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https://www.courtlistener.com/api/rest/v3/opinions/8492077/ | ORDER DENYING DEBTORS’ MOTION FOR NUNC PRO TUNC CORRECTION OF ORDER CONFIRMING PLAN
JOHN T. FLANNAGAN, Bankruptcy Judge.
Now on this 31st day of January, 1995, the Court considers debtors’ Motion for Order Nunc Pro Tunc Correcting Clerical Errors in Order Confirming Plan.1 The motion is denied for the reasons that follow.
The parties agreed to a stipulation of facts, filed April 5, 1993, outlining the relevant circumstances and events.
*874Debtors filed their Chapter 12 petition on May 4,1987, listing in their schedules a priority real estate tax claim held by Washington County, Kansas, in the amount of $12,179.80.
However, neither Washington County nor the debtors on behalf of the county filed a proof of claim in the case. Consequently, the Chapter 12 standing trustee made no payments to Washington County during the four and one-half years prior to the debtors’ motion for nunc pro tunc order. At the time of debtors’ motion, the trustee held $9,194.27 for distribution.
Debtors contend that Washington County’s priority tax claim should share in the funds remaining for distribution, while the Farm Credit Bank and the standing trustee take the position that those funds should go to general unsecured claim holders.
Debtors filed a Chapter 12 plan on August 3, 1987. Attached to the plan was a copy of the debtors’ schedules showing Washington County’s priority claim.
Paragraph 4 of the plan addressed priority claims:
4. Priority Creditors: Creditors holding claims entitled to priority under 11 U.S.C. § 507 shall be paid in full in deferred cash payments as set out in Exhibit A, class one.
The referenced Exhibit A stated that the priority creditors would receive payments over five years with no interest.
At the confirmation hearing on November 2,1987, debtors presented a liquidation analysis which showed that unsecured creditors were entitled to receive a minimum of $29,-232.61 to satisfy the best interest of creditor’s test of § 1225(a)(4). Based on the liquidation analysis, the Court confirmed the plan. The debtors filed an Order of Confirmation on November 25, 1987, to which they attached a copy of the liquidation analysis. The analysis indicated that unsecured creditors would receive the $29,232.61, but did not distinguish between unsecured priority and nonpriority claims. According to the debtors, they intended the analysis to mean that priority unsecured claims, such as Washington County’s, would share in the $29,232.61 liquidation amount with general unsecured claims. However, this was not clearly shown by the document, and the trustee did not interpret it to require him to pay anything to Washington County. Debtors want the Court to reform the confirmation order so that Washington County can be paid, at least in part. They are no doubt motivated by the realization that, contrary to the listing in the schedules, Washington County’s claim is secured by a statutory lien on the debtors’ land, which would be partially satisfied by the funds remaining in the trustee’s hands.
The debtors urge that because they attached to the plan their schedules showing the county’s priority unsecured claim, the Court should hold it entitled to payment under the informal claim doctrine. Unfortunately, Fed.R.Bankr.P. 3002 mandates that proofs of claim “shall” be filed in Chapter 12 cases within 90 days after the first date set for the meeting of creditors, subject to some exceptions not relevant here. While the informal claim doctrine applies in Chapter 11 cases, it does not operate in Chapter 12 cases.
Furthermore, since the debtors prepared the order of confirmation, they must bear the burden of any errors resulting from their failure to make their meaning clear. The creditors and the standing trustee are entitled to rely upon the debtors’ confirmation order as drafted.
The debtors’ motion for order nunc pro tune correcting clerical errors is overruled with directions to the trustee to distribute the funds at issue to unsecured creditors, excluding Washington County, Kansas.
IT IS SO ORDERED.
. Debtors appear by their attorney, Alan L. Tip-ton of Hamilton, Peterson, Tipton & Keeshan, Topeka, Kansas. Farm Credit Bank of Wichita appears by its attorney, Calvin J. Karlin of Barber, Emerson, Springer, Zinn & Murray, L.C., Lawrence, Kansas. The Chapter 12 Standing Trustee, Eric C. Rajala, also appears. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492079/ | MEMORANDUM OPINION ON COMPLAINT TO DETERMINE DEBTOR’S INTEREST IN PROPERTY
BENJAMIN COHEN, Bankruptcy Judge.
This matter came before the Court for a pretrial conference on the Complaint to Determine Debtor’s Interest in Property and to Compel Turnover of Property filed by Au-reus International, Inc. and Omni, Inc. Mr. William L. Chenault, III, the attorney for the Plaintiffs; Mr. Michael F. Terry, the attorney for former employees of Coala, who op*891pose the complaint; and Mr. Bob Rodgers, the Chapter 7 trustee, appeared at the hearing. The Defendant, Coala, Inc., was not represented and has made no response to the complaint or appearance in the ease. Mr. Rodgers appeared at the hearing but did not oppose the complaint. The matter was submitted on a stipulation of facts filed jointly by the plaintiffs and the former employees, the record in the case and the arguments and briefs of counsel, who advised the Court that no testimony would be offered.1
I. FINDINGS OF FACTS
Frieda F. Hyles (“Hyles”) is the president of Aureus International, Inc., (“Aureus”) a Colorado corporation. Edward C. Nott (“Nott”) is the president of another Colorado corporation, Omni, Inc. (“Omni”). Aureus and Omni each purchased a quantity of sewing machines and related sewing equipment from Walker and Reed Manufacturing Company of Moulton, Alabama, (“Walker and Reed”) on December 18, 1992. Aureus and Omni both executed leases of their respective sewing machines and equipment to the Defendant, Coala, Inc., on January 2, 1993. As of that date, Coala, Inc. was not a legal entity, but on January 12, 1993, Hyles and Nott incorporated Coala, Inc. in Lawrence County, Alabama, and are the sole stockholders and officers of Coala, Inc. (“Coala”).
The sewing machines and related equipment were subsequently delivered to Coala. Coala hired employees and proceeded to conduct a clothing manufacturing business. The sewing machines and related equipment leased from Aureus and Omni were used by the employees of Coala in the manufacturing operation.
Coala began to experience financial difficulties and on October 21,1993, a petition for involuntary bankruptcy was filed against Coala by former employees who are owed wages. An order for relief under Chapter 7 of the Bankruptcy Code was entered against Coala on November 17, 1993, and a trustee was appointed.2
II. THE FORMER EMPLOYEES’S CONTENTIONS IN OPPOSITION TO THE COMPLAINT
Aureus and Omni filed the above adversary proceeding seeking the return of the sewing machines and other equipment that had been leased to Coala. The former employees of Coala oppose the return of the property. They contend that Coala is a mere sham corporation, that Hyles and Nott allowed Coala to generate debts while insulating assets from the claims of creditors by retaining the assets in the name of Aureus and Omni, and that the Court should therefore pierce the corporate veil and hold that the property is subject to the claims of Coa-la’s creditors. In other words, the employees argue that because Hyles and Nott are the alter egos of Aureus, Omni, and Coala, that the assets of Hyles, Nott, Aureus and Omni should be subject to the claims of Coala’s creditors. In an additional but secondary argument, the employees contend that Aureus and Omni cannot obtain the property because neither has obtained a certificate of authority to do business in the state of Alabama.
The employees contend that the following excerpts from or conclusions derived from the Joint Stipulation of Facts support their contentions: (a) Hyles and Nott are the officers of all three corporations; (b) no lease payments were made by Coala to either Au-reus or Omni; (c) neither Aureus nor Omni attempted to recover the property, even though Coala was in default under the lease; (d) Coala did not provide evidence of insurance to Aureus and Omni as is required under the lease agreements; (e) neither Au-reus nor Omni filed a UCC-1 statement covering the property; (f) Coala did not pay security deposits to Aureus and Omni; (g) neither Aureus nor Omni were authorized to do business in the state of Alabama during the time frames when the events outlined herein occurred; (h) neither Aureus nor Omni listed the property with the Lawrence *892County tax assessor; and, (i) Coala had no assets at the time the property was leased.
III. CONCLUSIONS OF LAW
A. Piercing The Corporate Veil Theory
1.Stockholder Liability
The doctrine of piercing the corporate veil has historically been proposed by creditors of a corporation to impose personal liability on the corporation’s stockholders, and to obtain satisfaction of the corporation’s obligations from the stockholders’ assets. In this case the former employees have not proved that the property is owned by the stockholders or anyone else other than Au-reus and Omni. According to the stipulations of the parties, the property was purchased and paid for by Aureus and Omni from Walker and Reed. Coala has possession of the property only by virtue of leases from Aureus and Omni. Neither Aureus nor Omni owns stock in Coala. The “corporate veil” theory is useful only to impose liability on stockholders. Therefore, since the property is owned by Aureus and Omni, it cannot be reached by piercing Coala’s corporate veil. If the former employees have grounds for piercing Coala’s corporate veil, their remedy is by separate suit for money judgment against the stockholders of the corporation.
The shareholders of the debtor corporation, Hyles and Nott, are not parties to this proceeding and the former employees have not, to the Court’s knowledge, filed suit in any other forum or obtained judgment against either Hyles or Nott based on the debts owed to the employees by Coala. The Court knows of no basis for condemning specific property for the payment of a money obligation which has not been reduced to judgment. Even if Hyles and Nott had been proved to be the owners of the property, the property cannot be subjected to the payment of the debts owed to the former employees until the employees obtain a money judgment against Hyles and Nott. Chapter 7 may not be used as a de facto prejudgment attachment simply because the assets of the non-debtor entity happen to be in the hands of the bankruptcy trustee, especially where no proceeding has been instituted where a judgment may be anticipated.
2.The Former Employees’s Alter Ego Theory
The former employees’s theory appears to be that:
1. Because Hyles and Nott are the alter egos of Aureus and Omni, then the sewing equipment actually belongs to Hyles and Nott;
2. Because Hyles and Nott are the alter egos of Coala, then any debt owed by Coala is the personal obligation of Hyles and Nott;
3. Therefore, since the debt owed to the former employees by Coala is a personal obligation of Hyles and Nott, then that debt may be satisfied from the personal assets of Hyles and Nott, including the sewing equipment.
The first part of the argument, that Hyles and Nott own the sewing machines, is based on sort of an “inverted alter ego” theory, that is, if the corporation is a sham and a mere instrumentality of the stockholders, then the property owned by the corporation is in fact that of the stockholders and subject to payment of their individual debts. In other words, rather than the typical alter ego theory that corporate obligations are to be satisfied from stockholder assets, the employees argue that stockholder obligations are to be satisfied from corporate assets, here the sewing machines of Aureus and Omni. There are at least three problems with this theory. First, the joint stipulation does not indicate the extent, if any, that either Hyles or Nott own stock in either Aureus or Omni. The Court is limited by the stipulated facts in deciding the issues between the parties and may not assume facts which may be essential to either party’s cause of action or defense. Second, the former employees have cited no case which espouses or supports their “inverted alter ego” theory. While the corporate veil clearly may be pierced to subject the assets of individual stockholders to the payment of corporate obligations, the legal basis for subjecting the assets of the corporation to the satisfaction of the individual liabilities of the stock*893holders, except by judgment against the individual stockholders and execution on the stock owned by them, is less than clear.3 Third, others would be necessary parties to any action in which the assets of Aureus and Omni were being distributed. This would include other stockholders of Aureus and Omni, if any; other creditors of Aureus and Omni, who would be entitled to satisfaction from the corporate property first; and other creditors of the two individuals, who would be entitled to share in what was left after satisfaction of corporate creditors.
Even if Hyles and Nott owned all of the stock of Aureus and Omni, the former employees have not proved a basis for piercing Coala’s corporate veil, or that Hyles and Nott were the alter egos of Aureus and Omni. A corporation is a distinct and separate entity from the individuals who compose it as stockholders or who manage it as directors or officers and a corporation’s obligations and transactions are to be considered separately from those of the corporation’s stockholders.4 A corporation’s separate existence is recognized so that liability for the *894corporation’s debts will be limited to the corporate assets and those who invest in and operate the corporation will be insulated from liability for the same debts.5 An aggrieved party must first “pierce the corporate veil” before a shareholder’s liability for an obligation of the corporation may be established.6 Because the concept of limited liability is one of the principal purposes for which the law created the corporation, piercing the corporate veil is not a power that is lightly exercised.7
In order for a corporation to be accorded treatment as a separate legal entity, it must exist and function as such and not merely as the alter ego of a person owning and controlling it.8 A separate corporate existence will not be recognized when a corporation is so organized and controlled and its business so conducted as to make it a mere instrumentality of another or the alter ego of the person owning and controlling it.9
For the separate corporate existence to be disregarded under the “instrumentality” rule, the control by the stockholders must amount to total domination of the subservient corporation, to the extent that the subservient corporation manifests no separate corporate interests of its own and functions solely to achieve the purposes of the dominant corporation.10 “The dominant party must have complete control and domination of the subservient corporation’s finances, policy and business practices so that at the time of the attacked transaction the subservient corporation had no separate mind, will, or existence of its own....” First Health, Inc. v. Blanton, 585 So.2d 1331, 1334 (Ala.1991), quoting Messick v. Moving, 514 So.2d 892, 894-895 (Ala.1987).
Mere domination or control of a corporation by its stockholders is not however, enough to allow a piercing of the corporate veil. The stockholders must have misused that control and harm or loss must have resulted from it.11 It is typical for the ma*895jority stockholders to control the operation of a closely held corporation. The fact that majority stockholders control the business of the corporation does not make that corporation a sham.12 The law, in fact, recognizes one-person corporations and accepts the fact of domination by one person.13 Therefore, in order to justify piercing the veil of corporate existence, it is not enough to show that the corporation may have been controlled by one or a few persons.14 In the absence of fraud or inequity, the shareholders will be protected from individual liability by the corporate entity, even though the corporation is controlled by the shareholders.15 In order to pierce the corporate veil, the complaining party must show not only that the dominant party has complete control and domination of the subservient corporation’s finances, policy, and business practices but also that it misused that control to his detriment.16 If the stockholders dominated the subservient corporation, and were guilty of fraud in asserting the corporate existence, or if recognition of the corporate existence will result in injustice or inequitable consequences, the corporate veil may be pierced.17 If the corporation has been organized solely by stockholders to avoid personal liability and used by the stockholders for their personal purpose, subversive to the rights of others, the corporate veil can be pierced to impose personal liability on the stockholders.18
The following factors are generally considered when determining whether the corporate form may be disregarded: (1) inadequacy of capital; (2) fraudulent purpose in conception or operation of the business; or (3) operation of the corporation as an instrumentality or alter ego.19 The last mentioned factor, domination of the subservient corporation, is indicated “where a corporation is set up as a subterfuge, where shareholders do not observe the corporate form, where the legal requirements of corporate law are not complied with, where the corporation maintains no corporate records, where the corporation maintains no corporate bank account, where the corporation has no employees, where corporate and personal funds are in*896termingled and corporate funds are used for personal purposes, or where an individual drains funds from the corporation.” Backus v. Watson, 619 So.2d 1342, 1345 (Ala.1993), quoting Simmons v. Clark Equipment Credit Corp., 554 So.2d 398, 400-401 (Ala.1989). None of these factors are present in the instant case.
(a)Capitalization
The employees have not proved that either Omni, Aureus or Coala was undercapi-talized. The bare statement that “Coala, Inc. did not have any assets when the equipment was bought,” does not dispel the possibility that Coala subsequently received adequate financing to launch its manufacturing operation, or the possibility that the stockholders of Coala subsequently made capital contributions to the corporation to finance the operation, or the possibility that Coala acquired substantial assets after that date. Nothing in the stipulation indicates that Coa-la’s financial demise was the result of under-capitalization.20 In fact the stipulation contains no information regarding the capitalization of either Omni or Aureus.
(b)Fraud
The Court is sympathetic to the plight of the former employees. But this Court cannot discern from the stipulated facts any fraudulent purpose or scheme in the lease transaction between Aureus and Omni and Coala, or unjust or inequitable result that has inured to the former employees as a consequence of that transaction. The sewing equipment was purchased from funds of Au-reus and Omni and not from funds of Coala that might have otherwise been available to pay the claims of the former employees. It was only logical and fair for Aureus and Omni to then retain their respective interests in the equipment, rather than giving it to Coala outright, and to expect to receive a profit from their investment in the equipment. It would ostensibly be no different if Coala had leased the equipment from someone other than Aureus and Omni. Many companies lease their business equipment, furnishings and facilities. The former employees have not argued or proved that it was improvident from a business standpoint for Coala to lease the equipment from Au-reus and Omni. The employees do not contend that the terms of the respective leases were unfavorable to Coala or that Coala did not stand to benefit from those leases. The simple fact that Aureus and Omni were relate ed to Coala from the standpoint of having common officers is inconclusive.
Business dealings between related corporations are common and accepted when not fraudulent. The lease arrangement was beneficial to Coala. Coala paid nothing for the use of the equipment; a fact that would tend to facilitate the success of Coala’s business and the continued employment of its employees. It cannot be assumed that Au-reus and Omni or Hyles and Nott intended financial problems for Coala or anticipated receiving no income from the lease of equipment to Coala. Likewise, to the extent that Aureus and Omni exercised forbearance regarding the lease default by Coala, the former employees and Coala were the beneficiaries, and not Aureus and Omni or Hyles and Nott.
(c)Instrumentality
The employees have not proved that Hyles and Nott treated Omni, Aureus, and Coala as mere instrumentalities. The simple fact that Hyles and Nott owned all of the stock in Coala is insufficient.21 In fact *897there is nothing in the stipulation which indicates that corporate formalities were ignored.22 One possibility is that each corporation had separate books, each maintained separate bank accounts, none of the funds of any of the corporations were intermingled with those of another and Hyles and Nott did not use the funds of any corporation to make personal expenditures.
The employees have not proved that Coala was dominated by either Hyles or Nott or Omni or Aureus. Other than the transaction involving the lease of the sewing machines, there is no evidence that the businesses of the corporations were interrelated at all. Coala was in the business of manufacturing clothing. Neither Aureus nor Omni was involved in that business. Neither can, therefore, be said to have dominated or directed the business of Coala in any fashion. The stipulation submitted by the parties does not even indicate whether or not, and to what extent, Hyles and Nott were actually involved in the management of any of the corporations.23
B. Unqualified Foreign Corporations Theory
The former employees also contend that Aureus and Omni are precluded from obtaining possession of their equipment because neither has complied with Ala.Code § 10-2A-226 (1975).24 Under Ala.Code § 10-2A-226, a foreign corporation may not transact business in the state of Alabama until it obtains a certificate of authority from the Secretary of State. The only consequence of failure of a foreign corporation to comply with Ala.Code § 10-2A-226 is spelled out in Ala.Code § 10-2A-247, which provides as follows:
All contracts or agreements made or entered into in this state by foreign corporations which have not obtained a certificate of authority to transact business in this state shall be void at the action of such foreign corporation or any person claiming through or under such foreign corporation by virtue of said void contract or agreement. .. .25
*898The argument of the former employees must fail, for two reasons. First of all, application of the statute requires that the business being conducted by the foreign corporation be “intrastate” rather than “interstate” in character. The singular act of a foreign corporation, consisting of a lease of business equipment to an Alabama corporation, constitutes interstate business rather than intrastate business. Therefore, the foreign corporation is not required to obtain a certificate of authority before leasing the equipment, or suing for breach of the lease. An almost identical situation was addressed by the Supreme Court of Alabama. In that ease the Court’s opinion stated:
In these contracts the machines are leased by the foreign corporation to the domestic corporation to be used by the lessee for three years in its factory in this state. The machines are shipped by the lessor from Virginia to the lessee in Alabama, the lessee is to pay the freight, and the annual rental is to be paid when the machines are delivered. After the termination of the leases the machines are to be returned to the lessor in Virginia by the lessee, freight prepaid, by the lessee. The lessee is to keep the machines during the lease fully insured in favor of the lessor against loss by fire. The leasing of these machines under the contract and the facts constitute interstate commerce. Similar contracts of leasing chattels by the residents of one state to a resident of another state have been held to constitute interstate commerce, and the lessor was not thereby engaging in business or transacting business in the state of the lessee, which made the lessor subject to the conditions imposed by the statutes of the state of the lessee.
Houston Canning Co. v. Virginia Can Co., 211 Ala. 232, 234, 100 So. 104 (1924). More recently, the Alabama Supreme Court revisited the issue in Johnson v. MPL Leasing Corp., 441 So.2d 904 (Ala.1983), in which the following circumstances were presented:
MPL Leasing Corporation (“MPL”) is a California corporation organized for the purpose of offering alternative financing plans to dealers of Saxon Business Products. Saxon specializes in the sale of paper copiers which are distributed through independent dealers located throughout the United States, including Alabama. Jay Johnson was a Saxon dealer in Alabama.
Through mailings and telephone calls into the state, MPL solicited Johnson’s attendance at a sales seminar in Atlanta. Johnson attended the seminar and entered into an agreement with MPL. The agreement provided for Johnson to lease Saxon copiers with the option to buy. MPL shipped the machines into Alabama and filed a financing statement with the Secre-taiy of State.
Johnson became several months delinquent with his payments to MPL. MPL filed suit in Montgomery Circuit Court. Johnson moved to dismiss, alleging, among other defenses, that MPL was not qualified to do business in Alabama. We find that the trial judge correctly denied the motion.
441 So.2d at 905. The court held that MPL’s activities constituted interstate commerce and that, consequently, MPL could enforce the lease contract in the Alabama state courts. In that regard, the court stated:
MPL’s activities within Alabama are limited to (1) delivering copying machines by common carrier and (2) filing this action. This Court has never held previously that contacts as minimal as those of MPL constitute “intrastate business.”
Id. at 905.26
In addition, the statute does not purport to affect the property rights of unqualified corporations or to prohibit unquali-*899ñed corporations from utilizing Alabama courts to reclaim property owned by them. While the effect of the statute is to prohibit contract actions by unqualified corporations, it does not bar suits to exercise proprietary interests in property. Leasing Service Corp. v. Hobbs Equipment Co., 707 F.Supp. 1276, 1287 (N.D.Ala.1989) aff'd in part on other grounds and rev’d in part on other grounds, 894 F.2d 1287 (11th Cir.1990); In re Delta Molded Products, Inc., 416 F.Supp. 938, 945 (N.D.Ala.1976), aff'd Sterne v. Improved Machinery, Inc., 571 F.2d 957 (5th Cir.1978); Jones v. Americar, Inc., 288 Ala. 638, 643, 219 So.2d 893 (Ala.1969); Capitol Lumber Co. v. Mullinix, 208 Ala. 266, 268, 94 So. 88 (1922); Boulden v. Estey Organ Co., 92 Ala. 182, 9 So. 283 (1890). The statute would not, therefore, prohibit the present effort by Au-reus and Omni to obtain possession of the sewing equipment leased to Coala, even if the transactions had been intrastate in nature.27
IV. CONCLUSION
Based upon the foregoing discussion, the Court finds that the property made the basis of this adversary proceeding belongs to Au-reus and Omni, that the complaint filed by Aureus and Omni to obtain the return of the property from the trustee in bankruptcy should be granted, and that the objections filed by the former employees to the complaint should be denied. A separate order will be entered in accordance with this memorandum opinion.
APPENDIX
JOINT STIPULATION OF FACTS
January 11, 1995
COMES NOW the parties and jointly stipulate to the following facts:
In November of 1992, Frieda F. Hyles, the President of Aureus International, Inc., a Colorado Corporation, was notified by Thomas Bumbarger, that a number of sewing machines were for sale by Walker and Reed Manufacturing Company in Moulton, Lawrence County, Alabama. The asking price for the sewing machines and some other equipment was $25,000.00.
On December 18, 1992, Teddy Reed and Novel Walker executed and delivered two (2) Bills of Sales conveying the equipment used in the sewing operation of Walker and Reed Manufacturing to “Frieda F. Hyles, Aureus International DBA”, a copy of which is attached hereto and marked for identification purposes as EXHIBIT 1, and to Omni Executive Recruiters, Inc., a copy of which is attached hereto and marked for identification purposes as EXHIBIT 2. E.C. Nott, who is one and the same person as Edward C. Nott, is the President of Omni Executive Recruiters, Inc., a Colorado Corporation.
Aureus International, Inc. purchases sixty percent (60%) of the furniture, fixtures, equipment and supplies belonging to Walker and Reed Manufacturing Company. Aureus International, Inc. paid $10,000.00 in cash by a bank wire transfer and Aureus International, Inc. gave Teddy Reed and Novel Walker a promissory note in the amount of $5,000.00 to be paid beginning on February 1, 1993, and to be paid at the rate of $1,000.00 a month for five (5) consecutive months.
Omni Executive Recruiters, Inc. purchased forty percent (40%) of the furniture, fixtures, equipment and supplies belonging to Walker *900and Reed Manufacturing Company. Omni Executive Recruiters, Inc. paid $10,000.00 in cash by a bank wire transfer.
A true and correct list of the furniture, fixtures, equipment and supplies sold by Walker and Reed Manufacturing Company to Aureus International, Inc. and Omni Executive Recruiters, Inc. is attached hereto and marked' for identification purposes as EXHIBIT 3.
On January 2, 1993, Aureus International, Inc. purported to lease the equipment in question to Coala, Inc., with Frieda Hyles signing the lease document for Aureus International as its President and Frieda Hyles signed the lease document for Coala as President with Edward C. Nott signing the lease document for Coala as its secretary/treasurer. The lease provided for payment from Coala to Aureus International, Inc. of $480.00 per month for 60 months, a $1.00 security deposit, late charges for delinquent payments and a requirement for Coala to insure the equipment. A true and correct copy of said lease is attached hereto and marked for identification purposes as EXHIBIT 4.
On January 2, 1993, Omni, Inc. purported to lease the equipment in question to Coala, Inc., with Edward C. Nott signing the lease document for Omni, Inc. as its President and Frieda Hyles signed the lease document for Coala as its President with Edward C. Nott signing the lease document for Coala as its secretary/treasurer. The lease provided for payment from Coala to Omni, Inc. of $320.00 per month for 60 months, a $1.00 security deposit, late charges for delinquent payments and a requirement for Coala to insure the equipment. A true and correct copy of said lease is attached hereto and marked for identification purposes as EXHIBIT 5.
A reservation of corporate name was obtained for Coala, Inc. on December 15, 1992. The Articles of Incorporation of Coala, Inc. were filed on January 12, 1993, in Lawrence County, Alabama. The initial directors of Coala, Inc. were Frieda Hyles and Edward C. Nott. Frieda Hyles was President of Coala, Inc. Edward C. Nott was secretary/treasurer of Coala, Inc. Frieda Hyles and Edward C. Nott were the sole shareholders of Coala, Inc.
No payments were made from Coala, Inc. to either Aureus International, Inc. or to Omni Executive Recruiters, Inc. under the leases.
There were no threats to repossess the equipment due to default made.
There was no evident of insurance given by Coala, Inc. to Omni Executive Recruiters, Inc. or Aureus International, Inc. pursuant to the lease provisions.
There were no UCC-1 financing statements filed listing Omni Executive Recruiters, Inc. or Aureus International, Inc. as lienholders on the subject equipment.
There was no security deposit paid by Coala, Inc. to Omni Executive Recruiters, Inc. or Aureus International, Inc,
Omni Executive Recruiters, Inc. did not apply for or receive permission to conduct business in the State of Alabama.
Aureus International, Inc. did not apply for or receive permission to conduct business in the State of Alabama.
Omni Executive Recruiters, Inc. did not list the subject equipment with the Lawrence County, Alabama, Tax Assessor, Tommy Praytor, for personal property tax purposes in 1993.
Aureus International, Inc. did not list the subject equipment with the Lawrence County, Alabama, Tax Assessor, Tommy Praytor, for personal property tax purposes in 1993.
Coala, Inc did not have any assets when the equipment was bought.
The primary creditors of Coala, Inc. are former employees who are owed money for wages earned within ninety (90) days of the filing of the involuntary bankruptcy petition.
. Deposition transcripts were filed with the Court but were not offered as evidence.
. The Court adopts, without the accompanying exhibits, the parties' Joint Stipulation of Facts as filed on January 11, 1995. That stipulation, without its original exhibits, is attached hereto.
. The following statement of Alabama law applies:
A corporation, however, is an independent legal entity, separate and distinct from its shareholders. The legal title and ownership of corporate property is in the corporation. Warrior River Terminal Co. v. State, 257 Ala. 208, 58 So.2d 100 (1952); Martin Truck Line, Inc. v. Alabama Tank Lines, Inc., 261 Ala. 163, 73 So.2d 756 (1954). A share of stock in a corporation merely entitles a shareholder to an aliquot portion of the proceeds of the assets of the corporation, over and above the indebtedness of the corporation. Hall & Farley v. Alabama Terminal & Improvement Co., 173 Ala. 398, 56 So. 235 (1911). A shareholder is not, however, entitled to share in the assets of the corporation until a dividend is declared or except upon liquidation of the corporation. First National Bank of Birmingham v. Perfection Bedding Co., 631 F.2d 31 (5th Cir.1980); Jones Valley Finance Co. v. Tennille, 40 Ala. App. 284, 115 So.2d 495 (1959), cert. denied, 270 Ala. 738, 115 So.2d 504 (1959). Until either of said events occur, the shareholders are but the equitable owners of corporate property. First National Bank of Birmingham v. Perfection Bedding Co., 631 F.2d at 33; Martin Truck Line, Inc. v. Alabama Tank Lines, Inc., 73 So.2d at 759.
In re Sandefer, 47 B.R. 133, 135 (Bankr.N.D.Ala.1985). "The corporation is a person and its ownership is a nonconductor that makes it impossible to attribute an interest in its property to its members.” Warrior River Terminal Co. v. State, 257 Ala. 208, 212, 58 So.2d 100, 102 (1952), quoting Justice Holmes in Klein v. Board of Tax Supervisors, 282 U.S. 19, 23, 51 S.Ct. 15, 15, 75 L.Ed. 140 (1930).
Of course, if property has been fraudulently conveyed by the individual stockholders to the corporation, the separate corporate existence should be disregarded to allow creditors of the individual to reach the property. John R. Steele & Assoc., Inc. v. Villante, 659 F.Supp. 157 (D.N.J.1987); Eisenberg v. Casale, 72 B.R. 222 (E.D.N.Y.1987). For example, in divorce situations, if a husband purchased assets with personal funds but placed title to the assets in the name of a shell corporation so as to shield the property from the marital claims of the wife, the divorce court will customarily treat the assets as belonging to the husband and not the corporation for purposes of making the marital property division. Vallone v. Vallone, 644 S.W.2d 455 (Tex.1982); Lyons v. Lyons, 340 So.2d 450 (Ala.Civ.App.1976); Dandini v. Dandini, 120 Cal.App.2d 211, 260 P.2d 1033 (Cal.Ct.App.1953). Also, in matters involving the probate of a decedent’s estate and distribution of estate property, a court may treat property purchased by the decedent with personal funds as part of the probate estate, although title to the property was placed in a corporation wholly owned by the decedent. In re Will of Stukalo, 7 Misc.2d 1042, 166 N.Y.S.2d 478 (N.Y.Surr.1957). See also Central Motors & Supply Co. v. Brown, 219 Minn. 467, 18 N.W.2d 236 (1945) (court properly disregarded corporate veil where corporation sued sheriff for value of automobiles owned by corporation sold by sheriff to satisfy judgment against individual stockholder who was alter ego of corporation and used coiporation as mere agency to hide his own property from creditors).
While dicta found in Simmons v. Clark Equipment Credit Corp., 554 So.2d 398 (Ala.1989) may suggest wider application of the theory advanced by the former employees, the Court has found no additional support for the theory in case law. Since the former employees have offered no proof that there had been a fraudulent conveyance of the sewing equipment from Hyles and Nott to Aureus and Omni, or that the sewing equipment was actually purchased in the first place by Hyles and Nott with their own personal funds, the "inverted alter ego” theory must fail in this case.
. Southern Sash Sales and Supply Co. v. Wiley, 631 So.2d 968, 969 (Ala.1994); Backus v. Watson, 619 So.2d 1342, 1345 (Ala.1993); M & M Wholesale Florist, Inc. v. Emmons, 600 So.2d 998, 999 (Ala.1992); First Health, Inc. v. Blanton, 585 So.2d 1331, 1334 (Ala.1991); Huntsville Aviation Corp. v. Ford, 577 So.2d 1281, 1287 (Ala.1991); Wright v. Alan Mills, Inc., 567 So.2d 1318, 1319 (Ala.1990); Simmons v. Clark Equipment Credit Corp., 554 So.2d 398, 400 (Ala.1989); Co-Ex Plastics, Inc. v. AlaPak, Inc., 536 So.2d 37, *89438 (Ala.1988); Messick v. Moling, 514 So.2d 892, 894 (Ala.1987); East End Memorial Assoc. v. Egerman, 514 So.2d 38, 42 (Ala.1987); Deupree v. Ruffino, 505 So.2d 1218, 1222 (Ala.1987); Washburn v. Rabun, 487 So.2d 1361, 1366 (Ala.1986); Barrett v. Odom, May and DeBuys, 453 So.2d 729, 732 (Ala.1984); McKissick v. Auto-Owners Insurance Co., 429 So.2d 1030, 1032 (Ala.1983); Aloma Coat Corp. v. Behr, 408 So.2d 496, 498 (Ala.1981); Cohen v. Williams, 294 Ala. 417, 420, 318 So.2d 279, 281 (1975); Scudder v. Scudder, 485 So.2d 743, 745 (Ala.Civ.App.1986). As stated by the Supreme Court of Alabama:
The doctrine is well established, and obtains both in law and equity, that a corporation is a distinct entity, to be considered separate and apart from the individuals who compose it, and is not to be affected by the personal rights, obligations and transactions of its stockholders; and this, whether said rights accrued, or obligations were incurred, before or subsequent to incorporation.
East End Memorial Assoc. v. Egerman, 514 So.2d 38, 42 (Ala.1987).
. Huntsville Aviation Corp. v. Ford, 577 So.2d 1281, 1287 (Ala.1991).
. In re Birmingham Asbestos Litigation, 619 So.2d 1360, 1362 (1993).
. Backus v. Watson, 619 So.2d 1342, 1345 (Ala.1993); In re Birmingham Asbestos Litigation, 619 So.2d 1360, 1362 (Ala.1993); M & M Wholesale Florist, Inc. v. Emmons, 600 So.2d 998, 999 (Ala.1992); First Health, Inc. v. Blanton, 585 So.2d 1331, 1334 (Ala.1991); Simmons v. Clark Equipment Credit Corp., 554 So.2d 398, 400 (Ala.1989).
. Lyons v. Lyons, 340 So.2d 450, 451 (Ala.Civ.App.1976).
. Southern Sash Sales and Supply Co. v. Wiley, 631 So.2d 968, 969 (Ala. 1994); M & M Wholesale Florist, Inc. v. Emmons, 600 So.2d 998, 999 (Ala.1992); Huntsville Aviation Corp. v. Ford, 577 So.2d 1281, 1287 (Ala.1991); Thorne v. C & S Sales Group, 577 So.2d 1264, 1266 (Ala.1991); Wright v. Alan Mills, Inc., 567 So.2d 1318, 1319 (Ala.1990); Co-Ex Plastics, Inc. v. AlaPak, Inc., 536 So.2d 37, 38 (Ala.1988); East End Memorial Assoc. v. Egerman, 514 So.2d 38, 42 (Ala.1987); Deupree v. Ruffino, 505 So.2d 1218, 1222 (Ala.1987); Washburn v. Rabun, 487 So.2d 1361, 1366 (Ala.1986); Barrett v. Odom, May and DeBuys, 453 So.2d 729, 732 (Ala.1984); Woods v. Commercial Contractors, Inc., 384 So.2d 1076, 1079 (Ala.1980).
. Matrix-Churchill v. Springsteen, 461 So.2d 782, 788 (Ala.1984); Kwick Set Components, Inc. v. Davidson Industries, Inc., 411 So.2d 134, 137 (Ala. 1982).
. Johnston v. Green Mountain, Inc., 623 So.2d 1116, 1120 (Ala.1993); In re Birmingham Asbestos Litigation, 619 So.2d 1360, 1362 (Ala.1993); Backus v. Watson, 619 So.2d 1342, 1345 (Ala.1993); First Health, Inc. v. Blanton, 585 So.2d 1331, 1334-1335 (Ala.1991); Simmons v. Clark *895Equipment Credit Corp., 554 So.2d 398, 400 (Ala.1989).
. McKissick v. Auto-Owners Insurance Co., 429 So.2d 1030, 1033 (Ala.1983).
. Backus v. Watson, 619 So.2d 1342, 1345 (Ala.1993); Simmons v. Clark Equipment Credit Corp., 554 So.2d 398, 400 (Ala.1989).
. Washburn v. Rabun, 487 So.2d 1361, 1366 (Ala.1986).
. Wright v. Alan Mills, Inc., 567 So.2d 1318, 1319 (Ala.1990); Co-Ex Plastics, Inc. v. AlaPack, Inc., 536 So.2d 37, 39 (Ala.1988); Washburn v. Rabun, 487 So.2d 1361, 1319 (Ala.1986).
. Johnston v. Green Mountain, Inc., 623 So.2d 1116, 1120 (Ala.1993); Kwick Set Components, Inc. v. Davidson Industries, Inc., 411 So.2d 134, 136 (Ala.1982).
. Southern Sash Sales and Supply Co. v. Wiley, 631 So.2d 968, 969 (Ala.1994); Backus v. Watson, 619 So.2d 1342, 1345 (Ala.1993); Huntsville Aviation Corp. v. Ford, 577 So.2d 1281, 1287 (Ala.1991); Simmons v. Clark Equipment Credit Corp., 554 So.2d 398, 400 (Ala.1989); Co-Ex Plastics, Inc. v. AlaPak, Inc., 536 So.2d 37, 38 (Ala.1988); Messick v. Moring, 514 So.2d 892, 894 (Ala.1987); East End Memorial Assoc. v. Egerman, 514 So.2d 38, 42 (Ala.1987); Deupree v. Ruffino, 505 So.2d 1218, 1222 (Ala.1987); Washburn v. Rabun, 487 So.2d 1361, 1366 (Ala.1986); Barrett v. Odom, May and DeBuys, 453 So.2d 729, 732 (Ala.1984); McKissick v. Auto-Owners Insurance Co., 429 So.2d 1030, 1032 (Ala.1983); Kwick Set Components, Inc. v. Davidson Industries, Inc., 411 So.2d 134, 136 (Ala.1982); Woods v. Commercial Contractors, Inc., 384 So.2d 1076, 1079 (Ala.1980); Cohen v. Williams, 294 Ala. 417, 421, 318 So.2d 279, 281 (1975); Forest Hill Corp. v. Latter & Blum, 249 Ala. 23, 28, 29 So.2d 298, 302 (1947).
. Messick v. Moring, 514 So.2d 892, 894 (Ala.1987); East End Memorial Assoc. v. Egerman, 514 So.2d 38, 42 (Ala.1987); Deupree v. Ruffino, 505 So.2d 1218, 1222 (Ala.1987); Washburn v. Rabun, 487 So.2d 1361, 1366 (Ala.1986); Barrett v. Odom, May and DeBuys, 453 So.2d 729, 732 (Ala.1984); McKissick v. Auto-Owners Insurance Co., 429 So.2d 1030, 1033 (Ala.1983); Aloma Coat Corp. v. Behr, 408 So.2d 496, 498 (Ala.1981); Cohen v. Williams, 294 Ala. 417, 420, 318 So.2d 279, 280-281 (1975); C.E. Development Co. v. Kitchens, 288 Ala. 660, 666, 264 So.2d 510, 515 (1972); Morgan Plan Co. v. Vellianitis, 270 Ala. 102, 107, 116 So.2d 600, 604 (1959); Cleghorn v. Ferron Metalcraft, 587 So.2d 400, 401 (Ala.Civ.App.1991); Paddock, Smith & Aydlotte v. WAAY Television, 410 So.2d 106, 108 (Ala.Civ.App.1982); Lyons v. Lyons, 340 So.2d 450, 451 (Ala.Civ.App.1976); Scudder v. Scudder, 485 So.2d 743, 745 (Ala.Civ.App.1986).
. M & M Wholesale Florist, Inc. v. Emmons, 600 So.2d 998 (Ala.1992); First Health, Inc. v. Blanton, 585 So.2d 1331 (Ala.1991); Messick v. Moring, 514 So.2d 892 (Ala.1987).
. The fact that a corporation is under-capitalized is not alone sufficient to impose personal liability on the corporation's stockholders. Backus v. Watson, 619 So.2d 1342, 1345 (Ala.1993); Simmons v. Clark Equipment Credit Corp., 554 So.2d 398, 400 (Ala.1989).
. The fact that an individual owns all or a majority of the stock of a corporation does not, of itself, destroy the separate corporate entity. Backus v. Watson, 619 So.2d 1342, 1345 (Ala.1993); First Health, Inc. v. Blanton, 585 So.2d 1331, 1334 (Ala.1991); Simmons v. Clark Equipment Credit Corp., 554 So.2d 398, 400 (Ala.1989); Messick v. Moring, 514 So.2d 892, 895 (Ala.1987). Even if Hyles and Nott owned all of the stock of all three corporations, "the mere fact that some or all of the stockholders or officials of two corporations are identical or because one corporation dominates the other does not, of itself, destroy the corporate identity or merge one into *897the other." Forest Hill Corp. v. Latter & Blum, 249 Ala. 23, 26, 29 So.2d 298, 300 (1947).
. The mere fact that minor corporate formalities were not followed does not rise to such a level that the corporate veil should be pierced. Co-Ex Plastics, Inc. v. AlaPak, Inc., 536 So.2d 37, 39 (Ala.1988).
. While some of the remaining stipulations relied upon by the former employees indicate that a measure of control was exercised by Hyles and Nott over all three corporations, they constitute no evidence of misuse of corporate control or that the misuse of control resulted in any damage to Coala or its employees. To the contrary, by allowing Coala to conserve precious operating capital, Coala and the former employees were the immediate beneficiaries of the actions taken by Aureus and Omni to alleviate expenditures that Coala would have otherwise had to make, for example, in the form of security deposits and insurance premiums, had the equipment been leased from someone other than Aureus and Omni. In addition, the following points may be made regarding each stipulation:
(1)Coala did not provide evidence of insurance to Aureus and Omni as is required under the lease agreements.
The fact that Coala did not provide evidence of insurance to Aureus and Omni does not obviate the possibility that the property was actually insured either by Coala, Omni, or Aureus. Also, whether or not the property was insured should have been primarily the concern of Aureus and
Omni, and not Coala and the former employees. If Aureus and Omni did not insist on the property being insured, it was their investment at risk and not that of Coala.
(2) Neither Aureus nor Omni filed a UCC-1 statement covering the property.
Article 9 of the Uniform Commercial Code applies to security interests; not to leases.
(3) Coala did not pay security deposits to Aureus and Omni.
Once again, Coala and the former employees were the immediate beneficiaries of the fact that only de minimis security deposits of $1.00 were required under the lease contract.
(4) Neither Aureus nor Omni listed the property with the Lawrence Counly tax assessor.
The relevance of this stipulation to the former employees’ arguments is not apparent.
. The statute has been repealed and replaced by Ala.Code § 10-2B-15.01(a), which, for purposes relative to the issues addressed in this opinion, is identical to the previous statute.
. The statute has been repealed and replaced by Ala.Code § 10-2B-15.02(a), which provides as follows:
A foreign corporation transacting business in this state without a certificate of authority or without complying with Sections 40-14-1 through 40-14-3, 40-14-21, or 40-14-41 may not maintain a proceeding in any court in this state until it obtains a certificate of authority, complies with Sections 40-14-1 through 40-*89814-3, Section 40-14-21 and Section 40-14 — 41, and discharges its liability under subsection (d) hereof.
. See, e.g. North Alabama Marine, Inc. v. Sea Ray Boats, Inc., 533 So.2d 598 (Ala.1988) (foreign corporation could enforce in Alabama courts purchase money security interest in inventory even though not qualified to do business in Alabama); Billions v. White and Stafford Furniture Co., 528 So.2d 878 (Ala.Civ.App.1988) (foreign corporation could enforce in Alabama courts retail installment contract even though not qualified to do business in Alabama); Loudonville Milling Co. v. Davis, 251 Ala. 459, 37 So.2d 659 (1948) (contract to sell flour by foreign corporation not qualified to business in Alabama which was shipped in carload lots to foreign *899corporation, at its Alabama warehouse and sold to Alabama distributors for resale was "interstate” commerce); Watkins v. Goggans, 242 Ala. 222, 5 So.2d 472 (1941) (foreign corporation whose business consisted of sales by way of orders sent to its place of business outside of the state, where they were accepted or rejected, and if accepted the orders were filled and the goods shipped into Alabama could maintain contract suit in Alabama courts even though not qualified to do business in Alabama).
. The case cited and relied upon by the former employees, Allstate Leasing Corp. v. Scroggins, 541 So.2d 17 (Ala.Civ.App.1989), does not compel a different conclusion on either issue. The court in Allstate found that the equipment lessor in that case was engaged in intrastate business because it “had owned within this state on a routine and ongoing basis many machines which it had leased to Alabama residents, and the continuing ownership of those machines in Alabama is an indispensable part of Allstate’s primary business activity.” 541 So.2d at 18. Furthermore, the action brought by the lessor in Allstate was for breach of the lease, and not to recover possession of the property. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492081/ | *10DECISION ON CROSS MOTIONS FOR SUMMARY JUDGMENT
WILLIAM C. HILLMAN, Bankruptcy Judge.
Four limited partners of Belle Isle Limited Partnership (“BI”) (“Plaintiffs”) commenced these adversary proceedings on their own behalf as well as derivatively on behalf of BI,1 against BI’s three general partners, Edward G. LeRoux, Jr. (“LeRoux”), Albert F. Curran, Sr. (“Curran”), and Summit Investment and Development Corporation (“Summit”) (collectively “Defendants”). The complaint seeks a determination of the amount and non-dischargeability of certain debts.
In particular, the complaint seeks relief for
Count I: Breach of fiduciary duty
Count II: Constructive trust
Count III: Breach of contract
Count IV: Breach of implied contract; unjust enrichment
Count V: Negligence
Count VI: Fraud
Count VII: Securities fraud (M.G.L. c. 110A)
Count VIII: Promissory estoppel
Count IX: Waste of partnership assets
Count X: Deceptive practices (M.G.L. c. 93A)
Count XI: Dischargeability (11 U.S.C. § 523(a)(2)(a))
Count XII: Dischargeability (11 U.S.C. § 523(a)(4))
Count XIII: Dischargeability (11 U.S.C. § 523(a)(6))
LeRoux and Curran, as noted in the caption, are debtors in Chapter 11 cases currently pending in this Court.2 Summit is not a debtor.3
On February 24, 1993 I ordered the two adversary proceedings consolidated. The matter is now before me on cross motions for summary judgment.
Fed.R.Civ.P. 56, made applicable to adversary proceedings by Fed.R.Bankr.P. 7056, governs motions for summary judgment. It provides that
“The judgment sought shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.”
The burden of proof to demonstrate entitlement to summary judgment is upon the moving party in the first instance. In re Wang Laboratories, Inc., 155 B.R. 289, 290 (Bankr.D.Mass.1993). To defeat the motion, the opposing party must produce substantial evidence of a genuine dispute as to a material fact. Darr v. Muratore, 8 F.3d 854, 859 (1st Cir.1993); Hahn v. Sargent, 523 F.2d 461, 464 (1st Cir.1975), cert. denied 425 U.S. 904, 96 S.Ct. 1495, 47 L.Ed.2d 754 (1976). A material fact is one which has the “potential to affect the outcome of the suit under applicable law.” Federal Deposit Insurance Corp. v. Anchor Properties, 13 F.3d 27, 30 (1st Cir.1994) (quoting Nereida-Gonzalez v. Tirado-Delgado, 990 F.2d 701, 703 (1st Cir.1993)).
In making its determination, the court “must view the record in the light most favorable to the party opposing the motion, and must indulge all inferences favorable to that party.” Oliver v. Digital Equipment Corp., 846 F.2d 103, 105 (1st Cir.1988).
Defendants’ Motion
LeRoux and Curran base their motion upon two theories: First, that this adversary proceeding was not commenced within the prescribed period of the applicable statute of *11limitations.4 Second, that plaintiffs cannot prove essential elements of their claim.
A. Statute of Limitations
Plaintiffs’ complaint arises from allegedly false representations made by Curran and LeRoux in a Confidential Offering Memorandum dated June 9, 1986, and a Supplement to Confidential Offering Memorandum dated December 1, 1986. Amended Comp. ¶20. Plaintiffs allege that they purchased their limited partnership interests “in reasonable reliance on the specific representations made in the Supplement”, Id. ¶24, which representations, it is alleged, “were false”. Id. ¶ 25.
Plaintiffs became investors on August 1, 1986. LeRoux Ajf., Ex. C. Plaintiffs appear to concede that the operative event for limitations purposes was the purchase. However, they allege that they “did not know, and should not reasonably have known” of the falsity of certain representations “until December 14, 1989 at the earliest”, Amended Comp. ¶¶ 34, 48, 48, and of others until “early 1993”, Id. ¶ 43, or “late 1992 or early 1993”, Id. ¶ 54, 56,5 and hence the statute should not run until the date of discovery. Curran and LeRoux contend that the commencement of the running of the statute was much earlier.
A discussion of the evidence of record applicable to the factual determination will follow.
It is necessary in the first instance to determine when the state statute of limitations ran as to each count, for the estate has the benefit of that statute as against the plaintiffs. 11 U.S.C. § 558. The only state involved in this case is Massachusetts.
Massachusetts has two statutes of limitations with broad application. M.G.L. e. 260 § 2 requires that
“Actions of contract, other than those to recover for personal injuries, founded upon contracts or liabilities, express or implied ... shall, except as otherwise provided, be commenced only within six years next after the cause of action accrues.”
Section 2A of the same chapter provides that
“Except as otherwise provided, actions of tort, actions of contract to recover for personal injuries, and actions of replevin, shall be commenced only within three years next after the cause of action accrues.”
The present adversary proceeding was filed February 10,1993. As noted, August 1, 1986 was the date at which the plaintiffs became investors. If that date is determinative, and the three year tort statute applies, the limitation period would have expired on August 1, 1989. If the six year contract statute is the law to be applied, the period expired on August 1, 1992, a half year prior to the filing of this adversary proceeding.
Thus, whichever statute is applicable, plaintiff’s claims which are subject to the limitations of the quoted statutes are barred unless the commencement of the limitations period is extended.
Massachusetts eases recognize a limited discovery rule to create a later starting date for the limitations computation. The cases are well summarized, as to both tort and contract claims, in International Mobiles Corp. v. Corroon & Black/Fairfield & Ellis, Inc., 29 Mass.App.Ct. 215, 560 N.E.2d 122 (1990). As to negligence claims, the rule is as follows:
“In the general run of cases, negligence actions accrue when the accident happens and a person is injured. ... When negligence and harm are inherently unknowable, as in the case of an undiagnosed and asymptomatic disease, the running of the three-year limitations period begins ‘on the happening of an event likely to put the plaintiff on notice.’ ... Notice here refers not to discovery of every fact necessary to prevail on the claim, but rather to discovery of the plaintiff’s injury as causally connected to the defendant’s negligence. ... The plaintiff receives notice, and the statu*12tory period begins to run, when the plaintiff knows or reasonably should have known that it sustained appreciable harm as a result of the defendant’s negligence.”
29 Mass.App.Ct. at 222, 560 N.E.2d at 126. (Citations omitted).
In contract actions, the rule is similar:
“There are, however, situations in which a cause of action for breach of contract is not capable of being discovered because it is based on an ‘inherently unknowable’ wrong. In those case, the ‘discovery rule’ tolls the accrual date of the statutory period until the injured party knows or should know the facts giving rise to the cause of action. The discovery rules has been applied in breach of contract claims in those cases involving the rendering of professional services where a client would not be expected to retrace the professional’s steps nor be able necessarily to recognize the professional negligence should the client come across it. ... The inherently unknowable wrong must be incapable of detection by the wronged party through the exercise of reasonable diligence.” Id.
1. Counts I, III and V
These counts deal with alleged violations by the defendants of their duties as general partners owed to the plaintiffs. While Count V is worded in terms of negligence, it is the negligent performance of the general partners’ duties which is challenged. A partnership agreement in Massachusetts forms an association by voluntary contract. Curran I at 509. I must look at “the essential nature of the plaintiffs claim in determining what statute of limitations to apply. Palandjian v. Pahlavi, 614 F.Supp. 1569, 1577 (D.Mass.1985), aff'd 808 F.2d 1513 (1st Cir.1986) (TABLE), cert. denied 481 U.S. 1037, 107 S.Ct. 1974, 95 L.Ed.2d 814 (1987), citing Hendrickson v. Sears, 365 Mass. 83, 85, 310 N.E.2d 131 (1974). While I find support for the proposition that the alleged violations are contractual in nature and the six year statute applicable, see Fedder v. McClennen, 1994 WL 568734, *2 (D.Mass.1994), Kirley v. Kirley, 25 Mass.App.Ct. 651, 653, 521 N.E.2d 1041 (1988), it is possible that the Massachusetts courts would regard the claim as sounding in tort. See Pagliuca v. City of Boston, 35 Mass.App.Ct. 820, 626 N.E.2d 625 (1994) and eases cited.
The answer to that problem is academic. Whether Counts I, III and V are regarded as sounding in negligence or contract, the limitations period will begin to run later than the happening of the initial event only if a two part test is satisfied. First, the negligence or breach and the harm must be “inherently unknowable.” Second, the period commences when the plaintiff “knows or reasonably should have known” of the negligence or breach.
To meet the first element of the test, Plaintiffs must show that the inherently unknowable wrong was incapable of detection through the exercise of reasonable diligence. International Mobiles, supra.
After reviewing the pleadings and the affidavits attached thereto, I find as a matter of law that, on the facts of this case, Plaintiffs cannot meet this burden. There is ample evidence that the Plaintiffs were capable of detecting the wrong through the exercise of reasonable diligence.
The Third Amended and Restated Agreement of Limited Partnership provided in Article IV, Section 4.7(iv) that
“Each Limited Partner, or his authorized agent, shall have the right to examine all of the books and financial records of the Partnership at the principal office of the Partnership upon reasonable advance notice and only during the normal business hours of the Partnership.”
Plaintiffs knew of this provision. During his deposition, Arthur J. Triglione responded affirmatively to the question, “You knew that under the partnership agreement, you could look at any books and records of the partnership on reasonable notice?”. He also responded affirmatively to the questions regarding whether he was entitled to review any documents or ask any questions he wanted. Deposition of Arthur J. Triglione, September 23, 1994, page 48.
In his deposition, William J. McMillan testified that he knew that the partnership agreement gave him the authority to exam*13ine the books and records at reasonable times. He farther testified that he never availed himself of this right. Deposition of William J. McMillan, October 18, 199k, page 67.
I do not have such explicit testimony with regard to Richard C. Bane. In one excerpt, however, Mr. Bane does indicate that he is familiar with the terms of the Partnership Agreement. Deposition of Richard C. Bane, October 18, 1994, page 138.
In addition to the provisions of the Partnership Agreement, the Plaintiffs had the right to inspect the records of BI pursuant to Mass.Gen.L. Ch. 109 § 21.6
Lastly, there is ample testimony that several meetings were held by the general partners which the Plaintiffs attended and at which they were afforded the opportunity to ask any questions that they might have about the partnership.
Even affording the Plaintiffs the benefit of all favorable inferences, I find as a matter of law that Plaintiffs are not entitled to the benefit of the discovery rule and these counts are barred by the applicable statute of limitations.
2.Count II
This count alleges breach of fiduciary duty and seeks to impose a constructive trust as a remedy, operative upon certain assets which the defendants acquired “for themselves in breach of their fiduciary duty.” Amended Comp. ¶ 64. This claim is subject to the six year limitation period. See Brodeur v. American Rexoil Heating Fuel Co., Inc., 13 Mass.App.Ct. 939, 940, 430 N.E.2d 1243, 1245 (1982) and cases cited.
The complaint contains no facts, no matter how favorably construed in favor of Plaintiffs, from which I could even infer that certain assets were improperly acquired by Defendants, or when those assets were transferred. The allegations arise from the assertion that
“The failure of the General Partners to sell additional Units was motivated by self-interest in breach of their fiduciary duty, since under the Partnership Agreement, any unsold Units would inure to the benefit of the General Partners in obtaining shares of profits and distributions.”
Amended Comp. %k%.
I cannot find any basis in that assertion to support the view that Plaintiffs’ rights, if any they have under their averment, were such that Plaintiffs should have the benefit of the discovery rule, for the reasons stated with regard to the previously discussed counts. Defendants’ lapses could have been discovered through the use of ordinary diligence.
3. Count IV
Count IV seeks relief for breach of an implied contract and for unjust enrichment. In such actions, the statute of limitations applicable to actions at law apply. Desmond v. Moffie, 375 F.2d 742, 743 (1st Cir.1967); Palandjian v. Pahlavi, supra. There is no basis for differentiating this count from the others previously discussed.
4. Count VI
Count VI is a tort count for fraud, based upon representations made at the time Plaintiffs invested their funds. It is barred by the statute of limitations for the reasons stated above.
5. Count VII
Count VII alleges securities fraud in violation of M.G.L. c. 110A. Actions under that chapter must be commenced not more than “four years after the discovery by the person bringing the action of a violation.” M.G.L. c. 110A § 410(e).
There is no case law to help me determine whether the Supreme Judicial Court would *14rule that “discovery” under § 410(e) is the same concept as the exacting common law rule considered earlier in this opinion.7 I have considered without enlightenment cases decided under a variety of statutes, and no point would be served in setting forth the results of that exercise here. Suffice it to say that I can find no reason to espouse a difference in approach. I hold that the Supreme Judicial Court would use its common law approach to the meaning of “discovery” in interpreting c. 110A.
Having arrived at that point, I find that the evidence reviewed above compels the conclusion that Plaintiffs knew of the alleged violations of the securities laws prior to four years before February 10, 1993.
6. Count VIII
Count VIII purports to invoke promissory estoppel and seems to ask that the promises made be enforced. Amended Comp. ¶ 95. However, a fair reading of the entire count indicates that it is a restatement of the breach of contract claims made earlier in the complaint and discussed earlier in this opinion. It is barred by the statute of limitations.
7. Count IX
Count IX is entitled “waste of partnership assets” and seeks both damages for waste and an accounting. The latter is not an appropriate matter for litigation in this adversary proceeding. The former, however, could relate to activities at any time during the life of the partnership. But the same activities which are the basis of the other counts are relied upon here, and I find that the alleged waste constitutes a breach of the limited partnership agreement and is time barred as well.
8. Count X
Count X alleges a violation of M.G.L. c. 93A, §§ 2 and 11 through “misrepresentations in connection with the offer and sale of the [partnership] Units.” This misrepresentation would have occurred at the time of the sale, August 1, 1986. Since the applicable statute of limitations is four years, M.G.L. c. 260 § 5A, the action is time barred. It is true that the accrual date is determined by tort principles, which would include the discovery rule. Paterson-Leitch Co. v. Massachusetts Mun. Wholesale Elec. Co., 840 F.2d 985, 994 (1st Cir.1988); International Mobiles, supra. Nonetheless, the time has passed for this as of the other tort claims.
9.Counts XI, XII and XIII
These counts challenge the discharge-ability of Plaintiffs’ claims under 11 U.S.C. §§ 523(a)(2), (a)(4), and (a)(6). Of course, grounds for non-dischargeability must rest upon a valid cause of action. As I have held that all of Plaintiffs’ claims are barred by the applicable statutes of limitations, there is nothing upon which these counts could operate, and summary judgment is an appropriate disposition of them.
Plaintiffs’ Cross-Motion
Since I have held that Defendants’ motion for summary judgment is sustained as to each of the counts of the amended complaint, Plaintiff’s cross-motion must be denied.
Conclusion
A separate order will enter granting Defendants’ and denying Plaintiffs motions for summary judgment.
ORDER
For the reasons set forth in the accompanying decision:
1. Defendants’ Motion for Summary Judgment is GRANTED.
2. Plaintiffs’ Motion for Summary Judgment is DENIED.
. I have upheld the case as a derivative action. Bane v. LeRoux (In re Curran), 157 B.R. 500, 506 (Bankr.D.Mass.1993) ("Curran I").
. The effect of bankruptcy filings on the status of Curran and LeRoux as general partners is discussed in Summit Inv. & Dev. Corp. v. LeRoux (In re LeRoux), 167 B.R. 318 (Bankr.D.Mass.1994), aff'd B.A. No. 11251-DPW, 1995 WL 361500 (D.Mass. Oct. 21, 1994).
.I have previously held that I have jurisdiction over Summit in this proceeding. Curran I at 504. That jurisdiction, of course, only extends to a determination of the amount due from it.
. I have previously held only that the amended complaint “alleges dates within the limitations period as to each count.” Curran I at 506.
. There are no allegations which would make applicable the extended "fraudulent concealment” statute of limitations of M.G.L. c. 260 § 12.
. Mass.Gen.L. ch. 109 § 20 states:
Each limited partner has the right to:
(1) inspect and copy any of the partnership records required to be maintained by section five ["Records"], and
(2) obtain from the general partners from time to time upon reasonable demand (I) true and full information regarding the state of the business and financial condition of the limited partnership, (ii) promptly after becoming available, a copy of the limited partnership's federal, state and local income tax returns for each year, and (iii) other information regarding the affairs of the limited partnership as is just and reasonable.
. The notes to § 410 in Massachusetts General Laws Annotated state that it is "similar to” § 410 of the Uniform Securities Act (1956), but in this respect reference to the Uniform Act is not helpful. The latter statute has a limitation of "two years after the contract of sale.” The Massachusetts version is a non-uniform amendment and hence cases under the Uniform Act will not be helpful. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492082/ | ORDER DENYING DEBTOR’S MOTION TO DISQUALIFY
ARTHUR N. VOTOLATO, Bankruptcy Judge.
Before the Court is the Debtor’s 28 U.S.C. § 455 request that the undersigned “be disqualified in the within proceedings,” on the ground that our March 10, 1995, Order regarding attorney’s fees “casts a cloud of partiality over these proceedings.” This is so, the Debtor argues, because the denial of the fee application of Miller, Scott, Howe & Kelly, without prejudice, also provided that “[t]he movant is free to file a request for fees under 11 U.S.C. § 503(b) in the bankruptcy proceeding.” Although the Movant makes no specific reference to the sub-section under which disqualification is sought, we assume it is one of the following:
(a) Any justice, judge, or magistrate [judge] of the United States shall disqualify himself in any proceeding in which his impartiality might reasonably be questioned.
(b) He shall also disqualify himself in the following circumstances:
(1) Where he has personal bias or prejudice concerning a party, or personal knowledge of disputed evidentiary facts concerning the proceeding.
28 U.S.C. § 455.
The standard to be applied under § 455(a) is
whether the charge of lack of impartiality is grounded on facts that would create a reasonable doubt concerning the judge’s impartiality, not in the mind of the judge himself or even necessarily in the mind of the litigant filing the motion under 28 U.S.C. § 455, but rather in the mind of the reasonable man.
United States v. Cowden, 545 F.2d 257, 265 (1st Cir.1976), cert. denied, 430 U.S. 909, 97 *29S.Ct. 1181, 51 L.Ed.2d 585 (1977); United States v. Martorano, 620 F.2d 912, 919 (1st Cir.), cert. denied 449 U.S. 952, 101 S.Ct. 356, 66 L.Ed.2d 216 (1980); United States v. Mirkin, 649 F.2d 78, 82 (1st Cir.1981); In re Casco Bay Lines, Inc., 17 B.R. 946, 952-53 (1st Cir. BAP 1982). “In essence section 455(a) allows a judge to disqualify himself if a reasonable [person] would have factual grounds to doubt the impartiality of the court.” Blizard v. Frechette, 601 F.2d 1217, 1220 (1st Cir.1979). Under § 455(b)(1) the “ ‘reasonable [person]-reasonable factual basis’ test is not applicable [rather,] § 455(b)(1) ... requires a showing of personal bias or prejudice or personal knowledge of disputed facts, which has been obtained extra-judicially.” In re Casco Bay Lines, 17 B.R. at 953. After considering the Debtor’s argument, as well as the entire case record, we are aware of no factual basis upon which a reasonable person, after weighing all of the facts, would question the impartiality of the Court.1
For example, in reviewing the request as filed, the Court clearly had authority to treat the Miller, Scott, Howe & Kelly fee application as one under 11 U.S.C. § 503(b), and could have made an award accordingly. See e.g. In re Concretera Abreu, Inc., BK No. B-81-00244 (Bankr.D.P.R. May 26, 1995) (treating motion for reconsideration as application for final compensation); In re Dawson, 185 B.R. 406 (Bankr.D.R.I.1993) (construing creditors’ objection to Chapter 13 Plan as a § 523(c) dischargeability complaint, capable of amendment); In re Michaels, 157 B.R. 190 (Bankr.D.Mass.1993) (treating a motion for relief from stay as a motion for determination that the stay does not apply to garnishment proceeding, and as a complaint seeking a determination that a debt is excepted from discharge), MacDonald v. Tack (In re MacDonald), 164 B.R. 325, 330 (Bankr.C.D.Cal.1994) (court sua sponte avoided transfer under 11 U.S.C. § 544(a)(3)).
However, in fairness (we thought) to both parties, we denied the application, without prejudice, and, as we have routinely done in other cases, referenced the statutory basis for the applicant to re-file its fee request. See e.g. Williams v. United States (In re Williams), 181 B.R. 1, 5 (Bankr.D.R.1.1995); Pare v. Natale (In re Natale), 174 B.R. 362, 365 (Bankr.D.R.1.1994) (holding, sua sponte, that Plaintiffs may be entitled to attorney’s fees and expenses for having to needlessly persue the Debtor to collect insurance proceeds); In re Corporacion de Servicios Medico-Hospitalarios de Fajardo, Inc., 155 B.R. 1, 3 (Bankr.D.P.R.1993). This is the first such complaint we have had, but will of course discontinue that practice forthwith, if advised by the District Court that it is improper.
In addition, the Debtor has not alleged any personal bias or prejudice by the Court which was obtained extra-judieially. See In re Casco Bay Lines, 17 B.R. at 953. Overall, this pleading is unsupported and frivolous, and qualifies for the imposition of sanctions under Rule 9011, but which will be overlooked in this instance, not to exacerbate what appears to be a hyper-sensitivity on the part of the Debtor, which we feel is unwarranted.
In this adversary proceeding the Court has merely decided, after a thoroughly contested hearing, that the Debtor was wrong on the merits, and that opposing counsel is entitled to compensation, in some amount. The Court has no ill will towards the Debtor or her attorney. Neither do we believe, however, that any litigant should be able to choose his/her judge, or to switch judges, simply by rhetorically suggesting the possible existence of “clouds of impartiality.” Here, we would be encouraging that strategy, and would abdicate our judicial responsibilities if we acceded to the Debtor’s request.
For the foregoing reasons, the Debtor’s Motion to Disqualify is DENIED.
. While this is without doubt a self-serving conclusion by the Court, we: (1) believe it is correct; and (2) see no alternative, except to grant the Debtor's motion, without any questions. We may not do this, however, for the reasons contained herein. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492084/ | DECISION ON MOTION TO EXPUNGE OR REDUCE NEW YORK STATE REAL PROPERTY GAINS TAX AS NOT ENTITLED TO PRIORITY STATUS PURSUANT TO 11 U.S.C. SECTION 507(a)(8)
DOROTHY EISENBERG, Bankruptcy Judge.
This matter is before the Court pursuant to a motion by E. Thomas Williams, Jr. (the “Debtor”) to expunge and/or reduce the claim of the New York State Department of Taxation and Finance (the “Department of Taxation”) for, inter alia, amounts owed under the New York State Real Property Gains Tax (Article 31-B, Tax Law § 1440 et seq.) (the “Gains Tax”). The Debtor objected to the portion of the proof of claim relating to the Gains Tax on several grounds. In supplemental briefs and at oral argument, the Debtor raised the threshold issue of whether the Gains Tax is to be properly classified as a priority tax pursuant to 11 U.S.C. Section 507(a)(8)(A)1, or whether the amount due should be treated as a general unsecured claim. In a prior decision dated October 28, 1994, the Court concluded that the Gains Tax is a tax “on or measured by income”. The issue remaining is whether the timing of the assessment is within the statutory limitation pursuant to 11 U.S.C. Section 507(a)(8)(A)(i), (ii) or (iii) of the Code.
FACTS
In October 1982, the Debtor purchased shares to approximately 690 apartments in the cooperative known as Fordham Hill. The Debtor then commenced the sale of these cooperative apartment units which continued until July 1991. In accordance with the Gains Tax, real property owners who sell real property in excess of $1,000,000.00 consideration are liable for a tax equal to ten percent of the gain. The gain is calculated by subtracting the original purchase price from the actual selling price of the property being transferred.
According to the Department of Taxation’s proof of claim, the Gains Tax in the amount of $1,101,247.00 became due on May 12,1983. On October 18,1989, the Department of Taxation issued a Statement of Proposed Audit Adjustment to the Debtor relating to the sale of the Fordham Hill apartments. On or about October 30, 1989, the Debtor responded to the estimated Statement of Proposed Audit Adjustment, which commenced the assessment process. After obtaining additional information from the Debtor, a Statement of Proposed Audit Adjustment was prepared based on actual audit results by the Department of Taxation on November 14, 1990. *45Subsequently, on January 25, 1991, the Department of Taxation issued a Notice of Determination which assessed the Debtor’s tax arrears (Exhibit D, Affidavit of Department of Taxation to Motion). The Notice of Determination provided as follows:
“NOTE: You must file a Request for Conciliation Conference or a Petition For a Tax Appeals Hearing by 04/25/91.... If we do not receive a response to this notice by 04/25/91: This notice will become finally and irrevocably fixed and subject to collection action.”
The Debtor conceded that the Gains Tax was due and owing to the Department of Taxation. As a result, the Debtor did not file a Petition For a Tax Appeals Hearing. However, the Debtor did question the method employed to determine the amount of the tax and penalty assessed, and thus filed a Request For a Conciliation Hearing on April 24,1991, to determine the proper method for calculating the Gains Tax due. On March 11, 1992, a Conciliation Conference was held between the Debtor and the Department of Taxation and a Conciliation Order was issued sustaining the assessment on July 10, 1992. On July 8, 1992, an involuntary petition under Chapter 7 was filed against the Debtor. This involuntary petition was vehemently disputed, and several contested hearings were scheduled and held before an order for relief could be entered. No order for relief was ever issued with respect to the involuntary petition. However, on September 8, 1992, the Debtor converted the involuntary case into a voluntary Chapter 11 ease.
On July 10, 1992, the Conciliation Order was issued post-petition. On October 8, 1992, the Debtor petitioned for a Division of Tax Appeals (“DTA”) hearing, which was suspended due to the pending Chapter 11 case. On September 8, 1992, the Debtor filed the instant objection to claim.
DISCUSSION
Bankruptcy Code Section 507 deals with priorities. Pursuant to Section 507(a), the following expenses and claims have priority in the following order:
(8) Eighth, allowed unsecured claims of governmental units; only to the extent that such claims are for—
(A) a tax on or measured by income or gross receipts—
(i) for a taxable year ending on or before the date of the petition for which a return, if required, is last due, including extensions, after three years before the date of the filing of the petition;
(ii) assessed within 240 days, plus any time plus 30 days dining which an offer in compromise with respect to such tax that was made within 240 days after such assessment was pending, before the date of the filing of the petition; or
(iii) other than a tax of a kind specified in section 523(a)(1)(B) or 523(a)(C) of this title, not assessed before, but assessable, under applicable law or by agreement, after, the commencement of the case;
The Department of Taxation has taken the position that no final assessment of the Debtor’s Gains Tax liability had taken place as of the date of the filing of the petition, and therefore the Gains Tax liability falls within Section 507(a)(8)(A)(iii) of the Bankruptcy Code. The Debtor, on the other hand, asserts that the Gains Tax was assessed by the Department of Taxation on January 25, 1991, and that the time to file a Petition for an Appeals Hearing terminated 90 days thereafter, or April 25, 1991. Since the Debtor only requested a Conciliation Conference prior to the April 25,1991 termination date, and did not dispute that Gains Tax was owed, the assessment became final on April 25, 1991, which is more than 240 days preceding the filing of the petition. The Debtor also asserts that Subsection (iii) is limited in applicability to late filed or fraudulent tax returns, due to the references to Section 523(a)(1)(B) and (a)(1)(C) of the Code. Therefore, the Debtor argues that none of the three subsections of Section 507(a)(8)(A) of the Bankruptcy Code apply to the Gains Tax in question. The Debtor misinterprets the controlling statutes.
*46Section 507(a)(8)(A)(iii) of the Code, as the subsection upon which the Department of Tax is relying, is the focus of this decision. At the outset, the Debtor is operating under the false impression that this subsection only applies to late filed or fraudulent tax returns. However, Subsection (iii) clearly exempts these from consideration. See In re Treister, 52 B.R. 735, 738 (Bankr.S.D.N.Y.1985). Therefore, the applicability of this subsection turns on a different issue, which is the date of “assessment” of the Gains Tax. Although the Bankruptcy Code contains no definition of the term “assessed”, an assessment has been described as “a formal, discrete act with specific legal conse quences.” In re King, 122 B.R. 383, 385 (9th Cir. BAP 1991), aff'd, 961 F.2d 1423 (9th Cir.1992), quoting Clark v. United States (In re Heritage Village Church and Missionary Fellowship), 87 B.R. 401, 403 (D.S.C.), aff'd, 851 F.2d 104 (4th Cir.1988). In order to make the determination of when the tax has been assessed, reference must be made to the specific tax code in question. In re King, 122 B.R. at 385. In the ease of the Gains Tax, the date of assessment is governed by New York State Tax Law Sections 1444(1) and 170(3-a)(b). The Notice of Determination stated on its face, in accordance with New York Tax Law Section 1444(1), that the Debtor has 90 days within which to protest the Notice of Determination. By its terms, the Notice of Determination could not have been “final” until April 25,1991, when the 90 days had expired.
If the Debtor had taken no further action, the Gains Tax would have been assessed as of April 25, 1991, which date is more than 240 days prior to the July 8, 1992 involuntary petition date.2 This would have taken the Gains Tax out of the purview of Section 507(a)(8)(A) of the Code, rendering the Gains Tax liability an unsecured, non-priority claim. However, the Debtor took the step of requesting a conciliation conference on April 24, 1991, prior to the date the assessment was to be imposed. Under Tax Law Section 170(3-a)(b), “notwithstanding any provision of law to the contrary, [a request for conciliation conference] shall suspend the running of the period of limitations for the filing of a petition protesting [a Notice of Determination] and requesting a hearing.” The conciliation conferee has the authority to “waive or modify penalty, interest and additions to tax.” Tax Law Section 170(3-a)(c). The Debtor made a request for a Conciliation Conference on April 24, 1991. This request suspended the time period for the Debtor to protest the Notice of Determination past the April 25, 1991 date. This suspension occurred even though the Debtor objected only to the method of calculation, and not to the imposition of the Gains Tax itself.
As a result of the request for a Conciliation Conference, a Conciliation Order was issued on July 10, 1992. Tax Law Section 170(3-a)(e) provides that a conciliation order is binding on both the taxpayer and the Department of Tax unless the taxpayer “petitions for a Divisions of Tax Appeals [DTA] hearing within ninety days after the conciliation order is issued, notwithstanding any other provision of law to the contrary.” It should be noted that unless issuance of the Conciliation Order dated July 10,1992 constituted merely a ministerial act, the Conciliation Order is either void or voidable as it was issued post-petition. See Rexnord Holdings v. Bidermann, 21 F.3d 522, 527-28 (2d Cir.1994). On October 8,1992, the last day to do so, the Debtor petitioned for a DTA hearing. As the Debtor petitioned for a DTA hearing post-petition, the Department of Tax could do nothing further to finalize the assessment process. Section 362(a) of the Bankruptcy Code prohibited the assessment process from continuing. However, the Department of Tax did file a proof of claim in this case seeking priority status. As a result of the Debtor’s request, the Gains Tax remains assessable today, and meets the requirements for priority status as enunciated in Section 507(a)(8)(A)(iii) of the Code.
The reasoning set forth above is in accordance with the case law on this issue. As *47stated by the Bankruptcy Appellate Panel for the Ninth Circuit in In re King, 122 B.R. at 387, the actual tax assessment cannot occur until it is “final” as determined by the relevant statute. In this case, the assessment becomes final only upon expiration of the time to contest the Notice of Determination. As stated in the Notice of Determination, the determination does not become irrevocably fixed until the deadline expires. Section 170(8-a)(b) of the Tax Law specifically provides that the time to file a petition protesting the determination is suspended upon the filing of the Notice of Conciliation.
In addition, as in the present ease, In re General Development Corp., 165 B.R. 691, 695 (S.D.Fla.1994) involved a Florida taxpayer who filed a challenge with the tax department to a notice of deficiency. The Southern District Court of Florida found that the relevant statute exempted any challenged portion of the tax deficiency from becoming an assessment which could be collected after the expiration of 60 days from the notice of deficiency. Once the Debtor protested the tax, the notice could not ripen into an assessment, until the taxpayer’s objections had been fully adjudicated in the appropriate action. This prevented the assessment from taking place for the purposes of Section 507(a)(8) of the Code.
To date, the Debtor’s objections to the Gains Tax remain to be fully adjudicated, and ultimately assessed. The hearing pursuant to the Debtor’s request, for which Debtor timely applied, has not yet commenced due to the filing of the involuntary Chapter 7 petition. Therefore, the Department of Tax has been precluded from finally assessing the amount due pursuant to the Gains Tax to date.
CONCLUSION
This Court has jurisdiction over the subject matter and the parties pursuant to 28 U.S.C. Sections 1334 and 157(a). This is a core matter pursuant to 11 U.S.C. Section 157(b)(2)(B).
This Court finds that the Gains Tax due from the Debtor falls within Section 507(a)(8)(A)(iii) of the Bankruptcy Code as it was not assessed before, but remained assessable after the commencement of this case. Such tax is entitled to priority status pursuant to § 507(a)(8) of the Bankruptcy Code.
Settle an order in accordance with this decision.
. Under § 304(c)(2) of the Bankruptcy Reform Act of 1994, H.R. 5116 (eff. October 22, 1994), priority of taxes, formerly governed by § 507(a)(7), is now governed by § 507(a)(8).
. The date of filing of the involuntary petition is the controlling date for the purposes of determining the applicability of § 507(a)(8)(A) of the Code, even though the Debtor later applied for conversion to Chapter 11. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492085/ | DECISION AFTER TRIAL
MICHAEL J. KAPLAN, Chief Judge.
This is a dischargeability proceeding under 11 U.S.C. § 523(a)(2)(B), which has been fully tried to the Court and submitted for decision. The following constitutes the Court’s findings of fact and conclusions of law as required by Fed.R.Civ.P. 52. The Court finds that the Plaintiff has failed to carry its burden of proving that the Debtor signed an incomplete loan application with “intent to deceive,” despite his recklessly not having read it.
Facts
The facts of this case are simple. The Debtor had an ongoing relationship with the credit union and went to the credit union, by appointment, to borrow an additional $1300 for automobile repairs. Because of his ongoing relationship with the credit union, and because of its automated system, he was not *49handed a credit application to fill out and sign. Rather, the loan officer called up his existing file on a video screen visible only to her. By her account, the loan officer set aside the usual thirty minutes for this appointment, during which she asked particular questions of the Debtor to confirm the information she had, entered the updated information into her computer, printed out the completed loan application, and handed it to the Debtor. Also by her account, she discussed the information contained therein with the Debtor and made sure he understood it and agreed with its completeness and accuracy, whereupon he signed it.1 Since his debt-to-income ratio as represented on the application was favorable, she approved the transaction, rolling over his existing account balance and extending the additional monies. She then went to the vault and prepared or obtained a check for the $1300 and gave it to him.
In fact, the application did not recite that a major circumstance had changed in his financial condition. He had bought a house, and now had mortgage payments to make. Had that been disclosed, his debt-to-income ratio would have dramatically changed, resulting in that loan officer’s inability to approve the loan. She would have had to refer the loan to the loan committee for further consideration, and the loan committee would have had to deny it pursuant to the credit union’s standard practice.
Issue
Although counsel for each side has ably addressed the myriad legal issues surrounding “false financial statement” litigation in those instances in which a debtor denies knowledge of the contents of the financial statement he signed, the Court believes the facts of this case to be peculiarly sui generis and finds there to be no need to address any of those legal issues, save one: whether a prospective borrower’s signing of a materially false financial statement ipso facto constitutes the reckless disregard or reckless indifference that fulfills the statutory requirement that the borrower have intended to deceive the creditor. 11 U.S.C. § 52S(a)(2)(B)(iv).
Discussion
Without hesitation, this Court reaffirms its finding in previous cases that fraud cases like this may never be decided against a debtor before examining the totality of circumstances.2 The fact that a debtor signs *50an inaccurate financial statement does not, of itself, inexorably lead to the conclusion that the debtor intended to deceive the creditor; and in the case at bar, that is all the creditor has proven.
Section 523(a)(2)(B)(iv) requires that the debtor have made or published a false financial statement “with intent to deceive” in order for a debt incurred in reliance thereon to be excepted from discharge. As noted below, the requisite intent may be inferred from the circumstances and may be found in the act of a debtor’s “reckless disregard” for the accuracy of the document.
Signing a loan application (as opposed to some other kind of statement of financial condition) is an act that should be visited with some degree of solemnity. Indeed, some might feel that a debtor’s signature on a false loan application should, of itself, make a prima facie case and should shift the burden of going forward to the debtor, as might be the effect of having acknowledged, sealed, or sworn when signing.
However, it was the very lack of solemnity with which some lenders approached the loan application process, that in 1978 nearly led Congress to abolish the false financial statement exception to discharge. As explained by Judge Spector in the ease of Security Federal Credit Union v. Carter (In re Carter), 78 B.R. 811, 816-18 (Bankr.E.D.Mich.1987), Congress had little regard for lenders who filled out loan applications for borrowers and then elicited the borrower’s signature in an atmosphere or environment that belittled the significance of the signature and application. Such lenders made a practice of not giving applicants enough space on the document to be complete or enough time to be accurate, telling applicants that the information contained on the incomplete or inaccurate application was not relevant because the lending decision would be made on a different basis, such as a credit report or income verification. Sometimes, the lender would suggest to the debtor that only “major” items need be included and numerous other obligations could be left out. But later, if bankruptcy ensued, the same lender would use the falsity in the application as a basis for threatening dischargeability litigation in order to obtain reaffirmation of the debt from the debtor who feared added legal costs.
It is clear that when Congress elected to retain the false financial statement exception, it knew that not every signed loan application that was incomplete was fraudulent; such applications were not always made “with intent to deceive.” Some, however, are made with ill intent, but because of the inherent difficulty of proving a debtor’s state of mind, it is only by some judicial construct like “reckless disregard” for the truth that the creditor is able to prove the intent element of § 523(a)(2)(B). “Reckless disregard” has earmarks: It may be found where the debtor comprehends the information addressed in the document and has no reasonable explanation for any misstatement; in a pattern of falsity in dealings with the creditor; in a lack of credibility before the Court3 (which might make the Court more inclined to find that there was a broader fraudulent scheme); where the debtor allows a self-interested third party to make representations on the debtor’s behalf (over the debtor’s signature) to the detriment of a disinterested potential lender,4 or other contexts. But it is the word “contexts” that is important. Although a debtor may not lightly discredit his or her own signature in defense of an allegation of fraud by false financial statement, the burden remains on the creditor to prove fraud by a preponderance of the evidence, and that requires a totality of circumstances amidst which the reckless disregard that be*51speaks the requisite intent to deceive may be found.
Beyond the sole legal issue already addressed, this is a case dependent strictly upon the sufficiency of proof, and the Court concludes that the Plaintiff has failed to prove its case by a fair preponderance of the evidence.
In almost every other instance within the knowledge of the Court wherein the debtor claimed not to have read the false application, more evidence was available to the creditor than is available to the creditor here to support the finding of reckless disregard tantamount to intent to deceive. But the creditor here, it appears, was in transition from a manual method of preparation of loan applications to an automated method. The method of preparing loan applications used at the time of the transaction at issue here was such as to virtually assure the Plaintiff that it would never be able to prove that when the Debtor signed the application, he knew that it was false and that he either intended to deceive or that he acted with reckless disregard that was tantamount to an attempt to deceive. With only very minor adjustments to this creditor’s method of preparing its loan applications, it will likely never again suffer the absence of proof that is fatal to its case today, as discussed below.
Under the facts of this ease, the only way that the credit union would be able to carry its burden of proof would be if the Debtor did not dispute them. This is because the procedure in use by the credit union causes this case to be of the same ilk as those which caused Congress, in 1978, to seriously consider abolishing the “false financial statement” exception to discharge.
In the present case, in which it is clear that the information on the loan application was placed on it by the loan officer, but where the Debtor denies having been asked any specific question about where he was living or what new debts he had incurred, how can the creditor possibly prove its version of the facts, short of successfully impeaching the Debtor’s credibility on the witness stand? When there is no proof of actual deceit and it is the word of the loan officer against the word of the debtor, will the debtor’s signature alone tilt the balance in the creditor’s favor? In light of the concerns of Congress, this question must be answered in the negative.
All the credit union has to do in order to prevail in this type of case is to adopt some procedure that would document the care with which the loan application was completed and checked with the borrower, thereby removing the transaction from the type of environment for which Congress expressed disdain. For example, if the credit union were to hand the computer generated loan application to a potential borrower and say, “Take it home, read it over, make sure it’s accurate and complete, and bring it back tomorrow and sign it when you come in,” that would probably suffice. Or if the applicant were required to initial the document at various strategic places thereon to demonstrate that attention had been called to critical elements such as address, place of employment, income, outstanding debts, and the like, the Court would be far less likely to believe a debtor who claims that he or she didn’t read the application, didn’t know of its falsity or incompleteness, or who claims that the loan officer treated the application as having little significance.
It also should be noted that unlike most loan applications, this one contained much complicated “fine print” at the signature line, rather than a bold caution to read the application completely and not sign it if there are any blanks or inaccuracies.
There may be other similar easy steps that could be taken to preserve the credit union’s ability to make a § 528(a)(2)(B) claim, or, if it chooses, it may make no changes at all, and forego § 523(a)(2)(B) claims unless it possesses some other, extrinsic evidence beyond the false application itself and the debtor’s signature.
The Complaint is dismissed on the merits. The Debtor’s request for attorney’s fees under § 523(d) is denied, as the Plaintiffs position was not without justification.
Judgment shall enter accordingly.
SO ORDERED.
. For his part, the Debtor testified that he was asked only one or two questions, the tenor of which was, “Is everything still the same?” Believing the question to be referring to the terms of the loan as compared with previous loan transactions, he answered that he guessed it was, and did not read the work product when asked to sign. Debtor says she overlayed and folded the documents so that only the signature lines were visible, and that he did not see or ask to see their substantive content. (Counsel for the Plaintiff calls this the "origami defense.”)
. This is the third in a series of "I signed it, but I didn't read it and didn't mean it” defenses raised before this Judge.
In the case of American Credit Services, Inc. v. Kabel (Jn re Kabel), 184 B.R. 422 (Bankr.W.D.N.Y.1992), the Court found for a self-employed debtor (a building contractor) who bought and financed more than thirty motor vehicles through the same dealer over a long period of time and who accepted the dealer's invitation (after ten or twelve such purchases and full repayments) to sign the subsequent financing applications in blank and let the dealer fill them out from information "on file.” At the time of his bankruptcy, three loans were outstanding, and his income had been materially overstated on the applications. The finance company in that case communicated only with the dealer, and as a matter of internal policy “never" would communicate with the borrower or independently verify income information that appeared to be consistent with the occupation listed on the application. I found the debtor’s explanation for signing “in blank” to be reasonable, and found no intent to deceive.
In the case of Buffalo Fire Department Federal Credit Union v. Butski (In re Butski), 184 B.R. 193 (Bankr.W.D.N.Y.1993), I found against a debtor who claimed that he did not know that the car loan in question was to be a secured loan, but who had signed a Department of Motor Vehicles form that clearly and conspicuously was a "Notice of Lien" form, and who clearly understood the operation of motor vehicle title and lien law in this state.
In the Kabel case I stated, "When it is not disputed that a loan application was signed by the Debtor, then the contents of the application should, in general, be attributable to the Debtor and entitled at least to great weight, and perhaps decisive effect.” Kabel at 425. Butski reiterated that view and added, "The fact that one does not read the documents he or she signs does not relieve him or her (absent a showing of special circumstances) from being charged with knowledge of their contents,” suggesting that such *50“special circumstances” might exist where the debtor "was deceived about the contents of what he was signing....” Butski at 195.
The present case continues the exploration of the general rule that holds a debtor accountable for his or her signature, and the special circumstances that may relieve the debtor of such accountability.
. See the analysis of reckless disregard as a means of inferring intent offered by Judge Berk in Hudson Valley Water Resources, Inc. v. Boice (In re Boice), 149 B.R. 40, 47-48 (Bankr.S.D.N.Y.1992).
. See Massey-Ferguson Credit Corp. v. Archer (In re Archer), 55 B.R. 174, 179 (Bankr.M.D.Ga.1985). But see In re Kabel, discussed supra note 1, where the third party was the lender's agent. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492086/ | REASONS FOR ORDER
JERRY A. BROWN, Bankruptcy Judge.
This matter comes before the court on the complaint of Stephen L. Read (“Stephen Read” or “debtor”) for a preliminary injunction. Patricia I. Read (“Patricia Read”) opposes the motion. The court has reviewed the record, memoranda, and applicable law. Accordingly, the motion is denied for the reasons stated below.1
I. FACTS
The ten year marriage of Stephen and Patricia Read was dissolved by a final judgment of dissolution of marriage issued in the 11th Judicial Circuit in and for Dade County, Florida (the “Florida court”) on April 26, 1988 issued in accordance with a settlement agreement (the “April 26, 1988 judgment”). (Ex. P-1). The April 26, 1988 judgment set lump sum alimony at $140,000 and periodic alimony at $5,060 per month for 36 months. (Id. at 1-2). With regard to the lump sum alimony, the judgment stated that the debt was “not dischargeable in any bankruptcy proceeding”. (Id. at 2).
In and around 1990, Stephen Read came under federal investigation for money laundering. In 1992, he was convicted on those charges and sentenced to federal prison. In December, 1994, he was moved to a half-way house, from which he is scheduled to be released in June, 1995.
Stephen Read filed the pending bankruptcy on April 10,1991 as a case under Chapter 11 of the Bankruptcy Code. The matter was converted to a Chapter 7 case on October 25, 1991. Patricia Read was listed as an unsecured creditor on the debtor’s schedules in amounts of $125,473.73 and $90,900.00. (Ex. P-2). An order of discharge was signed by the court on December 21, 1994. (Case No. 91-111433, PI. 145).
In 1993, Patricia Read filed a motion for contempt against the debtor in the Florida court for failure to pay alimony. After a trial on the merits2, the Florida court signed a judgment on November 2,1994 (the “November 2, 1994 judgment”) in favor of Patricia Read, finding the debtor in arrears to Patricia Read for alimony in the amount of $150,-699.00, and interest in the amount of $70,-651.00. (Ex. P-3; PI. 4, Ex. 3). The $150,-699.00 judgment amount is not broken down into lump sum or periodic alimony.
On December 28, 1994, Patricia Read filed Case No. 94-19903 in the Civil District Court for the Parish of Orleans, State of Louisiana, which seeks to make the November 2, 1994 judgment executory in Louisiana (the “Louisiana court”).
The debtor filed the pending adversary proceeding on April 6, 1995. The complaint seeks the following relief: (1) a preliminary injunction directing Patricia Read to immediately cease continuation of the suit pending in the Louisiana court; (2) a determination that the November 2, 1994 judgment be declared void and without effect; (3) a determination that the amount owed to Patricia Read for lump sum money is a debt dis-chargeable under 11 U.S.C. § 523; (4) Patricia Read be held in contempt of court for violating the automatic stay; (5) Patricia Read be required to pay all actual damages, *110including attorney’s fees incurred by the debtor in the Florida court; and (6) punitive damages of $125,473.73.
On April 12, 1995, the court signed a consent order: (1) preliminarily enjoining Patricia Read from continuing prosecution of the Louisiana court suit pending a hearing on the debtor’s preliminary injunction on April 17, 1995, and (2) enjoining the debtor from alienating or otherwise transferring any assets he owns in Louisiana until April 17, 1995. (PI. 3). On April 17, 1995, the court granted a preliminary injunction pending an evidentia-ry hearing to be held on April 25,1995. (PI. 5).
On April 25, 1995, the court held an evi-dentiary hearing on the debtor’s complaint for preliminary injunction. (PI. 8). The court also entered an order continuing the injunctions in effect pending further order of the court. (PI. 7).
II. ANALYSIS
A. Burden of Proof
Stephen Read seeks a preliminary injunction to restrain Patricia Read from proceeding against certain trust assets in Louisiana allegedly belonging to him pending a trial on the complaint to set aside and void the November 2, 1994 judgment.
Rule 65 of the Federal Rules of Civil Procedure applies to adversary proceedings in bankruptcy eases. Bankr.R. 7056. Rule 65 requires that four elements be present before a preliminary injunction may issue. First, the movant must establish a substantial likelihood of success on the merits. Second, there must be a substantial threat of irreparable injury if the injunction is not granted. Third, the threatened injury to the plaintiff must outweigh the threatened injury to the defendant. Fourth, the granting of the preliminary injunction must not disserve the public interest. Cherokee Pump & Equipment Inc. v. Aurora Pump, 38 F.3d 246, 249 (5th Cir.1994); Landmark Land Co. v. Office of Thrift Supervision, 990 F.2d 807, 810 (5th Cir.1993). A preliminary injunction is an extraordinary remedy, and should only be granted if the movant has clearly carried the burden of persuasion on all four elements. Cherokee Pump & Equipment, 38 F.3d at 249. The decision to grant a preliminary injunction is to be treated as the exception rather than the rule. Id.
B. Whether there is a substantial likelihood of success
The first element for issuance of a preliminary injunction is a substantial likelihood of success on the merits. The debtor argues that the November 2, 1994 judgment is void, and that the lump sum alimony awarded in the April 26, 1988 judgment is a dischargeable property settlement.3
Section 523(a)(5) of the Bankruptcy Code provides for nondischargeability of debts:
(5) to a spouse, former spouse, or child of the debtor, for alimony to, maintenance for, or support of such spouse or child, in connection with a separation agreement, divorce decree or other order of a court of record, determination made in accordance with State or territorial law by a governmental unit or property settlement agreement, but not to the extent that—
(B) such debt includes a liability designated as alimony, maintenance, or support, unless such liability is actually in the nature of alimony, maintenance, or support.
11 U.S.C. § 523(a)(5).
Patricia Read contends that the doctrine of res judicata applies to bar the debtor from asserting that the lump sum alimony is a dischargeable debt.
The doctrine of res judicata has four elements: (1) the parties must be identical in the two actions; (2) the prior judgment must have been rendered by a court of competent jurisdiction; (3) there must be a final judgment on the merits; and (4) the same cause of action must be involved in both cases. Eubanks v. Federal Deposit Ins. Corp., 977 F.2d 166, 169 (5th Cir.1992). Under the doctrine of res judicata, a party is barred from raising an issue in subsequent *111litigation if it was actually litigated, or could have been raised even if it were not litigated, in a prior action between the same parties. In re Weeks, 133 B.R. 201, 204 (Bankr.W.D.Tenn.1991). Thus, res judicata will give a preclusive effect to a judgment in foreclosing claims that were or could have been raised in earlier proceedings. Allen v. McCurry, 449 U.S. 90, 94, 101 S.Ct. 411, 414, 66 L.Ed.2d 308 (1980); Weeks, 133 B.R. at 204.
In the ease at bar, the first requirement is met because the parties in the Florida court proceedings and in this case are the same— Stephen Read and Patricia Read.
The second requirement is also met because the Florida court has competent jurisdiction to determine the amount of alimony owed by the debtor to Patricia Read. Indeed, it has long been the rule that the whole subject of domestic relations belongs to the law of the various states. In re Smith, 114 B.R. 457, 461 (Bankr.S.D.Miss.1990), citing, Simms v. Simms, 175 U.S. 162, 20 S.Ct. 58, 44 L.Ed. 115 (1899). Thus, the determination by the Florida court that the debtor is in arrears to Patricia Read on alimony payments was made by a court of competent jurisdiction.
The third element is complied with because the November 2, 1994 judgment entered by the Florida court was a final judgment on the merits.
The fourth element requires consideration of whether the same cause of action is involved in both cases. This question is a closer call. In the November 2, 1994 judgment, the Florida court found that the debtor was in arrears to Patricia Read in the amount of $150,699.00 “for alimony”, plus interest through October 28, 1994 of $70,-651.00, and interest at the rate of 12% per year from October 28, 1994. (Ex. P-3).
Patricia Read argues that the debtor should have raised the dischargeability defense in the Florida court, and that he is barred from raising it now.
In Brown v. Felsen, 442 U.S. 127, 99 S.Ct. 2205, 60 L.Ed.2d 767 (1979), the Supreme Court determined that in considering the dischargeability of a debt, the bankruptcy court was not confined to a review of a state court’s record and judgment in prior state court proceedings, and that res judicata did not apply. The Supreme Court reasoned that the dischargeability issues were not identical to those arising under state law, so the parties had little incentive to litigate them. Brown, 442 U.S. at 134-35, 99 S.Ct. at 2211. The Supreme Court pointed out that it would serve no purpose to require parties to seek advisory opinions from the state courts in the event that a claim or issue may later be raised in a hypothetical bankruptcy hearing. Id.
The Brown v. Felsen decision is applicable, however, only to pre-petition state court judgments. In re Canganelli, 132 B.R. 369, 385 n. 3 (Bankr.N.D.Ind.1991); In re McHenry, 131 B.R. 669, 672 n. 2 (Bankr.N.D.Ind.1989). This is because when a state court judgment is entered prior to the filing of bankruptcy, the parties are denied a full opportunity to litigate the issues relating to dischargeability.
At least one court has addressed the applicability of res judicata to actions that were litigated after the filing of the bankruptcy petition. In the case of In re Northwest Pipe and Casing Co., 67 B.R. 639, 643 (Bankr.D.Or.1986), the court, in analyzing the public policy sought to be upheld in Brown v. Felsen, noted that the Supreme Court had determined that “it would be unfair to force a plaintiff, involved in litigation with a nonbankruptcy defendant, to litigate issues which had no special significance at that time, but which would take on special significance if the defendant should decide to file bankruptcy”. The court determined that the facts before it were “markedly different from Brown v. Felsen in that the first proceeding took place after the bankruptcy petition was filed, and it was the debtor who initiated the litigation”. Id. The debtor, thus cognizant of the consequences of the district court action, “had incentive to litigate the issue fully.” The debtor “knew, or should have known,” that he could assert the relevant defense, but chose not to. As a result, the court found that he “must be bound by that decision”. Id. The court went on to note that “[a] party acts at its own *112risk if it chooses to forego asserting arguments in District Court with the assumption that if it loses there it can try again in the bankruptcy court.” Id. See also In re Grenert, 108 B.R. 1, 6 (D.Me.1989) (Res judicata would be applied to consent order to prevent relitigation of status of wage claims when bankruptcy action was pending at the time of entry of the consent order); In re Weeks, 133 B.R. 201 (Bankr.W.D.Tenn.1991) (Res judica-ta precluded the debtor from litigating fraudulent conveyance issue when raised for the first time in bankruptcy proceedings, and the debtor had previously had a full opportunity to litigate the issue).
Thus, the inquiry in this case should focus on whether the debtor could or should have raised the dischargeability claim in the Florida court. It is uncontested that the debtor did not raise the claim in the Florida court.
The debtor argues that the ultimate finding of whether a debt is dischargeable must be made by the bankruptcy court. The debt- or cites the following language from Dennis v. Dennis (In re Dennis), 25 F.3d 274, 278 (5th Cir.1994) in support of this proposition:
To be sure, “[t]he ultimate finding of whether [a debt is nondischargeable, as ‘defined’ by the bankruptcy law] is solely [in] the province of the bankruptcy court.” In re Shuler, 722 F.2d 1253, 1256 (5th Cir.), cert. denied, 469 U.S. 817, 105 S.Ct. 85, 83 L.Ed.2d 32 (1984) (quoting Franks v. Thomason, 4 B.R. 814, 820-21 (Bankr.N.D.Ga.1980)).
The court disagrees with the rigid and technical application of Dennis urged by the debtor in this ease. In Dennis, the state court judgment was issued prior to the initiation of the bankruptcy action. Dennis, 25 F.3d at 277. The wife in Dennis could not have known that the husband would be seeking bankruptcy protection. Any attempt by the parties to litigate dischargeability issues would have been nothing more than a request for an advisory opinion by the state court. Furthermore, the Shuler case upon which the Dennis court relied also involved a pre-bankruptcy state court determination. Shuler, 722 F.2d at 1254.
It is true that whether a particular debt is in the nature of alimony, maintenance, or support is a matter of federal bankruptcy law, not state law. In re Biggs, 907 F.2d 503 (5th Cir.1990). However, state and federal courts have concurrent jurisdiction to decide the issue. Siragusa v. Siragusa (In re Siragusa), 27 F.3d 406, 408 (9th Cir.1994); Goss v. Goss, 722 F.2d 599 (10th Cir.1983) (construing former Section 17(a)(7) of the Bankruptcy Act); In re Jenkins, 94 B.R. 355, 361 (Bankr.E.D.Pa.1988); In re McHenry, 131 B.R. at 672-73 n. 2; In re Canganelli, 132 B.R. at 386 n. 2.
At the time of the Florida proceedings, Stephen Read was represented by counsel. Both were fully aware of the ongoing bankruptcy action. (PI. 10, Ex. 1). The debtor is an experienced businessman and has no viable excuse for failing to raise the discharge-ability issue in the Florida court. Here, unlike Brawn v. Felsen, the preclusive effect of failing to raise dischargeability in the Florida court was clearly foreseeable. Raising the defense would not have required the Florida court to issue a speculative, advisory opinion. The then pending bankruptcy action was not hypothetical. A dischargeability defense raised in the Florida court would have been directly at issue. The Florida court could also have either resolved the dischargeability issue itself, applying appropriate federal law, or stayed the matter pending a ruling from the bankruptcy court. At the very least, the Florida court could have delineated between periodic and lump sum alimony in its judgment, thereby obviating the necessity of this court to retry the issue even if res judicata were not applicable. That the debtor only raised the issue in this court after an unfavorable decision by the Florida court smacks of an attempt to get two bites at the apple.
Under the circumstances, the court finds that application of the doctrine of res judica-ta is appropriate to bar the debtor from litigating whether the lump sum alimony is dischargeable. The Florida court found the debtor was liable for alimony, and this court will not disturb that finding. Because alimony is not dischargeable under 11 U.S.C. § 523(a)(8), the debtor has failed to show a *113substantial likelihood of success on the merits.
C. Whether there is a substantial threat of irreparable injury
The general rule is that injunctive relief is not appropriate when money damages are an adequate remedy at law. Estate of Daily v. Title Guaranty Escrow Service, Inc., 178 B.R. 837, 847 (D.Haw.1995), citing, Flynt Distributing Co., Inc. v. Harvey, 734 F.2d 1389, 1395 (9th Cir.1984). As stated by the court in Instant Air Freight Co. v. C.F. Air Freight, Inc., 882 F.2d 797, 801 (3rd Cir.1989), quoting, Sampson v. Murray, 415 U.S. 61, 90, 94 S.Ct. 937, 953, 39 L.Ed.2d 166 (1964):
Mere injuries, however substantial, in terms of money, time and energy necessarily expended in the absence of a stay are not enough. The possibility that adequate compensatory or other corrective relief will be available at a later date, in the ordinary course of litigation, weighs heavily against a claim of irreparable harm.
Any injuries to the debtor from the failure to issue a preliminary injunction will be in the form of monetary damages for which the debtor may be compensated at a later date. Thus, the debtor has failed to show a substantial threat of irreparable injury.
D. Whether threatened injury to the plaintiff outweighs harm to the defendant.
The debtor had no immediate need for money while he was incarcerated. In addition, any money damages muring to the debtor from Patricia Read’s execution of the Florida November 2, 1994 judgment can be compensated by money damages. The debt- or has failed to show that the threatened injury to him outweighs the harm to Patricia Read if a preliminary injunction is not issued.
E. Whether public interest will be dis-served.
This litigation is between private parties, and does not involve the public interest. This requirement is inapplicable.
III. CONCLUSION
An order will be entered denying the debt- or’s request for a preliminary injunction, and setting a pretrial conference on the trial of the permanent injunction and remaining issues in the debtor’s complaint.
. These reasons for order constitute the court’s findings of fact and conclusions of law in accordance with Bankruptcy Rule 7052. The court has jurisdiction over the matter under 28 U.S.C. § 1334. The matter is a core proceeding under 28 U.S.C. § 157(b)(2).
. The judgment indicates that the trial was held on October 17 and October 28, 1994 (Ex. P-3), while Patricia Read's memoranda indicates the court took four days of testimony. (PI. 10 at 3). In any event, it is clear that the trial lasted at least two days.
. The debtor has conceded that the periodic alimony award is nondischargeable. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492089/ | ORDER ON MOTION FOR ABSTENTION AND MOTION FOR SUMMARY JUDGMENT1
PAUL B. LINDSEY, Chief Judge.
This adversary proceeding was commenced on July 22, 1993, by Johnny Leroy Wheeler (“Wheeler”), plaintiff herein and debtor in the underlying bankruptcy ease, requesting a determination of the dischargeability of a tax assessment imposed by the Internal Revenue Service (“IRS”), the defendant herein, against Wheeler for his alleged failure to collect, truthfully account for, and pay to IRS, income and FICA taxes withheld from the wages of employees of Enterprise Management Consultants, Inc. (“EMCI”), for the last three quarters of 1986, as is required by 26 U.S.C. § 6672.2
*266On April 20, 1994, IRS filed its answer to Wheeler’s complaint.
On September 30, 1994, Wheeler, after having obtained leave of this court, filed an amended complaint additionally requesting, inter alia, a determination of whether he is a “responsible person” for purposes of 26 U.S.C. § 6672, and therefore liable for the subject assessment, and a determination of the extent and amount of his alleged liability.
On October 13, 1994, IRS, relying upon 11 U.S.C. § 523(a)(1)(A), filed a motion for summary judgment with regard to whether Wheeler’s alleged liability for the subject assessment is dischargeable in the underlying bankruptcy ease, and filed a motion to dismiss the complaint as to all other issues.3
On November 14, 1994, Wheeler filed an objection both to IRS’ motion for summary judgment and to IRS’ motion to dismiss.
On December 9, 1994, IRS filed its motion requesting that this court abstain from determining whether Wheeler is hable for the subject assessment.4
On December 23, 1994, Wheeler filed his objection to IRS’ request for abstention.
On February 1, 1995, a hearing was held on IRS’ motion to abstain, and the objection thereto filed by Wheeler. At the conclusion of that hearing, and after having heard the arguments of counsel, the court took the matter under advisement.
THE ISSUES
At this juncture, the only issues to be determined are whether abstention is appropriate with regard to any determination of Wheeler’s liability for the subject assessment, and whether summary judgment is appropriate.
MOTION FOR ABSTENTION
In its motion requesting abstention by this court, IRS points out that the underlying bankruptcy case is a “no asset” Chapter 7 case, and that it did not file a proof of claim since a distribution, if any, to debtor’s creditors would be insignificant.
IRS asserts that no purpose would be served in connection with the administration of the underlying Chapter 7 case by determining debtor’s liability for the assessment. It argues that 11 U.S.C. § 505(a)(1), which authorizes a bankruptcy court to determine the amount or legality of any tax, fine, or penalty relating to a tax, or any addition to tax of a debtor in bankruptcy, is a permissive exercise of the bankruptcy court’s authority.
IRS urges this court to abstain from exercising its authority to determine debtor’s liability, contending, inter alia, that such a determination would not be material to the administration of the underlying bankruptcy case considering the lack of assets available for any distribution. It further contends that the burden that would be imposed on this court’s docket in determining Wheeler’s liability is unnecessary since other forums are available to debtor for adjudication of the issue regarding his liability.
In his objection, Wheeler argues, inter alia, that if the court should abstain from deciding the issues herein, a substantial delay in the administration of this proceeding would result.
The ultimate issue presented in this adversary proceeding is whether Wheeler’s alleged *267liability for the unpaid trust fund taxes may be discharged in the bankruptcy case, which is the subject of IRS’ motion for summary judgment. However, prior to reaching any determination on that issue, it must be established that Wheeler is a “responsible person” for purposes 26 U.S.C. § 6672, and therefore liable for the subject assessment.
By its pleadings, IRS requests that this court abstain from adjudicating Wheeler’s liability, but nevertheless, enter summary judgment in its favor as to the non-dis-chargeability of that alleged liability.
As is conceded by IRS, this court has authority and jurisdiction to determine Wheeler’s alleged liability. The court is of the view that in these circumstances granting IRS’ request for abstention would only serve to delay both this adversary proceeding and the administration of the underlying bankruptcy ease.
MOTION FOR SUMMARY JUDGMENT
Summary judgment under Rule 56, Fed.R.Civ.P., made applicable to this proceeding under Rule 7056, Fed.R.Bankr.P., is appropriate if the pleadings, depositions, answers to interrogatories, admissions, or affidavits show that there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).
As is noted above, there exists a genuine issue of material fact with regard to the issue whether Wheeler is a responsible person for purposes of 26 U.S.C. § 6672. This fact issue precludes summary judgment on the ultimate issue regarding the extent of, and dischargeability of "Wheeler’s liability, if any, for the assessment made by IRS, and that therefore, summary judgment is inappropriate.
DECISION
Based upon the foregoing, IRS’ motion requesting that this court abstain from adjudicating Wheeler’s alleged liability with regard to the subject assessment, and its motion for summary judgment with regard to the dischargeability of "Wheeler’s alleged liability on that assessment, will be denied.
The court will therefore set this matter for a pre-trial conference on its first available docket.
IT IS SO ORDERED.
. At this time, there is pending before this court a request for summary judgment. A decision on the motion for summary judgment could not be rendered until such time as the instant motion to abstain was decided. Because the court now decides the motion to abstain, the court will also enter its decision on the motion for summary judgment as part of the instant order.
. Title 26 U.S.C. § 6672(a) provides:
(a) General rule. — Any person required to collect, truthfully account for, and pay over any tax *266imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any 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. No penalty shall be imposed under section 6653 for any offense to which this section is applicable.
. Title 11 U.S.C. § 523(a)(1) provides:
(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt.—
(1) for a tax or a customs duty—
(A) of the kind and for the periods specified in section 507(a)(2) or 507(a)(7) of this title, whether or not a claim for such tax was filed or allowed.
(This provision was amended on October 22, 1994, substituting § 507(a)(8) for § 507(a)(7) to reflect the corresponding change in priority of certain unsecured claims of governmental entities.)
. The court notes that IRS withdrew its previous motion for dismissal, as is stated within its motion seeking abstention. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492091/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW AS TO CLAIM 41
GEORGE L. PROCTOR, Bankruptcy Judge.
This case is before the Court upon Adventure Resorts of America, Inc.’s (“Debtor”) Objection to claim 41 filed by the United States Internal Revenue Service (“Claimant”). The claimant assessed a deficiency against the debtor for failing to withhold taxes on interest paid to a foreign corporation and levied penalties against the debtor for failing to file tax form 1042. Upon the evidence presented at a final evidentiary hearing on January 31, 1995, the Court enters the following Findings of Fact and Conclusions of Law.
FINDINGS OF FACT
1. From 1989 until 1991, debtor was a subchapter S corporation held by Charles Edward Patton, James H. Patton, and Edward L. Lewis (“PP & L”). During this period, debtor paid interest to Abaco Ventures, Limited. (“Abaco”), a foreign corporation, and listed the payments on its 1989, 1990, and 1991 1120-s tax returns.
2. In 1989, 1990, and 1991, the debtor failed to withhold tax at the source for interest paid to Abaco as required by 26 U.S.C. § 1442(A). Debtor also failed to file tax form 1042 as required by Treas.Reg. § 1.1461-2(b) (1994).
3. On March 9,1993, debtor filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Middle District of Tennessee. Venue of the case was transferred to the Middle District of Florida on June 29, 1993.
4. On December 19, 1994, the claimant filed a claim the debtor, consisting of a secured claim of $17,322.03; an unsecured priority claim of $137,747.05 for unpaid withholding taxes and interest for 1989,1990, and 1991; and an unsecured general claim of $29,592.91 for delinquency penalties.
5. Pursuant to 26 U.S.C. § 6651(a)(1), the claimant assessed a 25 percent delinquency penalty against the debtor for failing to file tax form 1042. The penalties for 1989 through 1991 totalled $28,306.17.
6. The debtor admits liability for the secured claim, the amount of the withholding tax, and the interest due. The debtor objects to the portion of the general unsecured claim for penalties attributable to debtor’s failure to file form 1042.
CONCLUSIONS OF LAW
The primary issue before the Court is whether the claimant’s assessment of penalties under 26 U.S.C. § 6651(a)(1) should be allowed. To determine whether the penalties were properly assessed, however, the Court must examine the legality of the undisputed portions of the claim regarding the unpaid withholding taxes.
Because the majority of claim 41 is undisputed, the Court finds it unnecessary to engage in a lengthy discussion of the burden of proof. For purposes of adjudicating the disputed portion of the claim, the Court accepts the proof of claim as prima facie evidence of the debtor’s tax liability. See Fed. R.Bankr.P. 3001(f). See also Helvering v. Taylor, 293 U.S. 507, 55 S.Ct. 287, 79 L.Ed. 623 (1935) and In re VTN, Inc., 69 B.R. 1005 (Bankr.S.D.Fla.1987).
ASSESSMENT OF UNPAID WITHHOLDING TAXES AND INTEREST
In 1989, 1990, and 1991, debtor paid interest to Abaco Ventures, Limited, a/k/a Abaco Venturers, Limited, a Bahamian corporation. *298Section 1442(a) of the Internal Revenue Code requires domestic corporations paying interest to foreign corporations to withhold a tax percentage. In relevant part, the statutes states:
(a) In the case of foreign corporations subject to taxation under this subtitle, there shall be deducted and withheld ... a tax equal to 30 percent thereof. 26 U.S.C. § 1442(a).
The withholding tax due is determinable by computing 30 percent of the interest paid to Abaco Ventures, Limited. The Court finds that claimant’s Exhibit 7 presents a straightforward calculation of the withholding tax, assessing the tax liability for each year in issue as follows:
Year Interest Paid to Abaco Tax Due
1989 $ 67,054.08 $17,116.22
1990 $136,702.72 $41,010.82
1991 $183,658.80 $55,097.64
The debtor does not dispute the amount of interest paid to Abaco or the amount of unpaid withholding taxes assessed by the claimant. The Court finds that the total unpaid withholding tax due is $113,224.68.
The amount of interest due on the unpaid withholding tax is also undisputed. To petition date, the interest due for each year is issue is as follows:
Year Withholding Tax Due Interest
1989 $17,116.22 $ 7,791.95
1990 $41,010.82 $12,237.69
1991 $55,097.64 $ 3,943.76
The Court finds that the total interest due on the unpaid withholding taxes is $23,973.40.
ASSESSMENT OF DELINQUENCY PENALTIES
The claimant asserted a claim against debtor for delinquency penalties which to-talled $29,592.91. The debtor objects only to penalties relating to debtor’s failure to file tax form 1042 as required by Treas.Reg. § 1.1461-2(b) (1994).
A domestic corporation paying interest to a foreign corporation is required to withhold for tax 30 percent of the total amount paid. 26 U.S.C. § 1442(a). The corporation required to withhold the tax is termed a “withholding agent.” 26 U.S.C. § 7701(a)(16). See also Treas.Reg. § 1.1441-7(a) (1994). Pursuant to Treasury Regulations § 1.1461-2 (1994), withholding agents “shall make on or before March 15 an annual return on form 1042 of the tax required to be withheld.... ” Any withholding agent failing to file form 1042 is subject to penalties under 26 U.S.C. § 6651. Treas.Reg. § 1.1461-2(e).
In relevant part, 26 U.S.C. § 6651(a)(1) imposes penalties against a taxpayer “[i]n case of failure — (1) to file any return required under authority of subchapter A of Chapter 61 ... not exceeding 25 percent in the aggregate....”
Debtor paid interest to a foreign corporation and was required to withhold a tax equal to 30 percent of each yearly total. Debtor failed to withhold the tax and failed to report the tax on form 1042 as required by Federal Treasury Regulations. Debtor’s failure to report the withholding tax on the appropriate form subjects it to delinquency penalties computed at 25 percent of the total tax due. The claimant’s assessment of the delinquency penalties totals $28,306.17. The Court finds that the penalties are correctly assessed.
Debtor’s objection to claim 41 maintains that the claim should be disallowed because the claim is unliquidated and not supported by documentation. These arguments are insufficient to rebut the claim. The claim for delinquency penalties is readily calculated at 25 percent of the amount of tax due. The claimant supports its claim with the undisputed tax records of the debtor and a copy of form 1042 with accompanying instructions.
CONCLUSION
The Court concludes that the debtor is liable for the following: 1) unpaid withholding taxes for 1989-1991 totalling $113,224.68; 2) interest due on unpaid withholding taxes totalling $23,973.40; 3) delinquency penalties for failure to file form 1042 totalling $28,-306.17; and the uncontested portions of claim 41 including a secured claim of $17,322.03, uncontested liabilities for WT-FICA and FUTA payments totalling $548.97, and penalties on the uncontested portion of the claim *299totalling $1,286.74. Debtor’s total liability on claim 41 is $184,661.99.
The claimant acknowledges computational errors in its original Revenue Agent’s Report (Form 4549(A)) on which claim 41 was based. The Corrected Revenue Agent’s Report is in evidence as Government’s Exhibit 7 and is the basis of the Court’s assessment of the debtor’s tax liability. The claimant seeks leave to file an amended proof of claim to correct the errors in the original claim.
The Court understands that amendments to proofs of claim require thorough examination to ensure that the amending party has not asserted a claim wholly independent from those in the original proof of claim. In re AM International, Inc., 67 B.R. 79, 81 (N.D.Ill.E.D.1986). The Court finds that the amendment proposed by the claimant asserts corrections to the original claim and no new claims have been introduced.
Accordingly, by separate order, the Court will overrule debtor’s objection to claim 41 and order the claimant to amend its proof of claim within 30 days to conform with the corrected Revenue Agent’s Report which is in evidence as Government’s Exhibit 7. The Court will issue a final order in accordance with these findings of fact and conclusions of law after the amended proof of claim has been filed and any objections have been ruled upon.
ORDER OVERRULING DEBTOR’S OBJECTION TO CLAIM 41 WITHOUT PREJUDICE TO CLAIMANT FILING AN AMENDED CLAIM WITHIN 30 DAYS
This ease came before the Court on debt- or’s objection to claim 41 filed by the Internal Revenue Service. Upon findings of fact and conclusions of law separately entered, it is
ORDERED:
1. Debtor’s objection to claim 41 is overruled.
2. The Internal Revenue Service shall have 30 days to amend its proof of claim to conform to the corrected Revenue Agent’s Report which is in evidence as Government’s Exhibit 7.
3.If the amended proof of claim is filed without objection, the Court will enter a final order in accordance with the findings of fact and conclusions of law entered on this date. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492092/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW
GEORGE L. PROCTOR, Bankruptcy Judge.
This proceeding came before the Court upon a Motion for Summary Judgment filed by defendant, City of Jacksonville, a body corporate (“City”) pursuant to Federal Rule of Bankruptcy Procedure 7056. Upon the evidence presented at a hearing on January 18, 1995, the Court enters the following findings of fact and conclusions of law.
FINDINGS OF FACT
1. Prior to September, 1989, debtors were the owners of the following apartment complexes located in Jacksonville, Florida: Society Courts, 1780 Pearce Street; Grothe Gardens Apartments, 1402 through 1414 Grothe Street; and Mercedes Court Apartments, 1477 North Davis Street.
2. On September 8,1989, debtors and the City entered into a Construction Loan Agreement under which the City agreed to make a loan for improvements to the Society Court Apartments.
3. Pursuant to the terms of the Construction Loan Agreement, construction was to be completed “no later than 9 months from the date [of the Construction Loan Agreement] or June 9,1990.” (Construction Loan Agreement, Paragraph 3).
4. On September 8, 1989, debtors and Harold D. Drake, owner of the J.A.D.M.E. Company, entered into a Rehabilitation Work Contract under which J.A.D.M.E. agreed to furnish “all labor, materials, equipment, permits, licenses and services for the proper completion” of the renovation project. (Rehabilitation Work Contract, Article 1).
5. Under the rehabilitation Work Contract, the City was responsible for the “general administration of the Contract” and was directed to “assist the [debtors] by acting as the [debtors’] representative during the construction period.” The contract also provided that the City should “make inspections of the work while in progress to determine if it *304is proceeding in accordance with the contract documents.” (Rehabilitation Work Contract, Article 9).
6. As of April, 1990, J.A.D.M.E. had billed for 97 percent of the contract costs relating to the Society Courts project but failed to pay certain subcontractors. The subcontractors filed a lien for $63,000.
7. While the Society Court property was under renovation, the debtors entered into negotiation with the City for similar renovation projects for the Mercedes Courts Apartment Complex and the Grothe Gardens Apartments.
8. As a result of the liens placed by the subcontractors and the City’s erroneous payments to J.A.D.M.E., the Society Courts project was delayed. Due to the delay in the Society Courts renovation project, debtors were unable to begin renovation of Mercedes Courts Apartments and the Grothe Gardens Apartments. Both of these properties deteriorated and were heavily fined by the City of Jacksonville. The Grothe Gardens property was later condemned and demolished.
9. The debtors sued J.A.D.M.E. for damages in the Circuit Court of Duval County, Florida, and obtained a judgment.
10. The debtors filed for relief under Chapter 11 of the Bankruptcy Code on June 1, 1992. The case was converted to Chapter 7 on September 13, 1994. On November 9, 1994, plaintiff commenced this adversary proceeding by filing a complaint to recover money or property belonging to or owed to the estate by the defendants.
11. The complaint alleges that the defendants’ failure to inspect the Society Court property and administer the renovation contract delayed the project and caused the debtors to sustain economic loss.
12. The complaint further alleges that the delay in the Society Courts Project led to the deterioration of the Mercedes Court and Grothe Garden projects and caused the debtors to incur municipal code enforcement fines on those properties. Plaintiff also contends that debtors incurred demolition liens and suffered the loss of future income due to the destruction of the Grothe Gardens Apartment Complex.
13. Finally, plaintiff alleges that because the identity of defendant A. James Agett was not disclosed, the debtors were without remedy to secure completion of the Society Court renovation project and suffered damages of at least $245,000.
14. On December 21, 1994, the City of Jacksonville filed a motion for summary judgment, alleging that no triable issues of fact exist because the City was shielded from liability by an indemnification clause in the Construction Loan Agreement. The indemnification clause states:
SERVICES TO BENEFIT LENDER:
All inspections and other services rendered by or on behalf of Lender and whether or not paid for by Owner shall be rendered solely for the protection and benefit of Lender, and Owner shall not be entitled to claim any loss or damages against Lender or its agents or employees for failure to properly discharge their duties to Lender. (Construction Loan Agreement, Paragraph J).
15. The City alleges that the indemnification clause (a “hold harmless” clause) automatically protects it from plaintiff’s claims for damages and removes any triable issues of fact.
16. At hearing, plaintiff argued that the clause was ambiguous and the required interpretation presented a triable issue of fact.
CONCLUSIONS OF LAW
Summary judgment may be awarded only when no triable issues of fact exist and when the movant is entitled to summary judgment as a matter of law. F.R.B.P. 7056 and F.R.C.P. 56. When considering a summary judgment motion, the Court must construe the evidence in the light most favorable to the nonmovant. Mercantile Bank & Trust Co. v. Fidelity & Deposit Co., 750 F.2d 838, 841 (11th Cir.1985). Other courts have held that “where conflicting inferences may reasonably be adduced from the evidence, even where the evidence itself is not in conflict, the motion for summary judgment should be denied.” Burroughs Corporation v. American Druggists’ Insurance, 450 So.2d *305640, 544 (Fla. 2nd DCA 1984). Thus, “[i]f there is even the slightest doubt as to the existence or non existence of a genuine issue of material fact, that doubt must be resolved against the movant.” Id.
Plaintiff alleges that the defendant is not entitled to summary judgment because the indemnity provision is ambiguous and presents a triable issue of fact. According to Florida contract law, “[a] phrase in a contract is ambiguous when it is uncertain of meaning and disputed.” Laufer v. Norma Fashions, Inc., 418 So.2d 437, 439 (Fla. 3rd DCA 1982). To determine the meaning of an ambiguous phrase, the Court would necessarily have to determine the intent of the contracting parties. The Supreme Court of Florida has suggested that the basic objective in construing an indemnity provision “is to give effect to the intent of the parties involved.” University Plaza Shopping Center, Inc. v. Stewart, 272 So.2d 507 (Fla.1973). Florida case law also supports the general rule of contract law that “intent is a question of fact that should not be decided on a summary judgment.” Sanders v. Wausau Underwriters Insurance Company, 392 So.2d 343, 345 (Fla. 5th DCA 1981).
The Court finds that the indemnity clause is ambiguous because the parties dispute its meaning and interpretation. To determine the exact obligations of the parties under the indemnity provision, the Court would need to determine the intent of the parties. Intent is a question of fact which cannot be decided on a summary judgment motion. Thus, the Court finds that a triable issue of fact exists and the motion for summary judgment should be denied.
The Court will enter a separate order consistent with these findings of fact and conclusions of law. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492093/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW
GEORGE L. PROCTOR, Bankruptcy Judge.
This proceeding came before the Court upon the Trustee’s objection to Claim 200 filed by Barbara Ann Smith (claimant) seeking a priority unsecured claim of $1,842.45. Upon the evidence presented at a hearing on March 30, 1995, the Court enters the following findings of fact and conclusions of law.
FINDINGS OF FACT
1. Prior to the filing of the Stockbroker Liquidation under the Securities Investor Protection Act of 1970 against the defendant, the defendant employed the claimant pursuant to a letter agreement dated January 24, 1991.
2. The defendant ceased operations on March 25, 1991, and terminated claimant’s employment on the same date.
3. Claimant employed the law firm of Chester J. Trow, P.A., to represent her in a state court action to collect unpaid wages and severance totalling $985.60.
4. Claimant’s state court action was stayed by the filing of this proceeding and no judgment was entered.
5. Claimant filed Claim 200 in this proceeding on July 10,1991, claiming $369.60 for unpaid wages, $616 for severance, $783 for attorney’s fees, $60 for state court costs incurred by Chester J. Trow, P.A., and $13.85 for interest.
6. The Trustee filed a limited objection to Claim 200 on November 15, 1994. On November 23,1994, this Court entered an Order Directing Response, requiring any creditor contesting the Trustee’s objection to file a written response within 30 days.
7. Claimant filed a timely response to the Trustee’s objection, alleging that she was entitled to a priority claim for attorney’s fees and costs as a part of her employment agreement with the defendant.
8. The Trustee does not object to the priority claim for unpaid wages and severance but objects to priority status for attorney’s fees, court costs, and pre-petition interest.
CONCLUSIONS OF LAW
The Bankruptcy Code provides for priority claims in § 507(a)(3), and states in relevant part:
(3) Third, allowed unsecured claims, but only to the extent of $4,000 for each individual or corporation, as the case may be, earned within 90 days before the date of the filing of the petition or the date of the cessation of the debtor’s business, whichever occurs first, for — (A) wages, salaries, or commissions, including vacation, severance, and sick leave pay earned by an individual
11 U.S.C. § 507(a)(3).
In this case, claimant asserts a claim for unpaid wages and severance which are clearly permissible priority claims under § 507(a)(3). Claimant also argues that her claims for attorney’s fees, interest, and costs are so closely aligned with the underlying *307claim for wages that the Court should allow all the claims as one priority claim.
In support of her argument, claimant cites Florida Statute 448.08 which states that “[t]he (state) Court may award to the prevailing party in an action for unpaid wages costs of the action and a reasonable attorney’s fee.” Fla.Stat. 448.08 (1993). Claimant also cites Florida Statutes which award interest and court costs to a prevailing party. See Fla.Stat. 448.08, 55.03(1), and 57.041 (1993).
The Court finds that a strict construction of these statutes prevents the claimant from recovering attorney’s fees, costs, and interest because the claimant was not a prevailing party in the state court. Claimant’s state court action to recover unpaid wages and severance was stayed by defendant’s bankruptcy filing. Thus, claimant did not prevail with a judgment.
Bankruptcy law also prevents claimant from recovering attorney’s fees, costs, and interest, and bankruptcy courts have been reluctant to award these items as priority claims under 11 U.S.C. § 507(a)(3). The Bankruptcy Court for the District of Massachusetts held that asserting attorney’s fees as a priority claim under § 507(a)(3) was inappropriate and referenced such a claim as being the product of a “profound misunderstanding of the Bankruptcy Code’s priority scheme.” In re Simon, 161 B.R. 329, 333 (Bankr.D.Mass.1993). The Court concluded that no authority “allows a creditor’s attorney’s fees as a priority wage claim against a bankruptcy estate.” Id. Courts in this District have refused to allow attorney’s fees to be claimed against the estate when those fees were conditioned on arbitration which was stayed by a bankruptcy filing. See In re Murray, 114 B.R. 749 (Bankr.M.D.Fla.1990).
This Court agrees that when a state court action is stayed by a bankruptcy filing, allowing a creditor to claim resulting attorney’s fees, costs, and interest against the bankruptcy estate is inappropriate. The Bankruptcy Code clearly delineates the priority claims available under § 507(a)(3). Attorney’s fees, interest, and costs are not included as priority claims under that section. Additionally, state law provides recovery for these claims only after the party claiming them has been awarded a judgment. Whether the state court would have awarded these items to claimant is a matter of speculation. This Court finds that claimant’s claims for attorney’s fees, costs, and interest are not priority claims under 11 U.S.C. § 507(a)(3).
Thus, the Court finds that the Trustee’s objection to Claim 200 should be sustained. The Court will allow the claim in the amount of $985.60 as a priority unsecured claim for unpaid wages and severance, and $843 as a general unsecured claim for attorney’s fees and costs. The Court will enter a separate order consistent with these findings of fact and conclusions of law. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492094/ | MEMORANDUM OPINION AND ORDER
HELEN S. BALICE, Chief Judge.
This is the court’s Opinion on a core matter.1 Rexene Corporation has moved for summary judgment seeking to disallow or to limit claim # 445 of Bobby E. Seitz.
I. Legal Standard
In considering Rexene’s motion, the court will view the record in the light most favorable to Seitz to determine whether Rexene is entitled to judgment as a matter of law. Hon v. Stroh Brewery Co., 835 F.2d 510, 512 (3d Cir.1987); Fed.R.Bankr.P. 7056(c). Given the nature of Rexene’s arguments, the relevant facts are undisputed.
II. Facts and Procedural History
The germane facts are those underlying the substance of Seitz’s claim, as well as prior procedural and substantive history relating to litigation on that claim in this court and in an appellate court. Discussion of these matters frames the issues presently before this court.
The claim of Bobby Seitz is for supplemental retirement benefits in the amount of $539,969.40. Seitz worked for El Paso Products Company (now known as Rexene) for four and one-half years beginning January 1, 1984. In June 1986, Seitz and El Paso entered into a participation agreement whereby Seitz became a participant in the Executive Security Plan of El Paso. To be eligible for retirement benefits under the Executive Security Plan (ESP), Seitz needed to satisfy a “retirement” clause as that term was defined by a retirement plan El Paso adopted in April 1984. That plan, as amended, required an employee to have completed a period of service of five years.
Seitz voluntarily terminated his employment with El Paso on June 30, 1988. Although at that time he had not worked five years, he left El Paso with the understanding that he would be eligible to receive retire*371ment benefits under the ESP. This understanding was based upon verbal conversations he had with representatives of El Paso. According to Seitz, the ESP and the participation agreement allow him retirement benefits of $2,999.83 per month beginning on July 30, 1988 and continuing for a period of 180 months; hence the total claim of $539,-969.40.2
Rexene filed an objection to Seitz’s proof of claim. Rexene then filed a motion for summary judgment on that objection. Seitz filed a cross-motion for summary judgment. After completion of the briefing, this court issued an Opinion granting Rexene’s motion. In re Rexene Corp., 154 B.R. 430 (Bankr.D.Del.1993). On appeal, the United States District Court affirmed in part, and reversed in part. Seitz v. Rexene, C.A. No. 93-318 (SLR), slip op. (D.Del. April 13, 1994). In that decision, the District Court agreed with this court that Seitz did not work for five years and did not “retire” as defined by the 1984 retirement plan.
The next issue the District Court discussed was Seitz’s assertion that he was entitled to benefits under a promissory estoppel theory, because of the verbal representations he asserted were made to him concerning his eligibility for retirement benefits. The District Court ruled that the ESP was not subject to ERISA. Thus, while application of ERISA would have precluded oral modification of the employment benefits contract, the District Court concluded that Seitz’s claim of promissory estoppel could proceed. Because of the fact-specific nature of promissory estoppel, the District Court remanded for a determination of the appellant’s claim. An evidentiary hearing on that claim was scheduled for December 8, 1994; however, Rexene filed this second summary judgment motion, taking the hearing off the calendar.
III. Discussion
In the second summary judgment motion, Rexene again argues it is entitled to judgment on Seitz’s claim. It points out two cases decided after the briefing deadline in the District Court appeal which allegedly support Rexene and undercut Seitz’s position that the ESP is not subject to ERISA.3 On the basis of these two cases, Rexene argues that ERISA does apply to an employee benefit plan of the type at issue here, and that thus ERISA does preempt Seitz’s state law promissory estoppel claim. Rexene further argues that these cases constitute an intervening change in the case law that allows this court to ignore the law of the ease doctrine. See generally In re Continental Airlines, 154 B.R. 176, 179 (Bankr.D.Del.1993) (discussing doctrine).
This court will not address the merits of those two cases, as Rexene’s reliance on the new case exception to the law of the case doctrine is wholly misplaced. Assuming that the District Court did not consider those eases, and assuming those cases constitute an intervening change in the case law, this court still has no jurisdiction to reevaluate the decision of a higher court. Only the United States District Court for the District of Delaware can reconsider its own rulings, and only the United States Court of Appeals for the Third Circuit can reverse a legal ruling of the United States District Court for the District of Delaware.4 Indeed, Rexene has cited no authority for the proposition that upon remand, a lower court can “reverse” the ruling of a higher court because of an intervening change in the law. This ground for summary judgment is without merit.
Rexene’s second request for relief on its present motion is to limit the amount of Seitz’s recoverable damages from the claimed amount of $539,969.40 to an amount *372less than $40,000.5 Rexene argues that under 11 U.S.C. § 502(b)(7), Seitz is entitled only to one year’s worth of compensation provided under his employment agreement. Section 502(b)(7) states:
[T]he court ... shall allow [a] claim ..., except to the extent that—
íji íjí í}í í?;
(7) if such claim is the claim of an employee for damages resulting from the termination of an employment contract, such claim exceeds—
(A) the compensation provided by such contract, without acceleration, for one year following the earlier of—
(i) the date of the filing of the petition; or
(ii) the date on which the employer directed the employee to terminate, or such employee terminated, performance under such contract; plus
(B) any unpaid compensation due under such contract, without acceleration, on the earlier of such dates.
Based upon this section, Rexene argues that Seitz’s claim is a “claim of an employee for damages resulting from the termination of an employment contract,” and is thus limited by the value of one year of compensation.
In In re Prospect Hill Resources, Inc., 837 F.2d 453 (11th Cir.1988) (per curiam), a leading case relied upon by Seitz, the court was confronted with facts materially identical to those here. The Prospect Hill employee retired pre-petition and filed a claim for retirement benefits. The court held that the claim fell outside the scope of § 502(b)(7), reasoning:
Section 502(b)(7) limits claims arising out of the rejection of an executory employment contract. It also limits claims for future compensation, which conceivably would have been earned had the parties to the agreement performed under the terminated contract. On its face, section 502(b)(7) does not apply to vested retirement benefits. The statute, by its terms, refers to claims by employees, not by retired workers.
837 F.2d at 455. This court finds the reasoning of the Prospect Hill case persuasive.
Rexene attempts to distinguish this case by arguing that Seitz’s retirement benefits were not “vested.” First, this is incorrect within the context of the Prospect Hill court’s discussion. Seitz was vested in the ESP. Seitz v. Rexene, C.A. No. 93-318 (SLR), slip op. at 7 (D.Del. April 13, 1994).6 Second, whether Seitz’s right to these benefits is vested is irrelevant on this motion for summary judgment. What is relevant here is that the claim is for supplemental retirement benefits. Specifically, this supplement is to provide “the difference between what [Seitz] receives in pension benefits from [El Paso plus other private industry pension plans,] and 60% of Seitz’s salary at retirement.” Participation agreement, at 1, ¶2.
Rexene relies primarily on one case it argues supports its position; however, this ease actually supports Seitz. In In re CPT Corporation, 1991 WL 255679 (Bankr.D.Minn. November 26, 1991), the debtor CPT terminated employee Sims pre-petition. Sims later filed a proof of claim for severance pay, and CPT sought to limit that claim through § 502(b)(7). The CPT court agreed with the debtor, reasoning that the severance pay was clearly a measure of damages from the termination of his employment contract The severance pay was designed to compensate Sims for the loss he would suffer upon being terminated without cause. The CPT court explicitly recognized that Sim’s claim was different from the claim in Prospect Hill, where retirement benefits were at issue. Id. at 3-4.
In summary, Seitz’s claim is not the claim of an employee for damages, but rather a claim for retirement benefits. Seitz’s claim falls outside the scope of 11 U.S.C. § 502(b)(7). Seitz’s alternative argument on the limit issue need not be reached. Trial *373shall proceed on the proof of claim filed for $539,969.40.
An order in accordance with this Memorandum Opinion is attached.
ORDER
AND NOW, June 29, 1995, for the reasons stated in the attached Memorandum Opinion,
IT IS ORDERED THAT:
1. The motion of Rexene Corporation for summary judgment disallowing or limiting claim no. 00445 (docket no. 867) is DENIED.
2. A hearing on Rexene’s objection to this claim shall commence on August 9, 1995 at 2:00 p.m.
. 28 U.S.C. § 157(b)(2)(B).
. Additional facts concerning the provisions of the retirement plan and the executive security plan are discussed in In re Rexene Corp., 154 B.R. 430, 431-34 (Bankr.D.Del.1993).
. Whether either of those courts would have reevaluated the preemption issue, or whether either of those courts will do so in the future, are not issues before this court.
. Those cases are McLellan v. Klein, 867 S.W.2d 953 (Tex.App.1994), and Kemmerer v. ICI Americas, 842 F.Supp. 138 (E.D.Pa.1994).
. The exact amount is in dispute; however, that dispute is not material to the legal issue before the court.
. Rexene asserts in its reply memorandum that the District Court expressly held that Seitz has no "vested retirement benefits.” That court’s Opinion does not contain the quoted holding. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492095/ | *375
MEMORANDUM OPINION
STEPHEN A. STRIPP, Bankruptcy Judge.
I.INTRODUCTION
This will constitute the court’s decision on a motion by the Lawrence Paper Company (“LPC”) to enforce the terms of a sale and a cross-motion by Tilden Financial Corporation (“Tilden”) for sanctions against LPC and/or auctioneer Alan P. Loeser and Company (“Loeser”). This court has jurisdiction pursuant to 28 U.S.C. §§ 1384(b), 157(a), and 151. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (N), and (0). The court reserved decision on the parties’ motions at a hearing held on April 10, 1995. For the reasons that follow, LPC’s motion is granted and Tilden’s cross-motion is denied.
II.FINDINGS OF FACT
The court signed an order on September 1, 1994 authorizing an auction sale of obsolete machinery and equipment (“the equipment”) owned by debtor Victory Corrugated Container Corp. of N.J. (“debtor”) and setting forth terms for the auction sale. The subject equipment was encumbered by approximately $18 minion in liens held by a number of creditors. The order specifically provided that the sale would be free and clear of such liens, with valid liens, if any, to attach to the proceeds of sale.
The order specified that the equipment would be included in the auction sale unless a secured creditor chose to exclude its collateral from the sale. No other restrictions were placed upon the auctioneer’s ability to sell the equipment. The order did specify, however, that if equipment was offered for sale and no bids were received, that equipment would be deemed abandoned to the creditor with a hen on it.
The auction sale took place on October 12, 1994 at debtor’s warehouses located in both Linden and Roselle, New Jersey. Representatives from Tilden and LPC, among others, attended the auction. During the auction, several pieces of machinery subject to Til-den’s security interests, including a Langston Folder Gluer (“the Gluer”), were offered for sale. It is undisputed that no bids were submitted for the Gluer during the auction.
Upon completion of the auction, Loeser approached LPC’s representatives and asked them to make an offer for certain equipment which had not been sold at the auction, including the Gluer.1 LPC made an offer of $10,600 for certain equipment including the Gluer. Loeser accepted this offer and LPC thereafter forwarded payment to Loeser. The debtor is currently holding those funds pending the outcome of these motions.
Despite LPC’s payment, LPC has not been able to obtain possession of the subject machinery. When LPC attempted to take delivery of the machine, its attempt was blocked by Tilden, which had not authorized the post-auction sale. Tilden argued that it was entitled to possession because, inter alia, the subject machinery was not bid upon at the auction and was therefore deemed abandoned to Tilden. When LPC and Tilden reached an impasse as to who would take possession, Tilden phoned Loeser. There is no dispute that Loeser thereafter authorized a release of the subject machinery to Tilden.
III.CONCLUSIONS OF LAW
A. LPC’s MOTION TO ENFORCE THE SALE TERMS
The question for the court to determine on this motion is whether LPC is entitled to enforce the sale terms. It is undisputed that LPC did not bid on the Gluer during the active solicitation of bids at the auction. LPC argues, however, that its post-auction offer constituted the winning auction bid on the machine and that the sale must therefore be enforced. Alternatively, LPC argues that even if its bid did not occur as part of the auction, the sale should be enforced because *376the auctioneer exercised apparent authority to sell the machine on behalf of Tilden.
1. LPC’s OFFER DID NOT OCCUR DURING THE AUCTION SALE
The court rejects LPC’s assertion that it submitted the winning bid for the Gluer at the auction. An auction is a sale in which competitive bidding is utilized as a means of procuring the best and highest possible price for property being sold. 7 Am.Jur.2d Auctions and Auctioneers § 21, at 380 (1980); 7A C.J.S. Auctions and Auctioneers § 2, at 853-54 (1980); Black’s Law Dictionary 130 (6th ed. 1990). The touchstone of an auction sale is the presence of competitive bidding. See Bassford v. Trico Mortgage Co., Inc., 273 N.J.Super. 379, 384, 641 A.2d 1132 (Law Div.1993) (“An auction is a public sale to the highest bidder.”) (citation omitted), aff'd, 273 N.J.Super. 228, 641 A2d 1054 (App.Div.1994). The agreement between Loeser and LPC was, however, a post-auction private sale in which no other parties were asked to make competing bids. LPC’s argument that its offer was the winning bid at the auction is therefore without merit.
2. THE POST-AUCTION PRIVATE SALE DID NOT REQUIRE SEPARATE NOTICE
Tilden contends that Loeser’s private sale of the Gluer to LPC is void because it violated both the order authorizing the auction sale and the notice requirements of the Bankruptcy Code and Rules.
The court rejects that argument. Every creditor of the debtor received notice of the auction pursuant to Fed.R.Bankr.P. 2002 and 6004. In view of the fact that it is apparently customary for auctioneers to engage in post-auction private sales of items not sold during an auction, see infra at 377-378 & n. 3, the court finds that the notice which was given was also sufficient to apprise creditors of the possibility of a post-auction private sale.
Moreover, the terms of the order authorizing the auction sale provided that equipment not bid upon during the auction would be deemed abandoned to the creditor holding a security interest therein. The Gluer had therefore become Tilden’s property at the conclusion of the auction and was no longer property of the estate. See 11 U.S.C. § 554. Bankruptcy Code § 363(b) and the notice requirements of Fed.R.Bankr.P. 2002 and 6004 do not apply to property in which the bankruptcy estate no longer has an interest. See, e.g., Tambay Trustee, Inc. v. Dickman (In re Simicich), 71 B.R. 48, 50 (Bankr.M.D.Fla.1987) (pointing out that § 363 is inapplicable to property which is not property of the estate). Loeser’s post-auction private sale of Tilden’s Gluer to LPC therefore did not require any further notice to the debtor’s other creditors.
S. LOESER WAS VESTED WITH APPARENT AUTHORITY TO BIND TILDEN TO A POST-AUCTION PRIVATE SALE
LPC argues in the alternative that even if the sale was not part of the auction and the Gluer had become Tilden’s property by operation of the September 1 order, Loeser nonetheless possessed apparent authority to sell the Gluer to LPC on behalf of Tilden. In support, LPC states that Tilden placed tags on its equipment on which it had hens, thus indicating to all that Loeser was authorized to sell the equipment. Moreover, LPC alleges that auctioneers commonly sell items after an auction in private sales, and that it was therefore reasonable to believe that Loeser was vested with authority to sell the equipment on Tilden’s behalf.
The apparent agency doctrine applies in cases where the “principal” engages in acts or manifestations indicating that an “agent” is authorized to operate on the principal’s behalf, even though not actually authorized. Sears Mortgage Corp. v. Rose, 134 N.J. 326, 338, 634 A.2d 74 (1993). See Barticheck v. Fidelity Union Bank/First Nat’l State, 680 F.Supp. 144, 149 (D.N.J.1988). An apparent agent can bind a principal only where the third party actually relies upon the “principal’s” acts or manifestations in accepting the apparent agent’s authority. Sears Mortgage Corp., 134 N.J. at 338, 343, 634 A.2d 74; N. Rothenberg & Son, Inc. v. Nako, 49 N.J.Super. 372, 381-83, 139 A.2d 783 *377(App.Div.1958); Nappen v. Blanchard, 210 N.J.Super. 655, 663, 510 A.2d 324 (Law Div.1986). The person seeking to prove an apparent authority agency bears the burden of proof. Blaisdell Lumber Co., Inc. v. Horton, 242 N.J.Super. 98, 103, 575 A.2d 1386 (App. Div.1990).
The facts of this case indicate that Loeser was vested with apparent authority to bind Tilden. By allowing its equipment to be sold at the auction, Tilden led others to believe that Loeser was authorized to sell the subject equipment. See Barticheck, 680 F.Supp. at 149 (applying New Jersey law and finding apparent authority where three plaintiffs voluntarily placed a fourth plaintiff in position where the defendant would believe the fourth plaintiff was the agent of the other three plaintiffs). Because Tilden acted affirmatively to create the impression that Loeser was its agent, Tilden should not be permitted to now deny Loeser’s agency. See Wilzig v. Sisselman, 209 N.J.Super. 25, 35, 506 A.2d 1238 (App.Div.) (noting that apparent agency doctrine is closely related to doctrine of es-toppel), certif. denied, 104 N.J. 417, 517 A.2d 415 (1986).
This conclusion follows even though Loeser’s sale occurred after the auction had concluded. One New Jersey court’s discussion is instructive on this point:
As between the principal and third persons the true limit of the agent’s power to bind the principal is the apparent authority with which the agent is invested. The principal is bound by the acts of the agent within the apparent authority which he knowingly permits the agent to assume, or which he holds the agent out to the public as possessing. And the reason is that to permit the principal to dispute the authority of the agent in such cases would be to enable him to commit a fraud upon innocent persons.
The question in every such case is whether the principal has, by his voluntary act, placed the agent in such a situation that a person of ordinary prudence, conversant with business usages, and the nature of the particular business, is justified in presuming that such agent has authority to perform the particular act in question. ...
N. Rothenberg & Son, Inc., 49 N.J.Super. at 380, 139 A.2d 783 (quoting J. Wiss & Sons Co. v. H.G. Vogel Co., 86 N.J.L. 618, 621, 92 A. 360 (E & A 1914)) (citations omitted). See Restatement (Second) of Agency § 49 cmt. c (1957).2 There can be no denying that Tilden permitted Loeser to serve as auctioneer of Tilden’s equipment. Moreover, the proofs in this case show that persons conversant with the business of auctions could reasonably presume that Loeser possessed authority to conduct a post-auction private sale of equipment at the auction site.3 Because persons acquainted with the business of auction sales would presume that Loeser possessed post-auction sale authority, Loeser’s agency therefore extended beyond the auction to include the post-auction sale. Since LPC’s president who attended the auction in question was familiar with common auction practices, the court concludes that LPC relied upon Til-den’s inclusion of the Gluer in the auction as the basis for accepting Loeser’s authority to sell Tilden’s equipment after the auction. The rebanee element has been met in this case. See Sears Mortgage Corp., 134 N.J. at 343, 634 A.2d 74.
*378The court rejects Tilden’s argument that the state law doctrine of apparent authority is not applicable to a federal bankruptcy law proceeding. Whether Loeser exercised apparent authority on behalf of Til-den is a question of state law. It is well settled that bankruptcy courts must, in the absence of countervailing federal interests, utilize state law in determining parties’ competing rights in a bankruptcy proceeding. See In re Roach, 824 F.2d 1370, 1373-74 (3d Cir.1987); see also Official Committee of Unsecured Creditors v. Action Industries, Inc. (In re Phar-Mor Securities Litigation), 178 B.R. 692, 694 (W.D.Pa.1995). Because there are no countervailing federal interests involved with the agency question presented here, it is clear that New Jersey state law should supply the rule of decision in this ease.
The court thus concludes that LPC purchased the Gluer and is entitled to possession of it. Loeser was vested with apparent authority to bind Tilden to a post-auction private sale of the Gluer, and did so. This court will exercise its equitable power to enforce the terms of the auction sale. See, e.g., In re Karpe, 84 B.R. 926, 933 (Bankr.M.D.Pa.1988) (utilizing bankruptcy court’s equitable power to specifically enforce Code § 363 sale). Til-den shall turn the Gluer over to LPC. LPC shall be entitled to recover from Tilden and Loeser any additional delivery costs incurred as a result of Tilden’s removal of the machinery from the debtor’s warehouse.
B. TILDEN’S MOTION FOR ATTORNEY FEES AND SANCTIONS AGAINST LPC AND LOESER
Tilden’s cross-motion seeks sanctions and reimbursement of its attorney fees from Loeser and/or LPC. According to Tilden, Loeser had no actual authority to sell the Gluer to LPC in a post-auction private sale. Moreover, Tilden argues that Loeser sold the machine without regard to specific “upset prices” upon which Loeser and Tilden allegedly agreed prior to the sale. Finally, Tilden argues that LPC may have acted in bad faith by purchasing the machine with knowledge that the auction had ended.
1. TILDEN’S MOTION SEEKING ATTORNEY FEES AND SANCTIONS AGAINST LPC
Tilden’s motion will be denied as to LPC. The record does not indicate any bad faith on the part of LPC. Instead, all that is revealed in the facts is the existence of a bona fide dispute between Tilden and LPC as to the ownership of the machinery at issue. Attorney fees and sanctions are not to be awarded in such circumstances.
2. TILDEN’S MOTION SEEKING ATTORNEY FEES AND SANCTIONS AGAINST LOESER
Tilden’s entitlement to sanctions and/or attorney fees from Loeser is inadequately developed on this motion. Moreover, if Loeser sold the Gluer without authority, Tilden may be entitled to damages from Loeser.4 The measure of damages would presumably be any difference between the value of the Gluer and the sale price.5
There are factual disputes regarding the issues of whether Loeser had actual authority to sell the Gluer to LPC in a post-auction private sale and as to the value of the Gluer. In addition, it is unclear from the record how much of the $10,600 which LPC paid was *379allocable to the Gluer, since LPC also purchased other items in that transaction. The court concludes that the matters at issue between Tilden and Loeser should be resolved in an adversary proceeding by Tilden against Loeser.
IV. CONCLUSION
LPC is entitled to enforce the terms of the sale. An additional hearing will be held, if necessary, for the purpose of determining LPC’s entitlement to additional delivery charges occasioned by Tilden’s removal, with Loeser’s permission, of the Gluer from debt- or’s warehouse.
Tilden’s motion seeking attorney fees and sanctions against LPC is denied without prejudice to Tilden’s right to file an adversary proceeding against Loeser.
The attorney for LPC shall submit an order within ten (10) days on notice pursuant to D.N.J.Bankr.Ct.R. 4(c).
. The affidavit of Alan M. Hill, president of LPC, states that Alan Loeser approached Mr. Hill and the affidavit of Mr. Loeser is silent as to who approached whom. Mr. Loeser’s attorney stated at oral argument that he did not know who approached whom. The court finds from the uncontradicted certification of Mr. Hill that Mr. Loeser approached Mr. Hill, although it makes no difference to the outcome of these matters.
. According to the Restatement:
If a principal puts an agent into, or knowingly permits him to occupy, a position in which according to the ordinary habits of persons in the locality, trade or profession, it is usual for such an agent to have a particular kind of authority, anyone dealing with him is justified in inferring that he has such authority, in the absence of reason to know otherwise. The content of such apparent authority is a matter to be determined from the facts.
Restatement (Second) of Agency § 49 cmt. c (1957).
. Compare Affidavit of Alan M. Hill (March 13, 1995) (auctioneers commonly engage in post-auction private sales) and Affidavit of Alan D. Loeser (April 3, 1995) (auctioneer did not take any inappropriate actions at the auction sale) with Tilden Letter Brief (March 31, 1995) (admitting that post-auction private sales by auctioneers “may be common elsewhere in the business world”). Finally, Loeser's attorney stated on the record that "[a]s far as we're concerned, this [practice of post-auction private sales by an auctioneer] is not only a common practice, there's nothing illegal about it.... It is common practice apparently to get rid of equipment that there was no bids taken on." Transcript of Hearing Held on April 10, 1995, at 17-18 (April 19, 1995).
