d at 405, 471 N.E.2d at 807; see also, 2 J. Barrett & E. Seago, Partners and Partnerships Law and Taxation Ch. 8, § 3.5 at 28 (1954); A. Bromberg, Crane and Bromberg on Partnership Ch. 8, § 85 at 488. Here, the Defendant did not file his Counterclaim for rescission until April 12, 1985, more than two (2) years after the discovery of Wolfram’s fraud in February of 1983. See, e.g., Zapffe v. McElroy, 364 S.W.2d 299, 301 (Tex.Civ.App.1962) (Summary Judgment granted against defrauded partner seeking rescission more than two (2) years after discovery of the fraud). It is unclear what effect Mr. Thompson’s Affidavit would have in this case. The Affidavit only deals with the discovery of the timing of the fraud. Moreover, the Seventh Defense and Counterclaim were filed prior to Mr. Thompson’s knowledge of that timing.
Both parties have spent considerable effort discussing liability under an es-toppel theory, and the need to prove that each creditor relied on the representation that Mr. Thompson was a partner in Bell & Beckwith. In light of the cases cited above, the estoppel theory is not necessary to the Trustee’s case. Nevertheless, in the present case, there was an ongoing partnership with a certificate on file with the State of Ohio. Under these circumstances, no proof of reliance is required to hold an actual partner liable. See, Van Andel v. Smith, supra; see also, In re Lamb, 36 B.R. 184, 188 (E.D.Tenn.1983). The present case is distinguishable from Montgomery Ward & Co. v. Barger, 108 Ohio App. 67, 160 N.E.2d 554 (1958) where the plaintiff failed to prove that an actual partnership existed. Thus, if necessary, the Trustee could prevail under O.R.C. § 1775.15.
Adopting the Defendant’s theories would simply encourage partners to collusively “defraud” each other into entering into the partnership agreement so that they might be protected from possible partnership losses. As the Securities Investor Protection Corporation has pointed out, promoting such a policy would be particularly inappropriate in the setting of the securities industry, where it is generally presumed, as a matter of law, that “customers” of a brokerage firm rely on the existence of adequate capitalization. See, Scott v. Deweese, 181 U.S. 202, 21 S.Ct. 585, 45 L.Ed. 822 (1901); In re Weis Securities, 605 F.2d 590 (2d Cir.1978).
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.
Accordingly, the Defendant’s Seventh Defense and Counterclaim being legally insufficient to avoid liability on the Trustee’s *863Complaint, and consequently unrelated to liquidation of Bell & Beckwith, it is
ORDERED that the Defendant’s Seventh Defense be, and is hereby, Stricken. ■
It is FURTHER ORDERED that the Trustee’s Motion for Summary Judgment on the Defendant’s Counterclaim be, and is hereby, Granted.
. Clement Bates was a member of the Cincinnati Bar and co-authored Ohio Digest (1875). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491155/ | BENCH DECISION/ORDER
HELEN S. BALICK, Bankruptcy Judge.
The cause for debtor’s motion for a preliminary injunction and its underlying complaint is Noma and Brown’s proceeding with discovery against RPM in the District Court for the Western District of Missouri. The discovery permitted by that Court’s order is limited to the taking of two depositions of former Gates’ employees, requests for production of documents and answers to interrogatories. One of the depositions was taken and is critical to a pending settlement as to Noma.
Gates contends that the action taken by Noma and Brown in the Western District of Missouri violated the provisions of 11 U.S.C. § 362(a) in that they were doing indirectly what they are prohibited from doing directly. The § 362(a) provisions are not available nor do they inure to the benefit of non-debtors. Consequently, there has been no violation of the automatic stay. However, the action taken in the Western District of Missouri requires the court to consider, in its discretion, whether a § 105 preliminary injunction should issue against Noma and Brown. Gates must show that it will be irreparably harmed if that discovery goes forward and a likelihood of success on the merits. The court must balance that harm with that caused Noma and Brown and keep the public interest in mind.
The nature of the discovery permitted by the District Court’s limited order will harm debtor to the extent that it sees the need to participate in the remaining deposition and the costs entailed by counsel. Any participation shall not be a waiver of the stay provisions of § 362(a). On the other hand, inability to complete a proposed settlement of its claim with RPM, which would save harmless Gates, would be a greater harm to Noma and adversely affect the public interest.
There is no likelihood of success on the merits as to those issues of the complaint which flow from a violation of § 362(a). They are dismissed.
Here, we are dealing with a limited order on discovery. The question as to whether any further action should be enjoined is not before the court. Consequently, that matter will go to trial as scheduled.
For the reasons stated, the motion for preliminary injunction is DENIED. The remaining deposition may be rescheduled; the interrogatories and production requests answered.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491156/ | MEMORANDUM AND DECISION ON COMPLAINT TO AVOID MORTGAGES UNDER CODE § 544(a)(1)
ALAN H.W. SHIFF, Bankruptcy Judge.
I.
The parties have stipulated to the following facts. On January 13, 1988, the debtor and Carole Lynn Terkeltaub purchased real estate located at 12 Beachside Common, Westport, Connecticut, and on January 18, 1988, they gave the defendant a $500,-000.00 mortgage deed on that property (the “Prepetition Mortgage”). On January 19, 1988, the Prepetition Mortgage was recorded in the Westport land records. The Pre-petition Mortgage does not contain an executed acknowledgment as required by Connecticut General Statutes § 47-5. See supra at 4. On February 24, 1989, the debtor filed a petition under chapter 11 of the Bankruptcy Code. On May 23, 1989, Colony Savings Bank, a creditor, filed a motion for the appointment of a chapter 11 trustee. See 11 U.S.C. § 1104(a). On July 10, 1989, the debtor and Carole Lynn Terkel-taub gave the defendant a second $500,-000.00 mortgage (the “Postpetition Mortgage”), which included an acknowledgment and was recorded in the Westport land records on July 19, 1989. The Postpetition Mortgage was not authorized by the court. On July 21, 1989, Colony’s motion was granted, and on July 31, 1989, an order entered appointing the plaintiff as chapter 11 trustee.
*49On January 19, 1990, the plaintiff commenced the instant adversary proceeding, seeking to avoid both mortgages. As to the Prepetition Mortgage, he contends that he has the rights and powers of a hypothetical judgment lien creditor under Code § 544(a)(1); that the lack of an acknowledgment voided the defendant’s legal interest in the property as grantee; and that any equitable interest the defendant has under Connecticut General Statutes § 47-17 is subordinate to his subsequent legal interest as a hypothetical judgment lien creditor. As to the Postpetition Mortgage, he contends that it was recorded in violation of the automatic stay. See 11 U.S.C. § 362(a)(4). The plaintiff further contends that the defendant’s grossly inequitable conduct in causing the Postpetition Mortgage to be recorded deprives it of the right to assert its equitable interest in the property under either mortgage.
The defendant concedes that the lack of an acknowledgment nullified its legal rights under the Prepetition Mortgage in relation to the plaintiff, but contends that under Connecticut General Statutes § 47-17 it has an equitable interest in the property; and that the plaintiff is charged with notice of and is subordinated to that prior equitable interest.1 The defendant admits that the Postpetition Mortgage was obtained in violation of the automatic stay.
II.
Code § 544(a) provides:
The trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that 'is voidable by—
(1) a creditor that extends credit to the debtor at the time of the commencement of the case, and that obtains., at such time and with respect to such credit, a judicial lien on all property on which a creditor on a simple contract could have obtained such a judicial lien, whether or not such a creditor exists....
See Robinson v. Howard Bank (In re Kors, Inc.), 819 F.2d 19, 22 (2d Cir.1987) (“Pursuant to [§ 544(a)(1)] the trustee in bankruptcy can avoid unperfected liens on property belonging to the bankruptcy estate.”). In determining the trustee’s rights and priorities as a hypothetical lien creditor, i.e. whether a security interest has been perfected against the trustee, state law is controlling. Id. at 22-23. See also Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 918, 59 L.Ed.2d 136 (1979) (“Property interests are created and defined by state law. Unless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding.”).2
*50Connecticut General Statutes § 47-5(a)(3) mandates that “[a]ll conveyances of land shall be ... acknowledged by the grantor, his attorney or such duly authorized person to be his free act and deed_” (Emphasis added). Thus, the lack of an acknowledgment eliminated the defendant’s legal interest in the property, see Bowne v. Ide, 109 Conn. 307, 312-14, 147 A. 4 (1929); Dart & Bogue Co., Inc. v. Slosberg, 202 Conn. 566, 573-75, 522 A.2d 763 (1987), but did not invalidate the mortgage for all purposes. Under Connecticut General Statutes § 47-17, “[a]n unacknowledged deed ... may be recorded in the records of the town in which the land is situated; and such record shall be notice to all the world of the equitable interest thus created.” Thus, the recording of the Pre-petition Mortgage gave the defendant an equitable interest in the property, and the plaintiff is charged with notice of that interest. But, contrary to the defendant’s argument, that notice is of no significance here because under Connecticut law a defective mortgage is invalid against a subsequent lien creditor, even if that creditor has notice of that mortgage. See Andrews v. Connecticut Properties, Inc., 137 Conn. 170, 172-73, 75 A.2d 402 (1950) (“The fact that [the subsequent attaching creditor] had notice of the state of the title was immaterial_); Ives v. Stone, 51 Conn. 446, 458 (Conn.1883) (“When the question arises between two creditors as to the validity of a mortgage the matter of notice is not material.”). See also In re Minton Group, Inc., 27 B.R. 385, 391 (Bankr.S.D.N.Y.1983) (discussing New Jersey law), aff'd, 46 B.R. 222 (S.D.N.Y.1985).3 I therefore conclude that the Prepetition Mortgage is avoidable by the plaintiff.
The Postpetition Mortgage is void. Code § 362(a) provides:
[A] petition filed under section 301 ... of this title ... operates as a stay, applicable to all entities, of—
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(4) any act to create, perfect, or enforce any lien against property of the estate....
The creation and recording of the Postpetition Mortgage violated that provision. Actions taken in violation of the automatic stay are void. 48th Street Steakhouse, Inc. v. Rockefeller Group, Inc. (In re 48th Street Steakhouse, Inc.), 835 F.2d 427, 431 (2d Cir.1987), cert. denied, 485 U.S. 1035, 108 S.Ct. 1596, 99 L.Ed.2d 910 (1988).
III.
For the foregoing reasons, with respect to the plaintiff’s successor interest in the property, IT IS ORDERED that judgment *51enter avoiding the Prepetition Mortgage. and declaring the Postpetition Mortgage* void.4
. The defendant makes two alternative arguments which are easily disposed of. First, the defendant cites Connecticut Nat'l Bank v. Esposito, 210 Conn. 221, 554 A.2d 735 (1989), Dart & Bogue Co., Inc. v. Slosberg, 202 Conn. 566, 522 A.2d 763 (1987), and this court’s decision in Pinkus v. Union Trust Co. (In re Schreier), 111 B.R. 25 (Bankr.D.Conn.1990), and argues that the mortgage is valid despite the lack of an acknowledgment because it gives reasonable notice of the obligation secured. Those cases are inapposite. In each, there was no dispute as to whether the mortgage complied with the formal requirements imposed by the Connecticut statutes. The issues of whether a mortgage meets the formal statutory requirements and whether a mortgage which does meet the formal requirements adequately describes the obligation secured are separate and distinct.
Second, the defendant claims that the Prepetition Mortgage was cured by Section 3(a)(1) of Special Act 89-6 (the "Validating Act”), which provides that no mortgage or deed shall be deemed invalid because it was not acknowledged. However, Section 9 of the Validating Act provides that it is not applicable “if any action, suit or proceeding has been commenced ... on or before the effective date of this act.” The effective date of the Validating Act was April 5, 1989, and as noted the petition was filed on February 24, 1989. I conclude that the commencement of the bankruptcy case constitutes the commencement of a proceeding within the meaning of Section 9.
. I note that the phrase "without regard to any knowledge of the trustee” in § 544(a) refers to any personal knowledge the trustee may have. E.g., Bezanson v. Laconia Sav. Bank (In re Bertholet Enter., Inc.), 88 B.R. 9, 11 (Bankr.D.N.H.1987). It is necessary to look at state law to determine whether constructive notice will im*50pair the trustee’s avoiding powers as a hypothetical lien creditor. Id.
. It is emphasized that the principal thrust of the plaintiff's argument arises under Code § 544(a)(1), not (a)(3). See Plaintiffs Brief at 3-4. The former subsection relates to a trustee's status as a hypothetical lien creditor, the latter to the trustee’s status as a bona fide purchaser.
The defendant suggests that there is no distinction between a bona fide purchaser’s rights and those of a lien creditor and cites several early Connecticut cases in support of his argument that a defective mortgage deed is enforceable against both bona fide purchasers and attaching creditors who have notice of that mortgage. E.g., Chamberlain v. Thompson, 10 Conn. 243 (Conn.1834); Watson v. Wells, 5 Conn. 468 (Conn.1825). Assuming that those cases support the defendant’s position, and it appears that only the Chamberlain case might, the holding in Ives v. Stone, supra, 51 Conn, at 458, which followed all of the cases relied upon by the defendant, clearly blunts the force of the defendant’s argument. In Ives the Court distinguished between bona fide purchasers, who may not have notice, and attaching creditors, for whom notice is irrelevant. Bankruptcy courts have recognized the distinction. E.g., In re Minton Group, supra, 27 B.R. at 391 ("Constructive notice does not preclude one from becoming a judicial lien creditor or an unsatisfied execution creditor as it does in the case of a bona fide purchaser, where such notice affects the purchaser’s bona fide status.").
. "Ordinarily, the trustee is merely a successor in interest to the debtor and therefore he should take no greater interest in the property than ' held by the debtor.” Pitrat v. Morris (In re Santa Fe Adobe, Inc.), 34 B.R. 774, 776 (9th Cir.BAP 1983). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491158/ | HELEN S. BALICK, Bankruptcy Judge.
This is the Court’s Opinion on the Debtors’ objections to First Federal Savings & Loan’s proof of claim. In addition to the parties’ stipulation of fact, the Court has taken judicial notice of its record.
The Debtors do not dispute that First Federal is entitled to the principal and interest portion of a default judgment entered August 24, 1988, on First Federal’s mortgage foreclosure complaint in Superior Court. They do dispute First Federal’s claim to the extent it includes the late charges and attorneys’ fees portion of that judgment. The Debtors took no action with respect to that judgment before filing their bankruptcy case at 8:59 a.m. on January 10, 1989, which stayed a Sheriff’s sale of their real property scheduled for that morning.
The Debtors contend that the claim is time barred or, alternatively, First Federal as the holder of a non-consensual lien is not entitled to late charges or attorneys’ fees under 11 U.S.C. § 506(b). Neither argument is meritorious.
The Debtors listed the judgment on their schedules as being in the approximate disputed amount of $90,000. The order for the “341” meeting directed that any creditor notified that his claim is disputed must file a proof of claim on or before the first date set for disclosure statement hearing. Debtors did not comply with Local Order # 11 requiring debtors within 15 days of the filing of their schedules and statements to notify holders of disputed claims of their position. The Debtors stated their position in their disclosure statement, which was noticed for hearing on October 10 and to which First Federal filed an objection on October 4. That objection went not only to the lack of adequate information but also stated with specificity a claim in the total amount of $114,481.10.
An amended disclosure statement was approved on October 10. On November 13, First Federal filed a proof of claim in the amount of $81,262.15, plus interest, late charges and attorneys’ fees. The Debtors filed an amended plan on November 16 which was confirmed November 20 over First Federal’s objection. The next day, First Federal filed an amended proof of claim for $95,848.44, plus interest. This amount reflects the dollar amount of the default judgment and conforms to the Court’s ruling of November 20 that First Federal was not entitled to any late charges or attorneys’ fees subsequent to the entry of judgment.
Section 506(b) of title 11, United States Code, permits a creditor whose claim is secured by property greater than the amount of its claim to recover fees, costs or charges which are provided for in the agreement from which the claim arose.
First Federal’s claim arose from the note and mortgage the Debtors executed in connection with a loan. The note and mortgage provided for the payment of late charges and attorneys’ fees and were approximately included in the default judgment. Thus, at the time of the bankruptcy filing, First Federal held a valid state court judgment based upon a consensual lien in the amount of $95,848.44, plus interest.
Having determined that the late charges and attorneys’ fees stated in the default judgment are an appropriate part of First Federal’s claim, the question is whether the disputed portion of First Federal’s claim is time barred because of its *103failure to file a proof of claim before the first scheduled disclosure statement hearing on October 10. First Federal’s pleading to the Debtors’ disclosure statement specifically states the nature of its claim, its components and respective amounts, and an intent to hold the Debtors liable for the total amount of the judgment plus interest from the judgment entry date. It meets the test for an informal' proof of claim and is subject to post bar date amendment so long as there is no attempt to establish a new theory of recovery. In Re Mitchell, 82 B.R. 583 (Bkrtcy.W.D.Okl.1988).
The first formal proof of claim does not assert any new theory of recovery. It is based on the same judgment but reflects an increased amount for accrued interest, late charges and attorneys’ fees. The second proof of claim conforms to the Court’s rulings on issues relating to the claim during the hearing on confirmation. Therefore, First Federal Savings & Loan’s claim in the amount of $95,848.44, plus interest at the judgment rate to January 10,1989, is allowed.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491160/ | OPINION AND ORDER ON OBJECTION TO CONFIRMATION OF MODIFIED CHAPTER 13 PLAN
BARBARA J. SELLERS, Bankruptcy Judge.
This matter is before the Court on the requested confirmation of a Chapter 13 *327plan proposed by Delbert Roy Smith, III (“Debtor”). Ford Consumer Credit Co. (“Ford”) objected to confirmation and the matter was heard by Judge Cole of this Court. Following that hearing this Court received the matter under advisement, read the hearing transcript, and reviewed all relevant pleadings.
The Court has jurisdiction in this matter under 28 U.S.C. § 1334 and the General Order of Reference previously entered in this district. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(L) which this bankruptcy judge may hear and determine.
The Debtor filed a petition and plan under Chapter 13 of the Bankruptcy Code on October 2, 1989. As presently proposed the plan calls for payments to the Chapter 13 trustee of $200.00 each month and a lump sum payment of at least $5,000.00 each year from commissions the Debtor expects to earn from a second job. The plan further proposes payment in full of all allowed secured and priority unsecured claims and a 10% dividend to allowed general unsecured claims.
The Debtor’s schedules listed Ford as the holder of a consensual third mortgage against the Debtor’s residential real property (the “Property”). More accurately, however, Ford holds a judgment against the Debtor in the amount of $5,148.36. That judgment was certified and filed of record on June 3, 1987, thereby creating a judicial lien against the Property.
There are two consensual mortgages against the Property which are prior to Ford’s lien. The first mortgage in favor of State Savings Bank has an unpaid balance of $2,352.58. A note to Household Realty Corporation secured by a second mortgage is estimated by the Debtor to have an outstanding balance of $4,500.00. Unpaid real property taxes in the amount of $304.00 are a statutory lien also prior to Ford’s lien. There are several judgment liens junior to Ford’s interest.
It is the Debtor’s intention to pay Ford the full amount of its allowed secured claim with a discount factor, as required by 11 U.S.C. § 1325(a)(5)(B). The proper amount of that allowed secured claim is the subject of this dispute.
The Debtor submitted an appraisal which indicates a market value for the Property of $16,000.00. After subtraction from that value for the two mortgages, the tax lien and an estimated 10% for hypothetical costs of sale, $7,243.42 remains as the estate’s interest. See In re Neal, 10 B.R. 535 (Bankr.S.D.Ohio 1981). The Debtor maintains that Ford is entitled to an allowed secured claim only after the estate’s interest in the Property has been reduced further by his $5,000.00 homestead exemption, asserted pursuant to 11 U.S.C. § 522(b)(2) and Ohio Revised Code § 2329.66(A)(1). In support of his position, the Debtor relies on the provisions of 11 U.S.C. § 506(a) and the holding of In re Smith, 92 B.R. 287 (Bankr.S.D.Ohio 1988). The Debtor further declares that he is not attempting to avoid Ford’s lien interest under 11 U.S.C. § 522(f)(1), but merely wishes to value Ford’s claim for purposes of repayment through the Chapter 13 plan.
Ford, however, relies upon the recently decided case of Ford Motor Credit Corp. v. Dixon (In re Dixon), 885 F.2d 327 (6th Cir.1989), as corrected, reh’g. denied, 1989 WL 106653, 1989 U.S. App. LEXIS 17065. Ford asserts that Dixon deprives a Chapter 13 debtor in Ohio from claiming a homestead exemption prior to the interest of a judgment lien creditor unless the real property for which the exemption is sought has been subjected to actual foreclosure, garnishment or execution process. No such actions are pending against the Property. Therefore, Ford believes that its allowed secured claim is determined by a comparison of the amount of its claim and the value remaining in the Property after reduction of the estate’s interest only for prior liens, real property tax liens and hypothetical costs of sale.
If the Debtor is correct, the amount of Ford’s allowed secured claim would be $2,243.42. If Ford is correct, its claim of $5,148.36 will be fully secured.
Section 506(a) of Title 11, United States Code controls the allowance of Ford’s secured claim. That provision indicates that *328an allowed secured claim is determined by the value of the creditor’s interest in the estate’s interest in property against which the creditor has a lien. In turn, the estate’s interest is limited by the value of the debtor’s interest in the property. Section 506(a) does not create substantive rights of avoidance, however. Further, exemptions are generally available to a debtor only against unliened value or equity. Unless the Debtor has a right to avoid the effect of Ford’s lien under some other provision of the Bankruptcy Code, his claim of exemption will be junior to Ford’s lien interest to the extent Ford’s lien interest is otherwise valid under state law.
By reversing the Bankruptcy Court in Dixon, the Court of Appeals for the Sixth Circuit reversed the opinion cited in Smith, the case upon which the Debtor relies. In Dixon, the Court of Appeals made it clear that the effect of a judicial lien may be avoided by an Ohio debtor only if the debtor’s right to an exemption is impaired by that lien. And under Ohio law, absent “an attachment or other involuntary disposition of the property, the debtor’s exemption is not impaired.” Dixon, 885 F.2d at 330, quoting Nat’l Deposit Guarantee Corp. v. Peck (In re Peck), 55 B.R. 752, 755 (N.D.Ohio 1985). The reason for this nonimpairment, according to the Dixon court, is that the exemption cannot be impaired if it cannot be asserted. Absent involuntary disposition of the Property, no right arises to assert a homestead exemption against the interest of the holder of a judicial lien. Dixon at 330.
This Court does not believe Ohio intended to limit a debtor’s right to claim an exemption in a manner which is not limited by the federal exemption scheme set forth in 11 U.S.C. § 522(d). Rather, Ohio intended by its opt-out legislation to control the amount and type of property which could be exempted from the reach of a debtor’s creditors. It also can be argued that the filing of a bankruptcy case, including a petition under Chapter 13, acts as a law suit in which one’s creditors must set up their interests in all non-exempt property of the debtor in the same manner as would occur in the involuntary alienation of such property specified by the Ohio exemption statute.
Whatever arguments could be made in this regard, however, the Court of Appeals for this Circuit in Dixon has determined that the mere filing of a Chapter 13 petition does not effect an execution process which permits a debtor to assert a homestead exemption against the interests of a judgment lien creditor. This Court is bound by the Dixon holding and must rule accordingly. If the Ohio legislature did not intend that result, it will have to clarify its statutory provisions accordingly. Because the exemption is not assertable against Ford’s judicial lien, that lien and Ford’s secured claim attach to whatever value remains in the Property after reduction for sale costs, prior mortgages and prior tax liens, up to the amount of Ford’s allowed claim.
Based upon the foregoing, Ford’s objection to confirmation is- sustained and confirmation of the Debtor’s proposed plan must be, and the same is hereby denied. The Debtor’s claim of exemption may not be used to avoid the effect of Ford’s judgment lien in determining the amount of Ford’s allowed secured claim. The Debtor is given twenty (20) days from the entry of this order to amend his plan or take whatever action is appropriate under the circumstances.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491162/ | MEMORANDUM AND ORDER
KENNETH J. MEYERS, Bankruptcy Judge.
Following a determination by this Court that the debtors were not entitled to exempt the interest of debtor J. Lloyd Tomer in a Church of God, Inc., pension,1 the trustee brought this turnover action to compel the Board of Pensions of the Church of God, Inc. (“Board”), to pay over the current balance of the debtor’s account for the benefit of the bankruptcy estate. The Board answered and filed a motion for summary judgment in which it asserted that the pension plan has the attributes of a spendthrift trust and is excluded from the debtors’ estate under 11 U.S.C. § 541(c)(2). The trustee filed a cross motion for summary judgment, and the facts are not in dispute. Having considered the arguments of the parties, the Court finds that that portion of the debtor’s pension representing his voluntary contributions to the plan is an asset of the debtors’ estate and must be paid over to the trustee.
The debtor, who became an ordained minister with the Church of God in 1969, is a participant in the Contributory Reserve Pension Plan of the Church of God, Inc. The pension plan is funded by a combination of member and congregation contributions. The plan provides that the member (debtor) shall contribute 3% of his salary and the congregation which employs him shall contribute 8% of the member’s salary. Both the member and the congregation may make additional optional contributions, which are to be allocated as member or congregation contributions, respectively. When a member attains the age of 60 years or completes 40 years of service, the com*393bined accumulation of the member and congregation contributions is applied to purchase a retirement annuity for the member.
Article VIII provides that if a member becomes ineligible under the plan before the age of retirement or 40 years of service, he may elect to withdraw part or all of the accumulated member contributions. The amount remaining in the member’s account will be fully vested in the member and will continue to draw interest until it can be applied toward an annuity or death benefit as provided in the plan. The member accumulation that may be withdrawn consists solely of member contributions and does not include interest on those amounts.
The debtor is 56 years of age and is still an ordained minister of the Church of God, although he is no longer employed as a minister to a congregation. The Board concedes that the debtor could become eligible to withdraw the accumulated member contributions under the plan by the act of resigning his ordination as a minister of the Church of God. The current balance in the pension fund for the debtor is $51,-' 273.35, and the total member contribution, which is the amount the debtor actually contributed to the plan, is $6,848.10.2
At hearing, the Board argued for exclusion of the entire pension from the debtors’ estate, or, in the alternative, for exclusion of those amounts other than the member accumulation portion of the pension. The Board noted that, under a clause prohibiting alienation or assignment of an interest in the plan, the plan assets could neither be levied upon by creditors nor transferred by the debtor. The Board did not dispute the trustee’s characterization of the debtor’s contributions as “voluntary,” but asserted that since the debtor has no present right to withdraw the member accumulation portion of the plan, neither should the trustee be able to reach the debtor’s interest for the benefit of unsecured creditors.
The trustee argues preliminarily that the Board has no standing to raise the issue of whether the pension constitutes property of the debtors’ estate because of this Court’s previous order sustaining the trustee’s objection to the debtors’ claim of exemption. In its order of January 3,1990, the Court made no ruling concerning inclusion of the pension interest as property of the estate but ruled only that the debtors failed to show entitlement to an exemption under Ill.Rev.Stat., ch. 110, par. 12-1001(g)(5) (1987). The Board was not joined as a party in the prior proceeding and, while the debtors could have raised the issue of exclusion from property of the estate in that proceeding, their failure to do so does not preclude the Board from making that argument now. Cf. In re Loe, 83 B.R. 641 (Bankr.D.Minn.1988): issue of whether pension interest was property of estate determined in adversary proceeding after the trustee’s objection to exemption was sustained in prior proceeding.
The scope of the bankruptcy estate under the Bankruptcy Code is quite broad and consists of “all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1). In general, property becomes part of the debtor’s estate regardless of any restrictions which may have been placed on its transfer. 11 U.S.C. § 541(c)(1). An exception to this rule is found in § 541(c)(2), which provides that “[a] restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankrupt-cy law is enforceable in a case under this title.” 11 U.S.C. § 541(c)(2).
The pension plan in the present case contains a standard ERISA clause restricting the transfer of a beneficial interest under the plan by alienation or assignment, “whether voluntarily or involuntarily, or directly or indirectly.”3 The majority of *394courts addressing the exclusion of ERISA plans under § 541(c)(2) have found such anti-alienation provisions to be insufficient, without more, to result in exclusion of a debtor’s benefits as property of his estate. Rather, it is generally held that a debtor’s interest in a pension plan will be included in the bankruptcy estate unless the plan qualifies as a spendthrift trust under state law. In re Silldorff, 96 B.R. 859 (C.D.Ill.1989); In re Balay, 113 B.R. 429 (Bankr.N.D.Ill.1990); see In re Perkins, 902 F.2d 1254 (7th Cir.1990).4
In this case, the debtor’s pension provides that it is to be governed by the laws of the state of Indiana, which recognizes spendthrift trusts by statute and case law. Traditionally, there are three requirements for a spendthrift trust: (1) the settlor may not be a beneficiary of the trust plan, (2) the trust must contain a clause barring any beneficiary from voluntarily or involuntarily transferring his interest in the trust, and (3) the debtor-beneficiary must have no present dominion or control over the trust corpus. See Matter of Jones, 43 B.R. 1002 (N.D.Ind.1984); Matter of Gifford, 93 B.R. 636 (Bankr.N.D.Ind.1988). The degree of control which the beneficiary exercises over the trust corpus is the principal consideration underlying the determination of spendthrift trust status. Jones; Gifford.
In 1987, the Indiana legislature amended the state’s spendthrift trust statute.5 Indiana Code § 30-4-3-2 now reads:
(a) The settlor may provide in the terms of the trust that the interest of a beneficiary may not be voluntarily or involuntarily transferred before payment or delivery of the interest to the beneficiary by the trustee.
(b) Except as otherwise provided in subsection (c), if the settlor is also a beneficiary of the trust, a provision restraining the voluntary or involuntary transfer of his beneficial interest will not prevent his creditors from satisfying claims from his interest in the trust estate.
(c)Subsection (a) applies to a trust that meets both of the following requirements, regardless of whether or not the settlor is also a beneficiary of the trust:
. (1) The trust is a qualified trust under 26 U.S.C. § 401(a).
(2) The limitations on each beneficiary’s control over the beneficiary’s interest in the trust complies with 29 U.S.C. § 1056(d).
Subsection (c) of the amended statute creates an exception to the traditional rule against self-settled or beneficiary created spendthrift trusts, provided the trust is qualified under 26 U.S.C. § 401(a) and meets the requirements of 29 U.S.C. § 1056(d). In the instant case, the debtor has made voluntary contributions to the pension plan and may be said to be both a settlor and a beneficiary as to that portion of the plan consisting of member contributions. Under the traditional test for spendthrift trusts, the member accumulation portion of the plan would not qualify as a spendthrift trust so as to be excluded from the estate under § 541(c)(2). However, because the plan contains an anti-alienation clause complying with 29 U.S.C. § 1056(d), the debtor’s plan would constitute a valid spendthrift trust under Indiana Code § 30-4-3-2 despite its self-settled nature.
While amended § 30-4-3-2 alters the first requirement of a spendthrift trust that the settlor not also be a beneficiary of the trust, the additional requirement that a beneficiary enjoy no present dominion and control over trust assets remains intact. Matter of Brown, 86 B.R. 944 (N.D.Ind.1988); Gifford. As noted above, the beneficiary’s inability to gain access to or demand distribution from the trust corpus is the primary element of a spendthrift trust. The determination of whether a trust fulfills this most quintessential of require*395ments must be made upon examination of all aspects of a particular case. Jones; Gifford.
The Jones and Gifford decisions illustrate the factual inquiry necessary to the determination of whether a particular plan complies with the control requirement for a spendthrift trust. In Jones, the debtor could make no withdrawal from her employer’s pension plan even if she discontinued participation in the plan. The only way the debtor could gain access to any portion of the plan was to retire, be terminated, become disabled, or die. The court found this restriction on the debtor’s ability to reach plan assets to be sufficient to qualify the plan as a spendthrift trust.6
In Gifford, the debtor was the sole beneficiary of a retirement plan established and administered by his professional corporation, of which he was the only shareholder and director. The plan provided that the employer corporation could terminate the plan and, in its discretion, direct distribution of the plan’s assets to the debtor as plan participant. The Gifford court, noting that the bankruptcy estate succeeds to powers that a debtor may exercise for his own benefit, concluded that the debtor’s right to gain access to the plan corpus “supports a finding of present control over the funds when [the debtor] filed bankruptcy.” 93 B.R. at 640. Because the plan did not satisfy the control requirement for a spendthrift trust under Indiana law, the court ruled that it was property of the debtor’s bankruptcy estate.
The instant case is like Gifford in that the debtor, at the time of filing bankruptcy, had the ability to withdraw the member accumulation portion of his pension assets by the act of resigning his ordination as a minister of the Church of God. He is no longer employed as a minister and would suffer no loss of employment as a result. Indeed, the only thing he would lose is the right to make further contributions to the pension plan.7 Thus, the debtor here, like in Gifford, could compel a payment of plan assets by ending his participation in the pension plan.
In a true spendthrift trust, a beneficiary can take no action to initiate an early termination of the trust or invasion of the trust corpus. A right to control distribution from trust funds is inimical to the purpose of a spendthrift trust, which is to provide for the maintenance of another while protecting the beneficiary from his own improvidence or incapacity. Because the debtor could access the entire amount of his member contributions by the voluntary act of resigning his ordination as a minister, he has effective dominion and control over these assets sufficient to disqualify this portion of the plan as a spendthrift trust.
The trustee, in her complaint, seeks turnover of the total assets in the debtor’s pension plan, which includes the member contributions and the congregation contributions as well as interest on those amounts. Under the terms of the plan, however, the debtor could withdraw only the member contribution portion by resigning his ordination at this time. The amount remaining in the pension plan is shielded from his dominion and control and thus retains its character as a spendthrift trust. The disqualification of a portion of a plan as a spendthrift trust does not bring the debtor’s entire interest, including those funds to which he has no rights of withdrawal, into property of the estate. The funds to which the debtor has no rights of withdrawal satisfy traditional spendthrift *396requirements and are excluded under § 541(c)(2). See In re Peterson, 88 B.R. 5 (Bankr.D.Me.1988); In re Wallace, 66 B.R. 834 (Bankr.E.D.Mo.1986). The Court finds, therefore, that only the member accumulation portion of the debtor’s plan constitutes property of the estate subject to the trustee’s turnover action.
The recent decision of the Seventh Circuit Court of Appeals concerning a pension plan governed by Indiana law, In re LeFeber, 906 F.2d 330 (7th Cir.1990), is distinguishable from this case in that the court there considered whether an anti-alienation clause complying with § 1056(d) constituted a restriction on transfer of plan benefits sufficient to meet Indiana spendthrift trust requirements. Section 1056(d), which requires inclusion of a clause prohibiting alienation or assignment of benefits in a qualified ERISA plan, provides that a plan allowing a revocable assignment of ten percent of plan benefits will not be disqualified on that basis. 29 U.S.C. § 1056(d)(2). The trustee argued that this ten percent interest should be included in the debtor’s bankruptcy estate because its transfer was not restricted under the debtor’s plan. The LeFeber court found, however, that the Indiana legislature’s specific reference to § 1056(d) in defining spendthrift trusts meant that the legislature meant to protect the ten percent that could be revocably assigned under § 1056(d).
In the present case, the debtor’s plan contains an absolute restriction on alienation or assignment of plan benefits, and there is no question, as in LeFeber, regarding the sufficiency of the plan’s anti-alienation clause. However, the plan here, unlike that in LeFeber, contains a provision allowing the withdrawal of plan benefits prior to completion of the plan according to its terms. While the debtor’s plan precludes creditors from reaching the plan assets, it fails to protect the plan assets from invasion by the debtor himself. Thus, the plan fails as a spendthrift trust to the extent that the debtor can compel a premature distribution of plan assets, as this is contrary to the purpose and requirements of a spendthrift trust under Indiana law.
The Board asserts that even if fund assets are found to be property of the estate, the trustee cannot recover these funds for the estate because, at the time the debtor filed his bankruptcy petition, the debtor had not resigned his ordination and had no present right to withdraw his contributions from the plan. The Board relies upon In re Silldorff, in which the court, after finding that the debtors’ interests in the subject pension plans were property of their bankruptcy estates because plan participants could access the vested corpus of their pension by terminating their employment, concluded that the trustee had no right to compel distribution of the pension funds because the debtors had not terminated their employment at petition date and had no present right to demand the funds. See also In re Balay: trustee not entitled to receive funds which the debtor himself “was not able to presently access” because he had not terminated his employment. Both the Silldorff and Balay courts cited the well-established principle that a trustee’s claim to estate property is no greater than a debtor’s claim at the time of filing. See 11 U.S.C. § 541(a)(1).
Like at least one court that has rejected the Silldorff position, this Court finds the reasoning of Silldorff and Balay to be anomalous and inconsistent. See In re Lyons, 114 B.R. 572 (Bankr.C.D.Ill.1990). In both instances the courts found that the debtors had the ability to access the funds in their pension plans, resulting in disqualification of the plans as spendthrift trusts. Yet, after finding that the debtors could reach the trust assets, these courts ruled that the trustee had no right to the funds.
To take this reasoning to its logical extreme, suppose the debtor here, at the time of filing bankruptcy, had become disqualified under the Church of God pension plan by resigning his ordination as a minister but had not yet applied for distribution of his member contributions as provided in Article VIII of the plan.8 In that instance, all would readily agree that the trustee *397would have the right to take the additional step of making a demand for the funds. It would not be necessary for the trustee to compel the debtors to seek distribution from the pension plan in order to bring the funds into the bankruptcy estate. In the same way, since the debtor, through his voluntary action of resigning his ordination as a minister, could compel distribution of pension funds, the trustee has a concomitant right to the funds regardless of whether the debtor has taken the step of actually resigning his ordination or not. Cf. In re Smith, 103 B.R. 882 (Bankr.N.D.Ohio 1989): trustee entitled to turnover of plan funds of debtor who had reached retirement age but had not yet requested distribution under terms of plan.
The Court agrees with the analysis of the court in In re Schmitt, 113 B.R. 1007 (Bankr.W.D.Mo.1990) and finds its statement of the issue to be well-put. Declining to follow Silldorff, the court stated:
The Silldorff court equates the right of distribution from the pension with termination of employment. The proper analysis seems to be not whether the debtor is presently entitled to receive a distribution, but instead, whether the debtor has rights which allow him to control distribution. It is the debtor’s rights to exercise dominion and control over the profit sharing plan that render the plan unenforceable as a spendthrift trust in this case. The trustee, although having no power to terminate the debt- or’s employment relationship ..., succeeds to the same rights to control distribution of the proceeds. Since the debtor can absolutely obtain the proceeds, at any time, by terminating his employment, the trustee in bankruptcy succeeds to the absolute right to compel distribution.
Schmitt at 1013.9
The Court has found that the debt- or’s interest in the Church of God, Inc., pension is property of the estate to the extent the debtor had the ability to withdraw funds before completion of the plan term by resigning his ordination as a minister. Because the debtor, through his voluntary action, could compel payment of his accumulated member contributions under the plan, the Board must pay over this amount to the trustee as property of the estate. The Board, therefore, is directed to determine the exact amount of member contributions held in the debtor’s account at the commencement of the debtor’s bankruptcy case and remit this amount to the trustee.
IT IS ORDERED that the Board’s motion for summary judgment is GRANTED IN PART and DENIED IN PART and the trustee’s cross motion for summary judgment is GRANTED IN PART and DENIED IN PART.
. In the Court’s order of January 3, 1990, it sustained the trustee’s objection to the debtors’ claim of exemption under Ill.Rev.Stat., ch. 110, par. 12-1001(g)(5) (1987). The Court found that the debtors were not entitled to exempt their interest in the pension assets because the statutory language exempts a "payment” rather than any lump sum asset. The Court further found that, even if the debtors could show a qualified payment, they had made no showing that such payment was necessary for their support or that of a dependent.
. This is the balance shown on the pension account statement dated March 22, 1990. A statement dated August 3, 1989, which coincides more closely with the date of the debtors’ bankruptcy filing on July 7, 1989, shows the member’s contribution to be $6,584.10.
. The provision restricting alienation or assignment is required by ERISA (Employee Retirement Income Security Act of 1974), 29 U.S.C. § 1056(d), and is necessary for tax qualification under the Internal Revenue Code, 26 U.S.C. § 401(a)(13).
. The legislative history of § 541(c)(2) indicates that Congress intended to preserve the status of traditional spendthrift trusts, as recognized by state law, enjoyed under the old Bankruptcy Act. In re Goff, 706 F.2d 574 (5th Cir.1983).
. Neither of the parties' counsel in this case referred to the amended Indiana statute relating to spendthrift trusts. Since Indiana law governs the interpretation of the pension plan at issue, the Court is at a loss to explain counsel’s lack of diligence in bringing this provision to the Court’s attention.
. Courts are divided on the question of whether a plan beneficiary’s ability to withdraw plan assets by terminating his or her employment constitutes sufficient control to preclude the plan from being characterized as a spendthrift trust. In re Perkins, 902 F.2d at 1257, n. 2; cf. In re Boon, 108 B.R. 697 (W.D.Mo.1989): employment termination is a significant restraint upon withdrawal of employee benefits so that ability to access funds by quitting job does not disqualify plan as spendthrift trust, with In re Silidorff: even though ramifications of quitting one’s job to gain access to pension interest may be sufficiently severe to prevent abuse, beneficiary’s power to compel distribution of plan corpus is antithetical to the nature of a spendthrift trust.
. Article VIII provides that any member who becomes ineligible under the plan can make no further member contributions to the pension plan.
. Article VIII provides that in the event a member becomes ineligible under the plan, “upon application a member may elect to be paid part *397or all of the member accumulation of the member.” Emphasis added.
. The district court in In re Perkins, 1988 WL 120651, 1988 LEXIS 12360 (N.D.Ill.1988), vacated by the Court of Appeals on procedural grounds, 902 F.2d 1254 (7th Cir.1990), likewise found that the debtor's "degree of access" at the commencement of the case was not determinative. The court observed that if so, the debtor could resign and make a demand for payment at any time and the pension account would pass outside the debtor’s estate. The court stated that it did not believe Congress intended such an anomalous result. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491163/ | MEMORANDUM OPINION
MARK B. McFEELEY, Chief Judge.
This matter came before the Court on plaintiffs’ complaint to determine dis-chargeability of debt filed April 16, 1990, and defendants’ motion to dismiss filed May 16, 1990. The parties agreed to submit a stipulation of facts and legal memo-randa for the Court’s consideration. Having considered the documents submitted by the parties, having consulted the proper authorities and being otherwise fully informed and advised, the Court issues this memorandum opinion.
FINDINGS OF FACT
The parties have stipulated to the following facts:
1. That the parties will submit the issue on briefs and that no oral argument is required unless requested by the Court.
2. That the parties will file memorandum briefs pursuant to the Order Resulting From the July 13, 1990, Scheduling Conference.
3. That the Court may consider the exhibits attached to the pleadings, the pleadings, the bankruptcy petition and schedules in this bankruptcy, in the prior bankruptcy No. 7-88-01644 MA; and may take judicial notice of all of these pleadings including any proofs of claim or other filed documents.
4. That the Barths were creditors of the Samoras at the time the prior bankruptcy was filed and dismissed.
5. That the only issue before the Court is: Whether or not the debt of the Samoras to the Barths in the amount of $20,901.21 plus interest and attorneys fees should be discharged in the Samoras’ bankruptcy because the Samoras’ prior bankruptcy was dismissed for failure to obey an order of the Bankruptcy Court or whether this debt should be determined to be nondischargeable.
The Court makes further findings:
6. The plaintiffs are judgment creditors against the defendants, having obtained a judgment in Bernalillo County District Court on June 5, 1989 in the amount of $20,901.21.
7. On July 22, 1988, the defendants filed a chapter 7 petition for bankruptcy in No. 7-88-01644 MA.
8. On March 13, 1989, this Court entered a dismissal of that bankruptcy because the defendants had not complied with an Order of this Court requiring them to amend schedules and statements.
9. The prior 1988 bankruptcy was dismissed without a discharge having been entered or denied.
10. The defendants filed this petition for relief under chapter 7 on December 12, 1989.
DISCUSSION
The plaintiff points to § 523(a)(10), § 727(a), and Perlman v. 322 West Seventy-Second St. Co., Inc., 127 F.2d 716 (2d Cir.1942), for the proposition that all of the debts listed in the prior proceeding are nondischargeable in the current proceeding, and that if an estate is closed without the debtor obtaining a discharge, the debt- or is in the same position as one whose *662discharge is denied. Plaintiff argues that it makes no difference that this case involves a dismissal rather than a denial of discharge or revocation of discharge, and states that § 109(g) is not applicable to this case.
Defendants point to § 349(a) for the proposition that dismissal of a case does not bar the discharge of the same debts in a later case. Further, defendants rely on § 109 in asserting their right to become a debtor in bankruptcy and have all of their debts, including the debt to the plaintiffs, discharged by their bankruptcy.
The applicable Bankruptcy Code provisions are set forth below.
Section 523(a)(10) provides in part:
(a) A discharge under section 727 ... does not discharge an individual debtor from any debt—
(10) that was or could have been listed or scheduled by the debtor in a prior case concerning the debtor under this title or under the Bankruptcy Act in which the debtor waived discharge, or was denied a discharge under section 727(a) ... (6) ... of this title.
Section 727(a)(6) provides in part:
(a) The court shall grant the debtor a discharge, unless—
(6) the debtor has refused, in the case—
(A) to obey any lawful order of the court, other than an order to respond to a material question or to testify.
Section 349(a) provides:
(a) Unless the court, for cause, orders otherwise, the dismissal of a case under this title does not bar the discharge, in a later case under this title, of debts that were dischargeable in the case dismissed; nor does the dismissal of a case under this title prejudice the debtor with regard to the filing of a subsequent petition under this title, except as provided in section 109(f) of this title.
Section 109(g)(1) provides:
(g) Notwithstanding any other provision of this section, no individual or family farmer 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;
With the exception of Perlman, which this Court declines to follow, plaintiffs' reliance on the case law cited in their legal memorandum to support the argument that the previously listed debts should be dis-chargeable under §§ 523 and 727 is misplaced. In every other case cited, there was either a discharge granted in the previous bankruptcy prior to dismissal, a denial of a discharge by order of the court, or a revocation of a discharge in the previous bankruptcy. See Klapp v. Landsman, 24 B.R. 598 (BAP 9th Cir.1982), aff'd, 706 F.2d 998 (9th Cir.1983); Cantor, Anderson & Bordy v. Smith, 95 B.R. 468 (Bankr.W.D.Ky.1988); Pope v. Housler, 41 B.R. 455 (D.C.W.D.Penn.1984); Patterson Dental Co. v. Mendoza, 16 B.R. 990 (Bankr.S.D.Cal.1982); Francis v. Hairston, 3 B.R. 436 (Bankr.D.N.M.1980).
In the case now before the Court, there was an order of dismissal in the previous bankruptcy, but there was not a court order that denied a discharge or revoked a discharge previously given. In fact, no discharge had been entered. Plaintiff states that it makes no difference whether an order denying or revoking discharge was entered. The Court disagrees.
Section 349 provides that a dismissal of a bankruptcy case shall be without prejudice unless the court, for cause, orders otherwise. In re Ray, 46 B.R. 424 (D.C.S.D.Ga.1984). Further, § 349 clearly states that unless the Court orders otherwise, a debtor may file a subsequent petition and discharge debts that were dis-chargeable in a previous case that was dismissed. Section 109 bars a debtor from refiling a petition if they have been a debt- or in the preceding 180 days, if the ease was dismissed by the court for willful failure of the debtor to abide by orders of the court. These sections read together, allow *663a debtor to refile after 180 days after a dismissal, and to discharge debts that were dischargeable in a previous case. Section 523, on the otherhand, denies discharge of debts that were or could have been listed where the debtor waived discharge or was denied a discharge under § 727. Section 727 does not mandate an automatic denial of a discharge for failure to obey on order of the Court. The Court in its discretion may dismiss a case without a denial of a discharge.
In the case in question, the previous bankruptcy case was dismissed without specifying whether it was with or without prejudice, on March 13, 1989. The debtors filed their second petition on December 12, 1989, which was outside the 180 day period under § 109. Thus, because a discharge was not waived or denied in the previous bankruptcy, the debtors are free to discharge the debts previously scheduled. This case is similar to In re Ray, 46 B.R. at 424, in which the Court dismissed sua sponte, the debtors chapter 11 proceeding. The Court stated that the debtors in that case were free to refile and obtain a discharge of the debts, since the dismissal was without prejudice. Also, Nash v. Hester, 765 F.2d 1410 (9th Cir.1985), addressed the same issue and stated that the debtor is not barred from listing debts in a later case that were listed in a previous case which was dismissed without prejudice and without obtaining a discharge.
Therefore, based on the above discussion, the plaintiffs’ shall be awarded nothing on their complaint, and defendants’ motion to dismiss shall be granted. This memorandum opinion constitutes the Court’s findings of fact and conclusions of law. Bankruptcy Rule 7052. An appropriate order shall enter. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491165/ | ORDER ON SECOND SUPPLEMENT TO THE FIRST APPLICATION FOR ALLOWANCE OF INTERIM COMPENSATION AND REIMBURSEMENT OF EXPENSES BY KAHN CONSULTING, INC., AS ACCOUNTANTS FOR THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS
ALEXANDER L. PASKAY, Chief Judge.
THIS CAUSE came on for hearing with proper notice given to all interested parties upon the Second Supplement to the First Application for Allowance of Interim Compensation and Reimbursement of Expenses by Kahn Consulting, Inc. (KCI), Accountants for the Official Committee of Unsecured Creditors. In this Application, KCI seeks fees in the amount of $151,056.75 and expenses in the amount of $1,116.04 for services rendered during the period of March 16, 1990 through April 30, 1990. According to the Application, KCI spent 779.75 hours performing the services described in the Application during this six-week period. It is to be noted that this six-week period, based on an average forty-hour work week, represents 240 business hours. Thus, it would take three employees of the firm working full time exclusively on the affairs of the Creditor Committee six weeks to accumulate 779.75 hours of work. KCI is a small accounting firm, and services were rendered in this case by nine people at KCI.
A review of the record indicates that KCI filed its First Application for Compensation for services rendered during the period of December 15, 1989 through January 15, 1990. KCI sought $84,173.50 in fees, and $6,646.75 in expenses in this Application. This Court denied that Application in toto because KCI had not been authorized and, in fact, had not even applied, to be employed for the Creditors Committee in this case until January 16, 1990. The Order disapproving this Application is currently on appeal.
KCI filed its Second Application for Compensation for services rendered during the period of January 16, 1990 through March 15, 1990. In this Application, which is currently under advisement, KCI seeks fees in the amount of $209,262.50 and expenses in the amount of $11,332.09. As noted earlier, the Application currently under consideration, described as the Second Supplement to the First Application for Allowance, seeks fees in the amount of $151,-056.75 and expenses in the amount of $1,116.04 for the services rendered during period of March 16, 1990 through April 30, 1990. In sum, KCI has sought fees in the total amount of $444,492.75 and expenses in the amount of $19,094.88 for the period from December 15,1989 and April 30,1990. This averages out to more than $100,000.00 per month.
*702The services performed by KCI on behalf of the Committee, as described in the Application, include analyzing the Debtor’s Disclosure Statements and Plans of Reorganization. It is notable that this Court has yet to confirm a Plan of Reorganization, let alone approve a Disclosure Statement in this case. Additionally, KCI also claims to have analyzed the cash flow of the Debt- or’s affiliates, who are not debtors in this case, because those affiliates will ultimately provide the funds needed to fund a Plan of Reorganization. Additionally, KCI investigated numerous financial transactions among the Debtor and several of its affiliates, assisted the Creditors Committee in evaluating the feasibility of the Debtor’s Reorganization Plans, monitored intercom-pany cash transactions, and prepared financial information summaries.
The only Objection to this Application was filed by the Office of the United States Trustee. The basis of this Objection is twofold. First, the Trustee argues that the Application is premature in that a previous Application was filed less than 120 days ago, and KCI failed to file a Motion Seeking Permission to File an Application for Interim Compensation as required by § 331 of the Bankruptcy Code. This Court is satisfied that it is appropriate to overrule the Trustee’s objection only because the first fee Application of KCI was denied in toto and the second fee Application is under advisement. However, this should not be construed to condone filing fee applications more often than once every 120 days without leave of Court, as is required by § 331 of the Bankruptcy Code. The Trustee’s second objection was that the fees appear to be generally excessive, and as an example, the Trustee points out that KCI expended 40.5 hours in preparing its fee Application.
After reviewing the Application for Compensation filed by KCI, this Court is satisfied that an excessive number of hours were expended by KCI on behalf of the Creditors Committee. Furthermore, KCI spent time performing services which have nothing to do with accounting functions, such as analyzing fee applications of other professionals. While this Court has no quarrel with the reasonableness of the hourly fee charged, it is satisfied that the hours spent were excessive. In addition, KCI expended time on matters for which it was not retained, and other matters which are not compensable. For example, KCI charged for time examining the fee applications of other firms, reviewing law journals, analyzing creditor claims and working on unspecified “confidential matters.” Clearly, time spent on these activities should not be paid for by the Debtor. Likewise, many of the expenses charged by KCI are attributable to general overhead costs and are not to be borne by the Debt- or. These examples include photocopy charges, some transportation costs, office supplies and meals. In sum, this Court is satisfied that it is appropriate to enter an order approving the Application for Interim Compensation by KCI; however, the Application is approved only in a reduced amount. Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the Second Supplement to the First Application for Allowance of Interim Compensation and Reimbursement of Expenses by Kahn Consulting, Inc., is approved in part, and KCI is entitled to fees in the amount of $125,423.25 and expenses in the amount of $552.78.
DONE AND ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491166/ | ORDER ON MOTION TO AVOID LIEN
ALEXANDER L. PASKAY, Chief Judge.
THIS is a Chapter 7 liquidation case and the matter under consideration is a Motion To Avoid Lien filed by Richard Brewer (Debtor), who seeks to use the benefits of § 522(f)(1) and invalidate a lien which is claimed to be an avoidable judicial lien. The lien in question which is sought to be avoided encumbers the homestead property of the Debtor, a property which was claimed and allowed as exempt.
In opposition to the Motion, the former spouse of the Debtor, Tamula Clarice Brewer (Ms. Brewer), contends that the lien is not a type of judicial lien which could be avoided under § 522(f)(1) of the Bankruptcy Code. The facts which are relevant to the resolution of the matter under consideration are without dispute and can be summarized as follows:
On January 7, 1988, the Tenth Judicial Circuit in and for Polk County, State of Florida, entered a Final Judgment dissolving the marriage of the Debtor and Ms. Brewer. As part of the divorce decree, the Circuit Court awarded Ms. Brewer’s interest in the marital home to the Debtor, but ordered the Debtor to pay $10,000 for her interest within six months of the entry of the Final Judgment. It is without dispute that the Debtor did not live up to this obligation. As a result of his failure to comply with this Final Judgment, Ms. Brewer filed a Motion in the Circuit Court and sought to enforce this provision of the Final Judgment by contempt proceeding. Her Motion was heard in the Circuit Court on July 17, 1989, at the conclusion of which the Circuit Court concluded that she was entitled to a greater amount for her equity in the former marital home and granted Ms. Brewer a lien on the Debtor’s homestead securing the obligation of the Debtor in the increased amount of $25,000. It further provided that unless this amount was paid by the Debtor within ten days, the lien should be foreclosed and the property should be sold by the clerk to satisfy the Debtor’s obligation to Ms. Brewer. It is without dispute that the final judgment was properly recorded in the Public Records of Polk County where the Debtor’s homestead was located. The Debtor again failed to comply and the state court directed that the public sale of the property *713should be held on December 13, 1989. On December 12, or the day before the scheduled sale, the Debtor filed his voluntary Petition for Relief under Chapter 7. The property involved was properly scheduled by the Debtor and was also claimed as exempt as his homestead pursuant to Art. X, Sec. 4, Pla. Const. In due course, his exemptions claimed were allowed, no one having filed or interposed any objection to his claim of exemption.
These are the undisputed facts based on which it is the contention of the Debtor that he is entitled to the relief he is seeking based on § 522(f)(1) of the Bankruptcy Code. This Section provides that:
“The debtor may ... avoid the fixing of a lien on an interest of the debtor in property to the extent such lien impairs an exemption to which the debtor would have been entitled under (federal, state or local law) if such lien is ... a judicial lien....”
The term “judicial lien” is defined by § 101(32) of the Bankruptcy Code and provides that “judicial lien” means “a lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding.”
It is without doubt in this instance that the lien was created by a judicial fiat, that is, by the entry of the Final Judgment by the Circuit Court. An almost identical question was raised in the case of In re Sanderfoot, 899 F.2d 598 (7th Cir.1990), in which case the Seventh Circuit concluded that when a divorce court ordered the debt- or to pay his ex-spouse a sum in excess of $29,000, and to secure this obligation awarded the non-debtor spouse a lien against the family residence, the lien created by the judgment was a judicial lien, thus, subject to avoidance. The Seventh Circuit remained faithful to the plain language of § 522(f)(1) and § 101(32) of the Bankruptcy Code, having concluded that the federal definition of a “judicial lien” is clear and is controlling.
The Tenth Circuit agreed with this reasoning in the case of Maus v. Maus, 837 F.2d 935 (10th Cir.1988), in which the Court of Appeals held that the lien created by a divorce decree was a judicial lien for purposes of the avoiding provisions of § 522(f)(1) of the Bankruptcy Code. See also In re Pederson, 875 F.2d 781, 19 BCD 604 (9th Cir.1989).
This Court had the opportunity recently to interpret the term “judicial lien” in the case of In re Davis, 96 B.R. 1021 (Bkrtcy.M.D.Fla.1989). In Davis, this Court refused to apply § 522(f)(1) to avoid a lien because Davis involved a vendor’s lien on the debtor’s homestead property and the judgment in that case merely recognized an already existing equitable lien granted to vendors of real property. Based on these facts, this Court concluded that the lien in question was not created by a judicial fiat, that is, a judgment or through equitable process or proceeding, but merely recognized an already pre-existing lien which had its genesis in the purchase of the subject property.
In sum, based upon the foregoing, this Court is satisfied that the lien under consideration is a judicial lien, thus subject to the provisions of § 522(f)(1) of the Bankruptcy Code.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the Motion To Avoid Lien filed by Richard Brewer, Debtor, be, and the same is hereby, granted, and the lien imposed by the Circuit Court on the Debt- or’s homestead legally described as
All of the S lk of the S lk of the N V2 of the SW V4 of the SE Vi of Section 22 Township 26 South, Range 27 East, lying and being West of the Old Dixie Highway in Polk County, Florida
by a judgment entered on the 16th day of November, 1989, be, and the same is hereby, declared to be within the avoiding provisions of § 522(f)(1) of the Bankruptcy Code, and the same is declared to be avoided and rendered unenforceable.
DONE AND ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491167/ | ORDER ON REMAND
A. JAY CRISTOL, Bankruptcy Judge.
This matter was remanded by the “Order Dismissing Appeals as Moot and Remand” entered by United States District Judge William J. Zloch on September 9, 1988. In accordance with the order of the District Court, it is hereby
ORDERED as follows:
1. The order dated June 10, 1987 and published at In re Flanigan’s Enterprises, Inc., 75 B.R. 446 (Bankr.S.D.Fla.1987), is VACATED as moot.
2. The claim of the United States for Internal Revenue taxes is allowed as follows:
Kind of Tax Period Tax Due Interest to 11/04/85 Total
Income 9/30/73 > 27,522.00 $ 28,703.67 $ 56,225.67
Income 9/0/75 107,185.00 81,824.37 189,009.37
Income 9/30/76 -0-33,599.08 33,599.08
Income 9/30/77 219,292.00 231,766.03 451,058.03
Income 9/30/78 93,049.00 82,060.88 175,109.88
Income 9/30/80 412,851.00 322,137.30 734,988.30
Income 9/30/81 4,701.00 3,273.84 7,974.84
Income 9/30/82 (3,466.00) (1,483.09) (4,949.09)
Income 9/30/83 60,798.00 14,773.81 75.571.81
Excise 10/1/85 84,895.82 -0-84.895.82
!1,006,827.82 $796,655.89 $1,803,483.71
*7253. Flanigan’s Enterprises, Inc. shall receive appropriate credit in the amount of $712,888.05 with respect to the income tax liabilities set forth above.
DONE and ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491170/ | ORDER DENYING MOTION OF GOL-DOME REALTY CREDIT CORP. FOR DISMISSAL OF CASE AND RELIEF FROM AUTOMATIC STAY
BARBARA J. SELLERS, Bankruptcy Judge.
The matter is before the Court upon the Motion of Goldome Realty Credit Corporation (“Goldome”) to excuse compliance with 11 U.S.C. § 543 pursuant to § 543(d) of the Bankruptcy Code, for relief from the automatic stay, and for dismissal of this case pursuant to § 1112(b) of the Bankruptcy Code. All motions were opposed by the debtor Northgate Terrace Apts., Ltd. (“Northgate”) and were heard by the Court.
The Court has jurisdiction over these matters pursuant to 28 U.S.C. § 1334(b) and the General Order of Reference entered in this district. This is a core proceeding which this bankruptcy judge may hear and determine.
The Court finds that Goldome’s Motion seeking dismissal of this case must be, and is hereby denied. The Court further finds that Goldome’s Motion for relief from the automatic stay also must be, and is hereby denied. Both denials are premised upon the short period of time this case has been pending as a Chapter 11 reorganization effort, the presence of a receiver on the property which is Northgate’s primary asset, and the resulting inability of North-gate to have access to data needed to determine the financial prospects of reorganization. The Court believes Northgate is entitled to a reasonable period of time while in possession of all its assets to attempt to reorganize its business. However, because financial data available at the time of hearing indicates that Northgate’s ability to reorganize is uncertain, the denial of Gol-dome’s motions seeking dismissal and relief from stay is without prejudice. If North-gate fails to file a disclosure statement and a reasonable plan of reorganization within sixty (60) days from the date of the entry of this order, or if other post-petition “cause” arises, Goldome may renew its motions.
The Court is separately issuing an Order on the Motion of Goldome Realty Credit Corporation to excuse compliance with 11 U.S.C. § 543.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491171/ | MEMORANDUM OPINION
JOHN D. SCHWARTZ, Chief Judge.
This matter comes before the court on the motion of the defendant, Cheryl F. Kroner, to dismiss the adversary complaint filed by David R. Herzog, the appointed trustee in this case. For the reasons set forth herein, the court, after considering all of the pleadings, memoranda and exhibits, hereby grants the motion to dismiss.
I. FACTS AND BACKGROUND
On July 26, 1988, Dennis R. Kroner (“Debtor”) filed for protection under Chapter 7 of the Bankruptcy Code. (11 U.S.C. § 101 et seq. All reference sections are to the Bankruptcy Code unless otherwise noted.) David R. Herzog (“Trustee”) was appointed to serve as the trustee in the ease.
On November 14, 1988, the Trustee commenced an adversary proceeding entitled “Adversary Proceeding Objecting to the Discharge of the Debtor and for Turnover and Sale of Property Free and Clear of all Liens” and referred to as 88 A 878 (“Prior Proceeding”). Among the named defendants was Cheryl F. Kroner (“Defendant”), who happens to be the Debtor’s wife. The Prior Proceeding was a two-count complaint that requested that the court deny the Debtor a discharge because the Debtor failed to list property commonly known as 3023 Indianwood Road, Wilmette, Illinois, (“Wilmette property”) as property of the estate. Furthermore, the Trustee requested that the court order the turnover of the Wilmette property on the basis that the Trustee had an equitable lien in that property and the Trustee desired to sell the property free and clear of all liens and encumbrances.
The defendants in the Prior Proceeding answered the complaint and denied liability. On March 9, 1990, subsequent to the filing of the Debtor’s motion to dismiss the Prior Proceeding, the court entered an Agreed Order dismissing the Prior Proceeding with prejudice.
On January 3, 1990, the Trustee filed the present adversary proceeding (“Present Proceeding”) which names only one defendant, Cheryl F. Kroner. In another two-count complaint, the Trustee prays for a judgment in the amount of payments made by the Debtor on certain notes (the amount is not specified in the complaint) based on the fact that the Debtor’s estate is entitled to reimbursement from the Defendant because the Debtor was merely an accommodation party and the Defendant was the principal maker and the party accommodated.
On February 12, 1990, the Defendant filed an amended motion to dismiss the Present Proceeding. The Defendant argues that this action is barred by res judi-cata due to the fact that the court entered the Agreed Order on March 9, 1990 dismissing the Prior Proceeding.
II. DISCUSSION-
The Defendant argues that the Trustee’s Present Proceeding is barred by the doctrine of res judicata. The following three requirements must be met for the doctrine of res judicata to apply: (1) an identity of the parties or their privies; (2) an identity of the causes of action; and (3) a final judgment on the merits. Federated Department Stores, Inc. v. Moitie, 452 U.S. 394, 398, 101 S.Ct. 2424, 2427-28, 69 L.Ed.2d 103 (1981); Car Carriers, Inc. v. Ford Motor Co., 789 F.2d 589, 595 n. 9 (7th Cir.1986); Barnett v. Stern, 93 B.R. 962, 973 (Bankr.N.D.Ill.1988).
The Trustee concedes that the court rendered a final order between the identical parties when it dismissed the Prior Proceeding. (“Plaintiff’s Memorandum Opposing Defendant’s Motion to Dismiss”, p. 3, n. 2, hereinafter “Plaintiff’s Memo”:) The issue in dispute is whether the Prior Proceeding and the Present Proceeding are based on the same cause of action.
The Defendant argues that the factual allegations in the Prior Proceeding and the Present proceeding are essentially identical. (See Defendant’s Reply Memorandum in Support of Motion to Dismiss, p. 2, here*88inafter “Reply”). The identical allegations are as follows:
(1) Mrs. Kroner is the sole beneficiary of a land trust which holds title to certain improved real property located in Wil-mette, Illinois where Mr. and Mrs. Kroner live (compare Complaint in Prior Proceeding, ¶ 9 with Complaint in Instant Proceeding [Present Proceeding], Counts I and II, ¶¶ 6 and 7),
(2) in September 1985 and June 1988, the First National Bank of Chicago and the First Illinois Bank of Wilmette loaned Mr. and Mrs. Kroner the sums of $250,-000 and $55,000, respectively, which loans were secured by that property (compare Complaint in Prior Proceeding, ¶¶ 12, 14, 17, and 18 with Complaint in Instant Proceeding, Count I, 1[ 8, Count II, HIT 8-10). and
(3) all or substantially all repayments of those loans were made by Mr. Kroner and not by Mrs. Kroner (compare Complaint in Prior Proceeding, 1TTÍ15 and 16 with Complaint in Instant Proceeding, Count I, 1110, Count II, ¶ 13).
(Reply, p. 2-3). The Defendant argues that (1) the allegations that the Debtor had an interest in the Wilmette property which then entitled the Trustee to an equitable lien in that property and an order against the defendants in the Prior Proceeding (which includes the present Defendant) requiring the turnover of the property and (2) the present allegations that the Debtor was an accommodation party on the loans which now entitles the Trustee to recover from the Defendant the amounts repaid on the loans are merely legal conclusions which arise from the factual allegations stated above. Id. The Defendant alleges that these different legal theories are not different causes of action for res judicata purposes.
The Trustee argues that the factual allegations in the two complaints “operate differently in each complaint and thus the complaints are not premised on common operative facts.” (Plaintiffs Memo, p. 4). The Trustee alleges that the allegations common to both complaints function differently in each complaint and the two claims are premised on different underlying causes.
It is well established that the Seventh Circuit refuses to allow a plaintiff to bring a second suit seeking a different remedy or form of relief than sought in a prior suit arising out of the same factual circumstances. Matter of Energy Co-Op, 814 F.2d 1226, 1230 (7th Cir.1987) (“all claims arising from that transaction must be brought in one suit or [be] lost” citation omitted); Diaz v. Indian Head, 686 F.2d 558, 562 (7th Cir.1982) (“the issue, therefore, is whether the claim now raised arises out of the ‘same basic factual situation’ ... and could properly have been raised in the earlier suit” citations omitted); Gasbarra v. Park-Ohio Industries, Inc, 655 F.2d 119, 121 (7th Cir.1981) (test of res judicata is “whether the claims ‘arise out of the same basic factual situation’ ... and ‘whether the entire amount to be due plaintiff arises out of one and the same act or contract ... citations omitted). The Seventh Circuit prohibits the practice of “claim splitting.”
The Seventh Circuit endorses the approach of section 24 of the Restatement (Second) of Judgments (1982): “Once a transaction has caused injury, all claims arising from that transaction must be brought in one suit or lost.” Matter of Energy, 814 F.2d at 1230, quoting Car Carriers, Inc. v. Ford Motor Co., 789 F.2d 589, 593 (7th Cir.1986).
In the case at hand, it is quite clear to this court that res judicata precludes the litigation of the Present Proceeding. The Prior Proceeding and the Present Proceeding involve the same loan agreements, the same loan payments, the same property, the same transactions, the same facts, the same parties and the same points in time. In the Present Proceeding, the Trustee attempts to raise another claim that should have been raised at the time of the Prior Proceeding. The policy behind res judicata is to protect defendants and the courts from a multiplicity of suits arising from the same set of facts. Litigation must end. The court cannot and will not allow the Present Proceeding to continue.
*89CONCLUSION
For the foregoing reasons, the court grants the Defendant’s motion to dismiss the Trustee’s complaint. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491175/ | *132AMENDED ORDER ON JOINT OBJECTION TO THE CLAIMS OF THE INTERNAL REVENUE SERVICE
A. JAY CRISTOL, Bankruptcy Judge.
This cause came before the Court on February 21, 1990, at 1:30 p.m., on the Joint Objection to the Claims of the Internal Revenue Service (“IRS”) (the “Objection”) filed by the Debtor, T.M. Products Co. (“TM”) and its president Thomas Metz-ger (“Metzger”).
This Order is intended to constitute the Court’s findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052.
These Chapter 11 proceedings have been pending since 1985. TM is a manufacturer of aluminum doors and windows, whose plant is in an economically blighted area. It employs approximately 160 people, most of whom are minorities.
At the hearing the IRS made an ore tenus motion to dismiss for the lack of standing of TM and Metzger. Because TM joined in the motion, and because Metzger was a principal of TM and is a major creditor of the estate, the Court denied the Motion.
For the purposes of this hearing, the Court takes judicial notice of the orders entered with respect to status conferences (the “Orders"), as well as all other orders, pleadings and reports filed in the case. The Orders, almost since the inception of the case, have reflected the Court’s efforts to balance the interests of TM and its creditors in reorganization and the rights of administrative claimants, in particular the IRS, to the payment of obligations incurred in the reorganization process. Indeed, the IRS took the position, as early as Fall, 1985, that the proceedings should be dismissed for the failure of TM to pay its employment taxes to the IRS. See United States of America’s Motion to Dismiss.
Another interest that the Court was required to protect was that of Mellon Bank (“Mellon”). As reflected in numerous orders governing the use of cash collateral, the Court authorized TM’s use of monies derived in the operation of its business and required percentage payments to Mellon. See, eg. Agreed Order on Debtor’s Emergency Motion for Further Modification on Adequate Protection and Mellon Bank’s Motion to Compel Compliance, entered August 18, 1986.
There is little question in the Court’s mind that the most persistent and significant problem during the pendency of this case was TM’s difficulty in timely paying its tax obligations, particularly those comprising withholding tax trust fund payments. Numerous pleadings filed by the IRS reflect its significant efforts to see that trust fund taxes were in fact paid by TM when due and many of the Orders reflect the Court’s efforts to see that such taxes were paid. See eg. Order on Status Conference, entered August 15, 1988, (in which the Court directed that all delinquent and current withholding taxes be paid pri- or to any further interest payments to Mellon Bank).
About June of 1989, it became apparent that TM would not survive and that a Chapter 11 plan if filed, other than a consensual liquidating plan, would not be confirmed. The Court was advised that the principal impediment to a successful plan was the administrative tax liability, in excess of $1.5 million. Under Section 1129(a)(9)(A) of the Code, such claims must be paid in full in cash on the effective date of the plan, unless otherwise agreed. Thus, the taxing agencies held the trump card; no plan could be approved without their consent, *133and no investor or purchaser appeared interested in satisfying such claims.
However, in June of 1989, TM and Metz-ger filed a Joint Motion to Sell Substantially All Assets of Debtor Free and Clear of Liens. The Joint Motion reflected an attempt by the movants to sell the company as a going concern to maximize the estate’s recovery. The Court entered its Order Granting Joint Motion to Sell Substantially All Assets of Debtor Free and Clear of Liens, on July 7, 1989. The Court now recognizes that the serious disruption that would have occurred in the event of dismissal has not occurred because of the sale; but, that has been achieved at great cost. We have avoided the Scylla of liquidation but not the Charybdis of significant unpaid administrative liability.
The Objection arises from a disagreement over the amount of such tax liability. Specifically, it arises from a dispute between TM and Metzger and the IRS as to the proper application of payments made during these proceedings.
TM and Metzger contend that all sums paid to the IRS during the course of these proceedings were on account of trust funds taxes. The IRS has filed an amended proof of claim (the “Claim”), dated January 30, 1990, apparently recognizing, in part, such an application of payments.
In discussions with Metzger however, the IRS has apparently taken the position that the true liability for trust fund taxes of the company, and hence Metzger’s personal liability as a “responsible officer” within the meaning of Section 6672 of the Internal Revenue Code, 26 U.S.C. § 6672 (1982), is significantly greater than reflected in the Claim or that which TM and Metzger assert is owed. It is unclear whether the IRS even stands by its Claim.
The issue presented to the Court is not novel. As the Court sees it, the issue is two pronged. First, under what circumstances may a debtor designate where payments made in a Chapter 11 are to be applied. Second, when may this designation occur.
The authority is divergent. Certain appellate decisions have held that payments under a Chapter 11 Plan of Reorganization are involuntary and may not be designated. In re Ribs-R-Us, 828 F.2d 199 (3rd Cir.1987); In re Technical Knockout Graphics, Inc., 833 F.2d 797 (9th Cir.1987); In re DuCharmes & Co., 852 F.2d 194 (6th Cir.1988).
However, the Eleventh Circuit in In re A & B Heating Corp., 823 F.2d 462 (11th Cir.1987), vacated and remanded for consideration of mootness, 486 U.S. 1002, 108 S.Ct. 1724, 100 L.Ed.2d 189 (1988), holds to the contrary,1 as does the First Circuit in In re Energy Resources Co., Inc., 871 F.2d 223, 230 (1st Cir.1989).
In both A & B Heating and Energy Resources debtors in Chapter 11 plans were permitted to designate the application of payments made to the IRS. As stated in both, the issue turns on whether the payments to the IRS, under its rules, are deemed “voluntary” where the taxpayer pays its liability or “involuntary” where the payment is a result of collection efforts. If voluntary, the debtor may designate and if involuntary, the IRS may apply the payments where it chooses.
In In re Energy Resources Co., 871 F.2d 223 (1st Cir.1989), the Court acknowledged that payments in a Chapter 11 cannot be easily described as either voluntary or involuntary: “In our view, the labeling question is a difficult one because a Chapter 11 proceeding has some characteristics that make one consider a related tax payment ‘involuntary’; but it also has other characteristics that make a ‘voluntary’ label seem more natural.” Id. at 228 (emphasis in original).
The characteristics which make a Chapter 11 proceeding seem voluntary are:
(1) the debtor chooses voluntarily to enter chapter proceeding;
*134(2) Chapter 11 proceedings are intended to offer protection to the debtor from its creditors;
(3) Chapter 11 gives the debtor options as to how the IRS will be paid;
(4) third parties may have provided funds used for payment;
(5) if the debtor does not file a plan restructuring the IRS obligations, the case may be dismissed; and
(6) historically, the debtor in a bankruptcy proceeding, can choose which of several claims held by a creditor will be satisfied by a payment.
In re Energy Resources, 871 F.2d at 229.
The factors which favor a conclusion that payments in a Chapter 11 are involuntary are based upon a simple premise: A Chapter 11 requires enforcement action by the IRS, court supervision and court orders requiring the debtor to achieve confirmation of a plan and to meet the obligations contained therein including the payment of priority tax claims. Id.
Even if A & B Heating is not binding authority, the Court finds its reasoning and that of Energy Resources persuasive. The Court concludes that TM was entitled to designate.
Because this case did not involve a Chapter 11 plan which designated payment, the Court must make a preliminary factual determination as to whether there was, in fact, some other designation. Jerry Davis, TM’s comptroller, testified that it always was TM’s intention to comply with the Orders which, as mentioned, required the payment of TM’s employment taxes, despite the fact that the dozens of checks involved do not bear a description. These problems notwithstanding, even Madeline Oliver, the IRS representative, testified that she was aware, on several occasions, that Davis indicated TM’s intention that specific checks were for trust fund taxes.
Davis’ explanation was that, because of orders entered at Mellon’s insistence requiring Mellon to be paid, there were insufficient funds on hand to pay the IRS. The same is true of taxes owing to the State of Florida. The parties, including Mellon, were apparently aware of this fact.
The Court heard testimony that during the proceedings, the Metzger family infused approximately $1.2 million so that TM could meet its obligations and at least some portion of those funds were used to pay the IRS. Further, during the proceedings, the IRS was paid approximately $2.5 million.
The Court finds that many of the factors enumerated in Energy Resources are present. Here, TM tried for a number of years to reorganize, albeit unsuccessfully. Metzger personally did a yeoman’s job in tirelessly using his efforts and funds in attempts to reorganize. Ultimately, no plan was confirmed, but TM was sold as a going concern for fair value and the jobs of employees were preserved. Although this was not a reorganization in the classical sense, it has achieved at least as much as a liquidating plan would. The Court was advised in Court that a plan would not be successful because, as mentioned, any plan would require the payment of all administrative claims, including taxes, upon confirmation. Without the agreement of IRS to a plan there could be no confirmation.
