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https://www.courtlistener.com/api/rest/v3/opinions/8492395/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW
GEORGE L. PROCTOR, Bankruptcy Judge.
This adversary proceeding came before the Court upon Defendant’s Motion for Summary Judgment. Upon the pleadings, memorandums of law, supporting affidavit and arguments presented at the hearing on July 17, 1996, the Court enters the following findings of fact and conclusions of law:
FINDINGS OF FACT
1. On October 13, 1994, L. Bee Furniture Company (Debtor) borrowed $150,000 from SunTrust Bank, Central Florida, N.A. (Defendant), evidenced by a promissory note. (Adv.Rec. 11, Ex. A-B). The terms of the Note provide that Debtor is to repay Defendant the $150,000 loan in fifty-nine (59) monthly installments of $3,080, commencing November 13,1994. (Id,.). The Note further provides that payment was due on the thirteenth (13th) of each month, and a five percent (5%) late charge is assessed against each payment received after the due date. (Id.).
2. In the affidavit supporting the motion for summary judgment, Defendant states it is the Bank’s practice to send invoices to business borrowers ten (10) days before monthly payments are due, and to send past due notices to borrower ten (10) days after payment is due. (Adv.Rec. 11). Debtor established the following payment record with Defendant:
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(Adv.Rec. 11, Ex. “B”).
3. On February 23, 1996, Debtor filed for protection under Chapter 7 of the Bankruptcy Code, and Charles W. Grant was appointed Chapter 7 Trustee (Plaintiff). (Main Case Rec. 1). On May 7, 1996, the Plaintiff filed this adversary proceeding seeking to avoid three payments totalling $9,702.00. (Adv. Rec. 1). The three transfers that the Plaintiff seeks to avoid are:
*70[[Image here]]
(Adv.Rec. 1).
4. The Plaintiff, in the complaint, argues that the transfers were avoidable pursuant to 11 U.S.C. § 547(b). (Id.). Defendant, in its answer, asserts affirmative defenses alleging that the transfers sought to be avoided were made in the ordinary course of business between the Debtor and Defendant pursuant to 11 U.S.C. § 547(c)(2). (Adv.Rec. 4).
5. On July 15, 1996, Defendant moved for summary judgment pursuant to Bankruptcy Rule 7056. (Adv.Rec. 5, 7). Defendant concedes that the requirements of subsection 547(b) are satisfied, but argues that the transfers sought to be avoided were made in the ordinary course of business under subsection 547(c)(2). (Id. at 3-8).
6. Plaintiff urges the Court to deny Defendant’s motion for summary judgment because there are genuine issues of material fact and movant is not entitled to summary judgment as a matter of law. (Adv.Rec. 6). Alternatively, Plaintiff asserts that summary judgment should be entered in his favor. (Id.).
7. The sole issue in this proceeding is whether the payments made within the preference period were made within the ordinary course of business exception of subsection 547(e)(2). Plaintiff contends that they are not. Defendant asserts that the transfers were made in the ordinary course of business, and thus, are within subsection 547(c)(2) exception to the preferential transfers.
CONCLUSIONS OF LAW
Defendant contends that the Court should enter summary judgment in its favor because the transfers sought to be avoided are within the ordinary course of business exception of subsection 547(e)(2) of the Bankruptcy Code. (Adv.Rec. 5). A motion for summary judgment is granted if “the pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, show that there is no genuine issue of material fact and the moving party is entitled to a judgment as a matter of law.” Fed.R.Civ.P. 56; Fed.R.Bankr.P. 7056. The burden of showing that there are no genuine issues of material fact falls on the party moving for summary judgment. Macks v. United States of America (In re Macks), 167 B.R. 254, 256 (Bankr.M.D.Fla.1994) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2552-53, 91 L.Ed.2d 265 (1986)). After the moving party has met its burden, the party opposing a Motion for Summary Judgment must make a sufficient showing establishing the existence of an essential element of that party’s case on which the party bears the burden of proof at trial. Id.
This sole issue in this proceeding is whether the transfers sought to be avoided were made within the ordinary course of business exception under subsection 547(e)(2) of the Bankruptcy Code. Subsection 547(c)(2) provides that:
(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) (1994).
After an examination of the pleadings, memoranda and affidavit, the Court *71concludes that there are triable issues of fact, and the Court’s record is insufficient to grant Defendant’s motion for summary judgment as a matter of law pursuant to subsection 547(c)(2). This Court has employed the following factors to determine whether transfers were made within the ordinary course of business exception under subsection 547(c)(2): (1) the prior course of dealings between the parties, (2) the amount of the payments, (3) the timing of the payments, and (4) the circumstances surrounding the payments. Grant v. Sun Bank/North Central Florida, et al. (In re Thurman Construction, Inc.), 189 B.R. 1004, 1011-12 (Bankr.M.D.Fla.1995) (citing Braniff v. Sundstrand Data Control, Inc. (In re Braniff, Inc.), 154 B.R. 773, 780 (Bankr.M.D.Fla.1993)). The creditor has the burden of proving that the requirements for the ordinary business exception have been satisfied. Thurman, 189 B.R. at 1011 (citations omitted). The standard of proof is preponderance of the evidence. Id. Subsection 547(c)(2) is narrowly construed. Id.
From the outset, the Plaintiff and Defendant disagree on the proper construction of subsection 547(e)(2). The Plaintiff argues that subparagraphs “A” and “B” of 547(c)(2) should be analyzed subjectively, applying the factors outlined above, while subparagraph “C” of 547(c)(2) should be analyzed objectively by looking at the industry norms. (Adv. Rec. 6). Conversely, Defendant argues that subsection 547(c)(2), in its entirety, should analyzed subjectively, looking only to the Debtor and Defendant’s prior dealings with each other, not objectively, examining industry norms. (Adv.Rec. 5).
The courts in this district, including this Court, have applied the above four factors to subsection 547(c)(2) on a whole. See, e.g., Thurman, 189 B.R. at 1012; Braniff, 154 B.R. at 780; Hyman v. Stone Lumber Co. (In re Winter Haven Truss Co.), 154 B.R. 592, 594 (Bankr.M.D.Fla.1993) (citations omitted); Florida Steel Corp. v. Stober (In re Industrial Supply Corp.), 127 B.R. 62, 65 (Bankr.M.D.Fla.1991) (citations omitted). In Thurman, this Court, addressing subpara-graph “C” of 547(c)(2), indicated that evidence of “industry norms” was not offered to prove that transfers were “made according to ordinary business terms.” Thurman, 189 B.R. at 1012. However, the Court ultimately concluded that an examination of the prior dealings between the parties was sufficient in deciding whether transfers were made “according to ordinary business terms.” Id.
The Court now turns to the four factors outlined in Thurman. The first factor is the prior course of dealings between the parties. Thurman, 189 B.R. at 1011. Both the Plaintiff and Defendant disagree as to whether the prior course of dealings between the parties made transfers fall within the ordinary course of business exception under 547(e)(2). Based on the affidavit and attached exhibits submitted by Defendant, there is a history of Debtor making each payment of the loan after the due date. (Adv.Rec. 11). However, the Court is unable to determine the prior course of dealings between the parties regarding the treatment of the late payments. The affidavit simply states Defendant’s practices with respect to commercial borrowers, and does not address specifically the relationship between Defendant and Debtor. (Adv.Rec. 11).
The second factor examines the amount of each payment before and during the preference period. Thurman, 189 B.R. at 1011-12. Defendant argues that the amount of each payment before the preference period is relatively the same as the amount of each payment during the preference period. (Adv. Rec. 5). Defendant further argues that the late charges were added both to monthly installments before the preference period and monthly installments during the preference period. (Id.) Plaintiff, however, argues that payments before the preference period are different from payments made during the preference period. (Adv.Rec. 6). Defendant’s affidavit and exhibits show that the amount of payment, including late charges, before the preference period varied, while the contested payments during the preference period were the same. (Adv.Rec. 5).
The third factor deals with the timing of each payment. Thurman, 189 B.R. at 1012. The Eleventh Circuit has held that “lateness” is an important factor in deciding whether payments should be protected by the ordinary course of business exception. Marathon Oil Co. v. Flatau (In re Craig Oil *72Company), 785 F.2d 1563, 1567 (11th Cir.1986). There is a presumption that late payments are outside the ordinary course of business, but such presumption may be overcome by a showing that late payments were in the ordinary course of the parties’ business. Braniff, 154 B.R. at 780-81. The Plaintiff argues that Defendant has not overcome the presumption that late payments are outside the ordinary course of business. (Adv.Rec. 6). The Court lacks sufficient facts to determine whether Debtor’s late pay-. ments became part of the ordinary course of business between Defendant and Debtor.
With the fourth and final factor, the Court examines the circumstances surrounding the payments. Thurman, 189 B.R. at 1012. Subsection 547(c)(2) protects those payments that do not result from “unusual” or “extraordinary” debt collection practices. Craig Oil Co., 785 F.2d at 1567. The Plaintiff argues that payments made during the preference period were prompted by unusual or extraordinary collection efforts. (Adv. Rec. 6). Defendant, however, contends it followed its routine collection efforts over the entire life of the loan. (Adv.Rec. 5). Whether Defendant conducted extraordinary collection practice to obtain payments on its loan within the preference period creates a triable issue of fact.
The Court concludes that there are genuine issues of material fact, especially regarding the third and fourth factors outlined in Thurman. The affidavit and attached exhibits that Defendant submitted to the Court are insufficient to decide: (1) whether late payments by Debtor to Defendant were a part of the normal business relationship between the parties; and (2) whether Defendant conducted “unusual” or “extraordinary” collection activities within the preferential period. Therefore, for purposes of granting summary judgment, Defendant has failed meet its burden of establishing that there are no genuine issues of material fact and it is entitled to summary judgment as a matter of law under the ordinary course of business exception of subsection 547(c)(2).
CONCLUSION
The motion for summary judgment is denied because the pleadings, answer, motions and affidavit show that there are genuine issues of material fact and movant is not entitled to summary judgment as a matter of law. Although the Plaintiff did not file a separate motion for summary judgment, to the extent that Plaintiff plead in the alternative that the Court should enter summary judgment in his favor, the Plaintiffs motion for summary judgment is denied. The Court will enter a separate order consistent with these findings of fact and conclusions of law.
ORDER DENYING DEFENDANT’S AND TRUSTEE’S MOTIONS FOR SUMMARY JUDGMENT AND SCHEDULING TRIAL
This adversary proceeding came before the Court upon Defendant’s Motion for Summary Judgment. Upon findings of fact and conclusions of law separately entered, it is,
ORDERED:
1. Defendant’s motion for summary judgment is denied.
2. Plaintiff’s motion for summary judgment is denied.
3. The Clerk’s Office will separately notice the trial scheduled for October 15, 1996 at 1:00 p.m. in Room 240, United States Courthouse and Post Office Building, 311 West Monroe Street, Jacksonville, Florida. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492397/ | OPINION AND ORDER EXCEPTING DEBT FROM DISCHARGE
WALTER J. KRASNIEWSKI, Bankruptcy Judge.
This matter is before the Court on Robert C. Meis’s (“RCM”) adversary complaint against Debtor Judith A. Meis (“Debtor”) under § 523(a)(4). RCM, as assignee of the claim of his late mother Lavada A. Meis (“LAM”), seeks to recover from the Debtor based on her alleged misappropriation of funds from LAM. Having concluded that the Debtor embezzled $92,000.00 from LAM, the Court finds that the Debtor’s debt to RCM, as assignee of LAM, should be excepted from discharge.
FACTS
The Debtor filed a petition under chapter 13 of title 11 on July 11, 1994 (the “Petition Date”) which case was subsequently converted to a case under chapter 7.
The Debtor and RCM were married in 1963 and divorced on February 25, 1993. The Parties’ Conduct With Regard to Certain Bank Accounts Prior to the Divorce
The parties are in dispute as to whether the Debtor misappropriated approximately $92,000.00 from the late LAM prior to the date of the divorce. The Debtor argues that LAM gifted funds in excess of $184,000.00 (the “Funds”) in two joint checking accounts with People’s Savings Association and Society National Bank (the “Bank Accounts”) to RCM and the Debtor in February, 1990. On the other hand, RCM argues that, although LAM transferred legal title of the Funds to RCM and the Debtor in 1990, LAM retained equitable title to the Funds.
The parties agree that LAM was dependent on them for a number of years prior to her death in 1993 because she suffered from arthritis and had difficulty walking. RCM delivered groceries for LAM. The Debtor assisted LAM in maintaining her residence. In more recent years, the Debtor assisted LAM with bathing and personal grooming. The parties also assisted LAM in her personal banking.
From 1980 through 1990, LAM designated the Debtor as her attomey-in-fact on certain bank accounts which she held jointly with RCM in order for the Debtor to handle certain banking transactions for her. Complaint, at p. 1, para. 4; see Answer at p. 1, para. 4.
Subsequently, LAM transferred title of the Funds, which totaled in excess of $180,000.00, to RCM and the Debtor in February, 1991. According to the Debtor, LAM had an unrestricted right to use the Funds when she needed them. Further, the Debtor testified that if LAM had asked her and RCM to transfer the Funds back into LAM’s name, she would have done so.
RCM testified that he was required to ask LAM’s permission prior to making withdrawals from the Bank Accounts. Further, the Debtor testified that she asked LAM’s permission prior to making withdrawals from the Bank Accounts to purchase certain non-necessity items.
RCM testified that LAM placed the Funds in the names of RCM and the Debtor for LAM’s convenience. According to the Debt- or, one of LAM’s expressed purposes in transferring the Funds to RCM and the Debtor was to avoid probate.
The Debtor admittedly withdrew approxi-, mately $92,000.00 from the Bank Accounts prior to the divorce in 1992. Answer, at p. 2, para. 7. The Debtor spent approximately $21,265.01 of the Funds which she had removed from the Bank Accounts prior to the divorce.
*168Proceedings in Domestic Relations Court
In his decision dated February 12, 1993 which granted RCL and the Debtor a divorce (the “Opinion”), the Honorable Donald Dodd (“Judge Dodd”) of the Common Pleas Court of Lucas County, Ohio, Domestic Relations Division (“State Court”) found “from the evidence that [LAM] placed her two savings accounts totalling $184,000.00 into the names of [RCM] and [the Debtor] in September of 1990.” Opinion at p. 1, para. 6. Judge Dodd also found that RCM and the Debtor asked LAM’s permission “if they desired to spend any of the [Funds] for their own use.” Opinion, at p. 2, para. 6. In addition, Judge Dodd found that no gift tax return was filed by LAM when she transferred the Funds to the Debtor and RCM. Judge Dodd further found that the Funds were the property of LAM.
Judge Dodd found that the Debtor withdrew $92,000.00 from one of the Bank Accounts when she separated from RCM prior to the divorce.
In light of the above findings, Judge Dodd ordered the Debtor to transfer the remainder of the Funds which the Debtor had in her possession on the date of the Decree to LAM. Moreover, Judge Dodd ordered the Debtor to execute a note in favor of LAM for the difference between the $92,000.00 which she had originally removed from the Bank Accounts and the remainder of the Funds which the Debtor had in her possession on the date of the Decree.
Pursuant to the instructions of the State Court, ROM’s counsel prepared a judgment entry (the “Decree”) which was executed by Judge Dodd, the parties’ respective counsel, and the parties themselves. The Decree states' that “[t]he various bank accounts in the name of [RCM] and [the Debtor] in the total approximate amount of $184,000.00 represent funds that [LAM] solely contributed to the accounts and represented funds of [LAM] on the date of the name change to [RCM] and [the Debtor].” Decree, at p. 2, para. 4. The Decree ordered the Debtor to transfer to LAM all funds remaining in her possession which were part of the $92,000.00 which she withdrew from the saving accounts when the parties separated. Decree, at p. 4, para. 4. The Decree further ordered “that [the Debtor] shall immediately execute and deliver to [LAM], her promissory note for the difference between the amount of money still in her possession and the $92,000.00 which she withdrew, said note to bear interest at the rate of 3.5 percent per annum on the unpaid balance until said note is paid in full.” Decree, at p. 4, para. 5.
DISCUSSION
APPLICABLE STATUTE
Section 523(a) of title 11 provides that:
[a] discharge under section 727 ... of this title does not discharge an individual debt- or from any debt—
... (4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement or larceny[.]
11 U.S.C. § 523(a)(4).
BURDEN OF PROOF
RCM bears the burden of proof in this adversary by the preponderance of the evidence. Kaye v. Rose (In re Rose), 934 F.2d 901, 904 (7th Cir.1991) (citing Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991)). RCM also bears the burden of establishing that the requirements of collateral estoppel have been met. Spilman v. Harley, 656 F.2d 224, 229 (6th Cir.1981).
WHETHER THE FUNDS WERE LAM’S PROPERTY
Whether the Debtor is Collaterally Es-topped from Arguing That The Funds Were Not LAM’s Property
The Debtor is collaterally estopped by the Decree from arguing that the Funds were not LAM’s property. See Grogan, 498 U.S. at 285 n. 11, 111 S.Ct. at 658 n. 11 (collateral estoppel applies in actions under § 523(a)).
“The bankruptcy court’s otherwise broad powers do not include the power to reject a party’s invocation of collateral estoppel on an issue fully and fairly litigated in another court.” Bugna v. McArthur (In re Bugna), 33 F.3d 1054, 1058 (9th Cir.1994).
*169In accordance with 28 U.S.C. § 1738, this Court must apply Ohio’s law of collateral estoppel. Rally Hill Productions, Inc. v. Bursack (In re Bursack), 65 F.3d 51, 53 (6th Cir.1995) (citing Marrese v. American Academy of Orthopaedic Surgeons, 470 U.S. 373, 386, 105 S.Ct. 1327, 1334-35, 84 L.Ed.2d 274 (1985)).
Under Ohio law,
if an issue of fact or law actually is litigated and determined by a valid and final judgment, such determination being essential to that judgment, the determination is conclusive in a subsequent action between the parties, whether on the same or a different claim.
Hicks v. De La Cruz, 52 Ohio St.2d 71, 369 N.E.2d 776, 777 (1977) (per curiam); see also Goodson v. McDonough Power Equipment, Inc., 2 Ohio St.3d 193, 443 N.E.2d 978, 981 (1983) (describing collateral estoppel as “the preclusion of the relitigation in a second action of an issue or issues that have been actually and necessarily litigated and determined in a prior action”) (citing Whitehead v. Gen. Tel. Co., 20 Ohio St.2d 108, 254 N.E.2d 10 (1969)).
The parties involved in the instant adversary are the same parties involved in the State Court action which terminated in a final judgment against the Debtor requiring the Debtor to return certain of the Funds to LAM. The issue of whether the Funds belonged to LAM is the same issue reached by Judge Dodd in the State Court action. This issue was fully litigated before Judge Dodd, who received both documentary and testimonial evidence prior to rendering the Opinion. Further, the issue of whether LAM owned the Funds was essential to Judge Dodd’s decision. Therefore, the Court concludes that the Debtor is collaterally estopped from arguing that she was the owner of the Funds at the time that she removed certain of the Funds from one of the Bank Accounts.
The Debtor argues that the Decree is not entitled to preclusive effect in the instant adversary because Judge Dodd acted beyond his subject matter jurisdiction in ordering the Debtor to repay the Funds to LAM. The Court cannot agree with the Debtor that Judge Dodd acted plainly beyond his jurisdiction. See Medovic v. Medovic, unpublished, 1991 WL 191839 at *2-3, No. D-180018 (Ohio Ct.App. Sept. 26, 1991) (holding that domestic relations court did not err in finding that marital home, in which spouses*' were listed as tenants in common along with husband’s mother, was not a marital asset and in awarding home to husband’s mother); cf. Lester Mobile Home Sales, Inc. v. Woods (In re Woods), 130 B.R. 204, 205-08 (W.D.Va.1990) (concluding that order confirming chapter 13 plan could be given res judicata effect on the issue of bankruptcy court’s subject matter jurisdiction because policy of finality of judgment outweighed individual party’s interest in validity of judgment).
Furthermore, even if the Court were to review the issue de novo, the Court agrees with RCM that LAM owned the Funds at the time that the Debtor removed certain of the Funds from the Bank Accounts.
WHETHER THE DEBTOR WAS A FIDUCIARY OF LAM AT THE TIME THAT SHE WITHDREW THE FUNDS FROM THE BANK ACCOUNTS
RCM has failed to provide sufficient proof in support of his allegation that the Debtor was a fiduciary of LAM at the time that she withdrew certain of the Funds from one of the Bank Accounts. See Hall v. Cooper (In re Cooper), 30 B.R. 484, 489-90 (9th Cir. BAP 1982) (concluding that debtor was not acting in fiduciary capacity when she withdrew funds from joint survivorship cheeking account established for grandmother’s convenience); Office of Public Guardian v. Messineo (In re Messineo), 192 B.R. 597, 599-600 (Bankr.D.N.H.1996) (concluding that debtor was not acting in a fiduciary capacity when he withdrew funds from joint bank account with mother); Bast v. Johnson (In re Johnson), 174 B.R. 537, 541-42 (Bankr.W.D.Mo.1994) (held that debtor husband did not stand in fiduciary capacity to wife’s aunt based on power of attorney which she had executed in his favor); cf. Schaffer v. Dempster (In re Dempster), 182 B.R. 790, 801-02 (Bankr.N.D.Ill.1995) (held that debtor, who cohabited with and handled plaintiff’s financial affairs, did not stand in a fiduciary capacity to plaintiff); Farina v. Balzano (In re Balzano), 127 B.R. 524, 531-32 (Bankr.*170E.D.N.Y.1991) (finding that debtor who maintained joint bank account with creditor did not have fiduciary relationship with creditor based on prior romantic relationship).
WHETHER THE DEBTOR EMBEZZLED FUNDS FROM LAM
The Court nonetheless finds that the Debtor embezzled $92,000.00 from LAM. See Skemp v. Michel (In re Michel), 74 B.R. 88, 90-91 (N.D.Ohio 1986) (finding that debt- or’s debt to creditor for unexplained loss of funds to which debtor had sole access constituted an embezzlement); see also Ball v. McDowell (In re McDowell), 162 B.R. 136, 140 (Bankr.N.D.Ohio 1993) (stating that attorney’s wrongful appropriation of Ghent’s settlement for his own use constituted an embezzlement). The Debtor intended to permanently deprive LAM of $92,000.00 when she removed the money from one of the Bank Accounts and transferred the money to her own account. Moreover, the Court finds incredible the Debtor’s testimony that she viewed LAM’s transfer of the Funds into the names of RCM and the Debtor as a gift. Rather, as in Judge Dodd’s opinion, the Court concludes that the Debtor was well aware that she was required to seek LAM’s permission prior to withdrawing $92,000.00 from the Bank Accounts. Furthermore, RCM testified that he was required to ask permission of LAM prior to making withdrawals from the Bank Accounts.
In light of the foregoing, it is therefore
ORDERED that the Debtor’s debt to Robert C. Meis, as assignee of the late Lavada A. Meis, be, and it hereby is, excepted from discharge. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492398/ | OPINION AND ORDER GRANTING UNITED STATES’ MOTION TO DISMISS, OR IN THE ALTERNATIVE, FOR SUMMARY JUDGMENT
BARBARA J. SELLERS, Bankruptcy Judge.
This matter is before the Court on the defendant United States’ motion to dismiss, or in the alternative, for summary judgment. The plaintiffs, William J. Brady and Jennifer S. Brady, oppose the government’s motion.
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 157(a) and the General Order of Reference entered in this district. This is a core matter which this bankruptcy judge may hear and determine under 28 U.S.C. § 157(b)(2)(B) and (K).
Plaintiffs commenced this adversary proceeding on November 2, 1995, seeking damages and injunctive relief against the United States Department of Treasury, Internal Revenue Service, and a determination by this Court of the validity of the debt underlying the government’s proof of claim. The United States answered the complaint, and the plaintiffs then filed an amended complaint without leave of court. The amended complaint consists of two counts and contains the following prayer for relief:
*180A. A determination of the accuracy and excessiveness of defendant’s tax assessment on plaintiffs.
B. A determination of the validity of the assessments and the resulting liens.
C. A determination of the discharge-ability of the assessment on May 20, 1991 for the tax year 1990.
D. Any other equitable and legal relief the Court deems appropriate.
Although the government’s motion was directed at the original complaint, it has supplemented its motion to include plaintiffs’ amended complaint.
Following the briefing on the United State's’ motion, the parties entered into a joint stipulation that the plaintiffs’ liability for their 1990 taxes is dischargeable pursuant to 11 U.S.C. §§ 507(a)(8), 523(a) and 1328. Such dischargeability, however, according to the stipulation, shall have no effect on any federal tax lien based on the plaintiffs’ 1990 tax liability as assessed on May 20, 1991. In light of the joint stipulation, the relief sought by the plaintiffs in paragraph C of their prayer has become moot.
The United States contends that the relief requested in paragraphs A and B of plaintiffs’ prayer is barred by res judicata or that the plaintiffs are collaterally estopped from relitigating the issues previously determined by this Court on plaintiffs’ objection to the Internal Revenue Service’s proof of claim. The plaintiffs respond that the Court’s allowance of the claim “does not automatically and irrevocably establish the validity and truthfulness of the amounts claimed or of the nature of the underlying obligation giving rise to the debt claimed ... ”.
The Court disagrees with the plaintiffs’ restrictive interpretation of its order overruling their objection to the allowance of the Internal Revenue Service’s claim. The order plainly states that “[t]he claim of the United States of America, Internal Revenue Service, as evidenced by its proof of claim filed on August 29, 1995, shall be allowed.” The proof of claim allowed set forth a total amount of $65,586.72; and of that amount, $604.31 was listed as unsecured, $23,988.90 as secured, and $40,993.51 as priority claims. The Court will consider, then, whether plaintiffs’ claims are precluded by the prior litigation.
In order that this Court’s November 6,1995 order constitutes res judicata and thereby precludes the cause of action brought by the plaintiffs in this proceeding, four elements must be established:
1. that the order overruling plaintiffs’ objection to the IRS’s claim was a final judgment and that this Court had competent jurisdiction to render that decision;
2. that this adversary proceeding involves the same parties or their privies, as the claim objection matter;
3. that this adversary proceeding raises an issue actually litigated or which should have been litigated in the claim objection matter; and
4. that the causes of action in this adversary proceeding and in the claim objection matter are identical.
Sanders Confectionery Products v. Heller Financial, Inc., 973 F.2d 474, 480 (6th Cir.1992), cert. denied, 506 U.S. 1079, 113 S.Ct. 1046, 122 L.Ed.2d 355 (1993). See also Kane v. Magna Mixer Co., 71 F.3d 555 (6th Cir.1995), cert. denied, - U.S. -, 116 S.Ct. 1848, 134 L.Ed.2d 949 (1996).
In examining the first element, it is clear that an order allowing a proof of claim is a final judgment. Bank of Lafayette v. Baudoin (In re Baudoin), 981 F.2d 736, 742 (5th Cir.1993). Further, this Court is competent to hear and determine the allowance and disallowance of claims under 28 U.S.C. § 157(b)(2)(B).
There is also no question that the same parties are involved in this adversary as were involved in the prior claim objection matter. Therefore, the first two elements of res judi-cata are satisfied.
The Court further finds that the validity and accuracy of the IRS’ assessments and any resulting liens were actually litigated in the prior claim objection matter. Accordingly, the third element is met.
Finally, the fact that the plaintiffs have instituted a complaint for damages and injunctive relief in this proceeding while merely objecting to the IRS’ claim in the prior matter does not mean that for purposes of res judicata, the causes of action are not identical. In this context, the fourth element *181requires only the “identity of the facts creating the right of action and of the evidence necessary to sustain each action.” Sanders, 973 F.2d at 484 (quoting Westwood Chemical Co. v. Kulick, 656 F.2d 1224, 1227 (6th Cir.1981)). A review of the October 17, 1995 transcript of the hearing on the debtors’ objection to the claim of the Internal Revenue Service and of plaintiffs’ amended complaint in this proceeding clearly demonstrates that the plaintiffs have relied on and are relying on the same “facts” and “evidence” to establish both their objection to the IRS’ claim and their present claims against the IRS.
For the foregoing reasons, the Court concludes that the United States has satisfied each of the elements of res judicata. Accordingly, the United States’ motion to dismiss, or in the alternative, for summary judgment is GRANTED. As a final note, the fact that the plaintiffs request in paragraph D of their amended complaint “[a]ny other equitable and legal relief the Court deems appropriate” is immaterial since they have faded to state any claim for which such relief could be granted. Prayers for relief which are not justified by pleadings of law are mere surplusage and require no specific attention. Bowman v. Alaska Airlines, 14 Alaska 62, 14 F.R.D. 70 (1953).
IT IS SO ORDERED.
JUDGMENT ENTRY
In accordance with this Court’s Opinion and Order Granting United States’ Motion to Dismiss, or in the Alternative, for Summary Judgment, entered this date, this adversary proceeding is hereby DISMISSED.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492399/ | ORDER
JACK CADDELL, Bankruptcy Judge.
This matter is before the Court on a complaint filed by the debtors, Richard and Patty Mayhall (hereinafter the “debtors”), seeking the turnover of one 1996 Ford Explorer vehicle pursuant to 11 U.S.C. § 542. The hearing in this matter was held on the 13th day of August, 1996.
The issue before the Court is whether the bankruptcy estate has any interest in leased property repossessed pre-petition. After consideration of the pleadings, arguments of counsel, and documents submitted in support thereof, the Court finds that the subject lease agreement expired upon Ford Motor Credit’s repossession of debtors’ vehicle according to the terms of the lease.
Ford Motor Credit repossessed the subject vehicle on July 25, 1996. At the time of the repossession, the debtors were two months behind on their car payments. On July 26, 1996, one- day after the repossession, the debtors filed a petition for relief under Chapter 13 of Title 11 of the United States Bankruptcy Code, 11 U.S.C. § 101 et seq. (hereinafter the “Bankruptcy Code”). The debtors propose to pay for the lease arrearage through their Chapter 13 plan of reorganization, to assume the lease, and pay for the subject vehicle outside the plan.
The debtors argue that they have a viable interest in the vehicle under 11 U.S.C. § 1322(b)(3) pursuant to which the debtors' can provide for the curing of any default in their Chapter 13 plan. In support of their argument, debtors cite the case of General Motors Acceptance Corp. v. Lawrence (In re Lawrence), 11 B.R. 44 (Bankr.N.D.Ga.1981), wherein the bankruptcy court allowed the debtor to pay two months pre-petition ar-rearage through his Chapter 13 plan upon the debtors assumption of the car lease. The case was before the bankruptcy court on the creditor’s motion to compel the assumption or rejection of an unexpired lease agreement. Id. Similarly, this Court previously held that obligations to cure pre-petition arrear-age on an unexpired car lease should generally be cured immediately upon assumption of the lease except in certain exceptional eases in which the Court will allow the debtor to satisfy his obligation to cure the pre-petition default by including and paying said arrearage in his plan as an administrative expense. See In the Matter of Eldred Jones, BK 95-82700, Doc. # 17.
In the present case, however, the debtors’ lease terminated according to the terms of the lease agreement prior to the petition date. The lease agreement provided as follows:
16. TERMINATION This Lease wifi terminate (end) upon (a) the end of the term of this Lease, (b) the return of the Vehicle to Lessor, and (c) the payment by You of all amounts owed under this Lease. Ford Credit may cancel the Lease if You default.
* * * * ^ #
21. DEFAULT You will be in default if (a) You fail to make any payment when due ...
* * * :fc *
If You are in default, Ford Credit may cancel this Lease, take back the Vehicle and sell it at a public or private sale. You also give Ford Credit the right to go on Your property to peacefully retake the Vehicle.
It is undisputed that the debtors were in default in accordance with paragraph twenty-one (21) of the lease agreement pursuant to which Ford was entitled to repossess the vehicle. Upon Ford’s lawful repossession of the vehicle, the lease terminated pursuant to paragraph sixteen (16) of the lease agreement. Accordingly, the debtors no longer have an interest in the vehicle, and the lease cannot be assumed because it is not property of the bankruptcy estate. See Estep v. Fifth Third Bank of N.W. Ohio (In re Estep), 173 B.R. 126 (Bankr.N.D.Ohio 1994) (holding that *243debtor could not assume a car lease that creditor effectively terminated pre-petition).
Based upon the foregoing, the Court finds, and it is ORDERED, ADJUDGED, AND DECREED that judgment on the complaint is entered in favor of the defendant, Ford Motor Credit Company, and against the debtors, Richard and Patty Mayhall. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492400/ | ORDER ON PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT
PAUL M. GLENN, Bankruptcy Judge.
THIS CASE came before the Court to consider the Motion for Summary Judgment filed by the Plaintiff, Gerald S. Mickle, Jr. The Plaintiff commenced this adversary proceeding by filing a Complaint to Determine Dischargeability Pursuant to 11 U.S.C. Section 523 and to Determine that the Liens filed by the Internal Revenue Service are Ineffective as to the Debtor’s Property Acquired Post-Petition (the Complaint). The Complaint contains two counts.
In the first count of the Complaint, the Plaintiff requests the Court' to determine that the tax liabilities due and owing to the IRS for the tax periods ending December 31, 1979, 1981, and 1989 are fully dischargeable general unsecured debts under 11 U.S.C. § 727. Supporting this demand for relief, the Debtor alleges that the taxes, and the penalties and interest assessed thereon, are “stale” and therefore dischargeable pursuant to § 727 because they do not meet the requirements for nondischargeability set forth in § 523(a)(1)(A), § 523(a)(1)(B)(ii), or § 507(a)(8)(A) of the Bankruptcy Code.
In the second count of the Complaint, the Plaintiff seeks a determination that the pre-petition tax hens filed by the IRS are enforceable only with respect to property owned by the Plaintiff at the time he filed his chapter 7 petition, but that they are not enforceable as to any property acquired by the Plaintiff subsequent to the filing of the petition.
In his Motion for Summary Judgment, the Plaintiff contends that there is no genuine issue as to any material fact in either count, and that he is entitled to the entry of a judgment in his favor as a matter of law.
The United States filed an Amended Answer and Defenses to the Complaint on May 30,1995. In the Amended Answer, the United States admitted that the tax liability which the Plaintiff seeks to have discharged is “a tax measured by income or gross receipts for the taxable years ending on or before the date of the filing of the petition for which returns are required and last due, including extensions, before three years before the date of filing the petition.” (Complaint, paragraph 12). The United States also admitted that the taxes were assessed in 1990 and 1991 (more than 240 before the date of the petition), and that the Plaintiffs returns were filed more than two years before the chapter 7 petition was filed. Consequently, the United States does not appear to contest the allegations that the taxes are “stale” and that they would not be excepted from the discharge under § 523(a)(1)(A), which incorporates § 507(a)(8), or § 523(a)(1)(B)(ii), if those were the only exceptions considered.
The United States denies that the taxes are dischargeable, however, and as separate defenses to the Complaint, asserts that the taxes are excepted from the discharge under § 523(a)(1)(C)1 of the Bankruptcy Code, that the Plaintiffs claim is barred by the doctrines of collateral estoppel and res judicata, and that the Court lacks subject matter jurisdiction over Count II based on the Anti-Declaratory Judgment Act.
It appears undisputed that the taxes owed by the Plaintiff to the United States are “taxes on or measured by income,” and that they arise from the tax years ending on December 31, 1979, December 31, 1981, and December 31, 1989. According to the No*247tices of Federal Tax Lien attached to the Complaint, as of December 26, 1990, the unpaid balance of the assessment for the 1979 taxes was $1,786,044.14, and the unpaid balance of the assessment for the 1981 taxes was $145,246.25. As of September 20, 1991, the unpaid balance of the assessment for the 1989 taxes was $5,054.59. All of the taxes are identified on the Notices as “1040” taxes.
Sections 523(a)(1)(A), 523(a)(1)(B)(ii), and 507(a)(8)(A)
In Count I of his Complaint, the Plaintiff alleged that the taxes due for 1979,1981, and 1989 are “stale” and therefore dischargeable pursuant to § 727 because they do not meet the requirements for nondischargeability set forth in § 523(a)(1)(A), § 523(a)(1)(B)(ii), or § 507(a)(8)(A) of the Bankruptcy Code. Other issues also appear in this case by virtue of the Amended Answer and Defenses asserted by the United States, as well as the allegations raised in Count II of the Complaint.
Rule 56(d) of the Federal Rules of Civil Procedure, as made applicable by Rule 7056 of the Federal Rules of Bankruptcy Procedure, provides:
(d) Case Not Fully Adjudicated on Motion. If on motion under this rule judgment is not rendered upon the whole case or for all the relief asked and a trial is necessary, the court at the hearing of the motion, by examining the pleadings and the evidence before it and by interrogating counsel, shall if practicable ascertain what material facts exist without substantial controversy and what material facts are actually and in good faith controverted. It shall thereupon make an order specifying the facts that appear without substantial controversy, including the extent to which the amount of damages or other relief is not in controversy, and directing such further proceedings in the action as are just. Upon the trial of the action the facts so specified shall be deemed established, and the trial shall be conducted accordingly.
As set forth above, in this ease the United States admitted the allegations in the Complaint that the tax liabilities for 1979, 1981, and 1989 are income taxes for which the returns were last due “before three years before the date of the filing of the petition,” and also admitted that the taxes were assessed in 1990 and 1991. Consequently, the Court finds that these material facts appear without substantial controversy, and that the taxes do not fall within the exception to discharge contained in § 523(a)(1)(A) and § 507(a)(8)(A) of the Bankruptcy Code. Further, the United States also admitted that the returns for each of the tax years in question were filed more than two years before the chapter 7 petition was filed. Accordingly, the Court also finds that this material fact appears without substantial controversy, and that the taxes do not fall within the exception to discharge contained in § 523(a)(1)(B)(ii) of the Bankruptcy Code.
The facts specified in the preceding paragraph shall be deemed established in further proceedings in this case. The specifications are limited to the Plaintiffs allegations under § 523(a)(1)(A) and § 523(a)(1)(B)(ii), however, and in no way affect the allegations asserted by the United States under § 523(a)(1)(C) of the Bankruptcy Code or any determinations to be made by this Court under § 523(a)(1)(C).
Section 523(a)(1)(C)
In the Plaintiffs Motion for Summary Judgment, in response to the United States’ defenses that the taxes are not dischargeable under § 523(a)(1)(C) and that the Plaintiffs claim is barred by the doctrines of collateral estoppel and res judicata, the Plaintiff attached a certified copy of a decision issued by the United States Tax Court on August 14, 1990, in a case encaptioned “Gerald S. Mickle, Jr. and Anne H. Mickle v. Commissioner of Internal Revenue,” Docket No. 37841-84. This decision states:
Pursuant to agreement of the parties in the above-entitled case, it is
ORDERED AND DECIDED: That there is a deficiency in income tax due from the petitioner for the taxable years 1979, 1980 and 1981 in the amounts of $391,060.00, $1,331.00, and $46,277.00 respectively.
That there is an addition to the tax due from the petitioners for the taxable years 1979 and 1980 under the provisions of Internal Revenue Code Section 6653(a) in the *248amounts of $41,985.00 and $67.00 respectively, and
That there is an addition to the tax due from the petitioners for the taxable year 1981 under the provisions of Internal Revenue Code Section 6653(a)(1) in the amount of $2,314.00, and
That there is an addition to the tax due from the petitioners for the taxable year 1981 under the provisions of Internal Revenue Code Section 6653(a)(2) in an amount equal to 50% of the statutory interest due on a deficiency of $23,139.00 from April 15, 1992 to the date of assessment of tax, or, if earlier, the date of payment.
Based on this decision, the Plaintiff contends that the doctrines of collateral estoppel and res judicata actually operate in his favor, because the decision “dealt with the issue of fraud in regard to the 1979 and 1981 taxes,” and determined that the tax returns for those years were only filed “negligently” and not “fraudulently.” The Plaintiff bases this conclusion on the fact that the additions to the taxes were imposed under section 6653(a), which relates only to negligently filed returns. Had the returns been filed fraudulently, according to the Plaintiff, the Tax Court would have imposed the additional taxes under a different subsection, Section 6653(b).
The Plaintiff did not present any additional documentation concerning his claim under Section 523.
The United States filed an Opposition to the Plaintiffs Motion for Summary Judgment. In its Opposition, the United States contends that it is not precluded by the doctrines of collateral estoppel or res judica-ta from relying on Section 523(a)(1)(C) to assert the nondischargeability of the taxes owed by the Plaintiff, because the issue of fraud was not dealt with or litigated in the tax court proceedings.
Collateral estoppel, or issue preclusion, bars relitigation of an issue previously decided in judicial or administrative proceedings. Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991); In re St. Laurent, 991 F.2d 672 (11th Cir.1993).
Three elements must be present for issue preclusion to be proper:
(1) the issue at stake must be identical to the one involved in the prior litigation;
(2) the issue must have been actually litigated in the prior litigation; and
(3) the determination of the issue in the prior litigation must have been a critical and necessary part of the judgment in that earlier action.
In re Halpern, 810 F.2d 1061, 1064 (11th Cir.1987), citing In re Held, 734 F.2d 628, 629 (11th Cir.1984).
The Court cannot make the determinations necessary to apply the doctrine of collateral estoppel on the basis of the record presented. It is not apparent from the record whether the issues at stake in this proceeding (that is, whether the debt is for a tax with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax) were involved in the prior litigation, were actually litigated, and were a critical and necessary part of the judgment.
The tax liability for the year 1989 apparently was not involved in the tax court litigation. The Plaintiff has alleged that the tax for 1989 as well as the taxes for 1981 and 1979 are “stale” and are therefore discharge-able. The IRS has denied that the taxes are dischargeable and has asserted that they are excepted from the discharge pursuant to § 523(a)(1)(C). Plaintiff argues that it should be entitled to summary judgment on the basis that the IRS failed to aver a statement of fact supporting this defense. In his Motion for Summary Judgment, the Plaintiff states that he moves to strike this defense; however, this “motion to strike” is neither properly nor timely made. See Fed.R.Bankr.P. 7007(b) and 7012(f). The IRS has raised the defense, and the defense raises issues of fact. The defense of the United States is supported by the Declaration of Ann Reid, filed in opposition to the Motion for Summary Judgment.
Accordingly, the motion for summary judgment with respect to Count I must be denied to the extent that it seeks a determination that the tax liabilities are not excepted from *249discharge under § 523(a)(1)(C) of the Bankruptcy Code.
Count II
With respect to Count II, the Plaintiff acknowledges that the tax Kens attach to any property acquired before he filed his bankruptcy petition, but argues that because the taxes for 1979, 1981, and 1989 are discharge-able in his chapter 7 case, the Kens seeming those taxes cannot attach to any property obtained after the debts have been discharged.
It is not appropriate to resolve this issue until it is determined whether or not the taxes are dischargeable. Accordingly, the motion for summary judgment with respect to Court II should be denied.
Therefore,
IT IS ORDERED that:
1. The Plaintiffs Motion for Summary Judgment is granted in part, to the extent that the tax KabiKties are not excepted from discharge under § 523(a)(1)(A) or § 523(a)(1)(B)(K) of the Bankruptcy Code.
2. In all other respects, the Plaintiffs Motion for Summary Judgment is denied.
. § 523(a)(1)(C) excepts from the discharge a tax with respect to which the debtor made a fraudulent return or which the debtor willfully attempted in any manner to evade or defeat. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492401/ | ORDER DENYING DEBTOR’S EMERGENCY MOTION FOR SANCTIONS FOR VIOLATION OF AUTOMATIC STAY AND EMERGENCY MOTION TO COMPEL ELECTION TO ASSUME OR REJECT CONTRACT (EVEN IF NON-EXECUTORY) AND FOR DETERMINATION THEREON
ALEXANDER L. PASKAY, Chief Judge.
IN THIS Chapter 11 case, the matters under consideration are an Emergency Motion for Sanctions for Violation of Automatic Stay (Motion for Sanctions) filed by R.E.B. & B., Inc. d/b/a Cottman Transmission Center (Debtor) against Cottman Transmission Systems, Inc. (Cottman), and an Emergency Motion to Compel Election to Assume or Reject Contract (Even if Non-Executory) and For Determination Thereon filed by Cottman. The Debtor, in the Motion for Sanctions alleges that on August 14, 1996, the Debtor filed its voluntary Petition for Relief under Chapter 11 of the Bankruptcy Code and continued to operate its business as a Debtor in Possession. According to the Debtor, on August 15,1996, the Debtor’s phone service was transferred to another location without the Debtor’s knowledge and consent. Upon learning of the change, the Debtor notified a representative of Cottman that the transfer was unauthorized, but a representative of Cottman refused to take any action to reverse the order. Based on the foregoing, the Debtor contends that Cottman willfully violated the automatic stay. Therefore, the Debtor requests the reinstatement of the phone service, the imposition of sanctions *264and an award of compensatory damages, punitive damages and attorney’s fees.
The facts relevant to the issues raised by the Motion for Sanctions and the relief sought are without dispute and are as follows. On June 14, 1994, the Debtor entered into an Agreement with Cottman entitled, “License Agreement” (Agreement). Pursuant to the Agreement, Cottman granted a franchise to the Debtor and authorized the Debtor to operate a business repairing, re-manufacturing and servicing transmissions and to use Cottmans’ name. Among the extensive provisions of the Agreement, there are specific provisions relating to the telephone system to be used by the Debtor in his business operation. Paragraph 14 entitled, “Telephone Service,” provides that the Debt- or acknowledges that all telephone numbers and directory listings for a business referred to as a Center are property of Cottman, and that Cottman has the sole and exclusive right and authority to amend, transfer, or terminate such telephone numbers and directory listings as Cottman in its sole discretion deems appropriate. Paragraph 19 entitled, “Effect of Termination,” provides inter alia that if within three days after termination of the Agreement, the Licensee, in this case the Debtor, has not taken any steps necessary to amend, transfer, or terminate the phone listings and service, the Debtor authorized Cott-man to effect these changes in his name and to take such actions as may be necessary to amend, transfer or terminate the telephone listings and service. Based on the foregoing, it is the contention of Cottman that first, the telephone listing and the Yellow Page advertisement were not property of the estate, and thus, are not subject to the protective provisions of the automatic stay imposed by § 362(a) of the Bankruptcy Code. Therefore, the termination of the telephone service and the transfer of the same to another location was not a violation of the automatic stay and the Debtor is not entitled to the relief it seeks.
In support of its Motion for Sanctions, the Debtor contends however, that even assuming without admitting that the telephone service and the listing in the directory were property of Cottman by virtue of paragraph 14, nevertheless, it had a right to use the telephone number and the listing to conduct its business and the right to use is a sufficient intangible interest which is protected by the automatic stay. In addition, the Debtor contends that Cottman only had a right to change the listing or transfer the listing unilaterally, by virtue of Paragraph 19(d), after an effective termination of the Agreement. At the time the Debtor filed its Petition for Relief, the Agreement was not yet terminated. Therefore, Cottman had no right to transfer the telephone service, and thus, it violated the automatic stay.
Obviously, the initial threshold question is whether or not the Debtor’s interest in the telephone service is an interest protected by the automatic stay. It can no longer can be gainsaid that the scope of § 541(a) which defines what is property of the estate is broad and expansive and includes both tangible and intangible property. United States v. Whiting Pools, Inc., 462 U.S. 198, 205, 103 S.Ct. 2309, 2311, 76 L.Ed.2d 515 (1983). It is also established that a mere possessive interest is protected by the automatic stay. In re 48th Street Steakhouse, Inc., 61 B.R. 182, 187 (Bankr.S.D.N.Y.1986), aff'd, 835 F.2d 427 (2d Cir.1987), cert. denied, 485 U.S. 1035, 108 S.Ct. 1596, 99 L.Ed.2d 910 (1988). Moreover, Courts have consistently held that telephone numbers are property of the estate. See In re Fontainebleau Hotel Corp., 508 F.2d 1056, 1059 (5th Cir.1975); In re Kassuba, 396 F.Supp. 324, 326 (N.D.Ill.1975); In re Personal Computer Network, Inc., 85 B.R. 507, 508 (Bankr.N.D.Ill.1988). The difficulty is, that by virtue of the Agreement, the telephone number and the listing clearly were the property of Cottman. Cottman paid for it and Cottman had an absolute right to transfer the same in its discretion, if it appeared to be appropriate. Balancing Cott-man’s interest against the interest of the Debtor in the telephone service, there is hardly any question that the Debtor’s interest in the telephone service is almost nil, in light of the undisputed fact that the Debtor no longer operates as a Cottman franchisee, and now operates his business by using the same telephone as it used while it was a Cottman franchisee under the name of Conti*265nental Transmission. Based on the foregoing, it is evident that the relief sought by the Debtor, to the extent it requests this Court to order Cottman to reinstate the telephone number, is academic and cannot be granted.
In this connection, it should be pointed out that Cottman also filed an Emergency Motion to Compel Election to Assume or Reject Contract (Even if Non-Executory) and For Determination Thereon, which Motion is now moot in light of the fact the Debtor no longer operates nor intends to operate as a Cottman franchisee.
This leaves for consideration whether or not this Court should consider the Debt- or’s request for imposition of sanction against Cottman for the violation of the automatic stay. Based on the specific and clear provision of the Agreement, this Court is satisfied that Cottman had an absolute right and sole discretion to amend, transfer, or terminate the telephone numbers and directory listings. This right is not conditioned upon the effective termination of the Agreement and the fact that Paragraph 19(d) of the Agreement authorized Cottman to effectuate a transfer in the event the franchisee, in this case the Debtor, fails to do so after termination is of no consequence. Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the Debtor’s Emergency Motion for Sanctions for Violation of Automatic Stay Against Cottman Transmission Systems, Inc., be and the same is hereby denied.
It is further
ORDERED, ADJUDGED AND DECREED that the Emergency Motion to Compel Election to Assume or Reject Contract (Even if Non-Executory) and For Determination Thereon, be and the same is hereby denied as moot. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492402/ | ORDER OVERRULING OBJECTION TO CLAIM
STEVEN H. FRIEDMAN, Bankruptcy Judge.
This matter came before the Court September 11, 1995, for hearing on the objection of the Debtor, Alfred B. Pond (the “Debtor”), to the claim of the Internal Revenue Service (“IRS”), filed in the amount of $61,394.45. The IRS contends that the Debtor is a “responsible person” for Jolie’s Books, Inc. (“Jo-lie’s”), pursuant to Section 6672 of the Internal Revenue Code, and thus is personally liable for the unpaid taxes of Jolie’s. Having considered the evidence, the candor and demeanor of the witnesses, the argument of counsel and for the reasons set forth below, the Court overrules the Debtor’s objection to the claim of the IRS and finds that the Debtor is a person responsible for the unpaid taxes of Jolie’s.
The Debtor’s wife, Jolie Pond, owned a book store known as Jolie’s Books. Jolie Pond and Scott Pond, the son of the Debtor and his wife, were the only shareholders of Jolie’s. During the period of 1988 through 1992 and during the third quarter of 1993, Jolie’s became delinquent in payment of its employee withholding taxes and social security taxes. Jolie’s eventually filed bankruptcy and never paid the delinquent taxes. On October 20, 1993, the IRS sent the Debtor a letter notifying him that because the efforts of the IRS to collect taxes from Jolie’s were not successful, the IRS planned to charge the Debtor as a “responsible person” for the unpaid trust fund taxes. On February 14, 1994, the IRS assessed a penalty against the Debtor in the amount of $33,662.09 for the trust fund portion of the unpaid employment taxes of Jolie’s. On June 7,1994, the Debtor filed for protection under Chapter 13 of the Bankruptcy Code. The IRS filed a proof of claim claiming it held a secured tax lien for $34,298.11 on real property, a motor vehicle and all property and rights to property, and an unsecured priority tax claim in the amount of $2,096.34. The Debtor objected to the IRS’s proof of claim on the basis that the Debtor was not a responsible person under Section 6671(b) of the Internal Revenue Code and that the penalty assessment against the Debtor was invalid.
Pursuant to 26 U.S.C. § 6672(a)—
Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax,'or willfully attempts in any manner to evade of 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 *269amount of the tax evaded, or not collected, or not accounted for and paid other.
Section 6671(b) defines “person” to include—
an officer or employee of a corporation, or a member or employee of a partnership, who as such officer, employee, or member is under a duty to perform the act in respect of which the violation occurs.
Case law has determined that the responsibility of a person is a—
“matter of status, duty and authority, not knowledge.” Indicia of responsibility includes the holding of corporate office, control over financial affairs, the authority to disburse corporate funds, stock ownership, and the ability to hire and fire employees.
Thibodeau v. United States, 828 F.2d 1499, 1503 (11th Cir.1987) (citations omitted). Whether a person is “responsible” is the first part of the equation. A “responsible” person will not be liable for the unpaid trust fund taxes unless it is also determined that the person “willfully attempts in any manner to evade or defeat any such tax or the payment thereof.”
The term “willfully” is defined by prior cases as meaning, in general:
a voluntary, conscious, and intentional act, such as payment of other creditors in preference to the United States, although bad motive or evil intent need not be shown. The willfulness requirement is satisfied if the responsible person acts with a reckless disregard of a known or obvious risk that trust funds may not be remitted to the Government, such as by failing to investigate or to correct mismanagement after being notified that withholding taxes have not been duly remitted.
Mazo v. United States, 591 F.2d 1151, 1154 (5th Cir.1979) (citations omitted). William Repoli, a revenue officer for the IRS, testified that he decided to recommend that the Debtor be assessed 100% of the tax penalty because the Debtor was involved in the business, was listed as a manager in the city telephone directory, guaranteed Jolie’s lease, and was a significant investor in the business. Introduced into evidence was Repoli’s “Report of Interview held with Persons Relative to Recommendation of 100-Percent Penalty Assessments” for an interview held with the Debtor on July 21, 1993. Repoli’s report notes that the Debtor stated that he was the manager of Jolie’s who “oversees employees, pays small bills & signs cheeks as needed in addition to general duties of running the store.” The Debtor and his wife testified at the hearing that Jolie’s was the business of Jolie Pond alone, and that the Debtor merely helped in the store. According to their testimony, the Debtor was never a shareholder; he was elected as an officer for 20 days while his wife was in China; Jolie made all management and financial decisions; the Debtor did none of the hiring or firing; all checks that the Debtor wrote on behalf' of Jolie’s were first approved by his wife, and the Debtor had no knowledge of the unpaid tax liability. Further, although the Debtor invested money in Jolie’s, he held no pecuniary interest in Jolie’s.
Although, for purposes of the issues before this Court, it would be in the Debtor’s best interest that he not be considered a “responsible” person under 26 U.S.C. §§ 6671 et seq., the evidence before the Court indicates otherwise. The definition of a “person” under 26 U.S.C. § 6671(b) set forth above is inclusive rather than restrictive, and thus is subject to interpretation. According to both the debtor and his wife, it was Jolie Pond who made the financial decisions for Jolie’s Books, and it was Jolie Pond who determined which creditors were, and were not, to be paid. Furthermore, the Debtor signed checks on behalf of Jolie’s only with his wife’s approval, unless she was out of town, or unless it was necessary for him to pay emergency expenses. Otherwise, Jolie Pond, and not her husband, was responsible for the day-to-day of Jolie’s Books, Inc. The Debtor did not have the authority to hire or terminate employees, or enter into contracts on behalf of Jolie’s. Rather, the Debtor simply assisted his wife in her store, operated the computer equipment owned by Jolie’s, performed repair work when needed, filed and inventoried books, and waited on customers.
Yet while in the minds of the Debtor and his wife, the Debtor may have been only a common laborer, in reality the Debtor was a *270eo-venturer and investor with his wife in Jolie’s Book Store, Inc. The most telling indication that the Debtor possessed more than a passing interest in Jolie’s is in the form of the December 31, 1991 Financial Report and Statements for Jolie’s. The statement, prepared on or about December 31, 1991, indicates that the Debtor “is the executive manager & incharge (sic) of computer data management, & purchasing. He has the greatest working knowledge of the store. Jolie has the greatest executive or administrative knowledge of the store.” The report notes that the Debtor “has invested a great amount of money to the business (and) has steadfastly worked long, loving hours & has always been underpaid.” The financial information encompassed in this report bears out the foregoing statement. Through 1987, the Debtor and his wife jointly had invested principal amounts exceeding $444,000 into the Jolie’s Books venture. The Debtor, a former career United States Air Force Tech Sergeant and Pratt-Whitney employee, has invested his life’s savings (with his wife) into Jolie’s. Although the Debtor may have occupied a subservient role in the operation of Jolie’s, in one very significant aspect he exerted control over Jolie’s financial affairs — to the extent that he was, at the very least, a creditor of Jolie’s for at least $220,000 (his one-half share of the joint obligation owed by Jolie’s). The Debtor thus had a strong incentive to assist his wife in the operation of Jolie’s, that being to protect his investment. Thus, considering the magnitude of the Debt- or’s investment in Jolie’s, together with his status as manager of the Jolie’s, and his exercise of authority in paying various of the expenses of Jolie’s, the Court concludes that the Debtor falls within the definition of a responsible person under 26 U.S.C. § 6671(b).
As noted above, an individual deemed a responsible person for a recalcitrant tax payer can be held personally liable for the unpaid taxes only if he or she is deemed to have “willfully” attempted to evade or defeat payment of the taxes. The Debtor contends that his failure to pay Jolie’s withholding taxes was not wilful, in that his authority to issue checks was subject to the complete control of his wife, who oversaw the payroll process for Jqlie’s and signed all payroll checks. In addition, the Debtor asserts that he had no knowledge that there were insufficient funds available to meet payment of the payroll taxes. However, the Debtor knew at least as early as October 20, 1993 (the date of the correspondence of the IRS directed to the Debtor) that Jolie’s was not remitting withholding taxes. The Debtor continued to perform duties on behalf of Jolie’s, as “manager” or “executive manager” of Jolie’s, including the issuance of checks, well beyond October 1993. He thus had the ability to direct the payment of the available funds of Jolie’s to satisfy the trust fund obligation of Jolie’s rather than to satisfy the obligations due to other creditors. “Once an individual is established as a — responsible person — , he has the burden of disproving wilfulness.... This court has held that the wilfulness requirement of section 6672 is satisfied if the responsible person has knowledge of payments to other creditors after he becomes aware of the failure to remit the withheld taxes.” Williams v. U.S., 931 F.2d 805, 810 (11th Cir.1990). Once it is established that a person is a responsible person, he has the burden of disproving willfulness. Smith v. U.S., 894 F.2d 1549, 1552 (11th Cir.1990). Sub judice, the Debtor has failed to do so. Perhaps the Debtor chose to ignore the liability due to the IRS, at a time when he had full capability to satisfy same, rather than to run the risk of marital discord by paying the IRS obligation against his wife’s wishes. Nonetheless, the record warrants a determination that the Debtor, as a responsible person of Jolie’s Books, Inc., willfully failed to pay the trust fund portion of Jolie’s withholding taxes for the tax periods set forth in the Proof of Claim filed by the IRS. Accordingly, it is hereby
ORDERED that the Debtor’s objection to the claim of the Internal- Revenue Service is overruled. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492404/ | ORDER DENYING REQUEST FOR ISSUANCE OF PLURIES SUMMONS AND DISMISSING ADVERSARY PROCEEDING WITHOUT PREJUDICE
WALTER J. KRASNIEWSKI, Bankruptcy Judge.
This matter is before the Court on this Court’s Order to Show Cause dated May 7, 1996 (the “Show Cause Order”), which stated that the Court was considering dismissal of the instant adversary based on the Barnett Bank of Broward County’s (“Bank”) failure to perfect proper service pursuant to Fed. R.Bankr.P. 7004, to which the Bank has filed a response. Debtor Daniel R. Tussing (“Debtor”) filed a reply to the Bank’s response. The Bank has also “requested[ed] that a Pluries Summons be issued” in the instant adversary proceeding against the Debtor. The Court finds that the Bank’s request that a pluries summons be issued is not well taken and should be denied. The Court further finds that, pursuant to the Show Cause Order, the instant adversary proceeding should be dismissed without prejudice.
FACTS AND BACKGROUND
The Debtor filed a petition under chapter 7 of title 11 on October 4, 1995.
The Bank filed this adversary complaint under 11 U.S.C. § 523(a)(2)(A) against the Debtor on January 26, 1996. On March 12, 1996, the Clerk of this Court (“Clerk”) issued a summons to plaintiff’s counsel.
This Court entered an order on May 7, 1996, requiring the Bank to show cause why this adversary should not be dismissed because of the Bank’s failure to perfect proper service pursuant to Fed.R.Bankr.P. 7004. In response, the Bank stated that:
*316[d]ue to an office error, neither the complaint nor the Summons and Notice of Pretrial Conference were served as required by Bankruptcy Rule 7004 and inadvertently and inexplicably, the Summons issued by the Clerk was placed in the ease file at the [Bank’s] counsel’s office and remained in the file until the date that the undersigned counsel received this Court’s Order to Show Cause.
Plaintiffs Response to Order to Show Cause (the “Response”), at p. 2, para. 4. The Bank further asserted that such actions “amounted to excusable neglect”, Response, at p. 3, para. 7, and that the Bank’s conduct had not prejudiced the Debtor. Response, at p. 8, para. 8. Therefore, the Bank requested the Clerk to issue an alias summons. Response, at p. 3, para. 9.
Subsequently, the Clerk issued an alias summons (the “Alias”).
In a letter to the Clerk dated July 16,1996 (the “Letter”), the Bank’s attorney requested the issuance of a “Pluries Summons” in the instant adversary. The Letter acknowledged that the Alias “was not served within the ten (10) days required by the Bankruptcy Rules”. Letter, at para. 2.
DISCUSSION
Applicable Rule
Rule 7004(a) of the Federal Rules of Bankruptcy Procedure incorporates the version of Rule 4(j) of the Federal Rules of Civil Procedure which was in effect on January 1, 1990. See Fed.R.Bankr.P. 7004(a) (stating that Fed.R.Civ.P. 4(j) applies in adversary proceedings); Fed.R.Bankr.P. 7004(g) (providing that “[t]he subdivisions of Rule 4 FR Civ P made applicable by these rules shall be the subdivisions of Rule 4 FR Civ P in effect on January 1, 1990, notwithstanding any amendment to Rule 4 FR Civ P subsequent thereto”). Former Rule 4(j) provided that:
[i]f a service of the summons and complaint is not made upon a defendant within 120 days after the filing of the complaint and the party on whose behalf such service was required cannot show good cause why such service was not made within that time period, the action shall be dismissed as to that defendant without prejudice upon the court’s own initiative with notice to such party or upon motion.
Burden of Proof
The Bank bears the burden of establishing “good cause”. Friedman v. Estate of Presser, 929 F.2d 1151, 1157 (6th Cir.1991) (citation omitted).
Whether the Plaintiff has Demonstrated “Good Cause” for Not Perfecting Service Within 120 days
[3] Initially, the Court notes that the Bank did not request the Court to extend the time in which it was required to perfect service pursuant to Fed.R.Bankr.P. 9006(b)(1). Nor can the Clerk’s issuance of the Alias be interpreted as granting the Bank an extension of time under Fed.R.Bankr.P. 9006(b)(1). See Braxton v. United States, 817 F.2d 238, 242 (3rd Cir.1987) (concluding that letter from judge’s courtroom deputy clerk, which directed plaintiffs counsel to make service within 15 days and stating that court would consider dismissal if plaintiff did not take such action, did not extend time for service under Rule 4(j)); see also Mendez v. Elliot, 45 F.3d 75 (4th Cir.1995) (finding that district judge’s letter directing plaintiff to provide status report on case did not extend time to serve complaint); Mrochek v. Oprean (In re Oprean), 189 B.R. 616, 618-19 (Bankr.E.D.Va.1995) (rejecting plaintiffs argument that “good cause” existed for extension of time to serve complaint because plaintiffs counsel had construed bankruptcy court’s statement to plaintiffs counsel to “serve the complaint again” as an extension of time) (citation omitted).
Further, the Court finds that the Bank has not shown “good cause” for its failure to comply with the requirements of former Fed.R.Civ.P. 4(j). See Moncrief v. Stone, 961 F.2d 595, 596-99 (6th Cir.1992) (held that lack of prejudice to defendant United States Attorney did not represent “good cause” for plaintiffs admitted failure to satisfy the requirements of former Fed.R.Civ.P. 4(j)); Boykin v. Commerce Union Bank of Union City, Tennessee, 109 F.R.D. *317344, 346-49 (W.D.Tenn.1986) (held that affidavit of plaintiff’s attorney as to standard office procedures for the handling of complaints in federal court and affidavit of law clerk that complaint was actually mailed did not warrant finding of “good cause” under former Fed.R.Civ.P. 4(j), notwithstanding the fact that defendant had not been prejudiced); cf. Friedman, 929 F.2d at 1157 (held that plaintiffs’ reliance on district court’s purported stay of all proceedings did not represent “good cause”); Dowdy v. Sullivan, 138 F.R.D. 99,101-02 (W.D.Tenn.1991) (held that mistaken reliance by plaintiffs attorney on nongovernment publication for rules on service of process did not represent “good cause” under former Fed.R.Civ.P. 4(j)). Under former Fed.R.Civ.P. 4(j), ‘“good cause’ requires a greater showing than ‘excusable’ neglect”. Broitman v. Kirkland (In re Kirkland), 86 F.3d 172 (10th Cir.1996). More specifically, as the Tenth Circuit stated in Kirkland,
inadvertence or negligence alone do not constitute ‘good cause’ for failure of timely service. Mistake of counsel or ignorance of the rules also usually do not suffice. (Citation omitted).... Although a small delay in achieving service may not prejudice the defendant, absence of prejudice alone does not constitute ‘good cause’.
Kirkland, 86 F.3d at 176; see also McGinnis v. Shalala, 2 F.3d 548, 550 (5th Cir.1993) (stating that inadvertanee, mistake, or neglect of counsel do not constitute “good cause”), rehearing denied, 5 F.3d 530 (5th Cir.1993), cert. denied, 510 U.S. 1191, 114 S.Ct. 1293, 127 L.Ed.2d 647 (1994); Braxton v. United States, 817 F.2d 238, 241-42 (3rd Cir.1987) (stating that neither inadvertence of counsel nor half-hearted attempts at service amount to “good cause” under former Rule 4(j) in holding that the “unexplained delinquency on the part of the process server and lack of oversight by counsel” did not constitute “good cause”) (citations omitted); Cartage Pacific, Inc. v. Waldner (In re Waldner), 183 B.R. 879, 882 (9th Cir.Bankr.1995) (stating that “inadvertence of counsel”, “[ijgnorance of the rule and its requirements” and “half-hearted attempts to serve the defendant” do not constitute “good cause”) (citations omitted). Significantly, the Bank has not alluded to, let alone provided any evidence in its Response, that the Debt- or’s conduct has contributed to its failure to effect timely service. Further, there is no evidence before the Court that the Bank has made reasonable efforts to effect service on the Debtor subsequent to the Clerk’s issuance of the Alias. Therefore, the Court finds that the Bank has not shown “good cause” for its failure to comply with the 120 day deadline of former Fed.R.Civ.P. 4(j). See Waldner, 183 B.R. at 882 (held that creditor failed to demonstrate “good cause” for failure to timely serve summons and complaint, despite the fact that there was some evidence that debtors attempted to evade service, where court concluded that plaintiff easily could have served defendant by first class mail).
Finally, even if the Letter could be construed as a motion to enlarge time under Fed.R.Bankr.P. 9006(b)(2), the Bank has not demonstrated grounds for an enlargement of time. In the context of former Rule 4(j), courts have held the “good cause” standard applicable to motions to enlarge time under Fed.R.Civ.P. 6(b)(2). See Putnam v. Morris, 833 F.2d 903, 905 (10th Cir.1987) (stating that “[ajlthough the trial court has the power to extend the 120-day time period after it has run under Fed.R.Civ.P. 6(b)(2), it will do so only if the movant demonstrates ‘good cause’ for the delay which the court deems to be excusable neglect”) (citation omitted); DeLoss v. Kenner Gen. Contractors, Inc., 764 F.2d 707, 711 (9th Cir.1985) (held that “good cause” standard applied to motion to extend time under Fed.R.Civ.P. 6(b)(2)); Motsinger v. Flynt, 119 F.R.D. 373, 375 (M.D.N.C.1988) (stating that “[a] motion for additional time within which to serve process made after the expiration of the 120-day time period set in Rule 4(j), Fed.R.Civ., is governed by the specific good cause standard of that rule as opposed to the excusable neglect standard of Rule 6(b)(2), Fed.R.Civ.P.”) (citations omitted); Boykin, 109 F.R.D. at 350 (“holdpng] that a plaintiff who moves for an extension of time in which to effect service after the 120 days provided by Rule 4(j) has expired will be granted such an extension only if good cause for the failure to comply with Rule 4(j) *318exists”) (footnote omitted). As the foregoing discussion indicates, the Bank has failed to demonstrate “good cause”.
In light of the foregoing, it is therefore
ORDERED that Bank’s “request that a Pluries Summons be issued” be, and it hereby is, denied. It is further
ORDERED that Bank’s adversary complaint against the Debtor be, and it hereby is, dismissed without prejudice. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492405/ | MEMORANDUM OPINION
ARTHUR B. BRISKMAN, Bankruptcy Judge.
This matter came before the Court on the Trustee’s Motion to Dismiss Case for Debt- or’s Failure to Comply with the Requirements of the Order Establishing Duties of Trustee and Debtor, and Confirmation Procedures, Ordering Debtor’s Compliance, Allowing Administrative Expenses and Ordering Adequate Protection Payments (Doc. 33). Appearing before the Court were Debtor, Richard H. Maclean, Jr., pro se; Richard A. Palmer, the Trustee; Karen Gable, Assistant United States Attorney, counsel for the Internal Revenue Service; Philip Storey, counsel for SunTrust Bank, Central Florida, N.A.; and Gary Lublin. After reviewing the motion and response, and hearing argument on the matter, the Court makes the following Findings of Fact and Conclusions of Law.
FINDINGS OF FACT
Richard H. Maclean, Jr. (“Debtor”) filed for relief under Chapter 13 of the Bankruptcy Code on February 8, 1996. 11 U.S.C. § 101 et seq. The Court entered an Order Establishing Duties of Trustee and Debtor, and Confirmation Procedures, Ordering Debtor’s Compliance, Allowing Administrative Expenses, and Ordering Adequate Protection Payments (“Duties Order”) on February 9, 1996. The Duties Order required the Debtor to file with the appropriate agency any delinquent federal or state tax returns within thirty days of the date of the Order. In addition, the Order commanded the Debtor to simultaneously provide a copy of the tax returns to the Chapter 13 trustee. The Debtor filed his Schedules and Statement of Affairs on February 26, 1996. On Schedule I, the Debtor identified his occupation as electronics but indicated that he had no employer. The Debtor listed his current monthly gross wages, salary, and commissions as totalling $2,500.00. This schedule also shows that the Debtor receives an additional $866.00 from “software/repair/printing.” On his Statement of Affairs, the Debtor listed his gross income received from employment, trade, or profession, or from operation of business for the present year and previous years as $3,133.00 and $5,033.00. The Debtor filed his Chapter 13 plan on February 26, 1996.
The Debtor failed to file tax returns for the year 1995 within the thirty day required by the Duties Order. The Trustee filed a Motion to Dismiss Case for Debtors’ Failure to Comply with the Requirements of the Order Establishing Duties of Trustee and Debtor, and Confirmation Procedures, Ordering Debtor’s Compliance, Allowing Administrative Expenses and Ordering Adequate Protection Payments. On June 7, 1996, the Court entered an Order of Impending Dismissal based on the Debtors’ failure to comply with the Duties Order stating that it may enter an order dismissing the case without further notice or hearing unless the Debtor filed the required items within fifteen days or filed a notice of conversion pursuant to 11 U.S.C. § 1307(a).
The Debtor filed a document entitled “Refusal for Cause/Order of Impending Dismissal” and a “Motion to Strike/Motion to Dismiss.” The Trustee filed a response to the Order of Impending Dismissal on June 25, 1996 requesting that the Court proceed with the dismissal for the Debtor’s failure to comply-
The Court held a hearing on the Trustee’s motion and the Debtor’s response on July 30, 1996. As of the hearing date, the Debtor still had failed to file the tax returns for the year 1995 as required by the Court’s Duties Order. The Court issued an oral ruling that it was dismissing the case and entering a 180-day injunction enjoining the Debtor from *419filing for relief under Title 11 of the United States Code.
CONCLUSIONS OF LAW
Section 1307(c) of Title 11 provides that upon the request of a party in interest or the United States trustee, a court may dismiss a case under this chapter for cause and lists a number of bases for dismissal. 11 U.S.C. § 1307(c). Although lack of good faith is not enumerated as a specific basis for dismissal, courts have recognized lack of good faith as sufficient cause for dismissal of a Chapter 13 case. In re Love, 957 F.2d 1350, 1354 (7th Cir.1992); In re Stathatos, 163 B.R. 83, 87 (N.D.Tex.1993); In re Powers, 135 B.R. 980, 990 (Bankr.C.D.Cal.1991); Ekeke v. United States, 133 B.R. 450, 452 (S.D.Ill.1991) (stating that by the terms of § 1307(c), the enumerated causes of § 1307(c) are not exhaustive).
In filing bankruptcy, the Debtor has sought this Court’s protection from creditors. However, the Debtor has continued to ignore this Court’s Duties Order to file tax returns. The Court finds that the Debtor’s failure to file tax returns for the year 1995 demonstrates the Debtor’s lack of good faith.
Based on the Debtor’s failure to comply with the Court’s Duties Order and the Debt- or’s lack of good faith, the Trustee’s Motion to Dismiss Case for Debtor’s Failure to Comply with the Requirements of the Order Establishing Duties of Trustee and Debtor, and Confirmation Procedures, Ordering Debtor’s Compliance, Allowing Administrative Expenses and Ordering Adequate Protection Payments is due to be granted. Pursuant to 11 U.S.C. § 109(g), the Debtor shall be enjoined from filing for relief under Title 11 of the United States Code for a period of 180 days from the date of the entry of the Court’s accompanying Order. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492406/ | MEMORANDUM OF DECISION
JAMES B. HAINES, Jr., Bankruptcy Judge.
The issue for decision is whether Aaron Gleich, Inc., (“AGI” or “the debtor”) may insist on a jury trial to determine its claims against the Housing Authority of New Haven (HANH), a creditor that has filed a proof of claim seeking damages arising from the same contractual dispute that underlies AGI’s causes of action. For the reasons set forth below, I conclude that, even assuming AGI’s claims are “legal in nature,” the parties’ dispute is part and parcel of the “claims allowance process.” Therefore, AGI has no right to trial by jury.1
Procedural Background
AGI filed its voluntary petition for Chapter 11 relief on August 18, 1993. On October 28, 1993, HANH timely filed a proof of claim seeking damages arising from AGI’s allegedly deficient performance of asbestos abatement work undertaken under the terms of “precleaning” and asbestos removal contracts. HANH sought reimbursement for expenses it incurred as a result of AGI’s *465asserted contractual defaults, including indemnification for liability it anticipated as a result of an Environmental Protection Agency lawsuit, for legal fees associated with defending the EPA suit,2 and other, unliquidat-ed, contingent damages. On August 21, 1995, AGI initiated this adversary proceeding by filing its complaint, entitled “Objection to Claims of the Housing Authority of New Haven and Counterclaim.” The complaint took issue with HANH’s claims and counterclaimed seeking an affirmative award of compensatory and punitive damages based upon breach of contract (Count I), quasi contract/quantum meruit (Count II), and fraud (Count III). The complaint set forth a jury trial demand and HANH consented to jury trial in the bankruptcy court.3
HANH obtained summary judgment against AGI on Counts II and III, leaving only the parties’ respective contract claims unresolved.4 At that point, I ordered that the parties indicate whether they continued to insist on a trial by jury in light of my view that the “controversy now appears to be limited to the debtor’s attempt to recover assets of the estate based on the Housing Authority of New Haven’s alleged contractual liability and a dispute relating to offset and claims allowance_”5 AGI renewed its jury demand, HANH objected, and the parties briefed the issue.
In the meantime, AGI confirmed its Chapter 11 plan.6 The plan separately classifies HANH’s claim and provides that to the extent HANH proves that AGI owes it damages, its right to payment is “secured” by contract payments it has withheld from AGI, as well as by rights it holds under AGI’s contract performance bonds. To the extent that HANH’s claim exceeds such funds and rights, it will be paid as an unsecured creditor. The plan’s funding for its dividend to unsecured creditors comes from any of several potential sources, including any affirmative damages recovery it might obtain from HANH.7
Discussion
“In any action commenced in a federal court, ‘the right to a jury trial ... is to be determined as a matter of federal law.’ ” Germain v. Connecticut Nat’l Bank, 988 F.2d 1323, 1326 (2d Cir.1993) (quoting Simler v. Conner, 372 U.S. 221, 222, 83 S.Ct. 609, 610, 9 L.Ed.2d 691 (1963) (per curiam)). We know that HANH, having filed a proof of claim, may not insist upon a jury trial. Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 58-59, 109 S.Ct. 2782, 2798-2799, 106 L.Ed.2d 26 (1989), Katchen v. Landy, 382 U.S. 323, 335, 86 S.Ct. 467, 475, 15 L.Ed.2d 391 (1966). But the tables are turned. It is *466the debtor, not the creditor, asserting jury trial rights. For present purposes, we may assume that if AGI’s claims were scrutinized under the model articulated by the Supreme Court,8 we would readily conclude that, without bankruptcy, AGI’s contract claims against HANH are “legal claims” entitled to trial by jury. But because AGI’s “counterclaims” to HANH’s proof of claim involve the same contentions and issues as are central to the process of allowing or disallowing HANH’s claim, a jury trial is not available. See Granfinanciera, 492 U.S. at 58-59, 109 S.Ct. at 2798-2799; Langenkamp v. Culp, 498 U.S. 42, 44-45, 111 S.Ct. 330, 331-332, 112 L.Ed.2d 343 (1990); see also, e.g., Billing v. Ravin, Greenberg & Zackin, P.A., 22 F.3d 1242, 1247 (3rd Cir.1994) (“legal claims that may involve private rights ... may, in certain bankruptcy contexts, be decided in equity”), cert. denied, - U.S. -, 115 S.Ct. 508, 130 L.Ed.2d 416 (1994); Frost, Inc. v. Miller, Canfield, Paddock & Stone, P.C. (In re Frost), 145 B.R. 878, 882 (Bankr.W.D.Mich.1992) (debtor not entitled to jury trial because its breach of contract and negligence claims were part of claims allowance process).
HANH and AGI assert prepetition claims against each other. In considering allowance or disallowance of HANH’s proof of claim, I.must necessarily consider whether HANH must pay or turn over such funds as it owes to AGI. 11 U.S.C. § 502(d);9 see also 11 U.S.C. § 553(a).10 The claims allowance/disallowance process cannot avert collision with the very issues that underlie AGI’s adversary complaint. Indeed, the very style of AGI’s complaint (“Objection to Claims of Housing Authority of New Haven and Counterclaims”) recognizes as much. In order to ascertain whether AGI owes HANH money for which a plan distribution need be made, I must consider (1) whether AGI owes HANH anything and (2) if so, whether it owes HANH more or less than the funds HANH retains from what AGI claims is owed it under their contracts. See Romar Int’l Georgia, Inc. v. Southtrust Bank of Alabama, N.A. (In re Romar Int’l Georgia, Inc.), 198 B.R. 407, 411 (Bankr.M.D.Ga.1996); cf. Germain v. Connecticut Nat’l Bank, 988 F.2d at 1327 (“before a claim may be allowed, a court must resolve any preference issues that the trustee might raise”)
In the parlance of non-bankruptcy litigation, we would characterize AGI’s contract claims against HANH as mandatory counter*467claims to HANH’s asserted right to damages. See Fed.R.Civ.P. 18(a) (counterclaim is mandatory if it arises out of “the transaction or occurrence that is the subject matter of the opposing party’s claim” and does not require joinder of parties over whom the court cannot exercise jurisdiction); see generally 6 Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure 2d §§ 1409, 1410 (1990 & Supp.1996). Their claims against one another are more than intertwined — they grow on one vine.
Thus, the dispute is, quintessentially, a claims dispute. That AGI claims the right to recover affirmatively from HANH does not change things. The dispute’s essential character does not change as a function of the extent of AGI’s counterclaims. Whether it is a big dispute or a small dispute, its gravamen is disagreement about the parties’ respective rights and liabilities under the prepetition contracts that form the basis for HANH’s proof of claim. When AGI filed its voluntary Chapter 11 petition, it set in motion a process invoking this court’s equity jurisdiction over the allowance and disallowance of claims. It thereby submitted its dispute with HANH to that jurisdiction. It may not now revoke that election piecemeal. See Auto Imports, Inc. v. Verres Financial Corp. (In re Auto Imports, Inc.), 162 B.R. 70 (Bankr.D.N.H.1993); Splash v. Irvine Co. (In re Lion Country Safari, Inc.), 124 B.R. 566 (Bankr.C.D.Cal.1991).11
Conclusion
AGI’s renewed jury trial demand is denied. This proceeding shall be set for nonjury trial in accordance with the terms of the earlier-entered pretrial scheduling order.
. The pertinent facts are undisputed. This memorandum of decision sets forth my legal conclusions. See Fed.R.Bankr.P. 7052, Fed.R.Civ.P. 52. Unless otherwise indicated, all references to statutory sections are .to the Bankruptcy Reform Act of 1978 ("Bankruptcy Code”), as.amended, 11 U.S.C.§ 101 ef seq.
. Proof of Claim No. 2.
. A.P.Doc. Nos. 7, 9. AGI initiated bankruptcy proceedings before enactment of 1994 amendments to bankruptcy jurisdictional statutes that provided express, qualified, statutory jury trial authority to the bankruptcy courts. See 28 U.S.C. § 157(e). Those amendments became effective for bankruptcy cases filed after October 22, 1994. Because I conclude that this dispute’s character removes it from the ambit of matters that debtors may insist be tried by jury, it is unnecessary for me to consider whether bankruptcy courts have statutory authority to conduct jury trials within bankruptcy cases filed prior to October 22, 1994. The First Circuit has had no occasion to rule on the issue. Compare Official Comm. of Unsecured Creditors v. Schwartzman (In re Stansbury Poplar Place, Inc.), 13 F.3d 122 (4th Cir.1993) (bankruptcy courts not statutorily authorized to conduct jury trials); In re Grabill Corp., 967 F.2d 1152 (7th Cir.1992) (same), reh’g en banc denied, 976 F.2d 1126 (7th Cir.1992); Rafoth v. Nat’l Union Fire Ins. Co. (In re Baker & Getty Fin. Services, Inc.), 954 F.2d 1169 (6th Cir.1992) (same); Kaiser Steel Corp. v. Frates (In re Kaiser Steel Corp.), 911 F.2d 380 (10th Cir.1990); and In re United Missouri Bank of Kansas City, N.A., 901 F.2d 1449 (8th Cir.1990); with Ben Cooper, Inc. v. Insurance Co. of Pa. (In re Ben Cooper, Inc.), 896 F.2d 1394 (2d Cir.1990) (bankruptcy courts have implicit statutory authority to conduct jury trials), vacated, 498 U.S. 964, 111 S.Ct. 425, 112 L.Ed.2d 408 (1990), reinstated by 924 F.2d 36 (2d Cir.1991), cert. denied, 500 U.S. 928, 111 S.Ct. 2041, 114 L.Ed.2d 126 (1991).
. Order dated May 14, 1996, A.P.Doc. No. 55; Order dated May 28, 1996, A.P.Doc. No. 57.
. Order dated May 28, 1996, A.P.Doc. No. 57.
. Order dated January 19, 1996, Court Doc. 142.
. Id.; Second Amended Plan of Reorganization, Art. VI, VII. In the event that HANH’s claim is allowed in an amount that exceeds its security, its dividend as an unsecured creditor will be paid by AGI or by AGI's sole shareholder within thirty days of allowance. Order dated January 19, 1996, Court Doc. No. 142.
. "First, we compare the statutory action to 18th-century actions brought in the courts of England prior to the merger of the courts of law and equity. Second, we examine the remedy sought and determine whether it is legal or equitable in nature.” The second stage of this analysis is more important than the first. If, on balance, these two factors indicate that a party is entitled to a jury trial under the Seventh Amendment, we must decide whether Congress may assign and has assigned resolution of the relevant claim to a non-Article III adjudicative body that does not use a jury as factfinder.
Granfinanciera, 492 U.S. at 42, 109 S.Ct. at 2790 (quoting Tull v. United States, 481 U.S. 412, 417—18, 107 S.Ct. 1831, 1835-36, 95 L.Ed.2d 365 (1987)).
. Section 502(d) provides:
Notwithstanding subsections (a) and (b) of this section, the court shall disallow any claim of any entity from which property is recoverable under section 542, 543, 550, or 553 of this title or that is a transferee of a transfer avoidable under section 522(f), 522(h), 544, 545, 547, 548, 549, or 724(a) of this tide, unless such entity or transferee has paid the amount, or turned over any such property, for which such entity or transferee is liable under section 522(i), 542, 543, 550, or 553 of this tide.
.Section 553(a) provides:
Except as otherwise provided in this section and in sections 362 and 363 of this tide, this tide 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 tide 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;
(B) while the debtor was insolvent; and
(C) for the purpose of obtaining a right of setoff against the debtor.
. Today’s holding, which addresses claims disputes and closely-related counterclaims between a voluntary Chapter 11 debtor and a creditor that has filed a proof of claim is not at odds with the Second Circuit’s conclusion that, by filing a voluntary bankruptcy petition, a debtor does not necessarily waive all jury trial rights'in adversary proceedings. Germain v. Connecticut Nat’l Bank, 988 F.2d 1323 (holding that debtor retained jury trial rights on post-petition lender liability claims, the resolution of which was unnecessary to allowance or disallowance of defendants pre-petition claim); see In re Jensen, 946 F.2d 369 (5 th Cir.1991) (addressing debtor’s claims against non-creditor third party, holding that debtor retained jury trial rights and discussing waiver effected by filing proof of claim). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492407/ | MEMORANDUM OF DECISION ON APPLICATIONS FOR FEES AND REIMBURSEMENT OF EXPENSES BY FORMER CHAPTER 7 TRUSTEE AND COUNSEL
FRANCIS G. CONRAD, Bankruptcy Judge.
Before this Court are applications1 for final allowance of compensation and reimbursement of expenses by Former Trustee of Debtors and Former Trustee’s bankruptcy counsel, P & M. Former Trustee seeks the sum of $8,575.00 for fees and $57.92 for reimbursement of expenses for the period from September 8, 1995 through January 9, 1996, for a total sum of $8,632.92. P & M seeks the sum of $44,552.50 for fees and $1,052.89 for reimbursement of expenses for the period from September 21, 1995 through February 7, 1996, for a total sum of $45,-605.39. Debtors filed an objection to both Fee Applications.
The applications are granted in part and denied in part because some of the work performed was necessary and benefited the estate; the remainder did not.
*500
BACKGROUND
On July 20,1994, these eases were converted from Chapter 11 to Chapter 7 under the Bankruptcy Code.2 On August 15, 1994, Former Trustee was appointed Chapter 7 trustee. Debtors appealed the conversion order and on August 19,1994, Former Trustee and Debtors consented to the vacatur of the July 20, 1994 Order by the District Court.
On September 7, 1995, this Court (Ryan, J.), sua sponte, entered a second order converting these cases to Chapter 7 (the “Conversion Order”). Addressing the prior conversion of the cases, the Conversion Order contains the statement: The Chapter 7 trustee, Richard Stern, participated in the vacatur activities. Inexplicably, he did not seek to defend his appointment. Instead he tacitly consented to his “disappointment.” (Conversion Order at p. 9).
By Notice of Appointment dated September 8, 1995, the United States Trustee again authorized Former Trustee to be the Chapter 7 trustee. On September 18, 1995, Debtors filed a notice of appeal of the Conversion Order and a stay application under Fed. R.Bkrtcy.P. R. 8005, pending the appeal.3 Also on that date, Former Trustee filed an application for an order authorizing him, inter alia, to conduct the business of the Debtors, for a limited period, under section 721. On September 21, 1995, Judge Ryan declined to hear the conduct of business motion finding he did not have jurisdiction to hear it while an appeal of the second Conversion Order was pending. On October 4, 1995, Debtors requested, and the District Court granted, that the hearing on the Stay Application be held simultaneously with the conduct of business motion4 on October 6, 1995. By order dated October 6, 1995, the District Court granted a stay of the Conversion Order.
Former Trustee directed his counsel to immediately prepare opposition papers to the appeal. P & M prepared and filed the Trustee’s opposition papers and appeared in District Court for the hearing. At the hearing, the District Court directed the Debtors to provide the Former Trustee with a copy of the appeal papers and the hearing was adjourned to October 13, 1995. P & M prepared for the hearing on the Stay Application and appeared in district court in October 1995, participating in a four hour hearing on the Stay Application. The District Court granted the Stay Application and scheduled an expedited briefing schedule with respect to the appeal of the Conversion Order. P & M vigorously opposed the appeal of the Conversion Order, expending many hours drafting papers in opposition, and preparing for and attending the hearing before the District Court. On November 17, 1995, the Conversion Order was reversed and remanded to this Court.
DISCUSSION
At the heart of this dispute is the necessity of the legal services for which P & M seek compensation, including, but not limited to, the Former Trustee’s defense of his appointment as trustee by instructing his counsel to oppose Debtors’ appeal of the Conversion Order and Debtors’ motion for a stay pending the appeal. Debtors contend that the compensation sought is not reasonable and the services rendered by P & M were not necessary or appropriate because the Former Trustee lacked standing, as he was not a party-in-interest at the time Judge Ryan ordered the case converted and played no role in the Court’s sua sponte conversion hearing.
We are sensitive to Former Trustee’s and P & M’s position that the services rendered were necessary “because Judge Ryan had made the Trustee’s previous ‘disappointment,’ as Chapter 7 trustee, an issue in the Conversion Order” (as discussed herein). Therefore, Former Trustee and P & M argue, “the Trustee felt an obligation to ensure that he fulfilled his professional as well as fiduciary obligations to the greatest extent *501possible.” (Response at p. 3) Both the Former Trustee and P & M are experienced bankruptcy counsel. They are intimately familiar with the duties of a Trustee as set forth under the Bankruptcy Code. While we are sensitive to “lawyers’ paranoia,” in our view, it was improper for them to take the gratuitous statement by Judge Ryan and turn it into a directive. Most importantly, Former Trustee and P & M have failed to demonstrate that their services were necessary to protect the interests of, and provide a benefit to, the creditors of these estates.
In support of their Fee Applications, Former Trustee and counsel rely upon section 508(b)(3)(E) of the Bankruptcy Code. This section provides for administrative expense compensation5 for superseded pre-petition custodians of estate property. The section provides:
(b) After notice and a hearing, there shall be allowed administrative expenses ... including—
(3) the actual, necessary expenses, ... incurred by—
(E) a custodian superseded under section 543 of this title, and compensation for the services of such custodian.
11 U.S.C. § 503(b)(3)(E).
A custodian is defined in section 101(11)(C) to include a:
trustee, receiver, or agent under applicable law, or under a contract, that is appointed or authorized to take charge of property of the debtor for the purpose of enforcing a hen against such property, or for the purpose of general administration of such property for the benefit of the debtor’s creditors.
11 U.S.C. § 101(11)(C).
Former Trustee and P & M contend that they were acting as agents who exercised effort to benefit debtors’ creditors, and therefore are entitled to such compensation. We find this argument novel but without merit for two reasons. First, all the elements of section 101(11)(C) are not satisfied. Specifically, we find that Former Trustee and P & M did not, by opposing Debtors’ Stay Application and appeal of the Conversion Order, take charge of property of the debtor to generally administer the property for the benefit of creditors. This Court finds that Former Trustee and P & M went beyond the bounds of their duties, as set forth under section 704, because the time spent on such activities provided no benefit to the Debtors’ estates. Indeed, the actions served only to increase the cost of administering the estates. Second, Congress never intended a Chapter 7 trustee to be included under section 101(11)(C). Rather, compensation of Chapter 7 trustees is governed under sections 326 and 503(a). Therefore, such time and expenses are not compensable under section 503(b)(3)(E). The conduct of business motion is another matter, however.
Following appointment by the United States Trustee, a Chapter 7 trustee is charged with the statutory duties enumerated under section 704. Section 704 directs a trustee to “collect and reduce to money the property of the estate for which such trustee serves ...” 11 U.S.C. § 704(1). We find that the Former Trustee and P & M correctly made the conduct of business motion because Debtors own and operate numerous parcels of real estate and buildings that require daily maintenance and attention. Additionally, one of a trustee’s duties would be the collection of any income generated by the buildings and monitoring of the tenants’ operations. As a result, the filing of the conduct of business motion was necessary to fulfill a trustee’s obligation under section 704. Therefore, those portions of the Fee Applications seeking compensation and reimbursement of expenses relative to the conduct of business motion are allowable under section 503(b)(1)(A).
CONCLUSION
We hold that Former Trustee and P & M are not entitled to an administrative claim under section 503(b)(3)(E) for legal services performed and expenses disbursed in opposing the Stay Application and appeal of the Conversion Order. They are allowed, howev*502er, fees and expenses for administering assets. Accordingly, the Fee Applications filed for final allowance of compensation and reimbursement of expenses by the Trustee and P & M will be denied in part and granted in part. P & M is directed to settle an order accompanied by time and expense sheets reflecting a breakdown of time and expenses disallowed and allowed consistent with this decision.
. Our subject matter jurisdiction over this controversy arises raider 28 U.S.C. § 1334(b) and the General Reference to the Court under Rule 4 of the General Rules of the United States District Court for the Eastern District of New York. This is a core matter under 28 U.S.C. § 157(b)(2)(A).
. Unless otherwise indicated, all statutory references are to Title 11 of the United States Code.
. As of September 18, 1995, eleven (11) days after the entry of the Conversion Order, Former Trustee had not received notice that the Debtor had filed an appeal of the Conversion Order.
.We know of no action taken by the District Court on the conduct of business motion.
. A custodian is entitled to such compensation for reasonable expenses incurred in working with the debtor. 11 U.S.C. §§ 503(b)(3)(E) and 507(a)(1). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492409/ | MEMORANDUM OF DECISION
ROBERT L. KRECHEVSKY, Bankruptcy Judge.
I.
John J. O’Neil, Jr., Trustee of the Chapter 7 Estate of Northeastern Contracting Co. (the “Debtor”), on June 2, 1995, brought a complaint pursuant to 11 U.S.C. § 547(b)1 to set aside and recover as preferential two payments which the Debtor made to the defendant, Orix Credit Alliance, Inc. (“Orix”) on a debt guaranteed by defendants, Salvatore J. Marino, Sr. and Salvatore J. Marino, Jr., insiders of the Debtor. The complaint alleges the payments were made more than 90 days but less than one year before the bankruptcy petition date. The court initially denied both Orix’s motion to dismiss the complaint as to it2 and Orix’s and the Trustee’s cross-motions for summary judgment. Orix and the Trustee have now submitted the matter, as between them, upon a stipulation of facts and memoranda, on which the following background is based.
II.
BACKGROUND
A
Creditors filed an involuntary Chapter 7 petition against the Debtor, a construction *762firm, on May 11, 1993. The Debtor made two payments of $6,000.00 each to Orix on August 25, 1992 and September 17, 1992 (the “Transfers”)3 by endorsing checks received by the Debtor from Industrial Construction Co., Inc. (“ICCI”) over to Orix. See Stipulated Facts, ¶ 3-7. The Transfers represent progress payments for work performed under a construction contract between the Debtor, as subcontractor, and ICCI, as general contractor. Id. at ¶ 5, 7. The Transfers are proceeds from accounts receivable generated by the Debtor for work it had previously performed. Id. at ¶ 8. The Debtor made the Transfers to Orix while insolvent. Id. at ¶ 15. The Debtor had granted Orix a security interest on August 2, 1991 in, inter alia, the Debtor’s existing and after-acquired accounts receivable and their proceeds. Id. at ¶ 16.4 Orix duly perfected such security interest and is an undersecured creditor of the Debtor at least in an amount equal to the amount of the Transfers. Id. at ¶ 13, 17. The Trustee relies on the Deprizio trilateral doctrine to extend the preference recovery period to one year in order to recover from Orix. Id. at ¶ 21-22.
B.
Orix contends the Transfers are not preferential in that the Transfers did not result in any diminution of the Debtor’s estate because Orix was entitled to receive the $12,-000.00 under its perfected security interest, as the proceeds of its collateral — the accounts receivable. The Trustee contends a transfer under § 547(e)(3)5 does not occur until the debtor has acquired rights in the property transferred; the Debtor did not acquire rights in the Transfers until the time of payment; Orix’s security interest therefore is avoidable as attaching within one year of the petition date. Orix responds that its security interest attached not at the time of the Transfers, but on October 21, 1991, the date the Debtor executed the contract with ICCI, and is thus outside the one-year preference period and not avoidable.
III.
DISCUSSION
Orix’s collateral, the accounts receivable, came into existence when the Debtor earned the right to payment for work performed under the contract with ICCI. The Debtor acquired rights in the accounts receivable, and Orix’s security interest attached, on the dates the Debtor rendered performance to ICCI, not the date of the ICCI contract execution. See Northwest Elec. Co. of Ohio v. A.P. O’Horo Co. (In re Northwest Elec. Co. of Ohio), 84 B.R. 400 (Bankr.W.D.Pa.1988) (date of transfer under preference statute is date upon which Debtor earned right to payment); Graban v. McDowell Nat'l Bank (In re Engel), 96 B.R. 602, 604 (Bankr.W.D.Pa.1989) (“lien on an account receivable of the debtors ... could not be perfected until the debtors’ right to payment of the account arose, and the right to payment did not arise until the work was performed. No work — no account receivable— no lien.”).
Orix and the Trustee, through their stipulation, have, in effect, merged the dates of payment and endorsement of the cheeks with dates that the Debtor performed the work. The Trustee, in his brief, states the “payments [were] earned at (or shortly before) the time of payment.” Trustee Reply Brief at 2. Orix, in its responsive brief, does not oppose this characterization of the Trustee and relies on its own contention that its “security interest in the Transfers [arose] at the time the [ICCI] Contract was executed.” Orix Memorandum Of Law In Opposition To Reply Brief Of Plaintiff at 7. n. 3. Cf. Beck v. Int’l Harvester Credit Corp. (In re E.P. Hayes, Inc.), 29 B.R. 907 (Bankr.D.Conn.1983).
The Court finds, treating the dates the Debtor received payments as occurring shortly after the dates the Debtor performed *763service under the ICCI contract, that the transfers to Orix, for the purposes of § 547, occurred within one year of the petition date. The transfers are avoidable.
Orix has repeated its argument that under In re Erin Food Services, Inc., 980 F.2d 792 (1st Cir.1992), the $12,000.00 payment to Orix conferred no tangible benefit on Salvatore J. Marino, Jr., one of the insiders, and that Orix is entitled thereby to judgment. This contention invoking the Deprizio doctrine was addressed by the court in the ruling cited in note 2, supra, and the court sees no reason to ehange its opinion
IV.
CONCLUSION
The Trustee has satisfied his burden of proving that the $12,000.00 transferred to Orix represents a voidable transfer under § 547. Accordingly, a partial judgment shall enter that the Trustee recover of Orix the sum of $12,000.00, plus interest and costs.
PARTIAL JUDGMENT
This action having come before the Court, Honorable Robert L. Kreehevsky, United States Bankruptcy Judge, presiding, and the Court having issued a written ruling of even date, it is
ORDERED, ADJUDGED AND DECREED that the plaintiff John J. O’Neil, Jr., Trustee, recover of the defendant, Orix Credit Alliance, Inc., the sum of $12,000.00, with interest thereon at the rate of 5.67% from June 2, 1995, the date of the complaint, and his costs of suit.
. Section 547(b) provides:
(b) Except as provided in subsection (c) of this section, the trustee may avoid any transfer of an interest of the debtor in property—
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;
(3) made while the debtor was insolvent;
(4) made—
(A) on or within 90 days before the date of the filing of the petition; or
(B) between 90 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).
. See O’Neil v. Orix Credit Alliance, Inc. (In re Northeastern Contracting Co.), 187 B.R. 420 (Bankr.D.Conn.1995).
. So designated in the stipulation.
. Neither the Trustee's complaint nor Orix's answer contain any reference to a security interest held by Orix in property of the Debtor.
. Section 547(e)(3) provides: "For the purposes of this section, a transfer is not made until the debtor has acquired rights in the property transferred.” 11 U.S.C. § 547(e)(3). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492412/ | ORDER DENYING MOTION FOR RELIEF FROM STAY
ARTHUR N. VOTOLATO, Bankruptcy Judge.
Heard on August 21, 1996, on the Objection of David Rivera, an alleged creditor, to the motion of Peerless Insurance Company for Relief from the Automatic Stay. Peerless argues that it should be allowed to proceed with a declaratory judgment action pending against the Debtor in the Federal District Court for the District of Rhode Island. While Peerless’ argument is strategically understandable, we find for the reasons stated below, that its position, on either legal or equitable grounds, is not well taken at this time. Therefore, Peerless’ motion for relief from stay is denied, without prejudice.
BACKGROUND
On June 24, 1994, Derek Gagnon, an employee of the Debtor, was involved in a motor vehicle accident allegedly caused by his negligence, and arising out of and in the course of his employment with Annie’s, Inc. Several people were injured, including David Rivera, one of the objectors herein. Peerless denies coverage, and is seeking a declaratory judgment in the District Court that it is not liable under its policy with Annie’s. Also pending in the Federal District Court is an action by David Rivera against Annie’s for the personal injuries allegedly caused by Annie’s agent. On July 22, 1996, Annie’s filed a Chapter 11 case, staying both District Court actions.
Peerless argues that its declaratory judgment action is ready for hearing and that it *30should be allowed to proceed because “it is anxious to resolve the coverage dispute” and that it “is in the best interest of all parties” to resolve this (coverage) issue promptly. The Debtor represents that it is financially unable to defend the declaratory judgment action and that Peerless would win its coverage argument by default, if the stay is lifted. The Debtor also argues that a finding of no coverage, and then a damage award against it would result in the conversion of this reorganization case to Chapter 7, as the business has neither the ability nor the resources to pay a substantial personal injury claim. David Rivera argues that under Rhode Island law, R.I. Gen.Laws § 27-7-2.4, he is entitled to name Peerless as the Defendant in his pending lawsuit, or he can sue Peerless in a separate action. Either way, he argues, Peerless can raise its policy defenses, the chips will fall where they may, after hearing, and no one will be legally prejudiced. Rivera contends that as the real party-in-interest, he is the one who will suffer irreparable harm if Peerless is granted relief from stay and the Debtor defaults in the declaratory judgment action. There is also, of course, the ultimate harm to the Chapter 11 trade creditors that would likely be caused by the lifting of the stay, i.e. conversion of the Debtor’s reorganization effort to a no asset Chapter 7 case.
DISCUSSION
Peerless is seeking relief from stay “for cause,” under 11 U.S.C. 362(d)(1). “Where neither prejudice to the bankruptcy estate nor interference with the bankruptcy proceeding is demonstrated, the desire of a stayed party to proceed in another forum is sufficient cause to warrant lifting the automatic stay.” Carter v. Larkham (In re Larkham), 31 B.R. 273, 276 (Bankr.D.Vt. 1983); see also In re Newport Offshore, Ltd., 59 B.R. 283, 285 (Bankr.D.R.1.1986). On the facts before us, it is abundantly clear that if the stay is lifted there will be both practical and legal prejudice to the Debtor, to the estate, and the creditors. The Debtor represents that due to its weak financial condition, it would not be able to defend against the declaratory judgment action.1 Peerless would win the coverage issue by default and the personal injury claimants would be frustrated in their ability to realize a monetary recovery against a bankrupt defendant.2 The only fair and reasonable course is for Peerless to present its policy (and other) defenses in David Rivera’s personal injury action, where it will confront the true party in interest. The only disadvantage to Peerless is possibly some delay3 in resolving the coverage issue, and when balanced against the potential financial harm to the personal injury claimants, it is an easy call that the relief sought by Peerless must be denied, at this time.
Accordingly, Peerless’ Motion for Relief from Stay is DENIED, without prejudice. The automatic stay is modified, however, to allow David Rivera to proceed with dispatch in the Federal District Court with his personal injury claim, substituting Peerless as the defendant in that action, and only to the extent that said claim is covered by insurance. Peerless (or either party for that matter) may seek reconsideration of this order if, contrary to present expectations, the Rivera lawsuit does not proceed as expected.
. This allegation has not been challenged by Peerless.
. Peerless contends that the personal injury claimants sustained "serious personal injuries.” If the policy is found to apply to this accident, there could be coverage up to $ 1 Million dollars.
.We understand that the District Court is handling its caseload in a very timely fashion, and that Peerless will not be unreasonably delayed in ascertaining whether it must provide coverage for Rivera’s claim. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492413/ | ORDER SETTING COMPENSATION AND COMPELLING DISGORGEMENT
ARTHUR'N. VOTOLATO, Bankruptcy Judge.
Before the Court is the final fee application of the Chapter 11 Trustee, Joseph B. Garb, who requests total compensation of $555,175 and expenses of $7,934.57 in what has been previously described as “this liquidating and professionally beleaguered Chapter 11 case.” In re Narragansett Clothing Co., 160 B.R. 477, 478 (Bankr.D.R.1.1993). The Unsecured Creditors’ Committee and the United States Trustee object to the application.
The applicant has previously received compensation, on account, in the amount of $400,000, and reimbursement of $7,511 in expenses, and points out that his maximum statutory commission under 11 U.S.C. § 326 would be $557,062.1 The Trustee calculates his request by multiplying 2,220.7 hours at' the rate of $250 per hour, across the board, with no adjustments for the type of service being rendered.2 We have already written extensively on fee requests in this case, and in 1993, Mr. Garb’s maximum hourly rate was set at $160. See id. at 483; see also In re Narragansett Clothing Co., 175 B.R. 820 (Bankr.D.R.1.1995). He does not address this in the instant application. Suffice it to say that nothing has changed since our earlier fee decision(s), and that we agree with, *32adopt, and incorporate by reference herein the positions of the Objectors. (See Exhibits A and B.) Accordingly, Mr. Garb’s request for compensation in the amount of $555,175 is DENIED, and he is allowed final and full compensation in the amount $347,936.
To arrive at this precise number, since most of the services were rendered circa 1993, we multiplied 2,174.6 hours by $160 per hour. See Narragansett, 160 B.R. at 483. Giving Mr. Garb the benefit of many doubts and close calls, his time has been reduced by a mere 45.4 hours, simply because he has not provided any time entries for these hours. We make this modest (time only) adjustment to the request, notwithstanding the fact that the benefit to the estate of many of Mr. Garb’s services are subject to serious question. See Narragansett, 160 B.R. at 484. We have also taken into account the First Circuit guidance regarding application of the lodestar and the Johnson criteria. See King v. Greenblatt, 560 F.2d 1024 (1st Cir.1977), cert. denied, 438 U.S. 916, 98 S.Ct. 3146, 57 L.Ed.2d 1161 (1978) (adopting the factors set forth in Johnson v. Georgia Highway Express, 488 F.2d 714 (5th Cir.1974); Furtado v. Bishop, 635 F.2d 915 (1st Cir.1980); In re Swansea Consol Resources, Inc., 155 B.R. 28 (Bankr. D.R.I.1993); In re Almacs, Inc., 178 B.R. 598 (Bankr.D.R.1.1995). In additional deference to Mr. Garb, we make no order regarding interest on the amount being disgorged, even though he has had the use of that money since March 26, 1992. This translates approximately into an additional $11,600.
Because he has already received $400,000, Mr. Garb must disgorge the overpayment of $52,064, to himself as Trustee, for distribution to creditors, and it is so ORDERED.3 Any delay by Mr. Garb in accomplishing the final distribution will cause us to reconsider our Order regarding interest.
Enter Judgment consistent with this order.
EXHIBIT A
UNITED STATES BANKRUPTCY COURT
DISTRICT OF RHODE ISLAND
In re: NARRAGANSETT CLOTHING COMPANY, Debtor.
Chapter 11
Case No. 90-10149-ANV
UNITED STATES TRUSTEE’S OBJECTION TO APPLICATION FOR COMPENSATION OF JOSEPH B. GARB AS POST CONFIRMATION TRUSTEE AND REQUEST FOR ORDER COMPELLING TRUSTEE TO FILE AMENDED PROPOSED DISTRIBUTION AND TO DISTRIBUTE FUNDS
Pursuant to 28 U.S.C. § 586(a)(3)(A), 11 U.S.C. §§ 307, 330, 704, 1106 and 1129(a)(4) and Local Rule 25, the United States Trustee objects to the request for compensation (“Application”) dated June 20, 1996, of Joseph B. Garb the former Chapter 11 Trustee and current post confirmation trustee of the above captioned Debtor and requests this Court enter an order compelling the Trustee to file an amended proposed distribution and to distribute funds. In support, the United States Trustee says:
A. FEE OBJECTION
1. On November 8, 1993, this Court issued its decision and order relevant to Garb’s Second Interim Application for services rendered between January 1,1992 and February 26,1993.
2. The decision indicated that Garb’s blended rate for purposes of awarding his fees under a load star analysis should be $160.00 per hour. Based on interim awards totalling $407,511.00 the Court declined to award further fees at that time.
3. The Second Application sought compensation for 2,174.6 hours. Based on the Court’s load star rate for Garb he would have therefore been entitled to $347,936.00 in compensation if all of Garb’s time were allowed *33as reasonable. Therefore, under the Court’s decision, Garb as of that point had already been over compensated $59,575.00.
4. The instant Application requests compensation for 2,220.7 hours, that is 45.4 hours in addition to the fee requested in the Second Application. The instant application however fails to include contemporaneous time records. The United States Trustee objects to the Application as he is unable to determine whether the time spent was reasonable and necessary. See Local Rule 25(A)(3)(ii).
5. Absent further documentation by Garb, the instant fee request must be reduced consistent with this Court’s decision of November 8, 1993, and a final fee award entered.
B. OTHER RELIEF
6. The instant Application includes a proposed distribution. The Trustee is treating this confirmed Chapter 11 ease as a Chapter 7 case for purposes of distribution. The proposed distribution includes Garb’s fee request of $129,236.00.
7. Garb has certified that the ease has been fully administered. See Application at ¶ 9. Therefore, after final fee awards, there is no reason to delay distribution to creditors. Garb remains vested with the duties of a Trustee serving under sections 1106 or 704. See Disclosure Statement at p. 12, ¶ E. The United States Trustee, requests the Court order Garb to file an amended proposed distribution with the Court, the United States Trustee and the Official Committee of Unsecured Creditors within fourteen days of this Court’s decision regarding final fee allowances in this case.
8. Pursuant to Article 13, ¶ D of the confirmed plan this Court has retained jurisdiction of this confirmed case “[t]o enforce the payments of any amounts payable under the provisions of this Plan.” In order to insure prompt distribution in this case, the Court should require Garb to effectuate distribution within fourteen days following approval of the United States Trustee and Creditor’s Committee counsel of the proposed distribution. •
WHEREFORE, the United States Trustee respectfully requests that the Court enter an order: i) allowing the fee request of Joseph B. Garb consistent with its decision of November 8,1993; ii) compelling Garb to file an amended proposed distribution within fourteen days; iii) compelling Garb to effectuate distribution within fourteen days after approval of the United States Trustee and Creditor’s Committee counsel of his proposed distribution and iv) for such other relief as justice demands. Dated: 8/7/96
EXHIBIT B
UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF RHODE ISLAND
In Re: NARRAGANSETT CLOTHING COMPANY
Case No. 90-10149-ANV
Chapter 11
COMMITTEE’S OBJECTION TO CHAPTER 11 TRUSTEE’S/POST-CONFIRMATION TRUSTEE’S FINAL REPORT AND APPLICATION FOR COMPENSATION AND REIMBURSEMENT OF EXPENSES
Now comes the Official Committee of Unsecured Creditors (the “Committee”), by and through its attorneys, and hereby objects to the Chapter 11 Trustee’s/Post-Confirmation Trustee’s Final Report and Application for Compensation and Reimbursement of Expenses (“Final Application”), filed in this case. In support hereof, the Committee states as follows:
1. This ease commenced on February 5, 1990. Joseph B. Garb (the “Trustee”) was appointed Chapter 11 Trustee shortly thereafter on April 4, 1990. This Court confirmed the Trustee’s Third amended Plan of Reorganization on February 4, 1991, and pursuant thereto, authorized the Trustee to serve as post-confirmation trustee in this case.
2. The Trustee has advised the Committee that, for the period commencing on the date of his appointment and ending on February 26, 1993, he worked ap*34proximately 2,220 hours. In his application, the Trustee requests compensation at the rate of $250 per hour during this period in the aggregate amount of $555,175. He also seeks reimbursement for expenses in the amount of $7,934.57. The Trustee has advised the Committee that, subsequent to this period, he has expended approximately 100-150 hours for which he is not seeking compensation. To date, Mr. Garb has been paid the sum of $407,511.00 on account.
3. This Court has previously determined that Mr. Garb’s fees will be calculated based on a blended rate of $160 per hour. In re Narragansett Clothing Co. 160 BR. 477 (Bankr.D.R.I., 1993).
4. Based on this Court’s prior rulings in this case, and in light of Mr. Garb’s decision not to seek compensation for 100 to 150 hours of work subsequent to February 26,1996, the Committee submits that Mr. Garb has been sufficiently compensated for all of his work performed pre-confirmation and post-confirmation by his prior receipt of $407,511.00. No further compensation should be allowed.
5. The reduction of the amount of compensation paid to Mr. Garb will result in a greater final distribution to unsecured creditors. Also, counsel for the Committee will supplement their fee application to include work related to the Final Application in the immediate future. The Final Application should therefore be amended to reflect a greater distribution to unsecured creditors.
WHEREFORE, the Committee prays that Mr. Garb retain the sums previously paid to him on account as payment in full, that no further compensation be awarded to him, and that the distribution to unsecured creditors be modified accordingly.
Dated: July 23,1996
. That § 326 establishes only maximum compensation, and creates no entitlement to a commission in that amount, was settled ten years ago in In re Roco Corp., 64 B.R. 499 (D.R.I.1986) ("11 U.S.C. § 326(a) (1978) capped the fees which could be awarded to a trustee for his services in such capacity, but created no entitlement to a commission in that amount. There is nothing in the statute, in its legislative history, or in the relevant caselaw for that matter, which suggests an opposite conclusion.”)
. In earlier requests for compensation Mr. Garb has argued, in justifying large blocks of time to accomplish certain easy tasks, that "since he is a one-man office, he has to do everything himself." Mr. Garb's choice to cut office and personnel overhead by doing everything himself is hardly a reason to charge creditors for ministerial and clerical work at his regular hourly rates. The degree of difficulty of the work performed has a significant bearing on the applicable hourly rate, regardless of who does the work.
. On September 11, 1996, we granted the United States Trustee’s Motion to Compel the Trustee to file an amended order of distribution and final report. In light of our findings herein, these new numbers should be included in the Trustee’s distribution order and report. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492414/ | MEMORANDUM
MERHIGE, District Judge.
This matter is before the Court on a Motion by Daikon Shield Claimant Anna M. Galarneau (“Galarneau”) to Enforce the Plan and Set Aside her Alternative Dispute Resolution Decision.1 For the reasons which follow, the Court finds that Galarneau’s motion must be denied.
I. Background
Galarneau is a Daikon Shield claimant who alleges that the Daikon Shield caused her to suffer a miscarriage in September 1972.2 Galarneau rejected her Option 3 offer of approximately $9,000.00 and elected to proceed with binding Alternative Dispute Resolution (“ADR”). In electing ADR, Galarneau signed an “Alternative Dispute Resolution Election and Agreement” (“the ADR Agreement”) which provided:
*144By making this choice and signing this form, in consideration of the Trust’s agreement to proceed through the ADR process and to be bound by any award and to the terms of this Election and Agreement, I knowingly and voluntarily agree to the following:
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The decision of the referee in ADR is final and binding and the award the referee makes, if any, will be full and final payment of my claim.
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The ADR process on my claim shall be conduced as provided in the Second Amended Rules Governing Alternative Dispute Resolution, which are attached and incorporated into this Agreement, and which I have read and understand.
Exhibit A.
Although the ADR referee found this to be “an extremely close and difficult case,” he found that Galarneau had failed to sustain her burden that the Daikon Shield was the cause of her miscarriage. Exhibit J (Referee’s Decision) at 2.3 Accordingly, the referee awarded no compensation. Galarneau now asks the Court to set aside her ADR award and to reinstate the Trust’s Option 3 offer. The thrust of Galameau’s claim is that the Trust did not adequately inform her that she had the burden at the ADR hearing of proving that the Daikon Shield caused her injuries.4 Galarneau also claims that she was not aware that the referee’s decision could potentially be less than her Option 3 offer.5 In short, Galarneau feels that she was given misinformation and misdirection from the Trust regarding the ADR procedures.
II. The ADR Process
On April 1,1992, the Trust established the ADR process to resolve the claims of Daikon Shield claimants. ADR was designed to be a more efficient, more expedient, and less costly alternative to trial or arbitration. “The purpose of ADR is to allow claimants the opportunity to present their cases in person to a neutral party to resolve their claims as quickly as possible and with as few legal complications as possible.” Second Amended ADR Rule 2. Claimants who elect ADR bargain away certain procedural rights inherent in the litigation process in exchange for an opportunity to use an expeditious and inexpensive resolution process. Dalkon Shield Claimants Trust v. Honore, 197 B.R. 530, 532-33 (E.D.Va.1994). For example, unlike arbitration or trial, there is no discovery process in ADR. Second Amended ADR Rule 7. Moreover, the Trust, which bears the administrative costs of ADR, is represented by a non-lawyer advocate. Clearly, the Trustees structured ADR to further the CRF’s goal of “providing an efficient economical mechanism for liquidating claims which favors settlement over arbitration and litigation.” Claims Resolution Facility (“CRF”) § A.
ADR is not, however, without its risks. It is well-settled that, unlike the Trust’s threshold claims resolution' determination, there is no presumption of causation in ADR. Rather, all claimants have the burden in ADR of proving that the Daikon Shield caused the injuries they assert. In re A.H. Robins Co. (Reichel v. Dalkon Shield Claimants Trust), 197 B.R. 537 (E.D.Va.1994).
Most important to the ADR framework is the fact that ADR is intended to serve as a final resolution to a claim. Accordingly, when a claimant elects ADR, the claimant expressly agrees that the referee’s decision is *145final and binding. Second Amended ADR Rule 13.B.2 (“The referee’s decision is final and binding on all parties”); Bledsoe at 553; see also Gunnell v. Dalkon Shield Claimants Trust, 197 B.R. 533, 536 (E.D.Va.1994) (ADR Agreement is binding). The finality of the referee’s decision is also clearly indicated on the ADR agreement, as well as many of the materials and pamphlets that the Trust sends to a claimant who rejects an initial Trust offer.6 Moreover, a claimant choosing ADR agrees to waive her right to pursue litigation against the Trust as well as her right to elect in-depth review/settlement conference and arbitration. Second Amended ADR Rule 3.A1.; Bledsoe at 553.
The ADR framework clearly furthers the CRF’s stated goal of “providing an efficient economical mechanism for liquidating claims which favors settlement over arbitration and litigation.” CRF § A As this Court noted in Bledsoe, “ADR was designed to be every bit as final as an acceptance of an offer under Option 3 and thus an inexpensive and expedient alternative to trial or arbitration.” Bled-soe at 553.
III. Relief from ADR
Neither the plan nor the ADR rules expressly provide for any relief from the referee’s decision. Nevertheless, this Court has recognized that “fairness requires some form of relief from an ADR decision.” Bled-soe at 554.7 This Court also recognized, however, that fairness to the entire group of claimants requires that this avenue of relief be quite limited. Accordingly, this Court has held that it will only review an ADR decision under the most extreme circumstances where a claimant can demonstrate “flagrant referee misconduct by clear and convincing evidence.” Id.8 The limited circumstances in which a party can seek relief are consistent with the nature and purpose of ADR and the claimant’s contractual decision to accept certain risks, including an adverse decision, in exchange for the advantages of the ADR process. Id.9
IV. Galameau’s Claim
Applying the Bledsoe standard to the instant case, the Court finds that Galameau has failed to present clear and convincing evidence of extreme circumstances of flagrant referee misconduct that would compel the Court to upset the ADR decision.10 Rather than pointing to referee misconduct, Galameau claims that the Trust did not adequately inform her that it was her burden to prove causation at the ADR hearing. She alleges that she was “hoodwinked” by the Trust into believing that the ADR procedure was akin to Option 2, requiring her only to *146show Daikon Shield use and an injury listed on Exhibit A to the CRF. Movant’s Motion at 1. Apparently, Galameau mistakenly believed that ADR guaranteed her an award that was at least as large as the Trust’s Option 3 offer, and perhaps as large as $20,-000.
In response to GaJarneau’s motion, the Trust has produced a wealth of evidence which demonstrates that Galarneau knew, or should have known, that she would be required to prove that the Daikon Shield caused her injury as well as the fact that the referee could possibly award no damages. For example, both the First and Second Amended ADR Rules, which Galameau admits to have read, clearly list the items that Galarneau was required to prove at the hearing. The First Amended Rules explained the ADR proof of causation requirement:
It is the claimant’s burden to prove by a preponderance of the evidence that (1) she or he suffered an injury, (2) the injury was caused by the use of the Daikon Shield, and (3) she or he should receive compensatory damages.
First Amended ADR Rule XII.G. (emphasis added).11
Galarneau later received the Second Amended ADR Rules12 which again explained that a claimant in ADR was required to, prove that the Dalkon Shield caused her an injury:
A User claimant has the burden of proving each of the following: (a) that she used a Daikon Shield; (b) that she was injured; (c) that such injury was caused by the Daikon Shield; (d) that she should receive compensatory damages for such injury; and (e) the amount of those compensatory damages, if any.
Second Amended ADR Rule 12.H.1. (emphasis added).13
Galameau does not contend that she did not receive these materials. In fact, Galar-neau states that after rejecting her Option 3 offer, she and her husband specifically prepared for the ADR hearing by rereading the rules of ADR. Movant’s Motion at 1-2. Ga-lameau instead argues that the Trust materials were unreasonably confusing because the precise wording of the burden of proof requirements changed slightly from document to document. For instance, the First Amended ADR Rules differ from the Second Amended ADR Rules in that the First Rules only have three, rather than five, elements of proof and do not state that it is the claimant’s burden to prove “each” of the elements. Compare First Amended ADR Rule XII.G. with Second Amended ADR Rule 12.H.1.14 *147Galarneau argues that these variations are misleading, especially in light of the fact that the Trust repeatedly advised her that ADR was intended to offer a forum where claimant could argue their ease without the need for legal counsel. While Galarneau is correct in pointing out that the exact wording in the various documents differs somewhat, the fact remains that both the First arid Second Amended ADR Rules contain a specific Rule entitled “Burden of Proof’ which should have clearly put Galarneau on notice that she would be required to produce evidence at the hearing which would tend to show that her injury was caused by the Dalkon Shield.
V. Conclusion
The Court does not doubt that Galarneau was honestly confused, at least initially, about her burden of proof at the ADR hearing. However, under the standard articulated by this Court in Bledsoe, a claimant’s misreading of Trust material does not constitute the extreme circumstances which warrant vacating a referee’s determination. Furthermore, to the extent that Galarneau’s confusion could possibly serve as a ground to vacate the ADR award, the Court finds that any initial confusion Galarneau experienced simply did not exist at the time of the ADR hearing. That is to say, it appears that Galarneau was well aware of the adversarial nature of the hearing as well as the fact that the Trust contended that the Daikon Shield was not the cause of her miscarriage. In Galarneau’s pre-hearing Statement of Issues submitted to the Referee,15 Galarneau indicates that she realized that the Trust contended that there was no proof that the IUD caused the miscarriage. See Exhibit H at 4 (“The Trust claims that there is no documented proof stating that the IUD caused the miscarriage.”). Galarneau responded to this charge by noting that the fact that she experienced normal pregnancies both before and after her use of the Daikon Shield constituted sufficient evidence that the Daikon Shield was the cause of her miscarriage. In Galarneau’s words, “I place my medical record against the Daikon Shield’s history.”16 The Court is satisfied that even if a claimant’s misunderstanding of the ADR process was grounds to set aside referee’s decision, Galarneau understood her burden of proof at the time of her ADR hearing.
VL
Having failed to show by clear and convincing evidence blatant misconduct or disregard of the rules by any party to the ADR hearing, the Court must deny Galarneau’s request for relief.
An appropriate Order shall issue.
. Galameau wrote to the Court seeking "reinstatement” of her claim. Her letter was docketed as a Motion to Vacate her ADR award. As this Court has stated previously, when a claimant seeks relief from an ADR decision, the Court will treat the motion as a Motion to Enforce the Plan and Set Aside the ADR decision. See In re A.H. Robins Co. (Bledsoe v. Dalkon Shield Claimants Trust), 197 B.R. 550 (E.D.Va.1995) [hereinafter Bledsoe]. The Court also notes that Galameau appears pro se and is mindful that courts must liberally construe the pleadings of pro se parties. See Gordon v. Leeke, 574 F.2d 1147, 1151 — 52 (4th Cir.) cert. denied, 439 U.S. 970, 99 S.Ct. 464, 58 L.Ed.2d 431 (1978); Coleman v. Peyton, 340 F.2d 603, 604 (4th. Cir.1965).
. Galameau had a Daikon Shield inserted in February 1972 and later became pregnant with the Shield in place. Galameau’s medical records indicate that she experienced bleeding approximately two weeks prior to her miscarriage. At no time, however, was there any diagnosis or evidence of infection. It should also be noted that Galameau experienced normal pregnancies, without complication, for her other two children.
. At the hearing, the Trust contended that miscarriage is only associated with IUD use when an IUD-related infection has been established. Because medical records showed no such infection, the Trust argued her miscarriage could not have been caused by the Daikon Shield. See Exhibit G (Trust’s ADR Statement of Issues).
. Movant's Motion at 2 ("Nobody ever told me that if I couldn't prove the Daikon Shield caused the injury, that my proof of using the Shield would mean nothing. Had I known that, I would have made other decisions.”).
.Galarneau claims that she believed that the purpose of the ADR hearing was simply "to determine the fairness of the amount offered [by the Trust under Option 3].” Movant’s Motion at 1. Galarneau also indicates that a Trust representative assured her that "The referee rarely goes below the Trust's offer.” Id. at 2.
. See, e.g., ADR Agreement ("The decision of the referee in ADR is final and binding and the award the referee makes, if any, will be full and final payment of my claim.”); Q & A Common Questions About Alternative Dispute Resolution, (January 1994) at 5 (“Q: If I do not like the referee's award, can I still sue in court? A: No. ADR is binding. Even if you or the Trust do no agree with the referee's findings and decision, neither party has the right to ‘try again’ in a lawsuit or arbitration.”) (emphasis in original).
. The Court reasoned that some relief must be made available if the Trust is to satisfy its goal of “fairness in the resolution of each and every claim.” Bledsoe at 553 (citing Claimants Trust Agreement § 2.02).
. Examples of such misconduct include where a referee brazenly refuses to abide by the ADR rules or makes plainly egregious and patently unfair procedural errors. Bledsoe at 554. Additionally, relief would be available where an ADR referee affirmatively ascribes a meaning to the ADR rules that is not apparent on the face if those rules. Id.
. Such a motion for relief must be made exclusively in this Court within 60 days, absent good cause show, from the date that the Neutral Third Party sends the decision to the parties. See In re A.H. Robins Co. (Dalkon Shield Claimants Trust v. Reiser), 972 F.2d 77, 79 n. 1 (4th Cir.1992) (upholding the exclusive nature of this Court's retained jurisdiction); In re A.H. Robins (Dalkon Shield Claimants Trust v. Honore), 197 B.R. 530, 532 (E.D.Va.1994) (motion for relief must be received by this Court within 60 days).
. In fact, the only specific reference that Galar-neau makes to the conduct of her ADR hearing is a bare reference to an “appearance of impropriety” surrounding the fact that the non-lawyer Trust representative was present in the hearing room when Galameau arrived and remained in the room after the conclusion of the hearing. Movant's Motion at 2. While ex parte communication between the referee and either party is *146prohibited by Second Amended ADR Rule 12.A., the Court is not satisfied that this fact, without more, constitutes flagrant misconduct.
. With the First Amended ADR Rules, Galar-neau received a “Question and Answer” pamphlet from the Trust which should have alerted Galameau to her burden of proof at the ADR hearing:
Q. Do I have the burden of proving that I was injured by the Daikon Shield or is it the Trust's burden to prove I was not injured by the Daikon Shield?
A. You, the claimant, must prove that you (1) suffered an injury; (2) the injury was caused by the use of the Daikon Shield; and (3) should receive compensatory damages.
Q & A: Common Question about Alternative Dispute Resolution (Jan. 1993) at 3 (emphasis added).
. The Second Amended Rules Governing ADR, which took effect in January 1994, replaced the First Amended Rules. The Second Amended Rules raised the maximum amount recoverable in ADR from $10,000 to $20,000.
. With the Second Amended ADR Rules, Galar-neau also received an updated "Question and Answer” pamphlet which again described her burden of proof at ADR:
Q: Do I have the burden of proving that I was injured by the Daikon Shield or is it the Trust's burden to prove that I was not injured by the Daikon Shield?
A: A User claimant ... has the burden of proving each of the following: (1) that she used a Daikon Shield; (2) that she was injured; (3) that such injury was caused by the Daikon Shield; (4) that she should receive compensatory damages for such injury; (5) the amount of those compensatory damages, if any.
Q & A: Common Questions About Alternative Dispute Resolution (January 1994) at 3 (emphasis added).
. It also appears that Galameau was confused by language contained in the First Amended Rules Governing Arbitration which discuss the plaintiff's burden of proof using the legal terms "cause in fact" and "proximate cause.” See Movant’s Reply. As noted earlier, Galameau had elected to pursue ADR rather than arbitration.
. The Second Amended ADR Rules require that the parties exchange twenty days before the hearing any exhibits they intend to use at the hearing as well as a document summarizing the facts and issues. Second Amended ADR Rule 8.
. In that same pre-hearing statement, Galar-neau admitted that "[i]n a situation such as this, it is very hard for an individual to prove with certainty that a product caused an injury or an event.” Exhibit H at 4. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492415/ | MEMORANDUM OPINION AND ORDER RE MOTION TO COMPEL DEBTORS TO IMPLEMENT PLAN AND FOR SANCTIONS
G. HARVEY BOSWELL, Bankruptcy Judge.
This matter is before the Court on motion of Capital Leasing Underwriters, Inc. (“CLU”) to Compel Debtors to Implement Plan and for Sanctions, Debtors Objection to the Motion of CLU and Debtors Motion to Require CLU to Implement Plan and for Sanctions. The Court conducted hearings on the various motions and concluded same on the 2nd day of April, 1996. Counsel for either party was allowed additional time to supplement their briefs and to file any affidavits. Thé following will serve as the Court’s findings of fact and conclusions of law. Fed. R.Bankr.P. 7052.
After what was basically a totally contested Chapter 11, debtors and CLU reached agreement on the eve of confirmation. This allowed debtors to have their plan confirmed by the acceptance method pursuant to 11 U.S.C. § 1129(a). Confirmation of Debtors Third Amended Plan of Reorganization occurred on February 20, 1996. Debtors and CLU agreed to a closing date of March 20, 1996. This closing date was not imposed by the Court but was a date agreed to by the parties during negotiation of a settlement. It is undisputed that closing did not take place on this date. The dispute arises over whether or not CLU is entitled to fees and expenses incurred as a result of the transactions not being closed on the agreed date. Debtors argue that sufficient documents and all funds were delivered on the date of closing to allow this Court to deny CLU’s motion. Debtors further argue that because of requirements of CLU a standard closing was not possible but required additional time. All documents required for closing have been delivered and closing has occurred. Debtors argue that there is no contractual basis for payment of fees and expenses under the *203“American Rule.” See Shimman v. International Union of Engineers Local 18, 744 F.2d 1226,1229 (6th Cir.1984).
CLU has presented statements and affidavits as to the additional fees and expenses incurred as a result of the failure of the closing to take place as scheduled. The most troubling part of the evidence presented by CLU was the statement by Mr. Lobrano regarding his conversations or attempted conversations with Mr. Shelton prior to leaving Florida. Mr. Lobrano’s statements regarding the assurances given him by Mr. Shelton or Mr. Shelton’s failure to request a delay for closing are uncontradicted. This Court must, however, determine if sanctions are available under these circumstances.
After reviewing all the facts, memo-randa and statements of counsel, this Court has determined that the imposition of sanctions is appropriate. The Court must next determine against whom to impose the sanctions and the amount of said sanctions. CLU asserts that debtors’ failure to timely pay the premium due on a life insurance policy to be transferred to CLU at closing was one of the events which prohibited closing from taking place. The major reason, however, asserted by CLU is that Mr. Shelton failed to have his law firm timely prepare the documents required for closing. Perhaps the most troubling to this court is the fact that Mr. Shelton did not advise Mr. Lobrano that the agreement would not close at the time agreed upon, thus avoiding the time and expense associated with travel to Memphis for closing.
After much deliberation the Court has determined that the proper party to impose sanctions against is counsel for debtors, Mr. Henry Shelton. The Court finds that by being straightforward with Mr. Lobrano, Mr. Shelton could have avoided this situation. A simple truthful statement that the closing would not occur as promised would have been appropriate. Attorneys owe a duty to this Court and all other courts to not recklessly create needless costs during litigation. Congress has enacted a statute to allow courts to deal with situations where an attorney multiplies a proceeding in an unreasonable and vexatious manner. See 28 U.S.C. § 1927.1 This Court also has inherent power to award sanctions for such conduct. See 11 U.S.C. § 105. The Court specifically finds that Mr. Shelton has unreasonably and vexatiously multiplied these proceedings by failing to act responsibly in his dealings with Mr. Lobrano. See In re TCI Limited, 769 F.2d 441 (7th Cir.1985) (holding that when an attorney recklessly creates needless costs the other side is entitled to relief).
After having determined that sanctions are appropriate against Mr. Shelton, the Court must now determine the amount of such sanctions. After reviewing the record, the Court finds that sanctions in the amount of $7,581.55 will be imposed. The Court determines this amount by recognizing that had the closing taken place as agreed, Mr. Lobrano would have been travelling to Memphis on March 19, 1996 and would have closed the various transactions on March 20, 1996. The Court, therefore, will not award the fees requested by Mr. Lobrano and Mr. Hill for these dates. The Court does, however, award the 25.9 hours after March 20,1996 to Mr. Lobrano at the requested hourly rate of $175.00 per hour. In addition, the Court awards expenses to Mr. Lobrano for air travel on April 2, 1996 in the amount of $642.80. The Court further awards requested fees for Mr. Hill for 13.75 hours incurred after March 20, 1996. These hours are allowed at a rate of $175.00 per hour. The Court does not allow an award for all requested hours by Mr. Hill and his firm, finding some to be duplicative.
It is therefore ORDERED that CLU recover from counsel for debtor, Mr. Henry C. Shelton, sanctions in the amount of $7581.55.
IT IS SO ORDERED.
. The code section reads as follows:
Any attorney or other person admitted to conduct cases in any court of the United States or any Territory thereof who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys’ fees reasonably incurred because of such conduct.
28 U.S.C. § 1927. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492417/ | MEMORANDUM AND ORDER
VRATIL, District Judge.
Debtor Erwin Seymore Kahn, M.D., appeals the bankruptcy court’s ruling that the Mutual Release and Settlement Agreement dated January 19, 1993, does not bar James Sehigur’s Amended Proof of Claim filed January 7, 1993. For reasons stated below, we reverse the decision of the bankruptcy court.
A. FACTS
On October 9, 1991, Kahn filed a petition under Chapter 7 of the United States Bankruptcy Code, 11 U.S.C. § 101, et al, Case No. 91-22100-7. David C. Seitter was appointed Trustee of the bankruptcy estate.
Prior to the bankruptcy filing, Kahn and Schigur engaged in various business transactions. On February 13, 1992, Schigur filed a Proof of Claim against the bankruptcy estate. On January 7, 1993, Schigur filed an Amended Proof of Claim which increased the amount of the original claim.
On March 17,1992, Schigur and the Trustee, as joint plaintiffs, filed an adversary proceeding against Kahn challenging his right to receive a general discharge under 11 U.S.C. § 727(a)(2)(A). In January, 1993, the parties settled the adversary proceeding by executing a Mutual Release And Settlement Agreement.1 The agreement recited that the parties had agreed that it was in the best interest of the bankruptcy estate and its creditors to compromise and settle the obligations, liabilities, and debts of Kahn to Schigur and the Trustee and to provide mutual releases. Under the agreement, Kahn agreed, inter alia, to tender certain property and sums of money into the bankruptcy estate. In addition, the agreement contained the following release language:
Debtor [Kahn] and Plaintiffs [Schigur and the Trustee], for themselves, their heirs, successors, assigns, agents, attorneys, officers and employees, hereby waive, compromise, release, cancel, satisfy and discharge one against the other any and all debts, liabilities, claims, demands, actions and causes of actions whatsoever that they respectively have or may have or may claim one against the other from the beginning of time to the date of this Agreement, whether known or unknown at the time of the' execution of this Agreement, and whether arising under federal law or regulation, a state law or regulation, a county or city regulation ordinance [sic] or at law or equity, EXCEPTING any issues relating to the post-petition payments of malpractice premiums by Spring Anesthesia on Dr. Kahn’s behalf.
The bankruptcy court approved the Mutual Release And Settlement Agreement on February 18,1993.
B. PROCEDURAL BACKGROUND
On May 5, 1994, Kahn filed a motion to conduct examination under oath and request for documents by Schigur, pursuant to Bankruptcy Rule 2004. On May 10, 1994, Schigur filed an objection to the motion, arguing that the Mutual Release And Settlement Agreement estopped Kahn from asserting any claim against Schigur. On August 29, 1994, the bankruptcy court determined that before deciding the motion, it needed to decide whether Schigur’s claim against the bank*287ruptcy estate was barred by the Mutual Release And Settlement Agreement.
On November 16, 1994, after briefing and argument by the parties, the bankruptcy court found that the Mutual Release And Settlement Agreement does not bar Schi-gur’s proof of claim. Although the court noted that the broad, boiler-plate release language in the agreement would certainly have the effect of releasing all claims of Schigur against Kahn in a two-party adversary ease in state or federal court, it concluded that the parties did not intend to release Schigur’s proof of claim against the bankruptcy estate. The court interpreted the agreement with its primary focus on administration of the bankruptcy estate and purposes of the Bankruptcy Code, because the agreement arose post-petition in the context of a bankruptcy adversary proceeding. In reaching its conclusion, the Court cited § 105 of the Bankruptcy Code, the comment to § 541 of the Bankruptcy Code, and the Trustee’s affidavit that he did not agree to release Schigur’s claim against the estate. The court reasoned that although the agreement had the effect of releasing all other liability of Kahn to Schi-gur, Kahn lacked power to release a claim against the estate, and the Trustee did not intend to release Schigur’s claim against the estate.