. See Heritage Bank v. Vilsmeier Auction Co., 218 N.J.Super. 440, 442, 527 A.2d 970 (Law Div.1986) (auctioneer liable for conversion where sold property without consent or knowledge of secured party). See generally 7 Am.Jur.2d Auctions and Auctioneers § 65 at 416-17 (1980) (stating that auctioneer may be held liable for breach of contract where auctioneer fails to follow instructions); 7A C.J.S. Auctions and Auctioneers § 23 at 886-87 (1980) (same).
. This determination is based upon the general measure of damages applicable to conversion actions, see, e.g., Foley Mach. Co. v. Amland Contractors, Inc., 209 N.J.Super. 70, 78, 506 A.2d 1263 (App.Div.1986) (liability for conversion is based upon the market value of the item converted at the time and place the conversion occurred), and the general contract law principle that an injured party must be put in as good a position as that party would have been had the contract been performed as promised. Wolpaw v. General Accident Ins. Co., 272 N.J.Super. 41, 46, 639 A.2d 338 (App.Div.), certif. denied, 137 NJ. 316, 645 A.2d 143 (1994). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492096/ | DECISION AND ORDER DENYING DEFENDANT’S MOTION TO DISMISS
WILLIAM A. CLARK, Chief Judge.
Before the court is a motion of defendant to dismiss plaintiff’s complaint as untimely filed. The court has jurisdiction pursuant to 28 U.S.C. § 1334 and the standing order of reference entered in this district. This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(F).
FACTS
1) On June 13, 1991, Tower Metal Alloy filed a petition in bankruptcy pursuant to chapter 11 of the Bankruptcy Code and thereby became a debtor in possession;
2) Ruth A. Slone-Stiver (Plaintiff) was appointed a chapter 11 trustee for the debtor’s estate on December 31, 1992;
3) On September 21, 1993, the debtor’s case was converted from chapter 11 to chapter 7;
*5034) Subsequently, Ruth A. Stiver-Slone was appointed the chapter 7 trustee of the debt- or’s estate;
5) On December 29, 1994, the plaintiff filed a complaint in the present adversary proceeding against defendant Sol Tick and Co., Inc., under § 547 of the Bankruptcy Code to recover an alleged preferential transfer made by the debtor to the defendant.
Defendant’s “Motion to Dismiss” (Doc. # 5) states that plaintiffs complaint “is time barred pursuant to the two year statute of limitations set forth in § 546(a)(1) of the United States Bankruptcy Code.”
CONCLUSIONS OF LAW
On the date relevant to this decision, § 546(a) of the Bankruptcy Code read as follows:1
(a) An action or proceeding under section 544, 545, 547, 548, or 553 of this title may not be commenced after the earlier of—
(1) two years after the appointment of a trustee under section 702, 1104, 1163, 1302, or 1202 of this title; or
(2) the time the ease is closed or dismissed.
11 U.S.C. § 546(a).
The issue before the court is whether the two-year statute of limitations of § 546 began running on the date that the debtor filed its bankruptcy petition or on the date the chapter 11 trustee was appointed. Defendant relies upon the decisions of several circuit courts of appeals for its position that the two-year period began running on the date the debtor became a debtor in possession and therein a representative of the estate, i.e., on the date the petition in bankruptcy was filed. The leading case for the defendant’s view is Zilkha Energy Co. v. Leighton, 920 F.2d 1520 (10th Cir.1990), wherein the court found that, although 11 U.S.C. § 546(a) specifically refers to the appointment of a “trustee,” a debtor in possession is the functional equivalent of an appointed trustee, and, therefore, § 546(a)(1) applies to an action filed by a debtor in possession:
The key to this case is the scope of § 546(a), and the question to resolve is whether a debtor in possession is subject to the same two-year statute of limitations as an appointed trustee. We believe § 546 is ambiguous; therefore, it must construed. We do not believe that Congress intended to limit actions filed by an appointed trustee to two years without making the same restriction apply to a debtor in possession who is the functional equivalent of an appointed trustee. Because of the virtual identity of function between a trustee and a debtor in possession, there would be no reason to create a different limitation period for the filing of actions by the two fiduciaries. Moreover, when the balance of § 546 is considered, it is even more apparent that Congress intended for the word “trustee” to apply to a debtor in possession, for every reference to actions brought by a trustee contained in § 546 obviously applies to actions brought by a debtor in possession. A contrary analysis would deprive § 546 of significance in the majority of recovery actions filed in chapter 11 cases.
Consequently, we construe § 546(a)(1) to apply to actions filed by a debtor in possession, and we believe the period of limitation begins to run from the date of the filing of a petition for reorganization under chapter 11. Id. at 1524.
In reaching this conclusion, the Tenth Circuit relied upon the provisions of 11 U.S.C. § 1107(a) by which “a debtor in possession is clothed with all powers of a trustee.” Id. at 1523.
§ 1107. Rights, powers, and duties of debtor in possession.
(a) Subject to any limitations on a trustee serving in a case under this chapter, and to such limitations or conditions as the court prescribes, a debtor in possession shall have all the rights, other than the *504right to compensation under section 330 of this title, and powers, and shall perform all the functions and duties, except the duties specified in sections 1106(a)(2), (3), and (4) of this title, of a trustee serving in a case under this chapter.
11 U.S.C. § 1107(a).
Of critical significance to this court, however, is the fact that in Zilkha the debtor in possession remained in possession, unlike the case before this court, and no chapter 11 trustee was ever appointed. The Tenth Circuit specifically noted that a different analysis might be required when a chapter 11 trustee was appointed:
We take no position on whether a subsequent appointment of a trustee in a chapter 11 case would change the analysis. See Boatman v. E.J. Davis Co., 49 B.R. 719 (Bankr.D.Conn.1985). While we perceive that to be a distinguishable circumstance requiring a different analysis, we leave the issue for a case in which that situation arises. Zilkha, 920 F.2d at 1524.
In Upgrade Corp. v. Government Technology Services, Inc., (In re Softwaire Centre International, Inc.), 994 F.2d 682 (9th Cir.1993), the Ninth Circuit also found that § 546(a) of the Bankruptcy Code is applicable to debtors in possession:
We agree with Zilkha that § 546(a) must be read in conjunction with § 1107(a). Not only does § 1107(a) by its terms subject debtors in possession to the limitations imposed on trustees, the legislative history also makes the point. As the Senate Report accompanying the Bankruptcy Reform Act of 1978 makes clear:
[Section 1107] places a debtor in possession in the shoes of a trustee in every way. The debtor is given the rights and powers of a chapter 11 trustee. He is required to perform the functions and duties of a chapter 11 trustee (except the investigative duties). He is also subject to any limitations on a chapter 11 trustee.... (citations omitted). Id. at 683.
In Construction Management Services, Inc. v. Manufacturers Hanover Trust Co. (In re Coastal Group, Inc.), 13 F.3d 81 (3rd Cir.1994), the Third Circuit followed Zilkha and Softwaire Centre. The Second Circuit 02 also concluded that the limitations period of § 546(a) apply to a debtor when it files its petition in bankruptcy and becomes a debtor under § 1101, U.S. Brass & Copper Co. v. Caplan (In re Century Brass Products, Inc.), 22 F.3d 37 (2nd Cir.1994). As was the case in Zilkha, however, the Second Circuit noted that the result might not be the same where a trustee is appointed in a chapter 11 subsequent to the filing of the debtor’s petition in bankruptcy:
[SJinee no trustee was ever appointed in the present case, we need not decide whether such an appointment might revive a claim that the DIP itself would have been barred from bringing. Id. at 41.
Only the Fourth Circuit has joined the “overwhelming majority of bankruptcy and district courts [which] have concluded that the two-year statute of limitations [of § 546(a) ] begins to run only upon the appointment of one of the trustees specified in § 546(a)(1).” Maurice Sporting Goods, Inc. v. Maxway Corp. (In re Maxway Corp.), 27 F.3d 980, 982 (4th Cir.1991). In reaching this result the court stated that it was relying on a plain meaning of § 546(a):
We believe that Maurice’s argument misconstrues the function and interaction of §§ 546(a) and 1107(a). Section 1107(a) confers upon a debtor in possession the power and authority of a Chapter 11 trustee. The operation of § 1107(a) thus provides standing to debtors in possession to seek the avoidance of preferential transfers even though § 547 explicitly refers only to trustees. Subsections (b)-(g) of § 546 similarly limit a trustee’s — and through the operation of § 1107, a debtor in possession’s — authority to recover property under §§ 544, 545, 547, 548, or 549. See 11 U.S.C.A. § 546(b)-(g) (West 1993). However, unlike the remainder of § 546, subsection (a) is not directed at limiting the authority of trustees to recover property. Rather, it establishes the time period within which an action may be commenced under §§ 544, 545, 547, 548 or 553. It provides that no one may bring an avoidance action more than two years after the appointment of the enumerated trustees, *505not that the enumerated trustees may not commence an avoidance action more than two years after their appointment. Thus, by its terms, § 546(a) applies both to trustees and debtors in possession, requiring both to commence an action within the specified time periods. The appointment of the various trustees is merely the starting point from which the clock begins to run in paragraph (1). Accordingly, an application of the plain language of § 546(a)(1) is not, in our view, inconsistent with general statutory scheme of functional equivalency established by the language and legislative history of § 1107(a). Id. at 983-984 (emphasis supplied).
Although the majority of these circuit court cases support defendant’s position that § 546(a) is applicable to a debtor in possession, they do not clearly provide the basis for defendant’s conclusion that, once a debtor in possession is created, the statute of limitations “expires two years later, even if the estate representative’s identity changes in the interim ” (Defendant’s Memorandum, Doc. # 14 at 4) (emphasis supplied). In a case where a chapter 7 trustee was appointed after the conversion of a case from chapter 11 (in which a chapter 11 trustee had been previously appointed), the Ninth Circuit found that, based upon a plain reading of § 546(a), the two-year statute of limitations of § 546(a) “begins running from the date the first trustee is appointed and that all subsequent trustees are subject to the same statute of limitations.” Ford v. Union Bank (In re San Joaquin Roast Beef), 7 F.3d 1413, 1415 (9th Cir.1993) (emphasis supplied). Although the case may be construed as conflicting with the Ninth Circuit’s earlier decision of Softwaire Centre,2 supra, wherein it was held that the two-year statute of limitations period of § 546(a) applies to debtors in possession, any apparent conflict between the two eases has been harmonized as follows:
The upshot of Softwaire Centre and San Joaquin Roast Beef is that in the Ninth Circuit there are two distinct two-year limitation periods for avoiding actions subject to section 546(a)(1). A debtor in possession gets two years from the date of filing the case. All trustees get two years from the date the first trustee was appointed. Iron-Oak Supply Corp. v. Nibco, Inc. (In re Iron-Oak Supply Corp.), 162 B.R. 301, 306 (Bankr.E.D.Cal.1993).
Accord, England v. Whitney (In re California Canners & Growers), 175 B.R. 346 (Bankr. 9th Cir.1994).
“The rationale for allowing the trustee an entire two year period, absent any subtraction for time used by the debtor in possession comports with the reality that a debtor in possession may lack the incentive to prosecute avoidance actions.” Id., at 348.
This court agrees with In re Iron-Oak Supply Corp. to the extent that the court found that the appointment of a trustee subsequent to a debtor being in possession of the estate commences a two-year statute of limitations period of § 546(a). In addition, this court concurs with the reasoning set forth in Reese v. First Tennessee Bank, N.A. (In re Brooke Meade Health Care Center, Inc.), 165 B.R. 195 (Bankr.M.D.Tenn.1994), where the question presented was “whether a chapter 11 trustee’s two-year period within which to commence an avoidance action under 11 U.S.C. § 546(a)(1) is counted from the appointment of the trustee or from the (earlier) filing of the petition.”
In the thicket of cases debating whether, how and to whom to apply the two-year limitation on avoiding actions in § 546(a)(1), this is the uncomplicated case. 11 U.S.C. § 546(a) is unambiguous with respect to the period of limitation within which a chapter 11 trustee must commence an avoiding action. The two-year limitation in § 546(a)(1) begins to run “after the appointment of a trustee under section 702, 1104, 1163, 1302, or 1202....” This trustee was appointed under § 11 U.S.C. § 1104 on September 18, 1991. This action was timely commenced within two years, on September 15, 1993.
It is unnecessary to decide whether the two-year limitation in § 546(a)(1) limits avoidance actions by a chapter 11 debtor in *506possession. Even if § 546(a)(1) applies to a debtor in possession, nothing in the language of § 54.6(a)(1) suggests that the limitation on a debtor in possession would be “tacked” or “added” to calculate the limitation with respect to a subsequently appointed trustee. Id. at 196-197 (emphasis supplied).
Accord, Gazes v. Kesikrodis (In re Ted A. Petras Furs, Inc.), 172 B.R. 170, 174 (Bankr.E.D.N.Y.1994).
For the foregoing reasons the court finds that plaintiff filed her complaint within the two-year period after the appointment of a chapter 11 trustee in compliance with the provisions of 11 U.S.C. § 546(a).3
It is, therefore, ORDERED that defendant’s motion to dismiss is DENIED.
. Subsequent to the debtor filing its petition in bankruptcy, 11 U.S.C. § 546(a) was amended by the Bankruptcy Reform Act of 1994 (Pub.L. No. 103-394). Because the debtor’s petition in bankruptcy was filed prior to the effective date of the Act, October 11, 1994, amended § 546(a) is not applicable to the present adversary proceeding.
. Softwaire Centre was decided approximately five months prior to San Joaquin Roast Beef, but no reference is made to the earlier decision by the latter.
. Because it is unnecessary to this decision, the court reserves the question of whether the appointment of a chapter 7 trustee after a case is converted from chapter 11 to chapter 7 initiates yet another two-year statute of limitations period. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492098/ | ORDER
MARY D. SCOTT, Bankruptcy Judge.
THIS CAUSE is before the Court upon the Objection to Confirmation, and the Motion for Relief from Stay, both filed on February 3, 1995, by creditors R.M. and Trella V. Tucker. The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157(a), 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)(G), (L).
*556In 1991, the parties signed several documents by which the debtors sought to purchase a parcel of real estate upon which the debtors would make their home. The parties entered into an Escrow Contract under which the debtor promised to pay $39,900, with $2,000 paid in cash and $339.81 to be paid on the sixth day of each month until paid in full. The debtors were obligated to pay the taxes and insurance. The document contained a forfeiture provision under which, if the debtors did not make a payment, after notice and twenty days grace, the contract and deed would be delivered to the sellers and all monies paid to that date would be deemed rent and damages. The seller also had the option to accelerate the note and sue for the balance. At the same time, the debtors executed a quitclaim deed, by which they quitclaimed any right title and interest in the property to the original sellers, the Tuckers. The deed was placed in escrow. Upon completion of the contract, they were to receive the deed. In the event of default, it was to be delivered to the Tuckers.
There were occasions when the debtors failed to make timely payments.1 However, until mid-1994, they made the payments upon receipt of the notice and demand from the escrow company. In July 1994, although they again received a 20-day letter, this time they did not make the monthly payment within the time required by the contract and letter. Upon this failure, the escrow company delivered the contract and Quitclaim Deed to the Tuckers. The deed was recorded in August 1994, after which the Tuckers began eviction proceedings. Ongoing negotiations between the parties having failed, this bankruptcy case was filed in November 1994.
The first plan filed by the debtors was for a term of only twelve months and provided for disbursal of the monthly payment to the Tuckers in addition to payments on an ar-rearage of approximately $2,000. The amended plan, filed March 6, 1995, extended the term of the plan to twenty-four months.
The uncontroverted testimony at trial was that the arrearage is in excess of $4,000. The Tuckers objected to confirmation of the plan on two grounds. They first assert that the debtors have no interest in the property in light of the delivery to them of the quitclaim deed. Alternatively, they argue that the plan cannot be confirmed inasmuch as it does not provide for payment of the entire arrearage. The motion for relief from stay requests that they be permitted to pursue their state court remedies inasmuch as the debtors have no interest in the subject real property.
The first issue for the Court is the legal effect of the escrow agreement and the quitclaim deed. The debtors essentially assert that the documents are in the nature of a mortgage such that they have an equitable interest in the property and may treat it in their bankruptcy case. The question is whether the Quitclaim Deed and attendant documents are absolute on their face, or, whether the documents constitute a mortgage such that the debtors have an equitable interest in the property which is property of the estate. The determination of this issue rests upon the intent of the parties in light of the circumstances. Carter v. Zachary, 243 Ark. 104, 418 S.W.2d 787 (1967); Hill v. Day, 231 Ark. 550, 331 S.W.2d 38 (1960); Bonanza Mining & Smelter Co. v. Ware, 78 Ark. 306, 95 S.W. 765 (1906); Scott v. Henry, 13 Ark. 112 (1852); Duvall v. Laws, Swain & Murdoch, P.A., 32 Ark.App. 99, 797 S.W.2d 474 (1990); Ruth v. Lites, 267 Ark. 752, 590 S.W.2d 322 (1979).
Upon viewing the demeanor of the witnesses, hearing their testimony regarding the transaction and their actions, and reviewing the documents, the Court believes that the debtors have carried their burden of demonstrating that the documents constitute a mortgage such that they have an equitable interest in the property. Accordingly, they are entitled to treat the property in their Chapter 13 plan.
However, in light of the debtor’s payment history, the dispute regarding insurance, their failure to adequately provide for *557payment of the arrearage, and the extremely short length of the plan, modifications must be made in order to propose a confirmable plan. Moreover, conditions must be met in order to protect the rights of the Tuckers in this bankruptcy case and ensure that the case is conducted in good faith. It is
ORDERED as follows:
1. The Motion for Relief from Stay, filed on February 3, 1995, is DENIED upon the conditions stated in paragraph 3 of this Order. Should the debtors fail, at any time, to meet any one of these conditions, the Tuckers are entitled to file an ex-parte motion for relief from stay in order to pursue their state court remedies against the debtors.
2. The Objection to Confirmation is SUSTAINED IN PART AND OVERRULED IN PART. The objection is sustained as to the failure to provide for payment of the arrear-age and overruled "with regard to the assertion that the debtor’s have no interest in the property.
3. The debtors shall comply with the following conditions and terms:
(a) Within twenty (20) days of entry of this Order, the debtors shall file a modification of the plan providing for: (1) full payment, within a two-year period of time, of the full amount of the arrearages, as testified by the escrow agent; (2) a term of no less than forty-two (42) months;
(b) The debtors shall ensure that insurance on the property is maintained at all times and shall provided proof to the Tuckers of insurance;
(c) The debtors shall ensure that taxes are timely paid on the property and shall provide proof of payment of the taxes to the Tuckers;
(d) During the life of the plan, the debtors shall make each and every payment to the trustee, in the amount required under the modified plan, in a timely manner. Should the debtors fail to ensure that the trustee receives certified funds on or before 4:00 p.m. on the last business day of each month, the Tuckers shall be entitled to ex-parte relief from stay.
IT IS SO ORDERED.
. Indeed, the debtors conceded that they were "trouble” from the beginning inasmuch as they repeatedly failed to make timely payments. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492139/ | MEMORANDUM OPINION
STEPHEN A. STRIPP, Bankruptcy Judge.
I. INTRODUCTION
This shah constitute the court’s decision on debtor-defendants’1 motion to dismiss this adversary proceeding and the cross-motion of plaintiff Oil, Chemical and Atomic Workers Union (“OCAW”) to amend its complaint. The debtors contend that this adversary proceeding must be dismissed because OCAW lacks standing to present claims on behalf of its members for violation of the WARN Act. OCAW argues in opposition that it has both direct and associational standing, and alternatively that it should be permitted to amend its complaint to add its members as plaintiffs if this court determines that OCAW does not have standing.
This court has jurisdiction pursuant to 28 U.S.C. §§ 1334(b), 151 and 157(a). The controversy at issue constitutes a core proceed*705ing. Id. § 157(b)(2)(A), (B) and (0). For the reasons that follow, the debtors’ motion to dismiss OCAW as plaintiff is granted. However, OCAWs cross-motion to amend its complaint to name certain of its individual members as plaintiffs is also granted.
II. FINDINGS OF FACT
OCAW commenced this adversary proceeding with the filing of its complaint on August 21,1992.2 The complaint alleges that the debtors violated the Worker Adjustment Retraining and Notification Act (‘WARN” or WARN Act”), 29 U.S.C. §§ 2101-2109 (1988), by failing to provide their employees with proper advance notice of a mass layoff of those employees at the debtors’ Mounds-ville, West Virginia plant. The complaint named OCAW, AFL-CIO-CLC and its Local Union 3-586 as plaintiff “on behalf of the members employed at Hanlin Chemical, West Virginia, Inc.” The complaint did not, however, name any individually affected worker as a plaintiff. In its prayer for relief, OCAW sought both what it described as declaratory relief and damages on behalf of OCAW members allegedly injured by the debtors’ violation of WARN.
The debtors filed their motion to dismiss for lack of standing on May 9, 1995. This court reserved decision at the conclusion of a hearing held on June 19, 1995.
III. CONCLUSIONS OF LAW
A
The debtors’ motion to dismiss relies upon United Food and Commercial Workers International Union Local 751 v. Brown Group, Inc., 50 F.3d 1426 (8th Cir.1995) (hereinafter, “UFCW, Local 751 ”) which held that a union lacked standing to assert a claim for violation of the WARN Act on behalf of its members because the union had not met the Constitutional test to assert either a direct or associational standing on behalf of its members. As in that ease, the plaintiff in this case relies upon the terms of the WARN Act, which states in pertinent part:
A person seeking to enforce such liability, including a representative of employees or a unit of local government aggrieved under paragraph (1) or (3), may sue either for such person or for other persons similarly situated, or both, in any district court of the United States for any district in which the violation is alleged to have occurred, or in which the employer transacts business.
29 U.S.C. § 2104(a)(5). A “representative” under the statute is “an exclusive representative of employees” as defined in federal labor laws. Id. § 2101(a)(4). The OCAW in this case, like the plaintiff in UFCW, Local 751, supra, is such a representative. The court held, however, that it doesn’t necessarily follow that the union has standing:
“Standing does not refer simply to a party’s capacity to appear in court,” but rather to ‘“whether the particular plaintiff is entitled to an adjudication of the particular claims asserted.’ ”
UFCW, Local 751, 50 F.3d at 1428-29 (quoting International Primate Protection League v. Administrators of Tulane Educ. Fund, 500 U.S. 72, 77, 111 S.Ct. 1700, 1704, 114 L.Ed.2d 134 (1991)). The court then held that under applicable Supreme Court precedent, the union lacked direct standing and standing to sue on behalf of its members because individualized proofs would be required as to each member’s damages. Id. at 1430 and 1432. The OCAW argues that this court should not follow UFCW, Local 751 because it was decided incorrectly. This court disagrees.
B.
OCAW contends that it has direct standing because it suffered an injury when the debtors failed to provide OCAW with the statutorily-required WARN notice. However, a person does not meet the test for direct standing under Article III unless he suffers an injury to himself that is distinct and palpable. Warth v. Seldin, 422 U.S. 490, 501, 95 S.Ct. 2197, 2206, 45 L.Ed.2d 343 (1974); Hospital Council v. City of Pittsburgh, 949 F.2d 83, 86 (3d Cir.1986). OCAW cannot establish direct standing because it has not alleged any direct injury to itself, as a union. Declarato*706ry relief and damages for OCAW members, which is all that OCAW has sought in this case, will not redress any injury OCAW might arguably have suffered by not receiving the WARN notice. See UFCW, Local 751, 50 F.3d at 1430.
C.
OCAW argues alternatively that it has as-soeiational standing to assert claims on behalf of its members. UFCW, Local 751 held, on similar facts, that the union in that case had no such standing. Id. at 1432. This court concludes that the same result must be reached here.
An association will have standing to sue in federal court on behalf of its members where:
(a) its members would otherwise have standing to sue in their own right; (b) the interests it seeks to protect are germane to the organization’s purpose; and (c) neither the claim asserted nor the relief requested requires the participation of individual members in the lawsuit.
United States v. Local 560 (I.B.T.), 974 F.2d 315, 339-40 (3d Cir.1992) (quoting Hunt v. Washington State Apple Advertising Comm’n, 432 U.S. 333, 342, 97 S.Ct. 2434, 2441, 53 L.Ed.2d 383 (1977)) (hereinafter “Hunt test”) (emphasis added). The first two elements of the Hunt test are not at issue here. The question is whether the claims asserted and relief requested require the participation of OCAWs members in this lawsuit, and the answer is plainly that their participation is required. If the debtors are found to have violated the WARN Act, the damages sustained by each union member will depend upon variables including their hourly rate of pay, when they left the debtors’ employ, and what if any unreimbursed medical expenses they incurred during the relevant period. 29 U.S.C. § 2104(a)(1) and (2); UFCW, Local 751, 50 F.3d at 1431-32. It follows that the OCAW cannot satisfy the third element of the Hunt test.
D.
The OCAW argues that the third element of the Hunt test is “prudential” (i.e. created by the courts for self-governance), and that it can therefore be eliminated by Congress. See Gladstone, Realtors v. Village of Bellwood, 441 U.S. 91, 100, 99 S.Ct. 1601, 1608, 60 L.Ed.2d 66 (1978) (citing Warth v. Seldin, 422 U.S. 490, 501, 95 S.Ct. 2197, 2206, 45 L.Ed.2d 343 (1974)). However, the Supreme Court held in Warth v. Seldin that it is a requirement of Article III of the Constitution, rather than a prudential requirement, that the plaintiff must himself have been injured:
Congress may grant an express right of action to persons who otherwise would be barred by prudential standing rules. Of course, Art. Ill’s requirement remains: the plaintiff still must allege a distinct and palpable injury to himself, even if it is an injury shared by a large class of other possible litigants.
Warth v. Seldin, 422 U.S. at 501, 95 S.Ct. at 2206 (citation omitted) (emphasis added). See also Gladstone Realtors v. Village of Bellwood, 441 U.S. at 100, 99 S.Ct. at 1608; International Union, UAW v. Brock, 477 U.S. 274, 288, 106 S.Ct. 2523, 2531-32, 91 L.Ed.2d 228 (1986); UFCW, Local 751, 50 F.3d at 1429.
E.
OCAW argues in the alternative that it is seeking declaratory relief on behalf of its members, and that the third element of the Hunt test for associational standing is therefore satisfied. That argument is based upon the statement in Warth v. Seldin that “[i]f in a proper case the association seeks a declaration, injunction, or some other form of prospective relief, it can reasonably be supposed that the remedy, if granted, will inure to the benefit of those members of the association actually injured.” Id. at 515, 95 S.Ct. at 2213. OCAW argues that it seeks a declaratory judgment that the debtors violated WARN, and therefore the quoted provision from Warth v. Seldin applies. That argument misconstrues the nature of declaratory relief. As noted in the above-quoted sentence, a declaratory judgment is a form of prospective relief.
The essential distinction between an action for declaratory judgment and the usual action is that it is preventative in nature, *707no actual -wrong need have been committed or loss have occurred in order to sustain the declaratory judgment action, but there must be no uncertainty that the loss will occur or that the asserted right will be invaded. Thus, the purpose of the declaratory judgment is to resolve uncertainties and controversies before obligations are repudiated, rights are invaded or wrongs are committed.
22A Am.Jur.2d Declaratory Judgments § 1 (1988) (footnotes omitted) (emphasis added). “The purpose of the Federal Declaratory Judgment Act is to settle actual controversies before they ripen into violations of law or a breach of duty_” Id. § 14. It follows that the “declaration” which the OCAW is seeking that the debtors violated the WARN Act is not in the nature of a declaratory judgment because it would not provide prospective relief resolving a controversy before a breach of duty occurs. Rather, the “declaration” which OCAW seeks is only a conclusion of law that the debtors violated the WARN Act, and that they are liable to certain OCAW members as a result. See UFCW, Local 751, 50 F.3d at 1431.
For these reasons, the court concludes that the OCAW does not have associational standing to assert on behalf of its members that the debtors violated the WARN Act when they closed the Moundsville, West Virginia plant.
IV.
OCAW cross-moves in the alternative to amend its complaint to add four members with direct claims as plaintiffs. The debtors oppose the cross-motion, arguing that they are prejudiced by the lateness of the amendment, and that the amendment would be futile because the case should be dismissed as to the new plaintiffs as well. The arguments in opposition fail, for these reasons.
As for the argument that the debtors are prejudiced, the only potential prejudice is the pendency of the trial date, which the court will adjourn in light of its ruling on these motions. Although the court is concerned about the length of time this ease is taking, it can be argued that the delay was occasioned in part by the fact that the debtors failed to file this motion until the decision in UFCW, Local 751. Because the court is granting the debtors’ belated motion to dismiss OCAW as plaintiff, fairness requires that individual members of the OCAW with direct claims have an opportunity to be substituted as plaintiffs. However, because of the fact that OCAW has been on notice of the possibility of this result since the debtors filed and served this motion in May, the court will grant an additional period of only twenty days from the date of the order on these motions to identify and add any and all new plaintiffs.
The debtors’ argument that the amendment would be futile also fails. An amendment is futile if the complaint is vulnerable to a motion to dismiss, even after being amended. Jablonski v. Pan American World Airways, Inc., 863 F.2d 289, 292 (3d Cir.1988); Massarsky v. General Motors Corp., 706 F.2d 111, 125 (3d Cir.), cert. denied, 464 U.S. 937, 104 S.Ct. 348, 78 L.Ed.2d 314 (1983). OCAW’s complaint will not, however, be vulnerable to a motion to dismiss after being amended. The individual members of OCAW clearly pass the Article III direct standing test. Moreover, there is no contention that there is a defect in the actual claim for money damages. Because the complaint would therefore withstand a motion to dismiss, the motion to amend is not futile.
The court also rejects the debtors’ argument that the claims of individual members of OCAW are time-barred. OCAW filed a timely proof of claim on behalf of its members. The filing of a proof of claim by an “authorized representative” is explicitly permitted by Fed.R.Bankr.P. 3001(b). A union is an “authorized representative” of its members under Rule 3001(b) for these purposes. In re Chateaugay Corp., 104 B.R. 626, 635-37 (S.D.N.Y.1989). The purpose of a proof of claim is to apprise the debtor and any other interested creditors of the existence of claims and the claim holders’ intention to hold the estate liable for debts. In re Stern, 70 B.R. 472, 476 (Bkrtcy.E.D.Pa.1987). OCAW’s proof of claim on behalf of its members fulfilled that purpose here.
*708For these reasons, OCAW’s cross-motion shall be granted.
CONCLUSION
For the foregoing reasons, the debtors’ motion to dismiss OCAW as plaintiff and OCAW’s cross-motion to add certain of its individual members to its complaint as plaintiffs are granted. Counsel for the debtors shall submit a form of order within seven days under D.N.J.Bankr.Ct.R. 4(c). As soon as that order is entered, counsel for the debtors shall arrange a telephone conference to schedule further proceedings in this adversary proceeding.
. References in this opinion to "debtor” shall mean only those debtors against which OCAW seeks relief, i.e., Hanlin Group, Inc. and Hanlin Chemicals West Virginia. The complaint named the other two debtors in these jointly administered cases as defendants, but sought no relief against them.
. The complaint was thereafter amended on June 16, 1993. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492140/ | OPINION
THOMAS M. TWARDOWSKI, Bankruptcy Judge.
Presently before the court are two motions filed by defendant, The Dial Corporation (“defendant”). In the first motion, filed pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure,1 defendant asserts that the complaint should be dismissed for failure to state a claim upon which relief can be granted. In the second motion, defendant requests referral of plaintiffs interstate claims to the Interstate Commerce Commission (“ICC”) for determination under the doctrine of “primary jurisdiction.”
JURISDICTIONAL STATEMENT
The Court has jurisdiction over the parties and subject matter of this proceeding pursuant to 28 U.S.C. §§ 157, 1384.
FACTUAL BACKGROUND
The following are the relevant facts.
On April 6, 1993, plaintiff filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code (“Code”), 11 U.S.C. §§ 101-1330, in the Bankruptcy Court for the Eastern District of Pennsylvania. Prior to this date, plaintiff operated as a motor common carrier in both interstate and intrastate commerce. Plaintiff has continued in possession of its assets and management of its business as a debtor-in-possession pursuant to 11 U.S.C. §§ 1107(a) and 1108.
From April of 1990 through March of 1993, defendant tendered goods to plaintiff for transportation. In July of 1993, plaintiff engaged the services of Trans-Allied Audit Company (“Trans-Allied”) to conduct an audit of plaintiffs freight bills to determine whether they had been properly rated according to the tariffs on file with the ICC and various state regulatory agencies. As a result of this audit, it was determined that defendant allegedly owed plaintiff $33,677.14 in freight undercharges. Trans-Allied billed defendant for this amount and made subsequent demands for payment. Upon defendant’s refusal to tender payment, plaintiff filed this complaint seeking to recover the difference between the amount defendant allegedly should have paid for the transport of freight according to the tariffs on file with the ICC and the various state regulatory agencies (the “filed rate”) and the amount defendant actually paid plaintiff (the “negotiated rate”).
DISCUSSION
We first consider defendant’s motion to dismiss the complaint since a decision granting this motion would eliminate the need to decide defendant’s motion for referral to the ICC. We begin by noting that dismissal of a complaint under Fed.R.Civ.P. 12(b)(6) for failure to state a claim is proper only when “it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.” Conley v. Gibson, 355 U.S. 41, 45, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957). In making this determination, the court must deem all material allegations in the complaint to be true and view them in the light most favorable to the plaintiff. Hamilton Bank v. Fidelity Elec. Co., Inc. (In re Fidelity Elec. Co., Inc.), 19 B.R. 531, 532 (Bankr.E.D.Pa.1982).
As stated earlier, plaintiff’s complaint seeks to recover freight undercharges. Gen*710erally, freight undercharges are recoverable under the filed rate doctrine2 so long as the rate sought is reasonable. Maislin Indus., U.S., Inc. v. Primary Steel, Inc., 497 U.S. 116, 110 S.Ct. 2759, 111 L.Ed.2d 94 (1990). Defendant does not dispute the validity of the filed rate doctrine in its motion to dismiss, but instead argues that plaintiffs complaint fails to state a claim under this doctrine because insufficient facts are alleged. To support this argument, defendant cites a decision rendered by the ICC in Vertex Corp., 9 I.C.C.2d 688, 691 (1993), modified, 10 I.C.C.2d 367 (1994) and asserts that plaintiffs complaint fails to state a claim because it does not allege: “(a) when the shipments moved; (b) what commodities were involved; (c) the origins and destinations of the shipments; (d) what the original rates were; and (e) what the sought rates are.” Defendant’s Brief in Support of Motion to Dismiss, p. 3, quoting Vertex, 9 I.C.C.2d at 691. Defendant contends that without this information, it is unable to determine which tariffs apply to the various claims and that, therefore, the complaint fails to state a claim upon which relief can be granted. For the reasons that follow, we disagree and conclude that defendant’s reliance upon Vertex is misplaced.
To explain, in Vertex, the ICC was not confronted with an attack on the validity of a freight undercharge complaint under Fed. R.Civ.P. 12(b)(6). In fact, no Rule 12(b)(6) motion had been filed in the Vertex case. Rather, Vertex dealt with the type and amount of evidence a carrier must present to establish a prima facie freight undercharge claim and to enable the ICC to render a decision. As stated by the ICC in Vertex, 10 1.C.C.2d 367, -, 1994 WL 657865, at *5: “[w]e need certain basic information before we can determine that the tariff an undercharge claimant relies upon applies to the shipments at issue.” Certainly, at the decision making stage of the litigation, it is imperative that a plaintiff produce sufficient evidence to establish a prima facie case and to enable a court or the ICC to render a decision or face dismissal of its claim. However, in the context of a Rule 12(b)(6) motion to dismiss, the type of detail sought by defendant is not essential to the validity of the complaint and therefore, its absence does not render the complaint defective and subject to attack under Fed.R.Civ.P. 12(b)(6).
Moreover, we find that plaintiffs complaint adequately places defendant on notice as to the nature of the claim asserted therein. Accordingly, we find that the complaint complies with Fed.R.Civ.P. 8(a) which requires “a short and plain statement of the claim showing that the pleader is entitled to relief.” Defendant can take advantage of the federal discovery rules enumerated in Fed.R.Civ.P. 26 through 37,3 to acquire the detail it seeks. We further note that sinee we are granting defendant’s motion to refer this case to the ICC, much, if not all, of the detail sought by defendant will have to be provided by plaintiff when the case is presented to the ICC. See Vertex, 10 I.C.C.2d 367, -, 1994 WL 657865, at *1. Accordingly, for all of these reasons, defendant’s motion to dismiss the complaint under Fed.R.Civ.P. 12(b)(6) shall be denied.
We next address defendant’s motion for referral of the interstate freight undercharge claims to the ICC. In this motion, defendant asserts that it is within the primary jurisdiction of the ICC to review the claims and defenses presented by the parties. The doctrine of primary jurisdiction4 requires a court to suspend a proceeding pend*711ing before it so that the matter might be referred to an appropriate administrative body. F.P. Corp. v. Ken Way Transp., Inc., 821 F.Supp. 1032, 1036 (E.D.Pa.1993).
The ICC is the regulatory agency charged by Congress with expert skill and knowledge of the interstate transportation industry. F.P. Corp. v. Ken Way Transp., Inc., 848 F.Supp. 1181, 1185 (E.D.Pa.1994). In Reiter v. Cooper, — U.S. -, -, 113 S.Ct. 1213, 1220, 122 L.Ed.2d 604 (1993), the United States Supreme Court addressed the issue of rate reasonableness and found it to be within the primary jurisdiction of the ICC.
In the case before us, both plaintiff and defendant agree that the rate reasonableness issue is within the primary jurisdiction of the ICC and cite a recent decision of this court in which referral to the ICC5 was granted. See SKF, 180 B.R. at 788. However, as we noted in SKF, referral to the ICC on rate reasonableness is not automatic. Rather, to justify referral of the rate reasonableness issue to the ICC, the shipper must make a threshold showing that the filed rates sought to be collected by the carrier are unreasonable. Id. at 795. In this case, defendant met this burden by alleging that plaintiff is attempting to collect rates, which, if on file with the ICC at the time of the shipments in question, were unreasonably high when compared to rates being charged by other carriers at the time in question.6
Accordingly, as we find that defendant made a sufficient threshold showing of rate unreasonableness to justify referral of this issue to the ICC, we shall stay the proceedings in this case to give defendant an opportunity to file an administrative complaint -with the ICC requesting a determination of the rate reasonableness issue and any other contested issues which lie within the primary jurisdiction of the ICC.7
An appropriate order follows.
ORDER
AND NOW, this 30th day of August, 1995, it is ORDERED that defendant’s motion to dismiss this adversary complaint pursuant to Fed.R.Civ.P. 12(b)(6) is DENIED.
IT IS FURTHER ORDERED that defendant’s motion requesting that the proceedings in this adversary case be stayed so that defendant may present various issues raised in the pleadings to the ICC is GRANTED.
IT IS FURTHER ORDERED that defendant shall, on or before September 25, 1995, file an administrative complaint with the ICC requesting a determination of the issues which are within the primary jurisdiction of the ICC.
IT IS FURTHER ORDERED that the proceedings in this adversary ease are placed in a state of civil suspense until a decision is issued by the ICC or until further Order of this court.
IT IS FURTHER ORDERED that the parties shall file a joint status report, which describes in detail the status of the ICC proceedings, with this court by March 29, 1996 and every sixty days thereafter, until the ICC proceeding is concluded.
IT IS FURTHER ORDERED that when the ICC proceeding is concluded, the parties shall promptly file a certified copy of the ICC decision with this court and request *712that the proceedings in this adversary case recommence.
. Fed.R.Civ.P. 12(b)(6) is made applicable to adversary proceedings in bankruptcy cases by Fed. R.Bankr.P. 7012.
. The history of the filed rate doctrine and its impact upon a carrier's ability to collect freight undercharges was explained in detail by us in Friedman's Express, Inc. v. SKF USA, Inc. (In re Friedman's Express, Inc.), 180 B.R. 788 (Bankr.E.D.Pa.1995), a case cited by both parties in their briefs, and need not be further explained in this Opinion.
. Fed.R.Civ.P. 26 through 37 are made applicable to adversary proceedings in bankruptcy cases by Fed.R.Bankr.P. 7026 through 7037.
.The primary jurisdiction doctrine applies when “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.” United States v. Western Pacific R.R., 352 U.S. 59, 64, 77 S.Ct. 161, 165, 1 L.Ed.2d 126 (1956).
. The term referral is a misnomer. As noted by the United States Supreme Court in Reiter v. Cooper, -U.S. at -, 113 S.Ct. at 1220, the Interstate Commerce Act does not contain a direct mechanism for a court to demand or request a determination by the ICC. Rather, a court can only stay the proceedings in the case before it and advise the party requesting referral to file the appropriate administrative complaint with the ICC.
. Attached to defendant’s motion to dismiss and motion for referral to the ICC is an affidavit of defendant’s Transportation Resource Manager, Peter Opsomer, which supports this allegation.
.In its brief, plaintiff makes an informal request that we modify our referral order should the United States Third Circuit Court of Appeals rule in Hargrave v. United Wire, Docket No. 94-5131 that the defenses enumerated in the Negotiated Rates Act are inapplicable to bankruptcy cases. As the Third Circuit has not yet issued a decision in Hargrave, defendant’s informal request is premature and will not be ruled upon at this time. If a decision of the United States Third Circuit Court of Appeals is rendered in the future which becomes relevant to this case, plaintiff can file the appropriate motion at that time. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492141/ | MEMORANDUM
DAVID T. STOSBERG, Bankruptcy Judge.
This matter comes before the Court on the Debtor’s Request For Creditor, Swope Automotive To Return Property Essential To The Debtor’s Reorganization Plan. The Debtor is seeking the return of a vehicle repossessed prepetition. The pleading filed by the debt- or, however, is procedurally defective. Bankruptcy Rule 7001(1) provides that an adversary proceeding is a proceeding to recover money or property.
We hereby adopt and incorporate by reference the Memorandum Opinion written by Judge Charles M. Allen of the United States District Court in the case of In re Carolyn Louise Carter (Liberty National Bank and Trust Co. v. Carolyn Louise Carter), Civil Action No. C-93-0728-L(A) (unpublished opinion). (Judge Allen has consented to our publication of this opinion vis-a-vis this Memorandum). In the Carter ease, Judge Allen directed the Bankruptcy Court for the Western District of Kentucky to discontinue accepting motions seeking turnover in Chapter 13 eases “in direct contravention to the plain and unambiguous language of Bankruptcy Rule 7001.” (Memorandum Opinion, at page 747).
In compliance with Judge Allen’s directive, we shall enter an Order incorporating this Memorandum and shall remand the Debtor’s request based on his failure to file an adversary proceeding.
ORDER
Pursuant to the findings of fact and conclusions of law set forth in the Court’s Memorandum entered this same date and incorporated herein by reference,
IT IS ORDERED that the Debtor’s Request For Creditor, Swope Automotive to Return Property Essential to the Debtor’s Reorganization, Pay Costs and Attorney’s Fees be, and is hereby, remanded.
APPENDIX
IN THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF KENTUCKY AT LOUISVILLE
CM Action No. C 93-0728-L(A)
IN RE: CAROLYN LOUISE CARTER, Debtor, LIBERTY NATIONAL BANK AND TRUST COMPANY, Appellant, v. CAROLYN LOUISE CARTER, Appellee.
MEMORANDUM OPINION
This case is before the Court on appeal from the United States Bankruptcy Court for *746the Western District of Kentucky pursuant to 28 U.S.C. Sec. 158. Appellant/creditor, Liberty National Bank and Trust Company of Louisville (Liberty), appeals from the Bankruptcy Court order directing Liberty to turn over property to Appellee/Debtor Carolyn Louise Carter (“Carter”).
In early September 1993, Liberty lawfully repossessed a 1993 Ford Festiva automobile in which it held a security interest. Three weeks later, Carter filed for Chapter 13 bankruptcy protection, listing Liberty as a secured creditor. Through her attorney, Carter also filed on that same day an emergency motion for turn-over of the repossessed automobile. On October 7, 1993, the Bankruptcy Court entered an order granting Carter’s motion.
Liberty unsuccessfully moved the Bankruptcy Court to reconsider the turn-over order, arguing that (1) Liberty’s interest in the property was not adequately protected; (2) the plan proposed by Carter was not feasible; and (3) the motion for turn-over was procedurally incorrect in that turn-over motions are governed by Bankruptcy Rule 7001 requiring an adversary proceeding. In denying the motion, the Bankruptcy Court reasoned that although Liberty was entitled to adequate protection of its interests, that right did not include a requirement that Carter show a confirmable plan. The Court held that Liberty’s interests were adequately protected by the requirements that Carter show proof of insurance and that Liberty’s repossession costs take priority over bankruptcy administrative costs. As to the procedural contention, the Court conceded that Liberty might be technically correct, but observed that “the promptness which the current motion practice allows eliminates many problems which an adversary proceedings would bring.” November 2, 1993 opinion at 2.
On this appeal, Liberty presses its argument that under Rule 7001 an action by a debtor for the turn-over of money or property in which the debtor has an interest must be initiated by adversary proceeding.1 Liberty relies on In re Riding, 44 B.R. 846 (Bkrtcy.D.Utah 1984), involving a fact pattern very similar to the case at bar. In that case the creditor bank sought relief from an order compelling it to turn over to the debtor a vehicle it had lawfully repossessed prior to debtor’s filing for Chapter 13 protection. The Utah District Court discussed the substantive law behind turn-over and summarized the history of turn-over procedure under the 1898 Bankruptcy Act and the 1973 and 1983 Bankruptcy rules. The court stated that “[t]he modern bankruptcy rules provide a mechanism for resolving turnover disputes in a manner that affords the parties a fair opportunity to present their sides of the issue, while promoting efficiency and uniformity in practice.” Riding, at 859. The court concluded that the bankruptcy rules mandate that the court await commencement of an adversary proceeding before determining whether turn-over should be allowed.
Riding has been followed in several cases from different jurisdictions. The Ninth Circuit has held that an action to recover property was procedurally incorrect because it was brought through an ex parte motion instead of the required adversary proceeding. In re Wheeler Technology, Inc., 139 B.R. 235 (9th Cir. BAP 1992). The Seventh Circuit has held that a turn over action is an adversary proceeding that must be commenced by a properly filed and served complaint. Matter of Perkins, 902 F.2d 1254 (7th Cir.1990). In re Ace Industries, Inc., 65 B.R. 199 (Bkrtcy.W.D.Mich.1986), the court held that a debtor’s motion for turn-over of certain monies and properties should have been brought as an adversary proceeding. In re Chanticleer Associates, Ltd., 592 F.2d 70 (2d Cir.1979), the Second Circuit ruled that the Bankruptcy Court acted beyond its scope by granting a last minute stay to debtor for a modification that was adverse to the creditor, where the stay was subject to the procedural requirements for adverse modification, i.e., an adversary proceeding as provided by the Bankruptcy Act. The Montana District Court observed that the proper procedure for such matters is an adversary proceeding *747to determine the validity, priority, or extent of liens. In re Lincoln, 144 B.R. 498 (Bkrtcy.D.Mont.1992). In re Amodio, 155 B.R. 622 (Bkrtcy.N.D.N.Y.1993), the Court noted that the matter should have been brought as an adversary proceeding, but the Court proceeded to decide the matter because neither party had raised the procedural defect.
Carter argues that despite Rule 7001, the motion proceeding was proper because it has always been common practice in the Western District of Kentucky for a Chapter 13 debtor seeking turn-over to proceed by motion. However, debtor’s counsel fails to cite any support for this proposition. Furthermore, for the bankruptcy of the Western District of Kentucky to continue such a practice would be in direct contravention to the plain and unambiguous language of Bankruptcy Rule 7001.
Carter also alleges that there is a split of authority among the circuit and district courts as to whether or not turn-over proceedings must be initiated by motion or adversary proceedings. Once again, however, debtor has failed to cite authority to support the claim. Carter argues that turn-over requests may be made by motion in order to speed up the judicial process. Regardless of any perceived practical advantages, we do not have authority to judicially create exceptions within the rules to allow for a turn-over action to proceed by motion in the interest of judicial economy.
Inexplicably, Carter cites In re Jackson, 142 B.R. 172 (Bkrtcy. N.D. Ohio 1992) in support of the claim that a turn-over action may proceed by motion despite Rule 7001. Jackson, however, did involve an adversary proceeding.2 Indeed, by employing a complaint plus temporary and preliminary in-junctive relief procedures, Jackson demonstrates how an adversary proceeding may serve simultaneously the interests of efficiency and due process. In contrast, in the case before the court, the matter was decided via telephonic conference with the creditor having little opportunity to confer with its counsel beforehand.
Carter also supports her argument by pointing to In re Cox, 133 B.R. 198 (Bkrtcy.N.D.Ohio 1991), in which the court allowed the debtor’s turn-over action to proceed by motion and found that an adversary proceeding was unnecessary. In reaching this conclusion the Cox court construed United States v. Whiting Pools, Inc., 462 U.S. 198, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983), as standing for the proposition that an adversary proceeding is not necessary for a turnover action. We must respectfully disagree with this broad a reading of Whiting (which, of course, was governed by 1978 statutory law). The issue of the proper procedure for effecting turn-over was not presented in Whiting. Rather, the issue was solely a matter of substantive law, i.e., whether property seized pursuant to an Internal Revenue Service lien should be considered an asset of the estate. There was no occasion for the Court to address the proper procedure, and, indeed, the matter was not even mentioned in passing. The Supreme Court concluded only that the IRS was not exempt from the bankruptcy laws relating to turn-over. Thus, Whiting is not applicable to the case at hand.
One last case cited by Carter is In re Gerwer, 898 F.2d 730 (9th Cir.1990). This case, too, is distinguishable. In Gerwer, the court found the trustee’s motion seeking turn-over to be harmless error because the case proceeded under Bankruptcy Rule 6004(c) governing motions for a sale free of liens, which required the observance of Bankruptcy Rule 9014, a catch all provision governing contested matters to which no other rules applied. In the current case Rule 7001 is clearly applicable thus Rule 9014 does not apply.
Carter attempts to distinguish In re Riding, on which Liberty relies, by pointing out that the turn-over in that case was initially granted by default. Thus, it is argued that unlike the creditor in Riding, Liberty had adequate notice of the hearing, participated therein and had the chance to offer proof and cross-examine witnesses thereby receiving its *748day in court. However, we see nothing to suggest that this was the operative factor in the Riding decision. Furthermore, as pointed out by Liberty, such matters may be handled through telephonic conferences, such that there may be little time for the creditor to confer with its attorneys before the conferences take place. Also, with the use of telephonic hearings there is no opportunity to cross-examine witnesses or offer proof, thereby depriving a creditor of an opportunity to examine the debtor’s plan or examine the debtor under oath.
Carter has failed to put before this Court sufficient authority to establish that it is procedurally correct for a turn-over action to proceed by motion. In light of Rule 7001, the Bankruptcy Court should not have granted the motion.
Finally, Carter argues that since Liberty will retain its security interest, Liberty could bring a motion for modification of the automatic stay or motion to dismiss if Carter fails to live up to her obligations. This has nothing to do with whether an action for turnover of property should be brought by motion or adversary proceeding. Actually it goes more to the question of whether Liberty was given adequate protection with regard to its security interest in the secured property.
ADEQUATE PROTECTION OF CREDITOR’S SECURITY INTEREST
Title 11 U.S.C. Sec. 363(e) states that upon a request by an entity that has an interest in property used, sold or leased, or proposed to be used, sold or leased by the trustee, “the court, with or without a hearing, shall prohibit or condition such use, sale or lease, as is necessary to provide adequate protection of such interests.” 11 U.S.C. Sec. 361 lists three possible methods by which adequate protection may be provided to a secured creditor: (1) requiring trustee to make a cash payment or periodic cash payments to such entity to the extent that the use, sale or lease under Sec. 363 results in a decrease in value of such entity’s interest in such property; (2) providing such entity with an additional or replacement lien to the extent that such stay, use, sale, lease or grant results in a decrease in the value of such entity’s interest in such property; (3) granting such other relief, other than entitling such entity to compensation allowable under section 503(b)(1) of this title as administrative expenses as will result in the realization of such entity of the indubitable equivalent of such entity’s interest in such property.
Liberty contends that it received inadequate protection under 11 U.S.C. Sec. 363(e) because no provision was made for payment of property depreciation, payment was not granted and no method of compensation was made for value reduction of property in the case of default by debtor. The methods of compensation listed in 11 U.S.C. Sec. 361 are neither exclusive nor exhaustive. Thus, the Bankruptcy Court may accept a method of protection that does not fall under any of the methods listed in Sec. 361. Although the Court does not fashion the protection to be given to a creditor, it must examine the plan offered by the debtor or trustee in order to determine whether the interest of the secured creditor is adequately protected before it accepts the plan and allows turn-over of the property. The Bankruptcy Court determined that Liberty would receive adequate protection by the debtor’s showing that she had obtained insurance on the vehicle and by giving the payment of Liberty’s repossession expenses super priority over the administrative expenses.
Liberty argues that this would maintain the status quo, but that given the nature of the collateral involved, it was an abuse of discretion for the Bankruptcy Court to accept Carter’s plan as providing adequate protection. First of all, vehicles depreciate in value. This deprivation is further increased by mileage as well as by wear and tear on the vehicle. The protection plan approved by the Bankruptcy Court does not compensate Liberty at all for the depreciation that will occur, especially between the period in which the car is turned over and receipt of first payment. Thus, the value of Liberty’s security interest will decrease with no corresponding compensation.
The purpose of adequate protection is to provide a secured creditor the benefit of its *749bargain while enabling the debtor to use the secured property; it is not intended as an “after the fact” method allowing creditors to obtain the full amount of secured claims. In re Northeast Chick Services, Inc., 43 B.R. 326 (Bkrtcy.D.Mass.1984). The adequate protection doctrine exists in essence to prevent impairment of a secured creditor’s position as a result of decline in value of debtor’s assets. U.S. v. Booth Tow Services, Inc., 64 B.R. 539 (W.D.Mo.1985). Thus, where collateral is sold or depreciated, the motion of adequate protection requires replacement or payment so that the value of the creditor’s interest is not dissipated. In re Prime, Inc., 35 B.R. 697 (Bkrtcy.W.D.Mo.1984).
Carter argues that Liberty’s interests are adequately protected because it will receive full payment of its repossession costs before the administrative expenses are paid and that it would receive 100% of its payments under the plan. To start with, Carter’s plan has yet to be approved. Furthermore, it will be at least four months before Liberty receives the first payment under the Plan. This does not take into consideration the fact that Liberty has not received a payment on the vehicle since April, 1993. The protection plan approved by the Bankruptcy Court does not make any provisions for the depreciation that will occur during the period between which Liberty is required to turnover the car and receipt of the first payment.
Carter maintains that since Liberty remains a secured creditor, its repossession rights also provide adequate protection. This is not adequate protection. Before Liberty may take action it must wait for Carter to default on her payments. Then it can bring a motion to modify the stay or for dismissal. The value of the vehicle will have declined; thus, upon resale, Liberty would be unable to receive as much as it could were the car sold today, thereby resulting in Liberty losing the full value of its secured property interest.
Before a debtor may receive the turn-over of property it must put forth a plan providing for adequate protection for any decline in value resulting from the use of the vehicle. Before passing on the adequacy of the debt- or’s protection plan, the Bankruptcy Court must establish the value of the secured creditor’s interest, identify the risks to secured creditor’s value resulting from debtor’s use of the property and determine whether the debtor’s proposal protects value as nearly as possible against risk to that value consistent with the concept of indubitable equivalence. In re Rankin, 49 B.R. 565 (Bkrtcy.W.D.Mo.1985). Sufficiency of the protection is a question of fact to be determined by the Bankruptcy Court on a case by case basis.
The record is totally devoid of any evidence that the Bankruptcy Court considered anything before granting the motion for turn-over. There is no way to tell from the record whether or not the court considered the reduction in value that would occur once the vehicle was turned over. Nor does it appear that the court considered the adequacy of the debtor’s protection plan. There is no way that insurance and payment of repossession costs can cover the value reduction that will occur because of depreciation and wear and tear.
An order in conformity has this day entered.
ORDER
This matter having come before the Court on appeal from the decision of the United States Bankruptcy Court, and the Court having entered its memorandum opinion and being advised,
IT IS ORDERED THAT the decision of the United States Bankruptcy Court is reversed and the matter is vacated for further proceedings.
This is a final and appealable order.
June 17, 1994
/s/ Charles M. Allen Charles M. Allen
Senior United States District Judge
. Bankruptcy Rule 7001 provides, in pertinent part: "An adversary proceeding is governed by the rules of this Part VII. It is a proceeding in a bankruptcy court (1) to recover money or property, except a proceeding under Sec. 5554(b) or Sec. 725 of the Code, Rule 2019 or Rule 6002.”
. After filing a voluntary Chapter 13 petition, "plaintiffs filed a verified complaint, seeking turnover ... and motion for temporary restraining order.” Jackson at 174. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492143/ | MEMORANDUM OPINION
ARTHUR B. BRISKMAN, Bankruptcy Judge.
This matter came before the Court on the Risa L. Kay, the Debtor’s, Motion to Convert Case to Chapter 11. After reviewing the pleadings, evidence, receiving testimony, exhibits, and arguments of counsel, the Court makes the following Findings of Fact and Conclusions of Law.
FINDINGS OF FACT
On September 15, 1993, the Debtor sought protection under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 101 et seq. The Court entered its Order Converting Case to Chapter 7 pursuant to 11 U.S.C. § 1112 on February 28, 1994. Thereafter, James C. Orr was appointed Chapter 7 Trustee.
The Debtor owns several parcels of Central Florida real estate, and based upon the Debtor’s estimate as to the relative value of each, over 70% of the total value of these parcels consists of unimproved non-income producing land. The Debtor’s real estate holdings are encumbered by mortgages in excess of $5.7 million held by three secured creditors. The Debtor has failed to pay loans secured by her real estate holdings other than her homestead and has been involved in protracted state court litigation defending foreclosure actions brought by secured lenders.
Simkins Industries, Inc. d/b/a Westfield Financial Corporation (“Westfield”) originated a loan on May 19, 1989 in the principal sum of $1,260,000.00 secured by 11.131 acres of real property situated at the Southwest quadrant of the intersection of State Road 436 (Semoran Boulevard) and Michigan Avenue in Orlando, Orange County, Florida (the “Southside Michigan Property”). The underlying note and mortgage evidencing the indebtedness to Westfield matured on May 19, 1991. A judicial foreclosure sale of the property was stayed by the Debtor’s filing of a Chapter 11 petition on the morning of the foreclosure sale.
Westfield obtained a final judgment in foreclosure on April 26, 1993 in the amount of $1,915,257.20 with interest at 12% per annum. As of December 14, 1994, the interest due on the judgment was $375,924.93 for an aggregate amount due of $2,291,222.13. Interest continues to accrue at the per diem rate of $625.69. The Debtor failed to pay Orange County, Florida ad valorem real estate taxes assessed on the Southside Michigan Property since 1990 in the sum of $109,-141.37. The Trustee succeeded the Debtor as the real party in interest of a counterclaim and appeal from final judgment arising in the state foreclosure action filed by Westfield in September 1991.
*875Firstate Financial, F.A. (“Firstate”) is seeking to foreclose three properties located in Orange County and Polk County, Florida in which Firstate held a mortgage with the following values:
Alafaya (Orange County) $1,540,000
No. Michigan Street (Orange County) $1,100,000
Baseball City (Polk County) $950,000
Since the loan was modified and extended in June 1990, the Debtor made no payment to Firstate on the loan nor paid any property taxes. Firstate seeks a principal balance of $1,830,319.83, advanced taxes of $269,850.15, interest of prime plus 2.5% to February 1, 1995 of $764,868.85, (the default rate of prime plus 7.5% from February 1,1991 to February 1, 1995 of $1,167,686.28), attorney fees, and costs.
The Debtor filed a counterclaim against Firstate for fraud and breach of fiduciary duty and a third-party claim against her former attorneys for negligence and breach of contract based on events related to the closing of a modification of the mortgage loan. Those attorneys filed a third-party claim against Firstate’s former attorneys and a claim against Firstate for fraud.
The RTC Mortgage Trust (“RTC”), successor in interest to Resolution Trust Corporation, as Receiver for Commonwealth Federal Savings and Loan Association, filed a foreclosure action against the Debtor arising from a loan consisting of a $1,500,000.00 promissory note and a $250,000.00 promissory note. The loan was secured by a first mortgage on the property referred to as Fairmont Plaza Shopping Center in Long-wood, Florida. Pursuant to the terms of the loan, the notes matured and became due in full on March 23, 1990. On January 1, 1990, the loan went into default for failure to pay the regular monthly payment. No loan payments have been made since this date.
On August 29, 1990, the RTC filed a foreclosure action. The Debtor filed affirmative defenses and a counterclaim alleging the RTC tortiously interfered with the Debtor’s business relationship with prospective purchasers and prospective tenants of Fairmont Plaza and for willfully and maliciously preventing the Debtor from selling or leasing space in Fairmont Plaza thus preventing the Debtor from satisfying amount owed the RTC.
The state court entered an Order on Sequestration of Rents which provided that the Debtor would manage Fairmont Plaza and be entitled to a fee of $2,500.00 per month. From January through August 1993, the total rental income collected by the Debtor was $30,413.50. During this period and pursuant to the state court Order, the Debtor paid herself $20,499.86 in management fees, 67% of the total rents collected. Pursuant to an agreement between the Debtor and RTC and this Court’s Order of November 29,1993, the Debtor received a management fee from rents collected at Fairmont Plaza in the sum of $1,000.00 per month and $2,500.00 per month from Amoco Oil Company. The Order Converting Case to Chapter 7 of February 28, 1994 rescinded all authorization to pay compensation to the Debtor.
On September 15, 1993, the date of the petition, the amount due the RTC was the sum of $1,769,263.28 consisting of $1,314,-339.98 in principal and $454,923.30 interest calculated at the contract rate.
The Debtor has attempted to sell each parcel of real estate since 1990 with no success. Significant amounts of interest and real estate taxes continue to accrue on the Debtor’s obligations resulting in a continuing loss to and diminution of the estate. The Debtor’s inability to sell any of the properties, make payments on her mortgages, and pay real estate taxes has resulted in unreasonable delay that is prejudicial to creditors.
On October 11, 1994, the Debtor filed a Motion to Convert to Chapter 11 alleging: the trustee’s compromises do not bring in enough money to the estate; since conversion to Chapter 7, the Debtor has continued to enhance the value of property of the estate by continuing to lease property in the Fair-mont Plaza; several creditors caused harm to the estate by pursuing state court actions in violation of the automatic stay during the Chapter 11 and after conversion to Chapter 7; A1 Frith and John Stump filed claims as creditors although they were not owed any money by the Debtor; and the Debtor should *876be allowed to propose a plan of reorganization.
The Motion to Convert to Chapter 11 is interwoven with three motions for and notices of proposed compromises of controversy (the “compromises”) filed by the Trustee to resolve litigation involving secured creditors and other parties. The three compromises are in the best interest of the estate and have been approved.
CONCLUSIONS OF LAW
On February 28, 1994, this Court entered an Order Converting Case to Chapter 7 pursuant to 11 U.S.C. § 1112. Section 706 of the Bankruptcy Code governs conversion and provides in pertinent part:
(a) The debtor may convert a case under this chapter to a case under chapter 11,12, or 13 of this title at any time, if the case has not been converted under section 1112, 1307, or 1208 of this title. Any waiver of the right to convert a case under this subsection is unenforceable.
(b) On request of a party in interest and after notice and a hearing, the court may convert a ease under this chapter to a case under chapter 11 of this title at any time.
11 U.S.C. § 706. The legislative history of Section 706 reveals the debtor has one absolute right of conversion to a reorganization or individual repayment plan case. If the case has already once been converted from Chapter 11 or 13 to Chapter 7, the debtor does not have that right. H.Rep. No. 95-595, 95th Cong., 1st Sess. 380 (1977), U.S.Code Cong. & Admin.News 1978, pp. 5787, 6336; S.Rep. No. 989, 95th Cong., 2d Sess. 94 (1978), U.S.Code Cong. & Admin.News 1978, p. 5880. This prevents debtors from seeking conversion back to Chapter 11, 12, or 13 without the control of the court after a case has been converted to Chapter 7. 4 CollieR on BANKRUPTCY ¶ 706.01 (15th ed. 1994). As this case has been converted from Chapter 11 to Chapter 7, the Debtor has no absolute right of conversion.
The Debtor’s right to convert is not unlimited. The decisions to convert are within the discretionary process of the bankruptcy court based on the court’s determination of what will most inure to the benefit of all parties in interest. Matter of Texas Extrusion Corp., 844 F.2d 1142 (5th Cir.1988); In re Graham, 21 B.R. 235 (Bankr.N.D.Iowa 1982). When the Debtor invoked the jurisdiction of the Court by filing for relief under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 101 et seq., she received the benefits and protection provided by the Bankruptcy Code. Litigation was stayed. The Debtor received additional time to effectuate a plan, sell, refinance the properties, or resolve the litigation with the lenders. While the Debtor is entitled to breathing room, the extent of the breathing room must be balanced against the legitimate rights of creditors.
The Court analyzed the issue pursuant to 11 U.S.C. § 1112 in converting the case to Chapter 7 on February 28, 1994 and in response to the motions to convert by various creditors. Section 1112 provides in pertinent part:
(b) Except as provided in subsection (c) of this section, on 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;
(4) failure to propose a plan under section 1121 of this title within any time fixed by the court;
(5) denial of confirmation of every proposed plan and denial of a request made for additional time for filing another plan or modification of a plan;
(6) revocation of an order of confirmation under section 1144 of this title, and denial of confirmation of another plan or a modified plan under section 1129 of this title;
*877(7) inability to effectuate substantial consummation of a confirmed plan;
(8) material default by the debtor with respect to a confirmed plan; [or]
(9) termination of a plan by reason of the occurrence of a condition specified in the plan; or
(10) nonpayment of any fees or charges required under chapter 123 of title 28 [28 U.S.C.S. §§ 1911 et seq.]
11 U.S.C. § 1112.
In the more than five months of protection under Chapter 11, the Debtor was unable to meet her obligations to the secured lenders holding mortgages to the several parcels of real estate. The lenders have received no payments for more than four years. Real estate taxes remain unpaid since 1990. Although the Debtor remained in possession and control of the property which she has been marketing since 1990, she was unable to dispose of any property, obtain refinancing, or resolve the pending litigation with the lenders. During this time, the Debtor was unable to obtain anything for the benefit of creditors. Pursuant to 11 U.S.C. § 1112, this constituted a continuing loss to or diminution of the estate and absence of a reasonable likelihood of rehabilitation; demonstrated the Debtor’s inability to effectuate a plan; and was an unreasonable delay by the Debtor that was prejudicial to creditors. The best interest of the creditors and the estate were served by conversion of this case to Chapter 7.
After conversion to Chapter 7, the Debtor continued to market the properties unsuccessfully. Although the Debtor’s pending lawsuits may have some merit, the costs of litigation must be balanced by the best interest of the creditors. Although the Debtor argues it is in both her best interest and that of the estate to convert to Chapter 11, there has been no change in circumstances since the Court converted the case to Chapter 7 pursuant to 11 U.S.C. § 1112. Using her best efforts as a debtor in possession and subsequent to conversion, the Debtor has been unable to sell the properties, refinance, or otherwise resolve the pending litigation. Based on the Trustee’s compromises, value will be realized for the estate. All creditors will be paid in full, the pending litigation will be resolved, and after payment of administrative expenses, it is anticipated the Debtor will receive in excess of $500,000.00.
The Debtor has received the benefits and protection provided by Chapter 11 and the opportunity to demonstrate if there is an ability to reorganize. Absent a change in circumstances, conversion to Chapter 11 would serve no valid purpose other than additional delay to creditors who have already suffered significant delay. Having been provided this opportunity and recognizing there has been no change since the Court converted the case, the creditors’ rights must be protected. Weighing the Debtor’s unsuccessful attempt at a Chapter 11 reorganization against the prejudice to the creditors and the costs to the estate, a liquidation of the Debtor’s assets will inure to the benefit of all parties in interest.
Accordingly, the Debtor’s Motion to Convert Case to Chapter 11 is due to be denied. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492145/ | MEMORANDUM DECISION ON PLAINTIFF’S MOTION FOR ENTRY OF DAMAGES
A. JAY CRISTOL, Chief Judge.
THIS CAUSE came before this Court on Hillard’s Motion to Award Damages in Favor of Hillard Development Corporation and Against the Defendants dated November 23, 1994 (the “Motion”). For good cause stated in the Motion, and after an evidentiary hearing before me on December 23, 1994, and based on the other submissions of the parties, for the reasons set forth below, Hillard is hereby awarded $98,732.00 in damages on account of improper disallowances made by the Commonwealth to Hillard’s 1992 Cost Reports, $45,606.98 in damages on account of improper recoupments by the Commonwealth, and no money for attorneys’ fees and costs.
FACTS
On March 24, 1993, this Court entered an Agreed Order approving Settlement Agreement and Dismissal of Adversary Complaint between the Debtor and the Defendants settling an adversary proceeding between the parties. Adv. No. 91-1197-BKC-AJC-A. The Settlement Agreement provides that it is to be construed in accordance with Massachusetts law. Settlement Agreement, ¶ 11.
Paragraph 4 of the Settlement Agreement provides as follows:
4. Furthermore, COMMONWEALTH agrees to withdraw and/or waive any and all other rights or claims it may have or otherwise assert now or in the future against PROVIDENT AND PILGRIM, its agents, officers, shareholders, successors and assigns for any payments, disallowance of costs, imposition of ceilings, set-off, recoupment or downward adjustment of costs or other limitation on reimbursement of costs, or rates as a result of the rates set forth in paragraph 11 and for all periods through December 31, 1993. (emphasis added)
In return, Hillard released the Commonwealth from any and all claims, liabilities, actions, causes of action and damages which could have been asserted in either Hillard’s 1990 Bankruptcy proceeding or the pending adversary proceeding. The wording of the mutual waiver was very broad and no reference was made to specific categories of claims, rates, or costs waived. The Settlement Agreement also established final prospective rates for the two nursing homes for the years ending December 31, 1992 and 1993. The Agreement did not set forth the method that was used to calculate the stipulated 1992 or 1993 rates or the basis that might be used to calculate rates for 1994.
Approximately three months after execution of the Settlement Agreement, Hillard filed its Cost Reports with the Commission for its Provident and Pilgrim Manor Nursing Homes. Def. Ex. 2 and 4. The Cost Reports are both a report of the financial condition of the facility and a claim for reimbursement. However, the Cost Reports also include Schedules which set out “non-allowable” expenses and represent costs which are not being “claimed” — although they are not being claimed because they are, in fact, non-allowable.
For example, Schedule XIII of Pilgrim Manor’s Cost Report states under the heading Detail of Non-Allowable Expenses:
Listed below are expenses which are not being claimed and which the Commission Type I (computer) adjustments process will automatically adjust. It is necessary to fill out this section. This is included in the report so that providers *923will know which accounts will be automatically adjusted.
Therefore, in certain Schedules, Hillard claimed reimbursement for certain costs, but did not claim reimbursement for other costs. Specifically, on pages 28-33 of its Cost Reports, Hillard itemized its non-allowable expenses which were not being “claimed” (the “Non-allowable Expenses”). The non-allowable expenses for which Hillard did not seek reimbursement are not related to “public patient care.” Transcript (“Tr. at_”) at 63, 76, 88.
The Commonwealth disallowed claimed allowable costs by Provident in the amount of $177,280 and by Pilgrim in the amount of $12,753. Del Ex. 1 under column heading “Disallowed.” The Commonwealth allowed Provident reimbursement in the amount of $20,805, and Pilgrim reimbursement in the amount of $70,496. Id. under column heading “Additional Reimbursement.” Thus, the Commonwealth disallowed claimed allowable costs in the net amount of $98,732. Id. in row entitled “Total Net Amount for Both Facilities.” All of Hillard’s reported non-allowable costs were disallowed.
On May 27, 1994 Hillard filed the instant adversary to declare or enforce the terms of the Settlement Agreement. On August 5, 1994 Hillard moved for Summary Judgment. There were two issues: 1) Hillard claimed that the Commonwealth improperly disallowed $1.2 million in costs on Hillard’s 1992 year end Cost Reports in violation of the Settlement Agreement, which has had the effect of lowering the nursing homes’ 1994 reimbursement rates; and 2) Hillard claimed that the Commonwealth improperly recouped funds from reimbursements issued to Hillard for its 1992 claims, in violation of the Settlement Agreement.
On November 3, 1994 this Court entered its Memorandum Order Granting Hillard’s Motion for Summary Judgment, wherein the Court concluded that the Settlement Agreement between the parties “was a complete waiver of all claims of the Commonwealth against the Plaintiff for, among other things, any disallowance of costs.... ” Thus, the Court has found that the Commonwealth waived its rights to any disallowance of costs for all periods through December 31, 1993. The issue remains as to how much, if any, 1992 costs were disallowed by the Commonwealth thereby resulting in reduced rates of Medicaid payments to Hillard during 1994.
On November 23, 1993, Hillard filed it’s Motion to Award Damages and on December 23, the Court held an evidentiary hearing on the amounts improperly disallowed by the Commonwealth.
CONCLUSIONS OF LAW
I. DOES COMMONWEALTH’S WAIVER OF ITS RIGHTS TO ANY DISALLOWANCE OF COSTS INCLUDE “NON-ALLOWABLE,” AND THUS UNCLAIMED, COSTS REPORTED BY HILLARD?
The Commonwealth contends it did not agree in the Settlement Agreement to reimburse Hillard for costs which are automatically disallowed by the Massachusetts Rate Setting Commission (the “Commission”) as “non-allowable expenses.” In fact, providers are not reimbursed for reported costs. Rather, Medicaid providers are reimbursed for the claims they submit for providing patient care. The Commonwealth merely uses the information of the Cost Reports submitted by nursing homes to calculate prospective reimbursement rates for claims. The Commonwealth argues that because Hil-lard merely reported but did not seek reimbursement for certain costs, the Commonwealth did not have a “claim” or “right” to disallow those costs. If it did not hold a claim, the Commonwealth submits, it could not have “waived” that claim for disallowance. As such, the Settlement Agreement does not entitle Hillard to have the reported but unclaimed costs included in the assessment of damages for amounts wrongfully disallowed by the Commonwealth, or included in its 1994 medicaid reimbursement rates.
Finally, the Commonwealth argues, if the Court were to conclude that the Settlement Agreement does require the Commonwealth to include Hillard’s reported but unclaimed costs, the Court should not award the damages requested by Hillard because then the *924Settlement Agreement would violate Massachusetts law.
Hillard maintains that it is entitled to damages for all disallowed reported costs. Hil-lard argues that under the Settlement Agreement it is entitled to a medicaid reimbursement rate that includes all reported costs, regardless of whether those costs were “non-allowable expenses” or claimed allowable expenses, and regardless of whether the Medicaid rate calculation process automatically disallows certain costs from yearly rates. Hil-lard claims that the 1994 rates set for the Pilgrim and Provident nursing homes are lower than they should be because the Commonwealth improperly disallowed costs from Hillard’s 1992 Cost Reports.2
Under Title XIX of the Social Security Act, the federal government provides federal assistance to states that participate in the Medicaid program. 42 U.S.C. § 1396, et seq. To be eligible to participate in the Medicaid program, a state must adopt a “State Plan,” approved by the federal Health and Human Services agency. 42 U.S.C. § 1396b(a). The State Plan must meet all the requirements of Subpart C of 42 C.F.R. Ch. IV, “Payment for Inpatient Hospital and Long-Term Facility Services”. 42 C.F.R. § 447.252(a). See 42 C.F.R. 447.253® (“the Medicaid agency must pay for ... long term care services using rates determined in accordance with methods and standards specified in an approved State plan.”) Under Massachusetts law, the Commission is required to follow the provisions of the State Plan in establishing rates of reimbursement to nursing facilities. G.L. c. 6A, § 32.3 The Supreme Judicial Court has held that the Commission, in “establishing ... rates of reimbursement, must follow the requirements and objectives of the State plan and of Federal Medicaid statutes and regulations.” Youville Hosp. v. Commonwealth, 416 Mass. 142, 146, 617 N.E.2d 605 (1993).
Further, if the state medicaid agency complies with the State Plan, the federal government reimburses the state for some percentage of the medicaid reimbursement payments it makes. 42 U.S.C. § 1396b(a). The Court notes that Massachusetts law prohibits the Commonwealth from making any Medicaid reimbursements that do not qualify for federal reimbursement. Under 114.2 Code of Massachusetts Regulations (“CMR”) 5.05(l)(a), for a cost to be “allowed” by the Commission in calculating a reimbursement rate, that cost must be “ordinary, necessary and directly related to the care of publicly-aided patients.” Non-allowable expenses which are not being claimed do not directly relate to care of publicly-aided patients. Tr. at 63, 76, 78.
Under Hillard’s construction of the Settlement Agreement, the unclaimed costs would have to be allowed by the Commission even though they do not relate to the care of publicly-aided patients. Further, 114.2 CMR 5.05(4) identifies “non-allowable costs.” Hil-lard’s unclaimed costs are included among the non-allowable costs enumerated therein.4
Hillard contends that it did not seek reimbursement for the non-allowable expenses *925because the cost reports were filed as of December 31, 1992, a date three months prior to execution of the Settlement Agreement. Hillard’s argument is without merit. Hillard filed its “amended” cost reports three months after execution of the Settlement Agreement. Tr. 74 and Def. Ex. 2 and 4. Thus, even though the Cost Reports covered the period through December 31, 1992, if Hillard genuinely believed when it filed the amended Cost Reports in June 1993 that the Settlement Agreement entitled it to reimbursement for all costs, it could have claimed them. Some providers do claim reimbursement for all costs. Tr. 79.
Alternatively, Hillard could have made some reference in the cost report to the Settlement Agreement, and its right to be reimbursed for costs generally “non-allowable.” Page 34 of the Cost Reports provided an opportunity for Hillard to refer to “footnotes and explanations.” Hillard did provide some information in this section. Yet, it made no reference to the Settlement Agreement or its entitlement to unclaimed non-allowable amounts. Furthermore, as the Settlement Agreement was executed in March 1993, the Commonwealth could not have waived a claim on account of a cost report that was not filed until June 1993. Accordingly, the Court concludes that the Commonwealth’s waiver of its rights to “any disallowance of costs” did not include non-allowable unclaimed costs reported by Hil-lard which are automatically disallowed by the Medicaid rate calculation process.
II. WERE AMOUNTS IMPROPERLY RECOUPED BY THE COMMONWEALTH OR WERE DOUBLE-PAYMENTS MADE TO HILLARD BY THE COMMONWEALTH?
In 1993 the Commonwealth began recouping funds from the reimbursements it was issuing to Hillard for its 1992 claims. Hillard objected to the withholding because the 1993 agreement waived any disallowance the Commonwealth might have in regard to Hillard’s 1992 claims. To make matters more confusing, in addition to withholding funds, the Commonwealth also paid some claims twice as a result of claims processing errors. The result was a series of confused debits and credits. At the conclusion of the evidentiary hearing on Hillard’s Motion to Award Damages, the Court directed the appointment of an Examiner, pursuant to 11 U.S.C. § 105, to determine whether the Commonwealth improperly recouped amounts from Hillard or whether double-payments were made by the Commonwealth to Hillard. The Examiner performed an initial investigation and presented his Examiner’s Findings and Recommendations and oral testimony to the Court on March 29, 1995.
Subsequently the Examiner filed an Amended and, on June 8, 1995, Second Amended Examiner’s Report and Recommendations which provided a detailed narrative of the facts which led up to the Examiner’s conclusion in the Amended Report.5 In analyzing the procedure for which the Commonwealth via the Massachusetts Division of Medicaid Assistance (the “Division”) “recoups” alleged “overpayments,” the Examiner provided the following explanation.
Under Massachusetts law, when a nursing home provider such as Pilgrim Manor or Provident files a claim for payment of services from the Medicaid program, the Division will pay the claim within 45 days. At some point after the Division pays the claims, perhaps as much as a year or two later, the Division reviews those claims to determine whether they were properly remitted. If the Division determines that a claim was not filed with the proper documentation, it will notify the provider and give the provider the opportunity to respond. The provider may *926then appeal the Division’s determination or resubmit the claim with the proper documentation.
If the provider does not appeal the Division’s determination that the claims were improperly filed or resubmit the claim properly, the Division may “withhold” from ordinary course payments (i.e., current payments for unrelated claims) the amount that it paid on account of improperly submitted claims. “Withholding” refers to the process by which the Division places monies it otherwise would have paid the provider for services rendered in the ordinary course into a specifically designated account. This account, referred to as a “sanction” account, is in the nature of an escrow account in that neither the provider nor the Division has use of the monies. If the provider does properly resubmit the claim, the money is released to the provider. If the claims are not resubmitted properly, the Division may “recoup” the amount withheld.6
A. Recoupments
Hillard submitted claims for patient services rendered prior to December 31, 1993. The Commonwealth allegedly paid these claims. In 1994, the Commonwealth disputed the paid claims in the initial aggregate amount of $280,859.34. Thus, in March of 1994, the Commonwealth set up a “sanction” account with an initial opening balance of $280,859.34.
Once the Commonwealth set up the “sanction” account, the Division and Hillard, through its agent, engaged in the dispute resolution process as outlined by Massachusetts law. During the period of time from March 29, 1994 through July 19, 1994, the Commonwealth made certain memo entries wherein the initial “sanction” account balance was reduced by $195,374.22 During the same period, the Commonwealth “recouped” against the “sanction” account balance a net amount of $85,484.78 as evidenced in remittance advices 1177, 1178, 1179, 1180, 1182, 1183, 1184, 1185, 1188, 1189, and 1197.
In addition to the “sanction” account, on May 24,1994, the Commonwealth established a separate “recoupment” account with an initial opening balance of $234,090.33. As referenced in run 1187, the “recoupment” account was established as a result of disputed and “voided” remittance advices submitted by Hillard prior to December 31, 1993. During the period of time from September 21, 1993 through November 1, 1994, certain memo entries were made wherein the initial “recoupment” account balance was reduced by $55,883.02. During the same period, the Commonwealth “recouped” against the “re-coupment” account a net amount of $178,-207.31, as evidenced in remittance advices 1145, 1197, 1201, 1202, 1204, and 1215.
Accordingly the Examiner purports that the net amount improperly “recouped” by the Commonwealth is $263,692.09 ($85,484.78 representing amounts recouped from the “sanction” account and $178,207.31 representing amounts recouped from the “recoupment” account).
B. Double-payments
The Examiner found that a double-payment had been made by the Commonwealth to Hillard in the approximate amount of $239,638.00. This overpayment of $239,-638.00 is comprised of $218,085.11 for service date prior to December 31, 1993, and $21,-552.89 for service dates in 1994. Prior to December 31,1993, Hillard provided services to a number of patients and submitted remittances advices to the Commonwealth. The Commonwealth paid Hillard. Subsequently, the Commonwealth disputed and “voided” the referenced remittance advices as noted on Run 1187, and set up a “recoupment” account wdth an opening balance of $234,-090.33. Hillard re-submitted, and the Commonwealth accepted the disputed and “voided” remittance advices. On August 9, 1994 the Commonwealth paid Hillard another *927$239,638.00 as evidenced by check no. 51474870. A review of Run 1200 indicates that the patient services paid in Run 1200 included the same patient services paid and the “voided” in Run 1187. Further, a portion of the $239,638.00 overpayment was properly “recouped” since it applied to services performed and paid after December 31, 1993.
Hillard argues that it should be allowed to keep the $218,085.11 overpayment for services dates prior to December 31, 1993 because the Commonwealth specifically waived any right to recover overpayments relating to the 1992 claims year. However, while the overpayment did relate back to 1992 claims, it was not made until seventeen months after the 1993 Settlement Agreement was signed. It would be a stretch to construe the Settlement Agreement as waiving an overpayment that had not even occurred and thus could not have been contemplated by the parties when they entered into the Settlement Agreement. Hillard’s interpretation of the Settlement Agreement would result in a windfall for these two nursing homes.
Accordingly, the net amount due Hillard ($263,692.09 in improper set-offs by the Commonwealth, less the $218,085.11 double-payment to Hillard for service dates prior to December 31,1993) is $45,606.98. The overpayment of $21,552.89, which relates to service dates after December 31,1993, should be handled in the ordinary course of business between Plaintiff and Defendant as they are outside the applicable period for dates of service relating to overpayments under the Settlement Agreement.
III. ATTORNEYS’ FEES AND COSTS ARISING FROM THE COMMONWEALTH’S BREACH OF THE SETTLEMENT AGREEMENT
Hillard requests the sum of $20,340.00 for attorneys fees and $703.36 in costs to bring this action to enforce the Settlement Agreement. The Commonwealth argues that under the terms of the Settlement Agreement each party agreed to bear its own costs.
In paragraph 16 of the Order, this Court stated that the only issue remaining to be decided is damages to be awarded to Hillard under Counts I and III of Hillard’s complaint. Although Count I was styled as a count for declaratory judgment and Count III a count for breach of contract, both concerned construction of the Settlement Agreement. Regardless of Hillard’s characterization of its action, it is not entitled to attorneys’ fees or costs under the terms of the Settlement Agreement.
In paragraph 9 of the Settlement Agreement, the parties agreed that neither would be entitled to recover attorneys’ fees or costs “in connection with” the adversary proceeding. That paragraph provides:
The parties have agreed that each party will bear its own costs and attorneys fees in connection with said adversary proceeding. (emphasis added)
As Counts I and III are actions to declare or enforce the terms of the Settlement Agreement, they are actions “in connection with said adversary proceeding.” Accordingly, Hillard is not entitled to attorneys’ fees or costs. While it may have been improvident of Hillard to agree to such terms, these are the terms to which both parties agreed under the Settlement Agreement and Hillard must live with it.
Hillard claims that this adversary proceeding is separate from the action in which the Settlement Agreement was entered. Its arguments are unavailing for two reasons. First, as noted above, this adversary proceeding concerns the Settlement Agreement. It is therefore one that is “in connection with” the adversary proceeding in which the Settlement Agreement was entered. Second, Hillard should have filed this action as a motion for enforcement of the Settlement Agreement, rather than as a separate adversary proceeding. If this had occurred, Hillard could not even argue that this proceeding is one not “in connection with” the one in which the Settlement Agreement was entered. Hillard may not recover attorneys’ fees simply by virtue of the way it has styled its action.
Furthermore, Hillard’s action is one for declaratory judgment and breach of contract. In the Settlement Agreement, the parties expressly agreed that the Settlement *928Agreement shall be construed and governed by Massachusetts law. Settlement Agreement, ¶ 11. Under Massachusetts law, the general rule is that a plaintiff may not recover attorneys’ fees in an action for declaratory judgment or breach of contract. More specifically, the Supreme Judicial Court has held in an action for breach of contract, that “counsel fees generally are not recoverable in this Commonwealth in the absence of statutory authorization.” Kohl v. Silver Lake Motors, 369 Mass. 795, 801, 343 N.E.2d 375 (1976). See Rozene v. Sverid, 4 Mass.App.Ct. 461, 466 n. 6, 351 N.E.2d 541 (1976) (in an action for breach of contract to sell land, the court declined to depart from the general rule that each litigant must assume the burden of counsel fees). Similarly, it has held that attorneys’ fees may not be awarded in a declaratory judgment action. Ellis v. Board of Selectmen of Barnstable, 361 Mass. 794, 802, 282 N.E.2d 637 (1972). Finally, even costs may not be awarded against the Commonwealth absent “specific affirmative authority.” M.C. v. Commissioner of Correction, 399 Mass. 909, 912, 507 N.E.2d 253 (1987). Hillard has failed to cite any authority to support its claim for attorneys’ fees or costs. Indeed, there is none. In short, this is a “plain vanilla” action for breach of contract and declaratory judgment. As such, Hillard is not entitled to attorneys’ fees.
CONCLUSION
For the foregoing reasons, this Court awards Hillard $98,732.00 in damages on account of its claim for adjustments to its 1994 rates, $45,606.98 in damages on account of improper recoupments by the Commonwealth, and no money for attorneys’ fees and costs. A separate order will be entered in conformity with Rule 9021.
. In paragraph 1 of the Stipulation, the parties stipulated to the amount of Hillard’s nursing homes' final prospective rates for calendar years 1992 and 1993.
. The 1994 Medicaid reimbursement rates are calculated based on the 1992 costs reported by nursing home providers.
. More specifically, the seventeenth paragraph of G.L. c. 6A, § 32, provides, in pertinent part, as follows:
... when establishing ... rates of reimbursement to providers under Title XIX, the commission shall ... follow the requirements and objectives of the Title XIX state plan, as administered by the department and of the federal statutes and regulations promulgated under Title XIX itself.
The twentieth paragraph of the section further provides:
Every rate, classification and other regulation established by the commission shall be consistent where applicable with the principles of reimbursement for provider costs in effect from time to time under Titles XVIII and XIX of the Social Security Act governing reimbursement or grants available to the to the commonwealth, its departments, agencies, boards, commissions or political subdivisions for general health supplies, care, and rehabilitative services and accommodations.
.For instance, some of the disputed costs Hil-lard alleges were wrongfully disallowed are the fixed costs of operating the nursing homes, such as salaries and overhead, which the Commonwealth requires its Medicaid providers to report for purposes of establishing prospective rates. These costs are reported for information purposes, not for reimbursement, and are automatically disallowed by the Commonwealth's claims system.
. The documents reviewed by the Examiner included, but were not limited to, the court file on Adv. Proceeding No. 94-0467-BKC-AJC-A, inclusive of the Settlement Agreement, Agreed Order, Plaintiff’s Exhibits, remittance advices, including, but not limited to 1145, 1177, 1178, 1179, 1180, 1182, 1183, 1184, 1185, 5187, 1187, 1188, 5188, 1189, 1197, 1200, 1201, 1202, 1204, 1209, 1211, and 1215, Defendants’ Exhibits, transcript of the December 23, 1994 hearing before the Court, Summary Judgment Order and spoke with the Commonwealth’s attorney, Thomas O. Bean, and met with Hillard's attorney, James B. Boone. The Examiner also reviewed a memorandum prepared by Attorney Bean dated March 3, 1995 and the Recoupment summary provided by Attorney Boone.
. The Examiner found the distinction given by the Commonwealth between “withholding" and "recoupment” to be semantical at best. Although the terms given to the disputed funds purportedly represent different treatment during the state imposed dispute process, the net effect was that the Commonwealth ultimately "recouped” against ordinary course payments due Hillard on unrelated post-December 31, 1993 claims for disputed claims filed on or before December 31, 1993. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492510/ | DECISION AND ORDER
JOHN C. NINFO, II, Bankruptcy Judge.
BACKGROUND
Although this case was commenced by the filing of an involuntary petition, the Debtor eventually operated voluntarily in Chapter 11 from April 5, 1993 until July 20, 1993. After evidentiary hearings conducted on June 18, 21 and 23 and July 9 and 14, the Court granted the motion of the Unsecured Creditors Committee (the “Committee”) to convert the case to a Chapter 7 case. On July .21, 1993, the Office of the United States Trustee (the “U.S. Trustee”) designated C. Bruce Lawrence as the Chapter 7 Trustee (the “Trustee”).
On November 12, 1993, upon the request of the Trustee and with the approval of the U.S. Trustee, the Court authorized the Trustee to retain Nixon, Hargrave, Devans & Doyle (“Nixon, Hargrave”), which had previously served as the attorneys for the Committee, as one of the attorneys for the Trustee.
In January, 1995, the Trustee commenced in excess of 350 separate adversary proceedings to recover alleged avoidable preferences, post-petition transfers and fraudulent conveyances. Except in a few cases where it had a conflict of interest, Nixon, Hargrave represented the Trustee in these adversary proceedings. Most of the eases were handled pursuant to a “Contingent Fee Agreement” entered into with the Trustee, but several larger cases were handled on a time basis.
On August 1, 1994, the Court issued a Decision & Order awarding Nixon, Hargrave an allowance for the professional services it had rendered on behalf of the Committee in an amount which was substantially less than what Nixon, Hargrave had requested.
On December 29,1995, the Court awarded Nixon, Hargrave an interim compensation allowance of $129,013.00 for professional services rendered pursuant to the Contingent Fee Agreement.
On April 16, 1996, the Court awarded Nixon, Hargrave an interim compensation allowance of $108,342.25 for time basis professional services rendered, which included a $10,000.00 premium for services in connection with the settlement of the amounts due under an Internal Revenue Service audit assessment.
On October 16,1996, Nixon, Hargrave filed an application (the “Application”) for an additional allowance of interim compensation for both hourly and contingent fee services rendered from November 1, 1995 through July 31,1996 (the “Application”). The Application included a request for an additional fee (a “Premium”) because: (1) substantial funds had been brought into the estate by the hourly and contingent fee professional services rendered; (2) the matters handled were difficult; and (3) overall, “excellent results” had been achieved.
On November 12, 1996, the Trustee filed an objection to the Application which: (1) indicated that the professional services rendered by Nixon, Hargrave were of the highest quality and produced excellent results; (2) did not recommend the payment of the Premium; (3) indicated that the Trustee would support a separate application by Nixon, Hargrave to request: (a) a clarification of the Contingent Fee Agreement and the reimbursement of certain disbursements; and (b) reasonable additional compensation for the waivers of claims which it had negotiated as part of the settlements in a number of the adversary proceedings, services which had possibly benefitted the estate and its creditors, but which had not been specifically requested by the Trustee; and (4) indicated that in the Trustee’s opinion, Nixon, Hargrave had used billing judgment in making its Application and had been careful in the performance of its services to assign tasks to the lowest billing rate professional competent *63to perform the task.1
On November 15, 1996, the U.S. Trustee filed an objection to Nixon, Hargrave’s request for a Premium.
Sensitive to its year-end, on December 31, 1996 the Court awarded Nixon, Hargrave an interim compensation allowance in the full amount requested in the Application for hourly and contingent fees, as well as disbursements, for a total of $82,312.53, and reserved decision on the request for a Premium.
DISCUSSION
This Court believes that in admittedly rare but appropriate circumstances, where an attorney for a trustee has achieved exceptional results and the Court, in its discretion, feels that after the application of a lodestar billing analysis, including consideration of the specific factors set forth in Section 330(a)(3)(A), to determine reasonable compensation, a professional has still not been adequately and fairly compensated, it can award a fee enhancement or premium.2 In fact, as set forth above, this Court has previously granted Nixon, Hargrave such a Premium in this case.
However, I do not believe that granting Nixon, Hargrave the Premium requested in its current Application would be an appropriate exercise of discretion for the following reasons:
(1) The Trustee has not recommended but has objected to the award of the requested Premium.3 This Court holds Panel Trustees to high standards in connection with their engagement of professionals, requiring that they: (a) hire professionals proven to be competent to perform the particular task for which they are engaged; (b) continuously supervise the professionals to ensure that they are providing competent, efficient and effective services; and (e) perform continuing cost-benefit analyses. In this case, the Trustee is a highly knowledgeable and experienced Trustee and practitioner in the area of commercial and bankruptcy law. He hired Nixon, Hargrave because it had proven itself fully competent to perform the required tasks, and he had an expectation of excellent service. The Trustee’s objection to the Premium indicated that as excellent as the services performed and results achieved may have been, they were within the range of his expectations, and that in his business judgment the award for the hourly and contingent services and disbursements, as otherwise requested by Nixon, Hargrave in its Application, was reasonable compensation for those excellent services and results. Where a trustee, who is in fact the client, and the U.S. Trustee, who supervises Chapter 7 Panel Trustees, object in good faith to the award of a premium and that professional has otherwise been awarded reasonable compensation, the Court does not believe that such an award to an attorney for that trustee would be a proper exercise of its discretion.
(2) Based upon the allowances for interim compensation to date, the Court’s internal computations indicate that Nixon, Hargrave has received compensation at a blended hourly rate, based on all non-attorney hours being deducted, of in excess of $210.00, a blended hourly rate, based on all paralegal hours being deducted, of in excess of $204.00, and an overall blended hourly rate of in excess of $166.00. Given the services performed, the Court believes, that Nixon, Hargrave, as attorneys for the Trustee, has received reasonable compensation.
(3) Nixon, Hargrave’s representation of the Trastee in this case has enhanced its reputation with the Court, the Panel of ' Trustees, the U.S. Trustee and the coun*64sel for the various defendants in the adversary proceedings which it handled. There is no doubt that this will mean additional business and referrals for Nixon, Hargrave in the future.
(4) Nixon, Hargrave, as the largest firm in the Rochester area, holds itself out to be a firm where excellent services and results are the norm, not the exception.
CONCLUSION
The request by Nixon, Hargrave in its October 16, 1996 Application for a fee enhancement or Premium is denied. This is without prejudice to it bringing a specific application4, as suggested by the Trustee, for the reimbursement of additional disbursements in connection with its contingent fee services or for additional compensation in connection with waivers of claims which it negotiated in connection with the various adversary proceedings it handled, since these waivers may have benefitted the estate, even though not specifically requested by the Trustee at the time they were negotiated. In connection with any such application, however, the Court would expect a thorough analysis of benefit to the estate versus mere benefit to remaining creditors.5
IT IS SO ORDERED.
. This Court consistently requires this of professionals seeking allowances of compensation under Sections 330 and 331.
. See the analysis and factors to be considered set out in In re Wright Air Lines, Inc., 147 B.R. 20 (Bankr.N.D.Ohio 1992); and In re Southern Merchandise Distributors, Inc., 117 B.R. 725 (Bankr.S.D.Fla.1990).
. The Trastee had recommended the prior premium and the U.S. Trustee had not objected to it.
. This could be done as part of a subsequent application for interim compensation.
. One attorney in this case has suggested on a number of occasions that the result of all of the adversary proceedings to avoid preferences has simply been “a rearranging of the deck chairs.” | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493988/ | Memorandum re Plan Confirmation
ALAN JAROSLOVSKY, Bankruptcy Judge.
Debtor Brain Osborn has proposed a Chapter 13 plan whereby he will pay $1,350.00 per month for 36 months to the Chapter 13 trustee. After payment of mortgage arrears, there will be a pot of about $43,000.00 for unsecured creditors to share. Unsecured creditor Tor Perkins objects.
Osborn is a licensed architect and general contractor. Perkins has filed a claim for $282,393.00 based on “construction liability.” Perkins alleges that Osborn overcharged him for design and construction work on Perkins’ home in Mill Valley. A state court lawsuit was pending when Osborn filed his Chapter 13 petition.
Perkins has raised three objections to confirmation. First, he alleges that Osborn was not eligible because his total debt exceeded the limit of § 109(e) of the Bankruptcy Code. Second, he alleges that due to a fraudulent transfer of property to his wife which would be avoided in Chapter 7 Osborn’s plan fails to meet the requirements of § 1325(a)(4). Third, he alleges that the plan has been proposed in bad faith.
Osborn is ineligible for Chapter 13 only if Perkins’ claim is considered liquidated. Osborn claims that his debt is liquidated because he can easily calculate it, but that is not the test. His claim is only liquidated if the court cán easily calculate it.1 Perkins’ claim is about as unliq-uidated as a claim can get; a full trial will have to be held to consider liability, each item of damages, and Osborn’s $107,000.00 counterclaim.2 The claim is not subject to ready determination and precision in computation of the amount due, as required by In re Nicholes, 184 B.R. 82, 91 (9th Cir. *206BAP 1995). Osborn accordingly is eligible for Chapter 13 relief.
In 2003, Osborn and his wife changed title to their home from community property to joint tenancy. Perkins argues that this was a fraudulent transfer and which a Chapter 7 trustee would avoid and which would result in a larger dividend for him in Chapter 7 than Osborn’s Chapter 13 plan affords him.
While the court remains unconvinced of Osborn’s argument that transmutation of community property to joint tenancy is never fraudulent, it rejects completely Perkins’ argument that Osborn has forfeited his homestead exemption as to the half of the property which was in his name on the date of filing of his bankruptcy. California Code of Civil Procedure § 704.710(c) defines a homestead as the dwelling in which the debtor resides; § 704.720(a) provides that a homestead is exempt. Perkins has cited no case where any court has held that a debtor who transmutates community property to joint tenancy forfeits all homestead rights.
Under bankruptcy law, a debtor is barred from exempting property which the trustee recovers by avoiding a fraudulent transfer. 11 U.S.C. § 522(g). However, Osborn’s joint tenancy interest does not fall within this bar because as to this interest there is nothing for the trustee to recover. Section 522(g) only applies to property restored to the estate, not property already in the estate on the date of filing. See In re Glass, 60 F.3d 565, 568 (9th Cir.1995).
Because there is so little equity in the property, the transmutation from community property to joint tenancy had no economic effect as long as Osborn had homestead rights in the property on the date he filed. Since he had such rights, a Chapter 7 trustee would not recover anything on account of the transmutation3 and Osborn’s plan accordingly meets the requirements of § 1325(a)(4).4
The only argument raised by Perkins which gives the court much pause is his argument that the transmutation from community property to joint tenancy is evidence bad faith. There is certainly every indication that this was done in order to reduce the consequences to Osborn’s wife if Perkins obtained a judgment against Osborn. However, a fraudulent transfer is not per se bad faith so as to make an otherwise confirmable plan un-confirmable. None of Osborn’s actions were taken in secret or concealed from Perkins or the Chapter 13 trustee. So long as Osborn’s creditors are not faring worse under his Chapter 13 plan than they would fare under a hypothetical Chapter 7, the requirements of the Bankruptcy Code are met. Osborn’s plan calls for large monthly payments and a significant dividend to creditors. Viewing all of the circumstances as a whole, the court finds good faith.
*207For the foregoing reasons, Osborn’s plan will be confirmed. Counsel for Osborn shall submit an appropriate form of order.
. Perkins’ argument that his claim is easily calculated requires the court to accept the findings of a non-binding arbitrator. However, because the arbitration was non-binding the court would have to take evidence on each and every issue decided by the arbitrator.
. In addition, Perkins' claim includes $90,000.00 in ’’loss of rental value,” which is a number pulled out of the ether by Perkins and will require expert testimony to substantiate.
. Or, if anything was recovered on account of the transmutation it would be smaller than the amount Osborn is to pay under his plan, so the plan still meets the requirements of § 1325(a)(4).
. After the court expressed scepticism about Perkins' forfeiture-of-homestead argument, Perkins argued that the $80,000.00 second deed of trust on the property was fraudulent or allowed Osborn to conceal assets. After further testimony, the court concludes that equivalent value was paid for the deed of trust and the proceeds were properly used to improve Osborn’s home. While this was probably pre-bankruptcy planning, such conduct is permissible and neither the deed of trust nor the loan proceeds would be avoidable by a Chapter 7 trustee. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493989/ | ORDER OF DISMISSAL
ELIZABETH E. BROWN, Bankruptcy Judge.
THIS MATTER comes before the Court on the Motion to Dismiss Case (“Motion”), filed by the Internal Revenue Service (“IRS”) and the Chapter 13 Trustee (“Trustee”). Following an evidentiary hearing, the Court FINDS and CONCLUDES as follows:
A. Background
This is not the Debtor’s first bankruptcy case. In March, 2001, he filed a Chapter 7 case. At the time, the IRS was pursuing its claim against him for over $500,000 in income taxes which the Debtor failed to pay during the years 1992 through 1995. The Debtor testified at the hearing that he did not pay taxes during those years because he relied on bad advice from an unnamed organization which had assured him he could be “out of the tax system.” The IRS contested the dischargeability of the Debtor’s 1992-1995 income taxes in an adversary proceeding. The IRS claimed the taxes were non-dischargeable under 11 U.S.C. § 523(a)(1)(C) because the Debtor had made fraudulent returns or had willfully attempted to evade or defeat his taxes. Immediately prior to the scheduled trial in December, 2003, the Debtor and the IRS reached a settlement. The settlement provided that 65% of the unpaid federal income tax assessments against the Debtor for the years 1992-1995, plus inter*213est allocable to those taxes was non-dis-chargeable, pursuant to 11 U.S.C. § 523(a)(1)(C). The balance of the taxes, penalties, and interest were discharged. The parties agreed that the amount of the nondischargeable taxes would be $263,450.70. This liability is referred to herein as the “Non-Dischargeable Taxes.” The Court approved the stipulation and entered judgment in accordance with its terms.
According to the Debtor’s testimony, he never intended to pay all of the Non-Dischargeable Taxes. He says that his understanding was that the settlement was structured in order to allow him to pursue an offer in compromise with the IRS and, if he could not reach an acceptable compromise, to file a Chapter 13. The Debtor says that the amount of the Non-Dis-chargeable Taxes was specifically negotiated to be lower than the unsecured debt limit for eligibility for Chapter 13 in order to preserve the Chapter 13 option. The record does not reflect whether the IRS was aware of the Debtor’s understanding regarding the settlement agreement or whether the Debtor ever proposed an offer in compromise to the IRS after the conclusion of the adversary proceeding. However, on January 11, 2005, little more than a year after the settlement of the adversary proceeding in his prior case, he filed this Chapter 13 case.
The Non-Dischargeable Taxes are the only unsecured debts scheduled in this case.1 The only other creditors listed are three secured creditors, holding liens against his vehicles. The Debtor’s initial Chapter 13 plan proposed payments of $479 per month for 36 months. The secured debts were to be paid outside the plan. After deductions for attorneys’ fees and the fees of the Chapter 13 Trustee, the IRS would have received $14,676 or 6.6% of the $222,953.81 in Non-Discharge-able Taxes. The Debtor’s first Amended Plan extended the monthly $479 payments for 42 months, resulting in a $17,289.09 payment to the IRS or 7.8% of the Non-Dischargeable Taxes. After the Chapter 13 Trustee’s office objected to the Debtor’s contribution to a retirement plan, the Debtor eliminated that expense from his budget and filed a Second Amended Plan, which increased the monthly payments by $614 to $1,093 per month for the remainder of the 42-month payment period. Under the Second Amended Plan, the IRS would have received $47,383.64, or 21.3% of the Non-Dischargeable Taxes. Finally, the Debtor filed a Third Amended Plan to address the IRS’ contention that its claim was partially secured by the Debtor’s retirement account. This Plan increased the length of the $1,093 payments to 54 months for a total plan length of 60 months. Under the Third Amended Plan, the IRS would receive $30,918.28 on its secured claim and $19,350.81 on its unsecured claim, for a total of $56,269.09 or 25.2% of the Non-Dischargeable Taxes.
The IRS and the Chapter 13 Trustee have objected to each Motion to Confirm which the Debtor has filed. The Court has held the matter of confirmation of the *214Third Amended Plan in abeyance pending the resolution of the Motion to Dismiss.
B. The Motion to Dismiss
The IRS filed its Motion to Dismiss this case after the filing of the Debtor’s Second Amended Plan and prior to the filing of the Third Amended Plan. It alleges that the case should be dismissed under 11 U.S.C. § 1307(c), for cause, because the Debtor filed this Chapter 13 case in bad faith. According to the IRS, the Debtor’s bad faith is shown by, among other things, his overstatement of expenses, his lavish lifestyle, and his intent to discharge the tax debt which he previously agreed was non-dischargeable in his Chapter 7 case. The Chapter 13 Trustee joined in the IRS’ motion. At the hearing, the Trustee stressed the delay of nearly ten months from the date of filing without confirmation of a plan, as well as the Debtor’s “deceptive motives” in filing.
The Debtor argues that he has not filed this case in bad faith, but rather in an honest attempt to recover from the bad tax advice he received in the 1990’s. The Debtor points out that he has continually increased the total amount of payments with each amended plan, and he contends that the delay in this case has been occasioned by his attempts to comply with all of the requirements of the Chapter 13 Trustee’s office.
C. Applicable Law
Section 1307(c) provides a nonexclusive list of grounds upon which a bankruptcy court may dismiss a Chapter 13 case for “cause”. Bad faith is not specifically listed, but nonetheless may constitute “cause” for dismissal. In re Gier, 986 F.2d 1326 (10th Cir.1993); In re Merrill, 192 B.R. 245 (Bankr.Colo.1995). Lack of good faith is shown when a debtor files a petition without intending to perform the statutory obligations of a debtor under the Bankruptcy Code or when a debtor’s conduct before or during a case constitutes an abuse of the provisions, purpose or spirit of the chapter under which relief is sought. In re Merrill, supra. In determining whether a case has been filed in bad faith, the Tenth Circuit has adopted a “totality of the circumstances” test. In re Young, 237 F.3d 1168 (2001); Pioneer Bank v. Rasmussen, 888 F.2d 703 (10th Cir.1989), Flygare v. Boulden, 709 F.2d 1344 (10th Cir.1983). In the Flygare case, the Tenth Circuit adopted the Eighth Circuit’s nonexclusive list of eleven factors to consider in making this determination. In Pioneer Bank v. Rasmussen, it added three additional factors to the list.
Accordingly, this Court considers the following factors in determining whether a case has been filed in bad faith:
1) The amount of proposed payments and the amount of the debtor’s surplus;
2) The debtor’s employment history, ability to earn and the likelihood of future increases in income;
3) The probable or expected duration of the plan;
4) The accuracy of plan’s statements of the debtor’s debts, expenses, and percentage repayment of unsecured debt and whether any inaccuracies are an attempt to mislead the court;
5) The extent of preferential treatment between classes of creditors;
6) The extent to which secured claims are modified;
7) The type of debt sought to be discharged and whether any such debt is non-dischargeable in Chapter 7;
8) The existence of special circumstances such as inordinate medical expenses;
*2159)The frequency with which the debt- or has sought relief under the Bankruptcy Reform Act;
10) The motivation and sincerity of the debtor in seeking Chapter 13 relief;
11) The burden which the plan’s administration would place upon the trustee;
12) Whether the debtor has stated his debts and expenses accurately;
13) Whether the debtor has made any fraudulent misrepresentation to mislead the bankruptcy court; and
14) Whether the debtor has unfairly manipulated the Bankruptcy Code.
D. Discussion
In its discussion below, the Court will mention only those of the fourteen factors that are implicated by the facts of this case. The factors not mentioned are either not a basis for a bad faith finding in this case or they are neutral in this case.
The amount of the proposed payments and the amount of the Debtor’s surplus.
The current Third Amended Plan proposes payments of $479 per month for six months and $1,093 for 54 months. A payment amount of $1,093 per month is not an insignificant payment. However, it is questionable whether $1,093 accurately represents the Debtor’s monthly surplus. The actual surplus may, in fact, be much higher. The accuracy of the Debtor’s statement of his monthly income and expenses is highly questionable and is discussed in greater detail below.
The accuracy of the plan’s statements of the Debtor’s expenses and whether any inaccuracies are an attempt to mislead the court.
Whether the Debtor has made any fraudulent misrepresentations to mislead the Bankruptcy Court.
These two factors, probably more any others, are indicative of the Debtor’s lack of good faith. There are numerous problems with the Debtor’s statement of his monthly expenses as reflected in his Schedule J, as originally filed, and as amended on July 21, 2005.
The Debtor significantly overstated the tuition expense for his son who attends Colorado State University. On Schedule J as originally filed, this expense is shown as $1,585.99. On the Debtor’s Amended Schedule J, it is shown as $1,285.99 per month which would equate to $15,431.00 per year. However, at the hearing, the Debtor admitted that he pays only $2200 per semester for two semesters, or $4400 per year, for tuition at CSU. Even assuming there is additional expense for books and the like, the college expense has been overstated by almost $10,000 per year.
Furthermore, the Debtor’s Schedule I shows he pays $1,400 per month for insurance premiums, which the Court finds highly questionable. It also shows $1,870 per month in housing expense, even though the Debtor does not own any real property. The Debtor’s expenses for food ($750/month) and entertainment ($200/ month) are too high for one person.
Schedule J shows an expense for $300.00 per month for an “office assistant.” While the amount of this expense may be reasonable for a self-employed individual, frankly the Court has serious doubt as to whether the Debtor actually pays an office assistant each month. The transcript reflects the following responses from the Debtor under questioning by counsel for the Chapter 13 Trustee:
Q. And, who is your office assistant?
A. In the past, I hired a lady to help me do my business. She also helps me with outbound calls, thank you notes, etcetera, that I need to keep *216up with in terms of contact with my clients.
THE COURT: I believe the question was who?
THE WITNESS: Oh, I’m sorry. Say again, ma’am?
Q. Who is the person that you hired.
A. In the past, it’s been a lady named Alhberg. I am sorry that I can’t recall the name.
Although the Debtor later gave a name for this alleged employee, the Debtor’s testimony lacked credibility.
The Court also questions the Debtor’s credibility regarding his income and expenses because of the testimony at hearing regarding whether the Debtor should be classified as a “statutory employee” or a “common law” employee for tax purposes. A “statutory employee” may take unlimited business deductions, but a “common law” employee must limit his business deductions to 2% of adjusted gross income. The Debtor’s employer, Allstate Insurance, has never considered the Debtor to be a statutory employee. It has issued W-2’s to the Debtor for each year’s income. However, the Debtor disputes this classification. In 2003, he altered the W-2 issued by his employer by checking the statutory employee box. The Debtor’s employer furnishes him with a laptop, a cell phone, a copy/fax machine, and a budget for business expenses. The employer reimburses the Debtor for his business expenses for air fare, mileage, automobile rental, meals, entertainment, and hotels.
Despite being reimbursed by his employer for the expenses listed above, the Debtor has deducted over $171,000 in business expenses on his tax returns for the years 2002-2004. The business expenses the Debtor has deducted include depreciation on his vehicles, which would not normally be done where mileage is reimbursed by an employer. The total amount of business expenses greatly exceeds the 2% limit, and the Debtor provided no explanation whatsoever of why his business expenses exceeded his reimbursements by such a large amount. Though the Court is not ruling on the propriety of the Debtor’s business expense deductions as matter of tax law, the Court does find that the Debt- or’s history of overstating his business expenses in order to minimize his tax liability calls into question the Debtor’s credibility and whether he has been forthright with this Court. He claims that he received bad tax advice in the 1990’s, leading to his unwise choice to not pay taxes and to submit highly questionable returns during 1992-1995 at least. It does not appear to this Court that the Debtor has mended his ways. It does not appear that he is sincerely motivated to repay his tax debts through this bankruptcy filing.
The Debtor also listed $710 per month in charitable contributions. This amount is the same in both the original Schedule J, filed on January 11, 2005, and the amendment filed in July. The Debtor’s discussion of the recipients of his $8,520.00 per year in charitable contributions had a distinct ring of evasiveness. When asked to whom he contributes this sum of money he listed, among others, the Salvation Army, ARC and Goodwill, but under further questioning, the Debtor admitted he gives clothing and household goods to these entities, not cash. The IRS presented evidence showing that in past years the Debtor has contributed $1,300 to $7,170 per year to charities. When asked if he was contributing more this year than in the past, the Debtor said that he thought that he was because of the hurricanes in the Gulf Coast. However, the hurricanes in the Gulf Coast occurred in late August and September, 2005, after the both the original and amended Schedules J were filed.
*217Some of the Debtor’s expenses are not reasonably necessary for the support of the Debtor or his dependents. He has two sons, the youngest of which is in college. Yet he continues to support both sons. It may be laudable to provide children with a college education and to help them establish themselves financially, but not to do so at the expense of your unpaid creditor.
The Debtor also completely failed to list any income which is contributed to the household by his spouse despite the fact that he admitted at the hearing that she is now employed “part-time,” and despite the fact that the expenses shown on Schedule J are clearly for the entire household. The Chapter 13 Trustee has been seeking the information on the Debtor’s wife’s income almost from the very inception of this case. Although the Debtor testified he provided this information to his attorney, he never amended his Schedule I or his Statement of Financial Affairs to reflect any current or past information on the amount of money his wife has earned. The IRS presented testimony at the hearing that showed that the Debtor’s wife earned about $40,000 in wage income in 2002, and over $92,000 in income from the sales of stocks and bonds in 2004. The Debtor’s testimony that he has no idea how much is wife is making now or how much she received from the sale of stocks and bonds in 2004 is simply not credible, and is a further indicator of the Debtor’s lack of forthrightness with this Court and his creditors.
The Court’s overall impression is that the Debtor has significantly overstated his expenses and has significantly understated his household income. The Debtor’s reluctance to give a straight answer when questioned about his income and expenses leads the Court to believe that the Debtor is attempting to mislead the Court and his creditors.
Whether the Debtor has stated his debts accurately.
Much of the testimony at the hearing related to claims that the Debtor has not accurately stated his tax liabilities. The IRS contends that the Debtor owes additional priority income taxes for the years 2002-2004 because he improperly claimed statutory employee status. The State of Colorado also maintains that the Debtor is liable for priority income taxes for the years 2002-2004. The Debtor did not file any Colorado income tax returns for the years 2002-2004 because he claims that, starting in 1999, he “decided to make Texas [his] residence.” Texas has no state income tax.
Both the IRS and the State of Colorado have filed claims reflecting priority taxes due. The debtor has objected to the claims of both taxing authorities. The objections to these claims have been held in abeyance pending the resolution of this Motion to Dismiss and the Court does not intend, by this ruling, to make any determination of the amount of the claims or the validity of the Debtor’s objections. However, the Court has considered the Debt- or’s testimony about his tax debts insofar as it impacts the good faith issue.
Perhaps the most troubling aspect of the Debtor’s testimony concerned where the Debtor lives. The Debtor’s employer testified that he is assigned to four states-Colorado, Utah, Montana, and Wyoming. The Debtor is married and has a wife and son who reside in a home in Fort Collins, Colorado which was formerly owned by the Debtor. The Debtor has claimed home mortgage interest, property tax, and home office deductions for this residence as recently as 2004. The Debtor’s car, while registered in Texas, was located at the Fort Collins address at the time of the hearing. The addresses listed as “apartments” on the Debtor’s tax returns for the *218years 2002-2004 are post-office boxes in Texas or Wyoming, another state without a state income tax. There was no indication that the Debtor maintains any other residence other than the one in Fort Collins. Yet, when asked if he didn’t live in Colorado during 2002, 2003, and 2004, the Debtor answered, “I was not a resident of Colorado.” The IRS’ attorney restated the question more directly, asking, “Did you live in Colorado?” The Debtor’s response was, “define live.” Further narrowing the question, the IRS’ attorney asked where the debtor slept and he admitted that, other than traveling on business, he sleeps in the Fort Collins family home.
The Debtor has no apparent connection to the state of Texas, other than the title documents for one of his cars. His territory for work does not include the state of Texas. There was no evidence that the Debtor maintains a house, an apartment, or any other type of residence in Texas. There was no evidence that the Debtor has moved recently or changed the location of his residence, business or assets. The filing of this bankruptcy case and the previous Chapter 7 case in Colorado shows that the Debtor believes that, at least for the greater part of the six months prior to the filing of each case, his domicile, residence, principal place of business or principal assets have been located in Colorado. See 28 U.S.C. § 1408(1). Yet, the Debtor maintains that his residence for tax purposes is in Texas.
During the hearing the Debtor was unwilling to answer the simple question regarding where he lives. This reluctance and the evasive nature of his answers paints a clear picture of who the Debtor is and what he is trying to accomplish with this Chapter 13 case. The Debtor deeply resents the concept of paying income taxes and despite his apparent repudiation of the “bad advice” he got in the 1990’s, he continues to push the envelope and to “play the system” in an attempt to minimize his tax payments. The fact that he may have understated his priority tax debts in this case is merely another page from the same book and does show the lack of overall sincerity with which the Debtor has sought relief from this Court.
The frequency with which the Debtor has sought bankruptcy relief.
The type of debt sought to be discharged and whether any such debt is non-dischargeable in Chapter 7.
Whether the Debtor has unfairly manipulated the Bankruptcy Code.
The motivation and sincerity of the Debtor in seeking Chapter 13 relief.
In the Debtor’s previous Chapter 7 case, he agreed that $263,450.70 of his tax debt was non-dischargeable under Section 523(a)(1)(C) as a result of his fraudulent tax returns or his willful attempts to evade or defeat his tax liability. In this Chapter 13 case, however, such a debt is discharge-able under the more lenient discharge provisions of Section 1328(a).2 It is beyond any question that the only reason the Debtor filed this Chapter 13 case was to discharge the tax debt which he had already agreed was non-dischargeable. The only other debts scheduled by the Debtor in this case were the three secured debts *219on vehicles which the Debtor proposed to pay in full outside of his Chapter 13 plan.
The fact that a debtor seeks to take advantage of the broader discharge provisions of Chapter 13 is not, in and of itself, a reflection of bad faith. The use of a Chapter 13 proceeding to discharge a debt previously held to be non-dischargeable under Chapter 7 (sometimes referred to as a “Chapter 20”) is not per se grounds for dismissal under Section 1307(c) for bad faith. Pioneer Bank v. Rasmussen, supra.
This case is very similar to the fact situation addressed by the Tenth Circuit in Pioneer Bank. In that case, the debtor had unsecured debts which exceeded the debt limit for Chapter 13. He filed a Chapter 7 bankruptcy and Pioneer Bank successfully sued to have the debt he owed to it declared nondischargeable as a result of fraud. Twelve days after the Bankruptcy Court ruled that Pioneer Bank’s debt was non-dischargeable, the debtor filed his Chapter 13 case, listing the debt to Pioneer Bank as his only obligation. While observing that the successive filings were not a per se indication of bad faith, the Tenth Circuit ruled that the filing of a “Chapter 20” was a significant factor to be considered. In analyzing this issue, the Tenth Circuit cited with approval the following language from the Fourth Circuit’s decision in Neufeld v. Freeman, 794 F.2d 149 (4th Cir.1986):
Resort to the more liberal discharge provisions of Chapter 13, though lawful in itself, may well signal an “abuse of the provisions, purpose, or spirit” of the Act, especially where a major portion of the claims sought to be discharged arises out of the pre-petition fraud or other wrongful conduct and the debtor proposes only minimal repayment of these claims under the plan. Similarly, a Chapter 13 plan may be confirmed despite even the most egregious pre-filing conduct where other factors suggest the plan nevertheless represents a good faith effort by the debtor to satisfy his creditors’ claims.
794 F.2d at 152-153.
Although the Tenth Circuit had no quarrel with the Bankruptcy Court’s finding that the debtor was committing his entire surplus to his plan payments, the $50 per month plan payments resulted in only a 1.5% payment to Pioneer Bank, which, the Tenth Circuit found, was tantamount to a discharge of the debt under Chapter 7. The court concluded that the debtor’s filing was not in good faith,
because the Chapter 13 filing was a manipulation of the bankruptcy system in order to discharge a single debt for de minimus payments under a Chapter 13 plan which was ruled not dischargea-ble under an immediately previous Chapter 7 filing, when the debtor could not originally meet the jurisdictional requirements of Chapter 13.
888 F.2d at 706.
In this case, the Court finds a similar manipulation of the bankruptcy system. The Debtor was originally ineligible for relief under Chapter 13 because he owed over $500,000 to the IRS alone. However, he negotiated a stipulation which reduced his unsecured debt below the limit for Chapter 13. Then he filed a Chapter 13 case and attempted to discharge his tax debt with a plan that proposed only a 6.6% repayment of the Non-Dischargeable Taxes.
The Chapter 13 Trustee’s objections to the various plans filed by the Debtor have caused him to increase the plan payments to the point where the Third Amended Plan now provides for 25.2% payment of *220the Non-Dischargeable Taxes.3 This is certainly not a de minimus payment and in that respect this case is different from Pioneer Bank. However, in Pioneer Bank, the debtor had proposed an honest budget and was committing his entire surplus to his plan. In this case, the Debtor has not been honest about either his expenses or his family income.
The Court finds that the Debtor is not committing his actual surplus to the plan and is not making a good faith effort to satisfy the claim of the IRS. Simply by accurately accounting for the college expenses the Debtor could fund an additional $10,000 per year, or a total of $50,000 into his plan. (This calculation even assumes the Debtor’s son would remain in college for the entire five-year duration of the plan.) The Court finds that the Debtor is not sincerely motivated, as he claims. It is clear that the Debtor has no desire to make a bona fide effort to pay the IRS. Rather, he attempts to manipulate the Bankruptcy Code and mislead the Court into “sticking it” to the IRS more time. The Court cannot allow the provisions of the Bankruptcy Court to be used in this manner.
E. Conclusion
For all of the reasons state above, the Court finds that this case has been filed in bad faith and that cause exists to dismiss this case under 11 U.S.C. 1307(c). Therefore it is,
ORDERED that this case is dismissed. The Clerk of the Court shall notify all creditors of the dismissal.
. The Debtor scheduled this debt at $257,175.00. The IRS, in its Amended Proof of Claim, filed on August 30, 2005, contends that $222,953.81 was due on the Non-Dis-chargeable Taxes as of the date of the filing of the Chapter 13 case. It is unclear how the liability to the IRS was reduced from the $263,450.70 judgment amount to $223,953.81 on the date of the Chapter 13 petition. The IRS did receive distributions from the Debt- or’s Chapter 7 case in the amount of $21,814.65. There was no evidence that any other payments were made. In fact, the IRS representative who testified at the hearing stated that the Debtor did not make any voluntary payments on the Non-Dischargeable Taxes after the stipulation was approved.
. This case was filed prior to the effective date of the most recent amendments to the Bankruptcy Code. Under the amended Section 1328(a), the Debtor's Section 523(a)(1)(C) tax liability would no longer be dischargeable even under the broader Chapter 13 discharge.
. The 25.2% figure assumes that there is no priority unsecured debt held by the IRS. However, if the IRS were successful in its challenge to the business expenses claimed by the Debtor in 2002-2004, the IRS would have a priority debt in the amount of $66,851.20, which would leave nothing for the repayment of the Non-Dischargeable Taxes. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493990/ | MEMORANDUM OPINION DETERMINING PALM BEACH COUNTY HEALTH CARE DISTRICT TO HAVE NO FURTHER LIABILITY TO BANC ONE LEASING CORPORATION PURSUANT TO TERMS OF LEASE AGREEMENT
STEVEN H. FRIEDMAN, District Judge.
THIS CAUSE came before the Court for a trial on August 22, 2005 on Plaintiff *224Banc One Leasing Corporation’s (“Banc One”) Fourth Amended Complaint (C.P.95) against Defendant Palm Beach County Health Care District (“District”). On May 18, 2005 this Court entered an Order Setting Evidentiary Hearing on Fourth Amended Complaint (C.P.234). The threshold issue was identified as follows:
[W]hether the Palm Beach County Health Care District had agreed to underwrite payments to Banc One under the subject lease beyond the five (5)-year guaranty provided in the Palm Beach County Health Care Act.
The Court, having carefully considered the evidence presented, together with argument thereon, and being otherwise fully advised in the premises, makes the following findings of fact and conclusions of law.
JURISDICTION
This Court has jurisdiction of this matter pursuant to 28 U.S.C. §§ 157 and 1334(b). This is an adversary proceeding as to which the Court is authorized to hear and determine all matters regarding this case in accordance with 28 U.S.C. § 157(b)(2)(A), and Bankruptcy Rule 7001 et seq.
THE EVERGLADES BANKRUPTCY
Everglades Memorial Hospital, Inc. (“Everglades”) commenced a Chapter 11 case by filing a voluntary petition for relief on April 7, 1998 (Bankruptcy Case No. 98-31823). From approximately October 1, 1986 through the filing of the petition for relief, Everglades exercised exclusive use, possession, and control of the hospital facilities known as Everglades Memorial Hospital (“EMH”), located in Pahokee, Florida, together with its ancillary buildings and lands. As of November 21, 1998, Everglades surrendered possession and control of the hospital to the Palm Beach County Health Care District (C.P.153). Donald Kaplan, the liquidating trustee under the debtor’s chapter 11 plan confirmed on March 26, 1999 (Bankruptcy Case No. 98-31823-BKC-SHF — C. P. 328), as successor to Everglades, thereafter continued to exercise exclusive possession and control of various assets of Everglades, including cash, accounts receivable, inventory, equipment, additional personal property, and certain real properties. See Liquidating Trustee’s Quarterly Reports (Bankruptcy Case No. 98-31823 — C. P. 428, 524, 554, 571, 575). Ultimately a public sale of these assets was conducted, the net proceeds of which were used to pay administrative expenses of the bankruptcy estate, as well as certain creditors, including Banc One and the District pursuant to the Settlement Agreement approved by this Court by Order dated June 14, 2001 (Bankruptcy Case No. 98-31823 — C.P. 601).
HISTORICAL BACKGROUND
The Northwestern Palm Beach County Public Hospital Board (“NW Board”) was created by a special act of the Florida Legislature, Chapter 26106, effective May 18, 1949. The purpose of the NW Board was to determine the need for public hospitals in Northwestern Palm Beach County and provide oversight of the operating hospital facilities in that area. The NW Board operated and managed Everglades Memorial Hospital (“EMH”), located in Pahokee, Florida. In 1985, the debtor, Everglades Memorial Hospital, Inc. (“Everglades”), was created. On October 1, 1986 the NW Board transferred EMH operations to Everglades pursuant to a restructuring agreement. In 1987, the NW Board approached Banc One to finance the construction of a physicians office building and renovation of the emergency room and intensive care unit at EMH.
*225
THE PALM BEACH COUNTY HEALTH CARE ACT
The Palm Beach County Health Care Act (the “Act”) was approved by the electorate in 1988. The Act created the Palm Beach County Health Care District (the “District”) and “ ... vested [it] with the authority and responsibility to provide for comprehensive planning and delivery of adequate health care (including, but not limited to, hospitals) and services for the citizens of Palm Beach County, particularly medically needy citizens” (Banc One. Ex. 2 — Section 3). The Act provided that the NW Board would be abolished and that “ ... all of the functions, rights, responsibilities, obligations, assets, and liabilities of said hospital board shall be transferred to and become the property and responsibility of the Palm Beach County Health Care District; said repeal, abolition, and transfer to take place 1 year after the effective date of this act.” (Banc One Ex. 2 — Section 11(2)). Pursuant to the Act, the rights and powers of the District fully vested as of November 8, 1989.
FIVE YEAR LEGISLATIVE GUARANTEE
Under Section 3(20) of the Act, the District was directed, for a period of five (5) years following its creation, to turn over to EMH tax revenues collected from property owners within the geographic boundaries previously governed by the NW Board, in an amount equal to the level of tax funding turned over by the NW Board to EMH during the fiscal year immediately prior to the abolition of the NW Board under the Act (commonly referred to as the “legislative guarantee”) (Banc One Ex. 2). During this five-year transition period, the District was prohibited from exercising any budgetary discretion when dealing with EMH.
There is no dispute that the District fully satisfied this legislative guarantee by turning over allocated tax revenues through its fiscal year ending September 30, 1994. With regard to the District’s fiscal year commencing October 1, 1994, and thereafter, however, the District asserts that it had a right and duty under the Act to exercise discretion when making budgetary decisions including its decision to withhold further contributions to EMH until Everglades, which still controlled the operations of EMH, agreed to certain administrative policies and procedures designed to grant to the District and the public more control over the operations and fiscal management of EMH. EMH and the NW Board initiated an action in the Circuit Court of the 15th Judicial Circuit in and for Palm Beach County, Florida to compel the District to continue to subsidize EMH, using the District’s ad valorem tax capabilities notwithstanding the expiration of the legislative guarantee under the Health Care Act. As a result of that litigation, the District was not compelled to provide further subsidies to fund EMH following the expiration of the legislative guarantee. At trial before this Court, Banc One was afforded the opportunity to demonstrate that the District, notwithstanding the expiration of the five-year legislative guarantee under the Palm Beach County Health Care Act, had undertaken the obligation to repay any balance due to Banc One under the Lease Agreement after application of all surplus hospital revenues of EMH.
THE BANC ONE LEASE/PURCHASE AGREEMENT
On October 26, 1989, the NW Board executed a lease/purchase agreement with Banc One (“Lease Agreement”). According to the Lease Agreement, Banc One agreed to provide financing to the NW Board in the amount of $2,745,000, to be *226repaid over ten years in semi-annual payments (Banc One Ex. 1). The signatory to the Lease Agreement on behalf of the NW Board was Donald Anderson in his capacity as the Administrator of EMH. On June 18, 1991, Banc One provided an additional $185,899.40 in financing pursuant to an amendment to the Lease Agreement, which included a revised payment schedule. The aggregate loan amount funded by Bane One to the NW Board was $2,930,899.40.
DISTRICT’S ARGUMENT
The District contends that the terms of the Lease Agreement make payments expressly and solely payable from a specific source of funds (the surplus gross revenues of EMH), rather than from funds generally available to the NW Board (tax revenues). The District contends that, prior to executing the Lease Agreement and subsequent amendment, the NW Board did not obtain the consent of the registered voters of Palm Beach County such that payments due under the Lease Agreement could be lawfully defrayed with general tax revenues. Neither the full faith and credit of the NW Board, nor its taxing powers, were committed as security for repayment of the Lease. (Banc One Ex. 1, Sections 6.3, 12.8). Therefore, according to the District, Banc One assumed the risk that revenues generated by EMH might not be sufficient to fund the payment obligation due under the Lease Agreement. The Lease Agreement contains several provisions which expressly limit the source of repayment to surplus gross revenues of EMH, and disclaim any right to compel the NW Board to levy taxes to pay any balance due to Banc One in the event EMH revenues proved insufficient to repay Banc One:
Section 6.3. Source of Rental Payments. The Rental Payments and other amounts due hereunder shall be payable from proceeds of this Lease deposited in the Property Acquisition Fund and the Surplus Gross Revenues; however such amounts shall not constitute a lien on the property comprising the Hospital. Lessee may, but shall not be required to, advance any money derived from any source other than such Surplus Gross Revenues and other sources specifically identified herein for the payment of the Rental Payments, but such other funds or property of Lessee shall not be liable for the payment of the Rental Payments. This Agreement shall not constitute a general obligation of Lessee or the State or any political subdivision thereof, and the full faith and credit and taxing powers of Lessee are not pledged for the payment of the Rental Payments, and no person shall ever have the right to compel the application of any Lessee funds (other than the Surplus Gross Revenues) or the levy of ad valorem taxes for the payment of Rental Payments.
Section 12.8. Liability Limited to Surplus Gross Revenues. Notwithstanding any provision of this Agreement, the Lessee’s liability to pay the Rental Payments and other amounts hereunder shall be limited to the Surplus Gross Revenues as provided in Section 6.3. In the event that such Surplus Gross Revenues shall be insufficient at any time to pay the Rental Payments and other expenses payable by the Lessee hereunder in full, the Lessee shall not be liable to pay or prepay such Rental Payments and other expenses other than from Surplus Gross Revenues.
(Lease Agreement, Banc One Ex. 1 pp 6-1 to 6-2,12-4).
To further support the position of the District, testimony was elicited at trial to the effect that on October 11, 1989, Glen Torcivia, Esq., then-general counsel to the District, had a telephone conversation with *227Jim Zook of Banc One. Mr. Torcivia testified that he specifically warned Mr. Zook that the District had not authorized execution of the Lease Agreement by the NW Board and that the District disavowed any responsibility for repayment of the Lease Agreement. Mr. Torcivia clarified and confirmed with Mr. Zook that Banc One’s dealings with the NW Board under the Lease Agreement were at Banc One’s risk.
At the District’s October 30, 1989 public meeting, Donald Anderson reiterated that the District assumed no liability or responsibility to make payments under the Lease Agreement which the NW Board had just executed with Banc One (Banc One Ex. 16). The District, at that public meeting, further disclaimed responsibility under the Lease Agreement and directed Mr. Torci-via to issue another letter to that effect to Banc One (Banc One Ex. 16). Mr. Torci-via did, in fact, issue such a letter the next day (District Ex. S).
BANC ONE’S ARGUMENT
Banc One contends that, regardless of the correspondence between various persons affiliated with the NW Board, the District, and Banc One prior to the execution of the Lease Agreement, the District assumed all obligations and benefits of the Lease Agreement on November 8, 1989 pursuant to the Act. Additionally, Banc One asserts that the District is legally obligated to make all payments when due and provide sufficient funding to make payments for the Lease Agreement’s full ten-year term. Banc One predicates this conclusion on the text of the Palm Beach County Health Care Act, Chapter 87-450, which states that effective November 8, 1989, the District assumes “... all of the ... responsibilities, obligations, assets and the liabilities of [the NW Board].” (Banc One Ex. 2 — Section 11(2)).
On October 16, 1989, Joel T. Strawn, Esq., counsel for the NW Board, issued to Banc One an opinion letter stating that he had reviewed the proposed Lease with Banc One, and that:
... effective November 8, 1989, all of the functions, rights, responsibilities, obligations, assets and liabilities of (NW Board) including the obligation and liabilities established under the (Lease) and related documents, will be transferred to and become the property and responsibility of the Palm Beach County Health Care District as provided for by the Palm Beach County Health Care Act.
(Banc One Ex. 6, ¶ (i)).
Banc One further contends, in support of its position that the District remains obligated under the Lease Agreement, that such a finding is supported by the fact that Bane One did not fund the loan until after the District subsumed the NW Board on November 8, 1989, and also by the fact that the District made payments to Banc One pursuant to the Lease Agreement for six years. At trial, Banc One offered the financial reports of the District, ostensibly corroborating that the District had assumed the Banc One lease by virtue of the District’s listing of the rental payments as a ten-year capital lease obligation. According to Banc One, the covenants in the Lease Agreement providing that the Rental Payments are “absolute and unconditional” further confirms that the District is obligated for the entire ten-year term of the Lease Agreement. Another covenant relied upon in Banc One’s argument is that “best efforts” would be utilized to obtain appropriations for the entire ten-year term (Banc One Ex. 1 — Section 6.5).
LEGAL ANALYSIS
The Lease Agreement is a contract and, as such, its construction and *228enforcement are governed by principles of Florida’s general contract law. Schwartz v. Florida Board of Regents, 807 F.2d 901, 905 (11th Cir.1987). In order to establish the basis of a contract, there must be common intent, or a “meeting of the minds” as to the terms of the contract. Kuharske v. Lake County Citrus Sales, 44 So.2d 641 (Fla.1949). The express terms of the Lease Agreement, together with the testimony of Banc One’s representative, Charles Litt, and its bond counsel, Leonard Rice, as well as the written legal opinion of the NW Board’s counsel, Joel Strawn, consistently acknowledged that the Lease Agreement was not intended to be a general obligation of the NW Board, and accordingly, that an approval of the Lease Agreement by voter referendum was not constitutionally required. Although the District did subsume the Lease Agreement upon its succession to the NW Board, the record establishes that the District did not undertake to pay the installments due under the Lease Agreement as a general obligation, payable from its general revenues, but instead committed to pay Banc One solely from the surplus gross revenues of EMH as specified in the Lease Agreement.
This Court is guided by several decisions of the Florida Supreme Court which differentiate between the nature of obligations which do not constitutionally require voter approval (special obligations), and those which are void if not formally approved by voting taxpayers (general obligations). In Northern Palm Beach County Water Control District v. State, 604 So.2d 440 (Fla.1992), the Board of Supervisors of the Water Control District adopted a resolution authorizing the issuance of bonds, and further providing that the bonds were to be “ ... payable solely from the drainage assessments to the landowners ... the bonds ‘shall not constitute a lien upon any of the facilities or properties’ of the District.” Id. at 442. Accordingly, the Court found that “ ... the bonds do not contemplate a pledge of the District’s credit,” and were payable solely from the revenue sources identified in the bonds. Id. See also State v. Broward County, 468 So.2d 965 (Fla.1985).
The Supreme Court of Florida was faced with a similar issue in State v. Inland Protection Financing Corp., 699 So.2d 1352 (Fla.1997), wherein a public benefits corporation issued bonds for financing the rehabilitation of contaminated sites. The Court found that the proposed bonds did not pledge the public credit or taxing power since the authorizing statute, the bond resolution, and the guaranty agreement all put the bondholders on notice that the obligation was limited to several specifically-defined revenue sources. Id. at 1356 (citing State v. Florida Development Finance Corp., 650 So.2d 14, 18 (Fla.1995)). The Court in Inland Protection Financing Corp. further affirmed that the bond instrument unambiguously placed potential bondholders on notice that the bonds did not constitute a debt or obligation of the State and therefore are not underwritten by a pledge of a tax revenue source. Id.
CONCLUSION
Upon consideration of the clear language of the Lease Agreement concerning the limited source of repayment, the Court concludes that the Lease Agreement constitutes a revenue obligation of the NW Board. As a result, Banc One’s repayment source was limited to surplus gross revenues generated by EMH operations, which ceased in early 1998, just prior to the filing of Everglades’ chapter 11 petition. As contemplated expressly by Sections 6.3 and 12.8 of the Lease Agreement, Banc One was contractually restricted to obtain repayment from those EMH revenues. It is Banc One, and not the District, which *229bore the risk that the terms of the Lease Agreement might not be satisfied in the event that surplus revenues were not generated through the operation of EMH. Based upon the foregoing findings of fact and conclusions of law, it is
ORDERED:
(1) Palm Beach County Health Care District has no further liability to Banc One Leasing Corporation under the terms of the October 26, 1989 lease/purchase agreement.
(2) A status conference shall be conducted in this adversary proceeding on _ at_ at the Forum Building Complex, 1675 Palm Beach Lakes Blvd., 8th Floor, West Palm Beach, Florida, to consider the status of the remaining issues, if any, to be adjudicated herein. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493991/ | ORDER DENYING MOTION FOR PROTECTIVE ORDER AS TO EXAMINATION OF UNIVERSAL FLEET, INC.
This matter came before the Court on May 1, 2006 on Amended Motion for Protective Order as to Rule 7030 Examination Duces Tecus of Universal Fleet, Inc. (CP # 72), and the Court having reviewed the Amended Motion, the Memorandum in Opposition filed by the Trustee, Joel Tabas (CP # 75), the Response thereto (CP # 76), the Memorandum of Law in Support of Amended Motion (CP # 94) and the Memorandum of Law in Response to the Memorandum of Law in Support (CP # 100), and the Court having considered all other matters the Court deems relevant to the decisions herein made, the Motion is DENIED for the reasons set forth below.1
Background
On September 26, 2005, MMH Automotive Group, LLC (“Debtor”) filed a voluntary petition under Chapter 7 of the United States Bankruptcy Code. Joel Tabas was appointed the Chapter 7 Trustee (“Trustee” or “Plaintiff’). On December 29, 2005, Plaintiff initiated this adversary proceeding, seeking recovery of certain alleged fraudulent conveyances from defendants, Global Automotive Group, LLC and G.A.G. Realty, Inc.
On March 28, 2006, the Plaintiff served a Notice of Rule 2004 Examination Duces Tecum (the “2004 Notice”) on Universal Fleet Lease, Inc. (“Universal”) in the main bankruptcy case. On that same date the Plaintiff served a Cross-Notice of Rule 7030 Examination Duces Tecum of Universal Fleet Lease, Inc. in this adversary proceeding.
On April 14, 2006, Universal and Mark Hessein, the brother of the principal of the Debtor, and the apparent principal of Universal (“Hessein”), filed an Amended Motion for Protective Order in the bankruptcy case and in this adversary proceeding (collectively the “Amended Motions”), seeking cancellation of the scheduled deposition and production because the scheduled date for examination was a Muslim holiday and because Hessein is involved in a criminal proceeding brought by the State *231of Florida, pending in the Circuit Court of Broward County.2
Stay of Discovery is Not Appropriate
There appears to be no dispute that Hessein is the subject of the criminal proceeding. However, the party against whom discovery is sought is Universal. Universal and Hessein argue that since Hessein is the corporate representative for Universal — “Mr. Hessein is the appropriate party to appear ...” the stay is appropriate even though Hessein, not Universal, is the subject of the criminal proceeding.
Hessein and Universal accurately cite cases that recognize that a court has the ability to enter a stay of civil discovery pending the outcome of a concurrent criminal proceeding. See United States v. Kordel, 897 U.S. 1, 90 S.Ct. 763, 25 L.Ed.2d 1 (1970); SEC v. Dresser Indus. Inc., 628 F.2d 1368 (D.C.Cir.1980). However, such decision rests solely in the court’s discretion, is granted in very limited circumstances, and with great reluctance. See Carroll v. Unicom AP Chemical Corp. (In re MGL Corp.), 262 B.R. 324 (Bankr.E.D.Pa.2001); SEC v. Incendy, 936 F.Supp. 952 (S.D.Fla.1996).
Hessein and Universal rely primarily on AWS Mgmt, LLC. v. United States, 2006 WL 824506, 2006 U.S. Dist. LEXIS 24894 and Bridgeport Harbour Place I, LLC v. Ganim, 269 F.Supp.2d 6 (D.Conn.2002), where, in each case, the court employed a balancing test to determine whether stay of civil discovery was appropriate, weighing several factors which Universal and Hessein have correctly summarized as “(1) the extent to which a defendant’s Fifth Amendment rights are implicated; (2) the interests of the plaintiff in an expeditious resolution and the prejudice to the plaintiff in not proceeding; (3) the interests of and burdens on the defendants; (4) the convenience to the court in the management of its docket and in the efficient use of judicial resources; (5) the interest of other persons not parties to the civil litigation; and (6) the interest of the public in the pending civil and criminal actions.”
However, in each of the cases cited by Hessein and Universal, the government was a party in both the civil and criminal matter, the civil and criminal matters un-disputedly arose out of the same facts and circumstances, and in all cases other than AWS (in which .both sides agreed a stay was appropriate), the party against whom discovery was sought was a party to the criminal proceeding.
In the instant case, the State of Florida is not a party to the adversary proceeding.3 Universal is not a party to the crim*232inal action and Hessein and Universal have only alleged in the Amended Motion that Hessein “believes the areas of inquiry and the documents requested in the Notice are directly relevant to those criminal proceedings.” However, Hessein provides no concrete example of how the discovery is “directly relevant” nor has he otherwise explained the basis for such belief.4 There is no evidence, nor has Hessein alleged, that this proceeding overlaps, or is parallel to, the criminal proceeding.
The Court must determine whether Hessein can use his position as corporate designee of Universal in discovery related to the adversary proceeding and in discovery allowed under Fed. R. Bankr.P.2004, to seek a stay of such discovery against the corporation that has been alleged might be connected with a criminal proceeding against Hessein individually. The answer is “no”.
There is no issue that a corporation does not enjoy the constitutional protections of the Fifth Amendment. Braswell v. United States, 487 U.S. 99, 108 S.Ct. 2284, 101 L.Ed.2d 98 (1988); In re Cotillion Investments, Inc., 04-41606-BKC-RAM, 2006 WL 1599217 (Bankr.S.D.Fla. May 25, 2006); Kozyak v. Poindexter (In re Financial Federated Title & Trust, Inc.), 252 B.R. 834 (Bankr.S.D.Fla.2000). Universal cannot create that constitutional protection indirectly by designating a corporate representative who is the subject of a criminal proceeding. As the Supreme Court noted in Kordel:
[A] corporation could not satisfy its obligation under Rule 33 simply by pointing to an agent about to invoke his constitutional privilege. It would indeed be incongruous to permit a corporation to select an individual to verify the corporation’s answers, who, because he fears self-incrimination may thus secure for the corporation the benefits of a privilege it does not have.
397 U.S. at 8, 90 S.Ct. 763 (citations omitted). See also Braswell, 487 U.S. 99, 117, 108 S.Ct. 2284, 101 L.Ed.2d 98 (The sole shareholder of a corporation refused to produce books and records subpoenaed from such corporation, arguing that such an act would incriminate him individually. The Supreme Court rejected this argument noting that “a corporate custodian is not entitled to resist a subpoena on the ground that his act of production will be personally incriminating....”)
In the Financial Federated case, the court denied a motion to stay an adversary proceeding to recover a fraudulent conveyance, which motion was filed by an individual who was a defendant in a related criminal action and by a corporation of which the individual was the sole shareholder, which corporation was not a defendant in the criminal case. The court rejected outright the corporation’s motion to stay, because the corporation “has not been indicted and is not a party to any pending criminal action.” 252 B.R. at 838. The court also rejected the individual’s motion to stay, noting first, the government wasn’t a party to the adversary proceeding and second, if the individual chose to assert her fifth amendment right, she could do so.
Universal can elect to designate another corporate representative. Alternatively if Universal chooses to go forward with Hes-sein as its representative then Hessein may assert any Fifth Amendment right to which he is specifically entitled as to any particular question or any particular document. However, neither Hessein nor Uni*233versal may throw up a general blanket of concern, and seek to hide under that blanket without any specific right or purpose in doing so. See United States v. Lot 5, Fox Grove, Alachua County, Florida, 23 F.3d 359, 364 (11th Cir.1994)(“[a] blanket assertion of the privilege is an inadequate basis for the issuance of a stay”); United States v. Argomaniz, 925 F.2d 1349 (11th Cir.1991); In re Keller Financial Services of Florida, 259 B.R. 391 (Bankr.M.D.Fla.2000); Financial Federated, 252 B.R. 834.
The Trustee must administer the assets of this estate including the resolution of all litigation matters. Universal may have information that is relevant to the relief the Trustee seeks in this adversary proceeding or with respect to the assets of the debtor generally. Indeed, contrary to assertions by Universal and Hessein, Rule 2004 does allow the Trustee to go on a general fishing expedition so long as the information sought relates to “the acts, conduct, or property or to the liabilities and financial condition of the debtor, or to any matter which may affect the administration of the debtor’s estate. ...” See In re Wilcher, 56 B.R. 428 (Bankr.N.D.Ill.1985). Universal and Hes-sein have failed to demonstrate why or how they are entitled to the limited protections afforded with respect to these discovery rights.
Weighing the factors this Court should consider in determining whether a stay of discovery requested from Universal is appropriate, the Court finds that there are no factors weighing in favor of a stay, and that there are several factors weighing against the imposition of a stay.
Conclusion
Based on the foregoing, it is ORDERED and ADJUDGED that the Amended Motion for Protective Order is denied. Universal shall respond to the discovery and make available for deposition whatever corporate representative Universal chooses to designate no later than three weeks from the date of this Order. The Court will enter such further and other orders as are necessary to ensure that discovery goes forward consistent with the terms of this order, but encourages the parties to make every possible effort to work through any disagreements prior to bringing such issues to the Court’s attention.
. Virtually identical motions and memoranda were filed in this adversary proceeding and in the main case, 05-40913-BKC-LMI (CP # 79, CP # 104, CP # 114). This order applies in both this adversaiy proceeding and in the main case and the Clerk of the Court is directed to docket this order in both.
. Hessein and Universal also raised in their memo as grounds for the protective order the issue of relevancy. However, the grounds for objection set forth in the Amended Motions were limited to the timing of the deposition and the existence of the criminal proceeding. Since the issue of relevancy was never raised in the Amended Motions, the Court will not consider legal argument relating to relevancy raised for the first time in the Memorandum of Law. Accord Fed.R.Civ.P. 45(c) made applicable by Fed.R. Bankr.P. 9016; Universal City Development Partners, Ltd. v. Ride & Show Engineering, Inc., 230 F.R.D. 688 (M.D.Fla.2005) (Objections to subpoenas waived if not timely raised.) Even had the relevancy objection been appropriately raised the Court would have denied the Amended Motions on such ground.
. Universal and Hessein make much of the fact that the assistant state attorney in the criminal proceeding is listed by the Trustee as a witness in this adversary proceeding. That the Trustee may call the assistant state attorney as a witness regarding a bond matter does not indicate the Trustee intends to share evidence in this adversary proceeding with the State of Florida in the criminal proceeding, and the Court finds there is no basis to make such an inference.
. In their Memorandum Hessein and Universal submit that Hessein "firmly believes that the areas of inquiry and the documents requested ... are directly relevant to [the criminal proceedings]," but still fail to provide any explanation of the basis for such belief. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8493992/ | MEMORANDUM OF DECISION REGARDING DEBT DIS-CHARGEABILITY
ROBERT SOMMA, Bankruptcy Judge.
By their complaint, Douglas Keene and Mary Beth Sidorowicz ask the Court to determine that their claim for damages against the Debtor arising from his alleged breach of a home improvement contract is excepted from discharge under 11 U.S.C. Section 523(a)(2)(A) and Section 523(a)(2)(B). More particularly, the Plaintiffs contend that the Debtor knowingly made a false representation when he portrayed himself to them as a skilled and experienced home improvement contractor capable of performing, and intending to perform, the work contemplated under the subject contract. The Debtor denies this contention.
I
Procedural History
On May 19, 2004, the Debtor filed a voluntary Chapter 7 petition, commencing the within case. On December 30, 2004, the Court entered an order of discharge in favor of the Debtor pursuant to § 727(a) of the Bankruptcy Code.
On August 23, 2004, the Plaintiffs commenced the within adversary proceeding. Their complaint seeks an order under 11 U.S.C. §§ 523(a)(2)(A) and 523(a)(2)(B) excepting from discharge their claim against the Debtor for damages in excess of $100,000 from his breach of a home improvement contract for renovation and addition to their home (“Residence”). Their claim for damages has not yet been adjudicated. In this proceeding, the Court determines the dischargeability of the claim, not the Debtor’s liability or the damages therefor. On July 19, 2006, the Court held a trial of the complaint and now states its findings of fact and conclusions of law in the matter so tried. For the reasons set forth below, the Court will dismiss the Plaintiffs’ complaint for determination of dischargeability.
II
Findings of Fact
On April 7, 2003, the Plaintiffs and the Debtor entered into a contract for certain modifications, renovations and improvements at the Residence (“Contract”) (“Project”). The Contract did not specify a payment or performance schedule.1 It did provide for a Project cost of $204,685 and for a $12,500 deposit which the Plaintiffs paid to the Debtor on or about the Contract date. The Plaintiffs made two further payments to the Debtor: $35,000 on *287May 10, 2003 and $20,000 on August 24, 2003.2 The Project comprised a new garage, laundry, bath and mud room; an addition to the kitchen; and various other items.
Before hiring the Debtor, the Plaintiffs conducted due diligence, checking the Debtor’s references and inspecting the Debtor’s prior projects. They concluded that he had the skill and experience to complete the Project in a timely manner. At that time, the Debtor had approximately twenty years experience as a carpenter and approximately five years experience as a licensed general contractor with numerous completed projects.