Further, and perhaps more compelling, unlike Energy Resources, this case involves persistent Court supervision to assure that taxes and particularly trust fund portions were paid when due. If the Court were to conclude that these payments were involuntary because the IRS was paid because of enforcement action, and therefore through a “legal proceeding,” Amos v. Commissioner, 47 T.C. 65 (1966), it would reach a truly anomalous result. Here the IRS' efforts and the Court Orders were specifically directed at the payment of trust fund taxes. To now recast those payments as having been made on account of nontrust fund taxes is inappropriate. Further, it would undermine the policy of encouraging guarantors and principals of debtors to infuse capital necessary to keep those debtors operating. Without the added assurance that in helping the debtor, they are limiting their exposure the principals might well just wait until responsible officer liability is assessed. Unfortunately, that may be too late for the debtor.
*135The Court additionally concludes, as to the second issue presented, that the designation of tax payments occurred at the time that they were paid and, again, upon filing of the Joint Motion. Either, standing alone, is sufficient.
Accordingly, it is
ORDERED and ADJUDGED that the Joint Objection is granted.
FURTHER ORDERED that the motion by the United States to dismiss the objection for lack of standing of TM and Metz-ger is denied.
FURTHER ADJUDGED that for the purpose of determining the tax liability of TM and Metzger, all payments received by the IRS during these proceedings shall be applied first to trust fund taxes.
DONE and ORDERED.
. The precedential value of A & B Heating is unclear since the case ultimately was dismissed as moot. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491177/ | AMENDED
MEMORANDUM, OPINION AND ORDER
ROBERT E. GINSBERG, Bankruptcy Judge.
This matter comes before the Court on defendant Yaffe & Company’s (“Yaffe”) motion for summary judgment. The Court has jurisdiction over the proceeding pursuant to 28 U.S.C. § 1334 and Local Rule 2.33 of the United States District Court of Illinois referring bankruptcy cases and proceedings to this Court. This is a noncore proceeding under 28 U.S.C. § 157(c)(1). The following constitutes the Court’s recommended findings of fact and conclusions of law. For the reasons contained herein, Yaffe’s motion is denied.
FACTS
The Court is all too familiar with the facts of this case. Diamond Mortgage Corporation of Illinois, (“Diamond”), was an Illinois corporation and licenced mortgage broker. Diamond was in the business of loaning money to consumer homeowners and primarily lent money to high risk consumer borrowers. All of Diamond’s loans were secured by a first mortgage on the borrowers’ homes. Diamond attracted borrowers through general advertisements, several which featured actor George Hamilton.
Diamond, however, had no independent source of capital. The money Diamond used for its mortgage loans came from an affiliated corporation, A.J. Obie and Associates, Inc. (“Obie”), an Illinois corporation. Obie, in turn, raised the money that it advanced to Diamond through an aggressive television advertising campaign which included commercials featuring actor Lloyd Bridges. Many of the Diamond and Obie commercials, including those featuring Bridges and Hamilton, were produced by the advertising agency of Molner & Company (“Molner”). Yaffe was subsequently retained by Diamond and Obie as advertising agency and arranged for the broadcast of the Molner commercials, including those commercials featuring Bridges and Hamilton, and created and produced additional commercials for Diamond and Obie.
The theory behind the structure of the Obie transactions was that each investment was to be matched with one or more specific Diamond mortgages. From the investor’s view point what was to happen was an investor would give his/her money to Obie which in turn would lend the investor’s money to Diamond. Diamond would lend the funds to the borrower who would sign a note agreeing to repay the funds plus interest. The borrower would also give Diamond a mortgage interest in the borrower’s home as security for the note. Diamond would transfer the note and mortgage to Obie. Obie would then assign this mortgage to the investor. When an investor was matched to one or more mortgages representing the amount of the investment, the investor became the mortgagee to Diamond’s borrower. Diamond was to continue to service the mortgage for the investor for a fee based on a percentage of the borrower’s payments. The notes carried a high interest rate, usually 15% or more, which in theory enabled the investor to get a generous return on his/her investment even after Diamond’s service fees was taken out of the monthly mortgage payment.
*585This was the theory. Unfortunately, the theory was not generally applied in practice. The money invested in Obie usually did not go toward funding Diamond mortgages. As the plaintiffs allege, most of the investors were never matched to mortgages. Rather, in a classic Ponzi scheme fashion, apparently most of the investors’ money went toward paying off other investors. In addition, allegations have been made that some of the money went to support the lavish lifestyles of certain members of the management of Diamond and Obie.
Not surprisingly, the house of cards came tumbling down in the summer of 1986. On August 25, 1986, Diamond and Obie filed voluntary Chapter 11 petitions. Subsequently, the plaintiffs, all Obie investors, sued the defendant Yaffe and several other parties, alleging a violation of the Illinois Consumer Fraud and Deceptive Business Practices Act, Ill.Rev.Stat., ch. 121V2, ¶ 261 et seq. (1987). Specifically, the plaintiffs allege that Yaffe
actively participated in the Obie/Diamond advertising campaign by creating, producing, placing and/or distributing the Diamond and Obie advertisements which are the subject of this Complaint to the broadcast media.... Yaffe also consulted with Obie and Diamond regarding each of these services, developed a general marketing strategy for Obie/Diamond and designed and defined the theme and nature of the Obie/Diamond advertising campaign.
The plaintiffs further allege that Yaffe should have known that Obie investments were unsafe.
Yaffe brings this motion for summary judgment alleging that there are no material factual disputes and that it is entitled to judgment as a matter of law.
STANDARD FOR SUMMARY JUDGMENT
Summary judgment is proper if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. Rule 56(c) Fed.R.Civ.P. Celotex Corporation v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247, 106 S.Ct. 2505, 2509-10, 91 L.Ed.2d 202 (1986); Howland v. Kilquist, 833 F.2d 639, 642 (7th Cir.1987); Cameron v. Frances Slocum Bank & Trust Co., 824 F.2d 570, 573 (7th Cir.1987); Shlay v. Montgomery, 802 F.2d 918, 920 (7th Cir.1986). The primary purpose for granting a motion for summary judgment is to avoid unnecessary trials when there is no genuine issue of material fact in dispute. Farries v. Stanadyne/Chicago Div., 832 F.2d 374, 379 (7th Cir.1987). On a summary judgment motion the inferences to be drawn from the underlying facts must be viewed in the light most favorable to the party opposing the motion. Anderson, 477 U.S. at 255, 106 S.Ct. at 2513-14. Moreover, the existence of a material factual dispute is sufficient only if the disputed fact is determinative of the outcome under applicable law. Anderson, 477 U.S. at 248, 106 S.Ct. at 2510; Howland, 833 F.2d at 642.
The party seeking summary judgment always bears the initial responsibility of informing the court of the basis for its motion by identifying those portions of the “pleadings, depositions, answers to interrogatories, and affidavits, if any,” which it believes demonstrates the absence of a genuine issue of material fact. Celotex, 477 U.S. at 323, 106 S.Ct. at 2552-53. This is essentially a requirement that the moving party make a prima facie showing that it is entitled to summary judgment. 10A Wright, Miller & Kane, Federal Practice & Procedure, Civil, § 2727. Once this burden is met, the party opposing the motion may not rest upon mere allegations or denials, but its response must show that there is a genuine issue for trial. Celotex, 477 U.S. at 323, 106 S.Ct. at 2552-53; Anderson, 477 U.S. at 248, 106 S.Ct. at 2510. However, if evidence opposing summary judgment is merely colorable or is not significantly probative, summary judgment may be granted. Anderson, 477 U.S. at 249-50, 106 S.Ct. at 2510-11.
*586DISCUSSION
Yaffe contends that the plaintiffs, in order to assert a claim under § 262 of the Illinois Consumer Fraud and Deceptive Business Practices Act, Ill.Rev.Stat., ch, 121V2 ¶ 261 et seq. (1987) (“ICFA”), must prove that: 1) Yaffe actively participated in the preparation of deceptive advertisements and knew or had reason to know that any advertisements were false; 2) the advertisements prepared by Yaffe contain actionable misrepresentations; and that 3) Yaffe was a proximate cause of the plaintiffs’ alleged injuries. According to Yaffe, it is entitled to judgment as a matter of law because the plaintiffs cannot prove any of these elements and there are no material facts in issue.
The plaintiffs allege that there remain genuine issues of material fact in dispute. Principally, the plaintiffs assert that it is a question of fact whether Yaffe should have known that some of the statements made in the Obie commercials were not true. The plaintiffs claim that Yaffe should have known that some of the commercials in which it was involved on behalf of Diamond and Obie contained statements which were not true and that the Obie commercials in which Yaffe was involved, including the Bridges commercials known as “Fair Weather” and “Foul Weather” contain actionable misrepresentations.1
The starting point of the Court’s analysis is § 262 of the ICFA which provides:
§ 2. Unfair methods of competition and unfair deceptive acts or practices including but not limited to the use or employment of any deception, fraud, false pretenses, false promise, misrepresentation or the concealment, suppression or omission of any material fact with intent that others rely upon the concealment, suppression or omission of such material fact, or the use or employment of any practice described in Section 2 of the “Uniform Deceptive Trade Practices Act” approved August 5, 1965, in the conduct of any trade or commerce are hereby declared unlawful whether any person has in fact been misled, deceived or damaged thereby.
Ill.Rev.Stat., ch. I2D/2, If 262 (1987).
To establish a violation of the ICFA, a plaintiff must show a misrepresentation, concealment or omission of a material fact with the intent that others rely on that fact. Kleidon v. Rizza Chevrolet, Inc., 173 Ill.App.3d 116, 122 Ill.Dec. 876, 527 N.E.2d 374 (1988). In order to be considered material, the concealed fact must have been such that had the other party known of it, he would have acted in a different manner. Id. 122 Ill.Dec. at 878, 527 N.E.2d at 376.
The Act provides broader consumer protection than the common law action of fraud since the Act also prohibits any “deception or false promise.” Perlman v. Time, Inc., 64 Ill.App.3d 190, 198, 20 Ill.Dec. 831, 838, 380 N.E.2d 1040, 1047 (1978). Illinois courts have followed the legislative mandate that the courts apply the Act to the utmost degree in eradicating all forms of deceptive and unfair business practices and grant appropriate remedies to injured parties. Duhl v. Nash Realty, Inc., 102 Ill.App.3d 483, 57 Ill.Dec. 904, 914, 429 N.E.2d 1267, 1277 (1981). It is well established under the Act that the seller’s intent is not important and a plaintiff may recover under the Act for innocent misrepresentations. Id.
*587Yaffe’s initial argument is that the plaintiffs did not rely on any commercials which it prepared or arranged for broadcast and that it was not an active participant in creating the advertisements on which the plaintiffs allegedly relied. Yaffe states that December 17, 1984 was the final broadcast date of an Obie commercial in which Bridges appeared, and that with the possible exception of Mr. and Mrs. Ara-mowicz, all of the remaining plaintiffs allege that they saw Obie commercials which featured Bridges on dates when no Bridges commercials were broadcast.
Yaffe contends that it did not participate in the development of any aspect of the advertising messages contained in the Bridges commercials — it did not write, edit, film or participate in the development of advertising strategies or the determination of the final format of the Obie commercials featuring Bridges. Yaffe maintains that it was hired by Diamond and Obie as their advertising agency after their previous agency had already produced the Bridges commercials upon which the plaintiffs allegedly relied and that its only connection with the Bridges commercials was to arrange for the Chicago broadcast of two of the commercials in 1984.
As this Court previously noted in its decision of July 25, 1988, the actual date that each plaintiff saw the advertisements is important in determining whether there was actual reliance. Yaffe has apparently interpreted this statement to mean that the dates on which the commercials were broadcast and the dates on which the plaintiffs claim to have seen the specific commercials must match in order to establish reliance. What matters is not the exactness of the dates recalled by the plaintiffs so long as it appears that the plaintiffs viewed the Bridges commercials prior to the time that they invested with Obie and that those dates are within the period that Yaffe served as advertising agency to Diamond and Obie. Without exception, each plaintiff recalls viewing the Obie commercials prior to making his/her decision to invest. The question is whether those commercials were relied on in making the investment decisions and whether Yaffe was responsible for putting false commercials on the air.
The ICFA provides that in construing § 262 courts should consider interpretations of the Federal Trade Commission and the federal courts relating to § 5(a) of the Federal Trade Commission Act. Ill.Rev. Stat., ch. 12172 11262 (1987).2 The essence of the plaintiffs’ complaint against Yaffe is that it allegedly violated the FTC’s Guides Concerning Use of Endorsements and Testimonials in Advertising (“Guides”). See 16 CFR § 255.0 et seq. The plaintiffs contend that since Yaffe was employed by Diamond and Obie as an advertising agency, it should have known that the advertisements were false.
Yaffe seeks to make much of the fact that the commercials featuring Bridges were written and produced by Molner and Co., Yaffe’s predecessor as Obie’s advertising agency. Yaffe’s sole role in the process was to arrange for airing those commercials in the Chicago market from April to October 1984. Yaffe relies heavily on language of the 9th Circuit in Standard Oil of California v. F.T.C., 577 F.2d 653, 659 (9th Cir.1978), to argue that unless it made the commercials or had reason to know they were false or deceptive, it has no liability for airing them. The fact is that Standard Oil has nothing to do with this case, because its facts are so different from those now before this court.
The facts of this case are unique. This court has found no case where one agency made an allegedly false or misleading commercial and another was responsible for airing it. Therefore, there is no direct precedent on which the Court can rely. However, logic dictates that neither the producer of the commercial nor the agency responsible for airing it should be able to escape liability by blaming the oth*588er. The fact that these plaintiffs did not sue Molner is irrelevant. When Yaffe chose to put Molner’s product on the air, it in effect adopted it as its own. It was the airing of those commercials that arguably led to these plaintiffs’ losses. It follows that if Yaffe was going to air Molner’s product, it acquired Molner’s duty to ascertain that they were accurate. Molner may have written the Bridges ads, but if Yaffe hadn't put them on the air, this lawsuit would not now be pending.
The balance of Yaffe’s arguments are similar to those raised by Bridges and have been dealt with in this court’s denial of Bridges’ summary judgment motion. While Yaffe clearly made some inquiry, the adequacy of that inquiry is a question of material fact to be reached at trial as are issues of reliance and proximate cause. Yaffe’s motion for summary judgment is denied.
CONCLUSION
The Court finds that there remain genuine issues of material fact in dispute. Accordingly, the court will deny Yaffe’s motion for summary judgment.
IT IS HEREBY ORDERED that defendant Yaffe & Company’s Motion for summary Judgment is denied.
. Bridges' advertisements for Obie included the following statements:
If you’re an investor you can’t always expect smooth sailing. Security values and yields can change with the weather. But A.J. Obie & Associates offer secure investments that give you the same high yield in fair weather or foul and you get this high yield by check in the mail each month for as long as you own them. Well, you'll want to know more about this rewarding investment opportunity. If you’ll listen, A.J. Obie has something to say. Conditions aren't always certain. Sometimes an investor has to chart a new course. But, some investments maintain a high yield in spite of storms in the securities market place. A.J. Obie and Associates offer securities that earn a high yield from the first day of their purchase and you get this yield by check in the mail each month for as long as you own them. Want to know more? Well, if you'll listen, A.J. Obie has something important to say.
. The ICFA is patterned after § 5(a) of the Federal Trade Commission Act, which declares unlawful “unfair methods of competition in commerce and unfair or deceptive acts or practices in commerce.” 15 U.S.C. § 45(a) (1973). The ICFA, however, unlike the Federal Trade Commission Act, authorizes a private cause of action for deceptive commercial conduct. See Crowder v. Bob Oberling Enterprises, 148 Ill.App.3d 313, 101 Ill.Dec. 748, 499 N.E.2d 115 (1986). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491178/ | SUPPLEMENTAL OPINION TO JUNE 5, 1990 JOURNAL ENTRY OF JUDGMENT
BENJAMIN E. FRANKLIN, Chief Judge.
This matter comes on before the Court pursuant to the Journal Entry of Judgment signed by this Court on June 5, 1990. In its Order the Court reserved the right to file a supplemental opinion to address issues involved therein in greater detail if a *798party to the Journal Entry of Judgment filed a timely appeal. On June 15, 1990, a notice of appeal was filed by T.S. Note Company.
At the May 15, 1990 trial, the plaintiff T.S. Note Company appeared by and through its attorney Donald S. Bucher of the law firm of Gould & Moore. The defendant United Kansas Bank & Trust appeared by and through its attorney, Chris W. Henry of the law firm of McDowell, Rice & Smith. The other defendants, Dick L. Sandifer and Cecilia R. Sandifer and the Johnson County Board of Commissioners do not appear as their claims had been previously settled.
FINDINGS OF FACT
Based upon the pleadings and the record, this Court finds as follows:
1. That on July 6, 1989, the debtor, Topsy's Shoppes Inc. of Kansas (hereinafter “debtor”) filed a voluntary Chapter 11 bankruptcy petition.
2. That on October 6, 1989, this Court signed its Order Approving Sale Free and Clear of Liens of certain of the debtor’s properties to Ramm Acquisition Corp., Joe Serwatka, Matt Hansen, A.H.B., Inc., Topsy’s Popcorn of Antioch, Inc. and Golden Harvest Popcorn Company.
3. That as part of this sale, the Ramm Acquisition Corporation would receive “All right, title and interest in and to the name Topsy’s and all Topsy’s logos, trademarks and copyrights.” October 6, 1989 Order, at 4. That in exchange for this and other personal properties of the debtor, Ramm Acquisition Corporation would pay a total of $135,000. Id., at 9.
4. That on November 15, 1989, T.S. Note Company instituted this adversary proceeding against Topsy’s Shoppes, Inc. of Kansas and United Kansas Bank & Trust praying for the Court to determine the validity, extent and priority of claims to the proceeds of the sale of the debtor’s assets.
5. That on January 5, 1990, T.S. Note Company filed its First Amended Complaint adding Dick L. Sandifer and Cecilia R. Sandifer and the Johnson County Board of County Commissioners as party defendants.
6. That on April 26, 1990, the defendant United Kansas Bank & Trust and defendants Dick L. Sandifer and Cecilia R. Sandi-fer filed their Application to Compromise.
7. That on April 30, 1990, within the prescribed time limits as set forth in the Pre-Trial Order, defendant United Kansas Bank & Trust filed its List of Witnesses and Exhibits and its Trial Brief with the Court.
8. That on May 2, 1990, defendant United Kansas Bank & Trust and defendant Johnson County Board of County Commissioners filed their Application to Compromise.
9. That on May 11, 1990, a hearing was held on both Applications to Compromise, at which time, the Application to Compromise between Defendants United Kansas Bank & Trust and Dick L. Sandifer and Cecilia R. Sandifer was sustained. Said Order was executed by this Court on May 15, 1990. The Application to Compromise between defendants United Kansas Bank & Trust and Johnson County Board of County Commissioners was also sustained, and the Order was signed by the Court on May 30, 1990.
10. That on May 11, 1990, defendant United Kansas Bank & Trust filed its Motion to Prohibit Plaintiff from Calling Witnesses or Introducing Exhibits since T.S. Note Company had failed to file its list of witnesses and exhibits with this Court within the time limits as set forth in the parties Pre-Trial Order (These lists were to have been filed at least 15 days prior to trial.)
11. That on May 15, 1990, T.S. Note Company’s First Amended Complaint to Determine the Validity, Extent and Priority of Claims came on for trial. The Court first heard the Motion to Prohibit Plaintiff from Calling Witnesses or Introducing Exhibits. After hearing the statements of counsel and their stipulations, this issue was determined to be moot in that the plaintiff offered no witnesses to testify. The case proceeded to trial. The plaintiff *799presented a deposition of one Carl Pigg, a T.S. Note Company officer, and offered it as testimony under Rule 32(a), Federal Rules of Civil Procedure, which is adopted by Bankruptcy Rule 7032, The plaintiff then rested its case.
12. After the plaintiff rested the defendant United Kansas Bank & Trust moved for directed verdict. After hearing the arguments of counsel the Court sustained defendant United Kansas Bank & Trust’s oral Motion for Directed Verdict, for the reason that the plaintiff T.S. Note Company had failed to present a prima facie case and had not sustained its burden of proof in. this matter.
13. That this Court further found that United Kansas Bank & Trust has a prior lien and prior security interest to that claimed by T.S. Note Company, and that this lien was perfected prior to that of T.S. Note Company. In addition, the Court found that the perfected security interest of United Kansas Bank & Trust was sufficiently described.
14. That the Court directed the debtor to disburse the sale proceeds being held in escrow in accordance with the Court’s Order.
CONCLUSIONS OF LAW
The party bringing an action to determine the validity, priority or extent of their interests in estate property has the burden of proof. More specifically, the Bankruptcy Code under § 363(o) states:
In any hearing under this section—
(2) the entity asserting an interest in property has the burden of proof on the issue of the validity, priority, or extent of -such interest.
Thus, in the case at bar, T.S. Note Company had the burden of proving that their perfected security interest in the sale proceeds was superior and prior to the perfected security interest of United Kansas Bank & Trust. T.S. Note Company failed to meet its burden of proof.
At the trial, T.S. Note Company, appearing solely through its attorney of record, only presented prior deposition testimony of one Carl Pigg, a T.S. Note Company officer at the time of the sale of Topsy’s to the debtor. T.S. Note Company offered this testimony pursuant to Rule 32(a) of the Federal Rules of Civil Procedure, which is adopted by Bankruptcy Rule 7032. It was Mr. Pigg’s understanding that in order for T.S. Note Company to allow the debtor a $50,000 sales price reduction, T.S. Note Company would have a first position on the franchise rights, trademarks and trade names on the financing statement and security agreement and United Kansas Bank & Trust would have a second position.
Through Mr. Pigg’s transcript, T.S. Note Company offered into evidence the financing statement, security agreement and promissory note taken by T.S. Note Company upon their sale of Topsy’s to the debtor. After those exhibits were admitted by this Court the plaintiff rested. United Kansas Bank & Trust then moved for a directed verdict which this Court granted.
Based upon the deposition of Mr. Pigg and the admitted evidence, this Court finds that T.S. Note Company did not prove a prima facie case.
Moreover, T.S. Note Company even stated that it did not dispute that United Kansas Bank & Trust’s financing statements were filed first (said statements being filed on November 4 and 13, 1987. T.S. Note Company’s financing statement was not filed with the Kansas Secretary of State until December 1, 1987). Thus, it was admitted that United Kansas Bank & Trust had a prior perfected security interest. See K.S.A. 84-9-312(4) (1986) (“A purchase money security interest in collateral other than inventory has priority over a conflicting security interest in the same collateral or its proceeds if the purchase money security interest is perfected at the time the debtor receives possession of the collateral or within 20 days thereafter.”) K.S.A. 84-9-312(5)(a) (1986) (“Conflicting security interests rank according to priority in time of filing or perfection.”)
Furthermore, at the trial, the plaintiff and defendant stipulated that there was no written subordination agreement between *800the parties whereby United Kansas Bank & Trust would take second position to that of T.S. Note Company on the franchise rights, trademarks and trade names. Thus, no prima facie case was established by T.S. Note Company as to the priority of their claim.
Counsel for T.S. Note Company saw this matter as solely a question of law for the Court. In his arguments against the Motion for a Directed Verdict, Mr. Bucher °alleged that United Kansas Bank & Trust’s financing statement description was insufficient to meet the standards required for perfection by the Uniform Commercial Code which has been adopted by the State of Kansas.
This Court finds that the description as set out on United Kansas Bank & Trust’s financing statement and security agreement, is sufficient. The United Kansas Bank & Trust’s security agreement and financing statement filed with the Kansas Secretary of State, describes its security interest as follows:
All machinery & Equipment, Furniture & Fixtures, (including automotive), Leasehold Improvements, Inventory and all present and future Accounts Receivable, proceeds arising therefrom, chattel paper, contract rights and general intangibles, however evidenced or acquired, now owned, purchased with loan proceeds and hereafter acquired, and all additions and accessions thereto.
K.S.A. 84-9-402 states in pertinent part as follows:
(1) A financing statement may be in a form prescribed by the secretary of state and shall give the names of the debtor and the secured party, shall be signed by the debtor, shall give an address of the secured party from which information concerning the security interest may be obtained, shall give a mailing address of the debtor and shall contain a statement indicating the types, or describing the items, of collateral. A statement of collateral in a financial statement is adequate if it generally identifies goods by one or more of the classifications listed in K.S.A. 8^-9-109, or generally identifies other collateral by one or more of the following classifications: fixtures, documents, instruments, general intangibles, chattel paper or accounts.
(emphasis added).
K.S.A. 84-9-106 has defined “general intangibles” to mean:
any personal property (including things in action) other than goods, accounts, chattel paper, documents, instruments and money_
Furthermore, in the Official UCC Comments accompanying K.S.A. 84-9-106 “general intangibles” is defined to include “miscellaneous types of contractual rights and other personal property which are used or may become customarily used as commercial security. Examples are goodwill, literary rights and rights to performance. Other examples are copyrights, trademarks, and patents, except to the extent that they may be excluded by Section 9-104(a).” In re Bucyrus Grain Co., Inc., 67 B.R. 336 (Bankr.D.Kan.1986) (“Courts have interpreted [K.S.A. 84-9-106] broadly enough to include: ... a tax refund, computer software, patent rights, trademarks, goodwill ...” Id. at 340); See Madison Nat’l Bank v. Newrath, 261 Md. 321, 275 A.2d 495 (1971).
Thus, this Court finds that the description in the financing statement and security interest of United Kansas Bank & Trust adequately defines the Bank’s security interests.
This Supplemental Memorandum shall constitute my Findings of Fact and Conclusions of Law under 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/8491179/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW
A. JAY CRISTOL, Bankruptcy Judge.
BACKGROUND
This cause came on before the Court for trial on October 25 and 26, 1989. The trial was continued to January 3, 1990, then to March 29, 1990, and was concluded on March 30, 1990. The Court, during the course of trial heard witnesses from both sides, accepted legal arguments from counsel for each of the parties and, received numerous exhibits into evidence.
K.G.L. Contracting Service, Inc. (hereinafter KGL), filed an adversary complaint seeking damages for unpaid transportation charges for goods actually shipped and delivered in late 1980 through the end of 1981. These transportation charges included the following categories: billed but unpaid shipments; unbilled and unpaid ship*882ments; late charges for shipments that were paid beyond seven (7) days after shipment; fuel surcharges; and fuel surcharges on backhauls of Coulter Electronics, Inc. (hereinafter CE) specially designed pallets.
KGL’s claim was voluntarily reduced during pretrial discovery as CE provided evidence of payment for specific shipments. The Court further narrowed the issues in a pretrial ruling when it granted partial summary judgement to CE based upon its affirmative defense that certain claims asserted by KGL were brought beyond the statute of limitations. At that time the Court ruled that KGL could not recover on shipments for which payment was due more than five (5) years prior to the commencement of this action. The Court reserved for trial the issue of whether a shorter period (four year statute) was applicable. If a five year statute is applicable then KGL may recover the charges otherwise supported by the evidence. If a four year statute is applicable, all of KGL’s claims would be time barred.
As of the opening of trial in this cause, KGL (in accordance with this Court’s ruling on the statute of limitations) was seeking the following damages from CE;
unpaid shipments $111,102.71
late charges $ 1,963.17
fuel surcharges $ 204.94
pallets — fuel surcharges $ 4,924.20.
Accordingly, at trial, KGL sought judgement for $118,195.02 plus interest beginning seven (7) days after the date of each shipment.
During trial, KGL abandoned its claim for fuel surcharges with a reservation of right to reassert the claim in the event that this Court’s ruling in regard to the statute of limitations was reversed. The Court has accepted this conditional abandonment.
The Court, at the close of KGL’s case further narrowed the remaining issues in this proceeding when it granted, in part, CE’s motion for “directed verdict” (involuntary dismissal) as to KGL’s claim for late charges.
Based upon the following findings, KGL has sustained its case only as to $111,-102.71 for shipping charges based upon bills of lading executed by CE.
FINDINGS OF FACT
1. KGL, at all times material hereto, was a licensed interstate “contract carrier” of freight.
2. CE, headquartered in Hialeah, Florida is a manufacturer of medical diagnostic equipment and related supplies.
3. KGL and CE, entered into a Contract Carrier Agreement dated October 12, 1979 whereby KGL would act as carrier for CE under the provisions therein.
4. Curtin Matheson Scientific, Inc. (hereinafter CMS), is a distributer of medi-' cal equipment supplies, including certain of CE’s products. CMS has distribution facilities throughout portions of the continental United States. CMS is also a subsidiary corporation of CE.
5. KGL and CMS entered into a Contract Carrier Agreement also dated October 12, 1979 but signed by CMS in January 1981, whereby KGL would act as carrier for CMS under the provisions therein. Contract content was identical to the KGL-CE contract.
6. KGL carried freight from CE’s Hialeah plant to CMS distribution points throughout the country. Each of the shipments were evidenced by “bills of lading”. All bills of lading identified CE as the “shipper”.
7. Between March 24, 1981 and December 7, 1981, one hundred and six (106) shipments (outbound) were undertaken by KGL at the request and direction of CE. These shipments were all picked up at CE’s Hialeah facility and were received by the consignee (CMS). In each instance a bill of lading was executed by CE. (Copies of these bills of lading are collected and tabbed in KGL’s plaintiff composite exhibit “S-l, Group I through III”.)
8. Each of the bills of lading referred to in ■ these findings of fact are uniform straight bills of lading which reflect CE as the shipper/consignor. The bills of lading were preprinted CE forms.
*8839. On each and every bill of lading, CE typed the words “ship prepaid”.
10. Tariff rates for these movements total $110,564.52.
11. On April 23, 1981 and May 29, 1981, CE engaged KGL to move two shipments of commodities (inbound) from Edison, New Jersey to CE’s Hialeah plant. The Tariff charges of $538.19 are unpaid. (These bills of lading are collected in KGL plaintiffs composite exhibit “S-l, Group IV (nos. 3 and 4)”.)
12. CE did not execute the non-recourse provision of the bill of lading which, under its terms and custom in the industry, would have released CE from liability for transportation charges.
13. CE exhibit 6, a letter from KGL to CMS dated January 16, 1981, sets forth procedures on how invoices would be mailed from KGL to CE for verification, then to CMS for payment.
14. In each instance, CE made all arrangements with KGL concerning the times of shipment, size and nature of each load, destination(s), risk of loss and freight rate.
15. There was evidence CMS’ was providing CE with some instructions on shipping information but overwhelming evidence that CE provided all shipping instructions directly to KGL.
16. The only tariff that was ever filed with the Interstate Commerce Commission (hereinafter ICC) was under the KGL-CE contract and no ICC permit was obtained in connection with the KGL-CMS contract.
17. KGL plaintiffs exhibit 18, in conjunction with plaintiff exhibit 100 demonstrates that at least one of the bills from the shipments to be paid by CMS was actually paid by CE.
18. Paragraph 2 of CE exhibit 11, a document introduced by testimony of one of CE’s witnesses, refers to the fact it took too long to pay the “Coulter’s bills”.
19. CE exhibit 12 indicates that the bills of lading were to be signed by the “shipper” at the time of pickup. In each instance, CE signed the bill of lading at the time of pickup.
20. CE exhibit 14 shows that the carrier, KGL, in July 1981, was still looking to CE as well as CMS for payment of past due deliveries.
21. The Court specifically finds that the pallets were transported under a verbal agreement of $3 per pallet and the agreement was made between KGL and CE, but no mention was made of a fuel surcharge obligation.
22. CE agreed to provide payment of $15,000 to KGL as a standing advance payment intended to cover KGL charges, in progress, but in excess of the seven day ICC payment rule, i.e. late charges.
23. KGL returned the $15,000 advance payment by applying it to the outstanding balance on CE’s account in December 1981.
CONCLUSIONS OF LAW
1. The applicable statute of limitations does not bar this action. Actions by contract carriers to recover their freight charges under bills of lading are governed by the state statute of limitations applicable to contract actions. At this time the Court makes its temporary ruling on this issue final. The Court specifically concludes that the Florida five year statute of limitations for obligations founded upon a written agreement is applicable to the claims in this case. See Florida Statute S95.11(2)(b); Nashville Railroad Co. v. Central Iron Co., 265 U.S. 59, 65, 44 S.Ct. 441, 442, 68 L.Ed. 900 (1965); R.E. Minton v. General Shale Products Corp., 52 Tenn. App. 60, 371 S.W.2d 808, 810 (Tenn.App.1963). (Finding (FF) 1-5)
2. CE has asserted that bills of lading do not constitute a written contract upon which suit can be brought. Such is not the case. As the United States Supreme Court recognized in Southern Pacific Transportation Co. v. Commercial Metals Co., 456 U.S. 336, 102 S.Ct. 1815, 72 L.Ed.2d 114 (1981), the ICC has prescribed a uniform bill of lading for use in all interstate shipments since the year 1919. Furthermore, “<the> bill of lading is the basic transportation contract between the shipper-consignor and the carrier; its terms and condi*884tions bind the shipper and the connecting carriers.” Id, at 342, 102 S.Ct. at 1820. See also Texas and Pacific Rail Co. v. Leatherwood, 250 U.S. 478, 39 S.Ct. 517, 63 L.Ed. 1096 (1919). This court concludes that the bill of lading is a written contract. (FF 6-8)
3. Liability is governed by the bill of lading contract between the parties and must be decided by interpreting that contract. C-G-F Grain Co. v. Atchison T. and S.F.R. Co., 351 I.C.C. 710, 712 (1976). Unless the bill provides to the contrary, the consignor remains primarily liable for the freight charges. (FF 8, 9)
4. This action was commenced on March 26, 1986 and payments were due seven (7) days after carriage. Hence, the Court’s ruling on summary judgement and ruling on final judgment effectively eliminates all charges in regard to shipments preceding March 19, 1981. KGL is entitled to assert its claims for all unpaid freight charges for carriage of freight moved after March 19, 1981. (FF 10, 11)
5. Each bill of lading contains a provision whereby the consignor may indicate to the carrier that the consignee or some other party is responsible for payment of the transportation charges applicable to the particular shipment being picked up. By failing to execute this “non-recourse” provision, CE continued to be primarily liable for those charges. Southern Pacific, supra, 102 S.Ct. at 1820; Watkins Motor Lanes, Inc. v. Imperial Freight Brokers, Inc., 493 So.2d 545 (Fla. 3DCA 1986); Missouri Pacific Railroad Co. v. Center Plains Industries, Inc., 720 F.2d 818 (CA5 1983). (FF 12)
6. Although CE was clearly the consignor on the bills of lading in dispute, it has contested its liability thereunder. CE argues that: (i) CMS was the “shipper” and therefore responsible for payment; and (ii) that CMS was substituted in the place of CE, relieving CE of any further responsibility to KGL;
a. although the evidence tends to suggest that there were two shippers and therefore concurrent liability, that issue is not relevant to the issues before the Court in this proceeding. ICC law generally does not prohibit an agreement that a third party will pay as long as the shipper is not released. Bekins Van Lines Co. v. Cauble, 547 S.W.2d 320 (Tex.Civ.App.1977). (FF 13)
b. the Court concludes that CE, as the party giving the instructions to the carrier, is the party that is in control of the shipment and is therefore the “shipper”. (FF 14, 15)
7. CE, as the contracting party and shipper, is liable for transportation charges unless expressly released. CE offered testimony that there was a “takeover” of the KGL-CE agreement by CMS. However, the Court concludes that as a matter of law that testimony is insufficient to extinguish CE’s responsibility. There is no release of CE on record. See AAA Trucking Corp. v. Spherex, Inc., 272 A.2d 594 (N.H.1970). (FF 16)
8. Although the KGL-CMS contract itself was executed, it does not by expression or by implication release CE. (FF 5) CE’s assertion that the mere similiarities between the two contracts was intended to effectuate a release is not credible. (FF 3, 5) It is difficult, indeed impossible to accept that sophisticated parties to a contract would leave something so important and so easy to express, to silence and speculation, if that were in fact the intention. (FF 7, 8, 9, 12, 14, 16)
9. This Court concludes that CE is liable under each of the bills of lading which are the subject of this action and that KGL is entitled to recover from CE transportation charges of $111,102.71 as the total due on all the remaining bills of lading. (FF 17, 18, 19, 20)
10. There is no evidence to support holding CE liable for any fuel surcharges. (FF 21)
11. KGL is not entitled to recover any late charges. The $15,000 advance payment was returned indicating KGL did not believe late charges were applicable. (FF 22, 23)
*885DISCUSSION
The final judgement turns on whether CE had a novation to their agreement with KGL or on the individual bills of lading, such that CMS assumed the obligation to pay transportation costs from CE. The record does not contain any competent evidence of any novation of CE’s liability to KGL. Although CE’s exhibit 6 sets forth a procedure whereby certain payments due KGL would be paid by CMS, this is insufficient to establish a novation. CE still received the invoices direct from KGL.
CE contends that a novation is “totally irrelevant, because KGL is sueing ... on the bills of lading and not on the Agreement.” However, CE overlooks the fact that a novation can be applicable to the bills of lading as well. Here, there was an opportunity for CE to extinguish its obligation on the bill of lading by executing the non-recourse provision but they failed to do so.
CE also contends that this proceeding is governed by Thunderbird Motor Freight Lines, Inc. v. Seaman Timber Co., Inc., 734 F.2d 630 (11th Cir 1984) and Louisville & Nashville Railway Co. v. Central Iron & Coal Co., 265 U.S. 59, 44 S.Ct. 441, 68 L.Ed. 900 (1924). The latter ease correctly states that the presumption that the shipper is the consignor is rebut-table by showing, “by the bill of lading or otherwise, that the shipper of the goods was not acting on his own behalf; that this fact was known by the carrier; that the parties intended not only that the consignee should assume an obligation to pay the freight charges, but that the shipper should not assume any liability whatsoever therefore; or that he should assume only a secondary liability.” Id. at 67-68, 44 S.Ct. at 443. Applying this to the former case it was found that the consignee was liable for freight charges because, not only did he make sole arrangements with the carrier directly, but the carrier never even presented any of the bills of lading or invoices to the alleged consignor. In fact, the arrangement made between the carrier and the consignee was such that the carrier, under consignee’s direct orders, would arrive unannounced at various unscheduled times at the alleged consignors work place and request pick up at that time. The court determined that the alleged consign- or had little control or interest in the arrangement between carrier and consignee and thus could hardly be deemed a shipper and was therefore not liable for freight charges. Here, the facts are readily distinguishable. CE, whether under CMS direction or not, made direct arrangements with KGL, prepared and signed the bills of lading, received invoices, and was in complete control of all pick ups by KGL. There is not sufficient evidence to indicate otherwise. As mentioned earlier, if the intent was to have CMS wholly responsible for the freight, then there were explicit means by which this could have been accomplished rather than have this Court find there existed a “secret director” making arrangements. It is clear that CMS could have controlled the shipments but did not.
KGL has consistently maintained the payment was due on each shipment seven (7) days after the shipment. The Court in this matter has found that each of the bills of lading was a contract and the evidence led to the substantially undisputed conclusion that the charges on each bill of lading were set by tariff applicable to these parties and therefore the damages are liquidated. KGL is entitled to prejudgement interest at the legal rate pursuant to Florida law beginning seven (7) days after the date of each shipment as indicated in Composite S-l. The legal rate of interest in the State of Florida from March 1981 through July 1, 1981 was 6% per annum. The rate was 12% per annum thereafter. A mathematical calculation of the prejudgement interest due through July 31, 1990 is $114,-376.88 and is equal to $36.53 per diem thereafter.
Each party is to bear their own costs.
DONE and ORDERED.
FINAL JUDGEMENT
THIS CAUSE came on before the Court for trial on October 25 and 26, 1989. The trial was continued to January 3,1990, then *886to March 29, 1990, and was concluded on March 30, 1990.
Based upon the Findings of Fact and Conclusions of Law entered herein, the Court awards Plaintiff, K.G.L. Contracting Services, Inc., Final Judgement against the Defendant, Coulter Electronics, Inc. d/b/a Coulter Diagnostics, Inc., damages of $111,102.71, pre-judgement interest of $114,376.88 through July 81, 1990 plus $36.53 per diem thereafter, for a total of $225,479.59, for which sum let execution issue forthwith.
Each party will bear their own costs.
DONE and ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491180/ | MEMORANDUM OPINION
STEPHEN A. STRIPP, Bankruptcy Judge.
This opinion shall supplement the record on the Court's determination on June 26, 1990 that Ernest R. Costanzo, Esq., attorney for the debtors, was in contempt of Court for intentionally violating an order as to where to file papers in this case, and for intentionally showing disrespect for the Court in open court on that date.
FINDINGS OF FACT
On December 26, 1989, Michael and Lucille Hicks, the debtors in this case, filed a joint petition for relief under chapter 13 of Title 11, United States Code (“the Bankruptcy Code”). A chapter 13 statement, plan and summary were not filed within fifteen days of the date on which the petition was filed as required by Bankruptcy Rules 1007(b)(2), 1007(c) and 3015. On May 31, 1990 the Court issued a sua sponte order to show cause why the case should not be dismissed for failure to file those documents. The order to show cause was returnable on June 26, 1990 at 11:00 a.m. Mr. Costanzo was served with the order to show cause by mail on June 1, 1990.
At a hearing prior to June 26th in another chapter 13 case on another order to show cause to dismiss for the same reasons, Mr. Costanzo stated that the missing documents in that case had been filed in the Bankruptcy Court Clerk’s office in Camden some time ago. The Court directed Mr. Costanzo to cease the practice of filing papers in Camden for bankruptcy cases assigned to Trenton, noting that the practice places an unnecessary burden on the Clerk’s office and tends to cause delay and confusion in administration of cases.
On the June 26th return date of the order to show cause to dismiss this case, Mr. Costanzo stated that the documents in question had been filed. On the basis of that representation, the order to show cause was vacated. Mr. Costanzo then volunteered the additional information that in spite of my order that he cease the practice, he had filed an order in this case in the Bankruptcy Court Clerk's office in Camden. The following exchange then took place:
MR. COSTANZO: They have been filed, yes, your Honor. That’s correct. Mr. and Mrs. Hicks signed. There’s one other issue, but after your Honor addresses these, I’d like to address one other issue, your Honor.
THE COURT: Well, what is it?
MR. COSTANZO: If your Honor has anything to add?
THE COURT: Well, if what you’re about to tell me relates to this, then I’d like to know it first.
MR. COSTANZO: Yes, it does. Your Honor, again, going back to the issue that we discussed last Monday.
THE COURT: Which one?
MR. COSTANZO: The issue resolved— regarding the filing in Camden.
THE COURT: Right.
MR. COSTANZO: Your Honor wanted an order extending the stay until today, which again is filed with your Clerk’s office. In order to get a clarification of this issue—
THE COURT: What issue?
MR. COSTANZO: The issue of filing in Camden that you said should not be done with Trenton cases, what I did in order to try to get a resolution of this. I filed it in Camden and I hand delivered it here waiting your Honor’s enforcement order so that I can appeal this. I would like to get a clarification of this, your Honor. THE COURT: Great. I’ll be delighted to have you do that, Mr. Costanzo.
MR. COSTANZO: Fine, your Honor. That’s the only other—
THE COURT: Now what is it specifically that you want to appeal, my instruction *57that you must file something for this vicinage in this courthouse?
MR. COSTANZO: Correct. That’s correct.
THE COURT: Okay.
MR. COSTANZO: It is my — may I set my position for the record with your Honor’s permission?
THE COURT: Sure, go ahead.
MR. COSTANZO: It is my understanding New Jersey being one Federal District, all these papers should be able to be filed in Newark, Trenton or Camden for any case at the lawyer’s convenience.
THE COURT: At the lawyer’s convenience.
MR. COSTANZO: That’s my understanding, your Honor. That would be my position, sir.
THE COURT: All right. Well, okay, that would be your position.
MR. COSTANZO: Yes, sir.
THE COURT: Well my position is that the Clerk’s office is not a messenger service for lawyers and that it causes considerable and frequent confusion and delay when papers are filed in one office for the benefit or for ultimate delivery to another office. It inconveniences the Court. It tends to inconvenience other interested parties because the papers are not often presented on time and for that reason I have instructed you and everyone else who I have found to engage in this practice to cease and desist filing papers in one office for another. And it will therefore be so ordered and it is so ordered pursuant to Code Section 105. Now—
MR. COSTANZO: Your Honor, as again—
THE COURT: —that will be a standing order to you in this and every other case. So be guided accordingly.
MR. COSTANZO: Well, your Honor, because I did do this in order to test this issue, I would appreciate some enforcement order because I did file that specifically in Camden for this issue, your Hon- or.
THE COURT: You would appreciate an enforcement order? What are you telling me?
MR. COSTANZO: Well, I would — I would expect some fine or some contempt order, your Honor, to issue in order to enforce that because I did specifically file that in Camden yesterday. THE COURT: Oh, I see. So your — in other words when I—
MR. COSTANZO: In other words, I have to have something to appeal from, your Honor.
THE COURT: When I ordered you on June — what was that, June 18th?
MR. COSTANZO: That’s correct.
THE COURT: I told you not to file papers in Camden any more in this case. MR. COSTANZO: That’s correct. Now yesterday—
THE COURT: And you filed the papers in Camden?
MR. COSTANZO: I filed the stay order that you requested, yeah.
THE COURT: And you did that knowingly and intentionally?
MR. COSTANZO: Correct.
THE COURT: And you did that with the intention of violating my order?
MR. COSTANZO: That’s correct.
THE COURT: All right. That being the case, I find you in contempt of court and I will fine you the sum of $1,000 which you are to pay to the Clerk of the Bankruptcy Court within 10 days. And you will submit an order to that effect.
MR. COSTANZO: Certainly, your Honor. Thank you, sir.
The above statements by Mr. Costanzo left no doubt that he was in contempt of court, and the Court ruled accordingly. He admitted violating an order of the Court, offering as justification his purported belief that he should be able to file papers in any of the three federal courthouses for a case assigned to another courthouse at his convenience. He invited the finding that he was in contempt, stating that he “would expect some fine or some contempt order.”
Mr. Costanzo’s statements in open court, together with his intentional violation of an *58order to cease filing papers in an office where a case is not being administered, constituted direct and flagrant contempt of Court. Because his actions and attitude showed unmistakable disrespect for the Court and defiance of its authority, the Court fined Mr. Costanzo the sum of one thousand dollars and directed that he pay it to the Court Clerk. Mr. Costanzo was further directed to submit an order to that effect.
It has now been almost three months since the hearing in question. In spite of the fact that his stated purpose was to obtain an order that he could appeal regarding the Court’s authority to direct an attorney as to where to file papers, Mr. Costanzo has not submitted any order. The Court has therefore prepared an order, which accompanies this opinion.
CONCLUSIONS OF LAW
Bankruptcy Code § 105(a) states:
The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.
For the reasons stated on the record on June 26, 1990, it is appropriate for the carrying out of the provisions of the Bankruptcy Code to require the filing of papers in the clerk’s office in the courthouse where a case has been assigned. There may be occasions where some emergency justifies a deviation from this rule. However, in view of the abundance of messenger services available at nominal cost, such occasions will be rare at best. Moreover, no argument based on emergency was made here. Mr. Costanzo merely argued that he should be able to file papers where he sees fit at his convenience. The Court concludes that its direction to Mr. Costanzo to file papers in this courthouse for cases assigned here was within the authority granted by Code § 105(a).
As far as the issue of contempt is concerned, Bankruptcy Rule 9020(a) states that contempt committed in the presence of a bankruptcy judge may be determined summarily by a bankruptcy judge. Such determinations are within the authority granted to bankruptcy judges under Code § 105(a). In re Grosse, 96 B.R. 29, 32 (E.D.Pa.1989), aff'd sub nom. Dubin v. Jakobowski, 879 F.2d 856 (3d Cir.1989), cert. denied sub nom. Jakobowski v. Dubin, — U.S. -, 110 S.Ct. 501, 107 L.Ed.2d 504 (1989); In re Atlantic Business and Community Corp., 901 F.2d 325 (3d Cir.1990); In re Walters, 868 F.2d 665 (4th Cir.1989). Mr. Costanzo's statements at the hearing on June 26, 1990 constitute contempt committed in the presence of the Court, which can and will be determined summarily.
An order accompanies this opinion.
ORDER DETERMINING ERNEST R. COSTANZO, ESQ. IN CONTEMPT OF COURT
For the- reasons stated on the record on June 26, 1990 and in the Court’s memorandum opinion of September 19, 1990,
IT IS on this 19th day of September, 1990 ORDERED and ADJUDGED as follows:
1. Ernest R. Costanzo, Esq. is in contempt of Court.
2. Ernest R. Costanzo, Esq. is fined the sum of $1,000., which shall be paid to the Clerk of the Bankruptcy Court in Trenton, New Jersey within 20 days of the date of this order. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491182/ | ORDER
WILLIAM A. HILL, Bankruptcy Judge.
This is a consolidated adversary proceeding commenced by the trustee on June 26, 1990, against thirteen defendants seeking recovery of alleged preferences and fraudulent conveyances. Ten of the answering defendants have filed demands for jury trial.1 Three defendants have not interposed any answer.2
In Granfinanciera v. Nordberg, — U.S. -, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989), the Supreme Court, relying heavily on its decisions in Katcken v. Landy, 382 U.S. *198323, 86 S.Ct. 467, 15 L.Ed.2d 391 (1966), and Schoenthal v. Irving Trust Co., 287 U.S. 92, 53 S.Ct. 50, 77 L.Ed. 185 (1932) held that the Seventh Amendment right to a jury trial is preserved in actions seeking to recover fraudulent transfers notwithstanding the fact that the claim arises in the context of a bankruptcy case. Although Granfinanciera was a fraudulent conveyance action under section 548, nothing in Granfinanciera or in the historical underpinnings of section 547 suggests that a preference action to recover a money judgment should be treated any differently than a fraudulent conveyance action. A jury trial is preserved in either situation. In Granfinanciera, however, the court clearly indicated also that the Seventh Amendment right to a jury trial is preempted upon the filing of a proof of claim. Granfinanciera, 109 S.Ct. at 2798-99. On this issue the court stated, “We read Schoenthal and Katchen as holding that, under the Seventh Amendment, a creditor’s right to a jury trial on a bankruptcy trustee’s preference claim depends upon whether the creditor has submitted a claim against the estate.” Id. 109 S.Ct. at 2799. Further elaborating on this point the court went on: “As Katchen makes clear ... by submitting a claim against the bankruptcy estate, creditors subject themselves to the court’s equitable power to disallow their claims, even though the debtor’s opposing counterclaims are legal in nature.... ” Id. 109 S.Ct. at 2799.
Dale and Leon Roesler, Kent Roes-ler, Merle Schatzke and Orval Beadles have filed proofs of claim and for that reason have no right to have the adversary proceeding against them tried by a jury.3 The six remaining defendants who have requested jury trials (Eldon Saunders, Alvin Leedahl, Steve Brakke, Paul Brakke, Don Brakke and Dallas Glasow) have not filed proofs of claim against the estate and are entitled to a jury trial with respect to the trustee’s claim against them.
In this circuit it has been determined that bankruptcy judges lack either express or implicit authority to conduct jury trials in legal proceedings brought by a debtor or trustee against third party creditors. In re United Missouri Bank of Kansas City, N.A., 901 F.2d 1449 (8th Cir. 1990). Thus, while these five defendants are entitled to a jury trial, that trial cannot be conducted by the Bankruptcy Court. It is appropriate procedurally that the trustee’s Complaint be severed with this court retaining jurisdiction over the trial of the section 547/548 actions against Zip Feed Mills, Dale and Leon Roesler, Kent Roes-ler, Merle Schatzke, Runck Chateau Ranch, Gordon Halvorson and Orval Beadles. The trustee’s Complaint against Eldon Saunders, Alvin Leedahl, Steve Brakke, Paul Brakke, Don Brakke and Dallas Glasow is transferred to the United States District Court for the District of North Dakota for trial before a jury as prayed for in their respective Answers.4
The Bankruptcy Court will continue to administer the instant adversary proceeding as to those actions retained. As to the actions transferred, all further pleadings and correspondence should be directed to the United States District Court.
SO ORDERED.
. Dale and Leon Roesler dba Roesler Farms, Kent Roesler, Merle Schatzke, Eldon Saunders, Alvin Leedahl, Steve Brakke, Paul Brakke, Don Brakke, Orval Beadles, and Dallas Glasow.
. Zip Feed Mills, Inc., Runck Chateau Ranch and Gordon Halvorson.
. Dale and Leon Roesler filed claims number 72, 78 and 84, Kent Roesler filed claim number 135, Merle Schatzke filed claim number 98, and Orval Beadles filed claim number 163.
(Zip Feed Mills dba Gold Label Feeds filed claim number 13 but has not interposed an answer or demanded a jury trial.)
. In United Missouri the Circuit granted a writ of mandamus requiring the District Court to withdraw reference of the case pursuant to 28 U.S.C. § 157(d). The court is satisfied from the pleadings that substantially the same circumstances exist which would require reference withdrawal as regards that portion of the Complaint being transferred. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491184/ | ORDER
JAMES E. RYAN, Chief Judge.
On this 18th day of September, 1990, the Trustee’s Objection to Exemption (Docket Entry No. 9) with Response by the Debtors (Docket Entry No. 11) came before this Court for consideration. At a hearing conducted on July 18, 1990, the parties conceded that the matter could be resolved on submission of Stipulations and legal Briefs; thus, further evidence was not necessary. As a result, the parties have submitted a Stipulation of Facts (Docket Entry No. 14) with a Supplement (Docket Entry No. 24) and Second Supplement (Docket Entry No. 30). In addition, this Court received a Brief in Support of Trustee’s Objection to Debtors’ Claim of Exemption (Docket Entry No. 20) and Brief in Opposition to *263Trustee’s Objection to Debtors’ Claim of Exemption of Retirement Funds (Docket Entry No. 29).
After review of the parties’ Stipulations, Briefs and the applicable law and precedent, this Court does hereby enter the following Findings of Fact and Conclusions of Law in conformity with B.R. 7052 in this core proceeding:
STATEMENT OF ISSUES
The Trustee’s Objection and subsequent pleadings give rise to the issues of:
(1) whether the Employee Retirement Income Security Act Program (ERISA) qualified retirement plan in which the debtor participates is property of the bankruptcy estate; and
(2) If so, whether the same plan can be validly exempted from the estate by the debtor pursuant to the Oklahoma exemption statutes in light of the provisions of the Federal statute creating and governing ERISA qualified retirement plans;
(3) whether the provisions under 11 U.S.C. § 522(b)(2)(A) are sufficient to exempt the ERISA qualified retirement plan at issue.
FINDINGS OF FACT
Pursuant to the Stipulations of the parties, this Court enters the following findings:
1. The Debtors, Stephen Lynn Smith and Marcia Anne Smith, filed for protection under Chapter 7 of the United States Bankruptcy Code on May 4, 1990 in the United States Bankruptcy Court for the Eastern District of Oklahoma.
2. On Schedule B-3 to the bankruptcy petition, the Debtors listed certain property entitled “Retirement” and valued at $95,-000.
3. The Debtors claim the Retirement as exempt property. The property listed as “Retirement” has been identified as a certain Halliburton Profit Sharing and Savings Plan (“The Plan”) in which the Debtor has an estimated value of $95,000.
4. The Debtors’ participant share in The Plan is identified as El No. 51913C and Participant No. 0008142.
5. The Plan is governed by the Employee Retirement Income Security Act of 1974 (“ERISA”). The Plan is entirely voluntary on the part of the Debtors.
6. The Plan allows for withdrawals while an active employee of the Regular Savings and Tax Deferred Savings Accounts. There is no condition precedent for eligibility to withdraw from the Regular Savings Account. Funds in the Tax Deferred Savings Account may be accessed in the event of an “immediate and substantial financial hardship.” Withdrawal from either account will cause such amounts to be subject to payment of ordinary income tax plus additional 10% penalty.
7. The Debtors have received information as to the contents of the Halliburton Oil Field Services Group Retirement Plan. That Debtors’ Fixed Income Fund (FIF) amount to employee contribution of $5,247.82, and not the previously estimated amount of $95,000.
8. That the GIF and HSF are funds which contain only employer contributions; their values are expressed in units, rather than dollars, which Debtors have accumulated 8,000.94 units at an approximate amount of $100,411.79.
9. The Halliburton Profit Sharing and Savings Plan is a qualified Plan under section 401(a) of the Internal Revenue Code.
CONCLUSIONS OF LAW
A. An ERISA qualified retirement plan such as the one at issue in this case has been determined to be property of the bankruptcy estate so long as it does not qualify as a spendthrift trust. See In re Weeks, 106 B.R. 257 (Bankr.E.D.Okla. 1989); In re Goff, 706 F.2d 574 (5th Cir. 1983).
In the case at issue, if a trust is created at all, it is “self-settled” in the debtor and this, combined with the considerable degree of control which may be exerted over the Plan funds by the Plan Administrator, disqualifies the debtor’s Plan as creating a *264“spendthrift trust.” As a result, the retirement plan is deemed property of the estate.
B. This Court has previously determined that the ERISA provisions “preempt” the Oklahoma exemption statute and thus an ERISA qualified retirement plan such as the one the debtor tries to exempt in this case is not subject to the exemption provisions of Okla.Stat.Ann. tit. 31, § 1(A)(20) (West Supp.1988-89). See Mackey v. Lanier Collections Agency and Service, Inc., 486 U.S. 825, 108 S.Ct. 2182, 100 L.Ed 2d 836 (1988) and In re Weeks, supra, at p. 261-63.
C. The debtors also raise an issue which this Court has not addressed in its previous rulings on the exemptability of ERISA qualified retirement plans. Namely, the debtor asserts that 11 U.S.C. § 522(b)(2)(A) permits the debtors to exempt the retirement plan at issue. This section provides that “any property that is exempt under federal law, other than subsection (d) of this section ...” may be claimed as exempt by a debtor. Since the ERISA statutes require that a qualified plan contain “nonassignability and nonal-ienation” clauses which prohibit the' garnishment of ERISA qualified plans, and since the ERISA law is a federal law, the debtors argue that the Plan at issue should be exempt under § 522(b)(2)(A) of the Bankruptcy Code.
Although the debtors cite two relatively recent opinions that have accepted this argument [In re Komet, 104 B.R. 799 (Bankr. W.D.Texas 1989) and In re Burns, 108 B.R. 308 (Bankr.W.D.Okla.1989) ], the vast majority of Courts, including the Circuit Courts which have addressed this issue, have declined to follow this view and have determined that Congress did not intend for ERISA to be included as a “federal law” envisioned by § 522(b)(2)(A). See In re Graham, 726 F.2d 1268 (8th Cir.1984); In re Goff, 706 F.2d 574 (5th Cir.1983); In re Lichstrahl, 750 F.2d 1488 (11th Cir.1985) and In re Brown, 95 B.R. 216 (Bankr.N.D. Okla.1989).
We concur with the reasoning of these decisions. The House and Senate Reports which address this provision include a nonexclusive list of laws intended to be addressed by this section. See S.Rep. No. 989, 95th Cong., 2nd Sess. 75, reprinted in 1978 U.S.Code Cong. & Ad.News 5787, 5861, 6315; H.R.Rep. No. 595, 95th Cong., 2nd Sess. 360 (1977). We find great merit in the “conceptual distinction” between the statutes listed in the legislative history and the ERISA statutes, in that the specific statutes listed are uniquely created federal protections in areas governed by the federal government, where ERISA is an attempt to regulate private employers and to protect employee retirement benefits. As a result, we reject the debtors’ urging to follow In re Komet, supra, and instead find that ERISA is not the “federal law” addressed under § 522(b)(2)(A).
Further, we must give some credence to the fact that ERISA became law in 1974, well in advance of the passage in 1978 of the Bankruptcy Code. Thus, while Congress was aware of ERISA, it did not include this statute in those federal laws intended to be affected by § 522(b)(2)(A).
IT IS THEREFORE ORDERED that the Halliburton Profit Sharing and Savings Plan is property of this estate. Further, the Objection to Exemption filed by the Trustee is hereby sustained for the reasons set forth hereinabove. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491187/ | ORDER ON TRUSTEE’S OBJECTION TO CLAIMS OF EXEMPTION AND MOTION FOR DEBTORS TO TURNOVER PROPERTY OF THE ESTATE
ALEXANDER L. PASKAY, Chief Judge.
This is a Chapter 7 liquidation case and the matter under consideration is the Trustee’s Objection to Claims of Exemption and Motion for Debtors to Turnover Property of the Estate. The facts which are relevant to the disposition of the issues as established at the hearing on the Trustee’s Objection are as follows:
The Debtors filed their Petition for Relief under Chapter 7 of the Bankruptcy Code on March 9, 1990. The Debtors claimed as exempt property in the amount of $2,000.00 pursuant to § 522(b)(2)(A) of the Bankruptcy Code and Florida Statutes Section 222.21. Among the property the Debtors claimed as exempt are two burial plots with a value of $600 pursuant to Florida Constitution Article X § 4(a)(2). The Trustee objects to this claim of exemption and requests this Court order the Debtors to turn over to the Trustee the value of these plots or their ownership interest of the plots.
Under Florida Statute § 497.033(l)(c), cemetery companies have the exclusive right to sell “interment or burial rights in earth, mausoleum, crypt, niche or columbarium interment.” Fla.Stat. § 497.005(11) defines “burial right” as “the right to use a grave space” and such use has been designated as an easement, license or privilege. 9 Fla.Jur.2d § 39; Mingledorff v. Crum, 388 So.2d 632 (Fla. 1st DCA 1980). Furthermore, the contract executed by both the Debtors and Lee Memorial Park for the purchase of the cemetery plots describes the interest sold as “the exclusive rights of interment/entombment.”
Based upon the foregoing, this Court is satisfied that the interest held by the Debt*327ors is an easement which is an interest m real property. 20 Fla.Jur.2d § 1. Since the only interest in real property which may be claimed as exempt is homestead property pursuant to Article X § 4(a) of the Florida Constitution, and since there is no evidence in the record to prove that the Debtors reside on this property, this Court is satisfied that it is appropriate to sustain the Objection by the Trustee. Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the Trustee’s Objection to the Debtors’ claim of exemption is sustained and the Debtors are ordered to turn over to the Trustee their interest in the burial plots so that the Trustee may administer them as property of the estate for the benefit of all creditors.
DONE AND ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491188/ | DECISION RE MOTIONS TO DISMISS CROSS-CLAIM
BURTON PERLMAN, Chief Judge.
In this adversary proceeding, defendant Walter C. Evans filed a cross-claim against the other defendants in the case, Timothy Smith, Edgar Shott, and Patricia Shott. Smith has filed a motion to dismiss the Evans’ cross-claim against him on grounds of res judicata. Defendants Edgar Shott and Patricia Shott have also moved to dismiss the Evans’ cross-claim as it applies to them. While Edgar Shott and Patricia Shott have filed separate motions, the contents of such motions and their respective memoranda are identical. Consequently, we will hereafter refer to the Shott motions to dismiss Evans’ cross-claim, and it will be understood to refer to both such motions. We deal hereafter separately with the Smith motion and the Shott motions.
1. The Smith Motion.
The basis for the contention of res judica-ta is that in a law suit in the Hamilton County Common Pleas Court, Evans v. Smith, Case No. A8905031, Evans, in his amended complaint, made allegations against Smith which cover the same ground as do the allegations of his cross-claim here with respect to Smith. The state court action resulted in a dismissal with prejudice, and Smith says that this precludes Evans from the right to press his claim against Smith in this court.
In order to deal with this motion to dismiss, we must analyze the complaint in the Common Pleas Court and measure it against the cross-claim here asserted by Evans.
Evans, in his amended complaint in the Common Pleas Court, presents eleven causes of action. Only the third, eighth and tenth are relevant here. They relate to a business transaction in which Evans and Smith were involved. In the third cause of action, Evans alleges that in 1988 he was engaged in negotiation for the purchase of Subrogation and Recovery Consultants, Inc. (SRC). Evans then says that Smith told him that he had been solicited by the owner of SRC to buy the business. Smith said that he would negotiate and purchase the business on behalf of Evans and himself without informing the seller that he was representing Evans’ interest. It is further alleged that Evans and Smith entered into an agreement whereby Smith would purchase the shares of the corporation on behalf of himself and Evans. Evans then paid Smith $14,000.00 and the purchase of the shares of SRC was completed by Smith in July, 1988. It is then alleged that Smith fraudulently refused to issue any of the shares of SRC to plaintiff as agreed, and Smith now claims full and complete ownership of SRC for himself.
In the eighth cause of action, Evans alleges that Smith acted as broker and adviser to Evans in the purchase of SRC. He says that Smith misrepresented material facts regarding the offer to sell SRC. In this cause of action, Smith bases his claim upon violations of Section 1701.01 to 1707.-44 of the ORC. In the tenth cause of action, again actions regarding SRC are alleged. Evans alleges that Smith attempted to terminate Evans’ business relationship and employment with SRC. In this cause of action, the basis is for tortious interference with a business relationship.
In the Evans’ cross-claim in this court, the following allegations regarding Smith are to be found. In paragraph 26, he says that on or about March 6, 1989, he and Smith entered into a stock purchase agreement wherein Smith agreed to sell his in*571terest in SRC to Evans. In paragraph 30, he says that Smith tortiously interfered with the business and contractual relations and shareholder rights of Evans. In paragraph 34, he says that Smith was aware of Evans’ intent in April/May 1988 to purchase all interests of SRC, and in paragraph 35 he says that subsequent thereto the owners entered into purchase negotiations with Smith for Smith to purchase their interest in SRC. In paragraph 37, he says that in late January/early February, 1989 Smith offered to sell him Smith’s interest in SRC. In paragraph 38, he says that he accepted Smith’s offer to sell Smith’s interest to him in SRC. In paragraph 43, he says that Smith did tell him of the owner’s offer to sell and about such owner’s negotiations with Smith to purchase. In paragraph 44, he alleges that he and Smith agreed that Smith would negotiate the purchase of SRC as the representative of Evans and Smith. In paragraph 45, he says that Smith did in fact negotiate the stock purchase agreement with the owners and such representative. In paragraph 46, he says that negotiations for purchase had been completed by June, 1989.
While the defense of res judicata is not specifically listed as a defense which may be raised by motion under F.R.Civ.P. 12(b), federal courts permit it to be raised by motion to dismiss. Westwood Chemical Co., Inc. v. Kulick, 656 F.2d 1224, 1227-89 (6th Cir.1981).
In determining whether the judgment entered in Hamilton County Case No. A8905031 precludes the cross-claim by Evans against Smith, this court is governed by the principles of res judicata. These are well stated in Westwood Chemical Co., Inc. v. Kulick, 656 F.2d 1224 (6th Cir.1981) at p. 1227:
... The purpose of res judicata is to promote the finality of judgments and thereby increase certainty, discourage multiple litigation, and conserve judicial resources. See Federated Department Stores, Inc. v. Moitie, [452] U.S. [394], 101 S.Ct. 2424, 2427-2431, 69 L.Ed.2d 103 (1981); James v. Gerber Products Co., 587 F.2d 324, 327-28 (6th Cir.1978). A final judgment on a claim is res judicata and bars relitigation between the same parties or their privies on the same claim. See Federated Department Stores, supra, [452] U.S. at [397], 101 S.Ct. at 2427; Herendeen v. Champion International Corp., 525 F.2d 130, 133 (2nd Cir.1975). It bars relitigation on every issue actually litigated or which could have been raised with respect to that claim. See James, supra, 587 F.2d at 328. To constitute a bar, there must be an identity of the causes of action — that is, an identity of the facts creating the right of action and of the evidence necessary to sustain each action. (Emphasis supplied.)
See also 63 O.Jur.3d Judgments, Sec. 409 (1985) where, at page 188, may be found the following:
The primary tests for determining whether two actions are on the same cause of action for the purpose of applying the doctrine have been stated as follows: the identity of facts creating the right of action in each case, the identity of the evidence necessary to sustain each action, and the accrual of the alleged rights of action at the same time.
Furthermore, the principle of res ju-dicata does not merely preclude the re-raising of identical issues. It also precludes the raising of new issues which could have been raised in a prior action, but were not. Westwood Chemical Co., Inc. v. Kulick, supra; Coogan v. Cincinnati Bar Assn., 431 F.2d 1209 (6th Cir.1970).
Plainly, the grievances of Evans’ amended complaint against Smith in the Common Pleas Court are the same as those set forth against Smith in his cross-claim in the present adversary proceeding. They relate to a transaction for the acquisition of SRC in which Evans and Smith were engaged. Evans therefore may not, because the doctrine of res judicata applies, proceed further with his cross-claim here against Smith. Smith’s motion to dismiss Evans’ cross-claim as to him will be granted.
Evans, in his memorandum in opposition to the Smith motion to dismiss, presents basically two arguments. His first is that *572the state court judgment is void. He argues that the state court lacked subject matter jurisdiction of the claims made in that case. The reason for this, he says, is that this court was vested with exclusive jurisdiction upon the filing of the present adversary proceeding and also because of the filing of the SRC Chapter 11 bankruptcy case. In this regard, he directs our attention to 28 U.S.C. Section 1384 which defines the subject matter jurisdiction of federal courts. His contention that this federal court has original and exclusive subject matter jurisdiction over the issues raised in this adversary proceeding is mistaken. Section 1334(a) states that the federal courts have original and exclusive jurisdiction of all cases under Title 11. It is not there that the jurisdiction governing the present adversary proceeding is to be found. Rather is it to be found at Section 1334(b) which expressly states that the federal courts have original but not exclusive jurisdiction of all civil proceedings arising under Title 11, or arising in or related to cases under Title 11. The present adversary proceeding is such a civil proceeding.
Further, Evans argues that when service was obtained upon the defendants in this adversary proceeding, somehow this conferred exclusive jurisdiction upon the bankruptcy court. True, it was the intention of this court to determine all the issues effecting ownership of the stock of debtor corporation, but that expectation is not self-executing. Had he attempted it, Evans might have persuaded this court to enjoin the conduct of the Common Pleas Court case pursuant to 11 U.S.C. Section 105. This court does have the power. In the absence of an injunction preventing the state court suit from proceeding, that court certainly had jurisdiction to proceed and its judgment is not void for res judicata purposes here.
The second argument presented by Evans is that res judicata is not available here to Smith because his claims in the present adversary proceeding “are not founded on the same core of operative facts nor advanced under the same cause of action.” The difference, says Evans, is that he does not merely claim ownership in 100 shares of SRC which was the claim in the Common Pleas Court case, but here claims ownership of 750 shares. But in neither the Common Pleas amended complaint nor in the relevant paragraphs of the Evans’ cross-claim is there any mention of a number of shares of stock. Both refer to efforts to acquire the business of SRC. Further, Evans argues that the scope of his cross-complaint is more extensive than that of the Common Pleas Court amended complaint, making reference to the various claims which he asserts in his cross-claim against the Shotts. That argument is misplaced because for present purposes we deal only with the motion to dismiss of Smith.
2. The Shott Motions
In their memoranda, the Shotts say, first, that the prior adjudicated case, Evans v. Smith, Case No. A8905031, in the Hamilton County Common Pleas Court, decided adversely to Evans, precludes his pressing his cross-claim here against the Shotts by reason of collateral estoppel. Second, the Shotts contend that on the facts disclosed in the contracts attached to the pleadings, Evans is entitled to no relief.
(a) Collateral Estoppel. The Common Pleas Court case was terminated when a motion to dismiss was granted. There is no indication that there was any trial on the merits of the claims asserted by Evans in that suit.
The law in the Sixth Circuit on the subject of collateral estoppel has been explicated in Spilman v. Harley, 656 F.2d 224 (6th Cir.1981). In that case, the court laid out the prerequisite which must be met before collateral estoppel effect may be accorded to a prior adjudication. At p. 228 the court said: “Collateral estoppel requires that the precise issue in the later proceedings have been raised in the prior proceeding, that the issue was actually litigated, and that the determination was necessary to the outcome.” Since the issues in the Common Pleas Court case were not “actually litigated”, the case having been terminated by a dismissal, the contention of movants that collateral estoppel should apply is mistaken.
*573(b) The Disclosed Facts. In this ground, movants specially rely upon facts which are not proved. For example, they assert that defendant Smith failed to meet his obligations under the terms of his agreement with Patricia Shott. Nowhere is this fact established.
The motions of the Shotts to dismiss the cross claim of Evans, being without merit, will be denied.
Walter C. Evans, defendant and cross-complainant herein, has requested a hearing on the motions dealt with above. Perceiving no desirability to augment the written submissions by the parties, such motion will be denied. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491189/ | MEMORANDUM OPINION
ROBERT F. FUSSELL, Chief Judge.
Pending before the Court is a motion filed by Neal Behimer and Sandra Behimer (debtors), seeking to add creditors after their chapter 7 discharge order. The debtors are seeking to add the claims of Rhonda Lou Ames, Ladene Nielsen, Martha Ann Arey [now Martha Ann Wills], J.B. Carrol, and Duane C. Carrol (Carrol-creditors). These claims are based on a September, 1989 judgment in the amount of $29,945.23 plus interest thereon at the rate of $8.23 per day from July 1, 1988 together with attorneys’ fees in the amount of $2,995.00; real property taxes in the amount of $161.79; and costs for abstract, and title work in the amount of $258.00. This judgment was entered against the debtors after the debtors’ discharge. The Carrol-credi-tors have objected to the motion, and contend that the debtors are barred at this stage of the proceedings from adding any additional claims. The Court held hearings on the motion on April 17 and 30, 1990.
Jurisdiction
The Court has jurisdiction over this pending matter pursuant to 28 U.S.C. § 1334. Further, the above proceeding is a core proceeding within 28 U.S.C. § 157(b)(2). The following memorandum opinion constitutes findings of fact and conclusions of law in accordance with Bankruptcy Rule 7052.
Findings of Fact
On July 10, 1981, Nora Aline Carrol sold to Neal L. Behimer, under a document entitled “Land Contract and Escrow Agreement”, 14.13 acres in Washington County, Arkansas, for $20,500.00. The terms of the contract provided for a $1,000.00 down-payment, and for the remaining $19,500.00 with interest thereon, at the rate of 10% per annum to be paid in monthly payments of $175.00 with two balloon payments due in 1985.
On August 21, 1981, Nora Aline Carrol and Neal L. Behimer entered into another land contract and escrow agreement wherein Carrol sold to Behimer an additional 10 acres in Washington County, Arkansas, for $20,000.00. The terms of this agreement provided for a $3,500.00 down-payment, and for the remaining $16,500.00 with interest thereon, at 10% per annum, to be paid in monthly payments of $150.00 with a balloon payment due in 1991.
On August 30, 1981, Neal L. Behimer sold to Henry Mahler, under a document entitled “Land Contract,” the 24.13 acres which Behimer had previously purchased from Nora Aline Carrol. The purchase-price, interest, and payment terms of the Behimer-Mahler contract were virtually identical to those contained in the Behimer-Carrol land contracts and escrow agreements. Behimer testified at the bankruptcy hearing that he purchased the aforesaid lands from Nora Aline Carrol for Mahler.
The debtors filed their chapter 7 petition on May 22,1987. The debtors filed “Schedules” and “Statement of Affairs” on June 8, 1987, reflecting that the case was an asset case. The Carrol-creditors were not listed in these documents. On June 18, 1987, the Court set a September 25, 1987 bar date for filing objections pursuant to 11 U.S.C. §§ 523(c) and 727. On January 20, 1988, the Court set an April 21, 1988 bar date for the filing of claims against the estate. There is no evidence that the Car-rol-creditors ever received any notice of these bar dates.
On September 14, 1988, pursuant to 11 U.S.C. § 348(d) of the Bankruptcy Code, the Court entered an order discharging the debtors from all personal liability for debts existing on the date of the commencement of this case, or deemed to have existed on *669such date. On March 31, 1989, a complaint was filed in the chancery court of Washington county by the Carrol-creditors against Behimer and Mahler, seeking foreclosure of the above real estate, and a deficiency judgment on the contracts of sale.
The evidence reflects that from the time of the Behimer-Carrol land purchases in 1981, Behimer had.no involvement in the subject land-contracts until 1989. Behimer made no payments on the land contracts, and paid no taxes on the land. Mahler made payments directly to Nora Aline Car-rol or her estate on behalf of Behimer. Further, no demand was ever made upon Behimer for any default in payments by Mahler. Behimer had no contact in regard to the subject properties until attorney Wayne Ball contacted him by telephone on April 1, 1989.
During this April 1, 1989 telephone conversation, Mr. Ball identified himself as an attorney for the Carrol-creditors, who were heirs of Nora Aline Carrol, and said that he was filing suit against Behimer and Mahler in order to clear the title on the Washington county property. Behimer testified that he made an offer to Ball to deed the property back to the Carrol-creditors, and that he would see if he could get Mahler to do the same. Ball indicated to Behimer that he thought this would satisfy his clients. Behimer testified that during the conversation he informed Ball that Behimer had filed bankruptcy.
Behimer executed warranty deeds on the properties in favor of the Carrol-creditors. Neither Ball nor Behimer, however, could locate Mahler in order for Mahler to execute warranty deeds on the property.
Behimer testified at the bankruptcy hearing that he subsequently learned that the Nora Aline Carrol estate and Mahler had re-negotiated the land contracts in 1985, and that they had agreed to an extension of Mahler’s payments. Behimer was not contacted in regard to these negotiations. Further, Behimer was not called upon by the Nora Aline Carrol estate to make payments under this new agreement. Behimer stated, at the bankruptcy hearing, that at the time of the filing of his bankruptcy petition, he did not list the two contracts on his schedules as he believed the Nora Aline Carrol estate had relieved him from the debts because it had re-negotiated the contracts directly with Mahler, and had not included Behimer in these negotiations.