C. DISCUSSION
We review de novo the bankruptcy court’s legal conclusions; however, we are bound by the bankruptcy court’s factual findings unless they are clearly erroneous. In re Themy, 6 F.3d 688, 689 (10th Cir.1993).
Kahn contends that the settlement agreement is unambiguous and, thus, the bankruptcy court should have determined the parties’ intent based on the language of the agreement alone. Because the agreement prevents Schigur from asserting a claim against Kahn outside of bankruptcy,, Kahn asserts that Sehigur’s claim against the estate is not allowable under § 502(b)(1). As set forth below, Kahn’s assertions are well supported in law.
Under Kansas law, a clear and unambiguous contract requires no construction by the court. Thomas v. Thomas, 250 Kan. 235, 244, 824 P.2d 971 (1992). Thus, a court must enforce an unambiguous contract according to its terms. Torre v. Federated Mutual Ins. Co., 854 F.Supp. 790 (D.Kan.1994). As long as its terms are plain and unambiguous, the court determines the meaning of the contract and the parties’ intent from the written agreement itself. First Nat’l Bancshares of Beloit, Inc. v. Geisel, 853 F.Supp. 1337, 1341 (D.Kan.1994). See also Harvest Queen Mill & Elevator Co. v. Newman, 387 F.2d 1, 3 (10th Cir.1967) (under Kansas law effect of release is determined by intention of parties as manifested by the instrument).
Whether a contract is ambiguous is a question of law for the court. Christie v. K-Mart Corp. Employees Retirement Pension Plan, 784 F.Supp. 796, 803 (D.Kan.1992). An ambiguity exists if a term can be interpreted reasonably in more than one way. Christie, 784 F.Supp. at 803.
Schigur contends that under the release agreement, he and the Trustee agreed only that they would not pursue Kahn on issues relating to denial of his discharge, and that the Trustee did not intend to release Schigur’s claim against the estate.2 While Schigur is correct in his assertion that the agreement does not specifically release any claims between him and the Trustee, the agreement clearly and unambiguously provides that Schigur waives all claims against Kahn (except those relating to post-petition malpractice premiums paid on Kahn’s behalf). Specifically, the Mutual Release And Settlement Agreement provides that Schigur and Kahn “waive, compromise, release, cancel, satisfy and discharge one against the other any and all debts, liabilities, [and] claims.... ” Because the language of the agreement is unambiguous, the Court is bound to determine the meaning of the contract and the parties’ intent from the terms of the written agreement.
Because Schigur’s claim is unenforceable against Kahn under the Mutual Release And *288Settlement Agreement, his claim is not allowed against the estate under § 502(b)(1). Section 502(b)(1) provides that a claim against the estate is disallowed to the extent such claim is “unenforceable against the debtor and property of the debtor under any agreement or applicable law for a reason other than because such claim is contingent or unmatured.” Schigur argues that § 502(b)(1) requires the Court to determine whether a claim is unenforceable against the debtor only at the time the bankruptcy petition is filed. Section 502(b) directs the Court to determine the amount of claim as of the date the petition is filed; however, the statute does not specify a point in time that the claim must be unenforceable against the debtor to be disallowed under subsection (1). A plain reading of the statute indicates that the Court should determine whether the claim is enforceable at the time it is deciding whether the claim is disallowed. Since many circumstances exist, in which a claim may become unenforceable after the petition is filed, ie., a third-party guarantor may satisfy the claim, this is also the most practical reading of the statute.
The Court sympathizes with the bankruptcy court’s attempt to reach the most equitable result under § 105 of the Bankruptcy Code. The equitable powers provided by § 105(a) are broad; however, they may not be exercised in a manner which is inconsistent with specific provisions of the Bankruptcy Code. See In re Frieouf, 938 F.2d 1099, 1103 n. 4 (10th Cir.1991), cert. denied, 502 U.S. 1091, 112 S.Ct. 1161, 117 L.Ed.2d 408 (1992); Matter of Smith, 21 F.3d 660, 666 (5th Cir.1994). Schigur’s claim is clearly unenforceable against Kahn under the Mutual Release And Settlement Agreement and, as a result, § 502(b)(1) disallows the claim against the estate.
The bankruptcy court’s order that the Mutual Release and Settlement Agreement dated January 19, 1993, does not bar James Schigur’s Amended Proof of Claim filed January 7,1993, is therefore REVERSED.
. The Trustee signed the agreement on January 13, 1993, and Schigur and Kahn signed the agreement on January 19, 1993.
. Schigur does not assert that he erred in executing the settlement agreement. Instead, he contends that the parties did not intend the settlement agreement to release claims between him and the bankruptcy estate. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492418/ | MEMORANDUM AND ORDER
YRATIL, District Judge.
The Shawnee State Bank (“Shawnee State”) appeals the bankruptcy court’s order granting First National Bank of Olathe (“First National”) leave to file its proof of claim out of time and share in distribution to general unsecured creditors of the bankruptcy estate. For reasons stated below, we affirm in part and reverse in part the decision of the bankruptcy court.
A. FACTS
On April 23, 1992, debtor Priscilla Lynn Winders filed a no asset bankruptcy petition under Chapter 7 of the United States Bankruptcy Code, 11 U.S.C. § 101, et al, Case No. 91-22100-7. On that same date, an original notice was sent to creditors informing them that no assets of the estate were known. The notice directed that creditors should not file a proof of claim until notified otherwise. First National and its attorney, Christopher B. Bacon, received a copy of the original notice.
After the original notice was sent, the Trustee discovered that the debtor and her husband, who had filed a separate Chapter 7 bankruptcy petition, owned certain real estate which was generating rental income. The Trustee agreed to divide the rental income equally between the bankruptcy estates. On May 19, 1993, the Bankruptcy Clerk mailed a notice of the Trustee’s motion for approval of the rental income agreement. Attached to the notice was a copy of the Trustee’s motion for approval of the compromise dividing real estate proceeds owned jointly by the debtor. Mr. Bacon received a copy of the notice on behalf of First National.
The Trustee recovered assets under the rental income agreement. On July 29, 1993, the Trustee filed a notice of need to file proof of claim, setting October 27, 1993, as the deadline for such filings. The Bankruptcy Clerk certificate indicates that a copy of the notice was mailed to the correct addresses of Mr. Bacon and First National. Neither notice was returned to the Clerk; however, First National contends neither it nor Mr. Bacon received a copy of the July 29, 1993, notice. Frederick Farmer, attorney for an*290other creditor in the case, received the July 29, 1993 notice. Mr. Farmer works in the same office as Mr. Bacon, but he did not show or discuss the notice with Mr. Bacon or First National.
On October 1, 1993, the Trustee filed a motion to appoint a manager for property belonging to the estate. On October 6,1993, some 21 days before the claims deadline, notice of the Trustee’s motion was sent to Mr. Bacon and First National. Mr. Bacon received the October 6,1993, notice.
On March 21, 1994, notice of the Trustee’s petition for compensation was mailed to Mr. Bacon and First National. Mr. Bacon received the March 21,1994, notice.
On April 14, 1994, notice of a creditor’s request for payment of administrative claim was sent to Mr. Bacon and First National. Mr. Bacon received the April 14,1994, notice.
In May, 1995, First National received notice of the Trustee’s filing of final account and intended distribution of estate funds of $21,216.97.
B. PROCEDURAL BACKGROUND '
On May 10, 1995, First National filed a motion for leave to file proof of claim out of time and to share pro rata in the distribution of general unsecured creditors under § 726(a)(2)(C). On August 10, 1995, Shawnee State filed an objection to the motion, arguing that the bankruptcy court did not have authority to extend the time for First National to file a proof of claim.
On September 20, 1994, after briefing and argument by the parties, the bankruptcy court sustained First National’s motion. The Court found that despite a presumption that First National received notice of the claims deadline, the fact that Mr. Farmer received notice combined with the affidavits of First National and Mr. Bacon stating that they did not receive notice were sufficient to rebut the presumption.
C. DISCUSSION
We review de novo the bankruptcy court’s legal conclusions; however, we are bound by the bankruptcy court’s factual findings unless they are clearly erroneous. In re Themy, 6 F.3d 688, 689 (10th Cir.1993).
Shawnee State argues that the bankruptcy court lacks power to allow First National to share in distribution to unsecured creditors unless it demonstrates deprivation of due process. The due process clause and general principles of equity insure that a claim will not be disallowed for tardiness if the creditor did not receive adequate notice. See In re Gullatt, 169 B.R. 385, 389 (M.D.Tenn.1994) (citing United States v. Cardinal Mine Supply, Inc., 916 F.2d 1087, 1089, 1090-92 (6th Cir.1990)). Normally, the due process requirement is satisfied when a creditor has notice or actual knowledge of a Chapter 7 case in time to file a timely claim. See In re Green, 876 F.2d 854, 857 (10th Cir.1989). Under Bankruptcy Rule 3002(c), proofs of claim must be filed within 90 days after the first date set for the meeting of creditors, unless one of six exceptions are met. One such exception is Rule 3002(c)(5), which provides that if creditors are provided notice that no assets are available for distribution under Rule 2002, and subsequently, the trustee notifies the court that assets are available for distribution, the clerk shall notify creditors that they may file proofs of claim within 90 days after mailing of the notice.
In the case at hand, First National received notice under Rule 2002 that no assets were available for distribution and that it should not file a proof of claim unless notified otherwise. Under these circumstances, First National had a right to assume that it would receive notice before its claim would be forever barred. See, e.g., City of New York v. New York, N.H. & H.R. Co., 344 U.S. 293, 297, 73 S.Ct. 299, 301, 97 L.Ed. 333 (1953); Reliable Elec. Co. v. Olson Construction Co., 726 F.2d 620, 622 (10th Cir.1984); Matter of Robintech, Inc., 863 F.2d 393, 396 (5th Cir.) (“A creditor’s claim can be barred for untimeliness only upon a showing that it received reasonable notice.”), cert. denied, 493 U.S. 811, 110 S.Ct. 55, 107 L.Ed.2d 24 (1989)); In re Hobdy, 130 B.R. 318, 320 (9th Cir. BAP 1991) (creditor who is aware bankruptcy has been filed is not necessarily put *291on inquiry notice about every matter brought before court).1
Shawnee State contends that First National has not produced evidence sufficient to overcome the presumption that it received notice of the claims deadline. First National presented evidence of its practice and procedure, and those of its attorney, concerning receipt of bankruptcy notices and affidavits stating that neither office received notice of the claims bar date. The bankruptcy court’s conclusion that First National sufficiently overcame the presumption that it received notice is not clearly erroneous. See In re Dodd, 82 B.R. 924, 929 (N.D.Ill.1987) (direct testimony of nonreeeipt in combination with standardized procedures used in processing claims sufficient to support finding that mailing was not received).
Finally, Shawnee State contends that even if the Court allows First National to file its claim out of time, it should subordinate the claim to third tier distribution under 11 U.S.C. § 726(a)(3). First National does not respond to this argument on appeal; however, in its motion before the bankruptcy court, it moved to participate pro rata in distribution to unsecured creditors under § 726(a)(2)(C).2 Section 726(a)(2)(C) provides for distribution of tardily filed claims if “the creditor that holds such claim did not have notice or actual knowledge of the case in time for timely filing of a proof of such claim....” 11 U.S.C. § 726(a)(2)(C) (emphasis added). First National does not satisfy this section because it clearly had notice of the bankruptcy case. Instead, First National’s claim falls under § 726(a)(3), which provides for payment of any allowed unsecured claim which is tardily filed other than a claim which falls under § 726(a)(2)(C). Because First National’s claim does not fall under § 726(a)(2)(C), it qualifies for third tier distribution under § 726(a)(3).
Based on the foregoing analysis, the Court AFFIRMS the bankruptcy court’s decision to allow First National to file its claim out of time and REVERSES its order allowing First National to participate pro rata in second tier distribution under § 726(a)(2)(C).
. Although these cases involve Chapter 11 proceedings, the Court believes their analyses applies to the case at hand. Since First National was directed not to file a proof of claim until notified otherwise, it was reasonable for First National to assume it would receive notice of the need to file a proof claim before its claim would be forever barred.
. Although the bankruptcy court did not address the priority of First National's claim, it sustained First National’s motion in its entirety. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492419/ | CARL L. BUCKI, Bankruptcy Judge.
The Chapter 7 trustee of Bentley-Russell, Inc., has objected to the allowance of four proofs of claim filed on behalf of the stockholders of the debtor corporation. With support from one of the unsecured creditors, the trustee proposes to reclassify the claims as equity. Specifically, the trustee and creditor contend that due to the undercapitalization of the business, the claims of stockholders must be equitably subordinated to those of all other creditors.
Jerome, Frances and Devereaux Bielecki purchased the stock of Bentley-Russell, Inc., from Paul and Wanda Russell in May of 1988. At the time of this acquisition, the Bielecki family made an initial investment totaling $50,000. It included four components: three loans to the corporation and a direct payment to the former owners of the debtor. The corporation used the first and second loans, respectively in the amounts of $10,000 and $8,486.75, to redeem all but three shares of the outstanding stock from Paul and Wanda Russell. As sole owners of the remaining stock, the Russells then conveyed one share to each of Jerome, Frances and Devereaux, in consideration of their payment of $6,513.25. Thus, by reason either of the stock redemption or the sale of the remaining shares, the Russells received cash payments totaling $25,000. The proceeds of the third loan, in the amount of an additional $25,000, were deposited into the debtor’s operating account.
Subsequent to their acquisition of Bentley-Russell, Inc., the Bieleckis advanced additional moneys to or for the benefit of the corporation. Altogether, they now assert four claims against the debtor’s estate. In claim 5, Jerome Bielecki seeks to recover $19,841.12, as the balance due on various loans and advances made after the stock purchase. Jerome then joins with his wife Frances to assert in claim 6 an entitlement of $34,930.56, as the balance due under the loans given to the corporation at the time of the stock acquisition. Filed respectively by Frances and Devereaux, claims 7 and 8 seek to recover $6,651,56 and $918.62 as the balances due for advances made subsequent to their respective purchases of single shares of corporate stock.
Boehmer Transportation Company, one of the creditors herein, has joined with the trustee to object to the allowance of the Bielecki claims. It contends that the Bie-leekis had caused the debtor to be undercapi-talized, and that that undercapitalization was responsible for the debtor’s insolvency. The creditor alleges further that repayment of the Bielecki loans may have “shortchanged the corporation and brought about its demise.” Under the present circumstances, it would disregard the corporate distinction as between the debtor and its principals. Citing Pepper v. Litton, 308 U.S. 295, 60 S.Ct. 238, 84 L.Ed. 281 (1939), Boehmer’s counsel urges that equitable considerations should compel this court to subordinate the Bielecki claims to those of all other unsecured creditors.
The subordination of claims has long been recognized as an appropriate exercise of the equitable powers of bankruptcy. Id. at 305, 60 S.Ct. at 24445. Congress codified this principle in section 510(c) of the Bankruptcy Code. It provides that the Bankruptcy Court may “under principles of equitable subordination, subordinate for purposes’ of distribution all or part of an allowed claim to all or part of another allowed claim....”
A primary advantage of incorporation is the flexibility that it provides for the raising of capital. In his classic treatise on the Law of Corporations, Professor Harry G. Henn has aptly observed that “[f]or no other form of business enterprise is there such a wide variety of types of securities — in almost limitless permutations and combinations — to fit almost every conceivable need.” Harry G. Henn, Law of Corporations, § 70 (2nd ed. 1970). When provided by shareholders, “such financing may be by shares alone or by a combination of debt and shares.” Id. at § 261, p. 518. Generally, shareholder loans are a fully legitimate method for financing corporate activity. A shareholder relation*356ship will not, therefore, by itself compel the subordination of debts bwed to shareholders. Rather, subordination requires some “additional contributing factor.” Collier on Bankruptcy, 15th edition, p. 510-12.
Equitable subordination appropriately applies to that claim which includes the two loans given to finance the redemption of stock from the former owners. Although the corporation’s temporary receipt of funds might constitute a technical consideration, the essence of this transaction was of no benefit to the debtor. Prior to the loan and redemption, Mr. and Mrs. Russell owned 100 percent of the corporate stock. After the redemption, the Russells still owned 100 percent of the stock, although in the form of 72 fewer shares. To finance the redemption, however, the corporation had incurred new liabilities of $18,486.75. In exchange for assumption of this liability, therefore, the corporation retained nothing of benefit to the corporation as distinct from the benefit to its departing or prospective shareholders. For the Bieleekis, these transactions required no greater outlay than if they had directly purchased all of the pre-redemption shares for $25,000. Had it been financed from a cash surplus that exceeded the corporation’s reasonable capitalization needs, the stock redemption would have entailed no consequences adverse to the claims of creditors. In this instance, however, the debtor funded the redemption exclusively from new indebtedness. This fact alone will support an inference that the debtor lacked sufficient surplus to finance the stock redemption. Nor have the Bieleekis rebutted this inference with evidence that the corporation was otherwise adequately capitalized.
When a corporation redeems stock from other than surplus funds, that redemption will diminish the working capital that the corporation may require to fulfill its ongoing obligations.1 The effect of the present redemption was to give to the Bieleekis a claim for recovery of their capital investment and by so doing, to dilute the potential for recovery of unsecured claims. In essence, the Bieleekis caused the corporation to transform a capital investment into a debt obligation. The Bankruptcy Code recognizes the primacy of creditor claims over shareholder interests. See 11 U.S.C. § 726. Equity should not allow the Bieleekis to reap the benefit of measures designed to so countermand the normal distribution in bankruptcy. Rather, the claim of the Bieleekis shall be equitably subordinated to the extent needed to restore unsecured creditors to the same comparative position as if unsecured claims were not diluted by what in essence were moneys advanced as consideration for a stock purchase.
Jerome and Frances Bielecki received two notes for the loans used to finance the stock redemption. The first was for an original amount of $10,000 and has a current principal balance of $8,370.12. The second note was originally for $8,486.75., and presently has a principal balance of $5,635.32. Prior to its bankruptcy filing, the debtor had made payments of principal and interest totaling $4,591.04 on the first note, and $5,440 on the second note. Because the debtor would not have made these payments if the Bieleekis had structured their investment as a simple stock purchase, these payments also served to diminish the operating funds that would have been available for other unsecured creditors. Thus, unsecured claims were essentially diluted in the total amount of $24,-036.48, this being the sum of the remaining principal balances on the two notes and all payments made on their account. Because claim 6 includes the claim for recovery of moneys due on these notes, that claim will be equitably subordinated for the amount of that dilution.
The balance of the Bielecki claims are either for moneys loaned to the corporation as working capital or for moneys actually expended for the debtor’s benefit. The trustee and Boehmer Transportation Compa*357ny argue that because the corporation was undercapitalized, all claims of its principals should also be subordinated. Inadequacies of capitalization may justify subordination of any claims that account for that state of undercapitalization. For example, incorporating shareholders will suffer consequences for their use of debt obligations as a substitute for the investment of sufficient working capital to meet the reasonable financial requirements for the type of business which this corporation proposes to undertake. In the present instance, the Bieleekis did not form the debtor corporation, but acquired its stock from a prior owner. Except as already discussed in the context of the stock redemption, they did not cause the corporation’s undercapitalization. Unless provided otherwise in the stock certificates or by agreement, a corporation cannot compel its shareholders to contribute additional equity. At the stage in which they acquired ownership of the debtor, the Bieleekis were under no obligation to make any further investment. If they chose to invest additional money, the Bieleekis were free to structure that investment in the form of either debt or equity. Having selected a fully legitimate option of investment, the Bieleekis may now share with other unsecured creditors a distribution on account of the balance of their claim. Under the present facts, the objectors have demonstrated no further basis for equitable subordination.
For the reasons set forth above, claims 5, 7, and 8 shall be allowed as filed. Claim 6 will be allowed as a general unsecured claim in the amount of $10,894.08, and as a subordinated claim in the amount of $24,036.48.
So ordered.
. For this reason, the New York Business Corporation Law authorizes a corporation to purchase its own shares only from surplus. N.Y.Bus.Corp. § 513 (McKinney 1986). Although the parties offered no proof regarding the impact that the present redemption had on surplus as defined in section 102 of the Business Corporation Law, the concern of the statute is nonetheless implicated: that a stock redemption not be effected through means detrimental to the interests of unsecured creditors. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492420/ | MEMORANDUM OF OPINION ON MORTGAGE PAYMENTS
JOHN C. AKARD, Bankruptcy Judge.
John Wesley Ronemus and Pamela Jean Ronemus (Debtors) who were the Debtors in a Chapter 13 ease, No. 190-10365, filed this adversary proceeding. The confirmed Chapter 13 plan called for two delinquent home mortgage payments owing to FTB Mortgage Services (FTB)1 to be paid through the plan with distributions by the Chapter 13 Trustee. Later it was discovered that one postpetition mortgage payment had been overloaded and the parties agreed to an order allowing that payment, together with associated late charges, FTB’s attorney’s fees and costs to be paid through the plan with distributions by the Trustee over the remaining life of the plan. The Debtors increased their monthly payments to the Trustee to accommodate this additional debt. The Chapter 13 case was very successful, the Debtors made their Chapter 13 payments regularly, and they received a discharge on November 20, 1995.2 *459The Chapter 13 case was reopened to permit them to file this adversary proceeding.
During the Chapter 13 case the Debtors timely made their mortgage payments to FTB, except for two occasions. On those occasions, the Debtors contacted FTB in advance and secured permission to delay one mortgage payment on the condition that the following month they pay two mortgage payments and one late charge of approximately $25.00. They did so.
The complaint in this adversary proceeding seeks injunctive relief, a declaratory judgment, and damages against FTB.3 After hearing the testimony and reviewing the evidence presented at trial, the court finds this to be the most egregious ease of creditor overbearing and creditor harassment that this court has seen in ten years as a bankruptcy judge. Not only did FTB fail to maintain adequate records, it failed to obey orders of this court, and violated the discharge injunction as well.
The only conclusion the court can draw from the testimony and evidence presented is that FTB’s records were in disarray. The schedule which FTB introduced at trial was an extract made from FTB’s records by an employee of FTB. It is not an original record so the court cannot rely upon it as reflecting FTB’s records. Additionally, the extract contained errors which bring its accuracy into question. FTB’s witness stated that the items about which the Debtors complained had been credited to the Debtors’ account. She offered no records to support that statement. Such an unsubstantiated statement carries less weight than the August 28, 1995 letter from an attorney for FTB to the Debtors’ attorney, admitted into evidence, which stated “I have checked with FTB Mortgage Services & was advised that the above-referenced loan is current postpe-tition.” Yet a few months after that letter,4 FTB initiated a course of harassment against these Debtors during which it insisted that the loan was not current, leaving the Debtors in constant fear of losing their home. For these reasons, the court cannot place any credibility in FTB’s records or in its testimony.
The evidence in this case shows the following:
1. The payments FTB received from the Debtors and from the Chapter 13 Trustee were not promptly applied to the Debtors’ note. That failure resulted in unnecessary and improper accrual of interest on the note. As a result of the improper accrual of interest, the principal of the note was not reduced as it should have been.
FTB’s witness stated that it placed payments received from the Chapter 13 Trustee in a “suspense” account until they equaled a regular Note payment, at which time it applied them on the loan. She stated that their computer program required this procedure. FTB’s attempt to evade its obligation to promptly apply those payments by blaming its actions on a computer cannot be tolerated. The computer program could and should have been adjusted. Further, FTB offered no reconciliation of the monies placed in suspense. From the evidence presented, the court cannot determine if all payments made by the Debtors and by the Chapter 13 Trustee were properly accounted for and properly applied to the Debtors’ note.
2. FTB charged a $60.00 filing fee to the Debtors’ escrow account without permission of the court.
3. When the court authorized reimbursement to FTB of attorneys fees and expenses, they were to be paid by the Trustee over the remaining life of the plan.5 Instead, FTB immediately paid *460itself out of the Debtors’ escrow account. That was a direct violation of this court’s order. Further, its actions threw the escrow account into a negative position, which resulted in a demand from FTB that the Debtors increase their monthly-payments by $55.00 per month. The Debtors paid this additional $55.00 per month for at least a year. Thus the Debtors were severely damaged by FTB’s violation of this court’s order.
4. Because FTB continued .to assess unauthorized late charges, many of the Debtors’ payments were placed in sus- . pense. Thus the Debtors were injured by increased interest charges as a result of FTB’s collection of unauthorized late charges and FTB’s failure to properly apply the Debtors’ timely payments to the reduction of principal.
5. The court signed the Debtors’ discharge on November 20, 1995. On December 8, 1995 (less than 20 days after the discharge) FTB wrote the Debtors demanding $298.47 in late fees incurred “during the course of your bankruptcy.” That action constitutes a clear violation of the discharge injunction.
6. On December 20, 1996 the Debtors’ attorney wrote to FTB about its claim for late charges. Instead of responding to him, FTB sent the Debtors a late notice which they received on December 29, 1995. This note demanded $156.68 in late charges and stated that the December 1, 1995 payment had not been made. The check for the Debtors’ December payment was timely and had cleared FTB’s bank before this notice was sent.
7. The Debtors’ attorney wrote to FTB on January 2,1996 and again on January 23, 1996. FTB responded to neither letter.
8. On January 22, 1996 the Debtors received a late notice with respect to their January 1, 1996 payment and a demand for $185.11 in late charges. The Debtors’ January payment cleared the Debtors’ bank account before the date of this notice.
9. Delinquent payment notices and demands for late payment fees in various amounts continued with regularity through July 2, 1996, even though this adversary proceeding was filed May 13, 1996.
10. In January or February 1996 the Debtors began receiving telephone calls from FTB’s collectors. Each time, the Debtors referred the caller to the Debtors’ attorney but none of the collectors contacted the attorney. In March 1996 Mr. Ronemus, one of the Debtors, received a very insulting call from one of FTB’s collectors. In that call the Debt- or was called names and cussed out. FTB’s witness stated that it is company policy not to use such language. No doubt the company has such a policy, but whether it is followed is another matter. The court finds the Debtor’s testimony about this matter to be credible.
There is no doubt that these Debtors were substantially damaged by FTB’s actions. The question now is how to remedy the situation. There is no evidence before the court of an opportunity to refinance this note with another company. Therefore, the court concludes that the next best thing is to draw a line and start over. The only evidence as to the principal balance of the note is a statement in FTB’s letter of June 11, 1996 which stated that after the August 1, 1996 payment, the principal balance would be $53,-822.25. For the reasons outlined above, the court finds that figure to be artificially inflated. Presumably the Debtors paid their September 1,1996 payment.
Therefore, with respect to drawing the line, the court orders as follows:
1. The Debtors shall timely make their October 1 and November 1, 1996 payments. The September, October, and November payments shall be applied first to the current escrow deposit, second to accrued interest on the note at the unaccelerated note rate, and third to principal, using $53,822.25 as the August 1, 1996 principal balance. No portion of those payments shall be applied to late charges or other charges.
*4612. On November 5, 1996, this note shall be set up on a new ledger and given an entirely new account number. The principal balance shall be the amount calculated as described above, less the sum of $10,000 which the court finds is reasonable and necessary to compensate the Debtors for unnecessary interest, unauthorized charges, and harassment of the Debtors by FTB. Interest on this new balance shall accrue at the unaccelerated note rate beginning November 1, 1996. The monthly payments of principal and interest shall remain as provided by the original note. All payments shall be applied first to accrued interest and then to the principal. The Debtors shall have ' the right to make additional payments or to pay off the note at any time, both without any premium or penalty. When the new balance, together with accrued interest thereon, has been fully paid, FTB shall promptly issue the Debtors a full release of the original note and all liens securing it, without charge to the Debtors.
3. Prior to November 6, 1996, FTB shall furnish to the Debtors’ attorney a receipt showing full payment of the 1996 ad valorem taxes on the property involved. That payment may be made from the existing escrow account to the extent that there are funds in that account. If the funds in the escrow account are insufficient to pay the taxes in full, FTB shall pay the balance from its own funds.
4. On November 5, 1996, the old escrow account shall be canceled and any funds in that account shall become the property of FTB. If there is a negative balance in the escrow account on that date, FTB shall cancel the balance. On that same date, FTB shall set up a new escrow account from its own funds for the benefit of the Debtors. FTB shall immediately fund that account in an amount equal to the 1996 ad valorem taxes on the property involved and the 1996 ■ insurance paid on the property, plus Jéth of the total amount. Thus, the escrow account will be funded to the industry standard of one year’s taxes and insurance plus two month’s deposit. The funds in that escrow account shall immediately become the property of the Debtors. Beginning with the payment due December 1,1996, the Debtors shall deposit each month to the escrow account ’Mh of the 1996 taxes and insurance. Beginning with the year 1998, the escrow account may be adjusted, not more than annually, in accordance with the Deed of Trust securing the note.
5. No later than November 6, 1996 FTB shall furnish to the Debtors’ attorney the following:
a. Proof of full compliance with this court’s order, including copies of new ledger pages for the note in question and the escrow account.
b. A new payment book for the Debtors showing the new account number and the new balance on the note.
6. FTB, its successors and assigns, are enjoined from taking any action whatsoever to attempt to collect from the Debtors, their heirs or assigns, any sums due prior to November 5, 1996 with respect to the note in question and/or with respect to any document securing said note. The only exceptions are the October 1 and November 1, 1996 payments described above, and the new principal balance with interest thereon from November 1,1996.
The Debtors have suffered substantial expenses for attorney’s and accountant’s fees in this matter. They will incur additional attorney’s fees in winding up this matter. Therefore, the court awards the Debtors a judgment against FTB for $8,000.00 toward their attorney’s and accountant’s fees. Such sum shall be paid to the Debtors’ attorney by November 5, 1996. Should FTB appeal this matter, the court reserves the right to award additional attorney’s fees and expenses to the Debtors.
All costs of court in this proceeding are taxed against FTB. All other relief requested by either party is denied.
*462JUDGMENT ACCORDINGLY.6
. During a portion of the Chapter 13 case, the mortgage was serviced by Sunbelt National Mortgage Corp. FTB is the successor, by merger, to Sunbelt. For convenience, the court will refer to both entities as FTB.
. The Trustee's Final Report shows that this was a five year plan under which the Debtors paid *459$28,868.80 to their creditors. Unsecured creditors received 45.97% of their claims. ceeding pursuant to 28 U.S.C. § 157(b)(1) and (b)(2)(0).
.This court has jurisdiction of this matter under 28 U.S.C. § 1334(b), 28 U.S.C. § 157(a), and Miscellaneous Rule No. 33 of the Northern District of Texas contained in Order of Reference of Bankruptcy Cases and Proceedings Nunc Pro Tunc dated August 3, 1984. This is a core pro-
. During the intervening months, the Debtors timely made their mortgage payments.
. Order Approving First Amended Modified Plan entered April 30, 1992.
. This Memorandum shall constitute Findings of Fact and Conclusions of Law pursuant to Fed. R.Bankr.P. 7052. This Memorandum will be published. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492421/ | MEMORANDUM OF OPINION
DAVID F. SNOW, Bankruptcy Judge.
The Trustee of Ben L. Plechaty, the Debt- or in this involuntary chapter 7 ease, filed this adversary proceeding against B & M Realty Corp. (“B & M”) and D.W.W. & Associates, Inc. (“D.W.W.”) to recover a $195,300 payment to B & M that the Trustee asserts is voidable as a preference under section 547 of the Bankruptcy Code. The Court has jurisdiction pursuant to 28 U.S.C. § 1334 and this is a core proceeding under 28 U.S.C. § 157(b)(2)(F). This memorandum sets forth the Court’s findings of fact and conclusions of law in accordance with Rule 7052 of the Federal Rules of Bankruptcy Procedure.
Background
In January 1994, B & M received $195,300 in the form of a cheek drawn on the account of Dorothy Plechaty, the Debtor’s wife. The cheek had been made out to B & M by the Debtor but was signed by her. The purpose for the payment was to provide B & M funds with which to buy out two minority shareholders. According to the Trustee, the $195,300 were the proceeds of a loan from Mrs. Plechaty to the Debtor which he paid to B & M for application against a $600,000 loan to him from B & M which had been outstanding since 1991. If so, the transfer would be presumptively voidable under section 547(b) of the Bankruptcy Code since the parties have stipulated, or it is undisputed, that at the time of transfer the Debtor was insolvent; B & M was an insider of the Debtor and the transfer was made within the year preceding the date his case was filed; and B & M received more on its claim against the *488Debtor than it would have received in this case since it appears that creditors will receive little or nothing.
B & M contends, however, that section 547(b) is inapplicable because the $195,300 was a new loan to it from Mrs. Plechaty, not a payment on the Debtor’s outstanding loan. In the alternative, B & M argues that even if the $195,300 payment were deemed a loan from Mrs. Plechaty to the Debtor,'payment to B & M was directed by Mrs. Plechaty, which insulates the $195,300 payment from preference attack under the earmarking doctrine articulated in Mandross v. Peoples Banking Co. (In re Hartley), 825 F.2d 1067 (6th Cir.1987).
B & M transferred the $195,000 to D.W.W., a corporate affiliate, which invested the funds for about three months and then returned them to B & M to effect the shareholder buy out. Notwithstanding return of the funds, the Trustee asserts that she is entitled to recover their value from D.W.W. under section 550(a) of the Bankruptcy Code.
For the reasons set forth below the Court concludes that the payment to B & M constituted a preferential transfer by the Debtor to B & M which is voidable under section 547(b) of the Bankruptcy Code, but that the Trustee is not entitled to recover' the value of the transfer from D.W.W.
The Loan
The form of the transfer to B & M does not of itself clearly establish its character. The only contemporary documentary evidence of the transfer is a check drawn on Mrs. Plechaty’s bank account made payable to and cashed by B & M. On its face this check could have reflected a repayment of debt by Mrs. Plechaty, a contribution to B & M’s capital, or, as B & M contends, a loan from Mrs. Plechaty to B & M. There is nothing in the form of the check to suggest, as the Trustee contends, that the $195,300 check reflected a loan from Mrs. Plechaty to the Debtor and a pay down of the Debtor’s obligation to B & M. There were, however, actions by both the Debtor and B & M that unambiguously support the Trustee’s theory. The Debtor maintained a running account of loans from his wife and recorded the $195,-300 payment to B & M as a loan to him. B & M recorded the $195,300 payment as a partial payment of its loan to the Debtor, not as a loan from Mrs. Plechaty. Standing alone these actions constitute unequivocal admissions by B & M and the Debtor that the $195,300 were the proceeds of a loan from Mrs. Plechaty to the Debtor.
B & M attempted to avoid these admissions by characterizing both the Debtor’s record of the transaction and its own application of the $195,300 payment to reduce the Debtor’s loan as mistakes. Consistent with its position, B & M changed the record of the $195,300 payment on its books, had its shareholders and directors adopt minutes, and its officers execute a note and other documents, casting the transaction as a $195,300 loan from Mrs. Plechaty to B & M.
The Trustee dismissed these actions as a sham designed to avoid liability. She rejected the notion that either B & M or Mrs. Plechaty determined the character of the $195,300 payment independently of the Debt- or because of the Debtor’s dominant role in his relationship with Mrs. Plechaty and with B & M. B & M attempted to support its theory by stressing that Mrs. Plechaty and B & M had the power and authority under the law to conduct their affairs independent of the Debtor and by downplaying the Debtor’s role. Under B & M’s theory the Debtor acted only as an advisor to Mrs. Plechaty and played no active role in B & M in connection with the $195,300 payment. These varying portrayals of the Debtor’s role are relevant both to the Court’s conclusion that Mrs. Ple-chaty loaned the $195,300 to the Debtor, not to B & M, and that the Debtor, not Mrs. Plechaty, controlled the payment of that loan to B & M.
The Debtor was a successful entrepreneur who, together with David Wright, had acquired and developed a number of substantial and profitable businesses. David Wright managed the day-to-day operations of B & M and other businesses under the Debtor’s control. It appears that Mr. Wright was, in effect, the Debtor’s junior partner in most of these businesses and owned a minority stake in the Debtor’s businesses. By the late 1980’s these businesses had prospered to the *489extent that the Debtor had a net worth in excess of $27 million according to at least one financial statement furnished to a lender. In the late 1980’s, however, the Debtor transferred the bulk of his holdings, including his interest in B & M, to or for the benefit of his wife Dorothy, his daughter Paula Cran, and her children. These businesses in which members of the Plechaty family own most of the beneficial interests, directly or indirectly, are sometimes referred to in this opinion as “Plechaty entities.”
Neither the Debtor nor Mrs. Plechaty had a direct financial interest in B & M when the $195,300 payment was made. The Plechaty interest in B & M is held in trusts for the benefit of Mrs. Cran and her children. The buy out of B & M’s minority shareholders was financed with dividends from The W.E. Plechaty Co., which was owned 90 percent by Mrs. Plechaty and 10 percent by Suzanne Wright, the wife of David Wright. The Ple-chaty and Wright interests also owned the controlling interest in B & M in approximately the same 90/10 ratio. The W.E. Plechaty Co. declared and paid dividends to Mrs. Ple-chaty and Mrs. Wright of $195,300 and $21,-700, respectively. Mrs. Wright gave her husband a check for $21,700 payable to him. He endorsed the check to B & M. The Debtor drew a check payable to B & M for $195,300 for Mrs. Plechaty’s signature. Wright delivered both checks to Eugene Feczko, B & M’s secretary and bookkeeper. Feczko recorded the Wright payment as a reduction of Mr. Wright’s loan from B & M. This treatment has not been questioned. Mr. Feczko recorded the Plechaty payment as a reduction of the Debtor’s outstanding loan. According to Feczko, neither the Debtor, Mr. Wright, nor anyone else told him how to account for the $195,300.
The Debtor testified that after he transferred his interests in the Plechaty entities he largely withdrew from the active management of the Plechaty entities, which was left to Mr. Wright, and acted only as an advisor. Consistent with that portrayal, the Plechatys testified that Mr. Wright orchestrated the buy out of B & M’s minority shareholders with the Debtor playing little if any role. These portrayals were intended to make B & M’s contention that Mrs. Ple-chaty decided to loan $195,300 to B & M plausible and to explain how B & M could have mistakenly accounted for the $195,300 payment. Although B & M’s witnesses attempted to enhance Mrs. Pleehaty’s role and assign a passive advisor’s role to the Debtor, their portrayals were not credible. •
The Debtor is a bright and sophisticated businessman with a forceful and dominating personality. In recent years he has apparently financed his cash needs, including substantial gambling losses, largely from loans from Mrs. Plechaty and the $600,000 loan from B & M in 1991. Following the transfers it appears that he had few assets of his own and relied on receiving money from his wife. The record shows that this reliance was justified.
According to his records, the Debtor borrowed over $1.3 million from Mrs. Plechaty from 1992 through 1994 in 63 transactions involving 56 borrowings and 7 repayments. His net indebtedness to Mrs. Plechaty grew from approximately $64,000 at the end of 1992 to approximately $760,000 at the end of 1994. Mrs. Plechaty had little recollection of the scope or frequency of these transactions with her husband. She kept no record of these loans or repayments and was even unaware that he kept such records. She expressed no interest or concern with whether or when she would be repaid or with the Debtor’s use of the loan proceeds, except that she disapproved of the Debtor’s admitted and extensive gambling. There is, however, no evidence that she refused to loan money to the Debtor. Her attitude appeared to be that he had made the money and that he could have it when he wanted it. She said that except for the $195,300 loan to B & M she was not aware of having made loans to other Plechaty entities.
•Mrs. Plechaty is and was legally blind and suffers from cardiovascular disease. She is a director or officer of several of the Plechaty entities including B & M. She testified, however, that she was “just sort of a figurehead” and did not have any active involvement in B & M or any of the other Plechaty entities. She was only vaguely aware of how the Ple-chaty entities were structured or of her own*490ership interests in them. It was clear from her testimony that whether due to ill health or otherwise, Mrs. Plechaty had neither the interest nor the ability to deal with such matters as financing the buy out of B & M’s minority shareholders, but left these matters to the Debtor. Her testimony that she intended the $195,300 payment as a loan to B & M is inconsistent with her practice of making loans only to her husband and her inability to recollect the specifics of other loans. It is credible that she wanted to benefit Mrs. Cran and her children, who were beneficial owners of B & M. But the benefit to B & M was in receipt of the $195,300, not in whether it was received from the Debtor or Mrs. Plechaty. In fact, a pay down of the Debtor’s loan was more beneficial to B & M than a new loan from Mrs. Plechaty. The Debtor was at that point insolvent. Therefore the $195,300 reduced an otherwise uncollectible debt. Moreover, if her testimony is to be believed, the loan to B & M rather than to the Debtor was a significant and nearly unique divergence from her practice of loaning money to him, and was made only with his advice and approval. But if so, it is unlikely that the Debtor would have forgotten the transaction and mistakenly recorded it as her loan to him and persisted in that mistake in his bankruptcy schedules and at his 341 exam.
Mrs. Cran testified that she is currently on the payroll of B & M and receives bi-weekly take-home pay of approximately $760 for doing “whatever they need,” including secretarial work, cleaning up after people, and acting as a company gofer. Her husband is B & M’s building superintendent. She was unsure whether she was an officer of B & M and admitted that she was “not real active” in its affairs. It was apparent from her testimony that she played no significant role in managing or directing the affairs of B & M and that she was not qualified to do so. Mrs. Cran’s testimony reflects her obvious desire that B & M retain the $195,300 payment and she no doubt has discussed that payment with her mother. But the notion that she discussed with her mother the structure of the payment to B & M at the time it was made is implausible in view of the very limited knowledge that mother and daughter had of the Plechaty entities. Moreover, as previously noted, the benefit to B & M was greater if the $195,300 were a pay down of the Debtor’s loan rather than a new loan from her mother.
Mr. Feczko has been B & M’s secretary and bookkeeper for a number of years and holds similar positions in other Plechaty entities. His responsibility was to keep B & M’s books and prepare its financial and tax returns. He appeared to be careful and meticulous. It seems unlikely that he could have made a mistake involving so much money, not only on B & M’s books, but later in its tax returns, and delayed so long in correcting it, without some reliable substantive basis for believing that the $195,300 was a pay down of the Debtor’s loan. The only people actively involved with B & M were Feczko, Wright, and the Debtor. Feczko and the Debtor had their offices in the B & M building. It seems improbable that Mr. Feczko would not have questioned the Debtor or Mr. Wright unless he had good reason to believe that his treatment of the $195,300 payment was correct. According to Feczko’s testimony, however, he did not discuss treatment of the $195,300 with the Debtor either before or after its payment. If so, the Debtor’s restraint was truly extraordinary. The Debtor is for practical purposes Mr. Feczko’s boss, and Fec-zko’s “mistake” stands to cost B & M $195,-300. Mr. Feczko’s effort to downplay the Debtor’s role in the Plechaty entities was belied by the role the Debtor played with Feczko’s knowledge in B & M’s 1991 mortgage refinancing. At that time the Debtor was no longer an officer or shareholder of B & M but only one of its directors. Nevertheless, he led Bank One to believe that he was authorized to dictate the terms of the restructuring and in fact did so. His dominance over B & M is most clearly reflected by the fact that he arranged that $600,000 of Bank One’s loan to B & M would be paid to him or on his behalf as an unsecured loan from B & M.
Feczko’s testimony, if believed, dramatizes the implausibility of B & M’s theory. Since, according to Feczko’s story, which was echoed by the Debtor, the two had no communication about B & M’s characterization of the *491$195,300 payment, neither could have been the cause of, or have been influenced by the alleged mistake of the other. The odds that the Debtor and Mr. Feczko would independently make virtually identical mistakes are vanishingly small.
The plausibility of B & M’s theory relies heavily on the fact that there was no contemporaneous formal corporate action characterizing the $195,300 payment and appears to presume that the nature of that payment remained undefined until B & M adopted corporate resolutions and drew up papers defining it. Mr. Feezko’s' conclusion that his contemporaneous characterization of the loan was a mistake was based on these corporate papers executed long after the fact. B & M’s expert witness, who opined that the $195,300 payment was a loan from Mrs. Plechaty to B & M, limited his review for that opinion to B & M’s corporate records and, so far as appears, carefully avoided any inquiry of the Debtor, Mrs. Plechaty, or anyone else who might have shed light on the parties’ actual intentions. But in fact those intentions control and cannot be supplanted by subsequent actions, however detailed and formal.
Based on all the evidence the Trustee has borne her burden of showing that the $195,-300 was intended as a loan from Mrs. Plechaty to the Debtor tendered to, and accepted by, B & M as a payment on the Debtor’s loan obligation, and that B & M’s subsequent actions and activities were an attempt to rewrite history not to rectify a mistake.
Earmarking
This leaves the question of whether B & M can insulate the $195,300 payment from preference attack under the earmarking doctrine. In general, that doctrine applies where the lender, not the debtor, selects the debtor’s creditor to be paid. Mandross v. Peoples Banking Co. (In re Hartley), 825 F.2d 1067 (6th Cir.1987).
The earmarking doctrine is described in Collier as follows:
In eases in which a third person makes a loan to a debtor specifically to enable that debtor to satisfy the claim of a designated creditor, the proceeds never become part of the debtor’s assets, and therefore no preference is created. The rule is the same regardless of whether the proceeds of the loan are transferred directly by the lender to the creditor or are paid to the debtor with the understanding that they will be paid to the creditor in satisfaction of his claim, so long as such proceeds are clearly “earmarked.”
A payment by a debtor with borrowed money, however, may constitute an avoidable preference where the loan so used was not made upon the condition that it should be applied to a particular creditor to whom it was paid over.
4 Collier on Bankruptcy ¶ 547.03 at 547-28, 547-29 (15th ed. 1996). The rationale for the earmarking doctrine is that if the lender dictates the recipient of the loan proceeds, those proceeds were not under the Debtor’s control and should not constitute “an interest of the debtor in property” for purposes of section 547(b). Hartley, 825 F.2d at 1069.
The fact that the payment went directly from Mrs. Plechaty to B & M is not dispositive.
[A] payment made by a third party to a creditor of the debtor may likewise amount to a preferential transfer, when such payment represents a loan by the third party to the debtor and the debtor, rather than the lender, designates the creditor to be paid and controls the application of the loan.
4 Collier on Bankruptcy ¶ 547.03 at 547-29, 547-30. Hartley involved direct payment of the loan from the new lender to the old creditor but the court made clear that that fact alone would not obviate a successful preference attack:
The trustee argues that the earmarking rule could permit incipient bankrupts to prefer one creditor over another. To prevent such abuse a court may ascertain that the new lender, not the debtor, earmarks the funds for the particular creditor.
Hartley, 825 F.2d at 1072. See also, Coral Petroleum, Inc. v. Banque Paribas-London, 797 F.2d 1351, 1355 (5th Cir.1986); Van Huffel Tube Corp. v. Artcraft (In re Van Huffel Tube Carp.), 74 B.R. 579, 585 (Bankr. *492N.D.Ohio 1987); Hargadon v. Cove State Bank (In re Jaggers), 48 B.R. 33, 36 (Bankr.W.D.Texas 1985).
Therefore the question under Hartley is whether Mrs. Pleehaty or the Debtor controlled the application of the $195,300 loan proceeds by directing payment to B & M. The fact that B & M was designated as the payee on Mrs. Plechat/s cheek would, without further evidence explaining that designation, justify an inference that Mrs. Pleehaty selected B & M. See Hartley, 825 F.2d at 1069; Grubb v. General Contract Purchase Corp., 94 F.2d 70, 72-73 (2nd Cir.1938). But, as discussed in the prior section, there is considerable evidence to rebut that presumption and to support the conclusion, that the Debtor designated B & M to receive the $195,300.
The Debtor, not Mrs. Pleehaty, filled out the check for her signature, including the designation of B & M as payee. There is no credible evidence to support the conclusion that Mrs. Pleehaty instructed the Debtor to show B & M as payee or that she conditioned the loan on payment of the proceeds to B & M. Compare the present facts with those in Virginia National Bank v. Woodson (In re Decker), 329 F.2d 836 (4th Cir.1964), where the court applied the earmarking doctrine because the lender, the debtor’s sister, insisted that the loan proceeds be used solely to pay the bank that was threatening her brother. Hartley described the facts in Decker as being very similar to the facts in Hartley. Hartley, 825 F.2d at 1071.
In this proceeding, by contrast, it appears clear that the Debtor, not Mrs. Pleehaty, structured the buy out of B & M’s minority shareholders for which the $195,300 was needed and arranged the payment to B & M. The suggestion by B & M’s witnesses that David Wright engineered and directed the use of $195,300 in Pleehaty funds without the Debtor’s active and informed approval is not credible. It appears from the evidence that Mrs. Pleehaty left such matters to her husband and would have signed the check if he had designated a different payee. This conclusion is also supported by the fact that there is no credible evidence which indicates that Mrs. Pleehaty controlled the use of the proceeds in any of her many prior loans to the Debtor.
The Court’s finding is not inconsistent with Mrs. Plechaty’s ownership of, or right to control, her. assets. The question is not whether she could have restricted use of the proceeds to pay down the Debtor’s obligation to B & M. There is no suggestion that she lacked that right. The question is whether she in fact did so and the evidence is quite clear that she did not. As she had on numerous prior occasions, she left use of proceeds of her loans to the Debtor.
B & M argues that the earmarking doctrine applies because the $195,300 payment did not diminish the Debtor’s estate. This argument has superficial appeal since the loan would probably not have been arranged by the Debtor or the payment made to B & M except for the purpose of buying out B & M’s minority shareholders. Therefore, B & M argues, the $195,300 would never have been available to the Debtor’s other creditors and its payment to B & M did not diminish the Debtor’s estate. But this argument would apply with the same force if the Debtor had arranged the loan at his bank and directed it to pay the $195,300 to B & M.
The courts have without exception, so far as the Court can discover, held that the debtor’s estate was diminished where the debtor controlled the application of the loan proceeds. See Hansen v. MacDonald Meat Co. (In re Kemp Pacific Fisheries, Inc.), 16 F.3d 313, 316 (9th Cir.1994); In re Smith, 966 F.2d 1527, 1535-37-(7th Cir.1992); Hart-ley, 825 F.2d at 1070; Coral Petroleum, 797 F.2d at 1359-61. In general, diminution of the estate has been an issue separate from control only where the lender designated the creditor to be paid but the debtor transferred property to the lender to induce or secure the loan. In those cases the courts focused on the harm to the debtor’s other creditors arising from the transfer to the lender and held the payment to the creditor was a preference to the extent of the value transferred to the lender. Hartley, 825 F.2d at 1071; Decker, 329 F.2d at 839-40.
Therefore it appears that applying the earmarking doctrine to these facts to *493insulate the $195,300 from recovery by the Trustee is not supported by the earmarking cases. It would, moreover, conflict with the purpose of section 547(b). Section 547 was intended to implement two important bankruptcy policies: first, the “prime bankruptcy policy of equality of distribution among creditors”, H.R.Rep. No. 595, 95th Cong., 2d Sess. 177-78 (1978) reprinted in 1978 U.S.C.C.A.N. 5787, 5963, 6137-39; and second, to reduce creditor incentive to dismember a financially pressed debtor. Id.; see Smith, 966 F.2d at 1535. An extension of the earmarking doctrine to these facts would seriously conflict with the policy of equality of distribution among creditors by permitting an admitted insider of the Debtor to retain more than its fair share of the Debtor’s assets in payment of its claim.
Transferee Liability
Promptly after receipt from the Ple-chatys and the Wrights of the $217,000 to be used in the minority buy out, B & M transferred the money to D.W.W. for investment pending the buy out. D.W.W. invested the money with Smith Barney. About three months thereafter D.W.W. returned the $217,000 to B & M which used it to buy out the two minority shareholders. The Trustee invoked section 550(a)(2) of the Bankruptcy Code to recover the $195,300 from D.W.W. despite its return to B & M. Sections 550(a) and (b) provide as follows:
(a) Except as otherwise provided in this section, to the extent that a transfer is avoided under section 544, 545, 547, 548, 549, 553(b), or 724(a) of this title, the trustee may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property, from—
(1) the initial transferee of such transfer or the entity for whose benefit such transfer was made; or
(2) any immediate or mediate transferee of such initial transferee.
(b) The trustee may not recover under section (a)(2) of this section from—
(1) a transferee that takes for value, including satisfaction or securing of a present or antecedent debt, in good faith, and without knowledge of the void-ability of the transfer avoided; or (2) any immediate or mediate good faith transferee of such transferee.
11 U.S.C. § 550.
D.W.W. was the immediate transferee of the $195,300 under section 550(a)(2). The Trustee argues that D.W.W.’s return of the money does not avoid its liability because of the language of section (a) which permits the trustee to recover the “value” of the property transferred. She also argues that D.W.W. cannot shield the transfer under subsection (b) because D.W.W. did not give value for the transfer from B & M.
The Trustee cites no authority for the proposition that the trustee can recover the value of the transfer from a transferee that has returned the preferential payment to the initial transferee. Although the language of section 550(a) can be read to support the Trustee’s position, the apparent purpose of permitting the trustee to recover the value of the transfer is to provide an appropriate remedy where a transferee has spent or converted the property transferred, see Aero-Fastener, Inc., v. Sierracin Corp. (In re Aero-Fastener, Inc.), 177 B.R. 120, 139 (Bankr.D.Mass.1994), and the language “if the court so orders” appears to afford the court some discretion in determining when such recovery should be allowed. Where, as here, the preferential payment was returned and there is no evidence that the transfer between B & M and D.W.W. was made in bad faith or adversely affected the Trustee, the Court believes that section 550(a) should not be applied to subject D.W.W. to liability for the value of the transfer.
It also appears that D.W.W. is protected under section 550(b)(2). There is no evidence to suggest that D.W.W. knew that the $195,300 was voidable and the payment to D.W.W. and its repayment to B & M occurred in what appears to have been the regular course of their businesses. The Ple-chaty companies managed their cash jointly. Therefore, even though B & M received no interest on the $195,300, this does not necessarily establish that the transfer to B & M was made without consideration for purposes *494of section 550(b)(2). Since the transfer was part of the regular cash management procedures of the Plechaty companies, it is reasonable to conclude that B & M benefitted from such procedures generally. If so, this was value for the advance to D.W.W. for purposes of 550(b)(1).
The Trustee’s justification for subjecting D.W.W. to liability is that her collection efforts against B & M may be frustrated because of the Debtor’s control and manipulation of B & M and that it is fair to recover the preference from another entity controlled by the Debtor. This is, in effect, an argument that the separate corporate shells of the Plechaty entities should be disregarded and their assets treated as the Debtor’s property. The Trustee did not, however, plead or attempt to prove that the corporate veils of B & M or D.W.W. could be pierced in this fashion. Therefore the Court finds that the Trustee has not established that recovery against D.W.W. is permitted under section 550 of the Bankruptcy Code. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492423/ | MEMORANDUM OPINION ON CONFIRMATION OF DEBTORS’ CHAPTER 11 PLAN
LEWIS M. KILLIAN, Jr., Bankruptcy Judge.
THIS MATTER came on for hearing on confirmation of the Debtors’ Chapter 11 Plan of Reorganization in these procedurally but not substantively consolidated cases. The Internal Revenue Service (“IRS”) has objected to provisions in the corporate debtors’ plan directing that payments to the IRS be applied first to trust fund taxes for which Gordon Linkenhoker (“Linkenhoker”) is ha-ble as a “responsible” person.1 For the reasons set forth herein, the objection of the IRS is sustained.
The debtor corporations are owned and operated by Linkenhoker. The claims of the IRS against the debtors include employment taxes withheld from employees’ pay but not remitted to the government (“trust fund taxes”).2 At the confirmation hearing, Linkenhoker testified regarding the financial condition of the corporate debtors and the feasibility of the plan. However, he presented no testimony regarding the necessity of applying tax payments first to trust fund taxes to the successful reorganization of the corporate debtors. Instead, debtors’ counsel argued that I could find the allocation necessary to the corporate reorganizations simply because such allocation would relieve the principal, whose expertise in the operation of the corporations is necessary, from his responsibility for those taxes. The debtors argue that such designation will give Link-enhoker incentive to assist in each corporation’s reorganization.
The United States Supreme Court in United States v. Energy Resources Co., Inc., 495 U.S. 545, 551, 110 S.Ct. 2139, 2148, 109 L.Ed.2d 580 (1990), established that a bank ruptcy court “may order the IRS to apply tax payments to offset trust fund obligations where it concludes that [such an] action is necessary for a reorganization’s success.” While the Bankruptcy Code (“the Code”) did not expressly authorize bankruptcy courts to approve reorganization plans designating the application of tax payments, the Code did grant the courts residual authority, under 11 U.S.C. § 1123(b)(5) (now (b)(6)), to approve a reorganization plan which includes “any ... appropriate provision not inconsistent with the applicable provisions of this title.” Energy Resources Co., Inc., 495 U.S. at 549, 110 S.Ct. at 2142. Further, pursuant to § 105 of the Code, bankruptcy courts are authorized *569to issue any “order, process, or judgment that is necessary or appropriate to carry out the provisions” of the Code. Id. The Supreme Court found those statutory directives consistent with the traditional understanding that bankruptcy courts, as courts of equity, have broad authority to modify debtor-creditor relationships. Id. However, the Supreme Court did not provide any guidelines for courts to follow in determining whether a tax allocation is “necessary for a reorganization’s success.” United States v. R.L. Himes & Assoc., Inc. (In re R.L. Himes & Assoc., Inc.), 152 B.R. 198, 202 (S.D.Ohio 1993). In fact, the court did not even require that a bankruptcy court make any specific findings, just that it conclude the allocation is necessary. Id. at 201.
In order to establish whether the designation is necessary to a debtor’s reorganization, I should consider the equitable reasons warranting such allocations. Id. at 203 (citing United States v. A & B Heating & Air Conditioning, Inc., 823 F.2d 462, 465 (11th Cir.1987), vacated on other grounds, 486 U.S. 1002, 108 S.Ct. 1724, 100 L.Ed.2d 189 (1988)). As part of that analysis, I must consider whether the designation as to the allocation of the tax payments puts in jeopardy the government’s tax claim and increases the risk the government will not be able to collect the total tax due (since the guaranteed trust fund taxes for which “responsible” persons are also liable would be paid before the non-guaranteed non-trust fund taxes); and whether such risk is acceptable by an offsetting likelihood that the allocation would increase the possibility for successful reorganization. In re Greenberg, 105 B.R. at 696. In essence, I must balance the interests of the IRS in collecting its debt against the interests of promoting the debtors’ successful reorganization.
In a situation similar to the instant ease, the court in In re R.L. Himes & Assoc., Inc. determined that the question of whether a designation is necessary for a reorganization is a question of fact for the court, reviewable on a clearly erroneous basis, and not a question of law as argued by the IRS. In re R.L. Himes & Assoc., Inc., 152 B.R. at 200. In that case, the debtor’s principal testified that the designation provided in the plan was necessary for a successful reorganization and that if the corporate officers remained liable for the payment of trust fund taxes, the incentive for them to pursue a successful reorganization would be greatly diminished. Id. The district court affirmed the bankruptcy court decision permitting the allocation, finding its reliance on the debtor’s representations was not clearly erroneous. Id. at 200, 201.
In a second case factually similar to both the case at bar and In re R.L. Himes & Assoc., Inc., the opposite result was reached. See U.S. v. Vokes Equipment, Inc. (In re Vokes Equipment, Inc.), No. 90-2872-CIV, 1993 WL 246155, at *3 (S.D.Fla.1993). There, the district court, also analyzing the necessity issue as a finding of fact subject to a clearly erroneous standard of review, found that the self-serving, unsupported and largely conclusory testimony of the debtor corporation’s president that the corporation’s reorganization would benefit from the designation, did not meet the evidentiary requirement for a finding of necessity. Id.
Regardless of whether or not mere conclu-sory statements as to the necessity of the designation constitute sufficient evidence to support such a designation, In re R.L. Himes & Assoc., Inc. and In re Vokes Equipment, Inc. both require a factual finding to be made by the court. In re R.L. Himes & Assoc., Inc., 152 B.R. at 200; In re Vokes Equipment, Inc., 1993 WL 246155, at *1, 3. In this case, unlike in In re R.L. Himes & Assoc., Inc. and In re Vokes Equipment, Inc., no evidence was presented that the designation in the debtors’ plan allocating tax payments first to trust fund taxes is necessary to the corporate debtors’ reorganization. Instead, the only argument presented by the debtor corporations, through counsel, is that in shielding Linkenhoker from the trust fund liability, Linkenhoker would have more incentive to use his restaurant experience to assist in each corporation’s reorganization.
As stated previously, while the court may not be required to make specific findings as to how a designation will aid in a reorganization’s success, it must be able to conclude that such a designation will be necessary. In *570re R.L. Himes & Assoc., Inc., 152 B.R. at 201. On the basis of the factual record in the instant case, I can make no such conclusion.
It is not enough in and of itself simply to argue that the designation is necessary because it will free a “responsible” party from trust fund liability thus presumably giving that party an incentive to assist with the corporation’s recovery. In fact, it is just as plausible an argument that without a plan provision directing that trust fund taxes be paid first, the corporate officers have as much or more incentive to assist in the corporation’s reorganization. As stated by the court in Matter of Visiting Nurse Ass’n of Tampa Bay, Inc., 128 B.R. 835, 837 n. 5 (Bankr.M.D.Fla.1991), where the “responsible” persons are post-petition management, “they have an incentive to implement the plan and keep the debtor efficient, thus insuring payment of the entire tax claim, both trust fund and non-trust fund portions.” Further, where a plan directs that trust fund taxes are to be paid first, the IRS has a legitimate concern that post-petition management only has an incentive until the trust fund portion of the claim is satisfied. Matter of Visiting Nurse Ass’n of Tampa Bay, Inc., 128 B.R. at 837 n. 5.; see also In re Vokes Equipment, Inc., 1993 WL 246155, at *3 (reversing the bankruptcy court’s decision overruling the objection of the IRS when allocation of the initial plan payments would serve only to reheve the debtor corporation’s principal of his joint liability earlier than IRS policy would allow).
While this Court has the authority by virtue of the Code and relevant case law to approve a reorganization plan which directs that tax payments be applied first to trust funds taxes provided such designation is necessary to the debtors’ reorganization, the record before me does not support such a designation. I decline to adopt a per se rule automatically allowing such a designation in order to provide an incentive for a “responsible” individual of a debtor corporation to assist in the corporation’s reorganization, which would run counter to the IRS’ statutory duty to maximize collection of taxes and authority to designate involuntary tax payments as it chooses.
The objection of the IRS is hereby sustained. The debtors will amend their plan accordingly.
A separate order shall be entered in accordance herewith.
. Any reference herein to "responsible” individuals or parties incorporates that term as it is used in the Internal Revenue Code, 26 U.S.C. § 6672. See discussion infra, note 2.
. The Internal Revenue Code requires employers to withhold from their employees’ paychecks money representing the employees' personal income taxes, unemployment insurance and social security taxes that those employees owe or will owe the government. 26 U.S.C. §§ 3102(a), 3402(a). Once withheld, pursuant to 26 U.S.C. § 7501(a), the taxes are to be held "in trust” for the United States, hence the name "trust fund” taxes. Slodov v. United States, 436 U.S. 238, 242-43, 98 S.Ct. 1778, 1782-83, 56 L.Ed.2d 251 (1978). Should employers fail to pay the trust fund taxes, the government can collect an equivalent sum directly from the officers or employees of the employer responsible for their collection and payment. 26 U.S.C. § 6672. These individuals are commonly referred to as the "responsible” individuals. In re Greenberg, 105 B.R. 691, 692-93 (Bankr.M.D.Fla.1989) (quoting Slodov, 436 U.S. at 242-43, 98 S.Ct. at 1782-83). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492424/ | APPEAL FROM TEE UNITED STATES BANKRUPTCY COURT FOR THE MIDDLE DISTRICT OF FLORIDA ORDER ON APPEAL
KOVACHEVICH, Chief Judge.
This cause is before the Court on appeal from Order, entered May 9, 1996, dismissing Adversary Proceedings in the Bankruptcy Court below pursuant to 28 U.S.C. Section 158(a).
STANDARD OF REVIEW
This Court functions as an appellate court in reviewing a bankruptcy court’s decision. 28 U.S.C. Section 158(a), (c). Findings of fact by the Bankruptcy Judge shall be upheld on appeal unless found to be clearly erroneous. Bankruptcy Rule 8013; In re Downtown Properties Ltd., 794 F.2d 647 (11th Cir.1986). A finding of fact is clearly erroneous when, although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed. United States v. U.S. Gypsum, 333 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746 (1948). Appellants are entitled to an independent, de novo review of all conclusions of law and the legal significance accorded to the facts. In re Owen, 86 B.R. 691 (M.D.Fla.1988).
FACTS
On October 12, 1994, Columbus J. South-erland, Jr. (“Appellant”) filed a voluntary petition for relief under Chapter 13 of Title 11, United States Code, in the Bankruptcy Court for the Middle District of Florida, Tampa Division, Case No. 94-9786-8B7. On November 11, 1994, Appellant filed an adversary. proceeding, No. 94-690, entitled “Complaint and Action for Civil Rights Deprivation.” The adversary proceeding named, inter alia, Appellees, Bobby C. Mi-lam, Marion T. Pope, the State of Georgia, and Judge Thomas Baynes as defendants. The Complaint failed to allege whether the adversary proceeding was core or non-core, and if non-core, whether the pleader had consented to final orders or judgment being entered by the Bankruptcy Judge. The adversary proceeding was reassigned to Judge C. Timothy Corcoran on November 9, 1994.
On November 29, 1994, Appellant voluntarily converted the Chapter 13 case to a Chapter 7 case. Appellee Georgia Marble Corporation filed an adversary proceeding, No. 95-151, after Appellant converted his case, to determine the dischargeability of debt owed to it by Appellant. The allegations were based on willful and malicious prosecution. The Trustee, Larry Hymen (“Trustee”), sought to abandon the cause of action raised in adversary proceeding No. 94-690. Appellant objected to the abandonment. Trustee then sought to compromise the action, and dismiss the adversary proceeding with prejudice. A hearing was set for this compromise. In response to Trustee’s compromise, Appellant filed a counterclaim against Trustee and Judge Corcoran. The case was then reassigned to Judge Paul M. Glenn.
Thereafter, Appellant filed a motion to dismiss the Chapter 7 case. At the hearing held on May 9, 1996, the Bankruptcy Court entered its order granting Appellant’s motion to dismiss the Chapter 7 case. Subsequently, the Bankruptcy Court ordered the dismissal of all pending adversary proceedings. *578Appellant objected to the dismissal of the adversary hearings, and appealed the order dismissing them.1
DISCUSSION
The only issue raised by Appellant on appeal is “Whether Bankruptcy Judge had authority to dismiss a civil rights action and to issue final orders over objection of the parties in other non-core actions.” Appellant contends that the United States Bankruptcy Court did not have jurisdiction, pursuant to 28 U.S.C. Section 157, to dismiss a civil rights case reserved exclusively for the District Court. The Court ■ finds Appellant’s contention to be without merit.
The Bankruptcy Judge has jurisdiction to hear a “proceeding that is not a core proceeding but that is otherwise related to the case under Title 11 ...” 28 U.S.C. Section 157(e)(1). Whether a matter is’ “related to” a bankruptcy proceeding within the meaning of the jurisdictional statute depends on “whether the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy.” Matter of Wood, 825 F.2d 90, 93 (5th Cir.1984). In a related non-core proceeding, the Bankruptcy Judge generally must prepare proposed findings of fact and conclusions of law for the District Court pursuant to 28 U.S.C. Section 157(c)(1). This Court must then review the Bankruptcy Court’s proposed findings de novo. Mann v. Alexander Dawson, Inc. (In re Mann), 907 F.2d 923, 926 (9th Cir.1990). When all of the parties consent to the Bankruptcy’s Court’s jurisdiction in a related non-core proceeding, the District Court reviews the proposed findings of fact for clear error.
Appellant consented to the Bankruptcy Court’s jurisdiction. Appellant invoked the Bankruptcy Court’s jurisdiction by filing a bankruptcy petition; absent that filing, the Bankruptcy Court would not have had the power to decide the rights of any of the parties. Fidelity & Deposit Co. of Maryland v. Morris, 950 F.2d 1531, 1535 (11th Cir.1992). Appellant choose to file his adversary proceeding and the counterclaim in the forum of the Bankruptcy Court. Appellant’s complaint failed to allege, pursuant to Federal Rule of Bankruptcy Procedure 7008, whether the adversary proceeding was core or non-core, and if non-core, whether the pleader did or did not consent to the entry of final orders or judgement by the Bankruptcy Judge. Appellant never objected to the Bankruptcy Court’s jurisdiction as to any of the adversary proceedings prior to the time it rendered its judgement. Although silence does not imply consent, affirmatively invoking the jurisdiction of the Bankruptcy Court, certainly does supply the necessary consent. Horwitz v. Alloy Automotive Co., 992 F.2d 100, 103 (7th Cir.1993). The Court finds that Appellant consented to the Bankruptcy Court’s jurisdiction.
Although 11 U.S.C. § 349.. gives the Bankruptcy Court the power to alter the normal effects of the dismissal of a bankruptcy case, if cause is shown, the general rule is that dismissal of the bankruptcy case usually results in dismissal of all remaining adversary proceedings. See Morris, supra. The decision of whether to retain jurisdiction over an adversary proceeding should be left to the sound discretion of the Bankruptcy Court or the District Court, depending on where the adversary proceeding is pending. It is the discretion of this Court that the Bankruptcy Judge below did not err by entering a final order dismissing the adversary proceedings. Accordingly it is
*579ORDERED that the order of the Bankruptcy Court be affirmed and the cause of this action be dismissed.
. Bankruptcy Rule of Civil Procedure 9011 states that in every petition, pleading, motion and other paper served or filed in a case under the Code, "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 weE grounded in fact and is warranted by existing law; and that it is not interposed for any improper purpose, such as to harass or to cause urmec-essary delay or needless increase in the cost of litigation or administration of the case.... If a document is signed in violation of this rule, the court on motion or on its own initiative, shaE impose on the person who signed it, the represented party, or both, an appropriate sanction, which may include an order to pay to the other party or parties the amount of the reasonable expenses incurred because of the filing of the document, including a reasonable attorney’s fee.” | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492425/ | MEMORANDUM OPINION AND ORDER GRANTING CITIBANK’S MOTION FOR STAY RELIEF
ROBERT A. MARK, Bankruptcy Judge.
Citibank, F.S.B. (“Citibank”) seeks stay relief to effect a setoff against funds in a Citibank bank account of the Debtor, Blackwell & Walker, P.A. (the “Debtor”). The central issue in dispute is whether certain guaranties executed by the Debtor are enforceable thereby establishing a prepetition debt to support the setoff claim.
PROCEDURAL BACKGROUND
This case was commenced by the filing of an involuntary Chapter 7 petition on February 14, 1996 (the “Petition Date”). The Debtor, a law firm that had disbanded and was in the process of liquidation, did not contest the petition and an Order for Relief was entered on March 7,1996.
Citibank filed its motion for stay relief on April 11, 1996. James Feltman, the Chapter 7 Trustee, filed an objection. The Court conducted an evidentiary hearing on the motion on May 7, 1996, and requested supplemental briefs. After consideration of the motion, the objection, the exhibits, testimony *583and argument presented at the hearing, and the supplemental briefs, the Court concludes that Citibank is entitled to stay relief to enforce its setoff rights under § 553 of the Bankruptcy Code.
FACTUAL BACKGROUND
On September 22, 1993, Citibank sent the Debtor a letter presenting Citibank’s terms for its Capital Contribution Loan Program (the “Program”). Citibank’s Exhibit No. 1. Under the terms of the Program, shareholders of the Debtor could apply to Citibank for extension of loans with the intention of contributing the proceeds of the loans to the Debtor. The terms of the Program also called for the Debtor’s guaranty of the loans to the individual shareholders. Certain of the Debtor’s shareholders entered into the following loan agreements (the “Shareholder Loans”) with Citibank prior to the Petition Date: (1) On December 20, 1993 Citibank loaned Patrick Barthet (“Barthet”) $32,500; (2) on January 18, 1994, Citibank loaned Robert Brown (“Brown”) $80,000; (3) on January 24, 1994, Citibank loaned William Charouhis (“Charouhis”) $120,000; and (4) on January 13, 1995, Citibank loaned William Bromagen (“Bromagen”) $30,000.1 Citibank’s Exhibits Nos. 2-5. Citibank had the right to demand full payment of each loan at anytime. Citibank’s Exhibits Nos. 2-5. As contemplated, the shareholders contributed the proceeds from the Shareholder Loans to the Debtor as capital.
Although the terms of the Program called for the Debtor’s guaranty of the loans at the origination dates of the Shareholder Loans, the Debtor did not execute guaranties of the Shareholder Loans when the loans were made. Citibank claims that the guaranties were required by Citibank and intended by the Debtor; however, Citibank cannot explain the failure of the parties to execute the guaranties when the Shareholder Loans were made.
On May 5, 1995, the Debtor executed a Continuing Guaranty (the “Continuing Guaranty”) with respect to two of the four loans at issue, the Charouhis and Bromagen loans. Citibank’s Exhibit No. 6. On May 11, 1995, the Debtor sent two letters to Citibank (the “May 11, 1995 Letters”) in which the Debtor discussed the two other loans at issue, the Barthet and Brown loans. Citibank’s Exhibits Nos. 7-8. These letters acknowledged that Citibank would not have entered the Shareholder Loans with either Barthet or Brown without the Debtor’s guaranty. Each letter purportedly “reaffirms and restates [the Debtor’s] guarantee of the Demand Note [for the Shareholder Loan].” Citibank’s Exhibits Nos. 7-8. The letters further advise Citibank that the Debtor assumes all obligations of Barthet and Brown under the Demand Note without requiring Citibank to release the individual obligors. Citibank’s Exhibits Nos. 7-8.
The aggregate principal amount remaining on the Shareholder Loans is $46.333.33. On the Petition Date, the Debtor had over $80,-000 on deposit at Citibank. Citibank remitted approximately $34,000 to the Trustee. The Debtor has $46,333.33 in bank accounts at Citibank, an amount sufficient to satisfy the remaining loan balance if the guaranties are enforceable.
DISCUSSION
Citibank seeks stay relief to offset $46,333.33 presently held in the Debtor’s bank accounts at Citibank against monies which remain due and owing by the Debtor in connection with the Debtor’s guaranty of the outstanding balance on the Shareholder Loans. To establish a right of setoff, a creditor must prove (1) that a debt exists from the creditor to the debtor which arose prior to the commencement of the bankruptcy case; (2) that the creditor has a claim against the Debtor which arose prior to the commencement of the bankruptcy case; and (3) that the debt and the claim are mutual obligations. In re Ruiz, 146 B.R. 877, 879 (Bankr.S.D.Fla.1992).
In this case, the first element is undisputed. The Debtor’s account balance at Citi*584bank constitutes a debt owed by Citibank to the Debtor which arose prior to the Petition Date. The third element is also undisputed if Citibank holds a claim since the obligations are mutual. The only element in dispute is the existence of a claim by Citibank, proof of which hinges on the enforceability of the guaranties.
The threshold question in determining enforceability is whether the Continuing Guaranty and the May 11, 1995 Letters executed after Citibank funded the loans are supported by consideration so as to establish the existence of a valid prepetition debt owed by the Debtor to Citibank.2 For the following reasons, the Court finds that the Continuing Guaranty and the May 11, 1995 Letters are supported by consideration and enforceable against the Debtor. .
The Trustee argues that new and separate consideration was necessary for the subsequent guaranties to become enforceable. The only exception to the new consideration requirement, the Trustee asserts, is when the subsequent guaranty covers future advances as well as existing indebtedness. The Trustee cites Texaco, Inc. v. Giltak Corp., 492 So.2d 812, 814 (Fla. 1st DCA 1986) and Gibbs v. American National Bank of Jacksonville, 155 So.2d 651, 655 (1st DCA 1963) for the general rule that new consideration is required where a guaranty is executed subsequent to the principal loan contract. Since the Debtor’s guaranties did not cover future advances, the Trustee argues that they must be supported by independent consideration to be enforceable.
Citibank argues that it was not necessary to provide independent consideration for the Continuing Guaranty and the May 11, 1995 Letters because these guaranties were conditions to Citibank originally making the Shareholder Loans, citing Barnett Bank v. University Gynecological Associates, Inc., 638 So.2d 595 (Fla. 4th DCA 1994). The Barnett court held that a written guaranty executed two months after the execution of the underlying note could be enforceable without separate consideration if the guaranty was a condition of the making of the original loan.
In Barnett, the appellate court did not hold that the written guaranty was enforceable as Citibank argues; it merely reversed the trial court’s entry of judgment for the guarantor on the pleadings. 638 So.2d at 596. In reversing the lower court judgment, the Barnett court distinguished Texaco on the grounds that the guaranty in Barnett was a condition of the loan. Id. The court reasoned that the new consideration requirement is not solely triggered by the timing of the guaranty. Id. The Barnett holding indicates that a guaranty executed after the principal obligor signed the note and received the loan may be supported by the consideration supporting the original loan transaction if the guaranty was a condition to the loan. Id.
Although Barnett does lend support to Citibank’s argument for enforcing the guaranties without the need for new consideration, Barnett’s limited discussion does not convince the Court that Citibank can simply bootstrap the consideration it gave to the shareholders át the time of the original loans to support the subsequent guaranties given to it by the Debtor. The prevailing law in Florida requires that a guaranty executed independently of the original loan must be supported by separate consideration. See e.g. Texaco, 492 So.2d 812, 814 (“A guaranty executed subsequent to the principal contract and not a part of the same transaction must be supported by a new consideration”); Gibbs, 155 So.2d 651, 655 (“[Wjhere the contract of guaranty is entered into independent of the transaction which created the original or present debt or obligation, the guarantor’s promise must be supported by a consideration distinct from that of the present debt-”) (citing to 24 Am.Jur., p. 906, Guaranty, § 50).
Three of the four subsequent guaranties in this case were executed almost seventeen months after the original loan contract. *585Plaintiffs Exhibit No. 6-7. The fourth was executed almost five months after the original loan was made. Plaintiffs Exhibit No. 6. Although there was evidence presented that the subsequent guaranties were intended to be in effect at the origination of the loan, the executed loan agreements did not require the guaranties. Therefore, the Debtor’s subsequent guaranties of the Shareholder Loans were executed independently and require new consideration.
Citibank argues alternatively that even if separate consideration is necessary for the subsequent guarantees, sufficient consideration was provided to the Debtor by Citibank forbearing from exercising its legal right to call the Shareholder Loans and to accelerate the debt due under each of the loans.3 Relying once again on Gibbs, the Trustee argues that mere forbearance by Citibank does not constitute sufficient consideration for a guarantee by a third party, such as the Debtor. Gibbs holds that “mere forbearance by a creditor ... is not deemed to be a sufficient consideration for a guaranty by a third person.” 155 So.2d at 655 (emphasis added).
Gibbs does not defeat Citibank’s argument. As the Gibbs court noted, where a creditor enters into an agreement to forbear, that agreement will suffice as consideration for a guaranty. Id. Indeed, forbearance to sue on a debt or to accelerate a debt is good consideration where that forbearance was bargained for at the time the guaranty was executed. Bara v. Jones, 400 So.2d 88, 89 (Fla. 4th DCA 1981). Such forbearance will, constitute adequate consideration even where the claim or acceleration is not directed at the guarantor. Id. (stating that an agreement to forbear is sufficient consideration even if “the forbearance was of no advantage [to the guarantor].”); Marks Brothers Paving Co. v. Mt. Vernon Homes, Inc., 156 So.2d 787, 787-788 (Fla. 3d DCA 1963).
In Marks Brothers, a corporation’s note was guaranteed by three shareholders of the corporation and the father of a shareholder. Marks Brothers, 156 So.2d at 787. The corporation submitted the note and guaranties in response to the creditor’s threats to sue on a previously overdue obligation of the corporation. Id. The creditor agreed to forbear and extend the time in which to pay the overdue obligation after various “conferences” between it and the guarantors. Id. at 788. The court reasoned that the four guarantors had “sufficient interest” in the corporation, so that their seeking forbearance on a suit against the corporation was sufficient consideration for the guaranties. Id. Thus, whereas mere forbearance may not fulfill the consideration requirement, if forbearance is agreed upon or bargained for, it will suffice as consideration for a guaranty even where the forbearance may not have a direct, immediate effect on the third party guarantor.
The Court must decide whether Citibank agreed to forbear from calling the loans or whether the Debtor was bargaining for such forbearance when it executed the guaranties. The Court concludes that the totality of the circumstances leading to the execution of the subsequent guaranties creates a fair and clear inference that Citibank agreed to forbear in consideration for the guaranties and that the Debtor bargained for the forbearance.
First, the Capital Lo.an Program, under which the Shareholder Loans were extended, was initiated for the benefit of the Debtor. The Debtor negotiated the terms of the Program and required its shareholders to invest the funds they received from the Program directly in the Debtor. In fact, Charles E. Sammons, a shareholder of the Debtor who testified at the hearing, stated that a share7 *586holder who did not contribute the loaned funds to the firm faced expulsion. Tr. p. 92, Lines 16-18.
Further, as Mr. Sammons stated at the hearing, the Debtor intended to guaranty the loans from the onset of the Program. Tr. p. 96. The Debtor’s Shareholder Agreement states in Paragraph 2.5 that “[t]he Corporation shall guarantee each Capital Loan to the financial institution extending such a loan to a Shareholder.” (emphasis added) Mr. Sammons stated that one of the shareholders’ primary concerns was getting such a provision incorporated in the Shareholder Agreement. Tr. p. 90, Lines 13-14.
The Debtor had a significant stake in Citibank’s Loan Program. Thus, it had an interest in maintaining an amicable lending relationship with Citibank, both directly on loans to the firm and indirectly on loans to its shareholders. That relationship would have most certainly ended had the Debtor not agreed to execute the Continuing Guaranty and the May 11,1995 Letters. Furthermore, had Citibank called the loans in May of 1995, the shareholders would have demanded indemnification under the Shareholder Agreement, a process that would have hurt the Debtor’s internal morale and subjected it to liability equal to the amounts it was asked to guaranty. By executing the subsequent guaranties, the Debtor avoided internal strife among its own shareholders, external strife with Citibank, and did not increase its ultimate liability. Although Citibank presented no evidence during the hearing that it expressly agreed to forbear, it can fairly be inferred that the Debtor bargained for and obtained such forbearance by executing the always intended guaranties. In sum, the Court finds sufficient consideration to support the guaranties.
The Trustee raised two issues for the first time in his supplemental brief. First, he argues that Citibank is equitably estopped from setting off the monies at issue because it misrepresented to the Debtor that the loans to the shareholders were fully satisfied at a time when they were not. The Trustee argues that had the Debtor not been misled by this misrepresentation, it would have avoided setoff of its funds by refraining from depositing monies into Citibank. The Court finds insufficient evidence of concealment or misrepresentation by Citibank to rise to the level necessary to trigger equitable estoppel. In addition, the Debtor had no choice but to deposit its funds into the Citibank account because it was required to deposit all funds held in other bank accounts into the Citibank account under an agreement it entered into with Citibank on November 10, 1995. Citibank’s Exhibit No. 18.
The Trustee also argues that a setoff would result in a fraudulent transfer avoidable under section 548 of the Bankruptcy Code and Florida law. The Court will not address the merits of a possible § 548 claim since it is beyond the pleadings and evidence presented in this contested matter.
For the foregoing reasons, it is—
ORDERED as follows:
1. Citibank’s motion for relief from the automatic stay is granted.
2. Citibank may setoff the outstanding indebtedness under the Shareholder Loans against the sum of $46,333.33 on deposit in Debtor’s bank account at Citibank.
. Citibank extended loans to several other shareholders during this time period. Those loans are not at issue here.
. The Trastee also raised the issue of whether the May 11, 1995 Letters are guaranties that satisfy the Statute of Frauds writing requirement. The Court finds that the May 11, 1995 Letters are guaranties that satisfy the writing requirement of § 725.01 (Statute of Frauds), Florida Statutes (1995).
. Citibank also contends that the guaranties were an essential term of Citibank's renewal of a $350,000 promissory note from the Debtor, executed contemporaneously with the Continuing Guaranty. Citibank's Exhibit 18. Although the 350,000 renewal note does refer to the guaranties, there was no evidence or testimony that the renewal of the loan was made in consideration of the Debtor’s guaranty of the shareholder loan. Although not itself sufficient consideration to support the guaranties, the contemporaneous execution of this renewal note is relevant evidence in support of the Court’s conclusion that the guaranties are enforceable. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492426/ | MICHAEL J. KAPLAN, Chief Judge.
These two otherwise unrelated adversary proceedings present an identical legal question, and have been consolidated here only for purposes of this decision. The Court today holds that undercharge claims on intrastate shipments that occurred before Congressional nullification of state regulations of that field, did not survive.
In the Chapter 7 case of B.C.B. Dispatch, this matter comes before the Court on Defendant’s Motion for Partial Summary Judgment on the Plaintiff-Trustee’s action, under 11 U.S.C. § 541 and New York Transportation Law §§ 178 and 179 (McKinney 1994), to recover undercharges on intrastate shipments which occurred prior to enactment of the Federal Aviation Administration Authorization Act of 1994 (hereinafter “FAAAA”) Pub.L. No. 103-305,108 Stat. 1605, 49 U.S.C. § 14501. In the alternative, Defendant seeks to have this matter referred to the New York State Department of Transportation to the extent it relates to undercharges on intrastate shipments. With respect to the Trustee’s action to recover undercharges on interstate shipments, Defendant seeks a stay of the action before this Court and referral to the Surface Transportation Board (formerly known as the Interstate Commerce Commission).
The Chapter 7 case of Dawson Transport, Inc. involves a similar action by the Trustee for undercharges on intrastate shipments. The Defendant seeks dismissal of the Trustee’s action under Federal Rule of Civil Procedure 12(b)(6), 12(c), and 15.1 In the alternative, Defendant requests a stay of these proceedings and referral of the Trustee’s action to the New York State Department of Transportation.
Debtors in these cases are motor carriers who performed under shipping contracts at rates which were less than the tariff rates on file with the New York Department of Transportation and/or the Surface Transportation Board. In the Dawson case there is a factual dispute as to whether or not Dawson was acting (during the time period in question) under common carrier or contract carrier status, but in light of today’s holding, that dispute is of no moment.
Prior to the enactment of the FAAAA, bankruptcy trustees routinely sought recovery of the difference between the rates charged under such shipping contracts and those which were mandated under state and federal law (“undercharge claims”). With respect to intrastate claims in New York, these actions were brought under New York Transportation Law §§ 178 and 179. Section 179 provides that, “No common carrier of property by motor vehicle shall charge, demand, collect or receive a different compensation for transportation or for any service in connection therewith ... than the rates and charges specified in the tariffs in effect at the time of shipment....” Section 178 provided the vehicle by which a Trustee could claim such undercharges: “It shall be the duty of every common carrier of property to establish,, observe and enforce just and reasonable rates, charges and clarifications, and just and reasonable regulations and practices relating *632thereto.” Undercharges on interstate shipments are sought on authority of comparable federal provisions.
Subsequent to the shipments in question, but prior to the Trustees’ actions for undercharges, Congress enacted the FAAAA, which provided, in pertinent part, that,
... a State, political subdivision of a State, or political authority of 2 or more States may not enact or enforce a law, regulation, or other provision having the force and effect of law related to a price, route, or service of any motor carrier ... with respect to the transportation of property.
49 U.S.C. § 14501(c)(1) (effective Jan. 1, 1995).
While all parties to these litigations agree that sections 178 and 179 are state laws “related to a price, route, or service of any motor carrier ... with respect to the transportation of property,” the parties disagree as to the effect of the FAAAA on the Trustees’ intrastate undercharge claims. The Trustees rely mainly on the Supreme Court decision in Landgraf v. USI Film Products, 511 U.S. 244, 114 S.Ct. 1483, 128 L.Ed.2d 229 (1994), and maintain that the statute cannot be applied retroactively to extinguish their rights to collect undercharges under sections 178 and 179 as those rights existed at the time the shipments in question occurred. The Defendants rely primarily on three recent decisions specifically addressing this issue—St. Johnsbury Trucking Co. v. Mead Johnson et al. (In re St. Johnsbury Trucking), 199 B.R. 84 (S.D.N.Y.1996), Salisbury v. S.B. Power Tool (In re Industrial Freight System), 191 B.R. 825 (Bankr.C.D.Cal.1996) and Noonan v. Cellu Tissue Corp. et al. (In re Palmer Trucking Co.), 201 B.R. 9 (Bankr.D.Mass.1996).
There may be a distinctly separate body of law for each of the following: (1) the retroac-tivity of statutes, in general; (2) the retroac-tivity of repealers and similar nullifications of existing law (where the existence of a “savings clause” is particularly useful); (3) federal statutes that preempt a field that has not yet been regulated by a state; and (4) federal statutes that preempt a field that has already been regulated by a state (also fertile field for “savings clauses”). Furthermore, different rules may pertain to causes of action that are already the subject of a lawsuit at the time of a new statute, as opposed to actions not yet sued. Here there is a clear federal preemption of a field already regulated by the state, but as to which no suit had been brought before the enactment of the FAAAA or before its stated effective date, January 1, 1995. If the outcome would be different under the body of law regarding retroactivity of nullifications such as repeal-ers, as opposed to the body of law pertaining to federal preemption of fields already regulated by the state, then it would be necessary for this Court to decide which body of law applies to the exclusion of the other. But this Court concludes that whether one applies principles of retroactivity or principles of preemption, the result is the same in this case, and the Court may issue concurrent holdings, leaving the resolution of the academic question of otherwise competing considerations to Constitutional scholars.2
RETROACTIVITY
The Supreme Court’s decision in Landgraf is the primary source for guidance when discussing the retroactive or prospective nature of a statute. In Landgraf, the Supreme Court recognized the opposing axioms which present themselves in this area of statutory interpretation. On the one hand, courts generally are required to apply the law in effect at the time it renders its decision, regardless of the law in effect at the time the action was instituted or the cause of action accrued. If the law has changed since the action was instituted or since the cause of action accrued, then applying the law in effect at the time of the rendering of the decision obviously may constitute a grant of *633retroactive effect to the change. On the other hand, retroactivity is not favored in the law, and a statute should not be applied retroactively unless Congress evinces a clear intent that it should be so applied. In Land-graf, the Supreme Court provided a road-map.
First the Court must determine whether Congress has prescribed the statute’s proper reach by expressly addressing the issue of retroactivity. “If Congress has done so, of course, there is no need to resort to judicial default rules,” said the Supreme Court. Landgraf 511 U.S. at 280, 114 S.Ct. at 1505. But if the statute contains no express command regarding retroactivity, then the court
must determine whether the new statute would have retroactive effect, ie., whether it would impair rights a party possessed when he acted, increase a party’s liability for past conduct, or impose new duties with respect to transactions already completed. If the statute would operate retroactively [as so defined], our traditional presumption teaches us that it does not govern absent clear Congressional intent favoring such a result.
Id.
To the extent that any of the three other courts that have addressed this question suggest that the language of the FAAAA quoted earlier in this decision (prohibiting a State, political subdivision of the State, etc. from enacting “or enforcing” any law, regulation, or other provision related to price, route or service) constitutes a clear statement of retroactivity, this Court respectfully, but vigorously, disagrees. Although in actions under 11 U.S.C. § 541 this Court sits as a state court would in a state court action for freight undercharges, and although a state court is an instrumentality of the state, no court of record is involved in the business of “enforcement” of any statute, and judges (other than administrative law judges) are not law enforcement officers. “Enforcement” of the law is an executive function, and to some extent the executive may elect what laws it will or will not enforce, and where. When Congress has sought to bar courts of record from applying otherwise existing laws, it has unequivocally done so in unambiguous language. See, e.g., 43 U.S.C. § 2011(c) (1986) (“No State or local court shall have jurisdiction of any claim whether in a proceeding instituted before, on, or after the date this chapter becomes effective.”) (dealing with crude oil transportation systems); 15 U.S.C. § 1673(c) (1982) (“No court of the United States or any State, and no State (or officer or agency thereof), may make, execute, or enforce any order or process in violation of this section.”) (containing federal restrictions on garnishment); 12 U.S.C. § 91 (1989) (“[N]o attachment, injunction, or execution, shall be issued ... in any suit, action, or proceeding, in any State, county, or municipal court.”).
Hence, this Court does not believe that any language of the FAAAA addresses the question of retroactive application in courts of record (as opposed to administrative courts of the executive branch of a state).3
Following the Supreme Court’s teaching in Landgraf, therefore, we must now look to determine whether application of the FAAAA “would impair rights [that the Debtors here] possessed when [they] acted, increase a party’s liability for past conduct, or impose new duties with respect to transactions already completed.” Landgraf 511 U.S. at 280,114 S.Ct. at 1505.
In this case, the right that the Trustees seek to assert was not a common law right; rather, it was a right derived from a statute enacted by the state in implementation of its efforts to regulate intrastate trucking. Indeed, the statute was in derogation of the common law right to contract for a mutually agreeable rate.
“A statute does not operate ‘retrospectively’ merely because it is applied in a case arising from conduct antedating the statute’s enactment....” Landgraf, 511 *634U.S. at 269, 114 S.Ct. at 1499. Therefore, the mere fact that these shipments occurred prior to enactment of the FAAAA does not mean that applying it now would be giving it retroactive effect.
In Landgraf, the Court quoted an earlier principle that “every statute, which takes away or impairs vested rights acquired under existing laws, or creates a new obligation, imposes a new duty, or attaches a new disability, in respect to transactions or considerations already passed, must be deemed retrospective.” Id. (quoting Society for Propagation of the Gospel v. Wheeler, 22 F.Cas. 756).
Presumably, a statute that does none of the above should be applied even to past conduct. In the present Court’s view, it is obvious that the FAAAA was, essentially, a repealer (albeit a Congressional repeal of state law) and consequently it did not create a new obligation or impose a new duty. Nor does repeal of a statutory cause of action attach a “new disability.” And, perhaps of greatest moment, it did not impair a “vested right” because an expectancy that a right bestowed by statute and statute alone is going to continue does not rise to the level of a vested right: “A right cannot be regarded as vested, ... unless it amounts to something more than a mere expectation of future benefit or interest founded upon an anticipated continuance of the existing general laws.”4
This Court thus concludes that application of the FAAAA today to the events in question would not constitute “retroactive effect,” and consequently it is the law in effect today that must be applied. In light of preemption, the applicable law is the federal law, and the Trustees are left with no remedy.
PREEMPTION
The result is the same if the matter is treated as one invoking principles of preemption only.
Given the decision of the United States Supreme Court in the case of American Airlines, Inc. v. Wolens, — U.S.-, 115 S.Ct. 817, 130 L.Ed.2d 715 (1995), which involved preemptive language identical to that of the FAAAA, it is beyond cavil that the FAAAA “preempts” state law regulating surface transportation. It has been said that once preempted, “the authority of the states is necessarily excluded, and any state legislation on the subject is void.”5
More specifically, it has been stated as to matters affecting interstate commerce that
[a]ny power which the states have exercised over interstate commerce by reason of congressional inaction ceases to exist from the moment that Congress exerts its paramount authority over the subject by enacting a statute that covers the same subject matter as, or is in direct conflict with, a state statute, even if, by the terms of the act of Congress, it is not to take effect until a future date. The exercise of power by Congress under such circumstances is not only supreme and paramount but also exclusive, superseding the state law and excluding additional or further regulation covering the same subject by the state legislature, regardless of whether the state regulations were adopted with respect to matters incidentally affecting such commerce or were enacted as a proper exercise of the police power.6
Presumably, Congress acted because of a legislative finding that the states’ regulation of intrastate 'rates materially affected interstate commerce, and it is ostensibly because of the several principles quoted above that the District Court for the Southern District of New York stated in St. Johnsbury Trucking, that “a broad federal pre-emption of the enforcement of state pricing regulations is akin to a repeal of those regulations.” St. *635Johnsbury Trucking, 199 B.R. at 87 (emphasis added). That characterization was a stepping stone to the District Court’s conclusion that the case was governed by the principle that “powers derived wholly from a statute are extinguished by its repeal.” Id. (emphasis added) (quoting Battaglia v. General Motors Corp., 169 F.2d 254 (2d Cir.), cert. denied, 335 U.S. 887, 69 S.Ct. 236, 93 L.Ed. 425 (1948)).
Thus it can be seen that if principles governing retroactivity are not applicable to the nullification (the “effective repeal”) of a state statute that is accomplished by federal preemption, then that nullification seems always to have the immediate effect of voiding pre-existing causes of action arising “wholly” under the state statute (at least if not already sued).7
CONCLUSION
The intrastate claims in the B.C.B. Dispatch ease are dismissed. Because the Trustee stipulated in open court to take the interstate claims to the Surface Transportation Board, the balance of his complaint against Wegmans is dismissed without prejudice to continuing them before the Surface Transportation Board.
In the Dawson case, it seems that only intrastate claims are involved, and they are dismissed.
Each Defendant may submit a suitable Order directing Judgment on the merits. The parties shall bear their own costs.
SO ORDERED.
. Although, in Dawson, the Trustee’s complaint alleged possible interstate undercharges pursuant to 49 U.S.C. § 10761, see Complaint ¶ 7, through subsequent pleadings the parties seem to agree that only intrastate shipments are at issue, ■ see Affidavit of Michael Shemanick ¶ 16 (supporting Try-It’s Notice of Motion (June 21, 1996)); Trustee's Opposition to Defendant’s Motion for Dismissal or for Stay and Referral (July 9, 1996).
. The Supreme Court case of American Airlines, Inc. v. Wolens,-U.S.-, 115 S.Ct 817, 130 L.Ed.2d 715 (1995), dealt with identical statutory language but did not engage in a retroactivity discussion. Both retroactivity and preemption are found here because the state statute in question was already in place at the time of the preemption, whereas in the case of Wolens, the preemptive federal statute had already been in effect at the time the state law cause of action arguably accrued.
. The fact that Congress chose to make express provision regarding state action, but said nothing as to the applicability of the FAAAA to past conduct does not rise to the level of a "savings provision," in this Court's view.
. 16A Am.Jur.2d Constitutional Law § 669 (1979). Although clear case authority for this proposition is elusive, cases that acknowledge a distinction between "mere expectancies” and "vested expectancies” are legion. This Court cannot offer sage guidance as to that distinction, but knows that it exists and knows that an expectation of the continuation of a statutory cause of action that is in derogation of a "bargained-for exchange,” falls short of a "vested right."
. 16 Am.Jur.2d Constitutional Law § 291 (1979).
. 15A AmJur.2d Commerce § 33 (1976) (citations omitted).
. The Trustee argues that when Congress made the FAAAA effective on January 1, 1995 (several months after enactment), that constituted a command that it be given effect only as to future conduct by carriers. The Court disagrees. At most, that effective date provision left a window within which to commence suit. The present actions were not commenced within that window. (The Court expresses no opinion as to the effect of the FAAAA on undercharge actions sued before January 1, 1995.) True "effective date” provisions such as the one in question are decisively different from those that are really “savings provisions,” e.g. "this statute shall be effective as to conduct occurring on and after....” | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492427/ | *637
MEMORANDUM AMD ORDER
WHITMAN KNAPP, Senior District Judge.
Presently before the Court is Magistrate Judge Andrew Peck’s August 15, 1996 Report and Recommendation that the Court grant the defendant’s motion to withdraw the reference to the Bankruptcy Court for this ease.
No objections to the Report and Recommendation have been filed. In the interests, therefore, of judicial economy, and because we find it eminently reasonable, we affirm the Report and Recommendation in its entirety.
SO ORDERED.
REPORT AND RECOMMENDATION
TO THE HONORABLE WHITMAN KNAPP, United States District Judge:
The Administrative Trustee of the bankrupt Towers Financial Corporation brought suit in Bankruptcy Court (Case No. 93-B-41558) against the law firm of Squadron, Ellenoff, Plesent & Sheinfeld (“Squadron El-lenoff’), alleging malpractice, breach of fiduciary duty and breach of contract. Squadron Ellenoff moves this Court to withdraw the reference to the Bankruptcy Court and the motion has been referred to me by Judge Knapp for a Report and Recommendation.
This Court and the District Court are intimately familiar with the facts of this ease through the related case of In re Towers Financial Coup. Noteholders Litig., 93 Civ. 0810, 1995 WL 571888 (S.D.N.Y. Sept. 20, 1995) (Peck, M.J.), aff'd, 936 F.Supp. 126 (S.D.N.Y.1996) (Knapp, J.), familiarity with which is assumed. (Collectively “the Note-holders’ litigation”; defined terms from that Report and Recommendation are used herein.) In the Noteholders’ litigation, this Court recommended, and Judge Knapp affirmed, dismissal of the Noteholders’ claims against Squadron Ellenoff for SEC Rule 10b-5 liability, with leave to replead a “conspiracy” claim against Squadron Ellenoff. For reasons of judicial economy, as more fully explained below, I recommend that the District Court withdraw the reference to the Bankruptcy Court for this case.
FACTS
The Noteholders’ Litigation Against Squadron Ellenoff
In brief, investors in Towers Notes sued, inter alia, the law firm of Squadron Ellenoff in a class action alleging that Squadron Elle-noff had participated in a far-reaching “Ponzi scheme” carried out by Towers, designed to deceive the plaintiff class into purchasing Towers Notes. In re Towers, 1995 WL 571888 at *1. The investors alleged that Squadron Ellenoff, which represented Towers and its officials at SEC hearings, had committed fraud on the investors by failing to disclose information regarding the Ponzi scheme to the SEC and the investors. As this Court summarized in In re Towers:
Defendant Squadron Ellenoff is a New York based law firm that served as counsel to Towers and defendants Hoffenberg and Brater and represented Towers before the SEC and other regulatory agencies. (Cplt. ¶¶ 54, 357.) In the course of representing Towers before the SEC in 1988, Squadron Ellenoff received access to a confidential memorandum prepared by the accounting firm of Spicer & Oppenheim that revealed Towers’ fraudulent accounting practices, but “Squadron Ellenoff went on to continue through various means,” including making or failing to correct false statements to the SEC, “to sustain Towers’ criminal course of conduct throughout the ensuing four years.” (Cplt. ¶ 361; see also id. ¶¶ 357-404.) “By the false statements made to the SEC and others, Squadron Ellenoff intended to prevent or delay, and did delay, the SEC from stopping Towers ... from selling Notes.” (Id. ¶ 401.)
1995 WL 571888 at *3. The Noteholder plaintiffs’ claims against Squadron Ellenoff included: Rule 10b-5 securities fraud, negligent misrepresentation, breach of fiduciary duty and common law fraud. Id. at *7.
In my Report and Recommendation dated September 20,1995,1 recommended that the Court dismiss all claims against Squadron Ellenoff because, inter alia, the firm had no duty to disclose such information to investors, and the Noteholder plaintiffs did not *638allege reliance on any false statement by Squadron Ellenoff. 1995 WL 571888 at *16-24. Judge Knapp affirmed on August 1, 1996, In re Towers, 986 F.Supp. at 126, but allowed plaintiffs to amend to assert a “conspiracy” claim against Squadron Ellenoff, id. at 126-30.
The Trustee’s Action Against Squadron El-lenoff
On April 1, 1996, Raymond H. Wechsler, Towers’ Administrative Trustee, commenced this action in Bankruptcy Court against Squadron Ellenoff, alleging claims of: (1) attorney malpractice (Bankr.Cplt. ¶¶ 32-38); (2) breach of Squadron Ellenoffs implied contract with Towers to exercise due care in providing legal services (Bankr.Cplt. ¶¶39-44); and (3) breach of fiduciary duty for failing to act in the best interests of Towers as opposed to Towers’ officers and directors. (Bankr'Cplt. ¶¶ 45-51.)
The Trustee’s complaint asserts that “[f]rom at least 1988 until the commencement of Towers’ chapter 11 cases, every business in which Towers was engaged was permeated with fraud personally overseen and directed by [Stephen] Hoffenberg [Towers’ CEO] and his cohorts.” (Bankr.Cplt. ¶ 6.) The Trustee further alleges that Hoffenberg “made it appear as though Towers’ collection business was profitable by creating a wholly fictitious 'accounting rule’ which generated illusory income, asset value and net worth.” (Id.) The “accounting rule,” known as the “30/30 rule,” permitted Towers “to claim that it recognized its fees as 30 percent of the amount expected to be collected, thus implying that the recoverable reserve purportedly based on historical experience was 70%.” (Bankr.Cplt. ¶ 7.)
In or about 1988, Towers retained the “accounting firm of Spicer & Oppenheim to identify support for ... the 30/30 rule.” (Bankr.Cplt. ¶ 9.) The Spicer & Oppenheim report “questioned the validity of the 30/30 rule and raised serious questions about Hof-fenberg and his accomplices.” (Bankr.Cplt. ¶10.)
Squadron Ellenoff began its representation of Towers and Hoffenberg in or about 1988 and continued the representation until at least March 24, 1993. (Bankr.Cplt. ¶ 17.) The Trustee contends that, in the course of its representation of Towers, Squadron Elle-noff became aware of the Spicer & Oppen-heim Report “and knew or should have known, its contents.” (Bankr.Cplt. ¶ 19.) Additionally, the Trustee alleges that, in the course of the SEC investigation, Squadron Ellenoff responded to inquiries and subpoenas from the SEC. (Bankr.Cplt. ¶ 21.) Squadron Ellenoff “met and conferred frequently” with Hoffenberg and other Towers’ officers and, despite “being on notice that information provided to them by Hoffenberg and [others] was either unreliable, ... or patently false and misleading,” Squadron El-lenoff provided such false information to the SEC. (Bankr.Cplt. ¶ 22.)
The Trustee’s complaint further asserts that
At no point in time did any member of Squadron Ellenoff bring Hoffenberg’s or his associates’ fraudulent or improper activity to the attention of those who may have been able to effectuate a cessation of this behavior before any greater liability of Towers as an entity was incurred. Nor did they refuse to employ the unreliable and false information in their submissions to the SEC.
Instead, Squadron Ellenoff aggressively sought to protect Hoffenberg and others from liability or scrutiny by the SEC. Throughout this period, Squadron Ellenoff was paid by Towers, even though its actions did not benefit Towers, but rather harmed it.
(Bankr.Cplt. ¶¶ 26-27.)
Finally, the Trustee asserts that “Squadron Ellenoffs desire to protect Hoffenberg and his associates from liability, at the expense of Towers, permitted Hoffenberg to continue perpetrating the Ponzi scheme' and increased the liability of its client corporation to the investing public, the SEC and others.” (Bankr.Cplt. ¶ 28.) The Trustee alleges that “Squadron Ellenoffs ability to delay the inevitable discovery of the Ponzi scheme, while simultaneously neglecting to advise Towers of the manifestations thereof, served to increase the number of defrauded investors and Towers’ ultimate liability.” (Bankr.Cplt. ¶ 29.)
*639The Trustee alleges that Towers suffered “damages in excess of $15 million.” (Bankr. Cplt. ¶ 31.)
ANALYSIS
THE DISTRICT COURT SHOULD WITHDRAW THE REFERENCE TO THE BANKRUPTCY COURT IN THE INTERESTS OF JUDICIAL ECONOMY
“The district court may withdraw, in whole or in part, any case or proceeding referred [to the Bankruptcy Court] under this section, on its own motion or on timely motion of any party, for cause shown.” 28 U.S.C. § 157(d). Although § 157(d) does not define what constitutes “cause,”
District courts in this circuit have considered a number of factors in evaluating cause: whether the claim or proceeding is core or non-core, whether it is legal or equitable, and considerations of efficiency, prevention of forum shopping, and uniformity in the administration of bankruptcy law.
Orion Pictures Corp. v. Showtime Networks, Inc. (In re Orion Pictures), 4 F.3d 1095, 1101 (2d Cir.1993), cert. dismissed, — U.S.-, 114 S.Ct. 1418, 128 L.Ed.2d 88 (1994).
A. This Case is a Non-Core Proceeding
As the Second Circuit stated in Orion Pictures, “[a] district court considering whether to withdraw the reference should first evaluate whether the claim is core or non-core, since it is upon this issue that questions of efficiency and uniformity will turn.” 4 F.3d at 1101.
Section 157 distinguishes between “core” an “non-core” or “related” bankruptcy proceedings. While bankruptcy judges may “hear and determine ... all core proceedings arising under title 11, or arising in a ease under title 11,” 28 U.S.C. § 157(b)(1), any decision a bankruptcy court makes in a non-core proceedings is subject to de novo review by the district court. 28 U.S.C. § 157(c)(1); see also, e.g., Orion Pictures, 4 F.3d at 1101.
Section 157(b)(2) lists various types of core proceedings, all generally involving matters that “would have no existence outside of the bankruptcy case.” J.T. Moran Financial Corp. v. American Consolidated Financial Corp. (In re J.T. Moran Fin. Corp.), 124 B.R. 931, 937 (Bankr.S.D.N.Y.1991) (citing eases). “A core proceeding must invoke a substantive right provided by title 11.” Id. On the other hand, non-core proceedings “involve disputes over rights that ... have little or no relation to the Bankruptcy Code, do not arise under the federal bankruptcy law and would exist in the absence of a bankruptcy case.” J. Baranello & Sons, Inc. v. Baharestani (In re J. Baranello & Sons, Inc.), 149 B.R. 19, 24 (Bankr.E.D.N.Y.1992).
This case clearly is a non-core proceeding. Certainly this case could exist independent of the bankruptcy case, since the claims are state law claims. See Interconnect Telephone Services, Inc. v. Farren, 59 B.R. 397, 400 (S.D.N.Y.1986) (“Noncore proceedings consist of those ‘claims arising under traditional state law which must be determined by state law.’ ... They are ‘those civil proceedings that, in the absence of a petition in bankruptcy, could have been brought in a district court or state court.’ ”).
Moreover, all of the alleged acts that form the basis of the Trustee’s claims against Squadron Ellenoff took place before Towers entered bankruptcy. (See Bankr.Cplt. ¶¶ 3, 17.) Thus, both the formation of the contract (for Squadron Ellenoff to provide legal services to Towers and Hoffenberg) and the alleged breach of contract and malpractice occurred in the period preceding Towers’ filing for bankruptcy protection. A “breach-of-eontract action by a debtor against a party to a pre-petition contract ... is non-core.” Orion Pictures, 4 F.3d at 1102; see also, e.g., Burger Boys, Inc. v. South Street Seaport Ltd. Partnership (In re Burger Boys, Inc.), 183 B.R. 682, 687 (S.D.N.Y.1994) (action involving a pre-petition contract and pre-petition breach of contract is a non-core proceeding); Private Capital Partners, Inc. v. RVI Guaranty Co. (In re Private Capital Partners, Inc.), 139 B.R. 120, 127 (Bankr.S.D.N.Y.1992) (“it is settled law in this court that a garden variety prepetition breach of contract case invokes no substantive principles of bankruptcy law and is a non-core proceeding.”) (citing eases).
*640Thus, the Court finds that this pre-petition breach of contract case is a non-core proceeding.1
The finding that this is a non-core proceeding is “not wholly determinative” of whether the reference should be withdrawn.
Houbigant, Inc. v. ACB Mercantile, Inc. (In re Houbigant, Inc.), 185 B.R. 680, 686 (S.D.N.Y.1995). The fact that the case is a non-core proceeding, however, weighs in favor of the District Court’s withdrawal of the reference, since any determination by the Bankruptcy Court would be subject to de novo review. See, e.g., In re Orion, 4 F.3d at 1101 (“the fact that a bankruptcy court’s determination on non-core matters is subject to de novo review by the district court could lead the latter to conclude that in a given ease unnecessary costs could be avoided by a single proceeding in the district court.”).
The Court must now “weigh questions of efficient use of judicial resources, delay and costs to the parties, uniformity of bankruptcy administration, the prevention of forum shopping, and other related factors.” Houbigant v. ACB Mercantile, 185 B.R. at 686.
B. Judicial Resources are Best Served By Allowing the District Court to Hear this Case Given the Court’s Knowledge of the Underlying Facts
Another factor strongly weighing in favor of withdrawal of the reference is that the district court is intimately familiar with the facts underlying this ease and thus is uniquely qualified to conduct discovery and ultimately trial on this case, or to dispose of the case by motion to dismiss. (Squadron Ellenoff has filed a motion to dismiss this action.)
The Trustee’s complaint against Squadron Ellenoff and the Noteholders’ complaint against Squadron Ellenoff both arise from the same set of facts. Both complaints base their liability on the same alleged Squadron Ellenoff conduct, namely: (1) Squadron Elle-noffs knowledge of the contents of the Spicer & Oppenheim Memo (Bankr.Cplt. ¶¶ 19-20; Noteholder Cplt. ¶¶ 357-61); (2) Squadron Ellenoffs representation of Towers and Hof-fenberg before the SEC (Bankr.Cplt. ¶¶ 21-22; Noteholder Cplt. ¶¶ 371-76); (3) Squadron Ellenoff partner Ira Sorkin’s correspondence with the SEC (Bankr.Cplt. ¶¶ 23-25; Noteholder Cplt. ¶¶370, 377-82, 397); and (4) Squadron Ellenoffs delay of the discovery of the Ponzi scheme (Bankr.Cplt. ¶¶ 29-30; Noteholder Cplt. ¶¶ 371-76).
As previously noted, on August 1, 1996, Judge Knapp affirmed my 73-page Report and Recommendation recommending dismissal of Squadron Ellenoff in the Notehold-ers’ litigation. In re Towers, 936 F.Supp. at 127-28. Judge Knapp heard oral argument on that motion and expended time and effort in rendering his opinion. This Court also spent significant time reviewing the parties’ briefs, writing that Report and Recommendation, and writing other Reports and Recommendations, Opinions and Orders in the Noteholders’ litigation. Given the fact that the District Court is so familiar with the facts and legal theories contained in both complaints, judicial economy suggests that the District Court should hear this case against Squadron Ellenoff. See, e.g., Houbigant v. ACB Mercantile, 185 B.R. at 686 (refusing to restore reference to the bankruptcy court where district court already familiar with the relevant facts by virtue of prior related cases); Wedtech Corp. v. London (In re Wedtech Corp.), 81 B.R. 237, 239 (S.D.N.Y.1987) (where a proceeding in bankruptcy involves common issues of law and fact with a case pending in district court, “the overlapping of facts, transactions and issues in the two cases ... is good cause for withdrawal of the reference and consolidation with the district court proceeding”).
Withdrawal of the reference makes particular sense here where Squadron Ellenoff has filed a motion to dismiss the complaint. (The motion is awaiting the Trustee’s response.) Based on a preliminary review of Squadron’s moving papers, there appears to be an overlap of issues between the motion to dismiss *641and issues that the District Court has faced in ruling on Squadron’s motion to dismiss and other motion practice in the Noteholders’ litigation. In any event, the issues raised in the motion are state law issues, not bankruptcy issues, which are more appropriately heard in the District Court.2
Moreover, if Squadron Ellenoff s motion to dismiss is denied, it makes sense for this Court to oversee any necessary discovery, since this Court has been coordinating the consolidated discovery in the Noteholders and other related Towers litigations from the start. Consolidation of this case with the other Towers’ discovery would eliminate the need to repeat document discovery or re-take depositions. This is especially true if the Noteholder plaintiffs are able to assert a conspiracy claim against Squadron Ellenoff as a result of Judge Knapp’s recent decision.
The Trustee argues that “the pen-dency of the Fraudulent Conveyance Action in Bankruptcy Court weighs against withdrawing the reference in this case,” since that would result in the litigation of two factually related eases in two different courts. (Trustee Br. at 8-9.) It is true that “an action for fraudulent conveyance is a core proceeding” wholly within the jurisdiction of the bankruptcy court. See, e.g., Wedtech Corp. v. London, 81 B.R. at 239.
However, the facts of the fraudulent conveyance case and the damages sought appear to be wholly separable from the facts and significantly greater damages alleged in this ease. (See Kaufman Aff. Ex. 4: “Complaint to Avoid and Recover Preferential and Fraudulent Transfers.”) In the fraudulent conveyance action, the Trustee seeks to recover approximately $660,000 in legal fees paid by Towers to Squadron Ellenoff between January 3, 1993 and March 24, 1993 (Fr.Conv.Cplt. ¶ 7), while the malpractice aetion refers to legal services rendered by Squadron Ellenoff between 1988 and February 8, 1993, and seeks over $15 million in damages. (Bankr.Cplt. ¶¶ 14,17.) Thus, the two actions are based on different factual grounds, covering mostly non-overlapping time periods, and with vastly different amounts at stake. Moreover, the Court notes that while the fraudulent conveyance action was commenced in March 1995, the Trustee does not appear to have moved the action forward. In any event, any overlap between the fraudulent conveyance action and this case is minor compared to the overlap between this case the Noteholders’ litigation in the District Court.3
C. The District Court Should Hear This Case to Avoid Forum Shopping
The Court also finds that it is in the interest of the prevention of forum shopping that this case be litigated by the District Court. It is more than coincidental that this action was filed in the Bankruptcy Court shortly after this Court’s Report & Recommendation that the Noteholder plaintiffs’ suit against Squadron Ellenoff be dismissed. It is also noteworthy that the Trustee and the Noteholder plaintiffs’ counsel have a cooperation and judgment sharing agreement. (See Kaufman Aff.Exs. 6-7.). In this Court’s view, it appears that the Trustee filed this action in order to avoid the outcome of this Court’s dismissal of Squadron Ellenoff from the Noteholders’ litigation.
Although the Trustee levels the same accusation against Squadron Ellenoff, even if both sides are guilty of forum shopping, as Judge Mukasey commented in LTV Steel Co. v. Union Carbide Corp. (In re Chateaugay Corp.), “[w]hen, as here, each side has run to its favorite courthouse, ‘the courts should be *642concerned with what the interests of justice require and not with who won the race.’ ” 193 B.R. 669, 678 (S.D.N.Y.1996) (quoting National Patent Dev. Corp. v. American Hosp. Supply Corp., 616 F.Supp. 114, 118 (S.D.N.Y.1984) (Weinfeld, J.)); see also McCrory Corp. v. 99 Cents Only Stores (In re McCrory Corp.), 160 B.R. 502, 507 (S.D.N.Y.1993) (when both sides have engaged in forum shopping, that issue is not dispositive).
This Court finds that it is in the interests of justice and judicial economy that the District Court hear the related Trustee action against Squadron Ellenoff rather than the Bankruptcy Court.
CONCLUSION
For the reasons set forth above, I recommend that the Court exercise its discretion and withdraw the reference of the Trustee’s action to the Bankruptcy Court.
FILING OF OBJECTIONS TO THIS REPORT AND RECOMMENDATION
Pursuant to 28 U.S.C. § 636(b)(1) and Rule 72(b) of the Federal Rules of Civil Procedure, the parties shall have ten (10) days from receipt of this Report to file written objections. See also Fed.R.Civ.P. 6. Such objections (and any responses to objections) shall be filed with the Clerk of the Court, with courtesy copies delivered to the chambers of the Honorable Whitman Knapp, 40 Centre Street, Room 1201, and to the chambers of the undersigned, 500 Pearl Street, Room 1370. Any requests for an extension of time for filing objections must be directed to Judge Knapp. Failure to file objections may result in a waiver of those objections for purposes of appeal. Thomas v. Arn, 474 U.S. 140, 106 S.Ct. 466, 88 L.Ed.2d 435 (1985); IUE AFL-CIO Pension Fund v. Herrmann, 9 F.3d 1049, 1054 (2d Cir.1993), cert. denied, — U.S.-, 115 S.Ct. 86, 130 L.Ed.2d 38 (1994); Frank v. Johnson, 968 F.2d 298, 300 (2d Cir.), cert. denied, 506 U.S. 1038, 113 S.Ct. 825, 121 L.Ed.2d 696 (1992); Wesolek v. Canadair Ltd., 838 F.2d 55, 57-59 (2d Cir.1988); McCarthy v. Manson, 714 F.2d 234, 237-38 (2d Cir.1983).
DATED:
Respectfully submitted,
/s/ Andrew J. Peck Andrew J. Peck
United States Magistrate Judge
. The Trustee "neither concedes nor contests the characterization of this adversary proceeding as non-core.” (Trustee Br. at 7 n. 2.)
. If after reviewing Squadron’s motion to dismiss the matter seems more appropriate for bankruptcy court determination, the "Court can remand ... to the Bankruptcy Court as appropriate.” Houbigant v. ACB Mercantile, 185 B.R. at 686.
. The Court also rejects the Trustee’s argument that the pendency of the Trustee's "omnibus” proceedings against the Towers insiders and the outside accounting firm (alleging fraud, breach of fiduciary duty, conversion, RICO violations, and violation of federal securities laws) weighs against the withdrawal of the bankruptcy referral. (Trustee Br. at 15.) The Trustee also does not appear to have moved that proceeding very far. As with the fraudulent conveyance action, the District Court's well-developed knowledge of the facts and law concerning Squadron Ellenoff's representation of Towers outweighs any overlap with matters pending in the Bankruptcy Court. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492428/ | ORDER ON APPLICATION OF ATTORNEY TO TRUSTEE FOR COMPENSATION
BARBARA J. SELLERS, Bankruptcy Judge.
This matter is before the Court on the United States Trustee’s Objection to the application of Arnold S. White for compensation for legal services performed for the trustee in bankruptcy. Mr. White is also the trustee in this ease.
This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 157(a) and the General Order of Reference entered in this district. This is a core matter which this bankruptcy judge may hear and determine under 28 U.S.C. § 157(b)(2)(A).
Total receipts in this estate are 1,018.06. The trustee seeks $151.08 as trustee compensation plus $70.86 for expenses and $884.50 for services performed as attorney for the trustee. No distribution to creditors is contemplated because the amounts requested for administrative expenses exceed the total receipts.
On May 17, 1996 the United States Trustee objected to the application for fees for legal services. The date of the objection is interesting because the application was not filed with the clerk until June 4, 1996. It is also interesting that the fee application is for Arnold S. White although the counsel appointment on March 11, 1993 was of White and Associates.
The United States Trustee objects to fees sought by the attorney in the following categories:
1. Trustee Activities. The United States Trustee asserts that much of what is billed for attorney services is for activities which a trustee is required to perform without the assistance of counsel. Specifically the United States Trustee points to a total of $90.00 for collecting and reducing to money certain real and personal property of the estate and another $180.00 for matters relating to the preparation of a final report.
2. Overhead. The United States Trustee also objects to a total of $95.00 for items alleged to be compensable as overhead and not separately chargeable to the estate. These entries are for the filing of motions, applications and complaints in various courts.
3. Insufficient Description. Finally the United States Trustee points to a total of $365.00 for services asserted to be inadequately described or described so incompletely that it cannot be determined whether or not the charges are proper. Those entries are described as “wrote letter to _” or “telephone call to _” without further detail. One letter is described as “re: payment.”
In response to the United States Trustee’s objection, Mr. White made an impassioned *920plea for this Court to intervene and stop the United States Trustee’s current emphasis on objecting to fee applications of attorneys for chapter 7 trustees where the amounts in controversy are so small that the effort involved in the objection process is economically unrealistic and of no benefit to creditors. He states that even if the United States Trustee is successful in all of the objections, any resulting distribution to creditors would be less than the costs of mailing the checks and less than 1% of the filed claims against this estate. He further explains that the panel trustees feel beseiged by these objections in cases where there is no economic reality to the process and the objection process delays considerably the distribution to creditors. He represents that the trustees feel at a political disadvantage in defending themselves out of concern for an arbitrary termination of case assignments. Beyond those comments, there was little discussion of the merits of the objection.
This Court must resist the trustee’s invitation to rule on the internal processes of the United States Trustee’s office where such matters are not properly before the Court. The matter noticed for hearing was Mr. White’s fee application and the United States Trustee’s objections to that application. This Court must consider and rule only on the substance of the matters raised by the pleadings. The trustee presented no witness or other testimony, and it would be improper for this Court to consider matters not noticed for hearing and not presented through evidence.
With regard to the fee request, the Court finds that the burden of establishing the propriety of the charges for legal services is on the attorney for the trustee. Once an objection has been filed, the attorney must respond in a manner that permits the Court to determine whether the charges are appropriate to assess against the bankruptcy estate.
The Court cannot determine the propriety of services alleged to be for “trustee activities” — collecting and reducing to money real and personal property of the estate. As this Court has previously ruled, it is not the duty to which the services relate that determines whether the services are legal or administrative in nature. Rather, it is the precise action taken that is determinative. If the specific activity is one for which a fiduciary would normally seek legal assistance, it is appropriately charged as legal services. If it is an activity a lay person generally would perform in the context of the facts of this case without counsel, it may be compensated only through the trustee’s statutory fees. Because no explanation was given regarding the context of the questioned services, the Court must find that the attorney has not met his burden of showing an entitlement to compensation for those services.
The next group of entries is alleged to be non-compensable as “overhead”. Those services are for “filing” various legal pleadings in federal and state court. This Court is not prepared to rule, however, that such services are included in an attorney’s hourly rate as overhead. If a client needs to have documents filed, the client can be billed for such efforts. If there is not a messenger or clerical person available to perform those tasks, the attorney will have to do the filing. The availability of support personnel for filing with various courts is not as common in a small legal office as is represented here as in a large law firm. The hourly rate charged for such activities, however, should be reasonable for the expertise involved. The reasonableness of such charges is a factor in the evaluation of attorney fee requests, but such scrutiny is not the same as saying that the activity must be absorbed only as overhead. In this case the time spent and the hourly rate charged for such activities do not seem unreasonable. Five legal pleadings were filed at different times in different courts for a total charge of $95.00. Those charges will be allowed.
The final category of disputed items was for lack of specificity in the descriptions *921of the activities. The descriptions are so cursory that the reader cannot tell whether the activity is of a legal nature. That problem has appeared previously in this attorney’s applications and it is properly the source of objection. There is nothing in the questioned descriptions that informs this Court of the specific nature of the activities. Therefore, the objection on that ground will be sustained in the amount of $365.00.
Based on the foregoing, the objection of the United States Trustee is sustained in part and overruled in part. The attorney for the trustee is allowed compensation for services in the reduced amount of $249.50.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492431/ | ORDER DENYING PETITION FOR LEAVE TO PROCEED IN FORMA PAUPERIS FOR LACK OF JUSTICI-ABILITY
MARY D. SCOTT, Bankruptcy Judge.
THIS CAUSE is before the Court upon a “Notice of Appeal, Belated Appeal and Designation of Record” and a “Petition for Leave to Proceed Informa [sic] Pauper-is,” filed by the defendant Thomas Womack, Jr., on September 27, 1996. On September 19,1996, this Court issued its findings of fact and conclusions of law relating to the trial of the Complaint by the United States Trustee for injunction and sanctions pursuant to 11 U.S.C. § 110 against Thomas Womack, a bankruptcy petition preparer. However, inasmuch as the Court awaits a statement of costs from the U.S. Trustee, the Court has not issued a final order in this adversary proceeding. Until a final order is entered, the matter is not ripe for an appeal.1 Upon receipt of the statement from the U.S. Trustee, the Court will issue a final judgment. It is from that judgment that Womack may, within ten (10) days of entry of the judgment, file his notice of appeal. Inasmuch as there is no final order entered in this adversary proceeding from which an appeal lies, the petition for leave to proceed in forma pauper-is does not present a justiciable issue for the Court. Accordingly, it is
ORDERED: that the “Petition for Leave to Proceed Informa [sic] Pauperis,” filed by the defendant Thomas Womack, Jr., on September 27,1996, is denied, without prejudice, as not presenting a justiciable issue. Upon entry of a final order in this adversary proceeding and upon a timely filing of a notice of appeal of that order, Womack may file and/or re-file any appropriate motions.
IT IS SO ORDERED.
. Womack also attempted to appeal an order of August 7, 1996. No court has subject matter jurisdiction over an appeal filed so late. See Jacobson v. Nielsen, 932 F.2d 1272 (8th Cir.1991); Pilliod of Carolina, Inc. v. Ray (In re Arkansas Wholesale Furniture, Inc.), 19 B.R. 1013 (E.D.Ark.1992) (Roy, J.); In re Moody, 41 F.3d 1024 (5th Cir.1995). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492432/ | MEMORANDUM OF DECISION AND ORDER ON MOTION TO OPEN JUDGMENT BY DEFAULT
ROBERT L. KRECHEVSKY, Bankruptcy Judge.
I.
ISSUE
The court, in this core adversary proceeding originally commenced solely by Suroviak Electric, Inc. (“Suroviak”) on June 3, 1996, entered a judgment by default which revoked the Chapter 7 discharges of Norman E. Sylvia, Jr. (“Norman”) and Alison Sylvia (together, “the Debtors”). The Debtors, appearing pro se on June 28,1996, filed on that date a motion to open the judgment contending, inter alia, that they had not been given notice of Suroviak’s requests for a default, default judgment and of the entry of such orders, and that they learned of such motions and orders only after their issuance. Surov-iak opposes the motion, asserting that the Debtors do not allege they have a meritorious defense to the complaint; that Suroviak gave notice in hand to the Debtors of the request for a default; that the Debtors have not established excusable neglect for their failure to appear in the proceeding; and that under Fed.R.Civ.P. 5, made applicable by Bankruptcy Rule 7005, the defendants were not entitled to notice of the motion to enter default judgment because they failed to file an appearance.1 A hearing on the Debtors’ motion concluded on September 11, 1996, after which Suroviak and the Debtors submitted memoranda of law.
II.
BACKGROUND
Suroviak, on March 21, 1995, filed a complaint requesting the court to revoke the Debtors’ discharges pursuant to Bankruptcy Code § 727(d)(2) (court shall revoke discharge if debtor fails to report or deliver estate property to trustee). The complaint asserted that Suroviak was a creditor in the Debtors’ joint Chapter 7 case, commenced on or about October 10, 1991; that the court granted the Debtors’ discharges on or about February 7, 1992; that the joint case was closed on March 30,1994; and that the Debtors had knowingly and fraudulently failed to deliver various described estate assets to their Chapter 7 trustee. Fatima T. Lobo, Esq. (“Lobo”), on April 24,1995, entered her appearance for the Debtors and filed an answer to the complaint denying the allegations of failure to deliver estate assets to a trustee and requesting dismissal of the complaint. The court, on October 17, 1995, granted the uncontested motion of LaFramboise Well Drilling, Inc. to intervene as a co-plaintiff in the proceeding.
Lobo, on February 26, 1996, filed a motion for permission to withdraw her appearance for the Debtors, asserting that the Debtors “have failed to cooperate with their counsel by failing to meet with counsel to discuss various adversary proceedings.” Motion For Permission To Withdraw Appearance. In compliance with local rules2, Lobo had ad*8vised the Debtors that their “failure to engage successor counsel, or to file a pro se appearance in this matter ... may result in ... a default being entered against you-” Notice Required By Rule 15 Local Rules United States District Court For District Of Connecticut. Lobo’s motion to withdraw came on for hearing on March 14,1996, when Joel Kessler, Esq. (“Kessler”), the plaintiffs attorney, and Matthew Potter, Esq., Lobo’s associate, were present in court. The court granted Lobo’s motion after finding compliance with the local rules.
The Debtors neither immediately filed pro se appearances nor obtained the appearance of successor counsel in the adversary proceeding. Suroviak, on March 29, 1996, moved for the entry of a default for failure of the Debtors to file an appearance, and claims to have served the Debtors with its motion on March 29, 1996. The clerk of the bankruptcy court entered the Debtors’ default on April 4,1996. See Fed.R.Civ.P. 55(a).3
Suroviak, on May 2, 1996, filed a motion for judgment by default. See Fed.R.Civ.P. 55(b).4 The court, following receipt of an affidavit executed by a Suroviak officer in support of the motion, on June 3, 1996, entered the judgment by default. The Debtors, on June 28, 1996, filed the instant motion to open the judgment by default. A hearing on the motion was continued at the Debtors’ request so that they could obtain counsel. On August 20, 1996, Kenneth E. Lenz, Esq. entered his appearance for the Debtors, and, as noted, the hearing on the motion concluded on September 11,1996.
III.
DISCUSSION
The post-hearing memoranda submitted by the Debtors and Seroviak primarily deal with the issue of whether Suroviak had made service upon the Debtors of Suroviak’s motion for a default on March 29, 1996. Suroviak claims the testimony it presented establishes that Kessler, its attorney who lives in the same town as the Debtors (Waterford, Connecticut), personally hand-delivered the motion to Norman at the Debtors’ residence. Both Debtors denied such service was made. There is no need for the court to resolve this issue of credibility.
Fed.R.Civ.P. 55(b)(2) provides, in material part, that “[i]f the party against whom judgment by default is sought has appeared in the action, the party ... shall be served with written notice of the application for judgment at least 3 days prior to the hearing on such application.” This provision means that where a party, such as the Debtors, have once been represented by counsel, even if counsel later withdraws her appearance and *9neither successor counsel’s nor pro se appearances are filed, it is necessary that the three-day notice of the motion for judgment by default be served on such party before such judgment may enter. Thus, the withdrawal of Lobo did not eliminate the notice provision, but required that the notice be served on the Debtors instead of Lobo. See 10 Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure Civil 2nd § 2687 (1983) (“A party’s failure to appear or be represented at any stage of the proceedings following an initial appearance does not affect [the Rule 55(b)(2)] notice requirement”); Radack v. Norwegian America Line Agency, Inc., 318 F.2d 538, 542 (2d Cir.1963) (the notice “provisions [in Rules 5(a) and 55(b)(1) ] are clearly intended to apply only to parties who have never made an appearance; they are inapplicable where a party has failed to make an appearance at some subsequent stage of proceedings”). Cf., Traveltown, Inc. v. Gerhardt Investment Group, 577 F.Supp. 155 (N.D.N.Y.1983) (where defendants served an answer, they “appeared” in the action within the meaning of Rule 55(b)(2); although the court warned at the pretrial that a default application would be entertained in the event any party failed to appear on the trial date, defendant was still entitled to three-day notice under the rule despite failure to appear).
Suroviak presented no evidence, and makes no claim, that its motion for the entry of a default judgment, filed with the clerk’s office on May 2, 1996, was served on the Debtors. Suroviak’s failure to give the three-day notice justifies granting the Debtors’ motion and setting aside the default judgment.5
IV.
CONCLUSION
Fed.R.Civ.P. 55(c) provides that “[i]f a judgment by default has been entered [the court] may ... set it aside in accordance with Rule 60(b).” Fed.R.Bankr.P. 9024 provides that “Rule 60 F.R.Civ.P. applies in cases under the Code” with exceptions not relevant to the matter at issue. Fed.R.Civ.P. 60(b)(1) authorizes a court to “relieve a party ... from a final judgment, order, or proceeding for the following reasons: (1) mistake, inadvertence, surprise, or excusable neglect.” The court concludes it was a mistake for the court' to have entered the judgment by default. The Debtors’ motion to open the judgment is granted, the judgment by default is set aside, and the clerk’s office shall schedule a pre-trial conference in the adversary proceeding. It is
SO ORDERED.
. Fed.RXiv.P. 5(a), in pertinent part, provides that "[n]o service need be made on parties in default for failure to appear....”
. Local R.Civ.P. 15, made applicable in the bankruptcy court by Loc.R.Bankr.P. 1(b), states:
Withdrawal of appearances may be accomplished only by leave of Court on motion duly noticed, and normally shall not be granted except upon a showing that other counsel has appeared or that the party has elected to proceed pro se, and that the party whose counsel seeks to withdraw has received actual notice by personal service or by certified mail of the motion to withdraw. In cases where the party has failed to engage other counsel or file a pro se appearance, where good cause exists for permitting the withdrawal by the appearing counsel, the Court may grant the motion to withdraw the appearance after notice to the party that failure to either engage successor counsel or file a pro se appearance will result in the granting of the motion to withdraw and *8may result in a dismissal or default being entered against the party.
. Fed.R.Civ.P. 55(a), made applicable in bankruptcy court by Fed.R.Bankr.P. 7055, provides:
When a party against whom a judgment for affirmative relief is sought has failed to plead or otherwise defend as provided by these rules and that fact is made to appear by affidavit or otherwise, the clerk shall enter the party’s default.
. Fed.R.Civ.P. 55(b) provides:
Judgment by default may be entered as follows:
(1) By the Clerk. When the plaintiff’s claim against a defendant is for a sum certain or for a sum which can by computation be made certain, the clerk upon request of the plaintiff and upon affidavit of the amount due shall enter judgment for that amount and costs against the defendant, if the defendant has been defaulted for failure to appear and is not an infant or incompetent person. (2) By the Court. In all other cases the party entitled to a judgment by default shall apply to the court therefor; but no judgment by default shall be entered against an infant or incompetent person unless represented in the action by a general guardian, committee, conservator, or other such representative who has appeared therein. If the party against whom judgment by default is sought has appeared in the action, the party (or, if appearing by representative, the party’s representative) shall be served with written notice of the application for judgment at least 3 days prior to the hearing on such application. If, in order to enable the court to enter judgment or to cany it into effect, it is necessary to take an account or to determine the amount of damages or to establish the truth of any averment by evidence or to make an investigation of any other matter, the court may conduct such hearings or order such references as it deems necessary and proper and shall accord a right of trial by jury to the parties when and as required by any statute of the United States.
. "On the other hand, when a defaulting party has failed to appear, thereby manifesting no intention to defend, he is not entitled to notice of the application for a default judgment under either Rule 55(b)(1) or Rule 55(b)(2).” 10 Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure Civil 2nd § 2687 (1983). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492433/ | MEMORANDUM — DECISION AND ORDER
ROBERT E. LITTLEFIELD, Jr., Bankruptcy Judge.
This matter is before the Court on the motion filed by the defendant, American Express Travel Related Services Company, Inc. (“American Express”), to dismiss the Chapter 7 Trustee’s (“Trustee”) complaint for improper venue pursuant to 28 U.S.C. § 1409(b). The Trustee’s complaint seeks to avoid a preferential transfer to American Express under 11 U.S.C. § 547(b). American Express also requests reasonable costs incurred in making its motion.
This matter falls within the Court’s core subject matter jurisdiction under 28 U.S.C. § 157(b)(2)(F).
FACTS
The Debtor, Donna Guilmette (“Debtor”), filed a Chapter 13 bankruptcy petition on November 23, 1994 and the case was subsequently converted to a Chapter 7 bankruptcy. The Trustee commenced the instant adversary proceeding alleging that within 90 days before the filing of the petition, the Debtor transferred $913.28 to American Express to pay an antecedent debt. The Trustee contends that the transfer constitutes an avoidable preference under section 547(b) of the Bankruptcy Code (11 U.S.C. §§ 101 et seq. hereinafter the “Code”) because the transfer enabled American Express to receive more than it would have received in a Chapter 7.