At the outset, the Debtor encountered two unanticipated and previously undisclosed construction tasks not contemplated in the Contract: the need for an environmentally compliant fence at or bordering on a wetlands area adjacent to the Residence and the need to re-route the utility connections to the Residence (i.e., water and electricity lines). In addition, despite his urging otherwise, the Plaintiffs suspended his work shortly after he started to permit the construction (by another contractor) of a pool at the Residence. Hence, he did not begin actual Project construction for at least a month after the Contract, having interrupted his work schedule to accommodate the pool installation. The pool was completed in mid-July 2003.
During the period after completion of the pool and especially during September through December 2003, the Debtor appeared only intermittently at the Residence, ultimately completing the fence installation, the utilities relocation and three separate foundations (one of which sustained a crack and was apparently replaced by a successor contractor) but nothing more. During that same period, the Plaintiffs tried, without success, to communicate effectively and regularly with the Debtor regarding his sporadic and unsatisfactory performance on the Project.
The Debtor deposited the monies paid to him by the Plaintiffs into his operating account and neither escrowed nor earmarked these funds for the Project. The Contract did not require such escrow or earmarking and the Plaintiffs did not request it. The Debtor values his work on the Project at $40,000-$45,000.
The Debtor could only remember one or two names of the subcontractors he employed on the Project. He never purchased any materials for the Project other than the foundation concrete. He failed to introduce any supporting documentary evidence at trial regarding his performance.
In January 2004, the Debtor acknowledged to the Plaintiffs in writing his poor performance, attributing it to his overcommitment to multiple jobs and unspecified personal problems. Despite the Debt- or’s assurances to the Plaintiffs that he could resume the Project on a better-managed basis, the Plaintiffs had lost confidence in the Project and in the Debtor. In February 2004, concerned about the construction disarray at the Residence, the onset of a particularly cold winter, the Debtor’s unsatisfactory performance and their payment of $67,500 with little to show for their money but a fence, a utilities relocation and three foundations (one defective), they elected not to proceed under the Contract and hired another contractor.
*288Thereafter,3 the Plaintiffs brought a complaint against the Debtor regarding the Project with the regulatory agency charged with oversight of home improvement contractors, the Board of Building Regulations and Standards of the Massachusetts Department of Public Safety (“Board”). On June 29, 2005, after notice and hearing, the Board issue its decision, finding that the Debtor failed to complete the Project and failed to include a Project payment or performance schedule in the Contract as required by law. M.G.L. c. 142A, §§ 17(2) and 2(a). For those violations, the Board suspended his contractor’s license for 30 days, levied a $500 fine and issued a formal reprimand. The Board’s factual findings are comparable to the allegations made in the complaint before this Court.
Ill
Discussion
a. Section 523(a)(2)(A)
In order to establish that a debt is non-dischargeable under Section 523(a)(2)(A) of the Bankruptcy Code, the Plaintiffs must prove that, in obtaining money from them, (1) the Debtor made a knowingly false representation or made a representation in reckless disregard of the truth; (2) the Debtor intended to deceive the Plaintiffs; (3) the Debtor intended the Plaintiffs to rely upon the false representation; (4) the Plaintiffs actually relied on the false representation; (5) the Plaintiffs’ reliance on the false representation was justified; and (6) the Plaintiffs’ reliance on the false representation caused damage to them. In re Spigel, 260 F.3d 27, 32 (1st Cir.2001), citing Palmacci v. Umpierrez, 121 F.3d 781, 786 (1st Cir.1997). See also In re Creta, 271 B.R. 214, 217 (1st Cir. BAP 2002) and In re Lyle, 334 B.R. 324, 331-332 (Bankr.D.Mass.2005). The Plaintiffs bear the burden of proof on each element and must meet that burden by a preponderance of the evidence as to all elements. In re Palmacci, 121 F.3d at 787.
Here, the Plaintiffs contend that the Debtor’s knowingly false representations, on which they relied and which he made with the intent to deceive them, were (a) that he was a skilled and experienced home improvement contractor who was capable of doing the work required by the Contract and (b) that he intended to complete the Project for the Contract price and in a timely fashion. These representations were false, the Plaintiffs contend, in that (a) the Debtor did not have — and knew he did not have — the experience and competence to complete the Project and (b) that he had no intention of completing the Project within the terms specified in the Contract. They cite as evidence supporting their contentions the following: the Debtor failed to complete the Project; he never purchased Project materials; he accepted payment from them but used their funds, in part, for other projects without escrow or earmarking; he was sanctioned by the Board based on adverse findings consistent with their allegations against him; the $204,685 Project cost estimate was far short of the actual cost of completion; he provided no documentation for his work on the Project or his use of Project funds; he did not recall the names of the subcontractors he employed during the approximate eight-month duration of the Project; he not only failed to complete any of the required improvements but rather damaged the Residence, leaving portions of it in disarray and in a deconstructed state. They also cite comparable complaints against the Debtor by two oth*289er homeowners who disputed his workmanship and/or construction costs during the Project period.
The facts amply support a finding that the Debtor performed in a less than workmanlike manner in respect of the Project and may well be liable for breach of the Contract. For dischargeability purposes, however, the issue is not whether he failed to perform but rather whether he falsely presented himself to them as capable of performing and intending to do so when he entered into the Contract.
The evidence supports the Debtor’s position. He was a registered home improvement contractor with the requisite prior experience when he entered into the Contract and commenced the Project. Indeed, the Plaintiffs had satisfied themselves as to his qualifications before the Contract was made and the Project commenced. He had completed other home improvement projects satisfactorily. There were no prior complaints regarding his work at the time of the Contract. He did install the required fence and did relocate the utilities, two Project add-ons disclosed to him after the execution of the Contract, and he did build the three required foundations.
I find the Debtor’s testimony credible. I further find that he was experienced and skilled for the Project, and did not misrepresent that skill and experience; and that he intended to apply that skill and experience to the Project but was overburdened by other projects and his inability to manage them all. The evidence indicates that, when he entered into the Contract, he was fully capable of performing it and fully intended to perform. He commenced work and returned to it after an interruption for pool installation. He performed the fence, utilities and foundation work. That he failed to complete the Project does not negate his original intention. The evidence reflects that he did a poor job on the Project. The evidence does not reflect or support a finding that he was incompetent to perform the Project in the first place or that he never intended to perform the Project or to comply with his obligations under the Contract when he made the Contract and commenced the Project.
I find that the Plaintiffs have failed to meet their burden by a preponderance of the evidence to demonstrate that the Debt- or knowingly made a false representation regarding his skill and experience as a home improvement contractor and his intention to perform the Project in accordance with the Contract. Hence, the Section 523(a)(2)(A) cause of action is not proved.
b. Section 523(a)(2)(B)
In order to establish that a debt is nondischargeable under Section 523(a)(2)(B) of the Bankruptcy Code, the Plaintiffs must prove that the Debtor obtained money from them by the use of a statement in writing (1) that is materially false; (2) respecting his financial condition; (3) on which the Plaintiffs reasonably relied; and (4) with the intent to deceive them. In re Cohn, 54 F.3d 1108, 1114 (3d Cir.1995). See also In re Mann, 40 B.R. 496 (Bankr.D.Mass.1984). Here, as well, the Plaintiffs bear the burden of proof on each element and must meet that burden by a preponderance of the evidence as to all elements. In re Cohn, 54 F.3d at 1114.
The Court has searched the trial record without success for any written statement respecting the Debtor’s financial condition furnished to the Plaintiffs by the Debtor (much less one that is materially false in any respect). There is no such document among the twenty-two admitted exhibits, nor is there any testimony regarding such written statement. I find that the Plaintiffs have failed to meet their *290burden by a preponderance of the evidence that the Debtor obtained money from them by use of a materially false written statement regarding his financial condition. Hence, the Section 523(a)(2)(B) cause of action is not proved.
IY
Conclusion
For the reasons stated above, judgment shall enter dismissing the complaint for determination of dischargeability.
. Although the Contract is silent on this point, there is evidence suggesting that the parties expected the Project to be completed by year-end.
. The Plaintiffs contend that the $20,000 payment was intended for the purchase of windows pursuant to the Contract while the Debtor testified that it was a Project progress payment in a lesser amount than he requested. The Plaintiffs did not testify. I find the evidence inconclusive as to the payment purpose.
. The parties do not specify when. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492099/ | ORDER
Before VOLINN and OLLASON, Bankruptcy Judges.
The panel has received and reviewed appellant’s “Notice of Objection to Appeal Being Heard and Determined by Bankruptcy Appellate Panel” (the “objection”). The notice of appeal was filed on May 12, 1995. It was not accompanied by an election for the appeal to be heard by the district court; the objection requesting that the matter be *594heard by the district court was filed on June 1, 1995.
In appeals arising in bankruptcy eases filed after October 22, 1994, by virtue of 28 U.S.C. § 158(b) and (c) which codified the Bankruptcy Reform Act of 1994,1 an appeal is deemed referred to the Bankruptcy Appellate Panel Service unless the appellant “elects” to have the appeal heard by the district court “at the time of filing the appeal.” Id. (emphasis added). An “Order Continuing Bankruptcy Appellate Panels of the Ninth Circuit” was promulgated by the Judicial Council for the Ninth Circuit, issued on April 28, 1995, providing that:
If the appellant wishes to make such an election, appellant must file a separate written statement of election with the clerk of the bankruptcy court at the time of filing the notice of appeal
Id. at 3(a) (emphasis added).
Prior to the 1994 amendment, under paragraph 8 of the Amended Order Establishing and Continuing the Bankruptcy Appellate Panel of the Ninth Circuit, revised October 15, 1992, both the appellant and the appellee had 21 days in which to “opt-out” of the jurisdiction of the BAP and remove the appeal to the district court. This procedure continues to apply to all appeals arising in cases filed before October 22, 1994.
As to the instant case, appellant filed its notice of appeal on May 12,1995 and filed its objection on June 1, 1995. While this objection would have been timely in a bankruptcy case filed prior to October 22, 1994, it is untimely in an appeal arising in a case filed after that date. Since the instant appeal arises in a ease filed on December 6, 1994, the new statutes and amended order issued pursuant thereto apply. When the notice of appeal was filed on May 12, 1995 no circumstances existed which could preclude or deter appellants from signifying by a separate written statement filed contemporaneously with the notice of appeal an election to have the appeal heard by the district court. Any notice received by appellants from the clerk of the bankruptcy court relating to the 21 day opt-out procedure would necessarily have been sent after the notice of appeal was filed and could not contribute to appellants’ failure to make a timely election. While appellees have 30 days from service of the notice of appeal in which they may elect to have this appeal heard by the district court, appellant’s objection to BAP jurisdiction is untimely and therefore is OVERRULED.
. Bankruptcy Reform Act of 1994, Pub.L. No. 103-394, § 104(c) and (d), 108 Stat. 4106, 4108-110 (1994); H.R.Rep. No. 103-835, 103rd Cong., 2d Sess. 37, reprinted in 1994 U.S.C.C.A.N. 3340, 3345-46. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492100/ | ORDER ON SUMMARY JUDGEMENT
JAMES E. YACOS, Chief Judge.
This adversary proceeding came before the Court on May 9, 1995 on a motion for summary judgment filed by the plaintiff and the defendants’ objection thereto. The plaintiff is seeking to bar the debtors’ discharge in the present bankruptcy case pursuant to 11 U.S.C. § 727(a)(8).
The underlying facts are not in dispute. The debtors filed their first chapter 11 petition on January 16,1992. An Order confirming their plan of reorganization was entered on January 31,1992 and the debtors obtained a discharge under § 1141(d)(1)(A). The plan reduced the Bank of New Hampshire’s $595,-000 secured claim to $350,000 which was the approximate value of the property securing the loan. The plan was substantially consummated and the case was closed on January 7, 1993.
One year later, in December of 1993, it was discovered the defendants had failed to pay their real estate taxes for 1989 through 1993. On March 1, 1994 the debtors filed a second chapter 11 petition. The debtors were unable to secure the funds needed to pay the outstanding taxes and after a number of failed negotiation attempts the bank foreclosed on the debtors’ property on August 23, 1994. The property was sold for $240,000 leaving the bank with an unsecured delicien-*667cy claim.1 The chapter 11 case was converted to chapter 7 on November 1, 1994.
The issue before the Court is whether or not the debtors are entitled to a discharge in their present case. The bank contends the debtors fall squarely within the § 727(a)(8) statutory bar from discharge because the debtors were granted a discharge under § 1141(d)(1)(A) in their first case which was commenced within six years of their second case. The debtors put forth a strong equity argument citing the “fresh start” policy of the Code and the fact that these “honest” debtors have undergone substantial hardship including losing their home and significantly reducing their standard of living in a failed attempt to secure repayment of their debts.
Although the Court is sympathetic to the difficulties the debtors have undergone, equity is not a license to ignore the plain language of the statute. Nor may the Court disregard the strong countervailing policy of the finality of a confirmation order. In re DiBerto, 171 B.R. 461, 471 (Bankr.D.N.H.1994). This Court has repeatedly stated that a reorganization plan is an enforceable contractual agreement which creates new obligations between the debtor and creditors. Id. Just as the Court would hold a creditor accountable to the terms of a reorganization plan, it must also hold the debtor accountable to the agreements as well. To encourage and foster consensual plans, settlements embodied in such plans must be strictly enforced. Id. at 476.
Every debtor that files a petition no doubt has endured hardships and sacrifices before and after seeking protection in the bankruptcy court. By choosing reorganization instead of liquidation, a debtor is able to retain its assets, reduce its debts and continue operations. However, this protection has a price: the debtor must live up to the obligations set forth in the reorganization plan or face the consequences of the failure to do so. To allow a debtor to walk away from the terms of a confirmed reorganization plan based only on a recitation of the hardships they have endured would essentially eviscerate the effectiveness and finality of every confirmation order entered hereafter.
Under § 727(a)(8), the Court must deny the debtor a discharge if the petition in the present case was filed within six years of obtaining a discharge in a earlier filed case. Courts have held this provision applies once the plan is confirmed even if the case is ultimately dismissed by order of the Court, In re Smith, 96 B.R. 468 (Bankr.W.D.Ky.1988), or by request of the debtor, Matter of Bishop, 74 B.R. 677 (Bankr.M.D.Ga.1987).
Based upon the foregoing reasons as well as the Court’s findings and conclusions dictated into the record at the conclusion of the hearing, which are hereby incorporated by reference, it is hereby ORDERED, ADJUDGED and DECREED as follows:
1. There is no genuine issue of material fact and the plaintiffs motion for summary judgement is hereby granted.
2. The exact amount of the monies owed to the plaintiff shall be determined by the procedure outlined in an Order by this Court entered contemporaneously this date.
3. Final judgement for the plaintiff will be entered following determination of the exact amount of the bank’s claim.
DONE and ORDERED.
. Until the date of the hearing on the motion for summary judgment, the bank never provided the debtor with an accounting of the sale. Although it is apparent the bank holds a claim, the exact amount of its claim has not been established. The exact amount of the claim is to be determined by this court in the procedure outlined in an Order entered contemporaneously this date. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492102/ | MEMORANDUM OPINION
WILLIAM L. STOCKS, Bankruptcy Judge.
This action to determine the dischargeability of a debt came before the court for trial on February 6, 1995. The issue before the court is whether a judgment debt resulting from the failure of J.F. Adkins, Inc. to maintain workers’ compensation insurance coverage for its employees should be excepted from discharge under 11 U.S.C. § 523(a)(2) or § 523(a)(6). For the following reasons, the court concludes that this debt should not be excepted from discharge.
FACTS
In October, 1989, Ellen Nicholson (“Plaintiff’) began working as a millwright for J.F. Adkins, Inc. (“Adkins, Inc.”), a corporation engaged in the business of installing industrial equipment. Plaintiffs husband, Thomas Nicholson, was a superintendent for Adkins, Inc. in 1989 and 1990. Mr. Nicholson earlier had worked for Adkins, Inc. as a superintendent between 1974 and 1984. On October 4, 1990, approximately one year after she began this job, Plaintiff fell from the second or third step of a ladder while installing industrial piping on a job site in Wilson, North Carolina. When she fell, Plaintiff hit her head, neck and back on a piece of equipment. She remained at work that day and performed some light tasks but was unable to continue rigging equipment. Mr. Nicholson, as job superintendent for Adkins, Inc., filed a document with the company secretary in Greensboro in which he reported the accident. Over the next couple of weeks, Plaintiff continued to suffer from dizziness, back pain, and weakness and numbness in her left leg. She ultimately sought medical treatment while in Florida with her family. She was initially diagnosed with degenerative disc disease exacerbated by her fall. She saw the Florida doctor on several occasions. She also received treatment from a doctor in Greensboro who concluded that she had an acute cervical lumbar strain from her work-related injury.
On April 22, 1992, the North Carolina Industrial Commission awarded Ms. Ni*705cholson $21,650.71 for the injuries she received in the course of her employment with Adkins, Inc. The Industrial Commission reached certain factual and legal conclusions contained in its order which was offered into evidence by Plaintiff. These findings and conclusions are binding upon the parties in this action.1 Specifically, the Industrial Commission concluded that at the time of this injury on October 4, 1990, the parties were subject to the provisions of the North Carolina Workers’ Compensation Act and that Adkins, Inc. was in violation of the Act because at the time of the accident it was neither covered by workers’ compensation insurance nor had it provided proof of financial ability to qualify as a self-insurer under the Workers’ Compensation Act.2 The Commission also found that the Debtor was the alter ego of Adkins, Inc., and was personally liable for the amount owed by Adkins, Inc.
In addition to the findings of the Industrial Commission, the court considered the other evidence that was presented at the trial on February 6, 1995. This evidence showed that although Adkins, Inc. was not insured on October 4, 1990, Adkins, Inc. had been insured during a portion of 1990. In his capacity as a supervisor, one of Thomas Nicholson’s responsibilities was to file accident reports when employees were injured. He testified that during the period of 1974-84, he filed numerous reports for employees, that these claims were covered and that he believed the company had maintained workers’ compensation coverage during this earlier period. He testified further that several employees were injured during 1989-90 and that their medical bills also were covered by workers’ compensation insurance. The evidence did not show the circumstances under which Adkins, Inc. ended up having no workers’ compensation insurance coverage on October 4, 1990. Hence, it is not apparent whether the absence of coverage was the result of a negligent omission or a calculated decision on the part of Adkins, Inc. or the Debtor. The evidence did not show when the coverage ended or for how long it had been terminated before Plaintiffs accident. There also was no showing as to when the Debtor first became aware that Adkins, Inc. had no workers’ compensation coverage nor how long that date was prior to Plaintiffs accident.
Debtor filed a voluntary petition under Chapter 11 of the Bankruptcy Code on August 6, 1992 and converted to Chapter 7 in February, 1993. As the issues of damages and liability have already been resolved in the administrative hearing, the court is left with the sole issue of the dischargeability of the judgment debt in this Chapter 7 case.
DISCUSSION
At the outset, the court acknowledges the general policy that exceptions to discharge should be construed strictly against the creditor and liberally in favor of honest debtors. Combs v. Richardson, 838 F.2d 112, 116 (4th Cir.1988); In re Murray, 116 B.R. 473 (E.D.Va.1990); In re Tester, 62 B.R. 486 (W.D.Va.1986). Further, in dischargeability actions, the burden is on the creditor to establish each element of its claim by a preponderance of the evidence. See Combs v. Richardson, 838 F.2d 112 (4th Cir.1988); Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).
I. Fraud, false representation or false pretenses.
Plaintiff first claims that this debt should be excepted from discharge because Debtor employed her without revealing that he lacked workers’ compensation coverage and that this constituted “false pretenses, a *706false representation, or actual fraud” within the meaning of 11 U.S.C. § 523(a)(2). Plaintiff has the burden of establishing the following elements in a fraud or false representation claim under this section: (1) that the debtor made a representation; (2) that at the time of making the representation, the debt- or knew it was false; (3) that the debtor made the representation with the intention and purpose of deceiving the creditor; (4) that the creditor relied on the representation; and (5) that the creditor sustained a loss as a result of that reliance. In re Booker, 165 B.R. 164 (M.D.N.C.1994); In re Criswell, 52 B.R. 184 (E.D.Va.1985); In re Showalter, 86 B.R. 877 (W.D.Va.1988).
Plaintiff failed to meet her burden of establishing that the debt should be excepted under § 523(a)(2)(A). There was no showing of fraud, a false representation or false pretenses at the time Adkins, Inc. hired Plaintiff. To the contrary, the evidence offered by Plaintiff tends to show that the company was covered by workers’ compensation insurance when Plaintiff was hired and for at least part of the period of time between the date she was hired and the date she was injured. Also, there was no showing that at the time Plaintiff was hired the Debtor made any express or implied representation regarding insurance coverage or that Plaintiff relied on any such representation.
Since Adkins, Inc. was not insured at the time of Plaintiffs injury, it is clear that coverage for Adkins, Inc. terminated at some point between October, 1989, when she was hired, and October, 1990, when she was injured. The court has carefully considered whether in this case the failure of Debtor to inform Plaintiff of the loss of coverage, standing alone, constitutes “false pretenses” within the meaning of § 523(a)(2). Under § 523(a)(2)(A), “false pretenses” means implied misrepresentations or conduct intended to create and foster a false impression when the truth is known by the debtor. The evidence does not support such a finding in this case. Plaintiff testified that during the course of her employment she did not inquire about coverage and did not know whether there was coverage. In fact, there was no showing of any direct discussions or dealings of any kind between Plaintiff and Debtor regarding workers’ compensation insurance.
The evidence strongly suggested that in the past it had been the practice of Adkins, Inc. to maintain workers’ compensation coverage. It is not even clear from the evidence that Debtor was actually aware that the coverage had lapsed some time before Plaintiffs accident on October 4, 1990. Even if the inference is drawn that Debtor, as alter ego of Adkins, Inc., was aware that the coverage had lapsed or otherwise terminated, there was no showing of how long he had such knowledge before the accident. Debtor may have been negligent in permitting the coverage to lapse, but nothing indicates that he intentionally and knowingly created a false impression upon which Plaintiff relied. The facts in this case simply do not support a conclusion that the Debtor was guilty of fraud, false pretenses or a false representation.
II. Willful and malicious conduct.
Plaintiff also claims that her injuries resulted from Debtor’s willful and malicious conduct and that her claim should be excepted from discharge under 11 U.S.C. § 523(a)(6).3 There are two separate elements to a nondischargeability claim under this section. The term “willful” means a deliberate or intentional act which is certain or substantially certain to cause injury. See e.g. In re Ketaner, 149 B.R. 395, 400 (E.D.Va.1992); In re Britton, 950 F.2d 602 (9th Cir.1991); 3 Collier on Bankruptcy ¶ 523.16[1] at 523-129 (15th Ed.1994). In order to establish that a debtor’s conduct was “malicious” within the meaning of § 523(a)(6), a plaintiff is not required to prove specific malice, spite, hatred, or ill-will. “Implied malice, which may be shown by the acts and conduct of the debtor in the context of the surrounding circumstances, is sufficient under 11 U.S.C. § 523(a)(6).” St. Paul Fire and Marine Ins. Co. v. Vaughn, 779 F.2d 1003, 1010 (4th *707Cir.1985). However, negligence, even gross negligence, is insufficient to satisfy the necessary elements of malice and willfulness. In re Brubaker, 57 B.R. 736, 739 (W.D.Va.1986).
There is a substantial body of recent case law involving the status of uninsured workers’ compensation claims under § 523(a)(6). In what appears to be the majority of cases, courts have found that such claims should be discharged. Many of these courts have reached this conclusion based on the rationale that the debtor’s failure to obtain insurance is not the direct cause of the creditor’s injury. See e.g., In re Kemmerer, 156 B.R. 806 (S.D.Ind.1993) (“Even if an employer’s failure to provide Workers’ Compensation insurance is willful, wrongful, and without just cause or excuse, it is not ‘malicious’ because harm to an employee is not substantially certain to follow”); and In re Frias, 153 B.R. 6 (D.R.I.1993) (“Failing to maintain insurance certainly created a risk that the employer might incur a personal financial liability, but that result was not so predestined that the Debtors’ conduct may be deemed willful or malicious, as a matter of law”). In these cases, the court often emphasizes that failure to insure produces only the potential for harm because it is unlikely that an employee will suffer a compensable injury and, if he does, the employer may be able to pay the claim out of the operating funds of the business. In re Scott, 13 B.R. 25 (C.D.Ill.1981); In re Zalowski 107 B.R. 431 (D.Mass.1989).
There is some support for the position that, since the physical injury to the employee did not result from the willful act of leaving employees uninsured, there is no willful and malicious injury. See In re Hampel, 110 B.R. 88 (M.D.Ga.1990). This approach relies on the plain language of 11 U.S.C. § 523(a)(6), which provides an exception for “willful and malicious injury by the debtor to another entity or to the property of another entity,” and not a willful and malicious act which causes an injury. This narrow view of § 523(a)(6) has not been widely accepted because the intentional failure to provide workers’ compensation coverage may be regarded as a willful injury to the employee’s statutory property right to be protected in the event of an injury on the job. See, e.g., In re Mazander, 130 B.R. 534 (E.D.Mo.1991); In re Frias, 153 B.R. 6 (D.R.I.1993); In re Strauss, 99 B.R. 396 (N.D.Ill.1989). In these cases, the analysis then shifts to an examination of whether such a willful omission was also malicious.
The cases that have excepted these workers’ compensation debts from discharge frequently have found a willful and malicious injury resulting from some type of egregious conduct on the part of the debtor/employer which is related to the absence of workers’ compensation insurance. For example, in In re Verhelst, 170 B.R. 657 (W.D.Ark.1993), an employer in an auto salvage business made express representations to a mechanic that he would provide coverage and then deliberately elected not to purchase coverage. The court found the debt to be nondisehargeable. Id. The same result has been reached when employers withheld wages for the ostensible purpose of purchasing insurance and then did not secure coverage for employees who labored and were ultimately injured in the course of their employment. In re Peel, 166 B.R. 735 (W.D.Okla.1994); In re Erickson, 89 B.R. 850 (D.Idaho 1988).
This court believes that in an appropriate case involving egregious conduct on the part of the debtor, a debt resulting from an intentional failure to comply with a statute requiring the debtor to maintain workers’ compensation coverage may be nondischargeable under § 523(a)(6). Whether such a claim, in fact, is nondisehargeable under this rule depends upon the particular facts of each case. Having carefully considered the facts of the present case, the court has concluded that the facts are insufficient to warrant a finding in this case that the plaintiffs claim is nondisehargeable under § 523(a)(6).
There was no showing of willful or egregious conduct on the part of Debtor in this ease. The Debtor made no representations whatsoever regarding workers’ compensation coverage at any time during the course of plaintiffs employment. He never made any assurance to Plaintiff or her husband that the corporation currently maintained coverage or would do so in the future. *708The corporation did not withhold premium amounts from employees’ paychecks and then fail to secure the coverage. Essentially all that was shown was that there was no coverage in effect on the date that Plaintiff was injured. There was no showing that this lapse was intentional or deliberate, rather than a negligent oversight nor was it shown when the lapse in coverage became known to the Debtor. In short, the evidence was insufficient to show either willfulness or malice on the part of the Debtor.4
The court also considered the nature of Plaintiffs employment and whether it warranted a finding of nondischargeability. Plaintiffs job involved some heavy construction and a certain degree of danger. Plaintiffs specific duties, however, were not so inherently dangerous that injuries were substantially certain to occur. The court considered the conduct of Debtor in the context of all of the surrounding facts and circumstances shown by the evidence, including the nature of the Plaintiffs employment. In light of the lack of any egregious conduct indicating willfulness or malice on the part of Debtor, the nature of plaintiffs employment is insufficient for the court to conclude that the plaintiffs claim should be treated as nondischargeable.
Since Plaintiff failed to establish by a preponderance of the evidence that the debt in question should be excepted from discharge under either § 523(a)(2)(A) or § 523(a)(6), judgment must be entered in favor of the Debtor. A judgment consistent with this opinion will be entered contemporaneously herewith.
. The court gives collateral estoppel effect to the facts and issues decided by the North Carolina Industrial Commission. The elements of collateral estoppel are as follows: (1) the issue sought to be precluded is the same as that involved in the earlier proceeding; (2) the issue was actually litigated in the earlier proceeding; (3) the issue was determined by a valid and final judgment; and (4) the determination was essential to the prior judgment. Combs v. Richardson, 838 F.2d 112, 115 (4th Cir.1988); King v. Grindstaff, 284 N.C. 348, 358, 200 S.E.2d 799, 806 (1973). The court finds that these elements are present in this case.
. N.C.Gen.Stat. § 97-93 requires employers to maintain insurance or furnish the Commissioner of Insurance with proof of financial ability to provide compensation.
. 11 U.S.C. § 523(a)(6) provides that a discharge “does not discharge an individual debtor from any debt — (6) for willful and malicious injury by the debtor to another entity of to the property of another entity.”
. Plaintiff argued that Debtor was not cooperative and forthcoming after the accident as grounds for finding willfulness and malice. While Mr. Adkins may have been unresponsive after the plaintiff was injured, such behavior after the accident is insufficient to establish that the failure to have coverage at the time of the accident should be treated as a willful and malicious injury to the plaintiff. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492104/ | FINDINGS OF FACT, CONCLUSIONS OF LAW AND MEMORANDUM OPINION
ALEXANDER L. PASKAY, Chief Judge.
THIS IS a Chapter 7 case and the matter under consideration is a Complaint to Determine Dischargeability of Debt filed by the Plaintiff, Peggy Fernandez (Fernandez). In her Complaint, Fernandez asserts that the debt owed to her by Jay A. McMahon (Debt- or) is nondischargeable under § 523(a)(6) of the Bankruptcy Code because according to her, the debt owed to her by the Debtor is based on a willful and malicious injury inflicted on her by the Debtor. The debt is represented by a Final Judgment entered against the Debtor and in favor of Fernandez by the Circuit Court for Pinellas County, Florida, on *950February 1, 1993, in the total amount of $384,860.25. On March 24,1994, the Plaintiff filed her Motion for Summary Judgment which was heard in due course and by an Order entered on September 2, 1994 the Motion was denied and the Plaintiffs claim was set for trial, at which time the Court heard testimony of witness and considered the evidence and the entire record and now finds and concludes as follows:
Prior to 1992, the Debtor was an oral maxillofacial surgeon licensed to practice in the State of Florida. In the years immediately prior to 1992, the Debtor concentrated his practice in the placement of dental implants, a procedure where the implant material is inserted into a patient’s jawbone. If the patient has sufficient bone structure then the implant material fuses with the bone structure by natural processes in order to serve as a foundation for permanent dentures or other teeth.
On April 29, 1988, Fernandez consulted with the Debtor in his office regarding the procedure and the terms under which Fernandez could receive a dental implant. It is without dispute that the Debtor and Fernandez discussed the general nature of the procedure, as well as the fact that the Debtor would perform the procedure at a reduced cost if she agreed that the procedure would be videotaped. Apparently, the Debtor had an arrangement with Stryker Surgical Corp. (Stryker), the manufacturer of the Stryker Precision Implant System, pursuant to which the Debtor would receive certain equipment in exchange for allowing the implant procedure to be videotaped for use by Stryker as an instructional tool.
The Debtor performed a preliminary evaluation of Fernandez in his office during her initial visit and ordered a CT Scan to be done at Humana Hospital. The evidence is in dispute as to whether the Debtor advised Fernandez that she would receive a general or only a local anesthetic during the surgery and also as to whether the Debtor advised her that her bone structure was inadequate and would need to be augmented. In any event, Fernandez did in fact undergo the CT Scan at Humana Hospital and the results were interpreted by a radiologist and sent to the Debtor. The Debtor’s records concerning his evaluation of Fernandez are minimal at best. The fact of the matter is that his Medical Evaluation and Diagnosis Forms were left completely blank. (Pi’s Exh. 8). Further, apart from notations concerning his fee for the surgery, his written treatment Plan reflects only that the Debtor proposed to install 6" root form implants, if possible. (Pi’s Exh. 8).
The Debtor performed the dental implant procedure on Fernandez on May 18, 1988 in the Debtor’s office. The procedure extended for more than 9 hours, from approximately 8:00 a.m. until after 5:00 p.m. During the entire procedure Fernandez was awake and aware of her surroundings. No record was maintained as to the amount or effect of the local anesthetic that was administered by an employee of the Debtor and not by a medical doctor specializing in administering anesthesia. The procedure was videotaped, at least in part, so that a camera man and his equipment was in the operating room during the procedure. Also present in the operating room was a nurse and other surgical staff. It is undisputed that one of the implants failed to fuse in the jaw bone, became loose and migrated into Fernandez’ sinus cavity during the procedure, and that the Debtor retrieved the implant with orthopaedic instruments. The procedure to retrieve the implant from the sinus cavity may have taken as long as 2$ hours. After the implant was recovered, the Debtor did not abandon the procedure, but instead resumed the procedure and installed the implants as planned. It appears that Fernandez was in great pain during the entire procedure and repeatedly cried for relief but was rebuffed by the Debt- or who told her that he would cut her tongue off if she did not keep quiet. The Debtor claims that the threat was not seriously intended and it was said in jest.
The evidence is in conflict as to other unusual incidents which may have occurred during the course of the surgery. For instance there was testimony, albeit contradictory, as to whether or not the operating room technician who administered a local anesthetic to Fernandez was qualified to administer injections. In addition, there was evidence, *951although contradicted, that during the procedure, the Debtor took a one-hour lunch break and had pizza with the staff in the adjoining room while Fernandez remained on the operating table; that during the entire time she was restrained or severely restricted in her movements; that her mouth was held open during the entire procedure by a retractor without giving her an opportunity to relax her muscles; that the Debtor sought the advice of the representative of Stryker about the proper way to place the lower implants. There was also contradictory testimony as to whether the Debtor used an unsterile instrument to recover the lost implant from the sinus cavity after the instrument had been dropped on the floor by this same technician. According to the technician, the Debtor instructed her only to wash the instrument with alcohol after it was retrieved from the floor and before he used it again.
Be as it may, the Debtor installed a total of 10 implants in Fernandez’ mouth instead of six as originally stated in the Treatment Plan. The Debtor placed eight implants in her upper jaw, and two blade implants in her lower jaw. According to post-operative X-rays, all of the implants appeared to be properly aligned at the completion of the procedure, with no indication of any further migration of the implants into Fernandez’ sinus cavity. All of the implants used in the surgery were designed or manufactured in accordance with the Stryker implant system, a system which has not been approved by the American Dental Association.
Fernandez soon experienced pain and discomfort following the surgery and her family members attempted to contact the Debtor for assistance but received no response. It is without dispute that Fernandez later returned to the Debtor’s office on various occasions for heat treatments, intended to alleviate the pain and also appeared for additional filming or photography following the surgery by Stryker. Since the surgery, Fernandez has experienced continued discomfort with pain in her ears, temporomandibular joint ailments and she has been unable to chew properly.
Approximately six weeks after the implant procedure on June 29, 1988, Fernandez consulted with Dr. Anthony Auletta, an oral and maxillofacial surgeon, in order to obtain a second opinion regarding her discomfort and the placement of the implants. A radiograph or X-ray taken of Fernandez’ jaws and sinuses revealed that one of the upper left implants became loose and was lying within Fernandez’ sinus cavity. Dr. Auletta recommended that the implant be removed from the sinus through a special surgical procedure in order to prevent a potential for chronic sinus infections which might be caused by the implant in the sinus. Although it is unclear, it appears that Fernandez did discuss the migrant implant with the Debtor at some point, and the Debtor suggested that the implant should be left alone and there was no danger if the implant remained in the sinus.
On August 16, 1988, Fernandez returned to Dr. Auletta’s office and farther X-rays were taken. At that time it was discovered that an upper right implant had also moved and was then in Fernandez’ right maxillary sinus. On November 22, 1988, Dr. Auletta surgically retrieved both of the implants from Fernandez’ sinus cavities. Ultimately all but one of the implants were removed because they had not properly fused with the Debtor’s bone.
Based upon these facts, Fernandez contends that the debt owed to her by the Debtor should be declared to be nondischargeable pursuant to § 523(a)(6) of the Bankruptcy Code. This Section provides that an individual debtor is not discharged from any debt “for willful and malicious injury by the debtor to another entity.” Cases construing this Section in the context of medical malpractice actions are generally fact-intensive, and independent research failed to discover any decision by the Eleventh Circuit which is squarely on point. However, it is fundamental that the debt must result from a willful and malicious injury by the debtor in order to be determined to be nondischargeable. As used in this Section, the term “willful” means intentional, and the intent required is the intent to do the act, not the intent to injure the claimant. In re Britton, 950 F.2d 602, 605 (9th Cir.1991). In addition, the claimant must also prove “malice,” which *952means that the debtor had actual knowledge that his conduct would produce the injury, or that the injury was reasonably foreseeable, but that the debtor proceeded in the face of a known risk and that the act was done without just cause or excuse. Britton, 950 F.2d at 605; In re Tanner, 31 B.R. 338 (Bkrtcy. S.D.Fla.1983). In short, the plaintiff must show that the debtor’s conduct amounted to more than mere negligence, or even gross negligence, in order to satisfy the willful and malicious standard. In re Jaquis, 131 B.R. 1004, 1009 (Bkrtcy.M.D.Fla.1991). This showing must be made by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).
In this case, extensive expert testimony was presented regarding the “willful and malicious” elements of § 523(a)(6). The primary focus of this expert testimony centered on the Debtor’s failure to recognize that Fernandez was not a suitable candidate for the dental implant surgery. It appears that a qualified implant patient must have a sufficient amount of existing bone structure in the jaw to stabilize the implants, and that the sufficiency of the bone is critical to the success of the procedure. The quantity of the patient’s existing bone may be determined in part by X-rays and CT scans, prior to the procedure, and may also be ascertained with greater precision at the time of the procedure. If a patient’s bone structure is inadequate, the existing bone may be augmented in some instances by freeze-dried bone or other grafting material.
It is clear from the record that Fernandez had inadequate bone structure in her jaw prior to the surgery to support the implants, and there is ample evidence to conclude that the implants installed by the Debtor migrated into Fernandez’ sinus cavities as a result of the inadequate bone. According to the expert witnesses the Debtor failed to follow the appropriate procedure and should have foreseen the resulting injury in at least two primary respects:
(1)First, the Debtor failed to recognize in advance that Fernandez was not a suitable candidate for the implant surgery because of her inadequate bone structure.
(2)Second, after the insufficiency of the bone became apparent during the surgery the Debtor failed to either (1) convert the surgery into a two-step procedure and simply augment the bone in the first phase; or (2) abandon the procedure entirely.
There is evidence that the Debtor did in fact attempt to augment the bone with “freeze-dried” bone or a related substance during the procedure, although he also placed the implants during the same procedure and proceeded with the surgery even after one implant migrated into Fernandez’ sinus cavity. According to the expert testimony, the Debt- or should either have halted the surgery completely at that point or proceeded only with the augmentation of the bone but not with the simultaneous placement of the implants. Expert testimony also indicated that the Debtor fell below the acceptable standard of medical care as follows:
(1) The Debtor exercised poor judgment in using the Stryker implant system, a system not approved by the American Dental Association.
(2) The length of the procedure was extraordinary.
(3) The Debtor acted improperly to the extent that he used an orthopedic tool that had only been wiped with alcohol, but not sterilized, after having been dropped on the floor.
(4) The Debtor erred in recommending that the implant be left in Fernandez’ sinus cavity after it migrated there following the surgery.
As noted earlier, a mere negligence or even a gross negligence by a debtor is insufficient to establish a viable claim to the exception to discharge under § 523(a)(6). Neither is a conduct which otherwise would be tantamount to malpractice, which conduct fell below the prevailing professional standard in the community. See Fla.Stat. 766.102(1). However, a conduct of the debt- or which falls below the prevailing professional standard of care coupled with a conduct which produced a foreseeable injury and evidenced a conscious disregard of the safety of the procedure undertaken by the Debtor which ultimately caused the injury complained of is clearly sufficient to find that the *953Debtor’s liability to Fernandez should be excepted from the overall protection of the general bankruptcy discharge pursuant to § 523(a)(6).
A separate final judgment shall be entered in accordance with the foregoing. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492105/ | ORDER ON MOTION FOR SANCTIONS
ALEXANDER L. PASKAY, Chief Judge.
THIS is a Chapter 7 case and the matter under consideration is a Motion for Sanctions filed by Claire Ballato and Anthony T. Balla-to (Claimants). In their Motion, the Claimants seek the imposition of sanctions against the Debtor, Anthony J. Ballato, (Debtor), pursuant to F.R.B.P. 9011. The Claimants essentially assert that the Debtor violated F.R.B.P. 9011 by filing repeated Motions challenging a compromise entered into between the Chapter 7 Trustee and the Claimants. Claimants contend that these repeated challenges were without merit and that the Debtor continued to assert his objections long after the matter had been considered and decided by the Court. In response, the Debtor contends that his actions were necessary in order to preserve the assets of the Chapter 7 estate.
The relevant portion of the record reveals that the Debtor filed his voluntary Petition under Chapter 13 on October 11, 1989. While the Chapter 13 case was pending, Claimant Claire Ballato, the former wife of the Debtor, filed a Proof of Claim in the case (Claim #3) in the amount of $1,979,232.00. This Claim was based on a judgment granted in her favor in 1974 for alimony and child support, and damages on various contract and tort claims. Claimant Anthony T. Balla-to, the son of the Debtor, filed two proofs of claim in the case. Claim # 4 was filed in the amount of $2,000,000.00, and Claim No. 5 was filed in an unliquidated amount. Both claims were also based upon various contract and tort claims. The Chapter 13 case subsequently converted to a Chapter 11. While the Chapter 11 case was pending, the Debtor filed adversary proceedings styled as follows:
(1) Anthony J. Ballato v. Chimeinet Finance Limited, Anthony Ballato, Jr. and Claire Ballato — Adv. No. 90-134;
(2) Anthony J. Ballato v. Claire Ballato, Anthony T. Ballato and Peter Panaro— Adv. No. 90-318;
(3) Anthony J. Ballato v. Marvin Rosen-thal and Anthony T. Ballato — Adv. No. 90-335.
Litigation among the parties was also pending in State Court in New York.
On March 26, 1991, the Chapter 11 case was converted to a Chapter 7 case and Terry Smith (Smith) was appointed as the Chapter 7 Trustee. Smith was duly substituted as the Plaintiff in the adversary proceedings described above. On December 11, 1991, Smith filed his Amended Motion to Compromise Controversy with Claimants Claire Bal-lato and Anthony T. Ballato. Pursuant to the terms of the proposed compromise: (1) Claimants would pay the estate the sum of $7,500.00; (2) Claimants would withdraw their claims and assert no further claims against the Chapter 7 estate; and (3) the Trustee would release any claims that he had against the Claimants. The Compromise apparently was intended to resolve all pending issues between the Trustee and the Claimants. On January 3,1991, the Debtor filed a written objection to the Trustee’s Amended Motion to Compromise. Although this Objection is fairly extensive, the Debtor essentially alleged that the Claimants’ claims were *957fraudulent or otherwise invalid, that the Debtor in fact had substantial claims against the Claimants, and that the Compromise therefore was not in the best interest of the estate because it forfeits a valuable right in exchange for a relatively minimal sum.
On March 13, 1992, the Court entered an Order Granting the Trustee’s Amended Motion and Approving the Compromise (the Order). On the same date, the Court also entered a separate Order Overruling the Debtor’s Objection to the Compromise.
Subsequent to the entry of the Order, the Debtor has filed at least the following written challenges to the compromise:
(1) Motion for Rehearing or Reconsideration of the Order, which was denied ex parte by an Order entered on June 10, 1992.
(2) Objection dated November 23, 1992, to the Motion for Approval of the Stipulation of Settlement between Smith and the Claimants. The Motion to Approve the Stipulation apparently was filed to effectuate the consummation of the compromise and was approved on April 14, 1993.
(3) Motion for Relief from Order Granting Amended Motion to Compromise Controversy filed on December 14, 1992, nine months after the Order was entered. This Motion is based on the allegation that the Claimants’ claims were fraudulent and that the fraud was not disclosed to the Court before the compromise was approved.
(4) Amended Motion for Relief from Order Granting Amended Motion to Compromise Controversy filed on December 23, 1992. This Motion was denied on January 26, 1993.
(5) Notice of Appeal from the Order Denying the Amended Motion for Relief from Order, filed on February 4, 1993. This appeal was later dismissed for lack of prosecution.
(6) Debtor’s Motion for Temporary Stay on Delivery of Deed to Claire Ballato Pending Hearing to Annul Stipulation Settlement filed on March 11, 1994. This Motion essentially requests that consummation of the compromise be stayed until the Debtor has an opportunity to prove that the Claimants’ claims are the product of fraud and conspiracy. The Motion was denied on March 21, 1994, without prejudice to the Debtor’s right to file an adversary proceeding.
(7) Debtor’s Motion for Relief from Judgment or Order and to Annul or Dismiss Stipulation of Settlement and Agreement between Terry Smith, Trustee and Claire Ballato and Anthony T. Ballato and to Dismiss Claims Numbered 3, 4 and 5 of Claire Ballato and Anthony T. Ballato filed on March 28, 1994. The focus of his Motion again is that the Claimants’ claims are fraudulent or otherwise invalid. The Motion was denied on April 6, 1994.
(8) Debtor’s Motion to Reconsider and Annul Order Granting Amended Motion to Compromise filed on September 12, 1994, 18 months after the Order was entered. This Motion seeks relief from the Order approving the compromise on the grounds of “fraud, misrepresentation or other misconduct” of the Claimants. The Motion was denied on October 31, 1994.
It should be noted that all of the pleadings described above were signed by the Debtor in his own behalf, even though he had an attorney of record who also periodically filed papers on his behalf challenging the Trustee’s compromise with the Claimants. On October 7, 1993, for example, a Motion to Correct Order and Stay the Conveyance of Deed to Claire Ballato was signed and filed by Donald J. Shutz, Esq. as attorney for the Debtor. An Amended Motion was filed on October 25,1993. These Motions mirrored a similar Motion signed by the Debtor, individually, and filed on September 16, 1993. The Motions were denied on December 22, 1993.
Finally, it should be noted that the pleadings described above represent only the direct attacks on the Compromise that have been asserted by the Debtor. The Claimants assert that other indirect attacks have also been made in the form of challenges to the impartiality of the Chapter 7 Trustee and the Bankruptcy Judge who had presided over the case. These challenges include:
(1) Motion for Sanctions and Removal of Trustee filed on December 14, 1992;
*958(2) Motion to Disqualify Justice Thomas E. Baynes, Jr. and for Temporary Stay of All Proceedings filed on January 22, 1993;
(3) Motion for Reconsideration of the Order Denying the Motion to Disqualify filed on February 18, 1993;
(4) Motion to Remove all Civil Actions Pending in the Bankruptcy Court to the U.S. District Court filed on January 22, 1993.
Claimants contend that these, as well as other motions, are merely disguised attempts to unravel their compromise with the Trustee, in that they are premised upon the allegedly fraudulent claims of the Claimants and their treatment in the Bankruptcy case. Again, all of the Motions were signed by the Debtor on his own behalf. Basically, these are the relevant facts upon which the claimants contend that the Debtor violated F.R.B.P. 9011 and should therefore be sanctioned.
F.R.B.P. 9011
F.R.B.P. 9011 provides that every pleading, motion and other paper filed in a case must be signed by at least one attorney of record if the party is represented by an attorney, and that a party who is not represented by an attorney shall sign all papers in his own behalf. The Rule further provides:
The signature of an attorney or party constitutes a certificate that an 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.
It is generally held that a party’s conduct under Rule 9011 must be measured on an objective standard, or what is reasonable under the circumstances, rather than the party’s subjective state of mind. In re Byrd, Inc., 927 F.2d 1135 (10th Cir.1991). It is also generally established that only those claims without any factual or legal basis whatsoever are sanctionable. Davis v. Carl, 906 F.2d 533 (11th Cir.1990).
In this case, the Claimants contend that the Debtor violated Rule 9011 by filing repeated Motions continually raising the issue of the Claimants’ allegedly fraudulent claims, an issue that was resolved by virtue of the Court’s Order approving the Trustee’s compromise with the Claimants that was entered on March 13, 1992. According to the Claimants, the Debtor nevertheless signed and filed in excess of 19 Motions during the 2]é years following the entry of the Order, each time raising the same decided issue.
As set forth above, a party’s signature constitutes a certification under F.R.B.P. 9011 that he has made a reasonable inquiry and believes that the information contained in the document that he signed is “warranted by existing law or a good faith argument for the extension, modification or reversal of existing law.” Motions for reconsideration or similar motions which simply seek to relitigate old issues are unwarranted or without merit as a matter of law. In re Greco, 113 B.R. 658, 666 (D.Hawaii 1990). F.R.B.P. 9011 is specifically designed to prohibit the attempted re-argument of issues already ruled upon by the Court. In re Southern Indus. Banking Corp., 91 B.R. 463, 465 (Bkrtcy.E.D.Tenn.1988). Further, collateral attacks on final orders of a court have no basis in the law within the meaning of F.R.B.P. 9011. See In re Grantham Bros., 922 F.2d 1438, 1442 (9th Cir.1991).
Based on the foregoing, this Court is satisfied that the Debtor violated Rule 9011 by signing pleadings or other papers attacking the Chapter 7 Trustee’s compromise with the Claimants long after the Order approving the compromise had become final. No new information was offered in the subsequent pleadings. Consequently, regardless of whether the earlier, timely challenges to the compromise may have been legally warranted, the Order approving the compromise became final after the Debtor’s Motions for Reconsideration were denied and no timely appeal was prosecuted. All of the Debtor’s subsequent efforts to set aside the compromise were warranted neither by existing law *959nor by a good faith argument for modification of the law and therefore violated F.R.B.P. 9011.
Once it is determined that a violation of Rule 9011 has occurred, the imposition of sanctions is mandatory. In re Zaragosa Properties, Inc., 156 B.R. 310 (Bkrtcy. M.D.Fla.1993). In this case, the Claimants have requested an award in the amount of their attorney’s fees that were incurred as a result of the Debtor’s groundless motions. Since no calculation of such fees has been provided, Claimants shall have 20 days within which to file with this Court a detailed statement of the fees requested, and shall serve a copy of the statement on the Debtor. The Debtor shall then have 10 days from the date of service to file and serve any written objections to the statement that are appropriate.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the Motion for Sanctions filed by Claire Ballato and Anthony T. Ballato is hereby granted, and the Debtor is hereby determined to have violated F.R.B.P. 9011. It is further
ORDERED, ADJUDGED AND DECREED that Claire Ballato and Anthony T. Ballato shall have 20 days from the date of this Order within which to file with this Court a detailed statement of the fees requested and to serve the statement upon the Debtor. The Debtor shall have 10 days from the date of service of the statement within which to file and serve any written objections to the statement. Upon receipt of these documents, the Court will enter a further order establishing the amount of the sanctions that shall be awarded in favor of the Claimants and against the Debtor.
DONE AND ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492107/ | MEMORANDUM
JAMES J. BARTA, Bankruptcy Judge.
This matter is before the Court on a complaint objecting to the dischargeability of a debt under section 523(a)(4). At issue is a debt owed by Gary Robert Polk (“Debtor”) to his ex-wife, Sherri R. Bollinger (“Plaintiff’) pursuant to a Decree of Dissolution and related documents.
This is a core proceeding pursuant to Section 157(b)(2)(I) of Title 28 of the United States Code. The Court has jurisdiction over the parties and this matter pursuant to 28 U.S.C. Sections 151, 157 and 1334, and Rule 29 of the Local Rules of Missouri.
These findings and conclusions are based on the Stipulation of Facts and the Memo-randa of Law submitted by the parties and are the final determinations of the Bankruptcy Court.
Facts
The marriage of the Plaintiff and Debtor was dissolved by a Decree of Dissolution entered on June 18, 1991. The decree awarded the Debtor, as his sole and separate property, all right, title and interest in a parcel of real estate located at Route 2, Box 855A in Salem, Missouri. The Plaintiff was to convey all of her right, title and interest to the property to the Debtor by a quit claim deed. Decree of Dissolution, Joint Exhibit *1022“A” to Stipulation of Facts, page 10 at paragraph 7. The Debtor was to pay the Plaintiff $13,345.00 on or before June 18, 1992 in consideration of her equity in the marital property of the parties. Decree of Dissolution, page 10 at 8.
The Plaintiff refused to sign the quit claim deed. On December 3, 1991, pursuant to an order on a Motion for Contempt filed by the Debtor, the Plaintiff signed and delivered the quit claim deed to the Debtor rather than go to jail for contempt. In the same order, the Circuit Court required the Debtor to deposit his net proceeds of the sale, after payment of all costs and any lien, into the registry of the court. The net proceeds were to be paid over to the Plaintiff June 18, 1992 as a payment on the property settlement owed to her by the Debtor. The Debtor was to receive any interest earned by the net proceeds. Memorandum Order of the Circuit Court of Phelps County, Missouri, Joint Exhibit “B”, Stipulation of Facts, pp. 1, 2.
On December 4, 1991, prior to the commencement of this case, the Debtor gave his parents a second deed of trust on the real property as additional security for a note dated September 5, 1991. This note, in the amount of $39,832.50, was payable by the Debtor to his father (Robert Gail Polk) for a sale of the Debtor’s partnership interest in Polk Farms to his father, as part of his father’s agreement to assume the partnership debt. On December 11, 1991, the Debt- or closed on the sale of the real property that had been under contract since October 4, 1991. The closing statement shows the payment of the first deed of trust to Dent County Bank in the amount of $58,505.50, a second deed of trust to Robert and June Polk in the amount of $5,935.21, and expenses totaling $8,788.29 leaving no net proceeds due the Debtor. No net proceeds were deposited with the registry of the court.
The Debtor filed for Chapter 7 relief on June 19, 1992.
Discussion
Section 523(a)(4) states that a discharge under section 727 does not discharge an individual from any debt for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.
The Plaintiff alleges the Debtor was her fiduciary with respect to her equity in the real property that was awarded to the Debt- or pursuant to the decree of dissolution. The Plaintiff further alleges the Debtor fraudulently transferred funds received from the sale of this property to his parents, thus acting defalcatantly in failing to deposit these funds with the registry of the court.
Three elements are necessary for a finding of non-dischargeability under section 523(a)(4) in this case; a debt, a fiduciary relationship, and a fraud or defalcation. In re Butts, 46 B.R. 292, 294 (Bankr.D.N.D.1985). The courts narrowly define a fiduciary relationship under section 523(a)(4) to mean an express or technical trust. Butts, 46 B.R. at 294-295; see Davis v. Aetna Acceptance Co., 293 U.S. 328, 55 S.Ct. 151, 79 L.Ed. 393 (1934), Barclays American/Business Credit v. Long (In re Long), 774, F.2d 875, 878 (8th Cir.1985). The Plaintiff has not established that there was such a fiduciary relationship between the Plaintiff and the Debtor.
If the Debtor is to be charged as a trustee for the Plaintiff under the decree, the Plaintiff must have retained or been awarded some equitable interest in the Debtor’s property. See In re Brown, 21 B.R. 377, 380 (Bankr.E.D.Cal.1982). The decision of the state court which granted the couple’s divorce determines the nature of the parties’ interests created in the real property and is to be afforded full faith and credit by the Bankruptcy Court. In re Porter, 112 B.R. 979, 981 (Bankr.W.D.Mo.1990) citing 28 U.S.C. § 1738 (1948). The state court decree in this matter did not preserve any interest for the Plaintiff in the real property awarded to the Debtor.
During their marriage, the subject property was held by the parties in a tenancy by the entirety. As a general rule, a dissolution of marriage causes a tenancy by the entirety to be converted into a tenancy in common. Barry v. Barry, 579 S.W.2d 136, 140 (Mo.App.1979). Such was not the case here.
*1023In the Decree of Dissolution, the court specifically held that the subject real estate was awarded to the Debtor as his “sole and separate property with all right, title and interest”. Not only was the Plaintiff not awarded an equitable interest in the property, but also she was ordered to quit claim all her right, title and interest to the Debtor. Decree of Dissolution, page 10 at 7. The entry of the decree thus extinguished the Plaintiffs equitable interest in the real property. See Porter, 112 B.R. at 982. The quit claim deed would have served to extinguish her legal interest and any judicial lien that attached to the property.1 Thus, a plain reading of the decree shows that the circuit court intended to award the Debtor the real property free of any interest or lien in favor of the Plaintiff.
Instead of preserving an interest in the real property, the decree awarded the Plaintiff a cash award of $13,435.00 to be paid within one year as consideration for her equity in all of the marital property, not just for her equity in the subject real property. The cash award was not co-extensive with the Plaintiff’s equity in the real property and was not in exchange for it. Since the Plaintiffs equitable interest in the real property was extinguished by the decree, the Debtor was not a trustee for the Plaintiff pursuant to the decree of dissolution.
The Plaintiff also contends that the Debtor became her fiduciary in the sale of the real property under the court order of December 3, 1991. She identifies the res of this trust as being her equity in the real property. As explained above, the entry of the decree of dissolution extinguished her equity in the property. Furthermore, the court order does not mention equity in the property. Instead, after requiring the Plaintiff to comply with its previous order to execute a quit claim deed, it speaks of the Debtor’s net proceeds. The order made no mention of the pending sale or the contract price and required no accounting to determine the net proceeds prior to the sale. The order placed no limits on the Debtor’s ability to encumber the property with costs or liens. The money to be deposited with the registry of the court was the Debtor’s net proceeds, not the Plaintiffs equity.
Assuming, arguendo, that the order intended the Plaintiff to be a beneficiary of an express or technical trust, by the terms of the order this trust relationship could not come into existence until the Debtor received net proceeds from the sale. It is the net proceeds that the order identifies as the only property that might be subject to the alleged trust. The order defines net proceeds as the amount due the Debtor after payment of all costs and any lien. The duty of the Debtor, as the alleged trustee, was to deposit the net proceeds of the sale into the repository of the court. Since there were no net proceeds after payment of costs and liens, the alleged trust res never materialized and the Debtor’s duty never arose. The Debtor never became a trustee for the Plaintiff and, therefore, was not defalcatant.
The eases cited by the Plaintiff as precedent are distinguishable from the case at bar. In In re Butts, the quit claim was co-extensive with and in exchange for the payment of the ex-spouse’s equity in the subject real estate. In re Butts, 46 B.R. 292, 297 (Bankr.D.N.D.1985). The decision in Boyd v. Robinson hinged on a provision found in Minnesota law but not in Missouri law. Boyd v. Robinson, 741 F.2d 1112, 1114 (8th Cir.1984). See Porter, 112 B.R. at 982. The ex-spouse in In re Brown was awarded an equitable interest in the subject pension as her separate property in the divorce decree; thus, the Court found a fiduciary relationship existed between the Debtor and his ex-spouse. In re Brown, 21 B.R. 377, 380 (Bankr.E.D.Cal.1982).
*1024It might be argued that the transfer by the Debtor of a second deed of trust to his parents and the subsequent transfer of sale proceeds in the amount of $5,935.21 to satisfy that lien may have been a fraud upon the Circuit Court under its orders or under other Missouri law, but that matter was not submitted as an issue in this proceeding.
Therefore, upon consideration of the record as a whole, the Court finds that there was no fiduciary relationship between the Debtor and the Plaintiff pursuant to the State Circuit Court order of December 3, 1991. There being no other basis upon which a fiduciary relationship can be established here, the Court cannot find that the debt in question is nondischargeable under section 523(a)(4).
The Plaintiff’s original complaint included a request to find that the debt is not dischargeable under Section 523(a)(2)(A) as based on false representations or actual fraud, or under Section 523(a)(5) as being in the nature of maintenance, alimony or support. However, the memoranda of law submitted in this matter did not address the issues presented in these Sections. Furthermore, the State Court determined that, “Neither Petitioner nor Respondent are entitled to maintenance and none is awarded.” Dissolution Decree, page 11, paragraph 13. The evidence in this matter supports the conclusion that the State Court’s awards being reviewed here are not maintenance, alimony or support.
The Court further finds and concludes that the record in this proceeding has not established that the Debtor acted with the requisite intent to deceive the Plaintiff, such that the debt owed to the Plaintiff is not dischargeable pursuant to Section 523(a)(2)(A). In interpreting the intention of non-bankruptcy court orders, and in applying that intention to the process that supports the Congressional intent of the Bankruptcy Code, the Court must first look to the clear meaning of the language of the non-bankruptcy court order. In this case, the non-bankruptcy court orders did not contain language that prohibited the Debtor from encumbering his property by executing a junior deed of trust prior to the sale. If his actions were a fraud upon the non-bankruptcy court, appropriate relief may be available outside of the bankruptcy case. If the transfer of the lien of a deed of trust is otherwise avoidable, the record here would not support a judgment in favor of the Plaintiff, even if the issue could have been presented in this Adversary Proceeding.
By a separate Order, the Plaintiff’s Complaint is denied.
ORDER
On consideration of the record as a whole, and consistent with the determinations set out in the Memorandum entered in this matter,
IT IS ORDERED that this matter is concluded; and that the complaint of Sherri R. Bollinger (Plaintiff) to determine that the debt owed by Gary Robert Polk (Defendant), that arose from the proceeding that dissolved the Parties’ marriage, is not dischargeable pursuant to 11 U.S.C. § 523(a)(4) is DENIED; and that, as a result, judgment on the Plaintiff’s complaint is entered in favor of the Defendant and against the Plaintiff, in that the debt, as described in this matter is otherwise dischargeable in the Debtor’s Chapter 7 Bankruptcy case; and that all other requests for relief are DENIED.
. In Missouri, a judgment or decree by a court of record (with some exceptions) is a lien on the real estate of the person against whom it was rendered, situated in the county for which or in which the court is held. Mo.Rev.Stat. § 511.350. A judgment pursuant to a decree of dissolution creates such a lien. If the real estate is situated in a county other than the one where the judgment was rendered, the filing of a transcript of the judgment or decree in the office of the clerk of the county where the real estate is located creates a lien in that county on the real property of the person against whom judgment was rendered. Mo.Rev.Stat. § 511.440. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492108/ | ORDER
HOWARD SCHWARTZBERG, Bankruptcy Judge.
UPON the Summons and Complaint of Plaintiff, John F. Seheffel, the trustee duly appointed in this Chapter 11 case (“Trustee”), dated June 3, 1991; the Answer of Defendant, New York State Department of Taxation and Finance (the “Tax Department” or “Defendant”), dated September 4, 1991; the Notice of Motion dated September 20, 1991, sworn to September 21, 1991; the annexed Affidavit of John F. Seheffel and exhibits annexed thereto; and the accompanying Memorandum of Law in support of the Trustee’s motion for pretrial summary judgment; the Affidavit of Rosalie J. Hronsky sworn to October 1,1991 in opposition to the Trustee’s motion for partial summary judgment, which motion came to be heard before this Court on October 4, 1991; and upon the trial on October 4, 1991 of the above referenced adversary proceeding; the post-trial Brief of the Trustee dated October 11, 1991; the post-trial Brief of Defendant dated October 21,1991; and the Court having rendered a written decision dated October 23,1991 and entered October 24, 1991 holding, inter alia, that the Trustee is entitled to a determination that he is exempt from the tax imposed pursuant to New York Tax Law § 1441 (the “Gains Tax”) because the Gains Tax is a “stamp or similar tax” within the meaning of 11 U.S.C. § 1146(a); and the Court having issued an Order dated November 14, 1991 and entered November 26, 1991; and
UPON the application of the Trustee for an Order Authorizing Trustee to Cease Seeking Refund of New York State Transfer Gains Taxes dated January 19, 1993; and this matter duly having come to be heard before this Court on February 10, 1993; and Bigham Englar Jones & Houston (Aileen J. Fox, Esq.) having appeared as attorneys for the Plaintiff Trustee; and Robert Abrams, Attorney General of the State of New York (Rosalie J. Hronsky, Assistant Attorney General) having appeared as attorney for the Tax Department; and George Lebovits having appeared by his attorneys, Barr & Rosen-baum, Esqs. (Elizabeth A. Haas, Esq.); good and sufficient notice hereof having been given; and after due deliberation good and sufficient reason appearing herefore; and the Court having rendered its decision orally from the bench; and therefore
NOW, on the motion of Barr & Rosen-baum, Esqs.
ORDERED, that the Order of this Court dated November 14, 1991 and entered November 26, 1991, and the decision of this Court dated October 23, 1991 and entered October 24, 1991 hereby are vacated; and it is further
ORDERED, that George Lebovits and Israel Halpern, as their interest as the true parties in interest may appear, may assume and continue, in the place and stead of the Chapter 7 Trustee, that certain tax appeals pending before the New York State Division of Tax Appeals, numbered DTA 810377, at their own cost and expense; and it is further
ORDERED, that the Trustee be and he hereby is permitted to abandon to George Lebovits and Israel Halpern, as the true parties in interest, any and all rights and interests they and the Bankruptcy Estate may have to any claim for a refund for taxes paid by the Trustee. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492109/ | *210MEMORANDUM OPINION
PETER J. WALSH, Bankruptcy Judge.
INTRODUCTION
In this Chapter 7 case I have been asked to consider five motions: (1) a creditor’s lift stay motion, (2) Debtor’s motion to have parties held in contempt for violating the automatic stay order of 11 U.S.C. § 362(a),1 (3) Debtor’s motion to enforce the stay order, (4) the motion of the controlling person of Debt- or to have parties held in contempt for violating the automatic stay order, and (5) the motion of the controlling person of Debtor to enforce the stay order. Because I find the two civil contempt motions are without merit, I will deny them. I also find that the interests of justice are best served by having pending Delaware state court proceedings resolve the long standing disputes between Debtor and the lift stay movant, and therefore I would be disposed to grant the lift stay motion and deny the two motions to enforce the stay order. However, because I conclude that the petition filing constitutes an abuse of the bankruptcy process, I will grant broader relief by dismissing this Chapter 7 case.
This Court has jurisdiction over these matters pursuant to 28 U.S.C. §§ 151, 157 and 1334(a) and (b), and pursuant to the District Court’s July 23,1984 omnibus order of reference.
FACTS
This Chapter 7 case is the latest phase of protracted and acrimonious litigation involving the Conference of African Union First Colored Methodist Protestant Church (“the Conference”) and the Mother African Union First Colored Methodist Protestant Church (“the Mother Church”) which has twisted through the courts since 1991. The factual record regarding the litigation is somewhat convoluted. I will describe only the highlights of the litigation events in order to reach an understanding of the issues before me.
The Mother Church is a Delaware corporation incorporated in 1813. The Conference is a Delaware corporation incorporated in 1941. The Conference is a religious association that was created as a corporate vehicle to facilitate the voluntary association or affiliation of various African Methodist Protestant churches in a spiritual enterprise. Numerous local churches are affiliated with the Conference, and until April 1991, the Mother Church and the Conference had an affiliation built upon their mutual spiritual interests. The precise nature of this relationship was unclear and became the basis of the dispute between the parties.
In early April 1991, Rev. Delbert L. Jackson (“Rev. Jackson”), the religious and corporate head of the Conference, learned that the Mother Church was scheduled to hold a meeting to consider seceding from the Conference. In response to that development, Rev. Jackson caused deeds to be executed and recorded that purportedly transferred the Mother Church’s properties to the Conference. At that time, the Mother Church owned three properties in Wilmington, Delaware: the church building, the pastor’s home, and a cemetery. A meeting of the Mother Church was held and its members voted to secede from the Conference.
Upon the Mother Church’s declaration of secession from the Conference, a dispute arose between the two entities regarding ownership rights to the properties. In mid-April 1991, the Mother Church and two trustees of the Mother Church acting individually and on behalf of a class of persons *211similarly situated, filed an action in the Chancery Court for the State of Delaware for declaratory and injunctive relief. Mother Church, Comegys and Gardner v. The Conference and Delbert Jackson, Del.Ch., C.A. No. 12055.
The Chancery Court entered a temporary restraining order prohibiting the Conference and Rev. Jackson from “interfering with the quiet title, operation, use, enjoyment and governance of The [Mother] Church facilities” during the days and times specified in that order. The Mother Church v. The Conference, Del.Ch., C.A. No. 12055, Jacobs, V.C. (Apr. 19, 1991) (ORDER). After a hearing, the Chancery Court granted the Mother Church’s motion for a preliminary injunction and continued in effect the temporary restraining order until further order of the court. The Chancery Court found that “(a) the Mother Church owns the properties at issue, and (b) the April 6, 1991 deed purporting to transfer those properties to the Conference was void ab initio.” Mother Church v. The Conference, Del.Ch., C.A. No. 12055, Jacobs, V.C., Mem.Op. at 15 and 21, 1991 WL 85846 (May 15, 1991).
Immediately prior to the grant of the preliminary injunction, St. Paul’s Church, a Washington, D.C. church that is a member of the conference, filed a complaint in the United States District Court for the District of Delaware. St. Paul’s Church v. Comegys, Gardner, et al, C.A. No. 91-272-JR. That complaint alleged that the Chancery Court temporary restraining order violated the Federal Civil Rights Act and the United States Constitution. Contemporaneously with the filing of the complaint, St. Paul’s Church moved the District Court to temporarily restrain the Mother Church trustees from, inter alia, continuing to prosecute the ongoing Chancery Court action. During the oral argument on that motion, the District Court, in denying St. Paul’s motion, admonished St. Paul’s to carefully consider whether it was subject to the earlier temporary restraining order issued by the Chancery Court, which bound Rev. Jackson “and his agents, employees, officers, successors, assigns, and all others acting in concert with him.” The District Court later dismissed the St. Paul’s Church action on the ground of the federal abstention doctrine. St. Paul’s Church v. Comegys, et al, C.A. No. 91-272-SLR, Robinson, J. (Mar. 24, 1992) (MEM. OP.). That ruling was affirmed by the Third Circuit Court of Appeals. St. Paul’s Church v. Comegys, et al, No. 92-7149, 1992 WL 464355, 1992 U.S.App. LEXIS 31527 (3rd Cir. Oct. 9, 1992).
In response to the District Court action, the Mother Church filed a motion in the Chancery Court for a rule to show cause why the Conference and Rev. Jackson should not be held in contempt, alleging, inter alia, that prosecution of the District Court action constituted contempt of the temporary restraining order prohibiting Rev. Jackson, his agents, and all others acting in concert with him from interfering with the quiet title, use, enjoyment and governance of the Mother Church. The Chancery Court determined that the Conference’s filing of the District Court action did not constitute civil contempt. The Mother Church v. The Conference, Del.Ch., C.A. No. 12055, Jacobs, V.C., Mem.Op. at 20, 1992 WL 83518 (Apr. 22, 1992).
The Mother Church also sought to have the Conference and Rev. Jackson held in civil contempt for using the Mother Church’s facilities in violation of the injunction. The Chancery Court denied that relief but found that the Conference’s counsel’s inconsistent positions regarding certain representations formed the basis for a Chancery Court Rule 11 violation and imposed the following sanctions: (1) counsel was ordered to pay the Mother Church reasonable attorney’s fees, and (2) a copy of the Chancery Court opinion was forwarded to Disciplinary Counsel of the Board of Professional Responsibility for further proceedings as Disciplinary Counsel deemed warranted. Mother Church v. The Conference, Del.Ch., C.A. No. 12055, Jacobs, V.C., Mem.Op. at 10, 1992 WL 111257 (May 20, 1992). On appeal, the Supreme Court affirmed the judgment of the Chancery Court. The Conference v. The Mother Church, Del.Supr., No. 96, 1993, 1993 WL 433524, Moore, J. (Oct. 14, 1993) (ORDER), cert. denied, — U.S. —, 114 S.Ct. 637, 126 L.Ed.2d 595 (1993).
*212The dollar amount of the sanctions imposed upon the Conference’s counsel was later set forth in the Chancery Court’s Superseding Final Order and Judgment. The Mother Church v. The Conference, Del.Ch., C.A. No. 12055, Jacobs, V.C., Superseding Final Order and Judgment at 3 (Feb. 24, 1993). The Superseding Final Order and Judgment also finalized the Chancery Court’s finding in favor of the Mother Church as to the ownership of the properties and permanently enjoined the Conference and Rev. Jackson from interfering with those property rights. Furthermore, that order awarded the Mother Church costs and counsel fees against the Conference in the amount of $10,260. Id. at 3-4. No payment was made on that obligation.
In December 1993 the Conference executed a quitclaim deed to some of the Mother Church’s property and in May 1994 brought, through another attorney, an action against the Mother Church in the Chancery Court in Sussex County alleging that the Mother Church was contractually bound to convey title to all of its real property to the Conference. The Conference v. The Mother Church, Del.Ch., C.A. No. 1674-S. In response to the filing of C.A. No. 1674 in Sussex County, the Mother Church filed a motion in C.A. No. 12055 in New Castle County seeking to have the Conference and Rev. Jackson held in civil contempt of the Superseding Final Order and Judgment.
By an Order Enforcing Superseding Final Order and Judgment, the Chancery Court denied the Mother Church’s motion to hold the Conference and Rev. Jackson in civil contempt for filing C.A. No. 1674. The Mother Church v. The Conference, Del.Ch., C.A. No. 12055, Jacobs, V.C., Order Enforcing Superseding Final Order and Judgment at 2 (Jul. 6,1994). However, the motion was denied without prejudice to the Mother Church’s right to renew the motion for good cause. Id. Additionally, the Chancery Court ordered that the $10,260 of costs and fees previously assessed against the Conference be paid no later than July 15, 1994, and made Rev. Jackson jointly and severally liable for payment of that obligation in the event the Conference did not pay it by July 20, 1994. Id. Neither the Conference nor Rev. Jackson made payment to the Mother Church. Consequently, the Mother Church took steps to execute upon Rev. Jackson’s property. No steps were taken to execute upon the property of the Conference.
The Conference filed a motion in the Chancery Court for a stay of execution pending appeal of the Order Enforcing Final Superseding Order and Judgment. The Chancery Court denied that motion. The Conference filed a motion for a stay pending appeal in the Delaware Supreme Court. The Delaware Supreme Court granted the motion, and ordered execution of any judgment in C.A. No. 12055 to be stayed pending appeal, such stay to be in effect until issuance of a mandate. The stay was conditioned upon the deposit of $11,000 in cash with the Clerk of the Supreme Court as supersedeas. The Conference v. The Mother Church, Del.Supr., No. 297, 1994, Walsh, J. (Oct. 19, 1994) (ORDER). Rev. Jackson deposited $11,000 as supersedeas and execution against his property was stayed.
On March 3, 1995, the Delaware Supreme Court affirmed the Order Enforcing Superseding Final Order and Judgment. The Conference v. The Mother Church, Del.Supr., No. 297, 1994, 1995 WL 111029, Ridgely, J. (Mar. 3, 1995) (ORDER) (Ridgely, President Judge, Superior Court, sitting by designation). Prior to the issuance of a mandate, the Conference petitioned the Supreme Court for a rehearing en banc and made another motion to stay execution pending appeal. These two matters were pending-before the Supreme Court when the Conference filed its voluntary Chapter 7 petition on March 20, 1995.
During the course of the Conference’s appeal from the Order Enforcing Superseding Final Order and Judgment, the Mother Church discovered that the Conference had executed the quitclaim deed in apparent violation of the Superseding Final Order and Judgment. Accordingly, in August 1994 the Mother Church filed a motion in C.A. No. 12055 seeking to void the deed and to have the Conference, Rev. Jackson and their counsel held in contempt for violating the Superseding Final Order and Judgment. In *213July 1994 the Mother Church also filed a motion in C.A. No. 12055 seeking a contempt citation against the Conference, Rev. Jackson and their counsel for violating the Superseding Final Order and Judgment by filing the second Chancery Court action in Sussex County. These two motions were pending before the Chancery Court when the Conference filed its voluntary Chapter 7 petition on March 20, 1995.
The Conference immediately notified the Mother Church’s counsel and the Chancery Court of the Chapter 7 petition filing. By a March 22, 1995 letter to counsel, the Vice Chancellor requested that counsel advise him of “your position on the effect of the pending bankruptcy filing on (i) the motion to dismiss C.A. No. 1674-S and (ii) the motion for contempt and sanctions in C.A. No. 12055.” (Adv.Doc. # 9, p. 3) In response, counsel for the Mother Church requested “that the Court issue its rulings on all the pending motions that are before it with respect to Delbert Jackson, K. Kay Shearin, Esquire and Edith H. Hull-Johnson, Esquire.” (Case Doc. # 7, Ex. A) Counsel for the Conference responded that the stay order had the effect of constraining counsel and the Chancery Court from examining the breadth of the stay. According to the Conference’s counsel, the Chancery Court could only accept submissions “in the nature of status reports until [the bankruptcy court] lifts the automatic stay one way or the other.” (Adv. Doc. # 9, p. 5) In a March 29,1995 letter to counsel the Vice Chancellor expressed his view as follows:
The pending contempt motions, however, do not appear to implicate any asset of the bankrupt, and, indeed, concern parties other than the bankrupt. Hence, those motions would remain unaffected by the stay. Counsel for the defendants assert otherwise, but have chosen to offer no argument to support their assertions.
Accordingly, absent a contrary directive from the Bankruptcy Court, I do not consider myself constrained from proceeding to decide the contempt motions.
(Case Doe. # 7, Ex. B)
On March 24, 1995, the Mother Church filed a motion in this Court for relief from the automatic stay (the “Lift Stay Motion”). On April 3,1995, Debtor filed two motions in this Court: (1) Motion to Hold Vice Chancellor and Creditor In Civil Contempt For Violation of Automatic Stay (“Debtor’s Contempt Motion”); and (2) Motion For Order Enforcing Automatic Stay (“Debtor’s Enforcement Motion”). On April 3, 1995, Rev. Jackson also filed two motions in this Court: (1) Motion to Hold Vice Chancellor, Creditor and Counsel in Civil Contempt For Violating Automatic Stay (“Rev. Jackson’s Contempt Motion”) and (2) Motion For Order Enforcing Automatic Stay or For Order Staying Acts Against Debtor’s Agent (“Rev. Jackson’s Enforcement Motion”). A hearing on the five motions was held on April 13, 1995.
DISCUSSION
Rev. Jackson’s Contempt Motion
After considering the written submissions of counsel regarding their views of the effect of Debtor’s Chapter 7 filing on the matters pending before it, the Vice Chancellor advised counsel that because the pending contempt motions “do not appear to implicate any asset of the bankrupt, and, indeed concern parties other than the bankrupt” he would proceed to consider them. The Mother Church v. The Conference, Del.Ch., C.A. No. 12055, Jacobs, V.C. (Mar. 29, 1995) (LETTER OP.). Rev. Jackson claims that proceeding with the contempt motions is effectively a collection effort against Debtor which constitutes a willful violation of Code § 362(a) which, pursuant to Code § 362(h),2 subjects the offending parties to a contempt citation and entitles Rev. Jackson to an award of attorneys’ fees and treble punitive damages. Rev. Jackson’s Contempt Motion states his position as follows:
6. Those [contempt] motions are a means of collecting claims against the *214debtor from the Bishop personally, so continuing the proceedings against him while debtor’s bankruptcy is pending is a willful violation of the letter and spirit of 11 U.S.C. § 362(h).
7. The Bishop has standing to move the Court for relief because he is injured by that violation, in that if he is forced to satisfy the debtor’s debts to the Mother Church himself, the debtor will have no assets with which to indemnify him.
(Case Doc. # 7, p. 2)
Rev. Jackson misconstrues the matter which the Mother Church urged and which the Vice Chancellor agreed to consider. It is not the collection effort. The collection effort, i.e., the attempt to satisfy the $10,260 award of attorneys’ fees and expenses against Rev. Jackson because the Conference failed to pay it, is one of the matters addressed by the Delaware Supreme Court in its March 3,1995 order. Indeed, the posting of the $11,000 supersedeas deposit with the Supreme Court was effected in connection with the Supreme Court’s consideration of the Chancery Court order which allowed the collection effort to go forward.
The Chancery Court contempt proceeding is not a collection effort against the Conference or against Rev. Jackson. It is an effort by the Mother Church to have certain persons punished for willful violations of Chancery Court orders. As I understand it, the proceeding relates to the contempt motions filed by the Mother Church in July and August 1994 to have certain parties held in contempt for two separate acts: (1) filing the second Chancery Court action in Sussex County, and (2) recording a quitclaim deed in December 1993. While those two motions appear to target the Conference as well as Rev. Jackson, Ms. Hull-Johnson and Ms. Shearin, the Mother Church requested and the Vice Chancellor agreed that the contempt proceeding would go forward only as to the “parties other than the bankrupt.” (Case Doc. # 7, Ex. B) While the consequence of having the contempt proceeding go forward may well result in personal liability for Rev. Jackson and may even trigger a claim by Rev. Jackson against Debtor, Rev. Jackson has no rights arising out of the automatic stay order to protect against that consequence. When a bankruptcy petition is filed, it is common practice for a non-bankruptcy court where an action is pending against the debtor and others to sever the action and proceed with the causes against the non-debtors. There is sound basis for this practice. Code § 362(a) only stays actions against the debtor and its property. Code § 362(a) does not stay actions against persons (or their property) who are related to the debtor or who are participants in the harm or liability underlying claims against the debtor. Maritime Elec. Co. Inc. v. United Jersey Bank, 959 F.2d 1194, 1205 (3d Cir.1991) (“The automatic stay is not available to non-bankrupt co-defendants of a debtor even if they are in a similar legal or factual nexus with the debtor.”) Lynch v. Johns-Manville Sales Corp., 710 F.2d 1194, 1196-97 (6th Cir.1983) (“It is universally acknowledged that an automatic stay of proceedings accorded by § 362 may not be invoked by entities such as sureties, guarantees, co-obligors, or others with a similar legal or factual nexus to the ... debtor.”) Because the conduct of the Mother Church and its counsel in arguing for, and the Vice Chancellor in allowing, the contempt motions to proceed against Rev. Jackson did not implicate Code § 362(a), that conduct could not result in willful violations of the automatic stay order.
Under limited circumstances, pursuant to Code § 105(a),3 the bankruptcy court may extend the Code § 362(a) stay order to protect non-debtor parties whose obligations may (a) trigger obligations against the debtor or (b) otherwise adversely impact the debtor during the bankruptcy proceeding. See, e.g., In re American Film *215Technologies, Inc., 175 B.R. 847 (D.Del.1994). However, any such extension must be the subject of a specific order by the bankruptcy judge following a hearing on notice. No such order has been issued in this Chapter 7 case.
Debtor’s Contempt Motion
Debtor’s Contempt Motion asserts that the Mother Church and its counsel, in arguing to the Chancery Court for its continued consideration of the contempt motions, thereby engaged in actions to collect on a claim against Debtor and that such conduct constituted a willful violation of the stay order. Likewise, according to Debtor, the Vice Chancellor willfully violated the stay order when he agreed to continue to consider the contempt motions. Debtor’s Contempt Motion states the essence of its position as follows:
7. Attorney Neuberger’s argument was a continuation of his client’s actions to collect a judgment against the Debtor in No. 12055-NC and therefore constituted a “willful violation” of the stay as that term is used in 11 U.S.C. § 362(h), entitling debtor to actual damages, including costs and attorney’s fees, and punitive damages.
8. Vice Chancellor Jacob’s decision to continue considering the pending motions, and placing on debtor the burden of proving the stay applied, also constituted a “willful violation,” entitling debtor to damages, costs and fees.
(Case Doc. # 5, p. 2)
As noted above, the contempt motions are not collection actions against Debtor. It appears that Debtor is arguing that since the Chancery Court case is an action against Debtor, any consideration of, or decision on, the non-applicability of the stay order to any proceeding arising out of that action constitutes a continuation of the action against Debtor and therefore is a violation of the stay order.
The Debtor has not cited any authority, and I find no such authority, for the proposition that when a bankruptcy petition is filed the parties to an action pending in a non-bankruptcy court and the presiding judicial officer of that non-bankruptcy court are deemed to violate the stay order by eonsider-ing and deciding the applicability of the stay order to the non-bankruptcy court proceeding. Indeed, all the reported authority on the issue is to the contrary.
The observation of the court in Picco v. Global Marine Drilling Co., 900 F.2d 846, 850 (5th Cir.1990), is squarely on point:
The automatic stay of bankruptcy court does not divest all other courts of jurisdiction to hear every claim that is in any way related to the bankruptcy proceeding.... [Ojther district courts retain jurisdiction to determine the applicability of the stay to litigation pending before them, and to enter orders not inconsistent with the terms of the stay.
The Court in In re Baldwin-United Corp. Litigation, 765 F.2d 343, 347 (2d Cir.1985), found that a district court in New York had jurisdiction to determine the scope of the automatic stay of a bankruptcy court in Ohio and similarly concluded:
Whether the stay applies to litigation otherwise within the jurisdiction of a district court or court of appeals is an issue of law within the competence of both the court within which the litigation is pending ... and the bankruptcy court supervising the reorganization.
In In re Chateaugay Corp., Reomar, Inc., 93 B.R. 26, 30 (S.D.N.Y.1988), the court likewise ruled that it was within the competence of both the bankruptcy court and the non-bankruptcy court to decide the applicability of the stay order:
Under 11 U.S.C. § 362(d), a motion to modify or lift the provisions of the automatic stay with respect to a particular action must be made to the bankruptcy court which is supervising the reorganiza-tion_ In contrast, the issue of the applicability of the automatic stay to the litigation in question is within the competence of both courts — the court in which the litigation is pending, ... and the bankruptcy court supervising the reorganization.
Other federal and state courts have ruled to the same effect. Hunt v. Bankers Trust Co., 799 F.2d 1060, 1069 (5th Cir.1986) (finding that district court and federal appeals court *216had jurisdiction to determine applicability of stay to case pending before district court, as well as affect of stay on order forbidding filing bankruptcy anywhere else); N.L.R.B. v. Edward Cooper Painting, Inc., 804 F.2d 934, 938-39 (6th Cir.1986) (finding that court of appeals in which stayed litigation is pending has jurisdiction to decide not only its own jurisdiction but also the issue whether stay even applies); Westlund v. State, Dept. of Licensing, 55 Wash.App. 82, 778 P.2d 40 (1989), rev. denied, 113 Wash.2d 1020, 781 P.2d 1322 (1989) (court is empowered to determine whether or not the proceeding to revoke the debtor’s license is subject to the automatic stay provision).
In concluding that the automatic stay order did not apply to the contempt motions against parties other than Debtor, the Chancery Court was exercising its inherent authority to make determinations of matters properly before it. The cases cited above make it abundantly clear that it is not the intent of Code § 362(a) to override that authority. If an aggrieved party believes that the state court determination is wrong, it can seek relief in the bankruptcy court where the stay order emanated. In this regard, I view the Vice Chancellor’s comment as to how he intended to proceed “absent a contrary directive from the Bankruptcy Court” as an acknowledgment of that relief avenue.
Since a non-bankruptcy court has the right to consider whether the automatic stay order applies to matters before it, it logically follows that the parties before that court have the right, indeed perhaps the duty, to express to that court their views on whether the stay order applies to such matters. Absent bad faith conduct, the exercise of that right by the parties before the non-bankruptcy court cannot constitute a violation of the stay order. The record does not evince any such bad faith conduct.
Even if the Mother Church and its counsel and the Vice Chancellor came to the wrong conclusion (which in my view they did not) regarding the non-applicability of the automatic stay to the contempt proceeding against parties other than Debtor, there is an additional reason for not finding a willful violation. In In re Atlantic Business & Community Corp., 901 F.2d 325 (3d Cir.1990), this Circuit adopted a strict objective standard for determining whether a willful violation has occurred.
A ‘willful violation’ does not require a specific intent to violate the automatic stay. Rather, the statute provides for damages upon a finding that the defendant knew of the automatic stay and that the defendant’s actions which violated the stay were intentional. Whether the party believes in good faith that it had a right to the property is not relevant to whether the act was ‘willful’ or whether compensation must be awarded.
Id. at 329.
However, in University Medical Center v. Sullivan, 973 F.2d 1065 (3d Cir.1992), the court retreated from that strict interpretation. In University Medical Center, the Department of Health and Human Services set off post-petition payment obligations to the debtor hospital against pre-petition claims which it had against the hospital. The Department cited provisions of the Medicare statute which it believed overrode the provisions of Code § 362(a). The court disagreed, finding that the post-petition set-offs violated Code § 362(a). However, because the Department exercised a good faith belief based on persuasive legal authority, the court concluded that the violation was not willful as contemplated by Code § 362(h):
Here, however, the actions of the Secretary were neither in defiance of a court order nor were they contrary to certain contemporaneous interpretations of sections 362 and 365. The Secretary believed in “good faith” that he was not violating the stay. This of course is not sufficient under Atlantic Business to escape liability under section 362(h). However, the Secretary also had persuasive legal authority which supported his position.
Id. at 1088.
Hi * sfc * * *
We find that the Secretary was justified in standing firm in his position and in litigating these issues vigorously. We conclude, therefore, that the actions of the Secre*217tary, taken in reliance on statutory direction and ease law support, were not “willful” as we have defined that term in section 362(h) or in our explication of it in Atlantic Business.
Id., at 1089.
Not only did the Mother Church and Chancery Court have persuasive legal authority for their position, in the opinion of this Court, the Mother Church’s and the Chancery Court’s view of the law was clearly a correct one. Indeed, had Chancery Court decided that it could proceed to consider the action instituted by the Conference in Sussex County in May 1994, it would, in my view, have been correct on that score also. Assoc. of St. Croix Condo. Owners v. St. Croix Hotel, 682 F.2d 446, 448 (3d Cir.1982) (“Section 362 by its terms only stays proceedings against the debtor. The statute does not address actions brought by the debtor which would enure to the benefit of the bankruptcy estate.”).
As to the Vice Chancellor’s actions, there is still a further basis for rejecting the two contempt motions. The Vice Chancellor is entitled to judicial immunity when acting on matters within his jurisdiction, which he clearly was in this situation. See Pierson v. Ray, 386 U.S. 547, 553-54, 87 S.Ct. 1213, 1217-18, 18 L.Ed.2d 288 (1967); Stump v. Sparkman, 435 U.S. 349, 356, 98 S.Ct. 1099, 1104, 55 L.Ed.2d 331 (1978): Mireles v. Waco, 502 U.S. 9, 11-12, 112 S.Ct. 286, 287-88, 116 L.Ed.2d 9 (1991).
For the foregoing reasons, both Debtor’s Contempt Motion and Rev. Jackson’s Contempt Motion are denied.
Mother Church’s Lift Stay Motion; Debtor’s and Jackson’s Enforcement Motions
Pursuant to Code § 362(d), the Mother Church seeks relief from the automatic stay order to allow the proceedings involving Debtor to continue in both the Chancery Court and the Delaware Supreme Court.4 The Mother Church argues that the Chapter 7 petition was filed for the purpose of frustrating the relief which it was in the process of obtaining in the Chancery Court and in the Supreme Court. According to the Mother Church, Debtor’s filing was made in bad faith and such conduct is “cause” under Code § 362(d)(1) for lifting the stay order.
(d) On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying, or conditioning such stay—
Debtor’s Enforcement Motion seeks “an order of the Court directing Vice Chancellor Jacobs to cease further proceedings in No. 12055-NC and No. 1674-S.” (Case Doc. # 4, p. 2) The motion asserts that because Debt- or is statutorily and contractually bound to indemnify the non-Debtor respondents to the Chancery Court proceedings those proceedings are effectively proceedings against Debtor and “the debtor is in need of immediate relief from those continuing claims.” (Case Doc. #4, p. 2)
Rev. Jackson’s Enforcement Motion likewise seeks “an order of the Court directing Vice Chancellor Jacobs to cease all proceedings in No. 12055-NC and No. 1674-S.” (Case Doc. #8, p. 5) According to Rev. Jackson, this Court should enjoin the Chancery Court proceedings against him because the ultimate target of the proceedings is Debtor and because Rev. Jackson has indemnification rights against Debtor but Debtor has no assets. Furthermore, according to Rev. Jackson, a Chancery Court proceeding against him, in Debtor’s absence, could produce a result inconsistent with the result in subsequent proceeding against Debtor. Finally, Rev. Jackson argues that a proceeding against him is effectively a proceeding against Debtor.
Debtor’s and Jackson’s enforcement motions present the same issue as the Mother Church’s lift stay motion, namely, in what forum and when should the claims of Mother Church versus those of the Conference and its agents be determined? For the reasons set forth below, I conclude that the forum should not be this Court and there is no reason to delay the proceedings in other courts.
(1) for cause, including the lack of adequate protection of an interest in properly of such party in interest.
*218Filing bankruptcy in bad faith is “cause” for relief under Code § 362(d)(1). In re Dixie Broadcasting, Inc., 871 F.2d 1023, 1027 (11th Cir.1989), cert. denied 493 U.S. 853, 110 S.Ct. 154, 107 L.Ed.2d 112 (1989). Also, the existence of a more appropriate forum than the bankruptcy court is “cause” for relief under Code § 362(d)(1). In re Hohol, 141 B.R. 293 (M.D.Pa.1992); In re Drexel Lambert Group, Inc., 113 B.R. 830 (S.D.N.Y.1990); In re Makarewicz, 121 B.R. 262, 265 (S.D.Fla.1990).
That the petition was filed on the eve of the date for the Delaware Supreme Court’s issuance of its mandate, following its March 3, 1995 order affirming the Chancery Court decisions, strongly suggests that the petition was filed with the intent of delaying, if not supplant, the state court proceedings which commenced in 1991. The Conference has effectively acknowledged as much. In her March 24, 1995 letter to the Vice Chancellor regarding the effect of the stay order, Ms. Shearin, in urging the Chancery Court to do nothing, suggested that by time the stay order is lifted “the Bankruptcy Court will have resolved the financial issues between the parties, and that will leave many of the other issues either moot or res judicata.” (Adv.Doc. # 9, p. 5) At the hearing Ms. Shearin suggested that this Court should “sort out” the matter before the state courts as to who is entitled to the $11,000 superse-deas deposit.
This filing is similar to a tactic employed by the Debtor in 1991. Following the issuance by the Chancery Court of a temporary restraining order against the Conference in April 1991, the Conference, through a surrogate, commenced an action against the Mother Church in the District Court for the District of Delaware. The District Court had little difficulty in recognizing that tactic as an attempt to frustrate the jurisdiction of the Chancery Court and dismissed the action under the federal abstention doctrine articulated by the Supreme Court in Younger v. Harris, 401 U.S. 37, 91 S.Ct. 746, 27 L.Ed.2d 669 (1971).
Absent the tactic of frustrating or supplanting the state court proceedings, a bona fide reason for the filing is not diseerna-ble. Clearly, the petition filing makes no sense in terms of bankruptcy law policy. The petition is a filing under Chapter 7, not Chapter 11. This petitioner is not attempting to reorganize and seek accommodations from its creditors, thereby enabling it to continue to operate. Rather, the objective of a Chapter 7 case is to cause the appointment of an independent trustee to marshal and liquidate the assets of the estate for pro rata distribution among the classes of creditors. It is designed to promote equal treatment among classes of creditors versus the result produced outside of a bankruptcy when creditors who are swifter and more aggressive in their collection efforts benefit at the expense of the other creditors.
However, Debtor’s schedules, its pleadings and its counsel’s statements at the hearing show that there is really very little by way of estate assets to protect for the benefit of an equitable distribution to unsecured creditors. According to the schedules, Debtor has assets aggregating $298,850 versus liabilities aggregating $9,413,296. It turns out that the $298,850 asset figure is a bogus figure. That figure, according to the schedules, consists of: (1) cash deposit held by the Chancery Court — $11,000; (2) office equipment — $500; (3) a line of credit from the Peter Spencer Historical Society (“the Society”) — $272,000; (4) funds held by the Superior Court for condemnation of property — $4,350; (5) funds held by the Chancery Court for supersedeas on appeal — $11,000. At the hearing Debtor’s counsel adjusted the $298,850 asset value figure downward as follows: 5
(1) In the schedules the $11,000 deposit held by the Chancery Court was counted twice.
(2) The $272,000 line of credit is not an asset at all. That number reflects funds advanced by the Society to the Conference *219over the course of a number of years. Thus, the $272,000 figure is a claim against Debtor.
(3) The $4,350 of condemnation funds held by the Superior Court are funds which, when and if disbursed, will be paid to the Conference as trustee for one of its affiliated churches. The affiliated church is the beneficiary of the fund. Thus, the $4,350 is not an asset of this estate.
(4) As to the $11,000 deposit with the Chancery Court, Debtor asserts that these funds, if and when released to it by the Chancery Court, will be turned over to either Rev. Jackson or the Society, or both, because, according to Debtor, Rev. Jackson and the Society are secured creditors of Debtor and the collateral which secures their claims is the $11,000 deposit.
The Mother Church disputes Debtor’s position that the $11,000 deposit is property of the estate or that it is collateral for the claims of Rev. Jackson and the Society. The Mother Church asserts that because the funds were posted by Rev. Jackson to protect his property from judgment execution, given the Supreme Court’s affirmance of the judgment, that deposit serves to satisfy the judgment. The Conference has filed a motion for reconsideration with the Supreme Court, and if successful, presumably the Mother Church’s claim to the funds could be denied.
If the Debtor’s theory is correct, then the $11,000 Chancery Court deposit will go to Rev. Jackson and/or the Society. If the Mother Church is correct, the funds will go to it. In either event, the value of Debtor’s assets will have been reduced to $500.
When asked at the hearing whether it made any sense to file a Chapter 7 ease so that $9,413,296 of claims can look to $500 of assets for satisfaction, Debtor’s counsel responded that the claims figure was not really $9,413,296 — but a much smaller figure. According to Debtor’s counsel, the $9,413,296 resulted from an attempt to fully disclose Debtor’s potential exposure. When pressed to give a realistic liability figure, Debtor’s counsel stated that the aggregate amount of claims listed in the schedules is more like approximately $100,000. Adding this to the newly disclosed $272,000 claim of the Society produces a claims figure of $372,000. Thus, the aggregate claims figure of $9,413,296 in Debtor’s schedules was also a bogus number. However, it still remains that, according to Debtor’s theory, there are only $500 of assets to satisfy those claims. Ignoring the costs of administering the estate (including trustee’s fees, counsel fees and converting office equipment to cash), it is clear that the potential benefit to the unsecured creditors of this Chapter 7 estate is minute at best. Viewed in that light, and because Code § 727(a)(1)6 does not permit a corporation to obtain a discharge in a Chapter 7 case, I find that the petition filing serves no bankruptcy law purpose.
In its Response to Motion For Relief From Automatic Stay (Adv.Doe. #6), Debtor unequivocally states reasons for the petition filing which are not founded in bankruptcy law policy. At the hearing Debtor’s counsel confirmed these reasons. There are two:
(1) “Debtor began this proceeding to prove to Delaware’s Supreme Court, before it decides Debtor’s motion for reconsideration, that Debtor did not pay the judgment in No. 12055-NC because it had no assets, so the Bishop was not at fault for the failure.” (Adv.Doe. # 6, p. 3)
(2) “[T]he simple truth [is] that Debtor filed this proceeding to keep the $11,000 from being paid to [the Mother Church], an unsecured creditor, when the Bishop and/or the Spencer Society has secured claims for it.” (Adv.Doe. # 6, p. 5)
At the hearing Debtor’s counsel expounded on these two reasons for the filing. According to Debtor, since it has thus far been unable to convince the state courts that Debtor has no assets, it concluded that a way to do that is to have the independent trustee in this Chapter 7 case examine Debtor’s affairs and thereby presumably convince the state courts that Debtor has no assets. Given the many occasions where the state courts *220have been called upon to address the positions of the Conference and the Mother Church in this tangled legal saga, I find it inconceivable that Debtor has not had a fair opportunity to present its positions. But more to the point, I find bizarre the proposition that the federal bankruptcy law should be invoked to have a federal court be the mechanism for convincing a state court of a fact being promoted by a party before that state court. No bankruptcy law policy is promoted by that proposition and I conclude that it is not a proper reason for filing a petition.
I turn now to the second stated reason for the filing. Although perhaps not bizarre, it is anomalous. A dispute exists as to who is entitled to the $11,000 cash deposit with the Chancery Court. According to Debtor, because Rev. Jackson and/or the Society have secured claims to it, the filing was made to protect those claims vis-a-vis the Mother Church. Rev. Jackson and the Society have filed separate proofs of claims. Both claims were filed by Ms. Shearin who is shown on the documents as attorney for the claimants.7 Rev. Jackson’s proof of claim states that he is a secured creditor to the extent of $11,000 and the evidence of that security interest is an indemnification provision of the Delaware General Corporation Law, 8 DelC. § 145(c).8 According to the Society, it has a secured claim because the $11,000 check which Ms. Hull-Johnson delivered to the Supreme Court on October 21, 1994 as a supersedeas deposit came from funds which the Society turned over to Ms. Hull-Johnson. There is no written security agreement between Debt- or and Rev. Jackson or between Debtor and the Society, but Debtor constructs a U.C.C. Article 9 argument in support of the claims. I find that argument confusing and unconvincing. But for purposes of the motions before me, I need not decide whether Rev. Jackson and/or the Society are secured creditors with respect to the $11,000 deposit.
Assuming that Rev. Jackson and/or the Society are secured creditors of Debtor and the collateral for those security interests is the $11,000 deposit, the filing of the bankruptcy petition does not advance their cause. Absent specific bankruptcy court authorization for creating post-petition security interests in situations not applicable here,9 a bankruptcy filing does not create or enlarge creditor security interests. Security interests in a debtor’s property are determined by state law arising out of pre-petition transactions. Decatur Contracting v. Belin, Belin & Naddeo, 898 F.2d 339, 342 (3rd Cir.1990) (“The court must look to [state] law to determine what, if any, property interest the parties hold in the debtor’s estate.”). In other words, whatever security interests Rev. Jackson and/or the Society have, they had them the day before the petition was filed and they were not created, enlarged or enhanced by the filing of the petition, nor will they be created, enlarged or enhanced by any subsequent proceedings arising out of the filing. Consequently, neither Rev. Jackson nor the Society gain anything by the filing of the bankruptcy petition. If either or both of them are secured creditors with respect to the $11,000 deposit, their non-bankruptcy law created rights will be respected in the state court to the same extent as in this Court. Of course, whether their claims to the $11,000 deposit are superior to the interest of the Mother Church in the deposit is a matter for determination pursuant to state law. Thus, I conclude that Debtor’s second stated reason for the filing makes no sense in the context of bankruptcy law. No bankruptcy law policy is promoted by a filing made for the reasons put forth by Debtor.
*221As noted above, earlier in the history of the long running dispute between the Conference and the Mother Church, the Conference attempted to circumvent the jurisdiction of the Chancery Court by trying to bring the dispute into the federal forum. In its memorandum opinion of March 24, 1992, the District Court dismissed that action under the Younger abstention doctrine, finding that the three requirements for the application of the Younger abstention doctrine had been met: (1) there was a state court proceeding occurring at the same time as the newly instituted federal cause of action and the federal court proceeding was effectively intended to reverse the state courts decisions up to that point, (2) deciding the issue raised by the federal court plaintiff would require the District Court to apply state property law, an area which is properly left to the state’s discretion, and (3) the state court proceeding provided adequate means in which the federal court plaintiff could raise constitutional issues. The reasoning of the District Court in 1992 is equally, if not more, compelling today.
A brief look at a bankruptcy court’s jurisdiction is appropriate. In enacting the Bankruptcy Reform Act of 1978, Congress intended to grant bankruptcy courts broad jurisdiction to bring together all civil proceedings concerning the bankruptcy estate. Report Of The Commission On The Bankruptcy Laws Of The United States, H.R.DOC. NO. 137, 93d Cong., 1st Sess. 85, 90 (1973), reprinted in 2 APP. Collier on Bankruptcy (Lawrence P. King ed., 15th ed. 1989); see NLT Computer Seros. Corp. v. Capital Computer Sys., Inc., 755 F.2d 1253, 1260 (6th Cir.1985). Congress also recognized that the bankruptcy systems’ expansive jurisdiction created the potential to bring into federal courts matters best left to state courts to decide. H.R.Rep. No. 595, 95th Cong., 1st Sess. 51 (1977), reprinted in 1978 U.S.C.C.A.N. 5787, 5963, 6012. The framework for this expansive jurisdiction with clearly defined abstention directives is set forth in 28 U.S.C. § 1334. Pursuant to § 1334(a), the Bankruptcy Court, as a unit of the District Court, has original and exclusive jurisdiction of all cases under Title 11; and pursuant to § 1334(b), the Bankruptcy Court, as a unit of the District Court, has original but not exclusive jurisdiction of all civil proceedings arising under Title 11 or arising in or related to cases under Title 11. The proceedings in the Delaware state courts are civil proceedings related to this Title 11 case as contemplated by § 1334(b). For bankruptcy proceedings the Younger doctrine is codified in § 1334(c)(1) and (2) — one a discretionary and the other a mandatory abstention directive:
Subsection (c)(1) provides:
Nothing in this section prevents a district court in the interest of justice, or in the interest of comity with State courts or respect for State law, from abstaining from hearing a particular proceeding arising under title 11 or arising in or related to a case under title 11.
Subsection (e)(2) provides:
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.
Debtor and Rev. Jackson have asked this Court to stay the state court proceedings involving them. However, they do not indicate how such a stay would promote the goals of this Chapter 7 case. Presumably, at some point Debtor will ask this court to undertake a determination of issues which arise out of or are related to the state court proceedings and which are appropriate for decision by those courts.10 In that event, I can perceive of no reason why this Court would not abstain pursuant to 28 U.S.C. *222§ 1334(c)(1) and (2). Pursuant to Code § 704(1), the Chapter 7 trustee is to “collect and reduce to money the property of the estate ... and close such estate as expeditiously as is compatible with the best interests of parties in interest.” It seems to me that the most effective way to do that, as it relates to Debtor’s claims vis-a-vis those of the Mother Church, is to permit the state courts to conclude the business which was commenced in the Chancery Court in 1991.
By C.A. No. 1674, Debtor seeks specific performance of an alleged written contract whereby the Mother Church promised to convey its real estate to the Conference upon secession by the Mother Church from the conference. At the hearing, Debtor stated that that action has merit and Debtor specifically requested authorization to pursue that action.11 Given my view of Code § 362(a) as discussed above, prosecution of that action by Debtor is not stayed. The only question is whether and under what circumstances the trustee would deem it appropriate to pursue the action. Be that as it may, it seems to me that the second Chancery Court action clearly raises the matter of issue preclusion arising out of the first Chancery Court action. Indeed, in the first action the Mother Church has already sought to enjoin the Conference from pursuing the second action on the grounds that it is precluded from doing so by determinations already made by the Chancery Court in the first action. Given this obvious link between the two actions, if prosecution of the second is to continue, it is demonstrably clear that prosecution of the first should also continue.
Because I find no useful purpose is served in this Chapter 7 case by delaying the state court proceedings involving the disputed claims between Debtor and the Mother Church, I would be disposed to grant the motion of Mother Church to lift the stay to permit all the Delaware state court proceedings involving it and its agents and Debtor and its agents to continue, and to deny Debt- or’s and Rev. Jackson’s enforcement motions. However, I find the circumstances here justify broader measures.
A bankruptcy court as a court of equity has the inherent power to dismiss a case when its jurisdiction has been improperly invoked.12 In Matter of Century City, Inc., 8 B.R. 25, 29 (D.N.J.1980), the court cited the ample authority for this proposition:
[U]nder its inherent power the Court may act sua sponte to dismiss, independently of the grounds specified in either § 305[a] or § 1112[b] of the Code. See Banque de Financement v. First Nat’l Bank of Boston, 568 F.2d 911, 916 n. 8 (2d Cir.1977); In re Ettinger, 76 F.2d 741 (2d Cir.1935); In re Pioneer Warehouse Corp., 2 B.R. 1, 9 (Bkrtcy.E.D.N.Y.1979). The power of the Court to dismiss a case when its jurisdiction has been improperly invoked is inherent in the bankruptcy court as a court of equity, guided by equitable doctrines and principles; SEC v. United States Realty & Improvement Co., 310 U.S. 434, 435, 60 S.Ct. 1044, 1046, 84 L.Ed. 1293 (1941). See also Pepper v. Litton, 308 U.S. 295, 304, 60 S.Ct. 238, 244, 84 L.Ed. 281 (1939). “There is an overriding consideration that equitable principles govern the exercise of bankruptcy jurisdiction;” Bank of Marin v. England, 385 U.S. 99, 103, 87 S.Ct. 274, 277, 17 L.Ed.2d 197 (1965). See In re St. Matthew Lutheran Church, 6 Bankr.Ct.Dec. 578 (Bkrtcy. C.D.Cal.1980), wherein the court expressly based its decision to dismiss a Chapter 11 case, not on 11 U.S.C. § 305[a], but rather on its inherent power to dismiss a case which imposed upon its jurisdiction.
*223Citing numerous cases in support, the court in Matter of Coastal Nursing Center, Inc., 164 B.R. 788, 793 (Bankr.S.D.Ga.1993), found that:
[C]ourts which have considered whether [a good faith] requirement still exists have uniformly held that a bankruptcy court, sitting as a court of equity, possesses the inherent power to determine whether a debtor has improperly invoked its jurisdiction by coming into the court in bad faith, (citations omitted.)
And in Pleasant Pointe Apts. v. Kentucky Housing Corp., 139 B.R. 828, 831 (W.D.Ky.1992), the court found that when Congress amended Code § 105(a) in 1986, it expressly recognized that power.
In 1986, Congress amended section 105(a) of the Bankruptcy Code and resolved the uncertainty over the construction and effect of section 1112(b) by expressly recognizing the bankruptcy courts’ inherent powers to monitor and police proper use of the bankruptcy laws and mechanisms. Congress amended section 105(a) by adding the following sentence:
No provision of this title providing for the raising of an issue by a party shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.
11 U.S.C. § 105(a). According to this additional sentence, the fact that section 1112(b) requires a party or trustee to request dismissal or conversion does not preclude bankruptcy courts from evaluating a Chapter 11 petition and, on its own initiative, dismissing or converting that petition for cause. In re Clark, 107 B.R. 376 (S.D.Fla.1988). In re Miracle Church of God in Christ, 119 B.R. 308 (Bankr. M.D.Fla.1990). See also 5 Collier on Bankruptcy 1112.03[4] (1992).
For purposes of exercising the power authorized by Code § 105(a), it makes no difference whether it is a Chapter 11 case or a Chapter 7 ease.
I have described above in some detail why I find this case achieves no bankruptcy law objective and has only served to delay and frustrate legitimate state court proceedings. In summary, I find the following factors support the conclusion that this Chapter 7 filing was an abuse of the bankruptcy process:
(1) The assets and the claims figures in Debtor’s schedules are bogus. According to Debtor, it has available assets, at best, of only $500, versus claims of approximately $372,000. Based on his examination of Debt- or’s affairs, the trustee stated at the hearing that he views this as a “no asset” case. There are no meaningful creditor interests protected by this case and since Debtor is a corporation it cannot obtain the benefit of a discharge in this Chapter 7 case.
(2) Debtor is represented by counsel who represents the only alleged secured creditors. If those two creditors have security interests, those interests arise solely out of state law and are not enhanced or enlarged by bankruptcy law.
(3) This Chapter 7 filing is the latest tactical maneuver by Debtor in a four-year struggle with its principal adversary involving purely state law issues properly considered in state court proceedings.
(4) Debtor’s counsel has made it clear that the petition filing is intended to render moot, or dispose of by res judicata, state law issues which have been properly and extensively considered by state courts over a number of years.
(5) Debtor has expressed two reasons for filing this Chapter 7 case which are not consonant with bankruptcy law policy, namely,
(a) to try to convince a state court as to a factual contention being made by Debtor in that court, and
(b) to establish a proposition regarding security interests in Debtor’s property which cannot be established by a Chapter 7 filing.
I find that this Chapter 7 case serves no cognizable bankruptcy law purpose, but, rather, is an obvious attempt to circumvent and frustrate the disposition of state law *224remedies in state law tribunals and, accordingly, I dismiss the case.
ORDER
For the reasons set forth in the Court’s Memorandum Opinion of this date, Debtor’s contempt motion (Case Doc. # 5) and Rev. Jackson’s contempt motion (Doc. # 7) are denied, and this Chapter 7 case is dismissed.
. 11 U.S.C. § 362(a) provides, in pertinent part:
(a) Except as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title, or an application filed under section 5(a)(3) of the Securities Investor Protection Act of 1970 ... operates as a stay, applicable to all entities, of—
(1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title;
(2) the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under this title.
11 U.S.C. § 362(a)(1) and (2) (hereinafter, 11 U.S.C. § 101 et seq. is cited as “Code §-.”).
. Code § 362(h) provides:
An individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.
. Code § 105(a) provides:
The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.
. Code § 362(d)(1) provides:
. While the petition and schedules show Edith H. Hull-Johnson as counsel for Debtor, at the hearing Debtor was represented by K. Kay Shearin. According to Ms. Shearin, she and Rev. Jackson provided the information to Ms. Hull-Johnson to fill out the petition and schedules forms.
. Code § 727(a)(1) provides:
(a) The court shall grant the debtor a discharge, unless—
(1) the debtor is not an individual.
. Ms. Shearin offered no explanation as to why it is not a conflict of interest to be representing both Debtor and its two purported secured creditors at the same time.
. Section 145(c) provides:
(c) To the extent that a director, officer, employee or agent of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a) and (b) of this section, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by him in connection therewith.
.For example, pursuant to Code § 364(c), the court can grant a security interest in estate property to a post-petition lender, and, pursuant to Code § 361, "adequate protection" to a secured creditor may be provided in the form of an additional or replacement lien.
. As noted above. Debtor has already asked this Court to "sort out” the rights to the $11,000 supersedeas deposit.
. Such request, of course, is inconsistent with the relief requested by Debtor's Enforcement Motion which sought a stay of all matters related to both Chancery Court cases. (Case Doc. # 4, p. 2)
. In addition to this inherent power, there are specific Code provisions allowing dismissal of chapter cases. Code § 305(a)(1) provides that "[t]he court, after notice and a hearing, may dismiss a case under this title, at any time if ... the interests of creditors and the debtor would be better served by such dismissal or suspension.” Some authorities believe that Code § 305(a)(1) is to be narrowly construed and may only be applicable to involuntary cases. See, e.g., In re Pine Lake Village Apartment Co., 16 B.R. 750 (Bankr. S.D.N.Y.1982). Not relevant here are the specific causes spelled out in Code § 1112(b) for dismissing a Chapter 11 case. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492110/ | OPINION
THOMAS M. TWARDOWSKI, Bankruptcy Judge.
Before the court are defendants’ motions for more definite statement filed pursuant to Rule 12(e) of the Federal Rules of Civil Procedure, which is made applicable to adversary proceedings in bankruptcy cases by Rule 7012 of the Bankruptcy Rules. Defendants assert that the complaints are so vague and ambiguous that it is unreasonable to require them to file responsive pleadings. In particular, defendants maintain that the complaints are defective in that: (1) plaintiff failed to identify and exclude claims which may be barred by the United States Supreme Court’s recent decision in ICC v. Transcon Lines, — U.S. —, 115 S.Ct. 689, 130 L.Ed.2d 562 (1995); (2) plaintiff failed to adequately identify the nature and basis of claims which may be eligible for resolution under the provisions of the Negotiated Rates Act of 1993 (“NRA”), P.L. 103-180, 107 Stat. 2044 (Dec. 3, 1993); and (3) plaintiff failed to identify the nature and basis of state law claims which may be barred from federal adjudication by the abstention doctrine. In addition, defendant Reynolds alleges that the complaint contradicts previous demands for payment made by plaintiff prior to the filing of the complaint. Because each of the motions filed by defendants arises out of nearly identical fact patterns and allege similar defects in plaintiffs complaints, this opinion will serve as the basis of adjudication for all of the listed adversary proceedings.
A Rule 12(e) motion for more definite statement is appropriate when a pleading is wholly uninformative as to the basis for the claim. Schwartz v. Kursman (In re Harry Levin, Inc.) 175 B.R. 560, 565 (Bankr.E.D.Pa.1994). In this instance, while it is true that the complaints may lack detail, they are not so unintelligible that defendants cannot frame responsive pleadings. As we noted in Hamilton Bank v. Fidelity Electric Co., Inc. (In re Fidelity Electric Co., Inc.) 19 B.R. 531, 532 (Bankr.E.D.Pa.1982), a complaint filed in bankruptcy court, like all other pleadings filed in federal court, is merely a notice pleading whose function is to provide the opposing party with a general indication of the type of litigation involved. Given this, and the fact the Rule 12(e) motions are generally disfavored in light of liberal federal discovery rules, In re American Int’l Airways, Inc., 66 B.R. 642, 645 (Bankr.E.D.Pa.1986), we shall deny defendants’ motions. We begin our analysis with a summary of the relevant facts.
Prior to filing this Chapter 11 petition on April 6, 1993, plaintiff operated as a motor carrier in interstate commerce pursuant to authority issued by the Interstate Commerce Commission (“ICC”), and in intrastate commerce pursuant to authority issued by various state regulatory agencies. In July of 1993, plaintiff engaged the services of Trans-Allied Audit Company (“Trans-Allied”) to conduct an audit of plaintiffs freight bills to determine whether they had been properly rated according to the tariffs filed by plaintiff with the ICC and the various state regulatory agencies. The audit determined that defendants allegedly owed various amounts to plaintiff for freight which had been transported, and as a result, Trans-Allied billed defendants for these amounts. When subsequent negotiations failed to recover these *231alleged balances, plaintiff filed these adversary complaints against defendants seeking to recover the difference between the amounts defendants allegedly should have paid for the transport of freight according to the tariffs on file with the ICC and the various state regulatory agencies (the “filed rate”) and the amounts defendants actually paid plaintiff (the “negotiated rate”). These differences, customarily referred to as “freight undercharges,” generally are recoverable under the “filed rate” doctrine notwithstanding any prior negotiated rate agreement. Maislin Industries, U.S., Inc. v. Primary Steel, Inc., 497 U.S. 116, 110 S.Ct. 2759, 111 L.Ed.2d 94 (1990).
It is important to note, however, that the ruling in Maislin, allowing complete recovery of all freight undercharges, has been modified by the subsequent passage of the NRA, particularly, for purposes of this proceeding, 49 U.S.C. 10701(f). In addition, the United States Supreme Court recently held in ICC v. Transcon Lines, — U.S. at — - —, 115 S.Ct. at 694-95, that the “filed rate” doctrine does not bar the ICC from enjoining a trustee from collecting liquidated damages found in a filed tariff when it is shown that the carrier violated the ICC’s credit regulations. The NRA, enacted to provide shippers with some relief from undercharge litigation, and the decision in Transcon Lines are both integral parts of defendants’ motions for more definite statement and warrant further discussion.
Defendants first argue that the complaints fail to identify and exclude claims which defendants assert are barred by Transcon Lines. For purposes of these motions, we need not decide whether Transcon Lines effectively renders some or all of plaintiffs claims unrecoverable.1 Rather, we need only decide whether the complaint is so vague and ambiguous that defendants are unable to evaluate whether Transcon Lines might be applicable to these cases. To this end, we find that the complaints, when examined along with the Exhibits attached thereto, are sufficiently specific to make defendants aware that plaintiff is seeking recovery of freight undercharges. To explain, the complaints allege, in paragraph 10, that:
[a]s part of its freight audit service, Trans-Allied audited all of the shipments handled by Friedman’s for Defendant by comparing ... declared value of each shipment to the applicable tariff rates and rules provisions Friedman’s had on file with the ICC and/or various state regulatory agencies that were effective at the date of the shipment. The result of said audit was the creation of balance due original invoices in the amount of ... A copy of the statement of account evidencing the debt is attached hereto as Exhibit A.
By indicating that Trans-Allied compared the rates plaintiff had on file with the ICC and the various state regulatory agencies with those rates actually charged to defendants (and by attaching Exhibits “A”), we find that the complaints adequately place defendants on notice that plaintiff is seeking recovery for freight undercharges. This satisfies Fed.R.Civ.P.Rule 8(a), made applicable to these proceedings by B.R. 7008, which requires “only a short and plain statement of the claim showing that the pleader is entitled to relief’ and, as such, gives defendants adequate notice as to the nature of the claims against them. Whether some or all of these claims are barred by Transcon Lines is an issue which can be addressed in defendants’ responsive pleadings and subsequent discov*232ery. Consequently, we find that this aspect of defendants’ motions must fail.
Defendants next argue that plaintiffs complaints are defective because they fail to adequately identify the nature and basis of the claims. Defendants allege that this lack of detail poses a significant problem in these cases due to the provisions in the NRA, specifically 49 U.S.C. § 10701(f), which allow for dispute resolution upon timely election by defendants. In the cases before us, defendants must make their election within sixty days from the date the answers are filed to the complaints. Defendants allege that the vague nature of the complaints prevents them from taking advantage of the dispute resolution remedies available under the NRA and that obtaining the detail needed through discovery is an unsatisfactory solution because the sixty day election period may expire before discovery is complete. For the reasons that follow, we do not agree with defendants’ arguments.
By enacting the NRA, Congress sought to severely curtail the undercharge litigation that had become rampant as increasing numbers of carriers filed for bankruptcy protection in an increasingly competitive, deregulated industry. As a result, § 10701 of the NRA provides shippers with some protection from undercharge recovery by allowing shippers to settle these undercharge claims for a small portion of what would be recovered if strict adherence to the “filed rate” doctrine was applied. In particular, § 10701(f)(2), (3), and (4) provide shippers with a formula from which they may elect to settle undercharge claims. Subsection (2) addresses shipments weighing under 10,000 pounds and allows shippers to satisfy these claims for “twenty percent of the difference between the applicable and effective rate and that which was originally billed.” Subsection (3) differs only in that it applies to those shipments weighing over 10,000 pounds and allows shippers to satisfy these claims for fifteen percent of the difference. Finally, subsection (4) allows shippers who qualify as “public warehouseman” to satisfy claims for five percent of the difference notwithstanding subsections (2) and (3).
Shippers have the option of electing these remedies within the period set forth in § 10701(f)(8)(B). As mentioned earlier, in these cases, that time period is sixty days following the filing of the answers to the complaint. Failure to elect any of the remedies afforded under subsections (2), (3), and (4) does not automatically subject the shipper full payment of the undercharge claim. Instead, the shipper may pursue all rights and remedies available under Title 49.
In the cases before us, plaintiff attached an exhibit, identified as “Exhibit “A,” to each of the complaints. This Exhibit identifies, by bill of lading number and date, the shipments which plaintiff alleges apply to each undercharge claim. While this information admittedly lacks detail, it is sufficient to satisfy plaintiffs duty to file a complaint which complies with Fed.R.Civ.P. 8(a) and (e) and does not place an unreasonable burden upon defendants to evaluate and subsequently elect remedies available to them. Since plaintiff identified all of the shipments in issue by bill of lading number, defendants should be able to categorize the shipments by weight. Once the shipments are so categorized, defendants can compute the amount which would satisfy the claims under the dispute resolution provisions of the NRA. Because this task is one which we feel can reasonably be completed within sixty days of the filing of defendants’ answers, we deny this aspect of defendants’ motions as well.
We next address defendants’ argument that plaintiffs complaints are defective because they fail to identify and exclude state law claims which may be barred by the abstention doctrine. Once again, we find this argument unpersuasive. First, we note that we do not find that these alleged deficiencies prevent defendants from filing responsive pleadings. Second, we note that at this point in the proceedings, we need not decide the abstention issue.2 Rather, if, after filing their answers, defendants identify claims *233which they believe warrant abstention, they can file the appropriate motions at that time.
Finally, defendant Reynolds argues that plaintiff’s complaint contradicts earlier demands for payment. To support this argument, Reynolds points to a series of letters which it received from plaintiff outlining the amounts allegedly owed and the various settlement options available. Reynolds received the first letter prior to the United States Supreme Court’s ruling in Transcon Lines. The second letter, received after the Trans-con Lines decision, indicated that adjustments were made and that the amount claimed to be due was modified based on Transcon Lines. Reynolds relies on the amounts claimed to be due in these two letters and the fact that they were characterized as “late payment penalties” in the first letter but seemingly recharacterized as “other underlying tariff issues” in the second letter to argue that plaintiff recharacterized the amounts claimed to be due in an attempt to avoid application of the Transcon Lines decision. We disagree. First, while plaintiff’s complaint does not specifically identify the “other underlying tariff issues,” it is consistent with the second (post-Transcon) letter in that the amount sought in the complaint is nearly identical to the amount sought in the second letter. Second, Reynolds will have the opportunity to identify the “other underlying tariff issues” through the discovery process. If, after discovery is complete, Reynolds still finds fault with plaintiffs complaint and concludes that it violates Transcon Lines,3 Reynolds can file an appropriate motion at that time. As we find that the complaint is not so unintelligible or lacking in detail that Reynolds is not able to frame a responsive pleading, we reject this final argument raised by Reynolds in support of its motion for more definite statement.
For all of the foregoing reasons, defendants’ motions for more definite statement are denied. An appropriate order follows.
ORDER
AND NOW, this 27th day of July, 1995, it is ORDERED that defendants’ motions for more definite statement are DENIED.
IT IS FURTHER ORDERED that defendants shall file responsive pleadings to the complaints within thirty (30) days of the date of this Order.
. In fact, the United States Supreme Court left open the question of whether a shipper may use the carrier's violation of ICC credit regulations as a defense to a collection action instituted by the carrier. Specifically, the United States Supreme Court stated:
[i]n short, whether or not we would allow shippers to defend against a carrier’s collection action by relying on the carrier’s violation of credit regulations, it follows from Commercial Metals and our construction of the controlling statute that the ICC has the authority and the discretion to determine appropriate remedies for these violations. Where, as here, the remedy involves a ’federal-court injunction requiring a carrier to comply with the regulations' [citation omitted]; constitutes a reasonable and necessary means to effect enforcement of the ICC’s credit regulations; and protects the intended beneficiaries of the violated regulations, we believe the injunction is authorized under the [Interstate Commerce] Act.
Transcon Lines, - U.S. at -, 115 S.Ct. at 695.
. In fact, the abstention issue is not before us at this time because no motions to abstain have been filed in these cases.
. Once again, we note that the United States Supreme Court's decision in Transcon Lines leaves open the question of whether a shipper may defend a carrier's collection action by relying on the carrier's violation of credit regulations. Transcon Lines, - U.S. at -, 115 S.Ct. at 695. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492111/ | ORDER RE OBJECTION TO CONFIRMATION BY FORD MOTOR CREDIT COMPANY
BURTON PERLMAN, Bankruptcy Judge.
Creditor Ford Motor Credit Company (“FMCC”) filed an objection to confirmation of debtor’s Chapter 13 plan, alleging that it has a valid judgment lien on debtors’ real property and that the plan improperly lists it as an unsecured creditor. Debtor disputes the validity of the lien.
This court has jurisdiction of this matter pursuant to 28 U.S.C. § 1334(b) and the General Order of Reference entered in this District. This is a core proceeding arising under 28 U.S.C. § 157(b)(2)(E) and (L).
*285In the objection of FMCC to confirmation, it asserts that it is owed $2,816.76 [sic], plus interest; that it has a lien interest in debtor’s residence; and that debtor’s budget indicates that debtor could pay creditors more than is provided in her plan. Debtor responded to the objection that the amount due creditor listed in her schedules was provided by creditor; that creditor’s Certificate of Judgment had expired; and that debtor’s income does not warrant a greater payment to creditors than proposed.
The case came on for confirmation hearing. We then confirmed the plan (with a slight upward revision in the monthly payments to the trustee). This action by the court resolved the issues raised by creditor’s objection other than the question of the validity of creditor’s Certificate of Judgment. We turn now to a resolution of that question.
Debtor filed a Chapter 13 petition on February 3,1995. On Schedule F of the petition, debtor listed an unsecured debt to FMCC of $6,900.00. The debt arose from a loan entered into between debtor and FMCC on October 30, 1985 for debtor’s purchase of a 1983 Plymouth Torismo. After debtor defaulted on the loan, FMCC obtained a judgment against debtor on March 13, 1989 for $2,816.74 plus 16.6% interest from July 24, 1986. The debt listed in the petition thus comprises in large part interest that has accumulated on the judgment. FMCC filed a proof of claim, designating its claim of $6,857.70 as secured. FMCC bases its secured claim on Certificate of Judgment for Lien upon Lands and Tenements filed on April 5, 1989 pursuant to its judgment against debtor, and a second Certificate of Judgment filed on June 24, 1994.
The issue before the court is whether FMCC’s judgment lien is valid, thereby rendering FMCC a secured creditor for purposes of debtor’s Chapter 13 plan. Debtor contends that the 1989 Certificate of Judgment expired by operation of law on April 5, 1994, before the second Certificate of Judgment was filed. Debtor says that, as a result, FMCC’s judgment became dormant and its lien on debtor’s real property is no longer valid.
Under Ohio law, a lien upon real estate of a judgment debtor is created immediately upon the filing of a certificate of judgment. Ohio. Rev.Code § 2329.02; see also Tyler Refrigeration Equip. Co. v. Stonick, 3 Ohio App.3d 167, 169, 444 N.E.2d 43, 45 (Ohio Ct.App.1981); Feinstein v. Rogers, 2 Ohio App.3d 96, 97-98, 440 N.E.2d 1207, 1209 (Ohio Ct.App.1981). Section 2329.07 of the Ohio Revised Code governs the dormancy of a judgment and validity of a judgment lien, and provides in relevant part as follows:
If neither execution on a judgment rendered in a court of record or certified to the clerk of the court of common pleas in the county in which the judgment was rendered is issued, nor a certificate of judgment for obtaining a lien upon lands and tenements is issued and filed, as provided in sections 2329.02 and 2329.04 of the Revised Code, within five years from the date of judgment or "within five years from the date of issuance of the last execution thereon or the issuance and filing of the last such certificate, whichever is later, then, unless the judgment is in favor of the state, the judgment shall be dormant and shall not operate as a lien upon the estate of the judgment debtor.
FMCC does not dispute that its second Certificate of Judgment Lien was filed more than five years after the date the original Certificate of Judgment Lien was issued. It argues, however, that it collected on the judgment pursuant to garnishment, and that its act of collection during the five-year period prevented the judgment from becoming dormant.
Execution and dormancy statutes are to be strictly construed. Roach v. Roach, 164 Ohio St. 587, 590, 132 N.E.2d 742, 744 (Ohio 1956); Wichita Fed. Sav. & Loan Ass’n v. North Rock Ltd. Partnership, 13 Kan.App.2d 678, 779 P.2d 442, 446 (1989); Chandler-Frates & Reitz v. Kostich, 630 P.2d 1287, 1290 (Okla.1981). Section 2329.07 sets forth the only means in Ohio for preventing a judgment from becoming dormant. The clear language of the statute requires the issuance of execution or a certificate of *286judgment before expiration of the original five-year period to prevent dormancy.1 It does not except from that requirement judgments upon which collection has been undertaken.
Execution is defined in § 2327.01 of the Ohio Revised Code as “a process of a court, issued by its clerk, and directed to the sheriff of the county.” Some Ohio courts have regarded a garnishment action and a proceeding in aid of execution as equivalent proceedings. See, e.g., Bazzoli v. Larson, 40 Ohio App. 321, 326, 178 N.E. 331, 333 (Ohio Ct. App.1931) (“ ‘proceeding in aid of execution’ is in fact garnishment after judgment”). That a garnishment action may be deemed a proceeding in aid of execution does not avail FMCC, however, because FMCC has not provided any evidence that a writ of execution was issued as is required by § 2329.07. If a particular act of execution is to prevent a judgment from becoming dormant, “it must conform to the general rules pertaining to the issuance of such an execution.” 62 Ohio Jur.3d Judgments § 151 (1985).
Although Ohio courts have not addressed whether collection on a judgment extends the dormancy period, courts in other jurisdictions with similar dormancy statutes have held that only the issuance of execution or a certificate of judgment, and not partial payments, extends the dormancy period. See Dallas v. Dallas, 236 Kan. 92, 689 P.2d 1184 (1984) (issuance of execution or garnishment, not partial payment on judgment, is the only method for tolling dormancy under statute); First of Denver Mortgage Investors v. Riggs, 692 P.2d 1358 (Okla.1984) (partial payment does not operate as execution for purposes of dormancy statute); Chandler-Frates & Reitz v. Kostich, 630 P.2d 1287 (Okla.1981) (garnishment proceedings and partial payment on judgment do not prevent judgment from becoming dormant in absence of writ of execution). See also American Mortgage & Inv. Co. v. Fallin, 872 P.2d 949 (Okla.Ct.App. 1994) (under dormancy statute requiring that execution or garnishment summons be issued to effect judgment lien, either of those methods must again be undertaken before five-year period expires to extend effectiveness of judgment beyond initial period); DeKalb Swine Breeders, Inc. v. Woolwine Supply Co., 248 Kan. 673, 809 P.2d 1223 (1991) (under statute requiring that execution, which may include order of garnishment, be issued to prevent judgment from becoming dormant, notice of garnishment on judgment debtor does not extend time limit for dormancy; five-year period commences from date execution is issued, not date execution or garnishment is completed). Cf. First Nat’l Bank v. Daggett, 242 Neb. 734, 497 N.W.2d 358 (1993) (judgment did not become dormant because creditor did not permit five years to lapse between time executions were issued).
Section 2329.07 provides that in order to extend the effectiveness of a judgment beyond the initial five-year period there must be either execution or the issuance of a new certificate of judgment before expiration of the original execution or certificate of judgment. FMCC has cited no authority that would change the result dictated by the clear language of the statute. Accordingly, we hold that the judgment of FMCC has become dormant and that its judgment lien is no longer valid. The objection of FMCC to confirmation is overruled. Its claim is allowed only as unsecured.
So Ordered.
. A judgment creditor may obtain a lien on a debtor’s personal property by serving a notice of garnishment on the debtor or someone who possesses the debtor's property, such as an employer who owes wages to the debtor. Yardas v. United States, 899 F.2d 550 (6th Cir.1990). To extend a lien upon lands and tenements pursuant to § 2329.07, however, the creditor must effect issuance of execution or a certificate of judgment. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492112/ | MEMORANDUM
JOHN C. MINAHAN, Jr., Bankruptcy Judge.
Before the court is the Adversary Proceeding to Determine Dischargeability of Debt pursuant to 11 U.S.C. § 523(a)(2)(A). Mer-*346eantile Bank asserts that the charges made by the debtor on his Mercantile Bank credit card account should be determined nondis-chargeable because the debtor knew or should have known at the time the charges were made that he could not repay the amounts charged. I reject this argument, and conclude that the credit card debts are not excepted from discharge.
FINDINGS OF FACT
The debtor, Dennis Hiemer, filed Chapter 7 bankruptcy on August 6,1993. At the time of filing bankruptcy, the debtor had approximately $57,000.00 in unsecured debt, all of which was charged to credit cards. Besides the Mercantile Bank card at issue in this case, the debtor has approximately seventeen other credit cards, thirteen of which are Bank cards. Of these seventeen other credit card accounts, the majority were issued between ten and thirty years before the bankruptcy filing. The debtor had never defaulted on these other credit cards, and none of the other credit cards had ever been revoked. The debtor consistently made minimum monthly payments when due, and used these other credit cards to pay his over-the-road expenses and supplement his monthly income. The debtor is a truck driver.
The credit card at issue in this case, account number 5151-2040-0053-9860, was issued by Mercantile Bank to the debtor in late January or early February of 1993, approximately six months before the bankruptcy filing. The Mercantile Bank card was issued as the result of a solicitation letter sent to the debtor by Mercantile Bank in late December of 1992, indicating that Mr. Hiemer had been pre-approved for a Mastercard with a credit limit of $2,000.00. The debtor had not previously done business with Mercantile Bank, but returned the letter, indicating his acceptance of the card. Mercantile Bank performed a credit rating analysis on Mr. Hiemer based on a point system, and approved Mr. Hiemer for a $2,000.00 credit limit. At the time of the application, Mr. Hiemer was earning $19,000.00 to $21,000.00 a year as a truck driver, and possessed seventeen other credit cards, thirteen of which were bank cards. Prior to 1989, Mr. Hiemer was a farmer. Mr. Hiemer was forced to sell his farm equipment and seek other employment as a result of debt owed on the farm business.
Approximately $1,900.00 in charges were made by Mr. Hiemer on the Mercantile Bank account between February and August of 1993, and the entire unpaid balance is alleged to be nondisehargeable. Specifically, the debtor took two cash advances of $200.00 during April, and made 22 purchases between February and the end of July totaling $1,535.40. The debtor used the cash advances to meet his basic living expenses and to pay bills. The majority of the purchases involved over-the-road expenses of the debt- or while hauling freight, such as truck washing costs and hotel stays, except for a few charges for discretionary items. At no time prior to bankruptcy did the debtor ever exceed the $2,000.00 credit limit on the Mercantile Bank card. The last purchase made by the debtor on the Mercantile Bank card was on July 1,1993. The last payment made by the debtor was a $110.00 payment on July 29, 1993. It appears that the debtor remained current on his monthly payments on the Mercantile Bank card until filing bankruptcy. The debtor first contacted an attorney about filing bankruptcy in late July or early August of 1993. There is no evidence that the debtor made any charges or obtained any cash advances on his Mercantile Bank account in contemplation of filing bankruptcy.
At the time of filing bankruptcy, the debt- or was living on land owned by his uncle. The debtor’s income was approximately $1,300.00 per month, and his monthly expenses were $1,223.00 per month. (See Schedule I of Bankruptcy Schedules). At the time of the charges in question, the debt- or believed he would be able to repay these amounts based on an expected improvement in the cattle hauling business, his ability and willingness to work a second job, and his hope of obtaining a raise in his wages.
LAW
Counsel for Mercantile Bank asserts that the credit card debt owed to Mercantile Bank on account number 5151-2040-0053-9860 is *347nondisehargeable pursuant to § 523(a)(2)(A) of the Bankruptcy Code. Section 523(a)(2)(A) provides that a debt for money, credit, property, or services will be excepted from discharge if it is obtained by “false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition....” 11 U.S.C. § 523(a)(2)(A) (1995).
Notwithstanding the apparent clarity of this section, ambiguity results when it is applied to credit card cases. The cause of this ambiguity is the nature of credit card transactions. Although there may well be credit card cases under § 523(a)(2)(A) involving express written or verbal representations, such as a written misrepresentation on a card application, generally this is not the case. When a cardholder makes a purchase or obtains a cash advance, the cardholder is usually not dealing with the credit card issuer directly, but rather with a third party. Therefore, a verbal or written representation is not expressly made to the credit card company at the time of a credit card purchase or charge is made.
As a result of this conceptual difficulty, there exists considerable disparity in the de-cisional law in regard to the analytical structure for determining whether a credit card debt is excepted from discharge pursuant to § 523(a)(2)(A). Given the lack of an actual verbal or written representation by the cardholder, there exists no realistic basis for determining that the cardholder engaged in “false pretenses” or “false representations”, and courts who choose to analyze credit card cases as such are forced to engage in the fiction of an implied representation of an intent to repay upon the use of the credit card. The judicial fiction of an implied representation allows a court to analyze § 523(a)(2)(A) credit card transactions by reference to decisional law in cases where there was an actual, expressed fraudulent representation.
However, I conclude that a resort to the fiction of an implied representation, and the resultant application of the theories of false pretenses and false representations, is unnecessary in credit card cases. I reach this conclusion because there is an alternative, more direct way to approach the problem through the application of a theory of actual fraud. Pursuant to § 523(a)(2)(A), a debt is determined nondisehargeable if it arises from “false pretenses, a false representation, or actual fraud.” 11 U.S.C. § 523(a)(2)(A) (1995) (emphasis added). Under the decision of In re Dougherty, 84 B.R. 653 (9th Cir. BAP 1988), adopted by this court in Matter of Troutman, 170 B.R. 156 (Bankr.D.Neb. 1994), it was established that in order to hold a credit card debt nondisehargeable under § 523(a)(2)(A), a creditor must show “actual fraud” on the part of the debtor — namely that the debtor did not intend to repay the charges at the time such charges were made. In re Dougherty, 84 B.R. at 656-57.
The court in In re Dougherty held that various factors of circumstantial evidence may be considered in determining a debtor’s intent. Id. at 657. These factors are as follows:
1. The length of time between the charges made and the filing of bankruptcy;
2. Whether or not an attorney has been consulted concerning the filing of bankruptcy before the charges were made;
3. The number of charges made;
4. The amount of the charges;
5. The financial condition of the debtor at the time the charges are made;
6. Whether the charges were above the credit limit of the account;
7. Whether the debtor made multiple charges on the same day;
8. Whether or not the debtor was employed;
9. The debtor’s prospects for employment;
10. The financial sophistication of the debtor;
11. Whether there was a sudden change in the debtor’s buying habits; and
12. Whether the purchases were made for luxuries or necessities.
In re Dougherty, 84 B.R. at 657.
I conclude that the approach of In re Dougherty, which avoids the fiction of an *348implied representation, is the preferable approach in § 523(a)(2)(A) credit card cases, and will accordingly apply this analysis, with its various factors, to the case currently before the court.
DISCUSSION
Counsel for Mercantile Bank asserts that the entire unpaid balance of credit card debt owed it by the debtor should be determined nondischargeable because, as a result of the debtor’s financial condition, the debtor knew or should have known that he could not repay the amounts charged. In essence, counsel for Mercantile Bank asserts that the financial condition of the debtor at the time the charges were made should be the controlling factor in the court’s analysis, and that the court should conclusively presume actual fraud on the part of the debtor. I decline to accept this position. While the financial condition of the debtor at the time the charges were made is a relevant factor, I conclude that it is only one of numerous factors to be considered by the court, and it is not decisive on the issue of intent. It is important that courts soundly reject the proposed conclusive presumption arising from an objective inability to repay debt because its adoption would bestow upon the issuers of credit cards an unheralded bankruptcy preference. The fact is that nearly all bankruptcy debtors are hopelessly insolvent and have incurred debt at a time when they had an objective inability to pay. The first defense to such credits by a lender is sound loan underwriting. Where a lender finds itself in bankruptcy, its debt should not be excepted from discharge on the simple theory that the debtor had an inability to repay the debt at the time the debt was incurred. Such a presumption would discourage prudent underwriting by lenders because in bankruptcy the lenders’ debt would be nondischargeable. A debtor’s insolvency is simply a factor to be considered in determining whether or not the debtor intended to repay a debt. Insolvency should not result in a conclusive presumption that a debtor lacked the requisite intent to repay a debt. As in the law of fraudulent conveyances, insolvency is an indicia of fraud; it does not create a presumption of fraudulent intent.
After applying the factors of In re Dougherty to the facts of this case, I conclude that the debtor intended to repay the amounts charged at the time the charges were made. The charges in issue occurred over a five month period, which ended approximately a month before the bankruptcy was filed. In addition, there were numerous charges involved, some of which occurred on the same day or were within close proximity, and all of the charges were made at a time when the debtor was in financial difficulties. However, I conclude that these factors are counter balanced by the other factors of In re Dougherty.
The debtor did not consult an attorney about filing bankruptcy until nearly a month after making his last purchase on the Mercantile Bank card. In addition, the debtor never exceeded the credit limit on the Mercantile Bank card and continued to make minimum monthly payments even after his last use of the card and until immediately before filing bankruptcy. The debtor was gainfully employed at the time the charges were made, and was working extensive hours on the road. He was also attempting to work side jobs when possible to supplement his income. The debtor was not financially sophisticated. There was no sudden change in the debtor’s buying habits, although the debtor’s use of credit increased somewhat prior to bankruptcy, as the debtor used the Mercantile Bank card in similar fashion to the other credit cards he had maintained for numerous years. Finally, the vast majority of the charges involved were for necessary expenses during the debtor’s travel for work or to meet daily living expenses, rather than for luxury items of personal enjoyment. Therefore, it does not appear that the debtor was attempting to deceive Mercantile Bank in the use of his credit card or to manipulate his credit improperly.
Finally, I note that the argument of Mercantile Bank as to the financial condition of the debtor appears somewhat misplaced given the context of this case. The credit card in question was issued only six months prior to bankruptcy, at a time when the debtor’s financial situation was basically the same as it was at the time of the bankruptcy *349filing. Despite the debtor’s extensive credit card debt on his seventeen other credit cards, Mercantile Bank solicited the debtor with a pre-approved credit limit of $2,000.00 and approved the debtor after a preliminary credit check. The debtor at no time exceeded the credit limit which he was authorized to use. Interestingly, at about the same time as the debtor was approved for a credit card by Mercantile Bank, the debtor was turned down by General Motors for a pre-approved credit card. This is not to say that the practices of Mercantile Bank are unusual or unacceptable from a business standpoint. However, I conclude that Mercantile Bank can not now take advantage of its own procedures to obtain a per se determination of nondisehargeability based upon an objective inability to repay. This is particularly true where the inability to pay existed at the time the credit card was issued and there was no misrepresentation or fraud in connection with issuance of the card.
A separate order shall be entered holding that the credit card debts at issue in this case are dischargeable. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492115/ | MEMORANDUM OPINION
JUDITH K. FITZGERALD, Bankruptcy Judge.
The matter before the court is an adversary action to determine the dischargeability of debt under 11 U.S.C. § 523(a)(2)(B). The court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334. This is a core proceeding under 28 U.S.C. § 157(b)(2)(I).
The action arises from a home improvement loan Debtors obtained from PNC Bank, N.A. (PNC), in July, 1993. PNC approved the loan based upon a credit application which was submitted on July 21, 1993, by Debtors through Jerico Builders, Inc. (Jeri-co), a home improvement company. It is undisputed that the majority of the information contained on the credit application (Plaintiffs Exhibit 1) is true and correct. It is also undisputed that the application materially misstates the annual income of Debtor Frank Rodriguez and the nature of his employment. The document indicates that Mr. Rodriguez was employed as an officer of the Bank of Lancaster with an annual income of $39,000.00 as of July 1993. Debtors admit that Mr. Rodriguez was not an officer of the bank but rather was a senior adjuster and that his income was approximately $20,-000.00. Debtors’ combined annual income was reported on the application to be $51,-000.00 ($39,000 for Mr. Rodriguez and $1,000 per month for Mrs. Rodriguez) when, in fact, their actual adjusted gross income per their 1993 federal income tax return was $38,735. See Plaintiffs Exhibit 3.1 Debtors contend that they are not responsible for the inaccuracy of the information on the application because they signed the document in blank. Debtors further assert that they provided true and correct information concerning their annual income to the representative of Jerico who interviewed them for the purpose of assisting them with the credit application.
Testimony at trial established that sometime in early July of 1993 a canvasser for Jerico, going door-to-door, approached Mrs. Rodriguez and asked whether she was interested in home improvements. She indicated that she was willing to talk with Jerico at a time when her husband could also be present.
Subsequently, Larry Boyd, a Jerico representative, called Debtors, made an appointment, came to visit them, demonstrated replacement windows and displayed floor tile samples. Debtors decided that they were interested in making home improvements and, as a result, Mr. Boyd returned to their home and obtained from them certain personal information, including the nature of their respective employments and their incomes. Debtors aver that, although Mr. Boyd had with him a blank loan application form like Exhibit 1, he told Debtors that he had other appointments, but no other forms, and asked them to sign the form in blank. According to Debtors, they signed the form in blank.2 According to a witness from Jeri-co, Hal Paul, Vice President and General Manager of Jerico, the form was not signed in blank; rather the following events occurred:
Larry Boyd contacted Mr. Paul by telephone to provide him with Debtors’ credit information. In turn, Mr. Paul completed the credit application form. See Plaintiffs Exhibit 1. Mr. Paul testified that after he filled in the form and some other documents, he returned to Debtors’ house with the form and the documents and reviewed the information contained therein with Debtors. On July 21,1993, according to Mr. Paul, Debtors signed the application and the Home Im*470provement Installment Contract, see Plaintiffs Exhibits 1, 2, as well as a number of other forms that were not introduced into evidence. Mr. Paul testified that Debtors signed the application in his presence. Debtors testified that they did not sign the document in his presence.
The testimony established that the completed application was faxed by Jerico to PNC where the data was put into PNC’s computer. Sandra Gould, an employee of the bank, testified that she reviewed the information from the credit application on her computer screen to determine whether Debtors were creditworthy. Ms. Gould did not see the application itself. She also obtained and reviewed Debtors’ credit report. She testified that PNC is willing to approve home improvement loans of the nature involved in this case if the debt to income ratio does not exceed 40 percent. Based upon the amount of debt and income information that appeared on Debtors’ application and their credit report, PNC determined that Debtors’ debt to income ratio was 38 percent. Ms. Gould testified that had the application correctly indicated that Mr. Rodriguez’s income was only $20,000.00 annually, the debt to income ratio would have been higher than 40 percent and the loan would have been refused. Debtors, however, assert that even had Mr. Rodriguez’s income been stated accurately, based upon their actual 1993 income as reflected in their tax return, they would have qualified for the loan. Debtors contend that, using a 40 percent debt to income ratio, they would have been slightly under the maximum 40 percent ratio. PNC counters that in signing the application in blank, Debtors acted with such reckless disregard of the truth that their obligation to the bank should be declared to be nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(B). Moreover, according to PNC, even if Debtors’ version of the facts is believed and they told Jerico that their annual income was $20,000 for Mr. Rodriguez and $9,600 to $12,000 for Mrs. Rodriguez, PNC would have relied on the income reported on the July application, not on a tax return which contained income through December. The tax return listed two additional sources of income for Mr. Rodriguez that were never mentioned in the July application, and the total income from those two sources was $6,934.44. The undisclosed $6,934.44 is the income which, when combined with the $29,600 to $32,000 allegedly reported by Debtors to Jerico would have put Debtors within the 40 percent debt ratio acceptable to PNC.
PNC contends that the main dispute centers on whether Debtors intended to deceive PNC. Debtors assert that PNC’s reliance on the application was not reasonable. PNC seeks judgment for the following damages:
Principal Balance as of 5/94 $15,071.64
Interest, 5/94 to date 1,498.65
Attorney’s Fees 1,379.45
Expenses 121,00
Total $18,070.74
To establish nondischargeability under § 523(a)(2)(B), PNC must prove, to a preponderance of evidence, that Debtors obtained their financing with an intent to deceive, using a written statement that they published or caused to make that contained materially false information pertaining to their financial condition upon which the bank reasonably relied. 11 U.S.C. § 523(a)(2)(B); Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991); In re Cohn, 54 F.3d 1108 (3d Cir.1995).
First, we will examine Debtors’ contention that they would have been eligible for the loan based on their annual adjusted gross income of $38,735.00 as shown in Exhibit 3, the 1993 tax return. In July, 1993, when Debtors requested the home improvement loan, Debtors did not have available to them all of the information which appears on the tax return. For instance, Debtors testified that they told the Jerico representative that Mr. Rodriguez’s income was between $19,000 and $20,000 a year and that Mrs. Rodriguez’s income was between $800 and $1,000 per month ($9,600 to $12,000 per year), a total maximum combined income of $32,000. At no time did Debtors disclose to PNC (or acknowledge at trial) either additional income or its source. The extra, nondisclosed income is the difference between the combined income figure testified to by Debtors and that shown on their tax return, Exhibit 3. Therefore, to the extent Debtors failed to disclose the additional income, they published *471or caused to be published to PNC a materially false statement.
Furthermore, it is unclear when Debtors earned the additional income. If it was earned prior to the submission of the loan application, they should have disclosed it, and failing to do so was a material falsity. On the other hand, if the additional income was earned after Debtors filed the loan application, it would not have made Debtors eligible for the loan because the only income relevant to determining their loan eligibility was that known to Debtors and disclosed to the bank at the time Debtors applied for the loan. The court credits Ms. Gould’s testimony that had the application reflected Debtors’ acknowledged income of $32,000, as they testified it should have, they would not have been eligible for the loan since their debt-to-in-eome ratio would have been 47 percent: i.e., $1,260 (monthly debt obligation) divided by $2,667 (monthly income).
Therefore, we must determine whether, as PNC alleges, Debtors intended to deceive PNC or whether PNC reasonably relied on the loan application. The resolution of the dispute with respect to Debtors’ intent depends primarily on which version of the facts is credited. The court credits the version advanced by PNC and finds that Mr. Paul presented the completed application to Debtors for their review before it was submitted to PNC.
Mr. Rodriguez’s assertion that he signed the loan application in blank is not credible. Debtors admitted that Mr. Rodriguez was employed as a senior adjuster with a bank. Although he stated that his position did not routinely involve reviewing applications for credit, he testified that he had dealt with credit applications on an infrequent basis but knew a lender would rely on the information in an application to make or deny a loan. A person with his occupation and experience should appreciate the significance of signing a document in blank. Mr. Rodriguez testified that he thought it was “strange” that he was asked to sign a blank application. Even if we were to credit Debtors’ version, we conclude that signing financial statements or “submitting forms in blank, without concern or knowledge of their content on completion,” amounts to gross recklessness and establishes an intent to deceive. In re Weiner, 86 B.R. 912, 915 (Bankr.N.D.Ohio 1988), citing Massey-Ferguson Credit Corp. v. Archer, 55 B.R. 174 (Bankr.M.D.Ga.1985).
In In re Weiner, supra, the debtor was an educated businessman who signed and submitted a loan application and a personal financial statement in blank. The court found that such conduct amounted to gross recklessness regarding the veracity of the documents and thereby constituted an intent to deceive. 86 B.R. at 915. In the instant matter, regardless of when Debtors signed the application, we find that they had an opportunity to review and revise the completed form before it was submitted to PNC because it was presented to them by Mr. Paul. Immediately above Debtors’ signatures on the loan application is the statement that “[ejverything that I have stated in this application is correct to the best of my knowledge.” Plaintiffs Exhibit 1. Therefore, we find that Debtors intended to deceive the lender3 when they signed the application containing inaccurate income figures.
We also find that the information on Debtors’ application was materially false. Debtors significantly overstated their income by listing it as $51,000, which is $19,000 more than the $32,000 they admitted in court and $12,265 more than their actual income of $38,735. This clearly qualifies as a material falsity and a substantial untruth.4
In In re Cohn, 54 F.3d 1108 (3d Cir.1995), the Court of Appeals for the Third Circuit held the debtor responsible for false informa*472tion provided on an application form by the representative of the financial company from which the debtor was applying for a surety. The debtor relied upon the representative to fill out the application and related documentation using information the debtor had previously provided to the representative. After the representative completed the application, the debtor reviewed it (although he contended he did not read each page) and signed it. On the signed application, however, was the following representation:
... THE UNDERSIGNED FURNISH THIS APPLICATION AND THE INFORMATION CONTAINED THEREIN INCLUDING A TRUE AND ACCURATE STATEMENT OF THE UNDERSIGNED’S FINANCIAL CONDITION AS OF THE DATE OF THIS APPLICATION.
