url stringlengths 56 59 | text stringlengths 3 913k | downloaded_timestamp stringclasses 1 value | created_timestamp stringlengths 10 10 |
|---|---|---|---|
https://www.courtlistener.com/api/rest/v3/opinions/8492522/ | MEMORANDUM DECISION
ROBERT D. MARTIN, Chief Judge.
Richard Gehrke left his 1934 Chevrolet for sale on consignment at Capitol Corvette in November of 1995. Pursuant to the consignment agreement, David Larson, Capitol Corvette’s sole proprietor, was not to sell the ear for less than $37,500. On Sunday March 24, 1996, Mr. Larson took the car to a car show *946and sold it to Mr. Woods for $35,000 — $33,-300 in cash plus an offset of $1,700 which Mr. Larson owed Mr. Woods for various ear parts. Mr. Woods signed a Used Motor Vehicle Purchase Contract and paid by check post-dated to March 25 with the understanding that Mr. Larson would deliver the ear within two weeks. Mr. Larson deposited the check in his ordinary business account on March 27. By the middle of May, Mr. Larson still had not delivered the ear, so Mr. Woods went to Capitol Corvette and demanded a full refund. On May 16, 1996, Mr. Larson wrote Mr. Woods a check for $34,700. Fewer than 90 days later, on July 11, 1996, this involuntary bankruptcy case was filed against Mr. Larson and relief was ordered.
Mr. Larson’s bankruptcy trustee seeks to recover the $34,700 payment as a preferential transfer. Mr. Woods defends the transfer as not being a preference because Mr. Larson held bare legal title to the money which was held in an “actual or constructive trust.” Alternatively, Mr. Woods asserts there was no preference because the payment was made in the “ordinary course of business” under § 547(e)(2). The ordinary course of business argument was rejected in a partial ruling from the bench at the close of evidence and will not be considered further in this decision.
To prevail under § 547(b) 1 the trustee must show: a transfer of the property of the debtor, to or for the benefit of a creditor, for or on account of antecedent debt, while the debtor is insolvent, within 90 days preceding the petition, and the creditor has received more than what the creditor would have received under Chapter 7. Matter of Smith, 966 F.2d 1527 (7th Cir.1992). In this case, the only remaining issue under § 547(b) is whether the $34,700 transferred was property of the debtor. Mr. Woods claims Mr. Larson had no interest in the money because it was held in trust for the benefit of Mr. Woods. The trust arose because Mr. Larson, as consignee, had an obligation to pass the $34,700 to Mr. Gehrke, the consignor. Property in which the debtor holds bare legal title as trustee would not become property of the estate under § 541 and by extension should not be considered to have been the debtor’s property for this preference analysis. See Smith, supra.
In the present case, Mr. Larson and Mr. Woods did not put the $34,700 in a trust account nor set up a formal trust. At best, Mr. Woods could claim to be the beneficiary of a constructive trust. “Generally, money paid to a debtor prior to bankruptcy by wrongdoing is impressed with a constructive trust that follows it into the hands of the estate.” Collier on Bankruptcy, ¶ 541.13 (15th ed. 1992). Mr. Woods argues the “wrongdoing” was Mr. Larson’s selling Mr. Woods a ear that he could not deliver. If such a constructive trust arose, it did so under common law and not by operation of any statute. Cf. Begier v. I.R.S., 496 U.S. 53, 110 S.Ct. 2258, 110 L.Ed.2d 46 (1990). Furthermore, its purpose would not be the correction of an innocent mistake. Cf. In re Unicom Computer Corp., 13 F.3d 321 (9th Cir.1994). It would be a remedy for the alleged fraud of Mr. Larson.
Under Wisconsin law, a constructive trust is a remedy to prevent unjust enrichment that results from actual or con*947structive fraud, duress, abuse of confidential relationsMp, mistake, commission of a wrong or any form of unconscionable conduct. Prince v. Bryant, 87 Wis.2d 662, 275 N.W.2d 676 (1978). While Mr. Larson may have been unjustly enriched because of his fraudulent dealings,2 “the proponent of the constructive trust must be able to trace a res, identifiable in its original or substituted form.” In the Matter of Milwaukee Cheese Wisconsin, Inc., 164 B.R. 297 (Bankr.E.D.Wis.1993). Under Wisconsin law, “when trust funds are commingled with other funds, the trust may be enforced against any part of the commingled fund which can be traced into the hands of a trustee.” Simonson v. Mc Invaille, 42 Wis.2d 346, 352, 166 N.W.2d 155 (1969).
To prevail, Mr. Woods must identify his money. The $33,300 cheek went into the Capitol Corvette business account in March. In May, Mr. Larson wrote the $34,-700 refund check on the same account. Between March and May Mr. Larson withdrew money and made deposits many times. Where money is commingled in an account and the account is subsequently partially depleted and restored, the “lowest intermediate balance” rule governs tracing. Dan D. Dobbs, Dobbs Law of Remedies, vol. 2 at 22 (2d ed. 1993). Thus, Mr. Woods must trace his $33,300 check — the res — to the $34,700 refund subject to the “lowest intermediate balance” rule.
The Seventh Circuit explained the “lowest intermediate balance” rule in First Wisconsin Financial Corp. v. Yamaguchi, 812 F.2d 370 (7th Cir.1987). Although the parties in First did not seek a constructive trust, they were in effect asking for the same remedy— the return of fraudulently-obtained money. The court explained the “lowest intermediate balance” rule in simple terms:
If $100 is deposited in an account, and later transactions occur, how much of the “original” $100 is left? If subsequent transactions are $200 in, $150 out, and $100 in, the answer is $100, for that amount was always there; but if subsequent transactions are $100 in, $150 out, and $100 in (actual balance $150), the answer is only $50, for that was the lowest balance at any time.
Id. at 375. In short, if the res of a constructive trust is commingled and subsequent withdrawals and deposits are made, the maximum traceable res is the “lowest intermediate balance.”
If the account was overdrawn between the initial deposit and the date of the trust the “lowest intermediate balance” was zero. See In the Matter of Vorbeck, 1993 WL 726350 (Bankr.E.D.Wis.1993). Mr. Larson overdrew the Capitol Corvette account in April 1996. Capitol Corvette’s April bank statements show a low balance of “6277.250D” (Plaintiffs Exhibit 6). Although the specific date of the overdraft is not given, a zero or negative balance anytime during April 1996 is fatal to Mr. Woods’ claim. Because the lowest intermediate balance was zero Mr. Woods cannot trace his $33,300 to the cheek he received in May. The res of the alleged trust was lost. Funds paid to Woods arose from subsequent deposits and would have been property of the bankruptcy estate if still on deposit on the date relief was ordered.
The transfer of $34,700 on May 16 was a transfer of “an interest of the debtor in property,” thus the trustee has established all the formal requirements of § 547(b). By definition a preference is a prepetition transfer in which a creditor gets paid in whole or in part at the expense of other creditors in the bankruptcy. Ginsberg & Martin, Ginsberg & Martin on Bankruptcy, § 8.02 at 8-5 (4th ed. 1996). That is precisely the effect of the May 16 payment to Mr. Woods.
*948Upon the findings and conclusions contained herein judgement may be entered in favor of the trustee in the amount of $34,700.
. 11 U.S.C. § 547(b) provides:
Except as provided in subsection (c) of this section, the trustee may avoid any transfer of an interest of the debtor in property—
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;
(3) made while the debtor was insolvent;
(4) made—
(A)on or within 90 days before the date of the filing of the petition; or
(B)between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and
(5)that enables such creditor to receive more than such creditor would receive if—
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by the provisions of this title.
. Mr. Larson illegally sold on a Sunday for a price below that authorized by the owner a car for which he had no title on the representation it would be repaired and delivered within two weeks when he lacked the ability and presumably the intention to do so. Even if these facts are not conclusive of Mr. Larson's fraud, they are sufficient to require that this case be analyzed as if fraud had been proved. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492523/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW
JERRY A. FUNK, Bankruptcy Judge.
This 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 held on September 18, 1996, the Court enters the following findings of fact and conclusions of law:
FINDINGS OF FACT
L. Bee Furniture filed its petition for Chapter 7 relief on February 23,1996. (Doc. 1). This Adversary Proceeding was filed on April 30,1996. (Doe. 50).
Swindal-Powell Company, Inc. (“Defendant”) is a wholesale furniture distributor located in Jacksonville, Florida and has been in business since 1923. (Tr. 1, 12, 17-21). Defendant supplied furniture to L. Bee Furniture Company, Inc. (“Debtor”), and the two have maintained a business relationship since the 1960’s. (Tr. 8-23).
Mr. David F. Cook, the Treasurer and Secretary of Swindal-Powell, testified that Debtor generally placed orders with Defendant on a weekly basis. (Tr. 19-20). During the months of November 1995 through February 1996, Defendant shipped furniture to Debtor as follows:
[[Image here]]
(Tr. 16-23; Defendant Ex. 3-6).
Mr. Cook testified that the payment terms between Debtor and Defendant were “net 30 days” or 30 days from the date of invoice over the life of the parties’ relationship. (Tr. 20). Prior to the early part of 1995, Debtor established a $10,000 credit line with Defendant. (Tr. 20-21). In early 1995, Debtor’s credit line was increased to $15,000, and an additional increase to $25,000 took place in August 1995. (Tr. 20-21). This credit line remained the same until the Debtor’s bankruptcy petition was filed. (Id.).
With respect to the payment history between the parties, Mr. Cook testified that Defendant attempted to have Debtor pay its invoices within 60 days from the date of invoice although the terms were “net 30 days.” (Id.). This payment pattern existed over the life of the parties’ relationship. (Tr. 22). Mr. Cook further testified that there were times when more than 60 days elapsed between the date of the invoice and date the invoice was paid. (Id.). It was also possible that invoices remained unpaid for over 90 days. (Id.). This was discouraged by the Defendant, but Debtor routinely paid beyond the net 30 days terms. (Id.). Invoices were paid with a company check, and Defendant never requested cash payment. (Tr. 25).
Mr. Cook testified that when the Debtor exceeded its credit line, he would call Mr. Charles Moskovitz, President of L. Bee Fur*984niture, and ask him to send a check to lower the balance, but no action was taken when invoices were not paid within 30 days. (Tr. 23-24). Mr. Cook further stated that the Defendant normally called Mr. Moskovitz at the end of each month and informed him of the dollar amount needed to bring the account within 60 days of outstanding invoice and below the $25,000 credit line. (Tr. 24). Within the past three years, Defendant never received a payment from Debtor without first contacting Mr. Moskovitz, and the calls made to Mr. Moskovitz were non-threatening and amicable. (Tr. 25-30). Defendant neither threatened to stop shipping furniture to Debtor, nor did Defendant threatened to take legal action against Debtor. (Id.). Also, no security interest was ever retained in the furniture Defendant sold to Debtor. (Tr. 31). This way of doing business remained the same over the duration of the parties’ relationship. (Tr. 24).
Mr. Cook further testified that Defendant always accepted Debtor’s post-dated checks for outstanding invoices since 1994. (Tr. 31, 74r-75). Post-dated checks were given to Defendant as long as the parties have been doing business, and checks were usually postdated from ten to fourteen days. (Id.). Defendant never objected to Debtor’s request to hold checks for a week or to post-date checks and continued delivering furniture to Debtor. (Tr. 31). This information was confirmed by Mr. Moskovitz’s testimony.
Charles W. Grant, Trustee of the Debtor’s estate (“Plaintiff’) presented evidence showing that during the preference period, Debt- or made the following payments:
[[Image here]]
(Plaintiff Ex. 1-10). Mr. Cook testified, and Mr. Moskovitz confirmed, that Debtor never told Defendant how each check should be applied, and the checks received from Debtor were applied to the oldest outstanding invoices. (Tr. 33-34; 74-75). For example, check number 28893, dated 11-27-95 for $3,400 was applied to invoices dated 09-18-95 through 09-27-95; check number 28894, dated 11-30-95 for $3,500 was applied to invoices dated 09-27-95 through 10 — 04—95; and cheek number 29065, dated 12-07-95 for $3,110.70 was applied to invoices dated 10-04-95 through 10-10-95. (Tr. 44-46; Defendant Ex. 8). The other seven payments were applied in similar fashion. (Id.).
Defendant also presented evidence regarding Defendant’s business relationship with its other approximately 300 customers. Mr. Cook further testified that the company’s other customers also paid beyond the net 30 days terms. (Tr. 22). Also, other customers have asked Defendant to hold cheeks and have paid with post-dated checks. (Tr. 32). Mr. Moskovitz also testified that it was normal for other wholesalers to have normally accepted post-dated checks. (Tr. 71).
Mr. Elmer James, owner of Regal Furniture, Inc., testified of his general knowledge of industry standards in the retail furniture business. (Tr. 82-102). Mr. James has been in the retail furniture business since 1965 when he began working for Sears, Roebuck & Company. (Tr. 96). He then began operating Regal Furniture Store on April 1,1974. (Tr. 82). Regal Furniture is also one of Defendant’s customers. (Id.). Mr. James testified that it was very common for him ask *985Defendant to withhold depositing a check and has given Defendant many post-dated checks dating back to 1974. (Id.). Mr. James further testified that this is a common way of conducting business in the furniture industry. (Tr. 85-86). See also Defendant Ex. 11. Also, it is very common for furniture wholesalers and retailers to allow their credit terms to go beyond the net 30 days, although the invoices indicate “net 30 days” terms. (Tr. 91).
Defendant concedes that all the requirements of subsection 547(b) are satisfied, and Defendant asserts three affirmative defenses pursuant to subsections 547(c)(1), (2) and (4). (Adv.Rec. 12). Defendant, in its post-trial brief, abandoned subsection 547(e)(1) as an affirmative defense and maintains that transfers sought to be avoided are within the ordinary course of business exception under 547(c)(2) and the new value exception under 547(c)(4). (Id.).
CONCLUSIONS OF LAW
The issues in this proceeding are: (1) 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; and (2) whether Defendant is entitled to the new value exception under subsection 547(c)(4) of the Bankruptcy Code. The Court will address each issue accordingly.
A. Ordinary Course of Business Exception
Defendant asserts that the transfers at issue were payments made in the ordinary course of business and are precluded from being avoided by Plaintiff pursuant to subsection 547(c)(2). (Adv.Rec. 12). 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). The Eleventh Circuit Court of Appeals has highlighted that the Congressional intent of subsection 547(c)(2) 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 1563, 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 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(e)(2) should be narrowly construed. Id.
The parties have agreed that subparagraph “A” of subsection 547(c)(2) is satisfied because the debt was incurred in the ordinary course of business between the Debtor and Defendant. Therefore, this Court must resolve whether subparagraphs “B” and “C” of subsection 547(c)(2) are also satisfied.
The parties have, however, disagreed on the proper construction of subparagraphs “B” and “C” of subsection 547(c)(2). The Plaintiff argues that the Court should conduct a subjective inquiry of subparagraph “B” of 547(c)(2) by examining only the relationship between the debtor and creditor, while subparagraph “C” of 547(c)(2) should be analyzed objectively by looking at the *986industry norms. (Adv.Ree. 11). However, Defendant argues that both subparagraphs “B” and “C” of subsection 547(c)(2) should be analyzed by looking only to the Debtor and Defendant’s long standing relationship over the past thirty years. (Adv.Ree. 12). Therefore, this Court must first decide how sub-paragraphs “B” and “C” should be construed.
A minority of courts have construed sub-paragraph “B” subjectively, examining only the relationship between the particular 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: “[W]e 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 the 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 subparagraphs “B” and “C” which creditors would have to fulfill to prevent avoidance. Id. 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.
However, a majority of courts, including the courts in this district, have conducted a subjective inquiry into 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) (Kovachevich, C.J.) (citations omitted). In addition, although the Eleventh Circuit Court of Appeals has not explicitly stated 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 subparagraphs “B” and “C.” See Craig Oil Co., 785 F.2d at 1566-68.
In a similar proceeding in this main case, the subjective inquiry was adopted as the appropriate standard of analyzing both subparagraphs “B” and “C.” See Grant v. SunTrust Bank (In re L. Bee Furniture), 203 B.R. 778 (Bankr.M.D.Fla.1996). In that case, the court was persuaded by Graphic Prod. Corp. v. WWF Paper Corp. (In re Graphic Prod. Inc.), 176 B.R. 65 (Bankr.S.D.Fla.1994) (Cristol, C.J.). In Graphic Prod., a Chapter 11 debtor-in-possession brought an adversary proceeding to avoid alleged preferential transfers, and the defendant asserted, among other things, the ordinary course 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 ordi*987nary 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)). The Grant v. SunTrust court concluded that this rationale is in accord with the courts in this district and the Eleventh Circuit Court of Appeals. L. Bee, 203 B.R. at 781-82 (citing Craig Oil Co., 785 F.2d at 1566-68; Thurman, 189 B.R. at 1012.). Accordingly, this Court will also examine both subparagraphs “B” and “C” subjectively, looking only to the relationship between the parties.
Having concluded that the subjective analysis is appropriate in determining whether transfers were made within the ordinary course of the parties’ business and ordinary business terms, the Court now turns to applying the following four factors outlined in Florida Steel, 127 B.R. at 65. In Florida Steel, the court held that the 547(e)(2) inquiry should focus on the business practices unique to the particular parties involved, not industry practices and the following factors should be used to determine whether the exception has been established: (1) the prior course of dealing between the parties, (2) the amount of the payments, (3) the timing of the payments, and (4) the circumstances surrounding the payments. Florida Steel, 127 B.R. at 65. These factors were also adopted in Thurman. See Thurman, 189 B.R. at 1011-12.
The first factor the Court considers is the prior course of dealing between the parties. In this proceeding, the prior course of dealing between Debtor and Defendant reveals that before and during the preference period, payments were always made outside of the “net 30 days” terms. (Defendant Ex. 8-9). Defendant always accepted Debtor’s post-dated checks, and Defendant called Debtor’s President monthly before a check was received. (Tr. 22-30; 74-75). 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. Before the preference period, the amount of each payment to Defendant generally ranged from approximately $2,300 to over $8,000. (Defendant Ex. 9). During the preference period the amount of each payment ranged from $2,500 to $3,661.70. (Plaintiff Ex. 1-10; Defendant Ex. 8). Therefore, the record does not reveal that Debtor paid Defendant unusually large sums of monies 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 proceeding, both Mr. Cook and Mr. Moskovitz testified that late payments were within the ordinary course of the parties’ business. (Tr. 20-22, 31, 71-75). Although the Defendant’s invoices indicated “net 30 days” terms, Debtor routinely paid beyond the 30 day period. (Tr. 22-30; 74-75). Mr. Cook and Mr. Moskovitz testified that this was their usual way of practicing business over the past twenty years, and this practice remained the same during the preference period. (Id.). Therefore, Defendant has overcome the presumption that late payments were not in the ordinary course of business.
*988Finally, 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. Plaintiff, in this proceeding, argues that Defendant conducted unusual collection activity because each payment made during the preference period was made in response to Mr. Cook’s telephone contact with Mr. Moskovitz. Mr. Cook, however, testified that it was routine for him to call Mr. Moskovitz at the end of each month and to ask him to send Defendant a cheek in an amount that would lower the outstanding balance and bring the account within 60 days outstanding or below the $25,000 credit line. (Tr. 24). Within the past three years, Defendant never received a payment from Debtor without first contacting Mr. Moskovitz, but the calls made to Mr. Moskovitz were non-threatening and amicable. (Tr. 25-30). There were no threats to stop shipments of furniture to Debtor, nor were there any threats to take legal action against Debtor. (Id.). Also, Defendant did not retain a security interest in the furniture sold to Debtor. (Tr. 31).
Mr. Moskovitz also testified that Defendant always accepted Debtor’s post-dated checks, invoices were always paid beyond 30 days from the date of invoice, and Defendant never received any threatening correspondence regarding outstanding debts. (Tr. 70-76). In addition, Defendant always accepted Debtor’s checks and was never asked to pay with cash. (Id.). The parties conducted business in this fashion over the course of their relationship and did not change during the preference period. (Id.). Therefore, the Court concludes that Defendant has met it burden of proving that preferential transfers in the amount of $33,372.40 were made in the ordinary course of business and are not avoidable.
Even if the subparagraph “C” of section 547(c)(2) requires compliance with terms ordinary in the industry, the preferential transfers were made within ordinary business terms. When applying industry standards, the creditor must prove that the debtor made its transfers in accordance with the range of terms prevailing as some relevant industry norms. Fiber Lite, 18 F.3d at 226.
In this proceeding, Plaintiff contends that payments were not made in accordance with industry norms because Defendant accepted Debtor’s post-dated checks. (Adv.Rec. 11). Defendant, however, presented evidence showing that Defendant accepted post-dated checks from its other customers and other customers have asked Defendant to hold checks. (Tr. 32). Mr. Moskovitz also testified that it was normal for other wholesalers to have normally accepted post-dated checks. (Tr. 71). Defendant also presented a witness, Mr. Elmer James, who has been in the retail furniture business since 1965 when he began working for Sears, Roebuck & Company. (Tr. 96). Mr. James testified that it is very common for him to ask Defendant to withhold depositing a check and has given Defendant post-dated checks dating back to 1974. (Id.). Mr. James further informed the Court that his way of conducting business is very common in the industry. (Tr. 85-86). See also Defendant Ex. 11. Mr. James further testified that it is very common for furniture wholesalers and retailers to allow their credit terms to go beyond the net 30 days, although invoices indicated a net 30 days. (Tr. 91). Plaintiff presented no evidence that would refute Mr. James’ testimony. Therefore, even if the industry standard is appropriate, the transfers were made in accordance with ordinary business terms.
B. New Value Exception
Next, Defendant raised the “New Value” defense pursuant to subsection 547(c)(4) of the Bankruptcy Code. Having concluded that the transfers are protected under 11 U.S.C. § 547(c)(2), the Court will not address the new value exception.
CONCLUSION
Defendant has proved by preponderance of the evidence that the requirements for the *989ordinary course of business exception have been satisfied, and that it is entitled to retain the preferential transfers totalling $33,-372.40. 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/8492526/ | MEMORANDUM OPINION1
JUDITH K. FITZGERALD, Bankruptcy Judge.
We must determine Debtor’s Objections to Proof of Claim of the Internal Revenue Service. The IRS claim is for the 100 percent penalty assessed against Debtor pursuant to 26 U.S.C. § 6672 for trust fund taxes that were not paid by Triad Manufacturing Company, of which Debtor was vice president and 49 percent shareholder.2 Triad Manufacturing Company filed a chapter 11 on or about March 18, 1987.3 At that time, Triad owed approximately $40,000 to the IRS. Most of this amount represented unpaid employment taxes. On or about May 6, 1987, the IRS assessed a 100 percent civil penalty against “Dave Gongaware” and John Guckert, Triad’s 51 percent shareholder, as responsible officers of Triad for the periods ended September 30, 1986, December 31, 1986, and March 31, 1987, in the amount of $24,480.54.4 See Government Exhibit A-2. On October 29, 1990, the IRS again assessed a civil penalty against “Dave Gongaware” as a responsible officer of Triad in the amount of $6,092.09 for the period ended September 30, 1988.5 Government Exhibit B-2.
Debtor filed this chapter 13 petition on July 14, 1995. The IRS timely filed a proof of claim asserting a secured claim in the amount of $12,350 and an unsecured priority claim in the amount of $49,017.22. An amended proof of claim was filed on or about *98March 8,1996, in the amount of $54,103.33, of which $12,350 is claimed as secured and $41,-753.33 as unsecured. Debtor seeks an order disallowing the claim of the Internal Revenue Service on the grounds that (1) the taxes were not properly assessed and he was not the person identified on the relevant documents, (2) if the identified person was Debt- or, he cannot be considered a “responsible person” of Triad because he exercised insufficient control over the company’s financial affairs and (3) the amounts claimed by the IRS are too high. The facts as stipulated by the parties and as found by the court from the evidence presented at trial on November 1, 1996, follow, as do our conclusions of law.
Is Debtor the “Dave Gongaware" Who Was Assessed in 1987?
Debtor does not admit that he is the “Dave Gongaware” against whom the assessments were made. In connection with Debtor’s name, the 1987 assessment stated an address and social security number that were not his. The IRS’s internal request for assessments, Form 2749, Government Exhibit A-2, identifies the responsible person of Triad as:
David Gongaware
536 Oakland Avenue
Greensburg, PA 15601
Social Security Number AAA-BB-CCCC *
Under the heading “Related Assessments” is listed:
John Guckert
660 Kimlyn Avenue
N. Huntington, PA 15642
Social Security Number XXX-YY-ZZZZ *
Debtor’s social security number is XXX-YY-ZZZZ and Guckert’s is AAA-BB-CCCC. Debtor resides, and has resided at all relevant times, at 16 Observatory Street, Manor, Pénnsylvania. His mailing address is and has been at all relevant times P.O. Box 584, Manor, Pennsylvania, 15665. The evidence adduced at trial established that another David Gongaware resides at the Oakland Avenue address listed on the 1987 assessment. Debtor testified, and his testimony is undisputed, that this is not his address, that he does not know the other David Gongaware and that the two are not related. The IRS concedes that the contested information on the assessment was incorrect. According to the deposition testimony of Katherine Biros, a tax examiner’s assistant for the Congressional Unit of the Technical Problem Resolution Program of the IRS, the incorrect address and social security number appearing in connection with Debtor’s name were not corrected in the IRS records concerning the assessment until August of 1989 (social security number) and October of 1990 (address). Ms. Biros testified that Debtor’s address was changed later due to the processing of a tax return in the week of October 14, 1990. See Deposition Exhibit 2, Certificate of Official Record regarding attached Certificate of Assessments and Payments. ■
The second assessment occurred on October 29, 1990, after the address and social security number were corrected. The documents show the following: Government Exhibit B-2, Request for 100 Percent Penalty Assessment, created around September of 1990, contains the same names, addresses, and social security numbers that appeared on the 1987 Request for 100-Percent Penalty Assessment, Government Exhibit A-2, but the typed social security numbers for Gonga-ware and Guckert are lined through and their correct social security numbers are handwritten next to their names. The evidence shows that the social security number of each was originally typed next to the other’s name and later corrected by hand. Government Exhibit B-2.
Notwithstanding the incorrect social security number and address on the 1987 assessment, we find that Debtor was sufficiently identified. The errors cast doubt on the accuracy of the amount of the assessment, which will be discussed below, but not on the identity of the taxpayer. The social security numbers on the 1987 assessment belong to Debtor and Guckert, the sole officers and shareholders of Triad, although the positions of the social security numbers on the form were switched. Marilyn Riccio, accounting technician at the IRS’ Philadelphia Service Center, testified that the taxpayer’s social security number is the mode of identification used most often by the IRS and that it is the *99single most important piece of information. The address was not corrected until October of 1990 but this is not dispositive. It was corrected prior to the October 29, 1990, assessment and, even before that, Debtor certainly knew that he, not another David Gon-gaware, was one of two shareholders in Triad and that the other was John Guckert.
Section 301.6109-1 of title 26 of the Code of Federal Regulations state's that there are three types of taxpayer identifying numbers: the social security number, the IRS individual taxpayer identification number, and the employer identification number. The social security number is defined in 301.7701-11 as the taxpayer identifying number of an individual. Section 6109(a) of the Internal Revenue Code states that an identifying number shall be included in returns when required by regulation and that that number is the social security number. Section 301.6109-l(a)(ii)(A) states that “an individual required to furnish a taxpayer identifying number must use a social security number”.6 See also 26 U.S.C. § 6109(d); 26 C.F.R. § 31.3406(h)-l(b) (taxpayer identification number is “generally a nine-digit social security number for an individual”); 26 C.F.R. § 31.6109-l(a) (requires a return to “reflect such identifying numbers as are required by each return, statement, or document and its related instructions”).
Accounting technician Marilyn Riccio further testified that in the performance of her duties she uses the social security number provided by the Revenue Officer which, in this case, with respect to Debtor, originally was Guckert’s. Although the wrong social security number appeared on the 1987 assessment, there were only two social security numbers involved and each belonged to one of the owners and officers of Triad. Both of their names were listed on the Request for 100-Percent Penalty Assessment. In Moore v. United States, 1993 WL 414711, 72 A.F.T.R.2d 93-6571 (E.D.Cal.1993), the court found that the supporting record that identified the taxpayer as “Richard A. Moore” without “Sr.” added to the surname was sufficient to support the assessment, even though the underlying documentation contained the social security number of the taxpayer’s son, Richard A. Moore, Jr. In the matter before us Debtor’s correct social security number was on the assessment, albeit associated with Guckert’s name. Because Guckert’s social security number was associated with Debtor’s name and no other names or social security numbers were involved, the identification was sufficient inasmuch as Debtor and Guckert were the only shareholders and no other possible responsible persons have been identified of record. Even though the IRS is not required to identify a taxpayer by his social security number, Moore, 1993 WL 414711 at *2, it used those numbers in this case. This fact, coupled with Ms. Ric-cio’s testimony that the IRS relies on the social security number for taxpayer identification purposes, establishes that Debtor was sufficiently identified.
Based on the testimony and the relevant statutory and regulatory provisions, we find that the assessment was made against Debtor and not the David Gongaware who resides on Oakland Avenue. Debtor would not have been misled by the error and offered no evidence that the other David Gon-gaware was the person assessed. His contention is that the IRS can make no mistakes in an assessment in order to assure its validity.7 We have examined the errors and find that they were not sufficient to cause prejudice to Debtor who was sufficiently identified as a responsible person in the assessment. Thus, the only questions remaining are whether Debtor had sufficient control of Triad to be a responsible person, whether the assessment was valid (for reasons other than the ministerial errors just addressed), and *100whether the amount reflected in the proof of claim is correct.
Was Debtor a “Responsible Person” Under 26 U.S.C. § 6672?
Having found that Debtor was sufficiently identified on the assessment documents, we turn to the question of whether he is a “responsible person” under 26 U.S.C. § 6672. Section 6672(a) provides that
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 ... shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax ... not collected, or not accounted for and paid over.
An employer is required to pay over amounts withheld. 26 U.S.C. § 3403. An employer includes a person with control of the payment. 26 U.S.C. § 3401(d)(1). See also Bolding v. U.S., 215 Ct.Cl. 148, 565 F.2d 663, 670 (1977). We find that Debtor had control of the payments and willfully failed to pay them over.
The factors to consider in determining whether a taxpayer is a responsible person include his (1) control of the voting stock; (2) status in the corporation; (3) check signing authority, including the ability to prevent issuance by refusing to sign; (4) duties; (5) control and authority over the day-to-day management of corporate affairs. DiStasio v. U.S. 22 Cl.Ct. 36 (1990). See also Godfrey v. U.S., 748 F.2d 1568, 1576 (Fed.Cir.1984); Heimark v. U.S., 18 Cl.Ct. 15 (1989). In DiStasio the court held that DiStasio was not a responsible person because he (1) never owned a controlling interest and so could never have made a management decision without the majority shareholder’s consent; (2) never performed day-to-day management or had any significant role in the corporation’s financial affairs; (3) spent very little time in the office; (4) had little knowledge of the corporation’s financial affairs; (5) had no ready access to the books and could not have understood them had he had access; (6) often signed checks in blank but could not have written a corporate cheek without the permission of the majority shareholder; and (7) did not file corporate tax returns, prepare payroll or have anything to do with the corporate legal affairs. The court further noted that, even if DiStasio had refused to sign checks during part of the period in question, there was a third shareholder who could have provided the requisite second signature and, later, when the only shareholders were DiS-tasio and Hudlett, Hudlett, as the majority shareholder, could have changed the corporate signature requirements. Ultimately, the court concluded that DiStasio’s check signing authority was “merely ministerial”. He did not have the actual authority to direct payment and could not have prevented another from totally controlling all disbursement of funds. Cf., Heimark v. U.S., 18 Cl.Ct. 15 (1989) (mechanical duty of signing checks and preparing tax returns is not determinative); Bolding v. U.S., 215 Ct.Cl. 148, 565 F.2d 663 (1977) (taxpayer held to be responsible person even though his signature alone was insufficient to cause disbursement of funds since by withholding his signature he could have prevented disbursement); Burack v. U.S., 198 Ct.Cl. 855, 461 F.2d 1282 (1972) (exclusive control over corporate affairs is unnecessary).
The test is whether the taxpayer had the ultimate authority over the disposition of funds; i.e., the “power and authority to ‘avoid the default’ or to direct the payment of taxes”. Powell v. U.S., 9 Cl.Ct. 58, 61 (1985) quoting White v. U.S., 178 Ct.Cl. 765, 372 F.2d 513, 516 (1967). The determining factor is actual authority in a practical sense. See generally Powell v. U.S., 9 Cl.Ct. 58, 61 (1985); Godfrey v. U.S., 748 F.2d 1568 (Fed.Cir.1984).
In Hammon v. U.S., 21 Cl.Ct. 14 (1990), the court examined whether the taxpayer had the requisite status and authority to control the decision-making process as to allocation of funds, whether his duties included same, and whether he had ultimate authority over expenditure of funds. In that case, the taxpayer presided over a network of businesses covering the sale and leasing of automobiles and was the 100 percent stockholder and the president. The by-laws of the *101corporation defined the president’s duties as including general supervision over corporate affairs, the signing of stock certificates and contracts, countersigning of checks, et cetera. Although the status prong of the test is not met merely by holding corporate office, the functions associated with the status and the allegedly responsible person’s performance of those functions indicate whether the person had “ultimate authority” or “power to control” the disposition of funds. Hammon, 21 Cl.Ct. at 24, citing Godfrey, 748 F.2d at 1575.
In the case at bench, although Debtor testified that his title was Vice President of Quality Control, he signed promissory notes on behalf of Triad as its Secretary/Treasurer. Government Exhibits G-l, G-2. Furthermore, he is listed on Triad’s Statement of Financial Affairs, filed of record in this bankruptcy court, as “V.P., Treasurer”, and he signed the Statement. See Bankruptcy No. 97-20717; Government Exhibit H-2. See also id. at H-l, H-3 through H-6. What is more, his duties encompassed more than quality control, as illustrated by his testimony.
Although he was only a 49 percent shareholder, Debtor testified that he had assisted Triad in obtaining funding, was a signatory on its checking account, signed most of the cheeks, and paid suppliers, vendors, tax creditors, and lenders. Debtor testified that Guckert told him who to pay and that he and Guckert sometimes disagreed concerning which creditors to pay but, because Guckert was the majority shareholder he overruled Debtor and Debtor went along with the decision. However, Debtor also testified that he participated in reviewing invoices to be paid and signed the Form 941 federal quarterly employer tax returns for Triad. When Triad filed its bankruptcy petition Guckert was in the hospital and Debtor signed the petition and schedules. Based on these facts, we find that Debtor exercised sufficient control over the day-to-day management of Triad’s financial affairs and that he had and exercised the authority to determine which creditors to pay and when they would be paid. Even if Guc-kert sometimes made the decision on these points, Debtor generally decided who to pay and executed the payment process. Furthermore, there was no testimony that any disagreement between Debtor and Guckert had to do with payment of the taxes at issue. Debtor had significant control over which creditors to pay, notwithstanding the fact that he was a minority shareholder. See U.S. v. Carrigan, 31 F.3d 130, 133 (3d Cir.1994) (responsible person need only have significant, not exclusive control over finances; one “has significant control if he has the final or significant word over which bills or creditor get paid”) (emphasis added); Howard v. U.S., 711 F.2d 729, 734 (5th Cir.1983) (minority shareholder status “is legally insufficient to establish that he was not a ‘responsible person’”).8 Moreover, instructions from a superior to not pay the tax do not negate the responsible person status of the subordinate. Brounstein v. U.S., 979 F.2d 952, 955 (3d Cir.1992) (nonshareholder president and assistant treasurer of corporation had significant, not exclusive control over corporation’s finances).9
In addition, as early as 1986, Debtor was aware that Triad was delinquent on its taxes. He testified that notice that taxes were owed was received in the mail, “a stream” of letters followed, and a Revenue Officer paid a visit to discuss the employment taxes. Debt- or and Guckert met with the Revenue Officer. Debtor also testified that he and Guc-kert factored contracts to try to pay the tax liabilities and that he told Guckert to pay the tax bills. This, however, is not enough to excuse Debtor’s failure to ensure that the taxes were paid. Debtor was substantially involved in Triad’s daily operations and fi*102nancial concerns, unlike the taxpayer in DiS-tasio who had no day-to-day management responsibilities and did not participate in a significant way in corporate management. Debtor’s role was more akin to that of the taxpayer in Burack v. U.S., 198 Ct.Cl. 855, 461 F.2d 1282 (1972), who was “directly concerned with the financial aspects of the corporation” and had authority to control finances. See DiStasio, 22 Cl.Ct. at 47. Thus, Debtor’s reliance on DiStasio is misplaced.
Although the possibility exists that Guc-kert, the majority shareholder, could have exercised his ownership rights to divest Debtor of authority and control over corporate finances and bill-paying, there is no evidence that any such action occurred. Furthermore, Debtor never refused to sign checks and admitted that he paid other creditors knowing that taxes were due. He was intimately involved in Triad’s finances, even meeting with the IRS concerning the unpaid taxes. As the corporation was structured and operated during the time in question, Debtor actually had and exercised the necessary degree of control to be deemed a “responsible person” for purposes of 26 U.S.C. § 6672. See generally Powell v. U.S., 9 Cl. Ct. 58, 62 (1985) (taxpayer was substantially involved in day-to-day operations and signed the bankruptcy documents). Based on his own testimony, we find that Debtor had the requisite authority and control over Triad’s financial affairs and day-to-day operations to make the tax payments and is a responsible person for purposes of 26 U.S.C. § 6672.
Willful Failure to Pay the Tax
Having concluded that Debtor is a responsible person we now consider whether he willfully failed to pay the taxes due. In DiStasio the court noted that liability should not be imposed without personal fault on the part of the taxpayer, even if the taxpayer is a responsible person. DiStasio, 22 Cl.Ct. at 47, citing Slodov v. U.S., 436 U.S. 238, 254, 98 S.Ct. 1778, 1788-89, 56 L.Ed.2d 251 (1978). At the very least there must be evidence of a deliberate choice to pay non-government creditors or of a reckless disregard of the duty to pay. DiStasio, 22 Cl.Ct. at 47-48, citing Powell v. U.S., 9 Cl.Ct. 58, 62 (1985). The standard has been articulated as:
A failure to pay taxes is deemed willful if it is “a deliberate choice voluntarily, consciously and intentionally made to pay other creditors instead of paying the Government, and ... it is not necessary that there be present an intent to defraud or to deprive the United States of the taxes due, nor need bad motives or wicked design be proved in order to constitute willfulness.”
Powell v. U.S., 9 Cl.Ct. at 62. In Godfrey v. U.S., 748 F.2d 1568, 1576 (Fed.Cir.1984), the court opined that the responsible person must have had actual notice of the delinquency in order to find a duty to act. An actual intent to defraud the government is not necessary. Debtor testified that he knew that taxes were not being paid. He admitted that he used available funds to pay non-government creditors in the face of this knowledge.10 Debtor’s instruction to Guekert to pay the taxes does not constitute a reasonable effort to ensure tax compliance in light of the fact that Debtor was the person issuing most of the checks. See Hammon, 21 Cl.Ct. at 28-29.
The instant case is distinguishable from DiStasio wherein the taxpayer held only a 24.5 percent ownership interest, had check signing authority but never signed a check or paid a bill without approval and was never responsible for dealing with creditors. Here, Debtor testified that he shared equal responsibility for dealing with Triad’s creditors and performed most of the check signing duties. In DiStasio the taxpayer did not have actual authority to direct payment and could not *103have prevented the majority shareholder from controlling all disbursements. He had no custody or control of the corporate records and his title as vice-president, treasurer and, later, secretary, was meaningless in that the designation had no relation to his limited responsibilities. In the matter before us, on the other hand, the record concerning Debt- or’s duty, authority and control was comprised primarily of Debtor’s testimony. The evidence established that Debtor had primary responsibility for making payments and chose to pay creditors other than the IRS.11
Validity and Amount of Assessments
Debtor objects to the IRS’s claim on the basis of the validity and amounts of the 1987 and 1990 assessments. The challenge to the validity of both assessments is based partially on the failure of the IRS to properly identify him as the responsible person. We have addressed that issue above and found it to be without merit. The other challenge is to the amount of the IRS’s claim based on the failure of the IRS to assess against Debt- or all amounts owing by Triad on the tax obligation for the periods to which the 1987 assessment relates (the third and fourth quarters of 1986 and the first quarter of 1987). Debtor contends that the secured claim is overstated by the unassessed amount. Debtor also attacks the 1990 assessment in light of the IRS’s failure to produce a Form 23C in support of the assessment. We will address the amount of the 1987 assessment first.
The Amount of the 1987 Assessment
Steven Bucci, a Revenue Officer/Ad-visor for the IRS Special Procedures Branch in Pittsburgh, Pennsylvania, testified that Government Exhibit A-2, Request for 100-Percent Penalty Assessment concerning the 1987 assessment, was prepared manually. This exhibit lists the tax periods, the unpaid balance for the periods, and the trust fund portion of the outstanding balance that was assessed against Debtor. The amounts assessed against Triad were: (1) $10,282.55 for the third quarter of 1986, (2) $13,137.42 for the fourth quarter of 1986 and (3) $6,145.76 for the first quarter of 1987. The amounts for the fourth quarter of 1986 and the first quarter of 1987 are not in dispute. Bucci testified that no payments were made by Triad for the fourth quarter of 1986 and the first quarter of 1987. These amounts also were assessed against Debtor and he did not offer any evidence that he made payments for these quarters. Thus, for these two quarters, the liability assessed against Debt- or totals $19,283.18.
The only dispute with respect to the 1987 assessment concerns the amount assessed against Debtor for the third quarter of 1986. Bucci testified that Triad’s total liability for this period was $10,282.55 and that $141.43 of a payment of $5,018.90 was applied to the employee portion of the liability. Thus, Triad’s liability for this period was reduced to $10,141.12. See Government Exhibit I. However, only $5,197.36 of this amount was assessed against Debtor. Bucci admitted on cross-examination that the statute of limitations has run with respect to this period and, therefore, the balance of $4,943.76 cannot be assessed against Debtor. A tax lien can be based only on the amount assessed.12 Thus, the IRS’s secured claim, to the extent that it includes the $10,141.12 assessed against Triad, must be reduced by $4,943.76, the difference between $10,141.12 and $5,197.36.
Because this is a 100 percent penalty case, however, the fact that an assessment was not valid does not negate Debtor’s obligation to pay the unassessed portion of the *104tax. Goldston v. U.S., 104 F.3d 1198 (10th Cir.1997). In Goldston, a tax assessment was made during the course of a chapter 11 bankruptcy without the benefit of an order granting relief from stay. The debtor was a responsible person for FICA and federal income taxes. The chapter 11 later was dismissed and the IRS filed a notice of federal tax lien. The debtor thereafter filed a chapter 13 and the IRS filed a secured claim based on its lien. The Court of Appeals held that the statutory obligation to pay a tax or tax penalty exists regardless of whether the assessment is void. The liability for the trust fund taxes arises when wages are paid and the federal income and social security taxes are withheld. See Marvel v. U.S., 719 F.2d 1507, 1513-14 (10th Cir.1983) (taxpayer had actual notice that an assessment had been made; court held that there is no requirement in the Internal Revenue Code that notice of a deficiency or assessment be given before liability for employment taxes accrues); Long v. Bacon, 239 F.Supp. 911, 912 (S.D.Iowa 1965) (liability for payment of tax arises upon collection of the tax, not the date the statute requires that it be paid to the government). In light of the foregoing, we find that Debtor owes $10,141.12 for the third quarter of 1986. However, only $5,197.36 was assessed and is secured. The unassessed portion cannot be liened but is an allowed unsecured claim in the amount of $4,943.76.
Debtor’s Total Liability Pursuant to the 1987 Assessment
Based on the foregoing, we find that the amount assessed against Debtor in 1987 totaled $24,480.54 ($19,283.18 + $5,197.36). In its post-trial brief the IRS claims $20,197.54 as its secured claim for this period.13 This lower amount represents the $24,480.54 assessed minus credits of $2,464.00, $185.00, and $1,634.00 (for a total of $4,283.00) from income tax refunds due Debtor that were set off. Debtor’s unsecured liability for unas-sessed trust fund taxes pursuant to the 1987 penalty assessment is $4,943.76.
The 1990 Assessment
We now address Debtor’s challenge to the 1990 assessment. Debtor argues that because the IRS failed to produce an Assessment Certificate, Form 23C, which is a record of all assessments made on a particular day, the 1990 assessment is not valid. The Code of Federal Regulations provides, in relevant part, that:
The assessment shall be made by an assessment officer signing the summary record of assessment. The summary record, through supporting records, shall provide identification of the taxpayer, the character of the liability assessed, the taxable period, if applicable, and the amount of the assessment____ The date of the assessment is the date the summary record is signed by an assessment officer....
26 C.F.R. § 301.6203-1.
An accounting technician at the IRS’s Philadelphia Service Center, Marilyn Riccio, testified to the process by which an assessment is made by her division. She testified that Form 2749 constitutes the request for a 100 percent penalty. See Government Exhibit B-2. See also Government Exhibit A-2. Form 2749 carries a document locator number which is an identification number for the assessment. Form 2859 is a summary of the information on Form 2749. See Government Exhibit A-2. Form 2859 is sent to the Philadelphia Service Center which then prepares a Form D813 (for billing) and Form 8166. See Government Exhibit A-3. Form 8166 lists all document locator numbers by tax class. This information is put into the tax certificate which carries the same document locator number. Then a Form 23C is prepared. It is a summary of all tax classes assessed that day and is the principal operating document used by the IRS to make an assessment. See Government Exhibit A-4. At trial, the IRS offered into evidence only Form 2749, Government Exhibit B-2. Ms. Riccio testified that she did not know if a summary record (Form 23C) exists regarding the 1990 as*105sessment because the collection branch, which also prepares assessments, generated the documents in this instance. She is not familiar with collection branch procedures and did not know if it would have issued a Form 23C.14
Debtor argues that, because the IRS failed to produce a Form 23C with respect to the 1990 assessment, the assessment is invalid. The IRS produced, however, a Certificate of Official Record, Form 2866, dated October 30, 1995, concerning the 1990 assessment. Government exhibit B-l. Attached thereto is a Certificate of Assessments and Payments, signed by an IRS officer, which includes a notation of the date the Form 23C was created. See Government Exhibit B-l. Debtor contends that, even if the Certificate of Official Record is an accurate reflection of the information on the assessment and of his liability as it existed in 1995, it is not accurate as of the date of the 1990 assessment. In Huff v. U.S., 10 F.3d 1440 (9th Cir.1993), cert. denied 512 U.S. 1219, 114 S.Ct. 2706, 129 L.Ed.2d 834 (1994), the Court of Appeals for the Ninth Circuit held that the Certificate of Assessments and Payments constitutes presumptive evidence of a valid assessment if the assessment date (the “23C” date) is listed on the Certificate of Assessments and Payments. 10 F.3d at 1445-46. Accord Jensen v. U.S., 59 F.3d 175, 1995 WL 377167 (9th Cir.1995) (unpublished); Tweedy v. U.S., 26 F.3d 132, 1994 WL 245894 (9th Cir.1994); Ghandour v. U.S., 37 Fed.Cl. 121 (1997).
In Boch v. U.S., 154 B.R. 647 (Bankr.M.D.Pa.1993), the bankruptcy court noted that Certificates of Assessments and Payments, signed by IRS officer, are routinely used to establish that an assessment was made. The court held that the Certificate of Assessments and Payments constitutes presumptive proof of a valid assessment. 154 B.R. at 652, citing Geiselman v. U.S., 961 F.2d 1, 5, 6 (1st Cir.), cert. denied, 506 U.S. 891, 113 S.Ct. 261, 121 L.Ed.2d 191 (1992); U.S. v. McCallum, 970 F.2d 66, 68 (5th Cir. 1992); Guthrie v. Sawyer, 970 F.2d 733, 737 (10th Cir.1992); Gentry v. U.S., 962 F.2d 555, 558 (6th Cir.1992); U.S. v. Chila, 871 F.2d 1015, 1017-18 (11th Cir.), cert. denied, 493 U.S. 975, 110 S.Ct. 498, 107 L.Ed.2d 501 (1989).
In Boch the only challenge to the validity of the assessment was the absence of Form 23C. The court determined that, in the absence of any other ground upon which to base a challenge to the validity of the assessment, it was presumptively valid in light of the Certificate of Assessments and Payments signed by an IRS officer. In the matter before us Debtor asserts the additional basis of misidentification but, as discussed above, this argument is without merit. With respect to the 1990 assessment, the deposition testimony of Katherine Biros, as detailed above, established that his social security number and address were corrected before the 1990 assessment was made. The Certificate of Assessments and Payments lists the 23C date as October 29, 1990, the date of the 1990 assessment. It is signed by an IRS officer. We are constrained to find, as a matter of law, that Debtor has not overcome the presumption that a valid assessment was made on October 29,1990.
Amount of the 1990 Assessment
It is not clear whether Debtor is challenging the amount of the 1990 assessment. However, he objects to the IRS’s claim and, to the extent that the objection to the claim includes the amount of the 1990 assessment, we address the issue. In this regard we credit the testimony of Special Procedures Branch Revenue Officer/Advisor Steven Bucci. Bucci examined Triad’s tax liability as it relates to the 1990 assessment. He testified that Triad should have paid $6,254.16. See Government Exhibit I. He further testified that, of the $3,350.32 paid by Triad and applied by the IRS to its 1990 assessed obligation, only $999.16 was applied to the employee FICA tax identified on the 1990 assessment. This payment reduced the *106trust fund amount due to $5,255. See Government Exhibit I. The 100 percent penalty assessed against Debtor, however, was in the amount of $6,092.09. The parties agree that this amount is incorrect and that the amount that Debtor should have been assessed is $5,255. An additional $14 lien fee was assessed against Debtor in 1994,15 Government Exhibit B-l, bringing Debtor’s total liability for the 1990 assessment to $5,269.
Conclusion
Based on the foregoing, we find that Debt- or’s liability is as follows:
1987 assessed amount: $20,197.54
1987 unassessed amount: 4,943.76
1990 assessed amount: 5,269.00
As a result, the IRS has secured claims of $20,197.54 and $5,269 and an unsecured claim of $4,943.76.
We further note that the IRS’s proof of claim as amended can not be reconciled with the evidence adduced at trial as summarized herein. Therefore, the IRS must further amend its proof of claim.
An appropriate order will be entered.
. The court’s jurisdiction is not at issue. This opinion constitutes our findings of fact and conclusions of law.
. Triad Manufacturing Company was formed in 1982 by John H. Guckert, William J. Nauman, and William G. Kohlur. It manufactured precision machine parts which it sold to the United States Department of Defense. In April of 1983, Guckert and Nauman bought out Kohlur’s interest in Triad. Thereafter, in November of 1985, Guckert purchased Naumans’ interest and became the 100 percent owner. In April of 1986, Debtor purchased 49 percent of the outstanding stock of Triad from Guckert and became Triad's vice president. Guckert remained as president and retained 51 percent of the stock for the tax periods in question.
. Triad Manufacturing company’s chapter 11 was filed at case number 87-20717. The case was closed on April 24, 1990.
. Government exhibits relating to this assessment begin with the letter "A”.
. Government exhibits relating to this assessment begin with the letter ’’B”.
(For illustrative purposes.)
. An exception exists if one is not eligible to obtain a social security number in which case the taxpayer identification number should be used. 26 C.F.R. 301.6109 — l(a)(ii)(B). This exception does not apply to Debtor. See also id. at 301.6109 — 1 (a)(ii)(D) (employer should use an employer identification number).
. The first challenge Debtor mounts to the assessment concerns his identity and we find, as matter of law, that he was sufficiently identified in the assessment. The second concerns the amount of the assessment. To the extent that amounts were not assessed they are not liened, as discussed infra. See also note 12, infra.
. In Howard v. U.S. the court stated that minority shareholder status would be relevant only to the extent that it supported the taxpayer's testimony that he was just following orders. In this regard, however, the court noted "Howard had the status, duty and authority to pay the taxes owed, and would only have lost that authority after he had paid them. Authority to pay in this context means effective power to pay." 711 F.2d at 734.
. Even the risk of losing one’s job for disobeying instructions to not pay the tax does not relieve an otherwise responsible person of the obligation to pay the tax. Brounstein v. U.S., 979 F.2d at 955. See also Howard v. U.S., 711 F.2d 729, 734 (5th Cir.1983).
. The absence of a reckless disregard of a duty to pay the tax may suffice to establish the absence of willfulness. Proof of the absence of one of the following must exist: (1) knowledge that the taxes were unpaid; (2) a reasonable opportunity to discover and remedy the non-payment of tax; or (3) failure to undertake reasonable efforts to ensure payment. See, e.g., Godfrey v. U.S., 748 F.2d 1568 (Fed.Cir.1984); Hammon v. U.S., 21 Cl.Ct. 14 (1990). Debtor admitted at trial that he knew in 1986 that payment of the withholding taxes was delinquent. See also Hammon, 21 Cl.Ct. at 27 ("taxpayers may violate § 6672 willfully either by choosing to pay creditors other than the United States with knowledge of the tax delinquency, or by recklessly disregarding a known risk that taxes might not be paid”).
. DiStasio is further distinguishable from the matter at bench in that the taxpayer in DiStasio had always relied on another to take care of the financial arrangements and had no reason to believe that his reliance was misplaced. He did not have access to the books and records which were kept under lock and key and, even if he had, he lacked the financial sophistication necessary to understand them. His efforts to hire an accountant to examine the books were thwarted. No such circumstances exist in the case before us.
. In order to have a valid lien, the IRS first must make a valid assessment, issue a notice of deficiency, and provide notice and a demand for payment. See Brewer v. U.S., 764 F.Supp. 309 (S.D.N.Y.1991). Debtor has not alleged improper notice or demand.
. Debtor's Exhibit 3 is a Notice of Federal Tax Lien dated August 19, 1996, in the amount of $20,754.31. The discrepancy between Debtor's. Exhibit 3 and the amount the IRS now contends is liened was not explained.
. The IRS also called Steven Bucci, a Revenue Officer/Advisor for the IRS Special Procedures Branch in Pittsburgh, Pennsylvania. He explained that Government Exhibit B-2, Request for 100-Percent Penalty assessment regarding the 1990 assessment, was generated by computer in the field branch office. The information was put into the computer by a clerk working from a Revenue Officer's worksheet. The witness could not explain the absence of a document locator number on Government Exhibit B-2 (Form 2749). He testified that the number on Form 2749 usually is inserted in the Service Center by an employee of the accounting branch.
. The $14 lien fee was assessed against Triad in 1987. See Debtor's Exhibit 2. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492528/ | ORDER
MARY D. SCOTT, Bankruptcy Judge.
This employment discrimination suit is before the Court upon the cross-motions for *189summary judgment. Although this is not a core proceeding within the meaning of 28 U.S.C. § 157(b), and the defendant has not consented to entry of judgment by this Court, the Court has jurisdiction to decide these motions, pursuant to 28 U.S.C. §§ 157(a), 1334.
The third amended complaint states five causes of action, (I) a violation of the Arkansas Civil Rights Act, (II) wrongful termination under Arkansas law, (III) violation of the Family Medical Leave Act of 1993, (IV) gender discrimination under Title VII, and (V) civil conspiracy. The defendant moves for summary judgment on all counts, and the plaintiff moves for summary judgment on counts I and II. The plaintiff concedes that counts III and V are subject to dismissal. Both parties request summary judgment on the basis that the opposing party does not state a prima facie ease or defense. Since only the issue of the statute of limitations is amenable to decision at this time, two counts of the complaint will proceed to trial.
Kebby McElhanon began working for the North Hills Country Club in March of 1990, serving as the membership coordinator. Her employers, being aware that she was required to care for a handicapped child, did not require her to work every weekend. In 1993, McElhanon became pregnant with a child due in May 1994. Upon being advised of her pregnancy, a member of management allegedly advised McElhanon’s direct supervisor that “They would just have to get rid of her.” On January 5, 1994, the corporation issued a memorandum requiring all membership personnel to work each and every weekend. When McElhanon indicated she could not work each and every weekend, her employment was terminated, on January 20, 1994.
Rule 56, Federal Rules of Civil Procedure, provides that summary judgment shall be granted where the pleadings, depositions, answers to interrogatories, admissions or affidavits show that there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986); Burnette v. Dow Chemical Company, 849 F.2d 1269, 1273 (10th Cir.1988). Summary judgment is appropriate when a court can conclude that no reasonable finder of fact could find for the non-moving party on the basis of the evidence presented in the motion and response. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52, 106 S.Ct. 2505, 2511-12, 91 L.Ed.2d 202 (1986).
Both federal and Arkansas law make it unlawful for an employer to discharge an individual because of that individual’s sex. See 42 U.S.C. § 2000e-2(a); A.C.A. § 16-123-101. This prohibition also includes discharge based upon a woman’s pregnancy. 42 U.S.C. § 2000e(k). Both parties contend that they have submitted sufficient proof for award of summary judgment in their favor. The trustee has clearly met his burden of demonstrating a prima facie case of discrimination. One method of establishing a prima facie ease for discrimination is through direct evidence, ie., proof that the motive for discharge was the individual’s sex, even though other factors also motivated the decision, 42 U.S.C. § 2000e-2(m). See generally Geier v. Medtronic, Inc., 99 F.3d 238 (7th Cir.1996). McElhanon’s immediate supervisor, the person who terminated her, unequivocally stated that he was directed to “get rid of her” because of her pregnancy and that he in fact terminated her because of her pregnancy. In addition, the motion and, indeed, the defendant’s response indicate that there is sufficient circumstantial evidence in the record to establish a prima facie case of discrimination. Accordingly, the defendant’s motion for summary judgment, as it relates to establishment of prima facie ease of discrimination under Title VII and under Arkansas law, is denied.
Similarly, the Court finds that the defendant has placed sufficient evidence in the record to withstand the plaintiffs motion for summary judgment. The defendant has submitted an affidavit wherein a corporate employee, the person who purportedly directed McElhanon’s termination, asserts that the reason for debtor’s termination was that she could not comply with the corporate policy, instituted shortly after management learned of her pregnancy, that “membership *190personnel”1 work each and every weekend. Accordingly, the plaintiffs motion for summary judgment will be denied.
In order to maintain an employment discrimination suit under Title VII, McElha-non was required to file a complaint with the Equal Employment Opportunity Commission on or before July 19, 1994. A complaint was not filed until July 10, 1995, one year past the expiration of the time limitation.2 The EEOC issued a right to sue letter on August 8, 1995. Accordingly, McElhanon was required to file a complaint with the district court on or before November 8, 1995. 42 U.S.C. § 2000e-5. In order to maintain an employment discrimination suit under 42 U.S.C. § 2000e, the trustee was required to file a complaint with the court on or before November 6, 1995. This complaint was not filed until February 16, 1996. Plaintiff does not dispute that the complaint was untimely under 42 U.S.C. § 2000e. Rather, he asserts that the doctrine of equitable tolling permits maintenance of the action.
The time limitations of Title VII are not jurisdictional requirements and, thus, are subject to equitable tolling. Zipes v. Trans World Airlines, 455 U.S. 385, 393, 102 S.Ct. 1127, 1132, 71 L.Ed.2d 234 (1982); Heideman v. PFL, Inc., 904 F.2d 1262 (8th Cir.1990), cert. denied, 498 U.S. 1026, 111 S.Ct. 676, 112 L.Ed.2d 668 (1991). Under the doctrine of equitable tolling, a plaintiff will be excused from application of the statute of limitations if the deadline was missed due to circumstances beyond plaintiffs control or if there is some positive misconduct on the party charged. Heideman, 904 F.2d at 1266 (8th Cir.1990). Under Heideman, the court does not focus upon whether the reason for the discharge was concealed, but, rather, whether the plaintiff was mislead or prevented from pursuing her rights. Id. Thus, under the equitable tolling doctrine, the focus is upon whether there was any misconduct or circumstances which prevented the plaintiff from pursing rights; the merits of the action or concealment of the motives are not relevant. Equitable tolling will not apply if the plaintiff had a “general awareness” of rights or the “means of obtaining such knowledge.” Id.
As a matter of law, McElhanon, into whose shoes the trustee steps, was not only aware of the her rights but also testified that, at the time she was terminated, she believed that she was terminated because of her pregnancy. Further, it was in January of 1995, six months prior to the filing of the EEOC complaint, that her former supervisor admitted to her that she had been fired because of her pregnancy. Despite this knowledge and information, the plaintiff allowed the statute of limitations to lapse. Accordingly, the doctrine of equitable tolling is not available to prevent dismissal of the Title VII action. Since the doctrine of equitable tolling is not applicable, the statute of limitations expired prior to the filing of the Title VII action such that it will be dismissed. It is
ORDERED as follows:
1. Counts III, stating a cause for violation of the Family Medical Leave Act of 1993, and V, stating a cause for civil conspiracy are DISMISSED.
2. Defendant’s Motion for Summary Judgment, filed on December 10, 1996, is DENIED in part and GRANTED in part. Summary Judgment is granted as to Count IV, stating a cause of action under 42 U.S.C. § 2000e.
3. Plaintiffs Motion for Partial Summary Judgment, filed on December 3, 1996, is DENIED.
4. Trial on the merits on the remaining counts, Count I, stating a cause of action under the Arkansas Civil Rights Act of 1993, and Count II, for wrongful termination, shall be set by subsequent notice.
IT IS SO ORDERED.
. It appears from this record that McElhanon was the only membership coordinator on staff at the country club.
. Although this bankruptcy case was filed in October 1994, 11 U.S.C. § 108 does not serve to toll the statutes since the limitations period ran prior to the filing of the bankruptcy case. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492529/ | *194MEMORANDUM TO ORDER OF MARCH 31, 1997
GREGORY F. KISHEL, Bankruptcy Judge.