American Express is a New York corporation with a principal place of business in New York City. It argues that because its principal place of business is located in the Southern District of New York, venue in the Northern District of New York is improper. *11American Express relies on 28 U.S.C. § 1409(b), which provides that the trustee may commence a proceeding arising in or related to the bankruptcy case to recover property worth less than $1,000.00 only in the district court for the district where the defendant resides.
DISCUSSION
I. Overview of § 1409
The general venue statute for bankruptcy proceedings is 28 U.S.C. § 1409.1 Courts generally agree that section 1409(a) sets forth the rule that venue for these proceedings is proper in the “home court” where the bankruptcy petition is filed, subject to the exceptions in subsections (b) and (d). See In re Eagle-Picher Indus., Inc., 162 B.R. 140, 142 (Bankr.S.D.Ohio 1993); In re Continental Airlines, Inc., 133 B.R. 585, 587 (Bankr.D.Del.1991); In re F/S Airlease II, Inc., 67 B.R. 428, 431 (Bankr.W.D.Pa.1986); In re Burley, 11 B.R. 369, 382-3 (Bankr.C.D.Cal.1981). Subsection (b) excludes matters “arising under” title 11 and is limited to proceedings “arising in” or “related to” a bankruptcy case. Subsection (d) does not apply because the Debtor paid American Express pre-petition.
II. “Arising under,” “arising in,” and “related to”
American Express’s motion presents the issue of whether 28 U.S.C. § 1409(b) requires the Trustee to bring his preference action to recover the prepetition transfer only in the Southern District of New York, where defendant resides.2 Courts have analyzed the limitation in the scope of proceedings covered by subsection (b) with differing results. See, e.g., In re Little Lake Indus., Inc., 158 B.R. 478 (9th Cir. BAP 1993); In re Van Huffel Tube Corp., 71 B.R. 155 (Bankr.N.D.Ohio 1987). In Van Huffel Tube, the court reasoned that the phrases “arising under,” “arising in,” and “related to” were “terms of art” Congress used to distinguish types of proceedings bankruptcy judges could hear and the places where those proceedings could be heard. 71 B.R. at 156. It concluded that a preference action was clearly a proceeding “arising under” title 11, since it could not exist but for a title 11 provision. Because 28 U.S.C. § 1409(b) only covers proceedings “arising in” and “related to” bankruptcy cases, the court concluded that venue was proper in the bankruptcy court where the petition was filed. 71 B.R. at 156-7.
In Little Lake, the Ninth Circuit Bankruptcy Appellate Panel disagreed with the *12result reached in Van Huffel Tube. The panel agreed that preference actions “arise under” title 11. 158 B.R. at 480. But after extensive analysis of the plain language and history of the statute and the use of the terms in related statutes, it concluded that “the terms ‘arising under’ and ‘arising in’ cannot be interpreted as mutually exclusive.” Id. at 484. It held that for section 1409 purposes, all proceedings “arising under” title 11 “arise in” the bankruptcy ease, thus, the trustee must lodge preference actions for recovery of less than $1,000 in the district court for the district where the defendant resides. Id.
This court disagrees with the result in Little Lake and agrees with the decision in Van Huffel Tube. With the advent of the Bankruptcy Reform Act of 1978, Congress intended to confer the broadest possible jurisdiction over bankruptcy cases upon the bankruptcy courts. See H.R.Rep. No. 595, 95th Cong., 1st Sess. 44 (1978). U.S.Code Cong. & Admin.News 1978, pp. 5968, 6005. In so doing, Congress defined three bases for jurisdiction: “arising under title 11,” “arising under a case under title 11” and “related to a case under title 11.” As finally codified in 28 U.S.C. § 1471,3 the second basis of jurisdiction, “arising under a ease under title 11,” was changed to “arising in a case under title 11.”
The “arising under” basis involves federal question jurisdiction and any “arising under” proceeding is based on a substantive claim under title 11. See 28 U.S.C. § 1381; In re Lorren, 45 B.R. at 588. Two alternative tests are used to determine federal question jurisdiction. See American Well Works Co. v. Layne & Bowler Co., 241 U.S. 257, 36 S.Ct. 585, 60 L.Ed. 987 (1916); Gully v. First Nat’l. Bank, 299 U.S. 109, 57 S.Ct. 96, 81 L.Ed. 70 (1936). Under either of these tests, a proceeding “arising under” title 11 must involve a substantial right or cause of action found in the Bankruptcy Code itself and not a nonbankruptcy-created right incorporated into the Bankruptcy Code by reference.
Code § 547 provides for preference actions, actions that exist only under federal bankruptcy law. Clearly, preference actions “arise under” title 11. In re Little Lake, 158 B.R. at 480; In re Van Huffel Tube, 71 B.R. at 156. The central question the Court must decide is whether the Trustee’s preference action also “arises in” or “relates to” the bankruptcy case.
The second jurisdictional basis (“arising in”) includes those proceedings existing only inside the bankruptcy but are based on rights not expressly created by title 11. See In re Wood, 825 F.2d 90, 97 (5th Cir.1987); In re S.E. Hornsby & Sons Sand and Gravel Co., 45 B.R. 988, 995 (Bankr.M.D.La.1985). The issues in In re Wood and In re Hornsby centered on core proceeding and abstention matters and did not involve a section 1409 venue issue. But abstention, core proceedings and venue all involve the subject matter jurisdiction of the bankruptcy court. Since the terms “arising under,” “arising in” and “related to” describe bankruptcy jurisdiction, the definition of these terms must equally apply in all situations. See In re Lorren, 45 B.R. 584, 588 (Bankr.N.D.Ala.1984). Consequently, bankruptcy proceedings could be “arising under” where they have no basis except in title 11 or they could be “arising in” where their resolution depends on nonbankruptcy law. In re Wood, 825 F.2d at 97; In re Hornsby, 45 B.R. at 995.
The instant preference action “arises under” Code § 547(b). In filing this preference action, the Trustee exercised a right expressly created by title 11; he did not exercise this right under any nonbankruptey law because no such law exists. Although the preference action would not exist outside of the bankruptcy, nonbankruptcy law does not control its outcome. Consequently, the action does not “arise in” the bankruptcy case.
Furthermore, although proceedings “arising under” and “arising in a case under” title 11 are both “core” proceedings under 28 U.S.C. § 157(b)(1), the Court cannot overlook the fact that 28 U.S.C. § 1409(b) specifically excludes proceedings “arising under” title 11. Because Congress chose not to include “aris*13ing under” proceedings in subsection (b), the Court presumes that Congress acted intentionally and purposely in the exclusion. See Russello v. United States, 464 U.S. 16, 23, 104 S.Ct. 296, 300-01, 78 L.Ed.2d 17 (1983). For these reasons, the Court does not agree with the bankruptcy appellate panel in Little Lake that “arising under” and “arising in” are interchangeable for section 1409 purposes.
As for the third jurisdictional basis (“related to”), the Second Circuit test is whether the proceeding has any “significant connection” with the bankruptcy ease. In re Turner, 724 F.2d 338, 341 (2d Cir.1983). Under 28 U.S.C. § 157(b)(1), proceedings “arising under” title 11 are “core” proceedings but under 28 U.S.C. § 157(c)(1), “related to” proceedings are “noneore” proceedings. While the bankruptcy court can enter final orders in a core proceeding, it cannot enter a final order in a noncore proceeding without the parties’ consent. 28 U.S.C. § 157(e)(1-2). Given this attenuation, the “related to” basis of jurisdiction does not appear to have any affinity or interchangeability with the “arising under” basis. See In re Little Lake, 158 B.R. at 482. Furthermore, since the Court does not agree that “arising under” is interchangeable with “arising in” in this case, the instant preference action cannot “relate to” the bankruptcy case for section 1409(b) purposes.
Under current law, the Trustee’s preference action is subject to the venue provisions of 28 U.S.C. § 1409. The proceeding is subject to subsection (a) not only because all elements necessary to establish a prima facie claim are contained in title 11 (“arising under”), but because the Trustee has to forego all preferences under $600.00 as well as those that occurred more than 90 days before the filing of the bankruptcy petition. Code § 547(b)(4)(A) and (c)(8). To subject the Trustee further to venue outside the home court would be unfair. As the Senate observed in 1978, “trustees have had great difficulty in recovering preferences that have been made to creditors prior to the bankruptcy proceeding.” S.Rep. No. 989, 95th Cong., 2d Sess. 6 (1978), U.S.Code Cong. & Admin.News 1978, pp. 5787, 5792.
Conclusion
In his preference action, the Trustee seeks to avoid the Debtor’s prepetition transfer to American Express in the amount of $913.28 pursuant to section 547(b). Because 28 U.S.C. § 1409(a) applies to this action, venue is proper in the Northern District of New York.
Accordingly, and for the reasons stated,
IT IS HEREBY ORDERED that the motion by American Express Travel Related Services Company, Inc. for dismissal of the above-entitled adversary proceeding for improper venue with costs is DENIED.
IT IS SO ORDERED.
. § 1409. Venue of proceedings arising under title 11 or arising in or related to cases under title 11
(a) Except as otherwise provided in subsections (b) and (d), a proceeding arising under title 11 or arising in or related to a case under title 11 may be commenced in the district court in which such case is pending.
(b) Except as provided in subsection (d) of this section, a trustee in a case under title 11 may commence a proceeding arising in or related to such case to recover a money judgment of or property worth less than $1,000 or a consumer debt of less than $5,000 only in the district court for the district in which the defendant resides.
(c) Except as provided in subsection (b) of this section, a trustee in a case under title' 11 may commence a proceeding arising in or related to such case as statutory successor to the debtor or creditors under section 541 or 544(b) of title 11 in the district court for the district where the State or Federal court sits in which, under applicable nonbankruptcy venue provisions, the debt- or or creditors, as the case may be, may have commenced an action on which such proceeding is based if the case under title 11 had not been commenced.
(d) A trastee may commence a proceeding arising under title 11 or arising in or related to a case under title 11 based on a claim arising after the commencement of such case from the operation of the business of the debtor only in the district court for the district where a State or Federal court sits in which, under applicable nonbankraptcy venue provisions, an action on such claim may have been brought.
(e) A proceeding arising under title 11 or arising in or related to a case under title 11, based on a claim arising after the commencement of such case from the operation of the business of the debtor, may be commenced against the representative of the estate in such case in the district court for the district where the State or Federal court sits in which the party commencing such proceeding may, under applicable nonbankrapt-cy venue provisions, have brought an action on such claim, or in the district court in which such case is pending.
28 U.S.C.A. § 1409 (West 1993) (emphasis added).
. The Court assumes, for the purposes herein, that American Express resides in the Southern District of New York and makes no finding as to its residency.
. Bankruptcy Reform Act, Pub.L. 95-598, 92 Stat. 2549 (1978). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492434/ | MEMORANDUM
DAVID T. STOSBERG, Bankruptcy Judge.
This case comes before the Court on the Motion of Stephen M. George, attorney for Debtors, for Approval of Attorney’s Fee as Administrative Expense. According to the bankruptcy petition and Mr. George’s Motion, the Debtors agreed to pay Mr. George a total fee of $600 for services rendered in this Chapter 7 case. In addition, Mr. George advanced the filing fee of $160. Presumably the Debtors have failed to fulfill their agreement to pay Mr. George his fee.
This case is an asset case, real property having been sold by the Trustee. It appears from the file that there will be sufficient sums in the estate to pay Mr. George’s fee. The question is whether a debtor’s attorney *81in a Chapter 7 case is entitled to receive his fee out of assets generated for the benefit of the estate. The issue under the Bankruptcy Code is specifically, whether the services of the debtor’s attorney “benefitted the estate.” 11 U.S.C. § 330.
This case was filed prior to the effective date of the 1994 Reform Act, which amended the Bankruptcy Code. We look to the state of the law prior to the effective date of the amendments. The case law prior to the Reform Act analyzes the question of awarding attorney fees in Chapter 7 cases in terms of “benefit to the estate.” See In re Towery, 53 B.R. 76, 78 (Bankr.W.D.Ky.1985); 2 Collier on Bankruptcy § 330.05 at 330-43 (1995).
The majority of courts addressing this question hold that the debtor’s attorney is entitled to a legal fee out of estate assets for assisting the debtors in performing their “administrative responsibilities.” See In re Ewing, 167 B.R. 233, 235 (Bankr.D.N.M.1994); In re Bennett, 133 B.R. 374, 378 (Bankr.N.D.Tex.1991); In re Leff, 88 B.R. 105, 108 (Bankr.N.D.Tex.1988); In re Brady, 20 B.R. 936, 938 (Bankr.N.D.Ohio 1982); In re Schaeffer, 71 B.R. 559, 560-61 (Bankr.S.D.Ohio 1987); In re Riverview Financial Services, Inc., 67 B.R. 714, 715 (Bankr.E.D.Mich.1986); and In re Vlachos, 61 B.R. 473, 482 (Bankr.S.D.Ohio 1986). This includes giving advice regarding bankruptcy, preparation and filing of the petition, and preparing for and representing the debtor at the meeting of creditors. Id. To recover from the estate for any other services, the attorney must demonstrate the benefit conferred upon the estate by his or her services. Id. We note that at least two courts required a farther demonstration that the debtors are not capable of paying the fees in questions. See Vlachos and Schaeffer, supra.
Mr. George did not file time entries describing the work he performed in this case. From what the Court is able to glean from the file, Mr. George’s services consisted of advising the Debtors on bankruptcy, preparing and filing the bankruptcy petition, attending the 341 meeting of creditors, and signing and filing one reaffirmation agreement on behalf of the Debtors. These duties are clearly part of a debtor’s “administrative responsibilities” which are compensable out of the estate. Since Mr. George has not detailed his time entries, the Court finds $500 to be a reasonable fee for this type of case, which amount is commensurate with the range of fees normally charged in this District in Chapter 7 cases. Further, the Court will award Mr. George the filing fee he expended on behalf of the Debtors in the amount of $160.
The Debtors have claimed a total exemption of $12,000 in the real estate sold by the Trustee and presumably will receive some money from the Trustee out of the sale proceeds. The Court questions the good faith of the Debtors in failing to pay Mr. George his agreed upon fee out of the money they will receive from their exemption. Payment of Mr. George’s fee from their exempt funds would not hinder the Debtors’ fresh start as contemplated by the Bankruptcy Code.
The Court hereby notifies counsel in Chapter 7 cases that in order to receive estate funds, time entries need to be filed indicating that the work was done to assist the debtor in his administrative responsibilities as outlined above. Further, the attorney should include a certification to the Court that the Debtors are unable to pay the attorney fee requested.
An Order has been entered this same date awarding Stephen M. George an attorney fee of $500 and reimbursement of expenses in the sum of $160, to be paid by the Trustee out of the estate, provided monies are available. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492435/ | MEMORANDUM OF DECISION
JAMES H. WILLIAMS, Chief Judge.
Before the court is an objection filed by the debtor, Heidi Lesnick (Debtor), to the claim of the Internal Revenue Service (IRS). The IRS filed a response asserting that the entire amount of the claim is due. The court conducted a hearing on the matter and, following the submission of post-hearing memo-randa by the parties, took it under advisement.
FACTS
The Debtor and Jerome Lesnick (Mr. Les-nick) (collectively, Lesnieks) have been married since 1983. From that time until 1993, the Debtor did not work outside the home. She is a high school graduate who has no formal training in either accounting or finance. Prior to her marriage to Mr. Les-nick, the Debtor worked as a bank teller for approximately 10 years.
In 1987, the Lesnieks legally resided in Florida but spent a significant amount of time in Ohio. Mr. Lesnick owns a condominium in Florida, and both the Debtor and Mr. Lesnick own a three bedroom house in Ohio with an appraised value of approximately $120,000.00. Mr. Lesnick also owned a rental property in Ohio and a one-third interest in a ski chalet in New York. In 1992, he transferred his interest in the rental property and ski chalet to the Debtor.
Mr. Lesnick handled the financial affairs of the Lesnick household. He paid the household bills and was involved in various business enterprises. Mr. Lesnick gave the Debtor money to purchase groceries and other household items.
During their marriage, the Debtor and Mr. Lesnick took two or three vacations per year. They traveled to Florida where they stayed in the condominium and to New York where they used the ski chalet. Mr. Lesnick has made certain gifts to the Debtor during their marriage including various items of jewelry. Mr. Lesnick provided the Debtor with various automobiles. In the early years of their marriage, the Debtor drove vehicles which were titled in Mr. Lesnick’s name; in later years, the vehicles were owned by Lesnick Leasing, Inc. which was solely owned by Mr. Lesnick.
In 1987, Mr. Lesnick acquired a 94% interest in a company known as Erectors, Inc. (Erectors). The remaining shares of Erectors were owned by Mike Conley. The Debtor served as the corporate secretary of *84Erectors. However, she has never been employed by the company and has never received any compensation from it. The Debt- or has never owned any shares of Erectors.
At the time Mr. Lesnick acquired his interest, Erectors was a sub-chapter C corporation pursuant to the Internal Revenue Code. Immediately thereafter, Erectors elected sub-chapter S status which necessitated the filing of two federal income tax returns for 1987. Erectors was a cash basis taxpayer when Mr. Lesnick acquired it but was converted to an accrual basis taxpayer thereafter. Erectors reported a $548,842.00 loss on Form K-l for 1987. Dale Jobe, a Certified Public Accountant (Jobe), prepared the tax returns and Form K-l for Erectors in 1987.
In 1987, the Lesnicks filed a joint tax return which was also prepared by Jobe. The return reported taxable income of $215,-710.00, including a $591,596.00 loss from “Rents, Royalties, partnerships, estates and Trusts,” and tax liability of $54,912.00. The “Rents, Royalties” loss included the $548,-842.00 loss reflected on Erectors’ 1987 Form K-l. After the application of $640.00 of pri- or payments, the Lesnicks owed $54,272.00 which they paid by check.
Although she did not read or review the 1987 tax return, the Debtor signed it voluntarily and without duress. She made no inquiries of either Mr. Lesnick or Jobe as to the accuracy of the return and specifically the propriety of the loss reflected on Erectors’ Form K-l. The Debtor testified that she was not prohibited from reviewing the return or from making such inquiries but rather she chose not to do so, relying on her husband and Jobe. Mr. Lesnick testified that he never directly lied to the Debtor relating to their financial affairs but he did not disclose to her the financial condition of some of his business ventures including Erectors.
In 1987, the Lesnicks sold stock in Carter Jones Lumber for approximately $1.64 million. During their marriage, Mr. Lesnick had given stock to the Debtor which accounted for approximately $80,000.00 of the total stock sold. As a result of these sales and other less significant transactions, the Les-nicks reported an $886,306.00 capital gain on their 1987 federal income tax return. The Debtor used the proceeds from the sale of her stock to purchase a golf club membership used in connection with Mr. Lesnick’s condominium in Florida.
The Lesnicks carried back a 1988 net operating loss passed through to them from Erectors to their 1987 return. As a result, the Lesnicks received a refund of their previously reported 1987 tax liability plus interest.
Sometime after 1987, the IRS conducted an audit of 1987 tax returns of both Erectors and the Lesnicks. As a result of that audit, a substantial portion of the deductions which resulted in Erectors’ 1987 loss was disallowed for that year. The deductions related to a consulting agreement with the previous owner of Erectors. Mr. Lesnick testified that the amount of the deduction was not disputed but rather the timing of it. On their original 1987 return, Erectors deducted $500,000.00 relating to the consulting agreement. However, the IRS later determined that that amount should have been amortized over several tax periods. As a result, the Lesnicks consented to a determination that their federal income tax liability for 1987 should have been $167,162.00. This liability was satisfied through carry backs of losses from subsequent years.
Erectors had significant financial difficulties after Mr. Lesnick acquired it. As a result of these problems, Mr. Lesnick expended significant sums of money in an attempt to keep the company in business. Despite these efforts, a receiver was appointed for Erectors in 1993 and the company was liquidated for the benefit of its creditors. The Debtor testified that she first learned of the financial trouble of Erectors when the receiver was appointed. Since that time, she has not filed a joint tax return with Mr. Lesnick.
Recently, Mr. Lesnick was convicted of federal bank fraud. He testified that from 1988 through 1993, he borrowed various amounts of money and pledged collateral which was either pledged to another bank or did not exist. At the time of the hearing before this court, Mr. Lesnick had not been *85sentenced; he has subsequently been sentenced to serve 14 months in prison.
The IRS assessed a $41,791.00 penalty against the Lesnieks on July 18, 1994 which is reflected in the certified copy of the IRS transcript for the Lesnieks’ joint account. The transcript also reflects that the IRS “abated” the penalty on the same date. On March 20, 1995, the IRS sent a notice to the Lesnieks that their joint account for the 1987 tax year had been changed because the “MISCELLANEOUS PENALTY THAT WAS PREVIOUSLY CHARGED HAS BEEN REDUCED” by $41,791.00. According to this notice, the balance owed by the Lesnieks relating to their 1987 tax year was $1,082.80.
On May 15,1995, the IRS filed the amended proof of claim which is presently at issue. The total claim is $42,873.80 which includes a $41,791.00 penalty relating to the understatement of 1987 tax liability and $1,082.80 which represents interest paid by the IRS to the Lesnieks. That interest was paid on the refund the Lesnieks received relating to their 1987 tax return as a result of the carry back of the 1988 net operating loss of Erectors.
DISCUSSION
A. In General
The court has jurisdiction in this matter by virtue of 28 U.S.C. § 1334(b) and General Order No. 84 entered in this district on July 16, 1984. This is a core proceeding under 28 U.S.C. § 157(b)(2)(B). This Memorandum of Decision constitutes the court’s findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052.
Counsel for the Debtor makes two separate arguments which are at issue before the court. First, he argues that as a result of the $41,791.00 abatement made by the IRS on July 18,1994, the claim of the IRS is only $1,082.80. Second, counsel for the Debtor argues that pursuant to 26 U.S.C. § 6013(e), the Debtor qualifies as an “innocent spouse” who is relieved of liability relating to the IRS’ claim.
B. Abatement
The Commissioner of Internal Revenue has the discretion to waive the imposition of a penalty. Caulfield v. Commissioner, 33 F.3d 991 (8th Cir.1994), cert. denied, — U.S. -, 115 S.Ct. 1358, 131 L.Ed.2d 216 (1995). What is at issue herein is whether the IRS waived its claim for a penalty as against the Debtor.
Pursuant to 11 U.S.C. § 362(a), the IRS cannot make an assessment against a taxpayer who has filed a bankruptcy petition unless it obtains relief from the automatic stay to do so or the stay is otherwise lifted by the bankruptcy court. If the taxpayer’s spouse has not also filed a bankruptcy petition, the IRS may take such action against the non-bankrupt spouse. Fred Yellon (Yellon), who has been employed by the IRS for approximately 24 years and has worked in the Special Procedures Branch of the IRS for the past 18 years, testified that to assess amounts against the non-bankrupt spouse, the IRS establishes what it terms a “non-master file” in the name of the non-bankrupt spouse only. According to Yellon’s testimony, the IRS corrects any assessment made against a debtor in violation of the automatic stay of the Bankruptcy Code. Indeed, failure to reverse violations of the automatic stay may result in the imposition of sanctions pursuant to 11 U.S.C. § 362(h).
The Debtor filed her Chapter 11 petition on September 18, 1993. The assessment of the $41,791.00 penalty on July 18, 1994 in the joint IRS account of the Lesnieks represented a violation of the Bankruptcy Code’s stay provision. However, as indicated in the certified copy of the IRS transcript for the Lesnieks’ joint account, the IRS “abated” the assessment on the same date it was made. In addition, the copy of the IRS transcript for Mr. Lesnick’s “non-master file” indicates that the IRS assessed a penalty in the same amount, $41,791.00, against Mr. Lesnick. Mr. Lesnick has not filed a bankruptcy petition, and thus, the IRS is not stayed from making an assessment against him.
Yellon also testified that in his experience, the IRS has never waived a penalty unless the taxpayer first has made a request for *86such waiver. There is no evidence before the court which indicates that the Debtor requested a waiver of the penalty at issue.
Based on the above, the court finds that the evidence is consistent with the IRS having corrected its assessment made against the Debtor after she filed her bankruptcy petition and seeking to collect its claim against her through this court. The court thus concludes that IRS did not waive its claim against the Debtor for the $41,791.00 penalty.
C. Innocent Spouse
1. The Test
Spouses who file joint returns are jointly and severally hable for the full amount of tax due on their combined incomes. I.R.C. § 6013(d)(3) (1995). Such liability exists “regardless of the source of the income or of the fact that one spouse may be far less informed about the contents of the return than the other.” Sonnenborn v. Commissioner, 57 T.C. 373, 381, 1971 WL 2600 (1971). One exception to this rule is the innocent spouse provision as set forth in 26 U.S.C. § 6013(e):1
Spouse relieved of liability in certain cases. (1) In general. Under regulations prescribed by the Secretary, if—
(A) a joint return has been made under this section for a taxable year
(B) on such return there is a substantial understatement of tax attributable to grossly erroneous items of one spouse,
(C) the other spouse establishes that in signing the return he or she did not know, and had no reason to know, that there was such substantial understatement, and
(D) taking into account all the facts and circumstances, it is inequitable to hold the other spouse liable for the deficiency in tax for such taxable year attributable to such substantial understatement,
then the other spouse shall be relieved of liability for tax (including interest, penalties, and other amounts) for such taxable year to the extent such liability is attributable to such substantial understatement.
The alleged innocent spouse has the burden of proof with respect to each requirement of § 6013(e)(1). Shea v. Commissioner, 780 F.2d 561, 565 (6th Cir.1986).
The IRS concedes that the first two elements of the innocent spouse provision have been satisfied. Thus, at issue in this matter is whether the Debtor satisfies the remaining two elements.
2. Knowledge
There is no evidence which indicates that the Debtor had actual knowledge that the 1987 return contained a substantial understatement. However, the Debtor will be unable to satisfy the third element of the innocent spouse defense if “a reasonably prudent taxpayer in her position at the time she signed the return could be expected to know that the return contained the substantial understatement.” Price v. Commissioner, 887 F.2d 959 (9th Cir.1989). Generally relevant to the determination of a “reason to know” are the alleged innocent spouse’s level of education and involvement in the family’s business and financial affairs, the presence of expenditures that appear lavish or unusual when compared to the family’s past levels of income, standard of living, and spending patterns, and the culpable spouse’s evasiveness and deceit concerning the couple’s finances. Stevens v. Commissioner, 872 F.2d 1499, 1505 (11th Cir.1989) (citations omitted). The alleged innocent spouse’s role as homemaker and complete deference to her husband’s judgment concerning the couple’s finances, standing alone, are insufficient to establish that a spouse had no reason to know. Shea v. Commissioner, 780 F.2d 561, 566-67 (6th Cir.1986).
Although a spouse may not turn a blind eye toward any misconduct, the duty to inquire does not extend so far as to impose *87on a spouse the duty to seek advice from her own independent legal and financial advisers as to the propriety of her spouse’s investments. Friedman v. Commissioner, 53 F.3d 523, 531 (2nd Cir.1995) (citations omitted). A spouse can satisfy her duty of inquiry by receiving assurances that the return was prepared by a reputable accountant. Resser v. Commissioner, 74 F.3d 1528, 1542 (7th Cir.1996) (citations omitted).
Counsel for the IRS has attempted to paint the Lesnieks’ lifestyle as lavish by fo-cussing on the gifts given by Mr. Lesnick to the Debtor, the fact that their home has a swimming pool and the vacations which the Lesnieks took. However, “one person’s luxury may be another’s necessity, and the lavishness of an expense must be measured from each family’s relative level of ordinary support.” Kistner v. Commissioner, 18 F.3d 1521, 1525 (11th Cir.1994) (citing Sanders v. United States, 509 F.2d 162, 168 (5th Cir.1975)).
Counsel for the IRS points to the fact that the Debtor knew that Mr. Lesnick had invested in Erectors as evidence that the Debtor had reason to know of the substantial understatement. However, mere knowledge of an investment is insufficient to support a conclusion that a spouse knew or had reason to know that a deduction of a loss resulting from that investment would give rise to a substantial understatement. Erdahl v. Commissioner, 930 F.2d 585 (8th Cir.1991).
As further evidence that the Debtor had reason to know of the substantial understatement, counsel for the IRS. directs the court to the fact that the Lesnieks reported capital gains totaling approximately $886,000.00 in 1987 yet, after the loss carry back from 1988, they had no tax liability. In particular, counsel for the IRS notes that the Debtor sold approximately $80,000.00 of stock. The court does not see the direct relation between the capital gains and the substantial understatement at issue herein. The Lesnieks’ 1987 tax return would have reflected a substantial understatement of tax liability even if they had not realized the capital gains. Had the reported loss of Erectors been proper for 1987, the Lesnieks legitimately would have had no tax liability for 1987 despite the significant capital gains. Thus, knowledge of the capital gains does not provide a basis for concluding that the Debtor had or should have had reason to know of the substantial understatement. It must also be noted that it is possible to realize losses, for tax purposes, that have nothing to do with cash flow.
The Debtor has a high school education and no formal training in accounting or finance. She has a very limited role in the family finances. She relied upon her husband and the CPA they employed to prepare their tax returns. During the year at issue, 1987, and for several years thereafter, the Lesnieks’ lifestyle did not change. Mr. Les-nick was trying to save Erectors by directing any available funds to the ailing company.
Mr. Lesnick testified that although he did not lie to the Debtor regarding the status of their financial affairs, he did not tell her everything. Although there was nothing to prevent her from reviewing their financial records including those of Erectors, the Debtor had no reason to do so. The Les-nicks’ income available for household expenditures remained substantially the same. Mr. Lesnick gave no indication to her that any problems existed. Based on these facts, the court finds that the Debtor did not know or have reason to know of the substantial understatement of the 1987 federal income tax liability.
3. The Equities
Whether it would be inequitable to hold the Debtor liable for the 1987 tax liability must be determined “taking into account all the facts and circumstances ...” in the words of the statute. One material factor which the court must consider is whether the Debtor obtained a significant benefit from the substantial understatement. For this purpose, “normal support” is not considered a significant benefit. Flynn v. Commissioner, 93 T.C. 355, 367, 1989 WL 107095 (1989). However, unusual or lavish support or gifts to the spouse seeking relief are considered even when the benefit is received several years after the year in which the substantial understatement occurred. Estate of Krock v. *88Commissioner, 93 T.C. 672, 679, 1989 WL 148355 (1989).
The Debtor did not obtain a significant benefit from the substantial understatement of the Lesnicks’ 1987 tax liability. The Lesnicks’ standard of living remained the same in 1987 and subsequent years. The Debtor received gifts from, her husband during this time but nothing in excess of the gifts she had received throughout their marriage. Mr. Lesnick apparently used any benefit which was obtained from the substantial understatement to help fund the fledgling operations of Erectors, a company in which the Debtor had no ownership interest.
Counsel for the IRS further argues that, as a matter of policy, it is not inequitable to hold the Debtor liable for the taxes at issue. Throughout their marriage, the Debtor has obtained the benefits of that marriage by filing joint tax returns. In addition, she has signed documents releasing any claims of dower she might have relating to certain real properties owned 'by Mr. Lesnick in connection with Mr. Lesnick obtaining financing for his various business ventures. Counsel for the IRS thus argues that because she has obtained these benefits and exercised these rights, it would not be inequitable to hold the Debtor liable for one of the resulting costs of that marriage — joint and several tax liability for taxes relating to joint income tax returns.
Obtaining the normal, incidental benefits of marriage cannot itself be the basis for denying innocent spouse relief. If it could, very few, if any, spouses would so qualify. In particular, that a spouse obtained the benefits of filing joint income tax returns cannot itself be the basis for denying innocent spouse relief because relieving a spouse from joint and several liability resulting from a joint income tax return is the basis for the innocent spouse exception. In conducting its analysis, the court must determine that notwithstanding the incidental benefits of marriage, it would be inequitable to hold the spouse liable for the taxes at issue. The existence of any incidental benefits of marriage is but one of many facts and circumstances the court must consider in its analysis. The relationship between the incidental benefits and the substantial understatement at issue must also be considered.
That the Lesnicks are still married, counsel for the IRS argues, weighs strongly against granting the Debtor relief as an innocent spouse. The court agrees that this fact must be considered in its analysis but disagrees that it should be determinative. There is no indication that Congress intended the status of joint taxpayers’ marriage to be anything other than part of the totality of circumstances which the court must consider. Had it intended a separation or divorce to be a condition precedent for innocent spouse status, Congress presumably would have so indicated explicitly in the statute. The court also notes that although the Lesnicks are not divorced or separated, Mr. Lesnick will serve 14 months in prison during which time, the Debtor will be primarily responsible for satisfying the IRS’ claim unless she is granted relief as an innocent spouse.
The Debtor was not involved with the activity that resulted in the substantial understatement and received no benefit thereby. She was not a shareholder or an employee of Erectors, the entity whose operations generated the deduction which was disallowed for 1987. The evidence establishes that she did not know and had no reason to know of the substantial understatement. Upon learning of Mr. Lesnick’s financial problems, the Debtor ceased filing joint income tax returns with him.
Based on the above, the court finds that it would be inequitable to hold the Debtor liable for the tax liability which resulted from the substantial understatement attributable to the grossly erroneous item of her spouse, Mr. Lesnick. The court further finds that the Debtor satisfies the requirements of the innocent spouse provision of the Internal Revenue Code and thus should not be liable for the amounts claimed by the IRS. Accordingly, the Debtor’s objection to the IRS’ claim will be sustained. An order in accordance with the foregoing shall issue forthwith.
. The purpose of the innocent spouse statute was to correct unfair prior case law which held innocent spouses liable for the tax consequences of their partners' misdeeds, and “to bring govemment tax collection practices into accord with basic principles of equity and fairness.” H.R.Rep. No. 1734, 91st Cong.2d Sess. 2 (1970). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492437/ | MEMORANDUM DECISION
JOHN J. HARGROVE, Bankruptcy Judge.
On September 26, 1996, this Court approved the Heffernan Memorial Hospital District’s (the “District”) Chapter 9 plan of reorganization (the “Plan”). The Court found, inter alia, that certain sales tax revenues (the “Sales Tax Revenues”) realized by the District and transferred, assigned and pledged by the District pursuant to its Plan to the Calexico Special Financing Authority (the “Authority”) constitute “special revenues” under Bankruptcy Code § 902(2).
This Court has subject matter jurisdiction over this matter pursuant to 28 U.S.C. § 1334 and General Order No. 312-D of the United States District Court for the Southern District of California. This is a core proceeding under 28 U.S.C. § 157(b)(2)(L).
FACTS
In 1975, the District was created as a political subdivision under § 32000, et seq. of the Health and Safety Code of the State of California. Upon the District’s creation, the City of Calexico (the “City”) transferred the hospital operating license (the “Hospital Operating License”) to the District. The District has continuously held the Hospital Operating License since 1975 and operates an acute care hospital (the “Hospital”) in the City.
The Hospital suffered from a multitude of operational and financial problems and on September 21, 1995, the District filed for protection under Chapter 9 of the Bankruptcy Code. On September 26,1996, this Court approved the District’s Plan. Pursuant to the Plan, the District and the City formed the Authority for the purpose of implementing the transactions contemplated under the Plan, including, among other things, the issuance of certain sales tax revenue bonds (the “Bonds”) by the Authority and the acquisition by the Authority of certain outstanding indebtedness of the District using the Bond proceeds. The Authority will generate sufficient proceeds from the Bonds (approximately $9 million) to pay creditors in accordance with the Plan. As a result, the District will be indebted to the Authority on account of its “buying” all claims against the District. Accordingly, the District pledged and assigned the Sales Tax Revenue stream1 to the Authority to secure and provide payment to the bondholders.
Among the confirmation findings requested by the District is the determination that the Special Sales Tax Revenues constitute “special revenues” under Bankruptcy Code § 902(2).
DISCUSSION
The 1988 Amendments to the Bankruptcy Code added the definition of “special revenues” in § 902(2). The 1988 Amendments were intended to preserve a dichotomy between general obligation and special revenue bonds for the collective benefit of bondholders (to secure the benefit of their bargain), municipalities (to maintain the effectiveness of the revenue bond financing vehicle) and taxpayers (to ensure that revenue obligations were not transformed into general obligations). According to Congress, *149the “intent is to define special revenues to include the revenues derived from a project or from a specific tax levy where such revenues are meant to serve as security to the bondholders.” H.R. 1011, 100th Cong., 2d Sess. 6-7 (1988) U.S.Code Cong. & Admin.News 1994, pp. 4115, 4120-4121. Further, the “amendment amounts to a recognition of a hypothetical mortgage from which revenues are derived where a real mortgage cannot be created either for legal reasons or because of compelling considerations of public policy.” S.Rep. No. 506, 100th Cong., 2d Sess. 12-15 (1988). Congress listed five discrete categories of “special revenues” including taxes pledged to “finance one or more projects or systems.” 11 U.S.C. § 902(2)(E).
Section 902(2)(E) defines “special revenues” as
taxes specifically levied to finance one or more projects or systems, excluding receipts from general property, sales, or income taxes (other than tax-increment financing) levied to finance the general purposes of the debtor....
To meet the requirement of a “special revenue” under this provision, “taxes must be restricted in use to a specific project or system.” 4 Collier on Bankruptcy ¶ 902.01A, at 902-6 (15th ed. 1994). In other words, the focus is on the nature and scope of the restrictions placed on the use of the tax receipts. Taxes available for general municipal purposes do not constitute “special revenues.” Id.
The Sales Tax Revenue stream pledged and assigned to the Authority is not available for general municipal purposes in this case. Rather, the Sales Tax Revenue stream is available only for the purpose of providing security and payment to the bondholders. Furthermore, Resolution 96, passed by the Board of Directors for the District on or about September 24, 1996, states that the Bonds do not constitute a debt or liability of the City or the District, but are payable solely from and secured by an absolute and irrevocable assignment and pledge of the Sales Tax Revenues to the Authority. The bondholders, although secured by the Sales Tax Revenue stream, will not have recourse to the general revenues, tax receipts or operations of the District, the City or the Authority. Accordingly, the Sales Tax Revenues constitute “special revenues” under § 902(2)(E).
CONCLUSION
This Memorandum Decision constitutes findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052.
. In April 1991, the California State Assembly passed A.B. 1498, which expressly authorized the City to levy a transactions and use tax at the rate of 0.5 percent. The bill, codified in California Revenue and Taxation Code § 7286.20, et seq., specifically required the net proceeds of the tax be used exclusively for the District. Pursuant to that authorization, the sales tax was approved by a super-majority of the voters of the City at a special election conducted on April 14, 1992, and by a majority of the members of the City Council of the City pursuant to Ordinance No. 921 adopted on May 19, 1992. Pursuant to § 7286.21 of the California Revenue and Taxation Code, the net proceeds of the sales tax are to be used exclusively for the District. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492438/ | MEMORANDUM OPINION
STEWART ROSE, Chief Judge.
This matter came on for preliminary hearing on February 12, 1996, on the Trustee’s final account and report filed January 12, 1996. The New Mexico Department of Taxation and Revenue objected to the report, alleging that it had filed an administrative claim on July 19, 1994, and an amended administrative claim on August 30, 1995, in the amount of $145,976.44 which were not included in the Trustee’s proposed distribution. The Department further alleged that “Both claims appear understated as the interest has not [been] updated, and they do not include estimates for post-petition, non-filed periods.” Although the first claim does not appear in the file, the second does.
This ease was commenced as a Chapter 11 reorganization on October 26,1992. On September 19, 1994, it was converted to a Chapter 7 liquidation. The estate is administratively insolvent, that is, there are insufficient funds to pay the Chapter 7 administrative claims and the Chapter 11 administrative claims. In accordance with 11 U.S.C. 726(b), the Chapter 7 administrative claims are to be paid in full, and the Chapter 11 administrative claims, pro-rata.
All of the Chapter 7 administrative claims were previously allowed by the court after notice and hearing. The Chapter 11 administrative claims consist of administrative rent, utilities and taxes. The rent claim of Goodwill Industries was allowed after notice and hearing. The utility claims of Gas Company of New Mexico and Public Service Company were compromised at the hearing on their allowance, although no order has been entered. The amended administrative tax claim of the New Mexico Department of Labor, filed August 2, 1995, in the amount of $10,955.40 has not yet been allowed by the court. The amended “Request for Payment” of the Internal Revenue Service, filed August 4, 1995, in the amount of $196,856.39 has not yet been allowed by the court.
The Trustee’s report proposes to pay, pro-rata, all of these administrative claims, except the administrative claim of the New Mexico Department of Taxation and Revenue. For this reason the Department objects.
The Trustee candidly admits that if he had received a copy of the Department’s claim, he *161would have included it in his proposed distribution.
The clear language of 11 U.S.C. 726(a) requires administrative claimants to file proofs of claim: “... property of the estate shall be distributed—
(1) first, in payment of claims of the kind specified in, and in the order specified in, section 507 of this title, proof of which is timely filed under section 501 of this title or tardily filed before the date on which the trustee commences distribution under this section;”
A “Request for Payment,” such as that filed by the Internal Revenue Service, constitutes an informal proof of claim, and is therefore sufficient as a proof of claim. In re Mansfield Tire & Rubber Co., Inc., 73 B.R. 735 (Bankr.N.D.Ohio, 1987).
Claims of creditors filed pursuant to 11 U.S.C. 501 are allowed, unless objected to, 11 U.S.C. 502. However, administrative claimants are not creditors, 11 U.S.C. 101(10), and the allowance of administrative claims is governed by 11 U.S.C. 503, which provides:
“(a) An entity may timely file a request for payment of an administrative expense, or may tardily file such request if permitted by the court for cause.
(b) After notice and a hearing, there shall be allowed administrative expenses ...”
Administrative claimants must therefore obtain the allowance of their claims. They are allowed if not objected to, as in the case of creditor claims. In re Glen Eden Hospital, Inc., 172 B.R. 538 (Bankr.E.D.Michigan, 1994).
In fairness to the administrative claimants, the trustee should not pay some of the not yet allowed claimants, but omit others. Thus, the court should not approve the report which proposes to pay the Internal Revenue Service and the New Mexico Department of Labor, but which does not propose to pay the New Mexico Department of Taxation and Revenue. The Trustee may perhaps wish to consider seeking a bar date for the allowance of administrative claims. The Trustee may then justifiably propose to pay only allowed administrative claims.
Turning to the objection of the New Mexico Department of Taxation and Revenue with respect to unfiled returns and uncom-puted interest, it is apparent that the Department must file an administrative proof of claim in the full amount which it seeks. The Trustee is not required to seek out administrative claimants and the amounts of their claims. It is the obligation of the claimants to file proofs of claim and to secure their allowance.
A final hearing on the Trustee’s report shall be held and notice thereof may be limited to administrative claimants. At the request of any party, and with notice to all administrative claimants, the court will consider the allowance of claims not yet allowed. The Trustee shall not be required to formally amend his report, but may adjust the proposed distribution at the time of the hearing.
The foregoing constitutes the court’s findings of fact and conclusions of law. No order shall be entered until the final hearing on the Trustee’s report. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492439/ | HELEN S. BALICE, Chief Judge.
Marilyn Janess, the plaintiff in this adversary proceeding has moved for summary judgment. This is my Opinion in this core proceeding. 28 U.S.C. § 157(b)(2)(I).
I. Legal Standard
On a motion for summary judgment, the court will view the record and the inferences therefrom in the light most favorable to the non-moving party. Hon v. Stroh Brewery Co., 835 F.2d 510, 512 (3d Cir.1987). If that record shows no genuine issue as to any material fact, and that the moving party is entitled to judgment as a matter of law, then summary judgment shall be granted. Fed. R.Bankr.P. 7056(e).
II. Facts
The debtor, Donald Messiek filed his petition for relief under Chapter 7 of the Bankruptcy Code. Janess seeks a determination that a $32,000.00 debt owed to her by Mes-sick is nondischargeable pursuant to 11 U.S.C. § 523(a)(2). 11 U.S.C. § 523(a)(2) reads in part:
A discharge under section 727, ... of this title does not discharge an individual debt- or from any debt for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by (A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition....
Before Messiek filed his Chapter 7 petition, Janess filed a complaint with two counts against Messiek in the Court of Common Pleas of the State of Delaware seeking to recover a debt. The first count alleged that Messiek fraudulently induced Janess to loan him $34,204.41. The second count alleged simply that Messiek “owes Plaintiff the sum of $34,204.41 for money loaned.” In the proceedings in the Court of Common Pleas, the arbitrator found for Janess. However, the arbitrator only issued a general ruling on the validity of the debt, and did not rule on the issue of fraud. The arbitrator’s ruling states: “I find for the plaintiff, Marilyn Janess and against the defendant, Donald Mes-siek in the amount of $32,000.”
III. Discussion
There is a four part test to determine whether a party can be collaterally estopped from relitigating a claim. The court would have to find that: (1) The issue sought to be precluded must be the same as that in the prior action; (2) that issue must have been actually litigated; (3) it must have been determined by a valid and final judgment; and (4) the determination must have been essential to the prior judgment. Haize v. Hanover Insurance Co., 536 F.2d 576, 579 *198(3rd Cir.1976). The burden is on Janess to show that all four parts of this test have been satisfied.
Janess asserts that the arbitrator’s order finding in her favor prevents Messick from relitigating the issue of fraud under the doctrine of collateral estoppel. Messick’s position is that the doctrine of collateral estoppel does not apply. Messick asserts that the arbitrator did not specifically rule on the issue of fraud, but only that the debt was valid.
In Stephenson v. Capano Development, Inc. 462 A.2d 1069, 1072 (1983), the Delaware Supreme Court considered the application of the doctrine of collateral estoppel in a similar situation. Stephenson was successful against Capano in a contract claim in the Court of Chancery and filed a suit in the Superior Court raising claims of fraud. She moved for summary judgment arguing that Capano was collaterally estopped from relitigating the Chancellor’s findings. Id. The Superior Court denied the motion, ruling that the record clearly stated that the issue of fraud was not decided. Id. On appeal, the Delaware Supreme Court affirmed and ruled that where there are no specific conclusions reached on the issue of fraud, the issue is not collaterally estopped in a subsequent action. Id. at 1073.
The record here shows that the arbitrator’s ruling only found for Janess for $32,-000.00. There were no specific conclusions reached on the issue of fraud. Therefore, there is still a question of whether the debt was obtained by fraud, and thus nondis-chargeable under 11 U.S.C. § 523(a)(2).
IV. Conclusion
The plaintiffs motion for summary judgment is DENIED.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492440/ | DOROTHY EISENBERG, Bankruptcy Judge.
Before the Court is a motion by Allan B. Mendelsohn, Chapter 7 Trustee (the “Trustee”) of the Estate of Frank Santora Equipment Corp. and Santora Crane Service, Inc. (the “Debtor”) seeking an order authorizing the Trustee to amend the complaint filed against Mack Financial Corporation (“Mack” or “Defendant”). The Trustee seeks to amend the complaint, which initially sought to avoid a preferential transfer pursuant to Section 547 of the Bankruptcy Code, to delete the preference action and to replace it with a cause of action to avoid the transfer as a fraudulent conveyance pursuant to 11 U.S.C. § 548. Mack has opposed the motion claiming: (1) that amending the complaint would cause undue prejudice to Mack; and (2) that the fraudulent conveyance claim would not relate back to the date of the original complaint as it is a new claim involving new facts, and therefore is untimely.
Based on the facts before the Court and relevant case law, the Court grants the Trustee’s motion to amend the complaint to *544delete the preference claim and add the fraudulent conveyance claim. The Court further finds that the fraudulent conveyance claim is not barred by the two-year statute of limitations since the claim asserted in the amended complaint arose out of the same transaction as set forth in the initial complaint.
FACTS
On September 22, 1995, the Trustee commenced this adversary proceeding by filing a complaint against Mack seeking to avoid a preference and recover payments made to Mack within one year prior to the filing date. The summons was issued on December 27, 1995 and the summons and complaint were served on January 8, 1996. The complaint alleged that within one year of the filing date, the Defendant received payments of not less than $39,381.77 (the “Transfer”) which were in consideration of an antecedent debt owed by the Debtor to the Defendant and benefited an insider of the Defendant. ■
It is clear that the Trustee did not file the complaint against Mack until two years after his appointment as permanent trustee, and over two years since his appointment as temporary trustee. However, the Court finds that the filing of the original complaint is timely pursuant to Section 546 of the Bankruptcy Code.
Currently, Mack’s New York branch is closed. Mack has undergone corporate downsizing and the assets of Mack Financial Corporation have been sold. Therefore, Mack would have difficulty in locating the personnel and documents necessary to defend any action requiring a review of Mack’s books and records, including a preference action or a fraudulent conveyance action.
On January 9, 1996, the Trustee served certain discovery requests upon the Defendant, including the first request for the production of documents and a first set of interrogatories (the “Discovery Request”).
Mack did not answer or otherwise respond to the complaint by the end of the time to respond. Thereafter, the Trustee obtained a supplemental summons dated April 18, 1996, which was served on other possible addresses of the Defendant on April 26, 1996. Mack did not timely respond to the supplemental summons. However, according to Mack’s counsel, Mack sent the summons and complaint to counsel shortly after the time to respond, on or about May 1, 1996. Counsel for Mack then requested consent from the Trustee to file a late response. The Trustee consented and thereafter Mack filed a motion to dismiss or, in the alternative, for summary judgment. The Court denied the motion to dismiss and set a pre-trial hearing for August 14,1996. The Trustee extended Mack’s time to respond to the Discovery Request until on or about August 2, 1996. On that day, counsel to Mack responded to the Discovery Request with a letter stating that “Mack has no records in the name of the [Debtors]”. Further, counsel stated that Mack was unable to provide any information or documents in response to the Discovery Request. See Exhibit “C” to Plaintiffs motion to amend. It is at this point that the Trustee first discovered that a fraudulent conveyance claim may lie against the Defendant. Prior to that point in time, the Trustee merely knew that Mack had received a payment from Santora Crane Service, Inc.
The Trustee now seeks to amend the complaint to add a fraudulent conveyance claim pursuant to 11 U.S.C. § 548. The amended complaint, which is annexed to the Plaintiff’s motion as Exhibit “D”, alleges that the fraudulent conveyance claim arises from the same transfer as indicated in the initial complaint. The additional language to be added to the complaint is that “the Transfer was made without fair consideration passing to the Debtors. Upon information and belief, the Debtor received less than a reasonably equivalent value in exchange for the Transfer.”
DISCUSSION
Federal Rules of Bankruptcy Procedure, Rule 7015 expressly makes Fed.R.Civ.P. 15 applicable to adversary proceedings commenced in bankruptcy cases. Rule 15(a) sets forth the standard for the amendment of pleadings. The second sentence of Rule 15(a) states that after issue has been joined:
[a] party may amend his pleading only by leave of court or by written consent of the *545adverse party; and leave shall be freely given when justice so requires.
Courts have consistently held that refusal to grant leave, absent justifying reasons, constitutes an abuse of discretion allowed to the courts and is inconsistent with the intent of the Federal Rules. See United States v. E.B. Hougham, 364 U.S. 310, 81 S.Ct. 13, 5 L.Ed.2d 8 (1960); and Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 230, 9 L.Ed.2d 222 (1962).
The directive that “leave shall be freely given when justice so requires” is to be heeded. See generally, 3 Moore, Federal Practice (2d ed. 1948), PP 15.08,15.10.
If the underlying facts or circumstances relied upon by a plaintiff may be a proper subject of relief, he ought to be afforded an opportunity to test his claim on the merits. In the absence of any apparent or declared reason — such as undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, futility of amendment, etc. — the leave sought should, as the rules require, be ‘freely given.’
Foman v. Davis, 371 U.S. at 182, 83 S.Ct. at 230. (emphasis added).
Rule 15(e)(2) further permits relation back to the amended complaint to the date of the complaint:
Whenever the claim or defense is asserted and the amended pleading arose out of the conduct, transaction or occurrence set forth or attempted to be set forth in. an original pleading, the amendment relates back to the date of the original pleading.
In this case, the amended complaint must relate back to the initial complaint or else the fraudulent conveyance claim would be barred by the two year Statute of Limitations.
The first issue the Court must decide is whether leave should be granted to allow amendment of the complaint. Mack asserts that undue prejudice will result if the motion is granted because the relevant books and records are not within Mack’s possession. However, the Second Circuit and other courts in this Circuit have held that merely having to undertake additional discovery does not rise to the level of undue prejudice. United States v. Continental Illinois Bank and Trust Co., 889 F.2d 1248, 1255 (2d Cir.1989); In re Walter T. Murphy, Inc., 94 Civ. 8094, 1995 WL 35672 (S.D.N.Y. January 30, 1995).
Mack also asserts that the Trustee acted in a dilatory manner which militates against allowing the amendment. However, the Court does not find that any delay on the Trustee’s part has been intentional or rises to the level of bad faith. In addition, the Trustee has been gracious in granting the Defendant additional time to file an answer, and has not engaged in any dilatory conduct during the course of this adversary proceeding. Therefore, the Court finds that the Trustee’s conduct has caused no impediment to granting the motion to amend the complaint as requested.
The Court also finds that granting the motion to add the fraudulent conveyance claim would not cause undue prejudice to the Defendant as it arises from the same transaction as the preference claim. In coming to this conclusion, the Court has found In re Walter T. Murphy, Inc. to be particularly illuminating. In this case, the District Court for the Southern District of New York reversed the Bankruptcy Court’s denial of the plaintiffs application to amend its complaint alleging a preference claim to add a fraudulent conveyance action. The initial complaint recited that the books and records relating to the checks at issue had never been delivered to the trustee by the debtor, which gave rise to the allegation that the transfer was a preference. It was only after discovery was commenced that the trustee in the Murphy case realized that the defendant in fact had never been a creditor of the debtor.
The District Court found that the wording of the initial complaint was sufficient to put the defendant on notice that a fraudulent conveyance claim might exist, and further found that no prejudice existed merely because the defendant would now have to investigate and prove that the funds were tied to legitimate business expenses. The Murphy Court also found that the new claims were “merely variations on the original theme aris*546ing from the same set of operative facts as the original complaint,” and therefore granted the trustee leave to amend. In re Walter T. Murphy, Inc., slip op. at p. 7.
The case before the Court is similar to the Murphy case. The transactions sued upon between the Debtor and the Defendant are one and the same under either Section 547 or 548 of the Bankruptcy Code.
In addition, the Defendant’s claims of prejudice in defending a new claim fail. At first blush, it might appear that the Defendant would be prejudiced since it no longer has the books and records of the Defendant. However, there is no actual prejudice to the Defendant. The Trastee has the same burden of proof to prove its case under Section 547 and 548, and the Defendant is in the same position (i.e. no books and records available regarding the transaction) to defend whether it be a claim for relief under Section 547 or Section 548 of the Bankruptcy Code.
Finally, the Court finds that the amendment is not barred by the two-year statute of limitations because the relation back doctrine as set forth in Rule 15(c)(2) applies to this amendment. As discussed above, the preference action and the fraudulent conveyance action arise from the same underlying transaction. This is not a case where the Trustee is seeking to add new claims stemming from completely different facts and transactions. See In re Srour, 138 B.R. 413 (Bankr.S.D.N.Y.1992) (Relation back doctrine inapplicable where party sought to add, inter alia, a breach of contract claim and a fraudulent conveyance claim based on facts never alleged in whole or in part in the initial complaint). Rather, the fraudulent conveyance claim stems from the same basic facts as alleged in the initial complaint, and put the Defendant on sufficient notice so as to permit relation back to the initial date of the complaint.
Therefore, the Court grants the Trustee’s motion to amend the complaint to add the fraudulent conveyance action and to remove the preference action.
Settle an Order in accordance with this decision within ten (10) days hereof. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492442/ | *590
ORDER DENYING MOTIONS TO SURCHARGE
STEVEN W. RHODES, Chief Judge.
This matter is before the Court on motions filed by Specialized Pharmacy Services (“SPS”) and Dr. Mamoun Dabbagh to surcharge the Internal Revenue Service (“IRS”) pursuant to § 506(c). Following oral argument on July 10, 1995, the Court took the matter under advisement. The Court now holds that surcharge is not justified and therefore the motions are denied.
I.
Glen Eden filed for chapter 11 relief on September 29, 1993. On May 22, 1994, a trustee was appointed. The trustee negotiated for the sale of the hospital, filed a plan of reorganization and filed a motion to sell the hospital. The sale of the hospital for $5,500,-000 was concluded on March 23, 1995. Post-petition, SPS continued to supply the hospital with pharmaceuticals and Dr. Dabbagh continued to refer patients to the hospital. The debtor owes SPS approximately $10,788. Dr. Dabbagh is owed approximately $17,000.
Dr. Dabbagh and SPS seek reimbursement from the IRS. They contend that the expenses were reasonable and necessary and that without their services, the hospital would have been forced to close and would not have been sold as a viable entity.
The IRS contends that it did not benefit from the services of Dr. Dabbagh or SPS because it was fully secured at the time the petition was filed. Thus, the IRS contends, it would have been paid in full had the estate been liquidated when the petition was filed.
II.
Section 506(c) provides:
The trustee may recover from property securing an allowed secured claim the reasonable, necessary costs and expenses of preserving, or disposing of, such property to the extent of any benefit to the holder of such claim.
A party seeking to surcharge has the burden of proving, by a preponderance of the evidence, either a direct quantifiable benefit to the secured creditor which enabled the secured creditor to realize as much or more than it would have had it enforced its security interest outside of bankruptcy, or that the creditor consented directly or by implication. In re Staunton Indus., Inc. 75 B.R. 699, 702 (Bankr.E.D.Mich.1987); In re Wyckoff, 52 B.R. 164, 167 (Bankr.W.D.Mich.1985); See also In re Flagstaff Foodservice Corp., 762 F.2d 10, 12 (2d Cir.1985) (movant must show that the funds were expended primarily for the benefit of the creditor and that the creditor directly benefitted from the expenditure).
Applying this standard to the facts of the case, the Court concludes that Dr. Dabbagh and SPS have failed to establish that their services provided a direct benefit to the IRS. The IRS had a security interest in accounts receivable, which amounted to $1,183,000 at the time the petition was filed. The IRS had a first secured claim of $420,000. Schedule D shows only one other creditor with a security interest in the accounts receivable. That creditor’s claim was $566,000. Thus, the IRS was oversecured by approximately $200,000 when the petition was filed. There is no evidence that the accounts receivable were not recoverable. Accordingly, the IRS would have received the entire amount of its claim had the hospital been liquidated when the petition was filed. If anything, the hospital’s continued operation provided a benefit to the debtor and the unsecured creditors, not the IRS.
Accordingly, the motions to surcharge filed by Dr. Dabbagh and SPS are denied. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492443/ | OPINION
WILLIAM V. ALTENBERGER, Chief Judge.
In this adversary proceeding the Debtor’s Trustee in Bankruptcy (TRUSTEE) brought a preference action against the Defendant (DEFENDANT), which defended on the theory of the “Earmarking” Doctrine. The facts were stipulated to as follows.
In September of 1995 the Debtor held a credit card issued by the DEFENDANT which had an outstanding balance of $4,022.95. The Debtor was solicited by the First Union National Bank of Georgia (BANK) to transfer her existing credit card balances to the BANK through the use of *612“balance transfer checks” issued by the BANK.1 In September of 1995 the Debtor used one of .the cheeks to transfer $3,200.00 from the DEFENDANT to the BANK. In October of 1995 she used another check to transfer $855.51 from the DEFENDANT to the BANK. She also used two checks to transfer $3,045.82 from First Card to the BANK and $1,000.00 from MBNA to the BANK.
After the Debtor filed her Chapter 7 case in bankruptcy, the TRUSTEE sued the DEFENDANT to recover the two transfer payments as preferential payments under § 547 of the Bankruptcy Code, 11 U.S.C. § 547. The DEFENDANT relies on the “Earmarking” Doctrine, contending that the Debtor did not control the funds, the funds could only be used to repay other debt, and that the transfers amounted to one creditor being substituted for another. The TRUSTEE contends that the doctrine does not apply because the Debtor designated the specific creditors to be paid. This Court agrees with the TRUSTEE.
Tracing the history of the judicially created “earmarking doctrine,” the court in In re Bohlen Enterprises, Ltd., 859 F.2d 561 (8th Cir.1988), stated:
When new funds are provided by the new creditor to or for the benefit of the debtor for the purpose of paying the obligation owed to the old creditor, the funds are said to be “earmarked” and the payment is held not to be a voidable preference.
The earliest enunciation of the doctrine occurred in cases where the new creditor providing new funds to pay off the old creditor, was himself also obligated to pay that prior debt. In other words, the new creditor was a guarantor of the debtor’s obligation, such as a surety, a subsequent endorser or a straight contractual guarantor. Where such a guarantor paid the debtor’s obligation directly to the old creditor, the courts reject the claim that such payment was a voidable preference. (Citations.) The holding rested on a finding that the new creditor’s payment to the old creditor did not constitute a transfer of the debtor’s property. The courts buttressed this conclusion with the rationale that no diminution of the debtor’s estate had occurred since the new funds and new debt were equal to the preexisting debt and the amount available for general creditors thus remained the same as it was before the payment was made. A possible additional rationale may have been the view that such a result was needed to avoid unfairness and inequity to the new creditor. If his direct payment to the old creditor was voided, and the money was ordered placed in the bankruptcy estate, the new creditor, as guarantor, would have to pay a second time.
Where the guarantor, instead of paying the old creditor directly, entrusted the new funds to the debtor with instructions to use them to pay the debtor’s obligation to the old creditor, the courts quite logically reached the same result....
Noting that courts had extended the doctrine to instances where a new creditor loans funds to the debtor for the purpose of enabling the debtor to pay an old creditor, the court questioned its expansion and set the following requirements for a transaction to qualify for the earmarking doctrine:
(1) the existence of an agreement between the new lender and the debtor that the new funds will be used to pay a specified antecedent debt,
(2) performance of that agreement according to its terms, and
(3) the transaction viewed as a whole (including the transfer in of the new funds and the transfer out to the old creditor) does not result in any diminution of the estate.
Although modern caselaw has expanded the doctrine, the majority of decisions limit application of doctrine to instances where the new monies are “earmarked” for a specific creditor. See In re Safe-T-Brake of South Florida, Inc., 162 B.R. 359 (Bkrtcy.S.D.Fla.1993); *613In re Amick, 163 B.R. 589 (Bkrtcy.D.Idaho 1994); Matter of Howdeshell of Ft. Myers, 55 B.R. 470 (Bkrtcy.M.D.Fla.1985). Unless the funds are solely available to pay “a particular debt to a particular creditor,” the doctrine does not apply. In re Jaggers, 48 B.R. 33 (Bkrtcy.W.D.Texas 1985).
At the time the Debtor filed bankruptcy, she was laden with credit card debt. Her schedules list the following unsecured creditors:
Chase Gold Visa $4,308.56
Choice Visa 5,317.31
Colonial National Bank 1,978.99
First USA Bank 3,316.94
First Union Visa Gold 7,931.19
MBNA America 9,976.36
Northwest Bank South Dakota, NA 119.06
According to the stipulation of facts, the funds made available to the Debtor by the BANK were not designated to be used to pay off certain specified creditors but were to be used to pay off some but not all of a particular class of creditors. This choice was to be made entirely by the Debtor. Given these facts, this Court finds that the “earmarking doctrine” is inapplicable.
This Opinion is to serve as Findings of Fact and Conclusions of Law pursuant to Rule 7052 of the Rules of Bankruptcy Procedure.
. Copies of the checks are attached to the Amended Stipulation. A copy of the agreement between the Debtor and the BANK is not. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492444/ | ORDER
JACK CADDELL, Bankruptcy Judge.
This matter is before the Court on the motion of the defendants seeking an order dismissing Count I of the above styled adversary proceeding. Upon due consideration of the arguments of counsel, and the documents submitted in support thereof, it is the opinion of the Court that this Court does not have subject matter jurisdiction over Count I of the complaint.
On April 1, 1996, BankersTrust and two other creditors initiated an involuntary Chapter 7 Bankruptcy proceeding against Potomac Systems Engineering, Inc. (hereinafter “Potomac”). The Court appointed Tazwell Shepard, Esq., as Chapter 7 trustee on April 12, 1996. The trustee and BankersTrust (hereinafter the “plaintiffs”), instituted this adversary proceeding in the United States District Court for the Northern District of Alabama on April 23, 1996. Upon plaintiffs’ Motion for Reference of Case, the District Court entered an order referring the instant proceeding to this Court on May 15, 1996.
In Count I of the complaint, plaintiffs seek the return of certain funds levied and seized by the defendants, and in support thereof cite 11 U.S.C. § 105 of the Bankruptcy Code and 26 U.S.C. § 6323 of the Internal Revenue Code.1 Defendants filed the instant motion to dismiss and argue that this Court lacks jurisdiction to adjudicate the claim set forth in Count I of the complaint. Defendants argue that the Court lacks subject matter jurisdiction to the extent that the plaintiffs seek the return of funds that are not property of the estate.
Plaintiffs counter that the cause of action in Count I concerns the allowance of claims against the bankruptcy estate and requires a determination of “the validity, amount and priority of the competing claims of the IRS and BankersTrust in and to property of the bankruptcy estate.” (Plaintiffs’ Response, AP Doc. # 15, p. 7) Accordingly, plaintiffs contend that Count I of the complaint constitutes a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(B) and (K). Alternatively, plaintiffs argue that the Court has jurisdiction to hear this cause of action as a proceeding related to the bankruptcy case within the meaning of 28 U.S.C. § 1334.
The Court rejects plaintiffs’ arguments and finds that Count I of the complaint is not a core proceeding within the meaning of 28 U.S.C. § 157. The Court further finds the claim set forth in Count I is not sufficiently related to Potomac’s bankruptcy case so as to be properly under the jurisdiction of this Court.
In the case at bar, BankersTrust and the defendants claim competing liens in the subject property in an aggregate amount that exceeds the value of the property. The jurisdiction of this Court does not extend to property in which the debtor has no interest. Romar Int’l Ga., Inc. v. Southtrust Bank (Matter of Romar Int’l Ga., Inc.) 198 B.R. 401 (Bankr.M.D.Ga.1996). Disputes between a debtor’s creditors “over non-estate property” constitute non-core, unrelated cases over which the bankruptcy court lacks jurisdiction. First National Bank of Geneva v. Biallas (In re Denalco Corp.), 57 B.R. 392, 394 (Bankr.N.D.Ill.1986).
*634Plaintiffs attempt to distinguish cases in which courts have determined that bankruptcy courts lack jurisdiction to consider disputes between third parties over non-estate property by arguing that the trustee has not abandoned its interest in the subject property, and by insisting that the trustee may have a possible superior claim in the subject funds. However, the facts of the ease at bar simply do not appear to support such arguments. In reality, “there is nothing to suggest that the debtor’s estate could ever ... assert any colorable interest” in the subject property. Id. at 895.
Plaintiffs further argue that any funds recovered by the trustee for the estate will constitute cash collateral of the estate over which this Court has jurisdiction. Such argument suggests that the outcome of this litigation will potentially effect the administration of Potomac’s bankruptcy estate. The Court rejects this argument and relies upon the case of In re Denalco where the bankruptcy court was confronted with a priority dispute between two competing lien creditors over proceeds in property in which the trustee disclaimed any interest. The district court found that the subject property was of no value to the bankruptcy estate where the debtor was proceeding in a “straight Chapter 7 liquidation proceeding,” and the trustee agreed to the sale of the property. Id. Under such circumstances, the district court determined that the bankruptcy court lacked subject matter jurisdiction to determine the dispute between the two competing lien creditors. Similarly in the case at bar, the trustee voluntarily agreed to the sale of the debtor’s assets to effectuate this “straight Chapter 7 liquidation proceeding.” The primary difference between the case at bar and In re Denalco is the fact that the trustee in the case at bar has not disclaimed its interest in the subject property. However, the trustee’s failure to abandon its interest in the subject property cannot vest subject matter jurisdiction in this Court where the trustee’s retained interest is of no value to the bankruptcy estate.
Where a dispute between competing lien creditors will not affect the amount of property available for distribution for other creditors, the dispute is not sufficiently related to the debtor’s bankruptcy case to vest a bankruptcy court with subject matter jurisdiction. Cullen Electric Co. v. Bill Cullen Electrical Contracting Co. (In re Bill Cullen Electrical Contracting Co.), 160 B.R. 581, 588 (Bankr.N.D.Ill.1993). Accordingly, the Court finds that it does not have subject matter jurisdiction to adjudicate Count I of the instant complaint. This determination mandates the dismissal of Count I or withdrawal of the reference to the District Court. Faced with this possible outcome at the hearing, plaintiffs requested an opportunity to file a motion to withdraw the reference to the District Court.
Based upon the foregoing, the Court finds, and it is ORDERED, ADJUDGED and DECREED that:
1. This Court lacks subject matter jurisdiction to adjudicate the claims set forth in Count I of the complaint.
2. The plaintiffs have thirty (30) days to file a Motion to Withdraw the Reference of Count I of the complaint or the complaint in its entirety to the United States District Court for the Northern District of Alabama. Failure to file such motion shall result in the dismissal of Count one (1) of the complaint without further notice or hearing.
Done and Ordered.
. Plaintiffs also cite 26 U.S.C. § 7426 of the Internal Revenue Code in their Response and Memorandum to Motion to Dismiss Parties and Claims. (AP Doc. # 15). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492447/ | MEMORANDUM OPINION
STEWART ROSE, Bankruptcy Judge.
This is a lawsuit by the trustee to recover a fraudulent conveyance pursuant to 11 U.S.C. § 548(a)(2)(A). The parties stipulated that the debtor was insolvent on the date of *780the transfer, that a transfer occurred, and that it occurred within one year before the date of the filing of the petition. The parties further stipulated that the fair market value of the property was $70,000. The only issue before the Court was whether the debtor received less than a reasonably equivalent value in exchange for the transfer under 11 U.S.C. § 548(a)(2). The trustee does not contend that this was a transfer with actual intent to hinder, delay or defraud creditors pursuant to 11 U.S.C. § 548(a)(1).
The Court tried the case on July 21, 1994, and found that the debtor received less than a reasonably equivalent value in exchange for the transfer and, because the defendants had sold the property transferred, entered judgment pursuant to 11 U.S.C. § 550 for the stipulated fair market value of the property transferred, less the secured balance due from the debtor to the transferees, as well as taxes paid by the transferees. The defendants appealed the decision to the United States District Court. The District Court adopted the Magistrate Judge’s recommendation with one modification and the decision was reversed and the matter remanded to the Bankruptcy Court for findings consistent with the magistrate judge’s proposed findings and recommended disposition. See, R.J. McCanna II v. Burke, 197 B.R. 338 (D.N.M.1996). Thereafter, this court retried the matter, admitting into evidence the testimony of the prior trial. Additionally, the court considered evidence introduced by the Trustee regarding alleged collusive activities of the Defendant and third parties related to the transaction at issue. This evidence was heard over the objection of the defendant. The relevant facts adduced from the trial and the hearing on remand are outlined below.
Jill Czel is the debtor in the pending bankruptcy proceeding. She was married to Julian Czel. The property at issue in this case is community property. On December 31, 1986, the defendants, Mr. and Mrs. McCan-na, sold to Julian E. Czel and Jill E. Czel a tract of land known as 16-A-2 which consisted of 13.422 acres near Placitas, New Mexico. The sale was made by a New Mexico standard form estate contract. The total purchase was $124,500 and the down payment was $24,000. The balance of $100,500 was to be paid in monthly installments of $1106.59 or more with interest of 12% per annum, with the entire remaining balance due on December 31,1991. The real estate contract provided for a late payment penalty of $250. The contract further provided that the property had not been platted and that it would be platted as soon as possible after closing.
Mr. McCanna testified that although Julian and Jill Czel were the purchasers of the property, that in fact the property was being purchased by the Czel family. The family consisted of Irene Czel, Julian Czel’s mother, and Irene’s husband who played no active part in the transaction, as well as Jim Czel, Julian Czel’s brother. Mr. McCanna understood that Julian Czel, Jim Czel, and Irene Czel were each purchasing one-third of the property. He testified that he understood that Jim Czel did not wish to be a purchaser of record because a judgment of approximately $200,000 had been obtained against Jim Czel in Connecticut which was about to be domesticated in New Mexico. 'Mr. McCanna had no information as to why Irene Czel was not a purchaser of record. However, he testified that he only wished to sell the property, and did not care who the purchaser or purchasers were.
In 1987, a plat of the property was prepared dividing the property into three lots, which for convenience will be called Lots A, B, and C, and each of which contain 4.474 acres. The plat of this division of the property was recorded on March 11, 1991, in the office of the County Clerk of Sandoval County, New Mexico;
Former counsel for Julian Czel testified that after the property was purchased, Julian Czel and his brother, Jim Czel, had a falling out with respect to the conduct of their business, which lead to the filing of an involuntary bankruptcy of the corporate business and extensive litigation, conducted with great animosity. The attorney opined that Irene Czel, the mother of Julian and Jim Czel, probably sided with Jim Czel. In any event, the falling out precipitated serious financial consequences to Julian and Jill Czel.
Despite the family feud, the Czel family did agree on one thing: that they would split *781the prior real estate contract with Mr. and Mrs. MeCanna to provide that Julian and Jill Czel would purchase Lot A and that Irene Czel would purchase Lots B and C. On February 13, 1991, Mr. and Mrs. MeCanna entered into a superseding real estate contract for Lot A with Julian and Jill Czel. On the same date they entered into a superseding real estate contract with Irene Czel for Lots B and C. The contract for Lot A with Julian and Jill Czel recited a total purchase price of $32,441.72, no down payment, and payments of $368.86 per month with 12% interest commencing March 31, 1991, and due the first day of the month thereafter until, December 31, 1991, when the entire balance was due.
The reality of the 1991 transaction was to split the purchase price, down payment and payments made on the original contract into thirds and to allocate one-third to the purchase of Lot A by Julian and Jill Czel. Thus, the purchase price of Lot A was $41,500 and the down payment was $8,000. The difference is $33,500 and the purchase price in the 1991 contract of $32,441.72 represents a reduction of the principal balance since 1986 of $1,058.28.
Although there is some dispute as to when Julian and Jill Czel failed to make the monthly payments called for in the 1991 contract, the documentary evidence indicates that they failed to make the payment due July 1,1991, and that on July 17,1991, in accordance with the provisions of the contract, a thirty-day demand letter was sent to them. When they failed to cure the default, the McCannas elected to forfeit the contract and recorded the special warranty deed placed in escrow with the contract on September 12, 1991.
Julian and Jill Czel had been sued by Professional Design Services, Inc., in a lawsuit commenced in 1990. A judgment was rendered against them on September 25, 1991, and a transcript of that judgment was recorded in the office of the County Clerk of Sandoval County on September 30,1991.
At about the time Julian and Jill Czel failed to make the monthly installment on their contract to the McCannas, Julian had a telephone conversation with Mr. MeCanna, in which he indicated that he was not going to be making any further payments on the contract. At the time Julian likely knew that the property would shortly be encumbered by a judgment lien, since Professional Design Services, Inc., was suing to collect for design services in connection with the property.
Mr. MeCanna testified that shortly after he terminated the real estate contract on Lot A, Irene Czel approached him, and advised him that she had listed Lots B and C for sale and had obtained cash buyers. However, the title company closing the transaction had indicated that there was a problem with the title. What exactly that problem might be, Mr. MeCanna did not know. However, Julian Czel’s former attorney indicated that it might have been the execution of a mortgage of Julian Czel to himself on Lots A, B, and C prior to the 1991 modified real estate contracts. Mr. MeCanna also indicated that perhaps the title problem was a judgment lien. In any event, Mrs. Czel proposed that Mr. and Mrs. MeCanna terminate the real estate contracts with respect to Lots B and C, thereby disposing of the title problems, and then sell the lots to the cash buyers she had obtained.
Mr. and Mrs. MeCanna did terminate the real estate contracts and sold Lots B and C to cash buyers for $70,000 each. Mr. and Mrs. MeCanna entered into two agreements dated November 27, 1991, with Irene Czel. The first, plaintiffs exhibit 2, provided for the termination of the contract and recited that neither party had any claims against each other. The second agreement recites that the property is subject to purchase agreements which are assigned to the McCannas. The agreement provided the McCannas would comply with the purchase agreements and that the net proceeds from the sale of Lots B and C would be applied by the McCannas as part of the purchase price of Lot A, on which Irene Czel held an unex-ercised purchase option. The agreement only referred to the purchase option; the date of the purchase option is unknown and the option itself was not introduced into evidence. Irene Czel was to exercise the purchase option on Lot A within 10 days of the closing of Lots B and C. Irene Czel further agreed to indemnify and hold harmless the *782McCannas from any loss, liability or expense incurred by the McCannas in the performance of the agreement.
Apparently the net proceeds from the sale of Lots B and C, after the deduction of the contract balances, in the previously terminated contract, were sufficient to pay the option price for Lot A. In fact, if we knew the option price, it is likely that it exceeded the fair market value of Lot A.
Mr. McCanna testified that he tendered a deed to Irene Czel for Lot A, but that she did not record it. He further testified that she then commenced a lawsuit against him. He stated that he did not know why Irene Czel had sued him. Ultimately, after the expenditure of some $10,000 in attorney’s fees, the McCannas settled with Irene Czel by the conveyance of Lot A to her.
There are a great many facts which we will never know in this case. The sketchy description of many of the transactions leaves much to be desired. A number of the transactions may have been structured in derogation of the rights of creditors at various times. However, the only transaction sought to be set aside as a fraudulent conveyance is the forfeiture of the real estate contract by the McCannas with respect to Lot A being sold to Julian and Jill Czel.
On remand the issue has not changed. This Court must still determine whether the forfeiture of the real estate contract on Lot A was a fraudulent conveyance because, as the Trustee contends, reasonably equivalent value was not received. The magistrate judge’s recommendation instructs this Court generally regarding the determination of reasonably equivalent value. To determine reasonably equivalent value it states that 1) fair market value may not be the sole determinant, 2) although not the sole factor, fair market value itself may be a factor that the court considers, 3) the property at issue must be disposed of in a manner consistent with the law of the forum state, and 4) all the facts of the case should be considered. R.J. McCanna II v. Burke, 197 B.R. 333, 339. This Court must consider “the value of the real property to the trustee at the time of the transfer had the trustee been holding the property subject to the terms of the distressed contract.” Id. at 341. Finally, this Court is also instructed that the ability or inability of the Trustee to assume the real estate contract is a factor to consider in determining value. Id. at 336. With respect to the third consideration above, the magistrate judge also instructed with particularity that, following BFP v. Resolution Trust Corporation, 511 U.S. 531, 114 S.Ct. 1757, 128 L.Ed.2d 556 (1994), “the Bankruptcy Code must be ‘construed to adopt rather than displace pre-existing state law.’” Id. at 337 (quoting, BFP v. Resolution Trust Corporation, 511 U.S. 531, -, 114 S.Ct. 1757, 1765, 128 L.Ed.2d 556 (1994)). Because “this transfer involved the integral state interest of titles to real property” this Court must determine whether a state court would give redress under the circumstances.
BFP supra, established a broad test for determining reasonably equivalent value. BFP held that a regularly conducted, noncollusive foreclosure sale satisfies the requirement of reasonably equivalent value. Id. at -, 114 S.Ct. at 1764. BFP does not specifically illuminate what is and is not reasonably equivalent value. One only knows that if all state procedures are complied with the sale will satisfy the requirements of reasonably equivalent value. BFP noted that the Bankruptcy Code provides no definition of “reasonably equivalent value” and only the word “value” is defined. Id. at -, 114 S.Ct. at 1760. Similarly, the Uniform Fraudulent Transfer Act which also addresses fraudulent conveyances does not define reasonably equivalent value but comes to a determination similar with BFP because the Act provides “a person gives reasonably equivalent value if the person acquires an interest of the debtor in an asset pursuant to a regularly conducted, noncollusive foreclosure sale....” Unif. Fraudulent Transfer Act. § 3(b) (1984). Thus, it is fair to assume that the term, reasonably equivalent value, should have the same meaning in the Uniform Fraudulent Transfer Act as in the Bankruptcy Code. If reasonably equivalent value is used in the same manner in these two statutes of nationwide application, it is not for this Court to disagree. Therefore, the framework for deciding this issue is that *783a regularly conducted, noncollusive foreclosure sale is a safe harbor from judicial invalidation as a fraudulent conveyance. This same safe harbor seems to apply to contract forfeitures. Thus, in Butler v. Goldetsky, 552 N.W.2d 226 (Minn.1996) the Minnesota Supreme Court considered, upon certification from the United States Bankruptcy Court, the issue of whether the Minnesota Fraudulent Transfer Act “app[lied]to regularly conducted, noncollusive statutory cancellations of contracts for deed_” Id. at 226. The court held that a regularly conducted noncol-lusive cancellation of a contract for deed was reasonably equivalent value. Id. at 235. See also, Vermillion v. Scarbrough, (In re Vermillion), 176 B.R. 563 (Bankr.D.Or.1994) (BFP applies in real estate contract forfeiture). Although one may not define what reasonably equivalent value is in all contexts, a properly conducted forfeiture is not avoidable where the transfer comports with the requirements of state law. In this way, the integral interests of state law are respected and not “displaced” by the Bankruptcy Code. To this end this Court must consider whether the state law of forfeitures has been complied with.
This Court has done an extensive review of New Mexico state law regarding the forfeiture of real estate contracts. Unlike Vermillion, supra, this Court does not have the benefit of a statutory enactment but must discern the rules of law from fact specific case law precedent. This precedent recognizes that real estate contracts are valid in New Mexico, and “[ajbsent circumstances that result in an inequitable forfeiture, the courts will enforce a real estate contract.” R.J. McCanna II, 197 B.R. 333, 337 (citing Russell v. Richards, 103 N.M. 48, 702 P.2d 993 (1985)). Despite the general recognition of validity of the real estate contract provisions, a real estate contract forfeiture will not be enforceable where such forfeiture would shock the judicial conscience. Id. at 338. A regularly conducted noncollusive foreclosure falls within the safe harbor. A regularly conducted noncollusive forfeiture should similarly fall within the safe harbor.
This Court must determine whether the contract forfeiture on Lot A shocked the conscience of the Court. The Trustee urges that the facts of Huckins v. Ritter, 99 N.M. 560, 661 P.2d 52 (1983) are analogous to this case. Huckins v. Ritter involved a purchase of residential real property in Ruidoso. Id. at 561, 661 P.2d at 53. The purchase price was $155,000, and the down payment was $45,000. Id. The purchasers assumed an underlying mortgage, and had a balloon payment for the outstanding balance, $69,274.67 due within three months of the down payment. Id. The purchasers made the down payment but were unable to make the balloon payment. Id. The seller forfeited the contract and retained the down payment. Id. The New Mexico Supreme Court held that this forfeiture shocked the conscience of the court because retention of the down payment was unfair under the circumstances. Id. at 562, 661 P.2d at 54. The Court held that the purchasers were entitled to return of the down payment, less reasonable rental for the period of their occupancy, any diminution in value of the property during purchasers’ occupancy and a reasonable attorneys fee for the defendant’s attorney. Id.
The relevant factor in Huckins was the large down payment, one-third of the purchase price, which was retained under a very short contract. In this case, to make the Trustee’s argument plausible one has to look at the original contract together with the superseding contract in 1991. Although there was a significant down payment under the first contract, approximately one-fifth of the purchase price, the time period before a balloon payment was five years, not three months. The property in this case was raw land, not residential real property. All of these factors make Huckins v. Ritter inapposite.
Given that a regularly conducted non-collusive forfeiture falls with the safe harbor, the Trustee has urged that the forfeiture was collusive, and therefore subject to attack. The Court finds that First National Bank of Alamogordo v. Cape, 100 N.M. 525, 673 P.2d 502 (1983), is instructive on the issue of collusion raised by the Trustee in the hearing *784on remand.1 In Cape, although the facts are extensive, there was fraud that was alleged because the vendee apparently requested the vendor forfeit the contract to keep it away from a third party claiming an interest in it. Id. at 527, 673 P.2d at 504. The fraud was determined when the vendee filed bankruptcy and the bankruptcy court held the debt was nondisehargeable because of fraud. Id. However, this bankruptcy decision was not available to the trial court or New Mexico Supreme Court. Id. Therefore, the trial court and the New Mexico Supreme Court found that there was no convincing evidence of a conspiracy, and the forfeiture was otherwise proper. Id. at 528, 673 P.2d at 505. Similarly, in this case there is no persuasive evidence of collusion between the defendant and the debtor with respect to Lot A There is some allusion to collusion with respect to Lots B and C. This hint of collusion can be seen in the termination agreement on Lots B and C. However, the termination agreement refers to an option to purchase, which the Court does not have the benefit of fully understanding because it was not introduced. As in Cape, there is no persuasive evidence of collusion.
Finally, the Trustee has urged throughout this case that the defendant received a windfall because of the equity in the property at the time of forfeiture. Although the enhancement in value of the property during the life of a real estate contract accrues to the purchaser, such interest does not survive a proper forfeiture. See e.g., MGIC Mortgage Corporation v. Bowen, 91 N.M. 200, 572 P.2d 547 (1977); Russell v. Richards, 103 N.M. 48, 702 P.2d 993 (1985). Additionally, appreciation of the property alone is not enough to shock the conscience of the Court. Albuquerque National Bank v. Albuquerque Ranch Estates, 99 N.M. 95, 105, 654 P.2d 548, 554 (1982).
For the foregoing reasons, the forfeiture of the real estate contract by the defendant does not shock the conscience of the Court. Therefore, the transfer is within the safe harbor described above and is not a fraudulent conveyance. There is no need for further analysis. This memorandum constitutes the Court’s findings and conclusions pursuant to Federal Bankruptcy Rule 7052.
. The defendants urge that the Trustee's evidence regarding the alleged collusive activities of the defendants and third parties should not have been allowed into evidence as it was beyond the scope of the "mandate", or beyond the magistrate’s instructions on remand. This Court does not agree. The magistrate held that the rationale of BFP v. Resolution Trust Corp. applies "with equal force to situations involving a contract forfeiture.” R.J. McCanna II v. Burke, 197 B.R. 333, 341. Because the Court must look at whether state law was followed, and if the procedures were noncollusive, and regularly conducted, it is appropriate for the Trustee to argue collusion. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492448/ | OPINION ON RENEWED MOTION TO REMAND
A. POPE GORDON, Bankruptcy Judge.
Pamela L. Traylor filed a motion on September 12,1994 to withdraw the reference of this adversary proceeding or to remand the proceeding to state court.
The district court reserved ruling on the motion to withdraw the reference pending consideration by this court of the motion to remand.1
The motion to remand came on for hearing on May 10, 1995. For the following reasons, the court concludes that the motion should be granted.
Pamela Traylor and her parents, Billy and Linda Traylor, filed this action initially in the Circuit Court of Randolph County, Alabama. The Traylors alleged various state law claims against First Family Financial Services arising out of the alleged attempted wrongful foreclosure of their residence.2 The Traylors demanded a jury trial.
First Family removed the action to the District Court for the Middle District of Alabama under 28 U.S.C. § 1334.3
The Traylors filed a motion to abstain and remand the action to the Circuit Court of Randolph County, Alabama.
The district court referred the action to this court.
This court denied the motion to abstain and remand because of suspected issue involving bankruptcy law.4
The court dismissed Billy and Linda Tray-lor because their claims are property of their bankruptcy estate, and the chapter 7 trustee is the real party in interest to those claims.
*792Pamela Traylor filed the instant motion to withdraw the reference and renewed, in the alternative, her motion to remand this proceeding to state court.
28 U.S.C. § 1452 allows the court to remand this adversary proceeding to state court on “any equitable ground” (emphasis added).
There are several equitable grounds to support remand of the instant adversary proceeding.
The bankruptcy case to which this action relates was filed by Billy and Linda Traylor in 1991 and closed in 1992. The bankruptcy ease was reopened solely because of the state court action which was not filed until 1993.
The action involves purely state law claims and does not involve any issues of bankruptcy law.5 The case could not have been commenced in federal court because the parties are not completely diverse and no federal question is involved.
The Circuit Court of Randolph County will have jurisdiction over the parties to this action. Pamela Traylor, a Georgia resident, submitted herself to the jurisdiction of the state court by filing the action in Alabama.
The action is a non-core proceeding under 28 U.S.C. § 157(b). The court does not have the authority to enter final judgments in non-core proceedings.6
Pamela Traylor who is not a debtor has requested and appears to be entitled to a jury trial in this case. Pamela Traylor has not consented to a jury trial by the bankruptcy court. The authority of the bankruptcy court to conduct a jury trial absent the consent of all parties is in question.7
The claims of Pamela Traylor should not be bifurcated from the claims of the chapter 7 trustee. All of the claims are predicated on the assumption that the Traylors were not in default on the loan from First Family at the time First Family attempted foreclosure of the Traylor residence. Both judicial economy and the risk of inconsistent results dictate that this issue should be decided by only one court.8
There is no evidence before the court that this adversary proceeding cannot be timely adjudicated by the Circuit Court of Randolph County, Alabama.
A separate order will enter remanding this adversary proceeding to the Circuit Court for Randolph County, Alabama.
. See Traylor v. First Family Financial Servs., 183 B.R. 286 (M.D.Ala.1995).
. The Traylors alleged that they were current in their payments on the note to First Family at the time foreclosure was attempted.
. The action was related to a bankruptcy case filed by Billy and Linda Traylor. Pamela Traylor was not a debtor in the bankruptcy case.
. The court suspected at the time that the enforceability of a reaffirmation agreement between Billy and Linda Traylor and First Family might be in question.
. Neither party challenges the enforceability of the reaffirmation agreement. The reaffirmation agreement, however, may be offered into evidence.
. See 28 U.S.C. § 157(c).
. The following amendment to the Bankruptcy Code applies only to cases filed after October 22, 1994:
If the right to a jury trial applies in a proceeding that may be heard under this section by a bankruptcy judge, the bankruptcy judge may conduct the jury trial if specially designated to exercise such jurisdiction by the district court and with the express consent of all the parties.
28 U.S.C. 157(e).
.A ruling that the Traylors were in default at the time of the alleged foreclosure by First Family would be dispositive of the action. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492449/ | MEMORANDUM OPINION
JOHN H. SQUIRES, Bankruptcy Judge.
This matter comes before the Court on the motion of the Chicago Housing Authority (“CHA”) pursuant to Federal Rule of Civil Procedure 59(e), incorporated by reference in Federal Rule of Bankruptcy Procedure 9023, to alter or amend the judgment order entered by the Court on October 7,1996, which denied CHA’s motion to modify the automatic stay. For the reasons set forth below, the Court denies the instant motion.
I.JURISDICTION AND PROCEDURE
The Court has jurisdiction to entertain this motion pursuant to 28 U.S.C. § 1334 and General Rule 2.33(A) of the United States District Court for the Northern District of Illinois. This matter constitutes a core proceeding under 28 U.S.C. § 157(b)(2)(G).
II.APPLICABLE STANDARDS
Effective December 1, 1995, Rule 59(e) was amended to require that “[a]ny motion to alter or amend a judgment shall be filed no later than 10 days after entry of the judgment.” Fed.R.Civ.P. 59(e) (emphasis supplied). CHA’s motion was timely filed on October 15, 1996, within ten days after the order was entered. Rule 59(e) motions serve a narrow purpose and must clearly establish either a manifest error of law or fact or must present newly discovered evidence. Federal Deposit Ins. Corp. v. Meyer, 781 F.2d 1260, 1268 (7th Cir.1986); Publishers Resource, Inc. v. Walker-Davis Publications, Inc., 762 F.2d 557, 561 (7th Cir.1985). The function of a motion to alter or amend a judgment is not to serve as a vehicle to relitigate old matters or present the case under a new legal theory. King v. Cooke, 26 F.3d 720, 726 (7th Cir.1994), cert. denied, — U.S. -, 115 S.Ct. 1373, 131 L.Ed.2d 228 (1995). Moreover, the purpose of a motion to alter or amend “is not to give the moving party another ‘bite at the apple’ by permitting the arguing of issues and procedures that could and should have been raised prior to judgment.” Yorke v. Citibank, N.A. (In re BNT Terminals, Inc.), 125 B.R. 963, 977 (Bankr.N.D.Ill.1990) (citations omitted). The rulings of a bankruptcy court “are not intended as mere first drafts, subject to revision and reconsideration at a litigant’s pleasure.” See Quaker Alloy Casting Co. v. Gulfco Indus., Inc., 123 F.R.D. 282, 288 (N.D.Ill.1988). “A motion brought under Rule 59(e) is not a procedural folly to be filed by a losing party who simply disagrees with the decision; otherwise, the Court would be inundated with motions from dissatisfied litigants.” BNT Terminals, 125 B.R. at 977. The decision to grant or deny a Rule 59(e) motion is within the Court’s discretion. LB Credit Corp. v. Resolution Trust Corp., 49 F.3d 1263, 1267 (7th Cir.1995).
III.DISCUSSION
CHA’s motion relates to an earlier order and Opinion of the Court which details *954the relevant facts and background. See In re Gant, 201 B.R. 216 (Bankr.N.D.Ill.1996). CHA contends that the Court erred in finding that it had waived the benefit of its termination notice by subsequently accepting a tendered rent payment from the Debtor, Sylvester Gant (“Gant”), on February 12, 1996 in the form of a money order for $125.00. CHA maintains that the $125.00 money order it accepted was partial payment for the past due rent it demanded in the notice, not current rent. CHA argues it could properly accept past due rent under § 9-209 of the Illinois Forcible Entry and Detainer Act without prejudice to its pending state court action seeking possession of the demised premises from Gant. Section 9-209 provides in relevant part:
Collection by the landlord of past rent due after the filing of a suit for possession or ejectment pursuant to failure of the tenant to pay the rent demanded in the notice shall not invalidate the suit.
735 ILCS 5/9-209.
CHA concedes, however, that acceptance of rent which accrued subsequent to Gant’s failure to pay the amount demanded in the notice would invalidate its suit for nonpayment of rent under Midland Management Co. v. Helgason, 158 Ill.2d 98, 102, 196 Ill.Dec. 671, 674, 630 N.E.2d 836, 839 (1994).
CHA had previously received a $630.00 money order from Gant on February 1,1996, after it had filed suit seeking possession of the subject premises on January 26, 1996. See Amended Affidavit of Ray Smith, ¶4. That sum was returned to Gant on February 7, 1996, after CHA rejected it because the fourteen day grace period under the notice had expired, the amount tendered exceeded the $515.50 demanded in the notice, and CHA’s Tenant Accounting Department was aware that legal proceedings were commenced against Gant. Id.
Gant failed to respond to CHA’s motion within the time allotted by the Court. The Court has reviewed the record in this matter to properly determine whether CHA’s motion should be granted. Among the papers previously submitted by Gant in opposition to the stay relief were Gant’s affidavits. In his September 4, 1996 affidavit, Gant made the following statements: he admitted the delinquency in his monthly rent of $115.00 for the last quarter of 1995 (¶ 6); he acknowledged receipt of CHA’s notice in December 1995 demanding $515.50 in back rent which he was unable to pay within the fourteen days after receipt of the notice (¶ 7); he further stated that he purchased and mailed the $630.00 money order to CHA on January 17, 1996, “in full satisfaction of all the rent I owed at that point....” (¶ 8); and he acknowledged the return of the money order to him by CHA’s building manager on February 7,1996 (¶ 9). In an earlier affidavit executed on April 2, 1996, furnished the Court as part of the record in the state court action, Gant averred the following: the $630.00 money order was tendered to CHA to cover the delinquent past due rent demanded in the notice, plus his January 1996 rent (¶ 6); on February 5,1996, he mailed the second money order to CHA for $125.00, “which constituted ... February rent of $115.00 plus $10.00 for laundry tokens” (¶ 7); and the second $125.00 money order was never returned to him (¶ 10).
Gant’s verified statements concerning these matters have not been rebutted by any of CHA’s evidence, and serve to conclusively show that the second money order sent by Gant and kept by CHA was intended and tendered by him to cover the currently accruing February 1996 rental installment, rather than a partial payment for the delinquent rent owed for the last quarter of 1995 as CHA argues. While CHA elected to refuse the tender of Gant’s first money order intended by him to cover the delinquent 1995 rent and the January 1996 period, it cryptically accepted the second tender, and thus falls squarely within the exception carved out by Midland Management. This is compelling evidence of an act inconsistent with CHA’s intended declaration of termination of the lease proving waiver of the breach which operated to reinstate the lease. Certainly, *955CHA had knowledge of Gant’s breach, but by accepting the second tendered payment, which Gant tendered for February 1996 rent, it waived its right to forfeiture of the lease. See Vintaloro v. Pappas, 310 Ill. 115, 117, 141 N.E. 377, 378 (1923). Smith’s statement in his amended affidavit that his office received 4,297 checks in January and 3,628 in February 1996, is unavailing, though perhaps serving, to explain the delay in the return of the first money order. CHA’s acceptance and non-return of the tendered second money order is an act, when coupled with the return of the first tendered money order, inconsistent with its intended forfeiture of Gant’s lease which, under Illinois law, was sufficient to reinstate the lease. Thus, there is no proper factual or legal ground upon which to grant CHA’s motion.
IV. CONCLUSION
For the reasons set forth herein, the Court hereby denies CHA’s motion to alter or amend the judgment order entered by the Court on October 7,1996.
This Opinion constitutes the Court’s findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052. A separate order shall be entered pursuant to Federal Rule of Bankruptcy Procedure 9021. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492450/ | ORDER
ROSS W. KRUMM, Chief Judge.
The matter before the court is Motion No. 2 for relief from the co-debtor stay filed by Lewis-Gale Clinic, Inc. against the debtor, Ernest Root and his non-debtor wife, Jeanne Marie Whitt Root. The facts as set forth in the motion are not in dispute. At all relevant times to this proceeding, Mr. and Mrs. Root have been married and are living together. Mr. Root filed his Chapter 13 proceeding on February 28,1995.
Prior to Mr. Root’s Chapter 13 proceeding, Mrs. Root received medical services from Lewis-Gale which extended from May 25, 1994, through May 25, 1995. There was a balance due to Lewis-Gale for medical services rendered to Mrs. Root in the amount of $531.70, that balance was not paid and on August 9, 1995, Lewis-Gale obtained a default judgment against both Mr. and Mrs. Root for the indebtedness resulting from medical services rendered to Mrs. Root.1
*56On September 22, 1995, Lewis-Gale garnished Mrs. Root’s wages at First Union Bank. The garnishment was returnable on December 13, 1995. On December 4, 1995, the debtor, by counsel, amended his schedules to include Lewis-Gale as a creditor and moved to quash the garnishment, asserting that the co-debtor stay of 11 U.S.C. § 1301 prohibited Lewis-Gale from proceeding. By order dated January 11, 1996, the motion to quash was granted and a motion to reconsider was denied on February 7,1996. On May 9, 1996, the debtor amended his plan for the third time to include a payment to Lewis-Gale of $549.70 at $11.40 per month over the plan payment period of 48 months. This plan payment would cover the judgment principal ($531.70) and judgment costs ($18.00) of Lewis-Gale. This plan has not been confirmed.
Lewis-Gale filéd motion number 2 for relief from the co-debtor stay imposed by 11 U.S.C. § 1301 on April 16, 1996. The debtor filed a responsive pleading opposing the motion on May 3, 1996, and the parties were heard on May 13, 1996. The case is ripe for decision.
Lewis-Gale seeks relief from the stay imposed by 11 U.S.C. § 1301(a) which states:
(a) Except as provided in subsection (b) and (c) of this section, after the order for relief under this Chapter, a creditor may not act, or commence or continue any civil action, to collect all or any part of a consumer debt of the debtor from any individual that is liable on such debt with the debtor ...
There is no dispute that the indebtedness claimed by Lewis-Gale in this case is a consumer debt as that is defined in 11 U.S.C. § 101(8). Further, there is no issue that it is a consumer debt of the debtor. Under 11 U.S.C. § 101(12), “debt” means liability on a claim. Under 11 U.S.C. § 101(5), “claim” means — “(A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured....” The Virginia common law doctrine of necessaries gives Lewis-Gale a claim against Mr. Root for the medical services rendered to his wife.2
Under 11 U.S.C. § 1301(c)(1), the court must lift the co-debtor stay to permit the creditor to proceed against the non-debt- or spouse in this case if she received the consideration for the claim held by such creditor. In this case, 'it is clear that all of the medical services were delivered directly to Mrs. Root. However, it seems to this court that the underpinnings of the Virginia common law doctrine of necessaries necessarily contemplates that a husband who has the legal responsibility for providing his wife with this kind of medical services receives a consideration from the provider of those medical services when they are delivered.3 Thus, this court finds that Mr. Root did receive a consideration when the medical services were delivered to his wife. Accordingly, section 1301(c)(1) is not available to Lewis-Gale to give it relief from the co-debtor stay.
Section 1301(c)(2) of the Code provides that the stay should be lifted if the plan filed by the debtor proposes not to pay such claim. In this case, the amended plan proposes a 100% payout of the claim. Therefore, upon confirmation section 1301(c)(2) is not available to Lewis-Gale for relief from the automatic stay.
*57Finally, section 1301(e)(3) provides that the court may lift the stay if the creditor’s interest would be irreparably harmed by a continuation of such stay. There has been no showing that Lewis-Gale will be irreparably harmed if the stay is not lifted.
For the reasons stated above, it is
ORDERED:
That the motion by Lewis-Gale Clinic, Inc. for relief from the co-debtor stay imposed by 11 U.S.C. § 1301(a) be, and it hereby is DENIED.
. The court notes that the pleadings of Lewis-Gale show that it obtained a judgment against Mr. Root in August of 1995, notwithstanding the fact that he had filed a Chapter 13 proceeding in February of 1995. This judgment was ineffective against Mr. Root as being a violation of the automatic stay imposed by 11 U.S.C. § 362(a). The only basis for the clinic's obtaining a judgment against Mr. Root was the Virginia Common Law Doctrine of Necessaries.
. See Schilling v. Bedford Cty. Memorial Hosp., 225 Va. 539, 303 S.E.2d 905, 906-907 (1983). While the Virginia Supreme Court invalidated the Common Law Doctrine of Necessaries in Schilling on the ground that it contained an unconstitutional gender-based classification, the Virginia General Assembly revived the doctrine in gender-neutral form in Code of Virginia § 55-37, which became effective on July 1, 1984.
. See id. ("The necessaries doctrine holds that a husband is responsible for necessary goods and services furnished his spouse by a third party. It stems from the common law rule that a wife could not have a separate estate. A husband was entitled to his wife's domestic services and consortium and was in return liable for her support, (citations omitted) ... The doctrine creates an obligation directly between the husband and the third party who has provided the services. This being so, the husband is liable on his personal indebtedness, not on a contract between the wife and the service provider.”) | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492451/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW
MARY D. SCOTT, Bankruptcy Judge.
THIS CAUSE is before the Court upon the trial of the complaint to determine dis-chargeability pursuant to 11 U.S.C. § 523(a). The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157(a), 1334. The objection to dischargeability 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) such that the Bankruptcy Court may enter judgment on the discharge-ability claim. However, the Court has no jurisdiction over any request for the imposition of criminal penalties.
At the outset, the Court notes that there is no evidence of any dishonest behavior by the debtor wife, Robin Jackson. Other than the fact that her signature appears on the documents, there is no evidence of her participation in the transactions or that she disposed of the bank’s collateral. Since there is no evidence that she acted in violation of the creditor’s rights, she is discharged of the debts.
First Stuttgart Bank and Trust Company (“the bank”) is the holder of two notes secured by a truck,1 tanning beds and video cassettes owned by the debtors. In the spring of 1995, the bank advised the debtors that an inventory of the collateral was needed to renew the notes. The debtors did not respond to the letter. Thereafter, the bank learned that the collateral, or some portion of it, had been sold. Accordingly, on July 7, 1995, and July 24, 1995, it sent the debtors demand letters for full payment of the debts. It is virtually undisputed that the debtor Johnny Jackson disposed of the collateral *148without regard to the rights of the bank. Indeed, at trial, the debtor admitted that he sold some videos, discarded some videos, and sold the tanning beds to get operating cash for a new store.
Section 523(a)(6) provides for the nondisehargeability of a debt if the debtor causes wilful and malicious injury to another entity or to the property of another entity. Under Arkansas law, “A conversion in the sense of the law of trover, consists either in the appropriation of the thing to the party’s own use and beneficial enjoyment, or in its destruction or in exercising dominion over it, in exclusion or defiance of the plaintiffs rights, or in withholding the possession from the plaintiff, under a claim of title, inconsistent with his own.” Ray v. Light, 34 Ark. 421, 427 (1879); Quality Motors v. Hays, 216 Ark. 264, 225 S.W.2d 326 (1949) (elements of conversion); see In re Phillips, 882 F.2d 302 (8th Cir.1989) (Breach of security agreement may fall within section 523(a)(6)). In the instant case, the injury was effected through conversion of the bank’s security interest.
Under section 523(a)(6), “wilful” means an intentional act and “malicious” means a wrongful act done without just cause or excuse. Aetna Casualty & Surety Co. v. Lentine, 166 B.R. 476 (Bankr.S.D.Fla.1994); E’Chavarrie v. West (In re West), 163 B.R. 133, 140 (Bankr.N.D.Ill.1993). Malice is 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 Posta, 866 F.2d 364, 367 (10th Cir.1989). There is no requirement that the debtor act out of personal hatred, spite or ill will. Lentine, 166 B.R. at 478; West, 163 B.R. at 140. Rather, the focus is upon the debtor’s actual knowledge or the foreseeability that his conduct will result in injury to the creditor. Hilliard v. Peel (In re Peel), 166 B.R. 735, 739 (Bankr.W.D.Okla.1994). In the instant case the unrebutted evidence is that the debtor Johnny Jackson deliberately and with knowledge of the bank’s rights disposed of the collateral. Indeed, his only excuse appears to be that the collateral was already damaged or had little value.
The wilful and malicious element of the cause of action is further demonstrated by the fact that the debtor attempted to conceal the disposition of the collateral from the bank. When the bank first inquired regarding the collateral, the debtor responded that it was “in storage.” At that time, however, the collateral had already been sold. This attempt at concealment is corroborated by the failure of the debtor to list the transfer on the bankruptcy schedules.
Finally, the Court does not find the debtor husband to be a credible witness. He was unable to answer questions directly, appeared to have several different versions of the same events, and was untruthful. The Court specifically does not believe his statement that he was unaware that the items were collateral for the loan.
The debtor asserts that the bank waived its rights in the collateral such that it is unsecured in this bankruptcy case. Specifically, the debtor asserts that since it did not ask for its collateral, it waived any right to assert secured status. While it is true that under Arkansas law, the routine acceptance of late payments may waive strict compliance with contractual enforcement provisions unless the creditor gives notice that strict compliance will be required in the future, Mercedes-Benz Credit Corp. v. Morgan, 312 Ark. 225, 850 S.W.2d 297 (1993), that rule does not equate to, as debtor appears to assert, a destruction of the security interest. The failure to demand turnover of the collateral when it made demand for payment does not effect a waiver of its rights under the contract. Cf. Brown v. Arkoma Coal Corp., 276 Ark. 322, 634 S.W.2d 390 (1982). Even were that the rule in Arkansas, as a factual matter, the bank did not waive the contractual enforcement provisions or its rights in the collateral by its failure to demand return of the collateral. When the notes were coming due, the bank expressly advised the debtor that it wished to inventory its collateral. Thereafter, upon learning that the debtor had disposed of the collateral, it demanded full payment. There cannot be a duty to demand return of collateral that does not exist. The debtor’s assertion that the bank waived its rights because it failed to perform *149a useless action is without basis in law or fact.
The bank was secured by tanning beds and videoeassettes. In selling or otherwise disposing of the collateral, the debtor husband acted wilfully and maliciously such that the debt is nondischargeable. Accordingly, it is
ORDERED: that the complaint will be dismissed on the merits as to the debtor Robin Jackson. The debt owed by Johnny Jackson to the creditor First Stuttgart Bank and Trust is nondischargeable in this bankruptcy case.
IT IS SO ORDERED.
. The truck was repossessed and sold by the creditor. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492452/ | MEMORANDUM OPINION
STEPHEN J. COVEY, Bankruptcy Judge.
This matter came on to be heard on this 13th day of November, 1996 upon cross-motions for summary judgment filed herein by Plaintiffs, Sunrise Island, Ltd. (hereinafter “Sunrise”) and Limited Gaming of America, Inc. (hereinafter “Gaming”), and Defendant, Goldman Sachs & Company for the benefit of Claude M. Ballard IRA Account No. 005990189 (hereinafter “Ballard”). Both Sunrise and Gaming are debtors in Chapter 11 proceedings before this Court. The Court, having reviewed the briefs filed herein, having heard arguments of counsel, and now being fully advised in the premises, hereby finds as follows:
FINDINGS OF FACT
In May 1995, Carolyn Lobato Bleidt (hereinafter “Lobato-Bleidt”) was the managing partner of Sunrise. Sunrise, a general partnership formed under the laws of the State of Florida, is the owner of Sunrise Island. Gaming, another entity involved in this litigation, is a Colorado corporation which has been domesticated in Florida. Lobato-Bleidt was the de facto president and majority shareholder of Gaming. Gaming held a note receivable secured by a first Deed of Trust lien against Sunrise Island in the amount of $1,522,500.00. Gaming and Sunrise and their directors, shareholders, and partners have been involved in extensive litigation. Significantly, all of the directors of Gaming are partners in Sunrise.
In late May 1995, Lobato-Bleidt, as managing partner of Sunrise, commenced negotiations with Ballard. The subject of the negotiations was Ballard’s proposed loan of $500,000.00 to Sunrise to be secured by a first Deed of Trust lien on Sunrise Island (the “Loan Transaction”). Ballard had not had previous business dealings with Sunrise, Gaming, or Lobato-Bleidt. In connection with the Loan Transaction, Lobato-Bleidt supplied Ballard with certain financial information on Sunrise, Gaming, and on herself.
Ballard was a sophisticated businessman with extensive experience in commercial real estate lending transactions. The financial information supplied to Ballard revealed that Lobato-Bleidt was a principal in both Sunrise and Gaming. This financial information also revealed that Sunrise’s note to Gaming, which was secured by a first Deed of Trust lien on Sunrise Island, was in default. Loba-to-Bleidt also provided Ballard with the name of her attorney, Scott Rost (“Rost”). Rost represented Lobato-Bleidt in court proceedings in Florida wherein a receiver was *174appointed to administer the assets of Gaming.1
Lobato-Bleidt provided Ballard with a Secretary’s Certificate dated June 9, 1995 referencing a May 4, 1995 telephonic resolution of the Gaming Board of Directors. The May 4, 1995 resolution purports to allow the subordination of Gaming’s lien against Sunrise Island to another lender for consideration. There is no written resolution reflecting a May 4, 1995 meeting of the Gaming Board of Directors. Ballard did not inquire into the validity of the Board of Directors meeting referenced in the Secretary’s Certificate. On June 9, 1995, Lobato-Bleidt executed a Subordination Agreement as President of Gaming, which subordinated Gaming’s lien against Sunrise Island to Ballard’s lien against the property.
All of the directors of Gaming, including Lobato-Bleidt, had a conflict of interest with respect to the Subordination Agreement transaction in that they were also partners in Sunrise. The Subordination Agreement was not authorized by Gaming’s shareholders. The Subordination Agreement was not authorized by the receiver appointed over Gaming’s assets by the Florida Court. In addition, the transaction was not a fair and reasonable transaction with respect to Gaming.
On June 15, 1995, the Loan Transaction between Ballard and Sunrise was closed. Lobato-Bleidt, as Managing Partner of Sunrise, executed a Note and Deed of Trust in favor of Wayne LaRue, Trustee for Ballard. Lobato-Bleidt also co-signed the Note individually.
At the time of the closing, Ballard knew or should have known that the Subordination Agreement from Gaming was a conflict of interest transaction. Ballard did not investigate or inquire into the validity of the Subordination Agreement from Gaming. In making the loan, Ballard testified that he did not rely on the legitimacy of the Secretary’s Certificate or the Subordination Agreement. Ballard testified that he relied on a Title Insurance Policy which he purchased to insure the priority of his Deed of Trust hen.
The net loan proceeds received by Sunrise from Ballard on June 15, 1996 were $472,-589.56. On June 16, 1995 and June 21, 1995, Sunrise deposited $296,286.66 of these loan proceeds into Gaming’s Daytona Beach Bank Account. During the period June 16, 1995 through July 7, 1995, $279,528.77 of these funds were disbursed by Gaming to Lobato-Bleidt, to her attorney, Rost, and to another entity controlled by Lobato-Bleidt, Oak Place Development Company. Lobato-Bleidt used Gaming as a conduit to transfer these funds for her benefit. On July 12, 1995, the remaining funds in Gaming’s Day-tona Beach bank account in the amount of $11,189.81 were disbursed to the receiver appointed for Gaming.
Conclusions op Law
The issue before the Court is whether Ballard’s hen against Sunrise Island should be subordinated to Gaming’s hen against Sunrise Island. In the alternative, the issue is whether the Subordination Agreement executed by Lobato-Bleidt is valid. The Subordination Agreement at issue subordinates Gaming’s first hen position against Sunrise Island to Ballard’s hen.
The Loan Transaction wherein Ballard loaned $500,000.00 to Sunrise in exchange for a first hen position against Sunrise Island was inherently a “conflict of interest” or “interested director” transaction. Lobato-Bleidt was a principal in both Gaming and Sunrise. Lobato-Bleidt negotiated the transaction on behalf of Sunrise and executed a Subordination Agreement on behalf of Gaming to subordinate Gaming’s first hen position against Sunrise Island.
The threshold inquiry in this matter is which state law apphes to the Loan Transaction. Gaming is a Colorado corporation domesticated in Florida. Sunrise is a Florida general partnership. After the receiver was appointed to administer the assets of *175Gaming on January 5, 1995, the Volusia County, Florida Court had jurisdiction over the assets of Gaming. The Sunrise note and Deed of Trust held by Gaming were assets within the jurisdiction of the Florida Court in the receivership proceeding. The State of Florida had a more significant relationship to conflict of interest transactions involving these assets than Gaming’s state of incorporation, Colorado. See Restatement (Second) of CONFLICTS of Law § 302(2); Fla.Stat. § 607.1432, 607.0832. Accordingly, after January 5,1995, Florida law governs any conflict of interest transactions involving the Sunrise note and lien.2
Contracts entered into by an interested officer or director of a corporation are voidable at the election of the corporation when the contract is not properly authorized or is part of a scheme. See McGourkey v. Toledo & Ohio C.R. Co., 146 U.S. 536, 13 S.Ct. 170, 36 L.Ed. 1079 (1892); 3 W.Fletcher, Cyclopedia of Private Corporations, §§ 913, 916, 917, 922, 923, 924, 925 (1994). Lobato-Bleidt, who entered into the Loan Transaction with Ballard, was clearly an “interested officer” when she subordinated the lien of Gaming and executed the note and lien and received the proceeds of the loan on behalf of Sunrise.
Under Florida law, a conflict of interest transaction is voidable by a corporation unless: (1) it is approved by a majority of the disinterested directors and shareholders of the corporation; or (2) it is approved by a majority of the directors and stockholders (whether or not disinterested) and the transaction was fair and reasonable to the corporation. Approval of the directors and shareholders and fairness must be established or the transaction is voidable. See Fla.Stat. § 607.0832 (1990); Colorado Business Corporation Act § 7-108-501; Robert A Wachsler, Inc. v. Florafax Intern. Inc., 778 F.2d 547, 552 (10th Cir.1985); 3 W.Fleteher, Cyclopedia of Private Corporations § 979 (1994). The Subordination Agreement and Loan Transaction executed by Lobato-Bleidt could not be approved by a majority of the disinterested directors of Gaming, since none of the directors of Gaming were disinterested.
The shareholders and directors of Sunrise did not approve the transaction. In addition, the Subordination Agreement ,and Loan Transaction were not fair and reasonable to the corporation because the subordination of Gaming’s first lien position was given without consideration to Gaming. Instead, the loan proceeds were merely passed through Gaming to ultimately benefit Loba-to-Bleidt. Also, the Subordination Agreement was not properly authorized by the receiver which had jurisdiction over the assets and affairs of Gaming. This authorization was required in addition to the requirements of § 607.0832 of the Florida Business Corporation Act pursuant to the Order of the Florida Court dated February 23, 1995. See Fla.Stat. § 607.1432.
Lobato-Bleidt, or in this case, Ballard, who received his interest in Sunrise Island from Lobato-Bleidt, has the burden of establishing the fairness of the Subordination Agreement and the Loan Transaction to Gaming. See Robert A Wachsler Inc. v. Florafax Intern., Inc., 778 F.2d 547, 551 (10th Cir.1985); 3 W.Fleteher, Cyclopedia of Private Corporations § 921 (1994). As stated above, the transaction was not fair to Gaming because the loan proceeds were passed through to Lobato-Bleidt instead of being retained for the benefit of Gaming. Ballard failed to meet his burden of proof with respect to the fairness of the transaction. See Fla.Stat. § 607.0832 (1990); 3 W. Fletcher, Cyclopedia of Private Corporations § 931 (1944).
Ballard had a duty to inquire regarding the validity of the conflict of interest transaction involving Gaming’s Subordination Agreement. Ballard had constructive knowledge of Lobato-Bleidt’s lack of authority. See In re Branding Iron Motel, Inc., 798 F.2d 396, 401 (10th Cir.1986); Schmidt v. Farm Credit Services, 977 F.2d 511 (10th Cir.1992). The burden is on Ballard to establish that a reasonable investigation would *176have failed to disclose the lack of authority by Lobato-Bleidt to execute the Subordination Agreement. See Robert A. Wachsler Inc. v. Florafax Intern., Inc., 778 F.2d 547, 551 (10th Cir.1985); 3 W.Fletcher, Cyclopedia-of Private Corporations § 921 (1994). Ballard testified that he did not inquire about the validity of the transaction — he made no inquiries with respect to Lobato-Bleidt’s apparent conflict with respect to the Subordination Agreement. Again, Ballard has faded to meet his burden of establishing that a reasonable investigation would have faded to disclose Lobato-Bleidt’s lack of authority in executing the Subordination Agreement.
Ballard contends that the Subordination Agreement and Loan Transaction were fair to Gaming because of an alleged “debt for equity” transaction which occurred between Gaming and Sunrise sometime in 1995. Gaming, in this transaction, purportedly reduced Sunrise’s debt by $1,000,000.00 in exchange for $1,000,000.00 of equity in Sunrise. Lobato-Bleidt executed the documents on this transaction without the authority of the receiver.
Ballard’s reliance on this transaction is without merit because the purported “debt for equity” transaction was a sham transaction. The transaction allegedly occurred after the Receiver was appointed and yet it was not approved by the Florida Court. In addition, the “debt for equity” transaction is also a conflict transaction executed by Loba-to-Bleidt. As stated above, the approval and fairness requirements necessary to overcome the voidability of a conflict transaction were not met.
In conclusion, the uneontested facts establish that Lobato-Bleidt was in a classic conflict of interest position in executing the Subordination Agreement and entering into the Loan Transaction with Ballard. The transaction was not approved by disinterested directors or by the shareholders and was inherently unfair to Gaming. Gaming may therefore void the transaction. Accordingly, Gaming is entitled to summary judgment on its Third Claim for Relief pursuant to Federal Rule of Civil Procedure 56 and Federal Rule of Bankruptcy Procedure 7056. The June 9, 1995 Subordination Agreement is void and Gaming’s Deed of Trust lien has priority over the Deed of Trust lien of Ballard. See Committee for the First Amendment v. Campbell, 962 F.2d 1517, 1521 (10th Cir.1992).
A separate Judgment Order will be entered consistent with this Memorandum Opinion.
IT IS SO ORDERED.
. On January 12, 1995, Robert Abraham was appointed receiver over the assets of Gaming in Volusia County, Florida.
. These transactions do not constitute “internal matters” requiring application of Colorado law.
See Fla.Stat. § 607.1505. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492453/ | MEMORANDUM OF DECISION
DUNCAN W. KEIR, Bankruptcy Judge.
At the time of the filing of the petition on April 15, 1996 instituting this case, debtor was the owner of a tenant-in-common interest in property known as 300 East Tantallon Drive, Fort Washington, Maryland. The co-tenant was Wanda Sanders (“Sanders”). Sanders instituted a complaint for partition of the property in the Circuit Court for Prince George’s County, Case No. CAE-93-05274 (“Partition Suit”), prior to the bankruptcy filing.
On March 15, 1996, the Circuit Court for Prince George’s County entered a Consent Order providing that the debtor (defendant therein) “shall pay unto the Plaintiff [Sanders] the sum of Twenty Thousand Dollars ($20,000.00) in consideration for the Plaintiff’s transfer to the Defendant [debtor] of all her right, title, and interest in and to the real property-” The Consent Order further required that the debtor cause Sanders to be relieved of all financial obligations in connection with the property. The source of funding and vehicle for obtaining the release of Sanders was to be a refinancing of the property which was required to be completed within 30 days of the date of the Consent Order. Finally, the Consent Order provided that in the event the debtor was unable to complete settlement on or before the aforesaid date, a trustee, appointed by the Circuit Court for Prince George’s County, would be immediately instructed to sell the property forthwith.
On the 31st day after the day of the Consent Order, debtor filed the instant Chapter 13 case. In his Amended Chapter 13 Plan, debtor proposes to pay the “claim of Wanda Sanders, allowed at $20,000.00 plus interest of 3.5%' per annum” in full under the 42 month plan. The plan further provides that “[u]pon payment in full of her claim, the ownership interest of Wanda Sanders in said real estate, shall be extinguished.”
Sanders has filed a proof of claim in this case asserting a secured claim in the amount of $40,000.00. The debtor has objected to the allowance of this claim. Sanders has objected to the confirmation of the debtor’s amended plan.
For the reasons set forth on the record at a hearing on confirmation held on October 24, 1996, this court by separate order denied confirmation of debtor’s plan with leave to amend. As to the debtor’s objection to claim, and Sanders’ response thereto, the court has reviewed these pleadings and finds that the facts and legal arguments are adequately presented in the materials before it, and that a hearing would not aid the deci-sional process.
Sanders attached to her proof of claim a copy of the aforesaid Consent Order as the basis for the claim. Accordingly, it appears Sanders asserts her $40,000.00 claim based upon her co-ownership of the subject *239property and the terms of the Consent Order. However, neither tenant-in-eommon owes to the other tenant-in-eommon a duty to purchase from her co-tenant the co-tenan-ey interest. As a result, a co-tenant has no rights under state law to offer her interest in the property to the remaining co-tenant(s) and demand payment. Thus, it is clear that prior to the entry of the Consent Order, Sanders held no right to payment from the debtor. Each co-tenant held an undivided interest in the subject property which could be separately transferred by a tenant-in-common. Werner v. Quality Serv. Oil Co., 337 Pa.Super.Ct. 264, 270, 486 A.2d 1009, 1012 (1984); cf. Morris v. Wilson, 187 Md. 217, 226, 49 A.2d 458, 462 (1946). In addition, each co-tenant held the right to seek a partition and sale of the entire property from the state court with a division of the proceeds from sale in accordance with the co-tenancy rights of the parties. Md.Code Ann., Real Prop. § 14-107 (1996); Lentz v. Dypsky, 49 Md.App. 97, 430 A.2d 109 (Md.Ct.Spec.App.1981).
After availing herself of the right to seek partition, and the entry of an Order by the Circuit Court for Prince George’s County appointing a trustee to sell the property, the parties entered into the Consent Order affording the debtor a limited opportunity to purchase Sanders’ interest in the property at a fixed price. Part of the required consideration to be provided by the debtor for the purchase of the property was the release of Sanders from any mortgage obligation upon the property. Finally, under the terms of the Consent Order, if the purchase was not completed in accordance with those terms within 30 days, the exclusive remedy of Sanders under the Consent Order was that the trustee appointed to sell under the partition order of the Circuit Court would go forward and dispose of the property.
The Consent Order does not confer upon Sanders a right to collect any amounts from the debtor, if the debtor failed to perform the purchase set forth in the Consent Order. Thus, neither the common law relationship between the parties, nor the Consent Order entered in the Circuit Court, forms a basis for a money claim against the debtor in this bankruptcy ease. For this reason, Sanders’ claim shall be disallowed in full.
At most, the Consent Order placed the parties in a relationship akin to that of an executory contract. Although the trustee1 may move to assume an executory contract in existence on the petition date pursuant to 11 U.S.C. § 365, no such motion has been filed in this case. Nor does it appear that the right of the debtor to purchase the interest of Sanders was an executory right which was enforceable on the date of the petition in bankruptcy. The 30 day period set forth in the Consent Order within which debtor was required to tender payment had expired immediately prior to the filing of the petition in bankruptcy. Although the period of performance under an executory contract may be tolled by the right to cure default under § 365 in some circumstances, a debtor may not resuscitate a contract right which has terminated by expiration before the petition date. Moody v. Amoco Oil Co., 734 F.2d 1200, 1214-16 (7th Cir.1984), cert. denied, 469 U.S. 982, 105 S.Ct. 386, 83 L.Ed.2d 321 (1984).
11 U.S.C. § 362(a)(3) stays any act to obtain possession or control over property of the estate. This stay currently prohibits the state court appointed trustee in the partition ease from moving forward to liquidate the interests of both the debtor (i.e. the estate) and Sanders. As no relief from stay has been sought by Sanders, the partition case remains stayed at this time.
An Order in conformity with this Memorandum of Decision shall be entered disallowing the claim.
. There is a question as to whether a debtor under Chapter 13 may exercise the rights of the trustee to assume a contract. Courts have allowed this result in some cases involving the rental of residential real estate. See 1 Keith M. Lundin, Chapter 13 Bankruptcy § 3.47 (2d ed.1994). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492454/ | ORDER GRANTING MOTION OF PLAINTIFF FOR LEAVE TO FILE AMENDED COMPLAINT AND DENYING MOTION OF CREL PETROLEUM, INC. FOR DISMISSAL AND FOR IMPOSITION OF SANCTIONS
GREGORY F. KISHEL, Bankruptcy Judge.
This adversary proceeding came on before the Court for hearing on the motion of Crel Petroleum, Inc. (“CPI”) for dismissal and for imposition of sanctions, and upon the Plaintiffs motion for leave to file an amended complaint and to join additional parties-defendant. CPI appeared by its attorney, Garrett M. Vail. The Plaintiff appeared personally and by her attorney, Timothy J. Ewald. Upon the moving and responsive documents and the arguments of counsel, the Court makes the following order.
NATURE OF PROCEEDING
Though the Debtor’s case was commenced as one under Chapter 11, it is presently pending as one for liquidation under Chapter 7. The Plaintiff is the trustee of the Debt- or’s Chapter 7 estate. She commenced suit against the named Defendant seeking relief under two theories of recovery.
In Count I of her complaint, she alleged that the named Defendant had received payments by check from the Debtor within 90 days of the commencement of the Debtor’s Chapter 11 case, which were avoidable as preferential transfers within the contemplation of 11 U.S.C. § 547(b). To effectuate the avoidance, she requested a money judgment against the named Defendant in “at least the amount of $279,128.07”, plus such other amounts as she could prove at trial, and “prejudgment interest from the date of the filing of the Complaint” in these adversary proceedings.
In Count II, the Plaintiff alleged that, shortly after the Debtor’s Chapter 11 filing, the named Defendant had received funds in the amount of $81,281.18 or more, when the Debtor’s bank honored checks that the Debt- or had issued immediately before or immediately after its Chapter 11 filing. All of these transfers were made in payment for pre-petition deliveries of petroleum products to the Debtor. The Plaintiff alleged that the transfers identified in Count II were unauthorized post-petition transfers of the Debt- or’s assets, avoidable under 11 U.S.C. § 549. She requested a money judgment in the stated amount, or such greater amount as she proved at trial, to effectuate such an avoidance.
MOTIONS AT BAR
An entity calling itself “Crel Petroleum, Inc.” filed the first motion at bar. In the text of the motion, CPI “contends that it is the real party defendant in interest,” and seeks dismissal of the Plaintiffs complaint. It argues several alternative theories to support this request:
1. 11 U.S.C. § 546(a) bars this proceeding because it was not commenced within two years of the commencement ’ of the Debtor’s Chapter 11 case.
*2882. 11 U.S.C. § 546(a) bars this proceeding because it was not commenced within two years of the date on which a disbursing agent, denominated as a “trustee” under the Debtor’s confirmed plan, formally assumed that status.
3. The complaint is time-barred under the terms of the order that the Court entered to confirm the Debtor’s Fourth Amended Plan of Reorganization, before the case was converted to one under Chapter 7.
4. The doctrines of laches and/or estoppel bar the bankruptcy estate from now prosecuting this proceeding against CPI, given the estate’s failure to commence it earlier in either phase of the underlying case.
In addition, CPI raises a fifth defense against Count III of the Plaintiffs complaint:
5. Because the terms of the Debtor’s confirmed plan do not preserve causes of action under § 549 in favor of the reorganized debtor and its creditors, the Plaintiff lacks standing to sue anyone under that statute.
Maintaining that the procedural history of the case unequivocally establishes that the Plaintiff had no right to commence this proceeding, CPI seeks the imposition of sanctions on the Plaintiff pursuant to Fed. R.BaNKR.P. 9011.
Shortly after CPI filed its motion, the Plaintiff filed a motion for leave to amend her complaint, to add CPI and another party named “Crel Investments, Inc.” (“CII”) as additional parties-defendant, pursuant to Fed.R.BaNKR.P. 7015(a), 7015(c), and 7018(a). As the grounds for allowing such relief, the Plaintiff states:
The [Plaintiffs] failure to join the proper named corporations at the time of the filing of the original Complaint is justified because the defendant [sic] Crel Petroleum, Inc. and Crel Investments, Inc. issued invoices in the name of Crel, Inc'., without regard to corporate formalities.
After that — and on the day before the scheduled hearing — the Plaintiff filed a response to CPI’s motion, strenuously opposing it.
PROCEDURAL HISTORY OF UNDERLYING BANKRUPTCY CASE
To support its motion, CPI relies mainly on the procedural history of the Debtor’s bankruptcy case, in both of its phases.
The Debtor filed a petition for relief under Chapter 11 on January 24,' 1991. In August, 1991, the Debtor’s Committee of Unsecured Creditors moved in the alternative for appointment of a trustee or an examiner pursuant to 11 U.S.C. § 1104. The parties produced substantial evidence on the motion. Via an order entered on September 13, 1991, the Court declined to grant the relief requested. After protracted and involved confirmation proceedings, the Court confirmed what the Debtor styled as a “Modified Fourth Amended Plan” of reorganization on July 17,1992.
The Court ordered the Debtor to comply with certain formalities to evidence the substantial consummation of the plan. Even after the Court granted an extension of the deadline, the Debtor did not comply. The Court entered an Order to Show Cause to ascertain the reasons for the delay; almost simultaneously, the U.S. Trustee served a motion for conversion of the case. On January 13, 1993, the Court granted the U.S. Trustee’s motion and converted the case to one under Chapter 7.
On January 15, 1993, the United States Trustee appointed the Plaintiff as Trustee of the Debtor’s Chapter 7 estate. On January 4, 1995, she filed the complaint that, commenced this adversary proceeding.
DISCUSSION
The motions at bar raise a half-dozen issues,, which should be treated separately and seriatim.
I. The Plaintiff’s Motion
The Plaintiff seeks leave to amend her complaint pursuant to Fed.R.Civ.P. 15(a), as incorporated by Fed.R.Bankr.P. 7015.1 *289The proposed amendments add CPI and CII as parties-defendant to this adversary proceeding. In explanation of this change, the Plaintiff alleges at ¶¶5 through 7 of her amended complaint:
5. Upon information and belief, Defendant Crel, Inc. is or was a Minnesota corporation and does business in the State of Minnesota or was the name used by Defendants Crel Petroleum, Inc. and Crel Investments, Inc. for some or all of their business operations in Minnesota.
6. Defendant Crel Petroleum, Inc. is a Minnesota corporation.
7. Defendant Crel Investments, Inc. is a Minnesota corporation.
The Plaintiff goes on to state her belief that all of the proposed named Defendants sold petroleum products, “individually or collectively,” to the Debtor during 1990 and 1991, and that “one or all of the Defendants” received the benefit of the preferential transfers at issue. She attributes her identification of the named Defendant in her original complaint to the fact that “Crel, Inc.” was the style under which most of the subject invoices were issued to the Debtor.
CPI has not objected to the Plaintiffs motion. Under the circumstances, it was well-put not to do so; it appears that the Plaintiffs prior imprecision in framing her complaint is attributable to earlier imprecision in the way the named Defendant and/or the proposed new Defendants held itself or themselves out to customers, including the Debtor. Justice clearly requires a grant of leave to amend.
Further, the circumstances satisfy Fed.R.Civ.P. 15(c), as incorporated by Fed.R.BANKR.P. 7015.2 All of the claims that would be brought against CPI and CII arise from the same facts pleaded against Crel, Inc. CPI does not allege that it would be prejudiced in its options for litigation, and clearly would not be. Finally, CPI admits that it is the appropriate party-defendant, or at least is one of them. The allegations of the amended complaint, then, are deemed to relate back to the date of the Plaintiff’s original complaint, for all substantive and procedural purposes.
II. CPI’S MOTION
A. Nature of Motion.
CPI styled its motion as one for dismissal under Fed.R.Civ.P. 12(b)(6), as incorporated by Fed.R.Bankr.P. 7012(b).3 Both parties, however, made reference to various attached exhibits, and to events other than those pleaded within the four corners of the Plaintiffs complaint. The motion, then, must be treated as one for summary judgment. Fed.R.Civ.P. 12(c), as incorporated by Fed. R.BankR.P. 7012(b).4 The parties correctly agree that there is no genuine issue of material fact as to any of the issues raised by *290CPI’s motion, and that they present only questions of law amenable to summary adjudication. Fed.R.Civ.P. 56(c),5 as incorporated by Fed.R.Bankr.P. 7056.
B. Section 546(a) Statute of Limitation: Seating of Debtor in Possession at Commencement of Chapter 11 Case.
For its main argument, CPI maintains that this adversary proceeding is time-barred by 11 U.S.C. § 546(a),6 because the Debtor failed to commence it within two years after it filed for reorganization under Chapter ll.7 As CPI would have it, 11 U.S.C. § 1107(a) makes a debtor in possession in reorganization the “functional equivalent” of the trustee to whom reference is made in § 546(a)(1). In any event, it argues, § 546(a), as a “limitation on a trustee serving in a case under” Chapter 11, is applicable to a debtor in possession as soon as it is invested with that status by the filing of its petition for reorganization.8
The majority of circuit courts that have addressed this issue under the pre-1994 language of § 546(a) have adopted CPI’s position. See IRFM, Inc., 65 F.3d 778, 780 (9th Cir.1995), reconciling In re San Joaquin Roast Beef, 7 F.3d 1413 (9th Cir.1993) and In re Softwaire Centre Int'l., Inc., 994 F.2d 682 (9th Cir.1993); In re McLean Indust., Inc., 30 F.3d 385, 387 (2d Cir.1994) and In re Century Brass Prod., Inc., 22 F.3d 37, 39-40 (2d Cir.1994); In re Coastal Group Inc., 13 F.3d 81, 86 (3d Cir.1994); Zilkha Energy Co. v. Leighton, 920 F.2d 1520, 1524 (10th Cir.1990). Under the broadest form of this rationale, the inaction of a debtor in possession can extinguish all avoidance causes of action, to the prejudice of a later-appointed trustee. This is the theory that CPI urges.
The Fourth Circuit, however, has reached the opposite conclusion. In re Maxway Corp., 27 F.3d 980, 983-984 (4th Cir.1994) (holding that post-confirmation preference action by unsecured creditors committee brought pursuant to plan was not barred by failure of debtor to exercise avoidance remedy in first two years of Chapter 11 case). In doing so, it relied explicitly on the “plain language” approach favored by the Supreme Court in its recent bankruptcy jurisprudence,9 and noted that the investiture of debtor-in-possession status by operation of law does not happen under any of the sec*291tions specifically enumerated in § 546(a)(1). Id.10
The Eighth Circuit has not addressed this narrow issue. In McCuskey v. Central Trailer Serv., Ltd., 37 F.3d 1329 (8th Cir.1994), however, it applied the pre-1994 language of § 546(a)(1) to a somewhat different set of facts. In McCuskey, an operating trustee had been appointed pursuant to 11 U.S.C. § 1104, before the debtor’s Chapter 11 case was converted to one for liquidation and a Chapter 7 trustee was appointed. The defendant argued that the Chapter 7 trustee’s preference action was time-barred because it had not been commenced within two years of the appointment under § 1104. The Chapter 7 trustee argued that the enumeration of statutory sections in § 546(a)(1) meant that a new limitations period commenced with each appointment under any of them. The Eighth Circuit agreed with the defendant.
The precedential holding in McCuskey is necessarily limited to its facts. Nonetheless, in rejecting the trustee’s argument, the Eighth Circuit more generally identified the signal event that commences a limitations period under that section:
In our view, the disjunctive language [of '§ 546(a)(1) ] only specifies that the single, continuous, two-year statute of limitations begins to run with the appointment of a trustee under one of the enumerated chapters [sic] ...
37 F.3d at 1332 (emphasis added).
Following the lead of this dicta, other judges in this District have held that an appointed panel trustee in a Chapter 7 case converted from one under Chapter 11 is not time-barred from bringing a preference claim by the failure of the debtor in possession to sue it out within two years after its Chapter 11 filing. Stoebner v. Vaughan, 179 B.R. 600, 603-04 (D.Minn.1995) (Doty, J.); In re T.G. Morgan, Inc., 175 B.R. 702, 707 (Bankr.D.Minn.1994) (Kressel, J).11 Several other courts have agreed. E.g., In re Wingspread Corp., 186 B.R. 31, 34 (S.D.N.Y.1995); In re Lakeside Community Hospital, 191 B.R. 122, 124-125 (Bankr.N.D.Ill.1996).
The decisions from this District correctly glean the import of the Eighth Circuit’s dicta, toward a result that follows the plain language of § 546(a)(1) in a situation materially indistinguishable from the one at bar.12 In the first place, § 1107(a)’s reference to the “limitations on a trustee serving in a case under” Chapter 11 refers to statutorily-imposed confines on the authority and duties of a trustee — and not to the time limits by which either a trustee or a debtor in possession may commence an action to enforce their avoidance powers. In re T.G. Morgan, Inc., 175 B.R. at 707. Second, § 546(a)(l)’s reference to the “appointment of a trustee” should be taken literally, to denote the affirmative process of appointment, structured and regulated by the specific provisions of the Bankruptcy Code identified in that statute. This is something very different from the investiture of a petitioning *292debtor with a trustee’s powers pursuant to § 1107, which takes place purely by operation of law. Id. Finally, and most tellingly, § 1107 is just not among the statutory vehicles that are enumerated in § 546(a)(1). Stoebner v. Vaughan, 179 B.R. at 608; In re T.G. Morgan, Inc., 175 B.R. at 707. See also In re Midway Indust. Contractors, Inc., 184 B.R. 551, 554 (Bankr.N.D.Ill.1995).