In re Cohn, 54 F.3d at 1112. The court, in finding the debtor responsible for the false information filled out by the representative, pointed out that the debtor signed the application and made representations to the creditor upon which the creditor relied. Id. at 1119.
Similarly, in this case, Debtors cannot escape responsibility for the false information on their loan application form. The documentary evidence and credible testimony presented to this court establish that, although Debtors did not fill out the loan application form, they signed it, made the representations on it, and reviewed it in completed form before it was submitted to PNC. In permitting the application to be submitted containing a substantial misstatement of their income, Debtors acted with such reckless disregard of the truth that they are deemed to have had the requisite intent to deceive PNC.
We further find that PNC reasonably relied on the completed signed application inasmuch as it adhered to its standard lending practices and credit verification procedures. Sandra Gould, an employee of PNC, testified that she verifies employment only if it is of less than two years’ duration. Mr. Rodriguez had worked for the Bank of Lancaster for more than two years and Mrs. Rodriguez had been employed for about four years. Based on Ms. Gould’s experience and the fact that she occupied a position similar to that of Mr. Rodriguez as stated in the loan application, she did not verify his employment. Mr. Rodriguez’s length of employment, position, and amount of income as stated in the application obviated the necessity for verification.5 In In re Cohn, the Court of Appeals discussed the reliance element of § 523(a)(2)(B) and concluded that it is met if the false statement is “capable of influencing, or had a natural tendency to influence, a creditor’s decision.” 54 F.3d at 1115. Ms. Gould substantiated PNC’s actual reliance on the application. The discrepancy between the actual and reported income figures is substantial and the court finds that it was material to PNC’s decision to award the loan. The amount of income stated on the application compared to Debtors’ existing debt was a pivotal factor in PNC’s decision to make the loan to Debtors. Ms. Gould’s testimony concerning the standard for approval of this type of loan was uncontradicted. Furthermore, there were no red flags in the credit application or credit report that would have put PNC on notice to investigate Debtors’ financial situation further. In re Cohn, 54 F.3d at 1117.6
In light of the foregoing, we find that Debtors’ representations on their loan application were materially false, that Debtors knew of the falsity, failed to correct it when given the opportunity and, therefore, intended to deceive PNC, and that PNC would not have made the loan had it known of Debtors’ *473true financial condition. Given the totality of the circumstances, Debtors exhibited a reckless disregard for the accuracy of the information on the application. Such conduct is sufficient to allow the inference of an intent to deceive the creditor. In re Cohn, 54 F.3d at 1118-19. Debtors’ obligation to PNC is nondischargeable.
An appropriate Order will be entered.
ORDER
And now, to-wit, this 2nd day of August, 1995, for the reasons set forth in the foregoing Memorandum Opinion, it is ORDERED, ADJUDGED AND DECREED that the obligation of Debtors, Frank and Carmen A. Rodriguez, to PNC Bank, N.A., in the amount of $18,070.74 is nondischargeable.
The Clerk shall close this adversary.
. Plaintiff’s Exhibit 3 is a copy of Debtors’ 1993 federal income tax return and W-2s.
. We note that immediately preceding their signatures is the following statement: This application for credit sale will be submitted to PNC Bank,.... Everything that I have stated in this application is correct to the best of my knowledge....
. Mr. Rodriguez testified that he did not read the name “PNC” on the application. He believed it would be presented to a government agency for a loan, not to a bank, but he knew it would be given to a lender.
. The Court of Appeals for the Third Circuit recently stated that: “Material falsity has been defined as ‘an important or substantial untruth.’ A recurring guidepost used by courts has been to examine whether the lender would have made the loan had he known of the debtor's true financial condition." In re Cohn, 54 F.3d 1108, 1114 (3d Cir.1995), citing In re Bogstad, 779 F.2d 370, 375 (7th Cir.1985).
. Hal Paul testified that Jerico obtains a credit report but the lending bank must verify income if it chooses to do so.
. Cohn recited three factors by which to determine reasonable reliance: "(1) the creditor’s standard practice in evaluating credit-worthiness ...; (2) the standards or customs of the creditors’ industry in evaluating credit-worLhiness ...; and (3) the surrounding circumstances existing at the time of the debtor’s application....” 54 F.3d at 1117. Although there was no evidence submitted regarding industry standards with respect to the evaluation of credit-worthiness, the result does not change inasmuch as Debtors presented no testimony or evidence to refute the reasonableness of the credit application review procedures employed by Ms. Gould. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492117/ | *540DECISION and ORDER RE CONFIRMATION
BURTON PERLMAN, Bankruptcy Judge.
Debtor in this single asset Chapter 11 real estate case filed a disclosure statement and plan. This case was set on a fast track by the court, and hearing on the disclosure statement and on confirmation were scheduled for the same time. Objections to the plan were lodged by Beal Bank S.S.D., the first mortgagee, and also by Clough Creek Limited (“Limited”), holder of a second mortgage. Prior to the hearing, debtor modified its plan by setting up a new class consisting of an otherwise unsecured creditor holding a certificate of judgment lien. Limited filed a motion calling this modification into question, and as well filed a specific objection to confirmation because of this modification. Additionally, at the hearing, debtor orally moved and expects forthwith to move in writing, for a further modification of its plan, so that unsecured creditors in Class 4 are paid interest on their claims at 9%.
A historical note of the case should be inserted here, as to two prior events in the court in this case. First, debtor is and throughout the pendency of the case, and indeed, for the past two years, has been out of possession of the Clough Creek Apartments, the property here involved. (Such property will hereafter be referred to as “the subject property.”) The subject property consists of ten units which have a total of 164 residential apartments. Secondly, Limited, the objector, purchased the claims of a sufficient number of creditors in Class 4 to control that class. That class has voted against confirmation.
Debtor earlier in the case moved that Limited be designated pursuant to § 1126(e) for this action. The court denied the motion. In connection with this point, a question about the existence of a bar date for claims in the case arose. FRBP 3003(c)(3) provides that the court shall fix a bar date. This court has done so at LBR 3.13 which provides that proofs of claim must be filed no later than the later of ninety days after the first date set for the § 341 meeting of creditors, or ninety days after the filing of an amendment to schedules. In the present case, debtor did not file its schedules until after the ninety days for the § 341 meeting of creditors had passed. At the hearing, we informed the parties that it was the ruling of the court that there was presently no bar date applicable to claims in this case, because it would be manifestly unfair to utilize the ninety day after the first meeting of creditors bar date, because creditors were not informed of the case until after that period had passed. Clearly, this arm of LBR 3.13 contemplated that schedules would be filed within the times contemplated in FRBP 1007(c). Nor is the other limitation in LBR 3.13(a) applicable here, because there were no amendments to the schedules. In these circumstances, we informed the parties that we had concluded that there was presently no applicable bar date. Consequently, the filing of the transferred claims by Limited were timely.
This court has jurisdiction of this matter pursuant to 28 U.S.C. § 1334(b) and the General Order of Reference entered in this District. This is a core proceeding aiising under 28 U.S.C. § 157(b)(2)(L).
At the hearing, the objection to confirmation by Beal Bank was dealt with and disposed of by agreement of debtor to modify its plan. Debtor had contemplated that Beal Bank, holder of the first mortgage, be unimpaired. Beal Bank took issue with this by pointing out that a provision of the plan provided for prepayment without penalty, while its note provided otherwise. Debtor conceded the point, and agreed to modify its plan by limiting the prepayment without penalty provision so that it did not apply to Beal Bank. Thereupon, Beal Bank withdrew its objection.
Debtor then presented evidence by way of the testimony of Jacob Feldman, comptroller of LCL Management, the debtor affiliated entity which would undertake management of the subject project if debtor regains possession, and also by Elliot Liebowitz, general partner of the organization which is the debt- or limited partnership, and also a principal in LCL Management. The purpose of the testimony of these witnesses was to establish that debtor’s plan complied with all the appli*541cable statutory requirements. We hold that they were successful in establishing a prima facie case to this effect.
We turn then to the objections by Limited, and address first what is a fundamental matter in this case. By its witnesses, Limited questioned the validity of the projections presented by debtor in its disclosure statement for the years 1995,1996, and 1997. Particularly, the thrust of the evidence offered by Limited was that, first, rental income was overstated, and capital expenses were understated. As to rental income, debtor had based its projection for 1995 on the occupancy rate of 95% for the subject property which was true for December 1994 as reflected in the receiver’s report, remembering that it is the receiver which is in possession. The evidence of Limited was that the occupancy rate several months later had declined to 85%, and therefore the rental income projected for 1995 is unrealistically high. After a careful review of the evidence in the record, we are unpersuaded that debt- or’s projection of rental income for 1995 is invalid. Further, Limited questions the projected capital expense figures in the debtor’s figures for 1995 and years thereafter. Again, we are unpersuaded that the figures offered are not realistic, and we accept the testimony of debtor that the capital needs can be made over a period of time rather than all at once. In part, this is based upon the fact that the receiver made very large expenditures for carpeting in 1994, and consequently, a capital expense for carpet will be less for the following year. As a result of all the foregoing, we hold that debtor’s plan is feasible.
In addition to its attack on debtor’s plan as not feasible, Limited argues that the requirement of § 1129(a)(10), that there be an accepting impaired class is not met. The step which debtor took of modifying its plan to separately classify the Bailey claim, distinguishing it from other unsecured claims because Bailey held a certificate of judgment lien, was taken for the purpose of creating an accepting impaired class. Bailey has accepted the plan. Limited objects to this modification, asserting that, first, that Bailey’s lien is unperfected and therefore it is improper to regard him as a secured creditor. Secondly, Limited argues that if Bailey is recognized as a secured creditor for classification purposes, there is another creditor in the very same position, and that other claim has voted against the plan. The requirement, then, says Limited, relying on 11 U.S.C. § 1126(c), that there be an accepting impaired class is not met, because for acceptance there must be more than one-half in number of the allowed claims of the class voting in favor.
In this case, we have earlier made reference to the step taken by Limited to acquire claims sufficient to cause a negative vote on the plan by Class 4. The step by debtor in creating the new class with the Bailey claim was in reaction to that step by Limited. This court disfavors technical maneuvering, and believes that matters should depend for decision upon the real issues in a case. Where, as here, one party makes a move for tactical reasons only, to which the other party responds by a counterbalancing tactical move, we are not inclined to look too closely at whether debtor has jumped all the hurdles under state law to qualify its claim. Had Limited not taken the step that it did in respect to Class 4 creditors, that class might well have voted in favor of the plan. We hold that debtor’s step in setting up a separate class consisting of a creditor holding a judgment lien is sufficient to justify the existence and legitimacy of that class. The second ground by Limited, that the other creditor holding a like judgment lien voted against the plan, cannot avail Limited, for that creditor has taken no step to separate itself from Class 4.
Finally, we must deal with the further modification of the plan proposed by the debtor, that unsecured creditors, who are to receive 100% in deferred payments under the plan, be paid 9% interest, and the implications of that proposed modification. The structure of debtor’s plan leaves the position of equity unchanged, that is, the debtor continues to own the subject property. That outcome could not be challenged (without resort to cramdown) if the unsecured creditor class were unimpaired. Debtor’s proposed modification appears to be a concession that the unsecured creditor class is im*542paired. We reach this conclusion because the proposed modification appears to have for its purpose a compliance with § 1129(b)(2)(B)(i). The Code there provides:
* * H* * H* H«
(b)(2) For the purpose of this subsection, the condition that a plan be fair and equitable with respect to a class includes the following requirements:
# H* Hs H*
(B) With respect to a class of unsecured claims—
(i) the plan provides that each holder of a claim of such class receive or retain on account of such claim property of a value, as of the effective date of the plan, equal to the allowed amount of such claim; or
Hs Hi Hi Hi * Hi
The question, then, is whether by its proposed modification, debtor has succeeded in meeting this provision. Debtor has indeed provided for the payment of unsecured creditors at 100%. Such payments are not, however, payable in cash on the effective date. Instead, deferred payments over a period of time are provided. In order to meet the quoted language where deferred payments are contemplated, interest must be paid. Debtor’s modification provides for interest at 9%. Limited questions the adequacy of 9% interest. In closing argument, its counsel asserted that interest at 11.5% was required. We find the present record to be inadequate to establish either proposal as the correct interest rate. Accordingly, we set this matter for further hearing on the interest issue only, on Wednesday, July 19,1995, beginning at 10:00 a.m., in Courtroom 817, U.S. Bankruptcy Court, Atrium Two, 8th Floor, 221 East 4th Street, Cincinnati, Ohio.
So Ordered.
SUPPLEMENTAL ORDER
In our Decision and Order Re Confirmation entered July 11, 1995, we resolved all issues raised by Clough Creek Limited (“Limited”) to confirmation, except for one issue. Referring to § 1129(b)(2)(B)(i), we said that the record was inadequate to establish an interest rate on account of the plan provision for deferred payments. We set a further hearing for July 19, 1995, limited to that issue only, and that hearing was held. Counsel for the debtor, as well as counsel for Limited, appeared.
In our prior decision we said:
... Debtor’s modification provides for interest at 9%. Limited questions the adequacy of 9% interest. In closing argument, its counsel asserted that interest at 11.5% was required. We find the present record to be inadequate to establish either proposal as the correct interest rate.
At the July 19, 1995 hearing, counsel for both parties agreed that the proper rate of interest to be applied was the market rate. Neither party, however, presented evidence to establish such a rate. Both parties at the hearing made reference to a rate applied by the state courts of Ohio on accounts in the absence of a written contract otherwise. See ORC § 1343.03. The interest rate prescribed by that section is 10%. Particularly in view of the record before us, we find this to be a reasonable basis upon which to establish market rate for purposes of § 1129(b)(2)(B)(i), and hold that 10% is the “correct interest rate” to be applied in the case before us.
This Supplemental Order, together with our Decision and Order Re Confirmation entered July 11, 1995, constitute a final order. On July 19, 1995, Limited filed a motion for reconsideration. This is to be regarded as though filed subsequent to final order. Limited shall have until July 28, 1995 to supplement its motion for reconsideration, or to advise the court that it does not wish to do so. Debtor shall then have until August 7, 1995, to respond to the motion for reconsideration.
So Ordered. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492118/ | DECISION and ORDER ON APPLICATION TO REOPEN
BURTON PERLMAN, Bankruptcy Judge.
Pursuant to 11 U.S.C. § 350(a) this Chapter 7 bankruptcy case was closed February 17, 1994. Debtors have now, pursuant to § 350(b), moved to reopen the ease.
This court has jurisdiction of this matter pursuant to 28 U.S.C. § 1384(b) and the General Order of Reference entered in this District. This is a core proceeding arising under 28 U.S.C. § 157(b)(2)(B) and (0).
On about September 14, 1994, Schriber Sheet Metal Company (hereafter “Schriber”) filed a complaint in the Common Pleas Court of Montgomery County, Ohio, naming debtors as defendants. Also named as defendants were John R. Davis and Marlene Davis, Energy Management and Conservation Corp. (hereafter “EMCC”), Tri-State Disposal and Recycling, Inc., dba Tri-State Tire Disposal, cjo Robert Anderson, and David R. Wiechel. In the balance of this paragraph we summarize the allegations of the complaint. It is alleged that the Davises were officers and directors of EMCC, while the Andersons were officers and directors of Tri-State. Defendant Wiechel was president of EMCC. Both Tri-State and EMCC utilized the trade name “Tri-State Tire Disposal.” Prior to April, 1992, the Anderson defendants operated Tri-State. The business of Tri-State was collecting, processing, sorting, and disposing of discarded auto and truck tires. The Andersons owned and operated a site near Cleves, Ohio, where TriState deposited scrap tires which it had collected. Prior to October, 1992, action was brought against Tri-State and the Andersons in Hamilton County Court of Common Pleas requiring them to clean up an accumulation of scrap tires. An order was issued thereon requiring that the site be brought into regulation by November 30,1992. On September 26, 1992, the Andersons sold the Tri-State business to EMCC.
Prior to October 1, 1992, Wiechel approached Schriber for the purpose of leasing a warehouse building located at 235-237 South Kilmer Street in Dayton, Ohio (“the Building”). Schriber did then, effective October 1, 1992, lease the premises to EMCC. EMCC thereafter continued its business of acquiring scrap tires. On or about December 4, 1992, the Davises permitted Anderson to remove substantial quantities of scrap tires and bring them to the Building. Between December 4, 1992 and March 9, 1994, a large quantity of tires were packed into the Building. On or about March 23, 1994, the Building was declared to be a nuisance by the City of Dayton, and Schriber was ordered to remedy the situation. Based on the foregoing allegations, Schriber seeks relief *544against the named defendants, including debtors. It is noteworthy that in its second claim for relief in the state court action, Schriber complains about the creation and the maintenance of a nuisance by defendants.
In support of its motion to reopen, debtors invoke In re Rosinski, 759 F.2d 539 (6th Cir.1985). Since this was a no asset case and we perceive no irremedial prejudice to the creditor, nor has it been suggested that there was any fraud or intentional design in the failure to list the creditor, ordinarily Rosin-ski would dictate that the case be reopened without further discussion, except that we would allow an opportunity to contest dis-chargeability. Schriber, however, vigorously contests reopening. It says that it was not scheduled as a creditor nor did it have actual knowledge of the commencement of the case in time to file a proof of claim, or in time to file a request for determination of discharge-ability, and therefore its claim, pursuant to 11 U.S.C. § 523(a)(2) could not in any ease be barred. This argument is flawed, however, because of the nature of the claim asserted by Schriber against these debtors. That claim is for committing a nuisance, and debtors can equally say that they were unaware of the claim in time to schedule it. At the hearing, a further consideration was discussed, and that was whether Schriber’s claim arose only post-petition. If this were so, it would not be subject to discharge.
After careful consideration, we have reached the following conclusion. The fact that what Schriber asserts is a claim on account of a continuing tort which, as stated in its state court complaint, is alleged to have begun prior to the filing of debtors’ bankruptcy case. That the claim is of this nature makes the case unusual and the authorities suggested by the parties inadequate. For this court to reach a conclusion as to the propriety, in accordance with bankruptcy law, of the dischargeability of all or any part of the claim asserted by Schriber against these debtors, would require us to undertake a consideration of a part of the litigation pending in the state court. This seems to us not the best use of judicial resources.
Accordingly, we take the following action. Debtors’ motion to reopen is granted. At the same time, we lift the stay which prohibits Schriber from continuing its state court litigation against these defendants. Our lifting of the stay is conditioned as follows: (1) there may be no execution on any judgment against debtors, but any such judgment will be subject to review and further proceedings in this court; and (2) we request that the Common Pleas Court which tries the ease, whether by the court or by a jury, specially find, in the event that liability on the part of debtors is determined to exist, (a) what portion of the claim is attributable to the period prior to the date of bankruptcy, September 8, 1993, and (b) whether action by the debtors or either of them which provides the basis for liability, was willful.
So Ordered. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492119/ | ORDER
JAMES G. MIXON, Chief Judge.
On October 16, 1991, George F. and Marie Louise Baldwin (Debtors) filed a voluntary petition for relief under the provisions of Chapter 11 of the United States Bankruptcy Code. Daniel K. Schieffler (Schieffler) was appointed Chapter 11 trustee on February 6, 1992, and on July 15, 1994, the case was converted to Chapter 7 and Schieffler continued as trustee.
On March 23, 1993, Schieffler filed an adversary proceeding against Mike Pryor and Linnette Pryor (the Pryors). Schieffler’s complaint alleged in substance as follows: That in 1988 the Debtors and the Pryors entered into an agreement for the sale of a land title abstracting business owned by the Debtors for the sum of $115,000.00, payable at closing. As part of the contract, the Debtors agreed not to compete with the Pryors in the operation of an abstract or title business for an initial term of eighteen months. The contract further provided that the covenant not to compete would thereafter be renewed through June 20, 2000, by payments as follows:
$5,000.00 July 1, 1991
$7,500.00 July 1, 1992
$7,500.00 July 1, 1993
$7,500.00 July 1, 1996
$7,500.00 July 1, 1997
$7,500.00 July 1, 1998
$7,500.00 July 1, 1999
Schieffler’s complaint alleged that the Pryors failed to pay the installment of $7,500.00 due on July 1, 1992, and Schieffler therefore, sought judgment for $7,500.00, plus interest and attorney’s fees from the Pryors.
The Pryors filed several responsive pleadings culminating in a pleading styled “Amended Counterclaim and Third Party Complaint.” The counterclaim sought relief against Schieffler as trustee and individually. The allegations against Schieffler are summarized as follows: That the contract of sale included a lease of certain real property owned by the Debtors (presumably the real property upon which the abstract business was conducted), which expired at the end of 1993. That pursuant to the lease agreement the Debtors would maintain the “building at 415 Union Avenue, Jonesboro, Arkansas” in a reasonable state of repair and that the Debtors warranted good title and quiet and peaceful possession to the premises. The counterclaim alleges that the Debtors and their successor, the trustee, have failed and refused to maintain the building in good condition, and have failed to clean the common areas. The counterclaim also alleges that the Debtors and their successor, the trustee, have “breached the terms of the lease agreement providing for peaceable and quiet enjoyment of the demised premises.”
More specifically, the counterclaim asserts that the Debtors and the trustee violated the covenant of peaceful and quiet enjoyment by “the fact that there was continuing interruption caused by prospective buyers” and that the Debtors and the trustee failed to pay over “the monies which had been collected from the lease benefits to the secured creditor [sic].” The counterclaim further alleged:
Said Daniel K. Schieffler and George F. Baldwin, Jr. and Marie Baldwin failed to pay the real estate taxes on the premises and allowed them to go delinquent, and even allowed the secured creditor to take action because of their failure and refusal
*560to pay on the indebtedness owed to said secured creditor, which affected the rights of the defendants to continued possession and use of the premises. In order to preserve said right to continued use and possession, among other things, these defendants were thereby required to pay a premium upon the premises to purchase same to preserve said rights. Said actions amounted to a breach of the right to peaceful and quiet enjoyment which had been warranted to the defendants by debtors and subsequently, in lieu thereof, by Daniel K. Schieffler, Trustee.... [W]hen the trustee took over, he made multiple threats of eviction and legal action, among other acts, seeking to collect additional rental sums for the use of said second floor area, without any concession or attempts to correct the defaults and the failure of the debtors to clean the premises or maintain same.
5. Said Daniel K. Schieffler acted both in his official capacity and outside his official capacity when an initial contract for sale was executed by the parties herein being Mike and Linnette Pryor, with said Daniel K. Schieffler, Trustee, offering to purchase said property. Said offer was accepted by Daniel K. Schieffler as trustee and the Court was petitioned by him for approval of same. After the contract was executed, said Daniel K. Schieffler, both as trustee and individually, as these acts may well have been and should be considered to be outside the realm of his official duties and authority, then actively solicited other individuals in a tortious manner to increase the offers over and above that made by the Pryors which had already been accepted, advising that he would then present the new offers. This amounted to a tortious interference with the defendants’ contract, so that both Daniel K. Schieffler, as trustee and individually, should be held liable for damages, both nominal and actual, for said actions.
6. Additionally, the debtors, George F. Baldwin, Jr. and Marie Baldwin also further violated the provisions of their agreement not to compete under the contract between the parties, in that George F. Baldwin, Jr. communicated directly with and solicited from a direct competitor of the defendants’ business to attempt to, and did obtain, an offer which, among other things, required the ouster of the defendants’ from the building as a part of the acceptance of the offer. It was then tendered by said Daniel K. Schieffler, Trustee, as a bona fide offer to the defendants in an attempt to require them to meet the offer or lose their right of first refusal. The offer on its face is not reasonable, not in good faith and was a wrongful attempt to force the defendants to increase their offer or. lose their tenancy and market position.
7.Said George F. Baldwin, Jr. directly solicited this unreasonable offer and supplied it to said Daniel K. Schieffler, who, individually and as trustee, provided same to the Pryors. Daniel K. Schieffler, Trustee, was purporting to act as the trustee and in the position of the debtors in his actions. Said actions required the defendants to incur attorney’s fees and costs in dealing with said matters, and caused them substantial concern, worry and loss of time as a result of having to deal with these matters. Said actions by the trustee and Baldwin were clearly taken only for the purpose of attempting to extract additional monies from the defendants without legal basis or justification. These actions were taken with a clear intent to effectively extort funds from, the defendants and to bring improper pressures to bear contrary to the contract provisions, as such offers posed by a direct competitor clearly required the defendants to be removed from the premises. This was in direct competition to their ongoing business at that location, thereby causing substantial loss and disruption if it occurred. The intent was tortious and the actions intentional, along with those of said Daniel K. Schieffler when he acted in attempting to interfere with the offer and acceptance which had been previously executed so that these counterclaimants and cross-complainants should have substantial judgment against all defendants, or such of them as the Court deems reasonable and proper for all damages.
*561Schieffler, as trustee and individually, filed a motion to dismiss the counterclaim pursuant Fed.R.Bankr.P. 7012. Schieffler argues in his brief in support of his motion that the counterclaim does not allege any facts to constitute a cause of action against Schieffler as trustee or individually. Schieffler also argued at oral argument that, as a bankruptcy trustee, he has derived immunity for his actions.1
DISCUSSION
For purposes of a motion to dismiss for failure to state a cause of action under Fed.R.Civ.P. 12(b)(6), the factual allegations of the complaint are presumed to be established and all reasonable inferences are made in favor of the nonmoving party. Harrison v. Springdale Water & Sewer Comm’n, 780 F.2d 1422, 1425-26 (8th Cir.1986).
A motion to dismiss under Fed. R.Civ.P. 12(b)(6) requires the Court to consider only the pleadings actually filed, although all reasonable inferences from the facts alleged must be liberally construed in favor of the party against whom the motion is made. Swanson v. Bixler, 750 F.2d 810, 813 (10th Cir.1984). It is not proper, however, to assume the moving party can prove facts that have not been alleged. Campbell v. Wells Fargo Bank, N.A., 781 F.2d 440, 443 (5th Cir.), cert. denied, 476 U.S. 1159, 106 S.Ct. 2279, 90 L.Ed.2d 721 (1986).
Construing the allegations in the light most favorable to the Pryors, the Pryors allege that the estate had continuing obligations to perform under a lease of real property of the estate, which the trustee failed to perform resulting in damages to the Pryors. This allegation is sufficiently clear to allege a claim against the estate and the motion to dismiss is denied as to this allegation.
The counterclaim also alleges that Schieffler, as trustee and individually, tor-tiously interfered with a contractual business relationship between the Debtors and the Pryors. The counterclaim alleges that Schieffler, after agreeing to sell real property of the estate to the Pryors, was apparently furnished a higher offer from some unnamed third party, an alleged competitor of the Pryors. The counterclaim asserts that the Debtors, who procured the offer, and Schief-fler “provided” the offer to the Pryors.
The counterclaim does not specifically allege if the offer was approved by the Court or whether a sale was consummated.2 The substance of the allegations is apparently that Sehieffler’s actions in considering a higher offer for the purchase of the real property constituted tortious interference with the Pryors’ business and caused the Pryors “to incur attorney’s fees ... and caused them substantial concern, worry and loss of time.” The counterclaim concludes that the Debtors, the estate, and the trustee, individually, are guilty of the tort of intentional and malicious interference with the contractual relationship and should respond in damages.
Arkansas recognizes the well-established principle of the tort of intentional and malicious interference with the business relationship of another. Mason v. Funderburk, 247 Ark. 521, 446 S.W.2d 543 (1969). The Arkansas Supreme Court in Mason v. Fun-derburk quoted with approval from the Restatement of Torts as follows:
The basic elements going into a prima facie establishment of the tort are (1) the existence of a valid contractual relationship or business expectancy; (2) knowledge of the relationship or expectancy on the part of the interferor; (3) intentional interference inducing or causing a breach or termination of the relationship or expectancy; and (4) resultant damage to the party *562whose relationship or expectancy has been disrupted.
Mason, 247 Ark. at 527, 446 S.W.2d at 547. Fisher v. Jones, 311 Ark. 450, 455, 844 S.W.2d 954, 957 (1993). However, merely concluding, as this counterclaim does, that evidence of Schieffler’s efforts to sell property of the estate is tortious interference does not make it so.
A trustee appointed under 11 U.S.C. § 701 (1988) is the official representative of the estate and has certain duties imposed by the bankruptcy code. 11 U.S.C. § 704 (1988). Among the trustee’s duties is the duty to “collect and reduce to money the property of the estate for which such trustee serves.” 11 U.S.C. § 704(1) (1988). Property of the estate is defined as “all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1) (1988).
The allegations in the counterclaim concern two separate contracts. One contract, which existed prepetition, concerns a provision not to compete. The second contract is alleged to exist between Schieffler and the Pryors for the sale of real property during the pendency of the bankruptcy case.
Schieffler, as trustee, succeeded to whatever benefits and obligations the alleged existing contract imposed on the Debtors. The cause of action of intentional and malicious interference with a business relationship requires that the tortious act be by a third party acting without legal justification or privilege. Mason v. Funderburk, 247 Ark. at 527, 446 S.W.2d at 546. Here, Schieffler is not a third party, but is the successor in interest of the Debtors and is not only justified and privileged to act, but is required to act. 11 U.S.C. § 704 (1988). Therefore, the counterclaim does not allege the elements necessary for a prima facie establishment of a cause of action for tortious interference with a business relationship of another.
The second contract between Schieffler and the Pryors is not alleged to have been interfered with by a third party; therefore, no cause of action for tortious interference with a business relationship of another has been alleged.
Therefore, for the foregoing reasons, the motion to dismiss the allegations in the counterclaim against Schieffler, as trustee and individually, regarding tortious interference with a contract are dismissed. Since there are no other allegations against the trustee individually, the entire counterclaim as to the trustee, individually, is dismissed.
Trial on the merits of the remaining' allegations against the Debtors and the estate will be set by subsequent notice.
IT IS SO ORDERED.
. Schieffler and the Pryors devoted a substantial amount of time arguing the issue of immunity; however, in view of the failure of the counterclaim to state a cause of action against Schieffler, individually, it is not necessary to determine the issue of immunity.
. The counterclaim did contain an allegation that implies that a sale occurred. This allegation is that, "In order to preserve said right to continued use and possession, among other things, these defendants were thereby required to pay a premium upon said premises to purchase same to preserve said rights.” | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492120/ | ORDER ON MOTION FOR SUMMARY JUDGMENT
THOMAS E. BAYNES, Jr., Bankruptcy Judge.
THIS MATTER came on for consideration upon the Motion for Summary Judgment filed by the Debtor in the above captioned case. This Court has considered all arguments and evidence consistent with a ruling on a motion for summary judgment. See Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986).
The instant matter cannot be characterized as a tribute to the Debtor’s nor to the Internal Revenue Service’s mathematical prowess. The Court suggests the parties’ mathematical conclusions were best foreseen by Lord Bertrand Russell. “Mathematics may be defined as the subject in which we never know what we are talking about, nor whether what we are saying is true.” Recent Work on the Principles of Mathematics, International Monthly, 1901, vol. 4, p. 84.
The Internal Revenue Service filed its initial Proof of Claim (Claim No. 12) for taxes on August 10, 1987. It filed consecutive Proofs of Claim (No. 14 and No. 15) on September 10,1987, and September 11,1987, respectively. Claim No. 14, although filed one day earlier, amended and superseded Claim No. 15, and Claim No. 15 amended and superseded Claim No. 12. This Court overruled Debtor’s objection to Claim No. 14, and allowed Claim No. 14 for $171,539.42.1
Debtor’s proposed Plan provided for the payment of the Internal Revenue Service’s priority tax portion of its claim with interest in full in ten (10) equal semi-annual payments. As a result of the Internal Revenue Service’s objection to confirmation, the Plan was confirmed requiring twenty (20) equal quarterly payments of the Internal Revenue Service’s priority tax claim including interest. The general unsecured portion of the Internal Revenue Service claim was to be treated as a class five claim, which entitled the Internal Revenue Service to a promissory note in the amount of fifty (50) percent of its allowed unsecured claim, payable in five equal installments.
Debtor’s Plan was confirmed on July 13, 1988. The Plan provided the first payment to the Internal Revenue Service was to be made November 1, 1988. On September 13, 1988, Debtor was supplied with a letter from the Internal Revenue Service which requested quarterly payments of $8,011.4, purporting to be consistent with the Plan. Unfortunately, the Internal Revenue Service, for reasons unknown to this Court, bungled the amortization of the $147,898 priority claim over a five year period into twenty (20) equal quarterly payments (see footnote 3 infra). There is no evidence to suggest Debtors provided a promissory note for the unsecured claim, nor that the Internal Revenue Service received its fifty (50) percent dividend on same.
This Adversary Proceeding was instituted for declaratory relief from the Internal Revenue Service’s assertions of an outstanding balance of its priority tax claim remains due. Simply put, the Internal Revenue Service asserts it miscalculated installment payment amounts, which were provided to Debtor by the Service’s letter of September 13, 1988. The installment payment amounts which the Service directed the Debtor to pay were insufficient to satisfy the underlying allowed claim owed the Internal Revenue Service. Debtor neither discovered the error nor alerted the Internal Revenue Service, and diligently complied with the requested payments throughout the Plan implementation, notwithstanding the fact these miscalculated payments were in Debtor’s favor and would not pay off the allowed priority claim determined by the Court’s Order of January 3, *6091989.2 Therefore, the issue herein relates to the twenty (20) equal installment payments as to the priority tax claim, and not the general unsecured portion on the Internal Revenue Service’s claim.
Debtor made payments under the confirmed Plan as to the priority tax claim in the amount of $8,011.14. There is no evidence accompanying Debtor’s Motion for Summary Judgment to support a finding Debtor believed $8,011.14 to be the appropriate payment to satisfy the Internal Revenue Service’s claim. Yet, Debtor argues the Internal Revenue Service is estopped from collecting any deficiency payment under the Plan because Debtor relied upon the Internal Revenue Service’s figures. The evidence does support a finding the Internal Revenue Service sent Debtor a letter outlining the payment amount, albeit erroneous, as required under the Plan, and Debtor complied with the payments requested by the Internal Revenue Service.
The Internal Revenue Service contends es-toppel is not available to Debtor as relates a claim of the United States. For this proposition, the Internal Revenue Service cites United States v. Vonderau, 837 F.2d 1540 (11th Cir.1988). In Vonderau, the court held a Veteran’s Administration loan officer did not have the authority to bind the Veteran’s Administration. By analogy, the manager of the bankruptcy unit for the Internal Revenue Service may not bind the Internal Revenue Service without the Secretary of the Treasury or the person delegated to make such decisions. In general, employees of the Internal Revenue Service do not have the authority to bind the United States government. Only the Secretary of the Treasury and those delegated with authority to enter into written agreements may bind the government. I.R.C. §§ 7121(a) and 7122; I.R.S. Delegation Order No. 11 (Rev. 26) (closing agreement authority); I.R.S. Delegation Order No. 11 (Rev. 11) (compromise authority); Kennedy v. United States, 965 F.2d 413, 419 (7th Cir.Ill.1992); McGee v. United States, 566 F.Supp. 960, 961 (M.D.Fla.1982). This Court finds, as a matter of law, a collection agent does not have the authority to waive indebtedness of a taxpayer. Id. Further, there is no evidence to support a finding the Internal Revenue Service intended to settle, compromise, or otherwise modify their rights to payment under the Plan.
Debtor contends the Internal Revenue Service’s figures placed it in a worse position as a result of reliance because the quarterly amount paid, although set forth in the Internal Revenue Service’s letter, was insufficient to pay off the priority claim. Nonetheless, Debtors reliance claim is without merit. First, this claim was a disputed claim which the Debtor vehemently opposed. This Court overruled Debtor’s objection and made a determination of the tax liability as set out in the Internal Revenue Service proof of claim. Debtor knew the amount of the claim, and it is likely Debtor would have recognized any errors that were not in its favor. Here, both parties knew what the correct amount of the priority claim was, and equally, they failed to exercise reasonable diligence to ensure their respective rights under the Plan. Secondly, there is no detriment to Debtor. The fact Debtor now has an outstanding liability does not suggest Debtor did not have the benefit of lower payments over the life of the Plan. In addition, the Internal Revenue Service has not suggested any sanctions or penalties be imposed upon Debtor. The Internal Revenue Service is requesting the amount yet owing without penalty or interest, despite the unlikelihood it would be entitled to penalties or interest for its own misfeasance.
Therefore, Debtor owes an additional amount of the priority tax liability. The question remains as to what amount Debtor must pay. It should be noted there is no credibility in the Internal Revenue Service’s figures or its suggestion the prior error was caused by the use of twenty four (24) payments rather than the Plan’s required twenty (20).3 Oddly enough, the evidence supports a *610finding the Internal Revenue Service has made another error in Debtor’s favor. Debt- or actually paid $160,222.80, over the five year period on the priority tax liability. This Court calculated the amount in which the payments should have been to be $195,075.60 (interest on priority claim included), or a remaining liability of $34,852.80. The Internal Revenue Service’s pleadings state remaining liability to be $32,044.56. Therefore, it is unnecessary for this Court to go beyond the pleadings, and Debtor remains liable for $32,044.56.
With respect to the general unsecured portion of the Internal Revenue Service’s claim, there is no evidence to suggest payments were made. The Internal Revenue Service maintains liability continues for that portion of its claim. Therefore, the Motion for Summary Judgment filed by the Debtor should be denied, as factual questions remain as to the general unsecured liability Debtor owes the Internal Revenue Service.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the Debtor’s Motion for Summary Judgment, be and the same is hereby, denied with respect to Debtor’s liability for the general unsecured portion of the Internal Revenue Service’s claim. It is further,
ORDERED, ADJUDGED AND DECREED the Motion for Summary Judgment is denied as to the priority tax claim and Debtor remains indebted to the Internal Revenue Service for $32,044.56, which represents the remaining portion of its priority tax claim.
DONE AND ORDERED.
. The Internal Revenue Service’s Proof of Claim consists of $147,898 for priority tax claims, and $23,641.42 for penalties which are a general .unsecured claim.
. This Court has jurisdiction to determine this issue as it relates to the terms and implementation of the Plan.
. There does not appear to be any consistent usage of figures in the instant matter by either party. The Plan simply sets out the priority tax claims shall be paid over five years, on a quarterly basis at ten percent simple interest. The *610amount of the priority tax claims was $147,898. Notwithstanding the Internal Revenue Service states $32,044.56 remains outstanding on the priority claim, the amortization is as follows:
Year
Balance
Interest
Payment (year)
Payment (Quarter)
1
$147,898.00
$14,789.80
$39,015.12
$9,753.78
2
$123,672.68
$12,367.27
$39,015.12
$9,753.78
3
$97,024.83
$9,702.48
$39,015.12
$9,753.78
4
$67,712.19
$6,771.22
$39,015.12
$9,753.78
5
$35,468.29
$3,546.83
$39,015.12
$9,753.78
Total
N/A
$47,177.60
$195,075.60
N/A
Further, if this Court analyzes the Internal Revenue Service’s assertion it miscalculated the payments based upon twenty four (24) quarters instead of twenty (20), the payments should have been:
Year
Balance
Interest
Payment (year)
Payment (Quarter)
1
$147,898.00
$14,789.80
$33,958.47
$8,489.62
2
$128,729.33
$12,872.93
$33,958.47
$8,489.62
3
$107,643.79
$10,764.38
$33,958.47
$8,489.62
4
$84,449.69
$8,444.97
$33,958.47
$8,489.62
5
$58,936.19
$5,893.62
$33,958.47
$8,489.62
6
$30,871.34
$3,087.13
$33,958.47
$8,489.62
Total
N/A
$55,852.83
$203,750.83
N/A
While mathematical computations of claims are usually not this Court's forte, the figures herein are believed to be superior to those asserted by the parties. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492121/ | ORDER
MARGARET H. MURPHY, Bankruptcy Judge.
This adversary proceeding is before the court on Plaintiffs Motion For Imposition of Sanctions Against Defendant For Contempt of Court (the “Contempt Motion”) for failure to obey the Preliminary Injunction entered September 1, 1994 and the Permanent Injunction entered October 18, 1994. The U.S. Trustee’s Contempt Motion and the Notice of Hearing were served upon Defendant and upon Defendant’s attorney December 15, 1994 and January 30, 1995, respectively. Hearing was held February 23,1995. Defendant and his attorney were present at that hearing. The parties were permitted to file post hearing briefs. The U.S. Trustee filed a brief; Defendant did not.
PROCEDURAL HISTORY
The U.S. Trustee alleged in the complaint which commenced this adversary proceeding that Defendant had filed the Chapter 13 peti*615tion in the main ease in the fictitious name of Charles Shirley to forestall the scheduled foreclosure sale of property owned by Linda Jeanette Shirley. At the hearing on the U.S. Trustee’s motion for a preliminary injunction held August 23-24,1994, Ms. Shirley testified that at the time she consulted Defendant, she had her own Chapter 13 ease pending in which the automatic stay had been modified to permit her mortgagee to foreclose on her residence. Ms. Shirley testified that she paid Defendant $1,500.00 based upon Defendant’s representation that, although it was last minute and would cost more, they could “petition the court for appeal” to stop the threatened foreclosure. Ms. Shirley further testified that she was unaware that Defendant had filed a bankruptcy petition in the name of Charles Shirley (who does not exist), listing Ms. Shirley’s property as an asset, until she began receiving notices at her residence pertaining to the ease.
In addition to the testimony of Ms. Shirley, the U.S. Trustee presented the testimony at the hearing of several witnesses, including five other “customers” of Defendant and Defendant’s secretary/receptionist. The testimony of those witnesses established Defendant’s modus opemndi: By means of telemarketing by his secretary and the mailing of 800-900 fliers per month to prospects whose names were obtained from the foreclosure advertisements in the local newspapers, Defendant solicited customers with promises that he could stop the foreclosure. Defendant was not engaged in the business of obtaining refinancing, although he sometimes discussed with a customer refinancing as a possible service he could provide.
The evidence presented at the preliminary injunction hearing established that Defendant, doing business as The Mortgage Place, operated to stop foreclosures by filing ostensibly pro se skeletal bankruptcy petitions. The evidence showed Defendant participated in filing or caused to have filed more than one such bankruptcy petition in a fictitious name to delay a foreclosure proceeding and showed that he routinely advised his customers not to disclose on the pro se affidavit required in this district that the customer received assistance in preparing the petition from Defendant or any employee of the Mortgage Place.
A review of the evidence presented at the preliminary injunction hearing shows that Defendant was in the business of preying upon the ignorance and desperation of persons anxious to save their home from foreclosure, utilizing methods whose description was sufficiently specific to secure payment of an excessive fee and sufficiently ambiguous to prevent the customers from becoming wary, while providing promises of assistance whose details were tailored to the client’s experience or lack thereof. For example, if a customer were reluctant to file bankruptcy, Defendant would promise proceeding in state court or discuss refinancing. The fee Defendant charged his customers was usually $1,500.00 and included only the preparation of a skeletal bankruptcy petition (a “skeletal” petition requires a minimum of information necessary to commence a bankruptcy and contains no schedules and plan, which are allowed to be filed within 15 days1). The average fee charged in this district by licensed attorneys does not exceed $1,000.002 for typical services, which include preparing and filing a Chapter 13 petition, schedules and plan and representing the debtor at the § 341 meeting of creditors, at the hearing on confirmation, and, often, at a motion to lift stay hearing. The average attorneys fee for filing a “no-asset” consumer Chapter 7 case is generally less.
Defendant’s practice of charging a $1,500.00 fee would be inappropriate without court approval if he were an attorney. The maximum so-called “retainer” or advance fee *616allowed by this court (without a detailed application and prior court approval) in a Chapter 13 case is $400.00.3 Many Chapter 13 attorneys commence a case for a debtor in Chapter 13 for less than $400:00, as the whole fee allowed in.the case is structured to be paid through the Debtor’s Chapter 13 plan at $75.00 per month.4 Thus, for a non-lawyer to charge and obtain $1,500.00 from debtors who could obtain legal services for much less is an abuse of the bankruptcy court system and a fraud on the public. The practice is repugnant when the preparer is a non-lawyer because the case is not filed in good faith to obtain the opportunity to pay creditors via a plan; the case has little or no chance of success without a lawyer to guide the debtor; the debtor’s scarce resources are obtained by a form of deception, promising that which cannot be delivered and the public, the court system — including creditors— and the Debtor, however desperate or willing, are abused.
At the conclusion of the preliminary injunction hearing August 24, 1994, the undersigned addressed Defendant at length directly and explained to him the types of activities in which he had engaged which would be considered practicing law. The undersigned orally directed Defendant on the record in open court to cease providing advice, assistance or services related to the preparation or filing of bankruptcy petitions or regarding remedies available under the Bankruptcy Code. See, transcript August 24, 1994. By written order entered September 1,1994 (the “Preliminary Injunction”), this court concluded that Defendant was engaged in the unauthorized practice of law and that the practices in which Defendant engaged constituted an abuse of the bankruptcy court system and process and that the continuation of those practices posed a substantial risk of irreparable injury to the public. A preliminary injunction was ordered which instructed Defendant to cease those activities and to prevent his employees or anyone using the facilities of The Mortgage Place from performing those activities. Additionally, Defendant, his employees or employees of The Mortgage Place were enjoined from entering into any fee-sharing agreements or arrangements with attorneys, law firms, paralegals or paralegal service firms with respect to bankruptcy matters.
Defendant filed a notice of appeal of the Preliminary Injunction, but, on October 18, 1994, a consent order (the “Permanent Injunction”) was entered in which Defendant agreed to a permanent injunction of the activities described in the Preliminary Injunction. Defendant also agreed to imposition of a monetary sanction in the amount of $1,000.00, payable within 20 days, and to payment of restitution to three individuals in the total amount of $2,350.00, payable over a five-month period. In connection with entry of the Permanent Injunction, a Stipulation of Dismissal of Defendant’s appeal of the Preliminary Injunction was filed in the U.S. District Court, which dismissal was approved by the U.S. District Court November 17, 1994.
On December 15, 1994, the U.S. Trustee filed the Contempt Motion, hearing on which was held February 23, 1995.
FINDINGS OF FACT
At the Contempt Motion hearing, the U.S. Trustee presented three witnesses who testified that Defendant had prepared skeletal Chapter 13 bankruptcy petitions for them after entry of the Preliminary Injunction. Mr. Hoyle Bridges testified that over a six month period he paid $1,500.00 to Defendant, of which $450.00 was paid after August 24, 1994. Their business relationship culminated with preparation and filing by Defendant of a bankruptcy petition for Mr. Bridges October 4,1994. Mr. Bridges testified that the signatures on the petition and the pro se affidavit were not his. On Defendant’s instruction, Mr. Bridges marked “No” the question on the pro se affidavit regarding whether he received assistance in preparing the petition.
Another witness, Deysi Steer, testified that Defendant accepted money from her August 25, 1994 (the day- after the hearing at which this court orally instructed Defendant, in detail, to discontinue the unauthorized practice *617of law), and prepared a skeletal bankruptcy petition for her which she filed pro se September 5, 1994.
A third witness, Joyce Davis, testified that she first went to The Mortgage Place for help in early 1994. She signed a “Consulting Agreement” with Defendant in July 1994 and began payments which continued from June through November, 1994, including $375.00 paid in November, 1994. A bankruptcy petition was prepared by Defendant and filed by Ms. Davis November 1, 1994. In the course of Ms. Davis’ testimony, she described another petition which had been filed by Defendant in the fictitious name of Mary Davis in June, 1994.
Another witness, Charlotte M. George, testified she received in mid-September, 1994, a flyer from Defendant advertising his services. She paid Defendant $350.00 September 22, 1994, but the next day cancelled the contract with Defendant.
The evidence presented by the U.S. Trustee shows that, despite the Preliminary Injunction and the Permanent Injunction, Defendant continued to operate in the same place, under the same name and in the same manner as he had operated before the U.S. Trustee filed this complaint. In opposition to the U.S. Trustee’s Contempt Motion, Defendant challenges this court’s authority and jurisdiction to hear and enter an order on such a motion. Specifically, Defendant asserts that:
(a) This court is without power to enjoin or sanction the unauthorized practice of law in the context of an individual bankruptcy case;
(b) The U.S. Trustee lacks standing to act as Plaintiff in this proceeding;
(c) This court lacks the power to preside over contempt proceedings; and
(d) Defendant is entitled to a jury trial.
CONCLUSIONS OF LAW
The first issue raised by Defendant is whether a bankruptcy court has power to enjoin or sanction the unauthorized practice of law within the context of an individual’s bankruptcy case. Pursuant to 11 U.S.C. § 105(a), this court “may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.” Section 105 permits this court to take any action, sua sponte, “necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.” Additionally, pursuant to 11 U.S.C. § 329, this court may examine transactions between debtors and their attorneys. Section 329 has also been found to provide authority for the bankruptcy court to examine transactions involving the unauthorized practice of law before a bankruptcy court. U.S. Trustee v. Kasuba (In re Harris), 152 B.R. 440 (Bankr.W.D.Penn.1993). The U.S. Supreme Court has approved a broad interpretation of 28 U.S.C. § 1334(b) and § 157(a). Celotex Corp. v. Edwards, — U.S. —, 115 S.Ct. 1493, 131 L.Ed.2d 403 (1995). Ample authority exists for a bankruptcy court to hear a challenge to the unauthorized practice of law in connection with a bankruptcy case.
Similarly, ample authority exists for the U.S. Trustee to appear as a proper party in interest in this action. The U.S. Trustee argues that Defendant’s challenge to the U.S. Trustee’s standing has been waived or, alternatively, is moot. The U.S. Trustee asserts that Defendant’s execution of consent to entry of the Permanent Injunction constitutes a waiver of a challenge to the U.S. Trustee’s standing. The U.S. Trustee asserts that the standing issue is moot because this court has now heard all the evidence and could enter sua sponte any order arising from the proceeding instituted by the U.S. Trustee. Both the U.S. Trustee’s arguments have merit.
Substantively, however, the U.S. Trustee in this proceeding is merely fulfilling the role Congress intended: “[Bankruptcy watchdogs to prevent fraud, dishonesty, and overreaching in the bankruptcy area.” H.R. No. 989, 95th Cong., 2d Sess. 88 (1978) U.S.Code Cong.Admin.News pp. 5787, 5963, 6173. Section 307 of the Bankruptcy Code permits the U.S. Trustee to “raise and appear and be heard on any issue in any case or proceeding” under Title 11. Defendant’s challenge to the U.S. Trustee’s standing is without merit.
*618Another issue raised by the Contempt Motion is whether this court has jurisdiction to hear any contempt motion. Many courts have held that a bankruptcy court has “the inherent power to enforce obedience of their lawful orders issued in connection with the proceeding over which such court had subject matter jurisdiction.” Matter of Lemco Gypsum, Inc., 95 B.R. 860, 863 (Bankr.S.D.Ga. 1989), citing Matter of Miller, 81 B.R. 669, 675 (Bankr.M.D.Fla.1988). The Lemco Gypsum court determined that “[i]n addition to Rule 9020, the inherent civil contempt power to enforce compliance with lawful judicial orders is well-recognized, as judicial power to issue an order carries with it the power to enforce such orders.” Lemco Gypsum, 95 B.R. at 863.5
In the case of Tele-Wire Supply Corp. v. Presidential Financial Corp., Inc. (In re Industrial Tool Distributors, Inc.), 55 B.R. 746 (Bankr.N.D.Ga.1985), the court held the statutory delegation of either civil or criminal contempt power to the bankruptcy court was an unconstitutional delegation of Article III powers. Tele-Wire, however, was based solely upon 11 U.S.C. § 105(a). Furthermore, Tele-Wire was decided prior to the 1987 amendment of Bankruptcy Rule 9020, which specifically governs contempt powers of the Bankruptcy Court.6
The Bankruptcy Rules are promulgated by the United States Supreme Court and approved by Congress and have the force and effect of law. Bankruptcy Rule 9020 was amended in 1987. The Rule currently provides:
Rule 9020 Contempt Proceedings.
(a)CONTEMPT COMMITTED IN PRESENCE OF BANKRUPTCY JUDGE. Contempt committed in the presence of a bankruptcy judge may be determined summarily by a bankruptcy judge. The order of contempt shall recite the facts and shall be signed by the bankruptcy judge and entered of record.
(b) OTHER CONTEMPT. Contempt committed in a case or proceeding pending before a bankruptcy judge, except when determined as provided in subdivision (a) of this rule, may be determined by the bankruptcy judge only after a hearing on notice. The notice shall be in writing, shall state the essential facts constituting the contempt charge and describe the contempt as criminal or civil and shall state the time and place of hearing, allowing a reasonable time for the preparation of the defense. The notice may be given on the court’s own initiative or on application of the United States Attorney or by an attorney appointed by the court for that purpose.
(c) SERVICE AND EFFECTIVE DATE OF ORDER; REVIEW. The clerk shall serve forthwith a copy of the order of contempt on the entity named therein. The order shall be effective 10 days after service of the order and shall have the same force and effect as an order of contempt entered by the district court unless, within the 10 day period, the entity named therein serves and files objections prepared in the manner provided in Rule 9033(b).[7] If timely objections are filed, the order shall be reviewed [de novo ] as provided in Rule 9033.
*619The procedure set forth in Bankruptcy Rule 9020, as amended, supersedes the decision in Tele-Wire. Kiker v. United States of America (In re Kiker), 98 B.R. 103, 108 (Bankr.N.D.Ga.1988).
The use of Section 105 together with current Bankruptcy Rule 9020 allows the bankruptcy court to exercise contempt powers. See Kiker, 98 B.R. at 108. Section 105(a) now allows a bankruptcy judge to take actions to enforce its orders sua sponte; therefore, it should be able to enforce its orders upon motion by a party in interest. In re Clark, 91 B.R. 324, 333 (Bankr.E.D.Penn. 1988). The Clark court determined that “a civil contempt order entered pursuant to Bfankruptcy] Rule 9020 does not offend the separation of powers doctrine embodied in Article III of the Constitution.”8 Id. at 334. Furthermore, the debtor has recourse by appealing an order of contempt to the district court for de novo review. Bankruptcy Rules 9020(c) and 9033; Kiker, 98 B.R. at 109. Therefore, Defendant’s challenge to this court’s power to hear and determine a motion for contempt is without merit.
Defendant also asserts that, as the U.S. Trustee seeks imposition of sanctions for criminal contempt, Defendant is entitled to a jury trial. In the post-hearing brief, the U.S. Trustee lowered the amount of his request for sanctions from $30,000.00 to $5,000.00, so as to bring this proceeding within the definition of a petty offense, for which Defendant is not entitled to a jury trial. See, 18 U.S.C. § 19 and § 3571(b)(6) and (7). As no criminal contempt sanctions will be imposed against Defendant, Defendant’s complaint that he was denied a jury trial is without merit.
The earlier events in this adversary proceeding make it clear that Defendant will say and will agree to whatever is expedient at any given time but without any intent to follow through on his representations or comply with the court’s directions and orders. Almost simultaneously with Defendant’s oral agreement in open court, following a lecture by the undersigned and his subsequent agreement in writing in the Permanent Injunction, Defendant continued without interruption the conduct which he had agreed to cease and from which he had been enjoined.
Options available to this court include:
(1) Sanctions for civil contempt, i.e. further compensatory awards requiring Defendant to disgorge amounts received for his services or sanctions such as a fine of $100.00 per day for so long as Defendant continues to violate the Permanent Injunction;
(2) Sanctions for criminal contempt, i.e. incarceration for specified period of time or imposition of a noncompensatory, punitive fine.
Debtor agreed in the Permanent Injunction to pay a fine of $1,000.00 but that fine has not been paid.
The compelling principles which underlie the Permanent Injunction are ones of public policy: protection of the non-lawyer from the deleterious consequences of other non-lawyers trying to practice law, and protection of the integrity of the bankruptcy process, including the interests of the debtor, of creditors, and of the public. With respect to sanctions for violation of the Permanent Injunction, the court has a duty to evaluate the type and magnitude of sanctions suitable to accomplish the purpose of the sanctions. Imposition of any further monetary sanctions intended to compel Defendant to comply with the Permanent Injunction or to compensate Defendant’s victims is futile: Defendant would likely fail to pay additional sanctions, as he has failed to pay the sanctions already imposed, to which he consented. As the U.S. Trustee does not seek to compel Defendant to act, but rather to restrain Defendant from further illegal activities, incarceration is not a tenable option as a sanction.9
*620This court affirms the commitment of the U.S. Trustee to pursuing bankruptcy preparers who engage in fraudulent, unfair or deceptive conduct.10 At this stage in the instant ease, however, it appears appropriate for this court to seek to invoke police power by referring this matter to the appropriate authorities. Accordingly, it is hereby
ORDERED that the U.S. Trustee’s motion for sanctions is DENIED.
IT IS SO ORDERED.
EXHIBIT A
UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF GEORGIA
ORDER RE ATTORNEYS’ FEES IN CHAPTER 13 CASES
To insure and promote uniformity and equitable treatment of debtors in Chapter 13 cases, effective May 15, 1991, it is
ORDERED that attorneys for Chapter 13 debtors in routine Chapter 13 cases shall be permitted to charge an attorney’s fee up to $1,000 per case, whether individual or joint, provided, however, that:
(a) prior to the case filing, an attorney shall only be authorized to collect advance fees or retainers in a sum not to exceed $400 for each case, whether individual or joint, plus the actual costs for filing, and
(b) the balance of any such attorney’s fees shall be paid under the debtor’s plan at the rate of $75 per month with payments accruing from the date of the filing of the petition and payable upon confirmation and continuing monthly thereafter until paid, and
(c) upon conversion or dismissal of the case after confirmation and subject to the provisions of subparagraph (b) any unpaid fees due debtor’s attorney shall be paid from the funds, if any, held by the trustee, after payment of the trustee’s fees and expenses, and
(d)in the event that no plan is confirmed and the case is dismissed or converted, the attorney for the debtor shall be allowed compensation not to exceed the sum of $600.00, less any sums previously received, and it is
ORDERED that, without specific application and order, the Chapter 13 trustee is authorized to pay debtor’s attorney’s fees from payments made by or on behalf of the Chapter 13 debtors within the limits set forth herein, not to exceed $1,000.00, unless otherwise ordered by the court, and it is
ORDERED that, after the filing of a Chapter 13 ease, attorneys for Chapter 13 debtors shall not collect any additional compensation from debtors without prior court approval based upon an appropriate application for compensation and order, and it is
ORDERED that any attorney collecting advances or retainers in excess of the authorized amounts shall be subject to sanctions and the court will require any sums collected by any debtor’s attorney in excess of such amounts to be turned over to the Chapter 13 trustee for disbursement pursuant to the debtor’s plan or returned to the debtor as may be appropriate, and it is
ORDERED that failure of an attorney to attend Section 341 meetings and any other scheduled meetings or hearings shall result in the reduction of the attorney’s fees by the sum of $150 for each such occurrence, or in such other amount as the court finds to be appropriate, and it is
ORDERED that nothing herein shall prohibit the attorney for the debtor in any case from seeking additional or extraordinary compensation in excess of $1,000.00 by application pursuant to the provisions of the Bankruptcy Code, Rules and the factors enumerated in Norman v. Housing Authority of Montgomery, 836 F.2d 1292 (11th Cir.1988), and it is
ORDERED that nothing herein shall prohibit the trustee, the debtor, any creditor or *621party in interest from objecting to any compensation provided for herein.
IT IS SO ORDERED.
At Atlanta, Georgia, this 15th day of May, 1991.
/s/ A.D. Kahn
A.D. KAHN, CHIEF
UNITED STATES BANKRUPTCY JUDGE
FOR THE COURT
. Bankruptcy Rule 1007 requires a debtor to file schedules of assets and liabilities, a schedule of current income and expenditures, a schedule of executory contracts and unexpired leases, and a statement of financial affairs (the "Schedules”). If those Schedules are not filed with the petition, they must be filed within 15 days thereafter. Bankruptcy Rule 3015 requires a Chapter 13 debtor to file a plan with the petition or within 15 days thereafter.
. See Standing Order entered May 15, 1991 (copy attached as exhibit to this order), which is applicable to all Chapter 13 cases filed in this district.
. See note 2.
. See note 2.
. See Matter of Lemco Gypsum, 95 B.R. 860, 863 (Bankr.S.D.Ga.1989) for a list of cases which support the inherent contempt power of the bankruptcy court and for a list of cases which deny the bankruptcy court contempt power.
. Sanctions to enforce compliance with orders of the court, or to compensate a party who has suffered losses or damages by reason of another party’s non-compliance with orders of the court, are for civil contempt. Commercial Banking Co. v. Jones (In re Maxair Aircraft Corp. of Georgia, Inc.), 148 B.R. 353 (M.D.Ga.1992). Criminal contempt sanctions are punitive in nature "and are imposed primarily for vindicating authority of the court." Yaquinto v. Greer, 81 B.R. 870, 879 (N.D.Tex.1988).
.Rule 9033(b) provides:
Within 10 days after being served with a copy of the proposed findings of fact and conclusions of law a party may serve and file with the clerk written objections which identify the specific proposed findings or conclusions objected to and state the grounds for such objection. A party may respond to another party’s objections within 10 days after being served with a copy thereof....
. “If Congress can constitutionally create legal presumptions, assign burdens of proof and prescribe legal remedies for Article I courts, it seems to follow that it can constitutionally grant them the power to enforce their lawful orders through civil contempt." Burd v. Walters, 868 F.2d 665, 670 (4th Cir.1988).
. Incarceration may be an option as punishment for criminal contempt but the U.S. Trustee does not seek Defendant's incarceration. Additionally, the specter of either incarceration or imposition of large fines for criminal contempt raises tangential legal issues and unwieldy procedural issues involving rights to jury trial and de novo *620review of a contempt order of this court by the district court.
. See, 11 U.S.C. § 110. The new § 110 was promulgated as a part of the 1994 Bankruptcy Reform Act and is applicable to petitions filed after the effective date of the Act, October 22, 1994. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492122/ | DECISION AND ORDER ON MOTION TO TRANSFER VENUE OR TO DISMISS CASE
LEIF M. CLARK, Bankruptcy Judge.
CAME ON for consideration the foregoing matter. The New Mexico Department of Revenue and Taxation moves to transfer venue to the District of New Mexico, or in the alternative, to have this case dismissed for improper venue. Movant asks this court to reverse its earlier decision in In re Lazaro, 128 B.R. 168 (Bankr.W.D.Tex.1991), arguing that the Supreme Court’s analysis in Connecticut Nat. Bank v. Germain, 503 U.S. 249, 112 S.Ct. 1146, 117 L.Ed.2d 391 (1992) confirms that Lazaro’s statutory analysis was incorrect.1
The facts in this ease are not in dispute. The debtors reside in Chaparral, New Mexico, approximately four miles over the state line from El Paso. They claim that, to file in Las Cruces, they would “need to drive through El Paso, passing the Federal Court building, passing the Chapter 13 Trustee’s office, passing the opposite city limits of El Paso, and then an additional 45 miles into Las Cruces.”2 Most of their creditors are in *742the El Paso area and the State of New Mexico is being paid in full. The case is a consumer case, not involving a business. However, the same case could as easily have been filed in Las Cruces, with the same payout to creditors.3 In short there are no extraordinary reasons for not filing this case in New Mexico.
These facts make out a strong ease for transfer of venue based on convenience of the parties. In re Abacus Broadcasting, 154 B.R. 682 (Bankr.W.D.Tex.1993). This court has on more than a few occasions cautioned attorneys that Lazaro ought not be interpreted to be a gilt-edged invitation to counsel to ignore the requisites for placing venue properly. In Abacus Broadcasting, this court explained that, even if the court could keep a given case as a matter of law under Lazaro, the facts of most improperly venued cases will often dictate that the court should transfer the case. If the facts of a given case counsel for its retention, then the result should be the same under either Lazaro or Abacus Broadcasting, because the self-same venue statute advises that “[a] district court may transfer a case or proceeding under Title 11 to a district court for another district in the interest of justice or for the convenience of the parties.” 28 U.S.C. § 1412 (emphasis added).
In addition, the court in Lazaro had before it facts that affirmatively demonstrated that Las Cruces was an inconvenient forum. In fact, some of the court’s assumptions regarding the Las Cruces docket have proven to be unfounded. The bankruptcy courts for New Mexico service that docket as regularly as the docket requires (they will go there monthly if that is what is needed — which is the same frequency with which the El Paso bench is also covered by a judge who travels from San Antonio). The chapter 13 trustee in New Mexico conducts first meetings of creditors in Las Cruces monthly. The “drain-off’ of New Mexico debtors who file in El Paso is not a significant percentage of the El Paso overall filings, but it is a significant portion of the Las Cruces filings. If more cases were filed in New Mexico, the resulting increase in the docket would both encourage the development of a local bar and increase the frequency and number of hearings in Las Cruces. What is more, the additional filings would make a significant monetary difference to the chapter 13 trustee, who would then be able to justify greater expenditures to service the Las Cruces and surrounding area.
The interests of justice and the convenience of the parties in this case are better served by a transfer of this case to the Las Cruces Division of the District of New Mexico. But more significantly, this case does not present the extraordinary fact pattern that would render transferring the case a positive injustice. We cannot say that Las Cruces is so inconvenient that we are justified in ignoring the normal rules for venue placement. The case therefore should be transferred.
Because this case has been decided by its facts, we do not reach the legal issue which the movant has urged. The motion to transfer venue is granted.
So ORDERED.
. Movant adds that no cases have to date followed Lazaro. See In re Great Lakes Hotel Assoc., 154 B.R. 667 (E.D.Va.1992); In re Washington, Perito & Dubuc, 154 B.R. 853 (Bankr.S.D.N.Y. 1993); In re Petrie, 142 B.R. 404 (Bankr.D.Nev. 1992); In re Sporting Club at Illinois Center, 132 B.R. 792 (Bankr.N.D.Ga. 1991).
. Actually, Chaparral is not so far from Las Cruces as this statement makes it sound. The debtors could have taken O’Hara Gap across the Franklin Mountains, picking up Interstate 10 on the west side of the mountains, from where it is a twenty to thirty minute drive to Las Cruces.
. The Las Cruces Division is in fact serviced by the bankruptcy judges in New Mexico, who come there as frequently as the docket demands. The chapter 13 trustee regularly conducts first meetings of creditors in Las Cruces. Many hearings are conducted telephonically on the New Mexico bankruptcy docket, but that system does not deprive litigants of their day in court. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492123/ | MEMORANDUM OPINION AND ORDER
BARRY S. SCHERMER, Chief Judge.
INTRODUCTION
In this Memorandum Opinion and Order, the Court will review a Motion to Reconsider this Court’s Order dated May 31, 1995, 182 B.R. 810, in which the Court denied a motion of a third party beneficiary of a real estate sale contract for specific performance and granted the non-breaching party’s motion for a refund of its earnest money and relieved that party from further performance under the contract.
JURISDICTION
This Court has jurisdiction over the subject matter of this proceeding pursuant to 28 U.S.C. §§ 151, 157, 1334 and Local Rule 29 of the United States District Court for the Eastern District of Missouri. This is a “core proceeding” which the Court may hear and enter appropriate judgments pursuant to 28 U.S.C. § 157(b)(2)(N) & (0).
STATEMENT OF FACTS
Great Southern Bank (“Bank”) filed its Motion to Alter Memorandum Opinion and Order Dated May 31, 1995, 182 B.R. 810, or, in the Alternative for a New Trial (“Motion *791to Reconsider”) concerning an order of this Court as it related to a sale of Debtors’, North Port Associates, Inc., and North Port Golf Associates I, L.P. (collectively “Debtors”) golf course and club house. The facts are spelled out in detail in the Memorandum Opinion and Order dated May 31, 1995 and need not be restated here.
To summarize some of the most relevant facts, the Debtors entered into a Contract for Sale of the Golf Course, Club House and other property (“Contract”), with Ozark Global, L.C. (“Buyer”). Thereafter, problems arose with the Contract concerning items such as proposed easements, legal descriptions, and access to sewer lines. The Court met with the Buyer and Debtors on several occasions, assisting in resolving these preclosure disputes and assuring the parties that appropriate easements would be granted in order to help this $3.75 million sale reach finality. After hours of negotiations, hearings, hand-holding, and dispute resolution, the Court, on May 8, 1995, issued an Order Approving the Sale of Assets pursuant to 11 U.S.C. § 363 (“Order Approving Sale”). That Order served as the Court’s determination that the standards for a sale under § 363 were met, in that (i) there was complete and timely notice to all creditors including those asserting liens in the real estate; (ii) all lienholders either consented to the sale or would be paid the value of their secured claim or their claim was subject to a bone fide dispute; and (iii) the $3.75 million price was fair and in the best interests of the estates.
Despite this concerted effort by the Buyer and Debtors with the full support of secured and unsecured creditors of the estate as well as the Debtors’ limited partners, the Debtors failed and refused to deliver the deed to the items specified in the Contract. The reasons why the deed was not conveyed were spelled out in a letter from the Debtors to the Buyer dated May 15,1995 and introduced as Exhibit 1-A at a hearing held on May 18, 1995.1 The reasons were described by the Debtors as three “operating issues:” 1) Buyer had failed to discuss the transfer of certain business licenses held by Debtors for the operation of the club house and golf course; 2) Buyer had faded to reach finality on negotiations for purchase of personal property in the club house (presumably this would include a variety of items from golf balls to the liquor inventory); and, curiously, 3) Buyer had failed to indicate whether the golf course would remain in operation.
The Debtors failure to tender a deed resulted in a hearing on the Bank’s Motion to Compel the Sale.2 At the hearing, the Bank argued that the Order Approving Sale binds the parties to perform. Rather than look at the Contract — which clearly delineates the terms of performance as well as the consequences of non performance — the Bank requests that the Court find the Order Approving Sale binding upon the terms of the parties performance.
The Court denied Bank’s Motion to Compel and ruled that because of the Debtors’ breach the Buyer was relieved from further obligations in the Contract. In denying the Bank’s Motion, the Court also ruled that the Buyer was entitled to a refund of its earnest money deposit3 because of the Debtors’ breach.
DISCUSSION
The Bank filed its Motion to Reconsider asking that the Court review its decision denying its Motion to Compel Sale. The Motion to Reconsider has six sections. They will be discussed in turn.
The Bank’s first position presents further argument as to why the Order Approving Sale should be contractually binding upon the parties to the Contract. Each sub-part of this position presents examples in which the Order Approving Sale allegedly supplements, modifies, or amends the Contract.
*792Certainly additional agreements were entered into between the Buyer and Debtors that were not part of the Contract. These resulted from facts first learned by the parties after a survey of the real estate was performed and included such items as: easements, licenses, and modifications of covenants. The agreements were made part of the record and were also included in the Order Approving Sale. While the Order Approving Sale may have been the vehicle for expressing these additional terms and conditions, they are on the whole de minimis to the exhaustive terms listed in the Contract. The mere inclusion of these additional specific terms which arose at the last minute should not negate the bargained for rights of the parties expressed in the Contract.
The Bank is essentially arguing that because of a few isolated terms not included in the Contract, the Court should ignore the Contract. The Court declines to do this. The Contract gave a date and a time for performance and the Debtors failed to comply-
The Bank also points to a paragraph in the Order Approving Sale in which the Buyer and Debtors agree to submit any post closing, future disputes as to easements to this Court. The Court simply fails to understand why such language in the Order Approving Sale would convince the Court that it should review its decision to examine the Debtors’ failure to close under the rubric of the Contract.4
The Bank’s second argument concerns the Court’s statements that the effect of a § 363 order is “simply an order finding that the Contract meets the requirements of § 363 and grants the Debtors the authority to sell according to the terms of the contract.” Memorandum Opinion at p. 7, 182 B.R. at p. 814. Upon reflection of the Bank’s argument, this Court does believe that a § 363 order may compel a sale pursuant to the terms of the order and need not be done by the time consuming and costly process of an adversary proceeding. Indeed, an order approving a sale may authorize and direct the parties to close.5 Even with such clarification, this Court’s May 31, 1995 Order was premised upon the Contract in which the parties negotiated a time of the essence provision. Debtors failed to close and moreover failed to close timely.
The third section of the Bank’s Motion to Reconsider is simply disingenuous. The Bank’s Motion to Compel was essentially a request for specific performance. This Court ruled that specific performance was not available because the Contract contained a time of the essence provision which under Missouri law protected the Buyer from proven damages which would have resulted if it were compelled to perform on a date later than the scheduled closing date.
The Bank now argues that a short delay in closing on the Contract did not represent an unreasonable delay.6 The Court notes that this is the same Bank that consistently refused to delay closing beyond May 15, 1995 arguing that it will be irreparably harmed by any delay in the closing date. This is the same Bank which grudgingly acquiesced to the Buyer’s and Debtors’ request to set the hearing to approve the sale back one week.7 For the Bank to argue now that a delay is not prejudicial entirely contradicts its prior position in several court hearings that the closing date not be delayed because of the potential yet unspecified prejudice to the Bank.
Overlooking the Bank’s disingenuous position, the assertion that the Debtors are entitled to specific performance is simply an incorrect understanding of the law. The Debtors failed to tender the deed pursuant to the Contract. Time was of the essence in *793performing the Contract and the Buyer articulated a certain change in condition and circumstance if compelled to close on a later date. The Bank cannot now question the potential damage when it had ample opportunity to do so at the hearing and did not do so.
The Bank’s fourth point concerns the harm to the estates if the Buyer and Debtors cannot be compelled to perform. This is not a situation where the Court is balancing the equities. The underlying case shall be governed by the Contract. Where one party failed to perform, the Court’s decision rests on contract not equitable remedies.
The Bank’s fifth argument is closely related to the fourth in that the Bank asserts that the proposed sale “presents a unique opportunity for substantial benefit to the Debtors’ estates.” Motion to Reconsider at P. 5. The Bank concludes that the Court should be persuaded by the unanimous voice of the creditor community. Once again, the Bank wishes this Court to ignore the specific terms of the Contract and the rights of the Buyer which relied on the time of the essence provision. The Court declines the invitation to rule contrary to the law merely because all of the creditors desire that result.
The Bank’s final position is that “the creditors have been deprived of notice and opportunity for hearing prior to the exercise by the Debtors of the unilateral, prejudicial and ‘perplexing1 action of failing and refusing to produce the Deed to the Golf Course.” Motion to Reconsider at p. 6.
The Bank’s position lacks merit. The Court approved the sale on May 8,1995 after lengthy hearings at which the Bank fully participated. Closing on the Contact was set seven days later on May 15, 1995. Debtors’ counsel had several conversations with Buyer’s counsel on May 13, 1995 concerning the issues creating an impasse to closing.8 The Bank had its claim in excess of $3 million at stake and either failed to avail itself of the opportunity to monitor discussions between May 8, 1995 and May 15, 1995 or did so and failed to seek an appropriate remedy prior to the May 15, 1995 closing.9 In either event, the Bank’s failure to take advantage of its opportunity in no way constitutes a deprivations of its due process rights.
CONCLUSION
For these reasons, it is
ORDERED that the Bank’s Motion to Alter Memorandum Opinion and Order Dated May 31, 1995, 182 B.R. 810, or for a New Trial is DENIED;
IT IS FURTHER ORDERED that the Court’s Memorandum Opinion and Order is MODIFIED only to the extent that it states that the Buyer is entitled to rescission of the Contract,10 such language concerning rescission is stricken.
. That hearing resulted in the Memorandum Opinion at issue here.
. The Buyer brought on its Motion for a Refund of its previously deposited earnest money of $500,000.
.Pursuant to the terms of the Contract and prior orders of the Court, the earnest money was being held by the Bank.
. The letter of May 15, 1995 lists the "operating issues” which caused the Debtors to refuse to tender the Deed. None of these "operating issues” were part of the Order Approving Sale, nor were they ever part of the lengthy protracted discussions attended by this Court prior to the Order Approving Sale.
. Section 105(a) may be invoked in order to compel compliance.
. "[T]he Debtors are entitled to specific performance ... The delay of less than three days in closing the transaction does not constitute [an] unreasonable relay.” Motion to Reconsider at p. 4.
. The Bank would not, however, move back the date set for closing even one day.
. These conversations are memorialized in the May 15, 1995 letter which was Exhibit 1-A at the May 18, 1995 hearing.
. If the bank did avail itself of this opportunity to monitor discussions, then the Bank surely had an opportunity to request emergency relief (e.g. the appointment of a trustee to execute the deed and receive the sale proceeds) from the Court so that the closing could have been effected on the afternoon of the scheduled May 15, 1995 closing.
.The Memorandum Opinion states "Buyer is entitled to recover its $500,000 deposit and is entitled to rescind any obligations it may have under the Contract without fear of breach." | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492124/ | MEMORANDUM OPINION
JAMES E. YACOS, Chief Judge.
Maryrose Arsenault, the debtor in this case, filed this adversary proceeding to void the second mortgage loan owed to the defendant due to violation of various New Hampshire consumer protection statutes. The Court ruled on some of the issues on cross motions for summary judgment (Court Doc. No. 20) and the remaining issues after a one day trial. (Court Doc. No. 24). At the conclusion of the trial, the Court made its findings of facts and rulings of law which are hereby incorporated by reference.
To briefly summarize, in September, 1988 Maryrose Arsenault, the debtor and plaintiff in this case contacted Mansfield Mortgage Company for the purpose of refinancing a $16,679.11 second mortgage on her home then held by United Savings Bank. Mansfield Mortgage denied Ms. Arsenault’s application and referred her to Realty Funding Corp. who did agree to refinance her loan. On October 5, 1988, the plaintiff signed a three year promissory Note for $32,000. Under the terms of the Note, the plaintiff was to remit monthly payments of interest only for 36 months commencing on December 1, 1988 and one final payment of the outstanding principal and interest on November 1, 1991. Realty Funding’s monthly interest only payments were at a variable rate between 18 percent and 36 percent for a term of three years. At the end of the three years a balloon payment of the original principal amount was due. Based on the record and findings previously made by this Court regarding the terms of this transaction and the circumstances surrounding the loan, the Court found the defendant willfully violated the provisions of N.H.Rev.StAnn. § 358-K:3 (prohibiting advance collection of interest) and violated the provisions of N.H.Rev.St. Ann. § 398-A.-2 II (limitation on the “charges” that may be collected upon default) although the latter was found “not a willful violation in that the requirements of the statute are not clear on its face and there is little or no ease law interpreting the language.” (Ct.Doc. No. 24, at 2).
At the conclusion of the trial, the Court ordered the parties to submit memorandums regarding the calculation of damages for the violations under the applicable statutory provisions. On January 26, 1995, after receipt of the memorandums, determination of the amount of damages was taken under advisement.
THE STATUTES
The statutory provisions in question will be set forth in some detail below since they are crucial to the appropriate determination of damages for the violations in question. Their general context however needs to be set forth first.
RSA § 358-K:3 appears in Chapter 358-K of the New Hampshire Revised Statutes entitled “Regulation of Consumer Credit Transactions” and § 358-K:6 makes applicable the provisions of that Chapter to all consumer credit transactions both secured and unsecured including those secured by a real property mortgage. The transaction in the present litigation with this defendant falls within the applicability of this Chapter.
RSA 398-A:2 “Interest and Interest Rates” appears in Chapter 398-A of the New Hampshire Revised Statutes entitled “Second Mortgage Home Loans” and provides the basic limitation on interest and interest rates permissible under New Hampshire law. It also provides explicitly in § 398-A:7 for the appropriate treatment of illegal loans under this Chapter. The transaction in the present litigation and this defendant come within the applicability of this Chapter.
RSA 358-A:2 is also implicated in the present case. That statute deals generally with unfair or deceptive acts or unfair methods of competition and appears in Chapter 358-A of the New Hampshire Revised Statutes entitled “Regulation of Business Practices For Consumer Protection” and provides in *866§ 358-A:10 for private actions resulting from violations of this Chapter.
We now turn to the specific statutory provisions in question, as they existed on the date of the subject transaction, and the particular legal issues presented in this case. N.H.Rev.St.Ann. § 358-K:S
The issue before the Court under this statute is whether the defendant’s willful violation of N.H.Rev.St.Ann. § 358-K:3 should result in either (1) a voiding of the entire contract in terms of its interest provisions, or (2) a voiding of only the illegal “advance interest” portion of the contract. The relevant statutory provisions read as follows:
358-K:3: Advance Collection of Interest in Consumer Credit Transactions Prohibited After June 30, 1985.
Notwithstanding any other law to the contrary, with respect to closed-end consumer credit transactions entered into after June 30, 1985, interest shall be collected only as earned, and no interest on such transactions shall be paid, deducted or added to principal in advance. This section shall not preclude the advance collection or prepayment of other charges to which the transaction is subject. This section shall not apply to the advance collection of interest at the inception of a closed-end consumer credit transaction for origination fees or for a fractional part of a month in order to achieve a common or convenient monthly payment date as provided by RSA 358-K:4-a.
358-K:5: Penalty.
Any person who willfully violates any provision of this chapter shall be guilty of a misdemeanor.
358-K:6: Application of Chapter to Types of Transactions.
The provisions of this chapter shall apply to all consumer credit transactions, both secured and unsecured, including those transactions secured by a real property mortgage.
N.H.Rev.St.Ann. § 398-A:2
The issue before the Court under this statute is the remedy for the defendant’s non-willful violation of N.H.Rev.StAnn. § 398-A:2. The relevant statutory provisions under 398-A read as follows:
398-A:2 (I & II) Interest and Interest Rates.
I. The allowable rate of interest computed on the unpaid balance that any person may directly or indirectly charge, take or receive for a second mortgage loan secured by property which is occupied in whole or in part at the time said loan is made as a home by any obligor on the mortgage debt or by any person granting or releasing any interest under said mortgage shall be the rate agreed upon in the note between borrower and lender; and following the sixth month of any period in which a loan has been in continuous default not more than 1)6 percent per month on any unpaid balances. [Amended 1985, 397:7. 1987, 339:8, eff. Jan. 1, 1988.]
II. Notwithstanding any other provisions of this chapter the charges which may be collected on any loan made under this chapter for the period beginning 6 months after the originally scheduled final installment date of a loan other than an open-end loan, or for the period beginning 6 months after the final due date of an open-end loan as established by the term applicable to the loan from time to time in accordance with the open-end note or loan agreement and ending with date of payment of the loan in full shall not exceed 18 percent per annum simple interest on the balances outstanding from time to time during said period. If the loan is an open-end loan the borrower’s privilege for further loans shall not be reinstated by the licensee where the rate has been reduced under the preceding sentence unless the borrower executes a new open-end loan agreement.
398-A:7 Illegal Loans.
Any loan made in violation of RSA 398-A:2 by any person shall be discharged upon payment or tender by the debtor or any person succeeding to his interest in such real estate of the principal sum actually borrowed. Any agreement whereby the borrower waives the benefits of RSA 398-A:2 or releases any rights he may have acquired by virtue thereof shall be deemed against public policy and void. The superi- or court shall have jurisdiction of all suits *867arising under RSA 398-A:2 and if a finding is made that such loan secured by any such mortgage violates said section such borrower shall be entitled as a part of his costs to a reasonable fee for the services of his attorney in such suit.
398-A:7-a Penalty.
Any person who willfully violates any provision of this chapter shall be guilty of a misdemeanor if a natural person, or guilty of a felony if any other person, for each such violation.
N.H.Rev.ShAnn. § 358-A:2
The issue before the court under the Consumer Protection provisions of Chapter 358-A is whether the violations of the other statutory provisions should also be determined to be a violation of this statutory proscription as well. A violation under Chapter 358-A can lead to enhanced doubling or trebling of damages as well as specific provision for allowance of attorneys’ fees and costs. A secondary issue is whether independently of the fact of proven violation of other statutory provisions by the defendant the conduct of the defendant involved in the present litigation should be determined to constitute a violation of § 358-A:2 directly. The relevant statutory provisions under Chapter 358-A are as follows:
358-A:2 Acts Unlawful.
It shall be unlawful for any person to use any unfair method of competition or any unfair or deceptive act or practice in the conduct of any trade or commerce within this state. Such unfair method of competition or unfair or deceptive act or practice shall include, but is not limited to, the following:
I. Passing off goods or services as those of another;
II. Causing likelihood of confusion or of misunderstanding as to the source, sponsorship, approval, or certification of goods or services;
III. Causing likelihood of confusion or of misunderstanding as to affiliation, connection or association with, or certification by, another;
IV. Using deceptive representations or designations of geographic origin in connection with goods or services;
V. Representing that goods or services have sponsorship, approval, characteristics, ingredients, uses, benefits, or quantities that they do not have or that a person has a sponsorship, approval, status, affiliation, or connection that he does not have;
VI. Representing that goods are original or new if they are deteriorated, altered, reconditioned, reclaimed, used or secondhand;
VII. Representing that goods or services are of a particular standard, quality, or grade, or that goods are of a particular style or model, if they are of another;
VIII. Disparaging the goods, services, or business of another by false or misleading representation of fact;
IX. Advertising goods or services with intent not to sell them as advertised;
X. Advertising goods or services with intent not to supply reasonably expectable public demand, unless the advertisement discloses a limitation of quantity;
XI. Making false or misleading statements of fact concerning the reasons for, existence of, or amounts of price reductions; or
XII. Conducting going out of business sales other than the name implies, or which last more than 60 days, or which are held more than once every 2 years by the same owner of the business.
358-A:6 Penalties.
I. Any person convicted of violating RSA 358-A:2 hereof shall be guilty of a misdemeanor if a natural person, or guilty of a felony if any other person.
II. Any person who violates the terms of an injunction issued under RSA 358-A:4, III, shall be guilty of a misdemeanor if a natural person, or guilty of a felony if any other person. For the purposes of this section, the court issuing said injunction shall retain jurisdiction.
III. Any person who subverts the intent and purposes of this chapter by filing false, misleading, or substantially inaccurate statements with the attorney general for the purposes of effecting prosecution under this chapter shall be guilty of a violation.
*868IV. If any person is found to have engaged in any act or practice declared unlawful by this chapter, the court may award to the state in any action brought under this chapter all legal costs and expenses. RSA 525:12 shall apply to civil actions commenced under this chapter.
358-A:10 Private Actions.
I. Any person injured by another’s use of any method, act or practice declared unlawful under this chapter may bring an action for damages and for such equitable relief, including an injunction, as the court deems necessary and proper. If the court finds for the plaintiff, recovery shall be in the amount of actual damages or $200, whichever is greater. If the court finds that the use of the method of competition or the act or practice was a willful or knowing violation of this chapter, it shall award as much as 3 times, but not less than 2 times, such amount. In addition, a prevailing plaintiff shall be awarded the costs of the suit and reasonable attorney’s fees, as determined by the court. Any attempted waiver of the right to the damages set forth in this paragraph shall be void and unenforceable.
II. Upon commencement of any action brought under this section, the clerk of the court shall mail a copy of the complaint or other initial pleadings to the attorney general and, upon entry of any judgment or decree in the action, shall mail a copy of such judgment or decree to the attorney general.
THE CONFLICTING CONTENTIONS
The plaintiff argues that the illegality of the interest provisions of the contract in question should result in a finding that the contract is unenforceable except with regard to repayment of the principal advanced by the defendant. More specifically, the plaintiff in her memorandum (Court Doc. No. 23) provides an analysis of allowable and varied charges in tabular form as follows:
Analysis of Benefits Conferred Upon Debtor under the Void Contract Which Should be Tendered or Paid to Realty Funding Under the Chapter 13 Plan.
Charge or Disbursement
Amount
Void
Allowed
Closing Cost On Original Loan
Legal Fee to Mark Harmon
700.00
700.00
Recording Costs
34.50
© LO ^ CO
Postage & Xerox
35.00
O O LO CO
Five Points Interest on Loan
1,600.00
1,600.00
Prepaid Interest to 10/31/88
320.00
320.00
Bring 1st Mortgage Current
1,866.14
1,866.14
Payoff 2nd Mortgage
16,679.11
16,679.11
Derry RE Taxes 1988
1,419.83
1,419.83
1st 12 Loan Payments Escrowed
5,760.00
6,760.00
Title Certification & Title Ins.
199.00
199.00
Brokerage Fee to Mansfield Mtge.
2,240.00
2,240.00
Net to Borrower
1,146.42
1,146.42
Servicing Costs
Derry RE Taxes 88 & 89
5,258.10
5,258.10
Homeowner’s Insurance
209.70
209.70
UPS
9.00
9.00
Derry RE Taxes 1990
1,476.02
1,476.02
Tamposi & Bouchard
512.60
512.60
Stephen Males, Esq.
1,849.50
1,849.50
UPS
9.00
9.00
Gatsas Appraisal
100.00
100.00
Stephen Males, Esq.
3,659.00
3,659.00
Stephen Males, Esq.
588.00
588.00
Stephen Males, Esq.
330.00
330.00
Stephen Males, Esq.
2,175.00
2,175.00
Paul J. Haley, Esq.
1,175.00
1,175.00
*869Charge or Disbursement
Amount
Void
Allowed
Interest
Int 11/1/88-5/30/93
30,579.13
30,579.13
Int 06/01/93-12/19/94
9,620.66
9,620.66
TOTAL
89,550.71
55,457.89
34,092.82
Under this analysis the plaintiff contends that since she paid $30,579.13 in pure interest payments over the life of the loan she entitled to a credit in that amount against the actual benefits received which total $34,-092.82. Accordingly the plaintiff argues that the Court should find that the debtor owes the defendant the difference, or $3,513.69 to be paid pursuant to a chapter 13 plan, before application of any credit for damages that might be awarded for the statutory violations.
The defendant for its part contends that the contract should only be adjusted to delete the illegal “advance interest” and the other violative interest features and their effects throughout the loan. The defendant’s analysis appears in tabular form in its memorandum (Court Doc. No. 25) as follows:
Defendant adjusts the original loan amount of $32,000.00 to $25,500, calculated as follows:
Original loan amount
$32,000.00
Less:
Escrow
amount
5,760.00
Five points assessed for escrow amount
288.00
Brokerage fee (7%)
403.20
Adjusted original loan amount
$25,548.80
Rounded principal balance
$25,500.00
5. To the adjusted rounded principal balance, defendant is entitled to the following additions:
Rounded principal balance
$25,500.00
Plus INTEREST
33,002.93
Monthly interest owed on 12/19/94
+ 33,002.93
PAYMENTS MADE BY DEFENDANT ON PLAINTIFF’S BEHALF
First year’s interest payments
5,990.14
2/9/90
Town of Derry real estate taxes
5,258.10
3/29/90
Continental Insurance
209.70
3/29/93
UPS
9.00
5/12/93
Town of Derry real estate taxes
1,476.02
TOTAL PAYMENTS FOR PLAINTIFF
+ 12,942.96
DEFENDANT’S COSTS RELATIVE TO DEBT COLLECTION
11/08/93
Tamposi & Bouchard
512.60
11/29/93
Stephen Males, Esquire
1,849.50
12/16/93
UPS
9.00
2/18/94
Gatsas Appraisal
100.00
2/18/94
Stephen Males, Esq.
3,659.00
3/21/94
Stephen Males, Esq.
588.00
4/29/94
Stephen Males, Esq.
330.00
6/10/94
Stephen Males, Esq.
2,175.00
*870DEFENDANT’S COSTS RELATIVE TO DEBT COLLECTION
11/04/94
Paul J. Haley, Esq.
1,175.00
12/29/94
Paul J. Haley, Esq.
2,475.00
TOTAL COLLECTION COSTS
+ 12.873.10
SUBTOTAL
$84,318.99
Less: Interest Paid by plaintiff
-30,579.13
Balance due defendant
$53,739.86
The defendant therefore contends that it is entitled to judgment in the amount of $53,-739.86. The defendant makes no mention in its Memorandum regarding damages for the statutory violations and/or enhanced damages, attorneys fees, and costs, if a violation of Chapter 358-A is also determined by this Court.
The debtor does spell out her claim for damages in her Memorandum claiming a statutory penalty under RSA § 358-A:10 for 36 separate violations that the debtor contends occurred on each month between December 3, 1990 and May 20, 1993, as well as on July 12, 1993, since the debtor argues the defendant actually collected interest payments from the debtor on those occasions which were based, in part, on a principal balance improperly inflated and therefore the debtor argues that each monthly interest collected was necessarily excessive.1
The debtor notes that the total of 36 separate violations would justify a damage award of at least $7,200 (at the $200 per violation penalty) and that a finding of a willful or knowing violation of Chapter 358-A of the New Hampshire Revised Statutes would permit the Court under RSA § 358-A:10 to double or treble this amount.2 The debtor finally claims entitlement to reasonable attorneys fees and costs “pursuant to NH RSA 398-A:7, NH RSA 361-C, NH RSA 358-C:4, and NH RSA 358-A:10.”
DISCUSSION
The primary legal question raised by the facts of this case is whether the defendant will suffer forfeiture of all interest on the loan in question or only that portion of the interest provided in the loan contract which has been determined to be illegal and in violation of the pertinent statutory provisions.
With regard to the violation of RSA § 398-A:2 the answer to this primary question is clear since § 398-A:7 explicitly provides that a borrower subjected to an illegal loan under this statutory provision may satisfy the loan in question by tendering the principal only to the lender. Moreover, the fact that the separate statutory provision of § 358-K-.3 violated by this defendant is not accompanied by a comparable provision in Chapter 358-K, dealing explicitly with loan repayment, does not necessarily absolve the defendant from a like result from that statutory violation as well.
The ease law in New Hampshire has long evidenced a dim view taken toward parties seeking to enforce contractual provisions under a contract found to have violated a statutory prohibition. As early as 1843 the New Hampshire Supreme Court in Allen v. Deming, 14 N.H. 133, 138 (1843) stated:
A party should not be heard before a tribunal whose duty it is to declare the law, when his cause of action arises from a transgression of the law. The principle has been applied to the sale of lottery tickets, Hunt vs. Knickerbocker, 5 Johns. 327; to a promissory note for the price of shingles under the statutory dimensions, Wheeler vs. Russell, 17 Mass. 258; to a sale of wood by the cord, not measured by a wood measurer, Pray vs. Burbank, 10 N.H.Rep. 377; and to many other cases. Fales vs. Mayberry, 2 Gall 560 [8 F.Cas. *871970]; Laws vs. Hodson, 11 East 300; Parkin vs. Dick, 11 East 502.
The New Hampshire Court reinforced this principle in Boutelle v. Melendy, 19 N.H. 196, 197 (1848) stating:
The sale was illegal; and it is well settled that such contracts shall receive no judicial sanction; that the law will recognize no validity, in favor of a wrong-doer in an act which it prohibits and punishes. To permit its subsequent ratification, or to consider it the sufficient and legal basis of a subsequent promise, would be a manifest inconsistency. It would be to annul the rule, and enable the parties, by an easy expedient, to evade laws based upon considerations of public policy. See Allen v. Deming, 14 N.H.Rep. 133.
In the ease of Karamanou v. H.V. Greene Co., 80 N.H. 420, 124 A. 373 (1922), a case in which the Court affirmed the granting of relief to a buyer of securities for the purchase price, without any showing of value or proof of loss, where the seller sold without a license required by statute, the Supreme Court commented (at page 423, 124 A. 373) as follows:
... “[W]here contracts or transactions are prohibited by positive statutes, for the sake of protecting one set of men from another set of men; the one from their situation and condition, being hable to be oppressed or imposed upon by the other; there, the parties are not in pari delicto; and in furtherance of these statutes, the person injured, after the transaction is finished and completed, may bring his action and defeat the contract.” Lord Mansfield, Browning v. Morris, 2 Cowp. 790, quoted in Edgerly v. Hale, 71 N.H. 138, 147 [51 A. 679]. The statute under consideration was passed for the protection of men such as the plaintiff. The sale only is penalized, not the purchase. If the plaintiff has paid money or other thing to the defendant under the prohibited contract, the defendant cannot set up a title to such money or thing under the contract made in violation of law and the plaintiff will be entitled to recover without proof of the defendant’s bad faith or the lack of value in the securities if he returns them. Edgerly v. Hale, 71 N.H. 138, 147, 148 [51 A. 679]; Edward v. loor, 205 Mich. 617 [172 N.W. 620], 15 A.L.R. 256.
These early New Hampshire cases, as well as a succeeding line of similar case decisions in New Hampshire, were examined by the Court of Appeals for the First Circuit in Doherty v. Bartlett, 83 F.2d 259 (1936) noting (at pages 260-261) the following:
In New Hampshire from the earliest time contracts or acts entering into contracts prohibited by statute subject to penalty have been uniformly held to be void, not voidable (Allen v. Deming, 14 N.H. 133, 40 Am.Dec. 179; Boutelle v. Melendy, 19 N.H. 196, 49 Am.Dec. 152; State v. Rand, 51 N.H. 361, 12 Am.Rep. 127; Albertson & Co. v. Shenton, 78 N.H. 216, 98 A. 516; Edgerly v. Hale, 71 N.H. 138, 51 A. 679; George v. George, 47 N.H. 27, and numerous other cases); whereas, in Massachusetts they frequently have been held voidable, if not executed, not void.
More recently, the New Hampshire Supreme Court has indicated some softening of its earlier rigid position of refusing to enforce any provision of a contract found to be viola-tive of a specific statutory proscription, as indicated in the decision of American Home Improvement Inc. v. MacIver, 105 N.H. 435, 201 A.2d 886 (1964). In that case the plaintiff had entered into a home improvement contract for work on the defendant’s residence and had separately entered into a financing contract, to cover the job, which was determined to be in violation of RSA § 399-B in that the rate of interest or finance charges under the loan contract were not clearly stated as required by the statute. The defendant breached the contract before much work was done on his residence but after the plaintiff had paid an $800 commission to the salesman who had obtained the home improvement contract. The plaintiff was denied any relief for the breach of the contract by the defendant even though it was determined that the plaintiffs violation of § 399-B was not willful.
*872In affirming the result in the American Home Improvement case, the New Hampshire Supreme Court reexamined the “illegality factor” as to contractual enforceability and commented (at page 438, 201 A.2d 886) as follows:
The parties have agreed that the plaintiff did not willfully violate the disclosure statute and this eliminates any consideration of RSA 399-B :4 (supp) which provides a criminal penalty of a fine of not more than five hundred dollars or imprisonment not more than sixty days, or both. This brings us to the second question whether the agreement is “void so as to prevent the plaintiff from recovering for its breach.”
“At first thought it is sometimes supposed that an illegal bargain is necessarily void of legal effect, and that an ‘illegal contract’ is self-contradictory. How can the illegal be also legal? ‘The matter is not so simple.’ 6 A Corbin, Contracts, s. 1373 (1962). The law is not always black or white and it is in the flexibility of the gray areas that justice can be done by a consideration of the type of illegality, the statutory purpose and the circumstances of the particular ease. ‘It is commonly said that illegal bargains are void. This statement, however, is clearly not strictly accurate.’ 5 Williston, Contracts (Rev. ed. 1937) s. 1630. The same thought is well summarized in 6 A Corbin, Contracts, s. 1512 (1962): ‘It has often been said that an agreement for the doing of that which is forbidden by statute is itself illegal and necessarily unenforceable. This is an unsafe generalization, although most such agreements are unenforceable.’ This section was cited in the recent ease of [William ] Coltin [&] Company v. Manchester Savings Bank, 105 N.H. 254 [197 A.2d 208], holding unenforceable a contract for a broker’s commission for the sale of real estate without a license in ■'violation of a statute.
In examining the exhibits and agreed facts in this case we find that to settle the principal debt of $1,759 the defendants signed instruments obligating them to pay $42.81 for 60 months, making a total payment of $2,568.60, or an increase of $809.60 over the contract price. In reliance upon the total payment the defendants were to make, the plaintiff pay a sales commission of $800.
******
In the circumstances of the present case we conclude that the purpose of the disclosure statute will be implemented by denying recovery to the plaintiff on its contract and granting the defendants’ motion to dismiss. [Burque v. Brodeur,] 85 N.H. 310, 158 A. 127; Park v. Manchester, 96 N.H. 331 [76 A.2d 514]; Albertson & Co. v. Shenton, 78 N.H. 216 [98 A. 516].
The new standard enunciated in the American Home Improvement ease was picked up and restated in Decato Brothers, Inc. v. Westinghouse Credit Corp., 129 N.H. 504, 529 A.2d 952 (1987), in another case involving a violation of full disclosure of interest rates under RSA Chapter 399-B. In this case the Court ultimately held that the loan contract was enforceable although the decision to a large extent was based upon the fact that there had been an explicit accord and satisfaction agreement between the parties before the question of statutory violation was ever raised by the borrower.
The Court in the Decato Brothers’ case restated the applicable standard in this context (at pp. 509-510, 529 A.2d 952) as follows:
We next must consider whether the defendant’s non-compliance with the disclosure statute renders the contract automatically void, to deprive the defendant of the benefit of its bargain. The question is whether the facts in this case justify our going beyond the criminal sanction of the statute to require the defendant to forfeit its right to payment for the time value of the money it loaned the plaintiff, along with the prepayment penalty.
We note that we are dealing with a technical violation of the statute. This court has held that the fact that a credit transaction runs afoul of chapter 399-B does not necessarily render it void for all purposes. First Fed. Savings & Loan Ass’n v. LeClair, 109 N.H. 339, 341, 253 *873A.2d 46, 48 (1969). As Chief Justice Kenison noted in American Home Improvement, 105 N.H. at 438, 201 A.2d at 888, “[t]he law is not always black or white and it is in the flexibility of the gray areas that justice can be done by a consideration of the type of illegality, the statutory purpose and the circumstances of the particular case.”
The violation here is punishable as a misdemeanor. Violation of statutes aimed at deterring sharp loaning practices should not be condoned. To decide whether a consequence beyond the one prescribed by the statute should attach, however, we must consider all the circumstances, including:
“what was the nature of the subject matter of the contract; what was the extent of the illegal behavior; was that behavior a material or only an incidental part of the performance of the contract ... what was the strength of the public policy underlying the prohibition; how far would effectuation of the policy be defeated by denial of an added sanction; how serious or deserved would be the forfeiture suffered by the plaintiff, how gross or undeserved the defendant’s windfall.”
Town Planning & Eng’r Assocs. Inc. v. Amesbury Specialty Co., Inc., 369 Mass. 737, 745 — 46, 342 N.E.2d 706, 711 (1976). Without engaging in a protracted analysis, we hold that in this case the vector of considerations points in the defendant’s favor. Courts should not go out of their way to visit hardship upon parties beyond that which is necessary to uphold the policy of the law. Nussenbaum v. Chambers & Chambers, Inc., 322 Mass. 419, 422, 77 N.E.2d 780, 782 (1948). In this case, the statutory violation is not so repugnant as to entitle the plaintiff to a gift of the defendant’s services, namely the free use of a large amount of money for a substantial period of time. As Professor Corbin has noted in the context of licensing statutes:
“[I]n very many cases the statute breaker is neither fraudulent nor incompetent. He may have rendered excellent service or delivered goods of the highest quality, [and] his non-compliance with the statute seems nearly harmless.... Justice requires that the penalty should fit the crime; and justice and sound policy do not always require the enforcement of licensing statutes by large forfeitures going not to the state but to repudiating [parties].”
6A A.L. Corbin, Corbin on Contracts 1512 at 713 (1962). We find this reasoning applies in the present context, and hold that the exchange notes in this case were properly the subject of an accord and satisfaction between the parties.
CONCLUSION
Under the foregoing New Hampshire authorities it is my conclusion that the violation of RSA § 358-K:3 found by this Court to have been willful on the part of the defendant should be determined to be no mere “technical” violation of the statute in question but rather a violation of an important public policy intended to protect unskilled and unlearned consumer borrowers from oppressive overreaching by lenders sophisticated enough to use an excessive interest scheme whose vice is not readily apparent to the average consumer. That being the ease, I believe it would be a travesty to allow the lender in that context to escape any substantial penalty by simply offering to refund the excessive interest charged. Such a result would not deter lenders using that device from repeated violations of the statute since they would still remain assured of recovering interest for the use of his money at the legal rate. I believe something more is required to “get the attention” of such lenders in the manner necessary to implement the public policy embodied in the legislation in question. That “something more” I conclude is to refuse to enforce the loan contract provisions with regard to any amount of interest therein provided.
The violation of RSA § 398-A:2 found by this Court might be viewed closer to the “technical violation” category under the De-*874cato analysis, inasmuch as the Court has determined that this violation was not willful due to the complexity of the statutory language involved, but the problem for the defendant with regard to this violation is that this statutory provision occurs in a Chapter in which it is explicitly provided under RSA § 398-A:7 that borrowers suffering a violation by illegal loans under Chapter 398-A may satisfy the loan in question by tendering the principal amount only. Moreover, there is no requirement for a finding of willfulness in that context. Accordingly, I conclude that the defendant should not be allowed to recover any interest with regard to the loan in question on the separate ground of violation of RSA 398-A:2 as determined by this Court.
The final question for determination is whether this Court should find and conclude that the statutory violations found by this Court to have occurred should also be determined to constitute a violation of RSA § 358-A:2 which involves the use of an unfair method of competition or an unfair or deceptive act or practice by the defendant in the conduct of his trade or commerce within this state. It is noted that Chapters 358-K and 398-A of the New Hampshire Revised Statutes do not explicitly provide that a remedy under Chapter 358-A is also available for a violation, although other consumer protection statutes in New Hampshire do provide explicitly for such an additional remedy.
It has recently been held in Chroniak v. Golden Investment, 983 F.2d 1140 (1st Cir.1993), applying New Hampshire law, that such an explicit remedy provision is not necessary to the availability of the additional remedies under Chapter 358-A if the situation otherwise warrants such remedies. As noted in Chroniak the conclusion is inescapable: “If conduct that is not proscribed by any statute may be found ‘unfair’ under CPA, § 2, conduct squarely within the proscriptive penumbra of a consumer protection statute surely satisfies the ‘unfairness’ requirement.” (983 F.2d at 1146).
Accordingly, I find and conclude that the defendant’s conduct in violating the specific statutory provisions determined by this Court also constitutes an unfair or deceptive act or practice in violation of RSA § 358-A:2. That being the ease, the Court determines that the plaintiff shall have damages pursuant to RSA § 358-A: 10 in the amount of $200.00 for each of the 36 separate violations or a total of $7,200.00 in statutory damages. The Court determines, however, no doubling or trebling of the statutory damages is warranted in the present case, in view of my conclusion above denying the defendant any collection of interest on the loan in question.
A separate order shall issue pursuant to this opinion providing for judgment in favor of the plaintiff in the net amount of $3,686.31 (damages of $7,200.00 less credit for $3,513.69 of unpaid principal) and determining that the hen upon the plaintiffs property shall be deemed satisfied and shall be removed from the public records.
The Court defers any ruling with regard to claim to attorney’s fees by the plaintiff but will retain jurisdiction in that regard for separate proceedings following entry of judgment in this matter as may be appropriate.
. The debtor also contends alternatively that damages could be calculated at $200 per violation pursuant to RSA § 358-C:4 but this Court has found no violation of that specific Chapter of the New Hampshire Revised Statutes.
. The plaintiff again contends alternatively for enhanced damages under Chapter 358-C of the statutes but again this Court has found no violation of that specific Chapter. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492125/ | MEMORANDUM-DECISION, FINDINGS OF FACT, CONCLUSIONS OF LAW AND ORDER
STEPHEN D. GERLING, Chief Judge.
The Court considers herein motions by Danny Dale Cromer and Betsy Cromer (“Debtors”) and Robert E. Littlefield, Esq., Chapter 13 Trustee (“Trustee”) which seek an order expunging a proof of claim filed by Beneficial Homeowners Services Corporation (“Beneficial”). Also before the Court is Beneficial’s cross-motion seeking an order permitting it to file a late claim and compelling the amendment of Debtors’ Chapter 13 Plan.
The motions were heard by the Court in Utica, New York on June 2, 1994. The Court did not require additional memoranda of law and the matter was submitted as of the date of oral argument.
JURISDICTIONAL STATEMENT
The Court has core jurisdiction of this contested matter pursuant to 28 U.S.C. *2§§ 1334(b) and 157(a)(b)(l) and (2)(B), (L) and (0).
FACTS
Debtors filed a voluntary petition pursuant to Chapter 13 of the United States Bankruptcy Code (11 U.S.C. §§ 101-1330) (“Code”) on March 12, 1993. In accordance with Federal Rule of Bankruptcy Procedure (“Fed. R.Bankr.P.”) 3002(c), August 25, 1993 was fixed as the date by which creditors were required to file proofs of claim.
At the time of the filing of Debtors’ petition, Beneficial was an alleged secured creditor holding a second mortgage on real property of the Debtors located at 907 Bradt Street, Schenectady, New York. Beneficial did not file a proof of claim on or before August 25, 1993. Subsequent to Debtors’ filing of their Chapter 13 petition, the automatic stay imposed pursuant to Code § 362(a) was lifted pursuant to an Order of the Court dated January 11, 1994, to allow the holder of the first mortgage, Midlantic Home Mortgage Corporation (“Midlantic”), which had previously been granted a judgment of foreclosure entered in December, 1992, in New York State Supreme Court, to complete its foreclosure of the Schenectady property. As a result of the foreclosure sale which occurred on or about March 14, 1994, there were no surplus monies available to be applied to the second mortgage of Beneficial.1 Thus, on April 22,1994, Beneficial filed a proof of claim as an unsecured creditor in the sum of $19,972.50.
Debtors’ Chapter 13 Plan, which was confirmed by Order of this Court dated June 9, 1993, provided for a distribution to unsecured creditors of 100% of their claims. The Debtors had not completed the payments required pursuant to the Plan at the time the instant motions were filed.
ARGUMENTS
Both the Debtors and the Trustee argue simply that because Beneficial’s proof of claim was filed some eight months after August 25, 1993, the so-called “bar date”, it cannot be allowed.
Beneficial asserts that as a secured creditor it did not have to file a proof of claim initially, but that upon learning that its second mortgage was fully unsecured by virtue of the foreclosure of the first mortgage encumbering the Debtors’ real property, it promptly filed an unsecured proof of claim for its deficiency.
It argues further that various sections of the Code allow for the filing of late claims and to the extent Fed.R.Bankr.P. 3002(e) is in conflict, it is null and void.
Finally, Beneficial contends that Debtors’ Plan provided for payment of 100% to unsecured creditors, that Debtors had only one creditor being paid “inside” the Plan at the time the Plan was confirmed, that being a claim for mortgage arrears on the first mortgage. Those arrears have now been paid in full and Beneficial estimates that if Debtors complete the payments pursuant to the Plan, it will receive between 50% and 80% of its unsecured claim and thus the Plan requires modification pursuant to Code § 1329(a) to adjust the percentage dividend to unsecured creditors from 100% to the estimated 50% to 80%.
DISCUSSION
This contested matter presents the Court with issues bearing some similarity to those which it previously considered in its decision in In re Bailey, 151 B.R. 28 (Bankr.N.D.N.Y.1993). However, there are significant factual dissimilarities between Bailey and the matter sub judice. The most significant of those dissimilarities is the fact that in Bailey, the late filing creditor was at all times unsecured. In this case Beneficial was, at least “on paper”, a secured creditor at the inception of the Chapter 13 case.
Fed.R.Bankr.P. 3002(c) which requires the filing of a proof of claim in a Chapter 13 ease does not by its terms include the holder of a secured claim. See Fed. R.Bankr.P. 3002(a). Thus, it appears that *3had Beneficial’s status as a secured creditor remained unchanged, there would have been no requirement for Beneficial to have filed any proof of claim. See In re Maylin, 155 B.R. 605, 611 (Bankr.D.Me.1993), In re Babbin, 160 B.R. 848, 849 (D.Colo.1993) and In re Wells, 125 B.R. 297, 300 (Bankr.D.Colo.1991). Equally significant is the acknowl-edgement that the failure of a secured creditor to file a proof of claim pursuant to Fed. R.Bankr.P. 3002(a) leaves unaffected the lien of that secured creditor. Matter of Tarnow, 749 F.2d 464, 465 (7th Cir.1984).
In the case sub judice, it is clear that the Debtors acknowledge in their Chapter 13 Plan filed March 12, 1993, that “The second mortgage (Beneficial) which is current will be reaffirmed and paid outside of plan”. Likewise, the Confirmation Order dated June 9, 1993 provided in paragraph III F) that Beneficial was indeed a secured creditor with the right to seek ex parte relief from the stay imposed pursuant to Code § 362(a) upon certain conditions occurring.
Beneficial posits that the recent decision of the United States Court of Appeals for the Second Circuit in In re Vecchio, 20 F.3d 555 (2nd Cir.1994) clearly establishes precedent in this Circuit, invalidating Fed.R.Bankr.P. 3002(c) to the extent that the Rule provides that late filed claims in both Chapter 7 and Chapter 13 cases must be disallowed. Beneficial argues that while Vecchio dealt with late filed claims in a Chapter 7 ease, the unequivocal holding of the Second Circuit that Rule 3002(c) must yield in light of Code §§ 501, 502 and 726, applies with equal force in Chapter 13. Finally, Beneficial contends that to the extent it is inconsistent with Vecchio this Court’s decision in Bailey has been overruled.
This Court does not believe that it is necessary to reconsider its decision in Bailey in light of the Second Circuit’s conclusion in Vecchio since it reaches the conclusion herein that Beneficial’s late proof of claim must be allowed.2
Debtors’ Chapter 13 Petition and Schedules listed the value of their real property at $70,000. Additionally, it listed the first mortgage due Midlantic with a balance of approximately $46,000 and the second mortgage due Beneficial with a balance of $20,000. Debtors’ Chapter 13 Plan provided that the first and second mortgages would be reaffirmed and paid outside the Plan. Clearly at the inception of the case, Beneficial, as an apparently fully secured creditor whose claim was being provided for by the Plan, had no requirement or reason to believe that it was required to file a proof of claim. Babbin, supra, 160 B.R. at 849.
In December 1993, however, Midlantic moved for relief from the stay alleging that Debtors had ceased making mortgage payments. On January 11, 1994, the Court granted Midiantic’s motion. Likewise, on January 18, 1994, Beneficial also moved for relief from the stay and that motion was granted by Order dated February 7, 1994. It is alleged by Beneficial and not disputed that on or about March 14, 1994, a state court foreclosure of the Midlantic mortgage occurred and Beneficial became aware that its mortgage was completely unsecured. Thus, on April 22, 1994 Beneficial promptly filed its proof of claim as an unsecured creditor.
This is clearly not the factual scenario found in Bailey. This is not a case where the unsecured creditor simply fails to timely file its unsecured claim. Here Beneficial, allegedly as a secured creditor, had no duty to initially file a proof of claim. Furthermore, it had no reason to believe that its secured claim was “under water” and that it would be necessary to file a proof of claim. It was not until some seven or eight months after the bar date for filing claims had come and gone that it became aware that its status had changed. See In re Lundy, 110 B.R. 300, 303 (Bankr.N.D.Ohio 1990).
*4Code § 1327(a) mandates that the provisions of a confirmed plan bind both the debtor and each creditor. According to the terms of the Plan, the Debtors were to reaffirm the debt owed to Beneficial and make payment outside the Plan. In light of the fact that the Debtors are bound by the provisions of the Plan to make payment to Beneficial and the fact that Beneficial, prior to the foreclosure sale, had no reason to object to said treatment, the Court concludes that the equities favor permitting Beneficial to file a late proof of claim.3 The fact that Beneficial is the only remaining creditor of these Debtors and payment of its claim at this juncture will prejudice no one serves as additional support for this conclusion. The primary rationale in those cases which have criticized the conclusions reached in In re Hausladen, 146 B.R. 557 (Bankr.D.Minn.1992) for not permitting the late filing of a proof of claim in a Chapter 13, to wit, prejudice to timely filed claims post-confirmation, does not exist here.
Thus, this Court reaches the conclusion under the specific facts presented in this contested matter that the motions of the Chapter 13 Trustee and the Debtors are denied, while the cross-motion of Beneficial is granted and Debtors’ Plan is modified insofar as it purports to pay unsecured creditors 100%, said percentage being modified to the extent that the balance of payments due under the Plan shall be paid to Beneficial.
IT IS SO ORDERED.
. By Order dated February 7, 1994, the Court also granted relief from the stay to Beneficial as to the Schenectady property.
. It should be noted that while not applicable to this case, the Bankruptcy Reform Act of 1994 (H.R. 5116) at § 213(a), amends Code § 502(b) to add lack of timely filing to the list of grounds upon which a proof of claim will be disallowed, thus, effectively overruling In re Hausladen, 146 B.R. 557 (Bankr.D.Minn.1992) and its progeny and to the extent that it relied upon Hausladen, seriously undermining the rationale in Vecchio supra.
. It is noted that Fed.R.Bankr.P. 3002(c)(3) purports to deal with a factual scenario similar to that which occurred herein, however, it is difficult to conclude that that Rule is dispositive since it is not clear when the "judgment became final”, as applied to the Midlantic mortgage foreclosure and sale, which effectively converted Beneficial's status from ostensibly secured to wholly unsecured. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492126/ | MEMORANDUM OPINION
EDWARD ELLINGTON, Chief Judge.
This adversary proceeding came on for trial upon the Complaint of Marvis M. Stin-son and Judith R. Stinson, wherein the Stin-sons seek a determination by this Court of the proper disposition of funds generated by the foreclosure of the Debtors’ home, upon which the Stinsons hold a third deed of trust. After considering the stipulation of the parties, the evidence presented at trial, together with arguments of counsel, the Court holds that the Stinsons are entitled to have their note secured by the third deed of trust satisfied out of the surplus remaining from the foreclosure proceeds after Omnibank’s note secured by the second deed of trust and costs of foreclosure are satisfied. In so holding, the Court makes the following findings of fact and conclusions of law.
FINDINGS OF FACT
On December 21, 1989, the Debtors, Elton B. Crosby and Betty A. Crosby purchased from the Stinsons a home located in Hinds County, Mississippi. As part of the purchase price for the home, the Crosby’s assumed a promissory note in favor of Kimbrough Investment Company. The promissory note was secured by a first deed of trust on the home.
Also in connection with the purchase of the home, the Crosby’s executed two additional notes and deeds of trust on the same date. The Crosby’s executed one promissory note in the amount of $25,257.50 in favor of Omni-bank. The note was secured by a second deed of trust on the home, which was recorded on December 28,1989, in the Office of the Chancery Clerk of Hinds County, Mississippi. The Crosby’s also executed a promissory note in the amount of $35,000 in favor of the Marvis and Judith Stinson. This note was secured by a third deed of trust on the home, and also was recorded on December 28, 1989 in the Office of the Chancery Clerk of Hinds County, Mississippi.
On January 12,1990 the Crosby’s executed an additional promissory note in favor of Omnibank in the amount of $30,007.50. The note states that the purpose of the loan was for working capital. In order to secure the note the Crosby’s granted a fourth deed of trust on the home. The deed of trust was recorded on January 20,1990 in the Office of the Chancery Clerk of Hinds County, Mississippi.
Finally, on June 1, 1990 the Crosby’s executed a third promissory note in favor of Omnibank in the amount of $65,265 along with a fifth deed of trust on the home. On its face, the note states that its purpose was to combine the purchase money note, the working capital note, and an additional note that is not in issue. The deed of trust was recorded on June 27,1990 in the Office of the Chancery Clerk of Hinds County, Mississippi.
On April 3, 1991 the Crosby’s filed a joint petition for relief under Chapter 7 of the Bankruptcy Code, and on April 16, 1991 an order was entered lifting the automatic stay *30as to Omnibank, and abandoning the home from the estate.
Upon the stay being lifted the Substituted Trustee under the second deed of trust, James E. Lambert, commenced foreclosure proceedings pursuant to applicable Mississippi law. A foreclosure sale was conducted by the Trustee on June 4, 1991, at which time Omnibank purchased the property with a bid of $56,000. A Substituted Trustee’s Deed was executed conveying the property to Om-nibank, and was recorded on June 4, 1991 in the Office of the Chancery Clerk of Hinds County, Mississippi.
From the proceeds of the foreclosure sale, the Trustee paid $39,352.59 to Kimbrough Investment, fully satisfying the indebtedness secured by the first deed of trust on the property. With the remaining sale proceeds, the Trustee partially satisfied Omnibank’s December 21, 1989 note secured by the second deed of trust.
The Stinson’s then commenced this adversary proceeding, seeking an accounting from the Trustee of the disposition of the foreclosure sale proceeds. The Stinsons claim the Trustee is required to pay their note secured by the third deed of trust out of any surplus remaining of the $56,000 foreclosure sale proceeds after paying off Omnibank’s December 21, 1989 purchase money note secured by the second deed of trust and after paying costs of foreclosure.
CONCLUSIONS OF LAW
No dispute exists as to the priority of liens on the property. As set forth above, the deeds of trust on the property were perfected in the following order:
1st Deed of Trust Kimbrough Investment
2ndDeed of Trust Omnibank
3rd Deed of Trust Stinsons
4th Deed of Trust Omnibank
5th Deed of Trust Omnibank
The Stinsons acknowledge that the Trustee was required to satisfy Omnibank’s December 21, 1989 note, secured by the second deed of trust, out of the $56,000 foreclosure sale proceeds. However, the Stinsons claim the Trustee had no authority to satisfy Kim-brough Investment’s note secured by the first lien, and instead was required under Mississippi law to apply any amount remaining after satisfying Omnibank’s December 21, 1989 note secured by the second lien and costs of foreclosure to the Stinsons’ note secured by the third lien.
Omnibank argues that the Trustee acted correctly in satisfying the indebtedness secured by the first deed of trust from the sale proceeds. Omnibank further argues that even if the Trustee was not required to pay the indebtedness secured by the first deed of trust, there still would be no equity to which the Stinsons would be entitled since Omni-bank’s second deed of trust contains both a “future advance” clause and a “dragnet” clause, which effectively secured the entire $66,408.78 due under the three notes held by Omnibank.
As to the appropriate disposition of the foreclosure sale proceeds, two issues must be addressed by this Court. The first is whether the Trustee had the authority to satisfy the indebtedness secured by the first deed of trust from the foreclosure sale proceeds. The second issue is whether the “future advance” clause and the “dragnet” clause contained in Omnibank’s second deed of trust operate to secure the Crosby’s entire indebtedness under the three promissory notes set forth above.
In addressing the foregoing issues, the Court must look to Mississippi law. While federal law is controlling as to bankruptcy proceedings, state law must be applied in determining the property rights of creditors. Butner v. U.S., 440 U.S. 48, 54, 99 S.Ct. 914, 917-18, 59 L.Ed.2d 136 (1979); See also Mutual Benefit Life Ins. Co. v. Pinetree, Ltd. (Matter of Pinetree, Ltd.), 876 F.2d 34, 36 (5th Cir.1989).
AUTHORITY TO SATISFY DEBT SECURED BY SENIOR LIEN
“The general rule is that, where a surplus remains after satisfying a senior mortgage, it should be applied on the junior mortgage.” Great Southern Land Co. v. Valley Securities Co., 162 Miss. 120, 137 So. 510, 514 (1931).
The Mississippi Supreme Court in Reese v. Ivey, 324 So.2d 756 (Miss.1976) considered *31the exact issue before this Court, namely, whether a trustee foreclosing under a second deed of trust must satisfy the first deed of trust out of the foreclosure sale proceeds. In holding that the trustee may not use the proceeds of the foreclosure sale to satisfy the first deed of trust, the court stated that “a foreclosure sale by the trustee in a junior deed of trust is made subject to prior liens on the property, and the trustee can sell and convey no better title than he acquired. Title vests in the purchaser subject to the prior lien.” Id. at 757 (citations omitted). The court further stated:
It was the purchaser’s obligation to pay the first lien. The surplus left after paying the second mortgage, attorney’s fee, and cost of foreclosure should have been paid over to the mortgagor, Reese. We hold that the Trustee had no authority to pay off the Commercial Bank deed of trust, and became liable to the mortgagor, Reese, for the amount thus paid.
Id. at 757.
This Court holds that Omnibank purchased the property at the foreclosure sale subject to the first deed of trust, and the Trustee had no authority to satisfy the debt secured by the first deed of trust out of the foreclosure sale proceeds.
EFFECT OF FUTURE ADVANCE CLAUSE AND DRAGNET CLAUSE
Having decided that the indebtedness secured by the first deed of trust was improperly paid from the foreclosure sale proceeds, the Court next must consider whether the “future advance” clause and the “dragnet” clause contained in Omnibank’s second deed of trust was effective to secure all three promissory notes held by Omnibank.
As previously stated, at the time of foreclosure the total amount due Omnibank under the three promissory notes was in excess of $66,000. If the second and third notes given by the Debtors to Omnibank were secured by the second deed of trust then no surplus would be available from the foreclosure sale proceeds to satisfy the Stinsons’ note secured by the third deed of trust. Omnibank’s second deed of trust is a standard Mississippi Bankers Form Deed of Trust. The “future advance” clause contained in the deed of trust states in pertinent part as follows:
1. This Deed of Trust shall also secure all future and additional advances which Secured Party may make to Debtor from time to time upon the security herein conveyed. Such advanced shall be optional with Secured Party and Shall be on such terms as to amount, maturity and rate of interest as may be mutually agreeable to both Debtor and Secured Party. Any such advance may be made to any one of the Debtors should there be more than one, and if so made, shall be secured by the Deed of Trust to the same extent as if made to all Debtors.
The “dragnet” clause also contained in the deed of trust states in pertinent part as follows:
2. This Deed of Trust shall also secure any and all other indebtedness of Debtor due to Secured Party with interest thereon as specified, or of any one of the Debtors should there be more than one, whether direct or contingent, primary or secondary, sole, joint or several, now existing or hereafter arising at any time before cancellation of this Deed of Trust. Such indebtedness may be evidenced by note, open account, overdraft, endorsement, guaranty or otherwise.
In applying Mississippi law, this Court has previously held that “dragnet” clauses are valid and enforceable, stating as follows:
The Mississippi Supreme Court has enforced “dragnet” clauses in deeds of trust in a variety of factual situations for more than sixty years. Coombs v. Wilson [142 Miss. 502], 107 So. 874 (Miss.1926); Campbell Brothers v. Bigham [149 Miss. 214], 115 So. 395 (Miss.1928); Holland v. Bank of Lucedale, 204 So.2d 875 (Miss.1967); Trapp v. Tidwell, 418 So.2d 786, 792 (Miss.1982); Whiteway Finance Company v. Green, 434 So.2d 1351 (Miss.1983); Walters v. M & M Bank of Ellisville, 218 Miss. 777, 67 So.2d 714 (Miss.1953).
The Mississippi Supreme court has excepted debts owed to third parties which *32were later acquired by the holder of a deed of trust. Hudson v. Bank of Leakesville, 249 So.2d 371 (Miss.1971).
In re Jennings, No. 861209JC (S.D.Miss. July 9, 1987).
In July of 1992 the Mississippi Supreme Court again reiterated its position that “future advance” clauses are valid and enforceable in Shutze v. Credithrift of America, Inc., 607 So.2d 55 (Miss.1992), stating:
Future advance clauses are enforceable according to their tenor. Accepting their creative and constructive role in a credit economy and, as well, freedom of contract, we have upheld such clauses for more than a century. See Coleman v. Galbreath, Stewart & Co., 53 Miss. 303, 306 (1876). the point has been repeatedly litigated since, and we have repeatedly ruled, incident to a secured transaction, the debtor and secured party may contract that the lien or security interest created thereby shall secure other and future debts which the debtor may come to owe the secured party. Such clauses are treated like any other provisions in a contract and will be enforced at law subject only to conventional contract defenses, e.g., fraud, duress, and the like, none of which are present here.
Id. at 58-59.
In so holding, the court went on to explain the effect of “future advance” clauses on junior lienholders:
The principle undergirding Whiteway is that, for priority purposes, the lien securing the future advance takes its date from the recording of the original deed of trust and by operation of law reaches forward to secure the advance made after intervening rights became perfected_ Third parties dealing with the debtor ... are given notice by the public record that the recorded lien secures any future Advances. Those third parties are charged at their peril to inquire of the debtor and prior secured creditors.
Id. at 63 (citations omitted).
As of July of 1992, the law in Mississippi seemed well settled as to “future advance” clauses and “dragnet” clauses. However, in November of 1992 the Mississippi Supreme Court apparently changed its position. Without making any reference to the Shutze decision, the court held in Merchants National Bank v. Stewart, 608 So.2d 1120 (Miss.1992), that while the law is well settled that “dragnet” clauses are effective to include future debt within the scope of the security agreement, where uncertainty exists regarding the extent of debt intended by the parties to be secured by the collateral, the written instrument will be construed narrowly against the drafter. Furthermore, where the document contains boilerplate language the court will look to the parties’ intent as to the collateral at the time the document was drafted.
It is from that perspective that we look to the language contained within the agreement to determine the intent of the parties at the time the agreement was drafted. If the document is clear and unambiguous as to the collateral securing other debts we have found intent to secure these debts....
The nature of the secured debt has also been examined in determining the validity of dragnet clauses with respect to other debt. Some courts have held that unless the debt is of the same nature, or type as the secured debt, the language will not cover the other debt. Moreover, the language “any and all other debts” ... has been interpreted to include only debts similar to the primary debt secured by the document.
Id. at 1126 (citations omitted).
Finding that the language of the security agreement was boilerplate, and finding that the primary debt was for money to purchase a farm while the subsequent debt was for a line of credit to be used for crop production, the court in Merchants National Bank held that the dragnet clause was not effective to secure the entire debt to the bank.
Likewise, in the present case, Omnibank’s second deed of trust contains boilerplate language regarding future advances and other debts to be secured by the collateral. Additionally, the note secured by the second deed of trust on the property was for the purchase of the property, whereas the second note to *33Omnibank was for working capital, and the third note to Omnibank was to combine the first, second, and an additional note held by Omnibank.
It is this Court’s opinion that Merchants National Bank v. Stewart is the most current authority on the effect of “future advance” and “dragnet” clauses under Mississippi law. Therefore, in applying those principles set forth in Merchants National Bank this Court finds that the second deed of trust held by Omnibank was not effective to secure the second and third notes held by Omnibank. While both the second and third notes to Omnibank were independently secured by fourth and fifth deeds of trust on the property, the third deed of trust held by the Stinsons gives them superior rights to satisfy their third deed of trust from any amount of the foreclosure sale proceeds remaining after Omnibank satisfies its December 21,1989 note secured by the second deed of trust and costs of foreclosure.
CONCLUSION
Based on the foregoing, this Court holds that James E. Lambert, Substituted Trustee under the second deed of trust, was without authority to satisfy the indebtedness to Kim-brough Investment secured by the first deed of trust out of the proceeds of the foreclosure sale. Instead, out of the $56,000 foreclosure sale proceeds, the Trustee was required to first satisfy Omnibank’s note dated December 21, 1989 secured by the second deed of trust and costs of foreclosure, and next to apply any amount remaining toward satisfaction of the Stinsons’ note secured by the third deed of trust. If after satisfying the indebtedness secured by the third deed of trust there still remains a surplus, then the surplus should be applied to any remaining indebtedness to Omnibank secured by the fourth and fifth deeds of trust.
A separate judgment consistent with this opinion will be entered in accordance with Rules 7054 and 9021 of the Federal Rules of Bankruptcy Procedure.
FINAL JUDGMENT
Consistent with the opinion dated contemporaneously herewith, it is hereby ordered and adjudged as follows:
1. From the foreclosure sale proceeds, James E. Lambert, the Substituted Trustee under Omnibank’s second deed of trust, shall first satisfy Omnibank’s promissory note dated December 21, 1989, together with all reasonable costs of foreclosure.
2. James E. Lambert shall next satisfy out of the remaining foreclosure sale proceeds the indebtedness to the Stinsons secured by the third deed of trust.
3. If there further remains a surplus, the Trustee shall apply any such surplus to the indebtedness secured by Omnibank’s fourth and fifth deeds of trust.
4. The Trustee and the attorneys for the Stinsons and Omnibank are ordered to confer and calculate the specific amounts due the parties consistent with the Court’s opinion.
This is a final judgment for the purposes of Rules 7054 and 9021 of the Federal Rules of Bankruptcy Procedure.
SO ORDERED AND ADJUDGED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492127/ | DECISION ON MOTION FOR SUMMARY JUDGMENT ON LeBLANC, SANTIAGO and NICHOLS CLAIMS
BURTON PERLMAN, Bankruptcy Judge.
Certain claims relating to alleged liability for lead paint injury have been filed in these consolidated bankruptcy cases. Eagle-Picher Industries, Inc., hereafter referred to as “debtor,” has filed a motion for summary judgment against these claimants. Involved are claims 4350, 4351, and 4352, filed by Richard Van Nostrand on behalf of Heath LeBlanc, Lisa LeBlanc, and Nathan Martin (collectively, the “LeBlanc claimants”); claim 4353 filed by Monica Santiago; and claims 4347, 4348, and 4349 filed by Mary D. Nichols on behalf of Mary Spriggs, Victoria Spriggs, and Michael Spriggs (collectively, the “Nichols claimants”). Hereafter, the term “claimants” will be used to refer to all those who are subject of the seven just identified claims. Monica Santiago pursued a claim for lead paint liability in a federal court, the final disposition of that claim being reported at Santiago v. Sherwin Williams Co., 3 F.3d 546 (1st Cir.1993).
This court has jurisdiction of this matter pursuant to 28 U.S.C. § 1334(b) and the General Order of Reference entered in this District. This is a core proceeding arising under 28 U.S.C. § 157(b)(2)(A) and (B).
With its memorandum in support of its motion, debtor has submitted the affidavit of John E. Iole, which serves as a vehicle to present a number of exhibits and legal authorities. The exhibits relate to prior litigation conducted by litigants in seeking relief for lead poisoning.
Claimants then filed a memorandum in opposition to debtor’s motion for summary judgment. With their memorandum, they filed the affidavit of Neil T. Leifer, their attorney. In his affidavit Leifer states that submitted with the memorandum are Exhibits 1 through 141 which comprise a “copy of the same set of Exhibits duly authenticated and submitted by Ms. Santiago as part of her Opposition to the Motion for Summary Judgment in her claim pending in the District of Massachusetts.”
Finally, with its reply memorandum, debt- or submitted the following: Exhibit A, an excerpt from the General Rules of the Massachusetts Supreme Court; Exhibit B, a decision Guest Quarters Hotels Ltd. Partnership v. Kaufman, No. 90-10671-Z, 1990 WL *4498407, 1990 U.S.Dist. LEXIS 8678 (D.Mass. July 6, 1990); Exhibit C, a docket sheet showing the course of certain legislation in the U.S. Congress relative to market share liability; Exhibit D, a decision Jackson v. The Glidden Co., No. CV-236835 (Ohio App. Dec. 8, 1994); and Exhibit E, a copy of plaintiff’s memorandum in opposition to a motion for summary judgment by the industry defendants in the Santiago case in Santiago’s prior federal litigation.
1. Collateral Estoppel.
It is the position of debtor that the Santiago claimant is collaterally estopped by the Santiago case from pursuing her present claim. Debtor was initially a co-defendant in that litigation. Prior to the time that summary judgment was granted to defendants therein, debtor’s bankruptcy case was filed, whereupon the automatic stay of 11 U.S.C. § 362 came into play so that further action by plaintiff against debtor could not occur. As the material provided to us on this motion shows, plaintiff in that ease did conduct extensive discovery of debtor before the bankruptcy filing, and conducted virtually no discovery in the case thereafter.
It is a long standing principle in American law, decided by the U.S. Supreme Court in the pivotal case Blonder-Tongue Laboratories Inc. v. University of Illinois Foundation, 402 U.S. 313, 91 S.Ct. 1434, 28 L.Ed.2d 788 (1971), that a plaintiff may be prohibited from proceeding against a defendant in a subsequent lawsuit by the doctrine of collateral estoppel even though the defendant in the second lawsuit was not a party in the first lawsuit. In other words, the requirement of mutuality of estoppel as a prerequisite to the preclusion is not required. (See Blonder-Tongue, at 320-27, 91 S.Ct. at 1438-42.) We believe that the holding of Blonder-Tongue precludes Santiago here, for the facts in the case before us are even more compelling than those in Blonder-Tongue. Here, debtor was a party to the prior litigation and played an important role prior to its bankruptcy filing. It is entitled to the benefit of the Santiago holding.
Debtor is entitled to summary judgment on this ground against Santiago.
2. Market Share.
It is clear from the record presented to the court on the present motion, that claimants are unable to prove a tort case against debtor in a traditional fashion, that is, by establishing that the lead poisoning they suffered was due to a product negligently produced and sold by debtor. Consequently, claimants rely upon an alternative tort theory, market share liability. That theory involves allocating liability without regard to whether the particular product originated with a particular producer; instead, liability is imposed upon an entire industry, each member of the industry being liable in proportion to the share of the market of the injurious product which it sold.
On the present motion, debtor asserts that the law of the State of Massachusetts must be applied to the tort claims of the several claimants, and under that law market share liability is not recognized. Claimants do not dispute that it is the law of Massachusetts which is to be applied, but they assert that that law is unsettled and it would be improper for this court to bar these claimants from proving a case on a theory of product liability. Claimants ask either that the motion be denied and they be allowed to proceed, thus, in effect, recognizing the applicability of the market share theory of liability, or that we certify the question to the Supreme Judicial Court of Massachusetts. Clearly, so far as this branch of debtor’s motion is concerned, what is presented is a pure question of law.
While the Supreme Judicial Court of Massachusetts has not expressly decided the question of the availability of market share liability in a lead poisoning case, as we have seen, one of these claimants, Santiago, pursued such a claim in the federal courts in the First Circuit, culminating in Santiago v. Sherwin Williams Co., 3 F.3d 546 (1st Cir.1993). We have had occasion earlier in this decision to consider that report for its preclu-sive effect. We refer to it now for a different purpose. The decision, of course, does not bind this court which sits in a Circuit other than the First Circuit. Our task here is to decide whether the case is persuasive in its *45reading of Massachusetts law. We have concluded that this court should follow that decision. In reaching this conclusion, we are impressed particularly with the following cogent statements:
We accept for the sake of argument plaintiff’s assertions (1) that the SJC [Supreme Judicial Court of Massachusetts] would, in some circumstances, relax the identification requirement and allow a plaintiff to recover under a market share theory; (2) that the SJC would recognize market share liability in the lead poisoning context; (3) that plaintiff has introduced sufficient evidence for a reasonable factfin-der to infer that her injuries resulted from lead poisoning; (4) that lead paint was, as one of plaintiffs experts puts it, at least “a substantial contributing factor of her lead poisoning”; and (5) that defendants, who were mere bulk suppliers of white lead and did not manufacture or market the alleged injury-causing paint, could still be adjudged to have acted negligently towards plaintiff. Nonetheless, we believe that the SJC’s professed interest in both holding wrongdoers hable only for the harm they have caused and in separating tortfeasors from innocent actors is fatal to plaintiffs claim.
and at p. 551:
In sum, allowing plaintiff to recover her full damages from the five named defendants despite her inability to specify the time of their negligence may well, on this record, do violence to the SJC’s stated interest in ensuring that wrongdoers be held hable only for the harm they have caused. It also would create a substantial possibility that tortfeasors and innocent actors would be impermissibly intermingled. The SJC has made it abundantly clear that it would not countenance either result. Accordingly, mindful that federal courts sitting in diversity at a plaintiffs election ought not “steer state law into unprecedented configurations,” see Martel [v. Stafford ], 992 F.2d at 1244 [ (1st Cir.1993) ], we affirm the district court’s grant of summary judgment to defendants on plaintiffs market share claim, [footnote omitted]
Thus, we find the reasoning of the First Circuit in the Santiago case persuasive in its conclusion that market share liability is not available under Massachusetts law. Claimants, however, urge that it would be a sounder course to certify the question to the SJC itself. In Transamerica Insurance Co. v. Duro Bag Manufacturing Co., 50 F.3d 370, 372 (6th Cir.1995), our Court of Appeals recently spoke on the question. There, in refusing to certify a question to the Kentucky Supreme Court, the court said:
Although Kentucky has not addressed the exact question at issue, it does have well-established principles to govern the interpretation of insurance contracts.
That language has a direct application here, for in the Santiago case, the First Circuit Court of Appeals found that while the Supreme Judicial Court of Massachusetts had not decided the specific question of the allow-ability of market share theory, it did find that that court had “well-established principles” which could be applied to reach a reasoned conclusion as to what might be expected from that court. We therefore decline to certify the question as requested.
Debtor is entitled to summary judgment on the ground that market share liability for lead poisoning is not available in Massachusetts.
3. Concert of Action.
While claimants chide debtor in their responsive memorandum for, in their view, failing to deal with the concert of action basis of liability which they assert (an assertion which debtor disputes by reason of its comment at page 10, footnote 3 of its memorandum-in-chief), claimants fail in their memorandum to set forth a justification for concert of action liability of debtor. Absent is any assertion that claimants can offer evidence that alleged concert of action by debt- or with others caused lead paint to be applied to the walls of their homes. In the absence of an offer to produce such evidence, a concert of action claim must fail because a showing of proximate cause is vital to making out such a claim. Santiago at p. 552.
*46We conclude that debtor is entitled to judgment on this ground of its motion as well. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492129/ | ORDER
W. HOMER DRAKE, Jr., Bankruptcy Judge.
This matter comes before the Court on the Complaint to Determine Dischargeability filed by Cleve Carian (hereinafter “Plaintiff’). By his Complaint, the Plaintiff alleges that Wyman Daniel Dover (hereinafter “Debtor”) knowingly made false representations which induced the Plaintiff to continue a then existing indebtedness after having released the security interest related to the loan. Consequently, the Plaintiff seeks this Court’s determination that the debts incurred by such fraudulent conduct are non-dischargeable under § 523(a)(2)(A) of the Bankruptcy Code. The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 157(b)(2)(I). Having taken these matters under advisement, the Court now bases its determination upon the following Findings of Fact and Conclusion of Law.
Findings of Fact
The factual background of this dispute remains hotly contested by the parties. Having weighed the relative credibility of the testimony offered by each party, the Court finds that version of the events which the Plaintiff has presented to be the more credible one. The Court, therefore, will summarize this accepted version as a presentation of its factual findings.
In 1985, the Debtor hired the Plaintiff to assist him in the construction of high-end residential homes. This relationship proved successful, and the Debtor ultimately assigned the Plaintiff the role of Project Manager/Superintendent. This position did not provide the Plaintiff with access to the financial records of the Debtor. However, due to his supervisory role, the Plaintiff had frequent contact with the Debtor’s general creditors. Having never heard one of those creditors complain about the Debtor’s failure to stay current, the Plaintiff assumed the Debt- or to be financially sound and a good credit risk.1
The next watershed point in these events occurred when the Plaintiff and his wife sold their home. As a consequence of this transaction, the couple received a large amount of cash, which they earmarked for a retirement nestegg. When the Debtor became aware of the Plaintiffs cash holdings, he asked him if he would consider making a loan. Needing an investment vehicle for his funds and trusting in the creditworthiness of the Debtor, the Plaintiff agreed to such a loan.
The parties executed a promissory note in the amount of $82,000.00. The loan provided for a 12% annual interest rate, well in excess of the market rate at that time. Under the terms of that note, the Debtor was to make interest-only payments until January of 1991, when the balance of this “balloon note” would become due. Lastly, the Plaintiff insisted that the Debtor produce some security for the loan. Security came in the form of a second mortgage on a Marietta commercial property owned by the Debtor. This mortgage more than adequately protected the Plaintiffs interest.
*87The loan arrangement proceeded as planned, and the Debtor made each scheduled payment on or before the date it became due. Then, in February of 1990, the Debtor told the Plaintiff that he was selling the property securing the note and that he intended to use the proceeds of the sale to pay off the loan. On the afternoon of February 20th, the Debtor produced a check for $81,-565, the balance then owing under the loan, and the Plaintiff released his mortgage on the property. The Plaintiff endorsed the check, but could not deposit it because the banks had already closed. The Plaintiff, therefore, took the check home with him and made plans to deposit it the following day.
On the morning of the 21st, before the Plaintiff had left for the bank, the Debtor approached him to discuss continuing the loan arrangement. Given the Debtor’s flawless payment history and the loan’s above average rate of return, the Plaintiff agreed to consider such a continuation. Therefore, following a promise by the Debtor to execute a new promissory note and provide a new source of security,2 the Plaintiff consented in allowing the current arrangement to continue. The Debtor resumed his monthly payments, and the Plaintiff kept possession of the Debtor’s uncashed check.
However, the note and security agreement promised by the Debtor were not forthcoming. Although hesitant to browbeat his employer, the Plaintiff made several requests that the Debtor produce the promised items. On July 1, 1991, some sixteen months after the renegotiation, the Debtor executed a promissory note in favor of the Plaintiff. However, the Debtor never gave the Plaintiff the security interest which he had promised.
Subsequently, in February of 1994, the Debtor filed a petition under Chapter 7 of the Bankruptcy Code. As of that date, the Debtor had made seventy-one (71) consecutive interest payments to the Plaintiff in a timely fashion, generating an aggregate of approximately $58,000.00 in remittances. However, the principal balance of the loan remained outstanding and subject to discharge in bankruptcy.
On the basis of the Debtor’s broken promise to provide security for the loan, the Plaintiff presented this Court with the present Complaint to Determine Dischargeability of the Debtor’s obligation to him. According to the Plaintiff, the Debtor’s false promise to provide security amounts to an act of fraud, such that discharge of the debt should be denied under 11 U.S.C. § 523(a)(2)(A).
Conclusions of Law
Against the general rule that bankruptcy operates to discharge debt obligations, § 523 provides for limited circumstances when that discharge will be denied. Courts make a custom of construing these exceptions narrowly, however, in order to benefit the honest debtor. Hope v. Walker (In re Walker), 48 F.3d 1161, 1163 (11th Cir.1995); St. Laurent v. Ambrose (In re St. Laurent), 991 F.2d 672, 680 (11th Cir.1993); see e.g. Bailey v. Chatham (In re Bailey), 171 B.R. 703, 706 (Bankr.N.D.Ga.1994) (Drake, J.). Moreover, the objecting party carries the burden of establishing by a preponderance of the evidence that the debts in question are excepted from discharge. Grogan v. Garner, 498 U.S. 279, 289-91, 111 S.Ct. 654, 661, 112 L.Ed.2d 755 (1991).
In terms relevant to the instant case, the language of § 523 provides:
* * * * * *
(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt—
:fs ^ ♦
(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained, by—
(A) false pretenses, a false representation, or actual fraud, other than a state*88ment respecting the debtor’s or an insider’s financial condition;
* * * * * *
11 U.S.C. § 523(a)(2)(A). Here, the Plaintiff has alleged that the Debtor perpetrated a false representation or actual fraud against him in the course of obtaining a renewal of credit.3 As the Eleventh Circuit has pointed out, a plaintiff relying upon such an argument must establish that: (1) the Debtor made a false representation with the intent to deceive his creditor; (2) the creditor relied upon that representation; (3) this act of reliance was reasonably founded; (4) the creditor sustained a loss as a consequence of that representation and reliance. St. Laurent, 991 F.2d at 676. The Court finds, and the parties appear to agree, that the Plaintiff has met the second and fourth elements of this standard. This matter, therefore, distills down to issues of whether the Debtor made a false representation with deceitful intent and, if so, whether the Plaintiff acted reasonably in relying upon that representation.
I. The Existence of an Act of False Representation.
Plaintiff appears to focus the brunt of his misrepresentation argument upon the fact that the Debtor broke a promise to provide a mortgage security at some future time.4 In and of itself, however, this argument falls short of the mark. It remains a settled point of fraudulent non-dischargeability analysis that the breach of a promise to perform some future act does not amount to a misrepresentation. 3 CollieR on BankRUPTCY ¶ 523.08 (15th ed. 1995) (“A mere promise to be executed in the future is not sufficient to make a debt non-dischargeable even though there is no excuse for the subsequent breach”). This Court finds the following excerpt from one landmark Georgia case particularly instructive on this issue:
* * Hi * * *
[I]n this case the only alleged fraud of which there was any proof consisted of a false promise on the part of the defendant thereafter to secure the debt by mortgage and also by personal indorsements, or to do some other act in the future, and therefore did not constitute such fraud as would render the defendant’s discharge in bankruptcy inoperative as to such debt.
Stephens v. Milikin, 35 Ga.App. 287, 133 S.E. 67 (1926) (cited in CollieR at ¶ 523.08 n. 17). Thus, the bare fact that the Debtor failed to keep his promise to provide a mortgage on this loan has no bearing on the non-dis-ehargeability question.
In a related fashion, however, the debt in question may be deemed non-dis-chargeable if, in the course of this promise, the Debtor misrepresented his intention. That is, a fraud may have occurred if, at the time of the promise, the Debtor had no plans of ever presenting mortgageable property, yet made a promise to the contrary. Collier at ¶ 523.08. In such a case, the defendant’s having lied about his known or reasonably certain plans for the future is said to be an act of misrepresentation in and of itself. In re Friend, 156 B.R. 257, 262 (Bankr.W.D.Mo.1993).
Here, however, the Plaintiff has faded to make such a showing of proof. The evidence presented to this Court only demonstrates that the Debtor had no mortgageable property at the time of the promise and that he never came into possession of such mortgageable property thereafter. These two facts do nothing to elucidate whether the Debtor intended to acquire such property at some point in the future.5
*89In sum, therefore, the Plaintiff has failed to establish the first element of his burden— that some act of cognizable misrepresentation occurred. Accordingly, it is unnecessary for this Court to address the remaining issues of intentionality of conduct or reasonable reliance by the Plaintiff.
ConClusion
The Court finds that the Plaintiff has failed to establish false representation, false pretense or actual fraud which would operate to except this debt from discharge under 11 U.S.C. § 523(a)(2)(A). Plaintiff’s Complaint to Determine Dischargeability of the Debt, therefore, is DENIED.
IT IS SO ORDERED.
. According to the Plaintiff, the everyday operations of the business also supported this conclusion. Specifically, the Debtor constructed very expensive homes under a high “retainage" fee, lived in a fair degree of luxury, and provided his employees with equipment such as new trucks and cellular phones. Having observed these vestiges of success, the Plaintiff concluded that the Debtor made good money and paid his debts on time.
. According to the Plaintiff, the Debtor did not make any specific promises as to which properly he would offer as collateral. Nor did the Plaintiff make any investigation of whether the Debtor had any such property. Rather, the Plaintiff understood and trusted that the Debtor either had mortgageable property or would acquire such property and then give him the mortgage which he had promised.
. Although the conceptual boundaries between "false pretenses” and "false representation” may appear blurry, the two principles do lend themselves to distinction. Specifically, a false representation is said to have occurred where the defendant has made an expressed, rather than an implied, misrepresentation. Matter of Schnore, 13 B.R. 249, 251 (Bankr.W.D.Wis.1981).
. The Plaintiff has produced no evidence that the Debtor, expressly or impliedly, represented that he had possession of such mortgageable property at the time of the promise. Rather, the Plaintiff argues that the Debtor promised to acquire such property, by some means, and present it for security. According to the Plaintiff, it is this breach of promise for future action which constituted fraud or misrepresentation.
.As much as anything else, these two facts could simply establish that, although harboring the noblest of intentions to follow through on his promise of acquiring mortgageable property, the Debtor was unable to do so in practice. Indeed, *89the bankruptcy courts are filled with individuals whose optimistic plans are spoiled by intervening and unforeseen financial misfortunes. This Court, therefore, finds it impossible to leap from the mere fact of ultimate non-acquisition to a conclusion regarding the Debtor's intentions at the outset. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492130/ | ORDER
JAMES E. YACOS, Chief Judge.
This matter came before the Court on June 6, 1995 on a Motion to Dismiss filed by Patrick Houghton and PPH Corporation and the trustee’s objection thereto as well as a Motion for Summary Judgement filed by the trustee and the defendant’s objection thereto. This is an action brought pursuant to New Hampshire state fraudulent transfer law made applicable under § 544(b) of the Bankruptcy Code.
Motion to Dismiss
At the onset of the hearing the Court denied the motion to dismiss based on the record and the memos filed and without further oral argument. The statute of limitations for the cause of action asserted, which is dictated by New Hampshire law, is four years after the transfer was made or obligation was incurred. N.H.Rev.StAnn. § 545-A:9. The assignment which the trustee is seeking to avoid occurred on September 23, 1992. This case was filed on November 11, 1994 which is undeniably within the limitations period. For these reasons the motion to dismiss is denied.
Motion for Summary Judgment
A summary judgment motion should be granted only when “the pleadings, deposition, 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 judgment as a matter of law.” A “material” fact is one which has “the potential to affect the outcome of the suit under applicable law.” F.D.I.C. v. Anchor Properties, 13 F.3d 27, 30 (1st Cir.1994) (quoting Nereida-Gonzalez v. Tirado-Delgado, 990 F.2d 701, 702 (1st Cir.1993)). When deciding a motion for summary judgment, the Court must read the record in the light most favorable to the nonmoving party making all reasonable inferences in that party’s favor. Levy v. F.D.I.C., 7 F.3d 1054, 1056 (1st Cir.1993).
Once the movant establishes the absence of evidence as to an essential factual element upon which the nonmovant would bear the burden of proof at trial, the non-movant must respond with specific facts demonstrating a genuine issue for trial. In re Menna, 16 F.3d 7, 8 (1st Cir.1994). A “genuine issue” exists when the evidence is such that the finder of fact may reasonably resolve the point in favor of the nonmoving party. NASCO, Inc. v. Pub. Storage, Inc., 29 F.3d 28, 31 (1st Cir.1994). Once the movant avers an absence of evidence to support the nonmoving party’s ease, the nonmoving party may not rest on the averments and denials of its pleadings but “must establish the existence of at least one fact issue that is both ‘genuine’ and ‘material.’” Local No. 48, United Broth. of Carpenters and Joiners of Am. v. United Broth. of Carpenters and Joiners of Am., 920 F.2d 1047, 1050 (1st Cir.1990); see also In re Ralar Distrib., Inc., 4 F.3d 62, 67 (1st Cir.1993).