Ball testified that he had been contacted by the Carrol-creditors to represent them in the probate of the estate of Nora Aline Carrol. Ball testified that he prepared the foreclosure complaint, filed it, and called Mr. Behimer in regard to the subject property. He stated that he explained to Mr. Behimer that his efforts were directed toward returning the property to the Carrol-creditors at a minimum of cost. Ball stated that he discussed with Behimer the possibility of Behimer and Mahler executing warranty, or quitclaim deeds, conveying the lands back to the Carrol-creditors. Ball testified that Behimer was unsuccessful in obtaining any deeds from Mahler as he could not locate Mahler. Ball stated that Behimer had previously forwarded two warranty deeds to Ball, and that on April 10, 1989, Ball returned the deeds to Behimer, and proceeded with the lawsuit. Ball testified that he had no recollection of Be-himer informing him of the bankruptcy proceedings in the April, 1989 telephone conversation. Ball stated that to the best of his recollection, Attorney James A. Pe-nix, Jr. called him in September of 1989, and at that time they discussed that (1) the Behimers had filed bankruptcy; (2) the Carrol-creditors had not been listed on the bankruptcy petition; and (3) an order of discharge had been entered against the debtors with the Carrol-creditors receiving no notice of the bankruptcy proceedings.
Duane Carrol testified that he found out about the Behimers’ bankruptcy proceeding in April, 1989, when Wayne Ball informed him about the bankruptcy filing.
On August 24, 1989, the chapter 7 trustee filed a “Notice of Filing Final Report and Account of Trustee, Applications for Compensation, Abandonment of Property, and Proposed Distribution to Claimants.” On September 11,1989, the Carrol-creditors were granted a judgment against the debtors. On October 23, 1989, the debtors filed *670a “Motion to Add Creditors After Discharge of Debtor.” The Carrol-creditors, on October 23, 1989, filed a response objecting to the motion.
Plaintiffs Exhibit No. 9, “Notice of Filing Final Report and Account of Trustee, Applications for Compensation, Abandonment of Property, and Proposed Distribution to Claimants,” states:
The account of the trustee shows total receipts of $12,530.87 and total disbursements of $2,439.42. The balance on hand is $10,091.45.
In addition to expenses of administration as may be allowed by the court, liens, and priority claims totaling $12,-448.70 must be paid in advance of any dividend to general creditors. Claims of general creditors totaling $438,605.00 have been allowed.1
Conclusions of Law
The debtors’ chapter 7 case remains open as of the date of this opinion. Therefore, Bankruptcy Rule 1009 is applicable to the case.
Bankruptcy Rule 1009(a) states:
Rule 1009. Amendments of Voluntary Petitions, Lists, Schedules and Statements.
(a) General Right to Amend. A voluntary petition, list, schedule, statement of financial affairs, statement of exec-utory contracts, or a chapter 13 statement may be amended by the debtor as a matter of course at any time before the case is closed. The debtor shall give notice of the amendment to the trustee and to any entity affected thereby. On motion of a party in interest, after notice and a hearing, the court may order any voluntary petition, list, schedule, statement of financial affairs, statement of executory contracts, or chapter 13 statement to be amended and the clerk shall give notice of the amendment to entities designated by the court.
Bankruptcy Rule 1009(a).
Clearly under the expressed language of Bankruptcy Rule 1009(a) the debtors may amend their schedules and add creditors as a matter of course at any time before the case is closed.
The real question before this Court is whether at this stage in the administration of the case the granting of a motion to add the Carrol-creditors filed after an order of discharge would prejudice the Carrol-credi-tors as compared to the creditors of the estate who were included in the original schedules.
Even in instances where a chapter 7 case has been closed, the Circuit Courts of Appeals have held that absent the debtor’s fraud, intentional omission or intentional design, the case may be reopened to allow discharge of a debt which existed at the time of the bankruptcy, but was not scheduled by the debtor. Samuel v. Baitcher (In re Baitcher), 781 F.2d 1529 (11th Cir. 1986); Rosinski v. Boyd (In re Rosinski), 759 F.2d 539 (6th Cir.1985); Stark v. St. Mary’s Hospital (In re Stark), 717 F.2d 322 (7th Cir.1983) (per curiam).
In the instant case, at the hearing on the “Motion to Add Creditors After Discharge of Debtor” the Carrol-creditors presented no evidence that the omission of their claim from the petition and schedules was due to any fraud or intentional design by the debtors. To the contrary, the Court is convinced that Neal Behimer had sufficient reason to believe in 1987, when he filed his petition, that the Nora Aline Carrol estate was not going to pursue the Behimer-Car-rol land-contract sales. Behimer, correctly, believed that the Nora Aline Carrol estate had elected to abandon its claims because (1) in 1985 the Nora Aline Carrol estate re-negotiated the land contract sales with Mahler, and extended the time in which Mahler had to make payments; (2) Behimer was not included in the 1985 renegotia-tions; (3) Nora Aline Carrol or her estate *671never requested that Behimer “make good” on any default in payments by Mahler; (4) Mahler, and not Behimer, made the payments on the Behimer-Carrol contracts; (5) Behimer paid no property taxes on the property; and (6), more importantly, from 1981 until 1989, eight years after the sale and two years after the filing of the bankruptcy, neither the Carrol-creditors nor Nora Aline Carrol contacted Behimer in regard to the property or any claim.
Unfortunately, neither party to the present proceeding sought to introduce the Trustee’s Final Report and Account and Proposed Distribution filed on July 28,1989 or the Trustee’s Supplemental Final Report and Account and Proposed Distribution.2 Nonetheless, from a review of plaintiff’s exhibit No. 9, “Notice of Filing Final Report and Account of Trustee, Applications for Compensation, Abandonment of Property and Proposed Distribution to Claimants,” it appears that even though this case is an “asset case,” there are not sufficient funds in the estate to pay priority creditors in full, and therefore there are no funds available to pay anything to the general or unsecured creditors. The claim of the creditors to be added are based on a judgment against the debtors, and would fall within the classification of general or unsecured creditors.
The evidence would appear to establish that the Carrol-creditors would not be prejudiced by the addition and discharge of their debt. If the Carrol-creditors had been originally listed, they would not have received any payment from the estate and their debts would be discharged. If the Carrol-creditors are added at this late date, their debts will receive the same treatment.
This Court, however, is convinced that if the Carrol-creditors are added to the list of the debtors’ creditors, they will not have been afforded the same procedural due process rights that were afforded to the creditors who were originally listed on the debtors’ schedules. Those originally scheduled creditors had the- opportunity to attend a first meeting of creditors and question the debtors about their acts, conduct, property, liabilities, and financial condition. In addition, the creditors could ask questions relating to any matter which could effect the administration of the debtors’ estate. See Bankruptcy Rules 2003 and 2004. Moreover, the originally scheduled creditors had an opportunity to file proofs of claim pursuant to Bankruptcy Rule 3002; to object to claims of exemptions pursuant to Bankruptcy Rule 4003; to file a complaint objecting to the discharge of the debtors pursuant to Bankruptcy Rule 4004(a); and to file a complaint to determine the dischargeability of a debt pursuant to Bankruptcy Rule 4007. See Bankruptcy Rules 3002, 4003, 4004(a) and 4007. If the pending motion is granted, with no provision being made for the Car-rol-creditors to have an opportunity to investigate the debtors’ financial affairs, the Carrol-creditors will be denied procedural due process.
Based on the above, this Court will enter an order granting the debtors’ “Motion to Add Creditors After Discharge” filed on October 23, 1989. In order, however, to ensure that the Carrol-creditors will receive the same due-process afforded the other creditors in this case, the Court will permit the Carrol-creditors to: (1) file proofs of claims within thirty (30) days; (2) take the debtors’ deposition in order to inquire about their acts, conduct, property, liabilities, and financial conditions, or any matters which could effect the administration of the estate within thirty (30) days; (3) file objections to the debtors’ exemptions within thirty (30) days; (4) file complaints objecting to discharge, or to determine dis-chargeability of a debt within sixty (60) days; and (5) file objections to the trustee’s final report, supplemental report, account and proposed distribution, or report of distribution within sixty (60) days. The time within which these various filings must occur begins from the date of the entry of an order based on this memorandum.
*672If any objections or complaints are filed, then the Court will conduct an evidentiary hearing on the merits as to the objections raised or complaints filed.
. The claim at issue is not included in the total amount of general claims as reflected in Plaintiff’s Exhibit No. 9.
. While this Court may take judicial notice of its orders and of the date of filing of pleadings in the case, it cannot take judicial notice of the matters alleged or set forth in the pleadings filed. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491190/ | MEMORANDUM DECISION
PEDER K. ECKER, Bankruptcy Judge.
ACTION
This decision adjudicates whether Chapter 7 debtors may reopen their closed case for the purpose of amending their schedules by listing an inadvertently omitted debt. The Court maintains jurisdiction under 28 U.S.C. § 1334, and this is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (J). This memorandum constitutes findings of fact and conclusions of law pursuant to Bankr.R. 7052.
FACTUAL BACKGROUND
Paul and Mary Hocum (“Hocums” or “debtors”) filed a no-asset Chapter 7 petition on December 2, 1988. Debtors obtained a discharge of debts on March 24, 1989. Debtors’ case was closed administratively on April 17, 1989. On June 14, 1990, debtors filed a motion to amend schedules to list a $262.94 medical debt owed to Sioux Valley Hospital which was assigned to Allied Collection Service, Inc. (“Allied” or “creditor”). Allied objected on grounds the case has been closed over a year.
DISCUSSION
Courts treat a debtor’s motion to amend schedules entirely different depending on whether debtor’s case is open or closed. A majority of jurisdictions follow the permissive approach, allowing schedule amendment of a no-asset Chapter 7 case as a matter of course any time before the case is closed provided the creditor suffers no prejudice and the debtor acts in good faith. Matter of Gershenbaum, 598 F.2d 779, 780 (3d Cir.1979); Matter of Brown, 56 B.R. 954, 958 (Bankr.E.D.Mich.1986); In re Galvin, 50 B.R. 583, 586 (Bankr.D.R.1.1985); In re Jordan, 21 B.R. 318, 320 (Bankr.E.D. N.Y.1982); Slates, The Unscheduled Creditor in a Chapter 7 No-Asset Case, 64 *725Am.Bankr.L.J. 280, 282 (1990). The creditor sustains the burden of establishing by clear and convincing evidence that the debt- or acted in bad faith or concealed property. Brown, 56 B.R. at 958. Rationale justifying liberal schedule amendment includes: amendment alone does not work a discharge; disallowance causes the debtor to lose bankruptcy’s fresh start protection; and Bankr.R. 1009 allows a debtor to amend schedules “as a matter of course” anytime before the case is closed. Ger-skenbaum, 598 F.2d at 782-83; Brown, 56 B.R. at 957-58. Free amendment of schedules is the majority rule if the case is open, but a different procedure controls if the case has been closed.
Some older authority exists holding that a no-asset Chapter 7 bankruptcy case may not be reopened in order to list inadvertently omitted creditors, e.g., Milando v. Perrone, 157 F.2d 1002, 1003 (2d Cir.1946); Matter of Swain, 21 B.R. 594, 596 (Bankr.D.Conn.1982), but a more recent line of cases permits reopening a case and amending schedules unless fraud, prejudice, or intentional design exists. Matter of Baitcher, 781 F.2d 1529, 1534 (11th Cir. 1986); In re Rosinski, 759 F.2d 539, 541 (6th Cir.1985); Matter of Stark, 717 F.2d 322, 323 (7th Cir. 1983); In re Minniear, 88 B.R. 1005, 1006 (Bankr.W.D.Mo.1988); In re Rhodes, 88 B.R. 199, 200 (Bankr.E.D. Ark.1988). The decision to reopen a bankruptcy case after it has been closed for the purpose of avoiding security interests, to add an omitted creditor, for the purpose of avoiding a lien, or for other cause is within the bankruptcy court’s sound discretion. 11 U.S.C. § 350(b); Hawkins v. Landmark Fin. Co., 727 F.2d 324, 326 (4th Cir.1984); Stark, 717 F.2d at 324; In re Walters, 113 B.R. 602, 606 (Bankr.D.S.D.1990). Hocums’ Chapter 7 case was administratively closed by this Court. The Court adopts the current case line, as enunciated in the respectively cited authorities, on the grounds of: equity; a creditor holding an otherwise dischargeable claim should not benefit from the debtor’s excusable mistake in not listing such creditor; a debtor need not forfeit the benefits of bankruptcy where the creditor has not been harmed; Section 350(b)’s express language permits reopening to add omitted creditors; and the recent line properly focuses on the substance of the harm that will occur rather than the form of the type notice the creditor received. Baitcher, 781 F.2d at 1534; Hawkins, 727 F.2d at 327; Stark, 717 F.2d at 324; Walters, 113 B.R. at 606; Slates, 64 Am.Bankr.L.J. at 294.
Authority exists holding a closed Chapter 7 no-asset case need not be reopened to list debts on debtor’s schedule in order to be discharged, as long as there is no fraud, breach of fiduciary duty, or willful and malicious injury by the debtor. In re Padilla, 84 B.R. 194, 196 (Bankr.D.Colo.1987). The court, in Padilla, reasoned that Section 523(a) deals with two main types of debt: those listed in 11 U.S.C. § 523(a)(2), (4), and (6), and all other debts. Id.
Padilla dealt with Section 523(a)(3)(A), which concerns debts not listed in time to permit a creditor to file a proof of claim. Since a no-asset Chapter 7 case does not accept proofs of claims in the district, the court reasoned that the filing time had not expired. Id. Therefore, Section 523(a)(3)(A) does not apply, and such debts are discharged provided they do not fall under Section 523(a)(2), (4), or (6), whether or not listed. However, unless the amendment was made under a reopened case, the creditor would not receive notice or the opportunity to file a nondischargeability complaint and prejudice would occur if the creditor held a Section 523(a)(2), (4), or (6) claim. Id. South Dakota does not permit proofs of claims to be filed in a no-asset Chapter 7.
The fifteen-month time lapse between the date of closing to the filing date of the motion to amend schedules warrants the Hocums reopening their closed case in order to amend schedules. Evidence growing stale, the need to make the debtors assertively defend their interests, and the desire to chill debtors debating a “selective” memory when completing schedules warrant a debtor to reopen a case closed in order to amend schedules. Where the case has been closed for more than one year, the *726debtor must reopen to amend his or her schedules. Hull v. Powell, 309 F.2d 3, 6 (9th Cir.1962).
A creditor’s inability to participate in a no-asset bankruptcy case is not prejudice. Hawkins, 727 F.2d at 327. It is clear that Hocums possess no assets from which distributions to creditors would occur and Allied suffers no prejudice since the creditor has not lost its opportunity to file a proof of claim to share equitably with creditors who were initially scheduled. Matter of Zablocki, 36 B.R. 779, 782 (Bankr.D.Conn. 1984).
Creditor’s reliance on Bankr.R. 9024 for the assertion that one year bars reopening of Hocums’ case is misplaced. Bankr.R. 9024 states that motions to reopen cases are not subject to the rigorous one-year time limit of Fed.R.Civ.P. 60 as are several other bankruptcy matters. Matter of Gratrix, 72 B.R. 163, 164 (D.Alaska 1984). Bankruptcy cases have been reopened as late as five years after closing to commence a proceeding to avoid liens absent a showing of prejudice by the lien claimant. In re Costello, 72 B.R. 841, 843 (Bankr.E.D.N.Y.1987). A lapse of over one year between entry of an erred distribution order and a motion to amend to list an unsecured debt due to inadvertence does not bar reopening by laches where the creditor would have received nothing under a proper distribution order. In re Frontier Enters., Inc., 70 B.R. 356, 359 (Bankr.C.D.Ill.1987). Allied does not allege Hocums failed to list the $262.94 debt on the schedules for any reason other than inadvertence. Hocums’ fifteen-month lapse in filing the amendment to schedules is reasonable because mere inadvertence caused the delay and Allied is not prejudiced since no distribution occurred and Allied has the opportunity to object to the debt’s dis-chargeability.
Proper procedural focus is on Bankr.R. 5010. This rule permits a court to reopen a case pursuant to 11 U.S.C. § 350(b), which includes avoidance of a debt and cause. In re Gortmaker, 14 B.R. 66, 68 (Bankr.D.S. D.1981). Hocums could reopen the closed case absent harm, fraud, or intentional omission.
Amendments to schedules are generally granted liberally. Reopening a case is appropriate where debtors did not intentionally avoid listing the debt. Matter of Davidson, 36 B.R. 539, 543 (Bankr.D.N.J. 1983). Hocums’ inadvertence caused the debt to be omitted from the schedules as originally filed. Allied suffers no harm by reopening the case to amend schedules to list an omitted unsecured debt. Hocums’ fifteen-month delay requires the case be reopened prior to amending the schedules in order to afford proper notice and opportunity to Allied should it seek to bring a nondischargeability complaint. With no fraud, prejudice, or intentional omission proven, debtors may reopen their closed Chapter 7 case. Allied may or may not have grounds for dischargeability under Section 523(a)(2), (4), or (6). Dischargeability is not now before this Court. The possibility that a creditor objecting to reopening a case may not have such grounds under 11 U.S.C. § 523(a), and that its debt is dis-chargeable even though belatedly scheduled, is sufficient reason to reopen a debt- or’s closed case. Hocums’ schedule amendment motion is interpreted to include a motion to reopen-their case, of which both motions are granted.
In the case at bar, the Court will enter an appropriate order.
ORDER REOPENING CASE AND ALLOWING AMENDMENT TO SCHEDULES
Pursuant to the Memorandum Decision executed this date, it is hereby ORDERED that the above-captioned debtors’ case is reopened; and it is further ORDERED that debtors may amend their schedules to include omitted debts. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491191/ | FINDINGS OF FACT, CONCLUSIONS OF LAW AND MEMORANDUM OPINION
ALEXANDER L. PASKAY, Chief Judge.
THIS IS a Chapter 7 case and the matter under consideration is the dischargeability vel non of a debt allegedly due and owing by David J. Pitney (Debtor) to Jules M. Hanken (Plaintiff). Prior to the trial, counsel of record for the Debtor filed a Motion To Withdraw, which was granted, and the Debtor proceeded to try this case in proper person.
The Complaint, the legal sufficiency of which was never challenged, sets forth three distinct claims of nondischargeability. Count I is based on § 523(a)(4) of the Bankruptcy Code and charges that the Defendant, acting in a fiduciary capacity, commit*842ted fraud or defalcation or larceny. In Count II, which is based on § 523(a)(2)(A), the Plaintiff contends that the Defendant obtained money from the Plaintiff by false pretenses, by false representation, or by actual fraud. The claim set forth in Count III is based on the Plaintiffs contention that the Defendant willfully and maliciously intended to cause injury to the Plaintiff or to the Plaintiffs property, and, therefore, the debt owed to the Plaintiff should be excepted from the general discharge pursuant to § 523(a)(6). Based on the foregoing, the Plaintiff sought a judgment against the Defendant in the amount of at least $7,000, plus interest, costs and attorney fees, and a declaration that the debt is nondischargeable.
The facts relevant to the resolution of the issues raised as established at the final evidentiary hearing are as follows:
At the time relevant to this controversy, the Debtor was a licensed mortgage broker employed by Anchor Mortgage Corporation of Florida, Inc. (Anchor Mortgage), and was also the principal of Pitney Mortgage Co., Inc. Prior to the events leading up to the transaction which is the basis of the Plaintiffs claim of nondischargeability, the Plaintiff invested in first mortgages encumbering several different properties primarily on residential homes located in St. Petersburg, Florida. Upon the recommendation of a banker, the Plaintiff contacted the Debtor and discussed the possibility of investing in second mortgages on residential properties. It was generally understood that the property in which the Plaintiff was interested in investing in had to have a loan-to-value ratio of 75% and was to be located in certain generally described areas in St. Petersburg, Florida.
It appears that the Debtor agreed to assist the Plaintiff to find a residential property owner who wanted to borrow funds secured by a second mortgage. The Defendant located a property located at 5201 15th Avenue, South, in St. Peters-burg, Florida, but it appears that ultimately, the $7,000 invested by the Plaintiff was secured by a second mortgage on the property located at 744 15th Avenue, South, in St. Petersburg, Florida. It is without dispute that the only funds the Debtor received from this transaction were his commission of $420. (Debtor’s Exh. Nos. 1 and 2).
The mortgage note executed by the property owner called for payments of $105 per month for one year, and the remaining payments were to then balloon and become payable in full. (Plaintiffs Exh. No. 4). It further appears that the Plaintiff received regular, albeit late, monthly payments for approximately one year, when the mortgage loan fully matured, but the mortgagor defaulted and failed to pay the amount which became due upon maturity.
There is nothing in this record to establish what amount of money the Plaintiff received on his second mortgage during the time the mortgage was in good standing. There is also nothing in this record to establish the current outstanding balance due and owing on the second mortgage. Soon after the Plaintiff stopped receiving payments on the second mortgage, the holder of the first mortgage on the property, Home Savings and Loan Association, instituted a foreclosure action, and the property was ultimately sold at the foreclosure sale. The Plaintiff received nothing on the remaining balance due on his second mortgage.
There is evidence in this record that at the time the Plaintiff loaned the money and received the mortgage, the property had a value sufficient to cover the first and second mortgages, but due to the drug infestation of the neighborhood, the property rapidly deteriorated in value. This deterioration, along with the fact that many residences in the neighborhood became uninhabitable, appears to have been the primary cause of a default on the mortgages.
The Plaintiff, who is a sophisticated investor in real estate, and who had several prior satisfactory dealings with the Debtor, attended the closing in person and certainly had the benefit of all closing papers and documents pertaining to this particular transaction. While there is some dispute, it appears that at the closing, the mortgage loan application, which clearly stated the *843address of the subject property as 744 15th Avenue, South, St. Petersburg, Florida, was available. (Defendant’s Exh. Nos. 1 and 2). There is also clear evidence in this record to show that a document evidencing insurance, which indicated the address of the subject property was 744 15th Avenue, South, St. Petersburg, Florida, was also available at the closing. (Defendant’s Exh. No. 2).
These are the relevant facts which, according to the Plaintiff, warrant the granting of relief he seeks based on the several legal theories set forth in the three Counts of the Complaint, i.e., a declaration of non-dischargeability of his claim in the amount of $7,000.
It should be noted at the outset that the purpose of the Bankruptcy Code is to provide the debtor with a new opportunity in life and a clear field for future efforts, unhampered by pressures of pre-existing debt. Lines v. Frederick, 400 U.S. 18, 91 S.Ct. 113, 27 L.Ed.2d 124 (1970). Exceptions to discharge are construed strictly against the creditor and liberally in favor of the debtor, and the creditor must prove by clear and convincing evidence that a particular obligation of the debtor falls within the scope of § 523. In the Matter of Bonanza Import and Export, Inc., 43 B.R. 577 (Bankr.S.D.Fla. 1984); In re Garner, 881 F.2d 579 (8th Cir.1989).
It is true that this view is not uniformly shared by the courts. For instance, while several Circuits require a clear and convincing burden of proof, see Chrysler Credit Corp. v. Rebhan, 842 F.2d 1257, 1262 (11th Cir.1988); Matter of Van Horne, 823 F.2d 1285, 1287 (8th Cir.1987); In re Phillips, 804 F.2d 930, 932 (6th Cir.1986); In re Black, 787 F.2d 503, 505 (10th Cir.1986); In re Hunter, 780 F.2d 1577, 1579 (11th Cir. 1986); In re Kimzey, 761 F.2d 421, 423-24 (7th Cir.1985), others held that the standard of proof is only the preponderance of the evidence. Combs v. Richardson, 838 F.2d 112, 116 (4th Cir.1988).
In light of the fact that there is a conflict among the circuits regarding the proper standard, the Supreme Court granted certiorari in the Garner case. Garner, — U.S.-, 110 S.Ct. 1945, 109 L.Ed.2d 308 (1990). Be that as it may, unless and until the Supreme Court determines that the standard necessary to sustain a claim of nondischargeability under § 523(a) is merely a preponderance of the evidence, this Court is satisfied that the proper standard in this Circuit remains the clear and convincing standard.
When considering the record as established at the trial in light of the clear and convincing standard, this Court is satisfied that there is nothing in this record to sustain a claim for the nondischargeability of a debt under either § 523(a)(2)(A), § 523(a)(4), or § 523(a)(6) of the Bankruptcy Code. Certainly there is nothing in the record to indicate that the Debtor obtained anything by false pretenses, let alone the $7,000 from the Plaintiff. The most that could be said is that the Debtor obtained his commission of $420 by false pretenses; however, the record is devoid of support concerning this proposition. Thus, the claim of nondischargeability under § 523(a)(2)(A) of the Bankruptcy Code cannot be sustained. Neither is there sufficient proof that the Debtor willfully or maliciously injured either the Plaintiff or any property of the Plaintiff and, therefore, the Plaintiff’s claim of nondischarge-ability under § 523(a)(6) equally must fail.
This leaves for consideration the Plaintiff’s claim of nondischargeability under § 523(a)(4) of the Bankruptcy Code. This Section excepts from discharge a debt of a debtor which is attributable to fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny. At trial, the Plaintiff failed to introduce any evidence regarding any embezzlement or larceny committed by the Debtor, and he also failed to introduce evidence that the Debtor owed a fiduciary duty to the Plaintiff or committed fraud and defalcation while acting in a fiduciary capacity.
For a fiduciary relationship to exist and to support an action for nondischarge-ability based on § 523(a)(4), there must exist a technical trust wherein there is a segregated trust res, an identifiable benefi*844ciary, and affirmative trust duties established by contract or by Statute. Davis v. Aetna Acceptance Co., 293 U.S. 328, 55 S.Ct. 151, 79 L.Ed. 393 (1934); Matter of Thurston, 18 B.R. 545 (Bankr.M.D.Ga. 1982); In re Angelle, 610 F.2d 1335 (5th Cir.1980). The trust relationship must exist ab initio and not as the result of a wrongful act. In re Angelle, supra. In re Dloogoff 600 F.2d 166 (8th Cir.1979).
In this case, there is no evidence at all that there was an actual trust created by a trust document or by statute. While it is true that Fla.Stat. 494.041(6) provides that funds received by a mortgage broker shall be deposited in the broker’s trust account until the note and mortgage are recorded, there is no proof in this record to establish that the Plaintiff deposited any funds with the Debtor which would bring this Statute into operation. The Debtor did not hold money for the Plaintiff that was to be invested in property on behalf of the party which made the deposit. Instead, the money was actually paid to the borrower at the closing.
Lastly, even if one views this record in a manner most favorable to the Plaintiff, this Court rejects the proposition that the Plaintiff, a sophisticated investor in real estate, did not realize, or was prevented by the Debtor from realizing, the identity of the property on which he invested his money.
In summary, this Court is satisfied that the Plaintiff has failed to meet the burden of proving by clear and convincing evidence that the debt owed by the Debtor to the Plaintiff should be declared nondischargeable by virtue of § 523(a)(2)(A), § 523(a)(4), or § 523(a)(6). A separate Final Judgment will be entered in accordance with the foregoing. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491193/ | ORDER ON MOTION FOR SUMMARY JUDGMENT
ALEXANDER L. PASKAY, Chief Judge.
THIS IS a confirmed Chapter 11 case, and the matter under consideration is a Motion for Summary Judgment filed by Madeline Sheila Galvin (Galvin) regarding the Debtor’s Objection to the amended proof of claim filed by Galvin. The Court has considered the Motion, together with the record, and finds the facts relevant to a resolution of this matter to be as follows:
On December 22, 1989, Galvin, an unsecured creditor, filed an amended proof of claim in the amount of $45,488.33. The claim is based on legal services rendered to the Debtor pursuant to a written fee contract. The contract (Exh. No. 1 to the amended claim) shows that the Debtor, at that time known as Helen Testo, agreed to compensate Galvin for her legal services rendered at the rate of $75 per hour for office time and $125 for court time. The amended claim was accompanied by a detailed description of services and time sheets (Exh. No. 2).
Post-confirmation, the Debtor objected to the claim contending that Galvin is not entitled to an allowance of the claim in any amount in that her entitlement to any payment depended on her success to obtain the financing for the restoration of certain properties owned by the Debtor and located in the State of New York. To support her objection, the Debtor relies solely on the deposition testimony of one Theodore Kon-doprias and Joseph Sabatino, neither of which have any personal knowledge of the facts relevant to the validity vel non of the claim filed by Galvin. The closest testimony that might shed some light on the real issue, that is, the contingency nature of the arrangement between the Debtor and Gal-vin, is a statement by Joseph Sabatino that “everybody would be paid after the funding was in place.” However, it should be noted that in his deposition on Page 41, Sabatino also stated that Galvin never indicated that she would not get paid and, as a matter of fact, this matter was never discussed at meetings which dealt with the proposition of the funding of the project.
Lastly, Sabatino stated on Page 44 in his deposition that it was his understanding that the right of Galvin to receive payment was not dependent on funding, but was simply a matter of delay in payment since at that time cash was not available. In the deposition of Theodore Kondoprias, Kon-doprias stated that it was his understanding that no one would receive payment until such time as financing was approved for the project.
Based on the foregoing, this Court is satisfied that having considered the record and argument of counsel, that the Debtor’s objection to Galvin’s claim should be overruled and that there are no genuine issues of material fact, and Galvin is entitled to resolve this controversy in her favor as a matter of law. Further, having considered the description of services accompanying the amended claim, it is clear that the time charged was reasonable and proper and the hourly rate is more than reasonable.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the Motion for Summary Judgment filed by Madeline Sheila Galvin be, and the same is hereby, granted. It is further
ORDERED, ADJUDGED AND DECREED that the Objection of the Debtor to Claim No. 27 be, and the same is hereby, overruled, and the claim is allowed as a *849general unsecured claim in the amount of $45,488.33.
DONE AND ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491195/ | ORDER ON MOTIONS TO DISMISS
ALEXANDER L. PASKAY, Chief , Judge.
THIS CAUSE came on for hearing with notice to all parties in interest upon submissions entitled Third Motions To Dismiss and Notices of Default in Adequate Protection (Motions), filed by Glendale Federal Bank, F.S.B. (Glendale), in each of the above-captioned Chapter 11 cases. Through the Motions, Glendale contends that these cases should be dismissed and, in the alternative, that the automatic stay should be lifted to permit Glendale to foreclose its mortgages on these Debtors’ primary assets, apartment complexes located in Hillsborough County, Florida, based on the Debtors’ alleged failure to comply with certain Orders of this Court. The facts relevant to the resolution of the Motions as established at the final evidentiary hearing are as follows:
It is undisputed that the Debtors are indebted to Glendale by virtue of promissory notes in the aggregate original principal amount of $12,700,000.00 secured by first mortgages (Mortgages) executed by the Debtors in favor of Glendale, encumbering property owned by Victoria Corporation of-Tampa (Victoria) known as Polo Run Apartments; property owned by Fletcher Regency Associated, Ltd. (Fletcher), known as Fletcher Regency Apartments; property owned by Bloomingdale Corporation of Tampa (Bloomingdale) known as Palm Apartments; and property owned by 51st Street Station, Inc. (51st Street), known as 11305 51st Street North.
The record reveals that in April of 1989, the Debtors defaulted under the terms of the Notes and Mortgages. In order to prevent foreclosure of the properties, the Debtors through Mr. Vincent Bekiempis (Bekiempis), president of Victoria, Bloomingdale and 51st Street, and general partner of Fletcher, entered into negotiations with Glendale for the modification of existing obligations. Specifically, the Debtors sought a modification of the Notes’ interest rates and a provision for a future advance funding to the Debtors. After extensive negotiations, Glendale and the Debtors had established the terms of the modification, which included an interest rate reduction, a future advance for payment of real estate *870taxes to be secured by a cross-collateralization of Palm Plaza, Polo Run, 51st Street Station and Fletcher Regency, together with four other properties owned by entities affiliated with the Debtors and a one-month moratorium.
It appears that representatives of Glendale and the Debtor had at least one telephone conversation whereby Glendale informed Bekiempis that the loan modification had been approved, and on July 27, 1989, Glendale’s attorney, Linda A. Cona-han, wrote a letter to Bekiempis, which provided:
Glendale has approved a future advance proposal which must now be put into final documentation. Pending a closing on the loan modification, Glendale is willing to accept your cheeks in the proposed new loan amounts as a courtesy and our further indications of good faith. However, the loan modification must be closed no later than August 15, 1989. If the modification is not closed by that date, any monies forwarded for the July payment will be applied to past due outstanding balances as they exist of this date, and Glendale will proceed without further notice or demand directly to foreclosure. Acceptance of the first July payment in anticipation of final documentation on the modification is in no way a waiver of any of Glendale’s rights. The terms of all existing loans and the accelerations which have occurred remain in full force and effect until such time as loan documentation has been finalized and executed. If you are in disagreement with any provision of this letter, please contact me immediately.
(emphasis added) (Debtors’ Composite Exh. 1(R)).
There is no doubt that Glendale consistently informed the Debtors that it was not waiving any of its rights under the loan documents, that there was no guarantee of a loan modification agreement, and that a closing was a condition precedent to the loan modification becoming final. (Glendale’s Exh. 1; Debtors’ Composite Exh. 1(E), (I), (J) and (R)).
On July 31, 1989, Bekiempis notified Glendale that he believed it would be impossible for the closing to occur on August 15, 1989, as he had not yet received the loan modification documents for review. (Debtors’ Composite Exh. 1(S)). On August 15, 1989, Glendale notified Bekiempis that its attorneys had determined that the future advance could not be cross-collat-eralized, apparently because of Glendale’s discovery of numerous judgment liens against the properties and stated that Glendale was still willing to work with the Debtors and made a new modification proposal. (Debtors’ Composite Exh. 1(T); Glendale’s Exh. 3).
It is undisputed that no closing occurred on August 15, 1989, or any time thereafter and despite further negotiations, on August 25, 1989, Glendale notified Bekiempis that it was not possible to mutually agree on a method to restructure the loans and that all negotiations were terminated. (Debtors’ Composite Exh. 1(U)).
On January 4, 1990, the Debtors filed their voluntary Petitions of Relief under Chapter 11 of the Bankruptcy Code. Upon learning of the Debtors’ bankruptcy filings, on March 2, 1990, Glendale filed Motions for Relief from Automatic Stay, to Prohibit Use of Cash Collateral, and for Sequestration of Rents and Profits, seeking an order authorizing Glendale to foreclose its mortgages, or, in the alternative, directing the Debtors to provide Glendale with adequate protection of its interests. This Court subsequently entered Orders denying the Motions, but granting Glendale adequate protection payments “in an amount equal to the regular contractual payment on a monthly basis beginning May 1, 1990”, and ordering the Debtors to cure all postpetition arrearages on or before May 1, 1990. There is no dispute that the regular contract payments due under the terms of the Notes as executed were $19,531.68 for Victoria; $33,103.68 for Fletcher; $43,015.64 for Bloomingdale; and $33,241.00 for 51st Street.
It appears that the Debtors failed to make the regular contractual payments as called for under the written terms of the *871Notes and Mortgages, but instead made payments in reduced amounts. On or about May 3, 1990, Glendale filed affidavits stating that the Debtors had failed to comply with this Court’s prior adequate protection Orders, and on May 22, 1990, filed the Motions under consideration. In due course, this Court scheduled a hearing to determine whether the Debtors had in fact defaulted under the terms of the adequate protection Orders. While ordinarily it should be fairly easy to determine the existence of a default, the Debtors claim that they have not defaulted under the terms of this Court’s Orders as Glendale and the Debtors entered into an oral agreement to modify the Notes and Mortgages to lower the regular contract payments due and thus, the “regular contract payments” required to be paid in this Court’s Orders should be determined according to the oral modification of the Notes and Mortgages.
Thus, the essence of the dispute is the existence or nonexistence of a valid oral modification to the Notes and Mortgages. It should be noted at the outset that the statute of frauds does not bar a suit for specific performance of an oral modification of a note and mortgage. See Howdeshell v. First National Bank of Clearwater, 369 So.2d 432, 434 (Fla. 2d DCA 1979); Martyn v. First Federal Savings and Loan Assoc, of West Palm Beach, 257 So.2d 576, 580 (Fla. 4th DCA 1971). However, if it is clear that a party signifies an intent that a contract will not be binding until it is expressed in a writing and signed by the parties to the contract, then he will not be bound by the original contract until the agreement to modify same is in fact in a signed writing. “If it [the written draft] is viewed as the consummation of the negotiation, there is no contract until the written contract is finally signed.” Rock v. Las Olas Co., 156 Fla. 510, 23 So.2d 839, 843 (1945) (citations omitted). See also Ocala Cooperage Co. v. Florida Cooperage Co., 59 Fla. 390, 52 So. 13 (1910).
A careful review of the evidence reflects that although there was a general agreement regarding the terms of the proposed modification between the Debtors and Glendale, there was always a full understanding that the modification would not be final until a closing occurred. The July 27 letter from Conahan to Bekiempis (Debtors’ Composite Exh. 1(R)) repeatedly emphasized that there was no enforceable contract until a closing of the loan modification occurred. The letter stated that the proposal had to be put into final documentation and Glendale was only accepting checks in the proposed new loan amounts as a courtesy and indication of good faith. Glendale made it clear that its acceptance of the first July payment in anticipation of final documentation on the modification was in no way a waiver of any of Glendale's rights. It is likewise clear that Glendale insisted that the terms of all existing loans and the accelerations which have occurred remained in full force and effect until such time as loan documentation has been finalized and executed. Finally, the letter explained that if Bekiem-pis was in disagreement with any provision of the letter, he was to contact Cona-han immediately. There is no evidence in this record to show that the Debtors ever expressed disagreement with the requirement that a closing take place before the proposed modification became effective.
Based on the foregoing, this Court is satisfied that although the modification may have been approved in general terms, this approval is immaterial to the ultimate conclusion of this matter as Glendale consistently communicated to Bekiempis its intent that the negotiations culminate at closing, and that without a closing, there was no contract.
To avoid the foregoing conclusion, the Debtors contend that because Glendale failed to provide the Debtors the closing documents in time for the August 15, 1989, closing date, it cannot take advantage of its own wrongdoing to avoid responsibility under the terms of the partially performed oral modifications. However, there was no partially performed oral modification. Although Glendale accepted the July payment under the proposed agreement, it expressly stated that acceptance was not a waiver of *872Glendale’s rights. Because Glendale communicated an intent not to be bound until closing, no amount of negotiation or oral agreement to specific terms resulted in the formation of a binding contract. Winston v. Mediafare Entertainment Corp., 777 F.2d 78, 80 (2d Cir.1985) (citing R.G. Group, Inc. v. Horn & Hardart Co., 751 F.2d 69, 74 (2d Cir.1984)).
The Debtors also contend that the relationship between Glendale and the Debtors was confidential and fiduciary and that Glendale had a duty to disclose that the cross-collateralization and the execution of loan modification documents were conditions precedent to the existence of a binding obligation. However, the Debtors have not proven that the relationship was anything other than an arms-length relationship of a lender and borrower. Further, this Court is satisfied that the Debtors knew that Glendale insisted on a total cross-collateralization of all the properties to provide additional security for its outstanding loans and intended that a closing reflecting that this proposition would be incorporated in the contract take place before the modification became final.
Notwithstanding the foregoing conclusion that no oral modification existed, this Court is satisfied that the Debtors should be allowed a short period of time within which to cure all defaults under the previous Orders entered by this Court granting adequate protection. Therefore, the Motions should be denied without prejudice based on the Debtors’ providing adequate protection to Glendale in addition to curing all postpetition defaults.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the Third Motions To Dismiss be, and the same are hereby, denied without prejudice conditioned upon the terms and conditions outlined below. It is further
ORDERED, ADJUDGED AND DECREED that the Debtors shall cure all postpetition arrearages based on the regular contractual payments as set forth in this Order within thirty (30) days of the date of the entry of this Order. It is further
ORDERED, ADJUDGED AND DECREED that the terms of this Court’s prior Orders granting Glendale adequate protection shall remain in full force and effect and thus, Victoria Corporation of Tampa shall make adequate protection payments in the amount of $19,531.68 per month; Fletcher Regency Associates, Ltd., shall make adequate protection payments in the amount of $33,103.68 per month; Bloomingdale Corporation of Tampa, Inc., shall make adequate protection payments in the amount of $43,015.64 per month; and 51st Street Station, Inc., shall make adequate protection payments in the amount of $33,-241.00 per month.
DONE AND ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491196/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW
SIDNEY M. WEAVER, Chief Judge.
THIS CAUSE came before the court upon the complaint of Leonardi’s International, Inc. (the “debtor”) against Dickerson Enterprises, Inc., Rachel E. Dickerson, Donald F. Dickerson and J.T. Purdue as Co-Trustees, (the “creditors”) for breach of contract and for rescission or reformation of a lease, 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:
Jurisdiction is vested in this court pursuant to 28 U.S.C. § 157(a), (b) and § 1334. This is a core proceeding in which the court is authorized to hear and determine all matters relating to this case in accordance with 28 U.S.C. § 157(b)(2)(I).
On April 26, 1983, the debtor and Dickerson Enterprises, Inc., entered into a lease agreement whereby the debtor became the lessee of one-half of the ground floor of a two story building located at 2681/2881 East Commercial Boulevard, Ft. Lauder-dale, Florida. The lease provided for a monthly rental of $2,257.50 and provided that the debtor would have an option to lease the other half of the ground floor should that portion of the premises become available. On March 9, 1987, a Second Addendum To Lease was executed by the same parties for the rental of the entire ground floor of the building. The Second Addendum To Lease, combined with the original lease, provided for a monthly rental of approximately $4,300.00.
Thereafter, negotiations commenced between the debtor and the attorney for Dickerson Enterprises regarding the possible leasing of the entire second floor of the building to the debtor. This portion of the premises had remained unoccupied since *876the departure of the previous tenant in June of 1983. The attorney for Dickerson Enterprises and the debtor both agreed that the second floor of the building was suitable for office space and could be strongly marketed for that use. In order to induce the debtor to enter into the new lease and take possession of the second floor of the premises, the attorney for the creditor arranged for Dickerson Enterprises to provide certain funds to the debtor for physical improvements to the second floor which would promote the marketing of the premises as office space.
Accordingly, on August 31, 1987, the debtor, Dickerson Enterprises, and the other creditors, who were joined for the purpose of including certain property for parking, executed a new lease whereby the debtor became the sole tenant of the entire building. The debtor obligated himself to make monthly rental payments of $9000.00 to the creditors. Additionally, the parties executed an Addendum to Lease wherein Dickerson Enterprises agreed to provide a loan to the debtor for a sum of money between $75,000.00 and $125,000.00 for improvements to the second floor of the building. Both the debtor and the attorney for Dickerson Enterprises agreed that this arrangement would benefit each of the parties in that the debtor now had the opportunity to sublease the premises as office space and the creditor now had the assurance that the second floor would no longer remain unoccupied.
Sometime thereafter, the debtor submitted preliminary architectural plans to the attorney for Dickerson Enterprises which evidenced the improvements envisioned by the debtor for the second floor of the premises. The debtor then requested a partial disbursement of the loan proceeds in order to pay for the architectural plans. Dickerson Enterprises refused to release the funds to the debtor contending that the payment of “soft costs”, such as architectural fees, were not permitted to be made from the improvement fund provided by Dickerson Enterprises in the lease addendum. The debtor did not have the $12,-000.00 necessary to pay the architect for the certified final plans. The architect hired by the debtor refused to release the certified plans until payment was made. In the time that followed, the debtor continued to be responsible for payment of the rent on the entire building. In November of 1989, the debtor could no longer meet the rental obligation due under the lease and ceased making payments to the creditors.
In count I of the adversary complaint, the debtor seeks damages for breach of contract based on the failure of Dickerson Enterprises to release the funds necessary to pay the architectural fees. In count II, the debtor seeks either reformation or rescission of the lease agreement. The debt- or’s .complaint centers on the necessity of the Court receiving parol evidence in interpreting that portion of the lease addendum wherein Dickerson Enterprises agreed to provide the funds to the debtor. That part of the lease addendum provides, in its material portion, the following:
8. IMPROVEMENTS TO PREMISES ... P. (1) Lessor shall make available an amount of money which shall not be less than Seventy-five Thousand nor more than One Hundred Twenty-five Thousand ($125,000.00) Dollars for internal improvements on the second floor of the building, which include remodeling of offices, plumbing, air conditioning duct work, partitioning, carpeting and wall covering. The availability of these funds shall only be made upon Lessor’s written consent to certified architectural plans for each phase of construction together with Lessor’s written consent of contractors, materials and contracts of construction. Lessor shall have no less than seven (7) days written notice for approval requests. The $125,000.00 shall be disbursed solely for the benefit and use on the second floor and shall not be used for any first floor remodeling or exterior improvements. The funds shall be made available for payment directly upon requisition by the architects and general contractor and upon receipt of appropriate evidence that work has been performed and completed to the extent of the requisition requested. The architects *877and general contractor shall provide appropriate partial releases at the time of the requisition for payment of the funds. The funds shall be payable to the general contractor and to all other parties deemed appropriate by attorney for the Lessor.
Florida courts have adhered to the latent ambiguity versus patent ambiguity distinction and ordinarily allow parol evidence where there is a latent ambiguity and reject it where there is a patent ambiguity. Landis v. Hears, 329 So.2d 323 (Fla. 2d DCA 1976). Extrinsic evidence is inadmissible if the ambiguity is patent, because such evidence would, in effect, allow the court to rewrite the contract for the parties by supplying information the parties themselves did not choose to include. Hunt v. First National Bank, 381 So.2d 1194 (Fla. 2d DCA 1980). The creditors allege that paragraph 8(F) of the lease addendum is clear on its face as to the non-inclusion of the payment of architectural fees out of the loan proceeds. The creditors point out that the first sentence of paragraph 8(F) states that the funds were to be made available for “internal improvements” to the second floor, meaning only actual physical improvements to the second floor. In the alternative, the creditors allege that if the Court should find paragraph 8(F) to be ambiguous, then the ambiguity is on the face of the document and should be deemed a patent ambiguity which would foreclose the admissibility of extrinsic evidence.
A latent ambiguity is said to exist where a contract fails to specify the rights or duties of the parties in certain situations and extrinsic evidence is necessary for interpretation or a choice between two possible meanings. Bunnell Medical Clinic, P.A. v. Barrera, 419 So.2d 681 (Fla. 5th DCA 1982). In such instance, this evidence is required because the instrument itself does not provide sufficient insight into the intent of the parties. Crown Management Corp. v. Goodman, 452 So.2d 49 (Fla. 2d DCA 1984). In this case, paragraph 8(F) of the lease addendum clearly indicates that the certified architectural plans were to be submitted to the creditor as a condition precedent to disbursement of the loan proceeds. However, paragraph 8(F) of the lease addendum also states that the funds shall be made available for payment directly upon requisition by the architects and general contractor. The language of paragraph 8(F) does not state that Dickerson Enterprises will not be responsible for architect fees or other so called “soft costs” associated with construction improvements. When read in its entirety, the lease addendum does not provide sufficient insight as to whether the parties intended that the payment of architectural plans would be covered under the loan proceeds.
Dickerson Enterprises attempts to support its position that payment of “soft costs” are not covered under the loan proceeds by referring to specific language in paragraph 8(F) which states that, “The funds shall be payable to the general contractor.” However, this is not determinative since the sentence continues to read, “and to all other parties deemed appropriate by attorney for the Lessor.” The debt- or could have reasonably concluded that “all other parties deemed appropriate by the Lessor” would have included the architects.
It is fundamental that doubtful language in a contract should be interpreted most strongly against the party who selected that language. Finberg v. Herald Fire Insurance Company, 455 So.2d 462 (Fla. 3d DCA 1984). When construing a contract, a court should place itself as nearly as possible in the exact situation of the parties to the instrument when executed, so as to determine the intention of the parties, objects to be accomplished, obligations created, and should reach an interpretation consistent with reason, probability and practicality. Bay Management, Inc. v. Beau Monde, Inc., 366 So.2d 788 (Fla. 2d DCA 1978).
The lease addendum was executed for the purpose of allowing the debtor to rent the second floor of the building and to make certain physical improvements thereon which would allow the debtor to sublease the second floor as office space. *878Dickerson Enterprises would also benefit since the physical improvements to the second floor would increase the value of the property, and create an income stream from property which had been vacant since June of 1983. Since Dickerson Enterprises drafted the instrument and had the opportunity to specifically state in the lease' addendum that certain “soft costs”, including payment of architectural plans, would not be covered out of the loan proceeds, it would not be unreasonable for the debtor to assume that payment of the architectural plans, which were required to be submitted to the creditor, would be covered under the loan proceeds. Thus, this Court finds that Dickerson Enterprises breached the lease agreement in that a fair and equitable construction of paragraph 8(F) of the lease addendum would allow for the payment of architectural fees out of the loan proceeds.
However, the Court also finds that the debtor has failed to meet its burden of proof with respect to an award of damages by this Court based on the breach by Dickerson Enterprises. The debtor failed to introduce sufficient credible evidence, beyond the opinion testimony of the principle of the debtor, so as to indicate to this Court the actual loss sustained by the debtor as a result of the failure of Dickerson Enterprises to provide the funds required to pay the architectural fees. Because the testimony of the principle of the debtor, in and of itself, did not provide this Court with a quantifiable measure of the actual loss sustained by the debtor, the Court concludes that the debtor shall not recover damages from the creditors.
The debtor also argues that a breach of the lease addendum by the creditors gives rise to the remedies of rescission or reformation of the lease. The general rule is that cancellation or rescission will not be granted for breach of contract in the absence of fraud, mistake, undue influence, or some other independent ground for equitable interference. Pinellas Central Bank & Trust Co. v. International Aerodyne, Inc., 233 So.2d 872 (Fla. 3d DCA 1970). “Fraud” includes the act of taking unfair advantage of another to his injury which amounts to unconscionable overreaching. Fishman v. Thompson, 181 So.2d 604 (Fla. 3d DCA 1966). A court of equity will not hesitate to interfere where it is perfectly plain to the court that one party has overreached the other and has gained an unjust advantage which it would be inequitable to permit him to enforce. Fishman, 181 So.2d at 608.
The evidence supported findings that the conduct by the attorney for Dickerson Enterprises, in connection with the negotiations leading to the execution of the lease agreement for the second floor of the building, amounted to overreaching by which Dickerson Enterprises was able to gain an unfair advantage over the debtor. At the time of executing the lease agreement, the attorney for Dickerson Enterprises knew that the debtor was representing himself in the negotiations. Dickerson Enterprises, and its attorney, also had reason to know that the fees for the proposed architectural plans for the second floor improvements would be substantial. Despite this apparent knowledge, Dickerson Enterprises did not include precise language in the lease addendum to indicate that the loan proceeds were not to be used to pay for architectural fees.
Further, the attorney for Dickerson Enterprises appeared to be acting in the best interest of both the debtor and Dickerson Enterprises when negotiating the lease agreement. It was the attorney for Dickerson Enterprises who approached the debtor with the idea of leasing the second floor of the premises. Additionally, when the debtor disclosed that it did not have the funds available to make the necessary improvements to the second floor, the attorney stated that he might be able to arrange financing for the debtor through Dickerson Enterprises.
On these facts, the Court concludes that the debtor is entitled to a rescission and cancellation of the August 31, 1987 lease based on the overreaching by the attorney for Dickerson Enterprises. The debtor and creditors shall be returned to their original positions before the execution of the lease *879and addendum, with the debtor being responsible only for the rental of the entire first floor of the building.
FINAL JUDGMENT
In conformity with the Findings of Fact and Conclusions of Law of even date, it is hereby:
ORDERED AND ADJUDGED that, with respect to Count I for Breach of Contract, the debtor, Leonardi’s International, Inc., shall not recover damages from the creditors, Dickerson Enterprises, Inc., Rachel E. Dickerson, Donald F. Dickerson, and J.T. Purdue, as Co-Trustees. With respect to Count II for Rescission or Reformation, the Lease Agreement and Addendum, executed by and between the debtor and the creditors on August 31, 1987, is hereby rescinded.
DONE AND ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491197/ | OPINION
DAVID W. HOUSTON, III, Bankruptcy Judge.
On consideration of the motion to dismiss or, in the alternative for summary judgment, filed by the defendants, Bank of Falkner, and James McMillin, President of the Bank of Falkner; response to said motion having been filed by the plaintiff, Kerry Whitten Hill; and the Court having reviewed said motion, response, supporting exhibits and affidavits, hereby finds and adjudicates as follows, to-wit:
I.
This Court has jurisdiction of the subject matter of and the parties to this proceeding pursuant to 28 U.S.C. § 157(b). This is a non-core adversary proceeding; however, all of the parties have consented to this Court entering a final order in this proceeding pursuant to the provisions of 28 U.S.C. § 157(c)(2).
II.
In late 1979 and early 1980, the plaintiff negotiated with the bank, through its representative, McMillin, for a loan in the amount of $55,000.00. Proceeds from this loan were to be used by the plaintiff for business operating expenses.
Around January 3, 1980, the plaintiff allegedly signed a blank promissory note in favor of the bank and received a deposit slip in the amount of $5,000.00, evidencing an initial advance on the loan. (The Court recognizes the legal principle that anyone who signs a document in blank does so at his or her peril.)
A dispute arose between the plaintiff and the bank as to the terms of the loan. The plaintiff contends that the loan required interest at the rate of 10% per annum, no monthly payments, and was due in full one year from the loan date. The bank contends that the promissory note, # 3065, executed in connection with the loan, was in the sum of $65,000.00, bore interest at the rate of 16% per annum, and was payable in 48 equal monthly installments of $2,000.00, beginning April 1, 1980. The parties also vigorously dispute whether the plaintiff actually defaulted under the terms of the loan.
The plaintiff contends that sometime before May 1, 1980, McMillin informed him that $15,000.00 had been transferred from his bank account and applied to the note balance. This transfer was allegedly made upon the insistence and instruction of an F.D.I.C. agent. The plaintiff asserts that this transfer was made without his consent or knowledge in violation of § 75-4-401, Miss.Code Ann., and, consequently, caused an overdraft in his account. In connection therewith, he seeks damages pursuant to § 75-4-402, Miss.Code Ann., because his checks were wrongfully dishonored.
The bank filed suit against the plaintiff in the Circuit Court of Tippah County, Mississippi, on August 15, 1980, under Cause No. 2018, seeking collection of note # 3065. A lis pendens notice was contemporaneously filed with the Tippah County Chancery Clerk. The bank’s attorney initiated an additional suit against the plaintiff for at*58torney’s fees incurred as a result of his filing Cause No. 2018, and filed a second lis pendens notice.
The lis pendens notices and the lawsuits were dismissed on August 28, 1980, approximately two weeks later, when the plaintiff signed a second promissory note, # 4012, in favor of the bank in the sum of $73,417.32. This note, which apparently was in settlement of the pending litigation, renewed note # 3065, and covered an overdraft of $8,417.82, caused by the aforementioned $15,000.00 transfer from the plaintiff’s account. The plaintiff now contends that this renewal note was executed “..., under duress and coercion perpetrated by the ... defendant bank and its agents and employees ...”
On January 21, 1983, the bank sued the plaintiff in the Tippah County Chancery Court, Cause No. 11,447, seeking specific performance of note # 4012. In response, the plaintiff filed an answer, amended answer, affirmative defenses, and a counterclaim against the bank alleging fraud. In substance, the counterclaim charged that the bank unlawfully altered the terms of note # 3065 and the description of the collateral which secured the note, all in violation of § 75-3-406 and § 75-3-407, Miss. Code Ann. This case has remained pending for over seven years.
On March 28, 1983, the plaintiff filed a cause of action against the bank, F.D.I.C., and McMillin in the United States District Court for the Northern District of Mississippi, Cause No. 83-58-LS. This case included allegations that the bank had violated the Federal Truth in Lending Act and various state banking statutes in connection with the loans evidenced by notes # 3065 and # 4012. This case was dismissed on August 17, 1984, and no appeal or other post-judgment relief was sought.
On February 19, 1988, the plaintiff filed another complaint against the bank and McMillin in the United States District Court for the Northern District of Mississippi alleging, inter alia: (1) that they had violated the Federal Racketeer Influenced and Corrupt Organizations Act (18 U.S.C. §§ 1961-1968), (2) that they had deprived the plaintiff of certain rights, privileges and immunities guaranteed under the United States Constitution in violation of 42 U.S.C. § 1983, and (3) that they had violated § 75-4-401, § 75-4-402, § 75-3-406 and § 75-3-407, Miss.Code Ann., all in connection with their activities related to the plaintiff’s loans. On March 12, 1988, the plaintiff filed his voluntary Chapter 7 bankruptcy petition. Almost one year later, the second District Court case, which had been assigned Cause No. 88-23-D-D, was referred to this Court for adjudication.
The bank and McMillin filed a joint motion to dismiss or, in the alternative, for summary judgment. This motion alleges that the various causes of action set forth in the plaintiff’s complaint are barred by the applicable statutes of limitations.
III.
To properly determine if the instant complaint was timely filed, the Court must first ascertain when the plaintiff’s alleged causes of action accrued. The plaintiff argues that he first discovered on October 1, 1982 that note # 3065 had been altered. Thus, he contends that all applicable statutes of limitations should begin to run from that date. This issue can be easily resolved through a review of the discovery materials furnished to the Court and the affidavits submitted by the defendants.
In a deposition taken June 10, 1983, the plaintiff admits that he received a copy of note # 3065 sometime during August, 1980.1
*59The affidavits, attached to the defendants’ motion, reveal that the plaintiff should have received copies of note # 3065 on at least three occasions, to-wit:
1. August 5, 1980; a letter was mailed to the plaintiff by R.S. Hardin which had enclosed a lis pendens notice and a copy of note # 3065 attached thereto, all of which was received by the plaintiff on August 16, 1980, as indicated by a certificate for receipt of certified mail. (Affidavit of Wendell H. Trapp, Jr., Exhibit “A”.)
2. August 18, 1980; a copy of note # 3065 was attached as an exhibit to a declaration filed in the Circuit Court of Tippah County, Mississippi, in Cause No. 2018, in which the plaintiff was served with process. (Affidavit of Wendell H. Trapp, Jr., Exhibit “B”.)
3. August 25, 1980; a copy of note # 3065 was attached to a document entitled “Agreement” entered into between the plaintiff and the bank acting by and through its president, McMillin. (Affidavit of Wendell H. Trapp, Jr., Exhibit “C”.)
The Court is of the opinion that it is not seriously disputed that the plaintiff was aware of the alleged misconduct by the defendants in August, 1980, rather than on October 1, 1982.
IV.
All illegal activity charged against the defendants pursuant to the federal RICO statutes, 18 U.S.C. §§ 1961-1968, is expressly alleged in the complaint to have occurred before August 28, 1980.
The United States Supreme Court has adopted a uniform four year statute of limitations for federal RICO civil actions. Agency Holding Cory. v. Malley-Duff and Associates, 483 U.S. 143, 107 S.Ct. 2759, 97 L.Ed.2d 121 (1987) (statute of limitations period based upon the Clayton Act, 15 U.S.C. § 15(b)). Similar decisions have been reached by the Fifth Circuit Court of Appeals. See, Corwin v. Marney, Orton Investments, 843 F.2d 194, 199 (5th Cir. 1988); Jensen v. Snellings, 841 F.2d 600, 605 (5th Cir.1988); Davis v. A.G. Edwards and Sons, Inc., 823 F.2d 105, 108 (5th Cir.1988); J.M. Muniz, Inc. v. Mercantile Texas Credit Cory., 833 F.2d 541 (5th Cir. 1987).
To have properly met the four year statute of limitations established for RICO civil claims, the plaintiff should have filed his complaint no later than August 28, 1984. However the instant suit was not filed until February 19, 1988, approximately three and a half years after the statute of limitations had run. Therefore, the Court finds that those portions of the plaintiffs complaint brought under the federal RICO statutes are barred.
V.
For purposes of this proceeding, causes of action brought under 42 U.S.C. § 1983 would be governed by Mississippi’s six year residual statute of limitations, i.e., § 15-1-49, Miss.Code Ann. (1972). Kozam v. Emerson Electric Co., 711 F.Supp. 313 (N.D.Miss.1989). See also, Owens v. Okure, 488 U.S. 235, 109 S.Ct. 573, 102 L.Ed.2d 594 (1989) (The U.S. Supreme Court held that general or residual statutes of limitations for personal injury actions *60are applicable to § 1983 actions where a state has multiple statutes of limitations for personal injuries.)
Section 15-1-49, Miss.Code Ann. (1972), provided the following:
All actions for which no other period of limitation is prescribed shall be commenced within six (6) years next after the cause of such action occurred, and not after. § 15-1-49, Mississippi Code Annotated, 1972.
(Effective July 1, 1989, this statute was amended to provide a reduced three year general statute of limitations.)
The plaintiff has broadly plead 42 U.S.C. § 1983, a civil rights statute enacted basically to provide a person a right of redress for injuries caused by another person who was acting at the time under color of state law. The complaint’s allegations of misconduct on the part of the defendants in this area are somewhat opaque. Nonetheless, there are no allegations of wrong doing that appear to have occurred subsequent to August 28, 1980. Therefore, the statute of limitations is dispositive.
For the plaintiff to have met the deadline prescribed by the six year statute, his suit should have been filed no later than August 28, 1986. However, the instant complaint was filed approximately eighteen months after the limitations period had expired. The Court, therefore finds that that portion of the plaintiffs complaint brought under 42 U.S.C. § 1983 is barred.
VI.
The remaining portions of the plaintiff’s complaint assert violations of § 75-4-401, § 75-4-402, § 75-3-406 and § 75-3-407, Miss.Code Ann., as well as, a variety of common law torts, such as intentional injury, fraud, false pretenses, libel, slander, slander of title, etc. Again, Mississippi’s six year residual statute of limitations, effective at the time of the initiation of this proceeding, would primarily be applicable. Section 15-1-35, Miss.Códe Ann. (1972), a one year statute of limitations, would apply to the plaintiff’s charges of libel, slander, and slander of title.
(Further Code sections are to be considered as Miss.Códe Ann. (1972), unless specifically noted otherwise.)
VII.
According to the complaint, the defendants’ purported violation of § 75-4-401, plead as the unlawful and illegal withdrawal of funds from the plaintiff’s account, occurred sometime between February 8 and May 1, 1980. (See Paragraphs VI and XIII of the complaint.) The defendants’ alleged violation of § 75-4-402, plead as the unlawful dishonoring of checks, occurred during this same period. (See Paragraphs VI and XIV of plaintiff’s complaint.) Because the complaint was filed almost two years late, considering the six year statute of limitations, the Court finds that those parts of the complaint alleging violations of § 75-4-401 and § 75-4-402 are barred.
VIII.
The plaintiff’s allegations regarding § 75-3-406 and § 75-3-407 charge the defendants with fraudulently and materially altering note # 3065. The complaint fails to specify when this purported act occurred, but simply states that the plaintiff did not discover the alteration until October 1, 1982. The Court has previously resolved this dispute against the plaintiff based on his own admission. Applying the six year statute of limitations once more, the Court finds that those parts of the plaintiff’s complaint, alleging violations of § 75-3-406 and § 75-3-407, are barred.
IX.
Insofar as the common law torts are concerned, the complaint does not assert that any of the alleged wrongful acts occurred after August, 1980. As such, these causes of action are barred by the provisions of § 15-1-35 and § 15-1-49.
X.
Having determined that no portions of the plaintiff’s complaint survive the requirements of the applicable statutes of limitations, the Court is of the opinion that
*61the defendants’ motion to dismiss is well taken and is hereby sustained.
An Order will be entered consistent with this Opinion.
. Q. All right, you earlier identified and you've referred to in your pleadings, a promissory note number 3065, and this is the $65,000 promissory note dated March 1 of 1980. Do you recall us discussing that some?
A. Sure do.
Q. Let me get it for you, so I’ll make sure we are on the same wave length. This is the one, I believe you allege was altered in some form or fashion after you signed it?
A. You mean, altered after I signed it. It was filled out after I signed it.
Q. All right. It wasn’t just a case of the $2,000 being put on there, it was the whole thing was done after you signed it?
A. Uh, huh.
*59Q. When did you first get a copy of that promissory note?
A. This?
Q. Yes, sir.
A. 1 didn’t sign this on March the 1st.
Q. But when did you finally get a copy of that promissory note?
A. I got a copy of this promissory note off of a lis pendens — I believe off of a lis pendens notice that the Bank of Falkner filed on me prior to the filing the suit in August of 1980.
Q. So, you got a copy of that promissory note, being the $65,000 one sometime in August of 1980?
A. Right, when it was served on me, uh, huh.
Q. Was that before or after you executed the later $73,417.42 note?
A. You mean, was — did I get the copy of it before that?
Q. Yes sir.
A. I got a copy before.
Q. Yes sir. You got the copy of the $65,000 loan before you executed the $73,000?
A. Right. It was attached to the lis pendens notice.... | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491198/ | OPINION
DAVID W. HOUSTON, III, Bankruptcy Judge.
On consideration before the Court is a motion-filed by the debtors pursuant to 11 U.S.C. § 522(f)(1) to avoid a judicial lien held by Willie Bullins; response to said motion having been filed by Bullins; and the Court having heard and considered same, hereby finds as follows, to-wit:
I.
The Court has jurisdiction of the parties to and the subject matter of this proceeding pursuant to 28 U.S.C. § 1334 and 28 U.S.C. § 157. This is a core proceeding as defined in 28 U.S.C. § 157(b)(2)(A), (B), (K), and (0).
II.
The facts in this proceeding are largely undisputed and are set forth in the following enumerated paragraphs:
1. As a result of a complaint for specific performance, Willie Bullins received a judgment, dated August 18, 1987, against Cassie Osborne, Jr., in the Chancery Court of Leflore County, Mississippi, Cause No. 24,-449, in the sum of $85,000.00, plus interest at the rate of 8% per annum.
The Court required Bullins to execute a warranty deed in favor of Osborne, Jr., to be held by the Chancery Clerk pending payment of the judgment. Once the judgment was satisfied, the warranty deed was to be delivered to Osborne, Jr.; but, in the interim, Bullins remained in possession of the premises. A judicial lien was awarded to Bullins, against the property described in the warranty deed, to secure said payment.
2. Cassie Osborne, Jr., is the son of the debtors herein.
3. The Leflore County Chancery Court decision was appealed to the Mississippi Supreme Court where it was subsequently affirmed.
4. As a part of the appellate process, the debtors executed a supersedeas bond as sureties in favor of Bullins in the penal sum of $60,000.00. When the Chancery Court judgment was affirmed, the Mississippi Supreme Court, by order dated January 17, 1990, awarded judgment against both debtors in the sum of $60,000.00.
5. The debtors filed their voluntary Chapter 7 bankruptcy case on January 31, 1990.
6. The debtors indicated that they owned as tenants by the entirety with rights of survivorship approximately 60 acres of real property in Carroll County, Mississippi, and approximately 35 acres of real property in Leflore County, Mississippi. All of this property was occupied and claimed by the debtors as their homestead. Prior to the filing of this bankruptcy case, based on the order of the Mississippi Supreme Court, Bullins levied execution against this property, but the execution sale was not completed.
7. Cassie Osborne, Sr., is now deceased, having departed this life on March 2, 1990.
*66III.
The first issue concerns the application of § 91-1-23, Miss.Code Ann., to this proceeding, particularly as it interfaces with § 85-3-21, Miss.Code Ann. These sections respectively provide as follows:
§ 91-1-23. Exempt property not to be partitioned in certain cases.
Where a decedent leaves a widow to whom, with others, his exempt property, real and personal, descends, the same shall not be subject to partition or sale for partition during her widowhood as long as it is occupied or used by the widow, unless she consent. Likewise, where a decedent leaves a widower to whom, with others, her exempt property, real and personal, descends, the same shall not be subject to partition or sale for partition during the period of his being a widower as long as it is occupied or used by the widower, unless he consent.
Since predecessor sections to § 91-1-23 appear in the cases quoted subsequently in this Opinion, they are noted as follows: Codes, 1892, § 1553; 1906, § 1659; Hemingway’s 1917, § 1391; 1930, § 1412; 1942, § 478; Laws, 1950, ch. 346.
§ 85-3-21. Homestead exemption — land and buildings.
Every citizen of this state, male or female, being a householder shall be entitled to hold exempt from seizure or sale, under execution or attachment, the land and buildings owned and occupied as a residence by him, or her, but the quantity of land shall not exceed one hundred sixty (160) acres, nor the value thereof, inclusive of improvements, save as hereinafter provided, the sum of thirty thousand dollars ($30,000.00); provided, however, that in determining this value, existing encumbrances on such land and buildings, including taxes and all other liens, shall first be deducted from the actual value of such land and buildings. But husband or wife, widower or widow, over sixty (60) years of age, who has been an exemptionist under this section, shall not be deprived of such exemption because of not residing therein.
The predecessor sections are noted as follows: Codes, Hutchinson's 1848, ch. 62, art. 17(1); 1857, ch. 61, art. 281; 1871, § 2135; 1880, § 1248; 1892, § 1970; 1906, § 2146; Hemingway’s 1917, § 1821; 1930, § 1765; 1942, § 317; Laws, 1938, eh. 125; 1950, ch. 360; 1970, ch. 323, § 1; 1979, ch. 447, § 1, eff from and after July 1, 1979.
(Further citations of Code sections in this Opinion shall refer to Miss.Code Ann. unless specifically noted otherwise.)
Succinctly stated, the most critical issue in the instant proceeding is whether § 91-1-23 allows Mrs. Osborne, as the surviving widow, to prevent the execution of Bullins’ judgment lien against that part of her homestead property which is not protected by the exemption allowance set forth in § 85-3-21. The answer is no.
When the value of the homestead property is less than the amount of the exemption, it is abundantly clear that there can be no partition of or execution against the property to satisfy a creditor’s non-consensual claim which is exclusively against the deceased spouse and not the surviving spouse. In the instant proceeding, resolving this issue is simpler because the judgment in favor of Bullins is against both the deceased and the surviving spouse.
It appears that the value of the Osborne property exceeds the $30,000.00 homestead exemption, although the total acreage is considerably less than the statutory limit of 160 acres. Mrs. Osborne contends that § 91-1-23 prevents Bullins from executing against and selling any portion of her homestead property during her lifetime as long as she resides as a widow on the property, regardless of the amount of the homestead exemption allowance. Several decisions of the Mississippi Supreme Court have touched on this question, but no opinion has addressed head-on the question of whether a creditor, who has a claim exclusively against the deceased spouse, can levy execution and sell that portion of the homestead property which exceeds the value of the statutory homestead exemption and which has vested in the surviving spouse. There is language in several opinions that implies that § 91-1-23, as it inter*67faces with § 85-3-21, is not applicable to the creditors of the deceased under these circumstances. The Court appeared to specifically reach this precise conclusion, but then added subsequent language that tended to obscure the conclusion. A prime example is Moody v. Moody, 86 Miss. 323, 38 So. 322 (1905), a case cited repeatedly in subsequent decisions, where the Court stated:
... The object of the exemption law is to insure that the families of the residents of this state shall never by financial misfortune or stress of circumstances be deprived of their homesteads, and the desired end is sought to be secured by providing that no creditor shall be permitted to wrest from the family the dwelling place. This has been the law and the recognized public policy of this state for many years. In 1892, recognizing the fact that after the death of the head of the family — “the breadwinner”— the homestead was often forced upon the market for sale for purposes of partition between the surviving widow and the children, and that thereby the beneficent intent of the homestead law was often defeated, section 1553, Code 1892, was by the Legislature, in the exercise of a most enlightened wisdom, adopted. The prime object of the law is to preserve the homesteads of the citizens of this commonwealth; but, in order to prevent this protective provision from being converted into a means of defrauding creditors of their just rights, a limitation as to value was placed on the amount which could be claimed as exempt. In order to insure stability of residence and to encourage the building up and improvement of homes, the Legislature provided that, where the head of the family would in a formal manner identify and select the homestead which he intended to claim, he might increase the value of that home without risk of having the same subjected to seizure for debt to an amount not to exceed $3,000. The limit of value thus placed upon the total exemption permitted is merely incidental to the main object, the preservation of the homes. At the death of the head of the family, as in his lifetime, the excess of the value of the homestead above the amount stated is liable to be subjected to the payment of the debts of the decedent. But before a creditor of the decedent could force a new allotment when the homestead is susceptible of division, or a sale for the purpose of subjecting the excess of the proceeds to his debts, it would be incumbent on the creditor to establish that at the date of the death of the decedent the value of the homestead exceeded the statutory ex-emption_ (Emphasis added.)
Id. 38 So. at p. 323.
At this point, it appears that § 1553 of the 1892 Code, one of several predecessors of § 91-1-23, would not prevent a creditor from levying against that portion of the homestead property which exceeded the exemption allowance.
The Moody case, however, can be distinguished from the proceeding now before this Court because the value of the Moody homestead property did not exceed the value of the statutory exemption, to-wit:
... The record discloses no evidence even tending to show that at the date of the death of E.S. Moody in January, 1900, the value of the homestead exceeded the statutory limit.
Id. 38 So. at p. 323.
To sprinkle a bit of ambiguity on the issue, the Court went on to say:
But we do not base our decision on that consideration. The limit of value placed by law on the amount of land which can be held as exempt is solely for the protection and benefit of creditors — to prevent unreasonable amounts from being held exempt from execution to the prejudice of those to whom just debts might be due. But the question of value has no place in a consideration of the rights of the surviving widow to the use and occupancy of the homestead. The purpose of the Legislature was to protect the surviving widow, to whom, with others, the exempt property might descend, by securing to her during her widowhood the undisturbed use and occupance thereof.
*68A law designed to establish a beneficent public policy must be liberally construed, in order to completely effectuate the legislative purpose. So we hold that the value of the homestead is not material in passing on the rights of the surviving widow under section 1553. She is entitled to continue to use and occupy the homestead. No matter how elegant or costly, be it ever so humble, it is still the home to her, and to it she has been granted rights which can neither be interfered with nor abridged. So long as she remains a widow, her rights are absolute. She cannot be called on to account for the use and occupancy, nor forced to purchase the rights of her co-tenants, nor is the property subject to partition in kind, nor to sale for the purpose of dividing the excess of the proceeds. (Emphasis added.)
Id. 38 So. at p. 323.
Using its own crystal ball, this Court is of the opinion that the Mississippi Supreme Court concluded that the predecessor to § 91-1-23 would not preclude a creditor from satisfying a nonconsensual debt against the value of property that exceeded the exemption allowance. Of course, the value of the property up to the exemption allowance would be protected. This Court is also of the opinion that Moody is authority for the conclusion that value is a non-issue, insofar as § 91-1-23 is concerned, when the rights of co-tenants, not creditors, is concerned.
Ironically, the Moody decision seemed to recognize and hold inviolate the exemption limitation of 160 acres while it said the value limitation was of no consequence. This incongruity was perceived by Presiding Justice Patterson in his dissenting opinion in Stockett v. Stockett, 337 So.2d 1237 (Miss.1976), a case touching on this same issue which will be discussed subsequently.
A case, which cited Moody with approval, is Horton v. Horton, 210 Miss. 116, 48 So.2d 850 (1950). In that case, the Court held that a surviving widow was entitled to claim two non-contiguous rural tracts, being used as one farming unit and consisting of less than 160 acres, as her homestead. This was a lawsuit brought by the children of the deceased against the surviving widow, all of whom were co-tenants, for the partition of the parcel of property which was not immediately adjacent to the parcel on which the widow and several other children continued to reside. The rights of creditors of the deceased were not in dispute. The Court made the following observations:
The trial court based its decision, in holding that the “lower” tract did not constitute a part of the homestead, on the ground that the upper tract alone was worth more than the $3,000 limitation in value allowed for a homestead. But this Court held in the cases of Moody v. Moody, 86 Miss. 323, 38 So. 322, and Dickerson v. Leslie, 94 Miss. 627, 47 So. 659, 660, that the question of value has no place in the consideration of the rights of the surviving widow to the use and occupancy of the homestead; that the beneficent public policy which the law was designed to establish in this regard must be liberally construed, in order to completely effectuate the legislative purpose; that the value of the homestead is not material in passing on the rights of the surviving widow, since it was never the intention of the Legislature that the “one hundred and sixty acres of land should be reduced in quantity, save in one instance, and that is where the rights of creditors were involved.”
In the case of Dickerson v. Leslie, supra, the Court declared that: “No higher claim under the law can be propounded that the right of the widow to claim her homestead rights. No statute ever passed has a greater claim upon the court for liberal construction than this.” There are no rights of creditors involved in the instant case, and it seems clear that from the homestead statutes hereinafter discussed and the language above quoted, it was the legislative intent that a rural homesteader should ordinarily be entitled to as much as 160 acres for homestead purposes if such an amount of his land is so located as to be truly susceptible of being *69devoted to homestead purposes as a unit, and without giving the homestead laws an unreasonable application for the protection of the homesteader in that behalf (Emphasis added.)
Id. 48 So.2d at p. 852.
Mrs. Osborne has expressed reliance on the case of Jones v. Jones, 249 Miss. 322, 161 So.2d 640 (1964) which is factually distinguishable. In Jones, the homestead property had descended to the surviving widow and several of the deceased’s children. Subsequently, the former wife of one of the children obtained a judgment for the non-payment of child support. The Court offered the following:
The testimony shows that prior to the death of A.A. Jones, the father of Willis Jones, in 1960, the 26 acres here involved belonged to A.A. Jones and appellee, Mrs. Annie Mae Jones, and that it was their homestead. After the death of Mr. Jones, Mrs. Jones has continued to live on the property, and the property is exempt from her debts, provided of course the 26 acres was valued at less than the exemption allowed by law. See § 317, Miss.Code 1942, Rec. On the other hand, Willis Jones has no homestead exemption in the land, so that if he owned any interest in the property which became subject to the judgment recorded in the chancery clerk’s office, such judgment became a lien on his undivided interest in the property. McCaleb v. Burnett, 55 Miss. 83; 26 Am.Jur., Homestead, § 173, p. 110.
Id. 161 So.2d at p. 642.
After addressing other legal issues which are not pertinent to the instant proceeding, the Court concluded with the following:
The undivided interest in the exempt property here involved descended to the wife and children of the decedent, A.A. Jones. § 476, Miss.Code 1942, Rec. However, the homestead, exempt under section 317, Miss.Code 1942, Rec., is not subject to partition (as shown by § 478, Miss.Code 1942, Rec.) during the widowhood of Mrs. Annie Mae Jones, provided she remains a widow and qualifies under the exemption statutes, supra. If, on the other hand, the property was of a greater value than $5,000 at the time of the death of decedent, that part over and above the exemption, may be subjected to the debts of the co-owner. In any case, the title to the undivided interest of Willis Jones may be sold to satisfy the judgment of appellant, although the actual property may not be partited during the widowhood of Mrs. Annie Mae Jones without her consent, because of the provisions of section 478, Miss.Code 1942, Rec.
