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https://www.courtlistener.com/api/rest/v3/opinions/8491262/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW ON ORIX’S MOTION TO TRANSFER CASE TO ORLANDO DIVISION
GEORGE L. PROCTOR, Bankruptcy Judge.
This case came before the Court for evi-dentiary hearing on November 29, 1990. The Court, having considered the evidence, makes the following Findings of Fact and Conclusions of Law:
Findings of Fact
1. The debtor’s studios, from which all programming is transmitted, are located in the Palm Bay/Melbourne area of Brevard County, Florida.
2. All employees of the debtor operate out of the Brevard County office of the debtor with the exception of one or two sales persons located in Volusia County, Florida. The sales persons report to the headquarters of the company in Brevard County, Florida.
3. The day-to-day operations of the company are run by a general manager who is located at the Brevard County headquarters.
*9114. With minor exception, all of the assets of the debtor are located within Bre-vard County, Florida, and have been located there for the majority of the 180-day period immediately preceding the filing of the bankruptcy petition by the debtor.
5. The debtor does not own antennas and the real property surrounding them in Volusia County, Florida. However, the debtor uses similar antennas located in Brevard County which it rents.
6. The debtor’s principal business consists of the operation of two television stations, WAYQ Channel 26 and WAYK Channel 56. Channel 26 is licensed to operate in Volusia County, Florida. Channel 56 is licensed to operate in Brevard County, Florida. All of the programming originates from Channel 56 and that programming is “simulcast” by Channel 26 in Volu-sia County.
7. The debtor does not operate or use any office or studio located in Volusia County which could be characterized as the headquarters of the company although the debtor does rent an office in Volusia County.
8. Some of the debtor’s principals are attorneys whose offices are located in Vo-lusia County, Florida. From time to time decisions affecting the debtor’s business are made in these attorneys’ offices solely for the convenience of the attorneys who are principally engaged in the practice of law.
9. All of the daily operations of the debtor are conducted out of its Palm Bay/Melbourne facility, and the books and records of the debtor are primarily located at this facility.
Conclusions of Law
1. The debtor’s principal place of business and principal assets are located in Brevard County, Florida, which is within the Orlando Division of the Middle District of Florida.
2. Local Rule 103(c) provides in pertinent part that:
All cases shall be commenced in that Division in which the domicile, residence, principal place of business, or principal assets of the person or entity that is subject of such case have been located for the 180 days immediately preceding such commencement....
3. The language of Local Rule 103(c) closely tracks the provisions of 28 U.S.C. § 1408, the statute governing venue in bankruptcy cases.1 The Local Rules were drafted after the enactment of Section 1408. The Court concludes that the drafters of Rule 103 intended that the terminology used in this local rule would be construed consistent with the provisions of Section 1408.2
4. The primary factors in determining whether a debtor limited partnership has commenced its bankruptcy case in the proper district (division) are (i) the location of its principal place of business and (ii) the location of its principal assets. In re FRG, Inc., 107 B.R. 461, 469 (Bankr.S.D.N.Y.1989); See also In re Bell Tower Associates, Ltd., 86 B.R. 795 (Bankr.S.D.N.Y.1988).
5. “Residence” and “domicile” are not relevant to a determination of the proper division to which a case involving a partnership debtor should be assigned. 1 Collier on Bankruptcy, ¶ 3.02[c][ii].
6. This case will be transferred to the Orlando Division of the United States Bankruptcy Court for the Middle District of Florida.
7. A separate order will be entered.
. 28 U.S.C. § 1408 provides in part that "a case under Title 11 may be commenced in the district court for the district ... in which domicile, residence, principal place of business in the United States or principal assets in the United States....”
. No reported decision addresses Local Rule 103. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491264/ | DECISION AND ORDER ALLOWING AMENDED PROOF OF CLAIM OF THE CROSSINGS
WILLIAM A. CLARK, Bankruptcy Judge.
Dated at Dayton, Ohio this 27th day of February, 1991.
This matter is before the court upon the motion of the debtors objecting to the second amended proof of claim of The Crossings, the response of The Crossings, and memoranda of citations submitted by the parties after the hearing on January 10, 1991. The court has jurisdiction over this contested matter pursuant to the standing order of reference from the district court and 28 U.S.C. § 157(b)(2)(B) allowance or disallowance of claims. The second amended proof of claim was for prepetition rent of $960.00, and the postpetition amount for late charges and damages to the premises in the amount of $596.00.
The debtors disputed the damages charged and claimed an offset for the $200.00 security deposit placed with The Crossings at the time of the rental of the premises, November 1, 1989.
The testimony of James M. Valentine, Jr., debtor, and Wanda Santy, representative of The Crossings, established that the rent, damages and late charges total $1,756.00. The court finds that the $30.00 charge for removal of a couch and mattress from the rear porch is not allowable since debtors’ friends or relatives moved those furniture items.
The lease (Respondent’s Exhibit 2) provides for late charges and certain expenses including painting, cleaning, and shampooing carpet. The court finds that the evidence presented establishes the claim for $1,726.00 due from the debtors subject to the $200.00 security deposit.
The debtors contend that the $200.00 security deposit is part of the bankruptcy estate which should be turned over to the chapter 13 trustee. The attorney for The Crossings contends that the $200.00 deposit was in the hands of The Crossings and was deducted from the total claim before the filing of the amended proof of claim.
The court has reviewed the cases submitted by each counsel. Counsel for the debtors relies upon In re Homan, 116 B.R. 595 (Bankr.S.D.Ohio 1990), where the court held a credit union’s postpetition administrative freeze on a debtor’s account constituted a violation of automatic stay; In re Cole, 104 B.R. 736 (Bankr.D.Maryland 1989), where the court held that under Maryland law a consumer debtor was entitled to have a prepetition utility deposit claimed as exempt applied to postpetition payment for utility services; and In re Wilde, 85 B.R. 147 (Bankr.D.N.M.1988), where the court held a bank could not setoff against funds the debtors claimed as exempt.
The creditor, The Crossings, has referred the court to In re Scionti, 40 B.R. 947 (Bankr.D.Ma.1984), where the court held that a lessor may setoff the amount of a security deposit under a lease against a prepetition claim for rent and damages owed to the owner; In re Communicall Central, Inc., 106 B.R. 540 (Bankr.N.D.Ill.1989), where the court held that the landlord was entitled to a setoff for a security deposit which it held against the amount of its allowed claim; and In re Aspen Data Graphics, Inc., 109 B.R. 677 (Bankr.E.D.Pa.1990), where the court held that the landlord held a secured interest in the sums held on deposit and that the sums properly were setoff prepetition.
*13Under the lease (Exhibit 2) paragraph 3 provides for the deposit of $200.00 as security for the debtors’ faithful performance of the obligation under the lease.
The posting of the security deposit with The Crossings created a secured position for The Crossings in the event of debtors’ failure to perform under the lease. The deposit served as collateral for the secured position of The Crossings. Therefore, under § 506(c), The Crossings held a secured claim in the amount of $200 and the remainder of its claim was unsecured. Although the setoff of the $200 deposit by The Crossings may have been a technical violation of the automatic stay of § 362, the application of setoff is permissive and lies within the equitable discretion of the court, DuVoisin v. Foster (In re Southern Industrial Banking Corp.), 809 F.2d 329, 332 (6th Cir.1987). The court declines to award damages in the instant matter. The debtors objected to The Crossings’ second amended claim on the ground “that the claim does not assert the offset of the $200.00 security deposit” (Doc. # 17); therefore, the debtors are estopped from changing their position and now complaining that The Crossings did setoff the $200.00.
It is ordered that the claim of The Crossings is allowed in the amount of $960.00 prepetition and $566.00 postpetition.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491266/ | MEMORANDUM OF OPINION AND ORDER
RANDOLPH BAXTER, Bankruptcy Judge.
I.
In this matter the Plaintiff, Richard A. Baumgart (Trustee), and the Defendant, Huntington National Bank (HNB), have filed cross motions for summary judgment regarding the complaint allegations set forth in Count I of the above-styled adversary proceeding. In pursuance of this effort, the parties have entered into the following stipulations of fact:
It is stipulated and agreed by and between the Plaintiff, Richard A. Baum-gart, Trustee, and the Defendant, Huntington National Bank (“HNB”), that if witnesses were sworn and testified in the above entitled Adversary Proceeding and any available documentary proof introduced, that the following facts would thereby be established or would be testified to, and the parties hereto agree to the same, the evidence of which, except for this agreement, need not be adduced upon trial.
1.That Plaintiff, Richard A. Baum-gart, is the Trustee in the bankruptcy case of Freewerth Enterprises, Inc. (“Freewerth”), the Debtor herein, which case was commenced by the filing of a voluntary petition for relief under Chapter 7 of the Bankruptcy Code on December 6, 1989, and in which case an Order for Relief was entered.
2. That the within Adversary Proceeding is a Core Proceeding pursuant to 28 U.S.C. § 157, and the within Bankruptcy Court has jurisdiction over the within Adversary Proceeding.
3. That the Debtor at all times relevant to the within Adversary Proceeding was a corporation which designed, constructed and installed custom cabinetry and restaurant equipment.
4. That prior to the year before the commencement of the within bankruptcy case, HNB made one or more commercial loans to the Debtor, and the Debtor, to evidence such loans, executed one or more promissory notes (the “Promissory Notes”) payable to HNB. All of the foregoing loans were made in the ordinary course of business or financial affairs of the Debtor and HNB, and according to ordinary business terms.
5. On September 10, 1985, the Debtor executed a security agreement granting to HNB a security interest in the inventory and receivables of the Debtor to secure payment of the Promissory Notes.
6. On September 10, 1985, the Debtor executed financing statements relating to the aforementioned security interest.
7. That on or about September 16, 1985, HNB filed the aforementioned financing statements with the Secretary of State of Ohio and the Recorder of Cuya-hoga County, Ohio, which filings did not effect a perfection of the aforementioned security interest, as the Debtor’s sole place of business in Ohio at all pertinent times was located in Summit County, Ohio.
8. HNB failed to perfect the aforementioned security interest by failing to file a financing statement with the Recorder of Summit County, and such security interest is unperfected as against Plaintiff and the Debtor. HNB claims *508lack of perfection constitutes an unjustifiable impairment of collateral for the promissory notes given by the Debtor, against whom Harry Friedman had a right of recourse, pursuant to Ohio Revised Code, §§ 1303.67 and 1303.72(A)(2).
9. That Harry Freedman was the president and sole shareholder of the Debtor at all times during the year prior to the filing of the within bankruptcy case, and was at all times during the year prior to the filing of the within bankruptcy case an “insider” of the Debtor as that term is defined in 11 U.S.C. § 101(30).
10. More than one year prior to the commencement of the within bankruptcy case, Harry Freedman personally guaranteed in writing all of the Debtor’s obligations to HNB, including the payment by the Debtor of the Promissory Notes. A photographic reproduction of the guarantees of Harry Freedman are attached hereto as Exhibits “A” and “B”.
11. That during the year prior to the commencement of the within bankruptcy case, the Debtor transferred to HNB the aggregate sum of $61,434.84 in partial satisfaction of its outstanding obligation on the Promissory Notes, $18,678.96 of which was transferred during the 90 days immediately prior to the bankruptcy and $42,755.88 of which was transferred between 90 days and one year prior to the bankruptcy.
12. The parties agree that the aforementioned transfers by the Debtor to HNB of $61,434.84 during the year prior to the commencement of the within bankruptcy case satisfies all of the elements of a preferential transfer required to be proved by Plaintiff to establish a prima facie case as set forth in 11 U.S.C. § 547(b).
13. During the period between 90 days and the year prior to the commencement of the within bankruptcy case, $10,-066.68 of the $42,755.88 in payments made by the Debtor to HNB in payment of indebtedness incurred by the Debtor in the ordinary course of business or financial affairs of the Debtor and HNB, and pursuant to the terms of the Promissory Notes.
14. Plaintiff disputes that 11 U.S.C. § 547(c)(2) applies to the within transaction.
15. On December 6, 1989, the outstanding principal balance on the Promissory Notes was $206,666.60.
16. On December 6, 1989, the value of HNB’s collateral was $10,685.95.
17. At all times during the year preceding the filing of the within bankruptcy case, the outstanding principal balance on the Promissory Notes was not less than $206,666.60.
18. At all times during the year preceding the filing of the within bankruptcy case, if HNB liquidated its collateral, HNB’s deficiency balance would not be less than $61,434.84.
II.
The Trustee’s Complaint seeks to have the Court avoid a lien, to recover an avoidable preference, to sell personal property, and to determine rights, priorities and claims to the proceeds thereof. In view of the above stipulations, the Trustee alleged that this failure to properly perfect the security interest is deemed to have been a transfer made immediately before the filing of the bankruptcy petition, pursuant to § 547(e)(2)(C) of the Code [11 U.S.C. § 547(e)(2)(C)],
In support of its motion for summary judgment, the Trustee asserts that HNB has stipulated to all of the prima facie elements under § 547(b) of the Bankruptcy Code [11 U.S.C. § 547(b)] to allow it to avoid a prepetition transfer of $18,678.96 as having been preferentially made by the Freewerth Enterprises, Inc. (Debtor) to HNB during the 90-day period prior to the commencement of this case. (Stips. 11 and 12). As the HNB has offered no § 547(c) exception to that transfer, the Trustee seeks its avoidance under § 547(b). While contending that HNB failed to perfect its security interest respecting the $18,678.96, the Trustee asserts that the requirements of § 547(e)(2)(C) provide a further basis for its avoidance. Section 547(e)(2)(C) provides *509that any transfer of a security interest not perfected prior to petition filing will be treated as if it was made contemporaneously with the bankruptcy filing. 11 U.S.C. § 547(e)(2)(C). Thusly, the Trustee claims that an avoidable preferential transfer under § 547(b) has been established.
The Trustee also contends that an avoidable transfer occurred with respect to all transfers made by the Debtor to HNB within the one year period prepetition as the Debtor’s president and sole shareholder, Harry Freedman, personally guaranteed the debt owed to HNB causing him to be an “insider” as that term is defined at § 101(30) of the Bankruptcy Code. See, Stip. No. 9. With regard to an amount of $61,434.84 transferred by the Debtor to HNB during the one year period prior to petition filing, the parties have stipulated that each required element of § 547(b) has been satisfied to establish an avoidable transfer. See, Stip. No. 12.
In response to the subject complaint allegation and the Trustee’s motion for partial summary judgment, HNB filed its motion for summary judgment. In support of its motion, HNB asserts that an insider recovery against HNB is inappropriate as the payments received within the preferential period were made in the ordinary course of business. Secondly, HNB argues that its failure to perfect its security interest operates as an unjustified impairment of the collateral securing the Debtor’s obligation to HNB, thereby discharging the insider-guarantor and preventing recovery against HNB for payments received during the preference period.
III.
Section 550 of the Bankruptcy Code provides that:
—[T]he trustee may recover, for the benefit of the estate, the property transferred or — the value of such property, from—
1) the initial transferee of such transfer or the entity for whose benefit such transfer was made; or
2) any immediate or mediate transferee of such initial transferee. 11 U.S.C. § 550(a)(1) and (2).
Section 547(e)(2)(C) of the Code provides:
—[A] transfer is made—
(C) immediately before the date of the filing of the petition, if such transfer is not perfected at the later of—
(i) the commencement of the case; or
(ii) 10 days after such transfer takes effect between the transferor and the transferee.
Section 547(b)(4)(B) allows the trustee to avoid any transfer of an interest of the debtor in property which was made between ninety days and one year prior to petition filing where the creditor, at the time the transfer was made, was an insider. Under § 101(30) of the Code, the definition of an “insider” includes a director, officer, or person in control of the debtor where the debtor is a corporation.
In the matter at bar, Harry Freedman (Freedman), is the Debtor’s sole shareholder and guarantor on the obligation owed by the Debtor to HNB. By reason of his position of control, Freedman is an “insider” pursuant to § 101(30). As guarantor on the subject indebtedness, Freedman also is a creditor of the Debtor as a guarantor has a contingent liability on the obligation in the event of a default by the Debtor to the transferee HNB. As an insider guarantor, the preferential reach back period of recovery extends to one year prior to petition filing, as provided under § 547(b)(4)(B). Further, as an insider guarantor, any payment made by the Debtor to HNB within the aforesaid preferential period necessarily benefits Freedman as guarantor, as such payments would diminish his contingent liability on the debt owed to HNB.
HNB asserts that Freedman is not a creditor of the Debtor nor a guarantor on the obligation owed by the Debtor to HNB. In support of that position, HNB states that Freedman’s contingent liability on the note as guarantor was discharged by reason of HNB’s failure to perfect its secured interest on the note. Citing U.C.C. 3-606, HNB argues that this failure to perfect its *510security interest on the debt caused an unjustifiable impairment of collateral and thereby discharged Freedman’s obligation as guarantor on the note. Further, HNB contends that recovery of the payments made by the Debtor is not appropriate from HNB since its failure to perfect substantially impaired Freedman’s right of recourse against the collateral due to an intervening lien of the Industrial Commission of Ohio’s Bureau of Workers’ Compensation.
IV.
The principal issue for determination is whether the Trustee is entitled to recover payments made by the Debtor during the one year preferential period. In resolving that issue, the Court must first determine whether (1) a guarantor is discharged on an obligation where the secured party fails to perfect its security interest and (2) whether a transferee can successfully deny recovery on an avoided preference and assert impairment of collateral as a defense where the party asserting impairment of collateral is also the party that failed to perfect its security interest.
Herein, the parties have stipulated to the existence of all elements required to avoid a prepetition transfer under § 547(b). As indicated above, HNB argues that a portion of the prepetition transfers were made in the ordinary course of the Debtor’s business and were therefore excepted from recovery pursuant to § 547(c)(2).
V.
In matters concerning the avoidability of transfers, generally, the burden of proof is upon the party who seeks the avoidance under § 547(b). Where a § 547(c) exception to avoidance is claimed, however, the party asserting the exception shoulders the burden of proof. In either instance the burden must be borne by a preponderance of the evidence. See, 11 U.S.C. § 547(g).
HNB’s contention that its failure to perfect its security interest is a valid defense to the Trustee’s avoidance of the security interest transfer is not well founded. As security perfection matters are generally the subject of nonbankruptcy law, an examination of applicable state law is required. In fact, the subject guaranties, attached to the parties’ stipulations, indicate that the guaranties are to be construed in accordance with Ohio law. As provided under U.C.C. 3-601:
—the extent of the discharge of any party from liability on an instrument is governed by — (d) impairment of right of recourse or of collateral (Section 3-606).
Promissory notes are negotiable instruments as the term “instrument” is defined under U.C.C. 3-102. In determining whether impairment has occurred with respect to recourse or on collateral, U.C.C. 3-606 must be examined which provides:
A) The holder discharges any party of the instrument to the extent that without such party’s consent the holder....
(2) Unjustifiably impairs any collateral for the instrument given by or on behalf of the party or any person against whom he has a right of recourse. [U.C.C. 3-606].
The Official Comment to U.C.C. 3-606 explains the language in U.C.C. 3-606(1) by providing:
1. The words “any party to the instrument” remove an uncertainty arising under the original section. The suretyship defenses here provided are not limited to parties who are secondarily liable, but are available to any party who is in the position of a surety, having a right of recourse either on the instrument or de-hors it, including an accommodation maker or acceptor known to the holder to be so.
The above-quoted statutory language is clear to state that the defense offered in U.C.C. 3-606 is “available to any party who is in the position of a surety ...”. Certainly, HNB is not in the position of a surety on the subject note. In fact, HNB is the holder of the instrument. As such, the defense of impaired collateral is not available to HNB on this basis, and avoidance of the unperfected security interests are avoidable transfers, recoverable *511under § 550 of the Bankruptcy Code, and are within the one year preferential period by operation of § 547(e)(2)(C) [11 U.S.C. § 547(e)(2)(C)] which provides:
(2 .. .[A] transfer is made— immediately before the date of the filing of the petition, if such transfer is not perfected at the later of—
(i) the commencement of the case; or
(ii) 10 days after such transfer takes effect between the transferor and the transferee.
Another important reason exists to deny HNB the defense proposed under U.C.C. 8-606 regarding an unjustifiable impairment of collateral. HNB is the holder of the instrument who, for whatever reason, failed to perfect its security interests in the subject collateral. Now that it is in the position of defending against the avoidance of the transfer of the security interests, it should not be allowed to profit by its failure to perfect by asserting impairment of collateral as an affirmative defense in this action. To condone this effort by HNB would be grossly inequitable. Simply stated, HNB was derelict in its duties as a secured creditor, as required by U.C.C. 9-207,1 and now should not be allowed to profit from its dereliction of duty. Arguendo, to the extent that the Bank’s unjustifiable impairment of security may have caused a discharge of Friedman’s suretyship, such a discharge is merely, pro tanto, that is, only to the extent of any impairment to the collateral. See, Huron Co. Banking Co. v. Knallay, 22 Ohio App.3d 110, 489 N.E.2d 1049 (1984); Provident Bank v. Gast, 57 Ohio St.2d 102, 109, 386 N.E.2d 1357 (1979). Since only a partial discharge could arguably be achieved by Friedman, HNB’s reliance upon provisions of U.C.C. 3-606 [Ohio Rev.Code § 1303.72(A)(1)] is misplaced. See also, U.S. v. Willis, 593 F.2d 247, 260-61 (6th Cir.1979). The duty of the holder of the security must exercise reasonable care in preserving the collateral and such duty cannot be disclaimed by agreement between the parties. U.C.C. 1-102(3). Moreover, notwithstanding the characterization of any possible discharge of HNB’s guarantor (Freedman) due to HNB’s unjustifiable impairment of collateral, the security agreement between HNB and the Debtor, remains valid. See, U.C.C. 9-201. In other words, the HNB’s failure to properly perfect its security did not render the security interest void ab initio.
The Trustee correctly argues that the Bank had until December 6, 1989 to perfect its security interest, since the Trustee did not become an intervening lien-holder until the date of petition filing. See, 11 U.S.C. § 544. The Bank simply failed to do so. The failure of a secured party to perfect its security interest does not in itself constitute an unjustifiable impairment of collateral as such impairment occurs only when the parties’ conduct allows third parties to obtain a superior interest in the collateral. This has not occurred in the present action. I.T.T. Industrial Credit Co. v. D.S. America, Inc., 674 F.Supp. 1330, 1340 (N.D.Ill.1987).
It is undisputed that the subject security agreement was effective between the parties until the date of petition filing. The intervention of the Trustee, as lien-holder, occurred only at the petition date. Under the Uniform Commercial Code, no provision provides for the discharge of a guarantor premised upon a hypothetical event. Rather, an actual intervening event must occur which causes impairment to the collateral. I.T.T., supra, at 1340. At bar, the earliest that the guarantor could have asserted a pro tanto discharge was the petition date and not sooner. At any rate, no impairment has been demonstrated by the surety, and the guaranty was fully in effect at the time of petition filing. Finally, the terms of the guaranty which are in force between HNB and Freedman are clear to reflect that the guaranty is unconditional and insures full payment to the Bank. See, “Continuing Guarantee Unlim*512ited,” Exhibits A and B, attached to Stipulations.
The type of guaranty issued by Freedman to HNB was of a continuing and unlimited nature. The guaranties attached to the Stipulations are entitled “Continuing Guaranty Unlimited.” The significance of this characterization of the guaranties is that it renders the guarantor without an ability to obtain any form of discharge thereunder — pro tanto or a complete discharge of suretyship. At paragraph No. 3 of both guaranties, in pertinent part, the terms provide:
Guarantors, and each of them, hereby promise that if one or more of the Obligations are not paid promptly when due, they, and each of them, will, upon request of Bank, pay the Obligations to Bank, irrespective of any action or lack of action on Bank’s part in connection with the acquisition, perfection, possession, enforcement or disposition of any or all Obligations or any or all security therefore or otherwise, and further....” (Emphasis added).
The above-quoted guaranty language tracks the language of U.C.C. 3-606, in part, and is clear to reflect that the issuer of these guaranties [Freedman] deliberately waived any right of recourse against HNB in the event of an unjustifiable impairment of collateral committed by HNB. Thusly, this position argued by HNB is without merit and is indefensible. The guaranties in question were “payment guaranteed”, meaning that the guarantor engages that if the instrument is not paid when due, he will pay it according to its tenor without resort by the holder to any other party. See, U.C.C. 3-416(1). Thusly, the Bank can proceed directly against Freedman before exhausting the principle security. Effectively, the terms of both guaranties provide consent to an impairment of collateral. Where, as here, a person consents to the partial or complete release of the collateral by the holder of the note, that party cannot then claim the benefit of the pro tanto discharge provided under Ohio law at Ohio Rev.Code § 1303.72(A). See, Huron County Banking Co., supra, 22 Ohio App.3d at 116, 489 N.E.2d 1049; Federal Land Bank of Louisville v. Taggart, 31 Ohio St.3d 8, 12-23, 508 N.E.2d 152 (1987). It is axiomatic that a party cannot assert a discharge by release under R.C. § 1303.72(A)(1) when he has consented to the conduct which he hereafter claims was effective to discharge his liability. See also, Fireman Fund Ins. Co. v. Joseph J. Biafore, Inc., 526 F.2d 170, 175-76 (3d Cir.1975); Nat’l. Acceptance Co. v. Demes, 446 F.Supp. 388 (N.D.Ill.1977).
In furtherance of the above finding that the subject guaranties were unconditional and payment guaranteed, the HNB’s argument that an implied agreement that the lien of the security interest will be preserved upon proper filing, is not well-founded. In view of the above-quoted guaranty language, Freedman expressly consented to an impairment of collateral. Joe Heaston Tractor & Implement Co. v. Security’s Acceptance Corp., 243 F.2d 196, 199 (10th Cir.1957); Nationwide, Inc. v. Scullin, 256 F.Supp. 929 (D.N.J.1966) (both cases rejected a theory of implied agreement of lien perfection).
The Trustee also correctly noted that the release of an obligation is an affirmative defense which must be specifically plead. Rule 8, Fed.R.Civ.P.. At bar, the Bank failed to so plead, causing a waiver of such defense. It is noted that each case relied upon by HNB involves a guarantor invoking an impairment of collateral defense. At bar, HNB the note holder, asserts the defense as a strategy to shield itself behind a statutory provision enacted for the benefit of a guarantor or surety. HNB lacks the requisite standing to assert this defense.
VI.
Lastly, it is necessary to address whether the $42,755.88 transferred by the Debtor to HNB within one year prior (Stip. No. 11) to bankruptcy petition filing is avoidable as a preferential transfer. HNB argues that the ordinary course of business exception allowed under the § 547(c)(2) is *513applicable to the present matter. The Trustee argues to the contrary, contending that these payments were not ordinary course payments under the § 547(c)(2) exception since they pertained to terms of long term commercial notes which are not within the § 547(c)(2) exception. The parties have stipulated that the payments to-talling $42,755.88 were made preferentially (Stip. No. 12), with $10,066.68 of those payments protected from avoidance under provisions of § 547(c)(2). See, Stips. Nos. 4 and 13. Remarkably, the Stipulation No. 4 provides:
4. That prior to the year before the commencement of the within bankruptcy case. HNB made one or more commercial loans to the Debtor.... All of the foregoing loans were made in the ordinary course of business affairs of the Debtor and HNB, and according to ordinary business terms.
Recent case law within this Circuit does not support the Trustee’s argument. “Long-term debt is as amenable to the exception of § 547(c)(2) as is any other type of debt, so long as the facts of the situation bring it within the ordinary course of business or financial affairs’ language.” In re Finn, 909 F.2d 903 (6th Cir.1990). Thusly, the § 547(c)(2) exception may be applicable to the prepetition payments totalling $42,-755.88.
CONCLUSION
Accordingly, the Trustee’s motion for a grant of partial summary judgment is sustained in part and is overruled in part. HNB’s motion for summary judgment is overruled, in part, and is sustained, in part.
IT IS SO ORDERED.
. U.C.C. 9-207(1): "A secured party must use reasonable care in the custody and preservation of collateral in his possession. In the case of an instrument or chattel paper reasonable care includes taking necessary steps to preserve rights against prior parties unless otherwise agreed.” | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491267/ | MEMORANDUM
JOHN C. COOK, Bankruptcy Judge.
This is an action in which the trustee obtained a judgment against John Carter Daniels resulting from a preferential transfer made to Daniels by Southern Industrial Banking Corporation (SIBC) within ninety days of SIBC’s bankruptcy filing. While the case was on appeal to the district court, John Carter Daniels died and the defendant, John E. Coker, the administrator of Daniels’ estate, was substituted as party defendant by a district court order of substitution entered on June 8, 1990, pursuant to Rule 25(a)(1) of the Federal Rules of Civil Procedure.1 Subsequently, the case was remanded to this court to consider the defendant’s claim made pursuant to Federal Rule of Procedure 60(b) that the judgment should be set aside because of newly-discovered evidence.
Following remand, the defendant filed a motion to dismiss for lack of subject matter jurisdiction. The defendant argues the court lacks subject matter jurisdiction to proceed with this action because the plaintiff failed to comply with Tennessee’s revi-vor statute, § 30-2-320 of the Tennessee Code Annotated, by failing to file a copy of the order of substitution with the clerk of the probate court administering Daniels’ estate within the time allowed by the statute.2
Although § 30-2-320 may govern the procedures for reviving an action under state law, the court is of the opinion that the statute is not a jurisdictional bar to the continuation of this federal lawsuit.
Under Tennessee law, there are two procedural requirements for reviving a pending action against a decedent’s estate. First, an order of substitution must enter in the pending state action substituting the administrator of the decedent's estate for the decedent in compliance with Rule 25 of the Tennessee Rules of Civil Procedure. Second, the order of substitution must be filed with the clerk of the court in which the estate of the decedent is being administered in compliance with Tennessee Code Annotated § 30-2-320. Mid-South Pavers *519v. Amco Constr., 771 S.W.2d 420 (Tenn.Ct.App.1989).3
Under federal law, if a right of action survives the death of a party, the court may order the substitution of the proper parties under Rule 25(a) of the Federal Rules of Civil Procedure and the action may continue.4 There is no procedural requirement under the federal rules that the order of substitution must be filed with the state probate court. Whether the state court will subsequently honor a federal judgment obtained without full compliance with the procedures set forth in a state revivor statute is an issue this court need not decide. See Ransom v. Brennan, 437 F.2d 513 (5th Cir.), cert. denied, 403 U.S. 904, 91 S.Ct. 2205, 29 L.Ed.2d 680 (1971); Downie v. Pritchard, 309 F.2d 634 (8th Cir.1962); Continental Assurance Co. v. American Bankshares Corp., 483 F.Supp. 175 (E.D.Wis.1980).
In Continental Assurance Company, the defendant died and the plaintiff moved to substitute the co-personal representatives of the defendant’s estate pursuant to Rule 25(a)(1) of the Federal Rules of Civil Procedure. The representatives opposed the motion arguing both that the plaintiffs claims did not survive the defendant’s death and that even if the claims survived the defendant’s death, substitution was not proper because the claims had not been perfected in accordance with Florida law. The court ultimately found that the claims survived the defendant’s death. In disposing of the second argument raised by the representatives, the court stated as follows:
Under Florida law, a claim was filed against the estate, but the representatives objected to the claim. The representatives argue that in order to perfect its claim against the estate, plaintiff had to file an independent action. Fla.Stat. § 733.705(3) (1977); Estate of Pridgeon, 349 So.2d 741 (Fla.App.1977). See Estate of Fornash, 372 So.2d 128 (Fla.App.1979). While Florida may not honor the judgment because the requirements of section 733.705(3) were not met, the law simply is unclear as to whether a court in passing on a motion under rule 25(a)(1) should take this factor into consideration. 7A Wright & Miller, Federal Practice & Procedure § 1952 at 649 (1972). Two courts have held that the question of whether a judgment will be honored need not be reached by the district court on a rule 25 motion, but instead by the probate court when the judgment is presented. Ransom v. Brennan, 437 F.2d 513 (5th Cir.1971); Downie v. Pritchard, 309 F.2d 634 (1962).
Notwithstanding the representatives’ reliance on Florida estate law, this Court need not decide the question of whether the Florida probate court will or will not honor a judgment obtained in this litigation. Wright and Miller in their treatise suggest that substitution is proper even though the claim against the estate is not adequately perfected. 7A Wright & Miller, § 1952 at 649. This suggestion appears reasonable. Whether a judgment is collectible is not a question with which this Court on a rule 25(a) motion should concern itself.
483 F.Supp. at 176-77.
To a certain extent, the procedures for substituting and pursuing a representative party in a lawsuit following a defendant’s death are similar in both the federal and Tennessee courts since Rule 25 of the Tennessee Rules of Civil Procedure providing for. the substitution of parties is patterned after Rule 25 of the federal rules. State law requires, however, the additional procedural step of filing the order of substitution in the probate court administering the decedent’s estate within the time specified by § 30-2-320. This procedural requirement, which is over and above that required by federal law, is not a requirement that must be met by the plaintiff before *520this federal lawsuit can proceed. So long as the federal procedural rule relating to substitution of parties has been complied with, the plaintiff may proceed with this action. See Downie v. Pritchard, 309 F.2d 634; Ashlar v. Honeywell, Inc., 95 F.R.D. 419 (D.Conn.1982); Boggs v. Blue Diamond Coal Co., 497 F.Supp. 1105 (E.D.Ky.1980); Continental Assurance Co. v. American Bankshares Corp., 483 F.Supp. 175; Lamb v. United Sec. Life Co., 59 F.R.D. 44 (S.D.Iowa 1973); 7C C. Wright, A. Miller & M. Kane, Federal Practice and Procedure § 1952 (2 ed. 1986).
Because a failure on the part of the plaintiff to comply with Tennessee Code Annotated § 30-2-320 would not deprive this court of subject matter jurisdiction in this case, the defendant’s motion to dismiss must be denied.5
An order shall enter in accordance with this memorandum.
. Rule 25(a)(1) of the Federal Rules of Civil Procedure reads as follows:
(1) If a party dies and the claim is not thereby extinguished, the court may order substitution of the proper parties. The motion for substitution may be made by any party or by the successors or representatives of the deceased party and, together with the notice of hearing, shall be served on the parties as provided in Rule 5 and upon persons not parties in the manner provided in Rule 4 for the service of summons, and may be served in any judicial district. Unless the motion for substitution is made not later than 90 days after the death is suggested upon the record by service of a statement of the fact of the death as provided herein for the service of the motion, the action shall be dismissed as to the deceased party.
. Tennessee Code Annotated § 30-2-320 reads as follows:
Pending actions considered legally filed demands — Manner of revival. — All actions pending against any person at the time of his death, which by law may survive against the personal representative, shall be considered demands legally filed against such estate at the time of the filing with the clerk of the court in which the estate is being administered of a copy in duplicate of the order or revivor, one (l) of which copies shall be certified or attested, a notation of which shall be entered by the clerk in the record of claims, as in the case of other claims filed. Pending actions not so revived against the personal representative within the period prescribed in § 30-2-307(a) shall abate.
Tenn.Code Ann. § 30-2-320 (Supp.1990).
The time period referred to in § 30-2-320 and which is prescribed in § 30-2-307(a) of the Tennessee Code Annotated is six months from the date of the first publication of notice to creditors. See Tenn.Code Ann. § 30-2-307(a) (1984). The defendant asserts that the notice to creditors for the estate of John Carter Daniels was first published on June 11, 1990, and thereby established a deadline of December 11, 1990, for purposes of § 30-2-320.
. The “order of revivor" mentioned in § 30-2-320 has been construed to mean an order of substitution under Tenn.R.Civ.P. 25. Mid-South Pavers v. Arnco Constr., 771 S.W.2d 420, 423 (Tenn.Ct.App.1989).
. There has been no suggestion in this case that the plaintiffs right of action did not survive the original defendant’s death.
. The plaintiff argues that § 30-2-320 by its terms would not apply to the facts in this case. According to the plaintiff, § 30-2-320 applies only to "pending actions" arid not to actions in which a judgment has been obtained and the case is pending in a post-judgment stage. In light of the court’s disposition of the issue presented by defendant’s motion, the court need not comment on the construction of § 30-2-320 urged by the plaintiff. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491268/ | MEMORANDUM OPINION
ALBERT E. RADCLIFFE, Bankruptcy Judge.
This matter comes before the court on the plaintiffs motion for summary judgment. All statutory references herein are to the Bankruptcy Code, Title 11 U.S.C. unless otherwise indicated.
PROCEDURAL BACKGROUND
On February 27, 1989, an involuntary Chapter 7 bankruptcy petition was filed against the debtor, an order for relief was entered herein on July 14, 1989.
The plaintiff is the Chapter 7 trustee in this consolidated involuntary proceeding of Southern Oregon Mortgage, Inc., The Bay Company, REO Holding Company, Inc., and Gold Key Properties, Inc. He filed his complaint herein on May 4, 1990 against the defendant, a creditor of Gold Key Properties, Inc. (Gold Key) to avoid, under § 544, an asserted security interest on behalf of the defendant in a promissory note and trust deed. The defendant answered the complaint and filed a counterclaim alleging that the security interest is duly perfected and constitutes a valid security interest in and lien upon the promissory note and trust deed in question.1
FACTS
The facts in this case are undisputed, they are as follows:
On September 15, 1986, David L. Taylor executed a promissory note in the amount of $36,000, payable to Gold Key. He also executed, as grantor, a trust deed in favor of Gold Key, as beneficiary, to secure payment of that promissory note. (The Taylor-Gold Key note and trust deed). The Taylor-Gold Key trust deed was recorded in the Douglas County, Oregon, deed records on September 15, 1986.
On October 5, 1987, Gold Key executed a promissory note in the principal amount of $17,847.96 payable to the defendant. In order to secure payment of this note, Gold Key executed an “Assignment for Collateral Security” which purportedly granted the defendant a security interest in the Taylor-Gold Key note and trust deed. The “Assignment for Collateral Security” was recorded in the deed records of Douglas County on October 19, 1987.
The defendant does not contend that she has ever had possession of the original *627Taylor-Gold Key note or trust deed. Plaintiff, in his affidavit in support of motion for summary judgment, asserts that he has had possession of the Gold Key loan files, including the Taylor-Gold Key note and trust deed, since shortly after the entry of an order for relief in this case. It appears, by implication, that the debtor had possession of the Taylor-Gold Key note and trust deed on the date the petition was filed herein, February 27, 1989.
ISSUE
The sole question before this court is whether the defendant holds a valid and perfected security interest in the Taylor-Gold Key note and trust deed.
The trustee argues, that under Oregon law, the Taylor-Gold Key note and trust deed are considered “instruments” when used to secure payment of the October 5, 1987 note. Once 21 days have passed after the time the security interest is granted, the only way a secured party can perfect a security interest is to retain possession of the original note and trust deed. Here, the defendant did not possess the note and trust deed at the time the bankruptcy petition was filed; her security interest is, therefore, unperfected and the plaintiff may use his strong-arm powers under § 544 to avoid it.
The defendant argues, that under Oregon law, the Taylor-Gold Key note and trust deed are not instruments because a writing which itself is a security interest cannot be an “instrument”. Accordingly, her security interest in them was perfected when she recorded the “Assignment for Collateral Security” in the Douglas County Deed records.
Richard D. Dicob, relying heavily upon Security Bank v. Chiapuzio, 304 Or. 438, 747 P.2d 335 (1987) maintains that the defendant’s recording of the “Assignment for Collateral Security” provides constructive notice of her security interest to the plaintiff. In addition, he contends that the plaintiff cannot be a judicial lien creditor against the Taylor-Gold Key note and trust deed. In order to obtain a judicial lien upon these documents, the trustee would have to levy upon them by execution.
DISCUSSION
Rule 56(c) of the Federal Rules of Civil Procedure, as incorporated by Bankruptcy Rule 7056, provides that summary judgment shall be rendered if the record shows 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. In re R & T Roofing Structures and Commercial Framing, Inc., 887 F.2d 981 (9th Cir.1989). Where the parties agree on all of the material facts relevant to the issue raised by the motion for summary judgment, the case can be resolved as a matter of law, and summary judgment is the proper procedural device. Ferguson v. Flying Tiger Line, Inc., 688 F.2d 1320 (9th Cir.1982); Smith v. Califano, 597 F.2d 152 (9th Cir.1979).
The plaintiff, as trustee, obtains his status as a judicial lien creditor pursuant to § 544(a) which provides, in pertinent part as follows:
(a) The trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by—
(1) a creditor that extends credit to the debtor at the time of the commencement of the case, and that obtains, at such time and with respect to such credit, a judicial lien on all property on which a creditor on a simple contract could have obtained such a judicial lien, whether or not such a creditor exists;
(2) a creditor that extends credit to the debtor at the time of the commencement of the case, and obtains, at such time and with respect to such credit, an execution against the debtor that is returned unsatisfied at such time, whether or not such a creditor exists; or ... (emphasis added)
“The extent, however, to which the plaintiff may utilize the powers conferred by *628§ 544 to avoid transfers of property of the debtor or obligations incurred by the debt- or is governed by state law. See In re Cox, 68 Bankr. 788 (Bankr.D.Or.1987).” In re Gold Key Properties, Inc., 119 B.R. 787, 789 (Bankr.D.Or.1990). In Oregon, the holder of an unperfected security interest has rights subordinate to the rights of a person who becomes a judicial lien creditor (even a judicial lien creditor with notice) before the security interest is perfected. O.R.S. 79.3010(1) and (4) provide (in part) as follows:
(1) ... [A]n unperfected security interest is subordinate to the rights of:
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(b) A person who becomes a lien creditor before the security interest is perfected.
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(4) A “lien creditor” means ... a trustee in bankruptcy from the date of the filing of the petition....
The Taylor-Gold Key note and trust deed are instruments:
It is clear to this court that under Oregon law a trust deed is an instrument when it is assigned for collateral security purposes. In re Staff Mortgage & Investment Corp., 625 F.2d 281 (9th Cir.1980); In re Bruce Farley Corp., 612 F.2d 1197 (9th Cir.1980); In re Columbia Pacific Mortgage, Inc., 22 B.R. 753 (Bankr.W.D.Wash.1982) (applying Oregon law). It is also clear to this court (and the defendant has not contended otherwise) that a promissory note is an instrument. The pertinent Oregon statutes are as follows:
O.R.S. 79.1050(l)(i) provides that:
“Instrument” means a negotiable instrument as defined in O.R.S. 73.1040, or a certificated security as defined in O.R.S. 78.1020 or any other writing which evidences a right to the payment of money and is not itself a security agreement or lease and is of a type which is in ordinary course of business transferred by delivery with any necessary indorsement or assignment.
O.R.S. 79.3040(1) provides (in part) that:
... A security interest in money or instruments (other than certificated securities or instruments which constitute part of chattel paper) can be perfected only by the secured party’s taking possession, except as provided in subsections (4) and (5) of this section and O.R.S. 79.3060(2) and (3) on proceeds.
O.R.S. 79.3040(4) provides that:
A security interest in instruments (other than certificated securities) or negotiable documents is perfected without filing or the taking of possession for a period of 21 days from the time it attaches to the extent that it arises for new value given under a written security agreement.
O.R.S. 79.3050 provides (in part) that: A security interest in letters of credit and advices of credit as provided in O.R.S. 75.1160(2)(a), goods, instruments (other than certificated securities), money, negotiable documents or chattel paper may be perfected by the secured party’s taking possession of the collateral. ...
The facts in In re Staff Mortgage & Investment Corp., supra, are similar to the facts in this case. Staff Mortgage and Investment Corp. (Staff) would borrow money and execute its note to evidence the loan. In order to secure the loan, Staff would pledge one or more promissory notes secured by trust deeds that Staff had in its inventory. The promissory notes and trust deeds were assigned to the lenders by way of a “Collateral Assignment of Note” and a “Corporation Assignment of Deed of Trust”. The assignments of the deeds of trust were recorded in the real property records where the real property was located, but the documents (except the note from Staff to its lender) were retained by Staff. After Staff filed bankruptcy, the trustee contended that the assignments of the notes and trust deeds were unperfect-ed. The Court of Appeals agreed with the trustee. It found that ... *629tiffs to take possession of the collaterals caused the security interests to be unper-fected under California Commercial Code § 9304(1)2; and (3) thus the trustee in bankruptcy took the collaterals free and clear of the plaintiffs’ claims.
*628(1) the collaterals, notes secured by deeds of trust, used to secure Staff’s promissory notes to the plaintiff were “instruments” under the California Commercial Code; (2) the failure of the plain-
*629In re Staff Mortgage & Investment Corp., 625 F.2d at 283.
In In re Columbia Pacific Mortgage, Inc., supra., Columbia Pacific Mortgage, Inc. (CPM) loaned money to one Backus and received, in return a note and deed of trust from Backus. CPM, in turn, borrowed money from First National Bank of Oregon (FNB) and assigned the Backus note and trust deed to FNB in order to secure the bank loan. In that case, FNB took possession of the Backus note and trust deed but did not record any assignment of the trust deed. In addition, FNB did not give notice of the assignment to Backus. Later, the Johnstones purchased the real property which was the subject of the Backus trust deed and the title insurance company/escrow agent paid CPM, at closing, to satisfy the Backus trust deed encumbrance. CPM did not forward the payment to FNB. The Johnstones brought an action seeking a declaratory judgment that the encumbrance had been satisfied and requiring conveyance of the deed of trust. The Johnstones argued that they did not have constructive or actual notice of FNB’s interest because the bank did not record the Backus trust deed. The bankruptcy court disagreed. Looking to Oregon law (as required by the language of the note), it said:
It is clear that by possession of the note and deed of trust, FNB had a perfected security interest in the Backus-CPM loan
FNB, in fact, had done everything required by the Oregon Uniform Commercial Code to perfect its security interest and was not legally required to record. Such a recording may or may not have given constructive notice; but as a means of perfection, it would have been meaningless.
22 B.R. at 755.
It is, thus, clear that the Taylor-Gold Key note and trust deed are instruments and that the defendant would have been required to have possession of these documents on the date the petition was filed herein in order to perfect her interest. “The debtor cannot qualify as an agent for the secured party for the purpose of perfection.” In re Bruce Farley Corporation, 612 F.2d at 1200. Since the defendant did not have possession of the Taylor-Gold Key note and trust deed on the date of the filing of the petition, herein, the defendant’s security interest therein was unperfected.
TRUSTEE’S AVOIDANCE POWER
Richard D. Dicob asserts, in his ami-cus brief, that since Oregon law requires that the plaintiff levy execution upon the note and trust deed, plaintiff does not have a judicial lien upon these documents. Such an argument overlooks the express provisions of § 544(a)(2), supra, and O.R.S. 79.-3010(4) supra. These statutes clearly provide that the plaintiff’s lien is superior to the unperfected security interest of the defendant in the Taylor-Gold Key note and trust deed.
Although, as Dicob contends, the recording of the assignment for collateral security may have provided some notice to the plaintiff of the defendant’s asserted security interest, since the defendant’s security interest was not properly perfected, such notice is ineffective as against the plaintiff’s lien creditor status. In re Gold Key Properties, Inc., 119 B.R. 787 (Bankr.D.Or.1990).
CONCLUSION
Based upon the foregoing, the plaintiff-trustee, exercising his avoidance powers *630contained in § 544(a), may avoid the defendant’s asserted security interest in the Taylor-Gold Key note and trust deed which security interest is therefore preserved for the benefit of the estate, herein pursuant to § 551. There is no genuine issue as to any material fact and plaintiffs motion for summary judgment should be granted.
This memorandum opinion contains the court’s findings of fact and conclusions of law; they shall not be separately stated. An order consistent herewith shall be entered.
. With the permission of this court Richard D. Dicob, who asserts that he is similarly situated to the defendant herein, filed an amicus curiae legal memorandum opposing the plaintiffs motion for summary judgment.
. Section 9304 of the California Uniform Commercial Code is nearly identical to its Oregon counterpart, O.R.S. 79.3040(1), and provides in part as follows:
... A security interest in money or instruments (other than certificated securities or instruments which constitute part of chattel paper) can be perfected only by the secured party’s taking possession, except as provided in subsections (4), (5) and (7) of this section and subdivisions (2) and (3) of Section 9306 on proceeds. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491270/ | MEMORANDUM OPINION
LETITIA Z. CLARK, Bankruptcy Judge.
FINDINGS OF FACT AND CONCLUSIONS OF LAW AND ORDER OF ADEQUATE PROTECTION REGARDING DEBTOR’S MOTION TO SELL CERTAIN REAL PROPERTY TO MCDONALD’S CORPORATION
Findings of Fact
Came on for hearing on August 15, 1990 Debtor’s Emergency Motion to Sell Real Property to McDonald’s Corporation. At the conclusion of the hearing, the opposing parties, Debtor and The Cumberland Federal Savings Bank, were asked to brief certain issues, all briefing to be concluded by August 24, 1990. They have done so. 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.
1. Debtor filed Bankruptcy June 13, 1990. Debtor is a corporation incorporated in the State of Texas which engages in the purchase, development and sale of real property. Debtor at present holds two such projects, a relatively small one in Texas, and a large one in Kentucky.
2. This court has heard a Motion by the largest secured creditor, The Cumberland Federal Savings Bank, for transfer of venue and from the bench announced Findings of Fact and Conclusions of Law as to that Motion whereby the Bankruptcy Court for the Southern District of Texas recommends to the United States District Court for the Southern District of Texas, that this Bankruptcy case be transferred to the Western District of Kentucky, where virtually all of Debtor’s real estate holdings are located. This court takes judicial notice of its Findings of Fact and Conclusions of Law in that recommendation, which recommendation has been reduced to writing and was signed September 9, 1990.
3. The United States District Court for the Southern District of Texas has not yet issued an Order with regard to transfer of venue. Until that time, it is the view of this court that it continues to have the authority to act in this case, (See B.R. 1014), and that it is in the best interest of the Debtor and its creditors that this court do so.
4. The parties before this court at the hearing with regard to the proposed sale to McDonald’s are in agreement that the proposed purchase price for a particular parcel in Debtor’s development know as Stony *740Brook North in Jefferson County, Kentucky, is a fair one, and that the McDonald’s Corporation is a good prospective purchaser. The testimony of Debtor’s President, Jeffrey Lagow, that having a McDonald’s in a development of this sort (multi-use, including a Loew’s Cinema Ten) enhances the value of the other sites in the development, was undisputed.
5. Jeffrey Lagow was a credible and competent witness.
6. The differences between the two opposing parties arise over disposition of proceeds from the sale.
7. The Cumberland holds a first lien on sixty percent (60%) of the parcel proposed for sale to McDonald’s, and a second lien on forty percent (40%) of the parcel. First Federal Savings and Loan of Paducah, Kentucky holds a first lien on forty percent (40%) of the parcel, and a second lien on sixty percent (60%) of it.
8. Debtor and First Federal have reached an agreement with regard to sale of the parcel. First Federal will release its lien as to that parcel upon payment to First Federal of $125,000.00. (Debtor’s EX 14.)
9. Debtor and The Cumberland have no agreement. Debtor proposes to pay The Cumberland $5.60 per square foot, and proposes to make various other payments from the proceeds as well.
10. The additional payments Debtor proposes to make are:
1) payments to real estate brokers involved in the sale;
2) payments to counsel in connection with the closing;
3) payments to an engineer for work related to Seller’s contractual covenants;
4) ad valorem real estate taxes;
5) a Mechanic’s and Materialmen’s lien claim fund; and
6) payments for site work required by purchaser.
(See Debtor’s EX 14.)
11. The Cumberland objects to any such payments except “those without which the sale cannot be closed.” The Cumberland contends that applicable Bankruptcy law protects it from having to bear any other charges, pursuant to 11 U.S.C. § 363.
12. The Cumberland believes its lien to be superior to that of any Mechanic’s and Materialmen’s lien, and therefore that no payments should be made on the Mechanic’s and Materialmen’s lien until The Cumberland has been paid in full.
13. Whether The Cumberland’s lien is superior to any Mechanic’s and Material-men's claimants will be determined with reference to Kentucky law. Not only is the real property located in Kentucky, but also the choice of law provisions in the contracts between the opposing parties call for application of Kentucky law.
14. The business of the Debtor involves sales of parcels of real property. Each time the Debtor desires to sell a parcel, where some of the parties disagree as to distribution of proceeds, a determination of distribution of proceeds will have to be made by the Bankruptcy Court handling the case. This will involve, in part, application of Kentucky law as it relates to Mechanic’s and Materialmen’s liens and to contracts between Debtor and its lienhold-ers.
15. The Cumberland contends that it is entitled to sixty percent (60%) of the net proceeds of the sale and that no portion of the proceeds should be paid until their first lien is paid.
16. There is a dispute between the parties as to the nature of an equity position that The Cumberland has in the development. The agreement between the parties creating this equity position is to be interpreted in accordance with Kentucky law.
17. With regard to release of property to be sold, the Development Loan Agreement between Debtor and The Cumberland provide The Cumberland is to receive the greater of one hundred percent (100%) of “net sales price” or one hundred fifteen percent (115%) of the value of the sales property as set forth on Annex I. Annex I provides for not less than $5.60 per square foot for inner lots, and $7.00 per square foot for “out parcels.” (See Debtor’s EX 18.)
*74118. This court finds that the parcel at issue is an out parcel.
19. David Hogan of Galloway Appraisal Company, an independent appraisal firm located in Louisville, Kentucky, testified concerning the value of the property. He testified that the fair market value of the property ranged from $12.50 to $12.75 per square foot and that the sale price (calculated to be approximately $12.40 per square foot) offered by McDonald’s appeared to be near the appraised value.
20. The Cumberland will retain its first lien position on the remaining acreage of Stony Brook North (approximately 69 acres) which the unrefuted testimony of David Hogan, the duly qualified appraiser, determined to be in excess of $12,000,-000.00. The Stony Brook North development loan balance is less than $6,000,-000.00.
21. The Cumberland will also retain its first lien position in the approximately 292 acre tract known as Stony Brook South. The undisputed testimony of David Hogan, a duly qualified appraiser, valued the Stony Brook South acreage subject to The Cumberland’s lien in excess of $21,000,000.00. The Stony Brook South development loan balance is less than $10,000,000.00.
Conclusions of Law
1. The Cumberland is not entitled to sixty percent (60%) of the proceeds from the sale. Debtor, as a debtor-in-possession, in the early stages of its Bankruptcy case, and with a substantial chance of reorganization in the hands of a competent manager, which this court finds Jeffrey Lagow, Debtor’s President, to be, is entitled to make use of some of the proceeds of the sale, provided that the lienholders are adequately protected. 11 U.S.C. §§ 363(e), 361; See Matter of Selby Farms, Inc., 15 B.R. 372 (Bankr.S.D.Miss.1981)
2. Debtor may sell the property free and clear to McDonald’s at the price cited in the Motion, $663,214.00, with the following payments being allowed as costs of the sale:
1) sales commission of approximately six percent (6%) to real estate agents, in the amount of $39,795.00;
2) attorneys fees for Debtor’s closing counsel, in the amount of $5,000.00;
3) fees for site work to be performed by seller in accordance with seller’s contractual covenants, in the amount of $55,-000.00; and
4) ad valorem taxes, if the authorities asserting ad valorem taxes will accept the Debtor’s proposed $6,000.00 payment as payment in full. Otherwise, the amount for taxes shall be deposited into an escrow fund pending further determination by a court of competent jurisdiction. (See Debtors EX 14.)
3. The sale will be conditioned upon:
1) Debtor’s paying $7.00 per square foot to The Cumberland;
2) payment of $125,000.00 to First Federal; and
3) the creation of an escrow fund which will consist of those funds (approximately $11,000.00) set aside for Mechanic’s and Materialmen’s claimants and any tax amounts not distributed.
4. The remainder of the sales proceeds will go to Debtor for its own use.
5. This court finds that The Cumberland is adequately protected, in accordance with 11 U.S.C. § 363, as a result of The Cumberland’s being paid $7.00 per square foot, in addition to its security interest on the remaining property. See Selby Farms, 15 B.R. 372.
6. It will remain for a court of competent jurisdiction to construe Kentucky law as it relates to Mechanic’s and Material-men’s liens and the equity position of The Cumberland, to determine the distribution of the escrowed remainder of the proceeds where, as here, the lienholder does not consent to the use of the proceeds. Thus, distribution to Mechanic’s and Material-men’s claimants and any further distribution to The Cumberland based on its equity position, will await further determination by that court, and will be payable, if so determined by that court, from the escrow fund hereby to be created.
*742Pursuant to and in accordance with the above Findings of Fact and Conclusions of Law, the court grants the Debtor’s Motion to Sell conditioned upon compliance with the provisions above. 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/8491271/ | MEMORANDUM OF OPINION AND ORDER
RANDOLPH BAXTER, Bankruptcy Judge.
I.
The matter before the Court is the motion of Donald E. Wallace (Debtor, Defendant) for a new trial in the above-styled adversary proceeding. Upon review of the pleadings, and the record, generally, the motion is hereby denied.
II.
On January 6, 1989, Susan M. Wallace (Plaintiff) was granted a judgment against Defendant in the above-styled adversary proceeding. The Defendant, more than two years later, filed a motion for a new trial on March 12, 1991. The Defendant contends that he is entitled to a new trial premised upon newly discovered evidence to prove the Plaintiff and her attorney willfully, with all knowing intent, did not disclose a Sales Agreement, with a settlement date that is pertinent to issues heard by this Court. The Plaintiff has filed no responsive pleading.
III.
The principle dispositive issue is whether the Court should grant the Defendant’s motion for a new trial,
IV.
The granting of a new trial is governed by Rule 59, Fed.R.Civ.P., made applicable herein by Rule 9023, Bankr.R., and provides in relevant part.
Rule 59. New Trials; Amendment of Judgments.
(a) Grounds. A new trial may be granted to all or any of the parties and on all or part of the issues (1) in an action in which there has been a trial by jury, for any of the reasons for which new trials have heretofore been granted in actions at law in the courts of the United States; and (2) in an action tried without a jury, for any of the reasons for which rehearings have heretofore been granted in suits in equity in the courts of the United States. On a motion for a new trial in an action tried without a jury, the court may open the judgment if one has been entered, take additional testimony, amend findings of fact and conclusions of law or make new findings and *754conclusions, and direct the entry of a new judgment.
(b) Time for Motion. A motion for a new trial shall be served not later than 10 days after the entry of the judgment.
The Defendant has filed his motion well outside of the ten (10) day time limitation referenced in Rule 59(b), Fed.R.Civ.P. This being the case, the only remedy available to the Defendant is to have judgment set aside pursuant to Rule 60, Fed.R.Civ.P., made applicable herein by Rule 9024, Bankr.R., which provides in part:
Rule 60. Relief from Judgment or Order.
(b) Mistakes; Inadvertence; Excusable Neglect; Newly Discovered Evidence; Fraud, etc. On motion and upon such terms as are just, the court may relieve a party or a party’s legal representative 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 ... The motion shall be made within a reasonable time, and for reasons (1), (2), and (3) not more than one year after the judgment, order, or proceeding was entered or taken.
The moving party bears the burden to demonstrate one of the enunciated grounds under Rule 60, Fed.R.Civ.P. See, Globe Paper Co. v. Morris Travis Drug Company, 112 F.2d 350 (6th Cir.1940).
The facts alleged by the Defendant appear to have been in existence at the time the adversary proceeding was pending before this Court. Although it is unfortunate that the Defendant did not have knowledge of these facts in time to present them to the Court, this does not warrant the Court’s disregard of the rule. Those allegations fall within the scope of Rule 60(b)(2), Fed.R.Civ.P. and, as such, are barred by the one (1) year statute of limitations of that rule. In re Miller, 36 B.R. 403, 405 (Bankr.N.D.Ohio 1984). The Defendant has demonstrated no other grounds on which relief from the judgment can be granted.
V.
Accordingly, the Defendant’s motion for a new trial is hereby denied.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491272/ | MEMORANDUM OPINION
RICHARD T. FORD, Bankruptcy Judge.
On August 3, 1990, Sharon K. Mullins, by and through her attorney, Hal B. Hav-lisch, filed an individual voluntary petition for protection under Chapter 7 of the Bankruptcy Code. Ellen Briones was appointed as Trustee on August 15, 1990. The first meeting of creditors concluded September *81012, 1990, with the Trustee’s report indicating a no asset case.
On October 15, 1990, AYCO Financial Services (Avco), by and through Carol D. Mills of Frandzel and Share, filed a Notice of and Motion for Relief from Stay against Mullins and the Trustee. Although the Notice of Motion indicates that the Motion is made pursuant to Local Rule 3, Part C., the Motion at page 3, paragraph 14, indicates it is brought pursuant to Local Rule 21, part C. General Order 89-1, dated May 11,1989, and effective June 1,1989, specifically states in paragraph III that Local Rule 21 (which was never used in the Fresno Division of the Eastern District of California) was renumbered to Local Rule 3. Local Rule 3 became effective and was adopted for use by the Fresno Division of the Eastern District of California on June 1, 1989.
Local Rules 3(C) and 3(D) govern the proceedings in relief from stay motions. Under Local Rule 3, a Motion for Relief from Stay brought pursuant to Section (C) is deemed a final hearing in that the Motion shall be heard within thirty (30) days of the date the Motion is filed. Further, all accompanying points and authorities, affidavits or declarations, other supporting papers, and other evidence shall be filed prior to the hearing of the Motion under Section (C). Local Rule 3(C)(3). Conversely, Section (D), the alternative procedure, explicitly states that the Notice of Motion under this part shall clearly indicate that the Motion is brought under Section (D) and that the hearing will be a preliminary hearing. For purposes of this opinion, the Motion will be viewed as one under Local Rule 3(C) as the Notice of Motion states this, the Motion at page 3, paragraph 14 specifies the hearing was not a preliminary hearing, and a Declaration in support of and an Exhibit “A” as required under Local Rule 3(C) all accompanied the Motion at the time of filing.
Avco’s Motion alleges relief from the automatic stay should be granted on two grounds. First, Avco alleges relief is warranted under § 362(d)(2) in that the Debtor lacks equity in the 1990 Ford Mustang vehicle, and, as this is a Chapter 7 case, the vehicle is not necessary for, nor is reorganization contemplated. Secondly, and alternatively, Avco alleges cause exists under § 362(d)(1) in that Avco is not adequately protected as the Debtor has not made payments, yet continues to use and possess the vehicle, thus depreciating its value.
This matter came on for hearing November 13, 1990, at which time Carol D. Mills appeared for Avco. There were no appearances for the Debtor or Trustee. Argument was received, and the matter then submitted.
This opinion constitutes this Court’s findings of fact and conclusions of law. Jurisdiction exists pursuant to 28 U.S.C. § 1334. This is a core proceeding within the meaning of 28 U.S.C. § 157(a) and (b)(1) and (b)(2)(G).
DISCUSSION
The party seeking relief from stay to proceed against property of the estate on the basis of lack of equity therein has the burden of proof on that issue. 11 U.S.C. § 362(g)(1). The opposing party has the burden on all issues other than lack of equity. Ibid. Implicit in motions for relief under Local Rule 3(C) is that a prima facie showing through the use of competent evidence be made indicating relief is warranted. As Local Rule 3(C) motions are treated as final hearings, all evidence must necessarily be submitted prior to the hearing and conform to those requirements expressed in the Bankruptcy Rules, Local Rules, Rules of Evidence and adopted guidelines used by this Court.
In support of Avco’s Motion, a photocopy of a facsimile document bearing an original signature of the declarant was submitted as evidence of the alleged lack of equity and cause for termination of the automatic stay. Bankruptcy Rule 9011(c) provides:
“(c) Copies of Signed or Verified Papers. When these rules require copies of a signed or verified paper, it shall suffice if the original is signed or verified and the copies are conformed to the original.”
*811Local Rule 3(C) makes no allowance for the use of copies. Rule 9011(c) presumes the existence of a signed original document where copies are not required. It necessarily follows that only original documents may be submitted in support of all motions, applications, etc. brought under Local Rule 3.
The editor comments to Rule 9011(c) state that when copies are necessary, certified or conformed copies will suffice and only the original need be signed. Norton, Bankruptcy Law and Practice, Rule 9011(c) 1989-90 Edition, Editor Comments p. 806 (Callaghan). Conformed copies are exact copies of original documents, which, where such an original document is a declaration, requires the declarant’s signature on the original document.
“Original document” is defined as an archetype. Black’s Law Dictionary 5th ed., West Publishing Co. (1979). “Archetype” is “the original from which a copy is made.” Ibid. “Original” is defined as preceding all others in time: FIRST; not derived from something else; being the source from which a copy, reproduction, or translation is made; not secondary, derivative, or imitative. Webster’s Ninth New Collegiate Dictionary, Merriam-Webster, Inc. (1987); see also Webster’s II, New Riverside University Dictionary, Merriam-Webster, Inc. (1984).
The only document submitted as proof for the allegations in the Motion for Relief was a photocopy of a facsimile document that bore an original signature of the de-clarant. The date is typed in on this photocopy and the signature is on the signature line. In both places, it is obvious that the original document was blank when faxed and subsequently copied for signature. Therefore, the document submitted, on its face, plainly shows that there exists no original document signed by the declar-ant.
Moreover, Mills’ own statements at the hearing clearly indicate that the original document was unsigned and that the document submitted was a “copy.” The pertinent part of the hearing is as follows:
“Court: Is it an original document?
Mills: Yes, your honor, it is. It’s the only signed original.
Court: Let me see. It’s originally signed but its not an original paper document as I understand the wording. How did you receive it?
Mills: How did I get the copy back? Through the mail.
Court: Well, you just referred to it as a copy—do you refer to it as a copy?
—pause—
Mills: The document came back in the mail with the original signature.
Court: Okay, this is not an original document as I understand the term.”
Clearly, the document submitted is a duplicate under the plain language of Federal Rules of Evidence Rule 1001(4). Where the contents of a writing are sought to be proved as in this case (lack of equity and that the property is not necessary for an effective reorganization, and cause, being lack of adequate protection), the Original Writing Rule requires submission of the original document. Federal Rules of Evidence Rule 1002.
While a duplicate under normal circumstances might be acceptable for the sake of convenience, it is unfair in this instance to allow a duplicate document to satisfy the proof requirement in light of the clear requirement under Rule 9011(c) of the existence of a signed original document, this Court’s understanding and the definition of that term, the known policy of this Court against receiving facsimile documents and photocopies of facsimile documents, and the fact that this is a final hearing for relief from the automatic stay.
This Court finds and holds that Avco has failed to meet its burden respecting lack of equity in the estate property and moreover that Avco has not submitted cogent evidence making a prima facie showing upon which relief could be granted. The only evidence submitted in support of their motion clearly indicates that the original declaration is unsigned. For the above reasons, relief is DENIED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491273/ | MEMORANDUM OPINION AND ORDER DENYING PLAINTIFF’S MOTION FOR SANCTIONS
JON J. CHINEN, Bankruptcy Judge.
United Capitol Insurance Co. has moved for sanctions against the attorney for Superior Homes of Hawaii, Inc. pursuant to Federal Rules of Civil Procedure (“Fed.R. Civ.P.”) Rule 11, Bankruptcy Rules (“Bankr.R.”) Rule 9011, 28 U.S.C. § 1927, and the inherent power of the court to punish abusive practices. A hearing was held on February 6, 1991, at 8:30 a.m. with appearances entered by Walter K. Horie, Esq. for the defendant-counsel of Superior Homes of Hawaii, Inc. and M. Tyler Potten-ger, Esq. for the plaintiff.
I.
BACKGROUND
While involved as a defendant in a law suit brought in state court by Superior Homes of Hawaii, Inc. (“Superior”), Kama-kani Services, Inc. (“Kamakani”) filed for bankruptcy in January 1988. Defense of the state action was tendered to Kamaka-ni’s general liability insurer, United Capitol Insurance Co. (“United”) in August 1988.
In December 1988, United filed the underlying declaratory action as an adversary proceeding in the Bankruptcy Court to determine whether a duty existed to defend or indemnify Kamakani in the state court action. As a potential beneficiary under the policy, Superior was allowed to intervene as a defendant.
Cross-motions for summary judgment were filed by United and Superior in 1989. By an order entered on November 13, 1989, the Bankruptcy Court granted summary judgment to United and denied Superior’s motion.
Superior filed a timely appeal to the District Court which, on July 2, 1990, affirmed the decision of the Bankruptcy Court. Final judgment was entered on August 10, 1990.
On January 10, 1991, United filed a motion for sanctions against the attorney for Superior. The memorandum submitted in support of the motion requests damages in the amount of $17,065.80 as detailed on attached billing statements. The amounts requested include attorney’s fees for defending against Superior’s appeal.
II.
FED.R.CIV.P. RULE 11
By the limitations contained within its own text, the Federal Rules of Civil Procedure “do not apply to proceedings in bankruptcy_” Fed.R.Civ.P. 81(a)(1). The Ninth Circuit recognized this in In re Akros Installations, Inc., 834 F.2d 1526 (9th Cir.1987).
In Akros, the Ninth Circuit held that a district court may not award sanctions under Fed.R.Civ.P. Rule 11 (hereinafter “Rule 11”) for an appeal from bankruptcy court. The court went on to explain that “[t]he Federal Rules of Civil Procedure are made explicitly inapplicable to ‘proceedings in bankruptcy ... except in so far as they *821may be made applicable thereto’ by the Bankruptcy Rules.” Akros, supra at 1531 (quoting from Fed.R.Civ.P. 81(a)(1)). No such exception for Rule 11 in the Bankruptcy Rules was found by the Ninth Circuit in Akros, nor is any found by this court today.
Thus, since Rule 11 is inapplicable, no award of sanctions may be made under this rule.
III.
BANKR.R. RULE 9011
Despite the inapplicability of Rule 11 to proceedings in bankruptcy as a basis for awarding sanctions, the policy and analysis of that rule may generally be applied to the imposition of sanctions under Bankr.R. Rule 9011 (hereinafter “Rule 9011”). E.g. In re Chisum, 847 F.2d 597, 599 (9th Cir.1988); In re Film Ventures Intern., Inc., 89 B.R. 80, 83 n. 1 (9th Cir.BAP 1988); 9 Collier on Bankruptcy §§ 9011.01-02 (15th ed. 1979). As the 9th Circuit has held that “Rule 9011 governs only the initial proceedings in bankruptcy court,” this court will only review, for the purposes of Rule 9011, Superior’s filings at the trial level. Akros, 834 F.2d at 1531.
A. Signing of Documents
Unlike Rule 11, Rule 9011 makes certain exceptions as to what must be signed when a party is represented by an attorney. The signature of an attorney is required on “[e]very petition, pleading, motion and other paper served or filed ... except a list, schedule, statement of intention, Chapter 13 Statement, or amendments thereto....” Bankr.R. 9011(a). By its terms, Rule 9011 is not applicable to a “violation” in connection with one of the excepted documents. The violations being alleged by United are traceable to documents filed and signed by Superior’s attorney during the course of litigating the declaratory action. As such, Rule 9011 scrutiny is proper.
B. Analysis
In Zaldivar v. City of Los Angeles, 780 F.2d 823, 829 (9th Cir.1986), the Ninth Circuit Court of Appeals held that Rule 11, as amended in 1983 1, did not require any finding of subjective bad faith on the part of a signing attorney. Instead, an objective test of “reasonableness under the circumstances” is used. See 1983 Advisory Committee Note on Rule 11. See also Business Guides, Inc. v. Chromatic Communications Enterprises, — U.S.-,-, 111 S.Ct. 922, 933, 112 L.Ed.2d 1140 (1991) (Whether signed by a party or attorney, Rule 11 utilizes a standard of reasonableness under the circumstances). Conduct is tested against the standard of “a competent attorney admitted to practice before the district court.” Zaldivar at 830. The court found two avenues for imposing sanctions under Rule 11: the “Frivolousness” Clause and the “Improper Purpose” Clause.
The “Frivolousness” Clause relates to a signing attorney’s certification that “to the best of the attorney’s or party’s knowledge, information, and belief formed after reasonable inquiry [the signed document] is well grounded in fact and is warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law_” Bankr.R. Rule 9011(a). Resolution of the facts and law associated with a disputed issue by dismissal or summary judgment is not dispositive of whether a Rule 11 or Rule 9011 violation has occurred. The court must look back to the time that the document was signed. Community Elec. Service v. National Elec. Contr., 869 F.2d 1235, 1243 (9th Cir.1989); Zaldivar at 830-831.
In the instant case, the fact and law branches of Rule 9011 are easily separated since the facts presented by both sides in litigating the declaratory action were substantially the same. The difficulty arises when reviewing the interpretations assigned by the parties to the same set of facts. Thus, the court must determine whether Superior’s attorney conducted a reasonable inquiry into the law and whether reliance on the fruits of that research was warranted.
*822Concrete evidence of a reasonable inquiry into the law by Superior’s attorney is seen by the authorities he cited. Neither side was able to provide the court with precedential cases on point from Hawaii’s state courts or any federal court interpreting Hawaii law. Superior was able to provide the court with case law from other, non-binding jurisdictions which supported Superior’s interpretation.
Superior’s reliance on its legal research appears warranted for two reasons. First, the specific issues presented by the declaratory action were of first impression in this jurisdiction. Neither side cited cases on point which would compel a bankruptcy court to adopt their position. In Bank of Maui v. Estate Analysis, Inc., 904 F.2d 470 (9th Cir.1990), the Ninth Circuit held that the binding effect of a bankruptcy appellate panel was so uncertain that a plaintiff’s reliance on a minority viewpoint from a bankruptcy court in another circuit, despite a plainly contrary case on point from this circuit’s BAP, was not clearly frivolous and unreasonable. In the case before this court, no contrary cases on point have been found and Superior appears to have even more supporting case law from other jurisdictions for its position than did the plaintiff in Bank of Maui.
Furthermore, Hawaii’s courts routinely look to arguments made in other jurisdictions for guidance in insurance contract cases when no precedent is available. E.g. Sturla, Inc. v. Fireman’s Fund Insurance Co., 67 Haw. 203, 210, 684 P.2d 960, 965 (1984) (use of a New Jersey case interpreting similarly worded insurance policy); Masaki v. Columbia Casualty Co., 48 Haw. 136, 141, 395 P.2d 927, 929 (1964) (use of Wisconsin and California cases to interpret an insurance clause).
Second, Superior’s attorney also appears to base his position on a general policy enunciated in Hawaii’s state courts:
Because insurance policies are contracts of adhesion and are premised on standard forms prepared by the insurer’s attorneys, we have long subscribed to the principle that they must be construed liberally in favor of the insured and the ambiguities resolved against the insurer.
Sturla, 67 Haw. at 209, 684 P.2d at 964. See also State Farm Mutual Automobile Insurance Co. v. Bailey, 58 Haw. 284, 289, 568 P.2d 1185, 1188 (1977). However, the Supreme Court of Hawaii has added that “ambiguity is found to exist and the rule followed only when the contract taken as a whole is reasonably subject to differing interpretation.” Sturla at 209-210 (quoting from Modern Construction, Inc. v. Barce, Inc., 556 P.2d 528, 529 (Alaska 1976)) (quotes omitted).
Superior meets the qualifying test of ambiguity for Rule 9011 purposes since Superior itself could reasonably interpret the insurance contract in the manner it did, and because the actions of the other involved parties showed some uncertainty over coverage. The first act occurred when Kama-kani’s president as debtor-in-possession attempted to tender defense to United in August 1988. As Kamakani’s president was the one who originally arranged for the insurance contract, his attempt to seek coverage was a reasonable indicator to Superior that at least one party to the insurance contract expected coverage under the facts as they existed.
The next step was taken by United. Rather than simply denying coverage because it felt the interpretation was crystal clear, United sought the protection of a declaratory action. This provided Superior with another signal that its arguments were not so fatally flawed that they should be dismissed outright.
Finally, when United filed its declaratory action, Kamakani’s chapter 7 trustee saw enough merit to file an opposing answer. Admittedly, the trustee then sat back and allowed United and Superior to duke it out, and it is reasonable for the trustee to lay back to preserve the bankruptcy estate in light of Superior’s active advocacy. Thus, Superior had three indications, other than its own assessment, that the terms of the insurance contract could reasonably be subject to differing interpretations.
The “Improper Purpose” Clause is to be tested by objective standards. Zaldi*823var at 831-832. No improper purpose is found by this court in Superior participating in the declaratory action. Policy favors a vigorous defense by a beneficiary-creditor when an insurance company denies coverage to an insured-debtor who may not have the funds to pursue uncertain claims. The beneficiary-creditor conserves the bankruptcy estate’s assets by bearing the brunt of the litigation costs and, if the creditor wins, reducing the amount of debt payable directly out of the estate to that creditor.
Superior’s intervention and subsequent litigation in the declaratory action is also bolstered by the implications of H.R.S. § 431:10-242:
Where an insurer has contested its liability under a policy and is ordered by the courts to pay benefits under the policy, the policyholder [and/or] the beneficiary under a policy ... shall be awarded reasonable attorney’s fees and the costs of suit, in addition to the benefits under the policy.
There is no corresponding statute awarding fees and costs to a prevailing insurance company. Hawaii’s legislative branch apparently favors a policy of vigorous defense by insureds and beneficiaries when faced by an insurance company denying coverage. While reliance on such a statute cannot excuse a violation of Rule 9011, it does help to illustrate that Superior’s intervention and litigation in the declaratory action was not improper.
C. Rule 9011 Sanctions
Since the court finds that Superior conducted a reasonable inquiry, had a position well-grounded in fact, made legal arguments warranted by existing law, and did not file documents for any improper purpose, no sanctions under Rule 9011 will be awarded.
IV.
SECTION 1927 AND THE COURT’S INHERENT POWERS
Application of 28 U.S.C. § 19272 hinges on a finding that counsel has acted recklessly or in bad faith to unreasonably and vexatiously multiply the proceedings. See In re Akros Installations, Inc., 834 F.2d 1526, 1532 (9th Cir.1987). In United States v. Blodgett, 709 F.2d 608, 610 (9th Cir.1983), the 9th Circuit allowed a district court to impose sanctions under § 1927 for a frivolous appeal to the circuit court. This principle of allowing a trial court to impose sanctions under this statute for an appeal taken from it has not been expressly overruled or reaffirmed in this circuit. But cf. Cooter & Gell v. Hartmarx Corp., — U.S. -, 110 S.Ct. 2447, 2461-62, 110 L.Ed.2d 359 (1990) (District courts cannot impose sanctions under Rule 11 for frivolous appeals taken from it to the circuit court).
United argues that bad faith is shown by Superior’s attorney’s knowledge of the facts prior to summary judgment. However, this court has already stated that the facts were not in dispute, only the interpretation given to those facts. If bad faith may be shown by a disagreement between counsel for each side over the application of law to a set of facts, sanctions would become quite common.
In regards to the appeal, United’s attorney attached an affidavit to the motion for sanctions averring that he had “advised” Superior’s attorney “as early as November 1989 that his (Superior’s) continued pursuit of this meritless claim might result in a request for sanctions.” Since summary judgment was granted on November 1, 1989, the court takes United’s attorney’s assertion to mean that a motion for sanctions may be brought (it was) if Superior appeals (it did). However, Superior’s counsel taking an appeal from an adverse summary judgment ruling under the facts of this case does not display bad faith.
*824United also points to the Bankruptcy Court’s grant of summary judgment and Superior’s “harassing, dilatory, unreasonable and vexatious conduct” in filing its appeal. The argument is made that the grant of summary judgment to United put Superior’s attorney on notice that his “claim was destined to fail.” United’s logic is odd. If the grant of summary judgment to one party determines whether an appeal by the loser is destined to fail, then why would anyone ever appeal? Without getting into numbers, it is known that summary judgments granted by trial courts are often reversed on appeal every year.
Finally, United zeroes in on a statement in the conclusion of the order affirming the grant of summary judgment in which the District Court states that the trial court’s decision was “the only tenable decision given the specific language of the policy in question.” Order Affirming Decision and Order of the Bankruptcy Court at 12 (Civ. No. 90-00085 MP, D.Haw. July 2, 1990). This phrase in the conclusion must be read in the context of the entire 12-page order issued by the District Court. It is the opinion of this court that the word “untenable” meant untenable in light of the legal reasoning laid out by the District Court and was not a finding that Superior’s legal arguments were untenable in the sense of being meritless, frivolous, or made in bad faith. This court notes that United did not ask the appellate court for the costs of appeal, nor did that court sua sponte grant such costs.
No recklessness or bad faith leading to an unreasonable and vexatious multiplication in proceedings is found in Superior’s intervention in the declaratory action, in its litigation through summary judgment, or in its appeal to district court.
The standards for awarding attorney’s fees and costs to a party under the inherent power of the court have several points in common with analysis for imposition of sanctions under 28 U.S.C. § 1927. Namely, the court must find that that counsel brought or maintained an unfounded action or defense “in bad faith, vexatiously, wantonly, or for oppressive reasons.” Akros at 1532 (quoting from 6 J. Moore, W. Tag-gart & J. Wicker, Moore’s Federal Practice § 54.78[3] (2nd ed. 1987)). Given the reasons already stated, this court finds no basis to utilize its inherent powers to impose sanctions on Superior’s attorney.
V.
TIMELINESS OF MOTION FOR SANCTIONS
An alternative ground for denying United’s motion for sanctions is its untimeliness. First, the primary purpose behind the use of sanctions is to deter subsequent abuses. “A proper sanction assessed at the time of a transgression will ordinarily have some measure of deterrent effect on subsequent abuses and resultant sanctions.” In re Yagman, 796 F.2d 1165, 1183-84 (9th Cir.1986), cert. denied, 484 U.S. 963, 108 S.Ct. 450, 98 L.Ed.2d 390 (1987). See also Schwarzer, Sanctions Under the New Federal Rule 11-A Closer Look, 104 F.R.D. 181, 198 (1985). This is not to say that sanctions decisions are never to be withheld until the end of litigation. Yagman at 1183.
In its memorandum supporting the motion for sanctions, United States that its summary judgment motion pointed out the fatal flaws in Superior’s position and that seven months was more than sufficient for Superior’s attorney to have made an adequate investigation of the law and facts. If this is taken as being true, United certainly had grounds to request sanctions long before termination by final judgment. Instead, they waited an additional 17 months and spent thousands of dollars before bringing this motion. While the court empathizes with an attorney’s desire to obtain the solid footing of having prevailed before attempting to get sanctions against an opposing attorney, such practices do not comport with the policy of using sanctions to deter abusive behavior. Rather, such practices promote the use of hindsight and creates the danger of turning sanctions into nothing more than a fee shifting tool.
Second, the timing of the motion is suspect. Final judgment was entered on Au*825gust 10, 1990. United’s attorney’s billings indicate that they discussed a motion for sanctions against Superior’s attorney on August 29 and 30, 1990. Research soon followed and United’s attorneys finished the draft of the motion for sanctions on September 28, 1990. On January 10, 1991, five months after final judgment and over three months after having completed their draft, United filed its motion for sanctions.
The timeliness of a Rule 11 or 9011 motion rests within the discretion of the judge. See Advisory Committee Note of 1983 to Amended Rule 11. The Ninth Circuit has formulated a flexible standard that looks at the circumstances and relates them to the deterrence aspect of Rules 11 and 9011. Community Elec. Service v. National Elec. Contr., 869 F.2d 1235, 1242 (9th Cir.1989); Yagman at 1184. Likewise, the timing of sanctions in contexts other than Rules 11 and 9011 should also relate to deterrence. Id.
Five months after the final disposition of a case is generally too long to wait to file a motion for sanctions. United offers no explanation for the long delay, nor for the three month period between finishing their draft of the motion and actually getting the motion filed. As such, the motion for sanctions is untimely.
CONCLUSION
For the reasons given, this court finds that sanctions against Superior’s attorney are not appropriate. The motion for sanctions brought by United Capitol Insurance Co. is DENIED in full.
. Rule 9011 was amended in 1983 to match the changes to Rule 11.
. The text of the statute:
Any attorney or other person admitted to conduct cases in any court of the United States or any Territory thereof who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys’ fees reasonably incurred because of such conduct. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491274/ | *52MEMORANDUM OF OPINION AND ORDER
RANDOLPH BAXTER, Bankruptcy Judge.
I.
The matter before the Court is the motion of the United States Trustee (UST) to dismiss the above-styled Chapter 11 proceeding or in the alternative to convert to a Chapter 7. Upon review of the pleadings, argument of counsel, and the record, generally, the motion is granted and the case dismissed.
II.
On January 11, 1991, Child Life, Inc. (Debtor) caused to be filed its Chapter 11 petition. The petition was filed, pro se, and did not contain an application to employ an attorney nor an attorney’s affidavit as required by 11 U.S.C. § 327 and Rule 2014, Bankr.R. The UST, on January 18, 1991, filed the present motion alleging that the Debtor is a corporate entity that has failed to retain counsel to represent it as required, and further that the Debtor is a child day-care center operating without the requisite license from the State of Ohio. Subsequent to said motion, the Debtor filed an application to employ an attorney which was denied for want of an attorney’s affidavit pursuant to Rule 2014, Bankr.R.
III.
The principal dispositive issue is whether or not the Court should dismiss or convert the Debtor’s Chapter 11 proceeding.
IV.
The employment of professionals is governed by section 327 of the Bankruptcy Code and Bankruptcy Rule 2014. Section 327 of the Bankruptcy Code provides that:
§ 327. Employment of professional persons.
(a) Except as otherwise provided in this section, the trustee, with the court’s approval, may employ one or more attorneys, accountants, appraisers, auctioneers, or other professional persons, that do not hold or represent an interest adverse to the estate, and that are disinterested persons, to represent or assist the trustee in carrying out the trustee’s duties under this title. [11 U.S.C. § 327(a)].
Bankruptcy Rule 2014 provides that: Rule 2014. Employment of Professional Persons.
(a) Application for and Order of Employment. An order approving the employment of attorneys, accountants, appraisers, auctioneers, agents, or other professionals pursuant to § 327 or § 1103 of the Code shall be made only on application of the trustee or committee, stating the specific facts showing the necessity for the employment, the name of the person to be employed, the reasons for the selection, the professional services to be rendered, any proposed arrangement for compensation, and, to *53the best of the applicant’s knowledge, all of the person’s connections with the debt- or, creditors, or any other party in interest, their respective attorneys and accountants. The application shall be accompanied by a verified statement of the person to be employed setting forth the person’s connections with the debtor, creditors, or any other party in interest, their respective attorneys and accountants. [Rule 2014, Bankr.R.].
Further, a corporation, which is an artificial entity, may act only through an agent and cannot proceed, pro se, in federal court. United States v. 9.19 Acres of Land, 416 F.2d 1244, 1245 (6th Cir.1969).
V.
The Debtor is a corporate entity that has failed to obtain counsel to represent it in this Chapter 11 proceeding. Further, the Debtor, a child day-care center, has not only failed to obtain the necessary license from the State of Ohio to operate but has now ceased all operations. A meeting of creditors was scheduled for February 26, 1991 at which the Debtor failed to appear without requesting a continuance or notifying the UST of its intention to be absent. Lastly, the Debtor has failed or neglected to respond to this present motion to dismiss or convert.
The Court upon request of a party in interest or the UST, may convert or dismiss a case filed under Chapter 11 for cause, including the absence of a reasonable likelihood of rehabilitation or an unreasonable delay by the Debtor that is prejudicial to creditors. See, 11 U.S.C. § 1112(b)(1) and (3). The aforementioned circumstances evidence cause which are grounds for conversion or dismissal pursuant to section 1112(b) of the Bankruptcy Code.
VI.
Accordingly, the UST’s motion is granted and the Debtor’s Chapter 11 case is hereby dismissed. It is further ordered that the Debtor shall pay to the UST within ten (10) days of the entry of this order such fees as the UST may be entitled to pursuant to 28 U.S.C. § 1930.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491419/ | MEMORANDUM OPINION AND ORDER SUSTAINING OBJECTION TO CLAIM FILED BY FLORIDA DEPARTMENT OF REVENUE
(Amended Claim No. 19663)
A. JAY CRISTOL, Bankruptcy Judge.
THIS CAUSE came before the Court for hearing on Wednesday, December 11, 1991 at 2:00 p.m., upon the Debtor’s Objection to Claim Filed by the Florida Department of Revenue and Motion for Reclassification of Such Claim (Amended Claim No. 19663). The Court having read and considered the Objection, the Responses filed by the Department of Revenue (“DOR” or the “Department”) and Continental Casualty Company (“CCC” or “Continental”), the authorities cited by the parties and other matters of record, heard the argument of counsel and otherwise been duly advised in the premises, issues this Memorandum Decision and Order sustaining the Objection, *129granting the Motion and reclassifying the DOR Claim as a general unsecured claim.
FINDINGS OF FACT
This contested matter arises out of a claim by the Department for corporate income taxes for the tax years 1974 through 1976, which have been the subject of litigation between the Debtor and DOR since 1981. Specifically, the Debtor objects to Amended Claim No. 19663, filed as a priority claim by the Department on October 9, 1990, and moves to reclassify the Claim as a general unsecured claim.
The facts are essentially undisputed by the parties, such that the Court may dispose of the Objection as a matter of law. A brief history of the events leading up to the filing of the Amended Claim is in order.
On February 2, 1979, the Department issued a notice of deficiency to GDC, proposing a net tax deficiency in the amount of $1,909,110.00. On March 30, 1979, GDC timely protested this notice under Florida law. Thereafter, on January 13, 1981, the Department issued a revised notice of deficiency, reducing the proposed tax deficiency to $1,219,379.00.
On March 6, 1981, GDC protested the revised notice of deficiency, and on March 25 attended an informal conference with the Department to discuss the issues raised in the protest. Following the informal conference, in an undated letter delivered on or about April 18, 1981, the Department sustained the adjustments and deficiencies proposed in the revised notice. The letter was intended to constitute the Department’s Notice of Decision with respect to the deficiency, and constitutes the final administrative action taken by the Department with respect to the taxes.
On June 18, 1981, GDC filed a complaint in the Leon County Circuit Court, challenging as illegal and in violation of Florida statutes the Department’s determination that the additional taxes were due. After initially filing a corporate bond to cover the tax assessment and interest, GDC obtained a surety bond on October 14, 1981. The bond has been periodically renewed and increased in amount to cover the accruing interest, and remained in effect as of the date of the Chapter 11 filings. CCC is the surety under the bond, and has filed its own separate claim against the estate.
Upon the commencement of these Chapter 11 cases, the controversy between DOR and the Debtor shifted to this Court. On April 30, 1990, the Department timely filed a proof of claim asserting a priority claim in the total amount of $2,677,909.37, representing $1,219,379.00 in corporate income taxes for the 1974-76 tax years plus $1,458,530.37 in prepetition interest. Thereafter, on June 4, 1990, the Department filed a Motion to Determine Applicability of Stay or for Relief Therefrom, seeking leave to proceed to judgment in the litigation pending in the Leon County Circuit Court.
Following a continuance of the hearing on the DOR stay relief motion, the Debtor filed a Motion to Approve Settlement of Department of Revenue Tax Claim. The resulting Order dated September 14, 1990 ratified and approved the terms of a settlement which liquidated the amount of the Department’s claim at $1,958,530.00 and permitted entry of a consent judgment in that amount in the state court action. Thereupon, the Leon County Circuit Court entered the consent judgment on or about September 28, 1990.1
The settlement order expressly reserved the rights of the parties with respect to the issue of whether the DOR claim is entitled to treatment as a priority claim under the Bankruptcy Code. It is this issue which the Objection now calls upon the Court to address.
CONCLUSIONS OF LAW
The parties are in agreement that the sole basis for the Department’s asserted priority is Section 507(a)(7)(A)(iii) of the Bankruptcy Code, 11 U.S.C. *130§ 507(a)(7)(A)(iii). Pursuant to that provision, allowed unsecured claims of governmental units are afforded a seventh priority, to the extent that such claims are for—
(A) a tax on or measured by income or gross receipts—
(iii) ... not assessed before, but assessable, under applicable law or by agreement, after, the commencement of the case.
Thus, the basic issue before the Court is whether, as the Debtor contends, the tax was assessed upon issuance of the DOR Notice of Decision in April of 1981 or, as the Department contends, only upon entry of the consent judgment in the Leon County Circuit Court in September of 1990. If the Debtor is correct and the tax was assessed in April of 1981, the claim is not entitled to priority; if the assessment did not occur until September of 1990, then the tax was assessable after the commencement of the case and the claim is entitled to priority under Section 507(a)(7)(A)(iii).
The initial issue over which the parties disagree is the question of what law the Court should apply to determine when the tax was assessed. The Department contends that in enacting Section 507(a)(7) Congress used the term “assessed” in the context of the Internal Revenue Code and with direct reference to the federal taxation scheme, such that the Court must look by analogy to federal law. The Debtor argues, and the Court agrees, that this analysis simply misses the mark. By its own terms, Section 507(a)(7)(A)(iii) refers to a tax assessed or assessable “under applicable law,” which the Court interprets to mean the laws of the State of Florida pursuant to which the taxes here in issue were imposed in the first instance.
This interpretation of Section 507(a)(7)(A) finds support not only in the plain language of the statute, but within the case law as well. As noted, Section 507(a)(7)(A)(iii) refers specifically to “applicable law,” which the Court construes to mean the laws governing assessment and collection of the particular tax for which a priority is asserted. Notably, Section 507(a)(7)(A)(ii) contains no similar reference, and courts interpreting that subsection have looked to the plain language of subsection (A)(7)(iii) in reaching this same result. The district court’s analysis in the case of In re Hartman, 110 B.R. 951 (D.Kan.1990), is directly on point:
‘Assess’ prominently appears at Sections 507(a)(7)(A)(ii) and (iii) ... of the Bankruptcy Code. Generally, if the same word is used in different sections of a body of law, the word is given the same meaning in each section.... In Section 507(a)(7)(A)(iii), the determination of whether a tax is ‘assessable’ is contemplated to involve applicable tax law.... Congress’ decision not to refer to the Internal Revenue Code in Section 507(a)(7)(A)(ii) or in a relevant definitional section is plausibly explained by the need for that provision to be adaptable to a variety of federal, state and local taxes on or measured by income or gross receipts.
Id. at 955. See also In re Oldfield, 121 B.R. 249, 252 (Bankr.E.D.Ark.1990) (same analysis of Section 507(a)(7)(A)).
This same construction also finds support within this District. In re Torrente, 75 B.R. 193, 195 (Bankr.S.D.Fla.1987) (applying Internal Revenue Code as “applicable tax law” in case involving claim of priority for federal income taxes pursuant to Section 507(a)(7)(A)(iii)).
Having determined that the ultimate issue before it is governed by the law of Florida, the Court turns next to a consideration of that law to determine when the subject taxes were assessed. The bond posted by the Debtor with the Leon County Circuit Court reflected on its face that it was so posted pursuant to § 214.26, Fla. Stat. (1979)2, which provides:
*131214.26 Actions involving legality of tax or penalty. In any case involving the legality of any tax or penalty assessed under this chapter, the complainant shall, except where the taxes assessed, including penalties and interest, have been paid to the department prior to the institution of suit, tender into court and file with the complaint the full account of the assessment complained of, including penalties and interest, or file with the complaint a cash bond or a surety bond endorsed by a surety company authorized to do business in this state or by such sureties as may be approved by the court, conditioned to satisfy any judgment or decree in full, including the taxes complained of, costs, penalties, and interest.
(emphasis added). The prominent use of the words “assessed” and “assessment” in § 214.26, together with other applicable Florida law, persuades the Court that assessment of the tax occurred prior to the Debtor’s circuit court action, when the Department issued its Notice of Decision in April of 1981.
In reaching this result, the Court also relies on other provisions of Florida statutory law, both past and present. Section 26.012(2)(e), Fla.Stat. (1979) granted exclusive original jurisdiction to the state circuit courts in all cases involving the legality of any tax assessment. DOR has never contested the jurisdiction of the circuit court, but in fact sought and obtained relief from the automatic stay in order to proceed against the Debtor in that court, and subsequently filed a motion in that court to enforce the bond against CCC.
Further support for the conclusion that the taxes were assessed in 1981 exists in Section 214.03(2), Fla.Stat. (1979). That section provides that when a taxpayer protests a notice of deficiency, as GDC did in 1981, the amount of the deficiency “shall be deemed assessed ... on the date when the decision of the Department with respect to the protest becomes final.... ” Id. (emphasis added). That date was sometime in April of 1981, when the Department issued its Notice of Decision in the form of an undated letter. Thereupon GDC commenced its action in the circuit court, and posted a surety bond pursuant to Section 214.26, Fla.Stat.
The Department contends that because GDC had continuously contested the liability for the taxes since the filing of the Leon County Circuit Court action, the assessment of those taxes never became final until that court entered the consent judgment in September of 1990. The basic premise for this argument is that an “assessment” does not occur until the taxes are finally determined to be due and owing and are subject to collection after the taxpayer’s exhaustion of all administrative and judicial remedies.
Whatever simplistic appeal this argument may have, it simply cannot withstand a literal reading of the statutory language upon which this Court must rely. Insofar as the Department was concerned, the taxes were due and owing and subject to collection when the Notice of Decision was issued in April of 1981. It is for this reason that in order to contest the legality of those taxes in the circuit court GDC was required to post a surety bond pursuant to § 214.26, Fla.Stat. (1979). The purpose of this bond is precisely to ensure that taxes assessed by DOR are collectible at such time as their legality is upheld by the courts.
This conclusion is also supported by the Florida Legislature’s subsequent enactment of Section 72.011, Fla.Stat. (1981), which provides in pertinent part:
(1) A taxpayer may contest the legality of any assessment or denial of refund of a tax ... by filing an action in circuit court;
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(2) No action may be brought to contest an assessment of any tax, interest or penalty assessed ... after 60 days from the date the assessment becomes final.
Effective as of October 1, 1981, Section 72.011 was intended to clarify existing law. Taken together, Sections 72.011(1) and (2) reinforce the Court’s conclusion that the DOR assessment became final in April of 1981, and that GDC timely commenced an *132action in the Leon County Circuit Court to contest the legality of that assessment within sixty days of its finality.
The Department draws an analogy between the Debtor’s circuit court action and a taxpayer's contest if a federal tax in the U.S. Tax Court, and argues that under the federal scheme the tax cannot be assessed until the Tax Court action becomes final and all appeals are exhausted. Where the “applicable law” which governs the issue of assessment under 11 U.S.C. § 507(a)(7)(A)(iii) — in this case, the law of Florida — appears so clear on its face, resort to analogy is inappropriate. In any event, the Court views the Debtor’s circuit court action as more analogous to a federal taxpayer’s payment of the tax and suit for refund in the District Court, in that the surety bond posted in accordance with Section 214.26, Fla.Stat., represents the “functional equivalent” of payment. See In re H & H Beverage Distributors, 850 F.2d 165 (3rd Cir.1988), cert. den. 488 U.S. 994, 109 S.Ct. 560, 102 L.Ed.2d 586 (1988) (Pennsylvania tax law analogous to federal law). The more appropriate Florida analogy to a federal tax court action would be an administrative proceeding under Chapter 120, Fla.Stat., which requires neither payment of the tax nor the posting of a surety bond. GDC, however, elected not to pursue administrative remedies but to commence the action in the Leon County Circuit Court and post the bond.
On the basis of these authorities, the Court concludes that under applicable Florida law the corporate income taxes payable by the Debtor for the tax years 1974 through 1976 were assessed in April of 1981, some nine years before the commencement of this Chapter 11 case. Thus, the taxes were “assessed before ... the commencement” of this Chapter 11 case, and are not entitled to priority under 11 U.S.C. § 507(a)(7)(A)(iii). For the Department to contend otherwise simply ignores ten years of litigation commenced with the posting of a statutory bond, and the express language of the relevant statutory provisions. Accordingly, it is
ORDERED AND ADJUDGED that the Debtor’s Objection to Amended Claim No. 19663 be and hereby is SUSTAINED, and the claim is hereby RECLASSIFIED as a general unsecured claim without priority of any kind.
DONE AND ORDERED.
. Notwithstanding the entry of that judgment and the Department's subsequent efforts to enforce the bond against CCC as surety, the DOR claim remains unpaid. By separate Order the Court has disposed of the Debtor’s Objection to the Claim filed by CCC in respect of that bond.
. The Court regards the subsequent repeal of this provision to be immaterial, in that there is no question that it was in effect at the time the Leon County Circuit Court action was commenced. Moreover, upon repeal § 214.26 was replaced with § 72.011, Fla.Stat. (1981), which contains a similar requirement of payment or filing of a bond. Section 72.011(3), Fla.Stat. (1981). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491420/ | ORDER ON PRO HAC VICE APPLICATION
DONALD E. CALHOUN, Jr., Bankruptcy Judge.
This matter is before the Court upon the Pro Hac Vice Application (“Application”) *191filed on October 9, 1991 by J. Michael Hood.
I. Findings of Fact
Mr. Hood seeks temporary admission to the Southern District of Ohio to represent Margaret J: Reza (“Debtor”) in a Chapter 7 proceeding which he filed on behalf of the Debtor two days prior to the submission of the Application.
The Application consists of one sole paragraph which states:
Now comes the undersigned J. Michael Hood, and hereby moves the Court to allow him to proceed Pro Hac Vice in order to permit him to appear on behalf of Margaret J. Reza who has filed a Chapter 7 Bankruptcy in this Court.
II. Conclusions of Law
Local Bankruptcy Rule 5.4 provides in part:
All motions and applications tendered for filing shall be accompanied by a memorandum in support...,
In addition, Local Bankruptcy Rule 4.1(a) provides that:
(a) Designation and Qualification of Case Attorney. Unless otherwise ordered by the court, in all cases and adversary proceedings filed in, referred to, transferred to or removed to this court, all parties not appearing pro se shall be represented by a “case attorney” who is a member in good standing of the United States District Court for this district, or who is a member in good standing of the highest court of a state, has been admitted to practice in a United States District Court, and maintains an office for the practice of law either within the State of Ohio or within 100 miles of the location of the court at Cincinnati, Columbus or Dayton.
The Sixth Circuit has apparently had few opportunities to address the issue of pro hac vice applications; however, in the case of D.H. Overmyer Co., Inc. v. Robson, 750 F.2d 31 (6th Cir.1984), the court stated:
On the one hand, the profession of an attorney is of great importance to an individual, and the prosperity of his whole life may depend on its exercise. The right to exercise it ought not to be lightly or capriciously taken from him. On the other, it is extremely desirable that the respectability of the bar should be maintained, and that its harmony with the bench should be preserved. For these objects, some controlling power, some discretion, ought to reside in the court.
D.H. Overmyer, 750 F.2d 31, 33 (quoting Ex parte Burr, 22 U.S. (9 Wheat.) 529, 6 L.Ed. 152 (1824)).
While this Court welcomes the appearance of competent practitioners not admitted to practice before it, the discretionary powers afforded this Court in preserving the standards of practice in this District indicate that certain guidelines should be imposed upon and followed by attorneys seeking permission to practice pro hac vice.
First, admission pro hac vice is temporary and limited in character and is not intended to be requested by a practitioner on a frequent basis. Black’s Law Dictionary defines pro hac vice as:
For this turn; for this one particular occasion. A lawyer may be admitted to practice in a jurisdiction for a particular case only.
Black’s Law Dictionary 1091 (5th ed. 1979).
Admittance to practice before this Court on a regular basis may be obtained through the passing of an examination, accompanied by a fee, which tests the applicant’s knowledge of the local rules of court. Repeated requests for pro hac vice admittance before this Court by a practitioner who chooses not to take this examination will not be granted.
Second, all requests for pro hac vice admittance must be supported by a statement from the applicant which evinces the applicant’s qualifications to practice before this Court. Given the strictures imposed upon attorneys by Rule 11 of the Federal Civil Rules of Procedure, it is sufficient that this information be set forth in a pleading and need not be in the form of an affidavit. The statement should include *192sufficient information to satisfy the Court that the admittance of the applicant pro hac vice otherwise complies with the local rules of this District and of this Court. At a minimum, the statement should include the courts before which the applicant is currently admitted to practice and the year such admission was obtained. In addition, the statement should disclose any information that might otherwise impact on the Court’s determination, such as some indication of previous bankruptcy practice and as a minimum an averment that the applicant is not under suspension from the practice of law before another court of this state or district or a court of another jurisdiction.
The one paragraph Application submitted by Mr. Hood does not comport with L.B.R. 5.4 and fails to provide this Court with any instruction as to Mr. Hood’s qualifications to act as case attorney under L.B.R. 4.1(a). Therefore, it is hereby
ORDERED that the Pro Hac Vice Application of J. Michael Hood is denied without prejudice.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491421/ | ORDER ON MOTION TO DISMISS
DONALD E. CALHOUN, Jr., Bankruptcy Judge.
This matter is before the Court upon the Motion for Default Judgment filed by Plaintiff FCC National Bank and the Memorandum Contra Plaintiff’s Motion for Entry of Default filed by Defendants Roy C. Kilian and Tammi L. Kilian. The basis for the Defendants’ opposition is the issuance of the Defendants’ discharge order in the underlying bankruptcy proceeding.
The Court is vested with jurisdiction pursuant to 28 U.S.C. § 1334(b) and the General Order of Reference entered in this district. This is a core proceeding under 28 U.S.C. § 167(2)0).
*193I. Finding of Facts
Defendants filed a Chapter 7 bankruptcy petition on June 7,1991. On September 13, 1991, Plaintiff instituted an adversary proceeding challenging the dischargeability of the debt owed to it by Defendant under 11 U.S.C. § 523(a). The Defendants failed to file a timely answer to the Plaintiff’s Complaint. The Plaintiff then filed a Motion for Default Judgment on November 27, 1991. On December 4, 1991, the Defendants filed a Memorandum Contra Plaintiff’s Motion for Entry of Default. The Discharge of Debtor was issued by the Clerk’s office to the Defendants on October 17, 1991.
II. Conclusions of Law
The Defendants oppose the Plaintiff’s Motion on the grounds that:
The Court has granted a Discharge to the Defendants, dated October 17, 1991 ... Defendants state that this debt has been discharged pursuant to said Order. ...
The Bankruptcy Code affords creditors with an option to challenge the granting of a discharge to a debtor: (1) with regard to all of the debts of the debtor under 11 U.S.C. § 727; or (2) with regard to the specific debt owed to the particular creditor under 11 U.S.C. § 523.
Although the order granting the Defendants’ discharge is not particularly clear, the portion of the order stating that “no complaint objecting to the discharge of the debtor(s) was filed within the time fixed by the court” refers to the filing of a complaint under § 727, challenging the dis-chargeability of all of the debts of the debtor. The interpretation of this portion of the discharge order is generally considered “common knowledge” among the practitioners in this Court.
In the absence of a complaint challenging dischargeability under § 727, a discharge is granted the debtor. Simply because one or two creditors believe that they have non-dischargeable debts under § 523 is no reason for the debtor’s discharge to be withheld as to all of the other debts owed by the debtor which are clearly dischargeable. The debtor’s discharge should not be delayed while the discharge-ability of one or two debts is being determined. Therefore, the discharge order specifically excludes from discharge those debts which are determined by the Court to be nondischargeable under § 523. The discharge is effective as to all debts not the subject of a timely-filed adversary proceeding.
In this case, no complaint challenging the granting of the Defendant’s discharge under § 727 was filed. A complaint was filed by the Plaintiff under § 523 challenging the dischargeability Of the particular debt owed by the Defendant to the Plaintiff.
Therefore, for the reasons stated above, a discharge was granted to the Defendant. However, if the debt owed to the Plaintiff is subsequently determined by the Court to be nondischargeable under § 523, the discharge order, by its terms, is of no effect as to that particular debt.
The Defendants have failed to file a timely answer in this case due to their incorrect reading of the Discharge Order. The Defendants’ failure to defend this action in accordance with the Civil Rules of Procedure without any other explanation warrants the entry of judgment by default against Defendants. Therefore, it is hereby
ORDERED that the Motion for Default filed by Plaintiff FCC National Bank is granted and judgment is hereby rendered in favor of Plaintiff FCC National Bank and against Defendants Roy C. Kilian and Tammi L. Kilian in accordance with the relief requested in the Motion for Default Judgment.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491422/ | ORDER ON APPLICATION TO MODIFY
DONALD E. CALHOUN, Jr., Bankruptcy Judge.
This matter is before the Court upon the Application to Modify filed by Lola Arlene Holley (“Debtor”) and the Memorandum in Opposition to Debtor’s Application to Modify filed by Frank M. Pees, Chapter 13 Trustee (“Trustee”). A hearing to consider this matter was held November 25, 1991 at which time the parties were afforded the opportunity to present evidence in support of their respective positions.
The Court is vested with jurisdiction pursuant to 28 U.S.C. § 1334(b) and the General Order of Reference entered in this district. This is a core proceeding under 28 U.S.C. § 157(b)(2)(L).
I. Findings of Fact
Debtor filed her Chapter 13 petition on November 21, 1990. The Debtor proposed a plan which was to pay a 100% dividend to her unsecured creditors over approximately 53 months with monthly payments of $433.33. The Debtor’s plan was confirmed by order of this Court entered February 7, 1991.
The Debtor, through her Application to Modify, seeks to reduce her monthly payment from $433.33 to $250.00 which will result in a dividend of 20% to her unsecured creditors. The basis for the requested modification is the termination of the Debtor’s employment with the State of Ohio. The Debtor further testified that she had been conscientiously seeking employment but had been unsuccessful in finding a full-time job.
*202Approximately ninety (90) days following the termination of her employment, the Debtor received a distribution of $11,822.96 from the State of Ohio representing the Debtor’s interest in her Public Employees Retirement System (“PERS”) account. The funds in the account are exempt, while in the account, under the Ohio Revised Code. The Debtor testified that she received these funds on August 10, 1991.
The Trustee filed a Memorandum in Opposition to the Debtor’s Application to Modify her plan, asserting that the Debtor’s interest in her PERS account should be made available for distribution to the Debt- or’s creditors. The Trustee contends that the distribution constitutes a windfall to the Debtor. The Trustee cites In re Fitak, 121 B.R. 224 (D.C.Ohio, 1990) in support of his position.
II. Conclusions of Law
In Fitak, creditors sought to modify the debtor’s plan to include a post confirmation distribution received by the debtor from her PERS account.1 The court reasoned that the doctrine of res judicata would normally preclude a creditor from, in effect, “relitigating” the confirmation of the debtor’s plan; however, the court held that a change in the debtor’s financial condition which was not reasonably anticipated at the time of confirmation by the party seeking modification would justify the reconsideration of the debtor’s plan. In determining that the receipt by the debtor of her PERS funds was not reasonably anticipated, the court stated:
To find in favor of Debtors would have the likely effect of encouraging future Debtors to withdraw PERS funds after the confirmation and during the term of the Plan allowing an undesirable windfall at the same time Creditors are seeking relief.
Fitak, at p. 227.
In the case presently before the Court, it is clear that the Trustee could not have foreseen the termination of the Debt- or’s employment with the State, since the Debtor’s employment was to have funded her confirmed plan. However, the Court does not perceive in this particular case the abuse which the district court sought to prevent. The education and recent job history of the Debtor, as well as her apparent emotional instability, indicate that there is little hope of the Debtor regaining the occupational benefits she enjoyed while working for the State.
The Debtor testified at hearing that she utilized the funds she received from her PERS account to pay her day-to-day living expenses, to repair her mobile home, and to make her plan payments. The distribution of the PERS funds to the Debtor did not in any way result in a windfall to her.
In addition, if this Court were to require the Debtor to pay her PERS funds to the Trustee, portions of which she has apparently already paid to the Trustee or otherwise spent, the Trustee would of course raise the Debtor’s best interest dividend. This will likely force the Debtor to convert her case to chapter 7, because she no longer has the funds which would be needed to meet the amended best interest dividend. A review of the case file indicates that the Debtor has few if any assets which are not exempt or unencumbered. The PERS funds, having already been spent, would not be a part of the Debtor’s chapter 7 estate, unless the chapter 7 trustee can recover the funds through a preference action or other means. Therefore, it would appear that the Debtor’s unsecured creditors would not receive a dividend in a liquidation. Continuation of the Debtor’s plan, even at a lower dividend, would be in the best interests of the creditors.
The Court must note that it does not disagree with the ruling in Fitak. This Court would certainly disapprove of any attempts by a debtor to convert previously exempt funds to his or her own use at the expense of creditors. Further, the Court would expect that the facts as presented by this case would be a rare occurrence. Any *203attempt by debtors to avoid the inclusion of formerly exempted funds from their Chapter 13 plan will be closely scrutinized by the Court. Therefore, it is hereby
ORDERED that the Application to Modify of Lola Holley is granted and the Plan dividend and monthly payment will be reduced to 20% and $250.00 per month, respectively.
IT IS SO ORDERED.
. While the Trustee does not here seek to modify the Debtor's plan, the Trustee's Memorandum in Opposition appears to suggest that such a modification would be appropriate in light of the Debtor’s Application to reduce the plan dividend from 100% to 20%. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491423/ | MEMORANDUM OPINION AND ORDER
HELEN S. BALICK, Bankruptcy Judge.
On January 8, 1992, this court issued an order retaining an examiner on fees and expenses. Only the United States of America and the Official Committee of Unsecured Creditors of Columbia Gas Transmission Corporation (TCo Committee) responded by the February 3 objection deadline.
The Limited Objection of the United States of America
The United States’ response is a limited objection relating to sub-paragraphs 3(c), 3(d), and 3(f) of the order, which state:
c. For each application, the examiner shall file a report to the Court (under seal), the United States Trustee, the Debtor and each official committee at least ten days [before any hearing on the fees]. Also, the examiner shall serve a copy of the examiner’s report for an applicant upon such applicant, subject to the same time restriction,
d. Any entity, before receiving a copy of the report as outlined in section 3(c) above, shall execute a confidentiality agreement with the examiner,
f. Any applicant may file a response under seal to the examiner’s report....
The United States offers at most two grounds in support of its limited objection.
The first ground relies upon 11 U.S.C. § 107 (1988), which provides circumstances under which papers filed in a case are not of public record. The relevant exception states:
[O]n the bankruptcy court’s own motion, the bankruptcy court may—
******
... (2) protect a person with respect to scandalous or defamatory matter contained in a paper filed in a case under this title.
11 U.S.C. § 107(b). The United States contends this exception is not applicable.
This contention is incorrect. The examiner’s report, in connection with any of the applications it analyzes, may state that the fees and/or expenses requested are not reasonable, actual and necessary. For example, the report may state in essence that time expended on a particular matter was of no benefit to the estate, was excessive, was charged at an excessive hourly rate, or did not occur at all. These statements are mere allegations and not necessarily true. The court is confident that the involved professional would agree that these statements are potentially defamatory! Indeed, the United States has offered no law to support its position that these types of statements are not defamatory as a matter of law.
The court observes, that in attempt to avoid the insertion of such remarks of this sensitive nature, sub-paragraph 3(b) encourages the examiner, in its discretion, to consult with the affected professional con*450cerning charges the examiner believes do not accord with 11 U.S.C. § 330(a) (1988).
While it is not clear from its objection, the United States apparently also objects on the ground that parties whose claims may be diminished by payment of administrative expenses have no access to the sealed report and possible responses. To the extent that this is an independent ground, the court simply notes the following. All documents that the examiner will use in preparing its report are of public record. Any party concerned about the effect of administrative expenses upon its claim and that wishes to file an objection to any fee application is of course free to examine the public record to the same extent as the examiner. § 107.
The Response of the TCo Committee
The response of the TCo Committee is not an objection. Indeed, the TCo Committee supports the appointment of a fee reviewer as “facilitatpng] the determination of appropriate professional compensation in these proceedings.” However, the Committee seeks clarification of paragraph 1(a) of Exhibit A of the order, which states:
l.a. Intra-office conferencing. Only one professional may charge. Highest rate may be chosen.
The Committee asserts that the “intraoff-ice conference” designation is used on professionals’ timesheets to reference activities outside the proper scope of this rule. Specifically, the Committee states:
These [Chapter 11] cases implicate numerous areas of legal expertise in addition to bankruptcy—federal energy regulation, federal securities’ laws, secured transactions, tax and litigation.... The attorneys performing these various activities must communicate with one another in order to represent their clients appropriately and to add value to the services rendered. Furthermore, such internal consultation benefits the estate by facilitating the coordination of effort, speeding the delivery of legal services, and preventing the need for rudimentary research.
Case No. 91-804, docket no. 274, at 2-3 (February 3, 1992).
The TCo Committee’s request for clarification answers itself. As paragraph 3(e) of the order explicitly states, the touchstone for any analysis on the appropriateness of fees sought is 11 U.S.C. § 330(a). Where time spent satisfies that statute’s requirements, the billing professional is entitled to compensation, regardless of the factual context of the activity.
Exhibit A should be read within the context it is referenced in the order, which not surprisingly is also (and only) paragraph 3(e). Paragraph l.a. of Exhibit A refers to a common factual context of past rulings of this court where the § 330(a) requirements were not met. All such factual contexts cannot be anticipated, and thus clarification neither practicable nor appropriate.
Conclusion
No hearing on these objections will be scheduled. No responding party requested such a hearing, the objections are legal and not factual in nature, and the court has found each objection to be without merit. The court will issue a supplementary order consistent with this decision.
SUPPLEMENT TO ORDER
(Docket No. 881 in Case No. 91-803)
DATED JANUARY 8, 1992
For the reasons stated in the Memorandum Opinion dated March 3, 1992,
IT IS ORDERED THAT:
1. The objections of the United States of America are OVERRULED.
2. Since all objections have been overruled, the parties affected by the order are ordered to- take all steps necessary to implement the order. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491425/ | ORDER GRANTING PERMANENT INJUNCTION
ALEXANDER L. PASKAY, Chief Judge.
THIS IS a Chapter 11 case and the matter under consideration is a Complaint for Permanent Injunction filed by the Debtor against Steven Gerhart (Gerhart) a former employee of the Debtor. The facts relevant to the resolution of this matter as established at the final evidentiary hearing are as follows:
On March 29, 1991, Plaintiff sought protection under Chapter 11 of the Bankruptcy Code and on October 23, 1991 filed a Complaint seeking injunctive relief to enforce the non-compete clause contained in the Employment Contract between the Debtor and Gerhart. In addition, the Debtor filed an Emergency Application for Temporary Restraining Order (sic) on October 24,1991, seeking to restrain Gerhart from conducting any further activity as prohibited under the non-compete clause of the Employment Contract. This Court granted the Debtor’s Application treated as a Motion for Temporary Restraining Order and by its Order entered on October 26, 1991, enjoined Ger-hart from working or performing any services for Catering By The Family, a/k/a Cookout America, or any other competitor caterer of the Debtor for a period of ten days, beginning on October 28, 1991 and ending at 12:00 a.m. on November 7, 1991. On November 4,1991, this Court conducted an emergency hearing upon Debtor’s Renewed Emergency Application for Temporary Restraining Order (sic). On November 12, 1991, the Court entered a Preliminary Injunction enjoining Gerhart from 1) soliciting sales accounts from past or present customers of the Debtor who reside or do business in the State of Florida, or from 2) initiating, either directly or indirectly, any communication or contact with any past or present customers of the Debt- or who reside or do business in the State of Florida. The Court also set the final evi-dentiary hearing for November 27,1991 for the purpose of receiving evidence in support of and in opposition to the ultimate relief sought by the Debtor, i.e., a permanent injunction enjoining Gerhart from working or performing services for a competitor caterer in the State of Florida for the duration of the non-compete agreement, i.e., three years.
The record as established at the final evidentiary hearing reveals that at the time relevant the Debtor operated an on-site catering business in conjunction with major outdoor events, especially sporting events. In May, 1988, Gerhart was employed by the Debtor as a sales representative responsible for soliciting new accounts and servicing already established accounts of the Debtor. On January 26, 1989, Gerhart entered into a Sales Employment Contract with the Debtor which, among other covenants, contained the following non-compete clause:
Employee agrees in the event employee is terminated voluntarily or otherwise to desist from working or performing services for a competitive caterer in the State of Florida for three years.
The Sales Employment Contract between the Debtor and Gerhart expired on January 26, 1990 by its own terms. The record reveals that Gerhart did not sign another employment contract with the Debtor after the expiration of the initial Employment *626Contract on January 26, 1990, but nevertheless continued to work for the Debtor and received substantially the same compensation from the Debtor as set forth in the Employment Contract, i.e., draw, commission, etc. In March, 1990, Gerhart received a promotion by the Debtor and was placed on salary rather than draw until his resignation on or about July 2, 1990.
After his resignation, Gerhart obtained employment with Cookout America, a division of Catering By The Family, a competitive caterer of the Debtor in the State of Florida. It is without dispute that Gerhart started to work for Cookout America in April, 1991, or within three years of the termination of his employment with the Debtor. Although the area limitation in the non-compete clause was originally drafted to cover the entire State of Florida, the Debtor voluntarily agreed to modify the area limitation as it relates to Gerhart to encompass only those counties in which Gerhart had worked (i.e. Hillsborough, Pi-nellas, Hernando, Polk, Orange, Brevard, Broward, Dade, Pasco, Manatee and Sarasota). Based on these undisputed facts, it is the contention of the Debtor that even though the original employment contract terminated by its own terms, since Gerhart stayed and continued to work for the Debt- or, the non-compete clause was carried over, albeit not to the execution of a new contract but is still binding, therefore, the Debtor is entitled to the relief it seeks.
It is the contention of Gerhart that a covenant not to compete executed after the commencement of employment must be supported by new consideration. It is the further contention of Gerhart that he did not receive anything under the written agreement which he did not already have under the verbal agreement covering his previous nine months of employment. It is the contention of the Debtor that the unwritten contract of unemployment existing between the Debtor and Gerhart during the initial period of employment was an employment contract, albeit oral, terminable at the will of either party.
As a threshold matter, it should be pointed out that employment contracts containing non-competition agreements are valid and enforceable in Florida. Fla.Stat. § 542.33(2)(a) (1987); Sarasota Beverage Co. v. Johnson, 551 So.2d 503 (Fla. 2d DCA 1989); Xerographics, Inc. v. Thomas, 537 So.2d 140 (Fla. 2d DCA 1988). The remedy for breach of a non-competition agreement is an injunction. Id.
There is a clear distinction under Florida law between employment contracts of definite or indefinite duration. An employment contract of indefinite duration is terminable at the will of either party. 1 Fla.Jur.2d Agency & Employment § 126; Olsen v. Allstate Ins. Co., 759 F.Supp. 782 (M.D.Fla.1991).
On the other hand, if the contract provides for a definite term of employment, termination in advance of expiration of the term is only allowable for cause and the employee may bring a breach of contract action against the employer for non-adherence to the “for cause” requirement. 1 Fla.Jur.2d Agency & Employment § 132; Olsen, supra. Thus, prior to the signing of the Employment Contract on January 26, 1989, Gerhart was under a terminable, at-will employment contract and could have been discharged without good cause and without entitlement of any remedy. Once the Employment Contract incorporating a definite term of employment, i.e., one year, was signed by the parties, Gerhart received the right to bring a breach of contract action against Debtor if he was discharged without good cause. Hence, the continuation of Gerhart’s employment through the written one-year term under the same terms and conditions as before the written agreement, along with his right to hold the Debtor accountable for a discharge without good cause, did constitute adequate consideration for the non-compete clause signed by Defendant. See Tasty Box Lunch Co. v. Kennedy, 121 So.2d 52 (Fla. 3d DCA 1960). In this case the employee was asked to sign an employment contract with a non-compete clause three months after the commencement of his employment with the employer. The Third District Court of Appeals held that “[ijnasmuch as the employment was a continuing contract termin*627able at the will of the employer or the employee, the continued employment and agreement to pay commissions was adequate consideration for the employee’s agreement not to compete.” Id. at 54.
Gerhart, in addition, also contends that the Employment Contract containing the covenant not to compete is unenforceable in any event because it expired by its own terms on January 26,1990, prior to the date he left employment with the Debtor. In support of this contention, Gerhart cites Storz Broadcasting Co. v. Courtney, 178 So.2d 40 (Fla. 3d DCA 1965) wherein the court held that a covenant not to compete related to termination of employment during the term and was not applicable after the employment contract was fully performed. Storz is distinguishable as to one pertinent fact, that is, that the employee in that case left the employ of Storz at the end of the expressed term of employment. In the case under consideration, Gerhart remained employed with the Debtor for a period of almost seven months after the expiration of the written one-year term.