Though they are against the majority line of decisions, the holdings from this Circuit and District better comport with the Supreme Court’s “plain language” jurisprudence. They also recognize good policy reasons that support the distinctions they glean from the wording and structure of the Code. In re T.G. Morgan, Inc., 175 B.R. at 707. See also In re Korvettes, Inc., 67 B.R. 730, 733-734 (S.D.N.Y.1986); In re Midway In-dust. Contractors, Inc., 184 B.R. at 555-556. Their rationale defeats CPI’s argument that this adversary proceeding is time-barred because the Debtor failed to sue it out during the first two years of its reorganization case. C. Section 546(a) Statute of Limitation:
Nomination of “Trustee” Under Debtor’s Confirmed Plan.
In the alternative, CPI argues that § 546(a)(1) bars this adversary proceeding because the Plaintiff did not commence it within two years of the date on which the Debtor’s plan was confirmed. It points out that the Debtor’s plan provides, as part of its description of the “Means of Carrying Out Plan”:
In order to secure to creditors the payments promised by this Plan, the debtor will nominate as trustee for the benefit of creditors Mr. Luther Stalland, an attorney ... All payments promised by this Plan will be made to Mr. Stalland, who will, in turn, make disbursements to classes of creditors as provided herein.
Other language in the same paragraph required the Debtor to execute a mortgage on its business premises in favor of Stalland, as trustee, to secure the Debtor’s obligations to creditors; it also required Stalland to monitor and enforce a pre-existing lease of a portion of the premises, to ensure that the rents from that portion and the long-term beneficial use of the premises were applied to the purposes contemplated by the plan.
Further in the plan, the Debtor provided:
Debtor reserves the right to assert the recovery of pre-petition transfers which might constitute preferences pursuant to the provisions of § 547 or “fraudulent” conveyances pursuant to the provisions of § 548. Any such recoveries, net of expenses and fees, will be used by the debtor to make the payments provided for creditors in [the class of unsecured claims].
Stalland did accept the position of “trustee,” and held it until he resigned shortly before the hearing on the U.S. Trustee’s motion for conversion.
Arguing by analogy from In re Harstad, 170 B.R. at 669, CPI maintains that
This Court must hold that section 546(a) applies to the trustee elected under the confirmed plan such that ... this action was time barred as of July 17, 1994 or two years after the election of the trustee under the Confirmed Plan and Confirmation Order.
Plans of reorganization sometimes contain provisions that nominate a person or entity other than the reorganized debtor as a “trustee,” an “estate representative,” or a “disbursing agent.” Such parties are then invested with the right to collect identified assets and the duty to distribute their proceeds to creditors in accordance with the plan. This Debtor’s plan provided for just that; the debtor “nominated” a specific individual to receive all of the post-confirmation business revenues that it committed to distributions to unsecured creditors, and to administer them.13
This, however, was the “trustee’s” sole right and duty. As such, it was a far cry from the panoply of powers and obligations that is the charge of a trustee statutorily-empowered under the Bankruptcy Code. The ministerial functionary contemplated by *293the Debtor’s plan cannot be blithely equated with a trustee formally appointed under one of the sections identified in § 546(a)(1).
Several courts have addressed the issue of whether the nomination or investiture of a “trustee” or disbursing agent under a confirmed plan commences the period of limitations under § 546(a). Predictably, they have split on their result. A number, including the Ninth Circuit, have held that the “appointment” or investiture of a third-party estate representative or agent under a confirmed plan is not among the triggering events identified in § 546(a). In re DeLaurentiis Entertainment Group, Inc., 87 F.3d 1061, 1064 (9th Cir.1996); In re National Steel Service Center, Inc., 170 B.R. 745 (N.D.Ga.1994); In re Mars Stores, Inc., 150 B.R. 869 (Bankr.D.Mass.1993); In re Hunt, 136 B.R. 437 (N.D.Tex.1991). Others have equated a post-confirmation disbursing agent with a trustee for the purposes of § 546(a). In re Gibbons Grable Co., 142 B.R. 164 (N.D.Ohio 1992); In re AOV Indust., Inc., 62 B.R. 968, 974 (Bankr.D.D.C.1986) (holding, however, that avoidance action was timely because it was commenced within two years of date of agent’s “appointment” under a plan). See also In re Iron-Oak Supply Corp., 162 B.R. 301, 308 (E.D.Cal.1993).14
The reasoning of the former line of decisions tracks the rationale that defeated CPI’s first argument. Again, it is dictated by the plain language of the statute, and for that reason it is more objectively principled at a deeper level. The Debtor’s nomination of a “trustee,” then, did not trigger § 546(a)(1). Because the more general statute of limitations under § 546(a)(2) applies, this action is not time-barred and CPI is not entitled to dismissal on this theory either.
D. Time-Barring Under Terms of Confirmation Order.
CPI raises a third time-barring theory, based on the terms of the order that confirmed the Debtor’s plan. Entered on July 17, 1992 on this Court’s standard form, the order provided:
4. OTHER PROCEEDINGS. All other motions, applications or complaints shall be filed within 90 days after the date of this order. Any time limit provided in this order may be extended or waived by the court for cause after notice and a hearing. Nothing in this order shall preclude any proceeding in another court with jurisdiction and within time limits otherwise applicable.
Under the first sentence of this provision, as CPI would have it,
any implied avoidance powers that survived confirmation were lost 90 days after July 17,1997, irrespective of who held any such powers[;]
therefore, the Plaintiff does not have them to wield against transferees like itself.15
This argument does not acknowledge the reason why the form confirmation order fixes the deadline in question, and misperceives its effect. By its terms, the deadline does not purport to accelerate any applicable statute *294of limitations, or to supersede any provision of the federal or local rules of bankruptcy procedure. To have this effect, it would have to mention the abrogated statute or rule. It would also have to set forth findings to establish some sort of cause for such an abrogation. The lack of such recitations reflects the fact that this term is purely ministerial in nature and origin. So does the term’s placement among other provisions governing the post-petition status of the Debtor’s case. The provision prompts reorganized debtors to consummate their plans as quickly as possible, so court files in Chapter 11 can be closed promptly and efficiently.
With its companion,16 the term is analogous to a scheduling order under Fed.R.Civ.P. 16(e)—or, even more aptly, under current 11 U.S.C. § 105(d)(2)17. As such, it functions as a caseload management device. However, it cannot, and does not, affect any substantive rights, or the application of statutes of repose, general or specific, to the assertion of such rights.
This is clearly reflected in the remaining sentences of Term 4. The second sentence reserves to the court the power to alter any of the deadlines fixed in the other terms of the order. Even more on point, the third sentence clearly contemplates that post-confirmation proceedings involving a reorganized debtor may be brought in any other court, subject to the establishment of jurisdiction there and subject to applicable statutes of limitation. In short, Term 4 functions as a notice to reorganized debtors and all other parties in interest: to use the Bankruptcy Court as a forum for post-confirmation litigation, through the vehicle of the Chapter 11 case as originally opened, they have to act quickly. It functions as nothing more than that, however, because it just does not purport to do so.
The passage of the deadline specified under Term 4 did not divest the reorganized debtor, or any successor to it, of the right to bring an adversary proceeding like the present one. This adversary proceeding is not time-barred on this theory, either.
E. Time-Barring by Laches.
As a final theory, CPI argues that this Court should bar the Plaintiff from prosecuting this adversary proceeding because of the simple passage of time.
Under the equitable doctrine of laches, a claim may be dismissed on motion of a defendant where the plaintiff unreasonably and inexcusably delayed bringing the claim, and where the delay resulted in material prejudice to the defendant. Goodman v. McDonnell Douglas Corp., 606 F.2d 800, 804 (8th Cir.1979); Hurst v. United States Postal Serv., 586 F.2d 1197, 1199-1200 (8th Cir.1978); Carlson v. City of Marble, 612 F.Supp. 669, 672 (D.Minn.1985); Funchie v. Packaging Corp. of America, 494 F.Supp. 662, 666 (D.Minn.1980). Where an action has been commenced within an applicable statute of limitations, the burden of proof on the elements of laches lies heavily on the proponent. Hurst, 586 F.2d at 1200. In such a case, laches generally will not lie to bar the action. Advanced Cardiovascular Systems, Inc. v. SciMed Life Systems, Inc., 988 F.2d 1157, 1161 (Fed.Cir.1993).
Though it invokes the doctrine by name, CPI does not use this formulation in so many words. However, it apparently has the reasonableness of delay in mind when it cites the Harstad court’s observation, 170 B.R. at *295669, that subjecting a debtor in possession to a two-year limitations period under § 546(a) encourages it to negotiate early and in good faith with parties who are both creditors and potential avoidance defendants, “and to disclose early on to its creditors the potential for recovery of assets for the estate.” CPI insists:
For that reason, if for no other, this Court should impose an equitable two-year limitation period in this case running from January 24,1991.
As a proponent’s ease on the delay element, this is rhetorical, but nothing more. One cannot deny the soundness of the policy argued. However, even as observed in Sto-ebner v. Vaughan, that policy simply does not apply to a situation where Congress has dictated a different approach on the basis of other policy considerations. The Plaintiff may have waited until very nearly the last minute — but, as concluded earlier, she still made it under the statute. She did not do so unreasonably or inexcusably.18
On the element of prejudice, CPI points in a very general way to the fact that the passage of time has dispersed the Debtor’s employees, and relevant documents may have wandered. However, it does not identify any person or thing that is no longer available to furnish evidence on the merits. This allegation, bare as it is, does not constitute the particularized showing that a proponent must make on this element.
There is a broader reason to reject a lach-es defense here, which is more specific to bankruptcy. CPI proposes the use of equitable doctrine to reconstruct provisions of the Bankruptcy Code that otherwise may leave it vulnerable to the Plaintiffs avoidance powers. Basically, it maintains, it would be grossly unfair to apply the two-year limitations period to only the situations identified in § 546(a), even though the one at bar is not among them; therefore, the Court should stretch the ambit of a statute of repose beyond the statute’s express terms.
This argument overassume's the reach of equity in bankruptcy proceedings. The binding pronouncements of the senior courts establish that the Bankruptcy Court’s
broad equitable powers may only be exercised in a manner which is consistent with the provisions of the [Bankruptcy] Code,
Johnson v. First Nat’l Bank of Montevideo, 719 F.2d 270, 273 (8th Cir.1983), and that
[wjhatever equitable powers remain in the bankruptcy courts must and can only be exercised within the confines of the Bankruptcy Code,
Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206, 108 S.Ct. 963, 968, 99 L.Ed.2d 169 (1988).
As the Eighth Circuit has suggested, and the District and Bankruptcy Courts for this District have held, § 546(a)(1) triggers a two-year limitations period only with the appointment of a trustee under one of its identified provisions. That did not happen in the Debt- or’s ease until January 15,1993, less than two years before the Plaintiff sued out this adversary proceeding. Applying the bar of laches to override the clear import of the statute is beyond this Court’s equitable powers. CPI, then, is not entitled to have this matter terminated on this ground either.
F. Dismissal of Request for Avoidance of Post-Petition Transfers in Count II.
In the alternative, and as to Count II of the Plaintiffs complaint alone, CPI argues that the Plaintiff does not have the power to avoid unauthorized post-petition transfers pursuant to 11 U.S.C. § 549(a). It correctly notes that the confirmed plan did not preserve such causes of action for. the reorganized debtor; thus, it argues, under Harstad v. First American Bank, 39 F.3d 898 (8th Cir.1994), those causes of action were extinguished upon confirmation.
This argument presents a more complex set of issues than CPI frames.19 Fur*296ther discussion is unnecessary, however, because the Plaintiff omitted Count II from her amended complaint; apparently she has forgone all claims to avoid the transfers in question, as to the current defendants. This part of CPI’s motion is now moot.
G. CPI’s Motion for Imposition of Sanctions.
Peppering the Plaintiff with a mass of accusations,20 CPI’s counsel requested the imposition of sanctions pursuant to Fed. R.Bankr.P. 9011(a).21 The result on CPI’s main motion — entirely in favor of the Plaintiff — dooms this demand. Even had CPI prevailed on the merits, however, the Plaintiff acted in good faith in pursuing the Defendant(s). The statute itself certainly seemed to allow for the litigation. There was no binding, on-point precedent that barred it, and there certainly was no unanimity in the persuasive authority from other jurisdictions. The issues being fair game for litigation, the Plaintiff was not out of bounds in suing this matter out — regardless of the passage of time of which CPI loudly complains, and certainly notwithstanding the unwarranted bombast of its counsel’s maledictions.
ORDER
Upon the foregoing discussion, then,
IT IS HEREBY ORDERED;
1. The Plaintiff is granted leave to amend her complaint to the form of that filed on May 16, 1995. Within ten days of the date of this order, the Plaintiff shall obtain the issuance of a summons on that complaint and shall serve both on all named defendants. Pursuant to Fed.R.Civ.P. 15(a), os incorporated by Fed.R.Bankr.P. 7015, the Defendants shall serve and file an answer or answers within ten days after service of the amended complaint on them.
2. The motion of Orel Petroleum, Inc. for dismissal of this adversary proceeding, construed as one for summary judgment, and for *297imposition of sanctions, is denied in all respects.
. The relevant text of the former rale is:
... a parly may amend the party’s pleading only by leave of court or by written consent of *289the adverse party; and leave shall be freely given when justice so requires.
.The relevant provisions of the former rule are: An amendment of a pleading relates back to the date of the original pleading when
(2) the claim or defense asserted in the amended pleading arose out of the conduct, transaction, or occurrence set forth or attempted to be set forth in the original pleadings, or
(3) the amendment changes the party or the naming of the party against whom a claim is asserted if the foregoing provision (2) is satisfied and, within the period provided by Rule 4(m) for service of the summons and complaint, the party to be brought in by amendment (A) has received such notice of the institution of the action that the party will not be prejudiced in maintaining a defense on the merits, and (B) knew or' should have known that, but for a mistake concerning the identity of the property party, the action would have been brought against the party.
. The former rule provides that a request for dismissal for “failure to state a claim upon which relief can be granted” may be brought by answer or via motion, at the option of the party asserting the defense.
. In pertinent part, this rule provides:
If, on a motion for judgment on the pleadings, matters outside the pleadings are presented to and not excluded by the court, the motion shall be treated as one for summary judgment and disposed of as provided in [Fed.R.Civ.P.] 56, and all parties shall be given reasonable opportunity to present all material made pertinent to such a motion by [Fed.R.Civ.P.] 56.
. In pertinent part, this rule provides:
The judgment sought shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.
. As it read in 1991, the text of this statute is:
An action or proceeding under [11 U.S.C. §§] 544, 545, 547, 548, or 553.... may not be commenced after the earlier of—
(1) two years after the appointment of a trustee under [11 U.S.C. §§] 702, 1104, 1163, 1302, or 1202 ... or
(2) the time the case is closed or dismissed. In the Bankruptcy Reform Act of 1994, Congress amended this provision, to address the veiy problem at bar. See Pub.L. No. 103-394, § 216, 108 Stat. 4106, 4127. Because this case was commenced before that enactment, however, the earlier language applies. See Pub.L. No. 103-394, § 702(b), 108 Stat. at 4150.
. CPI's counsel did not brief this variant on his time-barring theory, but he did present it in passing at oral argument.
. Section 1107(a) provides, in pertinent part:
Subject to any limitations on a trustee serving in a case under [Cjhapter [11], and to such limitations or conditions as the court prescribes, a debtor in possession shall have all the rights ... and powers, and shall perform all the functions and duties, ... of a trustee serving in a case under [Cjhapter [11],
In turn, § 1101(1) defines "debtor in possession” as "debtor except when a person that has qualified under [11 U.S.C. §] 322 ... is serving as trustee in the case ...”
. E.g., Rake v. Wade, 508 U.S. 464, 472-473, 113 S.Ct. 2187, 2192-2193, 124 L.Ed.2d 424 (1993); Patterson v. Shumate, 504 U.S. 753, 758, 112 S.Ct. 2242, 2246, 2247, 119 L.Ed.2d 519 (1992); Taylor v. Freeland & Kronz, 503 U.S. 638, 642, 112 S.Ct. 1644, 1647-1648, 118 L.Ed.2d 280 (1992); Barnhill v. Johnson, 503 U.S. 393, 395-400, 112 S.Ct. 1386, 1388-1391, 118 L.Ed.2d 39 (1992); U.S. v. Nordic Village, Inc., 503 U.S. 30, 32-37, 112 S.Ct. 1011, 1014-1016, 117 L.Ed.2d 181 (1992); Union Bank v. Wolas, 502 U.S. 151, 160-162, 112 S.Ct. 527, 533, 116 L.Ed.2d 514 (1991); Toibb v. Radloff, 501 U.S. 157, 160-161, 111 S.Ct. 2197, 2199-2200, 115 L.Ed.2d 145 (1991); Hoffman v. Connecticut Dept. of Income Maintenance, 492 U.S. 96, 101-102, 109 S.Ct. 2818, 2822-2823, 106 L.Ed.2d 76 (1989) (plurality opinion). Contra, Dewsnup v. Timm, 502 U.S. 410, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992).
.There is one more decision at the circuit level: In re MortgageAmerica Corp., 831 F.2d 97 (5th Cir.1987). At a first, superficial glance it seems to support the Plaintiff's position:
We agree that the limitations period under section 546(a) should commence consistent with the appointment of the trustee through a written order.
831 F.2d at 98. A more thorough reading shows that the issue in MortgageAmerica Corp. was whether the making of a docket entry reflecting a bankruptcy judge's "oral appointment" of a Chapter 11 trustee started the limitations period, or whether the much later entry of a nunc pro tunc written order did so. Because the defendant in MortgageAmerica Corp. apparently never even raised the argument that CPI does here, the Fifth Circuit's decision really does not have anything to say to the matter at bar.
. These decisions arose out of the bankruptcy case of T.G. Morgan, Inc., which was commenced under Chapter 11, in which no trustee was appointed while it remained under Chapter 11, and which was later converted to a case under Chapter 7.
. In an earlier decision. Judge Doty had held that § 546(a)(1) barred a post-confirmation preference action commenced by a reorganized debt- or, where it was brought more than two years after the debtor’s Chapter 11 filing. In re Harstad, 170 B.R. 666 (Bankr.D.Minn.1994). In Stoebner v. Vaughan, Judge Doty modified the theory he had applied in Harstad in light of the intervening decision in McCuskey. Stoebner v. Vaughan did not implicate the effect of McCuskey's dicta on a situation like that in Harstad, where no trustee was ever appointed. Neither does the case at bar.
. It did so in response to the hostility it had received throughout the case from various creditors, including CPI. They had continually insisted that the Debtor's management was neither willing or able to insure that creditors received their due after confirmation.
. Because the "designated representative” in Iron-Oak Supply Corp. brought its action within two months after the confirmation of a liquidating plan, the decision does not treat the issue at bar. However, the tenor of Iron-Oak Supply Corp., in its dicta, is that only formal appointment under one of the sections identified in § 546(a)(1) commences the two-year limitations. See 162 B.R. at 308.
. In another part of his brief, CPI’s counsel maintains that the Debtor's plan was somehow ambiguous, because it retained avoidance powers under 11 U.S.C. §§ 547-548 in the Debtor, but vested a third party with certain other powers for the benefit of creditors. This notion is silly. It may not be often done, but there is certainly no inconsistency or ambiguity in splitting post-confirmation duties and powers like this. In this case, there was good reason to structure things this way. The Debtor had large priority tax claims to service out of its net post-confirmation revenues. The servicing of those claims promised to take several years. Severed parties had expressed concern that the distribution rights of unsecured creditors would be jeopardized if deferred so long and left under the responsibility of the Debtor’s management. The role of the “trustee” was created in direct response to this specific concern. As a result, his powers were limited to monitoring the Debtor’s long-term post-confirmation operations to ensure that all net revenues were properly applied pursuant to the plan. The Debtor obviously did not contemplate that the vesting of statutory avoidance powers in the “trustee” was necessary, even if it thought that it should retain them. No creditor took issue with this proposal when the plan came up for confirmation.
. The form also provides, in pertinent part:
3. OBJECTIONS TO CLAIMS. All objections to proofs of claim ... shall be served and filed within 30 days after the date of this order, or 30 days after the claim was filed, whichever is ' later.
. 11 U.S.C. § 105(d)(1), enacted in the Bankruptcy Reform Act of 1994, authorizes the Bankruptcy Court to
hold a status conference regarding any case or proceeding under [the Bankruptcy Code] after notice to the parties in interest....
In turn, § 105(d)(2) empowers it to unless inconsistent with another provision of [the Bankruptcy Code] or with applicable Federal Rules of Bankruptcy Procedure, issue any order at any such conference prescribing such limitations and conditions as the court deems appropriate to ensure that the case is handled expeditiously and economicafiy.
The statute then identified seven described sorts of terms that may constitute such conditions. All of them fix deadlines for specific actions in the course of reorganization and bankruptcy estate administration.
. After all, she came into the claim as a successor by operation of law, under a clear statutory grant of a two-year period to evaluate the claim and to sue it out if appropriate. As a fiduciary exercising independent judgment in a very different form of bankruptcy case, she could not be bound by the Debtor’s inaction in bringing suit on it.
. The confirmation of a plan of reorganization reconfigures a debtor’s property rights and obligations of payment, effecting a new legal land*296scape. E.g., In re Kellogg Square Partnership, 160 B.R. 343, 368 (Bankr.D.Minn.1993); In re Ernst, 45 B.R. 700, 702 (Bankr.D.Mmn.1985). Harstad v. First American Bank illustrates one aspect of the way in which confirmation remakes the world around the reorganized debtor, legally and financially: if a debtor in Chapter 11 does not explicitly preserve its pre-confirmation avoiding powers by name in the terms of its plan, pursuant to 11 U.S.C. § 1123(b)(3), it loses them on confirmation. 39 F.3d at 902-903. CPI’s point seems to be that the Debtor did not hold any avoidance powers after confirmation because its plan did not preserve them in so many words, so such "assets” did not pass into the Chapter 7 estate upon conversion. This theory finesses the fact that, technically speaking, avoidance powers and rights of recovery under 11 U.S.C. §§ 544—551 are not property of the bankruptcy estate. Under 11 U.S.C. § 541(a)(1), "all legal or equitable interests of the debtor in property as of the commencement of the case ” pass into the estate. A trustee's avoiding powers spring into existence by operation of law upon the commencement of a case. Once the trustee exercises avoidance powers, of course, the recovered assets become property of the estate. 11 U.S.C. §§ 541(a)(3)-(4). However, the right of recovery itself probably cannot be said to be property reposing in the estate; it is created independently by statute, and lodges with whomever the statute empowers to wield it.
. Among other things, counsel accuses the Plaintiff of making "little or no effort to name” CPI as a proper party-defendant; of making verified allegations in her complaint that "were reckless if not intentionally disingenuous"; of failing to “offer any good faith arguments for the extension, modification or reversal of existing law, including the Confirmation Order”; of bringing this adversary proceeding "for the improper purpose of extracting a nuisance settlement” from CPI; of bringing this action in bad faith; and of violating a "higher standard” of conduct in litigation that, he maintains, should be imposed on trustees in bankruptcy.
. This rules requires that, inter alia, every motion or other paper served or filed in a bankruptcy case must be signed, and goes on to provide that the signature of an attorney
constitutes a certificate that the attorney ... has read the document; that to the best of the attorney’s ... knowledge, information, and belief formed after reasonable inquiry it is well-grounded in fact and is warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law; and that it is not interposed for any improper purpose, such as to harass or cause unnecessary delay or needless increase in the cost of litigation or administration of the case.
The rule then provides for imposition of “an appropriate sanction” on an attorney signing a document in violation of this "automatic certification of merit.” See, in general, In re KTMA Acquisition Corp., 153 B.R. 238 (Bankr.D.Minn.1993). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492456/ | MEMORANDUM OF DECISION
JAMES A. GOODMAN, Chief Judge.
On September 13, 1996, Philip Mans (“Debtor”) filed a motion seeking to alter or amend the judgment entered by this Court on September 6, 1996, declaring nondis-chargeable a debt owed to William & Norrine Field (“Plaintiffs”).
This case was tried by Bankruptcy Judge James Yacos on May 11, 1993, upon Plaintiffs’ complaint to determine dischargeability of a debt pursuant to § 523(a)(2)(A) of the Bankruptcy Code.1 Judge Yacos declared the debt dischargeable after finding that Plaintiffs had not reasonably relied on Debt- or’s false representation. The only issue on appeal was whether reasonable reliance was the appropriate legal standard. Both the District Court and the Circuit Court of Appeals for the First Circuit affirmed. Plaintiffs then appealed to the Supreme Court which, upon holding that the correct standard of reliance is justifiable, not reasonable, reliance, vacated the judgment and “remand[ed] the ease for proceedings consistent with this opinion.” Field v. Mans, — U.S. -, -, 116 S.Ct. 437, 447, 133 L.Ed.2d 351 (1995).
In accordance with the remand mandate, I declared the debt nondischargeable after finding that Plaintiffs had satisfied the less demanding standard of justifiable reliance. In the present motion, Debtor asserts that there has been no finding by any court that there was a debt or extension of credit “obtained by” the fraud. Debtor further contends that Plaintiffs’ forbearance from accelerating the note did not constitute an extension of credit within the meaning of § 523(a)(2)(A) and that Plaintiffs have not proven the causation element of § 523(a)(2)(A).
Plaintiffs argue that the motion is procedurally barred because Judge Yacos did make a finding after trial that the fraud resulted in an extension of credit by Plaintiffs. Debtor did not, before now, appeal that finding to any court. Plaintiffs rely on the doctrine of the law of the case to support their argument. I agree with Plaintiffs that Judge Yacos specifically found that Debtor’s misrepresentation resulted in an extension of credit:
[T]o the extent that the reliance and detriment elements are required here, it’s obvious to me that [the Fields] in their own minds did rely on these representations *357subjectively and didn’t do anything further and that in effect they extended the credit to Mr. Mans for another few years, ... whereas they could have called the due on sale clause as of October 1987 ... when the deed was recorded.
Trial Tr. at 81 (emphasis added). Although Debtor did not appeal this finding, he argued the issue before the Supreme Court.
I agree with Plaintiffs that the doctrine of the law of the case forecloses my review of the prior ruling. “The law of the case doctrine provides that a decision on an issue of law made at one stage of the ease governs the issue during subsequent stages of the litigation except in unusual circumstances.” Stark v. Advanced Magnetics, Inc., 894 F.Supp. 555, 557 (D.Mass.1995) and cases cited therein. The mandate rule requires a court to confine its inquiry “to matters coming within the specified scope of the remand.” Kotler v. American Tobacco Co., 981 F.2d 7, 13 (1st Cir.1992); Stark, 894 F.Supp. at 557. “The mandate constitutes the law of the case on such issues of law as were actually considered and decided by the appellate court, or as were necessarily inferred from the disposition on appeal.” Commercial Union Ins. Co. v. Walbrook Ins. Co., Ltd., 41 F.3d 764, 770 (1st Cir.1994); IB J. Moore et al, Moore’s Federal Practice ¶ 0.404[10] at 11-63 to 11-68 (2d ed. 1996). “[W]hen the Supreme Court vacates an entire judgment [the court], on remand, has the naked power to reexamine an issue that lies beyond the circumferences of the Supreme Court’s specific order ... [but] [t]his power is to be exercised sparingly and only when its invocation is necessary to avoid extreme injustice.” Kotler, 981 F.2d at 13 (citations omitted).
In his brief to the Supreme Court, Debtor presented the issue of whether there had been a debt or extension of credit obtained by the fraud as required by § 523(a)(2)(A). The Supreme Court had the opportunity to address the issue and affirm the lower courts’ decisions on that basis but chose instead to remand on the reliance issue. The necessary inference to be drawn is that the Supreme Court agreed with Judge Yacos’s finding. Justice Ginsburg, in a concurring opinion not joined by any other member of the Court, suggested that the “causation issue [was] still open for determination on remand: Was the debt in question, as the statute expressly requires, ‘obtained by' the alleged fraud?” Field, — U.S. at -, 116 S.Ct. at 447 (Ginsburg, J., concurring). However, that suggestion was not a part of the majority opinion nor of the remand mandate. Therefore, I may only revisit the issue to avoid extreme injustice.
Upon remand, the parties consented to a decision by me on the reliance issue based upon the record as it existed at that time. I agreed then, and agree now, with the findings made by Judge Yacos. Moreover, I cannot find anything in the record to suggest extreme injustice warranting a review of this matter. However, if I were to find that the issue had not been decided and that the doctrine of the law of the case did not apply, and if I were to find extreme injustice, which I do not, I would still be satisfied that Judge Yacos made the necessary findings and would uphold those findings upon reconsideration for the following reasons.
There is conflict among courts as to whether forbearance constitutes an extension of credit within the meaning of § 523(a)(2)(A). Compare In re Schmidt, 70 B.R. 634, 644 (Bankr.N.D.Ind.1986); In re Bacher, 47 B.R. 825, 829 (Bankr.E.D.Pa.1985) (holding that forbearance does not constitute an extension of credit within the meaning of § 523(a)(2)(A)); with In re Gerlach, 897 F.2d 1048, 1050 (10th Cir.1990); Chapman v. Frakes, 1991 WL 247602 at *4 (N.D.Ill.1991); Takeuchi Mfg. (U.S.), Ltd. v. Fields (In re Fields), 44 B.R. 322, 329 (Bankr.S.D.Fla.1984) (holding that forbearance does constitute an extension of credit within the meaning of § 523(a)(2)(A)).
Under the facts of this case, the better view is that a creditor “who is deceived into forbearing from collection without being given an opportunity to grant or deny the extension of credit” is protected by § 523(a)(2)(A). Fields, 44 B.R. at 329; In re Gerlach, 897 F.2d at 1050 (quoting Fields); Chapman, 1991 WL 247602 at *4 (“Courts which have held that forbearance constitutes an exten*358sion of credit have ruled so based on circumstances ... where the forbearance was based on fraudulent information.”)- Debtor’s conduct lulled Plaintiffs into a false sense of security which directly resulted in Plaintiffs’ involuntary forbearance of a collection action at a time when they had an absolute right to accelerate the note. Plaintiffs’ failure to act, a direct result of Debtor’s misrepresentations, provided Debtor with an extension of credit obtained by false representations.
Debtor’s motion is DENIED. The foregoing represents findings of fact and conclusions of law pursuant to Fed.R.Bankr.P. 7052. An appropriate order shall enter.
. Section 523 of the Bankruptcy Code provides in relevant part:
(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—
(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[J
11 U.S.C. § 523(a)(2)(A). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492457/ | ORDER
JOHN L. PETERSON, Chief Judge.
At Butte in said District this 13th day of December, 1996.
In this Chapter 7 bankruptcy, after due notice, hearing was held November 12, 1996, at Billings on Defendant’s Motion for Summary Judgment. Counsel for both parties appeared, and agreed to submit the matter on briefs and exhibits. Both parties have filed briefs and at hearing, each stipulated to the other’s exhibits. The Court, therefore, deems the matter ripe for adjudication.
The matter initially began in April of 1985, when the Internal Revenue Service (IRS) *461issued two Notices of Deficiency; one against Gale Palmer (Palmer) and the other against Juli Palmer. The Notice of Deficiency against Juli Palmer asserted a negligence penalty while the Notice of Deficiency against Palmer asserted a fraud penalty. Palmer petitioned the United States Tax Court for a redetermination of his liability. In response, the IRS filed an answer and affirmatively alleged that a portion of Palmer’s deficiency was attributable to fraud. Among other things, the IRS alleged that Palmer was an employee of the Montana Power Company (MPC), but failed to report his income from MPC on his Federal income tax returns for the years 1979 through 1983 and that Palmer filed an Exemption from withholding certificate (Form W-E) with MPC, on which Palmer claimed to be exempt from Federal income tax, even though he knew he was not.
When Palmer failed to respond to the IRS’ answer, the IRS petitioned the Tax Court for an Order Under Rule 37(c).1 The Tax Court granted the IRS’ motion in an Order dated December 20, 1985, stating that the affirmative allegations of fact set forth in paragraphs 8 A-R were deemed admitted. On January 27, 1986, the Office of the Clerk of the Tax Court sent Palmer a notice, apprising him of the Order and informing Palmer that the affirmative allegations were deemed admitted and that if he wished to object, Palmer would have to submit a Motion to Vacate and explain his failure to respond. Palmer took no action. The IRS subsequently moved for Summary Judgement, which the Tax Court granted in an Order and Decision, and Memorandum Sur Order dated May 22, 1986. The Tax Court specifically found that Palmer’s tax deficiencies were attributable to fraud.
On February 9, 1995, Debtors filed a voluntary bankruptcy petition. In their schedules, Debtors list a debt owing to the IRS in the amount of $107,413.00. A portion of the debt is the same debt that was at issue in the above Tax Court proceeding. On September 10, 1996, Debtors filed a Complaint to Determine Dischargeability, requesting that this Court find the debt dischargeable pursuant to 11 U.S.C. § 523(a)(1).2
Debtors advance three arguments in opposition to the IRS’ Motion for Summary Judgment. First, Debtors argue that bankruptcy courts have exclusive jurisdiction to determine the dischargeability of a tax. Second, Debtors argue that 11 U.S.C. § 505(a)(2) is not applicable to this case. Finally, Debtors argue that there was not an adjudication in the Tax Court.
The Court will first address Debtors’ exclusive jurisdiction argument. Debtors quote a footnote from a Supreme Court decision to support their proposition that bankruptcy courts have exclusive jurisdiction to determine fraud, and the resulting dischargeability. Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). However, Debtors misinterpret the meaning of the footnote, which reads:
Before 1970, the bankruptcy courts had concurrent jurisdiction with the state courts to decide whether debts were excepted from discharge. In practice, however, bankruptcy courts generally refrained from deciding whether particular debts were excepted and instead allowed those questions to be litigated in the state courts. The state courts therefore deter*462mined the applicable burden of proof, often applying the same standard of proof that governed the underlying claim. The 1970 amendments took jurisdiction over certain .dischargeability exceptions, including the exceptions for fraud, away from the state courts and vested jurisdiction exclusively in the bankruptcy courts.
Grogan, at 284, n. 10, 111 S.Ct. at 658, n. 10. Citations omitted.
In the footnote, the Supreme Court clearly states that bankruptcy courts have exclusive jurisdiction to determine whether particular debts are dischargeable. Nevertheless, bankruptcy courts do not have exclusive jurisdiction to determine the underlying issue in a dischargeability action, even if the underlying issue is fraud. The Supreme Court clarifies this:
If the preponderance standard also governs the question of nondischargeability, a bankruptcy court could properly give collateral estoppel effect to those elements of the claim that are identical to the elements required for discharge and that were actually litigated and determined in the prior action.
* * * * * *
In sum, if nondischargeability must be proved only by a preponderance of the evidence, all creditors who have secured fraud judgments, the elements of which are the same as those of the fraud discharge exception, will be exempt from discharge under collateral estoppel principles.
# Hí ‡ # ‡
A final consideration supporting our conclusion that the preponderance standard is the proper one is that, as we explained in Part I, supra, application of that standard will permit exception from discharge of all fraud claims creditors have successfully reduced to judgment.
Grogan, at 284-285, and 290, 111 S.Ct. at 658-59, and 661.
The above excerpt from Grogan demonstrates that both collateral estoppel and res judicata are applicable to nondischargeability actions. The above excerpt specifically mentions collateral estoppel, however, the requirement for a “judgment” demonstrates that res judicata is also applicable. As this Court has previously noted, res judi-cata has three elements: (1) the issue must have been decided in a prior adjudication and must be identical to the one presented; (2) there must have been a final judgment issued on the merits; and (3) the party against whom the plea is asserted must have been a party or in privity with a party to the prior adjudication. In re Pickering, 182 B.R. 268, 271 (1995).
In this ease, the issue of fraud was decided in a prior adjudication. Furthermore, the issue of fraud in the Tax Court is the same issue of fraud raised in the case at bar. Additionally, the parties in this adversary proceeding are the same parties involved in the Tax Court proceeding. The only remaining issue, is whether the Tax Court issued a final judgment on the merits.
This leads to Debtors second argument that there was not an adjudication of fraud in the Tax Court. To support this proposition, Debtors rely on Graham v. Internal Revenue Service (In re Graham), 973 F.2d 1089 (3rd Cir.1992). In Graham, the IRS sent a notice of deficiency to the taxpayers which included penalties and interest for fraud. Taxpayers challenged the IRS’ notice of deficiency in the Tax Court arguing that certain documents the IRS used in determining the tax, penalties and interest had been improperly obtained. The parties then entered into a stipulation in favor of the IRS, which made no reference to fraud as a basis for liability. Rather, the taxpayers conceded that “the deficiencies in income tax and additions to tax determined therein, although not admitted, are uncontested ... ”.
The taxpayers in Graham then filed for bankruptcy. The taxpayers also filed an adversary proceeding seeking to discharge the amount owed the IRS pursuant to the stipulation. In Graham, the Third Circuit held that “the fraud issue present in this case was not precluded by prior Tax Court judgment.” This Court agrees with the holding in Graham, however, Graham is factually distinguishable from the instant ease.
*463In Graham, the claim of fraud was not successfully reduced to judgment. In this case, the claim of fraud was successfully reduced to judgment. Palmer filed a petition in Tax Court. The IRS then filed an answer alleging fraud. When Palmer failed to respond to the IRS’ answer, the IRS filed a motion for an Order under Rule 37(c). Again, Palmer failed to respond. Consequently, the factual allegations of fraud in the IRS’s answer were deemed admitted. Based on Palmer’s petition, the IRS’ answer, and the deemed admitted facts in the IRS’ answer, the Tax Court, on a summary judgement motion, ruled in favor of the IRS:
Insofar as the additions to tax for fraud under section 6653(b)(1) and (2) are concerned, [IRS] has the burden of proof. Rule 142(b), Tax Court Rules of Practice and Procedure. We are satisfied that the factual, as distinguished from the coneluso-ry, allegations contained in [IRS’] answer and deemed admitted by the Court’s order, dated December 20, 1985, are sufficient to carry that burden.
By following specific procedural requirements, the IRS successfully reduced the claim of fraud to judgment. Consequently, the principles of res judicata prohibit this Court from redetermining the issue of fraud in the instant adversary proceeding. Since the Tax Court has already made a determination of fraud, which is binding on this Court, Palmer’s tax, including penalties and interest, that was previously determined to be attributable to fraud, is excepted from discharge pursuant to 11 U.S.C. § 523(a)(1)(C). Debtors argument that 11 U.S.C. § 505 is not applicable in this ease is rendered moot by the above findings.
Also at issue is whether the taxes, penalties and interest attributable to Juli Palmer’s negligence is dischargeable. There is not an exception to discharge for negligence. Consequently, any portion of the $107,413.00 due the IRS that is attributable to Juli Palmer’s negligence is dischargeable. The remaining portion that Debtors owe the IRS, that is attributable to Palmer’s fraud, is excepted from discharge.
IT IS THEREFORE ORDERED the clerk shall enter Judgment in favor of Defendant, Internal Revenue Service, and against Plaintiff, Gale E. Palmer, and the amount of taxes, penalties and interest owed the IRS as a result of Gale E. Palmer’s fraud is non-dischargeable pursuant to 11 U.S.C. § 523(a)(1)(C).
IT IS FURTHER ORDERED the clerk shall enter Judgment in favor of Plaintiff, Juli Palmer, and against Defendant, Internal Revenue Service, and the amount of taxes, penalties and interest owed the IRS as a result of Juli Palmer’s negligence is dis-chargeable.
. Tax Court Rule 37(c) provides:
(c) Effect of Reply or Failure Thereof. Where a reply is filed, every affirmative allegation set out in the answer and not expressly admitted or denied in the reply shall be deemed to be admitted. Where a reply is not filed, the affirmative ’ allegations in the answer will be deemed denied unless the Commissioner, within 45 days after expiration of the time for filing the reply, files a motion that specified allegations in the answer be deemed admitted. That motion will be served on the petitioner and may be granted unless the required reply is filed within the time directed by the Court.
. 11 U.S.C. § 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—
(1) for a tax or a customs duty—
* * * * * *
(C) with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492459/ | ORDER
JOHN S. DALIS, Chief Judge.
W. Jan Jankowski, the Chapter 7 Trustee for Rose Marine, Inc. (hereinafter “Trustee”) objects to two secured claims, number 40 and 90, filed by Dixie Power Systems (hereinafter “Dixie”).1 This matter constitutes a core proceeding within this court’s jurisdiction pursuant to 28 U.S.C. § 157(b)(1) & (2)(A), (B), (C), (K), (O) and § 1334. The objection is sustained.
On October 23, 1985, Dixie recorded a default judgment against the Debtor from the State Court of Chatham County, Georgia on the General Execution Docket for Chat-ham County. On October 9, 1985, Dixie garnished the Debtor’s checking account at Southern Bank and Trust Co., from which account Southern Bank and Trust Co. remitted $9,461.85 to the Clerk of the State Court. On December 4, 1985, the Clerk remitted this amount, less court costs to Dixie. On February 18, 1986, Rose Marine, Inc. filed this bankruptcy case.
The operational assets of the Debtor were sold at auction, and the proceeds thereof were distributed to the first lienholder, Signet Commercial Credit Corp. (hereinafter “Signet”) by order dated October 30, 1991. Dixie did not object to or appeal that order. On February 17, 1995,1 approved the Trustee’s settlement of adversary proceeding No. 88-4038, a pre-petition claim of Rose Marine against Marine Contracting Corporation, Earl J. Haden, Robert H. Thompson and John Budge (hereinafter collectively “Marine *513Contracting Defendants”). The Trustee currently holds over $380,000.00, consisting of the funds collected by the Trustee through this litigation2. Dixie asserts a security interest in these funds via its pre-petition judgment lien against the Debtor, asserting that Rose Marine’s pre-petition claim against the Marine Contracting Defendants constituted a pre-petition asset of Rose Marine upon the proceeds of which Dixie’s judgment lien attached. The Trustee offers two theories in opposition to the attachment of Dixie’s judicial lien to the litigation proceeds: 1) that by Dixie’s retaining an unavoided preferential transfer (the account garnishment), Dixie’s claim is disallowed in toto under 11 U.S.C. § 502(d), and 2) that the Debtor’s right of action against the Marine Contracting Defendants constituted a chose in action to which Dixie’s judgment lien could not attach under state law.
Pursuant to 11 U.S.C. § 502(d)3, the court shall disallow the claim of a creditor who retains funds obtained via a voidable transfer, including preferential transfers under 11 U.S.C. § 547(b).4 The Trustee asserts that Dixie’s garnishment constitutes a preferential transfer, subjecting Dixie’s claim to disallowance. The Trustee concedes that the default judgment, the service of the garnishment summons, and the removal of funds from the Debtor’s checking account all occurred outside the ninety day preference period. However, Dixie received the garnished funds within the preference period, and the Trustee asserts that this transfer date is definitive for preference analysis, citing Barnhill v. Johnson, 503 U.S. 393, 112 S.Ct. 1386, 118 L.Ed.2d 39 (1992). The Supreme Court in Barnhill ruled that the decisive transfer date for preference analysis arises on the date a check is honored, not on the date the creditor received the check from a debtor. Id. at 399, 112 S.Ct. at 1390. The Trustee attempts to analogize the instant case to the Barnhill decision, asserting that the transfer date for preference purposes is the date Dixie received the garnishment funds from Chatham County. However, a garnishment transfer is fundamentally different from a payment by a check. Under the Bankruptcy Code, “ ‘[t]ransfer’ means every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or with an interest in property ... ”. 11 U.S.C. § 101(54). A transfer of non-realty is perfected “... when a creditor on a simple contract cannot acquire a judicial lien that is superior to the interest of the transferee.” 11 U.S.C. § 547(e)(1)(B). The time at which this perfection of a transfer occurs is determined by state law. Palmer v. Radio Corp., 453 F.2d 1133, 1138 (5th Cir.1971). Under Georgia law, the perfection of a transfer by garnishment occurs upon service of the garnishment summons. Askin Marine Co. v. Conner (In re Conner), 733 F.2d 1560 (11th Cir.1984) (A *514“transfer” for preference analysis occurs on the date the creditor serves the garnishee with a summons of garnishment, not on the date funds are distributed to the creditor.)
The Supreme Court’s decision in Barnhill does not contradict the Eleventh Circuit’s holding in Askin Marine. Two facts critical to the Supreme Court’s analysis in Barnhill distinguish it from Askin Marine and the instant case: 1) the debtor continued to hold rights in the checking account funds between the date the creditor received the check and the date the bank honored the check and withdrew the funds from the account; and 2) a judgment lien created between the date of delivery of the check and the date the drawee bank honored the check would take priority over the cheek payee’s right to the checking account funds. Barnhill at 399, 112 S.Ct. at 1390. Under Georgia law, the Debtor loses its ability to withdraw the account funds when the garnishment summons is served, not when the court clerk remits the funds to the creditor. Furthermore, a subsequent judgment creditor cannot obtain a superior lien against the account after the garnishment summons is served. The transfer of funds to Dixie therefore occurred beyond the ninety-day preference period, removing Dixie’s claim from disallowance under § 502(d).
The Trustee also argues that under Georgia law the Debtor’s pre-petition claim against the Marine Contracting Defendants constitutes a chose in action and that Dixie’s pre-petition lien never attached to this asset or its settlement proceeds. Under Georgia law, “[a] chose in action is personalty to which the owner has a right of possession in the future or a right of immediate possession which is being wrongfully withheld.” O.C.G.A. § 44-12-20. The Debtor’s pre-petition claim against the Marine Contracting Defendants falls within this definition. See, Anderson v. Burnham (In re Burnham), 12 B.R. 286, 294 (Bankr.N.D.Ga.1981) (A debt is a chose in action as it is personalty which the person to whom the debt is owed has a right of immediate or future possession, and if possession is wrongfully withheld an action may be brought thereon.)
Under Georgia law, “[cjhoses in action are not hable to be seized and sold under execution, unless made so specially by statute.” O.C.G.A. § 9-13-57. Therefore, a creditor’s judgment hen does not attach to a chose in action except by way of summons of garnishment. See, Phillips & Jacobs, Inc. v. Color-Art, Inc., 553 F.Supp. 14, 16 (N.D.Ga.1982); General Lithographing Co. v. Sight & Sound Projectors, Inc., 128 Ga.App. 304, 196 S.E.2d 479 (1973). Because Dixie did not file a pre-petition garnishment action against the chose in action, its judgment hen did not attach thereto, leaving the proceeds of the adversary proceeding free of Dixie’s judicial hen, and as there are no other assets, leaving Dixie an unsecured creditor.
It is therefore ORDERED that the Trustee’s objection to Claim 40 is sustained, and the same is hereby stricken.
It is further ORDERED that the Trustee’s objection to Claim 90 is sustained, and Dixie’s secured claim is hereby reduced to general unsecured status.
. At hearing, Dixie's counsel conceded that the claims were duplicates and in post trial brief the Trustee conceded the amount due on claim 90, but continues to dispute the status of the claim as secured.
. By an Order dated December 28, 1995, $400,-000.00 of the setdement proceeds were paid to Signet in satisfaction of secured, priority and super priority claims against the estate. Dixie did not object to the settlement nor to the disbursement of these funds.
. 11 U.S.C. § 502(d) provides in part:
(d) Notwithstanding subsections (a) and (b) of this section, the court shall disallow any claim of any entity from which properly is recoverable under section 542, 543, 550, or 553 of this title or that is a transferee of a transfer avoidable under section 522(f), 522(h), 544, 545, 547, 548, 549, or 724(a) of this title, unless such entity or transferee has paid the amount, or turned over any such property, for which such entity or transferee is liable under section 522(i), 542, 543, 550, or 553 of this title.
. 11 U.S.C. § 547(b) provides:
Except as provided in subsection (c) of this section, the trustee may avoid any transfer of any 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 solvent;
(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. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492460/ | MEMORANDUM OPINION
STEPHEN A STRIPP, Bankruptcy Judge.
This is the court’s decision on an objection by the State of New Jersey, Division of Motor Vehicles (hereinafter “DMV’) to confirmation of the chapter 13 plan of Laurence and Sheelagh Fennelly (hereinafter “debtors”). The DMV argues that a debt arising from surcharges which it imposed is a statutory lien which cannot be avoided by the debtors’ plan. The debtors argue that the lien of the DMV is a judicial lien which can be avoided by the plan. This court has jurisdiction under 28 U.S.C. §§ 1334(b), 151 and 157(a). This is a core proceeding under 28 U.S.C. § 157(b)(2)(E) and (L). For the reasons which follow the court holds that the hen of the DMV is a judicial hen which can be avoided by the debtors under their plan by operation of Bankruptcy Code section 522(f).
FINDINGS OF FACT
The debtors filed a petition on May 7,1996 for adjustment of their debts under chapter 13 of title 11, United States Code (hereinafter “Bankruptcy Code” or “Code”). The DMV filed a proof of claim on October 4, 1996, against Laurence Fennelly in the amount of $14,103.91 for motor vehicle surcharges. The proof of claim asserts that the claim is secured by virtue of judgments entered on 10/18/94, 2/15/95, 2/15/95 and 2/21/95.
The debtors’ plan proposes to avoid the hen of the DMV surcharges under Code section 522(f) as a judicial hen which impairs the exemption to which they are entitled in their residence. The DMV filed an objection to confirmation, arguing that its hen is a statutory hen which cannot be avoided under Code section 522(f). The court reserved decision on the objection at the confirmation hearing on November 26,1996.
CONCLUSIONS OF LAW
The DMV rehes on N.J.StatAnn. 17:29A-35(b)(2), which authorizes the DMV to file a certificate of indebtedness with the Clerk of the Superior Court for motor vehicle surcharges. The only provision the- statute makes regarding hen status is that
the docketing of the [surcharges] shah have the same force and effect as a civil judgment docketed in the Superior Court, and the director [of the DMV] shah have ah the remedies and may take all of the proceedings for the coheetion thereof which may be had or taken upon the recovery of a judgment in an action....
Id.
In other words when docketed in the Superior Court, the DMV surcharge has the same force and effect as a civil judgment. In New Jersey a civil judgment is a hen on real *564property from the date it is docketed. NJ.Stat.Ann. 2A:16-1.
The DMV argues that the lien of its surcharge is a statutory lien, which is defined by Bankruptcy Code section 101(53) as a “lien arising solely by force of a statute on specified circumstances or conditions * * *, but does not include security interest or judicial lien....” By contrast, Code section 101(36) defines a judicial lien as a “lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding.” The DMV argues that there was no judicial action on its lien, and therefore it is not a judicial lien. It also argues that it has other remedies than judicial remedies to collect surcharges, and that the existence of such additional remedies confirms that the lien is a statutory hen.
The debtors reply that the hen of the surcharges did not arise automatically by operation of statute, as is required to qualify as a statutory hen. Rather, the hen of the surcharges didn’t arise until the DMV exercised its right to docket the surcharges with the Superior Court Clerk as a judgment. Such docketing, the debtor argues, is a “legal process or proceeding” within the definition of judicial hen in Bankruptcy Code section 101(36).
The court agrees with the debtor. The hen of the DMV surcharges does not arise solely by force of statute as is required of a statutory hen. It arises as a result of the discretionary act of the DMV of docketing the surcharge on the Superior Court’s judgment docket. Moreover, the state statute itself provides that upon such docketing the surcharge shah have the same force and effect as a civil judgment. As the debtor argues, “[tjhere is no logical basis for this Court to treat the DMV as different from other judgment creditors when the statute [N.J.S.A. 17:29A-35(b)(2) ] mandates that it be treated the same.” Debtors Brief Supporting Plan in Response to opposition from State of New Jersey, p. 3.
The court also agrees with the debtor that the existence of other procedures for the DMV to collect the surcharges is irrelevant to the analysis of the nature of the lien in question.
The DMV cites New York, Susquehanna and W.R.R. v. Vermeulen, 44 N.J. 491, 210 A.2d 214 (1961), for the proposition that a certificate of debt is not a judgment. The DMV has, however, mischaracterized that decision. The argument in Susquehanna was that it violated the separation of powers mandated by the New Jersey Constitution to permit the executive branch to docket a certificate of debt with the same force and effect as a judgment. Id. at 503, 210 A.2d 214. The New Jersey Supreme Court rejected that argument, stating “[w]e see no reason to question the legislature’s power to invest a tax assessment with the characteristics of a judgment and to provide for its collection by the same remedies available for the enforcement of a judgment.” Id. at 504, 210 A.2d 214. If that statement in Susquehanna has any bearing here, it is to support the conclusion that debts docketed on the judgment docket have the characteristics of a judgment.
The issue here of whether the lien in question is a judicial lien as defined by the Bankruptcy Code is a question of federal law. The U.S. Court of Appeals for the Third Circuit held in Matter of Blease, 605 F.2d 97 (3d Cir.1979), that a certificate of debt docketed with the Clerk of the Superior Court was to be treated as a judgment for purposes of section 70(c) of the Bankruptcy Act, the predecessor to the “strong arm” powers of a trustee under section 544(a) of the Bankruptcy Code. This court believes that Blease is still the law after the enactment of the Bankruptcy Code, and that it stands for the basic proposition that debts docketed as judgments with the Superior Court are to be treated as judicial liens in bankruptcy.
CONCLUSION
For the foregoing reasons, the lien of the DMV surcharges is a judicial lien within the meaning of Code section 101(36). Since the only basis asserted by the DMV for opposing its avoidance under Code section 522(f) was that the lien is not a judicial lien, the objection is overruled. Hearing on confirmation *565of the debtors’ plan shall be rescheduled for January 14,1997 at 11:00 a.m. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492461/ | ORDER DENYING SALE OF PROPERTY
DUNCAN W. KEIR, Bankruptcy Judge.
Barbara Lowery (“Movant”) filed a motion requesting the Court to authorize the sale of Gene Lowery’s (“Debtor”) interest in two parcels of real property (“Property”). The Property is described as 9.5 acres of raw land located in Alleghany County, and a residence located at 21611 Slidell Road, Boyds, Maryland. For the reasons set forth herein, this motion is denied.
The Property is held jointly by the Movant and the Debtor. When the Debtor filed for bankruptcy on November 17, 1995, the Property was held by the parties as tenants by the entirety. Although the Debtor’s interest in the Property became part of the bankruptcy estate pursuant to 11 U.S.C. § 541(a)(1), it was exempted as to non-joint creditors pursuant to 11 U.S.C. § 522(b)(2)(B). Sumy v. Schlossberg, 777 F.2d 921, 925 (4th Cir.1985); Greenblatt v. Ford, 638 F.2d 14 (4th Cir.1981). On June 17, 1996, the parties were granted a divorce by the Circuit Court for Montgomery County, Maryland (“Circuit Court”). The Order granting divorce provides for the appointment of a trustee to sell the Property upon approval of this Bankruptcy Court.
The Movant requests this Court’s authorization for the sale of the Debtor’s interest in the Property. Movant asserts that upon issuance of the final divorce Order, the Movant and Debtor no longer owned the Property as tenants by the entirety, but instead as tenants in common. Movant further asserts that the Debtor’s interest as tenant in common is property of the bankruptcy estate subject to the jurisdiction of this Court. Hence, Movant asks this Court to allow a non-debtor movant to sell the Property. The Debtor opposes Movant’s motion on the grounds that this Court does not have jurisdiction to order the sale of Movant’s interest in the Property.
The issue before this Court is whether the Court may authorize the sale of a Chapter 13 debtor’s interest in property held by a debtor and non-debtor at the time of the bankruptcy filing as tenants by the entirety, at the request of the non-debtor after the parties subsequently divorce. The power of this Court to authorize such a sale depends first on what interest, if any, the bankruptcy estate has in a debtor’s interest in such property after a divorce. If the bankruptcy estate does have an interest in such property, this Court must then determine if it has the power to authorize the sale of such property at the request of the non-debtor party.
For the reasons set forth below, this Court finds that the Debtor’s interest in the Property following the divorce is part of the bankruptcy estate. In Maryland, a tenancy by the entirety converts into a tenancy in common upon the dissolution of marriage. Tucker v. Dudley, 223 Md. 467, 164 A.2d 891 (1960); Hall v. Hall, 32 Md.App. 863, 362 A.2d 648, 659 (1976). Therefore, pursuant to Maryland law, the Debtor’s divorce converted his interest in the Property held as tenant by the entirety to an interest held as tenant in common. Upon the conversion of the tenancies, the Debtor either acquired a new interest in property at the time of conversion, or instead, maintained his old interest in converted form. In either case, the Debtor’s interest in the Property as tenant in common is part of the bankruptcy estate.
The severance of the tenancy by the entirety does not create a newly acquired property interest. This conclusion is consistent with the holding of the United States Court of Appeals for the Fourth Circuit in In re *589Ballard, 65 F.3d 367 (4th Cir.1995). In Ballard, the debtor and his co-debtor wife filed under Chapter 11. The filing was later converted to Chapter 7. Before the case was converted, upon request of the debtors in possession the Court authorized a sale of property held by the debtors as tenants by the entirety. The Court stated that the sale proceeds continued to be held as tenants by the entirety. After the sale of the property, but before the case was converted, the co-debtor wife died. Because applicable state law allowed only joint creditors to reach property held by the entirety, the issue arose as to whether this restriction extended to the sale proceeds after the death of one of the parties. See Ragsdale v. Genesco, Inc., 674 F.2d 277, 279 (4th Cir.1989). The Fourth Circuit held that it did not. In re Ballard, 65 F.3d at 371. The Court reasoned that by operation of state law, the whole estate of the entireties remained in the debtor by virtue of the right of survivorship. This interest was not a newly acquired interest, but rather was a result of the original interest the debtor held. Id. at 371. Further, although the severance of the entireties estate did not vest the debtor with a new interest in property, the severance did lift the protections against the property interest the debtor held by virtue of the entireties status. The Court stated that:
Of course, we recognize that the unique character of entireties property is such that the death of one spouse does not vest the other with interests he or she did not already hold. The termination of cover-ture does, however, extinguish the “separate and distinct” juristic personality that underlies those restrictions on alienation unique to entireties property. Thus, Mrs. Ballard’s death released her surviving spouse, and thus, his bankruptcy estate, from all conditions of the tenancy conceived to preserve unity of entireties property.
Id. at 371-72 (citations omitted).
The Ballard opinion stands for the proposition that the severance of a tenancy by the entirety upon the death of a co-owner extinguishes the protections that the Bankruptcy Code offers such tenancies under 11 U.S.C. § 522(b)(2)(B). The property does not leave or reenter the estate, but instead remains with the debtor in converted form.
Under the same reasoning, where an interest in property is held as a tenant by the entirety and that interest is transformed upon divorce to an interest held as a tenant in common, the debtor’s tenant in common interest also remains in the estate. In Ballard, the tenancy by the entirety status was severed by death under Virginia law. Similarly in this case, the tenancy by the entirety was severed by divorce under Maryland law. Tucker v. Dudley, 223 Md. 467, 164 A.2d 891 (Md.1960); Hall v. Hall, 32 Md.App. 363, 384, 362 A.2d 648, 659 (1976). Although the tenancy was severed by divorce and not death, the applicable case law states that the divorce operates to “convert their respective interests therein to that of tenants in common.” Hall v. Hall, 32 Md.App. at 384, 362 A.2d at 659 (emphasis added) (citations omitted). The Debtor’s interest is still in property that initially came into the estate pursuant to 11 U.S.C. § 541(a)(1). The effect of the change of the property’s character to a tenancy in common merely extinguishes the protections offered by § 522(b)(2)(B).
Even if the severance of the tenancy by the entireties created a new interest in the property, this interest is part of the bankruptcy estate pursuant to 11 U.S.C. § 1306(a)(1). Section 1306(a)(1) provides that: “Property of the estate includes, in addition to property specified in Section 541 of this title all property of the kind specified in such section that the debtor acquires after the commencement of the case....” Id. (emphasis added).
Concluding that the Debtor’s interest in the Property held as tenant in common is part of the bankruptcy estate, this Court must now decide whether it can authorize the sale of the Property at the Movant’s request. For the reasons set forth below, this Court holds that it cannot.
Under limited circumstances, the Bankruptcy Code allows for the sale of an estate’s and a co-owner’s interests in jointly held property. Section 363(h) grants such a power to a trustee: “the trustee may sell *590both the estate’s interest ... and the interest of any co-owner in property in which the debtor had, at the time of the commencement of the case, an undivided interest as a tenant in common, joint tenant, or tenant by the entirety_” 11 U.S.C. § 363(h).
A Chapter 13 debtor may have this trustee power. A Chapter 13 debtor is given the exclusive rights and powers of a trustee to act pursuant to §§ 363(b), (d), (e), (f), and (l). 11 U.S.C. § 1303. In spite of the seemingly limited language in § 1303, however, a debtor may have the power to invoke § 363(h) as well. See In re Rishel, 166 B.R. 276 (Bankr.W.D.Pa.1994). The Bankruptcy Court for the Western District of Pennsylvania held that when a debtor sells property as a co-owner pursuant to § 363(h), the debtor is acting as trustee and is required to comply with the restraints placed on trustees in § 363(j). Id. The Court stated that “the effect of § 363(h) is to grant the trustee authority to sell property of a debtor by virtue of § 363(b). Subsection (b) of § 363 is specifically included in § 1303. The debtor has the power of a trustee under 11 U.S.C. § 363(b) which is incorporated into 11 U.S.C. § 363(h).” Id. at 278; see also In re Yakubesin, 83 B.R. 462 (Bankr.S.D.Ohio 1988); In re Janoff, 64 B.R. 741 (Bankr.D.N.J.1985).
However, this Court finds that the Bankruptcy Code does not grant a non-debtor co-owner such right. Accordingly, this Court does not have the power to grant Movant’s motion for authority to sell the Property.
Under state law, the Circuit Court had the power to order a partition or sale of property owned by two parties in an action for divorce. Md.Code.Ann., Fam.Law § 8-202(b)(2) (1991 & Supp.1996). Such an order was entered by the Circuit Court before the bankruptcy petition was filed. However, upon the filing of the bankruptcy petition, partition and sale actions against the Property are stayed by § 362 of the Bankruptcy Code. Section 362(a)(3) provides that the filing of a petition operates as a stay of “any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.”
Upon a motion for relief from stay, the stay on an act to exercise control over property of the estate can be lifted by the court after notice and a hearing. 11 U.S.C. § 362(d). No such motion has been filed. Until or unless relief from stay is obtained, the state court ordered sale action cannot proceed.
ORDERED, that Movant’s Motion to Authorize Sale of Barbara J. Lowery’s Property is hereby DENIED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492462/ | MEMORANDUM OPINION
WILLIAM S. HOWARD, Bankruptcy Judge.
This matter is before the Court pursuant to an Agreed Order of Submission entered herein on September 11, 1996. The parties have submitted Joint Stipulations and have briefed their respective positions. This Court has jurisdiction of this matter pursuant to 28 U.S.C. § 1334(b); it is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)®.
This matter was initiated by the filing of the plaintiffs Complaint on May 12, 1994. Therein the plaintiff sought a judgment that his obligation to pay “maintenance” to the defendant under a decree of dissolution of marriage entered in the Bell Circuit Court on November 24, 1993, is dischargeable pursuant to 11 U.S.C. § 523(a)(5). The defendant filed her Answer on June 7, 1994. This matter was first set for trial on December 8, 1994. The trial was continued, however, pending resolution of Appeal No. 94-CI-000199 wherein the Kentucky Court of Appeals reviewed the award of “maintenance” under the Decree of Dissolution.
On September 29,1995, the defendant filed a Motion to Dismiss, stating that the Kentucky Court of Appeals had upheld the award of maintenance on June 23,1995. The plaintiff filed his Response to Defendant’s Motion to Dismiss on November 22, 1995. The defendant filed her Reply to Plaintiffs Response on December 5, 1995. The plaintiff filed a Supplemental Response to Defendant’s Motion to Dismiss on December 8, 1995. This Court entered an Order overruling the defendant’s Motion to Dismiss on December 22,1995.
The trial of this matter was rescheduled for April 5, 1996. On March 1, 1996, the parties filed a joint Motion to Submit, asking that the matter be submitted on the record. An Agreed Order was entered on April 1, 1996. providing that the matter would be submitted on the record. The parties were directed to tender an order providing a briefing schedule, a Joint Stipulation of Facts, a Joint Designation and Stipulation of the Record and Admissibility of Documents, and an Order of Submission. The Scheduling Order was entered on May 2, 1996. The Joint Stipulation of Facts and Designation and Stipulation of the Record and Admissibility of Documents was entered on July 9, 1996.
The Joint Stipulation of Facts provides as follows:
“1. Plaintiff and defendant were married on October 19, 1973, and separated on January 3, 1992, living apart continuously since that time. No children were bom of the marriage. The Final Decree dissolving the marriage was entered on November 24,1993.
2. Plaintiff was born on September 13, 1951, and was forty-two (42) years old when the Decree was entered. Plaintiff had completed high school and two (2) years of technical training as an x-ray technician. Plaintiff resided in Middlesboro, Kentucky in a rental house and was employed as a radiolog*622ic technologist at Downtown Radiology, Inc., and Lakeway Regional Hospital. Defendant contended that Plaintiff had unreported income from photography, wood working, framing, and leather enterprises, but these contentions were denied by Plaintiff.
8. Plaintiff was generally in good health and had no special medical needs, but was diagnosed with an osteoarthritic condition of the right shoulder which precludes strenuous work and restricts Plaintiffs mobility and the type of job activities available to him (see Page 7 and Exhibit 8 to Plaintiffs deposition, dated September 21,1993).
4. Defendant was born on November 22, 1943, and was forty-nine years of age when the Decree was entered. Defendant had a high school education, resided in the parties’ marital residence in Middlesboro, Kentucky, and was employed as a teacher’s aid in Mid-dlesboro during the school year. Plaintiff contended that Defendant had unreported income from real properties owned by Defendant, but these contentions were denied by Defendant.
5. Defendant was generally in good health and had no special medical needs, but was diagnosed with varicose veins and thrombophlebitis of the left leg that may get worse and could be a limiting factor in the type of work and length of time she may be able to work (see Page 28 and Exhibit M to Defendant’s deposition, dated June 24, 1993).
6. During the marriage of Plaintiff and Defendant, Defendant received by gift or inheritance from her mother, free of any mortgage debt, the following real property:
—Lot used for marital residence, Happy Hollow, Middlesboro, Kentucky (gift in 1974);
—Twenty-nine (29) acres, Happy Hollow, Middlesboro, Kentucky (inherited in 1986);
—Lots 27, 28 and additional lots in block 23, section S.E., Middlesboro, Kentucky (inherited in 1986);
7. Pursuant to the Decree, Defendant retained in her possession, subject to the mortgage indebtedness incurred during the marriage, all of the pre-marital real property referenced in Paragraph 6 and all of the improvements made thereon during the marriage, including the marital residence and pool constructed during the marriage. Plaintiff was not awarded any marital interest in said real properties or in any of the improvements made during the marriage.
8.At the time of their separation, Plaintiff and Defendant divided their personal property acquired during the marriage, and the Trial Court left undisturbed their division of personal property.
The issue before this Court is whether the payments designated as “maintenance” by the Bell Circuit Court are nondischargeable pursuant to 11 U.S.C. § 523(a)(5). That section provides, inter alia, that a discharge under 11 U.S.C. § 727 does not discharge a debtor from a debt to a former spouse for maintenance in connection with a divorce decree, but not to the extent that “such debt includes a liability designated as alimony, maintenance, or support, unless such liability is actually in the nature of alimony, maintenance, or support.”
What constitutes alimony, maintenance, or support is a question of federal law. In re Spong, 661 F.2d 6 (2nd Cir.1981). The defendant has consistently argued that In re Fitzgerald, 9 F.3d 517 (6th Cir.1993), is controlling in this case because the Bell Circuit Court denominated its award to the defendant as “maintenance.” This Court has already ruled in its Order of December 22, 1995, overruling the defendant’s Motion to Dismiss that Fitzgerald is not determinative because the fact that the payment in Fitzgerald was maintenance was undisputed. This Court farther noted that pursuant to 523(a)(5)(B), the label placed on the liability by the parties or the court is not determinative of the issue.
As set out in In re Calhoun, 715 F.2d 1103 (6th Cir.1983), the primary considerations in the determination of whether marital obligations are actually in the nature of support or maintenance are the intent of the court in fixing the obligation, and the real purpose served by the obligation in light of the parties’ circumstances at the time of the court’s award. The guidelines for granting an order of maintenance in Kentucky are found in KRS 403.200 which provides in per*623tinent part that the trial court may grant a maintenance order if the spouse seeking maintenance lacks sufficient property, including marital property apportioned to him, to provide for his reasonable needs, and is unable to support himself through appropriate employment.
The factors to be considered by the trial court in making a determination about maintenance include the financial resources of the party seeking maintenance, including marital property apportioned to him and his ability to meet his needs independently; the time necessary to acquire sufficient education or training to enable him to find new employment; the standard of living established during the marriage; the duration of the marriage; the age and physical and emotional condition of the spouse seeking maintenance; and the ability of the spouse from whom maintenance is sought to meet his needs, while meeting those of the spouse seeking maintenance.
The plaintiff contends that the record before the trial court does not support its findings. The trial court came to the conclusion that the plaintiffs yearly income was in excess of $35,000.00, and that the defendant’s was approximately $8,000.00. Neither of these figures is supported by the record. In fact, the only evidence is that the plaintiffs income was considerably less, and that the defendant’s was somewhat greater. In addition, the defendant received the marital home and all the property inherited from her mother. The trial court apparently considered neither the rental income the defendant received from these properties nor their worth. The trial court gave no meaningful consideration to the plaintiffs ability to support himself after making the monthly “maintenance” payments. Further, its finding that there was approximately $100,000.00 in outstanding loans against the defendant’s properties which became her sole responsibility is unsupported by the record.
Aside from the lack of support in the record for the trial court’s pronouncements concerning the parties’ respective resources, the language used in regard to the plaintiffs alleged infidelity makes it quite clear that the award of maintenance was intended to be punitive. The trial court intended to reallocate debt between the parties and restore property which the plaintiff had allegedly dissipated. In addition to restoring her “dissipated” property, the plaintiff contends, the trial court was attempting to relieve the defendant from her mortgage debt under the guise of “maintenance” to avoid the his discharge in bankruptcy. This Court agrees.
As set out in In re Chism, 169 B.R. 163 (Bkrtcy.W.D.Tenn.1994), a case similar to the case at bar, when the state court’s intention is to effect a division of property, such action cannot be masked by the application of labels such as “support” or “maintenance.” The Chism court found several components of the state court award before it to be in the nature of a division of property, and therefore dischargeable, and some components to actually be in the nature of support for the wife. In those instances, the trial court had made specific findings concerning her “present ability” to pay various debts, including attorney fees, that her husband had been ordered to pay. No such analysis was performed in the case at bar, as the trial court was too busy characterizing the plaintiff as an immoral wastrel and the defendant as the destitute victim.
This Court therefore concludes that the trial court had little or no justification for its award of “maintenance” except its desire to punish the plaintiff. The trial court’s action was in fact a division of property, and such an award is dischargeable in bankruptcy. An order in conformity with this opinion will be entered separately. • | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492463/ | DECISION and ORDER ON PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT
BURTON PERLMAN, Bankruptcy Judge.
The complaint now before us seeks relief by way of non-dischargeability of debt. Plaintiff is the daughter of defendant. The complaint asserts counts under 11 U.S.C. § 523(a)(2)(A) and § 523(a)(4).
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)(I).
In Count 1 of her complaint, plaintiff says that defendant obtained stock certificates owned by plaintiff with intent to defraud plaintiff and refused to surrender them to plaintiff on request. In her second count in the complaint, plaintiff says that defendant obtained stock certificates owned by plaintiff and by disposing of them committed defalcation while acting in a fiduciary capacity, embezzlement or larceny, in the language of § 523(a)(4).
Plaintiff has now moved for summary judgment, contending that she is entitled to summary judgment on grounds of collateral estoppel based upon prior proceedings in the Court of Common Pleas for Hamilton County, Ohio. Plaintiff supports her motion by a certified copy of a complete transcript of the September 12, 1994 decision of Hamilton County, Ohio, Court of Common Pleas, Case No. A91-10800, and certified copy of the complaint in that case. Defendant has filed a memorandum in opposition to the motion.
In regard to the application of collateral estoppel, this court must give to a state court judgment the same preclusive effect as would be given that judgment under the law of the state in which the judgment was entered. Migra v. Warren City School District Board of Education, 465 U.S. 75, 81, 104 *639S.Ct. 892, 896, 79 L.Ed.2d 56 (1984); In re Bursack, 65 F.3d 51 (6th Cir.1995).
Under Ohio law, collateral estoppel precludes parties from relitigating an issue that was actually and directly litigated in a prior action, was passed upon and determined by a court of competent jurisdiction, and when the party against whom collateral estoppel is asserted was a party in privity with a party to the prior action. Thompson v. Wing, 70 Ohio St.3d 176, 183, 637 N.E.2d 917, 923 (1994). See also Cashelmara Villas Ltd. Partnership v. DiBenedetto, 87 Ohio App.3d 809, 814, 623 N.E.2d 213, 215 (1993) (quoting Monahan v. Eagle-Picher Industries, 21 Ohio App.3d 179, 180-181, 486 N.E.2d 1165, 1168 (1984)).
It is the position of plaintiff that the findings of fact and conclusions of law included in the decision announced by the Common Pleas Court, which is part of the record here, establish that plaintiff is entitled to succeed on her § 523(a)(4) claim, that defendant committed defalcation while acting in a fiduciary capacity. Defendant contends that plaintiff cannot succeed on this ground because the Common Pleas Court did not find “that she [defendant] held them in a fiduciary capacity.” (Defendant memorandum p. 3). Plaintiff asserts, however, that defendant was a fiduciary with regard to plaintiff because of the parent/child relationship. Plaintiff argues that state law is to be used to determine if a fiduciary relationship exists, and under Ohio law, a parent/child relationship creates a fiduciary relationship, citing Simmons v. Becker, et al., 63 Ohio App. 374, 26 N.E.2d 939 (Mtgy.Cty.1939); Berkmeyer v. Kellerman, 32 Ohio St. 239 (1877).
It is the conclusion of this court that for purposes of § 523(a)(4), a parent/child relationship without more is not sufficient to constitute the parent a fiduciary with respect to the child. The applicable law was well stated by the court in In re Ford, 52 B.R. 553, 556 (Bankr.W.D.Ky.1985):
In order to come within Section 523(a)(4) on the ground of fraud applicable to fiduciaries, the creditor must prove the debtor was acting as a fiduciary as defined by federal law. In re Johnson, 691 F.2d 249, 251 (6th Cir.1982); Matter of Angelle, 610 F.2d 1335, 1341 (5th Cir.1980). The traditional definition of “fiduciary” — a relationship involving confidence, trust and good faith, is not sufficient in proving “fiduciary capacity” under Section 523(a)(4). In re Johnson, supra As noted by debtor, the term “fiduciary capacity” is limited in application in discharge of debt provisions to technical or express trusts. In re Johnson, supra; In re Cook, 38 B.R. 743 (Bkrtcy.App.1984); In re Blalock, 15 B.R. 33 (Bkrtcy., E.D.Tenn.1981). In re Duiser, 12 B.R. 538 (Bkrtcy., W.D.Va.1981); Matter of Murphy, 9 B.R. 167 (Bkrtcy., E.D.Va.1981); In re Boese, 8 B.R. 660 (Bkrtcy., S.D.1981).
See also In re Hiner, 94 B.R. 955, 958 (Bankr.N.D.Ohio 1988).
While plaintiff in her memorandum relies upon In re Steed, 157 B.R. 355 (Bankr.N.D.Ohio 1993) for the proposition that one may look to state law to determine the existence of a fiduciary capacity, that case involved a commercial relationship, and in any ease is not inconsistent with the proposition that in the end it is federal law which determines the existence of a fiduciary capacity for purposes of § 523(a)(4). Accordingly, plaintiff cannot succeed in her contention that the prior Common Pleas decision constituted an adjudication of her § 523(a)(4) claim. There was no holding by that court that there existed a fiduciary relationship between the parties. Such a relationship may not be implied because plaintiff and defendant were child and parent.
Plaintiff next contends that the Common Pleas Court had concluded that the acts of defendant constituted embezzlement, and this, pursuant to § 523(a)(4), entitles plaintiff to succeed here. The elements of embezzlement for purposes of § 523(a)(4) are: (1) property of another was entrusted to defendant; (2) defendant appropriated the property for use other than for which it was entrusted; and (3) the circumstances indicate fraud. In re Rico, 133 B.R. 880, 882 (Bankr.N.D.Ohio 1991). On this motion, defendant argues against plaintiffs position on the basis that there was no finding of fraud by the Common Pleas Court.
*640A review of the findings of fact contained in the decision by the Common Pleas Court discloses that that court found that defendant’s husband had left the household at a time when plaintiff and her brother Kevin were living with defendant and “Phyllis Bachman [defendant] had a number of debts to be paid pertaining to the mortgage payments on the house, the payments on the car,obtaining food and paying gas and electric bills so that she and Nicole and her son, Kevin, could still live and the Court finds that this was true, this was uncontroverted evidence.” The court further found that defendant paid for these expenses by borrowing money from her mother and then “selling certain assets that were in the name of Nicole” to repay her mother. Later in its decision, the Common Pleas Court did say that defendant wrongfully sold property of plaintiff, but the court also said that “there was a way under the law that she [defendant] could have sold the certificates by applying to the Probate Court.” The implication is clear that what the court regarded as wrongful about the sale by defendant of the certificates in plaintiffs name was that she did not follow correct legal procedure, for the court said “of course, ignorance of the law is no excuse.” On this review of the holdings by the Common Pleas Court, we agree with defendant that the court there made no finding or holding which could be interpreted as deciding that any act by defendant constituted fraud, and fraud is an essential element of embezzlement.
Thus, plaintiff is unable to satisfy the requirements for the application of collateral estoppel in respect to either ground of § 523(a)(4), defalcation while acting in a fiduciary capacity, or embezzlement, the grounds urged by plaintiff on the present motion. We note that on this motion plaintiff made only passing mention of entitlement to judgment on the basis of § 523(a)(2)(A), false pretenses, false representation, or actual fraud. It is clear that the decision of the Common Pleas Court cannot be looked to as an adjudication to support judgment for plaintiff here on that basis for the reason which we have just stated regarding the absence of any finding of fraud by the Common Pleas Court.
Plaintiffs motion fails because it is based upon a contention that the issues here involved were decided by the Common Pleas Court, which must here be given collateral estoppel effect. We have found this contention not to be valid, for the Common Pleas Court did not decide those issues. What is before us is a motion for summary judgment. To succeed on a motion for summary judgment a party must, pursuant to F.R.Civ.P. 56, show that it is entitled to judgment as a matter of law. This plaintiff cannot do, and so the motion must be denied.
So Ordered. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492592/ | [Cite as M.B. v. Mettke, 2022-Ohio-4166.]
IN THE COURT OF APPEALS OF OHIO
TENTH APPELLATE DISTRICT
[M.B.], :
Petitioner-Appellee, : No. 21AP-620
(C.P.C. No. 21CV-2072)
v. :
(REGULAR CALENDAR)
Richard Mettke, Sr., :
Respondent-Appellant. :
D E C I S I O N
Rendered on November 22, 2022
On brief: Trolinger Law Offices, LLC, and Christopher L.
Trolinger, for appellant. Argued: Christopher L. Trolinger.
APPEAL from the Franklin County Court of Common Pleas
LUPER SCHUSTER, P.J.
{¶ 1} Respondent-appellant, Richard Mettke, Sr., appeals from a judgment of the
Franklin County Court of Common Pleas granting a civil stalking protection order ("CSPO")
to petitioner-appellee, M.B. For the reasons that follow, we dismiss the appeal.
I. Facts and Procedural History
{¶ 2} On April 6, 2021, M.B. filed a petition requesting a CSPO against Mettke. The
magistrate granted an ex parte CSPO against Mettke and set the matter for a full evidentiary
hearing. Following the May 10, 2021 hearing, at which both M.B. and Mettke testified, the
magistrate issued a May 19, 2021 decision recommending the trial court grant M.B.'s
petition and issue her a CSPO effective until April 6, 2022. Mettke filed objections to the
magistrate's decision. In a November 2, 2021 decision and entry, the trial court sustained
in part and overruled in part Mettke's objections, adopted the magistrate's decision, and
granted the CSPO. Mettke timely appeals.
No. 21AP-620 2
II. Assignments of Error
{¶ 3} Mettke assigns the following errors for our review:
[1.] The trial court erred and abused its discretion in granting
appellee's petition for a civil stalking protection order as there
was insufficient evidence to support such finding and such was
against the manifest weight of the evidence and contrary to law.
[2.] The trial court erred and abused its discretion in finding
that appellant's pursuit of civil remedies and criminal
enforcement could constitute menacing by stalking for
purposes of R.C. 2903.214 as such is against public policy and
law.
[3.] The trial court erred in finding that appellant utilized law
enforcement to charge, prosecute and maximize appellee's
criminal penalties as a means of manipulating her to rekindle
her relationship with him.
III. Analysis
{¶ 4} Before we address Mettke's assignments of error, we sua sponte consider
whether the appeal is moot given that the CSPO expired on April 6, 2022.
{¶ 5} Pursuant to the mootness doctrine, a court will not decide a case in which
there is no longer any actual controversy. In re A.G., 139 Ohio St.3d 572, 2014-Ohio-2597,
¶ 37. This court has recently reiterated the general rule that " 'the expiration of a [civil
protection order] renders an appeal from that order moot.' " A.F. v. R.A.T., 10th Dist. No.
20AP-23, 2021-Ohio-2568, ¶ 5, quoting Foster v. Foster, 10th Dist. No. 11AP-371, 2011-
Ohio-6460, ¶ 4. There is no dispute here that the CSPO had expired prior to the scheduled
oral argument in this appeal. Nonetheless, Mettke asserts the appeal is not moot based on
the collateral consequences exception to the mootness doctrine.
{¶ 6} The Supreme Court of Ohio has held that "absent a showing of legal collateral
consequences resulting from an expired domestic-violence civil protection order, an appeal
of that order is moot." Cyran v. Cyran, 152 Ohio St.3d 484, 2018-Ohio-24, ¶ 1. Although
Mettke suggests that the protection order could adversely affect future reviews of the
security clearance he undergoes for his employment, his argument is purely speculative.
The Supreme Court was explicit in Cyran that "[s]peculation is insufficient to establish a
legally cognizable interest for which a court can order relief using the collateral-
No. 21AP-620 3
consequences exception to the mootness doctrine." Id. at ¶ 11 (declining to find the
application of the collateral consequences exception where the appellant did not
demonstrate or argue that he suffered any actual consequences, but instead argued "that
the possibility of future collateral consequences should preserve his appeal of the expired
order"). (Emphasis added.) "As a result, an appellant that fails to argue that he or she has
suffered any consequences or that merely speculates about the possibility of future
consequences has not demonstrated a legally cognizable interest for which an appellate
court can provide relief." A.F. at ¶ 6, citing Cyran at ¶ 11 (noting that "no provision of Ohio
law * * * imposes a restriction as a result of an expired protection order").
{¶ 7} Here, Mettke does not demonstrate any legal collateral consequences from
the CSPO such that the collateral consequences exception to the mootness doctrine would
apply. A.F. at ¶ 7; Cyran at ¶ 9 ("under current law, the collateral-consequences exception
to mootness applies in cases in which the collateral consequence is imposed as a matter of
law"). As the CSPO at issue expired by its own terms and neither the collateral
consequences exception nor any other exception to the mootness doctrine applies to this
case, we conclude that the questions presented by the appeal are moot. A.F. at ¶ 7-8.
Accordingly, we dismiss the appeal.
IV. Disposition
{¶ 8} Based on the foregoing reasons, the issues raised in this appeal are moot.
Therefore, we dismiss the appeal.
Appeal dismissed.
NELSON, J., concurs.
JAMISON, J., dissents.
NELSON, J., retired, formerly of the Tenth Appellate District,
assigned to active duty under authority of Ohio Constitution,
Article IV, Section 6(C).
NELSON, J., concurring.
{¶ 9} I concur in full with the decision of the court because we are bound by the
Supreme Court's instruction in Cyran.
{¶ 10} Although I am sympathetic with the concerns of the dissent, I do not believe
that the "imminent threat" standard that it proposes with regard to possible collateral
No. 21AP-620 4
consequences is derived from or consistent with the majority decision in Cyran. Compare
dissent here at ¶ 24 with Cyran (declining to adopt the probability analysis of the vigorous
dissent there, but looking instead to whether a continuing disability was "impose[d]" as a
matter of law as a result of the expired protection order). Mr. Mettke has not demonstrated
either that loss of his claimed security clearance is a necessary consequence of the expired
protection order, or even that review of such clearance would not be triggered by the
allegations or admitted facts of this matter (as opposed to the fact of the expired order itself).
I join the decision of the court.
JAMISON, J., dissenting.
{¶ 11} I disagree with the decision to dismiss this appeal as moot because I believe
the record shows appellant will experience significant collateral consequences as a result of
the findings made by the trial court in granting the CSPO. Additionally, because appellant
raises a public policy challenge to the CSPO, I believe it is important to reach the merits of
the appeal. For these reasons, I respectfully dissent.
I. FACTS AND PROCEDURAL HISTORY
{¶ 12} At the hearing on the CSPO, appellee told the magistrate that she is afraid of
appellant. Appellee maintained that appellant was terrorizing and harassing her and trying
to destroy her life. Appellee testified that appellant stepped up his pattern of threatening
words and conduct towards her after a protection order issued to her by the domestic
relations court was subsequently dismissed. Appellee submitted evidence in the form of
emails and text messages sent to her by appellant on March 25, 2020, July 19, 2020,
July 24, 2020, December 8, 2020, March 8, 2021, and March 13, 2021. Appellant admitted
that his texts to appellee include the following claims and allegations: "You lied to me and
you got arrested for solicitation. You lied to me and you got arrested for felony drug
possession. Yep ... You can blame me ..... * * * Your probation Violation ... You can blame
me. I pushed the [Grove City] police to file the Felony drug possession charges. I wish you
would have presented your case at the Protection order hearing you would have had more
charges .... All because of you[r] lies. * * * I will see you at the small claims hearing to show
how you defrauded me again ... I have all of your texts. But if you show up, I will have you
No. 21AP-620 5
arrested. * * * Or come back to me on bended knee. You have to ask and see what I say."
(May 18, 2021 Petitioner's Ex. at 7-8.)
{¶ 13} On April 12, 2020, appellant sent a text message to a mutual acquaintance
promising he would do whatever he could to make sure appellee gets jail time. In the same
text, appellant boasted: "I am the one that got [appellee] arrested and am proud of [it]."
(Petitioner's Ex. at 9.) In the text message appellant warns that he will make sure that
appellee's "life as a normal citizen is over" because of her deceitful conduct in causing him
to believe she loved him. (Petitioner's Ex. at 10.) Appellant also sent text messages to
appellee informing her that he had contacted the state police and various local police
departments claiming appellee was a fugitive from justice and providing her address. In
that correspondence, appellant referred to appellee as a "piece of shit Psycho." (Petitioner's
Ex. at 3.)
{¶ 14} In March of 2021, after appellant learned that appellee had been living with
a boyfriend, he sent a letter to the boyfriend informing him that he had turned appellee into
police for being a paid escort. Appellant admitted that he had appellee arrested on an
outstanding warrant when she appeared at a March 16, 2021 hearing in small claims court.
Appellant excused his behavior toward appellee by insisting that she had caused him harm
by deceiving him about their relationship and taking advantage of his generosity.
{¶ 15} Although appellant admitted that he sent numerous correspondence to
appellee in 2020 and 2021, he insisted that none of the emails and texts contained threats.
Appellant did acknowledge that he sent a package to the father of appellee's ex-boyfriend
containing information about the various pending actions against appellee. Appellant
claimed that he did so because he believed appellee still lived at the address. The package
contained several photographs depicting appellant and appellee posing in front of a mirror
in the nude. One of the photographs also depicts a third unidentified and unclothed female
posing with appellant and appellee in a compromising position.1 Appellee testified that
appellant sent the same salacious photograph to appellee's 87-year old grandmother and
aunt who lived in Texas.
1 Though the genitals are scratched out of the photographs, as well as the breasts of the females, the
salacious nature of the photographs are evident.
No. 21AP-620 6
{¶ 16} Appellee told the magistrate that appellant continued to contact her after she
had unequivocally told him she did not want to have any further contact with him. Though
some of appellee's correspondence with appellant suggest equivocation or encouragement
to appellant, the magistrate found her testimony credible on this matter. She also provided
unrebutted testimony that she has received treatment for post-traumatic stress disorder as
a result of appellant's continued harassment.
{¶ 17} When the magistrate asked appellee why she believed appellant would kill
her, she responded that she believes appellants behaviors show that he is mentally unstable.
Appellee also testified that appellant owns multiple firearms, and he keeps one in his truck.
Appellant referred to himself as a "gun enthusiast." (May 10, 2021 Tr. at 28.)
II. MOOTNESS
{¶ 18} Before I address appellant's assignments of error, I must address the
conclusion of the majority that the appeal is mooted by the expiration of the CSPO on
April 6, 2022.
{¶ 19} In Cyran v. Cyran, 152 Ohio St.3d 484, 2018-Ohio-24, the Supreme Court of
Ohio held that in the absence of demonstrated legal collateral consequences, the collateral
consequences exception to the mootness doctrine does not apply to an expired domestic
violence civil protection order. Id. at ¶ 14. The court also declined to establish a rebuttable
presumption that an appeal from an expired domestic violence civil protection order is not
moot. Id. at ¶ 13.
{¶ 20} In Cyran, appellant argued that appellee had sought the domestic violence
civil protection order only as leverage for herself in future post-divorce proceedings. He
also claimed that he faced the possibility of collateral consequences with respect to his
concealed firearm permit and his credit report as well as his ability to obtain housing, drive
certain vehicles, and obtain future employment. In affirming the dismissal of the appeal,
the Supreme Court rejected appellant's argument:
[Appellant] does not demonstrate or argue that he has
suffered any consequences. Rather, he argues that the
possibility of future collateral consequences should preserve
his appeal of the expired order. We are not convinced.
Speculation is insufficient to establish a legally cognizable
interest for which a court can order relief using the collateral-
consequences exception to the mootness doctrine.
No. 21AP-620 7
The presence of a disagreement, however sharp and
acrimonious it may be, is insufficient to create an actual
controversy if the parties to the action do not have adverse
legal interests.
(Internal citation and quotations omitted.) Id. at ¶ 11, ¶ 14.
{¶ 21} Though Cyran sets forth the general rule that an appeal from an expired
CSPO is moot, the language used by Supreme Court in the decision suggests relief under
the collateral consequences exception to the mootness doctrine may be available if
appellant argues and proves that a legally cognizable interest will be affected by the CSPO.
See A.F. v. R.A.T, 10th Dist. No. 20AP-23, 2021-Ohio-2568, ¶ 7, (The appeal is moot
because "the CPOs appealed expired in December 2020, there is no indication that appellee
has sought an extension of the orders, and appellants have not argued or otherwise
demonstrated legal collateral consequences from the CPOs."). I believe appellant
established that a legally cognizable interest will be affected by the expired CSPO in this
case.
{¶ 22} In issuing the CSPO against appellant, the trial court found appellant
committed menacing by stalking in violation of R.C. 2903.211 when he "knowingly engaged
in a pattern of conduct that caused the Petitioner mental distress." (Emphasis
deleted.) (May 19, 2021 Order of Protection at 6.) At the hearing before the magistrate,
appellant expressed his concerns regarding collateral consequences arising from the
issuance of a CSPO:
I'm currently working for a company called Global Systems
Technology where I am a vice president of government
operations and business development, and I'm proud to say
we won a $300 million contract on Friday to support the
Department of Homeland Security. I solve national security
types of problems, higher level, related to chemical, biological,
radiological, nuclear, and explosives. Maintaining of
clearance is important for me for my position.
Plus, you know, it's -- it's also -- you know, like I said, I'm a
gun enthusiast. It's also -- it would also hurt my security
clearance. But I'm -- I'm -- I'm done with her.
(May 10, 2021 Tr. at 28, 53.)
No. 21AP-620 8
{¶ 23} Unlike the appellant in Cyran, appellant herein provided unrebutted
testimony that the CSPO "would * * * hurt my security clearance." (Tr. at 53.) Appellant's
testimony also establishes that his employment as a civilian contractor depends on
maintaining a security clearance. A review of the relevant federal regulations permitting
civilian access to classified materials reveals that appellant's concerns are valid. For
example, 32 C.F.R. 147.12 requires consideration of criminal conduct, whether charged or
uncharged in assessing an applicant's security risk,2 and 32 C.F.R. 147.7 requires
consideration of certain personal conduct in the application process.3 The relevant
regulations also permit reinvestigation of a civilian contractor's security clearance at any
time, and require reinvestigation within five years of a prior investigation. See 32 C.F.R.
147.18-24, subpart B, attachment C.4 Thus, the expired CSPO remains a threat to
appellant's security clearance and his current employment as a civilian contractor. The
regulations further provide that an order from this court vacating the CSPO will mitigate
the negative impact of the expired CSPO, as such an order is equivalent to acquittal. Id.
{¶ 24} Based upon appellant's testimony and the relevant federal regulations, which
have the force and effect of law with regard to appellant's security clearance and federal
employment, appellant has established that the findings made by the trial court in granting
2 Title 32 C.F.R. 147 Subpart A, entitled "ADJUDICATIVE GUIDELINES FOR DETERMINING
ELIGIBILITY FOR ACCESS TO CLASSIFIED INFORMATION, provides at "Guideline J-Criminal conduct"
as follows:
(a) The concern: A history or pattern of criminal activity creates doubt about a person's judgment, reliability
and trustworthiness.
(b) Conditions that could raise a security concern and may be disqualifying include: (1) Allegations or
admissions of criminal conduct, regardless of whether the person was formally charged; * * *.
(c) Conditions that could mitigate security concerns include:
***
(5) Acquittal. (Emphasis added.)
3 Pursuant to 32 C.F.R. 147.7, "[c]onditions that could raise a security concern and may be disqualifying
also include:
***
(4) Personal conduct * * * that may increase an individual's vulnerability to coercion, exploitation, or duties,
such as engaging in activities which, if known, may * * * render the person susceptible to blackmail."
(Emphasis added.)
4 Title 32 was amended effective September 2022, but the relevant language was not changed.
No. 21AP-620 9
the CSPO create an imminent threat to a legally cognizable interest. Absent reversal on
appeal, those findings are final and unimpeachable. Because appellant has produced
evidence that his security clearance and employment would be negatively affected by the
findings of fact underlying the CSPO, and because the relevant federal regulations establish
a reversal of the trial court's order would mitigate the negative affect, appellant has
demonstrated legal collateral consequences sufficient to invoke the collateral consequences
exception to the mootness doctrine. Under the particular circumstances of this case, I
would find that the expiration of the CSPO did not deprive this court of jurisdiction to
review the merits of appellant's appeal.
III. LEGAL ANALYSIS
{¶ 25} In each of appellant's assignments of error, appellant argues, for slightly
different reasons, the trial court abused its discretion in granting appellee's petition because
appellee presented insufficient evidence to support the CSPO and the CSPO was against the
manifest weight of the evidence. I disagree.
{¶ 26} A decision to grant a CSPO is reviewed for an abuse of discretion. Guthrie v.
Long, 10th Dist. No. 04AP-913, 2005-Ohio-1541, ¶ 9. When considering whether a CSPO
is against the manifest weight of the evidence, an appellate court is guided by a presumption
that the findings of the trier of fact are correct. Lias v. Beekman, 10th Dist. No. 06AP-1134,
2007-Ohio-5737, ¶ 20. The underlying rationale of giving deference to the findings of a
trial court rests with the knowledge that the trial judge is best able to view the witnesses
and observe their demeanor, gestures and voice inflections, and use these observations in
weighing the credibility of the proffered testimony. Id. The discretionary power of this
court to grant a new trial when a CSPO has been issued by a trial court should be exercised
only in the exceptional case in which the evidence weighs heavily against the order. Holt v.
Feron, 3d Dist. No. 9-17-43, 2018-Ohio-3318, ¶ 17; Jones v. Hunter, 11th Dist. No. 2008-P-
0015, 2009-Ohio-917, ¶ 23.
{¶ 27} R.C. 2903.214 prescribes the requirements for a CSPO petition.
" '[R.C. 2903.214] provides that a petitioner seeking a civil stalking protection order must
demonstrate that the respondent engaged in the offense of menacing by stalking, in
violation of R.C. 2903.211.' " Lias at ¶ 13, quoting Podeweltz v. Rieger, 2d Dist. No. 21725,
2007-Ohio-1513, ¶ 28. R.C. 2903.211(A)(1) provides that "[n]o person by engaging in a
No. 21AP-620 10
pattern of conduct shall knowingly cause another person to believe that the offender will
cause physical harm * * * or cause mental distress to the other person." The burden of proof
under R.C. 2903.214 requires a petitioner to establish, by a preponderance of the evidence,
that the respondent engaged in conduct constituting menacing by stalking.
R.C. 2903.214(C). Griga v. Dibenedetto, 1st Dist. No. C-120300, 2012-Ohio-6097.
{¶ 28} "When determining what constitutes a pattern of conduct 'courts must take
every action into consideration even if * * * some of the person's actions may not, in
isolation, seem particularly threatening.' " (Internal citation and quotations omitted.)
Collins v. Vulic, 10th Dist. No. 20AP-528, 2021 Ohio App. Lexis 3261 (Sept. 23, 2021), *8.
"One incident alone is not sufficient to establish a pattern of conduct under R.C. 2903.211."
Collins at *7, citing Barium & Chems., Inc. v. Miller, 7th Dist. No. 14JE0030, 2016-Ohio-
5656, ¶ 15, citing State v. Scruggs, 136 Ohio App.3d 631, 634 (2d Dist.2000).
{¶ 29} For purposes of the offense of menacing by stalking, "mental distress" is
defined as: "Any mental illness or condition that involves some temporary substantial
incapacity; [or] [a]ny mental illness or condition that would normally require psychiatric
treatment, psychological treatment, or other mental health services, whether or not any
person requested or received psychiatric treatment, psychological treatment, or other
mental health services." R.C. 2903.211(D)(2). Pursuant to R.C. 2901.22(B), "[a] person
acts knowingly * * * when the person is aware that the person's conduct will probably cause
a certain result or will probably be of a certain nature."
{¶ 30} In State v. Horsley, 10th Dist. No. 05AP-350, 2006-Ohio-1208, ¶ 47, this
court determined that a CSPO may be issued if it is shown that an offender, by engaging in
a pattern of conduct, knowingly caused the victim to believe that the offender would cause
the victim mental distress. See also Griga, 2012-Ohio-6097. In other words, actual mental
distress on the part of a victim is not a required element of menacing by stalking. Id. In
Griga, for example, the court held that appellant's multiple threats to financially ruin
appellee, followed by his appearance at appellee's workplace, provided sufficient evidence
to support the judgment that the appellant had engaged in a pattern of conduct that
knowingly caused appellee to believe appellant would cause him mental distress. Id. at ¶ 16.
{¶ 31} In overruling appellant's objections to the magistrate's decision, in part, the
trial court agreed with the magistrate that the weight of the evidence showed appellant
No. 21AP-620 11
engaged in a pattern of conduct which knowingly caused appellee mental distress. The
evidence in the record supports the trial court's conclusion.
{¶ 32} Appellant sent multiple correspondence to appellee and others threatening
to aid authorities in maximizing her legal penalties and warning that her life as a "normal
citizen was over" unless she rekindled the relationship between the parties. (Petitioner's
Ex. at 10.) Appellant admitted he sent embarrassing nude photographs of appellee to her
family members. The record also shows that appellant's ex-boyfriend was granted a
protection order against appellant, and that appellant sent him unsolicited information
regarding appellee's participation in escort services. All of these instances of harassment
occurred within a period of less than two years.
{¶ 33} Appellant's correspondence evidence his desire to facilitate appellee's arrest
and prosecution for drug offenses. In a text message appellant sent to one of appellee's
friends, appellant takes credit for having appellee arrested and expresses his satisfaction
for doing so. Our review of the text messages and emails admitted into evidence reveals
appellant's primary goal was to ruin appellee's life and cause her to suffer serious mental
distress as retribution for deceiving and then rejecting him.
{¶ 34} For example, appellant admitted that he encouraged a Deputy Sheriff to
arrest appellee on a bench warrant prior to a hearing she attended in one of the civil cases
appellant had filed against her. Had appellant genuinely wished to pursue his civil remedy
to judgment, rather than causing appellee mental distress, he would not have taken steps
that delayed the hearing. At the CSPO hearing, appellant tried to deny he also caused
appellee to be arrested in 2019, but the magistrate told appellant: "I don't find those
responses to be credible." (Tr. at 46.) Appellant also admitted that prior to the CSPO
hearing in this case, he approached a Deputy Sherriff at the courthouse in an effort to have
appellee jailed for a prior offense. Appellant did not deny that the Deputy Sheriff detained
appellee temporarily until another police officer arrived and it was determined that no jail
time had been ordered. The following exchange regarding the incident is typical of
appellant's unapologetic behavior toward appellee:
[M.B.]: And when I got here today, he was trying to convince
the sheriff's deputy I had to serve five days forthwith in jail for
the -- for the time I went –
No. 21AP-620 12
THE MAGISTRATE: Mr. Mettke, did you do that today? Did
you talk to the sheriff about taking her into custody?
MR. METTKE: I did. If you'll let me -- if you look at the -- if
you look on -- this is -- that's why, if you look at A.
(Indicating.)
THE MAGISTRATE: Mr. Mettke, I don't understand. You say
you don't want to have any involvement with her.
MR. METTKE: I don't want to have any.
THE MAGISTRATE: You don't want to have any contact; but
everything you do seems to be about trying to obtain a pound
of flesh from her, * * *
MR. METTKE: She took a -- she took a pound of flesh from
me.
(Tr. at 54.)
{¶ 35} The magistrate found appellee's testimony credible, and that appellant's
testimony was not. In making this finding, the magistrate found "Petitioner to generally be
credible and Respondent to be evasive and at times not credible [and] * * * Petitioner was
more credible than Respondent." (Emphasis deleted.) (May 19, 2021 Mag.'s
Recommended Order of Protection at 6, 8.) The trial court noted that both parties provided
inconsistent testimony at the hearing, but the trial court ultimately agreed with the
magistrate stating: "Notwithstanding that Petitioner may have acted to deceive Respondent
during the parties' brief romantic relationship, and may have had prior criminal charges
and personal issues, the Court, after viewing her testimony and judging it under the proper
test, finds that her testimony before the magistrate was credible." (Nov. 2, 2021 Decision
& Entry at 12.)
{¶ 36} Appellant argues that public policy prevented the trial court from issuing a
CSPO against him because he was simply exercising his criminal and civil remedies against
appellee. I disagree.
{¶ 37} Contrary to appellant's claim, his right to prosecute civil claims or procure
criminal proceedings against others in Ohio is not unfettered. Indeed, Ohio common law
authorizes a cause of action for abuse of process, where one person uses legal process
against another for an ulterior motive. Yaklevich v. Kemp, Schaeffer & Rowe Co., L.P.A.,
No. 21AP-620 13
68 Ohio St.3d 294 (1994). A cause of action for malicious civil and criminal prosecution is
also recognized in Ohio common law where one person either commences a civil action
against another without probable cause or procures criminal proceedings against another
without probable cause. Id. See also Ash v. Ash, 72 Ohio St.3d 520, 522 (1995). I find no
merit in appellant's public policy argument in this case as R.C. 2903.211(A)(1) and 2903.214
establish the relevant public policy in Ohio with respect to menacing by stalking and
CSPO's. There is no exception in the statutory law for prohibited conduct that occurs in
connection with a civil action or criminal prosecution. If the general assembly had so
intended, the statutory language would reflect that intent.
{¶ 38} This court has previously rejected an argument similar to appellant's. In
Wildi v. Wildi, 159 Ohio App.3d 568, 2005-Ohio-257, ¶ 1 (10th Dist.), a husband was
granted a CSPO against wife. The wife claimed that her offending conduct occurred while
she was acting as her own private investigator in connection with her divorce case, not as a
stalker. The trial court rejected the argument stating that wife's stalking behavior was not
legally excusable, regardless of her purpose. Id. In wife's appeal, this court held that neither
the domestic relations division nor the criminal code precluded a party from seeking a
stalking civil protection order in the general division of a court while an action was pending
in the domestic relations division.
{¶ 39} Pursuant to this court's decision in Wildi, even if the trial court believed
appellant's claim that all of his misconduct occurred in prosecution of civil and criminal
actions against appellee, appellee was not precluded from seeking CSPO if the evidence
showed that appellant had engaged in a pattern of conduct which knowingly caused mental
distress or caused appellee to believe that appellant would cause her mental distress. Id.
Moreover, the weight of the evidence produced at the hearing establishes that appellant
engaged in various forms of harassment calculated to inflict emotional distress on appellee
that were unrelated to any civil or criminal proceeding pending against appellee, such as
sending embarrassing nude photographs of appellee to her grandmother and aunt, sharing
embarrassing details of appellee's involvement with escort services with her ex-boyfriend,
contacting appellee by email and text after she had told him to leave her alone, and sending
threatening and boastful correspondence to others promising to ruin appellee's life.
No. 21AP-620 14
{¶ 40} " 'The goal of R.C. 2903.214 is to allow the police and the courts to act before
a victim is harmed by a stalker.' " (Emphasis sic.) Bey v. Rasawehr, 161 Ohio St.3d 79,
2020-Ohio-3301, ¶ 16, quoting Irwin v. Murray, 6th Dist. No. L-05-1113, 2006-Ohio-1633,
¶ 15. In my view, the greater weight of the evidence produced in the trial court reveals a
pattern of troubling behavior by appellant that meets the definition of menacing by stalking
under R.C. 2903.211(A)(1). The preponderance of the evidence supports a finding that
appellant engaged in a pattern of conduct that caused appellee to believe appellant would
cause her mental distress and that appellant's pattern of conduct has, in fact, caused
appellee mental distress requiring treatment. The greater weight of the evidence also
substantiated appellee's claim that she fears appellant and that she is in need of a CSPO to
protect her from future conduct of appellant designed to cause her further mental distress.
{¶ 41} Appellant's text messages and emails to appellee and others demonstrates a
persistent spirit of vindictiveness towards appellee and an insatiable need to make appellee
suffer. Though appellant told the magistrate he had not seen appellee for several months
and has no desire to have any further contact with appellee, appellant admitted that he tried
to have appellee arrested prior to the CSPO hearing in this case. Appellee informed the
court that a hearing is scheduled for "tomorrow" in appellant's pending civil action against
her in small claims court. (Tr. at 14.) Thus, the weight of the evidence demonstrates
appellant's pattern of harassing conduct is ongoing.
{¶ 42} Because the CSPO is supported by sufficient evidence and not against the
manifest weight of the evidence, the trial court did not abuse its discretion when it granted
appellee's petition and issued appellee a CSPO against appellant. Accordingly, I would
overrule appellant's first, second, and third assignments of error and affirm the judgment
of the trial court.
IV. CONCLUSION
{¶ 43} Based on the foregoing, I would find that the appeal was not mooted by the
expiration of the CSPO, overrule the first, second, and third assignments of error, and
affirm the judgment of the trial court. Because the majority does not, I respectfully dissent. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492465/ | ORDER
PERRY, District Judge.
This matter is before the Court on the motion to alter or amend the judgment filed by the United States of America. Neither the debtor, Lauraanne Giaimo, nor the Trustee has responded to the motion to alter or amend.
The government makes two arguments in support of its motion to alter or amend the judgment. First, it argues that because the bankruptcy ease was converted to a Chapter 7 proceeding on the same day this Court entered its judgment, the reason for the Court’s decision no longer applies. Second, it argues that the Court misinterpreted the law. The Court disagrees with the government on the second argument, but finds the factual change in the circumstances to be compelling, and will grant the motion to alter or amend the judgment because of that change in circumstances.
The same day.that this Court entered its judgment reversing the Bankruptcy Court’s decision, the Bankruptcy Court converted the Chapter 11 proceeding to one under Chapter 7. Given this set of circumstances, the Court agrees that turnover is no longer in the interest of the estate because the estate would have to pay adequate protection to the Internal Revenue Service in order to obtain possession of the funds in dispute and would then be required to distribute them again. For that reason, the Court will vacate the judgment previously entered and will enter a new judgment affirming the Bankruptcy Court’s finding that the $14,198.18 in the debtor’s bank account was not properly included in the bankruptcy estate and will affirm the Bankruptcy Court’s order requiring the bank to pay the funds to the IRS.
Accordingly,
IT IS HEREBY ORDERED that the motion to alter or amend the judgment [# 18-1, # 18-2] filed by the United States is granted, and the judgment entered by this Court on April 4,1996 is HEREBY VACATED.
An Amended Judgment in accordance with this order is entered this same date. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492466/ | ORDER DISMISSING CASE
MICKEY DAN WILSON, Chief Judge.
On March 11, 1996, James Vann Pruitt (“Pruitt”) filed his voluntary petition for relief under 11 U.S.C. Chapter 13 in this Court. On March 19, 1996, Pruitt filed his Chapter 13 plan; and hearing on confirmation of the plan was set for April 24, 1996. On April 2, 1996, creditor United States of America ex rel. Internal Revenue Service (“U.S.A.”) objected to confirmation of the plan, and also filed its “Motion to Dismiss and Brief in Support”. On April 16,1996, Pruitt filed his response to U.S.A’s motion to dismiss. At hearings on April 24 and May 1, 1996, the Court received certain stipulations of the parties, heard statements of counsel and of Pruitt pro se, noted that “[a]ll parties agree that this is a non-eonfirmable plan,” see minute of 5/1/96 (docket #25M), and took the matter under advisement. Further briefs were filed by U.S.A. on June 12, 1996 and by Pruitt on July 18,1996.
On or about July 24, 1996, at a hearing in Case No. 96-01686-W In re Walter Edward Kostich, Jr., which said hearing Pruitt attended, and which said ease presented various issues and arguments similar to those in *746the present case, this Court recited into the record its decision granting U.S.A.’s “Motion to Dismiss ...” Pruitt’s case. This Court determined, among other things, that Pruitt’s proposed plan cannot be confirmed because it does not properly provide for U.S.A.’s secured claim pursuant to 11 U.S.C. § 1325(a)(5), nor for U.S.A.’s priority unsecured claim pursuant to 11 U.S.C. § 1322(a)(2); that it unfairly discriminates against certain unsecured claims, namely those of U.S.A. and of the Oklahoma Tax Commission, in violation of 11 U.S.C. § 1322(a)(3), (b)(1); that it is probably infeasible, due to the uncertain amount of Pruitt’s tax debt resulting from Pruitt’s own failure to file a tax return for the year 1994, in violation of 11 U.S.C. § 1325(a)(6); that Pruitt is unwilling or unable to propose a confirmable plan in this Chapter 13 case, which constitutes unreasonable delay that is prejudicial to creditors under 11 U.S.C. § 1307(c)(1); and that accordingly, cause existed for dismissal of Pruitt’s case, and U.S.A.’s “Motion to Dismiss ...” should be granted. This order memorializes said decision, whose findings of fact and conclusions of law are adopted and incorporated herein by reference.
IT IS THEREFORE ORDERED that U.S.A.’s “Motion to Dismiss ...” be, and the same is hereby, granted; and that this case under 11 U.S.C. Chapter 13 be, and the same is hereby, dismissed, with jurisdiction retained for the purpose of completing administration of the ease.
ORDER DENYING “MOTION TO VACATE ORDER OF DISMISSAL AND MOTION FOR RE-HEARING”
On or about July 24, 1996, this Court dismissed the above-styled case under 11 U.S.C. Chapter 13. On July 31,1996, debtor James Yann Pruitt.(“Pruitt”) filed herein his “Motion to Vacate Order of Dismissal and Motion for Re-Hearing”. Therein Pruitt asserts that his case was dismissed “without a hearing,” motion p. 2; that it was dismissed “on a technicality’ ” despite “all the filings that he has made in this proceeding,” id.; that “[t]his Court does not have jurisdiction” to “charge” Pruitt with failure to file tax returns, id. p. 4, or to “require [him] to file tax returns,” id. p. 5; and that U.S.A.’s tax claim is “ ‘bogus’ ” and “not legitimate” and “fraudulent,” id. pp. 5-6.
Pruitt’s ease was dismissed only after hearing — in fact, after more than one hearing. The Court is not required to schedule and convene a separate “hearing” merely to announce its decision. The ease was not dismissed on a “technicality,” but because of Pruitt’s unwillingness or inability to comply with several fundamental and indispensable requirements of Chapter 13. The number of Pruitt’s “filings” is immaterial — the bulk of pleading adds nothing to its weight. The Court has “jurisdiction” to order Pruitt to do any lawful thing which is necessary or appropriate to carry out the provisions of Title 11, 11 U.S.C. § 105(a), and to dismiss his case if he does not comply, 11 U.S.C. § 1307(c). This Court clearly has authority to determine tax matters incidental to bankruptcy, see e.g. 11 U.S.C. §§ 502, 505, 507(a)(8), 28 U.S.C. § 1334(b), as Pruitt himself elsewhere admits, motion p. 4 lines 14-15. Pruitt asserts that it is not lawful to force him to comply with the tax laws, regulations and procedures of the United States; but despite the bulk of his “filings” in this case, he has offered nothing — not a scintilla — which tends in the slightest degree to support such assertion. This Court is not required to delay creditors merely to provide a forum for litigation of a claim which lacks any color of law.
Accordingly, Pruitt’s “Motion to Vacate Order of Dismissal and Motion for Re-Hearing” is (are) hereby denied.
AND IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492468/ | ORDER ON SECOND MOTION TO DISMISS
ALEXANDER L. PASKAY, Chief Judge.
This is the next and, unfortunately, not yet the last round in this long, drawn-out, ongoing feud between the SEC and Bilzerian (Debtor). The present matter under consideration is the Second Motion to Dismiss the Complaint filed in the above captioned adversary proceeding. The Complaint under consideration was originally filed on August 10, 1992, by Bicoastal, formerly known as the Singer, Co., (Bicoastal) who challenged the Debtor’s right to a general discharge based on two separate grounds: (1) claiming that a transfer within one year by the Debtor of property of the estate to his wife, Terri Steffen, with intent to hinder, delay and defraud his creditors (Count I, § 727(a)(2)(A)); and (2) a claim that the Debtor committed a false oath in connection with his Chapter 7 case (Count II, § 727(a)(4)).
The present Motion is baséd on the Debt- or’s contention that the SEC has no standing to prosecute this adversary proceeding. The procedural history preceding the present Motion under consideration, is somewhat complex and a brief summary of the same should be helpful.
At the time of the commencement of this case, this Court did, pursuant to F.R.B.P. 4004 and F.R.B.P. 4007, notify all parties of interest as to the bar date set for January 24, 1992, to file complaints objecting to the Debt- or’s discharge and the dischargeability of a specific debt pursuant to § 523(c) of the Code. While Bicoastal did file its Complaint in a timely manner, on November 3, 1993, it also filed a Joint Motion and Stipulation for Dismissal of Complaint. The Motion was set down for hearing in due course and shortly after, this Court entered its Order on November 12, 1993, granting the Motion, with the proviso that the creditors of the Debtor have an opportunity to intervene and to prosecute the Complaint as successor Plaintiff on or before 15 days after the date of the Order.
On November 26, 1994, the SEC filed a Motion to Extend Time to File a Motion to Intervene. The Motion was initially granted by this Court and the deadline to File a Motion to Intervene was extended for all creditors to 14 days from the date of the Order disposing of the Motion for Approval of Settlement by and Between the Trustee and Terri L. Steffen, filed on November 24, 1993. The SEC timely filed its Motion to Intervene and its Complaint in Intervention Objecting to the Debtor’s Discharge on February 16, 1994. On February 24, 1994, this Court entered an Order Denying the SEC’s Motion to Intervene on the basis that the *768SEC was not a creditor and therefore, did not have standing to intervene in the adversary proceeding originally filed by Bicoastal.
The SEC having been aggrieved by the Order, filed a timely Notice of Appeal. The Appeal was considered in due course and on May 15, 1995, the District Court reversed this Court’s Order and remanded the adversary proceeding for further proceedings.
The District Court’s Order dated May 15, 1995, held that a Plaintiff objecting to a debtor’s discharge pursuant to § 727 became, in effect, the trustee of the action, and if successful, for the benefit of all creditors, citing In re Joseph, 121 B.R. 679, 682 (Bkrtcy.N.D.N.Y.1990).; In re Nicolosi 86 B.R. 882, 889 (Bkrtcy.W.D.La.1988). The Order further stated:
In order to preserve the benefit of a § 727 proceeding for all creditors, Rule 7041 [of the Federal Rules of Bankruptcy Procedure] allows other creditors to “step in the shoes” of the original creditor who brings a § 727 action and later abandons it. In re Nicolosi at 888. Procedurally, the new creditor is substituted for the former creditor and is limited to the objections to discharge set forth in the original complaint. The Commission [SEC] should be allowed to be substituted as a party pursuant to Rule 7041.
Based on the above analysis, the District Court ruled that the SEC did indeed have standing to be considered as a creditor.
On August 10,1995, Bieoastal withdrew its claim and no longer has an allowable claim in this Chapter 7 case. Relying on this fact, the Debtor contends that the right of the SEC to proceed with this lawsuit cannot be granted on its predecessor in interest i.e. Bicoastal, and since Bicoastal no longer has an allowable claim in this Chapter 7 case, the SEC has lost its standing.
The Debtor’s reliance on the fact that Bi-coastal withdrew its claim is misplaced and is of no consequence. This is so because while it is true that the right of the SEC cannot be greater than its predecessor in interest, Bi-coastal, who’s shoes it stepped into when it intervened, the status of Bicoastal as a creditor must be viewed when the claim was filed and not after it was withdrawn. There was never an adjudication by this court or by another tribunal that Bicoastal did not in fact have a valid allowable claim against the Debtor, and the fact that Bicoastal withdrew its claim for whatever reason has no bearing on its status as a creditor and in turn, on the right of the SEC to bring this adversary proceeding.
Accordingly it is
ORDERED, ADJUDGED AND DECREED that Defendant’s Second Motion to Dismiss be, and the same hereby is denied.
DONE AND ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492469/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW
GEORGE L. PROCTOR, Bankruptcy Judge.
This adversary proceeding came before the Court upon Complaint to recover preferential transfers pursuant to 11 U.S.C. § 547(b). Upon the evidence presented at the trial on October 15,1996, the Court enters the following findings of fact and conclusions of law:
FINDINGS OF FACT
1.On October 13,1994, L. Bee Furniture Company (Debtor) borrowed $150,000 from SunTrust Bank, Central Florida, N.A. (Defendant), evidenced by a promissory note. (Defendant Ex. 1). The terms of the Note provided that Debtor was to repay Defendant the $150,000 loan in fifty-nine (59) monthly installments of $3,080, commencing November 13,1994. (Id.). The Note further provided that payment was due on the thirteenth day (13th) of each month, and a five percent (5%) late charge was assessed against each payment received after the due date. (Id.).
2. On February 23,1996, Debtor filed for protection under Chapter 7 of the Bankruptcy Code, and Charles W. Grant was appointed Chapter 7 Trustee (Plaintiff). (Main Case Ree. 1). On May 7, 1996, the Plaintiff filed this adversary proceeding seeking to avoid three payments totalling $9,702.00. (Adv. Rec. 1). The three transfers that the Plaintiff seeks to avoid are:
Payment Pays Payment
Due Date Date Late Amount Late Charge
11-13-95 12-7-95 24 $3,234.00 $154.00
12-13-95 1-9-96 27 $3,234.00 $154.00
1-13-96 2-8-96 26 $3,234.00 $154.00.
(Adv.Rec.l).
3. The Plaintiff argues that the transfers were avoidable pursuant to 11 U.S.C. § 547(b). (Id.). Defendant’s answer includes affirmative defenses alleging that the transfers sought to be avoided were made in the ordinary course of business between the Debtor and Defendant pursuant to 11 U.S.C. § 547(c)(2). (Adv.Ree.4).
4. On July 15, 1996, Defendant moved for summary judgment pursuant to Bankruptcy Rule 7056. (Adv.Ree. 5, 7). A hearing was held on July 17, 1996, at which the Plaintiff made an ore terms motion for Summary Judgment. Defendant concedes that the requirements of subsection 547(b) are satisfied, but argues that the transfers sought to be avoided were made in the ordinary course of business under subsection 547(c)(2).
5. On August 12, 1996, the Court entered an Order Denying the Defendants and Trustee’s Motions for Summary Judgment because there was insufficient evidence to determine: (1) whether the disputed payments were part of the normal business relationship between the parties; and (2) whether Defendant conducted unusual or extra ordinary collection efforts to obtain the disputed payments. (Adv.Rec.12-13). The Court also left unanswered, whether to construe both subpara-graphs “B” and “C” of subsection 547(e)(2) of the Bankruptcy Code subjectively, looking only to the relationship between the parties, or whether to construe subparagraph “B” subjectively, while subparagraph “C” is ana*780lyzed objectively by looking at industry norms. (Id.).
6. The record shows that it was Defendant’s practice to send invoices to business borrowers ten (10) days before monthly payments were due, and to send past due notices to borrower ten (10) days after payment was due. (Adv.Rec.il).
7. Also, over the life of the loan, Debtor and Defendant established a certain payment pattern. Defendant’s Loan Officer testified that Defendant always accepted Debtor’s late payments. Debtor established the following payment record with Defendant:
Payment Days Payment
Due Date Date Late Amount Late Charge
11-13-94 11-30-94 17 $3,080.00 —
12-13-94 12-16-94 3 $3,234.00 $154.00
1-13-95 1-19-94 6 $3,080.00 —
2-13-95 3-2-95 17 $3,234.00 $154.00
3-13-95 4-4-95 22 $3,080.00 —
4-13-95 5-10-95 27 $3,388.00 $308.00
5-13-95 6-7-95 25 $3,050.00 —
6-13-95 6-29-95 16 $3,234.00 $124.00
7-13-95 8-9-95 27 $3,264.00 $184.00
8-13-95 9-7-95 25 $3,358.00 $278.00
9-13-95 10-6-95 23 $3,264.00 $154.00
10-13-95 11-6-95 24 $3,202.50 $152.50
11-13-95 12-7-95 24 $3,234.00 $154.00
12-13-95 1-9-96 27 $3,234.00 $154.00
1-13-96 2-8-96 26 $3,234.00 $154.00
2-13-96 2-21-96 Payo $119,594.28 —
(Defendant Ex. 3).
CONCLUSIONS OF LAW
The sole issue in this proceeding is whether the transfers sought to be avoided were made within the ordinary course of business exception under subsection 547(c)(2) of the Bankruptcy Code. Subsection 547(c)(2) provides that:
(e) 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) (1994). The Eleventh Circuit Court of Appeals has highlighted that the Congressional intent of this subsection is “to leave undisturbed normal financial relations, because [such an exception] does not detract from the general policy of the preference section to discourage unusual action by either the debtor or his creditor during the debtor’s slide into bankruptcy.” Marathon Oil Co. v. Flatau (In re Craig Oil Co.), 785 F.2d 1568, 1566 (11th Cir.1986) (citing H.R.Rep. No. 595, 95th Cong. 1st Sess. 373-74 (1977), reprinted in 1978 U.S.Code Cong. & Ad.News 5787, 6329) (alterations in original). The creditor has the burden of proving that the requirements for the ordinary business exception have been satisfied. Grant v. Sun Bank/North Central Florida, et al. (In re Thurman Construction, Inc.), 189 B.R. 1004, 1011-12 (Bankr.M.D.Fla.1995) (citing Braniff, Inc. v. Sundstrand Data Control, Inc. (In re Braniff, Inc.), 154 B.R. 773, 780 (Bankr.M.D.Fla.1993)). The standard of proof is preponderance of the evidence. Id. Subsection 547(c)(2) is narrowly construed. Id.
1. Construction of Paragraphs “B” and “C” of Subjection 547(c)(2).
First, subparagraph “A” of subsection 547(c)(2) is satisfied because both parties agree that the debt was incurred in the ordinary course of business between the Debtor and Defendant. Therefore, the controversy in this case surrounds the subpara-graphs “B” and “C” of subsection 547(c)(2).
Next, the Court must determine whether the disputed payments were made within the ordinary course of business or financial affairs of the Debtor and Defendant, and made according to ordinary business terms. In the past, this Court has employed the following four factors to determine whether transfers *781were made within the ordinary course of business exception under subsection 547(c)(2): (1) the prior course of dealings between the parties, (2) the amount of the payments, (3) the timing of the payments, and (4) the circumstances surrounding the payments. Thurman, 189 B.R. at 1011-12 (citations omitted).
In this case, the Plaintiff and Defendant disagree on the proper construction of subsection 547(c)(2). The Plaintiff argues the Court should conduct a subjective inquiry of subparagraph “B” of 547(c)(2) using the four factors outlined above, while subparagraph “C” of 547(c)(2) should be analyzed objectively by looking at the industry norms. (Adv.Ree. 17). However, Defendant argues that both subparagraphs “B” and “C” of subsection 547(c)(2), should analyzed subjectively, looking only to the Debtor and Defendant’s prior dealings with each other, not objectively examining industry norms. (Adv. Rec. 16). Therefore, the Court must first decide how subparagraphs “B” and “C” should be construed.
A majority of courts, including the courts in this district, have applied the four factors outlined above subjectively to subparagraphs “B” and “C” of subsection 547(c)(2). See, e.g., Thurman, 189 B.R. at 1012; Braniff, 154 B.R. at 780; Hyman v. Stone Lumber Co. (In re Winter Haven Truss Co.), 154 B.R. 592, 594 (Bankr.M.D.Fla.1993) (citations omitted); Florida Steel Corp. v. Stober (In re Industrial Supply Corp.), 127 B.R. 62, 65 (Bankr.M.D.Fla.1991) (citations omitted). However, these courts have not explicitly stated that the subjective inquiry is appropriate.
Although the Eleventh Circuit Court of Appeals has not specifically addressed whether subparagraphs “B” and “C” should be construed subjectively, it focused only on relationship between the debtor and creditor to make its determinations as to subpara-graphs “B” and “C.” See Craig Oil Co., 785 F.2d at 1566-68. Also, in Thurman, this Court, addressing subparagraph “C” of 547(c)(2), indicated that evidence of “industry norms” was not offered to prove that transfers were “made according to ordinary business terms.” Thurman, 189 B.R. at 1012. However, the Court ultimately concluded that an examination of the prior dealings between the parties was sufficient in deciding whether transfers were made “according to ordinary business terms.” Id.
A minority of courts have construed sub-paragraph “B” subjectively, examining only the relationship between the parties, and construed subparagraph “C” objectively, looking at industry norms. See, e.g., Fiber Lite Corp. v. Molded Acoustical Prod., Inc. (In re Molded Acoustical Prod. Inc.), 18 F.3d 217, 226 (3rd Cir.1994) (stating that: “we read subsection C as establishing a requirement that a creditor prove that the debtor made its pre-petition preferential transfers in harmony with the range of terms prevailing as some relevant industry norms.”); In re Tolona Pizza Prod. Corp., 3 F.3d 1029, 1033 (7th Cir.1993) (concluding that “ordinary course of business terms” refers to the range of terms that encompasses the practices in which firms similar in some general way to the creditor in question engage); Logan v. Basic Dist. Corp. (In re Fred Hawes Org. Inc.), 957 F.2d 239, 245 (6th Cir.1992) (holding that subsection C requires proof that the payment is ordinary in relation to the standard prevailing in the relevant industry); Yurika Foods Corp. v. United Parcel Service (In re Yurika Foods Corp.), 888 F.2d 42, 45 (6th Cir.1989) (examining industry norms to determine whether subparagraph “C” has been satisfied).
These courts have reasoned that, “the difficulty with majority approach is that it ignores subparagraph ‘C’ and thereby makes it a nullity, or it interprets subparagraph ‘C’ to require the same showing as subparagraph ‘B’ and thereby makes it superfluous.” See Fred Hawes Org. Inc., 957 F.2d at 243-44. These courts further reasoned that Congress clearly intended to establish separate, discreet, and independent requirements for sub-paragraphs “B” and “C” which creditors would have to fulfill to prevent avoidance. *782Id. Thus, subparagraph “C” should be construed objectively, establishing a requirement that a creditor prove that the debtor made its pre-petition preferential transfers in harmony with industry norms. Id.
This Court declines to follow the minority approach and concludes that a subjective inquiry is appropriate. The Court is persuaded by Graphic Prod. Corp. v. WWF Paper Corp. (In re Graphic Prod. Corp.), 176 B.R. 65 (Bankr.S.D.Fla.1994) (Cristol, C.J.). In that case, a Chapter 11 debtor-in-possession brought an adversary proceeding to avoid alleged preferential transfers, and the defendant asserted, among other things, the ordinary coruse of business exception pursuant to subsection 547(c)(2). Id. at 68. The plaintiff contended that the court should have required compliance with terms ordinary in the industry. Id. at 71. The court found that subparagraph “C” must be analyzed by examining the business practices between the particular parties involved and not to the generally prevailing industry practices. Id. The court reasoned that:
[Rjeading 11 U.S.C. § 547(c)(2)(C) as requiring compliance with the terms ordinary in the industry would negate any benefit the exception would convey. That reading would require that the parties would conduct themselves according to business norms, restricting their chosen course of dealing to an industry standard. The exception was created to allow debtors and creditors to continue in their normal course of business, and ‘discourage unusual action by either the debtor or his creditor during the debtor’s slide into bankruptcy’.... To hold otherwise would be to place the exception out of reach of all those debtors and creditors for whom it was written.
Id. (quoting In re Equipment Co. of Am., 135 B.R. 169, 173 (Bankr.S.D.Fla.1991)). This rationale is in accord with the courts in this district and the Eleventh Circuit Court of Appeals. See, e.g., Craig Oil Co., 785 F.2d at 1566-68; Thurman, 189 B.R. at 1012. Therefore, this Court will examine both sub-paragraphs “B” and “C” subjectively, looking only to the relationship between the parties. Having concluded that the subjective analysis is appropriate, the Court now turns to applying the four factors outlined in Thurman.
2. Application Of The Four Factors.
The first factor the Court considers is the prior course of dealing between the parties. Here, the payment history between Defendant and Debtor shows that Debtor made all its payments after the due date, and this pattern did not change during the preference period. (Defendant Ex. 3). Defendant’s loan officer also testified that Defendant always accepted late payments, and the manner in which the payments were made (via checks drawn on Debtor’s account) did not change during the preference period. Thus, the course of dealing between the parties remained the same before and during the preference period.
The second factor considered is the amount of the payments. Here, the amount of the payments did not change during the preference period. Each of the three payments sought to be avoided is $3,234, which consists of $3,080 in principal and a late charge of $154. The evidence shows that the average payment amount immediately before the preference period was $3,274.83. This is $40 above the amount of each payment during the preference period. Thus, there is no indication that Debtor paid Defendant unusually large payments during the preference period.
The third factor deals with the timing of each payment. The Eleventh Circuit has held that “lateness” is an important factor in deciding whether payments should be protected by the ordinary course of business exception. Craig Oil, 785 F.2d at 1567. There is a presumption that late payments are outside the ordinary course of business, but such presumption may be overcome by a showing that late payments were in the ordinary course of the parties’ business. Braniff, 154 B.R. at 780-81.
In this case, Defendant has overcome the presumption that late payments were not in the ordinary course of the parties’ business. During the preference period, the payments were made an average of 25.66 days late, while immediately before the payments were *783made an average of 24 days late. Thus, Debtor’s late payments over 20 days late on the average, and this did not change during the preference period.
Finally, with the fourth factor, the Court examines the circumstances surrounding the payments. Subsection 547(c)(2) protects those payments that do not result from “unusual” or “extraordinary” debt collection practices. Craig Oil Co., 785 F.2d at 1567. In this case, Defendant followed its routine collection activities. Defendant sent invoices to the Debtor prior to the due date, which were then followed by past due notices, followed by phone calls. These activities were routine over the life of the loan, and Defendant’s collection activities did not increase during the preference period.
CONCLUSION
Therefore, the Court concludes that Defendant has met its burden of proving that the preferential transfers in the amount of $9,702 were made in the ordinary course of business, and are not avoidable. 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/8492471/ | ORDER DENYING MOTION FOR LEAVE TO FILE PAPER COPY MATRIX
This matter came before the court upon the motion of counsel for the above debtor who asked the court for an order allowing the Clerk of the Court to accept paper copy of matrix.
The movant alleged that the attorney for debtor is a sole practitioner admitted to practice before the Bankruptcy Court in about 1990. The attorney has a practice where 30% of her caseload is in the area of bankruptcy. Said attorney has been utilizing “Brother WP-3400 word processor.” The attorney has not had the necessity of buying a computer although she realizes she is at a disadvantage to other attorneys without one.
Local Rule of Bankruptcy Rule Procedure 107(C) requires a matrix with each filing to be provided on a diskette. The attorney seeks a waiver of this requirement because of the circumstances set forth above.
The court referred the matter to the entire Bankruptcy Court for the Southern District of Florida who considered the issue en banc.
While the court is sympathetic to beginning practitioners who have not yet acquired their own computer, the court is also mindful of the fact that in the last calendar year, over 1,000,000 bankruptcy cases have been filed throughout the United States and that this court’s filings are up almost 29%. If the court is to be able to provide for the needs of the huge number of filers in the face of growing filings and diminishing budget, this can only be accomplished through the use of state of the art automation. If the alternative in this ease would require this attorney to spend thousands of dollars for installation of a computer system, the court would perhaps seek another alternative. An inquiry into the local public market place reveals that the attorney can take her paper matrix to the local Kinko’s business center (a company which is apparently operating nation-wide throughout the United States) and rent the use of a computer at the rate of approximately $.20 per minute or $12 an hour. Other vendors of secretarial support services offer similar pricing. Diskettes are available for sale at prices ranging from as little as $.50 to $1 or so each. This is a far cry from purchase of a computer system in the thousands of dollars and should prove little hardship to practitioners who are not yet ready to enter the computer era.
Accordingly, and upon consideration, of the foregoing, it is
ORDERED the motion for leave to file paper copy matrix and waive the requirements of Local Rule of Bankruptcy Rule Procedure 107(C) in the above-styled cause is denied.
/s/A. Jay Cristol A. Jay Cristol Chief Judge, United States Bankruptcy Court
/s/Robert A. Mark Robert A. Mark Judge, United States Bankruptcy Court
/s/Paul G. Hyman, Jr. Paul G. Hyman, Jr. Judge, United States Bankruptcy Court
/s/Raymond B. Ray Raymond B. Ray Judge, United States Bankruptcy Court
/s/Steven H. Friedman Steven H. Friedman Judge, United States Bankruptcy Court | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492473/ | MEMORANDUM OPINION
DOUGLAS O. TICE, Jr., Bankruptcy Judge.
Hearing was held on December 8,1994, on the confirmation of debtors’ First Amended Plan of Reorganization dated October 18, 1994, and on creditor First Union National Bank of Virginia’s Amended Plan of Reorganization dated November 10, 1994. Each party sought confirmation of their own plan and denial of confirmation of the other. The court took the matter under advisement.
After hearing the respective arguments of counsel and after reviewing proposed findings of fact and conclusions of law submitted by both counsel, the court finds that the debtors’ plan complies with the applicable provisions of the bankruptcy code and is preferable to First Union’s plan. Accordingly, the court will enter an order confirming debtors’ plan.
Findings of Fact
Debtors Robert H. and Leona M. Sehwarz-mann own and operate A-Abart Enterprises, Inc, which is also known as A & R Tool Rental. A-Abart services the construction industry with rental tools and equipment and operates out of several different locations on real property owned by debtors. The property includes: (1) the Merrifield property located at 8231-35 Lee Highway, Merrifield, Virginia; (2) the Chantilly property located at 43925 Lee Jackson Highway, Chantilly, Virginia; (3) the Manassas property located at 9029 Euclid Avenue, Manassas, Virginia; and, (4) the Gallows Road property located at 2754 Gallows Road, Vienna, Virginia. First Union holds a first deed of trust against all the property which secures debtors’ indebtedness to First Union as a successor in interest to Dominion Bank in the amount of approximately $4,230,000.00. The debt is also secured by a junior lien on debtors’ residence, a junior lien on the assets of A-Abart, and municipal bonds.
*921First Union’s promissory note dated January 4, 1990, is in the amount of $4,700,000.00 and is secured by first deeds of trust against the Merrifield, Gallows Road, and Manassas properties. The note was payable by a two million dollar curtailment prior to January 4, 1991, and thereafter by annual principal payments of $125,000.00 each. The two million dollar curtailment was not made when due; accordingly, the parties amended the note and executed an Allonge to Deed of Trust Notes dated June 28, 1991, which required either a one million dollar curtailment by January 2, 1992, and a $1,125,000.00 curtailment by June 30, 1992, or a $2,250,000.00 curtailment no later than June 30, 1992. At this time, First Union required as additional security a junior security interest in the assets of A-Abart, a second deed of trust on debtors’ residence, and a first deed of trust on the Chantilly property.
After the principal curtailments required by the Allonge to Deed of Trust Note were not made, debtors and First Union entered into a Forbearance Agreement where First Union agreed to forbear from taMng legal action to collect the debt until May 1, 1993.
First Union scheduled a foreclosure sale for the Gallows Road property in late December 1993. Debtors filed a voluntary Chapter 11 petition on December 28, 1993, which stayed the foreclosure.
Debtors have made monthly postpetition interest payments to First Union at the contract rate.
First' Union and debtors each submitted disclosure statements and plans of reorganization. This court approved both disclosure statements. First Union voted against debtors’ plan and voted in favor of its own plan. No other creditors voted in favor of First Union’s plan. All other classes of creditors accepted debtors’ plan. No creditor expressed a preference for First Union’s plan; however, four creditors expressed a preference for debtors’ plan.