This is an adversary proceeding for determination of dischargeability of debt. ' On March 31, 1997, the Court ordered judgment in favor of the Defendants, on the ground that the Plaintiffs complaint was time-barred under Fed.R.Bankr.P. 4007(c). This memorandum, entered pursuant to Fed.R.Bankr.P. 7052, contains the findings of fact and conclusions of law on which that order was based.
FINDINGS OF FACT
1. The Defendants filed a voluntary petition for relief under Chapter 7 on March 27, 1996.
2. On March 29, 1996, the clerk of this Court issued a document for this case, entitled “Notice of Commencement of Case under Chapter 7 of the Bankruptcy Code, Meeting of Creditors, and Fixing of Dates” and on a standard form. The notice set the date and time of a meeting of creditors at April 26,1996, at 11:00 a.m. It then included the following provision:
Discharge of Debts: Deadline to File a Complaint to Determine Dischargeability of Certain Types of Debts: 06/25/96
Finally, the notice later provided:
If a creditor believes that ... a debt owed to the creditor is not dischargeable under See. 523(a)(2), (4), (6), or (15) of the Bankruptcy Code, timely action must be taken on the Bankruptcy Court by the deadlines set forth above labeled “Discharge of Debts.” Creditors considering taking such action may wish to seek legal advice.
3. On June 26, 1996, this Court entered an order granting the Defendants a discharge under Chapter 7.
4. On June 27, 1996, the clerk of this Court received a letter written by the Plaintiff, dated June 19, 1996, signed in the original and addressed to Charles W. Ries, the trustee of the Defendants’ bankruptcy estate. The salutation of this letter reads “Dear Mr. Ries: or other,” with “Dear Mr. Ries” typewritten and “or other” in handwriting. The first paragraph of this letter reads as follows:
I believe Mr. Kamp should not have a discharge of my debt because he defrauded me of $11,106.83 plus interest. I intend to pursue legal action in criminal court to prove fraud. I am working with the Freeborn County County Attorney, Craig Nelson, to bring charges of fraud.
The court file contains nothing to indicate the identity of the person who caused this letter to be received by the clerk. Neither the face nor the back of document contain receipt-stamping or other marking to indicate if it was received by Ries, or when.
5.■ After a deputy clerk presented this letter to the undersigned, an order was entered on July 3, 1996, on a standard form used for such informal communications from creditors. In pertinent part, that order provides:
Mr. Kamrath apparently take(s) the position that a pre-petition debt owing by the Debtor(s) to him should survive a grant of discharge in bankruptcy. Such a result can only come about by a decision of the Court, and can be obtained only through a formal complaint in adversary proceedings. Fed.R.Bankr.P. 7001(6). This letter may not be sufficient as a pleading to commence such a proceeding, for several reasons ...
The clerk of this Court has a statutory duty to accept papers submitted for filing in bankruptcy cases. However, the Court has no absolute duty to entertain requests for adjudication when such requests are made without a colorable effort to comply with the rules of procedure that are applied to all proceedings and litigants in this Court.
IT IS THEREFORE ORDERED that the writing described in this order shall not be treated at present as a complaint in commencement of adversary proceedings for determination of dischargeability, or as a motion or application in commencement of any judicial proceedings in BKY 96-31639, insofar as the issuance of a summons or the setting of a hearing or a scheduling *195conference are concerned. If Harold Kamrath intend(s) to commence such proceedings, he shall do so by filing an appropriate complaint or pleading, in compliance with the Federal and Local Rules of Bankruptcy Procedure, and by paying the appropriate filing fee. The issue of the timeliness of such a complaint will be reserved for decision in an appropriate proceeding.
6. On July 11, 1996, the Plaintiff, pro se, filed the complaint upon which this adversary proceeding was opened. In it, he states:
I believe that Stephen Allen Kamp should not be discharged of his debt of $11,106.88 plus interest because he defrauded me. Clause (2) 11 U.S.C. Sec. 523(a).
The Plaintiff goes on to make six numbered allegations of fact, and then alleges:
Stephen Kamp took my $11,106.83 and did not perform any work as agreed on the contract. He made excuses for why the project was delayed until finally in October of 1995 he told me he did not have my money and was not going to do the job. He had used the money for other projects. I believe Stephen Kamp’s intention from the beginning was to take my money to pay his other debts when it should have been put in an account for my project only. I believe for the above reasons which show fraud Stephen Kamp should not be discharged of his debt.
7. The file does not contain proof of service for this complaint. Counsel for the Defendants timely filed an answer on August 6, 1996.
DISCUSSION
I. Nature of Motion at Bar
The Court’s order and judgment were entered on motion of the Defendants. They had styled their motion as one for dismissal under Fed.R.Civ.P. 12(b)(6), as incorporated, by Fed.R.BankrP. 7012(b).1 In his brief, however, their counsel referred 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.CivP. 12(c), as incorporated by Fed. R.Bankr.P. 7012(b).2 On the record made for it, there is no genuine issue of material fact as to a dispositive issue raised by the Defendants’ answer as an affirmative defense. That issue being purely one of law, it is amenable to summary adjudication. Fed. R.CivP. 56(e), as incorporated by Fed. R.BankrP. 7056.3
II. Merits
The défense at issue under the Defendants’ motion is that this adversary proceeding is time-barred by operation of Fed. R.Bankr.P. 4007(c).4 This rule sets up something in the nature of a statute of limitations, and one that is key to the goals of the system of bankruptcy adjudication. In re Harrison, 71 B.R. 457, 459 (Bankr.D.Minn.1987).
*196Were the only relevant documents those physically lodged and originally filed in this adversary proceeding, the discussion would not be long. The document that prompted the opening of the court file for this adversary proceeding — the “Complaint of Harold Kamrath for Determination of Dischargeability of Debt” that the clerk received on July 11, 1996 — was presented for filing long after the deadline fixed by the clerk’s notice of commencement of case — June 25,1996.5
The Eighth Circuit Court of Appeals, however, has cautioned trial courts to exercise some degree of lenity in construing pleadings and other papers submitted by pro se litigants. Ouzts v. Cummins, 825 F.2d 1276, 1277 (8th Cir.1987); Holloway v. Lockhart, 792 F.2d 760, 761-762 (8th Cir.1986); Burgs v. Sissel, 745 F.2d 526, 528 (8th Cir.1984). These rulings suggest that the Plaintiffs initial communication to the Trustee “and others” might be equated with a complaint for determination of dischargeability of debt for the purposes of the deadline of Fed. R.BankrP. 4007(c) — even though the letter was not addressed to a judge, was not properly style or presented as a complaint in adversary proceedings, and was not treated as such by the clerk and the court in the administration of their caseload.6
The timeliness of the earlier communication, however, is also at issue.7 As noted earlier, the clerk of this Court received it one day after the deadline for timely filing dis-chargeability complaints.8
To remedy this defect, the Plaintiff invokes the savings provision of Fed.R.BankR.P. 5005(c).9 The Plaintiff states in his memorandum that Trustee Ries received his first letter on or before June 26, 1996. He then maintains that this communication should “in the interests of justice” be deemed to have been submitted to the clerk as of that date— thereby making it “timely filed.”
The rule does operate in the general fashion urged by the Plaintiff:
... the Rule requires an “inten[t]” to file a paper, and an “erroneous[] deliver[y]” to an official.... [T]he Rule ... requires that the creditor intend that the paper will become a part of the bankruptcy court proceedings and receive some official action. A creditor who sends a paper to a court-appointed trustee or other official, under circumstances that the sender can *197be said to be acted with an expectation that it receive an official response, has done so with an intent that the paper is being “filed.” The sender is in error, however, because the paper should have been “filed” with the bankruptcy court. The sender has thus “intended ... [file] but erroneously delivered [the paper] to the trustee.” ... In the “interests of justice,” a bankruptcy court may then “deem” that the paper had been filed on time.
In re Anderson-Walker Indust., Inc., 798 F.2d 1285, 1288 (9th Cir.1986) (applying nearly-identical language of former Bankr.R. 509(e)). As established by its very last clause, however, the rule only permits the court to attribute the “filing” of a paper “as of the date of its original [erroneous] delivery.” Further, the power to make this attribution is discretionary. In re Rainbow Trust, 179 B.R. 51, 54 (Bankr.D.Vt.1995).
Fed.R.Bankr.P. 5005(c) sets up a defense to a motion for dismissal brought on time-barring grounds under Fed.R.Bankr.P. 4007(c). A plaintiff makes out the defense only upon proof that it made its misdelivery on or before the deadline. This crucial element is established where the recipient of a misdelivery has noted that event on the face of the subject paper, as required by the rule, and has done so with enough specificity to indicate the identity of the recipient and the date of its receipt.10 Where the recipient has not, it is still open to a plaintiff to prove up the receipt by other means. This could be an affidavit by the recipient of the misdeliv-ery, or its employee or agent, acknowledging the date of the misdelivery and its circumstances; a return receipt attesting to mail delivery; or, if the misdelivery was effected by in-hand means, the affidavit of the person who made it. In the absence of the contemporaneous endorsement mandated by the rule, however, it is incumbent on a plaintiff to produce this sort of proof to gain the protection of the rule.
With their motion, the Defendants established that the Plaintiff did not file the complaint that opened this adversary proceeding until several weeks after his deadline for doing so. They also showed that the letter could be deemed to have raised the issue earlier was not received by the Court by that deadline. The extant evidence all tended to show that the Plaintiffs request for determination of dischargeability was time-barred. The Defendants, then, met their initial burden under Rule 56. Celotex Corp. v. Catrett, 477 U.S. 317, 325, 106 S.Ct. 2548, 2553-2554, 91 L.Ed.2d 265 (1986); City of Mt. Pleasant v. Assoc. Elect. Co-op, Inc., 838 F.2d 268, 273-274 (8th Cir.1988). This shifted the burden of production over to the Plaintiff; he could avoid a dismissal of his complaint only by producing evidence to make out the safe haven of Fed.R.Bankr.P. 5005(c). Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250-252, 106 S.Ct. 2505, 2511-2512, 91 L.Ed.2d 202 (1986); Firemen’s Fund Ins. Co. v. Thien, 8 F.3d 1307, 1310 (8th Cir.1983); Heideman v. PFL, Inc., 904 F.2d 1262, 1265 (8th Cir.1990).
The Plaintiff failed to carry this burden; the record contains no evidence under oath that goes to the question of when Ries received the letter dated June 19, 1996, let alone evidence that is “significant” and “probative,” Johnson v. Enron Corp., 906 F.2d 1234, 1237 (8th Cir.1990), or “substantial,” Krause v. Perryman, 827 F.2d 346, 350 (8th Cir.1987). All of the evidence supports a finding in favor of the Defendants on the issue of timeliness of the Plaintiffs complaints, informal and formal: the issue of dischargeability was not preserved by timely, formal action by the Plaintiff; the debt was discharged before the issue was raised in this Court in any way; and the Plaintiff has no right to carry this litigation forward.11
*198For that reason, the Defendants were entitled to a judgment that their debt to the Plaintiff had not been excepted from their discharge in bankruptcy, and they received that judgment.
. 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, the former 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.
. The latter rule makes Fed.R.Civ.P. 56 applicable to adversary proceedings in bankruptcy. In pertinent part, Fed.R.Civ.P. 56(c) provides that, upon a motion for summary judgment,
[t]he judgment sought shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits [submitted in support of the motion], if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.
.In pertinent part, this rule provides:
A complaint to determine the dischargeability of any debt pursuant to [11 U.S.C.] § 523(c) ... shall be filed not later than 60 days following the first date set for the meeting of creditors held pursuant to [11 U.S.C.] § 341(a).... On motion of any party in interest, after hearing on notice, the court may for cause extend the time fixed under this subdivision. The motion shall be made before the time has expired.
. The clerk’s statement of the deadline comported with the governing rule; June 25, 1996 was exactly 60 days after April 26, 1996.
. Whether it should be so equated is another issue, and one that the parties have not treated with any precision in their arguments. As it turns out, however, one can assume for the sake of analysis that it does. In creating and using the form for the July 3, 1996 order, the undersigned was promptly by a wish to identify and preserve just this issue. The order is a simple announcement that informal statements of complaint about a debtor’s past conduct will not be given judicial attention until the complainant complies with the form and service requirements of the Bankruptcy Code and Rules. It is an attempt at quality control in pro se litigation. Not coincidentally, it is also designed to head off future inquiries and protests over the status of such communications. Were informal statements of complaint about a debtor’s right to discharge merely pinned into the file, or formally docketed, without any action by clerk or court, their authors would be left in the dark about their status — and, with some justification, would become impatient when they received no response at all.
. The Defendants’ counsel's major response to the first communication was that it did not state "the circumstances constituting fraud ... with particularity,” as required by Fed.R.Civ.P. 9(b), as incorporated by Fed R.Bankr.P. 7009. It is not clear whether he was conceding to the Plaintiff on the timeliness of the first communication, or merely making this argument to defeat the first communication as an alternative theory. In either case, the sufficiency of the Plaintiff’s "pleading” is a moot issue.
. The back of the letter bears a machine-produced receipt-stamp. This is routinely applied by the clerk’s staff to all papers received by mail and to those physically delivered to the front desk.
. In pertinent part, this rule provides:
A paper intended to be filed with the clerk but erroneously delivered to the United States trustee, the trustee, the attorney for the trustee, a bankruptcy judge, a district judge, or the clerk of the district court shall, after the date of its receipt has been noted thereon, be transmitted forthwith to the clerk of the bankruptcy court.... In the interest of justice, the court may order that a paper erroneously delivered shall be deemed filed with the clerk ... as of the date of its original delivery.
. Clearly, the directive of notation and transmission set forth in the first sentence of the rule is designed to further protect the beneficiary of the rule's relation-back effect.
. As the issues presented themselves, the Plaintiff lost for want of a simple affidavit by Ries or someone on his staff. At first glance this result seems regrettable, given the Plaintiff's status as a layperson unversed in the technical requirements of court rules. However, the Supreme Court has held that procedural rules in ordinary civil litigation should not be bent to excuse mistakes by those who proceed without counsel. McNeil v. United States, 508 U.S. 106, 113, 113 S.Ct. 1980, 1984, 124 L.Ed.2d 21 (1993). This principle is applied because
*198... experience teaches that strict adherence to the procedural requirements specified by the legislature is the best guarantee of evenhanded administration of the law.
Id. (quoting Mohasco Corp. v. Silver, 447 U.S. 807, 826, 100 S.Ct. 2486, 2497, 65 L.Ed.2d 532 (1980)). See also Ackra Direct Mktg. Corp. v. Fingerhut Corp., 86 F.3d 852, 856-857 (8th Cir.1996); Farnsworth v. City of Kansas City, 863 F.2d 33, 34 (8th Cir.1988); Burgs v. Sissel, 745 F.2d at 528 (all holding that pro se status does not excuse litigants from complying with rules of procedure and court orders). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492530/ | ORDER ON MOTION FOR SUMMARY JUDGMENT
ALEXANDER L. PASKAY, Chief Judge.
THIS IS a Chapter 7 liquidation ease and the matter under consideration is a Motion for Summary Judgment filed by Padgett Wares, P.A. (PW). The Motion is filed in this adversary proceeding commenced by Traci Strickland, the Trustee for Florida All*257state Trucking, Inc. (Trustee) against PW. The facts relevant to the resolution of this controversy as they appear from the record are undisputed and are as follows.
In March of 1993, Florida Allstate Trucking, Inc. (Debtor) and PW entered into a written fee agreement, signed and executed by Claude Donaway as president of the Debtor, whereby PW agreed to represent the Debtor in litigations in the Circuit Court of Hillsborough County. (Motion, Exhibit A.) These litigations included four separate lawsuits which were as follows:
1. Florida Allstate Trucking, Inc. v. Lumberman’s Mutual Insurance Company
2. Florida Allstate Trucking, Inc. v. Royal Knight Distributors
3. Florida Allstate Trucking, Inc. v. United Parcel Service
4. O’Connor v. Florida Allstate Trucking, Inc.
On January 18, 1995, PW, the Debtor, and the Debtor’s president, Claude Donaway, entered into an additional Agreement (separate from the written fee agreement) which was signed and executed by Claude Donaway as president of the Debtor. (Motion, Exhibit B.) The terms of this Agreement granted PW a lien on all monies recovered in seven identified lawsuits, listed in Exhibit A of the Agreement, as well as a lien in all monies recovered in “any other matter or lawsuit.” The four previously identified lawsuits were also included in the seven lawsuits. This Agreement granted PW up to seventy percent (70%) of the proceeds recovered from these lawsuits.
On March 15, 1995, the Debtor filed a Voluntary Petition for Relief under Chapter 11. The Chapter 11 was subsequently converted to a Chapter 7 on January 10, 1996, and Traci Strickland, the Trustee, was placed in charge of the administration of the Estate of the Debtor. After the Debtor filed its Petition, the Debtor informed PW that it intended to hire a different attorney to represent the Debtor in the then pending lawsuits. On March 24, 1995, PW filed a secured Proof of Claim claiming a charging lien on the proceeds recovered from any of the four lawsuits identified earlier and also on the proceeds in the other lawsuits filed on behalf of or against the Debtor prior to the commencement of this Bankruptcy Case (Motion, Exhibit C). On January 15, 1996, after the Chapter 11 was converted to a Chapter 7 case, PW filed, with this Court, Notices of Liens in all of the seven lawsuits.
In the course of the administration of the Estate, the Trustee commenced negotiations with counsel of the opposing parties involved in the above-mentioned four lawsuits in order to settle the claims of the Estate without litigation. On May 8, 1996, the Trustee filed a Motion and sought authority to compromise and settle the four lawsuits. The Motion was scheduled in due course, with notice to all parties of interest, for hearing. On June 26, 1996, this Court, having considered the Motion and an Objection to the proposed compromise filed by PW, entered an Order and approved the compromise with the proviso that the Trustee would hold the proceeds of the compromise in escrow pending a determination of the charging lien claim asserted by PW.
It is the contention of PW that there are no genuine issues of material facts and that PW is entitled to judgment as a matter of law declaring that PW has a valid charging lien on the proceeds of the four lawsuits procured in the compromise affirmed by this Court. PW contends that under applicable State law it has a valid enforceable charging lien which is superior to any of the rights the Trustee has to the proceeds obtained from the compromise.
In opposition to PW’s Motion, the Trustee, while she concedes that there are no disputed facts, contends that PW has no valid enforceable charging lien on the proceeds of the settlement of the four lawsuits approved by this Court.
This Court is in agreement that there are no disputed facts. Thus, the controversy under consideration can be properly resolved, as a matter of law, by the application of the controlling legal principles governing attorneys’ charging liens and their enforceability in bankruptcy.
*258Under the applicable principles an-nunciated by the courts of this State, there are four elements for the imposition of a charging lien. These four elements are:
(1) an expressed or implied contract between the attorney and client;
(2) an express or implied understanding for payment of attorney’s fees out of the recovery;
(3) either avoidance of payment or a dispute as to the amount of fees; and
(4) timely notice.
Daniel Mones, P.A. v. Smith, 486 So.2d 559, 561 (Fla.1986); Sinclair, Louis, Siegel, Heath, Nussbaum, & Zavertnik, P.A. v. Baucom, 428 So.2d 1383, 1385 (Fla.1983).
Furthermore, in order to provide timely notice of a charging lien, the attorney must either file a notice of lien or otherwise assert the lien in the original action. Daniel Mones, P.A., supra. In Florida, the preferred method of enforcing an attorney’s charging lien is a summary proceeding in the original action. Id. In addition, the attorney is also obligated to notify his client in some way before the close of the lawsuits and indicate to the client that he intends to assert the charging lien.
In the present instance, there is no dispute that the president of the Debtor entered into the second Agreement dated January 18, 1995, on behalf of the Debtor which granted a charging lien to PW. Thus, obviously the Debtor required no additional notice that PW was claiming a charging lien.
However, in order to perfect a charging lien under the applicable principles of law in this State, PW must have filed Notices of Liens in the court with original jurisdiction or asserted the lien in the original action. It is without dispute that PW filed its Notices of Lien in this Court on January 15, 1996 which was after the imposition of the automatic stay on March 15, 1995, when the Debtor filed a Voluntary Petition under Chapter 11. Therefore, PW’s filing of Notices of Liens was in violation of the automatic stay under 11 U.S.C. § 362(a)(5) of the Bankruptcy Code which prohibits “any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case....” As a result, PW did not meet all of the requirements to impose a valid charging lien because the charging lien was not perfected through timely notice.
In view of the foregoing, this Court is satisfied that there are no genuine issues of material facts and PW is not entitled to judgment as a matter of law.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the Motion For Summary Judgment be, and the same is hereby, denied. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492532/ | ORDER ON UNITED STATES MOTION FOR RELIEF FROM THE AUTOMATIC STAY and ORDER ON RESPONSE AND OBJECTION TO THE GOVERNMENT’S MOTION FOR RELIEF AND MOTION FOR SANCTIONS
ALEXANDER L. PASKAY, Chief Judge.
This is a Chapter 7 liquidation case and the matters under consideration are a Motion for Relief from the Automatic Stay, filed by the United States of America (Government), and the Debtor’s Response and Objection to the Government’s Motion for Relief and Motion for Sanctions (Response). The Government seeks relief based on Section 362(d)(1) of the Bankruptcy Code which provides that “the court shall grant relief from the stay ... for cause.” Lifting of the stay would permit the Government to conclude litigation with Carolyn May Fankhanel (Debtor) which is currently pending in the United States Tax Court. The Debtor seeks sanctions and damages against the Government.
In support of its Motion, the Government contends that the Debtor had a previous Chapter 13 case in the Orlando Division of this Court, Case No. 93-2642-6C7, which was dismissed by the Court for bad faith filing. The Debtor’s bad faith filing resulted from the Debtor’s refusal to file Federal income tax returns (Govt.Exh.C). Additionally, the Government contends that the Debtor herself filed a Petition in the Tax Court seeking a determination of her tax liability for the tax years of 1983 to 1993 inclusive, the years for which the Debtor did not file a tax return (Govt.Exh.D & E) which proceeding is still pending.
On May 21, 1996, the Tax Court ordered the Debtor to exchange documents with the Government by September 15, 1996. (Govt.Exh.G). According to the Government, the Debtor failed to comply with that Order (Govt.Exh.H). On December 9, 1996, the Tax Court issued an Order directing the Debtor to show cause why her case should not be dismissed and why she should not be sanctioned for her willful disobedience of the May 21, 1996 Order. (Govt.Exh.I). On January 2, 1997, the Debtor filed the current Chapter 7 case with this Court which brought all proceedings in the Tax Court to a halt.
The Government contends that these facts are more than sufficient to lift the stay for cause. Additionally, the Government points out that this Chapter 7 is a no-asset case; thus, by lifting the stay, it would have no impact on the administration of the Debtor’s case because: (1) the Government did not file a proof of claim in this case; (2) no rights of any creditors will be negatively impacted if the relief is granted; and (3) if, in fact, the Debtor is indebted to the Government, the debt would most likely be a nondisehargeable obligation by virtue of Section 523(a)(1) of the Bankruptcy Code.
In sum, the Government contends this is nothing more than a two-party dispute which is already pending before the Tax Court; therefore, the Bankruptcy Court should decline to resolve the dispute between the Government and the Debtor. In support, the Government relies on In re Millsaps, 133 B.R. 547, 554-56 (Bankr.M.D.Fla.1991), recommendation approved, 138 B.R. 87 (M.D.Fla.1991); In re Shapiro, 188 B.R. 140, 143-50 (Bankr.E.D.Pa.1995); and In re *294Hunt, 95 B.R. 442, 445-48 (Bankr.N.D.Tex.1989).
The facts involved in Millsaps, although not exactly on point, are still helpful. The Court in Millsaps discussed at length the application of 11 U.S.C. 505(a)(1), which clearly empowers Bankruptcy Courts to determine the validity, extent, or legality of any tax owed by the Debtor that impacts the administration of the Debtor’s estate. There is little question that this Court has jurisdiction to entertain the request to make such a determination. The relevant question is whether the Bankruptcy Court should exercise that jurisdiction.
The legislative history of Section 505(a)(1) indicates that Congress intended to refine the previous statute for the express purpose of providing a forum for rapid determination of claims so that disputed tax claims would not delay the conclusion of the administration of the bankruptcy estate. In re Diez, 45 B.R. 137, 139 (Bankr.S.D.Fla.1984), citing Cohen v. United States, 115 F.2d 505 (1st Cir.1940). See also, Congressional Record Statements (Reform Act of 1978).
Congress did extend the jurisdiction of the Bankruptcy Court to determine the Debtor’s personal tax liability under Section 505(a)(1). However, the debate in the House of Representatives leading to the passage of Section 505(a)(1) leaves no doubt that, when there is no need to determine a tax liability to administer the estate, Congress did not intend for the Bankruptcy Court to be the forum for this type of litigation. In the present case, it is not the Trustee of the estate who seeks the determination of tax liability relevant to the administration of estate. Here, it is the Government who seeks the determination of the tax liability in the Tax Court so that it can collect unpaid revenue, if any is due. The foregoing indicates that, while this Court has the power and jurisdiction to determine the Debtor’s tax liability, it would not be appropriate to do so under the facts of this case.
In opposition to the relief sought by the Government, the Debtor filed her Response contesting the Government’s Motion and seeking the imposition of sanctions and an award of damages against the Government. In paragraph 8 of the extensive six page Response, replete with numerous authorities, the Debtor contends that “[a]ll bankruptcy laws agree that a bankrupt corporation has no standing with the court and therefore this proceeding must be abated and financial sanctions ordered against Mr. Baer.” The bankrupt corporation mentioned in the Debtor’s Response ostensibly refers to the poor fiscal conditions and financial health of the Federal Government, a proposition supported by many.
Nevertheless, the Government is not a corporation and even if it were, there is no legal authority to support the proposition that an insolvent corporation is deprived of the right to seek appropriate relief in the Bankruptcy Court. If that would be the case, the Bankruptcy Court effectively would be put out of business because, with some very rare exception, all Debtors who seek relief in the Bankruptcy Court are bankrupt in the colloquial sense, that is, they are insolvent.
In addition, the Debtor relies on § 5059(a)(1) (sic), ostensibly referring to Section 505(a)(l)(2)(A) which, as noted earlier, authorizes the Bankruptcy Court to determine the amount or legality of any tax, fine, or penalty. In her attack of the Government’s position, the Debtor contends that attorneys for the Government harassed her and acted in bad faith; that they are guilty of various and sundry misdeeds (including lying and sabotaging her attempt to obtain legal representation); and that they committed slander and liable. Further, the Debtor contends that she owes no taxes and she is merely exercising the rights bestowed upon her by the Bankruptcy Court. Additionally, the Debtor contends that she had a heinous experience in the Tax Court and that she has an absolute right to have this Court determine her tax liability. In support of her request for the imposition of sanctions, the Debtor alleges that the attorney for the Government, Mr. Charles Baer, violated the Rules of Professional Conduct and is guilty of a flagrant and unlawful violation of her due process and equal protection rights under the law, citing Rule 4 — 3.3(1), Rule 4-8.4(d), and Rule 3 — 5.1(b)(1)(e) of the Rules Regulating the Florida Bar.
*295This Court carefully considered the foregoing contentions of the Debtor and is satisfied that they are without merit concerning her right to have her tax liability determined by this Court. Concerning her request for the imposition of sanctions, there is not a scintilla of evidence presented to support this. Therefore, the Motion for Sanctions must also be denied.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the United States’ Motion for Relief From the Automatic Stay be, and the same is hereby, granted and the automatic stay is hereby lifted to allow the United States Tax Court ease, Fankhanel v. Commissioner, Docket No. 2835-95, to continue for the purpose of determining Debtor’s Title 26 liabilities to the United States. It is further
ORDERED, ADJUDGED AND DECREED that the Motion for Sanctions filed by the Debtor be, and the same is hereby, denied with prejudice. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492533/ | ORDER
JOHN E. WAITES, Bankruptcy Judge.
This matter comes before the Court as a result of a request for sanctions against Defendants Superior Container Corporation and Cal Western, Inc. (hereinafter referred to as “Superior” and “Cal West”) contained in a Motion to Compel filed by the Plaintiff on October 10, 1996. An initial Motion to Compel against Superior and Cal West was decided by way of Order entered September 23, 1996. A second Order was entered on November 4, 1996 (the “Order Compelling Discovery”) which determined that Superior and Cal West had not complied with discovery requests and this Court’s prior Orders, but provided that the issue of sanctions resulting from such non-compliance would be taken under advisement.
This Court has previously ordered production of all of the information which the Plaintiff seeks. An Order entered August 8,1996, specifically addressed the issue of maintenance, operational and repair records and the issue of insurance information to be provided by Superior and Cal West. An Order entered September 23, 1996 restated that requirement and further required the production of the information requested in the Plaintiffs discovery served on August 6, 1996. The September 23, 1996 Order also provided that sanctions would be levied in the event that compliance did not occur by September 27, 1996. After review, it is apparent that the Defendants did not comply and adequately provide the information as of October 30, 1996, the date of the hearing in this matter.
At the hearing, the parties addressed at length only portions of the entire discovery request; Interrogatory No. 15, Interrogatory No. 21 and Motion to Produce No. 2. However, this presentation was sufficient to allow the Court to determine that the Defendants had not properly provided all the discovery requested and that they were in violation of this Court’s prior Orders.
At the Court’s direction, during a recess from the hearing, the parties met to determine whether a resolution of the remaining numerous discovery defects was possible. The Order Compelling Discovery of November 4, 1996, which is based upon the agreement reached by the parties resulting from such conference, further indicates that additional answers or modifications to the discovery responses by the Defendants would be needed and that therefore the Defendants had not complied with discovery in a number of other areas.
Given the passage of almost three months since the discovery was originally served and the entry of the Order of August 8, 1996, the continuing request for responses by the Plaintiff, and the number of hearings dedicated to this quest for adequate responses; there appears no reasonable basis for the continuing failure to provide the information to the Plaintiff.
One example of the failure of Superior and Cal West to comply can be found by reference to the issue of insurance coverage. Although the Court ordered Superior and Cal West to provide specific information to the Plaintiff by way of the Order of August 8, 1996, Superior and Cal West did not comply. No reasonable or acceptable justification for *497this non-compliance was presented. At the hearing on October 80, 1996, Superior and Cal West explained that they had simply been unable to obtain such information. Considering the circumstances of this case, such an explanation is difficult to accept.
Superior purchased certain equipment (the “Equipment”) through an Order issued by this Court in December of 1994. The Equipment was sold to Superior for a sum in excess of $4,000,000.00 with the Plaintiff retaining a lien on the Equipment. Cal West, a related entity, guaranteed the debt to the Plaintiff. From the outset of this adversary proceeding in which the Plaintiff, inter alia, seeks to recover the Equipment based upon an alleged default in the agreement(s) by Superior and Cal West, the Plaintiff has asserted questions regarding the condition, location and possession of the Equipment and its possible subsequent transfer. Superior and Cal West, through counsel, consistently denied the transfer at the first several hearings. However, it appeared to the Court that it was incumbent upon the owner and possessor of the Equipment to maintain insurance coverage on it and to provide information of such insurance to the Plaintiff. The Court specifically ordered these Defendants to provide that information. It has now come to light that the Equipment was transferred to a common principal of both Superior and Cal West, but that it is still being used to produce cans by one of these Defendants. In this context, it is implausible, as Superior and Cal West contend, that they have simply been unable to obtain correct information from their insurance agency in spite of three months of diligent effort. In addition, at times during this proceeding, Superior and Cal West have displayed conflicting and unclear insurance endorsements which further raised significant questions regarding the location and possession of the Equipment and whether it is in fact effectively insured.
Additionally, in response to the first Motion to Compel and after a hearing, this Court issued an Order entered September 23, 1996 requiring these Defendants’ compliance with Plaintiffs discovery and setting forth significant prescriptive sanctions in the event of non-compliance.1 The September 23, 1996 Order did not impose sanctions at that time but was intended to demonstrate to Superior and Cal West the seriousness and importance of timely, accurate and complete responses to the discovery. Those sanctions, if imposed for the period between September 29, 1996 and October 30, 1996, would total $77,500.00. Despite that Order, inadequate or incomplete discovery responses were provided to the Plaintiff on September 29, 19962. Further documentation and responses were apparently provided periodically by Superior and Cal West since that date, culminating in an attempt by them to amend their responses through delivery at 8:45 p.m. the evening before the hearing.
From the presentation at the hearing, the Court finds that Superior and Cal West failed to adequately respond to the discovery requests and that such failure is without substantial justification whether such a failure was due to an intentional desire to obstruct these proceedings or a colossal lack of regard for their duty to respond. The Court is equally satisfied that prior to its motion, the Plaintiff made a good faith effort to obtain the discovery responses and information without having to ask this Court to again intervene. Under these standards, the Defendant’s conduct is sanetionable under Rule 37 of the Federal Rules of Civil Procedure.3
The actions of Superior and Cal West have required a substantial amount of time and expense from the Plaintiff. Two Motions to Compel have been filed and at least three hearings have been held, all to address the issue of non-compliance with discovery and Superior and Cal West’s continuing refusal to provide complete discovery responses. At *498the hearing on the second Motion to Compel, the Plaintiff estimated the amount of time spent by attorneys on this discovery alone to exceed 250 hours. A subsequent affidavit, submitted by the Plaintiff, more precisely describes the total cost of time and fees spent in attempting to elicit discovery responses as $30,618.50.
The September 23, 1996 Order clearly states:
Failure to comply with this Order shall result in sanctions against the Defendants separately or jointly at a rate of $2,500 per day, said amount to continue to accrue daily, including weekends and holidays, up to the day and time that full and complete responses to Plaintiffs Discovery Requests and the Order are submitted to the Plaintiff.
This Court believes that the requirement to fully respond was made clear both in open Court and in its Orders.
The Court’s authority and ability to levy sanctions as a result of this type of behavior is clear. “District courts enjoy nearly unfettered discretion to control timing and scope of discovery and impose sanctions for failure to comply with its discovery orders.” Mutual Federal Savings & Loan Association v. Richards & Associates, Inc., 872 F.2d 88, 92 (4th Cir.1989); Hinkle v. City of Clarksburg, 81 F.3d 416, 426 (4th Cir.1996). Rule 37(a) provides for the imposition of sanctions upon an initial determination of non-compliance with discovery requests. The Court could have reasonably imposed such sanctions in its September 23, 1996 Order, but allowed the Defendants another chance to comply. Pursuant to Rule 37(b), harsher sanctions are now available and should be imposed. Such sanctions could include holding the Defendants in default with regard to their responses, denying the Defendants the ability to use any of the information to support their position or deny the Plaintiffs allegations, and other sanctions which would impact the Defendants’ rights to present their defenses in this litigation. Mutual Federal Savings & Loan Association v. Richards & Associates, Inc., 872 F.2d 88 (4th Cir.1989). The Court may also impose sanctions upon counsel for the Defendants. In re Howe, 800 F.2d 1251 (4th Cir.1986). However, this Court is mindful that lesser sanctions should be considered, if effective, to deter improper actions. Godley Auction Company v. Ford Motor Credit Company, Inc., 96-319-18 (D.S.C. 6/21/96). Rather than impose litigation ending sanctions, this Court chooses to levy monetary sanctions pursuant to Rule 37(b). The continuing delay and excuses offered by Superior and Cal West suggests that it will take Court imposed sanctions to prompt full and proper response to discovery requests and Orders in order to ensure a just, speedy and less expensive determination of this adversary proceeding.
For these reasons, the Court imposes sanctions of $10,000.00 as the reasonable expenses including attorney’s fees incurred by the Plaintiff due to the failure of Superior and Cal West to comply with this Court’s Orders for the period from September 29, 1996 until October 30, 1996, the date of this hearing. The Court has reviewed the pleadings in this adversary proceeding, taken notice of the entire bankruptcy case, and reviewed the affidavit submitted by counsel for the Plaintiff and finds that this amount of sanctions is reasonable. In the event that the further responses required of these Defendants by November 8, 1996 are inadequate in any way, further sanctions against Superior, Cal West and/or their attorneys may be considered.
These sanctions are to be paid to the Plaintiff, through its counsel, to compensate the Plaintiff/Debtor for the time and expense incurred as a result of the failure of Superior and Cal West to comply and are based upon Plaintiffs affidavit and this Court’s intimate familiarity with these proceedings and are to be paid to the Plaintiff in certified funds within 10 days of the entry of this Order.
AND IT IS SO ORDERED.
. The Court notes that the September 23, 1996 Order was not appealed.
. A two day delay beyond the Court ordered deadline was consented to by the Plaintiff in order to obtain copies of the discovery.
.Further references to the Federal Rules of Civil Procedure shall be by reference to Rule Number only. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492535/ | Memorandum Opinion
MARK W. VAUGHN, Bankruptcy Judge.
The Court has before it the complaint of Jeffrey Schreiber, Trustee versus Ronald Cereola, as Custodian (“Attorney Cereola”), Gail Coutinho (“Coutinho”), Patrick Houghton (“Houghton”), and PPH Corporation. This adversary proceeding brought by the trustee is to avoid as a fraudulent conveyance an assignment of a purchase and sale agreement to purchase real estate made by the Debtor, as assignor, and Houghton, as assignee; to avoid as a fraudulent conveyance a *8transfer to Coutinho;1 and to compel Attorney Cereola to turn over assets of the estate. The Court had previously granted summary judgment to the trustee, which order was vacated by the United States District Court for the District of New Hampshire by its order dated October 31,1996. In accordance with that order, an evidentiary hearing was held on April 4,1997.
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).
Facts
On January 23, 1992, the Debtor executed a note payable to Coutinho in the original face amount of $30,700 with payments of $300 per month to be made for six months and the unpaid balance to be due and payable on July 23, 1992. Coutinho testified that the Debtor defaulted on the note and the balance was not paid when due in July 1992. Coutinho eventually obtained a judgment in Hillsborough County Superior Court in April 1993 in the amount of $29,700 plus $4,000 in interest, costs and attorneys’ fees.
On or about September 21, 1992, Jodoin attended an auction held by Hillco Properties Services, Inc. of certain land and buildings located on 177-183 Hayward Street in Manchester, New Hampshire. Jodoin was the successful bidder at that auction for a total purchase price of $127,500. Jodoin entered into a purchase and sale agreement on September 21, 1992 with Hillco and made a deposit of $12,750. The purchase and sale agreement indicated that Jodoin desired to take title in a corporation “to be formed.” The purchase and sale agreement further contained in paragraph 10 an anti-assignment provision, which was not mentioned by any party at the April 4 hearing.
On September 23, 1992, Jodoin executed an assignment of his rights in the September 21 sales agreement and deposit receipt to Houghton. (Plaintiffs Exhibit No. 4.) The assignment does not indicate the consideration for the assignment, but Houghton testified there was money owed to him from another deal he had with Jodoin regarding property on Coteville Road in Derry, New Hampshire, specifically, the sum of $2,000 he loaned to Jodoin to purchase that property and the sum of $5,500, which Houghton believed was his profit from the sale of that property which was never paid to him. The assignment was not recorded in the registry of deeds.
At some point, Jodoin and Harvey Dupuis (“Dupuis”) agreed to be equal partners in the 177-183 Hayward Street property. The trustee entered into evidence an undated receipt showing a transfer of $10,000 from Dupuis to Jodoin. (Plaintiffs Exhibit No. 3.) Vickie Wood (“Wood”), who managed Dupuis’ real estate investments, testified that this receipt was executed prior to the formation of the Hayward Street Realty Corporation, whose articles of incorporation were filed at the Secretary of State on October 5, 1992. (Defendants’ Exhibit No. 345.) On November 25, 1992, the property was deeded from Hillco Properties Services, Inc. to Hayward Street Realty Corporation. (Plaintiffs Exhibit No. 7.)
On December 7, 1992, Dupuis, as Secretary, Treasurer and President of Hayward Street Realty Corporation, signed Jodoin’s stock certificate, indicating Jodoin owned 150 shares of Hayward Street Realty Corporation. (Plaintiffs Exhibit No. 8.) On August 23 or 24, 1993, Coutinho, who had an outstanding writ of execution, executed on Jodoin’s stock certificate, which was still in the possession of Dupuis. (Plaintiffs Exhibit Nos. 15 and 16.) On August 15, 1993, Houghton signed a letter from PPH Corporation to Attorney Clancy advising Attorney Clancy, who represented Jodoin, that PPH was the owner of fifty percent of the shares of Hayward Street Realty Corporation. *9PPH is a corporation owned by Houghton and his brother. (Defendants’ Exhibit No. 307.) On August 27, 1993, Attorney Clancy, now representing Houghton, sent a letter to Attorney Cereola, who represented Coutinho, in which Attorney Clancy indicated that Houghton was the bona fide purchaser in good faith of the stock certificate, which transaction took place prior to the execution on behalf of Coutinho. On September 1, 1993, the Hayward Street premises were transferred to a third party, Play to Win, Inc., for the sum of $225,000. After closing, Mr. Dupuis received one-half of the net proceeds, approximately $36,000, and the other half of the net proceeds were placed in escrow pursuant to an agreement between Attorney Clancy, representing Houghton, and Attorney Cereola, representing Coutinho.
On July 27, 1994, Jodoin filed a petition under Chapter 7 of the Bankruptcy Code. On November 2, 1994, the trustee brought this adversary proceeding alleging a fraudulent transfer of assets to Coutinho; a fraudulent transfer of assets to Houghton and PPH Corporation; and an action to compel Attorney Cereola to turn over assets of the Chapter 7 estate, namely, the proceeds from the real estate sale.
The Court further finds that, during the period September 23, 1992 through August 15,1993, the assignment was undisclosed and that Houghton knew that the property was to be taken in the name of a corporation to be formed. Further, at all times during the period September 23, 1992 through August 15, 1993, Jodoin acted as a fifty percent owner of the Hayward Street property in his relationship with Dupuis, the other fifty percent owner, in his actions to resell the property, and in the possession of the real estate, including storage of various items of his personal property in the Hayward Street premises. Finally, there is no evidence, other than Houghton’s testimony that he told Jodoin to form a corporation and to try to resell the property, of any active interest by Houghton or his corporation, PPH, from the time of the assignment to the August 15, 1993 letter to Attorney Clancy. For whatever reason, Jodoin, the assignor and the Debt- or, was not called to testify by any party to this adversary proceeding.
Discussion
The district court, in its October 31, 1996 opinion, found that upon execution of a purchase and sale agreement for real estate, the purchaser acquires valuable, enforceable and assignable legal rights, citing Bronstein v. GZA GeoEnvironmental, Inc., 140 N.H. 253, 665 A.2d 369 (1995); Lapierre v. Cabral, 122 N.H. 301, 444 A.2d 522 (1982); and also Estate of Jesseman, 121 N.H. 313, 315, 429 A.2d 1036 (1981). That is the law of this case. The trustee seeks to avoid the assignment as a fraudulent transfer under section 544 of the Bankruptcy Code which permits the trustee to proceed to avoid a fraudulent conveyance under state law, namely, N.H. RSA 545-A:4. Under that statute, the trustee alleges that the assignment was made with the actual intent to hinder, delay or defraud creditors of the Debtor or that the transfer was made without a reasonably equivalent value. The Court disagrees.
With respect to actual intent to hinder, delay or defraud a creditor, the Court realizes that actual intent may be inferred by the totality of the circumstances surrounding a transaction. Indeed, in this case there is evidence with respect to the Debtor’s overall business transactions that there may have been fraudulent conveyances. However, with respect to this particular transfer, the evidence is that Houghton or PPH Corporation had completed two similar transactions with the Debtor and had received similar assignments, specifically the assignment of a purchase and sale agreement dated July 30, 1991 for property located at 409 Cedar Street and an assignment of a purchase and sale agreement dated May 6, 1992 for property located at 432 Shasta Street. As indicated above, Houghton testified that he was owed $2,000 for monies loaned to Jodoin and $5,500 as a result of a transaction in which he did not receive his share of the profits. These debts constituted the consideration for the assignment. The Court finds that the assignment was executed in the ordinary course of both the Debtor’s and Houghton’s business arrangements. The evidence does *10not support a finding that, with respect to this transaction, the assignment was made with the intent to hinder, delay or defraud a creditor.
Under N.H. RSA 545-A:3, value for a transfer may be an antecedent debt. The only evidence of consideration in this case is the testimony of Houghton, which is that he was owed at the time of the assignment the sum of $7,500. The question then before the Court is whether $7,500 is “reasonably equivalent” to the value of the purchase and sale agreement assigned to Houghton. The Court finds that the value must be established as of the date of the transfer, namely, September 23, 1992. At that point in time, evidence indicates that Jodoin had deposited $12,750 as a down payment, had not yet formed a corporation to take title, and had not obtained the financing necessary to complete the transaction. There is no evidence before the Court that, at the time of the assignment, the value of the Hayward Street premises was anything other than the amount bid at the auction. Further, unless and until financing was obtained and the transaction was closed, the Court questions whether there was any value in the purchase and sale agreement itself. The trustee argues that value should be determined by the sales price of the property when sold almost a year later. Once again, the Court disagrees. Hindsight should not be utilized in determining whether at the time of the transfer Jodoin obtained reasonably equivalent value. The Court finds that the $7,500 antecedent debt owed by Jodoin to Houghton is a reasonably equivalent value and, thus, the assignment is not a fraudulent conveyance.
Having found that the assignment was not a fraudulent conveyance, the Court must next determine whether, by virtue of the assignment, Houghton or PPH Corporation obtained any interest in the shares of Hayward Street Realty Corporation and, thus, might be entitled to the proceeds of the subsequent sale of the property. For the following reasons, the Court finds that Houghton and PPH did not obtain any interest in Jodoin’s shares of stock of Hayward Street Realty Corporation and, thus, upon Jodoin’s filing of bankruptcy, the shares became assets of the bankruptcy estate subject to any valid encumbrances.
In the case of In re Estate of Jesseman, 121 N.H. 313, 315, 429 A.2d 1036 (1981), the Supreme Court found that under the doctrine of equitable conversion, an executory contract for the purchase and sale of real property conveys equitable title to the prospective purchaser. Thus, in this case, upon the execution of the purchase and sale agreement, Jodoin obtained an equitable interest in the property, which interest was then assigned to Houghton pursuant to the September 21,1992 assignment.
New Hampshire RSA 477:3-a requires that any “instrument which affects title to any interest in real estate ... shall not be effective as against bona fide purchasers for value until so recorded.” N.H.Rev. StatAnn. § 477:3-a (1992). The Court finds that the purchase and sale agreement and the assignment in question are instruments which affect title to an interest in real estate and, therefore, had to be recorded to be effective against a bona fide purchaser. However, neither were recorded. Houghton knew that the property was to be transferred to a corporation to be formed. The corporation was formed and the property was deeded to that corporation. Hayward Street Realty Corporation is a separate entity and, other than the fact that Jodoin became a fifty percent shareholder, there is no evidence before the Court that the corporation was not a bona fide purchaser for value. “A bona fide purchaser for value is one who acquires title to property for value, in good faith, and without notice of competing claims or interests in the property.” Hawthorne Trust v. Maine Sav. Bank, 136 N.H. 533, 537, 618 A.2d 828 (1992). The assignment was made prior to formation of the corporation and, when made, Jodoin was not acting as an officer of the corporation within the scope of his authority. See Sutton Mut. Ins. Co. v. Notre Dame Arena, Inc., 108 N.H. 437, 441, 237 A.2d 676 (1968). In addition, there is no evidence that the corporation, a separate legal entity, had knowledge of the assignment prior to the August 15, 1993 letter from Houghton to Attorney Clancy. The evidence *11is that Dupuis, who advanced $10,000 to Jodoin to obtain a fifty percent interest and whose wife financed the transaction, had no knowledge of Houghton’s claim or assignment. Counsel who prepared the corporate documents prepared them for Jodoin and Dupuis, both as officers, directors and shareholders, and apparently had no knowledge of any other claim.
Accordingly, because Houghton did not record his interest and Hayward Street Realty Corporation was a bona fide purchaser, the Court finds that upon the transfer from Hilleo to Hayward Street Realty Corporation, Houghton no longer had any interest in the real estate.
Houghton has made the further claim that he is the actual owner of the 150 shares of stock owned by Jodoin. However, neither the law nor the evidence supports that contention. The shares were issued to Jodoin. While the evidence indicates the corporate records were not maintained properly, there is no indication the shares were ever intended to be transferred on the books of the corporation to Houghton or PPH. At all times, Jodoin acted as a fifty percent owner in his dealings with the other fifty percent owner, Dupuis, as well as third parties. Houghton argues that Jodoin held the shares for his benefit, inferring at least that a resulting trust existed for his benefit. However, the Court finds that for a resulting trust to exist, the consideration must have some relation to the real estate being transferred. In the instant case, the consideration given by Houghton was an antecedent debt with respect to a transaction that had no relationship to the Hayward Street property. Thus, the Court finds that the shares are not subject to a resulting trust for the benefit of Houghton or PPH. See Thomas v. Finger, — N.H. —, 679 A.2d 567 (1996); Chamberlin v. Chamberlin, 116 N.H. 368, 359 A.2d 631 (1976); Kachanian v. Kachanian, 100 N.H. 135, 121 A.2d 566 (1956); Shelley v. Landry, 97 N.H. 27, 79 A.2d 626 (1951); Bailey v. Scribner, 97 N.H. 65, 80 A.2d 386 (1951); French v. Pearson, 94 N.H. 18, 45 A.2d 300 (1946).
For the reasons stated above, the Court finds that neither Houghton nor PPH Corporation has any interest in the shares of Hayward Street Realty Corporation and that the shares are property of Jodoin’s estate. Houghton’s or PPH’s claim, if any, is against the Chapter 7 estate or Jodoin, whose discharge has been previously denied, but not against any specific assets of the Chapter 7 estate.
This opinion constitutes the Court’s findings and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052.
. The trustee, pursuant to an order approved by this Court, has previously entered into a settlement agreement with Coutinho. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492536/ | MEMORANDUM OPINION
LETITIA Z. CLARK, Chief Judge.
The court having heard the confirmation of Debtors’ First Amended Chapter 13 Plan (Docket No. 11) and the Trustee’s Objection to Confirmation and Motion to Dismiss (Docket No. 13) and after considering the pleadings, evidence and argument of counsel, the court makes the following findings of fact and conclusions of law. To the extent any findings of fact are construed to be conclusions of law, they are hereby adopted as such. To the extent any conclusions of law are construed to be findings of fact, they are hereby adopted as such.
Findings of Fact
1. Debtors, Ramiro A and Mary T. Flores, filed a joint Chapter 13 bankruptcy petition on May 7, 1996 which was signed by Debtors and their counsel of record, Frank E. Mann, III. The petition reflects that Frank E. Mann, III and James J. Lesyna were designated as the attorneys representing the Debtors. Docket No. 1.
2. Original Schedules and the Statement of Financial Affairs were filed on May 21, 1996. Docket Nos. 4 and 5. Mr. Flores is employed by BWIP as a machinist and Mrs. Flores is employed by FabriCenters. Sched*31ule I, Current Income of Individual Debtors, reflects a gross monthly income for Mr. Flores of $3,220.00 and a gross monthly income for Mrs. Flores of $691.00. Schedule J, Current Expenditures of Individual Debtors, reflects expenses in the amount of $2,677.00.
3. Prior to the § 341 creditors’ meeting on July 24, 1996, the Chapter 13 Trustee, William E. Heitkamp, requested that the Debtors bring recent paycheck statements to the meeting. At the creditors’ meeting, Mr. Flores’ submitted a payroll statement for the period ending April 28, 1996 which reflects a gross monthly income of approximately $5,287.79. Testimony of Trustee, Trustee’s Exhibits 1 and 2.
4. The court takes judicial notice of the discrepancy in the figures for the gross monthly income of Debtors as reflected on Schedule J and Mr. Flores’ payroll statement.
5. In addition to discovery by Mr. Heitkamp of the income discrepancy at the creditor’s meeting, the Chapter 13 Trustee also learned that Debtors owned, but did not schedule, 2 pieces of unimproved real property (Lots 1 and 2 on Betty Sue Lane and Hilltop Lakes). Testimony of Trustee, Trustee’s Exhibits 1 and 2. Debtor, Mrs. Flores, valued the Betty Sue Lane property at $12,000.00 and valued the Hilltop Lakes property at $7,000, based upon the purchase price at the time that she and her husband purchased the property approximately fifteen years ago. Testimony of Mary T. Flores.
6. The Chapter 13 Trustee advised counsel for Debtors of the discrepancies and only then were Amended Schedules and an Amended Plan filed on August 1, 1996. The court takes judicial notice of the schedules and amended schedules. Docket Nos. 10 and 11. The Trustee filed the present Objection to Confirmation and Motion to Dismiss based upon the falsity of the schedules and the omission of significant non exempt assets constituting a willful failure to properly prosecute the ease. The Trustee requests dismissal with prejudice to refiling for 180 days pursuant to 11 U.S.C. § 109(g).
7. Mrs. Flores testified that the discrepancy in the amounts reflecting Debtors’ income on the original and amended schedules was due to income received as a result of Mr. Flores receiving pay for overtime work. As to the failure to have the additional real property included in the original schedules, Mrs. Flores testified that her concept of identifying assets were linked to whether they were income producing assets. As these properties were not producing any rental income, “it didn’t come to mind to divulge it also.” Testimony of Mrs. Flores. The court did not find Mrs. Flores’ explanation to be credible.
8. Mrs. Flores testified that their initial conference was with Mr. Mann, who spent less than 30 minutes with them going over their budget. She testified that she was comforted by the fact that they would be able to afford a monthly plan payment of $500.00, which was the figure arrived at as a result of the conversation between her and Mr. Mann. Mrs. Flores did not talk to or see Mr. Mann after her original visit. All subsequent meetings were with Mr. Mann’s paralegals. Mrs. Flores testified that at the first meeting with the paralegal, whom she could not identify, she was advised that the monthly plan payment would not be $500.00. Testimony of Mrs. Flores.
9. The original Plan reflects a proposed monthly payment to the Trustee of $725.00 and the First Amended Plan reflects a proposed variable monthly payment of $750.00 for months one through twelve and $850.00 for months thirteen through sixty. Plan and First Amended Plan, Docket Nos. 6 and 11.
10. Mrs. Flores testified that after her initial paralegal meeting, she began meeting with another paralegal at Mr. Mann’s office, Carol Ayers. Mrs. Flores met with Ms. Ayers for at least an hour to prepare the amended budgets. It was Mrs. Flores’ understanding that these amended budgets were drafted by Ms. Ayers. Mrs. Flores was cautioned by Ms. Ayers to be accurate as to the figures as this was information upon which the court and the Trustee would rely in determining whether the proposed monthly payment was a legitimate amount. Mrs. Flores further testified that the monthly payment might change but she was surprised *32when it went up to $750.00 per month. Testimony of Mrs. Flores.
11. The court takes judicial notice that the schedules, statement of financial affairs, budgets and plans are signed by Debtors and their counsel under penalty of perjury.
12. Based upon the circumstances outlined above, i.e., the discrepancies as to income, the omission of assets, the failure of Mr. Mann to be present at this hearing to assist in clarification of his participation in the sequence of events and the lack of credibility of Mrs. Flores, it is clear to this court that there has been wrongdoing and an abuse of the bankruptcy process. What is not clear to this court is the identity of the person or persons responsible for this wrongdoing and abuse, that is, whether responsibility lies with the Debtors, Mr. Mann and his personnel, or a combination of both. As a result, this court has concluded that a show cause hearing is to be set requiring Mr. Mann to personally appear and explain these discrepancies and to explain his or his personnels’ participation in the preparation of these documents.
13. Due to the discrepancies in the income figures and the omission of assets, the court is unable to determine whether the plan as proposed meets the standards set forth in 11 U.S.C. § 1325 as being in the best interests of the creditors and whether Debtors are contributing all of their disposable income for distribution to creditors under the plan. Accordingly, this court denies confirmation of the plan as proposed by the Debtors. The hearing on the Motion to Dismiss, contained in the Objection to Confirmation (Docket No. 13), is continued for presentation of additional evidence which is to be adduced at the same time as the Show Cause hearing.
Conclusions of Law
1. One of the requirements for court confirmation of a Chapter 13 plan is that the value, as of the effective date of the plan, of property to be distributed under the plan on account of each allowed unsecured claim is not less than the amount that would be paid on such claim if the estate of the debtor were liquidated under chapter 7 of the Bankruptcy Code. 11 U.S.C. § 1325(a)(4). Based upon the evidence submitted, the court is unable to assess the liquidation value of the property to be distributed under the plan.
2. In the event of an objection to confirmation of the plan, the court may not approve the plan unless, as of the effective date of the plan, the value of the property to be distributed under the plan on account of such claim is not less than the amount of such claim; or the plan provides that all of the debtor’s projected disposable income to be received in a three-year period beginning on the date that the first payment is due under the plan will be applied to make payments under the plan. 11 U.S.C. § 1325(b)(1)(A) & (B). Based upon the evidence submitted, the court is unable to determine whether all of the Debtors’ projected disposable income over the three-year period will be applied to make payments under the plan.
The Trustee’s Objection to Confirmation, contained in Docket No. 13, is sustained and confirmation is denied. The Motion to Dismiss, also contained in Docket No. 13, is continued for presentation of additional evidence. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492538/ | ORDER DENYING DEBTORS’ MOTION FOR SUMMARY JUDGMENT AND GRANTING GOVERNMENT’S MOTION FOR SUMMARY JUDGMENT
JAMES A. PUSATERI, Chief Judge.
This proceeding is before the Court on opposing motions for summary judgment. The plaintiff-debtors appear by counsel Paul D. Post. The United States of America appears by United States Attorney Jackie N. Williams and Trial Attorney Jaye Rooney of the Tax Division of the United States Department of Justice. The Court has reviewed the relevant pleadings and is now ready to rule.
FACTS
When the debtors filed a chapter 13 bankruptcy case in 1991, they owed federal income taxes for 1989 and 1990. The IRS filed a proof of claim showing the prepetition amount owed, and the taxes were allowed as a priority claim. About two-thirds of the taxes were paid while the case remained in chapter 13. The debtors converted the case to chapter 7 in April 1995, and they received *77a chapter 7 discharge in September of that year. They contend the IRS’s records show the 1989 tax claim was paid in full in April 1995, and that other payments they made totalled more than the 1990 tax claim before they received their discharge.
DISCUSSION AND CONCLUSIONS
Without expressly saying so, the debtors are trying to obtain a discharge of some of their priority tax obligations even though they failed to complete their chapter 18 plan. Debtors who successfully complete such a plan can discharge such debts under 11 U.S.C.A. § 1328(a). Since postpetition interest is allowed against an insolvent bankruptcy estate only on oversecured claims, see § 506(b), successful chapter 13 debtors can discharge their priority tax obligations by paying only the balance owed on them prepetition. However, priority tax claims are excluded from the discharge granted under § 727 to chapter 7 debtors. § 727(b); § 523(a)(1); § 507(a)(8). Interest on such claims is also excluded from the chapter 7 discharge, and penalties are as well unless the transaction or event giving rise to them occurred more than three years before the bankruptcy petition was filed. See Bruning v. United States, 376 U.S. 358, 360-63, 84 S.Ct. 906, 907-09, 11 L.Ed.2d 772 (1964) (postpetition interest); Nicholas v. United States, 384 U.S. 678, 682 n. 9, 86 S.Ct. 1674, 1679 n. 9, 16 L.Ed.2d 853 (1966) (interest suspended, not extinguished, during bankruptcy); Burns v. United States (In re Burns), 887 F.2d 1541, 1543-44 (11th Cir. 1989) (Bruning rule survived enactment of Bankruptcy Code; postpetition interest and penalties nondischargeable with three-year exception for penalties).
The debtors seem to suggest- the amount of the IRS’s nondischargeable tax claim is controlled by the proof of claim it filed while the case was pending in chapter 13. They overlook certain facts about proofs of claim. First, proofs of claim are filed to assert a right to share in any distributions made by the bankruptcy estate. Second, claims are generally allowed under § 502(b) in the amount owed on the date of the filing, so any postpetition facets of a claim are not covered by that section. Ordinarily, since most debts are dischargeable, the allowed amount of a claim is all that matters because postpetition additions through interest or penalties are discharged. However, this is not true for nondischargeable debts, and, under the cases cited above, the creditor remains free to try to recover any part of the claim that was not discharged, such as post-petition interest and penalties.
The debtors also argue the government should be equitably estopped from claiming they owe additional penalties and interest because it accepted a check on which they allegedly wrote “taxes paid in full” and it did not amend its proof of claim to include such amounts before the debtors received their chapter 7 discharge. If equitable estoppel can ever be applied to the government, it can only be in cases of affirmative misconduct by the government. DePaolo v. United States (In re DePaolo), 45 F.3d 373, 376-77 (10th Cir.1995). Even if the debtors could establish that their cheek was marked “taxes paid in full,” cashing such a check does not amount to affirmative misconduct. As indicated above, the purpose of the proof of claim was to state the amount the IRS asserted the debtors owed it on the date they filed for bankruptcy, not to specify the maximum amount the IRS could ever try to recover from them.
For these reasons, the debtors’ motion for summary judgment must be denied and the government’s motion must be granted. Despite their chapter 7 discharge and the payments they have made, the debtors still owe the balance of unpaid postpetition interest and penalties on their 1989 and 1990 federal income taxes.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492539/ | *146DECISION AND ORDER
ROSS W. KRUMM, Chief Judge.
The trustee in the above-captioned Chapter 7 bankruptcy proceeding has filed an objection to the claim of homestead exemption of the debtor. The issue presented for decision is whether a homestead deed executed by counsel for the debtor and recorded pursuant to Code of Virginia, § 34-17 is sufficient to claim the exemption under Code of Virginia, § 34-4. For the reasons set forth in this decision and order, the trustee’s objection to the claimed exemption will be sustained.