Under Florida law, where one enters into the service of another for a definite period of time and then continued in the employment after the expiration of that period without a new contract, a presumption arises that the employment is continued on the terms of the original contract. Zimmer v. Pony Express Courier Corp. of Fla., 408 So.2d 595 (Fla. 2d DCA 1981); Sultan v. Jade Winds Construction Corp., 277 So.2d 574 (Fla. 3d DCA 1973). Such a presumption may be rebutted by evidence showing a change of the terms of the contract or by proof of facts and circumstances showing that the parties understood that the terms of the old covenant were not to apply to the continued service. Id. There is evidence in this record to support the finding that the same terms of the Employment Contract continued in force after the January 26, 1990 expiration date until approximately March of 1990 when Gerhart, in fact, received a promotion and was placed on salary rather than draw against earned commissions. Clearly, there is no evidence showing a change of any of the other terms of the contract, nor any proof of facts and circumstances showing that the terms of the old covenant not to compete was no longer binding during the continued service after the expiration of the original terms of employment. On the contrary, there is evidence that Gerhart understood the non-compete clause remained in effect and was still binding.
Gerhart points out that evidence at the final evidentiary hearing established that Gerhart could not enforce the terms of the contract in his new position as sales supervisor inasmuch as his original contract was for á sales person and this position has been terminated. The proposition urged by Gerhart is off the mark and totally lacks any persuasive force. It is the conclusion of this Court that the terms of the written contract that were not expressly changed by subsequent actions of the parties remained in effect and did not terminate. Gerhart seems to be confusing the concept of mutuality of obligations with mutuality of remedies. Obligation, under a contract, pertains to the consideration while remedy pertains to the means of enforcement. Bacon v. Karr, 139 So.2d 166 (Fla. 2d DCA 1962). While mutual obligation of the contracting parties is essential for consideration, the means of enforcement of the obligation may differ without necessarily affecting the reciprocal obligations of the parties. Id. Mutual obligation, supporting consideration, has already been established by this record. The fact that Gerhart’s means of enforcement of the covenants under the contract may differ does not necessarily affect the reciprocal obligations of the parties.
Based on this record this Court is satisfied first, that the Debtor fully performed its obligation under the contract, i.e., to continue to employ Gerhart for the stated one-year term and to compensate him for his services. Second, Gerhart still has a continuing obligation based on his promise not to compete, to desist from working or performing services for a competitive caterer for three years. This obligation was executory until such time as his employment with the Debtor was terminated.
*628Accordingly, it is
ORDERED, ADJUDGED AND DECREED that Steven Gerhart is enjoined from working or performing services for a competitive caterer in Hillsborough, Pinel-las, Hernando, Polk, Orange, Brevard, Bro-ward, Dade, Pasco, Manatee and Sarasota Counties. It is further
ORDERED, ADJUDGED AND DECREED that the terms of this injunction shall be effective up to and including July 2, 1993. '
DONE AND ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491426/ | ORDER ON MOTION TO DISMISS COUNT V OF THE COMPLAINT
ALEXANDER L. PASKAY, Chief Judge.
THIS CAUSE came on for hearing with notice to all parties in interest to consider the Defendants’ Motion to Dismiss various Counts of the Complaint filed by Lauren Johnson (Trustee), the Plaintiff in this adversary proceeding. This Court earlier entered an Order denying the Motion directed to the claims set forth in Counts VI through XIX and XI, but reserved ruling as to Count V of the Complaint. Count V of the Complaint is based on the contention of the Trustee that the transfer of stock in several corporations by the Debtor to the Defendants is void and must be set aside as a matter of law. The Court has considered the Motion as it relates to Count V of the Complaint and is satisfied that it should be granted for the following reasons:
In Count V of the Complaint the Trustee seeks a declaration that Dr. Peter Urban (Debtor), “is and remains the sole shareholder of Florida Eye Care, Inc. — of Lake-land and Florida Eye Care Inc. — of Melbourne” and thus the shares of stock in *633these two entities are property of the estate. In support of this proposition the Trustee contends that both Florida Eye Care, Inc. — of Melbourne and Florida Eye Care, Inc. — of Lakeland are corporations whose sole business is to conduct medical practices subject to the provisions of Fla. Stat. § 621.01 et seq., i.e., Professional Service Corporation Act; that John Walden, Christiann Walden and Brenda Urban, the sole shareholders of record are not medical doctors; that ownership by these individuals of the stock of Florida Eye Care, Inc.— of Melbourne and/or Florida Eye Care, Inc. — of Lakeland, is void under Florida law; and “that the transactions in which Dr. Urban purportedly transferred his shares in Florida Eye Care, Inc. — of Lake-land, and Florida Eye Care Inc. — of Melbourne are void under Florida law because a result of the transfer was that no medical doctor was a shareholder in these corporations; and that based on this Dr. Urban remains the sole owner of Florida Eye Care, Inc. — of Melbourne and Florida Eye Care, Inc. — of Lakeland and as such his interests in these corporations are property of the estate pursuant to 11 U.S.C. § 541.”
In the Motion to Dismiss, the Defendants contend that Count V of the Complaint fails to state a cause of action upon which relief can be granted. Specifically, the Defendants claim that both corporations are organized under Fla.Stat. § 607.001 et seq., as opposed to Fla.Stat. § 621.01 et seq.; that neither corporation conducts a medical practice, but rather they employ physicians engaged in the practice of medicine which does not violate the Florida Statutes; and that as a result of these facts, the alleged transfer of stock by the Debtor to the Defendants is not void as a matter of law.
The Professional Service Corporation Act, Fla.Stat. §§ 621.09, 621.11, prohibits the sale or transfer of stock in a professional service corporation to individuals who are not members of the profession. Street v. Sugerman, 202 So.2d 749 (1967). Thus, if the corporations are Professional Service Corporations, the Debtor’s transfer of the stock to the Defendants would in fact be prohibited under Florida law. However, it appears that Florida Eye Care, Inc. — of Melbourne and Florida Eye Care, Inc. — of Lakeland are not professional service corporations, but instead are corporations formed under the general corporation laws of the State of Florida (Fla.Stat. § 607.001 et seq.). This is so because all professional service corporation names must include the words “chartered” “professional association” or the abbreviation “P.A.”. Neither Florida Eye Care, Inc. — of Melbourne nor Florida Eye Care, Inc. — of Lakeland include these words or abbreviation. As there is no restriction on who may hold stock in a corporation organized under Fla.Stat. § 607.001, et seq., there is no basis to find that the transfer of stock by the Debtor to these Defendants is void as a matter of law.
Based on the foregoing this Court is satisfied that Count V of the Complaint fails to state a cause of action upon which relief can be granted, and therefore it should be dismissed.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the Motion is granted as to Count V of the Complaint, and Count V is hereby dismissed with prejudice.
DONE AND ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491427/ | MEMORANDUM OPINION
GEORGE L. PROCTOR, Bankruptcy Judge.
This case is before the Court upon Trustee’s Motion for Turnover of Property. A hearing was held on February 5, 1992, and upon the evidence presented, the Court enters the following Memorandum Opinion:
FACTS
The debtor, Joseph C. Hadnot, filed for relief under Chapter 7 of the Bankruptcy Code on June 7, 1991.
During the course of the bankruptcy case, debtor was terminated from his employment with Winn-Dixie Blue Arrow Division (“Winn-Dixie”).
Winn-Dixie has a 401K profit sharing plan in which debtor participated. On September 30, 1991, debtor received $6,030.12 as proceeds from the plan.
Debtor received his discharge on October 4, 1991.
Subsequently, the trustee filed a Motion for Turnover of the $6,030.12, pursuant to 11 U.S.C. § 542.
Debtor initially filed an answer admitting that he had received the funds, admitting that the funds were property of the estate, and asserting that the funds were exempt property. On February 19, 1992, debtor amended his answer to reflect his contention that the funds are not property of the estate.
The debtor did not claim the monies received from the profit sharing plan as exempt on his schedule B-4.
DISCUSSION
Section 542 is the mechanism by which the trustee can compel turnover of estate property. It provides in relevant part:
(a) ... [A]n entity ... in possession, custody, or control, during the case, of property that the trustee may use, sell, or lease under section 363 of this title, or that the debtor may exempt under section 522 of this title, shall deliver to the trustee, and account for, such property or the value of such property....
The trustee’s motion for turnover presents two primary issues. First, are the proceeds from the profit sharing plan property that the trustee may use, sell, or lease under § 363? And, if so, are the proceeds property that the debtor may exempt under § 522?
*639A review of § 363 is necessary to resolve the first question. Section 363(b)(1) states that “The trustee, after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate.” Thus, it is necessary to determine whether the profit sharing proceeds are included within the scope of “estate property.”
A definition of estate property is contained in § 541(a) which 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 of the following property, wherever located and by whomever held:
(1)Except as provided in subsection (b) and (c)(2) of this section, all legal or equitable interests of the debtor in property as of the commencement of the case.
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(c)(2) A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable non-bankruptcy law is enforceable in a case under this title.
The Eleventh Circuit has decided that “applicable nonbankruptcy law” refers only to state spendthrift trust law. In re Lichstrahl, 750 F.2d 1488, 1489 (11th Cir.1985). Consequently, only state spendthrift trusts are excluded from the bankruptcy estate under § 541(c)(2).
In the instant case, the proceeds from the profit sharing plan are only excluded from the estate if the plan contains anti-alienation provisions that are enforceable under state law as a spendthrift trust. The Winn-Dixie profit sharing plan is not a spendthrift trust under Florida law and the proceeds are properly included in the bankruptcy estate under § 541(a)(1).
Having concluded that the proceeds are estate property, the Court must next consider whether debtor’s interest in the proceeds may be claimed as exempt. Under Fla.Stat. ch. 222.20, Florida has opted out of the federal exemptions contained in § 522(d) of the Bankruptcy Code. Instead, Florida residents may proceed only under § 522(b)(2) which provides:
(b) Notwithstanding section 541 of this title, an individual debtor may exempt from property of the estate the property listed in either paragraph (1) or, in the alternative, paragraph (2) of this subsection.
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(1) property that is specified under subsection (d) of this section, unless the State law that is applicable to the debtor under paragraph (2)(A) of this subsection specifically does not so authorize; or, in the alternative,
(2)(A) any property that is exempt under Federal law, other than subsection (d) of this section, or State or local law that is applicable....
The Eleventh Circuit has determined that this subsection was not intended to exempt ERISA-qualified pension plans from the bankruptcy estate. In re Lichstrahl, 750 F.2d at 1491. See In re Rosenquist, 122 B.R. 775, 781-82 (Bankr.M.D.Fla.1990). This Court must conclude that ERISA in and of itself does not provide a federal exemption for the profit sharing proceeds.
Next, the Court must consider whether the proceeds are exempt under applicable state or local law. Florida Statute 222.21(2)(a) provides:
(a) Except as provided in paragraph (b), any money or other assets payable to a participant or beneficiary from, or any interest of any participant or beneficiary in, a retirement or profit-sharing plan that is qualified under s. 401(a), s. 403(a), s. 403(b), s. 408, or s. 409 of the Internal Revenue Code of 1986, as amended, is exempt from all claims of creditors of the beneficiary or participant.
The Winn-Dixie profit sharing plan clearly falls within this exemption. Thus, the critical question presented is whether this Florida statute has been preempted by 29 U.S.C. § 1144(a).
Section 1144(a) provides in pertinent part:
... [T]he provisions of this subchapter and subchapter III of this chapter shall *640supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan described in section 1003(a) of this title and not exempt under section 1003(b) of this title.
Thus, if a state law “relates to” an employee benefit plan, ERISA preempts that particular law.
In a case factually similar to the case at bar, this Court held that ERISA preempts Florida Statute 222.21(2)(a). In re Schlein, 114 B.R. 780, 782-83 (Bankr.M.D.Fla.1990). The other bankruptcy judges of this district have also reached the same conclusion. In re Rosenquist, 122 B.R. at 782 (Corcoran, J.); In re Lee, 119 B.R. 833 (Bankr.M.D.Fla.1990) (Baynes, J.); and In re Sheppard, 106 B.R. 724 (Bankr.M.D.Fla.1989) (Paskay, C.J.). This Court sees no basis for departing from its past well-reasoned opinion.
CONCLUSION
Thus, having been preempted by ERISA, Florida Statute 222.21(2)(a) is not a viable basis for exempting the profit sharing proceeds from the bankruptcy estate. Therefore, the proceeds are estate property and the trustee is entitled to a turnover of the $6,030.12.
A separate order granting trustee’s motion for turnover will be entered consistent with this Memorandum Opinion. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491428/ | MEMORANDUM OPINION
JAMES E. YACOS, Bankruptcy Judge.
This matter came before the Court on motion by Carl and Bonnie Wallin, as secured claimants, for an order authorizing the release and distribution of $50,000 held in escrow by the chapter 7 trustee and his objection thereto. The movants claim security in assets of the debtor as a result of what they claim was their valid pre-judgment attachment of debtor’s .undivided one-half interest in his marital residence. They argue debtor's transfer of his interest failed for lack of delivery of the recorded deed to his then wife and acceptance of the same by her prior to the effective date of the attachment. Alternatively, they argue that the conveyance was fraudulent under N.H.Rev.Stat.Ann. Chapter 545-A (Supp. 1990).
The chapter 7 trustee objects, arguing that the debtor made a valid pre-attachment transfer of his interest in the real estate leaving nothing to attach. The trustee argues the transfer was not fraudulent and looks to distribute the $50,000 pro rata to all of debtor’s unsecured creditors including the movants.
Other than the debtor’s intent at the time of the transfer, the facts relevant to resolution of this matter are undisputed and the Court makes findings as follows:
1. By Writ dated March 5, 1986, Carl and Bonnie Wallin, (hereinafter the “mov-ants”) sued J. Peter Gosselin (hereinafter the “debtor”) for breach of a home improvement construction contract. They petitioned the Grafton County Superior Court to grant them permission to attach his real estate. The Writ of Summons with petition to attach lapsed without service.
2. Subsequently, and allegedly aware of the attempted attachment, the debtor transferred his one-half undivided interest in the marital residence held in the entire-ties to full ownership in his wife by warranty deed dated April 3, 1986, and recorded on April 7, 1986. Without attempting to answer the question of whether the debtor was “fully aware” of the first attempted attachment, which lapsed for want of service, the timing pattern of the facts in this case indicate the debtor was “aware” of the impending suit. Given the attempted attachment and subsequent transfer less than a month later, it would appear to this Court that the threat of the movants’ state *665court contract action was the precipitating cause of the transfer.
3. A subsequent Writ of Summons and petition to attach debtor’s interest in the marital residence was granted and the attachment in the amount of $40,000 was issued May 21, 1986. The attachment was recorded on July 2, 1986.
4. The debtor and his wife were divorced in September of 1988. A permanent stipulation dated September 16, 1988 was approved as a final decree of divorce on September 22, 1988. By the terms of the decree, debtor’s ex-wife was awarded their marital residence free and clear of any interest of the debtor but subject to outstanding bank mortgages and movants’ $40,000 attachment. As part of the divorce settlement, debtor’s ex-wife agreed to pay the debtor $65,000 on or before September 15, 1990, or upon the sale of the residence, whichever occurred first. The debtor was also ordered to indemnify and hold harmless his ex-wife from any claim arising out of the state court litigation between the movants and debtor and it was also ordered that upon the ex-wife’s payment of the $65,000, the movants’ attachment would be released.
5. On October 20, 1988, judgment was entered in favor of the movants in the breach of contract action. On November 22, 1988, the judgment was amended to the amount of $38,949.
6. On February 3, 1989, the state court granted movants permission to make an additional $20,000 attachment on the debt- or’s remaining interest in the real estate and also trustee process against the proceeds of the divorce settlement.
7. On November 10,1989, movants commenced a second action in state court to set aside the transfer by debtor to his then wife as a fraudulent conveyance pursuant to N.H.Rev.Stat.Ann. Chapter 545-A.
8. On March 20, 1990, the debtor filed a chapter 7 bankruptcy petition in this’ Court. At the time of the bankruptcy filing, the movants claimed the debtor owed some $54,528 in judgment and interest from the date of the first attachment.
9. The divorce settlement was subsequently compromised by agreement between the trustee, movants and debtor’s ex-wife from $65,000 to $50,000.
10. The movants released their attachments and signed a “Stipulation For Docket Markings” with debtor’s ex-wife in the state court fraudulent conveyance action. The stipulation recited that: "Judgement for the Plaintiff has been satisfied in full by the defendant’s payment in the United States Bankruptcy Court in the bankruptcy of J. Peter Gosselin.”
11. In an affidavit introduced during the hearing on the motion, debtor’s ex-wife swore that she did not know of the 1986 conveyance from the debtor until the time of the divorce negotiations in 1988. Accordingly, it is clear that there was no explicit, knowing acceptance of the conveyance by the then-wife as of the July 2,1986 effective date of the attachment which is the subject of this litigation.
DISCUSSION
A. Delivery
“The question of whether a deed is delivered is generally one of fact to be ascertained from the intent of the parties at the time of execution. Thus in order to effectively transfer property to another there must be an intention on the part of the grantor to convey together with delivery of the deed and acceptance by the grantee.” Newbury v. Parsons, 103 N.H. 96, 97, 166 A.2d 231 (1960) (citations omitted). “Although the determination whether an executed deed has been properly delivered is ordinarily a question of fact, on occasion, it becomes a mixed question of fact and law. Whether the facts, once ascertained constitute delivery is always a question of law.” Arwe v. White, 117 N.H. 1025, 1029, 381 A.2d 737 (1977) (citations omitted). “[I]n the absence of other evidence, delivery may not be presumed because [a deed] was recorded.” Fisher v. Koper, 127 N.H. 330, 335, 499 A.2d 1001 (1985) (quoting Newbury v. Parsons, 103 N.H. at 98,166 A.2d 231). “Although actual manual delivery is not established, delivery may be inferred from all the surrounding circumstances such as signing, attestation, acknowledgement and recording but this evidence is prima facie only and not conclusive.” Newbury v. Parsons, 103 *666N.H. at 98, 166 A.2d 231 (citing Wells v. Iron Company, 48 N.H. 491, 537 (1869)).
The Arwe opinion notes a general rule of conveyancing that “anything clearly manifesting the grantor’s intent that his deed become operative, by words, acts and the surrounding circumstances, is sufficient to support a finding of legal delivery.” Arwe quoting Lintner Estate v. Meier, 344 Mich. 119, 123, 73 N.W.2d 205 (1955). “The law no longer actually demands actual physical transfer of the deed if the grantor intends that the instrument be legally operative.” Arwe, 117 N.H. 1025, 1029, 381 A.2d 737 citing Reed v. Reed, 261 Or. 281, 493 P.2d 728 (1972). While mere physical possession of a deed by a grantee does not in itself constitute delivery, when taken together with all surrounding circumstances, it may well arise to legal delivery. Arwe, 117 N.H. at 1030, 381 A.2d 737.
“The authorities are split over whether acceptance is an integral part of delivery ... or whether it is a component of conveyancing independent of delivery_” Arwe at 1030, 381 A.2d 737. (citations omitted). Compare Boody v. Davis, 20 N.H. 140 (1849) (“There has been a regular delivery of the deed by the tenant to the recording officer, with the intent that it should pass to the grantees, and should in fact enure for their benefit. Their assent to it, which is a legal presumption at that moment, has been established as a fact by their subsequent acts that have been adverted to.”) with Haynes v. Davis, 18 N.H. 600 (1847) (“Delivering a deed to the register to be recorded, may be with the intention of still holding the deed under control,... It is evidence from which a jury, on consideration of all the circumstances, may find a delivery or not, according as they find the intention of the party.”)
In Arwe the Supreme Court of New Hampshire expressed its view that the split among the cases treating the matter of legal delivery inconsistently was “mostly over semantics.” Id. As stated by the New Hampshire Supreme Court:
Those who consider acceptance as part of delivery, view ‘delivery’ as a legal term of art. The other school describes no independent legal operative significance to any one word. Viewing the matter practically, a transfer of possession of the deed with intent to convey occurs first chronologically, though often virtually simultaneously with an expression of willingness by the grantee. We believe that the master, in citing New-bury, also viewed this matter practically and did not find that the physical transfer with intent to convey failed, but that the expression of willingness to accept did not occur.
Arwe at 1030-31, 381 A.2d 737.
Newbury v. Parsons, 103 N.H. 96, 166 A.2d 231 (1960) and Arwe v. White, 117 N.H. 1025, 381 A.2d 737 (1977) are the two more “modern” decisions bearing on this Court’s analysis of the dispute. In New-bury a husband transferred an interest in property he owned to his wife as a joint tenant. The deed was recorded by the husband’s bank and placed with his other personal papers. His wife never saw the deed nor did she give any consideration for it. She was aware that her husband did intend to make such a transfer but to take effect only on his death. Creditors of the wife made a real estate attachment on any real property in which she had any right, title, or estate in order to satisfy any future judgment.
The trial court found there was no intention by the husband of making a present gift to her, that there was no delivery of the deed with the requisite intent, and that she therefore acquired no present interest in the property which the plaintiff could reach through its real estate attachment. Newbury at 97, 166 A.2d 231. This disposition rendered moot any issue as to her acceptance of the actual deed. The trial court relied on testimony by the husband that he intended the transfer to placate his wife who was mentally unstable, pregnant, and concerned about her security in the event of his death. The New Hampshire Supreme Court affirmed the trial court’s finding on the basis of the husband’s testimony.
This matter is somewhat similar to New-bury except for the absence of any testimony by the debtor as to his intent in transferring his interest to his wife. The present case also squarely presents the ac*667ceptance issue. There seems little controversy that the debtor intended at least conditionally to effect a conveyance to his wife but the fact that it did not tell her about it could support an inference that he intended to “straddle” and preserve his options depending on the outcome of his problems with movants and perhaps other parties. In the absence of his own testimony, subject to cross-examination, the court is left with that conditional inference.
He did memorialize his intent by recording the deed and placing it with other family papers. By recording the deed he made it impossible to reverse the transaction without alerting his wife to the transfer but again the failure to disclose the deed to his wife raises a question as to whether he believed he could easily get her to reverse the transaction once the danger had passed. There is no indication that there were any marital problems in 1986.
In Arwe, the grantee unknowingly possessed the grantor’s unrecorded deed. Like Arwe, the wife in this matter arguably had constructive possession of the deed in the family drawer, although she too had no knowledge of it. The administrator of the decedent’s estate in Arwe requested a Master’s instructions regarding the effect of the unrecorded deed unknowingly in the possession of one of the grantee’s during the decedent’s lifetime. The Master ruled the deed failed for want of acceptance. Arwe at 1027, 381 A.2d 737. In overturning the Master’s ruling, the New Hampshire Supreme Court reasoned that delivery to the grantee, albeit unknown to the grantee, served the “evidentiary function equally well, and when the grantee has no knowledge of the deed even though he received it, no basis exists to deny him the benefits of the deed because he has delayed his acceptance ... We believe that the grantee’s actions here in pursuing this claim, although different, are of a character that evidence actual acceptance.” Arwe at 1031-32, 381 A.2d 737.
Like Arwe, it is arguable that debtor’s ex-wife knowingly accepted the conveyance by her subsequent actions in the 1988 divorce proceeding giving her ex-husband the note and second mortgage on the residence which is the center of this dispute. Boody v. Davis, 20 N.H. 140 (1849); Arwe at 1032, 381 A.2d 737. On the other hand, the trustee has cited no authority that such acceptance “relates back” to the time of the 1986 transfer to defeat the movants’ attachment, especially when the attachment was an intervening event between the debtor’s transfer and his ex-wife’s acceptance.
Arwe upheld a transfer without rec-ordation, knowledge, or acceptance as legal delivery in the context of disposition of property by a decedent with no intervening claims by creditors. Newbury on the other hand involved intervening claims by creditors but the acceptance question was mooted by virtue of the clear record establishing that there was no delivery of the deed in question with a present intention to transfer the property.
On balance, I conclude that the New Hampshire Supreme Court would not consider the Arwe decision as a binding precedent in a case which did involve intervening claims by creditors prior to effective acceptance of the transfer in question. The Court in Arwe essentially treats the situation of executed deeds found in the papers of decedents as being sui generis. The Court notes with regard to deeds held by third persons to be delivered after a grantor’s death that “such arrangements are common” and that if acceptance could not relate back the common practice could not be recognized. Arwe at 1030, 381 A.2d 737.
There is no common practice, recognized by the law as beneficial, whereby a husband may make an undisclosed transfer of property to his wife in the shadow of impending creditor collection action and still have the wife’s subsequent acceptance of the deed deemed to relate back to defeat intervening claims by creditors. On the contrary, if a debtor intends to transfer property effective against his creditors a debtor in that situation should make formal disclosed delivery of the deed to the grantee and have the grantee evidence acceptance by taking sole possession and control of the deed of transfer.
I conclude under the applicable law that the New Hampshire courts would not per*668mit use of the “relation-back” theory of acceptance in these circumstances to defeat intervening vested rights of creditors in the grantor’s property. It would have been quite simple for the husband in this case to have disclosed the transfer to his wife and given her formal delivery of the deed to eliminate any question about the present effectiveness of the transfer. Not having done so, it little behooves the debtor (or here the trustee standing in his shoes) to leave to speculation the reasons for not having done so.
This disposition of the matter renders unnecessary any decision with regard to the alternative contention by the movants that the transfer to the wife was a fraudulent transfer under N.H.Rev.Stat.Ann. Chapter 545-A. Any rights that the mov-ants may have had in that regard arguably were superseded by the chapter 7 trustee and his avoiding powers under the Bankruptcy Code, which incorporate any state law avoiding powers for the benefit of all creditors. That question is rendered moot in the present case, however, in view of the finding and conclusion in this decision that the property conveyed, even if ordered returned to this estate, would still be subject to the movants’ secured claim.
The parties shall settle upon a form of final order in favor of the movants in accordance with this opinion. Movants shall submit the same within ten days from date hereof. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491429/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW
GEORGE L. PROCTOR, Bankruptcy Judge.
This proceeding is before the Court on the Motion of Defendant-Intervenor Keco Industries, Inc. (“Defendant Keco”), to dismiss the adversary proceeding for lack of subject matter jurisdiction. The Court, upon the evidence presented, makes the following findings of fact and conclusions of law as required by Federal Rule of Bankruptcy Procedure 7052:
FINDINGS OF FACT
1. Plaintiff was awarded contract DAAK01-87-D-A160 (A160) for 36,000 BTU air conditioners by the United States Army Troop Support Command (TROS-COM) on September 25, 1987. This contract was terminated for default immediately prior to Plaintiff’s September 1, 1989, bankruptcy filing.
2. Defendant United States of America (“Defendant United States”) commenced adversary proceeding number 90-102 in this Court to reclaim property to which it claimed title under the A160 and other contracts with Plaintiff. Plaintiff counterclaimed for wrongful termination of the A160 and several other contracts. The parties settled such litigation by stipulation dated March 6, 1991. As part of the settle*998ment, Defendant United States released any claim it might have against Plaintiff in the nature of damages under contract A160, including assessment of excess costs of reprocurement.
8. Plaintiff’s plan of reorganization was confirmed by order dated March 18, 1991. The plan and confirmation order provided for payment of Defendant United States’ claim, including claims for excess repro-curement costs, over a period of 57 months, commencing 90 days following confirmation.
4. On May 3, 1991, TROSCOM issued solicitation DAAK01-91-B-0161 as a repro-curement of the defaulted contract A160. The contracting officer rejected Plaintiff’s bid because federal procurement law forbids awarding a reprocurement contract to a bidder who defaulted on the initial contract if the reprocurement award would be at a price greater than the price of the initial contract. Such law is applied to defaulting contractors regardless of whether they have filed for protection under the Bankruptcy Code.
5. There has been no attempt by Defendant United States to collect, recover, or offset any debt from Plaintiff.
6. Plaintiff filed the present adversary proceeding on March 3, 1992. Plaintiff claims that the contracting officer’s decision violates the discharge injunction of Section 524 of the Bankruptcy Code and the settlement agreement of the parties.
7. Defendant Keco filed a motion to dismiss the complaint for lack of subject matter jurisdiction, arguing that Plaintiff’s claims do not fall within the limited jurisdiction retained by this Court upon confirmation of the plan and that exclusive jurisdiction resides in the United States Claims Court.
8. Article VII of the plan states:
The Court shall retain jurisdiction of this case for the purposes of determining any and all objections to the allowance of claims and/or interest, for application for allowance of compensation or reimbursement of expenses after confirmation, to determine any and all motions pending at the time of confirmation for rejection, assumption or assignment of any exec-utory contract or unexpired lease and the allowance of any claims resulting therefrom.
Further, should it be determined that any modification of the Plan is necessary, the Court shall retain jurisdiction for that purpose.
The confirmation order did not alter this language.
9. The allegations of the complaint do not involve any of the matters over which this Court retained jurisdiction. The complaint ultimately seeks an award of the contract at issue to Plaintiff.
CONCLUSIONS OF LAW
This Court lacks subject matter jurisdiction over this proceeding. This is a postconfirmation issue involving only federal procurement law. Further, this proceeding is not within the limited retention of jurisdiction set forth in the plan. Neither the facts nor the law implicate in any way the application of bankruptcy law or the prior proceedings in this bankruptcy case. Plaintiff’s bid was rejected solely because it did not conform to the governing federal procurement law. Defendant United States has not attempted to collect any funds from Plaintiff, nor has Plaintiff been in any way penalized for having filed for bankruptcy.
After confirmation of a plan, the bankruptcy court has limited jurisdiction. Bankruptcy courts should exercise postcon-firmation jurisdiction only for compelling reasons. In re Good Hope Refineries, Inc., 9 B.R. 421, 423 (Bkrtcy.D.Mass.1981).
Jurisdiction to review preaward bid protest actions is vested exclusively in the United States Claims Court pursuant to Section 133(a)(3) of the Federal Courts Improvement Act, 28 U.S.C. § 1491(a)(3) (1988) (FCIA). This provision has been interpreted to preclude district court jurisdiction to review bid protest actions filed prior to contract award. J.P. Francis & Associates, Inc. v. United States, 902 F.2d 740 (9th Cir.1990); B.K. Instrument, Inc. v. *999United States, 715 F.2d 713 (2d Cir.1983); Rex Systems, Inc. v. Holiday, 814 F.2d 994 (4th Cir.1987).
Likewise, district courts in this circuit have determined that the FCIA divests the district courts of jurisdiction over pre-award bid disputes. Metric Systems Corp. v. United States Department of Air Force, 673 F.Supp. 439 (N.D.Fla.1987); Caddell Construction Co. v. Lehman, 599 F.Supp. 1542, 1546 (S.D.Ga.1985) (holding “the language of § 133(a)(3) must be read to vest jurisdiction in the Claims Court for pre-award contract claims, to the exclusion of this and all other courts.”)
Because this Court derives its authority from the district court under 28 U.S.C. § 157(a) (1988), it adopts the rule set forth in Caddell and Metric Systems and dismisses the complaint for lack of subject matter jurisdiction.
It is well established that the jurisdiction of the bankruptcy court may be retained by means of a specific reservation of jurisdiction in a Chapter 11 plan. If, however, the relief sought does not clearly fall within a specific reservation of jurisdiction, there is no subject matter jurisdiction. In re Neptune World Wide Moving, Inc., 111 B.R. 457 (Bkrtcy.S.D.N.Y.1990). The relief sought by Plaintiff does not fall within any of the categories set forth in the reservation of jurisdiction in Article VII of the plan. Nothing in the plan authorizes the retention of jurisdiction for an adversary proceeding to enjoin a postconfirmation contract award by Defendant United States to someone other than Plaintiff. Therefore, the plan does not vest this Court with subject matter jurisdiction over the claims asserted by Plaintiff.
Finally, this Court rejects the argument of Plaintiff that the actions set forth in the complaint deal with the discharge provisions of the Bankruptcy Code (11 U.S.C. §§ 524(a) and 1141(d)(1)). While this Court clearly has the power to enjoin violations of the injunction contained in § 524, see e.g. In re Moulton, 133 B.R. 248 (Bkrtcy.M.D.Fla.1991), there must be an actual violation of the injunction to justify relief. Section 524 only imposes a permanent injunction against creditors’ attempts to recover on a personal liability. In re McNeil, 128 B.R. 603 (Bkrtcy.E.D.Pa.1991). The complaint does not allege that Defendant United States has taken any action to recover or collect reprocurement costs from Plaintiff. Nor is there any evidence that Defendant United States is applying the reprocurement rule to force Plaintiff to pay a discharged debt. Plaintiff cannot invoke this Court’s jurisdiction simply by alleging violation of a provision of the Bankruptcy Code when the relief it seeks does not implicate the protection afforded by the Code.
Accordingly, this Court finds that it is appropriate to dismiss the complaint for lack of subject matter jurisdiction.
A separate order dismissing the complaint will be entered. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491431/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW ON ORDER GRANTING APPLICATION OF WILMER, CUTLER & PICKERING FOR INTERIM ATTORNEYS’ COMPENSATION
SIDNEY M. WEAVER, Chief Judge.
THIS CAUSE came before the Court upon a Request For Findings of Fact and Conclusions of Law Supporting Order Granting Application of Wilmer Cutler & Pickering For Interim Attorneys’ Compensation filed by Theodore B. Gould, one of the debtors herein. By order dated December 26, 1991 this Court awarded Wilmer Cutler & Pickering the sum of $75,000.00 in *1012fees and $3000.00 in costs, as interim compensation. The order provides that any party in interest may, within 10 days of the entry of the order, request that the Court enter findings of fact and conclusions of law supporting the amount awarded by the Court. On January 13, 1992, sixteen days after the order had been docketed, this Court received Mr. Gould’s request for findings of fact, along with a request that the Court excuse the untimeliness of his request inasmuch as the order awarding interim compensation to Wilmer Cutler & Pickering was not received by Mr. Gould until January 6, 1992. Although Mr. Gould has not complied with the requirement that a request for findings supporting the fee awarded be submitted within 10 days of the entry of the order, the Court will nonetheless enter these findings and conclusions in support of the order awarding interim fees and expenses to Wilmer Cutler & Pickering. Accordingly, 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, hereby finds and concludes as follows:
By order dated June 25, 1991 this Court authorized the employment of Louis Cohen, Esquire, of the law firm of Wilmer, Cutler & Pickering to act as special counsel to the liquidating trustee pursuant to the authority of 11 U.S.C. § 327. The employment was authorized in light of the appeals pending in the United States Supreme Court styled United States v. Smith, Nos.: 90-1361, 90-1484. Wilmer, Cutler & Pickering was employed for the purpose of representing the liquidating trustee in the challenge raised by the debtors and the solicitor general to the opinion of this Court, as affirmed by the district court, and the Eleventh Circuit Court of Appeals, declaring that the liquidating trustee is not responsible for the filing of tax returns or for the payment of taxes on the income generated by the property of the debtors. The controversy represented a dispute regarding a tax liability which the parties have estimated to exceed $30 million.
As is customarily done by this Court when authorizing the employment of counsel, the June 25, 1991 order recites that Louis Cohen, of Wilmer Cutler & Pickering, is the attorney authorized by the Court to represent the liquidating trustee. The Court routinely designates an attorney from the firm which is being employed as a professional in a case in order to insure that there is a responsible attorney whom the Court can rely upon. This designation was not meant to limit the professional resources that the Wilmer Cutler & Pickering law firm was to devote to the Supreme Court brief. At the time the Court appointed Mr. Cohen, however, the Court indicated very clearly that no duplication of effort would be allowed as between special counsel for the liquidating trustee, and counsel for the liquidating trustee, Mr. Herbert Stettin. Indeed, this Court is always conscious of the importance of maintaining professional fees at a reasonable level commensurate with the results obtained in the particular case.
Due to the complexity of the issues in the case, coupled with the added demands attendant to bringing a case before the United States Supreme Court, Mr. Stettin subsequently requested the Wilmer, Cutler & Pickering law firm to assume the lead responsibility for the preparation of the brief to be filed in the Supreme Court. As a result, other members of the Wilmer, Cutler & Pickering law firm were allowed to participate in preparing the case for argument before the Supreme Court.
On December 10, 1991, this Court entertained the Application of Wilmer, Cutler & Pickering For Interim Attorneys’ Compensation For The Period June 25, 1991 Through September 16, 1991. At that time, the Court heard the objections of the debtors, through Mr. Gould, and of the United States through the Department of Justice. The transcript of the hearing evidences that Mr. Gould objected to the award of any professional fees to Wilmer Cutler & Pickering at that time inasmuch as the United States Supreme Court had not yet rendered its opinion in the case. Counsel for the Department of Justice also objected to the award of fees for servicés *1013rendered by any professionals other than Mr. Cohen, asserting that the June 25, 1991 order refers to the liquidating trustee’s employment of Mr. Cohen exclusively. The Court considered the arguments and announced on the record that it would zealously review the application and make an award of interim fees.
In respect to the objection that Mr. Cohen was the only attorney authorized by this Court to act as special counsel for the liquidating trustee, the Court finds this contention to be self-serving. The other parties to this appeal each employed separate counsel in the Supreme Court case. To argue that the estate should have conserved the professional expenditures ignores the fact that the Department of Justice was represented by the Office of the Solicitor General and their brief was signed by six attorneys, that the debtors retained the law firm of Arnold & Porter and that their brief was signed by two partners, and that the Bank of New York, who raised no objection to the fee application, also employed a Washington law firm in addition to their counsel in Miami and New York. Given the fact that the opposition saw the need to attack the issue on appeal through the employment of professionals each well versed in the practice before the United States Supreme Court, the Court finds the contention that the liquidating trustee should have devoted fewer resources in preparing the Supreme Court brief to be without merit.
In determining the reasonableness of the professional fees in a case, the bankruptcy court is guided by the factors announced in Johnson v. Georgia Highway Express, Inc., 488 F.2d 714 (5th Cir.1974) and In the Matter of First Colonial Corporation of America, 544 F.2d 1291 (5th Cir.1977), which include: (1) the time and labor required; (2) the novelty and difficulty of the questions; (3) the skill requisite to perform the legal service properly; (4) the preclusion of other employment; (5) the customary fee; (6) whether the fee is fixed or contingent; (7) the time limitations imposed by the client or other circumstances; (8) the amount involved and the results obtained; (9) the experience reputation, and ability of the attorneys; (10) the “undesirability” of the case; (11) the nature and length of the professional relationship with the client; and (12) the awards in similar cases. While the December 26,1991 award of $75,000.00 in fees and $3,000.00 in expenses as interim compensation to Wilmer Cutler & Pickering was based on the Court’s analysis of each of these factors, of particular significance to this Court’s review of the Wilmer Cutler & Pickering fee application were the following: the time and labor required, the novelty and difficulty of the question presented, the skill requisite to perform the legal services properly, the customary fee, and the amount involved and the results obtained.
Firstly, this Court recognizes that the time and labor required to brief the case before the Supreme Court was substantial. The fee application reflects that Wilmer Cutler & Pickering expended 1085.10 hours for services rendered in researching, briefing and drafting the argument presented to the Supreme Court. Having reviewed the brief, the Court is satisfied not only with the quality of the work produced but also with the number of hours expended as well.
Secondly, the Court also finds that the issue presented before the United States Supreme Court was both novel and difficult. The case concerned questions of both tax and bankruptcy law. The issue involved was important to the liquidating trustee because it concerned a claim by the Internal Revenue Service that the parties have estimated to exceed $30 million. Indeed, special counsel for the liquidating trustee was faced with the task of responding to the government’s assertion that the opinion of the Eleventh Circuit Court of Appeals created a “tax loophole of troubling proportion.” In that regard, the issue was also important enough for thirty-two states, the District of Columbia and the City of New York to file amicus briefs, and novel enough for the Supreme Court to grant certiorari.
Thirdly, the Court is also cognizant of the legal skills required to prepare an argu*1014ment before the United States Supreme Court. Mr. Cohen was appointed by the Court because it was felt that his established skill was necessary to properly represent the liquidating trustee. The other members of Wilmer, Cutler & Pickering contributed their expertise in tax matters and bankruptcy law. This finding is further supported by the fact that each of the other parties before the United States Supreme Court undertook the employment of special counsel each with prior experience before the Supreme Court.
The Court also finds that the fee charged by the Wilmer Cutler & Pickering law firm is reflective of the fee charged in cases of this magnitude. Mr. Cohen’s hourly rate for this case was charged at $295.00. The blended hourly rate for partners who worked on the case was $276.66, the blended hourly rate for associates was $188.33, while the blended hourly rate for paraprofessionals was $81.25. The rates charged by Wilmer Cutler & Pickering were the lowest rates that the firm charges and were within the range of fees charged by similar firms for similar work. Indeed, the evidence introduced at the hearing on the fee application indicates that the professional fees charged by the Wilmer Cutler & Pickering law firm are among the lowest rates charged by the larger firms in the Washington, D.C. area.
The Court’s consideration of the amount involved and the results obtained was the factor that influenced the Court to temper the fee awarded to the Wilmer Cutler & Pickering law firm. While the Court recognizes that the Wilmer Cutler & Pickering law firm undertook their representation of the liquidating trustee with the understanding that their fee was not contingent upon the decision of the United States Supreme Court, the Court is also mindful that the results obtained is a significant factor in determining the reasonableness of a fee in a bankruptcy case. In re Gherman, 105 B.R. 714 (Bankr.S.D.Fla.1989). At the time the Court considered the fee application of Wilmer Cutler & Pickering, however, the United States Supreme Court had not yet rendered its opinion in the case.1 Therefore, it was difficult, if not impossible, for the Court to determine the results obtained by the Wilmer Cutler & Pickering law firm at that time.
The Court did have an opportunity to review the brief prepared by Wilmer Cutler & Pickering on behalf of the liquidating trustee. Based on its review of the time entries in the application, the review of the brief, and the testimony adduced at the hearing on the fee application, this Court concludes that a $75,000.00 fee award, less than one-third of the amount requested as interim compensation in the application, is a reasonable fee reflective of the value of the services rendered by Wilmer Cutler & Pickering on behalf of the liquidating trustee. “The rule is clear that an allowance for fees should be well below any possible final allowance.” In re Multiponics, Inc., 551 F.2d 1049, 1050 (5th Cir.1977). In making this award the Court recognizes that the Wilmer Cutler & Pickering law firm has performed substantial services on behalf of the liquidating trustee with the aim of benefiting the creditors of this estate.
In regard to the cost, Wilmer Cutler & Pickering requested reimbursement for $5,309.99 for actual and necessary expenses incurred in their representation of the liquidating trustee. The Court reviewed the cost exhibit attached to the application and made certain adjustments including: reductions for the photocopy expenses from a rate of $0.20 per copy to $0.15 per copy, reduction for facsimile charges, as well as for travel related expenses. The Court determines that a reasonable award for reimbursement of actual and necessary expenses to be $3,000.00.
Based on the foregoing, the Court concludes that Wilmer Cutler & Pickering is entitled to interim compensation in the *1015amount of $75,000.00 for fees and $3,000.00 for costs.
. On February 25, 1992, the United States Supreme Court issued its opinion in Holywell Corporation v. Smith, — U.S. -, 112 S.Ct. 1021, 117 L.Ed.2d 196 (1992), holding that the liquidating trustee was an assignee under 26 U.S.C. § 6012(b)(3) and was required to file tax returns and pay taxes on the income attributable to the property of the debtors. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491432/ | OPINION AND ORDER
JAMES E. YACOS, Bankruptcy Judge.
The issue the Court must decide is whether debtor’s Fifth Amended Plan of Reorganization dated January 16,1992, has *2inappropriately classified the claim of Provident Institute for Savings, now known as Shawmut (hereinafter referred to as “Shawmut”), along with the claims of general unsecured creditors in violation of 11 U.S.C. § 1122(a).1
In the debtor’s Third Amended Plan of Reorganization dated September 3, 1991, Shawmut occupied its own class. Under the Third Amended Plan, upon confirmation, the debtor was to transfer all the properties in which Shawmut held a first mortgage to Shawmut in full satisfaction of Shawmut’s claim, including any deficiency claim. On September 24, 1991, the Court entered an order approving a stipulation in settlement of Shawmut’s motion for relief from the automatic stay in which the debtor voluntarily transferred the properties Shawmut held a first mortgage on to Shawmut and Shawmut agreed not to press the motion for relief.
The stipulation granted Shawmut relief from the stay as of November 13, 1991 with Shawmut agreeing to assume responsibility for taxes on the properties and also to assume responsibility for security deposits owed to any tenants of the properties. Of note is the absence of any proviso whereby Shawmut agreed to waive any deficiency claim(s). After review of the relevant documents, it appears that Shaw-mut’s waiver of deficiency claims contained in the Third Amended Plan and mentioned in the stipulation was in fact not incorporated in the stipulation in settlement of Shawmut’s motion for relief from stay.
It thus appears that even though the debtor and Shawmut settled the motion for relief, Shawmut retained its right to assert a deficiency claim against the. estate. Shawmut has therefore been included in class 12 along with the other general unsecured creditors. In its description of class 12 in the Fifth Amended Plan, and Shaw-mut’s claim in particular, the debtor once again states that upon confirmation, the properties which Shawmut holds a first mortgage on will be transferred to Shaw-mut in full satisfaction of its claim. Further, the debtor restates that Shawmut has agreed to waive any deficiency claim against the debtor. Finally, the last sentence of the description of Shawmut’s claim states: “However, the debtor believes that Provident [Shawmut] holds an unsecured claim for purposes of voting on the plan and the debtor has asked Provident [Shaw-mut] to vote its unsecured claim in favor of the plan but to waive any distribution in accordance with its agreement with the debtor.”
DISCUSSION
It is on the basis of the last sentence describing Shawmut’s arrangement with the debtor that the other creditors have objected. They argue Shawmut’s inclusion with general unsecured creditors in class 12 is an inappropriate classification. They contend Shawmut has been shifted from its own class in the Third Amended Plan into the general unsecured class in the Fifth Amended Plan so that the debtor can get his plan of reorganization accepted.
While nothing in section 1122 could be read to prohibit the grouping of deficiency claimants along with the trade creditors, the objectors argue that the plan’s classification groups creditors having substantially different claims together. Unlike the other members of the class, Shawmut is releasing its deficiency claim against the debtor, being granted a transfer of the underlying properties without incurring foreclosure costs, and is not sharing in the distribution. The objecting parties have cited In re Featherworks Corp., 25 B.R. 634 (Bankr.E.D.N.Y.1982), aff'd, 36 B.R. 460 (E.D.N.Y.1984). While Featherworks was decided under § 1129(a)(10), which disenfranchises” insiders from being count*3ed among those accepting the plan, its reasoning applies to the facts of this case.
In Featherworks the court decided that the debtor lacked the necessary acceptances because the votes of two insiders were counted in determining the outcome in favor of the plan. Like Shawmut in the present case, the corporate insiders in Featherworks waived participation in the distribution to the class of unsecured creditors. The court wrote:
In opposing Kerwin and Elliott’s motion to equitably subordinate Windsor’s claim, the debtor has taken the flat position that Windsor would not participate in the $40,000 to be distributed among general creditors. Thus, when Windsor declares itself to be in favor of the acceptance of the plan, it is voting for what persons other than itself would be satisfied to receive. Windsor has taken itself out of Class II. To permit it to impose its will on the debtor’s true general creditors by creating a false majority in favor of the plan is inconsistent with the proper operation of the Code.
Featherworks, 25 B.R. at 640.
While no one has suggested that Shaw-mut is an insider, it is clear, in the words of the Featherworks court, that Shawmut “is influenced by totally different considerations from those motivating the other creditors [of Durrett].” Id. at 640. Even if Shawmut possesses an unsecured claim similar to that of other members of the class, the disparate treatment of Shaw-mut’s claim makes it substantially dissimilar to those of other members of class 12. In re Richard Buick, 126 B.R. 840 (Bankr.E.D.Pa.1991).2
Based on the disparate treatment of Shawmut’s claim upon confirmation of the plan, the court rules that the vote of Shaw-mut should not be permitted to tilt the class in favor of accepting the plan when the other members of class are not receiving the same treatment. Accordingly, it is hereby
ORDERED, ADJUDGED and DECREED that the debtor has failed to gain the requisite amount of claims voting for acceptance in class 12 (unsecured claims) to constitute acceptance of the plan of reorganization by that class pursuant to § 1126(c) of the Bankruptcy Code.
DONE and ORDERED.
. Section 1122 provides:
§ 1122. Classification of claims or interest.
(a) Except as provided in subsection (b) of this section, a plan may place a claim or an interest in a particular class only if such claim or interest is substantially similar to the other claims or interests of such class.
(b) A plan may designate a separate class of claims consisting only of every unsecured claim that is less than or reduced to an amount that the court approves as reasonable and necessary for administrative convenience.
. The Buick court noted that disparate treatment of claims within a single class not only violates § 1122(a) but also violates § 1123(a)(4) requiring the same treatment for each claim of a class. Id. at 854. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491433/ | MEMORANDUM OPINION
MARK B. McFEELEY, Bankruptcy Judge.
This matter came before the Court on defendants Allen and Janet Marks’ motion to dismiss or in the alternative, motion for summary judgment on the second amended complaint to set aside distribution of assets. Having considered the briefs, the arguments of counsel, the applicable law, and being otherwise fully informed and advised, the Court finds the motion to dismiss is well taken and will be granted.
FACTS
Defendant Alto Village Services Corporation (AVSC) is a wholly owned subsidiary of the debtor and was listed as an asset of the debtor on its schedules. The second amended complaint (complaint) seeks to set aside the payment of approximately $160,-000 in principal and $178,000 in interest paid to defendants Allen and Janet Marks out of proceeds of the sale of AVSC. The complaint alleged that the payment was for a note entered into on or about May 25, 1985, which was signed by the debtor, AVSC and by M.H. Blaugrund. The note provided that the debtor, AVSC, and Blau-grund would pay the Marks the original principal sum of $200,000 plus interest initially accruing at the rate of 12.79% per annum and thereafter at a rate equal to the rate on 26 week U.S. Treasury Bill to be determined annually as of April 25th of each year. The note further provides that, “[a]ll sums past due under the terms of this note shall bear interest from their maturity at the maximum legal rate of interest.” Pltf. Ex. A to complaint.
On October 30, 1987, Lakeside filed a chapter 11 bankruptcy petition. The plan was confirmed on May 4, 1990. Plaintiff United New Mexico Bank at Albuquerque (United) voted to accept the plan, allegedly based on a provision of the plan which provided that the Court would retain jurisdiction to determine
all questions and disputes regarding title to the assets of the estate, and determination of all causes of action, controversies, disputes or conflicts, whether or not subject to motions pending as of the date of confirmation, between the Debtors and any other party, including but not limited to, any right of the Debtor to recover assets pursuant to the provision of Title 11 of the U.S. Code.
Complaint, 1114. The plan further provided that a sale of AVSC was contemplated and that the sale would be noticed to all creditors and would be consummated only after approval of the Bankruptcy Court. Complaint, 1135, citing page 7 of the Second Amended Plan. The complaint further alleged that on or about, October 23, 1990, the sale of AVSC by Lakeside was closed. From the proceeds of the sale, $160,000 in principal and $178,000 in interest was paid to the Marks, without advance notice to creditors or hearing by the Court.
DISCUSSION
Although the Bankruptcy Code section is not specifically cited, United is apparently trying to set aside an unauthorized post-petition transfer of property of the estate on the basis that (1) the interest was usurious, and (2) the sale was consummated without notice to creditors and Court ap*29proval, as required by the plan. The Code provides:
[T]he trustee may avoid a transfer of property of the estate—
(1) that occurs after the commencement of the case; and
(2)(B) that is not authorized under this title or by the court.
11 U.S.C. § 549 (emphasis added). The Code language is clear and unambiguous; the trustee is the entity empowered with avoiding post-petition transfers.
Courts have been uniform in holding that creditors do not have standing to avoid post-petition transfers. “[The creditor] is faced with the fact that § 549 is an avoidance power belonging solely to the trustee or debtor-in-possession. In general, ... only trustees and debtors-in-possession, not creditors, have standing to invoke avoidance powers.” In re Pointer, 952 F.2d 82, 87 (5th Cir.1992). Accord Delgado Oil Co. v. Torres, 785 F.2d 857 (10th Cir.1986).
Courts have, however, allowed a creditor to proceed with an avoidance action once the creditor has obtained Court approval. For a creditor to assert the trustee’s avoidance power, “courts have found it imperative that the creditor first seek approval from the bankruptcy court and demonstrate that the claim is potentially meritorious.” In re Munoz, 111 B.R. 928, 931 (Colo.1990). As the Fifth Circuit quoted,
This is not to suggest that a bankruptcy court can never authorize an avoidance action on behalf of the estate by an individual creditor in a Chapter 11 case. Fair and orderly bankruptcy administration, however, would dictate that such authority might be granted upon showings of particularly extraordinary circumstances.
In re Pointer, 952 F.2d 82, 88 (5th Cir.1992), citing, In re V. Savino Oil & Heating Co., 91 B.R. 655, 656-57 (Bankr.E.D.N.Y.1988). Therefore, the Court finds that because United failed to obtain Court approval before commencing the adversary proceeding, the proceeding should be dismissed. The proceeding will be dismissed without prejudice, allowing United to move for Court approval to prosecute the action.
This memorandum opinion constitutes the Court’s findings of fact and conclusions of law. Fed.R.Bankr.P. 7052. An appropriate order shall enter. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491435/ | OPINION AND ORDER ON REQUEST FOR CONFIRMATION OF CHAPTER 11 PLAN
BARBARA J. SELLERS, Bankruptcy Judge.
This matter is before the Court on the requested confirmation of a second amended plan of reorganization (“Plan”) proposed by Chapter 11 debtor, Laurel Glen Apartments of Acworth, Ltd., (“Laurel Glen”). No objections were filed to confirmation. The Court has an independent duty to find that all elements for confirmation have been met, however, and may confirm a plan only if all those requirements, as set forth in 11 U.S.C. § 1129(a) (“§ 1129(a)”), have been satisfied.
The Court has jurisdiction in this matter under 28 U.S.C. § 1334(b) and the General Order of Reference entered in this district. This is a core proceeding under 28 U.S.C. § 157(b)(2)(L) which this bankruptcy judge may hear and determine.
I.Facts and Procedural History
Laurel Glen is a limited partnership operating under the provisions of Chapter 11. Its general partner, Cardinal Industries Inc., (“CII”), is also a Chapter 11 debtor before this Court. The Federal Home Loan Mortgage Corporation (“Freddie Mac”) is the holder of a note which Laurel Glen executed in the principal amount of $1,783,-000. Repayment of that note is secured by a mortgage against Laurel Glen’s primary asset, an apartment complex, and by a security agreement and assignment of rents. Freddie Mac has agreed to modify the terms of its loan under the Plan.
The Court approved the second amended disclosure statement filed by Laurel Glen, and on August 8, 1991, held a confirmation hearing on the Plan. Although the parties characterize the Plan as “consensual,” it is expressly consensual only between Laurel Glen and Freddie Mac.
II.Issue Presented
There are two issues before the Court. First, the Court must determine what showing a proponent of a Chapter 11 plan must make at a confirmation hearing where its plan is unopposed. Second, the Court must find whether Laurel Glen made such showing.
III.Conclusions of Law
A. The Showing Required of a Plan Proponent at an Unopposed Hearing on Confirmation
Confirmation of a chapter 11 plan generally acts as a discharge of a debtor’s pre-petition obligations and establishes new contractual relationships between the parties. 11 U.S.C. § 1141(d)(1)(A). Concern for that effect and the explicit mandate of § 1129(a) require the proponent of a chapter 11 plan to establish all prerequisites for confirmation under that section and, thus, create an appropriate record.
Initially, before the hearing on confirmation, counsel for the plan proponent “shall certify to the court the amount and number of allowed claims of each class accepting or rejecting the plan and the amount of allowed interests of each class accepting or rejecting the plan”. Local Bankruptcy Rule 3.15(c). Additionally, where the proponent seeks equity contributions from members of one or more classes, that certification should indicate the amount of such funds committed by parties to the reorganization process.
*201The provisions of § 1129(a) are mandatory and the Court must find that the plan fulfills all requirements set forth therein prior to confirming the plan. The Court cannot confirm the plan unless the evidence and arguments at the hearing establish all factual and legal requirements of § 1129(a).
Ideally, counsel for the plan proponent should speak to each subsection of § 1129(a). Although the Court may presume the good faith requirement without evidence, (Federal Rule of Bankruptcy Procedure 3020(b)(2)), the remaining requirements of § 1129(a)(4)-(13) require evidence. Statements of counsel may substitute for testimonial evidence if an § 1129(a) requirement either is not applicable or can be gleaned from previous filings with the Court. See, e.g., § 1129(a)(4-6), (8-10), and (12-13).
For example, the plan proponent must indicate by votes either that each class of claims or interests is unimpaired under the plan or that such class of claims or interests has accepted the plan.1 Counsel for the plan proponent, using the certification of votes, should go through each class of claims or interests at the hearing and show that this requirement is met. Filing the certification with the Court is a prerequisite, but is not a substitute for necessary statements of counsel on the record. The certification provides the data for the inferences, but it does not establish those inferences.
Testimonial evidence is usually necessary to establish the “feasibility” test found in 11 U.S.C. § 1129(a)(ll). For feasibility to be met, the Court must find from the evidence that the plan “offers a reasonable prospect of success and is workable”. 5 Collier, on Bankruptcy § 1129.02 at 1129-53 (15th Edition 1990). That proof should include a showing that funds will be available to make the payments required by the plan on or near the effective date. It is necessary for the witness to compare the amount of cash or other property on hand as of the effective date with the amounts required under the initial phases of the plan. The plan proponent must show the existence of these funds or the ability to generate needed additional funds. The long term economic prospects of the debtor must also be discussed as those impact upon plan requirements.
Evidence is also generally required to establish the “best interests of creditors test” of § 1129(a)(7). That evidence should make clear that each holder of a claim will receive, under the plan, a value not less than would be received if the debtor were liquidated under chapter 7 of title 11 on the effective date of the plan. Neither the Court nor the record will establish that element by inference from the Court’s file or by statements in the disclosure statement. Of course, if each member of every impaired class accepts the plan, that evidence will not be required.
Finally, the plan proponent must show that all court costs and fees owing to the United States Trustee have been paid or will be paid on the effective date of the plan. 11 U.S.C. § 1129(a)(12) and L.B.R. 3.16. The plan proponent should offer testimony to establish this requirement. A record of those court costs can be obtained from the Clerk’s office prior to the time of the hearing on confirmation.
B. Laurel Glen’s Satisfaction of the Confirmation Tests
Laurel Glen presented evidence which established that its proposed plan is feasible. A representative of Laurel Glen’s general partner testified that the debtor had sufficient cash on hand to meet the initial payment requirements under the plan.
Laurel Glen’s witness further testified that if the debtor’s real and personal property were liquidated under chapter 7 on the day of the hearing, the net proceeds from that liquidation would be insufficient to pay holders of claims as much as each holder is receiving under the plan. Financial calculations offered by the witness supported *202those conclusions. Therefore, the “best interests test” also was met.
The class of creditors holding general unsecured trade claims did not cast any votes. Although Laurel Glen proposed to pay each member of this class 100% of its allowed claim, that payment was to be made by installments over the next year. Thus, this class was impaired and did not accept the plan. Laurel Glen did not argue any construction of § 1129(a)(8) which would excuse compliance with this requirement. Therefore, the Court orally denied confirmation at the hearing.
Finally, Laurel Glen offered no statements of counsel or testimonial evidence that it has paid the court costs and United States Trustee fees assessed to its case.
IV. Conclusion
Confirmation of a proposed chapter 11 plan requires a debtor plan proponent to show more than an agreement between it and its major secured lender. The provisions of 11 U.S.C. § 1129(a) are mandatory and the Court will require that a record be made at the confirmation hearing to show that each requirement has been met.
Laurel Glen offered testimony or statements of counsel to establish certain confirmation requirements. However, it failed to establish that all impaired classes had accepted the plan or that it sought to “cram down” this class of claims. It also failed to show that § 1129(a)(12) had been met.
Based on the foregoing, confirmation of the debtor’s plan is denied. Laurel Glen is given seven days from the entry of this opinion and order to amend its plan or take whatever action is necessary under the circumstances.
IT IS SO ORDERED.
. If all impaired classes of claims or interests have not accepted the plan, but all other requirements for confirmation have been met, § 1129(b) sets forth additional requirements for a "cram down”. That procedure, however, is not presently before the Court. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491436/ | ORDER
JAMES G. MIXON, Bankruptcy Judge.
On June 20, 1990, Mammoth Spring Distributing Co., Inc. (debtor) filed a voluntary petition for relief under the provisions of chapter 7 of the Bankruptcy Code. On June 20, 1990, Jill R. Jacoway, Esq., was appointed trustee, and on November 5, 1990, Claude R. Jones, Esq., was appointed successor trustee. On July 2, 1991, First National Mercantile Bank and Trust Company (First National) filed a motion for relief from the automatic stay to foreclose an alleged security interest in a tax refund recovered by the trustee postpetition.
The proceeding before the Court is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B) and the Court has jurisdiction to enter a final judgment in the case. The relevant facts are stipulated as follows:
1. That a petition under Chapter 7 of the Bankruptcy Code was filed by the above captioned debtor and an order for relief under Chapter 7 was entered on June 19, 1990; that Jill Jacoway, Trustee, was appointed as interim trustee in this matter, and Claude Jones is now the successor trustee in this matter and is now liquidating the business and the property of the above captioned debtor.
2. That this Court has jurisdiction over this proceeding pursuant to 28 U.S.C. Section 1471 and 11 U.S.C. Section 362.
3. That First National Mercantile Bank and Trust Company, Joplin, Missouri, is the holder of a secured claim against the debtor in the total amount of $364,124.21 as of June 19, 1991, with interest accruing thereafter at the rate of $94.59 per diem; that the secured property pledged by the debtor to the plaintiff is shown on “Exhibit A” attached hereto and made a part hereof as though set forth herein word for word.
4. That First National Mercantile Bank and Trust Company, Joplin, Missouri, has a valid perfected security interest in the collateral described on “Exhibit A” attached hereto, having filed the appropriate UCC-1 documents with the appropriate offices in Missouri and Arkansas.
5. That the collateral of the plaintiff includes, but is not limited to general intangibles, tax refunds, cash, accounts receivable and all proceeds of collateral and proceeds of proceeds of the collateral. That the security agreement of the plaintiff also includes any property of a like type or nature of its collateral, whether now owned or hereafter acquired.
6. That the law of the State of Missouri authorizes a lien to exist and continue in general intangibles and in after acquired property and in proceeds of collateral.
7. That the lien of the plaintiff is a first lien on the items of collateral described in “Exhibit A.”
8. That the Court appointed trustee, Claude Jones, has recovered $7,236.95 from the Internal Revenue Service, which refund represents a refund of 1986 corporate income taxes.
*2079. That the $7,236.95 payment is a 1986 tax refund and was received as a result of losses by the debtor that occurred prepetition.
10. That the debtor received the tax refund referenced hereinabove in June of 1991.
11. That if the plaintiffs security interest extends to the tax refund, the plaintiff has not been offered adequate protection of its interest in the collateral and the trustee should be ordered to deliver to the plaintiff the $7,236.95 received from the Internal Revenue Service, plus interest thereon that has accrued.
The parties also introduced by stipulation Form 1139, “Corporation Application for Tentative Refund,” which was filed by the trustee on September 20, 1990.
The trustee argues that the estate did not acquire an interest in the tax refund until the amended return was filed postpe-tition and, therefore, 11 U.S.C. § 552(a) prevented First National’s lien from attaching.1 First National argues that the debtor acquired rights in the refund prepetition and, therefore, its lien attached and was perfected on the date the bankruptcy petition was filed.
DISCUSSION
Pursuant to Missouri Annotated Statute § 400.9-204(1) (Vernon 1965), First National’s security interest in general intangibles attaches when the debtor acquires rights in the intangibles. Smith v. Mark Twain Nat’l Bank, 805 F.2d 278, 286 (8th Cir.1986); Central Prod. Credit Ass’n v. Hopkins, 810 S.W.2d 108 (Mo.App.1991); Fricke v. Valley Prod. Credit Ass’n, 721 S.W.2d 747, 752 (Mo.App.1986). The security agreement executed by the debtor granted First National a security interest in after-acquired general intangibles. At the time the security agreement was executed, First National extended value, i.e., loan proceeds, to the debtor. This transaction occurred prior to the date the tax refund accrued. Missouri Annotated Statutes § 400.9-108 (Vernon 1965) provides that if the debtor acquires its rights in the property in the ordinary course of business, a security interest in after-acquired property is deemed to be taken for new value. Steinberg v. American National Bank & Trust Co. (In re Meyer-Midway, Inc.), 65 B.R. 437, 445 (Bankr.N.D.Ill.1986); Fairchild v. Lebanon Prod. Credit Ass’n (In re Fairchild), 31 B.R. 789, 791-92 (Bankr.S.D.Ohio 1983).
Under 11 U.S.C. § 541, property of the estate includes “all legal or equitable interest of the debtor in property of the estate as of the commencement of the case.” The debtor’s inchoate right to receive the tax refund resulting from a loss-carryback constituted property of the debt- or prior to the date the petition was filed, because the debtor’s right accrued as a result of prepetition losses sustained by it for the tax year ended December 31, 1989. Segal v. Rochelle, 382 U.S. 375, 380, 86 S.Ct. 511, 515, 15 L.Ed.2d 428 (1966) (“[T]he loss-carryback refund claim ... is sufficiently rooted in the pre-bankruptcy past and so little entangled with the bankrupt’s ability to make an unencumbered fresh start that it should be regarded as ‘property’ under [former Bankruptcy Act] § 70a(5)”); Doan v. Hudgins (In re Doan), 672 F.2d 831 (11th Cir.1982) (‘Segal was decided under the old Bankruptcy Act rather than the Code; the legislative history of the Code, however, makes clear that Segal retains its vitality[.]”); In re Lange, 110 B.R. 907, 908 (Bankr.D.Minn.1990); In re Edmonds, 27 B.R. 468 (Bankr.M.D.Tenn.1983). Therefore, since the debtor acquired a sufficient interest in the tax refund for it to constitute property of the estate, the debtor also acquired sufficient rights in the property for First National’s lien to attach.
The parties stipulated that First National’s claim exceeds the amount of the tax refund, therefore, no equity is available for the benefit of unsecured creditors.
*208For the reasons stated above, the motion for relief from stay is granted. The trustee is ordered to abandon the sum of $7,236.95, plus all interest the trustee has earned on said sum to First National. The automatic stay provisions are relaxed to permit First National to foreclose its security interest in the sum of $7,236.95.
IT IS SO ORDERED.
. 11 U.S.C. § 552(a) provides that: “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.” | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491437/ | FINDINGS OF FACT, CONCLUSIONS OF LAW AND MEMORANDUM OPINION
ALEXANDER L. PASKAY, Chief Judge.
THIS IS a confirmed Chapter 11 case and the matter under consideration is a five-Count Complaint filed by Sarasota Plaza Associates Ltd. Partnership (Debtor) originally against several Defendants, all of whom have been previously dismissed with the exception of Barry Trupin (Trupin). The Debtor’s Second Amended Complaint set forth the following claims. The claim in Count I is based on an alleged fraudulent transfer, the claim in Count II is based on money loaned, the claim in Count III is based on conversion, the claim in Count IV is based on civil theft, and the claim in Count V is based on a fraudulent misrepresentation.
At the commencement of the trial, the Debtor voluntarily dismissed the claim set forth in Count I which was based on an alleged fraudulent transfer. Thus, the trial proceeded against Trupin on the claims set forth in Counts II, III, IV and V. The facts as established at the trial which are relevant to the claims under consideration are as follows:
Barry Trupin was a syndicator of tax shelter equipment leases who moved into real estate syndication in 1984. The Debt- or was the first of several of Trupin’s real estate syndications. In July, 1984, Trupin formed Whitehall Associates Limited Partnerships (Whitehall), which was owned and controlled by the “MHT group of companies” (MHT). MHT, in turn, was wholly owned by the Tara Jill Trupin 1983A Trust (1983A Trust). The sole beneficiary of the Trust was Trupin’s daughter, and the trustee was Trupin’s father, Bennett Trupin. MHT was comprised of some 50 to 60 Tru-pin-controlled companies, all of which operated out of Trupin’s business office in New York City.
On September 14, 1984, Whitehall purchased the United First Federal Building (Building) from United First Federal for $15,200,000. At the time of the purchase, a Private Placement Memorandum was circu*261lated among potential investors offering units in a limited partnership to be formed for the sole purpose of owning the Building. According to the Private Placement Memorandum, there were several entities involved in the syndication. Rothschild Registry Management Corp. (Registry Management) was designated as general partner; Rothschild Registry International, Inc. (Registry International) was designated as the placement agent; and Rothschild Registry Properties Corp. (Registry Properties) was designated as managing agent. The Private Placement Memorandum named Peter Prowant as president of both Registry Management and Registry International, and named Marvin Schaffer as executive vice president of Registry International. Marvin Schaffer was a childhood friend of Trupin.
The three Rothschild corporations were owned by a company called Rothschild Registry Holding Corp. (Holding). The officers and directors of Holding — Peter Prowant, his brother John Prowant, Marvin Schaffer, and Jerry Sager — were officers or employees of Registry International when it was a wholly-owned subsidiary of another Trupin-controlled entity, Rothschild Reserve (Reserve).
In October, 1984, 160 investors purchased units in Sarasota Plaza Associates Limited Partnership, signed limited partnership agreements, paid $1,835 in cash, and executed negotiable promissory notes for $99,763 per unit. On October 31, 1984, Whitehall sold the Building which it had purchased for $15,200,000 to an entity named Conrad Realty for $22,400,000, generating a profit of $7,200,000 after holding the property for only six weeks. Conrad Realty was formed for the sole purpose of rendering services to the Trupin-controlled MHT group of companies, and Conrad Realty earned 100 percent of its income from MHT. On the same day as it purchased the Building, Conrad Realty sold the building to the Debtor for $22,763,000. There is some evidence that at that time, the value of the property was approximately $14,-600,000.
In October and December of 1984, the promissory notes given to the Debtor as payment for the limited partnership units were negotiated through a series of assignments to Registry Properties. The notes were then sold to a firm that buys and sells investor notes. Payments totalling $10,-614,249.94 were made by the Debtor to Registry Properties for the notes. Out of those funds, $7,414,067.90 was wire-transferred to Conrad Realty, which then wire-transferred $7,264,067.90 to Whitehall. Another $1,590,156.25 was wire-transferred to Conrad Realty, which in turn wire-transferred $1,690,156.25 to Whitehall.
In February, 1985, Trupin became a limited partner in the venture, substituting for three former limited partners, and executed a promissory note for $432,418.50. In mid-to-late 1985, Trupin became an officer or director of the general partner of the Debtor. From October, 1985 through October, 1986, numerous payments were made by the Debtor to Registry Properties and to Registry International. These payments were characterized by the Debtor as “loans,” and they totalled $3,136,850. In each case, the money received by Sarasota Management Corp. was immediately transferred to Reserve. Reserve was an entity which was owned by the Tara Jill Trupin 1980 Trust (1980 Trust), whose trustee was Barry Trupin and whose sole beneficiary was Trupin’s daughter.
These are the facts based upon which the Debtor has filed the five-Count Complaint, only four Counts of which were tried against Trupin. As noted earlier, Count I of the Debtor’s Complaint based on an alleged fraudulent transfer was voluntarily dismissed by the Debtor before the trial. This leaves for consideration Counts II through V of the Debtor’s Complaint.
Count II of the Debtor’s Complaint, the Count for money loaned, is based on the Debtor’s contention that “loans” totalling $3,136,850 were made by the Debtor to entities controlled by Trupin. The validity of this claim set forth in this Count is not free from serious doubt for this reason. There is nothing in this record to support the conclusion that the Debtor *262loaned money to Trupin personally. The fact that unauthenticated corporate records indicate that after a series of transfers, funds went from the Debtor to entities in which Trupin had an involvement falls woefully short of meeting the burden of proof needed to establish a claim for money loaned. The Debtor introduced voluminous corporate records at the trial to document the transfers of funds, however, none of these corporate records are admissible as competent evidence for the simple reason that the Debtor failed to introduce these records through a person with personal knowledge of these books and records and who had custody and control of these records or otherwise satisfied the requirement of the so-called Shop Book Rule. Fed.R.Evid. 803(6) as adopted by Bankruptcy Rule 9017. In sum, the only evidence to meet the allegations that the Debtor loaned funds which ultimately were received by Trupin but were not repaid, was not established by competent evidence. Accordingly, this Court is satisfied that the claim in Count II of the Debtor’s Complaint has not been proven with the requisite degree of proof and, therefore, should be dismissed.
The claims in Counts III and IV of the Complaint are based on conversion and civil theft and can be treated together. At common law, a cause of action for conversion consists of an unauthorized act which deprives another of his property permanently or for an indefinite time. Senfeld v. Bank of Nova Scotia Trust Co., 450 So.2d 1157 (Fla. 3d DCA 1985); Star Fruit Co. v. Eagle Lake Growers, Inc., 160 Fla. 130, 33 So.2d 858 (1948); National Union Fire Ins. Co. of Pennsylvania v. Carib Aviation, Inc., 759 F.2d 873 (11th Cir.1985). In a similar vein, § 812.014(1), Fla.Stat., provides as follows:
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 or a benefit therefrom. (b) Appropriate the property to his own use or the use of any person not entitled thereto.
In support of the claims in Counts III and IV, the Debtor points to a series of transfers of funds from the Debtor to various entities purportedly controlled by Tru-pin. While there is some evidence in this record of transfers of funds from the Debt- or to entities controlled by Trupin, in only one instance were funds ever transferred to Trupin’s personal account. However, there is evidence in the record to support the finding that the funds received by Tru-pin were immediately transferred back out of Trupin’s account. Def. Exh. # 2. In sum, the evidence only proves that the funds were transferred several times and ultimately were temporarily deposited into Trupin’s account, and this evidence falls short of proving a claim for either civil theft or conversion. It is evident that unless the Debtor can pierce the corporate veil between Trupin and the several corporations purportedly controlled by him, there is nothing in this record which would support a claim for conversion or civil theft simply because funds were transferred to corporations with which Trupin had some connection. In this connection, it should be noted that the Debtor made little effort to pierce the corporate veil between corporations in which Trupin was involved and Trupin.
This leaves for consideration Count V of the Debtor’s Complaint, a claim for fraudulent misrepresentation. In support of the claim for fraudulent misrepresentation, the Debtor contends that Trupin misrepresented the value of the building which was sold by Conrad Realty to the Debtor for $22,763,000, and which resulted in a profit of $7,563,000 for entities controlled by Tru-pin. It is well-settled in Florida that the essential elements of a claim for fraudulent misrepresentation are i) a false statement of fact by the defendant, ii) knowledge by the defendant that the statement of fact was false at the time it was made, iii) intent by the defendant that the statement of fact induce another to act in reliance thereon, and iv) actual reliance on the statement of fact resulting in damage. Spitz v. Pru*263dential-Backe Securities, 549 So.2d 777 (Fla. 4th DCA 1989); W.F. Yost v. Rieve Enterprises, Inc., 461 So.2d 178 (Fla. 1st DCA 1984).
The Debtor in this case failed to prove that there was any representation that the fair market value of the building was $22,763,000. While it is true that the Private Placement Memorandum which was circulated stated that this was the purchase price of the building paid by the Debtor, this is all that the Private Placement Memorandum stated. There is simply no representation in the Private Placement Memorandum that the fair market value of the building was $22,763,000. In short, the Debtor’s failure to prove that Trupin made a materially false statement regarding the value of the property on which the Debtor reasonably relied, means that the Debtor’s claim for fraudulent misrepresentation must fail since it is axiomatic that there can be no fraud where there is no false statement of fact. Further, this Court finds that the sale of the building was between equally sophisticated parties, and the Debtor is simply complaining of what it now considers to be a “bad deal.” In sum, this Court is satisfied that the Debtor’s claim for fraudulent misrepresentation is not well taken and should be dismissed.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that Count I of the Plaintiff’s Complaint which the Plaintiff voluntarily dismissed is dismissed. It is further
ORDERED, ADJUDGED AND DECREED that Count II, III, IV, and V of the Plaintiff’s Complaint are also dismissed. 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/8491438/ | OPINION
RICHARD T. FORD, Bankruptcy Judge.
INTRODUCTION
James M. Ford, the Chapter 7 Trustee in this case (no relation to the undersigned), moves to dismiss the United States Trustee’s Motion to remove him as the Chapter trustee. Alternatively, he seeks enforcement of the Court’s Rule 2004 examination order and sanctions for the United States Trustee’s failure to comply with that order. Lastly, Mr. Ford moves for disqualification of certain United States Trustee attorneys.
The United States Trustee’s Office for the Fresno Division filed an opposition to the Trustee’s Motion on July 23, 1991. They oppose all requests for relief by the Chapter trustee.
Having reviewed the evidence submitted herein, and being intimately familiar with these proceedings since their inception, the Court finds and holds that the United States Trustee’s flagrant unprofessional and dilatory conduct warrants dismissal of the United States Trustee’s Motion to remove James M. Ford as the Chapter trustee. Further, monetary sanctions in the amount of $3,871.05 are imposed against the United States Trustee’s Office, as to the Department of Justice. Sanctions are also imposed individually against Mark St. Angelo, Regional Assistant U.S. Trustee and Special Assistant U.S. Attorney, in the amount of $800.
FACTS
Debtor filed its Voluntary Petition under Chapter 7 of the Code on July 6, 1990. On July 17, 1990, James M. Ford was appointed Interim Trustee for the estate. That Order also provided that the amount of the bond was fixed and approved according to the blanket bond on file in the Clerk’s Office. Ford has remained the Trustee in this case thereafter.
On January 22, 1991, the Court heard and approved the appointment of a Creditors’ Committee in this case, authorizing them to bring any actions necessary to avoid any transfers avoidable by a Trustee. The Order reference this motion was filed February 21, 1991. The underlying Motion seeking such authority for the Unsecured Creditors’ Committee represented to the Court that Ford, as the Trustee, refused to take action to recover certain transfers, alleging that the estate lacked the requisite funds and that he was unable to obtain counsel to represent him in connection with any lawsuit or adversary proceeding. This Court found it to be in the best interest of the estate to allow the Creditors’ Committee to pursue such actions for the benefit of the estate.
*503Thereafter, on February 14, 1991, the United States Trustee’s Office, Fresno Division, brought a Motion to remove Ford as the Chapter 7 Trustee (MC No. UST-1). Not only was Ford’s removal sought in this case on the basis that he failed to investigate all allegations reference alleged fraudulent conveyances, the United States Trustee also sought his removal from all cases under 11 U.S.C. § 324(b) in which he was acting as trustee. That particular section states that when a trustee is removed under § 324(a) for cause, he is removed from “all other cases ... unless the Court orders otherwise.” Specifically, the United States Trustee’s Office sought Ford’s removal in 19 other cases. It was alleged that the Trustee’s attitude was one of stubborn noncooperation and that his consistent position was that if he was not compensated as defined by him, that he would refuse to administer the cases so assigned to him.
In order to prepare for his defense to the United States Trustee’s Motion (MC No. UST-1), Ford’s attorney, Mr. Hertz, caused a Notice of Deposition under Bankruptcy Rules 7030 and 9014 to be filed with this Court February 20, 1991, notifying the United States Trustee for District 17, Anthony G. Sousa, of the Trustee’s intent to depose Edward R. Handler and Gary W. Dyer. Evidently the examinations could not be worked out on a voluntary basis, and this Court issued subpoenas reference these witnesses on February 19, 1991.
Thereafter, on March 1, 1991, Ford’s attorney filed a Motion for Order of Examination reference Edward R. Handler and Gary W. Dyer. In the supporting declaration, Ford advanced the need to examine Handler and Dyer to prepare his defense. It is further advanced that James Snyder of the United States Trustee’s Office advised Mr. Hertz that the Notice of Deposition filed February 20, 1991, was ineffectual as there had been no response filed to the United States Trustee’s Motion to remove the Chapter trustee and that this therefore was not a “contested matter” and no deposition could be set. The declaration further indicates attempts by Mr. Hertz to arrange mutually convenient times for these depositions; however, the United States Trustee’s Office apparently refused Mr. Hertz’s attempts.
A hearing on the Motion for Order of Examination was held on March 14, 1991. The United States Trustee’s Office, by Assistant U.S. Trustee St. Angelo of the San Francisco Office, opposed the Trustee’s request requiring Messrs. Dyer and Handler to appear for examination. After a hearing on the matter, this Court granted the request for a 2004 examination. The Findings of Fact and Conclusions of Law and Order upon the motion for the order of examination were signed and filed by the Court on March 27, 1991.
Thereafter, on March 29, 1991, the United States Trustee’s Office (San Francisco Office) filed an appeal from that order to the District Court, Eastern District of California, Fresno Division. On April 1, 1991, the United States Trustee’s Office moved the Bankruptcy Court to stay the effect of its order allowing the 2004 examinations to go forward pending the appeal of this Court’s order of March 27, 1991. The request for the stay pending appeal was denied by the Bankruptcy Court but subsequently granted on appeal by the District Court until the matter could be heard.
The District Court for the Eastern District of California, Judge Price presiding, heard the United States Trustee’s appeal reference this Court’s Order Denying Stay Pending Appeal. After hearing the matter, the District Court for the Eastern District of California, Fresno Division, Judge Price presiding, issued a Memorandum Decision on April 18, 1991, affirming this Court’s decision not to issue a stay pending appeal. The Court found no basis to hold that the United States Trustee’s Office was exempt from examination under Bankruptcy Rule 2004.
On April 29, 1991, this Court ordered Messrs. Handler and Dyer to submit to a 2004 examination. The record reflects this examination occurred on May 15, 1991. The record further reflects that Mark St. Angelo of the United States Trustee’s office lodged numerous objections. It is the Trustee’s contention that because of the *504numerous objections, the purpose of the 2004 exam was thwarted.
Thereafter, on July 1, 1991, Trustee Ford, through his attorneys, Lang, Richert & Patch, brought this Motion (MC No. MTH-2) to Dismiss the United States Trustee’s Motion (MC UST-1) as a sanction for its failure to comply with the 2004 examination order; alternatively, this Motion sought enforcement of the Court’s 2004 examination order with respect to the questions objected to by the United States Trustee’s Office; the Motion also sought monetary sanctions for the failure to comply with that 2004 examination order; and lastly disqualification of all United States Trustee’s Fresno Office attorneys and Mark St. Angelo from participating in the furtherance of the United States Trustee’s Motion to Remove James M. Ford as Chapter trustee.
On July 23, 1991, the United States Trustee filed its opposition to Ford’s Motion for Dismissal. While Mark St. Angelo has appeared and represented Messrs. Kan-dler and Dyer in all proceedings reference their 2004 examination, which incidentally conforms with Mr. Kandler’s February 26, 1991, letter to Mr. Hertz attached as Exhibit “2” to Mr. Hertz’s Declaration in Support of Motion to Shorten Time for Hearing and in Support of Motion to Require Witnesses to Appear and Testify (MC No. MTH-1), it is Mr. Dyer who apparently prepared and signed the opposition to the within motion as opposed to Mr. St. Angelo. Typically, it should be Mr. St. Angelo, as counsel, who prepares such an opposition in his representative capacity as opposed to Mr. Dyer, who stands in the shoes of a client in this matter. The basis of the opposition is that dismissal is unwarranted in that the questions posed by Mr. Hertz at the 2004 examination were beyond the scope of that examination. The United States Trustee also opposes the sanctions Mr. Hertz requests and the request for a disqualification of the United States Trustee’s Fresno Office attorneys and Mark St. Angelo in pursuing their motion to remove Mr. Ford.
The hearing on this motion came on regularly July 23, 1991. The Court had previously reviewed Mr. Ford’s motion, declarations in support of his motion, and points and authorities. The Court also had reviewed the opposition and points and authorities and declarations in support of the opposition submitted on behalf of the United States Trustee’s Office. After hearing oral argument and taking the matter under submission, the Court now renders this decision.
This Court has jurisdiction over this proceeding pursuant to 28 U.S.C. § 1334. This is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(A), (O). This Opinion shall constitute this Court’s Findings of Fact and Conclusions of Law.
ANALYSIS
James M. Ford seeks imposition of very severe and harsh sanctions upon the United States Trustee’s Office for its alleged obstructive conduct reference the court-ordered 2004 examinations. The basis of Mr. Ford’s contentions are that by the United States Trustee’s flagrant refusal to abide by the prior court order reference examination, at least in spirit, Mr. Ford is unable to adequately prepare a defense to the United States Trustee’s motion for his removal. That motion is premised on the grounds that Mr. Ford has failed, and refuses, to perform those duties imposed on him under 11 U.S.C. § 704. Specifically, the United States Trustee’s Office alleges Mr. Ford, in the Dinubilo case, has failed to comply with 11 U.S.C. § 704(1) and (4). Moreover, the United States Trustee's Office asserts that Mr. Ford should be removed from all cases as required under 11 U.S.C. § 324(b). They list a number of cases in which they allege Mr. Ford has similarly failed to perform his statutorily imposed duties.
The Court has reviewed the Rule 2004 transcripts furnished by Mr. Ford. There are many instances where the objections lodged by Mr. St. Angelo of the United States Trustee’s Office to the questions posed by Mr. Hertz to Messrs. Handler and Dyer were unwarranted, hostile, dilatory, and unprofessional.
For example, at pages 5 through 8 of Mr. Kandler’s deposition, Mr. Hertz attempted *505to elicit foundational facts reference Mr. Kandler’s qualifications and background so as to gain insight into considerations underlying the motion to remove Mr. Ford as the Chapter trustee. He was met with nothing but relevancy and beyond the scope of examination objections. The record reflects at page 5 of Mr. Kandler’s deposition transcript, at lines 7 through 26, and continuing through page 8, that after Mr. Kandler was asked his name and his occupation, he was met with a myriad of objections. (See Exhibit “1” attached hereto, consisting of pages 5 through 8 of Mr. Kandler’s deposition testimony.)
Having reviewed the objections set forth by Mr. St. Angelo reference the foundational questions asked as attached in Exhibit “1” hereto, the Court would overrule each and every objection. Mr. Hertz has a justified right under the breadth of the 2004 examination to lay adequate foundation to show the competence of the witness to testify and to ascertain the basis of their motion to remove Mr. Ford.
The record also reflects that Mr. Hertz intended to question Messrs. Kandler and Dyer respecting their education, college, law school, employment, and legal experience of any kind. At pages 8 through 13 of Mr. Kandler’s 2004 examination tram script and pages 5 and 6 of Mr. Dyer’s 2004 examination transcript, Mr. St. Angelo made relevancy and beyond the scope of the examination objections to each and every question reference Messrs. Kandler and Dyer’s educational background. The Court concludes that Mr. St. Angelo’s conduct was calculated and designed to circumvent even the most basic of questions posed by Mr. Ford’s counsel at the 2004 examination. Mr. Hertz is correct in indicating at page 8 of Mr. Kandler’s transcript, lines 10 through 20, that a 2004 examination is a fishing expedition. Virtually any question can be posed providing it has some impact upon the administration of the bankruptcy estate. It can be very slight, as Mr. Hertz points out. In this instance, Mr. Kandler’s qualifications may have some impact in that they may influence his decision in the removal action of James M. Ford as trustee for the estate as they may potentially reveal insight into his expectations of Mr. Ford as a trustee. Therefore, it may have an impact upon the administration of the estate within the contemplation of Rule 2004(b) wherein it states “or to any matter which may affect the administration of the debtor’s estate ...”
At page 53 of Mr. Kandler’s examination transcript, Trustee’s counsel sought to inquire as to the United States Trustee’s first contact with Mr. Ford as a trustee or examiner in any case. Objections were again lodged by Mr. St. Angelo, asserting that such questioning was beyond the scope of examination. More particularly, Mr. St. Angelo, at page 53, line 26, and page 54, lines 1 through 3, stated “beyond the scope. It’s got nothing to do with Mr. Ford’s administration of the estate of Mr. Dinubilo. That’s got nothing to do with this motion.”
This Court could not more wholeheartedly disagree with Mr. St. Angelo’s objection. Such an objection would have to be overruled. As a second basis of the United States Trustee’s Motion, the trustee has alleged that Mr. Ford has failed to perform those duties with respect to 19 other cases. It is asserted that under 11 U.S.C. § 324(b), where a trustee is removed under § 324(a) for cause, that he should be removed from all other cases. In the 19 other cases referenced by the United States Trustee’s Office in their moving papers, they assert other acts of misconduct by Mr. Ford. The Court believes that as these cases and alleged acts of incompetence have been referenced by the United States Trustee’s Office, that such a line of questioning by Mr. Hertz is neither beyond the scope of the 2004 examination nor irrelevant.
Similarly, questioning occurred at page 129 of Mr. Kandler’s examination transcript as to whether removal of a trustee would be warranted if that trustee were underbonded. The course of questioning went as follows:
“Q. Is underbonding a ground for removing a- trustee?
A. Are you asking a legal question?
*506Q. I am asking whether if somebody was underbonded, you would move for their removal as trustee or even recommend it.
Mr. St. Angelo: Well, again, first of all, it’s a hypothetical that is clearly missing an awful lot to it.
Mr. Hertz: No, it isn’t, Mr. St. Angelo. Let me point out why.
Mr. St. Angelo: Besides which, it goes to the deliberative process by which the decisions are made in the U.S. Trustee’s Office as to when to file motions under what circumstances. And you know, that is something that as to when he’s not going to answer.
Q. Is a trustee in violation of your regulation if he underbonds?
Mr. St. Angelo: He’s in violation of the law.
Mr. Hertz: I’m asking Mr. Kandler.
Q. Mr. Kandler, is he in violation of your regulation if he’s underbonded?
Mr. St. Angelo: It’s irrelevant here.
Mr. Hertz: No it isn’t. Because you charge him with doing it. It’s hardly irrelevant.”
Thé questioning continued. At page 131 of the deposition transcript, Mr. St. Angelo objected on grounds that the questioning was beyond the scope of Mr. Handler’s authority to testify.
This Court views that testimony and the confrontational stance taken by Mr. St. Angelo as completely unprofessional under the circumstances and certainly not beyond the scope. Mr. Hertz posed a simple question that called for a simple response from Mr. Kandler as to whether or not under-bonding would be a basis for the United States Trustee’s Office to take action to remove a trustee. This is an action to remove Mr. Ford, and as the United States Trustee’s Office put this issue in contention in this motion, it certainly is not beyond the scope of this examination.
Questions were also asked reference the American Box case, in which the United States Trustee sought Mr. Ford’s removal under 11 U.S.C. § 324(b). This case, too, was referenced in the United States Trustee’s motion. Mr. St. Angelo’s objection to the questions posed reference American Box were that they were beyond the scope of the 2004 examination. In addition, he objected on grounds of relevance and that facts were assumed which were not in evidence. As the United States Trustee put American Box in issue by virtue of its motion, these questions certainly were not beyond the scope, and they do have relevancy to these proceedings.
Mr. Ford also argues in his motion that Mr. Dyer used his position of confidence as an attorney offering legal advice, at the direction of his supervisors, to gain information about various other cases in which Mr. Ford was acting as trustee. Mr. Hertz sought to elicit testimony as to program regulations or policies reference bonding requirements and various cases .in which Mr. Ford served as trustee. The recurrent objections by Mr. St. Angelo were that these questions were beyond the scope of the 2004 examination and irrelevant.
CONCLUSIONS OF LAW
The Court is of the firm conviction that sanctions are warranted for the United States Trustee’s egregious conduct at the 2004 examinations. Bankruptcy Rule 9014 governing contested matters succinctly states that Rule 7037 has application. Case law similarly supports imposition of sanctions under Rule 7037 for disobedience of an order requiring a Rule 2004 examination. See In re Sofro, 117 B.R. 745 (Bankr.S.D.Fla.1990); In re Alderson, 114 B.R. 672 (Bankr.D.S.D.1990); In re Olson, 105 B.R. 654 (D.Kan.1989).
In determining the type of sanction to be imposed, the trial court has considerable discretion. Bankruptcy Rule 7037(b)(2); see also United States v. Sumitomo Marine & Fire Insurance Company, 617 F.2d 1365, 1369 (9th Cir.1980). Sanctions are to be imposed for a number of reasons and must be weighed in light of the full record in the case. Cine Forty-Second St. Theatre v. Allied Artists, 602 F.2d 1062, 1066-1068 (2nd Cir.1979); accord in United States v. Sumitomo Marine & Fire Insurance Company, supra, 617 F.2d at 1369.
*507One purpose for imposition of sanctions is to insure that a party, and in this instance the United States Trustee’s Office, will not be able to profit from its failure to comply with this Court’s and the District Court’s orders requiring submission to the 2004 examination.
A second purpose for imposition of sanctions is to secure compliance with the particular order at hand. The record amply demonstrates that the United States Trustee’s Office still rigidly believes it need not submit to a 2004 examination. When posed with the most simple of foundational questions which would inevitably lead to matters discoverable under the scope of 2004, Mr. St. Angelo lodged repeated objections, thereby purposefully frustrating the 2004 examination process. This course of conduct completely disregards the orders of both this Court and the District Court requiring their submission to that examination.
Thirdly, and most importantly in this case, is the deterrent effect a sanction will have with respect to other cases. National Hockey League v. Metropolitan Hockey Club, Inc., 427 U.S. 639, 96 S.Ct. 2778, 49 L.Ed.2d 747 (1976) (per curiam); Societe Internationale Pour Participations In-dustrielles et Commerciales v. Rogers, 357 U.S. 197, 78 S.Ct. 1087, 2 L.Ed.2d 1255 (1958). While the Court would not want to preclude the United States Trustee or others from bringing future § 324 actions as to Mr. Ford should cause exist, the Court is compelled to ensure that neither the United States Trustee’s Office nor any other party will perform in a manner as the United States Trustee’s Office has performed in this case. Accordingly, the sanctions imposed must have a general deterrent effect with respect to the United States Trustee’s Office, not only in cases involving Ford as trustee, but in all cases pending or hereafter filed in this Court.
The Court is also keenly aware that the disobedient party in this action is a government agency. The United States Trustee’s flagrant disobedience and callous disregard of the Court discovery orders is quite disconcerting. Mr. St. Angelo’s frivolous objections that precluded Mr. Hertz from laying certain foundational requirements to proceed on to matters which would effect the administration of this estate is, in this Court’s opinion, totally unprofessional. As set forth in United States v. National Medical Enterprises, Inc., 792 F.2d 906, 910 (9th Cir.1986), a case which originated from Judge Coyle’s Court in the Eastern District of California, Fresno Division, here too there has been a violation of the spirit and intention of the 2004 examination order in an attempt to influence the outcome of this contested matter. As Chief Circuit Judge Wallace quoted in his concurring opinion in Potlatch Corp. v. United States, 679 F.2d 153, 158 (9th Cir.1982), “the effectiveness of and need for harsh measures is particularly evident when the disobedient party is the government. ‘The public interest requires not only that court orders be obeyed but further that governmental agencies which are charged with the enforcement of laws [as are the United States Trustees herein] should set the example of compliance with court orders.’ ” Citing United States v. Sumitomo Marine & Fire Insurance Company, 617 F.2d 1365, 1370 (9th Cir.1980) quoting Perry v. Golub, 74 F.R.D. 360, 366 (N.D.Ala.1976).
This case is clearly not one in which bureaucratic delay excuses the United States Trustee’s actions. Rather, this is a case where the United States Trustee’s actions are purposefully designed to obstruct the examination process ordered not only by this Court but by the District Court as well. Their obstructive conduct is consistent with their track record in this case, that being continued resistance to the 2004 examination process. As the United States Trustee’s Office is constantly in the public eye in the bankruptcy arena, a harsher sanction is warranted by virtue of the fact that this is a governmental agency acting in flagrant disobedience and disregard of the Bankruptcy Court’s and District Court’s orders requiring their submission to the 2004 examination. United States v. Sumitomo Marine & Fire Insurance Co., supra, 617 F.2d at 1370, citing National Hockey League v. Metropolitan Hockey Club, Inc., supra, 427 U.S. at 643, 96 S.Ct. *508at 2781. Only a severe sanction in this instance will further the purpose of Bankruptcy Rule 7037(b).
FACTORS TO BE WEIGHED IN DETERMINING SANCTIONS
In determining the appropriate sanction, several factors must be considered. This Court has gleaned the following factors from case law.
1. The diligence of the party against whom the motion is made;
2. The impact on the estate and the prejudice to the opposing party suffering the delay;
3. The notice and warning to the party that is to be sanctioned;
4. The effectiveness, availability, and effect of lesser alternative sanctions;
5. The severity of the sanctions imposed;
6. Is there a history of dilatory conduct demonstrating bad faith?
7. The public interest;
8. This Court’s need to manage its docket; and
9. The sanction must specifically relate to the particular claim at issue in the order.
In re Rubin, 769 F.2d 611, 616 (9th Cir.1985); Hamilton v. Neptune Orient Lines, Ltd,., 811 F.2d 498, 499 (9th Cir.1987); In re Tong Seae (U.S.A.), Inc., 81 B.R. 593, 597-598 (9th Cir. BAP 1987); In re Paolino, 87 B.R. 366, 368 (Bankr.E.D.Pa.1988);
While harsh and severe sanctions are inappropriate in the absence of willfulness, bad faith, or fault, it certainly stands to reason that where willful disregard for court orders and bad faith exists as in the instant case, fairness demands the imposition of severe sanctions. Fjeldstad v. American Honda Motor Company, 762 F.2d 1334, 1340 (9th Cir.1985) (emphasis added) citing Munoz-Santana v. I.N.S., 742 F.2d 561, 564 (9th Cir.1984).
A. Notice and Warning
Notice and warning in this case is amply apparent. Discovery was commenced by counsel for Mr. Ford attempting to obtain discovery under Rule 7037. Mr. Hertz thereafter complied with the United States Trustee’s demands that they disclose subject matter sought to be inquired into under the deposition. After complying with that request, the United States Trustee outright rejected discovery.
Thereafter, a motion to compel discovery was brought by Mr. Hertz in this Court. The Court ordered Messrs. Kandler and Dyer to appear for a 2004 examination. The United States Trustee’s Office thereafter applied for a stay pending appeal, which was denied in this Court and subsequently granted by the District Court. Upon hearing the appeal of this Court’s Order Denying Stay Pending Appeal in the District Court, the District Court concurred with this Court’s prior order and ordered Messrs. Kandler and Dyer to appear for the 2004 examination and answer all proper questions.
In flagrant disregard of those orders and the spirit of those orders, the United States Trustee has now, as evidenced by the deposition transcripts, continued in its course of conduct by lodging so many unwarranted objections so as to make the 2004 examination ineffectual for the preparation of Mr. Ford’s defense and also a waste of Mr. Hertz’s preparation time and time in conducting the 2004 examination. Therefore, this Court is satisfied that the United States Trustee had ample notice and warning of this Court's and the District Court’s positions reference discovery.
B. Continuing Dilatory Conduct Designed to Frustrate Proceedings
As in In re Paolino, supra, 87 B.R. 366, this case is plagued with the United States Trustee’s consistent refusal to comply with discovery requests. As described above, the United States Trustee’s course of conduct has been to flagrantly disregard and disobey Court orders requiring submission to the 2004 examination process. It is clear that their compliance is not a realistic expectation in this case. Accordingly, strong measures are in order to meet the objectives set forth under Rule 7037. Matter of Visioneering Construction, 661 *509F.2d 119, 123 (9th Cir.1981) citing G-K Properties v. Redevelopment Agency of San Jose, 577 F.2d 645, 647 (9th Cir.1978); accord National Hockey League v. Metropolitan Hockey Club, Inc., supra, 427 U.S. at 642, 96 S.Ct. at 2780; Societe Internationale v. Rogers, supra, 357 U.S. at 208, 78 S.Ct. at 1094; see also In re Rubin, supra, 769 F.2d at 616-617.
C. The Prejudice to Mr. Ford and the Impact Upon the Estate
Mr. Ford is certainly prejudiced by the United States Trustee’s conduct. Without being able to conduct a meaningful 2004 examination of the United States Trustee’s attorneys, Mr. Ford is unable to prepare his opposition and effectively defend the removal motion. Moreover, the current action, as correctly pointed out by Mr. Hertz, causes Mr. Ford to administer not only this case but all cases he is administering, both in the bankruptcy court and in the state court, under a cloud of unprofessionalism and incompetence. He should not be required to operate under such a cloud unless the allegations are proven through a fair hearing on the merits.
D. The Public Interest
Perhaps the most compelling reason in this case warranting harsh sanctions is that “the public interest requires not only that court orders be obeyed but further that governmental agencies which are charged with the enforcement of laws should set the example of compliance with court orders.” United States v. Sumitomo Marine & Fire Insurance Company, 617 F.2d 1365, 1370 (9th Cir.1980) citing Perry v. Golub, 74 F.R.D. 360, 366 (N.D.Ala.1976). Quite clearly, the public must know that when a court enters orders requiring submission to discovery procedures, they are to be obeyed. Should harsh measures not be taken in this action, especially as the disobedient party is the United States Trustee’s Office, this might foster sentiment amongst other litigants in this court that they are free or at least freer to disregard discovery orders of this court and that they are somehow above the law. Harsh measures are warranted to prevent the fostering of such sentiments. National Hockey League v. Metropolitan Hockey Club, Inc., supra, 427 U.S. at 643, 96 S.Ct. at 2781; G-K Properties v. Redevelopment Agency, supra, 577 F.2d at 647-648.
E.The Effectiveness and Availability of Lesser Alternative Sanctions
The record clearly reflects that lesser alternative sanctions in the form of monetary penalties coupled with orders to comply would not realistically compel compliance with the 2004 examination orders. Both this Court and the District Court ordered submission to the 2004 examination, and those orders have repeatedly been disregarded, in substance, by the United States Trustee’s Office. As discussed under Subdivision F below, the imposition of lesser sanctions would inevitably result in further motions to compel, appeals, motions for stay pending appeal, and further disobedience. It would be a futile attempt to insure discovery compliance by issuing monetary sanctions and orders to comply against the United States Trustee’s Office. With the exception of issuing monetary sanctions, both this Court and the District Court have already ordered compliance with the discovery requests, which have been disobeyed. As familiar as this Court is with this proceeding, and knowing the hostile posture in which this proceeding exists, lesser alternative sanctions are unrealistic to ensure compliance. This leaves no alternative to the issuance of harsh sanctions, particularly because the party involved is a governmental agency. Hence, dismissal in this instance is appropriate. Malone v. U.S. Postal Service, 833 F.2d 128, 131-133 (9th Cir.1987) cert. denied Malone v. Franks, 488 U.S. 819, 109 S.Ct. 59, 102 L.Ed.2d 37 (1988); North American Watch Corporation v. Princess Ermine Jewels, 786 F.2d 1447, 1450-1451 (9th Cir.1986); Wyle v. R.J. Reynolds Industries, Inc., 709 F.2d 585, 589 (9th Cir.1983) holding dismissal as an appropriate sanction where, as herein the failure to comply with discovery orders is due to willfulness, bad faith, or fault of the parties; United Artists Corp. v. La Cage Aux Folies, Inc., 771 *510F.2d 1265, 1270-1271 (9th Cir.1985) holding dismissal is warranted where trial court considers lesser alternative sanctions to be inadequate.
F. Docket Management
The facts in this case clearly indicate that should an order compelling responses to questions be entered, that further objections would be lodged by the United States Trustee’s Office. Subsequent to that, it is highly probable, as has already occurred, the United States Trustee’s Office would appeal the judgment of the Court. The Court believes that in the interest of judicial economy there should be an end to such frivolous tactics as have been employed by the United States Trustee’s Office in this case. Moreover, it is probable that a motion to remove might be brought in one of the 19 other cases referenced in the present removal motion. Neither this Court, nor the District Court, should have to endlessly endure such motions, requests for stays pending appeal, appeals, and subsequent disregard of orders. Therefore, this factor also militates against the United States Trustee’s Office.
G. The Severity of the Sanction and the Relation of that Sanction to the Particular Claim and Issue in this Case
The record clearly reflects that the United States Trustee has and will refuse to answer questions not specifically bearing on the administration of the Dinubilo estate. However, the Court notes that the issue herein addresses Mr. Ford’s competency as a Chapter trustee. Other cases in which the United States Trustee’s Office attack Mr. Ford’s credibility have been brought into issue by them. The 2004 examination transcript clearly represents that Mr. St. Angelo will not permit any foundational facts to be established other than relating to the Dinubilo matter, and that he will not allow questions involving any other cases to be answered by Messrs. Handler and Dyer. This course of conduct prevents Mr. Ford from establishing his defense to Trustee’s motion. Based upon the United States Trustee’s lack of cooperativeness and the continuing pattern thereof, dismissal is warranted in that an order compelling responses or monetary sanctions only will likely be ineffective. Dismissal is the only alternative that is related to the Trustee’s ability to examine and rebut the evidence offered in support of the United States Trustee’s motion.
Considering the foregoing factors, the parties involved in the instant proceeding, the past track record evidenced by the United States Trustee’s Office in this case, and their flagrant disregard for the orders of this Court and the District Court, this Court finds and holds that dismissal of the United States Trustee’s motion is warranted. Rule 7037(b)(2)(C).
Additionally, sanctions for the unnecessary expenses incurred by Mr. Ford in the defense of this contested matter are warranted. Fees to date reference preparing and participating in the 2004 examination and preparation of the instant motion are $5,864. The amount of $2,311 was incurred in preparing for and participating in the 2004 examination. Costs have been incurred in the amount of $67. Additionally, the cost of the transcript is $1,051.05. Having reviewed Mr. Hertz’s declaration in support of the total expenses incurred to date, that sum being $6,982.05, the Court is inclined to grant monetary sanctions in the total amount of $4,671.05 for fees and costs. While Rule 37(f) formerly precluded awards against the government until its repeal in 1980 (repealed Pub.L. 96-481, Title II, § 205(a), Oct. 21,1980, 94 Stat. 2330), sanctions in this instance are entirely appropriate as bureaucratic delay is non-existent and nothing else excuses the United States Trustee’s flagrant and dilatory conduct in this case. Potlatch Corp. v. United States, supra, 679 F.2d 153,158, concurring opinion by Circuit Judge Wallace. Accordingly, because of Mr. St. Angelo’s obstreperous conduct, he is individually sanctioned in the amount of $800, and the United States Trustee, through the Department of Justice, shall pay $3,871.05. These sums are due and payable to Mr. Ford’s attorneys, Lang, Richert & Patch, within thirty days of the date of entry of this judgment.
*511No sanctions are imposed against either Mr. Kandler or Mr. Dyer, as there is no evidence before the Court indicating that the United States Trustee’s course of conduct was pursued at their direction.
The Court also takes this opportunity to affirmatively state that it holds Mr. Dyer and Mr. Snyder of the United States Trustee’s Office in the highest of regard. These two attorneys are always prepared when appearing in this Court, have conducted themselves at all times in professional and ethical manners, and consistently seem genuinely concerned to execute the functions required of them as staff attorneys for the United States Trustee’s Office.
CONCLUSION
Based upon the record in this case, this Court finds and holds that dismissal of the
United States Trustee’s motion to remove James M. Ford as trustee from this case is the only sanction that will effectuate the underlying policies behind Rule 7037. Mr. St. Angelo has demonstrated a willingness to disregard court orders and has set out, even after orders have been issued, on a mission to circumvent the effect. Therefore, he shall be individually sanctioned in the amount of $800 in the hopes that this sanction will prevent future conduct of this sort. Sanctions in the amount of $3,871.05 against the United States Trustee’s Office, through the Department of Justice, are also warranted in this action. These sanctions shall be paid to Lang, Richert & Patch within thirty days from the date of entry of judgment as reasonable fees and costs incurred in the preparation and defense of these motions.
EXHIBIT 1
A. My name is Edward Kandler.
Q. And will you please state your occupation?
A. I am the Assistant United States Trustee for the Fresno Division of the Eastern District of California, Region 17, United States Department of Justice.
Q. Okay. And have you ever had your deposition taken?
MR. ST. ANGELO: Counsel, first, this is not a deposition, it’s a Rule 2004 Examination.
MR. HERTZ: Okay.
MR. ST. ANGELO: And whether he’s ever had his deposition taken is totally irrelevant to anything affecting the administration of this estate. And to that extent I’m going to advise him not to answer. Rule 2004 is quite limited in its scope as to the types of questions you may ask.
MR. HERTZ: All right. Let me rephrase the question.
Q. Have you ever testified anywhere, Mr. Kandler?
MR. ST. ANGELO: Again, there’s no relevance to this 2004 Examination as to whether he’s ever testified in any way.
MR. HERTZ: It does because it goes to his credibility.
MR. ST. ANGELO: Counsel, his credibility is not an issue in this 2004 Examination. The purpose of the examination is set forth very clearly in the Rule. If you wish to address this to the court, you may do so.
MR. HERTZ: Okay. You made your point.
Q. Are you on any kind of medication at the present time, Mr. Kandler?
And that is a relevant question.
A. No.
Q. Thank you.
Do you understand that when a question is asked of you, you have to answer clearly “yes” or “no”?
A. Yes.
Q. You make any explanation you wish after that?
A. I understand.
Q. Thank you.
What’s your date of birth?
MR. ST. ANGELO: Again, that’s not relevant to anything here. I will go ahead and let him answer, but let’s stick to what’s under Rule 2004, please.
THE WITNESS: September 18, 1949.
MR. HERTZ: Q. September 18th, 1949. Okay.
And your education, sir?
*512MR. ST. ANGELO: Again, that’s not relevant at all to this Rule 2004 Examination. Has nothing to do with the administration of this estate, Counsel.
MR. HERTZ: He’s a witness, and I have to know who he is.
MR. ST. ANGELO: You know who he is. He’s the region — he’s the Assistant United States Trustee in charge of the office here in Fresno. That’s all you need to know.
MR. HERTZ: Okay. I have a lot of questions to ask him about things which he’s written. And in order to judge what he has said—
MR. ST. ANGELO: Counsel—
MR. HERTZ:. —the veracity and his abilities, I have to know.
MR. ST. ANGELO: The judgment of veracity and his abilities is irrelevant, and it’s got nothing to do with the subject of this underlying action.
MR. HERTZ: I’ll ask all the questions I’m going to ask and you’ll make all your objections, and we’ll take it to the judge.
MR. ST. ANGELO: That's correct.
MR. HERTZ: Okay.
Q. All right. Are you — is basically your objection is that I can’t ask it because it doesn’t fall within the scope of Rule 2004 and is that it?
MR. ST. ANGELO: That is correct. In this particular instance I’m not going to make that statement as to every question you may ask, I don’t know what questions you’re going to ask.
MR. HERTZ: I’m going to ask him about his education, his school background, his employment, what he does in his normal job, all the normal questions you would ask of anybody. Do you feel that all of those are irrelevant?
MR. ST. ANGELO: First of all, those aren’t all the normal questions you would ask under Rule 2004 Examination or a in a deposition. One only asks him when they’re relevant to the particular subject matter.
MR. HERTZ: Well, all right. The Rule 2004 Examination is a fishing expedition. You can ask virtually anything you want as long as it has some impact upon the administration. It can be very slight. The qualifications of a witness is certainly — has an impact upon the administration. It has an impact upon what questions you ask him, about what you’re trying to find out. You have to know what the person is and who they are, and their perceptions, their abilities to understand and so on. To do that, you have to know about their education.
MR. ST. ANGELO: Counsel, nowhere in this case has there ever been any indication that Mr. Kander has ever had anything to do with the administration of this particular estate, in re Rocco Dinublio. Under those circumstances, you know, your speech notwithstanding, frankly, I disagree. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491439/ | MEMORANDUM OPINION
ALBERT E. RADCLIFFE, Bankruptcy Judge.
This matter comes before the court upon the trustee’s final report and application for compensation; application for final distribution of estate funds and U.S. Trustee’s certification.
BACKGROUND
The history of this case is long and cheerless. The debtor filed a petition under Chapter 11 herein, on April 4, 1984. Eventually, a Chapter 11 plan was proposed by creditors, Fred C. Beckley, William Ross and Melba Ross (the plan creditors). On February 27, 1987 this court entered an order confirming the plan.
The plan which was confirmed by the court was predicated upon a 1985 sale of the debtor’s commercial properties to Si*517gurd Frohlich for $550,000. The plan provided for full payment of all allowed administrative expenses, secured and priority claims and for an approximate 38% dividend to unsecured creditors.
Mr. Frohlich failed to make the payments due under the 1985 sale and the plan creditors were required to foreclose and take possession of the debtor’s two commercial parcels of real property located at 3355 and 3365 East Amazon, Eugene, Oregon. The plan creditors were never able to resell either of the properties. Over time, the market value of each property declined and secured claims against each property increased to the point where, by the time this case was converted to a case under Chapter 7 of the Bankruptcy Code, the secured claims far exceeded the market value of the properties. While this case was in Chapter 11, real property taxes against the two properties continued to accrue, but were not paid.
On November 5, 1990 this court entered an order converting this case to a case under Chapter 7 of the Bankruptcy Code. Thereafter, the court approved the sale of the two parcels of property free and clear of liens, (See amended order approving sales of property free and clear of liens entered April 30, 1991). That order provided that after payment of the costs of sale, the balance of the sale proceeds would be held by the trustee pending further order of the court and that liens would attach to the proceeds to the same extent as to the real property itself.
On July 17, 1991 the trustee filed his notice of final account and recommendation for distribution of the funds of the estate that he was holding. A summary of the account is as follows:
Receipts
Cash
Sale proceeds — 3355 E. Amazon $150,696.97
88,269.51
Cash on hand 3,281.73
Utility refund 1,665.84
Total Cash $243,914.05
Non-cash
Note — 3355 E. Amazon $ 50,000
Note — 3365 E. Amazon 22,000
Total Non-cash $ 72,000
Total Receipts $ 315,914.05
Disbursements
Expenses of sale — 3355 E. Amazon $ 15,012.56
Expenses of sale — 3365 E. Amazon 7,899.05
Utilities, security and insurance 4,717.77
Total Disbursements $ 27,629.38
Balance on hand $ 288,284.67
Claims
Priority — Chapter 7 — Administrative Expenses
Applications for Compensation (Fees & expenses, unpaid)
Trustee $ 4,535.84
Trustee’s attorney 6,130.01
Total $ 10,665.85
Clerk U.S. Bankruptcy Court 153.50
Total — Chapter 7 — Administrative Expenses $ 10,819.46
*518Priority — Chapter 11 — Administrative Expenses
Applications for Compensation (Fees & expenses, unpaid)
Lombard, Gardner, et al. $ 10,043.52
Larry Anderson 52,187.00
David Ramstead 10,749.65
Total $ 72,980.17
Clerk — U.S. Bankruptcy Court $ 258.00
IRS 43,349.81
Oregon Department of Revenue 4,832.49
Oregon Employment Division 4,764.35
Irene McDonald/Donald Furtick 55,820.14
Total $109,024.79
Total — Chapter 11 — Administrative Expenses $ 182,004.96
Post petition real property taxes Lane County, Oregon $ 105,256.65
Secured Claims
FDIC 90,217.461
Daniel Wingard 21,719.752
Annette Block 83,700.003
William & Melba Ross 146,560.584
Fred Beckley 101,316.735
Total — Secured Claims 443,514.52
The trustee proposes, pursuant to 11 U.S.C. § 724(b), to subordinate the real property tax claims of Lane County to all Chapter 7 and Chapter 11 administrative expense claims allowed by the court under 11 U.S.C. §§ 503(b) and 507(a)(1). The trustee then proposes a distribution scheme for the remaining funds of the estate.
In the alternative, if subordination of the real property tax claims of Lane County is denied, the trustee proposes that the allowed Chapter 7 administrative expenses be charged against the interests of secured creditors in each property pursuant to 11 U.S.C. § 506(c).
Lane County, Oregon (the county) filed objections to the trustee’s final report, opposing the subordination of its real property tax claims pursuant to 11 U.S.C. § 724(b). FDIC has filed an objection to the trustee’s proposed alternative treatment to charge Chapter 7 administrative expense claims against secured claimants pursuant to 11 U.S.C. § 506(c).
A hearing was held on August 27, 1991 concerning these matters. This court entered an order herein on September 4, 1991 resulting from that hearing in which applications for allowance filed on behalf of certain professionals, including the trustee and his attorney, were allowed as administrative expense claims, the county’s objection to the sale of estate property free and clear of liens based on constitutional grounds was denied and any ruling based on the request of any administrative ex*519pense claimant to charge their claim against the claims of one or more secured creditors under 11 U.S.C. § 506(c) was deferred pending a decision as to whether or not the real property tax claims of the county would be subordinated pursuant to 11 U.S.C. § 724(b).
ISSUE
The sole issue to be resolved by this opinion is whether or not the trustee can utilize the provisions of 11 U.S.C. § 724(b) to subordinate the county’s claim for real property taxes to pay Chapter 7 and Chapter 11 administrative expense claims in this case.
DISCUSSION
All statutory references are to the Bankruptcy Code, Title 11 United States Code, unless otherwise indicated.
The county contends that its claim for post-petition real property taxes is an administrative expense claim pursuant to § 503(b)(1)(B). Accordingly, the county’s claim cannot be subordinated to itself. In addition, the county claims that § 724(b) only applies to pre-petition, secured tax claims.
The trustee contends that a plain reading of § 724(b) does not indicate that its application should be limited to pre-petition, secured tax claims. The trustee does concede that in order for § 724(b) to be applicable, the property in question must be subject to an unavoidable tax lien which secures the tax claim.
Under Oregon law, real property taxes constitute a lien against the real property that is assessed. See O.R.S. 311.405.
Section 362(a)(4) prohibits “any act to create, perfect, or enforce any lien against property of the estate;” Accordingly, the county’s right to create, or enforce any lien for post-petition property taxes against property of the estate is interdicted by the filing of the bankruptcy petition. Perpetual American Bank, FSB, et al. v. District of Columbia, (In re Carlisle Court, Inc.), 36 B.R. 209 (Bankr.D.C.1983). Post-petition real property tax claims can be secured by liens against estate property only if the court grants such liens as part of providing adequate protection to the county pursuant to §§ 361, 363, and 364. Here, the county never sought, nor was it ever granted, adequate protection. in the form of liens against estate property. Section 724(b) provides as follows:
(b) Property in which the estate has an interest and that is subject to a lien that is not avoidable under this title and that secures an allowed claim for a tax, or proceeds of such property, shall be distributed—
(1) first, to any holder of an allowed claim secured by a lien on such property that is not avoidable under this title and that is senior to such tax lien;
(2) second, to any holder of a claim of a kind specified in section 507(a)(1), 507(a)(2), 507(a)(3), 507(a)(4), 507(a)(5), or 507(a)(6) of this title, to the extent of the amount of such allowed tax claim that is secured by such tax lien; (3) third, to the holder of such tax lien, to any extent that such holder’s allowed tax claim that is secured by such tax lien exceeds any amount distributed under paragraph (2) of this subsection;
(4) fourth, to any holder of an allowed claim secured by a lien on such property that is not avoidable under this title and that is junior to such tax lien; (5) fifth, to the holder of such tax lien, to the extent that such holder’s allowed claim secured by such tax lien is not paid under paragraph (3) of this subsection; and
(6) sixth, to the estate.
(emphasis added)
Section 724(b), in essence, allows the trustee to utilize any proceeds which would otherwise be available to satisfy the tax lien to pay, first, those claims which would be prior to the tax claim for distribution purposes as specified in §§ 507 and 726.
Here, as conceded by the trustee, the application of § 724(b) requires that the estate have an interest in property that is subject to an unavoidable lien which se*520cures a tax claim. Since the county was prevented from securing its post-petition, real property tax claims with such a lien in this case, the county’s post-petition, real property tax claims, as noted in the trustee’s final account, are not secured by a lien on property of the estate. Accordingly, § 724(b) has no application. This court need not decide whether § 724(b) might apply to post-petition tax claims if a lien had been granted to the county in this case.
Section 503(b)(1)(B) allows an administrative expense claim for “any tax — incurred by the estate, except a tax of a kind specified in § 507(a)(7) ...” (emphasis added). The § 507(a)(7) exclusion refers only to property taxes assessed before the commencement of the case, See § 507(a)(7)(B).
Accordingly, pursuant to § 503(b)(1)(B), the county’s claim for post-petition, real property taxes is an administrative expense claim. In re Mansfield Tire & Rubber Company, 85 B.R. 437 (Bankr.N.D.Ohio 1987); In re Carlisle Court, Inc., supra.
CONCLUSION
The trustee may not use § 724(b) to subordinate Lane County’s claim for post-petition, real property taxes to the payment of administrative expense claims in this case, such tax claims are properly characterized as an administrative expense claim, not as a secured claim. In addition, there is no tax lien which may be used, by the trustee, to pay administrative expense claims.
Given the magnitude of the secured claims as indicated in the trustee’s final account, the only way in which any administrative expense claimant may hope to receive payment is through the application of § 506(c). Accordingly, further proceedings shall be had so that any administrative expense claimant may seek to establish its claim pursuant to § 506(c).
This opinion shall constitute the court’s findings of fact and conclusions of Law; they shall not be separately stated. An order consistent herewith shall be entered.
. Plus $17.18 per diem interest from 2/17/91.
. Plus $3.39 per diem interest from 3/15/91.
. Plus $15.00 per diem interest from 3/15/91.
. Plus $28.76 per diem interest from 3/15/91.
. Plus 18% interest from 6/12/89. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491440/ | ORDER ON MOTION FOR SUMMARY JUDGMENT
ALEXANDER L. PASKAY, Chief Judge.
THIS IS a Chapter 7 liquidation case and the matter under consideration is a Motion for Summary Judgment filed by Harold W. Just, et al. (Plaintiffs) seeking a determination that debts due and owing by James A. Marks (Debtor) to the Plaintiffs are nondis-chargeable pursuant to § 523(a)(4) of the Bankruptcy Code. The facts which are undisputed and which are relevant to the matter under consideration, as they appear from the record, are as follows:
The Debtor is a former resident of Wisconsin. The Plaintiffs were limited partners with the Debtor in a business venture engaged in a real estate development. Pri- or to the commencement of this bankruptcy case, the Plaintiffs sued the Debtor in the United States District Court for the Eastern District of Wisconsin. In their suit, the Plaintiffs sought to recover damages suffered as a result of the Debtor’s alleged mismanagement of the affairs of the partnership, defalcation, and diversion of partnership funds. Based on the Debtor’s failure to respond to the Plaintiffs’ discovery request, the District Court struck the Defendant’s Answer and entered a Final Judgment by default against the Debtor. The Final Judgment included an award of more than $3 million based on the damage claim of the Plaintiffs, trebled under RICO, plus interest on the debt, plus attorney’s fees and costs.
After the Debtor moved to Florida, he filed a Petition for Relief under Chapter 7 of the Bankruptcy Code, and he properly listed the Plaintiffs as creditors on his schedules. In due course, the Plaintiffs timely filed a Complaint seeking a determination that the debt owed to them, represented by the Final Judgment entered by the District Court in Wisconsin, is a nondis-chargeable obligation based on § 523(a)(4) of the Bankruptcy Code.
The matter under consideration is a Motion for Summary Judgment filed by the Plaintiffs, who contend that there are no genuine issues of material fact and that they are entitled to a judgment in their favor as a matter of law. The Plaintiffs base this contention on the proposition that the Final Judgment entered in their favor in Wisconsin operates with preclusive effect as to issues involved in this adversary proceeding and, for this reason, they are entitled to a determination that their claim against the Debtor should be declared non-dischargeable pursuant to § 523(a)(4) of the Bankruptcy Code.
Article IV, § 1 of the Constitution mandates that full faith and credit shall be given to judicial proceedings of a state by the courts of every other state, and this rule has been extended to federal courts as well. Davis v. Davis, 305 U.S. 32, 59 S.Ct. 3, 83 L.Ed. 26 (1938). The full faith and credit normally accorded a state court judgment by another state or federal court is manifested by the doctrine of res judicata or the doctrine of collateral estoppel. Allen v. McCurry, 449 U.S. 90, 101 S.Ct. 411, 66 L.Ed.2d 308 (1980). As a general proposition, the bankruptcy court should not re-litigate issues which have been fully litigat*550ed; instead, issues which were actually heard and necessarily decided in a non-bankruptcy forum are precluded from being relitigated in the bankruptcy court. See, Spilman v. Harley, 656 F.2d 224 (6th Cir.1981); Matter of Ross, 602 F.2d 604 (3d Cir.1979).