Id. 161 So.2d at p. 645.
The primary distinction in Jones and the proceeding now before this Court is that the indebtedness was not owed by either the deceased spouse or the surviving spouse, but was incurred by a co-tenant after the death of his father. There was no mention in the opinion as to whether the value of the property exceeded the homestead exemption allowance, only the conclusion that the property could not be partitioned during the widowhood of the surviving spouse without her consent. Considering that the widow was not liable on the debt, this result is reasonable and equitable.
The only other case that the Court would mention is Stockett v. Stockett, supra, where the Court, relying on the earlier decisions of Hendry v. Hendry, 300 So.2d 147 (Miss.1974) and Moody v. Moody, supra, concluded that homestead value is relevant only in considering the claims of creditors. The Court went on to quote a portion of the passage from Moody, set forth more fully hereinabove, to the effect that the question of value has no place in the consideration of the rights of the surviving widow to the use and occupancy of the homestead. Again, this Court construes this conclusion in Stockett to refer to the rights of the widow against her co-tenants, rather than against creditors of the deceased or her own creditors.
The proceeding before this Court is easily distinguishable from all of the cases cited hereinabove. As mentioned earlier, both the debtors were liable as a result of *70Bullins’ judgment. As such, Mrs. Osborne is precluded from invoking the protection of § 91-1-23 because she was and is jointly and severally liable on the debt. A contrary result would give Mrs. Osborne more protection than she would otherwise be entitled against her own creditors solely because of her husband’s death. This result is not in keeping with the intent or purpose of § 91-1-23.
The motion to avoid the judicial lien held by Bullins is well taken insofar as it impairs the homestead exemption to which Mrs. Osborne is currently entitled in the sum of $30,000.00. The limit of this avoidance, however, is $30,000.00. The judgment lien will remain valid to the extent that the property has value exceeding the homestead exemption plus the amount of any debts that are secured by valid deeds of trust encumbering the property that were recorded prior to the entry of the judgment against the debtors.
ÍV.
The remaining issue in this proceeding involves an attempt by Mrs. Osborne to claim a widow’s allowance as provided in § 91-7-135 from the real property. This section provides as follows:
§ 91-7-135. Appraisers to set apart one year’s support for family.
It shall be the duty of the appraisers to set apart out of the effects of the decedent, for his widow and children who were being supported by him, or for the widow if there be no such children, or for such children if there be no widow, one year’s provision, including such provision as may be embraced in the exempt property set apart. If there be no provisions, or an insufficient amount, the appraiser shall allow money in lieu thereof or in addition thereto necessary for the comfortable support of the widow and children, or widow or children, as the case may be, for one year. In addition to the provisions or money in lieu thereof, the appraisers shall ascertain and allow what sum of money will be needed to purchase necessary wearing apparel for the widow and such children, or the widow or children, as the case may be, and to pay tuition for the children for one year. If a mother die leaving children who are infants and were being maintained by her, the same provisions and allowance shall be set apart and made for them as above provided.
A widow’s allowance can only be awarded from property that is a part of the decedent’s probate estate. When an individual files bankruptcy and then dies, the bankruptcy case remains open and viable, particularly a Chapter 7 liquidation bankruptcy such as that filed by the debtors herein. See Rule 1016, Federal Rules of Bankruptcy Procedure. Property that was included within the decedent’s bankruptcy estate would not be includible within his probate estate. The decedent’s probate estate can only be comprised of property that was claimed and allowed as exempt in the bankruptcy case or that was not property of the bankruptcy estate, e.g., a Chapter 7 debtor’s earnings for personal services accumulated post-petition. See 11 U.S.C. § 541(a). This, however, is not relevant to the instant proceeding.
As mentioned hereinabove, the debtors owned their real estate as tenants by the entirety with rights of survivorship. At the death of Mr. Osborne, the real property vested exclusively and immediately in the surviving tenant, Mrs. Osborne. As such, the property cannot become an asset of Mr. Osborne’s probate estate, and, consequently, is not available to said estate to be distributed in kind as a widow's allowance. This property is now exclusively a part of Mrs. Osborne’s bankruptcy estate and must be administered through her bankruptcy case. Mrs. Osborne, of course, is eligible to claim her full statutory homestead exemption in this real property pursuant to § 85-3-21.
Y.
The Court is aware that Cassie Osborne, Jr., has filed a voluntary bankruptcy case in the Eastern District of Kentucky, Frankfort, Kentucky. This bankruptcy case has temporarily stayed the foreclosure of the Bullins’ judicial lien which was awarded *71against Osborne, Jr., in the original chancery court decree.
Bullins, in his response to the debtors’ motion to avoid his judicial lien, requested relief from the automatic stay so that he could continue his efforts to execute upon the subject homestead property. The Court informed Bullins that procedurally this is incorrect in that a separate motion for relief from the automatic stay must be filed. The Court, however, also indicated that it would be extremely reluctant to lift the automatic stay in this ease before Bul-lins had completed the foreclosure of his judicial lien against the property which originally was to be sold to Cassie Osborne, Jr. This Court is of the opinion that it is extremely important that Bullins mitigate his damages before taking any further action against the homestead property which has now vested exclusively in Mrs. Osborne.
VL
In conclusion, the Court would summarize the findings of this Opinion as follows:
1. The provisions of § 91-1-23 cannot be utilized by the surviving debtor, Mrs. Doris Osborne, to preclude Bullins from enforcing the judgment of the Mississippi Supreme Court against the real property now vested in Mrs. Osborne, subject, however, to the protection provided by § 85-3-21, the homestead exemption statute.
2. At the death of Cassie Osborne, Sr., the real property which had been owned by him and his wife as tenants by the entirety with rights of survivorship became vested in Mrs. Osborne as the surviving spouse. As such, this property cannot become an asset of Mr. Osborne’s probate estate and is not available for distribution in kind as a widow’s allowance to Mrs. Osborne. This real property is exclusively an asset of Mrs. Osborne’s bankruptcy estate, again subject to the protection provided by § 85-3-21.
3. The motion to avoid the judicial lien filed on behalf of the debtors is well taken to the extent that said lien impairs Mrs. Osborne’s homestead exemption in the sum of $30,000.00. The value of the real property, however, which exceeds the $30,-000.00 exemption plus the value of any deeds of trust which prime Bullins’ judgment, is not exempt and, as such, is not impaired by the Bullins’ lien. Therefore, the motion to avoid the judicial lien is not well taken as to any excess non-exempt unencumbered value in the real property.
4.The request to lift the automatic stay which was pled in Bullins’ response to the motion to avoid his judicial lien is not well taken and will be overruled without prejudice. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491201/ | ALEXANDER L. PASKAY, Chief Judge.
THIS is a Chapter 7 liquidation case and the matters under consideration are Motions for Summary Judgment filed by the Debtor, Barry D. Haught (Debtor), and the Plaintiff, Resolution Trust Corporation (RTC), as successor in interest to Freedom Savings & Loan Association (Freedom). It is the contention of both RTC and the Debt- or that there are no genuine issues of material fact and that this adversary proceeding may be decided as a matter of law. The undisputed facts as appear from the record which are relevant to a resolution of these matters are as follows:
On July 8, 1988, the Debtor filed his voluntary Petition for Relief under Chapter 7 of the Bankruptcy Code. It is undisputed that at the time of the filing of the Petition, the Debtor was liable on a debt owed to Freedom by virtue of his guaranty of a fully funded $300,000 line of credit extended by Freedom to Mainstar, Inc., a corporation in which the Debtor was a principal. Despite this fact, the Debtor did not schedule Freedom or RTC as a creditor, nor were Freedom and RTC included on the matrix filed by the Debtor. Consequently, the notice informing the creditors of the date of the meeting of creditors and the bar date to file complaints objecting to the Debtor’s discharge or the dischargeability of any particular obligation pursuant to § 523(a)(2)(A) and (B), (a)(4) or (a)(6) was not mailed either to Freedom or to RTC.
It is without dispute that between July and September of 1988, or after the commencement of this Chapter 7 case, Mains-tar repaid the outstanding balance of its loan initially granted to it by Freedom, thus relieving the Debtor of any obligation to Freedom based on his guaranty of the original loan transaction. However, between September 16 and September 20, Mainstar obtained additional advances from Freedom in the amounts of $250,000 and $50,000, respectively, both of which loans were also guaranteed by the Debtor, thus, he again became liable to Freedom based on his guaranty. On November 3, 1988, the Debt- or received his general bankruptcy discharge pursuant to § 727.
The record reveals that on March 23, 1989, the Clerk of the Court notified creditors of this estate that the Court fixed June 21, 1989, as the bar date for filing proofs of claim in this case. It is undisputed that this notice was not sent to either Freedom or RTC because, as noted above, the Debt- or had not scheduled RTC or Freedom as creditors. On June 25, 1990, RTC filed its Complaint seeking a determination by this Court that the amounts owing by the Debt- *235or to RTC under the guarantee on the date of the filing of the Petition initiating this case are nondischargeable pursuant to § 523(a)(3)(A). Section 523(a)(3)(A) provides as follows:
§ 523. Exceptions to discharge
(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt—
(3) neither listed nor scheduled under section 521(1) of this title, with the name, if known to the debtor, of the creditor to whom such debt is owed, in time to permit—
(A) if such debt is not of a kind specified in paragraph (2), (4), or (6) of this subsection, timely filing of a proof of claim, unless such creditor had notice or actual knowledge of the case in time for such timely filing; ....
Based on the foregoing, RTC alleges that it did not have notice or actual knowledge of the bankruptcy case and as the Debtor never scheduled or listed RTC or Freedom as a creditor in time to permit RTC or Freedom to file a proof of claim, any debt owing to RTC or Freedom as of the date of the filing of the Petition is nondischargeable. In opposition, the Debtor contends that Freedom had actual knowledge of the Debtor’s bankruptcy filing, relying on the affidavit of J. Craig Berglowe, a commercial loan officer at Freedom. Thus, while it appears that there is a question of fact regarding Freedom’s actual knowledge of the bankruptcy case, this Court is satisfied that this dispute may nevertheless be resolved as a matter of law, but not on the ground urged by RTC.
The extent of protection granted to a debtor by the general bankruptcy discharge is defined in § 727(b) which provides that
... [a] discharge under subsection (a) of this section discharges the debtor from all debts that arose before the date of the order for relief under this chapter.... (emphasis supplied)
Thus, the initial inquiry must be addressed to the debt which is sought to be declared nondischargeable by the Plaintiff pursuant to 11 U.S.C. § 523(a)(3)(A). Even a cursory analysis of the undisputed facts compels the conclusion that the date the debt arose in this particular case is crucial to the determination of the Plaintiff’s claim. This is so because if a debt sought to be excepted from a general bankruptcy discharge is a debt which arose prior to the commencement of the case, the question of discharge-ability is rendered academic when that debt is fully satisfied postpetition. If a creditor seeks to have a debt which arose postpetition declared to be nondischargeable, which is clearly the case in the present instance, the question is moot again since, as noted, only debts which arose prior to the commencement of the case are discharged by virtue of § 727(b) of the Bankruptcy Code. In re Peltz, 55 B.R. 336 (Bankr. M.D. Fla.1985). This being the case, whether or not the Plaintiff received a notice or, as contended, had actual knowledge of the pend-ency of the case, is of no consequence.
The difficulty with this particular case is caused not only by the method in which the claim is presented, that is, by a Complaint filed pursuant to 11 U.S.C. § 523(a)(3), but also because of the procedural posture of the Motions for Summary Judgment filed by both the Plaintiff and the Debtor. Be that as it may, this Court is satisfied that the Plaintiff’s Motion, treated as a request to declare the particular debt now outstanding to be unaffected by the Debtor’s discharge, should be granted, and the debt owed by this Debtor incurred postpetition should be declared to be outside the overall protective provisions of the general bankruptcy discharge granted to the Debtor. This being the case, it is evident, of course, that the Debtor’s Motion for Summary Judgment is without merit and should be denied. It is therefore
ORDERED, ADJUDGED AND DECREED that the Motion for Summary Judgment filed by the Plaintiff be, and the same is hereby, granted, and the debt incurred by this Debtor postpetition be, and the same is hereby, declared to be not affected by the general bankruptcy discharge. It is further
*236ORDERED, ADJUDGED AND DECREED that the Debtor’s Motion for Summary Judgment be, and the same is hereby, denied.
A separate Final Judgment will be entered in accordance with the foregoing.
DONE AND ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491203/ | DECISION AND ORDER DENYING CONFIRMATION OF DEBTORS’ PROPOSED CHAPTER 13 PLAN
WILLIAM A. CLARK, Bankruptcy Judge.
Before the court is an objection of CityWide Building Finance Corporation (“CityWide”) to confirmation of the proposed chapter 13 plan of James G. McCullough and Fostina McCullough, debtors. The court has jurisdiction pursuant to 28 U.S.C. § 1334 and the standing order of reference entered in this district. This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(L) — confirmations of plans.
FACTS
The following facts appear from the un-contradicted representations of counsel made at the confirmation hearing and in memoranda of law:
1) On January 8, 1987 the debtors executed a promissory note (“Note # 1”) in favor of CityWide in the amount of $17,500 and granted a second mortgage to CityWide on real estate located at 2413-15 East Fifth Street, Dayton, Ohio;
2) On January 27, 1988 the debtors entered into an Agreement for Rental Rehabilitation Program and a Loan Agreement in which CityWide agreed to loan funds to the debtors for purposes of renovating property located at 209 and 213 Linden Avenue, Dayton, Ohio. The debtors executed a promissory note (“Note #2”) in favor of CityWide in the amount of $13,500 and granted CityWide a second mortgage on the Linden Avenue properties;
3) The “Agreement for Rental Rehabilitation Program” contained a provision that the principal amount of Note #2 would be annually reduced by 10% so long as Note # 2 did not become due and payable. By virtue of the loan documents, the principal amount and accrued interest on Note #2 were to become due and payable if—
a) the debtors transferred any legal or equitable interest in the real estate, or
b) the debtors defaulted on their payments to the first mortgagee, First National Bank, or
c) the debtors defaulted on their payments to CityWide on any other loan obligation.
4) On July 29, 1988 the holder of the first mortgage on the Fifth Street property *427filed a foreclosure action against the debtors in state court. At that time the debtors were in default of payment of Note # 1 with CityWide, and as part of the foreclosure proceedings, CityWide was granted a judgment in the amount of $15,602.03 plus interest. The Fifth Street property was sold at a sheriffs sale and the mortgage of CityWide was extinguished. No sale proceeds were received by CityWide. Subsequently, CityWide filed a certificate of judgment with respect to its judgment for $15,602.03 which presumably attached to the Linden Avenue properties;
5) On October 7, 1988, based on the debtors’ default under Note # 1, CityWide filed a complaint in state court alleging that the default under Note #1 constituted a default under Note # 2 and that CityWide was entitled to and was declaring the entire balance under Note #2 due and payable. A default judgment was granted to CityWide on December 21, 1988 in the amount of $14,516.57 plus interest;
6) On March 4, 1989 First National Bank, the first mortgagee for the Linden .Avenue properties, filed a foreclosure action against the debtors on the basis of a default in paying the first mortgage payments. A judgment and decree of foreclosure were granted to the First National Bank and the Linden Avenue properties were scheduled to be sold at an auction on December 22, 1989;
7) The debtors filed a petition in bankruptcy under chapter 13 of the Bankruptcy Code on December 22, 1989 and no sale of the properties was held;
8) The original plan of the debtors proposed to make “no payment” to CityWide with respect to its second mortgage on the Linden Avenue properties and states that “per original loan terms, balance will be forgiven if debtors retain title. Balance would be due upon forced sale”;
9) The debtors’ schedules list First National Bank as holding a first mortgage on the Linden Avenue properties in the amount of $54,840.86 (with arrearages of $10,177.60). The two properties on Linden Avenue have been appraised separately at $30,000 and $28,000;
10) The debtors’ amended plan proposes to pay $300 per month to the chapter 13 trustee for a period of 36 months and to pay a dividend of 30% to allowed unsecured claims.
CONCLUSIONS OF LAW
CityWide takes the position that, because of the existence of the cross-default provision in the Linden Avenue loan agreement, the debtors may reinstate the terms of the Linden Avenue note and mortgage under § 1322(b)(5) of the Bankruptcy Code only if they cure the arrearages arising from the Fifth Street loan and resume regular payments on that loan.1 Debtors maintain that § 1322(b)(2) of the Bankruptcy Code2 permits them to modify CityWide’s mortgage on the Linden Avenue properties, and that one of the terms they are proposing to modify is the effectiveness of the cross-default clause. The issue, then, is whether the debtors are permitted to adjust the terms of the Linden Avenue loan agreement so as to render a nullity the cross-default clause with respect to the Fifth Street property and to retain the Linden Avenue properties without making any payments to CityWide on the Linden Avenue loan.3
Initially, the court notes that it is not clear from the provisions of the debt*428ors’ proposed plan whether the debtors are proposing to “cure” the Linden Avenue mortgage or proposing to “modify” its terms. Although the terms “cure” and “modify” are not defined in the Bankruptcy Code, “it is clear that Congress intended ‘cure’ to mean something different from ‘modify’; otherwise, in light of (b)(2), (b)(3) would be superfluous.” Matter of Clark, 738 F.2d 869, 872 (7th Cir.1984).4 Despite the debtors’ position at the confirmation hearing that they are “modifying” CityWide’s rights, the provisions of the plan itself cut against such an interpretation. The debtors’ plan proposes to make no payments on the Linden Avenue loan because “per original loan terms, balance will be forgiven if debtors retain title.” This reference and reliance upon the operative effect of the original loan terms causes the court to conclude that the debtors’ plan proposes a reinstatement of CityWide’s Linden Avenue mortgage by curing its terms, rather than a modification of such terms. The following cases explain the concept of “cure” in a chapter 13 plan:
“A default is an event in the debtor-creditor relationship which triggers certain consequences — here, acceleration. Curing a default commonly means taking care of the triggering event and returning to pre-default conditions. The consequences are thus nullified. This is the concept of “cure” used throughout the Bankruptcy Code.” Di Pierro v. Taddeo (In re Taddeo), 685 F.2d 24, 26 (2d Cir.1982).
Ordinarily, the means by which one cures a default is by paying all amounts due and owing; however, “cure” is the end, not the means, and what the term refers to is the restoration of the way things were before the default. Thus, the plain meaning of “cure,” as used in § 1322(b)(2) and (5), is to remedy or rectify the default and restore matters to the status quo ante. Matter of Clark, supra, 738 F.2d at 872.
In the instant matter, the event which triggered the acceleration of the Linden Avenue loan was the default on the Fifth Street loan. Therefore, by not proposing to “take care of the triggering event” the debtors’ plan fails to propose a valid cure of the Linden Avenue loan. Nevertheless, even if the debtors were proposing to pay the Fifth Street loan, this court, under the facts of this case, would not permit such a cure, because it would clearly violate a fundamental principle of bankruptcy: that unsecured claims are to share equally in the distribution of a debt- or’s bankruptcy estate.
An examination of the debtors’ case file reveals that the Linden Avenue properties have a combined appraised value of $58,000 and a first mortgage value of approximately $55,840. This leaves very little equity to secure CityWide’s loan for the Linden Avenue properties and none at all to secure the certificate of judgment filed by CityWide for its judgment with respect to the Fifth Street property. Therefore, to either require or to permit the debtors to pay CityWide’s Fifth Street judgment by virtue of across-default clause would have the effect of elevating CityWide’s unsecured Fifth Street claim to a secured status at the expense of the other unsecured creditors. As a result, in the instant matter, a cure of the Linden Avenue loan is impermissible.
However, because the provisions of § 1322(b) of the Bankruptcy Code are permissive rather than mandatory, a “cure” of the Linden Avenue mortgage is not the only avenue available for the debtors to achieve confirmation. “Treatment of a secured claim arising from a long-term debt under § 1322(b)(5) is but one permissible option afforded a Chapter 13 debtor.” In re Hill, 96 B.R. 809, 814 (Bankr. S.D. Ohio 1989). Where the security for a secured claim is not a debtor’s principal residence, as is the case here, a debtor may modify the rights of the secured claim holder under § 1322(b)(2) of the Bankruptcy Code. The basic limitations on such a modification *429are contained in § 1325(a)(5). In re Neal, 21 B.R. 712, 714 (Bankr. S.D. Ohio 1982). That section provides that the court shall confirm a plan if—
(5) with respect to each allowed secured claim provided for by the plan—
(A) the holder of such claim has accepted the plan;
(B) (i) the plan provides that the holder of such claim retain the lien securing such claim; and
(ii) the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim; or
(C) the debtor surrenders the property securing such claim to such holder.
Because the debtors’ plan, as currently proposed, does not satisfy any of the above requirements of modifying a secured claim, it may not be confirmed at this time.5
In reviewing the requirements for obtaining plan confirmation under § 1325, the court observes that there may be an additional reason for denying confirmation at this time. Under the “best interests of creditors” test as expressed in § 1325(a)(4) of the Bankruptcy Code, unsecured creditors in a chapter 13 plan must receive at least as much as they would receive in a chapter 7 liquidation case. The debtors propose a distribution of $51,000 received in a postpetition settlement of a lawsuit to various creditors and the balance to the trustee for distribution pursuant to the terms of the debtors’ plan. Assuming that the cause of action existed at the time the debtors filed their chapter 13 petition and that its potential proceeds were unencumbered, it is the court’s initial impression that, because the cause of action would be part of a chapter 7 bankruptcy estate, the entire $51,000 would be available for distribution to unsecured creditors in a chapter 7 liquidation case. It is not readily discernible from the debtors’ proposed chapter 13 plan that the unsecured creditors are to be provided with this amount under the plan. Therefore, at any subsequent confirmation hearing, the court will expect the debtors to either explain why the court’s view regarding a hypothetical chapter 7 distribution of the settlement proceeds is mistaken or to demonstrate that the plan distributions will in fact satisfy the requirements of § 1325(a)(4).
For the foregoing reasons, it is hereby ORDERED that confirmation of the debtors’ proposed chapter 13 plan is DENIED. It is further ORDERED that any additional proposed plan of the debtors be filed within 30 days of the entry of this order.
. A chapter 13 plan may "provide for the curing of any default within a reasonable time and maintenance of payments while the case is pending on any unsecured claim or secured claim on which the last payment is due after the date on which the final payment under the plan is due." 11 U.S.C. § 1322(b)(5).
. A chapter 13 plan may "modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor's principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims." 11 U.S.C. § 1322(b)(2).
.Neither the parties nor the court have located any relevant case law concerning the effectiveness of a cross-default clause under the facts of this case. The debtors do not dispute that, absent bankruptcy, the cross-default provision is valid under Ohio law, and, therefore, the court assumes that the cross-default clause is effective under Ohio law.
. A chapter 13 plan may "provide for the curing or waiving of any default.” 11 U.S.C. § 1322(b)(3).
. In the event that the debtors propose in a subsequent plan to pay the amount of CityWide’s claim secured by the Linden Avenue properties over the plan period, it appears that a § 506 valuation proceeding may be necessary to establish the amount of the secured claim. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491206/ | MEMORANDUM
JOHN C. MINAHAN, Jr., Bankruptcy Judge.
This matter comes before the court upon Motion to Dismiss and Request for Expedited Hearing by Production Credit Association of the Midlands (the “PCA”) (Fil. #7), Motion to Dismiss and Request for Expedited Hearing by Wauneta Falls Bank (Fil. # 14), and Application for Judgment in the Event of Dismissal by the United States Trustee (Fil. # 20).
The debtors were in a previous Chapter 11 proceeding, BK87-67, for approximately three years. The predecessor case was recently dismissed under 11 U.S.C. §§ 1112(b)(2) and (3) for inability to effectuate a plan and unreasonable delay prejudicial to creditors. In re Emerson & Joyce Schwenk, Ch. 11 No. BK87-67, slip op. (Bkrtcy.D.Neb. Feb. 15, 1990) (Fil. #7 & 14, Exhibit A). Subsequent to the dismissal of the predecessor case, PCA commenced an action to replevy its collateral. A replevin hearing had been scheduled for June 29, 1990. The debtors filed the present bankruptcy case on June 25, 1990 (Fil. # 1). At the § 341 hearing held on July 20, 1990, the debtors stated that the present bankruptcy petition was filed in order to stay any further attempt by the PCA to recover its collateral. (Fil. # 21, Exhibit C, Page 4).
The debtors further stated, that to emerge successfully from this bankruptcy proceeding they intended to file a lender liability suit against the PCA for forcing them into bankruptcy. Debtors allege that the PCA improperly terminated debtors’ line of credit forcing them out of business and into bankruptcy (Fil. # 21, Exhibit C, Page 10). Other than the intent to file the lender liability suit against the PCA, there is no indication of any other change in circumstance from the time Case No. BK87-67 was dismissed.
The doctrine of res judicata bars relitigation of matters which were actually litigated or could have been litigated in a prior suit. Lovell v. Minton, 719 F.2d 1373, 1379 (8th Cir.1983), Oulman v. Rolling Green, Inc., 851 F.2d 1032, 1035 (8th Cir.1988). The order dismissing the debtors’ previous Chapter 11 case is res judica-ta on the issue of debtors’ ability to reorganize under Chapter 11 under the facts as they existed at the time the previous order was entered. Since debtors’ previous Chapter 11 case was dismissed for inability to effectuate a plan of reorganization and unreasonable delay prejudicial to creditors, I conclude that debtors have the burden to establish that a change in circumstance has occurred since the dismissal of their previous case. The change in circumstance must be sufficient to result in a reasonable likelihood of reorganization or to demonstrate that a reorganization is in prospect. Debtors assert that their intent to file a lender liability suit against the PCA is a change in circumstance that occurred since the dismissal of their previous bankruptcy ease which increases the likelihood of reorganization.
The debtors were in the previous bankruptcy proceeding for approximately three years. They had ample opportunity during the pendency of that case in which *526to file the lender liability action against the PCA. They failed to bring such an action. The debtors allege that by terminating their lines of credit, the PCA forced them out of the cattle business and out of the farming business for five (5) years. The underlying events upon which the lender liability action is based must, therefore, have occurred sometime before the previous bankruptcy case was dismissed. Accordingly, I conclude that the cause of action against the PCA existed during the previous bankruptcy case. The debtors could have filed an action on the claim during that previous bankruptcy case. Thus, there has been no change in circumstance since the dismissal of their previous bankruptcy case which increases the likelihood of reorganization.
An additional ground for rejecting debtors’ argument that this bankruptcy case should be permitted to remain pending to allow the lender liability suit to be brought, is the equitable concept of judicial estoppel. This doctrine applies to preclude a party from assuming a position in a legal proceeding inconsistent with one previously asserted. Judicial estoppel looks to the connection between the litigant and the judicial system. Oneida Motor Freight, Inc., v. United Jersey Bank, 848 F.2d 414, 419 (3rd Cir.1988), cert denied, 488 U.S. 967, 109 S.Ct. 495, 102 L.Ed.2d 532 (1988). The debtors failed to bring the then existing lender liability claim against the PCA in the previous bankruptcy case. Having failed to assert that claim in the previous long pending case, I conclude that the debtors are estopped from asserting that this bankruptcy case should remain pending to give them time to litigate that claim. Indeed, if a plan had been confirmed in the predecessor case, it is arguable that debtors would be precluded from ever asserting the claim against the PCA. See, In re Hoffman v. First National Bank of Akron, 99 B.R. 929, 935 (N.D.Iowa 1989), Pako Corporation v. Citytrust, 109 B.R. 368, 372-376 (D.Minn.1989).
Because, I conclude that there has been no change in circumstance since the dismissal of debtors’ previous bankruptcy case which increases the likelihood of reorganization, the order dismissing their previous Chapter 11 case is res judicata on the issue of debtors’ ability to reorganize in the present case.
Debtors may have an alternative forum available to assert their lender liability claim against the PCA. There is no reason debtors should be afforded the protection of the bankruptcy court in order to bring that action. Allowing debtors to proceed with the lender liability action in the present bankruptcy case would pose an unreasonable delay prejudicial to creditors. I conclude that this case should be dismissed for inability of the debtors to effectuate a plan of reorganization and unreasonable delay prejudicial to creditors. 11 U.S.C. §§ 1112(b)(2) and (3).
Based on the reasons set forth, I conclude that the Motions to Dismiss shall be granted. In addition, the United States Trustee has filed an Application for Judgment in the Event of Dismissal (Fil. # 20). There have been no objections filed to the application. The United States Trustee requests judgment for any unpaid quarterly fees and that the judgment for unpaid fees be preserved upon the entry of dismissal in this case. If all quarterly fees due to the United States Trustee are not paid within twenty-one (21) days hereof, judgment will be entered upon application by the United States Trustee with supporting affidavits.
A separate order in conformity herewith shall be issued contemporaneously with this journal entry.
ORDER
Based on the reasons set forth in the court’s journal entry of today’s date entered contemporaneously herewith,
IT IS ORDERED, ADJUDGED AND DECREED, that:
1. Motion to Dismiss (PCA, Fil. # 7) (Wauneta Falls Bank, Fil. # 14) is hereby granted and this bankruptcy case is hereby dismissed.
2. Debtors shall pay all quarterly fees owing to the United States Trustee within twenty-one (21) days hereof. If the fees *527are not paid within such time, judgment will be entered upon application by the United States Trustee with supporting affidavits. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491208/ | MEMORANDUM DECISION AND ORDER RE: MOTION FOR RECONSIDERATION
JON J. CHINEN, Bankruptcy Judge.
On May 21, 1990, C.U. Cars, Inc. filed a Motion for Reconsideration of Memorandum Decision and Order Entered on May 10, 1990 Granting Gillespie and Ottersen’s Post-Petition Interest and Attorney’s Fees (“Motion for Reconsideration”). The Trustee filed a Joinder in Motion for Reeonsider-ation on May 22, 1990, and Robert Gillespie, Jr., Larry Ottersen and Shirley Otter-sen filed a Memorandum in Opposition to the Motion for Reconsideration on May 31, 1990. The Court, being advised in the premises, now renders this memorandum decision and order.
The law provides that “a motion under Rule 59 is not intended merely to relitigate old matters already considered or give a disappointed litigant another chance.” Agola v. Hagner, 678 F.Supp. 988, 991 (E.D.N.Y.1987).
Issues which could have been presented to the court for consideration previously, but which were not, are not the proper subject of Rule 59(e) relief; the issues are waived.
Smith v. Stoner, 594 F.Supp. 1091, 1118 (N.D.Ind.1984).
Indeed, we have serious doubt whether in any event [the movant] would be entitled to “reconsideration” of the Court's grant of summary judgment to Frito-Lay based on evidentiary material which [the movant] could have presented, but may have chosen to withhold, on Frito-Lay’s original motion. If there is any such material ... this Court is obligated to hold [the movant] to his own tactical judgment.
Frito-Lay of Puerto Rico, Inc. v. Canas, 92 F.R.D. 384, 391 (D.P.R.1981).
Thus, the law is clear, that C.U. Cars, Inc. cannot bring up any additional facts, unless they can show that they were unavailable at the time of the hearing on the original application. C.U. Cars, Inc. has failed to provide any basis for reconsideration of this Court’s order. Accordingly, C.U. Cars, Inc. has not met the threshold burden of showing that the “newly discovered” evidence was unavailable at the time of the original hearing.
C.U. Cars, Inc. is prohibited from using a motion for “reconsideration” as a vehicle for raising new legal arguments. *558As noted in Durkin v. Taylor, 444 F.Supp. 879, 889-90 (E.D.Va.1977):
His brief in support of his motion is no more than an expression of a view of the law contrary to that set forth in the Court’s opinion. Whatever may be the purpose of Rule 59(e) it should not be supposed that it is intended to give an unhappy litigant one additional chance to sway the judge.
Since the plaintiff has brought up nothing new — except his displeasure— this court has no proper basis upon which to alter or amend the order previously entered, (emphasis added).
Motions to alter or amend under Rule 59(e) “are not intended to be a vehicle for obtaining rehearing or relitigation of old matters.” Kohl v. Woodhaven Learning Center, 676 F.Supp. 945, 948 (W.D.Mo.1987).
Nothing contained in the Motion for Reconsideration and in the supporting pleadings can be considered newly discovered evidence. The simple rule is that motions to amend are not tolerated where their purpose is “to introduce evidence that was available at trial but was not proffered, to relitigate old issues, to advance new theories, or to secure a rehearing on the merits.” Fontenot v. Mesa Petroleum Co., 791 F.2d 1207, 1219 (5th Cir.1986).
C.U. Cars, Inc. argues that post-petition interest is allowable only on tax claims. The Court acknowledges that, virtually in all cases whose post-petition interest on administrative claims have been allowed, the claims have been tax-related. However, in this case, there was a confirmed Plan of Reorganization under which the Debtor was selling vehicles to the public. Debtor, unfortunately was not delivering the vehicles and/or the title to the vehicles. Consequently, the purchasers, such as Gillespie and Ottersen were forced to expend time and money in obtaining that which they should have been given in the first instance. The customers of the Debt- or provided the funds that allowed the Debtor to remain in business. They have incurred attorney’s fees and costs in this matter. It is only equitable that the Debt- or pay for the use of these innocent purchaser’s money. As noted in In re Associated Air Service, Inc., 75 B.R. 47, 49 (Bkrtcy.S.D.Fla.1987), stated:
The framers of the Bankruptcy code clearly intended that all expenses of administration of the estate be paid in full before any payment of creditors with lower priorities. This rule was formed in part to encourage parties to deal with the estate with the assurance that they would receive full satisfaction before payment of any pre-bankruptcy claim. But a failure to include interest on administrative expenses would certainly conflict with that Congressional purpose, since delay of payment of any administrative expenses beyond the agreed-upon due date without reasonable interest inevitably under compensates the affected creditor. In effect, the creditor is forced to make an interest-free loan to the estate. The value of that loan will inevitably inure to the benefit of creditors of lesser priority, contrary to the Congressional policy of full satisfaction of administrative expenses before any payment of lower priority claims. (Emphasis added).
As stated by the Court in In re Thompson, 67 B.R. 1, 2-3 (Bkrtcy.N.D.Ohio 1984) (post-petition taxes), interest on post-petition obligations may fairly be treated as an actual and necessary expense of preserving the debtor’s estate:
[T]o hold otherwise would be, in effect, to grant the debtors an interest free loan at the expense of the government. If the debtors choose to finance their reorganization effort with funds that would otherwise be used to pay their taxes, then interest on the taxes may fairly be considered as an actual and necessary cost and expense of preserving the estate allowable as an administration expense under section 503(b)(1)(A). Indeed, section 364 of the Bankruptcy Code specifically recognizes that the cost of unsecured credit is allowable as an administrative expense under section 503(b)(1). (Citation omitted, emphasis added).
In this case, the debtor chose to finance its post-petition operation with funds from the *559innocent purchasers. In effect, these innocent purchasers were forced to make an involuntary loan to the debtor’s estate. Finally, as stated in Matter of Patch Press, Inc., 71 B.R. 345, 350 (Bkrtcy.W.D.Wis.1987), where interest on post-petition obligations was accorded administrative status:
Normal business practice is that one must pay her debts on time or be charged interest for the time she has had the use of money at the creditor’s expense. If creditors are to be expected to take the risk of extending credit to chapter 11 debtors, they cannot be expected to accept a lower rate of return by being denied interest on overdue accounts.
In short, interest on post-petition obligations is an actual and necessary expense of administration which, if unpaid, would force parties dealing with a Chapter 11 debtor to make interest-free loans to the debtor’s estate contrary to the Congressional policy of full satisfaction of administrative claims before payment of any lower priority of claims.
Based on the above,
IT IS HEREBY ORDERED that the Motion for Reconsideration filed herein on May 21, 1990 be and the same is denied in its entirety. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491209/ | ORDER
DAVID A. SCHOLL, Bankruptcy Judge.
AND NOW, this 14th day of November, 1990, upon receipt of the Defendant’s timely withdrawal of its Proof of Claim and upon consideration of the Plaintiffs’ Motion to Alter or Amend Judgment and/or to Reopen the Record (“the Motion”), it is hereby ORDERED as follows:
1. The Motion is DENIED. Our prior decision, at 114 B.R. 434 (Bankr.E.D.Pa. 1990), never held without reservation (“probably”) that the Debtor was Mr. Cousin’s daughter. In that decision, we questioned her credibility and made clear that we would probably not consider any claims on the contract in issue until Cousin’s estate was administered. 114 B.R. at 437, 438. With respect to reopening the record, we note that the Debtor insisted on proceeding on October 18, 1990, and provided no testimony or evidence to bolster her credibility, which she knew was in issue. After a verdict, “new” evidence available at the time of trial should rarely be admitted. See In re Pinto, C.A. No. 89-3233 (E.D.Pa. August 18, 1989). It would also *823unfairly prejudice the Defendant, which withdrew its claim in reliance upon our decision of October 24, 1990, 120 B.R. 817, prior to the filing of this motion, to reconsider that decision.
2. Judgment is entered in favor of the Defendant, UNION MORTGAGE COMPANY, and against the Debtor-Plaintiff, LOUISE EVANS.
3. This proceeding is DISMISSED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491210/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW ON DEBTORS MOTION TO DISMISS
LETITIA Z. CLARK, Bankruptcy Judge.
Movant Debtors seek to dismiss each of their Bankruptcy actions pursuant to 11 U.S.C. § 1112(b) of the Bankruptcy Code. Movants’ motions are opposed by a creditor, Gertner, Aron & Ledet Investments (“GALI”). After considering the pleadings, evidence, memoranda, and arguments of counsel the court makes the following findings of fact and conclusions of law and enters a separate Judgment in conjunction herewith. For the reasons discussed below, the Debtors’ Motions are to be grant*850ed, with certain caveats. To the extent any of the following findings of fact are considered to be conclusions of law, they are hereby adopted as such, and to the extent any of the conclusions of law are considered to be findings of fact, they are hereby adopted as such.
Debtors each filed a Chapter 11 under the Bankruptcy Code on July 22, 1987, and continue to operate their respective businesses. Debtors have each filed a Motion to Dismiss, to which GALI objected. GALI is the sole objector to this dismissal. GALI obtained a state court judgment jointly and severally against three debtors, Harold, Jerald and Ronald Turboff, based on breach of contract and fraud in an amount in excess of $4.5 million. GALI filed a claim in each Debtor’s case for over $7 million. Immediately following the verdict, Debtors filed the instant Chapter 11 cases and appealed the state court judgment. The state court judgment was reversed and remanded, on grounds that a partial summary judgment issue obscured evidence admitted on the fraud issue. The Texas Supreme Court denied GALI’s writ. A retrial as to the breach of contract claims was scheduled to be held (but was not) in April of 1990. The state court severed the tort issues, which have not yet been set for trial.
Debtors state they seek to dismiss because they each have sufficient assets to insure payment to their remaining creditors. They testified the continuance of Bankruptcy proceedings is a burden on each Debtor’s day-to-day business operations. Debtors are in the investment business, and state the continuation of Bankruptcy proceedings hampers expansion and prompt response to business opportunities. Additionally, given the conditional status of GALI’s claim, Debtors state no plan can be proposed and implemented until the state court proceedings are finalized. According to each party’s witnesses, exhaustion of the state court’s remedies, including anticipated appeal time, will take at least two years. Distributions under a Chapter 11 plan, before this state court litigation is resolved would be extremely difficult, perhaps impossible.
Section 1112(b) of the Bankruptcy Code permits the court to dismiss a voluntary Chapter 11 “for cause” upon the motion of any party in interest, including the debtor. While § 1112(b) contains a list of factors which constitute cause, this list is not exhaustive. Dismissal must be in the best interests of creditors and the estate. In determining whether to dismiss, courts use their equitable authority and consider the factors of each case to reach an appropriate result. See Comments to 11 U.S.C. § 1112. The court’s decision is discretionary. Matter of Atlas Supply Corp., 857 F.2d 1061 (5th Cir.1988). Although the Atlas case involved the dismissal of a Chapter 7, courts have applied the same reasoning to Chapter 11 dismissals for cause. In re Geller, 74 B.R. 685 (Bankr.E.D.Pa.1987). The Geller court reasoned that, some “plain legal prejudice” to creditors must be shown if dismissal is not to be granted. Id. at 690. Even upon a showing of this high degree of prejudice, the prejudice must outweigh articulated prejudice to the debtor to deny dismissal. Id. While the initial burden is on the movant to show cause for dismissal, In re Copy Crafters Quick-print, Inc., 92 B.R. 973 (Bankr.N.D.N.Y.1988), creditors must show that dismissal would result in “plain legal prejudice”. Geller, 74 B.R. at 690.
GALI’s showing of legal prejudice essentially rests on four grounds. First, GALI believes Debtors will refile for Bankruptcy if GALI obtains a favorable judgment in state court, and that this would force GALI to incur more costs in the new proceeding. Second, GALI has expended large sums of money to monitor the actions and transactions of the Debtors throughout this proceeding. Third, Debtors have allegedly made transfers which are avoidable or recoverable, and the right to avoid and recover such transfers will be lost once the Bankruptcy proceeding is dismissed. Fourth, and intertwined with the third ground, GALI claims that there is no assurance that Debtors’ assets will be preserved.
In addressing GALI’s first objection, it is apparent that the Debtors filed Bankruptcy *851as a result of the original GALI state court judgment. According to the testimony of Harold Turboff, Debtor, the posting of twenty percent (20%) of the judgment for a supersedeas bond would have tied up his cash collateral to the extent that his business would have decreased and been inoperable. Ronald Turboff, Debtor, gave similar testimony as to the effect on his business. Debtors on cross examination did not aver that if this proceeding were dismissed, they would not refile Bankruptcy if the state court decision on retrial was in favor of GALI.
With regard to GALI’s second objection, as a practical matter, GALI did not demonstrate that its appearing in a newly filed proceeding would be more costly than for GALI to continue in this proceeding. GALI’s showing of expenditures in monitoring these cases in itself does not demonstrate plain legal prejudice. These costs are unfortunate and virtually inevitable, but do not alone constitute a sufficient “stake” in the present proceeding to justify maintaining it over Debtor’s opposition.
However, GALI’s third proposed basis for denial of Debtors’ motions is of considerable concern. Dismissal or loss of potential causes of action to avoid and recover the transfer of funds under § 547, § 548 and § 549 of the Bankruptcy Code can result in plain legal prejudice. See In re Geller, supra, pp. 690-691.
It is a matter of record that GALI has not yet filed such suits pursuant to § 547, 548, or 549. However, for GALI to have done so would have been difficult, since such causes ordinarily may be brought only by the trustee or debtor-in-possession. In the case of individual Chapter 11 debtors, such as those here, the problem is especially acute. It would be rare indeed for an individual Chapter 11 debtor to sue himself for his own improper actions on behalf of the debtor-in-possession. Accordingly, third parties are at times authorized to bring such suits. See, e.g. In re Louisiana World Exposition, Inc., 858 F.2d 233 (5th Cir.1988); Matter of Marin Aviation, Inc., 53 B.R. 497 (Bankr.D.N.J.1984). GALI has sought leave to bring such a suit in the Harold Turboff bankruptcy (Docket No. 192), but passed the hearing on the Motion (Dockets Nos. 237 & 246), citing the uncertainty of the status of the state court litigation, and its own costs in proceeding prior to resolution of the state court case.
Although GALI has not, to date, sought leave of court to pursue any avoidance and recovery actions in the Ronald Turboff bankruptcy, the same problems apply in bringing such suits in this matter.
In balancing the various claims to equity, and upon consideration of Geller, supra, the court concludes that it is appropriate to give GALI an opportunity to file a motion seeking hearing on its Motion for Authority to Bring Suit (Docket No. 192) in the Harold Turboff matter, and any other such motion for authority to bring suit it deems appropriate, as to either Debtor.
If no such motion is filed within thirty (30) days of entry of these Findings of Fact and Conclusions of Law, Debtors’ counsel shall so certify to this court, and an order dismissing will be signed and entered.
If such a motion is filed, hearing will be held thereon. If, following such hearing, GALI is permitted by the court to bring suit pursuant to § 547, 548 or 549 and files such suit within thirty (30) days of entry of the order granting GALI leave to do so, no dismissal will be entered, until such suit is resolved and upon further order of this court. If GALI is not permitted to bring such suit, an order of dismissal will be signed and entered as to the appropriate Debtor(s).
INTERIM JUDGMENT
Pursuant to Findings of Fact and Conclusions of Law executed this date, it is
ORDERED that the Motion of each Debtor to dismiss, pursuant to Bankruptcy Code Section 1112(b), is granted with certain caveats: GALI is authorized to file a Motion to Set Additional Hearing on its Motion for Leave to Bring Suit in the Harold Turboff matter or other motions for leave to bring suit as to either Debtor; if no such motion is filed within thirty (30) days of entry hereof, Debtors’ counsel shall *852so certify to this court, and an order dismissing will be signed and entered. If such a motion is filed, hearing will be held thereon. If GALI is thereafter permitted by the court to bring suit pursuant to § 547, 548 or 549 and files such suit within thirty (30) days of entry of the order granting GALI leave to do so, no dismissal will be entered, until such suit is resolved and upon further order of this court. If GALI is not permitted to bring such suit, an order of dismissal will be signed and entered as to the appropriate Debtor(s). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491212/ | MEMORANDUM OPINION
LETITIA Z. CLARK, Bankruptcy Judge.
Came on for hearing the Motion for Partial Summary Judgment filed by Texas Trust Savings Bank, a successor in interest to Peoples Savings and Loan Association, and after considering the evidence, pleadings, memoranda and arguments of counsel, the court makes the following Findings of Fact and Conclusions of Law and enters a separate Judgment in conjunction herewith denying the Motion for Partial Summary Judgment. To the extent any findings of fact are herein construed to be conclusions of law, they are hereby adopted as such. To the extent any conclusions of law are construed to be findings of fact they are hereby adopted as such.
Findings of Fact
This adversary was filed by plaintiff, Texas Trust Savings Bank, as a complaint to determine the dischargeability of the debt due to plaintiff on a construction loan. Defendant, Mohammad Nasr, has set forth the affirmative defenses of setoff and re-coupment to the complaint. The affirmative defenses of defendant are based on allegations of breach of contract, breach of warranty, and fraud.
On or about June 6, 1986, Mohammad Nasr, Debtor, duly executed and delivered to Peoples Savings and Loan Association (“Peoples”), a Promissory Note in the original principal sum of $2,526,000.00. The loan was for the acquisition and development of real property located in Travis County, Texas (more fully described in plaintiff’s amended complaint — Docket No. 46). The construction note was secured by the property. Nasr and Peoples also entered into a Loan Agreement which set forth the terms and conditions under which Peoples would advance funds under the note. Under the terms of the note and agreement, the parties agreed the proceeds from the note would be drawn as necessary to pay expenses incurred under specific budget categories.
Nasr alleges that in order to obtain the construction loan, he was required by Peoples to purchase a marine complex in Corpus Christi, Texas. He asserts the documents for the construction loan and the documents for the purchase of the marina were prepared, negotiated, and closed at the same time, by and between the same parties. Nasr claims the entire transaction was treated as one: had there been no closing of the purchase of the marina, Nasr would have been denied the necessary construction funding for the Austin shopping center. Nasr argues he was fraudulently induced to purchase the marina.
Defendant Nasr applied to Peoples for the first draw on the construction note. Plaintiff Texas Trust alleges Nasr made fraudulent representations to Peoples as to how the funds drawn would be used. Texas Trust also asserts that Peoples relied on these representations in approving subsequent advances.
Nasr claims Peoples subsequently contacted him in November, 1986, and requested he delay construction since Peoples’ financial condition did not permit funding at that time. Several months later, Peoples refused a draw request by Nasr and suspended funding under the loan contract. Nasr alleges Peoples funded less than half of the original amount.
*857On December 29, 1989, the Federal Home Loan Bank Board passed a resolution placing Peoples Savings and Loan Association into receivership. The Federal Savings and Loan Insurance Corporation was appointed as receiver for Peoples Savings and Loan Association. Following the appointment of the FSLIC as receiver, Texas Trust Savings Bank entered into an Acquisition Agreement with the FSLIC. Texas Trust Savings Bank acquired some of the assets of Peoples Savings & Loan Association from the FSLIC. This included the note executed by M. Nasr and payable to Peoples Savings and Loan Association (Amended Affidavit of Terry Whitman— Docket No. 47).
Conclusions of Law
ISSUE 1—Setoff as Claim or Defense
Plaintiff Texas Trust argues Nasr’s affirmative defenses of setoff and recoupment may only be pled as counterclaims. Texas Trust asserts the complaint for set-off is an independent claim against Texas Trust for affirmative relief: i.e. judgment for damages incurred by Nasr as a result of alleged fraud of Peoples Savings and Loan Association. Texas Trust argues that a claim for setoff is not an affirmative defense. It further alleges the right to setoff one debt against the other does not constitute a defense but merely entitles defendant to a reduction of the judgment allowed. “A setoff is a counter demand which the defendant holds against the plaintiff arising out of a transaction extrinsic of plaintiffs cause of action.” Montgomery Ward & Company v. Robert Ca-gle Building Company, 265 F.Supp. 469 (S.D.Tex.—Houston, 1967); Hunt v. Bankers Trust Company, 689 F.Supp. 666 (N.D. Tex.—Dallas, 1987). Plaintiffs allege the claim for setoff is a counterclaim rather than an affirmative defense. These cases do not directly address the issue of whether a claim for setoff may be used as a defense.
Defendant Nasr does not raise the defenses of setoff and recoupment based on fraud, breach of warranty, and breach of contract to seek an affirmative relief, but only to defeat Texas Trust’s allegation of fraud under § 523(a)(2)(A). Nasr asserts he may elect to plead a claim as a defense. Numerous courts have treated the claim of setoff and recoupment as a defense which, while not in the nature of an affirmative claim for judgment, may be interposed in diminution of a plaintiffs claim. Desjardins v. Desjardins, 193 F.Supp. 210, 215 (E.D.Ky.1961) and cases cited therein.
According to 2A Moores Federal Practice, § 8.27(3), setoff and recoupment may be pled as either a counterclaim or an affirmative defense; a defendant is not compelled to use setoff as a defense and does not waive his right to setoff by declining to use it defensively. Claims of a debtor against a creditor for setoff may be asserted as a defense to the creditor’s claim. 1A Bankruptcy Service Lawyers’ Edition, § 4:42. A trustee’s right to offset debtor’s security deposit against unpaid rent was a defense the trustee could assert. In re Standard Furniture Co., 3 B.R. 527 (Bankr.S.D.Cal.1980).
There are few cases which address the issue of whether a claim for setoff may be asserted as a defense. In determining which should be controlling the following should be considered: exceptions to discharge under § 523 are construed narrowly, In re Belfry, 862 F.2d 661 (8th Cir.1988); the Bankruptcy Court must narrowly construe exceptions to discharge against the creditor and in favor of the debtor, In re Kudla, 105 B.R. 985 (Bankr.Colo.1989); exceptions to dischargeability of debts under § 523(a) are construed narrowly in favor of the debtor, In re Richey, 103 B.R. 25 (Bankr.Conn.1989). The case law is well settled on this policy of favoring the debtor in actions to determine dischargeability.
ISSUE 2—May Debtor Assert Defenses
Plaintiff Texas Trust asserts the claim of setoff or recoupment cannot be asserted by the bankrupt individual since these claims are property of the estate. Plaintiff Texas Trust argues that 11 U.S.C. § 541 bars the individual from bringing these defenses. Section 541 addresses *858claims which are property of the estate but does not address affirmative defenses.
11 U.S.C. § 558 allows the bankruptcy estate the benefit of any defense available to the debtor as against any entity other than the estate. The trustee is entitled to use the defense to its fullest extent without preventing the debtor from raising the same. Collier on Bankruptcy § 558.01 (pg 558-4) 15th Edition. The trustee’s right under § 558 to assert debtor’s defenses differs from the exclusive right to assert debtor’s causes of action. Id.
Debtor is asserting the actions of setoff and recoupment as affirmative defenses to the claim of fraud under § 523(a)(2)(A). As defenses, these actions are not exclusive to the trustee and may be asserted by the debtor. A trustee has no incentive to raise defenses in a complaint to determine dis-chargeability since this would provide little or no benefit to the estate, but no reason has been shown to bar debtor from raising these defenses. Furthermore, allowing debtor to raise these defenses is consistent with the policy of favoring debtor in a complaint to determine dischargeability.
ISSUE 3 — Applicability of the D’OENCH DUHME DOCTRINE
Plaintiff Texas Trust argues that Nasr’s defenses are barred by the D’Oench Duhme doctrine and the federal holder in due course doctrine.
Extending the status of a holder in due course to a federal institution as a matter of federal common law was derived from the D’Oench Duhme doctrine. FSLIC v. Murray, 853 F.2d 1251 (5th Cir.1988). Essentially, the Fifth Circuit in the Murray case held that FSLIC should enjoy at least holder in due course status as a matter of federal common law. Since the federal holder in due course doctrine encompasses basically the same issues and principles covered by the D’Oench Duhme doctrine, the following discussion relating to the D’Oench, Duhme doctrine is equally applicable to the federal holder in due course doctrine.
In D’Oench, Duhme & Co. v. FDIC, 315 U.S. 447, 62 S.Ct. 676, 86 L.Ed. 956 (1942), the FDIC acquired a note from a failed bank and sued D’Oench, Duhme & Co. for payment. The maker, D’Oench, asserted the defense of failure of consideration based on a secret collateral agreement with the bank that the note would not be enforced. The Supreme Court held that “an accommodation maker is not allowed the defense of no consideration as against the receiver of the bank or its creditors where his act contravenes the general policy to protect the institution of banking from such secret agreements.” D’Oench, Duhme & Co., 315 U.S. 447, 62 S.Ct. 676, 86 L.Ed. 956 (1942). D’Oench also asserted the FDIC was not a holder in due course.
The doctrine set forth in D’Oench Duhme has been expanded to bar most personal defenses raised by the maker to avoid payment of a note which was payable to a failed financial institution. FSLIC v. McLean, No. CA3-87-3005-D, slip op. at 10 (N.D.Tx. Nov. 14, 1988). The court in McLean cites numerous cases in which the D’Oench Duhme doctrine barred a defense. The D’Oench Duhme doctrine has been used to prohibit the assertion of defenses based on separate secret agreements “when the FDIC seeks to enforce unconditional notes and guarantees.” In re Pernie Bailey Drilling Co., 111 B.R. 565 (Bankr.W.D.La.1990); In re Perri Kanterman, 108 B.R. 432 (S.D.N.Y.1989), (emphasis added).
All of the cases cited by the court in McLean and in Texas Trust’s briefs on D’Oench Duhme are suits to enforce a note in which the court prohibited defenses based on a secret collateral agreement with the failed bank. Texas Trust argues that whether the claim for setoff or recoupment is raised in a proceeding on a complaint to determine dischargeability or in a lawsuit for collection of the note, the effect is the same, recovery by the new bank is reduced. Texas Trust alleges that therefore the D’Oench Duhme doctrine should apply and defendants should be barred from raising the defenses. Defendants contend D’Oench Duhme and its progeny do not *859apply to cases contesting dischargeability in a bankruptcy proceeding.
A suit to collect on the note is a suit on a negotiable instrument which clearly defines the obligation of the borrower. A suit to render an obligation evidenced by the note nondischargeable is not based on the instrument but on a myriad of elements necessary to prove actual fraud. Plaintiffs claim is not a suit on the note, but a suit on facts surrounding the loan transaction. The basis of plaintiffs claim is not the direct collection of the note but allegations of fraud under 11 U.S.C. § 523(a)(2)(A).
Bankruptcy Courts have limited the applicability of D’Oench Duhme in bankruptcy proceedings. The D’Oench Duhme doctrine and its progeny will not defeat a trustee’s claims for fraudulent transfers and preferences under the Bankruptcy Code. In re Pernie Bailey Drilling Co., 111 B.R. 565 (Bankr.W.D.La.1990); In re Perri Kanterman, 108 B.R. 432 (S.D.N.Y.1989). The courts have granted the trustee affirmative judgments despite the D’Oench Duhme doctrine. Defendant Nasr is not seeking an affirmative judgment against Texas Trust. Nasr is merely seeking to assert his defenses to their allegations of fraud in the complaint to determine dis-chargeability.
Exceptions to discharge are construed narrowly in light of the overriding purpose of the bankruptcy laws, which is comprehensive relief from virtually all indebtedness. In re Spilotros, 105 B.R. 708 (Bankr.M.D.Fla.1989); In re Coffee, 103 B.R. 825 (Bankr.S.D.Tex.1987); In re Harrell, 94 B.R. 86 (Bankr.W.D.Tx.1988). Applying the D’Oench Duhme doctrine to bar the debtor’s defenses in a suit to determine dischargeability is inconsistent with the policies of providing debtor with relief from indebtedness, and of favoring debtor in a dischargeability action.
If the debt is found nondischargeable, then Texas Trust may pursue an action to collect on the note. In addition, the FDIC or its assignees may pursue collection of the note against a bankrupt obligor through the claims process as a creditor. It may be that D’Oench Duhme could properly be raised by Texas Trust at those points.
Based on the foregoing, Texas Trust’s Motion for Partial Summary Judgment is denied. A separate Judgment will be entered by the court pursuant to the court’s Findings of Fact and Conclusions of Law. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491214/ | ORDER GRANTING DEBTOR’S MOTION FOR STAY PENDING APPEAL
JAMES E. YACOS, Bankruptcy Judge.
This is a ruling on a motion for stay pending appeal. The debtor, Francis Queen, has requested a stay pending appeal of my Order entered September 19, 1990 granting relief from the automatic stay to the Nashua Trust Company.
This case presents a novel question with regard to the “likelihood of success on the merits” factor that is normally applied with regard to grants of stay pending appeal. This Court in In re PSNH, 116 B.R. 347 (Bankr.D.N.H.1990), ruled that the likelihood of success on the merits factor, while appropriate for preliminary injunctive relief, should not be applied literally in the appeal context.
As I noted there, I am taking a position at variance with all the reported cases but I felt constrained to do so there, and feel constrained to do so here, because the merits factor, in the appeal context as contrasted with the injunctive context, cannot logically require a strict showing of likelihood of success on the merits on appeal if that factor is to be interpreted as a finding by this Court that the appellant is more likely than not to prevail and secure a reversal on the Order on appeal.
In my judgment, this appellant is not more likely than not to have my Order reversed, but I do think this appellant has a “substantial case” on appeal, since the questions involved and raised on appeal are not frivolous, or arguments that have no substance to them, but do represent arguments and issues that could result in a reversal. The Order I entered does relate to collateral estoppel and comity between courts in a rather unique situation and formulation that may or may not be approved by the appellate courts.
*2As I say, I believe that the Order I entered is based on findings and conclusions that should result in an affirmance, to avoid double litigation on these matters between the State and Federal courts once they are fully litigated in the state court. The nub of that finding of course comes within the words “fully-litigated” in the specific context. The debtor takes the position that that means a final judgment and I took the position that fully-litigated means what happened in this case in the state court pre-bankruptcy, and that that was sufficient to apply the collateral estoppel doctrine; or that independent of that ground comity between the courts should in these situations result in a bar to double litigation where the state court has done essentially all that it would normally do. The debtor should not have the opportunity to cross the street and come over here and relitigate the same matter and thus waste scarce judicial resources at both the state and federal level. However, for the reasons indicated, there still is a substantial ease on appeal in my judgment. Applying the more lenient standard from the PSNH ruling in this case, I think that the merits factor supporting a stay on appeal is established in this case, even though if I were to apply the likelihood of success on the merits in the strict literal sense of that word, likelihood, I would come down the other way.
With regard to irreparable harm, I think the debtor has shown that they will be subject to irreparable harm and that the harm to the debtor is balanced by harm to the appellee that is much less. I realize it is an uncertain real estate market, but even on a liquidation basis I think that the bank is protected at the point of appeal from essential delay costs that can be recovered out of the value of the property as I indicated during the course of the hearing.
Furthermore, I am going to require as a form of supersedeas protection that the debtor resume payments to the bank during the pendency of the appeal, in the amount of $500.00 a month, to commence 10 days from date and monthly thereafter. If those payments are not made, as indicated, the bank can request an ex parte order vacating the stay during appeal if there is no challenge to the fact of that default within 48 hours, pursuant to the Local Rules.
With regard to the public interest factor, I realize there is a concern here about state and federal comity and double litigation, but that is wrapped up into the first factor. I will grant the stay subject to that proviso that the debtor will resume payments to the bank of $500.00 monthly to be applied to accruing interest on the secured debt inasmuch as the bank is oversecured. In consideration of all of the foregoing, it is
ORDERED, ADJUDGED and DECREED:
There shall be a stay pending an appeal in this case effective immediately and lasting for the duration of the appeal provided the appellant pays the appellee $500.00 on October 12, 1990 and on the 12th of each month thereafter during the course of the appeal. If appellant fails to make said payment, then appellee can file a motion to vacate the stay, and if there is no challenge to the fact of default the motion will be granted without hearing after 48 hours.
DONE and ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491215/ | MEMORANDUM OF DECISION
GEORGE S. WRIGHT, Chief Judge.
This matter came before the Court on Creditor Bowest Corporation’s Objection to *110Confirmation and Motion for Relief From Automatic Stay,' filed by the Creditor on June 1, 1990. After a review of the record in the case in the context of the applicable law, Creditor’s Objection to Confirmation is due to be OVERRULED and Creditor’s Motion for Relief from Stay is due to be DENIED.
FINDINGS OF FACT
Debtors, Ricky Lamar Stafford and Brenda Lee Stafford, filed a petition for protection under Chapter 13 of 11 U.S.C. on January 30, 1990. The Staffords had originally listed a $45,000.00 obligation to Bow-est Corporation of San Diego, California, first mortgage on their home, as a non-plan secured obligation with a monthly payment of $428.00 to be made outside their Chapter 13 reorganization plan. The mortgage is on a mobile home that serves as the Stafford family residence. That initial listing of debt for the plan also included a $2,670.00 arrearage to Bowest for overdue payments from September of 1989 to January of 1990.
The $45,000.00 Bowest mortgage is the largest obligation in the total $66,638.69 in secured and unsecured debts listed by the Staffords at their bankruptcy. Other large debts included $3,700.00 for a pickup truck and $6,000.00 for a 1982 International Harvester cab-over truck Mr. Stafford used in his work. The Staffords listed a total of $4,908.14 in unsecured debt at the time of their bankruptcy. Of this total unsecured debt, $3,421.98 consisted of bills for various medical services, many of them for pediatric medicine, many of them in the hands of collection agencies by the time the petition was filed.
Mr. Stafford, a lease truck driver, reported approximately $12,000.00 in income for the year prior to filing bankruptcy; Mrs. Stafford, a substitute teacher, approximately $500.00. The couple listed three dependent children on their disclosure statement.
On April 3, 1990, this Court confirmed the Staffords’ plan for reorganization of their personal finances under Chapter 13. The order, which provided for 100 percent payment to secured and unsecured creditors, granted Bowest a $75.00-per-month payment on the pre-petition arrearage filed as Claim No. 19. It also provided that: “Further, that the regular monthly payment to Bowest Corporation is to be paid direct by debtor to creditor; further, that said creditor is granted limited relief from automatic stay to contact the debtor by mail or telephone concerning the payment of post-petition (no pre-petition) monthly installment payments. (Motion No. S-2583).” '
Then on April 24, 1990, the Court approved a modification to the Staffords’ plan which added a $50.00 payment for arrear-age and late charges for February, March, and April of 1990, and the regular monthly mortgage payments of $428.00 to the plan. The amendment, presented by Counsel for the Debtors, also raised the $475.00-per-month original installment to $953.00 to bring the regular mortgage payments and payments on both pre and post-petition ar-rearages into the plan.
On June 1, 1990, Creditor Bowest filed its Objection to Confirmation and Motion for Relief from Automatic Stay based on the contention that Chapter 13 plans may not be modified to cure post-petition arrear-ages. Bowest amended its motion August 16, 1990 to say that it had received no payments inside or outside of the plan and that the Staffords were in default for February through August of 1990 payments.
At a hearing that same day, August 16, 1990, the Court had set the final hearing for September 13, 1990. The Court also directed the Debtors to pay two payments, plus late charges, $890.24, to Bowest as adequate protection before the date of the September hearing.
Counsel for Debtors at the September hearing indicated that this amount had been paid directly to the attorney for Bow-est. Bowest offered no evidence in support of its motion at the hearing. The Court overruled Bowest’s Objection to Confirmation and entered an order denying its Motion to Lift Stay on September 21, 1990.
*111Bowest Corporation filed notice of appeal to the United States District Court for the Northern District of Alabama on October 2, 1990.
CONCLUSIONS OF LAW
I.
NOTHING IN THE PLAIN LANGUAGE OF OR CONGRESSIONAL INTENT BEHIND SECTION 1322(b) BARS A CURE OF POST-PETITION AR-REARAGE.
A. POST-PETITION ARREARAGE ON A DEBTOR’S RESIDENCE MAY BE CURED BY MODIFICATION OF A CHAPTER 13 PLAN.
This Court has just addressed the issue of whether a debtor may cure post-petition default on debt for his/her primary residence with Central Bank of the South v. Thomas, 121 B.R. 94 (1990). The Court must take the better and seeming majority view1 that a Debtor may modify his Chapter 13 plan under 11 U.S.C. § 1329 to cure “any default” including post-petition default as provided in 11 U.S.C. § 1322(b)(5).
The issue is treated at some length in the Central Bank case, but a short discussion is suitable here. As pointed out there, Congress anticipated that claims secured by the debtor’s principal residence would be handled under Section 1322(b)(5) — not Section 1322(b)(2)2 as suggested by Creditor in its motion. Congressional Record statements on the Bankruptcy Reform Act of 1978 include the following;
Section 1322(b)(2) of the House amendment represents a compromise agreement between similar provisions in the House bill and the Senate amendment. Under the House amendment, the plan may modify the rights of holders of secured claims other than a claim secured by a security interest in real property that is the debtor’s principal residence. It is intended that a claim secured by the debtor’s principal residence may be treated with under Section 1322(b)(5) of the House amendment, (underlining for emphasis)
(124 Cong.Rec. H11106-07 (daily ed. Sept. 28, 1978); S17423 (daily ed. Oct. 6, 1978); remarks of Rep. Edwards and Sen. DeCon-cini.)
11 U.S.C. § 1322(b)(5) provides the following for long-term debt in unambiguous language;
(b) Subject to subsections (a) and (c) of this section, the plan may—
(5) notwithstanding paragraph (2) of this subsection, provide for the curing of any default within reasonable time and maintenance of payments while the case is pending on any unsecured claim or secured claim on which the last payment is due after the date on which the final payment under the plan is due. (underlining for emphasis)
*112Neither House nor Senate reports differentiate between pre or post-petition default when they discuss the “cure” of arrearage under Section 1322(b)(5). The House report provides the following history concurrent with the adoption of the Bankruptcy Act of 1978:
Paragraph (5) (of Section 1322(b)) concerns long-term debt, such as mortgage debt. It permits the plan to provide for the curing any default within a reasonable time, and maintenance of payments while the case is pending on any unsecured claim or secured claim on which the last payment is due after the date on which the final payment under the plan is due.... (underlining for emphasis)
H.R.Rep. No. 595, 95th Cong. 1st Sess. 429 (1977), U.S.Code Cong. & Admin.News 1978, pp. 5787, 6384.
The Senate report likewise defined the goal of Section 1322(b)(5) as “(5) provide for curing any default on any secured or unsecured claim on which the final payment is due after the proposed final payment on the plan;” ... (underlining for emphasis)3
This Court’s role is implementing what appears to be the unambiguous language of the statute to allow debtors in a Chapter 13 reorganization plan to cure post-petition default. A non-all-inclusive listing of recent cases adopting the view that post-petition default can be cured in similar circumstances includes: In re Gadlen, 110 B.R. 341 (Bkrtcy.W.D.Tenn.1990); In re Davis, 110 B.R. 834 (Bkrtcy.W.D.Tenn.1989); In re Lynch, 109 B.R. 792 (Bkrtcy.W.D.Tenn.1989); In re Ford, 84 B.R. 40 (Bkrtcy.E.D.Pa.1988) and In re McCollum, 76 B.R. 797 (Bkrtcy.D.Or.1987).
The courts in these cases are in accord with the most respected and universally accepted treatise on bankruptcy law, the 15th edition of Collier on Bankruptcy.4 The debtor may wish to modify the plan for any of a number of reasons. A debtor may fall behind on post-petition mortgage payments and then seek to modify the plan to provide for a cure of the post-petition default,” Collier says at P. 1329.01 (underlining for emphasis).
If the United States Congress had intended to limit the debtor’s ability to cure default to pre-petition default it could, and would, have said so in the statute and the contemporaneous legislative history. As the Code now stands, since there is no evidence of legislative intent to the contrary, “any default” must be read to mean “any default” — not “any pre-petition default but not any post-petition default.”
In the real world, where debtors get sick, change jobs, get married, have babies, have automobile accidents, etc., a debtor has a right to modify his or her plan to meet such changes of circumstances.
B. DESPITE THE CLEAR STATUTORY LANGUAGE, THERE IS SOME DISAGREEMENT ON THIS ISSUE.
Some courts have held that a Chapter 13 debtor may not utilize Section 1329 to modify the plan to cure post-petition arrearages. As Counsel for Bowest points out in the Creditor’s Motion, the United States District Court for the Northern District of Alabama so held in In re Hollis, 105 B.R. 1003 (D.N.D.Ala.1989). That decision vacated an order of this Court denying South*113east Bank relief from stay and directing post-confirmation arrearage payments.
The District Court in Hollis held that a Chapter 13 debtor could not cure post-confirmation defaults on his residence. However, the Hollis holding was based on a Colorado decision with an overall rationale which is inapplicable to this situation.
The Alabama District Court cited In re Nicholson, 70 B.R. 398 (Bkrtcy.D.Colo.1987) as a main basis for its ruling, though that case ruled on Section 1322(b)(3),5 not Section 1322(b)(5) which Congress intended to cover long-term debt. Nicholson’s holding was also rooted in the minority theory that confirmation, by virtue of Section 1327, revested property in the debtor and thus created a new mortgage obligation which precluded the automatic stay from having any effect on post-petition arrearag-es. This Court does not agree with that view of the operation of Chapter 13 protections.
The Hollis view would have the absurd result that a Chapter 13 plan could cure a pre-petition default of thousands of dollars, but that a post-petition default of $1.00 could not be cured. It would have the effect of reading the Section 1329 “Modification of Plan after Confirmation” out of the Bankruptcy Code. This view would allow a Section 1329 modification to increase payments to creditors or to reduce the time for payment to creditors but not allow a Section 1329 modification to decrease payments or extend the time for payments to creditors.
For 11 U.S.C. § 1329(a)(1) and (2) provides the following:
(a) At any time after confirmation of the plan but before completion of payments under such plan, the plan may be modified, upon request of the debt- or, the trustee, or the holder of an allowed unsecured claim, to — ■
(1) increase or reduce the amount of payments on claims of a particular class provided for by the plan;
(2) extend or reduce the time for such payments_ (underlining for emphasis)
Congress clearly understood that a Chapter 13 plan would have to be modified during the pendency of the plan to meet changed circumstances.
C. THIS COURT MUST ADOPT THE VIEW THAT SEEMS TO EXPRESS BEST THE CONGRESSIONAL POLICY BEHIND CHAPTER 13, AND WHICH IS MOST IN KEEPING WITH STATUTORY LANGUAGE.
The policy goal set by Congress for the reorganization chapters of 11 U.S.C. is providing the debtor with his/her best chance at a fresh start while equitably sharing the debtor’s resources among creditors. Often, these Congressional imperatives conflict with rights creditors would have enjoyed under state law if the debtor had not sought the protection of the Bankruptcy Code. Where a protection given a debtor under the Bankruptcy Code conflicts with a right given a creditor by state law, the Bankruptcy Code supersedes under the supremacy clause of the United States Constitution.
Since the Bankruptcy Court’s role is to implement the will of Congress as embodied in this Code, this Court must hold that Chapter 13 debtors may cure post-petition defaults on their home mortgage under the provisions of 11 U.S.C. §§ 1322(b)(5) and 1329(a)(1) and (2). „
II.
BOWEST’S MOTION FOR RELIEF FROM STAY IS DUE TO BE DENIED UNDER SECTION 362(d)
Bowest Corporation filed a motion with the Court asking that it be granted relief from stay under 11 U.S.C. § 362(d).6 *114Normally, Section 362(f) would provide that the creditor had the burden of proof on the issue of the debtor’s equity; the debtor, the burden on other issues. In this case, a hearing was set on the Creditor’s motion and the Creditor introduced no evidence whatsoever to support its motion. Consequently, that motion must be denied.
It might also be noted that the Staffords’ Chapter 13 plan was confirmed at 100 percent repayment for both secured and unsecured creditors. The security interest at issue here is in the family home which houses this couple and their three children. Consequently, the risk of loss of the property or other failure to be able to locate the Debtors is extremely low.
Bowest Corporation is included in the Stafford Chapter 13 plan for the full amount of its $428.00 regular monthly mortgage payment, a $75.00-per-month payment on pre-petition arrearage and a $50.00-per-month payment on the post-petition arrearage. Thus Bowest Corporation must be regarded as adequately protected by the security it holds in the Debtors’ residence and the payments ordered by this court. Furthermore, the Court has entered an order routing the full payment toward the Debtor’s plan to the Chapter 13 Trustee by payroll deduction.
Consequently, the Court may not grant Bowest Corporation relief from stay based on Section 362(d) since it offered no evidence in support of its motion.
CONCLUSION
When the documentary evidence in this case is taken into account, the Court must overrule Bowest Corporation’s objection to the confirmation of the Staffords’ Chapter 13 plan for reorganization. Likewise, the Court must deny Bowest’s Motion for Relief From Stay since Bowest offered no evidence in support of its motion.
This memorandum shall constitute findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052. A separate order has been entered consistent with this opinion.
DONE AND ORDERED.
. In re Ford, 84 B.R. 40 (Bkrtcy.E.D.Pa.1988) considered this issue and concluded that a seeming majority of bankruptcy courts have allowed curing of post-petition default on long-term debt under Section 1322(b)(5). The rough proportion of cases found there continues in 1990. The Ford Court said:
The majority rule appears to be consistent with Collier’s statement that, even in a situation where § 1322(b)(5) is applicable, "[i]t [§ 1322(b)(5) ] may be utilized to cure post-petition defaults.” 5 COLLIER ON BANKRUPTCY, P 1322.09, at 1322-18 (15th ed. 1987). See, e.g., In re McCollum, 76 B.R. 797, 799-801 (Bankr.D.Ore.1987); In re Nickleberry, 76 B.R. 413, 416 (Bankr.E.D.Pa.1987); In re Minick, 63 B.R. 440, 442-46 (Bankr.D.D.C.1986); In re Canipe, 20 B.R. 81, 83-84 (Bankr.W.D.N.C.1982); and In re Simpkins, 16 B.R. 956, 960-68 (Bankr.E.D.Tenn.1982). These cases involve § 1322(b)(5), and hold that post-petition default of even a long-term obligation can be cured in a Plan despite the protections for long-term lenders provided in § 1322(b)(5), and the mandate of that Code section that the debtor "provide for ... maintenance of payments while the case is pending” on an obligation on which the last payment is due after the last plan payment.
Ford at 44.
. 11 U.S.C. § 1322(b)(2) reads as follows:
(b) Subject to subsections (a) and (c) of this section, the plan may—
(2) modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor's principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims;
. S.Rep. No. 989, 95th Cong., 2d Sess. 141 (1978), U.S.Code Cong. & Admin.News 1978, p. 5927.
. See 5 L. King, Collier on Bankruptcy P. 1329.-01 (15th ed. 1989):
Modification of Plan After Confirmation. § 1329.
[1] —In General.
[a] —Modification at the Request of the Debtor.
Chapter 13 debtors often encounter circumstances during the extension period which were unforeseen at the time of confirmation. Further persistent deterioration in a debtor’s financial condition after confirmation usually leaves only four courses of action open to the debtor. The debtor may convert the case to chapter 7, apply for a hardship discharge under 1328(b), dismiss the case, or modify the chapter 13 plan in response to prevailing conditions. A debtor is not eligible for discharge relief under section 1328(b) in circumstances when a post-confirmation modification of the plan is practicable, (underlining for emphasis)
. 11 U.S.C. § 1322(b)(3) provides:
(b) Subject to subsections (a) and (c) of this section, the plan may—
(3) provide for the curing and waiving of any default; (underlining for emphasis)
. 11 U.S.C. § 362(d)(1) and (2) provides as follows:
(d) On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, *114annulling, 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. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491216/ | MEMORANDUM
JOHN C. COOK, Bankruptcy Judge.
This case is before the court upon the plaintiffs motion for an order allowing the plaintiff to register the judgment entered in this case in any judicial district pursuant to 28 U.S.C.A. § 1963. The defendant opposes the motion.
I.
A judgment was entered against the defendant in this ease on February 10, 1989, in the amount of $33,342.57. Although the judgment is presently on appeal in the United States Court of Appeals for the Sixth Circuit, the defendant neither posted a supersedeas bond nor obtained a stay of execution on the judgment. To date, less than $100 has been collected on the judgment from assets in Tennessee.
The plaintiff has filed a judgment lien in Tennessee against property jointly owned by the defendant and her husband as tenants by the entirety. Obviously, the value of the defendant’s expectancy interest in the property would be far less than the amount of the judgment.
Through post-judgment discovery, the plaintiff has learned the defendant now lives and works in Kentucky and that she has assets in Kentucky. He seeks an order allowing him to register his judgment in any judicial district of the United States so that he can execute on assets of the defendant located outside the Eastern District of Tennessee.
II.
The issue in this case is whether the plaintiff may register his judgment under the newly-amended provisions of 28 U.S. C.A. § 1963. The defendant contends that the statute, as amended, went into effect after the judgment was rendered in this case and therefore the amended statute would not be applicable to the judgment here.