Facts
The parties have stipulated the facts in this ease. The debtor’s Chapter 13 proceeding was converted to a Chapter 7 proceeding on January 24, 1996. A section 341 meeting of creditors in the Chapter 7 proceeding was scheduled for February 15,1996, in Roanoke, Virginia. Debtor’s attorney prepared a homestead deed for the debtor’s execution intending to comply with Code of Virginia, § 34-17; however, counsel for the debtor was not able to contact the debtor or to find the debtor prior to the section 341 meeting and the debtor did not appear at the section 341 meeting. Therefore, debtor’s counsel was faced with the prospect that the debtor would not execute the homestead deed within five (5) days after the section 341 meeting (February 15, 1996), and would lose the benefit of the homestead exemption. As a result, debtor’s counsel executed the homestead deed using her signature as counsel for the debtor and recorded it on February 20, 1996, at 3:08 p.m. in the Circuit Court of Franklin County.1
The debtor has affirmed and ratified the act of his attorney in executing and recording the homestead deed and has not attempted *147to file any other homestead deed. Also, the parties stipulate that at all times relevant to these factual matters, counsel had been retained by the debtor as his duly authorized attorney.
Positions of the Parties
The trustee’s position is that the Code of Virginia and the Bankruptcy Code dictate that the debtor is the only person who can execute the homestead deed in order to claim it under Virginia law. The debtor, on the other hand, proceeds on the theory that the agency relationship between the attorney and the debtor enables counsel’s execution and recondition of the homestead deed on behalf of the debtor. The debtor also points to the fact that he has ratified and affirmed his counsel’s act of signing the homestead deed on his behalf and putting the same to record within the time provided by the Virginia Code for claiming a homestead exemption.
Law and Discussion
11 U.S.C. § 522(b)(1) authorizes “an individual debtor” to exempt from property of the estate property owned by him as of the date of the filing of his petition in bankruptcy. Relevant to the matter before the court for decision, section 522(b)(2)(A) specifies that property exempt under state law which is applicable as of the date of the filing of the petition can be exempted by the debt- or.2
Given the statutory scheme set forth by Congress in section 522(b) and the action by the Virginia General Assembly in opting out of the Federal exemption provisions of section 522(d), the debtor must comply with Virginia law in order to properly claim a homestead exemption. Code of Virginia, § 34-4 creates the exemption:
Every householder shall be entitled ... to hold exempt from creditor process arising out of a debt, real and personal property, or either to be selected by the householder, ____
Householder is defined in Code of Virginia, § 34.1 as “any resident of Virginia.” In looking at the plain language of both the Bankruptcy Code in section 522(b) and in the Code of Virginia in sections 344: and 344, it is clear that the “individual debtor” (§ 522(b)) or “householder” (§ 344) has the privilege of “selecting” the property to be exempted.3 Under section 34-6 4 and section 34-175, the debtor secures the benefit of the homestead by signing and recording a writing claiming the benefit.
The debtor does not dispute the statutory language in the Bankruptcy Code or Code of Virginia requiring the individual debtor to claim and to secure the homestead exemption. Instead, the debtor relies on the agency relationship which is established between an attorney and his client at the inception of an engagement. In particular, the debtor argues that an attorney is an agent of his client and has the authority to take all lawful steps for the protection of his client’s interest. See, Michie’s Jurisprudence, Vol. 2A, Attorney and Client, section 19, pages 590-591. However, as set forth in Michie’s, supra, at section 17, “if seasonably raised and properly brought in question, an attorney may always be called upon to produce satisfactory evidence of this authority, and upon his failure to produce such authority, *148the suit or proceeding instituted by such attorney should be dismissed.” Id. at 589.
In the case at bar, the trustee in bankruptcy has seasonably raised and properly brought into question the validity of the homestead deed which contained only the signature of debtor’s attorney on behalf of the debtor. The debtor has come forward with no evidence to show evidence of his counsel’s authority to execute on his behalf the homestead deed and put it to record. In fact, it is clear from the stipulation filed by the parties that debtor’s counsel signed and filed the homestead deed out of a sense of necessity only and not pursuant to any specific or blanket authority conferred upon the attorney at the time of the creation of the agency relationship. Having failed to meet the threshold challenge of the trustee to the attorney’s agency authority, the debtor cannot prevail on an agency theory. In addition, because there is no adequate proof of authority for the agent to sign the homestead on behalf of the debtor, the fact that the debtor subsequently ratified and confirmed the act of his attorney is not relevant.
Conclusion
For the foregoing reasons, it is
ORDERED:
That the trustee’s objection to the claim of exemption by James E. Goodman, the debt- or, be, and it hereby is SUSTAINED. The homestead deed of record in the Circuit Court of Franklin County does not meet the requirements of section 34-4 of the Code of Virginia and the debtor has failed to perfect a claim of homestead pursuant to section 34-17. Accordingly, the property which the debtor attempted to claim as exempt under Virginia law in his homestead deed recorded in Deed Book 0578, page 0042, in the Clerk’s Office of the Circuit Court of Franklin County is VOID and of no effect as against the trustee in bankruptcy. All of the property set forth in said homestead deed became property of the estate as of the date of the filing of the petition for relief under 11 U.S. § 541(a) of the Bankruptcy Code and remains property of the estate for administration by the Chapter 7 trustee for the benefit of creditors.
Copies of this decision and order are directed to be mailed to Roy V. Creasy, Esquire, Chapter 7 Trustee, Suite 915, 213 S. Jefferson Street, Roanoke, Virginia, 24011; and to Charles R. Allen, Esquire, counsel to the debtor, 120 Church Avenue, S.W., Roanoke, Virginia, 24011.
. The court has examined a copy of the homestead deed and notes that the notary for counsel’s signature is dated February 21, 1996, one day after the recondition of the homestead deed.
. Virginia has opted out of the Federal exemption provisions of section 522(d). See, Code of Virginia § 34-3.1.
. See, Linkenhoker v. Detrick, 81 Va. 44, 53 (1885) quoting In re Solomon (2 Hughes R., 164): "The constitution grants the exemption as & privilege to the householder. It declares that he shall be entitled to hold property to be selected by him."
. Code of Virginia § 34-6 states: "In order to secure the benefit of the exemptions of real estate under § 34-4 and 34-4.1, the householder, by a writing signed by him and duly admitted to record, ... shall declare his intention to claim such benefit and set apart the real estate to be held by the householder as exempt.” (emphasis added). (§ 34-13 allows the exemption of personalty by the “householder” selecting and setting apart his personal estate).
. Code of Virginia § 34 — 17 states in relevant part: "To claim an exemption in bankruptcy, a householder shall set such real or personal property apart on or before the fifth day after the date initially set for the meeting held pursuant to 11 U.S.C. § 341, but not thereafter.” | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492540/ | MEMORANDUM OPINION AND ORDER RE COMPLAINT TO DETERMINE DISCHARGEABILITY OF DEBT
G. HARVEY BOSWELL, Bankruptcy Judge.
On May 28, 1996, First Citizens National Bank (“Bank”) filed a Complaint to Determine Dischargeability of Debt. In the complaint, the Bank alleges that the debtor should be denied a discharge pursuant to 11 U.S.C. § 523(a)(6). Specifically, the Bank avers that the debtor caused abusive depreciation to the automobile by tearing out its interior and by accumulating mileage in excess of 170,000 miles. The debtor filed an Answer to Complaint to Determine Dischargeability of Debt on July 2, 1996. In the answer, the debtor denies that she committed any grounds for nondisehargeability under § 523(a)(6). This Court conducted a hearing in this adversary proceeding on March 7,1997. Federal Rules of Bankruptcy Procedure 7001 et seq. This is a core proceeding. 28 U.S.C. § 157(b)(2). The following shall serve as this Court’s Findings of Fact and Conclusions of Law pursuant to Federal Rule of Bankruptcy Procedure 7052.
I. Findings of Fact
On or about October 27, 1992, the debtor purchased a 1990 Nissan 280 SX automobile from Rick Hill Nissan in Dyersburg, Tennessee. The debtor financed $9,647.00 of the $11,517.00 purchase price through the Bank. The Bank secured this loan with a lien on the automobile. At the time of the purchase, the automobile’s odometer reading was 44,705 miles. On March 31, 1995, the debtor refinanced the 1992 loan by signing a note with a principle balance of $4,468.71. The odometer reading at that time was 120,428 miles.
On June 26,1995, the debtor filed a voluntary petition for relief under chapter 13. The debtor listed the Bank as a secured creditor with a claim of $4,355.00. The claim was allowed in full at 8% per annum with *163monthly payments of $107. The Court confirmed the plan on August 3, 1995. The Bank never received any payments through the chapter 13 plan. On March 11,1996, the debtor converted her ease to chapter 7.
On April 17, 1996, the Bank took possession of the automobile. When the Bank attempted to sell the automobile, however, the Bank bid $50.00, and it was unable to secure a higher bid from anyone else. The Bank avers that the debtor caused abusive depreciation to the automobile by tearing out its interior and by accumulating mileage in excess of 170,000 miles.1 The Bank cites this as the cause for its inability to secure a bid higher than $50.00 at the UCC-1 sale. The balance due on the automobile at this time is $5,318.68, which includes the costs for repossessing the automobile incurred by the Bank.
II. Conclusions of Law
The Bank contends that the debt owed to it by the debtor is nondischargeable pursuant to § 523(a)(6) of Title 11 of the United States Code, which states: “(a) A discharge under section 727 ... of this title does not discharge an individual debtor from any debt ... (6) for willful and malicious injury by the debtor to another entity or to the property of another entity.” 11 U.S.C. § 523(a)(6). In order to meet its burden, the Bank must establish that any damage to the car caused by the debtor was deliberate or intentional. Perkins v. Scharffe, 817 F.2d 392, 394 (6th Cir.), cert. denied, 484 U.S. 853, 108 S.Ct. 156, 98 L.Ed.2d 112 (1987) (defining a willful act as a “deliberate and intentional act which necessarily leads to injury”); see also Wheeler v. Laudani, 783 F.2d 610, 615 (6th Cir. 1986) (stating that “malicious” means “in conscious disregard of one’s duties or without just cause or excuse; it does not require ill-will or specific intent to do harm”).
The Bank alleges that the photographs it introduced into evidence, Exhibit 1, prove the Bank’s allegations of willful and malicious injury. The photographs show that the car battery is missing, that there is a tear in the upholstery on the driver’s seat, and that the lid to the console is detached and laying in the seat. The Bank also contends that the excessive mileage placed on the car by the debtor is further proof of the debtor’s abuse to the car.
After reviewing the facts of this case, the Court concludes that the Bank has failed to meet its burden. The debtor testified that she had been having mechanical problems with the car, and, while she paid for many of the repairs, see Exhibits 4 and 6, she had reached the point where she was unable to pay for additional necessary repairs. Thus, the Court finds that the debtor’s failure to replace the car battery does not rise to the level of willful and malicious injury to the Bank. Further, the Court is not convinced that the tear in the driver’s seat and the fact that the console lid is not in its proper place is sufficient proof of deliberate and intentional misconduct by the debtor.
The most compelling argument made by the Bank involves the mileage placed on the car by the debtor. When the debtor purchased the car in October 1992 the odometer reading was 44,705. When the Bank repossessed the car in April 1996 the odometer reading was 172,472. In approximately 3)6 years, the debtor put almost 130,000 miles on the car, the equivalent of approximately 3,700 miles per month. The Court notes, however, that there was no mileage restriction in either the original promissory note or the refinancing agreement. While to some people 3,700 miles per month may seem excessive, the court finds that the Bank did not prove that the debtor deliberately and intentionally drove the car excessively in conscious disregard of her duties or without just cause or excuse. See Wheeler, 783 F.2d at 615. Cars are made to be driven, and without any restriction within the promissory note or refinancing agreement with the Bank, the debtor was free to drive the car as she wished. As a result, the Court concludes that the Bank did not prove its case under § 523(a)(6).
However, this court finds that the Bank did not receive payments while the debtor was in chapter 13. The Bank was to have received $107 per month for eight months. Pursuant to § 1327(a), the eon-*164firmed plan binds the debtor and her creditors. Thus, the Bank is entitled to the payments is would have received while the debtor was in chapter 13 had the debtor made her plan payments. During the pendency of her chapter 13 case, the debtor, in essence, drove the Bank’s collateral without giving any consideration to the Bank. This court will not allow debtors to utilize a creditor’s collateral for a period of eight months without compensating the creditor for that use. The debtor was bound by the confirmed plan, and this Court will not allow her to circumvent that obligation.
The court, therefore, holds that the debtor must pay the Bank $856 for the use of the vehicle while she was in chapter 13. The court further holds that the remainder of the debt owed to the Bank is discharged.
III. Order
It is therefore ORDERED that a nondischargeable judgment for $856 is granted to First Citizens National Bank against the Debtor, Melissa L. Bryan. The remainder of the debt is discharged.
IT IS SO ORDERED.
. The Bank submitted photographs of the car which the Bank took after the repossession. Collective Exhibit 1. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492541/ | MEMORANDUM OPINION
JOHN H. SQUIRES, Bankruptcy Judge.
This matter comes before the Court on the motion of First State Bank of Pekin (the “Bank”) pursuant to Federal Rule of Bankruptcy Procedure 9023 to reconsider a Memorandum Opinion and Order entered on March 24,1997 granting judgment in favor of Larry Kondik (“Larry”). For the reasons set forth herein, the Court hereby denies the motion.
I. JURISDICTION AND PROCEDURE
The Court has jurisdiction to entertain this matter pursuant to 28 U.S.C. § 1334 and Local General Rule 2.33(A) of the United States District Court for the Northern District of Illinois. It is a core proceeding under 28 U.S.C. § 157(b)(2)(E) and (0).
II. FACTS AND BACKGROUND
On March 24, 1997, the Court entered a Memorandum Opinion and Order (the “Opinion”) wherein the Court granted judgment in favor of Larry and ordered the Chapter 7 Case Trustee to turnover to Larry segregated and escrowed proceeds. See Kondik v. Ebner (In re Standard Foundry Prods., Inc.), 206 B.R. 475 (Bankr.N.D.Ill.1997). The ultimate issues before the Court were: (1) whether the Bank’s security interest, which was granted by the Debtor, Standard Foundry Products, Inc. through its shareholders and officers, Joseph and Sharon Kondik, attached to certain equipment and its proceeds that Larry claimed were his; and (2) whether the Bank was entitled to priority over Larry’s claim of ownership. The Court held that this equipment, which was sold by the Chapter 7 Case Trustee at an auction, was in fact owned by Larry and that the Bank failed to establish that its security interest attached to the equipment in derogation of and as a priority over Larry’s claims. Further, the Court held that the Bank failed to demonstrate that Larry should be es-topped by his silence from asserting his claims.
*166III. APPLICABLE STANDARDS
The Bank seeks to vacate the Opinion under Federal Rule of Bankruptcy Procedure 9023, which incorporates by reference Federal Rule of Civil Procedure 59. The Seventh Circuit has made it clear that under the former version of Rule 59, the time a motion is served controlled whether it was treated as a Rule 59(e) motion. See Helm v. Resolution Trust Corp., 43 F.3d 1163, 1166 (7th Cir. 1995). If such a motion was served within ten days of a final judgment, it was considered a Rule 59(e) motion. United States v. Deutsch, 981 F.2d 299, 301 (7th Cir.1992); Charles v. Daley, 799 F.2d 343, 347 (7th Cir.1986). 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). The Bank’s motion was filed on April 3, 1997, within ten days of the entry of the Opinion on the docket.
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. Moro v. Shell Oil Co., 91 F.3d 872, 876 (7th Cir.1996); 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 rule essentially enables a district court to correct its own errors, sparing the parties and the appellate courts the burden of unnecessary appellate proceedings.” Russell v. Delco Remy Div. of General Motors Corp., 51 F.3d 746, 749 (7th Cir.1995) (citation omitted). 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. Moro, 91 F.3d at 876 (citation omitted); King v. Cooke, 26 F.3d 720, 726 (7th Cir.1994), cert. denied, 514 U.S. 1023, 115 S.Ct. 1373, 131 L.Ed.2d 228 (1995). Moreover, the purpose of such a motion “is not to give the moving party another ‘bite of 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. See LB Credit Corp. v. Resolution Trust Corp., 49 F.3d 1263, 1267 (7th Cir.1995).
IY. DISCUSSION
First, the Bank argues that the trial testimony of Larry and Joseph Kondik is in conflict with the testimony given at their depositions with respect to the Bank’s knowledge as to Larry’s claim of ownership to the subject equipment. Larry testified at trial that he may have alerted Tim Owen of the Bank with regard to his claim to the equipment. See 206 B.R. at 477. The Bank contends, however, that in his prior deposition testimony Larry was unable to recall if or when he had a conversation with anyone from the Bank. The Bank therefore concludes this constitutes a conflict in his testimony.
The Court disagrees with the Bank’s characterization of Larry’s testimony at trial as being in conflict with his testimony at his deposition. The fact that a witness does not recall an event at a deposition, but later testifies that he may recall same, does not necessarily constitute an impeaching conflict in his testimony. Moreover, standing alone, it will not properly serve as the basis for discrediting the otherwise credible evidence offered by the witness. Human memory is frail and fallible at best. That a witness had no recollection of an event at one point in time, later remembered, does not ipso facto mean the event did not occur or that the otherwise credible testimony of the witness should be ignored. Larry may have had time to reflect upon and recall this possible *167conversation he might have had with Tim Owen of the Bank.
The Bank also alleges that Joseph’s trial testimony is in conflict with his deposition testimony. The Court stated in the Opinion that Joseph admitted that he never informed the Bank of Larry’s claims to the subject equipment. See 206 B.R. at 477. Joseph also testified at his deposition that he did not inform the Bank of Larry’s ownership of the equipment. The trial testimony and deposition testimony do not appear to be in conflict. Thus, the Court is perplexed by the Bank’s argument that Joseph’s trial testimony is in conflict with the testimony given at the deposition relative to the equipment proceeds at issue. That the Debtor had Larry’s permission to use the equipment in its business, but no permission to grant a security interest in it to the Bank as collateral for the loan is undisputed.
Next, the Bank maintains that the documentary evidence submitted by the parties supports the conclusion that either the Debt- or, Joseph, or his wife, Sharon, were the true owners of all of the equipment at issue, not Larry. In support of this contention, the Bank argues that all of the checks issued in payment for certain items of equipment were issued by Joe’s Core & Machine and/or National Castings, two companies which Joseph Kondik testified were owned and operated by him. Further, the Bank submits that there is a list of equipment prepared on the letterhead of National Castings, and there is the Schedule C attached to the 1977 personal income tax return of Joseph and Sharon Kondik which tends to support that they listed the equipment for depreciation purposes on their income tax return. The Bank contends that the only evidence of ownership produced by Larry was his “naked testimony.”
The Court finds this argument unconvincing and lacking merit. First, as the Court previously stated, the fact that Larry did not produce any documentary evidence such as bills of sale, copies of checks, money orders, or other evidence of his payment for the items is not fatal to his claim of ownership. Illinois law recognizes the general common law presumption that the party in possession of personal property holds title to that property. See Almar Communications, Ltd. v. Telesphere Communications, Inc. (In re Telesphere Communications, Inc.), 167 B.R. 495, 502 (Bankr.N.D.Ill.1994) (citations omitted), rev’d on other grounds, 205 B.R. 535 (N.D.Ill.1997). This presumption may be rebutted or overcome by evidence of another’s ownership. People v. Poindexter, 18 Ill.App.3d 436, 440, 305 N.E.2d 400, 403 (1st Dist.1973). Larry’s testimony regarding his ownership of the subject equipment rebutted this presumption and was corroborated at trial by Joseph’s testimony.
The Court disagrees with the Bank’s conclusion that the documents admitted at trial conclusively prove that the subject equipment was acquired by Joe’s Core .and Machine and/or National Castings, and that the 1977 personal income tax return of Joseph and Sharon Kondik shows that National Castings depreciated the subject equipment. The Court was, and stiU is, unable to ascertain whether the equipment at issue is the same as that listed on the furnished income tax return of the Kondiks or on the equipment list of National Castings. Compare Larry’s Exhibit No. 1 and Exhibit A to Complaint to Bank’s Group Exhibit D. The Bank failed to elicit such testimony or demonstrate same at trial. Although Joseph and Sharon Kondik may have depreciated some of the equipment for income tax purposes, that does not conclusively prove that they or the Debt- or, rather than Larry, owned the equipment. Same might be indicative of their previously claimed improper tax depreciation. In any event, the Court is unable to ascertain from the face and contents of the exhibits furnished by the Bank whether the equipment Larry claimed is the same equipment that was depreciated by the Kondiks on their personal income tax return.
Additionally, the Bank asks, in light of the fact that it was not advised at the time of the loan that some of the equipment was not owned by the Debtor, how can it now submit any evidence that it would not have made the loan had it known of the true ownership of the coHateral? The short answer is that the Bank had listed a Bank officer among its witnesses to testify at trial, *168but for unknown tactical or other reasons, failed to call such witness to prove that but for Larry’s silence, as well as the Debtor’s representations through Joseph and Sharon, it would not have made the loan or lent as much to the Debtor had it known that Larry, not the Debtor, was the true owner of the subject equipment. It is the lack of such evidence, or something similar, that produced the end result here and the finding that the Bank failed to prove all elements for application of the doctrine of estoppel by silence as against Larry.
The Bank states that Larry’s silence alone is sufficient to establish the first prong of the three elements cited by the Court — words or conduct that led the Bank to take certain action. The Bank argues that Larry had an affirmative duty to come forward in 1988, when the loan was made, to profess ownership of the property at issue. The Bank contends that his silence alone is enough to satisfy the first prong of the estoppel theory. The Bank argues that it was led to believe by the actions of Joseph and Sharon Kondik and the silence of Larry that the Debtor was the true owner of the subject equipment. The Court disagrees because the record is devoid of direct evidence to show how the Bank relied on Larry’s silence and was thereby harmed to its detriment. The Court previously noted that Larry testified he may have alerted the Bank of his claim to the equipment. Thus, this absence of evidence from the Bank, notwithstanding Larry’s silence, precluded the Bank’s showing of the first element required for application of the doctrine.
The Bank’s argument also misses the point under In re Pubs, Inc. of Champaign, 618 F.2d 432 (7th Cir.1980). An owner does not have to expressly deny that another lacks the right to encumber property. Rather, the owner must grant another the right to encumber property. Hence, the Debtor, through Sharon or Joseph Kondik, could not have properly encumbered Larry’s property without his consent. The Court found that the evidence established that Larry did not give his consent to encumber his property as collateral security for the Bank’s loan. The Bank has failed to demonstrate that the Court made this finding in error.
Finally, the Bank argues that the third element of estoppel — the reliance must have caused harm to the party asserting the estoppel — was demonstrated by way of stipulation, namely, that the Bank is “woefully undersecured,” because the proceeds already turned over to the Bank by the Chapter 7 Case Trustee have not paid the Bank in full, and the escrowed proceeds which form the basis of the instant dispute, if turned over to the Bank, will not satisfy the Bank’s debt. Thus, according to the Bank, it has demonstrated harm. The Bank’s ultimate undersecured position, after liquidation post-petition of its collateral base, is not the functional equivalent of proof of exactly what factors and evidence it relied on in 1988 when it made the decision to loan to the Debtor on a secured basis. Simply stated, no proof of reliance leads to a conclusion of no proof of harm.
The Court thus rejects the Bank’s contention that the Bank established its reliance on Larry’s silence. The fact that the Bank is undersecured and that the proceeds held by the Chapter 7 Case Trustee do not satisfy the Bank’s debt do not establish the Bank’s reliance vis a vis Larry concerning the subject equipment at the time of the loan in 1988. Absent any evidence offered at trial from some agent or officer of the Bank, or some documentary evidence from the Bank’s file to establish the factors upon which it made the credit decision to lend, it is practically impossible for the Court to determine that the Bank in any way relied upon Larry’s silence in deciding to make the loan to the Debtor. Moreover, the record and evidence before the Court indicates that the Bank was substantially undersecured in any event, excluding the sale value of the subject equipment. The liquidation of its remaining collateral base was insufficient to satisfy its accrued pre-petition claim for unpaid interest and principal, exclusive of costs and fees. That substantial undersecured position itself created the bulk of the Bank’s loss on this loan of which the subject sale proceeds in dispute were a small portion.
*169Y. CONCLUSION
For the foregoing reasons, the Court hereby denies the Bank’s motion.
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.
ORDER
For the reasons set forth in a Memorandum Opinion dated the 12th day of May 1997, the Court hereby denies the motion of First State Bank of Pekin to reconsider. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492542/ | ORDER ON DEBTOR’S OBJECTION TO THE PROOF OF CLAIM FILED BY THE INTERNAL REVENUE SERVICE
PAUL B. LINDSEY, Bankruptcy Judge.
Debtor commenced this bankruptcy case on May 29,1996 by filing a voluntary petition for relief under Chapter 13 of the Bankruptcy Code.1
On June 28, 1996 the Internal Revenue Service (“IRS”) filed a proof of claim comprised of the following amounts: $49,342.16 representing § 507(a)(8) priority taxes; $21,-753.03 attributable to unpaid taxes secured by federal tax liens on debtor’s property; and $6,333.89 representing a general unsecured claim, for a total claim of $77,429.08.
On July 23, 1996, debtor filed an objection to IRS’ proof of claim.
On August 5, 1996, IRS amended its proof of claim reducing it to $64,429.08. The amended claim reflects an increase of $5,372.21 to the § 507(a)(8) priority taxes, an increase of $3,380.82 in the general unsecured claim, and a reduction of $21,753.03 resulting from the deletion of the secured portion of the original claim.
*231On October 19,1996 a hearing was held on debtor’s objection. At the conclusion of that hearing, after having heard the arguments of debtor’s counsel and counsel for IRS, and having heard the testimony and observed the demeanor of the witnesses, the court took the matter under advisement and directed the parties to file briefs in support of their respective legal positions. The parties have complied with the court’s request and the matter is now ripe for determination.
THE CONTENTIONS
In his objection, debtor argues that the priority taxes claimed by IRS include an assessment of $29,818.82 attributable to unpaid employee withholding taxes. He asserts that this assessment is based upon an employer/employee relationship asserted by IRS to be the business relationship between himself and James A. Conti (“Conti”), an individual working with debtor in the operation of Boyd’s Heat, Air & Electric (“BHA & E”). Debtor denies that the prior business relationship between himself and Conti for the tax years at issue was that of an employer/employee, and asserts, instead, that Conti and he were partners for the years at issue.
Based upon his alleged partnership with Conti, Debtor contends that he was not required to withhold employment taxes for monies paid to Conti during the subject period, and that he therefore has no tax liability with respect to any employment withholding taxes attributable to Conti’s income. Based upon this contention, debtor objects to IRS’ proof of claim to the extent that it includes a tax liability for employment withholding taxes attributable to Conti’s alleged status as an employee.
In its brief, IRS asserts that debtor, as the party claiming the existence of a partnership, has the burden of proof under applicable non-bankruptcy law to establish that a partnership existed between debtor and Conti for the 1992, 1993, and 1994 tax years. It argues that debtor’s actions with respect to the management and control of the business operations of BHA & E, and his actions with respect to Conti, do not support a conclusion that BHA & E was a partnership entity during the applicable period. IRS therefore contends that debtor, as sole proprietor of BHA & E, is personally liable for the appropriate withholding taxes attributable to the monies paid to Conti as an employee.
THE EVIDENCE
At the October 21 hearing, debtor testified he and Conti had been in business together since 1988, and that this business relationship terminated in March, 1996. Debtor further testified that during the course of their working relationship, he and Conti shared in the net profits of BHA & E, and that Conti had the authority to employ and terminate its employees. The testimony also revealed that sometime prior to 1992, debtor and Con-ti ceased their business relationship, but renewed it shortly thereafter.
During this brief period, debtor closed the joint checking account which was previously opened in the name of BHA & E in which debtor and Conti both had signature authority. Debtor then opened a new business account over which only he had signature authority. Debtor’s sole control over that account, and over the books and records of BHA & E, continued after debtor and Conti renewed their working relationship.
On cross-examination, debtor testified that on the advice of his tax preparer, he filed individual income tax returns, treating his interest in BHA & E as a sole proprietorship. He conceded that no partnership income tax return had ever been prepared or filed on behalf of BHA & E and that BHA & E had never been registered as a partnership with the State of Oklahoma.
Conti testified that he did not have access to the books and records of BHA & E and that he made no investment in the business. He also testified that while no written partnership agreement existed, he considered himself to be a “working partner” or “foreman” in the business.
The IRS Revenue Agent who had previously audited debtor’s 1992, 1993 and 1994 federal tax returns testified that upon completion of that audit, debtor admitted that those individuals working for him were employees. She further testified that at no time *232during the audit did debtor assert that BHA & E was a partnership entity or that Conti was a partner.
DISCUSSION AND DECISION
At the October 21 hearing, the parties agreed that the only issue necessary for the court to determine is the status of the business relationship between debtor, Conti and BHA & E for the tax years 1992, 1993 and 1994, and that after the court makes its determination, the parties would be capable of determining the amounts owed by debtor.
In their briefs, both parties set forth the numerous factors to be considered when determining the existence of a partnership under applicable non-bankruptcy law. See Oklahoma Uniform Partnership Act, Okla. Stat.tit.54, § 201 et seq. and Rev.Rul. 87-41, 1987-1 C.B. 296, 298-99.
In his brief, debtor cites Dowdy v. Clausewitz, 361 P.2d 288 (Okla.1961) for the proposition that the essential elements of a partnership are: (a) an intent to form a partnership; (b) a participation in both the profits and losses, and; (c) a community of interests. Debtor further points out that pursuant to Okla.Stat.tit. 54, § 207.(4)4, the receipt by a person of a share of the profits of a business is prima facie evidence that such individual is a partner in that business. He therefore urges the court to conclude that because Conti shared in the profits of BHA & E and had the authority to employ or terminate employees, Conti was a partner in the business.
In its brief, IRS points out that Okla. Stat.tit. 54, § 207, upon which debtor relies, also provides that no such inference shall be drawn if such profits were received as payment of wages of an employee. See Okla. Stat.tit. 54, § 207. IRS argues that the sharing of profits alone is but a factor to be considered, and is not dispositive of whether a partnership exists. This court agrees.
As is pointed out by both parties, an essential element of a partnership entity is that there exists an intent to form such partnership. Upon review of the evidence, after having observed the demeanor of the witnesses, and considering the relevant factors for determining the existence of a partnership, this court concludes that at no time during the tax years at issue herein did debtor’s conduct with respect to Conti, or his management and control of BHA & E, manifest an intent to form a partnership with Conti or to operate BHA & E as a partnership entity. Debtor now asserts that BHA & E was a partnership entity, in this court’s opinion, solely for the purpose of reducing his outstanding tax obligations.
With respect to the business relationship between debtor and Conti, although it is not necessary to the decision herein, this court is of the opinion that Conti’s position in the operation of BHA & E is best characterized as a “foreman” whose wages were computed as a percentage of the profits.
Based upon the foregoing, debtor’s objection to the proof of claim filed by the IRS, to the extent that such objection is premised on the issue presented herein, will be overruled.
IT IS SO ORDERED.
. References herein to statutory provisions by section number only will be to the provisions of the Bankruptcy Code, 11 U.S.C. §§ 101 et seq., unless the context requires otherwise. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492543/ | *319DECISION DENYING APPLICATION BY ATTORNEYS FOR SECURED CREDITORS FOR FEES DUE PURSUANT TO 11 U.S.C. §506(b)
DOROTHY EISENBERG, Bankruptcy Judge.
This matter is before the Court pursuant to an application made by the law firm of Pinks, Brooks & Arbeit (“Pinks”), which represented Ellen Newman (“Newman”), a creditor, in the latter stages of this case. Pinks is seeking compensation from the Debtor in the amount of $5,062.50 under 11 U.S.C. Section 506(b), which authorizes over secured creditors to recover legal fees, costs and interests from the Debtor to the extent allowed by the relevant credit agreement. Based on the terms of the particular credit agreement in this case, which limits the amount of counsel fees for which the Debtor shall be liable to $7,500, and the fact that said amount has already been included in the prepetition state court judgment awarded to Newman, the Court denies Pinks’ application.
FACTS
On January 1, 1990, the Debtor executed an unsecured promissory note in favor of Newman in the original principal amount of $152,000 (the “Note”). The Note provides that in the event that Newman is successful in any action instituted to collect the debt, Newman is entitled to attorneys fees limited to the sum of $7,500. The Debtor defaulted under the Note, and Newman commenced an action in state court to recover the principal balance of the Note. On November 6,1992, a judgment was entered on behalf of Newman and against the Debtor in the sum of $174,-357.82. The judgment was inclusive of the maximum amount of attorneys fees as provided under the Note, to wit, $7,500. The judgment was filed in all counties in which the Debtor owned real property, creating a judicial lien on all of the Debtors’ real property. It is undisputed that Newman is over secured as the value of the Debtor’s property against which Newman’s judicial lien attaches far exceeds the amount of Newman’s claim.
Thereafter, on April 3, 1995, The Debtors filed a petition for relief under Chapter 11 of the Bankruptcy Code. Initially, Newman relied on her husband, Peter Newman, Esq., to represent her in this case. After protracted legal disputes between the Debtors and almost all of the creditors of the Debtors, a plan of reorganization was proposed and ultimately confirmed at a hearing held on June 4, 1996, wherein all secured creditors would receive 100% of their allowed claims while retaining their liens on Debtor’s property, together with interest until the judgment is paid. Newman retained Pinks to represent her at the hearing on confirmation. Apparently some disagreement arose between Newman and the Debtors after the hearing on confirmation of the Debtors’ plan, and Pinks provided certain assistance settling theses matters.
From approximately June 3, 1996 to January 14, 1997, Pinks continued to represent Newman in connection with this case. A review of the time sheets submitted by Pinks reveals that Pinks spent a total of 20.25 hours largely on matters concerning the Order of Confirmation. Pinks is requesting that its fees in the amount of $5,062.50 be reimbursed by the Debtor pursuant to Section 506(b) of the Bankruptcy Code. As justification for entitlement to such award, Pinks is relying on the Note, which provides that Newman is entitled to up to $7,500 in legal fees in connection with any successful enforcement action.
At the hearing on Pinks’ motion under Section 506(b) of the Bankruptcy Code, the Court heard oral argument and gave Pinks an opportunity to brief the issue of whether additional fees could be awarded under this section of the Code given that (i) the Note expressly limits any award of fees in connection with enforcement of the Note to $7,500; and (ii) an award for fees in the amount of $7,500 had already been included in the prepetition state court judgment in favor of Newman.
DISCUSSION
Section 506(b) of the Bankruptcy Code provides as follows:
*320to the extent that an allowed secured claim is secured by property the value of which, after any recovery under subsection (c) of this section, is greater than the amount of such claim, there shall be allowed to the holder of such claim, interest on such claim and any reasonable fees, costs or charges provided for under the agreement under which such claim arose.
The purpose of this provision is to codify preCode law which permitted over secured creditors to assert as part of their claim interest, fees and costs arising under the operative credit agreement. See, Matter of Salisbury, 58 B.R. 635, 637 (Bankr.D.Conn.1985) (other citations omitted).
The critical issue in this case is whether under Section 506(b) of the Code Pinks may recoup any of its legal fees from this estate despite the fact that the Note clearly limits any recovery for collection of the note to the $7,500 which sum has already been awarded in the prepetition state court judgment. In support of its argument, Pinks attempts to analogize the facts of this case to Matter of Salisbury, supra, wherein the Bankruptcy Court authorized the secured creditor to recoup legal fees incurred in connection with a bankruptcy proceeding over and above the legal fees previously awarded to the secured creditor in a prepetition state court foreclosure judgment. However, the credit agreement in Matter of Salisbury contained no cap on the amount of legal fees which could be recouped by the secured creditor. That agreement provided that “[i]n the event of default, Borrowers agree to pay reasonable foreclosure costs as set by court.” Therefore, the only issue for the court to decide in Salisbury was whether it was reasonable to allow additional legal fees to the creditor’s counsel under Section 506(b) of the Code in addition to any judgment in foreclosure costs previously set by the Court. Had the facts been the same as in Matter of Salisbury, this Court would grant Pinks additional fees.
However, in the case before this Court, the issue is quite different. The Note clearly limits the amount of legal fees Newman can recoup from the Debtor to $7,500, regardless of whether the fees are awarded in connection with a state court foreclosure action or any other need for legal services to collect thereon. Nothing in the language of Section 506(b) of the Code or in Salisbury suggests that a creditor such as Newman can recoup additional fees merely because the borrower, in this case the Debtor, filed a petition in bankruptcy which resulted in collection becoming additionally complicated, requiring legal services greater than those usually required in a foreclosure action. Section 506(b) extends the right of payment for legal costs and fees only as they are provided for in the underlying agreement. The note evidences the contract between the Debtor and Newman. It reflects the underlying agreement. The restrictions contained in the Note cannot be modified by Section 506(b) of the Bankruptcy Code so as to enlarge the rights of the lender. Section 506(b) clearly permits an unsecured creditor to receive more than an under secured creditor would receive, but does so only if the underlying agreement provides for such payment. In this ease, the note did provide for reasonable costs and attorney’s fees, but limited the amount to $7,500.00. Pinks has cited to no other authority in support of its argument, and the Court has been unable to find any other cases which contravene its interpretation of this provision.
In its brief, Pinks has made an alternative argument under Section 503(b)(3)(D) of the Code that its services warrant payment by the Debtor as they constituted a substantial contribution to the ease. This argument was never advanced in Pinks’ original papers, nor was this argument raised at the hearing, thereby precluding any opposition by parties in interest. Aside from the fact that Pinks fails to provide adequate information for this Court to make such a determination, Pinks has failed to comply with the notice and hearing provisions required in this subsection. Therefore, Pinks’ request is denied in its entirety.
CONCLUSION
For the aforementioned reasons, the Court denies Pinks’ application for fees under Sections 506(b) and 503(b)(3)(D) of the Code.
*321Settle an order in accordance with this decision within seven (7) days hereof. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492544/ | DECISION ON REQUEST FOR RECONSIDERATION OF THE ISSUANCE OF SANCTIONS AGAINST COUNSEL
ADLAI S. HARDIN, Jr., Bankruptcy Judge.
In a decision dated October 16, 1995, 191 B.R. 564 following a trial in the above-entitled adversary proceeding, this Court sua sponte granted sanctions “for the costs incurred by the Trustee, including reasonable legal fees to be approved by this Court, in prosecuting this adversary proceeding through judgment” (Decision at 576) and stated that sanctions “will be awarded against Defendant and counsel to be borne equally” (Id. at 575). The Court instructed counsel for the Trustee to “serve and file an appropriate application ... for an award of counsel fees and expenses in accordance with the applicable rules” (Id. at 576). In compliance with the Court’s instruction, counsel for the Trustee submitted an application for an award of sanctions in the total amount of $84,520.89 of legal fees and expenses.
The day before the settlement date for the Trustee’s proposed order determining the issues in the adversary proceeding in conformance with the Court’s October 16, 1995 decision, counsel for Defendant submitted an affidavit and memorandum of law in support of a request for reconsideration of the issuance of sanctions against Defendant’s counsel. I hereby grant the request and, upon reconsideration, I conclude that the award of sanctions against counsel was improvident and should be withdrawn. I also conclude that the amount of the sanction to be awarded in favor of the Trustee and against the *322Defendant should be reduced to a figure below 50% of the allowed costs and expenses incurred by the Trustee in connection with the adversary proceeding.
The award of sanctions in this case was predicated not upon the fact that Defendant lost on the merits, but upon Defendant’s willful and contemptuous conduct and lack of good faith. Having authorized his counsel to state in his February 8, 1995 letter to the Trustee that “Mr. Markowitz is ready, willing and able to proceed to closing,” Defendant proceeded to willfully breach his obligation under his contract with the Trustee and under this Court’s order dated December 14, 1994 approving and confirming the sale. As shown by the evidence at the trial, the grounds asserted by Defendant for reneging on his obligations were pretextual and sham, and his testimony at the trial was palpably lacking in candor in a number of material respects. The Court’s findings with regard to the foregoing matters are set forth in the October 16, 1995 decision and need not be repeated here. Suffice it to say that, whatever the real reason(s) for Defendant’s decision to renege on his contractual and Court-ordered obligation to purchase the property, that decision was not predicated on the grounds testified to by Defendant at the trial, to wit, the alleged defects in the notice of sale and the alleged “confusion” at the auction.
In view of the foregoing and for the reasons stated in the October 16, 1995 decision, the Court hereby reaffirms its conclusion that sanctions against Defendant are appropriate in some amount. However, 50% of the Trustee’s legal expenses as revealed in the Trustee’s pending application would constitute a more onerous sanction than I contemplated and believe to be necessary or appropriate.1 It is my conclusion that $15,000, equating to approximately 5% of the monetary value of the judgment, including interest, attributable to Defendant’s conduct giviug rise to, and his defense of, this adversary proceeding, is a sufficient sanction. The order which I have signed today so provides.
Different considerations inform the issue whether to award sanctions against an attorney. Within reasonable limits and based upon reasonable inquiry, an attorney is entitled to rely upon facts, both objective and subjective, asserted by a client. In his affidavit requesting reconsideration, Defendant’s attorney has described the prior investigation which caused him to conclude that reasonable grounds existed for the legal and factual points raised in defense of Defendant’s breach. I accept counsel’s recitation and conclude that he represented his client “zealously [but] within the bounds of the law” within the meaning of Canon 7 of the Lawyers’ Code of Professional Responsibility, and particularly DR 7-101, DR 7-102 and DR 7-106.
In certain, highly unusual cases, public policy dictates that counsel who pursues a cause utterly without valid basis or objective, at material cost to the adversary or the system, should be sanctioned as recompense to the injured party, disincentive to fixture such conduct and vindication of the integrity of the system. Upon reconsideration, I conclude that such is not the case here. Accordingly, the award of sanctions against Defendant’s counsel is vacated.
. In his request for reconsideration, counsel for Defendant has argued that the Trustee's requested legal fees are excessive and unnecessary in various respects. I express no view on these contentions and will refrain from passing upon the questions raised until an appropriate application for an award of fees and expenses is made in the Chapter 7 case, at which time counsel will have an opportunity to address these issues. It is sufficient to state here that my decision to fix the sanction against Defendant in an amount far less than would result from the award articulated in the October 16 decision does not reflect agreement (or disagreement) with the arguments raised by Defendant's counsel in response to the Trustee's application. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492545/ | DECISION AND ORDER
ROSS W. KRUMM, Chief Judge.
The issue before the Court is whether the Debtor’s homestead exemption, claimed in the proceeds from the sale of her residence, takes priority over Movants’ contractual claim for brokerage fees. The Court denied Movants’ objection to exemption on December 16,1996, and the present motion to alter or amend judgment followed. The parties were given an opportunity to submit memoranda in support of their respective positions, and a hearing was held on January 15, 1997. The Court has reviewed the record and the memoranda, and the matter is ripe for decision.
Facts
In September 1996, Carol Lynn Graham (the “Debtor”) and her husband executed a contract to sell their Franklin County residence to Jimmy and Dreama Barbour. In conjunction with the purchase agreement, the parties signed a “Designated Agency Consent and Confirmation Agreement” naming Phyllis Johnson and Barbara Gilbert (“Movants”) as the seller’s agent and buyer’s agent, respectively. The form sales contract, provided by the Roanoke Valley Association of Realtors, contained the following provision:
10. BROKERAGE FEE: Seller represents that he has agreed that the Listing Firm will be paid, based on the purchase price, a fee for services of 6% (brokerage fee). In the event this is a cooperative sale, the Selling Firm is to receive 50% of the brokerage fee to be paid to the Listing Firm. Seller hereby authorizes and directs the settlement company to disburse to the Listing Firm and the Selling Firm from Seller’s proceeds the respective portions of the fee at settlement.
On September 19, 1996, a few days after the contract was executed, the Debtor filed for relief under Chapter 7 of the Bankruptcy Code. In her list of property claimed as exempt, the Debtor included $2,500.00 of equity in her Franklin County residence, and she filed a homestead deed claiming a $1.00 exemption in the realty. Believing that the Debtor intended to amend her exemption to an amount equal to the net sale proceeds, before payment of the brokerage fee, and believing that the proceeds would not be sufficient to pay the first hen deed of trust, closing costs, and commissions, Movants filed an objection to Debtor’s exemption. Subsequently, the residence was sold, and the proceeds were used to satisfy the first hen deed of trust and closing expenses. As anticipated by Movants, however, the remaining funds were insufficient to pay the real estate commissions in full. Therefore, the proceeds were placed in escrow pending an order of disbursement from this Court.
Positions of the Parties
Movants aver that the Debtor’s interest in her residence, and thus in the sale proceeds, is governed by the purchase agreement she executed pre-petition. Pursuant thereto, *386they argue, the Debtor assigned to Movants six percent of the gross sale proceeds. As the Debtor had no right to receive those funds as of the petition date, the money did not become property of the estate. As debtors may only exempt property that falls within the bankruptcy estate, Movants conclude that the Debtor’s exemption claim in the sale proceeds was invalid. Therefore, pursuant to the assignment, Movants are entitled to be paid their commissions directly from those funds. In response, the Debtor avers that the Court acted properly in denying Movants’ objection to exemption.
Discussion
The filing of a petition under 11 U.S.C. § 301 creates an estate comprised, in part, of “all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1). Section 522(b) authorizes debtors to claim exemptions in certain property of the estate, depending upon applicable State law. 11 U.S.C. § 522(b); Va.CodeAnn. § 34-3.1 (Mi~ chie 1996). It follows, therefore, that if a debtor has transferred his interest in property to a creditor pre-petition, that property does not come within the bankruptcy estate, and a debtor may not claim an exemption therein. Owen v. Owen, 500 U.S. 305, 308-09, 111 S.Ct. 1833, 1835-36, 114 L.Ed.2d 350 (1991); In Re Sloma, 43 F.3d 637, 640 (11th Cir.1995). Such a transfer is achieved when a debtor executes a valid assignment. Sloma, 43 F.3d at 640. Consequently, a decision on whether the Debtor’s claimed exemption in the proceeds from the sale of her residence takes priority over the Movants’ real estate commissions turns on the interpretation of the purchase contract. More specifically, it depends on whether the following language constitutes an assignment of six percent of the Debtor’s proceeds: “Seller hereby authorizes and directs the settlement company to disburse to the Listing Firm and the Selling Firm from Seller’s proceeds the respective portions of the fee at settlement.”
Whether the above language gives rise to a valid assignment is governed by Virginia law. Lone Star Cement Corp. v. Swartwout (In Re Richmond Lumber), 93 F.2d 767 (4th Cir.1938). No particular words or acts are necessary to effect an assignment, S.L. Nusbaum & Co. v. Atlantic Virginia Realty Corp., 206 Va. 673, 146 S.E.2d 205, 210 (1966), and it may be in oral or written form. Lone Star, 93 F.2d at 769. The substance of the transaction, not its form, is dispositive, Virginia Mach. & Well Co. v. Hungerford Coal Co., 182 Va. 550, 29 S.E.2d 359, 362 (1944), and the assignor’s intention is the controlling consideration. Kelly Health Care, Inc. v. The Prudential Ins. Co., 226 Va. 376, 309 S.E.2d 305, 307 (1983) (citing Nusbaum, 146 S.E.2d at 210).1
A mere agreement to pay a debt out of a particular fund, when received, does not constitute an equitable assignment because it only amounts to a promise to pay. It fails to evidence the assignor’s intent to give and the assignee’s intent to receive present ownership of the fund. Lone Star, 93 F.2d at 770; Nusbaum, 146 S.E.2d at 210. However, “[a]n order upon a third person made payable out of a particular fund, communicated to such person and delivered to the payee operates as an equitable assignment pro tanto and constitutes a lien upon the fund.” Alexander Bldg. Constr., Inc. v. Richmond Plumbing & Heating Supplies, Inc., 213 Va. 470, 193 S.E.2d 696, 698 (1973) (citing Virginia Mach. & Well, 29 S.E.2d at 362).
In Rinehart & Dennis Co. v. McArthur, 123 Va. 556, 96 S.E. 829 (1918), the Virginia Supreme Court was presented with a Defendant (“McArthur”) who had deposited $1,200.00 with the Dickenson County Court in lieu of a bond. He then wrote to his attorney and instructed him to pay the $1,200.00 to Rinehart & Dennis Company *387when the funds were no longer needed for security. Id., 96 S.E. at 833. Almost two years later, McArthur sent another letter to his attorney and rescinded the order. The court, in finding that McArthur’s dedication of the funds constituted an equitable assignment, pointed to McArthur’s testimony on cross-examination. There, he explicitly stated that he parted with ownership of the $1,200.00 and that, at the time of the original letter to his attorney, “it was [his] intention for Rinehart & Dennis Company to get that money.”2 Id.
Lone Star Cement Corp. v. Swartwout (In Re Richmond Lumber Co.), 93 F.2d 767 (4th Cir.1938), involved a lumber company in need of cement to comply with a government contract. Aware of the lumber company’s precarious financial position, Lone Star agreed to supply them on the condition that the money received from the government would be applied solely to the payment of Lone Star’s account. Subsequently, the lumber company also promised repayment from the proceeds of certain accounts receivables that were exhibited to Lone Star on a ledger sheet. The Fourth Circuit found no assignment and no lien. Lone Star, 93 F.2d at 770. In part, it relied on testimony by a Lone Star representative that the purpose of exhibiting the accounts receivables was to show that the lumber company had a considerable amount of receivables and that funds thereby collected “could and would” be used to pay Lone Star. Id. In addition, the court noted that “there seems to be no reason to distinguish promises to pay money from a specific fund when received from promises to deliver specific goods when manufactured.” Id.
Similar facts were at the heart of Virginia Mach. & Well Co. v. Hungerford Coal Co., 182 Va. 550, 29 S.E.2d 359, 362 (1944). There, the Well Company was unwilling to supply S.B. Franldin with materials on credit unless Franklin assigned it the money he was to receive under a contract with Mutual Life Insurance Association. The parties orally agreed to these conditions, and the supplies were furnished. Relying on Franklin’s testimony that he intended to give absolute control and ownership of the Mutual contract proceeds to the Well Company, the court found that a valid assignment had been executed. Id., 29 S.E.2d at 557. See also Alexander Bldg. Constr., Inc. v. Richmond Plumbing & Heating Supplies, Inc., 213 Va. 470, 193 S.E.2d 696 (1973) (assignment found where supplier ceased providing materials to subcontractor until acceptance by general contractor of signed letter from subcontractor “request[ing] and authoriz[ing] [the general contractor] to make all further payments” due subcontractor to supplier and subcontractor jointly).
Turning to the case at hand, Ms. Graham’s intent is dispositive. Kelly Health Care, 309 S.E.2d at 307. As with all legal issues that depend on a state of mind, however, the Court is placed in the difficult position of having to “determine” what an individual’s mental design was in undertaking and completing an act. Here, as is typical, there is *388little direct evidence of the Debtor’s intent. We are faced with language in a purchase agreement, taken from a form contract, that resembles language used to create an agency relationship.3 Unlike in many of the cases where an assignment has been found, there was no evidence produced that the brokerage fee provision was the subject of negotiation or that Movants conditioned their performance on obtaining an assignment.
Furthermore, Movants offered no testimony — either through direct or cross-examination — of the Debtor’s intent to give and Movants’ intent to receive present ownership of six percent of the sale proceeds. Instead of hoping to effect an assignment via the provision at issue, it seems more likely that the Debtor intended to implement a method of paying Movants that was both efficient and expedient. Taking the evidence as a whole, therefore, this Court holds that the Debtor had no intention of assigning a portion of her sale proceeds to Movant; thus, she acted appropriately in claiming her homestead exemption. Accordingly, it is
ORDERED:
That Movants’ Motion to Alter or Amend Judgment be, and it hereby is, DENIED.
. The court continued by noting that:
The intent to transfer a present ownership of the subject matter of the assignment to the assignee must be manifested by some word, written or oral, or by some act inconsistent with the assignor’s remaining as owner. This has sometimes been called a "present appropriation.” The assignor must not retain any control over the fund or property assigned, any authority to collect, or any form of revocation.
Id.
. In ruling that McArthur had assigned the $1,200.00 to Rinehart, the court distinguished Hicks v. Roanoke Brick Co., 94 Va. 741, 27 S.E. 596 (1897). In Hicks, W.F. Patterson executed an assignment to Fidelity Loan & Trust of all the money that he was to receive under a construction contract with the City of Roanoke. The Bank then wrote to Roanoke Brick Company stating that it would pay them for brick furnished to Patterson from funds it collected from the City. Relying on this letter, Roanoke Brick sent supplies to Patterson. Roanoke Brick alleged that the bank had acted on Patterson’s behalf; nevertheless, the court held that Patterson had not assigned his contract proceeds. Id., 27 S.E. at 598.
In McArthur, the court noted that the facts of Hicks were "entirely different" from the facts before it because McArthur personally gave an order to his attorney dedicating the entire fund to a particular purpose. McArthur, 96 S.E. at 834. However, another transaction was also examined in Hicks. Patterson had written to Fidelity Loan & Trust directing them to pay his debt to Guggenheimer & Co. out of funds to be received from the City, "this assignment being intended to embrace said fund after the payment of the sums necessary for the current expenses of the work.” Hicks, 27 S.E. at 599. The court again found no assignment as the order "was not drawn on the debtor of the drawer, nor on any person holding funds belonging to him, and did not place the fund, or any part of it, in the control of the payee.” Id.
. Movants rely on the following contractual provision: "Seller hereby authorizes and directs the settlement company to disburse to the Listing Firm and the Selling Firm from Seller’s proceeds the respective portions of the fee at settlement.” (Emphasis added). However,
a mere communication to the holder of the fund (the obligor), containing no words of present assignment and merely authorizing and directing him to pay to a third party, may properly bear the interpretation that it is a mere power of attorney to the obligor himself, empowering him to effectuate a transfer by his own subsequent act.
Kelly Health Care, Inc. v. The Prudential Ins. Co., 226 Va. 376, 309 S.E.2d 305, 307-08 (1983) (quoting 4 Corbin on Contracts § 862 (1951)) (emphasis added). The appointment of an agent or the grant of a power of attorney does not qualify as an assignment. Id., 309 S.E.2d at 307. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492546/ | DECISION AND ORDER
ROSS W. KRUMM, Chief Judge.
The court has before it a motion by New Jersey Steel Corporation (herein New Jersey Steel) which seeks determination of the following issues:
1. The date upon which the statute of limitations under which the trustee could have pursued claims against directors of Valley Steel Corporation (herein Valley Steel) on behalf of the estate expired.
2. A determination of the appropriate standard of care imposed on the trustee in carrying out the trustee’s duties under 11 U.S.C. § 704.
The parties have submitted extensive memoranda with respect to the two issues presented and have argued their respective positions before the court. The court has considered the written memoranda and the oral arguments. For the reasons stated in this decision and order, the court finds as follows:
1. That for purposes of the commencement of the statute of limitations the docketing of the order for relief in the involuntary Chapter 7 proceeding of Valley Steel was, as reflected by the court’s docket entry number 13, November 13, 1992. Pursuant to 11 U.S.C. § 108(a)(2), the trustee had two years after the order for relief to commence any action against the Valley Steel directors. Thus, the statute of limitations for any cause of action which the trustee might have against the Valley Steel directors expired on November 14, 1994.1 The nunc pro tunc provisions of the order dated November 4, 1992, and docketed November 13, 1992, have no effect on the operation of this statute of limitations.
2. The standard of care imposed upon the trustee in the exercise of his duties under 11 *390U.S.C. § 704 is that set out in In re Hutchinson, 5 F.3d 750 (4th Cir.1993). That standard is whether the trustee acted as expeditiously as was compatible with the interests of the debtors and other parties in interest.
Facts:
As the litigants are only too well aware, this case has a long and twisted history starting from its inception as an involuntary petition in bankruptcy filed against Valley Steel by three creditors. The petition turned out to be defective in nature and, upon motion of Valley Steel, this court dismissed it. Before the creditors could correct the defective portions of the involuntary petition and refile, Valley Steel filed a Chapter 11 proceeding. Thereafter, the three petitioning creditors filed another involuntary petition. However, this court dismissed it in favor of the voluntary Chapter 11. The involuntary petitioners appealed to the district court which reversed this court’s decision and held that the second involuntary petition related back to the first involuntary petition and took precedence over the voluntary Chapter 11 proceeding. The district court’s decision was appealed to the Fourth Circuit which ultimately upheld the district court’s opinion. While the involuntary petition worked its way through the appellate levels of the judicial system, the voluntary Chapter 11 proceeding of Valley Steel proceeded. At a point in time, however, Valley Steel voluntarily converted its Chapter 11 to a Chapter 7 proceeding and Donald W. Huffman (herein Huffman) was appointed Chapter 7 trustee of the voluntary Chapter 7. He proceeded to administer the assets of Valley Steel.
On June 4, 1992, the Fourth Circuit Court of Appeals affirmed the district court’s decision dated July 16, 1990. Thereafter, the parties returned to bankruptcy court and litigated the issue of whether or not the voluntary Chapter 7 should be consolidated into the involuntary Chapter 7 for purposes of further administration. Out of this litigation arose this court’s order dated November 4, 1992, and docketed November 13, 1992. The order accomplished three things:
1. It found Valley Steel to be in default in filing a responsive pleading to the involuntary petition which led to a finding by the court, that, under 11 U.S.C. § 303(h), the petition was not timely controverted and that Valley Steel should be adjudicated under Chapter 7 of Title 11 of the United States Bankruptcy Code.
2. It directed the clerk of the bankruptcy court to distribute the order for relief in the involuntary proceedings and that the order for relief was to be entered nunc pro tunc to July 6,1992.2
3. Consolidated the voluntary Chapter 7 proceeding into the involuntary Chapter 7 proceeding with the direction that the ease proceed in the involuntary proceeding. On page 2 of the November 4, 1992 order, the court stated:
Once adjudicated, however, it is necessary for the debtor to comply with the statutory requirements imposed on it and it is necessary that an interim trustee to [sic] be appointed by the Office of the U.S. Trustee and that a section 341 meeting be held where the creditors may elect a trustee. See, 11 U.S.C. § 702 and Bankruptcy Rule 2009.
Subsequent to the entry of the November 4, 1992 order, the Office of the U.S. Trustee appointed Huffman as interim trustee in the involuntary proceeding. Thereafter, a section 341 meeting was held and, because there was no election of a trustee under section 702(d), Huffman became the permanent trustee at the conclusion of the section 341 meeting. He then proceeded to administer the estate under the involuntary case.
*391
Law and Discussion
A. Statute of Limitations.
11 U.S.C. § 108(a)(2) states as follows:
If applicable nonbankruptcy law, an order entered in a nonbankruptcy proceeding, or an agreement fixes a period within which the debtor may commence an action, and such period has not expired before the date of the filing of the petition, the trustee may commence such action only before the later of—
(2) two years after the order for relief.
The issue in this ease and what divides the parties, is the effective date of the order for relief. New Jersey Steel argues that the nunc pro tunc provision of the November 4, 1992 order makes the effective date of the order for relief under section 108, July 6, 1992, leading to the conclusion that the statute of limitations for bringing claims against the Valley Steel directors expired on July 6, 1994. Huffman, on the other hand, takes the position that the earliest that the statute of limitations began to run is the date of the order, November 4,1992, leading to the conclusion that the statute of limitations expired, at the earliest, on November 4,1994.
Having considered all the arguments of counsel and the authorities cited, the court is satisfied that Borer v. Chapman, 119 U.S. 587, 7 S.Ct. 342, 30 L.Ed. 532 (1887), governs a decision in this case. In deciding Borer, the Supreme Court stated:
The date of that entry [of the nunc pro tunc order] is by a fiction of law, made and considered to be the true date of the judgment for one purpose only, and that is to bind the defendant by the obligation of the judgment entered as of a date when he was in full life; but the right of the complainant in this bill to enforce that judgment by the present proceeding certainly did not begin until after the judgment in that form was actually entered. Until that time, the right was in abeyance; the litigation had, until then ended, been continuously in progress. It cannot be that the statute of limitations will be allowed to commence to run against a right until that right has accrued in a shape to be effectually enforced.
Borer, 119 U.S. at 602, 7 S.Ct. at 349-50.
The rationale of the Borer decision is seen in the last sentence quoted above. A number of other courts have followed this reasoning. For example, in Fewlass v. Keeshan, 88 F. 573 (6th Cir.1898), the Sixth Circuit stated: “[t]he statute did not begin to run except from the time when the decree was actually entered. The fiction of a nunc pro tunc entry has no effect whatsoever on the operation of the statute of limitations.” Id, (citing Borer) (emphasis added). See also, American Sur. Co. of New York v. Gainfort, 123 F.Supp. 743, 745 (S.D.N.Y.1954) (holding that the retroactive effect of a June 14, 1935 judgment for $6,329.00 with interest, etc. nunc pro tunc as of June 30, 1930, only relates to interest “and has no significance with respect to the statute of limitations”) aff'd, 219 F.2d 111 (2nd Cir.1955); In re Stafford, 240 F. 155, 156-157 (D.Conn.1917) (“[F]or the purposes of a statute of limitations, the date of a judgment nunc pro tunc is the date of its entry, and not the date as of which the judgment order is to take effect, and until the entry of the judgment, the right is in abeyance.”)
New Jersey Steel makes much of the fact that Huffman was the trustee in the voluntary Chapter 7 proceeding as well as the trustee in the involuntary Chapter 7 proceeding and argues that he knew about the claims against the Valley Steel directors during his tenure as trustee in the voluntary Chapter 7. It argues further that he is not prejudiced by the four-month gap between July 6, 1992, and November 4, 1992, because of his service as trustee in the voluntary Chapter 7. However, in deciding this issue, it is important to focus on the office of trustee and not the person who fills that office. When viewed in this fashion, it is clear that the trustee in the involuntary Chapter 7 did not have a right to initiate any cause of action against the Valley Steel directors until, at the earliest, November 4, 1992, when the order adjudicating Valley Steel an involuntary bankrupt was entered. As the record reflects, after the entry of the November 4, 1992 order, Huffman was appointed interim *392trustee and ultimately became permanent trustee after the section 341 meeting in the involuntary case. As in Borer, Huffman’s right to bring a lawsuit against the Valley Steel directors in the involuntary case was held in abeyance until the order for relief was entered and the Office of the U.S. Trustee was in a position to appoint an interim trustee. The Office of the U.S. Trustee was not so positioned until, at the earliest, November 4, 1992. Therefore, this court holds that for purposes of commencing of the statute of limitations under 11 U.S.C. § 108(a)(2), the actual date of entry of the order adjudicating Valley Steel an involuntary controls. Further, this court holds that the order of adjudication, although dated November 4, 1992, actually became effective when it was docketed on November 13,1992.