The undisputed facts follow. On September 21, 1992, the debtor, George Jodoin signed a purchase and sale agreement for property located on Hayward Street in Manchester, New Hampshire in the name of a corporation to be formed named Hayward Street Realty Corporation. (Plaintiff Exhibit 1). On September 23, 1992, George Jodoin assigned his rights in the deposit receipt for the Hayward Street property to defendant Patrick Houghton “for consideration paid”1. The defendant contends that the “consideration paid” was forgiveness of a $7,500 antecedent debt although there is no documentary proof of this assertion.
*101On October 9, 1992, the Hayward Street Realty Corporation received its Certificate of Incorporation from the Secretary of State and the corporation came into existence. George Jodoin and Harvey Dupreis were named 50% stock holders in the corporation. On November 25,1992, a Quitclaim Deed was issued to the Hayward Street Realty Corporation for the Hayward Street property. (Plaintiff Exhibit 2).
Meanwhile, on January 19, 1993, Gail Coutinho, another creditor of George Jodoin filed a petition for an ex-parte, pre-judgment attachment on the real estate and bank accounts of George Jodoin for an antecedent debt. See Motion for Summary Judgment, Exhibit F (Adv.Doc. No. 19). On April 22, 1993, judgment was entered in favor of Gail Coutinho in the amount of $33,700 plus interest and costs. See Motion for Summary Judgment, Exhibit G (Adv.Doc. No. 19). On August 23, 1993, the Hillsborough County sheriff executed the writ of attachment upon Jodoin’s stock certificate representing his 50% interest in the Hayward Realty Corporation.
The defendants Houghton and PPH Corporation never openly asserted their purported ownership interest in the corporate stock of Haywood Street Realty Corporation to any third party until after Coutinho had received judgment on her claim against Jodoin and was pursuing attachment of the corporate stock. See letter of August 15, 1993, Motion for Summary Judgment, Exhibit L (Adv.Doc. No. 19).
On September 1,1993 the Hayward Street property was sold with a profit of approximately $72,000. The parties, by then aware of the looming lawsuit between Patrick Houghton and Gail Coutinho over the ownership rights to George Jodoin’s portion of the proceeds of the sale, agreed to place Jodoin’s 50% share of the proceeds of the sale in the custody of Attorney Ronald Cereola, pending resolution of the dispute. A civil action was then filed in Hillsborough County Superior Court to determine the rights of the parties. George Jodoin is a named defendant in that action which was stayed when he filed a petition for bankruptcy protection on July 27, 1994.
On November 9,1994, the trustee filed the present action to avoid the fraudulent transfer of assets of the estate to Patrick Hough-ton by virtue of the September 23, 1993 assignment and to avoid the fraudulent transfer of assets of the estate to Gail Cout-inho by virtue of the August 23, 1993 sheriff levy on the shares of the corporation. On March 30, 1995, the Court approved a settlement of the claims against Gail Coutinho. (Adv.Doe. No. 9). The motion for summary judgement deals exclusively with the action against Patrick Houghton.
The trustee is seeking to set aside the assignment to Patrick Houghton pursuant to New Hampshire state fraudulent transfer law. Under New Hampshire law, a fraudulent transfer occurs if either (a) the transfer is made with actual intent to hinder, delay, or defraud any creditor of the debtor2; or (b) the transfer is made without receiving reasonably equivalent value and the debtor either was engaged in a business or transaction which would leave the debtor with unreasonably small capital or the debtor believed or reasonably should believe he would incur debts beyond his ability to pay as they became due. N.H.Rev.StAnn. § 545-A:4I.
The Court however, need not get too far into the analysis of whether or not this was a fraudulent transfer, because it finds as an initial matter the assignment was not in fact an effective transfer of any assets of this *102debtor. On September 23, 1992, George Jo-doin assigned his rights in the Haywood Street property3. However, at the time the assignment was made, George Jodoin had no rights in the Haywood Street property.
The Haywood Street property was purchased in a name of a corporation to be formed in which Jodoin was to be a shareholder. Notably, at the time the assignment was made, the corporation had not received its Certificate of Incorporation thus George Jodoin did not yet have any “rights” in the property to assign. Not until the corporation formed and Jodoin was a named shareholder did he acquire “rights” in the Haywood Street property. Thus, on September 23, 1992, Patrick Houghton received all the rights held by George Jodoin by virtue of the sales agreement and deposit receipt dated September 21,1992 which were exactly none. Because no transfer of the debtor’s interest occurred, the motion for summary judgment must be granted.
For the purpose of judicial efficiency, the Court will rule in the alternative that even if Jodoin in fact had an interest in the property to assign on September 23, 1992, the exchange was not for reasonably equivalent value. The maximum amount of consideration that may have been paid in exchange for the assignment would be the $7,500 forbearance of a prior debt4. The debtor’s share of the profits from the sale of the Haywood Street property on September 1, 1993, one year after the assignment was made, was approximately $37,000, almost five times the value of the alleged consideration paid.
By way of explanation, the defendant contends that on the date of the assignment, the parties were unaware of the value of Jodoin’s interest in the property and the transaction was riskier than it now seems with the benefit of time. However, the defendant has offered no evidence of a significant change in the real estate market that would demonstrate that $7,500 was reasonable eonsider-ation in light of the current market conditions and circumstances at the time of the assignment. Failing this, the Court finds the assignment was not for reasonably equivalent value.
For the foregoing reasons it is ORDERED, ADJUDGED and DECREED as follows:
1. The motion to dismiss is hereby denied.
2. The motion for summary judgment is hereby granted on the basis that the exchange was not for reasonably equivalent value and the debtor was insolvent at the time of the transfer.
3. The trial scheduled for June 19,1995 is hereby canceled.
DONE and ORDERED.
ORDER ON MOTION FOR RECONSIDERATION
The above-captioned adversary proceeding came before the court on a Motion for Reconsideration of this court’s order of June 9, 1995 granting summary judgment in favor of the plaintiff filed by Patrick Houghton and PPH Corporation (Court Doc. No. 29). A Final Judgment based on that Order was entered on June 9, 1995 (Court Doc. No. 27). All parties present having been heard, the court hereby orders as follows:
1. The Motion for Reconsideration, to the extent that it requests a reconsideration and a vacating of this court’s basic ruling on June 9,1995 (Court Doe. No. 26) that there was no effective assignment of the stock certificates in question, is denied and that judgment will stand. That by itself supports the judgment entered in favor of the plaintiff and is so ordered and reaffirmed from the original order.
2. The Motion for Reconsideration, to the extent that it attacks the alternative basis for ruling that this court entered, is granted. That alternative basis for the ruling raises genuine issues of material facts relating to a question of insolvency at the time of the *103transfer as well as a question of reasonably equivalent value. In addition there are disputed material questions as to whether there was consideration given and, if so, in what amount, which would relate to both the question of unreasonable value equivalency as well as the question of any credit that the defendants would have if the transaction is not enforceable. Accordingly, the alternative basis for ruling is deleted and the order of this court and the judgment of this court will stand on the first ruling alone.
3. The first ruling, hereby reaffirmed, is based on the conclusion that there was no effective assignment of any stock interest in the corporation by the document in question for the various reasons indicated in my original ruling and in the questions I put to the movant during the oral argument on the Motion for Reconsideration. The defendants never acted to get issuance of the corporate stock; they never sought or obtained possession of the stock after issuance; they never notified the Secretary of State of their claimed stockholder interest in the corporation; and they allowed the debtor to use the property and whatever stock interest he had without protest. Moreover, the debtor simply had nothing to assign in terms of stock interest at the time that he issued the scribbled notation on the piece of paper in question. In my judgment that does not constitute an assignment of a stock interest in the corporation. I believe that the record establishes there never was any firm agreement during any relevant time by the parties controlling the corporate entity as to what percentage of stock the debtor would be entitled to in the corporation until the sale occurred and the dispute with the attaching creditor resulted in the placing of the subject monies in escrow under which that party voluntarily released any claim to anything more than 50 percent of the sales proceeds after deducting the monies he himself had advanced. All of this in my judgment does not amount to an effective and legal assignment of a stock interest in a corporation.
DONE and ORDERED.
. Specifically, the assignment, which was signed and dated by Jodoin, stated as follows:
“For consideration paid, I, George Jodoin, assign my rights of sales agreement and deposit receipt dated September 21, 1992 regarding property located at 177-83 Hayward Street, Manchester, NH to Pat Houghton”
See Exhibit C of Plaintiff's Motion for Summary Judgment (Adv.Doc. No. 19) (emphasis added).
. The indicia of an actual intent to defraud include whether (a) the transfer was made to an insider; (b) the debtor retained control of the property after the transfer; (c) the transfer was disclosed or concealed; (d) the debtor had been threatened with a lawsuit before the transfer occurred; (e) the transfer was for substantially all of the debtor's assets; (f) the debtor absconded; (g) the debtor concealed assets; (h) the debt- or received reasonably equivalent value for the exchange; (i) the debtor was insolvent or shortly became insolvent after transfer made; (j) the transfer occurred shortly before or after a substantial debt was incurred; and (k) the debtor transferred the essential assets of the business to a lienor who in turn transferred the assets to an insider. N.H.Rev.St.Ann. § 545-A:5II. Because this matter can be resolved on other legal grounds based on undisputed facts in the record, the Court specifically does not need to reach the factual determination of the defendants' actual intent to defraud.
. See footnote 1, supra.
. For the purposes of this motion, the Court will assume that the defendant's contention that consideration was paid in the forgiveness of a $7,500 antecedent debt. However, the Court notes that there is no documentation in this record that any consideration was paid in exchange for the transfer. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492132/ | ORDER DENYING SUMMARY JUDGMENT MOTIONS
JAMES A. PUSATERI, Chief Judge.
These proceedings are before the Court on motions for summary judgment based on the small-business concern defense created by Congress in the Negotiated Rates Act of 1993. Valiant Products Corporation (Valiant), a defendant in Adversary No. 90-7289, and Luetzow Industries (Luetzow), a defendant in Adversary No. 90-7351, have filed motions based on the same legal theory and American Freight System, Inc. (AFS), the plaintiff-debtor, has raised the same arguments in opposing both motions. Valiant appears by counsel Joseph M. Weiler. Luet-zow appears by counsel Richard P. Bourne and Richard C. Wallace. AFS appears by counsel Kurt Stohlgren. The Court has reviewed the relevant pleadings, and is now ready to rule.
FACTS
In these proceedings, AFS seeks to recover freight charges based on transportation services it provided to Valiant and Luetzow. The amounts of the charges were supposed to be fixed by tariffs which AFS was to have on file with the Interstate Commerce Commission. AFS alleges in its briefs and through the sworn affidavits of a corporate officer that it seeks to recover from each defendant some charges based on “original unpaid receivables” and others based on “undercharges.” It also asserts in both briefs that it is not seeking to collect the difference between rates negotiated and paid, and rates reflected in its tariffs on file with the ICC, but only the affidavit filed in Valiant’s case supports this assertion. AFS has not otherwise explained what its officer means by “original unpaid receivables” or “undercharges.”
*348Valiant and Luetzow both seek to take advantage of a provision of the NRA based on their possible status as small-business concerns. They contend their status relieves them from liability for all the freight charges AFS seeks to recover. Valiant submitted the affidavit of its “traffic manager,” who asserts that the company has less than 500 employees. He does not state what business Valiant is engaged in. AFS has filed a motion to strike the affidavit because it does not indicate it is based on personal knowledge and because it asserts an unsupported conclusion “concerning the ultimate facts and law in issue as to defendant’s status as a small business concern.” Luetzow submitted two affidavits to support its claim to be a small-business concern, but through some mix-up, each affidavit appears to have been signed by the person who was supposed to sign the other one. AFS has moved to strike these affidavits due to the switched signatures and their allegedly improper conclusions of law.
AFS also raises two procedural complaints about the defendants’ small-business defense. First, it contends the NRA required the defendants to notify it of their election to rely on the defense; since they did not, AFS argues they may no longer assert it. Second, it contends they have failed to properly plead their small business status as an affirmative defense. It appears Valiant first raised the defense at a pretrial conference in April 1995, and Luetzow in its summary judgment motion, filed in May 1995. AFS states that it is prejudiced by the assertion of the defense at this point, without explaining how it is prejudiced. It adds that assertion of the defense will make additional discovery necessary.
DISCUSSION AND CONCLUSIONS
A. The Affidavits
The problems with both defendants’ affidavits preclude the Court from determining on summary judgment motions that they qualify as small-business concerns under the NRA, which incorporates the Small Business Act’s definition of such a business. In fact, it does not appear that either defendant has attempted to establish all the criteria required to qualify as a small-business concern under 15 U.S.C.A. § 632(a)(1) and (2). See Scroggins v. Southern Wipers (In re Brown Transport Truckload), 176 B.R. 82, 89 (Bankr.N.D.Ga.1991) (“small-business concern” is one that is independently owned and operated, not dominant in its field of operation, and satisfies Small Business Administration criteria for number of employees or dollar volume of business). The Court could end this decision with that ruling, but chooses instead to address certain other issues the parties have raised which will affect these and other pending cases in the future.
B. Relevant Provisions of the NRA
After it filed for bankruptcy, AFS filed over one thousand adversary proceedings in which it sought to recover charges for transporting freight. Late in 1993, Congress passed and the President signed into law the Negotiated Rates Act of 1993 (NRA). P.L. No. 108-180, 1993 U.S.C.C.A.N. (107 Stat.) 2044, to 2053 (codified at 19 U.S.C.A § 10701(f), in a note to § 10701, and at scattered sections of title 1.9). At least potentially, the NRA could affect AFS’s claims for such charges. Section 2 of the NRA is labeled “Procedures for Resolving Claims Involving Unfiled, Negotiated Transportation Rates,” and subsection (a) of § 2 adds new subsection (f), which carries the same label, to § 10701. For present purposes, only the following paragraphs of subsection (f) are relevant.
(1) In General. — When a claim is made by a motor carrier of property ... providing transportation subject to the jurisdiction of the [ICC] under subchapter II of chapter 105 of this title ... regarding the collection of rates or charges for such transportation in addition to those originally billed and collected by the carrier ... for such transportation, the person against whom the claim is made may elect to satisfy the claim under the provisions of paragraph (2), (3), or (4) of this subsection, upon showing that—
(A) the carrier ... is no longer transporting property ...; and
(B) with respect to the claim—
*349(i) the person was offered a transportation rate by the carrier ... other than that legally on file with the [ICC] for the transportation service;
(ii) the person tendered freight to the carrier ... in reasonable reliance upon the offered transportation rate;
(iii) the carrier ... did not properly or timely file with the [ICC] a tariff providing for such transportation rate or failed to enter into an agreement for contract carriage;
(iv) such transportation rate was billed and collected by the carrier ...; and
(v) the carrier ... demands additional payment of a higher rate filed in a tariff.
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Paragraphs (2) and (3) permit shippers to satisfy such carrier claims by paying 20% or 15% of the amount sought, depending on the weight of the shipment. Paragraph (4) provides that “[notwithstanding paragraphs (2) and (3),” persons who are “public warehouse-men” may satisfy such claims by paying 5% of the amount sought. Subsection (f) later provides:
(7) Limitation on Statutory Construction. — Except as authorized in paragraphs (2), (3), (4), and (9) of this subsection, nothing in this subsection shall relieve a motor common carrier of the duty to file and adhere to its rates, rules, and classifications as required in sections 10761 and 10762 of this title.
(8) Notification of Election.—
(A)General Rule. — A person must notify the carrier ... as to its election to proceed under paragraph (2), (3), or (4). Except as provided in subparagraphs (B), (C), and (D), such election may be made at any time.
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(C)Pending Suits for Collection Made Before Or On Date of Enactment. — If the carrier ... has filed, before or on the date of the enactment of this subseetion, a suit for the collection of additional freight charges and notifies the person from whom additional freight charges are sought of the provisions of paragraphs (1) through (7), the election must be made not later than the 90th day following the date on which such notification is received.
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(9)Claims Involving Small-Business Concerns, Charitable Organizations, and Recyclable Materials. — Notwithstanding paragraphs (2), (3), and (4), a person from whom the additional legally applicable and effective tariff rate or charges are sought shall not be liable for the difference between the carrier’s applicable and effective tariff rate and the rate originally billed and paid—
(A) if such person qualifies as a small-business concern ...,
(B) if such person is [a charitable organization described in certain provisions of the Internal Revenue Code], or
(C) if the cargo involved in the claim is recyclable materials ...
Subsection (e)(1) of § 2 of the NRA establishes another procedure for resolving a carrier’s claim for the difference between its properly filed tariff rate and the rate it negotiated for its services if the carrier is no longer transporting property between places described in 49 U.S.C.A. § 10521(a)(1).1 This procedure requires the ICC to determine whether the carrier’s action constitutes an “unreasonable practice” under § 10701; the difference is uncollectible if the action is an “unreasonable practice.” Subsection (e)(2) of § 2 directs the ICC, in making this determination, to consider whether circumstances essentially identical to those listed in § 10701(f)(1)(B) exist. Subsection (e)(5) provides that the § 10701(f) procedure is not available if enforcement of subsection (e)(1) is sought.
*350C. The Issues Raised by the Parties in These Proceedings
1. Must shippers notify carriers of their election to rely on paragraph (9) of § 10701(f)?
AFS argues neither Valiant nor Luetzow may assert the small-business concern defense because neither notified AFS of its election to resolve AFS’s claims under § 10701(f)(9). It points out that NRA § 2(e)(5) provides that an election to proceed under § 2(e)(1) makes § 10701(f) inapplicable. However, AFS does not assert that either defendant elected to proceed under § 2(e)(1), so § 2(e)(5) is irrelevant to these cases.
AFS also refers to this Court’s order which directed AFS to give the defendants in its freight charge collection eases the notice required by subparagraph (8)(C) of § 10701(f) to trigger a time limit for the defendants to elect to satisfy AFS’s claims under paragraphs (2), (3), or (4). However, subparagraph (8)(A) provides that notice must be given only of an election to proceed under (2), (3), or (4). Paragraph (9) is not included. While carriers might have reasons to prefer that shippers be required to notify them that they claim to be small-business concerns or otherwise protected by paragraph (9), no provision in the NRA requires them to do so. Indeed, the notice required to trigger the election time limit is notice of paragraphs (1) to (7), not of (9). Furthermore, the NRA broadly provides shippers with two new options for resolving freight undercharge claims: (1) pay 5, 15 or 20 percent of the amount sought, or (2) go to the ICC and try to prove that the carrier’s claims constitute an “unreasonable practice,” which would excuse the shipper from paying any charges. These options present a real choice, so it makes sense for Congress to require shippers to “elect” which procedure to follow. Paragraph (9), however, provides a complete exemption from the charges based on more straightforward criteria than whether a carrier engaged in an “unreasonable practice,” namely, whether the shipper qualifies as a “small-business concern” or a charitable organization, or whether the goods shipped qualify as “recyclable materials.” Where these criteria are met, the shipper has no true “election” to make, but will certainly choose to easily avoid liability rather than spend money to go to the ICC and risk the ICC’s determination of the “unreasonable practice” question. Unlike the showing discussed below in issue three, the Court sees nothing in the NRA about this issue which suggests this procedural notice of election provision should extend to paragraph (9).
2. Did the defendants waive the small-business concern defense by failing to plead it in an answer?
AFS argues the defendants’ small-business concern status is an affirmative defense which they have waived by failing to plead it in any answer. Of course, Congress created the defense by enacting the NRA over three years after these adversary proceedings were filed. Federal Rule of Civil Procedure 15(d), made applicable here by Federal Rule of Bankruptcy Procedure 7015, governs the filing of supplemental pleadings to set forth events which have happened since the filing of the pleading sought to be supplemented. The Court has discretion to allow such supplemental pleadings, and should generally exercise this power in favor of granting leave; if necessary, the Court can fashion terms to prevent prejudice to the opposing party. 6A Wright, Miller & Kane, Fed.Prac. & Pro. Civil 2d, § 1510 (1990); see also 6 Fed.Prac. & Pro.Civil 2d, § 1&87 (discussing when leave to amend pleadings should be granted or denied). While summary judgment motions are not supplemental answers, the Court believes they effectively serve that function in these cases and will not require the defendants to file formal supplemental answers. The only significant prejudice to AFS in allowing the defendants to raise the defense now would be the added cost and delay arising from the need to conduct discovery about the defendants’ small-business status and the possible loss of its claims if the defense is successful. This prejudice, however, was created when Congress passed the NRA, not by the defendants’ actions. Valiant and Luetzow have not added measurably to the prejudice by waiting to assert the defense until sixteen to seventeen *351months after the NRA took effect. That delay should not have increased the difficulty of proving whether they qualify as small-business concerns. The Court concludes the defendants should be allowed to raise the defense. The Court will give AFS thirty days to conduct discovery on their claims to qualify as small-business concerns.
3. Must shippers prove that the carrier suing them is no longer transporting property under § 10701(f)(1)(A) and that the charges sought meet the criteria set out in § 10701(f)(1)(B) in order to be exempted from the charges under § 10701(f)(9)?
Valiant and Luetzow contend that under the NRA, they can exempt themselves from all AFS’s charges simply by showing that they are small-business concerns under the Small Business Act, 15 U.S.C.A. § 631, et seq. AFS contends they must also make the showings required by § 10701(f)(1)(A) and (B). A number of courts, including the Eighth Circuit, have rejected carriers’ arguments that small-business concerns relying on § 10701(f)(9) must make the showing required by (f)(1)(A) that the carrier is no longer transporting property. Jones Truck Lines v. Whittier Wood Products (In re Jones Truck Lines), 57 F.3d 642, 647-49 (8th Cir.1995); De’Medici v. FDSI Management Group (In re Lifschultz Fast Freight Corp.), 174 B.R. 271, 273-74 (N.D.Ill.1994); North Penn Transfer v. Polykote Corp., 170 B.R. 565, 567-68 (E.D.Pa.1994); Hoarty v. Midwest Carriers (In re Best Refrigerated Express), 168 B.R. 978, 984-85 (Bankr.D.Neb.1994); see also North Penn Transfer v. ATD-American Co., 175 B.R. 168, 170-71 (E.D.Pa.1994) (rejecting assertion NRA is conditioned on financial condition of carrier, court ruled small business exemption does not require showing that carrier is no longer transporting property); Scroggins v. Southern Wipers (In re Brown Transport Truckload), 176 B.R. 82, 85-86 (Bankr.N.D.Ga.1994) (same); Jones Truck Lines v. Polyflex Film & Converting, 173 B.R. 576, 580-81 (S.D.Miss.1994) (rejecting assertion small business exemption is conditioned on insolvency or financial condition of carrier, court ruled company need only show it is qualified small business to obtain the exemption). Only one court has been faced with the argument that a small-business concern must not only show that the carrier is no longer transporting property but also that the charges sought to be collected satisfy the requirements of (f)(1)(B); that court did reject both assertions. Adrian Waldera Trucking v. Quality Liquid Feeds, 848 F.Supp. 853, 855-56 (W.D.Wis.1994).2 After careful consideration of the provisions of the NRA and its legislative history, the Court must respectfully disagree with all these courts.
The Eighth Circuit’s decision in Jones Truck Lines, 57 F.3d 642, 647-49 fairly reflects the reasoning applied by all these courts in reaching their conclusions. The Court will describe that ruling before explaining its own reasons for disagreeing. Jones Truck Lines, Inc. (Jones), appealed a summary judgment ruling that the Negotiated Rates Act of 1993 (NRA) precluded it from recovering undercharges from shippers. Insofar as relevant here, Jones argued that shippers claiming the small business exemption under 49 U.S.C.A. § 10701(f)(9) had to show that the carrier making undercharge claims against them had ceased operations before they could use the exemption, that is, they had to make the showing required under subparagraph (f)(1)(A). The 8th Circuit began its analysis by noting paragraphs (2), (3), and (4) are referred to in paragraph (1), which explicitly requires a shipper to prove the carrier is not transporting property before the shipper may choose to settle under one of those paragraphs. Paragraph (9), the Circuit pointed out, is not listed in paragraph (1). Jones argued that because paragraph (9) is available “notwithstanding paragraphs (2), (3), and (4),” one of those paragraphs *352would have to be applicable before the shipper could exercise the exemption in paragraph (9). The Circuit then pointed out that in paragraph (7), Congress did include paragraph (9) along with (2), (3), and (4), and said Congress would also have included paragraph (9) in paragraph (1) if it meant to make the small business exemption contingent on the carrier’s status. Finally, the Circuit said any ambiguity in the text is resolved by legislative history indicating that Congress wanted to exempt paragraph (9) companies from “undercharge claims.” Although the Circuit was directly considering only whether a shipper must make the showing required under subparagraph (1)(A), its reasoning seems just as applicable to (1)(B).
The Court believes this seemingly reasonable analysis is flawed. First, while paragraph (9) is not included in paragraph (1), paragraph (9) itself says it applies “notwithstanding paragraphs (2), (3), and (4).” Paragraph (1) is omitted from this listing. Yet, paragraph (1) clearly says paragraphs (2), (3), and (4) do not apply unless the shipper makes the showings specified in sub-paragraphs (A) and (B) of paragraph (1). So if Congress had meant to make paragraph (9) apply without regard to paragraph (1), it did not need to make paragraph (9) apply “[n]ot-withstanding paragraphs (2), (3), and (4),” but instead should have made it apply “notwithstanding paragraph (1).” While it is true that paragraphs (2), (3), (4), and (9) are all listed in paragraph (7), this fact does not explain what the “notwithstanding” phrase in paragraph (9) means. The Circuit’s construction makes the phrase meaningless, violating a standard canon of statutory construction that courts should construe a statute to give effect to all its words. See Rake v. Wade, 508 U.S. -, -, 113 S.Ct. 2187, 2192, 124 L.Ed.2d 424, 433 (1993); Pennsylvania Dept. of Public Welfare v. Davenport, 495 U.S. 552, 562, 110 S.Ct. 2126, 2132-33, 109 L.Ed.2d 588 (1990). Instead, the “notwithstanding” phrase suggests that paragraph (9) is an exception to paragraphs (2), (3), and (4), but is subject to paragraph (1). In addition, another facet of the wording of paragraph (9) suggests that Congress at least might have intended for paragraph (1) to apply to that paragraph. The second phrase in paragraph (9), “a person from whom the additional legally applicable and effective tariff rate or charges are sought,” suggests that Congress had in mind in paragraph (9) a group of charges previously identified in the statute. Grammatically, the use of “the” in this phrase is appropriate only when the additional charges referred to have been previously identified. Under the Eighth Circuit’s construction, the phrase should use an indefinite article or word like “an” or “some” or “any,” rather than the definite article “the.” The most obvious reference would be back to the kind of rates or charges described in subparagraph (1)(B). Consequently, this Court is convinced the omission of paragraph (1) from the first phrase of paragraph (9) is as significant as the omission of paragraph (9) from paragraph (1), and must conclude the omissions make the statute ambiguous. A simple literal reading of the statute does not reveal its true meaning.
The overall structure of § 10701(f) leads this Court to believe it is more reasonable to read paragraph (9) as applying only if the paragraph (1) showings are made. The arrangement of the paragraphs suggests that Congress intended to define in paragraph (1) all the charges governed by the subsection, to provide in paragraphs (2) and (3) partial exemptions from those charges, to provide in paragraph (4) an exception to (2) and (3) which gives a greater exemption for a limited group of charges, and then to provide in paragraph (9) an exception to (2), (3), and (4) which gives a complete exemption for another limited group. This view of the statute explains the purpose of the “[njotwithstand-ing” phrases that begin paragraphs (4) and (9). It also comports with the labels Congress used, “In general” for paragraph (1), and “Claims involving ...” for paragraphs (2), (3), (4), and (9).
Perhaps more importantly, construing paragraph (9) to be subject to paragraph (1) limits the application of § 10701(f) to the kind of carrier claims that led Congress to enact the NRA. The interpretation adopted by the Eighth Circuit and other courts cited above appears to exempt small-business con*353cerns, charitable organizations, and shipments of recyclable materials from any charges sought beyond those originally billed and paid, even if the shipper had no reason to believe the amount it had paid was all it owed. For example, if the carrier simply made a mistake and billed the shipper too little, the shipper could rely on paragraph (9) to avoid paying the additional amount even though it had no agreement to pay the amount the carrier billed. The Court believes Congress was concerned only with charges sought in addition to those agreed to by the parties to a shipment (that is, negotiated rates), and not additional charges based on something else, like the correction of a mistake. See H.R.Rep. No. 359, 103d Cong., 1st sess., pp. 7-9, reprinted in 1993 U.S.C.C.A.N. 2534, 2534 to 2536. After all, the new statute is called the Negotiated Rates Act of 1998. See NRA § 1.
The legislative history relied on by the Eighth Circuit, properly understood, actually supports this Court’s contrary view of the statute. Both statements the Circuit quoted indicate Congress wanted to exempt small businesses, charitable organizations, and recyclers from “undercharge” claims. See 57 F.3d at 618 (quoting H.R.Rep. No. 359, 103d Cong., 1st Sess. 10, reprinted in 1993 U.S.C.C.AN. 2534, 2537 and 139 Cong. Rec. S16187 (Nov. 18, 1993) (Statement of Senator Danforth)). The Court believes the word “undercharge” is simply a short-hand way to refer to the types of charges described in § 10701(f)(1)(B), and was not meant to refer to all additional charges of any kind that a carrier might seek to recover from a shipper. Thus, statements in the legislative history about “undercharges” comport with this Court’s construction of the statute. The House Report on the NRA declared, “The purpose of [the House bill which was mostly included in the Senate bill that passed] is to provide a statutory process for resolving disputes for claims involving negotiated transportation rates brought about by trustees for non-operating motor carriers for past transportation services.” H.R. No. 359 at 7, reprinted in 1993 U.S.C.C.AN. at 2534. This statement further indicates the provisions of (f)(1)(A) and (B) were included to establish the scope of the NRA, and should raise doubts about applying any part of the Act to operating carriers or to rates not negotiated by the parties.
As indicated, the Eighth Circuit and all but one of the other courts which considered the NRA’s small business exemption were faced only with arguments based on the “no longer transporting property” provision in § 10701(f)(1)(A). Perhaps the carriers involved in those cases all conceded the charges they were trying to collect met the criteria of subparagraph (1)(B). By contrast, although AFS has already been determined to be “no longer transporting property,” American Freight System v. ICC (In re American Freight System), 174 B.R. 604 (Bankr.D.Kan.1994) (Robinson, J.), (it has appealed that ruling), it does argue that at least some of the charges it seeks do not satisfy subparagraph (1)(B). Had those courts been informed their rulings appeared to permit small-business concerns to avoid liability for charges they knew or should have known they owed, and not just for charges in addition to those they thought were all they owed because of their agreements with carriers, the courts might well have reached different conclusions about paragraph (9).
In the alternative, the Court believes it is possible, though less reasonable on the whole, to accept the conclusion that the omission of paragraph (9) from paragraph (1) means shippers need not show the carrier is no longer transporting property, but still conclude they must show the charges sought meet the criteria set out in subparagraph (1)(B). As indicated above, the use of the definite article “the” in paragraph (9) indicates the charges mentioned there have been identified previously, and the most obvious reference would be back to those charges described in subparagraph (1)(B). Under this construction based on language that does appear in paragraph (9), even though they would not have to show that AFS is no longer transporting property, Valiant and Luetzow would still need to show that AFS offered them a rate not on file with the ICC, they tendered freight in reliance on the offered rate, AFS did not properly file the offered rate, AFS billed them for the offered *354rate and they paid it, and AFS is now demanding they pay some higher rate that was on file.
D. Conclusion
The defendants’ motions for summary judgment must be denied because: (1) their affidavits are insufficient, and (2) they have not even attempted to show that the charges AFS seeks to recover from them satisfy the criteria set by 49 U.S.CA. § 10701(f)(1)(B). They were not, however, required to make any election to rely on the small-business concern exemption, and have adequately raised the exemption as an affirmative defense to AFS’s claims. AFS shall have thirty days from entry of this order to conduct discovery on the defendants’ status as small-business concerns.
IT IS SO ORDERED.
. Rather than being codified, NRA § 2(e) has been placed in the United States Code as a note to § 10701.
. In a summary judgment decision, Chief District Judge Van Bebber of this district ruled a shipper had established that it was a qualified small-business concern under the NRA and said it did not need to make any additional showing to rely on the exemption. Lewis v. Squareshooter Candy Co., 176 B.R. 54, 56-57 (D.Kan.1994). However, it appears that the plaintiff-trustee was arguing only that the shipper was not a qualified small-business concern and that the NRA violated the carrier’s constitutional rights. The statement that no additional showing was required was not a holding that the § 10701(f)(1)(A) and (B) showings need not be made. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492133/ | MEMORANDUM
JOAN N. FEENEY, Bankruptcy Judge.
I. INTRODUCTION
The matters before the Court are cross-motions for summary judgment. Stephen S. Gray, the Chapter 7 Trustee (the “Trustee”), seeks judgment against Huntsman Chemical Corp. (“Huntsman”) on his complaint to avoid certain preferential transfers pursuant to 11 U.S.C. § 547(b).1 Huntsman seeks summary judgment in its favor with respect to its asserted defenses to the complaint under 11 U.S.C. §§ 547(c)(1), (2), and (4) and 553(a). If Huntsman were to succeed, the Trustee would be precluded from avoiding any preferential transfers.
The Court heard the cross-motions on June 22, 1995. At the hearing, Huntsman conceded that the Trustee had established that it received preferential payments in the sum of $47,610.00 based upon the affidavit of Paul Wishengrad, a certified public accountant, with respect to the sections 547(b)(3) and (b)(5)(A)-(C). In its answer to the Trustee’s complaint, Huntsman had admitted allegations pertinent to subsections 547(b)(1), (2), and (4).
This Court may enter summary judgment if the “pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there *391is no genuine issue as to any material fact, and that the moving party is entitled to a judgment as a matter of law.” See Fed. R.Civ.P. 56(c), made applicable to this proceeding by Fed.R.Bankr.P. 7056. With respect to the Trustee’s motion, Huntsman admitted at the June 22, 1995 hearing that there were no facts in dispute.2 Accordingly, the Court shall enter summary judgment in favor of the Trustee. Huntsman’s defenses cannot be resolved so readily as the following analysis shall demonstrate.
II. FACTS
The parties have filed a “Joint Statement of Uncontested Facts.” The Court finds the following facts based upon the Joint Statement of the parties, as well as the evidentia-ry materials submitted by the parties in support of their respective motions for summary judgment.
Dooley Plastics Co., Inc. (“Dooley” or the “Debtor”) was in the business of brokering the sale of expanded polystyrene (“EPS”), commonly known as Styrofoam. It purchased EPS manufactured by Huntsman and arranged for its sale to various businesses. The Debtor received a commission from Huntsman based upon the number of pounds of EPS it sold. W.R. Grace was one of Dooley's largest accounts. At all material times, Huntsman shipped EPS directly to W.R. Grace and billed Dooley for each shipment. At the time of the filing of the Debt- or’s bankruptcy petition, Dooley owed Huntsman approximately $914,000.00.
Dooley and Huntsman began doing business in 1986. At the outset, they dealt with each other under ordinary business terms, which in the plastics industry consisted of shipping products on credit with payment due sixty days after the date of invoice. By July of 1989, Dooley was behind in its payments to Huntsman. By January 22, 1991, at least 22 of Huntsman’s invoices to Dooley were more than sixty days old. This situation deteriorated steadily until the time the Debtor filed its bankruptcy petition when virtually all of Huntsman’s invoices were more than one year old. Despite numerous repayment plans to which the Debtor agreed and then invariably breached, and, despite numerous warnings that shipments would be cut off and legal action undertaken, Huntsman was unable to substantially improve its credit relationship with the Debtor. Having obtained a credit report on Dooley in July of 1991, Huntsman was aware that legal action would not yield a substantial reduction in the amount of its outstanding invoices. Huntsman’s Director of Credits and Collections, Raymond J. McAtee (“McAtee”), made the informed decision to work with the Debtor to reduce the outstanding invoices rather than to initiate collection efforts through legal action. Working with the Debtor entailed constant communications with the Debtor’s principals to encourage compliance with the various repayment schedules undertaken during the course of the relationship, coupled with repeated, but less than dire, threats of shipment terminations and legal action.
Approximately one year prior to the bankruptcy filing, in August of 1991, Huntsman proposed that the Debtor’s principals, Frank and Rosemarie Dooley, execute an interest bearing note and personal guarantees of the Debtor’s outstanding obligations to Huntsman. The Dooleys refused this request. Around the same time, the Debtor began sending Huntsman post-dated cheeks. On September 23, 1991, Huntsman unilaterally altered its payment agreement with Dooley: before Huntsman would release a new shipment, Dooley would have to pay on its account an amount equal to the price of the new shipment plus $5,000.00 per week to reduce the old balance. The Debtor agreed to this arrangement, except that it asked for five-day credit terms for payment of the new shipments, a concession to which Huntsman *392agreed, as long as the post-dated check problem was resolved.
Although the post-dated check problem was never resolved (as of May 11,1992, postdated checks totalled approximately $80,-000.00), Dooley began to make the $5,000.00 payments and Huntsman extended credit to Dooley for new shipments on 5-day terms. The following chart summarizes the Debtor’s track record with respect to the $5,000.00 payments, as well as McAtee’s reminders (via fax) that the payments were not being received as promised.
PAYMENT DATE AMOUNT PAID DATE OF FAX RE: PAYMENTS
10/23/91 $5,000
10/31/91 $5,000
11/08/91 $5,000
11/16/91 $5,000
11/22/91 11/25/91 $5,000
11/26/91 $5,000
12/09/91 $5,000
12/13/91 $5,000
12/20/91 $5,000
01/21/92 12/26/91 $5,000
01/07/92 $5,000
01/10/92 $5,000
01/24/92 $10,000
01/31/92 $5,000
02/07/92, 02/18/92 $5,000
02/11/92
03/05/92 $5,000
03/06/92 03/13/92 $5,000
03/25/92 03/27/92 $5,000
04/03/92 $5,000
04/06/92 04/10/92 $5,000
04/20/92 $5,000
04/24/92 04/30/92 $5,000
04/30/92 $5,000
05/08/92, 05/15/92 $5,000
05/13/92,
05/26/92,
05/29/92,
06/04/92,
06/19/92,
06/30/92
With respect to the commission component of the Trustee’s preference claim, Huntsman initially applied commission credits to Dooley’s outstanding account on a quarterly basis. Beginning in the spring of 1992, at around the same time it began billing W.R. Grace directly, Huntsman began to credit the Debtor’s account monthly. The commission credits earned during the preference period totalled $17,610.00. The parties agreed that Dooley earned the following credits in the fall and spring prior to the filing of the bankruptcy petition:
DATE AMOUNT DESCRIPTION CREDITED
10/16/91 $1,260.00 COMM. FOR 06/15/91 SHIP. TO W.R. GRACE
10/15/91 $1,260.00 COMM. FOR 08/23/91 SHIP. TO W.R. GRACE
10/15/91 $1,260.00 COMM. FOR 08/28/91 SHIP. TO W.R. GRACE
10/15/91 $1,260.00 COMM. FOR 08/30/91 SHIP. TO W.R. GRACE
10/15/91 $1,260.00 COMM. FOR 09/10/91 SHIP. TO W.R. GRACE
10/16/91 $1,260.00 COMM. FOR SHIP. TO W.R. GRACE PRIOR TO 09/17/91
03/30/92 $10,080.00 COMM. FOR SHIP. TO W.R. GRACE FOR 1ST QUARTER
04/30/92 $8,820.00 COMM. FOR SHIP. TO W.R. GRACE FOR 4/92
06/03/92 $2,520.00 COMM. FOR SHIP. TO W.R. GRACE FOR 5/92
07/01/92 $11,280.00 COMM. FOR SHIP. TO W.R. GRACE FOR 6/92
This commission schedule differs from one that appears in the Trustee’s motion for summary judgment. In his motion, the Trustee sets forth the following schedule:
SHIPMENT DATE COMMISSION
04/01/92 $2,520.00
04/03/92 $6,300.00
05/19/92 $3,780.00
05/21/92 $1,230.00
06/09/92 $3,780.00
TOTAL $17,610.00
Since the Trustee did not reference either a deposition or an affidavit, the Court is unable to find that the Trustee’s shipment chronology represents an undisputed fact, particularly as the commissions attributable to the month of May are $2,520.00 per the undisputed chart and $5,010.00 per the Trustee’s chart.
III. DISCUSSION
Upon review of the undisputed facts, the Court discerns the following pertinent issues: 1) whether Huntsman has established that the Debtor’s payments and credits were “made according to ordinary business terms,” see 11 U.S.C. § 547(e)(2)(C); 2) whether Huntsman has established that the payments and credits were intended to be and in fact were contemporaneous exchanges for new value, see id. § 547(e)(1); 3) whether Huntsman gave new value to or for the benefit of the Debtor that did not result in the Debtor making “an otherwise unavoidable transfer to or for the benefit of’ Huntsman, see id. § 547(c)(4); and 4) whether Huntsman has established that it did not incur its obligation to the Debtor for commissions within the 90 days preceding the Debtor’s bankruptcy “for the purpose of obtaining a right of setoff,” see id., § 553(a)(3). Huntsman has the burden of proving each of its defenses to the Trustee’s preference claim, see id. § 547(g), as well as its right to setoff under section 553(a), see In re Fairfield *393Plantation, Inc., 147 B.R. 946 (Bankr.E.D.Ark.1992).
A. Ordinary Business Terms
In WJM, Inc. v. Massachusetts Department of Public Welfare, 840 F.2d 996, 1010 (1st Cir.1988), the Court of Appeals for the First Circuit determined that since subsection 547(c)(2) was written in the conjunctive, each of its elements must be established by a preference defendant raising the ordinary course of business defense.3 Assuming that Huntsman has submitted sufficient evidence with respect to the first two elements of subsection 547(c)(2), this Court finds that evidence with respect to the third and final element of the defense is lacking.
In the years after WJM, several circuit courts have addressed the meaning of the phrase “made according to ordinary business terms” found in section 547(c)(2)(C). A majority of them have determined that the Bankruptcy Code, which fails to define any of the phrases in section 547(c)(2), requires an objective analysis. See, e.g., Advo-System, Inc. v. Maxway Corp. (In re Maxway Corp.), 37 F.3d 1044 (4th Cir.1994); Sulmeyer v. Pacific Suzuki (In re Grand Chevrolet, Inc.), 25 F.3d 728, 733 (9th Cir.1994); Fiber Lite Corp. v. Molded Acoustical Prods., Inc. (In re Molded Acoustical Prods., Inc.), 18 F.3d 217, 223-26 (3d Cir.1994); Clark v. Balcor Real Estate Fin., Inc. (In re Meridith Hoffman Partners), 12 F.3d 1549, 1553 (10th Cir.1993), cert. denied, — U.S. -, 114 S.Ct. 2677, 129 L.Ed.2d 812 (1994); Jones v. United Sav. & Loan Ass’n. (In re U.S.A. Inns of Eureka Springs, Ark.), 9 F.3d 680, 683-84 (8th Cir.1993); In re Tolona Pizza Prods. Corp., 3 F.3d 1029, 1032-33 (7th Cir.1993); Logan v. Basic Distrib. Corp. (In re Fred Hawes Org.), 957 F.2d 239, 243-44 (6th Cir.1992). But see Marathon Oil Co. v. Flatau (In re Craig Oil Co.), 785 F.2d 1563, 1565 (11th Cir.1986) (using a subjective analysis for subsection 547(c)(2)(C) as well as subsection 547(c)(2)(B)). Generally, these cases require that a preference defendant must establish that “the payment terms are not unusual when compared with the prevailing standards in the creditor’s industry” in order to meet the test under section 547(c)(2)(C). See Advo-System, 37 F.3d at 1047.
In Advo-System, the Court of Appeals for the Fourth Circuit, with the benefit of what it described as “two well-reasoned panel decisions from the Seventh and Third Circuits,” elaborated on how to determine the relevant industry and how much of a departure from that industry’s norm would be allowed for purposes of subsection 547(c)(2)(C). Following a thoughtful analysis, which this Court shall not repeat, the court adopted the approach articulated by the Third Circuit, which embellished the Seventh Circuit’s rule:
‘[W]e read subsection C as establishing the requirement that a creditor prove that the debtor made its pre-petition preferential transfer in harmony with the range of terms prevailing as some relevant industry’s norms. That is, subsection C allows the creditor considerable latitude in defining what the relevant industry is, and even departures from that relevant industry’s norms which are not so flagrant as to be “unusual” remain within subsections C’s protection. In addition, when the parties have had an enduring, steady relationship, one whose terms have not significantly changed during the pre-petition insolvency period, the creditor will be able to depart substantially from the range of terms established under the objective industry standard inquiry and still find a haven in subsection C.’
Advo-System, 37 F.3d at 1050 (quoting Molded Acoustical, 18 F.3d at 226).
Having adopted this standard, the court applied it to the facts of the case in which the *394relevant industry was that of the preference defendant, Advo, a nationwide direct mail marketer. The Court assumed for the purpose of its ruling that Advo’s relationship with the Debtor was steady and well-established and that the preference payments were consistent with credit terms used by the parties in their prior course of dealing. The court ruled that Advo could not survive a motion for summary judgment because it submitted no evidence “on the credit terms it normally extended to its other customers.” 37 F.3d at 1050. The court found that Advo characterized the industry norm at “too high a level of generality” when it relied upon the proposition that its norm was “ ‘to work with its customers and [to] extend credit to some customers ... instead of requiring pre-payment.’ ” Id. The court implied that the test under section 547(c)(2)(C) could only be met by the introduction of evidence relative to “specific credit terms representative of ... [the] ... norm, e.g., the manner, form, amount, and timing of its customers’ credit payments-” Id. And, it ruled that section 547(e)(2)(C) could not be satisfied by the assertion that the industry norm is to extend credit, stating the following:
Preference payments are by definition credit payments and therefore would never be unusual vis-a-vis that proffered norm. Yet within that same industry there likely would be a range of credit terms that one would consider to be normal.... If a preference payment’s terms do not fit within that normal range of credit terms (e.g., a,preference payment made 100 days after receipt of an invoice), then the preference payment would fail subsection C notwithstanding that the extension of credit would not itself be unusual. Such a preference payment may ‘hasten bankruptcy by alarming other creditors and motivating them to force the debtor into bankruptcy to avoid being left out.’
Id. (quoting In re Meridith Hoffman Partners, 12 F.3d at 1553).
Huntsman’s evidence of the ordinary business terms suffers from the same infirmity as that in Advo-System, namely too high a level of generality. While McAtee indicated that Huntsman had similar workout arrangements with other customers whose accounts were delinquent and that such arrangements are common for collecting delinquent accounts in the plastics industry, this Court lacks evidence as to the number of distributors Huntsman utilized, the number of Huntsman’s delinquent accounts, the amount of credit usually extended to account debtors, and the frequency of workout arrangements with account debtors with invoices in excess of four months old. Without this evidence, the Court cannot allow Huntsman’s motion for summary judgment with respect to its subsection 547(c)(2) defense, even assuming payments were made in the ordinary course of business between Huntsman and Dooley. See First Software Corp. v. Micro Education Corp. (In re First Software Corp.), 103 B.R. 359 (D.Mass.1988).4
With respect to the commissions, this Court further notes that the commissions earned by Dooley were ordinarily applied to reduce the Debtor’s account balance with Huntsman quarterly. However, in the months before the bankruptcy filing, Huntsman applied the credits monthly, in a departure from the ordinary course of business between the parties that coincided with Huntsman’s decision to directly invoice W.R. Grace for shipments. Accordingly, the Court is unable to find that Huntsman sustained its burden under section 547(c)(2) with respect to the commissions.
B. Contemporaneous Exchange for New Value
With respect to Huntsman’s defense under subsection 547(c)(1),5 this Court rules *395that the defense fails. Huntsman has failed to clearly articulate what constituted new value6 and when the new value was given. Assuming that the new value was the shipment of goods to W.R. Grace, the new value was not given to the Debtor. Assuming the new value was the extension of credit, it is unclear whether the Debtor or W.R. Grace was given the credit because of the change in billing practices.
Huntsman argues that its agreement with Dooley was such that it would ship a new load of material on five-day credit terms for each $5,000.00 payment received from Dooley. In other words, each payment of $5,000.00 enabled Dooley to credit for a new load of material.
The Trustee argues that the $5,000.00 periodic payments were neither contemporaneous exchanges nor exchanges for new value. Since he is not seeking to recover the payments for product shipped on five-day terms, the Trustee argues that the $5,000.00 payments were intended to pay down the outstanding invoices that were more than 120 days old and that payments toward such old invoices could hardly be said to be contemporaneous. Most importantly, the Trustee notes that Huntsman dropped Dooley out of the loop sometime in the spring of 1992 and both shipped and billed W.R. Grace directly. According to the Trustee, the new value then went to W.R. Grace, not Dooley, and W.R. Grace, not Dooley, paid for product in a contemporaneous exchange.
The Court finds that the Trustee’s analysis is compelling. Moreover, upon the existing record, the Court finds that Huntsman has failed to meet its burden of proving that the six $5,000.00 payments or the commissions were intended to be a contemporaneous exchange for new value.
C. Subsequent New Value
Several recent circuit court decisions address the section 547(c)(4) defense to preference claims.7 See Mosier v. Ever-Fresh Food Co. (In re IRFM, Inc.), 52 F.3d 228 (9th Cir.1995); Laker v. Vallette (In re Matter of Toyota of Jefferson, Inc.), 14 F.3d 1088 (5th Cir.1994). In IRFM, the Court of Appeals for the Ninth Circuit noted that the exception contains two components: a) that the creditor must give unsecured new value, and b) that the new value must be given after the preferential transfer. The court also observed that the majority of courts add “a short hand approach to section 547(c)(4)(B) and hold that section 547(c)(4) contains a third element, that the new value must remain unpaid.” IRFM, 52 F.3d at 231 (citing In re Kroh Bros. Dev. Co., 930 F.2d 648 (8th Cir.1991) (the relevant inquiry is whether the new value has replenished the estate); In re New York City Shoes, Inc., 880 F.2d 679, 680 (3d Cir.1989); In re Jet Florida System, Inc., 841 F.2d 1082, 1083 (11th Cir.1988); In the Matter of Prescott, 805 F.2d 719, 731 (7th Cir.1986)). However, the Court of Appeals for the Ninth Circuit observed that a recent trend has emerged that does not bar the new value defense altogether anytime new value has been repaid, allowing the defense when the trustee can recover the repayment by some other means. IRFM, 52 F.3d at 231. The court explained:
If the debtor has made payments for goods or services that the creditor supplied on *396unsecured credit after an earlier preference, and, if these subsequent payments are themselves voidable as preferences (or on any other ground), then under section 547(c)(4)(B) the creditor should be able to invoke those unsecured credit extensions as a defense to the recovery of the earlier voidable preference. On the other hand, the debtor’s subsequent payments might not be voidable on any other ground and not voidable under section 547, because the goods and services were given C.O.D. rather than on a credit, or because the creditor has a defense under section 547(c)(1), (2), or (3). In this situation, the creditor may keep his payments but has no section 547(c)(4) defense to the trustee’s action to recover the earlier preference. In either event, the creditor gets credit only once for goods and services later supplied.
Id. at 231-32 (quoting Vern Countryman, The Concept of a Voidable Preference in Bankruptcy, 38 Vand.L.Rev. 713, 788 (1985) (emphasis added and footnotes omitted) quoted in Matter of Toyota of Jefferson, 14 F.3d at 1092-93). Thus, the court allowed a creditor to use subsequent new value advances to offset prior (although not immediately prior) preferences, stating “[a] creditor is permitted to carry forward preferences until they are exhausted by subsequent advances of new value.” 52 F.3d at 232. See In re Thomas W. Garland, Inc., 19 B.R. 920 (Bankr.E.D.Mo.1982). But see Leathers v. Prime Leather Finishes Co., 40 B.R. 248 (D.Me.1984) (new value advanced may be used to offset only the immediately preceding preference). The Court of Appeals for the Ninth Circuit concluded its discussion of the subsequent new value defense by adding qualifications to the approach set forth in Garland:
First, to calculate the new value defense, consideration must be given to whether an increment of new value has been paid for by something other than an avoidable transfer. If so, this increment of new value may not be included in calculating the amount of the new value defense.
Second, assurance must be given that the creditor will not attempt to obtain double credit for a transfer. This requirement may be satisfied by disallowing a creditor from asserting a separate section 547(c) defense against a preference when the creditor has already used section 547(e)(4) to offset that preference.
52 F.3d at 233.
In Kroh Brothers, the Court of Appeals for the Eighth Circuit considered the availability of the section 547(c)(4) defense when the creditor received payment for the goods or services constituting new value from a third party, a situation analogous to the instant case. The court observed that the beneficial effect on the creditor from payment by the third party is not the decisive component of the requisite inquiry. Rather, the court stated that the availability of the defense depended upon the whether the new value depleted or replenished the estate insofar as unsecured creditors were concerned. 930 F.2d at 653.
Huntsman’s arguments with respect to the subsequent new value defense fail to adequately address the paradigms set forth above. Ignoring the precise timing and significance of Huntsman’s decision to invoice W.R. Grace directly, and the effect of this decision on the Debtor’s bankruptcy estate, Huntsman maintains 1) that it advanced new, unsecured credit to Dooley after receiving the payments and crediting the commission which the trustee challenges as preferential, and 2) that after the date of the challenged payments and commission credits it shipped new orders to Dooley’s customers. According to Huntsman, because of these subsequent advances of new unsecured credit, the Trustee may not avoid the prior transfers.
The Joint Statement of Uncontested Facts lacks detail as to when products were shipped to W.R. Grace. Accordingly, the Court finds that Huntsman’s argument with its lack of specific reference to the timing and value of the new credit extended to W.R. Grace for the benefit of Dooley is inadequate to sustain its motion for summary judgment with respect to section 547(c)(4).
D. Setoff Under Section 553(a)
The Court finds that there is no dispute as to whether Huntsman established all the elements required for setoff under section 553(a) with respect to the commission *397credits.8 See WJM, 840 F.2d at 1011-1012 (“to be considered mutua], ‘debts must be in the same right and between the same parties, standing in the same capacity.’ ”). However, the Trustee raises an issue under section 553(a)(3)(C): whether the debt owed to the Debtor (i.e., the obligation to pay commissions on goods shipped to W.R. Grace) was incurred by Huntsman “for the purpose of obtaining a right of setoff against the debtor.” See 11 U.S.C. § 553(a)(3)(C).
During the spring of 1992, McAtee was unaware that Dooley was contemplating filing a bankruptcy petition. However, Huntsman altered its prior practice and began invoicing W.R. Grace directly for the goods it shipped, and it began crediting the commissions to Dooley’s account on a monthly basis. The Trustee argues that by continuing to pay Dooley a commission on sales to W.R. Grace Huntsman was in reality merely reducing Dooley’s obligation to it, thereby satisfying the test of section 553(a)(3)(C). Since Huntsman has failed to address this specific argument, and circumstantial evidence supports the Trustee’s position, the Court cannot enter summary judgment in its favor on its section 553 defense.
IV. CONCLUSION
In accordance with the foregoing, the Court hereby allows the Trustee’s motion for summary judgment and denies the Defendant’s motion for summary judgment.
. Section 547(b) provides in relevant part the following:
(b) Except as provided in subsection (c) of this section, the trustee may avoid any transfer of an interest of the debtor in property—
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;
(3) made while the debtor was insolvent;
(4) made—
(A)on or within 90 days before the date of the filing of the petition; ... 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).
. In its memorandum that accompanied its motion for summary judgment, Huntsman argued that the commission credits were not property of the debtor and therefore did not satisfy section 547(b)’s requirement that there be a "transfer of the interest of the debtor in property.” The Court finds that Huntsman waived this argument by conceding the existence of preference payments at the June 22, 1995 hearing. Alternatively, the Court rejects this argument. A similar argument was considered and rejected in WJM, Inc. v. Massachusetts Department of Public Welfare, 840 F.2d 996, 1007-1009 (1st Cir.1988).
. Section 547(c)(2) provides the following:
(c) The trustee may not avoid under this section a transfer.—
(2) to the extent that such transfer was—
(A)in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee;
(B) made in the ordinary course of business or financial affairs of the debtor and the transferee; and
(C) made according to ordinary business terms....
11 U.S.C. § 547(c)(2).
. Huntsman cited this case in support of its argument under section 547(c)(2)(B). However, for purposes of Huntsman's motion for summary judgment, the Court finds that the issues raised by section 547(c)(2)(C) are decisive.
. Section 547(c)(1) provides the following:
(c) The trustee may not avoid under this section a transfer—
(1) to the extent that such transfer was—
(A) intended by the debtor and the creditor to or for whose benefit such transfer was made to be a contemporaneous exchange for new value given to the debtor; and
(B) in fact a contemporaneous exchange....
*39511 U.S.C. § 547(c)(1).
. Section 547(a)(2) provides the following:
(a) In this section— ...
(2) “new value” means money or money’s worth in goods, services, or new credit, or release by a transferee of properly previously transferred to such transferee in a transaction that is neither void nor voidable by the debtor or the trustee under any applicable law, including proceeds of such property, but does not include an obligation substituted for an existing obligation.
11 U.S.C. § 547(a)(2). See generally In re Aero-Fastener, Inc. 177 B.R. 120, 137-38 (Bankr.D.Mass.1994).
. Section 547(c)(4) provides the following:
(c) The trustee may not avoid under this section a transfer—
(4) to or for the benefit of a creditor, to the extent that, after such transfer, such creditor gave new value to or for the benefit of the debtor—
(A) not secured by an otherwise unavoidable security interest; and
(B) on account of which new value the debt- or did not make an otherwise unavoidable transfer to or for the benefit of such creditor. ...
11 U.S.C. § 547(c)(4).
. Section 553 provides in relevant part the following:
(a) Except as otherwise provided in this section and in sections 362 and 363 of this title, this title does not affect any right of a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case under this title against a claim of such creditor against the debtor that arose before the commencement of the case, except to the extent that—
(1) the claim of such creditor against the debtor is disallowed;
(2) such claim was transferred by an entity other than the debtor, to such creditor—
(A) after the commencement of the case;
(B)(i) after 90 days before the date of the filing of the petition; and
(ii) while the debtor was insolvent; or
(3)the debt owed to the debtor by such creditor was incurred by such creditor—
(A) after 90 days before the date of the filing of the petition;
(B) while the debtor was insolvent; and
(C) for the purpose of obtaining a right of setoff against the debtor.
11 U.S.C. § 553(a). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492134/ | ORDER
ARTHUR N. VOTOLATO, Bankruptcy Judge.
Before the Court is the Motion to Extend Time by the Estate of Margaret Ekelund (the “Ekelund Estate”), to file a complaint to determine dischargeability under Bankruptcy Code § 523. The Debtors, J. Colin and Norma Dawson, object on the ground that the time for filing such complaints has elapsed pursuant to Fed.R.Bankr.P. 4007(c).
The pertinent facts are as follows: On November 6, 1991, the Debtors filed a Chapter 13 petition, and on March 31, 1992, the Creditor filed an Objection to Confirmation of the Plan. Said objection alleges misconduct by J. Colin Dawson, as Executor of the Estate of Margaret Ekelund, in misappropriating funds of the Estate, and requesting, inter alia, that the unpaid balance of a judgment awarded by the Cranston Probate Court in the amount of $18,074 be declared nondisehargeable, pursuant to § 523(a)(4).
Confirmation was denied on August 19, 1992. Thereafter, on November 5, 1992, the Chapter 13 ease was converted to Chapter 7, and February 8, 1993 was the deadline set for filing complaints to determine discharge-ability under § 523(a). The Creditor (Ekel-und Estate) did not file such a complaint within the established time period. Instead, it relies upon its earlier filed pleading entitled “Objection to the Chapter 13 Plan ...” as having met the filing requirements of Rule 4007(c), which provides:
A complaint to determine the discharge-ability of any debt pursuant to § 523(c) of the Code shall be filed not later than 60 days following the first date set for the meeting of creditors held pursuant to § 341(a). The court shall give all creditors not less than 30 days notice of the time so fixed in the manner provided in Rule 2002. On motion of any party in interest, after hearing on notice, the court may for cause extend the time fixed under this subdivision. The motion shall be made before the time has expired.
There is ample authority holding that technically defective pleadings filed before the expiration of filing deadlines may be the basis for later amendment. See Fed. R.Bankr.P. 7015; Revino v. Cohen (In re Cohen), 98 B.R. 179 (Bankr.S.D.N.Y.1989). We find that the above referenced objection to confirmation, although formally lacking as a § 523(c) complaint, does constitute an amendable dischargeability complaint.
Because of the March 31, 1992 filing of a sufficiently detailed pleading (the “objection”), which contains the requisite factual allegations of fraud, damages, etc., we rule, for § 523(a) purposes, that a “complaint” was timely filed. See In re Mary Ann Larson, BK No. 91-12874 (Bankr.D.R.I. Dec. 30, 1992). Accordingly, the Motion to Extend Time is DENIED, as moot, and the Creditor has 30 days within which to file an amended complaint to determine dischargeability in this Chapter 7 case.
Enter Judgment consistent with this Order. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492135/ | MEMORANDUM OF OPINION AND ORDER
RANDOLPH BAXTER, Bankruptcy Judge.
This action comes before the Court on Attorney Ford L. Noble’s Motion for Allowance of Attorney’s Fees, Administrative Expenses, and Client Fees. Attorneys Ford L. Noble and Daniel G. Morris seek reimbursement for themselves for legal fees amounting to $10,000.00 and administrative expenses for Debtor Frank Francosky in the amount of $1,538.75.
Attorneys Noble and Morris (Applicants) represented Debtor Frank Francosky in a lawsuit against Third Federal Savings pre-petition. On October 22, 1992 the Franco-skys filed a voluntary Chapter 7 bankruptcy petition. The Applicants continued to work on the lawsuit postpetition on a contingency fee arrangement. In the pursuit of this litigation, Mr. Francosky also contributed $1,538.75 for litigation expenses. The Applicants assert that they provided assistance to the Trustee in the eventual settlement of the subject litigation. On July 7,1995, the Applicants filed their motion seeking compensation for professional services rendered and for out-of-pocket expenses contributed by Mr. Francosky.
There are two dispositive issues before the Court. First, the Court must consider whether the Applicants may receive payment for services rendered pursuant to 11 U.S.C. 503(b)(3)(D) and (b)(9). Second, is the issue of whether Debtor Frank Francosky is entitled to compensation for out-of-pocket expenses advanced in the course of litigating a prepetition lawsuit.
The Applicants cite §§ 503(b)(3)(D) and (b)(9) of the Bankruptcy Code as the authority for this Court to award compensation for professional services rendered. The relevant parts of § 503(b)(3)(D) state:
After notice and a hearing, there shall be allowed administrative expenses ... including — (3) the actual, necessary expenses ... incurred by — (D) a creditor, an indenture trustee, an equity security holder, or 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.... (Emphasis added).
Since this proceeding is under Chapter 7, that section clearly does not apply herein.
Counsel also cites to § 503(b)(9) for authority to recover the compensation. That section simply does not exist under the Bankruptcy Code. Conceivably, Section 503(b)(4) may be the Code section the Applicants intended to cite; however, that section does not apply either. Section 503(b)(4) allows payment for expenses incurred by professionals who may recover under § 503(b)(3). As noted above, that section is not applicable in this Chapter 7 proceeding. Therefore, § 503(b)(4) also does not apply in this ease.
Section 327(e) is applicable in this proceeding. That section states:
The trustee, with the court’s approval, may employ, for a specified special purpose, other than to represent the trustee in conducting the case, an attorney that has represented the debtor, if in the best interest of the estate, and if such attorney does not *552represent or hold any interest adverse to the debtor or to the estate with respect to the matter on which such attorney is to be employed. (Emphasis added).
The Sixth Circuit Court of Appeals has specifically held a valid appointment under § 327 is a condition precedent to the allowance of compensation to professionals. Michel v. Federated Department Stores, Inc. (In re Federated Department Stores, Inc.), 44 F.3d 1310 (6th Cir.1995). Herein, the Applicants never sought retention approval by this Court to participate postpetition in the subject litigation. Thusly, the Code requirements under § 327 were not complied with by the Applicants. The instant case is one for relief under Chapter 7. As such, a case trustee was duly appointed to administer the affairs of the Debtors’ estate pursuant to pertinent provisions of § 704 of the Bankruptcy Code. 11 U.S.C. 704. To the extent a trustee requires other professionals to assist with the execution of those statutory duties, the trustee is required, pursuant to § 327 to seek approval of the Court before engaging assistance from others. Herein, the case trustee sought no such authorization from the Court and none was approved. For these reasons, the request for compensation by the Applicants is hereby denied.
No claim for such expenses, as a pre-petition obligation, were ever filed against the estate. Lastly, the Applicants have provided no authority, statutory or otherwise, to support their proposition that litigation expenses incurred by the Debtors prepetition are payable from the Debtors’ bankruptcy estate.
Accordingly, the Applicants’ motion for fees and expenses is hereby denied. The request for reimbursement of out-of-pocket prepetition litigation expenses incurred by the Debtors is also denied.
IT IS SO ORDERED.
JUDGMENT
At Cleveland, in said District, on this 23rd day of August, 1995.
A Memorandum Of Opinion And Order having been rendered by the Court in these proceedings,
IT IS THEREFORE ORDERED, ADJUDGED AND DECREED that the Applicants’ motion for fees and expenses, and for reimbursement of out-of-pocket prepetition litigation expenses incurred by the Debtors is denied. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492136/ | ORDER
JAMES J. BARTA, Bankruptcy Judge.
On July 17, 1995, Marvin Marion (“Applicant”) filed an “Application/Petition For Allowance of Administrative Expenses.” After notice was given to all creditors and parties in interest, the Chapter 7 Trustee filed an objection to the allowance and payment of an administrative expense to the Applicant. The trial of the disputed issues in this matter was conducted on August 16, 1995. At the conclusion of the evidence and oral argu*565ment, the Court announced its determinations and orders from the bench.
This is a core proceeding pursuant to Section 157(b)(2)(B) of Title 28 of the United States Code. The Court has jurisdiction over the parties and this matter pursuant to 28 U.S.C. Sections 151, 157 and 1334, and Rule 29 of the Local Rules of the United States District Court for the Eastern District of Missouri.
On or about October 3, 1983, the Applicant and St. Louis Shade & Hardware Co., and Joseph R. Marion, as Lessors and Sellers, entered into several agreements including an asset purchase agreement and a written lease of certain commercial real property. The Lessee and Purchaser was listed as Carl K. Sherman (President of the Debtor), individually and not as an officer of the Debtor. The lease described certain commercial real property located at 408 North Sarah Street, St. Louis, Missouri. Even though the term of the 1983 lease expired several years prior to the commencement of this Chapter 7 case, the Debtor had continued to operate its manufacturing and retail business from this location until the Bankruptcy petition was filed on February 28, 1995.
During September, 1993, Carl K. Sherman and Helene Sherman, his wife, individually and not on behalf of the Debtor, executed and delivered to Marvin Marion and Kenneth Marion (“Lessors”) a proposal for a second lease of the North Sarah Street property. For reasons that are not clear from this record, the Lessors did not execute this agreement, and no other written lease is known to exist between these parties for this property.
At the trial of this matter, the Applicant testified that, notwithstanding the absence of any written lease agreement, rent payments were made during the years after termination of the 1983 lease, and just prior to the commencement of this case, with checks drawn on an account in the name of the Debtor, Shermco, Inc., d/b/a St. Louis Shade and Hardware Company. The checks were signed by C.K. Sherman, individually.
In response to a question from his attorney during direct examination at this trial, the Applicant testified that he believed that his tenant at the North Sarah Street property was Shermco, Inc., the Debtor here, and that their relationship was based on a month-to-month unwritten lease, with terms identical to those set out in the documents described above. The Debtor did not present testimony or evidence at this trial.
There is little question but that the Debtor had operated its business from the North Sarah Street property for a number of years prior to the commencement of this Chapter 7 case. However, other than the Debtor’s occupancy of the North Sarah Street property, there is nothing in this record to substantiate the Applicant’s assertion that the Debtor/Corporation was obligated to the Applicant as a tenant. There is no written lease between the Debtor and the Lessors; the Debtor did not schedule any such obligation in its Bankruptcy papers; and the Debtor did not present any evidence at this trial in support of such an obligation. If the Applicant is the Lessor in a month-to-month tenancy agreement, the primary Lessee is a tenant other than this Corporate Debtor. This record has suggested that the month-to-month tenancy Lessee may have been the Debtor officer(s) or director(s). For purposes of this proceeding, it is not necessary that the Court determine the identity of the Lessee other than to find and conclude that the Lessee is an entity other than the corporate Debtor.
Therefore, as of the commencement of this case, the corporate Debtor was not a party to an unexpired lease or executory contract with this Applicant for the occupancy and use of the North Sarah Street property. It then follows that the Trustee in this case incurred no duty to perform any obligations of the Debtor under an unexpired lease of nonresidential real property as set out at 11 U.S.C. § 365(d)(3).
Notwithstanding the absence of a written prepetition lease, it may yet be established that the Bankruptcy estate incurred expenses in connection with the post-petition use of the North Sarah Street property. In a Chapter 7 liquidating bankruptcy case, the trustee is not authorized to continue the operation of a debtor’s business absent a *566specific order of the court. See 11 U.S.C. § 721 and Rule 2015, Federal Rules of Bankruptcy Procedure (“FRBP”). No such specific order was requested or entered in this case. If any postpetition agreement existed between the Trustee and the Applicant here, it was solely an oral agreement to provide for the temporary storage of the Debtor’s personal property at the Debtor’s former business location. If such a postpetition storage agreement existed, it is clear from this record that the parties had not agreed upon any amount to be paid as postpetition rent. Furthermore, if an amount for postpetition rent had been agreed upon, in the circumstances presented here, any unpaid postpetition rent would not be entitled to an administrative expense priority absent allowance by a specific order of the Court. See In re Dakota Industries, Inc., 31 B.R. 23 (Bankr.D.S.D.1983); 11 U.S.C. § 364. No such order authorizing such an administrative expense was entered in this case. The record here, including the testimony at this trial, clearly indicates that the Trustee did not agree that any postpetition amounts would be entitled to an administrative expense priority pursuant to 11 U.S.C. § 503.
Notwithstanding the absence of an unexpired lease, and notwithstanding the absence of a postpetition order allowing an administrative expense for rent, the Applicant may be entitled to a priority expense if it can be established that the rents were actual, necessary costs and expenses of preserving the estate. 11 U.S.C. § 503(b). The benefit that results from the preservation of the estate assets, and that will be the basis for the allowance of an administrative expense priority, must inure exclusively to the estate in a Chapter 7 case.
In the circumstances presented here, this exclusive benefit to the estate has not been established. During the period that this personal property was stored at the North Sarah Street address, the Trustee paid certain utility bills and other expenses. Furthermore, on May 2, 1995, the Court approved the Trustee’s sale of the Debtor’s inventory and remaining personal property located at 408 North Sarah Street to this Applicant. The Applicant as purchaser received a benefit from the postpetition storage of this property at the North Sarah Street address in that it incurred no additional expense to move the personal property from its storage location. The testimony at this trial indicad ed that the Applicant is operating a hardware store from this address, and is otherwise disposing of the inventory and other personal property from this location.
Furthermore, the testimony at this trial indicated that even though no specific post-petition storage fee had been agreed upon between the Trustee and the Applicant, the rates received by the Applicant prior to the commencement of this case were a factor in the negotiations that led to the Applicant’s purchase of this property from the Bankruptcy estate. The Trustee testified that she believed that had the personal property been stored at a different location, such as that provided by an auctioneer, no additional postpetition storage charges would have been incurred. The Court finds and concludes that any benefit to the estate that resulted from the storage of these assets on the Applicant’s premise was minor, nonexclusive, and fully provided for by the terms of the sale to this Applicant.
IT IS ORDERED that this matter is concluded; and that the “Application/Petition for Allowance of Administrative Expenses” filed by Marvin Marion (Document No. 44) for the postpetition use and occupancy of the premises at 408 North Sarah Street, St. Louis, Missouri is DENIED; and that the Applicant’s request for an allowance for postpetition rent is DENIED; and that the Trustee’s objection to the Applicant’s Application/Petition is SUSTAINED; and that all other requests in this matter are DENIED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492177/ | ORDER DENYING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT AND GRANTING DEFENDANT’S MOTION FOR STAY OF PROCEEDINGS
JAMES E. MASSEY, Bankruptcy Judge.
Following deregulation of the trucking industry, common carriers bowed to intense competition and negotiated rates with customers far below those on file with the Interstate Commerce Commission (“ICC”).1 Not a few carriers rode negotiated rates to ruin. TSC Express Co. appears to be one of them.
The wide-spread practice of negotiating rates violated the “filed rate” doctrine, which holds that carriers in interstate commerce must collect, and their shippers must pay, the published rates or tariffs filed with the ICC. 49 U.S.C.A. § 10761. See Maislin Industries, U.S. v. Primary Steel, Inc., 497 U.S. 116, 110 S.Ct. 2759, 111 L.Ed.2d 94 (1990). Relying on that doctrine, TSC’s Bankruptcy Trustee, L. Lou Allen, sued National Enquirer, Inc., one of TSC’s customers, for the difference between TSC’s published rates and the unfiled rates it negotiated with the Defendant for shipments delivered prior to 1990. There is no dispute that National Enquirer paid TSC the negotiated rates for the transportation services provided to it by TSC.
National Enquirer filed a counterclaim in which it contends that the filed rates are unreasonable and that it has a right to recoup the difference between those tariffs and reasonable rates. The Trustee moves for partial summary judgment, contending that she is entitled to judgment now, regardless of the merits of the Defendant’s counterclaim.
Subsequent to the creation of the claims that .are the subject of this dispute, Congress enacted the Negotiated Rates Act of 1993 (“NRA”), Pub.L. 103-180, 107 Stat. 2044. Section 2(e)(1) of the NRA provides in part:
For purposes of section 10701 of title 49, United States Code, it shall be an unreasonable practice for a motor carrier of property ... to attempt to charge or to charge for a transportation service provided before September 30, 1990, the difference between the applicable rate that is lawfully in effect pursuant to a tariff that is filed in accordance with chapter 107 of such title by the carrier or freight forwarder applicable to such transportation service and the negotiated rate for such transportation service if the carrier or freight forwarder is no longer transporting property *32between places described in section 10521(a)(1) of such title or is transporting property between such places described in section 10521(a)(1) of such title for the purpose of avoiding the application of this subsection.
TSC is no longer in business. Section 10701 of title 49 makes unreasonable practices described in that section defenses to claims made pursuant to 49 U.S.C. § 10761 and 10762. Under section 2(e)(2) of the NRA, the ICC is given jurisdiction to determine whether or not attempting to charge or charging a particular rate is an unreasonable practice under section 2(e)(1).
National Enquirer moves for a stay of this adversary proceeding case so that issues of rate reasonableness and unreasonable practices may be decided by the ICC. Through the affidavit of Michael Bange attached to National Enquirer’s motion, it has made a prima facie showing that TSC’s rates were unreasonable, requiring that the case be heard by the ICC. Allen v. Limited Distribution Services, Inc. (In re TSC Express Co.), 159 B.R. 1010 (Bankr.N.D.Ga.1993); Brizendine v. Southern Wipers, Inc., 144 B.R. 183 (Bankr.N.D.Ga.1992). National Enquirer also seeks a stay to litigate before the ICC issues concerning whether shipments are exempt from ICC regulation under 49 U.S.C. §§ 10526(a)(7) and 10528. The court agrees that such issues are better adjudicated in the first instance by the ICC. Finally, National Enquirer seeks to litigate before the ICC the issue of unfair practices under the NRA.
In response to National Enquirer’s motion and in support of her own motion for summary judgment, the Trustee makes three arguments. First, she contends that the NRA by its terms does not apply to this case. Second, she contends that the NRA is not retroactive. Third, she contends that the NRA, if applied retroactively, would be unconstitutional.
A. Applicability of the Negotiated Rates Act.
Section 9 of the NRA provides in part that “[njothing in this Act ... shall be construed as limiting or otherwise affecting application of title 11, United States Code, relating to bankruptcy; .... ” The Trustee quotes correspondence between two members of Congress and a congressional committee report for the proposition that section 9 of the NRA was a compromise that proscribes application of the NRA to the extent that it would affect assets of a bankruptcy estate. The Trustee points out that the claim against National Enquirer at the commencement of the case was property of the estate under section 541(a) of the Bankruptcy Code. She notes that under section 704, a trustee is charged with collecting and reducing such property to money. Her argument, reduced to its essence, is that any relaxation of the filed rate doctrine has to affect the application of title 11 because the estate’s assets would have greater value if the carrier and the shippers had to use the higher filed rates. She reasons that if the NRA applied here, an asset that existed at the commencement of the case would disappear so that she would be unable to do her job. To that extent, she concludes, the NRA would adversely affect an asset of the estate and thus would affect the application of title 11 within the meaning of section 9 of the NRA.
The Trustee misreads section 9 on two levels. First, the words “limiting or otherwise affecting application of title 11” are not ambiguous. These words rather plainly indicate that the NRA is not meant to alter substantive bankruptcy law or procedure set forth in title 11 of the U.S.Code when a trucking company files a bankruptcy petition.
The Trustee reads these words much more broadly to mean that application of the NRA to a case under title 11 is prohibited if its application would produce a different outcome of a dispute concerning what a shipper owes the bankrupt carrier. The claim for compensation for services rendered would be worth less than it would otherwise be, thus affecting a title 11 ease.
The NRA doesn’t refer to cases or assets, however. It refers only to the application of title 11. Nothing in the NRA proscribes or ' alters the application of title 11 to the reorganization or liquidation of trucking companies. The NRA may affect the value of a *33claim for performing transportation services, but it does not alter the manner in which substantive and procedural rules making up title 11 are applied in administering that asset.
Under the Trustee’s reasoning, Congress intended to bestow NRA defenses only on customers of those trucking companies that are not debtors in title 11 cases. What creditors and equity holders would be foolish enough to fail to act on their economic interests and not cause a title 11 case to be commenced? Hence, under the Trustee’s reading, the statute would serve no purpose because it would rarely, if ever, be applied. The legislative history makes it plain that the statute was enacted to deal with the thousands of cases filed by motor carriers no longer in business. H.Rep No. 359, 103rd Cong., 1st Sess. 4 (1993), reprinted in 1993 U.S.C.C.A.N. 2534. (“The purpose of [the NRA] is to provide a statutory process for resolving disputes for claims ... brought about by trustees for non-operating motor carriers for past transportation services.”) The point of the NRA is to create defenses to overcharge claims that did not previously exist. To employ the Trustee’s reasoning would be to ignore the plain directive of Congress.
On a different level, the Trustee’s contention that the NRA affects application of title 11 because it affects the value of an asset is flawed because it assumes incorrectly that attributes of an asset, such as value, are fixed at the commencement of a bankruptcy ease. A trustee and an estate take property of the debtor as they find it. Bankruptcy does not alter, enhance or diminish that property. Matter of Sanders, 969 F.2d 591, 593 (7th Cir.1992) “... a bankruptcy trustee succeeds only to the title and rights in property that the debtor had at the time she filed the bankruptcy petition_ Filing a bankruptcy petition does not expand or change a debtor’s interest in an asset; it merely changes the party who holds that interest.” Hence, if a change in a law or regulation might affect an asset’s value, the mere filing of a title 11 ease does not freeze that value by freezing the legal or regulatory environment that existed immediately prior to filing. The estate takes the asset subject to the possibility of changes in laws and regulations that might affect value as if the case had never been filed.
B. Application of The NBA To This Case.
The Trustee argues that section 2(e) of the NRA does not apply here because the NRA is not retroactive. It is plainly retroactive in the sense that it applies to transportation services provided before September 30, 1990. It also makes collection of a so-called “undercharge” claim on behalf of a defunct carrier an unreasonable practice. Thus, the statute covers the claims of the Trustee in this case.
C. Constitutionality.
The Trustee argues that the NRA is arbitrary and effects a denial of equal protection of the law. She contends that TSC had a “vested” property right when TSC’s bankruptcy case was filed and that the NRA deprives TSC and the estate of that property without due process. She asserts that retroactive application of the NRA violates the estate’s due process rights. Finally, she contends that the NRA violates the doctrine of separation of powers. None of these arguments has merit.
1. Arbitrariness and Equal Protection. The Trustee contends that the choice of September 30, 1990 as a cut-off date makes the NRA arbitrary, but she does not say why. The point of the NRA was to provide defenses to claims for the difference between filed rates and negotiated rates. Congress had to define the, claims to which the NRA would apply, and one way to do that was to refer to the dates on which the claims arose. The Trustee makes no case that a different date would be rational but that the date selected was not. Congress may have believed, for example, that an earlier date would have left too much litigation pending in district and bankruptcy courts on issues that it wanted resolved in the first instance by the ICC in accordance with the NRA’s provisions. Hence, the court is not persuaded that the choice of September 30, *341990 was an arbitrary or irrational exercise of power.
Contending that the NRA denies the Debt- or’s estate equal protection of law, the Trustee states the NRA “zeroes in on a particular class of claimants.” But, she never articulates how the NRA discriminates against a class in which TSC or its estate is a member. Indeed, she never actually identifies the class.
TSC could hardly complain that it is being subjected to invidious discrimination by being bound to accept the rates it voluntarily negotiated. The Trustee stands in its shoes. The contention that the NRA discriminates against carriers no longer in business, if that is her argument, lacks merit because Congress could reasonably have concluded that the reasons underlying the need for the filed rate doctrine do not apply to defunct carriers. If the Trustee has some other argument about equal protection, she has failed to raise it or to offer facts to support it.
2. Due Process Taking. In contending that the NRA effects a due process “taking,” the Trustee argues that it deprives the estate of a “vested” property right, one resulting from “reasonable investment backed expectations.” Evaluation of the Trustee’s contention that the NRA unconstitutionally takes property from TSC’s estate begins with an analysis of the nature of the property right. Generally, TSC and its bankruptcy estate have a property right to unpaid claims against shippers for services rendered. The NRA does not deprive the estate of those claims, but it may arguably affect how they are valued.
Under the filed rate doctrine, the shipper is bound to pay the filed rate. TSC seeks to recover on a contract for the delivery of goods, one term of which would be supplied by the application of the filed rate doctrine. The NRA would no longer require payment of the filed rate but would instead leave the parties with the rates they negotiated. That change in the law reduces the value of the contract to TSC. It is that reduction in value that the Trustee complains about.
To put the problem in context, consider the nature of the “value” that the NRA might take away. The filed rate doctrine permits carriers like TSC to publish any rate that they desire. The government does not dictate the rate; rather, it demands only that the rate be filed and that, if challenged, it be reasonable. So, the value of the claim to payment for services performed was solely within the control of TSC.
It is also significant that the Trustee has not and presumably cannot show TSC would have received the tariff premium. The competitive environment in which TSC operated would not have permitted it to file and charge rates higher than those it negotiated. At least the Trustee has made no contention that TSC could have negotiated and collected the filed rates. Hence, the Trustee is asserting a property right in receiving compensation that TSC could not have received. It is ironic that litigants and courts have consistently referred to such claims as “undercharge” claims, when they are in fact “overcharge” claims, windfalls, claims for that which never existed.
Consider further what the NRA does not take away. The NRA does not take property of the Debtor for a public purpose. It does not bar TSC or its bankruptcy estate from recovering on any contract it made. Similarly, it would not prevent the Trustee from bringing a claim to avoid a fraudulent transfer, if the negotiated rate was so far below market as to effect a fraudulent transfer.
The court concludes that the nature of the excess value of the filed rate over the negotiated rate is not a true measurement of the value of the claim for services but rather is a penalty extracted from the shipper to enforce a policy unrelated to the protection of the trucker. The payment of the penalty to the trucker is gratuitous and does not bestow any property right in the trucker until the penalty is actually paid.
In Penn Central Transportation Co. v. New York City, 438 U.S. 104, 124, 98 S.Ct. 2646, 2669, 57 L.Ed.2d 631 (1978), the Supreme Court referred to the frustration of “reasonable investment-backed expectations” as the touchstone in determining whether a *35prohibited taking of property had occurred. The Trustee has produced no evidence that TSC in fact had any expectation that the filed rate doctrine would not be abandoned or that it invested a nickel in the belief that customers would ultimately have to pay the filed rates. She produced no evidence that TSC transacted with the Defendant in anticipation of collecting the windfall rate. To have anticipated such a result, TSC’s principals would have to admit that they intended from the beginning to pull the rug out from under the feet of shippers, a highly dubious scheme even if somehow technically legal.
TSC could not have had a reasonable expectation that the regulatory environment would not change so as to eliminate “overcharge” claims by carriers no longer in business. The filed rate doctrine was put in place to protect railroads and the ICC’s regulatory power over them, not the right of truckers to collect filed rates.2 Where would such an expectation of its continued existence come from, when the purpose of the regulatory scheme was not to protect the carrier? Not the ICC. Not the courts, at least until Maislin. See Jones Truck Lines, Inc. v. Whittier Wood Products Co., 57 F.3d 642, 650-51 (8th Cir.1995).
Even if it were decided that the expectancy of a windfall or the nature of the contract between trucker and shipper under the filed rate doctrine demonstrated the existence of a property right, the application of the NRA does not take that right in violation of the due process clause of the Fifth Amendment to the Constitution. Unlike the case in which a regulation reduces the utility of property to such an extent that it is rendered valueless, this case involves the repeal of a regulation that imposed an artificial value.
In F.C.C. v. Florida Power Corp., 480 U.S. 245, 107 S.Ct. 1107, 94 L.Ed.2d 282 (1987), Florida Power Corp., a utility, appealed from an order of the Federal Communications Commission under the Pole Attachments Act, 47 U.S.C. § 224, that set a lower rate which the utility could charge cable television companies using its poles than the rate embodied in contracts between Florida Power and the cable companies. Florida Power contended that the abrogation of the higher rates in the contracts constituted a taking of its property without due process. The Supreme Court disagreed, stating,
The remaining question, whether under traditional Fifth Amendment standards the challenged FCC order effected a taking of property, is readily answered. It is of course settled beyond dispute that regulation of rates chargeable from the employment of private property devoted to public uses is constitutionally permissible. See Munn v. Illinois, 94 U.S. [4 Otto] 113, 133-134, 24 L.Ed. 77 (1877); Permian Basin Area Rate Cases, 390 U.S. 747, 768-769, 88 S.Ct. 1344, 1360-1361, 20 L.Ed.2d 312 (1968). Such regulation of maximum rates or prices “may, consistently -with the Constitution, limit stringently the return recovered on investment, for investors’ interests provide only one of the variables in the constitutional calculus of reasonableness.” Id., at 769, 88 S.Ct., at 1361. So long as the rates set are not confiscatory, the Fifth Amendment does not bar their imposition. St. Joseph Stock Yards Co. v. United States, 298 U.S. 38, 53, 56 S.Ct. 720, 726, 80 L.Ed. 1033 (1936); see Permian Basin, supra, 390 U.S., at 770, 88 S.Ct., at 1361.
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*36The rate imposed by the Commission in this case was calculated according to the statutory formula for the determination of fully allocated cost. App. to Juris.Statement of FCC 23a. Appellees have not contended, nor could it seriously be argued, that a rate providing for the recovery of fully allocated cost, including the actual cost of capital, is confiscatory. Accordingly, we hold that the FCC regulatory order challenged below does not effect a taking of property under the Fifth Amendment.
F.C.C. v. Florida Power Corp., 480 U.S. at 253-54, 107 S.Ct. at 1112-13 (footnote omitted).
Here, the Trustee makes no contention that the negotiated rates did not fully compensate TSC for the cost of the services it performed. Conceivably, the difference between the negotiated rates and the cost of the service might have resulted in a loss for TSC. But, if so, the loss was not because Congress required TSC to incur costs by permitting its property to be used for public benefit, as in Florida Power. The loss would merely have been a function of inefficiencies in TSC’s operations. Without a showing that the negotiated rates would be confiscatory of the value of TSC’s investment in the delivery of transportation services to the Defendant, the refusal to pass on the windfall cannot be an unconstitutional taking of TSC’s or the estate’s property.
In summary, the NRA does not deprive TSC of property or lower the true value of the service it rendered; rather, the NRA ends the transfer of a penalty imposed on the shipper to the trucker. It ends regulation and the only reasonable expectation that TSC and every other trucking company affected by the NRA could have had is that a regulation of this sort may change and hence the game of pulling the rug out from under shippers might end before the rug can be pulled.
3. Retroactivity. Retroactive application of the NRA also poses no constitutional dilemma. The Supreme Court has defined the due process standard to be applied to retroactive economic legislation as follows:
Provided that the retroactive application of a statute is supported by a legitimate legislative purpose furthered by rational means, judgments about the wisdom of such legislation remain within the exclusive province of the legislative and executive branches _ To be sure; ... retroactive legislation does have to meet a burden not faced by legislation that has only future effects.... ‘The retroactive aspects of legislation, as well as the prospective aspects, must meet the test of due process, and the justifications for the latter may not suffice for the former.’ ... But that burden is met simply by showing that the retroactive application of the legislation is itself justified by a rational legislative purpose.
Pension Benefit Guaranty Corp. v. R.A. Gray & Co., 467 U.S. 717, 729-30, 104 S.Ct. 2709, 2717-18, 81 L.Ed.2d 601 (1984), quoting Usery v. Turner Elkhorn Mining Co., 428 U.S. 1, 16-17, 96 S.Ct. 2882, 2893-94, 49 L.Ed.2d 752 (1976). The legislative purpose in making the NRA retroactive was to curtail “undercharge” (or, as this court views it, “overcharge”) litigation that, in the judgment of Congress, was wasteful and did not further the purpose of the filed rate doctrine. Carrying on this sort of litigation is very expensive. As the defense and counterclaim in this case demonstrate, it is not simply a choice between enforcing the tariff or enforcing the negotiated rate. A filed rate is not enforceable if it is unreasonable. By applying the statute retroactively, Congress may rationally have sought to proscribe litigation over issues concerning the reasonableness of tariffs several years old, where the cost of litigation in many cases could exceed the amount at stake. The NRA bears a reasonable relationship to such a goal and the goal itself is rational.
4. Separation of Powers. Finally, in asserting that the retroactive application of the statute violates the constitutional principle of separation of powers, the Trustee misses the mark. Unlike the situation in Plant v. Spendthrift Farm, Inc., — U.S. -, 115 S.Ct. 1447, 131 L.Ed.2d 328 (1995), the NRA does not require the reopening of a final judgment. The Court addressed the *37very argument made by the Trustee in these words:
It is true, as petitioners contend, that Congress can always revise the judgments of Article III courts in one sense: When a new law makes clear that it is retroactive, an appellate court must apply that law in reviewing judgments still on appeal that were rendered before the law was enacted, and must alter the outcome accordingly. See United States v. Schooner Peggy, 1 Cranch 103, 2 L.Ed. 49 (1801); Landgraf v. USI Film Products, 511 U.S. -, -, 114 S.Ct. 1483, 1500-1508, 128 L.Ed.2d 229 (1994).
Plant, — U.S. at -, 115 S.Ct. at 1457. In short, the Trustee has not identified any provision of the United States Constitution that the NRA as applied to this ease would violate.
For these reasons, the National Enquirer’s motion for a stay must be granted and the Trustee’s motion for summary judgment must be denied.
It is therefore
ORDERED that the Trustee’s Motion for summary judgment is DENIED. The Defendant’s motion for a stay is GRANTED. The Defendant shall have three months from entry of this order within which to file the appropriate pleading with the ICC to raise the issue of the reasonableness of rates charged by TSC Express to the Defendant, the issue concerning whether shipments are exempt from ICC regulation under 49 U.S.C. §§ 10526(a)(7) and 10528, and all issues covered by section 2(e)(2) of the Negotiated Rates Act of 1993. If such a pleading is timely filed, this ease is stayed for a period of two years thereafter. The parties are directed to advise the court within thirty days of any decision by the ICC and whether the parties then believe any issue remains for this eourt to decide. In the interim, this ease is administratively closed.
. See Wayne Johnson, Negotiated Rates Act of 1993: Congress Curtails Undercharge Litigation In Bankruptcy By Amending The Filed Rate Doctrine, 68 Am.Bankr.L.J. 319, 331-341 (1994) (discussing deregulation legislation and its aftermath).
. The tremendous expansion of the trucking industry threatened both railroads and the ability of the ICC to regulate railroads as if they were monopolies. As explained by Professor Pierce,
Congress confronted a clear policy choice. It could either deregulate railroads, in recognition of the effects that trucking had in dissipating the monopoly power of railroads, or it could extend regulation to trucking in order to protect the ICC’s power to regulate railroads. Not surprisingly, the 1935 Congress chose the second option....
... [T]he rationale for extending regulation to trucking — protecting the ICC’s power to regulate railroads as if they still had monopoly power — required the ICC to devise a regulatory regime that produced artificially high rates.
Richard J. Pierce, Jr., The Supreme Court's New Hypertextualism: An Invitation to Cacophony and Incoherence in the Administrative State, 95 Co-lum.L.R. 749, 766-776 (1995) (footnote omitted) (discussing the history of the filed rate doctrine as applied to the trucking industry in connection the Supreme Court’s statutory interpretation in Maislin Industries, U.S. v. Primary Steel, Inc., 497 U.S. 116, 110 S.Ct. 2759, 111 L.Ed.2d 94 (1990)). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492147/ | *947
ORDER DENYING CROSS MOTIONS FOR SUMMARY JUDGMENT
ROBERT E. BRIZENDINE, Bankruptcy Judge.
This adversary proceeding is before the Court on cross motions for entry of summary judgment. In his complaint, Plaintiff contends that Defendant-Debtor's discharge should be denied pursuant to 11 U.S.C. § 727(a)(2)(A) and (B). This is a core proceeding under 28 U.S.C. § 157(b)(2)(J). Upon consideration of the motions and the record, the Court concludes that both motions should be denied.
Plaintiff’s complaint objecting to Debtor’s discharge arises in connection with a state court judgment obtained against Debtor on July 9, 1991, on a joint and several basis along with Inter-State Computer Corporation and another individual with regard to unpaid legal fees. Prior to said judgment, Debtor had transferred his interest in three certain parcels of real property to his wife without consideration as evidenced by warranty deeds recorded by the Clerk of Superi- or Court, Cherokee County, Georgia and the Clerk of Superior Court, Pickens County, Georgia, on December 14, 1990 and December 18, 1990, respectively. Plaintiff alleges that these transfers were made in violation of O.C.G.A. § 18-2-22(1), (2), and (3) (Michie 1991) and were fraudulent and void and constitute a continuing concealment of assets. Further, he asserts that the transfers in question have already been determined to be null and void based on this Court’s earlier findings and conclusions in another adversary proceeding in this bankruptcy case and that they were made with intent to hinder, delay, or defraud creditors. See Judgment of March 7, 1994, Adv.Proc. No. 92-6843, Chapter 7 Case No. A92-62567-REB; see also Partial Transcript of February 28, 1994 (Ruling of the Court).
It is Plaintiffs position that these prior findings are binding upon this Court in this adversary proceeding and Debtor is collaterally estopped from relitigating same. In addition, he argues, Debtor concealed the beneficial interest he retained in that certain parcel of property on which he resides into the one year statutory period set forth in Section 727(a)(2)(A). Thus, he maintains, Debtor’s discharge may still be denied notwithstanding the fact that the transfer occurred fourteen months before the filing of this bankruptcy case on February 11, 1992. Plaintiff contends that Debtor’s continued living on one of the transferred parcels and that Debt- or’s claim of an exemption in this property in his bankruptcy schedules are both evidence of such concealed beneficial interest.
Debtor counters that Plaintiff, subsequent to the filing of the bankruptcy petition, has no standing as an individual creditor, as opposed to the trustee, to bring a claim under state fraudulent conveyance law to challenge transfers of property made fourteen months before bankruptcy. See Section 544(a).1 He argues that Plaintiff is estopped from claiming an interest in property allegedly retained by Debtor after the transfers. Only the Trustee, he maintains, is able to assert such a claim as it belongs to the estate. Further, any claim predicated upon O.C.G.A. § 18-2-22(1) and (3) has already been decided by the Court in Adversary Proceeding No. 92-6843 in favor of the Debtor when it was determined that, among other things, the Trustee failed to prove insolvency. In addition, the obligation allegedly owed to Plaintiff was not among those found to be in existence on the date of the subject transfers and, therefore, Debtor contends that relief on these grounds cannot be relitigated by Plaintiff.
Debtor also asserts that the present action is in violation of Fed.R.Bankr.P. 9011 because it is obvious that Section 727(a) does not apply to transfers occurring more than one year before bankruptcy. In defense of the alleged concealment as same relates to Debtor’s claim of an exemption in the transferred property, he contends that the exemp*948tion was claimed in error. Moreover, he states that the transfers were filed of public record and that he has never denied that he lived on one of the properties he transferred to his wife.2 Plaintiffs reliance upon matters of public record and those freely admitted by Debtor, he insists, cannot serve as proof of concealment.
Additionally, Debtor disputes the underlying basis of Plaintiffs claim for unpaid attorney’s fees, for which Debtor was found jointly and severally liable, on grounds that the legal services provided were performed for the benefit of and restricted to the corporate co-defendant, which was the entity that had agreed to compensate Plaintiff. Therefore, Debtor alleges that the judgment entered against him in state court for these fees was improper.3 Finally, he demands attorney’s fees under Section 523(d), claiming that this is an abusive and frivolous action.4
In the present action, Plaintiff is not seeking a judgment against Debtor based on this Court’s determination of liability. Consequently, there is no danger of duplicate judgments as asserted by Debtor. Instead, based on the prayers in his complaint, Plaintiff is only objecting to Debtor’s discharge under 11 U.S.C. § 727(a). Because such a challenge may be initiated by a creditor pursuant to Section 727(c)(1), it is necessary to establish whether Plaintiff does in fact hold a claim against Debtor and his estate.
As noted above, Debtor disputes the basis of Plaintiffs claim against him because Plaintiff allegedly only represented the corporate co-defendant in the original suit. Yet, he admits that the plaintiffs in the original state court action were not only seeking judgment against the corporation, but also against him as an employee. Debtor states that Plaintiff herein successfully argued that Debtor was not individually liable because he was merely an employee. Thereafter, Plaintiff brought suit against Debtor and the other defendants for unpaid legal fees in the State Court of Fulton County. Debtor contends that there was no contract to pay the fees, and further, that he was served with process in Fulton County, at his place of work, although he is a resident of Cherokee County.5
Although Debtor raised, among others, the defense of lack of jurisdiction and venue, Plaintiff obtained an unopposed summary judgment in his favor. He then initiated collection procedures in the Superior Court of Cherokee County as well as State Court of Fulton County; whereupon, Debtor sought bankruptcy protection. Apparently, this summary judgment was never appealed.
Debtor argues that a judgment which is void for lack of jurisdiction of the person may be contested at any time. See O.C.G.A. § 9 — 11—60(f). Preclusive effect, however, must be accorded to state court judgments as would be appropriate under the law of that state. See Harbuck v. Marsh Block & Co., 896 F.2d 1327, 1328 (11th Cir.1990). Further, in determining whether pre-clusive effect may be accorded to a prior state court judgment, federal courts are obliged to inquire into its jurisdictional basis. *949Id. at 1329. State court determinations of personal jurisdiction, however, are entitled to preclusive effect. Id.
Under Georgia law, personal jurisdiction and venue denote separate concepts. Improper venue may serve as grounds for a finding of lack of jurisdiction and this is apparently the basis of Debtor’s jurisdictional challenge. Debtor asserts that the issue of personal jurisdiction was never litigated and decided. He contends that there is no evidence that he and the corporate co-defendant were joint obligors in terms of Plaintiffs legal representation and thus, venue could only be properly laid against him in Cherokee County. See Ga. Const. art. 6, § 2, ¶ 6. Under Georgia law as reviewed by this Court, suits against alleged joint obligors residing in different counties may be tried in the county of residence of either co-defendant. See Ga. Const. art. 6, § 2, ¶4; O.C.G.A. § 9-10-31; see also Taylor v. Career Concepts, Inc., 184 Ga.App. 551, 362 S.E.2d 128 (1987); cf. Lester Witte & Co. v. Cobb Bank & Trust Co., 248 Ga. 235, 282 S.E.2d 296 (1981).
From a review of the record, it appears that judgment was entered against Debtor and the other co-defendants only after the state court judge examined the case file and concluded that Plaintiff was entitled to such relief, notwithstanding the fact that his summary judgment motion was unopposed. Joint and several liability was alleged as part of the claim and judgment was entered on that basis pertaining to legal services rendered to and accepted by Debtor and his co-defendants in connection with their prior defense by Plaintiff. See generally Llop v. McDaniel, Chorey & Taylor, 171 Ga.App. 400, 320 S.E.2d 244 (1984). Thus, it does not appear from the face of the state court judgment or record as presented herein that venue as to Debtor was improperly laid in Fulton County. Further, the record reflects no effort to seek a reconsideration of this ruling or to file an appeal on grounds of improper venue or with regard to the substantive basis or merits of the court’s determination of liability. Finally, whether or not, as argued by Debtor, such an agreement of joint representation was appropriate under state ethical rules, the state court evidently concluded that such a relationship did not prohibit the granting of a judgment on a joint and several basis.
Based on the foregoing, this Court concludes that under state law the courts of the state of Georgia would accord preclusive effect to the judgment entered by the State Court of Fulton County. In addition, the Court, having inquired into the jurisdictional basis of the judgment, concludes that it is appropriate to accord it full faith and credit herein. Accordingly, the existence and basis of Debtor’s liability to Plaintiff having been established, the Court concludes that Plaintiff, as a creditor, has standing to object to Debtor’s discharge under 11 U.S.C. § 727(a). See Section 727(c)(1).
Under Section 727(a)(2)(A), a discharge shall not be granted if a debtor “with intent to hinder, delay, or defraud a creditor ... has transferred, removed, destroyed, mutilated, or concealed— ... (A) property of the debtor, within one year before the date of the filing of the petition....” Ordinarily, issues of fraudulent intent are not susceptible to summary disposition due to the importance of observing witness demeanor and assessing credibility. Having previously observed Debtor and assessed the credibility of his testimony, this Court has determined that he made the transfers in issue with intent to hinder, delay, and defraud creditors in violation of O.C.G.A. § 18-2-22(2). See Transcript at 8.6
*950As noted above, Debtor argues that the relief granted to the Chapter 7 Trustee in Adversary Proceeding No. 92-6843 precludes relief to Plaintiff on the same grounds herein. Further, he maintains, Plaintiffs claim was not one of those recognized at the previous trial as having been in existence at the time of the transfers in question. Moreover, because the Trustee has now compromised and settled his claim against Debtor’s wife, the transferee, Plaintiff is further precluded from bringing this action. These arguments, however, misperceive the legal effect of the Court’s avoidance of the challenged transfers and related findings of fact.
Although the Trustee’s claim proceeded under 11 U.S.C. § 544(b) and O.C.G.A. § 18-2-22, the determination that Debtor made the subject transfers to his wife in an intentional effort to perpetrate fraud and conceal assets may constitute a sufficient legal basis for denying his discharge pursuant to 11 U.S.C. § 727(a)(2)(A). See generally Cohen v. Bucci, 905 F.2d 1111 (1990), reh’g denied, en banc (7th Cir. July 30, 1990); First Eastern Bank, N.A. v. Jacobs (In re Jacobs), 60 B.R. 811, 816 n. 8 (M.D.Pa.1985), aff'd without op., 802 F.2d 446, aff'd without op., Appeal of Jacobs, 802 F.2d 447 (3d Cir.1986). In Cohen, supra, for example, the avoidance of a transfer under Section 548(a)(1), based on a finding of fraudulent intent, served as grounds for denial of discharge under Section 727(a)(2)(A), given the substantial similarity between the language used in these provisions. The findings necessary to support a determination of actual intent to hinder, delay, and defraud creditors under O.C.G.A. § 18-2-22(2) are sufficiently identical to those required under 11 U.S.C. § 548(a)(1) to conclude that such findings are similarly dispositive of said issue in this case under Section 727(a)(2)(A).
Plaintiff is not seeking to set aside Debt- or’s transfers of property, but he is not necessarily precluded from relying on this Court’s prior determinations with respect to such transfers in Adversary Proceeding No. 92-6843. The issue of Debtor’s intent in connection with the subject transfers was actually litigated in the prior action and its determination was essential to the Court’s judgment. Further, the Court finds no evidence that Debtor lacked adequate incentive to fully litigate this issue therein. Accordingly, based on this Court’s prior judgment and the findings and conclusions therein that the Debtor acted with actual intent to defraud his creditors when he transferred the subject property to his wife, Debtor is collaterally estopped from relitigating this issue herein.
The remaining element in this action centers upon Debtor’s alleged concealment of a beneficial interest and the effect of the one year period prescribed in Section 727(a)(2)(A). Debtor argues that the application of this subsection is specifically restricted to those transfers occurring within one year of the petition date which, he claims, patently excludes the subject transfers to his wife. Existing case law, however, recognizes that a transfer or an initial act of concealment occurring prior to this one year period may, nonetheless, warrant denial of discharge if the transfer is concealed or a beneficial interest is secretly retained into this period. See Thibodeaux v. Olivier (In re Olivier), 819 F.2d 550 (5th Cir.1987); Friedell v. Kauffman (In re Kauffman), 675 F.2d 127 (7th Cir.1981); Penner v. Penner (In re Penner), 107 B.R. 171 (Bankr.N.D.Ind.1989); see also Rosen v. Bezner, 996 F.2d 1527, 1532 (3d Cir.1993).
Debtor maintains that, because the transfers were filed of public record, they could not have been concealed. Concealment under the statute, however, includes an apparent transfer of title whereby a debtor retains a concealed interest in the property and continues to use it as his own. It is the intentional, fraudulent attempt to distort the “true” state of ownership of an asset from creditors that establishes concealment. As used here, the true state of ownership refers to the transferor’s intent to deceive others through a public transfer of title with the secret anticipation or understanding that he will later “reclaim” the property from the transferee, or that he will continue to enjoy full access to the incidents of ownership. In this sense, then, transferring record title, when done according to such a design, is conceptually indistinguishable from tempo-*951rarity surrendering possession of an item of personal property in order to hide or conceal a claim to ownership. See generally Penner, supra, 107 B.R. at 173-74. Evidence of the retention of benefits can thereby serve to establish the existence of such fraudulent intent or scheme as well as confirm the underlying deceitful purpose of the transferor.7
In this case, it has already been shown that Debtor continued to live on one of the transferred parcels and that his wife did not know the transfers had even occurred until some time later as Debtor did not consult with or tell her about them. Nevertheless, upon review of the record and based upon the foregoing discussion, the Court concludes that a factual issue still exists with regard to the nature and extent of the benefits of ownership Debtor allegedly retained and concealed after the subject transfers. Accordingly, it is
ORDERED that Plaintiff’s motion for summary judgment is denied, and it is
FURTHER ORDERED that Defendants Debtor’s motion for summary judgment is denied. It is
FURTHER ORDERED that a pretrial conference will be held on the factual issue set forth hereinabove pursuant to 11 U.S.C. § 727(a)(2)(A) upon separate written notice.
IT IS SO ORDERED.
. Debtor also contends that Plaintiffs motion is procedurally defective in that his proposed findings, which appear in the form of issues and contain legal conclusions, do not satisfy the requirement under local rule that a motion for summary judgment must be accompanied by a statement of undisputed material facts. Plaintiff argues in response that Debtor’s counsel's mere unverified denials fail to meet the standard set forth in Fed.R.Civ.P. 56(e), applicable herein through Fed.R.Bankr.P. 7056, for showing the existence of specific fact issues.
. As a matter of record, Debtor has denied on several occasions that he continued to live in the premises as transferred. See Answer ¶ 1 (denying complaint ¶ 5); and Response to Plaintiff's proposed findings of fact ¶ 16. This parcel is given as his resident address in his schedules; to wit, Route 8, Ranchwood Trail, Canton, Georgia. Accordingly, the Court will construe the statements in his briefs and schedules as an acknowledgment that Debtor continued to live at the address describing this parcel of property with his wife after the transfer.
. Debtor contends that the summary judgment for unpaid legal fees, entered by the State Court of Fulton County after the defendants in that action failed to respond, is void for lack of jurisdiction. Under Georgia law, he asserts, Plaintiff should have brought his claims against Debtor individually in Cherokee County as the county where Debtor resided, and where Plaintiff also later attempted to collect his judgment. Jurisdictional issues, he claims, may be raised at any time. Further, Debtor states that there is no evidence that he and the corporate co-defendant were joint obligors as Plaintiff's duly in the original suit was to defend and provide legal counsel to the corporation alone. This issue, along with his jurisdictional challenge, has never been tried. Plaintiff disputes this contention.
. Because this is an action under Section 727(a), a claim for attorney’s fees may not be properly asserted under Section 523(d).
. Both the corporate co-defendant and the other individual co-defendant in that suit were apparently residents of Fulton County.
. Section 18-2-22 provides in pertinent part as follows:
The following acts by debtors shall be fraudulent in law against creditors and others and as to them shall be null and void:
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(2) Every conveyance of real or personal estate ... had or made with intention to delay or defraud creditors....
O.C.G.A. § 18-2-22.
. The debtor-transferor’s expectation that he will be able to use or reclaim full ownership of the transferred property is sufficiently culpable, whether or not his actual resulting interest would be legally insufficient to resist an action by the transferee to remove him as a tenant at sufferance or at will. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492149/ | ORDER
W. HOMER DRAKE, Jr., Bankruptcy Judge.
Before this Court is the Motion to Approve Administrative Expense of Don and Margaret Seay (hereinafter “the Seays”) pursuant to 11 U.S.C. § 503. This matter falls within the subject matter jurisdiction of the Court, see 28 U.S.C. § 157(b)(2)(A), (B), and will be disposed of as provided in the Findings of Fact and Conclusions of Law which follow.
Findings of Fact
At the time of their bankruptcy filing, Barbara S. and Charles H. Dayhuff III (hereinafter “the Debtors”) owned a commercial building situated at 2531 Lafayette Plaza Drive, Albany, Georgia (hereinafter “2531”). Although separately owned and operated, 2531 forms one unit of a six building office complex, known as Lafayette Plaza. At all times relevant to this matter, the Seays have owned the remaining five buildings in the complex.
The instant controversy draws into question the treatment of common areas in this Lafayette Plaza complex. As originally designed, the complex common areas fell subject to a series of cross easements, providing for their use and maintenance by the building owners. Under the terms of this arrangement, each owner paid a pro-rata portion of the common area maintenance expenses and property taxes, as calculated from his/her building’s relative size. According to a revocable appointment, an organization directed by the Debtor, Mr. Huff, supervised the daily maintenance of the common areas.
On March 18, 1992, the Debtors filed a petition under Chapter 7 of the Bankruptcy Code. Immediately thereafter, the Trustee assumed his duties of supervising the Debtors’ assets. Pursuant to these duties, the Trustee began to lease out the 2531 structure. He did not, however, undertake any plans regarding the common areas of the Lafayette complex.
As owners of the bulk of the units in the complex, the Seays took it upon themselves to pay the tax and water bills associated with the complex. The Seays also assumed the maintenance of the common areas. Rather than hiring lawncare and janitorial services, however, the Seays chose to do this maintenance work themselves. Moreover, the Seays did not consult the Trustee or obtain his consent for their activities.
Ultimately, the Trustee abandoned the 2531 structure. Shortly thereafter, the Seays filed the instant Motion to Approve Administrative Expense, arguing that the Debtors’ pro-rata share of common area maintenance and taxes should receive priori*973ty treatment under 11 U.S.C. § 503(b)(1)(A). According to the Seays, the Debtors’ share of these expenses amounts to the following:
TAXES-
1992. $861.36
1993. $957.24
1994. $951.54
Subtotal- $2770.14
MAINTENANCE
1992. $865.01
1993. $1583.70
1994. $1578.25
1995. $721.48
Subtotal- $4748.44
Total Claim Presented- $7518.58
The Seays also have augmented the maintenance portion of their claim by compounding interest at the rate of 10% per year, thereby generating a total claim of $8367.44.
On July 14,1995, this Court held a hearing to determine the validity of the Seays’ claim for administrative expenses. At that time, the Trustee vigorously opposed the Seays’ motion, presenting four separate grounds of objection. First, the Trustee pointed out that the estate had only recovered $15,000.00 from renting 2531 prior to abandonment. As such, the Trustee reasoned that the Seays’ administrative expense claim excessively outweighed any consequent benefits to the estate. In his second argument, the Trustee informed the Court that parties closely associated with the Seays had bought 2531 in a post-abandonment sale for far below the market value. Accordingly, the Trustee reasoned that the Seays already had received a windfall at the estate’s expense and should not receive yet another. As a third argument, the Trustee suggested to the Court that the Seays incurred the expenses at issue, not for the benefit of the estate, but for the benefit of their own ownership interests. Finally, the Trustee argued that, if classified as administrative expenses, these claims should not receive immediate payment due to a possibility that all administrative claims may not be payable from the limited assets on hand. Given the variety of legal and factual issues presented, this Court took the matter under advisement.
CONCLUSIONS OF LAW
This matter turns on the scope and application of 11 U.S.C. § 503(b). In pertinent part, that section provides:
******
After notice and a hearing, there shall be allowed administrative expenses ... including—
(1)(A) the actual, necessary costs and expenses of preserving the estate, including wages, salaries or commissions for services rendered after the commencement of the case.
******
Section 503(b)(l)(A)’s treatment of actual and necessary expenses marks a deviation from the principle of equality in distribution, justified by a desire to encourage post-petition dealings with the debtor. Ala. Surface Mining Comm’n v. N.P. Mining Co., Inc. (In re N.P. Mining Co., Inc.), 963 F.2d 1449, 1453-54 (11th Cir.1992). As exceptions to the rule, however, the provisions for administrative priority warrant close scrutiny and narrow construction. See Otte v. United States, 419 U.S. 43, 53, 95 S.Ct. 247, 254-55, 42 L.Ed.2d 212 (1974); In re D’Lites of America, 108 B.R. 352, 355 (Bankr.N.D.Ga.1989) (Drake, J.). Bankruptcy courts have broad discretion in determining whether an administrative expense claim justifies allowance. Younger v. United States (In re Younger), 165 B.R. 965, 967 (S.D.Ga.1994) (citations omitted). Moreover, the prospective holder of such a claim bears the burden of establishing that an actual and necessary post-petition expense in fact has taken place. In re Communications Management & Info., Inc., 172 B.R. 136, 141 (Bankr.N.D.Ga.1994) (Murphy, J.) (citations omitted); D’Lites, 108 B.R. at 355. With these standards in mind, the Court will address each aspect of the Seays’ administrative expense claim.
I. The Common Area Taxes.
As generated by the City of Albany/Dougherty County tax office, the tax bills at issue contained an itemized schedule, allocating a portion of the common area taxes to each individual building. Under this allocation, the bill assessed 12.34%, or $2770.14, of *974the total taxes for 1992-94 to the 2531 structure. To the extent that these bills assessed a specific portion of their costs to unit 2531, their payment presents an actual and necessary post-petition expense of the Debtors’ estate.1 Accordingly, the Court finds the tax portion of the Seays’ claim to merit administrative expense classification pursuant to 11 U.S.C. § 503(b)(1)(A).
II. The Common Area Maintenance Claims.
While the Seays’ claims for tax reimbursement merit administrative expense treatment, their claims for maintenance fees do not fare so well under the governing standards of evaluation. As noted previously, this Court will strictly construe all claims presented under section 503(b). See Otte v. United States, 419 U.S. 43, 53, 95 S.Ct. 247, 254-55, 42 L.Ed.2d 212 (1974); In re D’Lites of America, 108 B.R. 352, 355 (Bankr.N.D.Ga.1989) (Drake, J.). In the context of a section 503(b)(1)(A) claim, this means that the Court will afford a strict construction to the relevant terms “actual” and “necessary”. D’Lites of America, 108 B.R. at 355 (citing In re Patch Graphics, 58 B.R. 743, 745 (Bankr.W.D.Wis.1986)).
Here, the Seays have not presented a claim for “actual” expenses arising from the maintenance of the common areas. The Seays have not come to this Court seeking reimbursement for expenses they incurred through hiring an individual to perform the maintenance in question. Rather, they seek compensation for nothing more than their individual labors and time in performing the maintenance tasks themselves. The Seays do not hold themselves out as professional janitors or lawn keepers. Moreover, they have not presented this Court with any evidence of tangible expenses associated with their maintenance projects. Such claims, based solely upon expenditures of non-professional time by the claimant, do not constitute “actual” expenses for the purpose of 11 U.S.C. § 503(b)(1)(A).2 Consequently, this portion of the Seays’ claim cannot satisfy the basic pre-requisites for administrative expense treatment. See 11 U.S.C. § 503(b)(1)(A).
*975Aside from the illusory nature of the Seays’ maintenance expenses, this Court notes that a separate obstacle would prevent administrative expense treatment of this claim. As a general rule, creditors cannot receive administrative priority treatment of expenses which they incurred to benefit themselves, rather than the debtor’s estate. See Lebron v. Mechem Fin. Inc., 27 F.3d 937, 944 (3d Cir.1994) (citations omitted); Fruehauf Corp. v. Jartran, Inc. (In re Jartran, Inc.), 886 F.2d 859, 871 (7th Cir.1989); Wolf Creek Collieries Co. v. GEX Ky., Inc., 127 B.R. 374, 379 (N.D.Ohio 1991) (citations omitted); In re Communications Management & Info., Inc., 172 B.R. 136, 143 (Bankr.N.D.Ga.1994) (Murphy, J.); D’Lites of America, 108 B.R. at 357 (citations omitted). As owners of nearly all the buildings in the Lafayette Plaza complex, the Seays had a pressing, independent interest in the maintenance and condition of the common areas. This Court finds it clear that this personal interest, rather than a desire to benefit the estate, motivated the Seays’ maintenance activities. Because the Seays maintained the common areas solely in pursuit of such a self interest, their associated expenses will not qualify for administrative priority. Wolf Creek, 127 B.R. at 376; D’Lites of America, 108 B.R. at 357.
III. The Seays’ Bight to Immediate Payment.
Having established that the Seays’ tax claim qualifies for administrative expense classification, while their maintenance claim does not, this Court must address the Seays’ right to immediate payment of that aspect of their claim which has qualified under 11 U.S.C. § 503(b)(1)(A). As the Eleventh Circuit recently pointed out, “the determination of the timing of payment of administrative expenses is a matter within the discretion of the bankruptcy court. Varsity Carpet Serv., Inc. v. Richardson, (In re Colortex Ind., Inc.), 19 F.3d 1371, 1384 (1994). Where, due to limited funding, a threat exists that all administrative claims may not be satisfied, immediate payment of one claim should not proceed to the potential detriment of other administrative claimants. Varsity Carpet Serv., Inc. v. Richardson, (In re Colortex Ind., Inc.), 146 B.R. 881, 888 (N.D.Ga.1992) aff'd, 19 F.3d 1371 (1994). Here, the Trustee has expressed a fear that existing and future administrative claims currently suffer from such a threat of incomplete satisfaction. This Court finds the Trustee’s concerns to be well founded and, therefore, will deny the Seays’ request for immediate payment of the tax claims which qualify as administrative expenses.
Conclusion
In summary, the Seays’ $2770.14 claim for common area taxes qualifies for administrative expense treatment under 11 U.S.C, § 503(b)(1)(A). Their $5597.30 claim for maintenance does not meet section 503(b)(l)(A)’s criteria, however. Lastly, this Court finds sufficient cause not to allow immediate payment of that aspect of the Seays’ claim which does qualify as an administrative expense. As such, the Seays’ Motion to Approve Administrative Expense hereby is GRANTED IN PART and DENIED IN PART.
IT IS SO ORDERED.
. A growing majority of courts have held that the date of accrual rather than the date of assessment should govern the classification of tax-related claims. See United States v. Redmond, 36 B.R. 932, 934 (D.Kan.1984) (citations omitted); In re Hillsborough Holdings Corp., 156 B.R. 318, 320 (Bankr.M.D.Fla.1993); In re O.P.M. Leasing Serv. Inc., 68 B.R. 979, 983 (Bankr.S.D.N.Y.1987). Under this analysis, a tax, while assessed post-petition, nonetheless will not qualify as an administrative expense if the underlying tax liability accrued pre-petition. See Hillsborough Holdings, 156 B.R. at 320.
It, therefore, might appear that a portion of the 1992 tax bill should not qualify as an administrative expense, due to the fact that Debtors filed their Chapter 7 petition on March 18, 1992. Specifically, one might conclude that a portion of the 1992 tax accrued pre-petition and, therefore, should not qualify as an administrative expense. This Court, however, finds that such a conclusion would be in error.
All courts applying the accrual theory have done so in the context of income tax claims. See, e.g., Redmond, 36 B.R. at 932; Hillsborough Holdings, 156 B.R. at 318; O.P.M. Leasing, 68 B.R. at 979. Liability for income taxes accrues contemporaneously with the generation of the income. O.P.M. Leasing, 68 B.R. at 983-85. As such, the debtor may incur the tax expense pre-petition, even when no assessment ultimately takes place until after filing.
By contrast, liability for property or ad valo-rem taxes is triggered by ownership of the taxed property on the date of assessment. That is, notwithstanding any other fact, whoever happens to own the property in question on the date of assessment will bear the burden of that property or ad valorem tax. Thus, these taxes may be said to actually accrue on the date of assessment. When one applies the accrual theory in the context of property or ad valorem taxes, they, therefore, will find a different standard of timing in play, one focusing exclusively upon the date of assessment.
Applying this standard to the facts at hand, the Court notes that, although a portion of the taxed year had run before the filing date, the assessment itself came post-petition. Accordingly, the entire 1992 tax debt was incurred post-petition and qualifies for administrative expense treatment.
. As one court concluded when facing similar facts:
[The claimant] did not actually incur any out-of-pocket expenses in providing the labor nec-essaiy to care for [the debtor's] cattle, nor did he have any agreement setting the rate at which such labor was to be provided. All of the labor was provided by him and his family. Thus, any claim for administrative expenses must be reduced [by that amount].
In re Hayes, 20 B.R. 469, 472 (Bankr.W.D.Wis.1982). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492150/ | OPINION AND ORDER
JOHN J. THOMAS, Bankruptcy Judge.
This matter was initiated by the above-captioned Debtors/Plaintiffs, A. Barletta & Sons, Inc. and A. Barletta & Sons, a partnership, hereinafter (“Plaintiffs”), against Trib-ble & Stephens Co., et al., by adversary complaint filed September 16, 1994. The instant matter deals with a Motion for Summary Judgment filed on behalf of all of the above-captioned Defendants, hereinafter (“Defendants”). The complaint contains various counts all stemming from a sub-contract dealing with certain site work namely, providing asphalt paving and installation of a water-main system at a project commonly known as Mount Pocono Plaza located at the intersection of Pennsylvania Route 940 and Oak Street, Mount Pocono, Monroe County, Pennsylvania.
Defendant-CenterPoint, as owner, entered into a written construction agreement with DefendanteTribble & Stephens Co., as general contractor, on or about August 23, 1989 for the construction of the Mount Pocono Plaza project. Thereafter, on or about August 31, 1989, Plaintiffs entered into a subcontract with Defendant-Tribble & Stephens Co. for work to be performed at that project. The contract called for Plaintiffs to supply *978labor and materials for asphalt paving and installation of a water-main system. The original amount of the contract was One Million Four Hundred Thirty-Five Thousand Six Hundred Ten Dollars ($1,435,610.00) but, with certain change orders, the total amount allegedly due to the Plaintiffs increased to One Million Five Hundred Nine Thousand Five Hundred Thirty-Five Dollars ($1,509,-535.00). Of that amount, Plaintiffs allege that they have been paid One Million Sixty-Two Thousand Five Hundred Ninety-Eight and 01/00 Dollars ($1,062,598.01). Plaintiffs allege that the work under the sub-contract agreement was performed by the Plaintiffs from a period of August, 1988 through September, 1990.
Plaintiffs also provided labor and materials for the installation of a “ductile iron line system” to replace the water-main system required under the specifications for the project. The Plaintiffs allege that material and costs to install the ductile iron line system approximated Five Hundred Sixty-Nine Thousand Five Hundred Eighty-Eight and 93/100 Dollars ($569,588.93). Plaintiffs’ claim is in excess of One Million Dollars ($1,000,-000.00).
The several counts of the complaint comprise the following: Count I — Breach of Contract — Tribble & Stephens Co.; Count II— Unjust Enrichment — Tribble & Stephens Co.; Count III — Quantum Meruit — Center-Point Properties, Inc.; Count IV — Unjust Enrichment — CenterPoint Properties, Inc.; Count V — Intentional Interference with Contractual Relations — CenterPoint Properties, Inc.; Count VI — Intentional Interference with Contractual Relations — Tribble & Stephens Co.; Count VII — Equitable Subordination — Tribble & Stephens Co.; and Count VIII — Equitable Subordination — Center-Point Properties, Inc.
In addition to all the monetary damages requested by the Plaintiffs, they also request this court to equitably subordinate the Defendants’ claims, to the extent they are allowed, to all claims of other creditors pursuant to 11 U.S.C. § 510 of the United States Bankruptcy Code.
Some of the allegations against Center-Point Properties, Inc. and Tribble & Stephens Co. allege that bonding companies were notified by a letter to Pachence Insurance Agency of the failure of the ductile iron line and paving at the project which thwarted attempts by Plaintiffs to receive performance and payment bonds for future projects. This failure to receive performance and payment bonds hampered the Plaintiffs’ business operations because the actions by CenterPoint Properties, Inc. and Tribble & Stephens Co. were taken in callous disregard of the Plaintiffs’ rights and without diligent investigation as to any liability for failure at the project.
The Defendants argue that because the contract specifically provides that it shall be construed under the law of Texas that this court should apply Texas law in resolution of the instant adversary. In that regard, they argue that the applicable Texas statute of limitations has run, barring the instant lawsuit. They argue that Plaintiffs’ breach of contract claim is barred under Texas’ four-year statute of limitations found at Texas Civil Practice and Remedy Code Section 16.051 and that Plaintiffs’ unjust enrichment and contractual interference claims are barred under Texas’ two-year statute of limitations found at Texas Civil Practice and Remedy Code Section 16.003. In both cases, Defendants’ argue that the project, at the very latest, was completed in July of 1990 and the instant complaint was not filed until September 16, 1994, well over the two-year and four-year statutes of limitations indicated above.
As an alternative argument, Defendants claim that Plaintiffs’ breach of contract claim, unjust enrichment claim, and quantum meru-it claim are all governed by Pennsylvania’s four-year statute of limitations and are just as time-barred citing J¡,2 Pa.C.S.A § 5525. Likewise, Pennsylvania’s two-year statute of limitations found in lp2 Pa.C.S.A § 552U would bar Plaintiffs’ contractual interference claim.
Initially, the court must decide whether to apply Texas or Pennsylvania law to the instant adversary. In response to Defendants’ position, the Debtors argue that, under Pennsylvania conflict of laws principles, Pennsylvania law should be applied to *979interpreting the sub-contraet. The Plaintiffs assert that the interest and policies of the various states may overrule a specific choice of law provision found in a contract where the state named in the contract has no connection with the contract or its performance. Furthermore, even though the sub-contract provides that it shall be governed by the laws of the state of Texas, Pennsylvania conflict of laws principles dictate that Pennsylvania substantive law should be applied in interpreting the contract. Also, Plaintiffs claim that the sub-contract is one of adhesion and, therefore, the clause providing for application of Texas law is unenforceable.
In support of the Plaintiffs’ position, they draw our attention to the ease of LCI Communications, Inc. v. Wilson, 700 F.Supp. 1390 (W.D.Pa.1988). In that case, dealing with an employment contract, the court wrote the following at 1396. “Pennsylvania courts honor choice of law provisions in contracts, provided that the choice of forum does not seriously impair the Plaintiffs ability to pursue his cause of action.” Citing Central Contracting Co. v. C.E. Youngdahl & Company, Inc., 418 Pa. 122, 133, 209 A.2d 810, 816 (1965).
The instant sub-contract does not provide for a forum foreign to either of the parties. In fact, the Plaintiffs in this case have controlled the selection of the forum by selecting and filing an adversary complaint in this court and a lawsuit in the District Court for the Middle District of Pennsylvania in 1991.
Admittedly, there are many contacts with the state of Pennsylvania but there is no other argument presented to show that the interests and policies of Pennsylvania should overrule a specific choice of law provision found in this contract. The court finds nothing unusual that with one of the parties being a Texas corporation, the parties would select Texas as the law to be applied in the interpretation of this contract. While those arguments may have been compelling in a situation where the parties did not contractually determine the law to be applied to the interpretation of the contract, the court finds that nothing has been presented to this court to disturb the contractual arrangements made by the parties.
The court also finds that there is no support to the argument that this was an adhesion contract. Plaintiffs allege that the sub-contraet was on a pre-printed form and the terms were not subject to negotiation. A review of the sub-contract indicates the only portion of the contract that was not pre-printed was the space left in the paragraph indicating the contract would be controlled by the laws of Texas. Apparently, this contract was written in such a way that any state can be inserted into that form presumably after a negotiation between the parties has taken place.
The court having determined that Texas law applies, it will now look at the applicable statutes of limitations imposed by Texas law.
Concerning the four-year statute of limitations as applied to the breach of contract action, the court will recognize that, in May of 1991, the corporate Debtor filed an action against Tribble & Stephens Co. and CenterPoint Properties, Inc. in the Middle District of Pennsylvania. As to those Defendants, the running of the statute of limitations has been tolled. Regardless, the complaint in the instant action indicates that it is seeking damages through September of 1990. The Defendants argue that any breaches would have had to occur by July of 1990. The instant matter was filed in September of 1994 and there is a question as to when the causes of action for breach of contract actually arose. The court cannot make a determination at this point as to when the breach occurred. Therefore, as to both the corporate and the partnership Debtors, the court cannot determine that the statute of limitations for breach of contract has run.
Such is not the case, however, with the actions which are controlled by a two-year statute of limitations. Defendants argue that Texas does not recognize unjust enrichment as an independent cause of action citing PIC Realty Corp. v. Southfield Farms, Inc., 832 S.W.2d 610, 614 (Tex.App.-Corpus Christi, 1992). The court finds that there is no cause of action for unjust enrichment under Texas law. On the other hand, the PIC Realty court indicates that, while there is no cause of action, unjust enrichment could *980be considered as a measure of damages. Consequently, we will grant the Motion for Summary Judgment concerning the unjust enrichment counts of the complaint against the Defendants but will reserve a decision after presentation of evidence as to whether Defendants were unjustly enriched by the labor and materials provided by the Debtors and whether they can be considered a measure of damages by the court.
Regarding the quantum meruit claim, Defendants argue that Plaintiffs seek to recover in quantum meruit for the same labor, material and alleged damages as under the breach of contract action. No argument is made concerning the application of Texas law and, therefore, the court will deny the Motion for Summary Judgment as it applies to that count for quantum meruit. As was applied to the unjust enrichment claim, if the breach of contract action fails against the Defendants, quantum meruit can be applied as a measure of damages.
The court will next consider the Texas two-year statute of limitation barring the Debtors’ contractual interference claim. That claim, even accepting the Plaintiffs’ claim that the breach could have occurred in September of 1990, is filed four (4) years after that date and is barred by the Texas two-year statute of limitations. See Tex.Civ. Pract. & Rem. Code § 16.003.
Plaintiffs argue that, nonetheless, this action for intentional interference with contractual relations would not be time-barred because this claim was raised as a defense to the proof of claim filed by Tribble & Stephens Co. and that filed by the other Defendants. The count of the complaint for intentional interference with contractual relations has expired under the terms of the Texas statute of limitations (Tex.Civ.Pract. & Rem. Code § 16.003). The expiration of the limitations period, however, may not be used to deny the Debtors an affirmative defense to either a counterclaim in this litigation or as a defense to the proofs of claim filed in this case. Wells v. Rockefeller, 728 F.2d 209, 215 (3rd Cir.1984); 3 Moore’s Federal Practice, § 13.11, pp. 18-4.7-51.
The next argument for resolution concerns the application of judicial estoppel which Defendants assert should be applied by this court because of allegations made in a prior complaint filed in the Court of Common Pleas of Luzerne County in the case of Water Specialties, Inc. v. A. Barletta & Sons, Inc. filed to number 313-C of 1991 and an affidavit of Anthony Barletta attached thereto. In short, the Defendants request this court to apply judicial estoppel thereby barring the Plaintiffs from denying liability for certain costs of installing a replacement line and entitling the Defendants to a Motion for Summary Judgment on the water line claim portion of the complaint. The court has reviewed the cases in support of the Defendants’ position and finds that judicial estop-pel is not appropriate in this matter.
“The doctrine of judicial estoppel precludes a party from asserting a position in a judicial proceeding which is inconsistent with a position previously asserted by it. See Oneida Motor Freight, Inc. v. United Jersey Bank, 848 F.2d 414, 419 (3d Cir.), cert. denied, 488 U.S. 967, 109 S.Ct. 495, 102 L.Ed.2d 532 (1988). A party who has asserted a position may not later on be heard to contradict itself in order to establish an inconsistent position. See In re Pizazz Disco & Supperclub, Inc., 114 B.R. 104, 110 (Bankr.W.D.Pa.1990). That party may be estopped from asserting the inconsistent position in the latter proceeding. Id.
Judicial estoppel applies only if a party has successfully asserted an inconsistent position in a prior proceeding. Id. This means that the court must have been persuaded to accept its position in the prior proceeding. See In re Cheripka, 26 CBC2d [385] at 397-98 [1991 WL 276289 (3d Cir.1991) ]. Acceptance in this context requires only that the court adopted the position either as a preliminary matter or as part of a final disposition. See In re Pizazz, 114 B.R. at 110.” In Re Doemling, 157 B.R. 565, 572 (Bkrtcy.W.D.Pa.1993).
The state court action was dismissed by agreement of the litigants and, as such, was not successfully used by a litigant and accepted by a court.
*981Plaintiffs also filed a count for equitable subordination. The Defendants argue that they were within their rights to file a Motion for Abstention and, therefore, should not be equitably subordinated for exercising their procedural and substantive rights. In a request for equitable subordination based upon 11 U.S.C. § 510(c), the court finds that subordination under that section may be proper without creditor misconduct and that under certain circumstances, the court may exercise its discretion to subordinate a creditor’s claim. See Burden v. United States (In Re Burden), 917 F.2d 115 (3rd Cir.1990). The court will not dismiss this portion of the count at this time and will consider the request for equitable subordination at the trial on this matter.
Otherwise, the remaining arguments advanced by the Defendants go right to the heart of the instant lawsuit, namely, whether or not the Debtors caused the failure of the water line system. These remaining arguments and the documents filed in opposition to the Motion for Summary Judgment do not convince this court that there are not material facts in dispute and, therefore, the remaining arguments made by the Defendants will fail.
An appropriate Order will follow.
ORDER
AND NOW, this 20th day of July, 1995, IT IS HEREBY
ORDERED that the court will deny in part and grant in part the Motion for Summary Judgment filed by the above-captioned Defendants.
IT IS FURTHER ORDERED that the counts against the Defendants found in Counts II and IV for unjust enrichment and Counts V and VI for intentional interference with contractual relations are hereby dismissed and the Motion for Summary Judgment filed by the Defendants as to those counts are granted.
IT IS FURTHER ORDERED that, as to the several counts of the complaint surviving the Motion for Summary Judgment, the parties will proceed to a Pre-Trial Conference on this matter which will be held on Friday, September 22, 1995, at 10:00 o’clock AM. in Courtroom No. 1, Federal Building, 197 South Main Street, Wilkes-Barre, Pennsylvania. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492151/ | DECISION ON CROSS MOTIONS FOR SUMMARY JUDGMENT
TINA L. BROZMAN, Bankruptcy Judge.
Sheldon J. Aboff, a former employee of various U.S. businesses included in the worldwide holdings of the late Robert Maxwell and his family, seeks summary judg*38ment1 on his two $35 million proofs of claim. The claims are asserted against Macmillan, Inc. (“Macmillan”) and MCC/GAO, Inc. (formerly known as Official Airlines Guide, Inc. and referred to in this opinion as “OAG”). In response to the assertion of the claims the two estates2 interposed sizable counterclaims against Aboff. He seeks summary judgment on those as well. Aboff was no ordinary employee; having worked for many years in one or another of Maxwell’s enterprises, he acted more or less as Robert Maxwell’s U.S. “man on the spot.” The debtors claim that whatever his role in other Maxwell enterprises, Aboff did not work for them. Thus, they too seek summary judgment. However, the two estates also seek to dismiss his proofs of claim on grounds other than their merits, namely, Aboffs alleged evidence tampering and deceit under oath.
I.
A. The Relevant Part of the Corporate Map and the Role of David Shaffer
Certain background is necessary to understand the genesis of the present disputes. Except where noted, the facts are not contested. Maxwell’s empire had two distinct components, those companies owned wholly by Maxwell and his family and those owned partly by the Maxwell family and partly by the public. The components were known respectively as the “private side” and “public side.” The “public side” and “private side” labels serve to identify the type of ownership of particular corporations, be they domestic or foreign. The private side corporate parent is believed to have been Headington Investments, Ltd. (“Headington”), a United Kingdom corporation, and the public side corporate parent was Maxwell Communications Corporation, pic (“MCC”), another United Kingdom corporation. The two parents were not corporate strangers, however, for Headington owned part of MCC, functioning as the vehicle through which the Maxwell family maintained part ownership of the public side. Whereas ultimate corporate ownership of the public and private sides was in U.K. entities, there were lesser holding companies as well in both the public and private corporate chains. The U.S. private side businesses were owned by a U.S. holding company named PH(US)Inc. (“PH(US)I”), which is a contraction of Perga-mon Holdings (United States), Inc. PH(US)I, in turn, was owned, directly or indirectly, by Headington.
Having briefly regarded the entire corporate map, we return now to examine more closely one piece of it, the public side, embracing both the debtors against which Aboff has asserted his claims. The public side parent, MCC, had two assets which were its most valuable, its direct or indirect stock ownership of two U.S. corporations, Macmillan, the well-known publishing company, and OAG, publisher of the Official Airlines Guide. These two companies and their subsidiaries constituted about eighty percent of the value of the public side. Both OAG and Macmillan were acquired by MCC in 1988, OAG from Dun & Bradstreet and Macmillan in a hostile takeover.
Prior to its acquisition by MCC, OAG had as its president one David Shaffer. He agreed to remain on with MCC after OAG’s sale. Following Macmillan’s entry into the Maxwell fold, Shaffer’s duties were expanded to include management not only of OAG but of Macmillan as well. He also assumed management of the electronic information businesses of the U.S. subsidiaries of MCC and Macmillan, known collectively as the Electronic Publishing Group, all of which were public side companies.
At the time MCC purchased OAG, it had also obtained from Dun & Bradstreet an option to purchase a separately incorporated travel agency, Thomas Cook Travel, which also happened to be managed by David Shaffer. MCC did not exercise this option but instead assigned it to the private side, which *39purchased the company and renamed it TCTI, Inc. Neither Macmillan nor OAG had any ownership interest in TCTI, Inc. TCTI, Inc. did not operate alone but joined with a travel business owned by a couple named Paresky to form Thomas Cook Partnership (“TCP”). Thus the private side had fifty percent ownership of TCP through its ownership of TCTI, Inc. Because of his prior involvement with Thomas Cook Travel at Dun & Bradstreet, Shaffer agreed to become an officer and director of TCTI, Inc. He thereby oversaw the management of the private side’s interest in TCP, although he did not run TCP’s business.
Thus, to recap just a bit, in the early part of his tenure with Maxwell, Shaffer managed .OAG, Macmillan and the Electronic Publishing Group (all public side) and he oversaw TCTI’s investment in TCP (private side). In 1989 Shaffer was appointed executive vice president of Macmillan and the next year was elevated to the office of president, with responsibility for the management of all of the MCC companies located in the U.S. At this point, the Electronic Publishing Group ceased to exist; its component companies were integrated into various divisions of Macmillan. In 1991, Shaffer was appointed as MCC’s chief operating officer and his responsibilities were augmented to cover worldwide operations for the companies under his management. A month later, Shaffer became managing director of MCC. This role ceased when, later that month, MCC was plunged into bankruptcy and its management was replaced by a team of joint administrators appointed by the High Court in London. (Shaffer remained, however, as chairman, president and chief executive officer of Macmillan and as chairman of OAG until their sale, described below.)
B. The Bankruptcies of MCC, Macmillan and OAG
After Robert Maxwell’s death, his empire faltered, with bankruptcy proceedings ensuing in both the U.S. and the U.K. for a host of companies. MCC filed primary proceedings in both countries. Those two proceedings, a chapter 11 reorganization and a British administration, were handled in tandem. They resulted in a chapter 11 plan and a scheme of arrangement which were interdependent. (For ease of reference, the plan and scheme will be called the “MCC plan.”) The MCC plan contemplated that both Macmillan and OAG were to be sold as going concerns. After confirmation of the MCC plan, Macmillan and OAG each filed “prepackaged” chapter 11 cases, that is, cases where the chapter 11 petitions were accompanied by plans which had the approval of major parties in interest. Macmillan’s business was sold and, pursuant to its plan, the proceeds were set aside to satisfy the claims of creditors, with the remainder to be up-streamed to MCC, as Macmillan’s shareholder. In furtherance of that objective there were created two trusts, the Maxwell Macmillan Realization Liquidating Trust (the “Realization Trust”) and the Maxwell Macmillan Proceeds Liquidating Trust (the “Proceeds Trust”). These trusts were formed to (i) liquidate all assets, including some subsidiaries not sold along with Macmillan and (ii) distribute the proceeds to creditors holding allowed claims. The trustees were empowered to object to and resolve, by litigation or settlement, disputes respecting claims and to prosecute all causes of action of the debtor (with certain minor exceptions not here relevant).
C. Aboffs Relationship with the Max-wells and their Companies
With that background in place, we move still further back in time than when we began and turn to Sheldon Aboffs role with the Maxwells and their growing U.S. holdings. Although the facts regarding the early years are undisputed, the parties hotly contest Aboffs role not long after Shaffer joined the scene. Indeed, as will become apparent, the disputes are sufficiently material to preclude the grant of summary judgment.
Aboff worked as an auditor for Price Wa-terhouse from 1967 until 1975. One of the firm’s main clients was Pergamon Press, Inc. (“Pergamon”), a U.S. publishing company which at the time was Robert Maxwell’s principal holding in the United States. Parenthetically, throughout those years all of Robert Maxwell’s companies were privately *40owned. Over the course of time Aboff became the primary accountant from Price Wa-terhouse to work with Pergamon. In 1975, Maxwell invited Aboff to join Pergamon as treasurer and chief financial officer, an offer that Aboff accepted. As the years passed, Aboff was given responsibility for most aspects of the operations of Pergamon other than publishing and marketing. Ultimately, he was promoted to vice chairman of Perga-mon in 1981, being responsible for finance, administration and operations. In 1987, Aboff was named president of PH(US)I, which, as mentioned earlier, was the holding company for the private side interests in the U.S. At the end of 1987 Pergamon was sold to Maxwell Communication Corporation, N.A., then a U.S. subsidiary of MCC (identified earlier as the U.K. parent of the public side). Those facts concerning the relationship between Maxwell and his companies on the one hand and Aboff on the other are the only ones which are undisputed. The parties vehemently disagree about whether Aboff ever worked for any of the public side entities, most especially, Macmillan and OAG.
Aboff claims that by virtue of the sale to Pergamon to the public side, he became a public side employee, specifically, of Macmillan (into which Maxwell Communication Corporation, N.A. was merged), and that he remained as such until his termination in December, 1991. He asserts that he joined Macmillan in November, 1988, and assumed the official title of “Vice President — Special Projects,” reporting directly to Robert and Kevin Maxwell (Kevin being Robert’s son). According to his version of events, in the fall of 1989 Aboff became a group vice president of Macmillan and remained an executive at Macmillan working either on Macmillan matters or on assignments given to him by Macmillan officers and directors. This recitation is somewhat truncated given that virtually everything which Aboff says about his relationship with and work for the public side is disputed by the debtors. Suffice it to say that the work which Aboff performed and the identity of the companies for whose benefit and at whose behest he worked are all at issue. Indeed, the parties are even at loggerheads about what titles Aboff held at the various companies.
The debtors claim that Aboff never had any role at OAG but that because OAG had the best benefits, Shaffer granted Aboffs request in October, 1989, to be placed on the OAG payroll. The debtors admit that Aboff had a role at the Electronic Publishing Group (which comprised subsidiaries of MCC and Macmillan and was therefore public side). They state that Aboff was not well regarded at Macmillan but was viewed as a Maxwell “spy” as a result of which Shaffer thought it best to remove Aboff from Macmillan. In their version of events, he began to assume an increasing role at TCP and reported in that capacity to Shaffer. In early 1990, and here the parties agree, Aboff relocated his office from Manhattan to Greenwich, Connecticut, to a Thomas Cook travel agency branch. From this time on, the debtors say, Aboff continued to report to Shaffer but his business cards and stationery identified him only as a representative of the private side and he no longer appeared on lists showing executive signing authority at Macmillan. Aboff says that after the move he continued to perform all of the duties and responsibilities he was assigned as a Macmillan executive employee and to report to Macmillan officers. In essence, Aboff says, he worked at TCP as a direct assignment from his employer, Macmillan, pursuant to an alleged employment agreement with Macmillan about which more will be said later.
One wonders how these versions can be so disparate. Part of the explanation may lie in the controversy over how the public and private sides were operated. Aboff claims that until December, 1991, it did not make any difference to those working for Macmillan whether they performed services for a public or a private side company. Every department in the Macmillan organization was available to work on private side matters, he says, and the executive, real estate, tax, finance, accounting, human resources and legal departments did so on a regular basis. The debtors, on the other hand, assert that at all times the businesses and assets of the public and private sides were segregated and that the companies were separately incorporated, organized, audited, and financed. They state further that private *41and public side companies each had their own officers, directors and employees; although the public side provided services to the private side from time to time, these services customarily were billed, or “charged back,” to the company for which the services were provided.
D. Aboffs Proofs of Claim
Aboffs two proofs of claim hinge in large part on a photocopy of a letter agreement purportedly signed by Kevin Maxwell on Macmillan letterhead. It is Aboffs contention that this letter constitutes an employment contract with either Macmillan or OAG. As will be discussed later, the debtors challenge not only the substantive effect of this letter but also its authenticity.
In brief, Aboff seeks from the estates the following:3
(A)SALARY AND BONUSES:
(ii) his interest in the capital accumulation plan .... $733,3334
(iii) a bonus for his effort in the sale of TCP. $3,000,000
(iv) a bonus for his effort in the sale of Pergamon Press. $500,000
(B)CONTRACTUALLY MANDATED INSURANCE, PERQUISITES, AND EXECUTIVE FRINGE BENEFITS: 5
(i) estimated value of all perquisites other than legal fees for the period beginning December, 1991, and ending December, 1993 $100,000
(ii) legal fees and costs covered either by officer and director insurance or company policy for the period beginning December, 1991, and ending Decern- $362,-ber, 1993 . 1946
(C)CONTRACTUALLY MANDATED POST RETIREMENT PENSION AND BENEFITS:
(i) pension claims.$28,500,000
(ii) health insurance, life insurance, and “other” undetermined
In addition, Aboff amended his proofs of claim after the bar date had passed to seek damages for refusal to provide and specific misrepresentations as to the availability of director and officer and other related entities, claims against Aboff by the Arthur Anderson & Co. accounting firm7, and the counterclaims made against Aboff in the debtors’ objection to his proof of claim. Finally, another amendment seeks $1.2 million said to be due to Aboff from his account at Advest, Inc. as a result of liquidation of his holdings in the account to meet a December, 1991, margin call on stock as to which Aboff was only a stakeholder.
E. The Debtors’ Counterclaims
The debtors have not only objected to Aboffs claims but have interposed counterclaims against him through the institution of adversary proceedings, as the bankruptcy rules mandate. The subject of these counterclaims is Aboffs alleged participation in Robert and Kevin Maxwell’s diversion of Macmillan’s assets to private side companies controlled by and held for the benefit of the Maxwells. These diversions of cash, stock certificates of Berlitz International, Inc. (“Berlitz”) and tax refund checks are said to have aggregated some $29 million, to the detriment of Macmillan and its corporate parent, MCC. (Because Macmillan was solvent, after payment of its creditors, its remaining assets were upstreamed to MCC, as described earlier.) The debtors contend that these assets were diverted by means of unlawful transfers to Aboff personally and to PH(US)I, of which Aboff was president and a director.
*42I will deal first with the stock certificates. Berlitz had issued 19 million common shares, 10.6 million of which belonged to Macmillan, giving Macmillan 56% ownership of Berlitz. The minority stockholders were investors who purchased their shares on the New York Stock Exchange. The debtors allege that in November, 1990, Macmillan’s shares in Berlitz were transferred to a private side entity known as Bishopsgate Investment Trust, pic (“BIT”) as nominee for Macmillan. Despite the nominee status, they allege, in the following months the shares were unlawfully transferred to various banks and financial service institutions and pledged to serve as collateral for loans advanced to private side companies. Among these alleged unlawful diversions is the transfer, in several stages, of a total of one million Berlitz shares by BIT to an account held in AbofPs name at Advest, Inc., a broker-dealer. The debtors assert that Aboff borrowed against the shares on margin and wired some $3.6 million in proceeds to PH(US)I. The wired funds were then allegedly used to fund the cash needs of the private side, to the detriment of Macmillan and, ultimately, MCC.
In December, 1991, 235,000 shares of Berlitz held in the Advest account were sold for a total of approximately $3.7 million to satisfy margin requirements on the account, leaving a total of 765,000 shares in that account. The debtors assert that in September, 1991, a Japanese company bid approximately $26.26 per share for a majority stake in Berlitz but that the offer could not be consummated because a majority of Macmillan’s holding had been pledged by BIT. Macmillan is said to have been injured in that it eventually sold the remaining shares in the Advest account for only $23.75 per share. Because Aboff in an affidavit filed in an action other than this one swore that the Advest account contains only securities and cash dividends in which he has no beneficial interest, the debtors contend that there are no competing claims to the Berlitz shares or the remaining proceeds (some $18 million) from the sale of those shares.
Turning to the other asserted diversions, the debtors claim that Aboff, acting on Kevin Maxwell’s instructions, transferred $500,000 from Macmillan’s bank account to a PH(US)I account and thereafter sent the funds to the private side. Finally, the debtors allege that Aboff caused tax refunds belonging to two Macmillan subsidiaries to be deposited into a PH(US)I account and transferred to the private side.8
II.
With the factual backdrop, disputed and undisputed, in place, we move on to the motions themselves. I will treat with the issues in the following order: (1) the debtors’ request for dismissal of AbofPs proofs of claim based upon his alleged evidence tampering; (2) the summary judgment motions with respect to the employment contract; (3) Aboffs amendments to his proofs of claim; (4) the standing of the Liquidating Trust to pursue counterclaims against Aboff; (5) the Berlitz-related counterclaims; and (6) the PH(US)I-related counterclaims. We begin, however, by setting forth the standards which guide a court when deciding a motion for summary judgment. It may seem a little odd to begin with the law regarding summary judgment when the first issue to be decided is the alleged evidence tampering. Bear in mind, however, that I have not had the benefit of an evidentiary hearing and many of the facts are disputed. Thus, it is appropriate to view the requested dismissal through the prism of summary judgment.
Federal Rule of Civil Procedure 56(c), made applicable to these proceedings by Federal Rules of Bankruptcy Procedure 9014 and 7056, provides that summary judgment is appropriate if the court determines that the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is *43no 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, 247-48, 106 S.Ct. 2505, 2509-10, 91 L.Ed.2d 202 (1986); In re Ionosphere Clubs, Inc., 147 B.R. 855, 860 (Bankr.S.D.N.Y.1992). A fact is considered material if it “might affect the outcome of the suit under governing law.” Anderson v. Liberty Lobby, Inc., 477 U.S. at 248, 106 S.Ct. at 2510. In considering a motion for summary judgment, “the court’s responsibility is not to resolve disputed issues of fact but to assess whether there are any factual issues to be tried, while resolving ambiguities and drawing reasonable inferences against the moving party.” Cartier v. Lussier, 955 F.2d 841, 845 (2d Cir.1992); Knight v. U.S. Fire Insurance Co., 804 F.2d 9, 11 (2d Cir.), cert. denied, 480 U.S. 932, 107 S.Ct. 1570, 94 L.Ed.2d 762 (1987).
The moving party initially bears the burden of establishing the absence of a genuine issue as to any material fact. Celotex Corp at 322-23, 106 S.Ct. at 2552-53; Adickes v. S.H. Kress & Co., 398 U.S. 144, 157, 90 S.Ct. 1598, 1608, 26 L.Ed.2d 142 (1970); In re Ionosphere Clubs, Inc., 147 B.R. at 861. That burden can be satisfied by demonstrating the absence of evidence supporting the non-movant’s case. Celotex Corp., 477 U.S. at 325, 106 S.Ct. at 2553-54. When a motion for summary judgment is made and supported by the movant, Rule 56(e) requires the non-moving party to set forth specific facts demonstrating that genuine issues of material fact remain for trial. Matsushita Elec. Industrial Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586-87, 106 S.Ct. 1348, 1355-56, 89 L.Ed.2d 538 (1986). The non-moving party may not defeat a properly supported motion for summary judgment by relying on self-serving and conclusory statements concerning the true nature of the facts. Wyler v. United States, 725 F.2d 156, 160 (2d Cir.1983). As the Supreme Court has noted, the non-moving party must do more than simply show that there is some metaphysical doubt as to the material facts. Matsushita Elec. Industrial Co. v. Zenith Radio, 475 U.S. at 586, 106 S.Ct. at 1355-56; cf. In re Ionosphere Clubs, Inc., 147 B.R. at 861.
A. Aboffs Claims
1. Dismissal for Evidence Tampering and Deceit During Discovery
Aboffs asserted offenses are grounded in three pages of notes which were among those he produced during discovery and as to which he testified at his deposition. To understand the debtors’ complaint we need to spend a few moments with the background facts. Remember that it is Aboffs position that he had a valid and enforceable employment agreement signed by Kevin Maxwell on behalf of Macmillan or, perhaps, OAG (since OAG acted as a paying agent). Both sides agree that a photocopy of such a letter exists, although for reasons which will be discussed, the debtors object to the admissibility of the letter in the absence of an original. They also differ as to whether it in fact created an employment relationship with either of the debtors.