Section 1963, as amended, became effective on February 17, 1989, seven days after the plaintiff received a judgment in this case. Before § 1963 was amended, a creditor had to wait until a judgment was final by appeal or expiration of time for appeal before he could register it in another district. The statute prior to amendment read in pertinent part:
A judgment in an action for the recovery of money or property now or hereafter entered in any district court which has become final by appeal or expiration of time for appeal may be registered in any other district by filing therein certified copy of such judgment.
28 U.S.C.A. § 1963 (West 1982).
Under the amended statute, a creditor may register a judgment in any other district when it becomes final by appeal or expiration of the time for appeal or when ordered by the court that entered the judgment for good cause shown. The amended statute reads:
A judgment in an action for the recovery of money or property entered in any district court or in the Court of International Trade may be registered by filing a certified copy of such judgment in any other district or, with respect to the Court of International Trade, in any judicial district, when the judgment has become final by appeal or expiration of the time for appeal or when ordered by the *231court that entered the judgment for good cause shown. A judgment so registered shall have the same effect as a judgment of the district court of the district where registered and may be enforced in like manner.
A certified copy of the satisfaction of any judgment in whole or in part may be registered in like manner in any district in which the judgment is a lien.
28 U.S.C.A. § 1963 (West Supp.1990).
The defendant argues the court should not apply the amended statute retroactively to the judgment entered here. The problem with defendant’s argument, however, is that the amended statute can be applied to the instant case prospectively without having to delve into the current morass surrounding retroactive application of statutes.
Recognizing the applicability of the amended statute in this case would not be an instance in which a statutory rule is being applied retroactively to events and actions that have already taken place. Neither would it be an instance of a new statute changing or having an effect on the outcome or judgment in a case. Rather, the statute simply affords the plaintiff a present procedural remedy to assist the plaintiff in collecting a judgment that has not been fully satisfied. Thus, under the facts of this case, the amended statute would be prospectively applied.
Even if this were a case in which the court was being asked to apply the amended statute retroactively, there is precedent for giving the statute retroactive effect. Although the law in this area is somewhat muddled, there is a line of Supreme Court cases recognizing a principle “that a court is to apply the law in effect at the time it renders its decision, unless doing so would result in manifest injustice or there is statutory direction or legislative history to the contrary.”1 Bradley v. School Board, 416 U.S. 696, 711, 94 S.Ct. 2006, 2016, 40 L.Ed.2d 476 (1974).
In Bradley, the Supreme Court held that a statute providing for an award of attorney’s fees in school desegregation cases, enacted while an appeal from the district court’s award of fees was pending, had to be applied by the appellate court. Concluding that applying the statute to the pending action would not result in manifest injustice, the Court pointed out the new statute would not infringe upon or deprive a person of a right that had matured or become unconditional nor would it impose new and unanticipated obligations upon a party without notice or an opportunity to be heard. Id. at 720-21, 94 S.Ct. at 2020-21.
In the instant case, the legislative history does not indicate whether or not § 1963, as amended, applies to pending cases. See H.R.Rep. No. 889, 100th Cong., 2d Sess., at 67 (1988), U.S.'Code Cong. & Admin.News 1988, pp. 5982, 6028. If indeed this case entails the possible retroactive application of an amended statute, the principle stated in Bradley mandates that the court apply the present version of § 1963 to this pending case since application of the amended law would not result in manifest injustice. The amended statute does not infringe upon or deprive the defendant of any matured or unconditional right nor does it impose any obligations upon the defendant. In fact, the amended statute merely provides the plaintiff a more convenient and less expensive way of collecting his judgment. If the amended statute were not applicable here, the plaintiff could still file an independent action on the judgment in Kentucky in order to reach the defendant’s assets. Kaplan v. Hirsh, 91 F.R.D. 106, 108 (D.Md.1981) (when a party appealing from a judgment has failed to file a super-sedeas bond, a judgment creditor can file an independent action on his judgment in another jurisdiction notwithstanding the provisions of the prior version of § 1963). *232It would not be manifestly unjust to permit the plaintiff to record his judgment in Kentucky in order to avoid the cumbersome and expensive procedure of instituting an independant action on the judgment in that state.
The defendant also contends that even under the amended statute, the plaintiff has not shown good cause entitling him to an order permitting registration in other states. In Associated Business Telephone Systems Corp. v. Greater Capital Corp., 128 F.R.D. 63, 68 (D.N.J.1989), the court found good cause to exist under § 1963 justifying registration of the judgment in other states where the defendants had no assets in the judgment state but did have assets in the other states.
In the instant case, the defendant’s expectancy interest in real property located in Tennessee is insufficient to satisfy the plaintiff’s judgment. Because the defendant also has assets in Kentucky, and because there has been no stay of execution on the judgment, good cause exists entitling the plaintiff to an order permitting the judgment entered on February 10, 1989, in the amount of $33,342.57 to be registered in Kentucky.
An order will enter granting the plaintiff’s motion and allowing the plaintiff to register the judgment entered in this case in the state of Kentucky pursuant to 28 U.S.C.A. § 1963. Because the plaintiff has not shown the defendant has assets in other states, he has failed to show good cause for registering the judgment in states other than Tennessee and Kentucky.
. Another line of Supreme Court cases repre- , sents a conflicting principle that a statute should not be applied retroactively unless its language requires it. See, e.g., Bowen v. Georgetown University Hospital, 488 U.S. 204, 109 S.Ct. 468, 102 L.Ed.2d 493 (1988). In Kaiser Aluminum & Chemical Corp. v. Banjorno, - U.S. -, 110 S.Ct. 1570, 108 L.Ed.2d 842, the majority opinion recognized the apparent conflict in the two lines of Supreme Court cases but refused to resolve it. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491217/ | OPINION AND ORDER ON COMPENSATION FOR SPECIAL COUNSEL
BARBARA J. SELLERS, Bankruptcy Judge.
The Court has been requested to determine the allowance of compensation for services and the propriety and disposition of a retainer. The services were rendered by and the retainer paid to the law firm of Climaeo, Climaco, Seminatore, Lefkowitz & Garofoli Co., L.P.A. (“Climaco Firm”). The Court finds that the application of the Cli-maco Firm should be allowed in the amount of $322,426.15 for professional services and $20,963.72 for reimbursement of expenses. The retainer, minus amounts applied to services for certain subsidiary corporations, must be disgorged.
The Court has jurisdiction in this matter under 28 U.S.C. § 134(b) and the General Order of Reference previously entered in this district. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) which this bankruptcy judge may hear and determine.
BACKGROUND AND FACTS
In November of 1989 the only corporate entities in the Cardinal enterprise which were debtors in Chapter 11 cases before this Court were Cardinal Industries, Inc. (“CII”) and Cardinal Industries of Florida, Inc. (“CIF”). At that time the management of CII and CIF decided to request their existing bankruptcy counsel to withdraw from representation, primarily because of disagreements regarding the probability of success if the unsecured creditors’ committee of either Debtor sought the appointment of a trustee. The Climaco Firm was to be substituted as counsel.
Unknown to their existing bankruptcy counsel, CII and CIF engaged the Climaco Firm as counsel to two corporate subsidiaries and as successor counsel for CII and CIF. As part of the engagement process *520Oil’s officers and primary shareholder caused yet another wholly-owned subsidiary, Cardinal Securities Corporation (“CSC”), to extend loans to certain other Cardinal entities. CSC extended a loan in the amount of $150,000.00 to Cardinal Industries Development Corp. (“CIDC”), another wholly-owned subsidiary. A second loan, in the amount of $150,000.00, was extended jointly to Cardinal Industries Services Corporation (“CISC”), a wholly-owned subsidiary of CII; Cardinal Industries of Florida Services Corp. (“CIFSC”); and Cardinal Industries of Georgia Services Corp. (“CIGSC”). CIFSC and CIGSC are second-tier subsidiaries of CII. CIDC and CISC then engaged the Climaco Firm to represent their interests and paid them $300,-000.00 as a retainer for anticipated services. The retainer initially was to include services directly for CIDC and CISC and, after existing counsel had been discharged, services to CII and CIF. CISC has repaid its loan to CSC; CIDC has not.
On November 9, 1989 the Court heard CII and CIF’s joint motion seeking to hire the Climaco Firm and existing counsel’s motion to withdraw from representation. For various reasons set forth in the record of that hearing, the Court found that the Climaco Firm could not be hired to represent CII and CIF generally, but could be appointed as special counsel for the Debtors to defend the trustee motions. There were numerous objections to the method by which the Climaco Firm had been employed and to the retainer arrangement. Those objections came primarily from other professionals in the CII and CIF cases who were being paid only under the Court’s existing order and to whom extensive fees were owed. Those fees were unpaid because of CII and CIF’s shortage of cash. Those professionals had been assured by CII’s management that none of the subsidiary corporations had funds which could be used for the current payment of fees. The Court specifically reserved ruling on the issue of the retainer because of the urgency of other matters in both cases, caused to some extent by CII and CIF’s precipitous actions with regard to its counsel. The Climaco Firm was ordered to hold the retainer in its trust account pending later ruling by the Court.
The Climaco Firm defended CII and CIF’s management in the trustee motions in a fierce battle for control which was tried to the Court in the first part of December, 1989. That defense required considerable effort by the Climaco Firm over a short period of time to understand the complex Cardinal enterprise structure and its many financial problems. Despite such efforts, however, on January 4, 1990 the Court ordered the appointment of an operating trustee.
In February, 1990 the Climaco Firm applied to the Court for a final award of attorney fees. That application sought $356,426.25 for professional services and reimbursement for expenses in the amount of $20,963.72. In addition to those amounts, $40,607.12 was billed to the subsidiary corporations for work performed on their behalf. Numerous objections were filed to that application and, after hearing, the Court reserved determination primarily because the CII and CIF estates still were attempting to recover from the disruption caused by the trustee appointment process and the uncertainties regarding legal representation. Other counsel also were not receiving current payments of fees at that time.
Between March 27, 1990 and May 15, 1990, CIDC, CISC, CIFSC and CIGSC each filed a Chapter 11 petition with this Court. Those entities now seek to recover the retainer previously paid to the Climaco Firm to the extent the services for which compensation is requested were rendered to CII and CIF. The Court believes it is appropriate to decide all pending matters relating to the Climaco Firm’s services at this time.
FINDINGS AND CONCLUSIONS
A. The Retainer Paid by the Subsidiaries.
The Climaco Firm defends its receipt of the retainer on several grounds. ' It argues that the services provided exceed the amount of the retainer and that the request to disgorge the retainer will be meaning*521less or moot if a pending motion seeking substantive consolidation of all the Cardinal corporate entities is granted. The Cli-maco Firm also asserts that CIDC will be unjustly enriched if the retainer is repaid to it, that CISC was solvent at the time of the transaction and that the earmarking doctrine protects the retainage.
The Court could perform an extensive analysis of each argument the Climaco Firm raises. That analysis would establish that; other than possible elimination of fraudulent transfer arguments, the result in the substantive consolidation motion and CISC’s solvency are irrelevant to the real issues raised by the retainer payment; that unjust enrichment to CIDC will not occur if all parties are restored to their original positions; and that the earmarking doctrine is not applicable to the facts of this matter. The Court is also aware of case law which protects from disgorgement by the Bankruptcy Court retainers received from third parties and paid from non-estate assets. Palmer & Palmer v. United States Trustee (In the Matter of Hargis), 887 F.2d 77 (5th Cir.1989); rehrg. granted, 895 F.2d 1025 (1990). That case law can be distinguished, however, and a lengthy analysis of the Climaco Firm’s defenses would be only an academic exercise.
The critical and determinative fact is that all funds of the Cardinal subsidiaries, even where those subsidiaries had not yet filed for Chapter 11 relief, were under the control of these Debtors and their management. As the vertically integrated enterprise operated, monies not required for the subsidiaries’ operations were routinely up-streamed for the parent company’s use. Counsel and accountants appointed by the Court to represent the Debtors and the two unsecured creditors’ committees were working to preserve the value of the entire enterprise. That enterprise includes not only the corporate subsidiaries, but also the many affiliated partnerships. Interim compensation for those professionals had been authorized by the Court on a current basis, subject to a 15% holdback and to periodic applications to the Court. Those professionals had not received allowed compensation for some time because of cash shortages in the enterprise. Nevertheless, those professionals continued to serve and believed the Debtors’ representations that there were no funds which could be up-streamed for such payments.
Management further had specifically represented that CSG’s funds were “restricted” and could not be taken out of that company’s accounts. During the period these representations were being made, the subsidiary companies frequently consented to this Court’s exercise of jurisdiction over them when such exercise enabled them to enter into binding agreements to protect the assets of the entire enterprise. The only explanation given for the transfer of $300,000.00 for the retainer payment was that the restriction no longer applied.
The management of CII directed the payment of the retainer. While the Court does not fault the Climaco Firm for seeking payment of a retainer from assets not otherwise available to the estates of CII and CIF, the use of these particular funds to elevate one set of counsel over another was inappropriate and unfair. Further, the Court believes the entire replacement of counsel effort was misguided, destabilizing and threatening to the interests of CII and CIF’s estates.
This Court’s jurisdiction under 11 U.S.C. § 105(a) clearly extends to actions required to protect the fundamental fairness of the entire reorganization process. Accordingly, disgorgement of the retainer paid to the Climaco Firm is required to the extent the retainer has not been applied to services and expenses billed at $40,607.12 for the pre-petition representation of the subsidiaries which borrowed the funds and advanced the retainer. The reasonableness of the charges to those companies is not before the Court. Once disgorged, the net retainer should be repaid to the service corporations consistent with their contributions to any repayment of their loans to CSC and to CSC for the loan to CIDC which has been repaid.
B. The Allowance and Payment of Compensation for the Climaco Firm.
The Court has reviewed the Climaco Firm’s application for compensation for *522services rendered to CII and CIF and for reimbursement of expenses. In that review the Court applied the standards previously adopted by the Court in this process. In re Crawford Hardware, Inc., 82 B.R. 885 (Bankr.S.D.Ohio 1987). Specifically, the Court’s determination is based upon criteria first set forth in controlling case law in this circuit under the provisions of the Bankruptcy Act of 1898 (now repealed). With the exception of the economic concern for frugality which was explicitly overruled during the enactment of the Bankruptcy Reform Act of 19781, the factors governing fee applications by professionals in this circuit are those adopted in Cle-Ware Industries, Inc. v. Sokolsky, 493 F.2d 863 (6th Cir.), cert. denied 419 U.S. 829, 95 S.Ct. 50, 42 L.Ed.2d 53 (1974); see Hunter Savings Assoc. v. Baggott Law Offices Co. (In re Georgetown of Kettering, Ltd.), 750 F.2d 536 (6th Cir.1984). Those factors include:
1. The amount of work done;
2. The novelty and difficulty of the questions involved;
3. The skill requisite to perform the legal service properly;
4. The results accomplished;
5. Whether the fee is fixed or contingent;
6. The amount involved in connection with the services rendered;
7. The length of time consumed;
8. The experience, reputation and ability of the attorneys;
9. The size of the estate; and
10. The opposition met.
Cle-Ware, 493 F.2d at 868-69.
In making that determination, it is also helpful to consider the customary fee, the preclusion of other employment by the attorney because of the acceptance of the case, the undesirability of the case and awards in similar cases. See Johnson v. Georgia Highway Express, Inc., 488 F.2d 714 (5th Cir.1974); see also American Benefit Life Insurance Company v. Baddock (In the Matter of First Colonial Corp. of America), 544 F.2d 1291 (5th Cir.), cert. denied 431 U.S. 904, 97 S.Ct. 1696, 52 L.Ed.2d 388 (1977).
After consideration of all those factors, the Court finds that the Climaco Firm should be allowed $322,426.15 as compensation for services and $20,963.72 as reimbursement of expenses. That allowance recognizes the difficulties of the representation faced by the Climaco Firm and the temporary preclusion of other work, but discounts the requested amounts for the result achieved and the questionable value to the estate from the endeavor, for certain deficiencies in the description of the services performed, and for general reasonableness perceptions. Although the Clima-co Firm’s application seeks allowance as a final application, it will be subject to possible later reconsideration by the Court at the conclusion of these cases should that become necessary. Meanwhile, the Clima-co Firm’s allowed fees and expenses may be paid on a pro rata basis with other professionals in these cases when payments are being made for the time period during which these services were rendered, as authorized by prior orders of the Court.
IT IS SO ORDERED.
. 124 Cong.Rec. H 11,091-92 (daily ed. September 28, 1978) (statement of Rep. Edwards). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491220/ | OPINION AND ORDER GRANTING MOTION TO DISMISS CHAPTER 11 CASE
BARBARA J. SELLERS, Bankruptcy Judge.
This matter is before the Court on the Motion to Dismiss this Case (“the Motion”) filed by Oak Brook Apartments of Henrico County, Ltd. (“Debtor”) and the Objection of Mill Distributors and Louisiana Pacific Company (“the Objectors”). The Court heard the matter on August 14 and 27, 1990.
The Court has jurisdiction in this contested matter under 28 U.S.C. § 1334 and the General Order of Reference previously entered in this district. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (0).
The Debtor seeks to dismiss this case because an agreement has been reached between Signet Bank, the holder of a first mortgage against the Debtor’s real property, and the Trustee for Cardinal Industries Inc. (“CII”), the managing general partner of the Debtor. That agreement provides:
1. The Debtor will transfer its real property to Signet;
2. Signet will assume all of the Debtor’s accounts payable except those owing to CII or an affiliate of CII; and
3. Signet will release all claims it may ever have against the Debtor with respect to its property.
The Objectors hold a second mortgage against the Debtor’s real property. They maintain that the only way they can be paid on account of that second mortgage is through a reorganization of this partnership Debtor. The Objectors wish to propose a plan of reorganization which will use funds now in the Debtor’s accounts and future operating revenues generated by the Debtor’s property to pay all the partnership’s non-insider creditors and, from any surplus, to pay the Objectors.
The'second mortgage held by the Objectors was granted by the Debtor to secure an obligation of CII. There was no evidence that the Debtor received any consideration for encumbering its property with that second mortgage or that the Debtor received other benefit from the Objectors or from the Objectors’ loan to CII. Rather, it appears to the Court that the second mortgage is merely a guarantee mortgage undertaken by the Debtor to secure a claim of CII. The second mortgage does not create any obligation from the Debtor to the Objectors. Further, testimony established that the current fair market value of the Debtor’s real property is less than the balance of the obligation to Signet which is secured by a first mortgage.
The Debtor asserts that the Objectors’ mortgage lien is void or voidable under sections 506 and 544 of the Bankruptcy Code. Further, as the Objectors have no underlying claim in this case, the Debtor argues that the objection to dismissal is without merit.
In considering a Motion to Dismiss a Chapter 11 case, the Court must consider the following:
... the Court may convert a case under this chapter to a case under Chapter 7 of this title, or may dismiss a case under this chapter, whichever is in the best interest of creditors and the estate....
11 U.S.C. § 1112(b).
The Objectors are parties-in-interest in this case and they do not benefit from dismissal. However, the statute requires consideration only of the interests of creditors and the estate. The Objectors are not creditors because they have no claim against this estate. The estate likewise is not benefited by continuing this case under the auspices of Chapter 11 as the Debtor has represented that it is unable to effectu*790ate a plan of reorganization. The payments proposed to be made by Signet upon dismissal are more favorable to unsecured claimants than is the plan contemplated by the Objectors. It clearly is in the best interests of unaffiliated unsecured creditors of this Debtor to dismiss this case so that Signet will pay their claims in full under the terms of the agreement between Signet and CII. Finally, the Debtor partnership believes dismissal is more favorable to its interests because it will benefit from the waiver of claims which is part of the agreement with Signet. Although the result of this analysis produces a harsh impact upon the Objectors, their interest in this bankruptcy estate simply is not an interest which is or should be protected by the Bankruptcy Code or by state law.
Based on the foregoing, the objection of Mill Distributors and Pacific Louisiana Company is overruled. This case is hereby dismissed on the Debtor’s motion.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491221/ | MEMORANDUM
JOHN C. COOK, Bankruptcy Judge.
This case involves an action by a contractor against the bankrupt owner of a construction project and its principal lender. Contending that it was not paid its last draw request on the construction project, the contractor seeks compensatory and punitive damages, an equitable lien, and equitable subordination against the principal lender based upon a number of legal theories. The parties previously consented to the entry of a final judgment by this court pursuant to 28 U.S.C. § 157(a)(2). Jurisdiction lies under 28 U.S.C. §§ 1334 and 157. Having conducted a two-day trial on the issues raised in this lawsuit, the court now enters its findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052. References to plaintiff’s exhibits will be designated “Px.” and the exhibit number. *964References to defendant’s exhibits will be designated “Dx” and the exhibit number.
Findings of Fact
1. Blaine-Hays Construction Company (“Blaine-Hays”) is a Tennessee corporation engaged in the general contracting business with its principal place of business in Knoxville, Tennessee.
2. Union Planters National Bank (“UPNB”) is a national banking association with its principal office in Memphis, Tennessee.
3. Edgewater Motel, Inc. (“Edgewater”) is a Tennessee corporation which owns the project involved in this suit. Edgewater filed a petition for relief under chapter 11 of the Bankruptcy Code on March 25, 1986.
4. In 1983 the debtor, Edgewater and its principal shareholder and officer, Mr. R.B. Hailey, began plans for the construction of the Edgewater Motel in Gatlinburg, Tennessee (the “project”). Mr. Hailey began negotiating with Dorman Blaine of Blaine-Hays in the hope that Blaine-Hays would become the general contractor for the project. Mr. Hailey also commenced efforts to obtain a construction loan from UPNB and permanent financing from Security Federal Savings and Loan Association. Mr. Hailey obtained a written commitment from Security Federal dated September 30, 1983 (Px 1A).
5. On December 27, 1983, Mr. Fountain Barksdale of UPNB prepared a credit proposal for submission to UPNB’s Senior Loan Committee (Px IB). Mr. Barksdale was the UPNB officer who was initially responsible for the construction loan to Edgewater.
6. During the negotiation period in the latter part of 1983, Dorman Blaine met with Mr. Hailey, Mr. Barksdale, and Miles McMahan, an employee of Mr. Hailey’s, and discussed the project. Mr. Blaine was not willing to rely upon Mr. Hailey to provide the funds needed for construction. He was told by Mr. Hailey and later by Mr. Barksdale that the construction loan would come from UPNB.
7. Union Planters Mortgage Company, a division of UPNB, provided Mr. Hailey with a commitment letter dated January 17, 1984 (Px 1C) setting forth the terms upon which it would make a construction loan to Edgewater. The loan was to be in a principal amount of $7 million and was to be secured by a first deed of trust on the project premises. The commitment letter required the borrower to pay certain “costs” in connection with the loan and acquisition and construction of the property from funds other than the loan proceeds. Among these costs were $1.5 million for “Leased Equipment.” The commitment letter also required copies of executed leases with Walter Heller & Company covering “all furniture, fixtures, equipment, elevators, fireplaces and heating and air conditioning units” to be reviewed and approved by UPNB prior to closing of the construction loan.
8. A “preliminary budget” was attached as Exhibit B to the commitment letter. That budget was as follows:
Total Cost Amount Paid Balance to be Paid
Land acquisition 883,740 225,000 658,740
Building Construction loan Interest 5,585,000 600,000 600,000* 4,985,000 600,000
Permanent loan/ brokerage fees 298,000 172,100 125,900
Construction loan fees 114,500 114,500
Legal and recording fees 20,000 20,000
Survey, soil testing, etc. 18.000 15.000 3.000
*965Total Cost Amount Paid Balance to be Paid
Architectural & engineering fees 350,000 50,000 300,000
Contingency 350,000 175,000** 175,000
Pre-opening expenses . 300,000 300,000
Furniture, fixtures and equipment 900,000 900,000*
TOTAL 9,419,240 2,137,100 7,282,140
9. The amounts in the right hand column of the budget were to be paid from the construction loan proceeds, plus 12 monthly cash contributions by the owner of $23,500 each. The amounts in the second column supposedly were already paid or were to be paid by the owner from other sources.
10. According to the commitment letter and budget, $4,985,000, the construction loan proceeds and the owner’s equity contributions, would be used to pay Blaine-Hays for the cost of building the project. The remaining $600,000 needed to pay the contractor to install elevators, fireplaces, heating and air conditioning units would come from a lease financing arrangement with parties other than UPNB.
11. By this time Blaine-Hays through Dorman Blaine had tentatively agreed to become general contractor for the project. The terms of the construction contract required Blaine-Hays to obtain performance bonds to ensure Blaine-Hays’ performance under the contract. Although Dorman Blaine had been told by both Mr. Hailey and Mr. Barksdale that UPNB would make the construction loan, Mr. Blaine wanted firm assurance from the bank that construction funds would be available for the construction.
12. Sometime prior to entering into the construction contract, Mr. Blaine telephoned Mr. Barksdale who assured him that UPNB’s construction loan would cover the contractual price of the construction contract, namely, $5,585,950. Mr. Barks-dale also agreed to confirm in writing this representation.
13. After receiving Mr. Barksdale’s assurance, Blaine-Hays informed its bonding company that UPNB had verified that its construction loan would cover the construction contract and that a letter confirming the oral representations would be forthcoming.
14. Blaine-Hays and the owner thereafter signed a construction contract for a lump sum amount of $5,585,950 (the “construction contract”) (Px 2B). Although the construction contract does not show the date it was signed, it recites that it was made as of February 20, 1984.
15. The construction loan made to Edgewater by UPNB was closed on March 1, 1984.
16. Shortly before the closing of the construction loan between Edgewater and UPNB, Dorman Blaine instructed Miles McMahan not to turn over the construction contract to UPNB before receiving a commitment letter from the bank confirming the earlier representations by Mr. Barks-dale on the financing. Mr. Blaine gave Mr. McMahan a form letter that he wanted Mr. Barksdale to retype on UPNB stationery. Mr. McMahan followed Mr. Blaine’s instructions.
17. The commitment letter received back from Mr. Barksdale on UPNB stationery was signed by Mr. Barksdale and was dated February 28, 1984. Although there was some conflict in the evidence as to *966whether the words in the letter were those of Mr. Blaine or Mr. Barksdale, the letter and its contents were adopted, if not written, by Mr. Barksdale. The representations contained in the letter were the same representations made to Mr. Blaine by Mr. Barksdale to induce Mr. Blaine to enter into the construction contract and obtain performance bonds. The letter reads as follows:
February 28, 1984 Blaine-Hays Construction Company 9047 Executive Park Drive Knoxville, Tennessee Gentlemen:
This is to confirm that Union Planters National Bank has made a construction loan to Edgewater Motel, Inc. for the construction of a 210 room motel to be located in Gatlinburg, Tennessee pursuant to the terms of a certain Construction Loan Agreement dated March 1, 1984 (the “Agreement”), between Union Planters National Bank, as lender and Edgewater Motel, Inc. and R.B. Hailey, as borrower. The loan contains $5,585,-950.00 to fund the cost of construction, pursuant to the Agreement. Assuming no default under the Agreement, progress payments will be made monthly upon receipt of the required documentation approved by the Architect and the Owner in conformance with the Agreement and other loan documents executed in connection therewith.
Very truly yours,
UNION PLANTERS NATIONAL BANK
[Signature]
By: Fountain Barksdale Vice President
18.The first sentence of the letter clearly states that UPNB “has made” a construction loan to Edgewater for construction of the motel pursuant to a “Construction Loan Agreement (the Agreement).” The second sentence of the letter clearly states that “[t]he loan,” obviously referring to the construction loan mentioned in the first sentence, “contains $5,585,950.00 to fund the cost of construction, pursuant to the Agreement.” The representation that the bank construction loan contained $5,585,950 to fund the construction was false. The loan contained only $4,703,000 to fund the cost of construction, pursuant to the Agreement. An additional $282,000 was to come from the owner’s equity contributions. The other $600,000 was to be provided from another source under a lease financing arrangement. While the false representation was not intentional, it was nevertheless a false representation negligently made by UPNB in the course of its business.
19. Mr. Blaine was never told by UPNB or anyone else that the construction loan contained only $4,703,000 to fund the cost of construction. Based upon Mr. Barks-dale’s representation, Mr. Blaine and Blaine-Hays were led to believe that UPNB loan funds were available to cover the entire cost of the construction contract.
20. Because UPNB through Mr. Barks-dale clearly represented to Blaine-Hays that the bank’s construction loan contained $5,585,950 to fund the construction, a representation later confirmed by the letter dated February 28, 1984, it was reasonable for Blaine-Hays to rely upon this representation without examining the underlying construction loan agreement and accompanying papers.
21. Edgewater established three accounts at UPNB in connection with the construction loan. Account No. 239-0090288-01 (the “construction account”) was used to pay the owner’s draw requests. Typically, when UPNB advanced money pursuant to the construction loan, it deposited the money in the construction account. Account No. 8006717 (the “escrow account”) was used for deposit of the $23,500 monthly payments required to be made by Mr. Hailey pursuant to the construction loan agreement. Account No. 8006431 (the “retainage account”) was used for deposit of Blaine-Hays’ earned retainage.
22. Account No. 8006431 or the retain-age account was actually a money market savings account opened in the name of Edgewater. The bank was not instructed to open the account as an escrow account nor did Edgewater or Blaine-Hays obligate *967the bank to treat the account as an escrow account. Since there was no obligation on the part of the bank to treat the account as an escrow account, the bank obviously did not put up any security to ensure such an obligation. Although no checks were written on the account, a signature card for Edgewater was filled out and on file. Except on one occasion when UPNB withdrew funds from the retainage account to correct a clerical mistake made in a deposit, all withdrawals from the account were made pursuant to instructions from Edgewater.
23. Section 4.01 of the construction loan agreement required the owner to deposit in the escrow account twelve monthly payments of $23,500 each (a total of $282,000). UPNB was required to advance these funds “in connection with the construction of the project in accordance with the terms hereof....” The January 17 commitment letter (Px 1C) also stated that the payments would be used to pay the cost of construction in excess of the loan amount, based upon the preliminary budget.
24. Following the loan closing John Whooley of UPNB assumed responsibility for administering the loan. UPNB retained Mr. John E. Acuff, a consulting engineer, to act as an “independent inspector” for the project. Mr. Acuff’s duties were set forth in a letter to him dated March 26, 1984, from Mr. Whooley, which he signed and accepted on March 28, 1984 (Px 4A). This letter required Mr. Acuff, among other things, to review Blaine-Hays’ certificates for payment and to visit the project site each month to determine if there were sufficient construction loan funds remaining to complete the project according to plans and specifications.
25. Although Mr. Acuff did visit the project site on a number of occasions and submitted fifteen written reports to UPNB, none of these reports ever stated whether there were “sufficient construction loan funds remaining to complete the project according to plans and specifications” as required by the letter of March 26, 1984 (Px 4A).
26. After construction began, Blaine-Hays submitted applications for payment approximately every month. When it received these applications, Edgewater typically would complete its own draw request adding its other costs and expenses. Ms. Crystel Burke, who was Mr. Hailey’s secretary, would then forward these draw requests to UPNB with a cover letter signed by her (Px 7B-7R).
27. The owner charged project expenses to eleven different categories, which were numbered 1 through 11 on its draw requests. These categories correspond to the eleven categories on the budget shown on previously-mentioned Exhibit B.
28. In addition to the eleven categories of expenses as shown on the project budget, the owner’s draw requests also included two additional lines (nos. 12 and 13). These were for retainage accrual and interest on retainage. When Blaine-Hays submitted its applications for payment, 10 percent of the amount due for construction progress was withheld as retainage (this was reduced to 5 percent of the total contract price beginning with application no. 10). This earned retainage was always accounted for separately (as was the interest earned on retainage) and was deposited into the retainage account.
29. Typically, when UPNB received an owner’s draw request, it funded the construction loan by transferring the amount of earned retainage directly into the retain-age account and credited the construction account for the balance of the draw. It would then debit the construction account for the interest due it on its loan. The remaining funds in the construction account were then used by Edgewater to pay the project costs and expenses, including Blaine-Hays’ application for payment. This procedure was followed on the first thirteen draw requests between March 31, 1984, and April 1, 1985, which were paid in full.
30. On May 1, 1985, Blaine-Hays submitted its application for payment no. 14. This application included $413,079 in construction progress (Px 9A).
31. Blaine-Hays’ application no. 14 was forwarded to UPNB by letter dated May 15, 1985, together with owner’s draw re*968quest no. 14 (Px 9B). In addition to stating construction progress of $413,079, application 14 showed retainage of $288,397 or 5 percent of the total contract price. This was the same retainage shown on application no. 13.
32. Owner’s draw request no. 14 submitted to UPNB showed only $114,412 “work in place” for Item 2 “Building.” It also showed that the construction loan budget for “Building” had been exhausted.
33. When Edgewater forwarded draw request no. 14 to UPNB, it apparently was unaware that there were not sufficient funds remaining in the construction loan to pay this draw request because the transmittal letter asked UPNB to transfer $495,-528.54 in the Edgewater’s construction account to pay the full amount of owner’s draw request no. 14 (Px 9C).
34. When UPNB received owner’s draw request no. 14, however, it discovered there were not sufficient funds remaining in the construction loan to pay it. On May 20, 1985, there was only $111,423.34 remaining in the construction loan to pay the $495,-528.54 draw request. Demetra Quinn, a UPNB loan officer, prepared a memo (Px 9E) stating that draw no. 14 would be paid as follows:
$111,423.34 - from loan funds
292,306.93 - from the Hailey Escrow account (# 8006717)
91,798.27 - by borrower from lease funds
$495,528.54 - TOTAL
35. The ending balance as shown on the last statement (dated 4-30-85) for the escrow account was $292,306.93 (Px 9K). It apparently was UPNB’s intent to withdraw all the funds from the escrow account to pay draw request no. 14, and for Edge-water to fund the balance of that draw from the remaining construction loan funds and from unspecified “lease funds.”
36. The next day, May 20, 1985, in accordance with Ms. Quinn’s memo, UPNB withdrew all of the funds available in the escrow account, namely $292,306.13 and transferred this sum to the construction account. It also credited to the construction account the amount of $403,730.21, which was the $292,306.13 debited to the Hailey escrow account, plus the “remaining amount of the loan,” $111,423.32 (Px 9F). UPNB’s general ledger entry for this transfer described it as the “Final Draw Request” (Px 9F, p. 2).
37. As of May 21, 1985, however, funds in the amount of $91,798.27 were still needed to complete the payment of draw request no. 14. Ms. Burke's memo indicated that the additional $91,798.27 would be furnished by the borrower (Edgewater) from lease funds.
38. On June 3, 1985, Blaine-Hays received a check from Dover-Elevator Company for $165,849 (Px 9H) made payable to Blaine-Hays. The check was endorsed by Blaine-Hays’ controller over to Edgewater. The evidence did not disclose why the Dover Elevator check was made out originally to Blaine-Hays. At this point in time, Dover Elevator was not indebted to Blaine-Hays.
39. A telephone conversation apparently took place between John Whooley and Crystel Burke wherein draw request no. 14 was discussed. A letter dated June 3, 1985, from Ms. Burke to Mr. Whooley confirming the telephone conversation set forth instructions on how draw request no. 14 was to be paid (Px 9G). The instructions corresponded to the treatment of draw request no. 14 contained in Demetra Quinn’s memo.
40. Enclosed with the June 3 letter to be deposited into the Hailey escrow account was the Dover Elevator check in the amount of $165,849. Of that amount, $91,-798.27 was transferred to the construction account to complete payment of draw request no. 14, $65,764.56 was transferred to UPNB to pay interest on the construction loan, and $74,050.73 was left in the Hailey escrow account (Px 9J). With the addition of funds from the Dover Elevator check, draw request no. 14 was paid in full.
41. The funds from the Dover Elevator check, namely $165,849, were charged against the budgeted $600,000 lease funds. As noted previously, these lease funds were supposedly part of the financing package making up the total construction contract price of $5,585,950. As previously *969noted, although UPNB through Mr. Barks-dale represented to Blaine-Hays that the bank loan contained $5,585,950 to finance the construction, in actuality, the bank loan contained only $4,985,000 with the balance of $600,000 to be supplied through so-called lease funds from a source other than the bank.
42. It appears that in January 1985, Edgewater entered into a lease agreement with a company by the name of Borg-Warner Leasing (Px 6B). Pursuant to the lease agreement, furniture, fixtures, and equipment were leased to Edgewater for installation by Blaine-Hays into the project. Apparently, the installation costs were to be paid for out of advanced funds from Borg Leasing to Edgewater (Px 6A). The evidence did not reveal, however, how this financing arrangement was supposed to. work.
43. Blaine-Hays’ project manager for the Edgewater construction project was Don Sterchi. On May 17, 1985, he wrote Edgewater employee Miles McMahan and stated in part:
To recap our conversation of this morning, I am sending a letter to the affected subcontractors and suppliers concerning the “Borg-Warner” invoicing. (Dx Ex. 15).
On May 20, 1985, Don Sterchi wrote a letter to Dover Elevator Company stating in part:
As part of the financing package on the Edgewater Hotel, the Owner has entered into a leasing agreement with “Borg-Warner Leasing_ (Dx Ex. 16).
44. Although the letters written by Don Sterchi show that Blaine-Hays was aware at least by May 1985 that Edgewater was getting some type of financing from a source other than UPNB, Mr. Blaine testified that it was the understanding of Blaine-Hays that this financing was additional financing over and above the financing agreed to by UPNB. At no time was Blaine-Hays told that less than $5,585,000 was available in loan funds from the bank. At no time was Blaine-Hays told that its payments were coming from a source other than the bank loan funds committed to the project. Moreover, at the time draw request no. 14 was paid, Blaine-Hays was not advised that the bank’s construction loan had been fully disbursed.
45. The proof revealed that by May 20, 1985, there were insufficient funds remaining to complete construction and that the entire project was over budget by approximately $259,000. Blaine-Hays continued working on the project under the illusion that bank loan funds were still available to fund the remaining work.
46. On June 3, 1985, Blaine-Hays submitted its application for payment no. 15 (Px 10A). It included $122,057 as current payment due. Retainage remained at $288,397, 5 percent of the total contract price.
47. On July 12, 1985, the owner submitted owner’s application no. 15 requesting a total draw of $211,737.25, including interest of $70,425.22 (Px 10B). Four days earlier, on July 8, 1985, UPNB had already debited the escrow account in the amount of $70,425.22 to pay interest to itself in connection with this draw. This- amount was the remainder of the proceeds of the Dover Elevator check. Also on July 12, 1985, the owner sent a check for $137,-311.94 to UPNB for deposit into the escrow account. Four days later, on July 13, 1985, UPNB transferred that amount, plus an additional $4,000 from the escrow account to the construction account. This amount was used to pay draw no. 15, less the interest, which UPNB had already paid to itself. Blaine-Hays’ application no. 15 was paid in full thereafter.
48. Blaine-Hays’ application for payment no. 15 included $122,057 in construction progress. When the owner sent UPNB the check for $137,311.94 to fund this draw request, that amount, like the Dover Elevator check, was charged against item 11 of the budget. Also, like the Dover Elevator check, these “lease funds” were then used to fund the owner’s draw, including Blaine-Hays’ application for payment and the other expense shown on PX 10B. Therefore, UPNB once again knew that the $600,000 in “lease funds” that supposedly *970were budgeted to pay Blaine-Hays actually were being used for other purposes.
49. In both instances in which Blaine-Hays received a portion of these “lease funds,” they were not paid to it separately, but were transferred through the escrow account to the construction account, and then paid-to Blaine-Hays (in part) in the form of a check drawn on the construction account. Because Blaine-Hays was receiving its payment in the usual manner, it was not put on notice that its payments were coming from a source other than bank loan funds.
50. Blaine-Hays’ application no. 15 was ultimately paid in full.
51. The construction loan agreement between UPNB and Edgewater provided that failure of the project completion date to occur on or prior to May 1, 1985, constituted an event of default (Px 3D). The construction contract between Blaine-Hays and Edgewater, received by UPNB at loan closing, recited a final completion date of June 1, 1985 (Px 2B). Although the project was not completed by May 1, 1985, UPNB waived the time provision contained in the construction loan agreement by closing its loan with knowledge that the construction contract provided for a completion date after May 1,1985; by failing to give notice of any default; and by continuing to make progress payments after May 1, 1985.
52. On July 23, 1985, Blaine-Hays submitted its application for payment no. 16 (Px 11A). It was forwarded to UPNB by the owner on August 20, 1985. It included $129,201 in current payment due, and $218,397 in retainage that had been earned previously. Application no. 16 reduced the retainage to $70,000.
53. On August 21, 1985, UPNB transferred $234,908.52 from the retainage account to the construction account, leaving a balance in the retainage account of $70,000 on that date (Px 11C, 11D). This sum was used by the owner to make a partial payment on Blaine-Hays’ application for payment no. 16.
54. On September 17, 1985, Blaine-Hays submitted its application for payment no. 17 in the amount of $276,229.48. This represented the $112,689.48 in unpaid re-tainage due from application no. 16, $93,-540 in additional construction, and $70,000 in final retainage. No amount of this application has ever been paid to Blaine-Hays.
55. On September 27, 1985, UPNB debited the retainage account in the amount of $70,000, and credited this amount to the construction account. The owner then drew a $70,000 check on the construction account and deposited it into its account at First National Bank of Gatlinburg, where it apparently was used to off-set prior overdrafts by the owner. None of this money was paid to Blaine-Hays. After this transaction there was $1,484.90 left in the re-tainage account (Px 12H).
56. On December 12, 1985, UPNB debited the retainage account in the amount of $1,477.72 (Px 12J). It paid this amount to the owner. Blaine-Hays did not receive any of this remaining money.
57. In all, Blaine-Hays was paid $5,424,340.52 for its work on the project. Blaine-Hays’ final application for payment no. 17 in the amount of $276,229.48 submitted on September 17, 1985, remains unpaid.
Conclusions of Law
A.
The plaintiff predicates recovery of damages against UPNB upon a number of theories. The most viable theory is that of negligent misrepresentation. The representations at issue are the oral representations made by UPNB employee, Fountain Barksdale, to Dorman Blaine concerning the amount of bank loan funds available to fund the construction costs of the Edge-water Motel project. Those oral representations were later confirmed in the letter of February 28, 1984, from Mr. Barksdale to Dorman Blaine.
The tort of negligent misrepresentation is succinctly described in Restatement (Second) of Torts, § 552. That section reads in relevant part as follows:
(1) One who, in the course of his business, profession or employment, or in any other transaction in which he has a *971pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information.
(2) ... the liability stated in Subsection (1) is limited to loss suffered
(a) by the person or one of a limited group of persons for whose benefit and guidance he intends to supply the information or knows that the recipient intends to supply it; and
(b) through reliance upon it in a transaction that he intends the information to influence or knows that the recipient so intends or in a substantially similar transaction.
UPNB concedes that Tennessee recognizes the tort of negligent misrepresentation as set forth in § 552 of the Restatement. See Tartera v. Palumbo, 453 S.W.2d 780 (Tenn.1970); Merriman v. Smith, 599 S.W.2d 548 (Tenn.App.1979).
The findings in this case establish that the plaintiff has met its burden of proof on the issue of negligent misrepresentation. Mr. Barksdale, on behalf of UPNB, negligently represented to Mr. Blaine and Blaine-Hays that the UPNB construction loan contained $5,585,950 to fund the cost of the construction. The representation, made in the course of the bank’s business, was false. Mr. Barksdale made the representation to Mr. Blaine realizing that Blaine-Hays would rely upon the representation in committing itself to the construction project. Although Blaine-Hays’ surety on the performance bond wanted the representation in writing as a prerequisite for issuing the bond, Mr. Blaine testified that he also needed assurance himself as to the source of financing.
The representation from the bank that the loan contained $5,585,950, the full price of the construction contract, led Blaine-Hays to believe that sufficient bank loan funds up to that amount were available to fund the project. With this erroneous information, Blaine-Hays continued to work on the project even after the bank loan funds were depleted. If Blaine-Hays had been aware that only $4,703,000 in bank loan funds were available for construction, Blaine-Hays could have protected its interest before entering into the construction contract by insisting that other, acceptable financing was in place. Also, if Blaine-Hays had known that only $4,703,000 in bank funds were available to fund the construction, it could have stopped work when those funds were exhausted until assured that future payment would be made. As it turned out, Blaine-Hays proceeded with the construction of the project without knowing that the bank loan had been used up and without having the opportunity to approve or reject the alternative financing arrangement entered into by the debtor.
While Blaine-Hays may have become aware in May 1985 that some type of additional financing had been obtained by the debtor, it did not know this additional financing was part of the $5,585,950 in funds supposedly available through the bank. Neither Blaine-Hays nor the bank knew how this additional financing was supposed to function. If Blaine-Hays had known from the beginning that part of the construction funds payable to it were to come from another source, it could have insisted upon proper safeguards to ensure the money was available when needed.
In view of the bank’s clear representation that the UPNB loan contained $5,585,-950 to fund the construction pursuant to the loan agreement, the court rejects the bank’s argument that Blaine-Hays was contributively negligent in failing to review the bank loan agreement and accompanying documents. It was certainly reasonable for Blaine-Hays to rely upon the straight-forward and explicit representation from UPNB without having to investigate the accuracy of the representation.
UPNB also argues that the letter of February 28 stated that monthly progress payments would be made assuming no default under the loan agreement. The construction loan agreement provided that failure of the completion date to occur on or prior to May 1, 1985, constituted an event of *972default. Even though the project was not completed by that time, the bank gave no notice of a default and continued making progress payments in accordance with the agreement. Moreover, the construction contract between Blaine-Hays and Edge-water, furnished to UPNB at the time of loan closing, provided that the project’s final completion date would be June 1, 1985. UPNB accepted the construction contract without objection.
Even though a contract may call for performance at a certain time, if the parties by their conduct indicate an intention to regard the contract as still in force after default, the time provision is waived and the parties are estopped from asserting that there was a breach of the contract for failure to perform at the original time. Lamborn & Co. v. Green, 150 Tenn. 38, 262 S.W. 467 (1923); Farris v. Ferguson, 146 Tenn. 498, 242 S.W. 873 (1922); Petway v. Loew's Nashville & Knoxville Corp., 22 Tenn.App. 59, 117 S.W.2d 975 (1938).
Not only did the bank continue making loan payments after May 1, 1985, without giving notice of any event of default, but it also failed to object to the completion date of June 1, 1985, contained in the construction contract. If notice of default had been given and progress payments immediately stopped, Blaine-Hays could have halted construction at that point. Instead, UPNB continued to perform under the construction loan agreement with every intention of fulfilling the agreement despite the passing of the May 1, 1985, completion date. UPNB cannot now assert that nonpayment of the last draw request should be excused because of Edgewater's failure to complete the project by May 1, 1985.
As a consequence of its justifiable reliance upon the bank’s false representation, Blaine-Hays was damaged in the amount of $161,609.48, the difference between $5,585,950, the amount falsely represented, and $5,424,340.52, the amount paid to Blaine-Hays.
B.
The plaintiff also seeks recovery against UPNB for wrongful conversion of retainage. This theory of recovery is predicated upon an alleged violation of Tenn. Code Ann. § 66-11-144 (Supp.1987). That statute provides in relevant part:
(а) 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.
Jjt 5k £ ifc
While Edgewater may have had a duty under § 66-11-144 to set up an account in compliance with the statute, Rentenbach Engineering Co. v. General Realty Ltd., 707 S.W.2d 524, 528 (Tenn.App.1985), it failed to create such an account. The so-called retainage account established in this case was an ordinary money-market savings account opened in the name of Edge-water. A signature card for Edgewater was filled out and filed. The bank received no special instructions regarding this account nor did it enter into an agreement obligating itself to treat this account as an escrow account. Moreover, the bank was not required to put up any security to ensure the performance of an obligation to treat the account as an escrow account. Hence, UPNB cannot be faulted for complying with Edgewater’s instructions regarding withdrawals from Edgewater’s own money-market account.
C.
The plaintiff also seeks recovery from UPNB based upon alleged negligence in administering the construction loan. While the plaintiff concedes that the construction loan agreement does not create a duty, actionable in tort, running from UPNB to Blaine-Hays, plaintiff appears to argue that the false representation made by Mr. Barksdale to Blaine-Hays created a duty on the part of UPNB to administer the loan in accordance with Mr. Barksdale’s representation.
Mr. Barksdale represented to Blaine-Hays that the loan contained $5,585,950 to *973fund the construction. Blaine-Hays was damaged by UPNB only to the extent that the representation was false. The administration of the actual loan funds did not constitute the actionable tort in this case; rather, the actionable tort was the negligent misrepresentation that additional loan funds were available. Cf. Forest, Inc. v. Guaranty Mortgage Co., 534 S.W.2d 853 (Tenn.Ct.App.1975), cert. denied (Tenn.1976). Thus, the plaintiff would not be entitled to recover under the theory of negligent loan administration.
D.
The plaintiff seeks to have an equitable lien impressed upon the project in this case.
It has been said that the doctrine of equitable lien, in certain aspects, is not essentially different from the doctrine of subrogation. It is applied in cases where the law fails to give relief and justice would miscarry but for its declaration. Milam v. Milam, 138 Tenn. 686, 200 S.W. 826 (1917); Shipley v. Metropolitan Ins. Co., 25 Tenn.App. 452, 158 S.W.2d 739 (1941). The Tennessee Supreme Court in Milam described the circumstances justifying the recognition of an equitable lien.
Even in the absence of an express contract, a lien, based upon the fundamental maxims of equity, may be implied and declared by a court of chancery out of general considerations of right and justice as applied to the relations of the parties and the circumstances of their dealings.
There must be an intent to make the particular property, real or personal, a security for the obligation; but, that intent being clear, equity will treat an agreement to give a mortgage or lien, as effective to create an equitable lien, where money has been parted with on faith that there would be a compliance. [Citations omitted.]
Milam v. Milam at 691-92, 200 S.W. at 828.
In addition, the defendant against whom relief is sought must have title to the real property against which an equitable lien is claimed. Sondgeroth v. Carrington, 650 S.W.2d 737, 742 (Tenn.App.1982).
In the instant case, the legal title to the project is held by the debtor Edgewater, not UPNB. Obviously, there was no intent on the part of any of the parties that the project secure an indebtedness running from UPNB to Blaine-Hays which arose in tort. Cf. Greer v. American Security Ins. Co., 223 Tenn. 390, 445 S.W.2d 904 (Tenn.1969). Finally, Blaine-Hays has an adequate remedy at law in this case in its tort action for a judgment awarding damages against UPNB, a judgment UPNB will certainly be able to pay.
The court does not find the doctrine of equitable lien to be applicable in this case and therefore will not impress such a lien on the project.
E.
The plaintiff also seeks equitable subordination of UPNB’s lien pursuant to 11 U.S.C. § 510(c).
Equitable subordination is an extraordinary remedy. The misconduct which warrants the imposition of this remedy must be substantial. First Nat’l. Bank v. Charles Blalock & Sons, Inc. (In re Just for the Fun of It of Tennessee, Inc.), 7 B.R. 166 (E.D.Tenn.1980). Gross or egregious misconduct must be established in non-insider cases. Anaconda-Ericsson, Inc. v. Hessen (In re Teltronics Services), 29 B.R. 139 (Bankr.E.D.N.Y.1983); Berquist v. First Nat’l Bank (In re American Lumber Co.), 5 B.R. 470 (D.Minn.1980).
The conduct which damaged the plaintiff in the instant case was negligent conduct. It was neither intentional misconduct nor substantial misconduct. The facts and circumstances of this case do not justify resort to equitable subordination.
F.
The court finds no basis for allowing recovery upon the other theories cited by the plaintiff. Also, the evidence in this ease does not support plaintiffs claim for punitive damages. The court will allow, however, interest upon the assessed *974damages at the rate of 6.5 percent from September 27, 1985, a date ten days following the submission of plaintiff’s last application for payment. See Tenn.Code Ann. § 47-14-123.
A judgment will enter in accordance with the court’s findings of fact and conclusions of law.
$600,000 of the building cost (elevators, fireplaces, heating, and air conditioning units) as well as $900,000 of furniture, fixtures, and equipment will be leased.
To be covered by a letter of credit. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491224/ | MEMORANDUM OPINION
LETITIA Z. CLARK, Bankruptcy Judge.
Came on for consideration the Objection to Claim No. 1 of American Oilfield Exchange, Inc. (“American”) filed by the Debtor. American contends it is due a commission on the sale of an oil rig by Debtors to Petra Drilling Corporation on oral contract and quantum meruit theories. After considering the pleadings and memo-randa filed by counsel and the evidence adduced at trial, the court makes the following Findings of Fact and Conclusions of Law and enters a separate Judgment in connection herewith. To the extent any findings of fact herein are construed to be conclusions of law, they are hereby adopted as such. To the extent any conclusions of law herein are construed to be findings of fact, they are hereby adopted as such.
Findings of Fact
1. Debtor, Progress Drilling & Marine, Inc., (“PDMI”) filed a voluntary petition under Chapter 11 on November 15, 1985.
2. On December 23, 1985 American filed a proof of claim in the amount of $90,000.00.
3. The claim is for a $70,000.00 commission allegedly due as a result of the sale of an oil rig by Debtor to Petra Drilling Corporation (“Petra”), plus $20,000.00 in attorney’s fees.
4. Evidence was taken at hearings on February 23, and March 5, 1990.
5. Unsolicited by the Debtor, Roy Oliver, at that time the agent of American, flew with Wes McKinney, the President of Petra, to Houston, Texas and Morgan City, Louisiana to present the rig and equipment.
6. An unexecuted copy of a purported sales agreement between PDMI and Petra was admitted into evidence as part of Exhibit 1.
7. The agreement in Section (2)(d) calls for any commission owed to be paid by the buyer, Petra.
8. PDMI sold the rig to Petra for $1,400,000.00.
9. The only evidence supporting the allegation of an oral contract is a portion of the taped transcript of a telephone conversation admitted in evidence as Exhibit E. The conversation is between L.H. Robert*64son, at that time. President of PDMI, and Roy Oliver. The relevant portion reads: Oliver: “... and I feel like I’m due a commission on that.” Robertson: “I feel that very possibly that you do.” (sic).
10. The telephone conversation between Robertson and Oliver contemplates that services were rendered for Petra and not PDMI.
11. American is not entitled to relief based on an action in quantum meruit.
Conclusions of Law
1. A contract for the sale of personal property whose value exceeds $500.00 is governed by the Tex.Bus. & Comm.Code § 2.201.
2. Terms with respect to which the confirmatory memoranda of the parties agree may not be contradicted by evidence of any prior agreement or of a contempora-, neous oral agreement. (Tex.Bus. & Comm. Code § 2.202.)
3. The ultimate burden of proof in establishing á correctly filed proof of claim is’ on the claimant, i.e., American. In re Fidelity Holding, 837 F.2d 696 (5th Cir. 1988).
4. An oral contract must be proven by clear and convincing evidence. The contract must define its essential terms with sufficient precision to allow the court to determine the obligations of the parties. Weitzman v. Steinberg, 638 S.W.2d 171 (Tex.App.—Dallas 1982, no writ).
5. If negotiations are too indefinite to constitute a contract, denial of the claim is warranted. Mergenthaler v. Dailey, 136 F.2d 182 (2nd Cir.1943).
6. American has not met the burden of proof on this claimed oral contract.
7. The elements of a cause of action in quantum meruit are:
a) Valuable services rendered.
b) For the benefit of the person sought to be charged.
c) Which were accepted by the person sought to be charged.
d)Under such circumstances as to reasonably notify the person sought to be charged that the claimant was expecting to be paid by the person sought to be charged.
Carr v. Austin Forty, 744 S.W.2d 267 (Tex.App.—Austin 1987).
8. The evidence indicates that the services were rendered for Petra, not PDMI, and that Petra was to pay the commission due to American, if any.
9. American has not met the burden of proving an action in quantum meruit.
Based upon the foregoing Findings of Fact and Conclusions of Law, the court sustains Debtors’ Objection to Claim No. 1 of American Oil Field Exchange, and disallows the claim. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491225/ | ORDER ON APPLICATION FOR FEES BY ADDISON, KETCHEY & HORAN, P.A.
ALEXANDER L. PASKAY, Chief Judge.
THIS IS a Chapter 7 stockbroker liquidation case and the matter under consideration is the Application for Fees filed by Addison, Ketchey & Horan, P.A. (Addison, Ketchey). Addison, Ketchey was authorized by this Court to serve as special counsel for George Hadley, the Trustee in this Chapter 7 liquidation case after the Trustee filed an Application for Authorization To Employ Addison, Ketchey in order to pursue claims in excess of $6 million from E.F. Hutton & Co., Inc., and other major security brokerage houses. Addison, Ketchey seeks fees of $336,414.80 for services rendered to the Trustee for the period from May 7, 1987 through June 21, 1990, claiming to have spent 3,483.4 hours in conjunction with the services rendered to the Trustee.
At the initial hearing on the Application to employ Addison, Ketchey, this Court expressed its reluctance to authorize the employment for the purpose of filing a suit on behalf of the Trustee to recover damages from E.F. Hutton & Co., Inc., in light of the Supreme Court decision in Caplin v. Marine Midland Grace Trust Co., 406 U.S. 416, 92 S.Ct. 1678, 32 L.Ed.2d 195 (1972). In Caplin, the Supreme Court held that a reorganization trustee had no standing to assert against a third party, the trustee for debenture holders, claims on behalf of holders of the debtor’s debentures. Caplin was decided under the Act of 1898; however, Caplin has been held still the law by several circuits. See In re Ozark Restaurant Equipment Co., Inc., 816 F.2d 1222 (8th Cir.1987), cert. denied, 484 U.S. 848, 108 S.Ct. 147, 98 L.Ed.2d 102 (1987) (Chapter 7 trustee had no standing under § 544 of the Bankruptcy Code to bring cause of action on behalf of corporate debtor’s creditors); Williams v. Calif. 1st Bank, 859 F.2d 664 (9th Cir.1988) (Chapter 7 trustee had no standing to bring suit against bank on behalf of debtor’s creditors, even though creditors assigned to trustee their claims.) See also, Koch Refining v. Farmers Union Cent. Exchange, Inc., 831 F.2d 1339 (7th Cir.1987), cert. denied, 485 U.S. 906, 108 S.Ct. 1077, 99 L.Ed.2d 237 (1988).
Notwithstanding this Court’s reluctance to authorize the employment of Addison, Ketchey in light of Caplin and its progeny, the “victims committee” urged that the Application for Employment should be approved because of the potential recovery of $6 million. This Court did ultimately approve the Application for employment of Addison, Ketchey, and the law firm filed *150suit on behalf of the Trustee in the Circuit Court, which was removed to the district court based on diversity jurisdiction. Hadley v. E.F. Hutton & Co., Inc., 707 F.Supp. 509 (M.D.Fla.1989).
In the District Court, the Trustee’s Motion for Summary Judgment on the issue of standing was granted initially in part, and E.F. Hutton’s Motion for Summary Judgment on the same issue was denied. However, because the standing issue concerned a question of law involving a substantial ground for difference of opinion, the District Court certified the standing issue for an immediate interlocutory appeal. On appeal, the Eleventh Circuit Court of Appeals determined that the Trustee lacked standing to bring an action on behalf of creditors of the debtor. E.F. Hutton & Co., Inc. v. Hadley, 901 F.2d 979 (11th Cir.1990). The Circuit Court remanded the case back to the District Court with instructions to dismiss the case for lack of standing. The Circuit Court in its decision relied heavily on the Supreme Court’s decision in Caplin, supra, a case which was of concern to this Court initially when it considered the Application To Employ Addison, Ketchey as special counsel.
Pursuant to the mandate issued by the Eleventh Circuit Court of Appeals, the District Court entered a Final Judgment on September 6, 1990, in favor of E.F. Hutton, and against the Trustee.
In reviewing the Fee Application under consideration, it should be noted at the outset that this Court has no quarrel with the number of hours spent by the law firm, nor does the Court find the blended hourly rate of $96 per hour to be excessive. Thus, based on the lodestar principle, this Court ordinarily would not have any difficulty to conclude that the fees sought by Addison, Ketchey are more than reasonable. Norman v. The Housing Authority of the City of Montgomery, 836 F.2d 1292 (11th Cir.1988). However, in evaluating fee applications, this Court must also consider the factors identified in Johnson v. Georgia Highway Express, Inc., 488 F.2d 714 (5th Cir.1974), which were made applicable to bankruptcy proceedings in In re First Colonial Corp. of America, 544 F.2d 1291 (5th Cir.1977), cert. denied, 431 U.S. 904, 97 S.Ct. 1696, 52 L.Ed.2d 388 (1977). One of the factors in Johnson considers the amount involved and the ultimate results obtained.
Thus, if this Court considers only the results obtained, this Court might be inclined to disapprove the Fee Application in toto. It is clear that the efforts of the law firm, notwithstanding the fact that the quality of the services rendered might have been adequate or even superior, produced no benefit at all for the Debtor’s estate. However, this Court is mindful of the fact that the law firm was not employed to serve as special counsel for the Trustee on a contingency fee basis. Thus, it would be patently unfair to disapprove the Fee Application in toto. Notwithstanding, this Court must be mindful of the fact that considering the Supreme Court’s decision in Caplin, it was likely that the undertaking by the law firm involved substantial risk, and it was also more than likely that the Trustee would have no standing to sue E.F. Hutton.
Thus, while it would be patently unfair to the law firm to disapprove in toto the Application for Allowance, it is equally clear that it is appropriate to reduce the amount of fees. In Hensley v. Eckerhart, 461 U.S. 424, 103 S.Ct. 1933, 76 L.Ed.2d 40 (1983), the Supreme Court held that “the extent of a plaintiff’s success is a crucial factor in determining the proper amount of an award of attorney’s fees under 42 U.S.C. § 1988.” In sum, this Court is satisfied that it is appropriate to consider the lack of success of the law firm when determining the appropriate fee award. Accordingly, this Court is constrained to conclude that some reduction of the amount sought is appropriate under the circumstances, and the award shall not be more than $285,000.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the First Application for Reimbursement of Fees by Addison, Ketchey & Horan, P.A., be, and the same is hereby, approved in part and disapproved in part, and the law firm of Addison, Ketchey & *151Horan, P.A., is awarded fees in the amount of $285,000.
DONE AND ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491226/ | OPINION
WILLIAM F. TUOHEY, Bankruptcy Judge.
This case came before me for hearing on several motions filed in the above-captioned adversary proceeding and a motion to lift the stay in the main case which is related to the subject matter of the complaint. Because the decision on the motions to dismiss and for summary judgment filed by certain defendants, namely the debtor, Leonard A. Cordelia and John D. Yursha, will moot or otherwise affect other motions pending in this proceeding, the court has elected to rule on those other motions at a later time.
The complaint filed by DnC America Banking Corporation (DnC) is a foreclosure complaint wherein DnC seeks foreclosure of the mortgage held by it on the improved real estate which constitutes the assets of the debtor’s estate. This action was commenced in the Superior Court of the State of New Jersey, Chancery Division, in Somerset County, by the filing and service of a *237summons and complaint, filed November 6, 1989, and served November 15.
The defendants filed and served their answer and counterclaim on December 4, 1989;- the petition for relief in this case was filed by the debtor on the following day. The foreclosure action was removed to the United States District Court for the District of New Jersey on December 14, 1989 and was referred this court by order dated January 1, 1990.
In the motion to dismiss the complaint, defendants assert DnC is precluded from bringing the action under state law due to its failure to comply with the registration provisions applicable to foreign banks under the New Jersey Banking Act. N.J.S.A. 17:9A-318. In their motion for summary judgment, defendants request that this court find in their favor on the counterclaims and declare that the mortgages and guarantees they executed are null and void as the fruits of an illegal loan transaction. Defendants do not, however, request that this court nullify the underlying debt; at oral argument, counsel made it clear that it is the nullification of all documents which provide security for the debt which it seeks, and not avoidance of the debt. The debtor also asserts that claim should be treated merely as a general, unsecured claim.
DnC asserts that it is protected by the exemption in the Banking Act contained in N.J.S.A. 17:9A-331. That section provides, in relevant part:
Nothing in this article shall prohibit a foreign bank from ...
(3) enforcing in this State obligations heretofore or hereafter acquired by it in the transaction of business outside of this State ...;
(4) acquiring, holding, leasing, mortgaging, contracting with respect to, or otherwise protecting or conveying property in this State heretofore or hereafter assigned, transferred, mortgaged or conveyed to it as security for, or in whole or in part satisfaction of a loan or loans made by it or obligations acquired by it in the transaction of business outside of this State....
N.J.S.A. 17:9A-331(3 and 4). It is DnC’s argument that the loan was obtained and closed in New York, payments were made in New York, and the mortgage serving as security for the debt is precisely within the exception contained in the statute above-quoted. It therefore asserts that its mortgage constitutes a valid first lien enforceable in the New Jersey state courts, and it is a creditor holding security and should be treated as such.
The instant motions concern matters affecting the administration of the estate, motions regarding the stay and regarding the extent and validity of liens on property of the estate. As such, these are core proceedings under 28 U.S.C. § 157(b)(2)(A, B, G, and K). This opinion constitutes the court’s findings of fact and conclusions of law under Fed.R.Civ.P., Rule 52 and Bankruptcy Rule 7052.
DISCUSSION
DnC was incorporated as a bank under the laws of the State of New York. According to the parties, it is a wholly owned subsidiary of Den Norske Credit Bank, a Norwegian banking concern.
The parties agreed at oral argument that DnC does not fit New Jersey’s statutory definition of a “foreign bank” as stated in N.J.S.A. 17:9A-315,1 but does qualify as a bank under New York law. The New Jersey definition requires that a foreign financial institution offer some or all of the services specified in three statutes or possess certain powers also there specified. See N.J.S.A. 17-9A-24, -25, -28 and -315. Essentially, unless such institution offers *238checking and savings accounts or safety deposit box service, or can act in a fiduciary capacity, it will not qualify as a foreign bank under the New Jersey statute.
DnC neither offers such services nor can act in any fiduciary capacity in New Jersey, according to the concessions made by its counsel at the hearing. It is, therefore, more like an investment company as such is defined in N.J.S.A. 17:16A-1, which provides that an investment company is a corporation, foreign or domestic, which makes, issues, or guarantees investment contracts and is not, among other things, a bank.
Both the provisions of law relating to foreign banks and relating to investment companies require that banks or companies doing business in this state be registered, which requires them to provide financial data on an annual basis and, in certain instances, to deposit funds as bond protection. N.J.S.A. 17:9A-317 — 325 and 17:16A-2 — 6. The statutory scheme also provides for minimum financial deposits, safeguards, and for regulation by the Commissioner of Insurance and Banking, to the extent necessary to protect depositors and customers in this State. Ibid.
In this case, DnC has asserted it is protected by the exemption provision of the Banking Act which excludes foreclosure actions of the type at issue from compliance with the registration requirement. The debtor concedes DnC qualifies as a bank under the applicable New York law defining banks, but asserts it must also qualify under New Jersey law in order to take advantage of the exemption DnC asserts applies to this matter.
New Jersey’s laws governing the creation of banks and maintenance of their business is a comprehensive statutory scheme. It has defined most (if not all) types of financial institutions which may seek to do business in this state, including foreign banks.
It is a cardinal rule of statutory construction that the intention of the Legislature is to be derived from a view of the entire statute and that all sections must be read together in the light of the general intent of the act so that the auxiliary effect of each individual part of a section is made consistent with the whole. [Citations omitted.]
When the Legislature has clearly defined a term, the courts are bound by that definition. [Citations omitted.]
Febbi v. Division of Employment Security, 35 N.J. 601, 174 A.2d 481 (1961).
The New Jersey banking statutes clearly define “foreign bank” (N.J.S.A. 17:9A-315) and then provide exemptions for the transaction of certain business activities of “foreign banks” from the regulatory scheme. N.J.S.A. 17:9A-331. Since DnC does not qualify as a “foreign bank,” and since only a foreign bank as defined in the New Jersey statute may take advantage of the exemption provision, DnC cannot claim a privilege which it is not statutorily qualified to claim.
It is interesting to note that DnC has never sought to be treated as anything other than a foreign corporation with regard to its business activities in this State, as evidenced by the reports of its business activities filed annually for the years since this and other loans were made by it to New Jersey residents which were secured by mortgages. These reports are only required of foreign corporations under the Reporting Act, N.J.S.A. 14A:13-10, and not of foreign banks American Bank & Trust Co. of Pennsylvania v. Lott, 99 N.J. 32, 490 A.2d 308 1985). It follows that a decision was made at some point by a person in authority with DnC that it was a foreign corporation under New Jersey law rather than a foreign bank; DnC may not now assert a different identity in this state in order to evade the effect of its failure to register under the Corporations Act, N.J. S.A. 14A:1-1 et seq., and proceed with its foreclosure of the debtor’s mortgage under an exemption granted to a different type of entity which is not generally available. It is, in fact, estopped to do so.
In like vein, DnC’s assertion that it is empowered by the New York laws under which it is incorporated to offer the services and possess the powers which a bank must offer or possess to meet the New *239Jersey definition of “foreign bank” is to no avail. The New Jersey statutes do not refer to nebulous authorizations; the language is clear and unambigious, and requires that the bank seeking to qualify under N.J.S.A. 17:9A-315 must currently offer those services or have those powers. Since DnC does not, it cannot qualify under the literal requirements of the statute.
In any event, neither foreign banks nor foreign corporations who have failed to comply with applicable provisions of law may bring an action to enforce obligations in this state. N.J.S.A. 17:9A-330A and 14A:13-11. DnC has complied with neither Act and cannot claim protections offered under them. It follows that it may not be heard in state court on a request to enforce obligations of New Jersey residents.
DnC next argues that regardless of whether it should be treated as a foreign bank, corporation, or investment company, any bar to access to the courts contained in the statutes violates the interstate commerce clause of the Constitution of the United States. Const. Art. I, § 8, cl. 3. It asserts such a ban, being an enforcement provision of an unconstitutional registration requirement, cannot be enforced by this court and cites in support thereof First Family Mortgage Corp. v. Durham, 108 N.J. 277, 528 A.2d 1288 (1987).
The “negative aspect” of the Commerce Clause prohibits state regulation of business which amounts to economic protectionism. New Energy Co. of Indiana v. Limbach, 486 U.S. 269, 108 S.Ct. 1803, 100 L.Ed.2d 302 (1988). When a state law clearly discriminates against interstate commerce, it will be held violative of this clause unless it may be justified by a demonstration that it furthers legitimate state interests which cannot be served by less burdensome means. Ibid; Maine v. Taylor, 477 U.S. 131, 106 S.Ct. 2440, 91 L.Ed.2d 110 (1986).
The United States Supreme Court has recognized the importance of banking and financial services as matters of local concern. In Lewis v. BT Investment Managers, Inc., 447 U.S. 27, 100 S.Ct. 2009, 64 L.Ed.2d 702 (1980), the court reviewed a Florida law which prohibited ownership of local investment and trust companies by foreign concerns. The court held the limitations of the commerce clause do not permit the states to prohibit ownership of such companies where ownership of nonfinancial companies is not so restricted. Ibid., 447 U.S. 27, at 43, 100 S.Ct. 2009, at 2019.
In Lewis, as here, the foreign financial institution argued the statute prohibited interstate commerce and should be struck down as protectionist legislation. The court in Lewis, however, indicated in dicta that not all such statutes run afoul of the commerce clause; rather, in that case the legitimate local governmental purpose was not furthered by the statute due to its uneven application. Ibid, 447 U.S. 27, at 44, 100 S.Ct. 2009, at 2019-20.
In this case, the. New Jersey statutes governing establishment and operation of domestic financial institutions are quite comprehensive, and the organizational and financial data which such corporations are required to report to the Commissioner of Banking and Insurance is aimed at providing the regulatory agency with information necessary to ascertain the health of banking community members. It furthers the state’s interest in protecting its citizens from the evils which could result from bank failure by stringently requiring domestic banks to provide information necessary to determine that health.
In contrast, that information is not readily available from foreign financial institutions incorporated under the laws of other states or countries. Therefore, the regulatory scheme applicable to foreign banks requires them to report summaries of such information as is required to determine that they are: duly chartered and existing; of sound financial health, and; capable of providing services to New Jersey customers which they can expect of domestic corporations of similar ilk.
The necessity for such information is' more patent today than in 1980 when Lewis was decided, and the Supreme Court noted the profundity of local concern over bank chartering and regulation. Lewis, 447 U.S. 27, 42, 100 S.Ct. 2009, 2018-19, 64 L.Ed.2d *240702 (1980). In these days of savings and loan failures, bank failures, and even the failure of the Federal Savings and Loan Insurance Corporation, the governmental purpose to protect it citizenry is best served by regulation requiring the registration of all banking corporations, not just domestic ones, and the concomitant financial reporting. In a financial climate such as we now face, where banking problems have created a pervasive fear in depositors and eroded the public confidence in the banking system, regulations governing reporting; qualification to do business, and providing for minimum data necessary to inspection for fiscal health ought to be strictly enforced. Under the facts and circumstances of this case, the court sees no violation of the commerce clause through application of the regulations at issue to DnC, and holds it is properly governed thereby.
In light of the above, the court must now determine the effect DnC’s failure to comply with valid and enforceable state regulations has upon the mortgage securing the debtor’s indebtedness. The New Jersey legislature has determined that entities doing business in this state in violation of the regulations governing financial institutions and corporations are guilty of a misdemeanor. N.J.S.A. 14A:13-20, 17:9A-316 and 330, and 17:16A-2 and 20. This evidences an intent by the legislature to prohibit such business every bit as evident as that exhibited by the bar to use of the state’s courts discussed above.
Generally, the law will not permit the party doing business in violation of the law to profit from the illegal contract resulting therefrom and the contract, together with all other documents executed therewith or in furtherance thereof, are declared void. In re Kennerly, 90 B.R. 781 (Bankr. D.S.C.1987). In cases controlled by federal law, no such contract can be enforced because to do so is to compel performance of obligations which are created against the public policy as established by the laws enacted by Congress. Kaiser Steel Corp. v. Mullins, 455 U.S. 72, 102 S.Ct. 851, 70 L.Ed.2d 833 (1982).
In this case, the State of New Jersey has determined the appropriate remedy is to bar access to the courts to enforce the obligations created by such contracts. The only obligation created by these contracts which is governed by New Jersey law and enforceable only in its courts is the mortgage securing the underlying loan. It is this court’s opinion that the mortgage cannot be enforced under the statutory scheme for the reasons discussed above.
Under 11 U.S.C. § 506, only claims allowed by the court and secured by liens on property of the estate are secured claims. Since the instrument creating the security for the debt is void, c.f Abrams & Co., Inc. v. Dewey’s Garage, Inc., 58 N.J. Super. 266, 156 A.2d 169 (App.Div.1960) (identical result in case construing New York law), the debt must be treated as a general, unsecured claim due to the lack of an enforceable lien. 11 U.S.C. §§ 101(33), 502(b)(1), and 506(a). The court therefore holds DnC is a general creditor of this estate holding an unsecured claim.
. That statute provides as follows:
For the purposes of this article, "foreign bank” shall mean a corporation, other than a banking institution, organized under the laws of the United States, a territory or possession of the United States, another state, or a foreign government, which is authorized by the laws under which it is incorporated to exercise some or all of the powers specified in paragraph (4) of section 24, paragraphs (4), (5) and (13) of section 25, and paragraphs (3), (4), (5), (6), (7), (8), and (9) of section 28. [Reporter’s notes omitted.] | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491227/ | ORDER
J. VINCENT AUG, Jr., Bankruptcy Judge.
This matter is before the Court pursuant to the Motion for Summary Judgment brought by La Salle Street Fund Inc. of Delaware (hereinafter La Salle or landlord) (Doc.1981); La Salle’s Brief in Support *314(Doc.1982); La Salle's Supplemental Brief in Support of Motion for Summary Judgment (Doc.2026); Montgomery Ward, Inc.’s Memorandum in Opposition to La Salle’s Motion (Doc.2050); and Debtors’ Reply to La Salle’s Motion (Doc.2053). A hearing was held on October 25, 1990.
The parties stipulated that this is a core proceeding pursuant to 28 U.S.C. § 157(b)(2) and that this Court has jurisdiction pursuant to 28 U.S.C. §§ 157 and 1334.
The underlying dispute here concerns the Debtors’ Motion for Authority to Assume and Assign their twenty-five year lease and operating agreements at the Valley View Shopping Center in Dallas, Texas, to Montgomery Ward, Inc. for $5 million. The mall is owned by La Salle Street Fund, Inc. and the lease agreement was executed August 1, 1982. Debtors’ department store, Bloomingdale’s, vacated its leased space at Valley View on August 18, 1990. La Salle opposes the proposed lease assignment to Montgomery Ward for various reasons and has refused to consent to the transfer. The lease agreement also contains provisions restricting and conditioning the assignment of the lease to a third party.
At the hearing the Court denied La Salle’s summary judgment motion and instructed that this written decision would follow. The Court then conducted an evi-dentiary hearing to determine adequate assurance of future performance, pursuant to 11 U.S.C. § 365(f)(2)(B) and § 365(b)(3). The parties are to submit proposed Findings and Fact and Conclusions of Law by December 14, 1990. The Court then will rule on the Debtors’ request to assign the lease.
This decision deals solely with La Salle’s motion for summary judgment, which the Court denies for the reasons stated below.
For purposes of its motion for summary judgment, La Salle contends that the Bankruptcy Code, specifically 11 U.S.C. § 365(c)(1)(A), honors Texas contract law, which prohibits the proposed lease. assignment if La Salle withholds its consent. However, the Debtors assert that federal bankruptcy law, specifically § 365(f)(1), abrogates the Texas contract law and the lease agreement’s anti-assignment language. The Debtors contend that § 365(f)(1) allows assignment if the conditions of § 365(f) and § 365(b)(3) are met, including adequate assurance of future performance by assignee Montgomery Ward.
The central Code section in dispute, § 365(c)(1)(A), states in pertinent part:
(c) The trustee [which includes the debt- or in possession] may not assume or assign ... any executory contract ... if ... (1)(A) applicable law excuses a party, other than the debtor, to such contract ... from accepting performance from ... an entity other than the debtor or the debtor in possession ... and (B) such party does not consent to such assumption or assignment ... (emphasis added).