B. Trustee’s Standard of Care.
New Jersey Steel seeks a judgment against Huffman in this case for his alleged failure to carry out the duties imposed by a trustee under 11 U.S.C. § 704(1) of the Bankruptcy Code. Under that section, the trustee is to “(1) collect and reduce to money the property of the estate for which such trustee serves and close such estate as expeditiously as is compatible with the best interest of parties in interest.” The specific complaint of New Jersey Steel is that the trustee failed to investigate and pursue claims or causes of action on behalf of the estate against the former directors of Valley Steel in a timely fashion. In a nutshell, New Jersey Steel alleges that Huffman knew about potential claims against former directors of Valley Steel and that he let the applicable statute of limitations expire before he ever investigated the possibility of bringing lawsuits to recover monetary damages against the Valley Steel directors for their breach of fiduciary duties to Valley Steel.
The issue raised here for determination is the standard of care to be used in deciding whether Huffman violated his duties as trustee under 11 U.S.C. § 704. New Jersey Steel takes the position that the standard of care set forth in In re Hutchinson, 5 F.3d 750 (4th Cir.1993), is the standard of care to be used in determining the case at bar. In Hutchinson, the Fourth Circuit stated:
In order to close an estate expeditiously, a bankruptcy trustee must expeditiously perform each task necessary to close the estate, including the liquidation of the estate____
We conclude that § 704(1) imposed on McGee an affirmative duty to reduce the Hutchinsons’ property to money as expeditiously as was compatible with the interest of the Hutchinsons and other interested parties. So construed, the statute itself provides the necessary standard of care. The issue is not whether McGee acted reasonably in general, as the bankruptcy court viewed it, but whether she acted “as expeditiously as [was] compatible with the best interests” of the Hutchinsons and the other interested parties. Stated somewhat differently, the Appellants had to show that the delays in selling the Hutchinsons’ property were not reasonable given a standard of expeditious conduct by a bankruptcy trustee.
Discretion and judgment are irrelevant to the application of this rule. Therefore, the bankruptcy court erred in “taking into consideration the considerable discretion enjoyed by bankruptcy trustees”... Appellants do not challenge a discretionary decision of the trustee.
Hutchinson, 5 F.3d at 754.
The trustee, on the other hand, takes the position that the applicable standard of care is one of reasonableness. As stated in his brief, the trustee believes that,
Under the applicable law, New Jersey Steel must prove that Huffman was negligent in his exercise of his discretion to forego bringing a claim against the Valley Steel directors. As part of that proof burden, New Jersey Steel must show that had Huffman brought such a suit (1) he would have obtained a favorable judgment against the directors; (2) he would have been able to collect the judgment; and (3) he would have been able to accomplish both of these tasks without expending ex*393cessive amount of estate funds in the process.
See Huffman’s Response at page 11.
Where Huffman and New Jersey Steel differ is that Huffman believes that this case involves an exercise of discretion by the trustee which is governed by the standard of care which he articulates. All of the cases cited by Huffman for the proposition that the reasonable person standard should be employed in this case predate Hutchinson.
In Hutchinson, the Chapter 7 trustee had a fully equipped dairy farm which had liens and exemption claims against it totaling § 128.0S0.00. She received an offer to purchase the farm for $135,000.00 less than three months after the filing. However, between the time she received the offer (September 1981) and the date of court approval of the sale (April 1982), the offer was reduced twice because the offeror discovered that assets comprising the dairy farm operation were missing. The last offering price was $80,000.00 which the trustee refused to accept and the property was ultimately foreclosed. The holder of the second lien deed of trust and the debtors got nothing from the foreclosure sale and sued the trustee for negligence. Hutchinson at 752.
In deciding the standard of care issue, the Fourth Circuit noted: ‘What Appellants challenge is not McGee’s exercise of discretion regarding the Holbrook sale, but her expedition in obtaining the information necessary to make that decision.” Id. at 754. The Fourth Circuit stated:
In analyzing whether McGee failed to liquidate the Hutchinsons’ estate as “expeditiously as is compatible with the best interest of parties,” two questions must be asked. First, did McGee expeditiously determine whether Holbrook’s offer represented the best price available at the time the property was for sale? Second, once McGee determined that Holbrook’s offer should be accepted did she act expeditiously to obtain the bankruptcy court’s approval of the sale? Id.
As stated above, the issue in this ease, raised by the allegations in the complaint, is whether the trustee moved “expeditiously” to determine whether he had a cause of action against the Valley Steel Directors.3 This issue is similar to the Hutchinson issue of whether the trustee moved expeditiously in obtaining the information necessary to make the decision on whether to sell the dairy farm for the offered price. As in Hutchinson, New Jersey Steel does not challenge the exercise of discretion. This court finds that the Fourth Circuit’s decision in Hutchinson is applicable in deciding the issue of liability in the case at bar.
For the foregoing reasons, it is
ORDERED:
That the statute of limitations in the above-captioned case for causes of action against the Valley Steel directors for breach of their fiduciary duty to Valley Steel Corporation commenced to run, for the trustee in the involuntary Chapter 7 proceeding, on November 13, 1992, and expired on November 14,1994. It is
FURTHER ORDERED:
That for purposes of determining the issue of the trustee’s liability for violation of the duties imposed by 11 U.S.C. § 704 of the Bankruptcy Code the standard of care is one of expeditious conduct as set forth in In re Hutchinson, 5 F.3d 750 (4th Cir.1993). The burden which New Jersey Steel will bear is to show by a preponderance of the evidence that the trustee’s conduct in connection with the claims against former directors of Valley Steel Corporation does not meet standard of expeditious conduct.
. November 13, 1994, was a Sunday.
. The date of the nunc pro tunc order July 6, 1992, arose as a result of argument by the three petitioning creditors that Valley Steel had a ten-day period for filing of a responsive pleading after the Fourth Circuit's determination that its motion to dismiss the second involuntary petition should be denied. Thus, the sole reason for making the November 4, 1992 order nunc pro tunc to July 6, 1992, was to make the order for relief in the involuntary conform to the rules of bankruptcy procedure as to the earliest date that a default judgment order could have been entered adjudicating the debtor an involuntary bankrupt.
. See paragraphs 26-32 of the amended complaint. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492547/ | MEMORANDUM OPINION
LETITIA Z. CLARK, Bankruptcy Judge.
The court has considered the Motion of Italimplanti of America, Inc. for Determination of Non-Core Proceeding and for Abstention (Docket No. 6) (“Abstention Motion”), together with the responses, the briefs, the evidence, and the argument of counsel. The court heard the evidence on the Abstention Motion concurrently with the evidence on the Motion for Relief from Stay filed in the main bankruptcy ease by Italimplanti of America, Inc. (“ITAM”). The following are the Findings of Fact and Conclusions of Law of the court. Separate Findings of Fact and Conclusions of Law will be entered with regard to the Motion for Relief from Stay, and separate conforming Judgments will be entered in connection with each set of Findings of Fact and Conclusions of Law. To the extent any of the Findings of Fact may be considered Conclusions of Law, they are adopted as such. To the extent any of the Conclusions of Law may be considered Findings of Fact, they are adopted as such.
Findings of Fact
1. Ferretti Construction, Inc. (“Debtor”) filed a voluntary Chapter 11 petition on May 5, 1995. Debtor is a Texas corporation, and has its office in Houston, Texas.
2. Debtor’s business consists of the construction of steel and refractory production plants using union labor in the United States (Joint Stipulation, Docket No. 36, at p. 2).
3. On October 13, 1994, ITAM entered into a contract with Debtor in which Debtor was to be a sub-subcontractor to ITAM to provide supervision, labor, materials, tools and equipment for installation of a furnace on the premises of Empire-Detroit Steel (the “Armco Property”) in Mansfield, Ohio (the “Armco Project”) (Joint Stipulation, Docket No. 36, at p. 2).
4. Franco Pallazuoli, Vice President of the Debtor, testified that ITAM made payments to Ferretti as work was completed on the project.
5. Debtor substantially completed the work on March 29, 1995 (Joint Stipulation, Docket No. 36, at p. 2).
6. After Debtor completed the work, Debtor requested payment of invoices by ITAM in the total amount of $1,421,492.39. ITAM has asserted claims against the Debt- or in excess of Debtor’s claims against ITAM, alleging labor inefficiencies and poor productivity of workers supervised by Debtor (Joint Stipulation, Docket No. 36, at p. 2-3).
7. Debtor filed the instant adversary proceeding seeking to obtain payment of its invoices. The complaint states a claim for breach of contract, and also asserts turnover remedies pursuant to 11 U.S.C. § 542.
8. Debtor employed, inter alia, the following unions to work on the Armco Project: Bricklayers, Ironworkers, Plumbers’ and Steamfitters, and Boilermakers (Joint Stipulation, Docket No. 36, at p. 3).
9. On May 10, 1995, Debtor filed an Affidavit of Mechanics Lien against the Armco Property based on amounts Debtor claims are owed by ITAM on the Armco Project (Joint Stipulation, Docket No. 36, at p. 3).
10. Similar affidavits have been filed in Ohio by the labor unions employed by Debtor and other labor unions involved on the Armeo Project (Joint Stipulation, Docket No. 36, at p. 2-3).
11. On August 2, 1995, Voest-Alpine Industries, Inc., the general contractor on the Armco Project, posted a bond with respect to the Mechanics’ Lien filed against the Armco Property by Debtor (Joint Stipulation, Docket No. 36, at p. 4).
12. On August 4,1995, Voest-Alpine filed an Application for Approval of Alternate Security with the Common Pleas Court of Rich-land County, Ohio. Hearing on the Application has been postponed pending this court’s *398ruling on the Motion for Relief From Stay (Joint Stipulation, Docket No. 36, at p. 4).
13. Pallazuoli testified regarding the Debtor’s operations in Houston. He testified that Debtor administers the contracts on which it is operating from the Houston office.
14. Pallazuoli testified that the Houston office has one employee, other than Pallazuoli. The other employee administers contracts and manages the personnel employed on a particular project.
15. Pallazuoli testified that the Debtor has no operating contracts at this time. He testified that he has made bids on several contracts on behalf of the Debtor, but that Debtor’s employment on any of the contracts is not certain.
Conclusions of Law
1. The court is required to abstain from hearing a proceeding if the following elements are demonstrated:
a) a timely motion for abstention is filed;
b) the proceeding is based on a state law cause of action;
c) the proceeding is a non-core proceeding;
d) the proceeding could not have been commenced in a court of the United States absent jurisdiction under 28 U.S.C. § 1334; and
e) another proceeding which can be timely adjudicated has been commenced in a State forum of appropriate jurisdiction.
28 U.S.C. § 1334(e)(2).
2. Mandatory abstention does not apply in this instance. Another proceeding has not been commenced in a State forum of appropriate jurisdiction. Such a proceeding against the Debtor could not have been commenced without the movant first obtaining relief from the automatic stay.
3. The court may, in the interest of justice, or in the interest of comity with State courts or respect for State law, abstain from hearing a particular proceeding arising under Title 11 or arising in or related to a case under Title 11. 28 U.S.C. § 1334(c)(1).
4. The mere presence of state law issues is not a sufficient basis for permissive abstention. In re Republic Reader’s Service, Inc., 81 B.R. 422 (Bankr.S.D.Tex.1987).
5. However, the presence of several of the factors enumerated as pertinent to mandatory abstention afford a strong basis for permissive abstention. See, e.g., In re Engra, Inc., 86 B.R. 890 (Bankr.S.D.Tex.1988).
6. In the instant case, all of the factors enumerated in the statute requiring mandatory abstention are present except one. ITAM has shown its interest in going forward in state court, by filing its Motion for Relief from Stay. The issues faced by a state court would necessarily concern the validity and priority of the Mechanics’ Liens asserted by Debtor and the labor unions against the Armco Property.
7. Other factors militating in favor of abstention include the fact that several of the labor union claimants are local labor unions which reside in Ohio, and the fact that Debt- or has no ongoing contracts which it must administer from its Houston office.
8. The most compelling factor in favor of abstention is that what is presented to this court in the above captioned adversary proceeding as a turnover action is more properly characterized as a breach of contract action. The legal standards to be applied are those of Ohio contract and mechanics’ lien law.
9. The court concludes that permissive abstention is appropriate as to this adversary proceeding.
Based on the foregoing, the court will enter a separate Judgment granting permissive abstention as to the above captioned adversary proceeding. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492548/ | MEMORANDUM OF OPINION AND ORDER
RANDOLPH BAXTER, Bankruptcy Judge.
This matter came on for hearing upon the Motion of Alan J. Treinish (the Trustee) to *400compromise a certain controversy. Pursuant to Rule 2002, notice of the hearing was duly made.
On December 6, 1994, an involuntary petition for relief under Chapter 7 of the Bankruptcy Code [11 U.S.C. § 701, et seq.] was filed against AWF Liquidation Corp., a.k.a. A & W Foods, Inc. (the Debtor). Relief was granted respecting the involuntary petition, and the Trustee was duly appointed. Subsequently, the Trustee filed the present adversary proceeding against TOPCO Associates, Inc. (TOPCO) and Frosty Acres, a.k.a. F.A.B., Inc. (Frosty Acres) alleging, inter alia, a preferential transfer, breach of contract, and fraudulent transfer. Responsive pleadings were filed timely by both parties defendant challenging each of the several complaint allegations, while asserting their respective affirmative claims.
Among the several allegations, the Trustee’s case was primarily focused on two payments: (1) a payment made by the Debtor in the amount of $250,000.00 made on October 20, 1994 and (2) a transfer of funds for Frosty Acres to TOPCO of $560,593.39. During the discovery process, a new value set-off of approximately $154,025.13 was demonstrated to the Trustee’s satisfaction respecting the $250,000.00 transfer made by the Debtor. Regarding the $560,000.00 transfer from Frosty Acres to TOPCO, the Trustee’s investigation revealed to his satisfaction that those funds were held by Frosty Acres on behalf of the Debtor in the form of rebates. It was further determined by the Trustee that such rebates were normally paid to a cooperative member such as the Debtor at the end of the year or could be retained by the cooperative as security for a member’s line of credit. Following a series of negotiations between these parties, while assessing the relative strengths and weaknesses of their respective litigative postures. TOPCO and Frosty Acres offered to settle the lawsuit for $425,000.00. Upon consideration of the offer including the relative strength and weaknesses of his litigative posture, the Trustee asserts that the offer is fair, equitable and is in the best interest of the Debtor’s estate. Consequently, the subject Motion to Compromise was filed.
Of numerous factors to be considered by the Court in resolving this matter, the principal factor is whether the proposed compromise, if approved, is in the best interest of the Debtor’s bankruptcy estate. As noted above, no abbreviated notice of the hearing on the motion was requested or ordered. Each claimant of the estate was duly noticed, and no objection was filed by any of the claimants. Clearly, it is the estate’s claimants, particularly the unsecured claimants, who are reposed with the greatest economic risk if the proposed compromise is not in the best interest of the Debtor’s estate. Yet, herein, armed with apparent knowledge of such risk, each of the Debtor’s claimants has consented to approval of the proposed compromise by reason of their lack of objection.
The objectant Glenn C. Pollack a non-creditor of the estate, contends the compromise is not in the best interest of the Debt- or’s estate. As the objecting party, Pollack must support his objection by a preponderance of the evidence standard in order to be sustained. Rule 9019, Bankr.R., provides that the bankruptcy court may approve a compromise or settlement upon motion of the trustee and after notice and a hearing. Rule 9019 further provides that notice shall be given to creditors, the U.S. Trustee, the debtor and to any indenture trustees as provided under Rule 2002, in addition to any other entity the Court may direct. In re The Leslie Fay Cos., Inc., 168 B.R. 294 (Bankr.S.D.N.Y.1994). As presented, the motion fully comports with the procedural requirements of Rule 9019, Bankr.R..
A bankruptcy court may approve a compromise or settlement after a hearing to determine what is fair and equitable and in the best interests of the bankruptcy estate after considering the terms of the compromise compared with the probable complexity, expense, duration and outcome of litigation. Depoister v. Mary M. Holloway Foundation, 36 F.3d 582 (7th Cir.1994). Where an agreement provides tangible benefits to the estate in return for sacrifice of uncertain claims against its secured creditor, a bankruptcy *401court does not err in approving the settlement. In re Bond, 16 F.3d 408 (4th Cir. 1994). Furthermore, a right to prior notification of a hearing regarding settlement of a bankruptcy claim does not, in itself, confer the status of a “party in interest” on a debtor or some individual creditor who is not part of the settlement. In re Thompson, 965 F.2d 1136 (1st Cir.1992).
From the U.S. Supreme Court’s decision in TMT Trailer Ferry, Inc. v. C. Gordon Anderson, 390 U.S. 414, 88 S.Ct. 1157, 20 L.Ed.2d 1 (1968), it is incumbent upon this Court to provide an educated estimate regarding the complexity, expense, likely duration of litigation, possible difficulties in collecting, and any other factors which are relevant to a full and fair assessment of the propriety of the proposed compromise. See, also, Drexel Burnham Lambert, Inc. v. Flight Trans. Corp., 730 F.2d 1128 (8th Cir. 1984).
Among the enumerated duties of a ease trustee is the duty to:
§ 704 (1) collect and reduce to money the property of the estate for which such trustee serves, and close such estate as expeditiously as is compatible with the best interests of parties in interest, [11 U.S.C. § 704(1) ] (Emphasis added.)
In order to effectuate this particular duty, the trustee serves as a fiduciary for those who hold a stake in the debtor’s bankruptcy estate and, as such, is mandated to conduct his or her administration in their best interest.
Due regard has been accorded the aforementioned factors which the Court must consider in determining whether or not to approve a proposed compromise. Although the Complaint seeks recoveries and damages totaling $6,926,911.77 on the fraudulent transfer, preference, turnover, and breach of contract counts, the proposed compromise would settle all of the counts for $425,000.00. In considering the propriety of the offer, the Trustee acknowledged what were apparently strong affirmative defenses asserted by TOP-CO and Frosty Acres regarding the preference, turnover and fraudulent transfer counts. Specifically, he noted and considered certain statutory exceptions to an avoidable preferential transfer which were asserted under 11 U.S.C. § 547(c)(1), (2), (3) and (4), as well as an asserted basis for nonrecovery under 11 U.S.C. § 550(b). Other asserted affirmative defenses included, the Statute of Frauds, release, mutual mistake, set-off, accord and satisfaction, inter alia, which caused the Trustee to reduce his focus to a single $250,000.00 alleged preferential transfer which was later reduced to $70,000.00 upon examination of documents provided. The other focus narrowed to the $560,593.39 of rebate funds transferred by Frosty Acres to TOPCO. With regard to the latter transfer and in view of Frosty Acres’ assertion of a valid lien on those funds and the Trustee’s apparent further recognition that such funds could be retained by the cooperative as security for a member’s line of credit, the subject offer was accepted subject to Court approval. In view of these and other stated considerations, the Court is persuaded that due consideration has been given to the complexities of litigating these matters at trial. The Trustee in this proceeding has substantial experience in these matters, and his analysis in this regard is sound.
With regard to the breach of contract Complaint count, a breach of contract is alleged against TOPCO for changing the terms of the line of credit to the Debtor’s detriment. Reportedly, the source of that information which led to the allegation is the objectant, Glenn C. Pollack. It was later determined by the Trustee that the information provided by Pollack was inconsistent with the information provided by TOPCO and Frosty Acres. Considering that factor, among other known litigative risks based on additional research conducted by the Trastee which demonstrated that his allegations were “extremely tenuous as to its merits,” (See, Motion to Compromise and Response to Opposition.) this also prompted an alternative resolution of the matter as opposed to a trial proceeding.
Although the Trustee did not obtain financial balance sheets from the Defendants herein, he concluded that their collectability on a court entered judgment would be speculative by virtue of their being cooperative *402entities. A Hoover Report provided by Pollack shows that TOPCO is the fifth largest supplier of groceries in the United States and is one of the largest food co-ops in the country. In addition to groceries, it distributes pharmaceuticals, flowers and other products to more than 3,000 supermarkets representing more than (40) chains. Reportedly, the total retail size of its combined companies totals more than $50 billion. Actual gross revenues for TOPCO were reported in the amount of $3.9 billion.1 Notwithstanding this rather impressive profile, of TOPCO, the litigative risks considered by the Trustee were properly assessed independently, regardless of TOPCO’s apparent ability to pay potential damages. Similar profile data was not provided on Frosty Acres; however, perceived litigative risks were properly assessed independently from its capacity to pay potential damages. Surely, had the Trustee considered the litigative risks to be of lesser concern, he would have pursued a trial proceeding rather than compromise since the Trustee’s compensation is computed as a percentage of the Debtor’s gross estate. Simply stated, experienced Trustees do not habitually ignore funds which could enhance their own compensation.
Clearly, the proposed settlement is in the best interest of the Debtor’s estate for the following reasons: (1) each claimant of the Debtor’s estate was notified and none objected; (2) the Office of the United States Trustee filed no objection or comment; (3) the unsecured claimants, who share the highest economic risk, filed no objections; (4) in addition to providing notice to each claimant of the proposed compromise, the Trustee’s counsel discussed the proposal with counsel who represent more than ten percent (10%) in number and amount of the estate’s claimants. Pollack, as an equity holder only, is not a creditor of the Debtor’s estate and, as such, would receive a dividend only if all of the claimants received a 100% dividend pursuant to the absolute priority rule.
Litigation of the proceeding, as opposed to a compromise, involves an extensive discovery process in more than one state. Both federal and state law provisions are in play, in addition to numerous depositions being needed to fully assess the validity of the asserted affirmative defenses. In brief, the subject litigation is appropriately characterized as being complex. Consequently, pursuing a litigative resolution of the matter would only serve to delay any meaningful dividend which the unseeureds would receive. As stated above, the Debtor is an involuntary debtor whose petition was filed December 6, 1994. More than sufficient time has lapsed since the petition filing to fully administer the estate and pay any available distribution to claimants. In view of the particulars herein, the further pursuit of a litigative posture is unwarranted and would only tend to unduly delay any distribution to claimants. As stated in Bond, supra, where an agreement provides tangible benefits to the estate in return for sacrifice of uncertain claims, the Court does not err in approving the settlement.
Conclusion
Accordingly, in view of the assessment factors considered herein, the Motion for Authority to Compromise is hereby granted, and the Objection to Settlement is hereby overruled. Each party is to bear its respective costs.
IT IS SO ORDERED.
. Hoover's Company Profile Data base — American Private Enterprises, 1997 Report on TOPCO Associates, Inc.. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492549/ | ORDER ON OBJECTIONS OF UNITED STATES TRUSTEE TO APPLICATIONS FOR COMPENSATION FILED BY ATTORNEYS FOR TRUSTEES
BARBARA J. SELLERS, Bankruptcy Judge.
These matters are before the Court on objections by the United States Trustee (“UST”) to fee applications filed by the attorneys for each of the bankruptcy estates captioned above. In each case the trustee’s law firm has been appointed to represent the trustee in the performance of estate duties. Each of the cases is an asset case and each has projected meaningful repayment to creditors. The attorneys for these trustees have defended their applications.
The Court has jurisdiction in these matters under 28 U.S.C. 1334(a) and the general order of reference previously entered in this district. These are core proceedings which this bankruptcy judge may hear and determine.
The UST’s objections assert that attorneys for the trustees have billed the estates for work that is more properly compensable only through the trustee’s compensation calculated under § 326 of the Bankruptcy Code. According to the UST, the activities described in the fee applications do not require the assistance of an attorney either because the activities are non-legal in nature or because the activities are functions described in 11 U.S.C. § 704 which must be performed only by the trustees. Those functions include particularly:
(1) collecting and reducing to money the property of the estate, and closing such estate as expeditiously as is compatible with the best interests of parties in interest;
(2) accounting for all property received;
(3) investigating the financial affairs of the debtor; [and]
(4) if a purpose would be served, examining proofs of claims and objecting to the allowance of any claim that is improper.
11 U.S.C. § 704.
The Court understands that the United States Trustee system has a role in monitoring fee applications filed with the Bankruptcy Court and that such a role may not be popular. The exercise of that responsibility, however, must not be driven by political considerations and must take into account the practical realities of the legal profession and of attorney/client relationships. The United States Trustee system, as an oversight agency for certain administrative aspects of the bankruptcy process, also has an obligation to preserve estate assets for creditors and to encourage and develop the panel of private trustees it has selected. The method and process of these ever more numerous objections have demonstrated the vulnerability of that system to political considerations.1 Such concerns greatly undercut support for the panel trustees and for the distributions proposed for general or priority unsecured creditors.
A cursory examination of the seven cases involved in this latest round of objections shows that these are relatively small bankruptcy estates. None has gross assets in excess of $7,500.00. Those assets came from *405tax refunds, insurance proceeds, preference recoveries, accounts receivable, inventory sales, security deposits, and proceeds of a personal injury suit. The fees requested by the attorneys for the trustees are also relatively modest and range from $500.00 to $1,696.00. With the exception of the May case, the amounts objected to are so insignificant (between $122.00 and $500.00) that the expenses of responding to the objections, preparing for a hearing and attending a hearing far exceed the amounts in controversy or any possible benefits to the estates. The cases all propose a significant dividend to creditors.2
Of even greater concern is the content of the objections and the conduct of these and other recent hearings on these objections. Essentially the UST is saying that, absent actual litigation, a trustee may not use the services of his appointed attorney for advice or action relating to any of the functions described in § 704 of the Bankruptcy Code. For example, it is argued that because examining proofs of claim and objecting to their allowance is described in § 704(5), such activity must be performed by the trustee without legal counsel. Only if an objection to a claim is opposed by the claimant, can legal advice be sought. A similar position is taken with the other duties described in § 704.
The Court finds this position not only unduly rigid, but also unrealistic. Certain aspects of the examination of proofs of claim, such as analysis for timeliness or duplication, are administrative in nature. Many other aspects of that function, however, require legal skill relating to Uniform Commercial Code requirements or to real estate, contract, tort or other areas of law. Likewise, investigating the financial affairs of a debtor can be as administrative as obtaining bank account numbers or as technical as analyzing loan documents for compliance with various legal requirements. The position that legal advice cannot be requested for any function described in § 704 until a contested matter or adversary action has been initiated is an argument this Court believes to be incorrect and unjustified.
The UST also argues that absolute separation of administrative and legal tasks must be maintained throughout an inquiry. Even if a trustee has properly consulted an attorney about a possible fraudulent transfer, for example, if any part of the attorney’s efforts in investigating that fraudulent transfer could be performed by a lay person, that time must be deleted from the attorney’s fee application. Apart from the extreme difficulty of making such separations factually,3 that approach ignores the realities of legal practice and attorney/client relationships. An attorney does not turn over to his client bits and pieces of an ongoing legal project simply because some non-legal analysis may be necessary for a certain step. That would not be efficient or practical. Certainly, if there is to be a protracted effort for which legal expertise would not be needed, it would be economical and advisable to involve the client’s own efforts. Just because a legal project requires a letter or a telephone call which could be written or made by the client, however, does not force the attorney to cease all efforts and contact the client. Such contact and explanation to the client of what is required could cost more than the attorney’s performance of the task. Some thought has to be given to expediency and practicality in the process.
The six eases on this Court’s hearing docket for February 4, 1997, and the one case in Steubenville on February 21,1997 involve six different trustees. Four appeared in the courtroom.4 These trustees and others who have appeared over the last several months are disturbed by what they perceive as unjustified objections by the UST to the fee applications of their attorneys. Their eon*406ceras include fear of reprisals affecting their abilities to draw cases if they do not agree with the UST’s objections, sensitivity to state bar disciplinary ramifications should they engage in the unauthorized practice of law by performing as a fiduciary tasks they believe are properly legal functions, and general difficulties in making somewhat arbitrary distinctions. They also are concerned that such persistent objections to small amounts will cause them to decide not to administer small asset cases at all. That decision would harm creditors who have not objected to the administrative costs, especially those creditors who appear often and routinely in consumer cases. The trustees cannot justify the expense of defending these objections. They further do not understand why these matters cannot be resolved through meaningful compromise, rather than exclusively by complete accession to all of the UST’s demands.
After considerable thought about these eases and this process, the Court has reached certain conclusions. First, objections by the UST to fees for services for attorneys for chapter 7 panel trustees will no longer automatically be set for hearing. Absent unusual circumstances, such matters will be decided on the papers submitted, and the attorneys should submit orders with the amount of fees left blank in each case where an objection has been filed. Any response to the UST’s objection should be filed no later than the time the order is submitted.
Second, where the objections to fees for services performed are based upon assertions that the tasks actually are not legal in nature, a presumption will operate in favor of the trustee’s attorney’s decision that the service is properly compensable. These panel trustees are conscientious fiduciaries whose attorneys generally charge these estates fairly for legal services performed. This Court will not second-guess or use hindsight to overrule the concerns of trustees or their attorneys about the unauthorized practice of law or the most effective manner to handle these cases. The trustees and their attorneys are the ones whose livelihoods and professional reputations are at risk. Should an objection raise questions of conduct which is egregious in nature, a different process will be employed. To date no such issues have arisen. In this Court’s opinion, the bankruptcy system will be better served by not diminishing the return to creditors through pointless hearings involving hair-splitting attempts to second-guess able professionals about small charges for fairly debatable services for necessary activities.
Based upon the foregoing, the Court will sign and complete the orders submitted by the attorney for the trustee in each of these cases.
IT IS SO ORDERED.
. The Court was informed that this district is under pressure because the United States Trustee's office was not objecting to enough fee applications.
. The proposed dividends are: 67.9% to priority unsecured claimants, 23.25%, 37.39%; 52.94%, 62.17%, and 94.75% to general unsecured claimants and 100% to general unsecured claimants with a $941 surplus back to the debtor.
. The transcript of the hearing in the Escobedo case illustrates such difficulty.
. One trustee did not appear because his attorney withdrew his request for all contested items and another trustee requested that the matter be submitted only on the papers. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492550/ | MEMORANDUM ON CROSS-MOTIONS FOR SUMMARY JUDGMENT
RICHARD STAIR, Jr., Bankruptcy Judge.
The Debtor, B & B Utilities, Inc., filed a Chapter 11 petition on April 30, 1996, which was converted to Chapter 7 on May 20,1996. *420The Trustee, William T. Hendon, commenced this adversary proceeding on November 12, 1996, with the filing of a Complaint seeking to avoid and recover two alleged preferential transfers pursuant to 11 U.S.C.A. §§ 547(b) and 550(a) (West 1998). On March 21, 1997, the Trustee filed a Plaintiffs Motion for Summary Judgment. On the same date, the Defendant, General Motors Acceptance Corporation, filed a Motion for Summary Judgment. The foregoing summary judgment motions are supported by documents and affidavits executed by William T. Hendon, Trustee, William E. Stack,1 an employee of Olson Oldsmobile, Inc., and William R. Black, the president of the Debtor.
This is a core proceeding. 28 U.S.C.A. § 157(b)(2)(F) (West 1993).
I
On January 22, 1996, the Debtor executed two documents, each entitled “Retail Installment Sale Contract,” by which the Debtor purchased and financed two 1995 Isuzu Stake Trucks, VEST Nos. 4KLB4B1A8SJ002768 and JALB4B1K9S7010012, from Olson Oldsmobile, Inc. (Olson), in Livonia, Michigan.2 Each contract granted Olson a security interest in the respective vehicle that it financed, and both contracts, by their own terms, were assigned to the Defendant on the date they were executed. After execution of the contracts, the vehicles were sent by Olson to be customized. The vehicles were later delivered to the possession of the Debtor on February 29, 1996. On January 30, 1996, a Change Endorsement was issued by Central Mutual Insurance Company, adding the two vehicles, effective January 22, 1996, to the automobile insurance policy maintained by the Debtor. An Application for Michigan Title was submitted to the Secretary of State in the state of Michigan, requesting that the Defendant be listed as the first lienholder on the certificate of title.3 The application was received by the Secretary of State on March 1. 1996. Pursuant to an August 30, 1996 Order, the Trustee sold one of the vehicles on condition that the interest of the Defendant, if any, would attach to the proceeds of the sale.
II
Pursuant to Fed.R.Civ.P. 56(c), made applicable to this adversary proceeding through Fed. R. Bankr.P. 7056, summary judgment is available only when a party is entitled to a judgment as a matter of law and when, after consideration of the evidence presented by the pleadings, affidavits, answers to interrogatories, and depositions in a light most favorable to the nonmoving party, there remain no genuine issues of material fact. The mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment. The factual dispute must be genuine. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Street v. J.C. Bradford & Co., 886 F.2d 1472 (6th Cir.1989).
III
The single issue to be resolved by the court, as set forth in the February 5, 1997 Pretrial Order, is “[wjhether the Defendant’s interests in the estate’s two 1995 Isuzu Troopers, or proceeds therefrom, are avoidable by the [TJrustee pursuant to 11 U.S.C. §§ 547(b) and 550.” Bankruptcy Code § 547(b) provides in material part:
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;
*421(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;
(3) made while the debtor was insolvent;
(4) made—
(A)on or within 90 days before the date of the filing of the petition; []
(5) that enables such creditor to receive more than such creditor would receive if—
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by the provisions of this title.
11 U.S.C.A. § 547(b) (West 1993). The Defendant does not contest the foregoing elements of the Trustee’s claim. However, because these elements have not been stipulated, the court deems it necessary to hold the Trustee to his burden of proof. See 11 U.S.C.A. § 547(g) (West 1993).
As to the introductory requirement that there be a transfer of property of the debtor, the Bankruptcy Code broadly defines the term “transfer” as “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.A. § 101(54) (West 1993). It is settled law that the creation of a lien in favor of an unsecured creditor constitutes a transfer of property under § 547(b). See Grant v. Kaufman (In re Hagen), 922 F.2d 742, 745 (11th Cir.1991). The term “creditor,” as used in § 547(b)(1), is defined in 11 U.S.C.A. § 101(10) (West 1993) to include any “entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor.” 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.A § 101(5) (West 1993). It is undisputed that the Defendant holds a prepetition right to payment against the Debtor.
A debt is antecedent if it was incurred prior to the transfer of a debtor’s property. Southmark Corp. v. Schulte Roth & Zabel (In re Southmark Corp.), 88 F.3d 311, 316 (5th Cir.1996), reh’g denied, 95 F.3d 56 (5th Cir.1996), cert. denied, — U.S. —, 117 S.Ct. 686, 136 L.Ed.2d 611 (1997); Whittaker v. BancOhio National Bank (In re Lamons), 121 B.R. 748, 750 (Bankr.S.D.Ohio 1990). In this proceeding, the record is clear that the Debtor incurred its debt to Olson on January 22, 1996.4 To determine if this debt is antecedent to the transfers, the court must ascertain the date on which the transfers occurred. In making this determination, courts must look to 11 U.S.C.A. § 547(e)(2) (West 1993 & Supp.1997), which provides in material part:
For the purposes of this section ... a transfer is made—
(A) at the time such transfer takes effect between the transferor and the transferee, if such transfer is perfected at, or within 10 days after, such time ...; [or]
(B) at the time such transfer is perfected, if such transfer is perfected after such 10 days].]
State law governs the process by which a particular transfer is perfected and the time at which such perfection occurs. Battery One-Stop v. Atari Corp. (In re Battery One-Stop Ltd.), 36 F.3d 493, 495 (6th Cir.1994).
The perfection of a security interest in a motor vehicle in Michigan is governed by Mich. Comp. Laws Ann. § 257.238(a) (West 1996),5 which provides in material part:
When an owner named in a certificate of title creates a security interest in the vehicle described in such certificate or in any accessory thereon:
(1) The owner shall immediately execute an application in the form prescribed by the department to name the *422holder of the security interest on the certificate of title, showing the name and address of such holder and deliver the certificate of title, application and the required fee together with a copy of such application which need not be signed, to the holder of the security interest.
(2) The holder of the security interest shall cause the certificate of title, application and fee and the copy of such application to be mailed or delivered to the department.
(8) The department shall indicate on the copy of such application the date and place of fifing of the application and return said copy to the person presenting the same.
(4) Upon receipt of the certificate of title, application and the required fee the department shall issue a new certificate in the form provided by section 222 setting forth the name and address of each holder of a security interest in the vehicle or in any accessory thereon for which a termination statement has not been filed and the date on which the application first stating such security interest was filed, and mail the certificate to the owner.
In Michigan, a security interest in a motor vehicle is perfected upon delivery to the Secretary of State of an application in conformity with the requirements of § 257.238. Remes v. Ford Motor Credit Co. (In re Churchwell), 80 B.R. 855, 860 n. 7 (Bankr.W.D.Mich.1987); see also Frank v. Second Nat’l Bank (In re Gilbert), 82 B.R. 456 (Bankr.E.D.Mich.1988). In this proceeding, the record is clear that the Secretary of State received the Application for Michigan Title for each vehicle on March 1, 1996. Accordingly, the court finds that the Defendant perfected its security interests on the same date. Therefore, under the authority of § 547(e)(2)(B), the transfer of the Defendant’s liens occurred on March 1, 1996. Since the Debtor incurred its debt to the Defendant on January 22,1996, the March 1, 1996 transfer was clearly made “on account of an antecedent debt” under § 547(b)(2).
As to the question of whether the Debtor was insolvent at the time of the transfers, Bankruptcy Code § 547(f) provides:
For the purposes of this section, the debt- or is presumed to have been insolvent on and during the 90 days immediately preceding the date of the fifing of the petition.
11 U.S.C.A. § 547(f) (West 1993). The transfers occurred on March 1, 1996, when the Secretary of State received the Application for Michigan Title for each vehicle. This date is clearly within the 90 days preceding the fifing of the petition on April 30, 1996.6 Given that the Defendant has not presented any evidence to rebut the presumption of insolvency, the court finds that the Debtor was insolvent at the time of the transfers. For these reasons, the elements set forth in subsections (b)(3) and (b)(4) are satisfied. Finally, in regard to § 547(b)(5), the Affidavit of William T. Hendon, Trustee, establishes the following: (1) excluding the Defendant, creditors have filed unsecured and priority claims in the amount of $875,-922.69; (2) the Trustee has sold one vehicle for $13,000.00; (3) the Defendant has filed a claim, in the amount of $28,591.41, upon the vehicle sold; and (4) the Trustee does not anticipate having sufficient assets to pay 100% to unsecured creditors. Because the distribution to unsecured creditors will be less than 100%, the § 547(b)(5) element is satisfied. See Still v. Rossville Bank (In re Chattanooga Wholesale Antiques, Inc.), 930 F.2d 458, 465 (6th Cir.1991) (“Unless the estate is sufficient to provide a 100% distribution, any unsecured creditor ... who receives a payment during the preference period is in a position to receive more than it would have received under a Chapter 7 liquidation.”). Accordingly, the court finds that *423the Trustee has met his burden of proof as to the elements set forth in § 547(b).
IV
As already noted, the Defendant does not contest the § 547(b) elements of the Trustee’s claim. Instead, the Defendant asserts an affirmative defense under 11 U.S.C.A. § 547(c)(3) (West 1993 & Supp. 1997), which provides:
The trustee may not avoid under this section a transfer—
(3) that creates a security interest in property acquired by the debtor—
(A) to the extent such security interest secures new value that was—
(i) given at or after the signing of a security agreement that contains a description of such property as collateral;
(ii) given by or on behalf of the secured party under such agreement; (in) given to enable the debtor to acquire such property; and
(iv) in fact used by the debtor to acquire such property; and
(B) that is perfected on or before 20 days after the debtor receives possession of such property[J
The Defendant bears the burden of proving any § 547(c) defense by a preponderance of the evidence. 11 U.S.C.A. § 547(g); Rieser v. Randolph County Bank (In re Masters), 137 B.R. 254, 261 (Bankr.S.D.Ohio 1992).
The record in this proceeding establishes that: (1) the Defendant’s security interest secured new value to the Debtor in the form of two loans which enabled the Debtor to purchase the two vehicles; (2) the new value was given concurrent to the signing of the security agreement; (3) the security agreement contains a description of the property acquired by the Debtor that serves as collateral for the new value; (4) the new value was given by Olson, the Defendant’s assignor; (5) the new value was given to enable the Debtor to acquire the two vehicles; and (6) the new value was in fact used by the Debtor to acquire the two vehicles. Therefore, the only remaining issue is whether the Defendant perfected its security interest within twenty days from the time that the Debtor received possession of the vehicles.
It has already been established that the Defendant perfected its security interest, under Michigan law, on March 1, 1996. The Trustee contends that the Defendant cannot avail itself of the § 547(c)(3) defense because the Debtor received possession of the vehicles on January 22,1996, upon consummation of the contract between the Debtor and Olson. (Pl.’s Resp. to Mot. for Summ. J. Filed by Def., General Motors Acceptance Corporation at 6.) The Defendant, on the other hand, argues that such perfection was timely because the Debtor did not receive possession of the two vehicles until February 29, 1996. In support of this position, the Defendant has proffered the Affidavit of William E. Stack.7 By his affidavit, Mr. Stack establishes, among other things, that he is presently employed by Olson and that the general manager and sales manager who handled the sale of the two vehicles to the Debtor are no longer employed with Olson. In addition, in paragraphs 5 and 6 of the affidavit, Mr. Stack states that:
5. According to the files of Olson, the Trucks were returned to Olson by Truck Tech Engineers on February 29, 1996[,] after the Trucks had been customized. See Invoices of Tech attached hereto as Exhibits “C” and “D”, respectively.
6. According to the files of Olson, the Trucks were delivered to the possession of B & B on or about February 29, 1996.
In conjunction with paragraph 5, two invoices of Truck-Tech, Engineers, Inc., each dated February 29,1996, are attached to the affidavit as Exhibits C and D.
The Trustee has moved to strike paragraphs 5 and 6 and Exhibits C and D. (PL’s Resp. to Mot. for Summ. J. Filed by Def., General Motors Acceptance Corporation at 3 n. 1.) Specifically, the Trustee argues that paragraphs 5 and 6 cannot be considered in support of the Defendant’s Motion for Summary Judgment because they are not based upon the personal knowledge *424of Mr. Stack and constitute inadmissible hearsay. Indeed, Fed.R.Civ.P. 56(e) provides:
Supporting and opposing affidavits shall be made on personal knowledge, shall set forth such facts as would be admissible in evidence, and shall show affirmatively that the affiant is competent to testify to the matters stated therein.
If an affidavit does not include sufficient factual information to establish the personal knowledge of the affiant, then a court cannot consider the affidavit in ruling on the summary judgment motion. El Deeb v. University of Minnesota, 60 F.3d 423, 428-29 (8th Cir.1995). Moreover, hearsay within an affidavit cannot be considered either. Turoff v. May Co., 531 F.2d 1357, 1362 (6th Cir.1976). In the case of Mr. Stack’s affidavit, it provides insufficient information to establish that paragraphs 5 and 6 are based upon his personal knowledge. Although it establishes that Mr. Stack presently works for Olson, it does not indicate whether he worked for Olson at the time of the events set forth in paragraphs 5 and 6. Even if he did work for Olson at that time, the affidavit establishes only that the former general manager and sales manager had personal knowledge of these events and not Mr. Stack. Paragraphs 5 and 6 are not based upon the personal knowledge of the affiant but instead are based upon “the files of Olson” and constitute inadmissible hearsay under the authority of Fed.R.Evid. 802. Additionally, Exhibits C and D (two separate invoices of Truck-Tech Engineers, Inc.), although potentially admissible under the business records hearsay exception of Fed.R.Evid. 803(6), also constitute inadmissible hearsay because a proper foundation has not been laid for their introduction under the exception. Accordingly, the court will not consider paragraphs 5 and 6 of Mr. Stack’s affidavit nor Exhibits C and D attached thereto.8
Notwithstanding the inadmissibility of certain evidence submitted by the Defendant in support of its motion for summary judgment, the Defendant has proffered other evidence to support its position that the Debtor did not receive possession of the vehicles until February 29, 1996. An affidavit executed by William R. Black, the president of the Debtor at all times relevant to this proceeding, establishes that: (1) after he executed the contracts for the purchase of the vehicles, they were sent by Olson to be customized; and (2) the two vehicles were not delivered to the possession of the Debtor until February 29, 1996. The Trustee has submitted no counter affidavits or other evidence to dispute these facts.
To determine whether the Defendant is entitled to summary judgment, it is necessary to understand the meaning of the term “possession” as it is employed in § 547(c)(3)(B). Courts that have examined this issue have interpreted the term to mean “physical control or custody of the collateral, as opposed to the acquisition of a right of ownership.” Logan v. Columbus Postal Employees Credit Union, Inc. (In re Trott), 91 B.R. 808, 811 (Bankr.S.D.Ohio 1988); see also Scott v. McArthur Sav. & Loan Co. (In re Winnett), 102 B.R. 635, 637 (Bankr.S.D.Ohio 1989) (“possession is not to be equated with ownership”). Therefore, resolution of the issue before the court depends upon whether the Debtor acquired physical control or custody over the vehicles prior to February 10, 1996. See Lamons, 121 B.R. at 751-52 (concluding that Fed. R. BankrP. 9006(a) determines the time period within which a creditor must perfect its purchase money security interest under § 547(c)(3)(B)).9
*425Because the determination of whether a debtor received possession of the collateral on a certain date is a fact-specific inquiry, the court deems it beneficial to consider the facts of other cases that have addressed the issue. In Trott, the debtor executed a contract for the purchase of an automobile on March 11, 1987. To finance the purchase, the debtor obtained a loan from a credit union. The loan was secured by a purchase money security interest in the automobile. On March 13,1987, the automobile was delivered to the debtor. On March 19, 1987, a certificate of title to the automobile was issued to the debtor and delivered to the credit union. On March 24, 1987, the credit union had its lien noted on the certificate of title. The debtor filed a bankruptcy petition on April 2, 1987. The trustee commenced a preference action under § 547(b). The sole issue before the court was whether, under § 547(c)(3)(B), the debtor “possessed” the vehicle more than ten days prior to the perfection of the credit union’s security interest on March 24, 1987.10 The credit union argued that possession did not occur until March 19, 1987, the date on which the certificate of title was issued to the debtor. The trustee argued that the debtor received possession of the automobile on March 13, 1987, the date it was delivered to the debtor by the automobile dealership. The court rejected the credit union’s argument and entered a judgment in favor of the trustee. Trott, 91 B.R. at 813.
In Winnett, the debtors executed a contract for the purchase of a mobile home on October 3, 1987. On October 30, 1987, the debtors acquired a loan to finance the purchase price. The creditor secured the loan with a purchase money security interest in the mobile home. The mobile home was delivered to the debtors’ real property between November 2 and November 6, 1987. Prior to November 9, 1987, the seller returned to the debtors’ real property to, among other things, level the mobile home, remove the tires, set the mobile home on blocks, and install the steps. At that time, the debtors made the down payment and received the keys and the title to the mobile home. Thereafter, the creditor who made the loan to the debtors noted its lien on the certificate of title to the mobile home on November 18, 1987. The debtors filed a bankruptcy petition on December 7, 1987. The trustee commenced a preference action under § 547(b). The sole issue before the court was whether, under § 547(c)(3)(B), the debtor “possessed” the vehicle more than ten days prior to the perfection of the credit union’s security interest on November 18, 1987. The secured creditor argued that the debtors did not receive possession of the mobile home until November 9, 1987, the date on which the debtors obtained the keys to the same. The trustee, on the other hand, argued that the debtors received possession of the mobile home between November 2 and November 6, 1987, when the mobile home was delivered to their real property. The court agreed with the trustee, holding that the debtors received possession of the mobile home on the date it was delivered to their real property. Winnett, 102 B.R. at 638. In reaching this conclusion, the court noted that the debtors received possession once they had physical control over, and access to, the mobile home. Id.
In this proceeding, there is no evidence in the record that the Debtor had physical control over, or access to, the vehicles prior to February 29, 1996.11 In fact, the record is void of any details as to the location of the vehicles or any of the Debtor’s *426agents prior to February 29, 1996.12 In the absence of such evidence, the court cannot conclude that the Debtor had physical control over, or access to, the vehicles prior to such date. The court cannot assume that an agent of the Debtor was at the same location as the vehicles at the time that the installment sales contracts were signed, or any time thereafter. The record supports a finding only that a contract for the purchase and financing of each vehicle was executed on January 22, 1996, and that the vehicles were delivered to the possession of the Debtor on February 29, 1996.13 Given that there is no evidence of actual physical control over, or access to, the vehicles by the Debtor until February 29, 1996, the court concludes that the perfection of the Defendant’s security interests on March 1,1996, was timely under the authority of § 547(c)(3)(B).14 As such, the Trustee cannot prevail under § 547(b). See Luper v. Columbia Gas (In re Carled, Inc.), 91 F.3d 811, 813 (6th Cir.1996) (noting that a trustee may avoid transfers that fall within the provisions of § 547(b) unless one of the exceptions under § 547(c) applies).
V
For the reasons set forth in this memorandum, the Trustee’s summary judgment motion will be denied and the Defendant’s summary judgment motion will be granted. The Trustee’s Complaint will be dismissed. An appropriate judgment will be entered.
. Mr. Stack's affidavit is presented in two forms. A copy of the affidavit with supporting exhibits is appended to the Defendant’s Memorandum of Law in Support of Motion for Summary Judgment filed March 21, 1997. The original affidavit, unaccompanied by the exhibits, was filed on April 4, 1997. Only the later affidavit will be considered by the court. As the facts underlying the cross-motions for summary judgment are essentially undisputed, the court will deem the exhibits appended to the unauthenticated affidavit filed March 21, 1997, as filed with the April 4, 1997 authenticated affidavit.
. The Debtor's president, William R. Black, was a co-purchaser under both contracts.
. The parties agree that questions of state law arising in this proceeding are governed by the laws of Michigan.
. This obligation was assigned to the Defendant on the same date.
. See supra note 3.
. Where a bankruptcy case is originally filed under Chapter 11 of the Bankruptcy Code and later converted to Chapter 7, the ninety day preference period under § 547 is measured from the date that the Chapter 11 petition was filed and not from the date of conversion. 11 U.S.C.A. § 348(a) (West 1993); Vogel v. Russell Transfer, Inc., 852 F.2d 797, 798 (4th Cir.1988); State of Ohio, Department of Taxation v. H.R.P. Auto Center, Inc. (In re H.R.P. Auto Center), 130 B.R. 247, 256-57 (Bankr.N.D.Ohio 1991).
. See supra note 1.
. The Trustee also moved to strike paragraph 2 of the affidavit which provides:
2. According to the files of Olson, B & B Utilities, Inc. ("B & B”) and William R. Black executed contracts for the purchase of two (2) vehicles from Olson on January 22, 1996. One vehicle is a 1995 Isuzu Stake Truck, VIN 4KLB[4B]1A8SJ002768 and the other is a 1995 Isuzu [S]take [T|ruck, VIN JALB4B1K9[S]7010012 ("Trucks"). See Retail Installment Sale Contracts attached hereto as Exhibits “A” and "B”, respectively.
The court agrees with the Trustee that paragraph 2 is inadmissible evidence based upon hearsay and lack of personal knowledge on the part of the affiant. However, such an evidentiary ruling is immaterial since the Trustee himself has entered copies of the contracts into the record.
. Fed. R. Bankr.P. 9006(a) provides in material part:
*425In computing any period of time prescribed or allowed ... by any applicable statute, the day of the act, event, or default from which the designated period of time begins to run shall not be included. The last day of the period so computed shall be included, unless it is a Saturday, a Sunday, or a legal holiday[.]
. Prior to the Bankruptcy Reform Act of 1994, § 547(c)(3)(B) provided a creditor with only ten days to perfect its purchase money security interest.
. The Trustee contends that the issue should be framed as whether there is any proof in the record to establish “that the [D]ebtor did not take possession of the trucks prior to February 29, 1996.” (PL’s Resp. to Mot. for Summ. J. Filed by Del., General Motors Acceptance Corporation at 5.) The court disagrees. Although the Defendant bears the burden of proof on the § 547(c)(3) defense, this does not mean that the Defendant must prove the absence of possession when there is no evidence in the record to the contrary. The issue is whether the Defendant perfected its security interest within twenty days from the date that the Debtor received possession *426of the vehicles. The Defendant has satisfied this burden. Given that there is no dispute as to these facts, Fed.R.Civ.P. 56 places the burden on the Trustee, as the nonmoving party, to come forward with some evidence to create a genuine issue of material fact. Liberty Lobby, 477 U.S. at 255-57, 106 S.Ct. at 2514; Celotex Corp. v. Catrett, 477 U.S. 317, 324, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265 (1986) ("Rule 56(e) therefore requires the nonmoving party to go beyond the pleadings and by her own affidavits, or by the 'depositions, answers to interrogatories, and admissions on file,' designate 'specific facts showing that there is a genuine issue for trial.'" (quoting Fed.R.Civ.P. 56(e)). In the absence of such, the Trustee assumes the risk of an adverse judgment as a matter of law.
. The court knows that the vehicles were "sent” somewhere to be customized prior to February 29, 1996. However, the record does not establish the location where the vehicles were sent. Furthermore, it could be argued that the fact that the vehicles were "sent by Olson” implies that the vehicles were at Olson's place of business at some time prior to February 10, 1996. Although this is a viable possibility, it is pure speculation. It is also possible that Olson ordered a third party, such as the manufacturer, to send the vehicles to the location where they would be customized. Finally, even if the court could safely assume that the vehicles were at Olson's place of business prior to February 10, 1996, there is nothing in the record to establish that an agent of the Debtor was at the same location so as to create a situation whereby the Debtor exercised physical control over the vehicles.
. This information does not establish the location of the vehicles or agents of the Debtor. Nevertheless, this fact clearly establishes the date the Debtor acquired physical control over the vehicles.
. The Trustee also argues that under Michigan law a bailment relationship was created whereby one party delivers personal property to another in trust for a specific puipose. (Pl.'s Resp. to Mot. for Summ. J. Filed by Del., General Motors Acceptance Corporation at 6.) The court does not agree that bailment law bears upon the issue of possession. Either the Debtor did or did not receive possession of the vehicles prior to February 29, 1996. Whether the vehicles were delivered in trust for a specific purpose does not bear upon the issue of physical control. In essence, what the Trustee really argues is that legal ownership, and the authority to create a bailment, is tantamount to possession or physical control. Yet, as previously noted, legal ownership does not constitute possession or physical control. This is clear from the facts of Trott and Winnett. In neither case did the consummation of the sale contract give rise to possession. Instead, possession was based upon proof of physical delivery. In this proceeding, the earliest proof of such delivery is February 29, 1996. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492611/ | ORDER: (1) GRANTING MOTION TO REOPEN; (2) VACATING ORDER OF DISMISSAL; (S) MANDATING THE FILING OF SCHEDULES; AND (tí ORDERING THE APPOINTMENT OF A CHAPTER 11 TRUSTEE
ARTHUR N. VOTOLATO, Bankruptcy Judge.
Heard on June 25, 1997, on the Debtor’s Motion to Reopen this Chapter 11 ease which was dismissed on April 11, 1997, when the Debtor failed to show cause why the case should not be dismissed for failure to file schedules. Evidence adduced at the hearing regarding alleged, irregularities during the pendency and administration of the Chapter 11 case was sufficiently disconcerting that we will grant the Motion to Reopen, in order to have a second look at what happened.
The Debtor’s principal, Peter Belli, testified, and counsel for the Debtor represented to the Court that during the Chapter 11:(1) several creditors repossessed assets of the Debtor, without adequate notice, without Court authorization, and while the Debtor was not in payment default; and (2) the Debtor’s sub-lessor entered into a settlement agreement with the Rhode Island Airport Corporation (“RIAC”) terminating a lease with RIAC that was favorable to it, but disadvantageous to its sub-lessee (the Debt- or), and creditors. The Debtor alleges lack of notice and/or knowledge of all of these goings on, and the notice issue in general is a disputed question of fact. Based upon the entire record in this bankruptcy case, we find that the appointment of a Trustee is appropriate and necessary to investigate the actions taken by secured creditors, the Debtor, and others during the Chapter ll.1
Accordingly, the Order of Dismissal entered on April 11, 1997 is vacated, without prejudice, and the appointment of a Chapter 11 Trustee is ordered to investigate the propriety of all actions taken by the Debtor, the lessor, and any other persons or parties, and *204to provide the Court with a report and recommendation as to whether the case should remain under the aegis of the Bankruptcy Court, or whether the April 11,1997 dismissal order should stand. See Fukutomi v. United States Trustee (In re Bibo, Inc.), 76 F.3d 256, 258 (9th Cir.) cert. denied, — U.S. -, 117 S.Ct. 69, 136 L.Ed.2d 29 (1996) (bankruptcy court is permitted under Section 105 to sua sponte appoint a trastee). As part of said investigation we recommend that the Chapter 11 Trustee review the record of the June 25,1997 hearing, as well as the A.J. Flight Services file.
In addition, the Debtor, through its principal Peter Belli, is ORDERED to file all schedules within 10 days from the date of this Order. A continued status conference is scheduled for September 17, 1997, at 9:30 a.m., when the Chapter 11 Trustee should provide his/her report and recommendations. Evidence may be presented, if necessary, but only with reasonable notice and upon the filing of a joint pre-trial order.
. Mr. Belli also filed a Chapter 11 case for another company he owned, A.J. Flight Services. On March 6, 1997, that case was converted to Chapter 7 and Andrew Richardson, Esq., was appointed Chapter 7 Trustee. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492612/ | ORDER OF DISMISSAL
PER CURIAM.
There are two matters before the Court: (1) the response of the parties to an Order to Show Cause Why Appeal Should Not be Dismissed as Interlocutory, filed on July 25, 1997; and (2) The Appellant’s Request for Judicial Notice (“Request”). For the reasons set forth below, we conclude that this appeal must be dismissed as interlocutory, and deny the Request as moot.
BACKGROUND
Jerome Joseph (“Appellant”) is the plaintiff in an adversary proceeding against Stephen W. Lindsey, Sr. (“Appellee”). The Appellant purchased a judgment for over $1 million against the Appellee; the adversary proceeding involves the Appellant’s contention that this debt is nondischargeable.
During the course of the proceedings, the Appellee served the Appellant with Defendant’s Requests for Admission and Second Set of Interrogatories to Plaintiff Jerome Joseph (“Discovery R°onosts”). The Discovery Requests asked me Appellant to provide information regarding his admission to the practice of law, and to admit that he had been previously convicted of several crimes. As to all of these requests, the Appellant asserted the Fifth Amendment privilege against self-incrimination.
The Appellant then filed a Plaintiffs Motion for Issuance of a Protective Order with the Bankruptcy Court. The Appellant sought a determination that the Appellee was not entitled to the requested discovery, on the ground that it was not relevant to the adversary proceeding and that the discovery was requested for an improper purpose. The Appellant also asserted that his claim of the privilege against self-incrimination was proper. The Appellee opposed the motion, apparently on the ground that the evidence would be used for impeachment of the Appellant’s testimony, and in support of a motion for sanctions for filing a frivolous claim.
After a hearing, the Bankruptcy Court denied the requested protective order. The Court orally stated that it appeared that answering questions regarding prior convictions did not pose a risk of incriminating the Appellant, and that the information was discoverable. An order denying the protective order was entered on June 9, 1997. It is from this order that the Appellant appeals.
The Appellant’s Request for Judicial Notice requests that the Court take judicial notice of certain documents filed in the state court action related to the Appellant’s claim against the Appellee.
DISCUSSION
It is well settled that a trial court’s orders regarding discovery are interlocutory, not final, and therefore cannot be immediately appealed. See, e.g., Church of Scientology v. United States, 506 U.S. 9, 18 n. 11, 113 S.Ct. 447, 452 n. 11, 121 L.Ed.2d 313 (1992); United States v. Ryan, 402 U.S. 530, 532-33, 91 S.Ct. 1580, 1581-82, 29 L.Ed.2d 85 (1971); Graham v. Gray, 827 F.2d 679, 681 (10th Cir.1987); FTC v. Alaska Land Leasing, Inc., 778 F.2d 577, 578 (10th Cir.1985). “A party that seeks to present an objection to a discovery order immediately to a court of appeals must refuse compliance, be held in contempt, and then appeal the contempt order.” Church of Scientology, 506 U.S. at 18 n. 11, 113 S.Ct. at 452 n. 11. See Maness v. Meyers, 419 U.S. 449, 460, 95 S.Ct. 584, 592, 42 L.Ed.2d 574 (1975); Ryan, 402 U.S. at 532-33, 91 S.Ct. at 1581-82; Graham, 827 F.2d at 681; Alaska Land Leasing, 778 F.2d at 578.
*375“This method of achieving precompliance review is particularly appropriate where the Fifth Amendment privilege against self-incrimination is involved.” Maness, 419 U.S. at 461, 95 S.Ct. at 592 (footnote omitted). In Alaska Land Leasing, a nonparty asserted the Fifth Amendment privilege against self-incrimination in an ancillary proceeding to a civil case before the U.S. District Court for the Central District of California. The Tenth Circuit dismissed the appeal as interlocutory. “To perfect standing to appeal from a civil pretrial discovery order, a non-party'deponent must refuse to comply and submit to a contempt proceeding. Thereafter, an adverse contempt order is final and it may be appealed.” 778 F.2d at 578.
The collateral order doctrine does not apply here. One requirement of the collateral order doctrine is that the order must be effectively unreviewable on appeal from a final judgment. Boughton v. Cotter Corp., 10 F.3d 746, 749 (10th Cir.1993). Since the Appellant may obtain effective review by appealing any contempt order issued against him, the collateral order doctrine is not met. See Boughton, 10 F.3d at 749-50 (“This circuit has repeatedly held that discovery orders are not appealable under the [collateral order] doctrine.”). Cf. Ryan, 402 U.S. at 533-34, 91 S.Ct. at 1582-83 (although appeal from discovery orders is allowed in those eases where review would otherwise be unavailable, party could obtain full review by failing to comply and appealing any sanctions).