Regardless, it is undisputed that a letter was drafted at some point and that in connection with that endeavor Aboff consulted the firm of Whitman & Ransom.9 When questioned at his deposition as to his interpretation of that letter, Aboff referred to handwritten notes he took during a meeting he had with Kevin Maxwell on what he said he believed was March 27,1990. Aboff testified that he had discussed with Kevin Maxwell all the relevant points that were reflected in the notes for that occasion. He specifically testified that the item numbered (l)(a) on the first page Bates stamped A00044, which he wrote, says in substance that his job definition was “confirm I’m out of Max[well]/Mac[millan] politics,” (emphasis added). He also noted that item number (6) refers to the fact that were TCP (the private side partnership the debtors assert the agreement explicitly referred to) to be sold *44he would “return to Macmillan.” On his second page of notes, Aboff identified item number (9), which stated that his “continuing role in Max/Mac” would be his “availab[ility] for special projects”.10 The debtors contend that his deposition testimony should lead me to conclude that he was unambiguously asserting that the notes which he produced were contemporaneous with what he wrote down during one particular meeting with Kevin Maxwell.
At the time of Aboffs deposition, Whitman & Ransom’s successor firm, Whitman Breed Abbot & Morgan, in response to Aboffs subpoena had produced but two documents, both of which were alleged draft employment agreements for Aboff. Following Aboffs testimony regarding the Whitman firm’s role in drafting the purported contract, the debtors subpoenaed the firm. In addition, they noticed the depositions of David Morse and Ellis Freedman, two attorneys that Aboff testified had worked on his employment agreement on Macmillan’s behalf. The debtors state that on the morning that Morse’s deposition was scheduled to begin, they were informed that Morse had discovered an additional file in a remote record storage facility. These documents constituted Morse’s working file for his representation of Aboff in these matters. The file included three pages of handwritten notes. They appear to be versions of the pages which Aboff earlier stated were his notes. The debtors assert that these documents remained untouched since late 1990 or early 1991.11
These later-produced notes (for ease of reference, the ‘Whitman notes”) are decidedly different from the ones displayed at Aboffs deposition (the “Aboff notes”). The Whitman notes state “confirm I’m out of Max/Mac,” without any reference to “politics.” They also simply state “what happens after Cook is sold?”, without any reference to a “return to Macmillan.” In addition the Whitman notes say “continuing role in Max/ Mac — 0 [or the symbol for an ellipse]” without any reference to Aboffs availability for special projects.12 In addition, the debtors have submitted an affidavit by a document expert who asserts that another page of Aboffs notes, Bates-stamped A000046, contained entries “1(F) Support OAG” and “6 available for Maxwell/Macmillan special assignments/projects” added at a time after the notes were originally taken. If the debtors are correct, the amendments certainly could be read to change the meaning entirely of what Aboff noted — from a likely cessation of any role with Macmillan to the establishment of a continuing role with Macmillan.
Faced with the Whitman notes and the document expert’s affidavit, unsurprisingly Aboff admits that he amended his notes. He explains that it was his regular practice to amend and update his notes throughout the course of continuing negotiations such as those regarding his employment agreement. Aboff asserts that as his future role in the Maxwell organization was refined over the course of meetings, the notes were revised to reflect those developments.
The debtors attribute these changes not to amendments or clarifications of the earlier notations but to a deliberate strategy by Aboff to change what were admissions against interest into false evidence that would support his claims. They ask that I dismiss Aboffs claims outright under either of two theories: (1) Aboffs actions should be considered an admission of fact which entirely destroy his case; or (2) Aboffs actions *45warrant dismissal as a sanction pursuant to my “inherent authority.”
While the debtors have not addressed it, Federal Rule of Civil Procedure 37, made applicable to these proceedings via Fed. R.Bankr.P. 7037 could also be invoked as a grounding for the relief requested. That rule provides that a party who without substantial justification fails to make disclosure may be sanctioned by failure to use the withheld information at trial and/or other appropriate sanctions including attorney’s fees. In addition to requiring payment of fees and expenses the court is permitted to utilize any of the sanctions contained in rule 37(b)(2), including dismissal of the offending party’s claims.
The eases under Rule 37 provide guidance. Dismissal of an action under Rule 37 is a “drastic penalty which should be imposed only in extreme circumstances,” Valentine v. Museum of Modern Art, 29 F.3d 47, 50 (2d Cir.1994), such as when the failure to comply is due to wilfulness, bad faith, or any fault on the part of the noncomplying party. See Société Internationale Pour Participations Industrielles et Commerciales v. Rogers, 357 U.S. 197, 212, 78 S.Ct. 1087, 1095-96, 2 L.Ed.2d 1255 (1958). And, at least in this circuit, gross negligence in the performance of discovery obligations is sufficient “fault” to support imposition of the sanction of dismissal under the Rule. Cine Forty-Second Street Theatre v. Allied Artists, 602 F.2d 1062, 1067-68 (2d Cir.1979).
Sanctions, however, must be just under the circumstances. Bower v. Weisman, 674 F.Supp. 109, 112 (S.D.N.Y.1987); Wyle v. R.J. Reynolds Industries, 709 F.2d 585, 591 (9th Cir.1983). Thus courts have determined that, when necessary, the trial court may hold an evidentiary hearing on a motion for sanctions. Id. at 592. Indeed, the Ninth Circuit noted that an evidentiary hearing is often advisable in the sanctions context, since “that method best determines the appropriate sanctions while protecting a party’s due process rights.” Id. (citations omitted).
I noted earlier that I have not had the assistance of an evidentiary hearing to determine whether or not sanctions are appropriate under any theory. While I do not shy from sanctioning offending parties where appropriate, absent testimony in which credibility will be very much at issue, the record in this case is too ambiguous for me to dismiss Aboffs claims now, although I reserve the right to do so after an appropriate record is created.
Aboff has averred that it was his regular practice to update and amend notes during the course of discussions; he has submitted three supporting affidavits from those familiar with his practices attesting to that fact. In addition, while the debtors assert that the earliest involvement of the Whitman & Ransom firm was October, they attached a copy of a “cover memo” sent by Aboff to Ellis Freedman accompanying an exhibit purporting to be a draft employment contract prepared by the Aird & Berlis firm. See Brandon Affidavit, Exhibit E. This memo has a July date atop it, rendering it possible that the notes were sent prior to subsequent meetings between Aboff and Maxwell which, if they occurred as Aboff claims, clarified Aboffs role in the organization and resulted in later amendments. Similarly, as I noted above, the fax “telltales” of the Whitman firm seem to indicate that the firm’s involvement began earlier than August. Absent testimony that might clarify these discrepancies, it would be inappropriate for me to dismiss Aboffs claims on tampering grounds.
In much the same vein, the allegedly false deposition testimony is vague. Aboff was shown his notes and questioned as follows:
Q: Is all of the handwriting on these four pages yours, Mr. Aboff?
A: Yes, I believe it is.
Q: Do you recognize these notes as being anything in particular?
A: Well, these are notes of a meeting or discussion I had with Kevin on March 27, 1990. At least the first two pages are. And it is possible that the third and fourth are as well.
Q: And by Kevin, you mean Kevin Maxwell?
A: Yes.
Q: And what was the subject of the meeting or discussion on March 27, 1990?
*46A: I’m not certain of what else we might have discussed, but we certainly from these notes discussed my employment situation, my employment contract, et cetera.
Q: Are these notes that you made during the meeting or after the meeting or before the meeting?
MR EDLIN: If he can remember.
A: I believe (emphasis added) that these notes were made during the meeting.
Aboff Deposition Tr. at 313.
The debtors suggest that the testimony just quoted was carefully calculated to create the impression that all Aboffs notes were taken at the meeting on March 27. The debtors emphasize that, absent any solicitation by their counsel, Aboff pointed to his discussion with Kevin Maxwell on March 27 of those very portions of his notes which he now concedes were updated later. However, Aboff testified at another point in the transcript that he had had several meetings with Kevin Maxwell, Aboff Deposition Tr. at 228, so it is conceivable that Aboff may have inadvertently consolidated several meetings with Kevin Maxwell into one. The debtors also underscore that Aboffs testimony was to the effect that the notes he had provided them in discovery were the same as those in the possession of the Whitman firm. The relevant testimony follows:
Q: Did you give any documents to Whitman & Ransom?
A: Yes. Whitman & Ransom would have had as I recall, would have had the drafts, would have been the subject of discussions. They may have had some other notes. I can’t recall exactly what documents I gave them, but I probably would have given them whatever was available at the time.
Id. at 347-348. This testimony is not what I could call damning, filled as it is with equivocation and speculation.
To be sure, I wonder about Aboffs veracity. But I have not heard him testify and there are sufficient discrepancies not only in his testimony but in the version of facts which the debtors paint that I cannot conclude with any degree of certainty that Aboff doctored the evidence and then lied about it. As I noted above, dismissal ordinarily requires showings of malice, bad faith, wilfulness, or, at a bare minimum, gross negligence. The ambiguities in the testimony and the disputes regarding the facts preclude me from determining on this summary judgment record that Aboff should suffer the severest of sanctions, dismissal of his claims. See Wyle, supra, 709 F.2d at 592 (“In the course of [evidentiary sanction] hearings, a court will make inferences and credibility determinations from evidence received. No sound basis exists to distinguish between hearing issues that go to the merits of the case and those that go only to the conduct of the parties”)
For essentially the same reasons, I will not now construe the allegedly false testimony or changes to the notes as admissions by Aboff. The Second Circuit’s decision in Warner Barnes & Co. v. Kokosai Kisen Kabushiki Kaisha, 102 F.2d 450 (2d Cir.1939), modified on other grounds, 103 F.2d 430 (2d Cir.1939), upon which the debtors place heavy reliance, does not compel a different result. In that case, the district court found against a ship owner who had falsified the ship’s log in an attempt to demonstrate that it was not negligent in handling the ship’s cargo. Judge Learned Hand, writing for the circuit court, found that “[t]he condition of the log and the unsatisfactory explanation of it, coupled with the testimony of those who freshly examined it, are enough ...” Agreeing with the district court’s findings of tampering, the appellate court noted that “[w]hen a party is once found to be fabricating, or suppressing, documents, the natural, indeed the inevitable conclusion is that he has something to conceal, and is conscious of guilt.” Id. at 453. Thus, the court concluded that “[The act of tampering] goes much further than merely to discredit the document itself; it is positive evidence upon the very issue, and weighty evidence as well.” See also U.S. ex rel. C.H. Benton, Inc. v. Roelof Construction Co., 418 F.2d 1328, 1331 (9th Cir.1969) (where evidence is tampered with, court draws presumption against the party who is responsible). Unlike the trial judge in Warner Barnes, however, I am without the benefit of testimony to adequately determine whether Aboff tampered with evidence or merely *47amended his notes. This precludes granting the debtors the relief which they demand.
2. The Motions for Summary Judgment Regarding Claims Under the Employment Contract
Aboff has moved for summary judgment based upon the terms of the alleged employment contract with Macmillan or OAG, a document which the debtors urge is not admissible. As indicated earlier in this decision, the employment agreement tendered by Aboff is but a photocopy, neither side having seen in its files an original. The debtors challenge the authenticity of the photocopy, arguing that Aboff has failed to produce an employment agreement which satisfies the “best evidence” rule. It is they, they argue, who are therefore entitled to summary judgment.
To add weight to their contentions, the debtors have submitted an affidavit from a Price Waterhouse computer expert who opines that the document in question was created on the PH(US)I computer in February, 1991, and was modified by eleven keystrokes on December 4, 1991. Predicated on this opinion, the debtors raise the specter that Aboff may have edited the document on that latter date, printing it out on Macmillan letterhead. Aboff responds that eleven keystrokes are not very many and merely indicate that Aboff “scrolled” through the document on a word processor, reviewing it rather than altering it. He therefore argues that the presence of the eleven keystrokes should not lead to any inferences of tampering on his part.13
The “best evidence” rule, more correctly termed the “original writings” rule, is embodied in Article X of the Federal Rules of Evidence, rules 1001 through 1008 inclusive. The intellectual heart of the rule is embodied in Rule 1002, which provides that “[t]o prove the content of a writing, recording, or photograph, the original writing, recording, or photograph is required, except as otherwise provided in these rules or by Act of Congress.” Thus, the rule requires that parties that seek to prove what the contents of a writing are must produce the original writing unless a federal statute or another evidence rule affords them an exception. See Herzig v. Swift & Co., 146 F.2d 444, 445 (2d Cir.1945). The rationale behind the rule was noted by one commentator:
The rule was developed at common law to provide a guarantee against inaccuracy and fraud by insistence upon production at trial of original documents. Over time the scope of the rule was broadened to reflect modern reliance on mechanical and electronic recording devices and sophisticated methods of data compilation, storage, and retrieval, Rule 1001. The great expansion of pretrial discovery has measurably reduced the need for the rule.
B. Russell, Bankruptcy Evidence Manual, § 1001.0 (1994-95 ed.).
Rule 1001, which contains the necessary definitions, distinguishes between an “original” and a “duplicate,” with the latter including a photocopy of an original. Rule 1003 allows a duplicate to be used in the same manner as an original except where a genuine question is raised as to the authenticity of the original or where in the circumstances it would be unfair to admit the duplicate in lieu of the original. Notwithstanding these rules, however, where an original is not available there are some circumstances in which secondary evidence may be offered to prove the contents of a writing. Specifically, Rule 1004 provides, so far as relevant, that such secondary evidence may be admitted if the original is lost or destroyed unless the proponent lost or destroyed the original in bad faith; if when the original was under the control of the party against whom offered that party was put on notice that the contents would be a subject of proof at the hearing and that party does not produce the original at the hearing; or if the writing for which the original is not produced is not closely related to a controlling issue.
Rule 1004 recognizes no degrees of secondary evidence. U.S. v. McGaughey, 977 F.2d 1067, 1071 (7th Cir.1993), cert. denied — U.S. -, 113 S.Ct. 1817, 123 *48L.Ed.2d 447 (1993). Therefore, depending on the circumstances present in a given case, evidence may qualify as a “duplicate original” under Rule 1003, thus meeting the “original writing” rule’s requirements head on, or it may qualify as secondary evidence of the writing’s contents under Rule 1004. See U.S. v. Gerhart, 538 F.2d 807, 810 n. 4 (8th Cir. 1976) (photocopy could have been admitted either as a duplicate, or as secondary evidence, in circumstances when original was lost, and there was no showing of bad faith); see also United States v. Taylor, 648 F.2d 565, 568 n. 3 (9th Cir.1981) (photocopies might also qualify as originals for purposes of best evidence rule where bank officer had made loan in reliance on photocopy rather than “original” typed letter).
But here the debtors do raise legitimate questions as to the authenticity of the photocopy. In other words, there is a genuine and indisputably material question of fact which it would be inappropriate to determine on summary judgment. Moreover, at trial, even if Aboff were unable to establish the authenticity of the proffered employment agreement or a photocopy thereof, he might be able to introduce admissible secondary evidence of the contents of the original. Accordingly, whereas I cannot grant summary judgment to Aboff, neither can I grant it to the debtors. See also 5 J. Weinstein, M. Berger, Weinstein’s Evidence, ¶ 1001(1)[01] at 1001-14 (1994) ,(“[b]est evidence is a powerful tool that can preclude a case from being presented to the trier of fact. It should therefore be judiciously applied ... when the reason proffered in support of exclusion of the evidence can readily be directed instead to the weight of the evidence.”)
Having identified material issues of fact remaining for trial, it is unnecessary for me to discuss the parties’ other arguments relating to the employment contract. Accordingly, both parties’ motions for summary judgment on the contract claims are denied, pending a trial where I may properly determine whether or not (i) Aboff tampered with evidence, (ii) Aboff altered the employment agreement with or without the knowledge or assistance of Kevin Maxwell and (iii) the evidentiary threshold regarding the photocopied employment agreement has been met.14
3. Amendments Asserted After the Bar Date
The debtors contend that Aboffs amended proofs of claim asserts two new causes of action against the debtors that are time-barred, having been filed after the last date which I set for filing proofs of claim in each of the estates. There is no dispute that the amendments were filed after the bar dates. The issue is whether the amendments constitute new claims or instead relate back to the originally-filed proofs of claim.
Aboff initially sought damages for violations of New York Labor Law § 198 and for breach of his employment contract. Among the entitlements which he claimed was “Contractually Mandated Insurance ... and other executive fringe benefits....” Aboff amended his proof of claim to seek damages resulting from the debtors’ alleged misrepresentations as to the availability of director and officer insurance coverage for costs incurred in defending investigations involving certain business transactions engaged in by the policyholders. The second amendment seeks a sum said to be due to him on account of liquidation of shares in his personal margin account at Advest, the same account into which the allegedly stolen Berlitz shares were deposited.
Congress intended the bar date in a Chapter 11 ease to be a mechanism for providing the debtor and creditors with finality. Gulf States Exploration Co. v. Manville Forest Products Corp. (In re Manville Forest Products Corp.), 89 B.R. 358, 374 (Bankr.S.D.N.Y.1988), aff'd 99 B.R. 543 (S.D.N.Y.1989), aff'd, 896 F.2d 1384 (2d Cir.1990); see also Associated Container Transportation (Australia) Ltd. v. Black & Geddes Inc. (In re Black & Geddes, Inc.), 58 B.R. 547, 553-54 (S.D.N.Y.1983). The bar order does not function as a “mere procedural gauntlet,” but as an integral part of the reorganization pro*49cess. First Fidelity Bank, N.A. v. Hooker Investments, Inc. (In re Hooker Investments, Inc.), 937 F.2d 833, 840 (2d Cir.1991). Therefore, bar dates are likened to statutes of limitations which must be strictly observed. In re Brill, 52 F.2d 636 (S.D.N.Y.), aff'd per curiam, 52 F.2d 639 (2d Cir.1931) (Act case). And as I have observed before, “[although amendments to proofs of claim should in the absence of contrary equitable considerations or prejudice to the opposing party be freely permitted, such amendments are not automatic but are allowed, “where the purpose is to cure a defect in the claim as originally filed, to describe the claim with greater particularity or to plead a new theory of recovery on the facts set forth in the original claim.’ ” (citations omitted). In re W.T. Grant Co., 53 B.R. 417, 420 (Bankr.S.D.N.Y.1985) (Act case) (quoting Biscayne 21 Condominium Association, Inc. v. South Atlantic Financial Corp. (In re South Atlantic Financial Corp.), 767 F.2d 814, 819 (11th Cir.1985); see also In re McLean Industries, Inc., 121 B.R. 704, 708 (Bankr.S.D.N.Y.1990). The short of it is that amendments may not be used merely to circumvent the bar date; they therefore must be carefully scrutinized to ensure that the amendment is truly amending the timely filed claim and not asserting an entirely new claim. In re Drexel Burnham Lambert Group Inc., 151 B.R. 684, 694 (Bankr.S.D.N.Y.1993); In re American International, Inc., 67 B.R. 79, 81 (N.D.Ill.1986); In re Brown, 159 B.R. 710, 714 (Bankr.D.N.J.1993).
In deciding whether or not to allow an amendment to the proof of claim the court must first determine whether there was timely assertion of a similar claim evidencing an intention to hold the estate liable. Integrated Resources, Inc. v. Ameritrust Co. National Association (In re Integrated Resources, Inc.), 157 B.R. 66, 70 (S.D.N.Y.1993). If there was such an assertion, the court then balances the equities, looking to such factors as (1) undue prejudice to the opposing party; (2) bad faith or dilatory behavior on the part of the claimant; (3) whether other creditors would receive a windfall were the amendment not allowed; (4) whether other claimants might be harmed or prejudiced; and (5) the justification for the inability to file the amended claim at the time the original claim was filed. Id.
If a claim is “new” and therefore fails to relate back, all is not necessarily lost, however, because a late-filed claim may be permitted if the failure to file was the result of excusable neglect. See Nalco Chemical Co. v. LTV Steel Co. (In re Chateaugay Corp.), 1993 WL 127180, *6 (S.D.N.Y. Apr. 22, 1993); In re Brown, 159 B.R. 710, 715 & n. 4, 717-719 (Bankr.D.N.J.1993); see also In re Alexander’s Inc., 176 B.R. 715, 719 (Bankr.S.D.N.Y.1995).15 The party seeking to be relieved of the time bar bears the burden of demonstrating that its neglect was excusable. In re Nutri*Bevco, Inc., 117 B.R. 771, 786 (Bankr.S.D.N.Y.1990).
The Supreme Court has defined “neglect” to mean both faultless omissions to act and omission caused by carelessness. Pioneer Investment Services Co. v. Brunswick Associates Ltd. Partnership, — U.S.-,-, 113 S.Ct. 1489, 1494, 123 L.Ed.2d 74 (1993). As the Court explained in Pioneer, the determination of what is excusable neglect is “at bottom an equitable one;” the Court endorsed a balancing of the following factors: “the danger of prejudice to the debtor, the length of the delay and its potential impact on the judicial proceedings, the reason for the delay, including whether it was within the reasonable control of the movant and whether the movant acted in good faith.” — U.S. at-, 113 S.Ct. at 1498.
Here the original claim provided the debtors with notice that Aboff intended to hold the debtors liable for what he described as “Legal fees and costs covered by O & D insurance or company policy.” Thus the debtors were on notice that Aboff sought to hold them liable for the alleged contractually-mandated legal fees and costs; the amended claim seeks the same recovery under a differ*50ent theory, namely, that the debtors refused to provide and misrepresented to Aboff that there was such coverage to which he believes he was entitled under his contract. It is the same legal fees and costs which Aboff seeks to recover on both theories. Given that the recoveries sought are the same, there is no prejudice to the creditor body. Nor has there been any showing of bad faith by Aboff in the interposition of the amendment.16 The only factor which tilts in the debtors’ favor is that Aboff has failed to explain why he did not assert his alternative theory initially. However, the equities tip here in favor of Aboff. Accordingly, I will allow the amendment much as did the court in Integrated Resources, 157 B.R. 66, which permitted claimants who had asserted their right to recovery under certain guarantee agreements to amend to assert a claim against the debtor for fraudulently inducing them to enter into the agreements.
The amendment seeking damages arising out of the margin call on the Advest account suffers a different fate, however. Aboff has not even attempted to justify his failure to timely file this claim. See In re Black & Geddes, Inc., 58 B.R. at 554 (while not dispositive, the failure to assert an excuse for the late claim is one factor to consider in determining the relative equities). Aboff also failed to offer any explanation as to why this amendment should be allowed either on a relation-back theory or under the doctrine of excusable neglect. (Actually, Aboff never even mentioned excusable neglect in his submissions to the court.) I can discern no relationship whatsoever between his original proof of claim and this new claim. Therefore, this amendment is dismissed as time-barred.
B. The Debtors’ Counterclaims
1. Standing
Aboff contends that the Realization Trust lacks standing to assert the debtors’ counterclaims against Aboff. This trust was created in Macmillan’s confirmed plan of reorganization pursuant to section 1123(b)(3)(B) of the Code expressly for the purpose of prosecuting the debtor’s claims for the benefit of certain classes of its creditors. (The Maxwell Macmillan Realization Liquidating Trust Agreement, art. 4, § 6.1— “The Holders of the Allowed Class 3D and Class 3E Claims shall hold 100% of the beneficial interests in the Realization Trust”). Nevertheless, Aboff argues that the Realization Trust lacks standing to assert the counterclaims because, he says, these claims for breach of fiduciary duty and conversion belong not to the debtors, but to the creditors. For this proposition he relies on the rule that “[a] claim against a third party for defrauding a corporation with the cooperation of management accrues to creditors, not to the guilty corporation.” Shearson, Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114, 120 (2d Cir.1991). As Shearson explained, the critical inquiry in determining the debtor in possession’s standing is whether the claims asserted could have been asserted by the debtor just before the bankruptcy. Id. at 119. If the facts are such that the wrongdoing of management must be imputed to the debtor, this will defeat the trustee’s ability to recover, leaving only the creditors with a remedy.
In Shearson, the debtor’s bankruptcy trustee, who had sued on a variety of contract and tort claims, alleged that the defendant brokerage house aided and abetted the debtor’s sole stockholder and decisionmaker in making bad trades that dissipated corporate funds. The circuit court noted that the debtor’s sole stockholder actively participated in the bad trades and that the brokerage house owed no fiduciary obligation to the debtor other than to execute its trades. Id. at 120. Thus, the sole stockholder’s wrongdoing was imputed to the debtor, defeating the trustee’s standing. In Shearson, the principal was acting to the potential benefit of the corporation (if the trades had not been sour ones); stated differently, he had not wholly abandoned the corporation’s interests.
The law recognizes a distinction between fraud on behalf of a corporation and *51fraud against it. See Cenco, Inc. v. Seidman & Seidman, 686 F.2d 449 (7th Cir.), cert. denied, 459 U.S. 880, 103 S.Ct. 177, 74 L.Ed.2d 145 (1982); accord FDIC v. Shrader & York, 991 F.2d 216, 224 (5th Cir.1993); In re Crazy Eddie Securities Litigation, 802 F.Supp. 804, 817 (E.D.N.Y.1992). In Cenco, the Seventh Circuit explained that
[fjraud on behalf of a corporation is not the same thing as fraud against it. Fraud against the corporation usually hurts just the corporation; the stockholders are the principal if not the only victims.... But the stockholders of a corporation whose officers commit fraud for the benefit of the corporation are beneficiaries of the fraud ... [t]he primary costs of a fraud on the corporation’s behalf are borne not by the stockholders but by outsiders to the corporation, and the stockholders should not be allowed to escape all responsibility for such a fraud ...
686 F.2d at 456.
Bear in mind that the suit in Shearson was against a third party who owed no fiduciary obligation to the debtor. Here, it is Aboffs view that he was part of executive management of Macmillan (in fact, he notes that his stationery listed him as a group vice president of Macmillan and that he was identified as executive management on various corporate charts) contrary to what the debtors have contended. If Aboff is correct, then he would have owed certain fiduciary obligations to Macmillan, clearly distinguishing this case from Shearson on at least two grounds, first, that Aboff could not be considered a third party and, second, that Aboff was a fiduciary to Macmillan. Under those circumstances, Macmillan could have stated a claim against Aboff for his alleged wrongdoing, for plainly a corporation can sue its insiders for their derelictions vis-a-vis the corporation. In addition, it is certainly conceivable that the alleged theft or conversion of Macmillan’s assets was a fraud committed not on behalf of but against Macmillan. If the facts are as alleged by Macmillan, then the wrongdoing by Aboff and the Maxwells would in all likelihood not be imputed to Macmillan. See Mirror Group Newspapers, plc v. Maxwell Newspapers, Inc. (In re Maxwell Newspapers, Inc.), 164 B.R. 858 (Bankr.S.D.N.Y. 1994), aff'd without opinion, No. 94 Civ. 2711 (S.D.N.Y. June 14, 1994).17
The bottom line is that inasmuch as the salient facts are very much in dispute, I cannot grant summary judgment to Aboff on the grounds that the Realization Trust lacks standing to pursue the claims arising out of the alleged theft or conversion of Macmillan’s assets.
2. Remand of the Berlitz-related counterclaims
Having initially requested remand of the Berlitz-related counterclaims, to which remand the debtors consent, Aboff now argues that he is entitled to dismissal of all the counterclaims for the reasons discussed earlier, or, in the alternative, to mandatory abstention. As I have already denied him summary judgment dismissing the counterclaims, I believe that remand is the most appropriate course to pursue.
Last year I abstained from the state court action entitled Berlitz International, Inc. v. Macmillan, pursuant to the mandatory abstention provisions of 28 U.S.C. § 1334(c)(2). That action had been removed to the District Court and automatically referred to me. At the time that I remanded that suit, Advest had prepared an interpleader complaint with respect to the proceeds of the Berlitz shares held in Aboffs account. However, in light of the automatic stay which arose upon the filing of Macmillan’s bankruptcy petition, Ad-vest had been unable to file the interpleader complaint. (At that time, there was a dispute as to whether or not Aboff did, in fact, *52hold a beneficial interest in the account.18) Subsequent to the remand, Advest commenced the interpleader to determine to whom to deliver the proceeds in Aboffs account. Obviously, what the debtors allege in their counterclaims here is very much at issue in the remanded state court action.
Mandatory abstention over the Berlitz-related counterclaims probably is not appropriate because that doctrine only has currency with respect to non-core actions. See Eastern Air Lines, Inc. v. International Assoc. of Machinists & Aerospace Workers AFL-CIO (In re Ionosphere Clubs, Inc.), 108 B.R. 951, 954 (Bankr.S.D.N.Y.1989). The Berlitz counterclaims under a literal reading of 28 U.S.C. § 157(b)(2)(C) are core.19 However, I deem it proper to remand the Berlitz-related counterclaims to state court under the discretionary abstention provisions of 28 U.S.C. § 1334(c)(1). That provision states:
(1) Nothing in this section prevents a district court in the interest of justice, or in the interest of comity with state courts or respect for state law from abstaining from hearing a particular proceeding arising under title 11 or arising in or related to a case under title 11. 28 U.S.C. sec. 1334(c)(1).
As the Second Circuit has stated, “[t]he statute thus furnishes three admittedly nebulous criteria to determine whether abstention is appropriate.” Coker v. Pan American World Airways, Inc. (In re Pan American Corp.), 950 F.2d 839, 845 (2d Cir.1991). While the criteria remain nebulous, we know this provision was intended to codify the judicial abstention doctrine. Id. Courts have examined a number of factors in determining whether abstention is appropriate under that doctrine:
(1) the effect or lack thereof on the efficient administration of the estate if the court recommends abstention, (2) the extent to which state law issues predominated over bankruptcy issues, (3) the difficulty or unsettled nature of the applicable state law, (4) the presence of a related proceeding commenced in state court or other nonbankruptcy court, (5) the judicial basis, if any, other than 28 U.S.C. sec. 1334, (6) the degree of relatedness or remoteness of the proceeding to the main bankruptcy case, (7) substance rather than form of an asserted “core” proceeding, (8) the feasibility of severing state law claims from core bankruptcy matters to allow judgments to be entered in state court with enforcement left to the bankruptcy court, (9) the burden of [the court’s] docket, (10) the likelihood that the commencement of the proceeding in bankruptcy, (11) the existence of a right to a jury trial, and (12) the presence in the proceeding of nondebtor parties.
Couri v. Fisher (In re JCC Capital), 147 B.R. 349, 354 (Bankr.S.D.N.Y.1992); In re Ionosphere Clubs, Inc., 108 B.R. at 954 (quoting Republic Reader’s Service, Inc. v. Magazine Service Bureau, Inc. (In re Republic Reader’s Service, Inc.), 81 B.R. 422, 429 (Bankr.S.D.Tex.1987)); see also In re Pan American Corp., 950 F.2d at 846 (citing with approval use of factors in making discretionary abstention determination).
There is no talisman for weighing these factors, but in the instant case they militate heavily in favor of discretionary abstention. The counterclaims rest entirely on New York law and the underlying litigation between the Macmillan, Aboff and Advest is already in state court. Bankruptcy law has little or no relevance to the claims and they are easily severable from the core bankruptcy matters. As noted, the debtors have consented to remand of their counterclaims. Finally, pursuing these claims in state court along with similar other claims relating to the Berlitz *53shares offers a more efficient use of the estate’s resources.
Having determined to remand the Berlitz-related counterclaims, I see no reason to impinge on the prerogative of the state judge by addressing any other issues related to them.20
3. The Statute of Limitations
I am left with Aboffs argument that the statute of limitations bars the assertion of the counterclaims. It is impossible to deal with this issue now because of the multiple disagreements in the factual context, including the dates of the alleged conversions. (To the extent that the counterclaims are to be determined in the state court action, the limitations issue is one for the state judge in any event.) But even if an affirmative recovery by the debtors is time-barred, defensive use of the counterclaims may be permissible if they can be said to be more in the nature of recoupment than of setoff. See 51 Am. Jur.2d, Limitation of Actions § 76 at 655; 3 J. Moore, Moore’s Federal Practice at ¶ 13.11 (2d ed. 1995); Stone v. White, 301 U.S. 532, 539, 57 S.Ct. 851, 854-55, 81 L.Ed. 1265 (1937); see also Basham v. Finance America Corp., 583 F.2d 918, 927 n. 16 (7th Cir.1978).
SETTLE ORDER consistent with this opinion.
. Aboff's motion was styled as one for partial summary judgment. However, he has now withdrawn two claims and modified another such that he now seeks judgment on all his remaining claims.
. In actuality, the Macmillan counterclaims are asserted by a liquidating trust which was vested pursuant to that debtor's confirmed plan of reorganization with the right to pursue claims on behalf of the estate.
. At oral argument Aboff withdrew certain of his claims which will therefore not be discussed.
. Aboff also contends that he is entitled to an undetermined amount of interest on this sum.
. Aboff has produced no proof for either of these claims.
. This is asserted to be the minimum that the debtors owe.
. The claim’s reference to the accounting firm is cryptic. Presumably, Aboff is referring to one of the Maxwell entities such as Headington, whose administrator is a member of Arthur Anderson & Co.
. Although both estates are named as plaintiffs in the adversary proceeding instituted in response to Aboff's proofs of claim, the pleading makes no mention of OAG other than in the caption and various demands for relief. No identifiable harm to OAG is alleged. Nor do the papers submitted on these motions elucidate what claims OAG has against Aboff. Accordingly, I can only conclude that OAG has no counterclaim against Aboff and that summary judgment should therefore be granted against it.
. The debtors note that Aboff also consulted with a Canadian law firm, Aird & Berlis, in drafting his employment agreement. They accuse Aboff of failing to disclose that fact during his deposition when they inquired with whom he consulted regarding a draft employment agreement.
. Directly before this statement is a mark that the debtors contend is a zero, while Aboff states it is an "ellipse,” meaning that it is an "open set,” his shorthand for an open question. The significance of this dispute is discussed further below.
. There is some dispute as to when the Whitman firm commenced working for Aboff. The debtors assert that the earliest involvement was a phone conference between Messrs. Freedman and Morse on August 21, 1990, with an actual meeting between Aboff and Morse on October 2, 1990. Accordingly, the debtors claim that the notes remained unaltered for at least seven months. Aboff, however, claims that his contact with the Whitman firm was in June, and has produced several draft documents whose fax "telltales” indicate that the Whitman firm accepted transmittal at an earlier date than that ascribed to them by the debtors.
. Whether the mark is a zero or an ellipse, review of the Whitman and Aboff notes shows that the mark was left open at the top and filled in at a later time.
. In addition, the debtors question the actual date of the alleged employment agreement's execution and attack the affidavit of Kevin Maxwell under hearsay and other procedural grounds.
. In addition, of course, if the employment agreement is admissible, I will have to determine what it means. Its language is far from unambiguous.
. Rule 9006(b) provides in relevant part:
[W]hen an act is required or allowed to be done at or within a specified period ... the court for cause shown may at any time in its discretion ... permit the act to be done where the failure to act was the result of excusable neglect.
. This is not to say that X have forgotten the debtors’ contention that Aboff tampered with the central evidence supporting his original claims. If their contention be correct, Aboff will be sanctioned appropriately, possibly through dismissal of all his claims, whether original or amended.
. Aboff claims that a decision of the High Court in London in which Macmillan unsuccessfully sued brokerage houses and banks which received some of the Berlitz shares establishes that the Maxwells were acting for their own benefit. Although Aboff asserted collateral estoppel in his answer, he did not argue on this motion how it would operate to insulate him from suit. That his name may not have surfaced in Macmillan's suit against third party banks and brokerage houses is neither here nor there. Regardless of the effect of the English judgment, it is plain that the parties disagree with respect to Aboff's role at Macmillan which is certainly central to resolution of the standing issue.
. Given the time-barred amendment which Aboff sought to assert arising out of the liquidation of the securities in his account with Ad-vest, it may still be that he is contending that he had some beneficial interest in the securities in that account. Frankly, I can't make head or tail out of his submissions on that point.
. It is arguable that a permissive counterclaim to a proof of claim would not be core. Because I believe that discretionary abstention is appropriate, it is unnecessary to delve into the issue of whether the counterclaims are core such that mandatory abstention is implicated.
. I am assuming that neither party wishes me to abstain from the counterclaims to the extent that they allege diversions of assets other than the Berlitz shares. Given that the counterclaims plead all the diversions together, however, it is possible that the parties intend for the counterclaims, in their entirety, to be remanded. I will take up this matter with the parties when an order is settled following this opinion. If they are unable to agree on what is to be remanded, they are directed to schedule a conference with me to resolve this one issue. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492153/ | ORDER
TOM R. CORNISH, Bankruptcy Judge.
On the 26th day of July, 1995, the above-referenced adversary proceeding came on for trial. Counsel appearing were Mark Grober, attorney for the Plaintiff and Jim McClure, attorney for the Defendant. At the conclusion of the trial, the parties were allowed until August 18, 1995, in which to submit briefs on the entitlement to attorney fees. The Plaintiffs attorney filed a letter stating that he could not find any authority which indicated that attorney fees were allowable. Thus, attorney fees will not be awarded.
After hearing the evidence presented, this Court does hereby enter the following findings and conclusions in conformity with Rule 7052, Fed.R.Bankr.P., in this core proceeding:
FINDINGS OF FACT
1. The Debtor/Defendant testified that she was a resident of Muskogee, Oklahoma and had been employed at Anderson Wholesale Company for 20 years and 3 months. The Debtor contributed to a medical plan known as the “Anderson Wholesale Employee Benefit Plan” (“the Plan”). The Debtor testified that she received a copy of the Employee Benefit Plan Handbook. Section 8.03(m) of the Plan, as set forth in the Handbook, provided:
In the event that any payment is made as a benefit under this Plan, the Plan shall be subrogated and succeed to the rights of *139recovery by any participant from a third party for incurred hospital, surgical, and medical expenses. All sums recovered must be paid over to the Plan. The participant shall take such action as necessary to furnish information, assistance, execution of assignments/liens, or other instruments that the Plan may request to facilitate enforcement of the rights of the Plan hereunder.
2. The Defendant further testified that her son, Todd, was in a terrible accident. He was shot in the chest with a sawed off shot gun. As a result of the accident, Todd had three ribs removed.
3. Prior to the Plan paying any benefits on Todd’s claim, the Debtor executed a “Reimbursement Agreement.” She agreed to reimburse the Plan for medical benefits out of the recovery from the tort-feasor. The Plan paid $32,679.96 on Todd’s claim.
4. The Debtor settled with the tort-fea-sor’s insurance carrier, Preferred Risk Group, for $85,000.00. The Debtor did not consult with or retain an attorney while negotiating a settlement with Preferred Risk. At the time the Debtor settled with Preferred Risk, she and Todd executed a “Release. Indemnifying Agreement”. The Release provided, in pertinent part, as follows:
FURTHERMORE: The Undersigned do hereby expressly stipulate and agree, in consideration of the aforesaid payment and agreement, to indemnify and hold forever harmless the said tort-feasor(s) against loss from any further claims, demands or actions that may hereafter, or at any time, be made or brought against the said tort-feasor by the said Harold Todd Robertson, Beverly Robertson or any medical provider or payor by virtue of any medical coverage plan or by any one on behalf of said persons, provider, or payor for the purpose of enforcing a further claim for damages on account of the injuries sustained in consequence of the aforesaid accident.
5. Thereafter, the Debtor attempted to negotiate a compromise with the trustees of the Plan. The Debtor offered to pay ninety percent (90%) of the $32,679.96 to the Plan. James Mark Anderson, trustee of the Plan, testified that he did not feel that he could make a “deal” with the Debtor because other members of the Plan always paid one hundred percent of the medical expenses back to the Plan. He testified he felt he would be discriminating against the members of the Plan by accepting less than the whole amount of the Plan’s claim.
6. The Debtor testified that she no longer has any of the funds. She testified that she spent about $7,000 on her home and the other proceeds were used to purchase a car; pay off other loans; and to give her son and mother gifts. The Debtor further testified that she thought she might need some of the money, so she gave approximately $9,000 to her sister for safekeeping. The Debtor’s sister has since returned the $9,000.
7. The parties agree that the Debtor appropriated the funds to her own use and benefit. The parties further agree that the amount of the claim has been reduced to $23,299.96. The Plaintiffs recovered approximately $9,000 from the Debtor’s sister, thereby reducing their claim.
8. A lawsuit was filed by the Plaintiffs in the United States District Court for the Eastern District of Oklahoma based on their right of subrogation. A jury trial was held before Magistrate James H. Payne. A judgment was entered in favor of the Debtor and her son. On appeal to the District Court, the Honorable Frank H. Seay reversed the entry of judgment and remanded the case to Magistrate Payne to enter a judgment in favor of the Plaintiffs in the amount of $32,679.76.
9. The Plaintiffs contend that the debt for the payment of the medical bills constitutes a “willful and malicious injury” to the Plaintiffs and therefore the debt is nondischargeable. The Plaintiffs also contend that the debt is nondischargeable because it is a debt for fraud or defalcation while acting in a fiduciary capacity.
CONCLUSIONS OF LAW
A. Section 523(a) of the Bankruptcy Code provides, in pertinent part, as follows:
(a) A discharge ... does not discharge an individual debtor from any debt—
* * * ⅜ * *
*140(4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement or larceny;
* * * * ⅜ N*
(6) for -willful and malicious injury by the debtor to another entity or to the property of another entity.
B. A “willful and malicious injury” within the meaning of Section 523(a)(6) means a wrongful act, intentionally done without just cause or excuse. In re Springer, 85 B.R. 634, 635 (Bankr.S.D.Fla.1988) (citations omitted). The Tenth Circuit in In re Pasek, 983 F.2d 1524 (10th Cir.1993) held that the § 523(a)(6) exception required proof of intentional injury.
A debtor’s conduct is “willful” if it is volitional and deliberate, as opposed to unintentional or accidental. C.I.T. Financial Services vs. Posta (In re Posta), 866 F.2d 364 (10th Cir.1989). A willful and malicious injury includes conversion of property. Id. at 367. The “malicious” requirement should focus on the “debtor’s actual knowledge or the reasonable foreseeability that his conduct will result in injury to the creditor”. Id.; see also, In re Grey, 902 F.2d 1479, 1481 (10th Cir.1990). The Tenth Circuit noted that:
[M]alicious intent must be demonstrated by evidence that the debtor had knowledge of the creditor’s rights and that, with that knowledge, proceeded to take action in violation of those rights. In re Nelson, 67 B.R. [491] at 497 [Bankr.D.Minn.1985]; In re Dever, 49 B.R. 329, 332 (Bankr.W.D.Ky. 1984). Such knowledge can be inferred from the debtor’s experience in the business, his concealment of the sale, or by his admission that he has read and understood the security agreement, (citations omitted).
Id. at 367-68. In Posta, the court noted that the Postas were relatively inexperienced in business matters, that they had difficulty in understanding business concepts, and that they had not read the agreement. Id. at 368.
In Nationwide Mutual Fire Ins. Co. v. Hale (In re Hale), 155 B.R. 730, 738 (Bankr. S.D.Ohio 1993), the court found that the debtor retained proceeds from the sale of the tractor which belonged to Nationwide. The court held that his actions were intentional and deliberate. Id. Further, the court found that the conduct was wrongful and without just cause and caused injury to Nationwide and thus, the conduct was malicious. Id.
The Debtor and her son obtained funds from the settlement with the tort-feasor’s insurance company. She knew that the Plan was to be reimbursed for the medical expenses which it had duly paid. The fact that the Debtor attempted to negotiate a compromise settlement for ninety percent (90%) of the medical expenses is clear evidence of her knowledge of the Plan’s right to reimbursement. The offer of compromise was turned down by the Plaintiffs. All the proceeds from the settlement were used for the Debt- or’s own benefit or given to her son or mother. The Debtor has spent the settlement funds in violation of the Plan’s provisions and her subrogation agreement. The Court therefore finds that the debt is nondisehargeable. Since the debt is nondischargeable pursuant to § 523(a)(6), no discussion of § 523(a)(4) application is necessary.
IT IS THEREFORE ORDERED that the debt owed to the Anderson Wholesale Employee Benefit Plan is hereby determined to be nondischargeable. A separate judgment is hereby entered simultaneously with this Order. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492154/ | ORDER
GORDON B. KAHN, Chief Judge.
This matter having come on for hearing upon the objection of Alice Tibbetts to Trustee’s proposed sale; due notice of said hearing having been given; Frank Anderson having appeared as attorney for Alice Tibbetts and Lionel C. Williams having appeared as attorney for the Trustee; and testimony having been taken and arguments having been given and the matter having been taken under submission for briefing, the Court now finds, concludes, and orders as follows:
FINDINGS OF FACT
1. In December, 1965, the debtor and Alice Tibbetts (“ex-wife”) purchased a house at 429 Gordonwood Court in Mobile, Alabama (“the property”). The property was acquired by deed recorded December 14, 1965, which conveyed the property to the Tibbetts “... as tenants in common, with equal interests for the period or term that said Grantees shall both survive, and unto the survivor of said Grantees at the death of the other, ...”
2. The Tibbetts were divorced on April 4, 1989. Paragraph 1 of the Judgment of Divorce reads as follows:
That the jointly owned homeplace of the parties, located at 429 Gordonwood Court, Mobile, Alabama, shall remain in the joint names of the parties, with the right of survivorship, until such time as the Defendant [ex-wife] remarries, at which time the homeplace shall be sold and the net proceeds derived therefrom shall be equally divided between the parties after the in*142debtedness and expenses are paid; in the interim, the Defendant shall have exclusive use and peaceful possession of said home-place; and the Plaintiff [debtor] shall pay and be responsible for the first and second mortgage payments thereon, the said first mortgage payment is assessed as alimony.
The phrase “as tenants in common” was not used by the Domestic Court to describe the joint ownership of the property. Additionally, the property was ordered to be sold upon the remarriage of the ex-wife with the sale proceeds divided equally between the parties. This paragraph changed the manner in which the parties held title to the property.
3. The divorce was appealed by the ex-wife to the Alabama Court of Civil Appeals. In affirming the trial court’s holding, the appellate court stated in part:
The evidence reveals that the wife has worked 21 of the 30 years of the marriage and continues to do so. Her present salary almost equals that of the husband, and she has a retirement plan and insurance benefits available through her employment. The four children of the marriage are now adults.
4. The debtor filed an individual Chapter 13 bankruptcy on September 23, 1994. The case was converted to Chapter 7 on February 7, 1995. The house was not claimed as exempt.
5. On March 7, 1995, the Trustee filed a Proposal and Notice for Public Sale to take place on April 10, 1995. No objection was filed within the March 30, 1995 deadline established in the proposal. No sale was reported as having taken place on the date scheduled. On June 20, 1995, the ex-wife filed an objection to the proposed sale.
6. The fair market value of the property is between $90,000.00 and $120,000.00. There are two mortgages on the property with approximately $8,000.00 total remaining outstanding.
7. The ex-wife has a masters degree and is the principal of a parochial school. The house located on the property has four bedrooms and three baths. The property was the homeplace of the debtor, the ex-wife and their four children. The children are all grown and the ex-wife now lives there alone.
8.The property cannot be partitioned. A sale of the debtor’s undivided interest would be difficult and would yield only nominal revenue. It is undisputed that the property is not used for the production of electric or gas energy.
CONCLUSIONS OF LAW
It is undisputed that the debtor has an interest in the property, that his interest is not exempt, and that the Trustee may sell the debtor’s interest. What is disputed is the extent of the debtor’s interest and the Trustee’s ability to sell the ex-wife’s interest. The 1965 deed to the Tibbetts created a tenancy in common with cross-contingent remainders. This type of tenancy was held by the Supreme Court of Alabama to be indestructible without consent of both co-tenants. Bernhard v. Bernhard, 177 So.2d 565 (Ala. 1965). In 1972, Bernhard was overruled by Nunn v. Keith, 268 So.2d 792 (Ala.1972). Nunn held that a conveyance to joint tenants with rights of survivorship was a destructible tenancy which could be destroyed with the consent of all tenants. Nunn is prospective in its holding and has no affect on the Tib-betts original deed. If the Tibbetts had not divorced, this would determine the issue and the Trustee would be unable to force a sale of the entire property. See, In re Spain, 831 F.2d 236, 237 (11th Cir.1987); In re Livingston, 804 F.2d 1219, 1222-23 (11th Cir.1986).
The Tibbetts divorced in 1989, after the holding in Nunn was issued. It is clear under Alabama law that the Circuit Court has the power to adjust the ownership of property held by joint tenants or by tenants in common who are parties to a divorce action. Porter v. Porter, 472 So.2d 630, 633 (Ala.1985); Summerlin v. Bowden, 240 So.2d 356, 358 (Ala.1970); Owens v. Owens, 201 So.2d 396, 399 (Ala.1967). That is exactly what happened in the instant case. The Tibbetts divorce decree provided that the property “shall remain in the joint names of the parties, with the right of survivorship, until such time as the Defendant [ex-wife] remarries, at which time the homeplace shall be sold and the net proceeds derived there*143from shall be equally divided between the parties after the indebtedness and expenses are paid.” This language converted the indestructible tenancy in common into a destructible joint tenancy, which falls within the scope of section 863(h). See, Spain, 831 F.2d, at 239-240; 11 U.S.C. § 363(h). Both the failure to use the phrase “as tenants in common” and the order to sell the property upon the remarriage of the ex-wife with an equal division of sale proceeds thereafter separately accomplished the conversion. Spain, 831 F.2d, at 239, citing Durant v. Hamrick, 409 So.2d 731 (Ala.1981) (must use specific language to create Bernhard type interest); Owens, 201 So.2d, at 399 (Domestic Court can destroy indestructible nature of a tenancy in common with an expressed right of survivorship by ordering conveyance of the property).
Section 363(h) permits sale of both the estate and a co-owner’s interest in property “... in which the debtor had, at the commencement of the ease, an undivided interest as a tenant in common, joint tenant, or tenant by the entirety ...” Four tests must be met to permit a sale under this subsection: a) partition in kind is impracticable; b) sale of the estate’s undivided interest would realize significantly less for the estate than sale of the property free of the interests of co-owners; 3) the benefit to the estate of a sale of such property free of the interest of the co-owners outweighs the detriment, if any, to the co-owners; and 4) the property is not used for, or involved in any way, with the production of electric or gas energy. 11 U.S.C. § 363(h)(l-4). As found above, the property cannot be partitioned. Additionally, there is significant equity in the property which can be recognized upon a sale of the entire property, whereas a sale of the debt- or’s undivided interest will yield only a nominal amount. The children of the parties are grown and the ex-wife is the sole occupant of a four bedroom, three bath home. She is employed and able to earn her own way. The benefit to the estate in being able to pay some of the debtor’s creditors clearly outweighs the detriment to the ex-wife in having to find new housing. Finally, as found above, it is undisputed that the property is not used for energy production.
Based upon the above findings and conclusions, the objection of Alice Tibbetts is due to be overruled and the Trustee allowed to sell both parties entire interests. Proceeds from any sale are to be held pending a determination of the extent of the liens, if any, on the property, and the costs and expenses incurred in selling the property. Now, therefore, it is
ORDER
ORDERED, that the objection of Alice Tibbetts to the Trustee’s proposed sale be, and it hereby is, OVERRULED; and it is further
ORDERED, that the Trustee be, and he hereby is, AUTHORIZED to sell the property located at 429 Gordonwood Court, Mobile, Alabama, subject to any existing liens and encumbrances and with the proceeds to replace the property until the validity and extent of such liens, if any, and the costs and expenses incurred in selling the property can be ascertained; and it is further
ORDERED, that after payment of liens and encumbrances, if any, and of costs and expenses incurred in selling said property, the Trustee shall distribute to Alice Tibbetts fifty (50%) percent of the balance remaining of the sale proceeds and the remaining fifty (50%) percent to the debtor’s bankruptcy estate. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492155/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW
GEORGE L. PROCTOR, Bankruptcy Judge.
This proceeding is before the Court upon TUBE LIGHT COMPANY, INC.’s, a New Jersey corporation (“Defendant”), Motion for Bankruptcy Rule 9011 Sanctions against LLOYD T. WHITAKER, as Chapter 7 Trustee (“Plaintiff”) and Steven R. Browning (“Plaintiffs Counsel”). An evidentiary hearing was held on May 11, 1995. Upon the evidence presented, the Court enters the following Findings of Fact and Conclusions of Law.
FINDINGS OF FACT
Olympia Holding Corporation a/k/a P*PE Nationwide, Inc. (“P*I*E”) was a common carrier in the business of transporting goods. The Defendant is a New Jersey corporation. There is also Tube Light Company, Inc., a Florida corporation; Tubelite Company, Inc., a North Carolina corporation; Tubelite Company, Inc., a Tennessee corporation; and Tu-belite Company, Inc., a California corporation, all of which are separate and distinct corporate entities. P*I*E provided transportation services to each of these corporations.
In August of 1992, Plaintiff, as Chapter 7 Trustee for P*I*E filed an Adversary Complaint against the Defendant seeking damages in the amount of $148,311.25. The Complaint was signed by W. Kelsea Wilber. It is undisputed that the Adversary Complaint overstated damages by approximately $140,000.00. The other Tube Light entities were not listed as Defendants.
In October of 1992, the Defendant filed its Answer and Affirmative Defenses. In Paragraph 5 of its Answer, the Defendant specifically denied that all of the freight bills which were listed on Exhibit “A” to the Complaint related to services rendered to it. Additionally, the Defendant’s counsel corresponded with the Plaintiffs agents on several occasions advising them that not all of the freight bills attached to the Complaint applied to Defendant. Specifically, the Defendant’s counsel informed the Plaintiffs agents that only three (3) of the invoices related to transportation services provided to it by P*PE.
In its defense, the Plaintiff offered the testimony of George Coseo, a former manager of overcharge claims and revisions in the traffic department of P*PE. According to Mr. Coseo, it was the general practice of P*I*E to bill corporations at the locality where the shipments were sent. P*I*E records indicated that Tube Light Company, Inc. had nine (9) separate locations. However, in its Complaint, the Plaintiff sued only the Defendant and sought to hold it responsible for all services rendered to any of the different locations.
*159Mr. Coseo also testified that the Adversary Complaint overstated damages by approximately $140,000.00. According to Mr. Coseo, the overstatement was due to a clerical error in that the clerk erroneously typed “67411075” instead of “67410075”. This error was discovered around October 1992 by one of P*I*E’s auditors and was made known to the Plaintiff at that time. Mr. Coseo was aware of other errors of a similar nature that occurred, but was unaware of any procedures in place to prevent such errors from recurring.
On or about February 1, 1995, the Defendant filed its Motion for Rule 9011 Sanctions against the Plaintiff and Plaintiffs Counsel seeking $3,494.00 for its attorneys’ fees and $332.10 for costs incurred. On April 24, 1995, the Defendant filed a motion for summary judgment. On May 5, 1995, the Plaintiff filed its Motion for Leave to File Amended Complaint.
CONCLUSIONS OF LAW
It is the Defendant’s contention that based upon these facts, it is entitled to all of the attorneys’ fees and costs incurred in defending itself in the adversary proceeding under Rule 9011, Bankruptcy Rules.
Pursuant to Rule 9011, Bankruptcy Rules, “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 ...”
From the facts presented, it appears that the Adversary Complaint filed by the Plaintiff overstated the damages by approximately $140,000.00. The Plaintiff contends that the overstatement was the result of a clerical error and that they should therefore not be held responsible. However, according to the Plaintiffs own witness, Mr. Coseo, the overstatement was discovered by P*I*E’s auditors in October of 1992 and the Plaintiff became aware of the overstatement at that time.
Additionally, the Plaintiff and its counsel were informed of the overstatement in the Defendant’s Answer filed in October of 1992 as well as in correspondence originating from the Defendant’s counsel from July 28, 1993, through June 1994.
Despite the knowledge that they had overstated damages by approximately $140,-000.00, the Plaintiff and its counsel did not move to amend its Adversary Complaint to correct this error until May 5, 1995, approximately two and one-half years after the error was discovered, after the Defendant’s Motion for Sanctions was filed and only six (6) days prior to the hearing on the Defendant’s Motion for Rule 9011 Sanctions.
Once the overstatement was brought to the Plaintiffs attention, the Plaintiff and Plaintiffs Counsel had an affirmative duty to amend the pleadings to reflect the true amount of damages while the Adversary Proceeding was being prosecuted. Based upon their failure to so amend the pleadings, the Plaintiff and its counsel are in violation of Rule 9011, Bankruptcy Rules.
Although the Defendant has requested damages in the amount of $3,494.00 for its attorneys fees and $332.10 for costs incurred, the Defendant is only entitled to attorneys fees in the amount of $1,000.00 and costs in the amount of $321.25, which costs are comprised of $96.00 for copying charges, $45.00 for facsimile charges, and $180.25 for obtaining certified copies of the Certificate of Good Standing and Articles of Incorporation of the different Tube Light Company, Inc. corporations. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492156/ | ORDER
BARRY S. SCHERMER, Bankruptcy Judge.
This matter came before the Court on the confirmation of Debtors, Emma and Freddie Townsend’s, First Amended Chapter 13 Plan. At the confirmation hearing, attorney for the Chapter 13 Trustee, Diana Daugherty, objected to confirmation because under the amended plan, the proposed payments will not pay in enough funds to pay off home mortgage arrears within the 24 months stated in the plan.1 Amended Plan at ¶ 2. Indeed the amended plan proposes to pay the Debtors’ attorney ahead of and to the exclusion the home mortgage arrearage.
*249This Court finds that the First-Amended Plan is inconsistent with the spirit of § 1322(b)(5). The relevant language of § 1322(b)(5) reads: “the plan may ... provide for the curing of any default within a reasonable time ...” § 1322(b)(5). The opportunity to cure a default is a shield by which a debtor can heal a delinquent debt. It is not a sword which the debtor can use to further delay payment while the attorney collects a fee.2 Curing of any default within a reasonable time means payments in equal monthly installments over the first 24 (now 30) months after the filing of the plan. Payment of attorney fees cannot usurp the obligation to provide equal monthly payments beginning with the first disbursement under the plan. It is therefore
ORDERED that Confirmation of Debtor’s First Amended Chapter 13 Plan is DENIED; it is further
ORDERED that Debtor has 20 days to file an amended plan.
. Under the Local Rules as they existed prior to July 1, 1993, debtors were permitted to cure home mortgage arrears within 24 months payable in equal monthly installments.
. This Court can find no section of the Bankruptcy Code which states or even suggests that attorney fees should be paid ahead of any creditor. Section 1322(a)(2) requires only that attorney fees be paid in full. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492157/ | MEMORANDUM OPINION
ARTHUR B. BRISKMAN, Bankruptcy Judge.
This matter came before the Court on the Debtors’ Objection to Proofs of Claim filed by Luis R. Gutierrez (“Gutierrez”). After reviewing the pleadings, evidence, receiving testimony, exhibits, arguments of counsel, and authorities for their respective positions, the Court makes the following Findings of Fact and Conclusions of Law.
FINDINGS OF FACT
The Debtor filed for relief under Chapter 13 of the Bankruptcy Code on October 15, 1993. On March 7, this Court entered an Order converting the case to Chapter 11. Luis Gutierrez filed three separate claims in this proceeding. The first two, Claim No. 1 and Claim No. 2, purport to be secured claims arising out of judgments rendered March 20, 1991 and May 1, 1991 in the Circuit Court of the Eighteenth Judicial Circuit, Brevard County, Florida, Case No. 89-07288-CA-J. Claim No. 3 purports to be an unsecured claim for post-judgment costs and attorneys’ fees incurred in an effort to collect the foregoing judgments.
The Debtors previously filed for relief under Chapter 11 in 1984 in the U.S. Bankruptcy Court for the Middle District of Florida, Case No. 84-34-ORL-BK-GP. Gutierrez filed a proof of claim as a secured creditor in those proceedings. The principal amount of the claim was $26,000.00.
On April 30, 1985, the Court entered an Order Confirming Plan of Reorganization in Case No. 84-34-ORL-BK-GP. The confirmed plan provided, inter alia for payment of $50,000 to a class of secured creditors which included Gutierrez. Gutierrez was paid $26,000.00 which represented payment in full of the Debtors’ indebtedness, and substantial consummation of the Plan of Reorganization.
On July 16, 1985, a refinancing of the Gutierrez note and mortgage took place. The proceeds of the refinancing were to be used to fund the Plan of Reorganization. Desiring to recover interest not provided for under the confirmed plan, Gutierrez required the Debtors to execute a $10,000 note which is the subject of all of the claims filed in this case, before Gutierrez would execute a satisfaction of mortgage at the closing of the refinancing. The $10,000 promissory note lacked consideration. The Debtors executed the note with the understanding it lacked validity because of the confirmation of the plan of reorganization. The promissory note contained a compulsory arbitration clause.
After the Debtors failed to pay on the note, Gutierrez initiated arbitration proceedings before the American Arbitration Association. On April 3,1989, the Debtors failed to attend the arbitration, and the assigned arbitrator entered an award in favor of Gutierrez in the amount of $14,793.29. Gutierrez thereafter filed an action in the Brevard County, Florida Circuit Court to confirm the arbitration award in accordance with Chapter 682 Fla.Stat. The Debtors were unsuccessful in their efforts in state court to set aside the award. Following a trial on March 13, 1991, judgments were entered upon which the contested claims are based. A motion for rehearing was subsequently denied by the court and the Debtors unsuccessfully appealed the final judgments to the District Court of Appeal for the Fifth District of Florida.
CONCLUSIONS OF LAW
The issue before the Court is whether the $10,000 note which is the subject of Gutierrez’ Claims Nos. 1, 2, and 3, arose from a debt discharged by virtue of a confirmed Plan of Reorganization in Debtors’ Case No. 84-34-ORL-BK-GP. Section 1141 of the Bankruptcy Code, 11 U.S.C. §§ 101 et seq., governs the effect of confirmation of a plan of reorganization. It provides in pertinent part:
*278(a) Except as provided in subsections (d)(2) and (d)(3) of this section, the provisions of a confirmed plan bind the debtor ... any creditor ... whether or not the claim or interest of such creditor ... is impaired under the plan and whether or not such creditor ... has accepted the plan.
⅛ ⅛ $ ⅛ * ⅛
(d)(1) Except as otherwise provided in this subsection, in the plan, or in the order confirming plan, the confirmation of a plan—
(A) discharges the debtor from any debt that arose before the date of such confirmation, and any debt of a kind specified in section 502(g), 502(h), or 502(i) of this title, whether or not—
(i) a proof of the claim base on such debt is filed or deemed filed under section 501 of this title;
(ii) such claim is allowed under section 502 of this title; or
(iii) the holder of such claim has accepted the plan;
11 U.S.C. § 1141.
The Court entered an Order Confirming Plan of Reorganization in the Debtors’ Case No. 84-ORL-BK-GP which provided for payment to Gutierrez of $26,000 in full satisfaction of his claim. Gutierrez was paid $26,-000 pursuant to the plan, and the plan was substantially consummated. The $10,000 note which is the subject of all of the claims filed in this case arose from Gutierrez’ desire to recover interest not covered in the plan payment of $26,000. Gutierrez refused to execute a satisfaction of mortgage at a refinancing closing unless the Debtors executed the note.
The Debtors were under extreme time pressures and executed the note with the understanding it lacked validity due to the confirmed plan of reorganization. There was no consideration for the note. The note contained a compulsory arbitration clause. As the underlying obligation arose before the date of confirmation, and the plan was confirmed, pursuant to 11 U.S.C. § 1141, Gutierrez was bound to accept the $26,000 as payment in full of this obligation, and pursuant to 11 U.S.C. § 1141(d)(1)(A), the Debtors were discharged from the underlying debt.
The effect of discharge is governed by 11 U.S.C. § 524. It provides in pertinent part:
(a) A discharge in a case under this title—
(1) voids any judgment at any time obtained, to the extent that such judgment is a determination of the personal liability of the debtor with respect to any debt discharged under section 727, 944, 1141, 1228, or 1328 of this title, whether or not discharge of such debt is waived;
* * * * * *
(c) An agreement between a holder of a claim and the debtor, the consideration for which, in whole or part, is based on a debt that is dischargeable in a case under this title is enforceable only to any extent enforceable under applicable nonbankruptcy law, whether or not discharge of such debt is waived, only if—
(1) such agreement was made before the granting of the discharge under section 727, 1141, 1228, or 1328 of this title;
(2) (A) such agreement contains a clear and conspicuous statement which advises the debtor that the agreement may be rescinded at any time prior to discharge or within sixty days after such agreement is filed with the court, whichever occurs later, by giving notice of rescission to the holder of such claim; and
(B) such agreement contains a clear and conspicuous statement which advises the debtor that such agreement is not required under this title, under non-bankruptcy law, or under any agreement not in accordance with the provisions of this subsection;
(3) such agreement has been filed with the court and, if applicable, accompanied by a declaration or an affidavit of the attorney that represented the debtor during the course of negotiating an agreement under this subsection, which states that—
(A) such agreement represents a fully informed and voluntary agreement by the debtor;
*279(B) such agreement does not impose an undue hardship on the debtor or a dependent of the debtor; and
(C) the attorney fully advised the debtor of the legal effect and consequences of—
(i) an agreement of the kind specified in this subsection; and
(ii) any default under such an agreement;
11 U.S.C. § 524.
As the Debtors were discharged from the underlying debt, any direct or indirect act to collect the debt is a violation of the injunction, prohibited, and void. This is intended to insure that once a debt is discharged, a debtor will not be pressured in any way to repay it. The discharge extinguishes the debt and creditors may not attempt to avoid that. H.R.REP. NO. 595 95th Cong. 1st Sess. 365-366 (1977); S.REP. NO. 989, 95th Cong. 2d Sess. 80 (1978).
Section 524(a) renders null and void any judgment affecting the personal liability of the debtor obtained in any forum other than the bankruptcy court. The purpose of the provision is to make it absolutely unnecessary for the debtor to do anything at all in the state court action. COLLIER ON BANKRUPTCY, ¶ 524.01 (15th ed. 1994). Willfully proceeding in state court on a discharged debt is a violation of the permanent injunction of Section 524. See In re Miller, 89 B.R. 942 (Bankr.M.D.Fla.1988).
As the judgment obtained by Gutierrez on the note was intended to establish personal liability of the Debtors with respect to a debt which had been discharged by virtue of 11 U.S.C. § 1141, the judgment is void pursuant to 11 U.S.C. § 524(a)(1). Gutierrez’ actions to collect on this debt were in violation of 11 U.S.C. § 524(a)(2). The note, if alleged to be an agreement to pay for a debt otherwise dischargeable, fails to comply with 11 U.S.C. § 524(c), is void, and unenforceable.
Accordingly, pursuant to 11 U.S.C. §§ 1141 and 524, the Debtors’ Objection to Proofs of Claim Nos. 1, 2, and 3 filed by Gutierrez are due to be sustained. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492158/ | *338
DECISION AND ORDER ON PLAINTIFF-DISBURSING AGENT’S COMPLAINT SEEKING RECOVERY OF UNPAID RENT, ETC.
ARTHUR N. YOTOLATO, Bankruptcy Judge.
Heard on the Complaint of Charles Lovell, Esq., the disbursing agent appointed under the Debtor’s confirmed plan of reorganization, seeking recovery of unpaid rent, oil consumption charges, and taxes from the Defendant, Kevin J. Thornton Enterprises, Inc., d/b/a Rick’s Warehouse Liquors, Ltd. (“Thornton”). The Disbursing Agent also requests attorney’s fees, costs, and interest.
Based on the record and the arguments, for the reasons stated below we rule that the Disbursing Agent is entitled to relief in accordance with the following discussion, findings and conclusions.
BACKGROUND
On August 15, 1982, Robert Branchaud, d/b/a/ B & G Associates, entered into an eight year lease with Rick’s Warehouse Liquors, Ltd., of property located at 202-204 South Main Street, Woonsocket, Rhode Island. Under the terms of the agreement, the lessee was required to pay a minimum monthly rent of $1,666, with annual increases tied to the Boston Consumer Price Index. (Plaintiffs Ex. # 1, at 1-2). Additionally, the lessee was required to pay its pro-rata share (five-sevenths) of any increase in real estate taxes from the base year, and oil consumption charges. The lease contained options to renew for three additional periods of five years each. (Id. at 2-3, 6). On September 22,1988, the lease was assigned to Thornton, the Defendant herein. (Plaintiffs Ex. #2). On January 5, 1989, Thornton exercised its option to extend the lease for an additional five years, through August 15, 1995. (Plaintiffs Ex. #3).
On July 10, 1989, Robert Branchaud and five of his related entities filed petitions for relief under Chapter 11, and on July 24, 1989, these cases were consolidated administratively. On February 21, 1991, the Debtors’ Seconded Amended Plan of Reorganization was confirmed and Lovell was appointed disbursing agent. As such, he received title to the subject real estate, to administer for the benefit of creditors. In May 1991 Mr. Lovell informed the tenants of his appointment as disbursing agent, and began collecting rent.1
On August 20, 1993, Mr. Lovell sent Thornton a letter formally notifying him that rental increases since September 1990 were due in the amount of $3,936. (Plaintiffs Ex. #7). Thornton had not received a formal notice of rent increase since October 17, 1989, when Robert Branchaud increased the rent to $2,523.05 per month for the period September 1989 to September 1990. (Plaintiffs Ex. # 5). On September 8, 1993, Thornton responded to Lovell’s demand, by advising that he recalculated all rent increases and payments since September 1983, and discovered errors that resulted in overpay-ments totaling $6,287. (Plaintiffs Ex. #8).
THE ISSUES
Lovell alleges that: (1) Thornton has failed to pay rent increases called for under the lease since September 1990, amounting to $13,560; (2) Thornton owes $29,539, because it has failed to pay any rent since October 1994; (3) Thornton owes rent through August 1995, notwithstanding its abandonment of the premises; and (4) Thornton has failed to pay its pro-rata share of increased taxes and oil charges, in the amount of $2,725.
Thornton does not dispute that it owes the taxes and oil charges claimed, but argues that it (1) was constructively evicted by Lo-vell’s failure/refusal to provide lessor services, and (2) asserts a $5,700 offset resulting from the lessor’s miscalculation of the annual rent increase since the inception of the lease in 1982. We ruled at the May 9, 1995 hearing that Thornton could not go back to 1982 *339to recalculate past due rent.2 Thornton also argues that the Disbursing Agent’s acceptance of reduced rent payments since September 1990 constitutes payment in full, and that he is now equitably estopped from seeking past due rent.
DISCUSSION
This dispute centers around Lovell’s three year delay in formally notifying Thornton of annual rent increases allegedly due under the lease. Lovell denies that the delay was a result of neglect, but argues that even in the exercise of due diligence it took him until now to reach this matter, after tending to all of his other priority duties as disbursing agent. He submits that the five consolidated bankruptcies were very complex, involving over 200 creditors, that the rent increase provisions were clear, and that Thornton was on actual and constructive notice of the increases. Kevin Thornton, the president of the Defendant corporation, acknowledged that he was aware of the rent increase provisions, but in light of conversations with Lo-vell regarding the downturn in his business, he assumed that Lovell was accepting the reduced payments of $2,523 in lieu of the increased rent.
Both factually and legally this argument is without merit, and Thornton is bound by the terms of the lease as written. There is no evidence or writing to alter the terms of the original lease, Thornton’s unilateral “assumptions” do not equate to an agreement between the parties, and they certainly are not binding on the Disbursing Agent. See North Smithfield Volunteer Fire Dept. v. Kollet, 70 R.I.182, 38 A.2d 141 (1944) (Court found that an oral agreement did not alter terms of written lease). The lease provides that the “Lessee shall pay to the Lessor as a Minimum Annual Rent for each Lease year after the initial lease year (it being the intention of the Parties to calculate the Minimum Annual Rent for each such year separately), a sum calculated by_” (Plaintiff’s Ex. # 1, at 2). Under the terms of the lease, rent increases are self-executing, and there is no requirement that the lessor provide notice of such new amount to the lessee. Accordingly, we find that the Disbursing Agent did not waive the annual increases, nor has he engaged in any conduct that would cause him to be equitably estopped from enforcing the lease in any respect. Accordingly, we conclude that Thornton is liable under the lease for all past due rent increases, as calculated by the Disbursing Agent.
In support of his constructive eviction argument, Thornton complains that he encountered numerous maintenance problems with the subject property, that were not corrected by Lovell. For example: (1) the air conditioners did not work; (2) Lovell did not provide snow removal services for 1994 as required under the lease; (3) Lovell failed to replace light bulbs; (4) a garage door was left with inadequate temporary repairs after an attempted burglary; (5) the exterior was in need of painting; and (6) the roof and foundation leaked in 1994. Thornton admitted that he never alerted Lovell to some of these present complaints, because he “thought it would be fruitless” and that “communications had broken down.” He also states that he only telephoned Lovell once in January 1994 about the leaking roof and foundation.
The evidence does not support Thornton’s claim of constructive eviction. Paragraph 6(b) of the lease provides that the Lessor will:
[mjaintain the interior of the building of which the demised premises are a part up to the point of the demised premises, and keep the exterior and structural portion of the demised premises, in good repair during the continuance of this lease. Lessor shall be liable only for such damage or loss to the leased premises or the property contained therein by reason of rain, snow or other causes resulting from the negligence of the Lessor or Lessor’s failure to comply with the obligations of the lease only after due written notice of Lessor’s *340failure or breach has been hand-delivered or sent by certified mail to Lessor....
(Plaintiff’s Ex. # 1, p. 5). Lovell correctly points out that many of Thornton’s complaints were not the lessor’s responsibility, and also that Thornton failed to comply with any of the notice requirements under Paragraph 6(b). We agree with and adopt the position of the Disbursing Agent on this issue and reject Thornton’s assertion of constructive eviction. Thornton is correct, however, that under Paragraph 6(a) of the lease Lovell was required to provide snow removal, which he concedes he failed to do. Accordingly, Thornton is entitled to an offset of $1,375, the amount paid for snow removal in 1994. (See Defendant’s Ex. # C).3
Finally, we address Lovell’s claim for rent through August 1995, the lease expiration date. There is no dispute that Thornton stopped paying rent in October 1994. There is some question, however, as to when Thornton actually vacated the premises, and when the property became available for the Debtor to obtain a new tenant. Lovell testified that he knew as early as August 1994 that Thornton was contemplating vacating the premises, and in November 1994, he changed the electrical service to his name and began receiving electric bills. Lovell argues that he did not know for certain that Thornton had vacated the property until January 1995, when he received the keys. Subsequently, he made a business decision not to encumber the property with a long term lease, because he was uncertain whether he would abandon the property or place it on the market for sale.
While we do not second-guess Lovell’s business judgment not to re-let the premises, neither may we overlook his legal duty to mitigate damages, upon learning that Thornton had left the premises. “The doctrine of avoidable consequences states that a party may not recover damages ‘that the injured party could have avoided without undue risk, burden or humiliation’.... This rule prevents parties from sitting idly by and permitting their damages to accumulate.” Bibby’s Refrigeration, Heating & Air Conditioning, Inc. v. Salisbury, 603 A.2d 726, 729 (R.I.1992), quoting Restatement (Second) Contracts § 350(1) (1981). Considering that Lo-vell changed the electrical service to his name in November 1994, it is also reasonable to conclude that he should have marketed the property from that point, notwithstanding the fact that Thornton had not physically returned the key.4 We also rule, for damage mitigation purposes, that Lovell was entitled to approximately ninety days within which to obtain a new tenant after December 1, 1994. Accordingly, we find that Thornton is responsible for (reasonable) rent for the period November 1, 1994 through February 1, 1995, at the rate of $2,900 per month, for a total of $8,700. Based upon the foregoing, we find and conclude that Thornton is indebted to the Disbursing Agent for rent, taxes, and oil charges in the total amount of $23,610.5 In addition, the lease provides that the “Lessee agrees to pay on demand all attorney fees incurred by Lessor in enforcing Lessor’s rights under this agreement.” (Plaintiffs Ex. # 1, at 10). In accordance with this lease provision, the Disbursing Agent seeks attorney’s fees and costs. We find that the request (Docket # 16) of $7,236 is reasonable, and it is allowed in that amount, plus costs of $411. The Plaintiff is also entitled to pre-judgment interest on the award, pursuant to the terms of the lease at 12% per annum. (See Plaintiffs Ex. # 1, at 4). Post-judgment interest will accrue at the federal rate until the judgment is paid. See 28 U.S.C. § 1961.
Enter Judgment consistent with this opinion.
. Under the Plan, the unexpired lease with Thornton was rejected. Thereafter, Thornton filed a motion to set aside the rejection, and requested an order compelling the Debtor to reaffirm the unexpired lease. By Consent Order dated November 18, 1991, the parties agreed that Thornton could remain in possession under the lease for its remaining term, including any extensions exercisable under non-bankruptcy law.
. This ruling was based in part on the fact that Thornton was not even a lessee until September 1988 when the assignment of lease was executed, which would have been the appropriate time to raise the issue.
. Exhibit C also contains copies of two invoices from 1993 which have not been included in our offset calculation, because both Thornton and Lovell testified that the 1993 snow removal charges were paid by previous rent offsets.
. Locks, of course, can be and are changed regularly.
. $13,560 (unpaid rental increases) + $8,700 (unpaid rent) + $2,725 (oil & taxes) - $1,375 (1994 snow removal credit) = $23,610. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492159/ | SUPPLEMENTAL OPINION1
STEVEN W. RHODES, Chief Judge.
The following are the facts in each of these four Chapter 13 cases:
1. Paragraph I-D of the debtor’s confirmed plan provides that upon confirmation of the plan, all property of the estate shall vest in the debtor, as permitted by 11 U.S.C. § 1327(b).
2. Following confirmation, the debtor did not make all of the payments required by the plan.
3. As a result, a secured creditor filed a motion for relief from the stay.
At the hearings on these motions, the Court concluded that relief from the stay was unnecessary because the stay was no longer in effect.
Section 362(c)(1) of the Bankruptcy Code provides:
[T]he stay of an act against property of the estate under subsection (a) of this section continues until such property is no longer property of the estate[.]
Because each of the plans filed by these debtors provides for the vesting of all estate property in the debtor upon confirmation, the stay terminated as to such property upon confirmation. See 2 Keith M. Lundin, Chapter 13 Bankruptcy § 6.27, at 6-91 (2d ed. 1994) and the cases cited therein.
At the hearing, counsel for debtor Katherine Honey argued that even if in these circumstances the stay of an act against estate property terminates upon confirmation, section 362(a)(5) would still operate as a stay of the actions proposed by the secured creditor. That section provides that a petition operates as a stay of “any act to ... enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case....” 11 U.S.C. § 362(a)(5).
The difficulty with this argument is that the stay set forth in section 362(a)(5) never applied to the property in question, because after the petition was filed, the property was not “property of the debtor”; rather, it was “property of the estate.” The subsection applies primarily to exempt property. See 2 Collier on Bankruptcy ¶ 362.04[5], at 362-44 (Lawrence P. King ed., 15th ed. 1995). Accordingly, this argument should be rejected.
For these reasons, the Court concludes that the stay is no longer in effect in these cases, and the creditor’s motion to lift stay is unnecessary.
. This opinion supplements decisions made on the record in open court on July 13, 1995. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492160/ | MEMORANDUM OPINION
SAMUEL J. STEINER, Bankruptcy Judge.
This matter is before the Court on the motion of the United States for reconsideration of the Court’s ruling that Master-Hal-co’s claim to interpleaded funds is superior to that of the government.
The facts are undisputed. On December 3, 1990, the IRS assessed the debtors with income taxes of $59,763.30 for 1989. On April 27, 1991, Master-Halco obtained a $92,-714.92 judgment against the debtors in the local State Court. On December 2,1991, the IRS assessed the debtors with taxes of $121,-179.48 for 1989. On December 26, 1991, the IRS recorded a Notice of Federal Tax Lien in Snohomish County, Washington. On January 31, 1994, Master-Halco obtained a writ of garnishment against Merrill, the debtors’ debtor. The writ was served on February 1, 1994; Merrill answered that it was holding $15,421.10 of funds owed to the debtors; and judgment in that amount was entered on the garnishment on February 24, 1994. On March 30,1994, the IRS levied on Merrill for $287,630.94.
After filing, Merrill commenced this adversary proceeding, seeking to interplead the $15,421.10 and to recover its attorneys fees and costs. The United States moved for summary judgment, claiming a first right to the funds held by Merrill. Master-Halco filed its cross-motion. On June 26, 1995, the Court entered its Order which 1) granted the interpleader, 2) directed Merrill to deposit the funds into the Registery of the Court, 3) provided for the discharge of Merrill, 4) awarded it $1,000 for attorneys fees and costs, 5) denied the motion of the government, and 6) granted the motion of Master-Halco.
The United States has moved for reconsideration, again contending that it has a superi- or right to the funds; and that Merrill should not be awarded to its fees and costs, in that such a recovery diminishes the government’s recovery on its federal tax hens.
It is undisputed that the IRS had a hen on ah property of the debtor as of the date of assessments, and that its hen obtained priority over ah subsequent hens on the date it was recorded. 26 U.S.C. Sec. 6321, 6322. Master-Halco’s hen on the receivable due the debtors from Merrill arose when the writ of garnishment was served. Therefore, Master-Halco’s hen was at ah times subject to the IRS hen.
The IRS’s hen continues until the liability for the amount assessed is satisfied or becomes unenforceable by reason of lapse of time. 26 U.S.C. Sec. 6322. A hen continues to attach to a taxpayer’s property regardless of any subsequent transfer of that property. U.S. v. Donahue Industries, Inc., 905 F.2d 1325 (9th Cir.1990). The IRS may cohect the tax by administrative levy or court proceeding. United States v. National Bank of Commerce, 472 U.S. 713, 105 S.Ct. 2919, 86 L.Ed.2d 565 (1985). Any person in possession of the property subject to a levy must surrender the stated property upon demand, “except such part of the property ... as is, at the time of such demand, subject to an attachment or execution under any judicial process.” Sec. 6332(a).
Further, if a levy is ineffective for any reason, the IRS may seek judicial assistance, such as reducing the tax assessment to judgment and foreclosing its hen on specific property. United States v. National Bank of Commerce, Supra. If a creditor initiates legal action against certain property and fails to name the United States as a party to the action, the IRS may intervene in order to assert the federal tax hen. James K. Wilk-ens and Thomas A. Matthews, A Survey of Federal Tax Collection Procedure: Rights and Remedies of Taxpayers and Internal Revenue Service, 3 Alaska L.Rev. 269 (1986). If the United States has a properly perfected hen and is not joined as a party, the action and any adjudication will not affect the hen. Id. See also Orland and Tegland, Washing*503ton Practice, Trial Practice § 541, at 276 (4th Ed.1986).
Accordingly, the Court concludes that the Merrill receivable and the proceeds from it were at all times subject to the lien of the IRS.
The Court also concludes that the IRS had a lien on the Merrill receivable due the debtors, which attached to the funds when Merrill received the funds, or when they became available from Merrill; that the lien is prior to that of Master-Halco; and therefore the motion for reconsideration should be granted.
The Court further concludes that inasmuch as the IRS has a prior hen on all of the funds, no portion of them can be properly used to defray’s Merrill’s costs incurred in initiating this interpleader action. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492161/ | MEMORANDUM OPINION AND ORDER
ROLAND J. BRUMBAUGH, Bankruptcy Judge.
THIS MATTER came on for trial on September 19, 1995, on the Plaintiff’s Complaint pursuant to 11 U.S.C. § 362(h).
Facts
On September 16, 1994, the Plaintiff purchased a 1985 Toyota Célica automobile from the Defendant for $4,167.86 (including tax). The ear had 121209 miles on it and Plaintiff, through cash and trade-in paid $2,259.50 down, and financed the balance of $1,908.36 with the Defendant. Plaintiff was to make 19 biweekly payments of $100.44 each. Plaintiff admits that she defaulted in the payments, and on March 28, 1995, Defendant repossessed the car. Plaintiff testified that *504she then called A1 Huerta (the principal of Defendant) who told her that if she brought in $800 cash she could have the car back. Plaintiff, on that same date, went to the Defendant and tendered $300.00 cash, but at that time Mr. Huerta refused the tender and demanded the full amount due under the note plus the repossession charges (approximately $1,499.00). He told her she had ten days to come up with the money. At that point, Plaintiff retrieved her personal belongings and license plates from the car and left the Defendant’s premises.
On April 5, 1995, the Plaintiff filed her Chapter IS bankruptcy petition. Shortly thereafter, on approximately April 7, 1995, Plaintiffs counsel notified the Defendant of the bankruptcy and demanded return of the vehicle. When that was unsuccessful, the Plaintiff filed the instant adversary complaint and a Motion for Temporary Restraining Order on April 11, 1995. The Court granted that Motion on April 12, 1995, and set a hearing for a hearing on a preliminary injunction for April 18, 1995. Mr. Huerta appeared at that hearing and declared that he had already re-sold the car prior to the bankruptcy filing. Nevertheless, the Court ordered that the temporary restraining order was converted to a preliminary injunction and ordered that the Defendant file an answer by April 28, 1995. That injunction provided as follows:
... that until further Order of this Court, the Defendant and each of them and all agents, servants, employees and attorneys of the Defendant, and all persons acting under the control and direction of the Defendant are enjoined from selling or otherwise disposing of the Plaintiffs property, a 1985 Toyota Célica.
A pro se “Answer” was filed on April 28, 1995. On May 2, 1995, the Court sua sponte ordered that the document filed did not suffice as an Answer and ordered that the Defendant was in default. On May 5, 1995, through counsel, Defendant filed a Motion to set aside the default and an Answer. On May 8, 1995, the Court set aside the default.
The evidence showed that on April 1,1995, the Defendant sold the subject vehicle to third parties for $2,777.50. That sale was accomplished by way of a purchase contract. The testimony of Mr. Huerta was that, as per his usual custom, he issued a temporary license certificate to the new buyers, and that the paperwork concerning the transfer of title was prepared later. He further stated that somewhere between 30 and 45 days after the sale, the paperwork was submitted by the Defendant to the Colorado Department of Revenue for the issuance of a new title in the name of the new buyers. That new title was issued May 16, 1995.
Opinion
The initial issue presented is whether, under these facts, the Plaintiff/Debtor had any interest in the vehicle on April 5, 1995, upon which the automatic stay provided for by 11 U.S.C. § 362 could operate. Prior to that date the car was titled in her name, although that title was subject to the Defendant’s lien. Plaintiff argues that because “title” had not been transferred to the new buyers by the time she filed bankruptcy, then she still retained at least bare title on April 5,1995, and that, therefore, § 362 was operative to stay any further action on the part of Defendant to “conclude” the sale to the new buyers. Plaintiff cites the ease of Guy Martin Buick, Inc. v. The Colorado Springs National Bank, 184 Colo. 166, 519 P.2d 354 (1974), for the proposition that “... no purchaser shall acquire any right, title, or interest in and to a motor vehicle purchased by him unless and until he obtains from the transferor the certificate of title thereto_” C.R.S. 42-6-109. In that case the Court determined that there was indeed a transfer of title from the seller to the buyer via the bank as agent for the buyer. However, notwithstanding that language in the statute, the Colorado Courts have also held that non-delivery of the certificate of title does not prevent change of ownership as between the parties to the transaction. United Fire and Casualty Co. v. Perez, 161 Colo. 31, 419 P.2d 663 (1966); and Waggoner v. Wilson, 31 Colo.App. 518, 507 P.2d 482 (1972).
The Plaintiff also argues that because Defendant did not comply with the notice requirements of C.R.S. § 4-9-504, somehow Plaintiff’s rights in the vehicle were not af*505fected. However, C.R.S. § 4-9-504(4) provides as follows:
When collateral is disposed of by a secured party after default, the disposition transfers to a purchaser for value all of the debtor’s rights therein, discharges the security interest under which it is made and any security interest or hen subordinate thereto. The purchaser takes free of all such rights and interests even though the secured party fails to comply with the requirements of part 5 of this article or of any judicial proceedings ... [Emphasis added].
Thus, as between the Defendant here and the new buyers, the new buyers took all of the Plaintiffs rights in the car even if the Defendant faded to comply with C.R.S. § 4-9-504.
Since the new buyers obtained all the previous rights of the Plaintiff in the vehicle on April 1, 1995, there was no property subject to the automatic stay provided for in 11 U.S.C. § 362, and therefore, there could be no violation of the automatic stay.
This does not mean that Plaintiff is totally without remedy if Defendant did not comply with state law regarding the repossession and sale of the vehicle, e.g., failing to issue proper notice of the sale or failing to account for any surplus proceeds of the re-sale, etc. However, those remedies are not being sought herein. It is, therefore,
ORDERED that judgment of dismissal shall enter in favor of the Defendant and against the Plaintiff, each party to bear its own costs. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492162/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW
GEORGE L. PROCTOR, Bankruptcy Judge.
This proceeding came before the Court upon a Complaint to Recover Monies Owed Estate. The plaintiff suggests the estate is owed rent by the defendant pursuant to a verbal lease agreement between the debtor and the defendant. Upon the evidence presented at trial on April 18, 1995, the Court enters the following findings of fact and conclusions of law:
FINDINGS OF FACT
1. In 1993, defendant provided legal representation for the debtor in a state court action in Marion County, Florida. The defendant subsequently represented the debtor in two other state court proceedings.
2. Debtor verbally agreed to compensate defendant by allowing defendant to occupy non-homestead residential real property owned by the debtor located at 1514 Southeast 11th Avenue, Ocala, Florida (the property).
3. Defendant occupied the property from August 1993, through July 1994.
4. Debtor filed for relief under Chapter 7 of the Bankruptcy Code on December 20, 1993, and plaintiff was appointed as trustee.
5. By letters dated February 28, 1994, April 6, 1994, and June 13, 1994, plaintiff informed the defendant that any rent due should be paid to the plaintiff and requested that defendant provide information regarding the amount of rent paid and any remaining balance.
6. On January 5, 1995, plaintiff filed this adversary proceeding pursuant to 11 U.S.C. § 541 to collect rent owed to the estate by defendant. The complaint alleges that the fair monthly rental value of the property is $500 and that defendant owes the estate $3,000 for the six-month duration of his tenancy.
7. As an affirmative defense, the defendant asserts that through his legal services, he prepaid the debtor for the entire occupancy period prior to the debtor’s bankruptcy filing and owes no rent to the estate. The defendant also asserts that he spent in excess of $3,000 for repairs to the property and should be entitled to offset that amount against the value of any rental payments due.
CONCLUSIONS OF LAW
The filing of debtor’s petition for relief under Chapter 7 created a bankruptcy estate comprised of all his legal and equitable interests in property. 11 U.S.C. § 541. See also In re Mackey, 158 B.R. 509 (Bankr.M.D.Fla. 1993), and In re Brown, 165 B.R. 512 (Bankr.M.D.Fla.1994). The bankruptcy estate also includes any rent receivables relating to property of the estate. 11 U.S.C. § 541(a)(6). As trustee, the plaintiff has a duty to preserve the property of the estate and to collect any monies owed to it. The non-homestead residential real property owned by the debtor is property of the estate. Thus, it is undisputed that if the defendant owed rent to the debtor, those proceeds would also be property of the estate pursuant to 11 U.S.C. § 541(a)(6).
At trial, the Court heard conflicting evidence regarding the rental value of the property. The Court finds that the fair rental value of the property is $500 per month and agrees with plaintiff that the total rental value of the property for the duration of defendant’s tenancy is $3,000.
*525The Court, however, must examine defendant’s claimed entitlement to a setoff and must determine what amount, if any, the defendant may offset against the rent receivables. This Court has held that “[s]et off is a permissive doctrine that is within the equitable power of the Court to grant or deny,” and “is based on fairness.” In re Apex International Management Services, Inc., 155 B.R. 591, 596 (Bankr.M.D.Fla.1993).
In Bankruptcy cases, setoffs are governed by 11 U.S.C. § 553, which states:
(a) Except as otherwise provided in this section and in sections 362 and 363 of this title, this title does not affect any right of a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case under this title against a claim of such creditor against the debtor that arose before the commencement of the case....
11 U.S.C. § 553(a).
In their application of § 553 to requests for setoffs, Bankruptcy courts have held that under § 553, “[t]he only requirements are that the debts and claims be mutual and pre-petition.” Braniff Airways, Inc. v. Exxon Company, U.S.A, 814 F.2d 1030, 1035 (5th Cir.1987). See also In re Selma Apparel Corp., 155 B.R. 241 (Bankr.S.D.Ala.1992). The burden of proving these elements “rests on the party articulating a right to setoff.” Matter of Aquasport, Inc., 155 B.R. 245, 248 (S.D.Fla.1992). The party requesting setoff is not required to file a proof of claim. In re Selma Apparel Corp., 155 B.R. 241, 244 (Bankr.S.D.Ala.1992).
Case law has established guidelines for determining the mutuality of debts and claims and for determining whether they were incurred prior to the filing of the bankruptcy case. Courts have held that mutuality exists “where both obligations are held by the same parties, in the same capacity.” Id. However, it is unnecessary for debts to “arise from the same transaction to be mutual.” Id.
In determining whether the debts and claims arose pre-petition, the key test is whether “all the transactions which gave rise to [the mutual obligations] occurred prior to the petition date.” Braniff Airways, Inc. v. Exxon Company, U.S.A., 814 F.2d 1030, 1036 (5th Cir.1987) (quoting In re Delta Energy Resources, Inc., 67 B.R. 8, 12 (Bankr.W.D.La.1986)).
A. Defendant entitled to offset value of legal services
Defendant and debtor agreed that defendant would occupy debtor’s non-homestead real property in exchange for prior legal services rendered to debtor. Thus, the debtor owed the defendant for the costs of his representation and the defendant “owed” the debtor the fair rental value of the property for the duration of his tenancy. The Court finds these debts to be mutual.
The Court must next determine whether the debts were pre-petition obligations. The Court finds that mutual debts do not “have to be calculated prior to the filing of the bankruptcy petition in order for setoff to be available....” Braniff Airways v. Exxon Company, U.S.A., 814 F.2d 1030, 1036 (5th Cir.1987). In this case, the Court heard conflicting testimony regarding whether the defendant’s legal representation of debtor concluded prior to the debtor’s bankruptcy filing. The Court also heard conflicting testimony regarding the reasonable value of those services. Having reviewed the evidence, the Court finds the value of defendant’s pre-petition legal services to debtor to be $1,500. Debtor and defendant agreed that any rent payments from defendant to debtor would be waived to the extent of the value of defendant’s legal services to debtor. This agreement occurred prior to the debt- or’s bankruptcy filing. Thus, defendant is entitled to offset $1,500 against the fair rental value of the property for the 6 month duration of his tenancy ($3,000).
B. Defendant is not entitled to offset value of repairs to property
At trial, the defendant testified that he made numerous repairs to the property, including the replacement of a hot water heater, the installation of a pool pump, and the eradication of a rat infestation. Defendant, however, failed to produce evidence of *526the value of these repairs. The Court finds that defendant’s evidence is insufficient to provide an amount for setoff.
Additionally, the Court notes that “[a]s a general rule, neither a creditor nor a debtor may offset pre-petition debts and claims against post-petition debts and claims_” In re Virginia Block Co., 16 B.R. 771, 775 (Bankr.W.D.Va.1982). The Court finds that the value of defendant’s repairs to the property are post-petition claims and may not be offset against the value of the rental payments accrued during defendant’s occupancy of the property.
C. Conclusion
The defendant is entitled to setoff if the debts and claims existing between the defendant the debtor are mutual and pre-petition. The debtor and defendant agreed that defendant would occupy debtor’s non-homestead real property in exchange for defendant’s prior legal representation of debtor. This agreement created mutual obligations prior to the debtor’s bankruptcy filing. The Court finds that the fair rental value of the property for the period of defendant’s occupancy is $3,000. The defendant is entitled to offset $1,500 for legal services rendered to debtor prior to debtor’s petition for relief. The defendant is not entitled to offset the alleged value of his repairs to the property because those repairs represent post-petitions claims. Thus, the Court will enter a judgment in favor of the plaintiff for $1,500.
JUDGMENT
This proceeding came before the Court upon a Complaint to Recover Monies Owed Estate. Upon findings of fact and conclusions of law separately entered, it is
ORDERED:
1. Judgment is entered in favor of the plaintiff, Gregory K. Crews, Trustee, and against the defendant, Ronald Ira Cole.
2. Plaintiff shall recover $1,500 from defendant for which let execution issue. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492163/ | MEMORANDUM DECISION GRANTING MOTION TO LIFT THE AUTOMATIC STAY
ADLAI S. HARDIN, Jr., Bankruptcy Judge.
Secured creditor Nicholas Grammatikakis a/k/a Nicholas Grammas (“Grammas”) moves for an order pursuant to 11 U.S.C. § 362(d)(1) and (2) lifting the automatic stay in order to permit Grammas to conduct a sale of a parcel of real property belonging to the Debtor in accordance with a judgment of foreclosure. The petition under Chapter 11 in this case was filed on December 22, 1994.1 To resolve issues of fact in this motion relating to the value of the property and the prospects for a plan of reorganization, an evidentiary hearing (the “Hearing”) was held on July 27 and August 1.
The Debtor is a New York corporation primarily engaged in the business of owning investment real estate in the State of New York. At the time of the filing the Debtor owned six pieces of real estate but one has been sold. One of these parcels located at 560 Davenport Avenue, New Rochelle, New York (the “Property”) is the subject of the instant motion. The Property is approximately six acres, roughly 280 feet wide and 940 feet deep, situated between two beach clubs, and the eastern end is beachfi’ont bordering the Long Island Sound. The Property is improved by a three-story Tudor residence of over 5,500 square feet and a carriage house garage and apartment.
The Property was acquired by the Debtor in 1979. The mortgage and notes for which the Property is collateral were executed in May 1989 in the original principal amount of $1,500,000. The mortgagee, First Nationwide Bank, obtained a judgment of fore*599closure dated November 10, 1994 in the amount of $2,269,709.75, -with interest thereon from August 31, 1994 at the rate of $301.25 per day. A foreclosure sale was scheduled for December 22, 1994 but was stayed by the filing on that date of the petition in this ease. The notes, mortgage and foreclosure judgment were purchased in April 1995 for $1,200,000 by Grammas, who owns one of the beach clubs which is contiguous to the Property.
It is impossible to derive adequate financial information concerning the Debtor from the Debtor’s schedules and operating reports filed in this case. The schedules and the operating reports were filed in June 1995, evidently in order to stave off the U.S. Trustee’s motion to dismiss or convert. The property disclosed in the Debtor’s schedule of assets consists of the Property and four other parcels of real estate, and no other material assets. No values are given for the Property or any of the other parcels of real estate. The operating reports covering the period January 1 through May 31, 1995 (no subsequent operating report has been filed to date) are patently deficient. The reports evidence deposits in the Debtor’s bank account totalling $8,047.40 and aggregate disbursements of $5,895, without indicating the source of the deposits. No other information has been filed by the Debtor concerning its financial affairs, except in response to the instant motion. No plan of reorganization or disclosure statement has been filed.
Limited additional financial information concerning the Debtor was provided at the hearing on July 27 and August 1 by the Debtor’s President and sole shareholder, Aaron Hochman (“Hochman”), and by appraisals and expert witnesses. No appraisals were presented for the Debtor’s real estate other than the Property. Hochman testified that all parcels of real estate owned by the Debtor, other than the Property, are encumbered by the mortgage lien of a $5 million indebtedness owing to Citibank. It appears that the Citibank obligation is personal to Hochman (Tr. 84-85), and the debt is also secured by other real estate owned or controlled personally by Hochman. Hochman responded to a question from the Court by stating that the value of all of the real estate securing the $5 million Citibank debt is perhaps $8 or $9 million, but he was not certain of this (Tr. 111-112). On cross-examination, Hochman testified that, with one exception, none of the parcels of real estate owned by the Debtor has generated any rental or other income of any sort. The exception is a small apartment building, part occupied, with present rental income less than expenses (Tr. 99). For the past three to five years, Hochman testified, the Debtor has made little or no payments of principal or interest with respect to its real estate mortgaged to Citibank, and Citibank has paid all insurance costs and real estate taxes on the Debtor’s real estate other than the Property.
The Property itself is a single-family residence which at all times has been and still is occupied by Hochman personally, without payment of rent.
A number appraisals of the Property and one “study” of the prospective value of the Property were presented at the hearing. Grammas presented an appraisal of the Albert & Sterling Appraisal Company Inc. by the testimony of Eugene Albert which placed the current market value at $2,300,000. On rebuttal Grammas presented an appraisal of Landmark Appraisal Group (prepared last year for Hochman and the Debtor) by the testimony of Roger Smith which placed the market value of the Property at $2 million as of September 28, 1994. The Debtor offered in evidence an appraisal prepared for it by the Gabriele Appraisal Company through the testimony of Mauro Gabriele which opined that the market value of the Property as of July 6,1995 was $1,400,000. The Debtor also offered in evidence an appraisal as of November 19, 1993 by Houlihan & O’Malley Appraisal Co., Inc. prepared for the then mortgagee, First National Bank, by Joseph Houli-han which estimated the market value of the Property at $1,150,000. As further evidence of current market value, counsel noted the fact that First Nationwide Bank sold the loan, mortgage and foreclosure judgment to Grammas in March 1995 for $1,200,000.
Although no plan of reorganization has been presented, the Debtor through argument of counsel and the testimony of Hoch-*600man asserts that a feasible plan may be presented within a reasonable time frame based upon development of the Property by subdivision and sale of lots either improved or unimproved.2 In support, the Debtor offered a document called “Appraisal Report” of the Gabriele Appraisal Company, which was characterized by Mauro Gabriele in his testimony as being not an appraisal so much as a “study” or “analysis” based upon certain assumptions stated in the Report. At some risk of oversimplification, Mr. Gabriele presented his opinion that the “market value of the Potential Gross-Sell Out” of the Property is $2,550,000 based upon a number of assumptions, including (i) razing of the existing residence and outbuildings, (ii) obtaining all necessary governmental approvals, (iii) subdividing the Property into eight lots and (iv) installing access roads and sewage disposal facilities for each lot. Asserting that the six-acre Property might theoretically be subdivided into as many as seventeen lots, Mr. Gabriele selected eight lots as the conservative optimum number of lots considering the long and narrow configuration of the Property, the necessity for reasonable setbacks from the road at one end and the beach at the other, and the fact that the Property is bifurcated by a brackish water pond or inlet which is not susceptible of development.
In response, Grammas’ real estate appraiser, Eugene Albert, presented a discounted cash flow analysis of an eight lot subdivision, utilizing the Gabriele per-lot market values for the eight lots totalling $2,550,000, assuming two years for government approvals and a third year for sell-out, taking into consideration taxes, estimated costs, discount to present value at 10%, and a 15% “developer’s profit” ($382,500), all of which showed a present “indicated property value” of $1,166,774.
Hochman testified that he believed it might be possible to subdivide the Property into more than eight lots, although he offered no particulars as to how this might be done in the face of the constraints described above and the testimony and opinion of his own expert.
Hochman testified that his estimate of the total cost of subdividing the Property (including razing the existing buildings, government approvals, access roads and sewer facilities) is approximately $800,000 (although he provided no written analysis and no breakdown or calculation of this figure or any of its components) (Tr. 108-109). Hochman testified, however, that it would be his intention not merely to subdivide the Property but to build houses on the lots (Tr. 72-73,105-106). Hochman testified, based upon certain studies he said he had made,3 that he believed a 3,000 square foot house could be constructed on each of the eight lots projected by Ga-briele at a cost of $80 per square foot, or $240,000 per house, and that the lots as so improved could be sold at an average price of $500,000 to $600,000 each (Tr. 72-73, 106-111). The Court notes that, assuming sale of all of the lots at $600,000, this would produce gross sales revenue for all eight lots of $4,800,000. Assuming a $1,920,000 total cost of budding the eight houses (based on Hoch-man’s estimate of $240,000 per house) and Hochman’s estimate of $800,000 costs to subdivide the Property to the point of access roads and sewer facilities, the net revenue under Hochman’s concept would be $2,080,-000 ($4,800,000, less $1,920,000, less $800,-000). The current indebtedness owing to Grammas is $2,343,000 (Tr. 111).
One additional factual predicate is necessary for decision on this motion. The Debtor acknowledges, indeed avers, that the lien of the Grammas mortgage and the foreclosure *601judgment far exceed the present value of the Property, and that all of the Debtor’s assets combined produce nil or de minimis income. The Debtor and Hochman concede that the only source of funding for a plan of reorganization is Hochman himself. While Hochman did not submit a personal financial statement, he offered testimony and a prospectus of NACOLAH Holding Corporation (“NACO-LAH”) (a privately-held insurance holding company, the stock of which is not publicly traded) to support a valuation of his stock interest in NACOLAH at some $30 million, assuming the company can be sold at a given price. Hochman also testified that he has current and prospective income of $1,500,000 to $2,000,000 annually from dividends on his NACOLAH stock and from other sources (Tr. 74). Hochman testified and represented through counsel that he is ready, willing and able to fund all of the Debtor’s costs for real estate taxes and insurance for the Property, as well as “adequate protection” payments to Grammas at the annual rate of 9% of Gram-mas’ $1,200,000 cost of acquiring the mortgage. There is no evidence of record as to how long Hochman is willing to continue this funding. Hochman’s testimony as to his willingness to fund the costs of development of the Property will be examined below.
This motion is based on both subdivisions (1) and (2) of 11 U.S.C. § 362(d). With respect to subdivision (1) (lack of adequate protection), Grammas asserts that his and his predecessor-mortgagee’s position has already been and continues to be eroded at the rate of $301.25 per day.4 The Debtor responds, with respect to subdivision (1), by asserting that Grammas is not entitled to an allowance of interest under section 506(b) and by pointing to Hochman’s undertaking to pay the insurance, the taxes and such additional adequate protection as the Court might deem appropriate within reason. Based upon the appraisals offered in evidence and the testimony of the experts, I have no difficulty in finding as a fact that the value of the Property at the time of commencement of this case was substantially less than the indebtedness secured by the lien on the Property or by the judgment of foreclosure, for purposes of section 506(b). However, I decline to rule upon the question of adequate protection under subdivision (1) because it is my conclusion that the Debtor has not sustained its burden under subdivision (B) of subsection (2) of section 362(d).
Turning to section 362(d)(2), the Debtor acknowledges and I find as a fact that the Debtor does not have equity in the Property under subsection (A). The issue, then, is whether the Property is “necessary to an effective reorganization” under subdivision (B). That issue turns on whether there is a realistic likelihood of a plan of reorganization within a reasonable period of time. The leading case on the point is the decision of the Supreme Court in United Savings v. Timbers of Inwood Forest, 484 U.S. 365, 375, 108 S.Ct. 626, 633, 98 L.Ed.2d 740, 751 (1988), where the Supreme Court articulated the test under subsection (B) of section 362(b)(2) that: “there must be ‘a reasonable possibility of a successful reorganization within a reasonable time.’ ” The Court said in Timbers:
What this requires is not merely a showing that if there is conceivably to be an effective reorganization, this property will be needed for it; but that the property is essential for an effective reorganization that is in prospect.
Id. (emphasis in original). See also, In re Ritz-Carlton of D.C., Inc., 98 B.R. 170, 172 (S.D.N.Y.1989); In re Kent Terminal Corp., 166 B.R. 555, 562 (Bankr.S.D.N.Y.1994) (“Under the standards outlined in Timbers and its progeny, [Debtor] must show that the Property is essential to an effective reorganization that is not only feasible but in prospect.”); In re de Kleinman, 156 B.R. 131, 137 (Bankr.S.D.N.Y.1993); In re 499 W. Warren Street Associates, 151 B.R. 307, 310 (Bankr.N.D.N.Y.1992); In the Matter of Whitemont Associates Ltd. Partnership, 125 B.R. 354, 357, 359 (Bankr.D.Conn.1991); In the Matter of Highpoint Design Associates Ltd. Partnership, 128 B.R. 505, 508 (Bankr. *602D.Conn.1991); In re Diplomat Electronics Corp., 82 B.R. 688, 692 (Bankr.S.D.N.Y.1988); In re Riviera Inn of Wallingford, Inc., 7 B.R. 725 (Bankr.D.Conn.1980) (“likelihood of a successful reorganization on the horizon”).5
The burden is on the Debtor to establish that there is a reasonable likelihood of a plan within a reasonable period of time. In re New Era Company, 125 B.R. 725, 730 (S.D.N.Y.1991); In re Kent Terminal Corp., supra, 166 B.R. at 560; In re de Kleinman, supra, 156 B.R. at 137; In re 499 W. Warren Street Associates, supra, 151 B.R. at 310; In re White Plains Development Corp., 140 B.R. 948, 950 (Bankr.S.D.N.Y.1992) (“the debtor must show that the properties are necessary for an effective reorganization, as set forth in 11 U.S.C. § 362(d)(2)(B).”). In this case, the focus of inquiry is on Hochman, since Hoch-man is the only source of funding for a plan for this Debtor. Hochman’s testimony, considered in light of the figures relating to projected costs and values, provides no support for a conclusion or finding that there is a reasonable prospect of a plan of reorganization in this case — indeed, it supports the opposite conclusion.
Hochman’s testimony concerning his purported “analysis” upon which his financial estimates and projections for development of the Property were supposedly based, did nothing to support the credibility of those estimates and projections. See footnote 3, above, and Hochman’s testimony at Tr. 108-109 concerning his alleged calculation of the $800,000 projected costs of subdividing the Property. The likelihood of building eight 3,000 square foot houses in New Rochelle in the late 1990s for an average cost of $240,000 appears fanciful at best. But even accepting Hochman’s estimates and projections, including his maximum estimate of $600,000 as the average selling price for the eight lots, Hoch-man’s own testimony as to the circumstances under which he will be willing to fund development of the Property is fatal to the Debt- or’s position on this motion. When asked by his counsel why he would be willing to incur the costs of developing the Property, Hoch-man responded “I would hope to make a profit on the transaction” (Tr. 71). Having testified on direct examination that he would offer “a meaningful plan of reorganization” upon approval of a subdivision, when asked what he meant by “meaningful”, Hochman testified: “[a plan] that will reflect the interest of the various parties and offer me an opportunity to make a profit” (Tr. 83). On redirect examination, Hochman explained the kind of profit which would induce him to expend his own money on the Debtor’s Property. He testified:
I thought renting the properties would not produce much income and it would take a long time to do. I thought getting a plan of development where I could actually do something with the properties and make maybe a million or two million dollars was where I should spend my time rather than trying to rent buildings that needed some renovation in order to be attractive to be rented. I just didn’t think that was where I should be spending my efforts.... As a businessman, my mission is to try to find something like to make a lot of money; not just cover the costs. (Tr. 112-113)
In short, not surprisingly Hoehman’s motivation in expending several million dollars of his own money in the risky business of developing the Property of the Debtor is “to make a lot of money”, which he quantified as “maybe a million or two million dollars”. However, according to Hochman’s most optimistic projections offered at the trial the Debtor’s net revenues from sales of the eight lots (without any provision for capital gains taxes) would be $2,080,000. The indebtedness owing to secured creditor Grammas as of the date of trial was approximately $2,343,000, some $263,000 in excess of the net pre-tax proceeds. Thus, the Debtor’s own evidence proffered at trial refutes the likelihood of any feasible plan of reorganization *603■within any reasonable time period. Hoch-man’s conclusory and unsubstantiated expressions of optimism and intention to proceed with development are belied by his own evidence and do not provide grounds for denying the secured creditor’s motion to lift the stay. See, In re New Era Company, supra, 125 B.R. at 730 (“pipe dreams” not enough to withstand a section 362(d)(2)(B) motion); In re Diplomat Electronics Corp., 82 B.R. 688, 693 (Bankr.S.D.N.Y.1988) (“the court should not be left to speculate about important elements and key issues relating to the likelihood of an effective reorganization. ... The debtors’ hopes and aspirations for reorganization, although well-intended, have not been supplemented by any showing that a reorganization is possible, let alone reasonably likely within a reasonable period of time”); In re Kent Terminal Corp., supra, 166 B.R. 555, 562 (Bankr.S.D.N.Y.1994) citing Barclays Bank of New York, N.A. v. Saypol (In re Saypol), 31 B.R. 796, 803 (Bankr.S.D.N.Y.1983) (“It goes without saying that an effective reorganization cannot be based solely on speculation”).
To summarize my findings based on the testimony and other evidence of record on this motion, I conclude as follows:
(1) The lien of the mortgage and of the foreclosure judgment substantially exceeds the value of the Property, both now and as of the date of filing, and accordingly the Debtor has no equity in the Property under section 362(d)(2)(A).
(2) The only possible source of funding of a plan of reorganization is the Debtor’s President and sole shareholder, Hochman.
(3) There is no evidence in the record demonstrating that Hochman personally, or others on his behalf, have performed the kind of research, analysis and projections, generally referred to as due diligence, required to make any reliable assessment of the financial feasibility of any plan to develop the Property.
(4) Hochman testified quite clearly that he is not interested in making any substantial investment of his own capital unless there is a reasonable prospect that he will make a profit on that investment. While a person motivated by altruism might invest substantial sums solely to benefit his creditors, I will take Mr. Hochman at his word that he is not so motivated and that he will not expend money to develop the Property absent expectation of profit for himself.
(5)Debtor’s own estimates and projections refute such an expectation. Using the projections of cost and sales revenue offered in evidence by Hochman and by his real estate expert, Gabriele, there appears to be no prospect of realizing net income from any prospective development of the Property which would be sufficient to pay off the mortgage or the foreclosure judgment held by Grammas, let alone produce a profit for the Debtor or Hochman.
Based on the evidence at the Hearing, it is impossible to make findings as to the prospects for a plan of reorganization under section 362(d)(2)(B) required by Timbers of In-wood Forest and other governing authority. Accordingly, the motion to lift the stay must be granted.
Submit order.
. By notice dated May 17, 1995 the United States Trustee moved to dismiss or convert the case to a case under Chapter 7 on a variety of grounds. The motion has been carried on the calendar from month to month pending the outcome of this motion.
. The plan contemplated by the Debtor would initially entail development of the Property, and subsequently development of the other parcels of real estate owned by the Debtor (Tr. 100-101). But no analysis, evaluation, projection or conceptualization of any kind was offered with respect to any of the other real estate.
. When asked by his counsel to describe the financial analysis which he had undertaken to determine the feasibility of developing the Property, Hochman gave the following testimony (in its entirety):
A. Well, I decided to research the standard manuals of the building costs estimations such as Marshall Swift and there was also a service that I took to see what it would cost to build the properties of this nature. I attempted to estimate by talking to people in the field as to what it would cost to do some of the work that you described. And my conclusion was that there was a profit to be made. (Tr. 72)
. Although the estimates of value by the various experts have differed widely, and although Grammas has complained that the Property is not being well maintained, Grammas has not argued that the value of the Property has or is likely to decline materially for either intrinsic or extrinsic reasons. The evidence would not support such an argument.
. The Timbers test does not mean that a motion under section 362(d) for relief from stay should become a confirmation hearing. The question is whether there is a realistic likelihood that the debtor can propose a plan which is not patently unconfirmable, within a reasonable period of time. See, In re Kent Terminal Corp., 166 B.R. at 560; In re 160 Bleecker Street Associates, 156 B.R. 405, 411 (S.D.N.Y.1993); In re White Plains Development Corp., 140 B.R. 948, 950 (Bankr.S.D.N.Y.1992). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492166/ | MEMORANDUM DECISION
JOHN T. FLANNAGAN, Bankruptcy Judge.
The debtors in this case, Kansas Psychiatric Institutes, Inc., Psychiatric Health Centers of Greater Kansas City, Inc., Overland Associates, L.P., and Overland Park Hospital, Inc., filed for protection under Chapter 11 of the Bankruptcy Code on October 27, 1994.1 The Court entered an order for joint administration of the cases on January 5, 1995.
NATURE OF THE CASE
On January 3, 1995, NationsBank, N.A. (“NationsBank”), moved for relief from the automatic stay to proceed in a lawsuit styled NationsBank, N.A v. Psychiatric Health Centers of Greater Kansas City, Inc., Case No. 94-2355-GTV, pending in the United States District Court for the District of Kansas (hereinafter “NationsBank v. PHC”).2
The complaint filed in NationsBank v. PHC seeks a declaration that Letters of Guarantee assigned as security by PHC to NationsBank remain in full force and effect, enforceable against PHC shareholders. The suit also seeks an order compelling PHC to execute all documents necessary to permit NationsBank to draw upon the Letters of Guarantee. The Letters of Guarantee were originally given to Psychiatric Health Centers of Greater Kansas City, Inc. (“PHC”), by PHC shareholders in partial consideration for PHC stock.
In a Pretrial Order prepared in connection with this motion for stay relief, the parties stipulate to the following facts for purposes of the motion only:3
A PHC is the owner and holder of 100% of the issued and outstanding shares of capital stock of Overland Park Hospital, *725Inc. (OPH) and Kansas Psychiatric Institute, Inc. (KPI).
B. OPH, KPI and NationsBank are parties to a certain Revolving Credit Agreement dated October 10, 1989, as amended by a certain First Amendment to Revolving Credit Agreement dated May 31, 1990 and as further amended by a certain Second Amendment to Revolving Credit Agreement dated December 24, 1991 (collectively the “Loan Agreement”).
C. OPH’s and KPI’s payment obligations under the Loan Agreement is evidenced by a Revolving Credit Note dated October 10, 1989 (the “Revolving Credit Note”).
D. Pursuant to the provisions of the Revolving Credit Note, OPH and KPI, jointly and severally, agreed to pay to Na-tionsBank, on demand $1,000,000 or so much thereof as had been advanced to the account of OPH and/or KPI consistent with the terms of the Loan Agreement. As ultimately amended, the Revolving Credit Note, provided that KPI and OPH agreed to pay the amounts advanced under the Loan Agreement up to a ceiling amount of $500,000.00.
E. PHC guaranteed the obligations of KPI and OPH under the Loan Agreement and Revolving Credit Note through a Guaranty Agreement dated October 10, 1989 (the “PHC Guaranty”). A copy of the Guaranty is attached as Exhibit 1 to this Order.
F. Concurrent with the execution of the Loan Agreement and the PHC Guaranty, PHC executed an Assignment of Irrevocable Standby Letters of Guarantee (as from time to time amended the “Assignment”). The Assignment provided that PHC had issued shares of stock to its various stockholders in consideration for which said stockholders paid PHC $1.00 in cash and $4.00 in the form of an irrevocable standby letter of guarantee for each share purchased, (the “Letters of Guarantee”) the Letters of Guarantee were by their terms assignable by PHC to any lender of PHC or of one or more of its affiliates. Pursuant to the Assignment, PHC assigned to NationsBank all of its right, title and interest in and to said Letters of Guarantee. A true and correct copy of the Assignment is attached to this Order as Exhibit 2 and incorporated herein by reference.
G. Pursuant to the Assignment, PHC covenanted and agreed to promptly and upon request execute, acknowledge and deliver to NationsBank any assignment, certificates or other documentation which Na-tionsBank may reasonably require. PHC also agreed not to make any changes or amendments to the Letters of Guarantee or release, reduce, terminate or cancel any of the Letters of Guarantee without the NationsBank’s prior written consent. Subject to the terms and conditions of the Assignment, upon the occurrence of an Event of Default (as defined in the Loan Agreement), NationsBank had the right to make demand upon PHC’s stockholders for the amounts remaining due under the terms of the Letters of Guarantee.
H. Consistent with said Assignment, PHC delivered to NationsBank the original Letters of Guarantee on or about October 10, 1989.
I. By their terms the Letters of Guarantee provided that PHC or its assignees had the right to draw on the Letters of Guarantee the amount provided in the schedules set forth therein. Pursuant to those schedules, unless drawn on following an Event of Default and before February 16,1994, the duty of a stockholder to make payments under the Letters of Guarantee expired.
J. The Letters of Guarantee provided that drawings by any transferee thereunder shall be effected by presentation to the issuer of a Certificate of Draft and a Certificate of Transfer or Assignment of Letter of Guarantee, blank forms of which were attached to each Letter of Guarantee. The Letters of Guarantee were in differing amounts but the form of the Letters of Guarantee is set forth on the Letter of Guarantee attached as Exhibit 3 to this Order.
K. Pursuant to the Assignment, PHC executed and delivered to NationsBank Certificates of Transfer of Assignment for *726each of the Letters of Guarantee (the “Certificates of Transfer”). The form of the Certificates of Transfer of Assignment is set forth on the certificate attached hereto as Exhibit 4 to this order.
L. On or about May 31, 1990, OPH, KPI and NationsBank agreed to amend certain of the provisions of the Loan Agreement, as evidenced by a First Amendment to Revolving Credit Agreement, which provided for, among other things, an increase in the principal amount of the Revolving Loan Committed Amount (as defined therein) from $1,000,000 to $2,250,000.
M. Concurrent with the execution of the First Amendment to Revolving Credit Agreement, OPH, KPI, and NationsBank entered into a First Modification to Revolving Credit Note dated May 31, 1990 (the “First Modification to Revolving Credit Note”) to reflect the increase in the maximum principal amount to be advanced thereunder.
N. On or about December 24, 1991, OPH, KPI and NationsBank entered into a Second Modification to Revolving Credit Agreement (the “Second Amendment to Revolving Credit Agreement”), pursuant to which the parties agreed, among other things, to: (I) decrease the maximum principal amount of the Revolving Loan Committed Amount from $2,250,000 to $500,-000; and (II) permit OPH and KPI to repay a portion of the principal balance then outstanding under the Revolving Credit Note in an amount up to $1,250,000 on a term basis. A copy of the Second Amendment to Revolving Credit Agreement is attached as Exhibit 5 to this Order.
O. Concurrent with the execution of the Second Amendment to Revolving Credit Agreement, OPH, KPI and Nati-onsBank entered into a Second Modification to Revolving Credit Note, dated December 24, 1991 (the “Second Modification to Revolving Credit Note”) to reflect the reduction in the maximum principal amount that may be advanced and remain outstanding thereunder and to eliminate the words “or unless sooner demanded on September 30, 1992” from the Revolving Credit Note. With those modifications, all amounts advanced and outstanding under the Revolving Credit Note became payable strictly on demand. (The Revolving Credit Note, as amended by the First Modification to Revolving Credit Note and as further amended by the Second Modification to Revolving Credit Note is hereinafter referred to as the “Revolving Note”).
P. To evidence the repayment of that portion of the principal amount to be repaid on a term basis, OPH and KPI executed a term note, dated December 24, 1991, in the original principal amount of $1,250,000 (the “Term Note”). A true and correct copy of the Term Note is attached hereto as Exhibit 6 and incorporated by reference herein.
Q. On or about December 24, 1991, PHC executed a consent to the Second Amendment to Revolving Credit Agreement, thereby consenting and agreeing to that Amendment. The consent provided: “PHC acknowledges and agrees that neither execution and delivery of the foregoing Amendment nor any of the terms, provisions and agreements contained in the foregoing Amendment shall in any manner impair, lessen, waive, modify or otherwise affect the indebtedness, liabilities and obligations of PHC to the Lender under and in connection with the Guaranty, the Management Agreement Assignment, the Letters of Guaranty Assignment, the Stock Pledge Agreement or any of the other Financing Documents to which PHC may be a party, except that the definition of ‘Obligations’ secured by all of the foregoing is hereby amended and increased to include the ‘Obligations’ as amended and increased in the First Amendment”.
R. Concurrent with the Second Modification to Revolving Credit Note and the decrease in principal of the Revolving Loan Committed Amount, PHC executed a First Amendment to Assignment of Irrevocable Standby Letters of Guarantee dated December 24, 1991 (the “First Amendment”). The First Amendment altered the ceiling amount of the Letters of Guarantee. The First Amendment is attached hereto as Exhibit 7 to this Order. The First *727Amendment provided: “This Amendment may not be amended, changed, modified, altered or terminated without in each instance the prior written consent of the Lenders and PHC. This Amendment shall be construed in accordance with, and governed by, the laws of the State of Maryland.”
S. The First Amendment reduced the ceiling amount of the Letters of Guarantee to $1,000,000 and provided, among other things, that PHC will execute such confirmatory instruments with respect to the Assignments as NationsBank may require. The First Amendment defined “Assignment” as “that certain assignment of irrevocable letters of guarantee dated October 10, 1989.”
T. On or about February 22, 1993, PHC’s stockholders delivered to PHC various substitute irrevocable standby letters of guarantee, (The “Substitute Letters of Guarantee”) the Substitute Letters of Guarantee provided that PHC or any transferee who was creditor of or who had loaned or advanced funds to PHC or its subsidiaries or affiliates, had the right to draw amounts up to the principal amount stated therein on or before December 31, 1995. The expiration date set forth in the Substitute Letters of Guarantee is December 31, 1995. The Substitute Letters of Guarantee were in differing amounts but the form of the Substitute Letters of Guarantee is shown in the sample Substitute Letter of Guarantee attached hereto as Exhibit 8 to this Order.
U. The Substitute Letters of Guarantee were delivered to NationsBank on or about May 27, 1993, with a cover letter from PHC which stated: “enclosed are the original Substitute Irrevocable Standby Letters of Guarantee executed by each Stockholders of [PHC].” In its letter PHC instructed NationsBank to retain the Substitute Letters of Guarantee and to return the original Letters of Guarantee to PHC.
V. At the same time, PHC did not deliver to NationsBank any Certificates of Transfer with respect to Substitute Letters of Guarantee.
W. There were no new written assignments of Letters of Guarantee executed after December 24, 1991.
X. On or about December 28, 1993, in accordance with and pursuant to the terms of the Revolving Credit Note, NationsBank lent to OPH and KPI the sum of $375,000.
Y. On February 24,1994, NationsBank, through its agent, AMRESCO-Institutional, Inc., notified OPH and KPI that it was demanding payment of all sums due under the Revolving Credit Note within 90 days i.e. May 31, 1994 and terminating its agreement to make any further advances thereunder.
Z. On May 31, 1994, KPI and OPH did not pay to NationsBank the amount demanded.
aa. On June 7, 1994, NationsBank, through its agent, AMRESCO-Institutional, Inc., declared OPH and KPI to be in default of their obligations under the Revolving Credit Agreement and demanded immediate payment of all amounts then due.
bb. Thereafter, on July 8, 1994, Nati-onsBank notified OPH and KPI that it was declaring the Term Note to be in default and demanded immediate payment of all sums due thereunder. KPI and OPH did not pay NationsBank the amount demanded on July 8, 1994.
cc. On or about July 15, 1994, Nations-Bank wrote to each of the stockholders of PHC, stating PHC was in default of its Guaranty Agreement and demanded the stockholders pay the amounts set forth in the Substitute Letters of Guarantee.
dd. In response to NationsBank’s July 15, 1994 letter, PHC asserted that the Substitute Letters of Guarantee were “nullified” as of April 22, 1994 pursuant to a Notice of Nullification and Voiding of Substitute Letters of Guarantee (the “Notice”), which was enclosed with said Letter. A copy of the letter and the Notice of Nullification are attached to this Order as Exhibit 9, and a copy of the Written Consent in Lieu of Special Meeting of the PHC Board of Directors and Shareholders is attached as Exhibit 10 to this Order. PHC also asserted that the Substitute Ir*728revocable Standby Letters of Guarantee could not be honored because the transfer certificates in connection with those letters had not been executed and that the original Letters of Guarantee had expired on February 16, 1994.
ee. On or about August 22, 1994, Nati-onsBank wrote to PHC with a copy to the stockholders asserting that PHC had no authority to cancel the Substitute Irrevocable Standby Letters of Guarantee and that PHC’s purported nullification was of no force and effect, and demanded that PHC execute and deliver to NationsBank the Certificates of Transfer corresponding to the Substitute Letters of Guarantee.
ff. PHC has refused to issue said Transfer Certificates. The stockholders of PHC have not paid to NationsBank any of the amounts set forth in their respective Substitute Letters of Guarantee.
gg. The complaint filed by Nations-Bank in NationsBank v. PHC includes three counts: one seeking a declaratory judgment — namely that the Substitute Letters of Guarantee are valid, enforceable and have been properly assigned to Nati-onsBank; second, seeking specific performance — namely that PHC be directed to execute and deliver, as promised, the Certificates of Transfer and other documents needed by NationsBank to draw upon the Letters of Guarantee; and lastly, seeking injunctive relief for failure to comply.
hh. PHC is the sole defendant in Nati-onsBank v. PHC.
ii. The Substitute Letters of Guarantee by their terms state: Issuer shall have no right to reimbursement from, and no recourse against, Psychiatric Health or its subsidiaries or affiliates or any assignee or transferee of this Substitute Letter of Guarantee for any amounts that are drawn pursuant to this Letter of Guarantee and Issuer hereby waives any and all rights of refund, reimbursement, subrogation, contribution, indemnification or any other right to recover amounts paid hereunder from Psychiatric Health or any other person or entity. In no event shall Issuer have recourse against any assignee or transferee of Beneficiary for any actions of Beneficiary taken pursuant to this Substitute Letter of Guarantee.
The parties further stipulate and agree that the law governing the issue of Nati-onsBank’s right to relief from the automatic stay is found at 11 U.S.C. § 362(d)(1) and the cases decided under that section of the Bankruptcy Code.
DISCUSSION
Debtor contends that under 11 U.S.C. § 362(d)(1), “cause” does not exist to lift the automatic stay and allow NationsBank to move forward with its complaint in district court and that granting the relief requested will adversely affect the bankruptcy estate.
Conversely, NationsBank argues that granting it relief from the stay will not affect the administration or property of the estate since PHC has no right or interest in the Substitute Irrevocable Standby Letters of Guarantee which are at the heart of the controversy pending in the district court.
The automatic stay imposed by § 362(a) is designed to prevent diminution or dissipation of assets of a debtor’s estate, to give the debtor an opportunity to assess its financial condition, and to focus the claims resolution process in the bankruptcy court. Fortier v. Dona Anna Plaza Partners, 747 F.2d 1324, 1330 (10th Cir.1984). However, the stay may be modified “for cause” to allow commencement or resolution of non-bankruptcy actions against the debtor. 11 U.S.C. § 362(d)(1).
Section 362(d)(1) does not define “cause” and courts are required to consider this issue on a case-by-ease basis. In re Kelly, 125 B.R. 301 (Bankr.D.Kan.1991). In determining whether a creditor should be allowed to commence or continue a pending action in another forum, courts consider a variety of factors, including: (1) whether the estate or the debtor will suffer any great prejudice if the suit is allowed to proceed; (2) the impact of continuation of the stay on the movant and on other parties; (3) judicial economy and the need for expeditious and economical determination of the litigation between the parties; (4) whether the action essentially involves third parties; and (5) *729whether the relief will result in partial or complete resolution of the issue. In re Curtis, 40 B.R. 795, 799-801 (Bankr.D.Utah 1984); In re Makarewicz, 121 B.R. 262, 265 (Bankr.S.D.Fla.1990).
The Court finds that each of these factors support NationsBank’s request for stay relief. The stipulated circumstances support NationsBank’s contention that 'without an expeditious determination of the district court action, the creditor may suffer substantial prejudice since by their terms the Substitute Letters of Guarantee expire on December 31, 1995.
It is apparent that although the action is commenced against the debtor, the purpose is to make demand on the shareholder. While the results of the district court action may very well impact on the debtor’s plan, the fact remains that the issue must be decided with dispatch. Delaying the determination might visit upon NationsBank a forfeiture of a valid legal right to drawn upon the Substitute Letters of Guarantee.
The Court grants NationsBank’s motion for relief from the automatic stay in order to proceed to judgment in the pending district court action, NationsBank v. PHC, Case No. 94-2355-GTV.
The foregoing discussion shall constitute findings of fact and conclusions of law under Fed.R.Bankr.P. 7052 and Fed.R.Civ.P. 52(a).
IT IS SO ORDERED.
.Debtors appear by their attorneys, James E. Bird and Christopher C. Wren of the firm of Polsinelli, White, Vardeman & Shalton of Kansas City, Missouri. NationsBank, N.A. appears by its attorneys, Gregory S. Gerstner and Paul G. Schepers of the firm of Seigfreid, Bingham, Levy, Selzer & Gee, P.C., of Kansas City, Missouri. Cynthia Grimes of the firm of Levy and Craig of Overland Park, Kansas, appears for the Unsecured Creditors Committee.
. The Court finds that this 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 (D.Kan.Rule 705).
. The exhibits referenced in the Stipulation are not attached to this order. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492167/ | ORDER GRANTING BENEFICIAL KANSAS, INC.’S MOTION FOR DETERMINATION OF SECURED STATUS1
JOHN T. FLANNAGAN, Bankruptcy Judge.
Before the debtor Joyce Ann Cannon filed this Chapter 7 case on September 12, 1994, creditor Beneficial Kansas, Inc. (“Beneficial”) sued her in state court to collect on a promissory note.2 However, in the state court suit, *730Beneficial failed to demand foreclosure of its U.C.C. security interest in the following property:3 “rifle/gun; grandfather clock; paintings; Hummel collection; 2 diamond 1 ct.; 1 diamond & sapphire; 4 gold bracelets, and weights and rowing machine.”4
When the debtor failed to answer the petition, Beneficial moved for default judgment. Acting on the motion for default judgment, the state court noted in its Trial Docket dated August 17, 1994:5
Pltf. By representative. Def. does not appear. Court grants-the pltf. default judgment per prayer, upon surrender of note. Advised 10 days to appeal.
The question is whether Beneficial has obtained a state court judgment that now prevents it from enforcing its security interest. For the following reasons the Court finds that the state court did not enter a formal judgment that could have affected Beneficial’s security interest.6
A letter dated December 30, 1994, from Anita Scarborough, Leavenworth County District Court Clerk, to Mark Bechtold of Beneficial Kansas, Inc., explains the state judge’s reference to “surrender of note” in his Trial Docket note:7 •
I have been instructed by the Honorable Judge Philip Lacey to notify you of his decision that Notes are negotiable instruments and it is the court’s policy to sign journal entries of judgment only upon surrender of the original Notes. The Court then signs the journal entry' and cancels the original Note as being surrendered for the judgment.
To date, no Journal Entry of Judgment has been entered in the above-mentioned case.
I hope that this is the information you needed as per our telephone conversation.
Debtor claims (1) that a state court judgment exists because the debtor confessed judgment there; (2) that Beneficial is es-topped from denying the existence of the judgment because Beneficial had issued a wage garnishment; and (3) that Beneficial waived its security interest by taking a judgment against the debtor without foreclosing its security interest, However, beyond the debtor’s bald statement in her response that she had confessed judgment, nothing in the record supports a finding that the statement is true. And, while the record does show 'that Beneficial requested a garnishment, nothing in the record shows actual withholding of debtor’s wages under the garnishment.8 Finally, nothing in the record proves that Beneficial surrendered the note to the state court or that the court entered a formal judgment.
The Court agrees with Beneficial that no judgment has been entered in the state court ease. The notation on the trial docket and the letter from the Leavenworth County District Court Clerk make clear that the state *731court would not enter judgment until Beneficial surrendered the note; yet no one contends that Beneficial surrendered the note.
This matter came before the Bankruptcy Court on Beneficial’s motion to determine the secured status of its claim. In addition, Beneficial asked that the debtor be ordered to comply with § 521(2)(A), a Code section requiring the debtor to state whether she will retain, surrender, or redeem the pledged property or reaffirm the debt secured by the property. But for Beneficial’s request, the Court would question the nature of its jurisdiction to decide the validity of the creditor’s security interest in property removed from the estate by exemption. However, since § 521(2)(A) is implicated, the Court finds this proceeding is core under 28 U.S.C. § 157 and within its jurisdiction under 28 U.S.C. § 1334 and the general reference order of the District Court effective July 10, 1984 (D.Kan. Rule 705).
Therefore, the Court directs debtor to comply with § 521(2)(A) within ten days of the date of this order. Beneficial’s security interest remains intact. Debtor’s request for an award of attorney’s fees against Beneficial is denied.
IT IS SO ORDERED.
. Debtor appears by her attorney, Robert Hadley Hall, Leavenworth, Kansas. Beneficial Kansas, Inc. appears by its attorney, Scott McGlasson of the firm of Glenn, Cornish, Hanson & Karns, Topeka, Kansas.
. The pleadings and attached exhibits indicate that Beneficial sued the debtor in the District Court of Leavenworth County, Kansas, on July 27, 1994, using the Small Claims Procedure of the Code of Civil Procedure for Limited Actions, K.S.A. § 61-1601 et seq. The petition demanded judgment for $1,000.
. Beneficial has not favored the Court with a copy of its security agreement, but it indicates the debtor signed the note and security agreement in favor of Beneficial on or about April 12, ' 1994.
. Debtor listed this property in Schedule B— Personal Property — as “Household goods & furnishings In debtor’s possession,” which she valued at $1500. Using the .same value and description, she claimed the property exempt in Schedule C — Property Claimed ás Exempt.
. See Exhibit 2 to Response of Debtor to "Motion For Determination of Secured Status of Beneficial Kansas, Inc. Claim” filed January 31, 1995, ’ for a copy, of the "Tried Docket” in the case of Beneficial Kansas, Inc. v. Joyce Cannon, Case No. 9407SC00145, in the Small Claims Court of Leavenworth County, Kansas.
. The Court does not reach the question of whether a secured creditor who obtains judgment without foreclosing its security interest is prevented by the doctrine of res judicata from asserting a secured claim in the defendant's later bankruptcy. See Hill v. Bank of Colorado, 648 F.2d 1282 (10th Cir.1981); In re Wilson, 390 F.Supp. 1121 (D.Kan.1975); Kearny County Bank v. Nunn, 156 Kan. 563, 134 P.2d 635 (1943).
. Exhibit B to Reply of Beneficial Kansas, Inc. to the Response of Debtor to Motion for Determination of Secured Status of Beneficial Kansas, Inc. Claim filed February 9, 1995.
. Exhibit 3 to debtor’s response is a copy of a Request for Wage Garnishment filed August 29, 1994, by Beneficial in the Leavenworth County action. The garnishment was mistakenly directed to Beneficial as garnishee on August 29, 1994, or perhaps Beneficial was debtor's employer. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492169/ | DECISION AND ORDER MAKING ADDITIONAL FINDINGS, AND AMENDING JUDGMENT
ARTHUR N. VOTOLATO, Bankruptcy Judge.
Heard on May 4, 1995, on the Plaintiffs’1 Motion to Make Findings and/or Amend *777Judgment regarding our Decision and Order dated August 29, 1994. This litigation has been shuttling back and forth in the courts for more than eight years, at least five times before this Court, with two excursions to the District Court, before two different judges. In the circumstances, any recitation of the travel or background would be a little superfluous. See In re Reposa, 94 B.R. 257 (Bankr.D.R.I.1988); In re Reposa, Ch. 7 Case Nos. 85-00579, 86-00060, Adv. No. 87-0021, 1991 WL 519626 (D.R.I. Mar. 11, 1991); Reposa v. North Atlantic Fishing, Inc. (In re Reposa), 155 B.R. 809 (Bankr.D.R.I.1991); North Atlantic Fishing, Inc. v. Geremia, 158 B.R. 607 (D.R.I.1993); Reposa v. North Atlantic Fishing, Inc. (In re Reposa), 171 B.R. 722 (Bankr.D.R.I.1994).
By the instant motion, the Plaintiffs raise three issues:
(1) If interest accrues on the compensatory damage award; (a) when does it start, and (b) at what rate?
(2) Whether the judgment must be amended so that Lee and NAF “do not profit from their fraud,” in light of the prior undisturbed findings of Lee/NAF’s fraudulent conduct and intentional wrongdoing?
(3) Whether the instant award of compensatory and punitive damages should be deducted from Lee and NAF’s proof of claim, and if so, at what point in time, and in what amount?
Upon review of our August 29, 1994 Decision and Order, the written submissions, and the arguments presented at the May 4, 1995 hearing, we agree, as the Plaintiffs now argue, that our prior decision did not adequately or correctly address these issues.2 Accordingly, upon reconsideration, we make the following additional or revised findings of fact, and amend the August 1994 judgment as follows:
I. Interest on the Compensatory Damage Award
In our August 1994 decision, on remand and instructions from Chief Judge Lagueux, we awarded compensatory damages of $59,395, upon which interest accrues pursuant to R.I.Gen.Laws § 9-21-10 (prejudgment interest), and 28 U.S.C. § 1961 (post-judgment interest). Under Rhode Island law, pre-judgment interest on a pecuniary damage award accrues at 12% per annum from the “date the cause of action accrued.” The Plaintiffs’ cause of action accrued at the time the Reposas became aware of the defects in the vessel, and when the fraudulent representations made by Lee to induce the sale were discovered. The first such incident manifested itself on July 1,1984. Therefore, Plaintiffs are entitled to statutory interest of 12% from 7/1/84 to 12/29/88, the date of this Court’s first judgment in this adversary proceeding. Subsequent to December 29, 1988, the federal interest rate applies, calculated according to 28 U.S.C. § 1961. Loft v. Lapidus, 936 F.2d 633 (1st Cir.1991) (“section 1961 relates only to post-judgment interest, specifically providing that ‘[s]uch interest shall be calculated from the date of the entry of judgment ’ State law governs the prejudgment interest rate.”) 936 F.2d at 639 (other citations omitted).
28 U.S.C. § 1961 provides, in relevant part, that
(a) Interest shall be allowed on any money judgment in a civil case recovered in a district court.... Such interest shall be calculated from the date of the entry of judgment, at a rate equal to the coupon issue yield equivalent (as determined by the Secretary of the Treasury) of the average accepted auction price for the last auction of fifty-two week United States Treasury bills settled immediately prior to the date of the judgment.
For the period December 15, 1988 through January 12, 1989, the Treasury bill *778rate was 9.2%. Since our original judgment entered on December 29,1988, the applicable post-judgment interest rate was 9.2%, and should be the figure used to determine interest from December 30, 1988, until the judgment is paid.3
Accordingly, the compensatory judgment interest calculation is as follows:
(1) pre-judgment interest on $59,395 from 7/1/84 to 12/29/88 at 12% amounts to $39,656; and
(2) post-judgment interest on $99,051 from 12/30/88 through 9/20/95, at 9.2% is $65,033, for a total compensatory damage award of $164,084. See Exhibit A.
II. The Punitive Damage Award
In our August 1994 decision on remand, we reviewed at length the intentional and malicious aspects of the conduct of Lee (and NAP), and determined that an award of punitive damages was required to punish and to deter these (and other) Defendants from engaging in similar fraudulent conduct. City of Newport v. Fact Concerts, Inc., 453 U.S. 247, 101 S.Ct. 2748, 69 L.Ed.2d 616 (1981). Plaintiffs agree with our finding of liability, but argue that the amount of punitive damages assessed ($150,000) has no deterrent effect, because in the circumstances of this ease, Lee will end up with a financial profit as a direct result of his fraudulent conduct.
To avoid such an aberration, Plaintiffs argue, the $423,500 note and mortgage held by Lee and NAF must be declared void in its entirety. While this argument has an equitably appealing ring to it, Chief Judge La-gueux, in his May 4, 1993 remand decision, instructed this Court that punitive damages “should not be calculated specifically to prevent the Reposas from losing their homes.” North Atlantic Fishing, 153 B.R. at 614.
With Judge Lagueux’s admonition in mind, we agree, nevertheless, that reconsideration of the punitive damage award is needed, in light of the arguments presented at the recent hearing, including the Plaintiffs’ assertion that we misapplied the law in our August 1994 decision. There, we determined that punitive damages of $150,000 were appropriate, based upon the evidence of the Defendant’s financial condition, and the remand instructions of Judge Lagueux. On review, however, we recognize that our prior decision failed to take into account several important factors.
To begin with, the interest factor on the damage award was not addressed by either the parties, or the Court. In addition, our estimation of Lee’s financial worth was incorrect, in that we failed to consider the value of his ownership, use of, or access to certain assets, and most importantly we failed to take into account the very substantial value of Lee/NAF’s secured proof of claim. Finally, our punitive damage assessment was erroneous as a matter of law, due to the manner in which we applied the burden of proof. In this State, the wrongdoer has the burden of showing that, in light of his finances, a punitive damages award is excessive. See Greater Providence Deposit Corp. v. Jewison, 485 A.2d 1242, 1245 (R.I.1984). Although our August 1994 decision properly characterized the burden of proof, vis-a-vis punitive damages, Lee was not required to, nor did he offer to establish that a higher award would be excessive, in light of his asset and overall financial condition.
Below, we refer specifically to facts that should have been previously considered in establishing the punitive damage award:
*779(1) The actual value of the compensatory damage award is estimated to be $164,084. See ante.
(2) In addition to the $32,5004 received by Lee from the sale of the Pennsylvania property, additional evidence was introduced, but not adequately considered, that: Lee drove a (leased) Mercedes automobile; his children were attending expensive private school and colleges; his wife contributed to the family living expenses; and that when Lee needed money, his wife and mother made it available. We now conclude that, as a matter of law, it was Lee’s burden to show that this access to additional assets should not be considered by the Court in determining punitive damages, and that he has failed to do so at every turn.5
(3) Most importantly, however, our August 1994 decision did not factor in the value of the collateral securing the Lee/NAF proof of claim. At the May 4, 1995 hearing, the parties stipulated as follows: (a) Arthur Reposa’s residence is valued at $83,000, has a $7,000 outstanding tax obligation, with $76,-000 of value remaining as security for the Lee/NAF promissory note; and (b) the value of Peter Reposa’s house was agreed upon as $220,000, with $80,000 in encumbrances, leaving $140,000 of security for the Lee/NAF note. Collectively, this security is an asset worth at least $216,000. In addition, the Chapter 7 Trustee is holding $77,578 from the sale of the vessel, resulting in a grand total of $293,578 as security for Lee/NAF’s $423,500 proof of claim. Because it is un-dersecured, the claim accrues no interest.6 See 11 U.S.C. § 506(b); In re Kalian, 169 B.R. 503, 505 (Bankr.D.R.I.1994).
Thus, the value of the Lee/NAF claim starts at approximately $293,000, and increases, pro rata, to the extent any distribution is made to general unsecured creditors. The $129,922 difference between Lee’s $423,500 claim and his $293,578 security (the so-called anticipated deficiency), falls into the general unsecured creditor class and will share in any distribution to that class.
(4) Lastly, we must reconsider this financial information in conjunction with Lee’s failure to meet his burden to show that any award of punitive damages would be excessive, in the circumstances.7
Based upon the information now available to us, plus the fact that Lee has enjoyed the financial and other advantages of retaining and using his personal wealth, and other assets during the eight years this matter has been pending, we conclude that an increase in the punitive damage award is required.
In light of the revised figures discussed above concerning the value of these various assets and liabilities, and with the applicable burdens of proof now more correctly in focus, we conclude that the punitive damage award should be set at $250,000. With the guidance of the District Court, the present record, and the arguments, we think that this amount, taken together with the compensatory award of $164,084, will produce the required com*780pensation, punishment, and deterrence, as well as preventing this wrongdoer from profiting financially by his fraud.
III. Correlation between Compensatory and Punitive Damage Awards, and Lee’s Proof of Claim
11 U.S.C. § 553 contains the relevant setoff provisions in bankruptcy:
(a) [T]his title does not affect any right of a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case under this title against a claim of such creditor against the debtor that arose before the commencement of the case. 11 U.S.C. § 553(a)(1995).
But in Darr v. Muratore, 8 F.3d 854 (1st Cir.1993), the First Circuit Court of Appeals, in discussing the law of setoff in this jurisdiction, held that:
[Allowing setoff undermines a basic premise of bankruptcy law, equality among creditors, by “permitting] a creditor to obtain full satisfaction of a claim by extinguishing an equal amount of the creditor’s obligation to the debtor ... in effect, the creditor receives a ‘preference’.” ... As a result, setoff in the context of a bankruptcy is not automatic. Under section 553, debts cannot be setoff unless they are mutual. ... Where the liability of the party seeking the setoff arises from breach of a fiduciary duty, mutuality of debts does not exist and therefore no setoff is available.
8 F.3d at 860 (citing In re Bevill, Bresler & Schulman Asset Mgmt. Corp., 896 F.2d 54, 57 (3rd Cir.1990)) (other citations omitted).
More recently, the Ninth Circuit in In re Cascade Roads, Inc., 34 F.3d 756 (9th Cir.1994), stated that the section 553 setoff provisions are permissive, not mandatory, and that “ ‘[e]quity may override a creditor’s satisfaction of technical statutory requirements [of § 553].’ ” 34 F.3d at 765 (quoting Illinois v. Lakeside Community Hospital, Inc. (In re Lakeside Community Hospital, Inc.), 151 B.R. 887, 894 (N.D.Ill.1993)). In addition, the Ninth Circuit has quoted with approval the restriction announced in In re Blanton, 105 B.R. 321, 337 (Bankr.E.D.Va.1989), that “[a] second class of cases ... denies all right of setoff to a creditor either on grounds of public policy or because the creditor committed an inequitable, illegal or fraudulent act.” In re Cascade Roads, 34 F.3d at 765.
Our August 1994 ruling that “[t]his amount [the punitive damage award], as well as the award of compensatory damages in the amount of $59,395, should be deducted from Lee and NAF’s pending proof of claim.” Re-posa 171 B.R. at 728, was incorrect. Based upon 11 U.S.C. § 553, and in light of Mr. Lee’s fraudulent and willful misconduct, we conclude, as a matter of law, that setoff is not available to him in this case. Instead, it is our recommendation that: (1) the Chapter 7 Trustee abandon the collateral securing the Lee/NAF claim, which is of inconsequential value to these estates; (2) that Lee seek payment of his claim through the liquidation of the collateral, and that any deficiency be treated as an unsecured claim; and (3) that Lee pay to the Trustee the full amount of the damages ordered herein ($59,395 principal and $104,689 in interest to date as compensatory, and $250,000 in punitive damages, with all applicable post-judgment interest, for an approximate total, to date, of $414,084). Said funds shall be used to pay administrative expenses, the remaining allowed claims in both cases (including that of Lee/NAF), and any properly claimed exemptions, with the remaining assets, if any, to be refunded to the Debtors.
To facilitate the conclusion of this dispute in accordance with the foregoing rulings, and having in mind the District Court’s directions on remand, the Trustee is granted a lien on all proceeds realized by Herb Lee through the liquidation of the collateral pursuant to Recommendation (2) above, plus a lien on any collateral belonging to Lee which is in the possession of the Trustee. 11 U.S.C. § 105.
Enter Judgment consistent with this opinion.
*781
EXHIBIT A
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Post-Judgment Interest Calculation on $99,051
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. Plaintiffs are the Chapter 7 Trustee, Louis A. Geremia, Esq., and the Debtors in the consolidated bankruptcy cases of Arthur Reposa and Peter Reposa, father and son (hereinafter referred to as "Reposas”).
. The Defendants continue to argue that the imposition of punitive damages is not warranted by the facts of this case, and they do not address the issues raised by the Plaintiffs.
. The fact that on remand the original compensatory damage award was increased to $59,395 does not affect the date on which post-judgment interest commenced. See Cordero v. De Jesus-Mendez, 922 F.2d 11 (1st Cir.1990) ("[W]hen an award is modified on remand, interest should accrue on the modified award from the date of the original judgment to the date of payment.... The reduction of the judgment on remand ‘[did] not prevent interest from attaching upon the reduced amount from the date of the original judgment.'” 922 F.2d at 17-18 (quoting United States v. Michael Schiavone & Sons, Inc., 450 F.2d 875 (1st Cir. 1971))); see also Clifford v. M/V Islander, 882 F.2d 12 (1st Cir.1989).
. The sale produced $65,000 cash for Lee and his wife, or $32,500 each. Our August 1994 decision contained a mathematical error, listing Lee's interest as $23,500.
. Not once, in any written submission or oral argument before this Court, has Lee contended that he is financially unable to respond to a punitive damage award in any of the amounts variously sought or awarded. At most, Lee argues that his assets were diminishing and his net worth had declined in 1987, compared to prior years. We have no information from Lee as to his present net worth, and he has never offered to tell us what it is, or to rebut the Plaintiffs' evidence.
. To the extent our August 29, 1994 decision held that this claim was accruing interest, we reverse ourselves.
. Our August 1994 decision pointed out that, outside of the record in this case showing that Lee and NAF hold a secured claim listed at $423,000, very little was presented at trial by Lee regarding his financial status, see August 29, 1994 decision, at 13-14, and no amount was suggested by Lee as being excessive, in light of the evidence that was proffered by the Plaintiffs in the way of assets. Instead, Lee concentrated exclusively on arguing that no punitive damages should be imposed because of his lack of malice. That argument has been repeatedly rejected. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492170/ | MEMORANDUM-DECISION, FINDINGS OF FACT, CONCLUSIONS OF LAW AND ORDER
STEPHEN D. GERLING, Chief Judge.
This matter comes before the Court on a motion by the Internal Revenue Service (“IRS”) seeking summary judgment in the adversary proceeding commenced by Robert A and Elaine K. Chaffee (“Debtors”). Oral argument was heard at a regular motion term of the Court in Syracuse, New York, on March 7,1995. The parties were afforded an opportunity to file memoranda of law, and the matter was submitted for decision on March 31, 1995.
JURISDICTIONAL STATEMENT
The Court has core jurisdiction over the parties and subject matter of this adversary proceeding pursuant to 28 U.S.C. §§ 1334(b), 157(a), (b)(1), (b)(2)(I) and (0).
FACTS1
Debtors filed a voluntary petition of reorganization (“Petition”) pursuant to Chapter 11 of the Bankruptcy Code (11 U.S.C. §§ 101-1330) (“Code”) on September 6,1991. Debtor Robert Chaffee is the principal owner and President of Sevco Associates, Inc. (“Sevco”), which filed a Chapter 11 petition on July 2, 1991.
According to the Debtors’ Disclosure Statement, filed March 12, 1993, the filing of their Petition was occasioned by the imposition by the IRS of 100% penalties against them for nonpayment of Federal withholding taxes by Sevco. The IRS’ proof of claim filed in Debtors’ case on October 8,1991, lists a claim of $229,467.93, including a secured claim of $214,049.47 and a priority claim of $15,418.46.2
The Debtors’ plan of reorganization (“Plan”), filed on March 12, 1993, listed the IRS’ claim as a priority claim and provided *786that no payment would be made to the IRS by the Debtors as Sevco’s plan proposed to pay 100% of the trust-fund taxes due to the IRS. On July 2, 1993, the IRS filed its objection to the Debtors’ Plan. The IRS asserted that it held both a secured claim and a priority claim and, based on the Debtors’ schedules, its secured claim was actually oversecured, which entitled the IRS to be paid post-petition interest pursuant to Code § 506(b). The IRS also argued that pursuant to Code § 1129(a)(9)(C), the Debtors were required to provide for full payment of the IRS’ priority claim, with interest, within six years of assessment.