Thus, it is evident that once the liability of a debtor has been established in a non-bankruptcy forum, either through actual litigation or by an entry of a final judgment, the liability can no longer be questioned since it has been conclusively established. It is equally clear, however, that the character of that liability has not been established and could not have been established for the simple reason that whether the liability is excepted from the overall protection of the bankruptcy discharge is an issue which can only be litigated in a bankruptcy court where a case involving a debtor is pending. Section 523(c) mandates that any claim of dis-chargeability based on § 523(a)(2), (4) or (6) must be determined by the bankruptcy court. Bankruptcy Rule 4007(c) provides that unless such Complaint is filed within sixty days from the first date set for the meeting of creditors, the liability will be discharged, and by virtue of § 524(a)(1) any judgment entered by a non-bankruptcy forum against the debtor would be void.
Notwithstanding the foregoing, it is also recognized that based on the doctrine of issue preclusion, also commonly referred to as collateral estoppel, there may be a factual scenario under which the debtor would be precluded to litigate the dis-chargeability vel non of the liability established by a non-bankruptcy forum prior to the commencement of a case. Thus, even if the elements of a claim of nondischarge-ability under § 523(a)(2), (4) or (6) have been pled, and either have been actually litigated or could have been litigated, the debtor would be bound and would be barred by the doctrine of collateral estop-pel to relitigate the character of the liability-
It was thought earlier that because of the different standards of proof required by the bankruptcy courts in nondischarge-ability cases the doctrine of collateral es-toppel did not prevent the relitigation of the character of the liability. See Chrysler Credit Corp. v. Rebhan, 842 F.2d 1257, 1262 (11th Cir.1988) (clear and convincing standard of proof required in cases under § 523(a); In re Black, 787 F.2d 503 (10th Cir.1986) (clear and convincing standard required); cf, In re Braen, 900 F.2d 621 (3rd Cir.1990) (preponderance of the evidence standard required); Combs v. Richardson, 838 F.2d 112 (4th Cir.1988) (preponderance of the evidence standard required). Because of the conflict among the circuits, the Supreme Court granted review of this question, and in Grogan v. Garner, — U.S. -, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991), the Court held that the standard sufficient to establish a claim of nondis-chargeability is the preponderance of the evidence standard, rather than a clear and convincing standard.
The Eleventh Circuit has recognized the principle of collateral estoppel and has held that a bankruptcy court is precluded from relitigating issues by the doctrine of collateral estoppel only if:
—the issues at stake in the bankruptcy proceeding were identical to those involved in the state court;
—the issues at stake in the bankruptcy proceeding were either actually litigated, or could have been litigated [as in a consent judgment] in the prior proceeding; and
—the determination of the issues in the prior proceeding were a critical and necessary part of the judgment. See, e.g., Hoskins v. Yanks, 931 F.2d 42 (11th Cir.1991); In re Halpern, 810 F.2d 1061 (11th Cir.1987); In re Held, 734 F.2d 628 (11th Cir.1984); Deweese v. Town of Palm Beach, 688 F.2d 731 (11th Cir.1982).
In a case of first impression, the Court in In re Gibbs, 107 B.R. 492, 497 (Bankr.D.N.J.1989), held that inasmuch as a federal court cannot exercise jurisdiction over a proceeding arising under Title 11 until a bankruptcy case is commenced by the filing of a petition, a federal court determination that a debt is nondischargeable before a *551bankruptcy petition is filed is void. Thus, even if the Wisconsin District Court determined the Debtors’ liability to the Plaintiffs, the Debtors’ Petition for Relief under Chapter 7 of the Bankruptcy Code was filed long after the entry of the Final Judgment in the Wisconsin District Court, and the Wisconsin District Court therefore lacked the jurisdiction to enter any judgment of nondischargeability.
While there is no doubt that such issues as fraud, defalcation, or embezzlement would have been, if raised, critical to the judgment of the Wisconsin District Court, in the present instance, it is clear from the Complaint filed in the Wisconsin District Court that no facts were pled which would indicate that this Debtor in fact acted in a fiduciary capacity vis-a-vis these Plaintiffs. It is important to point out, however, that the Complaint filed by these Plaintiffs in this particular instance is based on the allegation that the liability represented by the Judgment entered by the Wisconsin District Court represents an exception from the discharge by virtue of § 523(a)(4) of the Bankruptcy Code. In the Complaint in the Wisconsin District Court, the Plaintiffs failed to plead any of the operating elements of a claim of nondis-chargeability of § 523(a)(4). It is also clear that the default judgment entered by the District Court was not based on any finding of fraud, breach of a fiduciary duty, embezzlement, or larceny. The judgment entered on January 19, 1990, made no finding except that the Defendant did not diligently pursue his defense. Therefore, the District Court struck the Defendant’s Answer and entered a Judgment of Default against the Defendant on April 13, 1990, based on 18 U.S.C. 1964(c), commonly known as the RICO statute, and not based on any of the facts which are essential to establishing a claim of nondischargeability under § 523(a)(4). This being the case, it is evident that the doctrine of collateral estop-pel does not bar the litigation of the Plaintiffs’ claim of nondischargeability asserted under § 523(a)(4) of the Bankruptcy Code in this Court.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the Plaintiffs’ Motion for Summary Judgment be, and the same is hereby, denied, and a pretrial conference in this matter shall be held before the undersigned on May 1, 1992 at 9:00 a.m. in the Barnett Plaza, 2000 Main Street, Suite 302, Ft. Myers, Florida. The Court will hear all pending motions at the pretrial conference, including motions for summary judgment.
DONE AND ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491441/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW
GEORGE L. PROCTOR, Bankruptcy Judge.
This adversary proceeding came before the Court upon the motion of Defendant to dismiss the complaint for lack of venue. After a hearing before the Court on March 19, 1992, and upon evidence presented by the defendant in the form of an uncontro-verted affidavit, the Court enters the following Findings of Fact and Conclusions of Law:
Findings of Fact
The plaintiff, the Chapter 7 trustee of Olympia Holding Company, a/k/a P*I*E Nationwide, Inc. (“P*I*E”), initiated this adversary proceeding by filing a Complaint for Turnover of Property and for Money Judgment, seeking to collect from defendant unpaid freight charges in connection with the shipments that are listed on Exhibit “A” to the complaint. P*I*E was formerly a motor common and contract carrier and the defendant was a shipper which is alleged to have used the plaintiff’s services to carry freight.
The defendant responded to the complaint by filing its Motion to Dismiss for Lack of Venue and Memorandum in Support Thereof (the “Motion”). The defendant stated in the Motion that the shipments that are the subject of the complaint predominantly occurred after P*I*E filed its Chapter 11 bankruptcy petition on October 16, 1990, and the majority of the dollar amount sought by the trustee also arose in connection with post-petition shipments. Therefore, the defendant maintained that venue did not lie in this district because venue properly lies in the district in which the defendant resides or does substantial business for post-petition claims.
The defendant supported the Motion with the Affidavit of Defendant Lanceco, Inc., dated March 9, 1992 (the “Affidavit”). The Affidavit provides evidence in support of the Motion, stating that the affiant made the Affidavit of his personal knowledge, is an officer of the defendant, and is familiar with the complaint. The Affidavit further states that the shipments that are the subject matter of the proceeding predominantly occurred after October 16, 1990 and a majority of the amount sought by the plain*566tiff is in connection with post October 16, 1990 shipments. The Affidavit also indicates that the defendant is headquartered in Kentucky, and is registered to do business only in that state, Illinois, and Indiana; that none of the shipments that form the basis for complaint originated in Florida; that the defendant does not do substantial business in Florida, is not qualified nor has it ever been qualified to do business in Florida, does not maintain a place of business nor did it ever have a place of business in Florida. The Affiant has no employees, nor has it ever had employees in Florida. The Affidavit indicates the defendant was not served with any process in this proceeding in the State of Florida.
The Affidavit is uncontroverted and the plaintiff offered no evidence in the form of affidavit or otherwise in opposition to the Motion.
Conclusions of Law
The complaint states that venue is proper in this Court under 28 U.S.C. § 1409(a). 28 U.S.C. § 1409(a) does not apply to this adversary proceeding, however, because the amounts sought by the plaintiff in the proceeding arose from predominantly post-petition shipments. 28 U.S.C. § 1409(a) is subject to the mandatory exception contained in § 1409(d) that the trustee may only commence an action based on a claim arising after the filing date in a forum where venue is proper under applicable non-bankruptcy venue provisions.
As shown by the Affidavit and as conceded by counsel for the plaintiff at the hearing, there is no dispute that these amounts are predominantly post-petition in nature. Thus, if venue is to be proper in this district, it must be under applicable non-bankruptcy venue laws. See In re All American of Ashburn, 49 B.R. 926 (Bankr. N.D.Ga.1985); see also In re Continental, 61 B.R. 758 (S.D.Texas 1986); In re Shear, 47 B.R. 544 (Bankr.S.D.Fla.1985) (Judge Britton); and In re Greiner, 45 B.R. 715 (Bankr.D.N.D.1985).
Non-bankruptcy federal venue laws are found in 28 U.S.C. § 1391. Under 28 U.S.C. § 1391(b) and (c), venue over a defendant corporation is only proper in districts in which it has contacts which would be sufficient to subject it to personal jurisdiction if that district were a separate state or in districts where a substantial part of the events that led to the subject claim occurred.
The plaintiff argues that federal venue law does not apply, and instead this Court should apply Florida venue laws, stating that this proceeding does not raise federal questions because it is not an action affecting interstate commerce. The defendant disagrees, stating that it is an action brought under the Interstate Commerce Act. The Court does not need to reach this point, however, because the plaintiff has not presented any evidence showing that venue is proper in any federal or state court in Florida or anywhere else. The Court only has before it the uncontroverted Affidavit, which contains sworn testimony that shows that venue does not lie against the Defendant anywhere in this' district.
Having decided that this Court is not the proper venue for this proceeding, the Court does not need to reach the issue of whether this proceeding should be transferred or dismissed because, after the Court announced its ruling on the venue at the hearing on the Motion, the plaintiff requested the Court dismiss the proceeding.
Conclusion
Based on the foregoing reasons, the Court determines that the Motion should be granted and this adversary proceeding should be dismissed without prejudice to the plaintiff refiling an action in an appropriate court.
The Court will enter a separate order. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491442/ | MEMORANDUM OPINION AND ORDER
RICHARD L. SPEER, Bankruptcy Judge.
This cause comes before the Court on B & B Company’s Request for Payment of Administrative Expenses. The Trustee and the Securities Investor Protection Corporation have filed Memoranda in Opposition in response to B & B Company’s Motion. The Court has reviewed the written arguments of counsel, the relevant case and statutory law, as well as the entire record in this case. Based on that review, and for the following reasons, the Court finds that B & B Company’s Motion should be granted.
FACTS
The facts do not appear to be in dispute. Pursuant to a court order by the United States District Court for the Northern District of Ohio, Western Division, the Trustee in this case, Patrick A. McGraw, has occupied the premises at 234 Erie Street, Toledo, Ohio, (hereinafter “Bell & Beckwith Building”) since February 10, 1983. B & B Company owned the Bell & Beckwith Building. B & B Company is an Ohio general partnership comprised of the Debtor, Bell & Beckwith, and individual general partners of the Debtor.
The Debtor rented the Bell & Beckwith Building from B & B Company on a month-to-month oral lease. According to the terms, the Debtor was to remit Four Thousand Thirty-three Dollars and Thirty-three Cents ($4,033.33) a month for rent, payable on a quarterly basis. On July 11,1983, this Court entered an Order granting the Trustee authority to assume the lease. The Trustee has not paid rent for either the period from February 10, 1983, to July 10, 1983, or the period from July 11, 1983, when the Trustee assumed the lease, to the present.
The Trustee contends that no rent has been paid due to the fact that the Bell & Beckwith Building was encumbered with a mortgage guaranteed by the individual general partners of Bell & Beckwith. B & B Company borrowed One Hundred Ten Thousand Dollars ($110,000.00) from United Home Federal (hereinafter UHF), granting UHF a mortgage on the Bell & Beck-with Building, and agreeing to pay quarterly payments of Twelve Thousand One Hundred Dollars ($12,100.00). The total rent charged by B & B Company per year is Forty-eight Thousand Four Hundred Dollars ($48,400.00). At the Hearing, held on February 15, 1990, the Trustee entered into evidence, without objection, a fair rental value of the Bell & Beckwith Building of Twenty-two Thousand Six Hundred Thirty-five Dollars ($22,635.00) per year. The Trustee asserts that the monthly rent charged by B & B Company, calculated on a quarterly basis, was an amount equal to the mortgage payments due to UHF. The Trustee, objects to the rent charged on the grounds it is excessive and asserts that the oral month-to-month lease is invalid under O.R.C. section 1335.04; and as such the Trustee need only be responsible for the use and occupation and the fair rental value of the premises, as opposed to the rent provided for in the lease.
The Trustee also chose not to pay rent so as to prevent the monthly rental income *649from eventually being paid to the Debtor’s general partners, as they comprised B & B Company. As a result, B & B Company could not make the mortgage payments and UHF threatened to foreclose on the mortgage. The Trustee needed the building for administration of the Debtor’s estate, so the Trustee purchased the note and mortgage for One Hundred Four Thousand Dollars ($104,000.00). The Trustee contends that this should be a set-off against the rent due.
Additionally, no rental payments were made because the Trustee made necessary repairs to the Bell & Beckwith Building, including installation of a furnace and a security system and repair of the roof. Real estate taxes were also paid by the Trustee. The Trustee contends that the cost of preserving the estate, approximately One Hundred Thousand Dollars ($100,-000.00), should be off-set from the rent claimed by B & B Company.
B & B Company admits that the Trustee is obligated to pay only the fair rental value of the property prior to assumption of the unexpired lease; but asserts that the oral month-to-month lease controls the terms of the leasehold once the Trustee assumes the unexpired lease agreement. B & B Company contends that the Trustee failed to make the rental payments and the mortgage payments without just cause. B & B Company requests payment as an administrative expense under section 503(b)(1)(A) of the Bankruptcy Code for the Trustee’s use and occupancy as well as payment of the monthly rent until the Trustee vacates the premises.
The issues presented in this matter are whether the Trustee assumed the lease; and if so, what effect does assumption have in this instance. The Court must also determine whether the Trustee is entitled to a rental set-off.
LAW
Bankruptcy Code Section 365 provides that the “trustee, subject to the court’s authority, may assume or reject any ... unexpired lease of the debtor.” 11 U.S.C. § 365. Assumption of an unexpired lease must also result in the assumption of both the benefits and burdens of the contract; the trustee may not pick and choose from the desirable and undesirable portions of the contract. In re Holland Enterprises, Inc., 25 B.R. 301 (E.D.N.C.1982); In re Italian Cook Oil Corp., 190 F.2d 994 (3rd Cir.1951). Upon assumption, the trustee is liable for the full contractual rent accruing under the terms of the contract. Memphis-Shelby County Airport Authority v. Braniff Airways, Inc., 783 F.2d 1283 (5th Cir.1986). Additionally, “[t]he rent reserved in the lease is presumptively a fair rental....” Don Allen Chevrolet, Inc. v. Foreman, 457 F.2d 331, 332 (5th Cir.1972).
On July 11,1983, this Court granted the Trustee “authority to assume the oral month to month lease over the Bell & Beck-with offices at 234 N. Erie Street, Toledo, Ohio” and ordered that the “oral month to month lease be and it hereby is [sic] assumed by the Trustee on behalf of the estate of the debtor." Order Granting Trustee Authority to Assume Certain Unexpired Lease, July 11, 1983 (emphasis added). This Order causes the first issue to be resolved rather quickly; the Trustee assumed the lease.
However, the Trustee asserts that the assumption of the oral month-to-month lease is invalid under the Statute of Frauds as set out in section 1335.04 of the Ohio Revised Code. O.R.C. Section 1335.04 provides that “No lease ... shall be assigned or granted except by ... note in writ-ing_” Ohio Rev.Code Ann. § 1335.04 (Baldwin 1988). The Court acknowledges that as a rule a lease is required to be in writing and additionally acknowledges the exception to that rule: that part performance will take the oral lease out of the Statute of Frauds. Egner v. Egner, 24 Ohio App.3d 171, 493 N.E.2d 999 (1985). Under the doctrine of part performance, “an exchange of possession pursuant to an agreement deems the agreement enforceable regardless of whether the agreement was properly executed.” Note, The Ohio Statute of Frauds of Coveyances and Leases of Interests in Real Property, 38 Cinn.L.Rev. 135 (1969). The Trustee en*650tered and occupied the Bell & Beckwith Building on February 10, 1983. On July 11, 1983, this Court granted the Trustee authority to assume the lease and the Trustee has been in continued possession of the Bell & Beckwith Building since that time. In light of this, the Trustee is es-topped from denying the validity of the lease.
The Court must now consider the effect of the assumption. It is important to note that we are dealing with two separate situations; the first being that period of time between February 10, 1983, when the Trustee took possession, to July 10, 1983. The second situation presented is that period of time from July 11, 1983, when the Trustee assumed the lease, to the present. Each situation is governed by different rules.
When considering the time period between possession by the Trustee and assumption of the lease, the rule is that the Trustee is liable only for the reasonable value of use and occupancy of the premises. In re Florida Airline, Inc., 17 B.R. 683, 685 (M.D.Florida 1982). Courts generally determine that amount to be the rent reserved in the lease. Id. at 685. This Court finds that the reasonable value of use and occupancy for this time period is Four Thousand Thirty-three Dollars and Thirty-three Cents ($4,033.33) per month.
Since the lease was assumed, the Trustee is bound by the terms of the lease from July 11, 1983 and cannot now object to the amount charged as excessive. B & B Company and Bell & Beckwith bargained for the rental amount at the commencement of the leasehold; and this Court will not rewrite the agreement to accommodate the Trustee’s views of what the rent should be. Equally important is the fact that the Trustee has made use of the entire premises since 1983. Had the Trustee strongly objected to the rent as excessive, the Trustee could have vacated the premises and located less expensive storage and operating space; or, alternatively, could have utilized a portion of the building as storage and operations and either rented out or abandoned the rest of the building. Therefore, the Court finds the Trustee liable to B & B Company for Pour Thousand Thirty-three Dollars and Thirty-three Cents ($4,033.33) per month in rent from July 11, 1983, to the present.
The Trustee has expended Two Hundred Four Thousand Dollars ($204,000.00) in preservation of the estate. The Court holds that the Trustee is entitled to a set-off of this amount from the rent due and owing to B & B Company.
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, it is
ORDERED that B & B Company’s Motion for Payment of Administrative Expenses be, and is hereby, Granted.
It is FURTHER ORDERED that the Trustee remit to B & B Company Twenty Thousand One Hundred Sixty-six Dollars and Sixty-five Cents ($20,166.65) for rent from February 10, 1983, to July 10, 1983.
It is FURTHER ORDERED that the Trustee remit to B & B Company Four Thousand Thirty-three Dollars and Thirty-three Cents ($4,033.33) per month for rent from July 11, 1983, until such time as the Trustee vacates the premises.
It is FURTHER ORDERED that the Trustee be, and is hereby, entitled to a set-off from the rent due in the amount of Two Hundred Four Thousand Dollars ($204,-000.00). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491443/ | MEMORANDUM OPINION AND ORDER
RICHARD L. SPEER, Bankruptcy Judge.
This cause comes before the Court after Trial on Complaint to Avoid Preference. At the Trial, a conflict arose as to whether Ohio Citizens Bank had a properly perfected security interest. The resolution of the Complaint hinged upon the efficacy of Ohio Citizens Bank’s security interest. The Court continued the preference issue until a determination of the perfection issue could be made. The Court heard oral arguments as to the proper place to file a security interest and ordered the parties to submit post-trial briefs on the issue. During oral argument, Ohio Citizens Bank made an oral Motion to Dismiss which the Court took under consideration. The Court has reviewed the oral arguments of counsel, the post-trial briefs, as well as the entire record in this case. Based upon that review, and for the following reasons, this Court finds that the Debtor’s location for perfection of a security interest is in the State of Michigan.
FACTS
On October 3, 1989, A.J. Gibbons Roofing and Sheet Metal, Inc. [hereinafter “Gibbons Roofing”], the Debtor, signed a promissory note for Seventeen Thousand Five Hundred Thirty-five Dollars and Seventy-seven Cents ($17,535.77). In exchange, the Debtor granted Ohio Citizens Bank [hereinafter “OC”], the Defendant, a security interest in all the Debtor’s inventory, receivables, and fixed assets. OC filed a financing statement with the Ohio Secretary of State and the Lucas County Recorder’s office. The promissory note, the security agreement, and the financing statements reflect the Debtor’s address as Temperance, Michigan.
On April 24,1989, June 16, 1989, October 4, 1989, and December 8, 1989, the Debtor made payments of at least Five Hundred Dollars ($500.00) to OC. On April 19,1990, the Debtor filed for relief under Chapter 7 of the Bankruptcy Code. On October 30, 1990, Louis J. Yoppolo, Trustee, filed an Amended Complaint to Avoid the April, June, October, and December payments as preferential transfers. In addition, the Trustee sought to avoid certain setoffs that OC had made against the Debtor's checking account. OC defended its actions by claiming it was a secured creditor and that the payments were made in the ordinary course of business. The Trustee claimed that OC was not a secured creditor as it did not properly file its security interest. The issue before the Court was where was the proper place to perfect a security interest in the Debtor’s accounts and receivables.
LAW
Because the power to regulate commercial transactions belongs to the state, the Court must look to state law to determine whether OC properly perfected its *656security interest. Butner v. United States, 440 U.S. 48, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979). O.R.C. Section 1309.-03(C) provides some guidance on where to file a security interest in accounts, general intangibles, and certain mobile goods:
(C) Accounts, general intangibles, and mobile goods.
(1) This division applies to accounts ... and to goods which are mobile and which are of a type normally used in more than one jurisdiction, such as motor vehicles ... and construction machinery ... and the like, if the goods are equipment or are inventory leased or held for lease by the debtor to others, and are not covered by a certificate of title....
(2) The law, including the conflict of laws rules, of the jurisdiction in which the debtor is located governs the perfection and the effect of perfection of non-perfection of the security interest.
(4) A debtor shall be deemed located at his place of business if he has one, at his chief executive office if had has more than one place of business; otherwise at his residence.
(5) A security interest perfected under • the law of the jurisdiction of the location of the debtor is perfected until the expiration of four months after a change of the debtor’s location to another jurisdiction, or until perfection would have ceased by the law of the first jurisdiction, whichever period first expires.
Ohio Rev.Code § 1309.03 (Baldwin 1988).
Because mobile goods may not stay in one place very long, and because intangibles have no corporeal existence, perfection cannot depend upon their location. The law of the debtor’s location governs perfection. See, O.R.C. § 1309.03(C)(4). The Official Comments to that section indicate that the “location” of the debtor “means the place from which in fact the debtor manages the main part of this[sic] business operations. This is the place where persons dealing with the debtor would normally look for credit information, and is the appropriate place for filing.” Ohio Rev. Code § 1309.03, Comment 5(c) (Baldwin 1988).
Turning to the case at bar, testimony was presented as to the location of the Debtor at the time the financing statement was signed, as well as all times subsequent thereto. At the Trial, only two witnesses testified: Arthur J. Gibbons, former president, director, and sole stockholder of Gibbons Roofing and James R. Thornbury, Vice-president of Special Loans at Ohio Citizens Bank. Based upon the testimony and the exhibits presented, the Court makes the following factual findings:
1. The Debtor was engaged in roofing projects mainly in Ohio; however, he did not maintain an office in Ohio.
2. The Debtor maintained an office in Michigan, as evidence by a telephone, an answering machine, a typewriter, and filing cabinets being located at Temperance, Michigan.
3. The Debtor’s president was located in, and operated out of, Michigan, and was responsible for all of the Debtor’s roofing projects.
4. That portion of the Debtor’s business which was conducted in Ohio was managed from and run by the Michigan office.
5. The Debtor’s president frequently met with the foremen of the roofing projects at the Michigan office.
6. The majority of creditors were located in Ohio.
7. Inquiries and invoices from creditors in Ohio were received by the Michigan office.
8. Since the late 1970’s, the Debtor maintained an office in Michigan.
9. Since 1987, the Debtor had been incorporated under the laws of Ohio.
10. On October 3, 1989, the Debtor designated its Temperance, Michigan address as its principal place of business on a security agreement signed with the Defendant.
11. The financing statement filed by the Defendant on October 19, 1989, with the Secretary of State for Ohio and the Lucas County Recorder’s office reflects the Debt- or’s address as Temperance, Michigan.
*65712. In the Statement of Affairs filed by the Debtor in these proceedings on April 19, 1990, the Debtor stated its address as 3200 West Temperance, Temperance, Michigan.
13. The Debtor maintained a checking account with OC. The checks on that business account reflect the Michigan address.
14. At the Trial, Mr. Thornbury testified that the documents in OC’s collateral file reflect the Michigan address.
The Court considered these facts as persuasive that the chief executive office of Gibbons Roofing was located in Michigan, during the relevant time period. The Court cannot find that this company was being managed and operated from Ohio, when the totality of the evidence is considered. Although the largest volume of business was primarily in Ohio, business volume is not the sine qua non of chief executive office location. See Thompson v. Shepherd Machinery Co., 665 F.2d 941 (Ct.App. 9th Cir.1982). Consequently, the Court must look to Michigan law for perfection requirements as that was the Debtor’s location.
M.S.A. Section 19.9401 [M.C.L.A. § 440.-9401] instructs one on where to file a security interest for proper perfection: “[I]n the office of the secretary of state.” Mich. Statutes Ann. § 19.9401(l)(c) [M.C.L.A. § 440.9401(l)(e) ] (Callaghan 1991-92 Supp.). OC did not comply with this section as they failed to file with the Michigan Secretary of State’s office. Thus, its security interest in the accounts and general intangibles is not superior as to the Trustee.
In some instances, strict compliance with requirements of the filing statute is excused.
A filing which is made in good faith in an improper place or not in all of the places required by this section is nevertheless effective with regard to any collateral as to which the filing complied with the requirements of this article and is also effective with regard to collateral covered by the financing statement against any person who has knowledge of the contents of such financing statement.
Mich. Statutes Ann. § 19.9401(2) [M.C.L.A. § 440.9401(2)] (Callaghan 1991-92 Supp.) (emphasis added). The Court does not believe that OC made a good faith attempt to perfect its security interest in the Debtor’s property. Based upon OC’s own records, OC should have filed in Michigan. See Exhibits A and B. This would not have caused the bank an undue burden. OC was in a position to know of the Debtor’s location and in fact, the evidence adduced at trial indicated that it possessed actual knowledge that the Debtor was located in Michigan. “Where a creditor is uncertain as to the filing requirements, ‘the logical and better practice is for the creditor to file security interests in all possible places where filing might be required.” Ledford v. Farmers State Bank and Trust Co. (In re Reier), 53 B.R. 395, 399 (S.D. Ohio, W.D.1985) (quoting In re Burgess, 30 B.R. 364, 366 (W.D.Okla.1988).
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, it is
ORDERED that the Debtor’s location for purposes of perfecting a security interest at the time the transaction occurred be, and is hereby, Michigan.
It is FURTHER ORDERED that OC’s security interest be, and is hereby, declared ineffective as to the Trustee.
*658[[Image here]]
[[Image here]] | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491444/ | MEMORANDUM OPINION AND ORDER
RICHARD L. SPEER, Bankruptcy Judge.
This cause comes before the Court after Trial on the Complaint to Determine Dis-chargeability of Debt. At the Trial, the parties were afforded the opportunity to present the evidence and arguments they wished the Court to consider in reaching its decision. The Court has reviewed the evidence and arguments presented, as well as the entire record in this case. Based upon that review, and for the following reasons, this Court finds that the debts owed to the following should be nondischargeable: Rick McPheron, Timothy L. Brandehoff, Mike Koenig, John D. Parker, Jim Rupert, Jim Wertz, Dan Cranfield, and Mike Har-nisfeger. The Court further finds that the debts owed to Mike Watkins, Brock Douglas, Bob Shaw, Joe Harnisfeger, and Russ Smith should be dischargeable.
*664FACTS
Based upon the evidence and testimony adduced at Trial, the Court makes the following factual findings. On, or about, February 16, 1988, Roger Bice [hereinafter “Bice”], Defendant/Debtor, was hired by BP Petroleum of Lima, Ohio, [hereinafter “BP”] to provide security services during a strike at the BP plant. Bice, a police officer with the Shawnee Township Police Department, contacted some fellow police officers from surrounding areas and asked them if they were interested in part-time security work during the strike. Bice informed them that they would be paid Twelve Dollars ($12.00) an hour for their services. Rick McPheron, Timothy L. Brandehoff, Mike Koenig, John D. Parker, Jim Rupert, Mike Watkins, Jim Wertz, Brock Douglas, Bob Shaw, Dan Cranfield, Mike Harnisfeger, Joe Harnisfeger, and Russ Smith [hereinafter collectively referred to as “Plaintiffs”] agreed. Bice scheduled and supervised the shifts. He also received one payroll check from BP from which he was to make cash payments to the Plaintiffs. Prior to the first pay, Bice decided to withhold One Dollar ($1.00) an hour from each Plaintiff, allegedly for tax purposes. The Plaintiffs filed this suit to recover the “withholding tax.”
Rick McPheron [hereinafter “McPher-on”], a police officer with the Shawnee Township Police Department, testified that Bice approached him to work security for Twelve Dollars ($12.00) an hour. When McPheron received his first check, he noticed that he was only receiving Eleven Dollars ($11.00) an hour. He testified that Bice told him that the One Dollar ($1.00) was being withheld for income tax purposes. A total of One Thousand Three Hundred Dollars ($1,300.00) was withheld from McPheron’s earnings. McPheron requested the return of this money from Bice and, to date, Bice has refused to return this money to McPheron.
Timothy Brandehoff [hereinafter “Bran-dehoff”], a patrolman with the Lima Police Department, testified that he had agreed to work security at BP for Twelve Dollars ($12.00) an hour. He testified that on the third night of work, Bice advised him that One Dollar ($1.00) per hour was being withheld for tax purposes. Brandehoff testified that he relied on Bice’s statements that the money was withheld and would be used for taxes. After receiving a 1099 form, he discovered that the taxes weren't paid. Brandehoff unsuccessfully requested the money from Bice. Consequently, Brande-hoff sued Bice in small claims court in Lima, Ohio, and received a judgment against Bice in the amount of Five Hundred Thirty-two Dollars ($532.00) plus costs at an interest rate of Ten Percent (10%) per year.
Mike Koenig [hereinafter “Koenig”], also a patrolman with the Lima Police Department, testified that Bice contacted him to work for Twelve Dollars ($12.00) an hour. One week after being hired, Bice advised Koenig that he was withholding One Dollar ($1.00) an hour for Koenig’s taxes. Koenig testified that he relied on the Defendant to pay the money over to the Internal Revenue Service. Koenig found out that the money hadn’t been properly administered when he received his 1099 form. Bice withheld a total of Five Hundred Eighty-four Dollars ($584.00) from Koenig’s earnings.
John Parker [hereinafter “Parker”], a patrolman with the Lima Police Department, testified that he worked for Bice on the BP security detail. He testified that the agreement was that he was to be paid Twelve Dollars ($12.00) an hour, but would receive Eleven Dollars ($11.00) an hour, as One Dollar ($1.00) an hour was to be withheld for his taxes. Parker started One and One-half weeks later than the rest of the Plaintiffs. Parker discovered that the taxes weren’t paid after some of the other Plaintiffs filed suit in small claims court. Six Hundred Sixty Dollars ($660.00) of Parker’s earnings were withheld by Bice.
James Wertz [hereinafter “Wertz”], a patrolman with the Shawnee Township Police Department, testified that he worked the project at BP under the direction of Bice. He testified that he was originally told that he would receive Twelve Dollars ($12.00) an hour in cash. He was advised later that One Dollar ($1.00) an hour would be with*665held for his taxes. Wertz testified that he relied upon the Defendant to pay the tax money to the Internal Revenue Service. He discovered that the Defendant had made no payments to the Internal Revenue Service after he received his 1099 form. A total of Six Hundred Eighteen Dollars ($618.00) was withheld from Wertz’s earnings by Bice.
Dan Cranfield [hereinafter “Cranfield”], a Detective on the Fort Shawnee Police Department, testified that he was contacted by Bice to work security for the BP strike. He testified that he was told that he would be paid Twelve Dollars ($12.00) an hour for his services. After receiving his first pay, he discovered that he was only getting Eleven Dollars ($11.00) an hour. When he asked Bice about the discrepancy, Bice responded that the One Dollar ($1.00) an hour was taken out for Cran-field’s taxes. Cranfield testified that he relied on the Defendant to pay the money for taxes. Cranfield found out that the money did not go to pay his taxes after he received his 1099 form, which reflected that he earned Eleven Dollars ($11.00) an hour. Bice withheld a total of One Thousand Three Hundred Forty-six Dollars ($1,346.00) from Cranfield’s earnings.
Mike Harnisfeger [hereinafter “M. Har-nisfeger”], a patrolman with the Fort Shawnee Police Department, testified that he worked the security detail at BP. He said that the Defendant told him he would be paid Twelve Dollars ($12.00) an hour. M. Harnisfeger found out that he was only being paid Eleven Dollars ($11.00) an hour when he went to receive his first pay. He was told by Bice that One Dollar ($1.00) an hour was being withheld for tax purposes. M. Harnisfeger discovered that no tax money was withheld after he received his 1099 form. Bice withheld a total of One Thousand Four Dollars ($1,004.00) from Harnis-feger earnings.
Jim Rupert [hereinafter “Rupert”], a retired police officer with Shawnee Township Police Department, testified that he was hired by Bice to work the security detail at BP at Twelve Dollars ($12.00) an hour. He testified that one week after starting work, Bice told him that One Dollar ($1.00) an hour would be withheld for his taxes. When Rupert received his 1099 form, he discovered that the Internal Revenue Service didn’t get the tax money which Bice had withheld. A total of Four Hundred Sixty Dollars ($460.00) was withheld from Rupert’s earnings by Bice.
Mike Watkins, Brock Douglas, Bob Shaw, Joe Harnisfeger, and Russ Smith, other police officers employed by Bice during the BP strike, did not testify. As none of these men were present, nor had submitted any evidence supporting their claim, the debt owed to them by Bice must be declared dischargeable.
David Yoakam [hereinafter “Yoakam”], Chief of Police at Cridersville Police Department, testified that he had worked for the Defendant at BP. He testified that Bice told him that the One Dollar ($1.00) per hour was being withheld for Bice’s expenses. Yoakam claimed that Bice never told him that the money was withheld for tax purposes.
Bice testified that he was the supervisor of the BP security detail. He received one check from BP made out to him. From that check, he paid the Plaintiffs in cash. He admitted that he told the Plaintiffs that he was withholding the money for tax purposes, but he denied that he ever specified that the money was for the Plaintiff’s taxes. At a Rule 2004 examination, the Debt- or said that he used the money he had withheld from the Plaintiff’s earnings to pay his own personal bills and to pay alimony to his wife.
The record reflects no dispute as to the number of hours each Plaintiff worked, or whether or not the security services were properly performed. The only issue presented is whether the debts owed to the Plaintiffs are nondischargeable under Section 523(a)(2)(A) of the Bankruptcy Code.
LAW
Section 523(a)(2)(A) of the Bankruptcy Code states that:
(a) A discharge ... does not discharge an individual debtor from any debt—
*666(2) for money, property, [or] services ... to the extent obtained by—
(A) false pretenses, a false representation, or actual fraud....
11 U.S.C. § 523(a)(2)(A).
To succeed in their claim, the Plaintiffs must prove the following elements: (1) that the Debtor made false representations; (2) that at the time made, the Debtor knew them to be false or acted with gross recklessness as to their truth; (3) that the representations were made with the intention and purpose of deceiving the Plaintiffs; (4) that the Plaintiffs reasonably relied on the representations; and (5) that the Plaintiffs sustained the alleged injury as a proximate result of the representation having been made. In re Phillips, 804 F.2d 930, 932 (6th Cir.1986); In re Martin, 761 F.2d 1163, 1165 (6th Cir.1985); In re Kleinoeder, 56 B.R. 77 (N.D.Ohio 1985). The Plaintiffs must sustain their burden by a preponderance of the evidence. Grogan v. Garner, — U.S. -, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). If there is room for an inference of honest intent, the question of nondischargeability must be resolved in favor of the debtor. In re Constantino, 72 B.R. 231 (N.D.Ohio 1987).
The first issue presented before the Court is whether the Debtor made a false representation. It is this Court’s opinion that he did. When he hired the Plaintiffs, he hired them at a rate of Twelve Dollars ($12.00) an hour. When the Plaintiffs received their first pay, they realized that they were only earning Eleven Dollars ($11.00) an hour. According to the testimony of eight Plaintiffs, when Bice was questioned as to this discrepancy, Bice told them he was withholding One Dollar ($1.00) per hour from each Plaintiffs’ pay in order to pay their taxes. The record reflects that Bice did not make any payments to the Internal Revenue Service on behalf of the Plaintiffs as he had indicated. Bice falsely represented that he was withholding a portion of the Plaintiffs’ money for tax purposes. It is apparent that the Plaintiffs sustained a loss in that each Plaintiff lost One Dollar ($1.00) per hour from his wages and each Plaintiff was still responsible for paying income taxes on the wages earned.
Mere breach of contract, without more, does not render a consequent debt nondischargeable under Section 523(a)(2)(A). A fraudulent promise under Section 523(a)(2)(A) requires proof that at the time the debtor made the promise, the debtor did not intend to perform as required. As to whether the Debtor intended to deceive the Plaintiffs at the time the contract was entered into, the Court may consider circumstantial evidence. “Because direct proof of intent (i.e., the debt- or’s state of mind) is nearly impossible to obtain, the creditor may present evidence of the surrounding circumstances from which intent may be inferred.” Matter of Van Horne, 823 F.2d 1285, 1286 (8th Cir. 1987). In other words, the debtor’s state of mind can be inferred from the debtor’s subsequent conduct.
At the Trial, the evidence presented and the Debtor’s own testimony, reflects that Bice had not paid the Internal Revenue Service the money he had withheld from the Plaintiffs as he had represented he would. Bice refused to turn-over any of the money he withheld from the Plaintiffs when the demand to do so was made. Bice used the money to pay off his own debts. Based upon the foregoing, an inference cannot be negated that the Debtor had the intent to deceive the Plaintiffs when he made the representation that he was withholding money from their earnings for their taxes.
As to the issue of reliance, this Court finds that the Plaintiffs’ reliance upon the Defendant’s statements was reasonable. At the outset, police officers working a detail are told whether they are responsible for paying their own taxes or whether the employer will withhold the money for their taxes. Bice, before the Plaintiffs received their first pay check, told the Plaintiffs that he was withholding money for their taxes. Since this was a normal procedure in such situations, the Plaintiffs reasonably relied upon the Debt- or. Although the Plaintiff’s might have done more to protect themselves, they were *667not required to do more to satisfy the reliance requirement.
The Court finds that the McPheron, Brandehoff, Koenig, Parker, Wertz, Cran-field, M. Harnisfeger, and Rupert have met their burden and accordingly holds that the debts owed by Bice to them are nondis-chargeable. The Court finds that Mike Watkins, Brock Douglas, Bob Shaw, Joe Harnisfeger, and Russ Smith have not met their burden and, as such, the debts owed by Bice to them are dischargeable.
In judging the credibility of the witnesses, the Court has taken into consideration the witnesses intelligence, age, memory, demeanor while testifying, the reasonableness of the testimony in light of all the evidence of the case, and any interest, bias, or prejudice the witnesses may have. In reaching the conclusions found herein, 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, it is
ORDERED that the debt in the amount of One Thousand Three Hundred Dollars ($1,300.00) owed to Rick McPheron be, and is hereby, declared nondischargeable.
It is FURTHER ORDERED that the debt in the amount of Five Hundred Thirty-two Dollars ($532.00) plus court costs at Ten Percent (10%) per year owed to Timothy L. Brandehoff be, and is hereby, declared nondischargeable.
It is FURTHER ORDERED that the debt in the amount of Five Hundred Eighty-four Dollars ($584.00) owed to Mike Koenig be, and is hereby, declared nondis-chargeable.
It is FURTHER ORDERED that the debt in the amount of Six Hundred Sixty-six Dollars ($660.00) owed to John D. Parker be, and is hereby, declared nondis-chargeable.
It is FURTHER ORDERED that the debt in the amount of Four Hundred Sixty Dollars ($460.00) owed to Jim Rupert be, and is hereby, declared nondischargeable.
It is FURTHER ORDERED that the debt in the amount of Six Hundred Eighteen Dollars ($618.00) owed to Jim Wertz be, and is hereby, declared nondischargeable.
It is FURTHER ORDERED that the debt in the amount of One Thousand Three Hundred Forty-six Dollars ($1,346.00) owed to Dan Cranfield be, and is hereby, declared nondischargeable.
It is FURTHER ORDERED that the debt in the amount of One Thousand Four Dollars ($1004.00) owed to Mike Harnisfeger be, and is hereby, declared nondis-chargeable.
It is FURTHER ORDERED that the debts owed to the following be, and are hereby, Dischargeable:
1. Mike Watkins
2. Brock Douglas
3. Bob Shaw
4. Joe Harnisfeger
5. Russ Smith. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491445/ | MEMORANDUM OPINION AND ORDER
RICHARD L. SPEER, Bankruptcy Judge.
This cause comes before the Court after Hearing on Debtors’ Objection to Huntington Mortgage Company’s Proof of Claim for arrearages. At the Hearing, the parties were afforded the opportunity to present the evidence and arguments they wished the Court to consider in reaching its decision. The parties also filed post-Hearing Briefs relative to the issue of the propriety of allowing Huntington Mortgage Company’s request for attorney’s fees and *675for interest on the arrearage. The Court has reviewed the evidence, the arguments of counsel, and the post-Hearing Briefs, as well as the entire record in this case. Based upon that review and for the following reasons, the Court finds that the Debtors’ Objection should be overruled.
FACTS
Huntington Mortgage Company is a secured creditor by virtue of a promissory note and mortgage held on the Debtors’ residence. Huntington Mortgage Company took steps to foreclose on this mortgage due to the Debtors’ default.
On November 1, 1989, Charles and Marlene Day, Debtors, filed their petition for relief under Chapter 13 of the Bankruptcy Code. On December 26, 1989, Huntington Mortgage Company filed a proof of claim which included an amount of Four Thousand Seventy-three Dollars and Fifty-two Cents ($4,073.52) for an arrearage from May 1, 1989, through November 1, 1989. The Debtors filed an objection to the interest and attorney’s fees included in the ar-rearages. The Debtors are paying on the mortgage outside of the Chapter 13 Plan.
Huntington Mortgage Company argues that it is entitled to the interest as it is necessary to provide a “cure” of the ar-rearage. Huntington Mortgage Company further argues that it is entitled to the attorney’s fees as the security agreement makes reference to “Title 38.”
In their Brief, the Debtors consent to an award of interest in light of In re Colegrove, 771 F.2d 119 (6th Cir.1985), but question the amount. Furthermore, the Debtors assert that the award of attorneys’ fees would be improper.
LAW
The Court will address the first of two issues to be resolved, namely whether Huntington Mortgage Company is entitled to pre- and post-Chapter 13 attorneys’ fees.
Huntington Mortgage Company correctly asserts that oversecured mortgagees are entitled to fees and expenses in Chapter 13 cases. See, Longwell v. Banco Mortgage Co., 38 B.R. 709 (D.C.N.D.Ohio 1984). However, Huntington Mortgage Company is not an oversecured creditor in this matter. A review of the petition reflects the fair market value of the property to be Forty Thousand Dollars ($40,000.00). The mortgage was for Forty Thousand Dollars ($40,000.00). Consequently, Huntington Mortgage Company is not entitled to attorneys’ fees.
Assuming arguendo that Huntington Mortgage Company was oversecured, it still would not have been entitled to attorneys’ fees. These fees are only awarded if the security agreement itself provides for them. Courts have emphasized that the allowance of attorneys’ fees, and by implication costs, must be “expressly” provided for in the agreement. Matter of Schwartz, 77 B.R. 177 (S.D.Ohio 1987), aff'd, 87 B.R. 41 (S.D.Ohio 1988); Longwell v. Banco Mortgage Co., 38 B.R. 709 (N.D.Ohio 1984). See, also, In re D.W.G.K. Restaurants, Inc., 84 B.R. 684 (Bkrtcy.S.D.Cal.1988).
The Court has very carefully scrutinized the Mortgage Note and finds no reference to the award of attorneys fees, except for a vague reference to Title 38. Title 38 permits the award of certain fees in connection with Veteran Administration guaranteed loans, attorneys’ fees, and other expenses under certain circumstances. See, 38 C.F.R. 36.4313. This Court believes that Title 38 was, in all likelihood, not readily available to the mortgagors, nor would they find it to be easily understood. Moreover, the idea of borrowers making the leap from Title 38 to the proper sections of the Code of Federal Regulations detailing the provisions relied upon by the creditor is even more improbable. Yet, without the Debtors knowing the terms to be incorporated, it is difficult to see how the provision could have been “bargained for” as required under the D.W.G.K. Restaurants decision. Accordingly, the Court finds that the reference to “Title 38” in the agreement was neither “express” nor “bargained for”, and thus the request for attorneys fees and costs should be disallowed.
*676The Court has studied Title 38. Based upon the language of 38 C.F.R. Section 36.4314(b) and 38 U.S.C. Section 1820, which defines the powers of the Veterans’ Affairs Administrator, it appears that the statute and corresponding regulation concern only the relationship between Huntington Mortgage Company and the Veterans’ Administration as guarantor. It does not apply to the Debtors, and does not give rise to any obligation on their part to pay Huntington Mortgage Company’s costs and attorneys’ fees incurred in prosecuting the foreclosure action. See, also, In re La-Rocke, 116 B.R. 93 (N.D.Ohio 1990).
Accordingly, the claim, amounting to Eight Hundred Twenty-five Dollars ($825.00), as it relates to attorneys’ fees and costs must be disallowed. The Court now turns its attention to the issue of interest on the arrearages.
Section 1322 of the Bankruptcy Code delineates the contents of a Chapter 13 plan. That Section provides, in part, that
(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
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(5)notwithstanding paragraph (2) of this subsection, provide for the curing of any default within a reasonable time and maintenance 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)(2) and (5). The Sixth Circuit Court of Appeals has construed this Section as allowing interest to “cure the default,” regardless of whether the creditor is secured or unsecured. In re Colegrove, 771 F.2d 119, 122 (6th Cir.1985). “In effect the law requires the creditor to make a new loan in the amount of the value of the collateral rather than repossess it, and the creditor is entitled to interest on his loan.” Memphis Bank & Trust Co. v. Whitman, 692 F.2d 427, 429 (6th Cir.1982). Therefore, the only issue to be decided is at what rate should the interest be allowed.
The determination of which rate of interest should be allowed has been extensively discussed by the Sixth Circuit Court of Appeals. See, Cardinal Fed. Sav. & Loan v. Colegrove, 771 F.2d 119 (6th Cir. 1985); Memphis Bank & Trust Co. v. Whitman, 692 F.2d 427 (6th Cir.1982). In Memphis, the secured loan was made at an interest rate of Twenty-one Percent (21%). Memphis, at 430. The Memphis court held that in the absence of special circumstances, bankruptcy courts should use the current market rate of interest for similar loans in the region. Id. at 431.
The Colegrove court expanded that decision by holding that “the most equitable interest rate on an undersecured loan should be the prevailing market rate of interest at the time of allowance of the creditors’ claim and the confirmation of the plan in bankruptcy, with a maximum limitation on such rate to be the underlying contract rate of interest.” Colegrove, at 123. With this decision, the debtor gets the better of the bargain by receiving either the prevailing market rate of interest or the contract rate of interest, whichever is lower. The contractual rate of interest was 10.5%. As neither party objected to the rate of interest, and the rate itself is not questionably high, this Court finds that the rate of interest to be charged on the arrearages is 10.5%.
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.
Accordingly, it is
ORDERED that the Debtors’ Objection be, and is hereby, partially Overruled and partially sustained.
It is FURTHER ORDERED that Huntington Mortgage Company’s claim for attorneys’ fees in the amount of Eight Hundred Twenty-five Dollars ($825.00) be, and is hereby, disallowed.
It is FURTHER ORDERED that Huntington Mortgage Company’s claim for ar-*677rearages in the sum of Four Thousand Seventy-three Dollars and Fifty Cents ($4,073.52), at the rate of 10.5% interest, less the disallowed attorney’s fees, be, and is hereby, allowed. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491447/ | MEMORANDUM OPINION AND ORDER
RICHARD L. SPEER, Bankruptcy Judge.
This cause comes before the Court upon Creditor’s Objection to the Trustee’s Renewal of Notice of Intent to Sell Personal Property. At the Hearing, the parties were given the opportunity to present the evidence and arguments they wished the Court to consider in reaching its decision. The Court has reviewed the written arguments of counsel and the relevant case law, as well as the entire record in this case. Based upon that review, and for the following reasons, this Court finds that the Creditor’s Objection should be sustained.
DISCUSSION
The Court finds the following facts. On July 24, 1984, Mr. Joseph E. Bashour/Debt- or [hereinafter “Bashour”] entered into a lease agreement with Ted Ruck Company [hereinafter “Ruck”] whereby Bashour was to pay Twenty-six Hundred Fifty Dollars ($2,650.00) monthly for the use of a Press *698and a 16 Cavity Plastic Injection Mold [hereinafter “mold”], which is the subject matter in question. On that same day, Bashour also signed a purchase agreement whereby Ruck would sell the aforementioned items to Bashour no earlier than July 15, 1985, and no later than June 15, 1987. On or about December of 1985, Bashour entered into a division of lease agreement whereby High Quality Plastics of Findlay assumed the Press obligation while Bashour continued payments on the mold.
On September 30, 1987, Bashour individually filed for Chapter 7 Bankruptcy. On April 27, 1988, Bashour entered into a cancellation of personal property lease and purchase agreement whereby Bashour remitted all rights to the mold in question. According to the division of lease agreement, One Thousand Three Hundred Forty-six Dollars and Twenty Cents ($1,346.20) was a monthly lease payment for the mold use, totaling Forty-eight Thousand Four Hundred Sixty-three Dollars and Twenty Cents ($48,463.20).
Additionally, a purchase agreement gave Bashour the right to buy the press and mold at the end of the three (3) year lease period, no later than June 15, 1987. The total purchase price for the 16 Cavity Plastic Injection Mold was Nineteen Thousand Dollars ($19,000.00). Bashour did not exercise the option to purchase.
On April 29, 1988, Ruck filed a replevin action in Hancock County Common Pleas Court against High Quality Plastics, Inc. [hereinafter “Plastics”]. Plastics sought to obtain ownership recovery of the press and mold. The Hancock County Common Pleas Court made a determination as to ownership of the mold and press, despite the fact that Bashour was not a party to the suit. The Third District Court of Appeals overturned the Hancock Court decision, reversing Hancock Court’s declaration that Plastics, Inc, was the owner of the mold in question. The Trustee claims that the Appeals Court decision is not applicable, as inter alia, he was not joined in the matter. Ruck contends that the Third District Court of Appeals decision that overturned the Hancock Court decision is dispositive regarding the purchase agreement, lease agreement, and the division of lease agreement.
The issue presented in this case is whether Bashour’s payments toward the mold were lease payments or payments in reduction of the purchase price. That is, in making these payments, did Bashour acquire ownership in the mold in question. If so, the mold is estate property, rightfully the trustee’s to sell.
The Trustee asserts that the payments were made in reduction of the purchase price and consequently the mold is estate property. The Trustee bases this assertion upon Debtor’s 2004 Exam wherein the Trustee claims Bashour stated that he entered into a division of lease agreement which provided that lease option payments were to be made and would in effect reduce the purchase price. The Trustee asserts that the payments totaling Forty-eight Thousand Four Hundred Sixty-three Dollars and Twenty Cents ($48,463.20) were not only sufficient, but in excess of the required purchase price of Nineteen Thousand Dollars ($19,000.00). The Trustee claims that under the Bankruptcy Code, title to the mold vested in him and is rightfully the Trustee’s to sell.
Ruck maintains that the agreement was for monthly lease payments of Twenty-six Hundred Fifty Dollars ($2,600.00) for a term of three years ending on June 15, 1987. Additionally, Ruck asserts that a purchase agreement gave Bashour the right to buy the press and mold at the end of the three years by paying Nineteen Thousand Dollars ($19,000.00) for each item. According to Ruck, the total rent payment would then be Ninety-six Thousand Dollars ($96,000.00).
At the hearing, Ruck entered into evidence a “bill of sale” dated July 24, 1984, from which Ruck claimed that it was initially the owner of the mold. The Trustee questioned the validity of the bill of sale. Among other things, the Trustee argued that the conduct of the parties would seem to indicate that the “bill of sale” was not dispositive of the relationship between the *699parties because the other documents refer only to a buy-back. Additionally, the Trustee asserted that the intentions of the parties as evidenced by their conduct is contrary to the “bill of sale” and is at odds with the purchase agreement itself. The Trustee noted that the purchase agreement refers to Thirty-six Thousand Dollars ($36,-000.00) for the mold and press, whereas the “bill of sale” contained no reference to the press. Additionally, the Trustee pointed out that there were no documents presented which indicate that Ruck was the owner of the press.
Ruck maintained that the “bill of sale” is valid because the dates are synonymous with those on the aforementioned agreements between the parties. Ruck also asserted that the bill of sale merely proves Ruck owned the mold on the same day that he signed an agreement with Bashour, i.e. on July 24, 1984. Nevertheless, the Trustee questioned the validity of the document because the lease agreement in question is not reflected in the “bill of sale,” which escaped the Bankruptcy discovery process.
This Court does not believe that the “bill of sale” is dispositive beyond what Ruck maintains, i.e. that it merely shows Ruck’s ownership on July 24, 1984, at the start of this tortured financial arrangement. Notwithstanding the “bill of sale” dated July 24, 1984, this Court finds that there are no other documents clearly determinative of ownership. Granted, Bashour made payments according to his statements at the Debtor’s 2004 Exam, however, the Debtor never plainly stated in any of the aforementioned documents that he was the owner of the mold as a consequence of his payments. In fact, in the Debtors’ 2004 Exam, to which the Trustee alludes, specifically pages 32 to 38, Bashour merely admits to making payments for the use of the mold. In fact, according to Bashour’s statements, he himself believed that the agreement was a lease, not a purchase agreement. On page 34, Bashour stated: “this was just a straightforward lease, the payments were rent, not of that money was applied to the purchase price.” On page 36 Bashour stated: “I was sure that he was very careful to write this lease to qualify as a true lease ... no matter what it says down here, as far as I understood it to mean, the Nineteen Thousand Dollar ($19,-000.00) was the price that I could buy the mold....”
However, the nominal residual amount of Nineteen Thousand Dollars ($19,000.00) as compared to the extraordinary amount paid since the inception of the agreement appears to indicate that this arrangement was a purchase agreement, not a lease.
Notwithstanding this fact, the Trustee can take no greater rights than the debtor himself. Therefore, if the aforementioned documents are accepted prima facie as valid, Bashour had no interest in the mold for the Trustee to rightfully acquire in the estate, i.e. no “legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1).
Regardless of whether payments were actually made with the intent or purpose to lease or purchase, Bashour remitted all interests, legal or equitable, in the mold when he did not exercise his option to purchase the mold before or on June 15, 1987. Therefore, this Court need not consider the post-petition issue regarding the validity of the Cancellation of Personal Property Lease and Purchase Agreement, dated April 27, 1988, that Bashour signed whereby he apparently cancelled his “right, title and interest in and to the leased property.”
This Court is dismayed at the fact that the Debtor contracted to lease or buy over time a mold for such an outrageous price, almost two and one-half (2.5) times the Nineteen Thousand Dollars ($19,000.00) offered purchase price. This agreement is so heavily weighed in favor of Ruck that doubts arise as to its representation as a voluntary and uncoerced agreement. To all outward appearances, this agreement is semblant of an adhesion contract. Obviously, Bashour had no counsel or other versed assistance in the preparation of this agreement. Nevertheless, according to the facts as presented in this case, this Court finds that Bashour had no legal or equitable interest in the mold at the com*700mencement of the case. Because the Trustee can take no greater rights than the debtor himself held, no interests pass to the estate under Section 541. Therefore, the Creditor’s Objection should be sustained.
In judging the credibility of the witnesses, this Court has taken into consideration the witnesses’ intelligence, age, memory, demeanor while testifying, the reasonableness of the testimony in light of all the evidence of the case, and any interest, bias, or prejudice the witnesses may have. In reaching these conclusions, this Court has considered all the evidence and arguments of counsel, regardless of whether or not they are specifically referred to in this opinion.
Accordingly, it is
ORDERED that the Trustee has no interest in the mold to sell.
It is FURTHER ORDERED that the Creditor’s Objection to Trustee’s Notice of Intent to Sell be, and is hereby, sustained. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491452/ | *854MEMORANDUM OPINION AND ORDER
RICHARD L. SPEER, Bankruptcy Judge.
This cause comes before the Court after Trial on Complaint to Determine Dis-chargeability of Debt. At the Trial, the parties were afforded the opportunity to present the evidence and arguments they wished the Court to consider in reaching its decision. The Court has reviewed the exhibits, the evidence and arguments presented, as well as the entire record in this case. Based upon that review, and for the following reasons, this Court finds that the debt should be nondischargeable.
FACTS
Jeffrey Cash [hereinafter “Cash”], Debt- or/Defendant, and Jeneva Cash, nka McCann [hereinafter “McCann”], Plaintiff, were divorced in 1985. They had one child, Justin. In mid-1986, Plaintiff and Defendant began living together in an attempt to reconcile their former marriage.
In July 1986, McCann and Cash purchased. a life insurance policy on McCann’s daughter, Amanda K. Cash. The beneficiaries listed on the policy were McCann and Cash. They were also listed as the parents of Amanda, although Cash was not her biological father.
On August 19, 1986, Amanda died, a victim of Sudden Infant Death Syndrome. The cost of her funeral totaled One Thousand Three Hundred Fifty-one Dollars and Eighty-seven Cents ($1,351.87), plus Five Hundred Thirty-two Dollars and Seventy-eight Cents ($532.78) for a headstone marking her grave.
On September 15, 1986, Western-Southern Life Insurance Company issued a death benefits check in the amount of 'Ten Thousand Seventeen Dollars and Thirty-three Cents ($10,017.33), payable jointly to Cash and McCann. Both parties endorsed the check and took it to the Defendant’s credit union to be cashed.
At that time, checks were issued to pay the funeral expenses and to pay for the headstone. A Five Thousand Dollar ($5,000.00) check was issued to Southside Savings and Loan as a downpayment on a house titled solely in the Defendant’s name. One Thousand Dollars ($1,000.00) cash was put down at closing on the house. The remainder of the death benefits check, Two Thousand One Hundred Thirty-two Dollars and Sixty-eight Cents ($2,132.68), went to McCann.
During their attempt at reconciliation, McCann and Cash had discussed purchasing a house. They located one they wanted and used part of the proceeds from the death benefits check as a downpayment on the house. When McCann and Cash had discussed the purchase of the house, McCann believed that the house was to be purchased with the joint funds and that her name was to be on the title, too. She did not find out differently until the day of closing. Cash, on the other hand, believed that the house would be titled solely in his name and that McCann’s name would be added if, and when, they remarried. Cash said that McCann was loaning the money to him to buy the property. Cash produced two receipts for personal property reflecting that McCann received Three Thousand Dollars ($3,000.00) worth of goods which Cash claimed were payments on the loan. McCann testified that she never received one of the two items which the receipt reflects she received.
In November 1986, Plaintiff and Defendant separated for the final time. McCann has demanded the repayment of her share of the death benefits check and Cash has refused to repay that amount. Cash states that McCann has received her share in cash and in personal property. McCann disagrees and claims that the debt Cash owes her is nondischargeable under Section 523(a)(2)(A) of the Bankruptcy Code.
LAW
Section 523(a)(2)(A) of the Bankruptcy Code provides that:
(a) A discharge ... does not discharge an individual debtor from any debt—
(2) for money, property, [or] services ... to the extent obtained by—
*855(A) false pretenses, a false representation, or actual fraud_
11 U.S.C. § 523(a)(2)(A).
To succeed in her claim, McCann must prove the following elements: (1) that Cash made false representations; (2) that at the time made, Cash knew them to be false or acted with gross recklessness as to their truth; (3) that the representations were made with the intention and purpose of deceiving McCann; (4) that McCann reasonably relied on the representations; and (5) that McCann sustained the alleged injury as a proximate result of the representation having been made. See, In re Phillips, 804 F.2d 930 (6th Cir.1986); In re Martin, 761 F.2d 1163 (6th Cir.1985); In re Kleinoeder, 56 B.R. 77 (N.D.Ohio 1985). McCann must sustain her burden by a preponderance of the evidence. Grogan v. Garner, — U.S.-, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). If there is room for an inference of honest intent, the question must be resolved in favor of the debtor. In re Constantino, 72 B.R. 231 (N.D.Ohio 1987).
The first issue presented before the Court is whether the Debtor made a false representation. It is this Court’s opinion that he did. When Cash and McCann had discussed the purchase of the house, they decided that they would use joint funds for the purchase. Implied in that decision to purchase was the representation that both names would be on the title of the house. McCann, relying upon that representation, loaned Cash a portion of her share from the death benefits cheek. McCann learned that her name would not be on the title at the closing. Cash testified at Trial that he knew he was not putting McCann’s name on the title at the time of purchase when he borrowed the money from her. Cash had the necessary intent required of a false representation and acted with bad faith when he deceived McCann so that she would lend her portion of the death benefits check to him.
As to damages, McCann was entitled to one-half of the death benefits check after the funeral expenses were paid. Thus, McCann was entitled to Four Thousand Sixty-six Dollars and Thirty-four Cents ($4,066.34). She received Two Thousand One Hundred Thirty-two Dollars and Sixty-eight Cents ($2,132.68), while she loaned One Thousand Nine Hundred Thirty-three Dollars and Sixty-six Cents ($1,933.66) to Cash. The amount that she loaned Cash is nondischargeable under Section 523(a)(2) of the Bankruptcy Court.
As to the two receipts produced at Trial, the Court believes that neither should be used to mitigate damages. The receipts do not indicate that the items given to McCann were given to reduce the debt. Additionally, McCann testified that although she signed the receipt for the stereo, she never received the stereo. There were unsubstantiated claims and conflicting testimony as to whether McCann and Cash agreed that the car and the stereo would reduce Cash’s debt to McCann. This Court believes the exchange was not done to reduce the debt.
In judging the credibility of the witnesses, the Court has taken into consideration the witnesses’ intelligence, age, memory, demeanor while testifying, the reasonableness of the testimony in light of all the evidence of the case, and any interest, bias, or prejudice the witnesses may have. In reaching the conclusions found herein, 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, it is
ORDERED that the debt in the amount of One Thousand Nine Hundred Thirty-three Dollars and Sixty-six Cents ($1,933.66) owed to Jeneva McCann by the Debtor be, and is hereby, nondischargeable. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491453/ | MEMORANDUM OPINION AND ORDER
RICHARD L. SPEER, Bankruptcy Judge.
This cause comes before the Court upon Complaint to Determine Dischargeability of Debt. A Pre-trial was held, at which time the parties agreed to have the issue decided upon the written arguments of counsel. Defendant filed a Motion for Summary Judgment, to which the Plaintiffs filed a Response. The Court has reviewed the written arguments of counsel and the relevant case law, as well as the entire record in this matter. Based upon that review, and for the following reasons, the Court finds that the debt should be non-dis-chargeable.
FACTS
On September 24, 1971, Amy Baker, f.k.a. Amy Schumaker [hereinafter “Baker”] was born to Darlene Shumaker [hereinafter “Shumaker”] and Robert Ernest Smith [hereinafter “Smith”]. On the birth certificate, Shumaker was listed as the mother; no father was listed. From the time of birth, neither party has disputed the fact that Smith is Baker’s natural father.
From the time of Baker’s birth until she reached the age of sixteen (16), Smith’s contact with his daughter was sporadic. Aside from occasional clothing and presents, the only financial assistance that was provided by Smith was to pay for Baker’s modeling classes. For the modeling classes, Smith paid Three Hundred Dollars ($300.00).
When Baker was sixteen (16) years old, a paternity action was commenced in the *866Wyandot County Court of Common Pleas, Juvenile Division. It was established that Smith was Baker’s father. On November 18, 1988, the court of common pleas ordered that Smith was to pay retroactive child support in the amount of Fifteen Dollars ($15.00) per week, from Baker’s birth until July 30, 1989. This amounted to a total sum of Thirteen Thousand One Hundred Eighty-Five Dollars ($18,185.00) [hereinafter “retroactive support”]. Smith was also ordered to make support payments in the amount of Thirty Dollars ($30.00) per week for the period of July 31, 1989, through September 24,1989, at which time Baker would turn eighteen (18) years of age. This amount totaled Two Hundred Forty Dollars ($240.00) [hereinafter “current support”] and was to be paid in one lump sum on August 17, 1989. None of the retroactive support has been made, however the current support has been paid in full. Therefore, only the retroactive support is at issue.
Baker and Shumaker contended that the retroactive child support was a non-dis-chargeable debt due to the fact that this amount constituted a court order pertaining to child support obligations. Shumaker added that, in order to raise Baker, it was necessary to borrow thousands of dollars from her parents. She noted that although the support obligation would not be used to provide current support for Baker, it would nevertheless be used to provide Baker with actual and necessary support.
Smith argued that this should be a dis-chargeable debt. Smith noted that a paternity action could have been commenced at any time after Baker’s birth, but that sixteen (16) years had passed before Shumaker initiated such an action. He also argued that he was under no obligation to provide support payments, prior to November 18, 1988, because neither Baker or Shumaker had commenced a paternity action prior to that time. In light of his unemployment, Smith also contended that the retroactive amount order by the court was excessive.
LAW
The dischargeability of a support obligation is governed by 11 U.S.C. Section 523 which states in pertinent part:
(a) A discharge under section 727 ... of this title does not discharge an individual debtor from any debt—
(5) to a ... child of the debtor, for ... support of such ... child, in connection with ... [an]other order of the court of record, ...
(B) [as long as] such liability is actually in the nature of alimony, maintenance, or support.
The Sixth Circuit Court of Appeals has established a four-tier test to be used in determining whether a particular debt is actually in the nature of child support:
(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 1103,1109-10 (6th Cir.1983) (emphasis added). Once any of the tiers are answered in the negative, the inquiry ends and the obligation is deemed dischargeable.
In analyzing the first tier of this test, the Court must ascertain whether either the state court or the parties intended to create a support obligation. Smith contended that prior to November 18, 1988, there was no obligation for Smith to support Baker, despite the fact that he admitted that he was her father. The Court disagrees with Smith’s contention because Shumaker and Baker properly imposed the obligation upon Smith by commencing “an action to determine the existence ... of the father and child relationship,” within the provisions of the statute. Ohio Rev. Code Ann. § 3111.05 (Baldwin 1992). A paternity action “may not be brought later than five years after the child reaches the age of *867eighteen.” Id. Plaintiffs commenced the paternity action while Baker was sixteen (16) years of age, clearly within the constraints of the statute. The Court of Common Pleas ordered Smith to pay support for Baker. That court intended to create a support obligation, and therefore, the first tier is satisfied.
The next step in the Calhoun test is the determination of whether the support provision has the actual effect of providing necessary support. That term has been construed to mean that which is necessary for the support of the child to maintain a standard of living commensurate with that of the child’s parents. In re Machmer, 2 Ohio App.3d 84, 440 N.E.2d 829 (1981). The Court finds that Fifteen Dollars ($15.00) per week was appropriate in this situation. Smith had been unemployed and no evidence had been presented as to Shu-maker’s standard of living.
Nothing in the Calhoun test states that the support obligation has to provide current support for the child, just necessary support. Shumaker bore the sole financial burden of raising Baker. She fed, clothed, and provided shelter for Baker. Over the course of sixteen (16) years, such needs far exceeded the amount of the retroactive support obligation. As a result of providing for her child, Shumaker had to borrow large sums of money from her parents. This Court believes that the support obligation ordered by the Court of Common Pleas has the actual effect of providing necessary child support. The award would allow Shumaker to repay the generosity of her parents. To hold otherwise would preclude a parent from collecting retroactive support once Bankruptcy proceedings have commenced. This Court does not believe that such a preclusion is within the spirit of Bankruptcy or was contemplated by the drafters of the Bankruptcy Code. Therefore, the Court finds the second tier has been met.
The third step in the analysis is whether the support is so excessive as to be unreasonable under traditional concepts of support. This Court believes that there is nothing either excessive or unreasonable about the retroactive support. Under Ohio law, both parents have an obligation to provide support for their children. Ohio Rev.Code Ann. 3103.03 (Baldwin 1992). No support payments were made by Smith over the course of Baker’s life. Since these payments were never made, though the law mandates such payments, an ar-rearage situation existed. In an arrearage situation, the question of reasonableness of the award should be answered in the context of the time that it was originally awarded. In re Matyac, 102 B.R. 125, 127 (S.D.Ohio 1989). Since parents have a legal obligation to provide financial support for their children, the Court believes that Baker was originally awarded support payments from Smith at birth.
The Court of Common Pleas determined that Fifteen Dollars ($15.00) per week was the retroactive support obligation. Although the total sum of Thirteen Thousand One Hundred Eighty-five Dollars ($13,-185.00) may appear unreasonable and excessive, it is not in this situation. If Smith had satisfied his financial obligation to provide for Baker since the time that his obligation arose, this would be only a minimal amount. It is the opinion of the Court that, in the context of the time that the support obligation was awarded, Fifteen Dollars ($15.00) was neither excessive nor unreasonable. To hold otherwise would preclude an individual from receiving even minimal retroactive child support. As mentioned previously, this is not contemplated under the Bankruptcy Code. Therefore, the Court finds that the third tier is satisfied.
This Court believes that because the third step in the Calhoun test was answered affirmatively, it is not necessary to examine the fourth tier of the Calhoun test. As a result of the Calhoun test being satisfied, this Court finds that the support provision is in the nature of child support and is, therefore non-dischargeable.
Accordingly, it is
ORDERED that the debt owed to Shu-maker and Baker in the amount of Thirteen Thousand One Hundred Eighty-five Dollars *868($13,185.00) be, and is hereby, declared Non-dischargeable. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491455/ | OPINION
THOMAS M. TWARDOWSKI, Chief Judge.
Before the court is a complaint filed by the Trustee pursuant to 11 U.S.C. § 524(b) to recover monies allegedly owed to the estate by Capp Construction, Inc. (“Capp”). Our review of the pleadings, testimony, evidentiary exhibits and relevant case law mandates a judgment for the trustee in the amount of $43,273.00. Further, we find that Capp has not sustained its burden of proof as to the items which it has interchangeably and alternatively pleaded as affirmative defenses, setoffs and counterclaims; therefore, all of Capp’s claims are dismissed with prejudice. A brief recitation of the relevant facts follows.
John Cappellano, d/b/a Capp Construction, Inc., had an ongoing fifteen year professional relationship with the Debtor, whereby Debtor was employed as a plumbing and heating subcontractor. Cappellano also is a principal owner of the Lafayette Inn (“Inn”), Easton, PA. We find, as a matter of law, that although aware of Cap-pellano’s ownership interest in the Inn, in all transactions at issue, the Debtor dealt with Cappellano d/b/a Capp.
The Debtor, from approximately January 11, 1988 through November 28, 1988, had undertaken subcontracting work, on Capp’s behalf, at the Sussex Wire Randolph Corp. *104(“Sussex”), the Helen Beebe Speech and Hearing Center, (“Beebe”) and the Inn, all located in Easton, PA, pursuant to a series of written and oral contracts.
The Sussex operation was undertaken pursuant to three written, executed contracts; same were executed on June 22, 1988, June 20, 1988 and June 20, 1988 for an aggregate price of $71,480.00. (Plaintiff-Sussex Exhibits 1, 2, 3).
The Beebe operation was undertaken pursuant to a single unexecuted estimate/contract provided to Capp, in early to mid October, four to five weeks before on site work was initiated. Despite nonexecution, Capp impliedly agreed to the estimate as they permitted the debtor, sans objection, to proceed with the project. The estimate was for $7,975.00. (Plaintiff-Beebe Exhibit 1). See, Deemer Steel Casting Co., Inc. v. Lebanon Foundry and Machine Co., 117 B.R. 103 (Bankr.D.Del.1990).
The Inn operation was undertaken pursuant to oral communication between the Debtor and Capp. From January 11, 1988 through August 1, 1988, without a written contract, and sans objection, the Debtor serviced the Inn’s air conditioning units. Logically, had Capp objected to the Debt- or’s actions, such service would not have continued over an eight month period. (Plaintiff-Lafayette Exhibits 1 through 42, inclusive.)
Plaintiff-Trustee alleges that service rendered at the Inn totals some $8,963.10, same amount then due to Debtor. Our review of plaintiff’s exhibits revealed simple addition errors, gross errors as to the compilation and billing of hourly labor rates and multiple billings for single service calls. We, therefore, recalculated plaintiff’s claims as they related to Inn. Our total for Exhibits 1 through 42, inclusive, is $8,963.85. This figure includes $4,359.85 of errant billings as outlined, supra; therefore, plaintiff’s Inn claim is allowed to the extent of $4,604.00.
In addition to the amounts, supra, Trustee also seeks to recover for work undertaken at Sussex, allegedly on Capp’s behalf. The “Sussex contracts,” collectively Plaintiff-Sussex Exhibits 1, 2, 3, at Paragraph eight provide in part:
“This agreement sets forth the entire transaction between the parties ... All changes in this agreement shall be made by a separate document and executed with the same formalities. No agent of the [debtor], unless authorized in writing ... has any authority to ... alter or enlarge this contract ...”
The invoices, dated August 15, 1988 and August 21, 1988, represent work allegedly undertaken by Debtor, at Sussex, on Capp’s behalf. Invoices alone, given the existing Debtor-Capp Sussex contracts, do not rise to the level of contractual obligations which would bind Capp. See, In re Greenwich Showboat, Ltd. Partnership, 117 B.R. 54 (Bankr.D.Conn.1990). The excerpt, supra, provides specific formalities which must occur before new or enlarged contractual relationships and responsibilities exist; none have occurred.
Trustee’s invoice submissions representing work undertaken at Sussex from November 1, 1988 through November 20, 1988, by B & D Plumbing & Heating, Inc. given the Debtor-Capp Sussex contracts, likewise do not contractually obligate Capp to the Trustee’s claims. Further, the record is devoid of evidence which shows that Capp granted Debtor the authority to enter into contracts on Capp’s behalf; to that end, the contractual relationship, if any, runs from Debtor to B & D, not from Capp to B & D.
We find, therefore, that: (1) three valid contracts existed between Debtor and Capp, as to Sussex, for $71,480.00; (2) a valid oral contract existed between Debtor and Capp, as to Beebe, for $7,975.00; and (3)a valid oral contract existed between Debtor and Capp, as to Inn, for $4,604.00; the total then due to Debtor, subject to payment received, as discussed infra, is $84,059.00. Further, the Sussex invoice submissions do not, absent more, give rise to a contractual debt; therefore, Trustee may not prevail against Capp as to these amounts.
Capp, in a termination of employment letter to Debtor, dated November 28, *1051988, indicated termination stemmed from “nonperformance and breach of contract.” The record, save a one-day deer hunting excursion, is devoid of any specific examples or actions, by Debtor, which indicate a material breach of contract. Capp’s overlapping employment of Debtor, initially at Inn, then at Sussex, and finally at Beebe, indicates that, contrary to the nonperformance and breach allegation, Debtor had performed for Sussex in conformity with customary industry practices. We apply the same standard to Debtor’s performance at Beebe and Inn. Absent specific examples of a breach or nonperformance, we find Capp’s unilateral termination of Debtor’s subcontracts without basis; therefore, Capp remains indebted to Debtor for the contractual amounts as outlined, supra.
Finally, our review of evidentiary submissions reveals that Capp tendered payments of $2,000.00, $18,000.00 and $20,-786.00 on June 24, 1988, July 27, 1988 and November 8, 1988, respectively; aggregate payments, then, total $40,786.00. As Debt- or has received such amount, he is due an additional $43,273.00 from Capp.
In light of the considerations, supra, I shall enter the following order.
ORDER
AND NOW, this 8th day of May, 1992, it is ORDERED that a judgment of $43,-273.00 be entered on the Plaintiff-Trustee’s Complaint. Further, all claims of Capp Construction, Inc., as to the Debtor, are DISMISSED WITH PREJUDICE as same are without merit. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491456/ | MEMORANDUM OPINION
HAROLD C. ABRAMSON, Bankruptcy Judge.
This dispute arises in the context of Placid Oil Company’s (“Placid’s”) Objection to Administrative Claim Filed by the Internal Revenue Service (“Objection”). Appearing on behalf of Placid were Khent Rowton and Richard Bruse of the law firm of Simon, Anisman, Doby, Wilson & Skillern. The Department of Revenue (referred to herein as the “Government” and the “IRS”) was represented by Grover Hartt and Lillian Brigman of the Department of Justice, Tax Division.
The Court has read the briefs and related documents submitted by counsel, heard the evidence presented, and the arguments of counsel and in light of the argument and evidence presented at trial finds in favor of the Internal Revenue Service.
This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 157. The following represents the Court’s findings of facts and conclusions of law. Although written in narrative form, this document is intended to comply to Bankruptcy Rule 7052.
I. PROCEDURAL HISTORY
Placid filed for relief under Title 11 Chapter 11 of the United States Bankruptcy Code on August 29, 1986. On September 30, 1988, this Court entered its Order confirming the Modified Fourth Amended Joint Plan of Reorganization of Placid Oil Company, et al. (the “Plan”). The Plan provided a bar date for the filing of administrative claims, and on December 7, 1988, the IRS filed its Administrative Claim in the amount of $12,327,919.50. Placid responded with an objection to the claim filed on December 16, 1988, which was later amended. The Administrative Claim pur*132ports to cover tax deficiencies for tax years 1986 and 1987, including accrued interest.
II. FINDINGS OF FACT
This matter arises out of a loss claimed by Placid on its 1986 tax return. Placid Oil Company, United Kingdom (“Placid, U.K.”), a subsidiary of Placid, deducted as a loss the sale of certain license interests in Blocks 16/121, 211/8 and 29/2 in the United Kingdom sector of the North Sea (the “License Interests”). The IRS challenged Placid’s loss deduction of $16,078,527.00 on the grounds that, inter alia, it originated in a transaction which did not give rise to a recognizable loss for tax purposes. To elucidate the tax problem, the Court shall develop the events and transaction which gave rise to the claimed deduction.
The Corporate Separation
The issued and outstanding shares of stock of Placid were owned by six trust estates: The N.B. Hunt, Jr. Trust Estate, the W.H. Hunt Trust Estate, the Margaret Hunt Trust Estate, the Lamar Hunt Trust Estate, the H.L. Hunt, Jr. Trust Estate, and the Caroline Hunt Trust Estate. In early 1982, the shareholders of Placid determined to effect a separation of Placid’s assets among its various shareholders. This separation involved a transfer of the License Interests.
As part of this separation the shareholders created new corporations, Rosewood Resources Inc., owned by the Caroline Hunt Trust and Britannia-Hunt Exploration, Ltd., owned by the Margaret Hunt and the H.L. Hunt Trusts. These newly formed corporations received a percentage of what were formerly Placid’s assets. Placid, U.K., Placid’s British subsidiary, transferred 35.7% of its License Interests to its parent, Placid.1 Placid then transferred 18.97% of the 35.7% to newly created Rosewood Resources, Inc. U.K. (“Rosewood”), a wholly owned subsidiary of Rosewood Resources, Inc. As the same time, Placid transferred 16.8% of its License Interests to Britannia-Hunt Exploration, Ltd. (“Britannia-Hunt”), a wholly owned subsidiary of Hunt Petroleum Corporation (“HPC”)2. In 1983, Britannia-Hunt paid Placid, U.K. $12,549,658 for the license interests which became Britannia-Hunt’s only tangible assets.
The Corporate Separation was somewhat complicated by United Kingdom Department of Energy (the “Department”) requirements. The Department required that a company employ a certain number of individuals in the United Kingdom to qualify as a “corporate presence” in order to be recognized by the Department of Energy as a named licensee for North Sea Oil exploration purposes.3 The Department had, at one time, indicated that it would recognize Rosewood and Britannia-Hunt as named licensees for oil exploration purposes. However, just prior to the conclusion of the separation, the Department took a contrary position and indicated that it would not recognize Rosewood or Britannia-Hunt as named licensees for oil exploration in the North Sea due to their lack of corporate presence. The testimony presented indicated that neither Rosewood nor Britannia-Hunt found compliance with the corporate presence requirement economically feasible. As a result, Placid, U.K., which qualified under Department requirements, retained its status as the named licensee and conveyed to Rosewood and Britannia-Hunt only beneficial interests in the licenses. By virtue of the separation agreements, and as a result of the corporate separation, Placid, U.K. was “trustee” for Rosewood and Britannia-Hunt with respect to the License Interests.
*133
The Sale of Rosewood License Interests
In October 1985, Rosewood determined to sell its License Interests. Rosewood’s sale of its License Interests created some controversy due to the existence of preemptive rights owned by parties to the applicable operating agreement for the North Sea licenses at issue. Notwithstanding the pre-emptive rights, Trafalgar House Oil and Gas (“Trafalgar”), which was not a party to those agreements, purchased Rosewood’s License Interests. Due to the preemptive rights issue, the other parties under the operating agreements took the position that Rosewood, and consequently, Trafalgar, as beneficial interest owners, did not own anything at all. The operators then refused to recognize Trafalgar as an interest holder in the Licenses. To settle this dispute, Trafalgar ultimately, years later, transferred 25% of the interest acquired from Rosewood to the Sun and Occidental Group.
The Sale of Britannia’s License Interests
In 1985 Britannia-Hunt desired to divest itself of all of its North Sea interests. Ultimately, by agreements executed on July 11, 1986, Placid, U.K. sold to North Sea Sun Oil Company, Occidental Petroleum Company, Conoco, and London & Scottish Marine Oil (collectively referred to as the “Sun-Oxy Group”), an undivided 16.8% license interests in P047 (valued at $1), P224 (valued at $399,999), and P212 (valued at $6 million) for $6,000,000 in cash and a $400,-000 note. The 16.8% transferred to the Sun-Oxy Group was a portion of Placid, U.K.’s own interests. Placid, U.K. then acquired all of the stock of Britannia-Hunt from HPC for $6.4 million dollars. In so doing, Placid, U.K. acquired Britannia’s License Interests in P212, P224, P361, and P047.4
Calculation of the Loss Deduction
Placid, through its subsidiary Placid, U.K. and by way of a consolidated tax return, claimed a loss of $16,078,527 on the sale of the License Interests. The deduction was the result of a reduction in basis in the property sold to the Sun-Oxy Group. Placid claimed its basis in the License Interests was $22,478,527. Placid deducted the amount derived from the sale of its License Interests ($6.4 million dollars).5
III. ISSUE
The fundamental issue for determination is relatively simple: Whether a corporation, acting as a vehicle for a separate entity, sells its own assets to a third party and obtains virtually identical assets from that entity by acquisition of stock, is entitled to a loss deduction which may result from the sale.
IV. DISCUSSION OF LAW
' A. The Proof Required
At the outset the Court must address the burdens of proof which surround the consideration of this claim in Bankruptcy Court. The Court acknowledges that Placid would bear the final burden of proof in another forum.6 In Tax Court, the burden of proof has been judicially established due to inherent conflicts between the taxpayer and the Internal Revenue Service *134and policy considerations regarding the protection of the public fisc. While Tax Court responds to the bidding of the Tax Code and its policies, the Bankruptcy Court responds to the Bankruptcy Code and the policies promulgated thereunder.
The Government’s proof of claim constitutes prima facie evidence of the claim’s validity and amount under Bankruptcy Rule 3001. The Government’s original and amended proofs of claim contain no documentary evidence, but are merely composed of assertions of assessments following the filing of Placid’s bankruptcy petition. The objection filed by Placid initiated a contested matter under Bankruptcy Rule 9014. As the objecting party, Placid has the burden of producing enough evidence to rebut the claim of the government. In re Fidelity Holding Co. Ltd. (California State Board of Equalization v. Official Unsecured Creditor’s Committee), 837 F.2d 696, 698 (5th Cir.1988).
Placid must produce evidence that is “of probative force equal to that of the creditor’s proof of claim.”7 Placid’s amended objection to the IRS’ corresponding proofs of claim consists of a discussion of the disallowed deductions and Placid’s reasons why the deductions should be allowed. The Court finds Placid’s evidence on the amended objection adequate to rebut the government’s prima facie case. The burden then shifts back to the claimant, to prove the claim by the preponderance of the evidence. The IRS, as claimant, carries the ultimate burden of persuasion. In re Fidelity Holding Co., Ltd., 837 F.2d at 698.
Bankruptcy laws, formulated by Congress, carry an underlying policy which encourages a fresh start or reorganization of a bankrupt. Although the Code does provide for some favorable treatment of taxing authorities as creditors,8 neither the Code nor the Rules prescribe diminished burdens of proof for claims of the government.
B. The Question of Deductibility
The IRS contests Placid U.K.’s right to claim a deduction for the assets sold on a number of grounds. First it argues that given the totality of the circumstances, Placid, U.K. did not sustain an economic loss. Second, the Government argues that Placid, U.K. acted as a mere conduit to facilitate Britannia-Hunt’s sale of its assets to a third party. Third, the Government argues that Placid, U.K. acquired what it gave away and so should not be entitled to recognize a loss. Finally, the Government argues that Placid, U.K. must treat this matter in the same manner for financial and tax accounting purposes; and that Placid U.K.’s treatment of this sale as a “wash” for financial accounting purposes precludes its treating the sale as a “loss” for tax accounting purposes. Placid, U.K. argues that because it had valid business reasons for its participation in the sale of assets, and conducted the sale without regard for United States tax ramifications, it is entitled to a loss deduction.
The general tax provision governing deductions is at 26 U.S.C. § 165 and states: “a taxpayer may deduct any loss sustained during the taxable year for which the taxpayer is not indemnified by insurance or otherwise.” Loss is to be recognized unless an applicable nonrecognition statute applies.
*1351. The Sham Transaction Doctrine: Economic Loss and Bona Fide Loss
a. The Sham Transaction Doctrine
Only a bona fide loss is an allowed tax deduction. Substance and not mere form shall govern in determining a deductible loss. Under 26 U.S.C. § 165 and the regulations promulgated thereunder, four factors must be present to qualify as deduction: (1) there must be an actual loss, (2) the loss must be sustained by the taxpayer, (3) the loss must be sustained in a closed transaction during the taxable year; and (4) the loss must not be compensated for by insurance. The closed nature of the transaction and presence of insurance indemnification are not issues in this case.
The relevant consideration before the Court is whether Placid sustained an “actual loss.” The term “loss” is not defined in the Tax Code, but in vague terms it is parting with value of an asset. Williamson v. Commissioner of Internal Revenue, 100 F.2d 735 (6th Cir.1938). No deduction is allowed under the Code unless the taxpayer in fact suffered a loss. The loss must be a bona fide loss representing a real change of position in a true economic sense; substance rather than form governs in determining a deductible loss. Treas. Reg. § 1.165(b) (1987).
A fundamental tenet of tax law requires that courts, in analyzing the tax consequences of a transaction, should look to the substance of the transaction and not the form. Gregory v. Helverling, 293 U.S. 465, 55 S.Ct. 266, 79 L.Ed. 596 (1935). A transaction will not be disregarded merely because it was entered into for tax saving motives if it otherwise has real substance. Gregory v. Heiverling, 293 U.S. 465, 479, 55 S.Ct. 266, 298, 79 L.Ed. 596 (1935). Elements of control, intent and tax motives are examined in determining the ultimate tax treatment of a transaction.
The evidence established that in October of 1985, Placid, U.K. and Britannia-Hunt concurrently offered to sell one hundred percent of each entities License Interests. However, Placid, U.K. later determined not to sell its interests, because it found the offered sale price too low.
In November of 1985, the Sun-Oxy Group, became interested in acquiring Britannia-Hunt’s license interests in the North Sea. On February 5, 1986, by Telex at its Dallas headquarters, HPC as sole shareholder of Britannia-Hunt, received a firm offer from North Sea Sun Oil, Occi-dential Oil, and Grand Metropolitan Oil for the bulk of Britannia’s assets. HPC accepted this offer.
In February of 1986, after Britannia-Hunt and the proposed purchasers had reached an agreement in principle, Britannia-Hunt’s London solicitors began earnestly examining ways in which to structure the transaction. It was concluded that problems existed with respect to the outright sale of Britannia-Hunt’s assets. Two areas required redress: (1) The commercial objections of the other operators9; and (2) the United Kingdom tax position of Britannia-Hunt.10 These factors led Britannia-Hunt’s London solicitors the conclusion that the best way to dispose of Britannia-Hunt’s assets was to sell 100% of the stock in the corporation.
This directive created another wrinkle in the disposition because, as a result, Britannia-Hunt, no longer interested an outright sale of its assets, had committed to a sale. The sale of stock presented difficulty because it was perceived that purchasers, acting as a group, would have tax problems in later separating the interests. No evidence was introduced to indicate that the Sun-Oxy Group was offered stock of Britannia-*136Hunt. To the contrary, in a memorandum dated November 8, 1985, the purchasers of the assets on the subject of “bidding strategy” stated:
It has been asked of Placid whether the interests would be sold by way of an asset sale or a stock sale. The telex received from Placid on 6th November confirms that the sale contemplated by their 17th October telex is an asset and not a stock sale_ (Placid Tr.Ex. 18)
Testimony at trial indicated that the structure of the transaction made the possibility of Britannia-Hunt’s disposal of its interests seem remote. Allegedly, James Parker, the President of Britannia-Hunt, serendipitously hit upon the idea to place Placid, U.K. in the center of the transaction. However, the IRS produced controverting evidence which indicated that the parties had contemplated Placid, U.K.’s involvement in the earlier Rosewood disposition. Moreover, because of the trust relationship between the Placid, U.K. and Britannia-Hunt, it would have been necessary for Placid, U.K. to have some direct involvement in any sale of Britannia-Hunt property.11
b. Economic Purpose
To determine whether economic substance is present, courts examine the objective realities of a transaction. See, Merryman v. Commissioner of Internal Revenue, 873 F.2d 879, 881 (5th Cir.1989). This question addresses the transaction from the standpoint of the business purpose behind the transaction. Courts ask whether the transaction at issue was entered for a valid, profit motivated, or business motivated reason.. A more probing question is whether a transaction might occur in a bona fide business setting. Merryman, 873 F.2d at 881.
Placid, U.K. does not allege that its sale of its assets was profit motivated. Indeed, Placid, U.K. alleges that it participated in the 1986 transfer of assets because of valid business concerns which arose out of its trust relationship with Britannia-Hunt, and further that United States tax considerations were not factors in the transaction. At trial, the litany of burdens created by the trust relationship between Placid, U.K.’s and Britannia-Hunt was presented by Michael Cuthbert (“Cuthbert”), a British solicitor retained by Britannia-Hunt.
Cuthbert testified that the arrangement between the companies was unusual given the nature of the oil development business. Because of operating agreements pertaining to the subject licenses, other parties were inadvertently involved by the severance of title. Evidence presented at trial demonstrated some general dissatisfaction with the situation by Occidental Petroleum, North Sea Sun Oil Company, and Conoco Oil Company (some of the other parties to the operating agreement).12 The situation did not impede Placid, U.K.’s conduct of business. From the evidence presented, it appears that the separation of the legal and *137equitable interests was tolerated by the other parties to the operating agreement because of the prior relationship between the companies arising out of the 1983 Corporate Separation.
Cuthbert testified that Placid, U.K. and Britannia-Hunt were forced to vote as a block with respect to the operating agreement. For this reason, Britannia-Hunt could not pursue its own agenda with respect to the License Interests.13 While this may have been burdensome to Britannia-Hunt, it did not affect Placid, U.K., which notwithstanding Britannia-Hunt’s divergent corporate agenda, continued to engage in exploration of its North Sea holdings.- No evidence was offered that Placid, U.K. refrained from taking any action with respect to those licenses out of deference to Britannia-Hunt’s desires. Cuthbert also testified that as a named licensee, Placid, U.K. was legally liable to the British Government for oil spills or environmental disasters which might have occurred. At trial the environmental liability was urged as an extreme concern. The Court notes, however, that Placid, U.K. had its own potential environmental liability and would have had a right of indemnification and contribution from Britannia-Hunt for its proportionate share. Therefore, the argument regarding the seriousness of this burden is less than convincing.
Placid, U.K., through testimony of Cuth-bert and Placid, U.K.’s comptroller, Jeff Jones, urged that the separation of interests created an administrative burden for Placid, U.K. The Court finds that while it may be true that Placid, U.K. was responsible for the care and maintenance of those interests, Britannia-Hunt paid its proportionate shares of the costs generated by this arrangement. The Court is aware that inasmuch as Placid, U.K. maintained its own interests in identical leases, it is less than convincing that such administrative concerns would have been a catalyst which would lead Placid, U.K. to engage in the complicated 1986 transaction.
Placid, U.K.’s sale of its assets in 1986 can hardly be said to have occurred in the context of an arms-length transaction or as a transaction which would have occurred in the ordinary business-world. This is evidenced by Britannia-Hunt’s reluctance to involve the third-party purchasers in the structure of the transaction.14 Britannia-Hunt was not, however, timid about involving Placid, U.K., which had been substantially involved since the inception of the creation of Britannia-Hunt’s ownership of those interests. Placid, U.K.’s partial motivation for its involvement in the 1986 transaction was an attempt to rectify a perceived inequity to HPC due to the corporate separation. (Placid Tr.Ex. 5; Trial Tr. p. 208-210).
Further evidence of the absence of an arms-length transaction is the fact that Placid, U.K. was not interested in selling its own assets, yet actually did so at the behest of Britannia-Hunt. With respect to the subsequent purchase of Britannia-Hunt stock, Placid, U.K., virtually insolvent at the time of the 1986 transaction, was hardly in a position to acquire the stock of another corporation. In fact, Placid, U.K. paid for the stock from funds received from the sale of its assets (Trial Tr. p. 198).
*138While Placid, U.K. asserts that it did not structure the transaction in consideration of U.S. tax consequences, it did in fact structure the transaction for United Kingdom tax avoidance. Great lengths were taken to make the sale of assets, and subsequent stock purchase, appear independent of one another in order to avoid the application of the United Kingdom “sham transaction doctrine.” (Government Tr.Ex. 21, p. 7-8). It would appear that the tax laws of the United States and the United Kingdom are similar enough that Placid U.K.’s efforts to avoid British taxation should not be rewarded by allowing it to avoid United States taxes.
The Court does not interpret case law to say that every transaction must be profit motivated for the consequences to be tax deductible, but sound business motives must be present. For the sake of deducti-bility, there must be more to an undertaking than relieving another entity of a burden brought about by the creation of a trust relationship. The Court finds that Placid, U.K.'s desire to accommodate Britannia-Hunt’s disposal of its License Interests, and its participation in that transaction does not give rise to a bona fide loss.
c. The Economic Loss Analysis
The economic loss analysis is a common sense approach to deductibility. Courts consider whether there has been an actual economic gain or loss. This is generally put in terms of an increase or decrease in a taxpayer’s net worth. Colloquially phrased, “Is the taxpayer, in fact, richer or poorer?” Eisner v. Macomber, 252 U.S. 189, 40 S.Ct. 189, 64 L.Ed. 521 (1920). The Government argues that the transaction between the corporations was not bona fide because there was no genuine economic loss. The transfer left the corporations in the same economic position as before. Assets simply shifted “from one pocket to another.” The Government contends that a transfer such as this, which really left things as they were, is not an appropriate occasion for recognizing a gain or loss under the Code. In considering this issue, the Court looks at the assets sold and acquired. It is true that Placid, U.K. sold License Interests and that Placid, U.K. acquired stock of Britannia-Hunt.
In acquiring the stock of Britannia-Hunt, Placid, U.K. merely acquired the exact interests in proportion to that which it sold. The clear evidence at trial establishes that the primary objective of the sale of assets and purchase of stock was that Britannia-Hunt divest its United Kingdom holdings. “A sale by one person cannot be transformed for tax purposes into a sale by another by using the latter as a conduit through which to pass title.” Robino, Inc. Pension Trust v. Commissioner of Revenue, 894 F.2d 342, 344 (9th Cir.1990), quoting Commissioner v. Court Holding Co., 324 U.S. 331, 334, 65 S.Ct. 707, 708, 89 L.Ed. 981 (1945). The 9th Circuit quoting Malkan v. Commissioner, 54 T.C. 1305, 1312-13 (1970), stated:
Where the issue is whether an individual is acting for himself or for trusts of which he is trustee, the chronological sequence of the steps taken to accomplish a preconceived objective (here a sale) may have little to do with determining who in truth and substance made the sale_ [¶] Our examination must focus on the realities of the transaction rather than the refinements of legal title, the verbiage of written instruments, or the chronological order of formal events.
Robino, Inc. Pension Trust, 894 F.2d at 345 (emphasis added) [additional citations omitted].
A similar case to the case at bar is Scully v. United States, 840 F.2d 478 (7th Cir.1988). In Scully, the government asserted the same argument regarding the economic outcome transaction between trusts. The simplified facts of Scully are these: Two trusts were controlled by the same individuals as trustees. One trust, Trust A, held land and no cash, the other trust, Trust B, possessed both cash and real property. When Trust A needed cash, Trust B agreed to purchase property from Trust A. The sale occurred at market value, in an arms-length transaction. Trust A later claimed a loss deduction arising out of a reduction *139in basis. The IRS objected and disallowed the deduction under 165 and 267(b)(5).15 At trial the trustees argued that their only motivation in the transaction was to keep the property within the family, the sale was not motivated by tax consequences, and they did not know a tax deduction would arise until well after the transaction had been completed. The opinion of the district court in favor of the government was affirmed by the 7th Circuit. The court in Scully found that the taxpayer failed, as it did here, to prove that actual separation in the operation of the interests at issue, and consequently, any genuine economic loss.16
The Court must examine the “actualities” of a situation in determining whether the flow of economic benefits have been altered. Scully v. U.S., 840 F.2d at 485. While the existence of separate legal entities cannot be disregarded, this factor “is only one incident necessary to complete an actual sale_” Scully v. U.S., 840 F.2d at 485, citing, Higgins v. Smith, 308 U.S. 473, 476, 60 S.Ct. 355, 357, 84 L.Ed. 406 (1940). It appears from the evidence presented that the purchasers neither wanted, or expected to deal directly with Britannia-Hunt in purchasing the License Interests. Because the other operators refused to recognize Britannia-Hunt’s ownership rights, this aspect of the sale would create problems for potential third party purchasers (see footnote 9 supra, and discussion of the “Sale of Rosewood License Interests” supra.). Placid, U.K., and Britannia-Hunt were inextricably interwound by the separation of legal and beneficial title of the License Interests. The evidence indicates that the Sun-Oxy Group dealt with Placid, U.K., as trustee of Britannia-Hunt’s interests and as the named licensee. No evidence indicates that the Sun-Oxy Group believed it was purchasing Placid, U.K.’s assets.
At the inception of the disputed transactions as between third parties, Placid, U.K. represented that it was selling Britannia-Hunt’s assets.17 The necessity of papering the transactions so that they appeared to *140be independent was recognized by the parties in the documentation of the transaction presented to the Court, it was not until May 13, 1986, that Placid, U.K., or Britannia-Hunt, actually attempted to characterize the sale as two separate transactions. That evidence is in the form of a letter from Cuthbert to the Department in which Cuthbert purported to write on behalf of all of the parties to the two transactions. Cuthbert wrote:
... You will note that the Party transferring the Working Interest to the Occidental Group is Placid. Shortly after this disposal occurs, Placid will acquire the entire issued stock of BHE from Hunt and BHE will therefore become a wholly owned subsidiary of Placid. This will terminate the involvement of Hunt as the indirect holder of beneficial interests in Petroleum Production Licenses in the United Kingdom....
(Placid Tr.Ex. 32). Later, Cuthbert wrote more forcefully, again to the Department:
We would like to make clear that the interest in respect of which consent is sought ... is legally and beneficially by Placid Oil Company (United Kingdom). There is no sale by Britannia-Hunt Exploration (U.K.) Limited of any beneficial interest it holds, [tl] There will, however, be a sale of the stock of Britannia-Hunt Exploration (U.K.) Limited, in due course, to Placid Oil Company (United Kingdom).
(Placid Tr.Ex. 33).
The Court observes that oil and gas license interests are hardly dissimilar. Placid, U.K. divested itself of nothing which was in any way unique.18 In purchasing the stock of Britannia-Hunt, Placid, U.K. intended to acquire and did acquire the same assets which were transferred to the Sun-Oxy Group.
It was argued (more forcefully by the IRS than by Placid) that Placid acquired interests in license number P301 from Britannia-Hunt and did not transfer its own interest in P301. Thus, Placid acquired more interests in the stock purchase than it sold. However, the sale of this license interest was recognized as more of a liability than an asset because the P301 license interest was the subject of ongoing litigation. In fact, had this been truly an arms-length transaction, it is unlikely that Placid, U.K. would have accepted the additional liability of the P301 license interest (See footnote 4, supra.).
2. The Step Transaction Doctrine
A corollary of the substance over form rule is the “step transaction” doctrine which directs courts not to focus on one segment of a complicated transaction but to look at the transaction as a whole. Security Industrial Co. v. United States, 702 F.2d 1234, 1244 (5th Cir.1983). The Government urges the Court apply the step transaction doctrine and consider the events as a whole rather than as two separate transactions. Generally speaking, if after viewing a transaction as a whole, the Court determines that it lacks in economic substance so as to be a sham, it will be avoided entirely through the step transaction.
Although, when considered individually, each step in a series of interrelated transactions may escape taxation, individual tax significance of each step is irrelevant *141under the step-transaction doctrine if steps when viewed as a whole amount to a single taxable transaction. Security Industrial Insurance Company v. United States, 702 F.2d 1234 (5th Cir.1983).
Two analyses have been utilized to determine if the step transaction doctrine should be applied to circumstances of taxation: (1) The “interdependence test” which requires an inquiry as to “whether on a reasonable interpretation of the objective facts the steps were so interdependent that the legal relations created by one transaction would have been fruitless without the series;” [citation omitted] or “[w]hen it is unlikely that any one step would have been undertaken except in contemplation of the other integrating acts,”; and (2) the “end result test” which establishes a standard whereby “purportedly separate transactions will be amalgamated into a single transaction when it appears that they were really component parts of a single transaction intended from the outset to be taken for the purpose of reaching the ultimate result.” Security Industrial Insurance Company, 702 F.2d at 1244 [additional citations omitted].19 If the facts apply to the above standards, application of the step transaction may be deemed appropriate. Security Industrial Insurance Company, 702 F.2d at 1245. Applying either standard, the Court concludes that Placid may not claim a deduction of its 1986 sale of assets.
In applying the “interdependence” standard, it is unlikely that any one step would have been undertaken except in contemplation of the others. Placid, U.K. executed a sales agreement with the Sun-Oxy Group on July 11, 1986, and three days later, July 14, 1986, entered into a stock purchase agreement with Britannia-Hunt, a beneficial interest holder in exactly the same proportionate share in License Interests as those which Placid, U.K. had previously divested. More importantly, while Placid, U.K. had no desire to sell its own assets, it was interested in aiding Britannia-Hunt’s disposal of its assets.
The characterization of the transaction as a sale of license interests and purchase of stock was mere legal fiction designed for the one ultimate outcome — Britannia-Hunt’s disposal of its North Sea License Interests. Placid, U.K. indicated at trial that it would not have sold its own assets without the contemplated purchase of stock of Britannia-Hunt to acquire Britannia-Hunt’s License Interests which were identical to those sold. The contracts evidencing the transaction between the parties are void of any cross-reference. This fact alone suggests self-contained and independent transactions. However, the contracts were written in that way intentionally, to avoid the potential application of the United Kingdom sham transaction doctrine. (Placid Tr.Ex. 23)
In applying the “end result” standard, “purportedly separate transactions are to be amalgamated when the successive steps were designed and executed as part of a plan to achieve an intended result.” Security Industrial Insurance, 702 F.2d at 1246. It is uncontroverted that the ultimate outcome was the result intended from the outset. Although Placid, U.K. did sell its own assets, it later acquired the same proportion in the same assets as sold. The transaction was a relatively uncomplicated two-step transaction, to reach the intended result which was Britannia-Hunt’s divestiture of its North Sea oil and gas interests. The machinations devised to avoid the application of British taxes do not change the result for United States tax purposes. See Security Industrial Insurance, 702 F.2d at 1246, citing, Minnesota Tea Co. v. Helverling, 302 U.S. 609, 613, 58 S.Ct. 393, 395, 82 L.Ed. 474 (1938).
*1423. Additional Observations
The Court, having reached its conclusion on under the sham transaction and step transaction doctrines, need not address additional issues asserted respect to the taxation issue. However, both the Government and the Debtor asserted arguments that are rather curious. The IRS argues that to further preclude the debt- or’s deduction is the debtor’s own financial accounting method which treated the sale and subsequent purchase of Britannia stock as a “wash” and later treated the sale as a loss for its accounting purposes. The IRS cited Thor Power Tool v. Commissioner of Internal Revenue, 439 U.S. 522, 99 S.Ct. 773, 58 L.Ed.2d 785 (1978), as authority prohibit the debtor from using a different method of accounting with respect to its financial and tax accounting purposes. At the outset, the Court finds the language and facts of Thor Power Tool inapposite to the case at bar and further notes that an identical argument was made in by the government in First Federal Savings & Loan Association of Temple v. United States of America, 694 F.Supp. 230 (W.D.Tex.1989), aff’d by San Antonio Sav. Assn. v. Commissioner of Internal Revenue, 887 F.2d 577 (5th Cir.1989). The District Court summarily rejected the government’s argument saying:
Typically, this section has been used by the I.R.S. to require a taxpayer to use a different method of accounting for tax purposes than he uses for financial or regulatory purposes when the I.R.S. (the ‘Commissioner’) is of the opinion that the change is required to clearly reflect the taxpayer’s income. Thus, the taxpayer would use different methods of accounting on its ‘books’ and on its tax return at the direction of the I.R.S. pursuant to the authority granted under Section 446. [¶] Here, however, the Government urges a rather novel interpretation of Section 446 which presents the Court with an issue of first impression. First, the Government argues that the ‘accounting method’ a taxpayer uses on his financial and regulatory books may differ from the method he uses in computing his taxable income only when the Commissioner requires it (i.e. the Commissioner determines that the taxpayer’s financial and regulatory accounting method does not ‘clearly reflect income’), [footnote omitted] The government goes on to contend, therefore, that [the taxpayer] must use the same accounting treatment for the loss at issue for both tax and financial reporting purposes unless the Commissioner explicitly instructs it not to do so by concluding that the financial accounting treatment of the claimed loss does not clearly reflect [the taxpayer’s] income.
The Court agrees with the findings of Judge Smith and rejects the contention of the IRS on the same grounds.
Placid argues that it would not have been able to utilize a deduction at all except in bankruptcy. As authority for this assertion, Placid cited United Savings Assn. of Texas v. Timbers of Inwood Forest Assoc., 484 U.S. 365, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988). The Court has carefully read Timbers in an effort to determine the basis of the Debtor’s argument and has found nothing in that case to support Placid’s assertion. Placid did not offer any additional explanation of its legal reasoning in its brief. The Court determines that Timbers is not applicable to this case.
V. CONCLUSION
The Court finds that in considering the transaction, Placid, U.K. incurred no loss on the sale of the license interests. The record reveals that Placid, U.K. had an no real economic purpose in the sale of its own License Interests except to facilitate Britannia-Hunt’s total divestment of its North Sea Holdings. Placid, U.K.’s role became relevant because of the separation of the legal and equitable interests in the License Interests, but became crucial when British taxation became an issue. The potential buyers were reluctant to purchase the stock of Britannia, and Britannia-Hunt was reluctant to sell its License Interests outright because of its basis in the License Interests. To facilitate the sale, Placid, U.K., with no reservations about purchasing Britannia-Hunt’s stock, acted as a ve-*143hide between Britannia-Hunt and the Sun-Oxy group.
The record reveals that Placid, U.K. first sold its 16.8% of the license interests to the Sun-Oxy group for $6.4 million and then used the proceeds to purchase the stock of Britannia-Hunt. In so doing, Placid, U.K., within approximately 72 hours, by a preexisting agreement with Britannia-Hunt, reacquired what it had sold. The direct and intended result of this transaction was Placid, U.K.’s regaining control of the 16.8% License Interests it had previously conveyed to the Sun-Oxy Group.
In consideration of the substance of this transaction and applying standards set forth by the 5th Circuit with respect to the step transaction doctrine the Court finds that this transaction does not give rise to a bona fide loss such that Placid, U.K or its parent, Placid Oil Company should be entitled to a deduction.
The Court finds IN FAVOR of the Internal Revenue Service. Counsel for the Government is requested to prepare an Order consistent with the findings herein.
. Placid, U.K. held a certain percentage in the License Interests at issue. Placid, U.K. did not own 100% of those License Interests. Of that portion which Placid, U.K. owned prior to 1983, it transferred a total of 35.7% to its Parent, Placid, which in turn, transferred 35.7% of those interests to the other corporations. Placid, U.K. retained 64.3% of its interests in those licenses.
. At the time of the Corporate Separation, HPC was known as “Louisiana-Hunt Petroleum Corporation."
. Apparently, qualification as a “named licensee” carries with it many burdens and benefits with respect to oil exploration.
. Placid, U.K. did not divest its interest in license P361. That license was withdrawn from the sale to the Sun-Oxy Group due to the then pending litigation relating to the drilling and exploration of that license. The Sun-Oxy Group sought an indemnification agreement from Placid with respect to that property and the possible liability associated with that interest. Placid, U.K. declined to provide such indemnification, and therefore, continued to hold the property.
.
Amount Received from the
Sale of L.I.: $ 6,400,000
Placid’s Basis in the License
Interests: <$ 22,478,527 >
Loss: <$ 16,078,527 >
. Deductions allowed by the Internal Revenue Code are a matter of legislative grace. Commissioner v. National Alfalfa Dehydrating & Milling Co., 417 U.S. 134, 149, 94 S.Ct. 2129, 2137, 40 L.Ed.2d 717 (1974). The taxpayer bears the burden of showing his or her entitlement to a particular deduction. C.A. White Trucking Co., Inc. v. Commissioner, 601 F.2d 867, 869 (5th Cir.1979), Cagle v. Commissioner, 539 F.2d 409, 416 (5th Cir.1976).
. In re Simmons, 765 F.2d 547, 552 (5th Cir.1985). Collier has observed:
While the burden of ultimate persuasion is always on the claimant, and while probative force is given to the allegations in that creditor’s proof of claim, the trustee nonetheless carries the burden of going forward to meet, overcome, or at least equalize, what operates in favor of the creditor by the force of section 502(a) and the Rule. 3 Collier on Bankruptcy, ¶ 502.01 p. 502-17 (15th ed. 1989). Another commentator on this subject has observed that,
In the final analysis, the amount of evidence necessary to rebut a presumption will vary depending upon such factors as the policy reasons favoring the presumption, the strength of the evidence supporting the presumption, and the quality and believability of the rebutting evidence.
Russell, Bankruptcy Evidence Manual, § 301.3 p. 42 (West 1987).
. E.g., Section 507 priorities.
. Other operators refused to recognize Britannia-Hunt as having any interest whatsoever. If any asset were sold, Placid, U.K. would have been required to participate because it was a party to the operating agreement. (Placid Tr. Ex. 19 and 26).
. The transfer to Britannia in 1983 had resulted in a valuation of its sole asset at a Low basis (roughly $500,000) while Britannia's basis in stock had been given a high basis (roughly $12.6 million). The sale of the asset would have resulted a taxable gain of 30% on the amount over the basis in the asset (in this case 30% of § 6.5 million minus $500,000, or 30% of $6 million).
. In its Amended Objection to the Government's proof of claim, Placid-states,
In 1986 [Britannia-Hunt] solicited bids to sell its License Interests. Because [Britannia-Hunt] was not recognized by the [Department] as a direct licensed owner, and because Ptacid[,U.K.] held legal title to [Britannia-Hunt’s] interests for the benefit of [Britannia-Hunt], Placid[,U.K.] was faced with executing any sales documents and guaranteeing title in the event of a sale by [Britannia-Hunt]."
Placid’s First Amended Objection to Administrative Claim at p. 9.
. In a letter dated July 5, 1985 to Cuthbert, regarding the separation of Britannia-Hunt’s legal and beneficial interests, a Sun Oil, U.K., Ltd. representative stated:
As you know, the other parties to the 16/12a Operating Agreement have expressed concern with the unusual, if not unique situation of having parties to the Operating Agreement, who are neither parties to the License nor parties to an Illustrative Agreement with a licensee. This point was discussed again at our meeting on the 2nd July, when all parties present advised Placid that the proposed transfer was unacceptable in its present form. I understand Placid are to revert to Rosewood Resources and Britannia-Hunt with a request that they come onto the License. In addition, in the case of Rosewood Resources, it was suggested that Placid could more simply dispose of a 7.2% interest and account to Rosewood Resources for any proceeds of sale, and I understand this suggestion will also be considered by Rosewood Resources.
(IRS Tr.Ex. 5).
. Britannia-Hunt wanted to cease exploration in the North Sea.
. In early London solicitors discussions of the problems with the tax aspect of transaction and possible solutions:
Although there may be a way of structuring the deal so as to avoid any such tax charge, it may be difficult to get the purchasers to accept such a structure. A sale of assets may therefore nonetheless have to take placef.] ... [emphasis in original]
******
It may be possible to structure a deal involving BHE first transferring its license interests to three UK subsidiaries, prior to the acquisition of BHE by the purchasing companies and its subsequent liquidation, [emphasis in original] The subsidiaries holding the licenses would be transferred in the liquidation to the three parent companies, the purchasers. The precise structure of such a deal would have to be considered. However, this course would be somewhat artificial and could be challenged by the Ofil] Tfaxation] Office], In any event the purchasers may not wish to go to these lengths since the structure would directly involve them and would require their cooperation. [emphasis added]
Placid Tr.Ex. 23, enclosure p. 1 & 6.
. 26 U.S.C. 267 provides that loss will not be recognized in sales or exchanges between related parties. Subsection (b)(3) provides that fiduciaries of two different trusts are related parties within the meaning of Section 267(a)(1) if the trusts have a common grantor. Subsection (b)(6) provides that transactions between the fiduciary of a trust and its beneficiary shall not be recognized. This provision would appear applicable to the case at bar, however, the Government did not tender this argument to the Court.
. In Scully, the court wrote,
We have reviewed the record and can find no significant evidence of any actual separation. As the trustees admit, the purpose of the sale was to keep all the real estate in the family. The land owned by the trusts was contiguous and used a unified drainage system. There is no evidence that the tenants on the land were aware of the separate ownership by the trusts. The trustees of the trusts are the same. The trustees are brothers. All of the current beneficiaries of the trusts are the children of the trustees ... The remainder beneficiaries of the trusts are the descendants ... Most important, as the trustees admit, the purpose of the sale was to keep all of the real estate in the family and to permit the trustees to operate the land in both sets of trusts as a single, integrated economic entity. This reshuffling of assets permitted the trustees to achieve this purpose.
840 F.2d at 486.
. IRS Tr.Ex. 13 is a telex from Britannia-Hunt to Sun Oil Company (U.K.) Ltd., Occidental Petroleum (Caledonia) Limited, and Grand Metropolitan Oil, Limited, which states:
WE, BRITANNIA-HUNT EXPLORATION (U.K.) LTD. (+ BHE +) ACCEPT YOUR OFFER TO PURCHASE THE PROPERTIES AND INTERESTS STATED IN SUCH LETTER WHICH ARE OWNED BY BHE. THE INTERESTS TO BE SOLD BY BHE WILL BE 16.80672/81.09244 OF THAT SET FORTH IN ITEM 1 OF YOUR LETTER. FURTHER, THE CONSIDERATION TO BE PAID BY YOU SHALL BE 16.08672/81.09244 OF [$]30,880,-000 U.S. OR [$]6,400,000 U.S. [¶] WE HAVE BEEN ADVISED BY PLACID THAT THEY DO NOT DESIRE TO SELL THEIR INTEREST AND ALSO THAT THEY HAVE NOTIFIED YOU OF THAT DECISION.
******
YOURS VERY TRULY,
TOM HUNT
PRESIDENT [HUNT ENERGY]
******
YOURS VERY TRULY,
JAMES L. PARKER
BRITANNIA-HUNT EXPLORATION (U.K.) LTD.
DALLAS, TEXAS.
. In the context of economic realities, compare the Fifth Circuit’s discussion in the context of realization provisions under the Revenue Code and its criticism of the analysis that realization is only .concerned with fixing gain or loss at a given time, whereas the nonrecognition sections of the code are concerned with analyzing the substance of a transaction. The court notes that a practical problem may result from this analysis. This method may result in placing limitations on realization through meaningless exchanges:
Realization of gain or loss would occur if farmer A exchanged 1,000 bushels of Kansas spring wheat with farmer B for 1,000 bushels of Kansas spring wheat or if individual C exchanged his 1969 red Ferrari with individual D's 1969 red Ferrari (of the same model), both of which had been garaged and never driven. As [the taxpayer] acknowledges, this doctrine would lead to deduction of the losses sustained on these transactions absent a specific Code non-recognition provision.
San Antonio Sav. Ass'n v. C.I.R., 887 F.2d 577, 583 (5th Cir.1989) (where taxpayer sought recognition of loss on exchanges of loans between savings and loans).
. There is a third test, called the "binding commitment test,” which is the most restrictive of the three tests. It has been rejected by the Supreme Court, the 5th Circuit and the 7th Circuit, except in extremely narrow circumstances. Under the binding commitment analysis, if one step is to be characterized as a "first step” there must be a binding commitment to take the later step. The binding commitment test requires telescoping several steps into one transaction only if a binding commitment existed as to the second step at the time the first step was taken. See Security Industrial Insurance, 702 F.2d at 1244. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491458/ | MEMORANDUM OPINION AND ORDER
RICHARD L. SPEER, Bankruptcy Judge.
This cause comes before the Court upon a Complaint for Recovery of Money. A Pre-trial was held, at which time the parties indicated that the issue revolved around whether a setoff was allowable under the Bankruptcy Code and that it could be resolved upon the written arguments of counsel. The Defendant filed a Brief in Support of a Right of Setoff, to which the Plaintiff did not reply. The Court has reviewed the Defendant’s Brief, and the relevant case law, as well as the entire record in this case. Based upon that review, and for the following reasons, this Court finds that the Defendant should be entitled to a setoff.
FACTS
On March 16, 1990, Lease-Sea, Inc. [hereinafter “Lease-Sea”], Debtor, filed a Chapter 11 petition in Bankruptcy. On July 30, 1990, this case was converted to one under Chapter 7 and Elizabeth Vaughan was appointed Trustee [hereinafter “Trustee”]. At the time of Bankruptcy, Lease-Sea was indebted to Resolution Trust Corporation [hereinafter “RTC”], receiver for First Federal, in the amount of Eight Million Three Hundred Seventy Nine Thousand Four Hundred Forty-nine Dollars and Ninety-four Cents ($8,379,449.94). This debt arose out of two floor plan arrangements and numerous loan agreements.
In May, 1989, RTC delivered Twenty-five (25) boats and Seven (7) automobiles to Lease-Sea for storage. Each item had previously been damaged by fire. On December 15, 1989, Lease-Sea removed the boats and the automobiles from the Glenwood warehouse to Anchor Pointe, without RTC’s knowledge or consent.
RTC contended that they should be entitled to setoff any amount awarded to the Debtor from the amount that Debtor owes to RTC. They also noted that they should not be held responsible for the cost of storage after December 15, 1989, because the automobiles and boats were removed from the premises without RTC’s knowledge or consent.
The Trustee did not file a brief in support of her position. However, the Trustee alleged, in previous pleadings, that the Defendant owes Two Hundred Sixty Thousand Nine Dollars ($260,009.00), as the cost of storage.
LAW
Section 553 of the Bankruptcy Code provides in pertinent part:
(a) Except as otherwise provided in this section and in sections 362 and 363 of this title, this title does not affect any right of the creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case under this title against a claim of such creditor against the debtor that arose before the commencement of the case
11 U.S.C. § 553(a). The exceptions numerated in the statute are not applicable herein.
In order for a RTC to be entitled to a setoff, pursuant to Section 553, they must prove that:
(1) a debt exists from the creditor to the debtor and that debt arose prior to the commencement of the bankruptcy case;
(2) the creditor has a claim against the debtor which arose prior to the commencement of the bankruptcy case; and
(3) the debt and claim are mutual obligations.
In re Learn, 95 B.R. 495, 496 (Bankr.N.D.Ohio 1989).
*184In analyzing the first tier of this test, the Court must ascertain if RTC owed a debt to Lease-Sea prior to the commencement of the bankruptcy case. On March 16, 1990, Lease-Sea initiated this bankruptcy proceeding. Prior to this time, Lease-Sea provided storage for Defendant’s boats and automobiles. This is evidenced by the Trustee’s allegation that RTC owes her for storage costs prior to December 15, 1989. Due to the fact that the Bankruptcy petition was not filed until more than Ninety (90) days after RTC became indebted to Lease-Sea for storage, the debt arose prior to the commencement of the bankruptcy case. Therefore, the Court believes that the first part of this test is satisfied.
The next step in the test requires that RTC had a claim against Lease-Sea prior to the commencement of the bankruptcy case. Section 101 of the Bankruptcy Code defines 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.” 11 U.S.C. § 101(4)(A).
In the present situation, it is undisputed that Lease-Sea was indebted to RTC in the amount of Eight Million Three Hundred Seventy-nine Thousand Four Hundred Forty-nine Dollars and Ninety-four Cents ($8,379,449.94), at the time the Bankruptcy petition was filed. This debt resulted from two floor plan arrangements and numerous debts between Lease-Sea and RTC. The facts illustrate that Lease-Sea was indebted to RTC prior to March 16, 1990, the date which the Bankruptcy petition was filed. Therefore, RTC had a claim against Lease-Sea prior to the commencement of the bankruptcy case. As a result, the Court believes that the second part of the test is satisfied.
The final requirement of the test is that the debt and claim are mutual obligations. Although mutual obligation is not defined in the Bankruptcy Code, “the debts to be setoff need not be of the same character or have arisen from the same situation”. In re Defense Services, 104 B.R. 481, 484 (Bankr.S.D.Fla.1989); 4 Collier on Bankruptcy K 553.04 (15th ed. 1992). The basic test is that “something must be owed by both sides.” In re Smith, 100 B.R. 330, 336 (Bankr.S.D.Ohio 1990); 4 Collier on Bankruptcy H 553.04 (15th ed. 1992). An example of where mutuality is lacking is where post-petition debts are involved. Smith, 100 B.R. at 336.
In the present case, both sides have pre-petition debts that are owed to one another. Lease-Sea owes RTC Eight Million Three Hundred Seventy-nine Thousand Four Hundred Forty-nine Dollars and Ninety-four Cents ($8,379,449.94) in outstanding loans. RTC owes Lease-Sea approximately Two Hundred Sixty Thousand Nine Dollars ($260,009.00) as the cost of storage. Since both sides owe money to each other, and the amount owed was from a pre-petition debt,' mutuality exists. Therefore, the Court believes that the third portion of the test is satisfied.
Due to the fact that all three portions of this test have been satisfied, this Court finds that RTC is entitled to setoff the cost of storage from the amount that Lease-Sea is indebted to them. From the pleadings in this case, however, the Court cannot make a finding as to when the automobiles and boats were delivered to Lease-Sea for storage, when the lease agreement ceased, and what was the amount of the set off because the record lacks appropriate information as to the cost of storage of the boats.
Accordingly, it is
ORDERED that RTC is entitled to set off in the amount of the cost of storage.