Nor should we grant leave to appeal under 28 U.S.C. § 158(a)(3). “Appealable interlocutory orders must involve a controlling question of law as to which there is substantial ground for difference of opinion, and the immediate resolution of the order may materially advance the termination of the litigation.” Personette v. Kennedy (In re Midgard Corp.), 204 B.R. 764, 769-70 (10th Cir. BAP 1997). Immediate review of this order will have no effect upon the duration of the litigation. As the Appellees have indicated, the purpose of the Discovery Requests relate only to the question of impeachment of the Appellant’s testimony and the seeking of sanctions. Whether the order is affirmed or reversed upon appeal will in no way settle the merits or shorten the litigation. Accordingly, interlocutory review should be denied.
Because this appeal must be dismissed, we conclude that the Request for Judicial Notice should be denied as moot.
CONCLUSION
For the foregoing reasons, it is HEREBY ORDERED THAT:
(1) This appeal is DISMISSED WITHOUT PREJUDICE.
(2) The Request is DENIED AS MOOT. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492614/ | ORDER ON MOTIONS FOR SUMMARY JUDGMENT
ALEXANDER L. PASKAY, Chief Judge.
THE MATTER under consideration in this Chapter 7 liquidation case is the dischargeability, vel non, of a debt owed by Aaron Smargon and his wife Donna Smargon (Debtors) to the United States of America (Government). The issue of dischargeability is -presented for this Court’s consideration in a Motion for Summary Judgment, filed by the Government, which contends that there are no. genuine issues of material fact and that the Government is entitled to a judgment, in the amount the Debtors are indebted to the Government for additional taxes, as a matter of law. The Government contends that this obligation is within the exception to discharge pursuant to Section 523(a)(1) of the Bankruptcy Code. Also under consideration is a Motion for Summary Judgment filed by the Debtors. The Debtors contend in their *1002Motion for Summary Judgment that there are no genuine issues of material fact and that the amount they are indebted to the Government for additional taxes is not excepted from the discharge and thus discharged. The relevant facts as they appear from the record are without dispute and can be summarized as follows.
By April 15, 1989, the Debtors filed their joint income tax return (Form 1040) for the tax year ending December 31, 1988. Although the 1988 return is not in evidence itself, it appears from the Declaration of Revenue Officer Ray Zacek that the Debtors claimed a refund in the amount of $411.71 on this 1988 return. (Govt. Exh. A to Motion for Summary Judgment). On June 28, 1991, after having audited the Debtors’ 1988 return, the IRS mailed a “Notice of Deficiency” (Notice) to the Debtors, informing them that they were liable for additional taxes for tax year 1988 in the amount of $4,409.00, plus interest and penalties. (PI. Exh. A to PL’s Affidavit in Opposition). In response to the Notice, the Debtors mailed the IRS their “Tax Payer Response to Proposed Change to 1988 Income Tax” (Response). Id. In the Response, the Debtors checked the box stating “total disagreement with the proposed changes.” Id. In addition, on September 1, 1991, the Debtors wrote to the United States Tax Court (Tax Court) requesting a redetermination of the claimed deficiency. (Pl. Exh. B to PL’s Affidavit in Opposition). In this letter, the Debtors sought information regarding the procedure for filing a petition.
On May 30, 1997, the Debtors filed Plaintiffs’ Motion for Leave to Supplement Record Under Advisement. (Doc. 28). On June 6, 1997, the Government filed its Response by the United States to Plaintiffs’ Motion for Leave to Supplement Record. (Doc. 30). In light of the Government’s Response, this Court heard counsels’ oral arguments on June 18, 1997 and granted the Plaintiffs’ Motion for Leave to Supplement Record Under Advisement. In effect, the record was supplemented with another letter dated September 1, 1991 from the Debtors to the Tax Court. (Pi’s Exh. A to PL’s Motion for Leave to Supplement). This letter, and not the letter attached to the Plaintiff’s Affidavit in Opposition, is in fact the true and correct copy of the letter sent to the Tax Court by the Debtors. This letter was different from the first one in that it asks the Tax Court to “accept this letter as a request for a petition,” rather than just formally requesting information as did the original letter submitted to this Court.
On September 23, 1991, the Tax Court docketed the letter dated September 1, 1991 as a Petition and ordered an Amended Petition to be filed along with the payment of the filing fee on or before November 25, 1991. (Joint Exh. Govt. B to Motion for Summary Judgment and PL C to PL’s Affidavit in Opposition). The Debtors did not respond to these instructions, resulting in the Tax Court’s dismissal of the case for lack of jurisdiction on January 22, 1992. (Govt. Exh. C to Motion for Summary Judgment).
On April 29, 1992, the Debtors filed their Chapter 7 Petition for Relief in the Bankruptcy Court. Under ordinary circumstances, the IRS has three years from the filing date of a return in which to make a tax assessment. 26 U.S.C. § 6501(a). Without taking into account the tolling of the limitations period, the three year period for the assessment of any additional taxes with respect to the Debtors’ 1988 tax year would have expired on April 15, 1992. However, the running of the period of limitations for assessment of taxes would be tolled by the commencement of a proceeding before the Tax Court pursuant to 26 U.S.C. § 6503(a)(1) which provides,
(a)(1) The running of the period of limitations provided in section 6501 or 6502 ... on the making of assessments or the collection by levy or a proceeding in court, in respect of any deficiency as defined in section 6211 ... shall ... be suspended for the period during which the Secretary is prohibited from making the assessment or from collecting by levy or a proceeding in court (and in any event, if a proceeding in respect of the deficiency is placed on the docket of the Tax Court, until the decision of the Tax Court becomes final), and for 60 days thereafter.
(emphasis added).
In effect, the statute of limitations would have been tolled from September 23, 1991 *1003until March 23, 1992, a period of six months, provided their letter sent to the Tax Court was, as a matter. of law, a “Petition” as docketed.
Approximately one month after the statute of limitations began running again, the Debtors filed their Chapter 7 Petition. As a result of this filing, the statute of limitations was once again tolled, pursuant to 26 U.S.C. § 6503, because the IRS was prohibited from making an assessment due to the automatic stay. Thus, the period of limitations was tolled for approximately an additional nine months, the period of time in bankruptcy plus an additional sixty days thereafter.
It is the Debtors’ contention that they never filed a Petition with the Tax Court, that the period of limitations had run, and that the 1988 tax liability should not be excepted from discharge pursuant to 11 U.S.C. §§ 523(a)(1)(A) and 507(a)(8)(A)(iii). While the Debtors admit to writing to the Tax Court, they contend that their letter to the Tax Court should not be treated as a Petition and that, therefore, the period of limitations for assessment should not be tolled.
However, case law is clear that letters mailed to the United States Tax Court, expressing an intention to seek a determination, are to be treated as Petitions for a redetermination of an asserted deficiency. The Tax Court refers to such submissions as imperfect petitions. See Ernest B. Holt and Lessie L. Holt v. Comm’r of Internal Revenue, 67 T.C. 829, 1977 WL 3653 (1977); John L. Brooks and Susanna L. Brooks v. Comm’r of Internal Revenue, 63 T.C. 709, 1975 WL 3106 (1975) (rejecting government’s attempt to have the cases dismissed for want of jurisdiction) Moreover, the language of 26 U.S.C. § 6503(a)(1) is clear and unambiguous. It states in plain language that the act which starts to toll the statute of limitations is the act of docketing the letter or the submission to the Tax Court.
In the present instance, it is without dispute that the Debtors’ letter was “placed on the docket.” Thus, the period of limitations was tolled, pursuant to the strict interpretation of 26 U.S.C. § 6503(a)(1), and the IRS’s assessment on April 6, 1993 was timely. Further, the 1988 tax liability should be excepted from discharge pursuant to 11 U.S.C. § 523(a)(1)(A).
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the Defendant’s Motion for Summary Judgment filed by the Government be, and the same is hereby, granted. It is further
ORDERED, ADJUDGED AND DECREED that the Plaintiffs’ Motion for Summary Judgment filed by the Debtors be, and the same is hereby, denied.
A separate Final Judgment will be entered in accordance with this opinion. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492616/ | *483
MEMORANDUM OPINION AND ORDER
DOUGLAS O. TICE, Jr., Bankruptcy Judge.
Hearing on Fireman’s Fund Insurance Company’s (“FFIC”) motion to dismiss defendants’ Nations Title Insurance of New York, Inc., Atlantic Residential Mortgage Corporation, Mortgage Access Corporation, and Cityscape Corporation (“Nations Title defendants”) claims of bad faith was held on July 30, 1997. Following oral argument the court took the matter under advisement and for the ' reasons stated below will grant FFIC’s motion.
Facts
FFIC is the insurer under a Miscellaneous Professional Liability policy issued to Thomas H. Dameron and additional named insureds St. Asaph Lawyers Title Company, Inc., Mid-Atlantic Title and Escrow Services, Inc., Beneficial Settlement Services, Inc., and Choice Settlement Services, Inc. (hereinafter, “insureds”).1 FFIC filed an action in this court seeking a declaratory judgment that it was not obligated to defend or indemnify the insureds with respect to the district court lawsuit, naming the Nations Title defendants as necessary parties.
The Nations Title defendants filed a counterclaim seeking a declaration that FFIC must defend and indemnify the insureds. In the counterclaim, the Nations Title defendants also seek recovery of attorney’s fees and costs as well as punitive damages for FFIC’s bad faith refusal to defend and/or indemnify the insureds.
FFIC filed a subsequent motion to dismiss only that portion of the Nations Title defendants’ counterclaim dealing with bad faith and punitive damages. FFIC challenges the Nations Title defendants’ standing under Virginia law to bring a bad faith action against FFIC.
The Nations Title defendants claim there is a well-recognized duty owed by insurers to injured third parties which provides a right to an independent action against an insurer.2
Discussion and Conclusions of Law
In Virginia, a third-party beneficiary to a contract is entitled to enforce the terms of a contract and is subject to defenses arising out of it. Va.Code § 55-22; see First Sec. Fed. Sav. Bank, Inc. v. McQuilken, 253 Va. 110, 480 S.E.2d 485 (1997); Levine v. Selective Ins. Co. of Am., 250 Va. 282, 462 S.E.2d 81 (1995). However, this statute is not one which confers an automatic right to a direct action by a third-party beneficiary against an insurer.3 Rather the doctrine is subject to an important limitation; the third party must show that the parties to the contract clearly and definitely intended at the time of contracting to confer a benefit on him. See American Bankers Ins. Co. of Florida v. Maness, 101 F.3d 358 (4th Cir.1996); Professional Realty Corp. v. Bender, 216 Va. 737, 222 S.E.2d 810 (1976); Sinicrope *484v. Black Diamond Sav. & Loan Ass’n (In re Sinicrope), 21 B.R. 476 (Bankr.W.D.Va.1982).
No evidence is before the court which would establish the Nations Title defendants as intended beneficiaries to the insurance contract between FFIC and the original named insureds under § 55-22. Without such evidence, the Nations Title defendants lack proper standing to bring an action alleging bad faith by FFIC. See Kelly Health Care, Inc. v. Prudential Ins. Co., 226 Va. 376, 309 S.E.2d 305 (1983).
In addition, most states which have considered the issue have not allowed a third-party claim against the insurer of an adverse party in the absence of a specific statutory provision. See Wilson v. Wilson, 121 N.C.App. 662, 665, 468 S.E.2d 495, 497 (1996) (citing cases from a majority of jurisdictions). Of the cases cited by the Nations Title defendants in support of their argument, most focus on the rights of the insured, not of a third party, to bring an action against the insurer. See, e.g., Aetna Cas. & Sur. Co. v. Price, 206 Va. 749,146 S.E.2d 220 (1966). In the cited eases in which the court did grant a third party an independent right to proceed, a statute from a jurisdiction other than Virginia or another non-applicable statute controlled the outcome. See, e.g., Maryland Casualty Co. v. Pacific Coal & Oil Co., 312 U.S. 270, 61 S.Ct. 510, 85 L.Ed. 826 (1941) (applying an Ohio statute which granted a right to proceed against an insurance company that failed to satisfy a judgment within thirty days); Federal Kemper Ins. Co. v. Rauscher, 807 F.2d 345 (3d Cir.1986) (applying the Federal Declaratory Judgment Act, 28 U.S.C. § 2201).
Lack of standing to bring a cause of action is a threshold issue that warrants dismissal. See Carver v. Brecher (In re Carver), 144 B.R. 643, 648 (S.D.N.Y.1992); Hutzelman v. U.S. Farmers Home Administration (In re North East Projects, Inc.), 133 B.R. 59, 60 (Bankr.W.D.Pa.1991).
IT IS THEREFORE ORDERED that the Nations Title defendants’ claim of bad faith requesting punitive damages and attorneys’ fees is dismissed.
. The Nations Title defendants filed suit in the United States District Court for the Eastern District of Virginia, Alexandria Division, against Thomas H. Dameron, Larry W. Lauffer, an alleged principal of one or more of the named or additional named insureds, and others for the alleged mishandling and improper certification of certain mortgages taken on property owned by Thomas Dameron. The insureds tendered the district court lawsuit to FFIC for defense and indemnification under the Professional Liability policy. FFIC denied coverage for defense and indemnification.
. The Nations Title defendants also urge that the claim be allowed since Dameron has filed for bankruptcy and therefore has little or no interest in contesting FFIC's complaint. The court finds this argument to be without merit since the Chapter 11 trustee, on behalf of Dameron and the other insureds, has filed and is pursuing a counterclaim seeking declaratory judgment against FFIC for defense and indemnification in the district court lawsuit and damages for bad faith denial of coverage. The trustee’s counterclaim is identical to the one filed by the Nations Title defendants.
.Virginia does not have a so-called "direct action” statute which would allow any party injured by an insured to bring an action directly against the insurer. Hill v. Liberty Mut. Ins. Co., 453 F.Supp. 1342, 1346 n. 2 (E.D.Va.1978). The only closely analogous provision is Virginia Code § 38.2-2200 which allows a direct third-party action against an insurer only under policies insuring against personal injury, death or property damage and then only if the third party already holds an unsatisfied judgment against the insured. See Vermont Mut. Ins. Co. v. Everette, 875 F.Supp. 1181, 1185 (E.D.Va.1995). Section 38.2-2200 is not applicable in the present situation. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492617/ | ORDER ON MOTIONS FOR SUMMARY JUDGMENT
ALEXANDER L. PASKAY, Chief Judge.
THIS IS a Chapter 7 liquidation case and the matters under consideration are three Motions for Summary Judgment filed by the United States of America (Government); V. John Brook (Trustee); and Richard E. Morgan and Mary A. Morgan (Debtors), respectively. In order to place the Motions in their proper perspective, it is helpful to briefly recap the procedural background of this adversary proceeding, originally styled, The First National Bank of Mt. Dora, Florida (Bank) v. V. John Brook, Jr., Chapter 7 Trustee, Richard E. Morgan, Mary A. Morgan, and Joseph Morgan, Defendants. On July 6,1995, the Bank filed its Complaint for Interpleader. On August 9, 1996, this Court entered an Order granting leave to the Government to intervene. The Order was entered on October 16, 1996, after this Court overruled the Debtor’s objection to the intervention by the Government. The Order also granted thirty days to the Government to file cross-claims against the Debtors and the Trustee, and thirty days to the Debtors to file a cross-claim against the Trustee and the Government.
On October 30, 1996, the Debtors filed their Cross-Claim against the Government. On November 13, 1996, the Government filed its Cross-Claim against the Trustee and the Debtors. On November 15, 1996, the Trustee filed his Cross-Claim against the Debtors. On November 30, 1996, the Bank deposited the funds in controversy in the Registry of this Court pursuant to an Order entered by this Court on July 31, 1995, granting partial summary judgment of interpleader in favor of the Bank. Thus, left for consideration are the competing claims to the funds in the Registry by the Government, the Trustee, and the Debtors.
The controversy presented for this Court’s consideration is the three Motions for Summary Judgment described earlier, in which each of the Movants contend that there are no genuine issues of material fact and that each is entitled to a judgment in their respective favors as a .matter of law. In its Motion, the Government contends that the Debtors are indebted to the Government for unpaid, assessed income tax liabilities for the years 1992 up to and including 1995; that as a matter of law, the Government has a lien on all assets of the Debtors, including the funds held by them in the Bank which are now deposited in the Registry; and that the controlling facts are not in dispute. Therefore, the Government contends that its Motion should be granted as a matter of law. In his Motion, the Trustee contends that he and his wife obtained a judgment against the Debtor, Richard Morgan, for slander of title; that in aid of execution of this judgment he garnished the funds which are in the Registry; that he has an agreement with the Government as to the respective priorities of the Trustee and the Government; and that based on the undisputed facts he acquired a valid lien on the funds vis-a-vis the Debtors. Therefore, the Trustee contends that his Motion for Summary Judgment should be granted.
*611Finally, the Debtors, in their Motion consisting of fifteen separate paragraphs, contend inter alia that this Court erred in permitting the Government to intervene due to “lack of knowledge”; that there is no such entity as the “Internal Revenue Service” set forth in the Constitution nor in any law written by Congress; that the assessment was improper because it was not signed by an “assessment officer”; that the Government lost all of its immunity (or sovereignty) when it filed a claim in the Bankruptcy Court; that the Proof of Claim filed contains an illegible signature; that the Proof of Claim is not supported by any documents; that the “United States of America nor the Internal Revenue Service” addressed the proof to a Table of Authorities provided by the Debtor; and that the Government successfully convinced the Court that it acquired a new client, the Southern Bank, even though “the Southern Bank sent no representative to a hearing.” In addition to the foregoing, the Debtors also set forth various and sundry statements, none of which are remotely relevant to their Motion for Summary Judgment. Therefore, it is unnecessary to either recite or paraphrase them.
The Debtors in the Wherefore Clause of their Motion request the following relief:
1. Order the monies in the Registry to be paid over to the Debtors.
2. Order any monies held in the estate to be paid over to the Debtors.
3. Order the sanction of the United States of America for representing the Southern Bank of Central Florida.
4. Order the non-existent “Internal Revenue Service” sanctioned for its entry of a non-perfect document described as “Form 10.”
5. Order an award of justieable (sic) money to the Debtors for the Department of the Treasury/Internal Revenue Service; as described by Title 18 United States Code; Sections 152 and 3571; for the violation in not submitting assessment forms signed by an “assessment officer” with properly delegated (published in the Federal Register) authority to sign such a documents.
6.Issue any other orders deemed justica-ble (sic).
In addition, the Debtors also filed a document entitled, “Objections to the Government’s and Brook’s Motions for Summary Judgment.” Neither the Rules which govern adversary proceedings nor any other rule of procedure provide for an “objection to summary judgment.” Nevertheless, this Court considers the same as a response and written argument against the Motions filed by the Government and the Trustee. Stripping the document of largely meaningless and irrelevant rhetoric, the Debtors’ argument presents nothing new and is, in essence, a rehash of the matter set forth in their Motion for Summary Judgment, reiterating a twenty-five page document with some reprint from the Internal Revenue manual and citations which are claimed to support the proposition urged by the Debtors. -It shall suffice to note that the foregoing contentions of the Debtors are merely restatements of the old refrain that the Internal Revenue Service (IRS) does not exist; that there is no obligation to pay income tax; that the system is voluntary; that there is nothing in the Internal Revenue Code providing that any part of earnings known as wages and commissions is regulated; that no one has an obligation to file Form 1040; and that there was no valid assessment of unpaid taxes against the Debtors.
The-one and only issue involves the validity, vel non, of -the tax and the garnishment hens claimed by the Government and the Trustee respectively. The facts relevant to this issue as they appear from the record can be summarized as follows.
It is without dispute that the Debtors did not file an income tax return (Form 1040) for the tax years of 1993, 1994, and 1995. On April 10, 1995, the IRS addressed a request to Richard Morgan urging him to file his tax return for the tax year ending December 31, 1993. On March 18, 1996, the IRS informed Mary E. Morgan that she failed to file her tax returns for 1993, 1994, and 1995, and urged her to file her tax returns. On June 3, 1996, the IRS requested that both Debtors contact the IRS within ten days and stated that if they failed to do so, the IRS would *612proceed with other action to bring them into compliance with the tax laws. (Govt. Exh. 7).
On June 10, 1996, Richard Morgan wrote to N. Kenyon, Tax Auditor, an employee of the IRS, and informed Mr. Kenyon that he does not meet the definition of a person who is required to file any Form 1040. Mr. Morgan also demanded that the IRS furnish him with an authoritative regulation to show that he is required to file a tax return, and send him any information the IRS had as to what his gross or taxable income was for the years in question and from what source derived, plus additional documentation to show Mr. Kenyon’s authority to send the letters (Govt. Exh. 8). Mrs. Morgan sent an identical letter to Mr. Kenyon.
After concluding the audit, the IRS made a jeopardy assessment of the federal income tax liabilities of Mr. Morgan for the years 1993, 1994, and 1995 in the total amount of $138,286.97 (Certificate of Assessment and Payments) (Govt. Exh. 9). On July 24,1996, the IRS made a jeopardy assessment of Mrs. Morgan’s federal income tax liability for the years 1993, 1994, and 1995 in the total amount of $97,703.60 (Certificate of Assessment and Payments, Govt. Exh. 10). On July 24, 1996, the IRS mailed a Notice of Jeopardy Assessment and Right to Appeal (Govt. Exhs. 11, 12). The Notice was sent to both Mr. and Mrs. Morgan.
On July 14, 1996, the IRS filed a Notice of Federal Tax Lien (Form 668(Y)) in the amount of $138,286.97 based on the tax liability assessed against Mr. Morgan. The Notice was filed in the Office of the County Comptroller. (Govt. Exh. 13). In addition, on July 14, 1996, the IRS served Notices of Levy upon the Clerk of the Bankruptcy Court, one concerning the tax liability of Mr. Morgan, the other of Mrs. Morgan (Govt. Exh. 14).
On May 18, 1995, the Debtors filed their joint Petition for Relief under Chapter 7 of the Bankruptcy Code. (Doc. No. 1). On their Schedule of Assets, the Debtors listed a joint checking account at the First National Bank of Mount Dora, Florida (Bank), stating a balance of $100,000.00. It is without dispute that on the date the Debtors filed their Petition they had three separate accounts in the same Bank: Accounts Numbers 0220338453, 02220338024, and 220338013, respectively. At the time the Debtors filed their Petition, Mr. and Mrs. Morgan were the only signatories on these accounts. (Govt. Exh. 2). On June 19, 1996, after the commencement of the case, the Debtors amended their signature cards and added Joseph M. Morgan, their son, as an additional signatory. (Govt. Exh. 3). There is nothing in this record and it is not contended by the Debtors that Joseph Morgan contributed to the funds on deposit in the Bank.
In due course, V. John Brook was appointed as Chapter 7 Trustee and placed in charge of the administration of the estate of the Debtors. On June 28, 1995, the Trustee made a written demand on the Bank to turn over all funds in the accounts maintained by the Debtors. (Govt. Exh. 4), On July 5, 1995, Joseph Morgan made a written demand on the Bank and requested that the funds in the accounts be wire-transferred to the Bank of Mississippi, Tupelo, Routing No. 0653-00486, Account Number 22379440. (Govt. Exh. 5). Faced with the two competing claims to the funds in the three accounts, the Bank filed its Complaint for Interpleader. (Doc. No. 11). The Government was not named initially by the Bank as a defendant. On July 31,1995, this Court entered a Partial Final Judgment in favor of the Bank, directing the Bank to deposit in the Registry all funds in the three bank accounts. (Doc. No. 23). On August 17,1995, the Bank deposited in the Registry in the amount of $125,943.49 in compliance with the Partial Final Judgment. (Adv. Doc. No. 26).
On July 27, 1995, the Debtors converted their Chapter 7 case to a Chapter 13 case, (Doc. No. 12), but on September 12,1995, the Chapter 13 case was reconverted to a Chapter 7 case on the motion filed by the Trustee (Doc. No. 53).
On August 28, 1995, the IRS filed a Proof of Claim in the amount of $60,322.27. (Govt. Exh. 6). The Proof of Claim was filed as secured based on the federal tax hens for assessed and unpaid income tax liability for the years 1990 through 1992, inclusive. On November 6, 1995, this Court dismissed the *613Debtor’s Chapter 7 case, retaining jurisdiction to determine fees and costs and to order the disbursement of the funds being held by the Clerk of the Bankruptcy Court. Furthermore, it is understood by all parties that the Court reserved jurisdiction to determine the respective right of the claimants to the funds deposited by the Bank in the Court’s Registry. (Doc. No. 69).
On May 8, 1996, after the case had been dismissed, the Debtors filed an objection to the Proof of Claim filed by the IRS. On May 22, 1996, this Court overruled the objection and after the IRS collected the assessed income tax liabilities of the Debtors for years 1990 through 1991, this Court allowed the Government’s claim against Mr. Morgan in the amount of $886.70, and against Mrs. Morgan in the amount of $17,715.23. (Doc. No. 106).
As noted earlier, on October 16, 1996, this Court granted leave to the Government to intervene in the interpleader filed by the Bank. The Government filed its Motion to Intervene, (Adv. Doc. No. 42), coupled with a Cross-Claim, (Adv. Doc. No. 44), as well as a response to the Cross-Claim filed by the Debtors, (Adv. Doe. No 43). On January 31, 1997, this Court granted the Government’s Motion to Intervene. (Adv. Doc. No. 53). Although this Court granted leave to Joseph Morgan to file a cross-claim asserting his claim against the fund in the Registry, he failed to file a cross-claim within the time fixed by this Court. Consequently, Joseph Morgan no longer has any claim against the funds in the Registry. The Government in its Cross-Claim asserted that the Government has a valid tax lien securing the Debt- or’s unpaid assessed federal income tax liability for the tax years of 1993, 1994, and 1995 in the total amount of $254,000.00, made up of the amount of the liability of Mr. Morgan and the amount of the liability of Mrs. Morgan in the amount of $103,539.95, plus interest and statutory additions.
The Trustee and his wife are the fee simple owners of their homestead, located in Pinellas County, Florida. There is no question that the Debtor was aware that the Trustee’s residence in Pinellas County was his properly established homestead. Notwithstanding, Mr. Morgan recorded in the Office of the Clerk of the Circuit Court of Pinellas County, in O.R.Book 9190, Page 1845, an instrument dated December 12, 1995, claiming a “common law” lien, or a “commercial lien” on the Trustee’s homestead.
In order to remove this cloud on the title on his homestead, the Trustee engaged the services of an attorney who filed a writ against Mr. Morgan to quiet title, for slander of title and also sought injunctive relief. On July 3, 1996, the Circuit Court in and for Pinellas County, Florida, entered its order on the Trustee’s Motion for Summary Judgment, finding that the property involved was in fact the homestead of the Trustee, that the Notice of Lis Pendens recorded in the Public Records of Pinellas County is a cloud on the Trustee’s title and shall be expunged. Furthermore, based on.Fla.Stat. § 57.105, the Court entered a judgment in favor of the Trustee and against the Debtor, Mr. Morgan, for $1,950 together with taxable cost in the amount of $210.50, or a total of $2,160.50 bearing a rate of interest at 12% per annum.
As the Debtor had not satisfied the Judgment within the time ordered by. the Court, the Trustee filed a Motion- for Writ of Garnishment on July 15,1996. On July 18,1996, the Clerk of the Circuit Court issued the Writ which was served on the Clerk of the Bankruptcy Court on July 14, 1996. In due course, the Government filed an Answer to the Writ on behalf of the Government and the Clerk of the Bankruptcy Court. In its Answer, the Government stated on behalf of the Clerk that the Clerk is not indebted to Mr. Morgan, who is merely a stakeholder of the funds. On December 16, 1996, Christine R. Brook, the Trustee’s spouse, assigned her interest in the Judgment to the Trustee (State Court Exhibit C). The Government and the Trustee agreed as to the respective priority of their claims to the fund. This leaves for consideration the dispute between the Government, the Trustee, and the Debtors.
GENERAL PRINCIPLES GOVERNING SUMMARY JUDGMENTS
Motions for summary judgment are governed in adversary proceedings by F.R.B.P. *6147056, which adopted Fed.R.Civ.P. 56. Fed.R.Civ.P. 56 is an integral part of federal practice and was designed to secure a just, speedy, and inexpensive determination of controversies where the relevant facts are not in dispute. Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). It is well established that it is appropriate to dispose of the controversy
if the pleadings, depositions, answers to interrogatories, and admissions on file, together with 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.
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986).
It is clear that the moving party has the burden to establish not only the absence of any genuine issue of material fact, but also that the controlling law supports, the claim and the relief sought. Celotex v. Catrett, supra; Adickes v. S.H. Kress & Co., 398 U.S. 144, 157, 90 S.Ct. 1598, 1608, 26 L.Ed.2d 142 (1970); Sweat v. Miller Brewing Co., 708 F.2d 655 (11th Cir.1983). To assure that the non-moving party receives a fair consideration of its position and especially its right to a plenary disposition of the controversy if there are genuine issues of material facts, the underlying facts and all reasonable inferences must be viewed in a light most favorable to the non-moving parties. Matsushita Electrical Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). It is equally clear, however, that the non-moving party may not rely on mere allegations or denials in the pleadings. Instead, it must set forth specific facts in affidavits or through competent evidence that there are genuine issues of material facts which require a resolution by trial.
This Court is satisfied that there are no disputed facts which would prevent the disposition of the conflicting claims of the Government and the Debtors by summary judgment. The Government made repeated efforts to secure the tax returns for the years in question and the Debtors did not file the tax returns for the years in question. It is equally without dispute that the Government sent and the Debtors received the notices of the deficiency and the notice of assessments and demand for payment; that they failed and refused to pay the amount found to be due and assessed for the years in question; that the Government made a jeopardy assessment against Mr. Morgan for the years 1993, 1994, and 1995 in the total amount of $138,286.97 and made a jeopardy assessment against Mrs. Morgan for the unpaid taxes for the same years in the amount of $97,793.60; and that the Notice of Jeopardy Assessment and Right to Appeal, along with an explanation of the income tax determination and demand for payment, were sent to both Debtors.
It is clear that the moment the assessment is made a federal tax lien arises, and shall continue until the liability for the tax assessed is satisfied or becomes unenforceable due to lapse of time. 26 U.S.C. § 6322. The tax lien as a matter of law becomes a valid charge on all properties of the taxpayer.
The Debtors, who do not deny the material facts and albeit do not expressly concede the absence of any genuine issues of material fact basically dispute that: (1) they are required to pay income tax; (2) the IRS is an existing entity with power to make the assessment; and (3) that there is a valid easement because there is nothing in this record to show an assessment signed by an “assessment officer.” The Debtors, therefore, contend that the Government never acquired any valid enforceable tax lien on the funds which were on deposit in the Bank, and that the Debtors are entitled to all the funds in the Registry.
Section 6201 of the Internal Revenue Code authorizes the Secretary of Treasury, or his delegate, to assess all taxes, including interest and additional taxes imposed by the Code. The assessment is made by “recording the liability of the taxpayer in the Office of the Secretary in accordance with the rules and regulations prescribed by the Secretary.” 26 U.S.C. § 6203. While it is true that in the present instance the actual assessments are not part of this record, the Government filed a Certificate of Assessment and Payments. It is recognized that such a *615certificate is presumptive proof of a valid assessment. United States v. Chila, 871 F.2d 1015, 1018 (11th Cir.1989), quoting United States v. Dixon, 672 F.Supp. 503, 505 (M.D.Ala.1987) aff'd, 849 F.2d 1478 (11th Cir.1988). See also Freck v. Internal Revenue Service, 37 F.3d 986, 991-92 n. 8 (3d Cir.1994) Long v. United States, 972 F.2d 1174, 1181 (10th Cir.1992). Moreover, the Debtors failed to challenge the IRS’s determination of their tax liability before it was assessed by filing a timely petition with the U.S. Tax Court. 26 U.S.C. § 6213. Therefore, the assessment was timely made. The Debtors had a right to challenge the correctness of the notice of deficiency issued after the jeopardy assessment of their 1993,1994, and 1995 tax liabilities by filing a timely petition in the U.S. Tax Court. 26 U.S.C. § 6961(b). While they did challenge the jeopardy assessment in the U.S. District Court, the jurisdiction of the District Court is limited to a review of the reasonableness of the assessment. Because they did not file a petition in the Tax Court within ninety days of the receipt of the notice of deficiency, the deficiency became assessable, 26 U.S.C. § 6213(c), regardless of the jeopardy assessment procedure. Humphreys v. United States, 62 F.3d 667 (5th Cir.1995). Lastly, while the Government may be named as a party in an interpleader action, the taxpayer cannot challenge the underlying tax assessment. Stoecklin v. United States, 943 F.2d 42, 43 (11th Cir.1991); Robinson v. U.S., 920 F.2d 1157, 1161 (3d Cir.1990); Schmidt v. King, 913 F.2d 837, 839 (10th Cir.1990). The only litigation which may be brought under 28 U.S.C. § 2410 is to challenge the procedural validity of the federal tax lien and the taxpayer may not attack the merits of the underlying assessment.
Based on the foregoing, this Court is satisfied that there is no dispute that the assessment has been made; that the Debtors failed and refused to pay the taxes assessed; and that as a result a tax lien arose against all properties of the Debtors, including the funds which were on deposit in the Bank. There being no genuine issues of the material fact, the Government is entitled to an Order granting its Motion for Summary Judgment vis-a-vis the Debtors, and based on the stipulation by the Trustee, its tax lien is superior to the claim of the Trustee, but only to the extent and consistent with the stipulation.
MOTION FOR SUMMARY JUDGMENT BY THE TRUSTEE
The facts relevant to the Trustee’s Motion are equally without dispute. The validity of the Judgment obtained by the Trustee in the State Circuit Court is not in dispute and neither is the fact that the Trustee obtained a Writ of Execution which was served on the Clerk of the Bankruptcy Court. The only question remaining is whether the garnishment lien did attach to the funds while the funds were in custodia legis.
In light of the fact that the Chapter 7 ease has been dismissed, and although ordinarily any property remaining would be returned to the Debtor, the estate as such has no further interest in the property. However, because it is understood that this Court retained jurisdiction over the adversary proceedings in which competing claims to the funds deposited in the Court’s Registry have been asserted by all parties in interest, this Court is satisfied that it is appropriate to consider the validity of the garnishment lien asserted by the Trustee. Based on the foregoing, undisputed record this Court is satisfied that the Trustee acquired a garnishment lien on the funds in the Registry, albeit junior to the tax lien of the Government. Since there are no genuine issues of material fact, the Trustee’s Motion for Summary Judgment should be granted.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that Motion for Summary Judgment filed by the Government be, and the same is hereby, granted.
It is further
ORDERED, ADJUDGED AND DECREED that the Motion for Summary Judgement filed by the Trustee be, and the same is hereby, granted.
It is further
*616ORDERED, ADJUDGED AND DECREED that the Motion for Summary Judgment filed by the Debtors be, and the same is hereby, denied.
A separate final judgment will be entered in accordance with the foregoing. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492619/ | MEMORANDUM OPINION
DANA L. RASURE, Chief Judge.
On July 14, 1997, the Amended Complaint of the Chapter 7 Trustee against Defendants Worley and Peoples Bank (the “Trustee’s Amended Complaint”) came on for Trial. The Trustee, Steven W. Soulé (“Soulé” or the “Trustee”), appeared and was represented by Andrew R. Turner. Melinda J. Martin appeared on behalf of Donald L. Worley *12(“Worley”). Richard D. Mosier appeared on behalf of Peoples National Bank of El Reno (“Peoples Bank”). The Trustee asserts the following causes of action against Worley and Peoples Bank: (1) avoidance of fraudulent transfers; (2) avoidance of unauthorized post-petition transfers; and (3) unjust enrichment. This Court has jurisdiction over the Trustee’s Amended Complaint pursuant to 28 U.S.C. § 1334(a) and 28 U.S.C. §§ 157(a), (b)(2)(A), (E), (H), and (0). The Court, having heard the testimony presented and arguments of counsel, having reviewed the exhibits admitted and the relevant legal authorities, and being fully advised, makes the following findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052.
FINDINGS OF FACTS
On September 7, 1994, Craig A. Coulter (“Coulter”) and Carolyn J. Coulter (Coulter and Carolyn J. Coulter sometimes collectively referred to as “Debtors”) filed a Petition under Chapter 11 of the United States Bankruptcy Code. Coulter assumed the responsibilities of the debtor-in-possession as provided in Section 1107 of the Bankruptcy Code.
On May 6,1995, Coulter, while a debtor-in-possession under Chapter 11, opened a checking account at State Bank & Trust, N.A. (“State Bank”) in the name of “Craig A. Coulter DBA TRIEXCO,” account number 900064153 (the “Account” or “Coulter’s Account”).1 The document which Coulter executed to open the Account authorized' State Bank to pay checks drawn on the Account and to charge the Account for the amount of such checks. To fund the Account, Coulter transferred $10,000.00 from another account he maintained at State Bank. Coulter did not inform State Bank that he was a debtor-in-possession under Chapter 11 of the United States Bankruptcy Code, nor did he disclose to the Court, the office of the United States Trustee, or any of the creditors that he had opened the Account.
In late February or early March of 1996, Coulter advised Worley that Triexco, Inc. desired to purchase Worley’s interest in the Stone Bluff Waterflood Project, an oil and gas project located in Wagoner County, Oklahoma (the “Stone Bluff Waterflood”). Worley testified that the terms of the purchase were that Triexco, Inc. would immediately pay $80,000.00 to Worley and that Triexco, Inc. would take possession of the Stone Bluff Waterflood. The $80,000.00 was to be paid as follows: $50,000.00 to Worley personally and $30,000.00 to Peoples Bank in partial payment of Worley’s indebtedness to Peoples Bank which was secured by a mortgage on oil and gas interests (some of which were included in the Stone Bluff Waterflood) (‘Worley’s Debt”). In addition, within ninety days, Triexco, Inc. was to pay the balance of Worley’s Debt and an outstanding bill for chemicals used on the Stone Bluff Water-flood.
On March 6, 1996, Coulter wrote two checks on the Account in partial payment for Worley’s interest in the Stone Bluff Water-flood. Check number 1130 was payable to Worley in the amount of $50,000.00 and check number 1129 was payable to Peoples Bank in the amount of $30,000.00 (collectively the “Two Cheeks”). On March 6,1996, Coulter’s Account had a balance of only $2,139.94.2 Coulter, however, represented to State Bank that he was expecting a wire transfer of funds from Europe and requested that State Bank pay the Two Checks.
On March 6, 1996, Worley deposited check number 1130 into an account at Kingfisher Bank & Trust Co. (“Kingfisher Bank”) belonging to his son, Donald L. Worley, Jr., to pay a debt Worley owed to his son. Later that day, Kingfisher Bank presented check number 1130 to the Federal Reserve Bank for payment. On March 8, 1996, State Bank received cheek number 1130 and debited Coulter’s Account in the amount of $50,-000.00. As a result of the $50,000.00 debit, *13Coulter’s Account had a negative balance of $47,890.06 on March 8, 1996. See Exhibit A. Because State Bank anticipated that the promised wire transfer would provide sufficient funds to pay cheek number 1130, State Bank elected not to dishonor the check by its statutory midnight deadline of March 9,1996.
On March 7,1996, Peoples Bank presented cheek number 1129 to the Federal Reserve Bank for payment. On March 11, 1996, State Bank received cheek number 1129 and debited Coulter’s Account in the amount of $30,000.00. As a result of the $30,000.00 debit, Coulter’s Account reflected a negative balance of $77,920.06 on March 11,1996. See Exhibit A. Again, notwithstanding the lack of funds in Coulter’s Account, State Bank elected not to dishonor check number 1129 by its statutory midnight deadline of March 12, 1996.
State Bank never received the wire transfer of funds promised by Coulter.
On March 15, 1996, State Bank advised Peoples Bank and Kingfisher Bank by telephone of its intent to dishonor the Two Checks and returned the Two Checks to Peoples Bank and Kingfisher Bank. Also on March 15, 1996, State Bank reversed the debits and credited Coulter’s Account in the amount of $80,000.00. See Exhibit A. Upon receipt of the Two Checks, Peoples Bank and Kingfisher Bank each filed a “Bank Claim of Late Return” with the Federal Reserve Bank because State Bank had failed to dishonor the checks in a timely manner.
State Bank did not dispute the Bank Claims of Late Return filed by Peoples Bank and Kingfisher Bank. Accordingly, on March 21,1996, the Federal Reserve Bank returned the Two Checks to State Bank and debited State Bank’s account at the Federal Reserve Bank in the total amount of $80,000.00, of which $30,000.00 constituted damages to Peoples Bank on cheek number 1129 and $50,-000.00 constituted damages to Kingfisher Bank on check number 1130. On March 26, 1996, State Bank again debited the amount of the Two Checks against Coulter’s Account. See Exhibit A. On July 26, 1996, State Bank commenced this adversary proceeding against Coulter, Worley, and Peoples Bank to recover the $80,000.00 paid to Worley and Peoples Bank.
On September 5, 1996, the Debtors’ Chapter 11 case was converted to a case under Chapter 7 upon the motion of State Bank, with the acquiescence of the Debtors. On September 13, 1996, Soulé was appointed as the Chapter 7 Trustee. On November 1, 1996, the Trustee was added as an additional plaintiff in this adversary proceeding. On December 18, 1996, Soulé filed the Trustee’s Amended Complaint. Also on December 18, 1996, State Bank filed the Amended Complaint of State Bank for Exception to Discharge and Objecting to Discharge against Coulter.
This adversary proceeding was bifurcated for trial, and the Trustee’s Amended Complaint was heard on July 14, 1997. State Bank’s Amended Complaint against Coulter has been held in abeyance until the Trustee’s Amended Complaint against Worley and Peoples Bank is resolved.
CONCLUSIONS OF LAW
Avoidance of Post-petition Transfers
In the Trustee’s Amended Complaint, Soulé asserts a cause of action against Worley and Peoples Bank for avoidance of post-petition transfers pursuant to Section 549(a)(2)(B) of the United States Bankruptcy Code. Section 549(a) provides as follows:
(a) Except as provided in subsection (b) or (c) of this section, the trustee may avoid a transfer of property of the estate—
(1) that occurs after the commencement of the ease; and
(2) (A) that is authorized only under section 303(f) or 542(c) of this title; or
(B) that is not authorized under this title or by the court.
11 U.S.C. § 549(a). To prevail on the cause of action under Section 549(a)(2)(B), the Trustee must prove:
1. A transfer of property occurred;
2. The property was property of the estate;
3. The transfer occurred after the commencement of the case; and
*144. The transfer was not authorized under the Bankruptcy Code or by the Court.
In re Beshears (Schieffler v. Coleman), 196 B.R. 464, 466 (Bkrtcy.E.D.Ark.1996).
The first element requires a transfer of property. Section 101(54) of the Bankruptcy Code defines “transfer” to mean—
every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or with an interest in property, including retention of title as a security interest and foreclosure of the debtor’s equity of redemption!.]
11 U.S.C. § 101(54).
The difficult threshold question in this case is whether a transfer of property of the estate occurred. Consideration of the various separate transfers of property involving the Two Checks is required to resolve this question.3
On March 6, 1996, Coulter delivered the Two Checks to Worley. State Bank paid check number 1130 on March 8, 1996, and debited Coulter’s Account in the amount of $50,000.00. State Bank paid check number 1129 on March 11,1996 and debited Coulter’s Account in the amount of $30,000.00. (The $50,000.00 and the $30,000.00 debits by State Bank are hereinafter collectively referred to as the “First Transfer of Property.”) On March 15, 1996, when State Bank concluded that it would not be receiving the wire transfer of funds from Europe promised by Coulter, State Bank decided to dishonor the Two Checks. Intending to recover the $80,000.00 by dishonoring the Two Checks, State Bank reversed the debits to Coulter’s Account and credited Coulter’s Account in the amount of $80,000.00, thus restoring Coulter’s Account to its status prior to the First Transfer of Property. At this point, to the extent that a transfer from Coulter’s Account occurred, such transfer was reversed.
State Bank attempted to dishonor the Two Checks by returning them to Peoples Bank and Kingfisher Bank. Peoples Bank and Kingfisher Bank each filed a “Bank Claim of Late Return” with the Federal Reserve Bank contending that State Bank failed to dishonor the checks in a timely fashion. Section 4-302 of Title 12A of the Oklahoma Statutes establishes a payor bank’s responsibility for the late return of an item. Section 4-302 provides in part as follows:
(a) If an item is presented to and received by a payor bank, the bank is accountable for the amount of:
(1) a demand item, other than a documentary draft, whether properly payable or not, if the bank, in any case in which it is not also the depositary bank, retains the item beyond midnight of the banking day of receipt without settling for it or, whether or not it is also the depositary bank, does not pay or return the item or send notice of dishonor until after its midnight deadline; or
(2) any other properly payable item unless, within the time allowed for acceptance or payment of that item, the bank either accepts or pays the item or returns it and accompanying documents.
12A O.S.1991 & Supp.1997, § 4-302(a). As a result of State Bank’s failure to dishonor the Two Checks prior to the midnight deadline established by Section 4-302, State Bank became independently obligated in the amount of $80,000.00 on the Two Cheeks.
Accordingly, on March 21,1996, the Federal Reserve Bank debited State Bank’s account in the amount of $30,000.00 for damages to Peoples Bank and $50,000.00 for damages to Kingfisher Bank and returned the Two Checks to State Bank. (The $50,-000.00 and the $30,000.00 debits by the Federal Reserve Bank are hereinafter collectively referred to as the “Second Transfer of Property.”) The debits against State Bank’s *15account by the Federal Reserve Bank constitute a transfer of property.
On March 26, 1996, after the Federal Reserve Bank debited State Bank’s account in the amount of $80,000.00, State Bank charged Coulter’s Account $80,000.00. See Exhibit A. When State Bank debited Coulter’s Account in the amount of $80,000.00 on March 26, 1996, a third transfer of property occurred. (The $80,000.00 debit by State Bank is hereinafter referred to as the “Third Transfer of Property.”)
The analysis reveals at least three separate transfers of property in connection with the payment of the Two Checks.
The second requirement of Section 549 is that the property transferred must be property of the estate. Section 541(a)(1) of the Code defines “property of the estate” as “all legal or equitable interests of the debtor in property as of the commencement of the ease.” 11 U.S.C. § 541(a)(1). In addition, Section 541(a)(7) defines “property of the estate” as “[a]ny interest in property that the estate acquires after the commencement of the case.” 11 U.S.C. § 541(a)(7). The determinative issue is whether any of the three transfers identified were transfers of “property of the estate.”
Because “transfer” is broadly defined in Section 101(54) of the Bankruptcy Code to include involuntary dispositions of property, the debits made by State Bank to Coulter’s Account on March 6, 1996, and March 11, 1996, which collectively constituted the First Transfer of Property, were transfers of property of Coulter’s Chapter 11 estate. The First Transfer of Property, however, was reversed, and the property was transferred back to Coulter’s Account.
The Second Transfer of Property occurred when the Federal Reserve Bank debited State Bank’s account in the amount of $80,-000.00. State Bank was independently obligated to pay $80,000.00 in damages as a result of its failure to timely dishonor the Two Checks. Because the $80,000.00 that was ultimately paid to Worley and Peoples Bank was property of State Bank and not property of the Debtors’ estate, the Trustee’s cause of action against Worley and Peoples Bank to avoid unauthorized post-petition transfers from the Debtors’ estate must be denied.4
Avoidance of Fraudulent Transfers
The Trustee also asserts a cause of action against Worley and Peoples Bank for avoidance of fraudulent transfers pursuant to Section 544(b) of the Bankruptcy Code. Section 544(b) provides:
The trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502 of this title or that is not allowable only under section 502(e) of this title.
11 U.S.C. § 544(b). Section 544(b) allows a trustee to avoid a transfer of the debtor’s interest in property that is voidable under state law by an actual creditor holding an unsecured claim. Inasmuch as Section 544(b) requires a transfer of “an interest of the debtor in property” and the $80,000.00 that was transferred to Worley and Peoples Bank was property of State Bank in which the Debtors had no interest, the transfer of the $80,000.00 cannot be avoided as a fraudulent transfer.
Unjust Enrichment
Finally, the Trustee asserts a cause of action against Worley and Peoples Bank for unjust enrichment. In order to prevail, the Trustee must prove that Worley and Peoples Bank received money that, “in equity and good conscience, they ought not be allowed to retain.” French Energy, Inc. v. Alexander, 818 P.2d 1234, 1237 (Okla.1991).
Under Oklahoma law, when a bank fails to give notice of dishonor prior to the expiration of the midnight deadline, the bank has an independent obligation, separate and apart from the instrument, to pay the *16amount of the check. See 12A O.S.1991 & Supp.1997, § 4-302; Goodman v. Norman Bank of Commerce, 565 P.2d 372, 375 (Okla.1977). State Bank was statutorily obligated to pay the Two Checks. “Equity and good conscience” do not require this Court to allow the Trustee to recover from Worley and Peoples Bank funds that State Bank was obligated by statute to pay to Worley and Peoples Bank. The Trustee’s cause of action for unjust enrichment is denied.
IT IS SO ORDERED.
EXHIBIT A
Daily Balance Summary of Coulter’s Account March 1996
Date Balance
2-29 $ 5,780.37
3-01 $ 2,280.37
3-04 $ 2,247.82
3-06 $ 2,139.94
3-07 $ 2,124.94
3-08 ($47,890.06)
3-11 ($77,920.06)
3-13 ($77,935.06)
3-14 ($77,965.06)
3-15 $ 2,034.94
3-26 ($77,965.06)
3-31 ($77,975.06)
. The Account was styled to indicate that Coulter was the sole proprietor of an unincorporated business even though Coulter was the sole shareholder of a corporation named "Triexco, Inc." The discrepancy in the form of the entity is not relevant to the analysis in this case.
. See Exhibit A appended to this Memorandum Opinion which reflects the "Daily Balance Summary" as shown on the Statement for Coulter’s Account for March 1996.
. Because the entire transaction occurred while Coulter was a debtor-in-possession in a Chapter 11 case, Coulter’s Account was property of the Chapter 11 estate, notwithstanding the fact that Coulter did not designate the Account as a debt- or-in-possession account. Property acquired post-petition by an individual debtor in Chapter 11 is property of the estate. 11 U.S.C. § 541(a)(7).
. The Third Transfer of Property occurred on March 26, 1996, when State Bank charged Coulter’s Account in the amount of $80,000.00. Prior to that charge, the balance in the Account was $2,034.94. State Bank applied that balance toward the $80,000.00 charged against Coulter’s Account. Although the $2,034.94 balance in Coulter's Account was property of the estate, the Trustee has not asserted a cause of action against State Bank to recover the funds transferred from Coulter’s Account to State Bank or to avoid the $80,000.00 debit. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492620/ | MEMORANDUM DECISION AND ORDER DENYING EX PARTE APPLICATION TO PRELIMINARILY APPROVE DISCLOSURE STATEMENT AND FOR RELATED RELIEF
STUART M. BERNSTEIN, Bankruptcy Judge.
The debtor, a limited partnership, filed this chapter 11 case on July 29, 1997. Its prineipal asset is a building located at 211 East 49th Street, New York, New York (the “Building”) which the debtor’s schedules value at $5 million. In addition, the schedules identify a bank account and rent receivables, aggregating $323,220.00, in the hands of a state court-appointed receiver. On the liability side, the schedules identify ten creditors. Praedium II Maricopa, LLC (“Maricopa”) holds a claim in the sum of $5,275,000.00 secured by a first mortgage on the Building. The New York City Department of Finance holds an unsecured, non-priority claim in the sum of $300.00. Eight other entities are listed as unsecured creditors holding claims in unknown amounts.
Maricopa has filed a plan and disclosure statement. The plan provides for the transfer of the Building to Maricopa, the satisfaction, in full, of the general unsecured claims1, and the payment of $200,000.00 to the debtor. Maricopa, the plan proponent, is impaired and entitled to vote. The unsecured creditors are also impaired because they will receive 100% of their claims without postpetition interest.2 Maricopa now asks me to “preliminarily approve” its disclosure statement to permit immediate solicitation, combine the disclosure statement and confirmation hearings, and grant related relief.
DISCUSSION
The threshold issue raised by Maricopa’s application is whether I can preliminarily approve the disclosure statement, and thereby authorize it to solicit acceptances to its plan prior to the actual hearing on the approval of the disclosure statement. Section 1125(b)3 precludes postpetition solicitation of an acceptance or rejection of the plan until the court has approved the .disclosure statement after notice and a hearing, and the *124proponent has transmitted the plan (or a summary) and the approved disclosure statement to the creditor. Although “notice and a hearing” means such notice and hearing as is appropriate under the particular circumstances, 11 U.S.C. § 102(1), the procedure adopted by Maricopa provides for neither. Maricopa implicitly concedes the inadequacy of the proposed procedure. It seeks only preliminary approval now, and asks me to schedule a full blown hearing — on the same day as the confirmation hearing — at which I can “finally” determine whether the disclosure statement contains “adequate information.”
Maricopa’s bifurcated approval procedure is a fiction designed to permit solicitation prior to the approval of the disclosure statement, a practice expressly proscribed by section 1125(b). Yet the 1994 bankruptcy amendments provide some support for the practice. In “small business” cases, the court can conditionally-approve the disclosure statement, permit solicitation, and combine the two hearings. 11 U.S.C. § 1125(f).4 This is not, however, a “small business” case.
In addition, 11 U.S.C. § 105(d) seems to implicitly authorize the procedure. It permits the court to combine the two hearings, a practice that makes no sense unless the parties can solicit acceptances and rejections prior to the combined, confirmation hearing. Section 105(d) provides in relevant part:
The court, on its own motion or on the request of a party in interest, may—
(1) hold a status conference regarding any case or proceeding under this title after notice to the parties in interest; and (2) unless inconsistent with another provision of this title or with applicable Federal Rules of Bankruptcy Procedure, issue an order at any such conference prescribing such limitations and conditions as the court deems appropriate to ensure that the case is handled expeditiously and economically, including an order that—
(B) in a ease under chapter 11 of this title—
(vi) provides that the hearing on approval of the disclosure statement may be combined with the hearing on confirmation of the plan.
Section 105(d) is limited, however, by its terms. The court cannot make an order that is inconsistent with the Bankruptcy Code or Rules. “An order combining the disclosure statement and confirmation hearings is inconsistent with Section 1125 except in prepackaged cases or ‘small business’ cases.” 2 Lawrence P. King, et al., Collier on Bankruptcy ¶ 105.08, at 105-83 to 105-84 (rev. 15th ed.1997); accord 4 William L. Norton, Jr., Norton Bankruptcy Law & Practice 2d § 91:16, at 89 (Supp. Aug. 1996); David G. Epstein, Basics of Bankruptcy: Plan Acceptance and Disclosure, 746 PLI/Comm 593, 603 (1996); see In re Aspen Limousine Serv., Inc., 187 B.R. 989, 995 (Bankr.D.Colo.1995), aff'd, 193 B.R. 325 (D.Colo.1996). Accordingly, section 105(d) does not authorize me to preliminarily approve the disclosure statement subject to a final hearing, or under the circumstances of this ease, combine the disclosure statement and confirmation hearings.5
*125Furthermore, even if a court can preliminarily approve a disclosure statement, it should exercise this power sparingly. Preliminary approval comes after the court’s ex parte review. This is not the best or most efficient approach. The United States Trustee, the creditors and the other parties in interest are more familiar than the court with the case, and are more likely to spot inaccuracies and deficiencies. In addition, participants in the ease should- have the chance to review the proposed disclosure statement, raise potential objections with the plan proponent, negotiate necessary changes, and present a “cleaner,” amended disclosure statement for judicial approval. Collapsing the two hearings into one does not prevent this. Still, human nature being what it is, plan proponents will be less willing to make modifications that could nullify votes they have already solicited. Further, courts may be reluctant to delay confirmation based on shortcomings that might have foreclosed approval of the disclosure statement if the hearings had not been combined. Cf. In re Rogers-Pyatt Shellac Co., 51 F.2d 988, 992 (2d Cir.1931) (professionals must be retained by the court before they render services to permit consideration of disqualifying relationships “unaffected by the emotional pressure which inevitably arises in their favor after the services have been rendered”).
Finally, it is not unfair for Maricopa to bear the additional time and expense of complying with section 1125(b). Maricopa and the debtor could have done their deal outside of bankruptcy. The debtor could have delivered a deed in lieu of foreclosure, or permitted Maricopa to foreclose. A non-bankruptcy resolution would not prejudice the handful of creditors who can look to the debtor’s general partner for satisfaction of their claims.
Maricopa and the debtor nevertheless prefer this bankruptcy, which appears to have been a collaborative effort. Bankruptcy may be preferable because a deed in lieu of foreclosure will not cut off junior interests,6 and a judicial foreclosure will take too long. Further, transferring the Building pursuant to a plan will avoid stamp and similar taxes. See 11 U.S.C. § 1146(c).
Having elected chapter 11, they must suffer its warts and barnacles. Maricopa has not identified any emergent circumstances that warrant expedited action, and as a practical matter, it could not obtain approval of the disclosure statement, solicit votes or confirm a plan until it has defined the outer universe of potentially allowable claims. The deadline for filing claims does not expire for another month, and during this period, Maricopa has ample time to obtain judicial approval of the disclosure statement through the traditional route.
For the all the foregoing reasons, I decline to sign Maricopa’s order preliminarily approving the disclosure statement and for related relief.
So ordered.
.The disclosure statement incorrectly states that the amount of unsecured claims is $0. The schedules identify the aforementioned $300 debt as well as eight unliquidated debts, and the deadline for filing claims does not expire until December 8, 1997.
. The disclosure statement erroneously states that the class of unsecured creditors is unimpaired.
. Section 1125(b) provides:
An acceptance or rejection of a plan may not be solicited after the commencement 'of the case under this title from a holder of a claim or interest with respect to such claim or interest *124unless, at the time of or before such solicitation, there is transmitted to such holder the plan or a summary of the plan, and a written disclosure statement approved, after notice and a hearing, by the court as containing adequate information. The court may approve a disclosure statement without a valuation of the debtor or an appraisal of the debtor’s assets.
. Section 1125(f) provides as follows:
Notwithstanding subsection (b), in a case in which the debtor has elected under section 1121(e) to be considered a small business—
(1)the court may conditionally approve a disclosure statement subject to final approval after notice and a hearing;
(2) acceptances and rejections of a plan may be solicited based on a conditionally approved disclosure statement as long as the debtor provides adequate information to each holder of a claim or interest that is solicited, but a conditionally approved disclosure statement shall be mailed at least 10 days prior to the date of the hearing on confirmation of the plan; and
(3) a hearing on the disclosure statement may be combined with a hearing on confirmation of a plan.
. This does not mean that a court can never combine the disclosure statement and confirmation hearings. Unimpaired classes are deemed to accept the plan, and their votes need not be *125solicited. 11 U.S.C. § 1126(f). If all classes are unimpaired and no solicitation is required, the court does not have to approve a disclosure statement prior to confirmation, if ever.
In addition, if Maricopa were the only impaired class under its plan, I could presumably schedule the confirmation vote to take place at the conclusion of the disclosure statement hearing. See Fed. Bankr.R. 3017(c). In that event, I could approve the disclosure statement, and after a brief recess to permit Maricopa to cast its accepting vote and certify the ballot, hold the confirmation hearing. Maricopa would not object to the expedited procedure. However, Maricopa's plan impairs the unsecured creditors who are also entitled to vote. Maricopa must, therefore, obtain approval of the disclosure statement, transmit the approved disclosure statement and the plan (or plan summary) to each claim holder, and give each claim holder a reasonable amount of time to examine these documents and decide how to vote.
. It is not clear whether there are any tenants in the Building. The disclosure statement and schedules do not identify any tenants or rental income. Yet according to the debtor’s schedules, the receiver is holding $270,000.00 in cash and $53,220.00 in "rent receivables.” These assets suggest rental income, and hence, tenants. Moreover, the parties have entered into a cash collateral stipulation, and the rents are the only cash collateral in the case. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492551/ | ORDER DISMISSING APPEAL
MARY DAVIES SCOTT, Bankruptcy Judge.
THIS CAUSE is before the Court upon a review of the file. This case was commenced on December 24, 1996, by the filing of a petition. On December 31, 1996, W.T. Paine filed an “Emergency Motion to Dismiss Chapter 11 Cases as Unauthorized and Filed in Bad Faith.” Hearing on the matter was held on March 24-25, 1997, and an Order of Dismissal was entered on March 28, 1997. A notice of appeal was required to be filed on or before April 7,1997. However, the debtor filed a Notice of Appeal on April 9, 1997, Fed. R. Bankr.Proe. 8002(a), and elected for the appeal to be heard by the district court. 28 U.S.C. § 158(c)(1)(A); L.R. BAP 8th Cir. 01(a)(1). Inasmuch as the appeal was untimely filed, no court has jurisdiction over the appeal.1 See Jacobson v. *467Nielsen, 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.1982) (Roy, J.). In addition, under Rule 8006, Federal Rules of Bankruptcy Procedure, the debtor was required to file and serve a designation of the record on appeal and request, if necessary, a transcript of the proceedings on or before April 21, 1997.2 The debtor has failed to designate the record, failed to provide copies of documents, and has failed to request a transcript from the Court recorder.
Under Local Rule 4-2(II)(d)(A), Rules of the U.S. District Court for the Eastern and Western Districts of Arkansas, “The bankruptcy court is authorized to dismiss an appeal field after the time provided by the applicable rules and any appeal in which the appellant has failed to file a designation of the items for the record, or the transcript designated for inclusion in the record or a statement of the issues as required by the applicable rules.” See generally Rivermeadows Associates v. Falcey (In re Rivermeadows Associates), 205 B.R. 264 (10th Cir. BAP 1997) (bankruptcy court had authority to dismiss appeal pursuant to local rule). Upon the debtor’s noncomplianee with the Federal Rules of Bankruptcy Procedure, and by virtue of the authority granted by the district court, it is
ORDERED that the appeal of the Order of Dismissal, notice of which was filed on April 9,1997, is DISMISSED.