On September 27, 1993, the Court signed Orders confirming the Debtors’ Plan, as well as that of Sevco. Incorporated in the Debtors’ Plan was a stipulation (“Stipulation”) between the Debtors and the IRS which provides:
In the event of a default by Sevco Associates, Inc. in payment of trust funds taxes due to the IRS or if the case of Sevco Associates, Inc. is converted or dismissed, the individual debtors Robert A. and Elaine K. Chaffee shall remain personally hable for said trust fund taxes. If it is determined that the claim of I.R.S. is over secured, then the debtors shall pay to the I.R.S. interest on the secured claim of I.R.S. from the date of filing of the debtors’ petition to the date of confirmation of debtors’ plan of reorganization ...
The parties subsequently determined that the claim of the IRS was not overseeured.
On or about February 1, 1994, the IRS sent the Debtors a letter indicating that interest on the trust fund recovery penalties from the date the petition was filed to the date of confirmation in the amount of $39,-034.10 was now due and payable.3 A second letter, dated February 3, 1994, informed the Debtors that an error had been made by the IRS, and that the total amount of interest now due was $42,808.54 as the IRS had failed to account for the fact that Sevco’s petition had been filed approximately two months before that of the Debtors. The letter states,
Interest in the corporate ease [Sevco] will not be paid for the period beginning with the petition date and ending with the confirmation of the Plan. Because of this, the pre-petition interest on the individual claim will not be paid by the corporation, is not discharged, and is now payable unless payment is provided for in the Plan or the Order confirming the Plan.
On October 14, 1994, the Debtors commenced an adversary proceeding against the IRS pursuant to Code § 523, requesting a determination of the interest claimed by the IRS4 and the extent to which the individual Debtors are liable therefor.
ARGUMENTS
The IRS asserts that as neither party disputes the material facts in this matter summary judgment is appropriate. The IRS contends that its motion should be granted and Debtors’ Complaint should be dismissed. The IRS makes the argument that the Stipulation merely addressed whether the IRS would be entitled to be paid interest from the Debtors’ estate pursuant to Code § 506(b) in the event that it was determined that the IRS was oversecured. The IRS asserts that the Stipulation provided that in the event that the IRS was not oversecured, it was not entitled to collect Code § 506(b) interest from the Debtors’ estate for the “gap period” from the date the Debtors filed their Petition to the date of confirmation of their Plan. The IRS contends that the Stipulation makes no mention of the interest accruing on the taxes from the date Sevco filed its Petition to the date of confirmation of its Plan. IRS argues that in agreeing to the Stipulation, it had not waived its right to collect post-petition interest on the non-dischargeable tax liability owed by the individual Debtors outside of their Plan.
*787The Debtors, however, make the argument that the Stipulation was intended to cover any and all interest that the Debtors might owe the IRS based on their personal liability for Seveo’s debt to the IRS and that the IRS has waived any right it might otherwise have had to collect interest from the Debtors for the period from September 6, 1991, through September 27, 1993 (“Debtors’ Gap Period”).
DISCUSSION
In considering a motion for summary judgment pursuant to Rule 7056(c) of the Federal Rules of Bankruptcy Procedure (“Fed.R.Bankr.P.”), the Court’s role is to determine whether there is a genuine issue as to any material fact that would preclude a movant from obtaining a judgment as a matter of law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-248, 106 S.Ct. 2505, 2509-2510, 91 L.Ed.2d 202 (1986); Hudson Hotels Corp. v. Choice Hotels Intern., 995 F.2d 1173, 1175 (2d Cir.1993). In the matter sub judice, both parties have agreed that there is no dispute regarding the material facts. The only issue is whether, the IRS is entitled to collect interest from the date Sevco filed its petition to the date of confirmation of Sevco’s plan, namely July 2,1991 through September 27, 1993 (“Seveo’s Gap Period”), in light of the Stipulation incorporated in the Debtors’ Plan.
Code § 1129(b)(2)(A)(i)(II) sets forth the treatment to be accorded a class of secured claims in order for a plan to be found to be “fair and equitable.” A holder of a secured claim is to receive “deferred cash payments totaling at least the allowed amount of such claim ...” (emphasis added). Normally, interest on tax claims does not accrue as against the estate from the date of the filing of the petition to the date of confirmation of the Chapter 11 plan. Bruning v. U.S., 376 U.S. 358, 363, 84 S.Ct. 906, 909, 11 L.Ed.2d 772 (1964), citing New York v. Saper, 336 U.S. 328, 69 S.Ct. 554, 93 L.Ed. 710 (1949); see also In re Jaylaw Drug, Inc., 621 F.2d 524, 526 (2d Cir.1980). In the case of an oversecured creditor, however, its allowed secured claim is to include post-petition interest pursuant to Code § 506(b). It makes no difference that the creditor is secured by virtue of a non-consensual lien. See U.S. v. Ron Pair Enterprises, Inc., 489 U.S. 235, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989).
In the matter sub judice, the IRS filed a proof of claim for both a secured and a priority claim. The IRS filed an objection to the Debtors’ Plan on the basis inter alia that the Plan did not provide for the payment of post-petition interest to which the IRS contended it was entitled based on the Debtors’ schedules which indicated that the IRS was oversecured. To settle the matter, the parties entered into the Stipulation which was incorporated into the Plan. According to the terms of the Stipulation, once it was determined that the IRS was not oversecured, the IRS’ was not entitled to receive post-petition interest, from the Debtors, on its allowed secured claim.
Debtors contend that by virtue of the Stipulation, the IRS waived any right it might have to collect any nondischargeable interest arising from Sevco’s failure to pay withholding taxes which accrued during the Debtors’ Gap Period. In support of their argument, the Debtors have asked the Court to consider In re Adelstein, 167 B.R. 589 (Bankr.D.Ariz.1994). In Adelstein the debtor and the IRS filed a stipulation for settlement of the claim filed by the IRS. The court’s order stated that the agreement was in “full and final settlement of the Proof of Claim filed by the IRS” in the amount of $41,683.84. The full amount of the claim of the IRS was paid by the Chapter 7 trustee approximately one year after approval of the settlement. The IRS then sought to collect post-petition penalties and interest on the claim. The court concluded that the debtor was no longer hable on the obligation, since payment, which was to have fully settled any claim of the IRS, had been made in accordance with the terms of the stipulation.
The Stipulation presently before this Court does not indicate that it was intended to be in full and final settlement of the Debtors’ liability for any and all interest that the Debtors might owe based on their personal liability for Sevco’s debt to the IRS. The Internal Revenue Code (26 U.S.C. §§ 1-9602) (“IRC”) requires a corporation/employer to withhold social security and federal *788income taxes from the wages of its employees. See IRC §§ 3102(a) and § 3402(a); see also Bradley v. U.S., 936 F.2d 707, 708 (2d Cir.1991). These monies are to be held by the corporation/employer in a special fund in trust for the United States. IRC § 7501(a). The corporation is liable for the withholding taxes on the due date of the tax return without the necessity of assessment or of notice and demand. First Nat’l Bank in Palm Beach v. U.S., 591 F.2d 1143, 1148 (5th Cir.1979). However, there is no liability for interest and penalties for late payment of withholding taxes until there has been notice and demand made on the corporation.5 Id. In the event that the corporation fails to pay the withholding taxes, the Government is authorized to collect 100% of the delinquent taxes from those persons who are responsible for the failure. IRC § 6672(a); see Bradley, supra, 936 F.2d at 708; see also U.S. v. Huckabee Auto Co., 783 F.2d 1546, 1548 (11th Cir.1986) (citation omitted). There is no requirement that there be notice and demand with respect to penalties assessed under IRC § 6672. See U.S. v. McCombs-Ellison, 826 F.Supp. 1479, 1501, n. 29 (W.D.N.Y.1993). Furthermore, the liability imposed by IRC § 6672 is separate and distinct from that imposed on the corporation pursuant to IRC §§ 3102 and 3402. Id.; see also Bradley, supra, 936 F.2d at 710. The IRS is allowed to collect the delinquent taxes only once, whether it be from the corporation or the responsible individuals. Id. at 711; see also Huckabee, supra, 783 F.2d at 1548.
Although the IRS was not required to collect first from Sevco before seeking payment from the Debtors pursuant to 11 U.S.C. § 6672 (see id. at 1549), by the terms of the Stipulation, the IRS agreed to accept payment from Sevco under its plan of reorganization before pursuing the Debtors. At the same time, the Stipulation specified that if it was determined that the IRS’ claim, against the Debtors, was oversecured, then it would be entitled to collect interest for the Debtors’ Gap Period on its allowed secured claim through the Debtors’ Plan. There is nothing in the language of the Stipulation to indicate that the IRS was waiving any right it might have to pursue the Debtors for the non-dischargeable interest outside the Plan in the event that it was not oversecured.
Mere “disallowance of post-petition interest has no effect on the discharge-ability of a claim for, and an individual’s future liability for, such interest.” In re Shelbayah, 165 B.R. 332, 335 (Bankr.N.D.Ga.1994) (citations omitted); see also In re Olsen, 123 B.R. 312, 314 (Bankr.N.D.Ill.1991) (actual allowance of a tax claim as a priority debt and the nondisehargeability of a tax claim are not related). The fact that it was determined that the IRS’ claim was not ov-ersecured and that the IRS was not entitled to an allowed claim which included Code § 506(b) post-petition interest for the Debtors’ Gap Period does not change the fact that the interest remained nondischargeable. Indeed, the amount of the IRS’ allowed claim against the Debtors’ Chapter 11 estate is a distinct matter from the size of its nondis-chargeable claim against the individual Debtors. In re Turgeon, 158 B.R. 328, 331 (Bankr.W.D.N.Y.1993). Code § 523(a) and Code § 1141(d)(2) expressly state that taxes of a kind specified in § 507(a)(7)6, including taxes required to be collected or withheld and for which the debtor is liable in whatever capacity, are nondischargeable only with respect to the individual debtor, not with respect to the corporate debtor. See Matter of E & J Underground, Inc., 98 B.R. 580, 581 (Bankr.M.D.Fla.1989).
“It is well established that a natural person who is a Debtor in Chapter 11 is personally liable for post-petition interest upon non-dischargeable taxes.” Turgeon, supra, 158 B.R. at 330 (citations omitted); see also In re Hubbard, 161 B.R. 173, 176 (Bankr.N.D.Tex.1993), citing In re Cline, 100 *789B.R. 660 (Bankr.W.D.N.Y.1989). The fact that the IRS never filed a proof of claim for the interest does not alter this conclusion. See Code § 523(a)(1)(A); see generally id. In the matter presently before the Court, the individual Debtors remained liable for the taxes, as well as for post-petition interest, despite the fact that the corporate debtor, Seveo, was discharged from any liability for taxes and interest upon confirmation of its plan. The IRS was still entitled to enforce its rights as they would exist outside of bankruptcy against the individual Debtors upon confirmation of their Plan. See In re DePaolo, 45 F.3d 373, 375 (10th Cir.1995), citing In re Amigoni, 109 B.R. 341, 345 (Bankr. N.D.Ill.1989); see also In re Gurwitch, 794 F.2d 584, 585 (11th Cir.1986) (Code § 1141(d)(2) provides that a plan of reorganization does not fix tax liability made nondis-ehargeable under Code § 523.)
Whether Debtors’ liability for interest accruing during Sevco’s Gap Period remains post-confirmation was addressed by the Court of Appeals for the Second Circuit in Bradley v. U.S., supra. In Bradley two “responsible persons” entered into a stipulation with the IRS whereby if the corporate debtor paid the entire trust fund liability plus interest, the IRS agreed to abate the unpaid part of the assessments made against the two individuals. The balance of the trust fund taxes and interest were paid by the corporate debtor, and the IRS then sought payment from the two individuals for the interest which accrued during the corporate bankruptcy. The Court of Appeals affirmed the decision of the District Court for the District of Connecticut which had entered a judgment against the two individuals for the interest which had not been paid by the corporation during the “gap period” prior to confirmation of its plan. Bradley, supra, 936 F.2d at 711.
While the responsible individuals in Bradley had not sought the protection of the Bankruptcy Code as is the case with the Debtors herein, the Court concludes that as the Debtors’ liability for interest, including that accruing during Sevco’s Gap Period, remains nondischargeable, the IRS is entitled to seek payment from the Debtors outside bankruptcy for that interest. As the Supreme Court in Bruning noted, “Congress clearly intended that personal liability for unpaid tax debts survive bankruptcy ... [There is] no reason to believe that Congress had a different intention with regard to personal liability for the interest on such debts.” Bruning, supra, 376 U.S. at 361, 84 S.Ct. at 908. Relying on Bruning, the Court of Appeals for the Second Circuit noted, “If we were to hold that it [IRS] likewise cannot recover from the arranged debtor, the effect would be to eviscerate pro tanto the nondis-chargeability of tax debts in Chapter 11 proceedings ... contrary to the spirit if not the letter of Bruning. ” Jaylaw, supra, 621 F.2d at 528.
Based on the foregoing, it is hereby
ORDERED that the IRS’ motion for summary judgment is granted insofar as it has been determined that any interest accruing on the penalty imposed on the individual Debtors by the IRS pursuant to IRC § 6672, including post-petition interest which accrued during Sevco’s Gap Period, is deemed to be nondischargeable.
. Pursuant to Rule 913.1 of the Local Rules for the Northern District of New York, the IRS annexed a statement of material facts to its motion for summary judgment to which it contends there is no genuine issue. Debtors do not controvert the facts as set forth by the IRS.
. Although not set forth in the IRS’ statement of material facts, the IRS filed an amended proof of claim in November 1991, and a second amended proof of claim on March 27, 1992. The second amended proof of claim lists a claim of $298,-119.02 as of the date of the Petition, including a secured claim of $214,076.47 and a priority claim of $84,042.55.
. The letter did not specify whether the "petition” referenced by the IRS was that of Sevco or the Debtors.
. The Court interprets Debtors’ request as one seeking clarification regarding the period for which the IRS was demanding that interest be paid by them, rather than a determination of the amount of interest, based on the oral argument and the papers submitted to the Court by the parties.
. Debtors have not presented any argument which would lead the Court to conclude that the IRS failed to provide the proper notice and demand on Sevco pre-petition.
. In the Bankruptcy Reform Act of 1994, made applicable to cases filed after October 21, 1994, Code § 507(a)(7) has been renumbered as § 507(a)(8) without change in the language of the section. As the Debtors' case was filed in 1991, the Court will refer to "§ 507(a)(7)” in its discussion. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492171/ | MEMORANDUM AND ORDER ON MOTIONS OF PARTIES FOR SUMMARY JUDGMENT
CHARLES J. MARRO, Bankruptcy Judge (By Recall).
The Motions of the parties for summary judgment are before the Court for determination upon the following
STIPULATIONS OF FACTS:
1. On October 3, 1994, James and Christine Briggs filed a petition for relief under Chapter 7 of Title 11 of the United States Code.
2. Raymond J. Obuchowski was appointed Interim Trustee, thereafter duly qualifying and is presently serving in such capacity.
3. The Debtors, James S. Briggs and Christine K. Briggs are the owners of certain land and premises as conveyed to James S. Briggs and Christine K. Briggs, husband and wife, by Warranty Deed of Francis Falco and Patricia M. Falco, husband and wife by Deed dated June 14, 1988, recorded in Book 62, Page 310 of the Town of Clarendon Land Records.
4. On June 14,1988, James S. Briggs and Christine K. Briggs executed and delivered a Mortgage Deed to Statewide Funding Corporation such deed conveying certain land and premises conveyed to James S. Briggs and Christine K. Briggs, husband and wife, by Deed of Francis Falco and Patricia M. Falco, husband and wife, dated June 14, 1988 to be recorded in the land records of the Town of Clarendon, to secure a principal sum of $77,-070.
5. The Mortgage of James S. Briggs and Christine K. Briggs to Statewide Funding Corporation was recorded on June 17, 1988 and filed for record in Book 62, Page 313 of the Town of Clarendon Land Records.
6. On or about June 20, 1988, Statewide Funding Corporation, a New York Corporation, assigned its interest in the mortgage from Christine K. Briggs and James S. Briggs, dated June 14,1988, which mortgage is recorded with the clerk of Land Records of the Town of Clarendon in Book 62, Page 313 to Associates National Mortgage Corporation of Dallas, Texas, such assignment having been filed for record August 3, 1988 in Book 62, Page 473 of the Town of Clarendon Land Records.
7. On or about July 20, 1988, Associates National Mortgage Corporation assigned and transferred to Foster Mortgage Corporation all beneficial interest under the mortgage dated June 14,1988 executed by Christine K. Briggs and James S. Briggs, as such mortgage was dated on June 17,1988 as recorded in Book 62, Page 313 of the Clarendon Land Records, such mortgage assignment was filed for record on or about August 18, 1989 in Book 65, Page 327 of the Town of Clarendon Land Records.
8. The assignment from Foster Mortgage Corporation was executed in the State of *832Texas. This assignment had no witnesses but was acknowledged.
9. On or about June 1,1991, Foster Mortgage Corporation executed an Assignment of Mortgage assigning and transferring to US Bancorp Mortgage Company all of its rights, title, and interest in and to the Deed of Mortgage to the property described under mortgage dated June 14, 1988 recorded in Book 62, Page 313 of the real property records of the County Clerk or Recorder of Rutland County, Vermont. Such assignment was witnessed by one person and acknowledged but not recorded in the Town of Clarendon Land Records; this assignment was recorded in the Town of Brandon Land Records.
10. On or about December 1, 1993, US Bancorp Mortgage Company executed an Assignment of Mortgage, assigning and transferring to Platte Valley Funding, L.P. all of its rights, title and interest in and to the Deed of Mortgage to the property described under mortgage dated June 14, 1988 and recorded in Book 62, Page 313 of the real property records of the Town of Clarendon Land Records. Such assignment was not witnessed but was acknowledge and recorded in the Town of Clarendon Land Records April 25, 1994 in Book 80, Page 260 of the Town of Clarendon Land Records.
11. On or about August 3, 1994, Associates National Mortgage Corporation executed a corrective assignment to Foster Mortgage Corporation regarding the mortgage instrument of Christine K. Briggs and James S. Briggs dated June 14,1988 filed for record in Book 62, Page 313 of the Town of Clarendon Land Records. Such corrective assignment was attested before two witnesses and acknowledged. Such corrective assignment was never recorded.
12. The underlying obligation was sold by Statewide Funding Corporation to Associates National Mortgage Corporation, by Associates National Corporation to Foster Mortgage Corporation, by Foster Mortgage Corporation to US Bancorp Company, and by US Bancorp Mortgage Company to Platte Valley Fund, L.P.
13.That as of the date of the filing of petition, there was due and payable $74,-158.08, principal, $8,583.03, interest, $616.17, late fees for a total due and owing in the amount of $83,357.28.
Under the foregoing stipulation of facts it is apparent that the mortgage from the debtors to Statewide Funding Corporation was executed and recorded in accordance with Vermont statutory requirements and that payment of the sum of $83,358.28 due and payable has not been made. Nevertheless, the trustee as one who has the status of a bona fide purchaser of real estate pursuant to 11 U.S.C. § 544(a)(3) seeks to avoid the lien of said mortgage on the grounds that some of the assignments of said mortgage made between June of 1988 and December of 1993, including the last one to Platte Valley Funding, L.P., were not in conformance with 27 V.S.A. § 341 and 342 in that they were not properly witnessed, acknowledged or recorded.
The trustee, in support, cites In re Vermont Fiberglass, Inc., 44 B.R. 505 (Bankr. D.Vt.1984) in which this Court held that the assignment of a mortgagee’s interest in real estate not properly acknowledged and recorded, is not effectual against the trustee in bankruptcy with the status of a bona fide purchaser pursuant to 11 U.S.C. § 544(a)(3).
Upon revisiting Vermont Fiberglass, Inc., the Court concludes that the trustee’s reliance on this case is misplaced. When deciding Vermont Fiberglass the Court’s rationale was flawed. It cited Passumpsic Savings Bank v. Buck, 71 Vt. 190, 44 A. 93 (1899); Ladd v. Campbell, 56 Vt. 529, 89 A.L.R. 126 (1884) as construing an assignment of a mortgagee’s interest in real estate as a conveyance within the purview of 27 V.S.A. § 341 requiring two or more witnesses, ac-knowledgement and recording. Such a reading of these cases was erroneous. The actual holding was expressed in Passumpsic Savings Bank at 71 Vt. 192, 44 A. 93 as follows:
The assignee of a mortgage who omits to have the records show the transfer, takes the risk of a wrongful discharge by the mortgagee, and the acquisition of the title by one relying on the discharge and without notice of the assignment. Torrey v. *833Deavitt, 53 Vt. 331 and Ladd v. Campbell, 56 Vt. 529 are eases of this kind. But he takes no risk against such purchaser with notice of the assignment. A record of the assignment is only for notice; and notice is given some other way, it is just as good against the person to whom it is given. The cases last cited show this plainly enough.
From the foregoing the conclusion is inevitable that an assignment is not a conveyance of real estate requiring two witnesses and an acknowledgement under 27 V.S.A. § 342.
Platte Valley Funding, L.P., in its supplemental memorandum of law, has succinctly analyzed the purpose of an assignment and the effect of lack of recordation. As a result, the Court revisited In re Vermont Fiberglass and concluded that its holding was erroneous.
In contrast to Vermont Fiberglass see In re Ivy Properties, Inc., 109 B.R. 10 (Bankr.D.Mass.1989) concluding that the assignment of debt carries with it the underlying mortgage, without necessity for granting or recording of separate mortgage assignments.
The original mortgage having been executed and recorded in accordance with Vermont statutes, the trustee has constructive notice of its existence. Since it remains unpaid, he is bound by the existence of the mortgage lien for the amount due and owing. It is not subject to avoidance.
ORDER
Upon the foregoing, IT IS ORDERED:
1. The motion of Raymond J. Obuchow-ski, Esq., trustee, plaintiff, for summary judgment is denied.
2. The motion of Platte Valley Funding, L.P., defendant, for summary judgment is granted. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492172/ | OPINION
NOVALYN L. WINFIELD, Bankruptcy Judge.
The creditors Philmar Jewelers, Inc., A.S.K. Co., Bijan Fine Jewelry, Fabrikant & Sons, Inc., Blauweiss/Berkowitz, Monaco Imports, Finest Castings, Jeff Greenwald, Inc., Leon Dimston Co. Inc., Abest Import Corp., and Namdar Sons (collectively “the Creditors”) filed a motion pursuant to Federal Rule of Bankruptcy Procedure 4007(e) to extend the time to file a complaint for determination of the nondisehargeability of a debt. Simultaneously, the Creditors also filed a complaint alleging the nondisehargeability of their debts. The Debtor, Garabet Cirkinyan (“Cirkinyan”), opposes the relief sought on the grounds that both the motion and the complaint are untimely. Because the Court finds that both the motion and the complaint were untimely, the motion is denied and the complaint is dismissed.
The Court has jurisdiction over this case pursuant to 28 U.S.C. § 1334 and the Standing Order of Reference by the United States District Court of New Jersey dated July 23, 1984. The matter before the Court is a core proceeding under 28 U.S.C. § 157(b)(2)(A) and (I), as it involves the dischargeability of the debtor’s obligations. The following constitutes this Court’s findings of fact and conclusions of law in accordance with Bankruptcy Rule 7052.
BACKGROUND
At the time that Cirkinyan sought relief under Chapter 7 of the Bankruptcy Code he was engaged in business as a diamond setter. The Creditors furnished Cirkinyan with diamonds and gold to mount in jewelry items and/or to sell on a consignment basis. The Creditors assert that the gold and diamonds provided to Cirkinyan had an aggregate value of approximately $141,264.00. The Creditors allege that Cirkinyan pawned the diamonds and gold, and that the resultant debts which he owes to them should be declared nondischargeable pursuant to 11 U.S.C. § 523(a)(2), (a)(4), and (a)(6). The objecting creditors comprise over sixty percent of the debts owed by Cirkinyan.
Cirkinyan filed his Chapter 7 ease on January 26, 1995. Cirkinyan listed the Creditors on Schedule F of his bankruptcy petition. Further, it appears from the certification of mailing in the court file that the Creditors received the Notice of Commencement of No Asset Case (“Notice”) at their addresses as listed on the petition. The Notice identified May 2, 1995 as the deadline to file a complaint objecting to the discharge-ability of debts. None of the Creditors have claimed that they did not receive the Notice. Nor have any of the Creditors claimed they were unaware of the deadline in the Notice. Further, actual receipt of the Notice by the Creditors can be inferred from Cirkinyan’s *880unrebutted statement that representatives of the Creditors appeared at the 341(a) hearing on March 3, 1995 and questioned him.
Apparently, at some time just prior to the expiration of the deadline for filing a nondis-chargeability complaint the Creditors retained Philip R. Kaufman, Esq. (“Kaufman”), to file such a complaint. At the hearing on the motion to extend time, Kaufman indicated that he was formally retained on May 1, 1995.
Kaufman states that he prepared the complaint and that he intended to file it on the deadline date of May 2, 1995, on his return from an appearance in state court. Kaufman anticipated that the state court matter would take no more than a half day. Unfortunately, the matter went longer than anticipated and Kaufman was unable to file the motion by the time the bankruptcy clerk’s office closed at 4:00 P.M. on May 2, 1995.
Neither the complaint nor the motion to extend time to file the complaint was filed with the court, or served on Cirkinyan on May 2,1995. However, Kaufman prepared a motion to extend the time to file a discharge-ability complaint which he served upon debt- or’s counsel during the evening of May 2, 1995 by means of facsimile transmission. On May 3, 1995 both the complaint and the motion papers were filed with the bankruptcy clerk’s office.
DISCUSSION
The issue before the Court is whether a motion to extend the deadline to file a nondischargeability complaint is timely made if it is served upon the debtor’s counsel by facsimile transmission prior to expiration of the deadline, but not filed with the court before the deadline has passed. For the reasons set forth at greater length below, this Court holds that a motion to extend time to file a complaint objecting to the discharge-ability of a debt is not timely made unless the motion is filed with the court prior to expiration of the deadline.
As a result of the Court’s ruling, the Creditors face the unfortunate consequence that they are now barred from challenging the dischargeability of the debtor’s obligations to them. Federal Rule of Bankruptcy Procedure (“Bankruptcy Rule”) 4007(c) requires that the motion be made before the lapse of the sixty day deadline. Further, although Bankruptcy Rule 9006(b)(1) authorizes the court, in its discretion, to permit an act to be done where the failure to act was a result of excusable neglect, subparagraph (b)(3) of the rule provides that any enlargement of time for taking action under Bankruptcy Rule 4007(c) is limited to the extent and under the conditions set forth in the Rules. In re Biederman, 165 B.R. 783, 788 (Bankr.D.N.J.1994). See also, In re Forte, 146 B.R. 592, 593-94 (Bankr.D.R.I.1992).
I. Timeliness of Motion to Extend Time
A motion to extend the deadline to object to dischargeability of a debt must conform to the requirements of Bankruptcy Rule 4007(c) which provides as follows:
A complaint to determine the discharge-ability of any debt pursuant to § 523(c) of the Code shall be filed not later than 60 days following the first date set for the meeting of creditors held pursuant to § 341(a). The court shall give all creditors 30 days notice of the time so fixed in the manner provided in Rule 2002. On motion of any party in interest, after hearing on notice, the court may for cause extend the time fixed under this subdivision. The motion shall be made before the time has expired, [emphasis added]
The Creditors claim that their motion for an extension of time to file a nondischargeability complaint against Cirkinyan was timely made within the meaning of Bankruptcy Rule 4007(e). Under their interpretation of Bankruptcy Rule 4007(c), a motion is “made,” by service of the motion upon the debtor prior to the deadline. The Creditors posit that their interpretation of the rule is sensible because the purpose of the rule’s deadline is merely to give a debtor notice of the claim and to give the debtor some certainty regarding what objections have been filed. However, the Creditors do not cite to any authority for the purpose they ascribe to the deadline.
Cirkinyan submits that in order for a motion to extend time to comply with Bankrupt*881cy Rule 4007(c), Creditors must file, not merely serve, their motion prior to the deadline. Therefore, Cirkinyan submits that the Creditor’s motion to extend time was not timely made, and therefore must be dismissed.
Relevant case law indicates that like the litigants, courts differ on whether a motion to extend must be filed rather than merely served prior to the deadline, in order to be made. Essentially, two approaches to the issue have developed.
Those courts which hold that a Rule 4007(c) motion is “made” when served rather than “filed,” cite to Fed.R.Civ.P. 5 for authority. See, In re Friscia, 123 B.R. 9, 10 (Bankr.E.D.N.Y.1991); In re Coggin, 30 F.3d 1443, 1448 (11th Cir.1994). They note the language of Fed.R.Civ.P. 5(d), which requires that, “all papers after the complaint required to be served upon a party shall be filed with the court either before service or within a reasonable time thereafter,” and surmise that if filing is required in order for a motion to be “made,” Fed.R.Civ.P. 5(d) is meaning-. less, inasmuch as it allows for filing after service.
The difficulty with the foregoing analysis is that it does not address the fact that a motion to extend is a contested proceeding and that Bankruptcy Rule 9014 governs service of such a motion. In In re Coggin, 30 F.3d at 1447, the court held that a motion to extend time under Bankruptcy Rule 4004 is a contested matter. The Coggin court reasoned that such a motion is a contested matter since it is opposed by the debtor, yet it is not among the adversary proceedings enumerated in Rule 7001. Id. This reasoning applies with equal force to a motion to extend time made pursuant to Bankruptcy Rule 4007(c).
Bankruptcy Rule 9014 specifies that service must be made in compliance with Bankruptcy Rule 7004, which incorporates Fed. R.Civ.P. 4, rather than Fed.R.Civ.P. 5. Fed. R.Civ.P. 4 pertains to the service of a summons and complaint in order to commence an action, and obviously envisions a filing simultaneous with, or prior to, service since the court may only issue a summons, “[u]pon or after filing the complaint.” Fed.R.Civ.P. 4(b). Furthermore, in direct contrast to the language of Fed.R.Civ.P. 5(d) which indicates the drafters envisioned filing the pleadings after service, Fed.R.Civ.P. 4(m) specifically contemplates that service occurs after filing as it provides a deadline (120 days) that is computed by reference to the filing of the complaint. Therefore, for purposes of determining the timeliness of a motion which is served but not filed prior to the deadline for “making” a motion, there is a dramatic difference between Fed.R.Civ.P. 4 and Fed. R.Civ.P. 5. Further, it is readily apparent that application of Fed.R.Civ.P. 5 does not dispose of the question of timeliness.
Nor is the Court persuaded by cases which have concluded that because the drafters of the rule used the word “filed” when referring to a complaint and the word “made” when referring to a motion for extension of time in Bankruptcy Rule 4004(b) and Bankruptcy Rule 4007(c), they intended that service, not filing, was all that was necessary to comply with the sixty day time limit these rules impose. See, In re Adams, 164 B.R. 58 (N.D.W.Va.1992). In re Friscia, 123 B.R. at 9. These courts reason that if the drafters had meant to say “filed” they would have said “filed.” One could as easily find, however, that if the drafters intended that a motion is made when “served,” they could have said “served.” Moreover, it can be readily argued that the use of the term “made” encompasses oral motions made at hearings as well as written motions filed with the Clerk.
The Court finds most persuasive the view that a Rule 4007(c) motion is valid when filed prior to the deadline rather than when served. Upon examination of Rule 4004(b),1 the Eleventh Circuit, in Coggin, 30 F.3d at 1443, reasoned that if mere service on the debtor and the debtor’s attorney were sufficient, without filing the motion papers prior to the bar date, the court might enter a discharge unaware that a motion for extension of time had been made. Such a practice *882introduces uncertainty and interferes with the prompt administration of bankruptcy cases. See also, Farouki v. Emirates Bank Int’l, Ltd., 14 F.3d 244, 247 (4th Cir.1994) (Rule 4004(b) motion timely where movant filed its motion for enlargement on the last day of the time period). In re Jeffrey, 169 B.R. 25, 27 (Bankr.D.Md.1994) (Rule 4007(c) motion is valid when it is filed); In re Hill, 811 F.2d 484, 486-87 (9th Cir.1987) (Rule prevents delay by requiring a party to file promptly rather than just prior to the final settlement of the bankruptcy case).
A purpose of the admittedly short time periods for objections under both Bankruptcy Rule 4004 and 4007 is to permit the debtor’s fresh start to date. Manifestly, it is equally important that motions for extensions begin at the earliest of time be addressed expeditiously. If service is all that is required, an element of unpredictability creeps into the process and the goal of promptly providing the debtor a fresh start is not met.
Though perhaps not as severely as an objection to discharge, an objection to the dis-chargeability of a debt impairs a debtor’s fresh start, and, therefore, motions to extend the time under either rule should be addressed promptly. This is particularly true where, as here, the objections to discharge-ability encompasses almost sixty percent of the debt the Debtor seeks to discharge.
Moreover, construing the second sentence of Bankruptcy Rule 4007(c) so that a timely made motion is one that is filed prior to the deadline, results in a fixed and uniform time period that compliments the deadline contained in the first sentence of the subsection. Importantly, a review of the antecedent rule indicates that'the rule drafters intended that uniformity, and predictability be among the purposes 4007(c). Pursuant to of Bankruptcy Rule former Bankruptcy Rule 409(a)(2) the cour; had great discretion to set the deadline for filing nondiseharge-ability complaints, which could be as soon as the first date set for the meeting of creditors and as late as ninety days thereafter. 8 Collier on Bankruptcy] ¶ 4007.02 at 4007-4 (15th ed. 1995) (citing) Former Bankruptcy Rule 409(a)(2)). Further, the former rule gave the court far greater flexibility to extend the deadline, while the current rule permits such an extension only on motion of a party in interest before the expiration of the deadline. Id. Thus, it is evident that a purpose of the present rule is to regularize the manner in which the court considers extensions of the time to object to the debt- or’s discharge or dischargeability of a debt. That purpose is facilitated by reading the rule to require that, to be timely, a motion must be filed prior to the deadline.
II. Manner of Service of Motion
Even assuming, arguendo, that service upon the Debtor’s attorney satisfied the time constraints of Rule 4007(c), the manner in which the Creditors effected service, i.e., via facsimile transmission, is impermissible. Contrary to the Creditors’ assertion, facsimile service is not a proper and effective method of service. Rule 7004 sets forth two venues through which service may properly be performed: by first class mail or pursuant to Fed.R.Civ.P. 4(c)(2)(C)(i) & (d) which allows for service in accordance with state law. Currently, New Jersey law does not recognize facsimile transmission as a permissible method of service. The Comment to N.J. Court Rules, 1969 explains that:
As to service by fax, the Civil Practice Committee in its 1992 report, 130 N.J.L.J. Index Page 537, 1 N.J.Lawyer 156 (1992), recommended against adoption of a rule permitting routine service by fax on the ground that the use of fax poses mechanical problems such as the preemption by a serving party of the equipment of the served party. In sum it was believed that this remains the technology of the future whose time has yet not arrived. On the other hand the Committee endorsed consensual use of fax as well as court orders permitting fax service in emergent situations.
R. 1:5-2, e. Thus, even if we assume that the Creditors’ motion was served to the required persons in a timely fashion, the manner of service, i.e., by facsimile transmission, was clearly inadequate pursuant to N.J.Court Rules made applicable by Fed.R.Civ.P. 4.
*883III. Service On Debtor’s Attorney
Lastly, the Creditors argue that they effectuated proper service when they served their contested matter motion on debtor’s attorney, but not on the debtor personally. Creditors invoke the proposition set forth in Munsell v. U.S., 651 F.Supp. 698 (D.Nev.1986), that service on an attorney is valid even when made outside of his office and/or after business hours. Munsell is not relevant precedent in this instance, however, because Munsell involved service governed by Fed.R.Civ.P. 5, not Fed.R.Civ.P. 4. As discussed earlier, service of a contested matter motion must comply with Bankruptcy Rule 7004, which incorporates Fed.R.Civ.P. 4. An examination of the requirements for proper service under Bankruptcy Rule 7004, indicates that service upon a debtor’s attorney, but not the debtor personally, is inadequate.
Specifically, Bankruptcy Rule 7004 incorporates Fed.R.Civ.P. 4(a), (b), (c)(2)(C)(i), (d), (e) and (g)-(j) of the former (pre-amended) Rule 4. Applicable to the instant matter is former section 4(e)(2)(C)(i), which allows for service of a summons in compliance with state law, and 4(d), which describes alternative appropriate service. The subparagraph of 4(d) applicable to the instant matter is Rule 4(d)(1), which allows for service of a summons and complaint upon, “an agent authorized by appointment or by law to receive service of process.” An attorney is not such an agent, unless defendant specifically designates him as such. In re Riverfront Food and Beverage Corp., 29 B.R. 846, 853 (Bankr.E.D.Mo.1983) (“Even under the notice requirements, of the Federal Rules of Civil Procedure, an attorney is generally not an agent authorized to receive service of process, unless he is expressly or impliedly authorized by his client to do so”). There is nothing which indicates that debtor’s attorney was authorized to accept service on behalf of the debtor in this instance, and therefore, Creditor cannot rely on this portion of Fed.R.Civ.P. 4 to validate his method of service.
Similarly, Fed.R.Civ.P. 4(c)(2)(C)(i) does not allow for service solely on debtor’s attorney. This subsection refers to state laws, and authorizes service which complies therewith. New Jersey’s Civil Practice Rules, R. 4:4-3, et seq., which governs the service of a summons, does not authorize service on an attorney, but not on the client as well. Therefore, Creditors otherwise defective service is not saved by Fed.R.Civ.P. 4(c)(2)(C)(i). Consequently, notwithstanding the other defects in the instant motion, it was improperly served upon the debtor, and is untimely for this reason as well as the others discussed supra.
Conclusion
For the foregoing reasons, the Creditors’ motion to extend time to file a dischargeability complaint is hereby denied, and the complaint is dismissed as untimely.
. A Rule 4004(b) motion for extension of time is analogous to a Rule 4007(c) motion. The language of both rules is virtually identical in form. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492173/ | OPINION
STEPHEN RASLAVICH, Bankruptcy Judge.
Introduction.
Charles E. Sigety Va Valley Green Corporate Center (the “Lessor”) has filed a Motion in this “liquidating” Chapter 11 case seeking an Order (1) allowing administrative expense claim; (2) providing that Lessor may recover its claim pursuant to 11 U.S.C. § 506(c); and (3) directing immediate payment of Lessor’s administrative expense pursuant to 11 U.S.C. § 365(d)(3) (the “Motion”). The Motion was initially opposed by the Debtor, Glickman, Berkovitz, Levinson & Weiner, a Professional Corporation (the “Debtor”), by the Official Committee of Unsecured Creditors (the “Committee”), by certain former employees of the Debtor (the “Employee Group”), and by First Valley Bank (the “Bank”). The Objections of the Debtor and the Committee were resolved in a written Stipulation of Settlement dated April 4,1995. The continuing objection of the Employee Group, if any, was effectively overruled through approval of the foregoing Stipulation of Settlement by the Court on April 6, 1995. The essence of the Settlement Stipulation was an agreed *885reduction in the amount of the administrative rent claim sought by the Lessor from $129,-484.09 to $110,000, and an agreement that the claim would be paid on a pro rata basis along with and at the same time as other administrative claims. The foregoing Settlement Stipulation resolved matters 1 and 3 as raised in the Motion. The agreed monetary reduction, however, is effective only as between the Lessor, the Debtor and the Committee. The Lessor continues to press herein matter 2 of its Motion, i.e., its surcharge claim against the Bank, under 11 U.S.C. § 506(c), in the original amount of $129,-484.09.
An evidentiary hearing was held on March 29, 1995, and the Lessor and the Bank have each submitted post-trial Memoranda of Law in support of their respective positions. For the reasons hereinafter discussed, the Lessor’s Motion will be granted in part and denied in part.
Background.
The Debtor is a former public accounting firm. It filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code on October 27, 1994. At the time of the Bankruptcy filing, the Debtor was the Lessee of approximately 23,769 square feet of office space in the Valley Green Corporate Center, Suite 300, 7111 Valley Green Road, Fort Washington, Pennsylvania 19034 (the “Leasehold Premises”), pursuant to a written lease dated October 21, 1988, as amended on or about March 6, 1989, July 18, 1989, November 30, 1989 and June 1, 1994 (the “Lease”). A copy of the Lease, as amended was admitted at the hearing of March 29, 1995, as Lessor’s Exhibit M-4.
At the time of its Bankruptcy filing, the Debtor was in arrears under the Lease in the approximate amount of $148,000. On or about December 22, 1994, the Debtor filed a Motion seeking an Order, pursuant to 11 U.S.C. § 365(d), extending the sixty day deadline for the Debtor to assume or reject the Lease. This Motion was opposed by the Lessor. However, by consent order dated January 26, 1995 (Exhibit M-6), the Debtor and the Lessor settled the dispute and agreed that the Lease would be deemed rejected as of January 30,1995, and the Debtor would surrender possession of the Leasehold premises to the Lessor on that date. The Bank apparently took no position with respect to the Debtor’s § 365(d) Motion or its settlement. It is undisputed that from the Bankruptcy filing date of October 27, 1994, through the rejection date of January 30, 1995, no rent or related charges were paid to the Lessor.
At the time of its bankruptcy filing, the Debtor had already discontinued on-going operations as an accounting firm. Rather, at or by that point in time the various shareholders of the Debtor corporation had resitu-ated themselves in new or different professional firms and were servicing the Debtor’s former clients from those new locations. The principal assets of the Debtor corporation at the time of the bankruptcy filing consisted of 1) office furniture and furnishings, computer equipment and related personalty, all or a large part of which still remained at the leasehold premises, and 2) outstanding accounts receivable.
The Bank is a secured creditor of the Debtor and holds a first lien on the foregoing assets. The gravamen of the Lessor’s motion to recover what amounts to all of the unpaid post-petition rent from the Bank under 11 U.S.C. § 506(c) is that subsequent to the bankruptcy filing date, the Debtor used the Leasehold Premises to store its furniture and equipment, and also allegedly “operated” out of the property in an effort to collect outstanding accounts receivable. The Lessor’s argument in this respect is two fold: first, the Lessor argues that the Bank implicitly consented to paying post-petition, pre-rejection period rent under the Lease by its agreement to a Stipulation and Order Authorizing Debtor’s Interim, use of Cash Collateral (Exhibit M-8), that was approved by the Court on December 15, 1994, and which authorized use of cash collateral for the period December 1, 1994 through December 31, 1994 to pay, inter alia, December rent and utilities in the amount of $3,800. Alternatively, the Lessor reasons that by establishing the amounts which the Bank has received from the liquidation of the furniture and equipment and/or the collection of accounts receivable, during the post-petition, pre-re-*886jection period, the Lessor can satisfy the burden of proof necessary for the assertion of a surcharge against these assets or their proceeds under 11 U.S.C. 506(c).
The Bank, in response, makes basically contra arguments. At the outset, the Bank challenges the Lessor’s standing to assert a motion under 11 U.S.C. § 506(c). To the extent this argument is unavailing, the Bank argues that the Debtor has failed to establish the Bank’s consent to pay post-petition rent, and has failed to meet its burden of satisfying the stringent criteria for a surcharge under 11 U.S.C. § 506(c).
Discussion.
A. Standing
Despite the rather lengthy discussion of the standing issue by the Bank in its post-trial Memorandum of Law, the Court does not perceive the standing question to be a particularly close one. The governing authority in this jurisdiction at the present time is represented by In re McKeesport Steel Castings Co., 799 F.2d 91, 94 (3d Cir.1986). The Bank argues that McKeesport is not controlling, however this argument in the main is merely an attempt to distinguish McKeesport on the basis of the facts presented herein. In this respect, the Bank’s argument is unpersuasive. The holding of McKeesport, meanwhile, is rather clear. It provides that a creditor, as opposed to a Trustee, has standing to file a § 506(c) motion where it can be shown that only the creditor would zealously pursue that action. Leaving aside the Bank’s argument that the specific facts of McKeesport are distinguishable from those herein, even the Bank appears to agree that McKeesport, at a minimum, requires a case by case analysis for the purpose of determining whether sufficient cause exists to allow a particular creditor to pursue a particular § 506(c) claim. In this instance, the Court notes that while both the Committee and the Debtor attended the evi-dentiary hearing held in this matter, each expressly stated on the record that they took no position with respect to the relief requested. Where the Debtor and the Committee decline to even support a creditor’s § 506(c) Motion, one may reasonably conclude that the creditor cannot rely on the Debtor or the Committee to “zealously pursue” that claim. In this respect, in particular, the Court rejects any argument that a specific “demand and refusal” must first be demonstrated before a creditor will be accorded standing to advance its own § 506(c) claim.
The Court accordingly concludes that the Lessor has standing to bring the Motion sub judice. See also, In re Isaac Cohen Clothing Corp., 39 B.R. 199 (Bankr.S.D.N.Y.1984); In re Nutri/System, Inc., 178 B.R. 645, 658 (Bankr.E.D.Pa.1995); In re Nicolet, Inc., 80 B.R. 733, 738-739 (Bankr.E.D.Pa.1987).
B. The Lessor’s 11 U.S.C. § 506(c) Claim
The Lessor seeks to surcharge the Bank in the amount of $129,484.09. This sum is calculated, as set forth in footnote 10 of the Lessor’s post-trial brief, as follows:
10. The $129,484.09 post-petition rent is calculated as follows: $6,090.50 for October (5 days at $1,218.10 per diem); $41,537.24 for November ($37,761.13 monthly rent, including operating expenses, plus $3,776.11 late charge); $41,537.24 for December ($37,761.13 monthly rent, including operating expenses, plus $3,776.11 late charge); $40,319.11 for January (30 days at $1,218.10 per diem, plus $3,776.11 late charge). The per diem rent was calculated by dividing $37,761.13, the monthly rent, including the Debtor’s share of operating expenses, by 31 days for the months of October and January.
There is relatively little room for disagreement over the relevant law on the point in issue as well as the allocation of the burden of proof.
A recovery under § 506(c) of the Bankruptcy Code is predicated on a creditor’s demonstration, by a preponderance of the evidence:
1) That the expenses for which it seeks to surcharge a secured party were reasonable and necessary for disposal of the secured party’s collateral;
2) That the expenses provided a direct benefit to the secured party; and
*8873) That the expenses were incurred for the purpose of preserving or disposing of the secured party’s collateral.
United Jersey Bank v. Miller (In re C.S. Assoc.), 29 F.3d 903, 906 (3d Cir.1994); In re Mechanical Maintenance, Inc., 128 B.R. 382, 389 (E.D.Pa.1991); In re Delta Towers Limited, 112 B.R. 811, 815 (E.D.La.1990), aff'd in part, reversed in part on other grounds, 924 F.2d 74 (5th Cir.1991); In re Birdsboro Casting Corp., 69 B.R. 955, 959 (Bankr.E.D.Pa. 1987).
As a complete and sufficient alternative, a creditor may recover under § 506(c) if it can demonstrate that the secured party consented to the expenses being incurred. In re Trim-X, Inc., 695 F.2d 296, 301 (7th Cir.1982).
In this jurisdiction, the foregoing alternative bases for relief under 11 U.S.C. § 506(c) have come to be referred to as the objective test, which focuses on objective criteria such as the reasonableness of an expense and its benefit to the secured creditor, versus the subjective test, which focuses on consent. In re Orfa Corp. of Philadelphia, 170 B.R. 257, 272-273 (E.D.Pa.1994); In re Nutri/System, Inc., supra.
The merits of the instant motion under the foregoing alternative tests will be considered in inverse order:
C) Subjective Test
Although the Lessor asserts that it has satisfied the subjective test, the Lessor’s evidence on the issue of consent was exceedingly weak. The only manifestation of consent to which the Lessor can point is the Bank’s joinder to the cash collateral stipulation for the month of December, 1994. (Exhibit M-8). This Stipulation, however, authorized only the very modest cash collateral usage of $3,800 for December rent and utilities. At the hearing on March 29, 1995, Bank Officer James Watt confirmed the Bank’s agreement that the $3,800 rent payment could be made from the Bank’s collateral. Numerous courts have found that by consenting to payments under a cash collateral stipulation a secured party demonstrates its consent to a corresponding surcharge under 11 U.S.C. § 506(c). McKeesport, 799 F.2d at 94. In re Phoenix Pipe & Tube, L.P., 1993 WL 303997, at *1 (Bankr.E.D.Pa. 1993); In re Croton River Club, Inc., 162 B.R. 656, 659 (Bankr.S.D.N.Y.1993). It is another matter, however, to argue that a surcharge should be imposed in an amount far greater than the amount specified in a cash stipulation simply because some outlay for the particular expense category was approved. That, nevertheless, is what the Lessor appears to urge herein.
In In re Flagstaff Foodservice Corp., 762 F.2d 10, 12 (2d Cir.1985), the Second Circuit Court of Appeals said “[a] secured creditor’s consent to the payment of designated expenses limited in amount will not be read as a blanket consent to being charged with additional administrative expenses not included in the consent agreement.” This Court agrees and quickly rejects the Lessor’s argument finding no basis upon which to infer the Bank’s consent to a surcharge in the amount of $129,484.09 from the Bank’s agreement to a single $3,800 rent expenditure.
Accordingly, the Court concludes that the Lessor has failed to demonstrate the Bank’s subjective consent to the payment of post-petition rent, other than the amounts specifically authorized in the December cash collateral stipulation, to wit: $3,800.1
D) Objective Test
The Lessor’s evidence relative to the objective test was somewhat more convincing. As already noted, the Debtor had ceased ongoing business operations as of the date of the bankruptcy filing. It is undisputed, meanwhile, that the Debtor’s furniture and equipment, at the time of the bankruptcy filing, was located throughout the two floors of office space it occupied at the Leasehold Premises. An inventory of this furniture and equipment was detailed on Lessor’s Exhibits M-l and M-3. The items listed on Exhibit M-3 remained at the Leasehold Premises until on or about December 21, 1995, at which time they, too, were sold pursuant to *88811 U.S.C. § 363 for the sum of $21,625.25. The items listed on Exhibit M-l remained at the Leasehold Premises until on or about January 23,1995, on which date that property was sold by the Debtor under 11 U.S.C. § 363 for the sum of $28,088. After deduction of the reasonable costs of sale, the Bank received the approximate sum of $37,000 from the liquidation of the foregoing collateral. At the hearing of March 29, 1995, the Lessor presented testimony from an expert in the commercial office furniture moving and storage industry which indicated that the costs to have moved and stored the furniture and equipment in question for the time periods involved would have been $27,276. On the basis of this evidence, the Lessor argues that a surcharge under 11 U.S.C. § 506(c) in the amount of $27,276 would be appropriate.
The Bank’s response to the foregoing was unpersuasive. In eonclusory fashion, the Bank simply asserts that the surcharge of rent in this context is neither reasonable nor necessary and that storage of the furniture and equipment at the Leasehold Premises neither provided the Bank with a direct benefit, nor relieved it of an obligation to pay expenses it would otherwise have been required to bear. The Court disagrees. It is clear that the furniture and equipment required storage somewhere pending its liquidation, and that if the assets had been removed from the Leasehold Premises, the Bank would have had to incur that expense to protect its collateral. The storage, in other words, benefitted the Bank by permitting it to realize $37,000 from this collateral. A surcharge for reasonable storage charges is therefore entirely appropriate. On this score, while it is fair for the Bank to quarrel with the Lessor’s utilization of commercial office space rental rates to measure reasonable storage charges, the Bank cannot at the same time quarrel with an additional surcharge in the amount of the moving costs that would have been occasioned in relocating the furniture and equipment for consolidation in less expensive warehouse space. The evidence was clear and unrebutted that the aggregate moving and warehouse storage costs would, in this instance, have been $27,-276. Accordingly, the Court finds that this amount is properly assessable against the Bank under 11 U.S.C. § 506(c).
The Lessor’s argument with respect to use of the Leasehold Premises for purposes of collecting outstanding accounts receivable was, for purposes of 11 U.S.C. § 506(c), far less convincing. The evidence did establish that, between the date of the commencement of this Chapter 11 case and the date the lease was rejected, the Debtor collected approximately $200,000 of its accounts receivable, which funds were turned over to the Bank. However, it did not follow from the evidence that these collections were attributable in any meaningful way to the Debtor’s post-petition operations at the premises. On the contrary, the evidence tended to establish that the responsibility for the collection of outstanding accounts receivable rested, in the main, with the former professionals of the Debtor who had billing responsibility for the particular outstanding accounts, and that billing and follow-up collection contacts with clients was handled off-site by those professionals. In particular, the Court also notes that no account payments were received directly at the Leasehold Premises. While it is true that the evidence also established that some small amount of data processing occurred at the Leasehold Premises post-petition in connection with the generation of billing and/or work-in-progress reports, this activity appears to have been not much more than incidental to the Debtor’s principal usage of the Property on a post-petition basis, which was for compliance with the Debtor’s administrative duties as a Debtor-in-Possession and, as noted, storage of the Debtor’s furniture and equipment. Clearly, no intention to benefit the Bank in this respect is evident to the Court. On this record, therefore, the Court concludes that the Lessor has failed to meet the elements of its burden of proof as discussed at pages 886-87, supra. The Court, accordingly, rejects the Lessor’s Motion to the extent it seeks to surcharge the Bank against the Debtor’s post-petition accounts receivable collections beyond the $3,800 as to which the Court has already determined the Bank consented.
Conclusion.
In summary, the Court concludes that the Lessor has met its burden of proof with *889respect to a surcharge against the Bank under 11 U.S.C. § 506(c), but only in the separate amounts of $8,800 and $27,276, for an aggregate total of $81,076.
An appropriate Order consistent with the foregoing conclusions will be entered herein.
ORDER
AND NOW, this 12th day of May 1995, upon consideration of the Motion of Charles E. Sigety ⅜⅛ Valley Green Corporate Center (the “Lessor”) for an Order (1) Allowing Administrative Expense Claim; (2) Providing that Lessor may Recover its Administrative Expense Claim Pursuant to 11 U.S.C. § 506(e); and (3) Directing Immediate Payment of Lessor’s Administrative Expense Claim Pursuant to 11 U.S.C. § 365(d)(3), as well as the parties’ legal memoranda, and after a hearing held on March 29, 1995, and consistent with the accompanying Opinion, it is hereby
ORDERED that the Lessor shall be and hereby is allowed an administrative claim pursuant to 11 U.S.C. § 506(c) in the amount of $31,076. It is further ORDERED that First Valley Bank shall remit said amount to the Lessor forthwith.
. In this respect. Exhibit M-8, as noted, authorized the sum of $3,800. The Bank’s post-trial brief states that a follow-up stipulation for the month of January 1995 approved an additional $500 rent expenditure, and, if so, this amount too would be subject to a consensual surcharge. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492174/ | MEMORANDUM
LIMBAUGH, District Judge.
This matter is before the Court on the appeal of appellant The Plan Committee from the final order of the United States Bankruptcy Court for the Eastern District of Missouri holding that a lack of concurrence or power of attorney in the mileage guide was fatal to all of Ware’s tariffs, thus, the Plan Committee could not proceed with a cause of action against defendant Eveready Battery Co. to collect freight undercharges. This Court has appellate jurisdiction of this matter pursuant to 28 U.S.C. § 158(a).
On an appeal, the United States District Court may affirm, modify, or reverse a judgment, order, or decree of á bankruptcy judge, or remand to the bankruptcy court with instructions for further proceedings. This Court may affirm the decision of a bankruptcy court if it is supported by law and the facts contained in the record. Findings of fact shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of a bankruptcy court to judge the credibility of the witnesses. In re Van Horne, 828 F.2d 1285, 1287 (8th Cir.1987); In re Martin, 761 F.2d 472, 474 (8th Cir.1985). Under Bankruptcy Rule 8013, findings of fact are clearly erroneous when they are not supported by substantial evidence, contrary to the clear preponderance of evidence, or based on an erroneous view of the law. In re Cook, 72 B.R. 976 (W.D.Mo.1987). Conclusions of law, however, are subject to de novo review. In re Martin, 761 F.2d at 474. Since the issue on appeal concerns a conclusion of law, the decision of the United States Bankruptcy Court for the Eastern District of Missouri is subject to de novo review by this Court.
It appears from the record before this Court that the underlying facts germane to this appeal are essentially undisputed. On or about May 20, 1991 J.H. Ware Trucking, Inc. filed its Chapter 11 petition in bankruptcy. From the date of filing until April 14, 1992 it operated as a Debtor-in-Possession (DIP). On April 14, 1992 a Second Amended Plan of Liquidation was confirmed by the Bankruptcy Court. The Second Amended Plan of Liquidation established the Plan Committee, which was assigned J.H. Ware’s rights in all causes of action belonging to it.
On or about May 19, 1993 the Plan Committee brought an adversary proceeding for alleged undercharges against appellee/defendant Eveready Battery Co. The Plan Committee sought additional freight charges which it calculated were due under J.H. Ware’s common carriage tariffs for shipments J.H. Ware had moved for Eveready Battery Co. Eveready Battery Co. filed its answer and counterclaim on June 17, 1993. On or about September 14, 1993 Eveready Battery Co. filed a motion for summary judgment contending that it was not liable for the additional freight charges because the underlying tariffs were invalid since J.H. Ware had no power of attorney to show it was authorized to use the Household Goods Carriers’ Bureau (HGCB) Mileage Guide. Extensive responsive pleadings were filed by both parties.
On November 17, 1993 the Bankruptcy Court issued its memorandum opinion holding that the lack of a concurrence or power of attorney in the mileage guide rendered J.H. Ware’s tariffs void as a matter of law. The Bankruptcy Court based its opinion primarily on the Eighth Circuit case of Atlantis Exp. v. Associated Wholesale Grocers, 989 F.2d 281 (8th Cir.1993) which held that carrier tariffs which reference the HGCB Mileage Guide without effective concurrences or powers of attorney are void as a matter of law. However, the Bankruptcy Court did note that Atlantis primarily relied upon the ICC’s similar decision in Jasper Wyman & Son, et al., 8 I.C.C.2d 246 (1992), which was subsequently overruled by the Court of Appeals for the District of Columbia in Overland Express, Inc. v. Interstate Commerce Com*937mission, 996 F.2d 356 (D.C.Cir.1993). Irrespective of the D.C. Circuit’s rejection of Jasper Wyman, the Bankruptcy Court held that in accordance with the Eighth Circuit’s ruling in Atlantis, the undercharge claims were invalid because they were based on tariffs that referenced the HGCB Mileage Guide without effective concurrences or powers of attorney. The Court granted Ever-eady Battery Co.’s motion for summary judgment. Bankruptcy Court Memorandum Opinion, dated November 17, 1993.
The Plan Committee then filed its appeal before this Court. On or about May 19, 1994 this Court entered a stay pending the United States Supreme Court’s decision in Security Services v. K Mart, 996 F.2d 1516 (3rd Cir.1993). In Security Services, a carrier which had filed for Chapter 11 protection sought to recover freight undercharges. The issue before the Supreme Court was whether a motor carrier’s failure to participate in the HGCB Mileage Guide, pursuant to applicable I.C.C. regulations, voids, as a matter of law, the carrier’s mileage-based rate tariffs that incorporate the mileage guide by reference. This Court determined that the Supreme Court’s determinations regarding the issues raised in the Security Services case would be instrumental in resolving the issue(s) raised in the instant case.
At about the same time that this Court entered a stay in this case, the United States Supreme Court rendered its decision in Security Services v. K Mart, — U.S.-, 114 S.Ct. 1702, 128 L.Ed.2d 433 (1994). It held that a bankrupt carrier cannot rely on tariff rates, which it has filed with the I.C.C. but are void for nonparticipation under the I.C.C. regulations, as the basis for recovering undercharges. In reaching this decision, the Supreme Court upheld the lower courts’ rulings and the I.C.C.’s rulings in Atlantis, supra and Jasper Wyman, supra; and rejected the rulings in Overland Express, supra. In fact, Overland Express and a similar case from the Seventh Circuit, Brizendine v. Cotter & Co., 4 F.3d 457 (7th Cir.1993), were both granted certiorari. The Supreme Court vacated both decisions and remanded the cases back to their respective appellate courts for further consideration in light of Security Services, supra. I.C.C. v. Overland Express, — U.S. — , 114 S.Ct. 2095, 128 L.Ed.2d 658 (1994); Cotter & Co. v. Brizen-dine, — U.S. — , 114 S.Ct. 2095, 128 L.Ed.2d 658 (1994).
There is no question that the Bankruptcy Court’s granting of Eveready Battery Co.’s motion for summary judgment was proper in light of Atlantis, supra, Jasper Wyman, supra, and now the recent Supreme Court decision of Security Services v. K Mart, supra. The Planning Committee concedes as much. However, it seeks to remand this case to the Bankruptcy Court in order to determine what rates are applicable and for a trial on the merits as to all non-mileage based undercharge claims. The Plan Committee does not specify as to what other tariffs might be applicable. It appears to base its remand request for further proceedings before the Bankruptcy Court on a statement made by Justice Ginsburg in her dissent in the Secunty Services case.
“Nullification of a rate can be an extremely harsh remedy, fof it ‘renders the tariff void ab initio. As ja result, whatever tariff was in effect prior to the adoption of the rejected rate becomes the applicable tariff for the [relevant] ¡period.’”
Security Services, — U.S. at at 1719 citing I.C.C. -, 114 S.Ct. v. American Trucking, 467 U.S. 354, 358, 104 S.Ct. 2458, 2461, 81 L.Ed.2d 282 (1984). However, the majority opinion expressly rejected Judge Ginsburg’s “retroactive voiding” concept. Id., — U.S. at-, 114 S.Ct. at 1709. Referring to the rule espoused in American Trucking, the Supreme Court stated:
“But the rule is not apposite here, for the void-for-nonparticipation regulation does not apply retroactively. The ICC did not, as in American Tr icking, void a rate for a period during which an effective rate was filed. The ICC’s regulations operate to void tariffs that would otherwise apply to future transactions, by providing that the rate becomes inapplicable when the tariff reference to the Mileage Guide is canceled ... The regulation works like an expiration date on an otherwise valid tariff in *938voiding its future application, in accordance with § 1812.23(a).”
Id., — U.S. at -, 114 S.Ct. at 1709.
Furthermore, Security Services upholds the I.C.C.’s ruling in Jasper Wyman wherein the I.C.C. stated “[i]f a carrier has no lawful rates on file, it has no basis for collecting undercharges based on the filed rate doctrine.” Jasper Wyman, 8 I.C.C. at 268, n. 32.
The Plan Committee has failed to present a sufficient legal basis for its contention that prior effective tariffs should form the basis for pursuing a claim for undercharges. The Court will deny the Plan Committee’s request for a remand in order to review J.H. Ware’s prior effective tariffs as the basis for seeking additional freight charges against Eveready Battery Co.
The Plan Committee also seeks a remand in order to recover additional freight charges it alleges are not mileage-based, and therefore, not within the holding of Security Services.
The Plan Committee admits that in its pleadings before the Bankruptcy Court it sought to recover other freight charges which it contended were not mileage-based. These other charges are flat rate charges, and supplemental charges (i.e. charges for driver-assisted loading and unloading, providing protective services, and too many intermediate stops). It has failed to identify specifically these alleged non-mileage based charges.
The Bankruptcy Court granted summary judgment to Eveready Battery Co. as to all common carriage shipments in dispute. It did so on the basis of the factual record before it, as well as the applicable law. The Plan Committee’s request for a remand as to non-mileage based claims presents a factual question and factual findings of the Bankruptcy Court cannot be set aside unless clearly erroneous. In re Van Horne, supra; In re Martin, supra. The Plan Committee has failed to present sufficient evidence to this Court that there are in fact non-mileage based claims and that the Bankruptcy Court’s findings are “clearly erroneous”. The Plan Committee’s request for a remand for a trial on the merits regarding alleged non-mileage based claims will be denied.
For the foregoing reasons, the Memorandum Opinion and Order of the Bankruptcy Court, dated November 17, 1993 will be affirmed. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492175/ | MEMORANDUM OPINION AND ORDER
ROLAND J. BRUMBAUGH, Bankruptcy Judge.
THIS MATTER comes before the Court upon the Defendants’ Motion to Quash Service and to Dismiss Complaint filed July 24, 1995.
The following facts are not in dispute:
12/11/92 — Bankruptcy petition filed.
3/17/93 — Amended Schedules filed and copy sent to Plaintiff/Trustee.
11/30/94 — Within Complaint filed.
12/12/94 — Last date to file avoidance action under 11 U.S.C. § 546(a).
12/8/94 — Service of Summons & Complaint by mail to Littleton, Colorado, address. 1/18/95 — Motion for Default Judgment filed.
1/20/95 — Default Judgment entered.
Early 6/95 — Plaintiff discovers Defendants not in Littleton, Colorado.
6/19/95 — Plaintiffs counsel reviews court files and finds Kansas address in Amended Schedules.
6/20/95 — Plaintiffs Motion for Issuance of Alias Summons and to Set Aside Default Judgment filed.
6/22/95 — Order granting Plaintiffs Motion entered and Alias Summons issued. 6/30/94 — Alias Summons & Complaint received by Defendants by mail in Kansas.
Further, there is no dispute that the Defendants never resided in Littleton, Colorado, and indeed have resided at their present address in Kansas for the past thirty years.
Fed.R.Civ.P., Rule 4(m) is applicable to this ease by reason of Fed.R.Bank.P., Rule 7004. That rule requires that the ease shall be dismissed without prejudice if service of the summons and complaint is not made upon a defendant within 120 days after the filing of the complaint, unless the plaintiff can show good cause why such service was not made within that period. If good cause can be shown, the time for service can be extended.
As the court stated in In re Furimsky, 40 B.R. 350, 354 (Bankr.D.Ariz.1984):
Both counsel have been diligent in citing cases supporting their positions.... Clearly, whatever I decide can be supported by case law. The trick is to do justice.
Plaintiff points to the fact that if the complaint is dismissed without prejudice, the statute of limitations period will preclude the filing of a new complaint. And, in the Notes of the Advisory Committee on Rules for the 1983 amendments it states:
... Relief may be justified, for example, if the applicable statute of limitations would bar the refiled action, or if the defendant is evading service or conceals a defect in attempted service_
However, the Court is mindful that even in the face of these comments by the Advisory Committee, the Tenth Circuit Court of Appeals has stated that “good cause” does not appear when counsel was inattentive, a process server was unable to find the defendant, and counsel allowed a good portion of the time available under the rule to run before attempting service. Cox v. Sandia Corporation, 941 F.2d 1124 (10th Cir.1991).
Plaintiff cites In re Hollis, 86 B.R. 152 (Bankr.E.D.Ark.1988), for the proposition that good cause exists where a trustee mistakenly believes that a defendant has been served. But in that case, the defendant did appear in the case with preliminary motions and only after those motions failed was the Rule 4 issue raised. Here, there was never an indication that Defendants knew of the pending case.
The Court must look at all the circumstances in the ease. Here, although Plaintiff did not allow a good portion of the time for service to run before attempting service, she did allow all but 12 days of the 2 year statue of limitations to run before filing the Com*15plaint. This in the face of the fact that she had the Amended Schedules 8$ months before filing her Complaint. Those Amended Schedules showed the Defendants as having received payments from the Debtors within the year prior to the bankruptcy; listed the date and amounts of each payment made; identified the Defendants as the parents of the Debtor Michael Wise; and listed the Defendant’s true address. Thus, the Plaintiff knew of the facts forming the basis for her Complaint herein, and knew the address of the Defendants, l&k months prior to effecting service upon the Defendants. Plaintiff argues that she did not use these Amended Schedules as the basis for her Complaint or to initially ascertain the address (Little-ton, Colorado) of the Defendants. Rather she was relying on a letter received from the FDIC, which had apparently done considerable investigation of the Debtor. Nevertheless, the Plaintiff had actual knowledge of the Defendants’ correct address since March 1993.
The Court, when it granted the Motion to Issue Alas Summons was not aware of the fact that the Plaintiff had the correct address of the Defendants in March 1998. Had that fact been brought to the attention of the Court, the Motion would not have been granted ex parte.
Considering all the facts and circumstances of the ease, the Court finds that there has been no just cause shown under the Rule. It is, therefore,
ORDERED that the within Motion to Quash Service and to Dismiss Complaint is granted. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492176/ | MEMORANDUM OPINION
ARTHUR B. BRISKMAN, Bankruptcy Judge.1
This matter came before the Court on the complaint of the plaintiff, Signet Bank/Virginia, to determine the dischargeability of indebtedness owed to it by the defendant, Theodros Gelagay. Appearing before the Court were Scott W. Spradley, attorney for the plaintiff, Signet Bank/Virginia; and Raymond 0. Bodiford, attorney for the debt- or/defendant, Theodros Gelagay. After receiving testimony, exhibits and arguments of counsel, the Court makes the following findings of fact and conclusions of law.
FINDINGS OF FACT
The defendant, Theodros Gelagay (“Gela-gay”), was issued a VISA credit card from the plaintiff, Signet Bank/Virginia (“Signet”), in 1988. Gelagay acquired the VISA card by completing a pre-approved credit card application Signet furnished him. Signet reissued a subsequent card upon the expiration of the initial card. Signet did not perform any type of credit investigation either upon the issuance of the initial credit card or upon the renewal. In 1991 and 1992 the VISA card Gelagay acquired from Signet had a credit limit of $4,500.00.
Gelagay was employed as a taxi driver in Los Angeles, California from 1988 through March 1992. His income from operating the taxi in 1990 was $27,000.00 and $27,000.00 in 1991. Gelagay moved to Orlando, Florida from Los Angeles after March 1992. His income for the first three months in 1992, prior to moving to Orlando, was approximately $7,000.00. Gelagay sold his interest in the taxi business in April 1992 and received $27,000.00. He used a portion of the proceeds to pay creditors. Gelagay was unable to obtain work after moving to Orlando and was unemployed from April 1992 through January 1993.
Prior to and after the move to Orlando Gelagay had fixed monthly expenses of $695.00. He lived with a girlfriend who contributed support. Gelagay had been receiving telephone calls from other credit card issuers regarding delinquent obligations before departing Los Angeles. Gelagay had amassed $171,000.00 in debt with forty-four (44) credit cards when his chapter 7 bankruptcy petition was filed on July 8, 1992.
On March 15,1992, Gelagay’s Signet VISA card had a zero balance. Until that time he had been using the card and paying for his purchases accordingly. On March 16, 1992, while still employed in Los Angeles, Gelagay obtained a $4,500.00 cash advance on the Signet VISA card. The following day Gela-gay obtained two $200.00 cash advances in Las Vegas, Nevada.2 Gelagay obtained an*17other $200.00 cash advance on March 31, 1992. Together with other charges, Gelagay soon had a balance of $5,430.15.
Gelagay used a portion of the $4,500.00 cash advance to satisfy other credit card indebtedness. Gelagay conceded he was ‘robbing Peter to pay Paul.’ After receiving the $4,500.00 cash advance, the three $200.00 cash advances and other charges, Gelagay made no further transactions with the Signet VISA card; nor did he make any further payments. Gelagay owed at least $97,000.00 in other credit card indebtedness at the time of the transactions in question.
At no time during the life of Gelagay’s account with Signet did Signet perform a credit investigation to determine whether Ge-lagay was credit worthy. Signet made no attempt to determine the nature and extent of Gelagay’s financial condition before Gela-gay acquired the cash advances. Moreover, Signet made no unequivocal and unconditional revocation of Gelagay’s credit card privileges prior to his receipt of the cash advances and the incurring of the other charges. Gelagay did not intend to defraud Signet even though he was incurring additional liabilities to reduce existing liabilities.
CONCLUSIONS OF LAW
Signet seeks to except from the debtor’s discharge the indebtedness owed to it by Gelagay because the debt was incurred while Gelagay was ladened with other financial obligations. Relying on this inference, Signet contends Gelagay obtained the cash advances and incurred the charges through “actual fraud” in contravention of 11 U.S.C. § 523(a)(2)(A). Exception to discharge are to be construed strictly to achieve the goal of providing the debtor with the “fresh start Congress intended.3 In re Hunter, 780 F.2d 1577, 1579 (11th Cir.1986) (citing Gleason v. Thaw, 236 U.S. 558, 35 S.Ct. 287, 59 L.Ed. 717 (1915)).
Credit card issuers assume the risk of nonpayment when they issue a credit card and are compensated for this risk. The finance charge, which is typically higher than that charged by other lenders, factors in this risk. This risk, however, does not entitle credit card issuers like Signet to more protection under 11 U.S.C. § 523 than other creditors. In re Ward, 857 F.2d 1082, 1085 (6th Cir.1988) (citing First National Bank of Mobile v. Roddenberry, 701 F.2d 927, 932 (11th Cir.1983)). To hold otherwise would reward creditors for their failure to ade-qtiately investigate their account debtors’ credit worthiness, discourage credit card issuers from adequately monitoring their accounts and permit a given credit card issuer to escape the consequences of its, and possibly others’, negligence.
A credit card issuer assumes the risk of loss by a credit card holder until it is shown the credit card issuer unequivocally and unconditionally revoked the user’s right to possession and use of the card and, further, that the user was aware of the revocation. First National Bank of Mobile v. Roddenberry, 701 F.2d 927, 932 (11th Cir.1983).4 A credit investigation must be conducted at some point before an objecting creditor can establish the element of reliance to preclude the discharge of indebtedness. In re Ward, 857 F.2d 1082, 1085 (6th Cir.1988). Finding it was unreasonable for the credit card company to rely on the debtor’s ‘good faith’ or implied ‘promise of repayment,’ the Sixth *18Circuit cited In re Hunter, 780 F.2d 1577 (11th Cir.1986) for the proposition that ‘“misplaced trust is insufficient for nondis-chargeability.’” In re Ward, 857 F.2d at 1085 (citing In re Hunter, 780 F.2d at 1580).5
A minimal investigation by Signet may have discovered the nature and extent of Gelagay’s liabilities. Signet may have determined that Gelagay’s credit never should have been extended, or warranted reduction or that the cash advances were an improvident extension of credit. However, from the outset of its relationship with Gelagay, Signet failed to take any measure to determine Ge-lagay’s accountability for the credit it was extending. At no time after the expiration of the initial VISA card, the reissuance of the subsequent card or the increasing of Gela-gay’s credit limit did Signet request updated information regarding Gelagay’s financial condition.
Signet seeks to except the indebtedness owed to it by Gelagay complaining the extent of Gelagay’s credit card obligations at the time of the transactions in question warrant the conclusion that due to the size of his credit card indebtedness and the prospects of repayment, Gelagay incurred the charges with an intent to defraud Signet. Excepting the debt from the discharge on the basis of this inference contradicts the strict construction accorded to 11 U.S.C. § 523. Moreover, Signet offered no evidence suggesting Gela-gay incurred the charges with the requisite intent to defraud. Gelagay’s belief that he would continue to be able to repay his indebtedness with the income from operating the taxi, his ‘robbing Peter to pay Paul’ and his loss of income subsequent to his incurring the charges in question demonstrates the lack of intent to defraud Signet that 11 U.S.C. § 523 exacts.
Accordingly, since there was no evidence of a communication of the revocation of Gela-gay’s credit privileges, no evidence that Signet conducted a credit investigation at any time and no evidence establishing an intention by Gelagay to defraud Signet, the indebtedness owed by Gelagay to Signet will be discharged if and when a discharge is granted in this case.
. The Honorable Arthur B. Briskman, United States Bankruptcy Judge for the Southern District of Alabama, sitting by designation pursuant to an order of the Judicial Council of the United States Court of Appeals for the Eleventh Circuit.
. In regards to the $200.00 cash advances, a $15.99 services charge was assessed for each cash advance.
. "[A] central purpose of the [Bankruptcy] Code is to provide a procedure by which certain insolvent debtors can reorder their affairs, make peace with their creditors, enjoy a 'new opportunity in life with a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.'" Grogan v. Garner, 498 U.S. 279, 285, 111 S.Ct. 654, 659, 112 L.Ed.2d 755 (1991) (quoting Local Loan Co. v. Hunt, 292 U.S. 234, 244, 54 S.Ct. 695, 699, 78 L.Ed. 1230 (1934)).
. In Roddenberry, the Eleventh Circuit Court of Appeals was construing section 17(a) of the Bankruptcy Act of 1898, 11 U.S.C. § 35(a)(2), repealed by the Bankruptcy Reform Act of 1978, Pub.L. No. 95-598. Although the Eleventh Circuit Court of Appeals has yet to declare the extent to which Roddenberry, applies under 11 U.S.C. § 523(a)(2)(A), the Court is guided by the Sixth Circuit Court of Appeals' decision in In re Ward, 857 F.2d 1082 (6th Cir.1988). Although factually dissimilar from Roddenberry, the Sixth Circuit followed Roddenberry, and was decided under the Bankruptcy Code, 11 U.S.C. § 101 et seq.
. In In re Hunter, the Eleventh Circuit Court of Appeals held to preclude the dischargeability of indebtedness pursuant to 11 U.S.C. § 523(a)(2)(A), a creditor must prove:
the debtor made a false representation with the purpose and intention of deceiving the creditor; the creditor relied on such representation; his reliance was reasonably founded; and. the creditor sustained a loss as a result of the representation.
In re Hunter, 780 F.2d at 1579 (emphasis added). More importantly, the court concluded “the debt- or must be guilty of positive fraud, or fraud in fact, involving moral turpitude or intentional wrong, and not implied fraud, or fraud in law, which may exist without the imputation of bad faith or immorality.” In re Hunter, 780 F.2d at 1579 (citations omitted) (emphasis added). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492188/ | ORDER GRANTING MOTIONS FOR SUMMARY JUDGMENT
A. JAY CRISTOL, Chief Judge.
THIS CAUSE came on for hearing on September 12, 1995 on the Motions for Summary Judgment on Trustee’s Seventh Objection to Claims (the “Motions”) filed by Sophia Bagdadi de Leon (“Sophia”), Monica Leon Bagdadi (“Monica”), and Roberto Leon Bag-dadi (“Roberto”) (collectively the “Leons”). The Court has considered the Motions, the Memorandum in Opposition filed by Banco Latino International (“BLI”), the Affidavit of Marielena Figarola, and the record in this matter. Thus, the Court determines that:
1. On December 9,1994, the Trustee filed his Seventh Objection to Claims (“Objections”) objecting to the claims of the Leons. BLI and Banco Latino, C.A. (“BLCA”) joined in the Objections. (Hereinafter the Trustee, BLI, and BLCA shall be collectively referred to as the “Objectors”).
2. First, the Objectors assert that the Leons are “insiders” and “cannot be entitled to a distribution on their claims until the Federal Reserve Board either dissolves” certain Cease and Desist orders it issued with respect to “insiders of Banco Latino International or specifically approves a distribution to a particular insider.” The Cease and Desist orders were not attached to the Objections and according to counsel for BLI their terms are confidential 'and cannot be disclosed to the Leons, absent, inter alia, an action against the Federal Reserve Bank.
3.Second, the Objectors objected to the amount of each of the Leons’ claims. Sophia conceded that the amount of her claim as of petition date should be $239,880.80 and Monica conceded that the amount of her claim as of the petition date should be $12,828.30. Roberto continues to dispute the amount of his claim.
4. Lastly, the Objectors objected to Sophia’s claim (but not Monica or Roberto’s) on the grounds that she allegedly received a preferential transfer from BLI.
5. The Motions were filed on January 13, 1995.
6. To date, none of the Objectors has filed a preference or equitable subordination action against the Leons.
7. The Objectors’ argument that the Leons’ claims should be disallowed based upon the terms of orders issued by a regulatory agency that are secret, confidential, and not available for examination offends the Court’s olfactory nerve. The Court determines on this record that the “secret” Cease and Desist Orders referenced in the Objections are insufficient to disallow the Leons’ claims under the Bankruptcy Code.
8. The Court also determines as a matter of law that the mere fact that the Leons may be “insiders” is not a basis to disallow the Leons’ claims under the Bankruptcy Code.
9. Thus, there are no genuine issues of material fact and these contested matters can be decided as a matter of law. Accordingly, it is
ORDERED and ADJUDGED that:
10. The Motions be and the same are hereby granted such that Sophia Bagdadi de Leon shall have an allowed general unsecured claim as of the petition date in the amount of $239,888.80 and Monica Leon Bag-dadi shall have an allowed general unsecured claim as of the petition date in the amount of $12,828.30 (both amounts are subject to further verification by BLI). Since as to Roberto’s claim the sole remaining issue is the amount of such claim as of the petition date, that issue shall be scheduled for hearing.
11. The Objectors (to the extent they are permitted under the terms of the confirmed plan or applicable bankruptcy law) are granted leave to file on or before November 13, 1995, (a) an adversary proceeding against Sophia, Monica, and/or Roberto under Sec*395tion 510(c) of the Bankruptcy Code; (b) an adversary proceeding against Sophia under Section 547 of the Bankruptcy Code; and/or (c) a motion to prevent the distribution to Sophia, Monica, and/or Roberto based upon the terms of the Cease and Desist Order (“Permitted Actions”).
12. In the event a Permitted Action is not timely filed as to Sophia, Monica, and/or Roberto (as the case may be), the Objector(s) shall be forever barred from bringing such Permitted Action. If no Permitted Action is timely filed as to a particular claimant, BLI shall make distribution to such claimant on account of their allowed general unsecured claim in the amount set forth in paragraph 11 (or in the ease of Roberto’s claim in the amount determined by further order of the court) pursuant to the terms of the confirmed Amended and Restated Plan of Liquidation Proposed by the Official Committee of Unsecured Creditors (“Committee”), as modified by the BLCA Agreement, as further modified and amended by agreement of BLCA, the Committee, the Trustee, and BLI as approved by this Court (the “Plan”).
13. In the event a Permitted Action is timely filed as to a particular claimant, BLI shall reserve the amount of such claim pursuant to the plan until further order of the Court.
DONE and ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492189/ | DECISION
WILLIAM C. HILLMAN, Bankruptcy Judge.
Lacy G. Newman (“Newman”) commenced this adversary proceeding to recover from Bank of New England Corporation (“BNEC”) funds held in an escrow account which represent amounts to which he claims he became entitled when BNEC terminated his position for reasons other than cause. He asks that I determine his entitlement to recovery and the validity, extent and priority of his lien upon the escrow funds. See Fed. R.Bankr.P. 7001(2), (9).1
I previously had granted summary judgment for BNEC. On appeal the United States District Court reversed the decision2 as will be discussed below.
*407Upon remand I held a trial and took the matter under advisement.
General Findings of Fact
Prior to his employment with BNEC, Newman had been employed in commercial banking for a number of years and at several different banks. In May of 1990, BNEC orally agreed to hire Newman as a Senior Vice President. During the pre-employment negotiations Newman and BNEC agreed on many conditions of his employment, including an annual salary of $225,000 for a two year period. At the time of the offer, however, the parties had not reached an agreement on the structuring of Newman’s severance benefits.
Newman had two requirements for his severance package. First, because of his experience with a previous employer, Newman wanted his severance package to be secured so that if the BNEC’s subsidiary banks (“the Banks”) were taken by a regulator and put in receivership, he nevertheless would be able to receive his benefits. Second, Newman requested an “evergreen” package which would pay him an amount equal to his annual salary whenever he might be terminated.
On June 7, 1990, Steven E. Wheeler (“Wheeler”), Newman’s boss, sent a memorandum to the Chief Executive Officer of BNEC, Lawrence Fish (“Fish”). Wheeler expressed his concern that the bank regulators would not accept a secured compensation position to be granted to a member of senior management. He proposed an alternative for Newman’s severance package, a “signing bonus”. On June 12, 1990, Wheeler sent another memorandum to Fish indicating that Newman would report to work under the assumption that the bank regulators would approve and adopt either the secured package or the “signing bonus” alternative.
On June 18, 1990, without a written employment agreement, Newman began working for BNEC. Newman anticipated, however, that the manner in which the severance package would be structured would be resolved within a matter of weeks. Over the next several months, Newman and BNEC considered various severance packages, which varied as to amount and term. Newman met exclusively with Wheeler until the beginning of August when he contacted William W. Abendroth (“Abendroth”), senior counsel at BNEC.
On August 22, 1990, after a meeting with Newman, Abendroth discussed the potential structure of the severance package with Mary Scatamacchia (“Scatamacchia”), a BNEC human resources employee. Scata-macchia proposed definitions, changes, and her professional opinion to Abendroth. Abendroth also asked Wheeler for assistance because he had never drafted an employee agreement and was unfamiliar with the applicable banking regulations.
Newman and Abendroth continued to meet and Newman saw drafts of the severance package. They worked together on the “example” which demonstrated the computation of severance pay that later appeared in the final draft. Abendroth made changes to the severance package and sent a rough draft of the document to the proposed escrow agents in September. Abendroth recalled no significant changes in the severance package from the mailed draft to its final form.
On November, 1, 1990, Newman and BNEC signed a two-year written employment agreement and an escrow agreement. The employment agreement was backdated to June 18, 1990, the day Newman’s tenure commenced. The employment agreement enabled Newman to collect a “signing bonus,” upon being terminated from his position. The “signing bonus” of $225,000 would be reduced by approximately $18,000 per month after the first year.
The employment agreement also included an escrow agreement to secure the payment of the “signing bonus.” It was dated November 1, 1990, attached as an exhibit to the employment agreement, and required BNEC to deposit three $75,000 certificates of deposit with an escrow agent. Upon termination Newman would was required to make demand upon the escrow agent to obtain payment.
On January 7, 1991, fewer than 90 days after the date of the escrow agreement and the delivery of the certificates of deposit to the escrow agent, BNEC filed for Chapter 7 bankruptcy relief.
*408On January 18, 1991 Newman wrote to the escrow agent and demanded payment. On January 22, 1991 the escrow agent informed the interim trustee of BNEC of Newman’s demand. Recognizing that BNEC’s obligation to Newman stemmed from the employment agreement dated June 18, 1990, and the escrow agreement dated November 1, 1990, the trustee believed that the agreement was a voidable preference on account of an antecedent debt under 11 U.S.C. § 547(b)(2).
The escrow agent continues to hold the funds.
Further findings of fact will appear as relevant to the particular issues discussed below.
Discussion
The issues have been narrowed to the following:
A. Was the creation and funding of the escrow a preference?
B. Has the condition precedent to Newman’s right to draw on the escrow transpired?
C. Has Newman violated the employment agreement to the extent that he should not be permitted to receive payment under it?
D. Is Newman’s claim limited by 11 U.S.C. § 502(b)(7)?
E. Is Newman entitled to interest on his claim?
A. Was the creation and funding of the escrow a preference?
A preference is a transfer of a debt- or’s interest in property
“(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;
(3) made while the debtor was insolvent;
(4) made—
(A) on or within 90 days before the date of the filing of the petition; or
(B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and
(5)that enables such creditor to receive more than such creditor would receive if—
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by the provisions of this title.”
11 U.S.C. § 547(b).
Newman admits that the creation of the escrow satisfies all of the elements of the section except one. He contends that his employment agreement was not settled until he signed the employment agreement on November 1, 1990, the same day his severance money was transferred into an escrow account, and hence the transfer could not be a preference because there was no antecedent debt. Moreover, even if it were found to be a preference, it constituted a contemporaneous exchange which excepts it from avoidance as a preference under 11 U.S.C. § 547(c)(1).3
Newman argues that the payment into escrow was not on account of an antecedent debt because circumstances demonstrate that the terms of the agreement were not final until November of 1990. Although the severance package he and BNEC discussed in May of 1990 contained similarities to the proposed drafts and to the one he eventually signed, the differences were substantial. Some of the differences from the May discussions include BNEC being able to choose to renew the employment agreement after one year and a continual monetary reduction in the second year. In the final agreement, Newman could potentially receive only $18,-000 if his position were terminated at the end of the second year.
*409BNEC’s position is that its obligation to Newman arose when he began to work for it on June 18, 1990, and therefore that the establishment of the escrow was for an antecedent debt. BNEC contends that Newman had agreed orally in May 1990 to all the conditions of employment, including a secured severance package. According to BNEC, the severance package merely had to be tailored by BNEC’s senior management and legal department to comply with the relevant banking regulations.
Judge Young’s Memorandum and Order reversing my order granting summary judgment shapes the discussion which follows:
“To determine whether the ... transfer was ‘on account of an antecedent debt,’ the Court must determine when the Bank’s obligation to Newman as to the severance agreement became ‘clear enough for the court to enforce the agreement as a final expression of the parties’ intention.’ Harvey Probber, Inc. v. Voko Franz Vogt & Co., 50 B.R. 292, 297 (Bankr.D.Mass.1985). Even assuming arguendo that Newman and [BNEC] agreed as to the amount of the severance benefit at the time Newman’s employment began in June, 1990, without any agreement as to the essential terms and conditions under which Newman would become entitled to severance benefits and the structure that the benefit would take, [BNEC’s] obligation would not be clear enough for the court to enforce. “Here the Record on Appeal reveals that a disputed issue of material fact exists as to when [BNEC] and Newman agreed to the structure of Newman’s severance benefits ....
“In light of the constantly changing nature of the severance agreement on the record before the Court, it is not possible to determine whether the Agreement become so sufficiently definite as to be enforceable at any time before November 1, 1990 when the Agreement was actually signed.”
Young Memo at 4-5.
It would be possible to conclude from Judge Young’s last paragraph, which does establish the law of the case, 150 North St. Assoc. L.P. v. Pittsfield (In re 150 North St. Assoc. L.P.), 184 B.R. 1, 6 (Bankr.D.Mass. 1995), that Newman must prevail on this issue. Even if Judge Young has not precluded further discussion and determination of the point, the case law and facts support the same conclusion.
Under Massachusetts law, parties are not contractually obligated to one another until their negotiations result in a definite agreement. Cataldo v. Continental Insurance Company (In re Data Concepts International, Inc.), 73 B.R. 406, 412 (Bankr. D.Mass.1987). See also Sibley v. Felton, 156 Mass. 273, 276, 31 N.E. 10 (1892) (no contract if no agreement on essential elements). I must determine when the employment contract was “clear enough for the court to enforce the agreement as a final expression of the parties’ intention.” Harvey Probber, Inc. v. Voko Franz Vogt & Co., supra at 297.
As explained above, Newman sought a written secured severance package. As of May 1990, BNEC’s management told Newman that he would have a secured severance package if he came to work for BNEC. Nevertheless, he thought that an oral severance contract existed to the extent that, if he were fired by BNEC before the employee agreement were written, he would have attempted to obtain his severance package.
Within a five day span, from June 7 to June 12, 1990, Wheeler twice altered significantly Newman’s severance package from the proposed original plan of May. These two plans proposed in a memorandum to Fish differ greatly from both the May “evergreen” plan and the package agreed upon and signed in November.
Because Abendroth had neither previously written an employee or severance agreement nor understood the applicable banking regulations, he struggled to draft a final document. Abendroth and Newman together decided to include an example of how the severance package might work because they felt the wording alone would not be sufficient. Abendroth, Newman, Wheeler, and Seata-macehia all contacted each other intermittently to discuss or draft the severance package during the four month period up until the employee agreement was signed. New*410man had seen numerous drafts of his employee agreement before signing it in November.
Because of the importance which Newman placed on a secured severance package and the lengthy negotiations which the parties endured to realize an acceptable plan, I find that there was no definite agreement until November 1, 1990.
While the numerous discussions and drafts were not sufficiently definite as to establish a contract, the desire of both parties to complete a written employment document indicates that the written document alone should be considered the binding agreement. Normally the fact that the parties contemplate the execution of a final written agreement justifies a strong inference that the parties do not intend to be bound by earlier negotiations or agreements until the final terms are settled. Rosenfield v. United States Trust Co., 290 Mass. 210, 216, 195 N.E. 323, 325 (1935); Wilcox, Inc. v. Shell Eastern Petroleum Products, Inc., 283 Mass. 383, 387, 186 N.E. 562, 563-64 (1933).
The written agreement of November 1, 1990 established a contract for which the payment of the certificates of deposit into escrow was a substantially contemporaneous exchange, not an antecedent debt, and hence not a preference.
B. Has the condition precedent to Newman’s right to draw on the escrow transpired?
Newman is entitled to recovery under the contract BNEC terminated him and the termination was not for cause. There is no suggestion that the severance of the relationship between Newman and BNEC was “for cause” and I find as a fact that there was no cause. The issue therefore is narrowed to whether BNEC terminated Newman’s employment or Newman left voluntarily.
On January 7, 1991, FDIC seized the Banks and BNEC filed for relief under Chapter 7 of the Bankruptcy Code. At that time, the employees of BNEC were “transferred” to New Bank of New England, N.A., a “bridge bank” created by FDIC as part of the seizure process. (“New Bank”). New Bank is not an affiliate, a subsidiary, or controlled by BNEC.
Newman continued performing the same type of work for the same superiors. Unbek-nowst to him at that time, he was working for a wholly owned subsidiary of the New Bank called BNEC Services Corp. (“Services Corp”). Around the middle of January, Wheeler informed Newman that all the employees of BNEC had been reassigned to the New Bank. Ralph Gordon (“Gordon”), who was the head of human resources at BNEC, had similar responsibilities at the New Bank. Newman approached Gordon a day or two after speaking with Wheeler. Newman asked Gordon if the New Bank intended to assume Newman’s contract, and Gordon informed Newman that the New Bank had no such intentions.
The Trustee of BNEC did not assume Newman’s contract, and BNEC did not cause any other entity to assume it. BNEC stopped paying Newman as of January 6, 1991, and he was paid at various times by Services Corp., the New Bank, and Fleet National Bank (to which FDIC transferred substantial assets of the Banks). Newman never entered into an agreement with any other entity and he did not waive his agreement with BNEC. He never offered his services to the Trustee. The Trustee knew that Newman was not working for him.
The employment contract provides that Newman was entitled to the funds in the escrow account if “during the Employment period, (a) Executive’s [Newman’s] employment with the Company or with a successor in interest (including any person or entity serving as receiver, trustee, or in a similar capacity) shall be terminated”. It also states that “if the Executive terminates employment during the Employment Period, this Agreement shall terminate without further obligations to the Executive”. There is no explication of “termination”.
It is manifest that once FDIC had taken control of the assets of the Banks, the services which Newman had been engaged to perform were no longer required by BNEC. Does that fact constitute a termination? While the parties have offered no case authority, and I have found none in my own *411research, there is a close parallel in the common law cases involving permanent or lifetime employment.
The genesis of the modern eases appears to be Carnig v. Carr, 167 Mass. 544, 46 N.E. 117 (1897), and the principle enunciated there is alive and well. See, e.g., Stevens v. G.L. Rugo & Sons., Inc., 209 F.2d 135, 137 (1st Cir.1954).
In Carnig, the defendant agreed to employ the plaintiff permanently. The defendant subsequently informed the plaintiff that defendant was moving his business and plaintiffs services were no longer required. Plaintiff sued for breach of contract.
The Supreme Judicial Court resorted to external circumstances to determine the meaning of the phrase:
“To ascertain what the parties intended by ‘permanent employment’ it is necessary to consider the circumstances surrounding the maMng of the contract, its subject, the situation and relation of the parties, and the sense in which, taking these things into account, the words would be commonly understood, for it fairly may be assumed that the parties used and understood them in that sense.”
167 Mass. at 547, 46 N.E. 117.
The Court concluded that
“So long as defendant was engaged in enameling and had work the plaintiff could do and desired to do, and so long as the plaintiff was able to do his work satisfactorily, the defendant would employ him.”
Id.
It reiterated the principal in Phelps v. Shawprint, Inc., 328 Mass. 352, 355, 103 N.E.2d 687 (1952): “Doubtless, such a contract will terminate if the employer in good faith quits the business; in other words, he is liable only so long as he conducts the business even if the employee is able and willing to perform his duties”.
Considering especially Newman’s motivation in insisting upon a secured severance package, these precedents are applicable in the present ease. I find as a matter of law that the termination of BNEC’s banking operations constituted a termination of Newman’s employment contract. The termination triggered Newman’s right to draw upon the escrowed funds. The date of termination is the date upon which the Banks were taken by FDIC, January 7, 1991.
The facts upon which Newman bases his claim of termination are earlier in time than those upon which BNEC relies. Having found a termination by BNEC, it is not necessary to consider Newman’s subsequent actions.
C. Has Newman violated the employment agreement to the extent that he should not he permitted to receive payment under it?
BNEC makes this argument in a cursory fashion and did not brief it nor offer any significant evidence supporting it. I find the position to be without merit in law and unsupported by the facts.
D. Is Newman’s claim limited by 11 U.S.C. § 502(b)(7)?
The contract provides a schedule of payments to be made to Newman if his employment is terminated, labeled “Date of Termination/Payment to Executive”. Since I have found that Newman was terminated by BNEC and that termination occurred prior to July 18, 1991, the scheduled payment is “$225,000 plus all interest earned [on the escrow account] to date of termination.” Id.
I find no basis in the contract for Newman’s assertion that he is entitled to the escrow fund “with all earned interest thereon.” Plaintiff’s Trial Memorandum at 26. The interest to which Newman has a claim in the contract is only the amount earned on the escrowed funds between the date of deposit on November 1, 1990 and the date of termination, which I have found to be January 7, 1991.
The initial investment of the escrow fund was in three $75,000 certificates of deposit bearing the following interest rates, which I have averaged:
Bank of New England 8.1500%
Maine National Bank 8.0000%
Connecticut Bank & Trust Co. 8.2000%
Average rate 8.1167%
*412The period of employment while the escrow was funded was 68 days. Computing the average rate for 68 days on $225,000 demonstrates that amount of interest to which Newman would be entitled under the contract is $3,402.34.
BNEC contends that Newman’s claim must be limited to “the compensation provided by such contract, without acceleration, for one year.” 11 U.S.C. § 502(b)(7)(A). That amount would be $225,000. Newman contends that § 502 is inapplicable because “Section 502 deals with claims under Section 501. It does not purport to deal with secured claims pursued by way of Adversarial Proceedings, for property belonging to Newman.” Plaintiff’s Trial Memorandum at 26.
That argument might have carried some weight if Newman had not filed a proof of claim. There was no need for him to do so if, as he ,asserts, he is a secured creditor. Only an “unsecured creditor or an equity security holder must file a proof of claim or interest,” with certain exceptions not relevant here. Fed.R.Bankr.P. 3002(a). The Advisory Committee Note to that rule provides specifically that “a secured claim need not be filed or allowed under § 502 or § 506(d)” but then adds “unless a party in interest has requested a determination and allowance or disallowance under § 502.”
Newman did file a proof of claim on June 19,1991. He filed this adversary proceeding on May 12, 1992.
“A claim or interest, proof of which is filed under this title is deemed allowed, unless a party in interest ... objects.”
11 U.S.C. § 502(a).
A party in interest, the debtor, did in fact object to Newman’s claim. Trustee’s First Omnibus Objection to Claims, Docket No. 784, filed September 9, 1994. I must therefore “determine the amount of such claim ... as of the date of the filing of the petition.” 11 U.S.C. § 502(b). The claim shall be allowed
“except to the extent that—
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“(7) if such claim is the claim of an employee for damages resulting from the termination of an employment contract, such claim exceeds—
(A) the compensation provided by such contract, without acceleration, for one year following the earlier of—
(i) the date of the filing of the petition; or
(ii) the date on which the employer directed the employee to terminate, or such employee terminated, performance under such contract....”
11 U.S.C. § 502(b)(7).
Initially I find as a matter of law that Newman’s claim is “the claim of an employee for damages resulting from the termination of an employment contract”, to quote 11 U.S.C. § 502(b)(7). See In re CPT Corp., 1991 WL 255679 (Bankr.D.Minn.1991) and eases cited. It would be difficult to describe it otherwise. As a result, his allowed secured claim is limited to $225,000 under § 502.'
However, the escrow fund exceeds the allowed amount of the claim. In this context § 502(b)(7) is supplemented by § 506(b):
“To the extent that an allowed secured claim is secured by property the value of which ... is greater than the amount of such claim, there shall be allowed to the holder of such claim interest on such claim, and any reasonable fees, costs, or charges provided for under the agreement under which such claim arose.”
The “interest on such claim ... provided for under the agreement” consists of two elements. The first is the sum of $3,402.34, computed as above.
The second is BNEC’s responsibility for costs and additional interest under ¶ 8 of the agreement:
“The Company [BNEC] agrees to pay, to the full extent permitted by law, all legal fees and expenses which the Executive [Newman] may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof, plus in each case interest at the applicable Federal rate provided for in Section 7872(f)(2) *413of the Internal Revenue Code of 1986, as amended (the “Code”).”
Interest at the contract rate should be calculated from the date of demand on the escrow agent, January 18, 1991.
I have no evidence as to the present balance in the escrow fund and I do not know the extent of counsel fees incurred by Newman. I cannot enter an order at this time. If the parties can agree upon the amounts payable to Newman, counsel for Newman may propose appropriate orders both as to the claim and objection and the adversary proceeding pursuant to Local Rule 43(A). In the absence of such agreement filed by November 16,1995 I will schedule an evidentia-ry hearing to make the necessary determinations.
. Newman also filed a proof of claim for the same sum, to which BNEC objected. Since this adversary proceeding contains "a demand for relief of the kind specified in Rule 7001," I consider the claim and objection to be joined and controlled by the present decision. Fed. R.Bankr.P. 3007.
. Newman v. Bank of New England Corp., C.A. No. 93-12209-Y (D.Mass.), Memorandum and Order of December 29, 1993. ("Young Memo").
. "(c) The trustee may not avoid under this section a transfer'—•
(1) to the extent that such transfer was—
(A) intended by the debtor and the creditor to or for whose benefit such transfer was made
to be a contemporaneous exchange for new value given to the debtor; and
(B) in fact a substantially contemporaneous exchange.... ” | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492190/ | MEMORANDUM
ROBERT J. WOODSIDE, Chief Judge.
Before me is a Complaint filed by plaintiff The Official Committee of Unsecured Creditors, on behalf of Intershoe, Inc. (the “Committee”) seeking to recover $515,000.00 in payments made by debtor Intershoe, Inc. (“Intershoe”) to defendant Mellon Bank, N.A. (“Mellon”) pursuant to Section 548(a)(2) of the Bankruptcy Code, together with prejudgment interest. For the reasons stated below, judgment will be rendered in favor of the Committee and against Mellon in the amount of $887,461.96.
Procedural history
On February 18, 1992, Intershoe filed its voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code. On January 20, 1993,1 issued an Order confirming the Chapter 11 plan of reorganization submitted by Intershoe. Pursuant to the terms of the confirmed plan, all claims of Intershoe for the avoidance of preferential and fraudulent transfers pursuant to Sections 547, 548 and 550 of the Bankruptcy Code were assigned to the Committee to pursue for the benefit of unsecured creditors.
On May 20, 1993, the Committee initiated the instant adversary proceeding against Mellon. Mellon filed an answer, and extensive discovery ensued. I conducted a trial on October 18 and 19, 1994, and December 21 and 22,1994. The parties subsequently filed proposed findings of fact and conclusions of law and legal briefs.
On May 2, 1994, the Committee filed a motion seeking to reopen the record to take the trial deposition of Braxton Glasgow. Mellon opposed the requested relief and I conducted a telephone conference on May 5, 1995, and entered an Order denying the requested relief. My decision was based upon the timing of the request and the absence of evidence that the testimony was not previously available.
Factual findings
1. At all times relevant to the Complaint, Intershoe engaged in the business of large-scale wholesale distribution of women’s shoes. Intershoe imported the bulk of its product lines from sole-source suppliers in Italy, Spain and Yugoslavia.
2. Through 1991, Intershoe’s primary secured lender was a group of banks which included Signet Bank of Virginia, Signet Bank of Maryland, Corestates Bank, N.A., and the Bank of Tokyo Trust Company (collectively the “Signet Group”). Intershoe also *459had subordinated indebtedness to Westinghouse Credit Corporation (‘Westinghouse”) and Westinghouse held stock purchase warrants with respect to Intershoe stock.
3. In the Spring of 1991, contemplating that the expiration of existing financing with the Signet Group would occur in the Pall, Intershoe sought to recapitalize and refinance its operations. Intershoe sought to attract an equity investment in the amount of $15 million. At the same time, Intershoe sought to replace the Signet Group as its secured lender with a new bank group extending a $53 million loan facility.
4. In March, 1991, Three Cities Research (“TCR”) made an initial non-binding proposal to make a $15 million investment in Inter-shoe and began a process of due diligence and negotiation with Intershoe.
5. Intershoe approached Mellon, The Bank of New York Commercial Corporation (“BONY’) and Citicorp North America, Inc. (“Citicorp”), seeking potential refinancing. In discussions with each lender, it was clear that an equity infusion would be a prerequisite to refinancing.
6. Representatives of Mellon had their initial meeting with representatives of Inter-shoe in February or March, 1991.
7. In April, 1991, Intershoe entered into an agreement with Westinghouse which provided Intershoe with the ability to retire its outstanding subordinated indebtedness to Westinghouse and repurchase the stock purchase warrants of Intershoe held by Westinghouse.
8. On June 13,1991, Mellon issued a proposal letter documenting its interest in extending a $53 million revolving demand line of credit and a $100 million foreign exchange line of credit. The proposal was contingent upon the proposed $15 million cash injection by TCR.
9. Intershoe did not accept Mellon’s June 13, 1991, proposal, but rather continued to explore potential financing with BONY and Citicorp, which initially did not contemplate the necessity of a large-scale equity injection.
10. Citicorp performed its due diligence and ultimately determined that it would not extend credit to Intershoe. BONY made a proposal, but revised it to require a large-scale equity infusion, and Intershoe chose not to endorse that proposal. Subsequently, In-tershoe returned to Mellon to pursue the refinancing.
11. On August 9, 1991, Mellon issued a second proposal letter similar in terms to its June 13, 1991, letter, also indicating that the proposed financing was contingent on the injection of new capital funds of at least $15 million. Other relevant provisions of the proposal letter were that: 1) Intershoe would pay a “facility fee” of % percent of the committed facility, half upon issuance of a commitment letter and half at closing; 2) Inter-shoe would pay a collateral management fee of $10,000.00, after the advancement of the lines; 3) Intershoe would reimburse Mellon for:
[a]ll out-of-pocket expenses, including without limitation, attorney’s fees, field examination costs, searches and filing fees, ... regardless of whether a financing package is concluded[;]
4) Intershoe would remit a “good faith deposit” in the amount of $125,000.00 with written approval of the letter; and 5) Mellon was required to have commitments from other financial institutions for $28 million of the $53 million facility. The proposal letter also set out the initial set of conditions under which Intershoe’s “good faith deposit” would be retained by Mellon.
12. The transaction contemplated in Mellon’s August 9, 1991, proposal letter was an asset-based loan and also a “highly leveraged transaction” (“HLT”), which involve greater risk than the more common type of loan collateralized by real estate. The type of loan contemplated required extraordinary measures of due diligence and monitoring of the borrower’s financial condition.1
*46013. Intershoe accepted and executed the August 9, 1991, proposal letter.
14. On August 12, 1991, Mellon received the initial sum of $125,000.00 from Intershoe by wire transfer pursuant to the August 9th proposal letter.
15. By August, 1991, Intershoe was against its borrowing base with the Signet Group and therefore could not borrow additional sums. Between August and October, 1991, Intershoe did not pay the vast majority of its invoices from suppliers and its unpaid accounts payable owed to trade creditors increased by approximately $10 million while its debt to the Bank Group decreased by approximately $10 million.
16. Between August 9, 1991, and November 18, 1991, Intershoe had numerous materially adverse changes which resulted in $4.1 million in losses for September and October, 1991.2
17. The Signet Group agreed to extend its loan facility from September 30, 1991, through November 29, 1991, which in turn permitted Intershoe to continue its business operations.
18. In early October, 1991, Mellon retained a law firm in connection with the proposed closing of the proposed Inter-shoe/Mellon transaction scheduled for November 26, 1991.
19. In October, 1991, Mellon requested an additional good faith deposit from Inter-shoe of $125,000.00. No letter, invoice or similar document was entered into evidence to document this request.
20. On October 8 or 9, 1991, Mellon received the additional fee of $125,000.00 from Intershoe by wire transfer.
21. By letter dated October 31, 1991, Westinghouse agreed to restructure Inter-shoe’s indebtedness and its equity position and to subordinate $5 million of its debt in order to accommodate the recapitalization and refinancing of Intershoe.
22.On November 7, 1991, Mellon issued its formal commitment letter to Intershoe, agreeing to provide Intershoe a revolving line of credit and a foreign exchange facility essentially consistent with the August 9,1991 proposal letter. The commitment letter:
a) made reference to the sum of $250,-000.00 in good faith deposits that Mellon previously had received and stated that the entire amount would be retained by Mellon if a closing did not occur as reimbursement for expenses and as additional compensation for Mellon’s time and effort in attempting to consummate the financial package;
b) requested Intershoe, if it accepted the commitment, to remit the additional sum of $265,000.00 to Mellon, one-half of which (or $132,500.00) represented a “non-refundable” facility fee representing compensation for Mellon’s commitment, and the other one-half represented a “non-refundable” agent’s fee for Mellon’s syndication of the loan transaction; 3
c) required a draft audited financial statement showing Intershoe had a net worth of approximately $6.5 million;
d) contained the condition that the Westinghouse debt and stock warrants be repaid or retired and that Westinghouse remain a creditor for subordinated debt of at least $5 million;
e) contained the condition that $28 million of the $53 million loan to Intershoe be participated out to other lenders who were satisfactory to Mellon;
f) contained the condition that there be excess availability under the line of credit of $4 million and Intershoe have a positive net worth of $6.5 million; and
g) provided for a separate collateral monitoring fee relating to administering the loan after closing.
*46123. The commitment letter by its terms was due to expire on November 29, 1991, when the Signet Group facility was due to expire.
24. By the time it issued its commitment letter, Mellon had commitments from other banks to participate in the loan facility in excess of the amount necessary to fulfill the syndication condition.
25. On November 7, 1991, Intershoe accepted Mellon’s commitment and tendered a check in the amount of $265,000.00 pursuant to the terms of the commitment.
26. Mellon commenced a takedown examination on or about November 7, 1991, to update financial information through the date of closing.
27. On November 15, 1991, Mellon received a draft financial statement from Inter-shoe confirming and verifying the financial statement previously provided by Intershoe and reporting that Intershoe had a net worth of approximately $6.5 million. On the same day, Mellon scheduled a meeting for November 20,1991, with Intershoe, the loan participants, TCR and Peat Marwick to further 'discuss the financial statements.
28. On November 17, 1991, TCR advised Intershoe by telephone that it had decided not to go forward with the equity infusion and confirmed its withdrawal by letter dated November 18, 1991. Intershoe advised Mellon of TCR’s withdrawal by telephone on November 18, 1991.
29. After Mellon learned of TCR’s withdrawal, the proposed Mellon/Intershoe transaction collapsed and a closing on the Mellon financing never occurred. Mellon’s total out-of-pocket costs related to the proposed Inter-shoe transaction were $127,539.00.
30. Intershoe’s trade creditors continued to extend credit to Intershoe even after the Mellon/Intershoe transaction collapsed and the Mellon commitment expired by its terms.
31. KPMG Peat Marwick (“Peat Mar-wick”) was the public accounting firm engaged by Intershoe to complete annual financial audits, to prepare audited financial statements and to assist Intershoe with tax compliance.
32. In accordance with Generally Accepted Audit Standards (“GAAS”), Peat Marwick conducted a financial audit of Intershoe for the fiscal year ended August 31, 1991, and finalized an audited financial statement prepared in accordance with Generally Accepted Accounting Principles (“GAAP”) on approximately November 15, 1991, in which it reported that, as of August 31, 1991, Inter-shoe’s liabilities exceeded its assets by $4,055,000.00.
33. According to GAAS and GAAP, when events after the balance sheet date provide additional evidence of “conditions that existed at the date of the balance sheet,” adjustments should be made to an audited financial statement prepared under GAAP so that the statement truly reflects those conditions. Intershoe’s audited financial statement was prepared in accordance with this principle and, notwithstanding the fact that certain adjustments were physically recorded after the balance sheet date, the underlying events and circumstances properly were considered in assessing the value of the company on the balance sheet date. For example, the termination of Intershoe’s financial negotiations with TCR and Mellon, which occurred after August 31, 1991, was properly considered as evidence of Intershoe’s financial condition as of August 31, 1991, and warranted adjustments to Intershoe’s audited financial statement.
34. An adjustment Peat Marwick noted should be made under the “subsequent events” principle was the write-off of $754,-000.00 in pre-paid financing fees which previously were reflected by Intershoe as an asset. Under the circumstances of this ease, including the deteriorating financial condition of Intershoe, the numerous unfulfilled conditions contained in Mellon’s loan proposal (and especially the failure to obtain the $15 million equity infusion), it would have been inappropriate to permit the $754,000.00 to remain on Intershoe’s financial statements as an asset as of August 31, 1991.
35. Another change Peat Marwick noted should be made under the “subsequent events” principle was to adjust the financial statement to write off $3.668 million owed to Intershoe from IS International, an affiliate *462owned by Intershoe’s president, and to record such advances as a loss on Intershoe’s August 31, 1991, audited financial statement. IS International was in extremely poor financial condition as of August 31, 1991, and there was no reasonable possibility that its account would ever be paid.4
36. Another change Peat Marwick noted should be made to Intershoe’s financial statement was the exclusion as unsubstantiated of a $4.5 million credit allegedly due from factory suppliers relating to defective merchandise, which for some period of time Intershoe carried on its books.
37. On or about December 11, 1991, In-tershoe properly accepted the changes to its August 31, 1991, financial statement Peat Marwick noted should be made and recorded those changes.5
38. Peat Marwick’s 1991 audited financial statement also included a “going concern paragraph,” which indicated that Intershoe would have difficulty remaining in existence for an additional 12 to 15 months as a going concern, and indicated that the auditors had not adjusted assets or liabilities for that likelihood. Peat Marwick included the going concern paragraph “due to the substantial current period loss; a working capital deficiency of approximately $15,231,000; a stockholder’s equity deficiency of approximately $4,055,000; and the default of certain loan covenants.”
39. Although GAAP permitted $6.7 million in receivables due from Intershoe Canada, Inc. (“Intershoe Canada”) and MidLantie Footwear, Inc. (“MidLantie”), two affiliates owned by Intershoe’s president, to remain on the audited financial statement as an asset, realization on those assets was doubtful and a cautionary notation was made on the statement.
40. Intershoe’s monthly internal operating statements also demonstrate the degree to which its financial condition had deteriorated and continued to deteriorate. The October statement indicated a loss for the two months ending October 31, 1991, of $4,132,-934.00; the November statement indicated a $390,514.00 loss for the month;6 the December statement indicated a $690,326.00 loss for the month; and the January statement indicated a loss of $1,245,069.00 for the month.
41. Intershoe’s amended schedules and statements indicate an excess of liabilities over assets in the amount of approximately $14 million.
42. The value of assets stated on Inter-shoe’s schedules was far more than the amount actually realized through sale of said assets in the bankruptcy proceedings.7
43. The Committee’s fair value analysis suggested that Intershoe had a value less than reported on the 1991 financial statements. In this analysis, in addition to write-offs required by Peat Marwick, the Committee subtracted from the value of the company the amount of receivables due from Inter-shoe Canada and MidLantie due to their uncolleetibility and eliminated the value related to a detachable warrant to Westinghouse carried on Intershoe’s books as an asset.
Discussion
The Committee seeks to recover 3 separate payments totaling $515,000.00 made by Intershoe to Mellon on August 12, 1991, October 8, 1991, and November 7, 1991, respectively, several months before Intershoe *463filed its Chapter 11 petition. The Committee brought its sole count against Mellon pursuant to the constructive fraud portion of the Bankruptcy Code’s fraudulent transaction section, which provides in relevant part:
the trustee may avoid any transfer of an interest of the debtor in property, that was made or incurred on or within one year before the date of 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)(1) 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). Section 548(a)(2) permits avoidance if the trustee can establish:
(1) that the debtor had an interest in property;
(2) that a transfer of that interest occurred within one year of the filing of the bankruptcy petition;
(3) that the debtor was insolvent at the time of the transfer or became insolvent as a result thereof; and
(4) that the debtor received “less.than a reasonably equivalent value in exchange for such transfer.”
BFP v. Resolution Trust Corp., — U.S. -, -, 114 S.Ct. 1757, 1760, 128 L.Ed.2d 556, rh’g denied, — U.S. -, 114 S.Ct. 2771, 129 L.Ed.2d 884 (1994). The first and second elements are not in dispute. Mellon disputes the Committee’s allegations that In-tershoe was insolvent at the time the relevant transfers occurred and that Intershoe did not receive “reasonably equivalent value” in exchange for the transfers. The parties agree that, under Section 548 of the Bankruptcy Code, the ultimate burden of proof rests upon the Committee. See Mellon Bank, N.A. v. Metro Communications, Inc., 945 F.2d 635, 648 (3d Cir.1991), cert. denied sub nom. Committee of Unsecured Creditors v. Mellon Bank, N.A, 503 U.S. 937, 112 S.Ct. 1476, 117 L.Ed.2d 620 (1992); In re Pittsburgh Cut Flower Co., 124 B.R. 451, 456 (Bankr.W.D.Pa.1991).
A. Insolvency
The Bankruptcy Code defines insolvency as a “financial condition such that the sum of such entity’s debts is greater than all of such entity’s property, at a fair valuation.” 11 U.S.C. § 101(32)(A). This test is frequently referred to as the balance sheet test. The relevant date for determining the value of a company’s assets is the time of the alleged transfer. In re Morris Communications, Inc., 914 F.2d 458, 466 (4th Cir.1990); In re Coated Sales, Inc., 144 B.R. 663, 668 (Bankr.S.D.N.Y.1992).
In the case before me, Intershoe’s insolvency subsequent to August 31, 1991, was established by the Committee through the testimony of three certified public accountants relying upon Intershoe’s audited financial statements which indicated that, as of August 31, 1991, Intershoe’s liabilities exceeded its assets by some $4 million. Mellon’s principal rejoinder to this evidence is its contentions that: 1) as long as there was a potential for the closing of the Mellon/Inter-shoe loan transaction, certain write-offs made in the audited financial statement should not have occurred; 2) it was only after the proposed Intershoe/Mellon transaction collapsed in mid-November that those write-offs were warranted and in fact were physically made; and 3) in absence of those write-offs Inter-shoe was solvent.
Although Mellon’s logic has a certain chronological appeal, as reflected in my factual findings, I accepted the Committee’s evidence which indicated that, pursuant to GAAS and GAAP, the subsequent events surrounding the collapse of the proposed In-tershoe/Mellon should be treated as evidence of Intershoe’s financial condition as of August 31,1991. Although events which drastically and unexpectedly change a company’s actual financial condition (such as a fire or other disaster) would not be the type of subsequent event that should evidence a company’s prior financial condition, I agreed with the testimony of the Committee’s experts that the failure of the proposed Mellon/Intershoe transaction is exactly the type of event that should be viewed as evidence of the company’s prior financial condition.
*464By all accounts, Intershoe’s financial survival was contingent upon the Mellon refinancing and the Mellon refinancing was contingent upon dozens of conditions, the least certain and most important of which was an equity infusion from TCR. TCR had made no commitment to go through with the investment, and, more importantly, the financial numbers coming out of Intershoe in September, October and November of 1991, showed a deteriorating financial condition that would cause serious concern to a potential equity investor. Although there was testimony that supported Mellon’s belief that TCR still was considering the transaction into November, 1991, the evidence was persuasive that TCR’s participation was sufficiently uncertain that anticipated consummation of the equity investment and ultimately the Intershoe/Mellon transaction should not be the basis for upholding book entries that ultimately turned out to have no basis in reality.8
Even in absence of the Committee’s testimony that the numbers contained in the audited August 31, 1991, financial statement comply with GAAP and GAAS, courts have concluded that the bankruptcy court is not strictly bound by GAAP and GAAS in its insolvency determinations. See, e.g., In re Parker Steel Co., 149 B.R. 834, 845 (Bankr. N.D.Ohio 1992); In re Sierra Steel, Inc., 96 B.R. 275, 278 (9th Cir. BAP 1989). These same courts have concluded that subsequent events, such as actual collection rates for receivables, that may not technically be cognizable under GAAP and GAAS, may be considered by the bankruptcy judge in insolvency determinations. Parker Steel, 149 B.R. at 845; Coated Sales, 144 B.R. at 668 (stating that “the court may consider information ‘originating subsequent to the transfer date if it tends to shed light on a fair and accurate assessment of the asset or liability as of the pertinent date’ ”) (citation omitted); Sierra Steel, 96 B.R. at 278. Additionally, courts have stated that a contingent asset or liability should be reduced ‘to its present, or expected, value before a determination can be made whether the firm’s assets exceed its liabilities.’ Parker Steel, 149 B.R. at 845 (quoting In re Xonics Photochemical, Inc., 841 F.2d 198, 200 (7th Cir.1988)).
Here the actual rate of realization on In-tershoe’s assets are dwarfed by its liabilities. Although I acknowledge the “hindsight” nature of this consideration, it merely buttresses the Committee’s already-sufficient evidence as to Intershoe’s then-present value. The evidence in the case also indicated that, as of August, 1991, prospects were poor for recovery on accounts receivable from Inter-shoe’s affiliates, and there was no credible evidence offered to substantiate the book-entry for alleged credits irom Intershoe’s suppliers. Even in absence of the testimony that adjustments were warranted by GAAP and GAAS, based upon the evidence, I find it entirely appropriate to make downward adjustments to Intershoe’s then-value to write off these alleged assets. Compare In re Worcester Quality Foods, Inc., 152 B.R. 394, 403 (Bankr.D.Mass.1993) (discounting worthless receivables in arriving at insolvency determination); In re Howdeshell of Fort Myers, 55 B.R. 470, 473 (Bankr.M.D.Fla. 1985) (stating that “[i]t has been held that it is not improper to use hindsight gained from success or failure of subsequent collection efforts to evaluate accounts receivable”); In re Chemical Separations Corp., 38 B.R. 890, 895-96 (Bankr.E.D.Tenn.1984).
On the basis of the audited financial statement for August 31,1991, and the associated testimony, the Committee established by a preponderance of the evidence that Intershoe was insolvent from that date forward.
B. Reasonably equivalent value
To satisfy the final element of the Committee’s constructive fraud case, it was required to establish that Mellon did not provide “reasonably equivalent value” for payments it received from Intershoe. The term “reasonably equivalent value” is not defined in the Bankruptcy Code.9 Courts recently have re-*465jeeted any fixed mathematical formula for determining reasonably equivalent value and instead have reviewed and considered the totality of the circumstances surrounding the transaction. See Barrett v. Commonwealth Federal Savings and Loan Ass’n, 939 F.2d 20, 23 (3d Cir.1991); see also In re Fairchild Aircraft Corp., 6 F.3d 1119, 1125-26 (5th Cir.1993) (stating that “[although the minimum quantum necessary to constitute reasonably equivalent value is undecided, it is clear that the debtor need not collect a dollar-for-dollar equivalent to receive reasonably equivalent value”). Various factors that have been identified as relevant by courts include:
the good faith of the transferee, the relation differences in the amount paid compared to the fair market value, and the percentage of the amount paid is of the fair market value ... [and] whether the sale was an arm’s length transaction between a willing buyer and a willing seller.
In re Chomakos, 170 B.R. 585, 592 (Bankr. E.D.Mich.1993) (quoting In re Morris Communications NC, Inc., 914 F.2d 458, 467 (4th Cir.1990)).
In a usual case, the bankruptcy court can consider a “subsidiary fact finding regarding the value of the property transferred and the Value’ received in exchange.” In re Besing, 981 F.2d 1488, 1495 (5th Cir.1993), cert. denied, - U.S. -, 114 S.Ct. 79, 126 L.Ed.2d 47 (1993). However, the receipt of services has been considered by many courts to constitute value even though the fair value of services may be difficult to measure, Chomakos, 170 B.R. at 590; In re Butcher, 69 B.R. 198, 203 (Bankr.E.D.Tenn.1986), and a number of courts have found that “reasonably equivalent value” need not necessarily be a tangible economic benefit. See Chomakos, 170 B.R. at 595-96 (holding that hotel had provided reasonably equivalent value in exchange for debtor’s gambling losses).
Recently, the Third Circuit in Metro Communications, although seeming to require some economic benefit, indicated that a benefit need not be direct to qualify as “reasonably equivalent value” under Section 548(a)(2)(A). In that case, an official committee of unsecured creditors sought, inter alia, to avoid an alleged fraudulent conveyance to a bank which financed a leveraged buyout (“LBO”) of a Chapter 11 debtor’s stock and received, in return, the debtor’s guarantee of repayment and a security interest in the debtor’s assets collateralizing the guarantee. In assessing whether the bank gave “reasonably equivalent value” in exchange for the guarantee and security interest, the Third Circuit acknowledged that the debtor corporation, as the target in an LBO, receives no direct benefit in the transaction. Metro Communications, 945 F.2d at 646. However, the Third Circuit determined that “[i]f the consideration [the debtor] received from the transaction, even though indirect, approximates the value it gave [the acquiring corporation], this can satisfy the terms of the statute.” Metro Communications, 945 F.2d at 646 (emphasis added). The Court further stated:
[t]hese indirect economic benefits must be measured and then compared to the obligations that the bankrupt incurred. Here, as well as in determining insolvency under section 548(a)(2)(B)(I), it is appropriate to take into account intangible assets not carried on the debtor’s balance sheet, including, inter alia, good will. The touchstone is whether the transaction conferred realizable commercial value on the debtor reasonably equivalent to the realizable commercial value of the assets transferred. Thus, when the debtor is a going concern and its realizable going concern value after the transaction is equal to or exceeds its going concern value before the transaction, reasonably equivalent value has been received.
Metro Communications, 945 F.2d at 647 (citations omitted).
In Metro Communications, the Third Circuit found indirect benefits in the debtor’s ability to borrow working capital from the bank subsequent to the LBO. It noted that:
[t]he ability to borrow money has considerable value in the commercial world. To quantify that value, however, is difficult. Quantification depends upon the business opportunities the additional credit makes *466available to the borrowing corporation and on other imponderables in the operation or expansion of its business.
Metro Communications, 945 F.2d at 647. The Third Circuit also concluded that the bankruptcy court had failed to account for value produced by the LBO itself in terms of a “strong synergy” between the debtor and the acquiring corporation. Metro Communications, 945 F.2d at 647.10
The Metro Communications decision also may be interpreted as rejecting the totality of the circumstances inquiry in favor of a more narrow inquiry that views the transaction solely from the perspective of creditors. As stated in Metro Communications,
because the fraudulent conveyance laws are intended to protect the debtor’s creditors, a lender cannot hide behind the position, although sympathetic, that it has parted with reasonable value. The purpose of the laws is estate preservation; thus, the question whether the debtor received reasonable value must be determined from the standpoint of the creditors.
Metro Communications, 945 F.2d at 646 (emphasis in original). However, less than three months prior to the issuance of the Metro Communications opinion the Third Circuit endorsed the parties’ application of the totality of the circumstances inquiry in Barrett, 939 F.2d at 23-24. Notably, the Metro Communications panel did not discuss or explicitly reject consideration of the totality of the circumstances. I read Metro Communications, therefore, as endorsing the creditors’ interests and the conferral of tangible economic value as important considerations among the circumstances to be considered in assessing reasonable equivalent value. I do not read the opinion as foreclosing other considerations such as the good faith of the transferee, the arm’s length nature of the transaction and society’s interest in maintaining the integrity of commercial transactions.
Indeed, in cases in which tangible economic benefit is present but difficult to ascertain or measure, circumstances surrounding the transfer which do not directly establish the value of the benefit may nevertheless provide important insight into the value of the benefit. For example, in The Official Committee of Unsecured Creditors of R.M.L., Inc. v. Zolfo, Cooper & Co., No. 1-92-00293, slip op., 1995 WL 711045 (Bankr. M.D.Pa. Jan. 27, 1995), the issue before me was whether Intershoe received reasonably equivalent value in exchange for hundreds of thousands of dollars it paid a financial consulting firm during the period in which Inter-shoe’s financial condition continued to deteriorate. Although Intershoe’s financial condition did not stabilize or improve during the relevant period, all parties, including the Committee’s own rebuttal expert, agreed that the firm’s consulting services had rendered value; however, the value was difficult to quantify. In light of the totality of the circumstances, I determined that the best measure of the value of the consulting firm’s services was the price Intershoe would have had to pay to go into the open market and obtain similar services.
To summarize the foregoing, I must review the totality of the circumstances of the instant case, giving due and weighty consideration to the perspective of Inter-shoe’s creditors, to determine whether Mellon rendered reasonably equivalent value in exchange for each of the three transfers from Intershoe. To constitute reasonably equivalent value, such benefit need not be the exact equivalent to the amount of the transfers and may be indirect in nature.
1. The August 12, 1991, $125,000.00 transfer
Intershoe’s first transfer of $125,-000.00 to Mellon was made pursuant to the August 9,1991, proposal letter, which provided for a “good faith deposit” in that amount to cover Mellon’s “out-of-pocket expenses.” The Committee’s evidence indicates that, in light of the failure of the Intershoe/Mellon loan to close and the failure of Intershoe’s financial condition to stabilize or improve *467subsequent to the date of the transfer, no reasonably equivalent value was conferred in exchange for the $125,000.00. Mellon contends not only that its expenses were necessary and reasonable, but that its proposal, due diligence and commitment subsequent to the initial $125,000.00 transfer conferred benefit on Intershoe by: 1) encouraging trade suppliers to extend unsecured credit to In-tershoe; and 2) encouraging the Signet Group to extend its loan facility with Inter-shoe during the relevant time period.
Considering Mellon’s contentions first, the evidence was persuasive that Mellon’s involvement in pursuing a loan transaction with Intershoe was a factor in the continuing extensions of credit from trade suppliers and the Signet Group, though not the sole or principal factor and not as weighty a factor as Mellon would like me to conclude. With regard to the trade suppliers, according to Mellon’s own evidence, Intershoe accrued more than $10 million in unsecured debt to the trade creditors during the period when Mellon was performing its due diligence; from their perspective this can hardly be deemed a benefit.11 Additionally, Mellon presented little direct evidence that its dealings with Intershoe were an important factor in continued extensions of credit from the trade suppliers; other significant reasons existed for continued extensions of credit, including the fact that many of Intershoe’s suppliers were sole source suppliers dependent upon Intershoe to distribute their products. Notably the trade suppliers extended credit to Intershoe before Mellon’s proposal and after the Intershoe/Mellon deal was dead.
With regard to the alleged benefit related to the Signet Group financing, I also conclude that Mellon’s dealings with Intershoe were a factor but neither the sole nor principal factor. The first extension by the Signet Group occurred in February, 1991, long before any proposal or commitment was issued by Mellon. The second extension occurred on September 29, 1991, prior to Mellon’s commitment — this was the time period in which Intershoe was paying the Signet Group millions of dollars at the expense of its trade suppliers. There appears, therefore, to have been significant incentive for the Signet Group to support Intershoe as a going concern exclusive of any interest by Mellon in the refinancing. Even after Mellon withdrew its commitment, the Signet Group agreed to extend its credit facility, lending credence to the Committee’s position that the Signet Group would have extended its loan facility regardless of Mellon’s involvement.
The Committee’s evidence that no benefit was conferred is simple and accessible yet is quite powerful in its simplicity. The Mellon loan never closed; therefore the primary anticipated source of value from the transaction failed. Additionally, during the period Mellon was actively involved, Intershoe’s going concern value did not stabilize or increase; rather, it deteriorated. Compare Metro Communications, 945 F.2d at 647 (stating that “when the debtor is a going concern and its realizable going concern value after the transaction is equal to or exceeds its going concern value before the transaction, reasonably equivalent value has been received”).
Other factors are relevant, however. Mellon established a valid contractual basis for retention of the $125,000.00. The August 9, 1991, proposal letter provides for a good faith deposit in that amount and Mellon established to my satisfaction that such agreement was of an ordinary commercial nature and that Mellon actually and reasonably incurred out-of-pocket expenses through the cessation of its takedown examination in excess of the $125,000.00 deposit such as warranted retention of the deposit under the agreement.12 The contractual nature of this *468relationship is entitled to some degree of respect in the balancing. Additionally, the parties’ agreement was made in the government-regulated arena of HLT transactions and in an open and competitive marketplace; the evidence indicated that the parties were at arm’s-length at the time the proposal was issued and accepted. Finally, a three month period passed between the transfer of the initial $125,000.00 and the termination of the proposed transaction; there was adequate time for some degree of the types of indirect benefit alleged by Mellon to accrue with respect to this initial transfer.
In the Zolfo Cooper case, discussed above, I was confronted with an analogous circumstance in which some degree of benefit was conferred on Intershoe in a commercial relationship, but the amount of that benefit was quite difficult of ascertainment. Under the totality of the existing circumstances, I found the best measure of that value to be the price Intershoe would have had to pay in the open market for similar services.
In the instant case, I also find there to have been a degree of value conferred on Intershoe by Mellon’s pursuit of the loan transaction. Here, as in Zolfo Cooper, the economic value of that benefit is quite difficult of ascertainment. As an additional complicating factor, due to the unique nature of the transaction and the circumstances associated with it, information on the market value of Mellon’s actual costs is not readily available.13 Under the circumstances of the case, I find that the parties’ initial August 9, 1991, agreement and Mellon’s proofs as to the reasonableness of the out-of-pocket expenses incurred thereunder provides the best available evidence of the value of Mellon’s contribution. The value conferred, $127,588.04, exceeds the transfer; therefore, Mellon will prevail with regard to the initial deposit amount.14
2. The October 8 1991, $125,000.00 transfer
The $125,000.00 transfer made from Intershoe to Mellon on or about October 8, 1991, stands on entirely different footing than the initial transfer. The transfer was described in the testimony as an additional good faith deposit; however, the August 9, 1991, proposal letter does not specifically provide for a second deposit and no document was introduced into evidence to substantiate the request. Moreover, Mellon was able to substantiate only $127,538.04 in out-of-pocket expenses through the date of termination of the proposed transaction in mid- to late November; therefore, under the contractual terms of the August 9, 1991, proposal letter, Intershoe would have been entitled to a return of $122,461.96 ($250,000.00 in deposits minus the $127,538.04).15
It was not until Intershoe executed the November 7, 1991, commitment letter, which provides among its terms for the retention by Mellon of all deposits if the transaction failed to close, that Mellon obtained a contractual right to retain the second deposit in its entirety. Put another way, on November 7, 1991, Intershoe transferred its right to a *469return of the bulk of the second deposit. Therefore, with regard to the $122,461.96, I find the relevant date of transfer to be November 7th.
To complete the analysis, I must assess the benefit Mellon conferred upon Intershoe subsequent to November 7,1991. Mellon issued a highly-eonditional commitment, which, inter alia, was contingent upon an equity injection of $15 million. Mellon asserts that the commitment had significant value; the Committee contends it had none. In reaching my determination as to Intershoe’s insolvency, I discussed the uncertainty associated with the equity investor’s prospective participation— TCR had made no commitment to participate in the transaction and Intershoe’s deteriorating financial condition was a deterrent to an equity investor. The evidence then indicates that the conditional nature of Mellon’s commitment decreased its value dramatically. In addition, there was a very short window of time during which the loan commitment was alive in which indirect benefit could accrue. There was no evidence of the amount of credit trade suppliers extended during that short period and the Signet Group did not then agree to further extend the credit facility to which it had already committed.
Mellon attempted to justify retention of the $122,461.96 by arguing that the exorbitant amount of time devoted by its officers and employees to the transaction was of value to Intershoe and the amounts of their salaries, bonuses, stock options and other compensation can be viewed as a measure of the value of the benefit Mellon conferred on Intershoe. Similarly, Mellon seeks to advance its lost opportunity costs as another item to be considered in determining value to Intershoe.
I note first that a large portion these costs were incurred prior to November 7, 1991, when Intershoe transferred its right to a return of the $122,461.96. Second, although I believe that Mellon’s internal costs are relevant in the totality of the circumstances, I do not feel that they must be accorded great weight. From the creditors’ perspective espoused in Metro Communications, it mattered little how much time Mellon’s people spent on the transaction; what would have been important would have been a firm and less conditional commitment.16 Additionally, credible testimony at trial indicated that internal costs are not normally factored into loan transactions exclusive of facility-type fees; therefore there is no commercial basis independent of the November 7th agreement for retention of the $122,-461.96. By November 7th, the arm’s-length nature of Intershoe’s relationship with Mellon had disintegrated; Intershoe’s financial condition had deteriorated and the Mellon loan appeared to be one of few if not the only remaining option Intershoe had to survive as a going concern. Mellon, then, had the opportunity to extract fees not ordinarily warranted on a arm’s length commercial basis.17
Excluding Mellon’s internal associated costs, and given the absence of an equity investor commitment to the transaction, the dependency of Mellon’s commitment on participation of an equity investor, and Inter-shoe’s precarious and deteriorating financial condition, it is extremely difficult to conclude that Mellon’s conditional commitment had a great deal of value. Based upon the totality of the circumstances, the Committee has established that Mellon failed to confer reasonably equivalent value in exchange for the $122,461.96.18
*4703. The November 7, 1991, $265,000.00 transfer
Intershoe’s transfer on November 7, 1991, of $265,000.00 entails most of the same circumstances as Intershoe’s surrender of its right to a return of the $122,461.96: 1) the transfers occurred on the same date; 2) both transfers were made in exchange for a highly conditional loan commitment, and all parties should have known there was a substantial probability that the loan would not close; 3) both transfers occurred at a time when In-tershoe was in a poor bargaining position; and 4) the proposed loan transaction disintegrated shortly after both transfers. The principal difference between the two transfers is that Mellon did proffer credible evidence at trial that a non-refundable commitment fee of $265,000.00 was commensurate with fees charged in the banking industry for the type and scale of the loan at issue.
Weighing this distinguishing factor in the totality of the circumstances, I still do not find reasonably equivalent value provided. The commercial “ordinariness” of the transfer to a degree alleviates the concern about whether the transfer was arm’s length but does not eliminate it. It is doubtful that Intershoe under arm’s length circumstances would have executed a commitment letter requiring the payment of $387,461.96 in fees and conditioned upon a $15 million equity investment without a firm and written commitment from the investor. Additionally, I find that the remaining factors discussed in the section above outweigh the consideration of the “ordinariness” associated with the amount and non-refundable nature of the fee, including the doubtful value of the highly-conditional commitment and its short-lived existence. In the terms of the Metro Communications court, Intershoe’s creditors benefitted little from Mellon’s highly conditional commitment which was rendered worthless within a short time after its issuance. Based upon the totality of the circumstances with due and weighty consideration to the creditors’ perspective, I find the Committee has met its burden of establishing that Mellon failed to confer reasonably equivalent value in exchange for the $265,000.00 transfer.
C. Good faith and the integrity of commercial transactions
In the Chomakos case, cited by Mellon, the bankruptcy court held that a gambling casino conferred reasonably equivalent value in exchange for a net $7,700.00 loss gambling. The bankruptcy court specifically limited its holding to the facts before it, stating:
[o]ne could readily conjure up a situation where a “high roller” whose financial situation is well known, gambles at a casino one or two times shortly before filing bankruptcy and loses an inordinately large amount of money. That factual situation, or something much more akin to it then (sic) this one, contains the seeds of a possibly different result.
Chomakos, 170 B.R. at 596. As persuasively argued by the Committee, the facts of the case before me are much more akin to the “high roller” analogy than to the specific facts before the Chomakos court and the case is therefore of limited direct relevance.
The Chomakos decision, however, is noteworthy because of the court’s thoughtful discussion of its concern about chilling commercial relationships with parties who are financially troubled. Many commercial relationships contain benefits to parties that are difficult if not impossible to measure or ascertain, and the Chomakos court questioned whether Section 548 was intended to sweep such transactions within its reach. The Cho-makos court apparently concluded that, in appropriate circumstances, the court may consider the ordinary commercial nature of the parties’ relationship as an important factor in its totality of the circumstances analysis. See also In re Fairchild Aircraft Corp., 6 F.3d 1119, 1126-27 (5th Cir.1993).19
*471With due respect for the Third Circuit’s decision in Metro Communications, I have tried to incorporate an element of the Cko-makos court’s reasoning into my analysis of the facts of this case, and I too express a concern for preserving parties’ confidence in ordinary commercial relationships. The result in this case seems to be the most appropriate balance possible under the circumstances: Mellon receives full payment of its reasonable and necessary out-of-pocket costs contractually provided in its proposal; however, it does not receive payment of fees associated with the granting of a highly conditional loan commitment on the eve of disintegration of the entire transaction. The decision should do nothing to discourage lenders from proceeding forward in good faith with risk-involved transactions to the point of commitment; though, in order to obtain fees associated with actual commitment, they may wish to assure that their loan commitments are not illusory.
D. Pre-judgment interest
The Committee also seeks an award of prejudgment interest. Most courts have found that bankruptcy courts have the discretion to award prejudgment interest in a fraudulent conveyance action. See, e.g., In re FBN Food Services, Inc., 175 B.R. 671, 690 (Bankr.N.D.Ill.1994). Under the equities of this case, which include the amount of the judgment being rendered in favor of the Committee, Mellon’s substantial losses associated with the transaction including lost business opportunities and time, and my finding of an absence of intentional bad faith on Mellon’s part, I have decided not to make the additional award of prejudgment interest.
Conclusions of law
1. I have jurisdiction over the instant adversary proceeding pursuant to Sections 157 and 1334 of the Judicial Code. Pursuant to Section 157(b)(2)(H), this is a core proceeding.
2. Intershoe had an interest in transfers to Mellon totaling $515,000.00 which were made within the one year preceding Inter-shoe’s bankruptcy filing.
3. At all times relevant to this adversary proceeding, Intershoe was insolvent.
4. The Committee failed to establish by a preponderance of the evidence that Intershoe did not receive from Mellon the reasonably equivalent value of the $127,538.04 in reimbursement for out-of-pocket expenses paid to Mellon.
5. The Committee established by a preponderance of the evidence that Intershoe did not receive reasonably equivalent value in exchange for $387,461.96 in fees paid to Mellon.
6. Pursuant to Section 548 and 550 of the Bankruptcy Code, the Committee is entitled to judgment in the amount of $387,461.96.
7. The equities of the case do not favor an award of prejudgment interest.
. Unlike commercial or real estate loans, an asset-based loan is granted against a borrower's accounts receivable and inventory, which requires extensive analysis of, inter alia, the borrower's accounts receivable, inventory, business plan, historical financial statements and projections. An analysis and verification of whether the borrower will be able to generate sufficient cash flow to service the debt and pay down the loan is required.
. Intershoe's monthly financial statement for October, 1991, indicated a loss for the two months ending October 31, 1991, in the amount of $4,132,934.00. By the end of October, 1991, Intershoe’s liabilities exceeded its assets by $8,187,903.00.
. If the loan had closed, Intershoe would have been required to pay an additional sum of $265,-000.00, one-half of which represented the facility fee that remained due to Mellon and the other half to be paid to the other loan participants.
. Mellon's own commitment letter seems to recognize the problems with IS International and Intershoe’s other affiliates, as it requires consolidation of the affiliates, which according to the evidence would have had the effect of eliminating the receivables owed by those companies and would have provided Intershoe with little value in return.
. Even though Peat Marwick opined upon the 1991 financial statement, it was Intershoe's decision to make the write-offs and adjustments actually made to the financial statement.
. While the seasonality of Intershoe’s business accounted for a degree of the losses in the Fall of 1991, the actual losses sustained were much higher than expected.
. Since March, 1992, the gross amount collected from the liquidation of Intershoe's inventory and receivables has been $41,871,000.00. It is believed that the net amount realized after payment of collection costs and commission will be approximately $34.5 million.
. Such unsupported entries include: Intershoe's uncollectible accounts owed by IS International; the alleged credit from Intershoe's suppliers; and the treatment as an asset of the three-quarter million dollars Intershoe spent to pursue the proposed Intershoe/Mellon transaction.
. Of the three words, only the last is defined. Pursuant to Section 548(d)(2)(A), "value” means *465“property, or satisfaction or securing of a present or antecedent debt of the debtor."
. The Third Circuit also found that, in valuing the cost of the debtor's guarantee, the right to contribution from co-guarantors needed to be balanced against the debt for which the debtor was liable. Id. at 648.
. From the perspective of the secured creditor, the Signet Group, however, this may very well have been a great benefit. While Intershoe was incurring trade debt, in made corresponding payments on its bank debt, reducing it by approximately $10 million.
. The Committee contends that Mellon's claimed expenses were inflated and unreasonable;- however, I accept and here adopt Mellon's evidence concerning the reasonableness of the $127,538.04 in out-of-pocket charges. I found the Committee’s comparisons of the Mellon transaction to other proposed loan transactions to be flawed, both because of differences in the other transactions and because most of the other transactions never reached the point of commitment and takedown examination; they stopped *468short at whatever point the bank determined it would not extend the credit on the requested basis. I also found the Committee’s contention that Mellon's European due diligence trip was a "junket” or "boondoggle” to have been wholly without credible support. Given the amount of the proposed loan and the risk associated with it, it appears to me that the visit to Intershoe’s facilities abroad and to the supplier facilities was entirely justified.
. As previously stated, I reject the Committee's contention that other bank transactions evidenced in this case were sufficiently similar in nature and development to serve as a basis for comparison to the costs Mellon incurred.
. I note that the August 12th transfer was the only transfer prior to August 31, 1991, the benchmark date for Intershoe's audited financial statements. Given my ruling with regard to this transfer, there was no need to extrapolate to August 12th to find insolvency on that date, although based upon the evidence, I would have no trouble doing so.
.Although the August 9, 1991, proposal letter does not specifically provide for return of unused good faith deposits under the circumstances that unfolded in this case, neither does it provide for retention under those circumstances. Given the nature of the transfer as a "deposit” and the Committee's testimony regarding ordinary banking practices, I find as a matter of contract interpretation that unused deposits should have been returned under the terms of the August 9 agreement and in absence of subsequent agreement.
. Mellon’s interned costs are different from the fees of the financial consultant in Zolfo Cooper, where the financial consulting firm's efforts were expended directly in the attempt to restructure and manage Intershoe.
. The Committee sought at trial to establish that Mellon knew by early November 1991, that the loan to Intershoe was not going to close, and it therefore issued its commitment letter with conditions impossible to meet solely to extract fees from Intershoe. I have not gone that far in my factual findings; however, I do find that Mellon had ample reason to believe there was a significant possibility that Intershoe could not meet one or more of the conditions of the commitment letter, including the TCR equity investment.
.With regard to $2,538.04 of the second $125,-000.00 deposit, I find that Mellon did confer reasonably equivalent value. Intershoe’s initial deposit was $125,000.00 and Mellon's actual out-of-pockets were $127,538.04; the $2,538.04 covers the remainder of Mellon’s out-of-pockets and should be retained by Mellon for the reasons *470stated in my discussion of the initial $125,000.00 deposit.
. Although I found the discussion in the Fair-child case, also cited by Mellon, to be relevant to this case, I found the facts distinguishable in that the court in Fairchild identified "several immediate benefits" to the debtor related to the transfers at issue. See Fairchild, 6 F.3d at 1126. Based upon my findings, I do not agree that similar immediate benefits are present in the case before me. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492191/ | MEMORANDUM OPINION
STEPHEN S. MITCHELL, Bankruptcy Judge.
This matter is before the court on the debtor in possession’s objection to the $100,-991.25 secured claim filed by Colonial Farm Credit, ACA (“Colonial Farm Credit”). The claim has been assigned to Lloyd C. March, Jr. (“March”) and his wife, June 0. March (collectively, “the Marches”).1 The issue is whether a mistaken quotation of the payoff amount, and the acceptance of that amount by the noteholder, has discharged the debt. For the reasons discussed, the court concludes that the indebtedness was not discharged, and that claim should be allowed as filed, reduced by a $5,108.14 post-petition credit.
Findings of Fact
The parties have stipulated to the relevant facts and documents. The debtor purchased a 166 acre tract in Suffolk, Virginia, from March on July 16, 1991, and gave back two promissory notes, one for $350,000.00 and one for $100,000.00, secured by first and second deeds of trust, respectively, against the real estate.2 March in turn pledged both notes to Colonial Farm Credit to secure his own $350,000.00 note to Colonial Farm Credit. In connection with the pledge, March endorsed the two notes to the order of Colonial Farm Credit and executed assignments of the two deeds of trust. The assignments were recorded in the land records. The endorsements and assignments were absolute on their face and did not include any restrictive language indicating that the transfer was for purposes of security only.
With March’s consent, Colonial Farm Credit collected the payments on the two notes and applied them to March’s own note. After the debtor filed its chapter 11 petition in this court on July 15, 1993, Colonial Farm Credit filed proofs of claim on or about August 24, 1993, with respect to the two notes.3 Additionally, on or about November 1, 1993, Colonial Farm Credit filed a motion for relief from the automatic stay in which it alleged it was the “holder” of a claim against the debt- or “evidenced” by the notes.4 After this court entered an order granting relief from the automatic stay effective December 31, 1993, Colonial Farm Credit advertised the property for foreclosure. .
The debtor had previously obtained an offer from Warren L. Birdsong dated August 25,1993, to purchase 146 acres of the property for $400,000.00. The sale was approved by this court on November 16, 1993, without objection from Colonial Farm Credit and went to settlement on January 20,1994. The motion to approve the sale did not seek, and the order did not provide for, a sale free and clear of liens under § 363(f),5 even though the “Land Purchase Agreement” between the debtor and Birdsong stated that the purchase offer was “[sjubject to removal of liens by Bankruptcy Court, if necessary to convey clear title.” The settlement attorney, Jesse J. Johnson, Jr., telephoned Colonial Farm *518Credit and requested payoff figures for the two notes. Colonial Farm Credit advised Johnson that the payoff amount was $394,-813.24. This figure, however, was not the amount due on the two notes made by the debtor6 but rather the amount due on March’s note to Colonial Farm Credit. The settlement attorney delivered a check for $394,813.24 to Colonial Farm Credit, which then marked March’s note as paid in full and endorsed back over to him the two notes made by the debtor. Neither note has been marked “paid” and neither deed of trust has been released.
Conclusions of Law
This court has jurisdiction of this controversy under 28 U.S.C. §§ 1334 and 157(a) and the general order of reference entered by the United States District Court for the Eastern District of Virginia on August 15, 1984. This is a core proceeding under 28 U.S.C. § 157(b)(2)(B).
There is no dispute between the parties as to the amounts actually owed on the two promissory notes on the morning of settlement. As noted above, that amount is stipulated to have been $499,896.06. The Marches concede that the $394,813.24 paid at settlement was sufficient to pay off the first deed of trust in full, but they vigorously dispute that it also paid the second deed of trust. The issue before the court, therefore, is whether the misstatement of the payoff amount by Colonial Farm Credit to the settlement attorney, and the delivery to Colonial Farm Credit of funds in that amount, operated as a full discharge of the indebtedness.
No reported Virginia case has been cited to the court deciding whether a note-holder is barred by a mistaken quotation of a payoff amount from thereafter enforcing the note according to its terms. Since Virginia law does permit a person who, under a mistake of fact, pays more than is due on a debt to bring an action to recover the overpayment,7 it seems likely that a Virginia court confronted with the issue would hold that a noteholder who by inadvertence or under a mistake of fact accepted less than was actually due would similarly be able to bring an action for the difference. Any such action, however, would necessarily be subject to the doctrine of equitable estoppel as recognized in Virginia. As explained by the then-Supreme Court of Appeals of Virginia in Thomasson, Adm’r v. Walker, 168 Va. 247, 256, 190 S.E. 309, 312-313 (1937),
The general rule of equitable estoppel, or, as it is frequently called, estoppel in pais, is that when a person, by his statements, conduct, action, behavior, concealment, or even silence, has induced another, who has a right to rely upon those statements, etc., and who does rely upon them in good faith, to believe in the existence of the state of facts with which they are compatible, and act upon that belief, the former will not be allowed to assert, as against the latter, the existence of a different state of facts from that indicated by his statements or conduct, if the latter has so far changed his position that he would be injured thereby.
As explained in Thomasson, equitable estop-pel flows from the principle “that when one of two innocent persons, each of whom is guiltless of an intentional moral wrong, must suffer a loss, it should be borne by that one of them who by his conduct has rendered the injury possible.” Id.
In this connection, it is worth emphasizing what the present litigation is not about. This *519matter is before the court on the debtor’s objection to the Colonial Farm Credit proof of claim, now assigned to the Marches. It is not before the court on an action by Birdsong to quiet title to the 146 acres he purchased from the debtor in possession. The distinction is crucial, because the facts that would operate as an estoppel in favor of Birdsong simply do not apply to the debtor.
Viewed from the prospective of the purchaser, Colonial Farm Credit was either the owner of the two notes8 or at the very least the authorized agent of March with apparent authority to quote a payoff figure for the notes. Regardless of whether it was the owner of the note or only an agent, Birdsong had the right to rely on the payoff figure provided by Colonial Farm Credit. No reason is suggested why such reliance would not have been reasonable, and it is inconceivable that Colonial Farm Credit would not have expected Birdsong to rely on the payoff figures in going through with settlement. Furthermore, based on Colonial Farm Credit’s representation as to the amount needed to pay off the notes, Birdsong changed his position to his detriment by paying the purchase price (almost all of which went to Colonial Farm Credit) and taking title to the property. Thus all the elements for equitable es-toppel are present.