IT IS FURTHER ORDERED that within Fourteen (14) days from the date of this Order, RTC is to provide the Court with a copy of the storage agreement regarding both the automobiles and the boats and other relevant documentation. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491459/ | MEMORANDUM OPINION AND ORDER
RICHARD L. SPEER, Bankruptcy Judge.
This cause comes before the Court upon Resolution Trust Corporation’s Motion for Abandonment of Cash Collateral and Relief from Stay. The Court held a Hearing on the matter, at which time the parties presented the evidence and arguments they wished the Court to consider in reaching its decision. At the conclusion of the Hearing, the Court ordered that post-Hearing Briefs be filed on the matter. The Court has reviewed the evidence and arguments presented, the post-Hearing Briefs, as well as the entire record in this case. Based upon that review and for the following reasons, the Court finds that Resolution Trust Corporation’s Motion should be granted, in part, and denied, in part.
ISSUE I: CASH COLLATERAL
A. FACTS
This portion of the Opinion dealing with the Motion of Resolution Trust Corporation [hereinafter “RTC”], receiver of First Federal Savings and Loan Association of Toledo, concerns itself with the issue of whether the rental income collected from the lease of boat slips owned by Lease-Sea, Inc. [hereinafter “Lease-Sea”], the Debtor, which are subject to RTC’s mortgage constituted cash collateral; and if so, whether said income should be turned over to RTC.
In June 1987, RTC made three separate loans to Great Lakes Builders, Inc. These loans totaled Two Million Eight Hundred Fifty Thousand Dollars ($2,850,000.00). Contemporaneously therewith, the titled owner to the premises, Port Lawrence Title and Trust Company, as Trustee, executed and delivered to RTC three separate mortgages to secure the payment of the loans.
In March 1988, Lease-Sea assumed all three mortgages and payment obligations. By August 1989, all three mortgages were in default. In February 1990, RTC instituted a foreclosure action against Lease-Sea. On March 11, 1990, Barry E. Savage was appointed receiver. On March 16, 1990, Lease-Sea filed for Bankruptcy under Chapter 11. The case was converted to one under Chapter 7 on July 30, 1990. At the time of conversion, there was approximately Twenty-four Thousand Dollars ($24,-000.00) in a cash collateral account which had been established by the debtor-in-possession as the depository for this rental income during the Chapter 11. Elizabeth Vaughan, as Trustee in Bankruptcy [hereinafter “Trustee”], objected to the payment of this cash collateral to RTC.
B. LAW
Section 363(a) of the Bankruptcy Code defines “cash collateral” to mean “cash, negotiable instruments, documents of title, securities, deposit accounts, or other cash equivalents whenever acquired in which the estate and an entity other than the estate have an interest and includes the proceeds, products, offspring, rents, or profits of *187property subject to a security interest as provided in section 552(b) of this title, whether existing before or after the commencement of a case under this title.” 11 U.S.C. § 363(a) (emphasis added).
Section 552(b) of the Bankruptcy Code provides, in pertinent part, that
[I]f the debtor and an entity entered into a security agreement before the commencement of the case and if the 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, product, 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.
11 U.S.C. § 552(b).
There are two requirements that the Plaintiff must satisfy in order to obtain the income from the mortgaged property in accordance with Section 552(b). The first requirement is that a pre-petition security agreement must exist between the Plaintiff and the Debtor; the second is that the security interest must be perfected. The Court must look to state law to determine whether First Federal had the requisite security interest in the income and whether the security interest in the income was perfected. Butner v. United States, 440 U.S. 48, 55-57, 99 S.Ct. 914, 918-19, 59 L.Ed.2d 136 (1979).
This Court believes that the first requirement has been met. RTC’s claim to the rentals and income stem from the mortgages themselves. Paragraph Nine (9) of each mortgage agreement confers upon RTC a right to the rentals and income in the event of default. That paragraph provides that “[ujpon default in any of the terms of the note secured hereby, or upon any breach of any condition or covenant of this deed, all rentals or income from the real estate hereinbefore described shall become payable immediately when due to [RTC], who is authorized and empowered to collect the same.” Consequently, the first requirement of Section 552(b) is satisfied, i.e., pre-petition security agreements exist which specifically provide for an interest in the rentals and income.
The second requirement to be resolved is whether RTC perfected its interest in the income from the property. This Court must again look to state law for this determination. Butner, 440 U.S. at 55-57, 99 S.Ct. at 918-19. The Court notes that the case at bar concerns itself with perfection of the interest in the income from the mortgaged property as opposed to perfection of the mortgage instrument. A mortgagee can perfect an interest in the rentals and income from mortgaged property in one of two ways: (1) obtain possession, or the right thereto, or (2) have a receiver appointed. Jacks v. Virginia Joint Stock Land Bank, 17 Ohio Law Abs. 464, 466 (1934).
For a mortgagee to obtain the right to possession, the mortgagor must have defaulted on the terms of the mortgage. Metropolitan Securities Co. v. Orlow, 107 Ohio St. 583, 588, 140 N.E. 306, 308 (1923). Moreover, the mortgage agreement itself must pledge the rents to secure the mortgage upon default, except in situations whereby the mortgagee is prevented from taking possession of the property. Banc-Ohio National Bank v. Andrew J. Haas Irrevocable Trust, 33 Ohio App.3d 253, 254, 515 N.E.2d 1024, 1025-26 (1986); Hutchinson v. Straub, 64 Ohio St. 413, 60 N.E. 602 (1901). Such a situation, for example, would be when property passes into the jurisdiction of a probate court.
The second way to perfect an interest is for the mortgagee to have a receiver appointed by the court, thus placing the collection of the rents within the purview of the court’s jurisdiction. Id. O.R.C. Section 2735.01 entitles a mortgagee to have a receiver appointed. Before such appointment, O.R.C. Section 2735.01 requires that the mortgagee demonstrate that the mortgaged property is in danger of being lost, *188removed, or materially injured or that the condition of the mortgage has not been performed, and that the property is probably insufficient to discharge the debt. Therefore, in Ohio, a mortgagee perfects its interest when it either appropriately acquires actual possession of the property or acquires the appointment of a receiver.
RTC asserts that it perfected its interest under both methods. Under the terms of the mortgages, RTC had the right to obtain possession when the Debtor defaulted on its payments. Also, RTC had a receiver appointed on March 11, 1990, to protect its interests. The Court agrees and holds that the Plaintiff is entitled to the rentals and income placed in the cash collateral account.
ISSUE II: OTHER ITEMS
A. FACTS
This portion of the Opinion deals with RTC’s Motion for Abandonment and Relief from Stay in connection with certain boats and vehicles which were in the possession of Lease-Sea before the case was converted to one under Chapter 7. Each item will be discussed individually. For clarity, though, these items are as follows:
1. 1975 Aluminum Hard Top Sedan
2. 1987 Cobalt
3. 1988 Sunrunner
4. 1986 Sunrunner
5. 1987 Starfire and trailer
6. 1988 Sunrunner
7. 1987 IMP
8. 1978 Bertram
9. 1985 Chris Craft Stinger
10.1988 Jefferson Monticello
ITEMS # 1-7
These items were collateral on two “repo” floor plan lines of credit between RTC and Lease-Sea. Between May and October 1988, Lease-Sea granted RTC a security interest in all the boats which had been purchased by the Debtor with funds advanced by RTC. RTC had new titles issued to Lease-Sea, but RTC retained possession of these titles.
On January 2, 1990, RTC had its liens noted on the certificates of title by the Clerk of Courts of Lucas County, Ohio. On March 16, 1990, Lease-Sea filed for relief under the Bankruptcy Code. RTC argues that their liens are perfected because it retained possession of the certificates of title despite notice not being placed on the certificates of title until January 2, 1990. The Trustee contends that RTC is not perfected because they did not comply with Section 1309.21 of the Ohio Revised Code.
O.R.C. Section 1309.21 provides rules as to when filing is required to perfect a security interest. Subsection (C)(2) of that Section states as follows:
(C) The filing of a financing statement otherwise required by sections 1309.01 to 1309.50 of the Revised Code is not necessary or effective to perfect a security interest in property subject to:
(2) The following statutes of this state: ... [section] 1548.20 [Watercraft Certificates of Title]....
Ohio Rev.Code Ann. § 1309.21(C)(2) (emphasis added).
Section 1548.20, The Watercraft Certificates of Title Act governs the issuance of certificates of title to watercraft and outboard motors and the perfection of security interest therein. That Section provides, in pertinent part, that
Any security agreement covering a security interest in watercraft ..., if such instrument is accompanied by delivery of a manufacturer’s or importer’s certificate and followed by actual and continued possession of such certificate by the holder of said instrument, or, in the case of a certificate of title, if a notation of such instrument has been made by the clerk of court of common pleas on the face of such certificate, shall be valid as against the creditors of the debtor ... and against subsequent purchasers, secured parties, and other lienholders or claimants.
Ohio Rev.Code Ann. § 1548.20. Certificates of title were issued for the boats in question. RTC advanced money in 1988, *189but did not cause the agreement to be noted on the face of the certificate of title by the clerk of courts until January 2, 1990. The Debtor filed for Bankruptcy on March 16, 1990. Clearly, the notation of the liens on the certificates of title occurred during the 90-day preference period causing this transaction to be avoided by the Trustee. See 11 U.S.C. § 547.
However, RTC argued that notation on the certificate of title was not the sole means of perfecting a security interest in watercraft. RTC contended that possession of the certificate of title constituted perfection under O.R.C. § 1309.24. RTC asserted that a certificate of title was a document which represented the right to the goods and thus possession was the permissible means of perfection. The Court disagrees with this position.
The Common Pleas Clerk issues certificates of title in triplicate: one copy remains with the clerk, a second copy is transmitted to the chief of the division of watercraft, and the third copy goes either to the applicant or the first lienholder. Ohio Rev.Code Ann. § 1548.09. Liens are to be recorded on all three copies. Ohio Rev.Code Ann. § 1548.20. The whole purpose of recording of liens is notice. This Court is at a loss as to how possession of the certificate of title, in light of Section 1548.09, would place other parties on notice of a lien on the watercraft. RTC is attempting to equate certificates of title with bills of lading or warehouse receipts. They are not the same. The Drafters of the Ohio Revised Code made special provisions for automobiles and watercraft and security interest therein. This Court is not willing to sculpt out an exception which goes against the grain of the notice requirement in commercial law. RTC argued that the notice requirement had been met, as any party wishing to purchase a boat would have to have the certificate of title assigned to that party by RTC or risk having that interest not recognized. See, Ohio Rev.Code Ann. § 1548.04. This argument is circuitous because how would a party request to have RTC assign the certificate of title, if the party had searched the records at the courthouse and found no notation by RTC of its lien. Fraud does happen and an unscrupulous boat salesperson may sell the boat without the proper title, which would cause the mass confusion that the Watercraft Certificates of Title Act and the Uniform Commercial Code were enacted to prevent.
The Ohio legislature chose to craft special statutes to be applied in determining ownership and lien priority on watercraft. This Court is bound to follow those sections of the Ohio Revised Code, as they are applicable to this case. Therefore, the Watercraft Certificates of Title Act prevails over the Uniform Commercial Code in determining who has a valid lien on the boats. RTC may have had a valid argument if had they retained possession of the manufacturer’s certificates, as Section 1548.20 gives those in possession of the manufacturer’s certificates priority over all other claimants. Accordingly, this Court finds that items 1-7 are property of the Debtor. In making this finding, the Court is not passing on the validity of RTC’s liens, but rather, is only finding the Trustee has a right superior to that of RTC on the boats.
ITEM # 8
Item number 8 is the 1978 28-foot Bertram. The Court is unable to make a determination as to who owns this boat. RTC’s pleadings contain unsubstantiated allegations that this boat was a trade-in for a 1977 33-foot Bertram, which was on the regular floor plan. RTC alleged that item number 8 constituted proceeds of the sale of a secured collateral. The Trustee allegations were to the contrary. The Court will need an evidentiary hearing on this matter.
ITEM # 9
Item number 9 is the 1985 Chris Craft Stinger. The Court is unable to make a determination as to who, if anyone, owns this boat and who, if anyone, has a valid lien. The documentation submitted by the parties is incomplete. The documents reflect that (1) RTC obtained a certificate of documentation in 1987; and (2) Mike Had-*190dad assigned the certificate of title in blank in 1988, but that the certificate of title reflects that Sand Castle Marine, Inc. was the previous owner. However, the certificate of title submitted by the Trustee lacks Mr. Haddad’s assignment in blank. The Court will need to set a further evidentiary hearing on this matter.
ITEM # 10
Item number 10 is the 1988 52-foot Jefferson Monticello. The manufacturer’s statement of origin reflects that Banner Yachts, Inc. assigned this item to Justice, Inc. on January 2, 1988. The parties agreed that this boat was traded-in on a larger model and was placed on the floor-plan arrangement when RTC advanced funds for the trade-in. A preferred mortgage on behalf of RTC was filed on January 1,1989. However, title remained in the name of Justice, Inc. on the certificate of documentation. In accordance with Section 1548.20 of the Ohio Watercraft Title Act, this Court finds that title is in the name of Justice, Inc. The Court further finds that the Debtor has no interest in the boat and that this Court is not the proper court in which to determine whether RTC has a lien due to the execution of its preferred mortgage.
The Trustee has stated that the items listed in Exhibit A (attached) were never an asset of the Debtor. RTC did not contest this assertion. Therefore, having no evidence to the contrary, the Court finds that the items listed in Exhibit A should be abandoned.
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, it is
ORDERED that the Trustee account for all rentals and income which were collected and placed in the cash collateral account and that she remit those amounts to the Resolution Trust Corporation, within Twenty-one (21) days from the date of this Order.
It is FURTHER ORDERED that the following be, and are hereby, declared property of the estate:
1. 1975 Aluminum Hard Top Sedan
2. 1987 Cobalt
3. 1988 Sunrunner
4. 1986 Sunrunner
5. 1987 Starfire and Trailer
6. 1988 Sunrunner
7. 1987 IMP
It is FURTHER ORDERED that the Resolution Trust, Corporation’s attempt to perfect their liens on the seven items listed above constituted voidable preferences under Section 547 of the Bankruptcy Code.
It is FURTHER ORDERED that the items listed in Exhibit A be, and are hereby, abandoned from the estate.
EXHIBIT A
4. MART PETTY PROPERTY PLACED ON THE REGULAR FLOOR PLAN
SERIAL FLOORED NUMBER YEAR DESCRIPTION MODEL NUMBER AMT, WHOLESALE RETAIL
30 1979 Chevrolet C-20 3,500.00 2,245.00 2,875.00 W/PIow
31 1986 Searay 390 SERF7323E686 139,000.00 90,000.00 118,000.00
ITEMS 32 THROUGH 46 will not have a current value due to insufficient information received at the time of the floor plan.
32 Clinton Work Boat 5255-20-576 9,000.00 n/a n/a
33 International 2404 Tractor 6,000.00 n/a n/a
34 John Deere 2010 Front Loader 7,500.00 n/a n/a
35 John Deere 420 Tractor 4,500.00 n/a n/a
36 Kubota Front Loader 3,900.00 n/a n/a
37 John Deere Diesel Tractor 4,600.00 n/a n/a
38 12 Steel Docks/ Piles with Floats 26,500.00 n/a n/a
*191NUMBER YEAR DESCRIPTION MODEL SERIAL NUMBER FLOORED AMT. WHOLESALE RETAIL
39 Ford Hyrda Tractor 10465-140 1,800.00 n/a
40 Jaeger Cetrifugel Pump 10729 3,300.00 n/a
41 Ford Front End Loader C456093 30,000.00 n/a
42 PH 15 Ton Picker 30499 35,000.00 n/a
43 PH Track Crane 22485 12,000.00 n/a
44 NW Mobile Crane 1-30T-1 11,500.00 n/a
45 Steel Barge 1-8x14 4,500.00 n/a a p-
46 Pin Barges 10x40 & 12x40 26,000.00 n/a a P | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491460/ | *295MEMORANDUM OPINION
STEPHEN J. COVEY, Chief Judge.
This matter comes on to be heard upon the adversary proceeding filed by Donald P. Taylor, (“Debtor”), asking for the following relief.
1. Determination of tax liability owing to the United States of America, Internal Revenue Service (“Defendant”) pursuant to Section 505 of the Bankruptcy Code.
2. Determination of dischargeability of taxes found due and owing pursuant to § 523 of the Bankruptcy Code.
3. Voiding of tax liens filed by Defendant against Debtor for taxes found not due and owing pursuant to § 105 of the Bankruptcy Code.
4. Refund of any amounts paid by Debt- or to Defendant for taxes found not due and owing pursuant to § 105 of the Bankruptcy Code.
In response to this Complaint, the Defendant filed an Answer denying this Court had jurisdiction to grant the requested relief and generally denying the allegations of the Complaint.
This Court conducted an evidentiary hearing and having now considered the testimony of the witnesses, the documentary evidence and arguments of counsel finds as follows.
Jurisdictional Issue
11 U.S.C. § 505 states in part as follows (a)(1) ... the court may determine the amount or legality of any tax, ...
11 U.S.C. § 105 states as follows:
(a) The Court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title....
28 U.S.C. § 1334 states in part as follows:
(b) Notwithstanding any Act of Congress that confers exclusive jurisdiction on a court or courts other than the district courts, the district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11.
18 U.S.C. § 157 provides in part as follows:
(a) Each district court may provide that any or all cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11 shall be referred to the bankruptcy judges for the district.
(b)(1) Bankruptcy judges may hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11, referred under subsection (a) .of this section, any may enter appropriate orders and judgments, subject to review under section 158 of this title.
(2) Core proceedings include, but are not limited to—
(B) allowance or disallowance of claims
(I) determinations as to the dis-chargeability of particular debts;
(O) other proceedings affecting the liquidation of the assets of the estate or the adjustment of the debtor-creditor or the equity security holder relationship, except personal injury tort or wrongful death claims.
Pursuant to these statutes, this Court rules it has jurisdiction to hear and determine the issues raised by the parties and that this is a core proceeding.
Statement of Facts
Delta Cattle Corporation (“Delta Cattle”) was an Oklahoma corporation formed in 1981. The Debtor, along with his brother, Oscar E. Taylor, were incorporators. The business of Delta Cattle was to breed, raise, and market cattle on behalf of numerous investors located throughout the country. Delta Cattle’s business office was in Tulsa, Oklahoma but the ranches were located in Eastern Oklahoma some fifty to one hundred miles away.
Delta Cattle filed for Chapter 11 bankruptcy relief on March 15, 1984. At the time of filing bankruptcy, Delta Cattle was indebted to the Defendant for failure to pay social security, unemployment and em*296ployee income taxes (withheld taxes) in the amount of $117,162.26. These tax liabilities were incurred by Delta Cattle during the quarters ending December 31, 1981, December 31, 1982, June 30, 1983 and March 31, 1984.
The Defendant assessed these taxes against the Debtor on March 18, 1985, pursuant to 26 U.S.C. § 6672(a) contending that the Debtor was a responsible party of Delta Cattle who had failed to collect, truthfully account for or pay over the withheld taxes.
On March 31, 1986, the Defendant filed a Notice of Federal Tax Lien with the Tulsa County Clerk and refiled said notice on August 13, 1987. The Debtor filed his Chapter 7 bankruptcy petition on December 16, 1986. On September 24, 1990, the Debtor filed the present adversary complaint.
During the periods in question, the Debt- or was an officer of Delta Cattle (vice president) and served on the Board of Directors (no Board meetings were ever held). He owned no stock in the company but was an authorized signatory on five checking accounts, had authority to borrow funds on behalf of Delta Cattle (which authority was never used), and participated in the hiring and firing of employees. He received a salary of approximately $63,500.00 per year.
The Debtor’s principal responsibility was to work on the ranches supervising the breeding, raising and marketing of the cattle. He was Delta Cattle’s “cowboy.” The Debtor spent very little time in the Tulsa office and signed checks or engaged in financial administration only on the direction of Oscar E. Taylor. It was not his duty within the corporate structure to prepare the payroll, to see that the taxes were properly withheld, to file quarterly returns, or make quarterly deposits.
Oscar E. Taylor was the “boss” of Delta Cattle. He made all business decisions and he hired the Debtor and determined his salary. He was president and sole stockholder of the company and was described by all the witnesses as the “boss.” He determined what checks were to be written and what bills were to be paid. Delta Cattle was in constant financial difficulty and it was Oscar E. Taylor who dealt with the creditors. He also spent most of his time out of the Tulsa office raising funds from new investors. He did, however, control the management of the business by telephone and would call the office ten to twenty times a day.
Arguments and Analysis
26 U.S.C. §§ 3102(a) and 3402(a) require an employer such as Delta Cattle to deduct and withhold social security, unemployment and income taxes from wages paid its employees. 26 U.S.C. § 7501 requires the amount deducted and withheld to be placed in a special trust fund for the United States, which is not to be used for any other purpose but to pay these taxes. 26 U.S.C. § 6672(a) places a separate penalty upon corporate employees who are “responsible” for actually withholding and paying over the trust fund taxes, and who “willfully” fail to ensure the corporate employer complies. This penalty is separate from the corporate employer’s liability for these employment taxes.
The full text of 26 U.S.C. § 6672 is as follows:
(a) Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or who willfully attempts in any manner to evade or defeat such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.
In alleging the Debtor was a “responsible person” who “willfully” failed to pay over the trust fund taxes, the Defendant’s definition of “responsible person” is over inclusive. Although the Debtor had some “badges” of responsibility, the actual responsibility for all financial decisions including the payment of wages and the withholding of taxes was vested in Oscar E. Taylor. The Debtor’s duties within the corporate structure did not include busi*297ness management or the responsibility in regard to payroll or the withholding of taxes.
A similar case is Henry M. Walls v. United States of America, 90-1 USTC ¶ 50,266 (E.D.Cal.1990). Walls was the president of a radio station. He was responsible for supervising and directing day-to-day station operations, but had no authority to expend an amount in excess of $10,000.00. He had no control over the payment of checks and was not even a checking account signatory during the tax quarters in issue. Walls did not have authority to determine what creditors would be paid or when. Although he had the title of president, the district court concluded the holding of such an office did not “per se impose liability upon him.” Walls v. USA, 90-1 USTC ¶ 50,266, citing Turner v. U.S., 423 F.2d 448, 449 (9th Cir.1970); Dudley v. United States, 428 F.2d 1196, 1201 (9th Cir.1970). The court found Walls was not a responsible person within the meaning of 26 U.S.C. § 6672. He may have been in control of the stations’ operations, but other persons were responsible for and controlled the payment of checks.
In In re Brady, 110 B.R. 16 (Bankr.D.Nev.1990), the corporate vice president and fifty percent owner, Brady, was not liable as a responsible person. He had the duty to organize and conduct sales at road shows. He did not control payments to creditors and was often out of the office for extended periods. The president of the corporation was a former CPA and managed the financial and administrative functions. Brady, however, was a signatory on the checking accounts. Consistent testimony showed the president cleared all checks verbally or in writing. The court concluded Brady was not a responsible person under 26 U.S.C. §§ 6671 and 6672, because he did not have the corporate duty within the corporation to ensure payroll taxes were paid during the tax quarters in question. Making the payments had been the duty of the president.
“A corporate assignment of different duties to different people is appropriate and usually necessary. Corporate titles are typically given to signify this division of duties. The title of treasurer may be sufficient, by itself to presume that a party is a responsible person. However, the title of vice president is a much more flexible title that often signifies duties completely removed from finance and operations.” In re Brady, 110 B.R. 16 (Bankr.D.Nev.1990), citing Bauer v. United States, 543 F.2d 142, 149, 211 Ct.Cl. 276 (1976).
This Court reads 26 U.S.C. § 6672(a) to mean, only persons actually responsible within the corporation for the payment of payroll taxes, are subject to the penalty. In this case, Oscar E. Taylor was the corporate officer who had this responsibility within Delta Cattle, not the Debtor.
The IRS contends because the Debt- or had badges of authority (Board of Directors, vice president, signatory authority on bank accounts), these are enough to make him a responsible party and liable for the unpaid withheld taxes of Delta Cattle. This Court disagrees with this construction of 26 U.S.C. § 6672. A responsible person under this section of the Internal Revenue Code is the person who within the corporate structure has the job to see that the withheld taxes are paid. It is not a question of what title is involved but who actually has the responsibility to see that the taxes are paid. In the present case, the Debtor had badges of authority but this does not make him a responsible party as his duties within the corporation were to be the “cowboy” on the ranch engaged in the breeding, raising and marketing of cattle.
The Debtor also requests a refund of $10,000.00, allegedly paid to the Defendant post-petition, which the Defendant applied to his alleged liability for Delta Cattle’s withheld taxes. The Defendant’s Answer denied this allegation and asserted this Court has no jurisdiction to hear a claim for a refund or turnover because 26 U.S.C. § 7422 does not allow a suit to be brought in any court prior to filing a claim for refund. This Court agrees with the position of the Defendant and denies the Debtor’s request for refund since the Debt- or has filed no claim with Defendant for said refund. Finally, since the Debtor does *298not owe the Defendant any money, the Debtor’s tax liens are held to be null and void. A separate order consistent with this Memorandum Opinion will be entered. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491461/ | MEMORANDUM OPINION AND ORDER
RICHARD L. SPEER, Bankruptcy Judge.
This cause comes before the Court upon Plaintiffs Renewed Motion for Summary Judgment against Louis Haubner, Jr. The Defendant has filed a Response to the Trustee’s Renewed Motion, in addition to a Motion for Summary Judgment. The Trustee has filed a Memorandum in opposition to the Defendant’s Motion for Summary Judgment. The Securities Investor Protection Corporation has also filed a Memorandum in Support of the Trustee’s Motion and a Motion for Sanctions against counsel for the Defendant. The Court has reviewed the written arguments of counsel and the relevant case and statutory law, as well as the entire record in this case. Based upon that review, and for the following reasons, the Court finds that the Plaintiff’s Renewed Motion for Summary Judgment Against Louis Haubner, Jr. should be granted. The Court further finds that the Plaintiff’s Motion for Sanctions should be granted.
FACTS
On February 5, 1983, the Securities and Exchange Commission filed a complaint against Bell & Beckwith, the Debtor, with the United States District Court for the Northern District of Ohio, Western Division [hereinafter “District Court”]. On that same date, the District Court issued a temporary restraining order and appointed Joseph D. Shibley as temporary receiver of the now defunct brokerage firm.
*450On February 7, 1983, the Securities Investor Protection Corporation [hereinafter “SIPC”] filed an application for a protective decree pursuant to 15 U.S.C. Section 78eee of the Securities Investor Protection Act [hereinafter “SIPA”]. On February 10, 1983, the District Court entered a protective decree. On February 11, 1983, the District Court certified the matter to the United States Bankruptcy Court for the Northern District of Ohio, Western Division.
Patrick J. McGraw, the Trustee in Bankruptcy [hereinafter “Trustee”], Plaintiff, filed a Complaint against the general partners of Bell & Beckwith to recover the deficiency between the Debtor’s assets and liabilities, as well as preference payments, transfers made to the general partners during insolvency, and certain other debts. One such preference payment the Trustee sought to recover involved Haubner. Haubner, a general partner until May 13, 1979, received a payment of Forty-three Thousand Four Hundred Forty-two Dollars and Ninety-one Cents from his Special Capital Account and Five Thousand Four Hundred Forty-five Dollars and Sixteen Cents from his Drawing Account between November 7, 1982, and February 5, 1983. See, Answer of Haubner (March 5, 1985); and Affidavit of Patrick A. McGraw, Trustee (December 22, 1987).
On January 22, 1990, this Court entered an Order granting Summary Judgment against Louis Haubner, Jr. [hereinafter “Haubner”], Defendant. The Court found that the transfer of Forty-eight Thousand Eight Hundred Eighty-eight Dollars and Seven Cents ($48,888.07) amounted to a voidable preference under Section 547(b) of the Bankruptcy Code. See, Patrick A. McGraw, Trustee v. Roscoe R. Betz, Jr., et al, Case No. 85-0024 (January 22, 1990).
On January 29, 1990, the Defendant informed counsel for the Trustee that he had not been served with any of the documents relating to the Motion for Summary Judgment. The Trustee served the Defendant with those documents and filed a certificate of service with the Court to that effect on February 15, 1990. On February 20, 1990, the Plaintiff renewed its Motion for Summary Judgment against the Defendant. The grounds for the Renewed Motion for Summary Judgment parallel those found in the original Motion for Summary Judgment.
On March 14, 1990, the Defendant filed a Response to the Trustee’s Renewed Motion for Summary Judgment. The Defendant also filed a request for Summary Judgment. The Defendant alleged that the “filing date” for purposes of calculating the Ninety (90) day preference period was February 11, 1983, the date the Bankruptcy petition was filed. Consequently, the Defendant argued that the transfers to the Defendant fell outside of the Ninety (90) day period.
The Trustee filed a Memorandum in Opposition to Haubner’s Request for Summary Judgment. SIPC filed a Memorandum in Support of the Trustee’s Renewed Motion for Summary Judgment and in Opposition to Haubner’s Request for Summary Judgment. Additionally, SIPC filed a Motion for Sanctions against Counsel for Haubner. Both the Trustee and SIPC strenuously argued that the “filing date” was February 5, 1983.
The issue confronting the Court is what is the filing date for a liquidation proceeding instituted under SIPA. For the following reasons, this Court finds that the filing date is when the application for a protective decree is filed unless a proceeding has been commenced under Title 11 or a receiver, trustee, or liquidator has been appointed prior to the application. Specifically, this Court finds that February 5, 1983, is the filing date for this case for the purposes of preference actions.
LAW
This case was removed to the Bankruptcy Court for proper liquidation under SIPA pursuant to Section 78eee(B)(4) of that statute. SIPA is intermingled with references to Title 11 of the United States Code, i.e., the Bankruptcy Code. For example, SIPA Section 78fff-l vests in the trustee “the same rights to avoid preferences, as a trustee in a case under title 11.” *45115 U.S.C. § 78fff-1. Section 547 of the Bankruptcy Code empowers a trustee to avoid certain pre-petition transfers of estate property. Therefore, by the language found in SIPA Section 78fff-1, Section 547 of the Bankruptcy Code applies to this liquidation.
SIPA provides that:
To the extent consistent with the provisions of this chapter, a liquidation proceeding shall be conducted in accordance with, and as though it were being conducted under chapters 1, 3, and 5 and subchapters I and II of chapter 7 of title 11. For the purposes of applying such title in carrying out this section, a reference in such title to the date of the filing of the petition shall be deemed to be a reference to the filing date under this chapter.
15 U.S.C. § 78fff(b). Consequently, when applying the provisions of the Bankruptcy Code in a SIPA liquidation, references to the date of the filing of the bankruptcy petition are deemed to be references to the “filing date” as defined in SIPA.
Section 547 of the Bankruptcy Code does make reference to the date of filing:
Except as provided in subsection (c) of this section, the trustee may avoid any transfer of property of the debtor—
(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 filing of the petition;
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(5) that enable such creditor to receive more than such creditor would receive if—
(A) the ease were a case under chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by the provisions of this title.
11 U.S.C. § 547(b) (emphasis added). Thus, the Court must look to SIPA for guidance on the determination of 'filing date.’
SIPA specifically defines “filing date.” SIPA Section 78III (7) provides, in pertinent part, that:
The term ‘filing date’ means the date on which an application for a protective decree is filed under section 78eee(a)(3) of this title, except that—
(A) if a petition under Title 11 concerning the debtor was filed before such date, the term ‘filing date’ means the date on which such petition was filed;
(B) if the- debtor is the subject of a proceeding pending in any court or before any agency of the United States or an State in which a receiver, trustee, or liquidator for such debtor has been appointed and such proceeding was commenced before the date on which such application was filed, the term ‘filing date’ means the date on which such proceeding was eommenced[.]
15 U.S.C. § 18111 (7). By definition, SIPA fixes the ‘filing date’ as the earliest of one of three situations: (1) the date an application for a protective decree is filed; (2) the date a Bankruptcy petition is filed; or (3) the date a receiver is court appointed.
In this case, the District Court appointed a receiver on February 5, 1983. SIPC filed an application for protective order on February 7, 1983. The District Court certified the matter to the Bankruptcy Court on February 11, 1983. Thus, the ‘filing date’ is February 5,1983, for purposes of Section 547 of the Bankruptcy Code.
Haubner contended that the appropriate ‘filing date’ was the date the District Court certified the matter to the Bankruptcy Court. In support of his contention, Haubner offered Section 303(b) of the Bankruptcy Code, which states that “[a]n involuntary case against a person is commenced by the filing with the Bankruptcy Court of a petition under Chapter 7 or 11 of this Title.” 11 U.S.C. § 303(b) (emphasis added). This argument ignores SIPA Section 78fff(b) which equates “commencement of the case” with the SIPA “filing *452date.” This argument also ignores this Court’s prior conclusion in this matter that the filing date was February 5, 1983. Other entities involved in this immense liquidation have agreed, and relied upon, that the ‘filing date’ was February 5, 1983. See, Murray v. McGraw, 821 F.2d 333 (6th Cir.1987).
This Court had previously addressed the remaining elements of Section 547 of the Bankruptcy Code in its Order of January 22, 1990, and will not revisit them here. This Court still finds that the withdrawals from Haubner’s accounts on November 9, 1982, in the combined amount of Forty-eight Thousand Eight Hundred Eight-eight Dollars and Seven Cents are voidable preferences under Section 547 of the Bankruptcy Code, as the transfers were made within the Ninety (90) day preference period.
Turning to SIPC’s Motion for Sanctions against Counsel for Haubner, the Court finds that this is a situation wherein sanctions are merited. Rule 9011 of the Federal Rules of Bankruptcy Procedure [hereinafter “Rule 9011”] provides that:
Every petition, pleading, motion and other paper served or filed in a case under the Code on behalf of a party represented by an attorney ... shall be signed by at least one attorney of record in the attorney’s individual name.... The signature of an attorney or a party constitutes a certificate that the attorney or party has read the document; that to the best of the attorney’s or party’s knowledge, information, and belief formed after reasonable inquiry it is well-grounded in fact and is warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law; and that it is not interposed for any improper purpose, such as to harass, or to cause unnecessary delay, or needless increase in the cost of litigation or administration of the case. * * * If a document is signed in violation of this rule, the court on motion or on its own initiative, shall impose on the person who signed it, the represented party, or both, an appropriate sanction, which may include an order to pay to the other party or parties the amount of the reasonable expenses incurred because of the filing of the document, including a reasonable attorney’s fee.
FED.R.BANKR.PRO. 9011. The language of Rule 9011 corresponds to that of Rule 11 of the Federal Rules of Civil Procedure. The Court must judge the attorney’s conduct by an objective standard of reasonableness under the circumstances at the time the pleading is filed. See, INVST Financial Group, Inc. v. Chem-Nuclear Systems, Inc., 815 F.2d 391, 401 (6th Cir.1987), cert. denied, 484 U.S. 927, 108 S.Ct. 291, 98 L.Ed.2d 251 (1987). Once a violation has occurred, the Court, though having wide discretion in selecting what is appropriate, must impose some sanction. Id. at 401.
SIPC argued that Counsel for Haubner violated Rule 9011 by failing to conduct a reasonable prefiling investigation of the existing law. SIPC alleged that there was no good faith legal argument which could have been maintained as to which date constituted the “filing date.” Moreover, SIPC points out that Stephen P. Harbeck, Senior Associate General Counsel for SIPC [hereinafter “Harbeck”], attempted on numerous occasions to contact Haubner’s Counsel in an effort to explain the controlling SIPA Sections and to urge Haubner’s Counsel to withdraw his pleadings in connection with the Renewed Motion for Summary Judgment. See, Affidavit of Stephen P. Harbeck, dated March 22, 1990.
Haubner’s Counsel did not withdraw the Request for Summary Judgment, nor did he amend his pleadings in any manner. Furthermore, he has not responded to SIPC’s Motion for Sanctions, so the Court can only review Haubner’s Request for Summary Judgment as an indication of whether Rule 9011 was violated.
The Sixth Circuit Court of Appeals has held that an attorney who signs pleadings or other court papers has three obligations to meet to avoid sanctions under Rule 9011.
First, the attorney must conduct a reasonable inquiry to determine that the document is well grounded in fact.
*453Second, the attorney must conduct a reasonable inquiry to determine that the positions taken are warranted by existing law or as a good faith argument for extension or modification of existing law.
, Third, the document must not be filed for any improper purpose.
Jackson v. Law Firm of O’Hara, Ruberg, et. al., 875 F.2d 1224 (6th Cir.1989). Although in Jackson, the Sixth Circuit Court of Appeals dealt with Rule 11, this Court believes that Rule 9011 and Rule 11 are similar in their requirements. It is the second obligation which this Court believes that Reeves did not meet.
This is a Bankruptcy that has been ongoing since 1983. Since the beginning, SIPC has been involved and this Court has applied SIPA where appropriate. Haub-ner’s Counsel should have known to consult SIPA before making his argument; the slightest research would have revealed that his argument was baseless. His Request for Summary Judgment does not contain any argument for the Court to consider extending or a modification of the existing law under SIPA. Had this Bankruptcy been fresh and had counsel been struggling to comprehend SIPA, then maybe this Court would have ruled differently.
Harbeck’s Affidavit indicates that he contacted opposing counsel and informed him of the application of SIPA to this case. Haubner’s Counsel continued to pursue his avenue of defense without attempting to alter his direction by filing any type of argument as to why SIPA does not apply. While these actions were not as egregious as some of the cases this Court has reviewed, this Court nevertheless finds that the prefiling investigation conducted by Haubner’s Counsel was insufficient because it failed to disclose that the legal argument put forth was not warranted by existing law or a good faith argument for the extension or modification law. See, e.g., Kinee v. Abraham Lincoln Fed. Sav. & Loan Ass’n., 365 F.Supp. 975 (E.D.Pa.1973) (holding that suing every individual or lending institution listed in the Philadelphia phone book under the heading of mortgage broker violated Rule 11 by bringing suit challenging a particular lending practice against 177 mortgage lending institutions where 46 of the 177 institutions did not follow the disputed practice.). Accordingly, the Court concludes that Haubner’s Counsel signed the Request for Summary Judgment in violation of the requirements of Rule 9011.
As to appropriate sanctions, this Court had wide discretion in determining what is appropriate for this situation. The primary purpose of Rule 9011 sanctions is deterrence, not compensation. This Court believes that striking all pleadings by Haubner’s Counsel in this matter is the appropriate sanction for this violation of Rule 9011. The Court makes this finding for a variety of reasons. One such reason is that the claim by Haubner’s Counsel was disposed of by summary judgment, therefore, any greater sanction would not be justified based upon the time involved. Furthermore, the record reflects no indication of a deliberate effort to misuse or abuse the litigation process. Haubner’s Counsel has practiced before this Court for many years and this is the only violation of which this Court is aware. This Court is in no way casting aspersions upon Haubner’s Counsel or upon his ability to competently practice law, but rather, this Court is only making a case specific finding that a violation occurred. All counsel who appear in this Court are strongly encouraged to argue on behalf of their clients, but are reminded that they are to state the controlling law fairly and fully and to perform adequate prefiling investigations.
In reaching the conclusions found herein, this Court has considered all the evidence and arguments of counsel regardless of whether or not they are specifically mentioned.
Accordingly, it is
ORDERED that the Trustee’s Motion for Summary Judgment be, and is hereby, Granted.
It is FURTHER ORDERED that judgment be, and is hereby, granted in favor of the Plaintiff, Patrick A. McGraw, Trustee, and against the Defendant, Louis Haubner, Jr., in the amount of Forty-eight Thousand *454Eight Hundred Eighty-eight Dollars and Seven Cents ($48,888.07).
It is FURTHER ORDERED that the Defendant’s Motion for Summary Judgment be, and is hereby, Denied.
It is FURTHER ORDERED that SIPC’s Motion for Sanctions be, and is hereby, Granted., | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491462/ | OPINION AND ORDER GRANTING MOTION FOR SUMMARY JUDGMENT AND EXCEPTING DEBT FROM DISCHARGE
WALTER J. KRASNIEWSKI, Bankruptcy Judge.
This matter is before the court upon plaintiffs motion for summary judgment of its complaint to determine dischargeability of debt pursuant to 11 U.S.C. § 523(a)(4) and Debtor/defendant’s response thereto. Upon consideration thereof, the court finds that said motion is well taken and should be granted and that the debt due plaintiff should be excepted from discharge.
FACTS
On July 31, 1991, Debtor/defendant filed his voluntary petition under chapter 7 of title 11. Thereafter, on November 14, 1991, plaintiff filed a complaint to determine dischargeability of debt and for monetary judgment. Although plaintiff’s complaint requests that the debt owed it be excepted from discharge pursuant to 11 U.S.C. § 523(a)(2), (4) and (6), its motion for summary judgment is premised upon § 523(a)(4), only. See Plaintiff’s Motion for Summary Judgment at 3 n. 2. Plaintiff states that prior to the filing of defendant’s petition, defendant pled guilty to, and was convicted of, grand theft by the Pike County Common Pleas Court. Defendant was ordered to make restitution to plaintiff in the amount of $25,000. To date, defendant has made one payment to plaintiff in the amount of $1,250. Defendant opposes plaintiff’s motion claiming that although § 523(a)(7) specifically excepts a debt for restitution from discharge, plaintiff’s motion is premised on § 523(a)(4).
DISCUSSION
Section 523(a)(4) of title 11 excepts from discharge a debt “for fraud or defalcation while acting in a fiduciary capacity, embezzlement or larceny.” Plaintiff has the burden of establishing the elements of this section by a preponderance of the evidence. Grogan v. Garner, — U.S. -, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). *888The basic elements of establishing an exception to discharge for embezzlement are “that property is acquired lawfully with the consent of the owner, the property is appropriated for the embezzler's own use, and some form of fraud or deceit is employed.” In Re Sinchak, 109 B.R. 273, 276 (Bkrtcy.N.D.Ohio 1990). See also In Re Johann, 125 B.R. 679 (Bkrtcy.M.D.Fla. 1991) (embezzlement is defined as the fraudulent appropriation of property by a person to whom such property has been entrusted or into whose hands it has lawfully come (quotation omitted)); In Re Imbody, 104 B.R. 830, 841 (Bkrtcy.N.D.Ohio 1989) (embezzlement has been held to require two elements which must be proven: (1) that the Debtor appropriated funds for his own benefit and (2) that the Debtor did so with fraudulent intent or deceit); In Re Valentine, 104 B.R. 67 (Bkrtcy.S.D.Ind.1988) (for purposes of determining dis-chargeability, embezzlement is defined as fraudulent, or knowing and willful, misapplication or conversion of property of another by a person to whom such property has been entrusted or into whose hands it has lawfully come).
Defendant, in answering plaintiff’s complaint, admitted that he embezzled $25,000 from plaintiff. Answer to Complaint. Additionally, plaintiffs motion is supported by pleadings in the state court action reflecting that defendant pled guilty to the charge of grand theft, in violation of O.R.C. § 2913.02. Supplement to Plaintiffs Memorandum in Support of Motion for Summary Judgment. By admission, then, the court finds that defendant embezzled funds from-plaintiff which represents a debt that is excepted from discharge pursuant to § 523(a)(4).
Defendant states that plaintiffs cause of action premised upon § 523(a)(4) is not well taken as defendant’s debt to plaintiff arises from a restitution order. This argument is superfluous. The debt was incurred as a result of defendant’s embezzlement; its character is not changed after entry of the restitution order.
Additionally, the facts in In Re Shinew, 33 B.R. 588 (Bkrtcy.N.D.Ohio 1983), are analogous to those of the instant case. In Shinew, defendant was convicted of grand theft; as part of his sentence, defendant was ordered to pay an amount in restitution. The Shinew court stated that
[a]s indicated in the comments which follow [O.R.C. § 2913.02], the statute covers a number of what were previously different offenses, including embezzlement ... Therefore, a conviction under the present statute signifies that there has been a wrongful taking or property, whether by theft or embezzlement.
Although a criminal conviction for grand theft does not, in and of itself, determine whether or not the resulting obligation is dischargeable, it is a fact that lends itself to such a finding.... Embezzlement is the fraudulent appropriation of property by a person to whom such property had been entrusted, or into whose hands it has lawfully come.... Since both O.R.C. § 2913.02 and 11 U.S.C. § 523(a)(4) contemplate the wrongful taking of property, an admission of conviction under the criminal statute would constitute, under the facts and circumstances of this case, an admission of nondischargeable conduct in relation to a debt for purposes of 11 U.S.C. § 523(a)(4).
As a result of these admissions there are an ample number of substantiated allegations so as to hold that the defendant should not be discharged from the debts owed to these plaintiffs.
Shinew, 33 B.R. at 592. See also Sinchak, 109 B.R. at 276 (basic elements of embezzlement are present in both common law and statutory definitions); In Re Goux, 72 B.R. 355, 15 B.C.D. 1132 (Bkrtcy.N.D.N.Y.1987) (creditor’s motion for summary judgment was granted as court found that Debtor’s obligation to creditor arose as a result of conduct constituting embezzlement under § 523(a)(4) and his prior guilty plea in the state court criminal proceeding collaterally estopped him from presenting evidence as to the debt’s dischargeability). Thus, the court finds defendant’s argument not well taken and that the debt due plaintiff from defendant should be excepted from discharge.
*889Finally, because this court finds that plaintiff is entitled to judgment under § 523(a)(4), the court, while noting that plaintiff does not seek summary judgment as to the allegations in its complaint premised upon §§ 523(a)(2) and (6), finds that disposition of these causes of action is unnecessary. In light of the foregoing, it is therefore
ORDERED that plaintiff’s motion for summary judgment on its complaint is well taken and that the debt due plaintiff from defendant be, and hereby is, excepted from discharge pursuant to 11 U.S.C. § 523(a)(4). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491463/ | MEMORANDUM OF DECISION ON § 523(a)(4) COMPLAINT
FRANCIS G. CONRAD, Bankruptcy Judge.*
This adversary proceeding is before us1 on Sun Bank’s § 523(a)(4) complaint to determine dischargeability of a debt. We will deny the relief sought and declare the debt to be dischargeable, because we hold that Debtor neither owed nor breached a fiduciary duty to Sun Bank, and, in the alternative, that Sun Bank is not entitled to contribution from Debtor.
The essential facts are not in dispute. A wrongful death action resulted in a cash settlement to Debtor and his two children, who were then minors. Part of the settlement went to Debtor personally; the balance was awarded to his two children. Upon settlement, Debtor was appointed guardian of his two children by the Probate Division of the 11th Judicial Circuit on March 6, 1985. In re Guardianship of Mark Anthony Lugo and Emery Jane Lugo, Probate No. 85-2178. That same date, the Probate Court issued an “Order Designating Depository for Cash Assets” (the “Order”), which required deposit of the children’s award with Sun Bank. The Order, issued with the prior consent of Sun Bank, required the bank to hold the children’s awards
*919in safekeeping subject to such instructions by the Guardian ... as [are] authorized by Orders of this Court directed to said Depository and to permit withdrawal thereon only upon Order of this Court.
Id. The Order also required “any person or corporation having possession or control of such funds” to pay them over to Sun Bank, and provided that “the receipt and acceptance thereof by [Sun Bank] shall relieve the person or corporation from all further responsibility therefor.” Id. It is undisputed that Sun Bank agreed to act as designated depository, received a copy of the Order, and accepted deposit of the $25,-000 from Debtor.
The deposit initially was put in the form of a Certificate of Deposit (CD) in trust for both children. Within six months, however, the CD had been rolled over twice, reduced in amount to $20,000, and the name of one child had been dropped. The diminution in value to $20,000, which is not an issue before us, is not accounted for by the evidence presented. Nor do we know whether any Court orders were presented to Sun Bank to authorize the reduction in original principal amount or the change in ownership.
On Sept. 9, 1985, the $20,000 CD was used, with the consent of Sun Bank, as collateral for a personal loan made by Sun Bank to Debtor. Although Sun Bank well knew that the CD account was restricted by order of the Probate Court at the time it was put up by Debtor as collateral, it took no action to prevent its use for that purpose. Indeed, the record indicates, and we find, that Debtor, who lacked financial sophistication, did not intend to misappropriate funds, but agreed to the collateral arrangement at the suggestion of Sun Bank. Eventually, Debtor defaulted on the loan secured by the CD.
In 1990, one of Debtor’s two children, Emery, now an adult, filed a Petition for Contempt in the Probate Court against Sun Bank as the designated depository of the guardianship’s cash assets. The Probate Court determined that Sun Bank caused the children’s estate to suffer damages “by reason of its negligence and misfeasance.”
Specifically, Sun Bank improperly permitted the withdrawal of the entire guardianship estate held by it without Court Order authorizing same in violation of the Order dated March 6, 1985 designating Sun Bank as depository pursuant to Florida Statute Sec. 69.031 and in violation of the Acceptance as depository executed by Sun Bank dated January 25, 1985 and filed in this cause on March 6, 1985.
In re Guardianship of Lugo, “Order on Petition for Contempt and Order to Show Cause,” Probate Case No. 85-2178 (11th Jud.Cir.Fla. March 6, 1985).
The Probate Court ordered Sun Bank to pay Emery the full amount due her, plus interest, costs and attorney’s fees, less $10,000 she had previously recovered directly from Debtor. In addition, Sun Bank was required to place the full amount due the remaining minor child, including interest, in a restricted account as required by the original Order. Debtor does not dispute Sun Bank’s claim that its losses total $10,065.81 as a result of the events set out above.
Sun Bank’s complaint against Debtor in this adversary proceeding seeks to have the $10,065.81 declared a non-dischargeable debt of Debtor to Sun Bank. Its argument has three steps. Sun Bank argues, first, that Debtor owes it a fiduciary duty, and, second, that Debtor’s liability for breach of that fiduciary duty does not depend upon proof of a subjectively evil intent.
To establish a defalcation [under § 523(a)(4) ], the plaintiff is not required to prove that the fiduciary derived a personal benefit from the diversion of the estate or that there was any criminal intent. [Plaintiff] need prove only that the diversion was unauthorized and intentional.
In re Stalnaker, 19 B.R. 784, 785 (Bkrtcy.S.D.Fla.1982). See also, Hirsch v. Winter, 108 B.R. 345, 346 (S.D.Fla.1989) (Under § 523(a)(4),2 the term “ ‘defalcation’ gener*920ally means the ‘failure of the fiduciary to account for the money he received in his fiduciary capacity.’ ”) (citation omitted). The third step in Sun Bank’s argument is its conclusion that Debtor is liable for defalcation, made nondischargeable under § 523(a)(4), based simply on the fact that the money is missing.
Sun Bank stumbles, we believe, at the first step, because it is unable to establish that Debtor owed it a fiduciary duty. Accordingly, we do not address the last two steps of its argument. While Debtor might have been liable to his children had they brought this adversary proceeding, Sun Bank must establish that it, too, was owed a duty by Debtor. Sun Bank claims that Debtor’s deposit of the estate funds in the restricted account under the Probate Court’s Order gave rise to a duty owed by Debtor to Sun Bank.
Generally, funds on general deposit in a bank are the property of the bank, that is, in the absence of a special agreement imparting a different character, the relationship between the parties is simply that of debtor-creditor. However, the nature of this deposit is not general, but very specific. The funds to be held by Sun Bank were intended to be held in trust for the ward. There is no question that Sun Bank was under a fiduciary duty to hold the funds. Accordingly, the Debtor was under a mutually existing fiduciary duty, which he owed to the bank, to refrain from misappropriating the funds.
Feb. 21,1992 letter memorandum from Sun Bank’s counsel, p. 2. (Citations omitted.) The assertion of the last sentence — that Debtor was under a fiduciary duty to Sun Bank — simply does not follow. The plain language of the Order, and of the underlying statutory scheme, clearly indicate that the intent of both was to relieve a guardian, like Debtor, from responsibility for estate funds placed into a designated depository.
The Order unambiguously provides that once Debtor deposited the funds in Sun Bank, he was “relieve[d] ... from all further responsibility therefor.” Sun Bank, as it concedes, thereupon became responsible for keeping the funds “in safekeeping.” Indeed, both the Order and statute3 on which it is based expressly mandate that all instructions from a guardian to a designated depository must undergo Court scrutiny, and are to be complied with only if the Court so orders.
A clear intention to place the fiduciary responsibility for deposited funds upon the designated depository, and to remove it from the guardian, is made explicit by subsections (2) and (3) of Fla.Stat. § 69.031. Subsection (2)4 requires that the Court, after deposit of estate funds into a designated depository, either waive the guardian’s bond altogether, or reduce it so that it applies only to funds remaining in the guardian’s hands. Subsection (3)5 express*921ly provides that the Court-ordered deposit of estate funds into a designated depository by one with possession or control over them “relieves the person or corporation from further responsibility therefor.” (Emphasis added.)
Under Florida law, Sun Bank notes,
[tjhere is a fiduciary relation between parties where confidence is reposed by one and a trust accepted by the other. The relation need not be legal but may be moral, social, domestic, or purely personal. Thus, the term, “fiduciary” or “confidential” relation as defined is a very broad one. Such a relation has been said to exist and to suffice as a predicate for relief in all cases wherein influence has been acquired and abused, or wherein confidence has been reposed and betrayed.
Prescott v. Kreher, 123 So.2d 721, 727 (2d Fla.Dist.Ct.App.1960). That pattern, however, is simply not present in the relationship between Sun Bank and Debtor. The confidence reposed was not by Sun Bank in Debtor, but by Debtor as guardian of his children’s estate in Sun Bank. Moreover, it was Sun Bank that accepted that trust, and thereby relieved Debtor of “further responsibility,” under both the terms of the Order and Florida statutory law. Finally, Debtor put up the CD as collateral with Sun Bank’s knowledge and authority. Sun Bank, as creator and custodian of the restricted account, cannot assign to Debtor its responsibility for the losses suffered by the estate of the Debtor’s children.
Accordingly, we hold that Debtor neither owed nor breached a fiduciary obligation to Sun Bank, and that any debt he might owe to Sun Bank is dischargeable.
As an alternative holding, we find that Sun Bank has failed to prove that it is entitled to contribution from Debtor in any case. Sun Bank was adjudicated liable for the losses to the estate by reason of its own “misfeasance and negligence.” In re Guardianship of Lugo, “Order on Petition for Contempt and Order to Show Cause,” supra. We will assume for the sake of this discussion, although it has not been established judicially, that Debtor also was liable. The Florida statute creating a right of contribution among joint tortfeasors, expressly excludes “breaches of trust or of other fiduciary obligation.” Fla.Stat. 768.31(2)(g).6
Finally, we find that even if Sun Bank had a right to contribution from Debtor, it was satisfied when Debtor paid $10,000 to the petitioning child without the necessity of judicial proceedings. Florida’s contribution statute requires that contribution be allocated pro rata according to the relative degrees of responsibility of the wrongdoers. Fla.Stat. 768.31(3)(a).7 We conclude, based upon the circumstances previously set forth, that Sun Bank’s fault was not less than Debtor’s. Accordingly, because both have paid roughly equivalent amounts, Debtor owes nothing to Sun Bank under Florida’s contribution statute.
Counsel for Debtor shall submit an order consistent with the findings and conclusions of law set forth in this Memorandum of Decision.
Sitting by special designation.
. Our subject matter jurisdiction over this controversy arises under 28 U.S.C. § 1334(b) and the general reference to this Court from the U.S. District Court for the Southern District of Florida. This is a core matter under 28 U.S.C. § 157(b)(2)(I). This Memorandum of Decision constitutes findings of fact and conclusions of law under F.R.Civ.P. 52, as made applicable by F.R.Bkrtcy.P. 7052.
. 11 U.S.C. § 523(a)(4) provides, in pertinent part:
*920(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—
(4) for fraud or defalcation while acting in a fiduciary capacity....
.Fla.Stat. § 69.031(1) provides, in pertinent part:
(1)When it is expedient in the judgment of any court having jurisdiction of any estate in process of administration by any guardian ... or other officer, because the size of the bond required of the officer is burdensome or for other cause, the court may order part or all of the personal assets of the estate placed with a bank ... designated by the court- All interest, dividends, principal and other debts collected by the financial institution on account thereof shall be held by the financial institution in safekeeping, subject to the instructions of the officer authorized by order of the court directed to the financial institution.
. Fla.Stat. § 69.031(2) provides in, pertinent part:
(2) ... After the receipt for the original assets has been filed by the financial institution, the court shall waive the bond given or to be given or reduce it so that it shall apply only to the estate remaining in the hands of the officer, whichever the court deems proper.
. Fla.Stat. § 69.031(3) provides:
(3) When the court has ordered any assets of an estate to be placed with a designated financial institution, any person or corporation having possession or control of any of the assets, or owing interest, dividends, princi*921pal or other debts on account thereof, shall pay and deliver such assets, interest, dividends, principal and other debts to the financial institution on its demand whether the officer has duly qualified or not, and the receipt of the financial institution relieves the person or corporation from further responsibility therefor.
. Fla.Stat. 768.31(2)(g) provides:
(2) Right to CONTRIBUTION.
(a) Except as otherwise provided in this act, when two or more persons become jointly or severally liable in tort for the same injury to person or property, or for the same wrongful death, there is a right of contribution among them even though judgment has not been recovered against all or any of them.
(g) This act shall not apply to breaches of trust or of other fiduciary obligation.
. Fla.Stat. 768.31(3)(a) provides:
(3) Pro rata shares. — In determining the pro rata shares of tortfeasors in the entire liability:
(a) Their relative degrees of fault shall be the basis for allocation of liability. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491464/ | MEMORANDUM OPINION AND ORDER
RICHARD L. SPEER, Bankruptcy Judge.
This cause comes before the Court upon the Defendant’s Motion for Summary Judgment. The Defendant challenges whether the Trustee should be allowed to reach the Defendant’s assets in order to satisfy the debts and obligations of the Debtor due to res judicata principles and the running of the statute of limitations. The Court has reviewed the written arguments of counsel, the relevant case law, as well as the entire record in this case. Based upon that review and for the following reasons, the Court finds that the Defendant’s Motion for Summary Judgment should be denied on both counts.
FACTS
There were four court proceedings involving this case. Cases one and four were Federal Bankruptcy cases. Cases two and three were state court cases. Case one was initiated on March 7,1983, when Carlin Investment Company, Defendant, was forced into involuntary Bankruptcy by its secured creditors. Case two was a state court proceeding (case number 83-2683) involving state statutory issues and was commenced on October 31,1983. On August 6, 1984, all parties consented to the jurisdiction of the Bankruptcy court to hear all matters referred to in case two. Case two was then dismissed by the state court without prejudice on January 23, 1985. Case three was also a state court proceeding (case number 85-0704) involving state statutory issues and was commenced on March 15, 1989. Case four was a bankruptcy adversary (case number 89-0118) involving an attempt by the Plaintiff, Marguerite Hall, and Trustee, John Hunter, to reach the Defendant’s assets in order to satisfy the debts and obligations of the Debtor. Case four was commenced on June 15, 1989, and was stayed pending a ruling in the state court on case three. On April 21, 1989, case three was dismissed. The same case was appealed and affirmed on May 18, 1990. The stay on case four was then removed and is now before the Bankruptcy Court.
LAW
Res judicata operates as a bar to raising an issue in a subsequent court proceeding provided that the issue was raised or could have been raised in the previous action and that:
1) the prior judgment was a final judgment on the merits;
*9632) the prior judgment was entered by a court of competent jurisdiction; and
3) the same cause of action and the same parties are involved.
Miller v. Meinhard Commercial Corp., 462 F.2d 358, 360 (5th Cir.1972); Allen v. McCurry, 449 U.S. 90, 101 S.Ct. 411, 66 L.Ed.2d 308 (1980). Both the Miller requirement that the issue was raised or could have been raised in a previous action and all elements of the Allen three prong test must be met in order for an issue to be barred by res judicata. This Court does not believe that res judicata is applicable to the case at bar.
The primary element of res judicata requires that the issues in question were raised or could have been raised in the previous action. Miller, 462 F.2d at 360. Because the state court does not have jurisdiction over bankruptcy issues, the bankruptcy issues could not have been raised in the state court proceeding absent relinquishment of the bankruptcy court’s jurisdiction. “The power to determine dis-chargeability was granted to the bankruptcy courts by the 1970 Amendments to the Bankruptcy Act.” Spilman v. Harley, 656 F.2d 224, 226 (1981). Congress intended to take the determinations governed by 11 U.S.C. Section 523(c) away from the state courts and grant exclusive jurisdiction to the bankruptcy courts. Id. As a result, bankruptcy issues would not fall into the state court’s jurisdiction. The bankruptcy court did not abdicate its jurisdiction in the case at bar. Therefore, the state court decision does not have a preclusive effect over the bankruptcy issues.
The Allen test does not support the Defendant’s theory that res judicata operates as a bar in the present case. The first prong of the Allen test has been met. The state court entered a final judgment on the merits of the case. Those findings of the Court of Common Pleas of Lucas County, Ohio were: 1) there was no fiduciary relationship between Hall and Carlin; 2) there was no duty to inform Hall of Carlin’s merger with Newton; 3) there was no misrepresentation to Hall regarding the future status of Newton; 4) no conspiracy existed to defraud Hall; and 5) no fraudulent transfer of assets was made to Carlin. Hall v. Cannaley, No. L-89-153, 1990 WL 65383 (App.Ct. Ohio May 18, 1190) (West-law, Ohio database, caselaw file).
The second prong of the Allen test has also been met. No bankruptcy issues were raised or addressed by the state court. Only state statutory claims were addressed. Therefore, the state court was a court of competent jurisdiction on all counts addressed in the state court action.
The third prong of the Allen test requires that the same cause of action and the same parties be involved in both cases. Herein lies the difficulty. Although all of the parties in the bankruptcy case were also parties in the state court proceeding, the causes of action differ. The Plaintiff’s complaint at bar involved five counts. Counts 1 and 2 involved a fraudulent representation in the relief from stay and abandonment which are both issues which fall in the jurisdiction of the Bankruptcy court. Counts 3 and 4 involved preferential transfers, which are wrongs defined by the Bankruptcy Code and are therefore within the jurisdiction of the Bankruptcy Court. Count 5 was an action to reach the assets of the Defendant’s in order to satisfy the debts and obligations of the debtor.
In the state court, the claim involved an allegation based upon Ohio statutes and is in relation to the transferring of assets as a result of fraudulent information allegedly given to Hall. This differs from the Bankruptcy definition of a fraudulent transfer because in Bankruptcy, fraudulent transfers refer to the transferring of assets within a specified time before filing for Bankruptcy. See 11 U.S.C. § 548. Even though the two causes of action arise out of the same nexus of facts, Hall’s selling of his stock, the causes of action are not the same. One cause of action is based upon state statutory grounds, while the other cause of action is based upon the Bankruptcy Code. Therefore, res judicata does not bar the subsequent action in the Bankruptcy Court.
The Defendant’s second claim in his Motion for Summary Judgment alleges that the statute of limitations has run. Over six years has passed between the *964filing of the bankruptcy petition and the filing of the present complaint. However, the Defendant neglected to note that the statute of limitations was tolled when the bankruptcy court stayed its proceedings pending decision of the proceedings in the state court. Therefore, the Defendant’s statute of limitations claim is without merit.
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.
Accordingly, it is
ORDERED that the Defendant’s Motion for Summary Judgment be, and is hereby, Denied.
It is FURTHER ORDERED that this matter be, and is hereby, set for further Pre-trial on Wednesday, August 21, 1991, at 1:00 P.M. in Courtroom No. 2, Room 119, United States Courthouse, 1716 Spielbusch Avenue, Toledo, Ohio. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491465/ | OPINION
WILLIAM F. TUOHEY, Bankruptcy Judge.
The within matter comes before the court pursuant to the debtor’s self-styled Motion in Aid of Litigant’s Rights, Etc. Through this motion, the debtor basically seeks to restrain creditor Superior Distributors, Inc., (“Superior Distributors”), certain witnesses, and the Office of the Sussex County, New Jersey, Prosecutor, (“Sussex Prosecutor”), from proceeding with the criminal prosecution of the debtor for an alleged pre-petition act. To this end, the debtor claims that the discharge of his debts pursuant to 11 U.S.C. § 523 precludes such prosecution.
The Sussex Prosecutor filed responsive pleadings and has appeared before this court to contest the motion on its merits.
Matters concerning the administration of a bankruptcy estate and dischargeability issues are core proceedings, as defined by Congress in 28 U.S.C. § 157. The within opinion constitutes this court’s findings of fact and conclusions of law.
FINDINGS OF FACT
1. The pro se debtor filed an individual voluntary petition for relief under chapter 11 of the United States Bankruptcy Code on September 28, 1990.
2. On October 30, 1990, the debtor filed with this court a notice of counsel. Since this date, the debtor has been represented by the counsel of his choice in these proceedings.
3. On February 11, 1991, this court entered an order converting the within bankruptcy case from a chapter 11 to a chapter 7, pursuant to the debtor’s application. A chapter 7 case trustee was appointed in March of 1990.
4. On August 12, 1991, this court entered an order discharging the debtor, which states in relevant part:
1. The above-named debtor is released from all dischargeable debts.
2. Any judgment heretofore or hereafter obtained in any court other than this court is null and void as a determination of personal liability of the debtor with respect to any of the following:
(A) debts dischargeable under 11 U.S.C. sec. 523,
(B) unless heretofore or hereafter determined by an order of this court to be nondischargeable, debts alleged to be excepted from discharge under clauses (2), (4) and (6) of 11 U.S.C. sec. 523(A),
(C) debts determined by this court to be discharged.
3. All creditors whose debts are discharged by this order and all creditors whose judgments are declared null and void by paragraph 2 above are enjoined *46from instituting or continuing any action or employing any process or engaging in any act to collect such debts as personal liabilities of the above-named debtor.
5. On December 18, 1991, the debtor filed with this court a Notice of Motion in Aid of Litigant’s Rights, etc.
6. Through this motion, the debtor seeks to enforce the August, 1991, bankruptcy discharge so as to enjoin Superior Distributors:
from in any way pursuing any criminal or quasi-criminal action against the debt- or, John P. Quinn and/or giving testimony in any form in the Superior Court of New Jersey or other court in any matter arising out of the issuance of the debt- or’s check no. 1776 in the amount of $5,000 to Superior Distributors, Inc. on June 11, 1990....
(See debtor’s notice of motion, page 2.)
7. Through this motion, the debtor also seeks to:
[join] the Office of the Sussex County, N.J. Prosecutor to the within action and enjoining and/or restrining [sic] said Prosecutor and his officers, agents and employees from in any way pursuing or continuing to pursue any and all criminal and/or quasi-criminal actions, whether pending or not, as against the debtor herein which arise out of the issuance of the debtor’s check no. 1776 in the amount of $5,000 to Superior Distributors, Inc. on June 11, 1990.
Id.
8. The debtor relies upon certain attached exhibits which include a letter brief used in the state court, the debtor’s criminal summons and indictment, and other court documents.
9. On January 23, 1992, the Sussex Prosecutor filed a memorandum of law in opposition to the debtor’s motion.
10. On February 14, 1992, after two adjournments, this matter was heard by the court. Both parties supplemented the record with oral argument, as well as exhibit S-1.1 At the conclusion of the hearing, this court reserved decision on the narrow issue of whether the debtor’s discharge in bankruptcy was an effective bar to criminal restitution in the state court proceedings.
11. The facts underlying the within motion are basically undisputed, as set forth in the adversaries’ papers and oral arguments.
12. According the debtor’s bankruptcy petition, he owed Superior Distributors a pre-petition debt of approximately $14,000. In an effort to settle the debt, the debtor, trading as Vernon Diesel Engine Service, issued pre-petition a check on June 11, 1990, in the amount of $5,000 to Superior Distributors. (Exhibit S-l.) The check was deposited by the attorney for Superior Distributors, and was subsequently dishonored by the debtor’s bank.
13. Superior Distributors filed a criminal complaint against the debtor on March 6, 1991 in the borough of Sussex, New Jersey. The complaint alleges that the defendant knowingly issued the referenced check in violation of N.J.S. 2C:21-5. (See debtor’s exhibit, copy of S060507.) The debtor was subsequently indicted for this offense on June 20, 1991. (See debtor’s exhibit, copy of Indictment 91-06-0108-1.)
14. According to the debtor’s state court letter-brief which is relied on as an exhibit to his pleadings, he voluntarily applied for admission into the State Pre-Trial Intervention Program, (“PTI”). This application was favorably received by both PTI program officials and the Sussex County Prosecutor with the proviso that $5,000 in restitution be paid to Superior Distributors.
15. Based upon these facts, the debtor maintains that this court’s discharge of the debtor bars the state from requiring restitution as a condition to PTI. He argues that it is improper to collect through the state criminal process a debt which is otherwise uncollectible. In support of this *47contention, the debtor cites 11 U.S.C. § 524 as follows:
A discharge [under the Bankruptcy Code] (1) voids any judgment at any time obtained ...; and (2) operates as an injunction against ... an act ... to collect ... any debt [so discharged],
16. In addition to the stated facts, the Sussex Prosecutor maintains that the $5,000 check arose as a partial settlement of a civil judgment obtained in the state court by Superior Distributors against the debtor on or about May 4, 1990, nearly five months prior to the debtor’s bankruptcy petition. A writ of execution was filed with the Sussex County Sheriff on or about May 10, 1990. Thereafter, a Sussex County Sheriffs Officer attempted to levy upon the debtor at his premises at 133 Route 23 N., Hamburg, New Jersey, and was denied access. (See Sussex Prosecutor’s Memorandum, Exhibits A, B, and C.) Superior Distributors was therefore a pre-petition judgment creditor who attempted to levy thereon, and had the levy returned unsatisfied.
17. The Sussex Prosecutor further maintains that the debtor negotiated a settlement of the judgment through his agent, and agreed to immediately pay the $5,000 check to Superior Distributors. Contemporaneous with the receipt of the check, Superior Distributors notified the Sussex County Sheriff to cease further levying efforts. The Sussex County Sheriff was, however, authorized by Superior Distributors to proceed with the levy sometime after June 20, 1990, the date that the check was dishonored. The bankruptcy was filed several months later on September 28, 1990.
18. In opposing the debtor’s motion, the Sussex Prosecutor relies upon a body of caselaw which mitigates against interference in the results of state criminal proceedings by federal bankruptcy courts. In this regard, the prosecutor notes, on page five of his brief, that the debtor has remaining state court options which have not yet been exercised:
[h]e could proceed to trial and, if acquitted, the issue would be moot. He could enter a conditional plea of guilty and litigate the state trial court’s ruling on an appeal of right. He could have made a motion for leave to appeal the state trial court’s ruling on an interlocutory basis.
19.It is further argued that the restitution condition to PTI admission was a valid exercise of prosecutorial discretion which has already been reviewed by a state court judge.
DISCUSSION
Exceptions to discharge in Chapter 7 bankruptcy proceedings are codified in 11 U.S.C. §§ 523, et seq. In relevant part, section 523(a)(7) protects any debt from discharge in bankruptcy,
to the extent that such debt is for a fine, penalty, forfeiture payable to and for the benefit of a government unit, and is not compensation for actual pecuniary loss
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Interpretation of this statute, in relation to a chapter 7 debtor who was ordered pre-petition to pay restitution during state court criminal proceedings as a condition of probation, was made by the United States Supreme Court in Kelly v. Robinson, 479 U.S. 36, 107 S.Ct. 353, 93 L.Ed.2d 216 (1986).
As a threshold concern, the Kelly court stated that,
Our interpretation of the Code also must reflect the basis for this judicial exception, a deep conviction that federal bankruptcy courts should not invalidate the results of state criminal proceedings. The right to formulate and enforce penal sanctions is an important aspect of the sovereignty retained by the States. This court has emphasized repeatedly “the fundamental policy against federal interference with state criminal prosecutions.”
Id., 107 S.Ct. at 360 (quoting Younger v. Harris, 401 U.S. 37, 91 S.Ct. 746, 751, 27 L.Ed.2d 669 (1971)).
In Kelly, the Court held that although section 523(a)(7) is subject to interpretation, it goes beyond protecting “traditional criminal fines” so as to include restitution obli*48gations which were imposed in a state criminal court as a condition of probation. Id. 107 S.Ct. at 362. To clear the hurdles imposed by Congress in that statute, the Court explained that the fines must accrue “to and for the benefit of a government unit,” and not as “compensation for actual pecuniary loss.” Id. The Court therefore noted that when restitution is ordered in criminal proceedings out of “the State’s interest in rehabilitation and punishment, rather than the victim’s desire for compensation,” it has been done “for the benefit of” the State.
In Kelly, however, the Court was faced with interpreting a restitution order which was part of a sentence predicated on a criminal conviction. In the instant matter, the debtor faces a restitution order in a pre-trial diversionary program, where no criminal conviction has been determined.
PTI was established pursuant to New Jersey Court Rule 3:28 in 1970.2 Upon admission into the program, the designated state court judge is authorized to postpone criminal proceedings against defendants who have been charged with penal or criminal offenses, upon the consent and recommendation of the program director and the prosecuting attorney.
N.J.S. 2C:43-12(a) provides in relevant part that the purposes of PTI include the rehabilitation and deterrence of defendants from committing further crimes. (Accord Guidelines for Operation of Pretrial Intervention in New Jersey, Guideline 1, December 1, 1982, as found in Rule 3:28.)
To achieve these ends, the prosecutor and program director are vested with significant discretion in deciding whether to admit defendants into PTI. Such decisions are based upon “the applicant’s amenability to correction, responsiveness to rehabilitation and the nature of the offense.” N.J.S. 2C:43-12(b). When the program director or prosecutor withholds consent, denied applicants are entitled to particularized findings concerning the denial and a hearing before the designated state court judge.
The New Jersey Supreme Court has reinforced the significant discretion of the prosecutor and program director by holding that admission to PTI may not be ordered over their objection unless there was a patent and gross abuse of discretion which would undermine the goals of the program. State v. Dalglish, 86 N.J. 503, 432 A.2d 74 (1981). Further, pre-trial appellate court review of such state court decision is limited by the terms of Rule 3:28(f).
The discretion of the prosecutor and program director in denying admission into PTI carries over into the terms and conditions of the program itself, subject to the Guidelines found in Rule 3:28.
Guideline 3(k) recognizes that, subject to judicial approval, restitution and community service may be required as part of an individual's PTI service plan to aide in his or her rehabilitation. Certain explicit limitations on the restitution conditions are provided in Guideline 3(k), including: (1) the prohibition against their existence being used in subsequent civil or criminal proceedings; (2) the flexibility of restitution conditions so as to encompass symbolic or partial restitution; and (3) the prohibition on denying PTI admission “solely on the basis of anticipated inability to meet a restitution requirement.” These limitations are indicative of a concern by the State of New Jersey that restitution be utilized as a tool for rehabilitation, and not as a means for the collection of private debts.3
*49It is the conclusion of this court, therefore, that restitution which is imposed as a condition in New Jersey PTI programs by the debtor meets the two requirements for nondischargeability of section 523(a)(7) as set forth by the Kelly court. PTI has an avowed purpose of rehabilitation and deterrence, which accrues for the benefit of the state, thereby meeting the first requirement. Moreover, restitution has been officially recognized by the PTI Guidelines of Rule 3:28 as an appropriate condition in certain cases. The fact that the restitution condition is subject to judicial review by the state court, is restricted in its application, and is not fundamentally imposed for the victim’s pecuniary gain, meets the second requirement.
The debtor’s motion seeking to avoid the restitution condition as a discharged debt, or because it is predicated on a discharged debt, is hereby denied. The terms of the discharge order itself provides that it relates only to those debts dischargeable under section 523(a), while in the instant matter the restitution issue is classified as nondisehargeable under section 523(a).4
Alternatively, the restitution condition accrued from a criminal action which was brought after the filing of the bankruptcy petition. The criminal complaint did not issue until March of 1991. Moreover, the restitution condition did not arise until late August, 1991. As such, the debtor’s discharge in the instant bankruptcy case in no way bars the discretionary authority of the PTI program to condition admission to the program upon payment of restitution to the crime victim.
. Exhibit S-l is an original check, number 1776, drawn on the National Bank of Sussex County from the account of Vernon Diesel Engine Service, account number 409002984, dated June 11, 1990. Superior Distributors is listed as the payee, and the amount of the check is the sum of $5,000. The front of the check bears the stamp “RETURNED NSF JUN 14 1990".
. Rule 3:28 is supplemented by the PTI Guidelines, as promulgated by the Supreme Court of New Jersey. These guidelines are generally codified in N.J.S. 2C:43-12. Under N.J.S. 2C:43-14 the Supreme Court has the authority to promulgate such rules, subject to veto by the Legislature under N.J.S. 2C:43-17.
. This reasoning is consistent with the official comments to Rule 3:28, which states in pertinent part: Full restitution need not be completed during participation in the program. In determining whether a restitution requirement has been fulfilled, the designated judge shall consider good-faith efforts by the defendant. In appropriate cases, at the conclusion of participation, a civil judgment by confession may be entered by the court. However, restitution should never be used in PTI for the sole purpose of collecting monies for victims. Rule 3:28, Guideline 3(k), comment.
. While the instant debtor has never filed as a chapter 13 debtor, it is noteworthy that Congress has recently acted to close a window which was opened by the United States Supreme Court in Pennsylvania Dept. of Public Welfare v. Davenport, 495 U.S. 552, 110 S.Ct. 2126, 109 L.Ed.2d 588 (1990). See 11 U.S.C. § 1328(a)(3), as amended by the Criminal Victims Protection Act of 1990, Pub.L. 101-581, effective Nov. 15, 1990. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491466/ | OPINION
THOMAS M. TWARDOWSKI, Chief Judge.
Before the court is defendant’s motion under Fed.R.Civ.P. 50(a) for judgment as a matter of law.1 As we find, after viewing the evidence in the light most favorable to plaintiff, that insufficient evidence was presented from which a jury could reasonably find for plaintiff, we grant defendant’s motion. A brief recitation of the relevant facts follows.
Plaintiff is in the business of selling a full line of products to the cable television *82industry. On July 24, 1983, plaintiff and defendant executed an employment agreement which included, in paragraph 7, a clause prohibiting defendant from disclosing confidential information both during and after his employment with plaintiff. This agreement did not contain a covenant restricting defendant’s ability to work for a competitor after his employment relationship with plaintiff ceased. Defendant continued to work as a salesman for plaintiff until early October of 1989, when he resigned. Several days later, defendant had a change of heart and contacted plaintiffs President, Mr. Ackerman, to discuss the possibility of reemployment. During these discussions, Mr. Ackerman explained to defendant that he was concerned about defendant’s past history of threatening to quit. Defendant then told Mr. Ackerman that he would not go to work for a competitor and offered to sign a document requiring that he not leave plaintiff’s employ to compete for three years. Additionally, defendant sent Mr. Ackerman two letters which contained representations that he would not work for a competitor.
On October 23, 1989, defendant was rehired by plaintiff as a salesman. Thereafter, Mr. Ackerman, without the advice of an attorney, drafted a document which was dated October 23, 1989 and which stated, inter alia:
He * 5k * * *
In consideration of granting you re-employment with TVC Supply Company, Inc. effective October 23, 1989, you have agreed not to seek nor accept employment elsewhere for a minimum of three years from this date.
Further, you agree to be bound by the Non-disclosure of Confidential Information as stated in your original employment letter of July 24, 1983, a copy of which is attached.
* * * * * *
This document was not signed by defendant until December 4, 1989. The employment relationship continued until approximately June 25, 1991, when defendant once again resigned. Thereafter, defendant began working for Midwest CATV, a direct competitor of plaintiff’s, as a salesman. Plaintiff then instituted this action seeking to enjoin defendant from breaching the restrictive covenant contained in the parties’ December 4, 1989 agreement. A hearing was held on plaintiff’s motion for a preliminary injunction and an order was entered denying the motion. However, defendant agreed to abide by paragraph 7 of the parties’ July 24, 1983 agreement (the nondisclosure of confidential information clause) and a consent order was entered to this effect from the bench. Thereafter, a hearing was held on plaintiff’s injunction complaint. At the conclusion of plaintiff’s case, defendant made an oral motion to dismiss, which we treated as a motion under Fed.R.Civ.P. 50(a), now known as a motion for judgment as a matter of law.
We begin our analysis with a discussion of the standard we must follow when deciding a motion for judgment as a matter of law under Fed.R.Civ.P. 50(a). Such a motion may only be granted if, after reviewing the evidence in the light most favorable to the opposing party, in this case, plaintiff, and giving the opponent the advantage of every fair and reasonable inference, the court concludes that there is insufficient evidence from which a jury could find for the opposing party. Laskaris v. Thornburgh, 733 F.2d 260, 264 (3rd Cir.1984), cert. denied, 469 U.S. 886, 105 S.Ct. 260, 83 L.Ed.2d 196 (1984). As stated by the Third Circuit Court of Appeals in Laskaris v. Thornburgh, 733 F.2d at 264, “[a] court cannot weigh the evidence or judge its credibility. If there is conflicting evidence that could reasonably lead to inconsistent inferences, a verdict may not be directed.”
We now turn to the substantive Pennsylvania law concerning the enforceability of restrictive covenants. In general, to be enforceable a covenant not to compete must: (1) be ancillary to an employment contract or to a contract for the sale of a business, (2) be supported by adequate consideration, (3) be reasonably limited in terms of activity, time and geographic extent, and (4) be reasonably necessary to protect legitimate interests of the employ*83er. Westec Security Services, Inc. v. Westinghouse Electric Corporation, 538 F.Supp. 108 (E.D.Pa.1982); Sidco Paper Company v. Aaron, 465 Pa. 586, 351 A.2d 250 (1976); George W. Kistler, Inc. v. O’Brien, 464 Pa. 475, 347 A.2d 311 (1975). In the case before us, the restrictive covenant was ancillary to an employment contract and accordingly, meets the first prong of the enforceability test. Additionally, we find that a binding oral employment agreement existed which included the restrictive covenant at issue. As recognized by the Pennsylvania Supreme Court in George W. Kistler, Inc. v. O’Brien,2 supra, parties may bind themselves contractually through mutual manifestation of assent prior to the execution of a written agreement. Since the restrictive covenant was part of the oral agreement, we find that adequate consideration existed for the restrictive covenant in the form of plaintiffs offer of reemployment to defendant and, therefore, the second prong of the enforceability test has been met. See, Jacobson & Company, Inc. v. International Environment Corporation, 427 Pa. 439, 235 A.2d 612 (1967). We next address the third and fourth prongs of the enforceability test, and for the reasons outlined below, we find that this covenant cannot pass muster under these prongs of the test.
A review of the covenant clearly reveals that it does not contain any restrictions on geographic limitation or on the type of employment or activity prohibited. Rather, the covenant prohibits defendant from being employed by anyone other than plaintiff for a period of three years from the date that the contract was executed. In effect, the covenant enslaves defendant to plaintiff for three years. We find this covenant severely overbroad and not reasonably necessary to protect any legitimate interest of plaintiff. Although Pennsylvania courts of equity will, in certain situations, reform an overbroad covenant and grant enforcement to the limited extent necessary to protect the legitimate interests of the employer, see, Westec Security Services, Inc. v. Westinghouse Electric Corporation, supra; Sidco Paper Company v. Aaron, supra, Barb-Lee Mobile Frame Company v. Hoot, 416 Pa. 222, 206 A.2d 59 (1965), they will not do so when the gratuitous overbreadth contained in the covenant indicates an intent to oppress the employee or to foster a monopoly, see, Sidco Paper Company v. Aaron, supra (interpreting prior Pennsylvania Supreme Court decision in Reading Aviation Service, Inc. v. Bertolet, 454 Pa. 488, 311 A.2d 628 (1973)); Reading Aviation Service, Inc. v. Bertolet, 454 Pa. 488, 311 A.2d 628 (1973); Bell Fuel Corporation v. Cattolico, 375 Pa.Super. 238, 544 A.2d 450 (1988). The covenant at issue, by prohibiting defendant from being employed by anyone other than plaintiff for the first three years of the employment contract severely oppresses defendant and evinces an intent to insure that defendant remains in plaintiff’s employ for three years3 rather than an intent to protect plaintiffs legitimate interest in customer goodwill acquired through defendant’s efforts.4
Finally, we note that the cases involving reformation of restrictive covenants, see, Westec Security Services, Inc. v. Westinghouse Electric Corporation, supra; Sidco Paper Company v. Aaron, supra; Jacobson & Company, Inc. v. International Environment Corporation, supra; Barb-Lee Mobile Frame Company v. Hoot, supra, involved covenants which were much *84more definitive then the covenant before us today and which bore some resemblance to the standard restrictive covenant ordinarily found in an employment agreement. Such a covenant ordinarily begins to run on the date of the employee’s departure and prohibits the employee from engaging in a defined competitive activity in a defined geographic area for a defined period of time. As so phrased, the standard restrictive covenant seeks to prevent the employee from using unfair advantage to compete with the employer, but is sufficiently limited in terms of activity, time and geographic area so as not to oppress the employee. The covenant in the case before us, however, begins to run on the date that defendant’s employment relationship with plaintiff commenced and expires three years thereafter and prohibits defendant from working for anyone other than plaintiff (not just a competitor) during this period of time.5 As phrased, this covenant bears no resemblance to the standard restrictive covenant ordinarily found in an employment agreement and is so severely overbroad as to evince an intent to oppress defendant. Accordingly, this covenant cannot be reformed.
An appropriate order follows.
ORDER
AND NOW, this 11th day of June, 1992, it is ORDERED that defendant’s motion for judgment as a matter of law under Fed.R.Civ.P. 50(a) is GRANTED.
. Prior to December 1, 1991, this motion was referred to as a motion for a directed verdict. As the Notes of the Advisory Committee on Proposed Rules make clear this change in nomenclature is merely technical, no change in substance was effected and the standard of review remains the same. Notes of Advisory Committee on Proposed Rules, subdivision (a).
. The facts in our case differ from those presented in George W. Kistler, Inc. v. O’Brien, supra, since in that case the court found that the restrictive covenant was not part of the prior oral employment agreement.
. Mr. Minari, plaintiffs vice president and general manager, testified on direct examination that the intent of the restrictive covenant was to "put to bed, for a period of three years, [defendant’s] seeking employment with one of our competitors." This testimony, when combined with Mr. Ackerman’s testimony that he was concerned about plaintiffs past history of threatening to quit clearly shows that plaintiff was primarily interested in making sure defendant remained in its employ for at least three years.
.We note that this legitimate interest continues to be protected by this court’s bench consent order requiring that defendant comply with paragraph 7 of the parties’ July 24, 1983 written employment agreement.
. Had defendant resigned after his third year anniversary with plaintiff, this restrictive covenant would have expired and defendant would not have been hindered by it, even though he would have had more time on the job during which he would have gained more extensive exposure to plaintiffs customers and would therefore appear to present a greater threat to plaintiff. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491468/ | ORDER ON MOTION FOR PARTIAL SUMMARY JUDGMENT AS TO AMENDED COUNT III
ALEXANDER L. PASKAY, Chief Judge.
THIS IS a Chapter 11 case and the matter under consideration involves certain claims set forth in the above-captioned adversary proceeding initiated by a three-count Complaint filed by Sunrise Investment Group, Inc. (Debtor) against Nate M. Oliver and Charlie Green, as Clerk of the Circuit Court for the Twentieth Judicial Circuit. The Complaint, entitled Supplemental Complaint, was filed on July 29, 1991.
In the claim in Count I, the Debtor alleged that certain checks drawn on the Debtor-in-Possession’s BancFlorida, F.S.B. (BancFlorida) account in the amounts of $2,755.00 and $2,164.74 were used to purchase a cashier’s check from BancFlorida in the amount of $4,919.74 and were paid to Charlie Green (Green), Clerk of the Circuit Court, by Nate M. Oliver (Oliver) who was at that time the president and the sole stockholder of the Debtor. It is alleged that these funds were property of the estate and that the payment is a voidable postpetition transfer, pursuant to § 549 of the Bankruptcy Code and therefore, Green should be required to turn over the funds to the Debtor. The claim in Count II seeks the turnover of a 1987 Acura Legend sedan which is allegedly in the possession of Oliver and is claimed to be property of the estate and therefore, Oliver should be ordered to turn over the vehicle to the Debt- or. The claim in Count III seeks to void a certain transaction as fraudulent pursuant *243to § 548 of the Bankruptcy Code, to wit, the granting of a mortgage by Oliver on behalf of the Debtor in favor of Phyllis Walker (Walker) a/k/a Phyllis Oliver, the former wife of Oliver.
This Court previously disposed of the claim in Count I by granting the Motion For Summary Judgment in favor of the Debtor and against Green, and dismissed Count II of the Complaint. This leaves for consideration the claim set forth in Count III of the Complaint, the claim based on the alleged fraudulent transfer by the Debtor involving the mortgage encumbering the property of the estate. It is the Debtor’s contention that there are no genuine issues of material fact and the Debtor is entitled to a judgment as a matter of law in its favor declaring that the granting of a mortgage by the Debtor to Walker is a voidable fraudulent transfer pursuant to § 548 of the Bankruptcy Code. The facts relevant to the resolution of this remaining issue as appear from the record are basically without dispute and should be summarized as follows:
On November 30, 1990, the Debtor, through its then president, Oliver, filed a Petition for Relief on behalf of the corporation under Chapter 11 of the Bankruptcy Code. At the time relevant Oliver was not only the president, but also the sole shareholder of the Debtor corporation and as such had exclusive possession and control of all records of the Debtor including the regular and Debtor-in-Possession bank account maintained by the Debtor.
In August, 1990, Stephen G. Kolody (Ko-lody) obtained a judgment against the Debtor in the amount of $18,393.78 and against Oliver individually in the amount of $2,250.00 in the Circuit Court for the Twentieth Judicial Circuit, Lee County, Florida. In addition, Kolody obtained an Order granting his Motion for Sanctions and for Taxation of Attorney’s Fees and Costs and awarded Kolody the sum of $16,926.14. The Circuit Court also entered an Order on January 7, 1991 which vested ownership of the Debtor’s stock, previously owned by Oliver, in Kolody. On the same date Kolo-dy elected himself as the president and sole director of the Debtor. Thus, Oliver was effectively removed from his previously-held positions and is no longer an officer or stockholder of the Debtor.
At the time relevant, the Debtor owned, and still owns, two commercial buildings located on South Cleveland Avenue in Ft. Myers, Florida. These buildings are encumbered by a mortgage executed by the Debtor in favor of Sun Bank of Lee County securing the principal amount of indebtedness in the amount of $400,000.00. This mortgage was executed by Oliver on behalf of the Debtor on June, 1990. In connection with the execution of this mortgage, the properties were appraised and a value for these two buildings was stated by the appraiser to be $825,000.00. It is without doubt that on August 6, 1990 Oliver, individually and also as an officer of the Debt- or, executed a mortgage to Walker allegedly securing a claimed indebtedness due to Walker in the amount of $433,880.08. The mortgage encumbered the two buildings mentioned earlier. This record is devoid of any evidence that the Debtor received any consideration for this mortgage and this Court is satisfied the Debtor was not indebted to Walker on or before the date the mortgage in question was executed.
It further appears that Walker executed and delivered a satisfaction of the mortgage in full to Oliver and the Debtor in August, 1990. The record further reveals that although Walker executed and delivered to Oliver both the satisfaction and a partial satisfaction on the second mortgage under consideration, she also executed an assignment of her second mortgage to Oliver. Oliver, who was still president of the Debtor, did not record these assignments. The deposition of Walker, which is part of this record, leaves no doubt that the purpose behind the execution of the second mortgage by the Debtor in favor of Walker and her simultaneous execution of the satisfaction and partial satisfaction of same and the assignment of the second mortgage to Oliver was designed for the purpose to immunize the properties in question from the judgment Order entered by the *244Circuit Court against the Debtor and Oliver in favor of Kolody.
Based on the foregoing undisputed facts, it is the contention of the Debtor that there are no genuine issues of material facts and the Debtor is entitled to an award of summary judgment on its claims set forth in the Complaint declaring that the execution of the mortgage by the Debtor in favor of Walker was a transfer and a transfer voidable as fraud pursuant to § 548 of the Bankruptcy Code. Section 548 reads as follows:
§ 548. Fraudulent transfers and obligations.
(a) The trustee may avoid any transfer of an interest of the debtor in property, or any obligation incurred by the debtor that was made or incurred on or within one year before the date of the filing of the petition if the debtor filed involuntarily—
(1) made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made or such obligation was incurred indebted; or
(2)(A) received less than a reasonably equivalent value in exchange for such transfer or obligation; and
(B)(i) was insolvent on the date that such transfer was made or such obligation was incurred or became insolvent as a result of such transfer or obligation;
In order to prevail on its Motion, it is the Debtor’s burden to establish that there are no genuine issues of material facts and that the Debtor is entitled to judgment as a matter of law.
Fed.R.Civ.P. 56 governs the procedure for summary disposition of litigation without the necessity of a full scale trial and has been adopted in toto by F.R.B.P. 7056. Summary judgment is appropriate when there are no genuine issues of material fact and when a party is entitled to judgment as a matter of law. Fed.R.Civ.Pro. 56 as adopted by F.R.B.P. 7056. In determining the merits of a Motion For Summary judgment, the Court is to consider the Motion, pleadings, depositions, answers to interrogatories, and admissions, together with affidavits, if any exist, showing that there are no genuine issues of material fact and that the movant is entitled to judgment as a matter of law. F.R.B.P. 7056(c).
It is now well established in this Circuit that summary judgment should not be granted unless the moving party has sustained its burden of showing the absence of a genuine issue as to any material fact when all the evidence can be viewed in the light most favorable to the nonmoving party. Sweat v. Miller Brewing, 708 F.2d 655 (11th Cir.1983).
This Court is satisfied that there are no generally disputed facts which would prevent the disposition of the Debtor’s claim by way of a summary judgment and that the Debtor did in fact establish the requisite burden of proof required to set aside the transfer under § 548(a)(2)(A) or, in the alternative, under § 548(a)(2)(B)(i). It is without dispute that Walker furnished nothing by way of consideration for the second mortgage granted to her encumbering the real property owned by the Debtor. It is equally without dispute that, taking into account the amount secured by the first mortgage due to Sun Bank in the amount of $400,000, together with the second mortgage granted to Walker purportedly securing the obligation in the amount of $433,880.08, the second mortgage to Walker, rendered the Debtor insolvent considering the appraised valuation of the properties at $825,000.00.
Moreover, although it is not very well articulated, it is fair to infer from this record that the execution of a mortgage and the simultaneous execution of a satisfaction by Walker and assignment by Walker to Oliver was merely a scheme to insure that the properties would be insulated from the judgment lien of Kolody which would have been junior both to the first mortgage of Sun Bank and also the second mortgage granted to Walker. In sum, there is hardly any question that the Debt- or did establish with the requisite degree of *245proof first, that the Debtor received less than reasonable equivalent value in exchange for such transfer; second, that the transfer did render the Debtor insolvent; and third, that the transfer was made within one year with the specific intent to hinder, delay, or defraud Kolody to whom the Debtor was indebted based upon the Judgment entered by the Circuit Court in favor of Kolody and against the Debtor and Oliver.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the Motion for Summary Judgment is granted in favor of Sunrise Investment Group Inc, and against Nate M. Oliver. A 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/8491469/ | ORDER GRANTING PLAINTIFFS’ MOTION FOR PRELIMINARY INJUNCTION
GEORGE L. PROCTOR, Bankruptcy Judge.
This adversary proceeding was commenced pursuant to 11 U.S.C. § 301, pursuant to jurisdiction vested by 28 U.S.C. Sections 1334, 2201 and 2202. The adversary proceeding is before the Court on Plaintiffs’ Motion For Preliminary Injunction filed on May 8, 1992 pursuant to Rule 7065(a), Federal Rules of Bankruptcy Procedure, and Rule 65, Federal Rules of Civil Procedure.
In order to grant the remedy of a preliminary injunction, the Court must make specific findings of fact and conclusions of law. Schrank v. Bliss, 412 F.Supp. 28, 34 (M.D.Fla.1976) (citing Granny Goose Foods, Inc. v. Brotherhood of Teamsters and Auto Truck Drivers, Local 70, 415 U.S. 423, 443, 94 S.Ct. 1113, 1126, 39 L.Ed.2d 435 (1974); Sampson v. Murray, 415 U.S. 61, 92 n. 58, 94 S.Ct. 937, 951 n. 58, 39 L.Ed.2d 166 (1974); Canal Authority of the State of Florida v. Callaway, 489 F.2d 567, 573, 578 (5th Cir.1974).
Upon the evidence presented, the Court makes the following findings of fact and conclusions of law as grounds for the issuance of the preliminary injunction.
FINDINGS OF FACT
On October 16, 1990, Olympia Holding Corporation, formerly known as P*I*E Nationwide, Inc. (“Debtor”), filed a petition for relief under Chapter 11 of the Bankruptcy Code.
As of the petition date, Debtor was principally engaged in the business of motor carrier transportation providing truckload and less-than-truckload service for its customers.
As of the petition date, Debtor had pledged its accounts receivable to Fidelcor Business Credit Corporation (“Fidelcor”) as security for more than $40 million in indebtedness to Fidelcor.
Fidelcor was Debtor’s principal pre-petition lender pursuant to prior agreements between them.
On December 15, 1990, in the course of a hearing being conducted in Debtor’s main bankruptcy case, Debtor announced its decision to terminate its operations.
On December 22, 1990, the United States Bankruptcy Court for the Middle District of Florida, Jacksonville Division (the “Bankruptcy Court”) ordered the appointment of a Chapter 11 trustee. On December 29, 1990, the Bankruptcy Court approved Lloyd T. Whitaker as the Chapter 11 trustee for Debtor.
In mid-January, 1991, Debtor terminated its operations.
On March 11, 1991, the Bankruptcy Court converted Debtor’s case from a case under Chapter 11 of the Bankruptcy Code to a case under Chapter 7 and Lloyd T. Whitaker (“Trustee”) was appointed the Chapter 7 trustee.
On March 24, 1991, the Bankruptcy Court granted Fidelcor’s motion for relief from the automatic stay and vacated the automatic stay imposed by Bankruptcy Code Section 362(a) to permit Fidelcor to collect freight charges owed from former customers of Debtor.
In 1991, Phoenix Advisors and Collections, Inc. was engaged by Fidelcor to act as the Trustee’s agent in collecting the accounts receivable owed the Debtor’s estate.
The statute of limitations for instituting actions to collect these freight charges may begin to expire on certain accounts as early *445as October 16, 1992, pursuant to Section 108(a)(2) of the Bankruptcy Code.
On June 4, 1991, the Trustee began filing adversary proceedings against former customers of Debtor (“Shippers”) to collect freight charges and undercharges owed to Debtor. The freight undercharges are generally comprised of the difference between the full filed tariff rate and some lower but either allegedly unlawful or discounted tariff or contract rate. The total of these freight undercharges is estimated by the Trustee to be in excess of $200 million. The number of adversary proceedings to collect freight charges and undercharges which must be filed is estimated by the Trustee to be in excess of 20,000.
The Bankruptcy Court maintains exclusive subject matter jurisdiction over these freight undercharges as assets of the estate. 28 U.S.C. § 1334(d).
On April 1, 1992, the ICC instituted an administrative proceeding styled Olympia Holding Company f/k/a P*I*E Nationwide, Inc., et al. and assigned Docket No. MC-C-30197. On April 16, 1992, the ICC reissued its Order and renumbered the proceeding as No. 40786 (“Order” or “ICC Order”).
The Order purports to institute an investigation to determine whether respondents (Plaintiffs here) “are violating the [Interstate Commerce Act] and the rules and regulations promulgated thereunder by collecting or attempting to collect freight charges in excess of those contained in duly filed tariffs without first seeking a determination from the Commission that the rate is unlawful”. The Order also names AAA Trucking, a shipper unrelated to any of the Plaintiffs in this proceeding; the AAA Trucking trustee, Joseph DiPasq-uale; and the AAA Trucking agents and assignees.
The ICC purports to make Plaintiffs, none of which is a motor carrier, respondents in the ICC administrative proceeding and require them to file written statements under oath “showing good cause why a cease and desist order should not be issued prohibiting them from collecting or attempting to collect more than the previously billed discount rates on file with the Commission”. The Order also requires these Plaintiffs to respond on or before May 6, 1992.
In addition, the Order provides that the Plaintiffs’ failure to respond will result in the automatic issuance of a cease and desist order. If entered, the cease and desist order would prohibit Plaintiffs’ collection of Debtor’s accounts receivable.
On April 13, 1992, respondents (Plaintiffs here) filed a motion for more definite statement with the ICC.
During 1992, the ICC has regularly advised Shippers, through letters, a telephone hotline, and a brochure, that the Shippers do not owe the money that the Trustee is attempting to collect and that they do not have to pay that money.1
On May 1, 1992, the ICC entered a decision in No. 40785, holding that the scope of its Order is limited to the shipper coded tariffs and that Plaintiffs’ response to the Order must be filed by May 25, 1992.
On May 12, 1992, Plaintiffs filed a Complaint for Declaratory Judgment and Injunction before this Court and asked it to enjoin the ICC from enforcing its Order in Docket No. 40785, from rendering any order, decision, or rule prohibiting Plaintiffs’ collection or attempts to collect freight charges due the estate, and from otherwise interfering with such collection efforts on the grounds that (1) the ICC’s Order and actions threaten the assets of the estate; (2) the ICC’s Order and actions violate the automatic stay provisions of the Bankruptcy Code; and (3) the four-prong standard for injunctive relief is met.
On May 27, 1992, the United States, on behalf of the ICC, filed a motion to withdraw the reference, or in the alternative to *446dismiss this proceeding, or in the alternative, in opposition to Plaintiffs’ motion.
On May 29, 1992, this Court held a hearing on Plaintiffs’ motion for preliminary injunction. This Court heard the testimony of the witnesses (1) Lloyd T. Whitaker, Trustee for the Debtor; (2) Kenneth S. Berg, Phoenix Advisors and Collection Service’s Director of Traffic; and (3) Don H. Norman, President of Don H. Norman Associates, Inc. This Court also heard argument from Plaintiffs and the United States, as well as from intervenors, Central States, Southeast and Southwest Areas Health and Welfare and Pension Fund and IU International Corporation.
CONCLUSIONS OF LAW
This Court has original and exclusive jurisdiction over property of the Debt- or’s estate pursuant to 28 U.S.C. § 1334(d). Congress has authorized this Court to have jurisdiction over estate property within the scope of Section 541 of the Bankruptcy Code. The accounts receivable, including the freight undercharges component, are assets of the estate. In re Crysen/Montenay Energy Co., 902 F.2d 1098, 1101 (2d Cir.1990); In re Southwest Equipment Rental, Inc., Bankr.L.Rep. (CCH) ¶ 73,272 at 96,581, 1990 WL 129972 (Bankr.E.D.Tenn.1990); In re Best Refrigerated Express, Inc., 1991 Fed.Carr.Cas. (CCH) 1183, 624 at 58,457. They are, therefore, property of the estate.
The Trustee has a duty and is required pursuant to Section 704(1) of the Bankruptcy Code to collect and reduce to money the property of the estate which the Trustee serves.
The ICC’s actions, Order, and threatened cease and desist order attempt to usurp jurisdiction over property of the Olympia estate, which is originally and exclusively before this Court.
Section 105 of the Bankruptcy Code empowers this Court to “issue any order, process or judgment that is necessary or appropriate to carry out the provisions of this title”. Accordingly, pursuant to Section 105, this Court has the authority to enjoin the ICC from usurping this Court’s exclusive jurisdiction over estate property.
Plaintiffs ask this Court to grant injunctive relief against the ICC Order and actions, contending they have met the four-prong standard for injunctive relief. The traditional standards for granting injunc-tive relief are recited in Local Rule 4.05(b)(4), United States District Court, Middle District of Florida:
(i) The likelihood that the moving party will ultimately prevail on the merits of the claim;
(ii) The irreparable nature of the threatened injury ...;
(iii) The potential harm that might be caused to the opposing parties or others if issued; and
(iv) The public interest, if any.
Cate v. Oldham, 707 F.2d 1176 (11th Cir.1983).
1. LIKELIHOOD OF SUCCESS ON THE MERITS
This Court finds that there is a substantial likelihood that Plaintiffs will succeed on the merits of their claim because the ICC has exceeded its statutory authority afforded it under the Interstate Commerce Act (“ICA”). Under 28 U.S.C. § 157, and the July 11, 1984 standing order of referral of the District Court for the Middle District of Florida, this Court has exclusive jurisdiction over property of the estate. The accounts receivable, including the component of freight undercharges, are assets of the estate. In re Crysen, 902 F.2d at 1101; In re Southwest, Bankr.L.Rep (CCH) at 96,581; In re Best, 1991 Fed.Carr.Cas. (CCH) at 58,457. This Court finds that the ICC has exceeded its statutory authority because the ICC does not have subject matter jurisdiction over the accounts receivable, assets of the estate.
2. IRREPARABLE HARM
Plaintiffs have made a sufficient showing of irreparable harm. The effect of the ICC Order and threatened cease and desist mandate is to inhibit and potentially prohibit Plaintiffs’ collection of assets of the estate. The statute of limitations to collect these claims may begin to expire on Octo*447ber 16, 1992. The ICC’s Order and threatened cease and desist order would prohibit the commencement of actions to collect or effectively would prohibit, by delaying, the commencement of actions to collect these accounts receivable. The Trustee may file in excess of 20,000 adversary proceedings by October 16, 1992, and has been and will be filing hundreds of cases on a daily basis. Any delay would place an unsurmountable burden and likely prohibition on the Trustee and this Court to timely process this massive litigation. The ICC’s Order and actions also would prohibit the collection of Debtor’s assets by blocking any steps to settle or otherwise resolve the complaints once commenced. No adequate remedy at law exists to compensate the estate for lost causes of action. Further, the instigator of this injury is the ICC, not the Shippers owing these claims, and therefore is not liable for these claims or for the lost causes of action on these claims.
Irreparable harm to the estate will also occur from the burdensome and unnecessary expense and time costs associated with asserting and then defending Plaintiffs’ position before the ICC and from the disruption of this Court’s ability to manage Debtor’s liquidation efforts effectively and timely.
3.POTENTIAL HARM TO THE ICC
This Court finds that the ICC would not be harmed by the issuance of the preliminary injunction. The preliminary injunction merely prevents the ICC from interfering with issues that are properly before this Court and from circumventing this Court’s jurisdiction. The issuance of this preliminary injunction will not encroach on the ICC’s administrative powers or on its appropriate statutory authority. The ICC has failed to establish how the ICC would be damaged should the preliminary injunction issue.
4. PUBLIC INTEREST
This Court finds that there are conflicting public policy interests. The Trustee has an interest in carrying out his duties and legal responsibilities under the Bankruptcy Code. The ICC has its legal responsibility to perform its functions under the ICA. Accordingly, this Court finds that the public policy conflict is not in and of itself determinative on the issuance of the injunction.
It is
ORDERED:
1. Plaintiffs’ Motion For Preliminary Injunction is granted until November 13, 1992 at 5:00 p.m.
2. The ICC is enjoined pendente lite from
a. enforcing its Order in Docket No. 40785;
b. issuing its threatened cease and desist order; and
c. initiating or maintaining any proceeding involving assets of this estate that would require any of the Plaintiffs to participate before the ICC.
3. Pursuant to Rule 65, Federal Rules of Civil Procedure, and Rule 7065, Federal Rules of Bankruptcy Procedure, Plaintiffs Fidelcor and Phoenix are required to post bond in the amount of $12,500 each by cashier’s check payable to the registry of the court, which after payment of costs, will remit upon' court order. This injunction will only then become effective. Pursuant to Rule 7065, Federal Rules of Bankruptcy Procedure, Plaintiff Trustee is not required to post bond.
4. The parties are to appear before this Court on Friday, November 13,1992 at 7:00 a.m. for further hearing on this injunction.
DONE AND ORDERED.
. Even though the Court is not enjoining those activities, the Court hopes that the ICC will discontinue such activities. They could be hazardous to shippers’ legal rights. For example, if, on the advice of the ICC, a shipper ignores a summons in a collection proceeding, a default could be taken and a judgment entered by the Court against the shipper. ■ | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491470/ | ORDER ON MOTION TO DETERMINE DAMAGES
ALEXANDER L. PASKAY, Chief Judge.
THIS CAUSE came on for hearing with notice to all parties of interest upon the claim for damages filed by Remote Services, Inc. (RSI) incurred in connection with the rejection of the Special Purpose Lease and Motor Fuels Commission Agreement by CFM-ETC., INC. (Debtor). A brief discussion of the relevant facts will help put the matter under consideration into proper focus.
On September 1, 1988, the Debtor, an operator of a convenience food mart, entered into a Special Purpose Lease (Lease) with RSI. (RSI Exh. 1). Under the lease, RSI was to install, repair and maintain underground motor fuel storage tanks on the property leased by the Debtor, for which RSI was to pay the Debtor a rental fee of $1.00 per year. The Lease provides that all of the pumps and other equipment furnished by RSI was to be considered the personal property of RSI. RSI and the Debtor entered into a second agreement, called a Motor Fuels Commission Agreement (Commission Agreement) (RSI.Exh. 2). Under this Agreement, the Debtor was to operate the fuel pumps installed by RSI; sell gasoline supplied by RSI at a price to be determined by RSI; and pay to RSI all of the proceeds from the gasoline, less a commission of $.02 per gallon of gasoline sold. The Lease provided for an initial term of 68 months, and granted RSI the right to extend the Lease for two five-year periods, or for an additional 120 months. The Debtor could terminate the Lease after the initial 68 months upon proper notice. *449The Commission Agreement was in effect for one year, and was to be automatically renewed from year to year unless RSI or the Debtor terminated it by providing a 30-day written notice.
The Debtor filed a Petition for Relief under Chapter li of the Bankruptcy Code on November 1, 1991. On November 7, 1991, the Debtor filed a Motion to Reject both the Lease and the Commission Agreement with RSI pursuant to § 365 of the Bankruptcy Code. This Court held a hearing on the Motion to Reject both executory contracts and entered an Order granting the Debtor's Motion. The Order granting the Debtor’s Motion to Reject provided that RSI could file a claim in connection with the damages incurred based on the Debt- or’s rejection of the Lease and the Commission Agreement.
RSI contends that its claim for damages should include lost profits for the period from November 1,1991, through the end of the Lease, including both 60-month option periods. RSI contends that it suffered damages by reason of the Debtor’s breach of the Lease and Commission Agreements in the amount of $206,208.65. RSI calculated its damages by multiplying the profit earned during each accounting period by the number of months remaining to the end of the Lease, including the 120-month extension, and then reducing that number to a present value. The Court finds this calculation to be problematic for several reasons. First, the calculation does not consider declines in gasoline sales which occurred during several accounting periods. Second, this Court finds it too speculative to estimate monthly profits twelve years from now based on current data. Finally, this calculation does not take into account the fact that the Lease may be terminated by the Debtor at the end of the initial term of the Lease and the Commission Agreement may be terminated by the Debtor at the end of any year upon 30 days written notice.
While RSI recognizes that the Debt- or has the ability pursuant to the Lease and Commission Agreement to terminate both at a certain time, RSI contends that the Debtor failed to present any evidence to indicate that the Debtor would actually terminate the Lease and Commission Agreement with RSI. Thus, RSI argues that it is entitled to damages for the entire life of the contracts, including the 120-month option periods.
The Court has reviewed the Lease, which provides in pertinent part that it is in effect for a primary term of 68 months, and thereafter, ... “unless Lessee notifies Lessor in writing of Lessee’s desire not to extend the lease, said notice to be given at least 60 days prior to the expiration of the primary term or the first renewal period as the case may be.” The Commission Agreement provides that it is in effect as of September 1, 1988 for a term of one year, and “shall be automatically renewed for additional periods of one year each unless either party shall give notice in writing to the other at least thirty (30) days prior to the end of such original term or any extended term as the case may be.”
Clearly, the Debtor has the right to terminate both the Lease and the Commission Agreement, and this Court is satisfied that any calculation of damages incurred by RSI must consider the Debtor’s rejection of the Lease and Commission Agreement. While the Debtor could not terminate the Lease until April 1, 1994, the Debtor has the contractual right to terminate the Commission Agreement in September of each year. Further, the profit earned by RSI is based on the Commission Agreement, not the Lease. Notwithstanding the contention of RSI that the Debtor provided no evidence that it would terminate the Lease and Commission Agreement, this Court finds the Debtor’s rejection of these executory contracts pursuant to the Bankruptcy Code is a de facto termination of these contracts. Therefore, this Court is satisfied that RSI is entitled to damages only from November 1, 1991, the date the Debtor filed its petition for relief under Chapter 11, through September 1, 1992, the date the Debtor could have terminated the Commission Agreement. Further, this Court finds that the value of the claim of RSI is $12,250, which is the aver*450age monthly profit of RSI in 1992 multiplied by 10, the number of months for which RSI has a claim for damages.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that Remote Services, Inc. has a claim for damages in the amount of $12,250 based on the rejection of the Special Purpose Lease and Motor Fuels Commission Agreement by CFM-ETC, INC. pursuant to § 365 of the Bankruptcy Code.
DONE AND ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491471/ | OPINION AND ORDER OVERRULING OBJECTION TO SETTLEMENT OF APPROPRIATION PROCEEDING
BARBARA J. SELLERS, Bankruptcy Judge.
The issue before the Court is the right of a mortgagee of a leasehold interest in real property to payment of proceeds from an appropriation proceeding initiated by a city under its powers of eminent domain. This is a core proceeding pursuant to 28 U.S.C. § 157(b) and jurisdiction of the Court in this contested matter is premised upon 28 U.S.C. § 1334.
L-K Motels, Inc. (“L-K”), one of the debtors in these jointly administered Chapter 11 cases, was formerly the lessee of real property located in Worthington, Ohio upon which a motel had been constructed. That leasehold interest has since been assigned to a third party.
On June 29, 1990 the city of Worthington initiated an action in the Common Pleas Court of Franklin County seeking to appropriate for city use a portion of the property in which L-K had its leasehold interest. During the course of that proceeding it was determined that a payment to L-K in the amount of $7,066.25 would fairly compensate it for the portion of its leasehold interest taken by the city. This Court authorized L-K to settle the appropriation proceeding in exchange for the $7,066.25, but ordered the payment to be held pending resolution of this dispute between Am-eritrust Company, N.A. (“Ameritrust”), the holder of a mortgage against L-K’s leasehold interest, and the Official Committee of Unsecured Creditors (“Committee”).
L-K proposes to pay its entire award of $7,066.25 to Ameritrust to reduce the principal owed to it on account of one or more mortgages Ameritrust holds against this leasehold interest. The Committee objects to that payment.
The grounds asserted by the Committee for its objection are that Ameritrust’s mortgages do not give it a lien against appropriation proceeds or, in the alternative, if such lien exists, L-K may use the proceeds by virtue of its cash collateral order with Am-eritrust. Finally, the Committee alleges that L-K’s assumption and assignment of this leasehold interest to a third party during this Chapter 11 case required Ameri-trust to release this mortgage. Therefore, argues the Committee, Ameritrust cannot assert a claim to any proceeds arising from rights under that mortgage, whether or not such release has actually been effectuated.
After review of applicable state and federal law and the documentary evidence submitted by the parties, the Court finds that the Committee’s objection should be overruled.
The Committee’s first argument, and the one upon which it appears to place the most reliance, is that Ameritrust’s mortgage and loan documents do not grant it an interest in the proceeds of an appropriation proceeding. Instead, the granting *621language speaks of rents, issues and profits. This argument, however, which focuses on security interests granted in rents and associated income from the property, ignores the interest in real property taken by the mortgagee of a leasehold interest. That real property interest, rather than the security interest in income or issue from the property, gives the mortgagee an interest in appropriation proceeds. See, Mahoning National Bank v. City of Youngstown, 143 Ohio St. 523, 56 N.E.2d 218 (1944). The taking by appropriation is an impairment of the value of Ameritrust’s collateral and its lien, therefore, follows those proceeds. Mahoning National Bank at 524, 56 N.E.2d 218 (paragraph three of the syllabus). In essence, the payment for the appropriation is not a rent, issue or profit, but is a sale of part of the collateral. The fact that the sale is forced by a governmental unit under its taking power does not make it any less a sale. Accordingly, Ameritrust’s rights as a mortgagee against the real property leasehold interest give it rights in the appropriation proceeding proceeds.
The Committee’s next ground for objection is that the cash collateral order gives L-K, as a Chapter 11 debtor, the right to use the appropriation proceeds. Rather than interpret that order, however, the Court believes that argument is irrelevant because, even if L-K has the right to use those proceeds (which the Court is not deciding), L-K has chosen not to use them. Nothing in the agreed cash collateral order forces the debtor to use all the cash collateral it is permitted to use. That argument cannot be sustained.
The Committee’s final argument is that Ameritrust cannot claim any interest in the appropriation payment because LK's subsequent assumption and assignment to a third party of that leasehold interest required Ameritrust to release its mortgage. That argument is incorrect, however, because Ameritrust’s interest in the appropriation payment arose before these Chapter 11 cases were filed and before any assignment by L-K of its leasehold interest. The subsequent assignment does not erase that pre-existing interest.
Based upon the foregoing, the Committee’s limited objection to the settlement of the appropriation proceeding relating to the disposition of the funds received by the bankruptcy estate is overruled. L-K may disburse the appropriation funds to Ameri-trust.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491472/ | MEMORANDUM OPINION ON SCHAU-WECKER’S MOTION FOR SUMMARY JUDGMENT AGAINST TRUSTEE’S CONDITIONAL COUNTERCLAIM
JACK B. SCHMETTERER, Bankruptcy Judge.
INTRODUCTION
The subject Adversary case Nos. 90 A 702, All American Laundry Service, Inc. et al. v. First State Bank of Harvard et al., and 90 A 753, Schauwecker v. Ascher, have been consolidated for trial. The two Adversary cases relate to the Chapter 7 bankruptcy proceeding of Walter Ascher (“Ascher”). Plaintiffs in each case are su*654ing for control of a commercial laundry business originally purchased from Royal Laundry Systems (“Royal”). Dorothy Schauwecker (“Schauwecker”) also seeks to recover $300,000 from Ascher and a declaration that such debt is non-discharge-able under § 523 of the Bankruptcy Code. David Grochocinski is the Chapter 7 trustee for the estate of Ascher (“Trustee”) and is a defendant in these Adversary proceedings. He has adopted the counterclaim filed by Ascher against plaintiffs in the All American case, and thereby seeks damages and an accounting based on the plaintiffs’ alleged seizure of the commercial laundry business. He also filed a conditional counterclaim against Schauwecker seeking damages against her if he prevails in these Adversary proceedings and on his counterclaim against the other plaintiffs. The basis for his conditional counterclaim is that Schauwecker is alleged to be a partner of the other plaintiffs and is therefore jointly and severally liable for their actions.
Schauwecker has moved in case No. 90 A 753 for summary judgment on the Trustee’s conditional counterclaim pursuant to Fed.R.Bankr.P. 7056 (Fed.R.Civ.P. 56). She argues that there is no genuine issue of fact on the issue of whether she and Ascher were co-partners, and contends that co-partners cannot be liable to one another for damages as a matter of law. She also seeks sanctions against the Trustee pursuant to Fed.R.Bankr.P. 9011 (Fed.R.Civ.P. 11) for filing his conditional counterclaim. For reasons discussed below, the conditional counterclaim against Schauwecker is stricken with leave to the Trustee to amend, and her motion for Rule 11 sanctions is denied. Schauwecker’s motion for summary judgment is being held in abeyance. If the Trustee does not seek to amend his complaint to seek a partnership accounting against her, summary judgment will be granted on her motion.
THE PLEADINGS
Plaintiffs seek accountings from Ascher (now against Trustee) for their benefit. The Trustee seeks an accounting from the All American plaintiffs. Further, this litigation will decide who owns and controls the ongoing commercial laundry business acquired from Royal through an asset purchase agreement (the “Agreement”) dated August 28, 1987. Schauwecker’s First Amended Complaint, Exhibit 2. Royal then operated the commercial laundry business at 200 East Frisco. Boulevard in Harvard, Illinois. Assets listed in the Agreement consisted of laundry equipment and related items then owned or leased by Royal. The Agreement transferred all of Royal’s assets to Ascher.
Ascher entered into the Agreement “on behalf of an entity to be formed.” Exhibit 2, at p. 1. In late 1987 or early 1988, Ascher formed All American Laundry Service, Inc. (the “Corporation”), and caused 10,000,000 shares of stock to be issued. The Corporation was formed for the purpose of operating a commercial laundry business. Ascher also formed a partnership called All American Leasing (the “Leasing Partnership”), and all plaintiffs apparently contend that they are partners in this entity. However, the plaintiffs in the two cases do not allege that they are partners with each other.
The purpose and function of the Leasing Partnership are in dispute. Ascher and the plaintiffs in All American allege that the Leasing Partnership was set up for purposes of creating a tax deduction for the partners. The plaintiffs in All American allege that Ascher proposed that the Corporation transfer ownership of the assets to the Leasing Partnership, and then have the Leasing Partnership lease the assets back to the Corporation which would operate the commercial laundry business. Tax deductions would be obtained by having the Leasing Partnership recognize losses based on depreciation of the assets and then passing on those losses on to the partners. The plaintiffs in All American allege that this sale and lease-back transaction never occurred because they questioned the propriety of both taking a tax deduction from the Leasing Partnership and owning stock in the Corporation. Ascher alleges that the transaction never occurred because these plaintiffs wrongfully seized the business *655before the transaction could be consummated.
Schauwecker has a different conception of the partnership. When she demanded an accounting of the Leasing Partnership’s activities, she referred to it as “ALL AMERICAN LEASING d/b/a ALL AMERICAN LAUNDRY, INC.” Schauwecker’s Amended Complaint at ¶ B. Therefore, it appears from her pleadings that Schau-wecker believes the Leasing Partnership owns the Corporation’s shares. The relationship of the Leasing Partnership to the laundry business will be an issue for trial.
Plaintiffs in All American Laundry Service et al. v. First State Bank of Harvard et al. are Michael Brogan, Edward Long, and James Kelly (hereinafter referred to collectively as the “All American plaintiffs”). They collectively owned 10,-247 shares in United Parcel Post of Amer-ica, Inc. (“UPS”) which they pledged to Commercial Bank of Berwyn as collateral for a $668,000 loan.1 They allege that the loan from this bank was used to purchase Royal’s assets, and contend that Ascher represented they would own a commercial laundry business as a result of their pledge of UPS stock to obtain the loan. Therefore, the All American plaintiffs claim to be constructive owners of over 68% of the Corporation’s stock. They say that Ascher owned .003% of the stock and Schauwecker owns the rest. It is apparent from their pleadings and the Trustee’s counterclaim that the All American plaintiffs have taken control of the business, and that an issue at trial will be the legality of that action.
Schauwecker alleges that she endorsed a $300,000 check over to Ascher to be used for “partnership purposes”. Schauwecker’s First Amended Complaint at 1113. Ascher then endorsed that check over to counsel for Royal who deposited it in such counsel’s escrow account. Schauwecker’s Complaint, Ex. 3. She says that this cheek was used as earnest money for the asset purchase under the Agreement. On the basis of these allegations, Schauwecker first seeks a non-dischargeable judgment of $300,000 against Ascher to recover her investment. She also seeks a declaration that the assets obtained in the Agreement are held in constructive trust for the benefit of the Partnership.2 She further demands a full accounting for all activities of the Corporation and the Leasing Partnership from the time when Royal’s assets were acquired until the present.
The Trustee’s response to Schauwecker and the All American plaintiffs is twofold. First, he denies that any plaintiffs own Corporation stock, and maintains that Ascher was the Corporation’s sole shareholder when he filed in bankruptcy. He contends that the plaintiffs were merely investing in a tax shelter scheme which yielded tax deductions through a form of sale and lease-back arrangement. Ownership of the assets obtained from Royal was supposed to be transferred from the Corporation to the Leasing Partnership. Consideration for this transfer was the pledge of stock and the $300,000 check.3 In the counterclaim against the All American plaintiffs, the Trustee implies that Ascher was unable to make this transfer because the All American plaintiffs seized the commercial laundry business and excluded him. If Trustee prevails, he will own all stock in the Corporation and contends that he would then have the right to operate and control the commercial laundry business.4
The Trustee also filed a counterclaim against the plaintiffs in All American and the instant conditional counterclaim against Schauwecker. In All American, Trustee *656has adopted the counterclaim filed by Ascher. Ascher alleged therein that the All American plaintiffs wrongfully took control and possession of the Corporation and the Premises where the laundry business is operated, and he sought to recover control. In his conditional counterclaim against Schauwecker, the Trustee claims that the seizure of control by the All American plaintiffs occurred in the ordinary course of the Leasing Partnership’s business. Therefore, the Trustee asks Schauwecker to be held jointly and severally liable for the assertedly wrongful seizure because she is an alleged partner with the All American plaintiffs in the Leasing Partnership.