IT IS SO ORDERED.
. The provision contained in Rule 8002, providing for an extension of time to file a Notice of *467Appeal upon a showing of excusable neglect, is inapplicable inasmuch as the Order appealed from is an Order dismissing the case. Fed. R. Bankr.Proc. 8002(a). In any event the time by which such a motion must be filed has expired.
. The tenth day fell on Saturday, April 19, 1997, such that the time to file the designation of record and statement of issues was required to be filed on April 21, 1997. Fed. R. Bankr.Proc. 9006. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492552/ | OPINION
JAMES A. PUSATERI, Chief Judge.
Debtor C. Glenn Cantrell appeals a bankruptcy court decision, entered after a bench trial, concluding that his debt to the Bank of Western Oklahoma (“BOWO”) is nondisehargeable pursuant to 11 U.S.C. § 528(a)(6). Mr. Cantrell asks us to determine whether the bankruptcy court erred in: (1) finding his debt was for “willful and malicious injury” to BOWO’s property; (2) finding the debt was for “willful and malicious injury” even though BOWO’s officers had to know what he was doing and implicitly consented to his actions; and (3) declining to enter a judgment specifying the amount of his nondischargeable debt. For the reasons stated below, we affirm the bankruptcy court’s decision.1
I. Background
Debtor C. Glenn Cantrell (“Cantrell”) ran a large cow-calf operation, making most of his income from selling calves produced each year by his breeding cattle. The First National Bank of Chieksha (“FNB”) had a first lien on his cattle herd. In 1992, he began borrowing money from BOWO as well. By December 1993, he owed BOWO $593,750 on a cattle loan, and had a $175,000 operating loan or line of credit; both loans were secured by his cattle herd and certain real estate. Cantrell was to pay off FNB’s loan with part of BOWO’s cattle loan, but paid an unsecured debt instead, leaving BOWO holding a second lien on his cattle.
Consistent with industry standards, Cantrell's agreement with BOWO provided that he was to give BOWO the proceeds when he sold its collateral, and to arrange for buyers to pay him with checks made payable to him and BOWO. This way, he could spend the proceeds only with BOWO’s permission. Once, when he told BOWO he had paid it with a loan from a third party, BOWO allowed him to use some sale proceeds to repay that party. This was the only time BOWO gave him permission to use sale proceeds to pay someone besides the bank.
Cantrell sought to renew and expand the operating loan for 1995. BOWO renewed the loan but declined to increase its $175,000 limit. Apparently, this left only about $5,000 of credit available on the loan. BOWO’s chief financial and operating officers were cattlemen with substantial knowledge of the cattle business. They were, of course, aware that Cantrell could only obtain about $5,000 for his 1995 operations under the operating loan. However, Cantrell has directed us to no evidence in the record which demonstrates these officers (or any other BOWO employees) knew that except for his adult cattle, Cantrell then had no calves or assets he could sell, or other source he could tap, to obtain the money he might need to continue his business.
During 1994 and 1995, Cantrell sold many of his breeding cattle. He used some of the proceeds to repay the third party as noted above and deposited some with BOWO. He made another sale to another third party which led to a dispute that BOWO settled, obtaining some money for the cattle, though not as much as Cantrell claimed it should have. Finally, he also received $272,274.42 in sale proceeds which he spent without BOWO’s permission and without paying down FNB’s competing loan. BOWO based its dischargeability complaint on Cantrell’s unauthorized disposition of this money. After Cantrell filed for bankruptcy, BOWO liquidated its remaining collateral, leaving it with a claim for $144,794.26.
At trial, BOWO relied solely on § 523(a)(6), which excepts from discharge a debt “for willful and malicious injury by the debtor to another entity or to the property of another entity.” The bankruptcy court ruled orally at the end of the trial. It quickly *501disposed of the willfulness requirement, saying,
[T]he act being claimed [sic] of here is the sale of the cattle without remittance of the proceeds to the plaintiff bank. There’s no question that that was a willful act of Mr. Cantrell, because he knew ... he was selling the cattle, and he knew he wasn’t paying the plaintiff. In virtually all of these eases, the willfulness part of its pretty much goes without saying, because you don’t ... sell cattle unknowingly.
The court then discussed the maliciousness requirement at some length, initially noting that it felt the word “malice,” as shown by various dictionary definitions, indicated an act that was done with ill will or was morally wrong. The court said, “I’m unable to find that [Cantrell] had any desire to injure the plaintiff bank, that he had any active ill will against it, or any hatred of it. He just sold the cattle and did something with the money other than to remit it to the bank.” Ultimately, however, the court turned to Tenth Circuit decisions which have discussed the meaning of “malicious” in § 523(a)(6). Interspersing quotations from C.I.T. Fin. Servs. v. Posta (In re Posta), 866 F.2d 364 (10th Cir. 1989), with its comments about applying the decision to the ease at hand, the court said:
“Malicious intent is demonstrated by evidence that the debtor had knowledge of the creditor’s rights,” which he did — he knew these cattle were pledged — “and that with that knowledge proceeded to take action in violation of those rights.”
Well, he had the knowledge that the bank had a security interest, and with that knowledge proceeded to sell the cattle without consent and without paying the money to the bank. The Court goes on:
“Such knowledge can be inferred from the debtor’s experience in the business”— he was well experienced — “his concealment of the sale” — he did conceal the sale — “or by his admission that he has read and understood the security agreement.”
There’s no question but that he knew the security agreement said the cattle were pledged.
The court also discussed and quoted from Dorr, Bentley & Pecha v. Pasek (In re Pasek), 983 F.2d 1524 (10th Cir.1993), saying the decision was the last Tenth Circuit ruling on the issue of which it was aware. The court concluded Pasek clearly declared that Posta was still the Circuit’s rule about the meaning of “malicious.”
After the court concluded the debt was nondischargeable, Cantrell’s counsel asked about the amount of the debt. The court said, “I don’t think that’s the function of the bankruptcy court to determine that,” and indicated the amount could be determined in a foreclosure proceeding that was apparently pending in state court.
II. Standard of Review
In reviewing an order of the bankruptcy court, an appellate court “reviews the factual determinations of the bankruptcy court under the clearly erroneous standard, and reviews the bankruptcy court’s construction of [a statute] de novo.” Taylor v. I.R.S. 69 F.3d 411, 415 (10th Cir.1995) (citations omitted).
A finding of fact is clearly erroneous only if the court has “the definite and firm conviction that a mistake has been committed.” United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746 (1948). “It is the responsibility of an appellate court to accept the ultimate factual determination of the fact-finder unless that determination either (1) is completely devoid of minimum evidentiary support displaying some hue of credibility, or (2) bears no rational relationship to the supportive evidentiary data.” Krasnov v. Dinan, 465 F.2d 1298, 1302 (3d Cir.1972).
Gillman v. Scientific Research Prods. (In re Mama D’Angelo, Inc.), 55 F.3d 552, 555 (10th Cir.1995).
III. Discussion
Cantrell argues that the word “willful” in § 523(a)(6) requires a finding that the debtor intended to injure the creditor or the creditor’s property and the word “malicious” requires a finding that the debtor’s intent to injure had the quality of ill will, or evil or mischievous motives. Since the bankruptcy *502court found he had no intent to injure BOWO, he continues, his debt should be dischargeable. We disagree, and conclude that the bankruptcy court correctly applied the Tenth Circuit’s decisions interpreting § 523(a)(6).
In Posta, where the bankruptcy court appropriately began its discussion of the dischargeability of Cantrell’s debt to BOWO, the Tenth Circuit said, “ Willful’ conduct is conduct that is volitional and deliberate and over which the debtor exercises meaningful control, as opposed to unintentional or accidental conduct.” 866 F.2d at 367. No intent to injure is required under this interpretation. We do not believe the Circuit deviated from this view in Pasek, its latest decision on the subject. See 983 F.2d at 1527. We certainly cannot say the bankruptcy court’s factual determination that Cantrell’s actions in selling cattle which were subject to BOWO’s security interest without remitting the proceeds to the bank was “willful” was clearly erroneous.
For a secured creditor complaining the debtor has sold its collateral and converted the proceeds rather than remitting them to the creditor, Posta and Pasek make clear that the maliciousness required by § 523(a)(6) can be established by showing the debtor had knowledge of the creditor’s rights and, without justification or excuse, proceeded to act in violation of those rights, and it was at least reasonably foreseeable the debt- or’s act would injure the creditor. See 983 F.2d at 1527-28, 866 F.2d at 367-68. The bankruptcy court properly distilled this test from the cases, and its findings that Cantrell was experienced in business, concealed the sales from BOWO, and knew what BOWO’s security agreement said are not clearly erroneous.
Cantrell also argues that BOWO’s officers necessarily knew he was selling off adult cattle to fund his operations because they were experienced cattlemen and he had only $5,000 of credit left on his operating loan for 1995. Some of his improper sales and conversion of proceeds occurred in 1994, so the availability of credit on the loan in 1995 can have no bearing on the propriety of those sales. As indicated above, Cantrell has pointed to no evidence in the record that demonstrates BOWO’s officers knew he had no other source of revenue in 1995 than selling his breeding cattle. Consequently, the bankruptcy court’s conclusion that BOWO did not know about or consent to these sales cannot be clearly erroneous. Even if we were inclined to believe BOWO’s officers should have known Cantrell was selling off some of his herd, we would not go so far as to hold the bank implicitly consented to his sale of over $270,000 worth of cattle and use of the proceeds to pay anyone other than BOWO or at least the first lien holder.
Finally, Cantrell complains that the bankruptcy court was obliged to enter a judgment fixing the amount of his debt to BOWO once it found the debt to be nondischargeable. We have some difficulty understanding his argument. He asserts in his opening brief that the court’s ruling “by default held the entire amount of the debt” to be nondischargeable, and in his reply brief contends the nondischargeable “amount of the debt is limited to the lesser of the value of the collateral converted or the amount of the debt outstanding.” Yet, at trial, the evidence showed Cantrell had converted over $270,000 in proceeds of cattle sales and BOWO conceded its dischargeability claim was limited to the balance of about $144,000 then owed to it. On appeal, both parties cite First of America Bank v. Afonica (In re Afonica), 174 B.R. 242, 247 (Bankr.N.D.Ohio 1994), for the rule that a judgment for converting a secured creditor’s collateral should be limited to the lesser of the value of the converted property or the amount of the debt. Thus, it seems BOWO agrees with Cantrell that the nondischargeable debt he owes it is limited to the principal balance left after it liquidated its remaining collateral.
Cantrell cites no authority which holds that a bankruptcy court must fix the amount of the debt which it has determined is nondischargeable. In Cowen v. Kennedy (In re Kennedy), 108 F.3d 1015, 1017-18 (9th Cir. 1997), the court rejected the converse argument that a bankruptcy court does not have jurisdiction to enter a judgment declaring the amount of the nondischargeable debt. In *503dicta, the court indicated a bankruptcy court could require a creditor whose claim has not been reduced to judgment to obtain stay relief, prosecute its fraud claim to judgment in state court, and then return to bankruptcy court for a determination of the discharge-ability of any judgment obtained. Id. at 1017. While many bankruptcy courts do enter judgments fixing the amount of debts they have determined to be nondischargeable, we do not believe it was reversible error for the court to decline to do so here. A state court foreclosure proceeding was pending in which this determination could easily be made. If Cantrell is aggrieved by that court’s decision, he can appeal it just as he has the bankruptcy court’s decision on the dischargeability question.
IV. Conclusion
The bankruptcy court’s decision is affirmed.
. After examining the briefs and appellate record, this panel has determined unanimously that oral argument would not materially assist in the determination of this appeal, and grants Mr. Cantrell’s request for a decision on the briefs. See Fed.R.Bankr.P. 8012; 10th Cir. BAP L.R. 8012-l(a). The case is therefore submitted without oral argument. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492553/ | ORDER ON OBJECTION TO EXEMPTIONS
ALEXANDER L. PASKAY, Chief Judge.
THIS IS a Chapter 7 case and the matter under consideration is the Objection to Cindy King’s (Debtor) Claim of Exemptions filed by Lauren Green (Trustee). The facts relevant to the objection are without dispute and based on the stipulation of the parties can be summarized as follows:
On September 26, 1996, the Debtor received a workers’ compensation award in the net amount of $8,450.00. The award was paid by Circle K Corporation, her former employer, in a lump sum payment on the same date. On October 18, 1996, the Debtor filed a Voluntary Petition for relief under Chapter 7. At that time, the Debtor still had $3,300.00 remaining of the workers’ compensation award, which monies were deposited in a cheeking account at Valrico State Bank. The Debtor claimed the workers’ compensation award as exempt on Schedule C pursuant to Fla. Stat. § 440.22. Consequently, the Trustee filed her objection to the Debtor’s exemption.
The parties dispute the applicability of Fla. Stat. § 440.22 to the Debtor’s workers’ compensation exemption. Fla.Stat. § 440.22 provides:
Fla.Stat. 440, et seq. WORKERS’ COMPENSATION
440.22 Assignment and exemption from claims of creditors.
No assignment, release, or commutation of compensation or benefits due or payable under this chapter except as provided by this chapter shall be valid, and such compensation and benefits shall be exempt from all claims of creditors, and from levy, execution and attachments or other remedy for recovery or collection of a debt, which may not be waived. (Emphasis added)
The Trustee contends that the Debtor’s claim was no longer “due and payable” because the Debtor had received the workers’ compensation award prior to filing her Petition. The Debtor contends that the phrase “due and payable” under Fla.Stat. § 440.22 does include money received from a workers’ compensation award, citing In re Fraley, 148 B.R. 635 (Bankr.M.D.Fla.1992). The court in In re Fraley held that because “the statute was designed to protect workers’ compensation claimants’ source of support from claims of creditors,” a worker’s compensation award received and deposited in a bank account was exempt. See id. at 637. The court further held that the term “due and payable” should not be construed so that funds once received and deposited in a bank account are not protected. See id.
Originally, both parties cited Broward v. Jacksonville Medical Center, Inc., 673 So.2d 962 (Fla.App. 1st Dist.1996), as the only state court decision at that time which addressed the interpretation of the term “due and payable.” The only issue raised in Broward was whether the phrase “due and payable” meant that once compensation benefits had been *572paid to an employee or the employee’s beneficiaries such benefits were no longer exempt from claims of creditors. See id. The First District Court of Appeals did not rule on the question but instead, certified it to the Florida Supreme Court, and that court granted review. Broward v. Jacksonville Medical, Inc., 681 So.2d 280 (Fla.1996).
The Florida Supreme Court recently ruled on Broward v. Jacksonville Med. Ctr., 690 So.2d 589 (Fla.1997). In Broward, the Florida Supreme Court was called upon to answer the following question, certified as being of great public importance:
DOES THE ‘DUE OR PAYABLE’ LANGUAGE OF SECTION 440.22, FLORIDA STATUTES, MEAN THAT ONCE COMPENSATION BENEFITS HAVE BEEN PAID TO AN INJURED EMPLOYEE OR HIS OR HER BENEFICIARIES THAT SUCH BENEFITS ARE NO LONGER EXEMPT FROM ALL CLAIMS OF CREDITORS?
Id.
The Florida Supreme Court, having reviewed the purpose of the benefits under consideration and the decision of the Bankruptcy Court in In re Fraley, 148 B.R. 635 (Bankr.M.D.Fla.1992), concluded that the words “due and payable,” which terms were involved in the workers’ compensation statute under their consideration, Fla.Stat. § 440.22, should not be construed so narrowly as to prevent a beneficiary of such an award to claim as exempt the payments received pursuant to the statute. See Broward, 690 So.2d 589. The court stated, “[t]he Workers’ Compensation Law was designed to protect employees and their dependents against the hardships that arise from an employee’s injury or death arising from the course of employment.” Id. (citing McCoy v. Florida Power & Light Co., 87 So.2d 809, 810 (Fla.1956)). As the court noted in Daniel v. Holmes Lumber Co., 490 So.2d 1252, 1256 (Fla.1986),
Florida’s workers’ compensation laws are remedial in nature and the courts should resolve any doubts as to statutory construction in favor of providing benefits to injured workers.
Based on the foregoing, this Court is satisfied that the decision of the Florida Supreme Court in Broward is determinative of the issue raised by the Trustee’s objection to the claimed exemption. The workers’ compensation award received by the Debtor and deposited into her checking account, therefore, maintained its exempt status under Fla.Stat. § 440.22.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the objection by the Trustee to the Debtor’s claim of exemption be, and the same is hereby, overruled and the Debtor’s workers’ compensation award is hereby allowed as exempt. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492557/ | MEMORANDUM OF DECISION AND ORDER ON DEFENDANT’S MOTION FOR SUMMARY JUDGMENT
ROBERT L. KRECHEVSKY, Bankruptcy Judge.
I.
Hal M. Hirsch, as Trustee of The Consolidated Estates of Colonial Realty Company *617(“Colonial”), Jonathan Googel (“Googel”) and Benjamin Sisti (“Sisti”), on July 12, 1993, filed a complaint against Union Trust Company (“UTC”). The complaint, as amended, seeks to avoid and recover certain transfers by Colonial to UTC as either preferential or fraudulent transfers. The principal transaction at issue is the pledge of a $1,000,000 Certificate of Deposit (“the CD”) by Colonial to UTC on July 6, 1990, as collateral for Colonial’s $4,000,000 then existing indebtedness to UTC.
UTC has moved for summary judgment contending that there are no genuine issues of material fact and that it is entitled to judgment as a matter of law. The Trustee opposes the motion on the basis that genuine issues of material fact exist.
II.
UNCONTROVERTED BACKGROUND
Colonial, a Connecticut general partnership, with Googel and Sisti as the sole general partners, and a nationwide syndicator of real estate limited partnerships, on or about June 21, 1989, entered into an unsecured revolving credit agreement with UTC, a Connecticut banking corporation, to establish a credit line of $4,000,000 (“the first loan”). On July 5, 1990, $4,000,000 under the first loan having been drawn down and repayment being in default, the parties negotiated a new revolving credit agreement for the $4,000,000 (“the second loan”), under which UTC immediately loaned $4,000,000 to Colonial for the purpose of repaying the delinquent first loan. This loan was due December 31, 1990, unless demand was sooner made, and required monthly interest payments starting August 1, 1990. A further condition of the second loan was that the debtors execute a “Cash Collateral Account Security and Pledge Agreement” (“the Pledge Agreement”), under which Colonial “deposited” $1,000,000 into a Certificate of Deposit (“the CD”) purchased from UTC. The CD, dated July 5,1990, had a maturity date of December 31, 1990 with interest at 8.15 percent per annum. UTC filed a UCC-I financing statement describing the CD.
Colonial, in the Pledge Agreement, granted UTC exclusive possession of the CD and authorized UTC to apply the CD to any of Colonial’s obligations to UTC upon default in such obligations. The Pledge Agreement provided that upon the CD’s maturity, its proceeds would be deposited in a named Colonial money market account at UTC. The $1,000,000 Colonial used to purchase the CD apparently came from an existing Colonial money market account at UTC. Colonial, on April 18,1990, at UTC’s demand, had deposited the $1,000,000 in this existing account.
Creditors, on September 14, 1990, filed an involuntary Chapter 7 petition against Colonial. On the same day, UTC cashed the CD and set off $1,016,073.61 (the $1,000,000 principal plus accrued interest) against $4,058,-189.73 then claimed due and owing under the second loan. Colonial had made an interest payment of $33,000 to UTC on July 24, 1990 under the second loan.
III.
POSITIONS OF THE PARTIES
Bankruptcy Code § 553(a)1 provides that the Bankruptcy Code preserves the setoff rights that exist at common law. UTC contends it is entitled to summary judgment because, based upon the uncontroverted facts, when UTC set off the $1,016,073.61 of CD proceeds on September 14,1990, the date of the filing of the bankruptcy petition, UTC had not improved its position during the prior 90 days contrary to the provisions of Bankruptcy Code § 553(b).2 UTC states *618that 90 days before the bankruptcy petition was filed, it had a $1,000,000 available setoff in the Colonial money market account which was succeeded by the $1,000,000 CD on July 6, 1990 and which CD UTC, on September 14,1990, set off.3
The Trustee responds, based upon Goo-gel’s deposition, that when Colonial, on April 18, 1990, deposited $1,000,000 in its UTC money market account, it did so on the express promise of a UTC officer that UTC would not exercise any right of setoff against that particular deposit. If the court were to find that UTC held no enforceable right of setoff in the money market account, the Trustee asserts the pledge of the CD to UTC on July 6,1990 constitutes a preference. See Bankruptcy Code § 547; American Bank of Martin County v. Leasing Service Corporation (In re Air Conditioning. Inc. of Stuart), 845 F.2d 293, 296 (11th Cir.1988), cert. denied, 488 U.S. 993, 109 S.Ct. 557, 102 L.Ed.2d 584 (1988) (Bankruptcy trustee may recover from bank, under preferential transfer statute, certificate of deposit transferred as security).
IV.
DISCUSSION
Connecticut law, like law generally, treats a deposit in a bank as a promise to pay from the bank to the depositor. If the depositor is also indebted to the bank, such debts of the depositor and the bank are mutual, and the bank may set off a past due debt with deposits held by the bank, provided there is no express agreement to the contrary and the deposit is not specifically applicable to some other particular purpose. Southington Savings Bank v. Rodgers et al., 40 Conn.App. 23, 29, 668 A.2d 733 (1995), cert. denied, 236 Conn. 908, 670 A.2d 1307 (1996); Vic Gerard Golf Cars, Inc. v. Citizen’s National Bank of Fairfield, 528 F.Supp. 237, 241 (D.Conn.1981). UTC would have been estopped from exercising its right to set off the Colonial money market account if, in fact, an agent of the bank promised Colonial that UTC would refrain from setting off against the deposit. See Texas Mortgage Services Corporation v. Guadalupe Savings & Loan Association (In the Matter of Texas Mortgage Services Corporation, 761 F.2d 1068, 1075 (5th Cir.1985)) (bank estopped from exercising right of setoff; bank promised to maintain certain deposits as trust funds); Federal Deposit Insurance Corporation v. Perry Brothers, Inc., 854 F.Supp. 1248, 1267 (E.D.Tex.1994), aff'd in part, 68 F.3d 466 (5th Cir.1995) (bank was estopped from exercising right of setoff by its prior promise not to exercise such right while parties were negotiating settlement of dispute and by its own inequitable behavior); Union Bank & Trust Co. of Helena v. Loble (In re Gans & Klein Co.), 20 F.2d 124, 126 (9th Cir.1927), cert. denied, 275 U.S. 545, 48 S.Ct. 83, 72 L.Ed. 417 (1927) (“bank may so deal with a depositor as to waive or be estopped to assert the right of setoff”).
V.
CONCLUSION
Fed.R.Civ.P. 56(c) provides that summary judgment “shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” See Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2553, *61991 L.Ed.2d 265 (1986) (quoting Fed.R.Civ.P. 56(c)). The moving party has the burden of proving that no material facts are in dispute, and in considering such a motion, the court “must ‘resolve all ambiguities and draw all reasonable inferences in favor’ of the non-moving party____” Mikinberg v. Baltic S.S. Co., 988 F.2d 327, 330 (2d Cir.1993) (quoting Heyman v. Commerce and Indus. Ins. Co., 524 F.2d 1317, 1320 (2d Cir.1975)). The court in deciding a summary judgment motion, “ ‘cannot try issues of fact, but can only determine whether there are issues of fact to be tried.’ ” R.G. Group, Inc. v. Horn & Hardart Co., 751 F.2d 69, 77 (2d Cir.1984)(quoting Empire Electronics Co. v. United States, 311 F.2d 175, 179 (2d Cir.1962)) (emphasis in original).
The court concludes that a genuine issue of material fact exists regarding whether UTC held an enforceable right of setoff prior to July 6, 1990. Accordingly, UTC’s motion for summary judgment must be, and hereby is, denied. In light of this ruling, it is unnecessary to discuss any other claims of the parties. It is
SO ORDERED.
. Section 553(a) provides, in part: "... this title does not affect any right of a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case____”
. Section 553(b) provides:
(1) "... if a creditor offsets a mutual debt owing to the debtor against a claim against the debtor on or within 90 days before the date of the filing of the petition, then the trustee may recover from such creditor the amount so offset to the extent that any insufficiency on the date of such setoff is less than the insufficiency on the later of—
(A) 90 days before the date of the filing of the petition; and
*618(B) the first day during the 90 days immediately preceding the date of the filing of the petition on which there is an insufficiency.
(2) In this subsection, "insufficiency” means amount, if any, by which a claim against the debtor exceeds a mutual debt owing to the debtor by the holder of such claim.
11 U.S.C. § 553(b).
. “The improvement in position test of § 553(b)(1) ... prevents] the creditor from using setoff to put itself in a better position than it was in prior to the ninety-day prepetition period. The improvement in position test ... requires a calculation of the insufficiency that existed (1) 90 days before the date of filing of the petition and (2) on the date of the setoff. To the extent that the amount of the insufficiency on the date of setoff is less than that on the 90th day, the creditor has improved its position in an amount that is recoverable by the trustee.” Belford v. Union Trust Co. (In re Wild Bills, Inc.), 206 B.R. 8, 14 (Bankr.D.Conn.1997) (citations and quotation marks omitted). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492559/ | MEMORANDUM OPINION
LETITIA Z. CLARK, Bankruptcy Judge.
Before the court is the Amended Motion to Set Aside Default Judgment and Grant New Trial (Docket No. 35) filed by the Debtor on September 27,1991. The motion was denied by the court by order entered November 5, 1991, and Debtor appealed. The District Court remanded the proceeding to this court “so that the bankruptcy court may explain its reasons for denying the debtor’s motion to set aside default judgment and grant a new trial.”
The court has reviewed the file not only in this case but in two preceding bankruptcy cases filed in the Southern District of Texas in which Devine was involved, as well as lengthy proceedings in the United States District Court for the District of Hawaii and ultimately an appeal before the Ninth Circuit Court of Appeals. The following are the Findings of Fact and Conclusions of Law of the court. To the extent any of the Findings of Fact may be considered Conclusions of Law, they are adopted as such. To the extent any of the Conclusions of Law may be considered Findings of Fact, they are adopted as such.
Background
Thomas J. Devine (“Devine”) was a debtor before this court in Case No. 87-02022-H3-7 (the “First Bankruptcy Case”). The First Bankruptcy Case was filed as a voluntary case under Chapter 11 on February 27,1987, and was converted to Chapter 7 by an order entered on May 6, 1988. The First Bankruptcy Case was dismissed by order entered June 30, 1989 (Case No. 87-02022-H3-7, Docket No. 76) on the motion of the Chapter 7 trustee (Case No. 87-02022-H3-7, Docket No. 68).
Devine was the president of Ringgold Corporation, which filed its own voluntary Chapter 11 petition in Case No. 87-02023-H5-11 on February 27, 1987, the same date on which Devine filed his voluntary petition. The Ringgold case was converted to Chapter 7 by order entered May 14, 1990 (Case No. 87-02023-H5-11, Docket No. 247). Devine appeared in the Ringgold case first as the president of Ringgold (Case No. 87-02023-H5-11, Docket No. 114), then as a creditor (Case No. 87-02023-H5-11, Docket No. 273), and finally, under arrest by the U.S. Marshal, as the designated representative of Ringgold (Case No. 87-02023-H5-11, Docket No. 289).
Devine commenced the above captioned Chapter 7 case by filing a voluntary petition on September 27, 1990. Holly and Douglas Worrall (the “Worralls”) filed the above captioned adversary proceeding and a companion adversary proceeding, Adversary No. 90-0783, seeking denial of Devine’s discharge and/or exception from any bankruptcy discharge of all of Devine,’s debt based on the judgment of the United States District Court for the District of Hawaii in Case No. 83-0711-PA (the “Hawaii Case”). The judgment in the Hawaii Case was affirmed by the Ninth Circuit Court of Appeals. Ringgold Corp. v. Worrall, 880 F.2d 1138 (9th Cir. 1989).
Pattern of Non-Appearance
The records in the above captioned bankruptcy case, the above captioned adversary *660proceeding, the First Bankruptcy Case, the Ringgold Case, and the Hawaii Case are replete with instances in which the Devine was required to appear, yet failed to do so.
In the Hawaii case, the Ninth Circuit found that Devine had failed to appear for a pretrial conference, a hearing on a motion for default, and the trial date in the matter. Ringgold Corp. v. Worrall, 880 F.2d 1138 (9th Cir.1989). As in the instant case, Devine filed a motion to set aside a default judgment entered by the District Court in Hawaii, alleging he received inadequate notice of the October 21, 1986 trial date. The Ninth Circuit determined that Devine and Ringgold had engaged in a pattern of repeated failure to attend pretrial conferences, and failure to otherwise participate in or remain informed about the litigation, and failure to attend on the first day of a trial which had been scheduled months in advance. Id., at 1141.
In the First Bankruptcy Case, the Chapter 7 trustee filed a motion to dismiss on April 14, 1989 (Case No. 87-02022-H3-7, Docket No. 68). The motion contains a declaration by the trustee stating that Devine failed to appear at creditors’ meetings pursuant to Section 341 on September 27, 1988 and on October 25, 1988. Notice was given by the Clerk of the filing of the motion to dismiss (Case No. 87-02022-H3-7, Docket No. 69, 70), and of the hearing set on the motion for June 27, 1989 (Case No. 87-02022-H3-7, Docket No. 74). Devine failed to appear at the hearing on June 27, 1989, and the ease was dismissed on the trustee’s motion (Case No. 87-02022-H3-7, Docket No. 76). Devine filed a motion to reinstate the First Bankruptcy Case on August 11, 1989. The court denied the motion by order entered October 23, 1989 (Case No. 87-02022-H3-7, Docket No. 85)
Devine’s non-appearance in the Ringgold case was noted by the court in its Order and Memorandum Opinion Granting Sanctions for Bankruptcy Rule 9011 Violations (Case No. 87-02023-H5-7, Docket No. 295). That bankruptcy court granted sanctions against Devine for falsely stating that he had not received notice of several hearings in the case. In the opinion, the court noted that it had ordered Devine to appear at Ringgold’s creditors’ meeting as the debtor’s representative pursuant to Bankruptcy Rule 2005. Devine had claimed not to have received notice because the notices were directed to him in his capacity as a creditor, rather than as the representative of Ringgold. Noting that Devine was an attorney, although not one licensed to practice in Texas, the court determined that Devine had a duty to know the rules of court and to appear after he himself requested a hearing. The court concluded that Devine “has a pattern of conveniently failing to receive notice irom this Court, from the trustee, and from the former counsel for debtor. After reviewing the evidence offered at the hearings, this Court concludes that Devine is lacking in credibility and received notice of the motions and hearings.” (Case No. 87-02023-H5-7, Docket No. 295, at p. 7).
Non-Appearance in This Case
In the above captioned adversary proceeding, Devine appeared through counsel throughout the pretrial proceedings, then failed to appear at trial on September 17, 1991. Devine and his attorney assert in the Amended Motion to Set Aside Default Judgment and Grant New Trial (Docket No. 35) that they had mistakenly calendared the trial for September 19, 1991. At the pretrial conference on August 6, 1991, with Devine personally present, the court announced a trial date of September 17, 1991. The announced trial date was recorded on the Deputy Clerk’s Courtroom Minutes, which is part of the court’s file in the above captioned adversary proceeding (Adversary No. 90-0782, Docket No. 26). The Worralls’ attorney was present for trial on September 17,1991. The court concludes that Devine was personally aware of the correct trial date and that even a cursory inquiry by counsel into the record would have revealed the correct trial date.
A hearing was held on the Amended Motion to Set Aside Default Judgment and Grant New Trial on June 29, 1995. Devine personally appeared at that hearing. The court continued the hearing to July 18, 1995, at 4:00 p.m., in order to permit the court to retrieve the files in this adversary proceed*661ing from storage. The date for the continued hearing was announced in open court, and is reflected on the Deputy Clerk’s Courtroom Minutes for the June 29, 1995 hearing (Adversary No. 90-0782, Docket No. 50). Devine failed to appear at the hearing on July 18,1995.
Discussion
The Federal Rules of Bankruptcy Procedure provide for setting aside of an entry of default for good cause shown. Bankruptcy Rule 7055, Rule 55(c), Fed.R.Civ.P. The Rules also provide for the setting aside of a default judgment in the event of mistake, inadvertence, surprise, or excusable neglect; newly discovered evidence, fraud, voidness of the judgment, satisfaction, or for any other reason justifying relief. Bankruptcy Rule 7055, Rules 55(c) and 60(b), Fed.R.Civ.P.
A trial judge, responsible for the orderly and expeditious conduct of litigation, must have broad latitude to impose the sanction of default for non-attendance occurring after a trial has begun. The situation is no different when, after repeated failure to attend pretrial conferences, otherwise participate in or remain informed about the litigation, a party fails to attend on the first day of a trial scheduled months before. Ringgold Corp. v. Worrall, 880 F.2d 1138 (9th Cir. 1989); Brock v. Unique Racquetball & Health Clubs, Inc., 786 F.2d 61 (2d Cir.1986).
The court finds Devine’s assertion of mistake in calendaring the trial date in the above captioned adversary proceeding not credible in light of his extensive history of failure to appear combined with claims of mistake in all of the preceding eases as well as in the instant case. The court concludes that it is appropriate to deny the Amended Motion to Set Aside Default Judgment and Grant New Trial.
Based on the foregoing, a separate judgment will be entered denying the Amended Motion to Set Aside Default Judgment and Grant New Trial (Docket No. 35). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492560/ | *685
OPINION AND ORDER DENYING MOTION TO DISQUALIFY COUNSEL FOR CERTAIN DEFENDANTS
BARBARA J. SELLERS, Bankruptcy Judge.
This matter is before the Court on motions by Myron N. Terleeky, trustee of the jointly administered bankruptcy estates of Dublin Securities, Inc. (“DSI”), Dublin Management Co. and Dublin Stock Transfer, Inc. As trustee, Mr. Terleeky is the plaintiff in all four of the adversary actions captioned above. As plaintiff, the trustee has moved to disqualify Russell A. Kelm as counsel for many of the defendants in these actions. Kelm opposed the motions and the Court heard the matters on November 21, 1996.
The Court has jurisdiction in these proceedings under 28 U.S.C. § 1334(b). These are core proceedings pursuant to 28 U.S.C. § 157(b)(2)(B), (E), (H) and (0) which this bankruptcy judge may hear and determine.
The trustee asserts that Kelm previously represented debtor DSI in connection with certain prepetition state court actions in Erie County, Ohio. Although Kelm appeared in those actions as the representative of certain initial unit purchasers (“IUPs”) of stocks brokered by DSI, the trustee asserts that DSI and the IUPs, all of which were defendants in these state court securities fraud suits, were engaged in a joint defense. Therefore, according to the trustee, Kelm’s representation of the IUPs was coordinated with the defense of DSI and Kelm received confidential information regarding DSI in that effort. DSI further paid Kelm’s former firm for his services to the IUPs.
Although the parties’ briefs did not set forth the legal grounds for this dispute with any specificity, ethical rules governing the conduct of attorneys before the Bankruptcy Court are as provided in Rule 83.4(f), formerly known as 2.6, of the Local Rules of the United States District Court for the Southern District of Ohio. See S.D. Ohio L.B.R. 4.0. District Court Rule 83.4(b) adopts the Model Federal Rules of Disciplinary Enforcement (“MFRD”) to govern the conduct of attorneys practicing in this court. Rule IV(B) of the MFRD defines misconduct by attorneys by reference to the Code of Professional Responsibility as adopted by the Supreme Court of Ohio.
The Canons and Disciplinary Rules (“DR”) adopted by the Supreme Court of Ohio to govern the conduct of attorneys in this state which impact on this dispute are Canon 4, DR 4-101 and Canon 9.
Canon 4 requires a lawyer to preserve the confidences and secrets of a client. DR 4-101 further requires that: ... a lawyer shall not knowingly (1) reveal a confidence or secret of his client; (2) use a confidence or secret of his client to the disadvantage of the client, or (3) use a confidence or secret of his client for the advantage of himself or of a third person, unless the client consents after full disclosure. Canon 9 requires a lawyer to avoid even the appearance of professional impropriety.
In this circuit a three-part test is applied to determine whether a party’s attorney shall be disqualified for a conflict of interest. First, the moving party must be a former client of the adverse party’s counsel. That relationship can be consensual and contractual, or it can be implied. Second, there must be a substantial relationship between the subject matter of the counsel’s prior representation of the moving party and the issues in the present lawsuit. Third, the attorney whose disqualification is being sought must have had access to, or was likely to have had access to, relevant confidential information in the course of his prior representation of the client. Dana Corp. v. Blue Cross & Blue Shield Mutual of Northern Ohio, 900 F.2d 882 (6th Cir.1990). The primary purpose for such a disqualification is to protect the confidentiality of information received from the former client, even if such information is only potentially involved.
The ability to deny one’s opponent the services of capable counsel is a potent weapon. This is especially so in complex proceedings such as these where the challenged counsel is familiar with the history and complexity of the IUPs’ issues. Courts must be sensitive to the competing public policy interests involved: preserving client confidences and public respect on the one *686hand and, on the other hand, permitting a party to retain the counsel of his choice. Manning v. Waring, Cox, James, Sklar, and Allen, 849 F.2d 222 (6th Cir.1988). The eases are factually driven and attempt to strike a balance between these public policy interests.
The first part of the test requires the trustee to show that Kelm had an attorney-client relationship with DSI or the other debtors, whether contractual or implied, such that Kelm could be considered to have acted as their counsel. He denies that relationship. The trustee has no witnesses to rebut that testimony because many of the persons formerly associated with DSI are deceased, imprisoned, under indictment, unavailable or perhaps, unreliable.
There was no evidence of any written contract of representation between Kelm and any of the debtors. The trustee’s arguments, therefore, depend upon some showing that would compel the Court to imply such a representation. Evidence introduced for that purpose included the uncontested fact that DSI agreed to pay for legal services utilized by the IUP defendants only if such services were performed by Kelm, the indictment and conviction of one IUP for securities fraud, and Kelm’s timesheet entries for his work in the prepetition state court actions.
The mere fact that DSI paid for Kelm’s services on behalf of the IUP defendants does not, as a matter of law, establish a lack of professional independence. A lawyer may be paid from a source other than the client, if the client consents after being informed of that fact and the arrangement does not compromise the lawyer’s duty of loyalty to the client. American Bar Association, Model Rules of Professional Conduct, Rule, 1.7. Where the party paying for the services has interests which are adverse to those of the party receiving the services, however, the representation should be scrutinized to determine if the attorney is actually representing the party paying for his services.
There was correspondence between DSI and the IUPs, and between Kelm and the IUPs which was designed to inform the IUPs of the state court action and of the representation available to them without charge if they used Kelm’s services. Many of the IUP defendants exercised that option and considered Kelm their attorney. Considering the criminal actions later taken against various persons connected with DSI, and DSI’s admission that it wanted to assist in the defense of the IUPs so DSI could continue to sell securities to them and others, the Court doubts that such consent was very informed. Further, while DSI and the IUPs wanted the Erie County suits to fail, DSI may have wished to keep the IUPs ignorant of certain aspects of its transactions so that such IUPs could participate in subsequent stock offerings. Therefore, DSI and the IUPs had some adverse interests. Their primary goal in those state court actions, however, was not adverse. Accordingly, the mere fact that DSI paid for Kelm’s services does not show conclusively that his representation lacked independence sufficient to cause the Court to find that Kelm was actually representing DSI.
The evidence also showed that at least one of the IUPs has been convicted of securities fraud for her participation in the DSI stock brokerage scheme. The trustee believes this shows that DSI and the IUPs were essentially co-conspirators whose defense in the state court actions were intertwined. Such joint effort leads the trustee to believe that Kelm represented both DSI and the IUPs and, of necessity, received confidential communications from DSI, as well as from the IUPs, for that joint defense.
Review of Kelm’s timesheets between February 1992 and March 1993 show more than 50 communications with the chief operating officer and majority shareholder of DSI, C.J. “Red” Eyerman, or, later, with Eyerman’s daughter. Eyerman was the contact person for Kelm for the IUPs in those lawsuits because many of the IUPs were Eyerman’s family members or friends. Likewise, there were at least 35 communications with DSI’s former counsel, also a defendant in the Erie County litigation, and with that former counsel’s new counsel, as well as 25 or more contacts with DSI’s new counsel. The defendants were discussing their strategy and coordinating their defense. One issue, there*687fore, is whether DSI was controlling Kelm’s efforts on behalf of the IUPs such that DSI was actually Kelm’s primary client.
Kelm testified that he never represented DSI and that his communications with Eyerman were only in Eyerman’s capacity as a representative of the IUPs and not as the representative of DSI. Unfortunately, Eyerman is now deceased. He and other persons connected with DSI and the other debtors have been convicted or are under indictment for securities fraud. Therefore, the trustee has many practical difficulties in any matter requiring witness testimony from a representative of DSI or the other debtors to rebut Kelm’s assertions.
Much of the case law on implied relationships between an attorney and client relates to preliminary consultation between a prospective client and an attorney, even though retention is not a result of such a consultation. See e.g., Westinghouse Elect. Corp. v. Kerr-McGee Corp., 580 F.2d 1311, 1319 (7th Cir.1978), cert. den. 439 U.S. 955, 99 S.Ct. 353, 58 L.Ed.2d 346 (1978). The more analogous cases, however, involve the sharing of information between co-defendants in a criminal proceeding, where an attorney later uses this information “to the detriment of one of the co-defendants, even though that co-defendant is not the one which [the attorney] represented in the criminal case.” Westinghouse, at 1319. What distinguishes an implied professional relationship from no relationship at all, however, is the “client’s belief that he is consulting a lawyer in that capacity and his manifested intention to seek professional legal advice.” Westinghouse at 1319 (quoting McCormick on Evidence (2d ed. 1972) Section 88, p. 179). Thus, for the trustee to establish that an implied attorney-client relationship existed, he must show that DSI believed and manifested that it was retaining Kelm and his former firm for DSI’s benefit, as well as for the benefit of the IUPs. The Court realizes that the trustee is handicapped by a lack of available credible witnesses to present evidence which would compel the court to imply an attorney-client relationship between DSI and Kelm. Were such a relationship to be shown, the substantial relationship test would be met because the facts underlying the trustee’s action against the IUPs are very similar to the facts underlying the prepetition state court actions. Were the Court able to imply the attorney-client relationship, however, the third prong of the test, that Kelm acquired confidential information from DSI, would still have to be shown.
There is case law which this Court finds to be well reasoned and close to these proceedings on its facts, which holds that the exchange of confidential information is not presumed when the professional relationship is implied, rather than expressly contractual. GTE North, Inc. v. Apache Products Co., 914 F.Supp. 1575, 1580 (N.D.Ill.1996). Although the GTE court found that it had evidence of the exchange of confidential information among certain co-defendants, it did not make use of any presumption in that finding. Thus, even though this Court could find that a professional relationship was created by the joint coordination of defenses in the state court actions, there is no presumption available to find that confidences, rather than merely trial strategies, were exchanged.
The trustee believes that in the conduct of the joint defense, Kelm was privy to many confidential communications relating to DSI and the other debtors and their stock brokerage operations. If Kelm now represents the defendant IUPs in a suit where the plaintiff-trustee is the representative of DSI, the trustee believes a clear and irreconcilable conflict of interest or appearance of impropriety is created. Further, according to the trustee, Kelm’s present representation of the IUPs in this action where DSI is the adversary means Kelm will be using the confidential communications he received from DSI in the earlier state court actions against DSI in these adversary proceedings. Kelm, however, denies that he ever represented DSI and denies that he ever received any confidential communications relating to the activities or operations of DSI or the other debtors.
The Court lacks sufficient evidence to imply an attorney-client relationship between DSI and Kelm for the purposes of disqualification under Canon 4. However, the Court believes that the defendants in the state court actions were strongly coordinating *688their defenses in these actions. Were there proof of the exchange of confidential information in that effort, this Court would disqualify Kelm under Canon 9. The Court has no such evidence, however. The only evidence on that issue is Kelm’s testimony that no information confidential to DSI or the other debtors was imparted to him. Accordingly, under the facts and circumstances of this matter, the Court must deny the trustee’s motion, and Kelm’s understanding of professional requirements must govern his actions in this matter.
Based on the foregoing, the trustee’s motion to disqualify Kelm is DENIED.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492561/ | ORDER
JAMES G. MIXON, Bankruptcy Judge.
The matter under consideration is an objection by the Department of Housing and Urban Development (HUD) to confirmation of the modified Chapter 13 plan of Billy and Carollee Starnes (Debtors). For the reasons set out below, the objection is sustained.
This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(L), and the Court has jurisdiction to enter a final judgment in the case.
Facts
On November 6, 1995, Billy Starnes and Carollee Starnes filed a voluntary petition for relief under the provisions of Chapter 13 of the United States Bankruptcy Code. The Debtors proposed a plan to be funded by monthly payments of $630.00 for thirty-six months.
Under the plan, HUD’s claim, which was fully secured by the Debtors’ personal residence at 504 West Garden Drive in Osceola, Arkansas, was treated as a long term debt pursuant to 11 U.S.C. § 1322(a)(2) and (5). The plan proposed to pay HUD a total of $532.59 per month, which included a regular mortgage payment of $308.31 and an additional $224.28 to defray an existing arrearage of $5382.59. The plan proposed to pay unsecured, nonpriority claims of $21,928.28 on a monthly pro rata basis from that portion in the plan’s fund that remained after distributions to HUD and to administrative claim*689ants. An order entered March 4, 1996, confirmed the plan.
On October 29, 1996, the Debtors filed a proposed modification of their plan stating their intention to surrender their “former” residence at 504 West Garden Drive pursuant to 11 U.S.C. § 1325(4)(C).1 The modification recited that fire had destroyed the residence and that it was uninsured at the time of the fire. The proposed surrender was to be in full satisfaction of HUD’s claim; however, the modification also provided that after disposition of the property any deficiency would be treated as an unsecured nonpriority claim under the plan. The modification also proposed to reduce the plan payments to $110.00 per month because the Debtor Carol-lee Starnes is no longer working.
On November 1, 1996, HUD objected to the proposed modified plan on the grounds that it was not proposed in good faith. HUD alleged that the Debtors failed to maintain the fire insurance required by the mortgage and that the fire was one of four at the property in the same month.
A hearing on HUD’s objection was conducted in Jonesboro, Arkansas, on December 16, 1996. At the hearing the Debtor acknowledged that the Osceola Fire Department responded to fires at his residence on September 23, 24, 26, and 30 of 1996. The Debtor also acknowledged that he had allowed his insurance to lapse. At the conclusion of the hearing the matter was taken under advisement.
The Debtors argue in their brief that a modification of a confirmed plan is appropriate pursuant to 11 U.S.C. § 1329 where a significant change in circumstances occurs. The United States has not filed a brief.
Discussion
The Bankruptcy Code permits modification of a confirmed Chapter 13 plan pursuant to 11 U.S.C. § 1329. This section provides in relevant part that the plan may be modified after confirmation but before completion of the plan by request of the debtor, trustee, or holder of an allowed secured claim. 11 U.S.C. § 1329(a) (1994).
Any modified plan proposed pursuant to 11 U.S.C. § 1329 must comply with § 1322(b)(2) and (5). 11 U.S.C. § 1329(b)(1) (1994); In re Jock, 95 B.R. 75, 76 (Bankr.M.D.Tenn.1989) (observing that section 1329(b) requires the application of § 1322(b) to modifications of plans). Section 1322(b)(2) does not allow a plan to alter the rights of holders of secured claims secured only by a security interest in real property that is the debtor’s principal residence. Section 1322(b)(5) permits the plan to provide for the curing of any default on a secured claim on which the last payment is due after the date of the final payment under the plan.
In circumstances where a secured creditor’s collateral is destroyed or damaged post-petition, there is a split of authority as to whether a debtor can amend a Chapter 13 plan to surrender the depreciated collateral. Compare In re Jock, 95 B.R. 75, 76 (Bankr.M.D.Tenn.1989) (holding plan may be modified to surrender automobile, value of which had drastically depreciated in five months, and pay deficiency as an allowed claim) with In re Banks, 161 B.R. 375, 379 (Bankr.S.D.Miss.1993) (denying debtor’s motion to modify plan to surrender damaged vehicle and pay deficiency as an unsecured claim when insufficient justification existed for shifting collateral depreciation to creditor) and In re Cooper, 167 B.R. 889, 890 (Bankr.E.D.Ark.1994) (Scott, J.) (sustaining objection to modification of plan on the basis of bad faith when debtor allowed insurance to lapse on collateral, wrecked the automobile, and then sought to surrender the collateral in full satisfaction of the debt).
However, these cited cases are inapposite because here the modified plan proposes to surrender collateral that is the Debtors’ principal residence. Although section 1325(a)(5)(C) permits the satisfaction of a secured creditor’s claim by surrendering the collateral, section 1322(b)(2) prohibits the Debtors’ proposal to surrender the collateral *690because the modification alters the rights of a holder of a secured claim secured only by a security interest in real property that is the Debtor’s principal residence. Nobelman v. American Sav. Bank, 508 U.S. 324, 328, 113 S.Ct. 2106, 2109-10, 124 L.Ed.2d 228 (1993) (holding Bankruptcy Code prohibits a Chapter 13 plan from modifying the rights of a holder of a claim secured only by the debtor’s principal residence).
Here the Debtors are seeking to modify their plan treatment of HUD’s claim, which was fully secured only by a security interest in the Debtors’ principal residence. The modification provides that the Debtors’ will surrender their “former” residence in satisfaction of HUD’s claim and treat any deficiency remaining after disposition of the collateral as a general unsecured claim to be paid pro rata with other general unsecured claims. Such a modification is unquestionably an alteration of HUD’s rights under the note and mortgage and is clearly prohibited by § 1322(b)(2). The fact that the Debtors allowed the property to become uninsured and now no longer desire to maintain their residence at the premises because of fire damages suffered postpetition is immaterial. Therefore, HUD’s objection to the proposed modification is sustained.
IT IS SO ORDERED.
. The Debtors’ proposed modification incorrectly cites the statute. Presumably the Debtors rely on 11 U.S.C. § 1325(a)(5)(C), which states that a court shall confirm a plan if, with respect to each allowed secured claim provided for in the plan, the debtor surrenders the collateral to the holder of the claim. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492562/ | ORDER GRANTING PLAINTIFFS’ MOTION TO STRIKE THIRD AFFIRMATIVE DEFENSE
C. TIMOTHY CORCORAN, III, Bankruptcy Judge.
These adversary proceedings came on for final pretrial conference on March 11 and 17, 1997. Following hearing argument at the conference, the court took under advisement the motions to strike the defendant’s third *721affirmative defense filed by the plaintiffs, G.E. Capital Corporation/Macy’s, Montgomery Ward Credit Corporation, and FDS National Bank.
I.
In the complaints filed by these plaintiffs, the plaintiffs allege in Count II claims under Section 523(a)(6) of the Bankruptcy Code for willful and malicious injury by the debtor to the property of the plaintiffs. The plaintiffs’ claims arise from the alleged disposition of the debtor’s property that she acquired using credit card accounts maintained with the plaintiffs. The plaintiffs allege that the debt- or’s disposition of this property in derogation of the plaintiffs’ security interests in that property constitutes the willful and malicious injury contemplated by Section 523(a)(6).
The defendant’s third affirmative defense states that:
If plaintiff i[s] the proper party in interest, plaintiff cannot recover under count 2 of the complaint due to the failure of plaintiff to have a security interest under Florida law, in that the agreement with the creditors falls under § 520.35 of the Florida Statutes, which section does not provide for security agreements.
In their motions to strike, the plaintiffs assert that this third affirmative defense fails to state a legal defense. The sole issue raised in the motions is whether a security interest can be taken by a credit card issuer in goods purchased on the credit card or “revolving account” under the Florida Retail Installment Sales Act, Section 520.30 et seq., Florida Statutes. For purposes of this motion, the court assumes as it must that each account in question is a “revolving account” within the meaning of the statute and that, if Florida law permits the taking of a security interest in goods purchased on each of the accounts, the parties have done all those things necessary to create those security interests. A security interest is required for the plaintiffs’ Section 523(a)(6) claims, of course, because the security interest creates the plaintiffs’ property rights that the debtor allegedly destroyed by disposing of the property.
II.
The defendant relies on Oszajca v. Sears, Roebuck & Co. (In re Oszajca), 199 B.R.103, 110 (Bankr.D.Vt.1996), as support for its third affirmative defense. In that case, the bankruptcy court concluded that, as a matter of Vermont law, a revolving charge agreement prohibits the taking of a security interest. Without a security agreement, the plaintiff’s Section 523(a)(6) claim failed.
That court’s analysis began with Vermont’s Retail Installment Act (VRISA), the applicable statute controlling all retail credit arrangements in that state. VRISA permits only two types of retail credit arrangements: a retail installment contract and a retail charge agreement. Every Vermont retail agreement is either one or the other; it cannot be both. The court concluded that the retail agreement at issue was a retail charge agreement. Id. at 107.
The court next turned to the issue of whether a Vermont retail charge agreement precluded the taking of a security interest. Because the statutory definition of a retail installment agreement provides for the taking of a lien and the statutory definition of a retail charge agreement does not, the court concluded that as a matter of statutory construction the absence of the language allowing the taking of a lien in the retail charge agreement statute should be read as an exclusion.1 Id. at 108.
The court was further persuaded by the fact that VRISA allows a higher interest cap in a retail charge agreement then it does in a retail installment agreement. It found that a distinction in the ability to take a security interest was a plausible explanation for the difference. Id. at 109.
*722Finally, there was some legislative history, albeit occurring some years after the passage of the Act, that supported the court’s conclusion that a retail charge agreement prohibited the taking of a security interest.
III.
Applying Florida law to the instant proceeding, the distinctions that the Vermont court found so persuasive are much more attenuated in the applicable Florida statutes than in the applicable Vermont statutes. The definition of a “retail installment contract” found in Section 520.31(10),2 Florida Statutes, contains no reference whatsoever to the granting of a lien or a security interest. Similarly, the definition of a “revolving account” found in Section 520.31(13) is silent on the subject of security.3
Nothing in Section 520.34 or Section 520.35, Florida Statutes, which set forth the requirements for these kinds of accounts, deals with the issue of security except the reference to security found in Section 520.34(10). That section requires the seller in a retail installment contract to deliver to the buyer a release of security upon the payment of the contract.4 Although this language clearly contemplates that a security interest may be taken with a retad installment contract, it is a much further reach to conclude that it is integral to the statutory definition of such a contract. That conclusion, it seems to this court, is a necessary predicate to a finding that one type of contract, the retail installment agreement, can be a secured transaction by definition and the other, the revolving account, cannot.
Florida is also distinguished from Vermont in that there is no legislative history to shed light on the reading of the statute.
It is true, as in Vermont, that Florida defines revolving accounts and retail installment accounts as mutually exclusive and provides for a higher interest cap for revolving charge accounts. The disparate interest rates may be explained, however, by the differing payment methods between the two types of accounts. The principal in a retail installment account is usually paid off at a much faster rate and the creditor’s risk accordingly diminished as a consequence. Because the account holder in a revolving account may elect to make minimum payments, the creditor has a greater exposure in the event of default and may, therefore, be entitled to a greater return.
Finally, the right to take a security interest is at bottom a common law right, subject to limitation by statute. In the absence of a clear legislative mandate, the court declines to abrogate this common law right. This is especially the case because it does not appear that any court in a reported decision has followed Oszajca in this or in any other state.
IV.
For these reasons, the court grants the plaintiffs’ motions to strike the third affirmative defense. The court strikes the third affirmative defense from the defendant’s answers to the complaints of these plaintiffs. The defense states no legal defense. Accordingly, the proceedings will come on for trial. As to the plaintiffs’ Section 523(a)(6) claims, Florida law does not preclude the plaintiffs from taking a security interest in goods pur*723chased by the defendant on revolving accounts if the parties otherwise comply with applicable law as to the creation of such a security interest.
DONE and ORDERED.
. 9 V.S.A. § 2401(7) defines a retail contract as “[A] contract entered into in this state and designated as a retail installment transaction, but not a retail charge agreement, or a document reflecting a sale under it, evidencing an agreement to pay the retail purchase price of goods, or any part thereof, in two or more installments over a period of time, and pursuant to which title to or a lien upon, or a security interest in, the goods is retained or taken by the retail seller to secure the payment of a price which includes the charge as limited by section 2405 of this tide.”
. FI. St. § 520.31(10) defines a "retail installment contract” as “an instrument or instruments reflecting one or more installment transactions entered into in this state pursuant to which goods or services may be paid for in installments. It does not include a revolving account or an instrument reflecting a sale pursuant thereto.”
. FI. St. § 520.31(13) defines a “revolving account” as "an instrument or instruments prescribing the terms of retail installment transactions which may be made thereafter from time to time pursuant thereto, under which the buyer’s total unpaid balance thereunder, whenever incurred, is payable in installments over a period of time and under the terms of which a finance charge is to be computed in relation to the buyer’s unpaid balance from time to time.”
. FI. St. § 520.34(10) states: "After payment of all sums for which the buyer is obligated under a contract, and upon written demand made by the buyer, the holder shall deliver or mail to the buyer, at his last known address, one or more good and sufficient instruments to acknowledge payment in full and shall release all security in the goods. ” | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492563/ | RULING ON DEFENDANT’S MOTION FOR PARTIAL SUMMARY JUDGMENT
ROBERT L. KRECHEVSKY, Bankruptcy Judge.
I.
Primarily at issue in the defendant’s motion for partial summary judgment is whether there is a genuine issue as to a material fact which precludes the granting of the motion. See Fed.R.Civ.P. 7056, making Rule 56 Fed.R.Civ.P. applicable in adversary proceedings (Summary judgment may be rendered if “there is no genuine issue as to any material fact and [ ] the moving party is entitled to a judgment as a matter of law.”).
II.
Martin W. Hoffman, the trustee (the “trustee”) of the Chapter 7 estate of Jones & Lamson Waterbury Farrel Corp. (the “debt- or”), on September 11, 1995, filed an adversary proceeding against the United States of America (the “defendant”), contending that transfers totaling $503,429.51 received by the defendant to satisfy the debtor’s various tax liabilities constituted preferential transfers under 11 U.S.C. § 547(b).1 The defendant’s motion for partial summary judgment, filed April 15, 1996, is based on its assertion that “except for $4,246.502 ... the transferred property was not the property of the debtor for purposes of section 547(b).” Defendant’s Opening Brief at 6.3 This contention is based upon the Supreme Court’s ruling in Begier v. IRS, 496 U.S. 53, 59, 110 S.Ct. 2258, 2263, 110 L.Ed.2d 46 (1990) that monies an employer holds that qualify as statutory (non-common law) “trust-fund taxes”, e.g. income and social security taxes withheld from employees’ gross wages, are not property of the employer-debtor’s bankruptcy estate, whether or not the employer segregates the funds. The trustee acknowledges this principle, but states that from the materials the defendant submitted with its motion, it is not possible to determine the extent of non-trust-fund taxes included in the transfers. Such non-trust-fund taxes would include taxes payable by the debtor under 26 U.S.C. § 3111 (employer excise taxes) which normally would be considered as paid from estate property.
III.
The debtor, a Delaware Corporation with a principal place of business in Cheshire, Connecticut, on or about June 28, 1991, in connection with certain loan agreements, had granted a duly-perfected, first-priority security interest in essentially all of its personal property, e.g. inventory, equipment, intellectual property, and contracts (the “collateral”), to U.S. World Trade Corporation (‘World Trade”). As of April 28, 1993, the debtor owed World Trade $5,273,650.91, and was in default under its loan agreements. World Trade, on that date, exercising its rights as a secured party, conducted a sale of the collateral to Waterbury Farrel Manufacturing Limited Partnership (the “Buyer”) See *790Plaintiff’s Attachment #5, “Secured Party Sale Agreement.” The Buyer paid $1,400,-000.00 to World Trade for the collateral. Id.
On February 21, 1992, April 15, 1992 and August 13, 1992, the defendant had filed three duly-perfected tax liens on the debtor’s property in the respective amounts of $331,-451.91, $399,062.60 and $166,144.09, for unpaid employment taxes for the three quarters ending September 30, 1991, December 31, 1991, and March 31, 1992. To enable the secured-party sale to go forward, the defendant agreed to discharge the collateral from the tax liens upon receipt of $496,773.40 from the sale proceeds, which sum the defendant received on April 29,1993. In a letter agreement dated April 22,1993, (the “letter agreement”) drafted by Sullivan & Worcester, the debtor’s attorneys, and agreed to by a representative of the Internal Revenue Service, the defendant agreed that out of the $496,-773.40 payment, it would allocate $367,195.86 as payment in full of “trust fund taxes and employer taxes for the periods prior to January 1, 1993.” Defendant’s Exh. Ik- The tax hens secured amounts considerably in excess of that amount, with outstanding trust-fund taxes exceeding $500,000. The defendant agreed, for that period, not to assess any responsible-officer penalties “against any person.” Id. The defendant further agreed to accept the balance of $129,577.54 in payment of “first and second quarter [1993] trust fund taxes and employer taxes” with the money to be applied first to “trust fund taxes” and the remainder “against employer payroll taxes.”4 Id. The letter agreement provided that the defendant “apply $92,-184.92 to the first quarter of 1993 and $37,-392.62 to the second quarter of 1993.” Id. Finally, the defendant “agreed that the balance of the proceeds of the [secured party] sale (net of cost of the sale) will go to U.S. World Trade Corporation, and the Internal Revenue Service will have no further interest in the proceeds.” Id.
On June 10, 1993, an involuntary petition under Chapter 7 of the Bankruptcy Code was filed against the debtor. The court, with the debtor’s consent, entered an order for relief on September 22,1993, and the debtor’s case was simultaneously converted to one under Chapter 11. The case, on December 7,1993, was reconverted to one under Chapter 7. The trustee’s complaint to recover preferential transfers from the defendant refers to $503,-429.51 [sic] as the total transfers received by the defendant because, in addition to the $496,773.40 payment, the debtor, on May 6, 1993 and August 24, 1993, had also made employment tax payments of $6,550.80 and $126.90, respectively, to the defendant for the second quarter of 1993. The parties have agreed in their memoranda that $6,292.00 of the $6,550.80 payment is not avoidable as a preference. The defendant concedes that the $126.90 payment is avoidable.