As of December 7,1994, the balance due to First Union was $4,639,000.00. Based on the testimonies at the December 8, 1994, hearing, the value of the collateral is as follows:1
a. Merrifield $2,100,000.00
b. Gallows Road 927,000.00
e.Chantilly 900,000.00
d. Manassas 936,000.00
e. Debtors’ residence (net of 1st trust) 648,000.00
f. Municipal Bonds 82,000.00
g. A-Abart equipment 1,600,000.002
(net of purchase
money financing)
TOTAL $7,093,000.00
At the confirmation hearing debtors and First Union presented cash flow projections showing implementation of their respective plans. Debtors’ cash flow projection contemplates the sale of their Gallows Road property because there would be no adverse tax consequences to this sale. Payment of the balance of First Union’s claim would be accomplished through refinancing. First Union’s cash flow projection provides for the sale of the Gallows Road, Manassas, Chantilly, and Merrifield properties. The projection does not include possible tax consequences to any sale. Debtors’ accountant testified that debtors would incur $600,000.00 in capital gains tax if the Merrifield property were to be sold as required by First Union’s plan.
Respective Plans
Debtors
Debtors’ plan divides creditors into four classes:
1. Class One consists of First Union’s claim which debtors propose to pay in full by continuing monthly interest payments at the contract rate, by making a one *922million dollar curtailment3 within one year from the effective date of the plan upon which First Union must release its lien on A-Abart’s equipment, and by paying the balance of the First Union claim within two years of the effective date. If debtors fail to make any of these payments, First Union may resort to any of its remedies under the loan documents.
2. Class Two consists of seven other secured claimants who are to be paid in full in accordance with terms of existing loan documents but who must obtain Bankruptcy Court approval for any lien enforcement actions; in addition, Child Development Center is required to accept continued amortization at the rate set forth in debtors cash flow projection even though its loan matured preconfirmation.
3. Class Three consists of one general unsecured claimant with an insider claim of $14,000.00.
4. Class Four consists of the contingent claims of A-Abart’s creditors which debtors have personally guaranteed. Such claimants must seek bankruptcy court approval before undertaking any collection activity against debtors.
First Union
First Union’s plan divides creditors into twelve classes.
1. Class One consists of allowed secured real property tax claims
2. Class Two consists of the allowed secured claim of First Union. The plan provides for payment of the claim by:
a. Liquidation of the municipal bonds and application of proceeds against claim.
b. Payment of $50,000 for partial payment of attorneys’ fees, appraisal fees, and environmental report fees pursuant to the forbearance agreement.
c. Payment of interest on the first day of each month at the contract rate.
d. Payment of all rents payable to debtors on the Merrifield property, the Gallows Road property, the Chantilly property, and the Manassas property.
e. Sale of the real property encumbered by First Union’s deeds of trust and payment of net proceeds to First Union up to the full amount of First Union’s claim.
f. Extension of the maturity date of First Union’s claim to two years following the effective date of the plan
g. Forbearance by First Union from enforcement action as long as there is no default.
8. Consent to the appointment of a receiver at First Union’s discretion.
3. Classes Three through Nine consist of the other secured claims. Each of these classes is allegedly unimpaired because each is to be paid in full in accordance with the terms and conditions of the applicable loan documents or such other terms and conditions as may be agreed to between debtors and claimant. Each secured claimant retains its security interest and lien. If debtors default, each claimant may enforce its rights against the collateral.
4. Class Ten consists of an insider claim of $14,000.00 which will be paid in full within two years following the effective date of the plan.
5. Class Eleven consists of the holders of guarantee claims against debtors. Under the plan, debtors’ personal guaranties would remain in full force and effect.
6. Class Twelve consists of debtors.
First Union amended its plan at the confirmation hearing to permit the filing of objections to First Union’s claim within thirty days after the effective date. The plain also provides for the appointment of First Union’s counsel, David S. Musgrave, as attorney-in-fact for the purpose of taking any action necessary to sell debtors’ properties. The plan also requires a 20-day notice of any sale. The plan provides deadlines for the sale of each property: the Merrifield property, the Gallows Road Property, the Manassas property, and the Chantilly property must be *923sold within twelve months following the effective date, and the residence must be sold within eighteen months after the effective date. If any of the properties are not sold within the specified times, First Union may foreclose its deed of trust on the unsold property. The sale of the Chantilly property would be subject to a triple net lease with A-Abart for at least $8,000.00 per month for a term of not more than five years.
Position of Parties
Debtors
Debtors argue that First Union’s plan would deprive A-Abart of the premises from which it conducts most of its business because the property upon which its operations are located would have to be sold under the plan. Debtors allege that this would prevent A-Abart from meeting its ongoing expenses, deprive debtors of income, and unnecessarily generate large capital gains tax liabilities for debtors which could only be paid by further liquidation of property, resulting in additional taxes and sales. Debtors claim that this extensive liquidation is not necessary for debtors’ effective and feasible reorganization and is in violation of 11 U.S.C. § 1129(a)(ll).
First Union
First Union argues that debtors’ plan fails to satisfy 11 U.S.C. § 1129(a)(10) because debtors do not have one impaired class accepting their plan. The bank alleges that debtors have artificially impaired Classes Two and Four by requiring that they seek this court’s approval before commencing enforcement action in the event of a default.
Furthermore, First Union argues that the plan fails to satisfy 11 U.S.C. § 1129(a)(1) because the requirement of court approval in the event of default is in essence a continuation of the automatic stay after confirmation. The bank claims that pursuant to 11 U.S.C. § 1141(b), confirmation of a plan vests all property of the estate in the debtor and that under § 362(c)(1), the automatic stay is terminated. Thus, First Union concludes that debtors’ plan does not comply with the applicable provisions of the bankruptcy code.
First Union also argues that the plan violates 11 U.S.C. § 1129(a)(ll) because it is not feasible. The bank states that debtors had agreed to sell a portion of their property and consolidate A-Abart’s operations in 1990 to meet the first curtailment and that they had been unable to do so. In addition, First Union alleges that debtors have been unable to refinance their debt in the past and have failed to demonstrate how they will be able to refinance under this plan.
Conclusions of Law
Pursuant to 11 U.S.C. § 1129(a), the court may confirm a proposed Chapter 11 plan only if all of the elements of 11 U.S.C. § 1129 are met. See 11 U.S.C. § 1129(a). One such criterion found in § 1129(a)(8) requires each class to accept the plan or be unimpaired under the plan. However, under 11 U.S.C. § 1129(a)(10) and 1129(b), a bankruptcy court can confirm a plan of reorganization over the objection of an impaired class if any impaired class accepts and if the plan is fair and equitable.4 First Union argues that debtors’ plan fails both requirements because no impaired class has accepted the plan and because the plan is not feasible and is, therefore, not fair.
Impairment
Pursuant to 11 U.S.C. § 1124, any alteration of the legal, equitable, or contractual prepetition rights of a holder of a claim constitutes impairment. See In re Barring-ton Oaks Gen. Partnership, 15 B.R. 952, 959-63 (Bankr.D.Utah 1981). However, just as a plan may not create an artificial classification, see Travelers Ins. Co. v. Bryson Properties, XVIII (In re Bryson Properties, XVIII), *924961 F.2d 496, 502 (4th Cir.), cert. denied, 113 S.Ct. 191 (1992), a plan may not artificially impair a class for the sole purpose of achieving a cram-down. See Windsor on the River Assocs. Ltd. v. Balcor Real Estate Fin. (In re Windsor on the River Associates, Ltd.), 7 F.3d 127, 131-32 (8th Cir.1993).
Debtors argue that Class Two is impaired for two reasons: creditors must obtain Bankruptcy Court approval for any lien enforcement action, and one claimant, Child Development, must accept continued amortization of its loan at the rate set forth in debtors’ cash flow projection even though its loan matured preconfirmation.
Debtors have given absolutely no reason for requiring creditors to obtain court approval before lien enforcement. In addition, First Union is not required to obtain court approval prior to foreclosure if debtors default under the plan. Therefore, the court finds that this requirement merely attempts to artificially impair the class so as to insure acceptance by at least one impaired class. See In re North Wash. Cent. Ltd. Partnership, 165 B.R. 805, 810 (Bankr.D.Md.1994). This artificial impairment “so distorts the meaning and purpose of Section 1129(a)(10) that to permit it would reduce (a)(10) to a nullity.” In re Windsor on the River Assocs., Ltd., 7 F.3d at 131. Accordingly, the court will strike the approval requirement from debtors’ plan.5
However, this finding is not necessarily fatal to confirmation of debtors’ plan because debtors also allege that Child Development is impaired under its plan. Debtor Robert Schwarzmann testified at the confirmation hearing that Child Development’s loan had matured preeonfirmation. The bank did not rebut this testimony. Under debtors’ plan Child Development must accept loan amortization at the rate set forth in the cash flow projections. This alteration of Child Development’s legal and contractual prepetition right constitutes impairment under 11 U.S.C. § 1124. Child Development, an impaired claimant, voted in favor of debtors’ plan. Accordingly, an impaired class has accepted debtors’ plan, and the plan can be crammed down and confirmed pursuant to § 1129(a)(10) if it meets the requirements of § 1129(b).
Fair and Equitable
Under the “fair and equitable” requirements of § 1129(b), the holder of a secured claim must retain the liens securing its claim, see § 1129(b)(2)(A)(i)(I), and must receive “deferred cash payments totaling at least the allowed amount of such claim, of a value, as of the effective date of the plan, of at least the value of such holder’s interest in the estate’s interest in such property.” 11 U.S.C. § 1129(b)(2)(A)(i)(II); See also In re Bryson Properties XVIII, 961 F.2d at 500.
First Union will at all times retain liens securing its claim to the extent of the allowed amount of its claim. The interest payable6 to the bank has increased during the pen-dency of the Chapter 11 case and is fair. In addition, debtors’ plan provides for full payment of First Union’s claim within two years, a mere six months longer than payment under First Union’s plan. Based on the testimony at the hearing, this sales period is reasonable. First Union’s claim will be paid in full by deferred cash payments totalling at least the allowed amount of First Union’s claim.
With a debt-to-value ratio of approximately 4.7/7.1, First Union has an equity cushion over 50 percent. Even after the one million dollar curtailment is made and the lien on A-Abart’s equipment is released, the debt-to-equity ratio will not be substantially changed. In addition, the value of First Union’s security is unlikely to diminish. Finally, because debtors’ plan allows First Union to exercise its remedies, including foreclosure, under the loan documents, the bank is protected in the event of plan failure.
*925Experts testified as to the feasibility of both plans. Based on the testimony, there is no reason for the court to find that payment of First Union’s claim within two years, a mere six months longer than payment under First Union’s plan, is unfeasible. Furthermore, other creditors believe debtors’ plan is feasible. The court may consider creditors’ preferences without regard to whether or not the creditors are impaired. See In re Rolling Green Country Club, 26 B.R. 729, 736 (Bankr.D.Minn.1982). Six creditors have expressed a preference for debtors’ plan. First Union is the only creditor to vote for its own plan.
The court also notes policy reasons for approving debtors’ plan instead of the bank’s competing plan. The philosophy of the bankruptcy code is to preserve economic units and, therefore, reorganization is preferable to liquidation. See In re Oaks Partners Ltd., 141 B.R. 453 (Bankr.N.D.Ga.1992). The bank’s plan requires liquidation of debtors’ property which could result in the liquidation of debtors’ business and further liquidation on the part of debtors. Also, debtors’ accountant testified that debtors would incur $600,000.00 in capital gains tax if the Merrifield property were to be sold as required by the First Union plan, which taxes could only be paid by further liquidation of property resulting in additional taxes and sales.
Because debtors’ plan has been accepted by an impaired class and “does not discriminate unfairly, and is fair and equitable[,]” the court will enter an order confirming debtors’ plan submitted on October 18, 1994, as modified by this memorandum opinion. Under these modifications, Class Two (A) consists of the secured claimants who are to be paid in full in accordance with terms of existing loan documents and whose claims have not matured. The requirement of court approval prior to lien enforcement is stricken from debtors’ plan; thus, Classes Two (A) and Four are unimpaired. Class Two (B) consists of the secured claim of Child Development, an impaired claimant, which is required to accept continued amortization at the rate set forth in debtors’ cash flow projection even though its loan matured preconfirmation. Because these modifications are in response “to and a logical outgrowth of issues raised by the creditor” and relate to an issue which notice and opportunity for a hearing was given, this court may consider them as part of the plan. See Crestar Bank v. Walker (In re Walker), 165 B.R. 994, 1000 (E.D.Va.1994).
The court directs debtors’ counsel to submit a confirmation order consistent with this opinion. Upon receipt of an appropriate order, the court will enter the order confirming debtors’ plan as modified and denying confirmation of First Union’s plan.
. At the hearing, debtors accepted, for purposes of plan confirmation, First Union’s appraised values of the real property securing the debt.
. First Union’s appraisal of A-Abart’s equipment was not offered into evidence. Debtor Robert Schwarzmann opined that the value of the equipment was between four and five million dollars. Debtor also proffered that First Union’s appraisal listed the property between two and three million dollars. Accordingly, for the purpose of this confirmation determination, the court finds that the value of the equipment is at least $2,500,-000.00. The equipment is subject to senior liens in the amount of $900,000.00. Accordingly, the value of First Union’s security interest is $1,600,-000.00. The court notes that First Union has not permitted A-Abart to invest the proceeds of equipment and inventory sold to third parties, and thus A-Abart has not been able to replace worn-out equipment.
. Debtors stated that they intended to make the one million dollar curtail by selling their Gallows Road property and by refinancing the balance.
. Pursuant to § 1129(a)(10), a court may approve a plan ‘‘[i]f a class of claims is impaired under the plan, at least one class of claims that is impaired under the plan has accepted the plan, determined without including any acceptance of the plan by any insider.” 11 U.S.C. § 1129(a)(10).
Section 1129(b)(1) reads in relevant part "... if all of the applicable requirements of subsection (a) of this section other than paragraph (8) [paragraph requiring each class to accept or be unimpaired] are met with respect to a plan, the court ... shall confirm the plan notwithstanding the requirements of such paragraph if the plan does not discriminate unfairly, and is fair and equitable....” 11 U.S.C. § 1129(b)(1).
. Since the court has removed the approval requirement from debtors' modified plan, I do not need to address First Union’s argument that this provision violates provisions of the bankruptcy code.
. The rate is a floating commercial rate plus 1 percent. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492474/ | ORDER GRANTING RELIEF FROM STAY
MARY D. SCOTT, Bankruptcy Judge.
THIS CAUSE is before the Court upon the Motion for Relief from Stay filed by Mary Marguerite Lineberger on October 16, 1996, by which this creditor seeks relief from the automatic stay in order to pursue her state court remedies. The debtor responded by her attorney on October 24,1996, and also responded by filing, pro se,1 an “Amended Answer to Motion for Relief from Stay,” on November 6,1996, and a “Request to Add to the Record,” on November 8, 1996. The Chapter 7 trustee also responded to the motion, on November 26, 1996, stating that since the debtor claimed the subject property as exempt, there was nothing for him to administer such that he did not oppose the motion.
Hearing on this matter was held2 on December 3, 1996, at which time the debtor, counsel for the creditor, and the Chapter 7 trustee appeared. Again, the trustee indicated that as administrator of the bankruptcy estate, that he had no interest in the property. The debtor asserted that she wished to prove to the Court that the creditor is not the owner of the subject property. Thus, the debtor seeks to litigate the creditor’s interest in the property.
When a debtor files a Chapter 7 bankruptcy case, all property and interest in property of the debtor becomes property of the estate, 11 U.S.C. § 541, subject to administration by the trustee. When a debtor exempts property pursuant to section 522, however, that property is removed from the estate and vests in the debtor. 11 U.S.C. § 522(b); In re Hoffmeister, 191 B.R. 875 (D.Kan.1996). Of course, this does not mean that the property is relieved from pre-bank-ruptcy liens or pre-bankruptcy orders issued by other courts. See In re Lillard, 38 B.R. 433, 438 (Bankr.W.D.Ark.1984). It has long been held that once the property is removed from the estate, and the trustee has declared that the estate has no interest in that property, there is no cause for the Court to exercise jurisdiction over that property or resolve disputes regarding that property. See Zapalac v. White, 9 F.Supp. 419 (S.D.Tex.1934). Since the trustee has no interest in the prop*38erty, the asset will not be administered within the context of the bankruptcy case. Since the trustee has no cause to administer the asset, any disputes regarding that property have no impact upon the bankruptcy ease. Rather, the debtor should present all of her arguments within the context of the pending state court litigation. The state court is singularly able and prepared to resolve lien and ownership disputes regarding the property.
In so ruling, there is no deprivation, as asserted by the debtor, of any right to due process. There is no specific right to litigate state court matters before the Bankruptcy Court. Rather, the debtor is afforded all of her rights to due process in state court. She may assert defenses, introduce evidence in support of her ease, or, if the matter has proceeded to judgment, appeal the ruling of the state trial court. This Court will not determine issues already decided by another Court or make determinations over issues and property over which it has no jurisdiction.
ORDERED: Motion for Relief from Stay filed by Mary Marguerite Lineberger on October 16,1996, is GRANTED.
IT IS SO ORDERED.
. The debtor’s attorney was subsequently permitted to withdraw.
. The Court granted relief from stay in open court at the conclusion of the hearing, and, as customary, directed the creditor's counsel to prepare the Order. Although the Order in fact precisely and properly reiterates the Court's oral ruling, the Court prepares this Order. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492475/ | MEMORANDUM
TIMOTHY J. MAHONEY, Chief Judge.
This memorandum contains findings of fact and conclusions of law required by Fed. Bankr.R. 7052 and Fed.R.Civ.P. 52. This is a core proceeding as defined by 28 U.S.C. § 157(b)(2)(B).
Facts
In lieu of a hearing, the parties have filed a stipulation of facts and submitted memoran-da of points and authorities.
The debtor, Best Refrigerated Express, Inc., filed its voluntary Chapter 11 petition on February 7, 1989, and a Trustee was appointed on February 28, 1990. The debt- or’s 1987 Annual Federal Unemployment (FUTA) Tax Return (Form 940) was required to be filed by January 31, 1988. The debtor filed its Form 940 with the Internal Revenue Service (IRS) on March 31, 1989, and contemporaneously paid the IRS $22,-002.47 and received credit for previous payments allegedly made to state unemployment funds.
On August 1, 1989, the date established as the bar date for claims, the IRS filed claim no. 112 in the amount of $551.07. The claim was for interest only on the late payment of the 1987 FUTA taxes.
On February 14, 1995, the IRS filed claim no. 204, revising the amount of its claim against the debtor for 1987 FUTA taxes from $551.07 to $94,674.12. The IRS disputed the fact that the debtor contributed to various state unemployment funds. This claim con*46sisted of $85,056.95 of unpaid FUTA tax for 1987 and $9,617.17 in pre-petition interest on the unpaid tax.
The Trustee filed a motion on July 3,1995, seeking, among other things, the disallowance of Claim No. 204.
Subsequent to filing the motion, the Trustee was able to document to the satisfaction of the IRS that the debtor had made payments to the unemployment funds of six of the states in which it did business. The total amount of tax paid was $41,210.09, and the IRS has agreed to reduce its claim by that amount and to recalculate pre-petition interest on the lower tax figure. The Trustee did not, however, agree to the allowance of the revised claim of the IRS.
The remaining states in question only keep records of the payment of such taxes for three to five years, and therefore have since purged their records for 1987. Accordingly, the taxing authorities for those states were unable to provide evidence as to whether or not the debtor had paid unemployment taxes for 1987.
Decision
The trustee’s motion for disallowance of the IRS claim (Claim No. 204) is sustained.
Discussion
The question presented is whether a creditor (specifically the IRS) may file, and have allowed, an amendment to a claim, more than five years after the claims bar date, which increases the amount of the claim by almost ten times the original amount. The determination of whether to permit an amendment to a timely filed proof of claim rests within the discretion of the court. United States v. International Horizons, Inc. (In re International Horizons, Inc.), 751 F.2d 1213 (11th Cir.1985); United States v. Norris Grain Co. (In re Norris Grain Co.), 131 B.R. 747 (M.D.Fla.1990), aff'd 969 F.2d 1047 (11th Cir.1992); In re AM Int'l, Inc., 67 B.R. 79 (N.D.Ill.1986); In re First Truck Lines, Inc., 141 B.R. 621 (Bankr.S.D.Ohio 1992), aff'd 190 B.R. 827 (S.D.Ohio 1993).
Initially, there is a question as to whether Claim No. 204 is an amendment to a timely filed claim, or is a new claim in and of itself. Post bar date amendments must be scrutinized to assure that there is no attempt to file a new claim under the guise of an amendment. International Horizons, 751 F.2d at 1216; In re Norris Grain Co., 131 B.R. at 750; In re Fischer, 109 B.R. 384, 387 (Bankr.E.D.Mo.1989), aff'd 131 B.R. 137 (E.D.Mo.1990). “[I]n a bankruptcy case, amendment to a claim is freely 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.” International Horizons, 751 F.2d at 1216. See, First Truck Lines, 141 B.R. at 629.
Bankruptcy Rule' 7015 incorporates Federal Rule 15(a) which provides that an amended claim relates back to the date of the original pleading if the substance of the amendment concerns the same transaction, conduct or occurrence in the original pleading. Fed.R.C.V.P. 15(a). See, In re Best Refrigerated Express, Inc., 192 B.R. 503, 506 (Bankr.D.Neb.1996). At first glance, it would appear that the taxes included in Claim No. 204 and the interest included in Claim No. 112 are not sufficiently related to permit the amendment to relate back. See, Norris Grain Co., 131 B.R. at 750 (“The nature of the timely claim was for unpaid interest on earlier income taxes paid, and was in no material way related to the post-bar date claim for unpaid income taxes ... [TJhese are two different types of tax, covered in different sections of the Internal Revenue Code ... The only factor common to both claims is that both relate to the same tax year. However, the fact that both claims are from the same year does not suffice to permit amendment, where the post-bar date claim for income tax does not relate to the transaction or occurrence set forth in the original claim for interest due.”) This issue does not need to be decided, however, because even if the amendment does relate back to the original claim, several equitable considerations require that Claim No. 204 be disallowed. See, In re R.G. Fisher Constructors, 116 B.R. 726 (Bankr.E.D.Cal.1990).
In R.G. Fisher, the IRS originally filed a timely claim in the amount of $1,250.13 for unpaid penalty arising from employer taxes reported. Four and one-half years after the bar date, the IRS filed an amendment to its proof of claim for $206,362.40 for FUTA tax*47es. The bankruptcy court, listing a number of factors, found that the equities present in the case required a determination that the amended claim filed by the IRS should not be allowed. Among the reasons listed were:
1. Nearly four and one-half years elapsed between the claims bar date and the filing of the latter claim.
2. The filing of the initial claim indicates that the matter of the debtor’s bankruptcy filing was timely known to IRS and that a review of the debtor’s tax liability was undertaken.
3. IRS has neither offered nor suggested any mitigating reason for its tardy filing of a claim for Form 940 taxes; it relies solely on an “oops” defense.
4. The claims file alone in this case covers thirteen volumes, and the trustee has already devoted nearly two and a half years to litigating various matters having to do with the filed claims.
5. Absent the filing of the subject claim, the trustee was in a position to proceed with distribution of nearly $390,000.00.
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8. Permitting an amendment so long after the bar date without a showing of good cause undermines the clear requirement of Bankruptcy Rule 3002(c) that claims be promptly filed and interferes with the need for the finality which a ... trustee must have in order to move forward with the administration of a case.
9. The creditor register on file with the clerk indicates that approximately 150 creditors did file timely claims.
Id. at 727-28.
In this case, over five years has elapsed between the claims bar date and the filing of the amended claim. Although the length of time between the filings could be excused in some instances, see, e.g., Best Refrigerated, 192 B.R. at 507, no reason or excuse has been provided that justifies the delay in this case.
The IRS stated in its brief that the debtor had failed to provide it with sufficient information with which to substantiate the debt- or’s claim that it had paid the unemployment taxes questioned. The fact that the debtor’s return was somehow deficient or lacking some form of information necessary to the IRS was certainly known by employees of the IRS years ago. However, there is no evidence that the IRS sought or requested or demanded any further information from the debtor regarding its 1987 FUTA taxes until it filed its amended claim over five years after the bar date. There is no justification or excuse for its failure to act in a more timely fashion. See, In re Stavriotis, 977 F.2d 1202, 1206-07 (7th Cir.1992) (“If a creditor knows that after analyzing information which is wholly within its own control it may later seek to amend its claim drastically, it must not keep that knowledge secret. If it does so, and later surprises the debtor or other creditors, it should not claim surprise if the bankruptcy court elects to deny the amendment.”)
In addition, the trustee has spent a number of years litigating matters having to do with timely filed claims. Although there is approximately $400,000 worth of assets remaining in the bankruptcy estate, the liquidation plan, which was confirmed on June 1, 1995, will pay general unsecured creditors only a small dividend. Allowance of this claim would deprive these creditors who timely filed claims.
The purpose of permitting amendments to pleadings is to “enable a party to assert matters that were overlooked or were unknown to him at the time he interposed his original complaint or answer.” Wright, Miller and Kane, Federal Practice and Procedure, § 1473 (1971). Often a party will amend a complaint in response to new information obtained in discovery, to correct insufficient pleadings, or for numerous other valid reasons. A rule which permits amendments to claims in such situations has the secondary effect of increasing a party’s time for filing a claim. However, bankruptcy courts are not required to permit late amendments which are primarily used as a back-door route to secure bar-date extensions. Were the rule otherwise, a party could effectively help itself to automatic extensions of the bar date without seeking leave of the court.
If the government had an unqualified right after the bar date to amend proofs of *48claim dramatically for any reason or for no reason at all, the bar date in bankruptcy would be meaningless. Under that view, every creditor could file grossly misleading proofs of claim and later amend those claims as of right at their leisure, whenever they decided to calculate the extent of the actual debt claimed to be owed.
Stavriotis, 977 F.2d at 1206.
The IRS maintains that the debtor is obligated to maintain its own tax records, and its “failure to maintain proper tax records does not excuse it from paying properly assessed federal taxes.” IRS Brief at 4. The IRS cites Treasury Regulation on Employment Tax 26 C.F.R. § 31.6001-l(e) (1987), which provides in part that “[a]ll records required by regulations in this part shall be kept, by the person required to keep them, at one or more convenient and safe locations accessible to internal revenue officers, and shall at all time be available for inspection by such officers.” However, the cited regulation goes on to provide that “[e]very person required by the regulations in this part to keep records in respect of a tax (whether or not such person incurs liability for such tax) shall maintain such records for at least four years after the due date of such tax for the return period to which the records relate, or the date such tax is paid, whichever is the later.” 26 C.F.R. § 31.6001-l(e)(2). The debtor filed its 1987 Form 940 on March 11, 1989, contemporaneously paid the IRS $22,002.47, and claimed credit for previous payments made to state unemployment funds. Thus, the debtor was required by Treasury regulations to maintain its records regarding its contributions to the state unemployment funds in question only until March 10,1993, almost two years before the IRS filed Claim No. 204.
Had the IRS acted in a more timely fashion, the information it now seeks to document the debtor’s contributions would have been readily available. The fact that the information is now unavailable cannot be attributed to some fault of the debtor, but rather to the tardiness of the IRS.1
The facts of this case are distinguishable from an opinion previously entered in this case. In Best Refrigerated Express, 192 B.R. at 503, the State of Nebraska sought to amend its proof of claim for post-petition fuel taxes five months after the bar date for filing a proof of claim for administrate priority expense claims and five years after the original claim was filed. The amended claim was allowed because the enlargement of the tax liability came from a correction in the computation of the amount of the fuel tax, not an alteration of the substance of the liability. Id. at 507. In addition, the error in the computations on the original proof of claim was not discovered until the trustee filed a motion to disallow the claim, and the trustee’s motion to disallow the particular claim was not made until five years after the original claim was filed. Id.
In the matter at bar, the IRS’s amendment was not due to a computation error. In addition, the original claim in the amount of $551.07 for interest was insufficient to put the trustee, the court and the other parties on notice of a claim for over $43,000 for unpaid taxes and interest. See, Stavriotis, 977 F.2d at 1206; International Horizons, 751 F.2d at 1217; Norris Grain Co., 131 B.R. at 750. See, also, AM International, 67 B.R. at 82 (“Ordinarily, to be within the scope of a permissible amendment, the second claim should not only be of the same nature as the first but also reasonably within the amount to which the first claim provided notice.”)
This case is also distinguishable from In re Papp Int'l, Inc., 189 B.R. 939 (Bankr.D.Neb.1995). In that case, the IRS was permitted to file a claim twenty-one months after the bar date. However, the claim filed was an original claim, and it was determined that the failure to file a timely proof of claim was attributable to “excusable neglect” under Bankruptcy Rule 9006(b). While “the hurdles to overcome in obtaining allowance of an amendment to a timely proof of claim after a claims bar date should not be higher than the hurdles determined by the Supreme Court for obtaining allowance of an untimely origi*49nal proof of claim,” Best Refrigerated Express, 192 B.R. at 507, there is no evidence that the IRS’s tardiness in filing an amendment was attributable to factors beyond the reasonable control of the IRS.
Accordingly, the Trustee’s motion to disallow Claim No. 204 is sustained.
Separate journal entry to be filed.
. Although only of a circumstantial nature, it is interesting to note that all of the states that still had their records certified that the debtor had, in fact, paid the unemployment taxes in question. Furthermore, none of the states filed a proof of claim for unpaid unemployment taxes in 1987. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492476/ | MEMORANDUM DECISION AND FINAL ORDER
GREGG ZIVE, Bankruptcy Judge.
This matter came on regularly for hearing before Gregg W. Zive, U.S. Bankruptcy Judge, upon an objection by Guy and Marlene Priest (“Priest”) to the United States of America and Internal Revenue Service’s (“IRS”) proof of claim.
Statement of the Case
This is a contested matter consisting of Priests’ objection to the proof of claim filed by the IRS for tax penalties in the amount of $21,568.10. The penalties were assessed under 26 U.S.C. § 6651(a) for failure to timely file income tax returns for 1991 and failure to pay the tax due in 1991, and, under § 6654(a), for failure to timely pay estimated income tax for 1991. The tax liability arose from an early pension plan distribution which Priest received in connection with the sale of the Hawaii drywall business, Guy’s Superior Interior, Inc. In order to determine Priest’s tax liability for the assessed penalties, the Court must decide who has the burden of proof.
The Court, after reviewing and considering the pleadings, the oral and documentary evidence, the demeanor and credibility of the witnesses, argument of counsel and the parties written authorities, hereby makes its written findings of fact and conclusions of law as follows:
Findings of Fact
1. Priest sold the Hawaii business, Guy’s Superior Interior, Inc., in 1990.
2. Priest received the proceeds of the sale from the business in 1990 and reported capital gains of $579,219 on a joint 1990 Form 1040 individual income tax return.
3. Priest paid $179,858 in taxes for 1990.
4. In November 1990, Priest applied for final pension distribution in connection with the sale of their Hawaii business. Priest elected an early distribution of the interest in the Guy’s Superior Interior, Inc. Retirement Plan (“Pension Plan”).
5. Priest received a total distribution of $171,315 in .1991. Two checks made payable to Guy’s Superior Interior, Inc., were endorsed to Guy Priest. A deposit of $157,-482.36 to the Priest bank account was made on February 25, 1991 (exhibit A). This deposit represents the first check. A check in the amount of $13,322.39 dated March 7,1991 was made payable to Guy’s Superior Interior, Inc. and endorsed by Guy Priest (exhibit B).
*556. Priests’ 1990 tax return was prepared by Alton Miyashiro, CPA, (“Miyashiro”) of Nishihama and Kishida, CPA’s, Inc., Honolulu, Hawaii. The 1990 return reported an overpayment of $8,736 to be applied toward the 1991 estimated tax.
7. The Priests did not receive advice from Miyashiro regarding the Pension Plan, the tax consequences of an early distribution or consult Miyashiro as to whether that income received from the 1991 distribution was included in the 1990 return. Guy Priest testified that he did not rely upon any advice from his accountant because he did not receive any advice.
8. In May or June of 1990, Priest moved from Hawaii to Las Vegas.
9. From April 1990 to May 7, 1991, there were no communications between Priest and Miyashiro.
10. On May 7, 1991, Miyashiro sent Priest a letter transmitting the 1990 federal and state income tax returns (“Miyashiro letter”). The Miyashiro letter stated:
“[w]e have also prepared 1991 Federal estimated vouchers based upon your estimate of income. Your estimated payments do not represent a ‘safe estimate’ and, therefore, you may be subject to an underpayment penalty ... [if] your 1991 tax liability exceeds the total of your quarterly payments.
We recommend that you consult with us if your tax situation changes in 1991 so we may revise your estimated payments.
We are aware of the distribution from the retirement plan of approximately $156,000. This distribution may also be subject to an additional 10% Federal tax.” (Exhibit C).
11. The Miyashiro letter had a two-page form entitled “Instructions for Filing Attached Income Tax Returns” which was enclosed (“instructions”). The instructions stated that there was an overpayment of $11,327, of which $2,591 was applied to a 1990 estimated tax penalty and $8,736 was applied toward 1991 estimated taxes. The 1991 taxes were estimated to be $54,000 (exhibit E).
12. Guy Priest testified that his understanding of the language in the Miyashiro letter was that the $156,000 was prepaid in 1990, but that the Priests were to be penalized another 10%.
13. On or about May 10,1991, the Priests signed their 1990 form 1040 return and mailed it to the IRS; this was subsequent to the receipt of the Pension Plan funds and the Miyashiro letter explaining the possibility an additional 10% imposition of federal income tax from the Pension Plan distribution.
14. Priests’ 1991 return had to be filed on or before April 15,1992. Priest and the IRS stipulated that Priest did not file a return on or before the due date and did not request an extension of time to file.
15. On or about April 12, 1993, the IRS sent Priest a notice regarding their failure to file a 1991 return. The IRS sent additional correspondence regarding this matter on or about June 7, 1993; July 19, 1993; and July 26,1993 (exhibits G, H, I, J).
16. Priest filed the 1991 tax return on September 30, 1993 (exhibit M). The return reported a pension distribution of $171,315. The tax due was reported as $53,501 plus an estimated tax penalty of $2,581. Other than the $8,736 overpayment for 1990 credited to 1991 estimated taxes, Priest has not made any tax, interest or penalty payments on the 1991 taxes.
17. The 1991 tax was assessed on November 8, 1993, along with interest and penalties accrued to that date. Penalties of $11,457 were assessed pursuant to 26 U.S.C. § 6651 for failure to timely file a tax return for 1991; $7,541 was assessed pursuant to 26 U.S.C. § 6651 for failure to pay the tax due for 1991; $2,581 was assessed pursuant to 26 U.S.C. § 6654 for failure to pay estimated income tax for 1991.
18. The Debtors filed their Chapter 13 petition on March 4,1994.
19. The IRS filed its proof of claim on April 20,1994 (exhibit N).
20. In addition to the penalty, the proof of claim lists undisputed priority claims for 1991 income tax of $50,920 and interest thereon of $7,440.62.
*5621. To the extent any of the foregoing Findings of Fact should be considered to be conclusions of law, they should be construed as such.
Conclusions of Law
Outside of a bankruptcy forum, the ultimate burden of proving the entitlement to a deduction lies with the taxpayer. United States v. General Dynamics Corp., 481 U.S. 239, 245, 107 S.Ct. 1732, 1737, 95 L.Ed.2d 226 (1987) (quoting Helvering v. Taylor, 293 U.S. 507, 514, 55 S.Ct. 287, 290, 79 L.Ed. 623 (1935)). That is not true in a bankruptcy case.
In a bankruptcy case, a properly filed proof of claim is deemed allowed and constitutes prima facie evidence of the validity and amount of a claim. In re Macfarlane, 83 F.3d 1041, 1044 (9th Cir.1996); 11 U.S.C. §§ 501, 502(a). Thus, a proof of claim when filed in accordance with 11 U.S.C. § 501 is presumptively valid.
The burden of initially going forward with evidence rebutting the validity of a claim is on the objecting party. In re Macfarlane, supra at 1044. The objecting party must show facts which would tend “to defeat the claim by probative force equal to that of the allegations of the proofs of claim themselves.” In re Holm, 931 F.2d 620, 623 (9th Cir.1991).
If the objecting party meets this burden, “the creditor must present evidence to prove the claim.” In re Macfarlane, supra at 1044. Thus, “the ultimate burden of proof is on the creditor” even if the creditor is the IRS. In re Macfarlane, supra at 1044-1045; In re Brady, 110 B.R. 16, 18 (Bankr.D.Nev.1990).
The IRS filed a proof of claim for penalties assessed against Priest under 26 U.S.C. § 6651(a) for failure to timely file an income tax return for 1991 and to pay the tax due in 1991; and pursuant to 26 U.S.C. § 6654(a) for failure to timely pay estimated income tax for 1991. The proof of claim constitutes prima facie evidence of the validity and amount of the claim. To rebut the validity of the claimed penalties, pursuant to 26 U.S.C. § 6651(a), Priest must present evidence which shows “that such failure is due to reasonable cause and not due to willful neglect” 26 U.S.C. § 6651(a) (1996). To demonstrate “reasonable cause,” the taxpayer must show he “exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time.” United States v. Boyle, 469 U.S. 241, 243, 105 S.Ct. 687, 689, 83 L.Ed.2d 622 (1985) (citing Treas.Reg. § 301.6651-1(e)(1) (1984)); See also Estate of Lang v. Commissioner, 613 F.2d 770, 774 (9th Cir.1980). The IRS has articulated eight reasons it considers to constitute “reasonable cause.” If the cause asserted by the taxpayer fails to fall within one of these categories, the IRS will determine whether the asserted cause is reasonable. “A cause for delinquency which appears to a person of ordinary prudence and intelligence as a reasonable cause for delay in filing a return and which clearly negatives willful neglect will be accepted as reasonable.” In re Boyle, supra at 243 n. 1 (citing Internal Revenue Manual (CCH) § 4350, (24) ¶ 22.2(3) (March 20,1980) (Audit Technique Manual for Estate Tax Examiners)).
In the objection to the proof of claim, Priest argued that reliance on Miyashiro when the 1990 return was filed was the basis for their belief that the income received from the Pension Plan was included in the 1990 tax return. However, Priest testified the tax consequences of the Pension Plan distribution were not discussed and no advice regarding the Pension Plan was received from Miyashiro. Priest cannot claim reliance as a basis for the failure to exercise ordinary business care and prudence. Instead, the Priests relied upon their own judgment in deciding not to timely file the 1991 return. Marlene Priest testified that she thought a 1991 return did not have to be filed because their income was below $10,000, as neither earned any wages and no rental income was received in 1991. Guy Priest testified about his lack of expertise regarding tax matters.
The Priests were advised of “the need to set aside something for the 1991 estimated payments” and about the 1991 estimated tax liability (exhibits E and F). Upon receipt of *57the Miyashiro letter explaining the distribution from the Pension Plan may be subject to a ten percent federal tax, Guy Priest testified that he “assumed that the [tax on the] [$]156,000 was prepaid in 1990, but we were going to be penalized another ten percent.” The advice and information contained in the Miyashiro letter is clear and sufficient to put a reasonably prudent person on notice of the likelihood of 1991 tax liabilities. Upon receiving this type of letter, a reasonably prudent person would have made inquiry and would have taken immediate action. It was not until the receipt of notices sent by the IRS in April-July, 1993, regarding the failure to file a 1991 return, that Priest took any affirmative measures. Priest contacted an accountant and filed the 1991 return on September 30,1993.
Priest decided to cash out of the Pension Plan in November 1990. The proceeds from the Pension Plan were not received until February and March of 1991. The tax return was mailed on May 10, 1991 and was signed on or about that time. Priest assumed the distribution was taxed in 1990, even though the distribution was not received until 1991. It is not reasonable to conclude that the distribution was included in the 1990 tax return, as the distribution was not received until 1991 and the Miyashiro letter in 1991 makes reference to the distribution proceeds and the potential for tax liability.
The evidence shows that Priest failed to produce sufficient evidence showing the exercise of ordinary business care and prudence with respect to 1991 tax liabilities. The term “willful neglect” is “read as meaning a conscious, intentional failure or reckless indifference.” In re Boyle, supra at 245. The Priests willfully neglected to timely file and pay 1991 taxes.
To rebut the penalties assessed under 26 U.S.C. § 6654(a), Priest must produce evidence that shows the failure to make estimated tax payments falls within a statutory exception under 26 U.S.C. 6654(e). “[S]eetion 6654 addition to tax is mandatory unless the petitioner can place himself within one of the computational exceptions provided for in subsection (d).” Grosshandler v. Commissioner, 75 T.C. 1, 20-21, 1980 WL 4621 (1980) (The statutory exceptions are now found in subsection (e)). Priest failed to produce any evidence to show that the failure to pay the estimated taxes falls within a statutory exception.
Priest has not “met its burden of overcoming the prima facie evidence of the proof of claim.” In re Brady, supra at 18.
If Priest had met its burden the IRS would have had to prove its claim by a preponderance of the evidence. In re Pugh, 157 B.R. 898, 900 (9th Cir. BAP 1993). The IRS met its burden and proved Priest’s failure to timely file and pay was not justified by a reasonable cause. Therefore, Priest is liable for the claimed penalties.
To the extent any of the foregoing Conclusions of Law should be considered to be findings of fact, they should be construed as such.
Pursuant to these Findings of Fact and Conclusions of Law, and good cause appearing therefor;
IT IS ORDERED that Priest’s objection to the IRS’s proof of claim is denied. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492477/ | AMENDED ORDER ON MOTION PURSUANT TO FED.R.CTV.P. 59 REGARDING FINAL JUDGMENT
ALEXANDER L. PASKAY, Chief Judge.
The matter under consideration in this Chapter 7 case of Christian George Dreshen, M.D., (Debtor) creates a unique issue presented by the Debtor, who filed the Motion Pursuant to Fed.R.Civ.P. 59 Regarding Final Judgment. The relief sought by the Debtor is in fact a request addressed to this Court to reconsider the Final Judgment heretofore entered in this adversary proceeding which determined that the debt, owed by the Debt- or to the Bank of St. Petersburg (Bank), is a nondischargeable debt by virtue of § 523(a)(2)(B) of the Bankruptcy Code. In order to illustrate the uniqueness of the relief sought, a brief recap of the relevant *84portion of the procedural history of this litigation should be helpful.
This litigation commenced with the Complaint filed by the Bank pursuant to § 523(c). The Bank in Count I of its Complaint sought an Order denying the Debtor the benefits of the general bankruptcy discharge. This Count was dismissed by this Court along with other Counts, and the Bank’s claim based on § 523(a)(2)(B) was ultimately tried. On March 22, 1995, this Court entered its Findings of Fact, Conclusions of Law and its Memorandum Opinion and determined that the debt owed by the Debtor to the Bank was nondischargeable. Unfortunately through oversight, no Final Judgment was entered. Notwithstanding the absence of the Final Judgment, the Debtor filed a Notice of Appeal and, surprisingly, the District Court affirmed this Court’s determination that the debt was non-dischargeable.
To further complicate the matter, the Debtor filed a Notice of Appeal with the Eleventh Circuit Court of Appeals even though the District Court equally failed to enter an actual Final Judgment. The Eleventh Circuit, having realized the absence of a Final Judgment, remanded the matter to the District Court for the entry of a Final Judgment. The District Court, rather than enter a Final Judgment, remanded the matter back to this Court with direction to enter a Final Judgment. In compliance with this mandate, this Court did finally enter the one and only Final Judgment in this adversary proceeding on July 17, 1996, based on the Findings of Fact, Conclusions of Law and Memorandum Opinion entered by this Court at the conclusion of the trial, and determined that the debt owed by the Debtor to the Bank was nondischargeable.
This is the procedural background of this convoluted litigation in which the Debtor now asks this Court to reverse its original Findings of Fact and Conclusions of Law, even though this Court’s determination of the issue of dischargeability was already affirmed and found to be correct by the District Court more than a year ago.
The Debtor’s Motion is filed pursuant to Fed.R.Civ.P. 59, as adopted by F.B.R.P. 9023, and is based on the Debtor’s contention that The Final Judgment contains a minor technical defect regarding the Statute referenced in Count III of the Complaint; that the Bank failed to present evidence sufficient to sustain this Court’s Findings and ruling; and that fundamental fairness and equity require reconsideration because dual representation by the law firm precluded any finding of reasonable reliance.
It appears from the foregoing that regardless of the ultimate merits of these contentions, this Court is constrained to reject them because to consider them would in effect require this Court to find that the District Court erred in affirming this Court’s Findings and Conclusions of Law. Under the current allocation of jurisdiction between the District Courts and Bankruptcy Courts, § 28 U.S.C. § 1334(a), (b) and (e), and § 157(a) of the Code, this would not be permissible and proper.
Accordingly, it is
ORDERED ADJUDGED AND DECREED that the Debtor’s Motion Pursuant to Fed.R.Civ.P. 59 Regarding Final Judgment, as adopted by F.R.B.P. 9023 be and the same is hereby denied. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492479/ | MEMORANDUM
JOAN N. FEENEY, Bankruptcy Judge.
I. INTRODUCTION
Two related matters are before the Court for determination: 1) the “Motion of Plaintiffs Jager, Smith, Stetler & Arata, P.C. and Jeffrey A. Kitaeff, Chapter 7 Trustee for Payment of Attorneys’ Fees and Expenses Pursuant to Order Dated July 12, 1991,” to which the United States of America objected; and 2) the “United States’ Motion for Partial Summary Judgment,” to which the Plaintiffs objected. Through the Plaintiffs’ Motion, the law firm of Jager, Smith, Stetler & Arata, P.C. (“JSSA”) seeks attorneys’ fees and expenses in the amount of $25,347.18. JSSA asserts that it is entitled to compensation in connection with the collection of the Debtor’s receivable from defendant Massachusetts Bay Transportation Authority (the “MBTA”). JSSA predicates its request upon an order entered on July 14, 1991 pursuant to which the Court, Gabriel, J., authorized both 1) the employment of JSSA as special counsel to the Chapter 7 Trustee for the purposes of collecting the receivables of Bay State York Company, Inc. (“BSY”), and 2) a compensation formula pursuant to which JSSA would be paid its expenses plus 25% of any amount collected as an attorneys’ fee. In addition, JSSA and the estate would divide the remaining collected funds such that the estate would receive 33.3% and JSSA would receive 66.7% “until such time as JSSA’s secured claim against the estate is satisfied in an amount to be determined by this Court.”
The United States, through its partial summary judgment motion, seeks a determination that it has a priority tax hen -with respect to a portion of the proceeds of the Chapter 7 Trustee’s settlement with the MBTA, which proceeds are also claimed by the Commonwealth of Massachusetts and by JSSA. The proceeds are now being held in an interest-bearing escrow account.1
II. BACKGROUND
On January 8, 1991, an involuntary Chapter 7 petition was filed against the Debtor. On February 1, 1991 the order for relief entered. On July 14, 1991, the Court entered an order allowing the Application for Order Authorizing Trustee to Employ Attorneys as Special Counsel and to Recognize Secured Claim. Accordingly, on that date, the Court recognized that JSSA held a pre-petition secured claim in the amount of $297,-694.44 and authorized the retention of JSSA on the terms outlined by the Plaintiffs in their motion which is now before the Court.2 The Court notes that the Application for Order Authorizing Trustee to Employ Attorneys as Special Counsel and to Recognize Secured Claim did not disclose the existence of any dispute regarding the priority of liens on the Debtor’s receivables. Additionally, the Court notes that the United States did not object to JSSA’s retention as special counsel to the Chapter 7 Trustee or to the terms of the firm’s payment.
On February 16, 1993, the Chapter 7 Trustee commenced an action against the MBTA seeking turnover of $163,407.94, representing the balance due BSY under a contract with the MBTA. The Trustee subsequently amended the complaint, joining *280JSSA as a party-plaintiff and naming the United States, the Commonwealth of Massachusetts and Park L. Davis Company as additional defendants. On November 19, 1993, this Court authorized the Plaintiffs and the MBTA to compromise the Plaintiffs’ claim against the MBTA in the amount of $94,422.35, and, on June 6, 1995, the Court granted the “Joint Motion of Plaintiffs and Defendant Massachusetts Bay Transportation Authority to Dismiss Amended Complaint as to Defendant Massachusetts Bay Transportation Authority,” leaving the priority of liens dispute among JSSA, the United States and the Commonwealth of Massachusetts unresolved.3
Following the entry of the order on June 6, 1995, the United States filed a Motion to Alter or Amend the Court’s Order, objecting to any determination that the funds collected from the MBTA be “considered property of the estate for the sole purpose of generating fees and costs to deplete the fund.” At approximately the same time, the Plaintiffs filed a Motion for Leave to Amend First Amended Complaint, seeking authority to amend their complaint to obtain a ruling that this Court has the authority to direct the United States to apply payments and credits against tax assessments that were the subject of its first and second Notices of Federal Tax Lien. The Court heard both motions on July 27,1995, at which time the Court granted the Plaintiffs’ motion and, with respect to the motion of the United States, ordered the United States and the Trustee to establish an escrow account for the settlement funds paid by the MBTA
The Plaintiffs filed their Second Amended Complaint and served it on Counsel to the Commissioner, Massachusetts Department of Revenue, and on the Tax Division of the Department of Justice. The Second Amended Complaint contains the following five counts: Count I — Determination of Priority of Lien, through which the Plaintiffs seek a determination that “JSSA has a perfected security interest in the proceeds of the MBTA Contract Balance which has priority over the lien of the United States in an amount to be determined by the court;” Count II — Determination of Validity of Lien through which the Plaintiffs allege that a Notice of Levy and any rights accruing to the Massachusetts Department of Revenue by virtue of the service of the Notice of Levy on December 14, 1990 are voidable preferences; Count III — Determination of Validity of Lien, through which the plaintiffs seek identical relief as in Count II with respect to a Notice of Lien filed by the Commonwealth of Massachusetts, Department of Revenue; Count IV — Determination of Validity of Lien, through which the Plaintiffs allege that the Notice of Federal Tax Lien served on December 4,1990 constituted a voidable preference; and Count V — Determination that the filing of a Notice of Lien on May 1,1991 was a violation of the automatic stay.
The Commonwealth failed to file an answer to the Second Amended Complaint, although it answered the First Amended Complaint. However, the Plaintiffs have not moved to default the Commonwealth and did not address the priority of the Commonwealth’s liens in their papers filed with the Court. The United States filed an Answer to the Second Amended Complaint and, within one month, filed the Motion for Partial Summary Judgment. In its motion, the United States failed to identify the Counts of the Second Amended Complaint upon which it seeks summary judgment. Based upon the pleadings, the Court presumes the United States is seeking judgment in its favor on Counts I and IV. Like the United States, the Plaintiffs failed to reference specific Counts of the Second Amended Complaint in their opposition to the partial summary judgment motion. Moreover, in response to the Motion for Partial Summary Judgment and the Memorandum of the United States in support of the Motion for Partial Summary Judgment, the Plaintiffs wholly failed to address Count TV. Accordingly, and in view of the provisions of the Bankruptcy Code and case law establishing that statutory liens are not voidable as preferences, 11 U.S.C. *281§ 647(e)(6), the Court finds that the Plaintiffs have waived the relief sought through Count IV.
The following pertinent facts are reflected in the various motions filed by United States and the Plaintiffs. The Court notes in this regard that neither the Plaintiffs nor the United States provided the Court with a clear statement as to the nature, extent and priority of liens as of the petition date and with information about the status of this case and whether there will be funds sufficient to pay all administrative claims in full and pay a dividend to unsecured creditors.
At the commencement of the case, JSSA claimed a perfected security interest in BSYs receivables in the total sum of $297,-694.44 and a first priority security interest in the receivables in the sum of $238,612.24 as of September 12, 1990, the date of the filing of the first Notice of Federal Tax Lien (“NOFTL”) (Application for Order Authorizing Trustee to Employ Attorneys as Special Counsel and to Recognize Secured Claim at ¶ J; Second Amended Complaint at ¶ 11; United States’ Memorandum, Statement of Facts). The current balance owed to JSSA with respect to its security interest is $5,766.60, and, according to JSSA, its security interest will be extinguished “vis-a-vis the United States” if that sum is paid to it pursuant to the settlement agreement with the MBTA.4 Accordingly, JSSA seeks a reallocation of payments made by BSY to the Internal Revenue Service (the “IRS”) pursuant to the NOFTLs that secured assessments made before JSSA perfected its security interest in the accounts receivable. The following chart summarizes the federal tax information available to the Court:
Tax Assessment Date Assessment Amount Qtr. NOFTL Date NOFTL Amount Assessment Balance (5/9/92)5
3/26/90 $503,985.93 4/89 12/4/90 $155,449.10 $100,029.54
6/11/90 $493,555.16 1/90 9/12/90 $311,486.09 $411,229.27
9/17/90 $366,975.71 2/90 12/4/90 $155,449.10 $19,672.31
12/17/90 $274,943.56 3/90 5/1/91 $66,917.98 $85,396.06
TOTAL $1,639,460 $616,327.18
In addition, the Commonwealth of Massachusetts made assessments against BSY on February 15, 1990, April 30, 1990, July 31, 1990 and October 31, 1990 for the fourth quarter of 1989 and the first three quarters of 1990 respectively.
The United States admits that payments and credits reported after September 12, 1990, the date of the first NOFTL totalled $511,824.84, which payments and credits are more than the amount of the first two Notices of Federal Tax Lien ($466,935.10).
III. POSITIONS OF THE PARTIES
A. JSSA
JSSA states the following: 1) the tax allocation issue raised by the Second Amended Complaint is irrelevant to its Motion for Payment of Attorneys’ Fees and Expenses because the allocation will have no bearing on the amount of the fees and expenses it seeks, which is determined by the formula approved by Judge Gabriel; 2) from the $94,-422.25 recovered from the MBTA, JSSA is entitled to $2,322.16 in expenses and 25% or $23,025.02 in fees; 3) distribution of the $69,-075.07 balance in settlement proceeds depends upon the tax payment reallocation is*282sue. JSSA explains the tax allocation issue as follows:
Unless there is such a reallocation the estate will not receive any further payments from JSSA’s efforts due to the fact that the amount of the intervening liens of the United States and the Commonwealth of Massachusetts are [sic] greater than the potential collections from BSYs creditors because the Trustee’s ability to recover is dependent upon JSSA’s lien.
Memorandum in Opposition to the Motion for Partial Summary Judgment at pp. 4-5. JSSA also states the following:
If as a result of a tax payment reallocation, JSSA’s security interest vis-a-vis the United States’ tax lien is deemed to be greater than $69,075.07, then two-thirds of that amount, or $46,050.05 will be paid to JSSA, and the remaining one-third, or $23,025.02, will go to the Trustee as an asset of the estate pursuant to Judge Gabriel’s or-der_ If ... the court does not reallocate any tax payment such that JSSA’s security interest is not increased vis-a-vis the United States’ tax lien, and JSSA’s security interest is satisfied out of the $69,075.07 balance, then the remainder of those funds would inure first to the estate, to the extent of one-third of the amount needed to satisfy JSSA’s security interest, and second to the benefit of the United States as the next most senior lienholder whose rights attached prior in time to those of the Trustee.... [A]ny balance of the MBTA settlement proceeds that are subject to the United States’ tax lien should be surcharged to compensate JSSA, inasmuch as JSSA would have recovered those funds for the United States’ benefit.
Motion for Payment of Attorneys’ Fees and Expenses at ¶¶ 12-13.
JSSA relies on 11 U.S.C. § 506(c) for the proposition that it is entitled to surcharge the settlement proceeds, and it principally relies upon the case of United States v. Energy Resources Co., Inc., 495 U.S. 545, 110 5.Ct. 2139, 109 L.Ed.2d 580 (1990), and 11 U.S.C. § 105 for the proposition that this Court has the authority to reallocate tax payments and credits.
B. The United States
The United States rejects JSSA’s argument that there is authority for this Court to order the reallocation of “tax payments that were applied to tax periods that are covered by hens inferior to the pre-petition hen of ... JSSA ... and then have such payments reapphed to tax periods covered by hens that are superior to the hen of JSSA.” It notes that pursuant to 26 U.S.C. § 6321 the Government has a hen for unpaid taxes on “ah property and rights to property of a taxpayer” that arises on the date of assessment and continues until the assessment is fully satisfied. The United States adds that this hen is valid as to third parties only after being recorded by the filing of a notice of hen pursuant to 26 U.S.C. § 6323(f).6 See Id. § 6323(c). See also Middlesex Savings Bank v. Johnson, 777 F.Supp. 1024, 1027 (D.Mass.1991). The federal tax hen secures the principal tax obhgations as well as unassessed interest, penalties and other additions. Johnson, 777 F.Supp. at 1027. Finally, the United States argues that there is no standing, no waiver of sovereign immunity and no jurisdiction for the reapphcation of BSYs tax deposits and payments made by BSY and apphed by the IRS years before the bankruptcy petition was filed, citing United States v. Pepperman, 976 F.2d 123 (3d Cir.1992); In re Simms, 177 B.R. 537 (Bankr.N.D.Ohio 1994).
IY. DISCUSSION
The Court finds the position advanced by JSSA to be opaque at best. According to the first sentence of its rationale appearing in its Motion for the Payment of Fees and Expenses, it would appear that if this Court were to order the reallocation of tax payments, then JSSA would be paid more money toward the satisfaction of the total amount of its claim of $297,694.44 and ap*283proximately $23,000.00 would pass through to the estate to the United States, resulting in a commission for the Chapter 7 Trustee and less money for the United States.7 Unfortunately, the balance of JSSA’s rationale for ordering reallocation is incomprehensible. Even assuming that JSSA would be entitled to expenses and 25% of the funds collected as attorneys’ fees plus payment of $5,755.60 to satisfy the balance of its priority hen, the Court, in view of 11 U.S.C. § 724(b)-(d), is unable to discern a principled argument that JSSA would be entitled to one-third of the balance of the funds that would be part of the bankruptcy estate, thereby priming the United States’ senior hen to satisfy the balance of its claim.
In any event, the Court finds that the legal authority cited by JSSA in support of its reallocation request is unpersuasive. The Court agrees with the analysis of the United States. Energy Resources is inapplicable to the instant ease. In the first place Energy Resources involved a Chapter 11 case in which the United States Supreme Court indicated that a deemed involuntary payment of employment taxes made by a Chapter 11 debtor pursuant to a plan of reorganization could be designated toward the payment of trust fund taxes by the debtor if the “designation is necessary to the success of a reorganization plan.” Thus, Energy Resources considered the future payment of taxes through a Chapter 11 plan, not the reallocation of taxes made years before the filing of a bankruptcy petition. Because Energy Resources is inapposite, the reallocation order requested by JSSA would appear to be an “undue expansion” of Energy Resources, Simms, 177 B.R. at 540, without any “overriding necessity” in the context of this Chapter 7 case where there has been no showing how the reallocation will benefit creditors other than JSSA. See In re Craft Aviation Service, Inc., 187 B.R. 703, 710 (Bankr.N.D.Okla.1995).
In the instant case, although not expressly stated, it would appear that BSY did not designate how its tax payments were to be credited to its outstanding tax obligations. Accordingly, the IRS was free to apply the payments to whichever liability of the taxpayer it chose. Sotir v. United States, 978 F.2d 29, 30 (1st Cir.1992). The Plaintiffs have failed to establish that they have standing to contest the allocation under Sotir. In that case, the Court rejected the claim of responsible officers that the IRS had failed to apply payments to the corporation’s trust-fund tax liability. The court refused to overturn the line of decisions allowing the IRS, absent some direction from the taxpayer, to *284apply payments to whichever of the taxpayer’s liabilities it wishes. 978 F.2d at 32. The relief requested by the JSSA essentially asks this Court to do just that. Under the reasoning of Sotir, this Court declines the invitation.
IV. CONCLUSION
In accordance with the foregoing, the Court grants the Motion of Plaintiffs Jager, Smith, Stetler & Arata, P.C. and Jeffrey A. Kitaeff, Chapter 7 Trustee for Payment of Attorneys’ Fees and Expenses Pursuant to Order Dated July 12, 1991 and allows JSSA attorneys’ fees and expenses in the total sum of $25,347.18. The Court denies JSSA’s request for any additional fees pursuant to 11 U.S.C. § 506(c) as such fees would be dupli-cative of the payment granted herein. The Court grants the Unites States’ Motion for Partial Summary Judgment. The Court shall schedule a trial at its earliest convenience to dispose of the remainder of the outstanding matters in this ease.
. At the July 27, 1995 hearing at which the parties agreed to the creation of an escrow, this Court made no determination as to whether the settlement proceeds were property of the estate.
. In the Application for Order Authorizing Trustee to Employ Attorneys as Special Counsel and to Recognize Secured Claim, the Trustee disclosed the following:
At the time that the involuntary petition was filed, JSSA was a secured creditor of BSY by virtue of the execution and filing of ... UCC Financing Statements.... JSSA is owed $297,694.44 for its prepetition services to debt- or.... JSSA has represented BSY as general corporate and litigation counsel over several years....
. Park L. Davis Company was defaulted on October 19, 1993, having failed to answer or otherwise defend.
. The Court presumes this statement means that the current balance of JSSA’s first priority secured claim is $5,755.60 and that JSSA still holds a potentially secured claim with respect to the $59,082.20 difference between its original priority lien of $238,612.24 and its total secured claim of $297,694.44.
. As of January 31, 1996, the United States was owed $32,429.27 with respect to the March 26, 1990 assessment; $528,932.03 with respect to the June 11, 1990 assessment; $132,456.55 with respect to the September 17, 1990 assessment; and $103,582.42 with respect to the December 17, 1990 assessment.
. Between the Commonwealth of Massachusetts and the United States, the United States concedes that the Commonwealth's liens arose on the date of assessment and that priority must be given to the Commonwealth's liens to the extent the assessments preceded those of the United States (i.e., the February 15, 1990 assessment for the fourth quarter of 1989).
. To the extent that the United States asserts that the MBTA settlement proceeds are not property of the estate, the Court unequivocally rejects that argument. The MBTA owed the Debtor money at the time of the commencement of the case as a result of a pre-petition construction contract. Accordingly, the estate’s claim against the MBTA and the settlement proceeds are property of the estate as that concept is defined at 11 U.S.C. § 541(a). Moreover, 11 U.S.C. 724(b) provides the following:
(b) Property in which the estate has an interest and that is subject to a hen that is not avoidable under this title and that secures an allowed claim for a tax, or proceeds of such property, shall be distributed—
(1) first, to any holder of an allowed claim secured by a lien on such property that is not avoidable under this title and that is senior to such tax lien;
(2) second, to any holder of a claim of a kind specified in section 507(a)(1), 507(a)(2), 507(a)(3), 507(a)(4), 507(a)(5), 507(a)(6), or 507(a)(7) of this title, to the extent of the amount of such allowed tax claim that is secured by such tax lien;
(3) third, to the holder of such tax lien, to any extent that such holder’s allowed tax claim that is secured by such tax lien exceeds any amount distributed under paragraph (2) of this subsection;
(4) fourth, to any holder of an allowed claim secured by a lien on such property that is not avoidable under this title and that is junior to such tax lien;
(5) fifth, to the holder of such tax lien, to the extent that such holder's allowed claim secured by such tax lien is not paid under paragraph (3) of this subsection; and
(6) sixth, to the estate.
11 U.S.C. § 724(b). "The effect of section 724(b) is to treat a tax lien as a claim ahead of the priority for taxes (now section 507(a)(8)) and after the other priorities under section 507(a) rather than as a secured claim. The result is to leave senior and junior lienholders and holder of unsecured claims undisturbed.” 4 L. King, Collier on Bankruptcy, ¶ 724.03 at 724-4 (15th ed. 1996). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492481/ | MEMORANDUM AND ORDER ON OBJECTION TO CLAIM
ALAN H.W. SHIFF, Chief Judge.
Alan D. Sibarium, the chapter 7 Trustee (“Trustee”), has filed an objection to the priority status of a prepetition claim of the accounting firm, Karp, Leonetti & Co., P.C. (“Respondent”), seeking a determination that the Respondent’s claim be disallowed as an administrative priority. The Trustee proposes that the claim be allowed as a general unsecured claim. For the reasons that follow, the Trustee’s objection is sustained and the Respondent’s claim is deemed to be a general unsecured claim.
BACKGROUND
New England Software, Inc. filed the instant chapter 7 petition as a no asset case on July 25,1995. On May 15,1996, the Respondent filed a proof of claim, Claim No. 7, listing $1,150.00 as an unsecured priority claim. See 11 U.S.C. § 501(a). A statement, dated July 24, 1995, which described the services rendered by the Respondent as the preparation of 1994 federal and state tax returns and a compilation statement for the year ending December 31,1994, was attached to the proof of claim. On June 17, 1996, the Trustee filed the instant objection that the services on which the claim was based were for services provided prior to the commencement of this case.
DISCUSSION
Section 502(a) provides that “[a] claim ..., proof of which is filed under section 501 of this title, is deemed allowed, unless a party in interest ... objects.” Section 507(a) lists the expenses and claims that are given priority status in bankruptcy distributions. The relevant subsection here is (a)(1) which relates to administrative expenses allowed under § 503(b). A determination of the Trustee’s objection to the Respondent’s claim turns on § 503(b)(1)(A) which provides that “[ajfter notice and a hearing, there shall be allowed administrative expenses ... including — the actual, necessary costs and expenses of preserving the estate, including ... commissions for services rendered after the commencement of the case ...” (emphasis added).1
It is well settled that “administrative expense priorities are to be narrowly construed to foster the paramount principle in bankruptcy of equitable distribution among creditors.” In re New York Trap Rock Corp., 137 B.R. 568, 572 (Bankr.S.D.N.Y.1992). Since administrative expenses “deplete the funds available to general unsecured creditors, administrative expenses must be given strict scrutiny by the court.” Matter of Cuisinarts, 115 B.R. 744, 750 (Bankr.D.Conn.1990). Such narrow construction of administrative expense is also mandated by the fact that “[cjreditors are presumed to act primarily in their own interests and not for the benefit of the estate as a whole.... ” Id.
*336The plain language of § 503(b)(1)(A) defeats the Respondent’s claim for administrative priority status since that provision limits such status to claims for “... services rendered after the commencement of the case_”2 The case law in this circuit supports that result. As Judge Sehwartzberg observed:
Administrative expenses under 11 U.S.C. § 503 are payable only if they are subsequent to the filing of the debtor’s petition. ... This is so because administrative expense claims are created by statute and not by the courts or on the basis of equitable grounds arising out of the conduct of the parties....
In re Balport Const. Co., Inc., 123 B.R. 174, 178 (Bankr.S.D.N.Y.1991) (citations omitted). Simply put, “[a] bankruptcy court is without discretion or authority to deviate from the Code’s narrow list of priorities on purely equitable grounds.” In re Drexel Burnham Lambert Group Inc., 134 B.R. 482, 488-9 (Bankr.S.D.N.Y.1991); see also In re 9 Stevens Cafe, Inc., 161 B.R. 96, 97 (Bankr.S.D.N.Y.1993) (prepetition services provided by an attorney to obtain a reduction of mortgage debt and settlement payment from mortgagees did not qualify for administrative expense priority status).
ORDER
For the foregoing reasons, IT IS ORDERED that the Trustee’s objection is sustained; and IT IS FURTHER ORDERED that the Respondent’s claim is allowed as a general unsecured claim in the amount of $1,150.00.
. It is noted that § 503(b)(2) provides for the allowance of an administrative expense to a professional person, such as an accountant, pursuant to § 330(a). That subsection is limited to professional persons who are employed by the trustee under § 327. The Respondent was not so employed.
. The Respondent utilized a Proof of Claim Form (Rev. 6/91) which contained the following: "NOTE: This form should not be used to make a claim for an administrative expense arising after the commencement of the case. A 'request' of payment of an administrative expense may be filed pursuant to 11 U.S.C. § 503.” That form was superseded by Form B10 (Official Form 10) (Rev. 12/94) which contained the identical note. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492482/ | MEMORANDUM DECISION ON PLAINTIFF’S MOTION FOR LEAVE NUNC PRO TUNC TO FILE AND SERVE SECOND AMENDED COMPLAINT
CONRAD B. DUBERSTEIN, Chief Judge.
This matter comes before the Court as an adversary proceeding brought by the Chapter 7 Trustee (hereinafter referred to as “Plaintiff” or “Trustee”) of the estate of Robert B. Smith (“Debtor”) to recover a preferential transfer or set aside a fraudulent conveyance within the meaning of sections 547 and 548 of the Bankruptcy Code (“Code”) respectively. The Plaintiff seeks leave of the Court nunc pro tunc for an order, pursuant to Federal Rule of Bankruptcy Procedure (“Bankruptcy Rule”) 7015 as it incorporates Rule 15(a) of the Federal Rules of Civil Procedure, permitting him to file and serve a second amended complaint on the Defendants. After consideration of the facts and issues surrounding this case, and for the following reasons, the Plaintiff’s motion is granted.
FACTS
The Debtor filed a Chapter 7 voluntary petition for relief on January 21, 1993, as a result of which David Doyaga was appointed trustee of the Debtor’s estate. The Trustee commenced this adversary proceeding on October 31,1994 by filing a complaint to recover a $111,286 payment made by the Debtor to the Defendants. The Trustee alleged in this first complaint that the payment in question constituted a preferential transfer within the meaning of section 547 of the Bankruptcy Code.
Shortly thereafter on November 10, 1994 the Plaintiff filed and served an amended complaint. This amended complaint, while making minor corrections to the original complaint, also sought to recover funds according to section 547 of the Code.1 The Defendants filed their answer to the first complaint, as amended, on November 23, 1994. Then, on May 31, 1995 the Plaintiff filed a second amended complaint. The second amended complaint sought to recover funds under a fraudulent transfer theory pursuant to section 548 of the Code. In their answer, dated June 5, 1995, to the second amended complaint the Defendants raised the affirmative defense that the Plaintiffs failed to comply with Federal Rule of Civil Procedure 15(a) by not seeking leave of the court to file and serve the second amended complaint. The Defendants requested that the second amended complaint be dismissed with prejudice.
The Plaintiff moved on April 26, 1996 for leave of this Court, nunc pro tunc, to file and serve the second amended complaint. The Plaintiff explained the delay in adding the fraudulent conveyance action by stating that he was not aware at the time the original complaint was filed that a fraudulent conveyance under section 548 of the Code had taken place. In addition, the Plaintiff contends *360that the Defendants had notice of this new claim because it is based on the same transaction as that in the original complaint. The Defendants, in opposition to the motion for leave, claim that the Plaintiff has not provided a sufficient justification for any delay and that they will suffer undue prejudice if they are forced to defend against a fraudulent conveyance action at this time due to the burden of additional discovery and the unavailability or destruction of evidence.
DISCUSSION
Federal Rule of Civil Procedure 15(a) is applicable to the instant proceeding through Federal Rule of Bankruptcy Procedure 7015. Rule 15(a) states that:
A party may amend the party’s pleading once as a matter of course at any time before a responsive pleading is served or, if the pleading is one to which no responsive pleading is permitted and the action has not been placed upon the trial calendar, the party may so amend it at any time within 20 days after it is served. Otherwise a party may amend the party’s pleading only by leave of court or by written consent of the adverse party; and leave shall be freely given when justice so requires.
Fed.R.Civ.P. 15(a). As the Defendants had already filed an answer to the Plaintiffs amended complaint, Rule 15 required that the Plaintiff seek leave from the court in order to file and serve the second amended complaint. The question presented here is whether leave should now be granted to allow the Plaintiff to file and serve the second amended complaint when a noticeable amount of time has passed between the filing of the original complaint and the filing of the motion presently before this Court.
In interpreting the requirements of Rule 15(a), the Supreme Court in Foman v. Davis, 371 U.S. 178, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962), declared:
In the absence of any apparent or declared reason — such as undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of the allowance of the amendment, futility of amendment, etc. — the leave sought should, as the rules require, be ‘freely given.’
371 U.S. at 182, 83 S.Ct. at 230. This has become the standard by which courts determine whether to allow the amendment of a pleading.
Based upon the guidelines in Foman, Federal Rule of Civil Procedure 15 has been construed broadly regarding the allowance of an amendment of pleadings. The decision of whether to allow an amendment lies solely within the discretion of the trial court, and such discretion should be employed in conjunction with the “liberalizing spirit of the Federal Rules.” United States v. Continental Ill. Nat’l Bank and Trust Co., 889 F.2d 1248, 1254 (2d Cir.1989) (citing Fed.R.Civ.P. 1). The result of such liberal allowance of amendment is that a plaintiff should be allowed to test its claim on the merits if the facts upon which it relies provide a proper basis for relief. Foman, 371 U.S. at 182, 83 S.Ct. at 230.
In accordance with the Supreme Court’s statement in Foman v. Davis, the rule in the Second Circuit is also quite liberal in allowing the amendment of pleadings. In addition to the factors cited in Foman, the courts of the Second Circuit have held that in order to deny leave to amend a pleading, a showing other than mere delay on the part of the movant is required. See Raehman Bag Co. v. Liberty Mutual Ins. Co., 46 F.3d 230, 234-35 (2d Cir.1995); State Teachers Retirement Bd. v. Fluor Corp., 654 F.2d 843, 856 (2d Cir.1981).2 This additional showing beyond mere delay can include bad faith on the part of the movant or undue prejudice to the party opposing the motion for leave to amend. See Richardson Greenshields Securities, Inc. v. Lau, 825 F.2d 647, 653 n. 6 (2d Cir.1987); State Teachers Retirement Bd., *361654 F.2d at 856 (citations omitted). The opponent of the motion for leave to amend has the burden of establishing one of these additional factors. See Saxholm AS v. Dynal, Inc., 938 F.Supp. 120, 123 (E.D.N.Y.1996); Fariello v. Campbell, 860 F.Supp. 54, 70 (E.D.N.Y.1994) (citing Panzella v. Skou, 471 F.Supp. 303, 305 (S.D.N.Y.1979)). As there has been no claim by the Defendants of bad faith on the part of the Plaintiff, this Court need only address questions of delay and prejudice.
In many circumstances allowing an amendment of pleadings can cause undue prejudice to an opponent. Undue prejudice arises where the amendment seeks to add new claims based upon a different time period, where a different set of facts is alleged and where the original complaint did not provide fair notice of the new claims. See Ansam Assocs., Inc. v. Cola Petroleum, Ltd,., 760 F.2d 442, 446 (2d Cir.1985). Undue prejudice has also been found where the new claims would substantially alter the original complaint’s claims for relief and where the trial of the case would be delayed. See Barrows v. Forest Lab., Inc., 742 F.2d 54, 58 (2d Cir.1984).
In Barrows the Second Circuit Court of Appeals affirmed the district court’s denial of leave to amend a complaint to add entirely new claims two and one-half years after the filing of the original complaint. The court found that allowing such an amendment would create a “radical shift” in recovery which could result in a windfall to the plaintiffs. Id. at 58-59. According to the Second Circuit Court of Appeals, allowing the amendment in Barrows would have been unfair as discovery would have to be greatly expanded for the new claims. Barrows, 742 F.2d at 59. Similarly, in Ansam Assocs., Inc. v. Cola Petroleum, Ltd. the lower court’s denial of leave to amend was upheld where the proposed amendment would have been “especially prejudicial” because the new claims were based on a completely different time period, the parties had already completed discovery and a summary judgment motion had been filed by the defendant. Ansam, 760 F.2d at 446.
Ansam and Barrows have set the standards for determining whether to allow a Rule 15(a) amendment, and the Court will be guided by them in the instant case. Here the Plaintiffs proposed amendment would allege a fraudulent conveyance claim based upon the same facts as those in the original complaint, which alleged a preferential transfer. Allowing the PlaintifPs amendment would not create a “radical shift” in recovery as described in Barrows because in this case the Defendants had notice of potential liability under the original complaint which is similar to the potential liability under the amended complaint. See Barrows, 742 F.2d at 58; Mendelsohn v. Mack Fin. Corp. (In re Frank Santora Equip. Corp.), 202 B.R. 543, 545-46 (Bankr.E.D.N.Y.1996) (finding no undue prejudice in the addition of a fraudulent conveyance claim to a complaint containing a preference claim, as both claims arose from the same transaction). Also, allowance of the amendment would not appear to significantly delay any trial, and in contrast to Ansam, no dispositive motions have yet been made in the instant case. Ansam, 760 F.2d at 446; accord State Teachers Retirement Bd, 654 F.2d 843, 856 (2d Cir.1981) (finding no prejudice where no trial date had yet been set and no summary judgment motion had been filed by the defendants). From the record presented to this Court, it appears that no trial date has yet been set in the instant case. However, a stipulation entered into by the parties and filed with the Court indicates that discovery has continued in this case as recently as June 18, 1996. (See Stipulation Extending Pl.’s Time to Respond to Defs.’ First Set of Requests for Admissions, so ordered by this Court on June 25, 1996.) Because the Plaintiffs motion was filed in April, 1996, when discovery was not yet complete, allowing the Plaintiff to amend the complaint would not rise to the level of prejudice found in Ansam and Barrows, where allowing the amendment of pleadings would have resulted in reopening and significantly expanding discovery.
The present dispute is similar to that in O’Neil v. Kelley Drye & Warren (In re Colonial Cheshire I Ltd. Partnership), 167 B.R. 748 (Bankr.D.Conn.1994), where the court allowed the plaintiffitrustee to amend the *362complaint in an adversary proceeding to add a fraudulent conveyance cause of action nine months after the filing of the original complaint, which was based on a turnover theory of recovery under section 542 of the Code. The O’Neil court noted that the courts of the Second Circuit find that prejudice to the opponent of an amendment is greatly reduced where discovery is complete but there is no trial date set and no dispositive motions filed. Id. at 751 (citations omitted). In finding that the new fraudulent conveyance claim relied on the same facts as the original complaint, the O’Neil court was not persuaded that there was undue prejudice to the defendant by reason of the additional discovery which would be required if the iraudulent conveyance claim was added. Id. (citing United States v. Continental Ill. Natl Bank and Trust Co., 889 F.2d at 1255 for the proposition that any burden of additional discovery was by itself not sufficient justification for the denial of leave to amend a pleading). Instead the bankruptcy court found that the addition of the new cause of action would not require a defense against allegations of which the defendant had no notice. Id
Notwithstanding the Defendants’ contention in the instant case that allowing the Trustee to amend the complaint to add the fraudulent conveyance claim would be prejudicial, this Court does not find that allowing the amendment will create undue prejudice. Defendants claim that the addition of such an amendment would be unduly prejudicial in that the evidence (books and records of John Grace & Co.) which they contend is required for a defense against the fraudulent conveyance action is no longer available. However, from the dates provided to this Court, it appears that such evidence may never have been available to the Defendants. The original complaint in the present adversary proceeding was filed on October 31, 1994. The Defendants claim that the records of John Grace & Co. were available as late as July, 1993 but since that time they may have been lost or destroyed. (See Defs.’ Aff. in Opp’n, ¶ 13(a).) According to the dates given by the Defendants themselves, the evidence which they contend has been either lost or destroyed would have been in such a state even if the Plaintiff had included a fraudulent conveyance cause of action in the original complaint.3
Allowing the Plaintiff to amend the complaint to include a fraudulent conveyance claim does not cause the Defendants undue prejudice. Instead it merely places the Defendants in the same position they would have been in if the Plaintiff had included the fraudulent conveyance cause of action in the original complaint.4 In addition, the Plaintiffs amendment is not unduly prejudicial as no dispositive motions have been filed in the ease, there is no radical shift in recovery from the original complaint, the new claim is based on the same transaction as that in the first complaint and discovery will not have to be greatly expanded. Therefore the Plaintiffs motion for leave nunc pro tunc to May 31, 1995 to amend the complaint is granted.5
The Defendants’ request that the Plaintiff bear the costs associated with locat*363ing the records of John Grace & Co., Inc. is denied. Further, the Court will not enter a conditional order dismissing the second amended complaint based upon the results of any future discovery, as requested by the Defendants. Although it is within the court’s power to grant leave to amend based upon “reasonable conditions,” Parissi v. Foley, 203 F.2d 454, 455 (2d Cir.1953); Hayden v. Feldman, 159 F.R.D. 452, 454 (S.D.N.Y.1995) (citations omitted), it is inappropriate to do so in the present case. There is no undue prejudice to the Defendants in allowing the amendment because they are in the same position (regarding any lost or destroyed evidence) as if the original complaint had included the fraudulent conveyance cause of action.
As to the effect of allowing the amendment of the complaint, both the Plaintiff and the Defendant concur that if this Court grants leave to amend, then all previously filed complaints will be superseded by the second amended complaint. “A pleading that has been amended under Rule 15(a) supersedes the pleading it modifies and remains in effect throughout the action unless it subsequently is modified.” 6 CHARLES A WRIGHT, ARTHUR R. MlLLER AND MARY KAY Kane, Federal Peactice and PROCEDURE § 1476 (1990). Thus, the second amended complaint now functions as the sole complaint in this adversary proceeding.
CONCLUSION
1. This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334 and 157(a). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(H).
2. The Plaintiffs motion pursuant to Federal Rule of Bankruptcy Procedure 7015, as it incorporates Rule 15(a) of the Federal Rules of Civil Procedure, for leave of this Court nunc pro tunc to file and serve the second amended complaint is granted.
SETTLE AN ORDER CONSISTENT WITH THIS OPINION.
. The Plaintiff was not required to seek leave of the Court for this first amendment of the complaint, as the Defendants had not yet served an answer. See Fed.R.Civ.P. 15(a).
. In fact, numerous amendments have been allowed by the courts, despite the passage of a significant amount of time since the original pleading. See Richardson Greenshields Sec., Inc. v. Lau, 825 F.2d 647, 653 n. 6 (2d Cir.1987) (citing several Second Circuit cases where amendment of pleadings was permitted despite the passage of time).
. At least one court has remarked that lost documents, inaccessible witnesses and the faded memories of witnesses do not constitute undue prejudice. See Lampert v. Pace University, No. 94CIV.3467(KTD)(RLE), 1996 WL 453060, at *2 (S.D.N.Y. Aug. 12, 1996) (Ellis, Mag.); aff'd., No. 94Civ.3467(KTD) (S.D.N.Y. Jan. 8, 1997).
. In a recent case very similar to the present dispute, Bankruptcy Judge Eisenberg of this district rejected the argument that lost books and records regarding the transaction in question create undue prejudice to the opponent of an amendment. Mendelsohn v. Mack Fin. Corp. (In re Frank Santora Equip. Corp.), 202 B.R. 543, 546 (Bankr.E.D.N.Y.1996). In allowing the trustee to amend the complaint to replace a preference claim with a fraudulent conveyance cause of action, Judge Eisenberg held that the defendant would not be unduly prejudiced by having to seek books and records from a defunct company. Id. Instead, the cotut noted that the defendant was in the same position regarding the unavailability of the books and records whether the trustee's cause of action was one under section 547 or section 548 of the Code. Id. The Defendants' similar claim of undue prejudice due to lost evidence is equally unpersuasive.
. The Plaintiff did not specify an operative date for the nunc pro tunc leave to amend requested in his motion. However, the Court assumes that the Plaintiff intended to request leave nunc pro tunc to May 31, 1995, the date the second amended complaint was filed with the Court. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492483/ | DECISION ON ALLEGED EMPLOYMENT CONTRACT AND DEBTORS’ COUNTERCLAIMS
TINA L. BROZMAN, Chief Judge.
Sometime in 1991, the'year in which the empire of the late Robert Maxwell (“Maxwell”) subsequently faltered, his son Kevin signed a brief but unusual letter agreement with Sheldon Aboff, the Maxwells’ U.S. man on the spot, which guaranteed Aboff, who was in his early forties, lifetime employment and, when he was terminated, entitled him to some $23 million — money which Aboff is now seeking. Despite its extraordinary nature, this letter never stated which of the Max-wells’ hundreds of companies was to be responsible for the hefty sums promised. Aboff claims that the $28 million is an obligation of Macmillan, Inc. (“Macmillan”), a solvent chapter 11 debtor which, after paying off its creditors, has upstreamed the proceeds from the sale of its assets to Maxwell Communication Corporation, pic, its corporate parent, for distribution in accordance with that company’s plan of reorganization.
*381The letter agreement not only fails to identify the obligor, but makes no mention whatsoever of Macmillan. So how is it that Aboff links Macmillan to the obligation? First, he points to the fact that the letter is printed on Macmillan letterhead. That, however, is pure happenstance; Aboffs secretary testified that she chose the letterhead when she printed the letter from her computer screen. Second, as an aid to interpretation of the ambiguous letter, Aboff proffers notes which purport to show that after his move out of Macmillan’s offices he was nevertheless to continue to perform all of his services at the behest of Macmillan, albeit for other Maxwell companies. Initially, these notes posed something of a problem for Macmillan, that is, until it was discovered that Aboff had doctored them to diametrically change their import before they were produced in discovery. As originally recorded, the notes actually confirm the testimony of Macmillan’s president that Aboff had been transferred out of Macmillan and into a different chain of Maxwell companies prior to the execution of the letter agreement. Aboffs response to the charge of evidence-tampering is that he characteristically amended notes with successive meetings. I might have been more inclined to believe him had he revealed, rather than hidden, the amendments and had the changes been more wide-ranging. However, the singular effect of the amendments was to change Aboffs removal from to his retention by Macmillan. And Aboffs lack of veracity was not confined to the flap over the notes, more about which will be said later.
Aboff attempted to prove that he was still technically an employee of Macmillan at the time of his resignation. That, however, is really not the issue. The issue is whether his employment agreement, executed in the year following Aboffs move into a different chain of companies, was intended to bind Macmillan.
Aboff also suggests that if Macmillan is not liable, MCC GAO, Inc. (“OAG”) is. However, Aboff concedes that he never performed services for OAG, which functioned as a paying agent for other Maxwell companies.
I.
A. How Aboff Came to Join Maxwell
Sheldon J. Aboff, a certified public accountant, worked from 1967 to 1975 at the New York office of the international accounting firm of Price Waterhouse, where he participated in the audits of the American businesses of Robert Maxwell. The two men developed a good working relationship, culminating in 1975 when Maxwell invited Aboff to join Maxwell’s wholly-owned company, Pergamon Press, Inc. (“Pergamon Press”) as treasurer and chief financial officer. Aboffs performance was obviously to Maxwell’s liking, because prior to Maxwell’s acquisitions of substantial publicly-held U.S. companies Aboff became chief financial officer of all Maxwell companies in North America. By 1981, Aboff rose to vice chairman of the board of directors of Pergamon Press and was responsible for administration, finance, and operations (with the exception of publishing and marketing).
B. The Birth of the Public Side
Aboff joined Pergamon Press at a time when the businesses were predominantly closely held by Maxwell and his family. A change occurred, however, in 1980 when Maxwell acquired majority control of British Printing, pic, a U.K. public company which he renamed Maxwell Communication Corporation, pic (“MCC”)1. Aboff provided services to Maxwell in connection with the latter’s acquisition of majority control of MCC.
The Maxwell business empire thereafter came to comprise two types of companies, those which were completely owned and controlled by Robert Maxwell and his family, identified by insiders as the “private side,” as well as MCC and its subsidiary companies, which had a minority public shareholding, and thus were known to insiders as the “pub-*382lie side.”2 Trial Transcript at 7363; see Maxwell Macmillan Realization Liquidating Trust v. Aboff (In re Macmillan), 186 B.R. 35, 38 (Bankr.S.D.N.Y.1995).
In the 1987 “Project Exodus,” Maxwell sold Pergamon Press, a private side company, and many, but not all, of its publishing subsidiaries to MCC, N.A., a public side subsidiary of MCC. Notwithstanding the move of Pergamon Press from the private to the public side, Aboff continued to serve as one of its officers and directors. In 1987, Aboff was named treasurer of MCC, N.A. and later became its vice president. At the time, MCC, N.A.’s office was located at 777 West Putnam Avenue in Greenwich, Connecticut (the “West Putnam offices”).
Aboff acquired an additional title in 1987, president of PH(US), Inc., known as “PH(US)I,” a contraction of “Pergamon Holdings U.S., Inc.” which was the U.S. private side holding company. PH(US)I operated out of the West Putnam offices. Among other assets, PH(US)I held title to the Per-gamon Press businesses which had not been sold in Project Exodus.
PH(US)I operated as a conduit through which Maxwell made millions of dollars of intercompany transfers. Many of these transfers were effectuated by Aboff with the additional signature of one of the other two authorized signatories for PH(US)I. Aboff remained president and chairman of the board of PH(US)I throughout 1992, in contradistinction to what occurred with the public side, which will be discussed shortly.
C. The Acquisition of OAG, Thomas Cook, and Macmillan
In late 1988, MCC made two major U.S. acquisitions, purchasing Official Airlines Guide, Inc. (now known as MCC GAO, Inc. and defined earlier in this opinion as “OAG”) from Dun & Bradstreet, and successfully tendering for the stock of Macmillan, the well-known publishing company, in a hostile takeover. These two companies and their subsidiaries constituted about eighty percent of the value of the public side at the time of MCC’s bankruptcy filing. Maxwell Macmillan Realization Liquidating Trust v. Aboff (In re Macmillan), 186 B.R. 35, 38 (Bankr.S.D.N.Y.1995).
When MCC acquired OAG from Dun & Bradstreet, David Shaffer, OAG’s president, agreed to remain, undertaking the additional duty of managing MCC’s U.S. companies. Following the Macmillan acquisition, Shaffer assumed a management role in that company as well. In April 1989, Shaffer was appointed group vice president of the so-called Electronic Publishing Group, which comprised all those publishing companies in the scientific, technical, and medical areas. The Electronic Publishing Group was a division of the Maxwell businesses; the name has no legal significance. By March 1990, Shaffer had been appointed president and chief operating officer of Macmillan, where he remained until the publishing business was sold by MCC in December 1993 as part of the latter’s reorganization.
At the time of OAG’s acquisition, MCC also obtained from Dunn & Bradstreet an option to purchase a separately incorporated travel agency, Thomas Cook Travel, another of the entities managed by David Shaffer. MCC did not exercise the option, but instead assigned it to the private side, which purchased Thomas Cook Travel in April 1989, renaming it TCTI, Inc. (“TCTI”).4 Aboff worked on this acquisition on behalf of the private side. Because of his prior involvement with Thomas Cook Travel, Shaffer agreed to become a director of and was consulted regarding TCTI, although he was not charged with operating the business.
*383D. Aboffs Role Following the Acquisitions
From the end of 1988 through the early part of 1989, Aboff worked on the integration of Macmillan into MCC, which was structured so that MCC, N.A. was merged into Macmillan, with Macmillan becoming a subsidiary of MCC. On this assignment, Aboff reported directly to Robert and Kevin Maxwell. His salary came from sources other than Macmillan. Operations of the related public side companies were moved into Macmillan’s headquarters at 866 Third Avenue in New York City (“the Third Avenue offices”). Aboff moved to the same address.
In the spring of 1989, Aboff was assigned by the Maxwells to assist with the Electronic Publishing Group, reporting to Shaffer, its head. The Electronic Publishing Group included OAG, TCTI, Pergamon Press and those companies’ subsidiaries. Soon after, finding it difficult to describe the diverse companies reporting to him, Shaffer coined the name “Maxwell/Macmillan Group,” a title which, like the Electronic Publishing Group, had no legal significance but was used to refer to Macmillan, OAG and their subsidiaries as well as the few private side companies, including TCTI, for which Shaffer had responsibility.
While he was under Shaffer’s supervision, a large portion of Aboffs job was to share with Shaffer historical and background information regarding the companies and personnel. Shaffer also put Aboff in charge of a few members of the Electronic Publishing Group to assess whether Aboff was an able senior manager. Later becoming dissatisfied with Aboffs performance, Shaffer removed from Aboff responsibility for all but one of those companies.
Shaffer’s influence was growing, for that same fall (in 1989) he was made a director of MCC, the English public side parent company which owned both Macmillan and OAG. At about this same time, Shaffer, at Aboffs request, placed Aboff on OAG’s payroll retroactive to the beginning of that year; Aboff had chosen the OAG payroll because it had the best benefits.
By the end of that year, the merger of MCC, N.A. into Macmillan was complete. TCTI and OAG, however, were not merged into Macmillan; OAG had its own headquarters in Chicago. Shaffer was replaced as president of OAG, although he remained on the boards of directors of both TCTI and OAG.
E. Aboffs Transfer to the Private Side
As Shaffer’s influence grew, he sought to limit Aboffs. Believing that Aboff was not a capable senior manager and perhaps recognizing that the Maxwells were unlikely to simply cut Aboff loose, Shaffer sought, ultimately successfully, to remove Aboff from his role at Macmillan. To this end, Shaffer began negotiating with Kevin Maxwell either to discharge Aboff or move him into an arena other than Macmillan. Shaffer first raised the subject of a severance package for Aboff in late 1989.
That same month the private side formed a travel agency partnership with David and Linda Paresky, owners of Crimson & Heritage Travel, Inc. The Maxwell-related partner was TCTI. The new partnership was known as Thomas Cook Partnership (“TCP”). Aboff assumed an increasing role at TCP, looking after the private side’s valuable partnership interest.5 At TCP, Aboff was charged with pursuing potential acquisitions. His title was Vice Chairman Acquisition/Strategy. Ex. UUU.
Effective March 1, 1990, Shaffer was elevated to Macmillan’s presidency and acquired responsibility for managing all of the MCC companies located in the United States, including, of course, OAG. That same month, Shaffer resumed, this time in writing, his dialogue with Kevin Maxwell regarding Aboffs future role. Shaffer prepared a memorandum (the “March memorandum”) suggesting three options:
• Aboff would be terminated and receive a severance package recognizing his longevity and efforts on behalf of the family and Macmillan.
• Aboff would continue to report to Shaffer but would be transferred to the private *384side, working out of a Greenwich office. He would be assigned responsibility for TCP and private side taxes, as well as any other matter the Maxwells wished to have handled on the private side. He would receive a salary, participate in a profit sharing plan, and receive a significant bonus if the Maxwells exited the travel business. He would continue to draw services from the Third Avenue office staff as needed (legal, analytical, personnel, etc.).
• Aboff would remain in the Third Avenue offices and be assigned a “special project” responsibility in addition to his other private side duties. Special projects might include: setting up an internal audit department and a centralized purchasing function for all operations, as well as handling some real estate matters.
At the end of his memorandum, Shaffer indicated that he would be willing to live with all three alternatives, but urged adoption of the second.
Rumors abounded that Aboff was “out of Macmillan,” leading Aboff to discuss his future with Kevin Maxwell. Aboffs notes tell us that Kevin informed Aboff at a meeting held on March 27, 1990, that he was out of “Max/Mac.” R. 994-95, Ex. 74. Two days later, Aboff met with Shaffer, who confirmed that Aboff was to depart from Macmillan. Shaffer and Aboff discussed to whom responsibility would be assigned for the individual companies within the Electronic Publishing Group. Aboffs notes dated March 29 — under the heading “When do we divide up my group?” — evidence Aboffs knowledge that he would be relinquishing any responsibilities for those companies. The Electronic Publishing Group was disbanded in April 1990 and integrated into other divisions at Macmillan and elsewhere.
Shortly after these conversations, Aboff moved to the West Putnam offices, the former MCC, N.A. offices, which became PH(US)I headquarters; a TCP office was also located there. In a witness statement given to the City of London Police on June 4, 1993, Aboff swore that “apart from the odd special acquisition or disposal, [he] was involved with TCP on a full time basis.” Ex. EEE ¶ 30; R. 937. Similarly, in an affidavit earlier submitted to the High Court of Justice in England, Aboff had sworn that “From the time when I started working for Thomas Cook Partnership in 1990 most of my work was for that partnership with very little involvement on the Macmillan public company side.” Ex. GGG ¶ 15; R. 951-52. Aboff suggests that these sworn statements are not inconsistent with his current contention that he was always Macmillan’s employee because he regularly worked in excess of a “full time” forty hour work week. Thus, he says, when he swore he was working full-time at TCP, he really meant he was working forty hours for TCP and twenty or more hours on Macmillan special projects. However, twenty or more hours per week is not the temporal equivalent of either an “odd special acquisition or disposal” or “very little involvement.” I therefore cannot credit Aboffs attempted reconciliation of his past and current statements.
Aboff points to his special assignments as proof that he perpetually worked at the behest of Macmillan, but the facts lead to just the opposite conclusion. In late 1989 or very early in 1990, Robert Maxwell charged Aboff with the duty to investigate suspected fraud within Macmillan, an assignment which bore the code name “Project Leona.” When Aboff was moved to Greenwich in April 1990, Maxwell replaced Aboff with Macmillan’s chief financial officer and removed Aboff from the assignment. In other words, consistent with Shaffer’s testimony, just at the time that Aboff was transferred to the private side, his work on Project Leona was ended. The second assignment concerned Aboffs participation, in early 1991, on the public side’s sale of Pergamon Press and certain of its affiliates and subsidiaries. Aboff was instrumental in this project, coined Project Tokyo, which took approximately three months to accomplish. After the bulk of the transfer in May 1991, Aboff continued to work to sell off the remaining book companies. Aboffs time and expenses working on Project Leona were charged back to the public side, again suggesting that, as Shaffer testified, Aboff had been transferred to the *385private side, which was not to be saddled with payment for work he performed primarily for the public side.6
Aboff says his continued use of Maxwell Macmillan Group letterhead after he moved to Greenwich shows that he was still a Macmillan employee. But he was responsible for whatever stationery he used. Far more probative are the organizational charts from August 1991 which list twenty some-odd executives at Maxwell Macmillan and show the authorization levels for each of those executives within Macmillan. Aboff appears on neither. In addition, Robert Bogart, Macmillan’s director of human resources from June 1990 (two months after Aboff moved to Greenwich) through November 1993, testified that Aboff was not a Macmillan group vice president during Bogart’s tenure.7
To rebut the inferences flowing from this evidence, Aboff proffers a memorandum from David Paresky circulated among the TCP staff after Aboff moved to Greenwich but well before the employment agreement was executed. The memorandum recites that Aboff will remain a Macmillan employee. Paresky, who was not a Maxwell employee or executive, may simply have been wrong. It also may be that this memorandum was intended for either or both of two other purposes: (i) to quell any concerns that Aboff was brought in to second-guess Paresky and (ii) as a face-saving measure for Aboff, who did not want rumors of his “banishment” from Macmillan to spread. In any event, the memorandum predated entry into the employment agreement. More importantly, the issue is whether Macmillan was intended to be the counterparty to that agreement, not whether Aboff maintained a limited relationship with Macmillan. I conclude from all the evidence which I’ve just explored that Aboff was transferred out of Macmillan and the public side and into Robert Maxwell Group, pie and the private side.
F. The Operation of the Empire
Robert Maxwell operated the hundreds of public and private corporations in “groups” according to the different purposes the companies served, regardless of whether or not the companies were public or private side. Certain departments at Macmillan, notably, human resources, real estate and legal, provided services to both public and private side entities. And of course Shaffer himself provided services to TCTI, a private side company. None of these services to the private side was gratuitous, however. Public side employees prepared “charge backs” to bill the time they spent on private side matters. Although Aboff insists now that he always remained a public side employee, contrary to other public side employees, he did not keep records of the time that he worked for the private side. Indeed, he was in charge of reviewing the charge backs to the private side to ensure that the private side was not being overcharged.
There were occasional services which Aboff performed for the public side, such as supervising the Macmillan employee in charge of mergers and acquisitions (an area in which Aboff had been very active previously). But, by and large, after he moved to *386Greenwich, Aboffs services on the public side were terminated; and where he performed services for the public side they were charged back to that side.
G. The Evolution of Aboffs Letter Agreement
1. The First Draft
In mid 1989, Aboff complained to Shaffer that he did not have a written employment agreement. They met in September to discuss the benefits which Aboff was already receiving and those additional ones which had been promised to him by Robert Maxwell. See Exs. 69, 70. Early the next year, Robert Maxwell told Aboff and Robert Miranda, the president of Pergamon Press, that they would be receiving employment agreements and would be provided with pension and retirement benefits for life. Maxwell instructed them to discuss with Kevin how to structure retirement benefit packages.
As mentioned earlier, Shaffer was dissatisfied with Aboffs operating capabilities and was contemplating a transfer of Aboff to the private side. Shaffer may also have been responding to “new” senior management’s resentment that Aboff had the ears of Robert and Kevin Maxwell and did not have to go through “channels.” In any event, Shaffer sent Kevin the March memorandum with its three proposed alternatives. After conversations with the Maxwells regarding this memorandum and Aboffs contemplated employment agreement, shortly after Aboff moved to Greenwich Shaffer directed the Macmillan Human Resource Department to prepare a draft employment agreement for Aboff, which it did on April 17, 1990. Ex. 85 (“the April 17 draft”). This draft, prepared on David Shaffer’s Macmillan letterhead, provided in relevant part that:
You will continue as an employee of the Maxwell/Macmillan Group,8 (“the Company”) paid from Official Airlines Guides (“OAG”) while the full-time services that you will provide will be performed on behalf of TCP and will include services which are consistent with your background and experience. You will be responsible for overseeing our interest in TCP and have accountability for our input into the partnership. It will be up to you to assure that the direction of the business reflects the interests of the Maxwell organization. You will also have responsibility for private company taxes, and other duties as may be assigned to you from time to time....
sfc
You will continue to participate in an annual bonus plan having the same provisions as the Macmillan Executive Incentive Compensation Plan (“EICP”) for key executives ....
In addition to the Incentive Compensation Plan discussed above, we are recommending to the Trustees that you become an eligible participant in the Long Term Incentive Compensation Plan currently being established by the Company....
In addition, you and I have discussed the possibility of an added incentive compensation component in the event that a decision is made to sell or dispose of our interest in TCP....
You will also continue to participate in the employee benefit plans customarily made available to Executive employees of the Company.
* * * # * *
All references to the Company, OAG, or TCP include subsidiaries and affiliates.
* * * * * *
Sincerely yours,
David H. Shaffer
Agreed:
Sheldon J. Aboff (date)
The following day, Aboff met with Shaffer to discuss certain aspects of the draft which disturbed him. Shaffer instructed Aboff to negotiate with Kevin.
It is necessary to digress from the chronology just a little to explain why OAG appears *387in the April 17 draft. As mentioned earlier, on October 5, 1989, Aboff had requested that he be placed on the OAG payroll retroactive to January 1, 1989, because OAG’s benefits were better than those of any other company owned and controlled by Robert Maxwell. Prior to that time, Aboff had not been on Macmillan’s payroll, and in fact, Aboff was never on Macmillan’s payroll. So the naming of OAG as the entity to pay Aboffs salary was consistent with the prior course of conduct.
Shaffer testified that OAG acted only as paying agent and that the payroll was charged back to the appropriate company. See also Ex. UU. Although Aboff does not dispute that he did not perform any services for OAG, he contends that TCP operated functionally as a subsidiary of OAG even though it was not a legal subsidiary. (In fact, TCP was private side while OAG was public side.) It is not necessary to chronicle all of the facts to which he alludes because they demonstrate only that there was a limited symbiosis between TCP and OAG, two travel-related companies, not that TCP operated as a subsidiary of OAG.
Shaffer, who was formerly president and then chairman of the board of OAG, testified that TCP did not support OAG. Aside from the tangential benefits which the companies derived from one another, the companies were not linked. And Aboff does not dispute that he did not work for OAG. Thus I conclude that Shaffer was truthful when he testified that OAG functioned only as a paying agent and was not Aboffs employer.
2. The Aird & Berlis Drafts
We return to the chronology. A few days after Aboff received the April 17 draft from Shaffer, he faxed it to Jay Lefton, Esq. of the Canadian law firm Aird & Berlis. Lefton responded on May 11,1990, by faxing a draft employment agreement to Aboff which Lef-ton had prepared. Among other things, this five page draft provides,
Dear Shelly,
The following will serve as our understanding regarding your assignment as Vice Chairman of Thomas Cook Partnership (“TCP”). Maxwell Travel_, a_of _, currently owns [all of the outstanding shares of] [Thomas Cook Travel Inc.], which in turn owns 50% of TCP. I expect that this assignment will be for a minimum of three years, during which you will be based in TCP’s Greenwich office. [Note: do we want to provide that you do not have to relocate?] Unless previously terminated, your employment will be automatically renewed. You will continue as an employee of the Maxwell/Macmillan Group (the “Group”), a division of Macmillan, Inc. (the “Company”), which will be responsible for your compensation payments from Official Airline Guides [Inc.] [Ltd.] (“OAG”), although the full-time services that you will provide will be performed on behalf of TCP and will include services which are consistent with your background and experience ....
Ex. FF (Draft: May 11, 1990) (brackets in original). After Aboff commented on this draft, Lefton replied with a red-lined version dated May 18,1990, which he faxed to Aboff. Notably, the language that Aboff was to “continue as an employee of the Max-weU/Macmillan Group (the “Group”), a division of Macmillan, Inc.” was removed and replaced by: ‘You wifi (continue as) (be) an employee of Official Airline Guides, Inc., although the full time services that you will provide will be performed on behalf of TCP_” Ex. JJ. It also contained references to benefits comparable to those provided by Macmillan:
You will continue to participate in an annual bonus plan on the terms and conditions set out in Schedule_hereto, which are the same provisions as the Macmillan Executive Incentive Compensation Plan for key executives....
You will also be entitled to participate in a capital accumulation plan....
You will continue to participate in the employee benefits and benefit plans customarily made available to Senior Executives of Macmillan, Inc. and shall be entitled to participate in such benefits and plans on terms no less favourable to you than you are currently receiving, ...
*388In addition, you shall be entitled to receive an incentive compensation component in the event that [the Group] [Pergamon Holdings, [Ltd.]] directly or indirectly, sells some or all of its interests in TCP during the term of your employment, including a sale of some or all of Maxwell Travel, Inc. (which owns all of TCTI) or TCTI (which owns 50% of TCP). [Note: does OAG fit into the chain?] In the event of such a sale. OAG will pay you five percent of the [gross] proceeds of such sale, ...
* * * * * *
All references to the Company, OAG, or TCP include subsidiaries and affiliates. Ex. JJ (Draft: May 18,1990) (brackets and bold-ing appear in original but red-lining has been omitted). Lefton provided for signature by Kevin Maxwell, yet indicated his own uncertainty by asking the following questions: “Signing on what letterhead on behalf of what company? Do you want a fall-back if OAG does not pay?” Ex. JJ (Draft: May 18, 1990); Ex. HH, II.
S. The Whitman & Ransom Drafts
The next significant event in the negotiations occurred in the summer of 1990 when Kevin Maxwell asked Ellis Freedman of Whitman & Ransom, Macmillan’s outside counsel, to assist in the negotiations. Macmillan also engaged outside pension consultants to help structure AbofPs benefits. Aboff met with Freedman in July 1990 and gave him a copy of the April 17 draft, AbofPs marked draft, David Shaffer’s own employment agreement, and notes Aboff had taken during conversations he had had with Kevin Maxwell and Shaffer.
Whitman & Ransom prepared several versions of AbofPs employment agreement between August and November 1990. Freedman marked up Shaffer’s nineteen-page agreement to reflect that AbofPs would be modeled after it. See Ex. 89. But in August, Robert Maxwell refused to execute the proposed agreement because of its complexity and length; he insisted that there be an informal letter agreement. So Aboff, Kevin Maxwell, and Freedman met in New York to discuss a simpler version.
On August 21, 1990, David Morse, a specialist in the area of employment contracts at Whitman & Ransom, prepared a term sheet (“the Morse term sheet”), which denominates Aboff vice chairman of TCP. See Ex. 90. The exhibit submitted into evidence contains notations made by Aboff on the Morse term sheet. Significantly, Aboff crossed out each and every reference to Macmillan. For example, where the Morse term sheet had said that Aboff would have, “Primary Management and oversight authority for Maxwell Macmillan Group’s interest in TCP,” AbofPs notations on the document change it to read that he would have that authority over the “Maxwell Group” interest, eliminating Macmillan’s name from the reference. Where it said that Aboff would participate in “Macmillan’s Capital Accumulation Plan,” Aboff struck Macmillan and wrote in the word “a”; and where the term sheet said Aboff was to “Continue to participate in Macmillan’s Executive Incentive Compensation Plan,” Aboff crossed out “Macmillan’s.” The “Responsibilities” section provided that Aboff was to remain an OAG employee although his full-time services would be performed with respect to TCP. Aboff wrote to the left of “Responsibilities” “1) Private Side Companies.” The term of the employment was to begin “Jan. 1 or April 1, 1990.” Above the signature line delineated for “Kevin Maxwell” there were five question marks typed in. Morse testified that there were discussions about which company would be the signatory on the contract.
Morse’s notes of a meeting regarding the employment agreement reflect that the document was to be a short letter agreement and the signatory was to be “Pergamon Holding (U.K.?) on behalf of all U.S. affiliated companies.” Ex. 78. Aboff would be “Responsible for private side, including private side taxes.” Id. Morse prepared approximately three more drafts. Ex. L (Draft: Oct. 3, 1990); Ex. M (Draft: Oct. 8, 1990); and Ex. O (Draft: Nov. 13,1990).
Exhibit L nowhere mentions Macmillan; the only reference is to TCP and the “Maxwell Group.” As drafted, the proposed agreement, which is to be effective April 1, *3891990, names OAG as the provider of all the benefits or perquisites, but that provision is crossed out on the exhibit. A few days later, many of the handwritten emendations reflected on exhibit L were inserted into exhibit M, except that OAG still appears as the provider of all the benefits “unless another member of the Maxwell Group makes such payment_” Exs. L; M.
On November 13, 1990, Morse sent to Aboff Exhibit 0, his third draft of the proposed agreement. As with the earlier drafts, there is no mention of Macmillan. This draft provides in pertinent part:
Dear Shelly,
This is our agreement regarding your employment as Vice Chairman of Thomas Cook Partnership (“TCP”), from _ 1990 to _ 1993. The term shall be automatically renewed from year to year, unless terminated by written notice at least three months before the end of the then current term.
You will be based in TCP’s Greenwich office and will report directly to Robert Maxwell, David Shaffer and myself. You will be an employee of Official Airline Guides, Inc. and will be responsible for overseeing the Maxwell Group’s interests in TCP, the private side companies, and their tax matters and such other senior management duties as may be assigned to you. The Maxwell Group shall provide sufficient financial resources, staff and other support to promote the growth of TCP and to enable you to perform your duties.
‡ ‡ ‡ ‡ ‡ ‡
Best regards
Kevin F.H. Maxwell
Date
Ex. O (Draft: Nov. 13,1990). Exhibit O was the last draft to be prepared by the Whitman & Ransom firm. Aboff gave this draft to his secretary, Barbara Tilley, who retyped it on her computer.
U- The Final Agreement
After several meetings, Aboff and Kevin Maxwell ironed out the remaining open issues. At some point Tilley printed the final agreement which Kevin and Aboff signed.9 The agreement provides in pertinent part:
Dear Shelly:
This is our agreement regarding your employment as Vice Chairman of Thomas Cook Partnership (“TCP”). The initial term shall run through December 31,1993, with automatic renewal for three year terms unless terminated by written notice at least six months before the end of the then current term.
You will be based in TCP’s Greenwich office and will report directly to Robert Maxwell, David Shaffer and myself. You will be an employee of Official Airline Guides, Inc. and will be responsible for overseeing the Maxwell Group’s interest in TCP, the private side companies, and their tax matters and such other senior management duties as may be assigned to you. The Maxwell Group shall provide sufficient financial resources, staff and other support to promote the growth of TCP and to enable you to perform your duties.
******
Best Regards
/s/K. Maxwell
Kevin F.H. Maxwell
4/1/90_
Agreed
Date
*390/s/Sheldon J. Aboff
Sheldon J. Aboff
Ex. 40.
a. The Letterhead
Although the agreement is printed on Macmillan letterhead, there is no mention of Macmillan in the text. Aboff points to five other employment agreements on the same letterhead, which does not identify a particular officer at Macmillan, and asks me to extrapolate from this that his agreement was therefore with Macmillan. A sixth letter agreement is not on any letterhead. But in five of the agreements which he has proffered, the employees are identified as officers of Macmillan and in each of the other employment agreements, the text identifies the employee’s duties at “Macmillan.” All six of these agreements also list “Macmillan, Inc.” above Kevin Maxwell’s signature. See Exs. 46, 50, 57, 59, 60 and 64.
There is another letter agreement which is also not on any letterhead but identifies the employee’s position as the president and chief operating officer of Macmillan and provides that he will serve as a director of both Macmillan and MCC. Kevin Maxwell signed this agreement twice, once in his capacity at Macmillan and then in his capacity at MCC, N.A.
Perhaps recognizing that there are striking distinctions between all these agreements and his own, Aboff points to Robert Miranda’s employment agreement, which lists no entity under Kevin Maxwell’s name. However, Miranda’s agreement describes Miranda as an employee of Macmillan, and provides that Miranda is to perform full-time services for Macmillan. Ex. 169. The letter was also copied to Shaffer, Macmillan’s president, Robert Bogart, vice president of human resources, and Ronald Dunn.
Aboff also relies upon David Shaffer’s revised compensation agreement, which does not name Macmillan under Kevin Maxwell’s signature. Ex. 51; cf. Ex. 89 (Shaffer’s executed original employment agreement with OAG indicates that OAG’s obligations were unconditionally guaranteed by MCC, NA.); Ex. 177 (Shaffer’s agreement once again restated, this time with Macmillan, has Macmillan’s name appearing above Kevin Maxwell’s). However, unlike AbofPs agreement, which makes no mention of Macmillan in the text, Shaffer’s revised compensation agreement is on “Maxwell Macmillan Group” letterhead, identifies Robert B. Bogart as “Vice President of Human Resources and Administration,” and expressly says in the text that David Shaffer was named president of “Maxwell Macmillan” effective March 1,1990. Ex. 51. Moreover, exhibit 51 is only a revision of Shaffer’s nineteen-page agreement reflected in exhibit 89. And not only Kevin Maxwell, but Robert Bogart, signed Shaffer’s employment agreement and provided that it was subject to “any approvals required by the Board or Shareholders.” Ex. 51.
In other words, unlike every other person’s employment agreement that Aboff submits in support of his claim, the only place where the name Macmillan is mentioned in Aboffs agreement is on the letterhead. Ex. 40. How that letterhead came to be used is significant. At trial, Aboff said that he told Tilley to use Macmillan letterhead because Kevin Maxwell so instructed him. At his deposition, however, Aboff had testified that he did not recall Kevin saying any such thing. Tilley told a different story — that she printed the document on Macmillan’s stationary because she had a standing order to use Macmillan’s stationary whenever one of the Maxwells was to sign something. I do not believe Aboffs self-serving “recollection” of what Kevin had told him; it does not comport with what Tilley said nor with his much earlier deposition testimony (taken only one and half years after the document was allegedly signed rather than five years later, at trial). The more credible explanation was what Tilley explained at trial, that she made the decision to use Macmillan letterhead because she always used Macmillan letterhead for both of the Maxwells. Accordingly, I attach no weight to the printing of the agreement on Macmillan letterhead.
b. Use of the Term “Maxwell Group”
Aboff testified that “Robert Maxwell Group” was the private side entity ultimately owning TCTI. Although the record does not reveal precisely what “Maxwell Group” *391means, it is clear that the term did not include Macmillan. Whenever Macmillan was intended to be included within a larger group, its name was utilized, such as with “Maxwell Macmillan Group” or simply “Maxwell Macmillan.” This finding is buttressed by Aboffs own deletions of the word “Macmillan” in references to “Maxwell Macmillan Group” on drafts of his employment agreement in addition to his deletion of Macmillan’s name every other place it appeared on the drafts. Deletion of “Macmillan” from the phrase “Maxwell Macmillan Group” was obviously meant to exclude Macmillan from the diverse group denominated. The most likely explanation for the term “Maxwell Group” in the letter agreement is that it refers to Robert Maxwell Group, pic, which was the entity with the ownership stake in TCP. This construction comports with the second paragraph of the letter agreement, which refers to Aboffs oversight of “the Maxwell Group’s interest in TCP” and obligates the “Maxwell Group [to] ... provide sufficient financial resources, staff and other support to promote the growth of TCP.... ”
c. Effective Date
Aboffs final, signed agreement is dated “4-1-90,” a date which Aboff describes as January 4, 1990, under the English convention for dates. If, however, the effective date was meant to be April 1, 1990, in accordance with American usage, that would add further support to David Shaffer’s testimony regarding implementation of his second alternative for what to do with Aboff, that is, move him to the private side. The significance of April 1, 1990, is that that was the day that Aboff was moved out of Macmillan’s offices and into TCP’s offices in Greenwich. It therefore makes good sense that the employment agreement would be executed as of that date, defining Aboffs future with the Maxwells’ private companies.
Aboff concedes that January 4, 1990, a random Thursday, has no particular significance. Nonetheless he testified, disingenuously I believe, that he and Kevin intended his agreement to become effective on that date. Aside from his testimony, he offers nothing in support. On the other hand, the debtors point to Aboffs own handwritten notes on the Morse term sheet (discussed earlier) which suggest that the contemplated date was to be “Jan 1 or April 1, 1990.” In addition, Morse’s draft agreements, admitted as exhibits M and N, include the April 1, 1990, date within the text. Moreover, all the other persons’ employment agreements that were submitted use the American method of dating. As will be discussed next, Aboff has already proven himself capable of falsification. I do not credit his testimony that the agreement was intended to be effective as of January 4,1990.
H. Aboffs Notes
Evidence of the intent of the parties to the ultimate agreement comes not only from testimony, prior drafts of the agreement, negotiations respecting those drafts, and other contracts executed on behalf of Macmillan, but may also be gleaned from Aboffs contemporaneous notes of meetings with Kevin Maxwell and David Shaffer. Written in his own hand, Aboffs notes include the following:
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*395Before meetings, Aboff would list those items he wanted to discuss, and, at the meeting, would jot down additional notes on the same page; he also updated his notes at subsequent meetings. Generally, Aboffs notes were in blue or black ink and were updated with different colored pens. Aboff explained that he used different colored notes to indicate updating and to highlight where follow-up was necessary. See, e.g., Exs. 88, 130. Aboff also used an ellipse, which appears on the notes above as “0,” to indicate that an item was “open” and therefore being discussed.
During discovery, Aboff asserted that his notes were taken contemporaneously at meetings with Kevin Maxwell and reflected that the letter agreement was intended to be with Macmillan or OAG, rather than with the private side. The debtors contend that Aboff tampered with those notes shown above as Nos. 1, 2 and 4 to add substance to his assertion that Kevin Maxwell intended to bind Macmillan and OAG to Aboffs contract.
Although it is not clear from the black and white versions replicated above, some of the additions to the notes were made in green ink. On No. 4: the “-3 years.” which appears at item two; the underlining which appears on items six, seven, and nine; the word Proposal at item six; the “Fair value 3rd past 5%” which appears at item ten; and the “0 available for special projects — ” language were all added in green.
Aboff had transmitted facsimile reproductions of the original version of all these notes to the Whitman & Ransom law firm on July 25, 1990, in connection with the firm’s assistance in drafting his agreement. Sometime later, he amended No. 4 to include the phrase “available for special projects — .” Notably, this change appears in nearly the identical green-colored pen as “0” and the other pre-July 25 amendments discussed above. See No. 4. The debtors point to the closed gap on the “0” to indicate where Aboff chose the spot to “match the pens.” Compare Ex. JJJ with Ex. 74.
On No. 2, Aboff also added items “F” and “6” sometime after July 25, 1990. However, on this page of notes, Aboff used black ink— the same color as the original notes. Yet other pre-July 25 amendments appear on that same page in green, specifically, the “Proposal far Acq team ” language at item five and the underlining which appears in that same item under “NFO.” The strong implication is that the inclusion in black ink of the added terms “F) Support OAG” and “6) Available for Macmillan/Maxwell group special assignments/projeets” was an attempt by Aboff to create the illusion that these additions were actually part of the original list of items to be discussed even though the emendations were actually made nearly four months later.
On No. 1, Aboff added the word “politics” to his job definition where it previously had said “Confirm I’m out of Max/Mac.” He also added the words “Return to Macmillan” to item six where it had previously asked only “what happens after Cook is sold.” These changes too were made after July 25, 1990, four months after the original meeting. Aboff testified that he kept his notes in a personal folder; every time he remembered to bring the folder to a meeting he therefore had the notes of preceding meetings. The notes do show a chronology. It is thus theoretically possible that Aboff had all three sets of notes at subsequent meetings and that he used different colored pens to make his amendments. I do not believe that that is what occurred, however. There is considerable circumstantial evidence which points to a single conclusion, that Aboff fraudulently altered his notes to induce the debtors — and me — to believe that his contract was with Macmillan and OAG. Aboff did not change the notes in the course of meetings with Kevin Maxwell.
All of the post-July 25 alterations significantly change the meaning of what Aboff noted, from a likely cessation of any role with Macmillan to the establishment of a continuing one. And all of the post-July 25 changes added only references to Macmillan or OAG, the critical parties for our purposes, and affected no other terms on the notes. The *396post-July 25 additions of items “F” and “6” on No. 2 were written in black, seemingly like all the other original items on that page. This is in contrast to the post-July 25 addition of the words: “available for special projects” language which was added in green, the same color as the other additions on that page. In addition, earlier amendments to the notes were consistent with the original content.15 Perhaps most noteworthy is the post-July 25 addition of the word “politics” to No. 1. By July 25, 1990 (a time when the word “politics” did not appear on the notes), Aboff no longer worked out of Macmillan’s Third Avenue offices, no longer attended senior staff meetings, and no longer received any senior executive Macmillan correspondence. At his deposition, Aboff had testified that the reason he was moved to Connecticut was to remove him from Macmillan’s “politics,” rather than its employ, and his contemporaneous notes were supposed to add substance to that point. However, the debtors later discovered that the word “politics” was added at some point after July 25, 1990, long after Aboff left the Third Avenue offices. Since no one from Macmillan worked at TCP, now, after his original version of his notes has come to light, Aboff concedes that it is senseless to argue that after July 25, 1990, Macmillan’s politics were any longer a concern to him. Rather he incredibly suggests that perhaps he wrote those words in a later discussion reflecting that he was then already out of Max/Mae politics. If the issue were debated whether or not Aboff was going to be out of Max/Mac “politics” or Max/ Mac itself, logic suggests that it would have occurred prior to the time Aboff moved away from those politics in April 1990. And Aboff s notes given to Whitman & Ransom in July would have reflected the addition of the word “politics.”
Significantly, during discovery Aboff produced to the debtors only black and white copies of his notes. He did not explain to the debtors that not all entries on the black and white photocopies were contemporaneous with the meeting he was describing. Neither did he tell the debtors that copies of the notes as originally written were sent to Whitman & Ransom.16 Surely Aboff understood during his deposition that black and white copies of his notes were misleading. Yet he neglected to mention anything about his practices either of updating notes or of using colored pens to reflect different things.
In addition to all these others matters, Aboff misrepresented to the debtors at his deposition that those notes which I have called No. 1 were taken at a meeting with Kevin Maxwell held on March 27, 1990. Indeed he volunteered that he specifically recalled that the “Support OAG ” language on No. 2 above was written at the March 27 meeting with Kevin Maxwell. He also said that, as he recalled, all the notes were taken on the same day. The falsity of these statements is categorically proven by the Whitman & Ransom version of the notes which, again, were transmitted to the law firm in July. At trial, Aboff admitted that his deposition testimony was false.
From all this, I conclude that Aboff deliberately altered the most critical evidence in his case and lied at his deposition about when the notes were taken.
I. Aboffs Claim to Employment by OAG
Aboffs employment agreement contained a provision entitling him to participation in a capital accumulation plan and a bonus. Ex. 40 ¶ 5 at 1. In May 1991, Glen Markowski, the General Manager of Financial Services at OAG, issued a bonus check to Aboff on which it was indicated that Aboff was “GRPVPX.” Pl.’s Ex. 107. Markowski indicated that he was issuing the check pursuant to Robert Bogart’s request. Aboff contends that this *397payment constituted OAG’s acknowledgment of its liability under the employment agreement.
There is another, more plausible, explanation, however. TCTI and TCP did not have their own payroll, and Shaffer testified that expenses incurred by the public side for private side matters were charged back to the private side. In the six months prior to May 1991 (the month when Aboff received his bonus check), approximately $25,000 per month was charged back to the private side by OAG. Yet in May, $224,572.95 of TCTI expenses incurred by OAG were charged back. Ex. UU. These numbers strongly suggest that Aboffs entire bonus was charged back to the private side, consistent with Shaffer’s testimony that he directed that Aboffs bonus be charged back to TCTI. This is also consistent with my conclusion, expressed earlier, that OAG was only a paying agent for Aboff, and not his employer.
J. Events Just Preceding Aboffs Resignation from the Public Side
1. The Increasing Debt owed by the Private to the Public Side
After the MCC accounts were closed for June 1991, Basil Brookes, the Finance Director of MCC, discovered that the intercom-pany balance owing to the public side from the private side was substantial, approximating £178 million. Ex. 172, Shaffer’s Statement to the City of London Police 13 (Sept. 16, 1992). Brookes approached Robert Maxwell, who mollified Brookes with an assurance that the situation would be rectified by July. Instead, the July balance increased to approximately £300 million. Brookes called an early August emergency meeting of the board of directors of MCC. Id. at 14. When Robert Maxwell unilaterally canceled the meeting, Brookes met privately with three directors of MCC, including Shaffer, to voice concern. They formed a subcommittee to monitor the public-private transfers and established procedures and guidelines for future MCC management.
By mid-October, although the procedures and guidelines for the transfer of funds between the public and private sides had been formulated by the independent members of MCC’s board of directors, the necessary board resolutions to enact these changes had not been passed. Brookes resigned or threatened to resign.
2. The Misappropriation of Macmillan and Pergamon Holdings Corp. Monies
The debtors charge Aboff with the responsibility for the misappropriation of several million dollars in tax refunds by PH(US)I from Pergamon Holdings Corp. The refund checks were deposited into PH(US)I’s account. Aboff was president and one of three directors of PH(US)I, the other two of whom were Robert Lefko and Steve Denbaum. Exs. H, EEE, GGG, KKK. All three had check-signing authority over PH(US)I’s account with Chemical Bank. Ex. H. The account required two officers to sign for transfers out in excess of $5,000. PH(US)I’s offices were located at West Putnam Avenue and housed essentially five employees, Aboff, Murtha, Tilley, Denbaum, and one Doug Robinson. Tilley and Murtha reported directly to Aboff and were under his supervision. For the most part, Robinson worked on TCP matters. PH(US)I operated as a conduit through which the private side would effectuate mostly intercompany transfers of millions of dollars. Upon the direction of the Maxwells, Aboff, in his capacity as president, would transfer the funds. Aboff testified that he had no knowledge that the transfers were wrongful. He also said that he did not always effectuate the requested transfers— sometimes Lefko and Denbaum did so. R. 1761. During his tenure, Shaffer was also unaware that the transfers were wrongful. He testified that there had always been in-tercompany balances between the public and private side companies. Ex. 172 at 13. Aboff testified that he had no involvement in the misappropriation and that he did not recognize the handwriting on the deposit slips or the endorsements on the back of the cheeks. Tilley, who testified that she could recognize Aboffs handwriting (and did so at other instances in the trial), also did not recognize the handwriting on the cheeks. Aboff said that Murtha and Denbaum were responsible for the bank statements and books and records of PH(US)I; Aboff testi*398fied that he did not maintain them. R. 1748, 1756. Lefko denied participation. So did Aboff.
On October 25, 1991, someone at Macmillan apparently authorized a $500,000 wire transfer to PH(US)I. That same day someone from PH(US)I wired out $1 million. Aboff swore that he did not recognize the Macmillan wire transfer request form associated with the transfer. Not only Aboff but Shaffer testified that Aboff did not have the appropriate authority to wire transfer funds out of Macmillan.
3. The Loss of Berlitz Shares
In order to purchase Macmillan and other business assets, MCC had borrowed approximately $3 billion from a syndicate of banks. The terms of the syndicated loan called for repayment of $750 million in October 1992. In the spring of 1991, MCC’s board of directors decided to sell off various assets in an attempt to raise the needed $750 million by December 31, 1991 so that Macmillan could retire the loan early and improve its negotiating posture with the banks. The bulk of the $750 million was to come from Macmillan’s sale of its majority interest in a publicly held company called Berlitz International, Inc. (“Berlitz”). Ex. 172, Shaffer’s Witness Statement to City of London Police, at 4 (Sept. 16, 1992). Toward this end, Shaffer entered into negotiations with a variety of potential purchasers of the stock which culminated in the fall of 1991 with a Japanese company’s offer of $265 million.
All along, Shaffer testified, he had thought that Macmillan’s shares of Berlitz were under Macmillan’s control. After Robert Maxwell’s death in November 1991, however, Shaffer was to learn that Shearson Lehman had filed a Schedule 13D which purported to show that it was the beneficial owner of 1.9 million of the shares. Ex. 172 at 5. After some investigation, Kevin Maxwell reported to the MCC board of directors that Robert Maxwell had in fact inappropriately and without authority pledged the Berlitz shares that were in the possession of Shearson Lehman. In addition, it was later discovered that another 2.4 million of Macmillan’s Berlitz shares had been pledged to a Swiss Bank. Ex. 172 at 7. The remainder of Macmillan’s Berlitz stock was also discovered to have been pledged to several other institutions. Id.
How these pledges occurred is a matter of some dispute. There is documentary evidence which purports to show that in November 1990 a telephonic meeting of the board of directors of Macmillan was convened at which Shaffer was a participant. During this meeting, Macmillan supposedly was authorized to transfer all of its interest in Berlitz, 10.6 million shares, to Bishopsgate Investment Trust, pic (a private side entity) as nominee, with Macmillan remaining the beneficial owner of the shares. Ex. 172 at 7-8 and documents annexed. Shaffer testified that he first discovered this alleged transaction a year later, in November 1991, and did not participate in the documented meeting of Macmillan’s board of directors.
Sometime in late October 1991, Aboff and the Maxwells discussed the Maxwell organization’s need for cash. Aboff suggested that if shares of a company traded on an American stock exchange could be made available, Aboff would approach brokerage companies and ask them to lend up to 50% of the shares’ value on margin. Ex. EEE ¶57. Aboff testified that Robert Maxwell told him that the private side had Berlitz shares available which were owned free and unencumbered. Id. Aboff opened an account at PaineWebber in the name of “BIT, c/o PHU-SI” specifically to receive 2.3 million shares of Berlitz stock to be margined for the borrowing. After PaineWebber expressed concerns about using the Berlitz stock as collateral because the number of shares might be too large for the market float, Aboff communicated with two other brokerage firms, Ad-vest and D.H. Blair, with whom Aboff had personal accounts. Ex. EEE. Aboff started with small amounts of Berlitz stock to avoid the concern expressed by PaineWebber.
Over a period of approximately twelve days, Aboff transferred one million Berlitz shares to his personal margin accounts, drew down $4.2 million in his own name and immediately transferred the funds to PH(US)I. Id. ¶ 63. Aboff did not tell the brokerage firms that he did not own the shares. Id. *399Once the funds landed at PH(US)I, Aboff used some of the proceeds to buy shares of MCC and Mirror Group Newspapers. Aboff testified that he acted at the behest of the Maxwells, receiving no remuneration for the use of his private accounts nor any written assurances from the Maxwells regarding repayment of the margin loans. Aboff claims that he did not know that the Berlitz shares belonged to Macmillan at the time that he acquired them as nominee and only learned of their true ownership on December 6,1991. The shares have never been returned to Macmillan.17 Aboff says that he informed Susan Aldridge, Macmillan’s chief financial officer, that he had some of Macmillan’s shares. Ex. EEE ¶ 64. Ms. Aldridge, however, did not testify in corroboration of Aboffs testimony. On the other hand, Shaffer testified that as soon as the shares were discovered missing, he engaged in many conversations with Aldridge regarding the issue. On December 12 or 13, after Shaffer had told Aldridge that some of Macmillan’s shares were in Aboffs possession, she indicated that she had no previous knowledge of the shares’ whereabouts.
Earlier, on December 8, 1991, Shaffer had told Aboff that Macmillan’s shares of Berlitz stock were missing. Aboffs notes of the conversation reflect his knowledge that the shares were missing yet he did not disclose to Shaffer that one million of them were in his accounts. See Ex. 53. It was not until December 12, 1991, that Aboff instructed his attorney to write to Macmillan’s chief counsel, Mr. Bender, and inform Macmillan that he possessed some of Macmillan’s missing Berlitz stock.
k- The Severance of the Public and Private Sides
As the independent directors of MCC began to suspect the extent to which Robert Maxwell may have defrauded the public companies, they concluded that many of the ties between the public and private companies had to be severed. On December 6, Shaffer informed Aboff that there was to be effeetu-ated a total separation of the public and private sides and that the private side employees on OAG’s payroll had to move off that payroll. See Ex. RRR. Shaffer also intimated that Aboffs employment agreement was being examined to determine whether it was a private or public side obligation.
On December 8, during the conversation about the missing Berlitz shares, Shaffer informed Aboff that it had been determined that his employment agreement was with the private side and was therefore solely a private side obligation. He also said that OAG would no longer pay Aboffs, Tilley’s, or Mur-tha’s salaries. On December 9,1991, Shaffer informed Aboff in writing that all expenses of the private side had to be separated from MCC and its subsidiaries. Ex. 116. Shaffer indicated that Maxwell Macmillan would no longer serve as paying agent for the private side for Aboffs salary and benefits. On December 11, through counsel, Aboff notified Shaffer that Aboff considered himself a public side employee and demanded Macmillan’s adherence to the letter agreement. On December 12, Bogart and one Bob Yardis informed Aboff, via internal memoranda, that OAG would cease to act as paying agent for his, Tilley’s and Murtha’s salaries. Ex. 118, 119. The next day, Robert Baldwin of MCC’s human resources department wrote to Aboff informing him that MCC had canceled the standing order under which MCC paid a $45,000 annual consulting fee to Aboff. Ex. 120. On that same day, Susan Doctors of OAG’s human resource department informed Aboff that OAG would no longer pay him. She noted further that since Aboff had provided services after the date upon which OAG would cease paying him, he would be entitled to his salary for all days worked from the employer to whom he provided the services. Ex. 121. James Harrington of Maxwell Macmillan’s risk management and employee benefits team similarly informed Aboff that Macmillan would no longer provide services to Aboffs company and that *400OAG would no longer pay his salary. Ex. 122.
Some days later, Robert Maxwell mysteriously disappeared from his yacht and turned up dead. On December 3, 1991, Kevin and another of Robert Maxwell’s children, Ian, were asked to resign from MCC’s board of directors. Less than two weeks later, on December 16, 1991, MCC filed a voluntary chapter 11 petition in this court followed immediately by a petition to the High Court of Justice in London for an administration order which, under Britain’s Insolvency Act 1986, is the closest equivalent in British law to chapter 11 relief. See In re Maxwell Communication Corp. plc, 93 F.3d 1036 (2d Cir.1996).
By December 1991, various banks with loans outstanding to the Maxwell companies had entered into a standstill agreement, and transactions affecting the public and private side were being scrutinized. An accounting firm was retained to examine the suspected unlawful goings-on and in this vein made an appointment with Aboff to examine the books and records of PH(US)I. Instead of meeting with the accounting firm as scheduled on December 17, 1991, Aboff, with the assistance of Murtha and Tilley, packed up many of the PH(US)I records and loaded them into his car. At his instruction, nine other bags of documents were shredded. The next day Aboff resigned from Robert Maxwell Group, pie and purported to do the same with respect to Macmillan. Ex. SSS.
II.
Earlier in these proceedings, both parties moved for summary judgment with respect to the employment contract. The debtors also moved to dismiss AbofPs proofs of claim on grounds that he had tampered with the evidence. Aboff sought summary judgment on the debtors’ counterclaims against him, arising out of (i) his margining Macmillan’s Berlitz shares on behalf of the private side, and (ii) the PH(US)I cash transfers and receipt of the debtors’ misappropriated tax refund checks. See Maxwell Macmillan Realization Liquidating Trust v. Aboff (In re Macmillan), 186 B.R. 36 (Bankr.S.D.N.Y.1995). I did not grant summary judgment to Aboff because the letter agreement was ambiguous and the debtors had come forward with sufficient evidence to lead me to question AbofPs veracity. I denied summary judgment to the debtors on evidence tampering grounds because Aboff had produced a sufficiently possible explanation for the emendations to defeat summary judgment. I determined that the Maxwell Macmillan Realization Liquidating Trust, which was created pursuant to MCC’s confirmed plan of reorganization, had standing to assert the counterclaims. Upon request, I remanded to the state court the Berlitz-related counterclaims pursuant to 28 U.S.C. § 1334(c)(1). I denied summary judgment on the argument that the counterclaims were time-barred because the dates of the alleged conversions were disputed.
At trial, Aboff abandoned the statute of limitations defense. He failed to address the issue in the joint pretrial order, neglected to argue it during the trial, and omitted the issue from his post trial submissions. Indeed, Aboff defended the counterclaims on the merits. The defense is therefore waived. See Camp, Dresser & McKee, Inc. v. Technical Design Assoc., Inc., 937 F.2d 840, 843 (2d Cir.1991); MEI Int’l v. Schenkers Int’l Forwarders, Inc., 807 F.Supp. 979, 989 (S.D.N.Y.1992).
III.
A. Employment Contracts
To recover for breach of an employment contract, the plaintiff must show “1) the making of an agreement; 2) due performance by the plaintiff; 3) breach of the agreement by the defendant; and 4) resulting damage to the plaintiff.” Palmer v. A. & L. Seamon, Inc., No. 94 Civ. 2968, 1995 WL 2131, *1 (S.D.N.Y. Jan. 3, 1995).
Authority to bind corporations to employment contracts is not presumed, however, in every contract made by the officers or directors of the corporation. See 2 W.M. FLETCHER, FLETCHER CYCLOPEDIA OF CORPORATIONS § 466 at 506 (1988 revised vol. 19, Clark Boardman Callaghan 1991-1994). The burden is upon the plaintiff to show that an *401employment contract was either made or ratified by an officer or director having the authority to bind the corporation. 2 FLETCHER, supra, § 466.1 at 515; Goldenberg v. Bartell Broadcasting Corp., 47 Misc.2d 105, 108-09, 262 N.Y.S.2d 274, 279 (Sup.Ct.1965). Contracts for lifetime employment have been deemed “unusual” by New York courts faced with claims relating to such contracts. Burke v. Bevona, 931 F.2d 998, 1001-02 (2d Cir.1991). Under New York law it is settled that in order to bind a corporation to an “extraordinary5’ contract entered into between a corporate official and another party, it is necessary to show that the official had the express authority to do so. Id. However, what is unusual or ordinary necessarily depends on the circumstances of the particular ease. Id. The party seeking to enforce the contract bears the burden of showing the existence of authority to sign an extraordinary contract. Id.