MOTION FOR SUMMARY JUDGMENT
Schauwecker has moved for summary judgment based on the admissions of Ascher and the Trustee that Ascher was a partner with Schauwecker in the Leasing Partnership. As discussed below, since there is no genuine issue between Schau-wecker and the Trustee as to this fact, Schauwecker is entitled to judgment on the conditional counterclaim as a matter of law unless the Trustee amends that counterclaim to seek a partnership accounting.
A further discussion of the pleadings related to this partnership issue is necessary to introduce the analysis. Schauwecker alleges, and both Ascher and the Trustee admit, that Schauwecker was a partner in the Leasing Partnership. Ascher admitted that he was also a partner in this partnership, but the Trustee denies in his answer to Schauwecker’s First Amended Complaint that Ascher was a partner. The Trustee has, however, adopted Ascher’s counterclaim against the All American plaintiffs which states in ¶ 21 that “a partnership was formed known as ALL AMERICAN LEASING” and that “ASCHER, BROGAN, KELLY and LONG were all partners with one another in said leasing entity.” The “leasing entity” referred to in ¶ 21 is the Leasing Partnership. Therefore, the Trustee has indirectly admitted that Ascher was a partner of Schauwecker by admitting in related pleadings that Ascher and Schau-wecker were partners in the Leasing Partnership until the Chapter 7 Trustee succeeded to Ascher’s rights.
The All American plaintiffs never allege in their pleadings that Schauwecker is their partner. Furthermore, they have not responded in any way to Schauwecker’s amended complaint, the answers to that complaint, the conditional counterclaim, or any of the summary judgment material. They only acknowledge Schauwecker as a shareholder in the Corporation in their complaint against Ascher and in their Joint Pre-Trial Statement. However, in the pleadings, it appears that only Schauwecker and the Trustee clearly agree or plead that she is a partner in the Leasing Partnership. This Agreement between the Trustee and Schauwecker is significant because the basis for Ascher’s liability under the complaint and the basis for Schauwecker’s asserted liability under the conditional counterclaim is her status as a partner in the Leasing Partnership. However, at this stage, the All American plaintiffs have remained silent in their pleadings on her role in the Leasing Partnership. While the All American plaintiffs and Schauwecker each seek accounting from Ascher (now from the Trustee) for their benefit, they are silent as to whether or not the plaintiffs) in the other case are to share in such benefit in event of victory. Therefore, their complaint and her complaint are like two dark ships passing in the night without recognizing each other.
Summary Judgment Standards
Under Fed.R.Civ.P. 56(c), Fed.R.Bankr.P. 7056, 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 of material fact and that the moving party is entitled to judgment as a matter of law. Celotex Corp. 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, 91 L.Ed.2d 202 (1986); Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 585-86, 106 S.Ct. 1348, 1355-56, 89 L.Ed.2d 538 (1986); *657Trautvetter v. Quick, 916 F.2d 1140, 1147 (7th Cir.1990); La Preferida v. Cerveceria Modelo, S.A. de C.V., 914 F.2d 900, 905 (7th Cir.1990). 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; Matsushita, 475 U.S. at 586, 106 S.Ct. at 1355; Billups v. Methodist Hosp. of Chicago, 922 F.2d 1300, 1302 (7th Cir.1991). However, 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 v. Kilquist, 833 F.2d 639, 642 (7th Cir.1987).
A party seeking summary judgment always bears the initial responsibility of informing the court of the basis for its motions, and must identify those portions of the “pleadings, depositions, answers to interrogatories, and affidavits, if any,” which it believes demonstrate the absence of a genuine issue of material fact. Celotex, 477 U.S. at 323, 106 S.Ct. at 2552. However, once the motion for summary judgment is made and supported as described above, Rule 56(e) requires that a party opposing the motion may not rest upon the mere allegations or denials in his pleading; the response of that party must set forth specific facts showing that there is a genuine issue for trial. Celotex, 477 U.S. at 324, 106 S.Ct. at 2553; Anderson, 477 U.S. at 248, 106 S.Ct. at 2510; Matsushita, 475 U.S. at 587, 106 S.Ct. at 1356; Randle v. LaSalle Telecommunications, Inc., 876 F.2d 563, 567 (7th Cir.1989). When the record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there is no genuine issue for trial and summary judgment should be granted. Matsushita, 475 U.S. at 587, 106 S.Ct. at 1356.
Partial Summary Judgment
Federal Rule of Civil Procedure 56(d) involves situations in which the motion does not lead to a judgment on the entire case, but only terminates further contest on a portion of the litigation. Because Rule 56(d) is part of the rule entitled “Summary Judgment”, the order prescribed by this rule has been referred to as “partial summary judgment.” C. Wright, A. Miller & M. Kane, Federal Practice and Procedure § 2737 (2d ed. 1983 & Supp. 1987). Partial Summary Judgment is not possible in federal pleading unless it disposes entirely of one or more counts of the complaint. Biggins v. Oltmer Iron Works, 154 F.2d 214, 216 (7th Cir.1946); Capitol Records, Inc. v. Progress Record Distrib., 106 F.R.D. 25, 28 (N.D.Ill.1985) (Getzendanner, J.); Triangle Ink & Color Co., Inc. v. Sherwin-Williams Co., 64 F.R.D. 536, 537-38 (N.D.Ill.1974). The instant motion is governed by Rule 56(d) because judgment on the conditional counterclaim would entirely dispose of that counterclaim but would not dispose of the whole case or obviate the need for a trial on the underlying case.
DISCUSSION
The conditional counterclaim against Ms. Schauwecker proceeds under a theory of partnership liability. The Illinois legislature has adopted the Uniform Partnership Act (the “Act”). See Ill.Rev.Stat., ch. 106x/2, HI et seq. Sections 13, 14, and 15 of the Illinois Act are cited by the Trustee as a basis for Schauwecker’s liability under the counter-claim. These paragraphs provide: ,
¶ 13 Liability of partnership for acts of partner
Where, by any wrongful act or omission of any partner acting in the ordinary course of the business of the partnership, or with the authority of his co-partners, loss or injury is caused to any person, not being a partner in the partnership, or any penalty is incurred, the partnership is liable therefor to the same extent as the partner so acting or omitting to act. ¶ 14 Misapplication of property of third persons
The partner is bound to make good the loss:
(a) Where one partner acting within the scope of his apparent authority re*658ceives money or property of a third person and misapplies it; and
(b) Where the partnership in the course of its business receives money or property of a third person and the money or property so received is misapplied by any partner while it is in the custody of the partnership.
If 15 Joint liability of partners — Partnership contracts
All partners are liable
(a) Jointly and severally for everything chargeable to the partnership under Sections 13 and 14.
(b) Jointly for all other debts and obligations of the partnership; but any partner may enter into a separate obligation to perform a partnership contract.
Also relevant to this litigation is ¶ 22(a) of the Act which provides that, “Any partner shall have the right to a formal account as to partnership affairs ... (a) If he is wrongfully excluded from the partnership business or possession of its property by his co-partners.”
Schauwecker moves for summary judgment, claiming that there is no genuine issue of fact concerning whether Ascher is a partner in the Leasing Partnership. Section 6 of the Act defines a partnership as “an association of two or more persons to carry on as co-owners a business for profit,” and section 7 provides rules to determine whether or not a partnership exists. However, while the Act provides these guidelines, whether a person is a partner in a partnership remains a factual question. Fitchie v. Yurko, 212 Ill.App.3d 216, 156 Ill.Dec. 416, 423, 570 N.E.2d 892, 899 (2d Dist.1991) (“whether a partnership exists is generally a question of fact to be resolved by the fact finder”); In re Marriage of Kamp, 199 Ill.App.3d 1080, 146 Ill.Dec. 57, 59, 557 N.E.2d 999, 1001 (3rd Dist.1990) (“the existence of a partnership relation is a question of intent to be gathered from all the facts and circumstances”).
The Trustee cites Sharp v. Gallagher, 94 Ill.App.3d 1128, 50 Ill.Dec. 335, 339, 419 N.E.2d 443, 447 (1st Dist.1981), rev. on other grounds, 95 Ill.2d 322, 69 Ill.Dec. 351, 447 N.E.2d 786 (1983), to argue that what constitutes a partnership is a question of law. While the question of whether the facts make an entity into a partnership is a question of law, the questions of whether that entity exists and who are the members of that entity are questions of fact. As shown below, those questions of fact are not at issue in here. Furthermore, no legal issues have been presented to contest that the Leasing Partnership was actually a partnership under the Act.
Judicial Admissions of the Trustee
Schauwecker argues that no genuine issue exists concerning her partnership with Ascher because of the admissions of Ascher and the Trustee in their pleadings to allegations that Ascher and Schauwecker were co-partners in the Leasing Partnership. By admitting this fact, the Trustee has admitted to a relationship that constitutes an absolute defense to his conditional counterclaim against Ms. Schauwecker. The Court may take these allegations to be judicial admissions.
A judicial admission is “a formal admission in the pleading which has the effect of withdrawing a fact from issue and dispensing wholly with the need for proof of the fact.” American Title Ins. Co. v. Lacelaw Corp., 861 F.2d 224, 226 (9th Cir.1988); In re Applin, 108 B.R. 253, 258 (Bankr.E.D.Cal.1989). This is because pleadings generally constitute “a statement of the pleader as to the occurrence of certain historical facts in the real world,” Hardy v. Johns-Manville Sales Corp., 851 F.2d 742, 746 (5th Cir.1988), and if both sides agree to that historical fact, then there is no issue as to that fact’s existence. Pleadings are not treated as judicial admissions only when they are made in the alternative or are hypothetical in nature. Id. A Court may, in its discretion, accept or reject a judicial admission. In re Applin, 108 B.R. at 258.
Here pleadings on the partnership relationship were not made in the alternative, nor were they hypothetical. After reviewing the Trustee's statement under local District Rule 12 (which has been adopted as *659a ruling of the Bankruptcy Court in this District), the Court finds no evidence supplied by him to support his contention that Ascher was not a partner in the Leasing Partnership. Therefore, the Court accepts the Trustee’s admissions in his pleadings as a judicial admission. Since this issue is determinative of the conditional counterclaim as presently pleaded, it must be dismissed on summary judgment unless the fact pattern in the pleadings is altered by submissions in the summary judgment proceeding. C. Wright, A. Miller & M. Kane, Federal Practice & Procedure § 1226. The Trustee has not succeeded in doing so. The movant has met her burden to show that she was Ascher’s partner and no genuine issue of fact exists as to Ascher’s partnership with her. Indeed, the Trustee has not revealed any evidence which might lead the Court to find that no such relationship existed. Therefore, there is no genuine issue of fact between these two parties as to Ascher’s partnership with Schauwecker in the Leasing Partnership.
Liability of Partners to Co-Partners under the Act
The partnership issue is determinative of the conditional counterclaim against Schauwecker as presently pleaded because liability under ¶ 13 of the Illinois Partnership Act is limited to loss or injury caused to “any person, not being a partner in the partnership.” Therefore, partners cannot sue their fellow partners under 1113 for acts which either occur in the ordinary course of the partnership’s business or are authorized by the co-partners. The ability to sue one’s co-partners was discussed in Balcor Income Properties, Ltd. v. Arlen Realty, Inc., 95 Ill.App.3d 700, 51 Ill.Dec. 198, 420 N.E.2d 612 (1st Dist.1981). The traditional rule is,
one partner cannot sue a co-partner on a matter concerning the partnership until there has been a final settlement of the partnership accounts.... The rationale behind the general rule is that resolution of disputes between partners on partnership matters usually entails a complete accounting in order to ascertain that the partner who claims some amount from his co-partner is not in fact liable to his co-partner in connection with some other partnership debt.... Some older cases also refer to the rule that a party cannot be both plaintiff and defendant in an action at law.... Many cases have looked to the reasons for the general rule in defining exceptions to the rule; where the court has found the rule’s rationale inapplicable, the rule has not been applied. (citations omitted) Id. at 701 [51 Ill.Dec. at 199], 420 N.E.2d at 613.
However, the Illinois court explained the rule further, saying, “a partner or a partnership can bring an action against a co-partner if the plaintiff’s claim can be decided without a full review of the partnership accounts.” Id. at 702, 51 Ill. Dec. at 200, 420 N.E.2d at 614. This is simply the traditional rule stated conversely. If the issue between partners can be decided without an accounting, one partner can sue the other. However, if such issue requires an accounting, that is the proper remedy to seek under § 22(a) of the Act.
In Balcor, the parties organized partnerships to acquire and manage shopping centers. The plaintiff had exclusive right to manage the properties, but it could employ an agent to provide management services. It hired its partner to provide these services. Later, the plaintiff sued its partner for mismanaging the properties. The court allowed the plaintiff to proceed because its suit could be resolved without a full accounting. Id. By contrast, in Schlossberg v. Corrington, 80 Ill.App.3d 860, 35 Ill.Dec. 936, 400 N.E.2d 73 (1st Dist.1980), the plaintiff sought to recover money which the defendant allegedly owed as capital contributions to the partnership. The court stated the traditional rule and held that plaintiff could not bring this suit without an accounting. Id. at 866, 35 Ill.Dec. at 940, 400 N.E.2d at 77.
Here the conditional counterclaim can not be decided without an accounting. Ascher’s alleged losses arise out of the assertedly wrongful seizure by the All-American plaintiffs of the Corporation and the premises where the laundry operations are housed. The legal theories in the coun*660terclaim against the All-American plaintiffs are conversion, breach of fiduciary-duty, and conspiracy. Schauwecker contends that she and others own the Corporation and control the premises through the Leasing Partnership, while the Trustee alleges that the seizure of control occurred in normal course of the partnership’s business. Both the counterclaim and the conditional counterclaim plead claims of wrongful exclusion from the business.
Section 22(a) of the Illinois Partnership Act specifically provides that the remedy for wrongful exclusion from a partnership business is an accounting. An accounting is the proper remedy for Ascher’s claim that has been adopted by the Trustee. Therefore, the conditional counterclaim against Schauwecker must be dismissed unless it is accompanied by a demand for a partnership accounting. The Trustee demands an accounting in all three counts of his counterclaim against the All-American plaintiffs, but inexplicably makes no such demand against Schauwecker. Without request for a partnership accounting, Schau-wecker cannot be held liable to Ascher under the Partnership Act for the alleged seizure.
The Trustee cites Saikin v. New York Life Ins. Co., 45 Ill.App.3d 1019, 4 Ill.Dec. 477, 360 N.E.2d 413 (1st Dist.1977), for authority that Schauwecker is liable under ¶ 13 of the Act. In Saikin, New York Life Insurance sued one partner for losses incurred as a result of the forgeries of her co-partner. The court held that the forgeries occurred in the normal course of the partnership’s business, and therefore, the partners were jointly and severally liable under ¶¶ 13 and 15 of the Act. Saikin has no application here since that case discussed liability to a non-partner, and this motion involves asserted liability to a co-partner.
Compliance with Rule 12(e) of the Local Rules
The Trustee asks that the motion be denied because Schauwecker has not adequately complied with Local District Rule 12(m). That rule requires motions for summary judgment under Ped.R.Civ.P. 56 to be accompanied by “a statement of the material facts as to which the moving party contends there is no genuine issue that entitle the moving party to judgment as a matter of law.” The rule further provides that “[fjailure to submit such a statement constitutes grounds for denial of the motion.” Indeed, the Court may reject a summary judgment motion on the sole basis that such a statement has not been filed. Grafman v. Century Broadcasting Corp., 762 F.Supp. 215, 219 (N.D.Ill.1991).
The only fact stated in Schauwecker’s statement under Local District Rule 12 is that Ascher is a partner in the Leasing Partnership. This fact is supported with references to Paragraph 21 of the counterclaim adopted by the Trustee and Ascher’s answer to Schauwecker’s amended complaint.5 The two other “facts” stated are merely legal assertions that partners are not liable to their co-partners under ¶ 13 of the Act, and that venue and jurisdiction are not in dispute. This statement is lean on details. However, it is adequate under Local District Rule 12. The Trustee had an opportunity to set forth facts showing that the relationship was not one of partnership, but he did not do so. The lack of a factual issue concerning Schauwecker’s and Ascher’s status as co-partners in the Leasing Partnership is therefore determinative, as a matter of law, of whether the Trustee may prevail on the conditional counterclaim as presently pleaded.
Liabilities of Schauwecker and the All American Plaintiffs to One Another
An issue not raised by any party is the relationship of Schauwecker and the All American plaintiffs to each other. Schau-wecker alleges that she is a partner in the *661Leasing Partnership and requests that the Corporation’s stock be held in constructive trust for the benefit of the Leasing Partnership. Both Schauwecker and the All American plaintiffs demand an accounting, which is a settlement of all liabilities between the parties. Complete relief in either complaint cannot be accorded without the presence of all parties in the litigation. Therefore, it appears that the All American plaintiffs and Schauwecker may have to be joined as indispensable parties, whether plaintiffs or defendants, in each complaint pursuant to Fed.R.Bankr.P. 7019 (Fed.R.Civ.P. 19). Compare VMS/PCA Ltd. Partnership v. PCA Partners Ltd., 727 F.Supp. 1167, 1171 (N.D.Ill.1989) (Rule 19 does not require the joinder of a partnership in an action between partners where all the partners are already before the court) with Schmidt v. E.N. Maisel & Assoc., 105 F.R.D. 157 (N.D.Ill.1985) (one limited partner was required to join the other limited partners in suing the general partner). See also, 7 C. Wright, A. Miller & M. Kane, Federal Practice & Procedure, § 1613 (“under the [Uniform Partnership Act] all partners theoretically are indispensable parties in an action against the partnership and must be joined. Conversely, all partners should join in asserting a partnership claim under a contract”). The Court does not finally resolve this issue now. However, it is serious and clear enough to warrant action of the trial date and consideration of striking both complaints unless plaintiffs amend under Rule 7019.
CONCLUSION
There is no genuine issue of fact concerning Ascher’s partnership with Schau-wecker in the Leasing Partnership. This fact is material because Schauwecker cannot be liable for the assertedly wrongful exclusion of her fellow partner from the business unless an accounting is demanded, and the Trustee has not demanded an accounting in his 'conditional counter-claim. Therefore, Schauwecker’s motion for summary judgment on the Trustee’s conditional counterclaim against her must be allowed unless the Trustee amends. The Trustee’s conditional counterclaim must be stricken for failure to state a claim upon which relief can be granted. However, the Trustee is given time to amend his counterclaim to seek an accounting. In the meantime, final ruling on the motion for summary judgment will be held in abeyance.
Since the Trustee would have a colorable claim if his conditional counterclaim were accompanied by a demand for accounting, no judgment will presently be entered and Schauwecker’s motion for Rule 11 sanctions will be denied.
In both cases, the Court will set a status date to consider whether the complaints must be amended to comply with Rule 7019. The trial date previously set will be vacated pending resolution of the pleading issues.
. The pleadings are unclear as to who was the borrower on this loan.
. Her complaint is unclear as to who currently holds title to the assets or who currently controls the commercial laundry business.
. The Trustee’s claims as to the use of the check and the loan are inconsistent. In his answers to the complaints, he admits that the loan and the check were used to acquire Royal’s assets. However, in his counterclaim against the All American plaintiffs, he maintains that the loan was only used to buy the land where the laundry business was located.
.His view of his obligations to the plaintiffs in the event of his victory are unclear.
. The Trustee maintains that this statement is a legal conclusion. Trustee's Statement of Genuine Issues (his Rule 12(f) statement), at ¶ 1. However, as pointed out above, the question of whether or not someone is a partner is first an issue of fact, then one of law. Therefore, an assertion that someone is a partner is a mixed question of fact and law. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491473/ | ORDER DENYING MOTION TO EXTEND DISCOVERY AND DENYING ADDITIONAL TIME TO PLEAD
MARY D. SCOTT, Bankruptcy Judge.
THIS CAUSE is before the Court upon the plaintiffs Motion to Extend Discovery and For Additional Time to Plead, filed on March 27, 1992. The procedural history of this case is as follows: The complaint was filed on June 10, 1991, in response to which the initial Answer was filed on July 10, 1991. Thus, the case was at issue in July *6661991. During the months of August through October 1991, amended pleadings were filed. On November 20, 1991, the parties filed their pretrial statement in which both parties advised the Court that three months time would be sufficient for discovery. By Order dated December 20, 1991, the parties were given the following deadlines: discovery was to conclude on or before March 20, 1992; amended pleadings were to be filed no later than March 27, 1992. On March 27, 1992, the plaintiff filed the instant motion, together with an amended pleading.
Bankruptcy Rule 9006 provides in pertinent part:
(1) In General. Except as provided in paragraphs (2) and (3) of this subdivision, when an act is required or allowed to be done at or within a specified period by these rules or by a notice given thereunder or by order of court, the court for cause shown may at any time in its discretion (1) with or without motion or notice order the period enlarged if the request therefor is made before the expiration of the period originally prescribed or as extended by a previous order or (2) on motion made after the expiration of the specified period permit the act to be done where the failure to act was the result of excusable neglect.
Rule 9006(b)(1), Federal Rules of Bankruptcy Procedure. The Rule sets forth different standards to be applied depending upon whether the motion is filed before or after the time for the act to be done. In the instant case, the plaintiff has filed its motion to extend discovery after the expiration of the discovery deadline, thus invoking the excusable neglect standard. The motion to extend the pleading time, filed on the last date to do so, invokes the for cause standard.
The motion to extend is based on the assertion that during a deposition on March 19, 1992, information pertaining to additional causes of action was discovered. There is no entitlement to an extension of discovery where there is no showing why discovery could not have been conducted earlier, in a timely and diligent manner. In re Air Crash Disaster at Detroit Metropolitan Airport, 130 P.R.D. 632 (E.D.Mich.1989).
Every deposition or other discovery tool holds the potential for uncovering additional causes or evidence. Therefore, it is necessary to plan discovery in order to be able to capitalize on such revelations. This action was filed in June 1991 and was at issue in July 1991. The only statements before the Court indicate that plaintiff waited until literally the last day to conduct discovery. Plaintiff had nearly eight months to conduct discovery, including deposing witnesses. The fact that its tardy discovery aids its case is not reason to extend discovery. Excusable neglect has not been demonstrated.
Plaintiff also states that both parties served discovery upon each other on the 19th and 20th of March. When a discovery deadline is established, discovery must be concluded on that date. Service of interrogatories or other document which, by calculation under the Federal Rules of Civil Procedure, are due after the close of discovery are ineffective unless an order is obtained shortening time or lengthening discovery before the expiration of the discovery period. Smith v. Principal Casualty Insurance Co., 131 F.R.D. 104, 105 (S.D.Miss.1990); see Feir v. Carabetta Enterprises, Inc., 459 F.Supp. 841, 844 (D.Conn.1978) (discovery opportunity forfeited where interrogatories served three days before the close of discovery). Accordingly, to the extent plaintiff requests an extension of time to sanction the late interrogatories, that motion will also be denied.
Plaintiff requests that it be permitted an extension of time to “plead further.” The Court in its discretion, may, for cause shown extend the time for pleading. See Rule 9006(b). Cause has not been shown for an extension of time to amend its complaint. The same reasons that preclude an extension of discovery are relevant to this motion: plaintiff has shown only that it waited until the last moment to prepare its case. Accordingly, cause is not demonstrated.
The plaintiff filed, on March 27, 1992, a document entitled “Second Amend*667ment to Complaint to Determine Discharge-ability, Objecting to Discharge and for Judgment.” By Order dated December 20, 1991, the parties were required to file amended pleadings no later than March 27, 1992. This deadline, however, does not nullify Rule 15, Federal Rules of Civil Procedure. Rule 15 provides two methods for amending a complaint after a responsive pleading has been filed: plaintiff may file a motion or obtain the agreement of counsel, in writing, to the amendment. Fed.R.Civ. Proc. 15(a) (“[A] party may amend the party’s pleading only by leave of court or by written consent of the adverse party.”). No motion to amend the pleadings has been filed within the required time'period. In addition, the amended complaint does not reflect that consent of the adverse party has been obtained. Accordingly, the complaint filed on March 27, 1992, will be stricken from the record.
ORDERED (1) the Motion to Extend Discovery and For Additional Time to Plead, filed on March 27, 1992, is DENIED; (2) The Second Amendment to Complaint to Determine Dischargeability, Objecting to Discharge and For Judgment is STRICKEN and does not constitute a pleading in this adversary proceeding.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491474/ | MEMORANDUM OF DECISION
GEORGE B. NIELSEN, Jr., Bankruptcy Judge.
Debtors and Citibank, N.A., as agent for a group of banks (the “Bank Group”), exe*696cuted a stipulation for use of cash collateral and adequate protection. This stipulation permitted debtors to use cash collateral generated by the sale of inventory in the ordinary course of their business.
On May 16, 1991, the Court approved an amended stipulation for use of cash collateral. Paragraph 2(e) provides that proceeds of perfected cash collateral received by debtors, “other than in the ordinary course of business,” will be paid to the agent for application toward the interim debt.
The amended stipulation specifically provides debtors are to pay to the Bank Group:
[N]et cash proceeds of ... Pre-Petition Collateral arising from ... sale of properties of ... Debtors located in Hawaii, (B) ... cash proceeds from return to ... Debtors by PRI International, Inc. of a deposit ... of $550,000, (C) the cash proceeds from return to ... Debtors of es-crowed funds ... of $4 million in connection with ... amendment and assumption of certain leases known as the “Kathary Group Leaseback Leases”, (D) all amounts ... paid in respect of the Pledged Debt, including, but not limited to, ... a note ... of $3 million made by McLane Convenience Foods, Inc. ... payable to Circle K, and (E) the net cash proceeds arising from ... assumption and assignment of ... the “Skybox License Agreement”....
Amended Stipulation at paragraph 2(e), p. 23, Docket 4, Exhibit B.
The amended stipulation provides debtors may use cash collateral to purchase inventory in the ordinary course of business, pay other ordinary course expenses, pay claims of reclamation creditors and pay professional fees. Supra. The latter provisions are subject to limitations not relevant here. The parties now dispute the meaning of their stipulation.
I
Debtors believe the following additional facts are material:
1. The amended stipulation does not define when proceeds are realized outside of the ordinary course.
2. Although the amended stipulation states five specific categories of proceeds to pay to Citibank, it is silent as to real property proceeds and the tax refund.
3. During negotiation of the amended stipulation, debtors informed Citibank that restricting usable cash collateral to proceeds of inventory sold in the ordinary course was unacceptable. See Affidavit of Peter R. Roest, Docket No. 16 at p. 2. It was debtors’ intention in negotiating the amended stipulation to expand the categories of usable cash collateral beyond inventory sold in the ordinary course.
4. A letter Mr. Roest wrote to bank counsel dated December 12, 1990, states the usable cash collateral should include: (1) proceeds from the sale of inventory in the ordinary course; (2) proceeds from sale of equipment in the ordinary course; (3) all other funds received by debtors in the ordinary course, including returns on invested cash, payments under leases and franchise agreements and any other funds debtors would normally receive in the ordinary course and would reasonably anticipate being able to use; and (4) any deposit refund and credit card reimbursement received in ordinary-course procurement. Docket No. 16, Exhibit A.
5. It was debtors’ intention in negotiating the amended stipulation to pay only with proceeds of large-scale asset dispositions, such as the closing of all stores in a particular region or market. See Affidavit of Bart A. Brown, Jr., Docket No. 18, pp. 1-2.
6. It is necessary and usual for debtors to enter into transactions that do not occur on a daily basis. These include real property leases, equipment leases and supply contracts. Supra, p. 2.
7. Circle K has or will receive cash proceeds from sales or condemnations of realty subject to bank group liens. Affidavit of Jerry F. Lyndes, Docket No. 15, at II2.
8. It is the usual practice of debtors to file tax returns and other documents with *697federal taxing authorities. See Affidavit of Michael Gibbons, Docket No. 20, p. 4.
9. On their 1990 consolidated tax return, debtors reported a net loss for fiscal year 1990 of $157 million. When carried back to the years 1988 and 1987, the loss eliminated taxable income and permitted a carryback of business credits. By applying the 1990 operating loss to earlier profitable years, debtors obtained refunds of approximately $17.5 million in fiscal 1991. Supra, pp. 3-4.
10. On their consolidated 1991 tax return, debtors reported a net operational loss for fiscal year 1991 of about $172.2 million. Debtors project they will incur a substantial net operating loss for fiscal 1992. During the ten year period beginning in fiscal year 1983 and ending with fiscal year 1992, debtors sustained net operating losses five times. The net operating losses incurred in fiscal year 1991 arose largely from the fact ordinary business expenses exceeded income. Of the $172.2 million net operating loss, approximately $23 million are restructuring charges. The remainder consists of operating losses. Gibbons Affidavit, supra.
11. Net operating losses incurred for fiscal year 1990 arose almost entirely from ordinary course expenses. Of the $157 million net operating loss, $18.3 million consists of restructuring charges. The remainder consists of operating losses. Supra.
12. Net operating losses incurred in fiscal year 1989 arose entirely from ordinary course expenses. Supra.
13. In fiscal year 1992, debtors are involved in 85 condemnation proceedings and settlements in lieu of condemnation. In fiscal year 1991, the total was 70. In fiscal year 1990, the total was 78, while in fiscal year 1989, the total was 82.
14. Debtors never had a policy of automatically replacing condemned stores or of earmarking proceeds of condemnations for acquisition of replacement stores. Brown Affidavit at p. 3.
Facts deemed material to Citibank include that from 1984 to 1988, debtors earned profits. The last previous tax refund received was in 1983 for $3,319,-639.00.
II
The Court previously entered an order approving the sale of Store 8820, located in Kissimmee, Florida, to Exxon Corporation. That order provided net proceeds of sale should be segregated, remain subject to Citibank’s lien and not be disbursed until issues were resolved. The sale of Store 8820 resulted in approximately $650,000. These proceeds were inadvertently paid by debtors to the Bank Group. Debtor also received, or will receive, cash proceeds from other sales or condemnations of realty-
In December 1990, debtors filed a motion to authorize property leasing in the ordinary course. The resulting order found that debtors, in the ordinary course, obtained and granted easements, closed stores, disposed of equipment, leased, bought, sold and renewed alcoholic beverage licenses, and entered into and terminated equipment leases. The order noted it was within debtors’ ordinary course to negotiate and accept awards or payments in condemnation proceedings. Adversary Docket No. 40, Exhibit A.
III
Citibank filed this adversary on September 24, 1991, seeking an order compelling debtors to follow the amended stipulation and remit tax refunds and real property proceeds for application toward the interim debt. Citibank alleged these proceeds were not within debtors’ ordinary course of business.
Defendants answered and filed a counterclaim, which was later amended. Debtors seek a finding that the tax refund and real property proceeds are within the ordinary course. They further requested return of funds inadvertently paid to Citibank for Store 8820. Finally, debtors request relief from possible claims of the Internal Revenue Service for a return of the tax refunds. Debtors request that if the IRS establishes a claim for the refund *698and the Court earlier ordered the refund paid to Citibank, that Citibank should be compelled to disgorge.
IV
This litigation clearly involves interpretation of a contract. The first issue is whether the parol evidence rule precludes debtors from introducing evidence concerning intent in negotiating the amended stipulation. See generally B. RUSSELL, BANKRUPTCY EVIDENCE MANUAL, § 21 (1991-92).
The parol evidence rule pertains to oral testimony and informal writings tending to contradict or vary a single, final written instrument. RUSSELL, supra, § 21, at 64. The parol evidence rule does not apply to incomplete or ambiguous instruments. Supra, at 63.
Parol evidence is not admissible to show intent where the instrument is clear. However, it is admissible to determine which of two meanings was intended. Supra, § 23 at 70-71.
Under Arizona law, when contract language is unambiguous, the language is interpreted as written, without reference to extrinsic evidence. McLane & McLane v. Prudential Insurance Co. of America, 735 F.2d 1194, 1195 (9th Cir.1984); Isaak v. Massachusetts Indemnity Life Ins. Co., 127 Ariz. 581, 584, 623 P.2d 11, 14 (1981). In the present case, the instrument appears complete on its face. However, the phrase “ordinary course of business” is not defined and is susceptible to more than one interpretation as applied to debtors’ operations.
The Bank Group argues for a narrow interpretation. Creditors conclude “ordinary course of business” can only mean that business directly related to debtors’ sale of gasoline and inventory in convenience store operations. The Bank Group states the meaning of Section 2(e)(ii) is understood in a common sense context. Creditors cite from a legal dictionary: “ordinary course of business” is the “transaction of business according to the common usages and customs of the commercial world generally or of the particular community or (in some cases) of the particular individual whose acts are under consideration .... In general, any matter which transpires as a matter of normal and incidental daily customs and practices in business.” BLACK’S LAW DICTIONARY 989 (6th ed. 1990).
The Bank Group argues Section 2(e)(ii) captures proceeds that debtors did not obtain as part of their daily business. Normal practices of debtors’ business are running convenience stores and selling groceries and gasoline, not generating huge tax refunds and amassing realty proceeds. In short, the language is not ambiguous.
Debtors argue the phrase “ordinary course of business” is ambiguous. They note Citibank has been unable to find a single case that supports its conclusion the term is unambiguous. Debtors argue the term cannot be defined without reference to extrinsic sources. In short, there is nothing in the amended stipulation that can be used to define the phrase. The fact the agreement was extensively negotiated and integrated is not a guarantee of lack of ambiguity.
Debtors argue the phrase must include the many transactions which made up debtors losses, leading to the tax refund. Further, debtors argue they have long been involved in condemnation or sales of retail store sites.
The phrase “ordinary course” is ambiguous within the context of this case. As such, the Court must examine the intent of the parties in negotiating the amended stipulation. Extrinsic or parol evidence will be considered.
V
Debtors offer affidavit testimony that creates, at a minimum, material issues of fact as to what the parties intended. Chief Executive Officer Brown avers it was debtors’ intention to pay the Bank Group only proceeds of large-scale asset dispositions, such as the sale of all stores in a particular region or market. He states it was never an automatic policy to replace *699stores that were condemned or to earmark proceeds for new or replacement stores. Docket No. 18, pp. 2-3. Given this dispute of extrinsic evidence, summary judgment for Citibank is denied. Sims Office Supply v. KA-D-KA, Inc. (In re Sims Office Supply), 83 B.R. 69, 74 (Bankr.M.D.Fla.1988).
VI
Debtors ask the Court to grant their cross-motion for summary judgment because Citibank presented no evidence as to what constitutes the ordinary course of debtors’ business.
Debtors are correct that Citibank does not cite facts supporting its view that the intent was that tax refunds and real estate proceeds were outside the ordinary course. Regardless, if debtors are entitled to prevail, their undisputed facts must fit the test for determining whether an event is within their ordinary course.
Neither the Code nor the legislative history offers guidance concerning what constitutes ordinary course of business. Ragsdale v. The Citizens and Southern National Bank (In re Control Electric), 91 B.R. 1010, 1012 (Bankr.N.D.Ga.1988). Courts interpreting the term have established guidelines which are helpful, however. Burlington Northern Railroad Co. v. Dant & Russell, Inc. (In re Dant & Russell, Inc.), 853 F.2d 700, 704 (9th Cir.1988).
Two tests assess whether a transaction is in the ordinary course. These are the horizontal dimension and vertical dimension tests. Supra.
The horizontal dimension test involves an industry-wide prospective in which debtors’ business is compared to similar businesses. In this comparison, the issue is whether the transaction is of a type that similar businesses would engage in as ordinary business. This showing ensures neither debtor nor creditor did anything abnormal to gain an advantage over other creditors. The transaction need not be common, it need only be ordinary. A transaction can be ordinary and still occur occasionally. In narrowing the focus, based on the nature of debtors’ business, the Court must decide whether a transaction is in the course of debtors’ or some other business. In re Dant & Russell, Inc., at 704.
It is axiomatic debtors’ rivals must file tax returns. Thus, filing income tax returns is an ordinary part of debtors’ business. Debtors have shown they incurred losses in earlier years for which they are presumably entitled to a refund. Debtors also established a substantial portion of the losses is attributable to ordinary business operations, not bankruptcy costs. In short, this transaction is not akin to a manufacturer raising a crop. Johnston v. First Street Companies (In re Waterfront Companies), 56 B.R. 31, 35 (Bankr.D.Minn.1985). Filing taxes is an ordinary event followed industry-wide by other convenience store companies. Given this, debtors’ undisputed facts establish the horizontal dimension test is met as to the tax refunds. Debtors concede filing a bankruptcy case is not an ordinary course event. Where losses are attributable to reorganization costs, that portion of the tax refund should be paid to Citibank.
Debtors established they are now and have previously been involved in sales and condemnation actions. They also established they never had a practice of automatically reinvesting proceeds into a replacement store. Thus, debtors made the showing they did nothing abnormal to gain an advantage over Citibank. Selling stores in lieu of condemnation was a common transaction.
Under the vertical dimension or creditor’s expectation test, the transaction is viewed from the vantage point of a hypothetical creditor. It inquires whether the transaction subjects a creditor to economic risks different from those accepted when the credit decision was made.
The touchstone of “ordinariness” is ... the parties’ reasonable expectations of what transactions the debtor in possession is likely to enter in the course of its business. So long as the transactions conducted are consistent with these expectations, creditors have no right to notice and hearing, because their objections *700to such transactions are likely to relate to the bankrupt’s Chapter 11 status, not the particular transactions themselves.
In re Dant & Russell, supra, at 705.
The creditor’s expectation test is reformulated as the vertical dimension test. Here, debtors’ prepetition business is compared to their post-petition transactions.
In the instant case, debtors proved they filed taxes on a regular basis, incurred losses prior to bankruptcy, were involved in sales and condemnation actions, and had no automatic policy of replacing stores. Citibank has presented no evidence debtors have deviated from this course post-petition. Given this, the challenged transactions should be consistent with Citibank’s expectations during negotiations of the amended cash collateral stipulation. Debtors have met the vertical dimension test.
YII
Debtors are granted summary judgment to use tax refunds incurred as a result of losses not attributable to reorganization costs. They are further granted summary judgment as to proceeds from condemnation sales and proceeds from the sale of Store 8820. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493982/ | MEMORANDUM OPINION
JOHN D. SCHWARTZ, Bankruptcy Judge.
This matter comes before the court on an adversary complaint filed by plaintiff, Martin G. Krist (“Krist”)1 against debtor and defendant, Richard W. Curtis (“Curtis”). The complaint states that Krist seeks relief pursuant to §§ 523(a)(2)(A), and (a)(2)(B) of the Bankruptcy Code (11 U.S.C. §§ 101 et seq.)2 finding that an alleged debt is non-dischargeable in this bankruptcy case.
Findings of Fact
Krist and Curtis became acquainted in 1994. At that time, Krist was a graduate from Cleveland State University with a Bachelor of Science degree in Chemistry. He had never taken any business courses. He had a total of $100,000 in an IRA account and a savings account at Old Phoenix National Bank in Medina, Ohio.
By 1994, the defendant Curtis had worked in the financial services arena and other businesses for almost 30 years. He had experience with leveraged investing on margin, he sold insurance and deferred annuities and invested in international bank instruments. He was licensed by the *872National Association of Securities Dealers. He recruited sales people and trained them. He, in turn, was recruited by prestigious securities firms and ran one of the most successful branches of one particular firm. In 1987, Curtis formed a corporation known as Intercon Financial Corp., of which he was the sole director and officer, for the purpose of conducting financial, real estate and other business. Defendant’s Exhibit 1. Intercon maintained a bank account at Regency Bank in Chicago.
In March of 1994, Krist, on a trip to New York, was introduced to Curtis by his Mend, Janet Eckhart. Curtis told Krist about an investment plan called “Accumulation Plan/250”. According to Curtis, he acted as the “finder” or “consultant” on investments in bank debentures. The court questioned Curtis at length about the nature of this investment and was never satisfied as to its legitimacy. Plaintiffs Exhibit P is, in part, a document issued by the Securities and Exchange Commission
alerting investors and regulated entities to the recent escalation in the number of possibly fraudulent schemes involving the issuance, trading or use of so-called ‘prime’ bank, ‘prime’ European bank or ‘prime’ world bank financial instruments. These instruments typically take the form of notes, debentures, letters of credit, and guarantees. Also typical in the offer of these instruments is the promise or guarantee of unrealistic rates of return; e.g., a 150 percent annualized rate of “profits.” Common targets of these schemes include both institutional and individual investors, who may also be induced to participate in possible “Ponzi” schemes involving the pooling of investors’ funds to purchase “prime” bank financial instruments.
The Accumulation Plan/250 appeared to be just such a fraudulent scheme with a promised annual return of 2080%. A document describing the investment (Plaintiffs Exhibit C), provided that the minimum investment was $250,000 for a term of 40 weeks and that the rate of return would be 40% per week for a total return of $4,000,000. The document also explains that “[a]t all times the participants invested funds are protected by either an escrow that prohibits the use of the funds for any purpose other than the purchase of a bank purchase order worth many times the value of the investment, or backed by a collateral instrument of greater value, or by profits already placed in a reserve account in the investor’s name and ownership. Thus, under no circumstances does the possibility of a loss to the participant exist” (Emphasis added).
Toward the end of Krist and Curtis’ first meeting, Krist said to Curtis that he had $100,000 to invest. According to Curtis, he told Krist that that was not enough for the Accumulation Plan/250 but Eckhardt said that she would make an effort to find an investor or investors to come up with the additional $150,000. Curtis gave Krist and Eckhardt a complete set of the paperwork. He testified that he did not think that he would hear from them because they didn’t have enough funds to participate.
Curtis testified that in June of 1994 he had a conversation with Krist in which Krist stated that the additional $150,000 would not be available but that he wanted to participate and asked Curtis to find a way for him to do so.
Krist entered into two agreements with Curtis, both dated March 25, 1994. Krist executed a special power of attorney authorizing Curtis to invest Krist’s money in the “No Risk investment.” Plaintiffs Exhibit F. Krist also executed a “Consulting and Account Management Agreement.” Plaintiffs Exhibit B. The agreement provides that Krist is employing Curtis as a *873consultant to assist Krist in “making a profit on investment in an investment trading program” and that Curtis would use his expertise and contacts to invest Krist’s funds in a “private trading program” which is one of many “sophisticated financial programs” with which Curtis is involved. It further provides that the primary business of the agreement is the investment of $100,000 yielding a profit of 40% per week.
Paragraph 4 of this agreement states that it “revokes, discharges and supersedes all prior representations, warranties or agreements between the parties concerning the subject matter of this agreement except as specifically set forth herein.” Paragraph 7 provides that:
The parties hereto acknowledge and agree that each has been given the opportunity to independently review this agreement with legal counsel, and/or has the requisite experience and sophistication to understand, interpret and agree to the particular language of the provisions hereof. In the event of any ambiguity in or dispute regarding the interpretation of same, the interpretation of this agreement shall resolved [sic] by any rule of interpretation providing for interpretation against the party who causes the uncertainty to exist or against the draftsman.
Krist testified that he did not consult any legal or financial advisor prior to transferring funds to Curtis. Curtis testified that he never heard from anyone representing Krist.
On July 22, 1994, Krist transferred $100,000 from Old Phoenix Bank to the Intercon account at Regency Bank. On August 2, 1994, Krist wrote to Curtis, explaining that he had 60 days from July 22 to return the funds to his IRA account to avoid a tax penalty and asking whether he could get an update at the end of August to “prepare for the return money transfer.” Curtis testified that he found a program in August of 1994 in which to “park the money.” He said that $125,000 was needed and that he put $25,000 of his own money in.
On September 19, 1994, Curtis wrote to Krist, giving him two options with respect to Krist’s IRA tax obligation. One option involved leaving the funds to grow and paying the tax obligation out of earnings and the other option involved Curtis immediately returning the amount of the tax obligation to Krist. The first option, as illustrated by Curtis, showed Krist with an account worth $16,431,380 after sixteen weeks. The second option, as illustrated by Curtis, showed Krist with an account worth $8,470,681 after sixteen weeks. Defendant’s Exhibit 9. Krist testified that he was prepared to set up an offshore account, on Curtis’ advice, to hold all of the money he was going to make.
The testimony of both parties indicated that Krist requested $22,500 to pay his tax obligation and that Curtis sent him the funds. There was also testimony to the effect that Krist requested $10,000 back from Curtis around Christmas in 1994 and that those funds were transferred back to him also. Curtis testified that on January 15,1995, he supplied the $32,500 necessary to maintain the $125,000 balance for the investment.
The investment that Curtis testified he found had the same terms as the Accumulation Plan/250 and the funds were to be placed with Arne Lundh, a Swedish man working out of England with Deutsch Bank. Curtis testified that he checked Lundh’s references because he had not worked with him before.
Curtis submitted to the court many pages of correspondence between him and Arne Lundh, dated from March 22, 1995 *874through December 3, 1996, which paint a picture in which Curtis is initially conducting the transaction and then becoming more frustrated with monies not being where they are supposed to be. In the midst of these alleged difficulties, in August, 1995, Krist received from Curtis an account statement showing that he had earnings to date of $174,400 in addition to the $100,000 deposit. Subtracting the advances that Curtis made to Krist of $32,500, the statement indicated that Krist had a total of $241,900 in his account. Defendant’s Exhibit 10. On December 13, 1995, a mere four months later, Curtis alleges that he wrote a letter to the Fraud Squad of Scotland Yard, reporting that $277,000 was stolen from him by Arne Lundh. Defendant’s Exhibits 16-20. Scotland Yard never responded in writing. No evidence other than Curtis’ testimony supports the allegation. Curtis testified that he never received any money from Lundh.
Krist never received any funds from Curtis after the $32,500 was transferred back to him, despite repeated demands. On September 18, 1998, he commenced a lawsuit against Curtis in Ohio. On January 15, 2004, Curtis filed for bankruptcy protection.
Conclusions of Law
Section 523 of the Bankruptcy Code provides for various exceptions to the dischargeability of debts. The party seeking to establish an exception to the discharge of a debt bears the burden of proof by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 287, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991); In re Sheridan, 57 F.3d 627, 633 (7th Cir.1995); Kress v. Kusmierek (In re Kusmierek), 224 B.R. 651, 655 (Bankr.N.D.Ill.1998). To advance the policy of giving the debtor a fresh start in bankruptcy, exceptions to discharge are construed strictly against the creditor and liberally in favor of the debtor. Meyer v. Rigdon, 36 F.3d 1375, 1385 (7th Cir.1994).
Section 523(a)(2)(A) of the Bankruptcy Code3 provides that a debt is not dischargeable if money, property, services or an extension of credit were obtained by false pretenses, a false representation or fraud. A cause of action under this subsection with an allegation that the debtor made a false representation, requires the following elements to be proven: (1) the debtor made a false representation; (2) the debtor made the representation with the intent to deceive the creditor; and (3) the creditor relied on the representation. Califf v. Park (In re Park), 2002 WL 130948 (Bankr.N.D.Ill.); Bletnitsky v. Jairath (In re Jairath), 259 B.R. 308 (Bankr.N.D.Ill.2001). The creditor’s reliance must have been justifiable, Field v. Mans, 516 U.S. 59, 74-75, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995) and “false pretenses” or “representations” are representations knowingly and fraudulently made that give rise to the debt. Driggs v. Black (In re Black), 787 F.2d 503, 506 (10th Cir.1986), abrogated in part on other grounds, Grogan v. Garner, 498 U.S. 279, 283, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).
Any cause of action under § 523(a)(2)(A) requires proving that the debtor acted with intent to deceive. First Nat’l Bank of Red Bud v. Kimzey (In re Kimzey), 761 F.2d 421 (7th Cir.1985), overruled on other grounds. Questions of intent are questions of fact to be determined by the bankruptcy court. Gabellini v. Rega, 724 F.2d 579 (7th Cir.1984).
*875Here, Curtis made several false representations. He represented that “under no circumstances does the possibility of a loss to the participant exist.” He represented that Krist would earn a profit of 40% per week on his money. He sent Krist an accounting indicating that Krist had a balance of $241,900.
Determining whether Curtis had the requisite intent to deceive Krist in this matter was not an easy task. Curtis presented an elaborate tale, complete with documentation of how he, too, was deceived. However, the court has not been convinced of his innocence. His sophistication and experience simply do not add up to his having been duped. Rather, this court believes that Curtis purposefully used his expertise to defraud Krist by engaging him in a scheme in which Curtis stood to gain a substantial commission or finder’s fee.
The pivotal question in this case is whether Krist was justified in relying on Curtis’ representations. In Field v. Mans, the Supreme Court established “justifiable reliance” as the proper standard in § 523(a)(2)(A) cases, which is a less demanding standard than reasonable reliance. 516 U.S. at 61, 116 S.Ct. at 439. Reasonable reliance is defined as what would be reasonable for a prudent person to do under the relevant circumstances. In contrast, reliance is justifiable when a person relies on a representation of fact “although he might have ascertained the falsity of the representation had he made an investigation.” Id. at 70, 116 S.Ct. 437 (quoting the Restatement (Second) of Torts § 540 (1976)).
The Court in Field v. Mans went on to explain:
the illustration is given of a seller of land who says it is free of encumbrances; according to the Restatement, a buyer’s reliance on this factual representation is justifiable, even if he could have walk[ed] across the street to the office of the register of deeds in the courthouse and easily have learned of an unsatisfied mortgage. [Restatement] at § 540, Illustration 1. The point is otherwise made in a later section noting that contributory negligence is no bar to recovery because fraudulent misrepresentation is an intentional tort. Here a contrast between a justifiable and reasonable reliance is clear: Although the plaintiffs reliance on the misrepresentation must be justifiable this does not mean that his conduct must conform to the standard of the reasonable man. Justification is a matter of the qualities and characteristics of the particular plaintiff, and the circumstances of the particular case, rather than of the application of a community standard of conduct to all cases. Id., § 545A, Comment b.
Id. at 70, 116 S.Ct. at 444.
Looking at the qualities and characteristics of this particular plaintiff and the circumstances of this particular case, this court can come to only one conclusion, that as a college-educated person Krist was not justified in relying on representations of Curtis that he would earn a 2080% profit on his money in one year. Krist did not have to conduct an investigation to have ascertained the falsity of Curtis’ representations. There was only one place that such returns could have come from and that was from the pockets of persons gullible enough to join in what amounts to a Ponzi scheme. If Krist really believed that this “program” was legitimate, he would have requested the advice of legal or financial counsel before he put every dime he had into it. By failing to examine the investment at all, he assumed its risk. If Krist was the innocent that he would like the court to believe he is one has to *876wonder why he was also prepared to set up offshore accounts, for the purpose of concealing gains from the taxing authorities. Under the rule of “justifiable reliance”, established by the Supreme Court in Field v. Mans he is not entitled to have his claim declared non-dischargeable.
Conclusion
For the foregoing reasons, Curtis’ obligation to Krist is dischargeable.
. Krist appears pro se.
. All references made to the Bankruptcy Code are made to the Bankruptcy Code prior to the amendments incorporated by the Bankruptcy Abuse Protection and Consumer Protection Act of 2005, because such amendments are not applicable to this case.
. Krist alleged that he had a cause of action under 11 U.S.C. § 523(a)(2)(B) in his complaint but this section is completely inapplicable to the evidence presented at trial. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493983/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW ON KINGSBURY OBJECTION TO SAME UNDER 11 U.S.C. § 36S(i)
JACK B. SCHMETTERER, Bankruptcy Judge.
Following trial with evidence on the issue of whether creditor Kingsbury is “in possession” of subject property under 11 U.S.C. § 365®, the following is made and will be entered as Findings of Fact and Conclusions of Law, ruling that Kingsbury is not “in possession” under that provision. Trial was held pursuant to pretrial order, and this ruling will apply as a dispositive ruling on the § 365® issue unless Kings-bury seeks to reopen it on motion and notice for good cause shown.
INTRODUCTION
Among many issues posed by the parties,1 Kingsbury, who has a pre-bankrupt-*889cy contract to purchase the subject premises, objected to the Debtor’s motion to sell certain assets and other motions on the following grounds:
FIRST
Kingsbury seeks to enforce the Debtor’s contract obligation to convey the real estate under its contract because it claims to be “in possession” of the property. As a result, § 365(i) of the Bankruptcy Code is said to preclude the Debtor from rejecting the contract and thereby avoid its obligation to deliver title under the “land sale contract” between Kingsbury and the Debtor, unless Kingsbury elects to have the contract terminated — which Kingsbury declines to do.
SECOND
If Kingsbury is not “in possession” of the Debtor’s property, Debtor would be able to reject its Sale-Purchase Agreement with Kingsbury. However, under § 365(j) of the Bankruptcy Code unless Kingsbury consents to a sale of the property (which it declines to do), any rejection of the contract would entitle Kingsbury to (i) a lien on the property to repay Kings-bury its contract earnest money, a portion of which in the amount of $468,000 was released to the Debtor and its corporate affiliate, Rezmar Corporation for' use, and (ii) satisfaction of that lien from proceeds of the Debtor’s attempted sale of the property under 11 U.S.C. § 363.
On June 2, 2006, the Court conducted trial with evidence limited to the question of whether Kingsbury was “in possession” of the Debtor’s real estate on the date Debtor filed its Chapter 11 petition herein. Testifying for Kingsbury was Nancy Car-reon (“Carreon”), Director of Construction for Kingsbury’s real estate development company affiliate, Centrum Properties, Inc. (“Centrum”). Testifying for the Debt- or was Robert Williams (‘Williams”), President and CFO of the Debtor’s LLC Manager/affiliate, Rezmar Corporation.2
FINDINGS OF FACT
1. The Debtor’s only significant asset is a .94-acre vacant, paved parcel of unimproved real estate located at the southwest corner of West Chicago Avenue between North Kingsbury Street and North Hudson Street, Chicago, Illinois, and commonly known as 750 North Hudson Street, Chicago, Illinois (“Premises”). Answ. ¶ 1. The Debtor purchased the Premises in 2001 from a different Centrum affiliate, MW-CPAG Holdings, L.L.C., for the price of $8,000,000 with the intent to develop a high-rise residential building. Id. Approximately six months after acquiring the Premises, the Debtor obtained from Broadway Bank a $10,940,000 loan secured by a mortgage of the Premises (“Mortgage”). Answ. ¶ 2.
2. Situated on the Premises in 2001 was a sales trailer (“Trailer”) that has remained there through the present. Tr. 9, 36-40. CH Exh. A-B. C. In prominent *890red letters above the entrance door to the Trailer appear the words “Hudson Tower”, which had been the name of the Debtor’s planned residential development, and which today still remain above the door. Tr. 38-39.
3. The Debtor actively used the Trailer for marketing activities at various times between 2001 and January 2005 (Tr. 44-46). Inside the Trailer the Debtor stored its materials, supplies and other personal property needed for marketing the residential building it had planned to develop on the Premises. Tr. 44-45. The Debtor also paid real estate taxes assessed on the Premises, secured and limited access to the Premises by installing a fence around its perimeter, insured the Premises and Trailer, and entered into utility and service contracts to make the Trailer operable and functional as a residential development marketing office. Id.
4. The Debtor’s efforts to develop the Premises were unsuccessful, and it never broke ground for construction of its planned residential building. Answ. ¶4; Tr. 46. On January 25, 2005, the Debtor entered into a contract (“Sale-Purchase Agreement”) to sell the Premises to a different Centrum affiliate known as AG-IV Realty Acquisition Corp. (“AG-IV”) for the price of $9,000,000. Answ. ¶ 4; Tr. 6, 48; CH Exh. D.
5. The terms of the January 25, 2005 Sale-Purchase Agreement, would obligate the Debtor to deliver at closing an executed Special Warranty Deed conveying good and marketable legal title, free and clear of all liens and encumbrances on Premises except for certain Permitted Exceptions. CH Exh. D §§ 8.1(a), 9.1(a). Specifically excluded in the definition of permitted title exceptions were exceptions relating to the Seller’s financing and any mechanic’s liens. Id. § 4.1-3. At closing, the Debtor would also be required to deliver an executed assignment of all utility and service contracts relating to the Premises and the Trailer, and “all keys in Seller’s possession or control to entrance doors to, and equipment and utility rooms located in, the [Premises] (including, without limitation, the Sales Trailer).” Id. § 8.1(f), (l). However, as described below that Agreement never closed.
6. By letter dated February 24, 2005, the Debtor agreed that AG-IV Realty Acquisition Corp. was to “have the right to use and access the Sales Trailer ... and ... park motor vehicles in designated parking areas on the [Premises].” Answ. ¶ 6; Tr. 48; CH Exh. F.
7. The Debtor leased the paved portion of the Premises to Premier Valet Chicago (“PVC”), Inc. pursuant to a written month-to-month lease agreement dated June 30, 2005. CH Exh. H. Thereafter through the present, PVC has used the paved portion of the Premises for valet parking of local restaurant patrons’ vehicles. Tr. 49.
8. AG-IV, as Assignor, and CP Kings-bury, L.L.C. (“Kingsbury”), as Assignee, entered into an Assignment of Sale-Purchase Agreement, Guaranty Agreement, and Earnest Money Escrow Account dated August 17, 2005. Tr. 7, 49; CH Exh. G.
9. The Debtor and Hudson entered into a Second Amendment to Sale-Purchase Agreement dated August 23, 2005 (“Second Amendment”) (Answ. ¶ 7; Tr. 50), pursuant to § 8 of which the Debtor granted Kingsbury “a license to access the [Premises], remove the existing fence and [Debtor’s] advertising material and commence marketing activities for [Kings-bury’s] proposed development, at [Kings-bury’s] sole cost and expense.” Section 8 of the Second Amendment further stated that “[Kingsbury’s] marketing activities may include, but are not limited to, installation of advertising promotions, landscap*891ing and use and improvement of the Sales Trailer, [Debtor] acknowledging that [Debtor] has no rights of ownership, or to possession or use of the Sales Trailer.” CH Exh. I § 8.
10. Following execution of the Sale-Purchase Agreement in January 2005, the Debtor removed most but not all its personal property from the Trailer (Tr. 30, 50-51), and Kingsbury neither used nor entered the Trailer (Tr. 27, 48). The Debtor has never turned over the Keys to the Trailer to either AG-IV, Kingsbury or Centrum (Tr. 28-29, 51). Nor has the Debtor transferred to Kingsbury or otherwise given it permission to enjoy any aspect or incident of possession of the Premises beyond the limited authorization granted under the February 24, 2005 letter agreement between the Debtor and AG-IV or the Second Amendment to the Sale-Purchase Agreement. Tr. 52. As a representative of Centrum, Carreon entered the Trailer twice after it was broken into (Tr. 28-29), but was not involved in the subsequent repair or replacement of the Trailer’s door handle and lock. (Tr. 29-30).
11. Kingsbury has conducted, and continues to conduct, through its affiliate Centrum Properties, Inc. (“Centrum”), the following activities on the Real Estate:
a. Demolished the existing guard tower located at the northwest corner of the Real Estate. Centrum rented two 10-yard construction waste containers for the removal of debris.
b. Removed all existing “Hudson Tower” marketing signage from the Real Estate, including removing two large billboards: one at the northwest corner, one at the northeast corner, as well as signage on the Hudson Tower marketing trailer. Centrum rented two 10-yard construction waste containers for the removal of debris.
c. Centrum assumed the responsibility for maintaining the vacant Real Estate, including the removal of debris and litter, providing lawn and weed maintenance, filing potholes in asphalt paving and providing snow removal as required for the parking lot and adjacent city sidewalk.
d. Centrum assumed the responsibility for meeting with the City of Chicago Streets and Sanitation inspectors regarding maintenance and city requirements for the Real Estate.
e. Centrum has provided, and continues to provide, parking for employees and construction staff on the Real Estate.
f. Centrum hired the Initial Security Co. to provide security personnel for the Real Estate. Centrum thereby continues to ensure the integrity of the fence at the perimeter of the Real Estate to prevent access by unwanted vehicles and persons.
12.Kingsbury did nothing to develop the Premises between February 24, 2005, and May 16, 2006, when the Debtor filed its Chapter 11 petition herein. Tr. 6. During that time, Centrum has made use of the Premises by allowing use of the Premises as a parking lot by its employees and contractors those of its affiliates other than Kingsbury who own real estate developments nearby the Premises. Tr. 7-8, 11-15, 21-26. Centrum has provided or paid for certain maintenance, security and municipal ordinance compliance services at Premises to in connection with the parking lot use just described. Tr. 14-15, 21-26. Centrum’s removal of billboard signs at the Premises and certain signage on the Trailer was the only activity at the Premises by Centrum, that Kingsbury was specifically authorized to conduct under Febru*892ary 24, 2005 letter agreement between the Debtor and AG-IV or the Second Amendment to the Sale-Purchase Agreement. Tr. 10, 31, 50-51.
13. Prior to the filing of the Debtor’s Chapter 11 petition, apart from incurring legal and other expenses, Kingsbury deposited earnest money in the amount of $1,000,000 pursuant to the Sale-Purchase Agreement, of which $468,000 was disbursed to the Debtor for its use. Answ. ¶ 9. It has been represented by Debtor’s counsel that this disbursement will be returned to the escrow, but that has not yet happened. The Debtor could not close on the closing date and thereby defaulted under the Sale-Purchase Agreement when Broadway Bank refused to release its mortgage on the Premises without being paid in full. Id. ¶ 10. As a result, in January 2006, Kingsbury filed a lawsuit against the Debtor in the Circuit Court of Cook County (“Lawsuit”) for specific performance of the Sale-Purchase Agreement. Id.
14. The Debtor introduced principals of Royal Apartments USA, Inc. (“Royal”) to Kingsbury in or around April 2006. Answ. ¶ 11. Discussions between Royal and Kingsbury concerning acquisition and development of the Premises were unsuccessful as of the first week of May 2006. Id. Royal thereafter submitted to the Debtor an offer to purchase the Premises (“Royal Offer”). Id. ¶ 13.d.
15. At a hearing held on May 26, 2006, one of Debtor’s LLC Members, Daniel Mahru, testified that prior to execution of the Sale-Purchase Agreement, the Debtor retained John Thomas as a broker to market the Premises and, further, that Mr. Thomas engaged in active discussions with at least ten potential purchasers, as outlined in his affidavit tendered in open Court at the hearing. Answ. ¶ ll.e. Additionally, the Debtor moved to Employ Millennium Properties to act as a broker and bid representative to market the property post-petition. Id., and that motion was allowed.
16. A procedure has been approved pointing toward a possible sale to Royal or a higher bidder under 11 U.S.C. § 363, scheduled for July 31, 2006.
17. Factual matters set forth in the Conclusions of Law will stand as additional Findings of Fact.
CONCLUSIONS OF LAW
This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334. This matter constitutes a core proceeding under 28 U.S.C. § 15(b)(2)(A), (O).
Section 365(i) of the United States Bankruptcy Code, 11 U.S.C. § 101 et. seq. (The “Bankruptcy Code”), if applicable, precludes a debtor from avoiding its obligation to deliver title under a land sale contract where the purchaser is “in possession” of the premises, unless the purchaser elects to have the contract terminated. See 11 U.S.C. § 364(i); see also McCannon v. Marston, 679 F.2d 13, 18 (3rd Cir.1982) (concluding that § 365(i) “specifically concerns the case in which ‘trustee rejects an executory contract of the debtor for the sale of real property under which the purchaser is in possession,’ ” and is not limited in application to land installment contracts); In re Maier, 127 B.R. 325, 327 (Bankr.W.D.N.Y.1991) (same).
“Possession” for purposes of § 365(i) is not defined in the Bankruptcy Code; however, courts have looked to federal and state law in determining whether a purchaser is in possession.
Kingsbury’s assertion that it is currently “in possession” of the Premises within the meaning of 11 U.S.C. § 365(i) has not been proven factually. In the *893Second Amendment to the Sale-Purchase Agreement, the Debtor granted Kingsbury a license to access the Property from and after October 1, 2005. Kingsbury would not have needed a license to gain access of the Premises if was in possession thereof. In order for Kingsbury to be “in possession” of the Premises, under authority cited below, it must show facts of actual physical possession. The Sale-Purchase Agreement itself was not to put Kingsbury in possession until after a sale closing would take place. From the evidence, it is clear that (i) the Premises are vacant and unoccupied, (ii) the Debtor remains responsible for payment of real estate taxes, (iii) the Debtor paid for the fence which currently secures the Premises, (iv) following execution of the Sale-Purchase Agreement, the Debtor has retained possession and control of the Trailer, (v) the Debtor currently leases the paved portions of the Premises to PVC for the specific purpose of parking cars on the Premises (resulting in income included in the Debtor’s Schedules and Statement of Financial Affairs), and (vi) the Debtor currently maintains liability insurance on the Premises and Trailer.
Kingsbury asserts that because the February 24, 2005 letter agreement together with ¶ 8 of the Second Amendment granted it a license to gain access to the Trailer, park vehicles on the Premises and perform marketing activities there, it therefore is “in possession” of the Premises. Paragraph 26 of the Sale-Purchase Agreement indicates the agreement is governed by Illinois law. Under Illinois law, the mere granting of a license gives the licensee a right to use the premises for a specific purpose, whereas the owner of premises retains possession and control thereof. Rosewell v. City of Chicago, 69 Ill.App.3d 996, 1001, 387 N.E.2d 866, 870 (1979). Moreover, Illinois law has defined “possession” to include, among other things, “that position or relation which one occupies, with respect to a particular piece of land which gives to him its use and control and excludes all others from a like use or control.” Ft. Dearborn Lodge, I.O.O.F. v. Kline, 115 Ill. 177, 3 N.E. 272 (1885).
Generally, possession of real estate has been found where a party physically possesses the land from and after the time of purchase. Crowell v. Druley, 19 Ill.App. 509 (1886). Possession was found, for example, where a sturdy fence had been erected around the property that would have been evident to anyone attempting to enter the property and which excluded the world from enjoying and using it. Chicago Title & Trust Co. v. Drobnick, 20 Ill.2d 374, 169 N.E.2d 792, 795-796 (1960). Similarly, possession was found where the parties claiming possession paid real property taxes, purchased insurance, cut and removed trees and being known in the area as the owner of the property. Klingel v. Kehrer, 81 Ill.App.3d 431, 36 Ill.Dec. 719, 401 N.E.2d 560, 566 (1980).
Possession of real estate in Illinois has not been found where lots were vacant and unoccupied as is the case here. Glos v. Miller, 213 Ill. 22, 72 N.E. 714 (1904). Nor where a party has failed to erect a fence or improve the land before claiming adverse possession. Robertson v. Bachmann, 352 Ill. 291, 296 185 N.E. 618, 620 (1933). Or where it has performed trivial acts on the real estate such as picking flowers or conducting a survey. Klingel v. Kehrer, 81 Ill.App.3d 431, 36 Ill.Dec. 719, 401 N.E.2d 560, 566 (1980).
Here Kingsbury failed to make use of the Trailer or conduct any marketing or other authorized activities upon the Premises. The only authorized activity at the Premises by its real estate development affiliate Centrum has been removal of bill*894board signs. Centrum’s unauthorized use of the Premises as a parking lot for its employees and contractors and those of its affiliates other than Kingsbury who own real estate developments nearby the Premises does not amount to “possession” of the Premises by Kingsbury.
Kingsbury’s reliance on § 365® of the Bankruptcy Code is misplaced. The legislative history of § 365® suggests that “possession” is concerned with buyers whose connection with the land is more permanent than ephemeral, more continuous than intermittent, more exclusive than shared, and more personal than delegable. In re Summit Land Co., 13 B.R. 310, 316-18 (Bankr.D.Utah 1981). See also In re Silberkraus, 253 B.R. 890, 907 n. 4 (Bankr.C.D.Cal.2000) (same); In re Balco Equities Ltd., Inc., 323 B.R. 85, 97 (Bankr.S.D.N.Y.2005) (same). Section 365® was never intended to be applied to circumstances similar to the case at bar. The legislative history of § 365® clearly indicates that the provision was originally enacted because of a concern for “obviating the hai'dship involved in forcing a purchaser already in possession to leave.” McCannon v. Marston, 679 F.2d 13, 18 (3rd Cir.1982). The Legislative History and Comments for § 365® state that subsection (i) gives a purchaser of real property under a land installment sales contract protection similar to that § 365(h) provides to lessees. If the contract is rejected, the purchaser “in possession” may choose to remain in possession or may treat the contract as terminated. If the purchaser remains in possession, he is required to continue to make the payments due, but may offset damages that occur due to rejection. The Debtor would then be required to deliver title, but is relieved of all other obligations to perform. H.R.Rep. No. 595, 95th Cong., 1st Sess. 349 (1977); S.Rep. No. 989, 95th Cong., 2nd Sess. 60 (1978), U.S.Code Cong. & Admin.News 1978, pp. 5963, 5787.
Kingsbury does not qualify as a purchaser in possession under § 365®. In cases applying § 365®, strong evidence showed that a purchaser was in physical possession of the property such actually leasing and occupied improved property in question. McCannon, 679 F.2d at 17; In re Maier, 127 B.R. 325, 327 (Bankr.W.D.N.Y.1991).
Although Kingsbury is not a “purchaser in possession” as required under § 365®, the provisions of § 365(j) nonetheless do apply. Kingsbury has a lien on the Premises for repayment of the earnest money deposit, including $468,000 that was distributed to the Debtor for its use from earnest money. It is asserted by Debtor that its principals Mahru and Rezko have agreed to put back into escrow $468,000 plus lost interest in cash to pay off in full lien of Kingsbury on the Premises. But as of the date of hearing, those funds had not been returned and Kingsbury now holds a § 365(j) lien for the earnest money deposit, including monies withdrawn therefrom.
CONCLUSION
The Premises have been exposed to the market prior to bankruptcy, and with the further marketing underway by a broker there may be sufficient marketing by the date of sale now scheduled for July 31, 2006, to enable a meaningful testing of the market through opportunities of interested parties to bid. Therefore, the sale process was approved.
By separate order, the § 365® ground asserted by Kingsbury in opposition to Debtor’s motion to sell its assets is now rejected, thus opening the way for sale to be held. But sale must be subject to Kingsbury lien under § 365(j) unless the *895earnest money deposit is entirely restored with lost interest and then refunded.
. Kingsbury seeks dismissal of this Chapter 11 proceeding or, alternatively, abstention by *889the Court from hearing it, because the Debtor allegedly filed this case in bad faith for the improper purpose of benefitting its principals in order to reduce their personal liability. Debtor seeks to sell the subject property that it contracted pre-bankruptcy to sell to Kings-bury. The § 365(i) hearing on Kingsbury's objection to sale was the first step taken by the Court to determine good faith of the filing and viability of the sale motion.
Debtor has also moved to reject the Kings-bury purchase contract, and Kingsbury raised other objections to the sale.
. Kingsbury allegations admitted or partly admitted by the Debtor are cited herein as "Answ. ¶ -”. A transcript of the Carreon and Williams trial testimony is cited herein as "Tr. at -", The Debtor's Trial Exhibits are cited to herein as "CH Exh. -”. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491478/ | OPINION
ROSEMARY GAMBARDELLA, Bankruptcy Judge.
This matter comes before the Court by way of an adversary complaint filed by the debtor, Theresa Johnson, against Allstate Insurance Company. This case involves an insurance claim on property damaged by fire on November 24, 1988. The insured, Theresa Johnson (“Ms. Johnson” or “debt- or”) is the owner of the home located at 109 Brookfield Avenue, Wenonah, New Jersey, where the fire occurred. After reviewing the record, the arguments of counsel, and the pertinent authorities, the Court makes the following findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052.
FACTS
Ms. Johnson testified that she purchased the home in Wenonah, about seven years before the fire, approximately in 1980 or 1981. (Transcript dated July 18, 1991 at pages 23 and 29) (hereinafter “T1 at_”). At that time, she also purchased Allstate deluxe homeowners insurance policy AU9601 (hereinafter “the policy” or “Allstate Policy”), which included losses from fire in its coverage. (T1 at 5) (policy # 009989596). Ms. Johnson paid her mortgage to New York Guardian Mortgage Corporation of Hempstead, New York and they in turn, made the payment for the insurance policy. (T1 at 71). Although Ms. Johnson had fallen behind in her mortgage payments, the policy did renew on July 8, 1988, with the policy term of one year. (T1 at 5). Thus, the policy remained in effect at the time of the fire on November 24, 1988.
On July 7, 1987, New York Guardian Mortgage filed a foreclosure action against Theresa Johnson in Gloucester County, New Jersey. (T1 at 5). A foreclosure judgment was entered against Ms. Johnson on February 29, 1988 and the mortgage company scheduled a sheriff sale for June 24, 1988. (T1 at 6). On June 17, 1988, however, Ms. Johnson filed a petition under Chapter 13 of the Bankruptcy Reform Act of 1978 as amended by the Bankruptcy Act Amendments of 1982, the Bankruptcy Amendments and Federal Judgeship Act of 1984, and the Bankruptcy Judges, United States Trustees, and Family Farmer Bankruptcy Act of 1986 (hereinafter, “Bankruptcy Code”), in the Bankruptcy Court for the District of New Jersey. (T1 at 6). This Court dismissed that bankruptcy matter on October 8, 1988. (T1 at 6).
About two weeks before the fire, in early November, 1988, Ms. Johnson’s electricity was shut off and she and her three children went to stay with a girlfriend, Elaine Bun-dy. (T1 at 16). Ms. Johnson remained living with Ms. Bundy after the fire on November 24, 1988 until September of 1989. (T1 at 43, 48, 128). She then moved to 163 Carver Drive, Wenonah, New Jersey, where she presently lives and rents *840her father’s home. (T1 at 47, 51). Ms. Johnson contacted Allstate Insurance Company (hereinafter “Allstate”) after the fire. (T1 at 45). On January 23, 1989, she submitted a proof of loss, represented by a public insurance adjuster, Guardian Adjustment Service, for $68,721.48 for real property loss and damage and a second proof of loss on February 7, 1989 for $31,219.95 for personal property loss. (See Proofs of Loss dated January 23, 1989 and February 7, 1989). Allstate conducted an investigation of the fire that included a deposition of Ms. Johnson taken on February 9, 1989. (See T1 at 46 and Examination Under Oath of Theresa Johnson dated February 9, 1989 entered as Exhibit D-l). Two weeks after the fire, Ms. Johnson testified that she received $2,000.00 from Allstate, which funds she testified were used to purchase clothing for herself and her children. (T1 at 44-45, 78). Allstate denied the plaintiffs claim on June 13, 1989. {See Letter dated June 3, 1989 attached as Exhibit “E” to unsigned copy of Certification of Paul Batteux, dated September 11, 1989).
On February 8, 1989, Theresa Johnson filed the present petition under Chapter 13 of the Bankruptcy Code in this Court. She is currently making payments under a Chapter 13 plan. (T1 at 56). On May 10, 1989, Ms. Johnson filed a complaint against Allstate. (Adversary No. 89-0461). In the complaint, Ms. Johnson alleged that the insurance policy was adequate to cover the claims, that Allstate had not made any payments on these claims and therefore, requested that Allstate be required to pay the claims of $68,721.48 and $31,219.95, plus interest and attorney’s fees and costs of the suit. (Complaint dated May 9, 1989).
On June 19, 1989, Allstate filed an answer to the plaintiff’s complaint and raised several affirmative defenses. Allstate demanded a dismissal of the plaintiff’s complaint together with the judgment that the policy was void and Allstate was not obligated to pay. (Answer, Affirmative Defenses and Jury Demand of Allstate Insur-anee Company dated June 15, 1989) (hereinafter “Answer, dated June 15, 1989”).
On April 12, 1990, the debtor filed a first amended complaint, which included a request for out of pocket living expenses in the sum of $875.00 per month since November 24, 1988. (Plaintiff’s First Amended Complaint dated April 11, 1990).1 Allstate answered the amended complaint with a request that this Court enter a judgment that Allstate is not obligated to make any payment whatsoever to the debtor resulting from the fire of November 24, 1988. (Answer, Affirmative Defenses And Jury Demand Of Allstate To First Amended Complaint, dated May 16, 1990).
This Court heard testimony on July 18, and October 21, 1991. At trial, the parties put on record a number of stipulations, which include the following: the fire occurred on November 24, 1988 and it originated inside the garage area of the house (T1 at 6); the fire was incendiary (T1 at 6); the Township of Deptford received the first report of the fire at 7:13 p.m. on November 24, 1988 (T1 at 5); there was in existence on November 24, 1988, a policy of insurance issued by Allstate Insurance Company to Theresa Johnson and her husband Michael Johnson (T1 at 5); the policy was an Allstate deluxe homeowner’s policy form AU9601 (T1 at 5); named on the declaration sheet of the policy as first mortgagee is New York Guardian Mortgage Corporation (T1 at 5); the policy did renew on July 8, 1988, with a policy term of one year (T1 at 5); coverage under the policy for the dwelling loss was $89,000 and coverage under the policy for contents damage was $62,300 (T1 at 7-8); the reasonable cost of repairing the damage to the dwelling caused by the fire at or about a reasonable time after the fire was $68,721.48 (T1 at 7). The parties, however, did not agree that this was the proper measure of recovery under the facts of the case. (T1 at 7).
At trial, Ms. Johnson testified that for about the last four or five years prior to the fire the deed to the house was in her *841name only, although it originally listed both her name and her husband’s name. (T1 at 23). Ms. Johnson testified that she purchased the house in 1980 or 1981. (T1 at 23, 29). She testified that the year before the fire she had occasionally taken in boarders to help her with the mortgage payment. (T1 at 25). But, at the time of the fire there were no boarders. (T1 at 26). Ms. Johnson testified that at the time of the fire the mortgage company, New York Guardian, was paying the cost of the insurance coverage renewal that took place in July of 1988. (T1 at 72).
Ms. Johnson testified that two weeks before the fire, she left her house because the electricity had been disconnected. (T1 at 14, 16). At that time Ms. Johnson testified that she and her three children were staying overnight at 945 Boundary road, Weno-nah, New Jersey, with her girlfriend Elaine Bundy, within “five minutes walking” distance of 109 Brookfield Avenue. (T1 at 14-15, 19, 28). She testified that prior to the fire, she had made arrangements to have the electricity reconnected on Friday, November 25, 1988, the day after Thanksgiving Day, the day of the fire. (T1 at 17). She stated at trial that she visited her property about every other day to ensure that everything was in order and to pick up clothes for herself and her children. (T1 at 18, 20). She learned the day of the fire that the water and gas had also been shut off. (T1 at 21-22).
At a deposition, Ms. Johnson stated that on the day of the fire, Thanksgiving Day, November 24, 1988, she had visited her home. (D-l, Examination under Oath dated February 9, 1989 at page 31) (hereinafter “D1 at_”). Ms. Johnson stated that she shut the front door and that it locked automatically. (D1 at 32). At trial, Mr. John Quinn, a fire investigator with Dove Associates, testified that his investigation of the subject fire on December 1, 1988 established that the fire originated inside the garage and that it was incendiary, that it was set. (T1 at 137). Quinn also testified that the front door lock latch did not go into the keeper, but if it was pulled closed, it would remain shut if a wind did not blow it open. (T1 at 142). He testified that Ms. Johnson told him that she would pull the door shut and leave it in that position. (T1 at 142). He further testified that Ms. Johnson told him that the day before the fire she had visited the house twice, at 5:00 p.m. and 9:30 p.m., that the front door would not lock, but it was still closed and everything was okay. (T1 at 143). Mr. Quinn testified that on December, 1988 he asked Ms.. Johnson whether before the fire she had experienced any problem with vandalism or unlawful entry into the subject premises. (T1 at 139). Quinn further testified that Ms. Johnson stated that she had gone on a trip the previous April or May 1988 and that when she returned neighbors had complained to her that children went into the garage and brought out some records and used them as frisbees. (T1 at 140). Quinn testified that there were two doors on the garage, an overhead garage door and a single hung door in the back of the garage which was blocked by storage on the inside of the garage. (T1 at 143). Quinn testified that regarding the overhead garage door, Ms. Johnson stated that she would close the door but normally would not lock it. (T1 at 143).
Quinn testified that during his inspection on December 1, 1988, he saw no physical evidence of forced entry at the front door of the premises. (T1 at 144).
Ms. Johnson at trial testified that in the seven years she had lived in the home, she had never experienced problems with anyone trying to break in. (T1 at 82; see also D1 at 32 (Ms. Johnson stated she had not had problems with “too much stealing” so she did not lock the overhead garage door)).
At trial, Ms. Johnson testified that an overhead door into the garage was closed but unlocked before the fire and that at the time she moved out, a couple of weeks before the fire, she did not make any effort to secure that door or add a lock to it. (T1 at 59, 81).
At trial, Ms. Johnson testified that on November 24, 1988, she received a call from her mother that the house was on *842fire. (T1 at 22). By the time she arrived, the fire department had almost completely stopped the fire. (T1 at 22). Ms. Johnson testified that she cooperated fully with Allstate’s investigation (T1 at 46) and that she was never charged with a crime related to the fire. (T1 at 23). She testified that the claims for losses she filed were true and accurate to her knowledge. (T1 at 33-42).
Mr. Richard Ferguson, an underwriting analyst with Allstate Insurance Company testified that based on evidence in Allstate’s computer data base, Allstate was not advised that the mortgage on the subject premises was foreclosed, or that the utilities had been disconnected at some point before the fire, or that Ms. Johnson had moved out of the premises for some period before the fire. (T1 at 102-103).
Mr. Ferguson testified that if Allstate had been notified of the mortgage foreclosure on the subject home, Allstate would have taken measures to cancel the insurance policy. (T1 at 109).
Mr. Daniel Hartwig, a property homeowner adjuster employed by Allstate Insurance Company testified that New York Guardian Mortgage Corporation has not submitted a claim to Allstate. (T1 at 151).
Hartwig also testified that on November 28,1988 Allstate made an advance payment of $1,000.00 payable to Theresa Johnson and Guardian Adjustment as an advance on contents. (T1 at 152). Hartwig also testified that on January 3, 1989, Allstate made another advance to Ms. Johnson and Guardian Adjustment in the amount of $1,200.00 as an advance on contents. (T1 at 152).
Allstate argues that the insurance policy is void based on three reasons: one, Ms. Johnson’s alleged post loss misrepresentations; two, an unreported increase of hazard in the risk assumed by Allstate; and three, a lack of an insurable interest in the home at the time of the loss. (Allstate Insurance Company’s Trial Brief dated October 24, 1991 at page 3).
The Court finds that the policy must be upheld. The following discussion addresses each argument and the reasons for upholding the policy.
DISCUSSION
This Court has considered the issues before it under the guidance of certain fundamentals of interpretation of insurance policies as established in New Jersey law. New Jersey courts have determined that insurance policies should be construed liberally in favor of the insured. Longobardi v. Chubb Insurance Co. of New Jersey, 121 N.J. 530, 537, 582 A.2d 1257 (1990) (citing Kievit v. Loyal Protective Life Insurance Co., 34 N.J. 475, 482, 170 A.2d 22 (1961)). Furthermore, New Jersey courts have signaled a preference that the contract should be upheld if a fair interpretation of the law allows it. Longobardi, 121 N.J. at 537, 582 A.2d 1257 (citing Kievit, 34 N.J. at 482, 170 A.2d 22); see also Krieg v. Phoenix Insurance Co., 116 N.J.L. 467, 473, 185 A. 21 (E & A 1936) (insurance policies liberally construed to uphold contract and forfeiture provisions construed most strongly against insurer). The words of the insurance policy, however, should be given their ordinary meaning and in the absence of ambiguity the court should not apply a strained construction to support the imposition of liability. Longobardi, 121 N.J. at 537, 582 A.2d 1257; Brynildsen v. Ambassador Insurance Co., 113 N.J.Super. 514, 518, 274 A.2d 327 (Law Div.1971).
Allstate alleges that the insurance policy must be declared void because Ms. Johnson violated the concealment or fraud provision of the policy. The policy specifically provides that it “is void if you intentionally conceal or misrepresent any material fact or circumstance, before or after loss.” (Allstate Policy, D-6 at p. 6).
The Supreme Court of New Jersey, in Longobardi v. Chubb Insurance Co. of New Jersey 121 N.J. 530, 539, 582 A.2d 1257 (1990) determined that such a provision covers any misrepresentations made when the insured is applying for coverage as well as when the insurer is investigating the loss. The Longobardi court explained, however, that forfeiture of the policy results only if the misrepresentation is knowing and material. Longobardi, 121 N.J. at *843540, 582 A.2d 1257. “A mere oversight or honest mistake” the court noted “will not cost an insured his or her coverage; the lie must be wilful.” [sic] Id. (citing Claflin v. Commonwealth Insurance Co., 110 U.S. 81, 95-97, 3 S.Ct. 507, 515-16, 28 L.Ed. 76 (1884)); Public National Bank of New York v. Patriotic Insurance Co. of Amer-ica, 105 N.J.L. 477, 482-83, 144 A. 566 (E. & A. 1929); Couch on Insurance 2d section 49A:66 at 580-81, section 49A:67 at 582-83) (Rev. ed. 1982).
Furthermore, the Longobardi court held that a misstatement is material if at the time it is stated “a reasonable insurer would have considered the misrepresented fact relevant to its concerns and important in determining its course of action.” Id. 121 N.J. at 542, 582 A.2d 1257. (citations omitted). Applying this test to the facts before it, the Supreme Court of New Jersey concluded that the insured’s (Longobar-di) misstatements were material since he, under examination, denied knowing two persons involved in a series of insurance fraud schemes involving facts similar to those in Longobardi’s claim. Id. at 543, 582 A.2d 1257. The court recognized that the insurance company would have legitimate concerns about Longobardi’s relationships with such parties. Id.
In the instant case, Allstate stated that Ms. Johnson made certain misrepresentations that amounted to material post loss misrepresentations. First, Allstate claimed that Ms. Johnson included a claim for loss of a vanity sink, but that this item, in fact, did not belong to Ms. Johnson. Second, Allstate claimed that Ms. Johnson testified at the February 9, 1989 examination under oath and at trial that her front door was locked, but that in fact, the front door was not locked.
At trial, Doris Robinson, a friend of Ms. Johnson’s, testified that she had at one time stored a vanity sink in Ms. Johnson’s garage. (Transcript dated October 24, 1991 at page 3-4) (hereinafter “T2 at _”). Ms. Robinson equivocally testified that she did not know when she had stored the item in Ms. Johnson’s garage nor did she know if it had been removed from the garage. (T2 at 5-6). Ms. Robinson’s testimony demonstrated that essentially, she had no interest in the vanity sink, whether or not it remained with Ms. Johnson. Furthermore, Ms. Johnson testified that the sink items for which she made claims did not belong to Ms. Robinson and were not the same items that Ms. Robinson had been storing in Ms. Johnson’s garage. (T2 at 9-10).
Allstate requests that this Court consider the issue of the vanity sink as a knowing and material misrepresentation. From the testimony at trial, it is questionable whether Ms. Johnson housed the vanity sink in her garage at the time of the fire. Ms. Johnson did testify, however, that she made no claim for any items belonging to Ms. Robinson. Accordingly, the Court finds that no knowing and material misrepresentation was made by the debtor here.
Allstate alleges that Ms. Johnson misrepresented the fact that her front door was locked at the time of the fire. Allstate pointed to an examination under oath as well as trial testimony, wherein Ms. Johnson stated that she locked the front door the day of the fire. Ms. Johnson, during her February 9, 1989 examination under oath, testified in response to questions from Christopher P. Leise, Esquire, attorney for Allstate:
Q: Did you keep the house locked while nobody was living there?
A: Yes, I did.
Q: Was that true on the day of the fire?
A: The fire marshal said that the door was open on the day of the fire.
Q: What I’m asking you is, the last time you were there, prior to the time of the fire, it was your understanding—
A: It was locked, yes.
Q: Are you sure about that?
MR. DANIELS: She answered the question.
BY ME. LEISE:
Q: The fire occurred on a Thursday evening?
A: Yes.
Q: And, I think you were notified about 8:00?
*844A: Yes.
Q: By the way, that was Thanksgiving, I guess?
A: Yes, it was Thanksgiving.
Q: When was the last time that you had been, let’s say, at the property, generally, 109 Brookfield?
A: I believe it was the day before.
Q: Wednesday?
A: Yes, I wasn’t there at all on Thanksgiving Day.
Q: On Wednesday, did you go inside?
A: Yes, yeah.
Q: Did you need a key to get in?
A: Yes, I did.
Q: Did you lock it when you left?
A: Yes, I do. It automatically locks.
Q: Now, there’s also a garage area; correct?
A: Yes.
Q: Was the area into the garage locked?
A: No. Was there anything valuable kept in the garage?
A: Quite a bit, yes.
Q: Any reason why you didn’t lock it?
A: I just never had any problems with too much stealing or anything, just not habit. Bad habit.
Q: There would have been overhead garage doors?
A: Yes.
Q: Was it one or two?
A: Just one.
Q: Was there also a way to get into the garage, a regular door?
A: There was a back door; but, that remained locked all the time.
Q: So, the door that was open—
A: Would be the big heavy one.
D-l at pp. 31-33.
At trial on July 18, 1991, Ms. Johnson testified as follows in response to questions by David P. Daniels, Esquire, attorney for the debtor:
Q: Now, did you do any checking on your property to see if it was secure?
A: Yes, I did. I had — everything was still in my property, our clothes, everything. My kids were in school, so I was going back and forth getting clothes and checking on the house and making sure everything was all right almost every day, every other day.
Q: Well, was the property locked?
A: Yes, it was.
Q: Did you check the doors to see that they were locked every time you went back there?
A: When I went, I primarily checked the front door. I didn’t go to each door, but I was certain that they were locked.
T1 at 18.
At trial, on July 18, 1991, in response to questions from Mr. Leise, attorney for Allstate, Ms. Johnson testified as follows:
Q: Mrs. Johnson, I’d like to ask you some questions about the number of doors and entrances in to the home on Brookfield Avenue. There were several ways to get in, correct?
A: Yes.
Q: And I’m talking about back in 1988 when all this was taking place with the fire and you moving out, etcetera.
A: Yes.
Q: Before the fire?
A: Before the fire.
Q: There was a front door?
A: Yes.
Q: There was a garage door?
A: Yes.
Q: Garage door was an overhead door?
A: Yes.
Q: Now, isn’t it true that the lock on the front door didn’t work effectively and you could gain access through that front door?
A: That is not true.
Q: Do you remember speaking to various representatives of Allstate after the fire who were investigating the fire?
A: Yes, I do.
Q: Including Mr. Hartwig?
A: Yes, I do.
T1 at 57-58.
Fire investigator, John Quinn, testified that the locking device on the door was defective. Furthermore, Mr. Quinn testi*845fied that Ms. Johnson told him she would just pull the door shut. Allstate claims that this discrepancy in the testimony is a material misrepresentation.
The testimony indicated some questions about whether the front door was operable. If the front door could not be locked at the time of the fire, then presumably Ms. Johnson misrepresented the fact that she locked the door. This Court examines the situation under the presumption that Ms. Johnson stated the door was locked, since she had pulled it shut, and that in fact, it did not lock. This does not amount to a knowing and material misrepresentation as defined in Longobardi. Instead, at worst, it is in the nature of an honest mistake. Allstate learned the day of the fire that the lock was not operating effectively and thus, it was not denied important information in the investigation. More importantly, Ms. Johnson’s misrepresentation does not appear to be a knowing attempt to conceal a fraudulent scheme. In fact, at the February 9, 1989 deposition examination Ms. Johnson disclosed information that she had obtained from the fire marshal that the door was open on the day of the fire. (D-l at 31).
Allstate, in its second argument, claims that coverage of Ms. Johnson’s policy must be suspended due to an increase of hazard at the time of loss. The increase in hazard allegedly was due to: one, Ms. Johnson’s mortgage company had foreclosed on the home, which Allstate argues resulted in a change of ownership; second, the termination of all utility services before the fire; third, Ms. Johnson had vacated the property before the fire; and the garage and main dwelling were unlocked; fourth, the character of the home changed from single family to single family with boarders.
The state of New Jersey requires that a basic fire insurance policy contain certain clauses. See N.J.Stat.Ann. § 17:36-5.20 (West 1985) (mandates certain clauses and provides specific language for these required clauses). One such clause is the “increase of hazard” clause, which provides that the company will not be liable for an increase in hazard that is within the control or knowledge of the insured. N.J.Stat. Ann. § 17:36-5.20.
Several courts have considered the meaning of “increase of hazard.” In Goldman v. Piedmont Fire Insurance, Co., 198 F.2d 712, 714 (3d Cir.1952), the United States Court of Appeals for the Third Circuit explained that the “hazard” referred to in the clause “is, of course, the hazard of fire, not of some other casualty.” See also Asbell v. Pearl Assurance Co., 59 N.J.Super. 324, 329, 157 A.2d 728 (App.Div.1960) (increased hazard exists if continuing threat of loss by fire beyond degree of risk originally contemplated by insurer when issuing the policy).
In Goldman v. Piedmont Fire Insurance Co., 198 F.2d 712, 713 (3d Cir.1952), the insured rented a one-story building in which he stored fans and parts. During a heavy snowstorm, a portion of the roof collapsed and the center skylight fell in, “causing the side walls to bulge and break away from each other at the corners and leave cracks and openings through which a person could enter the building.” Goldman, 198 F.2d at 713. The Goldman court indicated that the insured made no effort to rectify the situation and approximately one month later, a fire destroyed the building. Id. at 714. The court concluded that this was sufficient evidence to find an increase in the risk of fire. Id. The court also held that where the insured had knowledge of the increased hazard and that the means to abate it are within the insured’s control, but the insured does not take steps open to him to abate the hazard, the insurance remains suspended until he does so. Id. at 715.
Relying on the reasoning in Goldman, the New Jersey Superior Court in Asbell v. Pearl Assurance Co., 59 N.J.Super. 324, 329, 157 A.2d 728 (1960), found that the insured had increased the risk of fire, under a standard hazards clause in the insured policy. The insured had suffered losses from a fire and did not take steps to decrease the risk of another fire, and shortly thereafter, another fire occurred. As-bell, 59 N.J.Super. at 329, 157 A.2d 728. *846The Superior Court, in Asbell, faulted the insured for failing to remove debris from the first fire and board up the windows and doors, which the court identified as an “extra-hazardous situation.” Id. at 327, 329, 157 A.2d 728.
These two cases exemplify that courts recognize that the increase in hazard means hazard of fire. Most recently, in Industrial Development Associates v. Commercial Union Surplus Lines Insurance Co., 222 N.J.Super. 281, 292-95, 536 A.2d 787 (App.Div.), cert. den., 111 N.J. 632, 546 A.2d 546 (1988), the Superior Court of New Jersey focused on the use of an acetylene torch that came in contact with chemical residue and started a fire. Again, the use or changed condition caused an increase in the risk of fire.
In addition, the Industrial Development court also noted that an increase in hazard occurs “ ‘when a new use is made of the insured property, or when its physical condition is changed from that which existed when the policy was written and the new use or changed condition increases the risk assumed by the insurer.’ ” Industrial Development, 222 N.J.Super. at 291-92, 536 A.2d 787 (quoting 8 Couch, Insurance (2 ed. 1984) section 37A:291 at 329). The court instructed that the determination of whether there has been an increase of hazard is a question of fact to be decided by a jury “unless the evidence is so conclusive that reasonable minds could not differ.” Industrial Development, 222 N.J.Super. at 292, 536 A.2d 787 (citing Orient Insurance Co. v. Cox, 218 Ark. 804, 238 S.W.2d 757, 762 (1951) and Couch section 37A:302 at 346). Finally, the court commented that “the insurer bears the burden of proving that the insured has increased the hazard.” Industrial Development, 222 N.J.Super. at 292, 536 A.2d 787 (citing Couch, section 37A:305 at 352).
The standard fire clause, as mandated by the New Jersey statute, provides that the increase in hazard must be “within the control or knowledge of the insured.” NJ.Stat.Ann. § 17:36-5.20; see also Allstate Policy, D-6 at page 7 (“Losses We Do Not Cover: We do not cover loss to the property described in the Dwelling protection coverage resulting in any manner from_” Any substantial change or increase in hazard, if changed or increased by any means within the control or knowledge of an insured person). The court in Industrial Development emphasized that therefore, a finding of the insured’s negligence is not necessary to constitute a violation of the increased hazard clause. Industrial Development, 222 N.J.Super. at 294, 536 A.2d 787. Instead, “it is only a change in the condition or use of the premises which will defeat an insured’s claim ...” Id. The court added that “if the insured is negligent but the essential condition and use of the premises remains the same on the date of a loss as at the inception of the policy, there is no violation of an increase of hazards clause.” Id. at 294-95, 536 A.2d 787. (citing Orient Insurance Co. v. Cox, 238 S.W.2d at 761-62); see also Krieg v. Phoenix Insurance Co., 116 N.J.L. 467, 474, 185 A. 21 (E. & A.1936) (forfeiture of policy due to increase in hazard follows only if situation within control or knowledge of insured or the insured should have known by exercising ordinary care).
In the instant case, Allstate claims that there was an increase in the hazard due to various changed conditions. Allstate listed a number of changes in Ms. Johnson’s circumstances, but failed to demonstrate how these amounted to an increase in the risk of fire.
Ms. Johnson’s mortgage company, New York Guardian Mortgage Corp., had foreclosed and ostensibly had arranged for the sale of the property. This foreclosure action does not, however, increase the risk of fire. Similarly, Ms. Johnson had on occasion allowed boarders to rent a room in her home. Allstate failed to show that such a use increased the risk of fire. Furthermore, no boarders were staying at the home at the time of the fire.
Allstate noted that all the utility services had been disconnected before the fire. Allstate failed to show how the termination of the utilities increased the risk of fire. In fact, the disconnection of the electricity suggests a decrease in the risk of fire. At *847most, without electricity or gas, it is possible that the pipes could freeze and burst. Such a calamity was less unlikely to occur, however, since the water had also been shut off. Finally, Ms. Johnson had made efforts prior to the fire to have the electric reconnected, the only utility she knew of to be disconnected.
Allstate alleged that Ms. Johnson’s property had been “completely vacated” before the fire, the main garage door and the door to the house remained unlocked and as such, were indications of the increase in hazard. (Allstate Insurance Company’s Trial Brief at p. 8). Ms. Johnson had left her home two weeks prior to the fire because the electricity had been disconnected. She testified that she visited the property on an almost daily basis, to ensure that everything was in order. This cannot be characterized as “completely vacated.” Ms. Johnson’s leaving the premises appears prudent under the circumstances, since she had three children. Her testimony indicated that she intended to have the electricity reconnected so that she could return to her home.
The fact that certain doors remained unlocked does not automatically increase the risk of fire. The courts in Asbell and Goldman suggested that collapsed roof, walls, doors and windows amounted to an increase in the risk of fire. Ms. Johnson’s “unlocked” doors do not rise to the more drastic circumstances described in those eases.
In its third and final argument, Allstate stated that Ms. Johnson’s policy must be void because she did not prove that she had an insurable interest in the property at the time of the loss. New Jersey law requires that each fire insurance policy limit the amount of insurance “to the extent of the actual cash value of the property at the time of loss, but not exceeding the amount which it would cost to repair or replace the property with material of like kind and quality within a reasonable time after such loss, without allowance for any increased cost of repair or reconstruction by reason of any ordinance or law regulating construction or repair and without compensation for loss resulting from interruption of business or manufacture, nor in any event for more than the interest of the insured ...” NJ.Stat.Ann. § 17:36-5.19.
The New Jersey Supreme Court, in P.R. DeBellis v. Lumbermen’s Mutual Casualty Co., 77 N.J. 428, 435, 390 A.2d 1171 (1978) noted the majority view that the “insured’s interest is to be fixed at the time of the casualty.” (citing Wolf v. Home Insurance Co., 100 N.J.Super. 27, 241 A.2d 28 (Law Div.), aff'd o.b. 103 N.J.Super. 357, 247 A.2d 345 (App.Div.1968)); see also Miller v. New Jersey Insurance Underwriting Association, 82 N.J. 594, 600, 414 A.2d 1322 (1980) (insurable interest in property must exist at time of loss). The DeBellis court determined that “the coverage would depend upon the reasonable expectation of the insured.” DeBellis, 77 N.J. at 436, 390 A.2d 1171. The court added, however, that “the amount of recovery may not necessarily be limited to the precise situation of the insured as of the date of the casualty and subsequent events may be significant in determining the insured’s interest.” Id.
In Miller v. New Jersey Insurance Underwriting Association, 82 N.J. 594, 601, 414 A.2d 1322 (1980), on remand, 177 N.J.Super. 584, 427 A.2d 135 (1981), aff'd, 188 N.J.Super. 175, 457 A.2d 23, cert. den., 94 N.J. 508, 468 A.2d 169 (1983), the New Jersey Supreme Court reiterated the rule it formulated in DeBellis that the insurable interest is determined in terms of reasonable expectations of the insured. The court noted that an insurable interest need not rise to the level of legal or equitable title and that “an insured retains an insurable interest as long as he has a reasonable expectation of deriving pecuniary benefit from the preservation of the property or would suffer a direct pecuniary loss from its destruction.” Miller, 82 N.J. at 600, 414 A.2d 1322. Furthermore, the court added, that “[w]ith respect to real estate, an insurable interest need not rise to the level of legal or equitable title.” Id.
Relying on DeBellis, the Miller court concluded that the insured plaintiffs had an insurable interest in their property, despite an in rem foreclosure judgment before the *848loss by fire. Miller, 82 N.J. at 602, 414 A.2d 1322. The court noted that after foreclosure proceedings, the plaintiffs “continued to occupy their respective premises” and thus, “could reasonably believe that their fire insurance policies protected them from losses they might suffer upon destruction of their premises.” Id. The court emphasized that “continuing possession left plaintiffs with insurable interests of value ...” and they did not lose all reasonable expectations concerning the property “merely because they lost title to them.” Id. Finally, the court stated that “[t]o deny recovery ‘would create a windfall for the insurance company and ignore what we conceive to be the reasonable expectations of the parties.’ ” Id. (quoting DeBellis, 77 N.J. at 437-38, 390 A.2d 1171).
The reasoning in Miller and DeBellis is equally applicable in the instant case to show that Ms. Johnson had an insurable interest. Ms. Johnson may have had a foreclosure judgment against her, but she continued to remain in possession of the property. She testified that she believed the insurance policy remained in effect, despite her delinquency in the mortgage payments, as a result of payments made by New York Guardian Mortgage Corp., thus exhibiting a reasonable expectation of coverage from losses due to fire. (T1 at 71-73).
In Miller, the court found that the plaintiffs were “entitled to present proof of the value of their interests at a plenary hearing” and that at trial the plaintiffs have the burden of proving the value of those interests. Miller, 82 N.J. at 603, 414 A.2d 1322. Furthermore, the court held that the plaintiffs would be allowed to recover “[t]o the extent that [they could] establish their interests have a pecuniary value.” Id. at 604, 414 A.2d 1322. The court noted, however, that it could not make this determination on the limited record before it, but concluded that plaintiffs must be given an opportunity to show the value of their interests. Id.
On remand, the trial court found that the first insured plaintiff Miller’s interest in the subject property at the time of the fire was $4,500.00. Miller v. New Jersey Insurance Underwriting Association, 188 N.J.Super. 175, 180, 457 A.2d 23 (App.Div.1983). The trial court’s calculation, which was affirmed by the Appellate Division, was made as follows:
Although he [the trial judge] found Miller’s asserted monthly rental roll of $835, which he computed out to $10,000 a year, was exaggerated, Judge Yanoff used that figure for purposes of assessing Miller’s interest. He rejected Miller’s $7,000 estimate of repair expenses as unsupported. Accepting Miller’s allegation of a $10,000 yearly rental income, from that figure the judge subtracted taxes of $2,000, $1,000 for heating, $350 for insurance and $1,000 in mortgage payments. He concluded from this that Miller could have paid the mortgage and the municipal taxes if he had in fact realized a yearly rent roll of $10,000. Assuming a yearly payment of $1,000 on the tax arrearages, Miller could have realized a net income of $4,250 (by our calculation, $4,650). He concluded that Miller’s gross income from the building was between $4,000 and $5,000.
Judge Yanoff indicated that he took these post-fire events into account in computing plaintiff’s interest: (1) tax payments were never made; (2) no attempt to protect the property was made and (3) the unpaid taxes and interest accumulated to the point where, at trial, they totalled approximately $30,000. Taking all of these facts into account, as well as the fact that Miller had occupied the property since June 1973, and for the next two years had paid no taxes, Judge Yanoff found Miller’s interest in the property was $4,500.
Underlying Judge Yanoff’s assessment of Miller’s interest as $4,500 was the assumption that he had, at best, one more year of “milking” the property before Newark would either demand rental payments or commence summary dispossess action. In light of the testimony of the tax representative of the city that the tenant Horovera did not begin to pay the city rents until 1976, and that a dispossession action was commenced against *849McNair in August 1976, such assumption is supportable. The city representative testified he had attempted to begin the landlord-tenant relationship between the city and residents of 226 Springfield in October 1975. The dispossess action did not commence until August of the following year because of the backlog of matters in Newark’s legal department. In addition, if the representative is believed, Miller’s lack of expectation as to continued use of the property is inferable from his removal of improvements from the premises shortly after learning that the city was closing in. He testified that he stopped doing business on the property after the fire.
188 N.J.Super at 185-186, 457 A.2d 23.
On remand, the trial court found that the insured plaintiff Norwood’s interest in the subject property could be valued at the time of the fire at $13,332.00. Id. at 188, 457 A.2d 23. The trial court arrived at that figure by concluding from the evidence that the cost to restore the building to its condition prior to the fire would have been $20,000.00, to which amount the court applied a coinsurance clause as meaning that two-thirds of the above amount was covered by the policy, i.e., $13,332.00. Id.
The Appellate Division affirmed this award of valuation. In so ruling, the Appellate Division stated:
Judge Yanoff apparently took the cost approach to measure the Norwoods’ interest in the property instead of the alternative financial approach taken in Miller. Considering the differences between the way Miller and the Norwoods regarded their respective properties, we find the different approach to be appropriate. In Judge Yanoff’s view, Elijah Norwood regarded himself as the legal owner of the property who, although not entirely successful in keeping current with all of his expenses relating to the property, nevertheless did what was necessary to keep title in himself (with the miscalculation as to the City of Newark). We find Judge Yanoff’s finding that the Norwoods had a reasonable expectation of nearly unlimited ownership and occupancy of the premises to be supported by the evidence.
As to Judge Yanoff’s failure to take into account the thousands of dollars owed in back taxes and the amount- of Gilbert’s outstanding mortgage, defendant does not provide any support for the argument that these financial aspects are to be computed in determining an insured’s interest in property damaged by fire, nor have we found support for that position. To the contrary, it has been held that an insured may recover the entire loss under the policy irrespective of encumbrances. 6 Appleman, Insurance Law and Practice, § 3868 at 347 (1972).
188 N.J.Super at 190-92, 457 A.2d 23.
Allstate argues that while the parties have stipulated that the reasonable cost of repairing the damage caused by the fire at or about a reasonable time after the fire was $68,721.48, (T1 at 7), Ms. Johnson did not prove the pecuniary value of her interest in the dwelling and therefore, coverage must be denied.
This Court having found that the homeowner’s policy must be upheld, therefore needs to determine the amount the debtor is entitled to recover under the policy. The Allstate policy states that coverage for loss to building structures will be settled by either the Replacement Cost method or the Actual Cash Value method. (D-6). The subject policy provides under Section “5. How We Settle a Loss”:
Building Structures
Covered loss to building structures insured under the Dwelling Protection coverage will be settled by one of the following methods:
a) Replacement Cost. This means there will not be a deduction for depreciation.
Payment will not exceed the smallest of the following amounts:
1) the replacement cost of the part of the building damaged for equivalent construction and use on the same premises;
*8502) the amount actually and necessarily spent to repair or replace the damaged building; or
3) the limit of liability applicable to the building.
We will not pay more than the actual cash value of the damaged property until the repair or replacement is completed.
b) Actual Cash Value. This means there may be a deduction for depreciation.
If you decide not to repair or replace the damaged property, settlement will be on an actual cash value basis, not to exceed the limit of liability applicable to the building. You may make claim within 180 days after the date of loss for any additional payment on a replacement cost basis if you repair or replace the damaged property.
D-6 at p. 18. See also, Wolf v. Home Insurance Co., 100 N.J.Super. 27, 41, 241 A.2d 28 (1968) (insurance company only liable for actual cash value if reconstruction or repair is impossible). At trial, the parties stipulated that the reasonable cost of repairing the damage to the dwelling caused by the fire amounted to $68,721.48. (T1 at 7).
New Jersey law requires an insurer to pay the face value of the insurance policy to the extent of the actual cash value, but not exceeding the cost to repair or replace the property “nor in any event for more than the interest of the insured.” NJ.Stat.Ann. § 17:36-5.19.
Under this provision read together with the insurance policy, Allstate must cover the replacement costs so long as this amount does not exceed the interest of the insured. Accordingly, this court must determine if there is sufficient evidence of the value of Ms. Johnson’s interest, and if so, if the replacement costs exceed the value of this interest.
New Jersey law provides only minimal guidance on the issue of measuring the value of an insurable interest. In DeBel-lis, the New Jersey Supreme Court held that the extent of coverage would be measured by “the reasonable expectations of the insured.” DeBellis, 77 N.J. at 436, 390 A.2d 1171. The court allowed the insured, a holder of a Certificate of Seized Property delivered by the Internal Revenue Service to recover the value of his possessory interest on the date of the loss. The court noted that it was “fair to presume that the value was equivalent to at least the amount expended for that interest some three months before the fire.” Id. at 438, 390 A.2d 1171. Accordingly, the Court held that judgment should be entered in favor of the plaintiff in that amount, plus interest to the date of the fire, and that the plaintiff was entitled to a partial return of premium, its interest in the property having been severed on July 19, 1974, the date the prior owner redeemed the property. Id. The Supreme Court concluded that determination of that amount would be made by the trial court, both parties being able to introduce relevant evidence on that issue, and remanded the proceedings to the trial court for further proceedings. Id. at 437-38, 390 A.2d 1171.
In Miller, the New Jersey Supreme Court concluded that the insured’s continued possession of property, despite in rem tax foreclosure proceedings, the entry of a judgment of foreclosure and the loss of title, amounted to an insurable interest of value. Miller, 82 N.J. at 602, 414 A.2d 1322. The Miller court noted that the insured persons “could reasonably believe that their fire insurance policies protected them from losses they might suffer upon destruction of their premises.” Id.
Finally, the New Jersey statute defines an insurable interest as including “any lawful and substantial economic interest in the safety or preservation of property from loss, destruction or pecuniary damage.” N.J.Stat.Ann. § 17:37A-8(a)(3). In addition, courts in other jurisdictions have found pecuniary value in the insurable interests in property, even though the insured may not have legal title, and these courts have awarded recovery amounts based on the loss suffered due to damage to the property. For example, in Aetna Insurance Co. v. King, 265 So.2d 716, 717 (Fla.Dist.Ct.App.1972) the court awarded the amount for losses due to the destruc*851tion by fire of a grocery store building and its contents. The insured had conveyed the property to her daughters, but continued to receive financial support from the proceeds of the store building (i.e., rent proceeds went to the insured). The Florida court, based on the same statutory language defining insurable interest as N.J.Stat.Ann. § 17:37A-8(a)(3),2 noted that the “measure of the insurable interest is the extent to which the insured will be damnified by the loss of the property.” King, 265 So.2d at 718.
In this case, Ms. Johnson resided in her home for nearly 8 years, prior to the fire. Although she had fallen delinquent in her mortgage payments to the point that the mortgage company obtained a foreclosure judgment, she remained in possession of the property at the time of the fire.3 This Court finds that Ms. Johnson had a reasonable expectation that any loss or damage from fire would be recovered under her insurance policy. While the parties stipulated that the reasonable cost of repairing the damage to the dwelling caused by the fire at or about a reasonable time after the fire was $68,721.48, the record is devoid of sufficient testimony or evidence regarding the pecuniary value of the debt- or’s interest in the dwelling. This Court finds that there is sufficient evidence, however, of Ms. Johnson’s interest in the contents and the pecuniary value of that interest. Ms. Johnson owned all of the items she listed as losses of personal property in her claims for loss of contents in the amount of $31,219.95. As for the real estate and dwelling, to the extent that the debtor can establish that her interest in the Brookfield Avenue property has a pecuniary value, she will be allowed to recover under the policy. Miller, 82 N.J. at 604, 414 A.2d 1322. On this record, however, the Court cannot determine the pecuniary value of the debtor’s insurable interest in the Brookfield Avenue property. The debt- or will be given an opportunity to establish the value of that interest at a further hearing.
The debtor has also requested additional living expenses in the amount of $875.00 per month, since November 24, 1988. The Allstate Policy provides additional living expenses to an insured in certain situations. (Allstate Policy, D-6 at page 14). The policy states “We will pay the reasonable increase in living expenses necessary to maintain your normal standard of living when a loss we cover makes your residence premises uninhabitable.” (Allstate Policy, D-6 at page 14). Under *852this provision, the insured can receive payment for a maximum of nine consecutive months from the time of loss. Id.
Mr. Mark Milstein, the president of Guardian Adjustment Service testified that no written claim was submitted to Allstate Insurance company on behalf of Theresa Johnson for additional living expenses. Accordingly, Ms. Johnson did not submit a claim for additional living expenses or a signed proof of loss relating to those expenses even though Allstate sent Ms. Johnson a January 3, 1989 letter indicating the proper compliance procedures for coverage, including additional living expenses, {see Exhibit D-ll). The subject Deluxe Homeowners Policy provides under Section “3. What You Must Do After A Loss”:
3. What You Must Do After a Loss
In the event of a loss to any property that may be covered by this policy, you must:
(a) promptly give us or our agent written notice. Report any theft to the policy as soon as possible. If the loss involves a credit card, charge plate or bank fund transfer card, written notice must also be given to the company or bank that issued the card or plate.
(b) protect the property from further loss. Make any reasonable repairs necessary to protect it. Keep an accurate record of any repair expenses.
(c) promptly separate damaged from undamaged personal property. Give us a detailed list of the damaged, destroyed or stolen property, showing the quantity, cost, actual cash value and the amount of loss claimed.
(d) give us all accounting records, bills, invoices and other vouchers, or certified copies, which we may reasonably request to examine and permit us to make copies.
(e) produce receipts for any increased costs to maintain your standard of living while you reside elsewhere, and records supporting any claim for loss of rental income.
(f) as often as we reasonably require:
(1)show us the damaged property.
(2)submit to examinations under oath and sign a transcript of the same,
(g)at our request, give us a signed, sworn proof of loss within 60 days from the date of loss. This statement must include the following information:
(1) the date, time, location and cause of loss;
(2) the interest you and others have in the property, including any encumbrances;
(3) the actual cash value and amount of loss for each item damaged, stolen or destroyed;
(4) any other insurance that may cover the loss;
(5) any changes in title, use, occupancy or possession of the property that have occurred during the policy period;
(6) at our request, the specifications of any damaged building or other structure;
(7) evidence supporting a claim under the Credit Card, Bank Transfer Card, Check Forgery and Counterfeit Money protection. State the cause and amount of loss.
(D-6 at p. 17-18).
The January 3, 1989 letter informed Ms. Johnson that Allstate required her to provide a notarized proof of loss. Ms. Johnson submitted two Proofs of Loss subsequent to this letter, of which Allstate has acknowledged receipt. {See Proofs of Loss dated January 23, 1989 and February 7, 1989). Ms. Johnson’s only request for additional living expenses came in the form of an amended complaint to this Court more than one year after the fire and the January 3, 1989 letter. {See Plaintiff’s First Amended Adversary Complaint dated January 25, 1990 and Plaintiff’s First Amended Complaint dated April 11, 1990).
In Brindley v. Fireman’s Insurance Co. of Newark, 35 N.J.Super. 1, 10, 113 A.2d 53 (App.Div.1955), the court stated that if a proof of loss is a required condition in an insurance contract, “non-compliance is fatal to recovery in the absence of a showing of waiver or at least of substantial compliance.” (citations omitted). Here, this *853Court finds that Ms. Johnson did not comply with the proper procedures to obtain the additional coverage, Allstate did not waive the requirements, and therefore, no additional living expenses will be awarded.
This Court finds that coverage in favor of the debtor under the homeowner’s policy must be upheld and that Ms. Johnson is entitled to the amount of $31,219.95, as requested in the February 7, 1989 proof of loss she filed with Allstate for loss of personal property contents, less the $2,200.00 Allstate paid Ms. Johnson as an advance on contents subsequent to the fire. A separate plenary hearing shall be conducted by the Court on May 26, 1992 at 2:00 p.m., at which time the parties shall submit additional proofs on the pecuniary value of the debtor’s insurable interest in the Brook-field Avenue property.
Each party shall bear its own costs. .
An order in conformance with this Opinion shall be submitted.
. On January 26, 1990, the debtor also filed "Plaintiffs First Amended Adversary Complaint” which included the same request for out of pocket living expenses in the sum of $875.00 per month.
. N.J.Stat.Ann. § 17:37A-8(a)(3) provides:
a. Any person having an insurable interest in insurable property, who has failed to procure essential property insurance from an authorized insurer in the normal insurance market, shall, on or after the effective date of the plan of operation, be entitled to apply to the association for such coverage and for an inspection of the property. Such application may be made on behalf of an applicant by a broker or agent authorized by him. Every such application shall be submitted on forms prescribed by the commissioner after consultation with the directors of the association and shall contain information sufficient to indicate:
(3) Whether or not there is any unpaid, uncontested premium due from the applicant for prior insurance on the property (as shown by the insured having failed to make written objection to charges, within 30 days after billing). The term "insurable interest,” as used in this section, shall be deemed to include any lawful and substantial economic interest in the safety or preservation of property from loss, destruction or pecuniary damage.
. Ms. Johnson no longer resides at the 109 Brookfield Avenue dwelling and will not return to it, since, according to her testimony at trial, the Township of Deptford demolished the house. (T1 at 52-53). This court granted an order allowing the Township of Deptford to demolish the real property at 109 Brookfield Avenue and provided that such action did not violate the automatic stay in bankruptcy (Order dated August 21, 1990). The fact that Ms. Johnson’s real property was demolished nearly two years after the fire does not preclude recovery or necessarily decrease the amount of recovery as determined by this Court. The court in De-Bettis noted the majority viewpoint that the insured's interest is to be fixed at the time of the casualty. DeBellis, 77 N.J. at 435, 390 A.2d 1171. In addition, the court explained that the “key criterion” for determining coverage is the reasonable expectation of the insured. Id. at 436, 390 A.2d 1171. Finally, the court com- . mented that "the amount of recovery may not necessarily be limited to the precise situation of the insured" at the time of loss but "subsequent events may be significant in determining the insured's interest.” | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491479/ | MEMORANDUM OPINION
JAMES E. YACOS, Bankruptcy Judge.
This matter came before the Court on March 16, 1992, on plaintiffs’ motion for default judgment on a complaint brought pursuant to 11 U.S.C. 362(a)(6).
Plaintiffs’ complaint requests the Court to order defendants to cease all acts to collect, assess or recover claims against debtors that arose prior to the commencement of this bankruptcy case. Defendants failed to file an appearance in this adversary proceeding, and they did not appear at the pretrial hearing on December 4, 1991. Consequently, the Court ordered plaintiffs to file a motion for default judgment, and default was entered on December 26, 1991.
Plaintiffs now seek the imposition of attorneys fees and costs, and of punitive damages upon defendants. The Court, at the conclusion of the March 16, 1992 hearing, announced from the bench that it would award attorneys fees and costs in the amount of $1559.51, and that it would award punitive damages against each defendant in the amount of $5000. The Court today is entering separately a final judgment awarding attorneys fees and costs, and punitive damages. This memorandum opinion sets forth the Court’s specific findings of fact and conclusions of law supporting the final judgment.
Debtors, plaintiffs herein, filed for relief under Chapter 13 of the Bankruptcy Code on February 20, 1991. Plaintiffs listed both defendants as creditors in the bankruptcy petition, as follows:
Prentice Hall Publishing
Simon & Schuster
P.O. Box 105361
Atlanta, GA 30348-5361
Commerce Clearing House
4025 W. Peterson Ave.
Chicago, IL 60646
Service of debtors’ bankruptcy petition was made upon each defendant at the above addresses. The first meeting of creditors was held on April 30, 1991. Defendants did not appear. Defendant Prentice Hall, Incorporated (Prentice Hall) filed a proof of *12claim on August 22, 1991. Defendant Commerce Clearing House, Inc. (CCH) has not filed a proof of claim in this case.
Defendants were served with several notices of debtors’ bankruptcy case, including a March 1991 notice of the chapter 13 petition, the first meeting of creditors, and the claims bar date, an October 1991 notice of the adversary proceeding instituted against defendants, a December 1991 notice of plaintiffs’ motion for default judgment in the adversary proceeding, and a January 1992 notice of plaintiffs’ motion for entry of default. Each defendant was properly served with the above notices, including plaintiffs’ adversary complaint, and the summons and notice of the pretrial hearing.
In addition, plaintiffs’ attorney telephoned Prentice Hall’s attorney on July 17, 1991, and confirmed such telephone conversation with a letter sent that same day. Prentice Hall was informed that it had been listed and noticed in debtors’ bankruptcy case, and that Prentice Hall’s continued attempt to collect past debts was a violation of the bankruptcy laws.
Plaintiffs’ attorney also sent two letters to CCH on September 20, 1991 (one for each account). In the letters, plaintiffs’ attorney informed CCH that debtors had filed a chapter 13 petition on February 20, 1991, that CCH was listed as a creditor and included in debtors’ chapter 13 plan, that CCH’s continued attempt to collect past debts was a violation of the bankruptcy laws, that action would be taken by debtors if CCH continued to harass them, and that CCH should get an attorney if they had any problems.
Notwithstanding the notices given to each defendant by plaintiffs/debtors, defendants continued to send collection letters to debtors on a regular basis. Prentice Hall sent thirteen letters to debtors after the chapter 13 petition was filed. The letters were sent in June, August, October, November, and December of 1991, and in January, 1992. Twelve of the letters were sent after plaintiffs’ attorney had telephoned and written to Prentice Hall’s attorney. Nine of the letters were sent after plaintiffs had instituted the adversary proceeding against defendants, requesting that defendants be ordered to cease collection activities. The final three letters were sent to plaintiffs after the Court had entered a default judgment in the adversary proceeding, due to defendants’ failure to appear or respond to plaintiffs’ allegations.
Commerce Clearing House sent fourteen letters to debtors after the bankruptcy case was filed. The letters, or invoices, were sent in February, March, May, June, July, August, and September of 1991, and in January of 1992.
The foregoing facts evidence defendants’ continuous and willful disregard for the bankruptcy laws and the protections afforded to debtors thereby. Plaintiffs/debtors were incessantly harassed by the defendants’ collection attempts, which did not cease even after a comprehensive verbal and written warning to defendants from plaintiffs’ attorney. On the basis of these facts, this Court finds defendants in violation of the automatic stay protection of section 362 of the Bankruptcy Code. This Court further finds that plaintiffs were injured by the willful violation of the automatic stay, and are accordingly entitled to damages under section 362(h) of the Bankruptcy Code, including punitive damages.
Plaintiffs are awarded attorneys fees and costs in the amount of $1559.51, and punitive damages against each defendant in the amount of $5000, for which each defendant is individually liable. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491481/ | ORDER ON BENZ’ MOTION TO COMPEL UNITED STATES TRUSTEE TO PRODUCE DOCUMENTS
LEIF M. CLARK, Bankruptcy Judge.
CAME ON for hearing on November 13, 1991 the motion of Benz to compel United States Trustee to produce documents. After hearing the arguments of the parties, the court reset the matter for November 14, 1991, so that the motion to abandon assets to Benz could be heard and the question of Benz’ standing with regard to the Trustee’s Final Report could be resolved. The court has determined that, at the present time, Benz has standing. In re Strangis, 67 B.R. 243, 246 (Bankr.D.Minn. 1986). The court then took this matter under advisement, for consideration together with a similar discovery dispute between Benz and the Chapter 7 Trustee.