TV.
As previously noted, Begier v. Internal Revenue Service ruled that employees’ withheld taxes that an employer holds in trust for the government are not property of an employer-debtor’s bankruptcy estate, and, consequently, “any voluntary prepetition payment of trust-fund taxés out of the debtor’s assets is not a transfer of the debtor’s property. ...” 496 U.S. at 67, 110 S.Ct. at 2267. It follows that the employer’s share of social security taxes due the defendant under 26 U.S.C. § 3111 constitutes non-trust-fund taxes. See e.g. Brewery, Inc. v. United States, 33 F.3d 589, 593 (6th Cir.1994) (“ [T]he employer’s share of FICA and Medicare taxes under 26 U.S.C. § 3111 constitutes a tax liability that is not held in trust.”).
The trustee’s “Statement Of Material Facts As To Which There Exists Genuine Issues To Be Tried” asserts that “it is unclear how” the defendant allocated the $496,-773.40 payment “to ‘trust fund’ and non-‘trust-fund’ taxes.” Plaintiffs Statement at 2. The trustee points to the letter agreement sentence which reads: “You [the IRS agent] have agreed that $367,195.86 will pay in full trust fund taxes and employer taxes for the periods prior to January 1,1993.” Plaintiff’s *791Supplemental Brief at 5 (emphasis added by plaintiff).
Fed.R.Civ.P. 56(c) provides that summaiy judgment “shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” See Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265 (1986) (quoting Fed.R.Civ.P. 56(c)). The moving party has the burden of proving that no material facts are in dispute, and in considering such a motion, the court “must ‘resolve all ambiguities and draw all reasonable inferences in favor’ of the non-moving party____” Mikinberg v. Baltic S.S. Co., 988 F.2d 327, 330 (2d Cir.1993) (quoting Heyman v. Commerce and Indus. Ins. Co., 524 F.2d 1317, 1320 (2d Cir.1975)). The court in deciding a summary judgment motion, “ ‘cannot try issues of fact, but can only determine whether there are issues of fact to be tried.’ ” R.G.Group. Inc. v. Horn & Hardart Co., 751 F.2d 69, 77 (2d Cir.1984) (quoting Empire Electronics Co. v. United States, 311 F.2d 175, 179 (2d Cir.1962)) (emphasis in original).
The defendant has added to its motion papers a document entitled “Summary Of Governmental Exhibits” (the “Summary”) which outlines, in detail, the assessments the defendant made against the debtor for each of the pertinent five quarters for trust-fund and for non-trust-fund taxes; payments received by the defendant from the debtor prior to April 29, 1993, applied first to non-trust-fund, and then to trust-fund taxes; the balances thereby remaining; and the defendant’s application of the $496,773.40 payment to the five quarters. The Summary reveals that for the three quarters prior to January 1, 1993, the defendant applied $352,816 to trust-fund taxes and $14,378 to non-trust-fund taxes. Specifically, for the quarter ending December 31, 1991, the Summary shows the defendant applied $273,257 to that quarter’s tax obligations, where the trust-fund taxes outstanding amounted to $258,879 and $72,184 was due for non-trust-fund taxes.
For the quarter ending March 31, 1993, the defendant applied $92,184.92 to trust-fund taxes. For the 1993 second quarter, the defendant applied $33,146 to trust-fund taxes and $4,246 to non-trust-fund taxes.
The trustee contends that “the Defendant’s exhibits are incomplete” and that “it is possible that there may have been more non-trust fund taxes due and owing at the time of the $496,773 payment.” Plaintiffs Supplemental Brief at 5. He insists that genuine issues of material fact remain.
The defendant conceded in its motion that the $4,246 allocation in the 1993 second quarter was preferential. As to the $14,378 non-trust-fund tax allocation for the 1991 fourth quarter, the defendant seemingly argues that since it could have applied such sum to remaining unpaid trust-fund taxes in the other two pre-1993 quarters, the court should conclude that is what the letter agreement intended — namely, that the debtor’s principals would want trust-fund obligations paid ahead of the non-trust-fund obligations.
Based upon the materials submitted by the defendant, and the lack of any countervailing material from the trustee, the court concludes there is no genuine issue as to the allocation of the $496,773.40 payment. “If no evidence could be mustered to sustain the nonmoving party’s position, a trial would be useless and the movant therefore is entitled to a judgment as a matter of law.” 10A Wright, Miller & Kane, Federal Practice and Procedure Civil 2d, ¶ 2727 at 130 (1983); Matsushita Electric Industrial Co. Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586-87, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986) (“When the moving party has carried its burden under Rule 56(c), its opponent must do more than simply show that there is some metaphysical doubt as to the material facts____”). The court concludes that the defendant is entitled to summary judgment on all the transfers except for $19,009.70. This amount comprises $4,246 and $126.90 conceded by the defendant as received for non-trust-fund-tax obligations for the second quarter of 1993, $14,378 determined by the court to have been allocated by the defendant to non-trust-fund-tax obligations for the fourth quarter of 1992, and $258.80 agreed to *792by the parties as a preferential payment for the second quarter of 1993.
Y.
The trustee makes a further argument that the $496,773.40 payment was not voluntary in the sense that Begier v. IRS stated that “voluntary” prepetition payments of trust-fund taxes are not transfers of the debtor’s property. The trustee’s contention rests on the conceded fact that the payment to the defendant was made in return for the release of the federal tax liens the defendant filed against the collateral World Trade conveyed to the Buyer. This argument confounds the court since neither the trustee nor the defendant have questioned whether the funds received by the defendant came from the debtor.
According to the uncontroverted background recited in section III supra, the circumstances surrounding the sale indicate that none of the monies received by the defendant would have come from the debtor. The funds transferred to the defendant were apparently proceeds of the sale received by World Trade as the secured party selling the collateral and the party first entitled to the proceeds of sale towards satisfaction of the indebtedness secured by its security interest. See Conn. Gen.Stat. § 42a-9-504. Voluntariness thus is irrelevant. In addition, World Trade’s sale of the collateral, as a secured creditor, cannot give rise to a claim of preference. See 5 Collier on Bankruptcy ¶ 547.03[1][a] at 547-18 (15th ed. rev’d 1996); In re Hagen, 922 F.2d 742, 746 (11th Cir.1991) (transfer to secured creditor in amount of lien during preference period does not constitute preference).
The parties may very well have sufficient reasons why they have asked the court to resolve the defendant’s motion only on application of the trusVnon-trust tax doctrine. In any event, the trustee’s argument on voluntariness fails. See Muntwyler v. United States, 703 F.2d 1030, 1032-3 (7th Cir.1983) (quoting Amos v. Commissioner of Internal Revenue, 47 T.C. 65, 69, 1966 WL 1102 (1966)) (“An involuntary payment of Federal taxes means any payment received by agents of the United States as a result of distraint or levy or from a legal proceeding in which the Government is seeking to collect its delinquent taxes or file a claim therefor.”). There were no distraint, levy or other legal proceedings in the present matter.
VI.
CONCLUSION
The defendant’s motion for partial summary judgment is granted to the extent that a partial judgment may enter in which $484,-441.40 is determined to be the amount of transfers received by the defendant that is not avoidable as preferential under § 547(b) because this amount does not constitute a transfer of the debtor’s property. It is
SO ORDERED.
. 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).
. The defendant’s Opening Brief at note 1 uses the figure of $4,630 which is more accurate as to the extent of the defendant's concession. See Section IV, infra.
. The defendant's motion does not challenge the trustee's allegations as to any of the five subparagraphs in § 547(b), the sole argument advanced being whether the transfers came from estate property.
. A taxpayer may designate application of voluntary payments to either the trust or non-trust portion of its tax liability, but in the absence of such designation, the IRS treats the payment as one representing payment of non-trust-tax liability. Sotir v. United States, 978 F.2d 29, 30 (1st Cir.1992) cert. denied, 507 U.S. 961, 113 S.Ct. 1388, 122 L.Ed.2d 762 (1993). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492564/ | ORDER
HELEN S. BALICK, Chief Judge.
AND NOW, March 27, 1997, upon consideration of the merits of the first omnibus objection to allowance of proofs of claim (docket no. 347), as that objection relates to the proof of claim of Mather Carroll McDuffie (# 314), the court finds and orders that:
*8181. Mather McDuffie filed a claim for $25,-466.31. Docket no. 411. The debtors objected on the grounds that the claim should be classified as a general unsecured non-priority claim, and that the claim was not entitled to either administrative or priority status. That objection provided no caselaw in support of its position as to McDuffie’s claim. An evidentiary hearing and oral argument was conducted on March 10, 1997. McDuffie represented himself.
2. Dominion Engineered Textiles produces tire fabrics and other fabrics used in various industrial applications. It maintains corporate headquarters in Columbia, South Carolina and operates production facilities in Georgia. In June 1955, McDuffie starting working for the company at its Thomaston, Georgia facility. Starting in 1990, the company was experiencing financial problems and hired professionals in attempts to restructure the company out-of-court. By 1992, it was clear to management that drastic measures, including a possible Chapter 11 filing, would need to be taken.
3. As one cost-cutting measure, the company started offering early retirement to certain employees. In June 1992, Max McCord, a personnel manager, called McDuffie into his office. McCord offered McDuffie early retirement on the condition that he retire effective June 30, 1992. At this time, McDuffie was 56 years old and held the position of a full foreman. The offer was on a take it or leave it basis. A request by McDuffie to work one more month was rejected. McDuffie accepted the offer and signed an election and release drafted by the company (“the contract”). Docket no. 411. Pursuant to the contract, McDuffie would be paid $28,788.00 as severance pay, in exchange for valuable consideration as discussed in the contract and as is discussed further in paragraphs seven and eight of this order.
4. At the time the contract was signed, the company knew it would be filing a bankruptcy petition. Indeed, McDuffie had just started receiving monthly payments pursuant to this contract and totaling only $3,321.16 when, on August 24, 1992, the company filed its Chapter 11 petition. McDuffie received no more payments, and the unpaid balance due under the contract is approximately equal to the amount of his claim, $25,-466.31.1
5. The company takes the position that the unpaid balance is a general, unsecured claim. Under the confirmed first amended plan, such claims were impaired, and were paid approximately 10 cents on the dollar. Administrative claims, by contrast, were paid in full under the plan. McDuffie takes the position that his contract is an executory contract that was assumed by the company. If the contract was assumed, the company does not dispute that McDuffie is entitled to payment of his claim in full. National Labor Relations Bd. v. Bildisco & Bildisco, 465 U.S. 513, 531-32, 104 S.Ct. 1188, 1198-99, 79 L.Ed.2d 482 (1984).
6. The company never moved to assume or reject this contract. However, under the confirmed plan, all executory contracts not specifically rejected or assumed upon the date of confirmation were assumed by the company. Docket no. 219, Article VII, Paragraph 7.1. If the contract was executory, it was assumed by operation of the plan. Thus, as the parties agree, the key issue in this contested matter is whether McDuffie’s contract was executory.
7. A contract is executory if, at the time of the petition date, “the obligation of both the [debtor] and the other party to the contract are so far unperformed that the failure of either to complete performance would constitute a material breach excusing performance of the other.” E.g., In re Columbia Gas System, 50 F.3d 233, 239 (3d Cir.1995) *819(citations omitted). It is not disputed that the company’s obligation under the contract to make monthly severance payments to McDuffie is material. At the time of the petition date, McDuffie had unperformed and ongoing obligations to the company not to initiate any legal proceeding against the company for any claims he might have against the company. This is not disputed by the company. The company, however, does dispute that these obligations are material.
8.During closing argument, counsel for the company cited only two cases in support of its position on the materiality issue.
A. The first case is In re Stewart Foods, 64 F.3d 141 (4th Cir.1995). That case involved a retirement agreement whereby Stewart Foods provided the claimant Broecker with monthly cash payments. Pursuant to the agreement, Broecker had no continuing obligations to Stewart Foods, and the two parties stipulated that the contract was not executory. Id. at 146. The bankruptcy court sua sponte decided it knew better than the consensual reasoning of the debtor and the claimant, and held that the contract was executory. On appeal, the United States Court of Appeals for the Fourth Circuit properly reversed, holding that the retirement agreement was not executory. The Stewart Foods case does not support the debtors’ position.
B. The second case the company cited is In re Spectrum Information Tech., 190 B.R. 741 (Bankr.E.D.N.Y.1996). That case involved several employment and separation agreements. Each agreement entitled the respective former employee to pecuniary consideration in exchange for abiding by restrictive covenants that included confidentiality, non-interference, and non-compete clauses. The Spectrum court held that in each contract, the continuing obligations were not of the type that if breached by the employee, would necessarily allow the debtor to be excused from its obligation to pay the employee. Id. at 748, 749 (applying New York law).
C.The company’s reliance upon Spectrum ignores the plain language of the McDuffie contract, which states that if he violates the release, he “must repay to the Company all severance benefits that [he has] received and give up the right to all other severance benefits, and pay all of the Company’s attorney’s fees and costs caused by [his] violation of this Release.” Agreement at ¶2. This contract thus defines a breach by McDuffie of his ongoing obligation as a quintessential material breach that would excuse the performance of the company. Thus, the reasoning of the Spectrum case actually supports McDuffie.
9. The McDuffie contract was executory. It was assumed by operation of the plan.
10. For these reasons, and for the reasons stated in court, McDuffie’s claim for payment on a dollar for dollar basis of $25,466.31 is ALLOWED.
11. If the claim has not yet been paid, it will be paid within three business days of the date of this order.
. The exact unpaid balance is $25,466.84; however it is not clear from the record why McDuffie slightly reduced his claim from this amount. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492565/ | HELEN S. BALICK, Chief Judge.
This is the court’s decision on the motion of the United States Customs Service to allow the Customs Service to resolve the administrative protests of the debtors (docket no. 514), and on the motion of the United States Customs Service for this court to defer adjudication of the debtor’s objections to the claim of The Customs to the United States Court of International Trade (docket no. 513). The debtors oppose these motions, and have submitted about 45 pages of written argument asserting that this court must hear a dispute dealing with import duties and the Tariff Act. The United States Customs Service argues that this court does not have to, and should not hear this dispute. Each party asserts that the other is forum shopping.
I. Facts and Prior Proceedings
The following facts appear in the record in these Chapter 11 cases or have been admitted in the pleadings, and are sufficient to rule on these two motions. These facts consist primarily of prior proceedings here and elsewhere, the regulatory scheme under which Customs operates, and the legal positions of the parties.
A The Pre-Petition Drawback Dispute
The United States Customs Service is a federal agency that collects duties levied upon merchandise imported into the United States to regulate foreign trade and commerce. Anacomp Incorporated and Xidex Development Company, along with other related companies, provide micrographics systems, services, and supplies, and do business in the United States and many countries abroad. “Micrographics” is the conversion of information stored in digital form or on paper to microfilm or microfiche. Anacomp and Xidex regularly import merchandise that is subject to duties.
A drawback claim by an importer requests Customs to refund duties paid upon the importation of merchandise which is later exported in some form or for which substitute merchandise is exported. See generally 19 U.S.C. § 1313; 19 C.F.R. §§ 141-199. Generally, Customs may refund up to 99% of *821previously paid duties. 19 U.S.C. § 1313(a); § 1313(3).
When an “accelerated” drawback is requested, a Customs office may approve the drawback subject to later audit. 19 C.F.R. § 191.72; 19 C.F.R. § 191.10. Drawback claimants must post surety bonds to protect Customs from overpayment of accelerated drawbacks. 19 C.F.R. § 191.72; § 113.65. After Customs has paid a drawback claim, Customs reviews the claim and makes a determination as to whether the claim was correct. This is referred to as the liquidation process. 19 U.S.C. § 1500.
During the time period 1987 through 1995, Anacomp and Xidex (or their predecessors) filed 334 claims with the Customs Service for refunds of drawback duties they had previously paid Customs. Anacomp and Xidex sought accelerated drawbacks of these claims. According to Anacomp and Xidex, the imported parts upon which they had paid duties were used in the manufacture of merchandise which was then exported.
Anacomp and Xidex posted the necessary surety bonds. Customs refunded the drawback claims. Customs then audited the accelerated claims, and disallowed portions of the refunds. Customs billed the debtors for the previously refunded amounts that were disallowed. Anacomp and Xidex disagreed with Customs on Custom’s decision relating to the overpayment of drawbacks, and initiated administrative protests with the Customs office in San Francisco. The San Francisco office forwarded the protests to the Custom’s office of Regulations and Rulings in Washington, D.C.
The insurance companies that provided the surety bonds relating to these drawback claims filed protests. Customs denied the sureties’ protests.
B. Chapter 11 Events
Anacomp, Xidex, and related companies filed Chapter 11 petitions in this court on January 5, 1996. These cases were consolidated for procedural and administrative purposes. Customs voluntarily ceased all action with respect to the administrative protests and miscellaneous unliquidated entries while the automatic stay of 11 U.S.C. § 362(a) was in effect.
On May 20, 1996, this court confirmed the debtors’ third amended joint plan of reorganization.
On June 28, 1996, the United States Customs Service timely filed two proofs of claims against Anacomp. In summary, through these two claims, Customs asserts the debtors received overpayments of the above drawbacks and seeks repayment. Claim number 297 requests $2,482,081.88 as an unsecured nonpriority claim. Documents attached to this claim list 219 drawback entries of Xidex that Customs liquidated in the aggregate amount of $2,150,186.51. Customs claims this amount, plus interest of $331,-895.37.
Claim number 298 requests $352,879.53 as an unsecured nonpriority claim, and $5,375.71 as an unsecured priority claim. Documents attached to this claim list 102 drawback entries of Anacomp that Customs liquidated in the aggregate amount of $208,914.93; interest due to Customs of $29,782.03; and unliquidated drawback entries for which Anacomp received an aggregate refund of $113,182.57. The claim also lists a violation of 19 C.F.R. 113.62(a)(l)(i) that provides for liquidated damages of $1,000.00. These dollar amounts total $352,879.53. Claim number 298 also lists six drawback entries totaling $5,280.68 plus $95.03 in interest due (for a total of $5,375.71) for priority duty bills.
In August 1996, Anacomp filed an objection to both claims. The objection raises various legal and factual reasons why the claims should be disallowed, and in the alternative, why the $5,375.71 amount is not entitled to priority status.
C. The Motions Filed by Customs and Anacomp
On November 4, 1996, Customs filed two motions: (1) A motion to allow Customs to *822resolve the administrative protests of the debtors; and (2) A motion to defer adjudication of the debtor’s objections to the claim of Customs to the United States Court of International Trade. Customs filed the first motion because, while it believes those administrative protests should proceed, the debtors have asserted that the confirmed plan and order enjoin the protests from proceeding.
As a background for the second motion, Customs believes that the chief issues underlying Anacomp’s protests are the same issues Customs considered and rejected in the sureties’ protests. Customs states in its papers that it is ready to rule upon Anacomp’s protests, and the strong implication is that Customs will deny those protests. When Customs denies an administrative protest of a drawback claimant, the claimant has the right to seek judicial review in the Court of International Trade. 28 U.S.C. § 2636. Customs concedes that this court has concurrent jurisdiction with the Court of International Trade to resolve the drawback dispute. However, in its second motion, Customs asks that this court stay its hand and defer to the specialized expertise of the Court of International Trade.
On November 15, 1996, the reorganized Anacomp filed a motion for summary judgment with respect to its objection to both claims of Customs. The motion argues that as a matter of law, Customs is time-barred from disputing the debtors’ drawback entries (if the drawback entries of the debtors are allowed in full, Customs’ proofs of claims would be disallowed).
II. Discussion
A. The Motions of Customs Will be Considered First
In a November 25, 1996 letter signed by Laura Davis Jones, Esquire, Anacomp asks this court to consider its summary judgment motion first. That request is DENIED, as to do so would moot the two motions of Customs and effectively deny on the merits the relief requested in those two motions without giving consideration to the merits of those motions. Anacomp admits as much in its letter. In contrast, considering the two motions of Customs first, which do not ask for a ruling on the merits of the drawback dispute, does not prejudice the debtors.
B. This Court will Defer to the Administrative Proceedings Before Customs
Anacomp takes the position that any attempt by Customs to resolve the administrative protests would violate the confirmed plan and order. Customs counters that its resolution of the protests does not violate the Bankruptcy Code or Anacomp’s confirmed plan. Indeed, Customs asserts that this Court is without jurisdiction until the administrative proceedings before Customs are concluded.
These issues are not necessary to decide. Assuming Customs is wrong, and that Ana-comp is correct, Customs’ first motion essentially seeks to modify any applicable plan injunction to allow the administrative protests to proceed. Anacomp has properly admitted in several pleadings in these cases that even if its confirmed plan enjoins contemplated creditor conduct, the court can grant such relief from the injunction, for example, when the court decides to abstain from hearing a creditor’s claim. E.g., Docket no. 524 at 1; November 25, 1996 letter of Anacomp to the Court (asserting Customs’ two motions seek discretionary abstention); Docket no. 462 at 7-9 (memorandum of law of Anacomp discussing grounds for motion of a creditor seeking relief from the confirmation order).
Furthermore, the confirmed plan itself contemplates that while this court retains jurisdiction over certain matters, including this drawback dispute, this court may “abstain[] from exercising, or deeline[]to exercise, jurisdiction ... over any matter arising in, arising under, or related to the Chapter 11 cases.” Docket no. 304, section 13.2 (emphasis added).
Thus, the court turns to the discretionary issue of whether this court should allow Cus*823toms to resolve the debtors’ administrative protests. On this discretionary issue, the debtors are silent. Allowing the protests to proceed would “permit [an] administrative agency to develop a factual record, initially apply its expertise and discretion to the controversy, correct its own errors, eliminate judicial controversies, ... and prevent courts from frustrating congressional decisions to have certain disputes resolved originally in administrative forums.” In re St. Mary Hospital (Hiser v. Commonwealth of Pennsylvania), 125 B.R. 422, 428 (Bankr.Pa.1991) (citations omitted) (discussing doctrine of exhaustion of administrative remedies). Consideration of the doctrine of primary jurisdiction doctrine likewise strongly supports the same result. E.g., id. at 480. In short, the circumstances here overwhelmingly support allowing the administrative protests to proceed before Customs.
C. This Court Will Defer to the United States Court of International Trade
After Customs rules upon those administrative protests, the question remains of which court should consider the debtors’ continuing arguments. Customs moves for this court to defer to the United States Court of International Trade (“the CIT”). In a trilogy of cases, the United States Supreme Court established the doctrine whereby a reorganization court should stay its hand where Congress has entrusted the resolution of matters in controversy to a federal tribunal. Smith v. Hoboken Railroad Warehouse & S.S. Connecting Co., 328 U.S. 123, 66 S.Ct. 947, 90 L.Ed. 1123 (1946) (Court should stay its hand pending a decision by the Interstate Commerce Commission); Nathanson v. N.L.R.B., 344 U.S. 25, 30, 73 S.Ct. 80, 83-84, 97 L.Ed. 23 (1952) (same ruling vis-a-vis the National Labor Relations Board); Order of Railway Conductors v. Pitney, 326 U.S. 561, 565-68, 66 S.Ct. 322, 324-26, 90 L.Ed. 318 (1946) (same ruling vis-a-vis the Adjustment Board created under the Railway Labor Act). Customs relies on these cases in support of its second motion.
The debtors do not dispute that the Court of International Trade is a specialized federal tribunal created by Congress that has expertise in adjudicating the issues raised by the drawback dispute. Nonetheless, the debtors assert this court should not defer to that Court. They argue that the expertise of the CIT is not needed here. The debtors believe there is a threshold legal issue that this Court can easily resolve, and if it does so in the debtors’ favor, would then disallow the proofs of claims of Customs. This issue is the statute of limitations issue raised in the debtors’ summary judgment motion. That statute of limitations is contained in section 504 of the Tariff Act, and states in relevant part:
[A]n entry of merchandise not liquidated within one year from ... the date of entry of such merchandise ... shall be deemed liquidated at the rate of duty, value, quantity, and amount of duties asserted at the time of entry by the importer, his consignee, or agent.
19 U.S.C. § 1504(a). The debtors argue this language time-bars Customs from disputing their drawbacks. Customs disagrees as a matter of law. It argues that this language, which refers to “entries of merchandise,” applies only to entries of merchandise, but not “drawback entries,” and therefore does not apply to liquidation of the drawback claims at issue here. An entry of merchandise is defined at 19 C.F.R. § 141.0a(a). A drawback entry is defined at 19 C.F.R. § 191.2(h). Long before the present dispute arose, Customs promulgated a regulation stating that the one year liquidation time limit “shall not apply to ... drawback entries.” 19 C.F.R. § 159.11(b). In their briefs, the parties have written about 40 pages on the proper scope of section 504, not including affidavits and other attachments to those briefs. In short, the record suggests that the issue is more complex than the debtors are willing to admit to this court. Moreover, the Court of International Trade is better equipped to decide just how complex the section 504 issue is, and to ultimately interpret section 504, if necessary.
The debtors have also argued prepayment of the challenged drawbacks by the debtors *824would be jurisdictionally required to appeal to the CIT. Assuming that the debtors would need to prepay the disputed drawback amount,1 the debtors’ admit they have fully reserved the disputed amount on its balance sheet. Docket no. 211 at 32 (disclosure statement).2
The debtors also argue that Customs’ decision is entitled to a presumption of correctness in the CIT,3 and that therefore deferring to the CIT would unfairly shift the burden of proof. In the circumstances here, there is nothing unfair about requiring the debtors to follow the rules created under a Congressional scheme and normally applicable to an appeal of a Customs decision. However, the debtors’ argument does partially explain their determination to keep the drawback dispute in this Court.
The debtors also argue delay. While the ongoing loss of the use of the funds is unfortunate, the debtors decided to reserve those funds, and at the same time affirmatively oppose allowing the protests to proceed during the pendency of its Chapter 11 eases. The debtors have been reorganized and the plan substantially consummated without substantive resolution of the Customs’ claims. Under these circumstances, the delay does not materially change the analysis of whether to defer.
In their omnibus surreply brief, the debtors argue that the deferral motion is really an abstention motion. This is another argument that the court need not decide, as assuming Customs’ motion should be deemed one for abstention, the result would not change.
In the debtors’ abstention analysis, the debtors rely heavily upon In re Apex Oil Co., 131 B.R. 712 (E.D.Mo.1991). This is the only case cited by either party addressing the issue of whether a bankruptcy court should abstain to allow the CIT to resolve a dispute between a Chapter 11 debtor and Customs. That case focused on whether it was “in the interest of justice” to abstain pursuant to section 1334(c)(1) of Title 28. The debtors are correct that the factors considered by the Apex court should be considered by this court before “deferring” to the CIT. The Apex court ruled that that abstention was not in the interests of justice, for essentially two reasons “peculiar” to that case. Id. at 715. First, the drawback dispute arose post-petition and administrative proceedings would have to begin anew. Second, the CIT was not an available forum given the jurisdictional requirements of the CIT and provisions in Apex’ confirmed plan inconsistent with those jurisdictional requirements.
The Apex decision merely highlights the fact-intensive nature of whether this bankruptcy court should defer to the CIT, and supports Customs’ motion. This court has already ruled that the Anacomp debtors will complete the administrative protest process. Unlike Apex, because the debtors’ drawback dispute commenced pre-petition, and because of the parallel protests by the sureties, the remaining proceedings before Customs should be quick. If the debtors are correct as to the simplicity and merits of the statute of limitations issue, the proceedings before the CIT should be equally expeditious. The other factors relied upon by the Apex court are also not present here.
The debtors’ other arguments in opposition to Customs’ second motion are equally without merit.
III. Conclusion
In summary, this court declines to exercise jurisdiction over the drawback dispute. To the extent necessary, any injunction contained in the confirmation order or plan is MODIFIED as follows:
1. To allow the proceedings relating to the administrative protests of the debí*825ors to the United States Customs Service’s disallowance of portions of the drawback claims of Anacomp and Xidex, presently pending at the Office of Regulations and Rulings in Washington, D.C., to go forward and through completion;
2. To allow Customs to liquidate any previously unliquidated entries.
3. With respect to any decision resulting from the proceedings described in paragraphs 1 and 2 above, to allow the debtors to file and prosecute an appeal to the Court of International Trade, and to allow all other parties to that appeal to participate in that appeal.
IT IS SO ORDERED.
. This issue is not for this court to decide.
. One of the debtor’s briefs also asserts that $2.8 million of their funds have been deposited in the court registry in a United States District Court in an escrow for Anacomp's sureties in connection with Custom’s claims. Docket no. 523 at 9.
. This issue is also not for this court to decide. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492567/ | MEMORANDUM OPINION
WILLIAM S. HOWARD, Bankruptcy Judge.
This matter comes before the Court after having been submitted on the record pursuant to an Agreed Order of Submission entered herein on February 27, 1997. The issue before the Court is whether the trustee may avoid a transfer from the debtors to defendant Chrysler Credit Corporation (“Chrysler Credit”) pursuant to 11 U.S.C. § 547(b). 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)(F).
The trustee obtained a Summary Judgment against the defendant debtors on October 16, 1996. The trustee and Chrysler Credit entered into a Joint Stipulation of Facts on December 16, 1996. Included therein were these significant facts: the debtors filed their Chapter 7 petition in this Court on April 29, 1996. They were insolvent on that date. On March 15, 1996, they had purchased an automobile, executing in connection therewith an application and retail installment contract. On that date, the dealer from which the debtors purchased the vehicle had not received paperwork to transfer the title to it from an auto auction in Ohio. The dealer finally received the duplicate title on April 23, 1996. On that same date, ownership of the vehicle was transferred from the dealer to the debtors, and a title certificate issued which shows the hen of Chrysler Credit, with a first hen filing date of April 24,1996.
*884The trustee filed a Memorandum in support of summary judgment on January 15, 1997. Chrysler Credit filed a Motion for Summary Judgment on the same date. The trustee filed a Response on January 23,1997. The trustee maintains that he is entitled to judgment as a matter of law that the lien of Chrysler Credit must be avoided as a preferential transfer pursuant to 11 U.S.C. § 547(b). In order to prevail under that statute, the trustee must show that there was a transfer of property of the debtor to or for the benefit of a creditor, for or on account of an antecedent debt, while the debtor is insolvent, and within 90 days preceding the filing of the bankruptcy petition.
The trustee contends that the stipulated facts clearly require a finding of preferential transfer. The debtors transferred property by giving a security interest for the benefit of Chrysler Credit on account of an antecedent debt. The transfer was made while the debtors were insolvent and within 90 days before the filing of their Chapter 7 petition. The transfer enabled Chrysler Credit to receive more than it would have in a Chapter 7 case without the transfer, as it clearly would receive more with a hen in place on the vehicle than without it.
Chrysler Credit’s hen was not noted on the certificate of title until 38 days after the transaction, and the trustee contends that therefore the 20-day “relation back” exception for enabhng loans found in 11 U.S.C. § 547(c)(3) that would allow it to have its security interest considered perfected at the time it attached cannot be satisfied here. Support for the trustee’s position in this regard is found in In re Trott, 91 B.R. 808, 810 (Bankr.S.D.Ohio 1988). There the court was called upon to determine when the debtor received “possession” of the collateral for purposes of appheation of § 547(c)(3)(B). The court held that possession means “physical control or custody of the collateral, as opposed to the acquisition of a right of ownership therein” through issuance of a certificate of title. The debtor herein received possession of the vehicle on March 15 1996, the date he purchased it. Therefore the trustee is correct in his assertion that Chrysler Credit may not avail itself of the § 547(c)(3) exception.
Chrysler Credit’s Motion for Summary Judgment does not address the exception question, however, but maintains that attachment did not even occur until the debtors “acquired an interest” in the vehicle, and that they did not acquire their interest in the vehicle until the title was recorded in Kentucky. It cites KRS 355.9-203(c) which provides that a security interest is not enforceable and does not attach unless the debtor has rights in the collateral.
Chrysler Credit further cites a provision of the Ohio Revised Code, ORC § 4505.04, which provides in part that a person acquiring a motor vehicle from its owner does not acquire any right, title or interest in the vehicle until he receives a certificate of title. Chrysler Credit then concludes that on the date that the debtors purchased the vehicle, the Kentucky dealer had no right, title, or interest in it and so could not pass any on to them.
The trustee contends that the requirements of Ohio law are irrelevant here. This Court agrees; the transaction in question involved Kentucky consumers and a Kentucky automobile dealership, and to the extent that any state law is applicable, it is Kentucky law. The trustee further does not agree that the debtors did not acquire any rights in the collateral until April 23, 1996. As he points out, pursuant to KRS 355.9-203 there are three conditions that must be fulfilled before a security interest is enforceable and attaches: the debtor has signed a security agreement which contains a description of the collateral, value has been given, and the debtor has rights in the collateral. The only element in contention here is whether these debtors had rights in the collateral. The trustee maintains that they did.
While no Kentucky or Sixth Circuit eases were found which address the issue of “rights in the collateral,” other jurisdictions *885have had occasion to rule on it. Every state that has adopted the Uniform Commercial Code has the same provisions within its statutory framework. Consequently, KRS 355.9-203 has its exact counterpart in other states, and the interpretations of courts in those jurisdictions may be applicable herein. In In re Standard Foundry Products, Inc., 206 B.R. 475 (Bankr.N.D.Ill.1997), the court in interpreting this section stated:
The drafters of the UCC intended that ‘rights in the collateral’ not be equated with ownership...... Article 9 of the UCC is concerned with whether the debtor ‘has acquired sufficient rights in the collateral for the security interest to attach’ and is not concerned with title to the collateral.....
The phrase ‘rights in the collateral’ has generally been recognized to include the following: (1) the debtor has possession and title to the goods; (2) the true owner consents to the debtor’s use of the collateral as security; or (3) the true owner is estopped from denying the creation of the security interest. (Cites omitted.)
At page 479.
Further consideration of this issue was undertaken by the court in Matter of Joy, 169 B.R. 931 (Bankr.D.Neb.1994). There the court stated:
[Fjaetors such as the degree of control exercised over the goods may be considered in determining if attachment has occurred..... It has also been held that a debtor has sufficient rights in collateral for a security interest to attach “where a debt- or gains possession of collateral pursuant to an agreement endowing him with any interest other than naked possession.’____ (Cites omitted.)
At page 936. Taking these interpretations into account in this matter, the debtors would appear to have had “rights in the collateral” at the time they purchased the automobile. The debtors in fact had possession and control of the collateral on the date they purchased it from the dealer.
In consideration of all of the foregoing, it is the opinion of this Court that the trustee carried forward his burden of demonstrating that there is no genuine issue of material fact and that he is entitled to judgment as a matter of law that the belated perfection of a security interest by Chrysler Credit was a preferential transfer which he may avoid pursuant to 11 U.S.C. § 547(b). Chrysler Credit’s Motion for Summary Judgment should be overruled. 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/8492568/ | OPINION
RUSSELL, Bankruptcy Judge:
Dale and Leah Jones appeal the summary judgment granted by the bankruptcy court confirming their tax liability in the amount of $411,318.98. We VACATE and REMAND for trial consistent with this opinion.
*937I. FACTS
The plaintiffs/debtors Dale and Leah Jones (“debtors”) appeal the summary judgment motion granted by the United States Bankruptcy Court for the District of Idaho in favor of the Internal Revenue Service (“IRS”). The original adversary proceeding was brought by the chapter 131 debtors, seeking a determination from the bankruptcy court that they were no longer liable for certain taxes.
The following material facts are undisputed. On December 24, 1987, the debtors submitted a Form 656 “Offer in Compromise” to the IRS seeking to settle their federal tax liability for the years 1975 through 1979. The tax liability arose over several tax shelters the debtors claimed on their 1975 through 1979 tax returns that a federal tax court declared invalid. The tax court held the debtors liable for $139,466 on the tax returns in question. By 1987, however, this liability had grown to over $287,000 due to penalties and accrued interest.
The debtors offered to pay $139,466 to satisfy this $287,000 tax liability. Under the Compromise, the debtors paid the amount of the underlying tax in return for the IRS forgiving the accrued interest and penalties. In connection with the Offer in Compromise, the debtors submitted IRS Form 433 Statement of Financial Condition and Other Information. On Form 433, questions 24 and 25, the debtors denied having an interest (as beneficiary, trustee, life interest, etc.) in an estate or trust.
In June 1988, IRS revenue officer Betty Young set up a personal interview with Dale Jones (“Jones”) to go over Form 433 item by item to verify its accuracy. The revenue officer discovered that the debtors were the trustees of the Darback Trust. The revenue officer also discovered several “suspicious” transfers of property (real and personal) which were all made by the debtors to BICO Corporation on the same day in 1979. The transfers included the debtors’ personal residence, automobiles, and other properties. Dale Jones is the Secretary of BICO but claims no financial interest in the Corporation.
Inspector Young’s report, however, stated that the debtors continued to use the properties, and paid rent on their residence to BICO. The report stated:
The investigator believes these rents are below the fair market value of rents in the area. When asked about this, the taxpayer indicated he did work for the corporation in exchange for the reduced rent. The taxpayer states that he owns his automobile, although the Department of Motor Vehicles has the corporation, as mentioned above, as the registered owner. The investigator has been unable to show that the taxpayer has any financial interest in the corporation and so has been unable to refer the case to Criminal Investigation. The taxpayer conducts all his business by cash. Review of his bank statements and cheeks revealed nothing.
Despite these noted suspicions, the revenue officer recommended that the IRS accept the offer. The revenue officer concluded that the compromise offer exceeded the sum that could be collected under the usual collection procedures and, based on their present income and future prospects, appeared to be the maximum sum that the taxpayers could reasonably be expected to pay. On March 7, 1989, the IRS accepted the debtors’ Offer in Compromise and the debtors paid the IRS $139,466.
In May of 1989, however, the IRS began an investigation of BICO Corporation. This investigation led to a grand jury indictment against Jones in the United States District Court for the District of Idaho on April 13, 1994 for violating 26 U.S.C. SS 7201 and 7206(1). The charges were as follows:
Count One
On or about October 1, 1979, and continuing to about August 9, 1989, in the *938District of Idaho, DALE D. JONES, a resident of Pocatello, Idaho, did willfully attempt to evade and defeat the payment of a large part of over $287,000.00 in income tax due and owing him to the United States of America for the calendar years 1975 through 1979 1) by concealing his ability to pay, 2) by making false statements to representatives of the IRS, and 3) by submitting false documents to the IRS.
Count Two
On or about June 7,1988 in the District of Idaho, DALE D. JONES, a resident of Pocatello, Idaho, did willfully make and subscribe a Statement of Financial Condition and Other Information (IRS Form 433), which was verified by a written declaration that it was made under penalties of perjury and which DALE D. JONES filed with the Internal Revenue Service, not then believing the Form 433 to be true and correct as to every material matter in that: 1) item 23 of the IRS Form 433 reported that defendant JONES had no life interest in any trust, whereas, as defendant JONES then well knew, he had a life interest in the Darback Trust, and 2) item 24 of the IRS Form 433 reported that defendant JONES was not the grantor or donor of any trust, nor the trustee or fiduciary for any trust, whereas, as defendant JONES then well knew, he was the donor, grantor, and trustee of the Darback Trust.
On July, 18, 1994, Jones pled guilty to Count 1. In exchange for the guilty plea, the government agreed to dismiss Count 2 and to not take a position during sentencing. The District Court placed Jones on two years probation, and fined him $2,500.
On November 28, 1994, the IRS revoked acceptance of the debtors’ Offer in Compromise pursuant to 26 C.F.R. § 301.7122-l(c) (1)2 on the grounds that the debtors had falsified documents and concealed assets in connection with the submission of the Offer. On April 3, 1995, the IRS reassessed the debtors’ tax liability, which by that time consisted of the accrued interest and penalties on the previously paid tax.
On May 11, 1995, the debtors filed a petition for relief under chapter 13. On June 19; 1995, the IRS filed a proof of claim of $411,-318.98 for penalties and interest for tax years 1975 through 1979.
On August 11, 1995, the debtors filed an adversary proceeding seeking a determination by the bankruptcy court of the amount of their tax liability and a determination of what portion of that liability was a secured claim. The debtors moved for summary judgment, asking the bankruptcy court to determine that they were not liable for the taxes asserted by the IRS on the basis that it had improperly set aside the Offer in Compromise agreement.
On June 7, 1996, the bankruptcy court denied the debtors’ motion for summary judgment and entered an order granting summary judgment in favor of the IRS. The bankruptcy court concluded that “making false statements to representatives of the IRS, and submitting false documents to the IRS, are the same thing as a ‘falsification or concealment of assets’ by Debtor.” The *939bankruptcy court, therefore, held that the IRS was entitled to reopen and revoke the Offer in Compromise pursuant to 26 C.F.R. § 301.7122-l(c)(l). The court further concluded that the Offer in Compromise was properly set aside as to debtor Leah Jones as well. The debtors timely appeal.
II.ISSUE
Whether the bankruptcy court erred in granting summary judgment in favor of the Internal Revenue Service.
III.STANDARD OF REVIEW
Findings of fact by the bankruptcy court are not to be set aside unless found to be clearly erroneous. In re Littleton, 106 B.R. 632, 634 (9th Cir. BAP 1989), aff'd, 942 F.2d 551 (9th Cir.1991). Conclusions of law are reviewed independently and are subject to de novo review. Id.
Summary judgment is appropriate only if the evidence, viewed in the light most favorable to the non-moving party, shows that there are no genuine issues as to any material fact, and that the moving party is entitled to judgment as a matter of law. FED. R. CIV. PROC. 56(c); Hopkins v. Andaya, 958 F.2d 881, 884 (9th Cir.1992), cert. denied, 513 U.S. 1148, 115 S.Ct. 1097, 130 L.Ed.2d 1065 (1995).
The issue before the Court, whether summary judgment was proper, is a question of law and is reviewed de novo. In re LCO Enterprises, 12 F.3d 938, 941 (9th Cir.1993); see also Matter of Lockard, 884 F.2d 1171, 1174 (9th Cir.1989) (availability of collateral estoppel reviewed de novo).
IV.DISCUSSION
Whether the Bankruptcy Court Erred in Granting Summary Judgment in Favor of the IRS
1. Whether Dale Jones, by pleading guilty to (1) concealing his ability to pay. (2) making false statements to representatives of the IRS, and (3) submitting false documents to the IRS, was collaterally estopped from litigating whether he falsified or concealed his assets
Summary judgment should be granted if “the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.” Fed. R. Civ. Proc. 56(c). The trial court stated:
The issue is whether concealing his ability to pay, making false statements to representatives of the IRS, and submitting false documents to the IRS, are the same thing as a “falsification or concealment of assets” by Debtor. This court concludes that they are. Therefore, the IRS is entitled to reopen and revoke the Offer in Compromise pursuant to 26 C.F.R. section 301.7122-1(c)(1).
In granting summary judgment, the court collaterally estopped the debtors from litigating whether a guilty plea by Jones to concealing his ability to pay, submitting false statements to the IRS, and submitting false documents to the IRS were the same as “falsification or concealment of assets.”
For collateral estoppel to apply, the issue sought to be precluded must be the same issue involved in the prior action. The issue must have been actually litigated in the prior action. It must have been determined by a valid and final judgment, and that determination must have been essential to the final judgment. Matter of Ross, 602 F.2d 604, 608 (3rd Cir.1979).
The IRS argues that the “Debtors cannot relitigate in the Bankruptcy Court whether Mr. Jones falsified documents and concealed his assets as those facts have been conclusively established by Mr. Jones’ guilty plea.” The IRS correctly asserts that a guilty plea “conclusively admits all factual allegations of the indictment.” McCarthy v. U.S., 394 U.S. 459, 466, 89 S.Ct. 1166, 1171, 22 L.Ed.2d 418 (1969). The IRS contends that pleading guilty to willfully attempting to evade and defeat one’s federal income tax “(1) by concealing one’s ability to pay, (2) by making false statements to representatives of the Internal Revenue Service, and (3) by submitting false documents to the Internal *940Revenue Service,” is the same as falsifying or concealing assets.
Nowhere during the course of the criminal proceedings, however, did Jones admit to falsifying or concealing his assets.3 The only thing conclusively established by Jones’ guilty plea in the criminal trial was that Jones concealed his ability to pay, made false statements, and falsified documents, not assets.
Concealing one’s ability to pay is not the same as concealing assets. Form 433 requires the taxpayer to list both the taxpayer’s income and assets. The taxpayer’s income and assets both constitute an “ability to pay.” The debtors persuasively argue that “if a taxpayer has accurately reported his assets, but failed to accurately report his income, he has ‘concealed’ his ability to pay.” Jones’ guilty plea of “concealing his ability to pay” provides the court with no guidance as to whether Jones “concealed his assets.” Jones could have either failed to accurately report his income, his assets, or both.4 This issue was neither litigated nor determined in the criminal trial. The requirements for the application of collateral estoppel were therefore not met.
Assuming, arguendo, that this issue was actually litigated and determined that Jones’ guilty plea collaterally estopped him from litigating whether he “concealed his assets,” a genuine issue of material fact exists as to whether the IRS relied on Jones’ false statements in accepting the Offer in Compromise, as discussed below.
Because there was a genuine issue of material fact, the bankruptcy court erred in granting summary judgment. The IRS was not entitled to judgment as a matter of law. Fed. R. Civ. Proc. 56(c); Hopkins, 958 F.2d at 884.
2. Whether the IRS must prove reliance in order to revoke the Offer in Compromise
An Offer in Compromise is a contract, and is governed by contract law. “It has *941long been settled that an agreement compromising unpaid taxes is a contract and, consequently, that it is governed by the rules applicable to contracts generally.” U.S. v. Lane, 303 F.2d 1, 4 (5th Cir.1962) (citing Walker v. Alamo Foods Co., 16 F.2d 694 (5th Cir.1927), cert. denied, 274 U.S. 741, 47 S.Ct. 587, 71 L.Ed. 1320 (1927)).
The Ninth Circuit in Timms v. U.S., 678 F.2d 831 (9th Cir.1982), cert, denied, 459 U.S. 1086, 103 S.Ct. 569, 74 L.Ed.2d 932 (1982) also applied contract principles to offers in compromise under 26 C.F.R. § 301.7122-l(c). Although the case is not directly on point,5 the Ninth Circuit in Timms cited Lane with approval and stated that the decision in Lane stood “for no more than the proposition that an agreement is an agreement and that the taxpayer is bound by its terms. So too is the government.” Id. at 834. The Ninth Circuit consistently applied principles of contract law to the case, stating, “[t]he ‘rule of law’ which is normally applicable to a § 7122 compromise is that such compromises are final and may not be reopened in the absence of fraud or mutual mistake.” Rescission due to fraud or mutual mistake is a principle of contract law. See RESTATEMENT OF CONTRACTS §§ 152 and 162.
In order to revoke the Offer in Compromise, the IRS must show that it relied on Jones’ fraudulent representations. The debtors argue, however, that the IRS did not rely on Jones’ false statements and representations in determining whether to accept the Offer in Compromise. The debtors believe that the IRS, based on Inspector Young’s report, knew that there were false statements, knew that the Darback Trust existed, and also knew that Jones may have an interest in BICO. The debtors argue that “[detrimental reliance can hardly be claimed by the government, because it had full knowledge of Jones’ assets that were not specifically included in the Form 433, yet the government chose to accept the offer.”
The IRS argues that the plain reading of 26 C.F.R. § 301.7122, 26 U.S.C. § 7122, and 26 U.S.C. § 7805 does not require reliance. Under 26 U.S.C. § 7122(a), Congress gave the IRS express authority to enter into offer in compromise agreements. Section 7122(a) provides:
The Secretary may compromise any civil or criminal case arising under the internal revenue laws prior to reference to the Department of Justice for prosecution or defense; and the Attorney General or his delegate may compromise any such ease after reference to the Department of Justice for prosecution or defense.
The IRS argues that under Chevron, U.S.A., Inc. v. Natural Resources Defense Council. Inc., 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984) the interpretation of the regulation is valid because it is “a permissible construction of the statute.” Id. at 842-43, 104 S.Ct. at 2782. The Supreme Court in Chevron stated:
If Congress had explicitly left a gap for the agency to fill, there is an express delegation of authority to the agency to elucidate a specific provision of the statute by regulation. Such legislative regulations are given controlling weight unless they are arbitrary, capricious, or manifestly contrary to the statute. Sometimes the legislative delegation to an agency on a particular question is implicit rather than explicit. In such a case, a court may not substitute its own construction of a statutory provision for a reasonable interpretation made by the administer of an agency.
Id. at 843-44, 104 S.Ct. at 2782.
It is difficult for this Panel to conclude that Congress left a gap in contract law for the IRS to fill. Clearly, if Congress had intended to abrogate federal contract law as the IRS contends, it would have said so.
The IRS also contends that falsification of documents and making false statements to *942the IRS is in itself fraud and, therefore, no reliance is needed. The IRS argues:
Although fraud is not defined in these cases, it should be assumed that when the courts referred to fraud, they meant the concealment of assets or falsification specified in the regulation they were interpreting. In other words, it appears that the courts substituted the term “fraud” for the regulation’s “falsification or concealment of assets” as a generalized shorthand. There is no indication in these cases that the courts intended by using the term “fraud” that the United States be required to show anything more than what is required by the regulation: that is, falsification or concealment of assets.
This argument is unpersuasive. Fraud has a long established definition. BLACK’S LAW DICTIONARY defines fraud as “An intentional perversion of truth for the purpose of inducing another in reliance upon it to part with some valuable thing belonging to him or to surrender a legal right.”
We agree with the debtors’ argument that if reliance were not required, the IRS could simply accept an offer in compromise it knows to contain false statements and at some future point, if the debtors’ assets were to increase in value, rescind the offer and collect again.
Finally, the IRS argues that if reliance is required, it is clear from Inspector Young’s report that it relied on Jones’ false statements in accepting the Offer in Compromise.
It is far from clear that the IRS relied on the statements that Jones pled guilty to making, although it may have relied on certain statements in the Offer in Compromise.
Had Jones pled guilty to Count 2, which specifically included falsifying items 23 and 24 on Form 433, the IRS’ contentions of reliance would have a closer fit with Jones’ guilty plea. By pleading guilty to Count 2, Jones would have confessed to falsifying that he had a life interest in Darback Trust, and that he was a grantor, donor, and trustee of Darback Trust.
The government, however, dismissed Count 2 when Jones pled gufity to Count 1. Count 1 is not as specific as Count 2. Count 1 only states that Jones willfully attempted to evade or defeat paying his taxes by concealing his ability to pay, by making false statements, and by submitting false documents to the IRS. Therefore, the IRS did not establish that in accepting the Offer in Compromise, it relied on the falsities that Jones pled guilty to in Count 1.
V. CONCLUSION
A guilty plea by the debtor to concealing his ability to pay, to making false statements, and to submitting false documents to the IRS was not the same as “falsifying or concealing assets.” Because there was a genuine issue of material fact as to whether he falsified or concealed assets, it was error for the bankruptcy court to grant summary judgment for the IRS. The judgment is VACATED,6 and REMANDED for trial.
. Unless otherwise indicated, all chapter, section and rule references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1330 and the Federal Rules of Bankruptcy Procedure, Rules 1001-9036.
. 26 C.F.R. § 301.7122-l(c) provides:
Neither the taxpayer nor the Government shall, upon acceptance of an offer in compromise, be permitted to reopen the case except by reason of (1) falsification or concealment of assets by the taxpayer, or (2) mutual mistake of material fact sufficient to cause a contract to be reformed or set aside.
Congress expressly granted the IRS authority to make Offers in Compromise under 26 U.S.C. § 7122(a), which provides:
The Secretary may compromise any civil or criminal case arising under the internal revenue laws prior to reference to the Department of Justice for prosecution or defense; and the Attorney General or his delegate may compromise any such case after reference to the Department of Justice for prosecution or defense.
The IRS issued 26 C.F.R. § 301.7122-l(c) pursuant to the general regulatory authority granted of 26 U.S.C. § 7805(a), which provides:
Except where such authority is expressly given by this title to any person other than an officer or employee of the Treasury Department, the secretary shall prescribe all needful rules and regulations for the enforcement of this title, including all rules and regulations as may be necessary by reason of any alteration of law in relation to internal revenue.
. At the plea hearing the prosecutor, Mr. Bailey, gave a recital of the allegations and evidence against Mr. Jones. However, Mr. Jones did not plead guilty to falsification or concealment of assets. He pled guilty to Count 1.
THE COURT: Mr. Jones, insofar as it relates to Count 1 of the indictment, do you agree with prosecution's summary?
MR. RICHERT: [Jones attorney]: We disagree with the recitation and determination of the facts. We do believe there is a factual basis for the entry of the plea of guilty to Count 1. The Defendant did, in fact, as stated in Count 1 in the state of Idaho engage in fraud by concealing his ability to pay, by making false statements to representatives of the Internal Revenue Service and by submitting false documents to the Internal Revenue Service.
THE COURT: You admit that?
MR. RICHERT: The Defendant admits that, Your Honor.
THE COURT: You have a difference of interpretation of the facts, but you agree that there is sufficient evidence there to warrant a jury finding Mr. Jones guilty of the charge set forth in that indictment?
MR. RICHERT: That is correct, Your Honor.
THE COURT: Do you agree, Mr. Jones, with your counsel's statements?
DEFENDANT JONES: Yes.
THE COURT: Is it your desire to go forward at this point with a plea of guilty to Count 1?
DEFENDANT JONES: Yes.
THE COURT: The Court will ask you what your plea is to Count 1 of the indictment.
DEFENDANT JONES: Guilty.
MR. BAILEY: Your Honor, I'm sorry, maybe I misunderstood. Is the Defendant saying there is enough evidence to prove him guilty instead of saying he is guilty of the count?
MR. RICHERT: He is guilty of the offense, Your Honor.
MR. BAILEY: Thank you Your Honor, I apologize for taking that time. I just wanted to make sure. We understand that the Defendant is pleading guilty of the offense. He may have some disagreement about what the evidence and what the facts are, but they are facts, and he agrees that he is guilty of the offense, and that is our understanding.
. Ability to pay may also encompass a range of possibilities for obtaining funds to pay a debt which are unrelated to existing assets. The debt- or might have talents or abilities which could be income-producing, or borrowing power or access to loans or gifts because of personal connections. Lending institutions make loans frequently based on the debtor’s expectations rather than existing collateral.
. Timms concerned a taxpayer who brought suit for refund of amounts paid under an offer in compromise agreement.
. The debtors have also appealed the denial of their summary judgment motion. Because it is clear that material questions of fact exist, as discussed above, the interlocutory order denying Jones' motion for summary judgment is AFFIRMED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492569/ | Memorandum of Decision
ALAN JAROSLOVSKY, Bankruptcy Judge.
This court awarded debtor Dennis Walsh a large judgment against defendant Rodney Beard pursuant to section 362(h) of the Bankruptcy Code based on Beard’s serious and repeated violations of the automatic stay.1 The judgment was affirmed by the district court and the Court of Appeals. Walsh’s request for attorneys’ fees on appeal has now been referred to this court pursuant to Circuit Rule 39-1.8.2
The issue of whether section 362(h) mandates an award of attorneys’ fees on appeal to a successful debtor has been recognized but not resolved by the Court of Appeals. In re Del Mission Limited, 98 F.3d 1147, 1154 n 7 (9th Cir.1996). However, at least two district courts sitting as appellate courts have found that the mandatory attorneys’ fees provision of section 362(h) includes fees on *950appeal. In re Fingers, 170 B.R. 419, 434-35 (S.D.Cal.1994); In re Cascade Roads, Inc., 71 A.F.T.R.2d 93-1105, 1993 WL 461297 (W.D.Wash.1993), rev’d on other grounds 34 F.3d 756 (9th Cir.1994). But see FHLMC v. McCormack, 1996 WL 753938 (D.N.H.1996).
Statutes providing for the recovery of attorneys’ fees by the prevailing party in the trial court are generally construed to allow the recovery of such fees on appeal. 5 Am. Jur.2d, Appellate Review, section 919. Federal courts have followed this rule in several areas of law where there are such statutes. See, e.g., Vasquez v. Fleming, 617 F.2d 334 (3rd Cir.1980) [civil rights]; Williams v. Matthews Co., 499 F.2d 819 (8th Cir.1974) [fair housing]; Twentieth Century Fox v. Goldwyn, 328 F.2d 190, 222 (9th Cir.1964), cert den 379 U.S. 880, 85 S.Ct. 143, 13 L.Ed.2d 87 [antitrust].
The Court of Appeals seems to have departed from the general rule in In re Vasseli, 5 F.3d 351 (9th Cir.1993). However, that case dealt with a very unusual statute (section 523(d) of. the Bankruptcy Code) which provides for attorneys’ fees only in certain circumstances and only to a successful defendant, not a plaintiff. Section 362(h) has no similar restrictions and, unlike section 523(d), specifically identifies attorneys’ fees as an item of damages. Since the statutes are so dissimilar, the holding in Vasseli should not be extended to 362(h) cases.
The district court decision in In re Cascade Roads, Inc., supra, was reversed because the debtor in that case was not an individual. However, its rationale in favor of extending the mandatory award of attorneys’ fees to appeals of 362(h) judgments remains sound:
“... the statute expressly allows [the debt- or] to recover costs and attorney’s fees for its efforts to enforce the automatic stay when the stay has been willfully violated. These efforts include the defense on appeal of the bankruptcy court’s judgment. Moreover, for [the debtor] to recover attorney’s fees under section 362(h) in bankruptcy Court, and then be denied such a recovery when that court’s holdings are fully upheld on appeal, would contradict both logic and equity.”
It is easy to understand why the district court in Cascade found it illogical to deny fees to the debtor on appeal. Section 362(h) specifically identifies attorneys’ fees as part of the damages to which the debtor is entitled to make him or her whole. Fees incurred on appeal are no less damages than those incurred at trial, and the debtor will not be made whole unless he or she recovers all fees.
For the foregoing reasons, the court will grant Walsh’s motion for attorneys’ fees on appeal. The court has reviewed the fee request and finds the fees in question to be very reasonable; they will accordingly be allowed as sought. Counsel for Walsh shall submit an appropriate form of order.
. Section 362(h) provides:
(h) An individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys' fees, and, in appropriate circumstances, may recover punitive damages.
. Circuit Rule 39-1.8 provides:
39-1.8 Request for Transfer. Any party who is or may be eligible for attorneys fees on appeal to this Court may, within the time permitted in Circuit Rule 39-1.6, file a motion to transfer consideration of attorneys fees on appeal to the district court or administrative agency from which the appeal was taken.
The matter is automatically referred from the district court to this court pursuant to Local Rule 5011 — 1(a). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492570/ | MEMORANDUM OPINION
JERRY A. BROWN, Bankruptcy Judge.
This matter came on for trial on February 18, 1997 on the complaint of Tracy Humble (“debtor”) seeking a discharge of State of Louisiana income taxes under 11 U.S.C. § 523(a)(1). After listening to the evidence, reviewing the exhibits and pleadings, and considering the arguments of counsel, the court concludes that the 1983 taxes are dis-chargeable and that the 1986 and 1987 taxes are nondischargeable.1
I. FINDINGS OF FACT
A. Procedural background
The debtor filed for protection under Chapter 7 of the Bankruptcy Code on December 13, 1995. The debtor’s discharge was granted on April 1,1996. A final decree closing the case was entered on April 23, 1996.
On September 20, 1996, the debtor filed the pending complaint to determine the dischargeability of tax debts claimed by the Louisiana Department of Revenue and Taxation (“Department”).
On October 10, 1996, the debtor filed Adversary Proceeding No. 96-1187, seeking to determine the dischargeability of alleged tax debts owed to the Internal Revenue Service (“IRS”). (Ex. P-9). On January 28, 1997, a consent judgment was entered discharging the debtor’s federal tax debts for the tax years 1981 through 1988. (Ex. P-11).
B. The Louisiana taxes
The Department assessed the debtor for Louisiana income taxes on the following dates:
The taxes due for tax year 1983 were formally assessed on August 25,1989.
The taxes due for tax year 1986 were formally assessed on April 22,1988.
The taxes due for tax year 1987 were formally assessed on September 10, 1990.
(Pa. 9, Joint Pre-Trial Order at 1).
In their proof of claim, the Department claims the debtor owes taxes as follows:
Tax Interest Penalty Total
1983 1,015.001,762.90 265.75 $3,043.65
1986 385.00 495.54 96.25 976.79
1987 108.00 122.78 27.00 257.78
$4,278.22
(Ex. P-12).
The debtor testified that he was sure that he had filed tax returns for the three years in question, although he had no copies of the returns.
Joyce Amedee, a revenue audit supervisor and employee of the Department for 27/é years, testified that she was responsible for the proposed assessment of taxes made to the debtor for 1983. (Ex. P-3). She stated that the proposed assessment was based on information received from the IRS through a Revenue Agent Report. The proposed assessment indicated that the debtor owed $2,069.58 in taxes. (Id.)
*56The following language was printed on the bottom of the 1983 proposed assessment:
In accordance with Louisiana Law R.S. 47:1562, this department proposes to assess you for the tax shown above. The adjustments made to your return are based on the adjustments made to your federal return by the Internal Revenue Service. The Internal Revenue Service furnished to the State of Louisiana information obtained in an audit of your federal return under specific authorization of Section 6103 of the Internal Revenue Code.
Inquiries should be directed to the office audit section, income and corporation franchise taxes division.
(Ex. P-3).
Ms. Amedee stated that the Department’s records showed that the debtor did not file a 1983 income tax return, and that the above language printed on the 1983 proposed assessment was standard language used for all taxpayers. She testified that the standard language in the 1983 proposed assessment (“the adjustments made to your return”) was wrong in this case because the Department’s records indicate that the debtor did not file a 1983 income tax return.
Ms. Amedee stated that the formal assessment for 1983 taxes (Ex. P-4) was mailed to the debtor by registered mail, and that she was sure a registered mail receipt existed, although she did not have it. She further testified that it is the Department’s procedure to mail all formal assessments by registered mail.