Although the debtors question Kevin Maxwell’s corporate authority to bind Macmillan, at least three witnesses, one of whom was Macmillan’s in-house counsel, confirmed that he had such authority. See Testimony of Constantine, R. 59; Testimony of Miranda, R. 178; Testimony of Shaffer, R. 511-513,1947-1948, Ex. 177. Kevin Maxwell entered into more than one contract providing for lifetime benefits for Macmillan employees and Miranda is continuing to receive benefits under his. Yet Aboff has submitted no evidence that Kevin Maxwell had the express authority to bind OAG to a lifetime employment contract. Plainly, this is an extraordinary contract, permitting Aboff, who was then in his early forties, to immediately retire and receive a lump sum benefit of some $18 million. Aboff contends that since OAG began making payments under the contract, it therefore effectively ratified the agreement. However, there was no ratification because the payments made by OAG were charged back and were contemplated to be charged back from the very beginning; OAG was simply the paying agent. See Levy v. David C. Gold & Co., Real Estate, Inc., 141 A.D.2d 511, 529 N.Y.S.2d 133 (2d Dep’t 1988) (an agent for a disclosed principal will not be personally bound to a contract unless there is clear and explicit evidence of the agent’s intent to add or substitute its own personal liability for that of its principal); In re Thomson McKinnon Securities, Inc., 149 B.R. 61, 71 (Bankr.S.D.N.Y.1992) (compensation received from subsidiary consistent with terms of employment contract from parent did not make subsidiary assume obligations of employer). There was no evidence that OAG purported or was authorized to ratify another company’s obligation. Therefore, I turn to the issue of whether Macmillan was the intended counterparty to this agreement.
B. Interpretation of the Contract
The construction of corporate contracts, including employment contracts, is governed by the same rules applicable to contracts of individuals. 6 FletcheR, supra, § 2585 at 542-43. “The objective in any question of the interpretation of a written contract, of course, is to determine ... the intention of the parties as derived from the language employed.” Siebel v. McGrady, 170 A.D.2d 906, 907, 566 N.Y.S.2d 736, 737 (3d Dep’t 1991) (quotation omitted). That intent should be viewed from the time the parties executed and entered into the contract, not from hindsight. Fletcher, supra. “The court must ascertain the intent of the parties from the plain meaning of the language employed,” PaineWebber Inc. v. Bybyk, 81 F.3d 1193, 1199 (2d Cir.1996) (quoting Tigue v. Commercial Life Ins. Co., 631 N.Y.S.2d 974, 975 (4th Dep’t 1995)), giving reasonable, lawful, and effective meaning to all of its provisions. Id. (citing American Express Bank Ltd. v. Uniroyal, Inc., 164 A.D.2d 275, 277, 562 N.Y.S.2d 613, 614 (1st Dep’t 1990)). Definitive, particularized contract language generally takes precedence over expressions of intent that are general, summary or preliminary. Fletcher, supra, § 2585 at 558-559.
If the language of the contract is unambiguous, its meaning is determined without reference to evidence outside the “four corners” of the agreement; however, if the meaning of the language employed is unclear and the contract ambiguous, extrinsic evidence may be considered. See Paine-Webber, 81 F.3d at 1199; Janos v. Peck, 21 A.D.2d 529, 532-33, 251 N.Y.S.2d 254, 258-59 (1st Dep’t), aff'd, 15 N.Y.2d 509, 202 N.E.2d 560, 254 N.Y.S.2d 115 (1964). “A term is *402ambiguous if it is susceptible to more than one reasonable interpretation.” Lash Corp. v. Fisher Hamilton Scientific, Inc., No. 94-CV-767H, 1996 WL 111582, *2 (W.D.N.Y. Jan. 11, 1996); Hunt Ltd. v. Lifschultz Fast Freight, Inc., 889 F.2d 1274, 1277 (2d Cir.1989).
A court should construe ambiguous language against the interest of the party that drafted it “to protect the party who did not choose the language from an unintended or unfair result.” See PaineWebber, 81 F.3d at 1199 (quoting Mastrobuono v. Shearson Lehman Hutton, Inc., — U.S. -, -, 115 S.Ct. 1212, 1219, 131 L.Ed.2d 76 (1995)); Graff v. Billet, 64 N.Y.2d 899, 902, 477 N.E.2d 212, 213-14, 487 N.Y.S.2d 733, 734-35.
The parties spent a great deal of time litigating whether or not Aboff provided services for Macmillan. This type of evidence is relevant as an aid for determining the intent behind the words of an ambiguous contract; it tends to show that the parties intended the contract by virtue of the fact that they performed consistent with it. See Dow Chemical Co. v. S.S. Giovanella D’Amico, 297 F.Supp. 699, 706 (S.D.N.Y.1969); Janos, 21 A.D.2d at 535, 251 N.Y.S.2d at 261; Hoffman v. Hoffman, 212 A.D. 531, 208 N.Y.S. 734, 735 (4th Dep’t 1925); 4 Williston on Contracts § 601 at 306, § 618 at 718 (3d ed.1961); Rottkamp v. Eger, 74 Misc.2d 858, 861, 346 N.Y.S.2d 120, 125 (Sup.Ct. Suffolk County 1973). In and of itself, however, whether Aboff provided services to or for Macmillan is not outcome determinative of the objection to his claim. No liability is placed upon a stranger to an agreement, and unless the party intended to be bound by the agreement, it is not liable for its breach. New York Tel. Co. v. Teichner, 69 Misc.2d 135, 136, 329 N.Y.S.2d 689, 691 (Sup.Ct. Suffolk County 1972); American Express Bank, Ltd. v. Uniroyal, Inc., 164 A.D.2d 275, 277, 562 N.Y.S.2d 613, 614 (1st Dep’t 1990), appeal denied, 77 N.Y.2d 807, 569 N.Y.S.2d 611, 572 N.E.2d 52 (1991); see also Tigue, 219 A.D.2d at 821, 631 N.Y.S.2d at 975.18
The term “Maxwell Group” is certainly ambiguous. Aboff suggests that I construe this ambiguity against Macmillan and find that Maxwell Group includes Macmillan because it was Macmillan’s counsel who drafted the contract embodying the ambiguous term. I disagree. The purpose of the maxim is “to protect the party who did not choose the language from an unintended or unfair result.” PaineWebber, 81 F.3d at 1199. Here, Aboff contributed to the ambiguity present in the Whitman & Ransom drafts because Aboff personally crossed out every reference to Macmillan at each place it appeared on Morse’s term sheet. Contrary to what Aboff suggests now, it was Aboff who provided the term “Maxwell Group” to be used on his employment agreement: in his own hand, Aboff crossed out “Macmillan” from Morse’s reference to the “Maxwell Macmillan Group” on exhibit 90, changing it to read “Maxwell Group.” Accordingly, if I am to construe the ambiguity against anyone, it is against Aboff. Moreover, the inference that Maxwell Group does not include Macmillan is buttressed by Aboffs crossing out every other reference to Macmillan on the Morse term sheet.
As chronicled in much detail above, the services which Aboff provided, to Macmillan after his transfer did not rise to a level remotely suggesting that Macmillan intended to bind itself to a lifetime employment contract. And Aboffs salary, although paid by OAG, was charged back to the private side. As Aboff himself swore under oath, after he moved to the West Putnam offices, he had very little involvement in Macmillan matters. Ex. GGG. He was removed from one of his “special assignments,” and for the other, Project Tokyo, to the extent his services benefited the public side, they were charged back to the public side. Contrary to his claim, Aboff was indeed notified of his transfer to the private side. On March 27,1990, Kevin Maxwell notified Aboff that he would be “out” of Maxwell Macmillan. That instruction is shown to have been implemented by Aboffs dividing up his Electronic Publishing Group responsibilities on March 29,1990, and by his moving his office to Greenwich and taking on *403the role as group vice president of TCP on April 1, 1990. After he moved to TCP’s Greenwich office, Aboff stopped attending Macmillan employee meetings and stopped receiving Macmillan senior executive correspondence.
Aboffs contention that the failure to name Macmillan was a bilateral oversight is disingenuous. He himself ensured that Macmillan’s name did not appear on the final drafts. It was no mistake that Macmillan’s name did not appear on his final agreement. To bolster the theory of mistake, Aboff testified that it was never contemplated that he was to be out of Macmillan, only that the precise nature of his continuing role was being negotiated. This assertion is untrue. His own notes indicate that one of the terms being negotiated was “who is the legal entity” to be the counterparty to the agreement. See supra No. 4. Aboff points to the language, “You will continue as an employee of the Maxwell/Macmillan Group” in Shaffer’s original April 17 draft to support his theory that the absence of such language in the final draft was an oversight because, right from the very start, Aboff was to continue as an employee of Macmillan. Cutting the other way, however, is the progression of drafts which show that the identity of the legal entity was very much in debate. Cf. Ex. 85 (“You will continue as an employee of the Maxwell/Macmillan Group”); Ex. FF (‘You will continue as an employee of the Maxwell/Macmillan Group (“the “Group”), a division of Macmillan, Inc.”); Ex. JJ (‘You will (continue as) (be) an employee of Official Airline Guides, Inc.”); Ex. JJ (“Signing on what letterhead on behalf of what company?”); Ex. 90 (“Primary Management and oversight authority for the Maxwell Macmillan Group’s interest in TCP”); Ex. 78 (“Per-gamon Holding (U.K.?) on behalf of all U.S. affiliated companies”); Ex. L (reference to “Maxwell Group” but no entity above Kevin Maxwell’s signature line); Exs. M, N, 0, 40 (same). I do not believe that after a year and one-half of negotiations on that very issue, there was a mistake in omitting Macmillan’s name above Kevin Maxwell’s signature.
Further evidence of the parties’ intent comes from Aboffs altered notes. Evidence tampering “goes much further than merely to discredit the [altered] document itself; it is positive evidence upon the very issue [the document is intended to demonstrate], and weighty evidence as well.” Warner Barnes & Co. v. Kokosai Kisen Kabushiki Kaisha, 102 F.2d 450, 458, modified on other grounds, 103 F.2d 430, 453 (2d Cir.1939). Aboffs fraudulent amendments diametrically change the meaning of those notes. Therefore, Aboffs actions support the conclusion that the unaltered version of the notes accurately reflected that Aboff was to be “out of Max/Mac,” was not to “return to Macmillan” nor “support OAG.” See Warner Barnes & Co., 102 F.2d at 453; United States v. Philatelic Leasing, Ltd., 601 F.Supp. 1554, 1565-66 n. 10 (S.D.N.Y.1985) (quoting 2 John H. Wigmore, Evidence § 278 at 133 (James H. Chadbourn rev., 1979)), aff'd, 794 F.2d 781 (2d Cir.1986). In addition, Aboffs fraudulent inclusion of the term “available for special projects” leads me to conclude that he knew full well that Shaffer’s “second alternative” had been implemented. He added that language in an apparent attempt to fool me into believing that a version of the “third alternative” had been implemented instead because that option specifically referred to “special projects.”
That Macmillan engaged outside counsel and a pension consultant to assist in drafting Aboffs agreement is not particularly important. Credible testimony established that Macmillan frequently provided services to the private side. Testimony of Constantine, R. 65. Employees of the Maxwell Macmillan group of companies provided services to both the public and private entities simply because their employer had said to work on an assignment regardless of which entity was paying their salary. Id.; Testimony of Bogart, R. 1873; Testimony of Shaffer, R. 531-532; R. 739-40. Moreover, Shaffer’s “second alternative” — transferring Aboff — expressly contemplated that he would continue to draw services from employees at Macmillan’s Third Avenue offices. The fact that Macmillan’s outside counsel and Macmillan’s outside pension consultant assisted in the negotiations accordingly does not lead me to con-*404elude that Macmillan itself intended to be bound by Aboffs contract.
Similarly, Aboffs participation in Macmillan’s long term incentive compensation plan has no independent relevance. The benefit does not appear in Aboffs final agreement. Here, there was a demonstrated effort to burden only the private side with the obligations contained in Aboffs letter agreement and Aboffs participation in Macmillan’s long term incentive compensation plan does not affect that conclusion.
C. Whether the Debtors Are Estopped from, Denying Liability
Aboff urges that the debtors ought be estopped from denying that they are liable on his contract because the documents that Macmillan sent him in December 1991 prove that Aboff was not terminated until that time. He cites Leventhal v. New Valley Corp., No. 91 Civ. 4238, 1992 WL 15989, * 5 (S.D.N.Y. Jan. 17, 1992) which held, “[i]t is well settled that where a party to a contract terminates the contract and presents a specific reason for the termination, that party is estopped from raising a different reason upon the commencement of the action.” In Leventhal, the employer had paid the plaintiff in accordance with the agreement for over three years without once suggesting the contract was void for want of consideration or unconscionability. When the employer announced it was discontinuing severance payments, it stated as its reason “severe financial problems.” The Leventhal court held that the employer was equitably es-topped from later objecting to the agreement’s validity. Id. Aboff argues that he, similarly, was paid all along pursuant to the terms of the contract and then given a reason for his termination in December 1991 — recent events necessitating the complete separation of private and public side interests. There are important differences here, however. First, the salary paid to Aboff from OAG was charged back to the appropriate private side company. And the services Aboff performed on Project Tokyo were charged back to the public side. All of the documents sent to Aboff from the various companies did not say that Aboff was being “terminated” for the reason specified, but they affirmed that those companies would no longer be paying his salary and informed him that he would have to seek compensation from the private side employer to whom he was providing services. There is no estoppel here.19
D. Whether Aboff Is Responsible for the PH(US)I Transactions
“[0]fficers and directors may not be held liable simply on the basis of their authority-” American Feeds & Livestock Co., Inc. v. Kalfco, Inc., 149 A.D.2d 836, 837, 540 N.Y.S.2d 354, 356 (3d Dep’t 1989). “The ordinary doctrine is that a director, merely by reason of his office, is not personally liable for the torts of his corporation; he must be shown to have personally voted for or otherwise participated in them.” Armour & Co. v. Celic, 294 F.2d 432, 439 (2d Cir.1961).
The debtors charge Aboff with conversion and aiding and abetting the Maxwells’ asserted conversion, breaches of fiduciary duty, and fraud. In New York, conversion is the “unauthorized exercise of dominion over the property of another to the exclusion of the owner’s right, or the unauthorized use of that property.” Pinnacle Consultants, Ltd. v. Leucadia Nat’l Corp., 923 F.Supp. 439, 447 (S.D.N.Y.1995) (quoting City of Amsterdam v. Daniel Goldreyer, Ltd., 882 F.Supp. 1273, 1280 *405(E.D.N.Y.1995). Fiduciary duty is an obligation of “utmost good faith, fairness, [and] loyalty.” See Newburger, Loeb & Co. v. Gross, 563 F.2d 1057, 1078 (2d Cir.1977), cert. denied, 434 U.S. 1035, 98 S.Ct. 769, 54 L.Ed.2d 782 (1978). And corporate officers and directors can be held individually liable for fraud if they personally participated in, or had actual knowledge of, the fraud. People v. Apple Health & Sports Clubs Ltd., Inc., 80 N.Y.2d 803, 599 N.E.2d 683, 587 N.Y.S.2d 279, 282 (1992); People v. American Motor Club, Inc. 179 A.D.2d 277, 582 N.Y.S.2d 688, 692 (1st Dep’t 1992).
“Personal liability will be imposed [ ] upon corporate officers who commit or participate in the commission of a tort, even if the commission or participation is for the corporation’s benefit.” Key Bank v. Grossi, — A.D.2d -, -, 642 N.Y.S.2d 403, 404 (3d Dep’t 1996); National Survival Game v. Skirmish, U.S.A., Inc., 603 F.Supp. 339, 341 (S.D.N.Y.1985); Sachs New York, Inc. v. Kin Post Realty Corp., 84 Misc.2d 827, 377 N.Y.S.2d 437 (Civil Court Bronx County 1975).
Here, the debtors allege that Aboff knowingly misappropriated and converted tax refund checks aggregating millions of dollars and a specific Macmillan wire transfer. In order to hold a defendant liable for conversion, there must be evidence that the defendant knowingly fostered the conversion or was aware of the conversion and declined to exercise his ability to set it right. American Feeds & Livestock Co., Inc. v. Kalfco, Inc., 149 A.D.2d 836, 837, 540 N.Y.S.2d 354, 356 (3d Dep’t 1989); see also Bomar Resources, Inc. v. Sierra Rutile Ltd., No. Civ. 90 3773, 1991 WL 4544 (S.D.N.Y. Jan. 15, 1991). The plaintiff must show that the defendant exercised “unauthorized dominion” over the thing in question to the exclusion of the plaintiffs rights. It’s Entertainment v. Choice Entertainment, Inc., No. 90 Civ. 0653, 1991 WL 285615, * 10 (S.D.N.Y. Dec. 31, 1991); Republic of Haiti v. Duvalier, 211 A.D.2d 379, 384-85, 626 N.Y.S.2d 472, 475 (1st Dep’t 1995); Bomar Resources, Inc. v. Sierra Rutile Ltd., No. 90 Civ. 3773, 1991 WL 4544, *12 (S.D.N.Y. Jan. 15, 1991); Bankers Trust Co. v. Cerrato, Sweeney, Cohn, Stahl & Vaccaro, 187 A.D.2d 384, 590 N.Y.S.2d 201 (1st Dep’t 1992). Where the property is money, it must be specifically identifiable and subject to an obligation to be returned or to be otherwise treated in a particular manner. Duvalier, 211 A.D.2d at 384-85, 626 N.Y.S.2d at 475; Key Bank, — A.D.2d at -, 642 N.Y.S.2d at 404 (citations and quotations omitted); It’s Entertainment, 1991 WL 285615, at *10.
Aboff was the president of PH(US)I and one of three signatories on PH(US)I’s account into which were deposited the debtors’ misappropriated tax refund checks. The day to day transfers of cash to and from various companies were conducted out of PH(US)I’s West Putnam offices with its five person staff. See R. 1761-1765. PH(US)I’s raison d’etre was the transferring of funds the details of which were dictated by the Maxwells. In support of their claims, the debtors proffer certain PH(US)I deposit slips and certain Pergamon Holdings’20 tax refund checks which were endorsed, “for deposit into the account of PH(US)I.” R. 1785-88. The debtors also introduced into evidence a Macmillan wire transfer request form which indicated funds being transferred from Macmillan as well as PH(US)I bank statements which reflect transfers in and out of the account. However, the debtors were unable to link Aboff to the specific transactions upon which they are suing. Independent testimony established that Aboff s handwriting was not on the tax refund checks or the PH(US)I deposit slips associated with those transfers. In addition, Shaffer testified that Aboff could not wire transfer funds out of Macmillan. The few documents submitted by the debtors established merely that sums of money had been received by PH(US)I, but not their source or whether their receipt was improper. Whereas I may draw adverse inferences from several of Aboff s actions,21 Dow Chemi*406cal Co. v. S.S. Giovannella D’Amico, 297 F.Supp. 699 (S.D.N.Y.1969), I do not think those inferences rise to a level to permit me to conclude that Aboff exercised dominion over the funds in question.
The debtors also ask that I infer AbofPs knowledge that the transfers were wrongful. They reason that AbofPs denial of knowledge of wrongdoing ought not be believed. Aboff lied during these proceedings, shredded potential evidence, and manufactured his own. All these facts demonstrate that Aboff is capable of falsification to ensure his success on his own claims, and the destruction of documents suggests that Aboff might also be hiding something. Although one can postulate that Aboff may have had knowledge, the debtors have not given me evidence sufficient to draw that inference. Simply because Aboff was effectuating transfers as part and parcel of his responsibilities at PH(US)I does not prove knowledge of wrongdoing with respect to these transfers effected by someone else. Shaffer himself testified that he was aware of the intercom-pany borrowing. When the claim is based entirely on inference, the facts must give rise to a strong inference that the defendant had knowledge of or participated in the wrongdoing at the time of the alleged wrongdoing. See Connecticut Nat’l Bank v. Fluor Corp., 808 F.2d 957, 962 (2d Cir.1987) (pleading); see also Marine Midland Bank v. John E. Russo Produce Co., 65 A.D.2d 950, 950, 410 N.Y.S.2d 730, 732-33 (4th Dep’t 1978) (permitting a strong negative inference to be drawn based upon the other evidence submitted); cf. Greene v. Blumberg (In re Longfellow Indus., Inc.), No. 86-5434, slip op. at 17 (Bankr.S.D.N.Y. Oct. 9, 1990) (the negative inference drawn from a defendant’s assertion of his Fifth Amendment privilege alone is insufficient for a court to find in favor of the party against whom the privilege has been raised, “absent independent probative evidence of the facts alleged.” (citing Baxter v. Palmigiano, 425 U.S. 308, 317-18, 96 S.Ct. 1551, 1557-58, 47 L.Ed.2d 810 (1976); United States v. Bonanno Organized Crime Family of La Cosa Nostra, 683 F.Supp. 1411, 1451-52 (E.D.N.Y.1989), aff'd, 879 F.2d 20 (2d Cir.1989); In re Caucus Distributors, Inc., 106 B.R. 890, 921-22 (Bankr.E.D.Va.1989))). The fact that Aboff destroyed PH(US)I documents does not prove that Aboff made these transfers. Moreover, the debtors do not suggest that the documents which Aboff destroyed would have enabled them to fare better on any of the specific claims asserted here.
As to the debtors’ fraud claim, it is elementary that fraud will not be presumed and must be proven. Lowendahl v. Baltimore & Ohio Railroad Co., 247 A.D. 144, 158, 287 N.Y.S. 62, 76 (1st Dep’t), aff'd, 272 N.Y. 360, 6 N.E.2d 56 (1936). This claim fails for much the same reason as the conversion claims, a failure of proof.
E. Aboff s Request for Legal Fees
As a result of the highly suspect dealings between the public and private side companies, Aboff was investigated and sued. AbofPs proof of claim seeks damages of $362,194 for “refusal to provide and specific misrepresentations as to availability of directors’ and officers’ insurance coverage available to other directors, officers and employees” of the debtors in connection with investigation of business transactions of Macmillan and other Maxwell companies; claims against Aboff by Arthur Andersen & Co.; and in connection with the counterclaims which the debtors assert against him. During the trial, Aboff conceded that the claims for which he sought reimbursement were brought by private, not public, side companies for misappropriation of certain of their assets.
Aboff has the burden of proving the elements of the claim for insurance coverage. Cronin v. Aetna Life Ins. Co., 46 F.3d 196, 203 (2d Cir.1995). He contends that he incurred substantial legal fees, approximately $350,000, defending and successfully clearing himself of the various charges. He submits several exhibits relating to Macmillan’s officer and director liability insurance plan and says that Macmillan ought pick up the tab, because, at the very least, the debtors have conceded that he was a group vice president *407at Macmillan in 1989, and presumably some of the investigation related to his public side activities occurring during that time. See Ex. 175, 176. Aboff, however, offers no evidence beyond his recollection of what fees and expenses he incurred and nothing regarding what the services rendered covered. R. 1508-09, 1511-1516; see Ortho Pharmaceutical Corp. v. Cosprophar, Inc., 32 F.3d 690, 696-97 (2d Cir.1994) (claim under section 349 of New York General Business law properly dismissed where plaintiff failed to submit proof on element of claim). On cross-examination, the debtors demonstrated that Aboffs recollection is unreliable: some of the legal services were paid directly by PH(US)I and others did not even relate to matters supposedly covered, see Ex. XXX (examination of comparable state law regarding homestead exemptions in bankruptcy). Aboffs unsubstantiated recollection is insufficient to sustain his claim; he has too often tailored his testimony and destroyed or doctored evidence to permit me to rely on his word, assuming, without deciding, that his memory would otherwise be sufficient grounding for an award of fees. Moreover, Aboff has not adduced any proof as to any misrepresentation made to him about any insurance coverage.
Conclusion
Having failed to demonstrate that he had a contract with either Macmillan or OAG, Aboff is not entitled to payment from these debtors on his claims. Alternatively, Aboffs claims are disallowed because he intentionally tampered with critical evidence, causing substantial prejudice to the debtors. See Computer Assocs. Int'l, Inc. v. American Fundware, Inc., 133 F.R.D. 166, 168-69 (D.Colo.1990). Aboff did not establish that he is entitled to reimbursement for his asserted legal fees.
The debtors originally raised Aboffs breach of fiduciary duty not only as a defense to liability but as a separate claim against Aboff arising primarily out of his failure to inform Macmillan that he possessed some of the missing Berlitz shares. Because these issues are before the state court and are not necessary to this decision (given my determination that neither Macmillan nor OAG are liable on the contract), I will not dwell any further on that issue.
The debtors have failed to meet their burden of proof on the counterclaims and are therefore not entitled to the damages they seek.
SETTLE ORDER consistent with this decision.
. After Maxwell acquired British Printing, pic, the company underwent a series of name changes which ultimately rested with Maxwell Communication Corporation, pic. For simplicity's sake, I will refer to the company as MCC, whether or not it was named that at the time.
. For the sake of brevity I sometimes refer to public side companies as “Maxwell owned” or a similar phrase notwithstanding that members of Maxwell's family may have held some of the shares.
. The trial transcript will be referred to as "R.” for record, followed by the specific page upon which the cited testimony appears.
. The private side parent in this chain of companies was Robert Maxwell Group, pic, one of the companies from which Aboff said he resigned on December 18, 1991. Exhibit ("Ex.”) SSS.
. The gross sales of TCP for 1990 were in excess of $1 billion.
. As ¡further evidence of his supposed continuing employment by Macmillan, Aboff points to two things: (i) his consultation by a member of Macmillan’s real estate department and (ii) his furnishing of a performance review for a Macmillan employee whose work was in the area of mergers and acquisitions, one in which Aboff had extensive experience. Neither of these services convinces me that Aboff did not move to the private side. It is hardly surprising that someone with Aboff's history on the public side would be used as a sounding board by a former colleague with whom he had worked closely. Even less remarkable is the fact that Aboff was asked to give a performance review for a Macmillan employee of whom he had particular knowledge. After all, Aboff was still an important figure in the Maxwell empire.
. In September 1990 Aboff became a participant in the long term incentive compensation plan, pursuant to which he was entitled to receive grants of MCC shares and stock options. The following September Bogart wrote to Aboff notifying him of his first grant of stock under this plan. Bogart testified that it was he who compiled the list for the U.S. participants in the plan, who typically were public side employees. Indeed, Bogart testified that Aboff, who was not included on Bogart’s list originally but was added in England, was the only U.S. private side employee included within the plan. This long-term compensation plan was not included in Aboff's signed employment agreement.
. Remember that ''Maxwell/Macmillan Group” included those private side companies over which Shaffer had authority,
. Whereas Aboff and Tilley testified at trial, at odds with their deposition testimony, that the agreement was signed in February 1991, an interoffice memorandum admitted as exhibit VW strongly suggests that by May 29, 1991, Aboff's agreement had yet to be signed.
No original of the signed agreement has ever been located. Although the debtors suggest that the photocopy which Aboff produced is a fabrication, they have not convinced me that they are correct. Certainly there is conflicting testimony about when the agreement was signed and what happened to the original. But at worst, I believe, if there was any fabrication it was that the text was photocopied onto Macmillan letterhead. (That, however, is pure supposition.) But as I commented in the very beginning of this decision, I attach no weight to the fact that Macmillan letterhead was utilized. See page 390, infra.
. For example, as I mentioned above, on No. 2 amendments were added in green; the addition of the notes to include the phrase “Proposal for Acq team," which was added before July 25, 1990, in green, does not change the original meaning of the notes.
. The debtors learned of the alteration of the notes when Whitman & Ransom, after it had already complied with the debtors’ document demand, found another file containing the notes and supplemented its document production. Aboff does not contend that there was any violation of his attorney client privilege because he says that Whitman & Ransom were not his counsel, but counsel for Macmillan, whom Macmillan consulted on Aboff's behalf.
. The propriety of the transfers of the Berlitz shares is the subject of a state court action. These facts were adduced by the debtors to establish that even if Macmillan had an otherwise valid employment agreement with Aboff that it was unenforceable because Aboff had breached his fiduciary duly to Macmillan in regard to the Berlitz shares.
. Quantum meruit recovery is not sought and, in any event, Aboff has not proved the value of any services which he provided to Macmillan after his transfer to the private side.
. Aboff wonders why the debtors have not produced a document from their files which reflects Aboffs formal transfer to the public side in 1990 when both Shaffer and Bogart testified that in order for Macmillan to have severed Aboff, either termination, resignation, or a transfer would have had to occur. Testimony of Shaffer, R. 475; Testimony of Bogart, R. 1874-1875. Aboff submits an official interoffice communication which was sent out in January of 1992 for some other employee headed “Transfer of Employment” and questions why Macmillan cannot produce a similar one for his alleged transfer or termination. Ex. 127. Plainly and simply, Aboff has not shown that transfer forms were within Macmillan’s corporate procedures at the time that Aboff was transferred. Exhibit 27, dated January 1992, which is subsequent to the separation of the public and private sides necessitated by MCC's insolvency, is irrelevant to the pre-Decem-ber 1991 time period when Aboff was transferred. Aboff was notified orally of his transfer •to the private side on March 27 and again on March 29, 1990.
. Recall that Pergamon Holdings was a subsidiary of Macmillan.
. Specifically, at his deposition, Aboff concealed his knowledge about another of PH(US)I’s bank accounts, R. 1767-1770, but the account was unrelated to the transactions at issue in the counterclaims. Aboff also destroyed nine bags of PH(US)I documents at a time when the indepen*406dent auditors of MCC were seeking to examine them. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492484/ | ORDER GRANTING TRUSTEE’S MOTION FOR SUMMARY JUDGMENT
KAREN KENNEDY BROWN, Bankruptcy Judge.
Before the Court is the motion for summary judgment of Ben B. Floyd, Trustee of the jointly administered bankruptcy estates of Mary Teresa Ramirez Rodriguez, T.R. Network Companies, Inc., T.R. Financial Services, U.S., Inc., and Amicus Computer Systems, Inc., and plaintiff herein (the “Trustee”). This Court has jurisdiction of this proceeding pursuant to 28 U.S.C. §§ 1334 and 157(b)(2)(A) and (F). This is a core proceeding.1
I. History of these Proceedings
On May 7, 1998, involuntary chapter 7 bankruptcy petitions were filed against Mary Teresa Ramirez Rodriguez, T.R. Network Companies, Inc., T.R. Financial Services, U.S., Inc., and Amicus Computer Systems, Inc. by petitioning creditors Robert R. Ellis, Richard A. Trippeer, and Lynda Shea.
On May 24, 1993, the Court ordered the cases to be jointly administered and ordered the appointment of a trustee. On May 25, 1993, Ben B. Floyd was appointed interim trustee and is the acting Chapter 7 trustee of the debtors’ bankruptcy estates. On June 3, 1993, the bankruptcy court entered its Order for Relief under Chapter 7 of the Bankruptcy Code against the debtors.
The instant complaint was filed by the trustee on May 4, 1994, seeking to recover, as preferential transfers pursuant to 11 U.S.C. § 547(b), payments received by Shin-dler from funds of the debtors during the ninety-day period preceding bankruptcy to-talling $112,151.60, plus pre- and post-judgment interest and costs. James C. Shindler and Betty Shindler, jointly and severally, are hereinafter referred to as “Shindler.”
II. Undisputed Facts
In November 1990, Ms. Rodriguez began soliciting funds from investors for the ostensible purpose of using the invested funds to meet purchase order requirements for equipment and service procurement contracts for federal and state agencies. With each investor, Ms. Rodriguez executed a global agree*513ment entitled “Base Participation Contract,” one or more agreements entitled “Subcontract” for investment in particular procurement contracts and one or more documents entitled “Guaranty.” The Subcontracts state a participation purchase price to be paid by the investor and a participation profit estimate of a stated percent. The participation profit estimate contained in the Subcontracts ranges from seven percent (7%) to forty percent (40%) for a short term investment defined in the Base Participation Contracts to be “usually within thirty-five (35) days.” Under the Guaranty, Ms. Rodriguez and the other debtors unconditionally guaranteed payment of the purchase price and profit interest within five (5) business days after completion of the transaction to which the subcontract related. The Base Participation Contracts, Subcontracts, and Guaranties for all investors bear the same format and operative language.
Shindler executed or participated in the following Base Participation Contracts and Subcontracts: (1) Base Participation Contract No. 0619, dated effective December 14, 1992, Subcontract No. 0619-001, dated effective December 14, 1992, Subcontract No. 0619-001, dated effective December 14, 1992, Subcontract No. 0619-002, dated effective January 18, 1993, Subcontract No. 0619-003 dated effective February 22, 1993, and Subcontract No. 0619-004, dated effective March 29,1993; (2) Base Participation Contract No. 0625 dated effective December 21,1992, Subcontract No. 0625-001 dated effective December 21, 1992, Subcontract No. 0625-002, dated effective January 25,1993, Subcontract No. 0625-003, dated effective March 1, 1993, and Subcontract No. 0625-004, dated effective April 5,1993; and (3) Base Participation Contract No. 0732 dated effective February 2, 1993, Subcontract No. 0732-001, dated effective February 3, 1993, Subcontract No. 0732-002, dated effective March 10,1993, and Subcontract No.. 0732-003, dated effective April 14,1993. Ms. Rodriguez and the other debtors executed Guarantees for Subcontracts Nos. 0619-001, 0625-001, and 0732-001.
Debtors received payments from Shindler of $100,000 deposited on December 16, 1992, $50,000 deposited on December 21,1992, and $100,000 deposited on February 4, 1993. Shindler received payments from debtors and a related entity of $15,000 on January 18, 1993, $15,000 on February 24, 1993, $15,000 on March 31, 1993, and $82,151.60 on April 16,1993.
There were no deposits from proceeds of any government procurement contracts into the bank accounts of debtors and non-debtor businesses controlled by Ms. Rodriguez, or the personal accounts of Ms. Rodriguez. Debtors had no income-producing assets capable of generating funds necessary to pay the promised returns to the investors. Funds from new investors or those received or retained from existing investors were deposited and commingled with other funds into a number of bank accounts denominated in any of the several names of debtors and non-debtor businesses controlled and directed by Ms. Rodriguez and into various personal accounts of Ms. Rodriguez. Debtors did not treat the accounts as trust accounts or segregate investor funds. The commingled investor funds were used to pay earlier investors and to pay operating expenses, such as payroll, rent, interest payments on bank notes and the like, and the personal expenses of Ms. Rodriguez. Investor funds were also transferred between and among debtors and non-debtor businesses to cover expenses incurred by these entities. Other than the funds received from new or existing investors, no source of funds, including any or all of Ms. Rodriguez’s other businesses, was sufficient to repay the investors.
III. Debtors’ Ponzi Scheme
In a Ponzi scheme fictitious profits are paid to investors from the principal sums deposited by subsequent investors. Merrill v. Abbott (In re Independent Clearing House Co.), 41 B.R. 985, 994, n. 12 (Bankr.D.Utah 1984), aff'd in relevant part, 77 B.R. 843 (D.Utah 1987). See also, Wyle v. C.H. Rider & Family (In re United Energy Corp.), 944 F.2d 589, 590 n. 1 (9th Cir.1991); Danning v. Bozek (In re Bullion Reserve of North America), 836 F.2d 1214, 1219 n. 8 (9th Cir.), cert. denied, 486 U.S. 1056, 108 S.Ct. 2824, 100 L.Ed.2d 925 (1988); Cunningham v. Brown, 265 U.S. 1, 44 S.Ct. 424, 68 L.Ed. 873 (1924).
*514The undisputed facts of the instant case meet the elements of a Ponzi scheme: (1) deposits made from investors; (2) the Ponzi operator conducts no legitimate business as represented to investors; (3) the purported business of the Ponzi operator produces no profits or earnings, rather the source of funds is the new investments by investors; and (4) payments to investors are made from other investors’ invested funds.
Nevertheless, Shindler urges that the complaint itself does not allege a Ponzi scheme and the trustee, therefore, cannot present evidence of a Ponzi scheme. Evidence that Rodriguez operated a Ponzi scheme, however, does not eliminate the trustee’s burden of proof on the elements of 11 U.S.C. § 547. A Ponzi scheme while not an element of the trustee’s cause of action, is simply a further description of debtors’ operations. The trustee need not allege such a description as part of the complaint. See 41 B.R. at 993-994.
In the case at bar, the affidavit of the trustee’s accountant, Jesse N. Collier, sets forth facts supporting each element of 11 U.S.C. § 547. However, Shindler opposes Collier’s affidavit as being not made upon personal knowledge, not setting forth facts as would be admissible in evidence, and as not affirmatively showing that the affiant is competent to testify to the matters stated therein. Shindler claims that the affidavit is based upon an incomplete evaluation of debtors’ books and records, states legal conclusions, contains unsubstantiated opinions, is based on hearsay, fails to lay the proper predicate for testimony by an expert witness, and purports to be the affidavit of an “expert” on “Ponzi Schemes.”
Shindler claims that since no curriculum vitae or resume of Collier is attached to the affidavit, no predicate has been laid to show that Collier is an expert in any field. The Court notes that Shindler had abundant opportunity to depose Mr. Collier concerning his background and activities on behalf of the trustee and failed to do so. Furthermore, Shindler fails to allege any facts or raise any specific question concerning Collier’s educational or professional credentials. The Court takes judicial notice that this Court has approved the employment of Collier in numerous bankruptcy eases to assist various trustees on complex accounting questions. Collier’s credentials are sufficient for this Court to allow his testimony as an expert on accounting matters. Fed.Rule Evidence 104(a), 702.
Shindler claims that Collier’s affidavit is based on a review of only 75% of debtors’ documents and records. To the contrary, the accountants have reviewed all of the records of debtors seized by the FBI and Collier’s conclusions are based on that review.
Shindler claims that as a CPA, Collier is not competent to reach legal conclusions concerning preferential and fraudulent transfers. The Court finds that as a competent CPA, the affiant may give expert opinion testimony on the insolvency of debtors, the potential distribution to creditors upon liquidation of the estate, and the axiomatic conclusion that if there is less than a 100% distribution to creditors, those unsecured creditors who received payment prior to bankruptcy necessarily received more on that portion of their debt than they would have in a bankruptcy distribution. Collier is qualified to testify as to whether a business has the characteristics of a Ponzi scheme.
Shindler objects globally to the portions of the affidavit which restate provisions of debtors’ Base Participation Contracts. The Court finds that this opposition is unfounded since these contracts are otherwise in evidence.
Shindler opposes the affidavit because it fails to specify which records form the basis of Collier’s opinion. To the contrary, the ■Court finds that the statement that the review included debtors’ and non-debtor affiliates’ business, financial, and bank records from 1989 to 1993, including, but not limited to their balance sheets, financial statements, investor files and monthly investor statements, bank account statements, cancelled checks, wire transfer advices, and debit and credit memos, is sufficiently specific. Furthermore, these documents are the type of data reasonably relied upon by experts in accounting in forming opinions.
*515Lastly, Shindler complains that the affidavit reflects a review of debtors’ records by Collier Smith & Co., P.C., rather than Collier individually. A witness must testify based on personal knowledge but an expert witness may give opinion testimony based on facts or data perceived by or made known to the expert at or before the hearing. Fed.R.Evidence Rules 602 and 702. If the facts or data are of a type reasonably relied upon by experts in the particular field in forming opinions or inferences upon the subject, the facts or data need not be admissible in evidence. Fed.R.Evidenee Rule 703. The Court finds that the facts on which Collier relies for his opinions are those reasonably relied on by experts assessing the legitimacy of business operations such as those before the Court, and such facts are reasonably trustworthy to make such reliance reasonable. Viterbo v. Dow Chemical Co., 826 F.2d 420, 422 (5th Cir.1987); Soden v. Freightliner Corp., 714 F.2d 498 (5th Cir.1983); Fed. R.Ev. 104(a).
To the extent that Shindler claims that the trustee’s accountant is not an expert in Ponzi schemes, the Court concludes that the existence vel non of a Ponzi scheme is a matter for this Court to determine based on the factual evidence presented. The Court notes that Shindler does not controvert the accountant’s factual statements concerning the operations of debtors’ businesses, bank accounts, solicitation of investor funds or payments to investors. The Court concludes that the affidavit of Jesse N. Collier is competent summary judgment evidence. Debtors had no profit or income producing assets sufficient to support the debts incurred under the Base Participation Contracts and Subcontracts. The funds paid to investors were funds paid by other investors. The Court concludes that Ms. Rodriguez and the other debtors operated a Ponzi scheme.
IV. 11 U.S.C. § 547(b)
Bankruptcy Code section 547(b) provides that the trustee may avoid transfers of an interest of debtors in property that:
(i)were made to or for the benefit of a creditor;
(ii) for or on account of an antecedent debt;
(iii) while the debtors were insolvent;
(iv) to a noninsider on or within 90 days before the filing of the petition; and
(v) that enables such creditor to receive more than such creditor would receive through a Chapter 7 liquidation.
11 U.S.C. § 547(b).
The trustee seeks to avoid the transfers to Shindler totaling $112,151.60, (which excludes the transfer of January 18, 1993, of $15,000 as outside the 90-day period). Shindler urges that the payments he received were alternatively: (1) distributions of profits from joint ventures between Shindler and debtors, and as such the payments did not come from assets of debtors’ estate and were not payments on antecedent debts; (2) made in the ordinary course of business; and/or (3) offset by subsequent new value advanced by Shin-dler to debtors. Shindler further urges that the trustee is not entitled to pre-or post-judgment interest and costs.
V. Transfers of an Interest of Debtors’ in Property
The sums paid to Shindler were derived from the funds maintained in the commingled bank accounts of debtors except for the payment of $82,151.60 in April 1993. That payment came from the account of T & T Investments at Park National Bank which account was also controlled by Ms. Rodriguez. Shindler submits no summary judgment evidence to controvert the trustee’s evidence that the accounts of debtors and non-debtors including T & T contain commingled investor funds and were under the ultimate custody and control of Ms. Rodriguez. Where the funds transferred are under the custody and control of debtor “mere circuity of arrangement will not save a transfer which effects a preference.” Dean v. Davis, 242 U.S. 438, 443, 37 S.Ct. 130, 131, 61 L.Ed. 419 (1917).
Moreover, funds obtained from investors in a Ponzi scheme are property of debtor, and are susceptible to preferential and fraudulent disposition by debtor. See Merrill v. Allen (In re Universal Clearing House Co.), 60 *516B.R. 985, 995 (D.Utah 1986); Sender v. Buchanan (In re Hedged-Investments Assocs. Inc.), 168 B.R. 841, 850 (Bankr.D.Colo.1994); Dicello v. Jenkins (In re Int'l Loan Network, Inc.), 160 B.R. 1, 11 (Bankr.D.D.C.1993).
VI.Joint Venture
Shindler urges that his arrangements with Ms. Rodriguez were joint ventures and any payments he received were profit distributions from the joint venture, not payments from debtors on antecedent debts. Texas law provides that a joint venture include four elements: a community of interest in the venture; an agreement to share profits; an agreement to share losses; and, a mutual right of control or management of the enterprise. Ayco Dev. Corp. v. G.E.T. Serv. Co., 616 S.W.2d 184, 186 (Tex.1981).
Shindler urges that the Base Participation Contracts by their terms meet all of the elements of a joint venture except for the sharing of profits, which, Shindler claims, is implied. Shindler urges that a mutual right of control existed because Shindler invested funds with the right to withdraw them upon 30 days notice or at the time of renewal of the subcontract. Shindler urges that further control is evident because Shindler could reinvest the principal and interest.
To the contrary, the Base Participation Contracts expressly provide “that Participant [Shindler] acts entirely as an independent investing party, participating in no capacity with respect to the contracts other than purchasing a share of the profits to be derived from such contracts-” See Base Participation Contract No. 0619, Exhibit “A” to Accountant’s Affidavit. Further, “Participant specifically acknowledges ... that expectation of profits from such contract is not based on any entrepreneurial or managerial influence of Participant.” Id. Further, “Nothing in this agreement shall constitute Contractor [Rodriguez] and the Participant as partners nor entitle Participant to participate in the results than the contracts(s) in which Participant has purchased a share.” Id. Furthermore, Shindler testified in deposition that the rate of return on the investment was established by Rodriguez prior to Shindler’s investment of money. Lastly, contrary to an agreement to share losses, the debtors guaranteed repayment of Shindler’s investments and profits in subcontracts 0619-001, 0625-001, and 0732-001. The Court finds that there was no joint venture between debtors and Shindler.
VII.Shindler’s Status as a Creditor
A creditor is an entity that has a claim against the debtor that arose at the time of or before the order for relief. 11 U.S.C. § 101(10). A claim is a right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured. 11 U.S.C. § 101(5).
Shindler’s claim against debtors arose from his initial investment and the execution of the first Base Participation Contract, Subcontract, and Guaranty. The Base Participation Contracts provide that Shindler could withdraw funds at any time upon thirty days written notice. The Base Participation Contracts also obligated Ms. Rodriguez to pay Shindler the purchase price and profit share from each Subcontract, within five (5) business days from the time the Subcontract was completed. Likewise, the Guaranties executed by debtors unconditionally guaranteed payment of each purchase price and profit interest within five (5) business days after completion of the Subcontract. It is clear that Shindler became a creditor of debtors when funds were transferred under the Base Participation Contracts between the dates of December 15, 1992 and February 4, 1993.
VIII.Antecedent Debt
A prior debt that is reduced or discharged as a result of payment within 90 days of bankruptcy is an antecedent debt within the meaning of Section 547(b)(2). Merrill v. Abbott (In re Independent Clearing House Co.), 41 B.R. at 1010. Since Shindler fails to prove a joint venture defense, the Court finds all of the funds transferred to Shindler were paid while a creditor of debtors on account of the payments required by the Base Participation Contracts, Subcontracts, and Guarantees previously executed.
*517IX.Insolvency
A debtor is presumed to be insolvent during the ninety-day period preceding bankruptcy. 11 U.S.C. § 547(f). A trustee is not required to present evidence on insolvency unless a defendant first presents some evidence to rebut the presumption. In re Emerald Oil Co., 695 F.2d 833, 838-39 (5th Cir.1983). Shindler presents no summary judgment evidence on the issue of insolvency. Moreover, the promised rates of return render a Ponzi scheme operator insolvent from the time of the scheme’s inception, because the returns exceed any legitimate investments. In re Taubman, 160 B.R. 964, 978 (Bankr.S.D.Ohio 1993). Thus, as the scheme progresses and more investors are promised returns, the operator becomes more insolvent. Id., citing Cunningham v. Brown, 265 U.S. 1, 7, 44 S.Ct. 424, 425, 68 L.Ed. 873 (1924). This Court concludes that debtors were insolvent when the payments were made.
X. Distribution Upon Liquidation
Based on the testimony of the accountant and the trustee, the anticipated distribution to creditors of debtors’ estates is less than 100 percent.2 Thus, the preferential payments enabled Shindler to receive more than would have been received if the payment had not been made, and debtors’ estates were liquidated according to the provisions of the Bankruptcy Code.
XI. Ordinary Course of Business
Bankruptcy Code section 547(c)(2) provides:
(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 ...
Shindler urges that because debtors paid or reinvested the initial subcontracts according to their terms, the payments Shindler received meet the elements of the ordinary course defense. Shindler’s summary judgment evidence, however, supports rather than controverts the trustee’s evidence that the business for which debtors solicited and obtained investor funds was not the business for which such funds were actually used. Debtors purportedly operated a business for the purpose of procurement of equipment and service contracts for federal, state, a related agencies. This was the ostensible use of investor funds, including those of Shindler. Instead, debtors used investor funds to repay other investors and to pay personal expenses. The business in which Shindler invested was not the activity in which debtors were engaged. The monies transferred to Shindler were neither made in the ordinary course of business of Shindler and debtors, nor made according to ordinary business terms. Moreover, the ordinary course of business defense does not apply to transfers in furtherance of a Ponzi scheme. Wider v. Wootton, 907 F.2d 570 (5th Cir.1990).
XII.New Value
The trustee may not avoid a transfer to a creditor to the extent that after the transfer the creditor gives new value to the debtor. 11 U.S.C. § 547(c)(4). New value means money or money’s worth in goods, services, or credit. 11 U.S.C. § 547(a)(2). Shindler claims that debtors received new value by Shindler’s execution of Subcontract No. 0732-003 on April 14, 1994, after Shin-dler received a transfer of funds. However, Shindler fails to state that any money was paid to debtors in connection with the subcontract. The mere execution of the subcon*518tract without a related payment of money is not money or money’s worth. The subcontract is not an extension of credit to debtors and cannot be drawn on for cash. Shindler fails to prove the elements of 11 U.S.C. § 547(c)(4).
XIII. Prejudgment Interest
It is well settled that bankruptcy courts have discretion to award prejudgment interest to a trustee who successfully avoids a preferential or fraudulent transfer, from the time demand is made or an adversary proceeding is instituted, unless the amount of the contested payment was undetermined prior to the bankruptcy court’s judgment. See e.g., Sigmon v. Royal Cake Co. (In re Cybermech, Inc.), 13 F.3d 818, 822 (4th Cir.1994); Turner v. Davis, Gillenwater & Lynch (In re Investment Bankers), 4 F.3d 1556, 1566 (10th Cir.1993), cert. denied, 510 U.S. 1114, 114 S.Ct. 1061, 127 L.Ed.2d 381 (1994); Bergquist v. Anderson-Greenwood Aviation Corp. (In re Bellanca Aircraft Corp.), 850 F.2d 1275, 1281 (8th Cir.1988). Prejudgment interest may generally be awarded in cases where such an award serves to compensate the injured party and is otherwise equitable. In re Investment Bankers, Inc., 4 F.3d at 1566.
In this case, Shindler admits receiving the preferential payments in the amount of $112,151.60. The amount of the preferential payments is, therefore, known to both the trustee and Shindler without the need for judicial determination. An award of prejudgment interest to the trustee will compensate debtors’ estates for Shindler’s use of those funds that were wrongfully withheld from the estates during the pendency of this ease, and will further the prime bankruptcy policy of equality of distribution among creditors.
Accordingly, this Court awards prejudgment interest to the trustee at the statutory rate set forth in 28 U.S.C. § 1961(a), accruing from the commencement date of this case. See Milchem, Inc. v. Fredman (In re Nucorp Energy, Inc.), 902 F.2d 729, 734 (9th Cir.1990) (28 U.S.C. § 1961 should be used for calculation of prejudgment interest in preferential or fraudulent transfer suit unless equities demand a different rate); see also Bash v. Schwartz (In re B. Schwartz Furniture Co.), 131 B.R. 623, 626 (Bankr.N.D.Ohio 1991). Likewise, the trustee is entitled to post-judgment interest on the entire judgment amount as provided by 28 U.S.C. § 1961(a). In re Int’l Loan Network, Inc., 160 B.R. at 20.
Based on the foregoing, it is
ORDERED that summary judgment is GRANTED in favor of the trustee against James C. and Betty Shindler for the sum of $112,151.60 plus pre- and post-judgment interest at the rate of _% and costs of court.
FINAL JUDGMENT
In accordance with the Order Granting Trustee’s Motion for Summary Judgment, the Court enters this Final Judgment. It is
ORDERED, ADJUDGED and DECREED that Ben B. Floyd, Trustee have judgment against and recover of and from James C. Shindler and Betty Shindler, jointly and severally:
1. The sum of $112,151.60;
2. Pre-judgment interest on the sum of $112,151.60 at the statutory rate set forth in 28 U.S.C. § 1961(a) from May 4, 1994 to the date of entry of this Final Judgment;
3. Post-judgment interest on the entire judgment at the statutory rate set forth in 28 U.S.C. § 1961(a) from the date of entry of this Final Judgment until paid; and
4. Costs of court
for all of which let execution issue if not paid.
This judgment disposes of all parties and issues in this case and is a Final Judgment.
. Shindler disputes this Court’s jurisdiction over this matter and claims a right to a jury trial. Shindler also denies that this matter is a core proceeding and to the extent that such is provided by 28 U.S.C. § 157, Shindler claims that such statute is unconstitutional. Nevertheless, the Court determines that it has jurisdiction over this proceeding and it is a core proceeding. The Court does not reach the issue of whether Shin-dler has the right to a jury trial since this matter is disposed of by summary judgment. See e.g. Clarin Corp. v. Massachusetts Gen. Life Ins. Co., 44 F.3d 471 (7th Cir.1994).
. Shindler opposes the affidavit of the trustee alleging that it is based on unsubstantiated opinion because the trustee relies in part on the affidavit of Jesse N. Collier. The Court finds the affidavit of Jesse N. Collier to be competent summary judgment evidence. The Court also finds that the affidavit of the trustee is competent summary judgment evidence. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492485/ | MEMORANDUM OPINION
FRANK W. KOGER, Chief Judge.
Debtor has filed a Motion Pursuant to 11 U.S.C. § 105 for Order Modifying Bond in Criminal Case, requesting this Court to enter an order modifying the conditions of a bond entered in a criminal proceeding now pending in Cass County Circuit Court against H. Dale Hon, the principal of the debtor company. The relevant underlying facts are as follows:
Debtor, Pickering Estates, Inc., is the owner and developer of certain improved and unimproved lots, completed residential dwellings and amenities in Pickering Place, an older adult community in Belton, Missouri. H. Dale Hon is the president, sole director and sole shareholder of the debtor company. He has been responsible for the development and marketing of Pickering Place since it was established in 1983. The residents of Pickering Place are members of Pickering Place, Inc. (“PPI”), a corporation organized for purposes of providing maintenance and other services to homeowners in Pickering Place. The debtor company, having the majority voting interest in PPI, elected Hon as president of PPI. At some point, a dispute arose between the debtor company and Hon, on the one hand, and PPI and certain residents of Pickering Place on the other hand, concerning governance of the homes association. In approximately June, 1995, these residents obtained control of PPI and purportedly ousted Debtor and Hon from their roles in PPL The residents also challenged *558the payment of compensation and reimbursement of expenses to the debtor and Hon for items such as maintenance of the water, sewer and cable systems serving Pickering Place.
The conflict between the parties escalated over the following year and on August 9, 1996, the Cass County Sheriffs department arrested Hon for allegedly turning off the water supply to Pickering Place. Bond was originally fixed at $100,000. Later that day, pursuant to a motion, the bond was reduced to $50,000 and a new condition was imposed, namely that Hon is prohibited from going within 100 yards of Pickering Place. Hon paid the 10% on the $50,000 bond and was released. Other than changes of judge and venue, little has developed in the criminal case since then. Meanwhile, Debtor filed its voluntary petition for relief under Chapter 11 on August 30,1996.
Apparently, Hon’s residence is located in Pickering Place, as are the debtor company’s office and business records. Debtor asserts that because of the condition prohibiting Hon from going within 100 yards of Pickering Place, neither Hon nor the debtor have been able to participate in the bankruptcy proceedings. Debtor alleges that its counsel has attempted to contact, the Cass County Prosecutor to discuss a possible modification of the bond so that Hon can move back home and so that he and the debtor can participate in this bankruptcy case, but that counsel has been unsuccessful in working out a modification.
Consequently, Debtor filed the instant motion in which it seeks the intervention of this Court, pursuant to its equitable powers under § 105, in requiring the modification of the bond so that Hon can return to his home and his business. Debtor asserts that unless this occurs, Hon will not have the ability to continue development of Pickering Place and to sell lots and finished residences or to assist the Chapter 11 trustee in doing so. According to Debtor, if Hon is prevented from assisting the trustee, any attempt at reorganization will fail.
PPI, through its officers and directors, filed an objection to the motion for order modifying the criminal bond. It agrees with Debtor’s characterization that the relationship between the parties is quite acrimonious. PPI claims Hon has taken action and threatened to take further action against the residents of Pickering Place, particularly tampering with the water supply, which has placed the residents of Pickering Place in serious jeopardy for fire protection and safety. This, it contends, was the reason for the bond condition. PPI further asserts that the business records of the debtor have been delivered to the trustee and are available to Hon, albeit somewhere other than Pickering Place. He could, in fact, obtain the records presently from the trustee. PPI is also of the opinion that granting the motion and modifying the bond would actually impair, rather than assist, the trustee’s ability to conduct an orderly administration and control the affairs of the debtor in that they include resolution of a number of difficult issues relating to the development and services. In other words, PPI believes Hon’s participation would in fact be detrimental to the debtor’s reorganization.
This Court conducted a hearing on the motion on November 27,1996. At that hearing, in addition to Debtor and PPI presenting their positions on the motion, the State of Missouri, via the prosecuting attorney in the criminal matter, voiced its objection to the motion, declaring that the bond had been reduced on the condition that Hon stay away from the development and that Hon agreed to the condition at the time to get his bond reduced. It is the State’s position that not only did Hon agree to the condition and he should be bound by it, but the safety of the residents of the development necessitate the condition. At the conclusion of the hearing, the Court took the matter under advisement and ordered the parties to brief the issue regarding this Court’s jurisdiction to enter an order directing the State Court to modify a criminal bond condition.
Debtor filed its brief in support of this Court’s jurisdiction to modify the State Court criminal bond, and both PPI and the State of Missouri filed their briefs in opposition to the motion. Debtor concedes, for the sake of argument, that this is not a core proceeding, but asserts this Court has juris*559diction under 28 U.S.C. §§ 1334(b) and 157(c)(1) and 11 U.S.C. § 1051 to enter proposed findings of fact and conclusions of law for the district court or to enter some form of interlocutory order or injunction so as to provide Debtor and Hon relief while at the same time avoid stepping on the State Court’s toes.2 Essentially, Debtor maintains that the prosecution is being pursued in bad faith by the prosecutor’s office so as to appease a politically active constituency, namely the residents of Pickering Place and other older adults in the community, and that pursuant to this Court’s equitable power under § 105, the Court should provide Debtor with relief. Debtor declares it only seeks this order so Hon can participate in the reorganization of the debtor company because, according to Debtor, reorganization will be impossible without him.
28 U.S.C. §§ 1334(b) and 157(c)(1), on which Debtor relies to support its contention this Court has “related to” jurisdiction, provide, respectively:
Notwithstanding any Act of Congress that confers exclusive jurisdiction on a court or courts other than the district courts, the district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11.
28 U.S.C. § 1334(b).
A bankruptcy judge may hear a proceeding that is not a core proceeding but that is otherwise related to a case under title 11. In such proceeding, the bankruptcy judge shall submit proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall be entered by the district judge after considering the bankruptcy judge’s proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically objected.
28 U.S.C. § 157(c)(1).
Debtor relies on Celotex v. Edwards, — U.S. -, 115 S.Ct. 1493, 131 L.Ed.2d 403 (1995), to support its contention that the criminal case is sufficiently “related to” this bankruptcy case to confer jurisdiction on this Court to issue proposed findings and conclusions or enter some other kind of interlocutory order. Particularly, the United States Supreme Court stated in that case:
The usual articulation of the test for determining whether a civil proceeding is related to bankruptcy is whether the outcome of that proceeding could conceivably have any effect cm the estate being administered in bankruptcy.... Thus, the proceeding need not necessarily be against the debtor or against the debtor’s property. An action is related to bankruptcy if the outcome could alter the debtor’s rights, liabilities, options or freedom of action (either positively or negatively) and which in any way impacts upon the handling and administration of the bankrupt estate.
Celotex, — U.S. at -, n. 6, 115 S.Ct. at 1499, n. 6 (quoting Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3rd Cir.1984) (emphasis in original)). This Court will agree, arguendo, that the criminal proceeding is sufficiently related to this bankruptcy because the bond condition could conceivably have an effect on the estate in that it appears to have the effect of preventing Hon, the principal of the debtor, from participating as fully as he might absent the bond condition.3
*560Nevertheless, this Court does not believe that the circumstances of this case warrant its equitable intervention at this time. As Debtor states, federal courts are reluctant to enjoin state court proceedings due to the fundamental deference to federalism. 28 U.S.C. § 2283, the Anti-Injunction Act, provides:
A Court of the United States may not grant an injunction to stay proceedings in a State court except as expressly authorized by Act of Congress, or where necessary in aid of its jurisdiction, or to protect or effectuate its judgments.
Also as Debtor states, the bankruptcy law is one of the well-recognized exceptions to the Anti-Injunction Act. In re Si Yeon Park, Ltd., 198 B.R. 956, 967 (Bankr.C.D.Cal.1996). However, under the rule enunciated in Younger v. Harris, 401 U.S. 37, 54, 91 S.Ct. 746, 755, 27 L.Ed.2d 669 (1971), a federal court should not enjoin a state criminal prosecution begun prior to the institution of the federal suit except on a “showing of bad faith, harassment, or any other unusual circumstances that would call for equitable relief.”
[A] federal court must abstain from reaching the merits of a case over which it has jurisdiction so long as there is (1) an ongoing state judicial proceeding, instituted prior to the federal proceeding (or, at least, instituted prior to any substantial progress in the federal proceeding), that (2) implicates an important state interest, and (3) provides an adequate opportunity for the plaintiff to raise the claims advanced in his federal lawsuit.
Brooks v. New Hampshire Supreme Court, 80 F.3d 633, 638 (1st Cir.1996). Federal courts must abstain where those seeking federal relief fail to meet the basic requirements for equitable intervention. Loftus v. Township of Lawrence Park, 764 F.Supp. 354, 357 (W.D.Pa.1991).
Clearly, the criminal proceeding is an ongoing state judicial proceeding instituted pri- or to this bankruptcy proceeding and implicates an important state interest, namely the prosecution of a person charged with tampering with the water supply to a community of older adults. The bond requirement restricting Hon from going near the development further implicates an important state interest, namely the prevention of further serious and potentially dangerous activity allegedly committed by Hon. The question, then, is whether the debtor has an adequate opportunity in the state action to raise the claims advanced in this bankruptcy, particularly Hon’s desire to have access to his home and office so as to participate in the reorganization.4
This Court believes Hon and the debtor do have an adequate opportunity in the State Court to raise this claim. The enjoyment of one’s home and office is not an interest unique to bankruptcy, even though admittedly Debtor’s interest in Hon’s access to his office has additional significance here. In any event, this Court is confident that the State Court considered Hon’s interests, including his business interest in Pickering Estates, when it entered the bond condition and that it will continue to consider those interests as the criminal action proceeds. Both sides agree that the relationship between Hon and the residents is highly acrimonious and it is reasonable to presume the State Court balanced Horis interests against the potential for additional problems with the residents. This Court further finds, despite Debtor’s characterization of the agreement as unfair, it is significant that Hon himself agreed to the condition so as to have the bond amount reduced, which the State Court allowed.5
Under Younger, federal courts should abstain from interfering with state processes where equity does not clearly demand such interference. Loftus, 764 F.Supp. at 356. *561While Debtor asserts bad faith and harassment on the part of the residents, PPI, and the prosecutor’s office, and asserts equity demands this Court’s interference, this Court is not convinced.6 The State has alerted this Court that this tampering charge is only the most recent of three criminal charges which have been brought against Hon regarding his activities in relation to Pickering Place. It states that in light of Hon’s repeated criminal acts against the residents of Pickering Place, it was reasonable for the State Court to impose the restriction against his going within 100 yards of the development and that the restriction is necessary for the safety of the residents and the peace of the development. Of course Debtor asserts that all of the altercations were provoked by the residents but this Court declines to make any judgment as to which party is at fault. Clearly, the State Court is in a far better position to make such a determination than is this Court and if the State Court was convinced that Hon’s presence near Pickering Place poses a threat to the residents there, this Court will not disagree. Moreover, this Court is not convinced that the prosecution is responsible for causing delay in the criminal action. Again, the place to raise that is the state court.
Furthermore, PPI has agreed to turn over any records to the debtor. PPI also makes a compelling argument that Hon’s participation in the reorganization, at least in terms of his physical presence in Pickering Place, may be more detrimental than beneficial to the reorganization. Hon admits he has been the subject of vandalism and negative press in regard to his involvement with Pickering Place. Consequently, the Court finds that at this point, Hon’s physical presence in Pickering Place is not vital to the debtor’s reorganization and in fact may be detrimental to it. As the principal of the debtor company, Hon’s participation may very well aid the trustee, but his physical presence in Pickering Place is not necessary under these circumstances. Essentially, this Court finds that equity does not demand this Court intervene in the state court criminal action.
As a final note, both PPI and the State contend this Court lacks jurisdiction to enter an order governing a state court criminal proceeding because § 362(b)(1), (4), and (5) provide that the filing of a bankruptcy petition does not operate as a stay of the commencement or continuation of a criminal action against the debtor, or against a proceeding or the enforcement of a non-monetary judgment by a governmental unit to enforce a governmental unit’s police or regulatory power. They are correct on that point. However, the bankruptcy court’s § 105 equitable power applies when the automatic stay does not. In other words, it is because the automatic stay does not apply to the criminal action that the § 105 equitable power of the Court is called into play. In any event, as discussed at length above, this Court is declining to exercise its § 105 power to provide Debtor with the relief it requests in the instant motion.
CONCLUSION
For the foregoing reasons, Debtor’s Motion Pursuant to 11 U.S.C. § 105 for Order Modifying Bond in Criminal Case is hereby DENIED.
The foregoing Memorandum Order constitutes Findings of Fact and Conclusions of Law as required by Fed.R.Bankr.P. 7052.
. Section 105 "cannot be read as an independent grant of authority to a specific judicial officer; rather, the § 105 powers of bankruptcy judges are limited to those authorized under 28 U.S.C. §§ 157 and 1334.” In re Si Yeon Park, Ltd., 198 B.R. 956, 968 (Bankr.C.D.Cal.1996) (citing Celotex v. Edwards, - U.S. -, -, 115 S.Ct. 1493, 1498, 131 L.Ed.2d 403 (1995)).
. Debtor suggests this Cotut may not have the authority to order the state court to take some affirmative action in relation to modifying the bond, but suggests that this Court could "encourage” the state court to modify the bond, or could order the prosecutor to modify its request, or enter some other form of relief. PPI complains that Debtor’s motion is improper because does not make any specific request. It is not necessary for the Court to comment on this technical argument either way because as discussed, infra, the Court decides the motion on the merits.
. The State of Missouri distinguishes Celotex on the ground that that case did not involve a criminal action, but Younger and its progeny, discussed, infra, indicate that criminal matters may be sufficiently related for purposes of bankruptcy jurisdiction.
. The Court is aware that Hon and the Debtor are distinguishable entities and that proceedings involving one do not necessarily involve the other. However, this Court believes that because Hon is the principal of Debtor and because Debt- or wishes to have the bond condition lifted so as to allow Hon as an individual to go into Pickering Place, the distinction does not make a difference one way or the other to this Court’s decision to abstain from interfering in the state court proceeding.
. Debtor states, "Goethe himself would have been pleased with this 'bargain'.”
. PPI took issue with the debtor’s characterizations of the various parties and events in Debt- or’s brief. The Court agrees that some of the portrayals and accusations made by the debtor are very serious and hopes they were not made lightly. However, this Court has no evidence as to whether or not any of those allegations are true. The place to make those allegations is in the state courts. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492486/ | OPINION
LARRY L. LESSEN, Bankruptcy Judge.
The issue before the Court is whether an attorney has a valid claim for 20% of the proceeds of a worker’s compensation settlement.
The Debtor, David M. Odie, filed a petition pursuant to Chapter 7 of the Bankruptcy Code on February 23, 1996. One of the assets of the bankruptcy estate is a worker’s compensation settlement.
The Debtor retained Attorney Stephen CuUison on September 6, 1994, to handle a worker’s compensation claim against Philip Pennington, d/b/a Portable Sanitation Systems. The basis for the claim was a slip and fall accident which occurred on July 29,1994, during the course of the Debtor’s employment with Mr. Pennington. The Debtor pinched a tendon in his left shoulder and was on temporary total disability from July 30, 1994, to January 24,1995.
The Debtor’s representation agreement with Mr. CuUison provided for a contingent fee of 20% of the amount recovered. (Mr. CuUison later associated with Attorney Steven Berg for purposes of this case, with the agreement that any fees would be shared equaUy.)
A settlement in the amount of $12,000 was agreed to by the parties, and the settlement was approved by the State of Illinois Industrial Commission on January 16, 1996. The settlement provided for a payment of $3,000 upon approval of the settlement agreement by the Industrial Commission, and the bal-*715anee to be paid in installments. Pursuant to an Order of this Court dated July 29, 1996, Mr. Pennington was directed to make all payments under his worker’s compensation settlement to the Trustee until further order of the Court.
Mr. Cullison filed a secured claim in the amount of $1,800 on August 29, 1996. (Pursuant to an Order dated May 8,1996, the last date to file claims was August 6, 1996. Mr. Cullison, however, was not on the mailing matrix for this Order because the Debtor had failed to schedule the worker’s compensation claim as an asset of the estate or Mr. Culli-son as a creditor. It appears that Mr. Culli-son’s first notice of the bankruptcy was in May 1996, when Mr. Berg was named as a defendant in an adversary proceeding initiated by the Trustee to deny the Debtor’s discharge and to recover a preference.) Mr. Cullison’s claim is based on 20% of the $9,000 which he believed was still owed by Mr. Pennington or was held in escrow by a third party. Mr. Cullison claims an attorney’s lien upon any proceeds of the settlement with Mr. Pennington.
The Trustee filed an objection to Mr. Culli-son’s claim on three grounds. First, the claim was filed as secured and only unsecured claims are entitled to share in dividends. Second, the claim does not show proof of perfection as a secured claim. Third, the claim was filed late, and, if allowed, would be subject to 11 U.S.C. § 726(a)(2) regarding the distribution to late filed claims.
820 ILCS 305/16a covers attorney’s fees in worker compensation cases. The statute indicates a legislative intent “to encourage settlement and prompt administrative handling of such claims”. § 16a(A). The statute caps attorney’s fees at 20% of the amount of compensation recovered and paid. § 16a(B). Attorney’s fees must be fixed pursuant to a form prescribed by the Commission, and it must be filed with the Commission. § 16a(C). No attorney’s fees may be awarded for undisputed medical expenses, or for temporary total disability compensation unless the payment of such compensation is refused or terminated. §§ 16a(D) and (E). Attorney’s fees are limited to $100 in certain instances when there is no dispute as to liability or the results of the accident. §§ 16a(F) and (G). No attorney’s fees are allowed where the amount recovered does not exceed written offers made prior to representation. § 16a(H). Attorney’s fees are “only recoverable from compensation actually paid to” the employee or his dependents. § 16a(I). Disputes regarding attorney’s fees are heard and determined by the Commission. § 16a(J). Attorneys who violate the provisions of the statute are required to make restitution. § 16a(I).
820 ILCS 305/21 provides that the proceeds of worker’s compensation claims shall not be “assignable or subject to any lien, attachment or garnishment, or be held liable in any way for any lien, debt, penalty or damages”.
Under Illinois case law, attorney fees in workers’ compensation cases are not liens under Section 21 of the Act. Murphy v. Industrial Commission, 258 Ill.App.3d 764, 196 Ill.Dec. 900, 902, 630 N.E.2d 1065, 1067 (1994). Rather, “attorney fees approved by the Industrial Commission rise to the same level as the award granted to the injured employee”. Field v. Rollins, 156 Ill.App.3d 786, 789, 109 Ill.Dec. 484, 510 N.E.2d 105 (1987).
The parties have framed the issue in this case as whether Mr. Cullison has a valid perfected attorney’s lien on the Debtor’s worker’s compensation settlement, but the Court believes that the issue is more basic, i.e., whether the attorney’s claim for 20% of the proceeds is a “debt” subject to discharge. The Illinois Worker’s Compensation Act and the case law interpreting the Act indicate that an attorney’s entitlement to 20% of the proceeds of a worker’s compensation settlement is a separate property interest rather than an obligation of the Debtor arising out of the settlement agreement. A property interest in 20% of the proceeds of the worker’s compensation settlement was transferred to Mr. Cullison by the Lump Sum Settlement Order of January 16, 1995, wherein the Industrial Commission approved and certified the settlement. As such, Mr. Cullison’s 20% interest is not a debt subject to discharge. Accordingly, the Court concludes that Mr. *716Cullison has a vested property interest in 20% of the proceeds of the worker’s compensation settlement.
The Bankruptcy Code defines a “claim” as a “right to payment” and a “debt” as a “liability on a claim”. 11 U.S.C. § 101(5) and (12). Because Mr. Cullison’s 20% interest is a property interest rather than a debt subject to discharge, Mr. Cullison does not have a valid claim against the Debtor’s bankruptcy estate. Mr. Cullison’s 20% interest in the worker’s compensation settlement never became property of the bankruptcy estate because the Debtor never had a legal or equitable interest in this portion of the settlement. See, 11 U.S.C. § 541(a). Accordingly, Mr. Cullison’s claim should be denied.
For the foregoing reasons, the Trustee’s Objection to the claim'of Stephen R. Cullison is allowed.
This Opinion is to serve as Findings of Fact and Conclusions of Law pursuant to Rule 7052 of the Rules of Bankruptcy Procedure.
See written Order.
ORDER
For the reasons set forth in an Opinion entered this day,
IT IS THEREFORE ORDERED that the Trustee’s Objection to the claim of Stephen R. Cullison be and is hereby allowed. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492487/ | MEMORANDUM OPINION
MARK W. VAUGHN, Bankruptcy Judge.
The Court has before it the application for final fees of Michael B. Feinman (“Fein-man”), attorney for the trustee. Objections to the fee applications were filed by the United States Trustee and joined in by the Debtors.
This Court has jurisdiction of the subject matter and the parties pursuant to 28 U.S.C. §§ 1334 and 157(a) and the “Standing Order of Referral of Title 11 Proceedings to the United States Bankruptcy Court for the District of New Hampshire,” dated January 18, 1994 (DiClerico, C.J.). This is a core proceeding in accordance with 28 U.S.C. § 157(b).
Procedural History
This Chapter 7 case was commenced in June 1992. At the time of the commencement of the ease, Feinman represented Community Savings Bank, a creditor in the Chapter 7 ease. As part of his representation of Community Savings Bank, Feinman brought a motion for relief from the automatic stay, which was granted, and an adversary proceeding objecting to the Debtors’ discharge under section 727 of the Bankruptcy Code. This adversary proceeding eventually resulted in the denial of the Debtors’ discharge. In connection with discovery in that adversary proceeding, Feinman discovered certain assets of the Debtors that had been transferred which he believed could be avoided by the Chapter 7 trustee.
On March 26, 1993, this Court approved the hiring of Feinman as special counsel to the trustee. In connection with that employment, Feinman disclosed the above representation of Community Savings Bank in his affidavit.
On May 3, 1993, the trustee represented by Feinman brought an adversary proceeding against Russell Sehwarzenberg, individually and as trustee, and Raymond Durbin, Jr. seeking to avoid certain fraudulent transfers. Although settlement negotiations commenced in May 1993 (United States Trustee’s Ex. 2), a motion to approve a compromise was not filed until December 2, 1993, and was set for a hearing on February 3, 1994, and reset to February 1,1994. The compromise provided that one of two properties subject to the fraudulent conveyance allegations would be sold, the proceeds in the approximate amount *19of $35,000 would be given to the trustee, and mutual releases would be exchanged by the parties.
Prior to the hearing on the compromise, Community Savings Bank employed Fein-man to recover a deficiency it had against Raymond Durbin, Jr. On January 20, 1994, Feinman opened a new file for Community Savings Bank against Raymond Durbin, Jr. This Court held a hearing on the compromise on February 1, 1994, and approved it subject to a stipulated order being provided by the parties, which this Court approved and executed on February 11,1994. On February 7, 1994, Feinman obtained an attachment against Raymond Durbin Jr. on a property that was subject to the fraudulent conveyance allegations but was not property sold pursuant to the compromise.
These facts were brought to the attention of the United States Trustee. Feinman then filed a “Motion for Clarification of Employment of Counsel” in which Feinman set out the facts of his representation of Community Savings Bank against Raymond Durbin Jr. His basic contention in support of his actions was that he believed that the adversary proceeding had been settled and thus no actual conflict existed.1
At a continued hearing on the clarification motion held on August 23, 1994, this Court found that the opening of the file by Feinman prior to the final disposition of the adversary proceeding was an actual conflict and indicated that the matter of an appropriate sanction would be addressed at the hearing on Fein-man’s final application for fees. That hearing was held on June 16,1996, at which time the Court took the matter under advisement.
Discussion
Feinman’s final application for fees and expenses seeks legal fees in the amount of $13,430 and expenses of $527.44. In his response to the United States Trustee’s objection, Feinman agreed to reduce his legal fees by $352 and, at the hearing on the fees, agreed to reduce expenses by $148.50 leaving total legal fees requested of $13,078 and total expenses of $378.94. Subsequent to these deductions, the remaining objections of the United States Trustee are twofold. First, that the fees are excessive considering the amount of the settlement, and, second, that the fees should be reduced because of the conflict of interest issue discussed above.
I. Excessive Fee Issue
This Court has reviewed the application from the point of view of whether or not the fees requested are excessive. While the fees requested are greater than a typical one-third contingency fee, this Court approved Feinman’s retention on a general retainer based on an hourly fee arrangement plus expenses. Absent the doubt raised by the conflict issue, it appears that the time charges were appropriate to a rather complex adversary proceeding. Based on the retention approved by this Court, the Court will not reduce the fees or expenses on the grounds of being excessive.
II. Conflict of Interest
This Court has already found in its August 23,1994 order that a conflict of interest existed when Feinman opened a file for Community Savings Bank against Robert Durbin, Jr. prior to the compromise in the adversary proceeding in this Court being final. Feinman’s arguments that it was a mistake and that he believed that the matter had been finalized when he took on the other representation are insufficient in the eyes of this Court. The fact that the United States Trustee could make the following statement, found in paragraph 14 of its objection, highlights the significance of the problem.
But for Attorney Feinman’s actions on the part of his client, Community Savings Bank, in taking the 2004 examinations of the Debtors, and in disclosing the information obtained to the trustee, the estate would not have generated the $35,000 settlement. The problem is that it will never be known whether the $35,000 settlement *20recommended by Attorney Feinman may have been for less than its true value. The fact that Attorney Feinman attached the property even before the compromise was approved does nothing to dispel that discomfort.
Objection of United States Trustee to Final Fee Application of Michael B. Feinman as Special Counsel to Trustee, Court Doc. 54, ¶ 14 at 5. Feinman had an absolute obligation to the trustee in the bankruptcy estate to make sure that the adversary, including the compromise, was final before entertaining the representation of any client against assets that were the subject of the adversary proceeding which, as a result of the compromise, he knew were now available to the claims of other creditors.
Bankruptcy courts are given discretionary authority to compensate professionals employed under 11 U.S.C. § 327 by an estate trustee. In re DN Assocs., 3 F.3d 512, 514 (1st Cir.1993) (citation omitted). If a bankruptcy court concludes that an impermissible conflict of interest exists, available sanctions include disqualification and the denial or disgorgement of all fees. Rome v. Braunstein, 19 F.3d 54, 58 (1st Cir.1994). “However, courts may grant attorney’s fees even if a conflict of interest is demonstrated, as long as such an award is sensible in light of the circumstances.” DN Assocs., 3 F.3d at 514 (citing In re Kendavis Industries Int'l, Inc., 91 B.R. 742, 761 (Bankr.N.D.Tex.1988)).
Based on the above, the Court finds the appropriate sanction to be a reduction of forty percent of the legal fees requested by Feinman. The Court approves as a final fee legal fees in the amount of $7,846.80 and expenses in the amount of $378.94.
This opinion constitutes the Court’s findings and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052. The Court will issue a separate order consistent with this opinion.
. There is representation in the pleadings that the compromise was originally set for hearing on December 16, 1993 and continued to the February 1 date. The Court has reviewed the record, and it is apparent that the February 1 date was set upon the filing of the motion for compromise and a pretrial that had been previously scheduled was held on December 16, 1993. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492488/ | OPINION
DONALD R. SHARP, Chief Judge.
The Court has before it the confirmation of Debtor’s First Amended Chapter 13 Plan. The Attorney General of Texas, Child Support Division, objected to confirmation of Debtor’s Plan. At the conclusion of the hearing, the matter was taken under advisement. This opinion constitutes the Court’s findings of fact and conclusions of law to the extent required by Fed.R.Bankr.Proc. 7052 and disposes of all issues before the Court.
FACTUAL AND PROCEDURAL BACKGROUND
The Plan provides for payments to the Trustee over a sixty (60) month period and further provides, in pertinent part, that the “Trustee will make disbursements in the following order”... e) “the State of Texas o/b/o Shirley J. Webster shall be paid in lieu of the arrearage in child support claim and in satisfaction of the arrearage in child support claim pro rata payments per month for sixty (60) months for a total repayment of $6,709.16. Such total repayment represents the amount of $6,709.16 paid out at 0% interest per annum ...”
The Attorney General of Texas filed an Objection to confirmation of the Debtor’s Plan because the Plan does not “provide for post-petition interest on the child support arrearage owed.”
DISCUSSION
This matter came before the Court as an Objection to the Confirmation of Debt- or’s Chapter 13 Plan. During the discussion with counsel at the hearing, it became apparent that counsel both agreed that it was not appropriate to include interest in the Chapter 13 plan payments over the life of the Chapter 13 plan. The primary discussion and dispute between the parties centered around whether or not the state of Texas had the right to accrue interest on the child support payments which would become a part of the nondischargeable debt at the completion of the Chapter 13 plan. The primary dispute between the parties was as to the wording of the confirmation order since neither party wanted the confirmation order to act as a foreclosure of their rights in the future.
It is clear that pursuant to § 502(b)(2) of the Bankruptcy Code, unmatured interest is not allowed on this claim. The fact that the debt may or may not be nondischargeable has no bearing on that issue. See Leeper v. PHEAA, 49 F.3d 98, 101 (3d Cir.1995) which dealt with a student loan but the principle is exactly the same. It is also clear to the Court that nothing further needs to be done in connection with the question of the accrual of the interest. That issue is not ripe for decision at this point since there is no attempt to collect a post-petition nondischargeable debt at this point. There is also no attempt at this point to have that debt declared discharged. Those issues can properly be litigated if and when Debtor seeks a discharge in this case.
*83The objection to confirmation of the plan must be denied and Debtor’s counsel is instructed to present an order of confirmation within ten days. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492489/ | OPINION
DONALD R. SHARP, Chief Judge.
NOW before the court for consideration is the Post-Confirmation Modification to Debt- or’s Confirmed Plan of Reorganization Dated September 9, 1991, as modified, filed by WESTWOOD PLAZA APARTMENTS, LTD.. This opinion constitutes the Court’s findings of fact and conclusions of law to the extent required by Fed.R.Bankr.Proe. 7052 and disposes of all issues before the Court.
FACTUAL AND PROCEDURAL BACKGROUND
This case began when Westwood Plaza Apartments, Ltd. (hereinafter referred to as the “debtor”), filed its Chapter 11 Plan of reorganization on September 9, 1991. This Plan was subsequently modified and was confirmed by the Bankruptcy Court on August 3,1992.
The Department of Housing and Urban Development (hereinafter referred to as “HUD”), appealed the confirmation of the Plan to the United States District Court for the Eastern District of Texas. On January *8424, 1996, the District Court affirmed in part and reversed in part. The District Court affirmed in all respects except the finding that the plan complied with 11 U.S.C. § 1129(b). More specifically, it held that a three percent rate of interest on the unsecured claim of HUD is clearly erroneous. The District Court’s remand instructed the bankruptcy court to conduct further proceedings consistent with its Memorandum Opinion and Order.
The Debtor then filed a notice of appeal to the United States Court of Appeals for the Fifth Circuit and filed with this Court a “Post-Confirmation Modification to Debtor’s Confirmed Plan of Reorganization Dated September 9, 1991, as Modified.” The Motion seeks to modify the unsecured claim by having the Debtor pay $310,000.00 in full satisfaction of the claim. This amount represents 10% of the unsecured claim. HUD responded by filing an objection to the Modification.
Debtor filed a Motion to Dismiss the Appeal to the Fifth Circuit pursuant to a settlement whereby HUD would dismiss their Objection to Modification. HUD asserted that no settlement had been reached and therefore did not dismiss their objection. This Court has before it the modification and HUD’s Objection to Modification.
DISCUSSION
The issue before this Court is whether the Post-Confirmation Modification to Debtor’s Confirmed Plan of Reorganization is proper at this point in time and in accordance with the instructions on remand by the United States District Court for the Eastern District of Texas.
Debtor argues that the filing of its Post-Confirmation Modification is proper and now brings the plan into compliance with 11 U.S.C., § 1129(b) in accordance with the District Court ruling. In support of its proposition Debtor cited In re Western Real Estate Fund Inc., 109 B.R. 455 (Bkrtcy.W.D.Okl.1990). In that case, a similar situation occurred in that the District Court remanded several issues, one being the erroneous interest rate determination. The bankruptcy court on remand however addressed other issues raised by Debtors in their Plan Amendment and Supplemental Disclosure. Id. Debtor believes that the ruling in In re Western Real Estate Fund Inc. gives this court the authority to take into consideration the Post-Confirmation Modification on remand.
While this court finds that there is a slight similarity these cases are still very different. First, in In re Western Real Estate Fund Inc., the ultimate conclusion on remand was that the plan of reorganization should not have been confirmed. Id. at 459. While in this case, the District Court affirmed the bankruptcy opinion except for the determination of the interest rate on the unsecured claim. Second, in Western Real Estate Fund Inc., the District Court did not specifically require that the remand be limited to a determination of an appropriate interest rate, but allowed the proceeding on remand to be much broader. Id. While in this case, the District Court stated specifically what was to be determined on remand.1 In re Westwood Plaza Apartments Ltd., 192 B.R. at 695.
The “mandate rule” of the law of the case doctrine provides that the trial court must adhere closely to the dictates of the appellate court and it is error to grant relief not mandated by the remanding appellate court. Cole Energy Development Co. v. Ingersoll-Rand Co., 8 F.3d 607, 609 (7th Cir.1993); Turner v. Avery, 198 B.R. 192, 194 (E.D.La.1996). Explicit rulings on issues that were before the higher court and explicit directives by that court to the lower court concerning proceedings on remand are not dicta. Id.
Therefore, it is this Court’s duty to follow the explicit directives given by the District Court on remand. Before this Court can consider the proposed modification, it must first determine the proper interest rate to be used on the unsecured claim to bring the *85Plan into compliance with 11 U.S.C. § 1129(b).
CONCLUSION
For the foregoing reasons, the Post Confirmation Modification of Debtor’s Confirmed Plan of Reorganization Dated September 9, 1991 as Modified should be denied. Furthermore, a hearing shall be held to determine a proper interest rate to be used on the unsecured claim in order to comply with the Judge Brown’s remand order.
. The District Court held that the issue of Plan feasibility pursuant to 11 U.S.C. § 1129(b) is moot in light of its remanding to the bankruptcy court for reconsideration of a new interest rate on HUD's unsecured claim. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492490/ | MEMORANDUM
DAVID T. STOSBERG, Bankruptcy Judge.
The Court confronts today the troubling question of unauthorized postpetition transfers of retainer funds by debtor’s counsel.
Factual Background
This case began as a Chapter 11 proceeding on September 30, 1994. On November 10, 1994, David Chinn (“Chinn”) filed a Motion requesting approval to act as counsel for the Chapter 11 debtor-in-possession, disclosing the receipt of a $10,000 retainer. (See docket #21). The United States Trustee objected to Chinn’s employment and the Court scheduled a hearing to consider approval of Chinn’s employment as debtor’s counsel. Following that hearing, the Court converted the ease to a Chapter 7, which mooted the question of Chinn’s employment (See docket # 3). Chinn’s employment was therefore never approved by the Court.
The situation involving Chinn’s postpetition transfer of the retainer recently came to the Court’s attention through the Chapter 7 Trustee, Baxter Schilling (“Schilling”). Schilling obtained a Court Order on March 10,1995 directing Chinn to turn over certain documents to the Trustee, including bank statements. Schilling was unable to review the debtor-in-possession records as they had been destroyed. On numerous occasions, Chinn promised to willingly provide these documents to Schilling and Schilling granted Chinn several extensions. After Chinn failed to comply with the Court’s Order for a period in excess of a year, Schilling, on August 19, 1996, filed a Motion to Hold Debtor’s Counsel in Contempt. In the face of Schilling’s contempt motion, on August 19, 1996, Chinn finally provided the requested documents to Schilling.
On September 30,1996, the Court conducted a hearing to consider Schilling’s motion to *91hold Chinn in contempt of Court. It was at that time that Schilling disclosed to the Court that he had reviewed the bank statements which Chinn eventually provided, only to find that Chinn had made unauthorized transfers of the debtor’s monies. Particularly, at the September 30, 1996 hearing, Chinn acknowledged receipt of a $10,000 retainer prior to the Chapter 11 filing. Chinn then stated in open Court that he paid $5,000 of the retainer to Donald Heavrin (“Heavrin”) for Chinn’s personal rent, and “spent” the remaining $5,000. Heavrin acted as in-house counsel for the debtor prior to the bankruptcy filing. Heavrin, clearly an “insider” pursuant to 11 U.S.C. § 101(31), received one-half of the retainer soon after the filing.
In violation of the rules governing attorneys, Chinn deposited the retainer directly into his general operating account. See SCR 3.130(1.15(a)). Chinn admitted that he never obtained Court approval of any fees for services performed in this proceeding. Chinn contends, rather disingenuously, that the conversion of the case prevented him from filing the necessary fee application; yet, a review of the file reveals that Chinn’s own fee agreement provides specifically for Bankruptcy Court approval of all legal fees and expenses prior to any disbursement. (See attachment to docket # 21).
The Court granted Chinn yet another opportunity to explain the unauthorized transfer by scheduling a hearing directing Chinn to appear and show cause why the retainer should not be paid into the estate and further, why sanctions should not be imposed for Chinn’s failure to comply with the Court’s Order entered March 10, 1995, which directed Chinn to provide the documents requested by Schilling.
Despite having twenty-eight (28) days, Chinn filed no pleading or document whatsoever prior to the show cause hearing. At the show cause hearing, Chinn offered no explanation for his failure to comply with the rules governing client funds. The only explanation offered by Chinn was that he was suffering from “dire financial circumstances” at the time of the unauthorized transfer. Only after the show cause hearing did Chinn file an Application for Nunc Pro Tune Allowance of Compensation and Reimbursement of Expenses, seeking after-the-fact approval of fees and expenses for services performed from September 28, 1994 through August 6, 1996 in the total sum of $17,543.75. Obviously Chinn did not act as counsel for the Trustee. Nonetheless, most of the fees for which Chinn filed the belated request for approval were for services performed during the Chapter 7 proceeding.
The Court requested a copy of the cheek evidencing the retainer received by Chinn from the debtor and an accounting setting forth the application of these funds by Chinn, however, neither has been provided to the Court. On November 20, 1996, the Court ordered Chinn to obtain a copy of the check from his depository within three (3) business days and for Chinn to file a copy of the check with the Court within three (3) days of his receipt of the check from his depository. Chinn has filed nothing in response to the Court’s Order of November 20,1996.
Legal Analysis
With reference to the requirement of segregating client funds, the Rules of the Supreme Court of Kentucky provide:
A lawyer shall hold property of clients or third persons that is in a lawyer’s possession in connection with a representation separate from the lawyer’s own property. Funds shall be kept in a separate account maintained in the state where the lawyer’s office is situated, or elsewhere with the consent of the client or third person. Other property shall be identified as such and appropriately safeguarded. Complete records of such account funds and other property shall be kept by the lawyer and shall be preserved for a period of five years after termination of the representation. (Emphasis added).
SCR 3.130(1.15(a)). Safekeeping Property. The Comment to the Rule further provides that “A lawyer should hold property of others with the care required of a professional fiduciary. All property which is the property of clients ... should be kept separate from the lawyer’s business and personal property and, if monies, in one or more trust accounts.”
*92Chinn’s conduct in depositing the retainer funds into his general operating account flies directly in the face of this Rule. Where attorneys have commingled client funds with nonclient funds in violation of SCR 3.130(1.15(a)), suspension from the practice of law and even disbarment are warranted. See, Goble v. Kentucky Bar Ass’n, 845 S.W.2d 548 (Ky.1993) (attorney’s offer to resign from the KBA under terms of suspension for a period of five years accepted). See also, Kentucky Bar Ass’n v. Watson, 875 S.W.2d 96 (Ky.1994) (where attorney spent, borrowed and used client money without authorization, and failed to keep client’s money separate, disbarment was warranted).
Conclusion
Chinn’s conduct is contradictory to the overall mandate in bankruptcy proceedings of full and complete disclosure. Chinn’s role as counsel for a Chapter 11 debtor carried with it fiduciary-type responsibilities to insure that the debtor-in-possession properly administered property of the estate. Chinn’s unauthorized transfer of estate property amounted to a flagrant breach of his duties as debtor’s counsel. Chinn’s level of experience in the legal profession and years of practice in the bankruptcy arena prevent him from pleading ignorance of the law, particularly in light of his fee agreement which recites the requirement of court approval. Although not before the Court at this time, Heavrin’s conduct in accepting a portion of the funds in payment of Chinn’s personal rent obligation is likewise deplorable, especially in light of his insider status.
We surmise that Chinn’s delay in providing the Court-ordered documents to Schilling was in reality an attempt to prevent the Trustee from discovering the unauthorized transfer of the retainer funds. Chinn converted at least $10,000 of estate property to his own use. Chinn’s deliberate failure to disclose the unauthorized transaction, and his perplexing failure to demonstrate to the Court any justification for his actions, warrant the imposition of severe sanctions.
The Court elects to impose sanctions against Chinn as follows:
1). We shall order Chinn to refund the retainer funds to the Trustee;
2). By unanimous decision of all three divisions of this Bankruptcy Court, Chinn will be barred from practicing law in the United States Bankruptcy Court for the Western District of Kentucky for a period of two (2) years from the date of entry of the attached Order.
Our sanctions relate to the violation of the Rules of the Supreme Court of Kentucky and the Bankruptcy Code and Rules. A copy of this Memorandum and the related Order will be forwarded to the Kentucky Bar Association for appropriate action.
We have entered an Order this same date consistent with the conclusions of this Memorandum.
MEMORANDUM
This case comes before the Court on the Motion of David Chinn (hereinafter “Chinn”) to Alter or Amend the Court’s Order entered December 13, 1996, wherein the Court imposed certain sanctions against Chinn.
The Court conducted a hearing on the Motion and, thereafter, conducted conferences with the parties. Chinn has now paid the sum of $10,000.00 to the Trustee which leaves the Court only the issue of Chinn’s suspension from practice before this Court. After carefully considering the entire circumstances, the Court elects to reduce the suspension period from two (2) years to six (6) months with the understanding that Chinn will not appeal any Order reducing the suspension period. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492491/ | Order on Application for Attorney Fees
DONALD E. CALHOUN, Jr., Bankruptcy Judge.
The matter is before the Court on the application for approval of attorney fees filed by counsel for Debtors. Opposition to the application for fees was filed by Frank M. Pees, Chapter 13 Trustee (“the Trustee”), and the Office of the United States Trustee (“UST”). The matter came on for hearing on September 10, 1996, at which time the parties were afforded an opportunity to present argument and evidence in support of their respective positions. Debtors Robert Harshbarger and Mary Harshbarger (“Debtors”) were ordered to appear at the September 10, 1996 hearing, and did so appear. Testimony was provided at the hearing by Mary Harshbarger.
1. Findings of Fact
Debtors filed their petition under Chapter 13 of the Bankruptcy Code on August 21, 1992. Todd G. Finneran was attorney of record for Debtors at the time of filing, and has represented the Debtors, at times with co-counsel Wesley C. Emerson, throughout this case. Debtors’ initial Chapter 13 plan included a provision for the payment of 34% of the claims of general unsecured creditors. On September 2, 1992, Debtors submitted their First Amended Chapter 13 Plan, proposing to pay a 32% dividend to general unsecured creditors. On October 29, 1992, Debtors submitted a Second Amended Chapter 13 Plan proposing to, pay a dividend of 28% to general unsecured creditors.
On October 30, 1992, the Trustee filed an objection to confirmation of Debtors’ Chapter 13 Plan pursuant to 11 U.S.C. Section 1325, based on the disclosure in Debtors’ Schedule of Current Income that Debtors were proposing to pay $65.00 per month to satisfy an advance received against an ERISA qualified pension plan. The Trustee asserted that this provision was contrary to 11 U.S.C. Section 1325(b) whereby Debtors are required to pay all disposable income to their Chapter 13 plan for at least 36 months. This Court scheduled a confirmation hearing on Debtors’ Chapter 13 Plan for November 5, 1992, and found the Trustee’s objection to be well taken. Confirmation of Debtors’ Chapter 13 Plan was denied and Debtors were provided twenty days leave to amend their plan.
Debtors filed a Third Amended Chapter 13 Plan on December 1, 1992, and specifically included a provision whereby Debtors would continue to repay the $3,855.54 advance from Mary Harshbarger’s ERISA qualified White Castle System, Inc. Profit Sharing Plan and Trust in fall at the rate of $61.17 per month. On December 17, 1992, the Trustee filed an objection to confirmation of Debtors’ Third Amended Chapter 13 Plan in light of Debtors’ continued proposal to pay the White Castle System, Inc. Profit Sharing Plan and Trust advance in full, while paying a much lower dividend to other unsecured creditors. *111The Chapter 13 Trustee cited In re Jones, 138 B.R. 536, 539 (Bankr.S.D.Ohio 1991) where the undersigned specifically ruled that a proposal such as the one made by Debtors to repay their pension plan advance was unfair to other creditors, and violated 11 U.S.C. Section 1325(b).
On January 8,1993, Debtors filed an opposition to the Trustee’s objection to confirmation of their plan, arguing that the future wages being dedicated to repay the pension plan loan were not property of the bankruptcy estate, citing Patterson v. Shumate, 504 U.S. 753, 112 S.Ct. 2242, 119 L.Ed.2d 519 (1992) as support. The Debtors argued that the loan funds themselves were not property of the estate, and the repayment amount of $61.17 per month did not violate 11 U.S.C. Section 1325. By an Order entered February 10,1993, Debtors’ Chapter 13 proceeding was dismissed for failure to present a con-firmable plan. On February 19, 1993, Debtors filed a notice of appeal and a motion for stay of the order dismissing the Chapter 13 case during the pendency of the appeal process. By Order entered February 26, 1993, this Court granted the motion to stay the order dismissing Debtors’ Chapter 13 case during the pendency of the appeal process.
On December 8, 1993, the United States District Court for the Southern District of Ohio affirmed the decision of the Bankruptcy Court, and ruled that the loan from Mrs. Harshbarger’s profit sharing plan could not be repaid as proposed by Debtors’ Chapter 13 Plan. On January 5, 1994, Debtors filed their notice of appeal of the District Court’s Order to the United States Court of Appeals for the Sixth Circuit. On September 19, 1995, the United States Court of Appeals for the Sixth Circuit affirmed the District Court decision, and upheld the dismissal of the Debtors’ Chapter 13 bankruptcy proceeding for failure to submit a plan that satisfied the requirements of 11 U.S.C. Section 1325.
On April 1, 1996, counsel for Debtors filed a Supplemental Statement pursuant to Fed. R.Bankr.P. 2016(b), disclosing for the first time that Debtors and their counsel had agreed to attorney fees in the amount of $7,000.00 for representation of the Debtors in the appeals process. By an Order entered June 14, 1996, the Bankruptcy Court required counsel for Debtors to file an itemized fee application. Counsel for Debtors filed their application for attorney fees on July 8, 1996, ultimately resulting in the September 10, 1996 hearing on the fee application and the resulting objections.
This Court is called upon to determine what amount, if any, of the attorney fees requested by counsel for Debtors is allowable pursuant to 11 U.S.C. Section 330.
11. Conclusions of Law
Initially, it should be noted that this Court’s June 14,1996 “Order On Motion Of Chapter 13 Trustee To Require Debtors’ Counsel To File Supplemental Fee Disclosure And To File An Appropriate Fee Application” provides the Court with clear authority to rule on the application for attorney fees filed by attorneys Finneran and Emerson. That Order provided that the Court was “confirming its jurisdiction to order counsel for Debtors to file an itemized fee application, and to review fees requested for work performed during the course of Debtors’ bankruptcy proceeding, and the related appeals ... the Court is simply satisfying its duty to oversee fee issues in accordance with the terms and spirit of the Bankruptcy Code and Rules.” This Court’s June 14, 1996 Order was predicated on the responsibility of the bankruptcy court to review a debtor’s transactions with its professionals in every case, sua sponte, if necessary. In re Quaker Distributors, Inc., 189 B.R. 63, 68 (Bankr.E.D.Pa.1995). As set forth in this Court’s June 14, 1996 Order, the fact that this bankruptcy proceeding was dismissed does not result in the bankruptcy court losing jurisdiction to consider the allowance of attorney fees to Debtors’ counsel. In re Fricker, 131 B.R. 932, 938 (Bankr.E.D.Pa.1991).
Attorney fees for debtors’ counsel in chapter 13 proceedings are awarded pursuant to 11 U.S.C. § 330(a), and are entitled to priority expense status pursuant to 11 U.S.C. § 507(a)(1). While the Bankruptcy Reform Act of 1994 removed reference to payment of compensation to “the debtor’s attorney” from § 330(a), Debtors’ Chapter 13 proceeding *112was filed prior to the effective date of that amendment. In order to review the request of counsel for fees in this case, the Court will look to 11 U.S.C. § 330(a) as it existed prior to the 1994 Amendments. As of the date of filing this Chapter 13 proceeding, 11 U.S.C. § 330(a) allowed the court to award to the debtor’s attorney “reasonable compensation for actual, necessary services rendered by such ... attorney ... based on the nature, the extent, and the value of such services, the time spent on such services, and the cost of comparable services ...” Analyzing the fee applications submitted by counsel for Debtors, the Court must initially determine whether the fees applied for relate to services that were reasonable, actual and necessary. Based on the application filed by counsel for Debtors, the Court has no basis to question whether the fees were actually incurred, and therefor will concentrate its analysis on whether the fees were reasonable and necessary.
It is the applicant’s burden to demonstrate entitlement to fees. Continental Ill. Nat. Bank & Trust Co. of Chicago v. Charles N. Wooten, Ltd. (In re Evangeline Refining Co.), 890 F.2d 1312, 1326 (5th Cir.1989); In re Zwern, 181 B.R. 80, 85 (Bankr.D.Colo.1995). In the Chapter 11 case of Rubner & Kutner, P.C. v. U.S. Trustee (In re Lederman Enterprises, Inc.) 997 F.2d 1321 (10th Cir.1993), the court stated that “[a]n element of whether the [attorney’s] services were ‘necessary’ is whether they benefitted the bankruptcy estate.” Lederman, 997 F.2d at 1323. Before the reasonableness of an attorney’s services can be determined, such services must be found to have been necessary. Lederman, 997 F.2d at 1323. In a Chapter 13 case, the inquiry as to awarding fees to debtor’s counsel must be “whether the services were ‘necessary’ in order to enable the debtor to perform the debtor’s duties under the Code and to also enable the debtor to enjoy the benefits available in Chapter 13.” In re Stromberg, 161 B.R. 510, 516 (Bankr.D.Colo.1993). While this may allow the Court to have a somewhat broader interpretation of “necessary” than stated in Leder-man, the Court believes that in a Chapter 13 proceeding, counsel’s services must not have benefitted the individual debtor at the expense of the estate as a whole.
Unless Debtors’ counsel can prove both that the services rendered benefitted the estate, and that the services were necessary, fees will not be allowed under 11 U.S.C. § 330(a). Stromberg, 161 B.R. at 514; Zwern, 181 B.R. at 84, 88. The work of the attorney for which compensation is requested “must be evaluated in terms of benefit to the estate.” In re Copeland, 154 B.R. 693, 699 (Bankr.W.D.Mich.1993) (citations omitted). While the 1994 Amendments to 11 U.S.C. § 330(a)(4)(B) allow for counsel fees for representing the interests of the debtor based on the benefit and necessity of such services to the debtor, that amendment only applies to eases filed after October 22, 1994, and is inapplicable here. The Court will therefor analyze whether the services of counsel for Debtors were beneficial to the estate, and that such services were necessary in accordance with the analysis under 11 U.S.C. § 330(a) prior to the 1994 Amendments to the Bankruptcy Code.
The fees requested by counsel in this case relate solely to the appeals filed by Debtors in the United States District Court and Sixth Circuit Court of Appeals. During the appellate process, two issues were addressed by Debtors: (1) whether Debtors’ pension plan could be repaid at a higher dividend than all other general unsecured creditors would receive; and (2) whether the Chapter 13 trustee was engaged in the unauthorized practice of law.
Beginning with the more substantive issue, counsel for Debtors asserted that the pension plan advance could be repaid in full, despite a much lower dividend proposed to unsecured creditors as part of Debtors’ Chapter 13 plan, in light of the decision of Patterson. In Patterson, the Supreme Court found that an ERISA qualified pension plan was not property of the bankruptcy estate, but made no determination or inference as to whether future wages to repay a loan taken from such a plan would similarly be excluded from property of the estate. Debtors argued that “preserving one’s pension in toto through payroll deduction to an ERISA carve out should satisfy the requirements of disposable *113income.” Appellants’ Brief to United States District Court, p. 26. However, Debtors offered no authority to support that proposition, and the District Court found no such authority, instead finding that “[i]ncome which is used to pay back an unsecured loan or advance from a debtor’s retirement account is not expended for the ‘maintenance or support’ of the debtor.” Opinion and Order of the United States District Court, Case No. C2-93-0297, p. 4 (December 8, 1993).
At the time Debtors filed their Chapter 13 plan, this Court had already published its decision of In re Jones, 138 B.R. 536 (Bankr.S.D.Ohio 1991) which stated as follows:
As already mentioned, it would be unfair to the creditors to allow the Debtors in the present case to commit part of their earnings to the payment of their own retirement fund while at the same time paying their creditors less than a 100% dividend. In summary, to hold otherwise would permit the Debtors to insulate a portion of their future earnings from their estate which is unfair to the creditors and contrary to 11 U.S.C. § 1322. Secondly, it would set an untenable precedent, since it would encourage future debtors to take out such loans to insulate their future earnings from their creditors. Third, it would be counter to the public policy of providing a fresh start to debtors under conditions consistent with the Bankruptcy Code. The purpose of the Bankruptcy Code is to provide a fresh start, not a fine finish. Accordingly, this Court holds that the Debtors may not make payments on their retirement loan under the Plan while paying their creditors less than a 100% dividend. Jones, 138 B.R. at 539.
In addition to the Jones case, the case of In re Scott, 142 B.R. 126 (Bankr.E.D.Va.1992) was reported at the time Debtors filed this Chapter 13 case, agreed with the Jones decision, and held that assets in a retirement account are excluded from the bankruptcy estate under 11 U.S.C. § 541(c)(2), but future income dedicated to repayment of loans taken from such an account was not similarly excluded from the estate.
Debtors’ counsel argued that Jones and Scott were decided before Patterson, and the Patterson case gave Debtors the basis for proposing the subject Chapter 13 plan. However, as noted by the District Court and Sixth Circuit Court of Appeals, Patterson provided no support to Debtors’ position, simply holding that 11 U.S.C. § 541(c)(2) excludes any interest in a pension plan or trust that contains a transfer restriction enforceable under relevant nonbankruptcy law, including ERISA, from property of the bankruptcy estate. Debtors’ interest in their profit sharing plan account was not property of the bankruptcy estate under Patterson. However, there is nothing in Patterson to indicate or even infer that any part of Debtors’ future earnings, which Debtors attempted to voluntarily use for repayment of a profit sharing plan loan, could similarly be excluded from the bankruptcy estate. The District Court also noted that Debtors failed to establish that the profit sharing plan account loan was a “debt” or that the plan was a “creditor” holding a “claim” in light of the provisions of the loan agreement, enumerated in detail in the District Court’s decision of December 8, 1993. The Sixth Circuit Court of Appeals affirmed the District Court, citing Jemes and Scott with approval. The Sixth Circuit held that it was “clear” that 11 U.S.C. § 541(c)(2) and Patterson combined to exclude from the bankruptcy estate a debtor’s beneficial interest in a trust that is subject to a restriction on transfer enforceable under applicable nonbankruptcy law, but income debtors “chose” to use to repay a profit sharing plan loan was not similarly excluded. Harshbarger v. Pees (In re Harshbarger), 66 F.3d 775, 777 (6th Cir.1995). Such future income had to be treated as disposable income of the bankruptcy estate. Id.
Both the District Court and Sixth Circuit Court of Appeals gave short shrift to Debtors’ argument that Patterson v. Shumate had any effect on the precedential value of Jones and Scott. In addition, the District Court and Court of Appeals gave very little attention to the arguments of Debtors that the Trustee was engaged in the unauthorized practice of law, especially in light of the fact that Debtors had not raised this issue at the trial court level, with both courts citing In re Eagle-Picher Ind., Inc., 963 F.2d 855, 863 *114(6th Cir.1992). Certainly, there is no viable argument that raising the issue of the Trustee’s alleged unauthorized practice of law somehow benefitted Debtors or their estate. This is especially true where counsel failed to raise this issue at the trial court level, and had no realistic possibility of successfully raising the issue for the first time at the appellate level.
The Court is reluctant to engage in second guessing the actions of counsel for Debtors, but finds that the circumstances here make such a review unavoidable. Counsel for Debtors argued that the decision to appeal the bankruptcy court order was made by Debtors “based on our counsel and our best efforts to make or to assist them in determinations about what their rights were.” Transcript of September 10, 1996 Bankruptcy Court hearing, p. 8. Mrs. Harshbarger testified that Debtors’ decisions were made with the advice of counsel (Transcript of September 10, 1996 hearing, pp. 35 and 37). It is clear to the Court that counsel for Debtors did not competently advise Debtors of the state of the law both before and after the Patterson decision, or about the costs involved in the appeal and chances of success. The issue involved here was repayment of a pension plan loan in the amount of $3,855.54. Attorneys fees of $7,000.00 on a claim as tenuous as the one presented by counsel for Debtors, in a situation where Debtors could have presented a 100% Chapter 13 plan within the statutory 60-month period of time, or paid a 42% dividend over 36 months and then repaid the pension plan loan after the initial 36 months in accordance with the provisions of Chapter 13 of the Bankruptcy Code, can be considered neither reasonable nor necessary. Certainly, such services were of no benefit, and actually harmed the estate as a whole, and the benefit to Debtors individually is doubtful at best. In no way did counsel’s services with respect to the appeals enable Debtors to perform their duties under the Code, or enjoy the benefits of Chapter 13. See Stromberg, supra.
In this case, Debtors lost their commercial real property to foreclosure after paying the mortgage as part of an adequate protection payment during the pendency of the appeals process. Debtors did not receive a discharge in bankruptcy, are currently receiving regular collection notices, and received no benefit whatsoever from being in this Chapter 13 bankruptcy proceeding for more than four years. While Debtors repaid the pension plan loan during the appeals process, the cost of doing so was exorbitant. From a review of the testimony presented on September 10, 1996, the Court concludes that Debtors were not properly counseled with respect to the costs of appeal, and specifically testified that they did not know that the appeals would cost more than the amount of the loan at issue. September 10, 1996 hearing transcript, p. 48.
Counsel for Debtors argued that “sometimes the point has to be made. And if a client chooses to exercise their judgment to prove a point if they can, that is a benefit calculated and reasoned to the client.” September 10, 1996 hearing transcript, p. 64. These Debtors were simply not in a financial position to spend $7,000.00 to challenge by appeal an issue that could have been easily resolved by amending their Chapter 13 plan. Further, the Court finds the basis of the appeal to have been tenuous at best. The Court is hard pressed to see a realistic argument for extending the Patterson decision to future income “dedicated” by Debtors to repayment of a pension plan loan. Such an argument is clearly contrary to 11 U.S.C. § 1325. While Mrs. Harshbarger testified that she knew she could amend the Chapter 13 plan, she stated “... but we thought that with the length of time that it was going to take that it would have worked out, you know, we would still be paying into the plan, and if we lost we would have our money, we can make other arrangements.” September 10, 1996 hearing transcript, p. 37. The trouble with this testimony is that Mrs. Harsh-barger did not seem to consider the attorney fees that would be incurred in appealing the Bankruptcy Court and District Court decisions.
The transcript of the September 10, 1996 hearing is replete with examples of Debtors’ confusion with respect to the appeals process and costs of appeal. The Court also finds it troubling that Debtors were *115advised that they had like a “50/50” chance of winning the appeals. September 10, 1996 transcript, p. 40. The Court understands that any appeal may have a chance of success, but the Court considers the chances of success of this particular appeal, on the bases presented, to be negligible. “An entity in bankruptcy can ill afford to waste resources on litigation; every dollar spent on lawyers is a dollar creditors will never see.” Pioneer Investment Services Co. v. Brunswick Associates, 507 U.S. 380, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993). The Court here is left with the unmistakable impression that litigation costs were unwisely and needlessly incurred, based on advice of counsel. It is this Court’s responsibility to prevent attorneys from overreaching in an effort to be paid for wasteful and needless litigation. See, e.g., In re Riker Industries, Inc., 122 B.R. 964, 970 (Bankr.N.D.Ohio 1990).
The Court returns to the issue of whether the services of counsel for Debtors were reasonable and necessary, and provided a benefit to the Debtors or the bankruptcy estate. There is no question that the bankruptcy estate as a whole would have been better served by an amendment to the Chapter 13 plan, resulting in payment to creditors of between 42% and 100%, and Debtors receiving a discharge within the statutory period of time. Instead, as set forth above, Debtors have no discharge, have lost their rental property to foreclosure after making significant payments dining the pendency of the appeals, and are again being forced to deal with creditors whose claims should have been resolved through the Chapter 13 process. The Court finds it clear under these circumstances that the services of counsel for Debtors were neither reasonable nor necessary, and provided no benefit to Debtors individually or their estate. As such, the requested fees are not compensable under 11 U.S.C. § 330(a), or allowable under 11 U.S.C. § 503(b).
The Court also returns to the issue of the failure of counsel for Debtors to timely file their Supplemental Statement of Debtors’ Counsel Pursuant to Bankruptcy Rule 2016(b). That Statement was not filed until April 1,1996 in clear violation of Bankruptcy Rule 2016(b), and provides an independent basis for denying compensation. In re TJN, Inc., 194 B.R. 400, 403 (Bankr.D.S.C.1996); Fricker, 131 B.R. at 941.
Based on the foregoing, it is hereby ORDERED that the Application for Approval of Attorney Fees filed on July 8, 1996 is DENIED, and the Trustee is hereby authorized to return to Debtors any monies being held on behalf of Debtors, in accordance with 11 U.S.C. § 1326(a)(2).
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492492/ | OPINION
KENNETH J. MEYERS, Bankruptcy Judge.
Debtor, Rennie Clark, filed this Chapter 13 case after obtaining a discharge in a previous Chapter 7 case.1 In his schedules, the debtor listed two secured creditors holding first and second mortgages on the debtor’s residence, respectively, and no unsecured creditors. Simultaneously with the filing of his amended Chapter 13 plan, the debtor filed the present action to avoid the lien of the second mortgagee, Transameriea Financial Services, Inc. (“Transameriea”), as an unsecured claim under 11 U.S.C. § 506(a) and (d).
At hearing on the debtor’s complaint, the parties stipulated that the value of the debt- or’s residence was less than the amount of the first mortgage. Transameriea, however, asserted that the debtor could not avoid its lien by reason of § 1322(b)(2), which prohibits a Chapter 13 debtor from modifying a claim “secured only by a security interest in real property that is the debtor’s principal residence.” 11 U.S.C. § 1322(b)(2). Trans-america argued that the Supreme Court’s decision in Nobelman v. American Savings Bank, 508 U.S. 324, 113 S.Ct. 2106, 124 *141L.Ed.2d 228 (1993), was applicable to prevent a “strip down” of residential mortgages in Chapter 13 proceedings even when the lien is completely unsecured by any equity in the property.
The Court took the debtor’s complaint under advisement to determine whether, under the language of § 1322(b)(2) and the Supreme Court’s decision in Nobelman, the debtor could modify Transamerica’s claim by eliminating its lien on the debtor’s residence. At the time of hearing on the debtor’s complaint, the deadline for filing proofs of claim in the debtor’s Chapter 13 proceeding had not expired.2 However, subsequent to the hearing and while the debtor’s complaint was under advisement, the deadline for filing proofs of claim expired without a proof of claim being filed by Transamerica or by the debtor on Transameriea’s behalf. In light of this development, the Court, having not yet rendered its decision concerning avoidability of Transamerica’s lien, is required to consider whether § 1322(b)(2) may be applied to prevent modification of a claim in the absence of a proof of claim having been filed.
Section 1322(b)(2) by its terms sets forth the requirements of a Chapter 13 plan with regard to “claims” filed by creditors.3 It is axiomatic that in order to have an allowed claim entitled to payment under a Chapter 13 plan, a creditor must file a proof of claim. See 11 U.S.C. §§ 501, 502(a); In re Linkous, 141 B.R. 890, 895-96 (W.D.Va.1992), aff'd 990 F.2d 160 (4th Cir.1993); In re Francis, 15 B.R. 998, 1003 (Bankr.E.D.N.Y.1981). The anti-modification provision of § 1322(b)(2) relates to allowed “claims” of a creditor and not merely to obligations that are owing to a creditor. Since no proof of claim was filed regarding the debtor’s obligation to Transamerica, Transamerica has no “claim” in the debtor’s Chapter 13 proceeding that can be modified by the debtor’s plan. Indeed, in the absence of a claim to be paid under the debtor’s plan,4 the plan itself has no effect on Transameriea’s rights as a secured creditor.5 Transamerica, therefore, may not invoke the protection of § 1322(b)(2) when it has not filed a proof of claim that can be modified by the debtor’s plan.6
The question remains whether the debtor, without concern for the anti-modifica*142tion provision of § 1322(b)(2), may avoid Transameriea’s lien under § 506(a) and (d) when no proof of claim has been filed on Transameriea’s behalf. Section 506 provides in pertinent part:
(a) An allowed claim of a creditor secured by a lien on property in which the estate has an interest ... is a secured claim to the extent of the value of such creditor’s interest ... in such property, ... and is an unsecured claim to the extent that the value of such creditor’s interest ... is less than the amount of such allowed claim.
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(d) To the extent that a hen secures a claim against the debtor that is not an allowed secured claim, such hen is void unless—
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(2) such claim is not an allowed secured claim due only to the failure of any entity to file a proof of such claim under section 501 of this title.
11 U.S.C. § 506(a) and (d) (Emphasis added).
The clear implication of § 506(a)’s reference to “allowed” claims is that a creditor’s claim must be filed and allowed before a court can value the claim pursuant to § 506(a). See King, 165 B.R. 296, 299 (Bankr.M.D.Fla.1994). Section 506(a) speaks in terms of valuing a “claim” rather than the collateral underlying such a claim. Id.; see also Fed.R.Bankr.P. 3012 (providing for valuation of a “claim” secured by a hen on motion of a party in interest). Since it would be illogical to value something that does not yet exist, the language of § 506(a) indicates that filing a proof of claim is a prerequisite to a court’s determination of the value of a secured claim. King, at 298-99.
The avoidance provision of § 506(d) likewise refers to “allowed” claims and provides that a hen securing a claim that is not an “allowed secured claim” is void. While Transamerica’s hen constitutes such a hen, its avoidance is precluded under the exception of subsection (2), which states that a hen may not be avoided if the claim is “not an ahowed secured claim due only to the failure of any entity to file a [proof of claim].” Prior to the 1984 amendment adding subsection (2), there was a conflict in the courts concerning whether § 506(d) avoidance could be employed absent the filing of a proof of claim. See In re Henninger, 53 B.R. 60, 62 (Bankr.W.D.N.Y.1985). However, subsection (2) now clearly provides that hens for which no proof of claim has been filed may not be avoided for that reason under § 506(d), and the hen securing that creditor’s claim thus remains unaffected by a bankruptcy filing. Id.; see also Linkous, 141 B.R. at 897.
In this case, despite the parties’ stipulation that the value of the debtor’s residence is less than the first mortgage, the Court has made no determination of value under § 506(a) and is precluded from doing so in the absence of a claim having been filed and allowed. Cf. In re Dembo, 126 B.R. 195, 197 (Bankr.E.D.Pa.1991) (court unable to determine value under § 506(a) when no proof of claim was filed even though parties stipulated to value of collateral underlying their purported claims). Since the debtor has stated no basis for avoidance of Trans-america’s hen other than its lack of secured status under § 506(a) and (d), and since the claim secured by Transamerica’s hen is not an allowed secured claim only because no party filed a proof of claim under § 501, the exception of § 506(d)(2) apphes and prevents the avoidance of Transameriea’s hen on the debtor’s residence. Transamerica’s hen thus survives the debtor’s bankruptcy filing, and Transamerica may pursue whatever remedies such hen may afford it outside of bankruptcy. Apphcation of § 506(d)(2) does not unfairly prejudice the debtor’s fresh start in this case because he had the ability to file such a claim on Transamerica’s behalf in order to avoid the hen under § 506(a) and (d). See Fed.R.Bankr.P. 3004; King, at 299; Dembo, at 200.7
For the reasons stated in this opinion, the Court finds that the debtor may not avoid Transamerica’s hen against his residential real estate and that the relief requested in *143the debtor’s complaint under § 506(a) and (d) must be denied.
. The debtor’s Chapter 7 case, No. 96-40057, was closed as a "no asset” case on April 25, 1996. The debtor subsequently filed this Chapter 13 case on July 16, 1996.
. The deadline for filing proofs of claim in a Chapter 13 case is 90 days after the first date set for the 341 meeting of creditors or, in this case, November 11, 1996. See Fed.R.Bankr.P. 3002(c). If a creditor fails to file a proof of claim by this date, the debtor may do so on the creditor's behalf within 30 days after such date. Fed. R.Barikr.P. 3004. Thus, the last date for filing a proof of claim in this case was December 11, 1996.
. Section 1322(b) provides, for example:
(b) [T|he [Chapter 13] plan may—
(1) designate a class or classes of unsecured claims .
(2) modify the rights of holders of secured claims ..., or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims....
11U.S.C. § 1322(b) (Emphasis added).
. The debtor's confirmed plan makes no provision for payment of the obligation owing to Transamerica but merely recites that the debtor has filed a "motion to remove" Transamerica’s lien. The plan contains the standard provision that unsecured creditors “whose claims have been filed and allowed” are to share in the pro-rata distribution of remaining funds.
. If Transamerica were a fully secured creditor, it could ignore the bankruptcy proceedings and enforce its lien outside of bankruptcy against the collateral securing its debt. See In re King, 165 B.R. 296, 298-99 (Bankr.M.D.Fla.1994) (a properly secured lien passes through bankruptcy, and a creditor holding such a lien may ignore the bankruptcy proceedings and look to its lien for satisfaction of the debt). Recovery of any deficiency would be barred, however, as a deficiency claim is an unsecured claim that must be filed in the bankruptcy proceeding. Id.
.The Court can only presume that Trans-america’s failure to file a proof of claim in this case was inadvertent. While a secured creditor need not file a claim in order to retain its rights after bankruptcy against the collateral securing its lien, Transamerica has conceded that its lien is entirely unsecured by any equity in the debt- or's residence. Thus, by failing to file a proof of claim, Transamerica has not only lost the opportunity to persuade the Court that its mortgage lien is protected by the anti-modification provision of § 1322(b)(2), but has also lost its right to any distributions under the plan as the debtor’s only unsecured creditor. Of course, Trans-america may have calculated that its lien would become secured by value in the debtor’s residence as the debtor made payments on the first mortgage and thereby built up equity. If so, the Court can only conclude that Transamerica's argument at hearing concerning the applicability of § 1322(b)(2) was entirely disingenuous.
. The Court notes that while the parties in this case have requested a consideration of certain issues, both parties have failed, whether strategically or inadvertently, to take those steps necessary to present the issues to the Court in a manner in which they could be decided. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492494/ | *211OPINION
JAMES W. MEYERS, Bankruptcy Judge:
I
FACTS
The parties stipulated. to the following facts: On November 11, 1994, Sysco Foods Company, Inc. (“Sysco”) and Harris-Shcolnik & Associates, Inc. (“Harris”) filed a complaint in state court against Eldercare Housing Foundation, Inc. (“Eldercare”), together with an application seeking prejudgment writs of garnishment and attachment.
On December 6, 1994, the state court issued an order granting the application. On December 9,1994, Sysco and Harris obtained writs of garnishment and served the writs on Bank One, Arizona, NA (“Bank One”) and Pima Health Systems (“Pima”).
Bank One answered the writ alleging that it held $38,078.66 of Eldereare’s funds. Pima answered the writ alleging that it owed Eld-ercare.$55,095.10 as of the service date of the writ. Subsequently, pursuant to a stipulation, certain funds were released leaving the garnishees holding the sum of $55,095.10 collectively.
On May 23, 1995, Eldercare filed for relief under Chapter 11 of the Bankruptcy Code. As of the petition date neither Sysco nor Harris had obtained a judgment on its complaint. Eldercare then filed a complaint in the bankruptcy court seeking a release of the writs of garnishment and turnover of the funds held by the garnishees on the basis that the garnishments constituted avoidable transfers under Code Section 547.
Sysco and Harris answered the complaint by contending that the transfers were not avoidable preferences because they did not occur within the 90-day preference period. Eldercare filed a motion for summary judgment and Sysco and Harris filed a cross-motion. The bankruptcy court conducted a hearing on December 14, 1995. On December 21, 1995, an order was entered granting Eldereare’s motion, denying Sysco’s and Harris’ cross-motion and directing Bank One and Pima to relinquish the funds held to Eldercare.
II
STANDARD OF REVIEW
An order granting summary judgment is reviewed de novo. In re Cohen, 199 B.R. 709, 712 (9th Cir. BAP 1996). “The reviewing court will affirm a grant of summary judgment only if it appears from the record, after viewing all evidence and factual inferences in the light most favorable to the nonmoving party, that there are no genuine issues of material fact and that the moving party is entitled to judgment as a matter of law.” In re Yarbrow, 150 B.R. 233, 236 (9th Cir. BAP 1993).
Ill
DISCUSSION
In its complaint Eldercare seeks turnover of the funds and a determination regarding the validity of the interest asserted by Sysco and Harris. Eldercare contends that the writs were not transfers or, alternatively, they were avoidable as preferences.
We reject the argument that the writs of garnishment were not transfers. The definition of transfer pursuant to Section 101(54) is extremely broad. In re Bernard, 96 F.3d 1279, 1282 (9th Cir.1996). In Bernard, the Ninth Circuit Court of Appeals ruled that a debtor’s withdrawal of cash from a bank account was a transfer since the debtor parted with a claim against the bank in exchange for the money. 96 F.3d at 1283. Here, through the writs of garnishment Sysco and Harris asserted an interest in the claims Eldercare had against Bank One and Pima. Additionally, the writs prevented Eldercare from gaining immediate access to the funds in question. Looking at the effect of the writs of garnishment, there was a transfer of an interest in property of the estate.
The remaining issue is whether Eld-ercare can avoid these transfers pursuant to Section 547. The only issue in dispute is the timing of the transfer. Sysco and Harris assert that the transfer was made outside the 90-day preference period. Under Section 547(e), the determination of when a transfer is made depends on when it is perfected. *212For example, a transfer is deemed perfected immediately prior to the filing of the petition, if that transfer is not perfected at the time of the filing of the petition. 11 U.S.C. § 547(e)(2)(C). In such instances the transfer would fall within the preference period.
Pursuant to Section 547(e)(1)(B), a transfer is perfected “when a creditor on a simple contract cannot acquire a judicial lien that is superior to the interest of the transferee.” Sysco and Harris contend that this occurred upon the service of the writs. The bankruptcy court previously addressed this issue in a published opinion. In re McCoy, 46 B.R. 9 (Bankr.D.Ariz.1984).
In McCoy a creditor obtained a prejudgment writ of garnishment outside the preference period, but then obtained a judgment within the period. The garnished funds were transferred to the judgment creditor. In response to a preference action filed to recover the funds, the creditor argued that the transfer of funds should have been treated as occurring at the time the writ of garnishment was served. The bankruptcy court concluded that under Arizona law the writ of garnishment did not create a lien and there was no lien until the creditor obtained a judgment. Since the lien was not perfected until the creditor obtained the judgment, and the judgment was obtained within the preference period, the court determined that the transfer could be avoided as a preference.
The court relied primarily on Kuffel v. United States, 103 Ariz. 321, 325, 441 P.2d 771, 775 (1968). In that case, the Arizona Supreme Court stated that the writ of garnishment “itself constitutes, at most, a lis pendens notice that a right to perfect a lien on the garnished property exists, but such perfection must await judicial action.” Id. at 325, 441 P.2d at 775. All the garnishor obtained was the “right to have his claim heard without fear that the funds would be dissipated pending judgment.” Id. at 325, 441 P.2d at 775.
This reasoning was reiterated by the Arizona Supreme Court in Jackson v. Phoenixflight Productions, Inc., 145 Ariz. 242, 245-46, 700 P.2d 1342 (1985). In Jackson a creditor served writs of garnishment on the two entities indebted to an insolvent entity which owed money to the judgment debtor. Just a few days before the creditor obtained a judgment of garnishment, the state taxing authority recorded a notice of tax lien. The Jackson court held that service of the writs did not create a lien. Instead, “the effect of a writ of garnishment is to impound any asset or property of defendant which is found in the garnishee’s hands pending resolution of the merits of the garnishor’s claim.” 145 Ariz. at 246, 700 P.2d at 1346. In so ruling the court held that “[sjince plaintiffs writ and judgment did not create a lien, plaintiff did not gain priority over the state tax liens.” Id. at 247, 700 P.2d at 1347.
In this case, Sysco and Harris did not obtain judgments prepetition. Pursuant to the dictates of the Arizona Supreme Court, the Panel is satisfied that the transfers effected by the writs were unperfected at the time of the filing of the petition. Under Section 547(e)(2)(C) the transfers are deemed to have been made immediately before the date of the filing of the petition and can be avoided as preferences.
Sysco and Harris contend that the reasoning of In re Lane, 980 F.2d 601 (9th Cir.1992), calls for a different result. We find Lane to be distinguishable. In Lane, the creditor obtained a judgment prepetition. Even more importantly, since the judgment affected the title or right to possession of the real property at issue, under California law the judgment related back to, and received its priority from, the date the lis pendens was recorded. Id. at 604. There is no relation back under Arizona law for the writ of garnishment. This is in sharp contrast to a writ of attachment under Arizona law, as was explained in Jackson, supra, 145 Ariz. at 246, 700 P.2d at 1346. See also In re J.H. Welsh & Son Contracting Co., 68 B.R. 520, 522-23 (Bankr.D.Ariz.1986) (judgment related back to date of recording of writ of attachment). Finally, we note that the Lane court, in summarizing the holdings of McCoy and J.H. Welsh, stated the following:
Appellees misinterpret the relevance of Welsh and McCoy. These cases do not stand for the maxim: Perfection at judgment, or by lien if statute so provides. Rather, these cases stand for the proposi*213tion that, under Arizona law, a party does not attain an interest superior to a subsequent purchaser until a lien has been attached to the property in the case of an attachment proceeding, or until judgment in the case of a garnishment proceeding.
980 F.2d at 605-06.
IV
CONCLUSION
The writs of garnishment effected a transfer under Section 101(54). However, these transfers remained unperfected as of the bankruptcy petition. The bankruptcy court properly concluded that Eldercare could avoid the transfers and that the funds should be turned over to Eldercare.
AFFIRMED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492496/ | OPINION
MEYERS, Bankruptcy Judge:
I
The debtors filed a Chapter 13 plan proposing to treat one creditor as only partially secured and another as wholly unsecured. The creditors objected to the plan contending that the debtors had undervalued the collateral securing their claims. The debtors responded by filing objections to the creditors’ claims. The bankruptcy court sustained the claims objections and confirmed the plan.
We AFFIRM.
II
FACTS
Peter and Esther Kim (“Kims”) operated a dry cleaning business. Ardmor Vending Co., dba Great Northern (“Great Northern”), and Ardmor Co. Profit Sharing Plan (“Ardmor”) (collectively referred to herein as the “Appellants”) were creditors secured by the business’s equipment. Great Northern also took an assignment of the business lease as collateral. The Kims have not contested the validity of the security interests asserted by the Appellants.
On June 30, 1995, the Kims filed for relief under Chapter 13 of the Bankruptcy Code. As of the petition date Great Northern was owed $99,595 and Ardmor was owed $10,000. In their bankruptcy schedules the Kims listed the fair market value of the equipment as $34,000.
The Kims filed several Chapter 13 plans with the first being filed on July 14,1995. In the original plan Great Northern was treated as secured in the amount of $34,000 and otherwise unsecured, while Ardmor was treated as completely unsecured. On August 2, 1995, the Appellants objected to this plan on the basis that their claims were improperly treated as unsecured claims. A hearing on confirmation was set for September 11, 1995.
*241On August 18, 1995, the Appellants filed a supplemental objection in the form of the declaration of Irving D. Weiner (“Weiner”), the chief executive officer of Great Northern. Weiner declared that in his view the collateral, both the equipment and lease together, was worth approximately $100,000.
On August 18, 1995, the Appellants also filed proofs of claim: Great Northern in the amount of $98,758.97, plus interest from the petition date, and Ardmor in the amount of $10,437.49.
On August 30,1995, the Kims filed a reply to the plan objection. They objected to the introduction of Weiner’s valuation on the basis that he was not a qualified ‘Valuation expert i.e. an appraiser,” and he had not explained his methodology in reaching his valuation. The Kims also contended that the lease had no value because the rent exceeded the market value. In support of this argument, the Kims filed the declaration of Todd Basmajian (“Basmajian”), a Member of the Appraisal Institute (“MAI”) and certified real estate appraiser. .He concluded that the terms of the lease provided for rent in the amount of $3.97 per square foot, while the market rate, in his opinion, was $1.50.
In the Kims’ final modified Chapter 13 plan, which is the subject of this appeal, the Appellants’ claims essentially were treated as they had been in the first plan. The Kims then filed objections to the Appellants’ claims, which basically repeated the' arguments they had raised in response to the Appellants’ objection to the plan.
On November 1, 1995, the Appellants filed additional pleadings in response to the claims objections. The Appellants contended that the best valuation method would be to take the business as a whole rather than attempt to separately value the lease and equipment and that the Kims had failed to provide any evidence as to the value of the business. They also contended that Basmajian failed to take into account that the Kims had been able to modify their lease and reduce the rent from nearly $7,500 per month to $4,760 per month, as reflected in their Schedule J. Additionally, the Appellants filed the declaration of Robin D. Rix (“Rix”), a real estate agent who had previously listed the Kims’ business for sale. He maintained that were he to sell the business he would list it for $175,000 and expect to get $165,000.
A hearing on the claims objections was conducted on November 13, 1995.3 The Appellants argued that they were secured by the equipment and the lease and that when the two were taken together as a package there was value in excess of their claims. However, the court viewed the Appellants’ argument as an improper attempt to be treated as being secured by the value of the entire business. The trial court stated that the Appellants’ security interest in the lease and the equipment was “something substantially short of a security interest in the business, though.” The court continued the hearing to December 4, 1995, to allow the parties an opportunity to file further pleadings.
The Kims filed supplemental claims objections on November 22, 1995, along with another declaration from Basmajian. The Kims argued that the only remaining issue was the value of the lease. The Kims then contended that the Rix declaration was flawed because he had premised his opinion on the value of the entire business. Basmaji-an reiterated that if the contract rent exceeded the market rent, the lease would have no value.
The Appellants responded on November 30, 1995 and filed an additional declaration from Weiner. He again gave a very general overview of his business background and then declared that a sale of the equipment “off-location” would not bring in more than $45,200. He did not explain how he arrived at that figure. Additionally, he declared that Great Northern had never conducted an “off-location” sale of equipment. The declaration included a review of allegedly comparable sales Weiner’s company had conducted over the prior three years.
The final hearing was conducted on December 4, 1995. The court ruled that Weiner’s declaration lacked a “sufficient founda*242tion” for the valuation of the equipment and that Weiner had failed to demonstrate that he was competent to testify as to the value of the equipment. The court also ruled that the Appellants’ evidence of Great Northern’s other sales of equipment and leases was not admissible because it did not include the exact location of those businesses, the dates of the sales and the names of the parties involved. The Appellants sought a continuance so that they could supply the court with that information. The court rejected the request.
The court concluded that the lease had no net value because the payments under the lease were at least equal to the market rate. As for the equipment, the court found that the only admissible evidence was the Kims’ statement that the equipment was worth $34,000, and that the other evidence did not “relate to what the value of the equipment is apart from the value of the business, in which the secured creditor — in which the creditor does not have a security interest....” The court sustained the claims objections. The court then confirmed the Kims’ Chapter 13 plan.
Ill
STANDARD OF REVIEW
The court’s findings of fact concerning value are reviewed under a clearly erroneous standard. In re Tuma, 916 F.2d 488, 490 (9th Cir.1990). The Panel must be left with the definite and firm conviction that a mistake has been committed before a factual finding can be determined to be clearly erroneous. Anderson v. Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 1511, 84 L.Ed.2d 518 (1985).
We review under an abuse of discretion standard the trial court’s evidentiary rulings. In re Karelin, 109 B.R. 943, 947 (9th Cir. BAP 1990). Additionally, we apply that same standard to our review of the court’s denial of a continuance to allow the Appellants to supplement the record. U.S. v. Mejia, 69 F.3d 309, 314 (9th Cir.1995).
IV
DISCUSSION
A, Examination of the Court’s Methodology
The Appellants contend that the Panel should apply a de novo standard in its review of the court’s valuation on the grounds that the court used an improper methodology. Specifically, they maintain that the court erred as a matter of law by applying a liquidation analysis in contravention of In re Taffy 68 F.3d 306 (9th Cir.1995), affirmed as modified en banc, 96 F.3d 1190 (9th Cir.1996).4
We recognize that Taffi is the controlling authority in this circuit for valuations under Bankruptcy Code Section 506. Tajfi holds that a bankruptcy court must determine the fair market value of the collateral and not its liquidation value if the collateral is to be retained by the debtors under their plan. However, the Appellants have failed to show that the bankruptcy court acted contrary to this proposition. Instead, a review of the record demonstrates that the court’s valuation was dependent on the evidence presented and not on the application of an allegedly incorrect standard. In fact, the parties provided the court with very limited evidence as to the value of the collateral, with the Appellants putting forth only the declarations of Weiner and Rix to support their assertions as to the value of the collateral. The court made certain evidentiary rulings, discussed below, and then simply resolved the matter based on the remaining relevant evidence.
B. Valuation of the Lease and Equipment
The Appellants argue that the court improperly valued the equipment and lease separately; rather, they contend that the value of the entire business essentially consisted of the equipment and lease. However, the court properly recognized that the securi*243ty interest was limited to the equipment and the lease and did not include all value of the business. Indeed, there can be no dispute concerning the actual scope of the Appellants’ security interest.
1. Valuation of the Lease as a Starting Point
The court began its analysis with an examination of the value of the lease. This was as reasonable a place to start as any. The only direct evidence of the value of the lease in question was brought in by the Debtors through the declaration of Basmajian. The Appellants did not make any objections regarding his qualifications.
Basmajian asserted that the rent in the lease was far above market rate and, therefore, had no value. He fully explained the method utilized and provided information on comparable rates. Although the Appellants pointed out that Basmajian did not take into account any reduction in rent, they failed to demonstrate that his declaration was flawed as it related to the current market rental rate. At that point, the numbers spoke for themselves. The current market rate was $1.50 per square foot and, even under the modified rate, the Kims were paying approximately $2.53 per square foot.5 Clearly, the lease provided for rent far above the market rate. We do not see any reversible error in the court finding that the lease had no fair market value.