1. The court finds that the request for all correspondence by and between the United States Trustee and this Chapter 7 panel trustee or his attorney which in any way mentions this case, as well as all audits which that office might have in its possession regarding Mr. Seidler as a panel trustee, are entirely irrelevant to the Final Report and Account, nor are they likely to lead to the discovery of relevant evidence for purposes of the hearing on the Final Report, warranting denial of the motion to compel. Fed.R.Bankr.P. 7026.
The duty to supervise panel trustees devolves upon the United States Trustee. 28 U.S.C. § 586(a)(1), (3). That statute does not provide for actions by individual creditors in the nature of private attorneys general, nor do the provisions for the review and approval of final reports by the trustee appointed in a given chapter 7 case. The purpose of the trustee’s Final Report, and the hearing thereon, is to determine whether a given estate has been fully administered and whether fees and expenses should be allowed to the trustee. 11 U.S.C. § 704(9); In re San Juan Hotel Corp., 847 F.2d 931, 939 (1st Cir.1988) (purpose of final accounting is to insure that-trustees disclose and be held accountable for their handling of the estate); 4 Collier on Bankruptcy II 704.12, at 704-26.1 to 28 (L. King 15th ed. 1988). The issue of Mr. Seidler’s general qualifications to serve as a panel trustee is not within the purview of a hearing on the Final Report.1
If the United States Trustee fails to do his or her job, the exclusive remedy would appear to be resort to the oversight process, first to the extent it is built into the Department of Justice within the exec*156utive branch, and ultimately with Congress and its oversight committees. 28 U.S.C. § 586(c). The judicial branch has no direct supervisory responsibilities or powers over the United States Trustee. Indeed, it was the express intention of Congress to remove the courts from the administration of the bankruptcy system (including supervision of its trustees). See H.Rep. No. 595, 95th Cong., 1st Sess. 107-115, U.S.Code Cong. & Admin.News 1987, 5787, 6068-6076 (1977).
The placement of the Office of the United States Trustee in the executive, rather than the judicial, branch was a studied decision by Congress. Observed the House Report,
United States trustees will ... carry out the bankruptcy laws in their duties relative to panels of private trustees. They will be the officers responsible for putting into effect the system of panels, and for carrying out the rules and regulations prescribed by the Attorney General governing qualification for panel membership.
The United States trustees will conduct investigations in appropriate circumstances to ensure that participants in bankruptcy cases are not avoiding the requirements of the bankruptcy code. ... In cases in which a private trustee serves, the United States trustee ... is permitted to conduct his own investigation into the existence of facts that should spur the private trustee to action. Such periodic examinations will be necessary for the United States trustee to exercise effective supervisions and make an effective evaluation of the performance of the private trustees on the panel.
... The United States trustees will not be serving the bankruptcy courts as assistants or as arms of the court. The functions described above are not a part of the courts’ duties in bankruptcy cases under the proposed law. The courts’ duties relate solely to resolving disputes that arise in bankruptcy cases. Instead, the United States trustees’ responsibilities will be to operate the bankruptcy system and to execute the bankruptcy laws. As such, the United States trustee is created in the Executive Department, as an Executive Branch officer, and is not placed in the Judicial Branch.
Id. at 109-10,2 U.S.Code Cong & Admin.News at 6070-71.
Further pursuit of discovery whose aim is to expose purported mishandling of this case by the Office of the United States Trustee is entirely outside the purview of a hearing on the final report of a given trustee in a given case. More importantly, it is outside the purview of this court to rule on whether the Office of the United States Trustee is or is not properly discharging its functions pursuant to the statute. 28 U.S.C. § 586(c) (“Each United States trustee shall be under the general supervision of the Attorney General ...”). ,
The discovery sought by Benz and his attorney would only serve ulterior purposes, such as to furnish information for the press or for Congress,3 (or perhaps even to harass and intimidate). The discovery process in the context of a judicial proceeding is reserved for the development of evidence for the purposes of the judicial proceeding. Said the Supreme Court,
In deciding whether a request comes within the discovery rules, a court is not required to blind itself to the purpose for which a party seeks information. Thus, when the purpose of a discovery request is to gather information for use in proceedings other than the pending suit, dis*157covery properly is denied, [citations omitted] Likewise, discovery should be denied when a party’s aim is to ... embarrass or harass the person from whom he seeks discovery.
Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 340, 352 n. 17, 98 S.Ct. 2380, 2390 n. 17, 57 L.Ed.2d 253 (1978); see also United States v. Howard, 360 F.2d 373, 381 (3d Cir.1966) (examination of interrogatories demonstrated their extreme broadness and their lack of utility save as harassment, and that the desire for the discovery was “more a matter of form and tactics than of substance”).
Discovery of correspondence between the United States Trustee and the panel trustee is, for all the foregoing reasons, accordingly and properly denied as both improper and irrelevant. The motion to compel is not well-taken and is accordingly denied.
2. Benz argues that he is entitled to discovery of this information because the United States Trustee affirmatively certifies the Final Report, rendering it both a party in interest and a party with relevant information which should be disclosed. Benz misinterprets the function of the certification process, however, which is check that the final report is consistent with docket entries. The United States Trustee has standing to object to a Final Report, or to refuse to certify same, but no party has standing to question why the United States Trustee decides not to object to a final report in a given case, at least not within the context of a hearing to approve the final report. Certification is an administrative process, a prerequisite to the report’s being filed with the court for approval. It is not an appropriate subject for discovery relative to the hearing on the final report.
3. The United States Trustee has asserted that it is entitled to a governmental privilege (more properly denominated an “official information privilege”) with respect to the documents requested. The notion of governmental privilege originated at common law, and is limited in scope to those documents containing expressions of opinion or recommendations in intra-agency documents. It does not protect purely factual matters. In re Franklin National Bank Securities Litigation, 478 F.Supp. 577, 580-81 (E.D.N.Y.1979); Matter of Verrazzano Towers, Inc., 7 B.R. 648, 651 (Bankr.E.D.N.Y.1980). In order to properly invoke the privilege, the government must (1) formally assert the privilege, (2) attach an affidavit setting forth the specific reasons requiring confidentiality, and (3) submit an index specifically designating and describing the documents claimed to be privileged, in sufficient detail to allow a reasoned determination as the legitimacy of the privilege (a Vaughn index). In re Sunrise Securities Litigation, 109 B.R. 658, 667 (E.D.Pa.1990); see Vaughn v. Rosen, 523 F.2d 1136 (D.C.Cir.1975). These steps were not taken here. The privilege accordingly may not be asserted.
4. The United States Trustee protests that it has been caught in the middle of a private personality dispute of some considerable long standing between the trustee, Mr. Seidler, and Benz’ attorney, Mr. Beck. The United States Trustee adds that it has improperly been thrust into the position of adversary. The court is of course aware of the clash of personalities between these parties.
Abuse of the discovery process is not permitted in any federal court. National Hockey League v. Metropolitan Hockey Club, 427 U.S. 639, 643, 96 S.Ct. 2778, 2781, 49 L.Ed.2d 747 (1976); Adolph Coors Co. v. Movement Against Racism and the Klan, 777 F.2d 1538, 1542 (11th Cir.1985).4 Seeking discovery from one party to harass another is not permitted either. Neither is abusive or overreaching discovery sought from innocent third parties, imposing unreasonable time or expense obligations on *158them. Chapman & Cole v. Itel Container Int’l B.V., 865 F.2d 676, 686 (5th Cir.1989).
The United States Trustee has not prayed for any relief in its pleadings beyond being relieved from certain discovery. It has not sought sanctions under Rule 37 of the Federal Rules of Civil Procedure (made applicable to this contested matter by Rules 7037 and 9014 of the Federal Rules of Bankruptcy Procedure), or under 28 U.S.C. § 1927. Lacking such a request, the court is not inclined to entertain such relief on its own motion.
The motion of Benz to compel is denied. The claim of privilege is overruled. Sanctions under Rule 37, not having been pleaded, will not be entertained.
So ORDERED.
. A party may move to have a trustee removed for cause pursuant to 11 U.S.C. § 324(a). If the motion to remove is granted, the trustee is automatically removed from all other cases as well, pursuant to Section 324(b), unless the court orders otherwise. There is no such motion pending at this time in this case. Even if there were, the materials sought from the United States Trustee would still not be relevant to such a motion. The court notes that such a motion was filed in this case by a prior interested party (who was represented by the same lawyer as now represents Mr. Benz). That motion was not granted.
. Section 586 of Title 28 was originally proposed as part of H.R. 8200, the House version of the proposed bankruptcy code in 1978. It was amended in 1986 to extend to all judicial districts (save the districts in North Carolina and Alabama), but was otherwise unchanged by the 1986 amendments. The 1977 House Report is thus relevant to the interpretation of congressional intent in the enactment of Section 586.
. Neither the interests of a free press nor the interests of Congress are here called into question. Each have their own devices for obtaining information which operate entirely independently of judicial proceedings.
. Said the Supreme Court,
... [H]ere, as in other areas of the law, the most severe in the spectrum of sanctions provided by statute or rule must be available to the District Court in the appropriate cases, not merely to penalize those whose conduct may be deemed to warrant such a sanction, but to deter those who might be tempted to such conduct in the absence of such a deterrent.
Id. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491482/ | MEMORANDUM OF OPINION AND DECISION
WILLIAM J. O’NEILL, Bankruptcy Judge.
Before the Court is Plaintiff-Trustee’s motion to determine validity, amount and priority of the lien claim of George P. Zam-pelli, Defendant. This matter emanates from an adversary proceeding to set aside conveyances, determine liens and sell real property at 124 Pheasant Lane, Hunting Valley, Ohio. Judgment on the complaint to sell was granted and liens were transferred to the proceeds of sale by order of March 19, 1992. The sale was confirmed *187April 22, 1992. This is a core proceeding within the jurisdiction of the Court. 28 U.S.C. §§ 1334, 157(a), (b)(2)(E), General Order No. 84 entered on July 16, 1984 by the United States District Court for the Northern District of Ohio.
After hearing and consideration of the evidence, relevant facts are as follows:—
Bernard Leo Charms (Debtor) filed a voluntary petition under Chapter 7 of the United States Bankruptcy Code on March 21, 1991. This adversary proceeding arises in that case.
Debtor and his then fiance, Deborah Lowe Charms, contracted with George P. Zampelli for construction of a home at 124 Pheasant Lane, Hunting Valley, Geauga County, Ohio in late 1987 or early 1988. Debtor was title owner of the real estate when the parties contracted. The original contract price of $550,000 was paid in full. Due to various change orders, however, additional sums of $28,068.44 are owed to Zampelli. This debt is the basis for the mechanics’ lien in issue.
Construction of the home spanned seven months. Zampelli’s last draw on the construction loan was in July or August of 1988. It is unclear when the additional work was begun or completed. Debtor and Deborah Lowe Charms were married July 15, 1988. The couple resided in the home commencing the latter half of 1988. Debt- or quit-claimed the property to his wife by deed of August 20, 1988 which was recorded August 24, 1988. (P.Exh. 2). Zampelli did not learn of this change in ownership until commencement of this adversary proceeding in 1992.
On December 20, 1988, Zampelli, as original contractor, sent an affidavit by certified mail to the Debtor pursuant to Section 1311.04 of the Ohio Revised Code. This mailing included all subcontractors’ affidavits and certificates of all material men pertaining to construction of the residence. (P.Exh. 1). Deborah Lowe Charms signed the receipt for service of this affidavit. (D.Exh. C). An affidavit to obtain a mechanics' lien on the premises was filed with the Recorder of Geauga County on December 23, 1988. (P.Exh. 1). The affidavit names the Debtor as owner of the property. Notice of filing the affidavit to obtain lien was mailed to the Debtor at 124 Pheasant Lane, Hunting Valley, Ohio on January 5, 1989. (P.Exh. 1). Deborah Lowe Charms was apprised of all documents. Zampelli incurred $1,188.00 legal fees for preparation of documents to obtain a mechanics’ lien. (D.Exh. A). He incurred additional fees of $1,850.00 for defense of this adversary proceeding. (D.Exh. B).
The sole issue herein is whether Zampel-li’s filing an affidavit for lien and service of notice thereof as required by Sections 1311.06 and 1311.07 respectively, wherein Debtor was named and notified as owner of the property, is defective for purposes of obtaining a mechanics’ lien under the Ohio Code. Ohio Rev.Code §§ 1311.06, 1311.07. Trustee asserts Debtor was not owner of the property when the lien was filed as the Code requires. Zampelli alleges the Debtor continued to be owner since he retained a dower interest. Moreover, he argues for liberal construction of the requirements to establish a lien to include Debtor as owner of the property for purposes of filing and service of the affidavit for lien.
Section 1311.01 through 1311.24 of the Ohio Revised Code delineate the requirements to obtain a mechanics’ lien in Ohio. Recent amendments to these sections are inapplicable to this decision. Section 1311.24 provides for liberal construction of the Code provisions “to secure the beneficial results, intents, and purposes thereof; and a substantial compliance with said sections is sufficient for the validity of the liens under said sections ...” As a general rule, therefore, the statutes are liberally construed to effectuate the remedial purposes of the statute once a lien is established. Strict compliance with the procedures to create a lien, however, is required. Fairfield Ready Mix v. Walnut Hills Associates Ltd., 60 Ohio App.3d 1, 572 N.E.2d 114, (1988), see generally 68 O.Jur.3d, Mechanics’ Liens § 84 (1986).
Section 1311.06 of the Code sets forth requirements for contents and recording of an affidavit for mechanics’ lien. The affidavit as filed includes inter alia, “a descrip*188tion of the property to be charged with the lien, the name and address of the person to or for whom such machinery, material, or fuel was furnished and labor performed, the name of the owner, part owner, or lessee, if known, and the name and address of the lien claimant ...” Section 1311.07 requires service of a copy of this affidavit within 30 days after the filing thereof “on the owner, part owner or lessee of such premises or his agent” if they can be found within the county where the premises are situated. Section 1311.19 delineates appropriate service of the copy of the affidavit. Various methods of service are indicated including service by “registered letter addressed to such person ...”
“Owner, part owner or lessee” is defined in Section 1311.01(A) as follows:—
“Owner,” “part owner,” or “lessee” includes all the interests either legal or equitable, which such person may have in the real estate upon which the improvements contemplated under such sections are made, including the interests held by any person under contracts of purchase, whether in writing or otherwise.
The dower interest retained by Debtor upon his transfer of title to his spouse is not an interest within the parameters of this section. Glassmeyer v. Michelson, 23 Ohio N.P. (n.s.) 537 (1921). The issue, therefore, is whether Debtor was appropriately named and served as owner under the applicable Code sections after transferring his interest in the property to his wife. A mechanics’ lien is invalid when the supporting affidavit incorrectly names the owner of the property in question. Fairfield Ready Mix v. Walnut Hills Associates Ltd., 60 Ohio App.3d 1, 572 N.E.2d 114 (1988). Further, failure to serve a copy of the affidavit on the owner as provided in Section 1311.07 invalidates the mechanics’ lien. Suburban Heating Co. v. Lougher, 4 Ohio App.2d 343, 212 N.E.2d 659 (1964).
There is a paucity of Ohio case law discussing who is “owner” with respect to the filing and service of affidavit to obtain mechanics’ lien where the owner at the time work was contracted and performed has conveyed the property prior to the filing of the lien. In Schuholz v. Walker, 111 Ohio St. 308, 145 N.E. 537 (1924), the Ohio Supreme Court discussed Ohio’s prior analogous lien statute and held that the titled owner at the time the affidavit for lien is filed may be served under the terms of the statute. Specifically reserved was decision on whether service on the owner contracting for the services was appropriate after the property had been transferred. One Ohio common pleas decision determined such service to be appropriate prior to the Schuholz decision. See Fisher v. Jacobs, 24 N.P. (n.s.) 505 (1920). Also discussed but not decided by Schuholz was the issue of who is the owner to be named in the affidavit for mechanics’ lien after transfer of ownership has occurred. There is no definitive case law dealing with these issues subsequent to Schuholz. Consideration of the reasoning underlying that decision, however, leads to the conclusion that it is the person who owns the property at the time the affidavit for lien is filed who must be named and served.
In Schuholz, the Court noted that a mechanics’ lien attaches when the work is commenced or services performed and establishes a right in rem. Therefore, because the lien binds the land, the present owner is entitled to notice of the filing of an affidavit for lien. It is clear the term “owner” has more than one meaning depending on the surrounding circumstances. As noted in Schuholz, including the previous contracting owner for purposes of obtaining the lien would nullify various sections of the statute intended to protect the present owner of the property and would introduce absurdity. With respect to Sections 1311.06 and 1311.07, therefore, the term “owner” means the present owner of the property. This conclusion follows the rule generally applied in other jurisdictions. See Maurice T. Brunner, Annotation, Who is the “Owner” Within Mechanics’ Lien Statute Requiring Notice of Claim, 76 A.L.R.3d 605 (1977).
In the within cause Debtor was named as owner on the affidavit for lien and was served with a copy thereof. Debtor was *189not the owner of the property at the time the affidavit for lien was filed and the lien is, therefore, invalid. Deborah Lowe Charms’ signing the receipt for service of this affidavit, (D.Exh. C), does not cure this fatal defect. Although this decision appears harsh, it is noteworthy that the lien claimant had available methods of protection. The deed to Deborah Lowe Charms was recorded prior to filing of the affidavit for lien. The public records, therefore, reflected her ownership of the property. Moreover, there is no evidence of fraud or deceit by the Debtor. Trustee’s motion to invalidate the Zampelli mechanics’ lien is, therefore, appropriate. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491483/ | OPINION AND ORDER
BARBARA J. SELLERS, Bankruptcy Judge.
I.Preliminary Considerations And Jurisdictional Statement
This matter is before the Court upon a motion (“Motion”) filed by the debtors pursuant to 11 U.S.C. §§ 547 and 522(h) seeking avoidance of a judgment lien as a preferential transfer. The holder of such lien, Able Industries (“Able”), opposes the Motion. A hearing was held on September 16, 1991, following which the Court took this matter under advisement. The parties have filed post-hearing memoranda to supplement their legal arguments. Although the matter was initiated by motion rather than more properly by complaint, Abie’s response does not raise that procedural defect and, therefore, waives that argument.
The Court has jurisdiction in this matter under 28 U.S.C. § 1334(b) and the General Order of Reference previously entered in this district. This is a core proceeding as defined by 28 U.S.C. § 157(b)(2)(F) which this bankruptcy judge may hear and determine. For the reasons which follow, the Motion is denied.
II.Facts
The debtors filed their Chapter 7 petition on March 5, 1991 (“Petition Date”). On February 21, 1991, within 90 days prior to the Petition Date, Able filed a certificate of judgment, thereby perfecting a lien on real estate owned by the debtors. The judgment evidenced by the certificate of judgment was obtained by Able outside of the 90-day preference period. The debtors assert that Abie’s lien encumbers property which the debtor-husband would otherwise be entitled to claim as exempt.
The debtors’ statement of financial affairs filed March 5, 1991 indicates that they own a residence valued at $98,900 against which there is a first mortgage of $33,000 and a second mortgage of $36,000. Abie’s claim, which is secured by its judgment lien against the residence, is scheduled at $6,495.52. Each of the debtors claims a $5,000 homestead exemption in the residence under Ohio Revised Code § 2329.-66(A)(1).
Able does not contest, and apparently concedes, that each of the statutory elements of 11 U.S.C. § 547(b) has been met. Moreover, Abie’s opposition to the Motion does not rely on any of the statutory exceptions to the general preference rule found in 11 U.S.C. § 547(c).
Instead, Able contends that the debtors should be equitably or judicially estopped from asserting their preference claim due to the debtor-husband’s prepetition conduct upon which Able asserts it reasonably relied to its detriment. More specifically, Able asserts that, but for certain promises and assurances made by the debtor-husband after Able obtained judgment against him, Able would have promptly filed its certificate of judgment to perfect its lien. Able argues that because its forbearance in this regard was both reasonable and clearly to its detriment, equity should now prohibit the debtors from avoiding the lien, especially where the avoidance will inure to the benefit of the debtor-husband and not the debtors’ estate.
III.Issue
The Court need not decide many of the issues raised in this matter. Instead, the Court must only determine whether the debtors have sustained their burden of proof.
IV.Legal Discussion
In a preference action generally, the trustee has the burden of proving by a *194preponderance of the evidence each and every controverted element of a preference under 11 U.S.C. § 547(b). See, 11 U.S.C. § 547(g).
In this matter, the debtors seek, pursuant to 11 U.S.C. § 522(h), to assert the trustee's unpursued rights under 11 U.S.C. § 547(b). The Court believes, however, that the elements of the debtors’ action are not defined by § 547(b) alone.
Section 522(h) provides that a preferential transfer is avoidable by a debtor only “to the extent that the debtor could have exempted such property ... if the trustee had avoided such transfer.” Accordingly, when proceeding under § 522(h), a debtor must show that upon avoidance of the subject transfer, the debtor will be entitled to claim the property as exempt under applicable law.
At the hearing on this matter, the debtors offered no evidence in support of the Motion. From a review of the debtors’ statement of financial affairs, it does not readily appear to the Court that the debtor-husband would be entitled to claim additional property exempt under his homestead exemption should Abie’s judgment lien be avoided. Absent proof of the debt- or-husband’s ability to claim such exemption, the Motion must be DENIED.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491484/ | OPINION AND ORDER SUSTAINING MOTION FOR SUMMARY JUDGMENT
BARBARA J. SELLERS, Bankruptcy Judge.
I. Introduction And Jurisdiction
This matter is before the Court upon a Motion for Summary Judgment filed by the plaintiff who is the duly-appointed trustee of the Chapter 7 estate of debtor Calvin Angel (“Trustee”). The action seeks a recovery of damages under Ohio Revised Code Section 1309.50(A) against Star Bank, South Central Ohio (“Star Bank”).
The Court has jurisdiction in this proceeding under 28 U.S.C. § 1334(b) and the General Order of Reference entered in this district. This is a core proceeding which the Court has the authority to hear and determine pursuant to 28 U.S.C. § 157(b).
The following constitute findings of fact and conclusions of law. For the reasons set forth herein, summary judgment will be granted in favor of the Trustee and the remedial provisions of Ohio Rev.Code § 1309.50(A) will be enforced against Star Bank.
II. Factual Background
The uncontested facts are as follows:
On December 19, 1988, Calvin Angel (“Debtor”) filed a petition for relief under Chapter 7 of the Bankruptcy Code. The petition and schedules showed Star Bank as a creditor which had security interests in several vehicles and certain equipment belonging to the Debtor. In late December, Star Bank filed a notice which proposed that the Trustee abandon the vehicles and equipment.
The Trustee objected to the notice of proposed abandonment and on April 20, 1989, Star Bank withdrew that request. Concurrently, the parties agreed, and the Court approved by order, that Star Bank should be granted relief from the automat*196ic stay imposed by 11 U.S.C. § 362. Pursuant to that agreed order, Star Bank was permitted to repossess and sell the vehicles and the equipment in accordance with the provisions of Ohio Revised Code Chapter 1309. No formal abandonment was ever entered.
On April 22, 1989, Star Bank sold the vehicles which are at issue in this adversary. No specific notice was provided to the Trustee of the time and place of that sale.
III.Arguments of the Parties
The Trustee argues that she is entitled to judgment as a matter of law because Star Bank failed to give her, as the party holding legal interest in the vehicles, the statutory notice of the sale required by Ohio law. For such notice she relies upon Ohio Rev.Code § 1309.47(C) which provides in part:
Unless collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market, reasonable notification of the time and place of any public sale or reasonable notification of the time after which any private sale or any other intended disposition is to be made shall be sent by the secured party to the debtor if he has not signed a statement renouncing or modifying his right to notification of the sale.
Because the filing of the bankruptcy petition created an estate comprised of all legal and equitable rights held by the Debt- or, the Trustee asserts that she is the holder of title to the estate’s property and is the “debtor” within the meaning of Ohio Rev.Code § 1309.01(A)(4). As such, the Trustee is the party who must be notified with respect to the time and place of the sale.
The Trustee also argues that no genuine issue of material fact exists with regard to the security interests, the sale and the lack of notice. She maintains that she never renounced her rights to notification and is, therefore, entitled to judgment and recovery under Ohio Rev.Code § 1309.50. That recovery is measured by “an amount not less than the credit service charge plus ten percent of the principal amount of the debt” where the property in question is “consumer goods.” Ohio Rev.Code § 1309.50.
Star Bank opposes the Trustee’s motion. Because the Trustee’s objection to Star Bank’s proposed abandonment of the vehicles and equipment specifically singled out only other vehicles and the equipment, Star Bank contends that the Trustee waived whatever interest she had in the vehicles for which recovery is sought. According to Star Bank, such waiver relieved it of any obligation to notify the Trustee of the date and time of the sale. Additionally, Star Bank questions any characterization of these particular vehicles as “consumer goods” and claims there is a genuine issue as to whether the vehicles in question were used by the Debtor primarily for personal, family or household purposes.
IV.Issues Presented
1. Whether Star Bank has established the existence of genuine issues of material fact;
2. Whether the Trustee is a proper party to receive notice under the applicable provisions of Ohio Rev.Code and
3. The amount of damages.
V.Discussion and Conclusions of Law
A. Legal Standard for Motion for Summary Judgment
The Court should grant summary judgment to the movant “if the pleadings, depositions, answers to interrogativos and admissions on file, together with the affidavits, if any, show there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” Fed.R.Civ.P. 56(c), made applicable to bankruptcy proceedings by Fed. R.Bankr.P. 7056.
Recent case law expands the use of summary judgment as a procedural device by ruling that the “mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine *197issue of material fact.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-248, 106 S.Ct. 2505, 2509-10, 91 L.Ed.2d 202 (1986) (emphasis in original opinion). See, also, Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). The Court of Appeals for the Sixth Circuit has concluded that the above three decisions avoid the emasculation of summary judgment as an effective procedural device and effectuate a return to the tool’s original purpose. Street v. J.C. Bradford & Co., 886 F.2d 1472, 1476 (6th Cir.1989).
The party seeking summary judgment bears the initial burden of asserting that the pleadings, depositions, answers to interrogatories, admissions, and affidavits establish the absence of a genuine issue of material fact. Celotex Corp., 477 U.S. at 323, 106 S.Ct. at 2553; Street, 886 F.2d at 1479. However, the ultimate burden of demonstrating the existence of a genuine issue of material fact lies with the nonmov-ing party. Celotex Corp., 477 U.S. at 324, 106 S.Ct. at 2553. See, also, First Nat’l Bank of Arizona v. Cities Service Co., 391 U.S. 253, 288-89, 88 S.Ct. 1575, 1592-93, 20 L.Ed.2d 569 (1968). The Supreme Court held:
When the moving party has carried its burden under Rule 56(c), its opponent must do more than simply show that there exists some metaphysical doubt as to the material facts_ In the language of the Rule, the nonmoving party must come forward with “specific facts showing that there is a genuine issue for trial.” Fed.Rule Civ.Proc. 56(e) (emphasis added)_ Where the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is “no genuine issue for trial.”
Matsushita Elec., 475 U.S. at 586-87, 106 S.Ct. at 1356 (citations and footnotes omitted). Therefore, a motion for summary judgment may be granted where the evidence presented by the nonmoving party is merely colorable, Liberty Lobby, 477 U.S. at 249, 106 S.Ct. at 2511 citing Dombrow-ski v. Eastland, 387 U.S. 82, 87 S.Ct. 1425, 18 L.Ed.2d 577 (1967) or is not significantly probative. Liberty Lobby, 477 U.S. at 249, 106 S.Ct. at 2511 citing Cities Service, 391 U.S. at 290, 88 S.Ct. at 1592. The nonmov-ing party must show a genuine disputed fact and not merely a “scintilla of evidence” in support of her position. Id. 477 U.S. at 251, 106 S.Ct. at 2512.
B. Application of the Standard to This Proceeding
1. Factual Disputes
It is Star Bank’s argument that summary judgment should not lie since genuine issues of material fact exist with respect to the characterization of the property as consumer goods and with respect to the Trustee’s intention to retain an interest in the vehicles. The standards for summary judgment discussed above suggest that the evidence presented must be sufficient to enable a reasonable jury to return a verdict for the nonmoving party in order for a summary judgment to be deemed improper. Liberty Lobby, 477 U.S. at 249, 106 S.Ct. at 2511, citing Cities Service, 391 U.S. at 288-289, 88 S.Ct. at 1592-1593. The evidence must be probative in eviden-tiary value, qualitatively more than color-able, and quantitatively more than a mere scintilla.
a. Characterization of the Goods as Consumer Goods
With respect to Star Bank’s concern over the characterization of the vehicles as consumer goods, the Debtor has supplied a sworn affidavit that these particular vehicles were used primarily for personal, family, and household purposes. Two of the vehicles were apparently used by a former spouse and a son. Star Bank has not refuted that affidavit with anything more than bare allegations. Nothing in the Debtor’s financial statement supplied by Star Bank points with particularity to these vehicles as the ones the Debtor listed as business vehicles on that financial statement. Therefore, the Court concludes that insufficient probative evidence exists to allow a trier of fact to rule in Star Bank’s favor on this issue.
*198b. The Trustee’s Intention to Retain an Interest in the Property
Although Star Bank asserts that a color-able issue has arisen regarding the Trustee’s interest in the property, the Court finds that Star Bank misunderstands the difference in effect between an abandonment and relief from the automatic stay.
When the Debtor filed his Chapter 7 petition title to his vehicles transferred to the estate by operation of law. 11 U.S.C. § 541. Although Star Bank attempted to effectuate an abandonment of that property, it withdrew its Notice of Proposed Abandonment as to these vehicles and never subsequently obtained any abandonment. Thus, the vehicles remained property of the estate and the Trustee possessed all interests of the Debtor for the benefit of the estate. Relief from stay did not effectuate an abandonment. Therefore, no genuine issue of material fact exists about the nature of the Trustee’s interest. In a bankruptcy context, only abandonment constitutes a waiver of a trustee’s interest. Case law further suggests that actual knowledge of a secured party’s intent to sell does not constitute a waiver of the right to the statutory notice of that sale. In re Britt, 78 B.R. 514 (Bankr.S.D.Ohio 1987). Accordingly, as a matter of fact and law, there was no waiver of the estate’s interest or the right to notice.
2. The Trustee as a Party Entitled to Notice Under the Statute
The only question remaining is whether the Trustee, as representative of the estate, is a proper party who must be notified under Ohio law. If the Trustee is such a party, Ohio Rev.Code §§ 1309.47 and 1309.50 would operate to grant judgment to the Trustee as a matter of law.
Section 1309.47 of the Ohio Rev. Code suggests that unless collateral is perishable or threatens to decline speedily in value or is of the type customarily sold on a recognized market, reasonable prior notification of the time and place of any public sale must be given to the “debtor.” In the situation where the debtor and the owner of collateral are not the same person, the term “debtor” has been defined as the owner of collateral. Ohio Rev.Code § 1309.01(A)(4). One basic proposition of bankruptcy law is that the filing of a petition creates an estate comprised of essentially all legal and equitable rights of the debtor. 11 U.S.C. § 541. Functionally, an appointed trustee serves as the administrator of the estate and represents the estate as owner of the debtor’s property. Thus, a trustee in a Chapter 7 case is a “debtor” within the meaning of Uniform Commercial Code section 9-504 enacted in Ohio as Ohio Rev.Code § 1309.47 In re Floca, 126 B.R. 274 (Bankr.W.D.Tex.1991); In re Frye, 9 U.C.C.Rep.Ser. 913, 918-19 (S.D.Ohio 1970); In re Reed, 102 B.R. 243, 246 (Bankr.E.D.Okla.1989); The First National Bank and Trust Company of Tulsa v. Hutchins (In re Buttram), 2 B.R. 92, 96 (Bankr.N.D.Okla.1979).
The property sold by Star Bank consists of three used vehicles once used by the Debtor and his family for personal purposes. Such collateral is not within any of the statutory exceptions to notice based upon the collateral type. Thus, Star Bank, as a secured party, was required to notify the “debtor” of the time and place of the public sale. The Trustee was the “debtor” entitled to such notice and such notice was not given. Therefore, the Trustee is entitled to recover under the statute.
3. Calculation of Damages
The Court has found that no material issues of fact exist in this adversary proceeding. The Court has further found that the vehicles sold by Star Bank were consumer goods under Ohio law, that the Trustee never abandoned her interest in such vehicles and that the Trustee is, therefore, the party entitled to notice pursuant to Ohio Rev.Code § 1309.47. The required notice was not given. Therefore, the Trustee is entitled to the remedies for such violations set forth in Ohio Rev.Code § 1309.50. Those damages are calculated as an amount not less than the credit service charge plus ten percent of the principal amount of the debt or the time price *199differential plus ten percent of the cash price. Calculations of those sums were set out by the Trustee and were not contested by Star Bank. Therefore, the Trustee is entitled to damages as follows:
(1) Buick Regal Credit Service Charge $4,022.37 10% of principal amount 1,423.88 of debt ($14,238.75) $5,446.25
(2) Pontiac Fiero Credit Service Charge $2,693.84 10% of principal amount 1,223.80 of debt ($12,238.00) $3,927.64
(3) Pontiac Grand Prix Credit Service Charge $1,559.27 10% of principal amount 945.10 of Debt ($9,451.00) $2,504.37
VI. Conclusion
Based upon the foregoing, the Trustee is entitled to summary judgment on her motion and to damages in the amount of $11,868.26, plus interest under the statute. The Court finds further that Star Bank is not entitled to file a claim against the estate for any deficiency judgments arising from the sale of the vehicles at issue in this motion.
It is further ordered that trial of the Trustee’s second count is set for 9:30 a.m. on April 21,1992. Because it is clear to the Court that Star Bank acted under a misapprehension of the law, an award of punitive damages is unlikely.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491485/ | ORDER ON OBJECTION TO PROOF OF CLAIM
DONALD E. CALHOUN, Jr., Bankruptcy Judge.
This matter is before the Court upon the Objection to Proof of Claim filed by Frank Pees, Chapter 13 Trustee, (“Trustee”) and the Written Memorandum in Opposition to Trustee’s Objection to Proof of Claim filed by Household Finance Corporation (“Household”) as well as the other pleadings filed by the parties. A hearing to *220consider this matter was held June 20, 1991, at which time the parties were afforded the opportunity to present evidence in support of their respective positions.
The Court is vested with jurisdiction under 28 U.S.C. § 1334(b) and the General Order of Reference entered in this district. This is a core proceeding under 28 U.S.C. § 157(b)(2)(B).
I. Findings of Fact
Kenneth and Myra Marcum (“Debtors”) filed a petition under Chapter 13 of the Bankruptcy Code on September 26, 1990. Household is listed in the Debtor’s schedules as a secured creditor, holding a second mortgage on Debtors’ residence. The Debtors’ plan, filed with their petition, proposes a payment of a 100% dividend to creditors.
On November 6, 1990, Household filed its proof of claim indicating a fully secured claim in the amount of $23,520.96. The Trustee objected to this claim on the basis that the value of the residence ($75,000.00) is insufficient to fully secure the claim of Household after payment of the claim of the first mortgage holder ($51,276.80) and the deducting of a ten percent (10%) cost of sale.
Household does not take issue with the value assessed to the residence or the claim of the first mortgage holder. Household does oppose the subtracting of the 10% cost of sale from the value of the residence. Household notes that if the 10% were not deducted from the value of the residence, it would hold a fully secured claim and would be entitled to payment of interest upon the entire claim pursuant to 11 U.S.C. § 1325(a)(5)(B). Currently, Household would not receive interest upon the unsecured portion of its claim resulting from the 10% deduction.
II. Conclusions of Law
The controversy in this case stems from ambiguous language of 11 U.S.C. § 506(a) which provides:
(a) An allowed claim of a creditor ... 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, (emphasis added).
Courts have grappled with the task of harmonizing the two provisions of § 506(a) emphasized above. The first provision suggests that the creditor’s claim is secured to the extent of the creditor’s interest in the property. This provision would appear to indicate that the subtracting of a hypothetical 10% cost of sale is appropriate, as the realization of the creditor’s interest in the property through foreclosure or other disposition would necessarily entail a reduction of approximately 10% in the sale proceeds.1 The second provision appears to require that the focus of the valuation determination is the proposed disposition or use of such property. Thus, it could be argued that a debtor who intends to retain property securing a debt to a creditor cannot deduct a hypothetical cost of sale when no such sale is contemplated.
This issue has been batted around this district for some time. Recently, Judge Sellers issued her opinion in In re Weber, 140 B.R. 707, entered April 8, 1992, in which she permits the subtraction of the 10% cost of sale regardless of the intended use or disposition of the property. In order to facilitate uniformity on this issue for the practicing bar in this district, this Court chooses to follow In re Weber rather than this Court’s previous decision in In re Gerhardt, 88 B.R. 151 (Bankr.S.D.Ohio 1987). Therefore, it is hereby
*221ORDERED that the Objection to Proof of Claim filed by Frank Pees, Chapter 13 Trustee is GRANTED, and Claim # 8 of Household Finance, filed on November 6, 1990 in the amount of $23,520.96, shall be allowed as secured in the amount of $16,-223.20 with the balance of the claim allowed as unsecured.
IT IS SO ORDERED.
. The Court notes that the creditor's interest is likely to be eroded even further in foreclosure. The 10% cost of sale under consideration is deducted from the appraised value of the property. In foreclosure, the cost of sale can be deducted from as little as two-thirds the appraised value of the property. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491486/ | DECISION ON ORDER GRANTING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT
THOMAS F. WALDRON, Bankruptcy Judge.
This adversary proceeding, which arises under 28 U.S.C. § 1334(b) in a case referred to this court 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)(I) — determinations as to the dis-chargeability of particular debts.
This proceeding is before the court on a motion for summary judgment (Doc. 32-1) filed by the plaintiff, Estate of Reba Jones. This motion is opposed by the defendant, Samuel Morton Walters (Doc. 35-1).
FACTS
On January 25, 1991, Samuel Morton Walters individually and Samuel Morton Walters Executor of the Estate of Dorothy E. Walters filed for relief under chapter 7 of the Bankruptcy Code (the “Defendant”). The Defendant listed Reba S. Jones on his petition as a creditor holding a secured claim. Reba S. Jones (“the Plaintiff”)1 commenced this adversary proceeding by filing a complaint2 objecting to the dis-chargeability of this debt under 11 U.S.C. § 523(a)(2), § 523(a)(4), § 523(a)(5),3 and § 523(a)(6). Thereafter, the Plaintiff filed Plaintiffs Motion For Summary Judgment As To Issue Of Nondischargeability Of Debt (Doc. 32-1). The Defendant filed Defendant’s Response To Plaintiff’s Motion For Summary Judgment As To Issue Of Nondischargeability Of Debt (Doe. 35-1). The parties have submitted a Statement Of Agreed Facts And Exhibits (Doc. 31-1).
The Plaintiff asserts that she is entitled to summary judgment on the issue of whether the judgment rendered by a jury in the Common Pleas Court of Miami Coun*231ty, Ohio against the Defendant, in the amount of $143,217.65 plus $100,000 punitive damages, is nondischargeable. “The subject of the lawsuit [in the Common Pleas Court of Miami County] was that Dorothy Walters, niece of Reba Jones, and Samuel M. Walters, Dorothy’s husband, had without consent, used a power of attorney to take and cash in and place in their names certain certificates of deposit belonging to Reba S. Jones in the amount of $132,615.59.” (Doc. 31-1 at 1).
DISCUSSION
Summary judgment is governed by Federal Rule of Bankruptcy Procedure 7056 which incorporates Rule 56 of the Federal Rules of Civil Procedure. Rule 7056(c), in relevant part, provides:
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 judgment as a matter of law.
“[T]his standard provides that the mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986) (emphasis in original). Materiality is determined by substantive law. Id. “Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment.” Id. See generally Carl Subler Trucking, Inc. v. Kingsville-Ninety Auto/Truck Stop, Inc. (In re Carl Subler Trucking, Inc.), 122 B.R. 318, 320-21 (Bankr.S.D.Ohio 1990); Talbot v. Warner (In re Warner), 65 B.R. 512, 515-18 (Bankr.S.D.Ohio 1986). No genuine issues of material fact exist; thus, this proceeding is appropriate for summary judgment.4
The Plaintiff asserts that “preclusion principles” apply, and thus, based upon the state court judgment, summary judgment should be entered in her favor. The Supreme Court, in Brown v. Felsen, 442 U.S. 127, 99 S.Ct. 2205, 60 L.Ed.2d 767 (1979), held that bankruptcy courts were granted exclusive jurisdiction to determine dischargeability actions, and therefore, claim preclusion is not available in dis-chargeability proceedings. Claim preclusion bars relitigation of claims or defenses which were, or should have been, actually litigated in an earlier suit. Moore v. McQueen (In re McQueen), 102 B.R. 120, 122 (Bankr.S.D.Ohio 1989). However, the doctrine of collateral estoppel or “issue preclusion” may be applicable in bankruptcy dischargeability proceedings. Spilman v. Harley, 656 F.2d 224, 228 (6th Cir.1981); Crawford v. Dine (In re Dine), 116 B.R. 101, 104 (Bankr.S.D.Ohio 1990). Issue preclusion bars relitigation of issues in a subsequent proceeding which were actually litigated and determined in a previous suit. McQueen, 102 B.R. at 122. Issue preclusion serves the “ ‘dual purpose of protecting litigants from the burden of relitigating an identical issue ... and of promoting judicial economy by preventing needless litigation.’ ” Dine, 116 B.R. at 104 (quoting Parklane Hosiery Co., Inc. v. Shore, 439 U.S. 322, 326, 99 S.Ct. 645, 649, 58 L.Ed.2d 552 (1979)).
In determining the applicability of the doctrine of issue preclusion to a dis-chargeability action, the bankruptcy court must consider whether 1) the precise issues raised in the prior proceeding are the same issues for which preclusion is sought, 2) the issues were actually litigated, 3) the determination was necessary to the outcome, and 4) the prior determination resulted in a *232valid and final judgment. Dine, 116 B.R. at 104 (citing Spilman, 656 F.2d at 228). In addition, the doctrine of issue preclusion mandates that the evidentiary standard applied in the prior adjudication not be less stringent than the standard required in the dischargeability action. Dine, 116 B.R. at 104. The obstacles created by this requirement have been removed as a result of the Supreme Court’s recent decision in Grogan v. Garner, — U.S. -, 111 S.Ct. 654, 658, 112 L.Ed.2d 755 (1991). In Grogan, the Court held that the burden of proof applicable in dischargeability proceedings is preponderance of the evidence. 111 S.Ct. at 660.5
The Plaintiff asserts that she is entitled to summary judgment pursuant to 11 U.S.C. § 523(a)(6). Section 523(a)(6) excepts from discharge any debts of an individual “for willful and malicious injury by the debtor to another entity or to the property of another entity[.]” The Sixth Circuit has stated:
An injury to an entity or property may be a malicious injury within this provision if it was wrongful and without just cause or excessive, even in the absence of personal hatred, spite, or ill-will. 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 harm and is without just cause or excuse, may constitute a willful and malicious injury.
Perkins v. Scharffe, 817 F.2d 392, 394 (6th Cir.1987) (quoting 3 Collier On Bankruptcy 523-111 (15th ed. 1986)), cert. denied, 484 U.S. 853, 108 S.Ct. 156, 98 L.Ed.2d 112 (1987). The Sixth Circuit has rejected the stricter standard that “willful” and “malicious” requires an act with intent to cause injury. Vulcan Coals, Inc. v. Howard, 946 F.2d 1226, 1229 (6th Cir.1991).
The issue before this court is whether the precise issue of “willful and malicious,” pursuant to § 523(a)(6), was before the state court, whether that issue was actually litigated, and whether a determination of the issue was necessary to the outcome of the state litigation. Further, this court must determine whether the state court proceeding resulted in a valid and final judgment. To make this determination, “the bankruptcy court should look at the entire record of the state proceeding, not just the judgment.” Spilman, 656 F.2d at 228.
In the state court action, the jury was informed that the Plaintiff had the burden of proving her case by a preponderance of the evidence. The jury was then instructed:
The right to an action of conversion of personal property depends upon the wrongful possession by one party of the property of another. It is the wrongful taking of the property that gives the right of action to the owner of the property against the wrongdoer. It is not necessary for the party taking wrongful possession of the property to assert absolute ownership of it in order to give the owner the right to an action for conversion. If you find from the evidence that the plaintiff was the owner of the property in question and entitled to the immediate possession thereof, and was deprived of that possession by an unauthorized act by the defendants, or by the exercise of dominion over the property inconsistent with the right of possession by plaintiff, it is a conversion of the property. Any distinct act of dominion wrongfully exerted over one’s property in denial of his right or inconsistent with it, is a conversion.
The court instructs the jury that Samuel Walters, as the power of attorney for Reba Jones, is in a fiduciary relationship with the plaintiff. A fiduciary has been defined as a person having a duty, created by his undertaking, to act primarily *233for the benefit of another in matters connected with this undertaking. The term fiduciary involves the idea of trust and confidence. It refers to integrity, the fidelity of the party trusted, rather than his credit or ability. It contemplates good faith rather than legal obligation as the basis of a transaction.
A fiduciary owes the duty of good faith and loyalty to his principal, beneficiary or the person reposing the trust or confidence. The duty of the fiduciary may be breached even in the absence of bad intention or untruth.
One standing in a confidential relation who conceals or fails to make full disclosure of facts to his knowledge, knowing the other party to be ignorant of those facts, is guilty of fraud.
(Doc. 33-1, Ex. F. at 327-29) (emphasis added). With regard to punitive damages, the jury was instructed:
Punitive damages may be awarded against the defendants as a punishment to discourage others from committing similar wrongful acts. You are not required to award punitive damages to the plaintiff and you may not do so unless you find by the greater weight of the evidence that the defendants acted with fraud or actual malice.
Actual malice is a state of mind under which a person is characterized by hatred or ill will or a spirit of revenge, or a conscious disregard for the rights and safety of other persons that has a great probability of causing substantial harm.
(Doc. 33-1, Ex. F at 331) (emphasis added).
Upon examination of the state trial court transcript and the instructions to the jury, this court is persuaded that the issue of whether the Defendant’s acts were “willful” and “malicious” was before the court and was actually litigated. Although the jury instructions do not include the specific words “willful” and “malicious,” the court instructed the jury that, in order to find for the plaintiff, the jury must determine the defendants committed “an unauthorized act,” a “wrongful taking,” or a “distinct act of dominion wrongfully exerted.” The jury’s verdict establishes that the defendant committed intentional or deliberate acts which necessarily produce harm and are without just cause or excuse. Perkins, 817 F.2d at 394. This finding is reinforced by the jury’s award of punitive damages. The jury awarded punitive damages because, pursuant to the court’s instructions, the jury found “by the greater weight of the evidence that the defendants acted with fraud or actual malice.”
Further, with respect to the third requirement of collateral estoppel, this court concludes that the jury’s determination was necessary to the outcome of the state court action. With regard to the fourth element of collateral estoppel, the court finds that the state court judgment resulted in a valid and final judgment. This judgment was affirmed by the Court of Appeals of Miami County, Ohio (Doc. 31-1, Ex. C); and, the Supreme Court Of Ohio overruled a motion for an order directing the Court of Appeals for Miami County to certify its record, (Doc. 31-1, Ex. D), leaving the judgment as a fully reviewed, valid, and final judgment.
All elements requisite to the application of issue preclusion exist in this proceeding. Therefore, the judgment rendered by the Common Pleas Court of Miami County, Ohio is nondischargeable under 11 U.S.C. § 523(a)(6).
Having determined that the debt owed to the Plaintiff by the Defendant is nondis-chargeable pursuant to 11 U.S.C. § 523(a)(6), although it appears that the same result would be reached under Sections 523(a)(2) and (4), this court finds it unnecessary to address these assertions.
Accordingly, the motion for summary judgment (Doc. 32-1) filed by the Plaintiff, Estate of Reba Jones, is GRANTED.
An order in accordance with this decision is simultaneously entered.
SO ORDERED.
. After this proceeding was commenced, the Plaintiff died and her estate was substituted as a party in interest.
. This complaint was amended (Doc. 7-1); however, subsequently, the Plaintiff withdrew this amended complaint (Doc. 14-1).
.The Plaintiff asserts that the debt is nondis-chargeable under § 523(a)(5). This section is not applicable to this proceeding.
. There is a dispute between the parties with respect to the amount which is currently owed on the judgment; however, this dispute is not material. The Plaintiff states that the amount owed is $204,496.98 plus interest of ten percent per annum from November 21, 1990. The Defendant asserts that, as of January 28, 1991, the date of filing, the punitive damage amount was $115,344.40 and the compensatory damages amount was $91,357.11. Resolution of this dispute is left for a more appropriate forum.
. This court notes its decision in Shafer v. Wintrow (In re Wintrow), 57 B.R. 695, 698-701 (Bankr.S.D.Ohio 1986) which discusses concepts of preclusion. To the extent Wintrow held that dischargeability determinations under 11 U.S.C. § 523(c) require proof by clear and convincing evidence, rather than a preponderance of the evidence, this court is obligated to follow Gro-gan. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491489/ | ORDER DENYING APPLICATION TO REOPEN
MARY D. SCOTT, Bankruptcy Judge.
THIS CAUSE is before the Court upon the debtor’s Application to Reopen Closed Case, filed on May 29, 1992. This bankruptcy case was initiated on November 13, 1990, by the filing of a voluntary chapter 7 petition in bankruptcy. The discharge of the debtor was granted on March 11, 1991 and the file closed on March 15, 1991.
On November 13, 1990, during the pend-ency of the bankruptcy, the Chancery Court of Hempstead County entered a judgment and decree of foreclosure against the debtor and in favor of the creditors First National Bank of Hope and Linda Quillin. The sale of the debtor’s property occurred after the date of discharge. The debtor seeks to reopen this case in order to void the Chancery Court decree on the grounds that the decree was a violation of the automatic stay imposed by Bankruptcy Code section 362(a).
The Bankruptcy Code provides that a case may be reopened “to administer assets, to accord relief to the debtor, or for other cause.” 11 U.S.C. § 350(b); Fed. R.Bankr.Proc. 5010. Section 350(b) is not mandatory, but is within the discretion of the Bankruptcy Court. In re Rhodes, 88 B.R. 199, 200 (Bankr.E.D.Ark.1988).
While Rule 9024(1), Federal Rules of Bankruptcy Procedure, excepts a motion to reopen a case from the one year limitation prescribed in Rule 60(b), the doctrine of laches is applicable in determining whether such a motion should be granted. See In re Nelson, 100 B.R. 905, 906 (Bankr. N.D.Ohio 1989) (“Although no time limit is specified by the Bankruptcy Code during which a motion to reopen must be filed, such a motion must be brought within a reasonable time; laches may justify denial of such a motion.”). The strong policy and purpose of the bankruptcy laws in ensuring “prompt and effectual administration and settlement of the estate” requires that an interested person, including the debtor, act promptly to preserve its rights. Virgin Islands Bureau of Internal Revenue v. St. Croix Hotel Corp. In re St. Croix Hotel Corp., 60 B.R. 412, 414 (D.V.I.1986), aff'd, 867 F.2d 169 (3d Cir.1989). The longer a party waits to request that a case be reopened, the greater the burden in demonstrating that cause exists to reopen the case. White v. Boston (In re White), 104 B.R. 951, 958 (S.D.Ind.1989).
The Court finds that this motion comes too late to reopen the case. Fourteen months passed between the closing of the bankruptcy case and the filing of the motion to reopen. The debtor has offered no reason why the motion was filed so *327late.1 Mere inattention or neglect is not a basis to reopen a case. St. Croix Hotel Corp., 60 B.R. at 414. Judgment by the state court was rendered eighteen months ago and it appears from the debtor’s motion that sale of the property has already occurred.
ORDERED that the Motion to Reopen Closed Cased, filed on May 29, 1992, by the debtor is DENIED.
IT IS SO ORDERED.
. The debtor asserts that he did not receive notice of the sale. There is no indication, however, that he did not receive notice of the judgment. Further, it was incumbent upon the debtor to file a motion to reopen the case promptly upon learning of the sale. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491490/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW
GEORGE L. PROCTOR, Bankruptcy Judge.
This adversary proceeding came to be heard upon the Motion of Defendant for Referral to the Interstate Commerce Commission. A hearing was held on December 13, 1991. Upon the evidence presented, the Court makes the following Findings of Fact and Conclusions of Law:
*478
Findings of Fact
Debtor was both a motor common and motor contract carrier operating in interstate commerce pursuant, to the authority of the Interstate Commerce Commission (“ICC”).
Debtor filed tariffs with the ICC which provided for a Class 70 exception rate with a discount of 55-59% off of that Class 70 exception rate. Subsequent to the filing of such tariff rate, debtor filed tariff item 721 stating that any customer not paying its bill within 60 days of the date of the invoice would lose its class exception and its discount (“loss-of-discount tariff”).
Debtor filed a chapter 11 petition on October 16, 1990. Lloyd T. Whitaker was appointed as chapter 11 trustee on December 26, 1990. The case was subsequently converted to chapter 7 on March 11, 1991, and Lloyd T. Whitaker was appointed the chapter 7 trustee.
Defendant, as shipper, and Debtor, as common carrier, did business together on a tariff basis for a substantial amount of time.
In late November and early December of 1990, a dispute arose between debtor and defendant. Defendant claimed approximately $14,000.00 against debtor for goods lost or damaged in shipment and withheld payment on the shipping bills.
Plaintiff conducted an audit of debtor’s records and determined that the original amounts billed were not properly rated in accordance with the filed tariff. Accordingly, the plaintiff sent new bills to defendant which did not include the class exception or the discount and which were rerated at the full class rates. The rerated bills represented an increase in rates from the original bills of at least 65-69%. Plaintiff based the change on the loss-of-discount tariff. Defendant refused to pay the rerat-ed bills.
On June 20, 1991, plaintiff filed this adversary proceeding seeking turnover of property and a money judgment for $31,-516.48, based on the rerated bills. Defendant filed an answer raising the defenses of set-off and unreasonable rates and asked that the proceeding be referred to the ICC. With plaintiff’s consent, defendant later filed an amended answer asserting further defenses, as well as a counterclaim for damages.
Defendant contends that 1) the tariff rates on which plaintiff relies are inapplicable to the shipments in question; 2) if the rates do apply, they are unreasonable and unlawful under 49 U.S.C. § 10701(a); 3) the tariff rules violate 49 U.S.C. § 10761 and ICC regulations contained in 49 C.F.R. Part 1320; and 4) some sums sought by plaintiff were not demanded until after the requisite time periods of 49 C.F.R. parts 1320.2(e)(2) and (3), 1320.2(g)(2)(vi).
Plaintiff, on the other hand, argues that 1) this Court does not have jurisdiction under 28 U.S.C. § 1336(b) to make a referral to the ICC; 2) referral is not necessary because defendant must pay the filed rate and then seek reparations; 3) the loss-of-discount tariff does not violate ICC credit regulations, and 4) violation of the credit regulations is not a defense to enforcement of filed tariff rates.
Thus, the Court must initially determine whether it has the authority under 28 U.S.C. § 1336 to refer any issue to the ICC. If the Court does have such power, the question arises as to whether the issues raised in this proceeding must be resolved by the administrative agency and if so, at what point in time must such a determination be made.
Conclusions of Law
A. Referral Power
Congress provided in 28 U.S.C. § 1334(b) that “... district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11.” Under 28 U.S.C. § 157(a), the district court may provide that any or all cases or proceedings arising under title 11 shall be referred to the bankruptcy judges. The United States District Court for the Middle District of Florida has entered such a referral order. Rule 104, Local Rules for the Middle District of Florida. Accordingly, this bankruptcy case and this adversary *479proceeding have been referred to this Court.
The district court’s jurisdiction to refer issues to the ICC is embodied in 28 U.S.C. § 1336, which provides in relevant part:
(a) Except as otherwise provided by Act of Congress, the district courts shall have jurisdiction of any civil action to enforce, in whole or in part, any order of the Interstate Commerce Commission, and to enjoin or suspend, in whole or in part, any order of the Interstate Commerce Commission for the payment of money or the collection of fines, penalties, and forfeitures.
(b) When a district court or the United States Claims Court refers a question or issue to the Interstate Commerce Commission for determination, the court which referred the question or issue shall have exclusive jurisdiction of a civil action to enforce, enjoin, set aside, annul, or suspend, in whole or in part, any order of the Interstate Commerce Commission arising out of such referral.
Under the district court’s referral order, the bankruptcy court is sitting in the adversary proceeding as a unit of the district court. Thus, for purposes of 28 U.S.C. § 1336, “district court” includes the bankruptcy court. Railway Labor Executives’ Assn. v. ICC, 894 F.2d 915 (7th Cir.) reh’g denied, 908 F.2d 127 (7th Cir.1990); In re Total Transportation, Inc., 84 B.R. 590 (D.Minn.1988). Accordingly, this Court has jurisdiction to refer the issues at hand to the ICC.
It should also be noted that although his brief argues to the contrary, plaintiff’s counsel stated during the hearing that this Court has “the power to refer matters to any federal agency, including the ICC.” (Transcript at page 9).
B. Primary Jurisdiction
The doctrine of primary jurisdiction serves to ensure that the courts provide administrative agencies charged with specific regulatory responsibilities the appropriate opportunity to fulfill such duties. The United States Supreme Court explained the doctrine:
“Primary jurisdiction,” ... applies where a claim is originally cognizable in the courts and comes into play whenever enforcement of the claim requires the resolution of issues which, under a regulatory scheme, have been placed within the special competence of an administrative body....
No fixed formula exists for applying the doctrine of primary jurisdiction. In every case the question is whether the reasons for the existence of the doctrine are present and whether the purposes it serves will be aided by its application in the particular litigation.
United States v. Western P.R. Co., 352 U.S. 59, 63-64, 77 S.Ct. 161, 165, 1 L.Ed.2d 126 (1956) (citing General American Tank Car Corp. v. El Dorado Terminal Co., 308 U.S. 422, 433, 60 S.Ct. 325, 331, 84 L.Ed. 361 (1940)). The Court then indicated that the doctrine was intended to promote uniformity and consistency, as well as provide expert and specialized knowledge when resolving administrative questions. Id.; Far East Conference v. United States, 342 U.S. 570, 574-75, 72 S.Ct. 492, 494-95, 96 L.Ed. 576 (1952).
The issues in this proceeding primarily involve the validity of the loss-of-discount tariff and the reasonableness of the filed rate. In Western P.R. Co. the Court also indicated that where the issue merely involved construction of a tariff, courts could decide it as an issue “solely of law.” Western P.R. Co., 352 U.S. at 66, 77 S.Ct. at 166. Thus, as long as discretion in technical matters requiring a knowledge of intricate facts is not being exercised, a court may decide the issues.
The Court of Appeals for the Seventh Circuit has held that “... courts have original jurisdiction to interpret tariffs, rules, and practices where the issue is one of violation, rather than reasonableness.” Interstate Commerce Com. v. All-American, Inc., 505 F.2d 1360, 1363 (7th Cir.1974).
The defendant contends that the loss-of-discount tariff is unlawful because it does not comply with ICC credit regulations. Plaintiff argues that the credit reg*480ulations are irrelevant and that the loss-of-discount tariff is merely a condition precedent to participation in the discount programs. Accordingly, the issue involves either a violation of regulations or tariff interpretation, both of which are within the original jurisdiction of this Court.
The Supreme Court has indicated that jurisdiction to determine the reasonableness of rates is vested with the ICC: “ ‘The [Interstate Commerce] Act altered the common law by lodging in the Commission the power theretofore exercised by courts, of determining the reasonableness of a published rate.’ ” Maislin Industries, U.S., Inc. v. Primary Steel, Inc., 497 U.S. 116, -, 110 S.Ct. 2759, 2767, 111 L.Ed.2d 94 (1990) (quoting Arizona Grocery Co. v. Atchison, T. & S.F.R. Co., 284 U.S. 370, 384, 52 S.Ct. 183, 184, 76 L.Ed. 348 (1932)). The question of the reasonableness of debt- or’s filed rates should be properly decided by the ICC.
Both the parties admit that the ICC is the expert body vested with the authority to resolve a legitimate issue of rate reasonableness. However, the parties differ on their assessment as to when such a determination is properly made.
C. Rate Reasonableness
Currently the Circuit Courts of Appeal are split on the issue of when the ICC should determine whether a filed rate is reasonable. The first, third, seventh, and eighth circuits adhere to the stay and refer approach. Delta Traffic Service, Inc. v. Transtop, Inc., 902 F.2d 101 (1st Cir.1990); Delta Traffic Service, Inc. v. Mennen Co., 730 F.Supp. 1309 (D.N.J.), aff'd, 919 F.2d 134 (3rd Cir.1990); Western Transportation Co. v. Wilson & Co., 682 F.2d 1227 (7th Cir.1982); Atlantis Express, Inc. v. Standard Transp. Services, Inc., 955 F.2d 529 (8th Cir.1992). Those circuits hold that the judicial proceeding must be stayed and the issue of rate reasonableness referred to the ICC for determination. In so holding the cases necessarily recognize rate reasonableness as a defense to a proceeding to collect the filed rate.
The fourth and fifth circuits, on the other hand, hold that rate reasonableness cannot be used as a defense. In re Carolina Motor Express, Inc., 949 F.2d 107, 110-11 (4th Cir.1991), cert. granted, — U.S.-, 112 S.Ct. 1934, 118 L.Ed.2d 541 (1992); In re Caravan Refrigerated Cargo, Inc., 864 F.2d 388, 391-92 (5th Cir.1989). The cases indicate that the shipper must pay the filed rate and then the exclusive remedy for recovering excess charges is through the statutory reparations action. At that time the ICC would determine the reasonableness of a given rate.
Neither the District Court for the Middle District of Florida nor the Court of Appeals for the Eleventh Circuit has spoken on this issue. This Court finds that the rationale behind the holdings in the fourth and fifth circuits is more persuasive and, thus, holds that rate reasonableness is not properly asserted as defense to collection of the filed rate.
Prior to the enactment of the Motor Carriers Act of 1935, common law recognized a shipper’s right to restitution for unreasonable charges. Arizona Grocery Company v. Atchison, T. & S.F.R. Company, 284 U.S. 370, 52 S.Ct. 183, 76 L.Ed. 348 (1932); Arkadelphia Milling Company v. St. Louis S.R. Co., 249 U.S. 134, 39 S.Ct. 237, 63 L.Ed. 517 (1919). Subsequent to such enactment, it was assumed that the savings clause, 49 U.S.C. § SIO®,1 provided the basis for a continued right of restitution.
However, the United States Supreme Court subsequently held that the restitution remedy afforded shippers under common law had not survived. T.I.M.E. Incorporated v. United States, 359 U.S. 464, 79 S.Ct. 904, 3 L.Ed.2d 952 (1959). In holding that a shipper could not challenge the reasonableness of a rate in post-shipment litigation, the Court left shippers without any remedy when a filed rate was found to be unreasonable.
*481Congress recognized the problem and enacted 49 U.S.C. § 304a in 1965 in an effort to provide shippers with relief. Section 304a provided that shippers could recover overcharges by filing an action at law for “reparations” within a certain time period. The section specifically defined reparations as damages resulting from charges based on a tariff found to be unreasonable by the ICC. Section 304a has since been recodi-fied as 49 U.S.C. §§ 11705(b)(3) and 11706(c)(2), which read, in relevant part:
§ 11705. Rights and remedies of persons injured by certain carriers.
(b)(3) A common carrier providing transportation or service subject to the jurisdiction of the Commission under sub-chapter II or IV of chapter 105 of this title or a freight forwarder is liable for damages resulting from the imposition of rates for transportation or service the Commission finds to be in violation of this subtitle.
§ 11706. Limitation on actions by and against common carriers.
(c)(2) A person must begin a civil action to recover damages under section 11705(b)(3) of this title within 2 years after the claim accrues.
The statute, by its terms, provides a procedure through which a shipper may challenge a filed rate and recover “reparations” for excessive amounts paid. The scheme does not provide for the use of the right to reparations as a defense. The sole and exclusive remedy provided is a post-payment challenge to the rate reasonableness accompanied by a request for reparations. In re Carolina Motor Express, Inc., 949 F.2d 107, 110-11 (4th Cir.1991), cert. granted, — U.S.-, 112 S.Ct. 1934, 118 L.Ed.2d 541 (1992); In re Caravan Refrigerated Cargo, Inc., 864 F.2d 388, 391-92 (5th Cir.1989); Mohasco Industries, Inc. v. Acme Fast Freight, Inc., 491 F.2d 1082, 1085 (5th Cir.1974); Lifschultz Fast Freight, Inc. v. Rainbow Shops, Inc., 784 F.Supp. 89, 93 (S.D.N.Y.1992) (“The very characterization of the remedy in the statute — ‘reparations’—suggests a rule of pay first and sue later.”).
Rejection of reasonableness as a defense may lead to a harsh result, but it is the result dictated by the terms of the statute. In addition, it serves to support the filed rate doctrine espoused by the United States Supreme Court:
The rate of a carrier duly filed is the only lawful charge. Deviation from it is not permitted upon any pretext. Shippers and travelers are charged with notice of it, and they as well as the carrier must abide by it_ Ignorance or misquotation of rates is not an excuse for paying or charging either less or more than the rate filed. The rule is undeniably strict, and it may work hardship in some cases, but it embodies the policy which has been adopted by Congress in regulation of interstate commerce in order to prevent unjust discrimination.
Louisville & N.R. Co. v. Maxwell, 237 U.S. 94, 97, 35 S.Ct. 494, 495, 59 L.Ed. 853 (1915). The Supreme Court recently reiterated the importance of the filed rate doctrine in Maislin Industries, U.S., Inc. v. Primary Steel, Inc., 497 U.S. 116, -, 110 S.Ct. 2759, 2766-67, 111 L.Ed.2d 94 (1990).
By refusing to allow the defendant to assert rate reasonableness as a defense, the Court not only adheres to the statutory scheme, but also protects the filed rate doctrine and its underlying policy of discouraging price discrimination.
D. Conclusion
This Court has the jurisdiction to refer the issues raised to the ICC, but concludes that such referral is inappropriate at this time. Although the ICC has primary jurisdiction over rate reasonableness questions and is the proper body to make such determinations, rate reasonableness is not a defense to a proceeding to collect the filed rate. Defendant’s sole remedy for excessive charges is through the statutory reparations action.
A separate order denying defendant’s motion for referral to the ICC will be entered.
. Section 316(j) provides: "Nothing in this section shall be held to extinguish any remedy or right of action: not inconsistent herewith.” | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491491/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW
GEORGE L. PROCTOR, Bankruptcy Judge.
This case is before the Court upon the Motion for Relief from Automatic Stay or for Adequate Protection filed by John Deere Company (“Movant”). Upon the evidence presented, the Court enters the following Findings of Fact and Conclusions of Law:
Findings of Fact
On August 30, 1989, Debtor Richard Walker entered into a security agreement for the purchase of a John Deere Model 2955 Tractor and a John Deere Model 265 Loader. (Movant’s exhibit 1) The security agreement was accepted by Movant on September 7, 1989.
On October 2, 1989, Movant recorded a financing statement (UCC-1) in the Official Records in Nassau County, Florida. (Mov-ant’s exhibit 2) Prior to October 1, 1989, Fla.Stat. ch. 679.401(l)(a) required that financing statement on farm equipment be filed in the official records in the county of the debtor’s place of business, if the debtor was a resident of Florida. Effective October 1, 1989, the “farm equipment” portion of the statute was removed and, therefore, the proper place to file was with the Secretary of State, under Fla.Stat. ch. 679.-401(l)(c).
Conclusions of Law
A plain reading of the unambiguous terms of Fla.Stat. ch. 679.401(l)(a) and (c) yields a result that leaves Movant’s interest in the debtors’ farm equipment unper-fected. Farm equipment now falls under 679.401(l)(c) and, thus, a financing statement on the equipment purchased by Debt- or Richard Walker must have been filed with the Secretary of State in order to have perfected Movant’s interest.
Although based on the statute when it required that the financial statements be filed with the county of debtor’s business, this Court has addressed the issue of improper filing. In re Wil-Win Farms, Inc., 21 B.R. 299 (Bankr.M.D.Fla.1982). In that case, the creditor filed the financing statement in the county where the sales contract indicated the debtor was located and where the collateral was to be located. However, the debtor’s physical location was in another county. This Court stated that “ ‘[t]he duty to file as required by the Code is imposed upon the secured creditor. The fact that he may have been mislead by the debtor does not release him from the obligation imposed.’ ” Id. at 301 (quoting In re Flynn, 6 U.C.C.Rep. 1119 (Bankr.E.D.Mich.1969).
Just as the filing requirement was strictly construed in the Wil-Win Farms case, it must also be strictly applied in the instant case. Prior to October 1, 1989, Movant’s filing would have been proper and its interest perfected. However, “in order to perfect a security interest” on or after that date, a financing statement must have been filed with the Secretary of State. Movant’s financing statement was not so filed and, consequently, was not effective to perfect its security interest.
A separate order denying the Motion for Relief from the Automatic Stay or for Adequate Protection will be entered. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491492/ | ORDER DENYING MOTION TO SET ASIDE DISCHARGE AND/OR MOTION FOR ACCEPTANCE OF OBJECTION TO DISCHARGE NUNC PRO TUNC AND DISMISSING CASE
SIDNEY M. WEAVER, Chief Judge.
THIS CAUSE came before the Court on June 11, 1992 upon the plaintiffs’ Motion To Set Aside Discharge and/or Motion For Acceptance of Objection To Discharge Nunc Pro Tunc, and the Court having reviewed the motion, having listened to the argument of counsel and being otherwise fully advised in the premises does hereby make the following Findings of Fact and Conclusions of Law:
On January 2, 1992 the debtors filed their joint petition under Chapter 7 of the Bankruptcy Code. The plaintiffs were listed on the debtors’ Schedule F appended to their petition as creditors holding unsecured claims. Thereafter, the clerk of the court issued the Notice of Commencement apprising creditors of the estate that the § 341 meeting of creditors would be held on March 5, 1992 and establishing May 5, 1992 as the bar date for the filing of complaints objecting to discharge under 11 U.S.C. § 727(a) and of complaints to determine dischargeability under 11 U.S.C. § 523(a). '
On May 4, 1992, the plaintiffs submitted a complaint objecting to the discharge of the debtors by depositing the complaint in the night depository box. The complaint was not accompanied by the requisite filing fee or by the civil cover sheet and the summonses. Accordingly, when the clerk retrieved all the documents from the night depository box on the morning of May 5, the complaint was stamped “received May 4,1992 after 5 p.m.” and it was returned to counsel for the plaintiffs via the U.S. Mail by the clerk. The complaint was received by counsel on May 8, 1992. Attached to the motion that is presently before the Court is an affidavit which states that on May 13, 1992 counsel issued a check in the amount of $120.00 evidencing the requisite filing fee, as well as a civil cover sheet and summonses to a courier with instructions to have the same filed with the clerk of the bankruptcy court. According to that affidavit, the check and the documents were, for some reason unknown to the affiant, never received by the clerk of the court. Because no complaint objecting to the discharge of the debtors was “filed” by the May 5 bar date, the debtors were issued their discharge on May 16, 1992 with a copy served to all creditors of the estate.
Subsequently, on June 2, 1992, twenty-eight days after the submission of the defi-ciently filed complaint, counsel for the plaintiffs personally delivered the complaint which forms the basis of this action along with the filing fee, the civil cover sheet and the appropriate summonses to the clerk of the court for filing. By way of the motion that is presently before the Court, the plaintiffs request that this Court vacate the discharge of the debtors and that the Court consider the complaint as having been timely filed on May 4, 1992 when it was deposited in the night depository box without the filing fee.
Pursuant to 28 U.S.C. § 1930(b) the Judicial Conference of the United States has prescribed a $120.00 filing fee for the filing of an adversary proceeding in a bankruptcy case. The plaintiffs contend that the payment of this fee is only incidental and that the filing of the complaint is the decisive act in determining the timeliness of this action. In support of this proposition, the plaintiffs have cited In re Spearman, 68 B.R. 25 (Bankr.E.D.N.Y.1986), In the Matter of Boothe, 84 B.R. 636 (Bankr.D.Neb. *5231988) and In re Whitfield, 41 B.R. 734 (Bankr.W.D.Arkansas 1984).
In Spearman, 68 B.R. 26, the creditor submitted a complaint seeking a determination on the dischargeability of a debt within the deadline set by the court for the filing of complaints. The complaint was returned by the clerk based on the failure of the creditor to present the requisite filing fee. On the next business day the creditor returned the complaint to the clerk along with the $60.00 filing fee. In Boothe, 84 B.R. 636, the creditor timely submitted a complaint seeking a determination on the dischargeability of a debt, however, the filing fee was insufficient and the complaint was returned by the clerk of the court. Twenty-one days later the creditor resubmitted the complaint accompanied by the appropriate filing fee to the clerk. In Whitfield, 41 B.R. 734, the creditor timely filed an objection to the discharge of the debtor. The clerk returned the document to the creditor on the basis that the pleading was not properly initiated as an adversary proceeding and the creditor did not submit the filing fee. Fifteen days after the document had been returned to the creditor, the document and the filing fee were received by the clerk. The Spear-man, Boothe and Whitfield courts held that the initial complaints were timely filed reasoning that the critical event is not the payment of the filing fee but, rather the filing of the complaint. Spearman, 68 B.R. at 26; Boothe, 84 B.R. at 637; Whitfield, 41 B.R. at 736.
This Court finds that the authorities cited by the plaintiffs are factually distinguishable from the case at hand in that a factor present in this case was not present, or not considered, in the cases posited by the plaintiffs. Namely, the debtors in this case were discharged on May 16, 1992. The plaintiffs now ask the Court to vacate the discharge and permit them to proceed with their objection pursuant to 11 U.S.C. § 727(a) despite the fact that all creditors were placed on notice that they are enjoined, pursuant to 11 U.S.C. § 524, from any further collection efforts against the debtors.
In Spearman, 68 B.R. at 26, and Boothe, 84 B.R. at 637, the debtors were faced, not with complaints objecting to their discharge, but, rather, with complaints seeking a determination on the dischargeability of particular debts. The discharge form specifically provides that the debtors are discharged from all debts with the exception of, among others, any debt declared by the court to be nondischargeable under § 523(a). Thus, even though the court in Boothe had directed that a discharge hearing be conducted, the successful prosecution of the adversary proceeding would not have impacted the overall discharge of the debtor in that ease. Only in Whitfield were the debtors initially faced with an objection to their discharge; however, there is no indication in the Whitfield opinion that the debtors were issued their discharge before the court ruled on the timeliness of the creditor’s complaint.
Given the fact that the debtors herein have been discharged, this Court finds that the request of the plaintiff, if granted, would prejudice the substantive rights of the debtors. Vacating the discharge at this juncture in order to permit the plaintiffs to proceed with their objection would risk confusion among the general creditors of this estate that the debtors have had their discharge revoked and that the creditors are free to pursue and enforce all collection remedies available to them. Indeed, this concern was cited by the Court in In the Matter of Anderson, 5 B.R. 47 (Bankr.N.D.Ohio 1980), when ruling on the debt- or’s motion to dismiss a complaint that was untimely filed. The Anderson court noted:
The balance between the entitlement of the bankrupt to his discharge and the interest of creditors in avoiding such a discharge when possible fraud or other grounds exist changes as the proceedings in bankruptcy moves through its various stages. The pre-requisites for asserting a challenge to the bankrupt’s discharge change accordingly and must be complied with.
Matter of Anderson, 5 B.R. at 50 (quoting In re Capshaw, 423 F.Supp. 1388, 1390-91 (D.C.Va.1977). See also In re King, 35 B.R. 471 (Bankr.N.D.Ill., W.D.1983).
*524The plaintiffs here were listed as creditors of the debtors and, by counsel’s own admission, this case was monitored by counsel on their behalf. While this Court recognizes that § 727(a) seeks to strike a balance between the interest of providing the honest debtor with a “fresh start” by way of the discharge, and the creditor’s interest in avoiding a discharge in the case of fraud or other reprehensible conduct, at this stage of the proceedings where the debtors have already been discharged, the Court finds that the equities balance in favor of the debtors and against the plaintiffs.
Based on the foregoing, it is hereby:
ORDERED AND ADJUDGED as follows:
1. The Motion To Set Aside Discharge and/or Motion For Acceptance of Objection To Discharge Nunc Pro Tunc is denied. This adversary case is hereby dismissed with prejudice.
2. Because the plaintiffs filed a duplicate motion in the main case, the Clerk of the Court is hereby directed to file a copy of this order in the main case to reflect the Court’s disposition of the motion.
DONE AND ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491493/ | ORDER GRANTING MOTION TO IMPOSE SANCTIONS
(Rule 9011 of the Federal Rules of Bankruptcy Procedure)
RICHARD L. BOHANON, Bankruptcy Judge.
One of the creditors in this bankruptcy case, Homestead Federal Savings Bank, has moved to impose sanctions pursuant to Bankruptcy Rule 9011. The motion is directed at Michael Kotler, an attorney who signed and filed debtor’s bankruptcy petition, his law firm, Schwartz, Gold, Cohen & Zakarin, P.A. and his client, Richard Privitera.1 This decision addresses only the issues as they relate to Michael Kotler.
The facts, as developed at an evidentiary hearing, are relatively uncomplicated. Kot-ler is a member of the Florida Bar having graduated from law school in 1988. He is approximately 28 years of age.
He was contacted by Privitera whom he knew slightly. Privitera indicated that he had an interest in purchasing a night club in Fort Lauderdale and wished to employ Kotler to represent him in connection with this transaction.
The club was owned and operated by the debtor, Sir John, Inc. and all of its stock is owned by John M. Cunningham whose lawyer was Robert Cobb. Homestead had a validly perfected security interest in debt- or’s interest in the club. The principal amount of its debt is approximately $135,-000.
Prior to employing Kotler, Privitera met with Cunningham and Cobb and negotiated a contract to purchase all the stock of Sir John. This contract was initially executed by Peter Privitera, Richard’s brother on behalf of a corporation to be formed named Elaine, Inc. A subsequent meeting was scheduled for the closing. At this meeting Richard Privitera appeared but for numerous reasons relating primarily to his failure to perform conditions precedent the transaction did not close. At this meeting Pri-vatera stated that he wished to contact an attorney before proceeding further and he employed Kotler.
The parties’ intent was to form a corporation which would be owned by Privitera to purchase all of Cunningham’s stock in Sir John. The name Elaine, Inc. was unavailable so the corporation was called Mrs. Elaine, Inc.
At the second meeting some documents were executed. One of them was Cunningham’s resignation as an officer and director of Sir John. Even though the transaction did not close Cunningham allowed Privitera to operate the club and he remained on site as a consultant.
Privitera commenced operation of the club and collected the revenues but paid few of the bills. During this interim Kot-ler and Cobb continued to negotiate and correspond concerning the final form of the transaction.
From all appearances Privitera was in charge of the club and Kotler saw him on the premises in this capacity. The transaction, however, did not close and Privitera never received the stock certificates which remained in Cobb’s possession.
The financial condition of the club operation continued to deteriorate, the landlord *526served a statutory notice of eviction for failure to pay rent and the liquor license would terminate if the lease was canceled.
Privitera explained these circumstances to Kotler who had a copy of Cunningham’s resignation as an officer and director of Sir John. Based upon the resignation and Pri-vitera’s statements and activities in connection with the club Kotler hastily prepared the bankruptcy petition seeking to file it before the lease terminated. He states that it was his intent to file the petition before termination in order to provide for assumption of the lease under section 365 of the Bankruptcy Code. He also stated that it was his belief that the transaction was final but that Cobb was merely holding the stock until the last installment payment had been made. However, shortly before the petition was filed Kotler had written Cobb requesting changes in the arrangements stating that “we must resolve this matter and have the documents executed in final form, so that we may conclude this matter.” He thus obviously knew that the transaction was not final.
Approximately three months after it was filed Homestead moved to dismiss the case for lack of authority. Subsequently, this motion was granted and the petition was dismissed because neither Privitera nor Kotler were authorized to file the petition in the first instance.
At some time prior to the dismissal the club facilities were virtually destroyed by persons unknown and Homestead’s collateral was rendered almost valueless.
Homestead now seeks to impose sanctions upon Kotler contending that he failed to make a reasonable inquiry as required by Rule 9011. Homestead further contends that the amount of sanctions ought to be its principal, interest, fees and costs in connection with the case which, with some credits for amounts collected on a guarantee, total in excess of $150,000.
It first is necessary to weigh Kot-ler’s actions in filing the petition against the mandates of Rule 9011. It requires that, in order to sanction him, I find that he failed to make a “reasonable inquiry” to determine that the petition was “well grounded in fact” before he signed and filed it.2
If, therefore, Kotler failed to make the reasonable inquiry he must be sanctioned in an appropriate manner pursuant to Rule 9011. It can only be said that he did not make a reasonable inquiry. As evidenced by his own letter shortly before the petition was filed he knew that the transaction had not closed and his client did not have the stock of the corporation — even though Cunningham had executed the letter of resignation. There is no basis for saying that Kotler thought that Cobb was merely holding the stock until receipt of the final payment. Further, if there was any question in his mind the reasonable thing to do was to inquire of Cobb concerning who had the de jure authority to speak for the corporation. It can only be said that he filed the petition in a moment of youthful exuberance without stopping to think. Since he did not inquire reasonably sanctions must be imposed. The issue then becomes what is an “appropriate sanction” under these circumstances?
There are two general theories of what sanction is appropriate. Some adopt a cost-shifting approach and other a penal or deterrent approach. The views are discussed in Nelken, Sanctions Under Amended Federal Rule 11 — Some “Chilling” Problems in the Struggle Between Compensation and Punishment, 74 The Georgetown Law Journal 1313. In concluding this article says:
The cost-shifting view espoused by Professor Miller emphasizes the economic realities of litigation and seeks to have costs fall on the party whose wasteful or abusive conduct caused expense to the other side. This view likens sanctions to the English practice of awarding attorney’s fees to the prevailing party. The *527analogy is not really apt, since rule 11 sanctions are not automatically available to a prevailing party yet it comes closest in spirit to the goal implicit in a sanctioning standard aimed at frivolous filings. By contrast, Judge Schwarzer views the purpose of rule 11 as primarily punitive. He focuses on the nature of conduct giving rise to sanctions — a secondary factor in Professor Miller’s economic analysis. Judge Schwarzer believes that the imposition of sanctions is a duty that judges must discharge to encourage lawyers to take their ethical responsibilities seriously. He has not only imposed costs and fees upon lawyers who have violated the rule, but has published and ordered wide dissemination of his often highly critical opinions, a sanction that may have far more serious consequences for the offending lawyers than an order to pay fees.
Id. at p. 1352
A leading case on the subject within this circuit is Pelletier v. Zweifel, 921 F.2d 1465 (11th Cir.1991). There the “complaint had no reasonable factual basis when pled and [respondents] knew this. When they decided to pursue this action despite their knowledge that it was frivolous, they acted in bad faith.” Pelletier at p. 1515. The Court continued to say that “[i]t is apparent to us that [respondent] brought this suit purely to harass [movant] and, in the process, to extract a settlement from him.” It goes on to say that sanctions should “serve the dual purpose of deterring the filing of frivolous claims and defenses while not chilling attorneys’ legitimate enthusiasm and creativity in advancing legal and factual theories ... [lawyers] must stop and think before filing [their papers.]” Pelletier at p. 1522.
It thus is plain that in the Eleventh Circuit the standard trial courts are to apply in assessing sanctions may be based on deterrence as opposed to a fee-shifting or compensatory measure as applied in some other circuits.
The court of appeals for this circuit also holds that the court imposing the sanctions has wide discretion to tailor the sanction to the circumstances at hand in the particular case. Kleiner v. First Nat. Bank of Atlanta, 751 F.2d 1193, 1209-10 (11th Cir.1985); Donaldson v. Clark, 819 F.2d 1551, 1556-57 (11th Cir.1987). The Court has stated that whether sanctions are viewed as a form of cost-shifting or punishment, they are imposed for the purpose of deterring attorneys from violating Rule 11. Donaldson, 819 F.2d at 1556.
In furtherance of this policy, the Court of Appeals has held that various types of sanctions are within the courts’ discretion, including, but not limited to monetary sanctions, public reprimands, suspension or disbarment. Kleiner, 751 F.2d at 1209; Donaldson v. Clark, 786 F.2d 1570 (11th Cir.1986) vacated at 794 F.2d 572 (11th Cir.1986) and reheard at 819 F.2d 1551 (11th Cir.1987).
Several other jurisdictions have also held that the discretion of the court extends to imposition of penalties payable to the court. Whittington v. Lynaugh, 842 F.2d 818 (5th Cir.1988); Frantz v. U.S. Powerlifting Fed’n., 836 F.2d 1063 (7th Cir.1987).
In the exercise of this discretion I elect, in this case, to use the deterrence standard in fashioning the appropriate sanction. The task at hand, therefore, is to fashion a sanction which will deter Kotler from failing to make the required reasonable inquiry in the future.
Therefore, Homestead’s motion is granted and it is ordered that Kotler pay $500 to the Clerk of the Court; that this decision be published; that copies of it be distributed to all the bankruptcy judges in this district; and that the clerk maintain a copy of it in such fashion as will permit it to be located and considered should sanctions be sought against Kotler in the future in some other case. I find specifically that this sanction is appropriate in the circumstances in that it will serve to deter Kotler from failing to inquire reasonably in the future.
. Sanctions against a law firm do not lie and accordingly the motion as to the firm is denied. See Pavelic & LeFlore v. Marvel Ent. Group, 493 U.S. 120, 110 S.Ct. 456, 107 L.Ed.2d 438 (1989). Richard Privitera has not responded to the motion.
. The only consideration here is whether Kolter made a reasonable inquiry since I specifically find that he did not possess any improper purpose such as harassment, delay or to unnecessarily increase the cost of the matter. The record is totally void of any evidence which would support a finding of fact of this nature. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491495/ | MEMORANDUM OPINION AND ORDER
HELEN S. BALICK, Bankruptcy Judge.
First Federal Savings Bank (of Delaware) and the United States Trustee have moved for the conversion, dismissal, or appointment of a trustee in three related Chapter 11 cases: NuGelt, Inc., Mybev Associates and Michael Moskowitz. The court held a three-day hearing on these motions in March. Post-trial the United States Trustee argued that dismissal is the only appropriate remedy. ' The court agrees.
I. FACTS
Michael Moskowitz is the president and sole shareholder of NuGelt, a Delaware corporation. NuGelt operates two restaurants, one on the Kirkwood Highway in Wilmington and the second in Newark. Mybev is a partnership originally comprised of NuGelt, Michael Moskowitz and his former wife Beverly Moskowitz. Today the sole partners are Michael and NuGelt. Mybev holds title to the land the Kirkwood Highway restaurant occupies. Michael and Beverly held title to a nearby lot on Logan Lane used for employee parking. Carolyn Moskowitz, neé Durbin, is Secretary and Vice President of NuGelt. She was Vice President of NuGelt at the time of the loan transactions with First Federal. She is now married to Michael.
In March of 1987 First Federal approved a $1,850,000 mortgage loan package consisting of a $1,600,000 term loan to Michael and Beverly Moskowitz and a $250,000 loan to NuGelt in the form of a letter of credit or a line of credit and an equipment loan *663and a line of credit. The monthly payment for the term loan alone began at $8,889 and would have increased during the 15-year payback period.
The loan was secured by a first mortgage lien on the Kirkwood Highway restaurant real estate, allegedly including the Logan Lane parcel held by Michael and Beverly Moskowitz. (But only a mortgage lien on the property held by Mybev was actually conveyed at the closing.) NuGelt provided the lender with an MAI appraisal report: the two parcels were valued at $2,500,000 and the restaurant machinery and equipment at $500,000.
Michael Moskowitz accepted the loan on behalf of NuGelt. Michael, Beverly and Carolyn also accepted the terms individually and so are personally liable on the note. NuGelt was the corporate guarantor for Michael and Beverly’s term loan; it executed a promissory note to First Federal secured by NuGelt’s equipment, inventory, contracts and accounts receivable.
At closing, the Logan Lane parking lot was not included in the mortgage documents. The parties debate the scope of the land mortgage (First Federal claims an equitable interest in the Logan Lane lot), but that is not relevant to the court’s decision today.
Mybev filed under Chapter 11 on June 2, 1988. Michael Moskowitz filed under Chapter 11 on June 14, 1988. NuGelt filed under Chapter 11 on September 20, 1988. There were related concurrent Chapter 11 filings in this court which were long ago discharged or converted. The business debtors are represented jointly; the individual debtor has separate counsel.
The Debtors’ petitions listed the following assets and liabilities. NuGelt: assets of $3,500,000 and liabilities of $9,600,000 of which $3,500,000 is secured debt divided among three creditors ($14,264 cash on hand). Mybev: assets of $3,000,000 and liabilities of $7,300,000 divided between two secured creditors. Moskowitz: assets of $340,000 and liabilities of $9,600,000; $447,-750 of which is secured debt and $9,100,000 unsecured.
From the beginning, litigation has been heavy in these proceedings. First Federal’s post-trial memorandum lists eight adversaries, stay motions, and motions in the main cases currently pending before the court. The United States Trustee has been active in these eases as well. Most recently there have been Motions to Convert in Mybev (filed December 2,1991) and NuGelt (filed February 10, 1992) and a Motion for an Order Fixing Deadline for Filing Plan of Reorganization and Disclosure Statement in Moskowitz (filed July 16, 1991). Only the motion in Mybev was noticed for hearing on March 6,1992, but the United States Trustee asked to join in First Federal’s motions as well.
NuGelt and Mybev filed disclosure statements and plans of reorganization on December 29, 1989. First Federal objected to the disclosure statements. Hearings were held on February 2 and 7, 1990. There was a two day valuation hearing in April of 1990 to determine the amount of First Federal’s secured claim in connection with its objection to the Debtors’ disclosure statement. A decision on the exact underlying value of First Federal’s collateral is pending. Michael Moskowitz also filed a disclosure statement and plan on December 29, 1989.
In October of 1989 First Federal and NuGelt entered into a stipulation under which NuGelt would pay First Federal $10, 000/month commencing November 1, 1989. The payments were to continue until confirmation, dismissal or conversion, or the court scheduled a hearing on First Federal’s motion to convert, dismiss or appoint a trustee (which the court did on January 27, 1992). The court approved the stipulation on October 23, 1989. The payments were made as scheduled until August 1991 when NuGelt purposely stopped, without prior court approval or notice.
First Federal responded with a motion for rule to show cause why the Debtors should not be held in contempt for violation of this court’s October 23, 1989 Order. At the January 27, 1992 hearing the court deferred ruling on the motion, preferring to combine the motion with an update on the nearly two-year old expert valuation testimony for the 1990 valuation motion; *664First Federal’s renewed motions to convert, dismiss or appoint a trustee in the cases; and the United States Trustee’s motion to convert, dismiss or appoint a trustee in Mybev. Testimony was presented on March 6, 10 and 11 with post-trial briefing completed on April 2, 1992. This opinion follows.
II. DEBTORS’ POST-PETITION OPERATIONS
A. The Debtors’ Monthly Reports
Chapter 11 debtors are responsible for filing monthly operating reports with the United States Trustee. Mybev has interpreted this requirement to be purely a formality; “a useless gesture.” Tr. at 6. This is allegedly the result of Mybev’s status as a title holding company; its fortunes rise and fall with NuGelt’s. Accordingly, there are no monthly reports available to chart Mybev’s progress through its Chapter 11 case. Similarly Moskowitz has also stopped filing monthly reports as they were allegedly duplicative of NuGelt’s. Tr. at 69. The court does not understand why a corporation and an individual’s monthly statement of receipts and disbursements should be identical, but there it is: only monthly reports are available for NuGelt.
NuGelt’s monthly operating report itemizes two large categories of disbursements under “Other operating expenses paid”: “Wage Attachments” (12b.) and “Share holder distributions” (sic) (13b.). There was extensive testimony at trial by the Debtor’s principals as to what these monies went to, and that will be discussed in some detail infra. Suffice to say now that these are all checks written on the DIP account and signed by Michael or Carolyn Moskow-itz, the two signatories. The wage attachments total approximately $62,686.80 through February 1992. The shareholder distributions total approximately $327,000 through February 1992. The Monthly Reports list “NONE” under salaries of officers and owners.
NuGelt’s monthly report for January 1992 reveals total cash sales of approximately $10,500,000 since filing its Chapter 11 petition.
B. Testimony at Trial
The strongest testimony supporting First Federal’s motion to convert or dismiss focused on the DIP account and what use Michael and Carolyn Moskowitz made of it. Mr. Moskowitz testified that his personal living expenses are paid for by NuGelt and “[i]t’s been done for 40 months.” Tr. at 20. His monthly shareholder distribution (itemized on NuGelt’s operating report and currently averaging $10,000/month) varies with his personal expenses each month. Id. These personal expenses include credit card bills (the card is in Carolyn Moskow-itz’s name but admittedly mutual expenses are charged to it) (Tr. at 23) and all payments and expenses relating to the two Porsches Carolyn and Michael drive (Tr. at 25-28). The car payments alone are $2,100/month. Tr. at 52. All expenses arising from Michael and Beverly’s divorce such as alimony payments and the personal legal bills of the adversaries are also paid directly by NuGelt but these are accounted for as “wage attachments.” Tr. at 24-25.
Carolyn’s testimony supported Michael’s, but as corporate secretary she could supply more financial details. First Federal was interested in how Michael decides how much to draw each month as his shareholder distribution. Q: “Do I understand that you merely add up all your personal bills and then you write a check to Mr. Moskow-itz to cover all those bills every month?” Tr. at 53. The answer was that it is not quite that simple: all large personal expenses are paid by NuGelt; Michael receives only $3,000-3,500 each month to deposit in his personal account for smaller expenses. Id. Q: “What accounting constraint or bookkeeping constraint are you aware of that would prevent Mr. Moskow-itz from paying his own bills rather than having NuGelt pay his bills?” A: “It’s just an accounting procedure that we have followed for many years.” Tr. at 54. Whether the personal expenses are paid directly by NuGelt or indirectly via a check drawn on Mr. Moskowitz’s personal account it is accounted for on the NuGelt monthly report as a “shareholder distribution.”
*665Mr. Moskowitz is not on salary (Id.), and there is no attempt to budget Mr. Moskow-itz’s personal expenses that NuGelt pays (and of course Mrs. Moskowitz’s as well because she is not on salary either). Tr. at 54-56.
Carolyn received a large bonus the end of 1991 ($22,755), as did Michael’s son who works at Alyson’s ($5,800). Tr. at 44-45. Carolyn had her father deposit her bonus check into his account (Tr. at 60) admittedly to hide the income from the IRS. Tr. 62.
There were also many questions about a check drawn on the NuGelt account in January 1991 to cover a birthday party at the Hershey Hotel for Carolyn’s father. Both Michael and Carolyn testified that they were positive the money was repaid later that month (they could not remember when exactly). Tr. at 29, 47-48. Carolyn’s mother gave her cash. Tr. at 59.
Finally, there was one other important point made at trial: Michael Moskowitz identifies completely with his closely held company NuGelt. When asked by his counsel whether he had filed under Chapter
II, he testified that he had not; he was apparently unaware that there is a distinction between his personal bankruptcy proceeding and NuGelt’s:
Q. Mr. Moskowitz, focusing on your personal case now, do you recall filing before this Court a Chapter 11 plan and disclosure statement?
A. In my personal case?
Q. In your personal case.
A. Meaning NuGelt?
Q. No. You are Michael Moskowitz.
A. No.
A. I always thought I was tied to Nu-Gelt.
Tr. at 41.
III. ANALYSIS
Movants assert that they have shown cause to convert or dismiss all three Chapter 11 debtors. 11 U.S.C. § 1112(b). In the alternative, they request appointment of a trustee to run the businesses. 11 U.S.C. § 1104. The Debtors counter that cause does not exist under section 1112(b), nor is appointment of a trustee appropriate.
Section 1112(b) provides in pertinent part:
[O]n request of a party in interest or the United States trustee, and after notice and a hearing, 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, for cause, including—
(1) continuing loss to or diminution of the estate and absence of a reasonable likelihood of rehabilitation;
(2) inability to effectuate a plan;
(3) unreasonable delay by the debtor that is prejudicial to creditors; ...
(10) nonpayment of any fees or charges required under Chapter 123 of title 28.
A. Cause
Courts have wide latitude in determining whether cause exists to convert or dismiss. The section provides ten enumerated examples which constitute statutory cause. In the Matter of Berryhill, 127 B.R. 427, 430 (Bankr.N.D.Ind.1991). However the court is not limited to the statutory examples and cause may be determined from the facts and circumstances of the case. First National Bank of Sioux City v. Kerr (In re Kerr), 908 F.2d 400, 404 (8th Cir.1990). Perhaps the most apt description of cause which applies to all three debtors comes from Judge Grant: “It is clear that the debtors are not diligently prosecuting this matter to a conclusion. Instead, they are apparently content to remain under the protection of Chapter 11 and do little more than react to complaints of inaction.” Berryhill, 127 B.R. at 432 (finding cause to dismiss based on repeated delays and defaults).
1. NuGelt
Movants assert numerous statutory grounds for cause based on the facts: the continuing diminution of estate assets, inability to propose a confirmable plan and the nearly four-year prejudicial delay with no showing of progress towards confirmation. Movants devote much of their argument to *666the large monthly “operating expenditures” leaving the estate each month to meet personal expenses of NuGelt’s principals. The United States Trustee argues that these payments violate the absolute priority rule by paying equity holders ahead of creditors. First Federal argues that the Moskowitzes may be entitled to a salary but it must be reasonable and they have the obligation to justify the value of their services. Both argue that these so-called operating expenditures are a misuse of estate funds which is both a breach of the debtor-in-possession’s fiduciary duties to the estate and its creditors, and beyond the power of this court to approve.
The court finds section 1112(b) cause based on misuse of estate funds and other breaches of the debtor-in-possession’s fiduciary duty to the estate and its creditors. There is a second separate basis for the court’s finding and that is the intentional violation of an order of this court. Undoubtedly there are multiple grounds for a finding of cause with this Debtor. The court does not reach many of the probably legitimate grounds raised by First Federal and the United States Trustee.
The debtor-in-possession is a fiduciary to the estate and its creditors. “[I]f a debtor remains in possession — that is, if a trustee is not appointed — the debtor’s directors bear essentially the same fiduciary obligation to creditors and shareholders as would the trustee for a debtor out of possession. Indeed, the willingness of courts to leave debtors in possession ‘is premised upon an assurance that the officers and managing employees can be depended upon to carry out the fiduciary responsibilities of a trustee.’ ” Commodity Futures Trading Comm’n v. Weintraub, 471 U.S. 343, 355, 105 S.Ct. 1986, 1994, 85 L.Ed.2d 372 (1985) (citing Wolf v. Weinstein, 372 U.S. 633, 649-52 & 651, 83 S.Ct. 969, 979-808, 980, 10 L.Ed.2d 33 (1963)). Failure to comply with these obligations may be cause for dismissal. In re Wells, 71 B.R. 554, 557 (Bankr.N.D.Ohio 1987).
The hallmark of a trustee is accountability and segregation of funds. These rules are reflected in the requirements (for example) that the debtor-in-possession open a separate DIP account, file monthly DIP statements with the United States Trustee and obtain court approval for transactions out of the ordinary course.
Throughout the NuGelt bankruptcy the corporate shareholder and officers have used the assets of the estate as their personal assets. The individuals’ obligations have been satisfied from the corporate coffers. For example, Mr. Moskowitz’s Family Court ordered payments of alimony, child support and legal fees to his former wife are listed as “Wage Attachments” in NuGelt’s “Other operating expenses paid” schedule of the Monthly Report. These are the checks written on the DIP account to cover alimony, child support and legal fees Mr. Moskowitz has been ordered by the Family Court to make to his former wife Mrs. Beverly Moskowitz. The total post-petition payments by the Debtor-in-Possession to Mr. Moskowitz’s former wife are approximately $62,686.80 through February 1992.
There is no possible way to justify these payments as an operating expense of the corporate debtor NuGelt. It is irrelevant that Mr. Moskowitz will be in contempt if these payments are not made or face jail: “This court cannot act as a reviewer of state court decisions nor permit relitigation of issues tried in the state courts.” In the Matter of Young, 76 B.R. 376, 379 (Bankr.D.Del.1987).
The premise that insiders may simply take what they need or want of the estate’s assets is contrary to the Bankruptcy Code and the fiduciary duty owed the estate and its creditors. There is universal agreement among the courts that using estate property to pay personal expenses of the debtor’s principals is a misuse of estate property. See, e.g. Wells, 71 B.R. at 558; In re Lloyd, Carr and Co., 617 F.2d 882, 885 (1st Cir.1980) (court has no power to authorize personal use of estate funds by the debtor) (Act case).
The shareholder distributions of more than $327,000 raise the same issue of misuse of estate property, plus several others. Both Carolyn and Michael testified that these distributions are made in lieu of salary. The Monthly Reports list “NONE” *667under salaries of officers and owners. Mr. Moskowitz claims this treatment of owner and officer salary is mandated by the favorable tax treatment afforded shareholder distributions by sub-Chapter S corporations compared to salaries.
To the extent these distributions may be considered insiders’ salaries, they are reviewable by the court. In In re Zerodec Mega Corp., Judge Twardowski held that not only may the court review the retention of a Chapter 11 debtor’s officers, but that their salary may be reduced by the court if insiders cannot show that the salary is justified. 39 B.R. 932, 935 (Bankr.E.D.Pa.1984). The Moskowitzes have been drawing the equivalent of salary plus all living expenses through the NuGelt DIP account, whether in the form of wage attachments, shareholder distributions, or car payments and insurance. “[IJnsider transactions are subject to greater scrutiny than ‘arms length’ transactions,” Id.; the Moskowitzes have foreclosed review of NuGelt’s insiders’ salaries.
The United States Trustee argues that these shareholder distributions violate the absolute priority rule by putting those least entitled to payment under the Code ahead of creditors. 11 U.S.C. §' 1129(b)(2). The court would have to agree, particularly as the debtors appear to be practicing a form of creeping reorganization through unchecked disbursements of NuGelt income. See In re Cloisters of Brevard, Inc., 117 B.R. 722 (Bankr.M.D.Fla.1990).
The United States Trustee and First Federal argue that the large monthly shareholder distributions and personal expenses charged to NuGelt are a “continuing loss to or diminution of the estate.” Movants are absolutely right; there is no other way to characterize these payments.
Testimony at trial placed NuGelt’s cash on hand at $37,000, although it has been argued that the figure is actually closer to $100,000 when trade debt is added to it. Post-petition NuGelt has reported total gross sales of nearly $11,000,000 and an annual profit of $1,000,000, but its cash reserves have not reflected the excellent business revenues.
Given the debtor-in-possession’s propensity to siphon off NuGelt’s profits, the court finds there is little likelihood of rehabilitation. NuGelt has reached an impasse with its major secured creditor and really has not taken any steps towards a plan in years. Coupled with the constant bleeding of assets of the estate, the court finds that there is cause under section 1112(b)(1).
Finally, NuGelt is in violation of this court’s Order to pay First Federal $10,000/ month. These were the only payments First Federal received, and a lesser sum than what it was entitled to prepetition, or what it can expect under a plan of reorganization. The court holds that intentional violations of an order of this court constitutes cause under section 1112(b). Under section 109(g)(1) dismissal for “willful failure of the debtor to abide by orders of the court” results in a six month statutory bar to refiling.
2. Mybev
The court finds statutory cause to convert or dismiss the Chapter 11 petition of debtor Mybev under section 1112(b)(10).
The United States Trustee reported that Mybev has failed to pay quarterly fees as required by section 1930(a)(6) of Title 28 for the fourth quarter of 1988 and all quarterly fees from the second quarter of 1989 through the present. This was not disputed by the Debtor. The United States Trustee also faulted Mybev for failing to file monthly reports. Mybev represented to the court that its filing was a mere formality, a consequence of NuGelt’s bankruptcy, and because it receives no income and makes no disbursements, there is no need to comply with the United States Trustee’s monthly reporting requirements.
Mybev’s admitted failure to file monthly operating reports may be cause to convert or dismiss under section 1112(b). In re Cloisters of Brevard, Inc., 117 B.R. 722 (Bankr.M.D.Fla.1990). While the court is sympathetic to Mybev’s claim that the reports are needless in this instance, the United States Trustee has no way to know if the reports are not being filed because they are unnecessary or if the reports are *668not being filed as part of a nefarious plan to conceal income. Indeed, there may even be a difference of opinion as to why the debtor is not in compliance with the United States Trustee’s monthly reporting requirements.
First, the United States Trustee has the statutory duty to monitor these cases. The job would be impossible without some sort of reporting requirement. Second, if the court were to condone the selective abuse of formalities, debtors could ignore requirements as they deemed it appropriate and there would be no impetus for reorganization. If a debtor chooses to seek the protection of the bankruptcy court, it must play by the rules.
The failure to file monthly reports, standing alone, does not constitute cause under section 1112(b), given its long-standing nature and lack of notice to Mybev that it would not be tolerated. However, taken with the inability to effectuate a plan and failure to pay fees under Chapter 123 of title 28, the court finds statutory cause to convert or dismiss under section 1112(b)(2) and (10).
3. Moskowitz
The United States Trustee argues that there is cause to dismiss Moskowitz’s petition based on prejudicial delay. The court agrees. 11 U.S.C. § 1112(b)(3).
Generally courts find cause under section 1112(b) for dilatory behavior by individuals in Chapter 11. See, e.g., In re Canion, 129 B.R. 465 (Bankr.S.D.Tex.1989) (dismissal granted after ten months in Chapter 11); Matter of Berryhill, 127 B.R. 427 (Bankr.N.D.Ind.1991) (two and one-half years). Often the cases are marked by some sort of abuse, whether it’s noncompliance with reporting requirements (Berryhill ) or the appearance of settling in for a spending spree under the protection of the court. (The Canion debtor had spent $4,500 on yard and pool maintenance, $14,-000 on car payments, $18,000 on credit cards and $3,000 for country club expenses in less than one year.)
Moskowitz is not a large corporate debt- or requiring a complicated plan or disclosure statement. There is absolutely no reason it should take four years to propose a confirmable plan, if one is possible. Mr. Moskowitz is personally liable on the notes held by First Federal. He has substantial assets (house, Porsche, real estate) that could be used to satisfy a state court judgment. During his bankruptcy, his major creditor has received nothing. The delay of nearly four years for no legitimate reason is prejudicial to creditors. The court finds that the fact that the Debtor has failed to emerge from Chapter 11 in more than 44 months is cause under section 1112(b)(3).
Moskowitz has stopped filing monthly operating reports. “Timely and accurate financial disclosure is the life blood of the Chapter 11 process. Monthly operating reports are much more than busy work imposed on a Chapter 11 debtor.... They are the means by which creditors can monitor a debtor’s post-petition operations. As such, their filing is very high on the list of fiduciary obligations imposed upon a debtor in possession. Thus, the failure to file operating reports ‘in itself constitutes ‘cause’ for dismissal.’ ” Berryhill, 127 B.R. at 433 (citations omitted) (quoting In re McClure, 69 B.R. 282, 289 (Bankr.N.D.Ind.1987)). Carolyn Moskowitz testified that she stopped filing monthly reports for Michael, as they were identical to Nu-Gelt's. Tr. at 69.
The court sees this failure as related to Moskowitz’s view of his bankruptcy ease as identical to that of his closely held company, NuGelt, and his free use of assets of the NuGelt estate. Possibly if the three debtors before the court today, NuGelt, Moskowitz, and Mybev, had maintained separate identities in bankruptcy, one or more of them would have had a better chance of emerging as a reorganized debt- or or discharged individual.
B. Remedy
Originally the United States Trustee and First Federal sought appointment of a trustee as a least favored alternative. After the hearing, the United States Trustee advocated dismissal only, and apparently First Federal continues to argue this last option in the event the court does not find *669cause to convert or dismiss. Each Debtor has argued against the appointment of a trustee. Because the court finds cause and further finds that dismissal is appropriate in each case, the court will not reach the issue of appointment of a trustee.
After the court has made the threshold determination that cause exists, the court must decide whether conversion or dismissal “is in the best interest of creditors and the estate.” 11 U.S.C. § 1112(b); In re Mechanical Maintenance, Inc., 128 B.R. 382, 386 (E.D.Pa.1991). One application of the best interest test to creditors is to compare their rights in bankruptcy with their rights under state law. See Id. at 388 (citing In re GPA Technical Consultants, Inc., 106 B.R. 139, 144 (Bankr.S.D.Ohio 1989)). The decision is discretionary, based on the facts of each case. In re Winslow, 123 B.R. 641, 631 (D.Colo.1991); In re Sullivan, 108 B.R. 555, 557 (W.D.Pa.1989).
1.NuGelt
Certainly it is painfully obvious to all involved that this case cries out for conversion or dismissal. In similar cases courts have ordered conversion to ensure that creditors receive some payment. “The debtor has demonstrated throughout this ease that it cannot be trusted to act as debtor-in-possession. It is in the best interest of creditors and the estate, therefore, to convert the case to Chapter 7 where a trustee can liquidate the estate and insure that creditors will be paid.” Cloisters, 117 B.R. at 723.
Under the special facts of this case, the court finds it more appropriate to order dismissal rather than conversion. As the United States Trustee asserts, the case is essentially a two-party dispute between the Debtor and First Federal. The Official Committee of Unsecured Creditors, appointed by the United States Trustee in 1988, has not been active in the case for years. No one involved in these cases expects the unsecured creditors to receive a cent. Accordingly, under the best interests of creditors test the court need only consider the only creditor who stands to receive anything: First Federal. Problems the bankruptcy court is normally concerned with, such as the race to the court house, are absent in the situation where the entire estate will go to the major secured creditor. (And this appears to be the case regardless of the court’s decision on valuation.)
At the same time, NuGelt is a thriving restaurant. Mr. Moskowitz spoke with pride from the witness stand of the post-petition profit of one million dollars a year. It would be unfortunate to force the liquidation of such a profitable business. It is in the best interest of the estate to continue as a profitable business, and it is in the best interest of First Federal to resolve its state law issues speedily in state court. There may be further delay and administrative costs if the court were to convert Nu-Gelt rather than dismiss.
This court is also giving the debtor the benefit of the doubt: with its hard working management team and strong revenues it should be able to survive outside bankruptcy subject to normal state laws. Perhaps out of bankruptcy the debtor will be motivated to adopt some of the cost cutting measures recommended for restaurants by Mr. Laskaris (First Federal’s expert on restaurant management and accounting procedures). If NuGelt cannot operate profitably outside of Chapter 11 making normal debt payments, it may file again in six months under Chapter 7.
2.Mybev
In the single asset Chapter 11 case, conversion to Chapter 7 is tantamount to dismissal (or granting relief from stay). See In re Guaranteed Retirement, Inc., 112 B.R. 263, 279 n. 11 (Bankr.N.D.Ill.1990). The court finds that each option would lead to much the same result, with dismissal perhaps the fastest and least costly alternative for all concerned. Especially here where it serves little purpose to dismiss the main debtor NuGelt and leave the satellite debtor in Chapter 11.
3.Moskowitz
The United States Trustee argues that dismissal is preferable over conversion in that there would be no unencumbered assets available for distribution to unsecured creditors. The court agrees that the increased administrative costs of a trustee *670to liquidate Mr. Moskowitz’s assets are unnecessary. If it does come to a liquidation, the only creditor to receive anything will most likely be First Federal. A liquidation in favor of a single secured creditor may be accomplished just as easily in a state court foreclosure proceeding as in a Chapter 7 liquidation.
IV. RELATED ADVERSARY PROCEEDINGS
The court may at its discretion retain jurisdiction over adversary proceedings after dismissing the main case. 11 U.S.C. § 349; In re Roma Group, Inc., 137 B.R. 148, 22 B.C.D. 1133 (Bankr.S.D.N.Y.1992). The circumstances are not present which would warrant retention of jurisdiction. Most of the motions currently pending in this court are resolved by the dismissal; those that are not may be expeditiously resolved in a single state court action.
V. CONCLUSION
For the reasons given, the court finds that dismissal of all three Chapter 11 debtors is appropriate on these facts. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491496/ | OPINION AND ORDER DISMISSING TRUSTEE’S PREFERENCE CLAIMS AND GRANTING DEFENDANT’S ABSTENTION REQUEST
BARBARA J. SELLERS, Bankruptcy Judge.
I. Preliminary Considerations And Jurisdictional Statement
This matter is before the Court upon the motion (“Motion”) of defendant, Suitt Construction Co., Inc. (“Suitt”), requesting the Court to dismiss this adversary proceeding in whole or in part or, alternatively, to abstain from exercising its subject matter jurisdiction. Plaintiff, Jay Alix (“Trustee”), opposes the Motion.
In part IV(A) of this opinion and order, the Court holds that the Trustee’s preference claims under 11 U.S.C. § 547 fail to state claims upon which relief can be granted and, therefore, must be dismissed pursuant to Fed.R.Civ.P. 12(b)(6) and Fed. R.Bankr.P. 7012(b). In part IV(B) of this opinion and order, the Court holds that it will abstain from exercising any subject matter jurisdiction it may possess over the remaining state law counts of the Trustee’s complaint.
II. Facts
At all times relevant hereto, the debtor, Cardinal Industries, Inc. (“CII”), was and is the general partner of Harvest Grove Apartments of Columbus, Ltd., an Ohio limited partnership (“Harvest Grove”), and Cherry Glen Apartments of Marion County, Limited Partnership, an Ohio limited partnership (“Cherry Glen”) (Harvest Grove and Cherry Glen are hereinafter together referred to as the “Partnerships”). Harvest Grove owns certain real property located in Franklin County, Ohio (“Harvest Grove Property”). Cherry Glen owns certain real property located in Marion County, Indiana (“Cherry Glen Property”).
In or around March, 1989, CII executed a promissory note (“Note”) in favor of Suitt. CII, not the Partnerships, is liable to Suitt under the Note. As security for CII’s liability under the Note, on March 31, 1989, CII, on behalf of Harvest Grove and Cherry Glen, respectively, executed second mortgages (“Mortgages”) against the Harvest Grove Property and the Cherry Glen Property in favor of Suitt. The Mortgages were subsequently recorded.
On May 15, 1989, CII filed its voluntary petition seeking relief under Chapter 11 of the Bankruptcy Code. The Trustee is the duly-appointed Chapter 11 trustee for CII and its substantively consolidated estates. Neither Harvest Grove nor Cherry Glen have sought bankruptcy protection.
On May 14, 1991, the Trustee initiated this adversary proceeding against Suitt. In his complaint (“Complaint”), the Trustee seeks relief under three basic theories.
First, the Trustee seeks to have the transfer of the Mortgages avoided as preferential transfers under 11 U.S.C. § 547 (“Preference Counts”). Second the Trustee seeks a determination that the Mortgages are void and without legal effect because the Partnerships received no consideration for the grant of such Mortgages. Finally, the Trustee seeks a determination that the Mortgages are void and without legal effect because, pursuant to the relevant partnership agreements, CII was without legal authority to grant the Mortgages against the Harvest Grove Property and the Cherry Glen Property to secure CII’s own liability to Suitt. These final two theories are based upon state law only (collectively, “State Law Counts”).
*809On June 28, 1991, Suitt filed the Motion. In the Motion, Suitt first requests the Court to dismiss the Preference Counts under Fed.R.Civ.P. 12(b)(6). Additionally, Suitt requests the Court to dismiss the remaining State Law Counts of the Complaint for lack of subject matter jurisdiction pursuant to Fed.R.Civ.P. 12(b)(1) or, alternatively, to abstain from exercising subject matter jurisdiction pursuant to 28 U.S.C. § 1334(c)(1).
III. Issues
Although numerous issues are raised by the Motion and the Trustee’s opposition thereto, the Court must decide only two:
1. Whether the Preference Counts should be dismissed pursuant to Fed.
R.Civ.P. 12(b)(6).
2. Whether the Court should abstain pursuant to 28 U.S.C. § 1334(c)(1) from exercising whatever subject matter jurisdiction it may possess in this proceeding.
IV. Legal Discussion
A. Dismissal Of The Preference Counts Under Fed.R.Civ.P. 12(b)(6)
Fed.R.Civ.P. 12(b)(6), made applicable to this proceeding by Fed.R.Bankr.P. 7012, provides that a claim may be dismissed for failure to state a claim upon which relief can be granted. In considering Suitt’s motion to dismiss under Rule 12(b)(6), the Court must construe the Trustee’s Complaint in a light most favorable to the Trustee and accept all well-pleaded material allegations in the Complaint as true. Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974); Roth Steel Prod. v. Sharon Steel Corp., 705 F.2d 134, 155 (6th Cir.1983). In determining the sufficiency of a complaint that has been challenged by a motion to dismiss, the Court must proceed under the general principle that a complaint may not be dismissed for failure to state a claim unless it appears beyond a doubt that no relief could be granted under any set of facts that could be proved consistent with the allegations. Hishon v. King & Spaulding, 467 U.S. 69, 73, 104 S.Ct. 2229, 2233, 81 L.Ed.2d 59 (1984); Davis H. Elliot Co. v. Carribean Util. Co., 513 F.2d 1176, 1182 (6th Cir.1975).
Suitt contends that the Preference Counts fail to set forth claims upon which relief can be granted because the Mortgages were not transfers of property of CII, a necessary element for avoidance under 11 U.S.C. § 547(b). Section 547(b), argues Suitt, simply does not extend to permit a general partner bankruptcy debtor to avoid a mortgage granted by the partnership against partnership assets.
The Trustee counters that Suitt’s arguments exalt form over substance. The Trustee contends that CII, by the transactions, effectively transferred the value of its general partnership interests in the Partnerships to Suitt. Absent the transfers, argues the Trustee, such value would have been available for the benefit of all of CII’s unsecured creditors. Thus, the Trustee contends, the transfers were the equivalent of CII granting Suitt a security interest against CII’s general partner interests.
In this adversary proceeding, the Trustee bears the burden of proving all the elements of a preference set forth in 11 U.S.C. § 547(b). See, 11 U.S.C. § 547(g). With regard to § 547(b), “[t]he most basic element is that there was a ‘transfer of property of the debtor.’ ” Campbell v. Bolen (In re Caudy Custom Builders), 31 B.R. 6, 8 (Bankr.D.S.C.1983). The Trustee strains to find such a transfer of CII’s property; however, no such transfer exists.
In Cardinal Industries, Inc. v. Buckeye Federal Savings & Loan (In re Cardinal Industries, Inc.), 105 B.R. 834 (Bankr.S.D.Ohio 1989), this Court was careful to distinguish between CII’s interests attributable to its status as general partner in various limited partnerships, including the right to share in such partnerships, profits and losses (the “Partnership Interests”), and the ownership interests of such limited partnerships in realty. While the issues before the Court were different then than here,1 the impact of that distinction remains.
*810The subtleties of the distinction are not lost on the Trustee, either. Rather than attack the Mortgages as a grant of interest in the realty owned by the Partnerships, the Trustee urges the Court to view the Mortgages as a transfer to Suitt of the value of CII’s partnership interests in the Partnerships. Such value, argues the Trustee, was property of CII. Complaint at paras. 21 and 34.
The Trustee's arguments are not persuasive for at least two reasons. First, the Trustee’s arguments confuse property with such property’s value. The Court agrees that, under limited partnership law generally, the Partnership Interests are personal property of CII. However, the value of those Partnership Interests is not property at all.
Second, even if the Court were to construe the value of CII’s Partnership Interests as property, no transfer of CII’s interest in such property occurred. Any diminution of the value of CII’s Partnership Interests was only the effect of the Partnerships’ granting of the Mortgages to Suitt. The Trustee’s contention that “[functionally, the transfers are the equivalent of CII granting a security interest against its general partner interests” is incorrect. While either of the transfers might diminish the value of CII’s Partnership Interests, the Partnerships’ granting of the Mortgages to Suitt did not encumber directly Oil’s designated share of the Partnerships’ profits, losses and distributions.
B. Discretionary Abstention Under 28 U.S.C. § 1334(c)(1)
In the Motion, Suitt urges the Court to dismiss the State Law Counts pursuant to Fed.R.Civ.P. 12(b)(1) and Fed.R.Bankr.P. 7012(b) for want of subject matter jurisdiction. Alternatively, Suitt requests the Court to abstain pursuant to 28 U.S.C. § 1334(c)(1) from exercising whatever subject matter it may possess over the State Law Counts.
As to Suitt’s dismissal request under Rule 12(b)(1), the parties focus their arguments on whether this adversary proceeding is sufficiently “related to” Oil’s bankruptcy case to confer subject matter jurisdiction upon the district court and this Court by reference. See, 28 U.S.C. §§ 157(a) and 1334(b); Order No. Ms-1-84-152, United States District Court, Southern District of Ohio, July 31, 1984 (referring such proceedings to the bankruptcy judges of this district). The parties do not address the jurisdictional basis of the State Law Counts, if any, other than 28 U.S.C. § 1334(b). See, In re Opti-Gage, Inc., 128 B.R. 189, 193 (Bankr.S.D.Ohio 1991).
The test generally employed to define “related to” proceedings is “whether the outcome of the proceeding could conceivably have any effect on the estate being administered in bankruptcy.” Pacor, Inc. v. Higgins (In re Pacor, Inc.), 743 F.2d 984, 994 (3d Cir.1984). This test has been adopted by the Sixth Circuit. Kelley v. Nodine (In re Salem Mortgage Co.), 783 F.2d 626 (6th Cir.1986). There may be situations where an extremely tenuous connection to the estate would not satisfy the jurisdictional requirement. Salem Mortgage at 634. However, the Sixth Circuit “appears to have taken a particularly expansive view of the ‘related to’ jurisdiction.” In re Hunt Energy Co., 1988 U.S.Dist. LEXIS 14295 (N.D.Ohio 1988) [citing In re Southern Industrial Banking Corp., 809 F.2d 329, 331 (6th Cir.1987)].
In proceedings such as this where the connection to the debtor’s main bankruptcy case is quite remote, jurisdictional challenges oftentimes require the Court to hesitantly employ a sort of “line-drawing” analysis. Indeed, the boundaries of the “conceivable effect” test seem to be limited only by the imagination of the creative lawyer, leaving the Court to entertain the possibilities of speculative outcomes and their consequence to the estate.
Fortunately, Congress’ broad grant of bankruptcy jurisdiction is also qualified by the discretionary abstention provision of 28 U.S.C. § 1334(c)(1), which provides an additional limitation designed to prevent the overextension of bankruptcy jurisdiction:2
*811Congress wisely chose a broad jurisdictional grant and a broad abstention doctrine over a narrower jurisdictional grant so that the district court could determine in each individual case whether hearing it would promote or impair efficient and fair adjudication of bankruptcy cases.... The degree to which the related proceeding is related to the bankruptcy case, as a practical matter, will doubtless be an important factor in the decision whether to abstain. Salem Mortgage at 635.
Assuming, without deciding, that this Court has subject matter jurisdiction to determine the State Law Counts, the facts of this proceeding and those generally attending the entire CII bankruptcy persuade this Court to abstain in its discretion from doing so. First, the Court believes that the effect of the resolution of the State Law Claims in this proceeding is so tenuously connected to CII’s estate that the interest of justice is best served by this Court’s abstention. Second, much like Judge Clark in Olszewki, this Court is concerned that exercising jurisdiction herein would do violence to the bankruptcy policy that treats partnerships and their partners separately. Clearly, CII’s attempt to indirectly achieve results for the non-debtor Partnerships without the necessity of their filing bankruptcy petitions is contrary to the entity theory of bankruptcy law.
V. Conclusion
For the foregoing reasons, it is hereby ORDERED, that the Preference Counts of the Trustee’s Complaint are dismissed pursuant to Fed.R.Civ.P. 12(b)(6) and Fed. R.Bankr.P. 7012(b) for failure to state a claim upon which relief can be granted; and it is further
ORDERED, the Court will abstain in its discretion pursuant to 28 U.S.C. § 1334(a)(1) from hearing the remaining State Law Counts of the Trustee’s Complaint.
. In the Court's prior opinion and order, the Court held that the existence of CII's interests in various limited partnerships does not cause 11 U.S.C. § 362(a)(3) to stay the prosecution of foreclosure actions against property owned by such limited partnerships.