The term “applicable law,” emphasized in the above Code section, is at the heart of this conflict over statutory interpretation. La Salle contends that Tex.Prop.Code Ann. § 91.005 (Vernon 1984) is “applicable law” under § 365(c)(1)(A). Section 91.005 provides:
During the term of a lease, the tenant may not rent the leasehold to any other person without the prior consent of the landlord.
La Salle maintains this statutory rule prohibiting subletting also forbids assignment. In re Lile, 103 B.R. 830, 839-40 (Bankr.S.D.Tex.1989), citing Dillingham v. Williams, 165 S.W.2d 524, 526 (Tex.Civ. App.—El Paso 1942, writ ref’d w.o.m.).
The Debtors argue that the Texas law does not fall under § 365(c)(1)(A) and the Court should decide the propriety of the proposed assignment under § 365(f)(1) which provides as follows:
Except as provided for in subsection (c) of this section, notwithstanding a provision in an executory contract or unexpired lease of the debtor, or in applicable law, that prohibits, restricts, or conditions the assignment of such contract or lease, the trustee may assign such contract or lease under paragraph (2) of this subsection, (emphasis added).
*315From the outset the Court is hampered by a Code section that is ambiguous, as “applicable law” is not defined in § 365(c) and its legislative history offers little guidance. In re Fulton Air Service, Inc., 34 B.R. 568, 572 (Bankr.N.D.Ga.1983).
Because of the uncertainty, courts have been asked to reconcile § 365(c), which “excuses” an objecting party from accepting an assignment if “applicable law” precludes it, and § 365(f), which allows for assignment notwithstanding “applicable law” that “prohibits” it, except as provided in § 365(c). To add to the mix, the Court is sensitive to the congressional policy favoring assignments. The Bankruptcy Court in the ease of Fulton, Id. at 572-573, aptly expressed this concern:
The Court is mindful of Congress’ intent to allow a financially distressed entity to reorganize. In many instances, an unexpired lease is the entity’s major asset. To deprive it of the benefits which derive from the assignment of such a lease, would be to deprive it of a realistic chance of successfully reorganizing.
La Salle urges the Court to adopt the plain meaning of “applicable law” and to hold that § 365(c)(1) includes any applicable nonbankruptcy law that excuses a party from accepting performance from someone other than the debtor.
The Debtors cite several lower court cases which suggest that § 365(c)(1) should be limited to personal service contracts, but La Salle successfully refutes that argument by reference to three federal appeals court cases, In re West Electronics, Inc., 852 F.2d 79, 83 (3rd Cir.1988); In re Pioneer Ford Sales, Inc., 729 F.2d 27, 29 (1st Cir.1984); and In re Braniff Airways, Inc., 700 F.2d 935, 943 (5th Cir.1983). These appellate courts have not interpreted § 365(c)(1) so narrowly as to confine it to personal service contracts.
Debtors also argue that § 365(c)(1) should except a lease from assignment primarily in cases where the “applicable law” involves overriding public policy concerns. The Court finds merit in this argument.
Two federal appeals court cases which held that § 365(c) excused acceptance both involved “applicable law” of overriding public policy significance. In Braniff, 700 F.2d at 941, public air traffic safety was at risk. The “applicable law” in Braniff were federal regulations which gave the administrator of Washington’s National Airport sole authority to decide which carriers could lease space at the airport. Braniff tried to assign its lease to Pacific Southwest Airlines over the airport’s objection. The Fifth Circuit Court of Appeals held that applicable federal law excused the National Airport administrator from accepting performance from Pacific Southwest Airlines. Consequently, Braniff could not assign the lease without the administrator’s consent.
The Third Circuit case of In re West Electronics, Inc., 852 F.2d 79, concerned 41 U.S.C. § 15, which required the government’s consent to an assignment in a situation of obvious public importance — the production of military equipment. The dispute in West Electronics concerned a debtor’s proposed assumption of a contract to supply a substantial number of AIM-9 missile launcher power supply units to the Air Force. The Court of Appeals held that the federal law was “applicable law” pursuant to § 365(c)(1) which excused the government from forced acceptance of the contract.
We conclude that assignment of a contract calling for the production of military equipment is precisely what Congress intended to prevent when it prohibited assignments in 41 U.S.C. §15_ It therefore necessarily follows that under 11 U.S.C. § 365(c)(1) West, as a debtor in possession, cannot assume this contract, (emphasis added) Id. at 83.
Unlike West Electronics, the Texas contract law at issue here is precisely what Congress did not intend to protect when it enacted § 365(c). La Salle wants this Court to elevate Texas contract law to the kind of law that regulates important public rights, such as the public air safety in Braniff, or the regulation of government contracts for production of military equipment, as in West Electronics. In contrast *316the Texas law here deals with private rights between parties with no overriding public policy implications. Indeed, the interests which the Texas law protects are the proper care of the leasehold and payment of rent. Heflin v. Stiles, 663 S.W.2d 131, 134 (Tex.Ct.App.1983).
Further, La Salle's interpretation of § 365(c)(1) runs contrary to congressional intent favoring lease assignments. In re Howe, 78 B.R. 226, 230 (Bankr.D.S.D.1987), quoting In re Evelyn Byrnes, Inc. 32 B.R. 825, 829 (Bankr.S.D.N.Y.1983). By La Salle’s reasoning, any governing authority could promulgate laws which totally prohibit the assumption and assignment of executory contracts or leases, thereby thwarting the legislative purpose of § 365 altogether. Fulton, 34 B.R. at 572.1
La Salle relies upon another appellate court case, In re Pioneer Ford Sales, Inc., 729 F.2d 27 (1st Cir.1984), which this Court finds unpersuasive because the thrust of the decision dealt with an adequate assurance analysis, which is not at issue in this motion. In Pioneer Ford the Court reversed an order allowing assignment of an automobile franchise to a substitute dealer. The Rhode Island law in that case, R.I.Gen. Laws § 31-5.1-4(C)(7), allowed a motor vehicle manufacturer to veto an assignment of a franchise if the veto is reasonable. The Court categorized the law as falling within § 365(c)(1), but most of the discussion about § 365(c)(1) pertained to why § 365(c)(1) is not confined to personal service contracts, although the contract appeared to have the flavor of a personal service contract anyway.
In addition, the Court notes that § 365(f)(1) applies with special force in respect to assignments of shopping center leases. Although § 365(f)(1) requires a showing of adequate assurance of future performance before any executory contract or unexpired lease may be assigned, Congress enacted a special provision, § 365(b)(3), to deal with adequate assur-anee in regard to shopping center leases. Consequently, § 365(b)(3) provides a specific analytical scheme for protecting the interests of shopping center landlords, while expressly contemplating that shopping center leases could be assumed and assigned. We therefore find that § 365(b)(3) provides La Salle with all the protections it is due under the Bankruptcy Code. In re Joshua Slocum, Ltd., 99 B.R. 261, 266 (Bankr.E.D.Pa.1989).
The fact that Congress carved out a special category for shopping center leases in the Bankruptcy Code is further indication that Congress recognized such leases as potential major assets of a debtor, sometimes essential to a debtor’s reorganization. Section 365 reflects a “clear Congressional policy favoring assumption and assignment of executory contracts and leases.” In re Howe, 78 B.R. at 230. All these facts militate against La Salle’s view that Congress enacted § 365(c) to enable any state law to easily extinguish a shopping center lease’s assignability.
In summary, on the basis of the prevailing federal appllate cases, and because of the Bankruptcy. Code’s special statutory framework for shopping center leases contained in § 365(b)(3), the Court finds that § 365(f)(1) applies to this case, not § 365(c)(1). Accordingly, La Salle’s Motion for Summary Judgment, brought pursuant to Fed.R.Civ.P. 56 and Bankruptcy Rule 7056, is hereby DENIED.
IT IS SO ORDERED.
. The Bankruptcy Court in Fulton confined § 365(c) to excepting nondelegable personal service contracts from assignment, rejecting the Fifth Circuit Court of Appeals' broader view in Braniff, 700 F.2d at 943, that (c) also applies to other contracts. This Court concurs with the Braniff holding on that issue. Nevertheless, much of the other analysis in Fulton applies in the instant case. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491228/ | MEMORANDUM
TIMOTHY J. MAHONEY, Chief Judge.
This memorandum contains the findings of fact and conclusions of law required by Fed.R.Civ.P. 52 and Fed.Bankr.R. 7052. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(J).
Findings of Fact, Conclusions of Law and Discussion
This debtor purchased certain assets used in his shoe repair business and gave an unsecured note for the obligation. His wife also signed the note and the agreement of purchase. The obligation was approximately $33,000.00 in February of 1988. The debtor operated the shoe repair business and used the equipment purchased. According to the agreement between the seller and the debtor and his wife, Plaintiff’s Exhibit 5, a security agreement was included which granted a security interest in all of the personal property of the business. In addition, by separate agreement, a diamond ring worth several thousand dollars was treated as security and the seller took possession of the ring pending payment.
The shoe repair business included certain revenues from a contract to repair upholstery for a local trucking company. In late 1988 or early 1989, the debtor lost the *377contract to a lower bidder. His revenues declined and he was required to incur credit card debt and borrow some funds from his wife for the continued operation of the business. His wife was not directly involved in the business with regard to shoe repair or upholstery, but occasionally acted as receptionist and counter person.
In January of 1989, the plaintiff in this case obtained a judgment against debtor in the amount of $12,500.00 in the State District Court. Other lawsuits apparently were filed against the debtor for various reasons. Shortly after the judgment was obtained, the debtor contemplated filing bankruptcy to protect himself, but did not do so until late summer of 1989.
On May 1, 1989, the debtor transferred all of his interest in the assets of the business to his wife and she assumed all of the obligation to the seller and agreed to hold the debtor harmless from any claim by the seller. That sale was represented by a bill of sale, Defendant’s Exhibit 101 dated May 10, 1989, and recorded with the County Clerk of Douglas County, Nebraska, on June 26, 1989.
At the time of the transfer of the assets, the debt to the seller was approximately $15,000.00. The value of the equipment which was the subject of the debt was less than $5,000.00.
The debtor filed a Chapter 7 bankruptcy in August, 1989, and fully described the transfer of the assets to his wife. This creditor filed an objection to discharge under Section 727(a)(2) of the Bankruptcy Code. That section provides that the Court shall grant the debtor a discharge unless:
(2) the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed—
(A) property of the debtor, within one year before the date of the filing of the petition ...
This Court finds as a fact that the debtor did not transfer property within one year of bankruptcy with the intent to hinder, delay or defraud creditors. The property that was transferred was the subject of a security interest. The debt against the property was approximately $15,000.00 and the property was worth less than $5,000.00. The debtor’s wife, although a cosigner to the note, thereby being fully liable on the note, agreed, when taking a transfer of the assets, to hold the debtor harmless from any claim on the obligation to the seller. Such “hold harmless clause” is adequate consideration for the transfer.
In addition, the wife was not only completely liable pursuant to the original note, but may have actually been a joint owner, with the debtor, in1 all of the assets purchased. Because the documents used for the original purchase did not define the interest of the husband and wife, it is not clear who was the actual owner, whether the ownership was in common or joint tenancy. After the original purchase, the debtor operated the business as if it were his own and the parties testified that he operated it as a sole proprietorship.
The creditor presented expert testimony that the business was worth over $30,-000.00 at the time of the transfer. The expert based his opinion upon the capitalization of the earnings of the business, and not on the asset value. The expert also did not take into consideration the market for such a business in the community, nor did it take into consideration the amount of hours worked by the debtor at the time of the transfer. Although the expert testimony should be given credence, it is not necessarily binding upon the Court. The expert valued the property as if this was a going business that could be sold to an interested party who had the capacity to operate the business, repair shoes, market the services, obtain the right to use the leasehold, and work six days a week.
This Court finds as a fact that the business actually consisted of certain pieces of equipment that were worth less than $5,000.00 and the blood, sweat and tears of the debtor. Without the debtor’s personal services to the business, it was worth nothing more than the sale value of the equip*378ment. The Court concludes this by viewing the evidence after the transfer took place in May of 1989. Mrs. Green did not take over and operate the business. All she did was keep the books, which probably helped the management of the business considerably. Mr. Green continued to provide the personal service labor necessary to perform the boot and shoe repair business. For such service he received a minimum wage. She was able to pay off the debt obligations from the net earnings of the business because he continued to work for her in a labor capacity. Without his minimum wage labor services, she would have required, as would any buyer, another shoe repair person to perform the labor services. Because of these facts, and because this was a sole proprietorship consisting only of equipment and “good will” attributable to the operator, this Court does not accept the value of the business as anywhere close to $30,000.00 at the date of transfer.
The only evidence that the creditor relies upon, in addition to the value of the business, to convince the Court that this was basically a fraudulent transfer under Section 727(a) is that a judgment had been entered a short time prior to the transfer. This Court acknowledges that all of the circumstances must be considered when looking at a Section 727(a) complaint. However, this Court cannot find as a fact that there was any intent to hinder, delay or defraud creditors. The transfer was duly recorded and eventually properly listed on the bankruptcy schedules. The debt- or did obtain valid consideration for the transfer. He was relieved of a debt of $15,000.00 for the transfer of $5,000.00 worth of equipment. His creditors, other than the original seller, had the opportunity to pursue him, garnish his non-exempt wages and any other property that he had. If he had not transferred the assets, those creditors would have been no better off. He would have encumbered equipment and a personal service income from a sole proprietorship. The creditor could still have garnished the revenues of the business and the result of such a garnishment would have been that the business could not have paid its expenses and would have shut down. Neither Mr. Green nor any other laboring person is required to labor for the benefit of the creditors and he is not and was not in May of 1989 required to continue to perform labor services to generate non-exempt funds for the benefit of a judgment creditor. The fact that he relieved himself of certain obligations as well as a minimal amount of assets, does not amount to fraud.
Therefore, the Court finds in favor of the debtor and against the plaintiff. Judgment granting the debtor a discharge shall be entered by separate journal entry. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491229/ | MEMORANDUM OPINION AND ORDER
MICKEY DAN WILSON, Chief Judge.
Plaintiff brings this action against the Debtor Defendant for determination as to the dischargeability of particular debts pursuant to 11 U.S.C. § 523(a)(5). The parties stipulate that this Court has jurisdiction of the subject matter and of the parties, pursuant to 28 U.S.C. § 1354 and § 157 and that this is a core proceeding.
The sole issue remaining to be decided by the Court is whether or not the attorneys fees and costs of the Plaintiff are in the nature of alimony, maintenance or support and are accordingly, nondisehargeable. The Defendant confesses that the award of $30,000.00 for support-alimony is nondis-chargeable, as well as the support for the children of the parties, as required by the decree of divorce.
Facts presented at time of trial reveal that the Plaintiff and Defendant were married on August 21, 1965 and of said marriage two children were born, each of *435which have now reached majority. In addition, one child was adopted by the parties and is presently a minor. That on December 14, 1989, the parties were divorced. Said Decree of Divorce required the Defendant to pay child support of $810.00 a month and to keep current a medical insurance policy and in addition, the Defendant was responsible for 82% of the medical expenses not covered by said insurance policy. In addition, the Defendant was required to support the Plaintiff in the total sum of $30,000.00 payable at $500.00 a month. Each party was awarded property as their separate property, which took into consideration the property acquired during marriage and the indebtedness outstanding, if any, as well as the property which the Plaintiff had acquired in the future earnings of the Defendant, as alimony in lieu of property settlement (see Hubbard v. Hubbard, 603 P.2d 747 (Okl.1979)).
In addition, Plaintiff sought her attorneys fees in the sum of $17,964.05 and her expert witness fees in the sum of $10,-626.70. The Decree of Divorce and Order of the Court of December 14, 1989 was reduced to writing and submitted to the Court and filed of record on March 9, 1990. The application of Plaintiff for its attorneys fees was filed on January 5, 1990 and heard on January 22, 1990 and a journal entry of judgment was reduced to writing and filed March 9th, 1990. The journal entry recited that Plaintiffs application for attorneys fees was granted and Plaintiff was awarded a judgment against the Defendant in the amount of $13,000.00 as and for her attorney fees, plus interest and further judgment for the Plaintiff in the amount of $2,000.00 as and for expert witness fees, plus interest. The journal entry also recites “the Court finds that Plaintiffs application for attorneys fees, costs and expert witness fees should be sustained and the Court further finds that such attorneys fee, costs and expert witness fee awarded is intended to be in the nature of additional support for Plaintiff from Defendant.”
CONCLUSIONS OF LAW
“What constitutes alimony, maintenance or support will be determined under the bankruptcy law, not state law.” Senate Report No. 95-989, 95th Cong.2d Sess. 79, U.S.Code Cong. & Admin.News 1978, pp. 5787, 5865 (see In re Goin, 808 F.2d 1391 (10th Circ.1987); and Sylvester v. Sylvester, 865 F.2d 1164 (10th Circ.1989)).
In the 1980 case of In re Bell, 5 B.R. 653 (Bankr.W.D.Okl.1980) the Court stated “the new Code leaves undisturbed the principle that attorneys fee dischargeability or nondischargeability must rise or fall with the primary debt. Since the attorney fee herein was directly related to the awards of alimony, maintenance and support, specifically including $300.00 monthly support payments for four minor children, alimony of $12,000.00 payable $200.00 monthly, and the $550.00 arrearage in temporary support, such fee is nondischargeable.” The acquisition of child support and spousal support necessarily requires the incurring of attorneys fees to determine the same and the cost of acquiring the same must necessarily take on the nondischargeable attributes of what was acquired. Thus, the often used quote “dischargeability or non-dischargeability of attorney fee assessed against debtor in divorce action must rise or fall with nature of primary debt owed by debtor to former spouse.” This language comes from the syllabus of the Court prepared by West Publishing Company in the In re Bell, supra, case. This is an incomplete statement of applicable law for Judge Kline, in his In re Bell decision, went on to say that “since the attorney’s fees herein was directly related to awards of alimony, maintenance and support ... such fee is nondischargeable.”
A more thorough reasoned application of this principle requires the Court, if possible, to determine for what reason the attorney’s fees were incurred. In the event said attorney’s fees were incurred for the acquisition of alimony, maintenance or support, either for the spouse or children, then said attorney’s fees so incurred should take on the character of said obligation and be nondischargeable. In the event said attorney’s fees were incurred *436for the purposes of determining property division or determining the settlement awards then said attorney’s fees should take on the character of the type of award for which the attorney’s fees were incurred, and be dischargeable.
The problem comes about in the allocation of attorney’s fees, some for child support and related matters and some for spousal support and related matters; and some for property division and related matters (dischargeable obligations). In the event the attorney’s fees were incurred concerning property division, settlement or matters related thereto, then said attorney’s fees should be dischargeable. In the event the Court is unable to decipher for what purpose the attorney’s fees were incurred, then the same must take on the character of a nondischargeable debt.
In the case at bar, the Plaintiff sought substantial attorney’s fees in excess of what was awarded by the State Court. The Plaintiff had sought $17,964.00 in attorney’s fees and $10,626.00 in expert witness fees and upon hearing, the State Court, in its discretion, awarded the Plaintiff a judgment for $13,000.00 as and for attorney’s fees and $2,000.00 as and for the expert witness fees. Of critical importance is the State Court’s findings that said award of attorney’s fees and witness fees “are intended to be in the nature of additional support for the plaintiff from the defendant.” Thus the State Court, in its wisdom, has by its own language determined the amount of attorney’s fees and witness fees which should be assessed as a part or a parcel of the alimony and child support award by its specific finding of the fact that these awards were, in fact, in the nature of additional support for the Plaintiff from the Defendant.
Accordingly, the Court finds that the following obligations owed by the Defendant and to the Plaintiff are an exception to the discharge and nondischargeable, to-wit:
1. Child support in the sum of $810.00 per month, plus medical insurance and 82% of any deductible and medical expenses.
2. Alimony to the Plaintiff in the sum of $30,000.00.
3. Expert witness fees in the nature of maintenance and support of the spouse and child in the sum of $2,000.00, plus interest thereon at the rate of 12.35% from January 22, 1990 until paid.
4. Attorneys awarded to or on behalf of the Plaintiff in the sum of $13,000.00, plus interest thereon at the rate of 12.35% from January 22, 1990 until paid.
Plaintiff shall prepare and submit a judgment in accordance with this memorandum decision and order.
AND IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491236/ | PEDER K. ECKER, Bankruptcy Judge.
The above-captioned debtors brought the same issue before this Court of what constitutes disbursements for the computation of United States Trustee (UST) fees under 28 U.S.C. § 1930(a)(6). The Court combines adjudication of both in this letter decision which constitutes findings of fact and conclusions of law pursuant to Bank.R. 7052. The instant matters are core matters under 28 U.S.C. § 157(b)(2)(A) and (B). The debtors’ circumstances are similar, but not identical.
Wernerstruck, Inc. (Wernerstruck), during late 1988 and 1989, sold stored crops amounting to approximately $896,000. Wernerstruck gave its bank a large check, and the bank’s decision to cease working amicably with Wernerstruck caused it to file Chapter 11. A new banking arrangement was subsequently entered into. Pursuant to a settlement agreement, extra payments made to the bank were applied to the amount owing but could be drawn on for operating expenses by the debtor. Wernerstruck tendered to the bank about $336,978 in advance payments to gain advantage of interest payments applied because the debtor-in-possession account earned no interest. Wernerstruck withdrew approximately $200,000-$300,000 for farming operations. Wernerstruck asks whether the netting out of advance payments tendered against amounts withdrawn by the debtor is proper for determining the amount of disbursements for calculation under 28 U.S.C. § 1930(a)(6). The UST argues that disbursements constitute any payment of a debtor to a creditor, irregardless of Wernerstruck’s ability to borrow against advance payments to the bank. Wernerstruck maintains that taxing the UST fee on any type of payment made acts as a penalty or a duplicative fee on amounts deposited and subsequently withdrawn, since the bank lacked an absolute right to those funds.
Brandon Foodliner, Inc. (BFI), like Wer-nerstruck, raises the disbursements issue. BFI operates a grocery store. A stipulation between the grocer’s principal creditor and the debtor requires BFI to maintain a certain minimum level of inventory. Replacement of goods, to achieve the minimum level of inventory, occurs many times in a grocery store because there is a high turnover in volume coupled with a low price markup. BFI maintains one level of inventory throughout the month, replenishing it as customers purchase goods off the shelf. BFI reasons that its inventory should be subject to the disbursement computation only once, at the mandatory inventory level.
UST fees are calculated pursuant to 28 U.S.C. § 1930(a)(6). UST fees are computed on “disbursements.” 28 U.S.C. § 1930(a)(6). The fees increase in percentage as a debtor’s disbursements rise, resembling a gross tax on disbursements. The legislative history does not discuss disbursements. The UST must make a good faith determination of debtor’s disbursements in calculating the amount of quarterly fees. In re Flowers by Mike & Ray, Inc., 95 B.R. 31, 34 (Bankr.D.Md.1988). A debtor’s failure to make outstanding quarterly payments due the UST will not always prevent granting a debtor’s motion for voluntary dismissal of the case. Matter of Markhon Indus., Inc., 100 B.R. 432, 436 (Bankr.N.D.Ind.1989); In re Rose, 86 B.R. 439, 442 (Bankr.E.D.Pa.1988).
*1020Interpretation properly begins with the express language of the statute. U.S. v. Ron Pair Enters., Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 1030, 103 L.Ed.2d 290 (1989). 28 U.S.C. § 1930(a)(6) expressly calculates the UST fee on a debtor’s “disbursements.” A fundamental canon of statutory construction is that words shall be interpreted pursuant to their ordinary, common meaning. Perrin v. U.S., 444 U.S. 37, 42, 100 S.Ct. 311, 314, 62 L.Ed.2d 199 (1979). In general, “disbursement” means payment, to put out, or expend. 12A Words and Phrases, Disbursement (1954 & 1990 supp.); Black’s Law Dictionary (5th ed. 1979). Disbursement’s common and ordinary meaning shall be applied by the Court.
The scant case law on what constitutes a disbursement follows the plain language of the statute. 28 U.S.C. § 1930(a)(6)’s “disbursements” are not limited to postpetition payments made to pre-petition creditors, but rather encompass all expenses paid by a debtor. In re Ozark Beverage Co., Inc., 105 B.R. 510 (Bankr.E.D.Mo.1989). In addition, amounts disbursed by a party other than the debtor are “constructive disbursements” which are not subject to Section 1930(a)(6)’s disbursement calculation. In re Hays Builders, Inc., 95 B.R. 79 (Bankr.W.D.Tenn.1988), amended on reconsideration, 96 B.R. 142 (Bankr.W.D.Tenn.1989).
The UST System is self-funded, but not a profit tool for the Government. Hays, 96 B.R. at 144. Equity says an undue hardship should not stand in the way of reorganizing, and no gutting of the UST System occurs by recognizing a “constructive disbursement” exception. Id. The court, in Hays, looked to 28 U.S.C. § 1930(a)(6)’s express language, equity, and examined the funding purpose to hold that the tendering of funds from a non-debtor does not constitute disbursements for the purpose of calculating the UST’s fee.
A court must carefully scrutinize a UST fee request in order to prevent the UST from overreaching to get a larger share of the bankruptcy estate than it is entitled to. In re Juhl Enters., Inc., 921 F.2d 800 (8th Cir.1990) (Heaney, J., dissenting). The UST System is designed to be self-funding, and an ordinary and common definition of disbursement should permit an adequate level of funding.
It is axiomatic that a disbursement, or funds transfer, must be available for the creditor to freely use in order for the creditor to fully receive the benefit or use of the money. Full enjoyment or benefit resulting from a transfer is a concept commonly utilized in determining gift or estate taxes. 26 U.S.C. §§ 2036-2038. A disbursement involves a transfer of money. For tax purposes, a donor, who keeps so strong a hold over the actual and immediate enjoyment of what he puts beyond his own power to retake, has not divested himself of the degree of control necessary to have alienated himself from the property. Commissioner of Internal Revenue v. Holmes’ Estate, 326 U.S. 480, 487, 66 S.Ct. 257, 260, 90 L.Ed. 228 (1946); Helfrich’s Estate v. Commissioner of Internal Revenue, 143 F.2d 43, 46 (7th Cir.1944); Estate of Bischoff v. Commissioner of Internal Revenue, 69 T.C. 32, 34 (1977). The reservation of any significant powers over the transfer of property retains an interest in the transferor. Sulovich’s Estate v. Commissioner of Internal Revenue, 587 F.2d 845, 848 (6th Cir.1978); Durst v. U.S., 559 F.2d 910, 911 (3d Cir.1977). Substantial economic benefit, rather than technical vesting of title, is the focus of whether a transfer is complete. Holmes’ Estate, 326 U.S. at 486, 66 S.Ct. at 260. The right to withdraw or revoke prohibits a transfer from being complete. Helfrich’s Estate, 143 F.2d at 46. The insight provided by Title 26 law helps ascertain what constitutes a bona fide disbursement under 28 U.S.C. § 1930(a)(6).
By analogy, the tax code and case law establish that a complete disbursement theory has a basis in law. A creditor's substantial economic benefit from a transfer is a factor in determining whether an assessable disbursement for UST fee purposes occurred. An unconditional and actual disbursement is implied in the common definition of a disbursement. Tendering money must be without reservation to qualify as a disbursement, because only *1021through an absolute and unconditional transfer can the creditor fully enjoy the benefit and use of the money. Moreover, where the debtor merely places funds in an account subject to withdrawal, the debtor has not relinquished full control over the money, and no complete expenditure occurred.
A transfer with “strings” attached, whereby the debtor transferor has a contractual right to receive the money back, is not a complete disbursement. Such a situation is similar to a trust arrangement where the creditor holds funds which may have to be relinquished at a later date. Holding something of value, which may be released later, is not a complete transfer. In re Larsen, 122 B.R. 733 (Bankr.D.S.D.1990) (deed in escrow arrangement acted as adequate protection collateral). There is no reason why a debt- or attempting to increase the chance of reorganizing successfully by placing funds in an interest-advantageous account should be penalized by the form of the transaction.
The Court concludes that 28 U.S.C. § 1930(a)(6)’s disbursements include all money absolutely and unconditionally transferred by a debtor for any expense until a plan is confirmed or the case is converted or dismissed, whichever occurs first. Any less than complete transfer of money is not a bona fide disbursement for UST fee purposes. A disbursement, like most transfers subject to a fee or tax, must be complete to constitute a bona fide disbursement. The failure to adjust, prorate, or otherwise take into account the actual activity subject to the fee results in erroneous assessments, since items are tallied which should not be. Thus, the wrongful inclusion of non-disbursement transfers wrongfully bloats the UST fee, giving the UST a larger share of the bankruptcy estate than it is entitled to.
28 U.S.C. § 1930(a)(6) ties the UST fee to the generation of disbursements which correlates to the overall business activity. This procedure does increase UST fees where the debtor’s business constitutes a high volume or great turnover of inventory. Tying UST fees to bona fide disbursements is reasonable given that the UST may need to invest more of its own resources in policing a business which is active rather than dormant. Moreover, Congress varied the quarterly fees on a graduated scale, as the fees are tied to the amount of disbursements made, with ceilings at various levels and a fee cap. There is a basic difference between filling a gap left by Congress’s silence and rewriting a statute enacted by Congress. Mobil Oil Corp. v. Higginbotham, 436 U.S. 618, 625, 98 S.Ct. 2010, 2015, 56 L.Ed.2d 581 (1978). To go beyond concluding that Congress intends the UST System be funded by a fee based on actual, irrevocable disbursements would be to impermissively enact law rather than properly serve as a vehicle for statutory interpretation. Id. at 626, 98 S.Ct. at 2015; Ozark, 105 B.R. at 512. The statute requiring a debtor to pay greater fees in a high-volume, low-profit business diminishes the amount available to reorganize because expenditures for the replacement of inventory are subject to the UST fee. Nonetheless, such remedy lies with a congressional change of the statute. All that remains is to apply the law to the facts.
BPI’s payments to replace goods bought by shoppers were irrevocable, actual purchases. BFI’s contractual obligation to its principal creditor to maintain certain stock level is irrelevant given that shelves must be stocked to continue sales and are required to draw customers into the business. The Court concludes that all of BFI’s payments on expenditures qualify as disbursements under 28 U.S.C. § 1930(a)(6).
Wernerstruck’s advance payments to the bank bore the heavy string of being subject to withdrawal for operating expenses at the debtor’s leisure. The retention of the significant power to remove the funds deposited constitutes a revocable transfer of the funds, which does not qualify as a bona fide disbursement pursuant to Section 1930(a)(6). Wernerstruck and the bank entered into an enforceable contract which permitted withdrawals of advance payments. The Court concludes that, to the extent that advance payments exceed withdrawals by the debtor, such amount constitutes a disbursement for UST fee purposes. But for the contractual obli*1022gation of the bank to return advance payments to the debtor, all amounts Werner-struck tendered to the bank would constitute disbursements under 28 U.S.C. § 1930(a)(6). The enforceable, contractual obligation to return the funds rendered the transfer of advance payments, with reserve, as inchoate disbursements. While the bank had possession of these funds, such funds were required to be returned upon debtor’s demand.
The flexible and unusual financial arrangement of Wernerstruck and the bank resulted from an attempt to save the debt- or’s interest expense because the debtor-in-possession account accrued no interest. It would violate the common definition of disbursement and would be a blatant thrusting of form over substance to hold that Wernerstruck’s progressive reorganization financing advance payments arrangement constitutes disbursements. A plausible hypothetical proves the point. Werner-struck’s unequivocal withdrawal right could permit an advance deposit of $14,000 on Monday, revocation of the $14,000 on Tuesday for operating expenses, and, on Wednesday, after realizing the expense was not needed, it could redeposit and leave the $14,000 in the bank. The UST’s broad definition would assess its fee on $28,000, which churns disbursements by doubling the quarterly fee assessable under 28 U.S.C. § 1930(a)(6). The common definition of disbursement and the nonprofit, self-funding nature of the fee would conclude a $14,000 disbursement occurred. A bona fide disbursement, subject to the computation of the UST fee under 28 U.S.C. § 1930(a)(6), is computed by netting out the deposit of advance payments, in which Wernerstruck has an enforceable right to withdraw, against any such withdrawals.
The Court applies the plain and common meaning to 28 U.S.C. § 1930(a)(6)’s “disbursements.” Under federal law, particularly federal tax law applicable by analogy given the tax-like fee assessment of the statute and the need to hone out the scope of a disbursement, a disbursement constitutes an actual payment by the debtor given without enforceable reservation at law. Both BPI and Wernerstruck paid out or disbursed money pursuant to 28 U.S.C. § 1930(a)(6). BFI irrevocably paid to replace grocery items sold. All of BFI’s payments constitute disbursements pursuant to the statute. Wernerstruck, in contrast, tendered funds to the bank with the express contractual right to withdraw advance deposits for operating expenses. The distinction between the two debtors is that Wernerstruck’s deposits retained a significant string which prevented the bank from full, unequivocal, beneficial use of the funds. Only the net advance payment amounts, that being advance payments tendered less withdrawals made by contractual right, qualify as bona fide disbursements under 28 U.S.C. § 1930(a)(6).
Mr. Blake shall submit an appropriate order in the Wernerstruck case, and Mr. Nail shall submit an appropriate order in the Brandon Foodliner case. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491237/ | *112FINDINGS OF FACT AND CONCLUSIONS OF LAW
A. JAY CRISTOL, Bankruptcy Judge.
THIS CAUSE came on for trial before the Court on August 14, September 20, and October 23, 1990. The Court has examined the evidence and considered the testimony presented, observed the candor and demeanor of the witnesses, considered the arguments of counsel, and being otherwise duly advised in the premises, does hereby make the following findings of fact and conclusions of law:
The plaintiff is a debtor before this Court by virtue of a voluntary petition filed under Chapter 11 on July 30, 1987; which case was later converted to Chapter 7 liquidation on November 23, 1988. During the Chapter 11 proceedings, the debtor was the title owner of an approximate 17V2 acre parcel of real estate upon which the second mortgage was in arrears. This property was listed in the debtor’s schedules as his homestead property.
The debtor, during the Chapter 11 case, attempted to refinance the property, or to sell a portion of same to satisfy the outstanding indebtedness. This Court finally allowed a one acre parcel, containing the debtor’s residence and veterinary clinic, to be severed from the total parcel, and entered an order approving the sale of this specific one acre to the defendant for $35,-000.00. The defendant paid $33,000.00 of the purchase price. The remaining balance of $2,000.00, plus other surveying and closing costs were paid by other parties.
Pursuant to the order approving the sale, the second mortgagee was entitled to the issuance of a certificate of title on the remaining 1672 acres. Title to the approximate one acre parcel passed to the defendant through a Special Warranty Deed, which was properly recorded. The debtor has remained in possession of the property and continued to reside on the property up to, and including, the present date.
The plaintiff and defendant essentially agree as to the facts as set forth above. It is from this point that the positions of the parties depart with both parties now disputing the rightful ownership of the subject one acre parcel of property.
It is the plaintiff’s position that there was an oral agreement that the defendant would purchase this one acre parcel of property on behalf of the debtor and that the property would be reconveyed to the debtor when he had the financial ability to reimburse the defendant. It is further alleged by the debtor that despite repeated requests and demands for same, the defendant has. refused to reconvey the property, per the agreement, but has demanded an amount far in excess of the agreement for the return of the property. Accordingly, it is the debtor’s position that a constructive trust should be imposed on the property for the debtor’s benefit. The debtor has also asserted other claims for specific performance and relief from judgment based upon fraud.
The defendant asserts that there never was any such oral agreement, and that the complaint is without merit.
It’s a fact of life that a beautiful ripe peach or apple, with the passage of time turns rotten. So, in this case, a beautiful, benevolent act by the defendant, and the generous helping of a friend to save his home, with the passage of time turned rotten and corrupt, with the benefactor turning into an over-reacher.
It is well established that the bankruptcy court must look to state law to determine if a constructive trust comes into existence. City National Bank of Miami v. General Coffee Corporation (In re General Coffee Corporation), 64 B.R. 702 (S.D.Fla.1986), aff’d 828 F.2d 699 (11th Cir.1987), cert. denied 485 U.S. 1007, 108 S.Ct. 1470, 99 L.Ed.2d 699 (1988), citing Matter of Esgro, Inc., 645 F.2d 794 (9th Cir.1981) and In re Shepard, 29 B.R. 928 (Bankr.M.D.Fla.1983).
Under Florida law a constructive trust is defined as a remedial devise with dual objectives — to restore property to its rightful owner and to prevent unjust enrichment. Abreu v. Amaro, 534 So.2d 771 (Fla. 3rd D.C.A.1988). Furthermore, it is clear that a constructive trust can be proved by parol evidence under a clear and convincing stan*113dard. The elements to establish a constructive trust are: (1) a confidential relationship; (2) by which one acquires an advantage; (3) which one should not, in good equity and good conscience, retain. Williams v. Department of HRS, 522 So.2d 951 (Fla. 1st D.C.A.1988). It has also been established, under Florida law, that the trust is created when the fraud occurs and not when the Court decrees the trust. In re General Coffee, supra., 64 B.R. 702 at 704.
The long-standing authority of Thomas v. Goodbread, 78 Fla. 278, 82 So. 835 (1919), (wherein the court held that where a party buys land under a prior fraudulent promise to the owner that he will take title at a judicial sale and hold the property for the benefit of such owner, and he refuses to abide by his oral promise and retains the property as his own) establishes that equity will relieve the defrauded owner by impressing a constructive trust on the property for his benefit. Additionally, this case holds that the statute of fraud defense is inapplicable to the imposition of constructive trust. Goodbread, supra., 82 So. at 837.
Fortunately, for the debtor, who was at the time unable to fend for himself, sufficient clear, strong and unequivocal evidence exists to establish a constructive trust in favor of the debtor against that of the defendant. The Court, in reviewing the testamentary evidence finds that Mrs. Griffith was credible; Mrs. Bridges was credible; and that the debtor’s memory is very poor. The Court further finds that the defendant was not credible, nor forthcoming. Further, the testimony of the defendant’s prior counsel was credible, but added nothing, and the testimony of Kay Can-ington was credible, as was the testimony of Thomas Householder.
Based upon a thorough review of the evidence and testimony presented, the Court finds that the defendant does not have clean hands. He put up $33,000 towards the purchase price, and yet has made no effort to do equity and repay the balance of the purchase price, which he did not pay. Nowhere in the pleadings or in this proceeding was any such offer made.
Furthermore, the defendant may have jeopardized his entire cash advance by having demanded $120,000.00 for the property, which exceeds the allowable interest rate on a loan under Florida usury law.
The defendant’s argument that the balance of purchase funds due were paid by the debtor’s own funds, only causes this Court to find contrary to the defendant’s position. If the debtor had no interest in the property, and if the property was being sold from the bankruptcy estate to the defendant, there would be no reason for the debtor to pay or contribute any portion of the purchase price. The Court deems it preposterous to assume that Mrs. Griffin and Mrs. Bridges, (who were, apparently, only trying to help the debtor) contributed over $2,000.00 in cash plus $1,600.00 to $1,700.00 for survey and other closing costs in order that the defendant could buy the property. It is clear to the Court that they were trying to help the debtor, not make money, or a profit, or give a gift to the defendant.
The Court does not believe that it is important to determine whether the debtor and the defendant were friends or had any type of close personal relationship prior to the event of the acquisition. The Court finds that the “confidential relationship” between the parties was that fiduciary relationship which arose when the property was acquired and it was represented by the defendant to the debtor that this acquisition was being made for the benefit of the debtor. The defendant’s mother testified, and the Court so finds, that the property was purchased for the benefit of the debt- or. Accordingly, the Court finds that a constructive trust will be imposed on the property in favor of the debtor.
Additionally, the Court finds that there were further oral agreements regarding reimbursement to the defendant, by the debtor, for certain improvements and repairs to be made to the subject property. We now have in dispute, according to the parties, the issue of $39,639.32, which was admitted or conceded by the debtor, *114against a claim of $42,525.37, which was claimed by the defendant. The Court is of the opinion that the difference of about $3,000.00 includes some items that the defendant could not properly account for and some items that are doubtful. The Court, therefore, determines, that the basic amount found to be due and owing to the defendant is $41,000.00. To that there must be added an additional item for the defendant’s labor.
The defendant testified that he had visited the property for approximately 300 days on an average of one or two hours per day. That would allow for him being there for many more hours on some days and not at all on other days. He also testified that he made in his business, when he did his normal work, a rate of about $10.00 per hour. Although these are in essence estimated figures since the defendant did not keep time records, the Court deems it appropriate to determine that the defendant is entitled to be compensated for an hour and a half a day for 300 days at the rate of $10.00 per hour for a total of $4,500.00.
As to interest, arguments are made at two extremes. On one hand, that Florida Statute § 687.01 calls for interest at the rate of 12 percent. On the other hand, that there was no agreement as to interest and that no interest should be paid absent such an agreement. The Court finds that neither of these positions is appropriate. In an effort to make the defendant whole, he should be compensated at the rate of interest that he lost or would have earned on his money. The rate of interest that would have been paid by the institution where the defendant had his money on deposit approximated a weighted average of 7.8 percent.
Accordingly, the Court hereby imposes a constructive trust on the property for the benefit of the debtor, and orders the recon-veyance of same to the debtor upon payment of the sum of $41,000.00, plus $4,500.00 for defendant’s labor, and $7,547.01 for interest, for a total amount of $53,047.01, which sum shall be paid to the defendant within thirty (30) days of the date of this order. Said payment to defendant shall be held in escrow by defendant’s counsel until such time as defendant has executed and delivered to plaintiff a warranty deed reconveying the property to plaintiff, together with the insurance policies covering said property and the roof guarantee, if any, which shall in no event be later than 45 days from the date of this order.
The Court further finds for the defendant and against the debtor on the Count involving specific performance. However, by virtue of this Court’s holding in favor of the plaintiff for the imposition of a constructive trust on the property, the Court need not consider, nor does the Court address, the merits of plaintiff’s remaining allegations or the defenses asserted thereto.
FINAL JUDGMENT
IN CONFORMITY with the Findings of Fact and Conclusions of Law of even date, it is hereby
. ORDERED AND ADJUDGED that a final judgment shall be entered imposing a constructive trust for the benefit of the debtor on the one acre parcel of property located at 12750 S.W. 208th Street, the legal description of which is attached hereto as Exhibit “A”.
IT IS FURTHER ORDERED that the defendant DANIEL BUDZINSKI, shall re-convey this property to plaintiff, OSCEOLA CABOT KYLE, upon the debtor’s payment of the sum of $41,000.00, plus $4,500.00 for DANIEL BUDZINSKI’s labor, plus $7,547.01 for interest, for a total amount of $53,047.01. This sum shall be paid to the Defendant within thirty (30) days of the date of this Order.
IT IS FURTHER ORDERED that upon presentation of these funds to defendant’s counsel, said fund shall be held in escrow until an executed special warranty deed reconveying title to plaintiff, the insurance policies covering the property and the roof guaranty, if any, are delivered to plaintiff’s counsel, which shall in no event be later than 45 days from the date of this Order.
IT IS FURTHER ORDERED that this Court shall retain jurisdiction of this matter for enforcement of this Final Judgment, *115and for determination of assessment of costs and fees upon proper application.
DONE AND ORDERED.
EXHIBIT A
PARCEL “A”
LEGAL DESCRIPTION:
A parcel of land, lying, being and situate in the SE lk of Section 11, Township 56 South, Range 39 East, Dade County, Florida, being particularly described as follows:
COMMENCE at the Northeast corner of the SE Vi of Section 11, Township 56 South, Range 39 East, Dade County, Florida; thence run South 89° 29' 58" West along the North boundary of the SE Vi of said Section 11 for a distance of 610.36 feet to the POINT OF BEGINNING of the parcel of land hereinafter to be described; thence run South 00° 51' 09" East for a distance of 185.09 feet to a point; thence run South 89° 35' 24" West for a distance of 290.68 feet to a point; thence run North 00° 51' 09" West for a distance of 184.625 feet to a point of intersection with the North boundary of the SE lh of said Section 11; thence run North 89° 29' 58" East along the last described line for a distance of 290.68 feet to the POINT OF BEGINNING, SUBJECT to a dedication to Dade County of the North 35.00 feet thereof for road purposes, containing a net area after dedication of 1.00 Acre, more or less. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491238/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW
SIDNEY M. WEAVER, Chief Judge.
THIS CAUSE having come before the Court upon the complaint of Universal Credit Union (the “creditor”) against William Santomaso (the “debtor”), pursuant to 11 U.S.C. § 523(a)(2), and § 727(a)(2)(A), and (a)(3), 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:
Jurisdiction is vested in this Court pursuant to 28 U.S.C. § 157(a), (b) and § 1334(b) and the district court’s general order of reference. This is a core proceeding in which the Court is authorized to hear and determine all matters relating to this case in accordance with 28 U.S.C. § 157(b)(2)(J).
In May, 1989, the debtor submitted a loan application and a financial statement to the creditor in order to obtain a loan from the creditor. The creditor advanced the funds to the debtor who, as indicated on the loan application, used the monies to repay personal loans and pay for a personal vacation. The debtor defaulted on the loan and the creditor instituted a state court action against the debtor seeking to recover the outstanding loan balance. The state court entered judgment against the debtor in the amount of $2,377.06, plus interest, late penalties and costs. The debtor then filed a petition for relief under Chapter 7 of the - Bankruptcy Code. Thereafter, the creditor filed this adversary proceeding seeking to except the state court judgment from discharge and, alternatively, seeking to deny the debtor his overall discharge.
The creditor voluntarily dismissed Count I of the complaint where it sought to except the discharge of the state court judgment pursuant to § 523(a)(2)(A), and Count II of the complaint where the creditor sought to deny the debtor his discharge pursuant to § 727(a)(2). Accordingly, the creditor proceeded to trial on the objection to the discharge of the debtor based on the failure of the debtor to maintain and provide financial records pursuant to § 727(a)(3).
Under 11 U.S.C. § 727(a)(3) a debtor is granted a discharge unless “the debtor has concealed, destroyed, mutilated, falsified or failed to keep or preserve any recorded information, ... from which the debtor’s financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all of the circumstances ...” An individual debtor has no more of a duty to keep detailed records than that of any typical individual taxpayer. In re Rowe, 81 B.R. 653 (Bankr.M.D.Fla.1987). In determining whether the debtor has destroyed or failed to preserve proper records, the statute is to be liberally construed in favor of the debtor. In re Zaidan, 86 B.R. 296 (Bankr.S.D.Fla.1988). The burden is on the party objecting to discharge to prove by clear and convincing evidence that the debt- or should be denied his discharge. In re McMahon, 116 B.R. 857 (Bankr.M.D.Fla.1990). In order for a party objecting to discharge to meet his burden of proof, the evidence must be such that, when considered in light of all the facts, it leads the court to the conclusion that the debtor has violated the spirit of the bankruptcy laws and therefore should be denied the privilege of eliminating the legal obligation of his debts. In re Mart, 87 B.R. 206, 209 (Bankr.S.D.Fla.1988).
In this case, the creditor contends that the discharge of the debtor should be de*117nied based on the failure to provide any financial records. The debtor did not have any bank accounts at the time that he filed the petition, did not have any cancelled checks, and did not have any receipts or invoices evidencing debts owed to other creditors. The trustee of the bankruptcy estate, who is charged with marshalling and administering the estate for the benefit of the creditors, did not request any documentation or financial records from the debtor. Nonetheless, based on the lack of documentation, the creditor argued that the debtor should be denied his discharge.
The debtor explained to the Court the reasons why he did not possess any financial records. The debtor previously had a bank account which was owned jointly with his former wife. The debtor had closed the account when his wife developed a narcotic addiction and was depleting the funds to satisfy her addiction. The debtor did not open a new bank account. Further, the evidence also established that it was the practice of the debtor to pay for bills as they became due and then to destroy the statements. Since he had closed the bank account, the debtor paid his bills by purchasing money orders and making them payable to individual creditors.
Whether a debtor’s books and records are adequate to avoid being denied a discharge must be gauged on a case by case basis, according to special characteristics of the debtor’s occupation, business, and personal structure. In re Mart, 87 B.R. at 209. The evidence in this case illustrates that the debtor had minimal involvement in complex business transactions thereby minimizing the need for a bank account. The debtor lived with his parents and was not required to pay rent, although the debtor would advance funds on occasion to help his parents with the expenses. Although the debtor was previously employed as a sales representative, the debtor had minimal responsibilities with respect to expense accounts for his employer. The debtor would merely submit expense vouchers to his employer who would then pay the bills. Based on the evidence presented, the Court finds that the debtor has reasonably explained the absence of financial records and, therefore, the creditor has failed to establish that the debtor should be denied his discharge pursuant to 11 U.S.C. § 727(a)(3).
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/8491239/ | MEMORANDUM OF OPINION ON VALIDITY OF LIENS
JOHN C. AKARD, Bankruptcy Judge.
The question presented in these cases is whether a retail installment contract for household goods which refinances unpaid balances on prior contracts destroys the purchase money security interest character of the goods purchased under the prior contracts. If the goods purchased under prior contracts no longer retain their purchase money character, the Debtor can avoid the lien under § 522(f)(2) of the Bankruptcy Code.1 The court finds that the goods purchased under prior contracts retain their purchase money character pursuant to Title 79, ch. 6 of the Texas consumer credit statutes on retail installment sales. Tex.Rev.Civ.Stat.Ann. arts. 5069-6.01— 5069-6.09 (Vernon 1987).
Facts
Glen Roy Palmer and Glenda Jo Palmer (the Palmers) made their first purchase from Heath Furniture Co. (Heath) in December, 1984. They purchased an electric dryer for $493.04, signed a “Retail Installment Contract — Goods and Security Agreement,” and financed $448.00 payable in monthly installments of $34.54 each2. Their second contract in November, 1985 for the purchase of furniture showed a “Net Balance Prior Contract” of $197.99. This figure was added to the “Unpaid Balance of Cash Price” and financed at $39.47 per month. Similar contracts were signed in December, 1987 and February, 1989. The 1989 contract was for $3,888.00 (including the balance on the prior contract and interest) payable in 36 monthly installments of $141.91. The interest rates on the contracts ranged from 18.73% to 21.59%. As the Debtors entered into each new contract the interest on their prior contract was rebated ■ in accordance with the “rule of 78’s” in order to arrive at the “Net Prior Balance Contract.” Each contract provided that the merchandise purchased by the prior contracts “also becomes a part of this contract and security agreement.”
In connection with each contract the Palmers signed a “Consumer Credit Disclosure” prepared by Heath. Under the heading “Security”, each form recited: “Seller will have a security interest in the purchased goods, and in any goods previously purchased from Seller so long as the purchase price for such goods remains unpaid, and in all accessions thereto and proceeds therefrom, to secure this and any other debt of Buyer to Seller.”
On January 16, 1990 the Palmers filed for relief under Chapter 13 of the Bankruptcy Code. The proof of claim Heath filed in these proceedings listed all five contracts by number and stated that the claim was secured by the household goods listed on the retail installment contracts.
Voyles
Jimmy Everett Voyles and Bonnie Lou Voyles (the Voyles) first purchase from Heath was in September, 1979. The same form of retail installment contract was used. Subsequent contracts were made in November, 1980, December, 1982, May, 1983, October, 1983, July, 1984, May, 1986, April, 1987, and January, 1989. The last contract was for the purchase of furniture and a stereo system. The “Net Balance Prior Contract” was $1,436.85 which resulted in an amount financed of $2,324.85. The contract was payable in 30 installments of $99.53 each. Interest rates ranged from 16.99% to 20.59%. Some of the contracts *220listed the prior contracts, but the January, 1989 contract did not do so. The same consumer credit disclosure forms were used.
The claim Heath filed for $1,787.19 listed, all nine prior contracts and stated that the claim was secured by the household goods listed on the retail installment contracts.
Positions of the Parties
The Debtors argued what is commonly known as the “transformation rule”, i.e., that Heath lost its purchase money security status when new purchases were added to the original contract. Roberts Furniture Co. v. Pierce (In re Manuel), 507 F.2d 990 (5th Cir.1975). The rule states that a security interest is transformed into a non-purchase money security interest when the debt is refinanced and the property secures other obligations of the debtors. Therefore, the security interest was avoidable under § 522(f)(2).
Heath argued that the transformation rule did not apply to retail installment sale contracts in Texas, because the Texas Consumer Credit Code expressly allows consolidation of purchases into one contract with each contract retaining its purchase money status notwithstanding consolidation, therefore, the security interest was not avoidable by the Debtors.
STATUTES
Tex.Bus. & Com.Code Ann. § 9.107 (Vernon Supp.1991)3 states: A security interest is a “purchase money security interest” to the extent that it is
(1) taken or retained by the seller of the collateral to secure all or part of its price ...
Tex.Bus. & Com.Code Ann. § 9.203(d) (Vernon Supp.1991) states:
A transaction, although subject to this chapter, is also subject to Title 79, Revised Civil Statutes of Texas, 1925, as amended, [The Texas Consumer Credit Code as codified at Tex.Rev.Civ.Stat. Ann. art. 5069.01 et seq. (Vernon 1987] and in the case of conflict between the provisions of this Chapter and any such statute, the provisions of such statute control....
Tex.Civ.Stat.Ann. art. 5069-6.02(14)(a) (Vernon 1967) states in pertinent part: If, in a retail installment transaction, a retail buyer makes any subsequent purchases of goods or services from a retail seller from whom he has previously purchased goods or services under one or more retail installment contracts, and the amounts under such previous contract or contracts have not been fully paid, the subsequent purchases may, at the seller's option, be included in and consolidated with one or more of such previous contract or contracts. Each subsequent purchase shall be a separate retail installment contract under this Chapter, notwithstanding that the same may be included in and consolidated with one or more of such previous contract or contracts.
Tex.Civ.Stat.Ann. art. 5069-6.02(14)(c) (Vernon 1967) states in pertinent part:
When such subsequent purchases are made, if the seller has retained ... a security interest in any of the goods purchased under any one of the contracts included in the consolidation, the entire amount of all payments made prior to such subsequent purchases shall be deemed to have been applied to the previous purchases; and each payment after such subsequent purchase made on the consolidated contract shall be deemed to have been allocated to all of the various purchases in the same ratio as the original cash sale prices of the various purchases bear to the total of all. Where the amount of each installment payment is increased in connection with such subsequent purchases, at the seller’s option, the subsequent payments may be allocated as follows: an amount equal to the original periodic payment to the previous *221purchase, the balance to the subsequent purchase....
DISCUSSION
A security interest is a purchase money security interest when it is taken by the seller to secure all or part of the price of the goods. Tex.Bus. & Com.Code Ann. § 9.107 (Vernon Supp.1991). The Debtors argued that once Heath added new purchases and consolidated the obligations on a new contract, the goods lost their purchase money character because the collateral secured more than its own price. The Debtors relied on eases such as Manuel, supra, in which the Fifth Circuit Court of Appeals adopted the transformation rule. This court followed the transformation rule in Gillie v. First State Bank (In re Gillie), 96 B.R. 689 (Bankr.N.D.Tex.1989). Manuel and Gillie involved non-purchase money advances which were coupled with the balance due on a purchase money claim. Thus, Manuel and Gillie are inapplicable to the instant cases.
The court finds Bond’s Jewelers, Inc. v. Linklater (In re Linklater), 48 B.R. 916 (Bankr.D.Nev.1985) directly on point. Linklater adopted the dual status rule which holds that if two purchase money security interests are combined, the purchase money security interest is retained in each item to the extent of the unpaid balance of its price. In Linklater, the creditor applied the debtor’s installment payments to the oldest purchase — a first in, first out (FIFO) process. This court believes the FIFO method of allocation of payments is the most equitable since it encourages security agreements that benefit both the buyer and the seller and facilitate consumer sales. However, the Texas Legislature has spoken on the subject of allocation of installment payments and this court must follow its direction. Pristas v. Landaus of Plymouth, Inc. (In re Pristas), 742 F.2d 797 (3rd Cir.1984), held that the allocation provisions of a state statute controlled where a debt secured by a purchase money security interest in consumer goods was consolidated with that incurred for subsequent purchases, at least to the extent the original items secured the unpaid part of their own price.
The Texas Consumer Credit Code controls over the U.C.C. when the two conflict. Tex.Bus. & Com.Code Ann. § 9.203(d) (Vernon Supp.1991). The Texas Consumer Credit Code expressly provides that a retail installment contract retains its purchase money character even though subsequent purchases are commingled with those purchased under prior contracts. Tex.Rev.Civ. Stat.Ann. art. 5069-6.02(14)(a), (c) (Vernon 1987). Each purchase remains a separate retail contract. Id. Article 5069-6.-02(14)(c) provides for an allocation of payments on a pro rata basis. Under the Texas statute, installments paid after contracts are consolidated are allocated so that the most expensive item purchased gets the largest portion of the payment — even though it may not be the item purchased first. These statutory provisions are binding upon the parties because Tex.Rev.Civ. Stat.Ann. art. 5069-6.09 (Vernon 1987) states that “[n]o act or agreement of the retail buyer before or at the time of the making of a retail installment contract, retail charge agreement or purchase thereunder shall constitute a valid waiver of any of the provisions of this Chapter.” The contracts state that Texas law applies. The Debtors’ arguments that they were not apprised of these provisions is to no avail, because they are presumed to know the law.
Heath’s documents and claims might be read as claiming a nonpurchase money security interest in all of the furniture to secure all amounts due to Heath. It is not clear that such a reading could be sustained under the Texas Consumer Credit Code, but it is not necessary for the court to decide that issue. Both the Palmers and the Voyles elected the “federal exemptions” under § 522(d) and claimed their household furniture as exempt. Under § 522(f) they may avoid any nonpurchase money security interest in the exempt furniture.
Conclusions
The court finds that Heath retained a purchase money security interest in all *222goods purchased by the Debtors. Each purchase remained a separate contract and payments are required to be allocated in accordance with the Texas Consumer Credit Code. As a result, Heath’s security interest continues to the extent that the collateral secures its own price. The court will set a hearing to determine the value of and the balance due on each item.
ORDER ACCORDINGLY.4
. The Bankruptcy Code is 11 U.S.C. § 101 et seq. References to section numbers are references to sections in the Bankruptcy Code.
. The documents provided to the court state "see reverse side for additional articles.” The reverse sides of the documents were not included in the exhibits or in the proofs of claim.
. Tex.Bus. & Com.Code Ann. § 1.101 et seq. (Vernon 1968) (as supplemental) is the Texas adaptation of the Uniform Commercial Code.
. 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/8491240/ | STATEMENT OF UN CONTROVERTED FACTS AND CONCLUSIONS OF LAW
CALVIN K. ASHLAND, Bankruptcy Judge.
The motion for partial summary judgment of plaintiff R. Todd Neilson, Successor Trustee of debtor Newedge, a Nevada corporation, came on for hearing before the Court on March 20, 1988, the Honorable Calvin K. Ashland, United States Bankruptcy Judge, presiding. The plaintiff was represented by Pachulski, Stang & Ziehl, P.C., with an appearance by Jeremy V. Richards, and by Paul, Hastings, Janofsky & Walker, with appearances by Nancy L. Iredale and Jeffrey G. Varga. The defendant, State of California, Franchise Tax Board, was represented by John K. Van de Kamp, Attorney General of the State of California, Edmond B. Mamer, Supervising Deputy Attorney General, Lawrence P. Scherb, II, Deputy Attorney General, with an appearance by Deputy Attorney General Lawrence P. Scherb II. The Court, having considered the plaintiffs moving papers, supporting declarations and exhibits, the defendant’s opposition, the plaintiffs reply papers, oral argument of counsel, and all other matters properly a part of the record, hereby makes the following Statement of Uneontroverted Facts and Conclusions of Law:
STATEMENT OF UNCONTROVERTED FACTS
1. This adversary proceeding was instituted, for among other reasons, to determine the California franchise tax liabilities of debtor Newedge, a Nevada corporation, of Edgington Oil Company, Inc., later known as Oldedge, Inc., a Delaware corporation (hereafter “Edgington”), and of a number of subsidiaries of the parent company, Triad America Corporation, a Utah corporation (“TAC”) (collectively “Triad Group”). Plaintiff has moved for partial summary judgment. He seeks a determination that the California franchise tax liabilities of debtor, Edgington and the other Triad Group members listed in paragraphs 2 through 6, below, are correctly reported on the combined reports filed with defendant State of California, Franchise Tax Board (“FTB”) for 1983,1984 (as amended), 1985, 1986 and 1987,1 and that debtor, Edg-ington and the Triad Group members listed in paragraph 7, below, may report their 1988 California franchise tax on a combined basis. This determination turns on the resolution of one issue: Whether Edgington properly reported, and may properly report for 1988, its California franchise tax liability on a combined basis with the other members of the Triad Group. The uncontro-verted evidence overwhelmingly establishes that until it ceased to exist on December 27,1988, Edgington and the other members of the Triad Group listed in paragraphs 2 through 7, below, constituted a single, unitary business during each tax year for which they were included on the combined report. Therefore, under section 25101 of the California Revenue and Taxation Code, Edgington and the respective members of the Triad Group properly filed combined reports for tax years 1983 through 1987, and may properly do so for tax year 1988.
2. Included in the combined report filed with the FTB for tax year 1983 are the following entities {Plaintiffs Exhibit 1):
a. Newedge Acquisitions;
b. Edgington Oil Company, Inc.;
*364c. Hercules Oil Company of San Diego, Inc.; and
d. Sahuaro Petroleum and Asphalt Company.
No tax was reported due for 1983; the combined report shows that taxpayers were entitled to a $129,755 credit for overpayment of tax.
3. Included in the combined report filed with the FTB for tax year 1984 (as amended) are the following entities (Plaintiffs Exhibit 2):
AK Memphis Properties, Inc.;
A.K. Houston Properties, Inc.;
Triad Utah;
Triad Center;
Salt Lake International Center;
Triad Service Company;
Border Properties, Inc.;
Heritage Endeavors, Inc.;
L.T. Properties, Inc.;
Moresco, Inc.;
P.B. Development, Inc.;
TVCC California Corporation;
Triad Properties Corporation;
Salt Lake Temple Imperial 400 Motel;
Foster Center Properties, Inc.;
Triad Management Corporation;
Triad Center Systems Corporation;
Triad Property Management Corporation;
Triad Development Company;
Triad Trolley Corporation;
Triad/LaCaille Ventures;
Triad/LaCaille Carriage Associates;
Triad/LaCaille Devereaux Associates;
Triad Real Estate Corporation;
Triad Energy Corporation;
American Capital Aviation Corporation;
Mark III Leasing Company;
Triad Security Company;
Triad Entertainment Company;
Triad Sports, Inc.;
Triad America Services Corporation;
N111EK Corporation;
Newedge;
Triad Theater Company;
Triad Handcart Marketplace;
Triad Executive Centers;
Triad Condas Corporation;
Trison Distributing, Inc.;
Edgington Oil Company, Inc.;
Hercules Oil Company of San Diego, Inc.;
Edgington Management Services, Inc.;
Sahuaro Petroleum and Asphalt Company;
Oasis Aviation, Inc.;
International Airmotive, Inc.; and
Triad International
No tax was reported due for 1984; the combined report shows that taxpayers were entitled to a refund of $64,553.
4. Included in the combined report filed with the FTB for tax year 1985 are the following entities. (Plaintiffs Exhibit 3):
N111EK Corporation;
American Capital Aviation Corporation;
Mark III Leasing Company;
Triad International;
Triad Management Corporation;
Triad Property Management Corporation;
Triad Telecommunications, Inc.;
Triad Properties Corporation;
Triad Condas Corporation;
A.K. Houston Properties, Inc.;
L.T. Properties, Inc.;
P.B. Development, Inc.;
Border Properties, Inc.;
Heritage Endeavors, Inc.;
Moresco, Inc.;
A.K. Memphis Properties, Inc.;
Foster Center Properties, Inc.;
TVCC California, A California Corporation;
Salt Lake International Center;
Triad Center;
Triad Entertainment Company;
Triad Handcart Marketplace;
Triad Theater Company;
Triad Trolley Corporation;
Triad Executive Centers;
Triad Real Estate Corporation;
Triad Utah;
Triad Energy Corporation;
Newedge;
Edgington Oil Company, Inc.;
Triad Aviation;
*365Triad America Services Corporation;
Triad Center Systems Corporation;
Triad Security Company;
Triad Service Company;
Triad Development Corporation;
Triad/LaCaille Ventures;
Triad/LaCaille Carriage Associates;
Triad/LaCaille Devereaux Associates;
Trison Distributing, Inc.;
Hercules Oil Company of San Diego, Inc.;
Sahuaro Petroleum and Asphalt Company;
Edgington Management Services, Inc.;
International Airmotive, Inc.;
Palace Hotel;
Slurry Seal of Arizona;
Dunn Enterprises, Inc.;
Slurry Seal of New Mexico;
L.A. Mar Industries, Inc.;
Highway and Road Products Company, Inc.;
Edgington Oil Limited;
Triad Financial Services;
Triad Colorado Properties Corporation.
Triad Hotel Company;
Resort Management, Inc.; and
Concrete Technology Corporation
No tax was reported due for 1985; the combined report shows that the above-named taxpayers were entitled to a credit of $416,660 as a result of overpaid estimated tax and 1984 credits applied to 1985.
5. Included in the combined report filed with the FTB for tax year 1986 are the following entities {Plaintiffs Exhibit 4):
N111EK Corporation;
American Capital Aviation Corporation;
Mark III Leasing Company;
Triad International;
Triad Management Corporation;
Triad Property Management Corporation;
Triad Telecommunications, Inc.;
Triad Properties Corporation;
Triad Condas Corporation;
A.K. Houston Properties, Inc.;
L.T. Properties, Inc.;
P.B. Development, Inc.;
Border Properties, Inc.;
Heritage Endeavors, Inc.;
Moresco, Inc.;
A.K. Memphis Properties, Inc.;
Foster Center Properties, Inc.;
TVCC California, A California Corporation;
Salt Lake International Center;
Triad Center;
Triad Entertainment Company;
Triad Handcart Marketplace;
Triad Theater Company;
Triad Trolley Corporation;
Triad Executive Centers;
Triad Real Estate Corporation;
Triad Utah;
Triad Energy Corporation;
Newedge;
Edgington Oil Company, Inc.;
Triad Aviation;
Triad America Services Corporation;
Triad Center Systems Corporation;
Triad Security Company;
Triad Service Company;
Triad Development Corporation;
Triad/LaCaille Ventures;
Triad/LaCaille Carriage Associates;
Triad/LaCaille Devereaux Associates;
Trison Distributing, Inc.;
Hercules Oil Company of San Diego, Inc.;
Sahuaro Petroleum and Asphalt Company;
Edgington Management Services, Inc.;
International Airmotive, Inc.;
Palace Hotel;
Slurry Seal of Arizona;
Dunn Enterprises, Inc.;
Slurry Seal of New Mexico;
L.A. Mar Industries, Inc.;
Highway and Road Products Company, Inc.;
Edgington Oil Limited;
Triad Financial Services; and
Triad Colorado Properties Corporation.
The 1986 combined report shows a $557 tax due the FTB for 1986 which has been paid in full.
*3666. Included in the combined report filed with the FTB for tax year 1987 are the following entities (Plaintiffs Exhibit 5):
N111EK Corporation;
American Capital Aviation Corporation;
Mark III Leasing Company;
Triad International;
Triad Management Corporation;
Triad Property Management Corporation;
Triad Telecommunications, Inc.;
Triad Properties Corporation;
Triad Condas Corporation;
A.K. Houston Properties, Inc.;
L.T. Properties, Inc.;
P.B. Development, Inc.;
Border Properties, Inc.;
Heritage Endeavors, Inc.;
Moresco, Inc.;
A.K. Memphis Properties, Inc.;
Foster Center Properties, Inc.;
TVCC California, A California Corporation;
Salt Lake International Center;
Triad Center;
Triad Entertainment Company;
Triad Handcart Marketplace;
Triad Theater Company;
Triad Trolley Corporation;
Triad Executive Centers;
Triad Real Estate Corporation;
Triad Utah;
Triad Energy Corporation;
Newedge;
Edgington Oil Company, Inc.;
Triad Aviation;
Triad America Services Corporation;
Triad Center Systems Corporation;
Triad Security Company;
Triad Service Company;
Triad Development Corporation;
Triad Food & Beverage Operation;
Triad/LaCaille Carriage Associates;
Triad/LaCaille Devereaux Associates;
Trison Distributing, Inc.;
Hercules Oil Company of San Diego, Inc.;
Sahuaro Petroleum and Asphalt Company;
Edgington Management Services, Inc.;
International Airmotive, Inc.;
Palace Hotel;
Slurry Seal of Arizona;
Dunn Enterprises, Inc.;
Slurry Seal of New Mexico;
L.A. Mar Industries, Inc.;
Highway and Road Products Company, Inc.;
Edgington Oil Limited;
Triad Financial Services; and
Triad Colorado Properties Corporation.
The 1987 combined report shows a $862 tax due the FTB which has been paid in full.
7. For tax year 1988, plaintiff intends to file a combined report with the FTB in which the following entities will be included:
N111EK Corporation;
American Capital Aviation Corporation;
Mark III Leasing Company;
Triad International;
Triad Management Corporation;
Triad Property Management Corporation;
Triad Telecommunications, Inc.;
Triad Properties Corporation;
Triad Condas Corporation;
A.K. Houston Properties, Inc.;
L.T. Properties, Inc.;
P.B. Development, Inc.;
Border Properties, Inc.;
Heritage Endeavors, Inc.;
Moresco, Inc.;
A.K. Memphis Properties, Inc.;
Foster Center Properties, Inc.;
TVCC California, A California Corporation;
Salt Lake International Center;
Triad Center;
Triad Entertainment Company;
Triad Handcart Marketplace;
Triad Theater Company;
Triad Trolley Corporation;
Triad Executive Centers;
Triad Real Estate Corporation;
Triad Utah;
Triad Energy Corporation;
Newedge;
*367Edgington Oil Company, Inc.;
Triad Aviation;
Triad America Services Corporation;
Triad Center Systems Corporation;
Triad Security Company;
Triad Service Company;
Triad Development Corporation;
Triad Pood & Beverage Operation;
Triad/LaCaille Carriage Associates;
Triad/LaCaille Devereaux Associates;
Trison Distributing, Inc.;
Hercules Oil Company of San Diego, Inc.;
Sahuaro Petroleum and Asphalt Company;
Edgington Management Services, Inc.;
International Airmotive, Inc.;
Palace Hotel;
Slurry Seal of Arizona;
Dunn Enterprises, Inc.;
Slurry Seal of New Mexico;
L.A. Mar Industries, Inc.;
Highway and Road Products Company, Inc.;
Edgington Oil Limited;
Triad Financial Services; and
Triad Colorado Properties Corporation.
8. TAC is the parent corporation of Edgington and all the other entities listed in paragraphs 2 through 7, above. During all relevant times, TAC owned or controlled, either directly or indirectly, at least 51% of the voting stock of Edgington and all the other entities listed in paragraphs 2 through 7, above. Declaration of Wayne Elggren (“Elggren Declaration ”), 113f-3k.
9. At all relevant times, TAC was owned and controlled by Adnan and Essam Khashoggi (“Khashoggis”) through Triad International Corporation, a Cayman Island Corporation (“TIC”) which was owned and controlled by Adnan Khashoggi, and through ELK, a Cayman Island Corporation (“ELK”) which was owned and controlled by Essam Khashoggi. During the relevant periods, TIC held a 90% interest in TAC (reduced to 80% in 1984), while ELK owned a 10% interest (increased to 20% in 1984). Declaration of Emanuel A. Floor (“Floor Declaration ”), 113.
10. Until June 1983, the principal activity of TAC was the development of United States based real estate holdings for the benefit of the Khashoggis. Though prior to Edgington becoming a member of the Triad Group TAC was not directly engaged in the petroleum business, either Adnan Khashoggi or Essam Khashoggi, or both, indirectly owned a 50% interest in Oasis Petroleum Corporation (“Oasis”), a California corporation engaged in the business of buying, refining and selling crude oil and refined petroleum products and gasoline. Floor Declaration, 11114, 5; Declaration of Tarig Kadri (“Kadri Declaration ”), 11112, 5.
11. In early 1983, the TAC Board of Directors (“TAC Board”) and the Khashog-gis determined that TAC should directly engage in the petroleum industry. The expansion of TAC’s business activity into the petroleum industry was based on Es-sam Khashoggi's involvement with Oasis and on the Khashoggis’ belief that a petroleum-related concern would benefit from their connection with the Saudi Arabian royal family and the Khashoggis’ expertise and resources in the petroleum business.
12. Moreover the TAC Board felt that the purchase of a company involved in the petroleum industry would complement TAC’s existing United States business operations. These operations included real estate developments held through members of the Triad Group. Many of these real estate developments were start-up projects which it was anticipated would take several years to fully mature, develop equity and generate cash flow. The TAC Board planned that the cash flow of the company to be purchased would enable TAC to fund the deficits generated by TAC’s real estate operations until they became self-sufficient. Correspondingly, it was anticipated that as the Triad Group’s real estate developments matured, their increasing equity base would provide collateral against which to borrow funds for use of the oil company and its related energy activities. Thus, the TAC Board decided to acquire Edgington. See Floor Declaration, 11 6.
*36813. Since 1942 until the sale of substantially all its assets in September 1988, Edg-ington had been a significant refiner and supplier of asphalt and other petroleum products in certain market areas. Edging-ton owned and operated a refinery in Long Beach, California, a large product distribution and storage terminal in Signal Hill, California, and over sixty miles of pipelines that interconnected these facilities with other petroleum-related facilities in Southern California. Declaration of David G. Davidson (“Davidson Declaration ”) 11 5.
14. Prior to June 1983, Edgington was owned by Pennsylvania Company (“Pennco”). To acquire and own Edging-ton, TAC, together with Los Angeles Steamship Company (“LASCO”), a California corporation, formed Khamsin, a California general partnership, of which TAC and LASCO where equal general partners. Khamsin in turn formed Newedge Acquisitions, a California corporation, to buy the shares of Edgington from -Pennco and to help finance Edgington’s initial capital. Kadri Declaration, II 6. On June 1, 1983, Pennco sold the Edgington stock to New-edge Acquisitions in a leveraged buyout transaction. Id. 117.
15. The purchase price for Edgington was comprised, in part, of a $25 million down payment and $33 million representing an estimated payment for inventory and accounts receivable. The down payment was financed by the sale of Edgington’s marine terminal to Champlin Oil Company and the settlement of a lawsuit brought by Edgington against Champlin Oil Company. The net working capital payment, which was finally determined to be $36 million, was financed by Edgington from excess funds it borrowed. Kadri Declaration, II7.
16. The balance of the purchase price was comprised of a promissory note in the original principal amount of $8 million, executed by Edgington in favor of Pennco. This note was guaranteed by Edgington’s subsidiary, Sahuaro Petroleum and Asphalt Company, an Arizona corporation, and the guarantee itself was secured by a deed of trust encumbering certain real property owned by Sahuaro. In addition, the note was secured by a deed of trust encumbering Edgington’s refinery. Kadri Declaration, 1110.
17. Immediately upon Newedge Acquisitions’ purchase of the stock of Edgington, Khamsin was dissolved and its 100 shares in Newedge Acquisitions distributed equally between LASCO and TAC. Pursuant to an agreement for the purchase and sale of stock made “as of” June 1, 1983 and effective as of the same date, LASCO sold an additional 30 shares in Newedge Acquisitions to TAC. Thus, as of June 1, 1983 TAC owned 80% of Newedge Acquisitions and LASCO owned the remaining 20%. Kadri Declaration, All 12 & 13.
18. Following its acquisition of Edging-ton through Newedge Acquisitions, and in furtherance of its business expansion policy the TAC Board in September 1983 reorganized TAC and its subsidiaries along functional lines. The purpose of this September 1983 reorganization was to more effectively manage each of TAC’s existing or anticipated areas of business activity. As part of this reorganization, TAC created Triad Energy Corporation, a Utah corporation (“TEC”), as a wholly owned subsidiary. TAC then vested in TEC its then 80% interest in Newedge Acquisitions, the direct parent of Edgington. Kadri Declaration, A 14; Floor Declaration, A 7.
19. Although the executive, administrative and support functions for TAC and its subsidiaries had always been centralized in Salt Lake City, Utah, the September 1983 corporate reorganization formalized the pre-existing de facto arrangement by establishing an entity known as Triad Management Corporation, a Utah corporation (“TMC”), to employ the individuals performing the above described functions on behalf of TAC and the other Triad Group members. Floor Declaration, A 8.
20. TAC’s subsidiaries proliferated over the years, especially after the 1983 corporate reorganization. However, the TAC management, the TAC Board and TAC’s ultimate shareholders always viewed TAC’s activities, including those in the real estate and energy areas, and the corporations op*369erating in those areas, simply as “divisions” of one unified business. All internal organization, reports and budgets also reflected the unified business approach. Floor Declaration, ¶ 9.
21. In or about April, 1984, Newedge Acquisitions merged into Newedge, a Utah corporation. For convenience, Newedge Acquisition and Newedge will be referred to hereafter as “Newedge.” Kadri Declaration, If 15.
22. Following Edgington’s acquisition by Newedge, there were extensive inter-company financing, intercompany transfers of funds and other financial relationships among the Triad Group members. For instance, in or about June 1983, Newedge borrowed approximately $15 million from the Executive Life Insurance Company (“Executive Life”). In return, Newedge issued to Executive Life a promissory note which was guaranteed by a bond issued by The Aetna Casualty and Surety Company (“Aetna”). In October, 1984 TAC executed an indemnity agreement in favor of Aetna. Approximately $8 million of this $15 million loan was ultimately disbursed to Edging-ton. Edgington used these proceeds in its day-to-day operations. The balance was disbursed to Newedge, Pacific Associates, Oasis and LASCO. Thus, through the efforts of Newedge and TAC, Edgington received over 50% of the proceeds from a major loan. This loan would not have been available to Edgington standing alone. Floor Declaration, ¶ 10; Kadri Declaration, ¶¶ 17, 18; Elggren Declaration, ¶ 3a; Declaration of Mark G. Newgard (“New-gard Declaration ”), ¶ 4;
23. Another example of intercompany financial accommodations involved the payments to Executive Life and Aetna. New-edge’s promissory note to Executive Life required semi-annual interest payments only, commencing on December 1, 1983, with the repayment of principal and all accrued but unpaid interest due on June 1, 1988. Apart from possibly the first such payments, Newedge never used any part of its own funds to make payments on the note. Rather, Newedge made all or almost all of the semi-annual interest payments on the note with funds supplied by Edgington. Similarly, Newedge was obligated to make premium payments to Aetna with respect to the bond issued in favor of Executive Life. Again, except for perhaps the first such payments, Newedge made all or almost all of the premium payments with moneys furnished by Edgington. The interest payment on the note and the premium payments on the bond were treated by Edgington as advances to its parent corporations. Kadri Declaration, ÍI18; New-gard Declaration, II4.