The Appellants presented a declaration from Weiner concerning past sales conducted by the Appellants of leasehold interests and equipment. The court ruled that evidence of the previous sales conducted by the Appellants was not admissible because they had not disclosed the buyer, seller and exact location. We agree that such information would be necessary before the court could give much weight to the evidence. We note also that the declaration did not contain any information which would indicate whether the leases involved in those sales were above, below or at fair market value. Therefore, it added nothing to determining the value of the Debtors’ lease.
2. The Equipment was the Remaining Collateral
The court then directed the parties to focus their attention on the value of the equipment. The Appellants presented the declarations of Rix and Weiner, while the Debtors relied on their uncontested valuation set forth in their schedules.
i. Declaration of Robin Rix
The Rix declaration is barely two pages long and lacks any detail. As the trial court pointed out, Rix’s declaration only gave a value for the entire business, although that exceeded the scope of the Appellants’ security interest. This was also a point raised by the Debtors in an objection to the Rix declaration. Rix did not explain how the equipment and leasehold interest were valued within that overall valuation. We agree with the court that this was a sufficient basis for not giving the Rix declaration any weight.
ii. Declarations of Weiner
All that remained to support the Appellants’ position were the declarations from Weiner. These also proved to be of limited use. On August 18, 1995, Weiner declared that the collateral, equipment and lease together, was worth $100,000.6 He did not present a breakdown of the value of equipment. The Kims objected on the basis that Weiner was not a qualified expert and had not explained his methodology for reaching his determination.
Weiner’s subsequent declaration still failed to explain how he had determined the value of the Kims’ equipment. The trial court gave the Appellants an opportunity to explain if Weiner’s valuation was based on comparable sales. In response the Appellants provided data concerning sales of equipment and leases they had conducted, as well as estimates by Weiner as to what he believed the equip*244ment would have sold for had it been sold separately.
The trial court examined the declaration and questioned counsel as to how Weiner arrived at his estimates for the equipment values. Counsel acknowledged that the amounts were not based on actual sales. Instead, he explained that the estimates were “based upon his [Weiner’s] understanding of what they would draw if there were to be public sales of the equipment. But he would never sell it that way.” Indeed, in his declaration, Weiner admitted that his estimates were not based on personal knowledge, in so much as the Appellants had never in the history of their business conducted separate sales of equipment. Consequently, the trial court ruled that Weiner was not competent to speculate as to the value of the Debtors’ equipment.
Lay opinion is only admissible if it is rationally based on the perception of the witness. Federal Rule of Evidence 701; Joy Mfg. Co. v. Sola Basic Industries, Inc., 697 F.2d 104, 111 (9th Cir.1982). This requirement “reflects the general limitation embodied in Federal Rule of Evidence 602 that in order to testify on a subject a witness must have ‘personal knowledge of the matter.’” Id. (quoting Teen-Ed, Inc. v. Kimball International, Inc., 620 F.2d 399, 403 (3d Cir.1980)). Weiner’s valuation of the equipment was admittedly speculative, and was not based on personal knowledge. We do not see any abuse of discretion in the court’s decision to exclude Weiner’s declarations on the value of the equipment.
The Appellants have asserted that Weiner was testifying as an expert under Federal Rule of Evidence 702. The qualification of an expert is a question which lies within the sound discretion of a trial judge whose ruling will not be overturned in the absence of clear abuse, a standard which will be rarely met. 3 Weinstein’s Evidence ¶ 702[04], p. 702-53. See United States v. Booth, 669 F.2d 1231, 1240 (9th Cir.1981) (abuse of discretion standard applied to review of court’s refusal to admit expert testimony on grounds of relevance).
The record does not indicate that the Appellants ever asked the court to treat Weiner as an expert witness. Rather, his declarations stated each time that his testimony was purportedly based on personal knowledge. The declarations did not assert that Weiner was presenting opinion testimony as a qualified expert witness. Allowing Weiner to testify as an expert would have required a factual finding regarding his qualifications. The Appellants have failed to demonstrate that they presented this argument to the trial court, and therefore, we consider it waived. In re Lund, 202 B.R. 127, 131 (9th Cir. BAP 1996).
Additionally, the deficiency with Weiner’s declaration could not be overcome by merely asserting that he was an expert. Even an expert would have to provide an adequate explanation as to how he had reached his conclusions if his testimony were to have any value. Consequently, to the extent that the court chose to disregard Weiner’s declaration because he did not qualify as an expert, we cannot say that this was an abuse of discretion.
iii. Valuation of Equipment by the Debtors
All that remained before the court for consideration was the Kims’ own assertion that the value of the property was $34,000. As owners of the business, the Debtors were competent to give their opinion as to the value of their property. Robinson v. Watts Detective Agency, 685 F.2d 729, 739 (1st Cir.1982).
The dissent states that it is “surprising” that the trial court accepted the Debtors’ valuations since, in the dissent’s opinion, that valuation was no less speculative than Weiner’s. Additionally, the dissent states that “[n]ot a single question was asked of the Debtors as to how they eame up with that amount. No examination of the Debtors’ factual basis and no probing of the Debtors’ methodology appears anywhere in the record.” In other words, the Appellants did not raise any objections to the introduction of the Debtors’ valuation, nor did they seek to question the Debtors regarding this figure. Accordingly, we cannot agree with the dissent’s characterization of the trial court’s decision because we believe it was incumbent on the *245Appellants to object to the Debtors’ valuation if they believed it was inadmissible.
The Appellants’ inaction stands in stark contrast to the Debtors’ response to the introduction of the Appellants’ evidence. The Debtors did object to the declarations of Rix and Weiner. In fact, they specifically objected to Weiner’s declaration because he failed to explain the methodology utilized in reaching the valuations he did. Weiner’s declaration became inadmissible because the Debtors raised an objection and the trial court upheld the objection. On the other hand, no objection was raised as to the Debtors’ valuation. If the Appellants believed that the Debtors’ valuation was lacking and that the court should not have relied on it, they should have raised this before the court. Instead, they failed to present any reason for the court to disregard what was otherwise admissible evidence.
Only now do the Appellants assert that this valuation was a liquidation value. However, as the Kims point out, the bankruptcy schedules required them to state their opinion of the current market value of the equipment, not a liquidation value. We see no error in the court choosing to rely on the valuation provided by the Kims.
3. Value of the Entire Business
We have discussed the limited scope of the Appellants’ security interests. The bankruptcy court’s factual findings set forth the fair market value of the pertinent collateral. Still, the dissent argues that the Appellants’ security interests should be viewed as equal in value to the value of the entire business. We now address this point in more detail.
We see no error in the trial court’s finding that the lease exceeds market rate. If an essential component of the collateral is a lease which exceeds market rate, this component, realistically, cannot excite interest on the part of a buyer who does not have to buy, and therefore, such a lease has little, if any, intrinsic value. It might be that the secured creditor or a purchaser could independently negotiate a lease which would make continued occupation and operation worth while, but that is problematic if not speculative. There is nothing in the record which would warrant, let alone require, such a finding.
Implicit in the Appellants’ argument is the notion that somewhere, somehow, a purchaser would want to accept an uneconomical lease because the dry-cleaning equipment was there. This might have been done before or in a number of cases, but what the persuasions and representations were have not been made known. But we cannot agree that an uneconomical lease can per se become valuable simply because the tenant is permitted to occupy the premises.
The dissent presents a very thoughtful discussion of what may or may not be valuable in a dry cleaning business. While the dissent does a masterful job in analyzing the evidence in great detail, we view our role as an appellate court as more narrowly defined. When the bankruptcy court’s findings are plausible in light of the entire record, the Panel may not reverse even if it is convinced that it would have weighed the evidence differently had it been sitting as the trier of fact. Anderson v. Bessemer City, supra, 470 U.S. at 573-74, 105 S.Ct. at 1511-12. ‘Where there are two permissible views of the evidence, the factfin-der’s choice between them cannot be clearly erroneous.” Id. Further, the Appellants simply did not present any evidence which supports the dissent’s breakdown of the value of a dry cleaning business. While we might not disagree that the dissent’s viewpoint could be supported by the proper presentation of evidence, we believe it was incumbent on the Appellants to present such, evidence. Despite being given numerous opportunities to supplement the record, the Appellants consistently failed to demonstrate that the bankruptcy court must accept their valuations of the whole business as being the equivalent of the property in which they actually had an interest.
C. Court Did Not Abuse Discretion in Denying Continuance
Finally, the Appellants assert that the court should have granted them a continuance so they could have presented the court with the names of the buyers and sellers and the exact locations of the business involved in the prior transactions. Granting *246or denying a continuance was within the discretion of the court. U.S. v. Mejia, supra, 69 F.3d at 314. The matter had been pending for several months and the Appellants had several opportunities to present evidence to the court. In fact, prior to the last hearing the court invited the parties to file “[w]hatever is appropriate to determine the value of the collateral.” Additionally, before we could reverse, the Appellants would need to show that they have suffered prejudice due to the denial of the request. Id. at 314-15. The information the Appellants sought to present still would not have demonstrated Weiner’s personal knowledge concerning the equipment owned by the Kims. Also, as we explained, the data on previous sales had little value because it did not indicate if the leases involved were above or below market rates and Weiner would not have been qualified to present such evidence. Consequently, the Appellants have failed to demonstrate prejudice. The court did not abuse its discretion when it denied the request for a continuance.
Y
CONCLUSION
The Appellants have failed to demonstrate that the bankruptcy court abused its discretion in making the evidentiary rulings that it did. Effectively, what was left for the court to consider was the statement of fair market value presented by the Debtors in their schedules. Based on this, the court made its factual finding concerning the value of the collateral. Pursuant to these dictates, we cannot say that the bankruptcy court’s finding as to the value of the collateral was clearly erroneous.
AFFIRMED.
. A brief hearing also had been conducted on September 11, 1995, but the matter was continued to allow the court an opportunity to review the pertinent pleadings.
. The Court of Appeals' en banc opinion was decided on September 17, 1996, during the pen-dency of this appeal.
. This is based on rent of $4,760 for 1880 square feet.
. We note that in his November 30, 1995 declaration, Weiner asserted that the collateral was worth between $125,000 and $165,000. However, he failed to explain why the value had increased from his earlier assertion that the collateral was worth $100,000. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492497/ | DAVID E. RUSSELL, Bankruptcy Judge,
Dissenting:
In order to secure its investment, Great Northern7 took more than the typical lien on the Debtors’ dry cleaning equipment. It also obtained an assignment of the lease for the Debtors’ business premises. In the event of default, the creditor could evict the Debtors and sell the equipment in combination with the premises lease as an ongoing dry cleaning business. The court below and the majority decision today strip the creditor of the value of its bargain. Because I believe the bankruptcy court made a clearly erroneous mistake of fact as well as a mistake of law, I respectfully dissent.
ERROR OF FACT
Great Northern sells and finances laundromat and dry cleaning equipment. Few of its customers default, but Great Northern is not naive about its loans or credit sales; as an experienced vendor, Great Northern secures itself to the greatest extent possible against loss. Not only does Great Northern take back a security interest in everything it sells to a customer, it also takes an additional step: it makes the purchaser sign over the lease to the premises and obtains the right to reassign the lease from the landlord. The effect of this combination should not be underestimated. By perfecting its priority in the equipment, the lease, and, by virtue of the lease, the leasehold improvements, Great Northern captures everything of value; it secures itself with all the fixed assets necessary to generate an income stream. In the event of default, rather than having to step in and tear the equipment out, Great Northern can step in and kick the debtors out.
In the case at bar, the court viewed Great Northern’s security interest otherwise. The court said “[w]ell, it doesn’t look like you’d have a security interest in the business, sir. You have a security interest in equipment and you have a security interest in a lease.” Later, the court said: “you [Great Northern] don’t seem to have a security interest in income-producing potential either. All you have is the security interest in equipment and — the income-producing potential seems to belong to the Debtor.” And when Great Northern explained it planned to market the business as a turn-key operation, the court explicitly ruled Great Northern lacked a “turn-key situation”.
*247What more could Great Northern possibly need to obtain a turn-key operation? True, it lacked any interest in the accounts receivable, the sundry dry cleaning supplies, and the business name. And true, Great Northern had no right to the chapter 13 Debtors’ managerial skills. But Great Northern had plenty to market. Stated plainly, good will in a dry cleaning business belongs to the situs — if the manager walks away, the customers stay. Great Northern, by securing its loan with every one of the fixed assets of the business, assured itself that, in the event of default, it could market the site as a dormant business waiting for an entrepreneur willing to add labor. Neither the court nor the Debtors (nor the majority) points to a single additional piece of collateral Great Northern might need before it could sell the site as such. As discussed below, this holding, that Great Northern lacked a “turn-key situation,” led the bankruptcy court to neglect the most relevant evidence offered as to the market value of Great Northern’s secured claim.8
ERROR OF LAW
The court below also made a mistake of law. Great Northern contended its collateral should be valued in its proposed use: as part of an income-producing going concern. The court instead endorsed the Debtors’ valuation methodology. However, the Debtors’ valuation amounted to a liquidation. First, the Debtors separately valued the leasehold, as if marketed as an empty, unimproved site. After finding the lease to be of no value in this hypothesized sale, the Debtors then proceeded to another hypothesized sale: a separate auction of the dry-cleaning equipment, “off location on the street, not income producing.” This is the “reasonable disposition” approach and the Ninth Circuit has rejected it.
Section 506(a), the section that governs the classification of a creditor’s claim as secured or unsecured, uses very flexible language and a court has wide latitude in how it may approach a valuation task. However, § 506(a) valuations are not completely ad hoc; bankruptcy courts see recurring types of collateral in recurring situations and legal standards have developed to create some uniformity in claim valuations. The Ninth Circuit recently discussed appropriate standards in In re Taffi, 96 F.3d 1190 (9th Cir.1996) (en banc). The court stated:
When a Chapter 11 debtor or a Chapter 13 debtor intends to retain property subject to a lien, the purpose of a valuation under section 506(a) is not to determine the amount the creditor would receive if it hypothetically had to foreclose and sell the *248collateral.... Instead, when the proposed use of the property is continued retention by the debtor, the purpose of the valuation is to determine how much the creditor will receive for the debtor’s continued possession.
Id. at 1192.
In a reorganization, the Debtor’s “proposed use” is to keep the collateral plugged in as a component of a continuing business. Consequently, “if the debtor retains the property as part of a reorganization, the proper measurement of the estate’s interest in the property is the ‘going-concern’ value of the collateral to the debtor’s reorganization.” In re Taffi, 68 F.3d 306, 308 (9th Cir.1995) (quoting Matter of Rash, 31 F.3d 325, 329 (5th Cir.1994)) (emphasis added).9 See also In re Chateaugay Corp., 154 B.R. 29, 33 (Bankr.S.D.N.Y.1993) (going concern valuation applied to the claims of bondholders secured by selected “hard assets” used in the debtor’s operations); In re Wendy’s Food Systems, Inc., 82 B.R. 898, 900 (Bankr. S.D.Ohio 1988) (going concern or “in-place” standard used to value the claim of a creditor secured by equipment used in the debtor’s restaurants); In re Penz, 102 B.R. 826, 828 (Bankr.E.D.Okla.1989) (creditor’s secured claim is entitled to be valued to the extent of its contribution to the entire estate vis-a-vis going concern value); In re Winthrop Old Farm Nurseries, Inc., 50 F.3d 72, 75 (1st Cir.1995) (a court must consider the debtor’s use of the collateral to generate an income stream in a chapter 11 business reorganization); National Rural Utilities Co-op. Finance Corp. v. Wabash Valley Power Ass’n., Inc., 111 B.R. 752, 768-770 (S.D.Ind.1990) (“willing buyer-willing seller” standard applied in the context of a going concern); In re Bellanca Aircraft Corp., 56 B.R. 339, 386-387 (Bankr.D.Minn.1985) (going concern valuation incorporates more than a summation of market values attributable to an entity’s various assets; only where a business is wholly inoperative will going concern valuation be abandoned in favor of an item by item valuation) rev’d in part on other grounds, 850 F.2d 1275 (8th Cir.1988).
Of particular note, the Ninth Circuit explicitly rejected the alternative “reasonable disposition” approach, stating: “[w]e overrule In re Mitchell, 954 F.2d 557 (9th Cir.1992) to the extent that it held the valuation under section 506(a) should be based on determining “what the creditor would obtain if the creditor were to make a reasonable disposition of the collateral.’ Id. at 560.” 96 F.3d at 1193. Some courts had viewed this as an acceptable method by which to value secured claims. However, the vice in this method (as demonstrated by the case at bar) was that it created an improper incentive in reorganization cases. By permitting debtors to strip down the liens of secured creditors, piece by piece, to the “commercially reasonable disposition”10 (i.e. liquidation) price of the separate collateral components, debtors were able to capture for themselves or their unsecured creditors the surplus value of the organization which, before the bankruptcy filing, belonged to the secured creditors. In re Winthrop Old Farm Nurseries, Inc., 50 F.3d at 76; Matter of Rash, 90 F.3d at 1073 (Smith, J., dissenting). In short, it allowed debtors to usurp the equity inherent in a going concern. To permit the Debtors to usurp the equity in this case is particularly egregious, because Great Northern bargained for the lease, assignment for the very purpose of protecting the going concern value of its equipment.
Both the parties, and the majority, agree that Taffi supplies the appropriate standard for this case. However, the timing of the decision is critical. The court completed its valuation hearings before the Ninth Circuit published its en banc decision, the one that explicitly overruled the “reasonable disposi*249tion” approach.11 Unless able to correctly divine the implication of the Ninth Circuit Panel’s opinion in Taffi, (which itself was published in the midst of the three valuation hearings in the court below), the court simply had no reason to suspect that “reasonable disposition” pricing represented an improper valuation standard. Consequently, the appropriate adjudication of this case is to remand it for reconsideration in light of the Ninth Circuit’s intervening decision. See Apple Computer, Inc. v. Microsoft Corp., 35 F.3d 1435, 1448 (9th Cir.1994).
That the court used the “reasonable disposition” method is obvious from the hearing transcripts. The court explicitly endorsed the method in the following exchange:
[GREAT NORTHERN]: When he [the Debtors] speaks of $34,000 as the value of the equipment, that’s off location on the street, not income producing.
THE COURT: Well, that’s the way you have it, sir.”
In other words, the court valued the claim at the price Great Northern would receive if it removed its equipment from the leasehold and sold it off-site. That is a hypothetical sale; it is not the Debtors’ “proposed use”, and it amounts to de facto foreclosure or liquidation pricing. It was error as a matter of law for the court to value the equipment “off location on the street, not income producing” when the Debtors planned on retaining the equipment in their reorganized business.
When Great Northern presented evidence valuing the equipment based on its income-producing potential as a part of the Debtors’ business, the court rejected the evidence, stating “[a]ll you have is the security interest in equipment and — the income-producing potential seems to belong to the Debtor.” Again, that was error as a matter of law. Great Northern was entitled to have its claim valued to the extent of its contribution to the business vis-a-vis going concern value; at least a portion (if not all) of the income-producing potential did belong to Great Northern.
And, in its ruling, stated on the record, the court held:
The court finds that the other evidence [Great Northern’s] does not relate to what the value of the equipment is apart from the value of the business.... (emphasis added).
In other words, the court failed to consider the Debtors’ “proposed use” for the collateral; the Debtors planned to assume the lease, retain the equipment, and continue to operate the reorganized dry cleaners. The value of the equipment, as a part of the value of the business, was exactly how Great Northern’s collateral should have been valued.
THE EVIDENCE IN THE COURT BELOW
The impact of the foregoing errors is seen in the bankruptcy court’s evidentiary rulings. Great Northern introduced extensive (and competent) evidence valuing the dry cleaning equipment and lease as a turn-key operation. The bankruptcy court rejected this evidence, but not due to any technical failing in its admissibility. Rather, believing Great Northern lacked any security interest in “income-producing potential”, and believing the collateral components should be separately valued at their disposition price, the court viewed Great Northern’s evidence as irrelevant.
For example, the court gave no weight to the estimate of Robin Rix, Great Northern’s expert. Rix has twenty-six years of experience in the dry cleaning industry. He began by servicing machines, later sold dry cleaning supplies, then advanced into management. He has since built, installed, consulted on, owned, and now sells turn-key dry-cleaning businesses for a living. In the past nine years, Rix closed over three hundred and *250fifty sales of dry-cleaning businesses. In the last year alone, he averaged eleven sales per quarter, roughly one a week. The Debtors themselves employed Rix to sell their dry-cleaning business in 1992.
Based upon his familiarity with both the business and its location (from his previous employment with the Debtors), and after reviewing the Debtors’ schedule of business income and expenditures, Rix estimated the business would sell for $165,000. The key here is that neither the Debtors nor the court took issue with the quality of Rix’s testimony. Instead, the court took the view that, because Great Northern lacked a security interest in the business itself, Rix’s estimate, based on the value of the business, warranted no consideration. In other words, the court did not weigh the evidence, it rejected it outright as irrelevant12, premised on its view of the scope of the creditor’s security interest. As discussed above, that factual premise is clearly erroneous, and the error led the court to neglect highly relevant evidence.
Similarly, Weiner’s declaration valued the collateral as part of a going concern. As to his competency, it is difficult to conceive of anyone more qualified to estimate the value of dry-cleaning equipment or the value of a dry-cleaning business than Weiner. He has built, equipped, and sold laundromat locations for over forty-two years. He has been in the business of building, equipping, selling, and financing dry-cleaning operations for thirteen years. He is the chief executive officer of a company whose sole function is to sell and finance dry-cleaning equipment.
Before valuing the collateral, Weiner assessed the lease terms for the premises, the leasehold improvements at the site, the location of the facility, the equipment held by the Debtors, and the Debtors’ schedule of business income and expenditures. Based on what he viewed as a conservative gross income figure, Weiner estimated that the value of the collateral fell within a range of $125,-000 to $165,000. He explicitly stated that he did not include, for purposes of the estimate, any elements of the business not encompassed by his company’s security interest. But he did view the collateral as a package, marketable as an income producing dry-cleaning business. Again, the court gave no weight to Weiner’s testimony, not because of any failing in Weiner’s competency, but because the court held the creditor lacked any claim to the “income-producing potential” of the business.
The majority opinion gives the impression that the court below rejected Weiner’s entire declaration for lack of foundation. But a close reading of the record reveals that the court made only two, very limited, evidentia-ry rulings. First, the court excluded Weiner’s estimate that the equipment would sell for $45,000 if torn out of the existing operation and sold off-site. Given that Weiner himself stated that selling the equipment off-site would amount to “economic disaster” and, given that Weiner’s company, in its entire history, never attempted to first remove equipment from the leasehold before selling it, it is hardly surprising that the court excluded Weiner’s estimate of an off-site sales price. What is so surprising is that the court, in the next breath, accepted the Debtors’ estimate of value premised upon the same imaginary course of action the court had just rejected when proposed by the creditor. The Debtors, too, had never conducted an off-site sale of dry cleaning equipment. For that matter, the Debtors (unlike Weiner or Rix) had never sold any dry-cleaning equipment at all. More importantly, the Debtors had no intent of separately selling the equipment, they planned on using it in a going concern and that is how it should have been valued.
*251In the other evidentiary ruling, the court excluded Great Northern’s evidence of comparable sales. In his declaration, Weiner included the sales figures for the eleven repossessed businesses resold by his company in the three years preceding the hearings. Significantly, in every instance, Great Northern, because it held both the lease and the equipment, marketed the site as a “turn-key” package. Never had it needed anything more than the lease, the leasehold improvements, and the dry-cleaning equipment to successfully resell a location based on its income-producing potential. The court noted that Weiner failed to include the exact locations, the dates of sale, or names of the purchasers. I fail to see why that information is vital and I believe the court abused its discretion in denying the creditor a continuance. But that is to lose sight of the bigger picture: the court only excluded limited pieces of evidence. As for the bulk of Weiner’s testimony, the court simply neglected it because the court held Great Northern lacked a “turn-key situation”. That finding is a misconception of Great Northern’s security interest and is reversible error.
Finally, it is interesting to contrast the above rulings with the evidence the court ultimately endorsed when valuing Great Northern’s claim: the unadorned statement of value listed by chapter 13 debtors in their inventory of personal property on Schedule B. The Debtors simply inserted the number “$34,000” as the value of the dry cleaning equipment when they filled out their twenty-plus pages of schedules and forms, and the court accepted it as dispositive. Not a single question was asked of the Debtors as to how they came up with that amount. No examination of the Debtors’ factual basis and no probing of the Debtors’ methodology appears anywhere in the record. On appeal, the Debtors point out that Schedule B asks for “Current Market Value”. That, and the fact that courts have held a debtor is competent to give an opinion as to the value of estate property is all that supports the court’s valuation of Great Northern’s secured claim.
CONCLUSION
The court held that Great Northern lacked a turn-key operation or any security interest in the business as a whole. That is a clearly erroneous finding of fact which deprived Great Northern of its carefully bargained for rights. The court then valued each component of Great Northern’s collateral as if detached from the business and separately sold “off-site” in a “reasonable disposition”. That was an error of law. Because of these errors, the court below rejected Great Northern’s evidence as irrelevant when such evidence was, in fact, the most relevant offered. For the foregoing reasons, I would remand the case for further hearings consistent with the Ninth Circuit’s decision in In re Tajfi. Consequently, I respectfully dissent.
. This dissent focuses on the security interest held by Great Northern as opposed to that of Ardmor Plan since Ardmor Plan's security interest is junior to Great Northern’s.
. The Debtors and the majority make much of the estimate by the Debtors' expert, Basmajian, on the value of the lease. Basmajian surmised that the lease was worthless, and perhaps might have a negative value. But Basmajian misconceived the nature of the valuation task at hand; he based his estimate on the marketability of the leasehold as an empty, unimproved site. Neither the Debtors nor Great Northern ever proposed a separate sale of the lease. Instead, the Debtors planned to retain the lease. By failing to account for this proposed use, Basmajian rendered his lease valuation legally irrelevant, and the court should have given it no consideration. In re Taffi, 96 F.3d 1190 (9th Cir.1996), petition for cert. filed, 65 U.S.L.W. 3433 (U.S. Oct. 31, 1996) (No. 96-881).
Basmajian’s estimate was factually irrelevant as well. Prospective purchasers of a business or income-producing property (as opposed to purchasers of unimproved leaseholds) price an operation by estimating its potential for generating a net income stream. The net income stream is then capitalized using a discount factor sufficient to compensate the purchasers for their investment and risk taking. In re SM 104 Ltd., 160 B.R. 202, 211 (Bankr.S.D.Fla.1993); In re Montgomery Court Apartments of Ingham County, Ltd., 141 B.R. 324, 338 (Bankr.S.D.Ohio 1992). Only actual rent has any impact on that analysis: it is a recurring, fixed, monthly expense which must be deducted from expected earnings. The higher the fixed cost, the lower the expected net income stream, and the lower the business price. Only if the rent at the leasehold site was so high as to completely swamp out any potential for a positive net income stream would the business have no value to a prospective purchaser. What “market” rent the leasehold might fetch in some hypothetical or imaginary use, while perhaps significant in theoretical economic models, is of no pertinence to a small-business valuation of the type at issue. The. clearest demonstration of the truth of this proposition comes from the Debtors themselves: despite, their own expert's declaration, the Debtors appear quite ready and willing to assume the lease. The bankruptcy court erred in giving any weight to an estimate of the separate sales price for an unimproved leasehold. The object to be valued was the leased premises with the installed equipment, i.e., a business opportunity.
. The Fifth Circuit, sitting en banc, reversed the Fifth Circuit panel decision quoted above. Matter of Rash, 90 F.3d 1036 (5th Cir.1996). However, the Ninth Circuit, in its en banc rehearing of Taffi, sided with the en banc dissent in Matter of Rash. In re Taffi, 96 F.3d at 1192.
. Taffi rejected the use of a foreclosure sale price when valuing a creditor’s claim secured by real properly. A “commercially reasonable disposition'' is the personal properly analog to a foreclosure sale. See Cal.Com.Code § 9504(3); In re Crosby, 176 B.R. 189 (9th Cir. BAP 1994), aff'd, 85 F.3d 634 (9th Cir.1996).
. The trial court held a brief hearing on the valuation question on September 11, 1995, but continued the matter. On October 10, 1995, the Ninth Circuit Panel decided In re Taffi, 68 F.3d 306 (9th Cir.1995). The trial court held two additional valuation hearings, one on November 13, and the other on December 4, 1995. However, neither party brought the Taffi decision to the court's attention. On September 17, 1996, after this appeal was taken, the Ninth Circuit, sitting en banc, decided In re Taffi, 96 F.3d 1190 (9th Cir.1996). The en banc decision explicitly overruled In re Mitchell, 954 F.2d 557 (9th Cir.1992).
. The participants at the hearings focused on claim objections, but the proceedings also served as plan confirmation hearings. Even if Rix’s valuation of $165,000 for the entire business was irrelevant for the purpose of valuing Great Northern's claim under § 506(a), Rix's valuation was still relevant for the purpose of plan confirmation and remained uncontradicted. The Debtors’ amended chapter 13 plan proposed total payments of approximately $81,500, with the unsecured creditors to receive roughly thirty-one cents on the dollar. If the business were sold as a turn-key for a price of $165,000, all creditors, secured and unsecured, could be paid in full. See 11 U.S.C. § 1325(a)(4). In effect the Debtors have purchased the business at a 50% discount to the detriment of all creditors. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492498/ | MEMORANDUM OPINION AND ORDER
ROLAND J. BRUMBAUGH, Bankruptcy Judge.
THIS MATTER comes before the Court upon the Creditor’s Motion to Declare Claim a Super Priority Administrative Expense Pursuant to Bankruptcy Code Sections 507(a)(1) and (b) and to Order Chapter 13 Trustee to Turn Over Debtor Funds in Her Possession to Creditor filed by Southwest Capital Investments, Inc. (“SCI”).
The case was filed October 24, 1995. SCI is a secured creditor holding a lien on the Debtor’s 1987 Subaru automobile. The Debtor’s original proposed Chapter 13 Plan valued the collateral at $2,675.00 and it provided that “Adequate protection payments of $45.00 per month will be paid to secured creditor Security Capital Funding Corp. concurrently with attorney fees, until Distribution starts to Class Three Creditors.” The *289monthly payments to the Trustee were to be $145.00.
After the meeting of creditors held pursuant to 11 U.S.C. § 341, the Debtor filed an Amended Plan which valued the car at $3,335.00 and raised the “adequate protection” payments (under the same conditions as in the original Plan) to $85.00 with monthly payments to the Trustee of $300.00. This Amended Plan was confirmed February 13, 1996.
On May 21, 1996, SCI filed the within Motion alleging that as of that date it had not received any adequate protection payments and that on May 15, 1996, Debtor’s counsel telephoned SCI’s counsel and advised that the Debtor was going to surrender the vehicle because it had broken down in Pueblo, Colorado, and would require repairs exceeding $2,000.00. Debtor’s counsel also indicated that the Debtor would be converting the ease to Chapter 7 and provided the location of the vehicle so that creditor could recover it.
In response to the Motion, the Standing Chapter 13 Trustee stated that she currently was holding $425.00 for SCI and that all other monies she had received from the Debtor (excluding a 10% Trustee fee) had been paid to Debtor’s counsel pursuant to the terms of the confirmed Amended Plan. She requested that any order to pay funds to SCI be limited to the $425.00 she currently had in her possession. The Debtor’s response indicated only that there was no basis for a § 507 superpriority.
About this same time the Trustee filed a Motion to Dismiss because the Debtor had defaulted in his payments to the Trustee and the case was ultimately dismissed (August 19, 1996) for substantial default, but the Court retained jurisdiction to determine the within Motion. The Trustee’s Final Report showed that she had received a total of $795.00 from the Debtor. Of that amount she paid (1) to herself $2.82 as compensation and $34.31 for expenses, for a total of $37.13; (2) to Debtor’s counsel $332.87; and (3) to SCI $425.00.
At the hearing herein SCI produced evidence that it did recover the car (at the expense of $210.00). SCI also proved that it sold the car and that it was only able to obtain $450.00. There was no dispute as to these facts. Thus, since the case was filed, SCI received $425.00 from the Trustee, $425.00 net proceeds from the sale of the car, and paid $210.00 for towing the ear from Pueblo, Colorado, giving SCI a net recovery of $665.00. There was no contrary evidence, and the Court finds that the price received by SCI for the sale was reasonable and that the costs incurred in recovery of the car were reasonable. Under the confirmed Amended Plan SCI should have received the capitalized value of the car, or $3,869.00. This figure was arrived at by taking the value of the ear ($3,335.00) capitalized over the period of time necessary to pay SCI using a ten (10) percent capitalization rate.
SCI claims that it is entitled to a superpriority claim because the “adequate protection” provided by the Debtor “failed.” What has happened in this case is the unfortunate use of the term “adequate protection” by the Debtor in his confirmed plan. The Court must be guided, however, by what the Plan accomplishes, and not by what it says. Because SCI would not have started to receive payments under the plan for a considerable time, the Debtor was simply elevating SCI’s Class III payment priority under the plan to be co-extensive with payments to the Class I creditors, albeit for a definite dollar amount and not on a proportional basis. This was done in order to provide protection for the “qualitative” aspect of SCI’s interest in the car. The “quantitative” aspect of SCI’s claim was protected by the payment of interest (capitalization) at the rate of 10%. See, In re Johnson, 63 B.R. 550 (Bankr.D.Colo.1986).
SCI asserts its claim pursuant to § 507(b). That section refers only to “adequate protection” provided under §§ 362, 363 and 364. What SCI has done here is to equate the Debtor’s “adequate protection” payments under the confirmed plan with “adequate protection” payments pursuant to 11 U.S.C. §§ 362, 363, or 364. Section 364 is obviously not applicable in this situation. The payments could not have been pursuant *290to § 362 or § 363 because after confirmation of the plan § 362 does not apply, and the ear was no longer “property of the estate” as contemplated by § 363. As the Court stated in In re Johnson, supra:
Section 362 applies to stay such foreclosure diming the pendency of the Chapter 13 case, but it ceases to apply at such time as the collateral is no longer property of the estate. 11 U.S.C. § 362(c)(1). Unless the Chapter 13 plan provides otherwise (and the instant plan does not), confirmation of the plan serves to vest all of the property of the estate in the debtor. 11 U.S.C. § 1327(b). While the property may remain subject to the lien of the secured party (11 U.S.C. § 1327(e)), enforcement of the lien is no longer stayed by Section 362, and the “adequate protection” provisions of Section 362(d) are no longer applicable. Instead, at that point in time, the secured creditor’s rights and interests are defined strictly by the provisions of the plan. 63 B.R. 550 at 553.
In other words, all parties, including creditors, are bound by the provisions of a confirmed plan. And the Chapter 13 Trustee is required to make payments in accordance with a confirmed plan. 11 U.S.C. § 1326(c). That was done in this case. SCI received all the payments it was entitled to under the confirmed plan until the plan failed and the case was dismissed. But the Court cannot equate “plan failure” to a “failure of adequate protection” under § 507(b). It is, therefore,
ORDERED that the within Motion is denied. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492500/ | MEMORANDUM OPINION
ARTHUR B. BRISKMAN, Bankruptcy Judge.
This matter came before the Court on Plaintiffs, Leigh R. Meininger (“Trustee”), Complaint for Declaratory Relief (Doc. 1). Appearing before the Court were James E. Foster, attorney for the Trustee, Leigh R. Meininger; and Richard B. Webber, attorney for the Defendant, Mrs. Wood. After reviewing the complaint, arguments of counsel, and authorities for their respective positions, the Court makes the following Findings of Fact and Conclusions of Law.
FINDINGS OF FACT
Henry Lee Wood (“Debtor”) filed for relief under Chapter 7 of the Bankruptcy Code on March 8, 1995. The Trustee initiated an adversary proceeding against Mrs. Wood and Ronald M. Bergeron, Sr. (“Mr. Bergeron”) on November 3,1995 by filing a Complaint to Determine Declaratory Relief. .
The Debtor and Bergeron Land Development, Inc. (“BLD”) executed an Agreement for Sale and Purchase (“Agreement”) in May of 1994. The Agreement required the Debt- or to sell a parcel of real estate to BLD for $750,000.00 provided that Debtor would finance the transaction by accepting a wraparound promissory note and mortgage from BLD. BLD did not execute the wrap-around promissory note nor the mortgage, because in June, the Debtor, BLD, and Mr. Bergeron executed an Assignment of Deposit, Receipt, and Contract for Sale. BLD assigned its interest in the Agreement to Mr. Bergeron.
Mr. Bergeron executed a wrap-around promissory note (“Note”) requiring him to make 23 monthly interest payments, a balloon payment of the principal balance, plus any accrued interest to the Debtor. Mr. Bergeron was directed by the Note to tender all payments to the Debtor in care of Osceola National Bank n/k/a Southern Bank of Central Florida (“Bank”), which holds the first mortgage on the property. Funds not used to satisfy the mortgage are being held in an interest bearing escrow account at the Bank, pending final judgment.
The Debtor and Mrs. Wood executed a Marital Settlement Agreement in September of 1991 which was incorporated into a Final Judgement of Dissolution of Marriage. The Debtor failed to comply with the terms of the Marital Settlement Agreement. Mrs. Wood filed a Renewed Motion for Enforcement of the Final Judgment of Dissolution with the state court in September of 1994. The state court granted Mrs. Wood’s motion and ordered in pertinent part:
1. The Former Wife’s Renewed Motion for Enforcement of Final Judgment of Dissolution of Marriage be and the same is hereby granted. The Former Husband is accordingly found in breach and violation *326of the parties’ Marital Settlement Agreement, as incorporated by this Court’s Final Judgment.
5. In further partial satisfaction of the foregoing obligations, the Former Husband shall forthwith assign to the Former Wife all monthly and balloon payments to be received, on or following the date of this Order, under the Agreement for Sale and Purchase dated May 27, 1994, between HENRY L. WOOD (“Seller”) and Berger-on Land Development, Inc., a Florida corporation (“Purchaser”), less that portion of the aforesaid monthly and balloon payments which are presently encumbered under said Agreement (and Supporting documentation) by Osceola National Bank.
6. In the event the Former Husband shall fail or refuse to promptly execute appropriate documents formally assigning the aforesaid payments to the Former Wife, this Order, in it of itself, does and shall serve to effectuate the fact and circumstance of such assignment, and as against the Former Husband, HENRY LEE WOOD, can be fully relied upon by Bergeron Land Development, Inc., and Osceola National Bank in order to confirm and document the fact and consequence of such assignment.
(Doc. 11, Ex. D). The Debtor failed to surrender possession of the Note. Mrs. Wood did not seek an order compelling the Debtor to surrender the Note. No constructive trust was created.
CONCLUSIONS OF LAW
The issue before this Court is whether the Note is property of the estate. Section 541(a)(1) of the Bankruptcy Code provides, with certain exceptions, that all legal and equitable interests of a debtor in property as of the commencement of the ease become property of the estate. 11 U.S.C.A. § 541(a)(1) (West 1993). Applicable state property law determines whether a debtor had a legal or equitable interest in property as of the Bankruptcy petition date. In re Health Care Products, Inc., 159 B.R. 332, 337 (M.D.Fla.1993). A critical determination is whether any pre-petition actions transferred ownership in the subject accounts from Debt- or to Mrs. Wood. Id. at 338. The state court order did not effectively transfer ownership of proceeds from the Note from the Debtor to Mrs. Wood.
Florida Rule of Civil Procedure 1.570, entitled Enforcement of Final Judgments, provides:
(c) ... if judgment is for the performance of a specific act or contract:
(1) the judgment shall specify the time within which the act shall be performed.
Fla.R.Civ.P. 1.570(c)(1). The requirements of Rule 1.570 enable the court to conveniently and efficiently secure the enforcement of judgments for specific acts.
The state order required performance of an act, but it failed to provide for a period of time within which the required act was to be performed. Williams v. Shuler, 551 So.2d 585, 587 (Fla.Dist.Ct.App.1989). See also Parra v. Parra, 362 So.2d 380, 381 (Fla.Dist.Ct.App.1978). The absence of a time provision renders the order inadequate. The state court order is ineffective; as a result, Mrs. Wood does not possess an equitable interest in the proceeds of the Note. Accordingly, the Note between the Debtor and Mr. Bergeron is property of the estate pursuant to § 541(a)(1). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492501/ | AMENDED MEMORANDUM OPINION
JAMES D. WALKER, Jr., Bankruptcy Judge.
This matter comes before the Court on Motion for Reconsideration filed by Defendant, Federal Credit (“Federal”). This is a core matter within the meaning of 28 U.S.C. § 157(b)(2)(E). The following findings of fact and conclusions of law are entered in accordance with Federal Rule of Bankruptcy Procedure 7052.*
Findings of Fact
On January 19, 1995, Federal made a loan to Debtor and took a non-purchase money security interest in, among other items, a portable utility building and a big screen *351television set.1 On that date, Federal filed a UCC-1 financing statement. On June 19, 1995, Pioneer Credit (“Pioneer”) made a loan to Debtor. At that time they took a security interest in the same utility building and television set.2 Pioneer filed its financing statement twenty-five days later on July 12,1995. There appears to be no significance to that delay. Also, on July 12, 1995, Federal refinanced Debtor’s loan, executing a new note and security agreement and advancing additional funds in the amount of $30.00.3 Two days later, on July 14, 1995, Federal filed a new financing statement without any reference to its prior UCC-1.
On March 8, 1996 Debtor filed for relief under Chapter 7 of the Bankruptcy Code. This adversary proceeding was filed by Debt- or in order to determine priority between Federal and Pioneer as to the utility building and big screen television set. On October 3, 1996, this Court entered a Memorandum Opinion and Order which held that Pioneer had a first priority security interest in the aforementioned collateral based on the holding that Federal’s second loan was a transformation/novation of its first loan. The Court stated that, “[u]nder Georgia law, a renewal will maintain its original priority while a transformation will be considered an entirely new transaction with its own priority.” (Memorandum Opinion at 5.) Under that authority, the Court held that, by refinancing the original loan, Federal had caused a transformation of the original loan, and, accordingly, lost its first in time priority to Pioneer.
Subsequently, Federal filed a timely Motion for Reconsideration. In its motion, Federal contends that the Court did not consider the character of the new loan as one which may have been secured by the prior UCC-1 as a subsequent advance. Also, Federal contends, that, because of subsequent advance provisions of the first loan and security agreement, the transformation analysis is not dispositive of the issue of priority, as it might have been if the first transaction had been based on a purchase money security interest.
After further consideration, it appears that Federal is correct in that the transformation analysis does not fully resolve the question of priority. Accordingly, the Motion for Reconsideration will be granted, and the Court will now address the further intricacies of the legal issues presented.
Conclusions of Law
The basic issue presented here is the effect, if any, of a second UCC-1 filing on the priority established by an earlier UCC-1 filing by the same creditor covering the same collateral. The issue, however, is complicated by the fact that the collateral consists only of consumer goods securing an obligation of less than $5,000.00.4 Where such collateral is claimed as security, O.C.G.A. § 11-9-402(1) requires that the maturity date of the loan, if there is one, be noted on the financing statement.5
In addition, O.C.G.A. § 11-9-403(2) provides that “a filed financing statement is effective for a period of five years from the *352date of filing or until the twentieth day following any maturity date specified in the financing statement, whichever is earlier.” Thus, for such collateral, the five year period of effectiveness normally given to a financing statement may be reduced by the terms of the transaction.
On January 19,1995, Federal filed a UCC-1 financing statement as notice of their security interest in certain consumer goods to secure a loan of $1,147.20. Pursuant to O.C.G.A. § 11-9-402(1), the financing statement specified April 17,1996 as the maturity date of the loan. Thus, absent any further filings, Federal’s January, 1995 financing statement would have lapsed after the passing of the twentieth day following this stated maturity date of the note. As will be discussed later in this opinion, Debtor’s bankruptcy filing alters this outcome.
Two more filings took place after Federal’s initial filing. On July 12, 1995, Pioneer filed a financing statement to perfect a security interest in the same masonite storage building and big screen television covered by Federal’s January 19, 1995 financing statement.6 It is not disputed that, based upon the order of filings at that time, Federal would have a first priority security interest. The difficulty in determining the relative priorities between Federal and Pioneer arose after Federal filed a second financing statement on July 14, 1995, following the refinancing of Debtor’s original loan obligation and the advance of additional funds.7
Rather than filing a new financing statement, Federal could have chosen to rely on the future advances clause of its original security agreement.8 See O.C.G.A. § 11-9-204(3). But Federal chose to file the second UCC-1. This leaves the Court to determine if that second UCC-1 serves to deny to Federal the benefit of security status on a subsequent advance basis.
Should the second filing be treated as a continuation statement or amendment to the first filing? Should the second filing be disregarded as ineffective for any purpose? Or should the second filing have some separate and distinct significance in addition to the first filing? Each of these alternatives deserves separate consideration.
The Official Code of Georgia contemplates the use of a continuation statement in the consumer goods collateral context at issue here.9 This provision makes it clear that *353the statute permits a continuation statement in a consumer goods collateral situation. Accordingly, Federal could have preserved its first-in-time priority status by filing a continuation statement.
In order to qualify as a continuation statement, the filing “must be presented on the form prescribed by the Georgia Superior Court Clerks’ Cooperative Authority for continuation statements and must identify the file number and the date of the original statement....” O.C.G.A. § 11-9-403(3). In Georgia, a UCC-3 is the proper form to be used when filing a continuation statement. Georgia Superior Court Clerks’ Cooperative Authority, UCC Administrative Procedure, Rule IX., at 10 (1995). The July 14, 1995 filing by Federal was on a UCC-1 form, the proper form for original financing statements. Therefore, that filing cannot be considered a continuation statement.
Next, can the July 14, 1995 filing be considered an amendment to the original January 19, 1995 financing statement? Amendments to financing statements are covered by O.C.G.A. §' 11-9-402(4).10 Federal’s July 14, 1995 filing cannot be considered an amendment to the original financing statement because the changes made on Federal’s second filing were more material than the type of amendments that O.C.G.A. § 11-9-402(4) contemplates. More significantly, however, Federal’s second filing attempts to extend the effective period of the original filing, a result which cannot be accomplished by filing an amendment.11 See O.C.G.A. § 11-9-402(4) (“An amendment does not extend the period of effectiveness of a financing statement.”).
Since Federal’s second filing can neither be considered a continuation statement nor an amendment, the Court must determine its legal significance. The Court is reluctant to conclude that the second filing has no significance and should be ignored as ineffective for any purpose. Such a clearly intentional act would seem to have some legal significance. On the other hand, the policy of the Uniform Commercial Code encourages notice of liens. Any creditor who gives such notice in furtherance of the purposes of the code, should not be deemed to have surrendered an otherwise valuable right. In coming to this conclusion, the Court finds itself without any supporting or conflicting precedent. The second filing should not be construed in a way that harms Federal’s position, yet at the same time, it should be construed as having some separate significance.
Accordingly, the second UCC-1 will be deemed to be a back-up financing statement with its own separately established priority. Under the facts of this case, but absent the filing of Debtor’s bankruptcy petition on March 8, 1996, the second filing would have no practical effect as long as the first filing remained effective. However, upon the lapsing of the first financing statement, Federal’s priority would be established as of the date *354of the filing of its second financing statement. Here, since the first financing statement would have lapsed after the twentieth day following April 17, 1996 (the stated maturity date of the loan), Federal’s priority would then have been established on July 14, 1995, the date of the second filing.12 As a result Federal would have relinquished its first-in-time priority to Pioneer since Pioneer’s priority date of July 12, 1995 would precede Federal’s by two days.
In this case, Debtor’s bankruptcy petition added a curious wrinkle by preserving Federal’s first-in-time priority throughout the pendency of the bankruptcy case and for a period of up to sixty days after the close of the case. O.C.G.A. § 11-9^103(2).13 Here, the bankruptcy case was commenced on March 8, 1996. As of that date, Federal’s first financing statement was still effective. If the bankruptcy petition had not been filed, that first UCC filing would have lapsed after the twentieth day following April 17, 1996 (the stated maturity date of the loan), leaving Federal in second position. However, the filing of the bankruptcy case has preserved Federal’s priority position as of that date. Therefore, with the bankruptcy case still pending, Federal remains as the creditor with first priority.14
An order in accordance with this opinion will be entered on this date.
The Court previously published a memorandum opinion in this case on December 4, 1996. Upon review of that opinion it appears that a change in footnote 14 is appropriate. Except for that change, the revised memorandum opinion is identical to the previous opinion.
. The original amount of the Federal loan was $1,147.20. The collateral securing the loan consisted of one Sony big screen television set, one 8' x 10' masonite storage building, one Panasonic VCR, one Magic Chef microwave oven and one Sony Handi-Cam Video Camera Recorder.
. The original amount of the Pioneer loan was $1,186.14. The collateral securing the loan was the same 8' x 10' masonite storage building and Sony big screen television set in which Federal had a security interest.
. The original amount of this second loan by Federal was $1,037.93. The collateral securing the loan was the same as that listed in the January 19, 1995 security agreement. See supra note 1.
. The Official Code of Georgia contains special rules for this type of collateral. See O.C.G.A. §§ 11-9-402(1) & (4) (formal requisites and amendment of financing statements); §§ 11 — 9— 403(2) & (3) (lapse and continuation of financing statements).
. In relevant part, O.C.G.A. § 11 — 9—402(1) states:
A financing statement is sufficient if it complies with the requirements of this Code ..., and, where both (i) the collateral described consists only of consumer goods as defined in Code Section 11-9-109 and (ii) the secured obligation is originally $5,000.00 or less, gives the maturity date of the secured obligation or specifies that such obligation is not subject to a maturity date.
. Pursuant to O.C.G.A. § 11-9-402(1), this financing statement indicated that the maturity date of the loan Pioneer made to Debtor was to be December 19, 1996.
. Pursuant to O.C.G.A. § 11-9-402(1), this financing statement indicated that the maturity date of the refinanced Federal loan was to be October 12, 1996.
. While there is authority that the security agreement must contain an actual future advances clause, see Barksdale v. Peoples Fin. Corp., 393 F.Supp. 112 (N.D.Ga.1975), rev’d on other grounds, 543 F.2d 568 (5th Cir.1976), other courts disagree, holding that no such clause is needed in order to exercise a future advances and still maintain the original priority. See, e.g., Allis-Chalmers Credit Corp. v. Cheney Investment, Inc., 227 Kan. 4, 605 P.2d 525 (1980); James Talcott, Inc. v. Franklin Nat’l Bank, 292 Minn. 277, 194 N.W.2d 775 (1972) (“Parties may use future-advances and after-acquired clauses, and they are a great convenience. But, if they are not used, there is nothing in the code which prevents the parties from accomplishing the same result by entering into one or more additional security agreements.”). This Court, however, is not presented with this truly difficult question because Federal’s original security agreement actually contained a future advances clause. Specifically, the agreement indicates that the collateral described therein will "secure payment of a promissory note of even date and all other obligations, present and future, of Borrower to Lender."
.Specifically, the statute states the following:
The continuation statement must ..., where both (i) the collateral described consists only of consumer goods as defined in Code Section 11-9-109, and (ii) the secured obligation as defined in subsection (1) of Code Section 11-9-402 is originally $5,000.00, or less, specify the maturity date of the secured obligation or specify that such obligation is not subject to a maturity date.... Upon timely filing of the continuation statement, the effectiveness of the original statement is continued for a period of five years after the date to which the filing was effective or until the twentieth day following any maturity date specified in the continuation statement, whichever is earlier, whereupon it lapses in the same manner as provided in subsection (2) of this Code section unless another continuation statement is filed prior to such lapse. Succeeding continuation statements may be filed in the same manner to continue the effectiveness of the original statement.
*353O.C.G.A. § 11-9-403(3).
. In relevant part O.C.G.A. § 11-9-402(4) states the following:
A financing statement may be amended by filing a writing signed by both the debtor and the secured party, except that where the amendment only changes the name or address of the secured party, or the address or the social security number or Internal Revenue Service taxpayer identification number of the debtor, or corrects only typographical or other clerical errors set forth in the financing statement, such amendment may be filed without being signed by the debtor. Each amendment shall be filed with the filing officer of the county in which the financing statement being amended was filed. An amendment does not extend the period of effectiveness of a financing statement. If any amendment adds collateral, it is effective as to the added collateral only from the filing date of the amendment. In this article, unless the context otherwise requires, the term "financing statement” means the original financing statement and any amendments.
. Federal’s Januaiy 19, 1995 filing stated that the maturity date of the loan was to be April 17, 1996.
Therefore, absent any further filings, that financing statement would lapse at the close of the twentieth day following that date. See O.C.G.A. § 11-9-403(2). Federal’s July 14, 1995 filing stated that the maturity date of the loan was to be October 12, 1996. If the Court were to allow that second filing to be considered an amendment to the first filing, it would be allowing an amendment to extend the period of effectiveness of the filing, a result which is prohibited by O.C.G.A. § 11-9^102(4).
. In the absence of any farther filings, even this second financing statement would have lapsed after the passing of the twentieth day following October 12, 1996, the stated date of maturity of the refinanced loan.
. Specifically, O.C.G.A. § 11-9-403(2) states the following:
If a security interest perfected by filing exists at the time insolvency proceedings are commenced by or against the debtor, the security interest remains perfected until termination of the insolvency proceedings and thereafter for a period of sixty days or until the normal expiration date of the financing statement, whichever occurs later.
.It should be noted that upon the closing of the bankruptcy case, assuming the liens are not avoided under some other provision of the Bankruptcy Code, Federal will only retain its priority position for a period of sixty days, unless a continuation statement is filed within that time to extend the period of effectiveness of the original financing statement. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492502/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW ON COMPLAINT TO DETERMINE DISCHARGEABILITY OF DEBT
KAREN S. JENNEMANN, Bankruptcy Judge.
This adversary proceeding was heard on October 16, 1996, on the Complaint of Sears, Roebuck & Company (the “Plaintiff”) to determine the dischargeability of certain debts (the “Complaint”) (Doc. No. 1). Specifically, Plaintiff seeks to except from the discharge of the debtor/defendant, Toni A. Crisafi (the “Debtor”), certain debts pursuant to Section 523(a)(6) of the Bankruptcy Code. After reviewing the pleadings and considering the applicable law, judgment is entered in favor of the Debtor.
Facts. The Debtor and a representative of the Plaintiff testified at the trial. The evidence was largely undisputed, and the parties have stipulated to the following facts. Prior to filing her petition for bankruptcy on January 12, 1996 (the “Petition Date”), the Debtor maintained two revolving charge accounts with the Plaintiff. Prior to the Petition Date, she used these charge accounts to purchase the following items:
Item Purchased Purchase Value on Price Petition Date
Compressor $ 519.38 1 363.57
Grinder, etc. 235.36 164.75
Bed/Dresser 423.70 254.22
Bedroom Set 2,942.46 1,765.48
During each purchase, the Debtor signed a sales slip which contained the following language:
I acknowledge receipt of merchandise and/or services in the total amount shown hereon and agree that this credit purchase is subject to my Agreement with the credit card issuer identified hereon. If this is a credit purchase under my SearsCharge Agreement, then I grant Sears a security interest in the merchandise described *446hereon, unless prohibited by law until paid in full.
(Plaintiffs Exhibit 1).
The Plaintiff claims a security interest in the items purchased by the Debtor based upon the language and the Debtor’s signature on the sales slip. The Debtor, appearing pro se, testified that she did not know that she was granting the Plaintiff a security interest when she signed the sales slip.
The Debtor later sold all of the items she had purchased with her Sears charge card at garage sales or to friends. The Debtor credibly testified that she sold the property because she was in financial distress and that, at the time of the sale, she was not aware that the Plaintiff claimed a security interest in the items sold. The Plaintiff never consented to the sale of the items. The Plaintiff claims damages of $2,548.02, which is the value of the purchased items on the Petition Date, plus $120 in costs pursuant to Section 523(a)(6) of the Bankruptcy Code.
Issues. The issues1 in this adversary proceeding are:
a. Whether the Debtor’s sale of the items purchased on her Sears’ credit cards was willful under the definition of Section 523(a)(6) of the Bankruptcy Code.
b. Whether the Debtor’s sale of the items purchased on her Sears’ credit cards was malicious under the definition of Section 523(a)(6) of the Bankruptcy Code.
SECTION 523(a)(6)
In a challenge to the dischargeability of a debt, the plaintiff/creditor must prove by a preponderance of the evidence that the debt is within one of the specifically enumerated exceptions under Section 523(a) of the Bankruptcy Code. Grogan v. Garner, 498 U.S. 279, 287, 111 S.Ct. 654, 659-60, 112 L.Ed.2d 755 (1991); Fed.R.Bankr.P. 4005 (1995). Plaintiff relies upon Section 523(a)(6) of the Bankruptcy Code which provides that an individual debtor is not entitled to discharge a debt arising from “willful and malicious injury by the debtor to any entity or to the property of another entity.” 11 U.S.C. Section 523(a)(6) (1996). Accordingly, in this case, the Plaintiff must prove by a preponderance of the evidence that the Debtor “wil-fully” and “maliciously” injured the Plaintiff or its property.
Willful, for purposes of Section 523(a)(6), is defined as a deliberate or intentional act. Chrysler Credit Corp. v. Rebhan, 842 F.2d 1257, 1263 (11th Cir.1988). Wilfulness requires more than accidental conduct. The debtor must exercise some meaningful and intentional control. Sears, Roebuck & Co. v. Parker, 156 B.R. 858, 861 (Bankr.M.D.Fla.1993).
Malice is more difficult to define and requires a “finding of implied or constructive malice.” Rebhan, 842 F.2d at 1263. Implied or constructive malice is established if the nature of the act itself requires the offending party to exhibit a sufficient degree of malee. Id. Both elements of the definition must be present for a debt to be found nondisehargeable. See, Parker, 156 B.R. at 861.
The two necessary elements, willfulness and malee, are not synonymous. WU1-fulness imples intentional behavior. Malee connotes a malevolent purpose for the action. An examination of the wording of Section 523(a)(6) shows that to render an action mal-cious based solely upon willful or intentional conduct of the debtor renders the word “ma-Icious” meaningless under Section 523(a)(6). C.I.T. Financial Services v. Posta, 866 F.2d 364, 367 (10th Cir.1989).
In Parker, the debtor/defendant had purchased several items from Sears over a seven month period using his charge card issued by the plaintiff. 156 B.R. at 860. Similar to this ease, Sears claimed a security interest in all of the items based upon the defendant’s execution of a sales sip at the time of the purchases which granted Sears a purchase money security interest. Id. Subsequent to the purchase of the property and *447prior to the filing of his bankruptcy petition, the defendant sold the personal goods. Id. Sears then brought an adversary proceeding seeking to except the debts from discharge pursuant to Section 523(a)(6) and claiming that the defendant willfully and maliciously injured the plaintiff. Id. The Bankruptcy Court concluded that, although the debtor intentionally and wrongfully sold the collateral subject to Plaintiffs security interest, the action was malicious only if the debtor knew that “it was injurious to the creditor.” Id. There may be an act of conversion without the presence of a willful and malicious injury. Davis v. Aetna Acceptance Co., 293 U.S. 328, 332, 55 S.Ct. 151, 153, 79 L.Ed. 393 (1934); Miller v. Held (In re Held), 734 F.2d 628 (11th Cir.1984). Such a conversion, while a tort, does not bar discharge of the debt. Therefore, a debtor can violate the terms of a security agreement without forfeiting a right to discharge the debt if the action was taken without malice.
In this case, the Debtor’s sale of the items that she had purchased from the Plaintiff was unquestionably willful. There is no dispute that the Debtor intentionally and voluntarily sold the items without the Plaintiffs consent. The Debtor clearly violated the security agreement claimed by the Plaintiff. This behavior satisfies the willful element of Section 523(a)(6).
However, no evidence supports the Plaintiffs position that the Debtor acted maliciously. According to the Debtor’s testimony at trial,, she was not even aware that she had granted the Plaintiff a security interest in the property. As such, she could not have known she was doing anything wrong when she sold the items to fiiends and at a garage sale. Without such knowledge, she could not have acted maliciously, and she took no action to intentionally injure this plaintiff.
Accordingly, although the sale of the collateral may have been a violation of the security agreement, the violation alone is not sufficient to make the Debtor’s obligation to Plaintiff nondischargeable pursuant to Section 523(a)(6). Plaintiff has failed to meet its burden of proof. A separate judgment in favor of the Debtor and against Plaintiff shall be entered in accordance with these findings of fact and conclusions of law.
. Although the Plaintiff also asserted claims in the Complaint under Section 523(a)(2) and (a)(4) of the Bankruptcy Code, the Plaintiff elected not to proceed with those allegations at trial. As such, the only remaining issue is whether the Plaintiff is entitled to a judgment under Section 523(a)(6) of the Bankruptcy Code. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492503/ | ORDER OVERRULING OBJECTION TO EXEMPTION
MARY D. SCOTT, Bankruptcy Judge.
THIS CAUSE is before the Court upon the Trustee’s Objection to Exemptions, filed on October 28,1996. The parties have stipulated to the facts, submitted briefs, and request that the Court make a ruling based upon these submissions.
The debtors filed a Chapter 7 bankruptcy ease on August 14, 1996. Simultaneously, they filed their Statement of Affairs and Schedules, choosing the federal exemptions allowed by section 522(b)(1) of the Bankruptcy Code. The debtors claimed as exempt the following property:
1. Their principal residence, which has a market value of $59,000, but in which they hold equity of $14,468.20.
2. Other real property which has a market value of 70,000, and in which they hold $19,762.26 of equity.
3. A checking account which contains $600.
Section 522 of the Bankruptcy Code provides in pertinent part:
(d) The following property may be exempted under subsection (b)(1) of this section:
(1) the debtor’s aggregate interest, not to exceed $15,000 in value, in real property or personal property that the debtor or a dependent of the debtor uses as a residence.
* * * * * *
(5) the debtor’s aggregate interest in any property, not to exceed in value $800 plus up to $7,500 of any unused amount of the exemption provided under paragraph (1) of this subsection.
11 U.S.C. § 522(d)(1), (5). Each debtor in a joint case is entitled to the exemption, 11 U.S.C. § 522(m), but is analyzed separately.
In this ease, the debtors are entitled to the exemptions as scheduled and claimed. Under section 522(d)(1) each debt- *583or is entitled to a $15,000 exemption in the homestead. The equity apportionable to each debtor in the homestead is $7,234.10 (each entitled to one-half of the total equity, $14,468.20). Since the statute provides that each debtor may claim a $15,000 exemption, and only $7,234 of it is used, there remains $7,765.90 unused of the exemption under paragraph (1).
Under section 522(d)(5), the so-called wild card exemption, each debtor is also entitled to exempt an interest in property up to $800 in value plus up to $7,500 of any unused amount of the exemption under paragraph (1). Each debtor has elected to exempt his or her shares in a bank account, i.e., $300, leaving $500 plus $7,500 still available to be claimed if exemptible property exists. Each debtor elected to exempt $8,000 of the equity in a second parcel of real property in which they each hold an equity interest of $9,881.13.
Although the debtors analysis tracks the language of the statute, the trustee asserts that the debtors may not exempt more than their existing equity in real property, ie., $7,284 each, or a total of $14,468.20. He concedes they may each claim $800 under paragraph (5). The error in the trustee’s analysis is that he is substituting the term “equity” in paragraph (5) for the term that actually appears, “exemption.” Section 522(d)(5) permits the debtors to also claim any unused exemption under paragraph (1), not merely the unused equity in property. Under the trustee’s analysis, because the debtors have only $265.90 unused equity available, only that amount can be utilized under section 522(d)(5). However, the statute provides that each debtor is entitled to apply the unused exemption, which is $7,765.90 each, not merely the unused equity. The plain language of the statute permits the debtors to exemptions claimed. Accordingly, it is
ORDERED that the Trustee’s Objection to Exemptions, filed on October 28, 1996, is OVERRULED.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492504/ | OPINION ON COMPLAINT TO RECOVER A PREFERENCE STATEMENT OF THE CASE
RODNEY R. STEELE, Chief Judge.
Donald M. Martin filed a Chapter 11 on January 5, 1990. The case converted to Chapter 7 on December 10, 1990. Von G. Memory was appointed Trustee in the Chapter 7 case on December 11,1990.
C & C Land Corporation was filed as an involuntary Chapter 7 on April 11, 1990, was converted to Chapter 11 on May 31, 1990, and was thereafter converted back to a Chapter 7 on December 11, 1990, and Mr. Memory was appointed as trustee. C & C Land Corporation was wholly owned by Donald M. Martin.
*647The trustee of Don Martin, debtor, filed the complaint herein to recover a preference against this defendant on December 10,1992. He alleges that a payment of $105,062.49 in money, paid to defendant within 90 days of the debtor’s filing of Chapter 11, was an avoidable preferential transfer under Title 11 U.S.C. § 547.
The defendant joins issue, and asserts affirmative defenses under 11 U.S.C. § 547(c)(1) and (c)(4). Defendant further says that C & C Land Corporation and Don Martin, this debtor, were alter egos, and in that connection, they assert that new value was given to the debtor through C & C Land at the time the alleged preferential transfer occurred, maldng a preference, if any, non-avoidable.
Trustee later amended his complaint to claim, in addition to the preferential transfer, that the transfer was fraudulent under 11 U.S.C. § 548(a). The defendant then moved to dismiss the § 548 claim as being filed too late, and further defended on the grounds that the defendant gave value to the debt- or/plaintiff under § 548(d)(2).
At the hearing on June 18, 1993, the court granted the defendant’s motion to amend its answer, but denied its motion to dismiss the amended complaint. The remaining issues were submitted to the court on memoranda and the evidence.
JURISDICTION
The court has jurisdiction under to 28 U.S.C. § 1334, and 28 U.S.C. § 157(b)(2)(F) and (H). This is a core proceeding within the meaning of the latter statute.
FACTS
On March 9, 1988, and April 6, 1988, C & C Land Corporation (“C & C”), entered into a contract to purchase from Alfa Mutual Fire Insurance Company (“Alfa”), 50 residential building lots located in the Dannelly Pines Subdivision in Montgomery, Alabama.
On April 6, 1988, C & C paid a cash amount toward the purchase price and executed a promissory note to Alfa for the balance. The promissory note was for $242,500, due and payable in full 15 months from the date of execution. C & C also executed a mortgage on the real property to Alfa to secure the indebtedness under the note.
Both the mortgage and the promissory note were signed by the debtor, Don Martin, as Chairman of the Board of C & C Land Corporation. Don Martin also signed both the mortgage and the promissory note as a guarantor of those instruments.
Over the following 15 months, C & C marketed and sold lots in the Dannelly Pines Subdivision. As specified in the note C & C remitted $6,000 to Alfa for each lot sold and upon receipt of the funds, Alfa released that lot to C & C and reduced the indebtedness on the promissory note.
By the end of the 15-month term of the note, C & C had failed to pay the note in full. After July 6, 1989, and up until the balance was paid in full on November 3,1989, C & C worked under extensions granted by Alfa. Alfa required that a specific money amount be paid to extend the final pay-off date. In an August 3, 1989, letter addressed to Don Martin, President of Martin Realty and Construction Company, Alfa confirmed an agreement for an extension which was accepted by Don Martin under his signature as President. A check to fulfill the extension agreement was issued from the Union Bank and Trust account of Martin Realty and Construction Company.
Finally on November 3, 1989, a check was issued from the Union Bank and Trust account of Martin Realty and Construction Company to Alfa in the amount of $105,-062.49. This cheek represented the payment in full of the 1988 promissory note. Upon receipt of this check, Alfa executed and delivered a Corporate Cancellation and Release of the mortgage to C & C Land Corporation.
It is this November 3, 1989, check which trustee for Don Martin seeks to recover as a preferential transfer and a fraudulent transfer.
CONCLUSIONS
I. Trustee’s claim under 11 U.S.C. § 548 is that the November 3,1989, payment of $105,062.49 is a fraudulent conveyance because debtor did not get reasonably equiva*648lent value in exchange: the value went to C & C in the satisfaction of its debt and the release of its mortgage.
But defendant effectively defends under § 548(d)(2)(A). Debtor was a contingent creditor by virtue of his guaranty, who received reasonably equivalent value in the satisfaction of an antecedent debt of the debtor. See In re Cavalier Homes of Georgia, Inc., 102 B.R. 878 at 885-886, (U.S.B.C.M.D.Ga., 1989).
Plaintiff cannot recover under 11 U.S.C. § 548.
II. Trustee’s claim under 11 U.S.C. § 547 is that the November 3,1989, payment of $105,062.49 is a preferential transfer because it was a transfer to or for the benefit of a creditor for or on account of an antecedent debt owed by the debtor before the transfer was made, while the debtor was insolvent, made within 90 days before bankruptcy, and which gave Alfa more than it would have gotten in a Chapter 7 if the transfer had not been made. 11 U.S.C. § 547(b).
(A) Defendant says trustee has not proved the elements of a preference.
1. We find that there was a transfer of the debtor’s property to Alfa when the November 3,1989 check was delivered and honored. Debtor was a contingent debtor to Alfa. Title 11 U.S.C. § 101(5) and (10).
2. The payment was for or on account of an antecedent debt owed by the debtor before the transfer was made. (Payment on November 3, 1989, paid a debt incurred on April 6,1988.)
3. The debtor was insolvent when the transfer occurred on November 3,1989. The presumption of insolvency raised by § 547(f) was not contradicted by any evidence from defendant. Trustee bolstered the presumption with testimony that debtor was insolvent in the Spring of 1989 and thereafter until he filed his Chapter 11 petition on January 5, 1990. R. 49-50, and Cf. R. 23-26.
4. The payment was made on November 3,1989, within 90 days of the order for relief on January 5,1990.
5.. We find that the transfer enabled Alfa to receive more than it would receive if the case were a case under Chapter 7 (which it is). We assume that the transfer was not made, and that Alfa would have received a distribution in the Chapter 7 case.
Trustee testified without contradiction, that the distribution in this Chapter 7 case will not exceed ten cents on the dollar. (R. 23-25).
Defendant vigorously joins on this point, asserting that there can be no preference because:
A. C & C Land was the alter ego of Debtor Don Martin: Alfa says they were not kept separate by Don Martin, the debtor, who held all the stock of C & C, and were dealt with indiscriminately by creditors. Since Alfa was secured by its mortgage from C & C, it was therefore secured by Debtor Don Martin, and in a Chapter 7 would have been paid in full in any event on its over-secured claim.
Alter ego, or “piercing the corporate veil” is a useful equitable principle under state law, which comes into play when the proponent can “... show fraud in asserting the corporate existence or must show that recognition of the corporate existence will result in injustice or inequitable consequences.... ” Quoted with approval in Backus v. Watson, 619 So.2d 1342, (Ala.1993), from Simmons v. Clark Equipment Credit Corp., 554 So.2d 398,400-401 (Ala.1989).
It is a power not lightly to be exercised. Sole stock ownership will not justify its use, nor one-man corporations, nor under capitalization. There must be the added elements of misuse of control and harm or loss resulting from it. Simmons, infra. It is particularly inapplicable where superior federal statutory law is clear, as it is here. Cf. Norwest Bank Worthington v. Ahlers, 485 U.S. 197, at 205-07, 108 S.Ct. 963 at 968-69, 99 L.Ed.2d 169 at 179 (1988); In re Sublett, 895 F.2d 1381 at 1385 (11th Cir.1990).
Defendant adduced no such misuse or harm in the transactions giving rise to this adversary proceeding. There is no evidence here that C & C was set up as a subterfuge or that the legal requirements of corporate law were not complied with, or that the *649corporation maintained no corporate records, or that the corporation had no employees, or that corporate and personal funds were intermingled and corporate funds were used for personal purposes, or that debtor here drained funds from the corporation. Simmons, supra. There is no evidence here concerning the attitude or treatment of other creditors in dealings with Martin or C & C.
There is evidence that Don Martin was the owner and chief executive of C & C, and that he operated C & C as a part of his business holdings, which included other corporations. These businesses operated out of the same address with the same telephone number and employed some of the same people, but the debtor and C & C had separate bank accounts and separate tax returns and EID numbers. (R. 70, 57.) There is evidence that Richard Piel, an attorney hired by debt- or Martin to prepare documents of title, thought the several corporations were all one business (R. p. 74). But he knew nothing about the finances of these businesses (R.p. 77), and knew only that Mr. Martin considered all the businesses to be his own: “... in his mind, it was all the same, I believe.” (R. p. 77, et seq.) He knew that C & C operated as a valid corporation. (R. 92) but he knew nothing about the business affairs of these businesses. (R. 99-100)
These facts cannot support a conclusion that C & C was the alter ego of Debtor Don Martin.
Debtor and C & C had and have now a different make-up of creditors. There are many common creditors, but their claims are in different capacities and in different amounts, as trustees’ several applications for classification of claims have borne out. In the transaction attacked here, Alfa recognized the different entities when it sought and obtained Don Martin’s separate guaranty. It further recognizes the separate entity in its successful attack in this case on trustee’s claim under § 548.
Debtor Martin and C & C ostensibly had different functions, although they were often blurred. Debtor was in real estate sales and construction (R. 22). C & C held land for sale and resale and development, as was the case in this transaction. The maintenance of proper chains of title among Martin’s several business entities was often disregarded, but not in this case.
The conclusion finally must be that there is not sufficient evidence to invoke alter ego as a defense to the claim of preferential transfer, particularly as to the element of § 547(b)(5). If Alfa had foreclosed on its security against C & C Land as it insists it had a right to do as mortgagee, there would have been no payment of $105,062.49 from the assets of this debtor, and no preference. That is not what happened here.
(b) Alfa further argues that even if the alter ego equity is not available to it, there can be no preference where the benefits of a release of the mortgage to C & C flow through that corporation and benefit debtor Don Martin indirectly, as the sole stockholder of C & C Land. Therefore, Don Martin, debtor, did receive a co-equivalent benefit when the transfer occurred and the mortgage was released. So, says Alfa, the estate was not depleted under § 547.
This principle has been recognized. Rubin v. Manufacturers Hanover Trust Co., 661 F.2d 979 at 991, (2d Cir.1981) (fraudulent conveyance case); and In re Chase and Sanborn Corp., 848 F.2d 1196 at 1199 n. 7, (11th Cir.1988). But these and other cases make clear that the indirect benefit must be one realized or realizable by the creditors of the debtor who suffered the apparent avoidable transfer.
... [T]he court must keep the equitable purposes of the statute firmly in mind, recognizing that any significant disparity between the value received and the obligation assumed by either issuer will have significantly harmed the innocent creditors of that firm_ Rubin, supra, at p. 994.
Creditors of a debtor are also the focus of In re Chase and Sanborn Corp., 904 F.2d 588 (11th Cir.1990), where the court, in agreement with the Fifth Circuit, held that the' debtor’s estate was depleted by the transfer “to the detriment of the unsecured creditors,” and that “new value” cannot include such rights as subrogation, reimbursement, indemnification, and contribution, because a debtor’s preferential payment of actual mon*650etary value to a creditor under a guarantee agreement, in return for nothing more than the pre-existing right to assert a claim for (e.g.) reimbursement against the party whose debt was guaranteed depletes the tangible assets of the estate “to the detriment of the other creditors.”1
There must be some real, measurable economic value to the creditors of debtor before “new value” comes into play as a flow through benefit to debtor. Where C & C Land was also insolvent as here, there can be no benefit to the creditors of this debtor simply because Don Martin owned 100 percent of the stock of C & C Land.
B. Alfa raises the affirmative defenses of §§ 547(e)(1) and 547(c)(2).
1. Under § 547(c)(1), trustee cannot recover a preferential transfer to the extent it was intended by debtor and the preferred creditor to be a contemporaneous exchange for new value given to the debtor and was, in fact, a substantially contemporaneous exchange.
For the reasons set out above, it must be concluded that this defense is not available to Alfa. The new value must be “given to the debtor.” Indirect benefits must be of measurable economic benefit to the creditors of the debtor who made the preferential transfer. See In re Chase & Sanborn, 904 F.2d 588, which discusses new value in the context of § 547(c)(1). Alter ego is not available in this case. See the conclusion at 11(A)(5) above.
2. Under § 547(e)(4) trustee cannot recover a preferential transfer 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 not secured by an otherwise unavoidable security interest and on account of which new value the debtor did not make an otherwise unavoidable transfer to or for the benefit of such creditor.
For the reasons set out above, it must be concluded that this defense is not available to Alfa. While the language of Sections 547(c)(4) and 547(a)(2) appear to apply to the transaction sought to be avoided here, the history of this section and the cases decided under it favor an interpretation limited to new unsecured credit given after the voidable transfer which actually restores the depletion of the estate resulting from that transfer. Cf. In re Jet Florida System, Inc., 841 F.2d 1082 (11th Cir.1988). It was designed to give credit against the transfer when new value was extended to debtor directly.
But assuming that some indirect benefit was contemplated by this section, the conclusion reached above must hold under this subsection also. There is no measurable economic benefit available to the creditors of debtor because of the release of the mortgage lien to C & C Land. See In re Chase and Sanborn, 904 F.2d 588 at 595-597.
Alter ego principles for the reasons set out above, Part 11(A)(5), are not available to Alfa.
. This language is quoted because it makes clear that it is creditors of the debtor who must be benefltted by any indirect "new value” under 547(a)(2). The fact situation in Chase and Sanborn, 904 F.2d 588 differs in some respects from those in this case, and the holding there relates to "new value” under the exception of § 547(c)(1). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492505/ | MEMORANDUM OPINION
JERRY A. BROWN, Bankruptcy Judge.
This matter came on for trial on August 15, 1996 on the amended complaint of the debtor in possession, Enjet, Inc. (“Enjet”) seeking damages from Stapp Towing Co., Inc. (“Stapp”) allegedly suffered by Enjet as a result of Stapp’s wrongful retention of En-jet’s property. The court has considered the evidence, the memoranda, and arguments of counsel, and makes the following determinations.1
I. FINDINGS OF FACT
1. Enjet filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on January 3, 1995. The order confirming Enjet’s first amended plan of reorganization (the “Plan”) was entered on November 7,1995.
2. Enjet is engaged in the business of trading, blending and/or refining different types of oil into various petroleum products. *806(Pl. 34, Pretrial Order, Uncontested Material Fact # 4)
3. Stapp is a corporation organized under the laws of the State of Texas and is engaged in providing marine transportation services primarily with towing vessels and barges. (Pl. 34, Uncontested Material Fact # 5).
4. Prior to the bankruptcy filing, Enjet purchased 47,784.24 barrels of oil (the “Product”) from a third party. (Pl. 34, Uncontested Material Fact # 6).
5. Prior to the bankruptcy filing, Enjet contracted with Stapp for the transport and delivery of the Product to Galveston Terminals, Inc. (“GTI”) in Galveston, Texas. (Pl. 34, Uncontested Material Fact # 7).
6. The Product was subsequently loaded, prepetition, at a location on the Mississippi River in or near Geismar, Louisiana on Stapp’s Barges A-29 and DB-32. (Pl. 34, Uncontested Material Fact # 7).
7. According to Stapp Invoice No. 4602 and No. 4603, the charge for towing Barges A-29 and DB-32 containing the Product from Geismar, Louisiana to Galveston, Texas was $41,872.28. (Pl. 34, Uneontested Material Fact # 8).
8. When the barges arrived in Galveston, Texas on January 6, 1995, after the bankruptcy filing, Stapp refused to discharge the Product until Enjet paid all outstanding invoices for services rendered. Those invoices include invoices Nos. 4602 and 4603 and others for prepetition services, which total indebtedness was $208,962.23. (Pl. 34, Uncontested Material Fact # 10).
9. On January 6, 1995, Enjet tendered to Stapp a check in the amount of $41,872.28 for payment of the two invoices. (Pl. 34, Uncontested Material Fact # 9).
10. Stapp did not accept the tendered check, and informed Enjet that it had administratively frozen the Product so that it could exercise an administrative setoff to Stapp’s claim against Enjet. Stapp retained possession of the Product.
11. On January 12, 1995, Stapp notified Enjet that it was willing to accept Enjet’s $41,872.28 check, continue to hold $166,979.75 worth of Enjet’s fuel (10,365.19 barrels), and deliver the remaining fuel (37,419.05 barrels) to Enjet. Stapp also imposed the condition that Enjet would have to agree not to interfere, or cause any interference with, Stapp’s barges. Stapp notified Enjet that it intended to file a motion to lift the automatic stay so that it could administratively setoff the fuel that was subject to its administrative freeze against the debt that Enjet owed Stapp. Enjet refused Stapp’s offer.
12. Bruce Stapp, Chief Executive Officer for Stapp, testified that he also offered to return 37,419.05 barrels, and to sell to Enjet the remaining $166,979.75 worth of fuel that Stapp was holding.2
13. Stapp filed its Motion for Relief from the Automatic Stay and Abandonment, or Alternatively, for Adequate Protection (“motion for relief from automatic stay”) (Jt.Ex. 18) on January 17, 1995 seeking authority to proceed with an administrative setoff or, alternatively, for an order conditioning the delivery of the Enjet fuel on some form of adequate protection.
14. Enjet filed the pending adversary proceeding against Stapp seeking turnover of the Product on January 17,1995.
15. After negotiation and receiving acknowledgment and confirmation from Enjet that it would not interfere or cause any interference with Stapp’s barges, on or about January 20,1995, Stapp agreed to and did in fact discharge approximately 37,419.05 barrels of the Product into the possession of Enjet. However, Stapp maintained possession of approximately 10,365.19 barrels of the Product worth approximately $208,962.23 to protect the right to set off that it had asserted in its motion for relief from automatic stay. (Jt.Ex. 18). (Pl. 34, Uncontested Material Fact # 11).
16. The court denied Stapp’s motion for relief from automatic stay at a hearing on February 22, 1995. (Jt.Ex. 19). Immediate*807ly thereafter, Stapp delivered the remaining 10,865.19 barrels of Product to Enjet. (PL 34, Uncontested Material Fact # 11).
17. Enjet had originally purchased the Product to fulfill a spot contract (the “spot contract”) it had with Shell International Trading Company (“SITCO”). (Ex. 1). The spot contract provided that Enjet was to sell three types of oil to SITCO, including 100,-000 barrels of gasoil, and was to deliver the product between January 20 and 22, 1995. (Id. at 2). The ultimate destination of the oil sold to SITCO under the spot contract was Guatemala.
18. Enjet intended to supply the oil sold to SITCO under the spot contract in Galveston. The MTV PORT AU PRINCE was to transport the oil. Enjet had no direct contact with the shipowner, and no control over what the shipowner would charge for transporting the fuel.
19. John Kennelly (“Kennelly”), operations manager for Enjet, testified that it caused great concern when Stapp refused to discharge the Product because the type of oil on Stapp’s barges was hard to acquire.
20. Tim Mereier (“Mereier”), executive vice president for Enjet, is a trader who buys and sells oil products for Enjet. He testified that the gasoil required by the spot contract is used in the export market and is not found commercially in the United States. The ga-soil is unique in that it has a higher cetane level, is a lighter color, and has a much higher flashpoint than is normally commercially available. To fulfill the spot contract, Enjet had to blend several different types of petroleum products, similar to using a recipe, in order to get the right mix. Enjet’s Tank T-100-3 in Galveston was to be the primary receiver for all the components to make the right blend called for by the spot contract.
21. Mereier testified that when Stapp refused to deliver the Product, it caused great concern because there was no other material that Enjet could find commercially in the immediate area of Galveston that could satisfy the spot contract. He stated that Enjet had purchased the Product that was aboard the Stapp barges specifically in order to fulfill the spot contract with SITCO. After Stapp refused to deliver the barges, he personally contacted three companies, and other Enjet personnel contacted others, but no one could find fuel with a flashpoint that would be high enough to make an appropriate mix to fulfill the spot contract. Mereier further testified that Enjet needed all of the fuel aboard the Stapp barges to complete its mix. A release of only part of the fuel would not allow Enjet to fulfill the spot contract.
22. Mereier stated that in the absence of the Product aboard the Stapp barges, Enjet had to scramble to find a substitute material of a lesser quality, but that would still meet the SITCO requirements. As an alternative to using the Product, Enjet purchased approximately 70,000 barrels of fuel from the refinery in St. Rose, Louisiana to make a blend with approximately 30,000 barrels of fuel that Enjet had in Galveston.3
23. Mereier and Kennelly testified that in considering how to fulfill the spot contract without the Stapp Product, and using the 70,000 barrels of fuel from St. Rose, Enjet considered whether it would be better to divert the M/V PORT AU PRINCE or hire barges to move the fuel to Galveston. SIT-CO had advised Enjet that their estimate of the cost of rerouting the M/V PORT AU PRINCE was $45,000 to $55,000.
24. Kennelly testified that transporting the fuel by barge would require the M/V PORT AU PRINCE to be at anchor for approximately four days, with ship demur-rage running at $15,000 per day, or a total of approximately $60,000, or $80,000 if it took an extra day.4 In addition, the estimated charges for the barges was approximately $30,000. Thus, the total amount for using the barges would be at least $90,000, if all went well.
25. Mereier testified consistently with Kennelly that in analyzing what to do Enjet considered that the cost of moving the fuel *808by barge was equal to or greater than having the vessel load at two ports. In addition, if Enjet had to purchase other product and move it by barge, the company would be in further financial trouble. At that time, shortly after the bankruptcy filing, Enjet was in a cash crunch and did not have the financial wherewithal to charter more barges to move fuel.5 Enjet was hoping for a resolution of the matter with Stapp, but when a final decision had to be made around January 12, 1995, Enjet decided to divert the M/V PORT AU PRINCE.
26. Kennelly testified that Enjet and SITCO agreed to divert the MTV PORT AU PRINCE on January 16,1995. The confirming written notice was sent on January 17, 1995.
27. The MTV PORT AU PRINCE arrived at the diverted location — the IMTT Terminal in St. Rose, Louisiana on or about January 19, 1995, and departed on or about January 22,1995. The vessel arrived in Galveston on or about January 23, 1995, and departed on or about January 24,1995.
28. The court finds the testimony of Ken-nelly and Mercier to be credible.
29. The actual charges for diverting the MTV PORT AU PRINCE were $66,747.52. (Exs. 8 and 9). Kennelly testified that the costs for diverting the vessel are costs of the shipowner that are negotiated between the charterer and the shipowner. Enjet had no say in the amount of these costs. This amount was deducted from the invoice Enjet sent to SITCO for payment under the spot contract. (Ex. 9).
30. Because of the diversion, Enjet also incurred inspection charges for loading the MTV PORT AU PRINCE in St. Rose in the amount of $3,043.00. (Ex. 10).
31. Enjet also incurred charges of $801.50 ■ for inspection and analysis of the Product because Stapp broke up the Product into two deliveries. (Ex. 12).
32. Beginning on January 24, 1995, and for all times thereafter, Enjet paid the Bank of America interest at an annual rate of 9.5% on all borrowed funds.
33.Enjet filed its first amended complaint on February 22, 1996. (PI. 16). The first amended complaint seeks damages resulting from Stapp’s intentional violation of the automatic stay and wrongful detention or conversion of the Product in the amount of $74,587.31 and/or such other amounts proved at trial, plus legal interest and reasonable attorney’s fees and costs resulting from the failure of Stapp to deliver timely the oil.
II. CONCLUSIONS OF LAW
A. Core/Non-core
Stapp argues that Enjet’s claims of breach of contract and conversion raise non-core causes of action on which this court cannot render a final judgment without the consent of the parties. Stapp contends that it has never expressly or impliedly given such consent.
The analysis of the court’s jurisdiction to determine this case starts with 28 U.S.C. § 1334 which provides in pertinent part that:
“... the district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11.”
28 U.S.C. § 1334(b).
Although the district court is authorized to exercise jurisdiction in this case, the authority to determine contested issues has been delegated to this court pursuant to 28 U.S.C. § 157(a) which provides:
Each district court may provide that any or all cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11 shall be referred to the bankruptcy judges for the district.
28 U.S.C. § 157(a). In accordance with 28 U.S.C. § 157(a), the United States District Court for the Eastern District of Louisiana has referred to the bankruptcy judges of this district all cases under title 11 and all proceedings arising under title 11 or arising in *809or related to a case under title 11. Order of Reference of Bankruptcy Cases and Proceedings (E.D.La. Mar. 30,1990).
Subsection 157(b)(1) of Title 28 vests full judicial power in bankruptcy courts over “core proceedings arising under title 11, or arising in a case under title 11”. 28 U.S.C. § 157(b)(1). A non-exclusive list of core proceedings is set forth at 28 U.S.C. § 157(b)(2), and includes the following:
other proceedings affecting the liquidation of the assets of the estate or the adjustment of the debtor-creditor or the equity security holder relationship, except personal injury tort or wrongful death claims.
28 U.S.C. § 157(b)(2)(0).
The Fifth Circuit has further defined the types of proceedings that are included within core proceedings, as follows:
[A] proceeding is core under section 157 if it invokes a substantive right provided by title 11 or if it is a proceeding that, by its nature, could arise only in the context of a bankruptcy case.
In re Wood, 825 F.2d 90, 97 (5th Cir.1987).
Applying these precepts to the case at bar results in the conclusion that the debtor’s claims are core proceedings. Enjet and Stapp entered into the spot contract wherein Stapp agreed to transport and deliver the Product to GTI before Enjet filed for bankruptcy. After the bankruptcy filing, on January 6, 1995, Stapp refused to discharge the Product until Enjet paid all outstanding invoices for services rendered, including $167,089.95 in invoices for previously rendered services. Although Enjet tendered $41,872.28 to Stapp for payment of the two invoices for delivery of the Product, Stapp continued to refuse to discharge the Product. At the moment Stapp refused to discharge the Product, Stapp violated the automatic stay imposed by 11 U.S.C. § 362. But for the automatic stay, Stapp would conceivably have had warehouse liens, rights of reclamation, and/or other liens that entitled Stapp to keep the product until payment on all invoices was received. In other words, if En-jet had not been a debtor in possession, there would have been no right to demand the Product without payment of the prepetition debt. Therefore, the debtor’s claim comes within the definition of a core proceeding set forth in Wood because it invoked a substantive right provided by title 11 that could arise only in the context of a bankruptcy case. It further comes within Section 157(b)(2)(0) in that it will result in the adjustment of the debtor-creditor relationship. See also In re Pester Refining Co., 66 B.R. 801, 817 (Bankr. S.D.Iowa 1986) (conversion claim brought against a prepetition creditor who converted property of the estate post-petition was core proceeding).
Accordingly, the court finds that the debt- or’s claims are core proceedings and that this court may enter a final judgment on the claims in accordance with 28 U.S.C. § 157(b)(1).
Because the court finds that the debtor’s claims are core, it need not address the debtor’s alternative argument that Stapp’s failure to timely object to the court’s jurisdiction combined with its answer to the first amended complaint admitting that the case is a core proceeding impliedly consented to the jurisdiction of the bankruptcy court to render a final decision.
B. Turnover
The debtor’s original request made in the complaint for turnover of the Product is moot because Stapp ultimately turned over the Product to the debtor on January 20, 1995 and February 2,1995.
C. Breach of Contract Claim
1. Enjet’s entitlement to assert the claim
Stapp argues that the debtor’s claim for breach of contract is a new issue which was never raised in the debtor’s complaint or amended complaint, and that the debtor is attempting to “backdoor” its way into a damage award.
This argument is without merit. The pretrial order, filed on August 9, 1996 and signed by the attorneys for both parties, includes whether Stapp breached its contract with Enjet as a contested material fact and as an issue of law. It is a well-settled rule that a joint pretrial order signed by both parties supersedes all pleadings and governs *810the issues and evidence to be presented at trial. Branch-Hines v. Hebert, 939 F.2d 1311, 1319 (5th Cir.1991). Enjet is clearly entitled to assert its claim for breach of contract.
2.Enforceable contract
Stapp argues that an enforceable contract did not exist between Stapp and Enjet after Enjet filed for bankruptcy. Stapp contends that because the spot contract was entered into prepetition and was executory, it could only be considered a valid contract if it was assumed by Enjet and the assumption was approved by the court.
The debtor argues in response that the spot contract was not executory, but was an enforceable contract that was breached by Stapp. The debtor argues in the alternative that even if the spot contract was executory, the payment of the charter hire on or about January 6, 1995 by Enjet was an assumption of the contract.
Section 365(a) of the Bankruptcy Code permits the trustee to assume or reject any executory contract of the debtor subject to court approval. 11 U.S.C. § 365(a). While the Code does not define executory contract, courts applying Section 365(a) have indicated that “an agreement is executory if at the time of the bankruptcy filing, the failure of either party to complete performance would constitute a material breach of the contract, thereby excusing the performance of the other party.” In re Murexco Petroleum, Inc., 15 F.3d 60, 62-63 (5th Cir.1994). The common element of all executory contracts appears to be reciprocal obligations between the parties. In re Placid Oil Co., 72 B.R. 135, 138 (Bankr.N.D.Tex.1987), citing, NLRB v. Bildisco & Bildisco, 465 U.S. 513, 522 n. 6, 104 S.Ct. 1188, 1194 n. 6, 79 L.Ed.2d 482 (1984). A contract is not executory as to a party simply because the party is obligated to make payments of money to the other party. Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043, 1046 (4th Cir.1985); In re Placid Oil, 72 B.R. at 138.
Based on these precepts, the court finds that the spot contract was not executo-ry. Absent in this case are reciprocal obligations between the parties. Stapp and En-jet entered into the spot contract prior to the bankruptcy filing. Enjet loaded its oil onto Stapp’s barges for delivery to Galveston pri- or to the bankruptcy filing. At that point, Stapp was obligated to deliver the fuel to Galveston. Enjet’s only remaining obligation was to pay Stapp the agreed upon fee once the oil was delivered. Because the debtor’s only duty was to pay money, the spot contract is not executory. Furthermore, even if it were an executory contract, the tender of the check in the amount of $41,872.28 on January 6, 1995 was an assumption of the spot contract and satisfaction of the only performance obligation owed to Stapp by Enjet. Stapp’s argument that there was no enforceable contract must fail.
3.Breach of contract
Enjet and Stapp entered into a contract whereby Stapp agreed to transport and deliver two barges loaded with oil to GTI. When the barges arrived at GTI on January 6,1995, Stapp refused to discharge the Product unless it received payment for the present charter fee as well as all prepetition amounts owed. This refusal was made even though Enjet tendered a check for $41,872.28 for payment of the present charges. Stapp in effect held Enjet’s Product hostage to its alleged claim for setoff. Considering the bankruptcy filing, and the automatic stay imposed, this claim was clearly invalid. Stapp breached the spot contract with Enjet when Stapp refused to discharge Enjet’s fuel.
4.Damages
Texas law must be applied because both Enjet and Stapp are Texas corporations, and the breach occurred in Texas.
Damages for breach of contract are those losses that are the “natural, probable, and foreseeable consequence of the defendant’s conduct.” Federal Deposit Insurance Corp. v. Perry Brothers, Inc., 854 F.Supp. 1248, 1266 (E.D.Tex.1994). “The universal rule for measuring damages for breach of contract is just compensation for the loss or damages actually sustained.” Colorado Interstate Corp. v. CIT *811Group/Equipment Financing, Inc., 993 F.2d 743, 751 (10th Cir.1993) (applying Texas law).
Because Stapp did not discharge the Product, Enjet was forced to buy additional fuel in St. Rose, and divert the MTV PORT AU PRINCE to pick up the fuel in St. Rose. The diversion charges of $66,747.52 are recoverable.
In addition, Enjet incurred $3,043.00 for inspection charges for loading the M/V PORT AU PRINCE in St. Rose. These charges are recoverable.
Enjet also incurred recoverable charges of $801.50 for inspection of the Product because Stapp broke up delivery of the Product into two shipments.
Enjet claims it is entitled to damages of $1,663.29, consisting of interest Enjet paid Bank of America on the amount of $199,703.88 for the period of January 24, 1995 through February 24, 1995 ($199,703.8 x 9.5% x 32 days).
These damages were not sufficiently proved by Enjet. Although the parties stipulated that Enjet paid the Bank of America interest at an annual rate of 9.5% on all borrowed funds beginning on January 24, 1995, no evidence was introduced supporting the claim that Enjet actually incurred such interest rate charges during that period. This amount will not be permitted.
Consequently, Enjet is entitled to damages in the total amount of $70,592.02.
Enjet also claims entitlement to attorney’s fees.
Under Texas law, “[a] person may recover reasonable attorney’s fees from an individual or corporation, in addition to the amount of a valid claim and costs, if the claim is for: ... (8) an oral or written contract.” Tex.Civ.Prac. & Rem § 38.001. To recover attorney’s fees under Section 38.001, “the claimant must present the claim to the opposing party or to a duly authorized agent of the opposing party”. Tex.Civ.Prac. & Rem. § 38.002(2). The award of reasonable attorney’s fees to a plaintiff recovering on a valid claim founded on a written or oral contract preceded by proper presentment of the claim is mandatory. In re Smith, 966 F.2d 973, 978 (5th Cir.1992).
Enjet did not present evidence as to its attorney’s fees at the trial, and indicated it would file a statement if it prevailed on its claims. Accordingly, the court will enter an order setting forth appropriate deadlines for Enjet to file its evidence of presentment of the claim, and fee statement, and for Stapp to respond thereto.
5. Mitigation of damages
Stapp argues that Enjet is not entitled to recover anything because it failed to mitigate its damages. Stapp first argues that Enjet refused to give Stapp simple assurances on January 12, 1995 that Enjet would not interfere, or cause any interference with, Stapp’s barges. Stapp contends that if Enjet would have made such assurances, Enjet could have had substantially all of its fuel on January 12,1995.
The evidence does not support Stapp’s argument. The evidence showed that on January 12, 1995, Stapp made an offer to keep Enjet’s check for $41,872.28, return 37,419.05 barrels of fuel, and keep 10,365.19 barrels, if Enjet would agree not to interfere with Stapp’s barges. This offer can hardly be said to result in the return of “substantially all” of Enjet’s fuel. In addition, the evidence showed that all of the fuel was needed to comply with the spot contract. The return of 37,491.05 barrels, while keeping 10,365.19 barrels, would not have permitted Enjet to fulfill the spot contract. Enjet would still have had to buy additional fuel. Finally, there was no evidence that Enjet ever had any intention to interfere with Stapp’s barges, let alone that any interference actually took place. This “offer” was hardly a reasonable one because Stapp retained possession of a large quantity of Enjet’s oil.
Stapp further argues that Enjet failed to mitigate its damages because it refused Stapp’s alternative offer to return the 37,419.05 barrels, and to sell to Enjet, at market value, the remaining $166,979.75 worth of fuel that Stapp was holding.
This argument is absurd. Enjet can hardly be expected to mitigate its damages by paying Stapp for fuel Enjet already owned. *812Stapp’s offer to sell Enjet its own oil in return for the amount of the prepetition invoice amount owed was a coercive collection tactic that will not be tolerated.
Stapp’s claim that Enjet failed to mitigate its damages fails.
D. Conversion Claim
Having found that Stapp is liable to Enjet on the breach of contract claim, the court need not consider the debtor’s alternative claim for damages resulting from Stapp’s alleged conversion of the Product.
III. CONCLUSION
For the foregoing reasons, the court finds in favor of Enjet and against Stapp on En-jet’s claim for breach of contract. Damages are awarded in favor of Enjet in the amount of $70,592.02. As to attorney’s fees, Enjet is to file evidence of presentment of the claim, a verified schedule of attorney’s fees, and a supporting memoranda indicating why its evidence constitutes presentment of the claim in compliance with Texas law by March 17, 1997. Stapp’s opposition is due by March 28, 1997. Enjet may file a reply, if it chooses to do so, by April 4, 1997. The court will rule on the question of attorney’s fees on the memoranda, unless on or before April 4, 1997, either party requests oral argument.
An order will be entered in accordance with this memorandum opinion. A judgment will be rendered after the determination of the amount of attorney’s fees, if any, to be awarded.
. This memorandum opinion constitutes the court’s findings of fact and conclusions of law in accordance with Bankruptcy Rule 7052. The parties stipulated in the pretrial order that the court has jurisdiction over the matter under 28 U.S.C. § 1334(b), and that this is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(E) and (O). (PI. 34 at 2).
. The court places little weight on this testimony because Stapp did not own the fuel it was offering to sell back to Enjet. It was owned by Enjet.
. The spot contract was ultimately amended because Enjet could not comply with the original terms due to unavailability of the Product. (See amendment to Ex. 1).
. Paragraph 12 of the spot contract provided for a demurrage rate of $14,000 per day. (Ex. 1).
. If the vessel were diverted, the charges could be offset with SITCO and would therefore not require an immediate outlay of cash. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492506/ | MEMORANDUM
KEITH M. LUNDIN, Bankruptcy Judge.
The issue is whether the three year “look back” for the nondischargeability of taxes under 11 U.S.C. § 523(a)(1)(A)1 (incorporating 11 U.S.C. § 507(a)(8)(A)®2) is presumed or supplied by this debtor’s prior bankruptcy case during the three year period. It is not. To prepare the government’s equitable arguments for trial, it is also determined that federal income taxes for 1986 were a prepetition claim in the bankruptcy ease filed by this debtor on February 9, 1987. The following are findings of fact and conclusions of law. Fed.R.BanKR.P. 7052.
I.
Francis V. Nolan, Jr. filed his first Chapter 7 petition on February 9, 1987. Nolan’s 1986 tax return was due April 15, 1987. Nolan received an extension and eventually filed his 1986 tax return on October 19,1989. The IRS made an assessment on December 4, 1989.3 On May 25, 1993, Nolan received a *887discharge.4
On August 18,1995, Nolan filed his second Chapter 7 petition. In this adversary proceeding, Nolan argues for summary judgment that his federal income taxes for 1986 are dischargeable because 1986 taxes are now outside the three year “look back” in 11 U.S.C. §§ 523(a)(1)(A) and 507(a)(8)(A)®. The government moved for summary judgment that the three year look back is tolled or extended by 11 U.S.C. § 108(c)5 for the period (and then some) during which Nolan was a debtor in the prior bankruptcy ease or is enlarged by “equitable tolling” under 11 U.S.C. § 105(a).6
II.
This complicated interaction between bankruptcy and tax law is now well worn by reported opinions. Two schools of thought have emerged:
1. A majority, including courts of appeals in the Third 7, Seventh8, Ninth9 and Tenth10 Cireuits toll or enlarge the time periods for the nondischargeability of taxes in § 507(a)(8)(A) based on a prior bankruptcy. Among these courts there are two theories— some rely on the extension of time provisions in § 108(c) of the Bankruptcy Code 11; others invoke the equitable powers of bankruptcy courts under § 105(a).12
2. A minority of courts led by Bankruptcy Judge Benjamin Cohen in the Northern District of Alabama hold that the time periods in § 507(a)(8)(A) are statutory elements of the cause of action in § 523(a)(1) and are not automatically enlarged or tolled by a prior bankruptcy case.13 These courts recognize that equitable principles may supply or raise a presumption with respect to a timeliness element of the government’s cause of action under § 523(a)(1), but only upon proof of debtor misconduct or abuse.
For the many reasons discussed by Judge Cohen in In re Turner, 182 B.R. 317 *888(Bankr.N.D.Ala.1995), adhered to on reconsideration, 195 B.R. 476 (Bankr.N.D.Ala.1996), and In re Gore, 182 B.R. 293 (Bankr.N.D.Ala.1995), and by Judge Graves in In re Pastula, 203 B.R. 941 (Bankr.E.D.Mich.1997), the three year look back for nondis-ehargeability of taxes in § 507(a)(8)(A)(i) is not tolled or extended merely because the debtor had a prior bankruptcy case during that three year period. The arguments are summarized below.
A.
The three year look back in § 507(a)(8)(A)® is a substantive element of the government’s cause of action under § 523(a)(1)(A), not a statute of limitations.14 Ordinary principles of “equitable tolling” employed by many of the reported decisions are not applicable.15 This element of the government’s cause of action can be supplied by a court applying equitable principles only upon proof of substantial debtor misconduct.16 The courts that have allowed “equitable tolling” without proof of debtor misconduct have mistaken the three year look back for a statute of limitations. If this debtor committed wrongful acts justifying the equitable relief sought by the IRS, 11 U.S.C. § 105 provides a remedy.17 Nothing in § 105 provides that remedy based only on a permitted bankruptcy filing18 during the three year period in § 507(a)(8)(A)®.
B.
Sections 523(a)(1)(A) and 507(a)(8)(A)® are not ambiguous. Resort to legislative history to support exceptions to or extensions of the three year look back is not appropriate. These fundamental bankruptcy tax provisions are the result of “ ‘a series of carefully crafted compromises.’” In re Turner, 195 B.R. at 486 (quoting Community for Creative Non-Violence v. Reid, 490 U.S. 730, 748 n. 14, 109 S.Ct. 2166, 2177 n. 14, 104 L.Ed.2d 811 (1989)). Enlargement or tolling of the three years based on legislative history is not indicated because the statute as written leads to no absurd results.19
*889c.
11 U.S.C. § 108(e) is not applicable by its own terms to this action under § 523(a)(1). Section 108(e) affects the expiration of some time periods under applicable “nonbankruptcy law.” 11 U.S.C. § 523(a)(1) is not “nonbankruptcy law.”20 The three year look back in § 507(a)(8)(A)(i) is not extended or tolled by § 108(c). That provisions of the Internal Revenue Code such as 26 U.S.C. § 650321 may be extended by 11 U.S.C. § 108(c)22 says nothing about the dis-chargeability in bankruptcy of taxes that have aged beyond the three years in § 523(a)(1) and § 507(a)(8)(A)(i).23
D.
11 U.S.C. § 523(b)24 is unambiguous proof that Congress contemplated and empowered debtors to discharge taxes in successive bankruptcy cases. Notwithstanding the ruminations in some reported decisions,25 it is not plausible that Congress overlooked *890the possibility that debtors would file successive bankruptcy cases in which the automatic stay would interrupt the collection efforts of the IRS. Section 528(b) states that non-fraud taxes26 declared nondischargeable in a prior bankruptcy case can be discharged in a subsequent bankruptcy case. Section 523(b) necessarily contemplates more than one bankruptcy ease and more than one automatic stay.
Section 523(b) is part of the complex balance of interests in. the tax provisions of the Bankruptcy Code.27 The cross-reference in § 523(b) to § 523(a)(1) incorporates the cross-reference in § 523(a)(1) to § 507(a)(8)(A)(i). Put another way, the three year characteristic of a nondischargeable tax claim under § 523(a)(1) is directly implicated in § 523(b) analysis — when a taxpayer files successive bankruptcy cases, the three year look back is an element the government must prove to establish the nondischargeability of taxes in the last filed case. Courts that have been quick to find “equitable” exceptions to the counting of the three year look back in § 507(a)(8)(A)© have not addressed the conflict this creates with the logic and plain language of § 523©).
If Congress intended to except the duration of a prior bankruptcy case from the three year period in § 507(a)(8)(A)© and yet to allow the discharge of (non-fraud) taxes in a subsequent bankruptcy case based on the passage of time — a clear legislative statement of this intent would be found somewhere in §§ 523©), 523(a)(1) or 507(a)(8)(A)©. The government’s position that a bankruptcy filing during the three year period defeats § 523©) without regard to taxpayer fraud or misconduct is materially inconsistent with the statutory scheme that the passage of time changes nondischargeable (non-fraud) taxes into dischargeable claims in successive bankruptcy cases.
E.
11 U.S.C. § 507(a)(8)(A)© specifically states the circumstances under which the three year look back is tolled or extended; it is inappropriate for courts to read a different extension provision into a statute that already contains an extension rule. The three year period in § 507(a)(8)(A)© is counted from the “last due date ... including extension.” This debtor received an extension of the due date for his 1986 tax return in 1987. The three year counting for priority and nondischargeability was accordingly shifted in time by the statute itself. If Congress also intended to automatically suspend the three year look back for any period during which the taxpayer was a debtor in a prior bankruptcy case it would have said so.
F.
The immediately adjoining subsection of the Bankruptcy Code — § 507(a)(8)(A)(ii)28— also contains a special statutory rule for the counting of the 240 day period in that section. The 240-days in § 507(a)(8)(A)(ii) are suspended for any period during which “an offer in compromise” is pending between the taxpayer and the IRS. The proximity of this specific counting rule demonstrates again that Congress focused on the need for some extensions and tolling of the time periods in § 507(a)(8). The precision with which Congress crafted the balance between the dis-chargeability of taxes and the collection *891needs of the government in § 507(a)(8)(A)(i) and (ii) argues strongly against judicial tinkering with the counting rules in these subsections.
G.
There is evidence elsewhere in § 523 that Congress knows how to build precise extension provisions into the definitions of nondis-chargeable claims that include time periods. In 11 U.S.C. § 523(a)(8) Congress declared nondischargeable student loans that were first due within seven years before a bankruptcy filing. Excluded by law from the counting of this seven year period is any “suspension of the repayment period.” 11 U.S.C. § 523(a)(8)(A). See also 42 U.S.C. § 292f(g) (HEAL loans). The courts have recognized that the broad suspension language in § 523(a)(8)(A) extends or tolls the seven year period for time spent by the borrower in a prior bankruptcy case.29
There is no analog to the broad extension provision in § 523(a)(8)(A) in § 523(a)(1) or in § 507(a)(8)(A)(i). Instead there is only the narrow expansion of the three years in § 507(a)(8)(A)(i) to reflect extensions granted by the IRS for the filing of tax returns.
With ample evidence that Congress knows how to design both broad and narrow rules for the counting of time periods in the exceptions to discharge in bankruptcy, it is not for the judiciary to embrace a broad rule where Congress has enacted a narrow one.
H.
“Fears” of debtor abuse of the IRS and manipulation of bankruptcy filings to avoid the nondischargeability of taxes are resolved by other provisions of the Bankruptcy Code. For example, 11 U.S.C. § 34930 permits a bankruptcy court to insulate taxes from discharge at dismissal of a bankruptcy case if it appears that the debtor is serially filing and dismissing to manipulate the dis-chargeability of taxes.31 The bankruptcy court can grant the IRS relief from the stay for cause under § 362(d)(1) where the passage of time in a bankruptcy case will inappropriately defeat the collection rights of the government.
Diligence by the IRS or a state tax collector is relevant. Did the IRS seek relief from the stay in the prior bankruptcy ease? Did the IRS ask for a condition on dismissal in the prior bankruptcy ease? How much collection time did the IRS have between or during prior bankruptcy cases?32 That the facts matter is another way of saying that equitable principles are not applied automatically just because a prior bankruptcy case was pending during the three year period in § 507(a)(8)(A)(i).
III.
The Supreme Court recently instructed the bankruptcy courts to refuse equitable arguments that change the priorities of debts fixed by Congress in the Bankruptcy Code. In United States v. Noland?33 — U.S. —, 116 S.Ct. 1524, 134 L.Ed.2d 748 (1996), the Supreme Court held that a bankruptcy court may not invoke equity to subordinate tax penalty claims in a manner that changes the statutory priorities in § 507.
*892Section 507(a)(8) is part of the debt priority scheme at issue in Noland. Section 507(a)(8) becomes involved in this nondis-chargeability dispute only because of the cross-reference in § 528(a)(1) — in its ordinary life, § 507(a)(8) deals with the priority of debts for many important reasons, including the order in which bankruptcy estates are distributed to creditors.
Equitable tolling or extension of the three years in § 507(a)(8)(A)(i) as argued by the IRS has exactly the effect rejected by the Supreme Court in Noland — it would alter the extent of the government’s statutory priority for taxes based on an equitable principle whenever a debtor had a prior bankruptcy case during the three year period.
IV.
Sixth Circuit precedent weighs against the government’s position that a prior bankruptcy supplies the three year element in § 507(a)(8)(A)(i). In Smith v. United States (In re Smith), 96 F.3d 800 (6th Cir.1996), the Sixth Circuit refused to apply Bankruptcy Rule 9006 to extend the two year period for the nondischargeability of taxes in § 523(a)(l)(B)(ii).34 The court observed “we have been rather consistent in denying ‘equitable’ pleas to disregard the strict timing rules of the Tax and Bankruptcy Codes.” Id. at 802. The Sixth Circuit acknowledged the important distinction between ordinary procedural rules for counting time periods and the substantive provisions of the Bankruptcy Code that define nondisehargeable tax claims: “Here, we are not dealing with bankruptcy procedural rules but with the legal status of a debt at the time of the filing of the petition.” Id.
At issue in Smith, was § 523(a)(l)(B)(ii) which renders nondisehargeable any income tax with respect to which a late return was filed within two years before a bankruptcy petition. Smith gave a courier his (overdue) income tax returns on Friday, November 22, 1991. The courier delivered the returns to the IRS on Monday, November 25, 1991. Smith filed bankruptcy on November 23, 1993. Smith argued that the counting provisions of the Bankruptcy Rules moved the filing of his tax returns outside of the two years in § 523(a)(l)(B)(ii).
The Sixth Circuit refused to allow procedural rules to change the nondisehargeable status of the IRS’s claim at the petition. If Smith “filed for bankruptcy two days later, he would not now owe taxes.... The result strikes one as arbitrary and it is arbitrary in the sense that two years is just an arbitrary number chosen to set a line somewhere in the proximity of reasonableness.... [T]he Bankruptcy Code should be read in a ‘straightforward’ manner.” Smith, 96 F.3d at 803. A “straightforward” reading of §§ 523(a)(1)(A) and 507(a)(8)(A)(i) does not find the counting rule argued here by the IRS.
In United States v. Aberl (In re Aberl), 78 F.3d 241 (6th Cir.1996), the Sixth Circuit recognized that Congress knows how to protect the IRS from debtor “tactics” that allow the time periods for priority and nondis-chargeability to run under § 507 of the Bankruptcy Code. The taxpayer in Aberl made an offer in compromise to the IRS before the IRS formally assessed taxes. The IRS then assessed taxes and the taxpayer filed a Chapter 7 petition more than 240 days after that assessment. Because of the age of the taxes (1981 and 1983 taxes in a bankruptcy filed in 1991), the IRS’s only argument for priority and nondischargeability was 11 U.S.C. § 507(a)(8)(A)(ii) — that the taxes had been “assessed within 240 days [of the bankruptcy petition], plus any time plus 30 days during which an offer in compromise with respect to such taxes that was made within 240 days after such assessment was pending, before the date of the filing of the petition.”
As explained by the Sixth Circuit, the special “tolling” provision in § 507(a)(8)(A)(ii) *893was crafted by Congress to stop manipulation of the 240-day period for priority and nondisehargeability:
A review of section 507’s legislative history reveals Congress’ concern that debtors might use an offer in compromise to delay negotiations with the IRS, following the IRS’s formal assessment of unpaid taxes, until the debtors’ tax liability loses priority status. The statute was therefore enacted to give the IRS 240 days to collect the taxes that are due following its formal assessment of unpaid taxes. Indeed, section 507 attempts to balance two competing interests: the debtor’s interest in obtaining a fresh start free from creditors’ claims; and, the IRS’s interest in collecting unpaid taxes.
Aberl 78 F.3d at 244.
Construing the statute literally and strictly, the Sixth Circuit held that the debtor’s offer in compromise before assessment did not toll the 240-day period in § 507(a)(8)(A)(ii) — only an offer in compromise after assessment has that effect. The Sixth Circuit refused the IRS’s plea to reform § 507(a)(8)(A)(ii): “[Section] 507(a)[ (8) ](A)(ii) provides a distinction between pre-assessment and post-assessment offers in compromise submitted to the IRS, ... courts may not reform statutes to correct perceived inadequacies.” Aberl, 78 F.3d at 244.
Aberl is instructive here for two reasons. First, the Sixth Circuit recognized that Congress knows how to build into a bankruptcy tax statute a tolling provision that protects the public fisc from the running of the time periods for priority and nondis-chargeability. Congress wrote a specific provision into § 507(a)(8)(A)(ii) changing the counting of the 240 day period to accommodate the government’s consideration of a debtor’s offer in compromise. The preceding subsection at issue here — § 507(a)(8)(A)(i)— excludes from its three year period any extension of time granted by the IRS for the filing of a tax return. The new exclusion the IRS would have this court write into § 507(a)(8)(A)(i) — that a prior bankruptcy tolls, extends or supplies the three year element of the government’s case — is precisely the sort of statutory reformation refused by the Sixth Circuit in Aberl.35
Secondly, Aberl and Smith demonstrate the Sixth Circuit’s respect for the deliberate legislative balances in the Bankruptcy Code sections dealing with the dischargeability of taxes. Constructions that enlarge nondis-chargeability at the expense of the fresh start require clear statutory support. There is no clear statutory support for presuming or supplying the three year look back in § 507(a)(8)(A)(i) based alone on a prior bankruptcy ease. Without evidence of debtor misconduct or scheme to avoid taxes, it is unlikely that the Sixth Circuit would depart from the logic of Aberl and Smith to declare a broad new exception to the rule that taxes can be discharged in successive bankruptcy cases under § 523(b).
V.
The IRS is entitled to a trial of its contention that the three year element in § 507(a)(8)(A)(i) should be suppled by the court in this adversary proceeding. This argument from equitable principles cannot be resolve on summary judgment.
It may be relevant to the government’s equitable argument whether the debtor’s tax habihty for 1986 was a pre- or postpetition claim in the 1987 bankruptcy.36
The debtor’s 1986 tax labilty was a prepetition debt in the bankruptcy case filed on February 9, 1987. Debt means labilty on a claim. 11 U.S.C. § 101(12). *894See Pennsylvania Dep’t of Public Welfare v. Davenport, 495 U.S. 552, 558, 110 S.Ct. 2126, 2130-81, 109 L.Ed.2d 588 (1990). Claim means “right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, un-matured, disputed, undisputed, legal, equitable, secured or unsecured.” 11 U.S.C. § 101(5)(A). Congress intended by this language to adopt “the broadest available definition of ‘claim.’” Johnson v. Home State Bank, 501 U.S. 78, 83, 111 S.Ct. 2150, 2154, 115 L.Ed.2d 66 (1991).
For purposes of priority (and nondis-chargeability) of taxes, “claim” includes un-matured and unliquidated rights to payment for “a taxable year ending on or before the date of the filing of the petition....” 11 U.S.C. § 507(a)(8)(A)(i). See Raiman v. State Bd. of Equalization (In re Raiman), 172 B.R. 933, 940 (9th Cir. BAP 1994) (“taxable year” fixes reference point for taxes entitled to priority).
This debtor’s 1986 tax year ended on December 31, 1986, before the first bankruptcy petition. Because “claim” includes unma-tured and unliquidated rights to payment, it is not outcome determinative that the debt- or’s 1986 tax return was not yet due at the petition on February 9, 1987. Hypothetical transactions after the petition but before April 15,1987 that could affect the amount of tax owed could not defeat the existence of a claim for 1986 taxes at the petition.
United States v. Chavis (In re Chavis), 47 F.3d 818 (6th Cir.1995), is not contrary. Chavis holds that untimely filed tax claims are disallowed in a Chapter 13 case. The petition in Chavis was filed on May 23,1991. In a note, the Sixth Circuit said this about tax claims for the 1991 tax year:
Because the 1991 tax liability was not due until 1992, the 1991 tax liability is a non-dischargeable post-petition debt (pursuant to 11 U.S.C. §§ 1305(a)(1) and 1328(a)) and is not at issue.
Chavis, 47 F.3d at 819 n. 4.37
These parties concede that 1987 taxes were post-petition claims under Chavis in Nolan’s 1987 bankruptcy. However, Chavis did not address the status of tax claims for the prior calendar year when a bankruptcy petition is filed in the “gap” after December 31st and before April 15th. For such claims, the taxable year has ended (for most debtors), the government’s right to payment has accrued; all that awaits the passage of time is the filing of returns. Taxes for 1986 were prepetition claims in this debtor’s 1987 bankruptcy ease.
An appropriate order will be entered.
ORDER
For the reasons stated in the memorandum filed contemporaneously herewith, IT IS ORDERED, ADJUDGED and DECREED that the three year look back element of the government’s cause of action under 11 U.S.C. § 523(a)(1)(A) and 11 U.S.C. § 507(a)(8)(A)(i) is not tolled, extended, presumed or supplied as a matter of law by this debtor’s prior bankruptcy ease. IT IS FURTHER ORDERED that the government’s equitable arguments cannot be resolved on summary judgment and will be set for trial by a separate order. IT IS FURTHER ORDERED that the debtor’s federal income taxes for 1986 were a prepetition elaim in the bankruptcy case filed by this debtor on February 9,1987.
IT IS SO ORDERED.
. 11 U.S.C. § 523(a)(1)(A) provides:
(a) A discharge under section 727 ... 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)(8) of this title_
. 11 U.S.C. § 507(a)(8) was renumbered from 11 U.S.C. § 507(a)(7) by the Bankruptcy Reform Act of 1994, Pub.L. No. 103-394, § 304(c), 108 Stat. 4150 (Oct. 22, 1994). No substantive change was made in 1994. Although some of the cases cited below pre-date the 1994 amendments and use the prior numbering, all cites have been conformed to the new numbering. 11 U.S.C. § 507(a)(8)(A)© provides:
(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 filing 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.
.At oral argument in this adversary proceeding, counsel for the IRS conceded that the December 4, 1989 assessment was a technical violation of the automatic stay under the Bankruptcy Code in effect in 1989. But see 11 U.S.C. § 362(b)(9)(D) (as amended by the Bankruptcy Reform Act of 1994, Pub.L. No. 103-394, § 116, 108 Stat. 4150 (Oct. 22, 1994)). The IRS defended that it had no notice of bankruptcy at its 1989 assessment. Debtor’s current counsel thought the IRS had notice in the prior bankruptcy case. The main file for the debtor's first case, made an exhibit on these cross-motions for summary judgment, reveals that the IRS was not listed as a creditor and was not included on the mailing matrix in the first bankruptcy case.
. There is disagreement why entry of discharge was delayed in the debtor’s first case. Counsel for the debtor claims the delay was due to the filing of complaints objecting to discharge and dischargeability. The IRS suggests that the delay was caused by things the debtor did or failed to do during the first case. This factual dispute is relevant only to the government’s equitable arguments and is reserved for trial for the reasons discussed below.
. 11 U.S.C. § 108(c) provides:
(c) [I]f applicable nonbankruptcy law, an order entered in a nonbankruptcy proceeding, or an agreement fixes a period for commencing or continuing a civil action in a court other than a bankruptcy court on a claim against the debtor ... and such period has not expired before the date of the filing of the petition, then such period does not expire until the later of—
(1) the end of such period, including any suspension of such period occurring on or after the commencement of the case; or
(2) 30 days after notice of the termination or expiration of the stay under section 362 ... with respect to such claim.
. 11 U.S.C. § 105(a) provides:
(a) The court may issue any order, process, or judgment that is necessary or appropriate to cany 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.
. In re Taylor, 81 F.3d 20 (3d Cir.1996).
. Montoya v. United States (In re Montoya), 965 F.2d 554 (7th Cir.1992).
. West v. United States (In re West), 5 F.3d 423 (9th Cir.1993), cert. denied, 511 U.S. 1081, 114 S.Ct. 1830, 128 L.Ed.2d 459 (1994). See Brickley v. United States (In re Brickley), 70 B.R. 113 (B.A.P. 9th Cir.1986).
. United States v. Richards (In re Richards), 994 F.2d 763 (10th Cir.1993).
. See, e.g., In re West, 5 F.3d at 426-27; In re Taylor, 81 F.3d at 22-24; In re Montoya, 965 F.2d at 557-58.
. See, e.g., In re Richards, 994 F.2d at 765-66.
. See Quenzer v. United States (In re Quenzer), 19 F.3d 163 (5th Cir.1993); In re Postula, 203 B.R. 941 (Bankr.E.D.Mich.1997); Turner v. United States (In re Turner), 182 B.R. 317 (Bankr. N.D.Ala.1995), adhered to on reconsideration, 195 B.R. 476 (Bankr.N.D.Ala.1996); In re Macko, 193 B.R. 72 (Bankr.M.D.Fla.1996); Clark v. Internal Revenue Serv. (In re Clark), 184 B.R. 728 (Bankr.N.D.Tex.1995); Gore v. United States (In re Gore), 182 B.R. 293 (Bankr.N.D.Ala.1995); Saunders v. United States (In re Saunders), No. *88894-23489-BKR-RBR, 1995 WL 865471 (Bankr. S.D.Fla. Dec. 26, 1995).
. A statute of limitations fixes the “maximum time periods during which certain actions can be brought or rights enforced. After the time periods set out in the applicable statute of limitations has run, no legal action can be brought regardless of whether any cause of action ever existed.” Black's Law Dictionary 927 (6th ed.1990). The three year 'Took back” is not a statute of limitations — it is part of the definition of the taxes that are nondischargeable in a bankruptcy case. See Smith v. United States (In re Smith), 96 F.3d 800, 802 (6th Cir.1996) (two year period for nondis-chargeability of taxes under § 523(a)(l)(B)(ii) is not a procedural rule but is part of the "legal status” of the government’s claim).
. Equitable tolling and equitable estoppel apply to a statute of limitations to determine when it begins to run ánd when a defendant is barred from asserting the defense of a statute of limitations. See Hallstrom v. Tillamook County, 493 U.S. 20, 27, 110 S.Ct. 304, 309, 107 L.Ed.2d 237 (1989) (running of a statute of limitations “is traditionally subject to equitable tolling."). However, "equitable tolling or equitable estoppel can never be asserted to create a right nor to give a cause of action, but rather it serves only to prevent loss otherwise inescapable and to preserve rights already acquired.... Estoppel operates always as a shield and never as a sword.” Chattanooga v. Louisville & Nashville R.R. Co., 298 F.Supp. 1, 9 (E.D.Tenn. 1969), aff'd, 427 F.2d 1154 (6th Cir.), cert. denied, 400 U.S. 903, 91 S.Ct. 141, 27 L.Ed.2d 140 (1970).
. See, e.g., Welsh v. United States, 844 F.2d 1239 (6th Cir.1988) (equity may supply rebuttable presumption that element of cause of action exists where defendant negligently destroyed evidence foreseeably pertinent to litigation).
. Section 105 of the Bankruptcy Code confirms the bankruptcy court's equitable powers. A debtor might commit fraud or abuse the bankruptcy process sufficient to inspire a bankruptcy court to use § 105 to presume or supply the three year element in § 507(a)(8)(A)(i). In support of its motion for summary judgment, the IRS has not attempted to prove fraud, abuse of the bankruptcy system, or any scheme to manipulate bankruptcy filings to defeat its claims— except to argue that this debtor had a prior bankruptcy case.
. No claim is made that Nolan was ineligible to file either bankruptcy, nor is it disputed that Nolan is now eligible for a second discharge in bankruptcy. See 11 U.S.C. § 727(a)(8).
. This is not one of those "rare cases [in which] the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters." United States v. Ron Pair Enters. Inc., 489 U.S. 235, 242, 109 S.Ct. 1026, 1031, 103 L.Ed.2d 290 (1989).
. We know that "applicable nonbankruptcy law” in 11 U.S.C. § 108(c) means state law or federal law other than the Bankruptcy Code. See In re Quenzer, 19 F.3d at 165 ("Under the plain language of section 108(c), ... that suspension applies only to nonbankruptcy law and nonbank-ruptcy proceedings. Absent some other basis for tolling the section 507 time limit, the Quenzers' tax liability ... must be discharged.”). See also Patterson v. Shumate, 504 U.S. 753, 112 S.Ct. 2242, 119 L.Ed.2d 519 (1992) (interpreting the identical phrase in 11 U.S.C. § 541(c)(2)); Rogers v. Corrosion Products, Inc., 42 F.3d 292, 297 (5th Cir.), cert. denied, - U.S. -, 115 S.Ct. 2614, 132 L.Ed.2d 857 (1995) ("applicable non-bankruptcy law” in 11 U.S.C. § 108(c) means "other federal or state law”); Aslanidis v. United States Lines, 7 F.3d 1067, 1073 (2d Cir.1993) ("§ 108(c)(1) refers to only 'special suspensions’ that are found in nonbankruptcy provisions such as the Internal Revenue Code.”).
. 26 U.S.C. § 6503(h) provides:
The running of the period of limitations provided in section 6501 or 6502 on the making of assessments or collection shall, in a case under title 11 of the United States Code, be suspended for the period during which the Secretary is prohibited by reason of such case from making the assessment or from collecting and—
(1) for assessment, 60 days thereafter, and
(2) for collection, 6 months thereafter.
. The interaction of 11 U.S.C. § 108(c) and 26 U.S.C. § 6503 retains importance in bankruptcy though not because of any imagined affect on the dischargeability of taxes. For example, a debtor who tries and fails in a Chapter 13 case does not escape the assessment or collection of taxes upon dismissal because 11 U.S.C. § 108(c) and 26 U.S.C. § 6503 extend the assessment and collection rights of the government.
. Forced application of § 108(c) in this context leads to awkward outcomes that confess the defects in this approach. For example, the Bankruptcy Appellate Panel for the Ninth Circuit's opinion in Brickley, is often cited as the seminal decision applying § 108(c) to extend the time periods for nondischargeability under § 523(a)(1) and § 507(a)(8). Ten years after Brickley, the Ninth Circuit BAP was confounded by its own logic in Gurney v. Arizona Dep’t of Revenue (In re Gurney), 192 B.R. 529 (B.A.P. 9th Cir.1996). At the time, Arizona law fixed no time limitation on the collection of state excise taxes, thus Arizona law had no provision tolling that nonexistent limitation. Absent a tolling provision under state law to be grafted onto the counting periods in § 507(a)(8)(A) via § 108(c), the BAP’s prior decision in Brickley (and the adoption of Brickley by the Ninth Circuit in West) provided no basis for tolling or extending the time requirements for the nondischargeability of Arizona state taxes based on the pendency of a prior bankruptcy case. In other words, because the State of Arizona had the strongest possible tax collection system — one with no limit on the time within which the state could collect taxes — the tolling by "incorporation" of non-bankruptcy law into § 507(a) via (misuse of) § 108(c) was not available. Ironically, West and Brickley would only protect the priority and non-dischargeability of taxes from jurisdictions with less rigorous tax collection systems. To resolve this problem, the Ninth Circuit BAP reached into the bag of equity and found "equitable tolling” principles in § 105. A cynic might say that logical deficiencies in the use of § 108(c) in Brickley emerged in Gurney and inspired the BAP to fill the gap with equity under § 105(a).
. 11 U.S.C. § 523(b) provides:
Notwithstanding subsection (a) of this section, a debt that was excepted from discharge under subsection (a)(1), (a)(3), or (a)(8) of this section, under section 17a(l), 17a(3), or 17a(5) of the Bankruptcy Act, under section 439A of the Higher Education Act of 1965, or under section 733(g) of the Public Health Service Act in a prior case concerning the debtor under this title, or under the Bankruptcy Act, is dis-chargeable in a case under this title unless, by the terms of subsection (a) of this section, such debt is not dischargeable in the case under this title.
. See In re Richards, 994 F.2d at 765; In re Gurney, 192 B.R. at 535 & 539; In re Davidson, 120 B.R. 777, 780-81, 783-84 (Bankr.D.N.J.1990); Molina v. United States (In re Molina), 99 B.R. 792 (S.D.Ohio 1988).
. 11 U.S.C. § 523(b) deals only with the dis-chargeability of non-fraud claims in successive bankruptcy cases. The mere passage of time does not permit the discharge of claims declared nondischargeable in a prior bankruptcy if fraud was the underlying basis for exception to discharge.
. Section 523(b) was added to bankruptcy law in 1978. Under prior law, even non-fraud taxes declared nondischargeable in a bankruptcy case remained nondischargeable in a subsequent case under principles of res judicata. See Bankruptcy Act§ 17b, 11 U.S.C. § 35b (repealed).
.11 U.S.C. § 507(a)(8)(A)(ii) provides:
(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—
(ii) assessed within 240 days, plus any time plus 30 days during 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.
. See Virginia v. Gibson (In re Gibson), 184 B.R. 716 (E.D.Va.1995) (“applicable suspension" in § 523(a)(8) should be construed broadly enough to include any interruption in the payment schedule), aff'd mem., 86 F.3d 1150 (4th Cir.1996); Williams v. United States (In re Williams), 195 B.R. 644 (Bankr.N.D.Tex.1996); Saburah v. United States Dep't of Educ. (In re Saburah), 136 B.R. 246 (Bankr.C.D.Cal.1992).
. 11 U.S.C. § 349(a) provides:
(a) Unless the court, for cause, orders otherwise, the dismissal of a case under this title does not bar the discharge, in a later case under this title, of debts that were dischargea-ble in the case dismissed; nor does the dismissal of a case under this title prejudice the debtor with regard to the filing of a subsequent petition under this title, except as provided in section 109(g) of this title, (emphasis added).
. See In re Frieouf, 938 F.2d 1099 (10th Cir.1991), cert. denied, 502 U.S. 1091, 112 S.Ct. 1161, 117 L.Ed.2d 408 (1992).
. See, e.g., In re Dodson, 191 B.R. 869 (Bankr.D.Or.1996) ("large window of opportunity to collect taxes” unhindered by bankruptcy stays interrupts equitable tolling analysis in Brickley and West).
. Not the same Noland.
. 11 U.S.C. § 523(a)(l)(B)(ii) 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—
(B) with respect to which a return, if required—
(ii) was filed after the date on which such return was last due, under applicable law or under any extension, and after two years before the date of the filing of the petition.
. The filing of a bankruptcy petition differs from an offer in compromise — an offer in compromise does not automatically stop IRS collection efforts; a bankruptcy petition stays most collection activity. If any inference can be drawn from this difference it is that Congress ' made the policy choice to treat a prior bankruptcy differently than an offer in compromise for purposes of counting the time periods in § 507(a)(8). This construction is not clearly absurd and does not trigger judicial reformation of § 507(a)(8)(A)(i).
. For example, the affect of the automatic stay on IRS collection efforts during the 1987 bankruptcy may differ with characterization of the claim.
. Accord In re Epstein, 200 B.R. 611, 613 (Bankr.S.D.Ohio 1996) (in a Chapter 13 case filed on September 6, 1989, “the Debtors’ 1989 income tax year ended on December 31, 1989, and ... income taxes for 1989 were payable by April IS, 1990. Accordingly, the 1989 income tax liability is a postpetition debt.”) | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492507/ | FINDINGS OF FACT, CONCLUSIONS OF LAW, and ORDER
JOHN L. PETERSON, Bankruptcy Judge.
In this adversary proceeding, after due notice, trial was held on December 2, 1996, on the Complaint to Determine Debt to be Nondisehargeable filed by Plaintiff, Ethan D. Brown (“Brown”) against Debtor/Defendant, Philip Simonis (“Simonis”), on May 6, 1996. The complaint alleges several grounds for non-dischargeability of Brown’s claims. At trial, however, Brown presented a case based solely on 11 U.S.C. § 523(a)(6). Both parties appeared represented by counsel. The parties first argued their respective positions on Brown’s motion for summary judgement, dated November 11, 1997, and received by the Court on November 12,1997. At close of oral arguments the Court found that at least one outstanding issue of material fact remained — to wit, whether Simonis injured Brown without just cause or excuse — and denied the motion for summary judgment. Brown testified on his own behalf, and introduced the testimony of Simonis. Simonis testified in defense. Exhibits 1-8, 9A-9M, 10,12-17,18A-18B, 19, 20, and 22, as well as A, B and D, were admitted into evidence. At close of trial the Court granted the parties ten days to submit proposed findings of fact and conclusions of law. Such filing deadline having now passed, the matter stands ripe for decision. Upon review of the record, the Court finds for Simonis.
I. FINDINGS OF FACT
Simonis and Brown entered into a written contract in which Simonis agreed to perform certain renovations on Brown’s home in Ramona, California. (Exhibits 1A and IB). Si-monis signed the writing on May 3, 1993, as “General Contractor.” Notwithstanding this designation, however, Simonis testified, and Brown does not dispute, that Simonis prepared the contract pro forma to satisfy the lender financing Brown’s remodel. (Tr. p. 103). In performing the contract, Brown acted as the “owner/builder,” obtain any permits and disbursing all funds for supplies, materials and labor. Simonis acted as subcontractor hiring laborers and supervising *941work on the ground. (Tr. p. 104). In his role as owner/builder, Brown followed the terms of the written agreement only roughly. When making purchases, Simonis testified without dispute that Brown often upgraded building materials. Simonis seldom had control or prior knowledge over Brown’s choice of materials and supplies. When Simonis did make purchases, Brown would reimburse him only if he provided a receipt.
The written terms of the contract provide Brown would pay Simonis $38,260 for work described in the writing. (Tr. p. 18; Exhibits 1A and IB). The agreement also contemplated amendment of the contract price based on extras and other changes that Brown might request, providing for written modification if such changes occurred. The parties did not honor these provisions. (Tr. p. 103-104). The contract provided for progress payments, which the parties recorded on the back of the document. Next to each entry appears Simonis’ initials. (Tr. p. 75; Exhibit IB). By October 1,1993, Brown had made a total of $45,931.03 in progress payments, (Tr. p. 21; Exhibit 1C), when the parties met to discuss progress on the renovation. (Tr. p. 22). At the meeting, Simonis told Brown that Simonis should have the work finished in a week or two. Then, Brown added up the totals paid on the contract, and for the first time realizing how much he had spent on the project, informed Simonis that Brown had overpaid him, and that Simonis would have to complete the job without further remuneration.
On October 5, 1993, after Simonis continued to ask for additional payments, Brown sent Simonis a letter outlining Brown’s position. (Tr. pp. 23, 76; Exhibit 3). Upon receipt of this letter, Simonis left the job. Later, on October 14, 1993, Simonis made a written response to Brown’s assertions of overpayment, calculating that, because of changes in the original contract requested by Brown, Simonis had put $2,142.00 worth of extras into the job. (Tr. p. 24, 76-77; Exhibit 4). Brown wrote back to Simonis in reply to these assertions on October 18,1993. (Tr. pp. 24, 77; Exhibit 5). The letter informed Simonis that even with the extras, Brown had still overpaid him by $4,236.00, and that the contract listed at least a dozen items Simonis had failed to finish. (Exhibit 5).
In the meantime, after Simonis walked off the project, Brown reported Simonis conduct to the state board overseeing contractor licensing. (Tr. p. 24). The board told Simonis to get back on the job and finish the work. (Tr. p. 78). As a result of Brown’s report to the state board, Simonis and Brown negotiated a “finish agreement.” (Tr. pp. 25, 78-79; Exhibit 6). In the agreement, Brown and Simonis specify, as of October 26,1993, a list of 13 “items to be completed for the satisfaction of the contract” between the two “signed May 3, 1993.” (Exhibit 6). No mention appears in the finish agreement, however, of any additional monies owed Simonis by Brown on the contract. The only mention of further payments appears in the provisions for payment $1,000.00 to Simonis if he completes the 13 items before November 10, 1993, with an exception for inclement weather. Invocation of the weather exception eventually extended the completion date to December 5, 1993. (Id.) In negotiating the agreement, Simonis never raised an issue of whether Brown owed him any money under the original construction contract. (Tr. pp. 26, 80). In addition, the two signed no other written agreements in connection with the project. (Tr. pp. 31, 79).