. Rodeck v. Olszewki (In re Olszewki), 124 B.R. 743, 748 (Bankr.S.D.Ohio 1991). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491497/ | MEMORANDUM OPINION
JAMES G. MIXON, Bankruptcy Judge.
On January 17, 1990, an involuntary petition was filed against Swink & Company (Swink), and on February 23,1990, an order was entered adjudicating Swink a debtor under chapter 7 of the United States Bankruptcy Code. Charles Darwin Davidson, Esq., (trustee) was appointed the chapter 7 trustee. On June 29, 1990, the City of Elkins (Elkins) filed a complaint to determine priority status alleging that it is a “customer” pursuant to 11 U.S.C. § 741 and, therefore, entitled to a priority status pursuant to 11 U.S.C. § 752.
The proceeding before the Court is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), and the Court has jurisdiction to enter a final judgment in the case. The following shall constitute the Court’s findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052.
BACKGROUND
Swink was a securities broker-dealer with its principal place of business located in Little Rock, Arkansas. Swink was registered with the Securities and Exchange Commission and the Arkansas Securities Department. Elkins is a municipal corporation located in West Virginia. In June 1989, Elkins executed a “Customer’s Agreement” with Swink as the broker-dealer and Elkins as the customer for the purpose of buying and selling securities. The *875customer agreement authorized Swink to buy and sell securities for Elkins and denoted Elkins as a “customer” in this agreement. In August 1989, Elkins and Swink executed a “Master Repurchase Agreement” in anticipation of engaging in repurchase agreements involving securities. Both documents required Elkins to maintain a margin account as collateral for credit transactions involving the sale or purchase of securities.
According to Glyn Wyland, the City Treasurer of Elkins, the investment activities of Elkins included the purchase of securities such as U.S. treasury bonds and U.S. government agency securities such as mortgage-backed securities issued by the Government National Mortgage Association (GNMA) and the Federal Home Loan Mortgage Corporation (FHLMC).1 Elkins purchased securities on a trade date on credit with a settlement date in the future. Elkins would then attempt to “match” or “pair up” a sale of the same securities with the same settlement date. If the market price of the securities increased between the trade date and settlement date, Elkins would make a profit on the transaction. Conversely, if the market price of the securities decreased, Elkins would suffer a loss.
The two series of transactions involved in this adversary proceeding involve securities issued by FHLMC, known as pass through certificates. According to the testimony of Donald Gates, a former employee of Swink, these types of FHLMC securities are book-entry or uncertificated securities, which are maintained through the Federal Reserve book-entry system. Swink and Elkins entered into the two series of transactions between August and December, 1989. Each series commenced by Elkins purchasing a FHLMC security and, prior to the settlement date, selling the security back to Swink subject to an agreement by Elkins to repurchase the security at a stated price. Swink would simultaneously enter into almost identical transactions with Dain Bos-worth (Bosworth), a security broker located in Minneapolis, Minnesota, which involved the same securities.
More specifically, the two transactions were as follows. On July 20, 1989, Elkins purchased a $2,000,000 par value 10% FHLMC security whose pool number was 360064. The settlement date for this transaction was August 17, 1989. As the settlement date approached, the market price of the securities had decreased and Elkins was anticipating a loss on any attempted match. In order avoid a loss on the transaction, Elkins agreed to sell the $2,000,000 FHLMC security to Swink pursuant to a repurchase agreement. Between August 17 and December 27, 1989, Elkins repurchased and resold the same security to Swink on several occasions.
The second series of transactions began on December 4, 1989, when Elkins purchased a $4,000,000 par value 10!/2% FHLMC security whose pool number was 535754. The settlement date for this transaction was December 19, 1989. After the trade date on December 4, 1989, the market price of the securities decreased, and, as in the first series of transactions, Elkins sold the $4,000,000 bonds to Swink under a repurchase agreement, agreeing to buy the bonds back on December 31, 1989.
As a result of the two series of transactions, Elkins has a claim against Swink in the total sum of $201,625.37. Elkins’s claim is based on the following two components: (1) the November 1989 principal and interest due on the first transaction involving pool number 360064 in the amount of $27,112.81 and (2) the balance of its margin account, which is the net result of the series of trade transactions in the amount of $174,512.56. The amount of Elkins’ claim is not disputed.
DISCUSSION
The issue to be determined is whether a participant in a repurchase agreement with a broker-dealer is a “customer” pursuant *876to 11 U.S.C. § 741(2) and, therefore, entitled to the priority status granted a customer under 11 U.S.C. § 752.
Elkins argues that it meets the definition of “customer” as provided in 11 U.S.C. § 741 and, therefore, is entitled to a priority status as a customer. More specifically, Elkins alleges that it acquired securities from Swink in the ordinary course of Swink’s business as a broker-dealer, that the transactions involved the purchase and sale of securities, and that the transactions created a fiduciary relationship between Swink and Elkins.
The trustee argues that Elkins has not met the elements of 11 U.S.C. § 741 because the securities involved in the two series of transactions were not “held” by Swink for Elkins, but were sold to third parties pursuant to repurchase agreements. According to the trustee’s argument, the repurchase agreement transactions do not qualify for the customer protection afforded by 11 U.S.C. §§ 741-752.
Bankruptcy cases involving securities broker-dealers are administered under the provisions of 11 U.S.C. §§ 741-752, as well as other applicable sections of Title 11. A liquidation under 11 U.S.C. §§ 741-752 is independent from a proceeding pursuant to 15 U.S.C. § 78eee(b)(l) of the Securities Investor Protection Act of 1970 (SIPA).2 The analysis used to determine whether a claimant is a customer for purposes of a bankruptcy proceeding is analogous to the analysis used in SIPA proceedings because the definition of the term “customer” is substantially the same in both instances.
The Bankruptcy Code defines a “customer” to include:
(A) entity with whom a person deals as principal or agent and that has a claim against such person on account of a security received, acquired, or held by such person in the ordinary course of such person’s business as a stockbroker, from or for the securities account or accounts of such entity—
(i)for safekeeping;
(ii) with a view to sale;
(iii) to cover a consummated sale;
(iv) pursuant to a purchase;
(v) as collateral under a security agreement; or
(vi) for the purpose of effecting registration of transfer; and
(B) entity that has a claim against a person arising out of—
(i) a sale or conversion of a security received, acquired or held as specified in subparagraph (A) of the paragraph; or
(ii) a deposit of cash, a security or other property with such person for the purpose of purchasing or selling a security.
11 U.S.C. § 741(2).
The SIPA statute defines a “customer” as follows:
The term “customer” of a debtor means any person (including any person with whom the debtor deals as principal or agent) who has a claim on account of securities received, acquired, or held by the debtor in the ordinary course of its business as a broker or dealer from or for the securities accounts of such person for safekeeping, with a view to sale, to cover consummated sales, pursuant to purchases, as collateral security, or for purposes of effecting transfer. The term “customer” includes any person who has a claim against the debtor arising out of sales or conversions of such securities, and any person who has deposited cash with the debtor for the purpose of purchasing securities^]
15 U.S.C. § 78111(2). Therefore, the claimant’s status as a customer can be based on case law involving both SIPA and bankruptcy proceedings.
Elkins satisfies the literal definition of a customer pursuant to 11 U.S.C. § 741. El-kins has a claim for securities or cash “received, acquired, or held” by Swink in the ordinary course of its business; the securities or cash was received, acquired, *877or held “from or for the securities account” of Elkins; and the securities or cash have been received, acquired, or held by Swink either for safekeeping, with a view to sale, as collateral or for effecting transfer.3 However, “[i]t may not be enough ... merely to satisfy, the literal require-ments_ Courts have generally taken a restrictive view of Congress’ intended scope of ‘customer’ protection.” Cohen v. Army Moral Support Fund (In re Bevill, Bresler & Schulman Asset Management Corp.), 67 B.R. 557, 600 (D.N.J.1986).
Courts have consistently emphasized two factors as necessary to a determination that a claimant is a customer. First, the transaction must have been related to investment, trading, or participation in the securities market. Second, the transaction' must have arisen out of the type of fiduciary relationship that generally characterizes the relationship between a broker-dealer and its customer. Cohen v. Army Moral Support Fund (In re Bevill, Bresler & Schulman Asset Management Corp.), 67 B.R. at 600 (citing SIPC v. Wise (In re Stalvey & Assoc., Inc.), 750 F.2d 464 (5th Cir.1985) and SEC v. F.O. Baroff Co., Inc., 497 F.2d 280, 284 (2d Cir.1974)). Accord In re Hanover Square Sec., 55 B.R. 235, 238-40 (Bankr.S.D.N.Y.1985); In re John Muir & Co., 51 B.R. 150, 152 (Bankr.S.D.N.Y.1985); Ravis v. Day (In re Investors Sec. Corp.), 6 B.R. 420, 424 (Bankr.W.D.Pa.1980). More precisely, the Court in Bevill, Bresler focused on the following factors:
(1) whether the particular transactions were an integral part of the stockbroker’s ordinary course of business;
(2) whether the stockbroker maintained computerized accounts for each of the Repurchase Agreements and Reverse Repurchase Agreements in which the purchases and sales as to said transactions were duly recorded in the same manner as outright purchases and sales;
(3) whether the securities underlying the various transactions were held by the stockholder pursuant to the purchase of the securities by the Repurchase Agreement and Reverse Repurchase Agreement participants;
(4) whether the underlying securities were acquired by the stockbroker with a view to their resale on the other side of a Repurchase Agreement transaction on a predetermined future date;
(5) whether the securities were received, acquired, or held pursuant to completed or contemplated purchase and sale transactions which were conducted through trading accounts maintained by the stockbroker for the various participants on each side of the Repurchase Agreement and Reverse Purchase Agreement transactions.
Thomson McKinnon Sec., Inc. v. Residential Resources Mortgage Inv. Corp. (In re Residential Resources Mortgage Inv. Corp.), 98 B.R. 2, 21-22 (Bankr.D.Ariz.1989) (citing In re Bevill, Bresler & Schulman Asset Management Corp., 67 B.R. at 599-600).
The case of Bevill, Bresler is one of the first cases to consider whether a participant in a repurchase agreement transaction is a customer for SIPA proceedings. The court, in a lengthy and well-reasoned opinion, concluded that a repurchase participant is a customer. Bevill, Bresler & Schulman Asset Management Corp., 67 B.R. at 602. The Court observed as follows:
The Trustee and SIPC contend that claimants must have been trading through rather than with the bankrupt dealer in order to qualify as SIPA “customers.” ' They argue that repo and reverse repo participants were dealing strictly with BBS, Inc., and that the ultimate success of their transactions was dependant upon the continued financial well being of BBS, Inc. rather than the strength of the underlying investment. Thus, they argue that repo and reverse repo participants are no different than ordinary creditors of a dealer who rely on the creditworthiness of the dealer *878rather than the “vicissitudes of the particular market.” See, In re Co Petro, 680 F.2d 566, 571-72 (9th Cir.1982).
This argument, however, is a gross oversimplification which ignores the nature and mechanics of the repurchase market, and must fail for two reasons. First, under the plain language of the statute, the term “customer” includes “any person with whom the debtor deals as principal” for its own account. 15 U.S.C. § 78111(2). Second, as in any securities transaction, the success of an investment in the repurchase market is directly related to market fluctuations in the underlying security. Reverse repo participants surrender securities for a fixed term during which the market value of the securities is subject to substantial fluctuation. If the market value decreases over the term of the reverse repo agreement, the reverse repo participant will have lost an important opportunity to sell the securities outright. If, on the other hand, the market value increases, he will not only have had the use of a large portion of the cash value of the securities, but will also be repurchasing a more valuable security at a price fixed at the outset of the transaction. Precisely the opposite risks and opportunities for reward attend to every repo transaction. Repo participants also have the opportunity to trade the securities during the term of the repo agreement, trades which no doubt carry their own risks and potential rewards. The risks and potential rewards associated with repo and reverse repo transactions are unquestionably market-related, risks and rewards which are entirely distinct from and additional to any credit risk associated with the solvency of the broker as a financial intermediary.
The status of repo and reverse repo participants is thus markedly different than that of the stock lenders who were denied customer status in Baroff and SIPC v. Executive Securities Corp., 423 F.Supp. 94 (S.D.N.Y.1976), aff'd, 556 F.2d 98 (2d Cir.1977). Unlike the stock lender in Baroff, the repo and reverse repo participants in the BBS, Inc. test cases were not contributing “to the capital of the broker-dealer,” and did not become creditors of BBS, Inc. for reasons independent of investment and trading in an established securities market. 497 F.2d at 283-84. Nor is there any meaningful resemblance between the repo and reverse repo participants and a “commercial bank, trade creditor, landlord, equipment lessor, or any other party who relies on the ability of a business enterprise to repay a business loan.” Id. at 284. Unlike the stock lenders in Executive Securities, the repo and reverse repo participants were investing and trading in securities through customer accounts maintained for them by BBS, Inc. 556 F.2d at 99.
Id. at 601-02 (emphasis in original).
This conclusion was followed in the case of Thomson McKinnon Securities, Inc. v. Residential Resources Mortgage Investments Corp. (In re Residential Resources Mortgage Investments Corp.), 98 B.R. 2, 21-22 (Bankr.D.Ariz.1989). Research does not disclose any case that declines to follow the rationale of Bevill, Bresler. Some cases, however, have distinguished the facts in Bevill, Bresler and have reached different results. See Tew v. Resource Management (In re ESM Gov’t Sec., Inc.), 812 F.2d 1374, 1377 (11th Cir.1987) (“We agree with the holding in [Bevill, Bresler ], however, the facts of [this case] are distinguishable.”)
Under the facts presented in this case, the analysis of the Court in Bevill, Bresler is applicable and Elkins is a customer within the meaning of 11 U.S.C. § 741. Swink and Elkins executed documents with Elkins designated as a customer and the parties contemplated a relationship of trading in the securities market as broker-dealer and customer, respectively. Elkins maintained a margin account to facilitate the various purchases of securities on credit. Swink maintained computerized accounts of all the transactions with Elkins, including the repurchase and reverse repurchase transactions. Elkins purchased the securities on credit with a settlement date in the future. Swink acted in a fiduciary capacity in its transactions with *879Elkins. The substance of the relationship between Swink and Elkins remained the same during the course of time that Swink and Elkins engaged in repurchase transactions. The substance of the transactions between Swink and Elkins is not distinguishable from the transactions described in Bevill, Bresler.
Therefore, for the reasons stated, the trustee’s objection to Elkins’ claim of customer status is overruled. The City of Elkins is determined to be a customer with the meaning of 11 U.S.C. § 741 and is entitled to priority status pursuant to 11 U.S.C. § 752.
IT IS SO ORDERED.
. GNMA is a U.S. Government-owned corporation that approves the issuance of mortgage-backed securities that are guaranteed by the U.S. Treasury. Ginnie Mae is the colloquial name for mortgage-backed securities issued by GNMA. FHLMC is a federal agency that issues mortgage-backed securities known as Participation Certificates. Freddie Mac is the colloquial name for mortgage-backed securities issued by the FHLMC.
. The Securities Investor Protection Corporation (SIPC) elected not to become a party to this action. See 15 U.S.C. 78eee(a)(3). See also Holmes v. SIPC, — U.S. -, 112 S.Ct. 1311, 1314, 117 L.Ed.2d 532 (1992); In re Brittenum & Assoc., Inc., 82 B.R. 64, 65 (Bankr.E.D.Ark.1987).
. The record is not clear as to how the two series of transactions were financed; however, neither side argues that the securities were not delivered to Elkins in a manner authorized by law. Apparently the the securities were maintained by Bosworth or Swink on behalf of El-kins. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491499/ | MEMORANDUM OF DECISION
ALFRED C. HAGAN, Chief Judge.
The debtor-in-possession has requested an order from the court allowing the debtor to distribute from a sale of assets of the estate a portion of the proceeds to secured creditors West One and Emi Kido and to pay a personal tax obligation to Canyon County, Idaho. An order approving the distribution of funds to West One and Canyon County was entered on March 13,1992. That part of the motion concerning the payment to Emi Kido was set for further hearing. An evidentiary hearing as to the distribution of funds to Emi Kido was heard on April 8, 1992 and April 10, 1992.
The debtor’s estranged wife, Gwen Kido, has objected to the disbursement of funds to Emi Kido, the debtor’s mother. The proposed distribution is to pay two secured promissory notes given by the debtor to his mother for repayment of loans. Gwen Kido asserts the following objections to the disbursement:
*9251) Emi Kido, as the mother of the debtor, is an insider. Therefore her claim must be subject to closer scrutiny.
2) Disbursement at this time would deprive Gwen Kido of her community property interest. Gwen Kido contends there are various offsets that should be applied to reduce the balance of the debt owed to Emi Kido. She also contends any disbursement would result in a determination of the parties property rights which is the providence of the state divorce court.
3) There should be no disbursement on the July 1990 note as it was signed only by Duane Kido. Additionally, the note did not provide for any interest payments and it is not due until July 1998. Gwen Kido further argues the July 1990 note is not a secured obligation as it is a subsequent obligation incurred only by the debtor, Duane and the original security agreement only covers subsequent obligations incurred by the “Debtor” which is defined in the original agreement to be both Duane and Gwen Kido.
4) There has not been an adequate accounting of the equipment sale proceeds to enable the court to ascertain, where both West One and Emi Kido have a security interest in the farm equipment, if the proceeds from the sale of a certain piece of equipment have been applied to the lien of West One. If the proceeds have been so applied then it would not be available to be disbursed to Emi Kido. Essentially, Gwen is arguing that a disbursement of the full amount to Emi would mean she is getting payment from equipment in which she held no security interest and which is community property in which Gwen Kido has an interest.
5) There is no evidence Emi Kido is the lawful holder of the 1986 security agreement and promissory note on which Mas Kido is listed as the creditor due to the death of her husband, Mas Kido.
DISCUSSION
The fact Emi Kido is an insider does not void her claim. A full evidentiary hearing has been held wherein the debtor has been required to show the dealings with his mother were arms-length transactions. The debtor has met this burden of proof. A portion of the obligation was incurred as a result of Gwen’s refusal to authorize the community to obtain necessary operating capital in the form of bank loans, requiring the debtor to borrow from his mother.
Gwen Kido testified she believed the claim of Emi Kido should be offset by the various gifts given by Duane Kido to his parents. However, the evidence does not show any transfer to the parents which did not constitute classification of anything other than a gift.
Regardless of the use of names to identify the debtor, Gwen, or the community, the obligations to Emi Kido are valid community obligations. Each party to the community can bind the community.1 It is further found Emi Kido has a valid security interest in the equipment for the 1986 loan and 1990 loan. The 1986 security agreement provided it would also cover future advances.
There has been an adequate accounting by the debtor as to the proceeds from the sale of the farm equipment.
There is sufficient evidence in this record to support a finding Emi Kido holds an interest in the notes and would succeed to the interests of her deceased husband, Mas Kido. Under the provisions of 11 U.S.C. § 502(a) the claim of Emi is deemed allowed unless there is a filed objection to claim, and under the provisions of F.R.B.P. 3001(f) such claim is entitled to prima facie evidence of the amount and validity of the claim. For the same reasons, it is assumed the claim of Emi Kido is fully secured despite any cross collateralization with West One Bank.
As has been previously noted in this case, where one party to the community files a petition for relief, the provisions of 11 U.S.C. § 541(a)(2) cause the community property interests of both parties, or, the entire community, to become property of the estate, at least, in Idaho where the community property is under the control and management of both parties. Since the community property is property of the *926estate, it is subject to the jurisdiction of this court. This court further has authority to defer issues for decision to a state court concerning division and distribution of community property interests, but no motion for abstention2 has been made.
Since it has been determined the claim of Emi Kido is a secured claim, it is appropriate to pay the claim from the proceeds of sale of the secured property under the circumstances of this case even though the claim is unmatured.3
. Idaho Code § 32-912.
. 28 U.S.C. § 1334.
. 11 U.S.C. § 101(5)(A). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491500/ | ORDER ON MOTION FOR SANCTIONS
ALEXANDER L. PASKAY, Chief Judge.
THIS CAUSE came on for consideration upon the Motion for Imposition of Sanctions Pursuant to F.R.B.P. 9011 against Jeffrey H. Friedman, attorney for the Plaintiff in the above-captioned adversary proceeding. The Court has considered the Motion, together with the record, and comments of counsel and finds the following facts are relevant to the matter under consideration.
Ms. Harris and the Debtor were married on December 9, 1989. However, the marriage did not last long. On February 21, 1990, the Debtor filed a Petition for Dissolution of the marriage in Circuit Court for Pinellas County, Florida, Case No. 90-3217-9. On February 26, 1990, Ms. Harris filed a Response to the Debtor’s Petition, coupled with a “Request For Affirmative Relief.” In her Response, Ms. Harris admitted that the allegations set forth in the Petition, with some exceptions, were not relevant. In her “Request for Affirmative Relief”, Ms. Harris asserted an entitlement to temporary and rehabilitative alimony; attorney fees; a need to obtain funds to move her furniture back to Ohio; and a request that her maiden name be restored. In addition, she alleged in her Response that during her marriage to the Debtor, he infected her with genital herpes, a chronic condition which will require prescription medication and medical attention for the remainder of her life therefore, she sought a money award sufficient to enable her to meet the medical expenses connected with her infection. She also alleged that the Debtor battered her “by seducing her and fraudulently concealing his genital herpes condition” (sic).
Prior to the final hearing in the divorce proceedings, Plaintiffs counsel filed a Notice of Dismissal without prejudice of her request for affirmative relief based on her alleged contraction of genital herpes, but not the other reliefs sought by her in her Response to the Petition filed by her former husband. Neither the Court nor Defendant’s counsel objected to the dismissal without prejudice.
On March 9, 1990, the Circuit Court entered the Final Judgment dissolving the marriage of the parties. The Final Judgment recited, inter alia, that neither Ms. Harris nor her attorney were willing to participate in a non-jury trial; and that the Court after having heard the testimony of the Debtor dissolved the bonds of marriage between the Debtor and Ms. Harris. The Judgment further provided that the temporary injunction previously entered by the Court was confirmed and made permanent, and each party was ordered to pay their own costs and attorney fees. Most importantly, the Final Judgment denied all of the remaining prayers for relief whether contained in Debtor’s petition for dissolution of marriage or in Ms. Harris’ request for affirmative relief.
The record further reveals that on July 13, 1990, Ms. Harris filed a suit in the U.S. District Court, Northern District of Ohio, Eastern Division, against the Debtor, and sought a money judgment in Count I based on negligence; in Count II based on negligence per se; in Count III based on damages based on fraud; in Count IV based on intentional infliction of emotional distress; in Count V based on negligent infliction of emotional distress; in Count VI based on loss of enjoyment of life. In her complaint, she sought compensatory, punitive and “he-donic” (sic) damages plus reasonable attorneys’ fees.
Before the suit filed in Ohio came to resolution, the Debtor filed his voluntary petition for relief under Chapter 7 of the Bankruptcy Code which, of course, by virtue of the operation of the automatic stay, stopped all further proceedings in that action and compelled Ms. Harris to assert the claim of nondischargeability in this Court by virtue of § 523(c) of the Bankruptcy Code.
Based on these undisputed facts, the Debtor contended that based on the doctrine of res judicata, Ms. Harris is barred *984to litigate her claim against him. The Debtor filed a Motion for Summary Judgment contending that there were no genuine issues of fact and that he was entitled to judgment in his favor as a matter of law. This court heard extensive argument on whether the doctrine of res judicata barred the Plaintiff from litigating her claim against the Debtor based on her medical condition because the Plaintiff could have litigated that issue in the divorce court. This Court took under advisement the Debtor’s Motion for Summary Judgment, and the parties submitted extensive case authority on the issue.
The Court considered the comments of counsel, together with the case authority submitted by counsel, and wrote an extensive opinion and concluded that the Plaintiff was in fact barred from litigating her claim in the Bankruptcy Court by the doctrine of res judicata. Based on this Court’s Order granting the Debtor’s Motion for Summary Judgment, the Debtor filed a Motion under F.R.B.P. 9011 seeking to impose sanctions against Jeffrey H. Friedman, attorney for the Plaintiff, because of his pursuit of the Plaintiff’s claim in the Bankruptcy Court. F.R.B.P. 9011 provides in pertinent part as follows.
Rule 9011. Signing and Verification of Papers
(a) Every petition, pleading, motion and other paper served or filed in a case ... shall be signed by at least one attorney of record ... The signature of an attorney ... constitutes a certificate that the attorney ... has read the document; that to the best of the attorney’s ... knowledge, information, and belief formed after reasonable inquiry it is well-grounded in fact and is warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law; and that it is not interposed for any improper purpose, such as to harass to cause delay, or to increase the cost of litigation....
The very fact that this Court wrote such an extensive opinion on the issue of res judicata demonstrates that the issue is not a completely settled issue about which reasonable minds cannot differ. The arguments presented in support of and in opposition to the Motion for Summary Judgment were complex, and both the Plaintiff and the Defendant provided case law in support of their positions. In sum, this Court is satisfied that notwithstanding the fact that this Court granted the Debtor’s Motion for Summary Judgment, the Plaintiff’s Complaint was not interposed to harass, cause delay, or to increase the cost of litigation. Thus, the Court is satisfied that the Defendant’s Motion for Sanctions Pursuant to Bankruptcy Rule 9011 against Jeffrey H. Friedman, attorney for the Plaintiff, should be denied.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the Motion for Sanctions pursuant to F.R.B.P. 9011 against Jeffrey H. Friedman is hereby denied.
DONE AND ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491501/ | ORDER ON MOTION FOR SUMMARY JUDGMENT
ALEXANDER L. PASKAY, Chief Judge.
THIS IS a Chapter 7 case and the matter under consideration is a Motion For Summary Judgment filed by Comerica Bank, N.A. (Comerica), the Plaintiff in the above-styled adversary proceeding. It is the contention of Comerica that there are no genuine issues of material facts and that it is entitled to judgment declaring the indebtedness of Barney R. Weinhardt (Debtor) to Comerica nondischargeable. In support of its Motion, Comerica relies on the Complaint, the Amended Complaint, the Answer, the deposition of the Debtor, and the Affidavit of Jeffrey W. Slager, the loan officer of Comerica. The Debtors did not file a Counter-Affidavit in opposition to the Motion. The facts which appear from the record are without dispute and can be summarized as follows:
In the Fall of 1989, the Debtor applied for several loans and in connection with the same submitted loan applications to Comer-ica. In November and December, 1989, Comerica granted three loans to the Debtor in the total amount of $130,000.00. It is without dispute that in connection with these loan transactions, the Debtor executed several promissory notes evidencing the indebtedness due and owing to Comeri-ca. In each instance that the Debtor borrowed money from Comerica, he completed a new loan application and each was accompanied by a sworn statement in which he stated that he was engaged in business as a commercial painter and that the loan proceeds would be used as “working capital” in his business or “to purchase supplies for a job of interior renovation.” The sworn statements to Comerica were dated May 26,1989; July 27,1989; and August 7, 1989, respectively. (Exh. A to Amended Complaint). On the financial statement submitted by the Debtor to Comerica dated May 26, 1989, the Debtor stated that he was in business as an “interior contractor.” (Exh. B to Amended Complaint).
It is without dispute that the Debtor stopped working as a painting contractor some time in 1986, and he no longer operated a business as a painting contractor, nor was he involved in any business when he submitted his loan applications to Comerica and obtained the loans from Comerica involved in this controversy. The Debtor admitted in his deposition that the funds obtained from Comerica were not used by him to purchase supplies (Debtor’s deposition of May 28, 1991, Page 6, Line 4), but he used the money in part to buy stocks from a stockbroker and in part to cover previous purchases when the unpaid balance was called by the broker. (Debtor’s deposition of May 28, 1991, Page 17, Line 17 through Page 18, Line 6).
Jeffrey W. Slager (Slager), the loan officer, stated in his Affidavit that he dealt *986with the Debtor in these loan transactions; that he relied on the Debtor’s sworn statement that the loan proceeds were to be used by the Debtor in his painting business; and he would not have granted the loan if he knew that the proceeds would be used by the Debtor for the acquisition of securities and payment for securities previously purchased.
On April 2, 1990, the Debtors filed their Petition for Relief under Chapter 7 of the Bankruptcy Code. Comerica promptly filed the Complaint and sought a determination that the amount owed to Comerica shall be excepted from overall protective provisions of the general bankruptcy discharge. The claim set forth in the original Complaint is a claim of nondischargeability based on the allegation by Comerica in Paragraph 5 of its Complaint that in connection with the loans the Debtor granted to Comerica a security interest in certain accounts receivables and equipment; that Comerica perfected its security interest; and the Debtor fraudulently disposed of the assets which were serving as collateral for the loans obtained by the Debtor. Although paragraph 8 of the original Complaint stated that a sworn statement (Exh. #B attached to the Complaint) was false, it did not state what constituted the alleged falsity. Lastly, in paragraph 10 of its Complaint, Comerica alleges that the Debtor obtained “money extensions, renewals and refinancing of a debt by false pretenses, false representations and actual fraud.” Again, Comerica failed to specify the facts which constituted a viable claim under § 523(a)(2)(A) of the Bankruptcy Code. Based on the foregoing, Comerica contends that the actions of the Debtor constituted cause to determine that the debts due to Comerica should be declared nondischargeable by virtue of § 523(a)(2)(A) of the Bankruptcy Code. The Debtor, rather than attacking the legal sufficiency of the Complaint, filed an Answer consisting of perfunctory admissions and denials, even though it is evident that the Complaint failed to state the claim for which relief could be granted under § 523(a)(2(A) of the Bankruptcy Code.
On March 5, 1991, this Court scheduled a pre-trial conference, which was rescheduled at the request of counsel for the Debtor. At the close of the pre-trial conference, this Court entered an Order directing the parties to conclude discovery by May 31, 1991 and scheduled a final evidentiary hearing. Comerica then commenced discovery proceedings. No discovery was undertaken by the Debtor. On May 15, 1991, Comerica filed the Amendment to its Complaint. It also filed a Motion for Leave to File the Amendment. Counsel for the Debtor having consented, the Motion filed by Comeri-ca was granted. In the Amendment, which is described as Count II of the Complaint, Comerica again sought determination that the obligation of the Debtor evidenced by the three promissory notes in the amount of $25,000, $45,000, and $60,000 respectively, shall be declared nondischargeable pursuant to § 523(a)(2)(B) of the Bankruptcy Code. According to Count II of the Amendment to the Complaint, the alleged falsity of the personal and financial statement submitted by the Debtor to Comerica related to the valuation of the Debtor’s traded and marketable securities, however, there is not a scintilla of evidence which would support this claim.
On the date of the final evidentiary hearing, the parties announced their intention to compromise the matter and requested to continue the hearing pending the approval of the compromise. It appears however that the parties failed to agree on the terms of the compromise and therefore, Comerica filed its Motion For Summary Judgment, the Motion presently under consideration. In its Motion, Comerica contends that its claim of nondischargeability is based on § 523(a)(2)(A) of the Bankruptcy Code. In support of this proposition, it is alleged in the Motion that, in connection with the loan transactions described earlier, the Debtor submitted sworn statements in which he represented that the proceeds of the loans would be used as working capital in his commercial painting business and that the Debtor knew he would not or did not intend to use the loan proceeds for commercial painting, but instead intended to and did use the loan proceeds to invest in the stock market.
*987Even a cursory reading of the Motion For Summary Judgment leaves no doubt that nothing in the Motion even remotely resembles the claims of nondis-chargeability which were pled either in the original Complaint or the Amendment to the Complaint as set forth in Count II. As noted earlier, the claim of nondischarge-ability set forth in Count I of the Complaint did not state a viable claim for relief under § 523(a)(2)(A). This is so because an unauthorized disposition of the collateral of a secured party is not a basis for a claim of nondischargeability under § 523(a)(2)(A) of the Bankruptcy Code, and a bare verbatim recitation of the text of the Code dealing with this section is insufficient as a matter of law to establish a viable claim under this Section. The claim set forth in Count II relates solely to the alleged overvaluation of the Debtor’s traded and marketplace securities, and equally fails to establish a claim upon which relief can be granted.
While this record leaves no doubt that the underlying facts are without dispute, it is clearly improper to grant Comeri-ca a Motion For Summary Judgment based on the claim set forth in the original Complaint and the claim set forth by the Amendment in Count II. This being the case, this Court is satisfied that it is proper to deny the Motion For Summary Judgment and schedule the matter for final evidentiary hearing.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the Motion For Summary Judgement filed by Comerica Bank, N.A. is hereby denied. It is further
ORDERED, ADJUDGED AND DECREED that the final evidentiary hearing will be held before the undersigned on September 9,1992 at 1:30 p.m. in Courtroom A, 4921 Memorial Highway, Tampa, Florida.
DONE AND ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491510/ | ORDER DENYING MOTION TO DISMISS
MARY D. SCOTT, Bankruptcy Judge.
Now before the Court is the Answer and Motion to Dismiss filed on June 27, 1992, by the defendant. The defendant seeks dismissal of the complaint to determine dischargeability on three grounds. First, the defendant asserts that since plaintiff is the former attorney for defendant, plaintiff was first required to “obtain permission before disclosing information gained during the attorney/client relationship.” The defendant also asserts that the plaintiff has failed to state a cause of action and has failed to plead fraud with particularity. Inasmuch as the defendant answered the complaint, the latter two grounds are moot.1
The defendant has directed the Court to no authority which states that an attorney may not sue his former client under section 523(a)(2)(A) or section 727(a) without first seeking permission from the *703former client. The allegations of the complaint do not appear to state any particular attorney-client communications; no communications have yet been disclosed. Accordingly, even if disclosure of attorney-client communications were a basis for dismissal, the lack of such disclosure renders dismissal of the complaint inappropriate.
The allegations of the complaint concern plaintiff’s attorney’s fees, and representations made by the defendant to the Court and counsel regarding those fees. Based upon defendant’s statements to the Court and counsel, the plaintiff seeks to have the attorney’s fees declared non-dischargeable and also seeks an Order denying the defendant a discharge in bankruptcy. It is well-settled that fee arrangements are not confidential communications. See In re Grand Jury Proceedings, 841 F.2d 230, 233 n. 3 (8th Cir.1988). Further, the Bankruptcy Code not only requires disclosure of information regarding attorneys fees, 11 U.S.C. § 329(a), fee arrangements are closely scrutinized by the Bankruptcy Courts, see 11 U.S.C. § 329(b). Accordingly, the motion to dismiss, asserting that confidential fee information has been or will be disclosed, is without merit.
ORDERED that the Motion to Dismiss, filed on June 27, 1991, is DENIED.
IT IS SO ORDERED.
. Even had an answer not been filed, the grounds are without merit. Taking the allegations of the complaint as true, this cause should not be dismissed because it does not appear "beyond a doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.” Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974). Further, fraud has been pleaded with sufficient particularity for the defendant to frame his response and formulate discovery. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491511/ | MEMORANDUM
RALPH H. KELLEY, Chief Judge.
Now before the court is the bankruptcy trustee’s motion to confirm the sale of real property and the objection by Ted C. Moss with respect to lot 202, River Run Golf & Country Club. The trustee and Mr. Moss have agreed that time is of the essence and the court can decide the issues without formal pleadings under §§ 365 and 544 of the Bankruptcy Code. 11 U.S.C.A. §§ 365 & 544 (West 1979 & Supp.1992).
The court finds the facts as follows.
Don Williams Construction Company, Inc., owned several adjoining tracts of land commonly referred to as River Run Golf & Country Club. The land is located in Hamilton County, Tennessee.
Don Williams Construction sought a loan from a local bank but was turned down. Through a contact at National Title Insurance Agency, Inc., Mr. Moss learned that Don Williams Construction needed financing to complete portions of River Run. Mr. Moss agreed to lend Don Williams Construction $1,200,000 secured by a mortgage on part of the River Run property. Mr. Moss understood that the money would be used to complete the roads, utilities, and golf course at River Run.
Since Don Williams Construction was in a financial bind, the loan needed to be closed quickly. Mr. Moss contacted attorney Richard D. Crotteau about doing the legal work to complete the deal. Mr. Crot-teau testified that Mr. Moss wanted the deal closed in a day or so. Mr. Crotteau told Mr. Moss that he could not do all the paperwork that quickly for such a large transaction. Mr. Moss and Mr. Crotteau contacted National Title Insurance Agency, Inc., about helping with the paperwork. They agreed that Mr. Crotteau would prepare the loan commitment letter, the most complex of the documents to be prepared. National Title Insurance agreed to prepare a promissory note and deed of trust (the mortgage).
The loan commitment letter provides:
COMMITMENT FEE: In consideration of the issuance of this commitment and of my agreement to make the proceeds available to Borrower in accordance with the terms hereof and of subsequent agreements, you agree to deed to me, upon my request after the plat is filed, Lot # 148 as presently shown on the preliminary plat attached.
*867Attached to the loan commitment letter is a preliminary drawing of a plat for some of the undeveloped property at River Run. When the property was eventually platted, lot 148 became lot 202.
There was testimony that when the loan commitment letter was drafted, Mr. Moss was given a choice of commitment fees, either $100,000 cash or the promise to convey a lot of his choice. This testimony is not admissible to vary the terms of the loan commitment letter but is admissible as background information.
Mr. Moss chose a promise to convey lot 202 after it was properly platted. Mr. Moss testified that he was not in the business of making loans and would not have made the loan if he had not received a commitment fee of either $100,000 or the lot of his choice.
The mortgage provides that “this conveyance is made in trust for the following purpose and not otherwise”, and then goes on to recite the promissory note. It does not mention the loan commitment letter. The promissory note did not say anything about the promise to transfer lot 202 to Mr. Moss.
The loan commitment letter, the promissory note, and the mortgage were executed on June 30, 1989. The mortgage was recorded in the registry of deeds for Hamilton County, Tennessee. The loan commitment letter was not recorded.
Later, Mr. Moss and Don Williams Construction executed an addendum to the promissory note to provide for 5% late payment fees. The addendum is not dated. The addendum says that Don Williams Construction agreed to the late fees in return for an extension of time to make payments on the note and for other good and valuable consideration.
Don Williams Construction had continuing problems making the note payments on time. On the eve of foreclosure, Don Williams Construction filed a Chapter 11 bankruptcy case, which stopped the foreclosure. The Chapter 11 was filed on July 3, 1991.
From then until October 25, 1991, Don Williams Construction continued in control of its own business as debtor-in-possession. Mr. Moss had filed a motion for appointment of a bankruptcy trustee, and on October 25, 1991, attorney Jerry Farinash was appointed trustee. The trustee successfully platted the River Run property, and on May 23, 1992, he held an auction of the property. Lot 202 sold for $52,000.
Mr. Moss called William D. Jones as an expert witness in the real estate and title insurance business. Mr. Jones is an attorney. He is also a principal in Pioneer Title Agency, Inc. Pioneer Title Agency primarily sells title insurance and acts as the closing agent for real estate deals. Mr. Jones prepares legal documents for closings performed by Pioneer Title Agency.
If he were selling title insurance or closing the sale of any of the land subject to Mr. Moss’s deed of trust, Mr. Jones would have called Mr. Moss to find out the amount of the debt and the amount of the lot release fees if any. The deed of trust does not include an agreement on lot release fees. Both Mr. Jones and Mr. Crot-teau testified that if someone were buying a single lot, he would have to inquire of Mr. Moss as to the exact terms of the loan agreement.
On cross-examination Mr. Jones testified that Pioneer Title Agency prepares what is known as a property report. A property report is a report on the title to a particular tract of land. Preparing a title report requires a review of the recorded documents of title. The property report points out any inconsistencies in the recorded documents. If Mr. Jones were not selling title insurance or closing a sale of land subject to Mr. Moss’s deed of trust, the recorded documents of title would not have given him any reason to inquire of Mr. Moss concerning the title to the property. If Mr. Jones were preparing a property report, he would not call Mr. Moss.
DISCUSSION
Bankruptcy Code § 544(a) gives the bankruptcy trustee various rights in the property of Don Williams Construction *868Company. 11 U.S.C.A. § 544(a) (West Supp.1992).1
First, it gives the trustee the rights of a creditor with a perfected judgment lien on the property of Don Williams Construction. 11 U.S.C.A. § 544(a)(1) & (2) & § 101(36) (West Supp.1992) (definition of judicial lien).
Second, it gives the trustee the rights of a bona fide purchaser of real property from Don Williams Construction. 11 U.S.C.A. § 544(a)(3) (West Supp.1992).
The trustee is treated as if he became a creditor and perfected the judgment lien at the moment Don Williams Construction filed its bankruptcy case. The trustee is treated as if he became a bona fide purchaser of the real property and perfected the transfer to him at the moment Don Williams Construction filed its bankruptcy case. 11 U.S.C.A. § 301 (West 1979) (commencement of case).
The trustee’s rights as a judgment lien creditor and a bona fide purchaser are not affected by his own knowledge or the knowledge of any creditor regarding the property of Don Williams Construction. 11 U.S.C.A. § 544(a) (West Supp.1992).
The promise to transfer the lot to Mr. Moss is contained in the loan commitment letter. The loan commitment letter is an instrument that could have been recorded under Tennessee law to give notice of the promise to transfer the lot to Mr. Moss. Tenn.Code Ann. § 66-24-101(a)(l) (1982 & Supp.1991). However, the loan commitment letter was not recorded in the registry of deeds. This opens the way for the trustee’s arguments that he is entitled to Lot 202 ahead of Mr. Moss.
The trustee has two arguments based on Tennessee law and Bankruptcy Code § 544(a).
The first argument goes as follows. Under Tennessee law, the unrecorded promise to transfer the lot cannot be enforced against creditors of Don Williams Construction. Tenn.Code Ann. §§ 66-26-101 & 66-26-103 (1982).2 Bankruptcy Code § 544(a) gives the trustee the rights of a person who became a creditor of Don Williams Construction and perfected a judgment lien on the lot at the moment Don Williams Construction filed its bankruptcy case. The unrecorded promise to transfer the lot to Mr. Moss cannot be enforced against the trustee as a creditor with a judgment lien on the lot. As a result, the trustee is entitled to the lot or the proceeds from its sale ahead of Mr. Moss’s claim under the loan commitment letter.
The second argument is similar. Tennessee law provides that the unrecorded promise to transfer the lot cannot be enforced against a later bona fide purchaser of the lot from Don Williams Construction. Tenn. *869Code Ann. § 66-26-103 (1982). Bankruptcy Code § 544(a) gives the trustee the rights of a later bona fide purchaser of the lot. This means that the trustee is entitled to the lot or the sale proceeds ahead of Mr. Moss’s claim under the loan commitment letter.
Mr. Moss relies on the rule of inquiry notice. Mr. Moss argues that a potential buyer of lot 202 would end up having to question him, and he would reveal the promise to transfer the lot to him.
Unfortunately for Mr. Moss, he loses even if this argument is correct. A debtor’s unrecorded contract to transfer land is not effective against a judgment lien creditor of the debtor, even if the creditor knew of the contract before obtaining its judgment lien. Tenn. Code Ann. §§ 66-26-101 & 66-26-103 (1982). This has long been the rule under the Tennessee statutes. Moore v. Walker, 178 Tenn. 218, 156 S.W.2d 439 (1941); McCoy v. Hight, 162 Tenn. 507, 39 S.W.2d 271 (1931); Birdwell v. Cain, 41 Tenn. 310 (1860); Malone v. Brown, 46 S.W. 1004 (Tenn.Ch.App.1897).
Likewise, inquiry notice does not prevent a judgment lien creditor from prevailing over the unrecorded transfer. Inquiry notice is relevant only to the rights of a bona fide purchaser, and even then, only when there has been no actual recording of the transfer. Still v. Security Federal Savings & Loan Ass’n (In re Hill), 71 B.R. 252 (Bankr.E.D.Tenn.1986).
The district court’s decision in Lancaster v. Key obviously does not apply to the facts of this case. Lancaster v. Key, 24 B.R. 897 (E.D.Tenn.1982). In that case the debtors, before their bankruptcy, had conveyed all their interest in the land to the Keys. When Don Williams Construction filed its bankruptcy case, Mr. Moss had only the promise to convey the lot after the land was platted, and the land had not been platted.
The court concludes that the trustee prevails under Bankruptcy Code § 544(a)(1) & (2). The trustee’s rights in lot 202 as a judgment lien creditor of Don Williams Construction are superior to Mr. Moss’s rights under the unrecorded promise to transfer lot 202.
In the alternative, the court concludes that the trustee prevails under his rights as a bona fide purchaser of the land from Don Williams Construction.
The rights of a bona fide purchaser are determined by state law. Robertson v. Peters (In re Weisman), 131 B.R. 148 (N.D.Calif.1991). Under Tennessee law, a bona fide purchaser will take free of a prior unrecorded deed or contract only if the bona fide purchaser did not have notice of it. Tenn. Code Ann. § 66-26-103 (1982). Notice includes inquiry notice. Texas Co. v. Aycock, 190 Tenn. 16, 227 S.W.2d 41 (1950).
The bankruptcy trustee is not bound by his own personal knowledge or a creditor’s knowledge of a prior unrecorded contract or transfer by the debtor. 11 U.S.C.A. § 544(a)(3) (West Supp.1992). However, the trustee is treated as having notice if, under Tennessee law, the facts would put a purchaser on notice. Robertson v. Peters (In re Weisman), 131 B.R. 148 (N.D.Calif.1991).
Mr. Moss’s argument is simple. The court can assume that the recorded mortgage did not give inquiry notice of Mr. Moss’s claim to lot 202. However, the duty to inquire need not be based on the recorded documents. Facts outside the recorded documents may impose on the potential buyer the duty to inquire. Haywood v. Ensley, 27 Tenn. 459 (1847); Williams v. Title Guaranty & Trust Co., 31 Tenn.App. 128, 212 S.W.2d 897 (1948). As a practical matter, anyone who wanted to buy just a part of the land, such as lot 202, would find Mr. Moss’s recorded mortgage on all the land. The recorded mortgage does not provide for partial releases. Thus, the potential buyer would have to contact Mr. Moss to find out the amount due on the mortgage debt or the amount needed to obtain a release of part of the land. Mr. Moss would give the potential buyer notice of his claim to lot 202, and that would prevent the potential buyer from acquiring lot 202 free of Mr. Moss’s claim.
*870The trustee argues that this practical problem makes no difference. The recorded documents show good title in Don Williams Construction free of any claim to lot 202 other than Mr. Moss’s recorded mortgage. Don Williams Construction could have sold lot 202 or a part of the land containing lot 202 subject to Mr. Moss’s mortgage. The buyer would be a bona fide purchaser with notice of Mr. Moss’s mortgage. See, e.g., Hahn v. Eckel, 154 Tenn. 444, 289 S.W. 496 (1927); Lytle v. Turner, 80 Tenn. 641 (1883); Gookin v. Graham, 24 Tenn. 480 (1844). However, the buyer would be a bona fide purchaser without notice of Mr. Moss’s claim to lot 202, unless the buyer had inquiry notice. The buyer would not have inquiry notice. Nothing in the recorded mortgage would cause the buyer to inquire. The promise to transfer lot 202 to Mr. Moss is not the kind of promise that a potential buyer would necessarily expect in the transaction revealed by the recorded mortgage. The mortgage does not contain a due on sale clause. The buyer might be concerned with the amount due on the mortgage debt, but he would not necessarily check with Mr. Moss to find out the total pay-off. Lytle v. Turner, 80 Tenn. 641 (1883). The buyer would not be interested in release fees, since he would not be seeking a release from the mortgage. In summary, the facts would not give the buyer inquiry notice of Mr. Moss’s claim to lot 202, and as a result, the buyer’s rights would be subject to the mortgage but superior to the unrecorded promise to transfer lot 202.
The court agrees with the trustee’s argument. The recorded mortgage does not give record notice of Mr. Moss’s claim to lot 202. The recorded mortgage by itself does not give inquiry notice of Mr. Moss’s claim to lot 202. The recorded mortgage and the surrounding facts together do not give inquiry notice. Thus, a bona fide purchaser of lot 202 would not have notice of Mr. Moss’s unrecorded claim.
The court concludes that the trustee’s rights as a bona fide purchaser have priority over Mr. Moss’s claim to lot 202. If the court is wrong on this point, the trustee still prevails under his rights as a judgment lien creditor.
Of course, it makes no difference to this outcome that there was no lot 148 or lot 202 on the date of bankruptcy. The trustee’s rights apply to the land that eventually became identified as lot 202 without regard to whether it had been platted as lot 202 on the date of bankruptcy.
The trustee has also argued that the promise to transfer lot 202 is an executory contract, that he can reject the executory contract, and that Mr. Moss would not be entitled to a lien on the lot for the purchase price already paid.
In light of the court’s decision under § 544, the court will not address the questions raised by this argument.
This memorandum is the court’s findings of fact and conclusions of law. Fed.R.Bankr.Proc. 7052 (West 1984).
ORDER
In accordance with the court’s memorandum opinion entered this date, the court grants judgment to the bankruptcy trustee, Jerry Farinash, on his claim to avoid the debtor’s obligation to convey Lot Number 202, River Run Golf & Country Club, to Ted C. Moss. In particular, the court holds that the trustee may avoid the debtor’s obligation to transfer Lot Number 202, River Run Golf & Country Club, in his status as a judgment lien creditor pursuant to 11 U.S.C. § 544(a)(1) and his status as a bona fide purchaser pursuant to 11 U.S.C. § 544(a)(3). The trustee is entitled to retain the proceeds from the sale of the lot free of any claim by Ted C. Moss.
. (a) The trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by—
(1) a creditor that extends credit to the debtor at the time of the commencement of the case, and that obtains, at such time and with respect to such credit, a judicial lien on all property on which a creditor on a simple contract could have obtained such a judicial lien, whether or not such a creditor exists;
(2) a creditor that extends credit to the debtor at the time of the commencement of the case, and obtains, at such time and with respect to such credit, an execution against the debtor that is returned unsatisfied at such time, whether or not such a creditor exists; or
(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 commencement of the case, whether or not such a purchaser exists.
. Section 66-26-101 provides:
All of the instruments mentioned in § 66-24-101 shall have effect between the parties to the same, and their heirs and representatives, without registration; but as to other persons, not having actual notice of them, only from the noting thereof for registrations on the books of the register, unless otherwise expressly provided.
Section 66-26-103 provides:
Any of said instruments not so proved, or acknowledged and registered, or noted for registration, shall be null and void as to existing or subsequent creditors of, or bona fide purchasers from, the makers without notice. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491512/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW
GEORGE L. PROCTOR, Bankruptcy Judge.
This adversary proceeding came before the Court for a trial on April 21, 1992. Upon the evidence presented, the Court enters the following Findings of Fact and Conclusions of Law:
Findings of Fact
In June of 1987, the debtors sold real property to the plaintiffs and executed a second mortgage which reads as follows:
THIS INDENTURE, MADE THIS 5TH DAY OF JUNE, A.D.1987 BETWEEN WILLIAM T. PATTERSON AND WIFE, FLORENCE C. OF THE COUNTY DU-VAL, STATE OF FLORIDA, CALLED THE MORTGAGOR AND HAROLD W. JOHNSON AND WIFE ROSETTE S. OF THE COUNTY OF DUVAL, STATE OF FLORIDA, CALLED MORTGAGEE. THIS AGREEMENT CONSTITUTES A SECOND MORTGAGE. WITNES-SETH, THAT THE SAID MORTGAGEES BEING INDEBTED TO THE MORTGAGORS IN THE SUM OF $6,800.00 (SIX THOUSAND EIGHT HUNDRED DOLLARS). GRANTED, BARGAINED AND SOLD TO THE SAID MORTGAGEES AND THEIR HEIRS AND ASSIGNED FOREVER, THE FOLLOWING DESCRIBED LAND SITUATE IN THE COUNTY OF DU-VAL STATE OF FLORIDA, TO WIT:
LOTS 41 & 42 BLOCK 41, RIO VISTA, ACCORDING TO PLAT THEREOF RECORDED IN PLAT BOOK 10, PAGES 22, 23, 24, 25, 0
AND THE SAID MORTGAGORS DO WHERBY [sic] FULLY WARRANT THE TITLE TO SAID LAND, AND WILL DEFEND THE SAME AGAINST THE LAWFUL CLAIMS OF ALL PERSONS WHOMSOEVER. THE MORTGAGEES AGREE TO PAY: ALL CLOSING COST.
7% (SEVEN PER CENT) INTEREST ON NOTE ALL FEES NECESSARY TO EXECUTE NOTE
The instrument, according to its face, was prepared by the debtors and was executed by both the debtors, as well as Harold W. Johnson and Rosetta S. Johnson. The document was also acknowledged before a notary public and recorded in the public records of Duval County, Florida, at Volume 6356, Pages 1773 and 1774, on June 30, 1987.
Debtors filed a petition for relief under chapter 7 of the Bankruptcy Code on January 30, 1989. Defendant, Gregory K. Crews, was appointed the chapter 7 trustee.
On March 28, 1989, defendant sent a letter to plaintiff, Harold W. Johnson, stating that he was the trustee in the debtors’ bankruptcy case. The letter also informed this plaintiff that since the future payments due under the second mortgage were a bankruptcy estate asset, the payments should be made to him as trustee.
On March 31, 1989, plaintiff Harold W. Johnson sent defendant a letter, stating in part, “Enclosed is payment on a second mortgage owed to William Patterson.”
Again on April 14, 1989, plaintiff Harold W. Johnson wrote defendant, stating “Enclosed please find payment on the second mortgage owed to William T. Patterson.”
From the date of the bankruptcy filing through February 8,1990, plaintiffs paid to defendant $600.00 on the second mortgage. With some of the payments, plaintiff Harold W. Johnson included “memorandums” which stated what he believed the balance to be before and after the payment; however, the balances did not take into account the interest due under the second mortgage.
The last memorandum defendant received was dated October 13, 1989, and stated the balance after the payment to be $5,414.00. Subsequent to the memorandum, defendant received payments from plaintiffs totaling $175.00.
*963Defendant scheduled a public auction of the second mortgage for July 28, 1989, and plaintiffs filed an objection to the sale on July 14, 1989. The objection was withdrawn on August 16, 1989.
Defendant rescheduled the sale for November 9, 1989, and on November 3, 1989, plaintiff Harold W. Johnson filed another objection. A hearing on the objection was held on February 7, 1990, and the Court entered an order overruling the objection on February 12, 1990.
Plaintiff Harold W. Johnson subsequently filed a lawsuit against defendant in the state Circuit Court asking for refund of the monies he had paid to defendant, claiming that the second mortgage was invalid.
Pursuant to Federal Rule of Bankruptcy Procedure 9027, defendant filed an application for removal of the proceeding to the Bankruptcy Court on August 28, 1990.
Plaintiff Harold W. Johnson then sought to have the removed proceeding remanded. On October 24, 1990, this Court entered a Report and Recommendation for Disposition of Motion to Remand to the United States District Court recommending that the motion be denied.
Plaintiff Harold W. Johnson filed an objection to the Report and Recommendation. On March 13, 1991, the United States District Judge entered an order overruling the objection and adopting this Court’s Report and Recommendation.
Subsequently, defendant filed an answer denying the allegations of the complaint, a three count counterclaim asking for reformation, mortgage foreclosure, and a money judgment, and a third party complaint against Rosetta S. Johnson who was not yet a party to the proceeding.
On October 22, 1991, this Court entered an Order Granting Permissive Joinder of Rosetta Johnson as an additional plaintiff.
On May 21, 1992, defendant sent a letter to the Court indicating that he no longer wished to pursue his counterclaims for reformation and foreclosure. Thus, the only counterclaim remaining is for money judgment.
Plaintiffs suggest in their pleadings that the second mortgage is invalid based on the doctrine of merger. This argument is premised on the fact that the document incorrectly names plaintiffs as the mortgagees and debtors as the mortgagors. In addition, plaintiffs contend that the debt under the second mortgage has been extinguished based on business transactions with the debtors.
Conclusions of Law
Section 541, which defines what property is included in the bankruptcy estate, provides in relevant part:
(a) The commencement of a case under section 301, 302, or 303 of this title creates an estate. Such estate is comprised of all of 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.
The legislative history notes that the scope of the section is broad and is intended to “bring anything of value that the debtors have into the estate.” H.R.Rep. No. 595, 95th Cong., 1st Sess. 176 (1977). U.S.Code Cong. & Admin.News pp. 5787, 6136.
After the filing, plaintiffs intermittently made payments to defendant referring to the debt in two separate communications as a “second mortgage.” In addition, enclosed with several of the payments were “memorandums” reciting the running balance on the debt. Accordingly, plaintiffs’ post-petition actions indicate that they recognized the validity of the debt they owed to debtors under the second mortgage.
Although the second mortgage was not well drawn and does not include a provision for default, an acceleration clause, or a payment schedule, it does confirm a debt owed by plaintiffs to debtors. As such, the debt was an asset of the debtors that became property of the bankruptcy estate upon the filing of the chapter 7 petition.
The evidence indicates that from June, 1987, through February 8, 1990, plaintiffs *964made payments totaling $1,561.00 on the original $6,800.00 debt, thus leaving a balance of $5,239.00. The second mortgage document provided for interest at the rate of seven percent. Accordingly, $825.14 accrued in interest from the date of the filing. Consequently, defendant is entitled to a money judgment against plaintiffs for $6,064.14. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491513/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW
LARRY E. KELLY, Chief Judge.
The Trustee objected to certain property claimed as exempt by Charles R. Walden, Jr. and Laura H. Walden (hereafter the “Debtor”). This court is asked to determine whether a recent amendment of Article 21.22 § 1 of the Texas Insurance Code exempts the property at issue, which is an annuity. The annuity was substituted for other collateral used to secure payments to the Debtor under the terms and conditions of a non-competitive agreement. This is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(A), (B), and (K). The following represent the court’s Findings of Fact and Conclusions of Law as required by Bankruptcy Rule 7052.
BACKGROUND FACTS
In October, 1986, Golden Era Services, Inc., (“Golden Era”) began to negotiate to acquire the business operations and related assets of Cook-Walden Funeral Home and its affiliated funeral homes and cemeteries (hereafter “the business”). The principals with whom Golden Era dealt with were Charles Walden, Sr., Mrs. Hortense Fisher, and Charles Walden, Jr. Key provisions of the purchase agreement involved Golden Era acquiring ownership of stock, real estate and other assets of the business. This Debtor was to receive $111,132.07 for his stock (“DX3”); was to enter into an employment agreement starting January 1, 1987, with a monthly salary of $6,250.00 for ten years (“DX4”); and was to enter into a non-competitive agreement with the Debtor agreeing not to compete for a period of forty years while receiving an additional aggregate sum of $150,000.00 cash, plus $4,000.00 a month for 200 months beginning January, 1987. He also was to receive 50,000 shares of Series C, preferred stock of Golden Era, par value $1.00 for a sales price of $50,000.00, and a redemption *55agreement calling for mandatory redemption by Golden Era over stated intervals. Similar terms were offered to the other participants.
The non-competitive agreement was amended on or about November 26, 1986, to provide for a Deed of Trust Lien on certain real estate and a security interest in the name “Cooke-Walden Funeral Home” to secure payments due to the Debtor.
After the sale, the Debtor commenced to work for Golden Era until on or about October 2, 1987, at which time he was “ousted”. He along with his father, Charles R. Walden, Sr., and Mrs. Fisher were removed from the premises because of allegations that certain funds were missing, that the Debtor was responsible for running the business, and that his failure to report missing funds and to apprehend culpable parties was a breach of his fiduciary responsibility. (DX7).
After removal, the Debtor, his father and Mrs. Fisher, commenced a lawsuit against Golden Era, Cooke-Walden Funeral Homes, Inc., and a principal therein by filing their original petition in the 98th District Court of Travis County, Texas, in Cause No. 431,043. The petition alleged that the Defendants had breached or antici-patorily breached their employment agreements wrongfully and without just cause or legal justification. The Debtor asserted damages of $693,750.00 for the breach of his contract. The Debtor further alleged damages because of the breach of his noncompetitive agreement in the additional amount of $764,000.00. The other two plaintiffs alleged that the breach of Debt- or’s non-competitive agreement constituted a breach of their non-competitive agreement because “... all three plaintiffs entered into the non-competitive agreement as part of the sale of the family business, Cooke-Walden Funeral Homes, with the understanding and belief, that all would benefit from said non-competitive agreements, which the Defendants have breached.”
In addition to actual damages all of the plaintiffs sought exemplary damages which they alleged to be not less than three times actual damages sustained. (DX8).
The lawsuit was settled in 1988. Charles Walden, Jr., was to receive the following:
a. $61,500.00 in equal monthly installments of $5,125.00 over 12 months, beginning April 30, 1988, until paid in full;
b. Cooke-Walden was to recommence payment to him under his non-competitive agreement commencing April 30, 1988 “... in the same manner as provided therein. Said agreement shall be modified to allow Cooke-Walden to substitute a pre-paid annuity issued by American General, or comparable mutually agreeable insurance company, providing security comparable in value and providing the same monthly payments, to the then outstanding liability under said agreement at the time Cooke-Walden so elects.”; (emphasis added) and
c. Debtor was to return the 50,000 shares of Golden Era Series C stock and receive $275,000.00 over 12 months in equal monthly installments of $22,916.67 commencing April 30, 1988.
All three plaintiffs also agreed to resign their employment with Cooke-Walden effective October 2, 1987, and to execute mutual releases of claims. (DX9)
Documents were in fact executed between the parties to consummate the settlement agreements including a non-interest bearing promissory note in the original principle sum of $275,000.00 made payable to the Debtor in monthly installments (DX10); execution of a second amendment to the non-competitive agreement with the Debtor (DX11) and execution of mutual releases (DX12).
The substitution of collateral which was referred to in the settlement agreement (DX9) was effectuated in or about October, 1988. (DX13, DX14).
ISSUES PRESENTED
The court is asked to determine whether the “agreement” with Charles Walden, Jr., with the ultimate substitution of a pre-paid annuity providing the same monthly pay-*56merits as the then outstanding liability under the non-competitive agreement is exempt under article 21.22 § 1 of the Texas Insurance Code. The Debtor argues that it is exempt either because the annuity represents a “policy of insurance issued by a life, health or accident insurance company, including mutual and fraternal insurance ...” or represents a “plan or program of annuities and benefits in use by any employer ... ”.
FINDINGS OF FACT
There was no real testimony elicited at the trial of this cause. The Debtor’s exhibits 1 — 14 were stipulated by the parties and admitted into evidence. The facts recited herein are all contained in those exhibits. Additional factual stipulations were made as follows:
a. Payment of $105,425.04 was received by Charles R. Walden, Jr. in the form of a check pursuant to seller’s closing statement, exhibit D-3;
b. The Debtor began his employment with Golden Era Services, Inc., on January 1, 1987 and remained employed until October 2, 1987;
c. The application form for the annuity was send to the Debtor by Golden Era Services, Inc.; and
d. The money to fund the annuity (i.e., the premium payment) came from Golden Era.
The annuity was properly listed and claimed as exempt on Schedule C of the Schedule of Assets and Liabilities. The authority for claiming the exemption is Article 21.22 of the Texas Insurance Code. The Trustee’s objection to the claimed exemption was timely.
In addition to these facts which are not disputed, the court makes the following findings:
1. The annuity does not represent a policy of insurance issued by a life, health or accident insurance company.
2. The substitution of the annuity at issue was not done pursuant to any plan or program of annuities and benefits in use by any employer of the Debtor Charles R. Walden, Jr.
CONCLUSIONS OF LAW
1. In a prior opinion interpreting article 21.22 § 1 of the Texas Insurance Code, the bankruptcy court for the Northern District of Texas was asked to determine whether or not the cash surrender value of a life insurance policy was exempt under the language purporting to exempt “all lump sum payments”.1 Today’s version of that same provision would appear to exempt “lump sum payments”, including cash surrender values of life insurance. An important part of that decision however, remains applicable to the issue before this court. The court analyzed what is meant by the phrase “... any policy of insurance issued by a life, health, or accident insurance company ...”. It addressed all three types of policies, stating that:
“payments made under an ‘insurance policy’ are those made on the occurrence of a future contingency for which the insured and the insurance carrier have contracted. Under a health insurance policy, the carrier must pay when the insured become ill and incurs expenses related to his or her illness. Under an accident insurance policy, the carrier must pay for damages caused by certain accidents.” Brothers, at p. 85.
2. Accident insurance has also been defined in In re Powers, 112 B.R. 178, 180 (Bankr.S.D.Tex.1989) (“accident insurance refers to personal insurance; in other words, the policy covers financial loss resulting from bodily injury to a specified insured or beneficiary,” citing Appleman, Insurance Law and Practice, Section 24 (1981)).
3. An annuity has been described as “... essentially a form of investment which pays periodically during life of an annuitant or during terms fixed by contract rather than on occurrence of future contin*57gency.” In re Howerton, 21 B.R. 621, 623 (Bankr.N.D.Tex.1982).
4. If the annuity is not a “policy of insurance issued by a life, health, or accident insurance company,” the Debtor alternatively argues that the annuity was used by the “employer” as part of a plan to free up collateral and that the agreement with the Debtor was part of a broader plan of annuities which included Charles Walden, Sr., and Mrs. Hortense Fisher. The evidence, however, undisputedly shows that the Debtor was removed from his employment on or about October 2, 1987; that the employment agreement was then breached or anticipatorily breached (DX8 11 5); the annuity was part of a settlement of litigation which had sought damages including court costs, attorney’s fees and exemplary damages (DX8, 117); and that Debtor’s employment was terminated effective October 2, 1987, (DX9, II9); and the annuity itself was not effectuated till on or about October 13, 1988 (DX14).
CONCLUSION
The court finds that the Trustee’s objection to the claimed exemption of the annuity at issue is well founded. The annuity at issue is not a policy of insurance issued by a life, health or accident insurance company, nor does it represent a plan or program of annuities and benefits in use by any employer. By separate order of even date herewith this court will sustain the Trustee’s objection.
. In re Brothers, 94 B.R. 82 (Bankr.N.D.Tex.1988). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491514/ | MEMORANDUM OF OPINION AND DECISION
WILLIAM J. O’NEILL, Bankruptcy Judge.
Before the Court are cross-motions for summary judgment on the complaint to determine dischargeability filed by Plaintiffs, State Automobile Insurance Co. (State Auto) and Franklin D. Whatley and by Defendant-Debtor, Vince Kerpely. Initially, by order of July 6, 1990 this court adjourned deciding these motions pending further proceedings in state court. Subsequent adjournments were granted on request of the parties. This is a core proceeding within the jurisdiction of the Court. 28 U.S.C. §§ 1334, 157(a), (b)(2)(I), General Order No. 84 entered July 16, 1984 by the United States District Court for the Northern District of Ohio.
On consideration of the pleadings, exhibits and affidavit submitted, it is apparent there are no genuine issues of material fact. Summary judgment is, therefore, appropriate. See Fed.Bankr.R.Proc. 7056. Relevant facts are:—
1) Defendant-Debtor filed a petition under Chapter 7 of the United States Bankruptcy Code on February 28, 1990.
2) Schedule A-3 of Debtor’s Statement of Liabilities lists a disputed debt of $8,500.00 to State Auto arising from an automobile accident on March 16, 1984.
3) State Auto paid its insured Whatley the net amount of $8,495.80 for damages related to the accident and was subrogated to his claims in that amount. (Exh. B-l to B-19 appended to Complaint).
4) The traffic accident report states the Defendant-Debtor was tested for alcohol and indicates “HDB ability impaired.” Moreover, it reflects he “was under the influence and incoherent.” (Exh. B, Plaintiffs’ Motion for Summary Judgment).
5) Criminal charges were brought against Defendant-Debtor predicated on his operating a motor vehicle at the time of the accident. Judgment was entered against him on April 18,1984 by the City of Cleveland Municipal Court. The judgment was entered on a plea of “no contest” to the charge of driving while under the influence pursuant to Section 433.01 of the Cleveland Municipal Code. (Exh. C-l to C-6, D, Plaintiffs’ Motion for Summary Judgment).
6) State Auto obtained judgment against Defendant-Debtor based on the accident. Exhibit A to Plaintiffs’ motion is the default judgment for $8,495.80 plus costs entered after an evidentiary hearing on July 30, 1986 by the Cuyahoga County Court of Common Pleas.
7) Defendant-Debtor filed a motion to vacate and set aside the default judgment in the Common Pleas Court. He alleged the judgment was void having been entered without jurisdiction over him. This motion was overruled by entry of December 5, 1990. (Exh. B, Additional Exhibits to Plaintiffs’ Motion for Summary Judgment). Defendant-Debtor filed a motion for reconsideration of that ruling presently pending before that court. (Exh. A, Defendant’s Supplementary Brief).
8) Defendant signed an installment agreement on February 6, 1989 wherein he agreed to pay $8,500.00 to State Auto under specified terms. Failure to make payments as agreed would accelerate the balance which then became immediately due and payable. Pursuant to the agreement, Defendant was relieved from making a security deposit under the Ohio Motor Safety Responsibility Act. (Additional Exhibit filed by Defendant on July 6, 1992). No substantiation was provided of payments made as agreed.
Decision of this proceeding is controlled by former Section 523(a)(9) which *68provided for non-dischargeability of a debt:—
“to any entity, to the extent that such debt arises from a judgment or consent decree entered in a court of record against the debtor wherein liability was incurred by such debtor as a result of the debtor’s operation of a motor vehicle while legally intoxicated under the laws or regulations of any jurisdiction within the United States or its territories wherein such motor vehicle was operated and within which such liability was incurred.”
11 U.S.C. § 523(a)(9) (1988), amended by 11 U.S.C. § 523(a)(9) (Supp.-II 1990)
It is undisputed that Plaintiff, State Auto, has judgment against Defendant-Debtor arising from his operating a motor vehicle. Defendant asserts, however, the judgment is void due to ineffective service. Further, he argues he would have prevailed at a trial on the merits. It does not appear that Defendant challenges the allegation that the judgment represents liability incurred from his operating a motor vehicle while legally intoxicated under Ohio law, specifically the Cleveland Municipal Code. He does, however, argue that the judgment founded on a “no contest” plea is inadmissible in this proceeding. Finally, he maintains the February 6, 1989 agreement is a novation which extinguished the judgment. For reasons set forth below, all these arguments are without merit.
Defendant’s arguments attacking validity of the default judgment are groundless. His motion to vacate the judgment due to alleged ineffective service was overruled by the trial court. Since the judgment remains in effect, arguments of evidence which could have been presented in that case are without merit. State Auto has a valid default judgment against Defendant predicated on his operating a motor vehicle. Default judgments are appropriate for application of Section 523(a)(9) dischargeability provisions. Government Employees Insurance Co. v. Bennett, 80 B.R. 800 (Bankr.E.D.Va.1988).
The criminal judgment against Defendant-Debtor, based on the accident for which civil liability was imposed, establishes that liability was incurred because he operated a motor vehicle while legally intoxicated. Defendant’s challenging admissibility of the criminal judgment under Federal Rule of Evidence 410 is specious. Pursuant to Rule 410(2) a defendant’s plea of nolo contendere is inadmissible. That rule is inapplicable herein, however, because Plaintiffs rely on a criminal judgment, not a plea, to support their motion. The state court records of the civil and criminal judgments, therefore, clearly demonstrate and support determination of non-dischargeability under Section 523(a)(9).
The final argument for consideration is the assertion that the parties’ agreement of February 6, 1989 constitutes a novation. A novation “is a mutual agreement among all parties concerned for the discharge of a valid existing obligation by the substitution of a new valid obligation on the part of the debtor or another, or a like agreement for the discharge of a debt- or to his creditor by the substitution of a new creditor.” 18 O.Jur.3d, Contracts § 283 (1980). To effect a binding novation there must be a definite intention that the purpose of the agreement is to create a novation. The agreement herein reflects a novation was not intended. It merely sets forth a payment schedule on the judgment debt thereby relieving Defendant-Debtor from filing a security deposit with the Ohio Department of Motor Vehicles. It does not effect a substitution of obligations.
CONCLUSION
There are no genuine issues of material fact and Plaintiffs are entitled to judgment on their complaint as a matter of law. The judgment is a non-dischargeable debt pursuant to former Section 523(a)(9). 11 U.S.C. § 523(a)(9) (1988), amended by 11 U.S.C. § 523(a)(9) (Supp. II 1990). Plaintiffs’ motion for summary judgment is, therefore, granted. Defendant’s motion for summary judgment is denied according- | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491515/ | *408MEMORANDUM OPINION
MARY D. SCOTT, Bankruptcy Judge.
THIS CAUSE came on for trial before the Court, on April 29, 1992. Sylvia Borc-hert appeared for the trustee and Everett Gibson appeared for the defendant Ray F. Sharp Lumber Company. This adversary proceeding was initiated by a complaint to compel turnover of property. The trustee requests that certain transfers be avoided pursuant to sections 547, 548, 549, 550 of the Bankruptcy Code. Defendant Ray F. Sharp Lumber Company (“Sharp”) denies that any preferential transfers occurred, that he did not receive notice of the bankruptcy, and that he has a statutory lien on the property stored on his premises.
The debtor operated a wholesale lumber business. In February 1989, the principal of the debtor corporation (“Townsend-Robertson”), Cecil Robertson, died. Cecil Robertson’s son, David Robertson, sought to wind up the affairs of his father, including liquidation of the financially troubled company, Townsend-Robertson Lumber Company. One of the larger debts of Townsend-Robertson was owed to Ray F. Sharp Lumber Company (“Sharp”). On February 14, 1989, Townsend-Robertson owed $36,-765 to Sharp. However, there was a fairly large amount of lumber owned by the debt- or stored at Sharp’s place of business.
Sharp operates a custom kiln drying facility. It does not buy and sell lumber, but provides inspection, separation, and drying services. It stores lumber for short periods of time, but, in general, will charge a fee (calculated retroactively) if lumber is left on the premises for an excessive length of time. Storage fees are generally not charged to customers who do a large volume of business with Sharp and who turn over inventory rapidly.
Sharp’s course of dealing with Townsend-Robertson, however, varied somewhat from its normal practice. Because of the long-standing friendship between Ray Sharp and Cecil Robertson, Sharp stored lumber on its premises for Townsend-Robertson free of charge. Indeed, Sharp testified that some of the lumber which is the subject of this suit had been stored at Sharp since 1984. In this manner, Townsend stored much of its inventory of lumber on Sharp’s premises. Townsend would purchase lumber and ship it to Sharp. Sharp would treat the lumber and ship the lumber to the ultimate buyer upon instructions from Townsend-Robertson. At the time of Cecil Robertson’s death in February 1989, Sharp had possession of 231,817 feet of lumber owned by the debtor.1
David Robertson and Ray Sharp agreed, in February 1989, that Sharp would take title to some of the lumber stored at the business in satisfaction of the debt owed to Sharp. The invoice documents relating to this transaction are dated February 21, 1989. Particular pieces of lumber were selected and valued. The value was slightly in excess of the debt owed. Accordingly, Sharp delivered to the debtor a check in the amount of $2,286.41 in payment of the excess value of the lumber.
In March 1989, David Robertson and Ray Sharp spoke regarding the remainder of the lumber stored at Sharp. It was agreed between David Robertson and Ray Sharp that Sharp would sell the remaining lumber stored at the Sharp premises on the following terms: (1) Sharp would redry the lumber as necessary and deduct its fee for the redrying from the sale proceeds; (2) Sharp would deduct its fee for inspecting and separating the lumber from the sale proceeds; (3) Sharp would deduct a storage fee from the sale proceeds; and (4) Sharp would deduct a sales commission from the proceeds.2 The lumber was not in fact sold *409until sometime in June 1989. The involuntary chapter 7 petition in bankruptcy was filed on June 30, 1989.
The trustee seeks turnover of the value of the lumber transferred to Sharp and to obtain the proceeds of the lumber sold by Sharp. The trustee asserts that a fraudulent transfer under 11 U.S.C. § 548(a)(2), and/or a preference under 11 U.S.C. § 547 occurred.3 Sharp asserts that there are no remaining funds to turn over to the trustee. After deduction of his valid fees in preservation, storage, and sale of the lumber, protected by a statutory lien, there are no proceeds to remit.
In order to properly analyze the causes of action under the trustee’s two theories of recovery, it is necessary to separate the two different transactions or transfers at issue. The first transaction is the sale of lumber to Sharp in February 1989, in liquidation of Townsend-Robertson’s debt to Sharp, in which title to lumber was transferred to Sharp (“the title transaction”). The second transaction is the agreement between Townsend-Robertson and Sharp for Sharp to sell the remaining lumber (“the commission transaction”). Sharp does not contend that it is entitled to proceeds of the sale in excess of its fees; it contends that its fees consumed the proceeds.
The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157, 1334. Moreover, this Court concludes that this is a “core proceeding” within the meaning of 28 U.S.C. § 157(b) as exemplified by 28 U.S.C. § 157(b)(2)(E).
Fraudulent Transfer: Section 548(a)(2)
First, the trustee asserts that a transfer of an interest of Townsend-Robertson to Sharp was made within one year before the date of the bankruptcy, by which Townsend received less than reasonably equivalent value, such that the transfer must be avoided pursuant to Bankruptcy Code section 548(a)(2).4 There is no real dispute that a “transfer” occurred within the meaning of the Bankruptcy Code. The primary issue is whether the debtor received “reasonably equivalent value” in the exchange.
The Eighth Circuit Court of appeals addressed the meaning of “reasonably equivalent value” in In re Ozark Restaurant Equipment Co., Inc., 850 F.2d 342 (8th Cir.1988):
The concept of reasonably equivalent value is a means of determining if the debt- or received a fair exchange in the market place for the goods transferred. Considering all the factors bearing on the sale, did the debtor receive fair market value for the property.
Id. at 344-45.
The Court finds that reasonably equivalent value exists with respect to the title transaction. The transfer of the lumber in February 1989 in satisfaction of the debt was an arms-length transaction. The un-controverted evidence was that the value of the lumber was slightly in excess of the debt. In order to ensure a fair exchange, Sharp remitted $2,286.41 to Townsend-Robertson as payment for the excess value of the lumber. Accordingly, the trustee is not entitled to recover the value of the *410lumber related to the title transaction under section 548(a)(2).
The Court finds that the drying, inspection, separation, and commission charges also constitute reasonably equivalent value. The uncontroverted evidence demonstrated that reasonable amounts were charged and represented customary fees. The Court does not agree, however, that the storage charges are appropriate in this case. The evidence presented by both parties indicated that in the normal course of business between the debtor and Sharp, Sharp did not charge storage costs to the debtor. Accordingly, the Court will not permit Sharp to charge storage costs for lumber stored prior to the March 22, 1989, date when Ray Sharp and David Robertson entered into an agreement allowing Sharp to liquidate the remaining lumber inventory. The evidence indicated that the storage costs were a term of the agreement between David Robertson and Sharp. Accordingly, the Court will allow the reasonable storage costs from March 22, 1989, for a reasonable period- of time. Of course, any claim for storage costs for the portion of the lumber, title to which was transferred to Sharp, are not merited.
Sharp’s pending claims for storage costs do not cover a reasonable period of time. Sharp was not in the business of buying and selling lumber, although he believed he could find a buyer within a reasonable period of time. The motives of Ray Sharp in agreeing to sell the lumber were mixed. In addition to assisting the family of a friend, Ray Sharp wished to assist his own son in establishing a lumber business. It was Sharp’s intent to have his son find a buyer for the lumber and thus get started in the business, which motivated his agreement to sell the lumber.
The son did not sell the lumber. Ray Sharp ultimately had to sell the lumber himself. The lumber need not have been stored, at the debtor’s expense, during the time Ray Sharp was trying to assist his son’s efforts to learn the lumber-selling business. Such storage costs do not constitute reasonably equivalent value. Accordingly, storage costs in excess of three months will not be permitted. The Court will allow storage costs from March 22, 1989, to June 22, 1989.
The evidence demonstrated that Sharp received gross sale proceeds of $57,053.39,5 against which the following charges were made:
Commission (10%): $ 5,705.34
Inspection/Drying: 25,195.76
Total: $30,901.10
Accordingly, before storage charges, the trustee would be entitled to recover $26,-152.29. The Court will allow storage charges for a three month period at Sharp’s usual rate, as reflected in defense exhibits 2 and 3. Accordingly, Sharp is entitled to storage costs in the amount of $2,762.56. The total charges constituting “reasonably equivalent value” are $33,-663.66. The trustee’s portion of the sale proceeds is thus $23,389.73.
Preferential Transfer: Section 5⅛7
The Trustee’s second assertion is that a preferential transfer occurred with respect to the lumber sold by Sharp for Townsend-Robertson. A preferential transfer exists when a transfer is made:
(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 * * *; and
(5) that enables such creditor to receive more than such creditor would receive if—(a) the case were a case under chapter 7 of this title; (B) the transfer had not been made; and (C) such creditor received payment of such debt to the extent provided by the provisions of this title.
11 U.S.C. § 547(b). It is uncontroverted that the title transaction, the sale of lum*411ber to Sharp in February 1989, occurred more than 90 days before the date of the petition. Accordingly, the trustee may not recover as a preference any of the $36,765 value received by Sharp.
The second transaction, the retention of reasonable fees by Sharp is also not a preference. Sharp and Robertson agreed that Sharp would sell the lumber stored at his premises, in exchange for which Sharp would retain a commission and other fees associated with readying the lumber for market. In this manner, the fees constituted new value contemporaneously exchanged for the services in selling the lumber. As a factual matter, the elements of intent, contemporaneous exchange and new value exist such that, to the extent the charges were reasonable, the fees are not a preference.6 See generally Tyler v. Swiss American Securities, Inc. (In re Lewellyn & Co., Inc.), 929 F.2d 424 (8th Cir.1991).
Further, the retention by Sharp of the fees related to selling the lumber was not on account of an antecedent debt. After February 21, 1989, there was no debt to Sharp. The charges made by Sharp with respect to this transaction were proper charges for work performed in grading, drying and selling the lumber. The debt arose by virtue of the services performed in disposing of the lumber; it was not a debt previously owed by Townsend-Robertson to Sharp. See Ross v. Francis, 72 F.2d 358, 359 (2d Cir.1934) (“Since he took the collections into his possession immediately as they came in, there was no period when the company owed him an unsecured debt and no security was taken upon such a debt with knowledge of the debtor’s insolvency. A preference pre-supposes some credit given....”).
ORDERED that the trustee is entitled to judgment in the amount of $23,389.73 pursuant to 11 U.S.C. §§ 547, 548.
IT IS SO ORDERED.
. While the trustee asserts that the value of the lumber was $112,268.57, the evidence was un-controverted that the value of the lumber was less than the book value due its grade and the fact that it had been stored for so long.
. There was no indication that the rates charged for any of these items was unreasonable or not customary in the industry.
David Robertson, whose testimony was presented by deposition, was unable to recall with great specificity the terms of the agreement. His general recollection does not contradict the testimony of Ray Sharp regarding the terms of the agreement.
. The complaint also alleged that post-petition transfers occurred. 11 U.S.C. § 549. The trustee asserts that Sharp sold the Townsend-Robertson inventory between June and August 1989, without remitting these proceeds to the debtor or trustee. The evidence presented, however, indicates that all sales occurred between March 6, 1989, and June 1, 1990. Inasmuch as the bankruptcy petition was not filed until June 30, 1990, section 549 is inapplicable.
. Section 548 states in relevant part:
The trustee may avoid any transfer of an interest of the debtor in property, or any obligation incurred by the debtor, that was made or incurred on or within one year before the date of the filing of the petition, if the debtor voluntarily or involuntarily—
(2)(A) received less than a reasonably equivalent value in exchange for such transfer or obligation; and
(B)(i) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation. * * * *
11 U.S.C. § 548(a)(2).
. Gross sale proceeds for sale of all of the lumber was $83,017.14. However, Sharp is not entitled to fees on lumber to which it held title.
. Of course, to the extent the fees are not reasonable, there is no exchange for value. The Court has previously discussed the extent to which the charges were not merited. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491516/ | ORDER DENYING MOTIONS FOR REHEARING
MARY D. SCOTT, Bankruptcy Judge.
THIS CAUSE is before the Court upon several motions for rehearing filed by the debtor and also purportedly filed by various creditors in this case. On June 16, 1992, the creditors David F. Richter and Ethelyn A. Richter filed an Emergency Motion for Change of Venue in this and a related bankruptcy case, In re Woodland Heritage Corporation, Case No. 92-10151S (E.D.Ark. filed June 8, 1992). Hearing on the emergency motion was held on July 1, 1992, after which the Court granted the motion to transfer venue. The Court made oral findings of facts and conclusions of law, pursuant to Rule 7052, Federal Rules of Bankruptcy Procedure.
The debtor and several creditors have asked for a rehearing of the motion to transfer venue.1 The creditors David and Ethelyn Richter have responded. The following motions are before the Court:
1. “Debtor’s Motion for Rehearing,” filed on July 16, 1992. The basis for the motion is that numerous creditors were not served with the Court’s notice of hearing on the motion to transfer venue. This lack of notice, the debtor argues, mandates a new trial pursuant to Rule 9023, Federal Rules of Bankruptcy Procedure.2
2. “Creditors’ Motion for Rehearing,” filed on July 17, 1992, by the Bank of Evening Shade and the Arkansas Bank of Cave City, Arkansas. The basis of the motion is that the banks are “substantial creditors” of the debtors and “have a right to be heard on this seminal issue. Failure to notify the Banks affected their rights to participate in the Debtors’ bankruptcies without due process of law.”
3.“Creditors’ [sic] Motion for Rehearing,” filed on July 17, 1992, by the First National Bank of Sharp County. The basis of the motion is that the bank, “a substantial creditor” of the debtors “have a right to be heard on this seminal issue. Failure to notify the Bank affected, without due process of law, its right to participate in the Debtors' bankruptcies.”
The salient facts regarding the notice issue are not in dispute. The Emergency Motion for Transfer of Venue was filed on June 16, 1992, and was served on all creditors. Indeed, the creditors admit in their motions that they were served with and in fact received copies of the emergency motion. None of the complaining creditors responded or otherwise objected to the emergency motion. None of the complaining creditors filed an entry of appearance to precipitate notice of the hearing.
On June 19, 1992, the Court issued a Pre-Hearing Order in which the Court established deadlines for pretrial filings and set the emergency motion for evidentiary hearing for July 1, 1992. The Pre-Hearing Order was served upon the United States Trustee, the debtor’s counsel, and the Richters’ local and Texas counsel. The pretrial filings were submitted, including witness and exhibit lists. The debtor’s witness list included the following residents of Arkansas:
Paul Bacon, owner of Evening Shade Real Estate. Mr. Bacon appeared and testified at trial.
Richard Swink, owner of Landmark Water Company. Mr. Swink appeared and testified at trial.
*413John Thornton, Executive Vice President of the First National Bank of Sharp County. Mr. Thornton appeared and testified at trial.
L. Gray Dellinger. Although listed as a witness, Mr. Dellinger was not called to testify at trial.
The debtor requests a new hearing on the basis that all creditors were not given notice of the hearing. The debtor names three unnoticed “interested” creditors, one of whom is the debtor in the companion ease, Woodland Heritage Corporation. One of the remaining creditors, the First National Bank appeared as a witness and testified at the hearing on the motion to transfer venue. The debtor asserts that since these creditors appeared at the scheduled 341 meeting,3 they are obviously sufficiently interested such that they should have received notice of the hearing. The Court finds this statement disingenuous. Inasmuch as it appears to the Court that the debtor prepared or assisted in the preparation of the creditors’ motions submitted to the Court, there is a strong inference that the appearance by the creditors at the 341 meeting which occurred after the hearing on transfer of venue may have been orchestrated by the debtor.
While the Court does not base its decision upon the seemingly conflicting actions of the debtor, they should be noted. Both the Richters’ and debtor’s counsel have assigned client identification numbers to documents prepared for their respective clients. These numbers are generally recorded on word processing documents and appear in the lower right corner on the original documents filed with the Court. The same client identification number appears on all of the lengthier documents submitted by the debtor. This same number also appears on the two pending motions submitted by the creditors. The Court earlier highlighted the similarities in style and language of all of the motions for rehearing. The debtor’s assertion that the creditors’ activities indicate their “interest” in the case remaining in Arkansas is thus extremely suspect.
The motions purportedly prepared by the creditors state that they are interested in the proceedings and that litigating in Texas would constitute a burden upon them. Although admitting that they did not file a response to the emergency motion, they assert that they were entitled to notice of the hearing. Procedure regarding transfer of venue in a bankruptcy case is governed by Rule 1014, Federal Rules of Bankruptcy Procedure, which states in pertinent part:
Cases Filed in Proper District.4 If a petition is filed in a proper district, on timely motion of a party in interest, and after hearing on notice to the petitioners, the United States trustee, and other entities as directed by the court, the case may be transferred to any other district if the court determines that the transfer is in the interest of justice or for the convenience of the parties.
Fed.R.Bankr.Proc. 1014(a)(1) (emphasis added). Rule 1014 specifically states those persons upon whom notice must be served: the petitioners, the U.S. Trustee, and others as directed by the court. The clerk of the court served notice upon the movants, the debtors, and the U.S. Trustee. That is all the rule requires. See Hadar Leasing International Co., Inc. v. D.H. Overmeyer Telecasting Company, Inc. (In re Hadar Leasing International Co., Inc.), 14 B.R. 819, 821 (S.D.N.Y.1981) (“[Former] Rule 116(b) states that notice shall be given to those whom the court directs, and I have found no explicit authority, nor have the intervenors cited any, which mandates notice to creditors on a motion to transfer venue. Since Rule 116 authorizes transfer before the first meeting of creditors, it *414permits transfer before the creditors are heard.”)- No order was requested nor entered requiring notice upon any other persons. Despite the uncontroverted fact that the emergency motion was served upon all creditors, no creditor responded to or otherwise objected prior to the hearing.5 If the moving creditors were truly “interested” they could have, and should have, filed a response to the motion. Indeed, an interested creditor having a large stake in the bankruptcy, as some of these creditors assert, would have filed an entry of appearance in order to obtain copies of all pleadings and orders entered. Fed.R.Bankr. Proc. 9010(b).
Fairness and due process in bankruptcy requires that creditors have notice of particular matters affecting them and an opportunity to be heard with regard to their interests. While it is questionable whether creditors are required to have notice of a motion to transfer venue, see Hadar Leasing, 14 B.R. at 821, this Court holds that sufficient notice of the proceedings was given. While fairness and due process require opportunity to be heard, there is no requirement that the Court seek out creditors: creditors are not permitted to sit on their rights and wait for the Court to ask their opinion. In the instant case, all creditors were served with the emergency motion to transfer venue. All creditors had the opportunity to file a response or appear in the bankruptcy and be heard. Those persons evincing an interest in the matter had full opportunity to be heard. Indeed several of the creditors were heard: they appeared and testified regarding their status as creditors and the effect of transferring venue.
Notice provisions in bankruptcy cases are more carefully and fully set forth than in other matters litigated in federal courts. The reasons behind this are obvious: creditors by necessity must have notice of matters which affect their rights. The concerns of due process are balanced against the burdens and costs to the court and all litigants in the bankruptcy situation where numerous separate issues arise with respect to multitudes of creditors. The requirements of Rule 2002 generally list those matters of which all creditors must be given notice. A potential transfer of venue is not one of these items listed.6 Instead, Rule 1014 specifically states the persons to whom notice of the hearing must be given.
The Court finds the creditors’ statements that they had no opportunity to appear at the hearing to represent their interests disingenuous. One of the complaining creditors were listed as witnesses in the proceeding and in fact appeared and testified. Further, the complaining creditors’ status as creditors is somewhat remote. It appears from the schedules in the Woodland Heritage case that the complaining creditors are each fully secured. The debtor Gale is merely a guarantor of these debts owed by Woodland Heritage to the complaining creditor banks. Accordingly, the likelihood that these banks will be required to appear in the Gale ease is remote.
The debtor forcefully argued at the venue hearing that the majority of creditors reside in Arkansas. The Court reviewed the schedules and listing of creditors. The debtor has virtually no creditors in Arkansas. The only Arkansas debts are the guarantees on the three Arkansas banks and the potential liability represented by a lawsuit currently pending filed by an Arkansas resident.
Finally, of great import is the fact that none of the moving parties stated that they are aware of additional factors which would militate in favor of maintaining ven*415ue in the Eastern District of Arkansas. At the conclusion of the hearing, the Court made specific findings of fact and conclusions of law, finding that the interests of justice required transfer of the case to Texas. The movants have stated no facts which would alter the finding that the interests of justice require transfer of venue. The most convenient forum for virtually any creditor is the geographically nearest forum. Rehearing in this instance would simply be a waste of judicial resources and of the resources of the small creditors who have filed the motions. The court’s statement in Hadar Leasing is directly on point:
“I have considered carefully Hadar’s arguments that it was not afforded an opportunity to present witnesses before Judge Galgay, and that he did not consider the affidavits of several creditors. In light of my findings that Judge Galgay had sufficient evidence on the record on which to base his ruling, it would be a waste of judicial resources to remand for the purposes of a hearing.... ‘[bjecause transfer is so clearly warranted by the facts at hand, it is unnecessary to waste the district court’s valuable time by requiring a hearing on transferability.’ ... Even had witnesses testified as to Hadar’s activities in New York, they could not controvert Hadar’s own statements as to the primary nature of its business activity, ... the location of nearly all its assets in Ohio and its expectations that successful reorganization would require a determination concerning the validity of the leases.”
Hadar Leasing, 14 B.R. at 821-22. Even were the movants to submit testimony that venue in Arkansas is of greater convenience to them, the facts would still, overwhelmingly, support a finding that the interests of justice require that this bankruptcy case be administered in Texas. See In re Hadar, 14 B.R. 819.
At the conclusion of the hearing on July 1, 1992, the Court found that the overwhelming evidence required that the case be transferred in the interests of justice, pursuant to Rule 1014(l)(a). Neither the complaining creditors nor the debtor have raised any reason why this ruling should be reviewed. The argument that “substantial creditors” were denied an opportunity to be heard is meritless in light of the true nature of the debts and the fact that all were served with the emergency motion.
ORDERED as follows:
1. The “Debtor’s Motion for Rehearing,” filed on July 16, 1992, is DENIED.
2. The “Creditors’ Motion for Rehearing,” filed on July 17, 1992, by the Bank of Evening Shade and the Arkansas Bank of Cave City, Arkansas, is DENIED.
3. The “Creditors’ [sic] Motion for Rehearing,” filed on July 17, 1992, by the First National Bank of Sharp County is DENIED.
IT IS SO ORDERED.
. The motions filed in this case and the companion case are virtually identical. Indeed, the creditors Bank of Evening Shade, Bank of Cave City, and the First National Bank of Sharp County filed one pleading which combined the cases.
. Despite the assertions that a "substantial” number of creditors are interested in the venue issue, the debtor served none of the creditors with its motion for rehearing.
. The U.S. Trustee is required to schedule the 341(a) meeting within a particular period after filing of the petition in bankruptcy. Fed. R.Bankr.Proc. 2003(a). In this case, the trustee's minutes of the meeting held on July 15, 1992, which are included in the case files and records, indicate that it was continued due to the Court’s Order to transfer venue, entered on July 9, 1992.
. In the oral findings, the Court found that the Eastern District of Arkansas was a proper district for venue purposes.
. Counsel for the Arkansas Soil and Water Conservation Commission, who did file an entry of appearance, but not until June 30, 1992, appeared at the hearing, and stated an objection to the motion to transfer venue. The Court took due notice of the interest of this entity, which chose not to file a written objection. The attorney then inexplicably departed the courtroom and did not remain for the proceedings.
. Presumably, the debtor would be most desirous of maintaining its chosen forum and would ardently defend against any motion for transfer of venue. The Court can hardly imagine a case more zealously argued and tried than by the debtor in this case. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491517/ | ORDER DENYING MOTION FOR REHEARING
MARY D. SCOTT, Bankruptcy Judge.
THIS CAUSE is before the Court upon a motion for rehearing filed on July 27, 1992, by Sherra Hutchins. Hutchins, a plaintiff in a personal injury action pending in Sharp County, Arkansas, requests that the Order transferring venue be vacated.1 *417Hutchins asserts two bases for her motion. First, she asserts that the failure to receive notice of the motion to change venue effected a denial of due process of law. Secondly, Hutchins asserts that the “expense of trial of a civil action for personal injury in Bankruptcy Court in Texas will be prohibitive to Sherra Hutchins, and will effectively deny her access to the Courts, thus denying her equal protection of the law.”
The salient facts regarding the notice issue are not in dispute. The Emergency Motion for Transfer of Venue was filed on June 16, 1992. The certificate of service appended to the motion indicates that Hutchins was not served with a copy of the emergency motion.2 Hearing on the emergency motion was held on July 1, 1992, at the conclusion of which the Court found that the overwhelming evidence required that the case be transferred in the interests of justice, pursuant to Rule 1014(a)(1). An Order transferring venue was entered on July 9, 1992.
Hutchins asserts that she did not learn of either the bankruptcy proceeding or the Order transferring the bankruptcy case until July 17, 1992. The circumstances by which Hutchins learned of the bankruptcy proceedings are worthy of discussion because they highlight the manipulative methods by which the debtor is conducting this bankruptcy proceeding. The allegations of the motion state as follows:
3.That on Friday, July 17, 1992, Jerry Post, counsel for Sherra Hutchins, received by mail the following:
(a) In re Glen Gregory Gale, Jr., debt- or case number 9210152S.
(1) Application to Employ Attorney Under General Retainer (Catherine M. Stone) * * * *
[listing of documents received in Gale and Woodland Heritage Bankruptcy Case]
4. On Monday July 20, 1992 Jerry Post, attorney for Sherra Hutchins received a telephone inquiry from the office of Michael L. Alexander, Barber, McCaskill, Amsler, Jones and Hale, P.A., the attorneys for Woodland Heritage Corporation in the civil suit in Sharp County Circuit Court, asking to set a time and a place for the depositions of the plaintiff, and several of the plaintiffs witnesses.
5. Jerry Post, attorney for Sherra Hutchins inquired whether Mr. Alexander, or any member of the Barber Law Firm was aware of a bankruptcy proceeding, and asked that the Barber Law Firm direct an inquiry to Charles W. Baker, Jr., whose name appeared on the Motions.
In re Woodland Heritage Corporation, Case No. 92-10151S at 1-2 (Motion of Sher-ra Hutchins for Rehearing, filed July 27, 1992). The debtor is certainly aware of the existence of the law suit pending in Sharp County against it: the suit was listed in the schedules; counsel is involved in litigation of the suit. The debtor, however, failed to provide Hutchins with notice of the bankruptcy proceeding. Indeed, it is clear from these assertions, that debtor failed to advise its attorneys litigating the personal injury action of the filing of bankruptcy.3 The debtor has also failed to comply with the Local Rules of this Court which require that the debtor file a notice of bankruptcy *418in each court in which litigation is pending.4 The Court finds that these actions indicate the hand of the debtor in manipulating these proceedings without regard to the dictates of good faith.
Hutchins’ first assertion is that the failure to obtain notice of the bankruptcy proceedings and the emergency motion denied her due process of law. The failure of the debtor to provide notice to Hutchins of the bankruptcy proceeding itself does not require that the Order transferring venue be set aside. Secondly, failure to receive notice of venue proceedings does not require that the Order transferring the case be set aside. Procedure regarding transfer of venue in a bankruptcy case is governed by Rule 1014, Federal Rules of Bankruptcy Procedure, which states in pertinent part:
Cases Filed in Proper District.5 If a petition is filed in a proper district, on timely motion of a party in interest, and after hearing on notice to the petitioners, the United States trustee, and other entities as directed by the court, the case may be transferred to any other district if the court determines that the transfer is in the interest of justice or for the convenience of the parties.
Fed.R.Bankr.Proc. 1014(a)(1) (emphasis added). Rule 1014 specifically states those persons upon whom notice must be served: the petitioners, the U.S. Trustee, and others as directed by the court. The clerk of the court served notice upon the movants, the debtors, and the U.S. Trustee. That is all the rule requires. See Hadar Leasing International Co., Inc. v. D.H. Overmyer Telecasting Company, Inc. (In re Hadar Leasing International Co., Inc.), 14 B.R. 819, 821 (S.D.N.Y.1981) (“[Former] Rule 116(b) states that notice shall be given to those whom the court directs, and I have found no explicit authority, nor have the intervenors cited any, which mandates notice to creditors on a motion to transfer venue. Since Rule 116 authorizes transfer before the first meeting of creditors, it permits transfer before the creditors are heard.”). No order was requested nor entered requiring notice upon any other persons.
Notice provisions in bankruptcy cases are more carefully and fully set forth than in other matters litigated in federal courts. The reasons behind this are obvious: creditors by necessity must have notice of matters which affect their rights. The concerns of due process are balanced against the burdens and costs to the court and all litigants in the bankruptcy situation where numerous separate issues arise with respect to multitudes of creditors. The requirements of Rule 2002 generally list those matters of which all creditors must be given notice. A potential transfer of venue is not one of these items listed.6 Instead, Rule 1014 specifically states the persons to whom notice of the hearing must be given. Hutchins is not one of those persons.
Hutchins argues that “The expense of trial of a civil action for personal injury in Bankruptcy Court in Texas will be prohibitive to Sherra Hutchins, and will effectively deny her access to the Courts, thus denying her equal protection of the law.” This argument appears to assume that if the main bankruptcy case is transferred to Texas, the Arkansas state court action nec*419essarily is also transferred, removed, or otherwise before the bankruptcy court in Texas. Such an assumption is in error. Further, the change of venue of the main bankruptcy case in no manner prejudices Hutchins.
First, the state law action, although stayed pursuant to 11 U.S.C. § 362, is still pending in the Arkansas state court. That status does not change unless the matter is removed to the district court7 by a party. In the event the stay is lifted to permit continued litigation of the state court action, the matter would be tried in Sharp County, Arkansas. There is no assertion or any basis to believe that the debtor would attempt to remove this purely Arkansas state law claim to the district court, whether the bankruptcy case were pending in Arkansas or Texas. Indeed, an attempt to remove the matter to the district court in Texas could be indicative of bad faith on the part of the debtor. There being no indication that the matter will be removed to the district court, the assertion that the matter would be tried in Texas is without merit.
Even if the debtor removed the Arkansas state court proceeding to the district court, mandatory remand is implicated. 28 U.S.C. § 1334(c)(2).8 Upon timely motion by Hutchins, section 1334(c)(2) would require that the district court remand the matter to the state court. Even were mandatory abstention not implicated, the existence of “equitable grounds,” for discretionary remand appear to be overwhelming. See 28 U.S.C. § 1452(b). Finally, even if the state court action were removed to the district court within the context of the Texas bankruptcy proceeding, title 28 provides that the matter could yet be heard by the district court in Arkansas. Section 157(b)(5) provides that a personal injury tort action “shall be tried in the district court in which the bankruptcy case is pending, or in the district court in the district in which the claim arose, as determined by the district court in which the bankruptcy case is pending.” (Emphasis added.) A motion for transfer of venue of the district court proceeding would certainly be appropriate in the improbable event the matter is removed and not remanded.
Every principal embodied in title 28, in the Bankruptcy Code, and the principals of comity with state courts, respect for state law, and good faith indicate that Hutchins claim will be tried in Arkansas. This Court can conceive of no circumstance in which Hutchins would be required to litigate her Arkansas state law claim in Texas. Accordingly, the motion does not state sufficient cause for setting aside the Order transferring venue.
ORDERED that the Motion of Sherra Hutchins for Rehearing, filed on July 27, 1992, is DENIED.
IT IS SO ORDERED.
. A motion for rehearing, filed more than ten days after entry of the Order, is untimely. See Fed.R.Bankr.Proc. 9023. The request for relief and the content of the motion, however, indicate that this is a motion under Rule 9024, which requires only that the motion be made *417within a reasonable time. The Court finds that the interest of justice requires that the "motion for rehearing,” requesting that the Order transferring venue be set aside, be construed as a motion for relief from order under Rule 9024. The motion, filed only 10 days after Hutchins became aware of the bankruptcy and only 6 days after Hutchins became aware of the Order transferring venue, is filed within a reasonable time pursuant to Rule 9024.
In the alternative, Hutchins requests that the stay be relaxed in order that the state court personal injury action proceed. While the proper filing of such a separate contested matter would appear to have merit, 28 U.S.C. § 157(b)(2), (5), the request for relief from stay is not properly before the Court.
. The Court file reflects that the debtor failed to list Sherra Hutchins as a creditor in the initial documents filed with the Clerk of the Bankruptcy Court. Accordingly, the creditors moving for transfer of venue were unaware of her status as creditor.
. The debtor has filed no motion requesting that the attorneys litigating the state court proceedings be permitted to represent the debtor.
.Local Rule 4 provides in full:
As soon as possible after the date the bankruptcy petition is filed with the United States Bankruptcy Clerk, the debtor is required to give written notification to each court or administrative tribunal in which there is pending litigation involving the debtor. Copies of that written notification shall be mailed on the same date to all attorneys of record in the pending lawsuits.
The bankruptcy was filed on June 8, 1992. It appears from the allegations of Hutchins’ motion that, as of July 20, 1992, no such notice had been filed as required by Rule 4.
. In the oral findings made at the conclusion of the hearing on the emergency motion to transfer venue, the Court found that the Eastern District of Arkansas was a proper district for venue purposes.
. Presumably, the debtor would be most desirous of maintaining its chosen forum and would ardently defend against any motion for transfer of venue. The Court can hardly imagine a case more zealously argued and tried than by the debtor in this case.
. Bankruptcy courts are precluded from hearing personal injury tort actions. 28 U.S.C. § 157(b)(5).
. Section 1334 provides in pertinent part:
(2) Upon timely motion of a party in a proceeding based upon a State law claim or State law cause of action, related to a case under title 11 but not arising under title 11 or arising in a case under title 11, with respect to which an action could not have been commenced in a court of the United States absent jurisdiction under this section, the district court shall abstain from hearing such proceeding if an action is commenced, and can be timely adjudicated, in a State forum of appropriate jurisdiction. * * *
28 U.S.C. § 1443(c)(2) (emphasis added). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491520/ | ORDER DENYING UNOFFICIAL COMMITTEES OF PRE-SALE RETIREES FEES AND EXPENSES PURSUANT TO § 503(B)(3)(D) & § 503(B)(4)
JOHN T. FLANNAGAN, Bankruptcy Judge.
The Unofficial Committees of Pre-Sale Retirees apply for approval of administrative fees and expenses under § 503(b)(3)(D) and § 503(b)(4). They want the Court to approve $2,033.16 for expenses of Committee members; $345,350.98 in fees and expenses for lead counsel for the Committees; $23,607.93 in fees and expenses for local counsel for the Committees; and $25,-000.00 for anticipated fees and expenses of the Committees and their counsel. The debtors object and are joined in the objection by The Official Unsecured Creditors' Committee of Wilson Foods Corporation.
The Unofficial Committees of Pre-Sale Retirees appear by their attorneys, Richard Levy, Jr. of Milgrim Thomajan & Lee P.C., New York, New York, and Gary H. Hanson of Stumbo, Hanson & Hendricks, Topeka, Kansas. The debtors appear by their attorneys, Dennis R. Dow, Mark Moedritzer and Ken E. Nelson of Shook, Hardy & Bacon, Kansas City, Missouri, and Stutman, Treis-ter & Glatt, Los Angeles, California.
The Court denies the application because (1) a settlement agreement executed by the Unofficial Committees waives their right to claim administrative fees and expenses incurred during these proceedings, and (2) the Unofficial Committees did not make a substantial contribution to the bankruptcy estate, as required for allowance of their request for payment of administrative expense under § 503(b)(3)(D).
JURISDICTION
The Court finds that this proceeding is core under 28 U.S.C. § 157. The Court has jurisdiction under 28 U.S.C. § 1334 and the general reference order of the District Court effective July 10, 1984.
BACKGROUND
For some time before 1983, Wilson Foods Corporation and its then affiliate, Wilson & Co., operated meat processing plants in Albert Lea, Minnesota, and Cedar Rapids, Iowa. The Wilson companies provided health care and life insurance benefits to retired employees of the two plants. These retirees have been referred to throughout this case as the “Pre-Sale Retirees” and the Court will continue that reference.
Sometime in 1983, Wilson Foods Corporation filed a Chapter 11 case in the Western District of Oklahoma and ultimately obtained confirmation of a reorganization plan on March 28, 1984. On March 12, 1984, apparently in contemplation of its plan of reorganization, Wilson sold its Albert Lea, Minnesota, plant to Cornbelt Meats, Inc. Then on July 2, 1984, several months after the plan was confirmed, Wilson sold the Cedar Rapids, Iowa, plant to Cedar Rapids Meats, Inc. Thereafter, the two purchasing companies operated the plants under the trade name of Farmstead Foods. The name “Farmstead” has been used throughout this case to refer to the two purchasing companies and the Court will continue to do so.
Under the terms of the sale agreements, the purchasing companies assumed the seller’s obligations to the Pre-Sale Retirees for health care and life insurance benefits. The Farmstead companies made the payments to the Pre-Sale Retirees from the dates of sale until Cedar Rapids Meats, Inc. filed for Chapter 11 protection in the United State Bankruptcy Court for the Northern District of Iowa on March 9, 1990, and *521Cornbelt Meats, Inc. filed for Chapter 11 protection in the United States Bankruptcy Court for the District of Minnesota on March 14, 1990.
The present debtor, Wilson Foods Corporation, came into existence in 1988 when Doskoeil Companies Incorporated purchased the prior Wilson Foods Corporation in a leveraged buyout transaction involving the merger of the old corporation into a shell corporation which was ultimately given the same name, Wilson Foods Corporation.
On March 5, 1990, the present debtor, Wilson Foods Corporation, its parent Dos-kocil Companies Incorporated, and 17 affiliates, initiated this case by filing their petitions under Chapter 11 in this Court.
The Unofficial Committees organized themselves in December of 1990 to represent the interests of the Pre-Sale Retirees in these cases. The Pre-Sale Retirees, through their counsel, Milgrim Thomajan & Lee P.C., filed a motion for appointment of an official committee of retired employees pursuant to § 1114(c)(2), asking the Court, in effect, to appoint' one committee to represent the Pre-Sale Retirees as well as all other Wilson retirees.
In February of 1991, the Court authorized an official Section 1114 Committee (the “1114 Committee”), but in the face of Wilson’s denial of liability to Pre-Sale Retirees, declined to grant the Unofficial Committees’ request to include the Pre-Sale Retirees as voting members of the Official 1114 Committee, pending a ruling on whether Wilson was obligated to provide retiree benefits to the Pre-Sale Retirees. However, the representatives of the Pre-Sale Retirees were granted nonvoting, ex officio status and, with the consent of the voting members of the Official Committee, were allowed to attend its meetings.
On July 9, 1991, Wilson filed a motion asking the Court to rule that no Pre-Sale Retirees at the Albert Lea and Cedar Rapids facilities held allowable claims or rights to retiree health benefits against Wilson Foods Corporation (the “Disallowance Motion”).
On behalf of the Pre-Sale Retirees, the Unofficial Committees opposed the Wilson motion in a pleading filed on July 31, 1991. In addition, the Unofficial Committees moved to withdraw reference of the Wilson disallowance motion (the “Withdrawal Motion”), and moved for temporary allowance of the claims filed by the Pre-Sale Retirees for voting purposes (the “Voting Motion”).
On July 26, 1991, Wilson filed a motion under § 1114(g) seeking the Court’s approval of modifications to benefit payments for Wilson’s hourly retirees. Wilson indicated that confirmation of the Third Amended Joint Plan of Reorganization was conditioned upon adjustment of the retiree health care benefits under the pension plan for hourly employees of Wilson. The Unofficial Committees for the Pre-Sale Retirees filed their opposition to this motion on August 14, 1991.
On August 21, 1991, the debtors and the Unofficial Committees of the Pre-Sale Retirees announced that a settlement had been reached resolving the Disallowance Motion, the Withdrawal Motion, and the Voting Motion, and withdrawing the Unofficial Committees’ objections to the 1114(g) motion of July 26, 1991. The Court approved the settlement agreement by order of September 4, 1991. Paragraphs 2 and 10 of the settlement agreement provide:
2. Settlement of Claims.
a. The Administrative Claims.
(i) Conditioned upon the occurrence of the Effective Settlement Date, the Claims arising from and after the commencement of the Debtors’ chapter 11 cases but prior to the Settlement Approval Date (the “Administrative Claims”) shall be fully settled and satisfied as against Wilson Foods, Wilson and each of the Debtors, who shall be deemed released from said Administrative Claims, by the agreement of Wilson Foods, by execution of this Agreement, to pay the sum of One Million Five Hundred Thousand Dollars ($1,500,000) (the “Settlement Amount”) to a fund to be established and administered by the *522Committees or its designated representative(s)....
b. Claims for Future Benefits_
e. General Unsecured Claims. All other claims of the Pre-Sale Retirees against Wilson Foods, Wilson or any of the other Debtors, as a result of Wilson Foods’ adjustment of the retiree benefits of the Pre-Sale Retirees, or otherwise (the “other claims”) shall be fully settled and satisfied as against Wilson Foods, Wilson and each of the Debtors, who shall be deemed released from said claims, by the Pre-Sale Retirees, sharing, pro rata, with all other Class 20 (or 20a and 20b) creditors (the “Class 20 creditors”) of the Debtors (as said Class 20 creditors are defined in the Plan) in the Two Million Five Hundred Thousand Dollars ($2,500,000) payment to be made to said Class 20 creditors within 5 years of the Effective Date (as defined in the Plan) pursuant to the Plan....
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10. Indemnification. The Pre-Sale Retirees agree to indemnify and hold harmless the Debtors, each of them and their professionals, the Committees, their members and their professionals from any and all claims, damages, cost or expenses, including without limitation reasonable and necessary attorneys’ fees, litigation expenses and court costs (“Expenses”) arising out of any demands, claims or causes of action asserted by or on behalf of any Pre-Sale Retirees (including, without limitations, claims previously asserted by any party to this Agreement) for past or future retiree health care benefits. Such Expenses shall be paid upon demand from any Settlement Payment or Future Benefits payment held for distribution to Pre-Sale Retirees, upon reasonable prior notice to the Committees through their counsel....
There are no other paragraphs of the settlement agreement that might be construed as related to the treatment of the claims of the Pre-Sale Retirees.
DISCUSSION
Sections 503(b)(3)(D) and (b)(4) of the Bankruptcy Code state:
§ 503. Allowance of administrative expenses
... (b) After notice and a hearing, there shall be allowed administrative expenses, other than claims allowed under section 502(f) of this title, including—
... (3) the actual, necessary expenses, other than compensation and reimbursement specified in paragraph (4) of this subsection, incurred by—
... (D) a creditor, an indenture trustee, an equity security holder, or a committee representing creditors or equity security holders other than a committee appointed under section 1102 of this title, in making a substantial contribution in a case under chapter 9 or 11 of this title;....
... (4) reasonable compensation for professional services rendered by an attorney or an accountant of an entity whose expense is allowable under paragraph (3) of this subsection, based on the time, the nature, the extent, and the value of such services, and the cost of comparable services other than in a case under this title, and reimbursement for actual, necessary expenses incurred by such attorney or accountant. ...
The position of the Unofficial Committees is that without their counsels’ efforts and skill in resolving the dispute between the Pre-Sale Retirees and the debtors, the debtors may not have been able to achieve confirmation of the plan on the schedule that was ultimately realized; therefore, the Unofficial Committees did make a substantial contribution in the case and are entitled to recover their actual and necessary expenses under 11 U.S.C. § 503(b)(3)(D) and § 503(b)(4).
The debtors respond (1) that the terms of the settlement agreement are clear and that the agreement was intended to settle all claims of the Pre-Sale Retirees against the debtors; (2) that the Unofficial Committees did not make a substantial contribution in these cases, but even if they did, *523their application for fees and expenses fails to segregate the services that benefitted the estate from those which primarily bene-fitted the Committees and that the application requests reimbursement for items which are not compensable under the Bankruptcy Rules and the Fee and Expense Guidelines entered in these cases; (3) that § 503(b)(3) and (b)(4) were not intended to allow creditors to be paid their actual and necessary expenses involved in litigating their own claims; (4) that the fact that the issues were ultimately settled and confirmation proceeded as scheduled is not the type of “substantial contribution to the case” which courts have found entitle a creditors’ committee to reimbursement of expenses under § 503(b)(3) or (b)(4) where it was the creditors’ committee’s that raised the issues threatening to delay the confirmation hearing and where it was the creditors’ committee’s constituency alone that directly benefitted by the terms of the settlement agreement.
CONCLUSIONS OF LAW
Paragraph 2 of the settlement agreement divides “Settlement of Claims” into three sections: administrative, future benefits, and general unsecured claims.
In paragraph 2a, administrative claims arising from and after the commencement of the Chapter 11 are “fully settled and satisfied as against Wilson Foods, Wilson and each of the debtors, who shall be deemed released from said Administrative Claims.” The “administrative claims” are settled for $1,500,000.00. The total of the present administrative claim for attorneys’ fees and expenses is approximately $400,-000.00. It seems unlikely that the parties would discuss and settle administrative claims for $1,500,000.00, yet leave open the question of when and how a $400,000.00 attorneys’ fee claim would be paid without including an express exclusion of such fees from the release of the agreement. Either everyone understood that the agreement intended to release Wilson from all further liability to the Unofficial Committees of Pre-Sale Retirees or the attorneys for the Committees have committed a grievous oversight, which the Court doubts.
The language in the subparagraph on general unsecured claims reads, “All other claims of the Pre-Sale Retirees against Wilson Foods ... as a result of Wilson Foods’ adjustment of the retiree benefits of the Pre-Sale Retires ... shall be fully settled and satisfied....” This language acts as yet another “Terminator” for Wilson’s assault on the Committees’ position in this debate.
The terms of the settlement agreement are straightforward in releasing Wilson from any further liability. There being no express provision in the agreement excluding administrative expenses from the release, the Court can only find that movants have waived any claim for administrative expenses by entering into the settlement agreement.
Aside from the fact that it allowed the case to proceed to confirmation on schedule, the settlement agreement has not been shown to have benefitted the estate. Actually, retirees and creditors other than the Pre-Sale Retirees probably lost claim value when Wilson settled with the Pre-Sale Retirees for $1,500,000.00. This is money that went to the Pre-Sale retiree group rather than to other Wilson retirees and general creditors.
The Court agrees with the debtor that § 503(b)(3) and (b)(4) were not intended to allow creditors to be paid their actual and necessary expenses involved in litigating their own claims. The fact that the issues were ultimately settled and confirmation proceeded as scheduled is not the type of “substantial contribution to the case” which courts have found entitle a creditors’ committee to reimbursement of expenses under § 503(b)(3) or (b)(4).
The Committees’ request is denied.
The foregoing discussion shall constitute findings of fact and conclusions of law under Bankruptcy Rule 7052 and Rule 52(a) of the Federal Rules of Civil Procedure.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491521/ | ORDER DENYING MOTION TO ALTER OR AMEND BY UNITED STATES
A. JAY CRISTOL, Bankruptcy Judge.
This cause came before the Court on the motion of defendant United States to alter or amend the Court’s Memorandum Decision for Summary Judgment entered on March 19, 1992. The United States contends that the funds held by Heftier Realty Co. and owed to the debtor, Merida Tiles, Inc. are encumbered by federal tax liens as a result of the filing of a notice of lien by the Internal Revenue Service prior to the date the Chapter 11 petition was filed, and that the Bankruptcy Court must find the Internal Revenue Service has a secured interest in the cash and is entitled to adequate protection. The United States cites United States v. Whiting Pools, 462 U.S. 198,103 S.Ct. 2309, 76 L.Ed.2d 515 (1983) in support of its position that the cash is encumbered by a federal tax lien.
Whiting Pools is not applicable to the question of the effect of the tax lien on the cash. The property at issue in Whiting Pools was personal property. There was no question that the Internal Revenue Service held a secured lien in the debtor’s property. Whiting Pools, 103 S.Ct. at 2312. The discussion in Whiting Pools was limited to whether the Bankruptcy Court could order turnover of property already in the hands of the Internal Revenue Service as a secured creditor. The Court did not address the Internal Revenue Service’s interest in cash that belongs to the debtor but is not in the possession of the Internal Revenue Service.
In re Challenge Air International, Inc., 952 F.2d 384 (11th Cir.1992) specifically recognized that “the administrative levy does not determine whether the government’s rights to the seized property are superior to those of other claimants.” Challenge Air at 387 (Quoting United States v. National Bank of Commerce, 472 U.S. 713, 721, 105 S.Ct. 2919, 2924, 86 L.Ed.2d 565 (1985). The Supreme Court has held that the general federal tax lien “creates no property rights, but merely attaches consequences, federally defined, to rights created under state law.” United States v. Bess, 357 U.S. 51, 55, 78 S.Ct. 1054, 1057, 2 L.Ed.2d 1135 (1958). Whether the Internal Service holds a secured interest in the cash is determined by state law. The general tax lien merely defines what happens to the property if the Internal Revenue Service has an interest in the property ahead of other entities. State law determines the existence and extent of an interest in property, whereas federal law determines priority. See, e.g. Avco Delta Corp. Canada, Ltd. v. United States, 459 F.2d 436 (7th Cir.1972).
It is a fundamental concept, codified in Florida law, that an interest in cash or cash equivalents cannot be perfected absent physical possession of the cash or cash equivalent. Fla.Stat. § 679.304 (1991) (Uniform Commercial Code). Whiting Pools and Challenge Air rejected the notion that service of a notice of levy or lien was equivalent to constructive possession of cash. 952 F.2d at 386-387.
CONCLUSION
An interest in cash or cash equivalents comes into existence when the cash or cash equivalents are taken into custody by the creditor. Filing a notice of lien by the Internal Revenue Service merely serves to determine the priority of the Internal Revenue Service’s interest in property in which it already has a perfected interest under state law. The cash held by Heftier Realty Co. belongs to the debtor. To perfect its interest in the cash, the Internal Revenue Service was required to take actual possession of the cash prior to the date of the Chapter 11 petition. The Internal Revenue Service has merely an unperfected interest in the cash. The cash is not impressed with a federal tax lien and must be turned over to the debtor’s estate without a requirement of adequate protection for the unsecured interest of Internal Revenue *552Service. The motion of the United States to Alter or Amend the Summary Final Judgment is therefore denied.
DONE AND ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491522/ | MEMORANDUM OPINION AND ORDER DISALLOWING CLAIM NO. 061214 FILED BY SARASOTA COUNTY
A. JAY CRISTOL, Bankruptcy Judge.
This Cause was heard on February 18, 1992 upon the Debtor’s objection to claim no. 061214 filed by Sarasota County. This Court, after considering the applicable law and the parties’ arguments and evidence, disallows Sarasota County’s claim subject to GDC’s fulfilling the condition set forth below.
BACKGROUND
Sarasota County’s claim is based upon a settlement agreement approving the Myak-ka Estates Development of Regional Impact dated February 16, 1982 (the “Final Development Order”). The Debtor (“GDC”) and Sarasota County were parties thereto. The Myakka Estates Development of Regional Impact (“Myakka Estates DRI”) is owned by GDC and situated in the city of North Port, which is within Sarasota County. Pursuant to the Final Development Order, GDC was to, inter alia, extend a road, Sunnybrook Boulevard, through the Myakka Estates DRI. GDC has not done *553this, nor has it abandoned the Myakka Estates DRI pursuant to Florida Statutes § 380.06(26). Thus, Sarasota County has filed the instant claim.
GDC contends, for the following reasons, that its objection should be sustained. Developments of Regional Impact (“DRI”) are governed by Chapter 380 of Florida Statutes. Upon examining this chapter it is evident that a DRI condition, such as the road extension imposed upon GDC, is just another name for an impact fee. See, e.g., Fla.Stat. §§ 380.06(1), (15)(d) & (e) and (26). As such, DRI conditions are subject to case law regulating the imposition of impact fees. Impact fees are valid only if
the local government [can] demonstrate a reasonable connection, or rational nexus, between the need for additional capital facilities and the growth in population generated by the subdivision. In addition, the government must show a reasonable connection, or rational nexus, between the expenditures of the funds collected and the benefits accruing to the subdivision. In order to satisfy this latter requirement, the ordinance must specifically earmark the funds collected for use in acquiring capital facilities to benefit the new residents.