The situation with respect to the debtor, however, is very different. Prior to the date of the Birdsong contract, Colonial Farm Credit had filed proofs of claim in the debtor’s case setting forth the balances due on the two notes. Those balances, in the aggregate, substantially exceeded the purchase price at which the debtor negotiated to sell the 146 acres to Birdsong. The debtor, as debtor in possession, must be charged with at least constructive knowledge of the proofs of claim filed in its own case. It is true, as noted above, that Colonial Farm Credit may well have sowed confusion by attaching as exhibits to its $359,487.35 proof of claim copies of both the $300,000.00 and the $100,000.00 notes and both deeds of trust. Standing alone, that proof of claim could logically be read as a representation that $359,487.35 (plus allowable post-petition interest) would pay off both notes in full. However, the $359,487.35 proof of claim did not stand alone. Colonial Farm Credit also filed a separate proof of claim with respect to the $100,000.00 deed of trust, and the debtor in possession could not simply ignore the fact, at the time it sought approval of the Birdsong contract, that there were before the court two proofs of claim by Colonial Farm Credit totalling $460,478.60.
Moreover, the balance due on the two notes was not the type of information that in the nature of things would have been within the exclusive knowledge of Colonial Farm Credit. The debtor was the maker of both notes and was certainly aware of their relevant terms. Each note was for a fixed rate of interest, with payments being applied first to accrued interest, then to reduction of principal. Since there is no indication that any party other than the debtor was making payments on the notes, and since the debtor presumably knew what payments it had made, the debtor was in as good a position as Colonial Farm Credit to calculate how much was due on the notes.
Additionally, approximately a week prior to tendering the sketch order approving the sale of the 146 acres to Birdsong, the debtor had been served with Colonial Farm Credit’s motion for relief from the automatic stay. The motion alleged an aggregate balance due on the two notes well in excess of the purchase price to Birdsong, and the debtor in possession therefore could not reasonably have believed, when it went to settlement approximately 10 weeks later, that the purchase price would fully satisfy the two notes. Colonial Farm Credit’s erroneous quotation of the payoff amount to the closing attorney occurred after the contract had been signed and after the court order had been entered approving the sale. As both a legal and a factual matter, therefore, the debtor in possession could not have relied on the mistaken figures furnished by Colonial Farm Credit in entering into the contract with Birdsong nor *520could it have changed its position to its detriment as a result of such reliance.
It may be argued that, had the debtor learned at the settlement table that another $105,082.82 was needed to pay off the two deeds of trust in full, it could have returned to this court and sought, under § 363(f) of the Bankruptcy Code, an order allowing the sale of the 146 acres free and clear of liens. But even assuming the debtor had successfully done so, the result would have been at most an order releasing Colonial Farm Credit’s Ken from the 146 acres being sold and transferring the Ken to the proceeds of sale. To the extent the note was not satisfied, however, the Ken would have remained on the 20 acres retained by the debtor.
The debtor in possession cites to two reported Virginia decisions in support of its position. Neither opinion, however, addresses the issue currently before the court. In Hall Building Corp. v. Edwards, 142 Va. 209, 128 S.E. 521 (1925), a sufficient sum of money (from insurance proceeds of a budding destroyed by fire) had been placed in the noteholder’s hands to pay the deed of trust in full. At the request of the maker, however, the creditor paid part of the funds back to reimburse the costs of constructing a replacement structure on the property and credited the note for the difference. The issue presented was whether the tendering and acceptance of funds in the fuU amount due on the note effected a release of the deed of trust. The decision simply held that whether the acceptance of the funds constituted payment of the debt turned on the intent of the parties, and that since the evidence did not show a mutual intent that the payment was received in full satisfaction of the debt, the debt was not discharged.
In American Security & Tr. Co. v. John J. Juliano, Inc., 203 Va. 827, 127 S.E.2d 348 (1962), the maker of a deed of trust note had deKvered payoff funds to the payee not knowing that payee had assigned the note and deed of trust to another party as coUat-eral. (The original payee, in response to an inquiry from the settlement attorney, impKed that it had the original note and would deKver it for cancellation.) The court in that case held that where payment of a note is made to a party who does not have the note in hand, the maker takes the risk that such party does not have authority to accept payment on behalf of the noteholder. Since there was no evidence that the noteholder had held out the original payee as its agent for coUection of the note, payment to the original payee was ineffective to discharge the indebtedness, and the assignee was entitled to foreclose under the deed of trust. As in Hall, there was no issue of a factual mistake as to the payoff amount.
In short, whatever equities may operate in favor of a party who changes his position in reasonable reKance on a mistaken payoff quotation, they do not apply to the debtor in possession in this case, who was placed on notice, and should reasonably have been aware, that the sales price was insufficient to satisfy both notes. The debtor is, of course, entitled to have the two notes credited with the amount paid to Colonial Farm Credit. The Marches do not dispute that the $394,-813.24 paid to Colonial Farm Credit was sufficient to pay off the $300,000.00 first trust note in full. The debtor in possession is therefore entitled to have that note marked as paid. The debtor in possession is also entitled to have the $5,108.14 remaining after payment of the first deed of trust appKed to the $100,000.00 second trust note. The terms of the note provide that payments received are to be appKed first to accrued interest, then to principal. The amount due on the $100,000.00 note on January 20, 1994, when the payment was tendered, was $97,-412.35 of principal plus interest of $12,778.53. Of the interest due, at least $4,563.70 had accrued post-petition. Under § 506(b), Bankruptcy Code, post-petition interest is allowable “[t]o the extent that an allowed secured claim is secured by property the value of which ... is greater than the amount of such claim....” There is no assertion by the debtor in possession that the value of the 166 acres was less than the principal and accrued interest as of January 20, 1994 on the two notes. Thus, appKcation of the $5,108.14 payment reduces the accrued interest by that amount but does not affect the principal balance of the note, which remains at $97,412.35. Whether additional in*521terest properly accrues depends on the value of the collateral. Since that issue is not currently before the court, the court makes no ruling.
Accordingly, a separate order will be entered (1) disallowing the $359,487.38 claim in full as having been paid post-petition,9 and (2) allowing the $100,991.25 claim in the amount claimed, reduced by the $5,108.14 post-petition credit against accrued interest. The allowance of the claim is without prejudice to the right of the debtor in possession to bring a motion under § 506(a) of the Bankruptcy Code to value the debtor’s collateral.
This memorandum opinion constitutes the Court’s findings of fact and conclusions of law under Fed.R.Bankr.P. 7052.
. The Marches are themselves debtors in possession in their own chapter 11 case.
. There was also an unsecured note for $40,-000.00 which is not at issue here.
. One proof of claim, in the amount of $359,-487.35, included as attachments copies of both the $350,000.00 and the $100,000.00 promissory note and copies of both deeds of trust. The other proof of claim, which was in the amount of $100,991.25, had attached a copy of the $100,-000.00 note and the deed of trust securing it.
. The balance due on the two notes was alleged in the motion to be in the “approximate amount of $450,000.00.”
. The order simply provided, "WHEREFORE the Court does approve the application and grant the debtor in possession the authority to sell and convey the aforesaid property.”
. The stipulated amount (principal and interest) owed on the first trust note was $389,705.18. The amount owed on the second trust note was $110,190.88.
. See, e.g., Hughes v. Foley, 203 Va. 904, 906, 128 S.E.2d 261, 262 (1962) (Payment made under a mistake of fact is recoverable "where the person to whom the payment is made is not entitled thereto and cannot in good conscience retain it.” In such a case, "the right of recovery is based upon the promise to return the money which the law implies, irrespective of any actual promise, and even against the refusal to make it, whenever the circumstances are such that in equity and good conscience the money should be paid back”). To the same effect is Va. Ins. Rating Bureau v. Commonwealth ex rel. State Farm Mutual Automobile Ins. Co., 186 Va. 270, 42 S.E.2d 419 (1947) (Although payment made under mistake of law is ordinarily not recoverable, payment made by inadvertence is recoverable where person to whom it is made is not entitled thereto and has not altered its position as a result of the payment).
. The Marches concede that Colonial Farm Credit was the "holder” of the note at the time the payment was made.
. Although the objection before the court specifically addresses only the $100,991.25 claim, the claims are inextricably intertwined and the court, in reaching a decision as to the amount due on the $100,000.00 note, is necessarily required to determine the status of the $350,000.00 note. Accordingly, since all necessary parties are before the court and the court has the benefit of all evidence relevant to both notes, the court, in order to provide complete relief and avoid a multiplicity of proceedings, will enter an order with respect to both proofs of claim. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492192/ | *522DECISION AND ORDER
ROSS W. KRUMM, Chief Judge.
The matter before the court arises as a result of the motion by the trustee in bankruptcy for the above-captioned estate for a determination as to the secured status of certain judgment liens with respect to certain real property located in the State of New York which became property of the estate under 11 U.S.C. § 541(a)(5)(A). There are of record in New York State three judgment liens and one tax lien. For the reasons stated in this decision and order, the court holds that neither the judgment liens nor the tax lien attached to the property of the estate and the creditors involved do not have a position of priority in the distribution of sales proceeds over unsecured creditors.
Facts
Arlene Frances Campbell, the debtor, filed her petition for relief on July 29, 1992. On October 20, 1993, the debtor’s mother died and left property located at 4033 Anne Drive, Seaford, New York. Under the laws of intestate succession in the State of New York, the debtor was entitled to inherit a one-half (3/¿) interest in the real property.
By order of this court dated September 15, 1993, the trustee was authorized to sell the property free and clear of liens and to retain the proceeds attributable to the property of the estate pending a determination by this court as to the nature, extent and priority of three judgment liens and an IRS 1040 tax lien all of which had been obtained against the debtor pre-petition and duly recorded in the jurisdiction where the New York real estate owned by her deceased mother was located. The judgments recorded are as follows:
1) Judgment in favor of New York Telephone Company docketed October 6, 1983;
2) Judgment in favor of Key Bank of Long Island docketed on June 27, 1989;
3) Judgment in favor of Joseph Guardino docketed May 1, 1990; and
4) IRS 1040 tax lien docketed on March 19, 1990.
All of the foregoing were docketed against the debtor and no other party.
Law and Discussion
At the date of the filing of debtor’s petition for relief, all of the above-referenced creditors had inchoate judgment liens which had not attached to the real property owned by the debtor’s mother who was then living. When the debtor’s mother died on October 20,1993,11 U.S.C. § 541(a)(5)(A) operated to bring a one-half flé) interest in the real estate under the jurisdiction of the bankruptcy court. That section states:
(a) The commencement of a case under section 301, 302, or 303 of this Title creates an estate. Such estate is comprised of all the following property, wherever located and by whomever held:
(5) Any interest in property that would have been property of the estate if such interest had been an interest of the debtor on the date of the filing of the petition, and that the debtor acquires or becomes entitled to acquire within 180 days after such date—
(A) by bequest, devise, or inheritance;
It is common knowledge that 11 U.S.C. § 362(a) of the Code imposes a stay, applicable to all entities of “(4) any act to create, perfect, or enforce any fien against property of the estate.” Thus, when the debtor filed her petition for relief the automatic stay of 11 U.S.C. § 362(a) was imposed. This stay was in place on October 20, 1993, when debt- or’s mother died. 11 U.S.C. § 362(c)(1) states:
(c) Except as provided in sub-section (d), (e), and (f) of this section—
(1) The stay of act against property of the estate under sub-section (a) of this section continues until such property is no longer property of the estate.
Pursuant to 11 U.S.C. § 541(a)(5)(A) of the Code, the debtor’s entitlement to the inheritance automatically became property of the estate on the date of her mother’s death. No lien could attach to that property of the estate because of the automatic stay imposed by 11 U.S.C. § 362(a). The property to which debtor was entitled by inheritance on *523the date of her mother’s death remains property of the estate in the form of sales proceeds. Under section 362(c)(1), the stay continues in force. Thus, the creditors referenced above are merely unsecured creditors of the debtor’s estate insofar as the proceeds from sale of the real property of the debtor’s deceased mother is concerned.
The issue raised in this case has been thoroughly reviewed by the bankruptcy appellate panel of the Ninth Circuit. The holding in that ease is equally applicable to the case at bar:
In summary, when the debtors filed their petition they had no interest in the inheritance. As a result, the federal tax hen had not attached, nor could it have been perfected. (citation omitted) By the time the inheritance was acquired, whether by the debtors or by the estate, the automatic stay was in place, preventing the attachment or perfection of the federal tax hen against the inheritance, (citations omitted) While section 541(a)(5) does bring the inheritance into the estate, that statute neither requires, nor implies that such property is also subject to the pre-petition hens. Absent such language, the panel is unwilling to adopt an interpretation contrary to the express provisions of section 362. In re Fuller, 134 B.R. 945, 949 (9th Cir.BAP 1992).
There has been some discussion in this case as to whether the Fuller case is distinguishable from the case at bar with respect to the IRS tax hen because the claim of the Internal Revenue Service in the ease is a nondisehargeable debt. Whether the claim of the IRS is dischargeable is not relevant. The claim of IRS at the date of filing of the debtor’s petition was unsecured vis-a-vis the inheritance which arose post-petition. It may well be that the inchoate hen of IRS will attach to any property of the debtor which she acquires post-petition and post-discharge. However, the inheritance was not the debtor’s property at the petition date and never became the debtor’s property. Section 541 is exphcit. Under sub-paragraph (a) the commencement of a case “creates an estate.” One of the components of that estate is found in sub-paragraph (a)(5) and is “Any interest in property that would have been property of the estate if such interest had been an interest of the debtor on the date of the filing of the petition.” This property of the estate will not pass to the debtor at the conclusion of the bankruptcy proceeding. Instead, the trustee will distribute the proceeds from the sale of the real property to creditors according to law. Therefore, the automatic stay imposed by 11 U.S.C. § 362 will never be lifted to permit attachment of the judgment liens and the IRS hen.
Based upon the foregoing, it is
ORDERED:
That the judgment hens of New York Telephone Company, Key Bank of Long Island, and Joseph Guardino together with the IRS 1040 tax hen be, and they are ah hereby determined to be NON-ENFORCEABLE against the proceeds of sale held by the trustee in bankruptcy as a result of her sale of real property in the State of New York which became property of the estate post-petition upon the death of the debtor’s mother and the operation of the laws of intestate succession in the State of New York. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492196/ | OPINION
LARRY L. LESSEN, Bankruptcy Judge.
The issue before the Court is whether the Debtor may use his wild card exemption under 735 ILCS 5/12-1001(b) to exempt the proceeds from the sale of a business.
The Debtor, Dennis E. Gullo, Jr., filed a petition pursuant to Chapter 7 of the Bankruptcy Code on July 11, 1995. He is currently unemployed. In October 1994, the Debtor sold a business in Galesburg, Illinois, to Brad Price for $20,000.00. He received $9400.00 for the transfer, and he is owed $10,651.00. The Debtor has claimed $2000.00 of the $10,651.00 as exempt personal property under 735 ILCS 5/12-1001(b). The Trustee filed an objection to the exemption on the grounds that the property claimed as exempt is business property.
735 ILCS 5/12-1001 provides in pertinent part as follows:
The personal property exemptions set forth in this Section shall apply only to individuals and only to personal property that is used for personal rather than business purposes.
In this ease, the Debtor is an individual who is not engaged in any business. The limitation on the personal property exemption does not extend to the proceeds from the sale of a business; it only applies to personal property that is used for business purposes. Since the $2000.00 at issue here will be used for personal rather than business purposes, the Trustee’s objection must be denied.
For the foregoing reasons, the Trustee’s Objection to Exemption is denied.
This Opinion is to serve as Findings of Fact and Conclusions of Law pursuant to Rule 7052 of the Rules of Bankruptcy Procedure. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492197/ | ORDER DENYING U.S. TRUSTEE’S MOTION TO ALTER OR AMEND ORDER OF AUGUST 21, 1995
ROBERT G. MOOREMAN, Bankruptcy Judge.
This matter is before the Court pursuant to the U.S. Trustee’s Motion to Ater or Amend the Opinion and Order Denying Motion to Remove Rhonda Repp as Chapter 7 Trustee and Rhonda Repp’s response thereto. After due consideration of the pleadings, the joint pre-trial statement and the record herein, and under the present posture of the case, the Court finds and concludes that no hearing is necessary to dispose of the pending motion.
This Court entered its Opinion and Order Denying the U.S. Trustee’s Motion to Remove Chapter 7 Trustee on August 21, 1995. The U.S. Trustee timely filed the pending motion to alter or amend on August 30,1995, under Bankruptcy Rule 9023. The motion speaks more to reconsideration but the Court will answer the arguments in detail because of the U.S. Trustee’s deep concern about the overall effect of this Court’s ruling.
As an initial matter, the Court will first deal with the U.S. Trustee’s request that the Order be amended to recognize that the embezzlement of bankruptcy estate funds by Laura Carey is a bankruptcy crime. This Court did not hold that Ms. Carey’s embezzlement of the funds was not a bankruptcy ciime. The Court held that Ms. Carey’s actions did not constitute a bankruptcy crime under the applicable version of 18 U.S.C. 153. See Opinion and Order dated August 18, 1995, page 7. That section was amended in 1994 and the Court noted that under the section, as amended, Ms. Carey’s actions appeared to constitute a bankruptcy crime. However, in light of its holding, the Court did not need to determine whether Ms. Carey’s embezzlement was actually a bankruptcy crime pursuant to the amended 18 U.S.C. 153 which did not apply.
The U.S. Trustee argues that the Court used the wrong standard in judging Repp’s nondisclosure of Ms. Carey’s embezzlement to the U.S. Trustee or the U.S. Attorney. While it is true that trustees have a fiduciary duty to an estate and its creditors, administrative decisions by a Trustee, including how to operate his or her office, are judged under the “reasonable trustee” test. In re Haugen Construction Service, Inc., 104 B.R. 233, 240 (Bankr.D.N.D.1989), citing, Ford Motor Credit Company v. Weaver, 680 F.2d 451, 461 (6th Cir.1982). The acts complained of by the U.S. Trustee are administrative decisions. Repp’s actions regarding administration of the bankruptcy estates under her supervision were found to be reasonable under the evidence presented to this Court at trial.
The U.S. Trustee also complains that the Trustee’s Final Reports which Repp signed contained false statements and that *671she therefore breached a fiduciary duty she had to fill out the reports honestly. Trustees are only personally liable for willful and deliberate breaches of his or her fiduciary duty. Id.' The Trustee’s Final Reports signed by Repp and presented as evidence at trial were not patently false and this Court found that Repp did not willfully or deliberately breach any fiduciary duty she had in regard to preparing and signing the reports. See Opinion and Order dated August 18, 1995, page 9; Trial Exhibit “1.” There was no evidence before the Court which established that Repp breached any fiduciary duty.
In the pending motion, the U.S. Trustee concedes that this Court’s conclusion that under 18 U.S.C. 153, prior to the 1994 amendment, Ms. Carey’s actions were not specifically denominated as bankruptcy crimes and therefore Repp had no duty to report the embezzlement under 18 U.S.C. 3057. However the U.S. Trustee then proceeds to argue that Ms. Carey’s embezzlement of the funds is a bankruptcy crime under both 18 U.S.C. 152 and 18 U.S.C. 645 and therefore should have been reported by Repp under 18 U.S.C. 3057. The Court notes of record that neither section 152 nor section 645 were cited at the trial nor do these statutes appear in any pleading filed in this action by the U.S. Trustee. In fact, when questioned by the Court at trial regarding under which statute a bankruptcy crime had been committed, the U.S. Trustee only mentioned 18 U.S.C. 153. And, it is the Court’s opinion that neither 18 U.S.C. 152 nor 18 U.S.C. 645 are applicable to this case.
The U.S. Trustee argues that Ms. Carey committed a bankruptcy crime pursuant to 18 U.S.C. 152(1) and (7). This particular statute is entitled “Concealment of assets; false oaths and claims; bribery.” The specific sections cited by the U.S. Trustee read as follows:
A person who—
(1) knowingly and fraudulently conceals from a custodian, trustee, marshal, or other officer of the court charged with the control or custody of property, or, in connection with a case under title 11, from creditors or the United States Trustee, any property belonging to the estate of a debt- or;
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(7) in a personal capacity or as an agent or officer of any person or corporation, in contemplation of a case under title 11 by or against the person or any other person or corporation, or with intent to defeat the provisions of title 11, knowingly and fraudulently transfers or conceals any of his property or the property of such other person or corporation;
The U.S. Trustee appears to have misread this statute and case law makes it clear that these sections are intended to cover the actions of a person, usually a debtor, who transfers or conceals assets in contemplation of filing bankruptcy or after filing. See U.S. v. Cherek, 734 F.2d 1248, cert. denied 471 U.S. 1014, 105 S.Ct. 2016, 85 L.Ed.2d 299 (7th Cir.1984) (This section requires the bankrupt to disclose the existence of assets whose immediate status in bankruptcy is uncertain). Although 18 U.S.C. 152 may be violated by persons other than the bankrupt, the principal objective of sections 152(1) and (7) is to allow identification of all of a debtor’s assets and affairs to prevent the debtor from hiding or fraudulently transferring any assets. See 1, Colliers on Bankruptcy, 7A.02[l][i] and [7] (15th Ed.1987). The Court concludes that the proper reading of the cited subsections of 18 U.S.C. 152 shows that the statute is intended to cover actions relating to disclosure of assets and affairs of debtors, as opposed to outright theft or embezzlement, which are the crimes covered by 18 U.S.C. 153.
In this case, Ms. Carey embezzled funds, an act which is entirely different from the concealment or fraudulent transfer of a debt- or’s assets, and which is specifically covered by 18 U.S.C. 153. The Court therefore concludes that neither 18 U.S.C. 152(1) or (7) are applicable under the facts of this case.
The U.S. Trustee also alleges that 18 U.S.C. 645, which is part of Chapter 31— Embezzlement and Theft, applies to this case to make Ms. Carey’s actions a bankruptcy crime which Repp had to report under 18 *672U.S.C. 3057. Section 3057 requires a trustee to report “... any violation under Chapter 9 of this title or other laws of the United States relating to insolvent debtors ...” Chapter 9 of Title 18 deals specifically with bankruptcy crimes. Included in Chapter 9 is section 153, which makes embezzlement a bankruptcy crime. However, 18 U.S.C. 645 is part of Chapter 31 of Title 18 and does not specifically relate to insolvent debtors as specified by 18 U.S.C. 3057. Section 645 deals with embezzlement by an officer of the court or by an officer’s employee, but the statute itself does not deal with insolvent debtors. The Court finds and concludes that no duty exists under 18 U.S.C. 3057 requiring a trustee to report an embezzlement which is possibly a crime under 18 U.S.C. 645.
With no analysis, the U.S. Trustee also argues that under U.S. v. Sharpe, 996 F.2d 125 (6th Cir.1993), cert. denied, — U.S. -, 114 S.Ct. 400, 126 L.Ed.2d 347 (1993), 18 U.S.C. 645 applies to bankruptcy trustees and their employees even where 18 U.S.C. 153 does not. It is true that where two criminal statutes may apply to the same conduct, the government may choose which statute it will proceed under unless Congress has clearly intended that one statute supplant the other. Id. at 129, citing, United States v. Oldfield, 859 F.2d 392, 398 (6th Cir.1988). However, the fact that 18 U.S.C. 645 may apply to a case does not in and of itself create a requirement that the alleged crime be reported by a trustee under 18 U.S.C. 3057.
At trial, the U.S. Trustee argued that a bankruptcy crime had been committed pursuant to 18 U.S.C. 153, and as stated here Section 645 was never mentioned until the pending motion was filed. There is no valid reason for 18 U.S.C. 645 to be cited for an act of embezzlement covered by 18 U.S.C. 153. 18 U.S.C. 3057 does not apply to 18 U.S.C. 645 and since the U.S. Trustee chose to proceed pursuant to 18 U.S.C. 153 it cannot now move under 18 U.S.C. 645 after the issues were framed and determined at trial. This is not a criminal proceeding, but the Court finds it disingenuous that the U.S. Trustee now seeks to pursue this action under 18 U.S.C. 152 and 18 U.S.C. 645 at this late date. The Court concludes on this record and the facts of this case that 18 U.S.C. 3057 does not impose a duty on a trustee to report a suspected crime under 18 U.S.C. 645. The Court further concludes that Ms. Lacey’s embezzlement does not constitute a bankruptcy crime under 18 U.S.C. 153, 18 U.S.C. 152 or 18 U.S.C. 645 on this record and therefore Repp was under no duty under the law to report the embezzlement to the U.S. Trustee or the U.S. Attorney pursuant to 18 U.S.C. 3057. The Court concluded that Rhonda Repp took appropriate action by reporting the embezzlement to the local police and of course the U.S. Trustee was well aware of the case in State Court.
The U.S. Trustee states that this Court’s Opinion and Order condones the withholding of information by trustees from the federal authorities and sends a message that candor on the part of a trustee is not required. This bold assertion is an inaccurate statement at best. The Court in no way condones withholding of information from federal authorities by trustees nor does it condone a lack of candor by a trustee. As stated in the opinion it is a good policy matter to notify the U.S. Trustee of a potential loss of assets in due course. Under the circumstance presented there is no applicable law which required Rhonda Repp to give any information to any federal authorities. There is also nothing on this record which proved to the Court that any material representations lacked candor or were patently false. An accusation against a trustee for a lack of candor must be examined on an analysis of the facts. The Court made its prior ruling in light of the specific facts of this case and to hold otherwise on this record would be an injustice.
Accordingly,
IT IS ORDERED denying the U.S. Trustee’s Motion to Alter or Amend this Court’s prior ruling or for reconsideration if so urged by the motion. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492199/ | ORDER ON MOTION FOR PARTIAL SUMMARY JUDGMENT
ALEXANDER L. PASKAY, Chief Judge.
THIS IS a confirmed Chapter 11 case and the matter under consideration is a Motion for Partial Summary Judgment filed by Hillsborough Holdings Corporation (HHC), one of the several debtors involved in these procedurally consolidated Chapter 11 cases. The Motion is filed in the above captioned adversary proceeding commenced by the Debtors and involves a challenge by the Debtors to the allowability of one of the several claims filed by the United States of America (Government). The part of the claim under challenge is registered as Claim No. 1311 and is based on the alleged liability of the Debtors for federal income tax, federal payroll tax and including for “foreign withholding tax.” This is an amended claim and was filed on October 4, 1993 or approximately eleven months after October 30, 1992, the bar date established earlier by this Court. According to HHC the claim based on “foreign withholding tax” set forth in the amended claim is a new claim, filed long after the bar date, is neither a clarification or correction of a previously timely filed claim by the Government thus it does not relate back to the original timely filed claim therefore it should be disallowed.
The facts relevant to the narrow issue as outlined above are really without serious dispute and may be briefly summarized as follows:
On December 27, 1989, HHC and 32 of its Affiliates filed their respective Petitions for Relief under Chapter 11 of the Bankruptcy Code. The Government filed its first Proof of Claim, Claim No. 189, on July 10, 1990. The claim is based on an alleged liability for income taxes for the years 1980, 1983 and 1984 in the amount of $37,504,153.97. This Proof of Claim was amended several times and superseded by Claim No. 246, Claim No. 253, Claim No. 1089 and Claim No. 1310, respectively. All these amendments changed the amounts claimed but all of them were based on corporate income tax liability and some FICA taxes in a minimal amount, but none of them asserted a claim for “foreign withholding tax” liability in the amount of $60,654 included for the first time in the last amendment, Claim No. 1311. This part of the Amended Claim No. 1311, the Claim presently under consideration and challenged by HHC who seeks a disallowance of this Claim on the basis that it is time barred.
It should be helpful to note the following at the outset.
In February, 1994 this Court entered two orders sustaining an objection to two claims *765filed by the Government. The Proof of Claims registered respectively as Claim No. 1310 and 1311 raised for the first time an alleged tax liability of one of the affiliates of HHC, Jim Walter Resources (JWC), based on coal royalties for the fiscal years ending August 31, 1983 and August 31, 1984. In its Order the Court found and concluded that these claims, raised almost a year after the bar date, were new claims and not amendments of previously filed claims. Based on this, the Court struck from the claims anything which related to the coal royalty claims for the fiscal years noted earlier. The Government having been aggrieved by the ruling timely filed a Notice of Appeal. On January 26, 1995, the District Court affirmed this Court’s Order striking the coal royalty claim.
In support of its opposition to the Motion for Partial Summary Judgment, the Government filed a Declaration of Joseph Johnson (sic) to be treated as an Affidavit. Mr. Johnson is a case manager of the Internal Revenue Service (IRS) Examination Group in Tampa, Florida. Mr. Johnson’s Affidavit states that during the audit cycle between 1985 and 1987 conducted by the IRS, HHC and the Government exchanged issues which were in dispute and a liability for imputed interest income arising from in-tercompany transactions between Celotex Corporation (Celotex) which at that time was an affiliate of HHC’s predeeessor-in-interest, Jim Walter Corporation (JWC) and Carey of Canada, a foreign corporation. In the exchange of issues, according to Mr. Johnson, Issue No. IE-003 prepared by the International Examiner included the “foreign withholding tax” issue. Mr. Johnson further states in his Affidavit that at the meeting prior to the commencement of the Chapter 11 cases, the representatives of the IRS and HHC met and discussed the current status of issues concerning the audit relating to the tax years 1985, 1986 and 1987. One of the items on the list which was discussed included “foreign withholding tax” issue which was noted as “disagreed.” This list was prepared by HHC and this issue was discussed at the meeting. In conclusion, Mr. Johnson states in his Affidavit, a statement which is obviously self-serving, that the IRS never intended to abandon the foreign tax issue.
In addition, it is the contention of the Government that the amendment under challenge, Claim No. 1311, merely increased the amount and the newly asserted claim included in Claim No. 1311 for foreign withholding tax liability “relates” to the same transactions which gave rise to the tax liability timely asserted. While the Government concedes that this Court has the discretion to recognize or refuse to recognize the proposed amendment, it would be an abuse of discretion not to recognize the same, first because all parties including, of course, the taxpayers, in this instance HHC and its affiliates, were fully aware of the tax liability claim based on foreign withholding tax; second that it would be inequitable to disallow the amendment because the Bankruptcy Court must be guided by the principles of equity, and the Court must act to insure that “fraud will not prevail, and substance will not give way to form, that technical considerations will not prevent substantial justice from being done.” Pepper v. Litton, 308 U.S. 295, 60 S.Ct. 238, 84 L.Ed. 281 (1939).
It is a generally accepted proposition that amendments to a claim are freely allowed when the purpose of the amendment is to cure a defect in the claim originally filed, to describe the claim already asserted with greater particularity or to plead a new theory of recovery, but only if the amendment is based on the same facts which were the basis for the claim set forth in the original claim. Szatkowski v. Meade Tool & Die Co., 164 F.2d 228, 230 (6th Cir.1947); In re G.L. Miller & Co., 45 F.2d 115 (2d Cir.1930). It is equally recognized, however, that claims filed past the bar date will be carefully scrutinized to assure that the amendment is truly an amendment of the claim originally and timely filed and not really a disguised attempt to file a new claim. In the Matter of Commonwealth Corp., 617 F.2d 415, 420 (5th Cir.1980); Wheeling Valley Coal Corp. v. Mead, 171 F.2d 916, 920 (4th Cir.1949).
The Government in its brief submitted in support of the opposition glosses over the fact that the District Court affirmed this Court’s decision which involved the identical factual scenario, a decision which struck the *766coal royalty claims of the Government which this Court found to be a new claim and not truly an amendment. The Government attempts to characterize the claims filed in this instance as merely changing the amount of the claims from the original amount of $37,-504,153.97 to the ultimate number of $110,-560,883.34. This Court is constrained to reject this characterization for the reason that it is quite evident that the claim for “foreign withholding tax” is totally and entirely different from the basis of all claims timely and previously filed by the Government, all of which were based on corporate income tax liability and some small amount of FICA taxes. The Eleventh Circuit Court of Appeals considered the identical question in the case of In re International Horizons, 751 F.2d 1213 (11th Cir.1985). In this case the Eleventh Circuit affirmed the decision of the District Court which in turn affirmed the decision of the Bankruptcy Court which struck an amended claim of the Government on the basis that the amendment was in fact asserting a new claim and, therefore, to include this claim in a claim filed after the bar date was untimely and was properly disallowed. The Eleventh Circuit gave short shrift to the argument that in light of the fact that the Debtor’s were fully aware of the claim of the IRS therefore it would be inequitable to disallow this newly raised claim because according to the Eleventh Circuit there was never anything in the record which would indicate that anyone in the case, including the debtors, were aware that the Government intended to assert a corporate income tax claim prior to the bar date. The Bankruptcy Court in In re International Horizons, 31 B.R. 723 (Bankr.N.D.Ga.1983), considered the case relied on by the Government in this instance in Menick v. Hoffman, 205 F.2d 365 (9th Cir.1953), and held that Menick had little precedential value and its value was limited to its factual setting in which notice to the individual’s business of a claim for withholding taxes also constituted notice to the individual of his income tax liability. The Bankruptcy Court expressly held that the Notice of the existence of a claim is not sufficient to establish a claim in a bankruptcy case and a creditor has an affirmative duty to file a Proof of Claim. In International Horizons, supra, the timely filed claims were limited to withholding and FUTA taxes and had no mention of any corporate income tax liability just as in the present instance where none of the timely filed claims ever asserted a claim for foreign withholding tax liability. The fact that prior to the commencement of the case this was an issue discussed and disputed is not tantamount to a notification that the Government will assert a claim based on foreign withholding tax liability. The contention of the Government that the amendments merely changed the amount has little if any persuasive force in light of the undisputed record of this case. The Government had numerous opportunities to amend its original claims and nothing prevented the Government from including the claim for foreign withholding tax liability in the four previous amendments. This Court is equally unpersuaded by the argument that it would be unfair and an abuse of discretion to disallow this claim since in the scheme of things this is almost a de minimis claim especially in light of the fact of the other pending claims of the Government in excess of $110 million, and the total claims filed in these cases which exceeds $2 billion. While it is true the amount involved is small, a recognition of this amendment is fraught with danger since it would open the door for additional amendments raising new claims relying on an allowance of this amendment as a controlling precedent.
Based on the decision of the District Court concerning the coal royalty cases and the Eleventh Circuit decision in the case of International Horizons, this Court is satisfied that the principles established by those cases compel and produce no other result but to grant the Motion of HHC for partial summary judgment coupled with the fact that there are no genuine issues of facts which would prevent a summary disposition of this particular issue.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the Motion for Partial Summary Judgment filed by the Debtor be, and the same is hereby, granted and the claim asserted in amended Claim No. 1311 for foreign withholding tax liability in the amount of *767$60,664 be, and the same is hereby, disallowed with prejudice.
DONE AND ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492201/ | DECISION AND ORDER DENYING SUMMARY JUDGMENT TO PLAINTIFF, AND GRANTING SUMMARY JUDGMENT TO DEFENDANT, FEDERAL HOME LOAN MORTGAGE CORPORATION
Robert John HALL, Bankruptcy Judge.
PRELIMINARY STATEMENT
This matter comes before the Court1 upon motion (“Motion”) by Hands Trien & Beck, P.C. (“HTB” or “Plaintiff’) for summary judgment on its first claim for relief against Federal Home Loan Mortgage Corporation (“FHLMC” or “Defendant”) pursuant to Federal Rule Bankruptcy Procedure 7056 and thereafter seeks a directive that FHLMC be directed to disgorge $535,556.00 of adequate protection payments it received and pay it to HTB as and for counsel fees and expenses previously awarded by this Court.
*858In opposition, FHLMC filed its motion for summary judgment (“Cross-Motion”). FHLMC also made a motion for a determination that it is entitled to a superpriority claim pursuant to 11 U.S.C. section 507(b), arguing that in the event of a disgorgement, this superpriority claim would be paid first and envelop any award of fees to be paid to HTB. In light of the Court’s decision with respect to the instant motions, this motion is academic.
For the reason set forth below, HTB’s Motion for summary judgment is DENIED and FHLMC’s Cross-Motion is GRANTED.
HISTORICAL OVERVIEW AND RELEVANT FACTS
The saga continues with respect to the parties’ interpretation of a cash collateral stipulation entered into between FHLMC and Blackwood Associates, L.P. (“Debtor”) on or about July 28, 1992 (“Cash Collateral Stipulation”) and thereafter approved by this Court on August 31, 1992 (“Cash Collateral Order”). The provisions of the Cash Collateral Stipulation that require a judicial reading to resolve the instant dispute are:
8. In the event that the Debtor misappropriates or attempts to misappropriate the Cash Collateral, defrauds or attempts to defraud FHLMC, or fails to make either the Adequate Protection Payment or the tax escrow payment FHLMC shall be entitled, after ten (10) days notice to Debtor during which period Debtor shall have the opportunity to cure such alleged default, to make application to the Court on notice to the Debtor for an Order granting FHLMC relief from the automatic stay to complete its remedies at law, including, without limitation, the appointment of a receiver and foreclosure of its interest in the Property.
9. In the event that relief from stay is obtained with respect to the Property, authorization to use Cash Collateral shall immediately terminate at FHLMC’s option upon i) the appointment of a receiver for the Property, or ii) at any other date following the grant of relief from stay. At such time, all Cash Collateral shall be immediately paid in full to FHLMC.
* * * * * *
IS. FHLMC agrees that i) fees of the U.S. Trustee shall be paid from the Cash Collateral and, ii) Debtors counsels fees and disbursements approved by the Court upon requisite notice and application as required by the Bankruptcy Code and Rules shall be paid from the Cash Collateral. Nothing contained herein shall constitute a waiver of FHLMC’s right to object on a substantive basis to particular amounts requested in any such fee application.
Cash Collateral Stipulation, ¶8, 9, 13.
This Court’s previous determination with respect to HTB’s entitlement to compensation as attorneys for the Debtor pursuant to their second interim fee application is discussed in In re Blackwood Assocs., L.P., 165 B.R. 108 (Bankr.E.D.N.Y.1994). We need not revisit the issue of entitlement. What does need to be addressed is if (emphasis added) the entitlement will be satisfied from disgorged adequate protection payments that had been received by FHLMC, Debtor’s senior secured creditor.
By motion dated April. 8, 1994, FHLMC sought reconsideration, amendment or clarification of this Court’s Order and Decision dated March 30,1994 (“March 30,1994 Decision”) that granted HTB’s second interim fee application (the “Award”). The motion was denied and the Court opined that its independent review and analysis of the application and the Court’s overall review and consideration of the posture of the case justified the Award. However, the Court did consider FHLMC’s revelation that no funds had been generated from rental income on the property prior to March 31, 19932 that were available to pay the Award.
*859At the time of its March 30, 1994 Decision, this Court believed that based upon the information provided, or in this instance not provided, that there were sufficient monies available in the estate to satisfy the Award.
Based upon this disclosure the Court directed in a June 14, 1994 Order,
... to the extent that it seeks to require FHLMC to pay any portion of the fees and disbursements awarded, to commence an adversary proceeding to determine its rights, if any, to require FHLMC to disgorge any portion of the cash collateral received by FHLMC pursuant to the Cash Collateral Order, and to use such disgorged fees to pay HTB’s allowed fees and disbursements.
HTB commenced the adversary proceeding with the gravamen of its complaint focusing on paragraph 13 of the Cash Collateral Stipulation and their belief that this “carve-out” was an unconditional and self-executing provision that would allow fees to be paid from the cash collateral.
HTB in its amended complaint dated November 29, 1994 asks the Court to award a judgment against FHLMC in the amount of $535,556.00 and to direct FHLMC to disgorge $535,556.00 from the cash collateral it received to satisfy that judgment.
FHLMC in its amended answer dated December 12, 1994 asserts that the complaint fails to state a cause of action upon which relief may be granted based upon their view that the provisions of the Cash Collateral Order do not give HTB any rights against FHLMC as there are no priority provisions or any other basis for the payment of fees to HTB once the automatic stay was lifted.
DISCUSSION
Under Fed.R.Civ.P. 56(c) summary judgment is proper if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).
The fact that both parties have moved for summary judgment does not in and of itself say that there are no genuine issues of material fact. In this instance, both parties seek summary judgment based upon the express language of the Cash Collateral Stipulation.
HTB seeks summary judgment based upon this Court’s previous actions with respect to the Cash Collateral Stipulation and their reading of the Cash Collateral Stipulation. That is, that the stipulation is enforceable against FHLMC with respect to their inalienable obligation to pay counsel fees. HTB relies on the unambiguous language of the Cash Collateral Stipulation. They rely on the fact that the Court placed its imprimatur on the Cash Collateral Stipulation when it was so ordered on August 31, 1992. They rely on this Court’s March 30, 1994 Order providing for the Award. They rely on this Court’s June 14, 1994 Order that denied FHLMC’s motion for reconsideration or amendment of the Award.
On the other hand, FHLMC also seeks summary judgment based on their reading of the Cash Collateral Stipulation. FHLMC argues that the terms of the Cash Collateral Stipulation are explicit and unequivocal, i.e., adequate protection payments had to be made so that the automatic stay would not be terminated, an event that could, that did, unilaterally terminate Debtor’s authorization to use cash collateral. Contending that no material issue of facts exist with respect to the conditions and obligations as set forth in the Cash Collateral Stipulation, FHLMC believes they have met their burden to allow summary judgment.
Central to this Court’s decision is the fact that the arguments presented revolve around a stipulation. One of the basic tenets of a stipulation is an agreement,
. The name given to any agreement made by the attorneys engaged on opposite sides *860of a cause.... A voluntary agreement between opposing counsel.
Blaok’s Law Dictionary 1415 (6th ed. 1990).
A stipulation should:
• Discuss the who, what, where, and why of the contested matter underlying the motion;
• Set forth the agreement of the parties to settle (particularly, that the agreement is in the best interests of both the debtor and the creditors in a bankruptcy case);
■ Specify the terms of the settlement and any conditions or sequence of events that attach thereto; and....
Anthony Michael Sabino, PRACTICAL Guide to Bankruptcy § 7.2[3] (Business & Legal Reports, Inc. 1994).
This Court views the Cash Collateral Stipulation as being very specific and crystal clear with respect to the conditions that would allow the debtor to use cash collateral. Any actions to the contrary, i.e., failure to make adequate protection payments or vaca-tur of the automatic stay would trigger a default. The carve-out, as provided in paragraph 13, existed during the efficacy of the Cash Collateral Stipulation.
Arguing that the Cash Collateral Stipulation provided a “true carve-out,” HTB offers the Court a definition of carve-out as stated by Judge Conrad in In re FYM Clinical Laboratory, Inc., No. 90 B 10954, 1993 WL 288541, at 5 n. 4 (Bankr.S.D.N.Y. June 17, 1993):
Bankruptcy jargon defined as: to set aside, cut into pieces or reserve something, which typically belongs to someone else, for a specific purpose; typically to pay professionals or the US. Trustee.
Following this definition, HTB believes FHLMC agreed to an absolute reserve in the Cash Collateral Stipulation for counsel fees.
This Court offers its definition of a “real carve-out” to aid the future negotiators of cash collateral stipulations that contemplate a carve-out.
An agreed upon term in a cash collateral stipulation where a specific amount of the cash collateral, either in existence or to be generated, is earmarked for the payment of counsel fees and disbursements where the payment thereof is not conditioned upon a specific event or occurrence.
Within the four corners of the stipulation, the agreement of the parties exists. Their bargained for exchange was reduced to a single writing. For HTB, the end result, the stipulation, is not what they meant, not what they thought about, and precisely what they regret. Any existing rejected drafts, letters, telephone conversations or memoran-da, whose contents were not included in the Cash Collateral Stipulation are of no import to this Court. They are extraneous to the Cash Collateral Stipulation. In re Bayer Cadillac, Inc., 164 B.R. 450 (Bankr.E.D.N.Y. 1994).
The exhibits attached to the moving papers, indicative of the negotiations, to the extent that they are offered to this Court for what should have been, are rejected. “Unfortunately, ... it is well-settled that where the terms of a written contract are clear and unambiguous the intention of the parties must be found therein, and extrinsic proof tending to substitute a contract different from that evidenced by the writing is inadmissible.” In re Bayer Cadillac, Inc., 164 B.R. at 452, (citations omitted).
Offering an argument that actually bolsters FHLMC’s position that:
(i) HTB got what HTB consented to; and
(ii) whatever HTB may have compromised in their eagerness to obtain FHLMC’s consent to use cash collateral, HTB would now like to edit in,
HTB now argues before this Court,
Mr. Trien: ... I don’t think that the draftsmanship was that poor, I think that the cash collateral order should be read the way we say it should be read, that is that we should, in all events, be paid from Freddie Mac’s cash collateral....
Transcript of July 13, 1995 hearing at 26.
Counsel for HTB argues strenuously that this Court should disturb the Cash Collateral Stipulation and rewrite into the stipulation that which does not exist within the four corners of the document.
The caliber of counsel representing Debtor is admirable, indeed the affidavits in support of their retention and requested fees confirm *861this. If there were any doubt in their minds as to the ability to be paid for their efforts counsel could have easily negotiated a clause that would have provided that, in the event of a default in any of the provisions of the stipulation, counsel fees would still be paid from the cash collateral.
Allowing counsel fees to be paid from available cash collateral is a common practice. To ask this Court to require a secured creditor to disgorge adequate protection payments it received so that debtor’s counsel can be paid is absurd. The mere filing of a chapter 11 petition does not guarantee a successful reorganization where at the end of the day all sides are happy. To the contrary, seasoned bankruptcy counsel know this and ensure that the time and expertise expended will be rewarded after the order awarding the compensation has been entered. Requiring FHLMC to disgorge any money to pay Debtor’s counsel puts them in the unenviable position of having funded the attorneys’ efforts at reorganization — single handedly and unsuccessfully.
For the reasons set forth, HTB’s Motion for summary judgment as against FHLMC is DENIED and FHLMC’s Cross-Motion for summary judgment is GRANTED.
SO ORDERED.
. The Court has jurisdiction over this case pursuant to sections 1334, 157(a) and 157(b)(1) of title 28, United States Code ("title 28”) and the order of referral of matters to the bankruptcy judges by the United States District Court for the Eastern District of New York (Weinstein, C.J., 1986). This is a core proceeding pursuant to section 157(b)(2)(A), (M) and (O) of title 28.
. On April 22, 1993 this Court entered an order granting FHLMC relief from the automatic stay declaring that the value of the property as of March 31, 1993 was $25.3 million, and made a finding that "the Debtor has refused to make certain payments to FHLMC required under an *859agreed cash collateral order between the parties.” "[T]he debtor has not and cannot going forward provide adequate protection to FHLMC....” | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492202/ | MEMORANDUM
DAVID A. SCHOLL, Chief Judge.
The facts of the instant matter are straightforward and undisputed. THOMAS J. DOUGHERTY and HELEN D. DOUGH-ERTY (“the Debtors”) filed a joint Chapter 13 bankruptcy case on November 17, 1994. At that time, the Debtors had failed to file federal income tax returns for tax years 1990 and 1991.
During the course of their case, the Debtors mailed their 1990 and 1991 returns to the INTERNAL REVENUE SERVICE, SPECIAL PROCEDURES DIVISION (“the IRS”) on April 19, 1995, which were received by the IRS on April 28, 1995. The IRS disallowed the Debtors’ 1990 and 1991 tax claims in a letter dated July 25, 1995, because the returns were filed more than three years after their due dates.
The Debtors’ amended plan of reorganization was duly confirmed on August 2, 1995. On August 18, 1995, the Debtors instituted the instant adversary proceeding (“the Proceeding”) to recover $2,312.00, the amount which the Debtors alleged was owed to them by the IRS for overpayment of income taxes for tax year 1991. In so doing, the Debtors invoked 11 U.S.C. § 362, alleging that, by failing to “turn over” the $2,312.00 to them, the IRS was violating the automatic stay.
On the scheduled trial date of the Proceeding, September 26, 1995, the IRS noted that, on the previous day, it had filed a Motion to Dismiss the Complaint in the Proceeding (“the Motion”), pursuant to Federal Rule of Bankruptcy Procedure (“F.R.B.P.”) 7012, incorporating Federal Rule of Civil Procedure (“F.R.Civ.P.”) 12(b)(6), attaching thereto a Brief Memorandum of Law. After a colloquy with counsel, we entered an Order of September 27, 1995, allowing the Debtors until October 10, 1995, to respond to the Motion and continuing any necessary trial to October 31, 1995. We conclude that the trial is not necessary, because the Motion must be granted.
The Debtors argue that the proceeds of the requested tax return is within the broad scope of property of their estate. However, as this court pointed out most recently in In re Jones, 179 B.R. 450, 455 (Bankr.E.D.Pa.1995), although whatever rights the Debtors have in the refund would appear to in fact be property of their estate, the issue of whether those rights entitle them to a turnover of the refund proceeds must be resolved under applicable nonbankruptcy law. See also In re CS Associates, 121 B.R. *885942, 958-60 (Bankr.E.D.Pa.1990); In re Summit Airlines, Inc., 94 B.R. 367, 370 (Bankr.E.D.Pa.1988), aff'd, 102 B.R. 32 (E.D.Pa.1989); and In re Temp-Way Carp., 80 B.R. 699, 702 (Bankr.E.D.Pa.1987).
We should also note that we consider the Debtors’ invocation of 11 U.S.C. § 362(a) to be misplaced. The Debtors are simply invoking 11 U.S.C. § 542(a) to seek a turnover of estate funds allegedly due to them from the IRS. As we stated in In re TM Carlton House Partners, Ltd., 93 B.R. 859, 870 (Bankr.E.D.Pa.1988), “we do not believe that it is a violation of the automatic stay for a party indebted to a debtor to refuse to make payments.” A debtor can more properly simply file an adversary proceeding to recover the sums due without invoking § 362. Id.
The IRS contends that the applicable nonbankruptcy federal law precludes the Debtors’ claim because it is untimely. This analysis begins with reference to 26 U.S.C. § 6513 of the Internal Revenue Code (“the IRC”), which provides that any tax deducted and withheld during the tax year is considered paid on April 15 of the year following the tax year. The IRC, at 26 U.S.C. § 6511(a),. establishes a three-year limitation period after the April 15 return due date following the tax year for filing a claim for a refund. A claim must be filed before the IRS will consider allowing a credit or a refund. 26 U.S.C. § 6511(b)(1). If a claim is filed during the three-year limitation period, the credit or refund is limited to the portion of the tax paid within the three-year period preceding the filing of the claim, plus any filing extension period. 26 U.S.C. § 6511(b)(2)(A). If the claim is filed after the three-year period, any refund is limited to the portion of the tax paid during the two years prior to the claim. 26 U.S.C. § 6511(b)(2)(B). Consequently, any refund claim filed beyond the three-year limitation period is precluded, since the taxpayer would have no effective claim to a refund, unless perchance the taxpayer had paid taxes for the tax year in question during the two years prior to the late claim filing.
Here, the Debtors filed their 1991 claim with their original tax return for that year no earlier than on April 19, 1995.1 Thus, the claim in issue was filed well past the applicable three-year filing deadline. As a result, the Debtors’ claim is limited to any taxes paid for 1991 taxes after April 19, 1993. There is no evidence that the Debtors paid any federal income taxes for 1991 after April 19, 1993, and the Debtors do not make this assertion. Consequently, the Debtors’ claim, although apparently estate property, is barred because it has not been asserted in timely fashion.
In response to the IRS’ contention that their claim is therefore barred, the Debtors invoke 11 U.S.C. § 108(b), which provides as follows:
if applicable nonbankruptey law, an order entered in a nonbankruptcy proceeding, or an agreement fixes a period within which the debtor or an individual protected under section 1201 or 1301 of this title may file any pleading, demand, notice, or proof of claim or loss, cure a default, or perform any other similar act, and such period has not expired before the date of the filing of the petition, the trustee may only file, cure, or perform, as the case may be, before the latter of—
(1) the end of such period, including any suspension of such period occurring on or after the commencement of the case; or
(2) 60 days after the order for relief.
*886Clearly, § 108(b)(2) is not available, because the Proceeding was filed more than 60 days after the order for relief. Moreover, in light of the language in § 108(b) reciting that the time period in issue must not have “expired before the date of the filing of the petition,” it has been held that § 108(b) extends the time period for asserting only pre-petition, as opposed to post-petition, claims. See In re Phillip, 948 F.2d 985, 987 (5th Cir.1991); In re Northern Specialty Sales, Inc., 57 B.R. 557, 559 (Bankr.D.Ore.1986); In re Ward, 42 B.R. 946, 950 (Bankr.M.D.Tenn. 1984); and 2 COLLIER ON BANKRUPTCY, ¶ 108.02, at 108-7 (15th ed. 1995). The instant claim clearly did not arise earlier than April 19,1995, and therefore it is a post-petition claim. As a result, § 108(b) is of no help to the Debtors.
A more provocative issue, anticipated by the IRS in its Memorandum, but apparently not actually pressed by the Debtors, is whether equitable principles can be applied to toll the time periods set forth in 26 U.S.C. § 6511. We will address this issue because we recognize that a F.R.Civ.P. 12(b)(6) motion can be granted only if there is “an insuperable bar” to relief, precluding a cause of action under any set of facts, including a complaint amended to articulate any viable legal theory. See, e.g., In re Dinkins, 79 B.R. 253, 256-57 (Bankr.E.D.Pa.1987), and cases and authorities quoted and cited thfere-in. The Debtors could potentially amend their Complaint and state a claim if equitable tolling could be asserted against the IRS to extend the deadlines established in § 6511. Unfortunately for the Debtors, equitable tolling could not be successfully asserted here.
In 1990, the United States Supreme Court declared that it would not permit equitable principles to be the sole basis to provide jurisdiction in an action by taxpayers to recover an overpayment of federal income taxes when they filed their return more than three years after taxes were paid. United States v. Dalm, 494 U.S. 596, 608, 110 S.Ct. 1361, 1368, 108 L.Ed.2d 548 (1990). The Court expressly held, in Dalm, that federal courts did not have the jurisdictional power to go beyond the authority provided in 26 U.S.C. § 6511(a) of the IRC to so much as consider an independent action for recovery of overpaid taxes on the basis of general equitable principles when the taxpayers had filed their return beyond the applicable three-year statutory time-limit. Id. at 609, 610, 110 S.Ct. at 1369, 1369.
However, later in the same year, the Court seemingly revised its position in a case involving a discrimination complaint against the Veterans Administration by declaring that “the rebuttable presumption of equitable tolling applicable to litigants in private lawsuits should also apply to suits against the federal government.” Irwin v. Department of Veterans Affairs, 498 U.S. 89, 95-96, 111 S.Ct. 453, 457, 112 L.Ed.2d 435 (1990). As a result, several federal courts have subsequently permitted equitable tolling of the limitation periods in §§ 6511(a) and 6511(b)(2)(A), relying on Irwin. See Wiltgen v. United States, 813 F.Supp. 1387 (N.D.Iowa 1992) (taxpayer was suffering from severe mental illness); Scott v. United States, 847 F.Supp. 1499 (D.Hawaii 1993) (taxpayer was suffering from severe alcoholism). But see Vintilla v. United States, 931 F.2d 1444 (11th Cir.1991) (affirming the trial court’s decision that the three-year limitation period for filing a late tax claim was not subject to equitable tolling).
In 1991, the Court again addressed the issue of equitable tolling of claims in a securities fraud context, declaring that the three-year limitation period for bringing an action after a violation of securities law anti-fraud rules, which was in addition to the requirement for bringing the action within one year after the fraud was discovered, was a “period of repose inconsistent with tolling.” Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 363, 111 S.Ct. 2773, 2782, 115 L.Ed.2d 321 (1991). Although the Court has never applied this analysis to 26 U.S.C. § 6511 subsequent to Dalm, the First Circuit Court of Appeals did so, analogizing the statutory deadlines at issue in Lampf to the three-year claim filing deadline and the refund recovery limitation in §§ 6511(a), (b)(2)(A), and holding that no equitable tolling of the time limitations set forth in the *887latter statutes was possible. Oropallo v. United States, 994 F.2d 25, 28-30 (1st Cir. 1993), cert. denied, — U.S. -, 114 S.Ct. 705, 126 L.Ed.2d 671 (1994).
Although the Dalm decision addressed only § 6511(a), we believe that it is directly applicable to the facts presented in the instant case, and that the interplay of § 6511’s subsections justifies the conclusion that a taxpayer’s recovery is limited by the rule in Dalm to what is recoverable under § 6511(b)(2)(B). Therefore, we do not believe that reference to Lamp/ is necessary or that consideration of the principles set forth in Irwin is appropriate. Section 6511(a) describes the limitation period for filing an income tax refund claim. It identifies taxpayers who are in a position to obtain a refund, although it does not decide who may succeed or what their recovery might be. Section 6511(b)(2)(A) sets a limit on the amount of the credit or refund for a claim which is filed within the three year limitation period stated in § 6511(a). Section 6511(b)(2)(B), which essentially incorporates § 6511(b)(2)(A), describes the refund limit for claims filed beyond the limitation period in the same way, i.e., as a moving range of years whose parameters are established by the claim-filing date.
Basically, equitable tolling would require relief through an extension or revision of the limitation period in § 6511(a). The change to the limitation period would flow through to §§ 6511(b)(2)(A) and 6511(b)(2)(B), which rely on § 6511(a).
Without equitable tolling, the three-year limitation period stands as absolute, and a taxpayer’s recovery is confined to the circumstances described in § 6511(b). If tolling were permitted in application of §§ 6511(b)(2)(A) and 6511(b)(2)(B), those statutory provisions would be automatically modified by any relief granted under § 6511(a). We do not believe that these sections can effectively be read in isolation from one another, and we are therefore satisfied that the Dalm decision is controlling in establishing that application of principles of equitable tolling to the time periods set forth in §§ 6511(a) or (b) is beyond the jurisdictional power of this court.
Although we believe that Dalm controls the case before us and precludes the consideration of equitable tolling principles, we further note that, even if equitable tolling could be considered, no grounds appear to exist for application of that principle to the instant facts. The Debtors have not presented any facts supporting the application of equitable tolling. In Irwin, the Court confines the circumstances in which equitable tolling may be applied against the United States to those where the claimant “has actively pursued his judicial remedies during the statutory period,” or where the claimant was “induced or tricked by his adversary’s misconduct into allowing the filing deadline to pass.” 498 U.S. at 90, 111 S.Ct. at 454. However, where the claimant has merely “failed to exercise due diligence in preserving his legal rights,” or presents “what is at best a garden variety claim of excusable neglect,” id., the Irwin Court states that equitable tolling against the United States is unavailable.
In the matter before us, the Debtors do not claim to suffer from any disability comparable to those of the Wiltgen and Scott taxpayers, nor is there any evidence of any other acts, such as fraud by a third party, which would lead this court to believe equitable tolling of the three year statute of limitations could even be appropriate. The Debtors simply were late in filing their returns, and therefore they apparently could not articulate any possible grounds for application of equitable tolling other than perhaps an insufficient garden-variety claim of excusable neglect. Perhaps for this reason, they recognized that such a claim would have been futile. In any event, we hold that no potential for equitable tolling is presented such as to prompt us to refrain from granting the IRS’ Motion to dismiss their Complaint.
Accordingly, the Motion must be granted, and the Complaint in this proceeding is dismissed in the following Order.
. There is considerable judicial support for the “physical delivery rule,” pursuant to which a claim for a refund is considered "filed” only upon its receipt by the IRS. See, e.g., United States v. Lombardo, 241 U.S. 73, 76, 36 S.Ct. 508, 509, 60 L.Ed. 897 (1916); Miller v. United States, 784 F.2d 728, 730 (6th Cir.1986); Smith v. United States, 186 B.R. 411, 412-13 (N.D.Ohio 1995); and Bazargani v. United States, 1992 WL 189399, slip op. at *3 (E.D.Pa. July 29, 1992), aff'd, 993 F.2d 223 (3d Cir.1993). Application of the "physical delivery rule” would set back the critical “filing date" of the Debtors' returns to April 28, 1995. However, as the April 19, 1995, date is itself beyond the applicable three-year period which ran out on April 15, 1995, the determination of which date determines the "filing date” is immaterial to .the instant outcome. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492203/ | AMENDED MEMORANDUM DECISION
M. DEE McGARITY, Bankruptcy Judge.
Introduction
This adversary proceeding for recovery of an avoidable preference or setoff was brought by the debtor in possession, P.A. Bergner & Co. Holding Company (“Bergner” or “debtor”) against its prepetition creditor, Bank One, Milwaukee, N.A. (“bank,” “creditor” or “Bank One”), on April 26, 1992. For ease of reference, the plaintiff will be referred to as “Bergner” or the “debtor,” notwithstanding that the time frame being discussed might be before filing, during the pendency of the Bergner cases, or after confirmation.
The debtor, now known as Carson Pirie Scott & Co., and 14 related entities filed voluntary petitions under chapter 11 on August 23, 1991. Another related entity filed its petition on December 2, 1992. A joint plan of reorganization for all cases, with one exception not pertinent here, was confirmed on October 15,1993. Shortly after confirmation, final payments under the plan were completed. Bergner’s general unsecured creditors received $.33 per dollar of claim, and the class of creditors that purchased the debt owed to a group of lenders headed by Swiss Bank (which appears to have been partially secured and partially unsecured) received equity in the reorganized entity. The plan further provided that the debtor retained the right to prosecute any pending preference actions in its own behalf, and this court has previously held that the provision in the plan was sufficiently explicit to give the postconfirmation entity standing to continue the action (see minutes of hearing on January 20, 1995). At the same January 20, 1995 hearing, the court dismissed two counts in the plaintiffs First Amended Complaint that referred to 11 U.S.C. § 553(a) as inapplicable to the facts of this case. Also, Berg-ner withdrew its claims respecting any letters of credit issued by defendant, other than those benefitting Bergner’s supplier, Associated Merchandising Corporation (“AMC”), and Bergner’s insurance carrier, Liberty Mutual Insurance Company (“Liberty”).
Both parties have moved for summary judgment on the issue of whether the debtor can recover as an avoidable preference under 11 U.S.C. § 547, or as an avoidable setoff under 11 U.S.C. § 553(b), payments made by Bergner to Bank One for draws on letters of credit issued to AMC and Liberty. For the reasons stated herein, Bergner’s motion for summary judgment is granted, and Bergner is entitled to recover both payments as a matter of law.
This court has jurisdiction over this proceeding pursuant to 28 U.S.C. § 1334(b); this is a core proceeding under 28 U.S.C. § 157(b)(2)(F). This memorandum decision constitutes the court’s findings of fact and conclusions of law in accordance with Fed. R.Bankr.P. 7052.
Facts
The events that transpired between the parties are not in dispute. These facts are derived from briefs, affidavits and exhibits filed with the court, and no facts appear to be controverted.
The plaintiff in this action was, and continues to be after confirmation, the holding company for a number of large department stores, primarily in the Midwest. The defendant is the bank in which Bergner’s primary operating account was located. The bank also issued letters of credit in substantial amounts to entities with whom Bergner did business, such as the inventory supplier and insurance company that were the beneficiaries of the letters of credit referenced in this action.
*970On July 26, 1989, Bank One and Bergner entered into a Standby Letter of Credit Agreement, the master agreement under which the bank would issue standby letters of credit to be paid only if Bergner failed to pay directly amounts owed the beneficiaries or if any other event of default occurred. The pertinent events giving rise to payment pursuant to the two letters of credit at issue in this case were (1) the failure of Bergner to pay amounts due the beneficiaries, (2) the nonrenewal of the letter of credit, and (3) the presentation of conforming documents by the beneficiary. The master agreement required that Bergner pay Bank One amounts drawn on a letter of credit before such amounts were paid by the bank, but payment did not affect the bank’s obligation to the beneficiary. See, generally, Matter of Compton Corp., 831 F.2d 586, 589-91 (5th Cir.1987); Toyota Indus. Trucks U.S.A., Inc. v. Citizens Nat’l Bank of Evans City, 611 F.2d 465, 469-71 (3rd Cir.1979); Matter of Val Decker Packing Co., 61 B.R. 831, 837-39 (Bankr. S.D.Ohio 1986).
The master agreement was automatically renewable unless the bank determined not to do so, a so-called “evergreen” type of agreement. If Bank One elected not to renew, it was required to give Bergner and the beneficiaries 60 days notice of its decision. The agreement granted the bank a security interest in funds on deposit with Bank One, but it contained no other collateral for a debt that might arise in connection with a draw.
Standard letters issued to AMC and Liberty provided that if Bergner failed to pay outstanding amounts due the entities, Bank One was obligated to the entities up to the amount of the letter of credit. The amounts outstanding on these letters of credit fluctuated over the years, depending on obligations that Bergner had outstanding to the beneficiaries of the letters of credit or, in the case of AMC, the amount of its outstanding orders for merchandise. Bergner paid a fee as consideration for issuing the letters, which various figures put in the neighborhood of $300,000.
Associated Merchandising Corporation
Associated Merchandising Corporation (AMC), a cooperative buying association acting on behalf of a consortium of department stores, is the purchaser of goods manufactured primarily in Pacific Rim countries. Goods are ordered by the retailers, and AMC contracts with its suppliers for their manufacture. AMC makes its own financial arrangements with manufacturers. It then resells these goods to retailers, such as Berg-ner, throughout the world. Goods are invoiced to AMC’s buyers as soon as they are shipped, and payment is due within 48 hours.
In 1989, AMC required a standby letter of credit to cover the possibility of its not being paid for goods on order to Bergner. Such a letter was provided by Bank One, and there were nine amendments to the original letter as orders fluctuated. When AMC finally drew on the letter, the amount outstanding was $31,207,000. Ninety days before filing, the amount was over $37,000,000. Until the transfer sought to be avoided was made, Bank One had never paid on a standby letter of credit issued to AMC.
On May 23,1991, Bank One sent a letter to Bergner stating that Bank One would not be renewing its letter of credit. It also notified AMC, and both Bergner and Bank One knew that AMC would now be entitled to draw on the letter of credit, notwithstanding the fact that Bergner owed nothing to AMC at the time. Anticipating a draw on its obligation to AMC, Bank One demanded that Bergner deposit $31,000,000 in its account at Bank One.
On July 19,1991, AMC presented conforming documents to draw on the letter of credit, nonconforming documents having been presented two days earlier. At the time conforming documents were presented, Bergner had at least $207,000 in its Bank One account. At 11:02 a.m., Bank One received a deposit of $31,000,000 to Bergner’s account, which Bergner had acquired by drawing on its revolving line of credit with the Swiss Bank lenders. At 11:15 a.m., Bank One notified Bergner that it had received the funds. At 1:24 p.m., Bank One “memo posted” Berg-ner’s account for the $31,207,000 to be sent to AMC, which means that it effectively froze the account, and prevented Bergner from using the funds for any purpose other than to *971fund the AMC wire. At 2:11 p.m., Bank One wire transferred $31,207,000 to AMC’s account at Hong Kong Shanghai Bank via Bank One’s account at the Federal Reserve, thus giving Bergner a credit balance at AMC for goods not yet shipped. At the end of the day, Bank One debited Bergner’s account for the amount transferred to AMC. Bank One’s internal “Standby Letter of Credit General Ledger Account” was credited for the payment. This account records outstanding standby letters of credit for which the bank might be held liable in the future. Except for the deposit from Swiss Bank, all of the pertinent activity in Bergner’s account on July 19, 1991, was initiated by Bank One, not by Bergner.
Thirty-five days later, on August 23, 1991, the Bergner chapter 11 eases relevant to this proceeding were filed. Bergner owed Bank One nothing on its AMC letter of credit obligation. AMC continued to ship goods to Bergner, and most of the credit balance was consumed by postpetition shipments.
Bergner now seeks to recover the prepetition transfer of $31,207,000 to Bank One.
Liberty Mutual Insurance Co.
Liberty was the holder of a letter of credit under the same master agreement as AMC, which covered charges for past insurance coverage. On May 24, 1991, Bank One notified Liberty it would not renew its letter of credit for Bergner when the letter expired on July 31, 1991. Nonrenewal was an event of default under the agreement, and Liberty was at that time entitled to draw approximately $5,800,000. However, on July 29, 1991, two days before the existing letter of credit expired, Bank One agreed to issue a new letter of credit for $6,358,000, thus allowing Bergner to continue insurance coverage and avoiding an immediate draw by Liberty. The new letter of credit provided it could be drawn on only after July 31, 1991, the expiration date of the old letter. Therefore, Bank One’s obligation to Liberty and Bergner’s letter of credit coverage were uninterrupted.
Two days after the new letter of credit was issued, Bank One learned of the deterioration of Bergner’s relationship with Swiss Bank. By letter dated July 31, 1991, Bank One demanded that Bergner keep sufficient funds in its account, at least $6,400,000, to cover the amount outstanding on the Liberty letter of credit. Bergner agreed to maintain the required balance, but in fact, on August 2, 1991, the account was overdrawn. Bergner maintained a balance in excess of $6,400,000 after August 2, 1991, until its bankruptcy filing. Except for the requirement of a minimum balance, the bank did not restrict the account, nor did it ever dishonor checks.
On August 23, 1991, Bergner informed Bank One it intended to file its bankruptcy petition. Bank One immediately debited the account by $6,358,000, and wrote a letter to Bergner stating it had set off the account in the amount of the Liberty letter of credit. The money was deposited in the bank’s “Cash Letter of Credit Account,” an account kept on Bank One’s books for its outstanding letters of credit, and commingled with other bank funds in the account. When the petitions were filed later that morning, no debt was owed Bank One on account of the Liberty letter of credit. The Cash Letter of Credit Account was debited from time to time as Liberty drew on the letter postpetition.
Bergner also seeks to recover the $6,358,-000 transferred from the Bergner account to Bank One on August 23, 1991.
Summary Judgment Standard
The policy of the summary judgment procedure is to dispose of factually unsupported claims or defenses, to serve judicial economy, and to avoid unnecessary litigation. Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Cloutier v. United States, 19 Cl.Ct. 326 (1990).
Motions for summary judgment in bankruptcy are governed under Fed.R.Bankr.P. 7056, which specifically references Fed. R.Civ.P. 56. A motion for summary judgment:
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 *972that the moving party is entitled to a judgment as a matter of law.
Fed.R.Civ.P. 56(c).
In ruling on a motion for summary judgment, the court shall view the facts in a light most favorable to the party opposing the motion. Brock v. American Postal Workers Union, 815 F.2d 466, 469 (7th Cir. 1987). The court’s role is not to weigh the evidence on the merits but to determine whether there is a genuine triable issue in dispute. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986). When there are numerous issues in dispute, summary judgment may be used to reduce the number of issues that must be tried and focus the parties on only those issues involving factual disputes.
A party who moves for summary judgment has the initial burden of showing either the absence of a genuine issue of material fact or a complete lack of evidence to support a necessary element of other party’s case or defense. Celotex, 477 U.S. at 823, 106 S.Ct. at 2552-53. If this burden is met, the nonmoving party then has the burden of showing the existence of a genuine factual dispute regarding an essential element of its case or defense. Id. at 322-25, 106 S.Ct. at 2552-54. In order to rebut movant’s case for summary judgment, the nonmoving party will generally have to go beyond the pleadings and present evidence, by affidavit, deposition or otherwise, to “set forth specific facts showing that there is a genuine issue for trial.” Fed.R.Civ.P. 56(e); Celotex, 477 U.S. at 324, 106 S.Ct. at 2553. “If the adverse party does not so respond, summary judgment, if appropriate, shall be entered against the adverse party.” Id.
Both parties have filed cross motions for summary judgment on the merits of the case.
For the first time at oral argument on this motion, counsel for Bank One raised the issue of whether Bergner’s motion for summary judgment permitted a final determination on the bank’s defenses. Counsel argued that this court could determine whether all of the elements of 11 U.S.C. § 547(b) were met, but the bank’s defenses under 11 U.S.C. § 547(c) could not be determined in Berg-ner’s favor because of the wording of Berg-ner’s motion. There was no argument that the bank did not have sufficient notice that Bergner was asking for a decision on the merits disposing of the entire case.
Bergner asked for summary judgment in its favor on counts Three, Four, Seven, Eight and Nine of its First Amended Complaint. These counts seek recovery under 11 U.S.C. § 550 for avoided transfers pursuant to 11 U.S.C. §§ 547 and 553(b). Subsection (b) of § 547 states that the trustee can avoid a transfer of the debtor’s interest in property “[e]xcept as provided in subsection (c) of this section!.]” A recovery under 11 U.S.C. § 547(b) necessarily includes a determination of the creditor’s defenses under 11 U.S.C. § 547(c), and the provisions of the latter subsection are effectively incorporated by reference in the former. Both are appropriate for summary judgment under these facts.
This court is satisfied that Bergner’s motion is adequate to allow this court to find in its favor without the necessity for a trial on the bank’s defenses. As Bergner is entitled to recover the full amount of the transfers, whether characterized as preferences or set-offs, the distinction is unnecessary.
Preference Elements — 11 U.S.C. § 517(b) 1
Introduction — Transfer of debtor’s interest in property.
The plaintiff has the burden of proof to show by a preponderance of the evidence *973that each of the five elements of an avoidable preference exist. 11 U.S.C. § 547(g).
The initial requirement for an avoidable preference appears in the introductory section of 11 U.S.C. § 547(b), before the enumeration of the five preference elements. This is the starting point in the analysis of whether a preference has occurred.
Bank One argues that no interest of the debtor in property was transferred by the debit for either letter of credit because a corresponding asset was acquired by the debtor, namely a credit balance with AMC and a credit with Bank One for payment of insurance charges by Liberty. Under this theory, the bank was merely a conduit for the movement of funds. Thus, the debtor’s assets were not diminished by the transfers. If the debtor’s assets were not diminished by the transfers, the argument continues, there could not have been a transfer of the debtor’s interest in property to be avoided.
A number of cases interpret this introductory paragraph of 11 U.S.C. § 547(b) as a requirement that the debtor’s estate be diminished by the transfer sought to be avoided. This is akin to a sixth requirement under 11 U.S.C. § 547(b), although this requirement actually comes first.
Bank One argues that this sixth element was not met as there was no transfer because the debtor had credits in place of its cash. Even if there were a transfer, Bank One argues, there was no diminution in the value of Bergner’s property; hence, no preference. However, the concept of “diminution of the estate” (technically, diminution of the debtor’s property before the estate arises) is a holdover of the preference recovery provision under the Bankruptcy Act. While the requirement does not explicitly appear in 11 U.S.C. § 547(b), the concept has been left undisturbed in the Seventh Circuit without the necessity for analysis. See Matter of Smith, 966 F.2d 1527, 1535-7 (7th Cir.1992), cert. dismissed — U.S. -, 113 S.Ct. 683, 121 L.Ed.2d 604 (1992).
Whether “transfer” and “diminution” are two different concepts, or whether “diminution” is merely descriptive in determining whether a transfer of the debtor’s interest in ProPerty transpired, this court holds that the debtor’s Pr°Perty was transferred with the memo PostinS and debits Bank 0ne made to cover of the AMC and Liberty letters of credit. Furthermore, the debtor’s property was diminished by each transfer,
The primary meang for determining whether property wag transferred is to examine who had control over the property at a particular time and whether that control shifted from one party to another. In an unrestricted bank acCount, the depositor has control oyer the ^ because it can draw the funds at will. Matter of Prescott, 805 F2d 719, 729 (7th Cir.l986). If control shifts> a transfer has occurred.
^113 unrestricted funds were property of the debtor> the subsequent restriction of those funds resulted in a transfer to the ' bank. Bonded Fin. Serv., Inc. v European Am. Bank, 838 F.2d 890, 893 (7th cir.1988). A «transfer» is defined in u u.S.C. § 101(54) ag «every mode¡ direct Qr indirect; absoMe or conditionalj voiuntary 0r involuntary, of disposing of or parting ^ property or with an interegt in property ...» Bonded Fin_ Serv. describes a transfer as occurring when the transferee obtains “dominion” over the property and the right to put the property to its own purposes. Id. Applied to the facts of this case, before the memo posting occurred, Bergner had control of the funds in its account. Earlier, Bergner had control over the $31,000,000 it had borrowed from Swiss Bank; Bergner demonstrated this control by telling Swiss Bank where to send the funds. For over two hours, from the time the money was deposited until Bank One memo posted the account, the funds were unrestricted. The memo posting froze the account and transferred control, and the debiting of the account completed the seizure, thereby changing ownership as well as control. Therefore, a prepetition transfer of *974Bergner’s funds occurred when Bank One memo posted and took control over the $31,-207,000.
To refute this proposition, the bank maintains it was only sending Bergner’s funds to AMC. Its control demonstrates this was not so. Bergner did not instruct Bank One to send' its funds to AMC; no check, debit memo or similar direction from Bergner has been disclosed and offered as evidence. Bank One made the decision when to pay AMC. The funds wired to AMC were the bank’s funds. Matter of Compton Corp., 831 F.2d 586, 589 (5th Cir.1987), reh’g granted, 835 F.2d 584 (5th Cir.1988). These funds had already been transferred from Bergner to the bank when the account was seized prior to the AMC wire.
The concept becomes clearer when the bank is correctly viewed not as a receptacle of funds but as a debtor to its depositors and the owner of all of its funds. See, e.g., In re CJL Co., Inc., 71 B.R. 261, 265 (Bankr.D.Or. 1987); In re Zimmerman, 69 B.R. 436, 438 (Bankr.E.D.Wis.1987). The $31,207,000 was transferred by seizure of the funds wired to the debtor, and the bank later transferred its own funds to AMC.
The fact that $31,000,000 of the funds seized by Bank One for the AMC wire were borrowed from Swiss Bank is of no consequence. The transfer of borrowed, unrestricted funds results in the diminution of the debtor’s property within the meaning of 11 U.S.C. § 547(b). Smith, 966 F.2d at 1533. In Smith, the bank had allowed the debtor to write checks on a deposit that was subsequently dishonored. This made the bank an inadvertent and involuntary lender. Nevertheless, the court held that payment to a creditor with a check written on these “borrowed” funds resulted in an avoidable preference to the creditor, and the preference had to be returned to the trustee.
If diminution in the debtor’s property were a separate requirement for preference recovery, and this court is by no means certain that it is, the transfers from Bergner’s account meet this requirement. To determine whether the transfer diminished the debtor’s property, it is useful to examine what property the debtor would have had at the time of filing absent the transfer. Here, the debtor would have had the cash in its accounts, including $37,565,000 for the two debits. It would also have had whatever accrued to it by virtue of Bank One honoring the letters of credit, for which Bergner had paid substantial consideration. Bank One intimates that it might not have paid its obligations on the letters, a remarkable posture for a reputable bank to take. Nevertheless, the bank is correct that Bergner is not a third party beneficiary of the letters, and Bergner could not compel compliance on the beneficiaries’ behalf. This merely underscores the independence of Bank One’s obligation to AMC and Liberty and Bergner’s obligation to Bank One. See In re Security Services, Inc., 132 B.R. 411, 414-15 (Bankr.W.D.Mo.1991); Matter of Val Decker Packing Co., 61 B.R. at 837-39. However, even if Bank One had successfully evaded its obligations under the letters of credit, the substantive difference between having unrestricted cash of $37,565,-000 and having credits of $37,565,000 that can be used only for one supplier, AMC, and for one insurance carrier, Liberty, is significant enough to constitute diminution of the debtor’s property.
The “earmarking doctrine,” developed to interpret whether an interest of the debtor in property has been transferred, clearly does not apply to these facts. Earmarking occurs only when a new creditor advances funds, and the parties intend that those funds be used to pay an antecedent creditor. Payment of the old creditor is a condition for obtaining the new credit. See, e.g., Matter of Smith, 966 F.2d at 1533; In re Love, 155 B.R. 225, 230 (Bankr.D.Mont.1993). This type of transfer results only in the substitution of creditors, and there is no diminution in the debtor’s property. Swiss Bank loaned the funds with no agreement as to their use to pay AMC; in fact, Swiss Bank’s representative testified at his deposition that Swiss Bank had no right under the loan agreement to direct how Bergner used its borrowed funds. Therefore, the earmarking doctrine does not apply.
Similarly, Bank One’s debit to the debtor’s account to pay its liability on the Liberty *975letter of credit constituted a transfer of the debtor’s funds to a special account in the bank’s control, the “Cash Letter of Credit Account.” These were commingled with other Bank One funds in the account. The debtor could neither control nor direct how those funds were to be used because they were no longer the debtor’s funds. This satisfies the initial requirement that there be a transfer of the debtor’s interest in property-
The following is a discussion of the five elements of 11 U.S.C. § 547(b), as they relate to the $31,207,000 debit of Bergner’s account for the AMC letter of credit and the $6,358,-000 debit for the Liberty letter of credit. The court is satisfied that Bergner has met its burden of proof as to all of these elements as a matter of law.
AMC
1. To or for the benefit of a creditor.
The bank argues that the $31,207,-000 transferred was from Bergner to AMC, which was neither a creditor at the time of the transfer nor a defendant in an adversary proceeding, not from Bergner to the bank. It maintains the bank merely served as a conduit or vehicle for the transfer of Berg-ner’s funds. Alternatively, the bank argues that when it did receive the funds, the bank was not Bergner’s creditor because it had not yet paid AMC. Following this reasoning, if Bank One were not a creditor, it could not have received a preference.
Neither of Bank One’s characterizations of the AMC account debit is persuasive. As was discussed in the introductory section, the memo posting of Bergner’s account was a transfer to Bank One. Bank One then posted the funds to its own Federal Reserve account, which it argues is a prerequisite for a wire transfer on behalf of a depositor. This may indeed be so. However, the mechanics of wire transfers notwithstanding, the bank had control over where the money went. It went to AMC at Bank One’s direction, not Bergner’s. Thus, the bank transferred its own funds. See also Matter of Val Decker Packing Co., 61 B.R. at 839. Furthermore, the transfer was for Bank One’s benefit in that it eliminated the bank s liability to AMC on account of its letter of credit. When the debtor pays an obligation of another party, it has made a transfer for the benefit of that party, which can be avoided as a preference. See, e.g., Levit v. Ingersoll Rand Fin. Corp., 874 F.2d 1186, 1192 (7th Cir.1989) (transfer to creditor by principal was preference to guarantor).
The bank claims it was not a creditor of Bergner at the time of the debit. It cites various commentators and cases that describe a liability to the issuing bank as arising when the letter of credit is paid, not before. However, the Standby Letter of Credit Agreement in this ease states otherwise. The bank was at least a contingent creditor before it paid AMC, which satisfies the definition of “creditor” under the Bankruptcy Code. 11 U.S.C. § 101(10); see also 11 U.S.C. §§ 101(5), (12); Matter of Milwaukee Cheese, 164 B.R. 297, 305 (Bankr. E.D.Wis.1993). More accurately, because AMC had presented conforming documents for the draw earlier the same day, and because Bergner was contractually obligated to pay Bank One (not AMC) before payment of the draw, the obligation had matured and was no longer contingent. Payment to AMC, with its attendant liability of Bergner to Bank One, was a certainty after presentation of conforming documents. Bank One demanded the deposit, as it had a right to do under the contract. The bank’s distinction that payment was due, even though the liability had not yet been incurred, is unavailing. That distinction has already been rejected elsewhere. In re Western World Funding, Inc., 54 B.R. 470, 476-77 (Bankr. D.Nev.1985). If an entity is entitled to payment, how can that entity not be a creditor under the Bankruptcy Code’s expansive definition? Obviously, an entity entitled to payment is a creditor. 11 U.S.C. § 101(10).
Finally, the only reason Bergner would create a huge credit with AMC is to satisfy its obligation to Bank One. After all, Berg-ner owed AMC nothing. Therefore, the court finds that Bank One was a creditor of Bergner, and the seizure of Bergner’s funds from its account by memo posting, followed by debit and transfer to Bank One accounts, *976satisfies the requirement under 11 U.S.C. § 547(b)(1) of a transfer to a creditor 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.
Bank One characterizes this transaction as a transfer from Bergner to AMC. Bergner was not obligated to prepay AMC, and the bank is correct that prepayments, at least those not required by contract, are not antecedent debts. But Bergner is not asking to recover the funds paid to AMC; it seeks to recover the funds seized from its account by Bank One. Bank One is the creditor referred to in 11 U.S.C. § 547(b)(2), not AMC. Here, Bank One had an independent obligation to AMC under the standby letter of credit, which is separate from Bergner’s obligation to Bank One. See Matter of Compton Corp., 831 F.2d at 590; In re Carley Capital Group, 119 B.R. 646, 647-48 (W.D.Wis.1990); In re Security Services, Inc., 132 B.R. 411, 414 (Bankr.W.D.Mo.1991). See also Toyota Indus. Trucks U.S.A., Inc. v. Citizens Nat’l. Bank of Evans City, 611 F.2d at 469-70. The bank was obliged to perform whether Bergner prepaid the bank or not.
Bank One argues it was only a contingent creditor of Bergner, and a contingent creditor cannot hold an antecedent debt within the meaning of 11 U.S.C. § 547(b)(2). On the contrary, contingent debts are also antecedent debts within the meaning of 11 U.S.C. § 547(b)(2). See, e.g., Matter of Milwaukee Cheese, 164 B.R. at 305; Matter of Val Decker Packing Co., 61 B.R. at 841. Cases cited by the bank, such as Matter of Wey, 854 F.2d 196 (7th Cir.1988), are distinguishable. In Wey, the transfer sought to be avoided was the forfeiture of a down payment that occurred when the debtor could not complete a sale. The court stated that a debt does not arise until there is a legal obligation to pay, and the debtor was not obligated to pay until closing. There was no debt until his breach, which extinguished his interest in the down payment previously transferred. The breach resulted in no transfer as well as no antecedent debt. This is distinguishable from cases such as Milwaukee Cheese, in which the liability for payment was certain, but the timing of payment or the happening of an additional event was uncertain.
In this case, events had developed to a point of certainty that made Bank One no longer a contingent creditor. The letter was not to be renewed, which was an event of default. Moreover, AMC had drawn on its letter. This meant that when Bergner’s account was seized, Bergner’s debt to Bank One had matured and was payable. The agreement between Bergner and Bank One required payment before the draw, not reimbursement after the draw; thus, the money was already owed to Bank One when the debit of Bergner’s account occurred. The obligation sought to be avoided was not a prepayment to AMC; it was payment on a mature obligation of Bergner to Bank One. This satisfies the requirement that the transfer was on account of an antecedent debt owed by the debtor before the transfer was made. 11 U.S.C. § 547(b)(2).
3. Made while the debtor was insolvent.
This is not disputed by the parties. The debtor was insolvent at all times during the 90 days before filing.
4. Made within 90 days before the date of filing the petition.
It is undisputed that the transfer in question was made 35 days before filing of the petitions under chapter 11.
5. That enables the creditor to receive more than it would in a chapter 7 case if the transfer had not been made.
[21] Bergner asserts, without refutation by Bank One, that unsecured creditors would have received nothing if the transfer had not been made and if Bergner and its companion eases had been filed under chapter 7. Bank One was paid in full. Therefore, if the transfer of $31,207,000 to Bank One is avoidable, it is avoidable in full.
Nevertheless, Bank One argues that it had a security interest in Bergner’s account, and it would have been paid 100 cents on the dollar in a chapter 7 case, not 0 cents on the dollar as an unsecured creditor. *977To the extent a creditor is paid on an unavoidable secured claim during the preference period, the payment is not subject to recovery as a preference. See, e.g., Levit v. Ingersoll Rand, 874 F.2d at 1199-1200; Barash v. Public Fin. Corp., et al., 658 F.2d 504, 508 (7th Cir.1981). Thus, a transfer within the preference period can pay the secured creditor 100% of the claim and not run afoul of 11 U.S.C. § 547(b)(5). The fact that unsecured creditors actually received $.33 on the dollar of claim is irrelevant to this test.
The master Standby Letter of Credit Agreement granted Bank One a security interest in accounts at Bank One. However, an unperfected security interest is subject to avoidance. See, e.g., 11 U.S.C. § 544(a). Furthermore, a previously unper-fected security interest that is perfected during the preference period is also subject to avoidance. 11 U.S.C. § 547(b). As deposit accounts are not governed by the Uniform Commercial Code, Wis.Stat. § 409.104(13), perfection must be accomplished under the common law, i.e., by seizure. In re CJL, 71 B.R. 261, 264-65 (Bankr.D.Or.1987); Matter of Zimmerman, 69 B.R. at 438 n. 1.
Bank One had never restricted or seized funds from Bergner’s account before it seized the $31,207,000. Therefore, any security interest in Bergner’s account arising under the Standby Letter of Credit Agreement was unperfeeted until seizure. The perfection by seizure was a transfer subject to avoidance, occurring as it did within the 90 day preference period. 11 U.S.C. § 547(b). Consequently, this court holds that the transfer is avoidable in full. 11 U.S.C. § 547(b)(5).
Liberty
As with the AMC letter of credit and the funds seized to pay the draw, the five elements of 11 U.S.C. § 547(b) must be analyzed with respect to the Liberty letter of credit and the funds seized for payment to Bank One.
1. To or for the benefit of a creditor.
As was the case with the AMC letter of credit, the account debit of $6,358,000 on the day of filing was a transfer to Bank One. The funds were posted to the bank’s internal “Cash Letter of Credit Account,” which was itself debited as Liberty drew on its letter of credit from time to time postpetition.
When these funds were seized on August 23, 1991, Liberty had not presented documents to draw on the letter of credit issued on July 29, 1991. Nevertheless, Bank One was a creditor of Bergner’s because it had at least a contingent claim on the date of filing arising under the letter of credit. This is sufficient to make Bank One a creditor within the meaning of 11 U.S.C. § 547(b)(1). See also 11 U.S.C. §§ 101(5)(a), (10). Moreover, the insolvency of Bergner, followed by the bankruptcy filing, was an event of default under the Liberty letter of credit. That insolvency matured Bank One’s obligation to Liberty under the letter of credit, thereby maturing Bergner’s obligation to pay Bank One before the draw. Even if a contingent creditor were not a “creditor” under 11 U.S.C. § 547(b)(1), a creditor having a mature debt such as Bank One’s does qualify.
The account debit was also a transfer “for the benefit of’ Bank One since it gave the bank a fund from which to satisfy its own obligation to Liberty. This alone is sufficient to meet the requirement of 11 U.S.C. § 547(b)(1).
2. For or on account of an antecedent debt owed by the debtor before such transfer was made.
At the time Bank One debited Berg-ner’s account for $6,358,000, Liberty had not presented documents to draw on its letter of credit. Bank One had not paid Liberty, and the debtor did not owe Liberty anything. From these facts, the bank infers that there was no “antecedent debt” when it seized the funds on the day of filing.
As was stated above, a contingent debt does satisfy the requirement of an antecedent debt under 11 U.S.C. § 547(b)(2). However, Liberty had a right to draw on the letter 'because of Bergner’s insolvency and bankruptcy, and such a draw was a virtual certainty. Under the letter of credit agreement, payment by Bergner was required before Liberty drew, not after, which made the *978debt no longer contingent. Therefore, this court holds that Bergner’s obligation to Bank One for the Liberty letter of credit was an antecedent debt under 11 U.S.C. § 547(b)(2).
3. Made while the debtor was insolvent.
This is not disputed by the parties. The debtor was insolvent at all times during the 90 days before filing.
4. Made within 90 days before the date of filing the petition.
It is undisputed that the transfer in question was made before the petition was filed and on the same date.
5. That enables the creditor to receive more than it would in a chapter 7 case if the transfer had not been made.
As was stated earlier, unsecured creditors would have received nothing if the Liberty seizure had not occurred and the debtors had filed petitions under chapter 7. The bank argues again it was fully secured, because this time it took a security interest in the debtor’s account when it issued the new letter of credit on July 29,1991, and the actual perfection by demand or by seizure was substantially contemporaneous. 11 U.S.C. § 547(c)(1). However, the letter from Bank One to Bergner outlining their agreement for issuance of the new letter stated that “on or before January 31, 1992, the entire $12,000,000 credit facility will be col-lateralized ...” (emphasis added). It did not say the letter of credit is now collateralized. The letter of credit would be collateralized in the future, but it was not collateralized when the letter was issued. Consequently, the subsequent perfection when the account was seized on August 23,1991, is subject to avoidance for the same reasons that the perfection of the bank’s security interest in the account for recovery of amounts due AMC was avoidable. These facts are in stark contrast with the facts of Pine Top Ins. Co. v. Bank of Am. Nat’l. Trust and Sav. Ass’n., et al., 969 F.2d 321 (7th Cir.1992), in which the loan agreement called for granting of a security interest when the obligation was incurred.
If the bank had not seized the debtor’s funds on the date of filing, paying itself 100 cents on the dollar, and if the debtor had filed chapter 7 cases, the bank as an unsecured creditor would have received nothing. Therefore, as with the seizure of funds for the AMC letter of credit, the transfer for the Bank’s Liberty obligation meets the criterion for avoidability under 11 U.S.C. § 547(b)(5).
Creditor’s Defenses■ — 11 U.S.C. § 517(c) 2
Once the plaintiff has established that all of the elements of 11 U.S.C. § 547(b) *979exist, the creditor has the burden of proof to show by a preponderance of the evidence that the transfer is not avoidable because a defense under 11 U.S.C. § 547(c) applies. 11 U.S.C. § 547(g). Successful proof of any of these defenses results in an unavoidable transfer.
AMC
1. Intended by debtor and creditor to be a contemporaneous exchange for new value and was a substantially contemporaneous exchange.
Congress carved out an exception to avoidable preferences to protect transactions intended to be a contemporaneous exchange for new value, provided the transfer is in fact a contemporaneous exchange for new value. 11 U.S.C. § 547(c)(1). “New value” is defined in 11 U.S.C. § 547(a)(2) as “money or money’s worth in goods, services, or new credit, or release” of property previously transferred, provided the previous transfer is not itself avoidable. The definition specifically does not include an obligation substituted for an existing obligation, i.e., a rollover. 11 U.S.C. § 547(a)(2). A transaction qualifying for this exception stands alone; that is, the transaction under scrutiny is independent of an antecedent debt that the debtor owes the creditor.
No transaction constituting a contemporaneous exchange for new value occurred when Bank One seized the Bergner bank account. The only purpose for Bergner’s deposit, which both parties knew would be swept up by the bank, was to pay Bergner’s obligation on the letter of credit; there is no evidence Bergner intended by the deposit to purchase a credit balance at AMC. Nothing in the affidavits presented by the bank supports any other purpose for the payment/deposit but to pay Bergner’s obligation to Bank One.
More importantly, upon seizure of the funds when the transfer occurred, Bank One did not incur a contemporaneous corresponding obligation to Bergner, which would be necessary for a successful defense under 11 U.S.C. § 547(c)(1). The bank’s only obligation was to AMC, which it paid. The bank neither intended to transfer anything to Bergner, nor did it in fact transfer anything to Bergner at the time of the seizure. Therefore, there was no contemporaneous exchange for new value.
2. Debt was incurred in ordinary course of business affairs of debtor and creditor, and payment is made in ordinary course of business affairs of debtor and creditor and according to ordinary business terms.
There are three necessary elements for the “ordinary course” defense under 11 U.S.C. § 547(c)(2), all of which must be met for a creditor to resist disgorgement of an otherwise avoidable preference. The first, that the debt be incurred in the ordinary course of the business affairs of the *980debtor and creditor, is met here. 11 U.S.C. § 547(c)(2)(A). It is undisputed that the parties established a substantial letter of credit relationship over the two years preceding the bankruptcy.
The second requirement is that the debt be paid in the ordinary course of the business affairs of the debtor and creditor. This defense was intended to leave normal business relations undisturbed and to avoid transfers brought about only by unusual actions taken by the debtor or creditor that resulted in a creditor obtaining a relatively better position than other similarly situated creditors. See In re Energy Co-op., Inc., 832 F.2d 997, 1004 (7th Cir.1987), citing legislative history. In Matter of Tolona Pizza Products Corp., 3 F.3d 1029, 1032 (7th Cir. 1993), the court required that for a creditor to be protected from having to disgorge a prepetition transfer, the transfer or payment should “conform to the norm established by the debtor and the creditor in the period before, preferably well before, the preference period.” While transactions need not occur often to be found in the ordinary course, the same court said “a creditor asserting § 547(e)(2) must show that the debtor incurred its debt and paid the creditor in ways similar to other transactions.” In re Energy Coop., Inc., 832 F.2d at 1004 (citations omitted).
This court’s colleague in Matter of Milwaukee Cheese Wisconsin, Inc., 164 B.R. 297, 307 (Bankr.E.D.Wis.1993) (citations omitted), identified four tests to examine the circumstances surrounding the challenged payment. Each test might be probative of the parties’ prior relationship in determining what was ordinary for the parties. These are particularly illuminating when applied to the undisputed facts in this case:
“(1) whether the transfer was in an amount more than usually paid.” Neither party suggested there was a prior payment by Bergner that even approached $31,207,000, and this court will boldly characterize this as an unusually substantial amount.
“(2) whether the payments were tendered in a manner different from previous payments.” There is no allegation that Bank One had ever involuntarily seized Bergner’s bank account for payment of an obligation.
“(3) whether there appears to be any unusual action by either the debtor or creditor to collect or pay the debt.” This factor is most telling. Bergner borrowed $31,000,000 from Swiss Bank to make the deposit, and Bank One seized the funds. Before doing so, Bank One had cancelled the letter of credit, thereby precipitating the event of default. This was not standard conduct of the parties.
“(4) whether the creditor did anything to gain an advantage in light of the debt- or’s deteriorating financial condition.” Involuntary seizure of a bank account gave the bank a significant advantage over other creditors.
The third element of the 11 U.S.C. § 547(c)(2) defense is that the payment be made according to ordinary business terms. This requires inquiry into “the range of terms that encompasses the practices in which firms similar in some general way to the creditor in question engage, and that only dealings so idiosyncratic as to fall outside that broad range should be deemed extraordinary and therefore outside the scope of subsection C.” Matter of Tolona Pizza Prod. Corp., 3 F.3d at 1033. The bank’s officer, Thomas Gaglione, stated in his affidavit that it was within the ordinary course of the business of banks issuing standby letters of credit to refuse to renew those letters on expiration, to demand prepayment of drafts, and to ask customers how they wish to pay for drafts. Such practices may be common in the banking industry. However, he also stated in his deposition, “No one expects a standby letter of credit to be drawn.”
Conspicuously absent from Mr. Gaglione’s affidavit is any assertion that Bergner gave instructions for debiting the account. The involuntary seizure of funds in an account may be something banks commonly do to protect their legal rights. However, there was no assertion by Bank One or its experts that such a seizure is a common industry practice during the ongoing letter of credit relationship or at its ordinary termination.
This is simply not the sort of transaction intended to be protected by 11 U.S.C. *981§ 547(e)(2); it is precisely the type of “idiosyncratic” exercise of creditor muscle that 11 U.S.C. § 547 was designed to avoid. Matter of Tolona Pizza Products, 3 F.3d at 1033.
Although a deposit to a bank account can be a transfer to the bank, unrestricted bank accounts usually are considered funds of the depositor. Matter of Prescott, 805 F.2d at 729. Banks cannot deal with those funds without the permission of the depositor except in unusual circumstances, usually related to the debtor’s precarious financial circumstances. Nothing in Bank One’s submissions of proof has alleged that banks ordinarily take control over depositors’ accounts, even when the depositor has a loan outstanding, as was done here.
Therefore, the seizure of Bergner’s account and payment to itself for the AMC wire was outside the ordinary course of business or financial affairs of the debtor and the transferee, and the resulting transfer was not made according to ordinary business terms. 11 U.S.C. § 547(c)(2)(B), (C).
3. To the extent that after such transfer, creditor gave new, unpaid, unsecured value to debtor.
This subsection, 11 U.S.C. § 547(c)(4), was raised by the bank but is inapplicable to the facts. This defense requires that after the transfer, the creditor gave new value to the debtor, and the new value was not paid for (“on account of which new value the debtor did not make an otherwise unavoidable transfer to or for the benefit of such creditor”). 11 U.S.C. § 547(c)(4)(B); Matter of Century Brass Prod., Inc., 71 B.R. 77, 78-79 (Bankr.D.Conn. 1987). Bank One was paid in full before filing, so there was no new value given by Bank One after the transfer for which it was unpaid.
Other subsections of 11 U.S.C. § 547(c) are likewise inapplicable to the facts.
Liberty
1. Intended by debtor and creditor to be a contemporaneous exchange for new value and was a substantially contemporaneous exchange.
Bank One argues that the transfer the court should focus on with respect to the Liberty payment is issuance of the new letter of credit on July 29, 1991. The bank maintains that the issuance of this new letter served as consideration for the granting of a security interest in the account, and that the perfection of the security interest by restricting the account, i.e., requiring a minimum balance of $6,400,000, constituted contemporaneous perfection. If the granting of the security interest was a contemporaneous exchange for new value protected by 11 U.S.C. § 547(c)(1), then the subsequent seizure would likewise be protected. 11 U.S.C. § 547(b)(5).
The bank cites Pine Top Ins. Co. v. Bank of Am. Nat’l. Trust and Sav. Ass’n., et al., 969 F.2d 321 (7th Cir.1992), in support of this theory. A careful reading of Pine Top, however, reveals that the parties in that case intended the granting of a security interest when the loan was made. The parties in this case did not. As was stated earlier, the agreement states that the letter of credit obligation would be collateralized in the future, not at the time of issuance.
The requirement of a minimum balance, merely a demand and not actual control, came when the bank learned of Bergner’s problems with Swiss Bank two days after the letter of credit was issued. Perhaps the bank would not have issued the letter had it known about the precarious nature of the revolving line of credit, but the fact remains that the bank did not know, and it did not take or perfect a contemporaneous security interest on July 29, 1991. Even if the demand for a minimum balance were sufficient for perfection, which this court is satisfied it is not, the granting of the security interest in the account and perfection were not contemporaneous with issuance of the letter. See In re CJL, 71 B.R. at 264-66.
Bank One has argued that the new letter of credit issued July 29, 1991, was not a renewal of the old expired letter of credit and that it constituted “new value.” This court is satisfied that, except for the $500,000 increase in the amount payable to Liberty, the issuance of the new letter merely took the place of the old letter. Issuance of the new *982letter continued the obligation of Bank One to Liberty uninterrupted, and it prevented a draw under the old letter, a significant benefit to Bank One. The new letter was “substituted for an existing obligation” of Bank One to Liberty as that term is used in 11 U.S.C. § 547(a)(2), and it is not new value. In any event, whether the issuance of the new letter is new value relates to Bank One’s obligation to Liberty, not Bergner’s obligation to Bank One. Only the latter is the subject for recovery in this action, and whether the seizure satisfied Bergner’s obligation to Bank One for a new or reissued letter of credit is irrelevant.
The decisive question is, if there was an exchange for new value, what was the new contemporaneous consideration that Bank One gave Bergner in exchange for the money seized? There was none, as Bank One had already obligated itself to pay Liberty when each letter of credit was issued. Matter of Compton Corp., 881 F.2d at 590; In re Security Services, Inc., 132 B.R. at 414. Thus, the analysis of the debit of Bergner’s account on August 23, 1991, for the Liberty letter of credit is similar to the analysis for AMC. The debit was intended to reduce Bergner’s obligation to Bank One, not to create a credit on Bank One’s books for application to future insurance charges, because on August 23, 1991, Bergner had no obligation to pay Liberty for either a debt or as a prepayment for future services.
Therefore, neither the issuance of the July 29, 1991 letter of credit nor the subsequent seizure of Bergner’s account to pay Bank One for future draws on the Liberty letter of credit were contemporaneous exchanges for new value within the meaning of 11 U.S.C. § 547(c)(1).
2. Debt was incurred in ordinary course of business affairs of debtor and creditor, and payment is made in ordinary course of business affairs of debtor and creditor and according to ordinary business terms.
As with the AMC letter of credit, the debt of Bergner to Bank One for the Liberty letter of credit was incurred in the ordinary course of the business of the debtor and the creditor. Also for the same reasons stated above, the debt was not paid in the ordinary course, nor was it paid according to ordinary business terms. Involuntary seizure of the account was, as between Bergner and Bank One, highly unusual (although it had been done at least once previously with the AMC letter of credit). It was clearly done in response to Bergner’s insolvency. The seizure was a form of self help that put Bank One in a superior position to other unsecured creditors. Therefore, the transfer was outside the ordinary course of business affairs of the debtor and creditor.
Similarly, ordinary business terms with respect to a bank account requires direction by the depositor, not involuntary seizure. Matter of Prescott, 805 F.2d at 729. For the same reasons applicable to the payment for the AMC letter of credit, the seizure for the Liberty letter of credit was outside ordinary business terms. 11 U.S.C. § 547(c)(2)(C).
3. To the extent that after such transfer, creditor gave new, unpaid, unsecured value to debtor.
As with the AMC letter of credit, 11 U.S.C. § 547(c)(4) is inapplicable to the seizure of Bergner’s account for the Liberty letter of credit. The obligation was not unpaid at the time of filing, as is required for application of this defense.
Other subsections of 11 U.S.C. § 547(e) are likewise inapplicable to the facts.
Setoff—11 U.S.C. § 553(b)
3
Whether the two transfers in question are analyzed as preferences under 11 U.S.C. § 547 or prepetition setoffs of mutual obligations under 11 U.S.C. § 553, the result here is the same. Damages are calcu*983lated differently under the two statutes, but both are limited to the amount of the transfers. Damages under the setoff statute are the amount by which the creditor improved its relative position with respect to the debt- or’s and creditor’s mutual obligations during the 90 day period before filing, but no more than the amount of the transfers. 11 U.S.C. § 553(b)(1). A comparison of the amount due the bank on the outstanding letters of credit with the bank account balance 90 days before filing (the “insufficiency” comparison under 11 U.S.C. § 553(b)) results in a number that exceeds the amount of the two transfers.4 Thus, damages are the amount of the transfers if either the preference or set-off statute is applied. The setoff statute does not provide for defenses found in 11 U.S.C. § 547(c), but the two statutes are analogous. See Matter of Prescott, 805 F.2d at 730. Both are intended to avoid transactions that place a creditor in a better position than it would have been at the time of the debtor’s bankruptcy absent the transfer or setoff.
The seizures of Bergner’s account and the cancellation of Bergner’s indebtedness on Bank One’s books, which the parties agree took place in each instance shortly after the account was debited, are appropriately designated setoffs, i.e., the offset of mutual debts. The bank owed Bergner the amount in the account as its depositor, and Bergner owed Bank One for draws that had taken place on the AMC letter of credit and for Liberty’s inevitable draw. Each seizure and corresponding book entries constituted a setoff of those mutual debts, and Bank One’s letter to Bergner of August 23, 1991, so states. The July 19, 1991 events resulting in the AMC payment were essentially the same.
Taken in isolation, the seizure of the accounts, by debit or memo posting, might be considered “transfers” as they resulted in the perfection of the bank s security interest. The security interest had arisen in the Standby Letter of Credit Agreement of July 26, 1989, but the interest was unperfected until seizure occurred. The perfection of a security interest results in a transfer that would require analysis under 11 U.S.C. § 547(b) and consideration of the bank’s defenses under 11 U.S.C. § 547(c), as was shown above.
Under the instant facts, the characterization of events as a transfer or a setoff results in a distinction without a difference. Berg-ner is entitled to recover the amount seized under either statute.
Double Recovery—11 U.S.C. § 550(d)
Bank One argues that recovery by Bergner of a preference or avoidable setoff permits the debtor to recover twice: first, Bergner received the benefits of the AMC credit and the goods the credit bought, and Bergner received insurance coverage as Liberty drew down its letter of credit; second, if Bergner prevails in this action, it would also receive the funds that previously purchased those assets.
Section 550(d) allows only a single recovery under subsection (a), which designates transferees from whom recovery may be sought. Bank One is the initial transferee of the funds taken from Bergner, and AMC and Liberty are transferees of the initial transferee. 11 U.S.C. § 550(a). Subsection (b) of § 550 provides that a subsequent transferee who acquires a transfer for value, including satisfaction of an antecedent debt, is not subject to recovery. As Bank One had independent antecedent debts to AMC and Liberty by virtue of its letters of credit, which were satisfied by the bank’s payments, *984Bergner cannot recover from those entities. 11 U.S.C. § 550(b)(1).
Bergner cannot pursue AMC and Liberty as creditors who received indirect transfers or for whose benefit transfers were made. 11 U.S.C. § 547(b)(1). AMC and Liberty were not Bergner’s creditors when payment was made. They were only Bank One’s creditors.
Had Bank One not seized the account on those two occasions, Bergner would have had precisely what it now seeks, the funds in its account. Bank One’s independent obligations would have eventually inured to Bergiier’s benefit because of Bank One’s payments, but as the bank points out, Bergner had no enforceable right to those benefits by virtue of having its bank account seized. Any benefit to Bergner arose as a result of Bank One satisfying its own liabilities, not on account of the transfer from Bergner.
In sum, Bergner has only one preference defendant, actual or potential, and only one recovery. In re Skywalker, Inc., 155 B.R. 526, 530 (9th Cir. BAP1992). This satisfies the requirement of a single recovery as provided by 11 U.S.C. § 550(d).
Prejudgment Interest
Bergner has asked the court to award prejudgment interest on its avoided transfers. No provision in the Bankruptcy Code provides for prejudgment interest, and such an award is not “mandatory or automatic.” In re Energy Co-op., Inc., 130 B.R. 781, 792 (N.D.Ill.1991), aff'd 832 F.2d 997 (7th Cir.1987).
If such interest were awarded, it would only be from the time Bergner made demand for return of the preferences, and the commencement of this action would be an appropriate starting point. The court believes no interest should be paid from the time of transfer to the commencement of the action because, up until that point, the payment was legal and unavoidable in all respects. A preference is not an avoidable preference until the court determines that it is.
Interest is to compensate the debtor for its inability to use the funds while in the transferee’s control, but it is unlikely that Bergner would have had use of the money subsequent to the transfer. Bergner’s unsecured creditors received $.33 on the dollar under the joint plan. Had the debtor had sufficient cash, chances are that number would have been higher. As debtor would have had to fund the plan, it is doubtful that Bergner would have retained the funds. Consequently, at this point, prejudgment interest would be a windfall to Bergner.
Accordingly, prejudgment interest will be denied.
Conclusion
For the reasons stated herein, there is no dispute as to any material fact, and the plaintiff is entitled to judgment as a matter of law. Fed.R.Bankr.P. 7056. The plaintiffs motion for summary judgment is granted in its entirety, and the defendant’s motion for summary judgment is denied. Plaintiff shall have judgment against the defendant for $37,565,000, plus costs. Prejudgment interest is denied.
Counsel for Bergner will prepare the order for judgment consistent with this decision.
. (b) Except as provided in subsection (c) of this section, the trustee may avoid any transfer of an interest of the debtor in property—
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;
(3) made while the debtor was insolvent;
(4) made—
(A) on or within 90 days before the date of the filing of the petition; or
(B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and
(5)that enables such creditor to receive more than such creditor would receive if—
*973(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).
. (c) The trustee may not avoid under this section a transfer — •
(1) to the extent that such transfer was—
(A) intended by the debtor and the creditor to or for whose benefit such transfer was made to be a contemporaneous exchange for new value given to the debtor; and
(B) in fact a substantially contemporaneous exchange;
(2) to the extent that such transfer was—
(A) in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee;
(B) made in the ordinary course of business or financial affairs of the debtor and the transferee; and
(C) made according to ordinary business terms;
(3) that creates a security interest in property acquired by the debtor—
(A) to the extent such security interest secures new value that was—
(i) given at or after the signing of a security agreement that contains a description of such property as collateral;
(ii) given by or on behalf of the secured party under such agreement;
(iii) given to enable the debtor to acquire such property; and
(iv) in fact used by the debtor to acquire such property; and
(B) that is perfected on or before 20 days after the debtor receives possession of such property;
(4) to or for the benefit of a creditor, to the extent that, after such transfer, such creditor gave new value to or for the benefit of the debtor—
(A) not secured by an otherwise unavoidable security interest; and
(B) on account of which new value the debt- or did not make an otherwise unavoidable transfer to or for the benefit of such creditor;
(5) that creates a perfected security interest in inventory or a receivable or the proceeds of either, except to the extent that the aggregate of all such transfers to the transferee caused a *979reduction, as of the date of the filing of the petition and to the prejudice of other creditors holding unsecured claims, of any amount by which the debt secured by such security interest exceeded the value of all security interests for such debt on the later of—
(A)(i) with respect to a transfer to which subsection (b)(4)(A) of this section applies, 90 days before the date of the filing of the petition; or
(ii) with respect to a transfer to which subsection (b)(4)(B) of this section applies, one year before the date of the filing of the petition; or
(B) the date on which new value was first given under the security agreement creating such security interest;
(6) that is the fixing of a statutory lien that is not avoidable under section 545 of this title;
(7) to the extent such transfer was a bona fide payment of a debt to a spouse, former spouse, or child of the debtor, for alimony to, maintenance for, or support of such spouse or child, in connection with a separation agreement, divorce decree or other order of a court of record, determination made in accordance with state or territorial law by a governmental unit, or property settlement agreement, but not to the extent that such debt—
(A) is assigned to another entity, voluntarily, by operation of law, or otherwise; or
(B) includes a liability designated as alimony, maintenance, or support, unless such liability is actually in the nature of alimony, maintenance or support; or
(8)if, in a case filed by an individual debtor whose debts are primarily consumer debts, the aggregate value of all property that constitutes or is affected by such transfer is less than $600.
11 U.S.C. § 547(c).
. (b)(1) Except with respect to a setoff of a kind described in section 362(b)(6), 362(b)(7), 362(b)(14), 365(h), 546(h), or 365(i)(2) of this title, if a creditor offsets a mutual debt owing to the debtor against a claim against the debtor on or within 90 days before the date of the *983filing of the petition, then the trustee may recover from such creditor the amount so offset to the extent that any insufficiency on the date of such setoff is less than the insufficiency on the later of—
(A) 90 days before the date of the filing of the petition; and
(B) the first date during the 90 days immediately preceding the date of the filing of the petition on which there is an insufficiency.
(2) In this subsection, "insufficiency” means amount, if any, by which a claim against the debtor exceeds a mutual debt owing to the debtor by the holder of such claim.
11 U.S.C. § 553(b).
. See Bergner brief filed February 22, 1994, p. 27, n. 7. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492205/ | OPINION AND ORDER DENYING ADVERSARY COMPLAINT FOR TURNOVER
WALTER J. KRASNIEWSKI, Bankruptcy Judge.
This matter is before the Court upon Beaver Office Products, Inc.’s (the “DIP”) adversary complaint for turnover of funds against Jamille Simon (“Simon”). The DIP seeks to collect funds which Simon allegedly owes to the DIP pursuant to two promissory notes executed in 1992 (the “Notes”). Upon consideration of the evidence adduced at trial, the Court finds that the DIP’s complaint is not well taken and should be denied.
BACKGROUND
The DIP filed a petition under chapter 11 of title 11 on September 30, 1993.
The DIP sells, rents and services office machines in northwest Ohio. In addition, the DIP sells office supplies.
Synco, U.S.A. (“Synco”), the DIP’s wholly owned subsidiary, also sells, rents and services office machines in northwest Ohio.
C.O.B.E.A, Inc. (“COBEA”) owns 100% of the DIP’s stock. John Elgin (“Elgin”) and Horst Lorenz (“Lorenz”) own COBEA’s stock. Lorenz serves as president of the DIP and secretary and vice-president of Syn-co.
Simon formerly owned Data Systems/Syn-co (“DSS”), an Ohio corporation.
FACTS
The DIP presented the testimony of Lorenz and Gary Lilje (“Lilje”), Synco’s controller. Simon testified in opposition to the DIP’s motion.
Simon acknowledges that he received funds from the DIP as set forth in the Notes and that he never satisfied the Notes. However, contrary to the DIP’s position, Simon testified that the parties never intended for him to repay the Notes. Further, Simon testified that the DIP discharged his obligations under the Notes in the Spring of 1992.
Simon testified that DSS, his former business, purchased office machines and office supplies from the DIP. Simon testified that he developed great respect for Lorenz’ “financial ability” based on his business relationship with Lorenz and the DIP.
Additionally, Simon testified that he and Lorenz were personal friends.
After DSS began experiencing financial difficulties in August of 1991, Simon sought Lorenz’ assistance in effecting a “workout” of DSS’ debt to ITT, one of DSS’ major credi*21tors. Simon testified that Lorenz assisted him in developing a proposed “workout” plan. Lorenz also participated in meetings between Simon and ITT. Despite the efforts of Simon and Lorenz, ITT rejected the proposed “workout” plan.
Upon ITT’s rejection of Simon’s proposed “workout” plan, Simon transferred DSS’ customer lists, employee files and computer records to the DIP in early 1992. Simon further testified that he assisted the DIP in obtaining the services of former DSS employees. Consistent with Simon’s testimony, Lilje testified that substantially all of the former employees of DSS became employees of the DIP in January, 1992.
On February 7, 1992, Simon leased the building which he owned at 3150 Bellevue, which building was formerly occupied by DSS, to the DIP. Thereafter, Simon assigned the Lease to his ex-wife Janie Simon pursuant to a divorce decree.
Subsequently, in April of 1992, Simon executed the Notes in favor of the DIP for $77,000.00 and $45,000.00, respectively. See Plaintiffs Exhibit A, Exhibit B. According to Simon, the DIP transferred funds to him in order to meet the payroll obligations of DSS for January of 1991 because Elgin and Lorenz feared that the DIP would be viewed as a successor-in-interest to DSS.
Simon testified that the parties never intended for him to repay the Notes. Rather, Simon testified that he executed the Notes at Lorenz’ request based on Lorenz’ assurance that the DIP would subsequently release him from liability on the Notes.
Simon testified that, shortly after he executed the Notes, the DIP discharged his obligations under the Notes when Lorenz signed a document stating that the DIP was forgiving “any and all obligations of [DSS] or Jamille Simon” (the “Release”). See Defendant’s Exhibit 1.
In contrast to Simon’s testimony, Lorenz testified that he never discussed forgiveness of the Notes with Simon and that he did not recall signing the Release.
Although the DIP listed the Notes as an asset on its balance sheets for January and February of 1992, the DIP did not list the Notes as an asset on balance sheets subsequent to February, 1992. Lorenz testified that he had no knowledge as to why the DIP’s financial statements made no reference to the Notes as an asset of the DIP. Lilje testified that the DIP wrote-off the Notes as a bad debt.
DISCUSSION
APPLICABLE STATUTE
Former Ohio Revised Code § 1303.71(A), applicable to the DIP’s alleged release of the Notes in 1992, provides that:
[t]he holder of an instrument may even without consideration discharge any party:
... (2) by renouncing his rights by a writing signed and delivered or by surrender of the instrument to the party to be discharged.
Ohio Rev.Code Ann. § 1303.71 (Anderson 1979).
BURDEN OF PROOF
Simon bears the burden of proof in establishing that the Notes have been discharged. Hubbard Realty Co. v. First Nat’l Bank of Pikeville, 704 F.2d 733, 736 (4th Cir.1983).
WHETHER THE DIP DISCHARGED SIMON’S OBLIGATIONS UNDER THE NOTES BY EXECUTING THE RELEASE
The specific language of the Release along with Simon’s testimony has convinced the Court that the DIP, acting through its president Lorenz, discharged Simon’s obligations under the Notes by executing the Release. See Winters v. Sami, 462 So.2d 521, 522 (Fla.Dist.Ct.App.1985) (finding renunciation of future right to receive mortgage payments under analogous Florida statute where mortgagees executed memorandum stating that they “ ‘ha[d] agreed to omit’ ” monthly mortgage payments due from mortgagor), review den’d, 475 So.2d 696 (Fla. 1985); see also Shaffer v. Akron Products Co., 91 Ohio App. 535, 109 N.E.2d 24, 25-27 (1952) (finding renunciation of holder’s rights against maker under former Ohio General Code § 8227 where document executed by *22holder indicated that holder would destroy note and make no claim against maker); cf. Kinney v. Columbus Temperature Control Co., 2 Ohio App.3d 396, 442 N.E.2d 465, 467-68 (1981) (finding that holder’s conduct in surrendering note to maker’s president constituted a renunciation of rights under promissory note). Moreover, the Court finds that the DIP’s release of its rights under the Notes was intentional and did not result from fraud or mistake. The absence of any reference to the Notes in the DIP’s financial statements subsequent to February, 1992 further supports Simon’s position that the DIP discharged Simon’s obligations on the Notes.
In light of the foregoing, it is therefore
ORDERED that the DIP’s adversary complaint for turnover be, and it hereby is, denied and dismissed with prejudice. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492206/ | ORDER ON MOTION FOR RECONSIDERATION
ALEXANDER L. PASKAY, Chief Judge.
THIS is a Chapter 7 liquidation case and the matter before the Court is a Motion for Reconsideration of this Court’s Order dated May 30, 1995 filed by James Orr, the Chapter 7 Trustee (Trustee) in the above captioned Chapter 7 case. The Motion is filed pursuant to Fed.R.Civ.Pro. 60(b) as adopted by F.R.B.P. 9024 and is based on the allegation that the Order which granted a cross-Motion filed by SSMC and the Judgment based on the Order should be set aside either because of newly discovered evidence or in the alternative because the Order and the Judgment were obtained by fraud upon the Court.
The court heard argument of counsel for the respective parties, considered the authorities cited in support and in opposition of the Motion, together with the relevant portion of the record and based on same now finds and concludes as follows:
On August 17, 1994, this Court entered an Order and granted the Cross-Motion for Summary Judgment in favor of SSMC and against James C. Orr, the Trustee of the estate of Paul A. Bilzerian (Trustee). In its Order, this Court made a specific finding that the guarantee executed by Bilzerian of the Primary Obligation of BPLP-1, a Florida Limited Partnership is valid and enforceable, and thus the Trustee’s objection to the allowance of the claim filed by SSMC should be overruled and the claim shall be allowed. Based on this finding, the Court entered a Judgment and overruled the objection and allowed the claim of SSMC. The Trustee, having been aggrieved by the Judgment, on September 14, 1994, filed a Notice of Appeal. *45On October 19, 1994, the clerk transmitted the record on appeal and the appeal is still pending before the District Court, yet to be decided.
On May 9,1995, the Trustee filed a Motion for Relief from Judgment based upon Fraud and/or Newly Discovered Evidence. This Court considered the Motion ex parte and denied the Motion on May 30, 1995, based upon the finding that this Court lacked subject matter jurisdiction to consider the Motion for Relief because of the pending appeal of the Order on Cross-Motions for Summary Judgment.
On June 1,1995, the Trustee filed the Motion which is currently before the Court. In his Motion, the Trustee seeks reconsideration of this Court’s Order of May 30, 1995 denying the Motion for Relief from Judgment based upon the contention that the Court does have subject matter jurisdiction to consider a Motion for Relief from Judgment filed pursuant to Rule 60(b).
In opposition to the Motion under consideration, SSMC contends that this Court lacks jurisdiction to consider the Motion because, once an appeal is filed and lodged in the District Court, this Court is effectively divested of jurisdiction to enter any order in the proceeding which is on appeal, citing In re Urban Development, 42 B.R. 741 (Bankr.M.D.Fla.1984).
In support of his Motion the Trustee cites Footnote 3 in Travelers Ins. Co. v. Liljeberg Enterprises, Inc., 38 F.3d 1404 (5th Cir.1994). In Travelers the Court of Appeals indicated that a 60(b) filed while the appeal is still pending may be considered by the District notwithstanding the pendency of the appeal. The Court also recognized however that when an appeal is taken, the District Court is divested of jurisdiction except to take action in aid of the appeal or to correct clerical errors pursuant to 60(a) citing 7 James W Moore, Moore’s Federal Practice 60.30(2). It is equally true that filing a notice of appeal from an appealable order of the bankruptcy court divests the bankruptcy court of jurisdiction over issues relating to the appeal. In re Health Care Products, 169 B.R. 753 (M.D.Fla.1994). In this case the District Court held that the bankruptcy court was without jurisdiction to strike an affidavit after a summary judgment was already entered and the state had filed a notice of appeal of the Order which granted the motion. Clearly, if the relief sought below would interfere with the appeal process, the Court whose order is on appeal does not have any jurisdiction and should not interfere with the appeal process. The soundness of this proposition is amply justified and needed in order to avoid confusion and waste of time which may occur if two courts were considering the same issues. In this instance, the court below has no discretion and must avoid interfering with or replacing the appellate process. In re Thorp, 655 F.2d 997 (9th Cir.1981); In re Urban Development, Ltd., Inc., 42 B.R. 741 (Bankr.M.D.Fla.1984).
While it is true that the instant matter under consideration, the Motion filed by the Trustee, does not raise precisely the same issues which are now pending on appeal, it is clear that if the relief sought by the Trustee is granted it would effectively moot out the issue on appeal, thus interferes with the appeal process. This being the case this Court is satisfied that to consider the motion filed by the trustee on its merit would be improper and would be an impermissible interference with the appeal process.
ORDERED, ADJUDGED AND DECREED that the Motion for Reconsideration of Order Denying Motion for Relief from Judgment under F.R.C.P. 60(b) as adopted by F.R.B.P. 9024 based on Fraud and/or Newly Discovered Evidence is hereby denied.
DONE AND ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492207/ | 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 claim to determine the non-dischargeability of a debt asserted by the Securities And Exchange Commission (SEC). The claim is presented in a one Count Complaint and is based on the contention that Paul A. Bilzerian (Debtor) obtained money by false pretenses, a false representation, or actual fraud, therefore, the liability of the Debtor, established by a Final Judgment entered on January 28, 1993, by the District Court for the District of Columbia in an action styled SEC v. Bilzerian, No. 89-1854 (SSH) (D.D.C.) shall be excepted from the overall protection of the general Bankruptcy discharge by virtue of § 523(a)(2)(A). The Final Judgment required the Debtor to disgorge the sum of $33,140,787.07 plus interest. On June 25, 1993, the District Court entered a separate Order which established the amount of the prejudgment interest to be disgorged by the Debtor as $29,196,812.46. Thus the total debt sought to be excepted by the SEC is $62,337,599.53.
The Complaint to Determine Discharge-ability of Debt filed by the SEC was immediately contested by the Debtor. Specifically, the Debtor filed a Motion to Dismiss the Complaint and contended that the SEC had no standing to bring a Complaint challenging the dischargeability of a debt owed by him because the SEC is not a “creditor” within the meaning of the Bankruptcy Code. This Court agreed and granted the Debtor’s Motion to Dismiss the Complaint. The SEC promptly filed a Notice of Appeal. On ap*47peal, the District Court agreed with the position of the SEC, reversed this Court’s Order of dismissal, and reinstated the Complaint based on its conclusion that the SEC was in fact a creditor with standing to challenge the dischargeability of the debt established by the Final Judgment.
The immediate matter under consideration is a Motion for Summary Judgment filed by the SEC. In its Motion, the SEC contends that the Debtor is collaterally estopped from relitigating the issues underlying the Final Judgment ordering the Debtor to disgorge the amount stated above. Specifically, the Motion is based on the SEC’s contention that the Debtor’s conviction for violating certain provisions of the Securities and Exchange Act of 1934 operate as a bar to litigating the Debtor’s liability for disgorgement based on the doctrine of collateral estoppel. Because the Debtor is precluded from relitigating these issues, the SEC contends that no genuine issues of material fact exist in this adversary proceeding and that the SEC is entitled to a judgment of nondischargeability as a matter of law.
In support of its Motion, the SEC filed a document entitled “Declaration of Catherine M. Shea in Support of SEC’s Motion for Summary Judgment on Nondischargeability Complaint.” In this Declaration, Catherine M. Shea (Shea) declares that she is an Assistant Chief Litigation Counsel with the SEC’s Division of Enforcement, that she is principally responsible for the SEC’s case against the Debtor, and that she is “familiar with the record in this matter.” Shea then simply lists nine documents and states that “true and correct” copies of the documents are attached to the Declaration as exhibits. The documents attached to the Declaration consist of copies of the following:
(1) a Judgment and Probation/Commitment Order entered in a criminal proceeding against the Debtor;
(2) a partial transcript of a court proceeding.
Although the transcript is incomplete, unsigned, and cannot be identified from the exhibit, Shea states that it is a transcript of the judge’s findings at the Debtor’s sentencing hearing in his criminal case;
(3) a second partial transcript of a judicial proceeding.
Again, the transcript is incomplete, unsigned, and cannot be identified from the exhibit. Shea states that it is a transcript of the jury’s answers to Special Interrogatories in the Debtor’s criminal case.
(4) a third partial transcript of court proceedings.
This transcript is also incomplete, unsigned, and cannot be identified from the exhibit, although Shea states that it is a transcript of certain jury instructions in the Debtor’s criminal case;
(5) a Declaration filed by the Debtor in a civil action in the District of Columbia in opposition to a Motion for Expedited Discovery by the SEC;
(6) an Order of Partial Summary Judgment and Final Judgment of Permanent Injunction against the Debtor in the District of Columbia civil action;
(7) the Order of Disgorgement entered against the Debtor, together with the Opinion accompanying the Order;
(8) the Order Regarding Calculation of Prejudgment Interest entered in the District of Columbia action;
(9) the Complaint to Determine Dis-chargeability of Debt filed by the SEC to commence this adversary proceeding.
Motions for Summary Judgment are governed by Rule 56 of the Federal Rules of Civil Procedure, as made applicable by Rule 7056 of the Bankruptcy Rules. Subsection (e) of that Rule specifically sets forth the requirements for Affidavits filed in support of Motions for Summary Judgment. That subsection provides that “[sjupporting and opposing affidavits shall be made on personal knoiuledge, shall set forth such facts as would be admissible in evidence, and shall show affirmatively that the affiant is competent to testify to the matters stated therein. Siuom or certified copies of all papers or parts thereof referred to in an affidavit shall be attached thereto or served therewith.” (emphasis supplied.)
In this case, it is clear that the Declaration of Shea does not satisfy the requirements of *48Rule 56. The Declaration is nothing more than a list of exhibits coupled with Shea’s .statement that the exhibits are “true and correct” copies of the original documents. The Declaration in no way establishes that Shea has any “personal knowledge” of the matters contained in the exhibits, and neither her statements nor the exhibits themselves would be admissible in evidence. The documents attached to the Declaration are not sworn, certified, or authenticated in any manner. In the absence of a competent affidavit or admissible documents to support the Motion for Summary Judgment, there is no basis in the record upon which this Court can grant the Motion.
Accordingly, it is
ORDERED, ADJUDGED, AND DECREED that the Motion for Summary Judgment on Nondischargeability Complaint filed by the Securities and Exchange Commission is hereby denied. It is further
ORDERED, ADJUDGED AND DECREED that a pretrial conference shall be scheduled before the undersigned in Courtroom C of the United States Bankruptcy Court, 4921 Memorial Highway, Tampa, Florida, on September 5, 1995 at 2:30 p.m. to prepare this matter for trial.
DONE AND ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492211/ | MEMORANDUM OPINION
MARY D. SCOTT, Bankruptcy Judge.
THIS CAUSE is before the Court upon a Complaint for Turnover filed by the debtors against the Internal Revenue Service (IRS). The IRS has responded and affirmatively requests relief from the automatic stay to allow the United States to offset a portion of its claim in this bankruptcy proceeding against the debtors 1994 overpayment. The debtors resist the motion and assert that their 1994 tax refund is property of the estate and upon confirmation of their Chapter 13 plan this refund would vest in them. The debtors assert they need the refund for living-expenses and necessities and that without possession of these funds, their plan is placed in jeopardy. They further assert them plan, already confirmed provides for payment in full of the IRS claim plus 10% interest.
The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157(a), 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), (G) and (K). Accordingly, this Court may enter final judgment.
On August 16, 1995, the parties filed a stipulation which stated the issue before the Court, the position of the parties, and the facts they deemed relevant to, and determinative of, the declared issue. The parties stipulated to the following facts:
“1. On October 19, 1992, the Internal Revenue Service (IRS) filed a notice of federal tax lien against the plaintiffs for their joint 1990 income tax liability.
“2. On February 23, 1995, the plaintiffs filed for bankruptcy pursuant to Chapter 13 of the Bankruptcy Code.
“3. On March 15,1995, the IRS, on behalf of the United States, filed a proof of claim in the amount of $8,458.77.
“4. On March 27, 1994, the IRS offset the debtors’ 1994 tax overpayment, in the amount of $1,292 against the debtors’ 1990 tax liability.
“5. Subsequently, the IRS reversed this offset, but maintains possession of the overpayment.
“6. On April 26, 1995, the IRS, on behalf of the United States, filed an amended claim seeking a secured claim in the amount of $4,926.61 for the debtors’ 1990 federal income tax.
“7. On or about April 12, 1995, the plaintiffs filed a Complaint for Turnover of Property of the Estate seeking their 1994 tax overpayment in the amount of $1,292.
“8. On or about May 23, 1995, the United States filed its Answer to plaintiffs’ complaint and requested that this Court lift the automatic stay to authorize offset of the 1994 overpayment against the 1990 tax liability, pursuant to Section 553 of the Bankruptcy Code.”
This Chapter 13 case was filed on February 23, 1995, at which time a plan was submitted proposing to pay, in full, a secured tax debt to the United States for federal income taxes due for the 1990 taxable year. The debtors owe $4,926.61 in federal income taxes. The Internal Revenue Service is currently holding a refund due for the 1994 taxable year in the amount of $1,292.00.
The Right to Setoff Under Section 553
The primary issue for the Court is whether the United States is entitled to relief from stay in order to setoff the income tax refund for 1994 against the secured income tax debt owed for 1990. The debtors do not assert that the United States is not entitled to setoff the refund because the 1994 refund is not mutual, but argue that there exists a confirmed plan under which the creditor will receive full payment plus interest on the debt, and they need the money for expenses and necessities.
Section 553 of the Bankruptcy Code preserves the right of setoff:
553. Setoff.
*261(a) Except as otherwise provided in this section and in sections 362 and 363 of this title, this title does not affect any right of a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case under this title against a claim of such creditor against the debtor that arose before the commencement of the case, except to the extent that
(1) the claim of such creditor against the debtor is disallowed;
(2) such claim was transferred, by an entity other than the debtor, to such creditor—
(A) after the commencement of the case; or
(B)(i) after 90 days before the date of the filing of the petition; and
(ii) while the debtor was insolvent; or
(3) the debt owed to the debtor by such creditor was incurred by such creditor—
(A) after 90 days before the date of the filing of the petition; and
(B) while the debtor was insolvent; and
(C) for the purpose of obtaining a right of setoff against the debtor.
11 U.S.C. § 553(a). Thus, in order to exercise its right to setoff, the United States must demonstrate:
(1) that the debt is mutual, i.e., that each party has the right, in his own name, to collect against the other, in his own right. In re MetCo Mining and Minerals, Inc., 171 B.R. 210, 217 (Bankr.W.D.Pa.1994); In re Glaze, 169 B.R. 956, 964 (Bankr.D.Ariz.1994);
(2) the debt owing to the creditor arose before the bankruptcy case;
(3) the claim against the creditor arose before the bankruptcy case; and
(4) that the right to setoff exists under nonbankruptcy law. See In re Whitaker, 173 B.R. 359, 361 (Bankr.S.D.Ohio 1994); see also In re MetCo Mining and Minerals, Inc., 171 B.R. 210, 216 (Bankr.W.D.Pa.1994).
Each of these elements has been met in this case. The right to setoff exists pursuant to 26 U.S.C. § 6402(a).1 Secondly, the debts are between the same parties, in their individual capacities. Third, the debt owing to the United States is clearly a pre-petition debt since it arose at the conclusion of the calendar year 1994. Finally, the funds held by the United States also constitute a pre-petition debt inasmuch as the taxes became an obligation on December 31,1990, the close of the tax year. Lawrence v. Comm’r (In re Lawrence), 19 B.R. 627 (Bankr.E.D.Ark.1981); Harbaugh v. United States, 89-2 U.S.T.C. (CCH) ¶ 9608, 1989 WL 139254 (W.D.Pa.1989), aff’d, 902 F.2d 1560 (3d Cir.1990); Kalenze v. Federal Crop Ins. Corp. (In re Kalenze), 175 B.R. 35 (Bankr.D.N.D.1994); In re Thorvund-Statland, 158 B.R. 837 (Bankr.D.Idaho 1993); In re Ferguson, 83 B.R. 676 (Bankr.E.D.Mo.1988). Accordingly, each of the elements required for set-off under section 553 has been met such that cause exists for relief from stay. See In re Murry, 15 B.R. 325, 326 (Bankr.E.D.Ark.1981) (“This section clearly grants the United States an unqualified right to setoff an overpayment against any federal tax liability of the person who made the overpayment. The automatic stay provisions of 11 U.S.C. Section 362 prevent the setoff from being made immediately, but no provision of the Bankruptcy Code eliminates the rights granted to the United States by the Internal Revenue Code.”); see also Wilson v. Internal Revenue Service (In re Wilson), 29 B.R. 54 (Bankr.W.D.Ark.1982).
The Effect of Plan Confirmation
The debtors argue that the United States should not be permitted to setoff the refund against the tax debt because the Chapter 13 plan, providing for full payment of the debt, has been confirmed. Section 553 states that “Except as otherwise provided in this section and in sections 362 and 363 of *262this title, this title does not affect any right of a creditor to offset a mutual debt....” “This title” necessarily includes section 1327 which establishes the effect of confirmation.2 Thus, based upon the unequivocal language of section 553, confirmation does not alter a creditor’s right to setoff. In re Olson, 175 B.R. 30 (Bankr.D.Neb.1994); In re Whitaker, 173 B.R. 359 (Bankr.S.D.Ohio 1994); see also Carolco Television, Inc. v. National Broadcasting Co., (In re De Laurentiis Entertainment Group, Inc.), 963 F.2d 1269 (9th Cir.), cert. denied, — U.S. —, 113 S.Ct. 330, 121 L.Ed.2d 249 (1992) (Chapter 11).
This Court does not agree that there is any inequity in the rule that the creditor is entitled to setoff despite plan confirmation. As noted by Judge Adams in In re Murry:
Not only is the Government’s right to set-off supported by statute, but it is also the equitable solution in this situation. Any refund made to the plaintiff at this point would be a windfall to her. The plan proposed by the debtor-plaintiff in this proceeding is based upon the net income which she has at her disposal during the course of the year. Amounts which are deducted from her gross income are not taken account of because it is assumed they are being used to cover current expenses. If, as in this case, the debtor’s current tax liabilities are less than the amounts withheld from her wages, then the excess should be available to her creditors under the plan. If the 1980 overpayment is simply refunded to the debtor-plaintiff herein, she will receive a cash windfall with no additional obligation to her creditors other than to continue with her payments under the plan. It is clearly a fairer solution to allow the United States to retain the overpayment against its claim in the bankruptcy proceeding.
Murry, 15 B.R. at 326. The situation in the instant case is the same. Moreover, setoff may in fact be of benefit to the debtors and to some of the other creditors in this case. Upon setoff, the debt to the United States will have been reduced by one-fourth, thereby permitting earlier or larger installment payments to secured creditors or providing for a small or increased payment to unsecured creditors. In this manner, the length of time required to pay the debts under the plan may be reduced, or, alternatively, more creditors may receive funds.
Conclusion
Having established cause for relief from stay, In re Orlinski, 140 B.R. 600, 603 (Bankr.S.D.Ga.1991), the automatic stay will be lifted in order for the United States to setoff the federal income tax refund for the 1994 taxable year against the debt owed to the United States for federal income taxes for the 1990 taxable year. Accordingly, it is
ORDERED that the Complaint for Turnover of Property of the Estate is DENIED. A separate judgment will be entered in accordance with these findings.
IT IS SO ORDERED.
JUDGMENT
This action came before the Court, Honorable Mary Davies Scott, U.S. Bankruptcy Judge, presiding, upon stipulated facts and briefs. A decision having been duly rendered,
IT IS ORDERED AND ADJUDGED that the Complaint for Turnover is DENIED and the United States is granted relief from the automatic stay to setoff the federal income tax refund for the 1994 taxable year against the debt owed to the United States for federal income taxes for the 1990 taxable year.
IT IS SO ORDERED.
. Section 6402(a) provides:
(a) General Rule. In the case of any overpayment, the Secretary, within the applicable period of limitations, may credit the amount of such overpayment, including any interest allowed thereon, against any liability in respect of an internal revenue tax on the part of the person who made the overpayment and shall, subject to subsections (c) and (d), refund any balance to such person.
. Section 1327(a) states that the provisions of the confirmed Chapter 13 plan bind the debtor and each creditor, whether or not the plan provides for the claim of the creditor. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492212/ | ORDER DENYING MOTION TO DISMISS COMPLAINT
LARRY E. KELLY, Chief Judge.
This is a Chapter 12 case in which a creditor, New Venture Partnership has filed a complaint objecting to the dischargeability of its debt under §§ 523(a)(2) and 523(a)(6). The corporate debtor has filed a motion to dismiss the complaint, asserting that § 523(a) exceptions are applicable only to individual debtors. The court considered this motion at a regularly noticed hearing on March 14, 1995. It is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(I).
The facts are not in dispute on the issue before the court. The Debtor, JRB Consolidated, Inc., is a Texas corporation and no party in interest has contested its eligibility to file a Chapter 12 proceeding. The eligibility requirements are set out in 11 U.S.C. §§ 109(f), 101(13), (18), and (41). New Venture Partnership asserts that it has been damaged by pre-petition fraud or willful and malicious acts committed by the Debtor and it timely commenced the above-styled adversary proceeding in order to receive a determination on this complaint. The Debtor then filed this Rule 12(b) motion to dismiss the complaint for failure to state a cause of action asserting that § 523(a) exceptions are inapplicable in Chapter 12 except against individual debtors.
The essence of the Debtor’s argument is that § 523(a) commences with the language “A discharge under § 1228(a) ... of this title does not discharge an individual debtor from any debt ...” and then goes on to describe *374certain types of debt to which this introductory debt applies.
However, New Venture Partnership notes that the specific language in § 1228(a) provides in relevant part that “as soon as practicable after completion by the debtor of all payments under the plan ... the court shall grant the debtor a discharge of all debts, provided for by the plan ... except any debt — (2) of the kind specified in § 523(a) of this title.”
New Venture Partnership asserts that the specific language of § 1228 is not inconsistent with that of § 523. Section 103 of the Bankruptcy Code indicates that § 523 is applicable in all Chapter 7, 11, 12 and 13 cases, while the provisions of Chapter 12 apply only to Chapter 12 cases. New Venture Partnership also observes that Chapter 12 itself treats only specific debtors as indicated here-inabove. Any debtor, otherwise eligible to file a Chapter 12 case, would clearly be eligible to file a Chapter 7 or a Chapter 11 case and individual debtors eligible to file a Chapter 12 would, subject to debt limitations, be eligible to file a Chapter 13 case. The contrary, however, is not true. All eligible Chapter 7, Chapter 11 or Chapter 13 debtors are not necessarily eligible to file a Chapter 12. It is a specific chapter, limited to special types of debtors and therefore, it would not be unexpected that Congress may provide for some different treatment of these debtors. For example, in a Chapter 11 case, § 1141(d) provides that debtors receive a discharge upon confirmation, subject to different treatment afforded by the plan of reorganization or order confirming the plan. This discharge would apply to all Chapter 11 debtors, including corporations. The provision, however, contains two limitations to the effect of the discharge. Corporate debtors, otherwise ineligible for a discharge under § 727, that liquidate all or substantially all of their property and cease to engage in business after confirmation will not receive a discharge. Further, the confirmation of a plan does not discharge individual debtors from any debt excepted from discharge under § 523. These two exceptions are specifically spelled out in Chapter 11, § 1141(d)(2) and (3). It seems clear from that language that corporate debtors in Chapter 11 are not subject to a complaint to determine dischargeability of debt under § 523(a). However, even without such a complaint, they are not eligible to discharge any debt if they liquidate.
Chapter 12, on the other hand, contains a specific provision in § 1228(a) which says “the debtor” gets a discharge “except” for debts “of the kind” specified in § 523(a). There is no “liquidation versus continuing business” distinction for corporate or partnership debtors and there is no specific separate section referring to individual debtors. The language of § 1228(a) is not inconsistent with § 523(a) as individual debtors are still subject to the § 523(a) exceptions. But, § 1228(a) is broader in that its language is inclusive of all debtors — individuals, partnerships, and corporations. This inclusive language is broader than the Chapter 11 discharge language and would appear to be consistent with the intent of Congress to provide special treatment for certain kinds of debtors otherwise eligible to file for Chapter 12.
It would be a stretch to try to fit the § 523(a) language into § 1228 and redefine what it meant by the term “debtor”. ' The meaning of the word debtor in Chapter 12 is not unclear. The wording in § 1228(a)(2) describing “debts of the kind” specified in § 523(a) does not naturally lend itself to also incorporate the meaning “for debtors of the kind” referenced in § 523(a). Debts of the kind easily seems to be limited to the subpar-agraphs of § 523(a) which identify the types of debts which are eligible to be excepted from discharge. Section 1228(a) uses the term debtor without restriction, has its own definition of debtor which is to be used for all purposes in all sections of Chapter 12 and this court believes that the term “of a kind” does not incorporate the limiting definition found in the introductory paragraph of § 523(a).
As such, this court concludes that creditors are entitled to file adversary proceedings to receive a determination of whether or not their particular claim is excepted from discharge under § 523(a), even if the Chapter 12 debtor is a person other than an individual.
*375It is therefore ordered that the Debtor’s Motion To Dismiss is DENIED.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492213/ | ORDER DENYING MOTION TO DISMISS AND SUSPENDING ADVERSARY PROCEEDING
MARY D. SCOTT, Bankruptcy Judge.
THIS CAUSE is before the Court upon the defendant’s Motion to Dismiss Adversary Proceeding, filed on June 30, 1995. The debtor originally filed his bankruptcy case under Chapter 7 of the Bankruptcy Code, on August 31, 1994. The schedules listed only two debts: the debtor’s automobile loan and a judgment based upon debtor’s assault upon plaintiff with a firearm. The Chapter 7 schedules also reflected that the debtor had monthly income of $700 and expenses of $699.
The plaintiff timely filed a complaint under section 523(a) of the Bankruptcy Code, asserting that the assault was a wilful and malicious act such that the debt was nondis-chargeable. One day after the parties filed their joint pre-trial statement, the debtor filed a motion to convert his case to a case under Chapter 13 of the Bankruptcy Code. New schedules I and J were filed, which, unlike the previous schedules, included debt- or’s spouse’s income and expenses. The new schedules created $210 of disposable income. No objections to the conversion, based either upon bad faith or feasibility, were filed and the case was converted by Order dated April 11, 1995.
The proposed plan provided for a payment to the trustee of $210 per month with payments to be made on the debtor’s automobile loan in the amount of $172 per month. Fees to the trustee and $1,000 to the debtor’s attorney would also be paid through the plan. The plaintiff unsecured creditor would receive a pro rata distribution of any remaining funds, which under this plan, would be virtually nothing. Despite the potential arguments against the plan, no objections were filed to the proposed conversion or to the plan, and, on June 15,1995, the debtor’s plan was confirmed.
A plan providing for plaintiffs claim having been confirmed, the debtor filed the instant motion to dismiss. The plaintiff responded that the adversary proceeding continue with the claim being designated “undisputed secured,”1 or, alternatively that the case be converted to a case under Chapter 7 based upon the debtor’s bad faith.
Under section 1327(a) of the Bankruptcy Code, a confirmed plan is binding upon the debtor and each creditor. Once the plan payments are completed, with few exceptions, the debtor is discharged of all debts provided for in the plan. 11 U.S.C. § 1328(a). Thus, the discharge under Chapter 13 discharges debts arising from intentional torts which would be otherwise nondischargeable in a Chapter 7 case are in fact discharged. In order to avoid the effect of this discharge, a creditor holding an unsecured judgment need object to the confirmation of the plan or seek dismissal of the Chapter 13 case.2 In the instant case, it appeal’s that plaintiff could have objected to *398both the conversion and to the plan, based upon bad faith and feasibility.3
However, the plaintiff failed to object either to conversion to Chapter 13 or to confirmation. Accordingly, he is bound by the terms of the plan which provides for a minuscule payment, if any, and, ultimately at completion of the plan, for discharge of the debt. Grounds for dismissal or conversion, 11 U.S.C. § 1307, have neither been pleaded, argued, nor proven. Revocation of confirmation is a remedy only if the order of confirmation was procured by fraud. 11 U.S.C. § 1830. There is no evidence of fraud. Accordingly, the remedies under section 1307 and 1330 do not exist at this time such that the plaintiff is bound by the terms of the plan.
Although the amount the plaintiff will receive on his debt is determined by the plan, a discharge is not entered until such time as the debtor completes all payments under the plan. 11 U.S.C. § 1328. Grounds for conversion or dismissal under section 1307 could yet arise. Accordingly, although the adversary proceeding is mooted by the existence of the Chapter 13 case, a subsequent conversion would resurrect the viability of the complaint. Therefore, the Court deems it appropriate that the adversary proceeding file remain open until such time as the debtor’s discharge is entered.
ORDERED that the Motion to Dismiss Adversary Proceeding, filed on June 30, 1995, by the debtor is DENIED. Litigation of this adversary proceeding is SUSPENDED pending completion of the Chapter 13 case.
IT IS SO ORDERED.
. The Court cannot, in this instance, create a secured interest where none existed. If the judgment were perfected pursuant to state law, the lien flows through bankruptcy, continuing to attach to prepetition assets, unless it is otherwise avoided.
. This is generally done within the context of the bankruptcy case, not an adversary proceeding.
. While these issues exist based upon the statements of the parties and the contents of the file, the Court expresses no opinion on the merits of either of these grounds. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492215/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW
MARY D. SCOTT, Bankruptcy Judge.
THIS CAUSE came before the Court upon the trial on the merits of the Complaint to Determine Dischargeability, filed on June 12, 1995. The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157(a), 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)(I).
Plaintiff First USA Bank holds a claim against the debtor Nathan L. McCall arising from one of his many credit cards. The account was opened in July of 1984 and had a credit limit of $6,000. In early April 1994, the debtor’s balance on the account was 00.00. A mere four months later, at the time of the filing of the Chapter 7 petition in bankruptcy, the account balance was $6154.06, of which $5,950 was due to cash advances taken within a two month period of time just prior to bankruptcy. The remainder of the balance is due to the finance charges. Thus, the entire balance is attributable to cash advances. Only one payment of $60 was made on the account, early in the withdrawal chronology.
The Chapter 7 schedules reflect that the debtors had a monthly income of $1,400 but had monthly expenses, excluding credit card payments, of over $1,800. Debtors’ listed unsecured debt, amounting to over $57,000, consists solely of credit card debt, the minimum payments on which amounted to approximately $1,000 per month.1 The debtors *401assert that these expenditures were for living and travel expenses.
The Bankruptcy Code provides in pertinent part:
A discharge under section 727 ... of this title does not discharge an individual debt- or from any debt—
(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—
(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition.
11 U.S.C. § 523(a)(2)(A). In determining whether use of a credit card is fraudulent, i.e., whether the debtor had no intent to repay the credit card debts, courts look to numerous factors, including: the length of time between credit card charges and the bankruptcy filing; the number of charges made; the nature of the charges made; the amount of the charges; the financial condition of the debtor at the time the charges were made; whether the debtor made monthly payments on the charges; and the past use of the credit card. See generally Chase Manhattan Bank v. Williams (In re Williams), 85 B.R. 494, 499 (Bankr.N.D.Ill.1988).
Based upon the facts of this case, the Court finds that the charges on the First USA Bank credit card were fraudulent under section 523(a)(2) because Nathan McCall had neither the ability nor the intent to repay the charges. The Court does not find credible the debtor’s protestations that he had the ability. In light of his extensive experience in the credit industry, including experience in credit collections, it is simply beyond credulity that he believed he could pay his current, excessive credit card debt, living expenses, and, at the same time, continue to draw on this account.
A comparison of the debtor’s income stream and expenses belie his assertions of means and intent. At the time he made the charges, the debtor was employed as a minister, earning only $286 per month in that position. His employment prospects were apparently so dismal that he was compelled to travel as far as Detroit, Michigan to seek employment. In contrast, the debtors expended $1,400 per month in consumer living expenses in addition to the $1,000 minimum payments on credit card debt. Debtor’s wife is not employed outside the home.
Once he began the cash withdrawals, debt- or made only one, minimum payment on the debt. The charges were made near in time to each other and to the filing of the bankruptcy case. Although the debtor orally asserted that he did not consult with an attorney for the purposes of filing bankruptcy, his responses to interrogatory numbers 7 and 8 (Exhibit 4A) indicate that he in fact sought legal advice from two different attorneys regarding debt collection and bankruptcy in June 1995 and July 1994. Debtor’s testimony that his first attorney “maneuvered” him into bankruptcy and that he “never agreed” ... is in conflict with his testimony that in July his finances had “deteriorated to where [he] had to do something else,” as well as in conflict with this extensive experience in debt collection.
The charges were entirely cash withdrawals in large amounts — in excess of the expenditures needed for the asserted “living expenses.” Debtor made a $3,000 withdrawal in one month, $1,200 in excess of his stated living needs and travel. In addition to these factors, it is noteworthy the debtor had a history of accruing large credit card debt. Indeed, the fact that his unsecured debt consists solely of credit card charges raises questions as to the accuracy of the schedules.2 While large credit card debt may not be unusual among debtors, the failure to list any other unsecured creditors is suspect.
The Court does not believe the debtor’s self-serving protestations that he had the ability, belief and intent to repay the credit card at the time he made the cash withdrawals. He was virtually unemployed with difficult prospects for employment. His monthly debt payments were vastly in excess of his *402income such that his stated “belief’ in his “ability” to repay is incredible. The debtor is not an uneducated novice in financial matters. He is experienced in collections and credit and thus was fully aware of his precarious financial position and the implications of withdrawing large amounts of cash on credit. Thus, at the time of the charges, they were “obtained by false pretenses, a false representation, or actual fraud.” See 11 U.S.C. § 523(a)(2)(A). Accordingly, it is
ORDERED that the debt owed by the debtor Nathan L. McCall is nondischargeable in this bankruptcy. Judgment shall be entered in favor of the plaintiff.
IT IS SO ORDERED.
JUDGMENT
This action came on for trial before the Court, Honorable Mary Davies Scott, U.S. Bankruptcy Judge, presiding, and the issues having been duly tried and a decision having-been duly rendered,
It is Ordered and Adjudged that the debt owed by the defendant Nathan L. McCall to the plaintiff First USA Bank is nondis-chargeable in this bankruptcy case pursuant to 11 U.S.C. § 523(a)(2).
IT IS SO ORDERED.
. These payments were not listed on the debtors' schedule of monthly expenditures.
. The debtor admits that he did not accurately complete the schedules, having omitted $1,000 in monthly payments from his schedule of expenses. | 01-04-2023 | 11-22-2022 |
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