24. Another illustration of intercompa-ny cash transfers relates to the First Boston Loan. In February 1984, Edgington borrowed $18 million from First Boston Corporation (“First Boston”) and immediately upstreamed that amount to Newedge. Newedge then disbursed approximately $500,000 to Edgington to cover certain fees that were incurred in connection with placing this loan. Newedge retained approximately $12,000 from the proceeds of this loan and disbursed the balance to TAC, Pacific Associates, N.V., Oasis, and Hong Kong and Shanghai Banking Corporation. Elggren Declaration, ¶ 3b.
25. Moreover, on numerous occasions Edgington transferred monies to or for the benefit of the Triad Group and/or its ultimate shareholders. Through these transfers, including those discussed above, Edg-ington advanced to Newedge, its parents and affiliates, an aggregate sum of $89.6 million. Elggren Declaration, 113c.
26. Another instance of intercompany financial transactions involved the Getty oil contract. Oasis had entered into a supply contract agreement with Getty Oil Company (“Getty”) for the purchase of a certain monthly volume of crude oil. From about April, 1984 to about May, 1985, Oasis resold the Getty oil it purchased to its subsidiary, Paramount Petroleum Corporation (“Paramount”). TAC and three other members of the Triad Group, Salt Lake International Center (“SLIC”), Triad Center and Triad Plaza Development Company, executed guarantees in favor of various banks that had lent moneys to Paramount. Through these guarantees, these four enti*370ties guaranteed Oasis’ performance of its obligations to deliver oil to Paramount. In return for guaranteeing the Getty oil contract, Oasis permitted TAC to administer and control the daily payment received from Paramount for the sale of the oil and the monthly disbursements made to Getty. Although Paramount made daily payments to Oasis for the Getty oil it received, Oasis was not obligated to make payments to Getty until the 20th day of the following month. Thus, at any given time, Oasis enjoyed a “float” between the daily payments made by Paramount and the monthly payments it made to Getty. This float was kept in a bank account (“Getty Account”) in the name of TAC at First Interstate Bank in Los Angeles, California. Edgington administered and managed the Getty Account for the benefit of TAC. At the direction of TAC, the “float” was used by Edgington to cover cash flow shortages and to avoid the need to borrow money or draw on lines of credit from third parties. Thus, in the one year period during which TAC controlled the Getty contract “float,” Edgington drew approximately $61.6 million through numerous transactions, and at month’s end it returned some or all the funds to the Getty Account. Kadri Declaration, ¶1¶ 19-23; Floor Declaration, II14; Elggren Declaration, 113d.
27. Another example of intercompany transfer of funds occurred in 1985 when TAC and Triad America International, an affiliate of TAC, advanced almost $11.5 million to Edgington. Elggren Declaration, ¶ 3e.
28. In addition to intercompany transfer of funds, there was extensive cross-collat-eralization, cross-guaranteeing and cross-indemnification between Edgington and the other Triad Group members. For example, in or about June 1983, Edgington entered into a revolving credit agreement with General Electric Credit Corporation (“GECC”). Pursuant to this agreement, Edgington had the ability to borrow up to approximately $70 million from GECC. Newedge executed the GECC loan agreement as a comaker, and in essence as a guarantor of the obligations of Edgington to GECC. In addition, LASCO and TAC, through the general partnership Khamsim, executed for the benefit of GECC an Income Maintenance Agreement whereby Khamsin, and ultimately LASCO and TAC, were required to advance funds to Edgington in the event that Edgington sustained specified cumulative losses over certain specified periods. Kadri Declaration, TI1T 7 & 8. •
29. As additional collateral for Edging-ton’s obligations under the GECC $70 million line of credit, TAC arranged for First Security Bank of Utah (“FSB”) to issue a $10 million letter of credit (the “FSB Letter of Credit”) in favor of GECC. FSB had previously made a series of loans to various Triad Group members doing business in Utah, including TAC, Triad Utah, and SLIC, but had no preexisting business relationship with Edgington. TAC and A.K. Houston Properties, Inc., another member of the Triad Group, applied for the FSB Letter of Credit whereby they agreed to reimburse FSB for any sums drawn by GECC against the FSB Letter of Credit. These obligations of TAC and A.K. Houston Properties, Inc., to FSB were collateral-ized by a deed of trust encumbering certain real property located in Texas owned by a subsidiary or subsidiaries of Triad Properties Corporation. Kadri Declaration, If 11.
30. Examples of cross-indemnification are also abundant. For instance, the $18 million First Boston loan discussed in paragraph 24, above, was secured by another bond issued by Aetna in favor of First Boston. The approximate principal amount of the bond was $21 million. TAC agreed to indemnify Aetna for any and all losses it might sustain arising out of this bond. Without this indemnification agreement from TAC, Edgington would have been unable to secure this loan from First Boston. Floor Declaration, ITII 11-12; Kadri Declaration, 1126; Newgard Declaration, II12.
31. In addition to the bonds issued with respect to the Executive Life note and the First Boston loan, Aetna issued at least 20 other bonds (collectively “Aetna/Edgington Bonds”) for the benefit of Edgington in favor of various state and federal agencies and third-party creditors. The Aet-na/Edgington Bonds had an aggregate lia*371bility in excess of $12 million. TAC and Newedge agreed to indemnify Aetna for any and all losses it might sustain with respect to the Aetna/Edgington bonds. Floor Declaration, ¶ 13. See also New-gard Declaration, ¶ 13.
32. Another example of cross-indemnification among the Triad Group members is TAC’s agreement to indemnify the directors and various key employees of Edg-ington from any losses or liabilities which they might incur while acting within the scope of their employment. Kadri Declaration, ¶ 25.
33. Similarly, evidence of cross-guaranteeing among Triad Group members is abundant. For instance, in 1985 Edgington borrowed approximately $5 million from Community Bank. Repayment of that obligation was guaranteed by TAC. Newgard Declaration, 1114; Kadri Declaration, ¶ 27.
34. Another example of cross-guaranteeing (and cross-collateralization) is shown by the FSB loans. FSB extended a letter of credit for the benefit of, among others, Newedge. FSB had lent substantial sums to TAC, Salt Lake International Center and another Triad Group member, Triad Utah. As of January, 1987, the Triad Group owed FSB approximately $17 million in all of its loans (collectively “FSB Loans”), of which approximately $15 million represented debts relating to unpaid loans made to TAC, Salt Lake International Center/Triad Utah Corporation. The FSB loans were extensively cross-collateralized and cross-guaranteed by Edgington, Newedge, TEC, TAC, Salt Lake International Center, Triad Utah Corporation, A.K. Houston Properties, Inc. and other Triad Group members, and were secured by a pledge of a portion of TAC’s shareholder interest in TEC, TEC’s shareholder interest in Newedge, and Newedge’s assignment of, and a security interest in, a portion of the. proceeds from the sale of Edgington’s shares. Declaration of Mark D. Howell (“Howell Declaration ”), ¶[¶ 3-5; Declaration of Lawrence R. Haggerty (“Haggerty Declaration ”) HIT 3, 4; Plaintiffs Exhibits 16-25. 35. Zions’ First National Bank of Utah (“Zions”) also made loans to Triad Properties Corporation, SLIC and Triad Center. The Triad Properties Corporation loan was guaranteed by TAC. The loan to SLIC was guaranteed by Triad Properties Corporation. By 1986, the loans made by Zions were in default. Zions was informed that its loans would be paid with the proceeds from the sale of Edgington or from the sale of certain real estate holdings belonging to various Triad Group members. In this connection, Zions was given a security interest on the proceeds of the sale of Edgington’s assets or stocks. Declaration of Thomas C. Swegle, 1TTT 3-5.
36. By 1987, all the FSB and Zion loans were in default. The obligations of the Triad Group arising out of the FSB and Zions loans were settled pursuant to the FSB/Zions settlement agreement entered into in September, 1988 by and among Newedge, TAC, Edgington, FSB, First Security Mortgage Company, Triad Properties Corporation, Triad Associates, SLIC, Triad Center, TEC, A.K. Florida Properties, N.Y. and Zions. Under the settlement agreement, FSB received an allowed claim in the TAC bankruptcy estate and received $4.8 million generated from the 1988 sale of Edgington’s assets. Zions, in turn, received an allowed general unsecured claim in the TAC bankruptcy estate and approximately $800,000 in cash for the sale of Edgington’s assets in September, 1988. Declaration of R. Todd Neilson, ¶ 3(a).
37. The Triad Group perceived itself and operated as a single, unitary business. The TAC management, the TAC Board and TAC’s ultimate shareholders always viewed TAC’s activities, including those in the real estate and energy areas, and the corporations operating in those areas, simply as “divisions” of one unified entity. Floor Declaration, ¶ 9.
38. Not only did the Triad Group operate as an integrated business entity, it was perceived as such by its creditors and other third parties. For instance, the very structure of the GECC revolving line of credit demonstrates that GECC was looking to the credit worthiness of not only Edgington *372but TAC, other Triad Group members and TAC’s ultimate shareholders. See also Plaintiffs Exhibit 26.
39. Aetna, too, viewed the Triad Group as a single, unitary entity. For instance, in a letter from Aetna’s underwriting agent with reference to the bonds issued for the benefit of Edgington, Newedge, Oasis and Handlingair, the beneficiaries were described as the “Oasis [sic] — Triad” Group and the letter speaks of Aetna requiring indemnities to cover all bonds written for “the group.” Kadri Declaration, 1128; Exhibit 27.
40. When Edgington and other members of the Triad Group sought loans or extensions of credit from third parties, they typically presented the consolidated audited financial statements for Edgington and the other members of the Triad Group. Moreover, the audited, consolidated financial statements for TAC and all of its subsidiaries (including Edgington) for 1983 and 1984 were distributed to the Triad Group’s major creditors. Floor Declaration, U 21.
41. FSB, Zions, and First Interstate Bank of Utah (“FIB”) made their credit decisions to extend loans to the various Triad Group members based, at least in part, on consolidated financial statements for TAC and/or the entire Triad Group, the reputed wealth of TAC’s ultimate shareholders, the Khashoggis, and direct or indirect representations that the Khashoggis had committed to contributing significant sums of money to the Triad Group over a period of time. Declaration of Kenneth W. Bell (“Bell Declaration ”), 114; Swegle Declaration, H 3; Haggerty Declaration, 114.
42. In or about November 1983, FIB approved the increased renewal of an $8 million (at that time $6 million) secured loan to Triad Center (another Triad Group member — Elggren Declaration, 11II 5g-5k) for land acquisition, planning and continuation of the building of the proposed Triad Center and a $6 million loan to TAC for working capital. An important consideration in this decision was that Edgington had become a part of TAC. See Bell Declaration, ¶ 2. Similarly, in or about September 1984, FIB approved a $2 million short-term unsecured loan to TAC. The bank, in extending this loan, relied to a significant degree upon TAC’s 1 indirect ownership of Edgington, which it perceived as bringing diversification and profitability to TAC. See Bell Declaration, 113. Significantly, one of the potential sources of repayment of this short-term loan was the daily receipts from Edgington. Id.
43. TIC and ELK, the shareholders of TAC, also looked to the entire Triad Group in deciding whether to contribute funds to TAC. On or about December 31, 1984, TIC, ELK and TAC entered into a Stock Subscription Agreement. Pursuant to the stock subscription agreement TIC and ELK agreed to contribute $150 million to TAC over a five year period beginning December 1, 1985, in return for additional stock from TAC. The amount that TIC and ELK would contribute under the stock subscription agreement was determined with reference to the operating budgets of Edgington and the other Triad Group members. Floor Declaration, H 15.
44. The Triad Group conveyed a public image of unity not only to the financial institutions discussed above but to the public in general. In particular, a corporate logo was used on the letterheads of TAC and all of its subsidiaries, including Edg-ington, identifying each as “A Triad Amer-ica Company.” Moreover, TAC’s publicity booklets, press releases and other public relations releases systematically presented TAC as the head of the United States businesses of the Khashoggis and identified TAC’s various subsidiaries, including Edg-ington, as divisions or areas of operation within one unified company. Floor Declaration, 111116, 17.
45: A number of the various functions and services provided for the benefit of the Triad Group members was centralized. For instance, Edgington and the other Triad Group members shared external accounting and tax planning services as well as internal accounting services. Similarly, there were occasions when Edgington and various other Triad Group members shared the same outside and in-house counsel. *373Moreover, the Triad Group, including Edg-ington, employed the same marketing and public relations firm. Floor Declaration, Ml 16, 18, 19, 20 and 22; Kadri Declaration, H 29; Newgard Declaration, ¶ 7.
46. The TAC Board and TAC’s president made most important decisions on behalf of Edgington and the other Triad Group members. The TAC Board actively participated in the affairs of all the Triad Group members, including those of Edging-ton. For instance, all major policy decisions concerning the Triad Group members, including Edgington, were made or approved by the TAC Board. Moreover, the heads of the various Triad Group members, including Edgington officers and directors, regularly attended the TAC board of director meetings. At these meetings, Edg-ington personnel, as well as the heads of the other Triad Group entities, gave presentations and made reports to the TAC Board. Further, at the time Newedge purchased Edgington, Edgington was unprofitable. It was the combined skills and management of the Edgington, Newedge, TEC and TAC boards of directors that helped eventually to restore Edgington to profitability. Moreover, the TAC board regularly reviewed and approved annual budgets and financial statements of all Triad Group members, including Edgington and its subsidiaries, as well as the bonuses of the key executives of the Triad Group, including Edgington and its subsidiaries. Floor Declaration, ¶ 24; Kadri Declaration, ¶¶ 31, 32; Newgard Declaration, 1111 7, 8.
47. There was also a substantial overlap among the directors of Edgington, New-edge, TEC, TAC and TAC’s other subsidiaries. Until approximately September, 1987, there was a member of the TAC Board on the board of directors of Edgington. This director was frequently a director of many other Triad Group corporations, including those in the real estate business. Similarly, during this period there was extensive overlapping of officers. Again, officers of TAC held offices with Edgington, Newedge and TEC, as well as in many other Triad Group corporations, including those engaged in real estate and other activities. See Floor Declaration, ¶ 2; Kadri Declaration, ¶ 4; Newgard Declaration, ¶ 3; Declaration of Philip G. Studarus, 11 If 3, 4.
48. During the relevant periods the various Triad Group members shared know-how and expertise. For instance, Tariq Kadri and Emanuel Floor, both officers and directors of TAC, rendered various consulting services to certain Triad Group members. In addition, during the approximate period from April 1986 to August 1986, when many of the Triad Group loans were in default, Archie Humphrey, Edgington’s chief financial officer, was, at TAC’s request, at the TAC offices in Salt Lake City, Utah, to negotiate on TAC’s behalf with FSB, Zions, FIB and various other lenders to forestall foreclosure until the Triad Group had an opportunity to sell Edgington or its assets and thereby generate sufficient cash with which to pay the Triad Group’s delinquent loans. Other examples of intercompany sharing of expertise include Edgington’s management of the Getty “float” and Mark G. Newgard’s efforts to sell Edgington to pay obligations incurred by other Triad Group members. Kadri Declaration, ¶ 30; Floor Declaration, 1123; Newgard Declaration, 1116; Swegle Declaration, U 5; Bell Declaration, 11 5.
49. On November 12, 1987, Edgington and Sulphur Mountain Oil Corporation, a California corporation (“SMOC”) entered into an asset purchase agreement pursuant to which Edgington agreed to sell, and SMOC agreed to buy, substantially all of the assets of Edgington. By order entered March 25, 1988, this Court authorized Davidson, the former Chapter 11 Trustee of Newedge, to vote the shares of Edging-ton in favor of the sale of the Edgington assets to SMOC, and on September 1, 1988, Edgington sold substantially all of its assets to SMOC. On December 7, 1988, the Court confirmed the Trustee’s First Amended Plan of Reorganization (“Plan”). On December 27, 1988, the “Effective Date” of the Plan, Edgington merged into Newedge and R. Todd Neilson, the Chapter 11 trustee of TAC became Newedge’s Sue-*374cessor Trustee. Davidson Declaration, ¶¶ 4, 7, 8 & 9; Neilson Declaration, ¶ 2.
50. Any conclusion of law, or part thereof, deemed to be an uncontroverted fact is hereby incorporated as an uncontro-verted fact.
CONCLUSIONS OF LAW
1. This Court has jurisdiction of the parties and has subject matter jurisdiction over this adversary proceeding. 11 U.S.C. § 505.
2. Affiliated corporations generating income both within and without California are subject to the California Franchise Tax on the net income apportionable to California. Section 25101 of the California Revenue and Taxation Code provides in pertinent part:
When the income of a taxpayer is subject to the tax imposed under this part as derived from or attributable to sources both within and without the state the tax shall be measured by the net income derived from or attributable to sources within the state....
If the affiliated corporations are engaged in a unitary business, they must combine their incomes for apportionment purposes. Edison California Stores, Inc. v. McColgan, 30 Cal.2d 472, 183 P.2d 16 (1947); Standard Register Company v. Franchise Tax Board, 259 Cal.App.2d 125, 137, 66 Cal.Rptr. 803 (1968).
3. Courts have developed two general tests to determine whether a group of affiliated entities is engaged in a unitary business. The first of these tests is the “three unities” test. The California Supreme Court in Butler Brothers v. McColgan, 17 Cal.2d 664, 678, 111 P.2d 334 (1941), aff'd, 315 U.S. 501, 62 S.Ct. 701, 86 L.Ed. 991 (1942) held that the unitary nature of a business is “definitely established” by the presence of the three unities: (1) unity of ownership; (2) unity of operation; and (3) unity of use. The evidence is simply overwhelming that during the period at issue Edgington and the other Triad Group members identified in paragraphs 2-7 of the Statement of Uncontroverted Facts, respectively, comprised during each particular tax year at issue “unitary business” under the criteria established by Butler Brothers and its progeny.
4. The first element — unity of ownership — is met. During all relevant periods TAC owned or controlled, either directly or indirectly, 51% or more of the voting stock of Edgington and the other Triad Group members identified in paragraphs 2 through 7 of the Statement of Uncontroverted Facts, above. Cal.Rev. Tax.Code § 25105 (“Direct or indirect ownership or control of more than 50% of the voting stock of the taxpayer shall constitute ownership or control for the purposes of this article.”)
5. The second of the three unities test, unity of operation, is also met. This requirement relates to staff functions. Chase Brass & Copper Company v. Franchise Tax Board, 10 Cal.App.3d 496, 502, 95 Cal.Rptr. 805 (1970). Courts have considered various factors in determining the existence of unity of operation, although the presence or absence of any one factor does not decide whether unity of operation exists. E.g. Container Corporation of America v. Franchise Tax Board, 117 Cal.App.3d 988, 995, 173 Cal.Rptr. 121, 126 (1981).
6. A crucial factor in determining whether unity of operation exists is the extent to which related companies are dependent upon each other for internal or third-party financing. See Anaconda Company v. Franchise Tax Board, 130 Cal.App.3d 15, 26, 181 Cal.Rptr. 640 (1982); Container Corporation of America, supra, 117 Cal.App.3d at 996, 173 Cal.Rptr. 121.
7. The existence of intercompany loans, intercompany cash transfers and intercom-pany financial accommodations is an important indication of unity of operation. See Chase Brass & Copper Company v. Franchise Tax Board, supra, 10 Cal.App.3d at 503, 95 Cal.Rptr. 805 (loans to subsidiary, in the amount of $10 million, constitute “substantial evidence of unity of operation”.). The uncontroverted facts dis*375cussed above amply demonstrate the existence of this factor.
8. The existence of agreements pursuant to which a related entity agrees to collateralize, guarantee, or indemnify third parties with respect to loans made to a related entity or entities is convincing evidence of the unitary nature of the related entities’ combined business. See Container Corporation of America v. Franchise Tax Board, supra, 117 Cal.App.3d at 996, 173 Cal.Rptr. 121; Anaconda Company v. Franchise Tax Board, supra, 130 Cal.App.3d at 26, 181 Cal.Rptr. 640. In the course of dealings and the historic relationship between Edgington and the other Triad Group members is replete with instances where Edgington has assisted another member or members of Triad Group in connection with third-party loans, and vice versa.
9. Another factor demonstrating unity of operation is evidence that the unitary group perceives itself and holds itself out as an integrated business. See, e.g., Container Corporation of America v. Franchise Tax Board, supra, 117 Cal.App.3d at 999-1000, 173 Cal.Rptr. 121; Standard Register Company v. Franchise Tax Board, supra, 259 Cal.App.2d at 135, 66 Cal.Rptr. 803. This factor also exists. The evidence demonstrates that Edgington, TAC and other members of the Triad Group always held themselves out as members of one integrated group. Moreover, in making their credit decisions, GECC, Aet-na, FSB, Zions and FIB generally looked at the Triad Group as a whole. Thus, there is abundant evidence establishing this factor, as well.
10. The centralizing of various functions and services for the benefit of the affiliated companies is further evidence of the unitary nature of the group. See, e.g., Honolulu Oil Corporation v. Franchise Tax Board, 60 Cal.2d 417, 423, 34 Cal.Rptr. 552, 386 P.2d 40 (1963). The uncontrovert-ed evidence demonstrates numerous instances where Edgington and the other Triad Group members shared the same internal organization to perform administrative and support functions, and shared the same external consultants and professionals.
11.The motivation of a parent for purchasing a subsidiary is also relevant in determining the existence of a unitary business. See generally Standard Register Company v. Franchise Tax Board, supra, 259 Cal.App.2d at 135 (¶ 1), 66 Cal.Rptr. 803. The evidence demonstrates that Edg-ington was purchased in order to expand TAC’s business operations into the petroleum industry. Moreover, the TAC Board expected that Edgington’s ability to provide cash would inject needed capital into TAC’s real estate projects until the developments became self-sufficient and income generating. See generally id. (II2). Conversely, the TAC Board anticipated that as the real estate development projects matured, they would provide collateral against which to borrow funds on behalf of Edg-ington and TAC’s other petroleum related activities. These purposes underlying TAC’s decision to acquire Edgington further point toward unity.
12. The third of the three unities test is unity of use. This element relates to interlocking executive forces and operational systems, Chase Brass & Copper Company v. Franchise Tax Board, supra, 10 Cal.App.3d at 504, 95 Cal.Rptr. 805, and to some degree overlaps with unity of operation, see id., at 502, 95 Cal.Rptr. 805; Container Corporation of America v. Franchise Tax Board, supra, 117 Cal.App.3d at 999, 173 Cal.Rptr. 121. As with unity of operation, the evidence overwhelmingly supports a finding of unity of use among Edgington and the other Triad Group members.
13. Perhaps the most significant factor in determining the existence of unity of use among related entities is whether the parent company determines “major policy matters” for its subsidiaries or affiliates. See, e.g., Chase Brass & Copper Company v. Franchise Tax Board, supra, 10 Cal.App.3d at 504, 95 Cal.Rptr. 805 (“The ‘major policy matters’ are what count in our estimation of integration.”). The evidence overwhelmingly establishes that the TAC Board and TAC’s president made most im*376portant policy decisions on behalf of Edg-ington and the other Triad Group members.
14. Interlocking officerships and directorships are exceedingly important indications of a unity of use. See, e.g., Chase Brass & Copper Company v. Franchise Tax Board, supra, 10 Cal.App.3d at 504, 95 Cal.Rptr. 805 (“The integration of executive forces is an element of exceeding importance.”); Container Corporation of America v. Franchise Tax Board, supra, 117 Cal.App.3d at 998, 173 Cal.Rptr. 121 (“The integration of major executive functions is a factor of great importance pointing toward unity.”). As discussed above, there was a considerable integration of executive forces between Edgington and the other Triad Group members as evidenced by the substantial overlap of officers and directors of Edgington and the other Triad Group members. Neilson Declaration, 113; Davidson Declaration, 1110. Indeed, plaintiff, the TAC trustee, is now also the Successor Trustee of Newedge.
15. The TAC Board regularly reviewed and approved the annual budgets and financial statements of Edgington and the other Triad Group members. These facts are also significant in finding a unitary business relationship between parent and subsidiary. See, e.g., Container Corporation of America v. Franchise Tax Board, supra, 117 Cal.App.3d at 998, 173 Cal.Rptr. 121; Anaconda Company v. Franchise Tax Board, supra, 130 Cal.App.3d at 27, 181 Cal.Rptr. 640; Standard Register Company v. Franchise Tax Board, supra, 259 Cal.App.2d at 136 (¶ 12), 66 Cal.Rptr. 803.
16. Another element in establishing unity of use is the sharing of expertise among members of a related group. E.g., Anaconda Company v. Franchise Tax Board, supra, 130 Cal.App.3d at 26, 181 Cal.Rptr. 640; Container Corporation of America v. Franchise Tax Board, supra, 117 Cal.App.3d at 999, 173 Cal.Rptr. 121. See also Standard Register Company v. Franchise Tax Board, supra, 259 Cal.App.2d at 136 (¶ 10), 66 Cal.Rptr. 803. The evidence establishes the existence of this factor as well.
17. The TAC Board reviewed and approved the salaries and year-end bonuses of Edgington’s key executives. This control over the salaries and bonuses of Edg-ington’s key executives further evinces unity of use. See Chase Brass & Copper Company v. Franchise Tax Board, supra, 10 Cal.App.3d at 504, 95 Cal.Rptr. 805.
18. The evidence is overwhelming that the three unities tests is met. Thus, the Court concludes that Edgington and the other Triad Group members identified in paragraphs 2 through 7, respectively, of the Statement of Uncontroverted Facts, above, were during each particular tax year at issue engaged in a unitary business.
19. As an alternate to the three unities test, some courts use the dependency/contribution test. E.g., Edison California Stores, Inc. v. McColgan, supra, 30 Cal.2d 472, 183 P.2d 16. This test requires a determination whether the operation of the portion of the business within California is dependent upon or contributes to the operation of the business without the state. Edison California Stores, Inc. v. McColgan, supra, 30 Cal.2d at 481, 183 P.2d 16. If the in-state operations are dependent upon or contribute to the out-of-state operations, they are unitary. Id. However, it is not necessary that the operations within and without California be “necessary and essential” to each other and to the functioning of the business as a whole. Superior Oil Company v. Franchise Tax Board, 60 Cal.2d 406, 34 Cal.Rptr. 545, 386 P.2d 33 (1963). It is sufficient if an affiliated group member contributes to the advantages of a unitary enterprise. Id. 60 Cal.2d at 414, 34 Cal.Rptr. 545, 386 P.2d 33.
20. The evidence that establishes the existence of the “three unities” demonstrates with equal force that the contribution/ dependency test is also satisfied. Edgington depended upon contributions of the other Triad Group members, and the Triad Group members depended upon Edg-ington’s contributions. Alternatively, both Edgington and the other members of the Triad Group contributed significantly to each other’s operations.
*37721. Therefore, plaintiff’s motion for partial summary judgment will be granted.
22. Any statement of uncontroverted fact, or part thereof, deemed to be a conclusion of law is hereby incorporated as a conclusion of law.
PARTIAL SUMMARY JUDGMENT IN FAVOR OF PLAINTIFF R. TODD NEILSON
Based on the Court’s Statement of Un-controverted Facts and Conclusions of Law filed in this adversary proceeding,
IT IS ORDERED, DECREED, AND ADJUDGED:
1. That the 1983 California Corporation Franchise Or Income Tax Return (Form 100) filed by Newedge Acquisition Inc. with defendant State of California, Franchise Tax Board (“FTB”) as a combined report of a unitary group correctly included Edging-ton Oil Company, Inc., later known as 01-dedge, Inc. (“Edgington”) and its subsidiaries on the said 1983 combined report; that neither Newedge Acquisition Inc. nor any of the entities included in the said 1983 combined report owes any tax, penalties or interest to the FTB for tax year 1983; and that Newedge Acquisition Inc. and the other entities included in the said 1983 combined report are entitled to a $129,755.00 credit for overpayment of tax for tax year 1983.
2. That the 1984 California Amended Corporation Franchise Or Income Tax Return (Form 100X) filed by Triad America Corporation and Subsidiaries with the FTB as a combined report of a unitary group correctly included Edgington and its subsidiaries on the said 1984 combined report; that neither Triad America Corporation nor any of the other entities included in the said 1984 combined report owes any tax, penalties or interest to the FTB for 1984; and that Triad America Corporation and the other entities included in the said 1984 combined report are entitled to a $64,553.00 refund for tax year 1984.
3. That the 1985 California Corporation Franchise Or Income Tax Return (Form 100) filed by Triad America Corporation and Subsidiaries with the FTB as a combined report of a unitary group correctly included Edgington and its subsidiaries in the said 1985 combined report; that neither Triad America Corporation nor any of the other entities included in the said 1985 combined report owes any tax, penalties or interest to the FTB for tax year 1985; and that Triad America Corporation and the other entities included in the said 1985 combined report are entitled to a $416,660.00 credit for overpayment of tax for tax year 1985.
4. That the 1986 California Corporation Franchise Or Income Tax Return (Form 100) filed by Triad America Corporation and Subsidiaries with the FTB as a combined report of a unitary group correctly included Edgington and its subsidiaries in the said 1986 combined report; that the said 1986 combined report correctly reported a tax in the total amount of $557.00 for tax year 1986; and that since that sum has been paid in full to the FTB neither Triad America Corporation nor any of the other entities included in the said 1986 combined report owes any tax, penalties or interest to the FTB for tax year 1986.
5. That the 1987 California Corporation Franchise Or Income Tax Return filed by Triad America Corporation and Subsidiaries with the FTB as a combined report correctly included Edgington and its subsidiaries in the said 1987 combined report; that the said 1987 combined report correctly reported the total amount of tax, penalties and interest of $862.00 for 1987; that since the said tax, penalties and interest have been paid in full to the FTB neither Triad America Corporation nor any of the other entities included in the said 1987 combined report owes any tax, penalties or interest to the FTB for tax year 1987; and that this determination of the tax, penalties and interest for 1987 shall be without prejudice to Triad America Corporation and the other entities included in the said 1987 combined report filing an amended 1987 combined report.
6. That the following affiliated corporations are subject to the provisions of the Bank and Corporation Tax Law and may *378properly be included m a combined report filed by Triad America Corporation with the FTB for tax year 1988:
N111EK Corporation;
American Capital Aviation Corporation;
Mark III Leasing Company;
Triad International;
Triad Management Corporation;
Triad Property Management Corporation;
Triad Telecommunications, Inc.;
Triad Properties Corporation;
Triad Condas Corporation;
A.K. Houston Properties, Inc.;
L T Properties, Inc.;
P B Development, Inc.;
Border Properties, Inc.;
Heritage Endeavors, Inc.;
Moresco, Inc.;
A K Memphis Properties, Inc.;
Foster Center Properties, Inc.;
TVCC California, A California Corporation;
Salt Lake International Center;
Triad Center;
Triad Entertainment Company;
Triad Handcart Marketplace;
Triad Theatre Company;
Triad Trolley Corporation;
Triad Executive Centers;'
Triad Real Estate Corporation;
Triad Utah;
Triad Energy Corporation;
Newedge;
Edgington
Triad Aviation;
Triad America Services Corporation;
Triad Center Systems Corporation;
Triad Security Company;
Triad Service Company;
Triad Development Corporation;
Triad Food & Beverage Operation;
Triad/LaCaille Carriage Associates;
Triad/LaCaille Devereaux Associates;
Trison Distributing, Iric.
Hercules Oil Company of San Diego, Inc.;
Sahuaro Petroleum & Asphalt Company;
Edgington Management Services, Inc.;
International Airmotive, Inc.;
Palace Hotel; ■
Slurry Seal of Arizona;
Dunn Enterprises, Inc.;
Slurry Seal of New Mexico;
L.A. Mar Industries, Inc.;
Highway & Road Products Company, Inc.;
Edgington Oil Limited;
Triad Financial Services;
Triad Colorado Properties Corporation.
7. That plaintiff R. Todd Neilson shall recover his costs of action from defendant FTB.
. Plaintiff notes the Triad Group will file an amended 1987 combined report with the FTB and requests that the Court’s determination be without prejudice to the filing of such an amended 1987 combined report. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491241/ | ORDER ON MOTIONS FOR SUMMARY JUDGMENT
THOMAS E. BAYNES, Jr., Bankruptcy Judge.
THE MATTER under consideration in the above-captioned Chapter 7 case is an Amended Complaint Seeking Exception to Discharge pursuant to Title 11 U.S.C. § 523(a)(2)(A) and (a)(4) filed by Plaintiff, Jerry Katzman, M.D. Ophthalmic Associates, P.A. Both Plaintiff and Defendant, Linda Kleinkorte Owens, moved for summary judgment on the basis there remain no genuine issues of material fact and they are entitled to judgment as a matter of law. The Court reviewed the record and finds the relevant facts as follows:
1. During the period of January 1987 through April 1988, Defendant was employed as the office manager for Plaintiff’s medical practice business.
2. Plaintiff brought criminal charges against Defendant alleging Defendant con*436verted to her own use monies in excess of $50,000.00 belonging to Plaintiff.
3. On September 2, 1988, Defendant executed a Plea Agreement: Acknowledgment and Waiver of Rights where she pled guilty to the charge of grand theft in the second degree1 which includes the crime of embezzlement.2
4. On December 15, 1988, the State Court entered a Judgment adjudicating Defendant guilty of grand theft in the second degree pursuant to Fla.Stat. 812.014(2)(b).
5. On May 18, 1989, the State Court ordered restitution against Defendant in the amount of $16,032.52.
6. Thereafter, Plaintiff filed a four-count Complaint against Defendant in the State Court seeking damages for embezzlement, violation of Fla.Stat., Chapter 772, Criminal Practices, breach of fiduciary duty and punitive damages.
7. In July 1989, Plaintiff and Defendant executed a Stipulation for Entry of Final Judgment. Subsequently, the State Court entered a civil Final Judgment in favor of Plaintiff and against Defendant in the amount of $50,000.00.
8. On September 22, 1989, Debtor filed a voluntary petition under Chapter 7 of the Bankruptcy Code.
Plaintiff moved for summary judgment on three points. First, Plaintiff argues the State Court civil Final Judgment has no effect in this adversary proceeding based on the principles of collateral estoppel espoused in this Court’s opinion, Chang v. Daniels (In the Matter of Daniels), 91 B.R. 981 (Bankr.M.D.Fla.1988). Second, Plaintiff argues Owens is collaterally es-topped from litigating the issue of guilt regarding her embezzlement of funds from Katzman. Third, Plaintiff alleges the restitution debt of $16,000.00 has no effect in this adversary proceeding; damages must be relitigated; and Plaintiff is entitled to prove up damages resulting from Defendant’s embezzlement.
Defendant also moved for summary judgment. First, Defendant argues the State Court civil Final Judgment has a collateral estoppel effect on this adversary proceeding. Thus, the' part of the $50,-000.00 civil judgment in the amount of $16,-000.00 is restitution, thus, nondischargeable. The remaining $34,000.00 of the $50,-000.00, which includes treble damages and attorney fees is dischargeable. Defendant also argues the State Court Stipulation for Entry of Final Judgment and civil Final Judgment represents an accord and satisfaction and Plaintiff has no cause of action or damages other than reflected in the Stipulation for Entry of Final Judgment and civil Final Judgment.
In addition, in Defendant’s brief in support of her motion for summary judgment filed on August 20, 1990, she “concedes her guilty plea and the Restitutionary Final Evidentiary Hearing ... and concedes that the amount of restitution determined on the evidence at that hearing ... [$16,-032.00] ... is a nondischargeable debt, minus any payments she has made under the restitution order.”
*437COLLATERAL ESTOPPEL AS TO THE ISSUE OF GUILT REGARDING EMBEZZLEMENT IN THE CRIMINAL ACTION AND TO THE ISSUE OF RESTITUTION
“[F]ederal courts, when considering the application of collateral estoppel to state court judgments, are required to initially determine whether state law would allow the judgment to have an issue preclusion effect.” Daniels, supra at 982-983, citing, Marrese v. American Academy of Orthopaedic Surgeons, 470 U.S. 373, 105 S.Ct. 1327, 84 L.Ed.2d 274 (1985). In Florida, “... collateral estoppel may be asserted only when the identical issue has been litigated between the same parties or their privies.” Trucking Employees of North Jersey Welfare Fund, Inc. v. Romano, 450 So.2d 843, 845 (Fla.1984), aff'g, 427 So.2d 802 (Fla. 4th DCA 1983), citing, Mobil Oil Corp. v. Shevin, 354 So.2d 372, 374 (Fla.1977).
Florida courts do not allow an issue decided in a criminal proceeding to be given preclusive effect in a subsequent civil action because the parties are not the same in the criminal proceeding and the civil action. For example, in Romano, supra, the petitioners in the civil action were the victims named in the criminal proceeding. The Florida Supreme Court did not allow the petitioners to use the judgment of conviction for the purpose of collateral estoppel in the subsequent civil action because the parties were not the same in both actions. While recognizing the federal courts and other jurisdictions have abandoned the requirement of mutuality of parties as a prerequisite to asserting the doctrine of collateral estoppel, e.g. Parklane Hosiery Co., Inc. v. Shore, 439 U.S. 322, 99 S.Ct. 645, 58 L.Ed.2d 552 (1979); Bernhard v. Bank of America Nat’l Trust & Savings Ass’n, 19 Cal.2d 807, 122 P.2d 892 (1942), the Florida Supreme Court did not follow these cases and still requires mutuality of parties as a prerequisite to asserting collateral estop-pel. Romano, supra at 845. Thus, in Romano, the Florida Supreme Court held a litigant, who was not a party to a prior criminal proceeding that resulted in a judgment of conviction, may not use the judgment of conviction “offensively”3 in a civil proceeding to prevent the same defendant from relitigating issues resolved in the pri- or criminal proceeding. Id.
In the instant case, neither the same parties nor their privies were involved in both the criminal and adversary proceeding. The State of Florida prosecuted the criminal proceeding while Dr. Katzman filed this adversary proceeding. Inasmuch as the Plaintiff in this adversary proceeding was not a party in the prior criminal proceeding, Plaintiffs Motion for Summary Judgment should be denied as to the issue of guilt regarding Defendant’s embezzlement of Plaintiffs funds.
However, inasmuch as Defendant “concedes her guilty plea”, and embezzlement is defined the same in Florida and Section 523(a)(4),4 this Court is satisfied the debt under Section 523(a)(4) is nondischargable.
As to the amount of restitution, since the parties were not the same in the criminal proceeding and this adversary proceeding, collateral estoppel can not be applied according to Romano, supra. Thus, Plaintiffs Motion for Summary Judgment *438as to the amount of restitution is granted. The amount of restitution determined in the restitutionary hearing has a limited effect in this adversary proceeding and damages must be relitigated under Section 523(a)(4). However, since Defendant admitted to $16,000.00 being nondischargeable, this Court finds $16,000.00, minus the amount of restitution already paid pursuant to the Restitution Order, is the minimum amount of damages nondischargeable under Section 523(a)(4) without prejudice to allow Plaintiff to establish damages under Section 523(a)(4).
COLLATERAL ESTOPPEL AS TO THE STATE COURT CIVIL FINAL JUDGMENT
The State Court entered a civil Final Judgment in favor of Plaintiff and against Defendant in the amount of $50,-000.00 based on a Stipulation for Entry of Final Judgment entered into between the parties. Without deciding the issue whether stipulations or consent judgments can be used as a basis of collateral estoppel in Florida, this Court finds the civil Final Judgment entered by the State Court can not be used to preclude issues from being litigated in this adversary proceeding.
When the issue is nondischargeablity of debts under Section 523 of the Code, the bankruptcy court must make an additional inquiry or subroutine within the state’s issue preclusion criteria. Within [the criterion regarding] the identity of issues, the [standard] of proof required as to fraud in the state litigation must be juxtaposed to the [standard] of proof of fraud under Section 523(a)(2) [and (4)]. This Court rejects the proposition the state [standard] of proof would apply in bankruptcy cases. The [standard] of proof in prior state litigation must be equal to or greater than the [standard] of proof required in the nondischargeability case in order for the doctrine of collateral estoppel to be applicable in a Section 523 action.
Daniels, supra at 984. The standard of proof regarding nondischargeability under Section 523(a)(4) is clear and convincing evidence. Gillespi v. Jenkins (In re Jenkins), 110 B.R. 74, 76 (Bankr.M.D.Fla.1990); In the Matter of Weber, 892 F.2d 534, 538 (7th Cir.1989). See also, Lee v. Ikner (In re Ikner), 883 F.2d 986 (11th Cir.1989). The standard of proof the State Court used when entering the civil Final Judgment was preponderance of the evidence, a standard lower than clear and convincing evidence. Therefore, since the standard of proof used by the State Court when entering the civil Final Judgment was not greater than or equal to the standard of clear and convincing evidence, collateral estoppel can not be applied in this adversary proceeding. In addition, federal courts have required a specific finding of fact in the final judgment that clearly establishes all elements related to the proof of nondischargeability. Daniels, supra at 985, citing, Halpern v. First Georgia Bank (In re Halpern), 810 F.2d 1061, 1063 (11th Cir.1987); Klingman v. Levinson, 831 F.2d 1292, 1296 (7th Cir.1987). Neither the Stipulation for Entry of Final Judgment nor the civil Final Judgment recited findings of fact and conclusions of law that clearly establish all elements related to the proof of dischargeability. Therefore, the Court finds Plaintiff’s Motion for Summary Judgment as to the State Court civil Final Judgment having no effect in this adversary proceeding is granted and Motion of Defendant for Summary Judgment is denied.
As to Defendant’s argument that the Stipulation for Entry of Final Judgment and civil Final Judgment represents an accord and satisfaction and Plaintiff has no cause of action or damages other than reflected in the Stipulation for Entry of Final Judgment and civil Final Judgment, the Court finds since the Stipulation and civil Final Judgment can not act as collateral estoppel, they also can not be used as an accord and satisfaction without prejudice to Defendant to seek enforcement of the Stipulation as otherwise binding on the Plaintiff.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that as to the preclusive effect of *439the State Court civil Final Judgment in this adversary proceeding, Plaintiffs Motion for Summary Judgment is granted. It is further
ORDERED, ADJUDGED AND DECREED that as to the issue of liability created by the guilty plea of embezzlement, Plaintiffs Motion for Summary Judgment is granted based on Defendant’s admission of embezzlement and its nondischargeability. It is further
ORDERED, ADJUDGED AND DECREED that as to the issue of the restitution amount being nondischargeable, Plaintiffs Motion for Summary Judgment is granted based on Defendant’s admission of the restitution being nondischargeable. The $16,000.00 restitution determined at the State Criminal Restitutionary Hearing is the minimum nondischargeable amount less payments made pursuant to the State Court’s Restitution Order. Any additional nondischargeable amounts shall be determined at a final evidentiary hearing. It is further
ORDERED, ADJUDGED AND DECREED that as to the preclusive effect of the State Court civil Final Judgment in this adversary proceeding, Defendant’s Motion for Summary Judgment is denied. It is further
ORDERED, ADJUDGED AND DECREED that the Stipulation for Entry of Final Judgment and civil Final Judgment can not be used as an accord and satisfaction without prejudice to Defendant to seek enforcement of the Stipulation as otherwise binding on the Plaintiff. It is further
ORDERED, ADJUDGED AND DECREED that by separate order, the Court will set a final evidentiary hearing to allow Plaintiff to establish any nondischargeable amounts in excess of that allowed herein under Section 523(a)(4).
DONE AND ORDERED.
. Fla.Stat. § 812.014 defines theft as
(1) A person is guilty of theft if he knowingly obtains or uses, or endeavors to obtain or to use, the property of another with intent to, either temporarily or permanently:
(a) Deprive the other person of a right to the property of a benefit therefrom.
(b) Appropriate the property to his own use or to the use of any person not entitled thereto ...
(2)(b) If the property stolen is valued at $20,000 or more, but less than $100,000, the offender is guilty of grand theft in the second degree, punishable as a felony of the second degree, as provided in ss. 775.082, 775.083, and 775.084.
. Fla.Stat. 812.014 (1989), the omnibus theft statute, incorporates into its terms the former separate offenses of stealing, larceny, purloining, abstracting, embezzlement, misapplication, misappropriation, conversion, and obtaining money or property by false pretenses, fraud, or deception. Id. See, Fla.Stat. § 812.012(2)(d)l; State v. Mischler, 488 So.2d 523, 525 (Fla.1986), citing, Martin v. State, 379 So.2d 179 (Fla. 1st DCA 1980). By pleading guilty to grand theft in the second degree, Defendant pled guilty to all the separate offenses listed above including each element of the offense. United States v. Boll (In re Boll), 82 B.R. 107, 109 (Bankr.N.D.1987) citing, United States v. Twenty Thousand Seven Hundred Fifty-Seven Dollars and Eighty-Three Cents ($20,757.83) Canadian Currency, 769 F.2d 479 (8th Cir.1985).
. "[Offensive use of collateral estoppel occurs when the plaintiff seeks to foreclose the defendant from litigating an issue the defendant has previously litigated unsuccessfully in an action with another party. Defensive use occurs when a defendant seeks to prevent a plaintiff from asserting a claim the plaintiff has previously litigated and lost against another defendant.” Parklane Hosiery Co., Inc. v. Shore, 439 U.S. 322, 326 n. 4, 99 S.Ct. 645, 649 n. 4, 58 L.Ed.2d 552 (1979).
. In Florida, embezzlement is defined as "the fraudulent appropriation of another’s property by a person to whom it had been entrusted.” Merckle v. State, 529 So.2d 269, 273 (Fla.1988). Embezzlement, pursuant to Section 523(a)(4), is defined as “the fraudulent appropriation of property by a person to whom such property has been intrusted or into whose hands it has lawfully come.” Gillespi v. Jenkins (In re Jenkins), 110 B.R. 74, 76 (Bankr.M.D.Fla.1990), citing, Gribble v. Carlton (In re Carlton), 26 B.R. 202, 205 (Bankr.M.D.Tenn.1982) citing, Moore v. United States, 160 U.S. 268, 269, 16 S.Ct. 294, 295, 40 L.Ed. 422 (1895). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491242/ | DECISION ON ORDER GRANTING MOTION OBJECTING TO ALLOWANCE OF CLAIM OF GENERAL MOTORS ACCEPTANCE CORPORATION
THOMAS F. WALDRON, Bankruptcy Judge.
This proceeding, which arises under 28 U.S.C. § 1334(b) in a case referred to this *581court by the Standing Order Of Reference entered in this district on July 30, 1984, is determined to be a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) — matters concerning the administration of the estate, and (B) — allowance or disallowance of. claims against the estate. Specifically, the issue presented to the court for determination is whether General Motors Acceptance Corporation’s failure to notify the debtor of the sale of the automobile, which was security for GMAC’s loan, bars GMAC from any unsecured claim.
This proceeding is before the court on the debtor’s Motion Objecting To Allowance Of Claim Of G.M.A.C. (Doc. 28) and Memorandum In Support Of Argument (Doc. 50). In response to the debtor’s objection, General Motors Acceptance Corporation filed a Memorandum Contra Motion Of Debtor Objecting To Allowance Of Claim Of General Motors Acceptance Corporation (Doc. 29) and Memorandum Of General Motors Acceptance Corporation (Doc. 49).
On May 14, 1986, the debtor, Connie S. Allen, purchased a 1986 Chevrolet Z28 Cá-maro under a retail installment contract (Doc. 48, Ex. V). General Motors Acceptance Corporation (GMAC) perfected a first lien on the automobile, evidenced on the automobile’s certificate of title.
On March 13, 1987, the debtor filed a voluntary petition for relief under chapter 13 of the Bankruptcy Code. The debtor listed its debt with GMAC as secured in the amount of $12,663.00 and unsecured in the amount of $3,197.00 (Doc. 8).
Not having received timely payments through the debtor’s chapter 13 plan, GMAC obtained relief from the stay on October 2, 1989; however, the debtor refused to surrender the automobile to GMAC. As a result, on December 4, 1989, GMAC filed a complaint in replevin in the common pleas court of Montgomery County to recover the automobile (Doc. 48). Subsequently, on December 13, 1989, the Debtor surrendered the automobile to GMAC (Doc. 48). On December 15, 1989, a “Notice of Sale” letter was sent to the debtor’s former attorney, Andrew M. Hughes, stating the time and place of the sale of the debtor’s automobile. No notice was sent to the debtor. On January 17, 1990, the debtor’s automobile was sold at a public sale at the Ohio Banc Auction. After computing all setoffs, credits, and additions, a deficiency in the amount of $7,768.26 resulted. GMAC filed an amended proof of claim for the deficiency amount.
DISCUSSION
The sole issue before the court is whether GMAC is allowed a claim in the debtor’s chapter 13 plan in the amount of the deficiency, when notice of the sale of the automobile was sent only to the debtor’s attorney and not to the debtor. The debtor alleges that she did not receive notice of the sale, and that therefore, pursuant to O.R.C. § 1317.12 and § 1317.16, GMAC is barred from asserting a claim in the amount of $7,768.26 (Doc. 28 and Doc. 50).
In response to the debtor’s objection (Doc. 29 and Doc. 49), GMAC contends that the provisions of the Ohio Revised Code requiring statutory notice to be given to a debtor are not applicable to proceedings arising under the Bankruptcy Code. Further, GMAC contends that although it obtained relief from the stay to repossess the debtor’s automobile, it did not have relief from the stay to allow it to contact the debtor by sending a notice of the sale.
GMAC’s contentions are without merit. The Bankruptcy Code makes it clear that Article 9 of the Uniform Commercial Code, as it is adopted by a state, governs consensual liens in personal property and fixtures and any claims arising from defaults under such agreement. Leasing Service Corp. v. First Tenn. Bank Nat. Ass’n., 826 F.2d 434, 437 (6th Cir.1987); In re Umbles Drew-Hale Pharmacy, Inc., 80 B.R. 421, 624 (Bankr.N.D.Ohio 1987). Further, a secured party may seek any appropriate relief from the stay in order to complete the procedural steps required by state law.
Section 1309.47 of the Ohio Revised Code sets forth the provisions governing a *582secured party’s right to dispose of collateral after a default. However, § 1309.47(F) states that this statute is “subject to the limitations of section 1317.-16 of the Revised Code.” Ohio Revised Code § 1317.16 is a provision contained within the Retail Installment Sales Act (RISA). The parties have conceded that the provisions of RISA are applicable to the issues in this proceeding.1 Ohio Revised Code § 1317.16 governs the disposition of collateral and in pertinent part provides:
(A) A secured party whose security interest is taken pursuant to section 1317.-071 [1317.07.1] of the Revised Code may, after default, dispose of any or all of the collateral only as authorized by this section.
(B) Disposition of the collateral shall be by public sale only. Such sale may be as a unit or in parcels and the method, manner, time, place, and terms thereof shall be commercially reasonable. At least ten days prior to sale the secured party shall send notification of the time and place of such sale and of the minimum price for which such collateral will be sold, together with a statement that the debtor may be held liable for any deficiency resulting from such sale, by certified mail, return receipt requested, to the debtor at his last address known to the secured party, and to any persons known by the secured party to have an interest in the collateral. In addition, the secured party shall cause to be published, at least ten days prior to the sale, a notice of such sale listing the items to be sold, in a newspaper of general circulation in the county where the sale is to be held. (Emphasis added).
Similarly, O.R.C. § 1317.12 sets forth the provisions pertaining to default, and in relevant part provides:
[I]f collateral for a consumer transaction is taken possession of by the secured party on default, the secured party shall, within five business days after taking possession, send to the debtor a notice setting forth specifically the circumstances constituting the default and the amount by itemization that the debtor is required to pay to cure his default. Any notice required by section 1309.47 or 1317.16 of the Revised Code may be included as part of the notice required by this section. A secured party who disposes of the collateral without sending notice required by this section may not recover the costs of retaking possession of the collateral and is not entitled to a deficiency judgment.
GMAC asserts that the “Notice of Sale” letter which was sent to the debtor’s attorney is sufficient to satisfy the notice requirements of O.R.C. § 1317.12 and § 1317.16. The court notes that O.R.C. § 1317.12 and § 1317.16 explicitly state that the debtor is to be given notice. A debtor is defined as “a person who owes payment or other performance of the obligation secured, whether or not he owns or has rights in the collateral, and includes the seller of accounts or chattel paper.” O.R.C. § 1309.01(A)(4). In determining whether a party comes within the definition of the term debtor, the court notes:
[I]t is a cardinal rule of construction that where a statute is clear and unambiguous, there is “no occasion to resort to the other means of interpretation.” Slingluff v. Weaver (1902), 66 Ohio St. 621, 64 N.E. 574, paragraph two of the syllabus. An “unambiguous statute is to be applied, not interpreted.” Sears v. Weimer (1944), 143 Ohio St. 312, 28 O.O. 270, 55 N.E.2d 413, paragraph five of the syllabus. It is only where there is some doubt as to the meaning or ambiguity in the language of a statute that he rules of construction may be employed. Slingluff, supra, paragraph one of the syllabus. This is even true even if extraneous circumstances show that the legislature intended to enact a statute different from that which it did enact. D.T. Wood*583bury & Co. v. Berry (1869), 18 Ohio St. 456, paragraph one of the syllabus.
State v. Allen County Bd. of Comm’rs, 32 Ohio St.3d 24, 512 N.E.2d 332, 335 (Ohio 1987). This court concludes that no ambiguity in the language of O.R.C. § 1309.01(A)(4), § 1317.16, and § 1317.12 exists, and therefore, the court is bound to adhere strictly to the language of the statutes. Because the debtor’s attorney does not come within the definition of debtor, the court concludes that GMAC failed to comply with the statutory requirement that the secured party give notice of the sale of the collateral to the debtor.
When a creditor has failed to comply with the notice requirements of O.R.C. § 1317.16 and § 1317.12, the creditor is barred from asserting a claim for the deficiency and has no right to payment from the debtor. Huntington Nat. Bank v. Stockwell, 10 Ohio App.3d 30, 460 N.E.2d 303, 305 (Ohio App.1983). See In re Lucas, 28 B.R. 366, 370 (Bankr.S.D.Ohio 1982); (denying the creditor any claim against the debtor as a result of the creditor’s failure to give notice pursuant to the less stringent notice requirements of O.R.C. § 1309.47(C)). See also Liberty Nat. Bank of Fremont v. Greiner, 62 Ohio App.2d 125, 405 N.E.2d 317 (1978).
Accordingly, the debtor’s Motion Objecting To Allowance Of Claim Of G.M.A.C. (Doc. 28) is granted and General Motors Acceptance Corporation is denied an unsecured claim.
An order in accordance with this decision is simultaneously entered.
SO ORDERED.
. The issue of whether O.R.C. § 1309.47 or whether O.R.C. § 1317.16 applies was not raised; however, several courts have addressed this issue. See Butz v. Society Nat. Bank of Miami Valley, 83 B.R. 459, 462 (S.D.Ohio 1987); Huntington Nat. Bank v. Elkins, 43 Ohio App.3d 64, 539 N.E.2d 1135, 1139 (1987). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491243/ | MEMORANDUM OPINION
JAMES E. YACOS, Bankruptcy Judge.
The Commonwealth of Massachusetts Department of Revenue has filed two proof of claims for unpaid Massachusetts sales taxes that were assessed more than three years before the bankruptcy petition was filed. One claim is secured and in the amount of $60,720.00; the other is unsecured and in the amount of $690.44. The debtor objects to these proof of claims.
The question I must resolve is whether the taxes are “trust fund” taxes entitled to priority under 11 U.S.C. § 507(a)(7)(C), or whether the taxes are excise taxes and therefore are not entitled to priority under 11 U.S.C. § 507(a)(7)(E) because they are more than three years old.
Recently, Bankruptcy Judge Gabriel, the Chief Bankruptcy Judge for Massachusetts, adopted the majority view on this issue as applied to Massachusetts sales taxes and concluded that the taxes were “trust fund” taxes entitled to priority. See In re St. Hilaire, 102 B.R. 1 (Bankr.D.Mass.1989). His opinion carefully analyzed the federal and state statutory framework, the legislative history, and the case law in reaching his conclusion.
I believe Judge Gabriel’s decision is well-reasoned and I will follow it. This is particularly the case here because I believe there must be a clear indication in the legislative history that an ambiguous statute is intended to change prior law from what existed under the former Bankruptcy Act before the statute is construed to effectuate change. Kelly v. Robinson, 479 U.S. 36, 50, 107 S.Ct. 353, 361, 93 L.Ed.2d 216 (1986); Midlantic Nat’l Bank v. New Jersey Dept. of Envt. Protection, 474 U.S. 494, 500, 106 S.Ct. 755, 758, 88 L.Ed.2d 859 (1986); In re Flo-Lizer, Inc., 916 F.2d 363 (6th Cir.1990)1. In addition, I take comfort in the fact that the three courts that have decided this issue since the decision in In re St. Hilaire was announced have all agreed with its conclusion. See In re Taylor Tobacco Enter., Inc., 106 B.R. 441 (E.D.N.C.1989); In re King, 117 B.R. 339 (Bankr.W.D.Tenn.1990); In re Gulf Consolidated Serv., Inc., 110 B.R. 267 (Bankr.S.D.Tex.1989).
. The contrary decisions on the § 507 question rely on statements made by Floor Managers DeConcini and Edwards, in the absence of a Conference Report, regarding what was to become the pertinent provisions of the 1978 Bankruptcy Code. In this regard, concerning the interpretation of other provisions of that Code, the remarks of Justice Scalia, concurring in Begier v. I.R.S., - U.S. -, 110 S.Ct. 2258, 2267, 110 L.Ed.2d 46 (1990), are particularly apt:
"Representative Edwards, the House floor manager for the bill that enacted the Bankruptcy Code, said on the floor that ‘[t]he courts should permit the use of reasonable assumptions’ regarding the tracing of tax trustfunds. 124 Cong.Rec. 32417 (1978). We do not know that anyone except the presiding officer was present to hear Representative Edwards. Indeed, we do not know for sure that Representative Edwards’ words were even uttered on the floor rather than inserted into the Congressional Record afterwards.” | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491244/ | MEMORANDUM OPINION AND ORDER
HELEN S. BALICK, Bankruptcy Judge.
This is a breach of contract action. Gates Engineering Co., Inc. sued Standard Roofing, Inc. to recover $68,674.09 for roofing materials Standard received but for which it did not pay. Standard denies liability, claiming that inventory it still possesses should be credited against monies it owes Gates. Standard also counterclaims against Gates for breach of contract and tortious interference with its contractual relationships with customers. Standard seeks compensatory and punitive damages and attorney’s fees.
I. Facts
A. The Business Agreement
Gates manufactures roofing materials, including EPDM and Hypalon. EPDM and Hypalon are forms of rubber sheet roofing membrane. Gates’ main office is located in Wilmington, Delaware.
Standard is a New Jersey' corporation whose primary business is the wholesale distribution of roofing materials and supplies to contractors. Standard has four branch offices in New Jersey and one in York, Pennsylvania. In 1983, Standard and Gates entered into a business relationship that, until July 1986, was governed solely by an oral understanding. Standard purchased Gates’ roofing material, neoprene and EPDM, at a wholesale rate, and then sold these materials to contractors and other retail sellers.
There are two grades of roofing materials that are used in the roofing business, firsts and seconds. Seconds are generally older, are of a lower quality, and are less expensive than firsts. Firsts have limited time during which their quality remains at a certain level. This duration is known as their “shelf life”. Standard’s oral agreement with Gates did not allow it to sell Gates’ materials that were seconds.
On July 29, 1986, Gates and Standard executed a written distributor agreement (contract). The contract appointed Standard as “an Independent Distributor” of Gates to promote and sell System I EPDM and System III Hypalon. The contract also designated the geographical territories where Standard was authorized to sell these products and provided that either party could terminate upon 30 days notice.
Gates suggested the idea of the written contract to Standard to conform to its overall business practice. Neither party intended the contract to change the prior oral understanding.
From 1983 to 1988, Standard inventoried and sold a substantial amount of Gates’ products. Several years these sales were over one million dollars. Most of these sales were within the territory designated in the contract. On two occasions, however, Standard sold Gates’ products to contractors for use on Long Island, New York, outside the contract territory. Gates approved of these sales. Standard also inventoried and sold roofing materials of other manufacturers. Specifically, Standard sold EPDM products of Celotex, Koppers Company, and Johns Manville that directly competed in the marketplace with Gates’ EPDM. Standard’s annual profits, however, derived primarily from the sale of Gates’ products.
Gates had approximately 50 distributors throughout the country that it worked with to sell its roofing products. Several of these distributors had territories overlapping the territory of Standard. In several instances, Gates sold its products directly to contractors.
B. The Agreement Terminates
In May 1988, Matt Bowen, regional sales manager for Gates, informally told Peter J. *716McKelvogue, a manager for Standard, that the contract was going to be terminated because of poor sales. At that time, McKelvogue gave Bowen a list of Standard’s inventory of Gates’ products total-ling about $130,000. Bowen examined the inventory and soon after, Gates offered Standard $17,000 in exchange for the return of this inventory. Standard did not accept this offer. Instead, with Bowen’s active assistance, Standard reduced the inventory through sales to a level of about $70,000. In June 1988, McKelvogue wrote to Alan S. Clapperton, Jr., chief executive officer of Gates, to ask about the return to Gates of unsold inventory.
Sometime during the summer of 19881 Gates sent Standard written notice of termination that became effective August 12, 1988. At Gates’ request, Standard moved all its remaining inventory to its Tinton Falls, New Jersey warehouse. In October 1988, Bowen inspected the inventory and discovered that some of the inventory’s shelf life had expired, and also that some of the inventory were seconds. Gates refused to accept any of the inventory.
II. The Merits of Gates’ Claim
Gates’ claim arises from roofing materials Standard ordered and received at various times but for which it never paid. The materials for which Standard did not pay are not the same materials that Standard had remaining as inventory when the contract terminated. Rather, some of the materials for which Standard did not pay were sold to and used by roofing contractors. The aggregate value of these unpaid for materials at the respective times they were shipped to Standard was $60,408.61. Gates also seeks $8,265.48 in service charges pursuant to a 1V2% per month formula it argues was part of the parties’ business agreement. Thus, Gates’ total claim in its complaint is $68,674.09.
In defense, Standard argues that it should have been able to return its remaining Gates’ inventory for a full credit. Standard alleges thé value of the inventory is $69,498.12, which more than offsets Gates’ claim.
A. Standard Should Not Receive an Offset for Unreturned Inventory
The contract did not provide for the return of goods. Standard argues, however, that the course of performance with respect to return of inventory establishes that the parties contemplated Standard would always be able to return inventory. See 6 Del.C. § 2-209(3). This argument fails.
Trial testimony established that Gates had the discretion not to accept inventory, after consideration of factors such as condition, shelf life and merchantability of the inventory. From 1983 onwards, this discretion was exercised on a regular basis to refuse the return of inventory Standard proffered.
Standard also argues that the usage of trade in the roofing industry should allow it to return the inventory. 6 Del. C. § 1-205. Standard did not show by a preponderance of the evidence that such a usage of trade existed. Standard itself had a return policy with respect to its customers that allowed it to refuse returns based on factors similar to those Gates employed.
Standard’s final argument is that Gates breached its implied covenant of good faith in performance of the contract. 6 Del. C. § 1-203. Standard has the burden to show a breach of the covenant of good faith. Coca-Cola Bottling Co. of Elizabethtown v. Coca-Cola Co., 668 F.Supp. 906, 918 (D.Del.1987). Standard points to the contract provision that requires it to “maintain an inventory of Gates Engineering materials.” Standard argues that Gates’ conduct was responsible for unsalea-bility of some of the inventory in October 1988.
This contention is rejected. (See Section I.B. supra). Standard had more than ample notice of the termination of the contract. Gates made a timely offer for the *717return of the inventory. When Standard rejected this offer, Gates worked with Standard to sell off some of the inventory. In addition, some of the inventory was more than a year beyond its shelf life. In light of the established practice of refusing the return of unsaleable inventory, it was reasonable for Gates to refuse the remaining inventory in October 1988.
Standard also relies upon the fact that Gates sold seconds to Geyer Roofing, a customer of Standard. Standard suggests this impeded its effort to reduce inventory. Standard’s contract with Gates related only to firsts. Thus, the sale of seconds to Geyer is not evidence of a breach of duty of good faith. Hancock Paper Co. v. Champion Int’l, 424 F.Supp. 285, 290 (E.D.Pa.1976). Gates did not breach its covenant of good faith.
B. Gates Cannot Claim a Service Charge
Gates asserts that in addition to the price of the goods it shipped to Standard, it can charge Standard interest on the unpaid balance at the rate of llh% per month, or 18% per year. This service charge policy was not part of the contract, nor does Gates point to any evidence of a course of performance effectively adopting this service charge policy. Gates relies upon invoices and monthly bills upon which Gates printed its service charge policy. Gates offers no legal argument or case law, however, to explain how this unilateral action by Gates translates into a contract term about which there was a meeting of the minds. Thus, Gates cannot recover interest on the unpaid balances pursuant to its 1V2% per month service charge policy.
C. Gates May Claim Interest
Gates alternatively argues that it is entitled to interest as an element of contract damages. This proposition is correct. F.E. Myers Co. v. Pipe Maintenance Services, 599 F.Supp. 697, 704 (D.Del.1984). Gates is entitled to prejudgment interest from the date when Standard’s payment for specific merchandise became past due through the date of judgment. Watkins v. Beatrice Companies, 560 A.2d 1016, 1020 (Del.Supr.1989). The applicable rate of interest is determined by 6 Del. C. § 2301(a). 560 A.2d at 1022-23. If Gates cannot provide the evidence necessary to properly compute prejudgment interest, however, the court has the discretion to award prejudgment interest from the date of the complaint. 599 F.Supp. at 705.
According to Gates’ invoices, the date interest becomes due is 30 days past the invoice date for a specific payment. Gates’ damages here flow from multiple payments which became due on different dates spanning many month! See American Original Corp. v. Legend, Inc., 689 F.Supp. 372, 383 n. 5 (D.Del.1988). Proper calculation of the aggregate amount of interest requires Gates to determine:
1. For each component of the unpaid balance, the date from which Gates is entitled to interest; and
2. For each component of the unpaid balance, the applicable rate of interest.
Gates can then compute the interest on each component to the date of this judgment. Gates did not present sufficient evidence at trial to calculate the interest.
III. The Merits of Standard’s Counterclaim
Standard claims the contract was exclusive and that it therefore should be awarded damages for sales Gates made to Standard’s customers within the contract territory before the contract terminated. In defense, Gates argues that the contract is not exclusive and that Standard has not proven its damages.
The first issue is whether the contract is exclusive — whether Standard had the right to sell Gates’ EPDM and Hypalon to the exclusion of other distributors and Gates itself. Standard has the burden to show that the contract was exclusive.
Standard concedes that the contract itself does not contain the word “exclusive” or otherwise expressly create an exclusive distributorship. Standard argues, however, that the contract is ambiguous and that therefore, the court may consider extrinsic evidence in determining the intent of *718the parties regarding the exclusivity issue. Gates agrees that if the contract is ambiguous, extrinsic evidence may be considered.
Standard’s ambiguity argument is supported by Dialist Co. v. Pulford, 42 Md. App. 173, 399 A.2d 1374 (1979). The Dialist court was also confronted with a distributorship contract that did not expressly create exclusive rights. It held that the combination of an assigned territory and the failure to specify whether the territory was exclusive rendered the contract ambiguous. Id. 399 A.2d at 1378 (following New York law). Applying Dialist here, the Gates-Standard contract is ambiguous.
The next issue is whether the extrinsic evidence surrounding the formation of and course of performance under the contract indicates the parties intended the contract to be exclusive.
Initially, the extrinsic evidence presented at trial helped remove the apparent contract ambiguity concerning exclusiveness. Both Gates and Standard’s witnesses testified that the industry normally utilizes nonexclusive contracts. This norm suggests that a contract silent on the exclusivity issue should be treated as non-exclusive. Also, the contract territory included Wilmington, Delaware. This is the location of Gates’ main office. That Gates would have agreed not to sell in a territory including its main office is unreasonable. Finally, Clapperton, President of Gates, explained that the contract territories were listed to correlate to locations where Standard had branch offices, sales offices or warehouses.
The parties’ course of performance also supports a finding of non-exclusiveness. Standard sold roofing materials of other manufacturers that directly competed with Gates’ EPDM and Hypalon. These materials were sold to contractors within the contract territory and before the contract terminated. Standard also sold Gates’ roofing materials outside the contract territory, in locations where Gates had other distributors. Gates was aware of and tacitly approved of this conduct.
Gates contracted with Roofers Mart of Central Pennsylvania, Inc. to sell Gates’ EPDM and Hypalon. The contract, dated November 25, 1987, was materially identical in language to the contract between Gates and Standard. Roofers Mart’s contract listed several counties that were also included in Standard’s contract. All the above described conduct by Gates and Standard is inconsistent with an understanding that the contract was exclusive.
Finally, the evidence concerning formation of the contract must be considered. Schab testified for Standard that prior to the execution of the contract, several employees of Gates suggested to him that the contract was exclusive. Gates’ employees denied making these statements. In addition, McKelvogue of Standard, while professing a subjective understanding that the contract was exclusive, was unable to recall any specific conversation supporting this belief. Standard has not met its burden on this question of fact, and the evidence surrounding the formation of the contract supports a conclusion that the parties contemplated a non-exclusive contract.2
This case is materially different from Dialist and other cases Standard relies upon to argue exclusivity. In Dialist for example, the contract granted “the distributorship” to the distributor, and the manufacturer admitted that he promised that no one else could sell in the listed territory. By contrast, in this case, the contract appointed Standard as “an Independent Distributor,” and Gates (the manufacturer) did not orally promise Standard exclusive rights.
As a matter of fact and of law, the contract between Gates and Standard was not exclusive. In light of this holding, it is not necessary to reach Gates’ other argument concerning proof of damages.
IV. Conclusion
An order in accordance with this Memorandum Opinion is attached.
*719ORDER
AND NOW, February 5, 1991, for the reasons stated in the attached Memorandum Opinion,
IT IS ORDERED THAT:
1. Gates’ claim for the unpaid balance of $60,408.61, with post-judgment interest, is GRANTED.
2. Gates’ claim for prejudgment interest is GRANTED in accordance with the prescribed computations in Section II. C., supra. Gates’ counsel is granted 15 days to provide the court with a form of order stipulated to by opposing counsel.
3. Standard’s counterclaim is DENIED.
. While trial testimony indicated several letters existed pertaining to both the inventory and termination matters, neither counsel chose to introduce them into evidence. This hinders the court's ability to pinpoint precise dates.
. Standard's briefing points to other evidence concerning formation and course of perform-anee it argues supports its position. This evidence is not particularly helpful to either party. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491245/ | ORDER GRANTING MOTION TO LIFT STAY
MASSIE M. TILLMAN, Bankruptcy Judge.
On the 21st day of June, 1990, came on for hearing the Motion Requesting Relief from Stay filed by NCNB Texas National Bank by and through its attorney of record, Haynes and Boone and Response to said Motion filed by Debtor, Brighton Company, by and through its attorney or record, Truman & Spicer, in the above-styled and numbered case. The Court reserved ruling, taking the matter under advisement.
This Court has jurisdiction over these matters pursuant to 28 U.S.C. §§ 157 and 1334, 11 U.S.C. § 362, and Bankruptcy Rule of Procedure 4001.
After review of the pleadings, legal memoranda, arguments of counsel, and legal precedent relevant to the dispute, this Court finds that there is no equity in the property; and such property is not necessary to an effective reorganization since the Proposed Plan of Reorganization contemplates and calls for the foreclosure of the property by NCNB. Therefore, pursuant to 11 U.S.C. § 362, the Automatic Stay shall be modified to allow NCNB Texas to *746take any and all action against the collateral described in the Deed of Trust.
At the June 21, 1990 final hearing on NCNB’s § 362 Motion, the Debtor agreed that the Automatic Stay should be terminated to allow NCNB to foreclose upon its collateral, subject to a condition requiring NCNB to make a minimum bid at the foreclosure sale of the less of the full balance of the debt owed by the Debtor to NCNB, or the fair market value of the collateral, as determined by this Court at a valuation hearing pursuant to Bankruptcy Rule 3012.
The Debtor asked the Court to condition the Modification of the Automatic Stay with a “minimum bid” by NCNB, citing § 105 of the Bankruptcy Code as authority and relying upon United States v. Energy Resources, Inc. et al., — U.S. -, 110 S.Ct. 2139, 109 L.Ed.2d 580.1
NCNB Texas opposes the minimum bid condition, arguing that there is no authority requiring the holder of the debt to make any bid whatsoever on a property that goes up for sale “on the courthouse steps.”
This Court is of the opinion that the request for a minimum bid is not supported by any authority under State or Bankruptcy law in regard to this particular set of circumstances. The Energy Resources, Inc. case cited by Debtor is not dispositive of the issue here. Additionally, this Court recognizes that Judge Akard may have, under certain circumstance, included the condition for a minimum bid in his orders lifting the stay. The Court has not seen any of these orders, nor been provided copies of these orders.
In the case at bar, Debtor had admitted that the “minimum bid” requirement is intended to protect the Debtor as well as Debtor’s partners and/or guarantors against any deficiency claim. However, the Bankruptcy Code does not provide for discharge of guarantors’ obligations. The rights of creditors against guarantors is specifically reserved in § 524(e) of the Bankruptcy Code, which states, “... discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt.”
There have been cases which the discharge of a guarantor in a confirmed plan was upheld on a res judicata theory where the creditor participated in the confirmation process and did not object to, or appeal from, the confirmation of the plan.2 In the instant case, however, NCNB has not agreed to the release of the guarantors as part of its terms.
This Court is of the opinion that it is not the duty of the Bankruptcy Court to protect the liability of guarantors nor shift the burden of sale to banks. Were it not for the Chapter 11 proceeding, NCNB could have foreclosed on the property, proceeded against the guarantors, or exercised both of those options several months ago.
IT IS THEREFORE ORDERED, ADJUDGED AND DECREED that the Motion for Relief from Stay filed by NCNB Texas National Bank be, and it is hereby GRANTED in favor of NCNB Texas National Bank.
IT IS FURTHER ORDERED that the Automatic Stay of 11 U.S.C. § 362 be, and it is hereby MODIFIED to allow NCNB Texas to take any and all action against its collateral as may be allowed by law, including foreclosure upon the same by Substitute Trustee’s Sale or otherwise.
IT IS FURTHER ORDERED that all further relief not expressly granted herein be, and it is hereby DENIED.
IT IS SO ORDERED.
. The United States Court of Appeals for the First Circuit held that the Bankruptcy Court has the authority to order the Internal Revenue Service (IRS) to treat tax payments made by Chapter 11 debtor corporations as trust fund payments where the Bankruptcy Court determines that this designation is necessary for the success of a reorganization plan.
. See, e.g., Republic Supply Co. v. Shoaf, 815 F.2d 1046 (5th Cir.1987). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491246/ | *777MEMORANDUM OPINION AND ORDER
RICHARD L. SPEER, Bankruptcy Judge.
This cause comes before the Court on Plaintiffs Complaint requesting that the Defendant be denied a discharge in bankruptcy and/or it be determined that certain alimony obligations be declared nondis-chargeable. A pre-trial was held on the complaint and a trial date was scheduled. This date was subsequently vacated and the parties have agreed to submit only the issue of dischargeability of alimony to the Court upon the record and written arguments of counsel. The Court has reviewed the written arguments of counsel as well as the entire record in the case. Based on that review, and for the following reasons, this Court believes the Plaintiffs Motion for Summary Judgment should be denied and the debt declared dischargeable.
FACTS
The facts in this case are not in dispute. The Plaintiff, Vitella N. Cornett, and the Defendant/Debtor, Thomas P. Cornett, were divorced in Lucas County Common Pleas Court on July 20, 1984. At the time of the divorce, the parties did not have any minor children.
As a result of the divorce decree, the Defendant was ordered to pay the Plaintiff Six Hundred Dollars ($600.00) per month as alimony. Additionally, the Plaintiff was awarded the residence at 618 Dorcas and was to hold the Defendant harmless on a land installment contract obligation on the property. In accordance with the divorce decree, the Plaintiff transfered her interest in the rental property, which is now the subject of this dispute, to the Defendant. The Defendant assumed the mortgage payments on the rental property and was to hold the Plaintiff harmless on this obligation. The Defendant also assumed responsibility for several mortgage payments that arose prior to the divorce as the mortgage was not current when deeded to him.
The Defendant then sold the rental property and the purchaser subsequently defaulted. The Defendant was unable to pay the mortgage and the lender foreclosed. A deficiency judgment was assessed against the Defendant. During this time, the Defendant filed for bankruptcy. The Plaintiff, who is now a defendant in a collection suit filed in Lucas County Common Pleas Court, seeks to have the mortgage obligation declared nondischargeable as alimony and support. The Defendant argues that the debt is a property settlement and is therefore a dischargeable debt.
LAW
The dischargeability of the mortgage obligation is governed by 11 U.S.C. § 523(a)(5), which states in pertinent part:
§ 523 Exceptions to Discharge
(a) A discharge under section 727 ... of this title does not discharge an individual debtor from any debt—
(5) to a spouse, former spouse, or child of the debtor, for alimony to, maintenance for, or support of such spouse or child, in connection with a separation agreement, divorce decree or other order of a court of record, determination made in accordance with state or territorial law by a governmental unit, or property settlement agreement, but not to the extent that—
(B) such debt includes a liability designated as alimony, maintenance, or support, unless such liability is actually in the nature of alimony, maintenance, or support.