Finally on December 16, 1993, with the work provided for in both the May contract and the October finish agreement still not completed, Brown sent Simonis a letter of termination. (Tr. pp. 30, 81; Exhibit 7). On December 17, 1993, the contractor’s license board issued a report indicating that it would take $11,000 worth of labor and material to finally complete Brown’s remodel. While Brown claims the board sent a copy of the report to Simonis, Simonis does not admit this. (Tr. pp. 31, 82). Simonis did, however, offer an explanation of a sort concerning the report, saying “that’s how much it cost to finish the job, but that wasn’t what I had to finish.” (Tr. p. 80). This statement implies that Simonis thought he had finished the part of the construction he bore responsibility for under the May and October agreements.
On February 17, 1994, despite his awareness of Brown’s claim that he had been over*942paid on the contract, Simonis filed a mechanic’s lien (referred to hereinafter as “the first hen”) for $12,560.00 against Brown’s home. (Exhibit 12). Simonis filed this hen without adequately documenting the figure Simonis claimed Brown still owed. (Tr. p. 85). Then on March 28, 1994, Simonis sent a letter to counsel for Brown offering to withdraw the hen on Brown’s home in exchange for Brown’s withdrawing a complaint to the contractors hcense board. (Tr. p. 98; Exhibit 14). The offer of settlement contains no indication whatsoever that Brown owed Si-monis money.
Nevertheless, Simonis did bring to Brown’s attention Simonis’ contention that Brown still owed monies for work Simonis had done. On October 21, 1993, Simonis prepared a document totaling these numbers. (Exhibit D). The figures in Exhibit D, added to those of Exhibit 4, equal $11,591.64 in specific extras, ah of which Simonis conferred with Brown about on or before October 21, 1993. (Tr. pp. 113-115). Moreover, Simonis failed to adequately document the first hen because Brown refused to provide an accounting of the materials purchased and work done. (Tr. p. 87, 115; Exhibit 18B). Then on May 9, 1994, Simonis filed another mechanic’s hen on Brown’s home, (referred to hereinafter as “the second hen”), in the of amount of $17,373.50, which Simonis based on additional information, in the form of copies of checks written by Brown. (Exhibit B).
Thus, as of May 10,1994, Simonis had filed almost $30,000 worth of hens against Brown’s residence. Simonis explained, however, that he never intended to file $30,000 in hens against Brown’s title. (Tr. p. 132). Simonis filed the second hen in an effort to simply replace the first hen, which, based on his accounting using Exhibit B, Simonis thought was for too httle money. This effort to amend failed because of errors in filing on Simonis’ part. No evidence appears in the record to refute Simonis’ explanation.
Despite the implication Brown has attempted to portray, that Simonis filed his hens solely as leverage against Brown on his complaint to the contractor’s hcense board, knowing Brown owed him nothing, the Court finds from the record that Brown failed to show that Simonis filed the first hen against Brown’s home without believing genuinely that Brown owed him over $12,000.00 on the work Simonis had done on Brown’s residence. In addition, the Court finds Brown failed to show that Simonis filed the second hen without believing genuinely, based on information later obtained, that Brown actually owed him over $17,000 instead of $12,-000. Finally, Brown has failed to show that Simonis filed the two hens redundantly, for a total of $30,000, against Brown’s title through other than mere inadvertence on the part of Simonis.
II. CONCLUSIONS OF LAW
The Court has jurisdiction to hear this case pursuant to 28 U.S.C. §§ 1334 and 157(b)(1). This is a core proceeding for purposes of § 157(b)(2)(i). On the issue of the determination of non-dischargeability of debts, the Ninth Circuit imposes a “weighty burden” on creditors, strictly construing exceptions to discharge in order to further Congress’ pohcy of affording debtor’s a fresh start. In re Rahm, 641 F.2d 755, 756-57 (9th Cir.1981); Quarre v. Saylor (In re Saylor), 178 B.R. 209, 214 (9th Cir. BAP 1995); McCrary v. Barrack (In re Barrack), 201 B.R. 985, 989 (Bankr.S.D.Cal.1996). Notwithstanding the weighty burden, however, in order to prevail, a plaintiff need only estabhsh the elements of a § 523 action by a preponderance of the evidence. See, Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).
Section 523(a)(6) of the Bankruptcy Code excepts from discharge any debt “for willful and malicious injury by the debtor to another entity or to the property of another entity.” The burden falls on the creditor to prove that an injury underlying a creditor’s claim was both “willful” and “malicious.” In re Posta, 866 F.2d 364, 367 (10th Cir.1989).
With regard to a defendant’s state of mind required to support a § 523(a)(6) claim, the Ninth Circuit, has held: “[Wjhen a wrongful act ..., done intentionally, necessarily produces harm and is without just cause or excuse, it is ‘willful and malicious’ even absent proof of a specific intent to injure.” *943Impulsora Del Territorio Sur, S.A. v. Cecchini (In re Cecchini), 780 F.2d 1440, 1442-1443 (9th Cir.1986) (citations omitted); Bond’s Jewelers, Inc. v. Linklater (In re Linklater), 48 B.R. 916 (Bankr.D.Nev.1985) (the court reasoned “[t]he term ‘willful and malicious’, as used in § 523(a)(6), does not necessarily mean ill will, spite, or personal hatred. An act injuring the property interests of another is willful and malicious for § 523(a)(6) purposes if it is without knowledge or consent, intentional, and unjustified or unexcused.”).
Furthermore, under California law, the “malice, express or implied” element of an action for slander of title echoes the “malicious” element of a § 523(a)(6) action. Howard v. Schaniel, 113 Cal.App.3d 256, 262, 169 Cal.Rptr. 678 (Cal.Ct.App.1980). “Malice implied in law” consists of the marring of title to property with a false filing, done in good faith, but without legal privilege to do so. Gudger v. Manton, 21 Cal.2d 537, 543, 134 P.2d 217, 221 (Cal.1943). In Gudger, the court defined privilege or justification in the slander of title context thus:
A privileged publication is one made— * * * 3. In a communication, without malice, to a person interested therein, (1) by one who is also interested, or (2) by one who stands in such relation to the person interested as to afford a reasonable ground for supposing the motive for the communication innocent, or (3) who is requested by the person interested to give the information.
Gudger, 134 P.2d at 222. The court then elaborated:
A rival claimant of property is conditionally privileged to disparage or justified in disparaging another’s property in land by an honest and good-faith assertion of an inconsistent legally protected interest in himself. See Thompson v. White, 70 Cal. 135, 11 P. 564; Restatement, Torts, § 647. The levy of an execution is an assertion of a claim to an interest in that it is a lien on the property levied upon.
Id. Thus, the fifing of a mechanic’s lien against title to property in the good faith belief that the owner owes the filer money is a privileged act under Gudger and an act with just cause or excuse under Cecchini. The Gudger ruling also instructs, however, that actual bad faith will support a slander of title action regardless of the filer’s privilege. Id.
Analyzing the facts sub judice in fight of the foregoing, the Court concludes that Brown failed to show by a preponderance of evidence that Simonis filed liens against Brown’s title without a subjective good faith belief — based, after Brown deliberately withheld cooperation and an accounting, upon investigation performed to the best of Simon-is’ ability — that Brown owed him the face amounts shown on the liens. Furthermore, the evidence Brown presented did not establish that Simonis intentionally or in bad faith inflated the impairment against Brown’s title by fifing the duplicate liens intentionally or by other than innocent mistake. Thus, Brown failed to demonstrate either that Si-monis filed each individual lien without the just cause of subjectively believing Brown owed him funds, or that Simonis filed the cumulative liens with intent to do so. As a result, the evidence establishes neither maliciousness with regard to the former acts, nor willfulness with regard to the latter. Consequently, Brown’s allegations lodged under 11 U.S.C. § 523(a)(6) must fail.
Finally, Brown has alleged that this Court should give collateral estoppel effect to a San Diego Municipal Court’s decision against Si-monis for slander of title. In support of this argument, citing In re Potter, 185 B.R. 68, 75 (Bankr.C.D.Cal.1995) and Garrett v. City and County of San Francisco, 818 F.2d 1515 (9th Cir.1987), Brown asserts that “collateral es-toppel bars refitigation when (1) the issue decided in the prior action is identical to the issue presented in the second action; (2) there was a final judgment on the merits; and (3) the party against whom estoppel is asserted was a party to the prior action.” (Pl.’s Mem. of Points and Authorities in Supp. of Mot. for Summ.J., p. 8). This, however, is a statement not of California’s doctrine of collateral estoppel, otherwise known as issue preclusion, but of California’s rules for application of res judicata, or claims preclusion. Bernhard v. Bank of America, 19 Cal.2d 807, 813, 122 P.2d 892, 895 (Cal. *9441942) (“In determining the validity of a plea of res judicata three questions are pertinent: Was the issue decided in the prior adjudication identical with the one presented in the action in question? Was there a final judgment on the merits? Was the party against whom the plea is asserted a party or in privity with a party to the prior adjudication?”); see Heath v. Cast, 813 F.2d 254, 258 (9th Cir.1987); Raymond v. Pickering (In re Pickering), 182 B.R. 268 (Bankr.D.Mont.1995).
As the California Court of Appeal has had occasion to clarify:
As was stated in Henn v. Henn (1980) 26 Cal.3d 323, at pages 329-330, 161 Cal.Rptr. 502, 605 P.2d 10, The doctrine of res judi-cata has long been recognized to have a dual aspect. [Citations.] ‘In its primary aspect the doctrine of res judicata operates as a bar to the maintenance of a second suit between the same parties on the same cause of action.’ (Clark v. Lesher (1956) 46 Cal.2d 874, 880, 299 P.2d 865....) Also, the doctrine comes into play in situations involving a second suit, not necessarily between the same parties, which is based upon a different cause of action. There ‘[t]he prior judgment is not a complete bar, but it operates [against the party against whom it was obtained] as an estoppel or conclusive adjudication as to such issues in the second action as were actually litigated and determined in the first action.’ (Id., citations omitted.) The court’s footnote [4] provides: This second aspect is referred to as judgment by estop-pel or, more commonly, collateral estoppel. (See Clark v. Lesher, supra, 46 Cal.2d at 880, 299 P.2d 865.) (Henn v. Henn, supra, 26 Cal.3d at pp. 329-330, 161 Cal.Rptr. 502, 605 P.2d 10, emphasis added; see also 4 Witkin, Cal.Procedure (2d ed. 1971) Judgment, § 148, p. 3293.) The basic principles of res judicata, as set forth in Summerford v. Board of Retirement (1977) 72 Cal.App.3d 128, 130, 139 Cal.Rptr. 814, are: A judgment in one tribunal is res judicata as to subsequent proceedings where: (1) the identical issue is under consideration; (2) a final judgment was reached on the merits in the earlier adjudication; (3) the party against whom that judgment is now asserted was a party or in privity with a party in the prior action. [Citations.] (See also Bernhard v. Bank of America (1942) 19 Cal.2d 807, 813, 122 P.2d 892; Saunders v. New Capital for Small Businesses, Inc. (1964) 231 Cal.App.2d 324, 331, 41 Cal.Rptr. 703; Jackson v. City of Sacramento (1981) 117 Cal.App.3d 596, 172 Cal.Rptr. 826.)
Garcia v. Borelli, 129 Cal.App.3d 24, 32, 180 Cal.Rptr. 768, 772 (Cal.Ct.App.1986); see People v. Sims, 32 Cal.3d 468, 476, 651 P.2d 321, 326, 186 Cal.Rptr. 77, 82 (Cal.1982); Clark v. Lesher, 46 Cal.2d 874, 879, 299 P.2d 865, 868 (Cal.1956).
Furthermore, on the proper application of issue preclusion, the Ninth Circuit Court of Appeals has taught:
The general rule of collateral estoppel, or issue preclusion, is stated in § 27 of the Restatement (Seoond) of Judgments (1982) (“Restatement”) as follows: When an issue of fact or law is actually litigated and determined by a valid and final judgment, and the determination is essential to the judgment, the determination is conclusive in a subsequent action between the parties, whether on the same or a different claim.
* * * * * H:
The elements necessary to invoke collateral estoppel are: the issue is actually litigated in the previous proceeding, there is a full and fair opportunity to litigate the issue, resolution of such issue is essential to the decision, there is a valid and final decision on the merits, and there is a common identity of the parties.... As the parties have noted, the “final judgment” requirement is somewhat more relaxed for purposes of “issue preclusion” than it is for purposes of “claim preclusion”: [F]or purposes of issue preclusion (as distinguished from merger and bar), ‘final judgment’ includes any prior adjudication of an issue in another action that is determined to be sufficiently firm to be accorded conclusive effect. Restatement at § 13_ Whether a judgment is “sufficiently firm” as to be “final” within the meaning of § 13 of the Restatement depends upon consider*945ation of several factors. Preclusion should be refused, for example, where the decision to be carried over is “avowedly tentative.” Restatement at § 13 cmt. g. On the other hand, that the parties were fully heard, that the court supported its decision with a reasoned opinion, and that the decision was subject to appeal or was in fact reviewed on appeal, are factors supporting the conclusion that the decision should be given preclusive effect. Id. The basic test, according to the Restatement, is whether the earlier decision was “procedurally definite,” and not whether the court might have had doubts in reaching the decision. Id.
O’Malley Lumber Company v. Lockard (Matter of Lockard), 884 F.2d 1171, 1174-1175 (9th Cir.1989); see Borg-Warner Corp. v. Avco Corp., 850 P.2d 628, 634-635 (Alaska 1993).
In the present case, although over two months passed between the date the Municipal Court ordered Brown to prepare a judgment against Simonis, and the filing of Simonis’ bankruptcy petition, no judgment appears in the record. Moreover, the Municipal Court’s Decision on Submitted Matter contains no written findings of fact and conclusions of law or other rationale to support the order, including no statement of jurisdiction. In addition, since the Municipal Court is not a court of record, no transcript appears in the record by which to evaluate the proceedings, or whether and to what extent the matter of Simonis’ alleged slander of title was fully heard and actually litigated.
Given the foregoing litany of weaknesses in the record at hand, the Court finds the Municipal Court record insufficiently clear to determine whether its decision in Brown’s favor on his slander of title complaint is “procedurally definite.1 ” Id.; Restatement (Seoond) of Judgments (1982) § 13, Cmt. g. Therefore, the Court holds the doctrine of collateral estoppel does not apply to the facts at bar. Further, given the absence of a “final judgment on the merits” not subject to amendment, California’s doctrine of res judi-cata likewise cannot apply. See Mueller v. J.C. Penney, Co., 173 Cal.App.3d 713, 719, 219 Cal.Rptr. 272, 277 (Cal.Ct.App.1985) (final judgment is one “immune, as a practical matter, to reversal or amendment.”) (citing Miller Brewing v. Jos. Schlitz Brewing, 605 F.2d 990, 996 (7th Cir.1978)).
This Order constitutes findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052. Simonis is directed to file with this Court a judgment against Brown in conformance with this Order within ten days from entry hereof.
. Indeed, the Municipal Court amended its Decision on Submitted Matter on March 1, 1996. (Plt-’s Mem. of Points and Authorities in Supp. of Mot. for Summ J., Exhibit B). Until entry of judgment in the matter, it continues free to do so. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492508/ | ORDER ON MOTION FOR SUMMARY JUDGMENT
THOMAS E. BAYNES, Jr., Bankruptcy Judge.
THIS CAUSE came on for consideration upon cross Motions for Summary Judgment by Defendant, Northbrook,1 and Debt- or/Plaintiff (Debtor). This Court considered all arguments and evidence consistent with a ruling on a motion for summary judgment. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252, 106 S.Ct. 2505, 2512, 91 L.Ed.2d 202 (1986) (holding the standard of proof in summary judgment rulings is the same as it would be at trial); Celotex v. Catrett, 477 U.S. 817, 323-35, 106 S.Ct. 2548, 2552-59, 91 L.Ed.2d 265 (1986) (discussing the appropriate burdens of proof and types of evidence to use in summary judgment decisions); Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 585-88, 106 S.Ct. 1348, 1355-57, 89 L.Ed.2d 538 (1986) (detailing the elements of summary judgment analysis).
INTRODUCTION
The cross Motions before the Court concern interpretation of the language of the Northbrook umbrella and Aetna primary insurance policies. The Aetna policy is Debt- or’s primary comprehensive general liability insurance coverage. Primary coverage will have to pay first for any occurrence covered by the policy. The Northbrook policy is an *980umbrella liability policy. Umbrella policies are the next layer of coverage, and here serve a dual role. In general terms, where a primary policy contains coverage, an umbrella policy is an excess layer of insurance for the same occurrence. Where the primary policy does not contain coverage, an umbrella policy serves to fill in the coverage gaps of the primary insurance layer.2
The parties seek the Court’s interpretation of three clauses of policy language; specifically, two clauses concerning occupational disease coverage found in the Aetna policy, and one clause concerning aggregate limits found in the Northbrook umbrella policy. Issues involving the interpretation of insurance coverage are determined under Illinois law. See Celotex Corp. v. AIU Insurance Co., et al., 194 B.R. 668, 673 (Bankr.M.D.Fla.1996) (deciding choice of law for these and other policies). Illinois law requires Courts “[i]n construing contracts of insurance ... [to] examine the policy as a whole, giving effect, to the extent possible, to all contractual provisions.” O’Rourke v. Access Health, Inc., 282 Ill.App.3d 394, 218 Ill.Dec. 51, 57, 668 N.E.2d 214, 220 (1996); see Caterpillar, Inc. v. Aetna Casualty & Surety Co., 282 Ill.App.3d 1065, 218 Ill.Dec. 320, 324, 668 N.E.2d 1152, 1156 (1996). Clear and unambiguous language must be interpreted according to its plain, ordinary, and popular sense or meaning. O’Rourke, 218 Ill.Dec. at 57, 668 N.E.2d at 220; Consumers Construction Co. v. American Motorists Insurance Co., 118 Ill.App.2d 441, 254 N.E.2d 265, 270 (1969). When construing contracts of insurance, courts must not create ambiguity, or create a new contract, under the guise of construction. O’Rourke, 218 Ill.Dec. at 58, 668 N.E.2d at 221; Consumers Construction, 254 N.E.2d at 270.
The parties did not argue, nor does this Court find, that any of the clauses at issue are ambiguous.3 Therefore, the Court must interpret the language in question according to its plain, ordinary, and popular meaning. The Court must look to the actual contract language, not the construction placed on the language by the parties. Bunge Corp. v. Northern Trust Co., 252 Ill.App.3d 485, 191 Ill.Dec. 195, 201, 623 N.E.2d 785, 791 (1993); see Bruder v. Country Mutual Insurance Co., 156 Ill.2d 179, 189 Ill.Dec. 387, 394, 620 N.E.2d 355, 362 (1993).
OCCUPATIONAL DISEASE COVERAGE ISSUE
Policy Language
The Northbrook umbrella policy contains a clause referred to in this litigation as Special Condition IV. Special Condition IV appears in the section of the Northbrook policy entitled “Conditions” and reads as follows:
IV. SPECIAL CONDITIONS APPLICABLE TO OCCUPATIONAL DISEASE As regards Personal Injury (fatal or nonfatal) by occupational disease sustained by any employe [sic] of the Insured, this policy, while in force, is subject to the same warranties, terms and conditions (except as regards the premium, the amounts and limits of liability and the renewal agreement, if any) as are contained in or as may be added to the underlying insurances pri- or to the happening of an Occurrence for which claim is made hereunder.
Special Condition IV is the subject of an earlier ruling made by this Court on October 18, 1995, pursuant to Fed.R.Bankr.P. 7052; Fed.R.Civ.P. 52.4 The prior ruling held, while Special Condition IV may have an expansive effect on Northbrook’s coverage, or a narrowing effect, the condition cannot be used to exclude coverage, i.e., it cannot incorporate the Aetna policy exclusions into the Northbrook policy. Nor can the condition act as an exclusion. This Court held Illinois law requires exclusions to be specifically ex*981pressed. The Aetna and Northbrook policies each contain exclusions as well as terms and conditions. Special Condition IV addresses terms and conditions, and could have addressed exclusions, but it rather makes no mention of exclusions. Therefore, the Court held Special Condition IV does not act as an exclusion of coverage, nor does it incorporate by reference the exclusions found in the primary policy.
Based on the Court’s prior ruling, the parties ask the Court to clarify whether two clauses in the Aetna policy are either (1) exclusions, or (2) conditions or terms. If the clauses are exclusions, the language is not incorporated as part of the Northbrook policy. Conversely, clauses deemed terms or conditions would be incorporated. The clauses at issue in the Aetna policy read as follows: 5
The first clause appears in the Exclusions section:
This Policy Does Not Apply:
(e) under Coverage B, to bodily injury by disease unless prior to thirty-six months after the end of the policy period written claim is made or suit is brought against the insured for damages because of such injury or death resulting therefrom;
The second clause is not in the Exclusions section:
IV. Application of Policy
This policy applies only to injury (1) by accident occurring during the policy period, or (2) by disease caused or aggravated by exposure of which the last day of the last exposure, in the employment of the insured, to conditions causing the disease occurs during the policy period.
Analysis
In Graman v. Continental Casualty Company, 87 Ill.App.3d 896, 42 Ill.Dec. 772, 409 N.E.2d 387 (1980), an Illinois court faced similar issues regarding language in a “claims-made” policy.6 Id. at 775, 409 N.E.2d at 390. The Court interpreted the language in question to be a term or condition of coverage, rather than an exclusion. Id. The clause interpreted reads as follows:
(b) Time
The insurance afforded by this policy applies to errors, omissions or negligent acts which occur on or after the date stated in item 6 of the declarations (the effective date of the first policy issued and continuously renewed by the Company) provided that claim therefor [sic] is first made against the insured during this policy period and reported in writing to the Company during this policy period or within 60 days after the expiration of this policy period.
Id. at 774, 409 N.E.2d at 389 (emphasis added).7
The clause insured the plaintiff against claims made against plaintiff, an architect, during the construction of a new school budding. Id. There were difficulties with the roof of the structure, culminating in a lawsuit filed by the school district four years later. Id. at 774, 409 N.E.2d at 389. The Graman court interpreted the clause according to its plain language to require suit must have been filed, and a written notice given, during the policy period or within 60 days of the end of the policy. Id. at 777, 409 N.E.2d at 392. The Graman court noted the policy was *982“characteristic of a ‘claims made’ policy, with the additional term allowing a claim to be reported within 60 days of the time the policy period expires.” Id. at 775, 409 N.E.2d at 390. Claims made policies offer coverage only for claims made during the policy period. Id.
In determining the “restrictions are not exclusions,” id. at 777, 409 N.E.2d at 392, the Graman court states “ ‘[a]n exclusion, in insurance parlance, serves the purpose of taking out persons or events otherwise included within the defined scope of coverage.’ ” Id. (quoting Hartford Accident Co. v. Case Foundation Co., 10 Ill.App.3d 115, 294 N.E.2d 7, 14 (1973)). The court reasoned the clause did not appear in the policy’s “exclusions” section, did not read like an exclusion, nor did the clear language intend it to be an exclusion. Id. The Graman court concluded “[t]he insured must notify the insurer of such a claim within the time constraints listed in the policy or there is no coverage for the acts, omissions or negligent acts of the insured, no matter when they occurred.” Id. The clause herein is not an exclusion, but relates directly to coverage, requiring an insured to meet certain time limits as a condition prior to coverage.
There are several distinctions between the Graman facts and the facts at issue in this case. Unlike the claims made policy in Graman, the Aetna policy is an occurrence based policy.8 Further, the clauses at issue in this case are not identical to those before the Graman court, although the Graman policy language is most similar to the first clause in the Aetna policy.9 Notwithstanding these distinctions, this Court finds the reasoning in Graman instructive when evaluating the nature of both of these clauses.
The first clause, which is most analogous to the language interpreted in Graman, further defines coverage as including only those events about which a “written claim is made or suit is brought” within thirty-six (36) months after the policy period. As in Gra-man, this clause appears to directly relate to coverage — defining what is included rather than carving out an exception. However, this clause appears in the “exclusions” section of the Aetna policy, while the Graman court specifically commented the clause in that case did not appear in an “exclusions” section. Further, Debtor argues this type of time constraint parameter is more consistent with a elaims-made policy, such as the one the Graman court interpreted, than it is with an occurrence based policy, such as the Aet-na policy in this case. While similar language in the Graman claims made policy may have defined coverage, the Debtor argues this language excludes coverage that would otherwise be available under the occurrence based Aetna policy. The Debtor urges this Court to find the first clause is an exclusion.
The Court appreciates the distinctions between the Graman facts and the facts in this case. Nevertheless, the Court finds the first clause in question is a condition, not an exclusion. Exclusions generally serve to carve out specific events or hazards from a universe of covered events,10 while conditions of the type before the Court generally require the performance of an act in order to permit a claim to be paid.11 For example, notice requirements are usually a *983condition to have a claim paid. Therefore, a provision in an insurance policy requiring prompt or timely notice conditions payment on a certain act—giving notice—by the insured, or sometimes a third party.12
In the first clause at issue, the Aetna policy language does not carve out any specific event or hazard. The language simply conditions payment of a claim on a certain act—filing suit or a written claim within thirty-six (36) months of the end of the policy period. This language requires an act to perfect coverage, which is consistent with a condition, not an exclusion. This clause is a condition for coverage under the Aetna policy. The Court finds the first clause is incorporated by reference into the Northbrook umbrella policy.
The second clause defines coverage to include only those events that occur during the policy period, or ultimately manifest from something that occurs during the policy period. This provision is consistent with an occurrence based policy. This clause is a term or condition for coverage under the Aetna policy, not an exclusion. The Court finds the second clause is incorporated by reference into the Northbrook umbrella policy.
Exclusions carve out events or individuals that would otherwise be covered in an insurance policy. Exclusions must be “clear, definite and explicit” before they will be used to deny coverage. O’Rourke, 218 Ill.Dec. at 57, 668 N.E.2d at 220. If there are any doubts as to these criteria, they are to be resolved in favor of coverage. Id. In the Aetna policy, the language at issue does not carve out otherwise covered individuals or events. Both clauses define the time period required for events to be covered under the policy, and provide a term or condition based on these time restrictions. Therefore, the Court finds both clauses are incorporated by reference into the Northbrook umbrella policy.
AGGREGATE LIMITS ISSUE
In the Umbrella Liability Policy issued by Northbrook, there is a clause containing language discussing the limits of liability as to Products Liability and Personal Injury by occupational disease which is the subject of debate between the parties. The clause appears in the Limit of Liability section of the policy and reads in relevant part as follows:
II. Limit of Liability
The Company shall only be hable for the Ultimate Net Loss in excess of either.... and then only up to a further sum as stated in Item 2(a) of the Declarations in all in respect of each Occurrence-subject to a limit as stated in Item 2(b) of the Declarations in the aggregate
A. for each annual period during the currency of this policy, but
B. separately in respect of Products Liability and in respect of Personal Injury (fatal or nonfatal) by occupational disease sustained by any employes [sic] of the Insured.
The limit referred to in Item 2(b) is the aggregate limit, and is ten million dollars under this policy.13 The parties agree the only dispute is the interpretation of the underlined sentence.14 The Debtor urges the Court to find separate aggregate limits for Products Liability and Personal Injury by occupational disease. The Defendants urge the Court to find a single aggregate limit for both categories.
No cases are offered by the parties, nor has this Court found any eases, in which an Illinois court interpreted language similar to the clause at issue.15 Therefore, this Court *984must use the general principles of contract interpretation which require the Court to determine the plain, ordinary and popular meaning of this language. O’Rourke, 218 Ill.Dec. at 57, 668 N.E.2d at 220; Consumers Construction, 254 N.E.2d at 270. The Court examines the language itself, and considers the interpretations offered by the parties.
Debtor argues the language in question sets two separate aggregate limits — one for Products Liability and one for Personal Injury from Occupational Disease — 10 million dollars each. Essentially, the Debtor breaks the sentence down as follows: “separately [a separate individual limit] in respect of [1st category] Products Liability and in respect of [2nd category] Personal Injury (fatal or nonfatal) by occupational disease....” Under Debtor’s interpretation, there would be ten (10) million dollars of coverage available for each category.
Defendant offers a different interpretation of this clause. The Defendant breaks the sentence down as follows: “separately [apart from the other policy limits] in respect of [both] Products Liability and in respect of Personal Injury (fatal or nonfatal) by occupational disease_” Under Defendant’s interpretation, there would be ten (10) million dollars of coverage available for both categories combined. The parties ask this Court to determine which interpretation is correct.
The Court finds the interpretation supported by Debtor is the more reasonable reading of this clause. The language at issue intends to separate these two distinct categories — products liability and personal injury from occupational disease — to afford an annual limit for each category, not for both. The language states the limits are separately in respect of products liability and in respect of personal injury — to read the language as lumping these two categories together strains the reasonableness of interpretation and is not supported by the language of the policy. See O’Rourke, 218 Ill.Dec. at 58, 668 N.E.2d at 221. The Court finds the reasonable interpretation of this language results in a total ten (10) million dollars of coverage each for products liability and personal injury from occupational disease.
CONCLUSION
This Court finds the language in the two Aetna policy clauses at issue concerning occupational disease are not exclusions, and are incorporated by reference into the North-brook umbrella policy. The Court finds the aggregate limits set in the Northbrook umbrella policy contemplate separate ten (10) million dollar annual limits each for products liability and personal injury from occupational disease. Accordingly, it is
ORDERED, ADJUDGED AND DECREED the Court grants the Debtor’s Motion for Summary Judgment in part as follows: there are separate annual aggregate limits set in the Aetna policy of ten (10) million dollars each for products liability and personal injury from occupational disease. The Court denies the remainder of the Debt- or’s Motion. It is further
ORDERED, ADJUDGED AND DECREED the Court grants the Defendant’s Motion for Summary Judgment in part as follows: the clauses at issue under the Aetna occupational disease policy language are not exclusions and are incorporated by reference into the Northbrook umbrella policy. The Court denies the remainder of the Defendant’s Motion.
. Northbrook refers to "Allstate Insurance Company, as successor-in-interest to Northbrook Excess and Surplus Insurance Company, formerly known as Northbrook Insurance Company....” Northbrook's Motion for Summary Judgment, Doc. No. 3476.
. 8A John Alan Appleman & Jean Appleman, Insurance taw & Practice, § 4909.85 (1981).
. See Bruder v. Country Mutual Insurance Co., 156 Ill.2d 179, 189 Ill.Dec. 387, 394, 620 N.E.2d 355, 362 (1993). The Bruder court defines the test for ambiguity of a term in an insurance policy as “whether the relevant portion is subject to more than one reasonable interpretation, not whether creative possibilities can be suggested. Reasonableness is the key.” Id.
.Tr. at 78-79 (Oct. 18, 1995). For a description of the interaction of the excess and primary policies at issue, see Tr. at 75-76.
. There is no dispute as to the language at issue in the policies. See Tr. at 5, 11-12 (Dec. 18, 1995).
. Claims made insurance policies offer coverage for claims made during the policy period, as opposed to the more traditional occurrence based policies which cover events which occur during a policy period without restrictions on when losses are incurred. Robert E. Keeton & Alan I. Widiss, Insurance L.: A Guide to Fundamental Principles, Legal Doctrines & Com. Practice, § 5.10(d), at 594, 598 (West 1988). Claims made policies evolved in the professional liability coverage industry, such as the policy at issue in Graman, and are spreading to other areas of liability insurance. Id. at 598-99. The time limit on coverage allows insureds to purchase claims made policies for lower premiums than those charged for occurrence based policies. Id. at 598. See 11 Couch, et al., Couch on Insurance § 44:1 (discussing the difference between claims made and occurrence based coverage).
.The Court notes while the policy language before the Graman court is most similar to the first clause at issue in this case, the interpretive reasoning is equally applicable to both clauses at issue.
. See supra note 6; Tr. at 110-12 (Oct. 18, 1995).
. However, the first clause discussed above is very similar to the clause interpreted in Graman.
. See Robert E. Keeton & Alan I. Widiss, Insurance L.: A Guide to Fundamental Principles, Legal Doctrines & Com. Practice, § 5.5(a)(3).
. See, e.g., Ideal Mut. Ins. Co. v. Lucas, 593 F.Supp. 466, 468 (N.D.Ga.1983), where a Georgia district court drew the distinction between exclusions and conditions as follows:
While there is no talismanic test to determine whether a provision in an insurance contract is a condition or exclusion, courts generally have found that exclusions are designed to limit the risks for which the insurer will provide coverage. In other words, the word "exclusions” signifies subject matter or circumstances in which the insurance company will not assume liability for a specific risk or hazard that otherwise would be included within the general scope of the policy. Conversely, a condition is a provision inserted in the contract for the insurer’s benefit that requires fulfillment of certain prerequisites before benefits will be released to the beneficiary under the contract.
. See 7 Couch, et al., Couch on Insurance § 36:48, for a discussion of conditions precedent to recovery which must be met after the insured incurs a loss.
. Id.
. Tr. at 71-2 (Dec. 18, 1995).
. The Illinois courts address issues involving policy limits and interpretation of policy language in automobile insurance cases. See, e.g., Stearns v. Millers Mut. Ins. Assoc., 278 Ill.App.3d 893, 215 Ill.Dec. 506, 508-09, 663 N.E.2d 517, 519-20 (1996), interpreting the choice between applying per-person versus per-occurrence policy limits in an automobile coverage case. This' Court did not find the reasoning in these types of cases helpful because the insurance policies in question are too dissimilar. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492509/ | MEMORANDUM OF CERTAIN PORTIONS OF A DECISION ENTERED ON FEBRUARY 7, 1997
MICHAEL J. KAPLAN, Chief Judge.
There are several issues presented by the present motion. The motion is filed by Wendy’s Old Fashioned Hamburgers of New York, Inc. (“Wendy’s”), and seeks “Surrender of Non-Residential Real Property and Relief from Automatic Stay pursuant to 11 U.S.C. § 365(d)(4) and 11 U.S.C. § 362.” The motion concerns four stores that the Chapter 11 Debtors lease from Wendy’s. (The Debtor leases nine other stores from other landlords.) The thrust of the motion is that 11 U.S.C. § 365(d)(4) gives Chapter 11 *46debtors only 60 days, or such further time as the Court directs, in which to assume such leases, and if a debtor fails to do so within the time allowed, then the leases are deemed rejected and the debtor must surrender the properties to the landlord.
Progressive Restaurant Systems, Inc. (“Progressive”) and James Fentress (“Fen-tress”) (together referred to as the “Debtors”) were co-tenants on the Wendy’s leases. Wendy’s argues that no extensions of time to assume or reject were ever granted in the Fentress case and that every extension of time granted in the Progressive ease has expired, and that it is, consequently, too late for the Debtors to make any proposals for the assumption of leases over the objection of Wendy’s. Further, Wendy’s demands surrender of the premises, and seeks relief from the stay to whatever extent is necessary to permit Wendy’s to enforce its rights.
The issues presented are these:
1. Clearly, the leases have been “deemed rejected” under 11 U.S.C. § 365(d)(4) as to Fentress. What is the effect of that fact on the present motion as it relates to Progressive?
2. What is the effect of this Court’s June 25, 1996 Order upon the operation of 11 U.S.C. § 365(d)(4), such Order having provided that Progressive could, instead of making a motion to assume or reject under Bankruptcy Rule 6006, file a Plan of Reorganization providing for assumption or rejection pursuant to 11 U.S.C. § 1123(b)(2)?
3. Assuming that the time provisions of 11 U.S.C. § 365(d)(4) continued in effect after Progressive elected to address the assumption of the leases by means of a plan, rather than by motion, what was the effect upon those time provisions, of this Court’s Order of September 27, 1996? That Order, which incoiporated an August 7, 1996 ruling of the Court declaring that Progressive’s proposals for assumption of leases could not be approved as a matter of law, sustained various landlords’ objections to the Disclosure Statement on those grounds, but provided that that ruling was “without prejudice” to Progressive’s filing of an amended plan and disclosure statement that might propose terms that would be confirmable under law.
4. If 11 U.S.C. § 365(d)(4) governs and if the time to assume the leases has expired, has Wendy’s waived the right to the remedies provided therein?
5. Does the fact that the Progressive has consistently indicated its intent to assume satisfy the statute?
6. If 11 U.S.C. § 365(d)(4) applies, and the time for assumption thereunder has expired, should the Court declare the time to be extended nunc pro tunc, or, in the alternative, should it extend the time retroactively for “excusable neglect” under Bankruptcy Rule 9006(b)(1) or provide some other form of relief for the Debtors?
The Court will address only issues 1, 2, 4 and 5 here. Questions 3 and 6 are the subject of a separate unpublished decision.1
The facts and procedural posture as recited by the Debtor are as follows:
FACTS
On December 15,1995 (“Petition Date”), the Debtors filed separate voluntary petitions for relief pursuant to Chapter 11, Title 11 USC. Since the Petition Date, the Debtors have remained in possession of their respective assets, including leases of real property, as debtors in possession pursuant to 11 U.S.C. §§ 1107 and 1108. Progressive is the owner and operator of thirteen (13) Wendy’s Old Fashioned Hamburger restaurant franchises throughout Western New York. James Fentress and Sandra Fentress are the Chief Executive Officer and President respectively, of Progressive
Wendy’s is the lessor of four restaurant locations operated by Progressive. Each location is the subject of a separate Lease Agreement executed by and between the Debtors and Wendy’s. The locations leased by the Debtors from Wendy’s include: 1051 Main Street, Buffalo, New York (“Main Street”), 10350 Bennett Road, Fredonia, New York (“Bennett Road”), 3180 Niagara Falls Boulevard, Amherst, *47New York (“Niagara Falls Blvd.”) and 6020 Porter Road, Niagara Falls, New York (“Porter Road”) (collectively, the “Leases”).
As of the Petition Date, the Debtors were in arrears for monthly rental payments and taxes due under the Main Street and Fredonia Leases in the total sum of approximately $67,000.00. All payments due under the Niagara Falls Boulevard and Porter Road Leases were current as of the Petition Date.
On February 8, 1996, and within sixty (60) days of the Petition Date, Progressive filed a motion pursuant to 11 U.S.C. § 365(d)(4) seeking an Order extending its time until April 13, 1996 to either assume or reject fifteen (15) leases of non-residential real property, including the subject Leases. The Court later entered an Order dated April 2, 1996 directing the Debtors to assume or reject all leases of non-residential real property by April 10, 1996.
On February 22, 1996, the Court approved a Stipulation entered into by the Debtors and Wendy’s pursuant to which the Debtors are required to make post-petition rental and ft-anchise royalty fee payments to Wendy’s. In addition, the Debtors remain responsible for the payment of all real property taxes, water charges and other levies due in connection with the Leases. The Debtors have remained current on all rental payments, taxes and other charges due under the Leases during the thirteen (13) months since the Petition Date. The Stipulation also required the Debtors to assume or reject the executory franchise agreements and Leases with Wendy’s by April 14, 1996.
On April 9, 1996, Progressive filed a motion seeking to assume eight (8) executory leases of non-residential real property and seeking additional time to assume or reject seven (7) remaining real property leases (the “Assumption Motion”). The Leases entered into with Wendy’s were identified in this Motion as four of the eight Leases to be assumed by Progressive.
On June 25, 1996, the Court entered an Order in connection with the Assumption Motion extending “the Debtors’ time to make its determination whether to assume, reject or to seek further time to make such determination concerning all unexpired commercial leases, either by filing a motion or by filing a Chapter 11 Plan of Reorganization seeking the above relief.” The Order further provided that “if the Debtor files a Chapter 11 Plan seeking to assume or reject all of its commercial leases on or before June 28, 1996, the Debtor’s prior motion seeking to assume eight leases of non-residential real property will be deemed moot as the Debtor’s Plan shall address the assumption or rejection of those non-residential leases.” The Debtors filed their respective Chapter 11 Plans and Disclosure Statements on June 28, 1996 which identified the leases of nonresidential real property to be assumed pursuant to 11 U.S.C. § 365. All four of the Wendy’s Leases were identified in the respective Plan and Disclosure Statements.
By Order dated August 19, 1996, the Court sustained objections filed by various lessors, including Wendy’s concerning the Debtors’ proposed cure of the pre-petition arrears and declined to approve the Disclosure Statements. The Debtors thereafter filed respective Amended Disclosure Statements on September 6, 1996. On September 27, 1996, the Court entered Orders again sustaining the lessors’ objections and denying approval of the Amended Disclosure Statement. The Orders issued, however, were “without prejudice to the submission and filing of a further amended Disclosure Statement and Plan.” (emphasis added).
On January 3, 1997, the Debtors filed their respective Second Amended Chapter 11 Plans and Second Amended Disclosure Statements which provide for the payment in full of pre-petition arrears accrued under leases of non-residential real property, including the Leases, over a twenty-four (24) month period, with interest at a rate of six percent (6%) per annum. Progressive shall also cure the pre-petition arrears owed to Wendy’s under the thirteen executory franchise agreements in full, with in*48terest at nine-percent (9%), in accordance with the terms of the pre-petition promissory notes executed by the Debtors and Wendy’s, and pay Wendy’s the interest, over a period of twenty-four (24) months, that has accrued post-petition with regard to the sums due under the promissory notes.
Debtors’ Mem.Opp’n at 2-5.
(1) What is the effect of the fact that no extension of time was sought in the case concerning James Fentress individually? It does not make a great deal of sense to argue about the effect of § 365(d)(4) in the Fen-tress case in light of the fact that whatever right Wendy’s would enjoy to demand “surrender” from Fentress would be subject to the automatic stay in the corporate case. Fentress does not dispute that he has a personal obligation to Wendy’s separate and apart from Progressive, for which provision must be made in his Chapter 11 reorganization plan. The true issue at Bar is whether Progressive will be permitted to cure defaults in the leases and reinstate the lease terms as part of its reorganization effort. If, as a matter of fact or law, that is not permissible or is not possible, then there is no need to discuss the interplay between the two cases in connection with the operation of 11 U.S.C. § 365(d)(4). Therefore, the Court will move on to consider the issues affecting the corporate case.
(2) What is the effect of this Court’s Order of June 25, 1996, declaring “that if the Debtor files a Chapter 11 Plan seeking to assume or reject all of its commercial leases on or before June 28,1996, the Debtor’s prior motion seeking to assume eight leases of non-residential real property will be deemed moot as the Debtor’s Plan shall address assumption or rejection of those non-residential leases, ...” with respect to the operation of 11 U.S.C. § 865(d)(4)? The answer is provided by the statute. 11 U.S.C. § 1123(b)(2) permits a debtor to avoid the need to make a specific motion to assume or reject an executory contract, instead permitting the debtor to include a provision for assumption or rejection of an executory contract in a plan of reorganization. But the statute specifically says that any such provision is “subject to section 365.” It is the view of this Court, therefore, that this Court’s Order did nothing more than it purported to do; to wit, to declare the then pending motions moot if a plan were to be filed. By express provision of the statute, § 365 continued to apply to any plan provisions dealing with assumption or rejection of the contracts, and therefore the time limitations of § 365(d)(4) and the remedy provisions thereof, continued to apply despite the change in procedural posture.
The Court rejects the assertion in the Debtors’ Memorandum of Law that states that “By the June 25, 1996 Order, ... the Court effectively substituted [a] new procedure for the procedure set forth in § 365(d)(4).” (Debtors’ Mem.Opp’n at 7).
Issue #3 is addressed in a separate unpublished decision.2
(4) Did Wendy’s waive its right to the remedies provided under 11 U.S.C. § 365(d) (1) ? Although the case authorities on each side of the question of waiver are informative and interesting,3 they are, as Wendy’s points out, irrelevant. Wendy’s Reply to Debtors’ Opposition points out that,
Progressive’s payment of postpetition rents occurred within and pursuant to an Order of this Court, granting Wendy’s adequate protection and related relief, which Order was dated February 22, 1996____
The second last [sic] decretal paragraph stated that the provisions of the Order, which in part required Progressive to timely pay rent in accordance with the Wendy’s Leases, did not prevent or prohibit Wendy’s from seeking further relief from the automatic stay or other appropriate remedies based upon the occurrence or *49existence of circumstances justifying the same.
Wendy’s Reply to Opp’n ¶ 10-11.
Whether a landlord may waive, or be es-topped from asserting, the rights and remedies contained in 11 U.S.C. § 365(d)(4) by actions consistent with a supposition that the leases are still in place and either have been assumed or will be assumed, is an entirely different question from that presented here. Here we have a landlord who, within the first few weeks of the Chapter 11 case, bargained for and obtained from Progressive a stipulation that the Debtor would do many specified things including the payment of rent, and which stipulation expressly preserved to Wendy’s the right to seek further relief and remedies based upon “the occurrence or existence of circumstances justifying the same.” The present Court considers Wendy’s conduct, consistent with the bargained-for exchange contained in the stipulation, to be categorically different than the kinds of conduct that a few courts have found to constitute a “waiver” of the remedies contained in § 365(d)(4), as cited in the Debtors’ Memorandum of Law. The Court will leave to another day the possibility that the kinds of considerations expressed by the court in the ease of In re Lew Mark Cleaners Corp., 86 B.R. 331 (Bankr.E.D.N.Y.1988), might cause the Court to conclude that certain rights bargained for in a stipulation were subsequently waived by conduct. Clearly, Wendy’s has not waived the rights bargained for by the stipulation here. The Court holds categorically, as indicated above, that the stipulation placed this case outside the reach of any rationale for declaring a waiver of the landlord’s § 365(d)(4) rights.
5. Does Progressive’s consistent posture toward assumption satisfy the § 365(d)(h) requirement? Although there is authority to the contrary,4 many cases hold that assumption is a two step process — (1) a stated intent to assume, and (2) court approval thereof — and that only the first step needs to be completed within the time specified by § 365(d)(4).5
I have no doubt that in an appropriate ease, the Court might be persuaded to deem the § 365(d)(4) limitation satisfied where a motion to assume is pending before the Court, and where there is either no objection thereto or where a debtor’s proposal is both clearly within the bounds of the law and within the bounds of the debtor’s ability to perform. Probably a debtor’s estate ought not to suffer for the Court’s inability to promptly act on the motion.
But the legislative intent behind § 365(d)(4), as illuminated by the eases on this issue, did not, in my view, extend only to getting the debtor or trustee to promptly make a decision. The intent was to limit uncertainty regarding whether stores, etc. would be vacant (principally whether vacant stores in shopping centers would remain vacant).6
The legislative history clearly presumes that the hypothetical debtor has the wherewithal to obtain an order overruling the landlord’s objection to assumption, and that, consequently, the critical matter that needs attention is getting the debtor to make a decision one way or the other.
Here, Progressive has spent the better part of a year unsuccessfully trying to get the Court to accept innovative arguments as to why various landlords’ objections to the proposed assumption should be overruled. The argument that a five-year cure provision is “prompt cure” was rejected here in August. The argument that Progressive could assume the Wendy’s leases without curing the other defaults under a certain “Restructure Agreement” which integrated those leases and various other obligations was rejected here in October. Only after the December 12, 1996 filing of Wendy’s present Motion did the Debtors state their intention to offer cure terms that complied with these decisions (assuming they do). And even as of this moment it is not known whether the *50Debtors have the means to complete their present intentions.
Under the circumstances, the § 365(d)(4) time limitation is not satisfied merely by Progressive’s consistently endeavoring to find some terms upon which it hoped eventually to persuade the Court, on the third or fourth try, that the objections could be overruled. The Court so rules.
If one intends to stray from “mainstream” assumption terms and engage in creative efforts, the failure to make certain that the § 365(d)(4) time has been or will be extended to cover the time necessary to pursue those efforts raises grave peril.
Issue #6 is addressed in a separate unpublished decision.7
CONCLUSION
The issues addressed above are resolved in Wendy’s favor. The remaining issues are the subject of a separate order.8
. In re Progressive Restaurant Systems, Inc., Case No. 95-14370 (Bankr.W.D.N.Y. Feb. 7, 1997).
. See supra note 1.
. Compare, e.g., Bethesda-Union Society v. Austin (In re Austin), 102 B.R. 897 (Bankr.S.D.Ga.1989) (finding waiver of lessor’s § 365(d)(4) rights), and In re T.F.P. Resources, Inc., 56 B.R. 112 (Bankr.S.D.N.Y.1985) (same), with In re Dial-A-Tire, 78 B.R. 13 (Bankr.W.D.N.Y.1987) (lessor's acceptance of rents does not constitute waiver of § 365(d)(4) rights), and In re Re-Trac Corp., 59 B.R. 251 (Bankr.D.Minn.1986) (same).
. See, e.g., In re Horwitz, 167 B.R. 237 (Bankr. W.D.Okla.1994).
. See, e.g., Turgeon v. Victoria Station, Inc. (In re Victoria Station, Inc.), 840 F.2d 682 (9th Cir. 1988); Tigr Restaurant, Inc. v. Rouse S.I. Shopping Ctr., 79 B.R. 954 (E.D.N.Y.1987).
. See 130 Cong.Rec. S8894 (daily ed. June 29, 1984) (statement of Sen. Hatch).
. See supra note 1.
. See supra note 1. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492511/ | ORDER DENYING MOTION TO COMPEL
JOHN J. THOMAS, Bankruptcy Judge.
On June 1, 1995, the Debtor filed a Statement of Intentions under 11 U.S.C. § 521(2). Although various creditors were identified in that Statement, the Debtor neglected to identify Sears, Roebuck and Company (“Sears”) as a secured creditor despite the fact that the Debtor admits that Sears possesses a purchase money security interest in certain merchandise.
On September 11, 1995, Sears filed the instant Motion to Compel the Debtor to Amend the Statement of Intentions under Federal Rule of Bankruptcy Procedure 1009(a) so that Sears could be added as a secured party and the Debtor would be compelled to state their intentions with regard to the secured collateral.
This matter is currently before the court for decision.
Federal Rule of Bankruptcy Procedure 1009(b) indicates that “The statement of intention may be amended by the debtor at any time before the expiration of the period provided in § 521(2)(B) of the Code.”
The period provided in § 521(2)(B) is identified as “forty-five days after the filing of a notice of intent under this section, or within such additional time as the court, for cause, within such forty-five day period fixes,____”
The court did not extend the time to file a notice of intention or any amendment thereto. We, therefore, conclude that Sears’ Motion to Compel is untimely filed inasmuch as the Debtor is not empowered to amend this statement after the time limits specified in Federal Rule of Bankruptcy Procedure 1009(b). Accordingly, the Motion is denied. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492512/ | MEMORANDUM OPINION AND ORDER DENYING DEFENDANTS’ MOTION TO DISMISS AND GRANTING PLAINTIFF’S MOTION FOR REMAND
ROBERT A. MARK, Bankruptcy Judge.
On April 10, 1996, the Court conducted a hearing on Defendants’ Motion to Dismiss (the “Motion to Dismiss”) and Plaintiffs Motion for Remand or, in the Alternative, Abstention (the “Motion for Remand”). At the conclusion of the hearing, the Court took the matter under advisement and invited the parties to, submit supplemental memoranda. For the following reasons, the Court will deny the Motion to Dismiss and grant the Motion for Remand.
FACTUAL BACKGROUND
Defendant, Romeo Charlie, Inc. (“RCI”), previously owned Piper Aircraft Corporation (“Debtor” or “Piper”). In 1988, RCI entered into an employment agreement with the plaintiff, Leroy Lopresti (“Plaintiff” or “Lopresti”), hiring Lopresti to provide services for Piper. In accordance with the agreement, RCI formed a subsidiary, Lopresti Piper Aircraft Engineering Company (“Lopresti Piper”). Defendant, Garrihy Aircraft Design Corp. (“Garrihy”) is the successor of Lopresti Piper.
On July 1, 1991, Piper filed a petition for relief under Chapter 11 of the Bankruptcy Code. On November 13,1991, Lopresti filed a proof of claim against Piper for unpaid wages, vacation pay and expense accounts. Lopresti also claimed that Piper was obligated to repay a loan Lopresti made to Lopresti Piper. Debtor objected to Lopresti’s claims. Because of the nature of the dispute, the Court directed Lopresti to file an adversary complaint to assert his claims.
On December 5, 1994, Lopresti, together with other members of his family, filed an adversary complaint against Piper, Adversary No. 94-1216-BKC-RAM-A (the “Piper Adversary”). Lopresti alleged that Piper, as the alter ego of RCI and Lopresti Piper, was liable to Lopresti for unpaid wages ($140,-384.60), unpaid expense accounts ($8,997.84), unpaid vacation pay ($16,771.15) and unpaid loans to Lopresti Piper ($13,577.70).
On May 30, 1995, Lopresti and Piper executed a Stipulation of Settlement Between Piper Aircraft Corporation and Curtis Lopresti, David Lopresti, James Lopresti, Margaret Lopresti, Roy Lopresti and Leroy Lopresti (the “Settlement Agreement”) which granted Lopresti a $40,000 unsecured claim in full satisfaction of his claims against Piper. The Settlement Agreement explicitly stated that “nothing in this Stipulation shall be construed to constitute a release of any claims the Loprestis may have against [RCI].”
On June 9, 1995, Piper filed its Motion of Piper Aircraft Corporation for Approval of Stipulation of Settlement Between Debtor and Loprestis (the “Motion to Approve Settlement”). As stated in the motion, Lopresti agreed to dismiss the complaint against Piper with prejudice and to release Piper, and the Piper bankruptcy estate, from any further claims. In return, Piper agreed to allow Lopresti a $40,000 general unsecured claim. The Agreed Order Approving Settlement Agreement Between Debtor and Lopresti was entered on July 7,1995.
*245The First Amended Joint Plan of Reorganization (the “Joint Plan”) treated Lopresti’s $40,000 general allowed unsecured claim. On July 11,1995, the Court entered its Order Confirming the Joint Plan (the “Confirmation Order”). Lopresti did not appeal the Confirmation Order.
PROCEDURAL BACKGROUND AND JURISDICTION
On June 27,1995, Lopresti filed the instant complaint (the “Complaint”) against RCI and Garrihy, Wa Lopresti Piper, in the Circuit Court, in and for Indian River County, Florida (the “State Court”). An amended complaint (the “Amended Complaint”) was filed on October 20, 1995. The Amended Complaint seeks relief against RCI and Lopresti Piper for the same allegedly unpaid wages, unpaid expense accounts, unpaid vacation pay and unpaid loan at issue in the Piper Adversary.
On November 13, 1995, Defendants filed Defendants’ Notice of Removal of Action Subject to Automatic Referral to Bankruptcy Court (the “Notice of Removal”) removing the case from the State Court to the United States District Court. On November 20, 1995, the district court entered its Order of Reference to Bankruptcy Court referring the matter to this Court.1
The Motion to Dismiss and Motion for Remand were filed while this action was pending in the district court. Upon referral, Plaintiff urged this Court to treat the Motion for Remand as a threshold matter since, according to Plaintiff, this Court lacks subject matter jurisdiction to adjudicate his claims against non-debtor defendants. The Court disagreed finding that it had jurisdiction to hear-the Motion to Dismiss since the Motion involves the res judicata effect of prior orders entered in the Piper bankruptcy case. In its January 29, 1996 Order Setting Hearing on Pending Motions and Deadlines for Responsive Pleadings, the Court set a briefing schedule on the pending motions. That Order also advised the parties that the Motion to Dismiss would be considered first followed, if necessary, by consideration of the Motion for Remand.
DISCUSSION
A. PLAINTIFF’S CLAIMS ARE NOT BARRED BY THE DOCTRINE OF RES JUDICATA
The primary issue before the Court is simply stated: Did the settlement of Lopresti’s claims against Piper in the Piper Adversary bar him, under the doctrine of res judicata, from prosecuting the same claims against RCI and Lopresti Piper? The Court concludes that it did not. This Complaint, against non-parties to the prior adversary proceeding, is not barred by res judicata since the record in the first action does not sufficiently establish that Piper was, in fact, the alter ego of RCI or Lopresti Piper. Moreover, one cannot ascertain that the Piper Adversary was dismissed based on a finding that RCI and Lopresti Piper were not directly hable.
The preclusive effect of a prior federal court judgment is a question of federal law. Citibank, N.A. v. Data Lease Financial Corp., 904 F.2d 1498, 1501 (11th Cir.1990); Hart v. Yamaha-Parts Distributors, Inc., 787 F.2d 1468, 1470 (11th Cir.1986). For res judicata to bar Lopresti’s claims, the Defendants must establish the following: (1) there must be a prior final judgment on the merits; (2) the prior decision must be rendered by a court of competent jurisdiction; (3) there must be an identity of parties or their privies; and (4) the causes of action must be the same. In re Justice Oaks II, Ltd., 898 F.2d 1544 (11th Cir.1990), cert. denied, 498 U.S. 959, 111 S.Ct. 387, 112 L.Ed.2d 398 (1990).
The first, second and fourth elements of res judicata are not contested. First, the dismissal of the adversary with prejudice, the Order Approving Settlement, and the Confirmation Order allowing Lopresti’s general unsecured claim are final judgments. See Citibank, N.A v. Data Lease Financial Corp., 904 F.2d 1498, 1501 (11th Cir.1990) (holding that the dismissal of a complaint *246with prejudice pursuant to a settlement was a final judgment on the merits for purposes of res judicata). Second, these prior decisions, the Order Approving Settlement and the Confirmation Order,, were rendered by a court of competent jurisdiction. As to the fourth element, the causes of action were the same. The Piper Adversary sought recovery from the Debtor, as the alleged alter ego of RCI and Lopresti Piper, for the same acts of RCI and Lopresti Piper alleged in the Amended Complaint in this proceeding. The key issue in dispute is whether the third element of res judicata is satisfied in this case, namely whether there is a sufficient identity of parties to confer res judicata effect on the Order Approving Settlement or the Confirmation Order. As explained below, the Court concludes there is not.
1. The Record Does Not Sufficiently Support a Finding of Privity
To prevail on their Motion to Dismiss, the Defendants must prove that the Amended Complaint seeks relief against the identical parties or “privies” of those parties named in the original action. Since RCI and Lopresti Piper were not defendants in the Piper Adversary and did not submit themselves to this Court’s jurisdiction in the original action, they were not “parties” in the first suit. See Yamaha, 787 F.2d at 1471 (stating that “[a] party is one who is both named as a party and subjected to the court’s jurisdiction”).
The Eleventh Circuit also discussed the “privity” element in Yamaha. Id. at 1472-1473. Like this case, Yamaha involved an attempt to invoke res judicata to bar a second suit against the alleged alter egos of the party dismissed with prejudice in the first suit. The Court acknowledged that res judicata would bar the second suit if and only if the alter ego doctrine applies: “Stockholders are not in privity with their corporations unless they are found to be alter egos.” 787 F.2d at 1473 (emphasis added).2
In Yamaha, the Eleventh Circuit reversed and remanded the district court’s finding of privity between the defendants in the two actions. The court found that the district court was clearly erroneous in finding privity where there was a lack of any factual basis in the record to support that determination. The court held that the defendant corporations “are not in privity merely because [the plaintiff] makes identical claims against them.” 787 F.2d at 1473.
The record from the Piper Adversary fails to meet the Yamaha standard for finding privity between alleged alter egos. The mere fact that Lopresti alleged that Piper was the alter ego was not a determination that Piper was in fact the alter ego of RCI and Lopresti Piper. Certainly, the dismissal of the Piper Adversary did not establish the alter ego relationship. The dismissal could be interpreted to mean that Piper was indeed the alter ego, but Lopresti had no merit in his underlying claims against RCI and Lopresti Piper. But, it could just as readily be interpreted to mean that Lopresti had no standing to sue Piper as an alter ego or could not prove its alter ego status, both of which were alleged as affirmative defenses in the Piper Adversary. There are simply no facts in the record of the Piper Adversary to prove the interrelationship of the corporations. As in Yamaha, this barren record is insufficient to establish privity based on an alter ego relationship. 787 F.2d at 1472.3
2. The Final Judgment against Piper in the First Action Was Not Necessarily Rendered Upon a Ground Equally Applicable to the Defendants in this Action.
Defendants argue that res judicata applies in the principal/agent or alter ego situation no matter which party is sued first as long as the claims against both parties are the same. However, such a broad per se rule fails upon *247a closer analysis of the relevant law, including the cases cited by the Defendants.
Defendants rely primarily on Citibank N.A. v. Data Lease Financial Corp., 904 F.2d 1498 (11th Cir.1990) to support their argument for a per se bar. In Citibank, Data Lease alleged that Citibank was vicariously hable for the actions of certain individual directors alleged to be Citibank’s agents. Data Lease settled with the alleged agents, dismissing its claims against them with prejudice. The district court approved the settlement agreement. The agreement explicitly stated that it would have no effect on Data Lease’s claims against Citibank.
Even though Data Lease expressly reserved its rights against Citibank, Citibank subsequently argued that the dismissal with prejudice of the alleged agents “extinguished Data Lease’s claim of vicarious liability against Citibank, as a matter of law.” 940 F.2d at 1500. The district court agreed and entered judgment for Citibank, and the judgment was affirmed on appeal. The Eleventh Circuit found that the dismissal with prejudice of claims exonerating the agents from liability barred a subsequent suit against Citibank, the principal, on the same cause of action. Id. at 1502-03. The court reasoned that the dismissal with prejudice of claims against the alleged agents had the same effect as would a final judgment finding that the alleged agents did nothing wrong. Id. at 1502. Simply put, the master (Citibank) could not be liable for conduct by its alleged agents since the dismissal adjudicated the conduct non-actionable.
The facts in this case are different. In Citibank, the agents were absolved in the prior suit (by the dismissal with prejudice), barring a later action against the alleged principal based on vicarious liability. Here, Piper, the party alleged to be vicariously liable, was absolved in the first action and the second case is against the parties Lopresti alleges are directly liable to him.
Defendants argue that under Citibank’s holding, it does not matter whether the first suit is against the agent or the principal, citing to the following language in the Eleventh Circuit’s opinion:
Most other federal circuits have concluded that employer-employee or principal agent relationships may ground a claim preclusion defense, regardless which party to the relationship was first sued.
at 1502 (quoting from Lubrizol Corp. v. Exxon Corp., 871 F.2d 1279, 1288 (5th Cir. 1989)) (emphasis added). So the question is narrowed further: For res judicata puiposes, does it matter if the party absolved first is party alleged to be vicariously liable rather than the party alleged to be directly liable? After further analysis of the cases cited in Citibank, this Court concludes that it does make a difference where, like here, the basis for vicarious liability was never established.
In their Supplemental Memorandum in Support of Motion to Dismiss, Defendants cite to Lubrizol Corp. v. Exxon Corp., 871 F.2d 1279 (5th Cir.1989), to support their contention that res judicata applies even if the principal is sued first. Lubrizol sued Exxon for patent infringement in federal district court in New Jersey. Since most of the evidence in the case was confidential and sensitive in nature, the court issued a protective order restricting access to the information. Exxon entered some of Lubrizol’s “restricted” information on computers at a facility in Texas. The facility was managed by an Exxon employee, Evans, and Evans was supervised by Lower, an Exxon attorney. Lubrizol requested sanctions against Exxon alleging that entering the confidential information in its computers violated the protective order. The parties resolved the dispute and executed a settlement agreement, dismissing the New Jersey case with prejudice.
Lubrizol then filed another suit against Evans, Lower, Exxon and other companies with access to the information entered on the computers, alleging common law fraud. Lubrizol complained that the affidavits of Evans and Lower filed in the New Jersey ease contained false statements. The court dismissed the lawsuit for lack of subject matter jurisdiction and, alternatively, granted summary judgment in favor of all the defendants. The Court stated that the crux of Lubrizol’s position was that “Exxon breached the [prior *248court’s] protective order, only because Evans and Lower — as Exxon employees acting in the scope of their duties — engaged in the exact conduct of which Lubrizol now complains.” Id. at 1288. The court cited a number of cases that stand for the following legal proposition:
Where a plaintiff has sued parties in serial litigation over the same transaction; where plaintiff chose the original forum and had the opportunity to raise all its claims relating to the disputed transaction; where there was a ‘special relationship’ between the defendants in each action, if not complete identity of parties; and where although the prior action was concluded, the plaintiff’s later suit continued to seek essentially similar relief — the courts have denied the plaintiff a second bite of the apple.
Id. (citations omitted).
Thus, Lubrizol and Citibank arguably support a conclusion that res judicata works both ways, that is, it does not matter whether the principal or the agent is sued first. On closer analysis, however, Defendants’ proposed rule is too broad. Instead, the ease law and treatises, including the cases cited by the Defendants, require a showing that privity was established in the first suit in order to apply res judicata in the “principal first, agent second” scenario. Only if privity was established can you ascertain that a judgment in favor of the principal necessarily was based on a finding that the agent did no wrong. As shown below, privity is proven in the “principal first, agent second” scenario only where the first judgment for the principal was based upon a ground equally applicable to the agent.
The “same grounds” requirement is critical in the eases cited in Citibank. For example, the court cited to the following language from Spector v. El Ranco, 263 F.2d 143, 145 (9th Cir.1959) (emphasis added):
Where, as here, the relations between the two parties are analogous to that of principal and agent, the rule is that a judgment in favor of either, in an action brought by a third party, rendered upon a ground equally applicable to both, is to be accepted as conclusive against the plaintiff’s right of action against the other.
Citibank also cites with approval to the following language from Lober v. Moore, 417 F.2d 714, 717-718 (D.C.Cir.1969):
“[I]t is the prevailing rule in the federal and the state courts that a judgment excusing the master or principal from liability on the ground that the servant or agent was not at fault forecloses a subsequent suit against the latter on the same claim .. ” 904 F.2d at 1502 (emphasis added).
A closer look at Lober emphasizes the importance of the “same grounds” element where the principal is sued first. In Lober, the plaintiff lost a jury trial against an employer for vicarious liability and later brought suit against the employee for negligently driving a taxi in which she was a passenger. 417 F.2d at 715-716. In the first action, the scope of employment issue was resolved in favor of the plaintiff as a matter of law. Thus, the only issue before the jury was whether the employee negligently drove the taxi. The jury found that the employer was not vicariously liable because the employee did not drive negligently.
The D.C.Circuit held that res judicata barred the plaintiff from bringing a second action against the employee. The court explicitly stated that its holding was dependant upon the fact that the jury verdict against the employer in the first action was based solely on the ground that the employee was not directly negligent. Id. at 716. The court went on to explain that res judicata would not apply if the first judgment was not based on the culpability of the agent:
If it were possible that the employer’s exoneration by the [first] judgment came in consequence of a finding that the employee acted beyond the scope of his employment, the judgment would not merit eonclusiveness here.
Id. at 718, n. 31 (emphasis added). See also Tamari v. Bache & Co. (Lebanon) S.A.L., 637 F.Supp. 1333, 1341-1342 (N.D.Ill.1986) (holding that res judicata does not apply where a court cannot determine whether the judgment for the principal in the first action was based on a defense that was personal to *249the principal) (citing to Restatement (Second) of Judgments § 51 (1980)).
The scenario described in Lober, in which res judicata would not apply, parallels exactly the facts in this case. The prior dismissal against Piper, as alter ego/prineipal, was not necessarily based “on the ground that” RCI and Lopresti Piper, as Piper’s agents, were not directly at fault. The dismissal with prejudice could also mean simply that Piper is not the alter ego of the defendants or that one of Piper’s other defenses was meritorious.4 Such a determination, while terminating the cause of action against Piper, is not “equally applicable” to RCI and Lopresti Piper, the parties Lopresti claims are directly liable. Simply stated:
[W]here the decision in favor of an agent or principal in the first action was based on a defense that was personal to that party, such as a finding that the agent’s acts were not within the scope of his agency, the judgment in the first does not preclude a second action against the party responsible for the conduct.
47 Am.Jur.2d § 687. This same rule applies here, where the basis of the decision in favor of Piper is unknown. See Lober, 417 F.2d at 718, n. 81; Tamari, 637 F.Supp. at 1341.
This Court’s holding can be harmonized with Citibank. In Citibank, since the agents were absolved first, the identity of parties element was conclusively established by the allegations against the principal. This must be so since proof of the relationship was a necessary element of proving vicarious liability. Moreover, when the agent is absolved first, there is no basis to hold the principal liable if the only theory of liability is vicarious liability for conduct by the agents previously adjudged to be non-actionable. The converse is not true unless it can be determined that the principal won the first action on the grounds that the agents were not liable. See e.g. Restatement (Second) of Judgments § 51 (1980); 47 Am.Jur.2d § 687.
In sum, RCI and Lopresti Piper have failed to establish the “identity of parties” element necessary to invoke res judicata. Where, as here, the party alleged to be vicariously liable is sued first and the dismissal (1) does not adequately prove an alter ego relationship; and (2) is not definitively based on a ground equally applicable to both the vicariously liable and directly liable party, res judicata does not bar the second suit.
3. The Confirmation Order’s Res Judicata Effect
In the alternative, the defendants argue that the Confirmation Order, allowing Lopresti a general unsecured claim of $40,-000 against Piper, operates to bar Lopresti from prosecuting his cause of action against RCI and Lopresti Piper under the theory of res judicata. In support of their argument, the defendants cite In re Justice Oaks II, Ltd., 898 F.2d 1544, 1552 (11th Cir.1990), cert. denied, 498 U.S. 959, 111 S.Ct. 387, 112 L.Ed.2d 398 (1990) (holding that the confirmation order barred an adversary proceeding which was essentially a collateral attack of the confirmation order, where the claims raised in the adversary complaint were already raised, or could have been raised, and were overruled in the plaintiffs’ objection to confirmation).
The defendants argue that Justice Oaks precludes Lopresti from filing a separate action against non-debtor defendants, who were not parties to the adversary proceeding, simply because Lopresti and the defendants were active parties in the bankruptcy and Lopresti had settled his claim against the Debtor. The Court rejects Defendants’ argument. Justice Oaks has no application here. Lopresti is not attempting to collaterally attack the Confirmation Order. He simply seeks to pursue his claims against non-*250debtor third parties outside of the bankruptcy case.
B. THIS PROCEEDING MUST BE REMANDED TO THE STATE COURT SINCE THIS COURT LACKS SUBJECT MATTER JURISDICTION
This proceeding was removed from the State Court under 28 U.S.C. § 1452(a). That section authorizes removal of claims related to bankruptcy cases if the “district court has jurisdiction of such claim or cause of action under § 1334 of [Title 28].” Thus, in order for this Court to have jurisdiction, it must find that the Amended .Complaint filed in state court by Lopresti is “related to” Piper’s Chapter 11 case. 28 U.S.C. § 1334(b). “Related to” has been defined as “whether the outcome of the [state court] proceeding could conceivably have an effect on the estate being administered in bankruptcy.” In re Lemco Gypsum, Inc., 910 F.2d 784 (11th Cir.1990), citing, Pacor v. Higgins, 743 F.2d 984 (3d Cir.1984).
As discussed earlier, this Court had “related to” jurisdiction to consider the Motion to Dismiss since it involved a determination of the res judicata effect of this Court’s prior orders. Having concluded that the pri- or Piper bankruptcy orders do not bar plaintiff’s claims, there is no further connection between the claims in this complaint and the Piper bankruptcy case that would confer jurisdiction in this Court. This is a dispute between third parties and does not involve the Debtor or the bankruptcy estate. Since the outcome of this lawsuit cannot “conceivably have an effect” on Piper’s bankruptcy case, there is no “related to” jurisdiction and the case must be remanded.5
For the foregoing reasons, it is—
ORDERED as follows:
1. The Motion to Dismiss is denied.
2. The Motion for Remand is granted. This Court does not have “related to” jurisdiction under 28 U.S.C. § 1334(b).
3.Upon the finality of this Order, the Clerk shall transmit this file to the Circuit Court in and for Indian River County, Florida.
. Procedurally, the defendants could have and should have filed tiheir Notice of Removal in the bankruptcy court. Rule 87.2, Local Rules of the United States District Court, Southern District of Florida.
. As discussed below, the Defendants rely heavily on Lubrizol Corp. v. Exxon Corp., 871 F.2d 1279 (5th Cir.1989). Interestingly, the Court in that case refused to find that a third “agent” was subject to res judicata because the court was not confident that based on the record, there was a sufficient agent/principal relationship between Exxon and him. 871 F.2d at 1289.
. In Yamaha, the Eleventh Circuit remanded the case to the district court for further factual findings on the issue of whether an alter ego relationship existed. The Court finds that such a factual inquiry in this case is unnecessary since, as discussed in the following section, Defendants' res judicata argument fails as a matter of law.
. All three of Piper’s affirmative defenses in the Piper Adversary raised issues having nothing to do with the merit of Lopresti's underlying contractual claims against RCI and Lopresti Piper. The first affirmative defense challenged Lopresti’s standing to bring an alter ego claim since he was a shareholder of Lopresti Piper. The second defense alleged that Lopresti could not bring an alter-ego claim without first seeking relief against Lopresti Piper. Finally, Piper alleged in defense that it never assumed any obligations of Lopresti Piper and was not in privity directly with Lopresti. Answer, Affirmative Defenses and Counterclaim of Piper Aircraft Corporation to Adversary Complaint for Allowance of Claims, CP # 5 in the Piper Adversary, pp. 5, 6.
. This Court abstains from considering all arguments raised in the Motion to Dismiss other than the res judicata argument. Thus, denial of the Motion to Dismiss is without prejudice to the Defendants finding a renewed motion to dismiss in the State Court rearguing these other grounds for dismissal. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492513/ | ORDER
JUDITH K. FITZGERALD, Bankruptcy Judge.
AND NOW, this 7th day of March, 1997,
WHEREAS Fayette Bank has filed a motion for relief from stay in the above-captioned case;
WHEREAS Fayette Bank was granted relief from stay by a default order in Debt- or’s prior chapter 7 ease;
WHEREAS Fayette proceeded to obtain a judgment in foreclosure, also by default;
WHEREAS thereafter Debtor filed the current chapter 13 case and Fayette Bank has again moved for relief from stay;
WHEREAS, from the evidence adduced at trial on March 5, 20, and 29, 1996, as more fully outlined in this court’s Memorandum Opinion dated March 7th, 1997, at Bankruptcy Nos. 95-23886 and 94-20147, the court finds that
(1) Debtor has no reasonable likelihood of reorganizing his financial affairs through a chapter 13;
(2) Debtor has insufficient funds from current income to provide adequate protection to this creditor;
(3) Debtor needs the property, if this case were to remain in chapter 13, to reorganize and begin operation of a tavern but cannot provide adequate protection to this creditor until the tavern would produce sufficient income, and
(4) Debtor has not satisfied his burden of proving that, in any reasonable time, the tavern would produce sufficient income to fund a plan or to pay this creditor’s claim (as further explained in the Memorandum Opinion dated March 7th, 1997);
(5) this creditor has already proven entitlement to and was granted relief from stay by default in the chapter 7 ease, 94-20147 JLC, and that ruling was not appealed and is not subject to modification nor is there any basis upon which to modify it upon the evidence adduced at trial.
NOW, THEREFORE, IT IS ORDERED, ADJUDGED AND DECREED that the Motion for Relief from Stay filed on behalf of Fayette Bank is GRANTED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492514/ | ORDER ON LETTER/MOTION FOR ACCOUNTING AND ON ORDER TO SHOW CAUSE
RODNEY R. STEELE, Bankruptcy Judge.
At Montgomery, Alabama on February 24, 1997 a hearing was held on a letter/motion for accounting and an order to show cause directed to James R. Barnes regarding a mortgage that has been paid through the debtors Chapter 13 plan but has not been marked satisfied and recorded.
This matter was continued from February 10, 1997 for Mr. Barnes to sign a release. He has failed to do so and has failed to respond or appear. Charles N. Parnell, former attorney of Mr. Barnes, advised the court that although he no longer represents Mr. Barnes he has attempted to contact him regarding this matter on more than one occasion and has supplied a certificate of mortgage satisfaction to Mr. Barnes but has not received a response.1
The courts finds that the debtor has satisfied the mortgage in question which is recorded at Real Property 0244 PAGE 0172 et seq., in the Probate Office of Montgomery County, Alabama.
The real property under that mortgage is described as:
Commencing at the Southeast corner of Section 18, Township 16, Range 20, Montgomery County, Alabama, thence North along the section line 6.80 chains to a point on the North side of the right of way of U.S. Highway 80, thence Easterly along the North side of said Highway 2.02 chains to the point of beginning, thence North 15 degrees West 2.18 chains, thence North 70 degrees 30 minutes East 3.50 chains to the West line of the Old Line Creek Road (now known as Ware’s Ferry Road), thence South 38 degrees East along the West side of said Old Line Creek Road 4.80 chains to the North side of U.S. Highway 80, thence Westerly along the north side of said highway 5.52 chains to the point of beginning. Said tract containing 1.37 acres and being same identical property conveyed to Mortgagors by deed from Gene M. Handy and wife dated November 16,1964.
It is therefore ORDERED that
1. James R. Barnes is directed to execute, acknowledge, prove and record all such documents necessary for satisfaction of the mortgage to real estate described above thereby permitting the debtor to obtain satisfaction of the mortgage.
2. James R. Barnes has 30 days from the date of this order, or until Friday March 28, 1997, to execute, acknowledge, prove and record all such documents necessary to satisfy the mortgage in the debtor.
3. If James R. Barnes fails to do all acts necessary to satisfy of record the real estate mortgage of the above described real estate in the debtor, then this order shall stand, pursuant to Rule 70 of the Federal Rules of Civil Procedure,2 incorporated as Rule 7070 *575of the Bankruptcy Rules3, as a judgment satisfying the mortgage of the above described real estate from James R. Barnes in favor of the debtor, Willie James Anderson. This judgment has the effect of conveyance executed in due form of law4 and is a satisfaction of the mortgage for recordation purposes.
4. The court may provide any penalties as may be necessary and allowed.5
. An Order of this court entered on September 29, 1993 pursuant to a compromise and settlement agreement between the debtor and James Barnes provided that:
[I]f the debtor ... pays James R. Barnes the sum of $12,500.00 before his case is dismissed, and he completes his case and receives his discharge, then in such event, James R. Barnes is ordered to satisfy of record and discharge the real estate mortgage indebtedness that he claims of debtor ...
. See United States v. One (1) Douglas A-26B Aircraft, 662 F.2d 1372 (11th Cir.1981): "Rule 70 is designed to deal with parties who seek to thwart judgments by refusals to comply with orders to perform specific acts ... and is not appropriate where the party seeking relief does not allege noncompliance with any order issued by the court.”
In the case at bar the court has issued an order to show cause and the debtor has further requested an accounting and that the mortgage is due to be and should be satisfied due to payment in full under the debtor's Chapter 13 plan, both the motion and order have not been acted upon by the mortgage holder James R. Barnes.
See also In re Health Science Products, Inc., 191 , B.R. 915 (Bkrtcy.N.D.Ala. 1995): "After property owner refused to honor a contract requiring him to transfer title to a manufacturing plant to the debtor, the bankruptcy court would enter an order requiring the property owner to take action necessary to transfer title to the manufacturing plant to the debtor, and if the property owner did not do so, then the order required *575those with the power and authority to do so ...” “Further, the court may direct another to perform the act or if the case involves the conveyance of land and the land is in the court’s district, the court may enter an order divesting the recalcitrant party of its interest in the land and vesting that interest in another."
. The court is aware that Rule 7070 of the Bankruptcy Rules is applicable in Adversary Proceedings. The court’s authority for its holding in this case is further supported by Rule 70 of the Federal Rules of Civil Procedure and by 11 U.S.C. 105 of the Bankruptcy Code.
. See Rule 7070 of the Bankruptcy Rules which states, in part:
If real or personal property is within the district, the court in lieu of directing a conveyance thereof may enter a judgment divesting the title of any party and vesting it in others and such judgment has the effect of a conveyance executed in due form of law.
.Alabama Code section 35-10-30 (1975) provides for a penalty of $200 for failing to make an entry required by this article for 30 days after the request is made. Also, Rule 70 of the Federal Rules of Civil Procedure and Rule 7070 of the Bankruptcy Rules grant the court authority to find a party in contempt "in proper cases”, “direct the act to be done at the cost of the disobedient party ...", and "on application ... the clerk shall issue a writ of attachment or sequestration against the property of the disobedient party to compel obedience to the judgment.” | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492515/ | ORDER
JOYCE BIHARY, Bankruptcy Judge.
This case is before the Court on cross motions for summary judgment relating to the debtor’s objection to the claims asserted by Richard D. Ellenberg, in his capacity as trustee of Midland Mechanical Contractors, Inc. (“Midland”). The debtor in this case is Stephenson Associates, Inc. (“Stephenson” or “debtor”). Both Midland and Stephenson were construction companies. Stephenson argues that any claim by Midland is offset by the prepetition claims which Stephenson has against Midland. Mr. Ellenberg argues that the terms of Stephenson’s confirmed plan preclude Stephenson’s objections to Midland’s claim or, alternatively, that Stephenson’s objections are barred by the doctrine of laches. After reviewing the briefs and the record in this case, the Court concludes that Stephenson’s objections should be sustained, arid Midland’s claim is disallowed.
The material facts are undisputed. Midland filed a petition for relief under Chapter 11 of the Bankruptcy Code on March 11, 1993, The debtor in this case, Stephenson Associates, Inc., filed a Chapter 11 ease on March 23,1993.
The Midland ease, Case No. 93-62925, was also filed in this district and was assigned to the Honorable W. Homer Drake, Jr. On June 24, 1993, the debtor in this case, Stephenson, filed a proof of claim in the Midland bankruptcy for $1,379,505.17. On March 21, 1994, the Court granted the United States Trustee’s motion to appoint a Chapter 11 Trustee in the Midland case, and Mr. Ellen-berg was appointed as the Chapter 11 Trustee. Some fourteen months later, on May 17, 1995, Mr. Ellenberg filed a motion to convert the Midland case to Chapter 7, and the case was then converted on July 11, 1995. Mr. Ellenberg continued to serve as the trustee.
In the meantime, the Stephenson case moved quickly to confirmation of a Chapter 11 plan. On July 29,1993, the Court entered an Order confirming' Stephenson’s Chapter 11 plan. Debtor filed an application for final decree on December 15, 1994, and the case was closed on December 30,1994. In August of 1995, debtor’s counsel filed a motion to reopen the Stephenson case to administer an unscheduled asset, unrelated to the matter now before the Court. The motion to reopen was granted.
*611On December 19,1995, Stephenson filed an objection to any claim by Midland in the Stephenson Chapter 11 case. The Court held a hearing on the objection on February 21, 1996. At the hearing, counsel for Mr. Ellenberg acknowledged that neither Midland or Mr. Ellenberg, as Midland’s trustee, ever filed a proof of claim in the Stephenson bankruptcy.
Counsel then described the entries on debtor’s schedules pertaining to Midland. Debtor’s Schedule F — “Creditors Holding Unsecured Non-Priority Claims” — is some twenty-three pages long. At the top of the first page of Schedule F, debtor’s counsel typed the following entry:
“ * * All debts reflected unliquidated * * ”
Counsel explained that the reason he listed all debts as unliquidated was because the controller had defrauded the company out of untold tens of thousands of dollars (Tr. At 9). Debtor’s counsel used this single notation of unliquidated instead of checking a column labeled “CUD” on each line item on each page. (The column “CUD” presumably means contingent, unliquidated, disputed.) Midland is listed on pages eleven, thirteen, and fourteen of the schedules, and there is nothing on these particular pages indicating their unliquidated status. Counsel for Mr. Ellenberg stated that he did not file a proof of claim because he did not understand that the Midland claims were listed as unliquidated.
At the hearing, the Court concluded that the claim should be resolved on the merits. The Court advised counsel that under the circumstances, the Court would decline to hold Mr. Ellenberg’s claim as time-barred, that the Court would give Mr. Ellenberg time to file a proof of claim in the Stephenson case, and that counsel should proceed to try the objection on the merits (Tr. At 13).
The Court directed counsel to submit an abbreviated pretrial order in thirty (30) days with respect to the claims objection, so that the matter could be set down for trial. Mr. Ellenberg filed a proof of claim on March 4, 1996, in the Stephenson case for $104,208.00. Counsel filed four joint motions to extend time to file this pretrial order, stating that they needed additional time for discovery and to file motions for summary judgment. On the fourth such request to extend time, the Court wrote “No further extensions.” The motions for summary judgment were then filed.
Debtor filed a detailed statement of material facts as to which there is no genuine issue to be tried, along with the affidavit of W. Barry Wallis, the CEO of Stephenson. While the response filed by Mr. Ellenberg argues that Mr. Wallis’ affidavit does not support the numbered material. facts, the Court has carefully reviewed and compared the material fact statement with Mr. Wallis’ affidavit and finds that the statements of material fact are well-supported by the statements in the affidavit. Thus, there is no material dispute of fact with respect to the underlying merits of this dispute.
In 1991, Stephenson contracted with Midland to provide certain labor and services in connection with the construction of the Georgia Dome. The amount of debtor’s contract with Midland was $1,440,164.10. As of October of 1992, Midland still owed Stephenson $781,369.70 for the labor and services provided pursuant to the construction of the Georgia Dome. On October 14, 1992, a Consent Judgment in the amount of $781,369.76 was entered in favor of Stephenson against Midland in the Superior Court of Fulton County, based on the amounts owed to the debtor by Midland in connection with the Georgia Dome project. As of the date of Stephenson’s bankruptcy, Midland had not satisfied its liability under the Consent Judgment.
Midland also owed the debtor $265,000.00 for services rendered pursuant to the construction of Phase III of Grady Hospital, $333,135.00 for services rendered pursuant to the construction of Phase I of Grady Hospital and other miscellaneous projects, and $351,-744.98 for services rendered pursuant to the construction of the Municipal Courthouse. These debts arose prior to the filing of Stephenson’s bankruptcy petition.
Under the confirmed plan in the Stephenson case, debtor’s claims against Midland, based on the Georgia Dome project and the Grady Hospital Phase III project, were assigned to Nations Bank, an unsecured credi*612tor of the debtor. Debtor’s claims against Midland for $333,135.00 based on the Grady Hospital Phase I project and for $351,744.98 based on the Municipal Courthouse project were not assigned to Nations Bank.
As previously stated, debtor filed a proof of claim early in the Midland bankruptcy ease for $1,379,505.17. At the present time, debtor’s claims against Midland for the $333,-135.00 owed in connection with the Grady Hospital Phase I project and for $351,744.98 owed in connection with the Municipal Courthouse project remain unpaid. Thus, the total amount owed to the debtor Stephenson by Midland is some $684,879.98. This exceeds Midland’s claim against Stephenson filed in the amount of $104,208.00.
Mr. Ellenberg argues that the Court should not reach the merits of Stephenson’s objection to his claim, i.e., whether there is a setoff, such that Stephenson does not owe Midland any money. First, Mr. Ellenberg argues that the order confirming Stephenson’s Chapter 11 plan has a res judicata effect, precluding any objection to Midland’s claim. This argument is without merit. The plan classified all allowed unsecured claims as Class Five creditors and provided in § 3.5, “In order for an unsecured creditor to have an allowed claim, said claim must be allowed under 11 U.S.C. § 1111(a) or under 11 U.S.C. § 502(a).” Section 1111(a) provides as follows:
A proof of claim or interest is deemed filed under § 501 of this title for any claim or interest that appears in the schedules filed ..., except a claim or interest that is scheduled as disputed, contingent, or unliquidated.
As previously described, Stephenson considered all of the unsecured claims to be unliquidated and noted this on the first page of its Schedule F. Mr. Ellenberg takes the position that because this notation appears on page one of Schedule F, and not on pages eleven, thirteen or fourteen of Schedule F, where Midland is listed, that his claim should be “deemed allowed,” regardless of whether Midland is really owed any money. This argument was rejected by the Court at the February 21, 1996 hearing, and Mr. Ellen-berg was given time to file a proof of claim.
Mr. Ellenberg also argues that the debtor’s plan precludes any objections to claims after the confirmation. This argument is contradicted both by the terms of the plan and by the ease law. Section 5.6 of the plan specifically allows the debtor to file objections to claims or interests and further provides that those objections will be resolved by the Bankruptcy Court. In fact, the debtor filed several objections to proofs of claim after confirmation. Neither the plan, nor the order of confirmation, nor the Federal Rules of Bankruptcy Procedure set a deadline for filing objections to claims. Furthermore, in Chapter 11 cases generally, objections to claims are not required to be filed prior to confirmation of a plan. See, e.g., Council of Apartment Owners of Bellaire House Condominiums, Inc. v. Yentis (In re Yentis), 125 B.R. 158, 162 (N.D.Tex.1991); In re Kula, 107 B.R. 225, 226 (Bankr.D.Neb. 1989).
Mr. Ellenberg’s second argument is that Stephenson’s objection on the merits should be barred by the doctrine of laches. Mr. Ellenberg argues that too much time has passed, and that he does not have the books and records he needs to prove his claim. This may be so, but the undisputed facts demonstrate that laches will not apply here. Stephenson is not responsible for the delay between the filing of the Midland case and the appointment of Mr. Ellenberg as a trustee. Nor has Mr. Ellenberg explained why Midland’s counsel or the trustee did not bring his claim to Stephenson’s attention at an earlier time. At the February 21, 1996 hearing on this objection, counsel for Mr. Ellenberg stated that when he came in as Chapter 11 trustee (which would have been in late March of 1994), he reviewed the schedules and the Stephenson plan and determined that Midland was entitled to 25% of its unsecured claim. The plan provided that payments were to begin on the first day of the first month following the date on which the confirmation order becomes final. Thus, payments were to begin on September 1, 1993.
Counsel for debtor Stephenson announced at the hearing on this matter that the first *613time he had notice of a claim by Mr. Ellen-berg was when he received a letter from Mr. Ellenberg requesting payment in May of 1995. The delay between September 1, 1993 and May of 1995 cannot be attributed to Stephenson. Counsel considered the request for payment between May and December of 1995, when Stephenson filed an objection. This seven-month delay is not unreasonable. Finally, the delay between the filing of the objection in December of 1995 and the present time is due to the four extensions of time which the parties sought jointly. Accordingly, the doctrine of laches cannot apply here, and the objection must be resolved on the merits.
Reaching the merits of the objection, Stephenson has presented undisputed facts showing a proper setoff. Stephenson had filed a proof of claim in the Midland bankruptcy for $1,379,505.17. Although Stephenson assigned some portions of the claim to Nations Bank, Stephenson retains a claim in excess of $680,000.00. The claim by Mr. Ellenberg against Stephenson is in the amount of $104,208.00. Stephenson is entitled to exercise its right of setoff, and Midland does not have an allowable claim against Stephenson.
Stephenson argues, in the alternative, that Mr. Ellenberg’s claim is a compulsory counterclaim which should have been asserted in the Superior Court action and cannot now be raised in the instant bankruptcy ease. Stephenson contends that Mr. Ellenberg’s claim against the debtor arose out of the construction of the Georgia Dome, and Midland should have asserted the claim in the Superi- or Court action in which the consent judgment was entered. The Court need not reach this issue, given the determination that the claim by Midland against Stephenson is offset by Stephenson’s claim against Midland.
Accordingly, debtor’s motion for summary judgment is GRANTED, Mr. Ellenberg’s motion for summary judgment is DENIED, and the claim filed by Mr. Ellenberg as trustee of Midland is DISALLOWED.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492516/ | MEMORANDUM & ORDER
KEVIN THOMAS DUFFY, District Judge.
This is an appeal from two bankruptcy orders of Bankruptcy Judge Conrad. The orders relate to an agreement (“the Agreement”) between the debtor District 65 (“the Union”) and the Appellant, New York Property Holding Corp. (the “Purchaser” or “NYPHC”), pursuant to which NYPHC was to purchase the premises at 13-25 Astor Place (“the Property”).
The Agreement set the purchase price at $5,650,000 and required NYPHC to make a $100,000 deposit upon its execution and another $150,000 upon the Bankruptcy Court’s approval of the sale. Under the Agreement (Art. 2):
Purchaser’s failure to make any of such payments when due shall constitute Purchaser’s material breach of, and default under this Contract and shall, in addition to any other rights and remedies Seller may have under the circumstances, entitle Seller to cancel and terminate this Contract and to retain all sums theretofore paid by Purchaser as agreed liquidated damages hereunder.
*678The Agreement required the Union, as seller, to provide vacant premises upon conveyance of title to the Property (Art. 6):
Except as to the leases, tenancies and occupancies set forth on the annexed Schedule C, the premises shall be vacant and reasonably free of rubbish and debris upon conveyance of title and delivery of possession.
The Agreement recognized that it — as well as the Union’s obligations under it — was subject to the Bankruptcy Court’s approval (Art. 14(a)):
this Contract, and Seller’s obligations hereunder, are subject to and conditioned upon the entry of an order by the Bankruptcy Court approving this Contract [and] the sale hereunder ...
The Agreement also contained a provision establishing time to be of the essence against NYPHC, the Purchaser (Art. 14(d)):
Time shall be of the essence as against Purchaser as to the Closing of the title hereunder by the 45th day after [ ] approval [of the Agreement by the Bankruptcy Court], subject, however, to a reasonable further adjournment by seller only, for any reason, or to an adjournment with Seller’s consent, in either of which events time shall be of the essence as against Purchaser on such adjourned date of closing.
The Agreement contained a provision preventing the parties from orally modifying or terminating it (Art. 22) and one providing that the Agreement would be governed and construed under New York law (Art. 23).
BACKGROUND
The facts, as found by Judge Conrad, are as follows. The Union filed a Chapter 11 petition in January, 1993. In June 1993, the Union and the Purchaser signed the Agreement. Judge Conrad approved the Agreement by an Order of Sale he issued on July 6, 1993. The initial scheduled closing date was August 20,1993, but the parties failed to close on that day. The parties were unable to close by August 23, 1993, 45 days after Judge Conrad had approved the Agreement.
On September 29,1993, the Union requested an adjournment to extend the closing date fixed in the Bankruptcy Court’s order of sale for an additional 67-day period until (and including) October 29,1993, solely at its own discretion and with time of the essence as against the NYPHC. The NYPHC, in the form of objections to the Union’s application for an extension order, requested that the court provide a new closing date which would be “at least 45 days after the compliance by the Debtor of the provisions for delivery of possession so as to enable the purchaser to execute the commitment and close title in accordance with the terms of the contract.” The Purchaser explained its request as follows:
The purchaser has sought financing and one of the conditions for issuing the commitment was the vacancy of the entire building other than those units set forth on Schedule C. As of this date, notwithstanding the assurance of the [Union] that the same would be vacant, the premises is still occupied by various union organizations. Obviously, the [Union] has not complied with the terms of the agreement and is not now willing and able to close.
On October 7, 1993, Judge Conrad issued an Order authorizing the Union to extend the closing date until (and including) October 29, 1993. The Order stated the following:
ORDERED, that any such adjournment of the closing of title shall be solely at Debt- or’s discretion, with time of the essence as against Purchaser on such adjourned date; and it is further
ORDERED, that except as herein provided, the Order of Sale shall be and remain in full force and effect according to its terms.
ORDERED, that the objection of [Purchaser] is DENIED.
On October 11, 1993, the Union scheduled a new closing date of October 22,1993 and so notified the Purchaser. On October 13, 1993 Purchaser notified the Union that it rejected October 22 as a closing date and requested a further adjournment. The Union treated this rejection as an anticipatory breach of the Agreement. On October 21,1993 the Property was fully vacated; thus the Union was prepared to close the next day. On October *67922, the Purchaser requested that the court adjourn the closing date.
Between August and October, the parties corresponded regularly in an attempt to close the transaction. In his Order of February 11,1994 (“the February Order”), Judge Conrad had this to say about their correspondence (at 3, fn. 3):
Although the dialogue between the parties addressed conditions requisite before closing could occur, no dates were set for closing with the exception of August 23 and October 22. * * * Apparently, Purchaser’s funding was subject to vacancy of the premises. Because the contract only required the premises to be vacant upon closing, [the Union] did not entirely vacate the premises until immediately before the October 22 closing date. Purchaser’s complaint of “four months of broken promises” (Response of [Purchaser] to [Union]’s 6 December 1993 Letter Reply to Memorandum, p. 4) refers to assurances made by the [Union] — unrelated to any contract conditions- — that the property would be vacated. Such assurance were not provided by the contract, nor was vacancy prior to closing. Only one true adjournment of the contract occurred.
Between October 29th and December 2nd, the Union negotiated the terms of a new Purchase Agreement with IOWNA Corporation. At a hearing on December 2, Judge Conrad offered the Purchaser one more opportunity to close the transaction at that time, but the Purchaser was unable to close then and there; rather it offered $1,000,000 in bank checks and asked for an additional week to provide the rest of the purchase price.
At that point in the hearing, the Union pointed out that the Agreement was “not conditioned on financing; financing is not our concern, and we also had no obligation to assist [Purchaser] in their financing if the question was whether or not the building was vacant.” Judge Conrad agreed with the Union. He ruled in the course of the hearing that the Agreement was no longer in effect because the Purchaser had defaulted (“the December Order”). He also signed an Order which authorized the Union to sell the Property to IOWNA for $6 million — $350,000 more than the Purchaser had agreed to pay. The Purchaser asked for an evidentiary hearing to determine “the reasonableness of the [Union]’s unilateral fixing of a ‘time of the essence’ closing date” of October 22nd and whether or not the Union had acted in bad faith in setting that date.
In his memorandum of February 11, 1994, Judge Conrad ruled that the Union fairly withheld the Purchaser’s $250,000 deposit as liquidated damages pursuant to the Agreement. In March, 1994, he signed an Order submitted by the Union authorizing it to retain the deposit as liquidated damages (“the March Order”). The Purchaser is now seeking reversal of the Orders.
DISCUSSION
In its brief on appeal, the Purchaser makes much ado about two totally irrelevant subjects: (1) its own financing requirements; and (2) the fact that the building did not become totally vacant until the day before the date for closing. The contract clearly was not conditioned upon or subject to the Purchaser obtaining financing. The Purchaser was represented by able counsel at the time that the contract was signed. The contract specifically provided that it could not be changed orally. For the Purchaser to complain now about these items is totally inappropriate. Likewise, there was no requirement in the contract for prior vacancy of the building — only that the building be vacant as of the date set for closing. That happened and Purchaser has no real complaint on the vacancy question.
I turn then to the legal issues raised by the Purchaser. Both of these issues are merely matters of contract interpretation.
The first argument advanced by Purchaser complains that the Bankruptcy Court made “Time of the Essence,” whereas the Purchaser claims it should have had “a reasonable time” to close the deal. This argument totally ignores the plain words of the contract. The words “time shall be of the essence as against ... Purchaser on such adjourned date of closing” mean just that. The fact that the adjourned date was also *680included in a court order certainly does not take away from the “Time of the Essence” factor. Being unwilling or unable to dose on the adjourned date does not relieve Purchaser of its obligations nor of its breach of contract.
The second issue raised is whether or not the Purchaser’s down payment may be retained by the Bankrupt’s Estate. The answer, once again, is to be found in the Contract. Article 2 of the Agreement provides that any breach “entitle[s] the Seller to cancel and terminate this contract and retain all sums therefor paid by Purchaser as agreed liquidated damages hereunder.” Purchaser would have this court refund its down payment because the Debtor was fortunate enough to be able to sell the property involved at a price higher than that contained in the Contract. The idea behind liquidated damages, however, is for the parties to set a sum to be considered as damages without regard to the real damages, thus, if the Bankrupt’s Estate had been seriously damaged in an amount far in excess described in the Contract, the Purchaser would not want to pay the higher sum, but would then rely upon the liquidated damages clause. The liquidated damages clause is for the benefit of both parties and, even though the Bankrupt’s Estate was not severely damaged, the Estate is entitled to the liquidated sum as prescribed in the contract.
The various arguments raised by the Appellant are truly not about the actions of the Debtor or the decision of the Bankruptcy Court, but are really complaints against the bargain which the Purchaser made. Having made just that bargain, the Purchaser has no right to ask to be relieved of it merely because its unreasonable expectations were unfulfilled.
The Orders appealed from are hereby affirmed.
SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492519/ | OPINION1
WARREN W. BENTZ, Bankruptcy Judge.
Introduction
On November 30, 1992 (“Petition Date”), Sharon Steel Corporation (“Debtor”) filed its voluntary Petition for relief under Chapter 11 of the Bankruptcy Code. Citibank, N.A. for itself and as Agent for Lenders (“Citibank”) holds a security interest in substantially all of the Debtor’s assets. As of the Petition Date, Citibank was owed approximately $77,000,000. Citibank’s claim has been reduced over the course of the bankruptcy, but has not yet been paid in full. The Movants served as employees of the Debtor during the postpetition period until the Debtor’s main facility was sold to Caparo Steel Company (“Caparo”) on or about November 30, 1994. During the postpetition period, the.Movants were paid all of their wages, holiday pay, vacation pay and, in one instance, paid maternity leave. Other benefits such as severance pay, health, prescription, dental, vision, and life insurance (collectively, the “Fringe Benefits”) were not paid. Movants seek payment of the postpetition Fringe Benefits as an administrative expense from the Debtor’s estate and as a § 506(c)2 claim against Citibank. The Debtor, Citibank, and the Official Committee of Unsecured Creditors (“Committee”) oppose the relief requested. An evidentiary hearing was conducted over a period of two days and the matter is now ripe for decision.
*778
General Background
Prior to the Petition Date, Citibank had curtailed the amount of its advances to the Debtor. Debtor had ceased operation of its steel-making facilities. Health benefits had been terminated for non-payment of premiums. Shortly after its bankruptcy filing, Debtor sought the use of Citibank’s cash collateral to restart operations. An initial hearing was held on December 2, 1992. The hearing was followed by an Order dated December 7, 1992 which authorized the Debtor to make certain specific expenditures from Citibank’s cash collateral including:
(c) a disbursement to Mutual of Omaha Insurance Company and other health benefit administrators in the amount of $50,-000 as the start-up and administration cost for processing retiree and active health benefit claims;
(d) a disbursement to Greenwood Pharmacy or its successor of an additional $25,000 for the Debtors’ prescription drug program;
(e) a disbursement to Metropolitan Life Insurance Company to maintain life insurance coverage for active employees and retirees;
(f) disbursements for wages to engage plant guards, firewatch personnel, and other necessary office personnel and staff, and related wage taxes and costs for the post-petition work and related expenses ...
In the same Order, Citibank was provided adequate protection:
4. As adequate protection pursuant to Sections 363 and 361 of the United States Bankruptcy Code, the prepetition liens of Citibank, N.A. as agent for the bank lenders shall continue postpetition and the prepetition liens of Citibank, N.A. as agent for the bank lenders shall continue in property acquired by the estates or the Debtors after the commencement of the cases.
Following two days of testimony on December 8-9,1992, the Court declined to allow the Debtor the full use of Citibank’s cash collateral:
My temporary conclusion, as I’m required to make under the code, is that we stay the way we are. The outstanding Order will be continued. I will not make an Order for — at this time for the — on a temporary basis for the company to reopen and recommence operations. That doesn’t mean that I won’t do it on a permanent basis, if we have further hearings or after I consider the evidence further.
But as this juncture my Order will be that the existing Order will stay in effect. Which simply means that the utilities will be paid and certain employees will be there and the guards will be there and the plant will be protected.
A final hearing on the Debtors’ request to use Citibank’s cash collateral was held on April 6, 7 and 8, 1993. On April 23, 1993, an Order was entered which denied the Debtors’ request to use cash collateral and further provides that “[t]he Debtor shall cooperate with the secured Lenders and limit expenditures to those the secured Lenders deem necessary to protect the Debtors’ assets.”
The Debtor has been in the process of liquidating its assets since that time.
Positions of the Parties
A Movants
Movants assert that although they received their postpetition salaries, holiday pay and vacation pay, they did not receive the promised Fringe Benefits which were set forth as part of the Debtors’ prepetition policies. The Movants assert that the Fringe Benefits were incidental to their employment and that management represented they would continue postpetition. The Movants further assert that their service was necessary to the preservation and disposition of Citibank’s collateral and that the services provided a direct benefit to Citibank.
B. Debtor/Committee
The Debtor asserts that the Fringe Benefits were not a term and condition of the Movants’ postpetition employment. The Debtor posits that the various medical benefits were terminated prepetition and that there was no promise that they would be *779restored. Similarly, the life insurance policy was terminated shortly after the Petition Date and payroll deductions for life insurance premiums ceased in January, 1993. Therefore, Debtor asserts that the Movants voluntarily chose to continue their employment without such benefits and that their claim must be refused both as an administrative claim under § 503 and as a § 506(c) claim.
The Debtor asserts that there is no evidence that a severance policy was in existence prepetition and that no promise was made to pay severance postpetition; that if a severance policy existed, it was not paid when an employee left for other employment; that the Movants left for other employment and are not eligible for severance. The Debtor further asserts that if the Movants are entitled to severance pay, they have -incorrectly calculated the amounts. The Committee asserts that the Movants’ claims must be apportioned between pre- and postpetition claims.
Finally, Debtor has asserted that the Movants lack standing to assert a § 506(c) claim and that the services provided by Movants did not provide the necessary benefit to qualify for § 506(c) treatment.
C. Citibank
Citibank asserts that the Movants’ Fringe Benefits were canceled prepetition and if they were not canceled prepetition, the amount must be apportioned between prepetition and postpetition claims. Citibank further asserts that the Movants’ claims are not entitled to § 506(c) treatment because there was no direct benefit beyond the wages paid to the Movants and Citibank did not consent to the payment of Fringe Benefits. Finally, Citibank asserts that any allowed § 506(c) claim must be paid from the § 506(c) fund established by this Court’s Order of February 15, 1995 and that any § 506(c) payment may not reduce Citibank’s claims and must be deemed to have come from that part of the Debtor’s estates which constitutes surplus in excess of Citibank’s claims.
Facts
A Witnesses
The Court heard testimony from Movants Greer, Darby, Herman, Walsh, Blair, Gianeola, Generalovich, Schuller, Laroeca,' Arthur, and Huff. Citibank and the Debtor presented the testimony of Joseph Santarlasci, Jr. (“Santarlasci”), a financial consultant to the Debtor. Also admitted as an exhibit is the deposition testimony of Debtor’s former senior vice president, general counsel and secretary, Malvin Sander (“Sander”).
B. Prepetition Benefit Policy
The Debtor’s prepetition policy concerning fringe benefits is set forth in a company newsletter which was distributed to employees. The described benefits include, inter alia:
—Life insurance (small payroll deduction) —Health coverage (comprehensive 80/20 Plan with $400 deductible and maximum out of pocket expense of $1,000)
—Dental (percentage of usual, reasonable and customary charge (100%, 85%, and 50%) and maximum of $1,000 per year per insured
—Vision (eye exam, lens and frames- — once every two or more years — a portion of charges is paid)
—Prescription (mail order program — $5.00 per prescription — generic drugs)
The severance policy (“Severance Policy”) for salaried employees is dated May 16,1988. It provides, in relevant part:
I. OBJECTIVE
A. To provide salary/income continuance to terminated employees while they seek alternative employment.
II. POLICY
A. Severance pay will be provided only when the employee is involuntarily terminated due to elimination of the employee’s assignment and no comparable new assignment is available and offered within the employee’s commuting range.
B. Severance pay will not be provided if the employee resigns or is termi*780nated for cause. Terminations for cause include terminations for repeated occurrences of grossly inadequate performance.
III. SEVERANCE BENEFIT
An eligible terminated Employee’s severance benefit will equal one week’s salary for each full year of service. The maximum severance benefit is ten weeks’ salary. There will be no pro-ration for a partial year of service. The minimum severance benefit an eligible terminated employee will receive is two weeks’ salary.
VI. ADMINISTRATION AND AMENDMENT
The Company, as the Administrator of this severance benefit, reserves the right, with appropriate notice to employees, to mend (sic) or terminate the Plan.
VII. This policy is not applicable to officers of the Company, elected or appointed.
Officers of the Debtor were provided a different severance benefit based on a document entitled OFFICER TERMINATION ALLOWANCE SCALE which provided for a severance benefit calculated according to the employee’s age and years of service at termination. Regarding the officer termination allowance, an inter-office communication dated May 10,1989 states:
Individual circumstances may dictate a deviation from the scale attached; however, in all cases, the Executive Vice President and Chief Operating Officer’s final approval will be required in determining applicable termination allowance.
C. Health Care Coverage
The Debtor’s health care insurance carrier, Blue Cross/Blue Shield (“Blue Cross”) notified the Debtor by letter dated November 5, 1992 that it would no longer provide health care coverage to the Debtor due to nonpayment of premiums. Blue Cross agreed to pay claims through October 31, 1992 and stated that it would issue conversion applications to all eligible employees to enable them to obtain coverage on a direct payment basis effective November 1,1992.
Shortly after the Petition Date, Debtor sought permission to use cash collateral. Management fully expected that it would be allowed to use cash collateral to restart operations and that it would be able to provide health care coverage. The December 7 Order allowing certain specific disbursements was not an authorization to provide health care coverage. As stated at the hearing, the payment to Mutual of Omaha was not to process claims, but to enable them to set up to begin processing claims once the court authorized claims to be processed, after the use of cash collateral was approved. Likewise, the $25,000 one-time payment to a pharmacy was to cover only a one-week period until a further cash collateral hearing could be held.
A further hearing was held on December 8-9, 1992 and the Debtor’s request to use cash collateral was denied on an interim basis. Further hearings were scheduled in February, 1993.
Meanwhile, the deadline for conversion to personal, employee-paid, Blue Cross coverage was January 29, 1993. On January 14, 1993, Debtor issued a memorandum to its employees which stated that it had tried to obtain the use of cash collateral to provide health insurance coverage, but was unable to obtain Citibank’s consent or court authorization. The Debtor arranged meetings where employees could meet with various health care providers to provide short-term alternative coverage that the employees could purchase on their own so that they would not be left without any coverage at all. Some of the Movants purchased alternative coverage and some were able to obtain coverage through their spouse’s employment. At this time, the purchased coverage was thought to be short-term as further cash collateral hearings were scheduled and management still expected to restart operations and once again be able to fund health care premiums. Movants were advised to keep an accurate record of their expenditures so that the Debtor could attempt to get them paid. Management expressed a hope that the employees could be reimbursed once authorization to use cash collateral was obtained or through the claims process in the Bankruptcy Court. There was *781no promise by management that the employees would be reimbursed or that health care coverage would be reinstated.
Following the April, 1993 hearings on the use of cash collateral, and the Court’s April 23, 1993 Order, the Debtor was in a liquidation mode. Citibank continued to refuse to fund health insurance benefits. Debtor’s management continued to promise to try and restore benefits. The employees continued to express concern over the availability and cost of privately purchased insurance. In an effort to alleviate the problem, the Debtor asked Blue Cross to establish a group plan which would be self funded by interested employees. Certain employees, including Movants Beachler, Giancola, Greer, Kane, Larocca, Schuller, Walsh and Yaksieh expressed interest in such a plan. Blue Cross was able to accommodate the Debtor. Effective April 1,1994, the employees were able to purchase Blue Cross coverage. Movants Generalovich, Giancola, Larocca, and Walsh were among the employees who elected to participate. In connection with the election, the participants signed a SALARY DEDUCTION AGREEMENT authorizing the Debt- or to deduct the cost of the insurance premiums from their salaries and acknowledging an understanding that revocation of the payroll deduction authorization would result in a termination of benefits.
The Movants now seek reimbursement for premiums paid for health insurance and for out-of-pocket medical expenses incurred due to a lack of insurance coverage.
D. Life Insurance
Movants Arthur, Darby and Huff seek reimbursement for life insurance premiums for insurance they purchased individually to replace the coverage previously provided by the Debtor.
Metropolitan Life Insurance Company (“Met Life”) provided group life insurance for the Debtor’s employees. The employees were required to contribute to the cost of the coverage by way of payroll deduction. The last payroll deduction for life insurance was made in December, 1992. The Debtor lacked funding to pay the insurance premiums. As with the health insurance, Debtor’s ability to provide life insurance was contingent upon approval of the use of cash collateral to restart operations.
Although the Debtor ceased payroll deductions for life insurance after December, 1992, and stopped making premium payments to Met Life, the policy remained in effect until August 20, 1993, pursuant to Court Order allowing Met Life to terminate the policy. In re Sharon Steel Corp., 161 B.R. 934 (Bankr.W.D.Pa.1994).
E. Severance
The Movants each claim two weeks’ severance pay, one for each year that they worked postpetition based upon the Severance Agreement which provided for a severance benefit of one week for each year worked up to a maximum of ten weeks.
Sander, as General Counsel, Secretary and Chief Operating Officer, testified that to the best of his knowledge, the Severance Policy was never rescinded and that the entitlement of an employee would be based upon a legal determination by the Bankruptcy Court.
Movants Arthur, Blair, Generalovich, Gianeola, Greer, Herman, Huff, Larocca and Walsh worked more than ten years prior to the Petition Date. Movants Blair, Darby, Generalovich, Giancola, Greer, Herman, Huff and Walsh were immediately employed by Caparo upon their termination of employment with the Debtor at the same or a higher wage. On December 6, 1994, Movant Darby advised Caparo that she, “in essence [was] working out a notice to Sharon ... through December 15th [and that because of] a personal commitment December 16th through December 19th [she] wish[ed] to officially begin ... employment with Caparo Steel on December 20th.”
It was the Debtor’s policy during the post-petition period to place employees on indefinite layoff status regardless of whether or not they left voluntarily for the reason that displaced employees were entitled to the continuation of certain government benefits regardless of whether or not they have gone on to other employment. Movants were given notice upon leaving employment that they were placed on indefinite layoff status.
*782Darby served as an officer of the Debtor. Darby is not seeking enhanced severance benefits pursuant to the officer’s severance policy. Under the officer’s severance policy, an officer who is seeking severance pay is required to obtain the approval of the Executive Vice President and Chief Operating Officer. When Darby’s employment ended, the offices of Executive Vice President and Chief Operating Officer did not exist or were vacant.
The Debtor did not pay any severance benefit postpetition with the possible exception of certain employees who had individually negotiated employment contracts which provided for a severance benefit.
F. § 506(c)
Pursuant to our order of December 4, 1992, employees remained on the premises to preserve and protect Citibank’s collateral. Following our Order of April 23, 1993, Debt- or’s operations were limited to the preservation of and liquidation of assets. Citibank was the beneficiary of the funds generated through the liquidation process. Citibank continually monitored the process and the job descriptions and number of employees engaged by the Debtor to complete the process. The postpetition service of each of the Movants directly contributed to the preservation and/or disposition of Citibank’s collateral.
Each of the Movants described his or her job responsibilities. Greer was the general manager of the finishing division. During the liquidation process, Greer located, transported and shipped inventory, winterized equipment, inventoried and helped sell various supplies, helped dispose of hazardous wastes, worked on roofs and did repairs.
Darby was involved in the due diligence process with various entities interested in purchasing the facility, including the buyer, Caparo.
Herman was the Director of Environmental Control. During the liquidation phase, he continued to maintain the environmental program which involved maintaining permits and compliance with reporting requirements. The permits were kept in an active state to lead to a smooth transition to a new buyer.
Walsh was the manager of production control. He worked with persons hired to liquidate the steel inventory and discussed operations with potential buyers of the business, including Caparo. He also gave reports on the status of the inventory liquidation to Wigton who was hired by Citibank to oversee the liquidation.
Blair served as a legal secretary. She performed all of the duties required by Sander who was in charge of the liquidation effort.
Gianeola served as director of safety and security. His duties were to ensure the safety of the personnel, the steel remaining at the facilities and the facilities themselves. He worked with insurance companies to keep everything at low risk for the potential of fire, explosions, etc. Gianeola also reported on the progress of the liquidation to Wigton.
Generalovich was the manager of order entry. Postpetition, she designed a program for the sale of inventory and to get the paperwork processed to sell the assets. She produced invoices to customers and collected the accounts receivable which went to Citibank.
Schuller served as general manager of transportation. He assisted in locating the steel inventory, identifying it, worked with customers buying the steel, arranged transportation, loaded the steel and made shipment.
Larocca was the manager of computer systems. He recovered data for all of the inventory systems from the main frame computer, reformatted it, and built an application system on a pc network to keep track of inventory and the cost of inventory. The data was used to keep track of the chemistry, grade and analysis of inventory to facilitate its sale.
Arthur was employed as captain of security. He served as a plant guard but also performed other functions postpetition. He maintained pumps, rotated generators, moved cranes to keep them operational, repaired broken water lines, repaired roofs and helped winterize equipment. Arthur is the only Movant who was an hourly union em*783ployee. All of the other Movants were salaried employees.
Huff was the foreman of engine repair. He maintained water lines, fire systems and pumps to keep them operational and to prevent flooding. He also made repairs to water lines to reduce water usage from 1,400 gallons per minute to 100 gallons per minute.
Sander testified that each of the Movants was involved in the preservation of Citibank’s collateral and that, with the exception of Arthur and Giancola, each Movant was involved in a component of the liquidation of the estate.
Discussion
A. § 506(c) Claim
11 U.S.C. § 506(e) provides:
(c) The Trustee may recover from property securing an allowed secured claim the reasonable, necessary costs and expenses of preserving, or disposing of, such property to the extent of any benefit to the holder of such claim.
Individual creditors have standing to bring a § 506(e) claim as if they were in the shoes of the Trustee. In re Mall At One Associates, L.P., 185 B.R. 981, 987 (Bankr.E.D.Pa.1995) citing In re Visual Industries, Inc., 57 F.3d 321, 325 (3d Cir.1995); see also In re McKeesport Steel Castings Co., 799 F.2d 91 (3d Cir.1986).
To recover expenses under § 506(c), a claimant must demonstrate that (1) the expenditures are reasonable and necessary to the preservation or disposal of the property and (2) the expenditures provide a direct benefit to the secured creditors. In re C.S. Associates, 29 F.3d 903, 906 (3d Cir.1994); see also Visual Industries at 325-26.
The payroll of employees directly and solely involved with the disposition of a secured creditors’ collateral are expenses which are directly related to disposing of or preserving the creditors’ collateral. Visual Industries at 325.
Movants all contributed to the postpetition preservation and liquidation of the collateral for the direct benefit of Citibank. Citibank closely monitored their activities and made sure that only those employees who were absolutely necessary to the liquidation process remained on the Debtor’s payroll.
The Movants are entitled to recover from Citibank or from Citibank’s collateral as a § 506(c) expense whatever they are due under the terms of their employment.
B. Health Insurance
The Movants’ health care coverage was terminated by Blue Cross prepetition. The Debtor and the Movants both believed at that time that health care coverage was incidental to the Movants’ employment and that following the filing of the bankruptcy Petition, the Debtor would be able to obtain the use of cash collateral and restore health insurance benefits retroactive to the date of the Blue Cross cancellation. The Debtor was unsuccessful in its first attempt to use cash collateral at the December, 1993 hearing and Citibank refused to fund health insurance premiums. As the final date for conversion from group to individual coverage under the Blue Cross plan approached, it became apparent to all parties that the Debt- or could not obtain the use of cash collateral by January 29 given that a further hearing on the use of cash collateral was not scheduled until early February. The Debtor arranged meetings between its employees and various insurance providers where the employees could purchase “short-term” coverage until the Debtor could obtain the use of cash collateral and once again provide coverage. The employees were advised to keep track of their expenditures with the hope that they could be reimbursed. All parties still considered health insurance coverage incidental to employment and fully expected that health insurance coverage would be reinstated once the Debtor recommenced operations. The February hearings were continued to April and following the Court’s Order of April 23, all parties knew that the Debtor was going to liquidate; that Citibank refused to provide health care coverage; and that any coverage would have to be funded by the employees.
While the Debtor continued to indicate that it was working on obtaining coverage *784and the consent of Citibank to provide such coverage, everyone knew that health insurance coverage was no longer available as a Fringe Benefit because Citibank refused to provide funds for the coverage and without funds, the Debtor was unable to provide it.
We conclude that health insurance coverage ceased to be a term of the Movants’ employment prior to the Filing Date. The Movants knew that health insurance cover-. age had been canceled and was not available. It was no longer a term of their employment. They chose to continue their employment without the benefit of health insurance coverage with a “hope” that it could be reinstated and that they might be reimbursed for out-of-pocket health care expenses. The Movants have no § 506(c) or § 503 claim for health care coverages.
C. Life Insurance
A similar analysis applies to life insurance coverage. The life insurance provided by the Debtor required a payroll deduc-. tion for the employees’ contributory portion of the premium. The Debtor made its final payroll deduction for life insurance in December, 1992 and advised employees that no deduction would be made in January, 1993 or thereafter as it was not able to fund life insurance premiums. Thus, in January, 1993, Movants knew that life insurance was no longer a term of their employment.
The Movants have no § 506(c) or § 503 claim for life insurance premiums.
D. Severance Benefits
The Severance Policy was in effect prior to the Petition Date and the Movants had no reason to believe it did not continue postpetition. Sander testified that the Severance Policy was never rescinded and that an employees’ entitlement to severance would be based upon a determination of legal issues by the Bankruptcy Court. Sander stated that the length of service is a factual component of that issue.
Caparo purchased the Debtor’s steel-making facility. Each of the Movants seeking severance, other than Schuller and Arthur, a non-salaried employee, accepted employment at the same or higher levels of compensation with Caparo immediately following their last day of employment with the Debtor. Although the Movants who went to work for Caparo were notified that they were placed on indefinite layoff, it was only for the purpose of allowing eligibility for certain government programs for displaced workers. The indefinite layoff status was subsequently crossed off of the forms by Debtor’s management.
Under the Severance Policy upon which the Movants rely, benefits were not paid if an employee left for other employment. Severance was only paid if an “employee is involuntarily terminated due to elimination of the employee’s assignment and no new assignment is available and offered within the employee’s commuting range.” The stated objective of the Severance Policy is “[t]o provide salary income continuance to terminated employees while they seek alternative employment.”
The Debtor and Citibank assert that those employees who immediately went to work for Caparo are ineligible for severance pay because they suffered no loss of income and were not terminated, but rather left to accept other employment. The Severance Policy is silent as to what happens if the company is sold and the employees are retained by a new buyer.
The noninterruption of work does not invalidate the Movants’ entitlement to severance pay. Ulmer v. Harsco Corp., 884 F.2d 98 (3d Cir.1989); In re Wean, Inc., 169 B.R. 126 (Bankr.W.D.Pa.1994) superseded by In re Wean, Inc., 171 B.R. 528 (Bankr.W.D.Pa. 1994); In re Old Electralloy Corp., 167 B.R. 786 (Bankr.W.D.Pa.1994). Although the Movants did not suffer a loss of work, the sale to Caparo terminated the pre-existing relationship between the Movants and the Debtor. The employment with Caparo is with a different entity. .Although the Movants received equal or better wages and benefits from Caparo, Caparo did not recognize their seniority.
As we did in Old Electralloy, we find that the cessation of the Debtor’s operations and the termination of its employment relationship with the Movants upon consummation of *785the sale to Caparo triggers the benefits the Severance Policy. of
The Debtor and Citibank assert that the Movants had accrued the maximum ten week severance allowance prepetition. They posit that there was no additional accrual postpetition, and thus there is no postpetition liability for severance benefits. This issue was addressed in In re Wean, Inc., 171 B.R. 528 (Bankr.W.D.Pa.1994) which states:
Both parties cite In re Roth American, Inc., 975 F.2d 949 (3d Cir.1992), in support of their positions. Roth American identified two types of severance pay claims: those claims that arise at termination of employment (a) in lieu of notice and (b) based on length of employment. Id. at 957. The severance pay in the case at bar is of the second type. Debtor argues that under Roth American the severance pay claims have administrative priority only to the extent that entitlement to the amount of severance pay accrued during the post-petition period. By analogy, the argument applies to the priority period as well. We disagree that the right to a specific amount of severance pay must accrue during the priority or postpetition period in order that the claim fall under § 507(a)(1) or (a)(3). Roth American holds that severance pay claims “only have administrative priority to the extent that they are based on services provided to the bankruptcy estate postpetition.” 975 F.2d at 957. Although there is language in that opinion concerning the timing of the earning of benefits, we do not read it to require that a specific amount of severance benefit must accrue during a priority period; rather, the right to payment at all must accrue at the relevant time. The Court of Appeals pointed out, with respect to § 507 administrative expenses, that § 503 refers to expenses that are actual and necessary to preservation of the estate, including those are incurred in relation to services rendered postpetition. 975 F.2d at 958.
It is undisputed that 125 hourly employees performed services for Debtor in the 90 days prepetition and 120 hourly employees did so until the permanent shutdown. Stipulation of Facts at pp. 4, 5. To the extent that these employees were eligible for severance pay when their employment with Debtor ceased, the severance pay attributable to the postpetition period must be given administrative priority. 11 U.S.C. § 507(a)(1). Similarly, that portion attributable to services performed in the 90 days prepetition falls within the purview of § 507(a)(3). See In re Jeannette Corp., 118 B.R. 327 (Bankr.WDPa.1990); In re Levinson Steel Company, 117 B.R. 194 (Bankr.WDPa.1990).
Section 507(a)(3)(A) refers specifically to severance pay claims which are “earned by an individual 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.” Under the collective bargaining agreement in this case, severance pay was not earned unless a plant or department closed and employees lost their jobs. Employment until the permanent' shutdown was a necessary step to the right to severance pay. Had an employee left the company before the permanent shutdown, that individual would have lost entitlement to all severance benefits. The shutdown occurred postpetition and the employees whose severance is at issue were all employed until the shutdown, including throughout the priority period. Thus, their entitlement to receive severance benefits arose postpetition, although the amounts of the benefits (for all but two employees) were fixed before 90 days prepetition. [FN4] Entitlement to any severance benefit is governed by the contract. Section 507 merely dictates the order of payment to various classes of creditors. FN4. Two employees passed the milestone for length of service and gained additional weeks of severance benefits in the 90 days prepetition. Two others did not qualify for additional benefits because their length of service stayed within the same step during and after the priority period. In summary, portions of severance pay attributable to services performed for Debtor postpetition are entitled to administrative priority under Roth American. Portions of severance pay attributable to the 90-day prepetition period are payable with priority to the extent of $2,000 if not *786already paid. [FN5] Amounts in excess of the $2,000 priority allowance constitute unsecured claims.
In re Wean, Inc., 171 B.R. at 531-32.
Movants assert that they are entitled to two weeks’ postpetition severance benefit, one week for each of the two years worked. Debtor and Citibank assert that the postpetition severance claims must be calculated in accordance with the formula set forth in In re Old Electralloy, 167 B.R. 786 (Bankr.W.D.Pa.1984).
In Old Electralloy, no employees had reached the maximum plateau for the accrual of severance benefits so that post-petition employment potentially increased the severance amount. We viewed the formula as an appropriate method to determine the pre- and post-petition amounts. The formula is inappropriate here. For example, one of the Movants has been employed 40 years. Debt- or and Citibank would have us calculate her postpetition severance allowance as % x 10 weeks or % week, while someone who had worked 8 years’ prepetition and 2 years’ postpetition would receive % x 10 or 2 weeks severance allowance. Such a result would be contrary to the general concept of rewarding long time faithful employees.
We find that each Movant is entitled to a severance benefit representing a two-week salary figure as an administrative claim. Pursuant to the language of our April 23, 1993 Order, Citibank had control of the Debtor’s expenditures. It carefully monitored each dollar the Debtor spent and was intricately aware of the work being performed by Debtor’s employees. Citibank knew that, in effect, it was responsible for payment of the employees’ compensation package. Health benefits and life insurance had been terminated. However, the severance benefit was not terminated and we think that if Citibank did not intend to make such payments, it was incumbent upon it to investigate the status of the employees’ severance benefits and make sure that the employees knew that severance benefits were no longer a condition of their employment. Accordingly, we hold that the severance benefit also qualifies as a § 506 claim against Citibank.
E. Richard L. Arthur Claim
The Debtor and Citibank assert that the claim of Richard L. Arthur (“Arthur”) was reclassified by Order dated November 1, 1994 from unsecured priority status to a general unsecured claim. On August 5,1994, Arthur filed claim number 1707 in the amount of $15,006.21 as an unsecured claim based on an Employee Stock Ownership Plan in the amount of $10,738.63 and an unsecured priority claim for wages in the amount of $763.06. Arthur was not represented by counsel at the time of the objection to his claim in 1994. Arthur asserts that claim 1707 addressed prepetition claims while the claim presently asserted is for postpetition services and that the November 1, 1994 Order has no effect on his current claims. To the extent that the November 1, 1994 Order has any effect on his current claims, Arthur requests reconsideration under Fed. R.Bankr.P. 3008.
Our review of Arthur’s prior claim reveals that it was a claim for totally different items than are being claimed now. We do not believe that the reclassification of his prior claim affects his claim for postpetition Fringe Benefits. His claim for health benefits will be treated the same as those of the other Movants.
Arthur’s claim for severance pay must be refused. The severance policy presented to the Court is limited to salaried employees. Arthur was an hourly employee. Whether or not Arthur has a severance claim under the terms of a union labor contract is not presently before the Court.
F. Lori Darby Claim
Citibank and the Debtor assert that Lori Darby (“Darby”) lacks standing to assert a severance claim because she was a corporate officer of the Debtor, and under the severance policy, she needed approval of certain officers to receive severance pay which she did not obtain. The office of the officers from which she was to obtain approval was not filled at the date of her layoff and therefore it was not possible to obtain such *787approval. Darby is not seeking an upward deviation from the usual severance benefit.
We conclude that Darby is entitled to the same severance benefit as the other Movants.
G.Movants Beachler, Kane, Keeler, Super and Yaksich
The Debtor and Citibank assert that Beachler, Kane, Keeler, Super and Yaksich failed to appear at trial and by reason of their failure to appear, their claims under § 503 and § 506(c) should be dismissed with prejudice.
Movants’ counsel advised the Court at the hearing on September 5, 1996 that Beachler, Kane, Keller and Yaksich did not intend to appear and would be withdrawing their claims. Their claims will be dismissed.
Super, however, intended to be present and would like to pursue his claim. Counsel indicated that Super’s father’s illness prevented him from being present on the day of the hearing.
Super’s counsel had assumed Super would be in Court on the day of trial and only learned by facsimile the day before trial that Super would not attend. The trial date was fixed several months in advance. Further inquiry by the Court revealed that Super’s father was in the Sharon area, roughly an hour and 15 minutes from the Court, not a great distance from his father. We believe Super could and should have been present.
At the time of the hearing, we afforded counsel an opportunity to reach Super to allow him to present his testimony by telephone. Counsel reported that Super was not in his office and could not be located. Super’s claim will be dismissed.
H.Source of § 506(c) Payment
Citibank asserts that the allowed § 506(c) claim must be paid from the § 506(c) fund established by this Court’s Order of February 15, 1995 and that the § 506(e) payment may not reduce Citibank’s claims and must be deemed to have come from that part of the Debtor’s estates which constitutes surplus in excess of Citibank’s claims. The Movants have no interest in the source of the § 506(c) payment so long as it is paid. The Debtor has not addressed this assertion by Citibank and it appears that it may not be an issue. We decline to address the matter at this time. If it later becomes an issue, it can be addressed by separate motion.
. This Opinion constitutes this Court’s findings of fact and conclusions of law.
. All code sections refer to Title 11 of the United States Code, unless otherwise indicated. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492521/ | MEMORANDUM AND ORDER
R. THOMAS STINNETT, Bankruptcy Judge.
This case is before the court upon the debtors’ motion to reopen case. A case may be reopened for cause. 11 U.S.C. § 350(b). The debtors’ stated purpose for reopening the case is to amend their schedules so as to add a pre-petition creditor. The relevant facts are apparent from the record in the case.
The debtors filed a voluntary petition under chapter 7 of the Bankruptcy Code (IF U.S.C. § 101 et seq.) (“Code”) on November 29, 1994. Because it appeared from the schedules there would be no assets for distribution to unsecured creditors, the clerk sent a notice to creditors advising them of the filing of the petition and also advising them there was no need to file claims at that time. Bankruptcy Rule 2002(e). See Form 9A of the Official Bankruptcy Forms. The notice did confirm March 7,1995, as the last day to file complaints to determine dischargeability of debts. See Fed.R.Bankr.P. 4007(c). The notice was sent December 8,1994.
The trustee appointed in the ease later filed what is commonly referred to as a no-asset report indicating there would be no distribution to creditors. A bar date for filing claims was never established. The debtors received a discharge on April 27, 1995. The case was closed June 13, 1995.
Subsequently, a state court civil action for recovery of damages was commenced against the debtors by Chrysler Credit Corporation (“Chrysler”). According to the motion, the claim of Chrysler is a pre-petition claim. Chrysler was not listed on the debtors’ schedules filed in the case and presumably had no knowledge of the bankruptcy at the time the civil suit was instituted. There is no indication whether this debt is of the kind specified in 11 U.S.C. § 523(a)(2), (4), or (6).
Of course, some debts are specifically excluded from the discharge afforded under 11 U.S.C. § 727. For example, certain taxes [11 U.S.C. § 523(a)(1) ], alimony and child support [11 U.S.C. § 523(a)(5) ], fines and penalties [11 U.S.C. § 523(a)(7) ], student loans [11 U.S.C. § 523(a)(8) ], and other types of obligations defined by 11 U.S.C. § 523(a)(9-17) (except 15) may be excluded from discharge without any affirmative action being initiated by the creditor. Such is not the case with respect to those obligations that may be defined by paragraphs (2) [money obtained by false pretenses or actual fraud, or by use of a false financial statement], (4) [fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny], (6) [willful and malicious injury], or (15) [obligations incurred in the course of a divorce or separation not described as alimony, maintenance or child support] of § 523(a) of the Code.
*909The Code and Bankruptcy Rules clearly provide that debt of the kind specified in paragraphs (2), (4), (6), and (15) of 11 U.S.C. § 523(a) will be discharged unless the creditor timely initiates an action to determine the dischargeability of the debt. 11 U.S.C. § 523(c)(1); Bankruptcy Rule 4007(e). Ordinarily, a timely complaint to determine dischargeability of a debt of the kind specified in paragraphs (2), (4), (6), and (15) of § 523(a) of the Code must be filed within sixty (60) days following the first date set for the meeting of creditors. Bankruptcy Rule 4007(c). The Code provides an exception to this general rule in the event a creditor was not listed or scheduled and does not obtain notice or actual knowledge of the case in time to file a timely request for determination of dischargeability of debt specified in paragraph (2), (4), or (6)1 of § 523(a) of the Code. 11 U.S.C. § 523(a)(3)(B).
Likewise, 11 U.S.C. § 523(a)(3)(A) protects creditors that were neither listed nor scheduled and do not have notice or actual knowledge of the case in time to file a timely proof of claim. 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—
... (3) neither listed nor scheduled ... in time to permit—
(A) if such debt is not of a kind specified in paragraph (2), (4), or (6) of this subsection, timely filing of a proof of claim, unless such creditor had notice or actual knowledge of the ease in time for such timely filing; or
(B) if such debt is of a kind specified in paragraph (2), (4), or (6) of this subsection, timely filing of a proof of claim and timely request for a determination of dischargeability of such debt under one of such paragraphs, unless such creditor had notice or actual knowledge of the case in time for such timely filing and request.
11 U.S.C. § 523(a)(3).
Even though a pre-petition creditor does not receive notice of a no-asset bankruptcy case, unless a bar date has been established, the creditor still has time to file a claim and receive a distribution equal to all other similarly situated creditors. Thus, if the court has not set a bar date for filing proofs of claim, then the debt is excepted from discharge, or can be excepted from discharge, only if it comes within one of the other exceptions in § 523(a); in that situation, § 523(a)(3) does not make lack of notice a sufficient ground to except the debt for discharge. In re Mendiola, 99 B.R. 864, 867 (Bankr.N.D.Ill.1989); Karras v. Hansen (In re Hansen), 165 B.R. 636, 638 (N.D.Ill.1994).
If the debt is a debt subject to the exceptions to * discharge as described in § 523(a)(2), (4), or (6), and the creditor does not have notice or actual knowledge of the ease in time to make a timely request for determination of dischargeability of the debt, then the debt is not discharged. Urbatek Systems, Inc. v. Lochrie (In re Lochrie), 78 B.R. 257 (9th Cir. BAP 1987); North River Ins. Co. v. Baskowitz (In re Baskowitz), 194 B.R. 839 (Bankr.E.D.Mo.1996). Any court of competent jurisdiction, including the state court and this court, would have jurisdiction to determine the dischargeability of the prepetition debts if it is asserted that the nature of the debt is described in § 523(a)(2), (4), or (6) under the facts of this ease. 11 U.S.C. § 523(e) and (a)(3)(B); Fed.R.Bankr.P. 4007(b); Fidelity National Title Ins. Co. v. Franklin (In re Franklin), 179 B.R. 913 (Bankr.E.D.Calif.1995).
Although reopening this case in order to allow the debtors to amend their schedules to include Chrysler as a creditor will not affect dischargeability of the debt, the debtors have requested the opportunity to do so. In addition to the unnecessary expense to *910debtors, reopening the case creates needless administrative paperwork. In re Humar, 163 B.R. 296 (Bankr.N.D.Ohio 1993).
The Sixth Circuit has held that in factually distinguishable cases, the failure to allow amendments to schedules is an abuse of discretion. Rosinski v. Boyd (In re Rosinski), 759 F.2d 539 (6th Cir.1985) (“Bankruptcy Judge abused discretion by refusing debtor’s motion to reopen case to schedule dearly dischargeable debt”); Soult v. Maddox (In re Soult), 894 F.2d 815 (6th Cir.1990) (“Allowed debtor to reopen case even though a bar date had been set.”) There may be other reasons not apparent on the face of the motion. Judd v. Wolfe (In re Judd), 78 F.3d 110, 117 (3rd Cir.1996). Thus, cause exists under 11 U.S.C. § 350(b).
The debtors have paid the $130.00 fee for reopening cases as prescribed in 28 U.S.C. § 1930(a). Accordingly,
It is ORDERED that the debtors are allowed to reopen this case in order to permit them to amend their schedules, and the clerk is directed to reopen this case; and
It is further ORDERED that the debtors are allowed ten (10) days from the date of entry of this Memorandum and Order within which to amend their schedules.
This Memorandum constitutes findings of fact and conclusions of law as required by Fed.R.Bankr.P. 7052.
. The Code is silent with respect to a debt specified in 11 U.S.C. § 523(a)(15), perhaps through inadvertence in drafting the 1994 Amendments. See Fidelity National Title Ins. Co. v. Franklin (In re Franklin), 179 B.R. 913, note 25 (Bankr. E.D.Cal.1995); 4 Lawrence P. King, et al., Collier on Bankruptcy ¶ 523.09, note 2 (15th ed. 1996). | 01-04-2023 | 11-22-2022 |
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