St. Johns County v. N.E. Fla. Builders Assn., Inc., 583 So.2d 635, 637 (Fla.1991). Finally, GDC contends that since it has not developed Myakka Estates DRI, nor does it have any intent to,1 the DRI condition forming the basis of Sarasota County’s claim is, under the standard above, an invalid impact fee. As such, Sarasota County’s claim is unenforceable and should be disallowed under 11 U.S.C. § 502(b)(1).
LEGAL ANALYSIS
Whether Sarasota County has an allowable claim depends upon whether GDC’s intent to abandon the, as of yet undeveloped, Myakka Estates DRI is sufficient to render the DRI condition unenforceable where GDC has not abandoned the Myakka Estates DRI pursuant to Fla. Stat. § 380.06(26). The Court accepts GDC’s position that DRI conditions must satisfy the standard governing the imposition of impact fees. As to GDC’s intent to abandon, the Court accepts GDC’s position to the extent this intent is present or short-term. However, the Court is unable to determine GDC’s long-term intent, a consideration which troubles the Court.
Applying the instant facts to the standard governing the imposition of impact fees set forth in St. Johns County v. N.E.Fla. Builders Assn., Inc., 583 So.2d 635, 637 (Fla.1991), it is clear that Sarasota County cannot convincingly argue2 that there is “a reasonable connection, or rational nexus, between the need for additional capital facilities and the growth in population generated by the subdivision.” Thus, Sarasota County’s claim is unenforceable and is disallowed. However, in light of the Court’s inability to determine GDC’s long-term intent to abandon and the fact that GDC has not yet abandoned the Myakka Estates DRI pursuant to Fla.Stat § 380.-06(26),3 the Court suspects that GDC may be unfairly preserving an option to develop Myakka Estates DRI while deferring its *554obligation to fulfill the DRI condition. For the foregoing reasons, it is
ORDERED that Sarasota County’s claim no. 061214 is disallowed subject to GDC’s commencing abandonment, as soon as statutorily possible, pursuant to Fla.Stat. § 380.06(26).
DONE AND ORDERED.
.With the exception of dirt access trails within Myakka Estates DRI, GDC has not developed the property. The development, thus, approximates no development. As to its intent not to develop the property, GDC offered the following: 1) GDC has expressed such intent; 2) development would be inconsistent with GDC’s objective of minimizing its expenses; 3) no deeds have been delivered to Myakka Estates DRI homesite purchasers, and; 4) GDC has "committed” to abandon Myakka Estates DRI under this Court’s "Agreed Order Approving Partial Settlement of Claim of City of North Port and Granting Related Relief" dated November 22, 1991. This settlement agreement was between the city of North Port and GDC. Sarasota County was not a party thereto.
. Sarasota County has not argued that the DRI condition forming the basis of its claim is able to meet this, nor any other, standard governing the imposition of impact fees.
. The Court does not know why GDC has yet to abandon the Myakka Estates DRI pursuant to Fla.Stat. § 380.06(26) as no explanation was given by either of the parties. Moreovér, the Court has not determined whether the reason may be that abandonment is presently impossible under the statute. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491524/ | OPINION
EDWARD R. GAINES, Bankruptcy Judge.
There came for consideration before the Court the Amended Objection to Claims of The Edge Companies and Delta Storage and Distribution Company filed by the Debtor, Delta Underground Storage, Inc., wherein the Debtor alleged that the claims were untimely filed. Having reviewed the pleadings, the court file, briefs submitted by counsel and other legal authorities, the Court determines that the claims were timely filed, and the Debtor’s objection is hereby overruled to that extent. Remaining issues raised in the objection are not currently before the Court.
I.FACTS
1. A petition for relief under Chapter 11 of Title 11 of the United States Code was filed by Delta Underground Storage, Inc., on February 19, 1991.
2. The first meeting of creditors required by § 341 of the Bankruptcy Code was scheduled by the United States Trustee for March 20, 1991, and notice was mailed to creditors.
3. The notice mailed to creditors contained the following language:
You must file a proof of claim, if your claim is scheduled as disputed, contingent or unliquidated, is unlisted or you do not agree with the amount. See 11 USC Sec 1111 & Bankruptcy rule 3003. Bar date is June 18, 1991.
4. The bar date set forth in the notice was fixed by the office of the Bankruptcy Clerk.
5. Claims totalling $747,489.09 were filed on behalf of The Edge Companies and Delta Storage and Distribution Company on July 2, 1991.
6. Subsequently, Delta Underground Storage, Inc. filed an objection to the claims arguing they were not timely filed.1
II. CONCLUSIONS
Federal Rule of Bankruptcy Procedure 3003(c) provides the following with reference to the time for filing proofs of claim in cases filed under Chapter 11 of the Bankruptcy Code:
(3) Time for Filing. The court shall fix and for cause shown may extend the time within which proofs of claim or interest may be filed ...
Fed.R.Bankr.Proc. 3003(c)(3). (emphasis added). Rule 9001 provides the definition of the term “court”:
In addition, the following words and phrases used in these rules have the meanings indicated:
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(3) “Clerk” means bankruptcy clerk, if one has been appointed, otherwise clerk of the district court.
(4) “Court” or “judge” means the judicial officer before whom a case or proceeding is pending.
Fed.R.Bankr.Proc. 9001.
Under the wording of these rules it is clear that the time period in which claims are to be filed in Chapter 11 proceedings must be set by the bankruptcy judge. The bar date referenced in the notice of the first meeting of creditors in this case was set by the clerk’s office, which apparently applied the 90 day deadline set forth in Federal Rule of Bankruptcy Procedure 3002(c). That rule requires that proofs of claim in Chapters 7,12 and 13 must be filed within 90 days after the first date set for the meeting of creditors pursuant to § 341. The bar date noticed to creditors was without authority of this Court and is therefore *718invalid and ineffective. Therefore, no bar date has yet been established in this Chapter 11 proceeding. The Court determines that the claims filed by The Edge Companies and Delta Storage and Distribution Company have not been filed late since no deadline has been fixed by the Court pursuant to Rules 3003 and 9001.
Additionally, the Court further suggests that the time for filing claims in Chapter 11 cases should be established on motion of debtor’s counsel and subsequent order of the Court, and then noticed by the Clerk pursuant to Federal Rule of Bankruptcy Procedure 2002(a)(8). The Court in Pioneer Investment Services Company, 943 F.2d 673 (6th Cir.1991), cert. granted, — U.S. -, 112 S.Ct. 2963, 119 L.Ed.2d 585 (1992), discussed the impact of noticing the bar date in a notice for the first meeting of creditors:
We also find it significant that the notice containing the bar date was incorporated in a document entitled “Notice for Meeting of Creditors.” Such a designation would not have put those without extensive experience in bankruptcy on notice that the date appended to the end of this notice was intended to be the final date for filing proof of claims ...
While we do not suggest that the court was obligated to notify creditors in precisely this form, the comparison between this Form 16 notice and the notice actually given in this case suggests the dramatic ambiguity of the latter. This ambiguity is exacerbated by the fact that the notice was simply and inconspicuously labeled “Bar date” without reference to its significance as a deadline for the filing of proof of claims. Even persons experienced in bankruptcy might confuse such a label for other deadlines. For example, the term “bar date” is also used to describe the deadline for filing objections to a debtor’s discharge under Rule 4007(c).
The uncontroverted evidence below established that while Berlin was an experienced businessman, he had no experience or expertise in bankruptcy. Thus, even if he could be attributed with having seen the “Notice for Meeting of Creditors” he should not necessarily have been attributed with understanding the significance of the date contained therein. This factor, when taken with Richards’ representations regarding the filing deadline, and the peculiar and inconspicuous placement of the bar date in a notice regarding a creditor’s meeting convince us that the bankruptcy court unjustifiably punished the plaintiffs for the sins and neglect of their lawyer.
943 F.2d at 678. This Court further notes that the more experienced bankruptcy counsel may be likely to miss a 90 day deadline for filing claims in Chapter 11 cases that is imbedded in a notice of first meeting of creditors since the Bankruptcy Rules indicate an intent to establish a deadline separately that is not the same shortened deadline applicable to Chapters 7, 12 and 13 proceedings.
Based on the foregoing, the Court concludes that the proofs of claim filed on behalf of The Edge Companies and Delta Storage and Distribution Company were timely filed and the debtor’s objection is hereby overruled to the extent that it relates to the issue of timeliness. Issues raised by the parties relating to excusable neglect pursuant to Federal Rule of Bankruptcy Procedure 9006 in filing late claims are rendered moot by this decision.
An order will be entered consistent with these findings and conclusions pursuant to Federal Rule of Bankruptcy Procedure 9021 and Federal Rule of Civil Procedure 58. This opinion shall constitute findings and conclusions pursuant to Federal Rule of Bankruptcy Procedure 7052 and Federal Rule of Civil Procedure 52.
. Other issues raised in the objection and discussed in the briefs submitted by counsel are not currently before the Court. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491525/ | OPINION AND ORDER GRANTING MOTION OF THE UNITED STATES OF AMERICA TO DISMISS AND HOLDING IN ABEYANCE PLAINTIFFS’ MOTION TO AMEND COMPLAINT
BARBARA J. SELLERS, Bankruptcy Judge.
I. Preliminary Considerations
Before the Court are two motions. The first motion (“Motion to Dismiss”) was filed July 11, 1991 by Defendant, the United States of America (“United States”), *760seeking dismissal of the original claim asserted against it in this adversary proceeding. The Motion to Dismiss is opposed by Plaintiffs, Larry E. Staats (“Trustee”) and SEOR, Inc. (“SEOR”) (together, “Plaintiffs”). A hearing on the Motion to Dismiss was held on October 1, 1991, at which time counsel for the United States and SEOR appeared. At the conclusion of that hearing, the Court took the Motion to Dismiss under advisement.
Subsequent to the October 1, 1991 hearing, Plaintiffs filed a motion (“Motion to Amend Complaint”) seeking an order of the Court permitting them to amend their complaint to add an additional theory of recovery. The Motion to Amend Complaint is opposed by the United States.
For the reasons which follow, the Court will grant the United States’ Motion to Dismiss and will hold Plaintiffs’ Motion to Amend Complaint in abeyance to await supplementation of Plaintiffs’ arguments.
II.Facts
The essential facts, as alleged in Plaintiffs’ original complaint (“Complaint”), are as follows:
The debtor, Frederick Petroleum Corporation, filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on March 15, 1985 (“Petition Date”). The debtor’s bankruptcy case was subsequently converted to one under Chapter 7 of the Bankruptcy Code. The Trustee is the duly-appointed trustee in the debtor’s Chapter 7 case.
Prior to the Petition Date, the debtor sold crude oil to Defendant, Main Star Oil Company (“Main Star”). On the Petition Date, Main Star owed the debtor approximately $75,000 on account. Complaint at 6.
Prior to the conversion of the debtor’s case to Chapter 7, this Court (Judge Grady L. Pettigrew) ordered Main Star to turn over “all cash proceeds and any other property received from or on behalf of Frederick Petroleum Corporation” (“Turnover Order”). Plaintiffs assert that Main Star has failed to comply with the Turnover Order. Complaint at Para. 8.
On or about March 15, 1989, the United States, through its agency the Internal Revenue Service (“IRS”), seized and levied upon Main Star’s checking account at The Central Trust Company of Southeastern Ohio, N.A., in Marietta, Ohio, obtaining approximately $350,000. Complaint at Para. 12 and 13. Plaintiffs aver that $75,000 of the money seized in such levy was property of the debtor’s estate. Complaint at Para. 13.
III.Issues
1. Whether the Court should dismiss Plaintiffs’ original claim against the United States.
2. Whether the Court should grant Plaintiffs’ request for permission to amend the Complaint to add an additional theory of recovery under 11 U.S.C. § 549.
IV.Legal Discussion
A. The United States’ Motion To Dismiss.
The United States moves the Court pursuant to Fed.R.Civ.P. 12(b)(1) and (6), made applicable to this proceeding by Fed.R.Bankr.P. 7012(b), for dismissal of Plaintiffs’ original claim under 26 U.S.C. § 6332(a) for lack of subject matter jurisdiction and for failure to state a claim for which relief can be granted. In its Motion to Dismiss, the United States contends that it has not waived its sovereign immunity to such claim. The United States asserts that the exclusive remedy available to Plaintiffs is provided in 26 U.S.C. § 7426,1 a statute *761upon which Plaintiffs do not rely.2 The United States further argues that, unlike § 7426, the provisions of § 6332 neither provide relief to Plaintiffs nor constitute a waiver of the United States’ sovereign immunity.
Relying upon the authority of a single decision, Plaintiffs contend that § 6332 does indeed afford them a legal remedy. Plaintiffs further dispute the United States’ assertion that it is immune from suit under § 6332.
At the outset, the Court notes the well-established rule that “[t]he United States, as sovereign, is immune from suit save as it consents to be sued, ... and the terms of its consent to be sued in any court define that court’s jurisdiction to entertain the suit.” United States v. Sherwood, 312 U.S. 584, 586, 61 S.Ct. 767, 770, 85 L.Ed. 1058 (1941) (citations omitted). “It is elementary that when consent to sue the United States is granted, the precise terms, conditions, and qualifications of such consent must be scrupulously followed.” Coleman v. United States Bureau of Indian Affairs, 715 F.2d 1156, 1161 (7th Cir.1983) (citing Sherwood).
Plaintiffs’ claim against the United States is based upon 26 U.S.C. § 6332(a),3 which provides:
Except as otherwise provided in subsection (b),4 any person in possession of (or obligated with respect to) property or rights to property subject to levy upon which a levy has been made, shall, upon demand of the Secretary, surrender such property or rights (or discharge such obligation) to the Secretary, except such part of the property or rights as is, at the time of such demand, subject to an attachment or execution under any judicial process.
Plaintiffs assert that an interpretation of § 6332(a) consistent with the holding in Securities and Exchange Commission v. Paige, 85-2 U.S.T.C. Para. 9588, 1985 WL 2335 (D.C.1985) compels denial of the United States’ Motion to Dismiss. Because Plaintiffs’ opposition to dismissal so heavily relies upon the Paige decision, the Court will briefly set forth its facts and holding.
In Paige, Mr. Paige engaged in an embezzlement scheme that resulted in his conversion of $5.9 million belonging to General Cinema Corporation (“GCC”). After an investigation into Paige’s activities, the Securities and Exchange Commission (“SEC”) instituted a civil action against Paige in the United States District Court for the District of Columbia. Early in that action, the district court entered an order requiring Paige to disgorge certain assets and place them in a court-ordered and court-supervised escrow account. The escrow assets had been purchased by Paige with the embezzled funds.
Later, the district court granted GCC’s motion to intervene as a party plaintiff in the SEC’s action against Paige. The district court also ordered the escrow assets transferred to GCC.
Before any of the escrow assets were transferred to GCC, however, the IRS levied upon the escrow account in an attempt to satisfy certain obligations owed by Paige to the IRS. The escrow agent then filed a request for instructions with the district court, asking whether he should obey the court’s prior orders directing that the escrow assets be transferred to GCC or whether he should transfer the assets to the IRS pursuant to its notice of levy. The district court denied the escrow agent’s request for instructions.
Presumably more than nine months after the IRS’ notice of levy, GCC and the United States jointly moved the district court to determine proper ownership of the escrow assets. In addressing the United States’ *762argument that the proceedings were barred by the nine-month statute of limitations provided in § 6532, the district court stated at pages 89,506-07:
IRS next argues that the proceedings are barred by the statute of limitations provided in section 6532(c)(1) of the Internal Revenue Code. GCC [General Cinema Corporation], by this proceeding, is seeking enforcement of the Court’s June 8, 1984 order that the escrow assets be transferred to GCC. At the time the Notice of Levy was served, the escrowed assets were in the constructive custody of the Court, having already been placed in an escrow account under the jurisdiction of this Court. The Court determines, therefore, that pursuant to Section 6332(a) of the Internal Revenue Code, because the escrowed assets were already in the constructive possession and actually under the jurisdiction of the Court, they were immune to levy. Therefore, the statute of limitations argument advanced by IRS must be rejected.
Focusing on this holding, Plaintiffs argue that § 6332 affords them a remedy from which the United States is not immune. The Court disagrees.
Although the Court has found no case directly on point, numerous decisions have held that when a person other than the taxpayer claims an interest or rights in property upon which the IRS has levied, that person’s exclusive remedy under the Internal Revenue Code against the United States is a wrongful levy action under 26 U.S.C. § 7426.5 The Paige decision, as legal precedent, is of limited utility because it simply does not consider that issue. Moreover, the Court believes that there are additional reasons why Paige is either wrong or inapplicable.
First, it is unclear whether the motion brought in Paige to determine ownership of the escrow assets was made pursuant to § 6332. This Court has found no other case where a third party claiming an interest in property (even by court order or other judicial process) was permitted a remedy against the United States under § 6332. Clearly, § 6332, on its face, is a defense for the “person in possession of (or obligated with respect to) property or rights to property” to a demand of the IRS for surrender of property upon which levy has been made. The United States Supreme Court appears to view § 6332 in such fashion.6
Second, even if the motion in Paige were somehow brought pursuant to § 6332, the decision plainly states that such motion was jointly brought by both GCC and the United States. As a movant, the United States’ assertion of sovereign immunity in Paige is a little surprising, if not confusing.
Finally, to the extent the Paige decision purports to create a cause of action for third parties against the United States for wrongful levy, this Court believes it is *763wrong as a matter of policy. Section 7426 waives the sovereign immunity of the United States for such actions, but limits the relief that may be granted by the imposition of a nine-month statute of limitations. As stated by the Fifth Circuit Court of Appeals in United Sand and Gravel:
The obvious reason for a short statute of limitations is to resolve doubts concerning the status of the taxpayer’s account swiftly. If someone else successfully claims property already credited against the taxpayer’s tax liability, the United States must look to other assets of the taxpayer to satisfy the taxpayer’s liability. I.R.C. § 6532(c) protects the legitimate interest of the United States in requiring other claimants of the seized property to bring their claims quickly.
624 F.2d at 739.
In consideration of the United States’ need to resolve quickly those disputes over taxpayers’ property, the Fifth Circuit Court of Appeals and other courts have held that § 7426 is a third party’s exclusive remedy against the United States for wrongful levy. Based upon the reasoning of those decisions, this Court believes that Plaintiffs are not entitled to a separate cause of action under § 6332.
B. Plaintiffs’ Motion To Amend Complaint.
Pursuant to Fed.R.Civ.P. 15(a) and Fed. R.Bankr.P. 7015, Plaintiffs seek leave to file an amended complaint setting forth an additional theory of recovery against the United States based upon 11 U.S.C. § 549. The Motion to Amend Complaint was filed October 9, 1991, a few days after the Court’s hearing on the United States’ Motion to Dismiss.
The United States opposes the Motion to Amend Complaint asserting that the Court’s granting of such motion will cause it prejudice. Specifically, the United States points out that the amendment was requested by Plaintiffs long after the court-ordered June 30, 1991 discovery cutoff date. The United States insists that if the Motion to Amend Complaint is granted, it will be denied an opportunity to conduct necessary discovery. Additionally, the United States argues that Plaintiffs’ attempt to add an additional theory of recovery “is merely an attempt to avoid dismissal of their original claim, thereby negating the time and expense the United States incurred in relation to that motion.” United States’ Opposition at 3.
Plaintiffs reply that the Motion to Amend Complaint seeks to add only an additional legal theory of recovery, which theory is based upon no new or additional facts. Plaintiffs argue that their memorandum in opposition to the Motion to Dismiss put the United States on notice of their intent to amend the Complaint. Plaintiffs further note that the United States has conducted no discovery to date.
The arguments of the parties must be considered in light of Fed.R.Civ.P. 15(a), which provides:
A party may amend the party’s pleading once as a matter of course at any time before a responsive pleading is served or, if the pleading is one to which no responsive pleading is permitted and the action has not been placed upon the trial calendar, the party may so amend it at any time within 20 days after it is served. Otherwise a party may amend the party’s pleading only by leave of court or by written consent of the adverse party; and leave shall be freely given when justice so requires. A party shall plead in response to an amended pleading within the time remaining for response to the original pleading or within 10 days after service of the amended pleading, whichever period may be the longer, unless the court otherwise orders.
“Rule 15 is premised on the theory ‘[tjhat pleadings are not an end in themselves, but are only a means to proper presentation of a case; that at all times they are to assist, not deter, the disposition of litigation on the merits.’ ” Yoder v. T.E.L. Leasing, Inc. (In re Suburban Motor Freight, Inc.), 114 B.R. 943, 950 (Bankr.S.D.Ohio 1990) (citations omitted).
With regard to motions to amend a complaint under Rule 15(a), the United States Supreme Court has stated:
*764Rule 15(a) declares that leave to amend ‘shall be freely given when justice so requires;’ this mandate is to be heeded (citation omitted). If the underlying facts or circumstances relied upon by. a plaintiff may be a proper subject of relief, he ought to be afforded an opportunity to test his claim on the merits. In the absence of any apparent or declared reason — such as undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, futility of amendment, etc. — the leave sought should, as the rules require, be ‘freely given.’
Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 230, 9 L.Ed.2d 222 (1962).
Since Foman, the developing case law of the Sixth Circuit has evidenced a “liberality in allowing amendments to a complaint.” Moore v. City of Paducah, 790 F.2d 557, 562 (6th Cir.1986). The Sixth Circuit has stated that “delay alone is insufficient reason to deny a motion to amend.” Estes v. Kentucky Util. Co., 636 F.2d 1131, 1134 (6th Cir.1980). “Rather, the critical factors are notice and substantial prejudice.” Estes at 1134, citing, Hageman v. Signal L.P. Gas, Inc., 486 F.2d 479, 484 (6th Cir.1973). “[TJhere must be ‘at least some significant showing of prejudice to the opponent’ if the motion is to be denied.” Janikowski v. Bendix Corp., 823 F.2d 945, 951 (6th Cir.1987), citing, Moore at 562.
Perhaps most pertinent to this proceeding is the Sixth Circuit Court of Appeals’ decision in Tefft v. Seward, 689 F.2d 637 (6th Cir.1982). In Tefft, the court held that it was an abuse of discretion for the district court to deny the plaintiff’s request to amend his complaint to add an additional theory of recovery. The plaintiff’s request was contained in his memorandum in opposition to the defendants’ summary judgment motion, which summary judgment motion was granted by the district court. In so holding, the Sixth Circuit found that the facts as set forth in the plaintiff’s original complaint supported the plaintiff’s new theory of recovery. Additionally, the court found that the amended cause of action was not so different as to cause prejudice to the defendants.
As in Tefft, the facts of the Complaint support Plaintiffs’ additional claim. Moreover, the United States has shown no significant prejudice resulting from the amendment. Under such circumstances, the Court would normally grant the Motion to Amend Complaint. However, the Court has an additional concern in this proceeding which prohibits it from now doing so.
Plaintiffs seek to amend their Complaint to add a claim against the United States under 11 U.S.C. § 549. Presumably, Plaintiffs’ request for relief on their § 549 claim will include a request for the recovery of monetary damages. See 11 U.S.C. § 550.
Since the filing of the Motion to Amend Complaint, the 'United States Supreme Court has rendered its decision in United States v. Nordic Village, Inc., — U.S. -, 112 S.Ct. 1011, 117 L.Ed.2d 181 (1992). In Nordic Village, a majority of the Supreme Court held that 11 U.S.C. § 106(c) does not waive the United States’ sovereign immunity to suits for money damages under §§ 549 and 550.
Absent some other waiver of sovereign immunity by the United States, the Court does not see how Plaintiffs can be granted relief under a § 549 claim. Where such an amendment would be futile under the law, denial of the Motion to Amend Complaint is proper. Foman, 371 U.S. at 182, 83 S.Ct. at 230; Marx v. Centran Corp., 747 F.2d 1536, 1150 (6th Cir.1984).
V. Conclusion
Based upon the foregoing, it is hereby
ORDERED, that the United States’ Motion to Dismiss is GRANTED. Plaintiffs’ claim against the United States pursuant to 26 U.S.C. § 6322(a) is dismissed; and it is further
ORDERED, that Plaintiffs’ Motion to Amend Complaint shall be held in abeyance. Plaintiffs shall have twenty (20) days from the date of entry of this opinion and order to file any supplement to their Motion to Amend Complaint to argue why *765such motion should not be denied in light of the Supreme Court’s holding in Nordic Village. The United States shall within twenty (20) days after service of any such supplement file its pleading in response thereto.
. Section 7426 of Title 26, United States Code, provides:
If a levy has been made on property or property has been sold pursuant to a levy, any person (other than the person against whom is assessed the tax out of which such levy arose) who claims an interest in or lien on such property and that such property was wrongfully levied upon may bring a civil action against the United States in a district court of the United States. Such action may be brought without regard to whether such property has been surrendered to or sold by the Secretary.
. It appears that this proceeding was commenced outside of the nine-month statute of limitations for actions against the United States under § 7426. See 26 U.S.C. § 6532(c).
. Section 6332(a) was amended by P.L. 100-647 effective after June 30, 1989. The version of the statute set forth herein is the one in effect at the time of the IRS’ levy and seizure and the version upon which Plaintiffs rely. Plaintiffs' Memorandum Contra at 4.
.Subsection (b) sets forth a special rule for life insurance and endowment contracts, which is not applicable to this case.
. See United Sand and Gravel Contractors, Inc. v. United States, 624 F.2d 733, 739 (5th Cir.1980) ("When someone other than the taxpayer claims an interest in property or rights to property which the United States has levied upon, his exclusive remedy against the United States is a wrongful levy action under I.R.C. Section 7426."); Texas Commerce Bank v. United States, 896 F.2d 152, 156 (5th Cir.1990) ("Section 7426(a)(1) ... affords the exclusive remedy for an innocent third party whose property is confiscated by the IRS to satisfy another person’s tax liability.”); Rosenblum v. United States, 549 F.2d 1140, 1144-45 (8th Cir.), cert. denied, 434 U.S. 818, 98 S.Ct. 58, 54 L.Ed.2d 74 (1977) (Section 7426 is the only jurisdictional basis for claims that IRS wrongfully seized property). See, also, Trust Company of Columbus, 735 F.2d 447 (11th Cir.1984); Morris v. United States, 652 F.Supp. 120 (M.D.Fla.1986), aff'd, 813 F.2d 343 (11th Cir.1987); Haywood v. United States, 642 F.Supp. 188 (D.Kan.1986); Matter of U.S. Industrial Fabricators Inc., 758 F.Supp. 1065 (W.D.Pa.1991).
. In United States v. Nat’l Bank of Commerce, 472 U.S. 713, 721-22, 105 S.Ct. 2919, 2924-25, 86 L.Ed.2d 565 (1985), the United States Supreme Court stated:
The courts have uniformly held that a bank served with an IRS notice of levy ‘has only two defenses for a failure to comply with the demand.’ ... One defense is that the bank, in the words of § 6332(a), is neither 'in possession’ nor ‘obligated with respect to' property or rights to property belonging to the delinquent taxpayer. The other defense, again with reference to § 6332(a), is that the taxpayer’s property is 'subject to a prior judicial attachment or execution.’ (citations omitted). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491528/ | PEDER K. ECKER, Bankruptcy Judge.
Debtors’ counsel, Attorney Charles F. Carbiener, filed a Motion to Compel Discharge of Liens and filed a memorandum in support of the motion. Debtors have consolidated their Chapter 11 bankruptcy proceedings and seek to compel the Farmers Home Administration [hereinafter FmHA] to discharge and release all liens and mortgages of record held against the Debtors’ property. The motion states that Debtors have tendered full payment of FmHA’s secured claim plus full payment of the present value of the unsecured payments due FmHA as provided for in the Amended Plan of Reorganization. Debtors further state that FmHA refuses to release the liens and encumbrances and refuses to accept the payment. A Supplemental Memorandum in Support of the Motion was filed.
Assistant United States Attorney Craig Peyton Gaumer filed a response on behalf of FmHA stating that no payment has been tendered or refused, but, rather, Debtors have made a settlement offer to the FmHA. The offer has been to pay the unsecured claim at its “present value.” FmHA states this is contrary to the confirmed plan, deprives the FmHA of the benefit of its bargain, and essentially requests a second discounting on the allowed claim. FmHA believes it is entitled to payment of the remaining unsecured claim “promised by the debtors, accepted by the FmHA, and approved by this Court in the confirmed Chapter 11 Plan.”
An evidentiary hearing was held, and the Court took this matter under advisement. The issue presented is whether a debtor fulfills its obligations pursuant to a confirmed Chapter 11 plan of reorganization by offering the present value of an allowed unsecured claim when the confirmed plan promises to pay the creditor a dividend representing ten percent of the unsecured claim, at which time, liens and encumbrances held by the creditor will be released, and when there is no prepayment clause provided in the plan.
I.
Two exhibits received into evidence at the hearing provide the appropriate factual background regarding FmHA’s treatment under the plan. Debtors’ Amended Plan of Reorganization, confirmed August 19, 1987, classified FmHA as the holder of a secured and an unsecured claim. The plan treats the $40,318.46 secured claim with fifteen annual payments of $3,754.41 each, based on a 4.5% rate of interest. As to the $88,187 unsecured claim, the plan states, “The debtors propose to return a 10% dividend to this class payable in ten (10) annual payments without interest.” The liens and encumbrances are held “until paid in accordance with this Plan.” As of June 12, *8731992, $53,007.82 had been paid toward the dividend, leaving only four payments of $8,818.70 each payable annually.
In support of the motion, Debtors rely on the “universal concept of the time value of money,” also known as present value. The present value concept is that since a creditor being repaid over a period of time receives interest as compensation for being deprived of the possession and use of its money, a debtor can fully satisfy a loan obligation prior to the maturity date by tendering the present value of a future payment calculating an amount to be repaid using an appropriate market rate of interest. Debtors point out that the time value of money is supported by public policy and usage of trade and is also contemplated and referred to by the Bankruptcy Code and its legislative history.
The present value argument is valid, Debtors believe, because the plan obligates the Debtors to satisfy the value of FmHA’s secured and unsecured claims. This interpretation, according to Debtors, is “merely proper implementation” of the present value concept. Once this obligation has been performed, the underlying debt will be extinguished, and pursuant to Article 9, Section 404(1) of the Uniform Commercial Code, FmHA will be obligated to release its liens and encumbrances or be subject to sanctions and damages if a termination of the security interest is not filed within ten days after payment is received and a demand is made by the Debtors. In sum, Debtors’ position is that, under this plan, they should be allowed to tender an amount today, which, if invested at the appropriate rate of interest, would yield $35,274.80 four years from now, which is the sum of the remaining four annual payments of $8,818.70. In exchange, FmHA should be compelled to release the liens and encumbrances currently held against Debtors’ property.
In its response to Debtors’ Supplemental Memorandum in Support of the Motion, FmHA contends that allowing a present value payment would, in effect, be a second discounting on FmHA’s allowed claim. Section 1129(a)(7) of the Bankruptcy Code states the debtor must pay the value of a creditor’s claim as determined on the effective date of the plan. The Code does not allow that amount to be altered once a Chapter 11 plan has been confirmed. Debtors did not object to FmHA’s proof of claim, and FmHA agreed to Debtors’ offer of payment (i.e., 10% dividend). The offer “did not contain any suggestion that the debtors could discount the claim to a present value,” and once confirmed, 11 U.S.C. § 1141(a) states that the terms and provisions bind both debtors and creditors. FmHA also states that the plan was drafted by Debtors and it did not identify the dividend as a future value of payments, but instead described it as a “dividend to the General Unsecured and Undersecured Creditors.” Since there is no provision in the plan to allow a discounting of the claim to present value, FmHA' believes Debtors are not entitled to do so.
II.
It is somewhat uncommon for a debtor to be able to satisfy a claim earlier than contemplated by a confirmed plan’s terms and payment schedule. Usually, the subject of prepayment is discussed in the context of promissory notes, mortgages, or some other instrument which is an integral part of a mortgage transaction. Within the realm of real estate transactions, the general rule is that a mortgagor has no right to pay off his obligation prior to its stated maturity date. Vicki A. Huffman, Annotation, Construction and Effect as to Interest Due of Real Estate Mortgage Clause Authorizing Mortgagor to Prepay Principal Debt, 86 A.L.R.3d 599, 603 (1978). In the event that a prepayment provision does exist, a “penalty” or “premium” is often required to protect the mortgage lender against rate fluctuations. Paul Goldstein Et Ah, Real Estate Transactions 396-97 (2d ed. 1988); see American Fed. Sav. v. Mid-America Service, 329 N.W.2d 124 (S.D.1983). And although a prepayment clause entitles early- repayment of all or some part of the debt, there is no reduction in the total amount to be paid back simply because of early repayment. Due to the unlikely situation of *874prepaying plan payments in bankruptcy reorganizations, it is no wonder there are no Bankruptcy Code provisions dealing with present value or prepayment of plan payments.
As noted by Debtors’ counsel, there are Bankruptcy Code provisions and legislative history that contemplate present value, such as 11 U.S.C. §§ 1111(b), 1129(a)(7), 1129(b)(2)(A), and 1325(a)(4), but these provisions relate to the court’s examination of how a proposed plan has valued property that will be distributed pursuant to a confirmed plan. “The Court may confirm a plan ... [if the plan property has] a value equal to the allowed amount of their secured claims.... The property is to be valued as of the effective date of the plan, thus recognizing the time-value of money.” H.R.Rep. No. 595, 95th Cong., 1st Sess. 413 (1977), reprinted in 1978 U.S.C.C.A.N. 5787, 6369. Thus, the Bankruptcy Code does recognize and support the time value of money concept as it relates to making determinations of confirmation, but there are no specific provisions specifically referring to present value payments after a plan has been confirmed.
Whether or not a prepayment clause is explicitly drafted into a document or the language of a document is construed to create a right to prepay, the general rules and principles of interpretation of written instruments, particularly contracts and deeds, will guide courts in making a proper resolution of related issues. Interpretation of plan provisions is no different. “A Plan is a contract consisting of a novation of the previous agreements between the parties.” In re Cook, 126 B.R. 575, 583 (Bankr.D.S.D.1991). Proper interpretation of plan provisions looks to the intent of the parties, the particular language of the document, and the conditions on which the promises were made. In re Cook, Civ. 91-3026 (D.S.D. June 23, 1992). See In re Amarex, Inc., 96 B.R. 330, 332 (W.D.Okla.1989).
In Cook, the confirmed plan contained a prepayment clause permitting debtors to prepay plan payments due. In re Cook, 126 B.R. at 578. This Court concluded that the Cooks could pay the present value of two future unsecured payments and then obtain FmHA’s release of encumbrances. Id. at 583. On appeal, however, the District Court reversed this Court’s decision as to the present value payments, only because the plan contemplated that the two payments would be tendered after real property and chattel property payments were completed, which, according to the facts, had not yet been completed. In re Cook, Civ. 91-3026, slip op. at 8. The District Court concluded that it was premature for it to rule on the proper value, present or full, of the unsecured payments. Id. In other words, the timing of when unsecured payments were due allowed the District Court to avoid the issue of whether tendering present value payments was appropriate under the facts of that case.
The result is that, in addition to a lack of Bankruptcy Code provisions dealing with this issue, there are also no bankruptcy decisions dispositive of this present value issue, either. The subject of prepayment clauses found in bankruptcy case law is usually presented in the context of whether a creditor is entitled to enforce a prepayment premium contained in a bond, promissory note, or other typical financial instrument against a debtor, and, generally, courts must “engage in a fact specific inquiry into the particular circumstances surrounding the secured creditor and the debt- or in the bankruptcy proceeding involved.” In re Public Service Co. of New Hampshire, 114 B.R. 813, 818 (Bankr.D.N.H.1990). Nonetheless, resolution of the issue at bar can also be achieved by using the general rules of interpretation and construction and considering the facts of this case, in particular, the intent of the parties as expressed in the confirmed plan provisions.
“When parties make a bilateral contract, they exchange promises in the expectation of a subsequent exchange of performances.” E. Allan Farnsworth, Contracts § 8.1, at 536 (1982). In this case, Debtors promised to “return a 10% dividend ... in ten (10) annual payments without interest.” The objective of this promise is to pay a 10% dividend to the two members of Class 14, one of which is FmHA. The method and timing of ten annual payments adds nothing to the promise. That portion of the phrase is simply a *875schedule provided for the parties’ convenience and establishes a formal point in time for the completion of the contractual promise. Western Town Site Co. v. Lamro Town Site Co., 31 S.D. 47, 139 N.W. 777 (1913). In return, FmHA promised to release all liens and encumbrances currently held against Debtors’ property when paid “in accordance with this Plan.” Based on these promises, it does not appear that the parties intended to permit payment of a present value of the promised dividend. Neither does the language of the plan suggest that Debtors’ obligation is merely to satisfy a present value. The plan’s unambiguous treatment of the unsecured claim is payment of ten percent of FmHA’s unsecured claim. Contrary to Debtors’ statement that equating a present value payment as a second discounting “totally ignores the universal concept of the time value of money,” the Court believes that allowing a present value payment of the ten percent dividend in exchange for a release of liens and encumbrances totally ignores and alters the promises contained in the confirmed plan. Both debtors and creditors are bound by a confirmed plan, and neither party is entitled to any better treatment than that which the plan allowed. 11 U.S.C. § 1141(a); In re Cook, 126 B.R. at 583.
Factually, this case is different from Cook in that this plan does not include any prepayment clause. Debtors have no explicit right to prepay plan payments. The Court, however, could construe a right to prepay based upon the plan’s language which states that the liens will be held “until” the dividend is paid, as well as the language that states that the ten annual payments “shall continue on each subsequent December 31st until fully paid.” It appears, therefore, that even without any express prepayment clause, Debtors may make full or partial payments which could conceivably satisfy the promised dividend prior to the scheduled completion date. FmHA’s duty to release its liens and encumbrances would not be due, however, until such time as the full ten percent dividend has been paid.
The Restatement Second of Contracts states that a condition is “an event, not certain to occur, which must occur, unless occurrence is excused, before performance under a contract becomes due.” The motion to compel FmHA’s discharge of liens requires the Court to first determine if FmHA’s duty to make the release is conditional or not. Second, if the duty is conditional, it must determine what the event is on which FmHA’s duty is conditioned. Clearly, the condition making FmHA’s performance due is the payment of the ten percent dividend. Once this has been completed, FmHA is under a duty to perform and release the liens and encumbrances held against Debtors’ property. Receiving an offer of settlement, or even accepting tender of the current value of the underse-cured claim, is not the event which must occur before FmHA’s performance under this plan becomes due.
CONCLUSION
The Court finds that as to the unsecured claim of FmHA, this plan was drafted, accepted, and confirmed with the understanding that bilateral promises were exchanged by Debtors and FmHA. Debtors promised to pay FmHA a dividend representing ten percent of FmHA’s unsecured claim in exchange for FmHA’s promise to release its liens and encumbrances held against Debtors’ property. There is no indication that the parties intended to allow a prepayment of the present value of the unsecured claim. And while there is no explicit prepayment clause allowing the prepayment of the ten percent dividend, the Court finds that, based upon the language of the plan, the parties’ intentions as expressed by the plan, and the concept of contractual conditions, Debtors may prepay the ten percent dividend prior to the ten-year time frame and, in return, obtain a release of liens and encumbrances. This is the fair and equitable result contemplated by the plan. And as the plan’s conclusion states, “[T]he debtor has given every thought to the complex problems confronting him and, with the assistance of counsel, has devised and formulated this Plan, with the hope that equitableness and fairness of the Plan will be considered by the parties in interest whose consent is necessary to perfect it.”
*876The Court shall enter an appropriate order.
ORDER DENYING MOTION TO COMPEL DISCHARGE OF LIENS
In response to and in compliance with the Letter Decision regarding Debtors’ Motion to Compel Discharge of Liens entered this day, it is hereby
ORDERED that since there is no indication that the parties intended to allow a prepayment of the present value of the dividend promised to be paid under the confirmed Chapter 11 plan of reorganization, the motion is denied and FmHA is not compelled to discharge liens and encumbrances held against Debtors’ property until the dividend representing ten percent of FmHA’s unsecured claim is paid. In this regard, it is further
ORDERED that Debtors may, pursuant to the confirmed plan’s language, prepay any or all of the payments constituting the promised dividend even though the plan has no explicit prepayment clause.
DATED at Sioux Falls, South Dakota, this 11th day of September, 1992. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491529/ | MEMORANDUM OPINION
MARK B. McFEELEY, Chief Judge.
This matter came before the Court on the motion of Melvin M. LaVail and Betty R. LaVail for dismissal and in the alternative, for summary judgment. Having considered the motion, the briefs, the applicable law, and otherwise being fully informed and advised, the Court finds the motion is not well taken and will be denied.
FACTS
Defendant debtors filed a voluntary chapter 11 bankruptcy petition on June 1, 1990. The case was converted to a chapter 7 case on September 26, 1990. A chapter 7 trustee was appointed on September 26, 1990.
At the time of filing their petition, the debtors were limited partners in three limited partnerships, collectively referred to as “Albuquerque West Limited Partnerships,” formed for the purpose of acquiring real estate for investment purposes.
On or about June 5, 1991, the trustee conducted a sale by auction of various property and interests of the debtors’ es*898tate including debtors’ interest in the Albuquerque West Limited Partnerships. The sales were made to the highest bidders “without warranties, guarantees, or representations.” On June 10, 1991, the trustee filed a Trustee’s Bill of Sale in favor “of a corporation to be formed” of the estate’s interest in the Albuquerque West Limited Partnerships.
DISCUSSION
Defendants rely on In re Priestley, 93 B.R. 253 (Bankr.D.N.M.1988) for the proposition that a limited partner’s interest in a limited partnership is always an executory contract and thus must be assumed within sixty days of filing a chapter 7 proceeding or be deemed rejected. That reliance is misplaced. In Priestley this court held that the general partner’s right to participate in the management of various limited partnerships and to receive compensation therefor was an executory contract right where substantial performance remained due from both the general partner and all limited partners. In Priestley, this court did not address the issue of whether the interest of an individual limited partner in a land development partnership was always an executory contract, as asserted by the defendant debtors. Additionally, this does not appear to be the type of contract which must be assumed within 60 days of the order for relief. 11 U.S.C. § 365(d)(1).
Assuming, however, that the limited partnership agreements were executory contracts that were not assumed by the chapter 7 trustee, the defendant debtors retained no interest in the limited partnership agreements. The purpose behind allowing the trustee to reject executory contracts is to relieve the estate from burdensome obligations while the debtor is trying to recover financially and to effect a breach of contract which will allow the injured party to file a claim. In re Register, 95 B.R. 73 (Bankr.M.D.Tenn.1989). It is not intended to deny the estate a valuable property interest. In re Vertich, 5 B.R. 684 (Bankr.D.S.D.1980). Further, even if the limited partnership interests were deemed executory contracts and rejected, there is still a bundle of economic rights which the holder of the limited partnership interests would retain under the provisions of the partnership agreements.
If the debtors’ limited partnership interests were executory contracts, which we need not decide here, rejection of the limited partnership contracts by the estate could effect the nature of the property acquired by the purchaser from the trustee. The rejection does not, however, leave the defendants with any ownership interest in Albuquerque West Limited Partnerships. It is clear that the trustee did not abandon any interest in the partnerships sold by the trustee to the Vindicator Group or its predecessor. If the defendant debtors’ argument were to be accepted by this court, it would create a claim against the estate by Albuquerque West Limited Partnerships for breach of the partnership agreement by the trustee while the entitlement to an offset, or any value to the estate of the interests were abandoned to the debtors. This result is inconsistent with the Bankruptcy Code.
Defendant debtors’ also allege that the Vindicator Group was not the purchaser of any rights in the Albuquerque West Limited Partnerships sold by the chapter 7 trustee. Plaintiff’s complaint, however, avers that the Vindicator Group was the “ultimate purchaser” of any interest in Albuquerque West Limited Partnership sold by the chapter 7 trustee. (Plaintiff’s Amended Complaint ¶ 1). For purposes of defendant debtors’ motion to dismiss, this Court must accept that averment as true. The same allegation in defendant debtors’ motion for summary judgment presents issues of fact that cannot be decided on a motion for summary judgment.
For these reasons, the Court finds that the Defendants’ motion for dismissal or in the alternative for summary judgment is not well taken. This memorandum opinion constitutes the Court’s findings of fact and conclusions of law. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491530/ | FINDINGS OF FACT, CONCLUSIONS OF LAW AND MEMORANDUM OPINION
ALEXANDER L. PASKAY, Chief Judge.
THIS IS a Chapter 11 case and the matter under consideration is a Complaint filed by Gulfshore Development Corp. (Debtor) against the National Bank of Lee County (Bank) and Sunshine Masonry, Inc. (Sunshine). The Complaint consists of one count and seeks the turnover pursuant to 11 U.S.C. § 542 of a Certificate of Deposit (C.D.) in the amount of $50,000.00 held by *907the Bank. Also under consideration is a counter-claim for declaratory relief filed by Sunshine against the Debtor, seeking a determination that the C.D. and various items of personal property held by the Debtor are not property of the estate by virtue of 11 U.S.C. § 541(d) as they are the subject of a constructive or resulting trust in favor of Sunshine. It should be noted that on March 6, 1992, this Court entered an Order dismissing the Bank as a Defendant in this adversary proceeding. This leaves for consideration the claims of the Debtor and Sunshine, both of which relate to the C.D. and some miscellaneous personal property. The relevant facts as established at the final evidentiary hearing relevant to this controversy are as follows:
Sunshine is a Florida Corporation and at the time relevant was engaged in business in Lee County, Florida, as a masonry subcontractor. In March of 1989, Sunshine formed a division for the purpose of bidding on and securing general contracting business. Sunshine hired Wade Moser (Moser) to head this new division. In order to bid on contracts for general construction, Sunshine was required to obtain a payment and performance bond. Sunshine obtained such bond from Amwest Surety Insurance Company (Amwest), which required an irrevocable letter of credit to secure the bond. In order to comply Sunshine obtained the irrevocable letter of credit from the Bank. In connection with issuing the letter of credit, the Bank required that Sunshine execute a promissory note in the amount of $50,075.00 in favor of the Bank, to be secured by the C.D. purchased by Sunshine from the Bank on March 29, 1989.
Shortly after Sunshine’s general contracting division commenced bidding on jobs, it became apparent that several of the general contractors with whom Sunshine did business as a subcontractor became upset because they were now bidding against Sunshine’s division for jobs. As a result, Sunshine’s principals decided to incorporate the general contracting division so that Sunshine’s subcontracting business and Sunshine’s general contracting business would appear to be unrelated. The division was then incorporated under the name of the Debtor. The record reveals that the parties intended that Sunshine would share in the Debtor’s profits and pay its expenses when necessary. However, it is undisputed that Sunshine was never a stockholder of the Debtor, and Moser has always been its sole stockholder.
On April 9, 1990, Moser, as President of the Debtor, wrote a letter to Sarah Hook at Amwest regarding the bonding requirements for the Debtor. In that letter, Mos-er stated as follows:
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As you are well aware, we are presently conducting business as the General Contracting Division of Sunshine Masonry, Inc. This type of business structure has worked quite well in the past, however, it has recently created some confusion and problems with our General Contracting clients and our Concrete/Masonry clients. I am sure you can understand the reluctance of a General Contracting firm to award concrete/masonry subcontracts to a firm that is in competition with them on other projects.
We feel it is in our best interest to negotiate and bid on all future contracting projects as a separate entity, specifically Gulfshore Development Corporation, thereby eliminating any conflict of intrust by Sunshine Masonry Inc.
The only time we would deviate from this practice would be if a client (Federal, State or local government) should require a firm to have operated under its’ present name for a time exceeding Gulf-shore’s active status. This would of course require us to submit our bid as the General Contracting Division of Sunshine Masonry, Inc.
After the Debtor was incorporated, the C.D. matured and a check in the amount of $50,000.00 was issued to Sunshine by the Bank. Sunshine, in turn, then endorsed the check over to the Debtor who then endorsed the check to the Bank in order to purchase a new C.D. to be held in its own name. At approximately the same time, the Debtor and Sunshine executed a prom*908issory note in the amount of $50,075.00 in favor of the Bank, which was secured by the C.D. purchased by the Debtor. The Bank then executed an addendum to its letter of credit, amending the previously issued letter of credit to reflect that it was established in favor of Amwest at the request of the Debtor to secure bonds issued on behalf of “Sunshine ... and/or [the Debtor].”
It is without dispute that the Debtor never maintained its own bank account. Through September or October of 1990, Sunshine collected all of the Debtor’s accounts receivable and paid all bills of the Debtor. Through December of 1990, Sunshine paid the Debtor’s employees and material men, apparently because these employees and suppliers required Sunshine’s guarantee of payment. Only if the Debtor was able to obtain credit, would it purchase materials and supplies in its own name. However, if the Debtor was not able to obtain credit on its own, Sunshine would purchase the needed supplies and materials. It is also undisputed that Moser individually, and not as President of the Debt- or, purchased office equipment, including a word processor, copier, computer, facsimile machine, and printer for use by the Debtor in its business. After purchasing the equipment, Moser would then forward the invoice for the purchased item to Sunshine, which would then write a check to Moser to reimburse him for the purchase price.
Sometime in the beginning of 1991, Mos-er, as President of the Debtor, attempted to cash in the C.D. In order to protect its interest in the C.D., Sunshine filed a Complaint in the Circuit Court of Lee County seeking (1) a temporary injunction prohibiting the Bank from delivering the C.D. to the Debtor, (2) declaratory relief to determine the true ownership of the C.D., (3) replevin of the personal property and (4) recovery of money lent on the theory that Sunshine had loaned the Debtor $59,068.02. On June 1, 1991, the Debtor filed its voluntary petition for relief under Chapter 11 of the Bankruptcy Code and then filed the Complaint under consideration.
Sunshine contends that the parties intended that the Debtor hold merely the legal title to the C.D. and to the personal property and Sunshine was the equitable owner of these assets. Sunshine urges that a constructive or resulting trust should be imposed on these assets in its favor and as such, these assets are not property of the estate by virtue of § 541(d) of the Bankruptcy Code.
In opposition, the Debtor contends that the money advanced by Sunshine to purchase the C.D. was a gift. Regarding the office equipment, the Debtor contends that these items were paid for by Sunshine with money representing the Debtor’s collected accounts receivable.
In resolving this dispute, it should be noted at the outset that § 541(a) defines property of the estate as “all legal and equitable interests of the debtor in property as of the commencement of the case.” § 541(d) goes on to provide:
“(d) Property in which the debtor holds, as of the commencement of the case, only legal title and not an equitable interest, such as a mortgage secured by real property, or an interest in such a mortgage sold by the debtor but as to which the debtor retains legal title to service or supervise the servicing of such mortgage or interest, becomes property of the estate under subsection (a) of this section only to the extent of the debtor’s legal title to such property, but not to the extent of any equitable interest in such property that the debtor does not hold.”
It is the contention of Sunshine that by virtue of § 541(d), the Debtor holds only bare legal title and Sunshine holds equitable interest in the C.D. and in the office equipment by virtue of a constructive or resulting trust. The difficulty with Sunshine’s contention is first, that the two concepts of trusts urged are not interchangeable, and in fact, they are mutually exclusive. Second, technically no issue was presented in a proper procedural manner in which Sunshine sought to impress the C.D. and the personal property with either resulting or constructive trust. Nevertheless, this Court is satisfied that it is appro*909priate to discuss these concepts and proceed to resolve whether a constructive or resulting trust should be impressed on the C.D. and the personal property involved.
A constructive trust is a device of equity and it is used to prevent fraud or injustice. In re Turner, 134 B.R. 646 (Bankr.N.D.Okla.1991). A constructive trust arises where a conveyance is induced on the agreement of a fiduciary or confidant to hold property in trust for a recon-veyance or other purpose, where the fiduciary or confidential relationships is one upon which the grantor justifiably can and does rely and where the agreement is breached, since the breach of the agreement is an abuse of the confidence. To establish such a trust it is not necessary to show fraud or intent not to perform the agreement when it was made. 76 Am.Jur. 2d, § 219, at p. 245.
This record leaves no doubt that there is no evidence in this record which supports the proposition that the Debtor obtained title to the C.D. or the personal properties by fraud or other improper conduct. On the contrary, it is clear that Sunshine advanced the funds to purchase at least the C.D. for the purpose to serve as an accommodation to the Debtor and to assist the Debtor to carry on its contracting business which it could not have done without the C.D. purchased and paid for by Sunshine. Neither is there any evidence which would support the conclusion that the personal properties in question were obtained by the Debtor through fraud or improper conduct.
This leaves for consideration the claim of Sunshine based on the resulting trust theory. In order for a resulting trust to arise under Florida law, it must appear from the entire transaction that the parties intended that one should hold legal title with the beneficial and equitable ownership to be held by another. Howell v. Fiore, 210 So.2d 253 (Fla. 2d DCA 1968); Socarras v. Yaque, 452 So.2d 992 (Fla. 3d DCA 1984); In re Gardinier, 49 B.R. 489 (Bankr.M.D.Fla.1985). As stated by the Court in Howell v. Fiore, supra:
a resulting trust arises when the legal estate in property is disposed of, conveyed or transferred, but the intent appears or is inferred from the terms of the disposition, or from accompanying facts and circumstances, that the beneficial interest is not to go to or be enjoyed with the legal title. In such a case, a trust is implied or results in favor of the person whom equity deems to be the real owner, (citations omitted).
Applying the above to the facts as they appear from this record, this Court is satisfied that a resulting trust should be imposed on the C.D. in favor of Sunshine. The record is clear that Sunshine advanced the funds used by the Debtor to purchase the C.D., and did so only to permit the Debtor to obtain the payment and performance bonds essential to its business, and the parties never intended that the Debtor would be permitted to cash in the C.D. for its own use.
Regarding the office equipment, however, this Court is satisfied that this property is property of the estate. The evidence reveals that Sunshine both collected both the Debtor’s accounts receivables and paid the Debtors expenses. There is no evidence to indicate that the payment for these items was made out of anything other than the Debtor’s revenues.
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/8491531/ | ORDER ON MOTION TO DISMISS OR, IN THE ALTERNATIVE, FOR RELIEF FROM AUTOMATIC STAY AND PROHIBITING USE OF CASH COLLATERAL
ALEXANDER L. PASKAY, Chief Judge.
THE MATTER under consideration does not involve anything new or unfamiliar. On the contrary, it involves an ever-recurring controversy so common in Chapter 11 eases which involves a debtor, actually a limited partnership with one single asset, as a rule an overly-leveraged apartment house, or at times, a motel, hotel or an R.V. Park, already involved in a foreclosure suit in which the ax is about to fall.
*912The scenario here is the usual — a challenge by Balcor Pension Investors V (Bal-cor), the mortgagee, to the Debtor’s right to maintain a Chapter 11 case and, of course, enjoy the protection of the automatic stay imposed by § 362 of the Bankruptcy Code, which was triggered by the filing of the voluntary petition initiating this case. However, this ease departs from the norm in two respects. First, the Motion to Dismiss this Chapter 11 case for cause, that is, for “bad faith” filing was filed, unlike as is ordinarily done shortly after the commencement of the case, more than one year after the commencement of the case, and second, after the Debtor already filed not only its original Disclosure Statement and Plan of Reorganization, but its Amended Disclosure Statement and Amended Plan of Reorganization. The other unusual feature of this case is that the Motion seeking a dismissal or, in the alternative, relief from the automatic stay was not filed by the senior lienholder on the Debtor’s sole asset, but by the second mortgagee, who, as a general rule, is substantially underse-cured and who usually has little hope to salvage anything out of its very precarious position in a foreclosure, except possibly in a confirmed Plan of Reorganization. The facts relevant and without dispute and as appear from the record are as follows.
The Debtor is a limited partnership and is the owner of a 275-unit apartment house complex known as Waldengreen Apartments located in Orlando, Florida. The property is encumbered by a first mortgage held by Clevetrust Realty Investors, securing an indebtedness in the approximate amount of $2,000,000.00. This mortgage has been serviced in full since the commencement of this case. Balcor holds the second mortgage on the property, and claims that as of June 26, 1992, the current principal balance on its mortgage is $5,600,-000.00 and accrued interest is $1,939,-000.00. It appears that the ad valorem taxes have been paid and thus, neither the first nor the second mortgage are in jeopardy because of unpaid taxes. It is without dispute that the Debtor is in default on Balcor’s second mortgage, that Balcor filed a suit to foreclose its mortgage in the Circuit Court in Orange County, Florida, and sought and obtained an order from the State Court sequestering the rents and requiring the Debtor to deposit the net rents into the registry of the State Court. The Debtor did not comply with the sequestration order entered on March 28, 1991, but instead filed its Petition for Relief in this Court on April 8, 1991, the day before the hearing in the State Court on Balcor’s Motion For Contempt And To Appoint A Receiver.
As noted earlier, this is a single asset case. The Debtor has no employees, and never did, and does not conduct any business in the orthodox sense. The unsecured creditors scheduled by the Debtor total $159,226.10, $148,000.00 of which is owed to WDG Partners, an insider of the Debtor. There is hardly any doubt that this is basically a two-party dispute. With a few possible exceptions, the complex has never generated sufficient cash flow to pay all the operating expenses, and to service both mortgages and keep all taxes current. During the year preceding the commencement of this Chapter 11 case, the Debtor paid to entities managing the property, all affiliates of the Debtor, more than $100,-000.00 in management fees.
Based on the foregoing, it is the contention of Balcor that under the well established principles enunciated by a long line of cases including In re Albany Partners, Ltd., 749 F.2d 670 (11th Cir.1984); In re Little Creek Development, 779 F.2d 1068 (5th Cir.1986); In re Phoenix Piccadilly, 849 F.2d 1393 (11th Cir.1988); and In re South County Realty, Inc. II, 69 B.R. 611 (Bankr.M.D.Fla.1987), the record fully supports the inescapable conclusion that there is “cause” to dismiss this Chapter 11 case pursuant to § 1112(b)(1) and (2) as the Petition was filed in bad faith, or as the Debtor is suffering continuing losses and there is an absence of a reasonable likelihood of rehabilitation. In the alternative, Balcor seeks relief from the automatic stay, for lack of adequate protection pursuant to § 362(d)(1) of the Code, or in the alternative, according to Balcor, the Debtor lacks equity in the property and the same is not needed for an effective reorganization relying on § 362(d)(2) of the Bankruptcy Code.
*913In its defense, the Debtor contends that it had an agreement with Balcor, albeit no formal or binding agreement with Balcor, it was understood that Balcor would accept the first Plan of Reorganization filed by the Debtor. The Debtor concedes that agreement has fallen through, and that it has already filed a Second Amended Disclosure Statement and Second Amended Plan and contends that it is able to overcome Balcor’s opposition by resorting to the cramdown provisions of § 1129(b). It is true that the Debtor has filed a Motion based on § 1129(a) to cramdown Balcor’s interests under the Second Amended Plan which is scheduled for hearing on August 24, 1992.
Because this case now is in a posture to proceed to confirmation without delay, this Court is satisfied that the Motion should be denied without prejudice, and the Debtor should be given an opportunity to resolve its problem with Balcor through its Motion for Cramdown. In the event that Motion is resolved in favor of the Debtor, it should be given one opportunity to obtain confirmation of its Second Amended Plan. In the event the Debtor is unable to obtain confirmation, the Court will reconsider the Motion presently under consideration and decide whether to dismiss this Chapter 11 case or convert the case to a Chapter 7 liquidation case.
Based on the foregoing, it is
ORDERED, ADJUDGED AND DECREED that the Motion To Dismiss, For Relief From Stay And To Prohibit Use of Cash Collateral is denied without prejudice. It is further
ORDERED, ADJUDGED AND DECREED that the Debtor shall have only one opportunity to obtain confirmation of its Second Amended Plan, and in the event the Debtor is unable to obtain confirmation, this Court will reconsider the Motion under consideration.
DONE AND ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491533/ | ORDER ON OBJECTION TO CLAIM # 123
(CITIZENS AND SOUTHERN NATIONAL BANK)
ALEXANDER L. PASKAY, Chief Judge.
THIS IS a confirmed Chapter 11 case and the matter under consideration is an Objection by Florida Precast Concrete, Inc. (Debtor) to the amended claim filed by Citizens and Southern National Bank (C & S). The claim was originally filed on September 15, 1989 as a secured claim in the amount of $1,400,760.72. C & S has filed an amended claim in the amount of $1,533,-767.13. The Debtor objects to the C & S claim on the grounds that the claim for interest is calculated at the contractual default rate, and the claim for attorney’s fees and costs provides no breakdown of the amounts sought. The facts which are relevant to the resolution of the issues before this Court as appear from the record can be briefly summarized as follows.
The Debtor filed a voluntary Petition for Relief under Chapter 11 of the Bankruptcy Code on April 8, 1989. During the penden-cy of the Chapter 11 ease C & S filed a motion seeking relief from the automatic stay in order to recover its collateral. The *929Motion was denied by this Court based upon the oversecured position of C & S and the Debtor’s periodic payments to C & S. This Court granted C & S adequate protection payments including interest calculated at the non-default rate. C & S appealed the Order of adequate protection and, on September 10, 1991, the District Court determined that the bank was entitled to receive interest at the default rate if, in fact, the bank was oversecured. The District Court remanded the case to this Court for a determination of C & S’ oversecured position. The adequate protection issue was rendered moot by the intervention of confirmation of the Debtor’s Plan of Reorganization in October, 1989. Both parties concede that C & S is oversecured. Based upon the foregoing the Debtor contends that C & S must be oversecured and the Debtor must be insolvent in order for C & S to be entitled to interest calculated at the contractual default rate pursuant to § 506(b) of the Bankruptcy Code.
Section 506(b) of the Bankruptcy Code provides in pertinent part as follows:
§ 506. Determination of Secured Status
(b) To the extent that allowed secured claims are secured by property at the value of which, after any recovery under subsection (c) of this section, is granted in the allowed amount of such claim there shall be allowed the holder of such claim, interest on such claim and any reasonable fees, costs or charges provided for under the agreement which such claim arose.
It is clear that Section 506(b) entitles the holder of an oversecured claim to postpetition interest, and in addition, gives one holding a secured claim created by an agreement, the right to reasonable fees, costs, and charges provided for in that agreement. United States v. Ron Pair Enterprises, 489 U.S. 235, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989); In re Anderson, 833 F.2d 834 (9th Cir.1987). The Bankruptcy Code provides creditors with certain statutory rights to interest where the creditor is oversecured, or where the debtor’s estate ultimately proves to be solvent. In re Sublett, 895 F.2d 1381 (11th Cir.1990) In re Anderson, supra.
The Debtor contends that the limitation upon a secured creditor’s entitlement to a default rate of interest is two-fold: the creditor must be oversecured, and the Debtor must be solvent. There is nothing in the language of § 506 or in the caselaw interpreting the Section which warrants this reading. Such a limitation would leave oversecured creditors with the ability to obtain default interest on their claim only in eases where the Debtor is solvent. Experience has shown that those cases are rare. In this case the parties agree that the C & S claim is oversecured. Based upon the foregoing, this Court finds that C & S is entitled to interest calculated at the default rate of interest.
This leaves for consideration the issue of the attorney’s fees and costs claimed by C & S as part of their proof of claim. This Court directed C & S to provide the Court with a detailed statement of the services rendered and costs incurred, in order for this Court to determine the reasonableness of these fees and costs. In view of C & S’ failure to provide this statement, it is appropriate to sustain the Debtor’s objection to the claim.
Accordingly, it
ORDERED, ADJUDGED AND DECREED, that the Debtor’s Objection to the Claim of C & S is hereby overruled in part and sustained in part. The C & S claim shall be allowed as to the request for contractual default interest, and disallowed as to the request for attorney’s fees and costs.
DONE AND ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491534/ | MEMORANDUM OPINION AND ORDER
RICHARD L. SPEER, Bankruptcy Judge.
This cause comes before the Court after Hearing on Objection to the Trustee’s treatment of the claims of Edward P. Wolfram, Sr. [hereinafter “Mr. Wolfram”] and his wife, Mabel R. Wolfram [hereinafter “Mrs. Wolfram”], in the liquidation of the Debtor-Brokerage in the underlying bankruptcy proceeding. Objection to the Trustee’s treatment of their claims was filed by Mr. Wolfram on behalf of Mrs. Wolfram as executor of her estate, and separately on his own behalf. At the Hearing, the parties presented the evidence and arguments which they wished the Court to consider in reaching its decision. Post Hearing memorandums were submitted by the Wolframs, the Trustee, and the Securities Investor Protection Corporation [hereinafter “SIPC”]. The Court has reviewed the testimony, exhibits, and arguments of counsel, as well as the entire record in this case. Based upon that review, and for the following reasons, the Court finds that while the claims are valid claims against the Debtor-Broker, the Trustee’s treatment of the claims as being outside SIPC coverage is based upon an accurate interpretation and application of the Securities Investor Protection Act of 1970 [hereinafter “SIPA”]. 15 U.S.C. § 78aaa et seq.
FACTS
Bell & Beckwith, the Debtor, was a stock brokerage firm located in Toledo, Ohio. The brokerage operated as a partnership, and was managed by Edward P. Wolfram, Jr. (Mr. Wolfram’s son) at the time of the Filing. Starting in approximately 1973, Edward P. Wolfram, Jr. began systematically diverting cash and securities held by the brokerage for his own personal use. By the time a Securities and Exchange Commission examiner discovered Mr. Wolfram Jr.’s fraud, Mr. Wolfram Jr. had diverted approximately Forty-six Million Dollars ($46,000,000.00) in cash and securities.
On February 10, 1983, the United States District Court for the Northern District of Ohio, Western Division, entered an Order declaring the customers of Bell & Beckwith in need of protection under the provisions of SIPA. 15 U.S.C. § 78aaa et seq. Concurrently, the District Court Ordered the liquidation proceeding of the Debtor-Broker removed to the United States Bankruptcy Court for the Northern District of Ohio, Western Division, pursuant to § 78eee(b)(4) of SIPA. 15 U.S.C. § 78eee(b)(4).
SIPC was established under SIPA as a nonprofit corporation responsible for insuring the accounts of customers with member brokerage firms. SIPC’s responsibilities include the advancement of funds to the Trustee of the Debtor-Broker for the purpose of satisfying the net equity claims of customers against the insolvent Debtor-Broker. 15 U.S.C. §§ 78fff(a)(1)(B), 78fff-3(a).
Edward P. Wolfram, Sr. and Mabel R. Wolfram had timely submitted claims to the Trustee in liquidation of the Debtor-Broker based upon various accounts held in their names. The Trustee determined that certain of these claims were not eligible for priority coverage under SIPA and as a result, the Wolfram’s objected to the treatment of four (4) of their claims. The four (4) claims in question relate to the following accounts: (1) Edward P. Wolfram Sr.’s Special Capital Account, (2) Mabel R. Wolfram’s Customer Account, (3) Edward P. Wolfram Sr.’s Customer Account, and (4) Edward P. Wolfram Sr.’s Drawing Account.
EDWARD P. WOLFRAM, SR.’S SPECIAL CAPITAL ACCOUNT
Mr. Wolfram had claimed Eighty-seven Thousand Five Hundred Forty-eight and 20/100 Dollars ($87,548.20) of his Special *981Capital Account for reimbursement. This Special Capital Account was established at the time of his retirement from Bell & Beckwith, and coincided with his change in status from a general partner to a limited partner on June 1, 1972. The Retirement Agreement which Mr. Wolfram entered into with Bell & Beckwith on June 1, 1972 states at 114:
It is understood and agreed that all of Wolfram’s Special Capital, from and after June 1, 1972, shall remain as Capital of the firm and be subject to the risk of the business; and any claims of either himself, his heirs, legal representatives or beneficiaries to such capital shall be subordinated to the claims of present and future creditors of the firm.
Defendant’s Exhibit S, 114.
As a result, the funds in Mr. Wolfram’s Special Capital Account are capital of the Debtor-Broker and subordinated to the claims of creditors.
At the Hearing, the parties agreed that: (1) the claim is not entitled to reimbursement by SIPC under SIPA, 15 U.S.C. § 78aaa et seq.; and (2) it is a valid claim against the general estate of Bell & Beck-with to be paid pursuant to the provisions of the Bankruptcy Code if, and to the extent that there is property of the estate available to pay such claims. Therefore, the status of this account is no longer at issue and a decision is not required by this Court relating to the Trustee’s classification of Mr. Wolfram’s Special Capital Account.
MABEL R. WOLFRAM’S CUSTOMER ACCOUNT
Mrs. Wolfram had a customer account with a net equity value of Thirty-two Thousand Four Hundred Ninety-two and 41/100 Dollars, ($32,492.41), on February 5, 1983, the date of filing. At the Hearing, the Trustee acknowledged that certain of the securities in this account were in fact registered in Mrs. Wolfram’s name as “customer named securities” under SIPA § 18111(3). As such, they are non-negotiable instruments and the Trustee agreed to turn them over to her Estate. These customer named securities had a filing date value of Eight Thousand Nine Hundred Eighty-six and 14/100 Dollars ($8,986.14), leaving a balance of Twenty-three Thousand Five Hundred Six and 27/100 Dollars ($23,506.27) at issue in Mrs. Wolfram’s customer account.
The Trustee has refused to provide reimbursement of this remaining balance based upon his determination that the account has a zero net equity value and therefore is not entitled to reimbursement by SIPC under SIPA § 78fff-2(a)(4), (b)(1). This determination relies upon a document dated May 23, 1974, and signed by Mabel R. Wolfram. This document authorized Bell & Beckwith to treat the accounts of Mabel Wolfram and Zula Wolfram (Edward P. Wolfram, Jr.’s wife) as one. (Defendant’s Exhibit D-1). At the time of filing on February 5, 1983, Zula Wolfram’s accounts were at a deficit level of Twenty-four Million Six Hundred Eighty-nine Thousand Seven Hundred Ninety-seven and 66/100 Dollars ($24,-689,797.66). In accordance with the above referenced document, the Trustee has set off Mabel Wolfram’s customer account against the deficit balance in Zula Wolfram’s account resulting in a zero net equity value in Mabel Wolfram’s customer account.
The May 23, 1974 document is clear and unambiguous on its face and specifies no limits as to its duration or effect. No documents have been found revoking the agreement and Mr. Wolfram testified to having no knowledge of Mrs. Wolfram having ever revoked or modified the agreement either verbally or in writing. Zula Wolfram’s account had insufficient cash and securities in it to cover its margin requirements in 1974 when the document was signed by Mabel Wolfram. Due to the fraud perpetrated by Edward Wolfram, Jr., the negative value of Zula Wolfram’s accounts was not discovered until February of 1983 by the Securities and Exchange Commission Examiner.
EDWARD P. WOLFRAM, SR.’S CUSTOMER ACCOUNT
Edward P. Wolfram, Sr. maintained an acknowledged customer account with Bell & Beckwith with a net equity value of Four Thousand Four Hundred Fifty-one and 63/ *982100 Dollars ($4,451.63). As of the date of the Hearing, the Trustee had paid out Sixty-one point Five Percent (61.5%) of the value of this account pursuant to a First Partial Distribution Order of this Court. The amount in contention and the subject of Mr. Wolfram’s objection is therefore One Thousand Seven Hundred Thirteen and 88/100 Dollars ($1,713.88). The Trustee has determined that Mr. Wolfram is not entitled to an advancement in funds from SIPC to cover the remaining value of the account because he falls within the exception to SIPC advances as a limited partner with greater than Five Percent (5%) interest in the partnerships net assets or net profits. 15 U.S.C. § 78fff-3(a)(4). It is this determination to which Mr. Wolfram objects.
Mr. Wolfram’s Special Capital Account of Eighty-seven Thousand Five Hundred Forty-eight and 20/100 Dollars ($87,548.20) makes up Eight point One Percent (8.1%) of the total capital contributions of the general and limited partners. Mr. Wolfram’s Retirement Agreement (Defendant’s Exhibit S at 11 3) and the Limited Partnership Agreement of Bell & Beckwith (Defendant’s Exhibit R at pg. 9) authorize the priority payment of Six Thousand Dollars ($6,000.00) per year to Mr. Wolfram out of the partnership's net profits. According to both documents, Mr. Wolfram is entitled to this amount even if net profits for the year fall below One Hundred and Twenty Thousand Dollars ($120,000.00). At any level of partnership profit below One Hundred and Twenty Thousand Dollars ($120,000.00) per year, Mr. Wolfram would be entitled to more than Five Percent (5%) of the total net profits of the firm.
EDWARD P. WOLFRAM, SR.’S DRAWING ACCOUNT
Mr. Wolfram also has an account referred to as a “drawing account.” This is a specialized account made available only to the partners of the firm. Their purpose was to provide a separate account for each partner into which authorized funds could be transferred (e.g. the partner’s share of the partnership’s net profits), authorized expenses could be deducted (e.g. insurance premiums), and from which a partner could withdraw funds. Per Mr. Wolfram’s testimony, the partners were not permitted to purchase securities from these accounts.
The Trustee has classified this account as other than a “customer account” under SIPA § 78111(2) and determined that while it is a valid claim against the general estate of Bell & Beckwith, it is not subject to reimbursement out of funds advanced by SIPC to cover priority customer account claims. It is the Trustee’s failure to classify this account as a “customer account” or a “trust account” to which Mr. Wolfram has objected.
LAW
MABEL R. WOLFRAM’S CUSTOMER ACCOUNT
The issue before the Court regarding Mr. Wolfram’s objection to the Trustee’s treatment of Mrs. Wolfram’s customer account is whether the agreement which Mrs. Wolfram signed in 1974 is still valid and binding. Mr. Wolfram has not questioned the validity of the agreement at the time of its inception in 1974, nor does he contend that the agreement, as originally signed, has ever been cancelled or amended by Mrs. Wolfram.
While no authority has been cited to support his position, Mr. Wolfram contends that the agreement can no longer be held enforceable because the general custom of the industry requires that customers be notified of their account’s pledged status on a monthly basis. He argues that since this was not done for Mabel Wolfram’s account at anytime between 1974 and 1983, the agreement could not be enforced by Bell & Beckwith and therefore cannot be enforced now by the Trustee. The only evidence presented in support of industry custom was the testimony of Mr. Wolfram as to the procedure followed by Bell & Beckwith while he was a general partner with the firm. No testimony was offered as to Bell & Beckwith’s procedure for the handling of customers’ pledged accounts after Mr. Wolfram retired or at the time Mrs. Wolfram signed the document.
*983Mr. Wolfram does not question the validity of the agreement when originally signed in 1974. In addition, through his testimony at the Hearing, Mr. Wolfram acknowledges that the document was signed at a time, and with Mrs. Wolfram’s knowledge, that additional margin collateral was needed for Zula Wolfram’s account. The document is clear and unambiguous on its face, with no limitations expressed or implied as to duration. No evidence was presented to show any attempts or intentions of Mrs. Wolfram to either cancel or limit the agreements effect.
Based upon the foregoing, the Court can find no reason for refusing to give full weight to the terms of the May 23, 1974 agreement regardless of industry custom. Accordingly, this Court overrules the objection to the Trustee’s treatment of Mabel R. Wolfram’s customer account.
EDWARD P. WOLFRAM, SR.’S CUSTOMER ACCOUNT
Mr. Wolfram posits two arguments to support his objection to the Trustee’s handling of his customer account. He first argues that as of the date of filing, the capital balance of the firm was zero, and as such, there is no way to calculate the Five Percent (5%) limited partner rule of SIPA § 78fff-3(a)(4). In the alternative, he argues that he is entitled to the full protection of SIPC as a customer and that the refusal by the Trustee to honor the balance of his customer account from SIPC funds is contrary to the Limited Partnership Law of the state of Ohio, and denies him his property without due process of law. The basic issue before the Court is whether Mr. Wolfram is entitled to SIPC protection on his customer account.
SIPA prohibits the advancement of SIPC funds to customer accounts of “a limited partner with a participation of five per centum or more in the net assets or net profits of the debtor.” 15 U.S.C. § 78fff-3(a)(4). Mr. Wolfram falls within this prohibition on both the net asset and net profit counts.
“Under SIPA, in determining the nature of a claimant’s status in relationship to the debtor, the court must look to matters as they existed on the date the liquidation proceeding was commenced.” In re Bell & Beckwith, 124 B.R. 35, 36 (Bkrtcy.N.D.Ohio 1990). This holding applies to the status of claims against the Debtor-Broker. All claims are therefore fixed in value as of the date of filing. The amount claimed will not be adjusted either up or down due to subsequent fluctuations in the value of the securities held in the claimant’s accounts. 15 U.S.C. § 78ZZZ(11). However, the same rule for fixing claim values does not apply to the net asset value of the Debtor-Broker. Distributions of funds for claims against the Debtor-Broker are controlled by the amount of funds obtained in the liquidation process and not based upon a net book value of the firm’s assets at any one set date. The Debtor-Broker’s net asset value cannot be fixed and will continually fluctuate until the liquidation process is complete and the last asset is converted into cash.
Mr. Wolfram’s capital account represents Eight point One Percent (8.1%) of the capital contributions of all of the partners. This entitles Mr. Wolfram to Eight point One Percent (8.1%) of any asset distributions made to the partners by the Debt- or-Broker upon the winding up of affairs. Ohio Rev.Code Ann. §§ 1782.30(A), 1782.-47(C) (Baldwin 1991). This is a statutorily established right to participation in the firms net assets in lieu of any agreement by the partners to the contrary. Under SIPA § 78fff-3(a)(4), it is this right to participate in the net assets of the firm at the time of filing which is controlling, not whether there is a positive net asset value on the books at that time. This Court therefore finds that Mr. Wolfram meets the requirements of SIPA § 78fff-3(a)(4) as a limited partner with a participation level exceeding Five Percent (5%) in the partnership’s net assets at the time of filing.
SIPA § 78fff-3(a)(4) also applies if the limited partner is entitled to participate in the profits of the firm at greater than a Five Percent (5%) level. It has been established from Mr. Wolfram’s Retirement Agreement (Defendant’s Exhibit S), and *984the Amended and Restated Limited Partnership Agreement of Bell & Beckwith (Defendant's Exhibit R), that Mr. Wolfram was to receive a pension which was tied to the firm’s profits (Exhibit S at 113 and Exhibit R at pg. 3). Under the formula stated in these agreements, Mr. Wolfram’s entitlement to more than Five Percent (5%) would occur in any year in which the firm’s profits were greater than Zero (0) but less than One Hundred and Twenty Thousand Dollars ($120,000.00). This Court therefore finds that Mr. Wolfram also meets the requirements of SIPA § 78fff-3(a)(4) as a limited partner with a right to over Five Percent (5%) of the firms profits in any year in which the firms net profits were greater than Zero (0) but less than One Hundred and Twenty Thousand Dollars ($120,000.00).
In the alternative, Mr. Wolfram asserts that the refusal by the Trustee to provide him the full protection of SIPC through his acknowledged customer account is contrary to the limited liability nature of Ohio’s Limited Partnership Law and denies him his property without due process of law. Under Ohio Limited Partnership law, “a limited partner shall not become liable for the obligations of a limited partnership unless he is also a general partner or, in addition to the exercise of his rights and powers as a limited partner, he takes part in the control of the business.” Ohio Rev.Code Ann. § 1782.19(A) (Baldwin 1991). The denial of SIPC protection to Mr. Wolfram’s customer account cannot be construed as holding Mr. Wolfram liable for the obligations of the partnership and is therefore not in conflict with SIPA. Mr. Wolfram has already received Sixty One point Five Percent (61.5%) of the value of his account through the First Partial Distribution Order of this Court. Additional distributions will be made as the liquidation process continues. No effort appears to have been made, or will be made, to hold Mr. Wolfram personally liable for any obligations left unsatisfied at the completion of Bell & Beckwith’s liquidation. However, even if there were a direct conflict between Ohio Partnership Law and SIPA, the conflict would be resolved under the Supremacy Clause of the United States Constitution, and SIPA would prevail. U.S. Const, art. VI, cl. 2.
The refusal by the Legislature to provide SIPC protection to limited partners who hold customer accounts within their own firms has not denied Mr. Wolfram his property without due process of law. In order to be a taking, the enactment of SIPA would have to deny Mr. Wolfram property to which he would otherwise have been entitled. Had SIPA not been enacted, Mr. Wolfram would have been entitled to no more than that which Bell & Beckwith would have been able to pay out to its customers as an insolvent Broker. Ohio’s Limited Partnership Law would have provided him no relief from financial losses based upon funds invested in his customer accounts. Mr. Wolfram is receiving exactly what he would have been entitled to prior to the enactment of SIPA. As such, he can claim no taking by the government without due process of law.
Based upon the above stated analysis, the Court finds that Mr. Wolfram falls within the SIPA § 78fff-3(a)(4) exception to reimbursement by SIPC of his customer account and that he has not been deprived of his property without due process. Accordingly, this Court overrules the objection to the Trustee’s treatment of Edward P. Wolfram, Sr.’s customer account.
EDWARD P. WOLFRAM, SR.’S DRAWING ACCOUNT
Mr. Wolfram has objected to the Trustee’s refusal to accord customer account status to his “drawing account” thus exempting it from reimbursement by SIPC. “SIPA does not protect all creditors of a brokerage firm against all losses in the event of the demise of the firm. Instead, SIPA protection extends to each ‘customer,’ a statutorily defined term of art.” In re Hanover Square Securities, 55 B.R. 235, 238 (Bankr.S.D.N.Y.1985).
Those accounts entitled to reimbursement by SIPC are “customer accounts” as defined in § 78111(2) of SIPA. That section reads in relevant part: “The term ‘customer’ includes any person who has a claim *985against the debtor arising out of sales or conversion of securities, and any -person who has deposited cash with the debtor for the purpose of purchasing securities.” 15 U.S.C. § 18111(2) (emphasis added). Congress intended to protect those who had entrusted cash or securities to their broker-dealers for the purpose of trading and investing. SIPC v. Executive Securities Corp., 556 F.2d 98, 99 (2d Cir.1977).
Mr. Wolfram testified at the Hearing on his objection to the Trustee’s actions, that he was not permitted to purchase any securities from the funds in his drawing account. He testified that in order to purchase securities with funds from this account, he was required to first transfer the funds to another of his securities accounts. Based upon Mr. Wolfram’s testimony and the specialized nature of the drawing accounts assigned to the partners, this Court finds that Mr. Wolfram’s drawing account was not an account used for the purpose of purchasing securities and therefore not entitled to priority status as a customer account. Even if it were deemed a customer account, the advancement of SIPC funds would be prohibited under SIPA § 78fff-3(a)(4) based upon Mr. Wolfram’s limited partner status as discussed previously.
Mr. Wolfram further contends that if the account is not deemed by the Court to be a customer account, then it must be given special status as a “checking” or “trust” account. However, there are no provisions in SIPA for a priority status other than that of a customer account. The Trustee has acknowledged the validity of the claim against the general estate of Bell & Beck-with and recognizes its obligation to satisfy such a claim pursuant to the distribution provisions of the Bankruptcy Code if, and to the extent, there is property of the estate available to pay such claims. This is all that is required under either the Bankruptcy Code or SIPA.
The Court finds no basis for determining that the Trustee has misapplied SIPA in classifying Mr. Wolfram’s drawing account as other than a customer account. Accordingly, this Court overrules Mr. Wolfram’s objection to the Trustee’s treatment of his drawing account as a general claim against the estate of Bell & Beckwith and not a priority status customer account.
In reaching the conclusions found herein, the Court has considered all of the evidence and arguments of counsel, regardless of whether or not they are specifically referred to in this opinion.
Accordingly, it is
ORDERED that the objections to the Trustee’s treatment of the claims of Edward P. Wolfram, Sr. and Mabel R. Wolfram are hereby, OVERRULED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491536/ | MEMORANDUM OPINION AND ORDER
RICHARD L. SPEER, Bankruptcy Judge.
This cause comes before the Court after Trial on the Complaint Objecting to Discharge of the Debtors. At the Trial, the parties had the opportunity to present the evidence and arguments they wished the Court to consider in reaching its decision. The Court has reviewed the testimony, the exhibits which were admitted at Trial, and the arguments of counsel, as well as the entire record in this case. Based upon that review, and for the following reasons, this Court finds that the Debtors discharge should be denied.
DISCUSSION
On November 14, 1990, Arlo and Helen Boggs, Debtors, filed a Bankruptcy Petition under Chapter 7 of the Bankruptcy Code. On May 3, 1991, Robert and Patricia Spilker, Plaintiffs, filed a Complaint Objecting to Discharge, pursuant to 727 of the Bankruptcy Code, alleging that the Debtors kept insufficient records of their real estate transactions.
The Plaintiffs contended that the Debtors did not maintain adequate records of their business affairs, thus the Plaintiffs were unable to ascertain the Debtors’ financial status and properly evaluate the case. The Plaintiffs argued that none of the transactions involving the purchase or sale of real estate were documented and that it appeared that the Debtors transferred property without any consideration. They contended that without such records, Debtors should be denied their discharge.
The Debtors contended that their records were sufficient. They noted that prior to this proceeding, the Internal Revenue Service [hereinafter “IRS”] performed an audit and was satisfied with the documentation provided by the Debtors. The Debtors argued that since their records were adequate enough to sustain an IRS audit, those records should be sufficient to satisfy their Creditors in Bankruptcy. Therefore, they contended that sufficient records were maintained, and as a result, they should be granted their discharge.
Section 727 of the Bankruptcy Code provides in pertinent part that:
(a) The court shall grant the debtor a discharge, unless—
(3) the debtor has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which the debt- or’s financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all of the circumstances in the case; [or] (5) the debtor has failed to explain satisfactorily, before determination of denial of discharge under this paragraph, any loss of assets or deficiency of assets to meet the debtor’s liabilities.
11 U.S.C. § 727(a)(3)(5).
The purpose of this section was to protect the creditor’s interest by placing on the debtor the responsibility to take such steps as ordinary fair dealing requires to allow the creditors the opportunity to learn what was done with the debtor’s estate. While the duty to maintain sufficient records depends upon the nature of the business, records are sufficient if they reflect with a fair degree of accuracy the debtor’s *15financial condition. Although a debtor's records need not state in detail all transactions and need not be done in any specific manner, they must reflect with sufficient identity all transactions required to portray the debtors financial dealings. The intent to conceal is not relevant to this determination. The question is solely whether or not the records, which are required under the-circumstances, fail to reflect the debtor’s financial history. See, In re Kinney, 33 B.R. 594 (Bankr.N.D.Ohio 1983) (citations omitted).
Under 11 U.S.C. § 727(a)(3), a debtor must provide sufficient written financial information so as to permit creditors to follow the debtor’s business transactions, make intelligent inquiry, and ascertain the debtor’s present and past financial condition. In re Bowie, 80 B.R. 99 (Bankr.N.D.Ohio 1987); In re Drenckhahn, 77 B.R. 697, 708 (Bankr.Minn.1987). To determine sufficiency of evidence, one factor that can be taken into consideration is the sophistication of the debtor. This inquiry should include the education, experience, and the volume of the debtor’s business. In re Wilson, 33 B.R. 689, 692 (Bankr.M.D.Ga.1983).
Arlo Boggs was a retired chemistry professor at Bowling Green State University [hereinafter “B.G.S.U.”]. He taught Chemistry at B.G.S.U. for approximately Thirty-four (34) years. He had been involved with real estate for many years and was a founding partner of Equity Investments, a real estate investment company, in the early 1980’s. Helen Boggs was a real estate broker for many years and worked as a loan teller at Mid-Am Bank for approximately One and One-half (IV2) years. This Court believes that a person with this type of education, work experience, and real estate experience must certainly understand the need for adequate recordkeeping. This Court finds that adequate records were not kept and consequently, the Debtors’ discharge will be denied.
One issue which was raised at Trial was whether there was sufficient documentation to support Arlo Boggs’ contention that he relinquished his Sixty Percent (60%) interest in Equity Investments to his son, Roger, to satisfy outstanding debts to Roger. Arlo Boggs contended that his interest in Equity Investments was conveyed to Roger to satisfy debts owed to him in the amount of approximately Fifty-eight Thousand Eight Hundred Dollars ($58,800.00). However, while at Trial, Arlo Boggs was unable to produce sufficient documentation to explain the existence of this debt. The sole exhibit seemed to indicate, but was not conclusive thereof, that Arlo Boggs sold his interest in Equity Investments to his daughter-in-law, Angela, for One Dollar ($1.00). Furthermore, the exhibit was a letter from a Certified Public Accounting firm in Bowling Green, Ohio, which reflected that the promissory note involved in this debt was based upon “mistaken facts.” This Court is not clear on the circumstances surrounding the debt and the testimony and exhibits only muddied the water. This Court believes that when a sum of this magnitude is owed, individuals should preserve the proper documentation. No such documentation was provided and no justifiable reason was given for not providing it. Therefore, this Court believes that insufficient records exist.
Another issue which was raised at trial was that of the 1987, 1988, and 1989 income tax returns of the Boggs. Their tax preparer testified that the records of Equity Investments appeared as though they “were kept in a shoe box.” Additionally, the tax preparer stated that Arlo Boggs did not provide her with much documentation about the interest income from Equity Investments, but that the forms were prepared on Arlo and Helen Boggs’ oral information. Once again, this Court believes that failure to provide a tax preparer with documentation of income of business transactions, without sufficient explanation, indicates that adequate records were not kept.
In addition to the aforementioned incidents of inadequate records, there is also a question of whether the records are sufficient for dealings between Arlo Boggs and his brother, Harlan. Arlo Boggs and Harlan were in a partnership arrangement for the purpose of renting and selling real es*16tate. From the testimony presented at trial, this Court believes that the statements at Trial were not able to be corroborated by adequate records. Therefore, the Court believes that since it cannot ascertain the relationship and financial arrangements between these two individuals, competent records were not maintained.
Based on the foregoing, this Court finds that the Debtors have been unable to present sufficient evidence that they maintained adequate records of their business dealings. Accordingly, this Court denies the discharge of both Debtors.
In judging the credibility of the witnesses and the weight given to their testimony, this Court has taken into consideration the witnesses intelligence, age, memory, their demeanor while testifying, the reasonableness of their testimony in light of all the evidence of the case, and any interest, bias, or prejudice they may have. In reaching the conclusions found herein, 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, it is
ORDERED that Debtors discharge be, and is hereby, Denied. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491538/ | MEMORANDUM OPINION
JOHN T. FLANNAGAN, Bankruptcy Judge.
The debtor, Huey P. Grey, appears by his attorneys, Dan E. Turner and Phillip L. Turner, Topeka, Kansas. The United States of America, on behalf of the Farmers Home Administration, appears by its attorney, Melanie D. Caro, Assistant United States Attorney.
This proceeding is core under 28 U.S.C. 157. The Court has jurisdiction under 28 U.S.C. 1334 and the general reference order of the District Court effective July 10, 1984.
This is a contested matter brought by motion of the United States of America, on behalf of its agency, Farmers Home Administration (“FmHA”), to dismiss this Chapter 12 bankruptcy proceeding. Mov-ant charges that the debtor is not eligible to adjust his debts under 11 U.S.C. 1201, et seq. because he (1) is not a “family farmer”; 1 (2) is not a “family farmer with regular income”;2 (3) is not engaged in a “farming operation”;3 and (4) filed the case in bad faith.
After filing his Chapter 12 petition on February 4, 1992, the debtor lodged an adversary complaint against the Commodity Credit Corporation (“CCC”). The com*87plaint alleges that he entered into Conservation Reserved Program (“CRP”) contracts with the CCC in 1988 and 1989, and that the CCC breached the contracts and wrongfully withheld his contract payments. The complaint asks the Court to reinstate the contracts and to find that the debtor is entitled to all back payments.
At the hearing on the FmHA’s motion to dismiss held on August 4, 1992, debtor’s counsel stated that if the Court were to rule against the debtor in the adversary proceeding, the debtor would concede that the case should be dismissed. But, if he is successful in the adversary proceeding and the Court orders the Commodity Credit Corporation to reinstate the CRP contracts and make all back payments, the debtor contends that he will then have income attributable to 1991 and that he can amend his 1991 tax return to show farm income for that year.
Section 101(18)(A) of Title 11, United States Code, provides:
(18) “[F]amily farmer” means—
(A) individual or individual and spouse engaged in a farming operation whose aggregate debts do not exceed $1,500,000 and not less than 80 percent of whose aggregate noncontingent, liquidated debts (excluding a debt for the principal residence of such individual or such individual and spouse unless such debt arises out of a farming operation), on the date the case is filed, arise out of a farming operation owned or operated by such individual or such individual and spouse, and such individual or such individual and spouse receive from such farming operation more than 50 percent of such individual’s or such individual and spouse’s gross income for the taxable year preceding the taxable year in which the case concerning such individual or such individual and spouse was filed_ (Emphasis added.)
The debtor’s schedules filed February 28, 1992, show that he received no farm income in 1990, 1991, or 1992.
On August 20, 1992, the debtor filed copies his 1990 and 1991 federal income tax returns with the Court. The 1990 return, line 19, “Farm income (or loss)”, shows a farming loss of $1,093.00. The 1991 return, line 19, lists no income or loss from farming, although Schedule F, “Profit or Loss From Farming,” lists $500.00 in rental income and $944.00 in insurance expenses for the year.
Section § 61 of the Federal Internal Revenue Code, defines “gross income” as follows:
Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items: ....
Bankruptcy Code § 101(18)(A) defining “family farmer” speaks in terms of “gross income for the taxable year preceding” the year of filing the Chapter 12 case. Since the Bankruptcy Code and the Internal Revenue Code are federal statutes, it is reasonable to assume that in using the phrase “gross income for the taxable year” in the Bankruptcy Code, Congress had in mind a concept similar to that used in the Internal Revenue Code. Since the income must come from a “farming operation”, it is likely that such income would be taxable income, rather than federally exempt income such as municipal bond interest. Indeed, some courts have construed Code § 101(18)(A) as suggesting that they look only to the debtor’s gross income as shown by his federal income tax return when determining his right to file under Chapter 12.
The eligibility of a debtor in Chapter 12 was examined in In re Fogle, 87 B.R. 493 (Bankr.N.D.Ohio 1988). In that case, the debtor sold all of his farm machinery and equipment before he filed his bankruptcy petition on December 31, 1987. A creditor argued that if the debtor had filed his petition one day later, he would have failed to qualify for Chapter 12 relief. But, in ruling for the debtor, the court considered only the 1986 income tax return and stated that it was without power to look beyond the face of the return in determining eligibility.
In In re Nelson, 73 B.R. 363 (Bankr.D.Kan.1987), the debtors moved to convert *88their Chapter 13 case to a Chapter 12 and the creditors objected. The debtors claimed that a settlement they received in the year preceding the filing of the bankruptcy should be considered by the court as farm income, despite the fact that the debtors failed to declare the settlement as income on their federal tax return. The court held that the statute was “clear on its face that only income from the preceding taxable year is to be considered in determining whether the debtors must meet the definition of family farmer.... [T]his Court has neither the power nor the inclination to delve beyond the face of debtors’ income tax returns.” Id. at 365.
By the doctrine of the foregoing cases, the debtor is ineligible to proceed in a Chapter 12 because when he filed his petition in 1992, his 1991 income tax return reflected that he had received no farm income in that tax year.
Finally, the debtor urges upon the Court a bootstrap argument — that the outcome of his adversary dispute with the CCC should determine his eligibility to file the case in the first place. It is obvious that the debt- or’s right to file the Chapter 12 case and to bring the adversary action within the case itself depends first upon a finding that he is eligible for relief under the Chapter. If he is not eligible for relief, he cannot become so by filing the case and initiating an adversary proceeding — the very actions that he is not eligible to undertake.
Accordingly, the Court finds that the debtor is not eligible to proceed in a Chapter 12 bankruptcy. He has not shown that he received more than 50 percent of his gross income from a farming operation in taxable year 1991, the taxable year preceding the filing of his Chapter 12 petition. The Court need not discuss the other grounds for dismissal raised by the FmHA.
The debtor shall have ten (10) days from the entry of the order effectuating this opinion to convert this case to a Chapter 7 proceeding or to dismiss the case.
The foregoing discussion shall constitute findings of fact and conclusions of law under Bankruptcy Rule 7052 and Rule 52(a) of the Federal Rules of Civil Procedure.
IT IS SO ORDERED.
. ll U.S.C. § 101(18)(A).
. 11 U.S.C. § 101(19) and 11 U.S.C. § 109(f).
.11 U.S.C. § 101(21). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491539/ | MEMORANDUM OPINION AND ORDER
RICHARD L. SPEER, Bankruptcy Judge.
This cause comes before the Court after a Hearing on the Objection to Chapter 13 Plan Confirmation by Eagle Flooring Distributors, Inc. (hereinafter “Eagle”). At the Hearing, the parties had the opportunity to present the arguments and evidence they wished the Court to consider in reaching its decision. The Court has reviewed the evidence and arguments presented, as well as the entire record in this matter. Based upon that review, and for the following reasons, the Court Denies the Objection to Plan Confirmation brought by Eagle.
FACTS
Rollin Ernst Lutterbein (hereinafter “Lutterbein”) owns and operates Lutter-bein’s Carpet and Interiors. The major aspects of the business, during the period in question, were the sale of floor coverings and the sale of custom picture frames.
Eagle was Lutterbein’s major supplier of materials for the floor covering aspect of the business. Traditionally, Eagle supplied the materials on an unsecured credit basis. Lutterbein fell behind in his payments to Eagle, and Eagle became concerned with the increasing debt. On March 28, 1990, a representative of Eagle appeared unannounced at Lutterbein’s business and insisted that Lutterbein enter into an agreement to secure his debt to them.
The financing statement and security agreement contained language which would have included all of the inventory and work in process involved in Lutter-bein’s business. Since none of the material related to the picture framing business were in any way connected to Eagle, Lut-terbein insisted that the items covered under the security agreement be limited to floor covering materials only.
Lutterbein and the Eagle representative agreed to a modification of the agreement *234which Eagle had prepared. They inserted the words “floor covering” to modify the agreement and they both initialed the change. The portion of the finance statement and security agreement which delineates what types of property were covered by the agreement, when modified, read as follows:
“Floor Covering” (the added term) inventory which is held for sale or lease, including that held for display or out on lease on [sic] consignment, or to be furnished under contract of service, work in process or inventory used or consumed in debtor’s business.
Accounts receivable, contract rights, purchase orders, rights of lien, notes, drafts, acceptances and other forms of obligations and receivables.
On February 12, 1991, Lutterbein filed for bankruptcy under Chapter 13 of the Bankruptcy Code. In his petition, Lutter-bein listed as assets inventory, equipment and fixtures and work in progress which totaled Thirty-eight Thousand Dollars ($38,-000.00). This figure represented assets in the listed categories from both the floor covering and the picture framing portion of his business. At this time, Lutterbein had an outstanding debt to Eagle of Twenty-two Thousand Nine Hundred Seventy-five Dollars and Ninety-one Cents ($22,975.91).
On February 22, 1991, Lutterbein filed a Chapter 13 plan which stated that Debtor was surrendering the collateral to Eagle in full satisfaction of its claims. Debtor’s intent was to return all floor covering inventories to Eagle in satisfaction of its claims.
On March 15, 1991, Eagle filed an Objection to the Plan Confirmation based upon the belief that they were entitled to all the inventory and work in progress of Debtor and not just those related to floor covering. Eagle also noted that the collateral surrendered could not be in total satisfaction of all claims because Eagle was entitled to file an unsecured claim for any amount not covered by the collateral.
Following a Hearing on the Objection, an Order Confirming the Plan was entered on July 18, 1991. Some confusion ensued concerning the disposition of Eagle’s Objection, and on September 5, 1991, the Objection was renewed. On October 17, 1991, the Order for Confirmation was Revoked. A further hearing was held on the objection, and the Court now renders its final decision on the Objection.
LAW
The question before the Court is one of interpretation of the language of the financing statement and security agreement. Specifically, whether the collateral represented by the agreements entails all the inventory and work in progress of Debtor’s business, or only that involved in the floor covering portion of the business. In answering this question, the Court looks to the foundations of contract law.
The primary focus is on whether the added words “floor covering” modify the phrase “work in process or inventory used or consumed in debtor’s business.” The question is essentially whether or not the term “floor covering” modifies every other clause of the sentence.
Where the meaning is doubtful so that the contract is susceptible to two constructions, the interpretation which makes a rational and probable agreement must be preferred. Gibbons v. Schwind Realty Co., 25 Ohio L. Abstract 260, 262 (Ct.App.1937). If possible, every provision in a contract should be held to have been inserted for some purpose and to perform some office, and an attempt must be made to harmonize, if possible, all provisions of a contract. Ford Motor Co. v. Frazier & Sons Co., 29 Ohio Op.2d 379, 381 (Ct.App.1964). “In harmonizing apparently conflicting clauses of a contract, they must be construed so as to give effect to the intention of the parties as gathered from the whole instrument, and where the object to be accomplished is declared in the instrument, the clause which contributes most essentially to that object will control.” Ray v. Lane Cotton Mills Co., 16 Ohio L. Abstract 711, 712 (Ct.App.1934); see Mills-Carleton Co. v. Huberty, 84 Ohio St. 81, 87-88, 95 N.E. 383 (1911). Therefore, anything in an agreement which conflicts with *235the chief purpose therein must give way to the clause which makes the major intent effective. Ford, 29 Ohio Op.2d at 381.
From the testimony and documents filed in this case, the Court has determined that the intent of the parties when entering into the security agreement and financing statement was to include only the floor covering as collateral. The floor covering aspect of Debtor’s business was the only part in which Eagle had a real interest. Eagle did not supply any of the picture framing materials used in the business. It seems clear from the insertion of the term “floor covering” at the beginning of the statement of what was included as collateral that the parties intended to limit the collateral to that floor covering.
It is inconsistent with the intent of the document to argue that only floor covering inventory was covered, but that later in the same sentence the collateral expanded to include all “work in process and inventory used or consumed in debtor’s business.” Since a finding of this sort would make ineffective the inclusion of the term “floor covering” at the opening of the statement, it is a construction which is not harmonious with either the apparent intent of the parties or even the contract itself when read as a whole.
As a result, the Court interprets the term “floor covering” as intended to modify the entire first sentence of the agreement. Therefore, the “work in process and inventory used or consumed in debtor’s business” includes only those items involved in the floor covering aspect of Debtor’s business. The items used in the picture framing portion of Debtor’s business would not be included.
Eagle is correct in its statement that any difference between the amount of the claim and the value of the secured collateral is treated as an unsecured claim. 11 U.S.C. § 506(a). Therefore, following this ruling, Eagle may file an amended proof of claim to reflect any deficiency which may exist as an unsecured claim.
In reaching these conclusions, the Court has considered all the evidence and arguments of counsel, and the testimony of all witnesses appearing before the Court, whether or not they are specifically referred to in this opinion.
Accordingly, it is
ORDERED that the Objection to Confirmation of the Chapter 13 Plan brought by Eagle Flooring Distributors, Inc. be, and is hereby, DENIED.
It is FURTHER ORDERED that Eagle forthwith take possession of the designated collateral property and dispose of it in the appropriate manner and then file an amended proof of claim within fourteen (14) days as to any deficiency after the sale of the collateral. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491541/ | MEMORANDUM OF DECISION
JOHN T. FLANNAGAN, Bankruptcy Judge.
This is an adversary proceeding in which the plaintiff seeks nondischargeability for his claim under Bankruptcy Code §§ 523(a)(10) and 727(a)(6)(A) because the debtor’s prior bankruptcy petition was dismissed and his discharge denied, ostensibly for failure to obey a lawful order of the Court. The parties have stipulated to the undisputed facts. The Court finds that the plaintiff’s claim against the debtor is not excepted from discharge because plaintiff has failed to show that the Court found cause to deny the discharge.
The parties have stipulated that the Court has jurisdiction over the parties and subject matter of the action; that venue in this district is proper; that all necessary and indispensable parties are joined; and that the Court may try this adversary proceeding to final judgment.
The Court finds independently of the stipulation that this adversary proceeding is core under 28 U.S.C. 157 and that the Court has jurisdiction under 28 U.S.C. 1334 and the general reference order of the District Court effective July 10, 1984.
*325FINDINGS OF FACT
On July 5, 1989, the debtor, Craig A. Logan, filed a petition under Chapter 7 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Kansas. The proceeding was assigned Case No. 89-11666.
Debtor listed the plaintiff, Lyle W. Britt, as an unsecured creditor on his schedules and on August 4, 1989, plaintiff, by his attorney, Wilbur D. Geeding, filed a proof of claim for $6,424.97 in Case No. 89-11666.1
The order for relief entered in Case No. 89-11666 on July 14, 1989, set debtor’s § 341 meeting for 9:00 a.m. on August 14, 1989. This order recites:
IT IS ORDERED AND NOTICE IS HEREBY GIVEN THAT:
A meeting of creditors pursuant to 11 U.S.C. Section 341(a) shall be held at the time and place specified in Section A above [August 14, 1989, at 9:00 a.m.] at which time creditors may attend, examine the debtor and elect a trustee as permitted by law. The meeting may be continued or adjourned by notice at the meeting without further written notice to creditors.
The debtor ... and attorney for debtors) shall appear at the Section 341(a) meeting....
Failure of the debtor or debtor’s attorney to appear at the Section 341(a) meeting or to timely file schedules and statement of affairs may result in dismissal or other appropriate relief without further notice or hearing.
When debtor failed to appear at the August 14, 1989, Section 341(a) meéting, Karla G. Schumacher, Paralegal Specialist with United States Trustee’s Office, wrote the following letter to debtor’s counsel with a copy to the debtor. Ms. Schumacher’s letter appears in the official court file stamped by the Clerk as filed August 18, 1989.
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*326The debtor failed to appear at the second § 341 meeting on August 29, 1989.
On September 11, 1989, the trustee in Case No. 89-11666 filed and served a “Notice and Application to Dismiss Bankruptcy And to Deny Discharge of Debtor.” The Notice requested that the case be dismissed and stated:
NOTICE AND APPLICATION TO DISMISS BANKRUPTCY AND TO DENY DISCHARGE OF DEBTOR
1. Notice is hereby given by the Trustee of his application to dismiss the bankruptcy and deny discharge to the above-captioned Debtor.
2. The Trustee states that the Debtor filed a voluntary petition in bankruptcy on July 5, 1989.
3. The Debtor did not appear at his second scheduled § 341 hearing on August 14,' 1989.
4. Objections to the dismissal of the bankruptcy and denial of discharge to the Debtor shall be made in writing to the Clerk of the United States Bankruptcy Court, Room 167, 401 North Market, Wichita, Kansas 67202 on or before 4:30 p.m. on October 6, 1989. Copies of any objections must be served on the Trustee at his office, Suite 1600, 301 North Main, Wichita, Kansas 67202. If no objections are made to this Application, the Court may enter an order dismissing the bankruptcy and denying discharge to the Debtor without further notice.
5. If objections are filed by the date set out above, a hearing will be held at 9:00 a.m., October 19, 1989 before the United States Bankruptcy Court, Room 150, United States Courthouse, 401 North Market, Wichita, Kansas.
The Certificate of Service on the document shows that the trustee, J. Michael Morris, mailed the Notice and Application to Dismiss Bankruptcy And to Deny Discharge of Debtor to all parties listed on an attached matrix. The matrix included the names and addresses of the debtor’s Chapter 7 attorney, Ronald J. Sickmann, but did not include the name of the debtor. Debtor did not respond to the trustee’s application.
Paragraph 3 of the debtor’s answer to plaintiff’s complaint states: “3. That Craig A. Logan informed his attorney that he did not wish to proceed with the matter and did not appear for his 341 meeting.”
On December 13, 1989, The Honorable John K. Pearson, United States Bankruptcy Judge sitting at Wichita, Kansas, sustained the trustee’s application and signed an “Order to Dismiss Bankruptcy Proceeding and to Deny Discharge of Debtor” in Case No. 89-11666. The Order provided:
ORDER TO DISMISS BANKRUPTCY PROCEEDING AND TO DENY DISCHARGE OF DEBTOR
NOW, on this 13th day of December, 1989, the application by the Trustee to dismiss bankruptcy and to deny discharge of Debtor comes on for hearing. The Trustee appears by and through J. Michael Morris of Klenda, Mitchell, Aus-terman & Zuercher. Thereupon, the Court FINDS:
1. On September 11, 1989, the Trustee forwarded to all parties in interest a notice of application to dismiss bankruptcy and to deny discharge of Debtor.
2. No objections to the application to dismiss bankruptcy and to deny discharge of Debtor were filed.
3. The bankruptcy proceeding of Craig Allen Logan is dismissed and discharge of the Debtor is denied.
IT IS SO ORDERED.
Debtor did not move to alter or amend the order nor did he appeal.
On April 19, 1991, the debtor filed the instant Chapter 7 bankruptcy, Case No. 91-11316, and listed plaintiff as a unsecured claim holder in an estimated amount of $7,000.00.
*327On July 19, 1991, the plaintiff filed his complaint to determine dischargeability of debt in this Case No. 91-11316.
The parties have stipulated to the following facts in the Final Pretrial Conference Order filed February 4, 1992:
6. STIPULATIONS
The parties hereto stipulate and agree that venue is properly laid in this District; that the United States Bankruptcy Court for the District of Kansas has jurisdiction of the parties hereto and the subject matter hereof and may try the adversary proceeding to final judgment; that all proper, necessary and indispensable parties are parties hereto, and to the following facts:
A. That the debtor filed a Chapter 7 bankruptcy in the United States Bankruptcy Court for the District of Kansas on July 5, 1989 and said proceeding was assigned Case No. 89-11666.
B. That in Case No. 89-11666, the plaintiff was properly scheduled and listed, did receive a notice pertaining to said proceeding and did file his claim therein by and through his attorney, Wilbur D. Geeding.
C. That in Case No. 89-11666, the debtor was to appear at the scheduled 341 meetings and failed to appear at either the first or the second scheduled 341 meeting as is evidenced by the “Notice and Application to Dismiss Bankruptcy and to Deny Discharge of Debt- or” filed in said case.
D. That on September 11,1989 in said ease No. 89-11666 the trustee filed and served by mail to all necessary parties a “Notice and Application to Dismiss Bankruptcy And to Deny Discharge of Debt- or;” that said “Notice and Application to Dismiss Bankruptcy And to Deny Discharge of Debtor” is wholly based upon the debtor’s failure to appear at the scheduled 341 hearings.
E. That on or about December 13, 1989 the Honorable John K. Pearson, United States Bankruptcy Judge, in said case No. 89-11666 sustained and entered an “Order to Dismiss Bankruptcy Proceeding and to Deny Discharge of Debt- or.”
F. That on April 19, 1991, the debtor filed Chapter 7 Bankruptcy and plaintiff was listed on said bankruptcy as a creditor. Case No. 91-11316.
G. The parties further stipulate and agree that nothing has been filed in said case No. 89-11666 requesting modification or vacation of the Order of the Honorable John K. Pearson, Judge of the United States Bankruptcy Court dated December 13, 1989.
The following additional stipulation is contained in the Motion and Order Submitting to Stipulated Facts and Proposed Briefing Schedule filed February 4, 1992:
H. The parties also stipulate and agree that various documents listed as Exhibit “A”, items 1-5 should be considered by the Court and the parties stipulate to their admittance and use by the Court in deciding this Adversary proceeding.
The documents referenced as Exhibit “A”, items 1-5, in this additional stipulation are attached to the Motion and Order Submitting to Stipulated Facts and Proposed Briefing Schedule.
CONCLUSIONS OF LAW
Plaintiff points to § 523(a)(10) of the Code, and its reference to § 727(a)(6), to support his position that this Court’s order dismissing the debtor’s prior Case No. 89-11666 operates to except plaintiff’s claim from discharge in this case.
Section 523(a)(10) provides:
(a) A discharge under section 727 ... of this title 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)(A) states:
*328(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....
Plaintiff suggests that discharge in the present case cannot discharge his claim because in the prior case the debtor refused “to obey any lawful order of the court, other than an order to respond to a material question or to testify,” namely the directives to appear at two scheduled § 341 meetings.
Perhaps the first inquiry should be whether § 727(a)(6) applies to the past case at all in this context. The words “in the case” could mean that the debtor must have refused to obey a lawful order in the present case, not in a past case, before § 727(a)(6) can be held to apply through § 523(a)(10).
Another question is whether the words “other than ... to testify” mean that § 727(a)(6)(A) does not apply here. If the order for relief was an order “to testify,” the clear language of the statute excludes it from the class of lawful orders the debt- or must obey to obtain a discharge.
Disregarding these questions, the plaintiff suggests that the debtor refused to obey a lawful order of the Court because paragraph 3 of Judge Pearson’s order of December 14, 1989, denied a discharge. The order reads: “3. The bankruptcy proceeding of Craig Allen Logan is dismissed and discharge of the Debtor is denied.” (Emphasis added.)
Code § 349 entitled, “Effect of dismissal,” treats such an order.2 It 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.
(Emphasis added.)
Apparently, the plaintiff equates the December 14,1989, order dismissing the bankruptcy and denying the debtor a discharge with an order finding “cause” to deny debt- or’s discharge in the prior case. But, it is clear that Judge Pearson’s December 14, 1989, order does not specify any cause for denying discharge. It simply says, “... discharge of Debtor is denied.” Nevertheless, by referring to the application for the order, we can deduce that if cause existed, it could only have been that the debtor failed to attend the § 341 meetings.
While the trustee no doubt wished to have the case dismissed for the debtor’s failure to attend the 341 meetings, there is nothing to indicate why he would be interested in denying the debtor’s discharge. Normally, he would have no such motivation.
The record shows that the debtor was not personally served with the “Notice and Application to Dismiss Bankruptcy and to Deny Discharge of Debtor,” except through notice to his attorney. According to the debtor’s brief, he informed his attorney that he did not wish to proceed with the case.
The Notice and Application stated that if no objection was filed in writing by 4:30 p.m. on October 6, 1989, the Court “may enter an Order dismissing the bankruptcy and denying discharge to the Debtor with further notice.” Under the motions practice procedure used in Wichita, the Notice and Application would come before Judge Pearson at a regular monthly motions docket. The trustee would announce that no written objections had been filed and, unless someone stood to orally protest the Notice and Application, in the usual course the Court would direct the trustee to pre*329pare a journal entry sustaining the dismissal. If the Court had taken up the question of cause for denial of discharge, the record would reflect the Court’s findings. Yet, no such findings have been detailed within the four corners of the dismissal order, nor has a transcript of the Court’s remarks showing such findings of cause been offered. For all that has been shown, the trustee may have added the denial of discharge language to the journal entry without the Court ever having made such a specific finding of cause to support the denial.
Karla G. Schumacher’s letter shows that the second § 341 meeting was scheduled for August 29, 1989. The trustee’s Notice and Application, while correctly stating that the debtor did not appear at his second scheduled § 341 hearing, incorrectly stated that the date of the second § 341 hearing was August 14, 1989.
The fact that the notice of continuance of the § 341 meeting was given in a letter written by an agent of the United States Trustee calls into question whether the debtor was being ordered by the Court to appear. Section 341 meetings are administrative procedures controlled by the United States Trustee’s office, not the Court. True, the order for relief commands the debtor and his attorney to appear at such a hearing or a continuance thereof. However, an argument can be made that such a directive is included in the order for relief as a matter of administrative convenience in aid of the United States Trustee, under whose authority § 341 meetings are administered.
In light of the foregoing statutory ambiguities and procedural irregularities, the Court cannot find that the dismissal order contains sufficient detail to warrant denial of discharge for cause. In the absence of any showing that the Court ruled definitively on the numerous issues presented by the fact pattern, the plaintiff’s claim that debtor’s discharge was delibera-tively denied must be overruled.
The foregoing discussion shall constitute findings of fact and conclusions of law under Bankruptcy Rule 7052 and Rule 52(a) of the Federal Rules of Civil Procedure.
IT IS SO ORDERED.
. Plaintiff is an attorney at law. Attachments to his pleadings show that his claim against the debtor has been reduced to judgment in the District Court of Sedgwick County, Kansas.
. The Court of Appeals for this circuit sets the tone for this statute in Hall v. Vance, 887 F.2d 1041 (10th Cir.1989), where the court found that the decision to dismiss the case with prejudice was in error. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8491542/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW
GEORGE L. PROCTOR, Bankruptcy Judge.
This proceeding is heard upon plaintiffs’ Motion for Summary Judgment on Counts I and II of the complaint. Plaintiffs, J.C. Faw, 0. Doyle Claywell, Tom G. Webb, and Trent Development Associates, seek a determination that a portion of a judgment debt owed by defendants, Lanny F. and Susan S. Wiles, is non-dischargeable pursuant to 11 U.S.C. § 523(a)(2)(A) and (a)(4).
A hearing on the summary judgment motion was held on April 29, 1992. The Court enters the following Findings of Fact and Conclusions of Law:
FINDINGS OF FACT
In April of 1989, defendant Lanny Wiles sued J.C. Faw, 0. Doyle Claywell, Tom G. Webb, C. Richard Vaughn, and Maurice R. Elledge in North Carolina state court. The complaint sought relief for damages arising out of certain transactions concerning Trent Development Associates, a partnership of which all parties were partners.
Plaintiffs answered the state court complaint, filed a counter-claim, and asserted a third party complaint against defendant Susan S. Wiles. Plaintiffs claimed the following grounds for relief in the North Carolina action: 1) breach of fiduciary duties, 2) conversion with intent to deprive the owner, 3) obtaining or using property of another with intent to deprive the owner, 4) breach of fiduciary duties, 5) conspiracy to *348convert funds owned by another to their own personal use and benefit, and various other counts including breach of contract.
The North Carolina trial was held on October 1, 1990, and neither of the defendants in this proceeding appeared at the time, personally or through counsel. The court heard the evidence, made findings, and entered judgment for the state court defendants.
The Judgment included the following findings:
6. At all times material hereto, the defendants, Faw, Claywell and Webb, and the plaintiff, Lanny F. Wiles, along with Elledge were general partners of a North Carolina partnership known as Trent Development Associates (Trent).
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8. Elledge was at all times material hereto the managing partner of Trent Development.
9. On or about April 21, 1986, Tucker State Bank made a loan or loans in the aggregate principal amount of at least $200,000.00 to Elledge, the plaintiff and the third-party defendant, Susan S. Wiles (the subject loan).
10. To secure or partially secure the subject loan, Elledge and the plaintiff took $130,231.25 of funds owned by Trent Development. These funds were used by Elledge and the plaintiff to purchase a certain certificate of deposit from Tucker State Bank in the amount of $130,231.25 which certificate of deposit was purchased in the name of Trent Development and was designated certificate number 2201 (the certificate of deposit).
11. The third-party defendant, Susan S. Wiles knew or should have known that the said funds were wrongfully and unlawfully taken from Trent Development’s possession and control and that the certificate of deposit was the property of Trent Development.
12. The certificate of deposit was hy-pothecated by Elledge and the plaintiff, purporting to act on behalf of Trent Development, to Tucker State Bank as security for the subject loan.
13. The partners of Trent Development did not authorize the removal of these funds ($130,231.25) from the accounts of Trent Development. Neither did the partners of Trent Development authorize the purchase of the certificate of deposit nor did they authorize the hypothecation of the certificate of deposit to Tucker State Bank as security for the subject loan.
14. The subject loan went into default and was later satisfied in whole or in part by Tucker State Bank seizing and negotiating the $130,231.25 certificate of deposit.
15. The third party defendant acted in concert with the plaintiff and Elledge in accomplishing each of the following acts: (a) Taking funds from the accounts of Trent Development sometime prior to April 21, 1986; (b) Purchasing with the funds taken from Trent Development, the certificate of deposit from Tucker State Bank; (c) Hypothecating the certificate of deposit to Tucker State Bank as security for a loan or loans to the plaintiff the third-party defendant, Susan S. Wiles, Elledge and Elledge and Associates; (d) Allowing Tucker State Bank to take and negotiate the certificate of deposit in a settlement or partial settlement of the loan or loans to the plaintiff, the third-party defendant, Susan S. Wiles, and Elledge; and (e) Failing or refusing to return the funds with interest together with the certificate of deposit upon demand of the defendants, Faw, Claywell and Webb.
Each act was accomplished pursuant to a conspiracy to convert funds belonging to Trent and its partners, Faw, Claywell and Webb to the personal use and benefit of the plaintiff, the third party defendant and Elledge.
16. At all times material hereto the certificate of deposit was owned by and legal title to it with all equitable interest therein was vested in the partners of Trent.
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BASED upon the foregoing finds [sic] of fact, it is hereby ORDERED, ADJUDGED and DECREED that:
*3491. The partnership Trent Development Associates shall have and recover the sum of $130,231.25 plus interest from April 21,1987, jointly and severally, from the plaintiff Lanny Wiles and from the third party defendant Susan S. Wiles.
Several months after the entry of the state judgment, defendants filed a motion to set it aside. In denying the motion, the North Carolina court found that no facts existed to justify relieving defendants of the judgment.
CONCLUSIONS OF LAW
Plaintiffs argue that no genuine issue of material fact exists and the doctrine of collateral applies, thus mandating that summary judgment be entered in their favor on Counts I and II of the complaint. Defendant counters by claiming that all the elements of collateral estoppel have not been satisfied, thus precluding entry of summary judgment in favor of plaintiff.
The facts concerning the entry of the state court judgment are not at issue, consequently resolution of the summary judgment motion requires a consideration of the application of collateral estoppel.
In Brown v. Felsen, 442 U.S. 127, 99 S.Ct. 2205, 60 L.Ed.2d 767 (1979), the United States Supreme Court held that bankruptcy courts are not bound by the doctrine of res judicata in dischargeability proceedings. The United States Court of Appeals for the Eleventh Circuit has extended the Brown doctrine and permits bankruptcy court to apply the doctrine of collateral estoppel in exception to discharge proceedings under certain circumstances. In re Halpern, 810 F.2d 1061, 1064 (11th Cir.1987). See In re Latch, 820 F.2d 1163, 1166 (11th Cir.1987); In re Jolly, 124 B.R. 365, 366 (Bankr.M.D.Fla.1991); In re Reynolds, 122 B.R. 455 (Bankr.M.D.Fla.1990).
The application of collateral estop-pel in an exception to discharge proceeding requires that the requesting party satisfy the following three elements:
(a)the issue at stake must be identical to the one involved in the prior litigation;
(b) the issue must have been actually litigated in the prior proceeding; and
(c) the determination of the issue in the prior litigation must have been a critical and necessary part of the judgment in that earlier decision.
In re Halpern, 810 F.2d 1061, 1064 (11th Cir.1987).
The Halpern test first requires that “the issue at stake must be identical to the one involved in the prior litigation.” Id. The United States Supreme Court recently held that the standard for proving an exception to discharge under § 523 is preponderance of the evidence, rather than clear and convincing evidence. Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). The state court issues of fraud, breach of fiduciary duty, embezzlement, and larceny are usually governed by the same standard of proof utilized in § 523 proceedings. The issues asserted in the state court complaint mirror the issues of Counts I and II of this adversary complaint and the first element of Halpern has been satisfied.
The second prong of Halpern requires that “the issue must have been actually litigated in the prior proceeding.” Halpern at 1064. “Actually litigated” only contemplates that the defendant have been given a full opportunity to present a defense. Defendant Lanny Wiles initiated the state court action and defendant Susan Wiles answered the third party complaint. A trial was conducted by the North Carolina court, evidence was taken, and findings were made. Defendants now cannot complain because they failed to participate in the duly noticed trial.
This Court has found that a default judgment satisfies the “actually litigated” prong of Halpern. In re Wilson, 72 B.R. 956, 959 (Bankr.M.D.Fla.1987). Therefore, where a party participated in a suit and chose not to appear at a properly noticed trial, the element is also fulfilled. Thus, the second prong of Halpern is satisfied.
The third and final prong of Halpern states that “the determination of the issue in the prior litigation must have been *350a critical and necessary part of the judgment in that earlier action.” Halpern at 1064. The state court judgment contains extensive findings and holds the two defendants in this proceeding guilty of a conspiracy to convert funds. Conversion is separate and distinct from fraud, fraud in fiduciary capacity, embezzlement, and larceny.
Consequently, this Court cannot conclude that the fraud, breach of fiduciary duty, embezzlement, or larceny issues in the state proceeding were a critical and necessary part of the judgment as entered. Accordingly, the third element has not been satisfied and the collateral estoppel doctrine cannot be applied to the proceeding at bar.
Having concluded that collateral estoppel does not apply, the Court will deny plaintiffs’ Motion for Summary Judgment.
A separate Order will be entered consistent with these Findings of Fact and Conclusions of Law. | 01-04-2023 | 11-22-2022 |
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