Under this provision, those obligations which are imposed by a divorce decree, and which are in the nature of alimony, maintenance, or support, are not dischargeable in a Chapter 7 proceeding.
It is well established that Bankruptcy Courts are not required to accept as determinative those statements within a divorce decree which label a particular obligation as alimony or as a property settlement arrangement. In re Singer, 787 F.2d 1033, 1035 (6th Cir.1986); In re Conrad, 33 B.R. 601, 603 (Bankr.N.D.Ohio 1983). Rather, the Court may examine the facts and circumstances of each case, and make a determination based upon federal bankruptcy *778law. In re Calhoun, 715 F.2d 1103, 1107 (6th Cir.1983); In re Hoover, 14 B.R. 592 (Bankr.N.D.Ohio 1981). The Court may look to state law for guidance. In re Calhoun, 715 F.2d at 1108-09.
The Sixth Circuit has set forth a four-tier test to be used in determining whether the particular debt is alimony or a property settlement:
(1) Whether the intent of the state court or the parties was to create a support obligation;
(2) Whether the support provision has the actual effect of providing necessary support;
(3) Whether the amount of support is so excessive as to be unreasonable under traditional concepts of support; and
(4) If the amount of support is unreasonable, how much of it should be characterized as nondischargeable for purposes of federal bankruptcy law.
In re Calhoun, 715 F.2d at 1109-10 (emphasis added).
Once any of the tiers are answered in the negative, the inquiry ends and the obligation is deemed dischargeable. Id.
In analyzing the first tier, the Court must ascertain whether the assumption of the debt was intended to create a support obligation. In re Calhoun, 715 F.2d at 1109. This Court believes that neither the parties nor the state court intended the assumption of the mortgage to be a support obligation.
At the time of the divorce, the parties owned two pieces of real estate. The division of this real property was done in such a way that it appears to be a property settlement and not an alimony agreement. Ms. Cornett was given the residence on Dorcas and was to assume liability for a land installment contract on the same. Mr. Cornett was given the property on Poplar Street and was to assume the liability for a mortgage on the same. There were no provisions in the state court’s divorce decree for termination of either of these obligations upon remarriage. The presence of this type of provision, terminating the Debtor’s obligation upon remarriage of the Plaintiff, would support a finding that the obligations were intended for support.
Having satisfied the first tier, that the parties did not intend that the assumption of the mortgage be support for the Plaintiff, this Court’s inquiry ends and the debt is deemed dischargeable under Calhoun.
In reaching these conclusions, the Court has considered all the evidence and arguments of counsel, regardless of whether they are specifically mentioned in this opinion.
It is therefore Ordered that the Plaintiff’s Motion for Summary Judgment be denied and the Defendant’s Motion be, and is hereby, granted. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491249/ | MEMORANDUM
JOHN C. MINAHAN, Jr. Bankruptcy Judge.
This is an action by the debtor, Milo Smith, to determine the validity, priority or extent of the defendant, Ruthelma Smith’s interest in payments to be made under a land sale contract. Her interest, which was obtained in connection with her divorce from the debtor, is also sought to be avoided under 11 U.S.C. § 544. The parties have submitted this matter to the court for decision upon a stipulation of facts.
In 1974, debtor and defendant, then husband and wife, acquired joint title to a parcel of land in Chase County, Nebraska. In June 1980, debtor and defendant sold the property by a land sale contract. In April 1982, debtor and defendant were granted a divorce. Under the divorce decree, defendant, Ruthelma Smith, was to receive all rights under the land sale contract as her separate property and she thereafter received payments made on the land sale contract for the years 1983 through 1989. Debtor claims that he has a legal interest in the land, because title is still in the name of he and Ruthelma Smith. Debtor asserts that Ruthelma Smith’s interest in the land and land contract is avoidable under 11 U.S.C. § 544 because her interest is not duly recorded. Debtor, thus seeks to avoid Ruthelma’s interest in the land contract payments so that this revenue can be used by debtor under the plan of reorganization.
Ruthelma Smith argues that her interest in the land contract and in the payments to be made on the land contract are not property of the debtor’s bankruptcy estate. *857She relies on the fact that under a state court judgment all rights under the land sale contract were awarded to her as her separate property.
I conclude that Ruthelma Smith’s argument is valid. After execution of the land contract, Milo Smith and Ruthelma Smith had bare legal title to the land and a vendor’s rights under the land contract. Upon entry of the state court judgment, Ruthelma Smith became the owner of all rights under the land contract and Milo Smith thereafter had no ownership interest in the land contract or in payments to be made thereunder. It should be noted that Ruthelma’s interest in the land contract was a matter of public record. Legal title to the underlying property was in the name of Milo Smith and Ruthelma Smith. Further, Ruthelma Smith was a vendor under the recorded land contract. Under the state court judgment, Ruthelma obtained Milo Smith’s interest in the land contract and that fact became of public record when the judgment was docketed. I therefore conclude that the land contract and the right to receive payments under the land contract are not property of Milo Smith’s bankruptcy estate.
Milo Smith was a titleholder of record on the underlying land at the time this bankruptcy case was commenced. The bankruptcy estate includes only Milo Smith’s interest in property. When a debt- or holds only legal title and another party holds the equitable interest, only the debt- or’s legal interest constitutes property of the bankruptcy estate. See 11 U.S.C. §§ 541(a)(1) and 541(d). Upon entering into a land sale contract the interest in property is deemed transferred to the vendee under the doctrine of equitable conversion. The interest held by the vendor is considered personal property. The legal title is retained by the vendor as security for payment on the debt. See Buford v. Dahlke, 158 Neb. 39, 62 N.W.2d 252 (1954); DeBoer v. Oakbrook Home Association, Inc., 218 Neb. 813, 359 N.W.2d 768 (1984); Ehlers v. Vinal, 382 F.2d 58 (8th Cir.1967). Milo Smith’s holding of legal title to the land is really of no significance under Nebraska law, as he has no equitable interest in either the underlying land or in payments to be made under the land contract. I conclude that property of this bankruptcy estate does not include the interest of Ru-thelma Smith in the payments to be made under the land contract. The land contract payments are her property and Milo Smith has no interest in the payments under Nebraska law. Milo Smith has legal title in the real estate and his legal title is property of the bankruptcy estate.
Having concluded, in first instance, that Ruthelma’s interest in the land contract is not property of the bankruptcy estate, we must now consider whether Ru-thelma’s interest may be drawn back into the bankruptcy estate under 11 U.S.C. § 544. If Ruthelma’s interest in the property is avoided under 11 U.S.C. § 544, her interest would become property of the bankruptcy estate under 11 U.S.C. § 541(a)(3).
As of the commencement of the bankruptcy case, the trustee (or debtor in possession) is given the status and power to avoid transfers voidable by judicial lien creditors, unsatisfied execution creditors, or bona fide purchasers of real property. 11 U.S.C. § 544(a). As stated above, a vendor’s remaining interest in a land sale contract is personal property. As such, Ruthelma’s interest in the land contract and land contract payments may be avoided if a levying creditor of Milo Smith would take priority over her interest under Nebraska law. A levying creditor of Milo Smith would not prevail against Ruthelma because all rights under the land sale contract are Ruthelma’s property. Under the state judgment, Ruthelma was awarded all rights under the land sale contract for her share of marital property. Therefore, Milo Smith retained nothing upon which his creditors could levy. Thus, Ruthelma’s interest in the land sale contract is not avoidable under 11 U.S.C. § 544.
Debtor contends that according to the land records, debtor and Ruthelma have legal title to the land sold. Further, debtor asserts that although the land sale contract is recorded, a hypothetical creditor of debt- *858or could attach his interest in the land contract. Similarly, debtor argues that a hypothetical bona fide purchaser of real property could acquire debtor’s interest in the land. Thus, debtor concludes that Ru-thelma’s interest in the land contract and land contract payments may be avoided under 11 U.S.C. § 544.
Assuming arguendo that Milo Smith did retain an interest in the land sale contract that could be attached by a levying creditor, I conclude that Ruthelma’s interest would take priority over such levying creditor under Nebraska law. As stated above, a vendor’s remaining interest in a land sale contract is personal property not real property. Even if Milo Smith’s interest was considered real property the interest of Ru-thelma could not be avoided. The land contract was duly recorded. Therefore, a hypothetical bona fide purchaser of real property would have notice of the contract and be subordinate thereto. Thus, there is no basis for avoidance under 11 U.S.C. § 544(a)(3).
Since the land contract is personal property under Nebraska law, we must consider whether a levying creditor could defeat Ru-thelma Smith. As against a hypothetical levying or garnishing creditor of Milo Smith, Ruthelma would also have priority. Ruthelma’s rights in the land sale contract are represented by a judgment from the state court. See Neb.Rev.Stat. § 42-366 (Reissue 1988). A right represented by a judgment (other than a judgment taken on a right to payment which was collateral) is not subject to the perfection requirements of Article 9 of the Uniform Commercial Code. U.C.C. § 9-104(h). Thus, Ruthelma was not required to file a financing statement in order to perfect her interest in the land sale contract. Under Nebraska law, a garnishing or levying creditor takes subject to any unrecorded transfers or interests that arose before the garnishment or levy. See Scoular Grain Company v. Pioneer Valley Savings Bank, 233 Neb. 608, 610, 447 N.W.2d 38, 40 (1989) (judgment lien was subject to an earlier unrecorded contract for the sale of real estate). On the facts of this case, not only did Ruthelma Smith have an interest in the underlying land contract before the bankruptcy case was filed, but her interest was of record through docketing of the state court judgment. Under Nebraska law, Ruthelma Smith’s interest would be enforceable against and have priority over a creditor of Milo Smith who levied upon her interest on the date this bankruptcy case was commenced. Therefore, Ruthelma Smith’s interest in the land sale contract and in the payments to be made thereunder, is not avoidable under 11 U.S.C. § 544(a)(1) or (a)(2).
Accordingly, the rights under the land sale contract are not property of debtor’s bankruptcy estate and may not be avoided and drawn into the estate under 11 U.S.C. § 544. A separate order will be entered consistent herewith. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491250/ | ORDER
JOHN L. PETERSON, Bankruptcy Judge.
In this adversary proceeding, the following matters are pending:
1. The standing of the Chapter 12 Trustee to bring this action under §§ 544 and 548 of the Code;
2. Defendants’ Motion to Dismiss; and
3. Plaintiff Trustee’s Motion for Summary Judgment.
1. Trustee’s Standing.
This adversary proceeding seeks to avoid certain alleged fraudulent transfers between Chapter 12 Debtors, family members, and a family corporation. The Chapter 12 Trustee commenced this action under §§ 544(b) and 548 of the Code.
Under § 1203, which is patterned after § 1107 of the Code, it is provided:
“Subject to such limitations as the court may prescribe, a debtor in possession shall have all the rights, other than the right to compensation under section 330, and powers, and shall perform all the functions and duties, except the duties specified in paragraphs (3) and (4) of section 1106(a), of a trustee serving in a case under chapter 11, including operating the debtor’s farm.”
5 Collier on Bankruptcy, 111203.01, p. 1203-3 (15th Ed.) states in discussing Section 1203:
“All of the avoidance powers of chapter 5 of the Code are also vested in the debtor in possession. These include the *888power to avoid certain transfers and obligations under section 544, statutory liens under section 545, preferential transfers under section 547, fraudulent transfers and obligations under section 548, post-petition transfers under section 549, and improper setoffs under section 553. The debtor in possession also has the authority under section 554 to abandon any property of the estate that is burdensome or of inconsequential value or benefit to the estate.”
By contrast, the duties of the Chapter 12 Trustee are limited under § 1202(b). Specifically to the present case, § 1202(b)(2) permits the Court to order the Trustee to perform the duties of a Chapter 11 Trustee under Section 1106(a)(3) and (a)(4) if the Court finds cause to do so, and if the Court has been requested to do so by the Trustee, the United States Trustee, or by any other party in interest. Section 1106(a)(3) directs the Trustee to investigate the acts, conduct, assets, liabilities, and financial condition of the Debtor, the operation of the Debtor’s business, the desirability of continuance of the Debtor’s business, and any other matters pertinent to the cause or the formulation of a Plan. Section 1106(a)(4) directs the Trustee to file and serve a report regarding the Trustee’s investigation. See, e.g., In re Graven, 101 B.R. 109 (Bankr.W.D.Mo.1988), enforcing, 84 B.R. 630 (Bankr.W.D.Mo.1988), where the court directed the Trustee to investigate pre-petition activities of the Chapter 12 Debtors, and then considered, after investigation, the proper disposition of the case by converting the case to Chapter 7.1 As 5 Collier on Bankruptcy, ¶ 1202.1, p. 1202-7 points out:
“Overall, the duties of the Chapter 12 Trustee are similar to those of the Chapter 13 Trustee, though of a lesser magnitude. The most notable differences between the two is that the Chapter 12 Trustee is not charged with the Chapter 13 Trustee’s duty of advising and assisting the Debtor in performing under the Plan. Nor will the Chapter 12 Trustee investigate the Debtor’s business unless specifically ordered by the court. This reduced role reflects a congressional decision to allow the family farmer to continue the farming business without assistance or interference from the Trustee.”
There are two ways in which the Chapter 12 Trustee’s ordinary duties are expanded. One is to remove the Chapter 12 Debtor from possession for cause under § 1204, upon which event the Chapter 12 Trustee duties are expanded under § 1202(b)(5) to encompass the duties, among others, of § 1203. Upon this occurrence, the Chapter 12 Trustee will then be granted the avoidance powers under Chapter 5, described above. The other method is for the Chapter 12 Trustee to seek authority to limit the Chapter 12 Debtor’s rights and duties under § 1203, which is prefaced by the proviso, “Subject to such limitation as the court may prescribe, * * Upon proper application of a Chapter 12 Trustee, the power of the Chapter 12 Debtor-In-Possession to exercise Chapter 5 avoidance powers may be reduced, and that power placed in the Chapter 12 Trustee where the facts indicate that the Debtor is not performing his duties in the best interests of the creditors. The proviso in § 1203 is nearly identical to language contained in § 1107(a) (“Subject * * to such limitations or conditions as the court prescribes * * ”), which 5 Collier on Bankruptcy, 111107.2, p. 1107-2 (15th Ed.) discusses as follows:
“The beginning language of section 1107(a) is easily overlooked but can have real importance in any given situation. * * * Thus, that which follows and gives to the debtor in possession the rights and powers of a trustee is subject to any conditions that the court may impose.”
*889Matter of Gaslight Club, Inc., 782 F.2d 767, 770-771 (7th Cir.1986) holds:
“The Bankruptcy Code authorizes the bankruptcy court to ‘issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.’ 11 U.S.C. § 105(a). Further, it states that the rights and powers of a debtor in possession are subject ‘to such limitations or conditions as the court prescribes.’ 11 U.S.C. § 1107(a). The case law demonstrates that the court has considerable authority to interference with the management of a debtor corporation in order to protect the creditors’ interests.”
If, for example, as the Chapter 12 Trustee charges in the present case, the Debtor-In-Possession refuses to commence avoidance actions to protect creditors because the Debtor willingly participated in such activities, then the Chapter 5 avoidance powers of the Debtor may, upon proper application of the Trustee or creditor, be circumscribed and those powers placed in the Chapter 12 Trustee.2
In the pending action, the Chapter 12 Trustee has not sought a Court Order to either investigate the pre-petition activities of the Chapter 12 Debtor under § 1202, restrict the Chapter 12 Debtors duties and powers under § 1203, remove the Debtor as Debtor-In-Possesson under § 1204, or convert this ease to Chapter 7 under § 1208. I conclude, based upon the above discussion, that until the Chapter 12 Trustee triggers a Court order authorizing the Trustee, as opposed to the Debtor-In-Possession, to bring this avoidance proceeding, the Chapter 12 Trustee has no standing as a Plaintiff in this cause. By reason of this holding, a decision on the other pending Motions is presently unnecessary.
IT IS ORDERED the Chapter 12 Trustee Plaintiff shall have ten (10) days to make proper application to gain standing to continue this action or this adversary proceeding will be dismissed.
. In two Chapter 12 cases, In re Caldwell, 101 B.R. 728 (Bankr.Utah 1989) and In re Reinbold, 110 B.R. 442 (Bankr.D.S.D.1990), the courts converted the cases to Chapter 7 under § 1208(d), based on findings of fraud of the Debtors. Reinbold indicates the remedy to treat fraud is either dismissal or conversion under § 1208. Id. at 445-446. See also, In re Zurface, 95 B.R. 527 (Bankr.S.D.Ohio 1989). Conversion to Chapter 7 allows the Trustee to seek return of all assets fraudulently transferred. This remedy has not been sought in this case.
. The Debtor and Trustee’s avoidance powers are different under Chapter 13, where case law has developed a split of authority as to the power of a Chapter 13 Debtor, vis-a-vis the Chapter 13 Trustee, to bring an avoidance action. Compare, In re Mast, 79 B.R. 981 (Bankr.W.D.Mich.1987) with Matter of Einoder, 55 B.R. 319 (Bankr.N.D.Ill.1985). Clearly, rights and duties of a Chapter 13 Trustee and Debtor are not the same as those in a Chapter 12 case, which is patterned after Chapter 11 statutory provisions. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491253/ | MEMORANDUM OF DECISION
JAMES B. HAINES, Jr., Bankruptcy Judge.
Before the court is the trustee’s complaint seeking a turnover of estate property pursuant to 11 U.S.C. § 542(a). Joined in his efforts by Fleet Bank,1 the trustee seeks to compel George Lussier Enterprises, Inc., d/b/a Corvette City (“Lussier” or “Corvette City”) to turn over a 1985 Chevrolet Corvette2 presently stored at Corvette City’s facility.in Manchester, New Hampshire.
Based upon the testimony and the exhibits introduced in evidence, the court hereby enters the following findings of fact and conclusions of law.3
Findings of Fact
Dale Achorn (“Achorn” or “Debtor”) filed a petition for relief under Chapter 7 on May 7, 1990. Prior to the filing, he held an ownership interest in the Corvette. The car’s title certificate remained in the hands of Fleet Bank (“Fleet”), which obtained a valid, perfected, first priority security interest in the vehicle4 when it extended credit to Achorn in the amount of $10,-018.00 on April 25, 1987.5 As of the trial date, February 12, 1991, Achorn owed Fleet $6,605.14, comprised of $5,874.54 in principal and $730.60 in interest, all of which accrued post-petition.
Before his bankruptcy, Achorn borrowed from Fleet on a number of occasions. The loans were typically secured by motor vehicles owned by Mr. Achorn.6 From time to time, he would trade or sell encumbered cars, necessitating the bank’s release of its security interest to provide clear title to third parties. Fleet would release its lien and accept a substitution of collateral if the new collateral was of equal or greater value than the collateral released and if Ac-horn could produce lien-free title to it.7
*152In August 1988, Achorn suggested substituting another vehicle for the Corvette that secured Fleet’s $10,018.00 note. He raised with Jack Kenney the possibility of replacing the Corvette with a 1984 Cadillac convertible as security for the loan. Although the proposal was discussed, the Debtor never tendered to Fleet the title for the Cadillac, the bank never processed the substitution, and its lien on the Corvette was never released.8
On August 16, 1988, the Debtor entered into a compact with Corvette City, agreeing to trade the Corvette in on a 1984 Cadillac Eldorado convertible.9 The Corvette was given a trade in value of $15,000.00 against the Cadillac’s $18,500.00 purchase price, with the balance paid in cash or by check.10 Achorn left the Corvette at the dealership and drove away in the Cadillac. Lussier planned to sell the Corvette at once, but, around October 1, 1988, it was taken off the sales lot and moved to storage space in a nearby hangar building, where it remains. Lussier removed the car from the lot because there was a “problem with the titles” that precluded immediate resale.
Lussier repaired and reconditioned the Corvette during the period from June 8, 1989 through January 1990. Repairs were made to keep the car in running condition and to “prepare it for sale”. The repairs and renovations were completed at Lussier’s shop pursuant to in-house repair orders, reflecting that, at the time the repairs were made, Corvette City considered itself to be the owner of the car. None of the work was performed at the request of either Mr. Achorn or of Fleet. According to Lussier’s records the work was “billed” at $779.00, a wholesale figure. The car was fitted with new tires at a neighboring business at a wholesale price of $800.00.
By February 1990, Fleet had referred Achorn’s account to its collections department because of occasional payment defaults. Through Achorn, a Fleet employee attempted to locate the Corvette for possible repossession. Achorn referred her to Corvette City and, in response to her inquiries, the corporation’s president informed her that the Corvette had been accepted in trade, that Corvette City had repaired and stored it, and that the Corvette would not be released to any party without payment for repairs and storage.
Without the repairs and new tires, the car would be worth $1,500.00 to $2,500.00 less than it is today. The present value of the car is $13,000.00 at retail, or $9,500.00 at wholesale, based upon the NADA blue book.11 Daniel Lussier also explained that Corvette City has stored the car in its hangar space since approximately October I, 1988. The company asserts that it is entitled to storage fees at the rate of $10.00 per day from that date to the present.12
Conclusions of Law
The trustee invokes 11 U.S.C. § 542(a)13 to compel Corvette City to turn the car *153over to him for disposition. Fleet, by reason of its security interest, seeks the same result so that it can see its collateral liquidated to satisfy its claim. Corvette City resists, asserting possessory garageman’s liens for storage14 and repairs.15 It contends that its lien claims of $8,650.00 for storage16 and of $1,579.00 for repairs, coupled with Fleet’s $6,605.14 secured claim, exceed the worth of the Corvette, rendering it of “inconsequential value” to the estate, thereby precluding the trustee from requiring it to relinquish the car.
Without doubt, the Corvette is property of the estate.17 Although on the commencement date he no longer had possession of the car, Mr. Achorn remained its owner of record.18 Consistent with his statutory duties,19 the trustee wishes to obtain the vehicle and reduce it to money through sale.20 Given the uncontroverted evidence that the Corvette presently is worth from $9,500.00 to $18,000.00, the trustee is entitled to judgment ordering Corvette City to deliver it to him, unless its claimed liens are valid and consume all value exceeding Fleet’s unchallenged lien, rendering the car’s worth to the estate of no consequence.21
In establishing a statutory garage-man’s lien for repairs, the “specified requisites must be strictly observed.” Iacomini v. Liberty Mutual Ins, Co., 127 N.H. 73, 497 A.2d 854, 857 (1985), quoting Manchester Federal Sav. & Loan Asso. v. Letendre, 103 N.H. 64, 68, 164 A.2d 568, 572 (1960). An essential prerequisite to the lien is the owner’s consent. Iacomini v. Liberty Mutual Ins. Co., supra, 497 A.2d at 857. The lien’s foundation is in the contractual relation between lienor and lienee. Id. See also Hiltz v. Gould, 99 N.H. 85, 105 A.2d 48 (1954). Corvette City’s claim to a lien for repairs must fail for lack of this essential. Neither Mr. Ac-horn or Fleet requested that repairs be made.
According to Corvette City’s own witness, maintenance repairs and reconditioning were undertaken for two reasons: first, to prepare the car for resale; and *154second, to keep the car in running condition, a requirement for storage. The work was done by Corvette City for its own reasons and was “billed” on in-house repair orders. No formal or informal billing issued either to Fleet or to Achorn. In the absence of consent, the lien must fail. Iacomini v. Liberty Mutual Ins. Co., supra.
Corvette City argues that, whatever can be said about its claim for a repair lien, it has established a lien for storage charges and that the storage lien alone combines with the bank’s secured claim to exhaust any value the car might hold for the estate. Although the path to decision on this point is not so brief, the pertinent principles, inimical to the storage fee lien claim, are equally clear.
New Hampshire’s statute provides that a person who maintains facilities for storing motor vehicles may claim a possessory lien on a vehicle “brought to his premises or placed in his care by or with the consent of the legal or equitable owner” for “proper charges due him for the parking, storage or care of the same.”22 Just as the foundation for a garageman’s or mechanic’s repair lien is consent, so, too, is some form of consent the basis upon which a storage lien rests. Consent can be express, as when an owner or authorized agent places a vehicle in the care of a garageman for a term. The requisite consent can also be implied, as when an owner fails or refuses to reclaim a vehicle upon the completion of repairs, thereby necessitating storage. See generally Annot., 48 A.L.R.2d 894, § 4 (1956 & Supp.1990.)23
When Achorn left the car at Corvette City, he did so as a part of an agreement to transfer ownership in exchange for credit against the 1984 Cadillac’s purchase. Delivering the car was not a temporary transfer of possession with the expectation of later reclamation. Rather, it was a surrender of possession. At the time, Corvette City was aware that Fleet held a security interest in the car.24 It took the trade and, having done so without a “clean” title for the Corvette in hand, it also assumed the risk that its interests would remain subordinate to Fleet’s.
All that Corvette City did was in furtherance of its role as a frustrated vendee. Having taken the risk of parting with the Cadillac without cementing its rights in the Corvette, it was ultimately frustrated by Achorn’s contract breach and, ultimately, by his insolvency.
On the filing of the bankruptcy, Corvette City’s possessory interest as ostensible vendee became subject to the interests of the trustee, as well.25 Corvette City had not yet obtained a new title for the car. At the filing, it held no record interest in it.
Corvette City’s claim against Achorn is, concededly, one for breach of contract. However, it is for breach of a purchase and sale contract, rather than breach by nonpayment for requested repairs or storage.26 As such, it is an unsecured claim, unaided by the garageman’s lien statute. Thus, the car’s value to the estate is not diminished by the claimed liens.27 The Corvette must be surrendered to the trustee.28
*155CONCLUSION
For the reasons set forth above, judgment will be entered for the trustee.
. Fleet Bank of Maine is successor by merger to Merrill/Norstar Bank and Norstar Bank, each of which dealt with the Debtor. For the sake of simplicity, reference throughout this opinion will be to Fleet Bank.
. The vehicle in question, V.I.N. 1G1YY0787F5100396, will be referred to as the "vehicle,” the "car” or the "Corvette” throughout this opinion.
. See B.R. 7052.
. Defendant’s Exhibit 2, certificate of title. For purposes of this proceeding, Fleet Bank’s interest and priority are unchallenged.
. Defendant’s Exhibit 1, consumer note.
. Testimony established that the Debtor presented himself as a collector of and dealer in automobiles.
. According to Mr. Jack Kenney, a former bank vice-president, Fleet had agreed to collateral exchanges requested by Achorn in the past. Confirming the value of the new collateral consisted of a visual inspection coupled with reference to the National Auto Dealers Association monthly booklet of vehicle values (the “blue book”).
. Mr. Kenney testified that, after referring to the blue book, he was satisfied that the Cadillac was of equal or greater value than the Corvette, although he apparently never inspected it firsthand. His testimony that the substitution was never processed and that the bank’s lien on the Corvette was never released, or ever promised to be released, is uncontroverted.
. Lussier Exhibit 1 is a copy of a Motor Vehicle Purchase Agreement/Bill of Sale, detailing the transaction. Although dated August 16, 1988, it is unsigned. Daniel Lussier, testifying for Corvette City, stated that Mr. Achorn signed a handwritten bill of sale that day.
. The transaction was negotiated by a Corvette City salesman. Daniel Lussier, who was then manager of Corvette City's specialty (collectible and exotic) car division, was informed of the terms. The deal was approved finally by Mr. George Lussier, the company’s president.
. These values, testified to by Daniel Lussier, are unchallenged.
. Mr. Lussier testified that the rates for specialty car storage in Manchester, New Hampshire range from $15.00 to $25.00 per day.
. 11 U.S.C. § 542(a) provides:
(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 *153value of such property, unless such property is of inconsequential value or benefit to the estate.
The exceptions set forth in subsection (c) and (d) are not applicable here.
. The parties agree that the law of New Hampshire is to be applied in determining the validity and extent of Corvette City’s asserted possessory liens. New Hampshire has recognized the ga-rageman’s storage lien in N.H.Rev.Stat.Ann. § 450:1, which states:
Any person who maintains a public garage, public or private airport or hangar or trailer court for the parking, storage or care of motor vehicles or aircraft or house trailers brought to his premises or placed in his care by or with the consent of the legal or equitable owner shall have a lien upon said motor vehicle or aircraft or house trailer, so long as the same shall remain in his possession, for proper charges due him for the parking, storage or care of the same.
. New Hampshire’s possessory garageman’s lien for repairs found N.H.Rev.Stat.Ann. § 450:2 provides:
Any person who shall, by himself or others, perform labor, furnish materials, or expend money, in repairing, refitting or equipping any motor vehicle or aircraft, under a contract expressed or implied with the legal or equitable owner, shall have a lien upon such motor vehicle or aircraft, so long as the same shall remain in his possession, until the charges for such repairs, materials, or accessories, or money so used or expended have been paid.
. Through February 11, 1991, with additional accrual of $10.00 per day thereafter
. 11 U.S.C. § 541(a)(1).
. Defendant’s Exhibit 2, certificate of title.
. 11 U.S.C. § 704.
. 11 U.S.C. § 363.
. Corvette City asserts that its lien is entitled to priority over the bank. If the liens were valid, the assertion would likely prove out. See N.H. Rev.Stat.Ann. 382-A:9-104(c), 9-310. See generally, Annot., 48 A.L.R.2d 894, § 12 (1956 & Supp.1990); II G. Gilmore, Security Interests in Personal Property § 33.3 (1965). However, relative priority between or among lienors is not at issue here. Given today’s determination, it will not become necessary to decide the issue.
That the Debtor might assert an exemption in the Corvette, thereby consuming $1,200.00 of otherwise available equity and rendering the asset of inconsequential value to the estate is highly unlikely given the content of Maine’s exemption statute and the August 1988 trade-in. See 14 M.R.S.A. § 4422(2).
. N.H.Rev.Stat.Ann. § 450:1, supra n. 14.
. Cf. State v. Hill, 115 N.H. 37, 332 A.2d 182 (1975) (affirming criminal conviction for interference with rights of towing and storage lienor under N.H.Rev.St.Ann. § 266:3).
. Lussier Exhibit 1, the purchase agreement lists Fleet as lienor, albeit as lienor on the Cadillac. Thus, the parties contemplated the substitution of collateral that Achorn earlier had suggested to the bank, but which was never effected.
. See, e.g., 11 U.S.C. § 544.
. The testimony of Mr. Lussier makes this conclusion plain. When asked if the Corvette would be released voluntarily without payment for storage and repairs, he responded that, absent payment, it would not be surrendered "until we get the Cadillac back."
. At trial, Corvette City raised a potential quantum meruit claim on account of improvements it made to the vehicle. However, such a claim is properly characterized as one for "reliance damages" arising from Achorn's breach of his promise to convey clear title. See Restatement (Second) of Contracts § 90 (1981). That issue is not before the court. In any event, it is not secured by the asserted liens.
. The question of to what extent Fleet Bank, or any other entity, may be surcharged for the value of post-petition storage charges under 11 U.S.C. § 506(c) is not before the court. In that *155regard, however, it should be noted that pre-fil-ing storage, like the repair work, was a consequence of the aborted sale. The value of that storage is or may become a component of Corvette City's unsecured breach of contract claim. Post-petition storage fees, which unquestionably preserved the asset, should have accrued no longer than through July 31, 1990, when the trustee filed this action demanding the vehicle's release. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491255/ | MEMORANDUM OPINION
MARK B. McFEELEY, Chief Judge.
This matter came before the Court on December 4, 1990, to consider confirmation of the debtors’ second amended plan dated September 25, 1990. Two issues were raised by CIT Group/Equipment Financing, Inc. (CIT), and the Court continued the confirmation hearing pending the resolution of these issues. The Court must decide: 1) whether an amended proof of claim filed after the bar date will be allowed; and 2) whether the debtors’ plan violates the absolute priority rule.
FACTS
On July 22, 1988, an involuntary petition was filed against C.P.M. Construction by Larry E. Morgan and Paul Alan Morgan. On the same day, voluntary petitions were filed by Larry E. Morgan and Jeannie Denise Morgan and by Paul Alan Morgan and Diane Annette Morgan. The cases were consolidated for joint administration by order dated September 15, 1989.
An order for relief as to C.P.M. was entered in the jointly administered cases on March 16, 1990. On April 3, 1990, the debtors filed a motion to set claims bar date. That motion was granted on April 24, 1990, and the Court set May 31, 1990, as the claims bar date. A notice of claims bar date was sent to all creditors on May 1, 1990. The notice of claims bar date was supplemented on May 16, 1990, in order to notify creditors who were not listed on the original matrix provided by the Bankruptcy Court clerk. CIT Group is listed twice on the matrix which was sent on May 1, 1990, at a Denver address and at an address in Vancouver, Washington. CIT is also listed on the May 16, 1990, matrix, with an ad*337dress in Tempe, Arizona. CIT does not dispute that it received notice of the bar date.
On May 15, 1990, CIT timely filed its proof of claim in the amount of $136,-651.15. The debtors filed their first disclosure statement and first plan of reorganization on June 15, 1990. The disclosure statement lists CIT’s claim at $136,651.15. CIT did not file an objection to the disclosure statement.
On September 13, 1990, the debtors and CIT filed a stipulation valuing collateral (equipment) at $103,500. On September 25, 1990, the debtors’ second disclosure statement was filed. CIT is provided for on page 13, where the disclosure statement states that CIT shall retain its lien and further states that the debtors believe the value of the equipment to be $103,500. The disclosure statement then indicates that any unsecured portion of CIT’s claim will be treated as a class 11 unsecured claim. On October 16, 1990, the Court approved the second disclosure statement and fixed a time for balloting on the plan as well as for filing objections to the plan.
On October 29, 1990, without leave of Court, CIT filed an amended proof of claim. The claim was increased to $239,908.37. The additional $103,256.72 is explained on the amended proof of claim as representing “late charges accrued through date of filing on five accounts.” 1
On October 29,1990, the debtors’ counsel filed a certificate of service reciting that the plan, disclosure statement, ballot and a copy of the order approving disclosure statement and fixing time for filing acceptance or rejection of plan had been mailed to everyone on the matrix. On November 1, 1990, CIT filed a ballot which listed the amount of its claim at $136,651.65. On November 13, 1990, CIT filed an objection to confirmation, wherein it claimed that the debtors owe it $281,043.03.2
I. Whether an amended proof of claim filed after the bar date will be allowed?
In a case commenced under Chapter 11 of the Bankruptcy Code, the time for filing a proof of claim is set forth in Bankruptcy Rule 3003(c)(3). The time limit for filing a proof of claim is set by the court and may be extended for cause. Bankruptcy Rule 3003(c)(3). In this case, the claim bar date was set as May 31, 1990. CIT filed its proof of claim on May 15, 1990. CIT did not, as allowed by Bankruptcy Rule 9006(b)(1), move for an extension of time in which to file an amendment prior to the expiration date. A motion for extension of time, filed after the expiration of the original period, will be granted upon showing of excusable neglect. In re Dix, 95 B.R. 134 (9th Cir. BAP 1988). CIT did not request, after the expiration of the bar date, an extension of time to file its amended claim.
The § 341 meeting3 was held on December 3, 1990, one day before the confirmation hearing. CIT argues that it was deprived of important procedural protections because the normal procedures were not followed in this case. Bankruptcy Rule 2003(a) requires that the meeting of creditors be held within 40 days of the order for relief. Through inadvertence the normal procedures were not followed in this case. CIT now argues that it should not be held to the claims bar date set by the Court because of the failure to timely schedule the § 341 meeting. This is the first time that CIT has made this argument. CIT did not bring this matter to the Court’s attention in the months prior to the confirmation hearing date, while the claims bar date came and went. Raising the argument at *338this time appears to be nothing more than an attempt to circumvent the claims bar date. The Court finds that it is without merit. The creditors are bound by the deadlines set by the Court. If CIT felt that it was deprived of procedural protections, it should have raised the issue long before now.
CIT argues that it was entitled to question the debtor at the § 341 meeting before it filed its proof of claim. CIT’s argument is deflated by the fact that it filed its first proof of claim in May, five months before the § 341 meeting. Moreover, the amended proof of claim’s increase in amount is attributed to late charges accrued on five accounts through the date of filing. These late charges were readily ascertainable without need to question the debtor. Although there is a general sequence of events in the administration of a bankruptcy case, that sequence does not need to be followed in all cases. In In re O.P.M. Leasing Services, Inc., the court altered the sequence of events because it yielded an efficient and just method of administering the debtor’s case. Such an arrangement, however, did not provide sufficient reason to allow the late filing of proofs of claims. 48 B.R. 824 (S.D.N.Y. 1985). Even where the sequence of events was not altered by the court, but was through inadvertence, deadlines must be observed. Courts have developed a two-prong test to determine if amendments to proofs of claims will be allowed. The first prong of the test looks at the original claim and the amended claim'to see if the amended claim “reasonably relates” to the original claim. In re McLean Industries, Inc., 121 B.R. 704, 21 B.C.D. 139 (Bankr.S.D.N. Y.1990). The amended claim must not be a “veiled attempt to file a new claim.” Id. 121 B.R. 704, 21 B.C.D. at 141. An amendment is allowed if it corrects a defect of form, describes the claim with greater particularity, or pleads a new theory of recovery. Id. The central question is whether the debtor received reasonable notice of the later claim. In this case, CIT’s amended proof of claim stated that the additional amount claimed was for “late charges accrued through date of filing on five accounts.” Debtor's Exh. 22. The debtors could reasonably expect that late charges would accrue on an account which was the basis for the original proof of claim. The debtors knew that $136,651.65 was the-principal amount owed. Late charges and interest charges on the principal go to the same claim; they do not create a new claim. Therefore, the first prong of the test is met. CIT’s amended claim reasonably relates to the original claim and is not an attempt to file a new claim.
The second prong of the test requires that the amendment be fair and impose no undue hardship. In re McLean Industries, Inc., 121 B.R. 704, 21 B.C.D. 139 (Bankr.S.D.N.Y.1985). The amendment must not prejudice the debtor or the estate. In re Candy Braz Inc., 98 B.R. 370, 380 (Bankr.N.D.Ill.1988). Here is where CIT’s amended proof of claim must fail. The amendment was filed on October 29, 1990, four months after the expiration of the claims bar date. On the same day, the debtors sent out the second amended disclosure statement, plan, and ballots. Indeed, CIT returned its ballot on November 1,1990, listing its claim at $136,651.15, two days' after it filed its amended proof of claim. The first notice that the debtors received of CIT’s increased claim was in CIT’s objection to confirmation filed November 13, 1990, which states that, “CIT is a secured creditor with a debt of $239,-908.37.” CIT knew what amount the late charges on the five accounts were on the date of filing in 1988. There was no reason why the original proof of claim could not have included the late charges claimed. CIT received notice of the first and second disclosure statements and did not object to the amount stated in either document. The debtors propounded a plan based on the two disclosure statements and the objections thereto, all the while treating CIT’s claim as stated in the original proof of claim. CIT’s increase of its claim by 75% just before the confirmation hearing is clearly prejudicial to these debtors. Therefore, CIT’s amended proof of claim will not be allowed.
*339II. Whether the debtors’ plan violates the absolute priority rule?
If the debtors cannot obtain acceptance of the plan by vote, the plan can be confirmed over objection pursuant to the Code’s “cramdown” provisions. See 11 U.S.C. §§ 1126(c), 1129(a)(8), 1129(b)(1). To be crammed down over the objection of creditors, the plan must be fair and equitable. 11 U.S.C. § 1129(b)(1). With respect to a class of unsecured creditors, fair and equitable means that they would receive under the plan property of a value equal to the allowed amount of their unsecured claims, or that no class junior will share under the plan. 11 U.S.C. § 1129(b)(2)(B)(ii). This is known as the “absolute priority.rule.” The plan proposes that the debtors, a class junior to the unsecured creditors, retain property consisting of their partnership interests in C.P.M. Construction. The plan also proposes payment of only 60% of allowed unsecured claims, less than in full, and therefore, it violates the absolute priority rule. The question then becomes whether the debtors fall into an exception to the rule.
There is an exception to the absolute priority rule.4 The debtor can retain an interest to the extent that new value is put into the estate. The new value must be “in money or money’s worth” and must be substantial. Case v. Los Angeles Lumber Products Co., 308 U.S. 106, 60 S.Ct. 1, 84 L.Ed. 110 (1939). A substantial contribution means that to retain property to the exclusion of the unsecured creditors, the contribution must at least equal the interest being retained. In re Ashton, 107 B.R. 670, 674 (Bankr.N.D.1989). The Supreme Court held that “labor, experience, and expertise” would certainly not constitute new value to allow confirmation over the objections of unsecured creditors. Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 108 S.Ct. 963, 99 L.Ed.2d 169 (1988).
In the case at bar, the debtors argue that they will contribute “new value” which is substantial in relation to the interst being retained by virtue of the fact that they have worked at below market wages for the post-petition, pre-confirmation period and thus the estate has benefited because the company’s expenses have been decreased. They attempt to distinguish Ahlers because there the labor which the debtors were going to contribute was a promise oí future labor. Here, the debtors propose to contribute the wages from past labor, which they contend is ascertainable and can be assigned a specific value. The Court finds this argument to be without merit. Whether the labor is past or present, there is no difference. The distinction must be made between time and value. Time is not an asset until it has been converted into something upon which a creditor can levy, such as wages. In In re Pappas, the court stated, “[o]f course everyone’s time is in some sense is one’s earnings in . that without time we cannot engage in activity that produces earnings.” 106 B.R. 268, 271 (Wyo.1989). The court concluded that time was not an asset, citing to Ahlers and In re Stegall, 865 F.2d 140 (7th Cir.1989). But where a debtor contributes time and “through the sweat of his brow creates value ... and contributes it to the bankrupt estate,” then that would constitute new capital. In re Stegall, 865 F.2d at 143. Thus, time, by itself, cannot constitute a new contribution. The debtors volunteered their labor, without pay, for the post-petition, pre-confirmation period. If they had been paid a wage, and then turned it over to the estate, there actually would be a contribution of fresh capital to the estate. But where there was no money to pay the debtors, they cannot claim that what they would have been paid constitutes new value to the estate.
Furthermore, the practical aspects of what the debtors propose trouble the Court. If the Court were to allow post-pe*340tition, pre-confirmation labor to constitute new value or a new contribution, debtors would try to prolong the confirmation process in order to increase the value to be put into the estate. Such a result would frustrate the purposes underlying chapter 11.
Assuming, arguendo, that past labor is a contribution to the estate, the debtors have not shown that their contribution is substantial in relation to their retained interest. The debtors claim that their contribution is substantial. They argue that their contribution of foregone wages is almost $54,000. They then compare this to the interest proposed to be retained, their interests in the partnership. In the balance sheet that accompanies the debtors’ plan, the partnership interests are assigned a zero or a negative figure. Therefore, the debtors contend that their contribution of $54,000 is substantial in relation to their retained interest of zero or a negative figure. The “no value” argument was rejected by the Supreme Court in Ahlers.
Even where debts far exceed the current value of assets, a debtor who retains his equity interest in the enterprise retains “property.” Whether the value is “present or prospective, for dividends or only for purposes of control” a retained equity interest is a property interest to “which the creditors are entitled ... before the stockholders can retain it for any purpose whatsoever.”
Ahlers, 485 U.S. 197, 208, 108 S.Ct. 963, 974, 99 L.Ed.2d 169, 180 (1988) (citing, Northern Pacific R. Co. v. Boyd, 228 U.S. 482, 508, 33 S.Ct. 554, 561, 57 L.Ed. 931 (1913). Judge Posner, in In re Stegall, noted, “there is a deeper point. It cannot be correct that, even if a farm could have a negative market value, any plan of reorganization whereby the bankrupt debtor contributed a penny or more to the operation of the farm could be crammed down the throats of the unsecured creditors.” 865 F.2d at 144. Therefore, even if the Court were to find that foregone wages constituted new value, the Court could not find that the value of the contribution was substantial in relation to the retained interest.
Therefore, the Court finds that the plan violates 11 U.S.C. § 1129(b)(2)(B)(ii) and cannot be confirmed as proposed. This memorandum opinion constitutes the Court’s findings of fact and conclusions of law. B.R. 7052.
An appropriate order shall enter.
ORDER
This matter came before the Court on December 4, 1990, to consider confirmation of the debtors’ second amended plan dated September 25, 1990. The Court continued the confirmation hearing pending the resolution of the issues raised at the hearing. Debtors’ counsel represented that if the outcome of either matter was adverse to the debtors that an amended plan and disclosure statement would have to be filed. For the reasons stated in the memorandum opinion entered herewith,
IT IS ORDERED that CIT Group/Equipment Financing, Inc.’s amended proof of claim is not allowed.
The Court also concludes that the Plan as proposed is not confirmable.
IT IS FURTHER ORDERED that the debtors file an amended disclosure statement and plan within 15 days of the entry of this order.
. It is not clear whether the "filing” refers to the bankruptcy petition or to the amended proof of claim. It is assumed that it refers to the bankruptcy filing.
. The $281,043.03 claimed by CIT is broken down as follows: $103,500 secured pursuant to the stipulation valuing equipment; $177,543.03 unsecured and $41,134.66 as a gap creditor. CIT memorandum opposing confirmation, 2.
.11 U.S.C. § 341 provides that the United States trustee shall convene and preside at a meeting of creditors within a reasonable time after the order for relief.
. There is still debate as to whether this exception survived the codification of the Bankruptcy Act. CIT argues that there is no exception to the absolute priority rule. The Supreme Court and the Seventh Circuit have not dealt directly with the issue, holding only that if such an exception existed, the facts before them would not support an exception. For purposes of this opinion, it is assumed that the exception exists. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491259/ | ORDER GRANTING TRUSTEE’S “OBJECTION TO EXEMPTION”
MICKEY DAN WILSON, Chief Judge.
On December 11, 1990, there came on for hearing the Trustee’s “Objection to Exemption.” At said hearing, evidence was introduced and received, and arguments of counsel heard; thereafter, the matter was taken under advisement. Upon consideration thereof, and of the record herein, the Court, pursuant to Bankruptcy Rules 7052 and 9014, finds, concludes and orders as follows.
FINDINGS OF FACT
On August 27, 1990, Richard Wayne Gee and Rebecca Jean Gee (“Mr. Gee;” “Mrs Gee;” “debtor(s)”) filed their voluntary joint petition for relief under 11 U.S.C. Chapter 7 in this Court.
Debtors’ schedule of current income and expenditures reports gross income of $1,960.00 per month, all of it from Mr. Gee’s regular wages; and further reports that Mr. Gee “receives annuity from his employer as a result of a sales bonus in the amount of $5,555.56 per year.” Debtors’ schedule of current income and expenditures and statement of financial affairs ¶ 2a reports that Mr. Gee is employed by “Pepsi Cola, Inc.” as “route driver, salesman.” Debtors’ statement of financial affairs II 2d reports income in 1988 of $33,-384.00 which “includes annuity” and in 1989 of $35,743.00 which “includes annuity.”
Debtors’ schedule B-2s reports, as Mr. Gee’s separate property (designated as such by the letter “H” for “husband”), a “20 years annuity from his employer at the rate of $5,555.56 per year as a sales bo*583nus,” and values the entire property at “$5,555.56.” Debtors’ schedule B-4 claims the same annuity, similarly valued, as Mr. Gee’s separate exemption (designated as such by the letter “H” for “husband”), and notes that the annuity is “exempt as wages/debtor to reaffirm for debtor’s personal use.” Said .schedule B-4 also claims a joint exemption (designated as such by the letter “J” for “joint”) of $100 cash, said to be “for debtor’s personal use.” These and all other exemptions claimed on said schedule B-4 are said to be exempt pursuant to “OKLA.STATS., Tit. 31.”
Judi E. Beaumont was appointed and continues to serve as Trustee of debtors’ bankruptcy estate (“the Trustee”).
On October 2, 1990, the Trustee filed her “Objection to Exemption” herein, objecting to exemption of “20 year annuity at the rate of $5,555.56 per year ... based upon the unconstitutionality of Okla.Stat., tit. 81, § 1(A)(20) due to the supremacy preemption provisions of the Employee Retirement Income Security Act of 1974 over the Oklahoma Statutes attempting regulation of such pension plans.” Said objection was set for hearing on November 20, 1990, continued to December 7, 1990, continued again and heard on December 11, 1990, and thereafter taken under advisement.
Mr. Gee has been an employee of “Pepsi Cola, Inc.” or “PepsiCola” or “PepsiCo” since at least 1987. (Mr. Gee’s employer will be referred to hereinafter as “Pepsi-Co,” whether or not that is the correct name of the corporate entity.) In 1987, PepsiCo conducted an “incentive contest” among its employees. The contest was in the nature of a sweepstakes, awarded on the basis of performance on the job; the award was an annuity purchased by Pepsi-Co for the benefit of the winning employ-eels). There were 18 winners in 1987, one of them Mr. Gee. Each of the winners, including Mr. Gee, was issued an annuity purchased by PepsiCo from John Hancock Mutual Life Insurance Company.
The awards were announced on or about June 21, 1987. The annuities were issued some time later. An undated “Application for Annuity ...” indicates that PepsiCo had paid $52,744.14 for an annuity to be issued on September 29, 1987. The “Proposed Annuitant” was Mr. Gee. The “payments desired” were as follows:
20 payments of $5,555.56 per year ($111,-111.20) beginning October 1, 1987, and continuing annually thereafter through and including October 1, 2006.
In the event of death of the initial payee prior to October 1, 2006, the remaining payments under this Contract shall be paid to the Beneficiary below ... [naming Mrs. Gee].
There was a “special request,” as follows: “The owner absolutely and irrevocably assigns to the annuitant the payments described above.” See exhibit 6.
The “Individual Annuity” actually issued pursuant to the application stated on its cover page that
John Hancock Mutual Life Insurance Company agrees, subject to the conditions and provisions of this contract, to pay the Annuity Payments ... as specified on page 3 ... in consideration of the application and payment of the Single Premium.
“This contract” was stated to include “this and the following pages.” The following page labeled “2. Contract Specifications” provided in its entirety as follows:
Initial Payee: Richard Wayne Gee
Single Premium: $52,744.14
Date of Issue: September 29, 1987
Schedule of Annuity Payments
20 payments of $5,555.56 per year ($111,-111.20) beginning October 1, 1987 and continuing annually thereafter through and including October 1, 2006.
In the event of death of the Initial payee prior to October 1, 2006, the remaining payments under this Contract shall be paid to the Beneficiary below:
Rebecca Jean Gee
9925 W. 91st, Lot # 64
Sapulpa, Oklahoma 74066
The owner absolutely and irrevocably assigns to the initial payee, or its Beneficiary, all of the above-mentioned payments.
Other contractual provisions were as follows:
*5843. OWNER
The Owner will be as shown in the application unless changed by you.
You shall have the sole and absolute power to exercise all rights and privileges without the consent of any other person unless you provide otherwise by written notice.
You may change the Owner by written notice. A change will take effect when the notice is signed if we acknowledge receipt on the notice. The change will take effect whether or not the Owner is alive at the time of the acknowledgement. A change shall be subject to the rights or any assignee of record with us, and subject to any payment made or action taken by us before the acknowl-edgement.
4. CLAIMS OF CREDITORS
The annuity payments under the contract will be exempt from the claims of creditors to the extent permitted by law. They may not be assigned before becoming payable without our agreement.
5. ASSIGNMENT
We will not be on notice of any assignment unless it is in writing; nor will we be on notice until a duplicate of the original assignment has been filed at our Home Office. We assume no responsibility for the validity or sufficiency of any assignment.
6. INCONTESTABILITY
This contract shall be incontestable after 1 year from its Date of Issue.
7. THE CONTRACT
The entire contract between the applicant and us consists of this contract and the written application. A copy of the application is attached at issue. All statements made in the application shall be deemed representations and not warranties.
This contract is not entitled to share in any of our divisible surplus.
Only the President, a Vice President, the Secretary, or an Assistant Secretary of the Company has authority to waive or agree to change in any respect any of the conditions or provisions of the contract, or to extend credit or to make an agreement for us.
Pursuant to 117 just recited, the written application was appended to the “contract” proper. See exhibits 5, 6.
According to John Hancock’s attorney, “We ... classify these contracts a[s] being Single Premium Immediate Annuities,” exhibit 3. According to other John Hancock personnel, the twenty payments are “guaranteed” and, should the annuitant die before completion of the scheduled payments, John Hancock “will pay the remaining annual payments to the beneficiary named in the application ...;” but “This is subject to Federal Taxes under the IRS rules and produces a W-2P at year end” which “should be used in filing your Income Taxes,” exhibit 2. According to an officer of the Pepsi-Cola Bottling Company of Tulsa, “This award is considered taxable earnings each year and has absolutely nothing to do with retirement or pension plans,” exhibit 1.
Any “Conclusions of Law” which ought more properly to be “Findings of Fact” are incorporated herein by reference.
CONCLUSIONS OF LAW
This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B), (O), 11 U.S.C. § 522(b), (l), § 541(a)(1), (e)(2).
A preliminary question is whether the annuity ever became property of the estate under 11 U.S.C. § 541; for, if it never entered the estate, there is no need to exempt it out of the estate under § 522. 11 U.S.C. § 541(a) provides in pertinent part that
The commencement of a case under ... this title creates an estate ... comprised of all the following property, wherever located and by whomever held:
(1) Except as provided in subsections (b) and (c)(2) of this section, all legal and equitable interests of the debtor in property as of the commencement of the case ...
Whatever interest debtors had in this annuity pre-petition, becomes property of the estate and is “owned” by the estate’s *585Trustee post-petition. This general inclusion of debtors’ pre-petition interests in their bankruptcy estate is subject to a special exception set forth in 11 U.S.C. § 541(c)(2), which provides that “A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case under this title.” Although the parties have not briefed or argued this matter, it appears to the Court that there is no trust here at all, since this annuity contract creates an in personam right to payments but does not exhibit any intent to create a trust, or constitute either PepsiCo or John Hancock as trustees, or establish any identifiable trust res, In re Riley, 91 B.R. 389 (B.C., E.D.Va.1988); In re Brown, 86 B.R. 944 (N.D.Ind.1988); In re Miller, 16 B.R. 790 (B.C., D.Md.1982). Accordingly, the Court is satisfied that this annuity is property of the estate under 11 U.S.C. § 541(a)(1) and is not excluded therefrom by 11 U.S.C. § 541(c)(2). The extent to which debtors have a present right to annuity payments which can be realized by the Trustee is not before the Court at this time; the Court determines only that, whatever debtors’ present interest in the annuity contract and in any payments thereunder may be, it is property of debtors’ bankruptcy estate. The Court proceeds to consider whether the annuity may be exempted from the estate pursuant to 11 U.S.C. § 522.
11 U.S.C. § 522(b), 31 O.S. § 1(B) provide that debtors may claim exemptions only under State law or Federal nonbankruptcy law. The directions on Official Form No. 6, Schedule B-4, require debtors to “Specify statute creating the exemption.” Debtors claim all exemptions listed on their Schedule B-4 under “OKLA. STATS., Tit. 31.” 31 O.S. § 1(A) alone lists twenty-one (21) subdivisions, each specifying a different possible claim of exemption, ranging from chickens to pension plans; other statutes in Title 31 modify or supplement these basic exemption provisions in various ways. Several of these provisions could apply in the alternative to the same items of property; and debtors do not indicate which of these many potential grounds of exemption apply to their-particular items of property. There is no reason why the Trustee, the debtors’ creditors or this Court should be forced to guess what legal basis may exist for each of debtors’ claims of exemption, in effect doing debtors’ attorney’s work for him. Since no party in interest asked that these insufficient “claims” of exemption be stricken, the Court will pass the matter by — this time— and will proceed to consider those possible grounds for exemption indicated, in one manner or another, by the documents filed by debtors or by the Trustee.
Debtors’ Schedule B-4 states that the annuity should be “exempt as wages.” Mr. Gee has a right to continue receiving the annuity payments even if he quits working forthwith, indeed (it would appear) even if he is fired “for cause.” Under such circumstances, the annuity payments cannot reasonably be described as “wages.” Although debtors’ attorney did not specify the statute, the Court observes that 31 O.S. § 1(A)(18) exempts “Seventy-five percent (75%) of all current wages or earnings for personal or professional services earned during the last ninety (90) days ...” Exactly how this statute should be applied to exemption of present and future annuity payments is not clear. In any event, 31 O.S. § 1(A)(18) does not stand alone. 31 O.S. § 1.1 further provides for exemption “by reason of undue hardship [of] that portion of ... earnings or professional services necessary for the maintenance of a family supported wholly or partially by the labor of the debtor.” Both 31 O.S. § 1(A)(18) and § 1.1 are qualified in turn by 31 O.S. § 1.3, which provides that
The determination and order issued by the court pursuant to a hearing requested under Section 1.1 of this title shall not take into consideration any total gross family income which exceeds one hundred twenty times the federal minimum hourly wage prescribed by Section 6(a)(1) of the Fair Labor Standards Act of 1938, U.S.C. Title 29, Section 206(a)(1) as amended and in effect at the time the earnings are payable or the equivalent for pay periods other than one (1) week. *586The excess amounts shall not be subject to the seventy-five percent (75%) wage exemption as provided in paragraph 18 of subsection A of Section 1 of this title or due to undue hardship.
The Federal minimum hourly wage prescribed by 29 U.S.C. § 206(a)(1), effective from April 1,1990 to March 31, 1991, is not less than $3.80 per hour, which would amount to wages of approximately $1,824 per month. Debtors’ actual income is questionable, since their Schedule of Current Income and Expenditures indicates a salary of about $23,520 per year plus a yearly annuity payment of $5,555.56 for total annual income of only $29,075.56, while their Statement of Financial Affairs 11 2d indicates annual income in recent years of $33,-384 to $35,743. But even the lower figure given in debtors’ Schedule of Income and Expenditures indicates gross income of $1,960 per month, which is already greater than the maximum statutory wage exemption of $1,824 per month. If these exemption statutes apply to these annuity payments at all, they would not exempt any portion of the annuity payments over and above Mr. Gee’s regular wages. For all these reasons, debtors’ claim of exemption of the annuity as “wages” cannot be sustained.
The Trustee objected to the claim of exemption on the supposition that it might be based on 31 O.S. § 1(A)(20), which exempts “any interest in a retirement plan or arrangement qualified for tax exemption purposes under present or future Acts of Congress ...” The Trustee proposed that any such exemption is preempted by Federal law, namely the Employment Retirement Income Security Act of 1974 (ERISA), and is therefore inapplicable and ineffective. But this annuity is not a “retirement plan” any more than it is “wages.” Debtor has a right to receive the payments even though he has not yet retired; he enjoys the right whether he retires or not; and the right was never offered to employees at large for purposes of retirement, but to a select few employees as a reward for salesmanship. The officer of the Pepsi-Cola Bottling Company of Tulsa was entirely correct when he declared, “This award ... has absolutely nothing to do with retirement or pension plans.” Even if the annuity was in some sense a retirement or pension plan, there is no showing that either the annuity premium or the annuity payments are tax-exempt; and the evidence affirmatively demonstrates that the annuity payments, at least, are not considered tax-exempt. A plan or arrangement must be tax-exempt to qualify for exemption from creditors under 31 O.S. § 1(A)(20). Since the annuity would not be exempt as a tax-qualified retirement plan under 31 O.S. § 1(A)(20) even if that statute did apply, there is no need to consider whether the statute applies or not.
Since the debtors’ present interest in the annuity is property of the estate and is not exempt on any basis claimed by debtors or suggested by the Trustee, debtors’ claim of exemption of their present interest in said annuity or any payments thereunder must be, and the same is hereby, denied and disallowed; and the Trustee’s objection to exemption must be, and the same is hereby, granted.
AND IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491261/ | ORDER ON MOTION TO VACATE
R. GUY COLE, Jr., Bankruptcy Judge.
I. Preliminary Matters
This matter is before the Court on the debtors’ motion to vacate an order entered by default on December 7, 1990. The motion has been opposed by the Chapter 7 trustee. An evidentiary hearing was held on February 11, 1991, following which the matter was deemed submitted for decision.
The Court has jurisdiction over this case pursuant to 28 U.S.C. § 1334(b) and the General Order of Reference entered in this district. This matter is a core proceeding which the Court may hear and determine under authority of 28 U.S.C. § 157(b)(1), and (b)(2)(A), (E) and (O).
II.Findings of Fact
A. Facts Underlying the Motion to Vacate
The debtors filed their joint case under Chapter 7 of the Bankruptcy Code on January 9, 1989. William B. Logan was appointed interim trustee on January 12, 1989. Following Logan’s rejection of the appointment, Nora E. Jones was appointed as successor interim trustee. Jones became case trustee (“Trustee”) upon conclusion of the meeting of creditors held pursuant to §§ 341 and 343 of the Bankruptcy Code. By order entered August 14, 1989, the Court appointed the Trustee’s law firm of Schottenstein, Zox & Dunn as her counsel.
On November 8,1990, the Trustee filed a motion for turnover (“Turnover Motion”). The Turnover Motion requested the “turnover [of] $17,519.62, said amount representing nonexempt cash-like assets as well as the real estate commissions earned pre-pe-tition but paid post-petition.” The Turn*752over Motion was served by regular U.S. Mail on the debtors and their case attorney, Lee Mittman. Under the local bankruptcy rules, the debtors had twenty days to file a written response to the Turnover Motion.
On November 21, 1990, the bankruptcy clerk’s office scheduled the Turnover Motion to be heard on January 7, 1991. Notice of the hearing was mailed on that date to all interested parties. On December 5, 1990, after the twenty-day time period had expired, the Trustee submitted to the Court a proposed Order for Turnover. The Order for Turnover specifically included a finding “that no responsive filing or memorandum has been filed and that the response time to the motion expired on November 29, 1990.” There being no written opposition, the Court signed and entered the Order for Turnover on December 6, 1990, thereby ordering turnover to the Trustee of the sum of $17,519.62, plus interest.
Unaware that the Order for Turnover had been entered, the debtors, on December 10, 1990, filed a memorandum in opposition to the Turnover Motion. On December 13, 1990, and without knowledge that the debtors had filed an opposing memorandum, the Court vacated the hearing date on the Turnover Motion. The debtors, on December 14, 1990, filed a motion to vacate (“Motion to Vacate”) the Order for Turnover.
The debtors seek relief from the Court’s judgment pursuant to Rule 60(b)(1) and (6) of the Federal Rules of Civil Procedure, made applicable to bankruptcy cases by Bankruptcy Rule 9024. They claim that the Trustee was required to provide them with notice and an opportunity for hearing pursuant to Bankruptcy Rule 9014 and this Court’s established practice. Such notice would include a statement advising the debtors of the filing of the Turnover Motion, and of their right to respond and request a hearing.
Mittman claims that his mistaken belief that the debtors had thirty days, not twenty, to file a written opposition to the Turnover Motion is an additional basis to grant the relief requested. Mittman notes further that the debtors’ move from one residence to another, without his knowledge, delayed him in meeting with the debtors and responding to the Turnover Motion. Mittman believed, at all times, that the debtors had until December 10,1990, to file a response to the Turnover Motion and request a hearing.
The Trustee asserts that the last date on which the debtors could file a written response was December 3, 1990. When no response was filed by that date, the Trustee complied with her duty under Local Bankruptcy Rule (“LBR”) 5.11 and submitted a proposed order granting the relief requested. The order was predicated on the lack of opposition to her motion within the twenty-day period provided by LBR 5.4(b). The Trustee asserts that she simply followed this Court’s published local rules, and that Mittman’s assertions of mistake and excusable neglect fall short of the standard for relief under Rule 60(b)(1) and (6). The parties apparently agree that the Order for Turnover constitutes a default judgment.
B. Facts Underlying the Motion for Turnover
The evidence established that William F. Antonick, one of the debtors, was employed by Jeffrey R. Yocca Builder, Inc. The employment agreement between Yocca and Antonick (“Debtor”) describes the Debtor as a salesperson. The Debtor’s statement of financial affairs, filed with this Court, also discloses his occupation as a “home sales person.” The Debtor claims that he was a “home servicer,” by which he means he consulted with Yocca’s customers during all phases of construction of their homes.
Pursuant to the employment agreement, Yocca advanced the Debtor the sum of $1,538.46 every two weeks as a draw against earned commissions. Commissions were earned at the rate of 1.5 per cent of the gross sales price of each home sold by the Debtor where he procured the sale. The commission was deemed earned at closing, i.e. the time of sale. The Debtor also could earn non-commission income by servicing customers. This service fee like*753wise was earned as of the time of closing. Thus, although the Debtor is not a licensed realtor, he could, and apparently did, earn commission income from the sale of homes built and/or owned by Yocca. As of the filing date of the petition, the Debtor had a negative balance of $12,996.03 in his draw account.
The debtors were entitled to receive certain tax refunds at the time the petition was filed. These refunds represented amounts the debtors credited from their 1988 federal income tax refund to their 1989 tax liability to cover an anticipated gain from the sale of their residence. Mitt-man now admits that all or a substantial portion of these refunds should be turned over to the Trustee as property of the estate.
III. Conclusions of Law
Rule 60(b) provides the following grounds for setting aside a default judgment:
On motion and upon such terms as are just, the court may relieve a party ... from a final judgment, order, or proceeding for the following reasons:
(1) mistake, inadvertence, surprise, or excusable neglect; (2) newly discovered evidence which by due diligence could not have been discovered in time to move for a new trial under Rule 59(b); (3) fraud (whether heretofore denominated intrinsic or extrinsic), misrepresentation, or other misconduct of an adverse party; (4) the judgment is void; (5) the judgment has been satisfied, released or discharged, or a prior judgment upon which it is based has been reversed or otherwise vacated, or it is no longer equitable that the judgment should have prospective application; or (6) any other reason justifying relief from the operation of the judgment.
Thus, Rule 60(b) sets forth the reasons upon which the Court may relieve a party from a final judgment or order.
The Sixth Circuit Court of Appeals has previously noted the following distinction between the Rule 55(c) standard for setting aside an entry of default and the Rule 60(b) standard for setting aside default judgments: “[a] default can be set aside under Rule 55(c) for ‘good cause shown/ but a default that has become final as a judgment can be set aside only under the stricter Rule 60(b) standards for setting aside final, appealable orders.” INVST Financial Group v. Chem-Nuclear Systems, 815 F.2d 391, 398 (6th Cir.1980) (quoting Jackson v. Beech, 636 F.2d 831, 835 (D.C.Cir.1980) (emphasis in original)); see also Shepard Claims Service, Inc. v. Darrah, 796 F.2d 190 (6th Cir.1986); United Coin Meter v. Seaboard Coastline R.R., 705 F.2d 839 (6th Cir.1983). The motion to vacate seeks to set aside a final judgment or order entered by default; thus, this Court is bound to apply the more stringent standards of Rule 60(b).
In INVST, the Sixth Circuit examined Rule 60(b) and followed its previous decision in United Coin Meter, which set forth three factors essential to a determination of the merits of a motion to vacate a default judgment. See United Coin Meter, 705 F.2d 839 (6th Cir.1983). Guided by its decision in United Coin Meter, the court of appeals concluded that the outcome of a motion to vacate a default judgment must take into consideration the following three factors:
1. Whether the prevailing party will be prejudiced;
2. Whether the defaulting party has a meritorious defense; and
3. Whether culpable conduct of the defaulting party led to the default.
INVST Financial Group, 815 F.2d at 398; United Coin Meter, 705 F.2d at 845. See Hritz v. Woma Corp., 732 F.2d 1178, 1181 (3d Cir.1984); Falk v. Allen, 739 F.2d 461, 463 (9th Cir.1984) (per curiam); Feliciano v. Reliant Tooling Co., Ltd., 691 F.2d 653, 656 (3d Cir.1982); Meehan v. Snow, 652 F.2d 274, 277 (2d Cir.1981) (per curiam); Keegel v. Key West & Caribbean Trading Co., Inc., 627 F.2d 372, 373 (D.C.Cir.1980); Jackson, 636 F.2d at 836. See also 6 Moore’s Federal Practice, Para. 55.10[2] at 55-59 (1985 ed.). The United Coin Meter court recognized that while the standards were slightly different in Rule 55(c) motions and Rule 60(b) motions, the same *754factors were applicable in both situations. United Coin Meter, 705 F.2d at 845. Finally, the INVST court noted that a court “ ‘should ... construe[ ] all ambiguous or disputed facts in the light most favorable to the [defaulting party].’ ” And that any doubts should be resolved in favor of the defaulting party. INVST, 815 F.2d at 398 (quoting Jackson v. Beech, 636 F.2d 831, 836 (D.C.Cir.1980)).
A. Prejudice to the Prevailing Party
Initially, the Court must inquire into whether the Trustee will be prejudiced if the default judgment is vacated. The Court is sympathetic to Trustee’s expressed concern regarding the finality of an order of judgment. This concern, however, is outweighed by the well-settled policy that trials on the merits are favored in federal courts. Keegel, 627 F.2d at 373-74. As noted by one appellate court, “[s]ince the interests of justice are best served by a trial on the merits, only after a careful study of all relevant considerations should courts refuse to open default judgments.” Tozar v. Krause Milling Co., 189 F.2d 242, 245 (3d Cir.1951).
Additionally, delay in the adjudication process is not a sufficient basis for establishing prejudice. Davis v. Musler, 713 F.2d 907, 913 (2d Cir.1983); see, e.g., United Coin Meter, 705 F.2d at 845, Keegel, 627 F.2d at 374. The concept of prejudice does not merely imply a loss of time or even money in reliance upon the default judgment obtained. Rather, this definition of prejudice means that the “party opposing the motion will no longer be able to present, or will be unduly burdened in attempting to present, the claim(s) advanced in the original pleading as a result of the action, or more commonly the inaction, of the party against whom the default judgment was obtained.” Beaman v. Levy (In the Matter of Levy), 75 B.R. 894 (Bankr.S.D.Ohio 1987).
Prejudice must be demonstrated such as to convince the court that the setting aside of the default will result in “ ‘the loss of evidence, create increased difficulties of discovery, or provide greater opportunity for fraud and collusion.’ ” Davis, 713 F.2d at 916 (quoting C. Wright, A. Miller and M. Kane, 10 Federal Practice and Procedure, § 2899 at 536-37 (1983)). If the party opposing the vacating of the default can only demonstrate prejudice through the loss of time or money, that party may request that such matter be addressed as a component of the order setting aside the default judgment. Shepard, 796 F.2d 190, 195. The Court, of course, may raise and address the issue sua sponte.
This Court finds that the Trustee has failed to demonstrate any cognizable prejudice which may result from granting the Motion to Vacate. The Trustee’s bare allegation that Mittman’s untimeliness does not constitute excusable neglect is insufficient to defeat the Motion to Vacate under the standards articulated by the Sixth Circuit Court of Appeals. Such assertions must be supported by some showing of harm. The record is devoid, however, of evidence demonstrating such harm or adversity; in fact, the delay in hearing the Turnover Motion will be slight. And, any costs incurred by the Trustee by virtue of this Order will be borne by the estate. Accordingly, the Court concludes that no prejudice will occur to the Trustee if the default judgment is vacated.
B. Meritorious Defense
The second factor the Court is obligated to consider is whether the debtors have presented a meritorious defense. “In determining whether a defaulted defendant has a meritorious defense ‘[ljikelihood of success is not the measure’ ... [r]ather, if any defense relied upon states a defense good at law, then a meritorious defense has been advanced.” United Coin Meter, 705 F.2d at 845 (quoting Keegel, 627 F.2d at 374). In Keegel, the court elaborated on this point by finding that “even a hint of a suggestion” of a defense is sufficient if proven at trial. Keegel, 627 F.2d at 374. As one noted authority posited, the key consideration is “to determine whether there is some possibility that the outcome of the suit after a full trial will be contrary *755to the result achieved by the default.” C. Wright, A. Miller, M. Kane, supra, § 2697 at 531.
The debtors oppose the turnover of the so-called “real-estate commissions” and, perhaps, portions of their federal tax refunds. While the Trustee’s assertions of entitlement to the debtors’ commission income have substance, it cannot be said that the debtors are without meritorious defenses. To be certain, the debtors have not convinced the Court that they will prevail on these defenses at hearing; nonetheless, they have advanced defenses which appear to have merit.
C. Culpable Conduct of the Debtor
All three factors announced in United Coin Meter must be considered in ruling on a motion to set aside a default judgment. The Court notes, however, when the first two factors mitigate in favor of setting aside the entry, it is an abuse of discretion to deny a Rule 55(c) motion in the absence of a willful failure of the moving party to appear and plead. Shepard, 796 F.2d at 194. While cognizant that this matter deals with a default judgment, and not a default under Rule 55, the Court finds this reasoning persuasive in assessing the merits of the Motion to Vacate.
Under the final factor of the United Coin Meter inquiry, the Court must make a determination as to whether culpable conduct of the debtors resulted in a default judgment. To be considered “culpable conduct,” the debtors’ behavior must display either an intent to thwart judicial proceedings or a reckless disregard for the effect of their conduct on those proceedings. Shepard, 796 F.2d at 194; INVST, 815 F.2d at 399. This Court does not find the debtors’ conduct to be within the Sixth Circuit’s meaning of “culpable.”
Although the debtors should have provided their new address to the Trustee and Mittman, their failure to do so was not a material factor in the tardiness of their response. The evidence established that the debtors at all times disputed the Trustee’s turnover request. Mittman, as their attorney, had numerous communications with the Trustee’s counsel concerning the debtors’ defenses to that request. The debtors met with Mittman as soon as they were contacted about the Turnover Motion and believed that Mittman was taking all steps necessary to contest the Trustee’s request.
If there is fault here, it must be attributed to Mittman. Mittman’s initial excuse — that he and the debtors were entitled to receive a specific statement of their right to respond — is without merit. While Bankruptcy Rule 9014 does require, as Mittman argues, that “reasonable notice and opportunity for hearing shall be afforded the party against whom relief is sought” by motion, there is no requirement for the type of notice stated by Mittman. It is undeniable, however, that a practice has developed in this Court, and most other bankruptcy courts, whereby a moving party often includes a statement that the party against whom relief is sought has a specific time period — typically 20 or 30 days — to respond and request a hearing; otherwise, a proposed order granting the requested relief will be presented to the Court for signing. Such procedure is common in bankruptcy courts because of the massive volume of motions and objections — many unopposed — which must be noticed to the creditor body in the administration of the case. The practice is administratively convenient for the Court and all parties involved, but is in no way mandated unless specifically required under the Bankruptcy Code or Rules. See Bankruptcy Rule 2002. There is, however, one instance where a movant must provide a statement similar to the one advocated by Mittman, and that is in the relief-from-stay context. LBR 6.0(c) requires:
The motion for relief from stay shall be accompanied by a statement that any responsive filing or memorandum shall be filed within twenty (20) days from the date of service of motion unless otherwise provided for by the Court, and that a failure to file a response and accompanying memorandum on a timely basis may be cause for the Court to grant the motion as filed without further notice.
*756This local rule is intended to harmonize the unique requirements of § 362(e) with the bankruptcy court’s motion practice.
The Trustee was well within her right to proceed as she did in this matter. LBR 5.4(b) provides:
Unless otherwise ordered by the Court or required by the Bankruptcy Rules, any responsive filing or memorandum to a motion or application shall specifically designate the pleading to which it responds and shall be filed within twenty (20) days from the date of service as set forth on the certificate of service attached to the motion or application. Failure to file a response and accompanying memorandum on a timely basis may be cause for the Court to grant the motion or application as filed without further notice.
When no response is filed, LBR 5.11 imposes an affirmative duty on the moving party to submit a proposed order granting the relief requested in the motion. The Trustee submitted the Order for Turnover when no response was filed and it was entered as a default order.
The Court recognizes, however, that default judgments are not imposed as a disciplinary mechanism for attorneys; it is the client who suffers by being deprived of his day in court. Shepard, 796 F.2d at 195; INVST Financial Group, 815 F.2d at 400. As the Sixth Circuit has stated:
Although a party who chooses an attorney takes the risk of suffering from the attorney’s incompetence, we do not believe that this record exhibits circumstances in which a client should suffer the ultimate sanction of losing his case without any consideration of the merits because of his attorney’s neglect and inattention.
Shepard, 796 F.2d at 194. In the instant case, there is absolutely no showing that failure to file a timely response was a deliberate attempt by the debtors to thwart or usurp these proceedings, nor is there any evidence of a reckless disregard by the debtors in connection with this proceeding. The fault was in Mittman’s confusion over LBR 5.4(b) and Bankruptcy Rule 9014. This confusion is not patently meritless, since it may be unclear to parties, at times, when the additional language must be used. Bankruptcy Rule 2002 sets forth those instances when such notices must be used; however, it is not inconceivable that legitimate misunderstandings arise from time to time about the rule’s application. Rule 2002 is clear, and such misunderstandings should rarely arise; however, the Court is aware that they occasionally do.
The Court notes additionally that there was only a four-day lapse between the time the default judgment was entered by the Clerk’s office and the filing of the Motion to Vacate. Clearly, this short time-period does not reflect egregious behavior which rises to the level of willful or culpable conduct. It evidences, instead, the debtors’ continuing objection to the turnover request.
The Trustee has relied heavily on the case of Miller v. Owsianowski (In re Salem Mortgage Co.), 791 F.2d 456 (6th Cir.1986), for the proposition that Mittman’s claims of mistake and excusable neglect must be based on Rule 60(b)(1), not Rule 60(b)(6)’s residual clause. In reversing the bankruptcy court’s refusal to set aside a default judgment, the Sixth Circuit noted in that case that Rule 60(b) is “ ‘not intended to relieve counsel of the consequences of decisions deliberately made, although subsequent events reveal that such decisions were unwise.’ ” In re Salem Mortgage Co., 791 F.2d at 459 (quoting Federal’s, Inc. v. Edmonton Investment Co. [citation omitted]). While this is undoubtedly true, those facts did not exist in Salem Mortgage and do not exist here.
The Court finds that, under the facts of this case, including the inadvertent scheduling of a hearing for January 7, 1991, Mitt-man’s mistake and excusable neglect, a legitimate basis for granting the debtors’ request for relief from the Order for Turnover. Accordingly, and for the reasons stated herein, the Motion to Vacate is GRANTED. A notice of a rescheduled hearing on the Turnover Motion shall be issued forthwith. In the interim, the Trustee and debtors should make every effort to *757resolve a dispute which, it seems, should not require further judicial intervention.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
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