Ms. Donna Perkins, employed by the Department for 20 years, is presently a revenue audit supervisor over the bankruptcy section and the collection division. She is the custodian for the bankruptcy files. She testified that the value of the Department’s proof of claim was determined by reviewing the debtors account and determining outstanding and potential liabilities. She stated that she did not review the debtor’s account to determine whether the notice of assessments had been mailed to the debtor by registered mail.
The debtor requested that the Department produce copies of his tax returns, all documents showing when the taxes were assessed, and the basis for the assessment. See EX. P-1. The Department was not able to produce the tax returns, the registered mail receipts, or the documents referred to in the 1983 proposed assessment that referred to information received by the Internal Revenue Service. See Ex. P-2. All of the documents that the Department did produce, consisting of the proposed assessments and assessments for 1983, 1986, and 1987, were introduced into evidence. (Exs. P-3 through P-8).
The Department’s responses to the debtors interrogatories state that “[t]he records of [the Department] reflect that the Debtor has not filed individual income tax returns for the periods 1983, 1986, and 1987.” (Ex. P-2 at ¶ 2).
II. CONCLUSIONS OF LAW
A. Burden of Proof
The creditor seeking to establish that a debt is nondischargeable bears the burden of proof under 11 U.S.C. § 523 by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). Consequently, the Department bears the burden of proving that the debt falls within one of the exceptions to dischargeability of a debt set forth in Section 523.
B. Applicable Bankmptcy Code Sections
Section 523(a)(1) provides in relevant part:
(a) A discharge under section 727, ... of this title does not discharge an individual debtor from any debt—
(1) for a tax or a customs duly—
(A) of the kind and for the periods specified in section 507(a)(2) or 507(a)(8) of this title, whether or not a claim for such tax was filed or allowed;
(B) with respect to which a return, if required—
(i) was not filed
11 U.S.C. § 523(a)(1).
Section 507(a)(8) defines taxes to include the following:
*57(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.
11 U.S.C. § 507(a)(8)(A)©.
C. Arguments of the Parties
The Department claims that the debtor’s taxes are nondischargeable under Section 523(a)(1).2 The Department asserts it properly assessed the debtor’s taxes for 1983, 1986, and 1987 which suspended prescription on the taxes under applicable Louisiana law. Presumably, the Department argues that the taxes are nondischargeable under Section 523(a)(1)(A) because due to the suspension of the prescriptive period, the taxes fall within the category “last due after three years before the date of filing” language of Section 507(a)(8)(A)©. The Department’s apparent argument under Section 523(a)(1)(B)© is that the taxes are nondischargeable because the tax returns were not filed.
The debtor argues that the Department failed to prove the debtor was “required” to file state income tax returns for the applicable tax years as required by Section 523(a)(1)(B).
D. Issues
The issue of law to be determined is whether the debtor was “required” to file state income tax returns for the years 1983, 1986, and 1987. The factual issue is whether the debtor filed income tax returns.
E. Analysis
1. 1983 Taxes
The Department claims that it properly assessed the debtor’s taxes in accordance with Title 47 of the Louisiana Revised Statutes, and that prescription was therefore suspended under La.R.S. 47:1580.
A brief explanation of the Louisiana tax assessment and collection scheme is required. The tax collector may enforce the collection of taxes due by any of three alternative remedies:
(1) Assessment and distraint, as provided in R.S. 47:1562 through 47:1573.
(2) Summary court proceeding, as provided in R.S. 47:1574.
(3) Ordinary suit under the provisions of the general laws regulating actions for the enforcement of obligations.
LA Rev. Stat. Ann. § 47:1561 (West 1990).
Under an assessment and distraint, the collector audits or investigates the failure to file or the inaccurate filing. LA. Rev. Stat. Ann. § 47:1562 (West 1990). The statute further provides that “[h]aving determined the amount of tax, penalty and interest due, the collector shall send by mail a notice to the taxpayer ... setting out his determination and informing the person of his purpose to assess the amount so determined against him after fifteen calendar days from the date of the notice.” Id. This notice may be referred to as the notice of intent.
After fifteen days from the mailing of the notice of intent, the collector is required to assess the tax determined to be due. LA Rev. Stat. Ann. § 47:1564 (West 1990). This is referred to as the formal assessment.
Section 1565 of the Revised Statutes, providing for notice of assessment, states in pertinent part:
A Having assessed the amount determined to be due, the secretary shall send a notice by registered mail to the taxpayer against whom the assessment is imposed at the address given in the last report filed by said taxpayer, or if no report has been filed to any address obtainable. This notice shall inform the taxpayer of the assessment and that he has sixty calendar days form the date of the notice to either *58pay the amount of the assessment or to appeal to the Board of Tax Appeals for a redetermination of the assessment. All such appeals shall be made in accordance with the provisions of Chapter 17, Subtitle II of this Title.
B. If the taxpayer has not filed an appeal with the Board of Tax Appeals within the sixty day period, the assessment shall be final and shall be collectible by distraint and sale as hereinafter provided—
LA. Rev. Stat. Ann. § 47:1565(A) (West 1990).
The Louisiana Constitution provides for the interruption or suspension of taxes as follows:
Taxes, except real property taxes, and licenses shall prescribe in three years after the thirty-first day of December in the year in which they are due, but prescription may be interrupted or suspended as provided by law.
LA Const. Art. 7, § 16 (West 1996).
Among the ways of suspending the prescription of state income taxes is “[t]he secretary’s action in assessing any such amounts in the manner provided by law.” LA. Rev. Stat. Ann. § 47:1580(A)(1) (West 1990).
Under the present facts the debtor cannot be held responsible for his 1983 taxes based on the'Department’s own argument. Under the- Louisiana Constitution, the prescriptive period for the 1983 taxes would have run on December 31, 1987. See LA. Const. Art. 7, § 16. The assessment occurred on August 25,1989, after the prescriptive period had tolled. Therefore, there is no argument that would allow the 1983 taxes to be nondischargeable under the Bankruptcy Code.
2. 1986 and, 1987 Taxes
The Department makes the same argument as to suspension of prescription on the 1986 and 1987 taxes, claiming that it properly assessed the debtor’s taxes in accordance with Title 47, and that prescription was therefore suspended in accordance with La. R.S. 47:1580. The debtor contends that the assessment was not proper because the Department did not show it mailed the assessments by registered mail, as is required by La.R.S. 47:1565(A).
[4] The Department argues in response that it is the issuance of the tax assessment, not the receipt of the tax assessment that suspends the running of prescription. The Department cites the cases of Louisiana Pacific Corp. v. Secretary of Dept. of Revenue and Taxation, 391 So.2d 35, 36 (La.App. 3rd Cir.1980) and Bunge Corp. v. Secretary of Dept. of Revenue and Taxation, 414 So.2d 867 (La.App. 4th Cir.1982) in support of this proposition. In Louisiana Pacific, the Department mailed a notice of intent to assess income taxes for the years 1973 and 1974 to the taxpayer on October 14, 1977. On December 30,1977, a formal assessment against the taxpayer was issued pursuant to La.R.S. 47:1564. Notice of the assessment was mailed to the taxpayer on January 4, 1978 as provided by La.R.S. 47:1565. The Third Circuit held that prescription running against the state income tax was interrupted when the Department formally assessed the taxpayer pursuant to La.R.S. 47:1564. Therefore, because the assessment occurred within the three year prescriptive period, payment on the taxes was suspended. The court reasoned that the taxpayer was not prejudiced by receipt of the notice under La.R.S. 47:1565 after the three years had run because the taxpayer had 30 days from the date of the notice within which to pay the assessment or to appeal to the Board of Tax Appeals. The Fourth Circuit followed Louisiana Pacific in the Bunge decision under similar facts.
Based on the Louisiana Pacific and Bunge cases, the court finds that the 1986 and 1987 taxes were suspended because under La.R.S. 47:1565 it is the assessment itself, and not the receipt of the assessment that suspends the running of prescription.
Furthermore, even assuming that the debtor is correct, and that the Department must prove the assessments were sent by registered mail, Ms. Amedee testified that it is the Department’s procedure to mail all formal assessments by registered mail. Even though the Department did not introduce the registered mail receipts showing *59that the assessments had been sent by registered mail, the court finds the testimony of Ms. Amedee to be credible. Consequently, the court finds that the Department did comply with the requirements of La. R.S. 47:1565, and that the prescriptive period on the 1986 and 1987 taxes was suspended. As a result, the taxes are nondischargeable under Section 523(a)(1)(B).
3. The debtor’s “requirement” to file taxes
The debtor submits that the Department failed to introduce any evidence showing that the debtor was “required” to file a tax return under La. R.S. 47:101. In this regard, the debtor submits that the mere fact that an individual has filed a Louisiana income tax return does not mean as a matter of law that the individual was “required” to file one under La.R.S. 47:101, and that it is just as likely that the individual filed a return to obtain a refund of state income tax withholdings.
Section 47:101 of the Louisiana Revised Statutes sets forth the requirements for filing state income tax returns. The requirements include an amount of “gross income” or “tax table income”, above which income tax returns are required. LA. Rev. Stat. Ann. § 47:101A(Z) (West 1990).
The court disagrees with the debtor’s argument. Although it is true that the Department did not introduce any evidence tending to show that the debtor met the income requirements of La.R.S. 47:101, it is uncontested by the parties that the Department formally assessed the debtor for taxes due on the dates set forth above. The Louisiana tax system provides that upon the issuance of a formal assessment, the debtor may either pay the assessment or appeal to the Board of Tax Appeals for a redetermination of the assessment. La.R.S. 47:1565(A). Because the debtor did neither of these options, it is untimely for the debtor to now argue that returns were not required at all.
Judgment will be entered in accordance with this opinion.
JUDGMENT
For the reasons assigned in the foregoing memorandum opinion issued this date, accordingly,
IT IS ORDERED, ADJUDGED, AND DECREED that judgment be and it hereby is entered in favor of the debtor, Tracy Humble, and against the defendant, Louisiana Department of Revenue and Taxation, with respect to the debtor’s 1983 tax liability owed to the State of Louisiana, and that the debt- or’s 1983 taxes are DISCHARGEABLE under 11 U.S.C. § 523.
IT IS FURTHER ORDERED, ADJUDGED, AND DECREED that judgment be and it hereby is entered in favor of the defendant, Louisiana Department of Revenue and Taxation, and against the debtor, Tracy Humble, with respect to the debtor’s 1986 and 1987 tax liabilities, and that the debtor’s 1986 tax liabilities in the amount of $976.79 and the 1987 tax liabilities in the amount of $257.78, plus interest at the legal rate, are NONDISCHARGEABLE.
. This memorandum opinion constitutes the court’s findings of fact and conclusions of law in accordance with Bankruptcy Rule 7052. The court has jurisdiction over the matter under 28 U.S.C. § 1334. The matter is a core proceeding under 28 U.S.C. § 157(b)(2).
. It is unclear under which subsection of Section 523(a)(1) that the Department claims the debtor's taxes are nondischargeable. On page 1 of its brief, the Department claims the taxes are nondischargeable under Section 523(a)(1)(A). On unnumbered page 7 of its brief, the Department claims the taxes are nondischargeable under Section 523(a)(l)(B)(i). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492571/ | ORDER
MARY DAVIES SCOTT, Bankruptcy Judge.
THIS CAUSE is before the Court upon the Motion for Extension of Time within Which to File Complaint Objecting to Discharge, filed on May 6,1997. This bankruptcy case was commenced on February 3,1997, with March 6, 1997, established as the date first set for the meeting of creditors pursuant to section 341(a). Accordingly, pursuant to Rules 4004, 4007, Federal Rules of Bankruptcy Procedure, complaints to object to discharge or the dischargeability of a debt were required to be filed on or before May 5, 1997.
Federal Rule of Bankruptcy Procedure 4004(a) provides that complaints to determine dischargeability must be filed not later than 60 days following the first date set for the meeting of creditors held pursuant to § 341(a). Rule 4004(b) states that extensions may be granted for cause. However, “[t]he motion shall be made before such time has expired.” Thus, the rule states a statute of limitations and it is strictly construed. In re De la Cruz, 176 B.R. 19 (9th Cir. BAP 1994). The Court’s only authority to extend the *128deadline is that stated in Rule 4004 because Rule 9006, which provides for enlargements of time generally, expressly limits the Court’s power to extend the deadline to file discharge complaints. See Fed. R. Bankr. Proc. 9006(b)(3); In re Isaacman, 26 F.3d 629 (6th Cir.1994); In re Stratton, 106 B.R. 188 (Bankr.E.D.Cal.1989). Motions to extend the time period must be made before the time for filing such complaints has expired. Edwards v. Whitfield (In re Whitfield), 41 B.R. 734, 736 (Bankr.W.D.Ark.1984)(Mixon, J.); In re Biederman, 165 B.R. 783 (Bankr.D.N.J. 1994).
Inasmuch as the time for filing the complaint or motion expired on May 5, 1997, and the motion for extension of time was filed on May 6, 1997, this Court has no authority to extend the time for filing a complaint objecting to discharge. Accordingly, the motion must be denied.
ORDERED: the Motion for Extension of Time within Which to File Complaint Objecting to Discharge, filed on May 6, 1997, is DENIED.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492572/ | ORDER
JAMES J. BARTA, Chief Judge.
The matter being considered here is the motion of Steven T. Stanton (“Applicant”) to reconsider the Court’s Order dated April 4, 1997 that reduced the amount of fees requested by the Applicant. These determinations and orders are based on a consideration of the record as a whole.
The determination of the amount of fees allowed in this matter was based upon a consideration of the full amount requested in the application: $7,325.00 as fees and $173.44 as reimbursement of parking fees and mileage. This gross total did not reflect any reduction as may have been agreed upon by the Applicant. The Court’s deductions from the gross amount were based upon the findings and conclusions set out in the April 4, 1997 Order and did not include a specific deduction of the $2,000.00 announced by the Applicant and the United States Trustee. To the extent that the Parties’ announcement was a request to approve the $2,000.00 reduction as a settlement, said request will be denied.
The denial of fees in this matter was largely for services related to opposition to the complaint to revoke confirmation and to the appointment of an operating trustee, and was not an automatic disallowance of compensation sought by the losing party. The denial was based upon the finding and conclusion that the legal services did not benefit the Debtor, but rather benefited the inter*490ests of officers and insider principals of the Debtor. The motion to reconsider has not presented a basis to support any change to these findings and conclusions.
In the interests of fairness, the Court has reconsidered the request for compensation for travel time. In these circumstances, the Applicant’s travel time had been allowed prior to the revocation of the Order of Confirmation, and the Applicant was justified in anticipating such allowance after he became associated with a different law firm. The benefit to the estate resulted from the continuation of legal services without the need for new Counsel to familiarize himself or herself with the proceedings in the case. The value of these services is equal to one-half the hourly rate allowed for other services performed. Based upon the actual travel identified in the fee application, the total travel time was 11.5 hours, and the allowed compensation will be increased by $575.00. Therefore,
IT IS ORDERED that the motion of Steven T. Stanton (“Applicant”) to reconsider a previous Order of the Court is GRANTED in part; and that the Applicant is allowed the additional amount of $575.00 as compensation for legal services rendered in this matter in addition to the amounts previously allowed; and that such additional amount is to be paid as a Chapter 11 expense of administration in this converted Chapter 7 case; and that all other requests in this motion are DENIED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492573/ | DECISION ON OBJECTION TO IRS PROOF OF CLAIM
PHILIP H. BRANDT, Bankruptcy Judge.
On 27 January 1997, David Myrland, Debt- or in this Chapter 131 case, filed his Objection (Docket no. 16) to the Proof of Claim of the Internal Revenue Service (“IRS”), which had been filed in November of 1996. Concurrently he filed his brief in support (Docket no. 17). Although both the objection and the brief reference exhibits, none are attached to either, nor did Myrland file any declaration or affidavit in support.
By Order entered 25 February 1997 (Docket no. 25), I set a briefing schedule and the hearing. I also directed Myrland to file a memorandum of authority “on the question of whether an individual can have regular income for the purposes of Chapter 13 of the Bankruptcy Code (11 U.S.C.), but not for the purposes of the Internal Revenue Code (26 U.S.C.) ...”. Debtor’s Memorandum in Response (Docket no. 31) reiterates and expands upon arguments in his original brief regarding the nature of income and whether labor has a cost which the tax code2 must recognize, but cites no authority suggesting the terminology might have different meanings in the two statutory schemes.
The United States filed responses on behalf of the IRS to the objection and to Debt- or’s memorandum (Docket nos. 34 and 40). In reply to the former, Myrland filed his response to IRS’s Opposition (Docket no. 36).
At hearing on 20 March 1997, the IRS indicated it would be amending its claim in response to the Debtor’s objection; rather than deal with these issues repetitively, I entered an Order (Docket no. 48) setting a deadline for the amended claim, and providing that I would treat the objection as an objection to the amended claim, and allowing the Debtor to file any additional objection and supporting evidence if he wished. The Amended Claim was filed 1 April 1997, deleting the secured claim; the IRS now claims an unsecured nonpriority claim of $8,513.293, and an unsecured priority claim of $2,500.00 4 for a total of $11,013.29.
As the Amended Claim merely excised a portion of the original claim, and Myrland has filed no supplemental objection, the original Objection, now to the Amended Claim, is ripe for decision. This is a core proceeding within this Court’s jurisdiction. 28 U.S.C. §§ 157(b)(2)(B) and 1334; GR 7, Local Rules, W.D. Wash.
Accordingly, my rulings on the grounds specified in that Objection:
ISSUE (A) IRS LACKS REQUISITE STATUTORY LEAVE TO OPERATE5.
Debtor’s implicit premise that, under 4 U.S.C. § 72, all IRS offices (or at least those who have taken action in this case or with respect to his federal tax liability) must be “attached to the seat of government” and therefore located in Washington, D.C., is unsupported. In any event, I am bound to follow higher authority, and the Ninth Circuit has ruled to the contrary. Hughes v. U.S., 953 F.2d 531, 541-542 (1992).
*526
ISSUE (B) AS A CITIZEN OF THE UNITED STATES, SUBJECT TO CHAPTER ONE OF THE TAX CODE, DEBTOR CANNOT BE TAXED UNDER CHAPTERS 2 OR 21 OF THE CODE.
26 U.S.C. § 1 imposes income taxes on “individuals” rather than citizens. Myrland does not assert or argue that he is not an individual, as indeed he cannot, if he wishes to be a debtor in Chapter 13. Section 109(e).
ISSUE (C) AMOUNTS CLASSIFIED AS A COST UNDER THE LAW ARE WRONGFULLY INCLUDED IN GROSS INCOME BY THE IRS. DEBTOR HAS BEEN DEPRIVED OF THE PROVISIONS OF IRS § 83, 212, 1001, 1011, AND 1012.
As a properly executed and filed Proof of Claim is prima facie evidence of the validity and amount of the claim, Rule 3001(f), and is presumptively valid, § 502(a), an objecting party must present evidence overcoming the prima facie ease. In re Murgillo, 176 B.R. 524, 529 (9th Cir.BAP1995); In re Holm, 931 F.2d 620, 623 (9th Cir.1991).
As noted above, Myrland has submitted no evidence supporting this ground, or relating the legal proposition he argues to the amount of his tax liability.
ISSUE (D) IRC § 83 APPLIES TO ALL COMPENSATION SUBJECT TO AN ‘‘INCOME TAX”, THEREFORE, IRC § 83 APPLIES IN CHAPTERS 2, 21, AND 21 AS WELL AS CHAPTER 1.
Debtor has submitted no evidencé supporting this ground, or relating it to his tax liability.
ISSUE (E) IRS HAS DEPRIVED DEBTOR OF CERTAIN DEDUCTIONS FROM AMOUNTS UPON WHICH FICA IS IMPOSED.
Debtor has submitted no evidence supporting this ground, or relating it to his tax liability.
ISSUE (F) IRS HAS GRANTED CREDITS OF CERTAIN TAXES FOR WHICH THE DEBTOR IS INELIGIBLE.
Debtor has submitted no evidence supporting this ground, or relating it to his tax liability.
ISSUE (G) DEBTOR HAS BEEN DEPRIVED OF CERTAIN DEDUCTIONS ALLOWABLE FROM AMOUNTS UPON WHICH FICA IS IMPOSED.
Debtor has submitted no evidence supporting this ground, or relating it to his tax liability.
ISSUE (H) IRS HAS IMPOSED PENALTIES FOR FAILURE TO REPORT TIPS FOR WHICH NO REPORTING REQUIREMENT EXISTS.
Debtor has submitted no evidence supporting this ground, or relating it to his tax liability.
ISSUE (I) THE IRS HAS NO CONGRES-SIONALLY BESTOWED AUTHORITY TO ASSESS THE TAXES NOW SOUGHT. ASSESSMENT AUTHORITY WAS OBTAINED THROUGH REGULATORY DEVIATION FROM STATUTE THAT DEPRIVES THE DEBTOR OF PRIVACY.
Myrland has not articulated how, if at all, any deviation by the IRS from the statute affects his tax liability, imposed by the Internal Revenue Code. Further, the argument that 26 U.S.C. § 6201 allows assessment only of taxes payable by stamp is a strained construction of the statutory language, unsupported by authority: that language precludes the assessment of taxes which have been paid by stamp, and not of taxes which have not been paid.
ISSUE (J) FILING REQUIREMENTS OUTLINED IN REGULATIONS ARE NOT THOSE FOLLOWED BY THE IRS; DEBTOR MUST VIOLATE REGULATION TO SATISFY THE IRS; COMPLIANCE PROTECTS PROPERTY.
Debtor has submitted no evidence supporting this ground, or relating it to his tax liability.
Debtor’s argument, in paragraph (J)3 of his brief, that he is a nonresident alien, is unsworn and contradicts both his assertion of U.S. citizenship in his argument (B), above, and his sworn representation of residence within this judicial district on his Petition. See also, U.S. v. Nelson (In re Becraft), 885 F.2d 547, 548-549 (9th Cir.1989), holding *527such arguments, made in a petition for rehearing in a criminal tax evasion case, frivolous, and sua sponte imposing sanctions on counsel.
ISSUE (K) IN THE CASE OF AN EMPLOYEE, FORMS W-2 DO NOT MEET STATUTORY REQUIREMENTS FOR THE PURPOSES OF EVIDENCE OF PAYMENT OF SALARIES OR WAGES.
Debtor has submitted no evidence supporting this ground, or relating it to his tax liability.
ISSUE (L) THE IRSS RELIANCE UPON PRIOR DECISIONS AND CASE LAW VIOLATES 26 U.S.C. § 7852(a) SEPARABILITY CLAUSE.
Whatever may be Debtor’s beliefs regarding IRS practices, he has articulated no relevance of those beliefs to the amount of his tax liability.
ISSUE (M) IF IRS CANNOT REASONABLY REBUT DEBTORS CLAIMS, DEBTOR MUST RECEIVE FULL REFUNDS AND BE GIVEN LEAVE TO GO WITH FREE LABOR.
Debtor has submitted no evidence supporting this ground, or relating it to his tax liability. Even if copies of Myrland’s “financial disclosure statements”, referenced as a exhibit supporting this proposition, had been attached to the Brief, the Brief itself is unsworn: it is only argument, not evidence.
As noted above, the IRS’s proofs of claim are by statute and rule presumptively correct and valid; Myrland’s premise is simply incorrect.
ISSUE (N) IRSS DETERMINATION OF TAX LIABILITY VIOLATES PERTINENT REGULATIONS.
Debtor has submitted no evidence supporting this ground, or relating it to his tax liability.
ISSUE (0) NO DOCUMENTATION SUPPORTS IRS’ CLAIM OF AMOUNTS OWED FOR 1998,199), AND 1995.
No evidence supports this ground. As noted by the Fifth Circuit in Portillo v. C.I.R., 932 F.2d 1128, 1133 (1991) in a taxpayer’s challenge to an assessment, the IRS must prove the correct amount of taxes owed, once the taxpayer establishes the assessment is arbitrary and erroneous. The same is true respecting a proof of claim. Myrland has submitted no evidence suggesting the IRS’s claim is incorrect.
ISSUE (P) ADJUSTMENTS FOR PAYMENTS ALLEGED ARE TO BE MADE WITHOUT INTEREST.
Debtor has submitted no evidence supporting this ground, or relating it to his tax liability.
ISSUE (Q) FORMS REQUIRED OF THE DEBTOR ARE OTHER THAN THOSE PRESCRIBED BY THE IRS.
Debtor has submitted no evidence supporting this ground, or relating it to his tax liability. Myrland does not even articulate in argument the extent to which the IRS’s alleged deviation from the tax code affects his (or its) calculation of the taxes he owes.
Finally, Myrland’s discussion in his brief of the U.S. Tax Court’s decision in Talmage v. Commissioner, 1996 TC Memo 41, has no clear relevance. To the extent it is an argument that Debtor is entitled to deduct the value of his labor from his income in calculating his taxes, he has not submitted a shred of evidence regarding that value or his income for any of the tax years in question, and the argument is contrary to controlling authority. U.S. v. Romero, 640 F.2d 1014 (9th Cir.1981).
I will enter an Order overruling Debtor’s Objection to the Claim and Amended Claim of the Internal Revenue Service.
. Of the Bankruptcy Code, 11 U.S.C. §§ 101— 1330: Absent contrary indication, all section and chapter references are to the Bankruptcy Code, and all "Rule” references are to the Federal Rules of Bankruptcy Procedure. “LBR" refers to the Local Rules of Bankruptcy Procedure for the Western District of Washington.
. 26 U.S.C. §§ 1-9806; also referenced as "IRC".
. Unassessed liability, interest, and penalty for income tax for the years 1986 through 1992.
. Unassessed liability for 1993, 1994, and 1995.
. The underlined headings are quoted from Debt- or's Brief, and differ somewhat from their parallels in his Objection. To the extent of any substantive difference, the objections are overruled for failure to serve and file supporting authority. LBR 9013(d)(6). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492574/ | MEMORANDUM OF DECISION AND ORDER ON PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT
ROBERT L. KRECHEVSKY, Bankruptcy Judge.
I.
ISSUE
For determination in this adversary proceeding is whether a recorded document entitled “Caveat” represents a valid encumbrance on property of the debtor’s estate. This issue has been presented in a motion for summary judgment filed by Neal Ossen, the plaintiff and Chapter 7 trustee of the debt- or’s estate (“the trustee”). The parties are in agreement that there are no genuine issues of material fact in dispute.
II.
BACKGROUND
John J. DePastino (“the debtor”) filed a Chapter 7 petition on November 9, 1993. He and Valerie S. DePastino, the defendant, on October 8, 1991, had entered into a “Property and Settlement Agreement” (“the agreement”) while parties to a marriage dissolution action pending in the Connecticut Superior Court. Article III, entitled “Property Division”, of the agreement provided in section B that the defendant “shall transfer all her right, title and interest in the six (6) acres of land in Southington, Connecticut [‘the property1] ... in consideration for which the [debtor] shall pay to the [defendant] upon sale and closing of said land the sum of $40,000 free of any tax and costs.” Agreement at 4.
The Superior Court, on October 8, 1991, entered a judgment which dissolved the marriage and also “incorporated by reference [the agreement] in this judgment.” Judgment at 3. The defendant, on April 10, 1992, transferred her one-half interest in the property by quitclaim deed to the debtor. In addition to the quitclaim deed, the debtor and the defendant recorded the following document:
CAVEAT
To All Persons To Whom This May Come: Be It Known that pursuant to a Judgment in DePastino vs. DePastino, Docket No. FA-90-0438670 S, Superior Court Judicial District of Hartford/New Britain at New Britain, dated October 8, 1991 the Defendant, Valerie S. DePastino, is entitled to payment of certain sums from the sale of certain real estate conveyed by her this date to the Plaintiff, John J. De-Pastino. In order to comply with said Judgment, said John J. DePastino does grant to said Valerie S. DePastino a lien against lots proposed to be sub-divided from said real estate, described in Exhibit A1 hereto, which lots will be released from this caveat by agreement of the parties but until so released, this caveat shall constitute a lien prior in right to title of any purchaser from said John J. DePastino of *587any portion of those premises described in Exhibit A.
Dated at New Britain, Connecticut, this 11th day of April, 1992.
Valerie S. DePastino
BYS/_
Jason E. Pearl
Her Attorney
John J. DePastino
BYS/_
James Wu
His Attorney
The trustee, on June 26, 1996, after notice and hearing, sold the property to a third person for $85,000, with the caveat, by consent, to attach to the proceeds pending a determination by the court of its validity as a perfected encumbrance.
The trustee contends the caveat complies with no Connecticut statute providing for the establishing of secured claims on realty and does not otherwise represent a valid encumbrance entitling the defendant to $40,000 of the sale proceeds. The defendant argues that the intent of the parties is clear from the caveat that it “constitute^] a lien prior in right to title of any purchaser from [the debtor]” and that the court should find the caveat to be an equitable mortgage and a valid encumbrance. Defendant’s Brief at 4.
ITT.
DISCUSSION
A bankruptcy trustee, under 11 U.S.C. § 544(a),2 has the rights of a lien creditor and bona fide purchaser of real property and can avoid any liens voidable by such parties, including unperfected security interests. The extent of the trustee’s rights are determined by state law. Robinson v. Howard Bank (In re Kors. Inc.), 819 F.2d 19, 22-3 (2nd Cir.1987).
The defendant concedes in his memorandum of law that the “Caveat is not a judicial lien” and that the filing of the “Caveat was not done pursuant to statute, either federal or state.” Defendant’s Brief at 3 (emphasis in original). She contends that the caveat creates an equitable lien on the property which is binding against the trustee.
Connecticut law, both statutory and common, provides procedures for obtaining a lien upon real property post-judgment. Conn. Gen. Stat. § 52-380a3 contains the requirements for the filing of a judgment lien. Statutory and common law bases exist for the execution and recording of a realty mortgage. See Dart & Bogue Co. v. Slosberg, 202 Conn. 566, 572, 522 A.2d 763 (1987). The defendant does not refer the court to any *588Connecticut law recognizing the filing of a caveat executed by attorneys at law as a means to obtain a lien against realty. Whether the caveat is binding as between the debtor and the defendant is not the issue before the court. Rather, the issue is whether a document, such as the instant “Caveat”, is valid under Connecticut law as an encumbrance enforceable against a lien creditor or bona fide purchaser of the realty.
Under the defendant’s theory, any recorded document indicating an intent to create a lien will create a valid charge against the realty. The court does not believe such is the law in Connecticut. Cf. Dent & Pflugner, P.A v. Kalivas, 8 Conn.App. 512, 516, 513 A.2d 198 (1986) (The filing of a certified copy of a judgment on the land records of a town where affected real estate is situated is not sufficient compliance with judgment lien statute and is therefore unenforceable. “[A] judgment lien is a creature of statute, [and] a lienor must comply with statutory requirements in order to perfect his claim.”) (citation and quotation marks omitted). Cf. also Hart v. Chalker, 14 Conn. 77, 81 (1840). (“Adopt the principle contended for, and it would seem to be enough to stamp upon the deed ‘this is intended as a mortgage,’ to render it valid. After the repeated decisions of this court, we do not feel at liberty to adopt these principles; nor do we think them correct. It is far better that one honest creditor should have his security postponed to another perhaps equally honest, who has apparently a subsequent title, rather than that the valuable provision of our statute relative to the recording of deeds should be nullified, or its vitality impaired.”). The court concludes that the document entitled “Caveat” does not represent a lien enforceable against a bankruptcy trustee under any provision of Connecticut statutes or any established standard of Connecticut common law.
IV.
CONCLUSION
The motion of the trustee for summary judgment is granted, and a judgment will enter declaring the caveat filed by the defendant to be an invalid encumbrance and avoiding it. It is
SO ORDERED.
. Exhibit A, containing a description of the properly, was attached to and recorded with the caveat.
. Section 544(a) provides:
(a) The trustee shall have, as of the commencement of the case, and with regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by—
(1) a creditor that extends credit to the debt- or at the time of the commencement of the case, and that obtains, at such time and with respect to such credit, a judicial lien on all property on which a creditor on a simple contract could have obtained such a judicial lien, whether or not such a creditor exists;
(2) a creditor that extends credit to the debt- or at the time of the commencement of the case, and obtains, at such time and with respect to such credit, an execution against the debtor that is returned unsatisfied at such time, whether or not such a creditor exists; or
(3) a bona fide purchaser of real property other than fixtures, from the debtor, against whom applicable law permits such transfer to be perfected, that obtains the status of a bona fide purchaser and has perfected such transfer at the time of the commencement of the case, whether or not such a purchaser exists.
11 U.S.C. § 544(a).
. Conn. Gen. Stat. § 52-380a. Judgment lien on real
(a) A judgment lien, securing the unpaid amount of any money judgment, including interest and costs, may be placed on any real property by recording, in the town clerk's office in the town where the real property lies, a judgment lien certificate, signed by the judgment creditor or his attorney or personal representative, containing: (1) A statement of the names and last-known addresses of the judgment creditor and judgment debtor, the court in which and the date on which the judgment was rendered, and the original amount of the money judgment and the amount due thereon; and (2) a description, which need not be by metes and bounds, of the real properly on which a lien is to be placed, and a statement that the lien has been placed on such property. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492575/ | OPINION AND ORDER
JOHN J. THOMAS, Bankruptcy Judge.
Within this contested matter, the United States Trustee has filed a Motion for Sanctions under Federal Rule of Bankruptcy Procedure 9011 against Timothy A. Thornton.
Originally, a Motion to Hold Creditor Betty J. Thornton in Contempt was filed by Timothy A. Thornton, doing business as Thornton’s Millwork. This Motion was filed December 21, 1995 and named the Debtor’s ex-spouse, Betty J. Thornton, as the Respondent.
The Motion centered around the alleged violation of the automatic stay by Betty J. Thornton when she “sold the vehicle for an undisclosed sum without obtaining a lifting of the stay.” (Motion to Hold Creditor Betty J. Thornton in Contempt ¶ 6.)
Timothy A. Thornton advanced this Motion, pro se.
An answer was filed by Betty J. Thornton, also pro se, denying that a violation occurred.
On February 13, 1996, the Office of the United States Trustee, through counsel, Gregory R. Lyons, Esquire, filed a Motion for Sanctions against Mr. Thornton alleging that “The statement that Mrs. Thornton sold *644the car is false.” (United States Trustee’s Motion for Sanctions Against Timothy A. Thornton ¶ 3.)
This matter came for hearing on March 26, 1996 at which time Timothy A. Thornton, Betty J. Thornton, as well as Attorney Lyons, appeared. At the conclusion of testimony, the Court issued a Bench Order denying Mr. Thornton’s Motion against Betty J. Thornton. Nevertheless, the Court held open the Motion for Contempt against Timothy A. Thornton with regard to sanctions under Rule 9011.
Despite further opportunity to the parties to present evidence with regard to the Motion by the United States Trustee against Timothy A. Thornton, no further evidence was offered.
“The signature of an attorney or a party constitutes a certificate that the attorney or party has read the documents; that to the best of the attorney’s or party’s knowledge, information, and belief formed after reasonable inquiry it is well grounded in fact____” Federal Rule of Bankruptcy Procedure 9011.
The U.S. Trustee maintains that Mr. Thornton violated Rule 9011 by falsely stating that the vehicle in question was sold. As the testimony developed, the vehicle was not, in fact, sold. Rather, it was apparently conveyed from the dual ownership of the Debtor, Timothy A. Thornton, and his ex-spouse, Betty J. Thornton, to Betty J. Thornton, individually, when she utilized a “power of attorney” that had been theretofore executed by the Debtor.
Contemporaneous with this transfer, Betty J. Thornton placed a lien on that title in favor of her father, securing an antecedent debt owing to her father in the approximate amount of Ten Thousand Dollars ($10,-000.00). The vehicle has generally been inoperable and is stored at her father’s premises. All of these transactions appear to have occurred during the pendency of the bankruptcy.
At the time of the hearing, this Court denied the Motion for Sanctions against Betty J. Thornton under 11 U.S.C. § 362(h) inasmuch as it was this Court’s understanding that the duty of the co-owner was to transfer property to a Chapter 7 Trustee. 11 U.S.C. § 542. Unfortunately, the United States Trustee’s Office has not seen fit to appoint a Chapter 7 Trustee to accept such property and, therefore, the Court concluded that Betty J. Thornton’s conduct, in retaining possession of the vehicle, may have been somewhat justified since there was no entity administering the estate.
In now considering whether Timothy A. Thornton should be subject to contempt under Rule 9011, the Court finds some guidance in the case of Milwaukee Concrete Studios, Limited v. Fjeld Manufacturing Company, Inc., 8 F.3d 441 (7th Cir.1993). That court analyzed Rule 11 as designed to deter baseless filings. The court further concluded that isolated factual errors should not be allowed to support a sanction request.
Technically, Mr. Thornton was incorrect when he referred to Betty J. Thornton’s transaction as a “sale.” Nevertheless, the property was conveyed from her and the Debtor to herself and she allowed it to be encumbered by a substantial lien in favor of her father, who thereafter retained possession. While this may not qualify as a technical sale, it is certainly the equivalent of such.
Although Rule 11 applies to pro se plaintiffs, the court must take into account a plaintiffs pro se status when it determines whether the filing was reasonable. Harris v. Heinrich, 919 F.2d 1515, 1516 (11th Cir.1990); Kurkowski v. Volcker, 819 F.2d 201, 204 (8th Cir.1987) (“We recognize that pro se complaints are read liberally, but they still may be frivolous if filed in the face of previous dismissals involving the exact same parties under the same legal theories.”). Warren v. Guelker, 29 F.3d 1386, 1390 (9th Cir.1994).
Taking Mr. Thornton’s pro se status into account, as well as Ms. Thornton’s unauthorized activity with the asset, I conclude that there is insufficient facts to support the United States Trustee’s Motion for Sanctions and I, therefore, deny same. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492621/ | OPINION AND ORDER GRANTING MOTION TO DISQUALIFY COUNSEL FOR DEFENDANT
BARBARA J. SELLERS, Bankruptcy Judge.
This matter is before the Court on a motion by Myron N. Terlecky, trustee of the jointly administered bankruptcy estates of Dublin Securities, Inc. (“DSI”), Dublin Management, Inc. (“DMI”) and Dublin Stock Transfer, Inc. As trustee, Mr. Terlecky is the plaintiff in this adversary action. As plaintiff, the trustee has moved to disqualify the law firm of Climaco, Climaco, Seminatore, Lefkowitz & Garofoli Co., L.P.A. (“The *312Climaeo Firm”) as counsel for the defendant. The Climaeo Firm opposed the motion and the Court heard the matter on February 27, 1997.
The Court has jurisdiction in this proceeding under 28 U.S.C. § 1334(b). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B), (E), (H) and (0) which this bankruptcy judge may hear and determine.
On August 18, 1993 DSI filed a voluntary petition under Chapter 11 of Title 11 of the United States Code in the United States Bankruptcy Court for the Southern District of Ohio. DSI was converted to a proceeding under chapter 7 on June 10, 1994. Plaintiff was then appointed the successor trustee on August 25,1994.
On April 10, 1992, the chief operating officer of DSI, Clarence J. “Red” Eyerman, sent a letter to its former counsel indicating that The Climaeo Firm would be representing Eyerman’s family and his various entities (including DSI). The Climaeo Firm represented DSI in all legal matters from April 1992 until August 1993. During the course of that representation, The Climaeo Firm billed DSI a total of $793,620.92 and was paid $478,186.51. Billing records submitted as evidence describe the extent of that representation.
The trustee argues that The Climaeo Firm’s past representation of DSI disqualifies that firm from now representing the defendant in this adversary action brought by DSI against NSC Consulting Corp.
The Climaeo Firm admits the fact of its past representation of DSI, but denies that this matter is substantially related to any matters for which it represented DSI and asserts further that the trustee has waived any attorney/client privilege which DSI might wish to protect.
Rules governing the conduct of attorneys before the Bankruptcy Court and any disqualification of counsel on ethical grounds are as provided .in Rule 83.4(f), formerly known as 2.6, of the Local Rules of the United States District Court for the Southern District of Ohio. See S.D. Ohio L.B.R. 4.0. District Court Rule 83.4(b) adopts the Model Federal Rules of Disciplinary Enforcement (“MFRD”) to govern the conduct of attorneys practicing in this court. Rule IV(B) of the MFRD defines misconduct by attorneys by reference to the Code of Professional Responsibility as adopted by the Supreme Court of Ohio.
The Canons and Disciplinary Rules, as adopted by the Supreme Court of Ohio to govern the conduct of attorneys in this state, which impact on this dispute are Canon 4, Disciplinary Rule 4-101 and Canon 9.
Canon 4 requires a lawyer to preserve the confidences and secrets of a client. Disciplinary Rule 4-101 further requires that: ... a lawyer shall not knowingly (1) reveal a confidence or secret of his client; (2) use a confidence or secret of his client to the disadvantage of the client, or (3) use a confidence or secret of his client for the advantage of himself or of a third person, unless the client consents after full disclosure. Canon 9 requires a lawyer to avoid even the appearance of professional impropriety.
In this circuit a three-part test is applied to determine whether a party’s attorney shall be disqualified for a conflict of interest. First, the moving party must be a former client of the adverse party’s counsel. That relationship can be consensual and contractual, or it can be implied. Second, there must be a substantial relationship between the subject matter of the counsel’s prior representation of the moving party and the issues in the present lawsuit. Third, the attorney whose disqualification is being sought must have had, or have been likely to have had in the course of his prior representation of the client, access to relevant confidential information. Dana Corp. v. Blue Cross & Blue Shield Mutual of Northern Ohio, 900 F.2d 882 (6th Cir.1990). The primary purpose for such a disqualification is to protect the confidentiality of information received from the former client, even if such information is only potentially involved.
The ability to deny one’s opponent the services of capable counsel is a potent weapon. Courts must be sensitive to the competing public policy interests involved: preserving client confidences and public respect on the one hand and, on the other hand, permit*313ting a party to retain the counsel of his choice. Manning v. Waring, Cox, James, Sklar, and Allen, 849 F.2d 222 (6th Cir.1988). The eases are factually driven and attempt to strike a balance between these public policy interests.
The first part of the test requires the trustee to show that The Climaco Firm had an attorney/elient relationship with DSI or the other debtors, whether contractual or implied, such that the firm could be considered to have acted as counsel. Such representation is not denied. The Climaco Firm represented DSI during an extensive period of time in varied matters, including certain state court litigation involving DSI’s issüance of certain securities.
The second part of the test is that there must be a substantial relationship between the subject matter of the counsel’s prior representation and the issues in this suit. The Climaco Firm denies that such a relationship exists.
In this adversary action the trustee seeks to recover from NSC certain payments made to NSC from DSI or DMI for consulting services. Those services performed by NSC related to representation of DSI’s interests before certain legislative and executive agencies of the state government. In connection with this representation between May 8, 1991 and December 31, 1992, NSC was to execute a subcontract with Public Policy Consultants, Inc., an entity owned and operated by Paul Tipps. The trustee alleges that some of the payments to NSC were fraudulent transfers either because the payments were made by one of the debtors which was not a party to the NSC/DMI contract or because the payment amounts were in excess of amounts specified under the contract.
The link between The Climaco Firm’s pri- or representation of DSI and the facts underlying this adversary appear to center on a relationship with Paul Tipps, owner and principal of Public Policy Consultants, Inc., the company with which NSC had a subcontract in connection with its contract with DSI.
The trustee states that a review of DSI records reveals references to Paul Tipps in connection with The Climaco Firm’s representation of DSI in certain state court lawsuits involving individual unit purchasers of certain securities brokered by DSI. The legality of those brokerage activities was an issue in those suits. In connection with those matters there are references to meetings between The Climaco Firm and Tipps relating to the political nature of the investigation and to strategies for defense.
Information prepared by Tipps as part of its subcontract with NSC in connection with NSC’s consultation contract with DSI was used by DSI in its defense to the state court actions. In other words, in its representation of DSI in 1992 and 1993, The Climaco Firm utilized for DSI’s defense materials prepared for DSI by Tipps. That work by Tipps was performed in connection with the contract at issue in this adversary. One issue in this adversary is whether payments to NSC, which would presumably include monies NSC passed on to Tipps’ company, were in excess of the reasonable value of NSC’s services.
Based on those facts, this Court finds that there is relationship between the subject matter of this adversary action and The Climaco Firm’s prior representation of DSI. It is possible that such relationship could be substantial. Accordingly, the second prong of the test for disqualification of counsel for conflict of interest has been met.
The third part of the test for disqualification requires that the law firm sought to be disqualified be shown to have had access to relevant confidential information in the course of the prior disqualifying representation. The Climaco Firm does not deny that confidential information relating to DSI was imparted to it. It claims, however, that any privilege resulting from such confidentiality has been expressly waived by the trustee in connection with certain criminal prosecutions brought against principals and agents of DSI in state court.
The effect of a waiver of the attorney/client privilege upon a disqualification of counsel for a conflict of interest is not easily resolved. The trustee, as the representative of these consolidated estates, waived the confidentiali*314ty of the debtors’ communications with certain of their attorneys, including The Climaco Firm, as to a special prosecutor appointed to investigate alleged criminal acts committed by certain of the debtors’ officers and employees. As a result of that waiver The Climaco Firm produced records and communications to the special prosecutor relating to the debtors’ registration and sales of securities and warrants and other transactions. That waiver produced facts which were testified to in certain criminal actions. As a consequence, an objection to testimony based upon the attorney/client privilege probably would not be sustained.
The problem is that waivers for purposes of excluding evidence in a court proceeding tend to be rather broadly interpreted in favor of the testimony. See, e.g. In re Grand Jury Proceedings October 12, 1995, 78 F.3d 251 (6th Cir.1996). Such interpretation is understandable, because the privilege keeps out evidence which may lead to discovery of relevant facts,
Inquiry for the purpose of establishing a conflict of interest in an adversary’s attorney, however, does not proceed from the same assumptions or work for the same goals. Just because confidentiality has been waived to help establish facts underlying certain criminal actions does not mean that the client has agreed that its former attorneys may use confidential information obtained by former attorneys in the course of a prior representation to defeat the client in the subsequent actions. In the first instance the client has agreed not to stand behind a shield of privilege- in a conquest for facts in a criminal proceeding. In the second instance, applying that earlier waiver, would mean that the client has agreed to arm its opponent in a civil action with all its confidences so that the opponent will have a possible road map to defeat a civil action against it.
In addition to the inquiry as to whether a waiver reaches to that extent, the conflict of interest issue involves matters of professionalism or appearance of professionalism. The ethical obligation under Canon 4 is broader than the attorney-client privilege. Cannon v. U.S. Acoustics Corp., 398 F.Supp. 209, 222 (N.D.Ill.1975). “This ethical precept, unlike the evidentiary privilege, exists without regard to the nature or source of information or the fact that others share the knowledge.” Id. (quoting EC 4-4). Therefore, even if the trustee is deemed to have waived the debtors’ attorney-client: privilege with respect to The Climaco Firm, this Court, in furthering this ethical precept, retains the inherent right to examine the totality of the circumstances involved in the waiver. Jackson v. Bellomy, 105 Ohio App.3d 341, 663 N.E.2d 1328, 1333 (1995).
This Court finds that the circumstances surrounding the waiver strongly indicate that the trustee, as the representative of these consolidated estates, did not consent to the use of confidential information by The Climaco Firm in this action. Furthermore, the Court concludes that the use or apparent use of such information would violate The Climaco Firm’s ethical obligations under Disciplinary Rule 4-101 and/or Canon 9.
Based on the foregoing, the Court-GRANTS the trustee’s motion to disqualify The Climaco Firm from representing any party in this adversary proceeding. Accordingly, The Climaco Firm shall promptly withdraw from any further representation of defendant NSC Consulting Corporation in this matter.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492622/ | MEMORANDUM OPINION
JACK CADDELL, Bankruptcy Judge.
This cause came on to be heard on the motion by First Union National Bank of North Carolina (“bank”) for relief from the automatic stay to proceed with foreclosure against debtors’ residence due to default in postpetition payments. The hearing in this matter was held on the 1st day of October 1997. At the hearing, the Abrights testified that they vacated the property and consented to the lifting of the stay with regard to the house; however, debtors did not consent to the lifting of the stay, with regard to two Trane heat pumps purchased by debtors subsequent to execution of the mortgage. The parties were granted thirty (30) days to brief the issue of whether the debtors have the authority to exempt the replacement heat pumps as personal property, or whether the heat pumps are fixtures subject to the mortgage held by the bank. Upon due consideration of the pleadings, arguments of counsel, and relevant law, the Court finds that the heat pumps are fixtures subject to the mortgage held by the bank and cannot be removed from the premises by debtors as exempt property.1
On October 17, 1996, the Abrights executed a note with the bank in the amount of $129,000.00. As security for the note, the debtors executed a mortgage in favor of the bank on the real property described in the mortgage, as well as, a security interest in after-acquired property. Subsequently, the Abrights purchased two heat pumps to replace the existing heating and air-conditioning system in their home. The Tennessee Valley Authority (“TVA”) financed the heat pumps and a third party eo-signed the loan for same. On or about November 8, 1996, TVA filed a financing statement maintaining a purchase money security interest in the heat pumps.
On March 23, 1997, the Abrights filed a voluntary petition for relief under chapter 13 of title 11 of the Bankruptcy Code. On schedules B and C of their petition, debtors listed an “air conditioner unit” as exempt personal property in the amount of $7,500.00 pursuant to section 6-10-6 of the Aabama Code. The debtors seek to remove the subject property from the real estate as exempt personal property.
In determining whether the heat pumps become part of the real estate so as to fall under the after acquired property provisions of the mortgage, “improvements,” it is necessary to determine whether they are fixtures or personal property. To do so, the Court must look to applicable state law. See In re Morphis, 30 B.R. 589, 591 (Bankr.N.D.Ala.1983). The Aabama Code defines fixtures as goods that have “become so related to a particular real estate that an interest in them arises under real estate law.” ALA. CODE 17-2A-309(/, )(a) (1975). Aabama courts have held that a fixture is “ ‘an article which was once a chattel, but which, by being physically annexed or affixed to the realty, has become accessory to it and part and parcel of it.’ ” In re Morphis, 30 B.R. at 590 (citations omitted). In the oft quoted case of Langston v. State, 96 Ala. 44, 11 So. 334 (1892), the Aabama Supreme Court established the criteria for determining whether an item is to become part and parcel of the real estate to which it is attached as follows:
(1) Actual ánnexation to the realty or to something appurtenant thereto;
(2) appropriateness to the use of purposes of that part of the realty with which it is connected;
(3) the intention of the party making the annexation of making permanent attachment to the freehold.
Id. 11 So. at 335; See also Kennedy v. Lane Foods, Inc. (In re Kennedy), 192 B.R. 282 (Bankr.M.D.Ga.1996)(applying the Langston criteria to determine whether a restaurant building affixed to real property qualified as a part of the realty under Aabama law); In re Morphis, 30 B.R. at 590 (utilizing *410the Langston criteria to find a mobile home became a fixture where debtor voluntarily moved the mobile home onto his lot, removed the wheels and attached plumbing lines thereto). For the reasons set forth below, the Court finds that the movant has satisfied these requirements in the ease at bar.
With regard to the first element, actual annexation, the Albrights allege that the financing company required debtors to install the heat pumps so as to allow same to be removed without damage to the realty. It is not essential, however, to the element of actual annexation that a fixture’s “annexation to the freehold be made absolutely permanent.” Langston v. State, 11 So. at 336. Indeed, the Alabama Supreme Court has held that the general rule for purposes of determining whether a good is a fixture is that “whatever is attached to the realty, though but slightly, is prima facie part thereof.” Silverman v. Mazer Lumber & Supply Co., 252 Ala. 657, 42 So.2d 452, 453 (1949).
Although the parties were unable to cite any Alabama eases’ concerning the attachment of heat pumps to realty, the case of Household Fin. Corp. v. BancOhio, 62 Ohio App.3d 691, 577 N.E.2d 405 (1989) is instructive on the issue, in that case an Ohio appellate court determined that a heat pump was a fixture where the heat pump was located outside the house and bolted to a concrete slab with wires and tubes going into the house. The court noted that the element of annexation is satisfied by “slight physical attachment.” Id. 577 N.E.2d at 406 (quoting the case of Holland Furnace Co. v. Trumbull Savings & Loan Co. 135 Ohio St. 48, 19 N.E.2d 273 (1939) in which the Ohio Supreme Court determined whether a warm-air furnace installed by slight physical attachment was a fixture). Although the heat pumps in the present case could undoubtedly be removed from the house, the Court finds the same to be sufficiently, even if slightly, attached to the realty to satisfy the element of actual annexation.
To satisfy the second element of a fixture, the heat pumps must be appropriate to the purpose of the use of the realty to which they are attached. In the Household Finance case, the court discussed the function and purpose of heat pumps for purposes of determining the second test as follows:
[The heat pump is] indispensable for the comfortable enjoyment of a dwelling house in this climate. When installed, it certainly became an integral and necessary part of the whole premises.... The adaptation of the chattel ... to the permanent use and enjoyment of the freehold; the lack of utility of the premises if it were severed and the necessity of replacing it with another or similar kind if it were removed, all indicate that the second test of a fixture is satisfied in the case of this [heat pump].
Id. at 407 (citations omitted). Similarly, the Court finds that the heat pumps in the case at bar are clearly integral to the function and the purpose of the subject house.
With regard to the final element of a fixture, intent can be inferred from the “nature of the article annexed, the relation of the party making the annexation, the structure and mode of annexation, and the purposes and uses for which the annexation has been made.” In re Kennedy, 192 B.R. at 287-88. The intention of the party making the annexation is the controlling factor in determining the character of the article annexed. Id. (citing Langston v. State, 11 So. at 335-36).) Intent to affix property to the realty is presumed where a debtor voluntarily annexes same to the realty. In re Morphis, 30 B.R. at 591(citing Milford v. Tennessee River Pulp & Paper Co., 355 So.2d 687 (Ala.1978)).
In the case at bar, the Court finds that the heat pumps satisfy the third element of a fixture. The heat pumps are connected to the house and constitute the heat and air-conditioning source for same. Removal of the heat pumps would necessitate the replacement of the heat .source to make the house habitable. The Albrights enjoyed the benefit of the original heating and air-conditioning system securing the bank’s mortgage. Although the Albrights were under no obligation to replace the system when worn out by their use, they chose to purchase replacement heat pumps to benefit their home. These actions evidence an intent on the part of the Albrights to permanently affix the *411heat pumps to their residence such that the same became a part of the realty.
Therefore, the Court finds that the Al-brights cannot remove the heat pumps from the house because debtors’ mortgage contains an after-acquired property clause granting the bank a security interest in all “improvements now or hereafter erected on the property, and all easements, rights, appurtenances and rents all of which shall be deemed to be and remain a part of the property conveyed by this Mortgage.... ” Pursuant to the terms of the after-acquired property clause, all improvements made to the property are considered to be part of the bank’s security interest. After acquired-property clauses are standard as it would create havoc if a mortgagor, faced with foreclosure, were permitted to remove heat pumps and other accessions to the home replaced by mortgagor after the original mortgage was given.
Finally, the Court notes that the Albrights have waived their right to exempt the heat pumps because the mortgage is a voluntary conveyance. On October 17, 1996, debtors executed a mortgage in favor of the bank and granted the bank a security interest in the residence together with all improvements now or thereafter erected on the property. Section 522(g)(1)(A) of the Bankruptcy Code preserves the right of a debtor to claim an exemption in property recovered pursuant to an avoidance proceeding, but only if the debtor did not voluntarily transfer the property or cause the same to be concealed. See Schieffler v. Beshears (In re Beshea/rs), 182 B.R. 235, 239 (Bankr.E.D.Ark.l995)(determining that debt- or could not exempt property recovered by the trustee having voluntarily transferred the property prepetition); See also First Bank v. Sloma (In re Sloma), 43 F.3d 637 (11th Cir.1995)(rejecting debtor’s Bankruptcy Rule 4003(b) argument and finding that a debtor cannot claim as exempt property that he does not own). The Albrights cannot now claim the heat pumps as exempt having voluntarily transferred same to the bank pursuant to the terms of debtors’ mortgage.
A separate order will be entered consistent with this opinion.
. This Memorandum Opinion constitutes findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure' 7052 and Federal Rule of Civil Procedure 52. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492576/ | ORDER
JAMES A. PUSATERI, Chief Judge.
This matter comes before the Court on the Debtor’s Objection to the Claim of Internal Revenue Service. A hearing was held on January 17, 1997. Appearing for the parties were Lynn D. Lauver, attorney for the debtors, and Martin M. Shoemaker, attorney for the United States. Also present were Royce Harper and David Tarvin, Assistant Attorneys General for the State of Nebraska.
The Internal Revenue Service has filed a proof of claim in the amount $46,149.45. The claim consists of a priority claim for delinquent child support certified to the IRS by the Secretary of Health and Human Services pursuant to 26 U.S.C. § 6305(a). The State of Nebraska had requested the certification under 42 U.S.C. § 652(b) and 45 C.F.R. § 303.71.
The grounds for the debtors’ objection are that the certification procedures set forth in 45 C.F.R. § 303.71 have not been followed, the certification is no longer valid, and thus the IRS claim should be disallowed.
Having heard the arguments of counsel and having reviewed the file, the Court finds that this Court is not the proper forum for the debtors’ challenge of the assessments made pursuant to 26 U.S.C. § 6305(a). The assessments originally made are those which form the basis of the IRS claim. Debtor seeks modification of that assessment. The Court lacks jurisdiction over the necessary parties to that action, including the State of Nebraska. The debtors’ redress is in Nebraska state court with respect to his claim that child support assessments are inaccurately reflected on the proof of claim of the Internal Revenue Service.
IT IS THEREFORE ORDERED that the Debtors’ Objection to the Claim of the Internal Revenue Service is denied. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492578/ | ORDER RE MARS SETTLEMENT
BURTON PERLMAN, Bankruptcy Judge.
Debtor in this Chapter 11 case had operated retail department stores prior to filing their bankruptcy case. It continued as an operating business until a short time after its filing, at which time it ceased operations. While it remains in Chapter 11, it is now in a liquidation mode. Debtor continues to own certain real estate. The Official Unsecured Creditors Committee (“UCC”) has been au*129thorized by this court to act in the name of the debtor regarding the disposition of that real estate. The UCC has entered into a Settlement Agreement which provides for such disposition. The UCC here moves for approval of that Settlement Agreement.
This court has jurisdiction of this matter pursuant to 28 U.S.C. § 1334(b) and the General Order of Reference entered in this District. This is a core proceeding arising under 28 U.S.C. § 157(b)(2)(A) and (0).
Not long before the bankruptcy filing, certain stock purchase transactions occurred pursuant to which ownership of the equity interests in the debtor were transferred. In order to fund such transfers, a series of sale-leaseback agreements were entered into between the debtor and Mars Partnership (“Mars”). Mars is exclusively owned and controlled by Hari Budev and Chandu Budev. Debtor sold three of its most valuable properties to Mar’s as follows:
1. The debtor sold its Glenway Avenue (Western Hills) property to Mars for the case purchase price of $6.75 million.
2. The debtor sold its Princeton Pike (Tri-County) property to Mars in exchange for the assumption by Mars of certain IRB indebtedness outstanding on that property in the amount of $5.005 million.
3. The Debtors sold its Red Bank Road property to Mars in exchange for a subordinated, secured 30-year Promissory Note in the principal amount of $2.245 million.
Property
Glenway Ave. (Western Hills)
Princeton Pike (Tri-County)
Red Bank Road
The transfer of the Swallen’s Properties will be accomplished through either
(i) consensual foreclosure;
(ii) delivery of a deed in lieu of foreclosure; or
(iii) by limited warranty or quit claim deed.
2. Upon transfer of the Red Bank Property to the Committee (or its designee), Fifth The Glenway Avenue, Princeton Pike, and Red Bank Road properties mentioned above shall be referred to collectively as the “Swallen’s Properties”. At the time of the Debt- or’s transfer of the Swallen’s Properties to Mars, they had an aggregate appraised value of nearly $18 million.
Contemporaneous with Debtor’s transfer of the Swallen’s Properties to Mars, Mars entered into a series of loan agreements with the Fifth Third Bank through which Mars obtained the funding necessary to acquire the Swallen’s Properties from the Debtor. In exchange for the financing, Fifth Third Bank was granted a senior mortgage on each of the Swallen’s Properties.
Simultaneously with the foregoing, Mars and the Debtor also entered into a series of long-term, triple net leases, (collectively the “Mars Leases”) for each of the Swallen’s Properties under which, inter alia, the Debt- or became obligated to pay substantial sums to Mars for annual rentals, as well as real estate taxes and all other amounts arising for maintenance and operation for each of the Swallen’s Properties.
The principal terms of the Settlement Agreement are the following:
1. Upon approval of the Settlement, Mars and the Budevs will transfer ownership and control of the Swallen’s Properties to Fifth Third Bank and/or the Committee, respectively, as follows:
Transferee
Fifth Third Bank
Fifth Third Bank
Committee (or its designee)
Third Bank will release its mortgage lien on the property.
3. The Committee shall be free to sell or otherwise dispose of the Red Bank Property, in its sole discretion, the proceeds of any such disposition shall ensue to the sole benefit of the Debtor’s general unsecured creditors; provided, hoivever, that $250,000 of any disposition proceeds will be deposited in an interest bearing escrow (the “Deficiency Es*130crow”) at Fifth Third Bank pending Fifth Third Bank’s disposition of the Western Hills and Tri-County properties to cover its deficiency claim, if any, resulting from the disposition of the Swallen’s Properties, together with such other side collateral that the Budevs have delivered to Fifth Third Bank. The Deficiency Escrow will last for not more than 2 years, after which it shall be distributed to the Debtor’s creditors, unless earlier terminated and distributed ratably as between the Committee and Fifth Third Bank under the terms of the Settlement Agreement.
4. The Committee, on behalf of the Debt- or’s unsecured creditors, has also preserved the opportunity to share in any “upside” that may be realized upon a disposition of the Western Hills and Tri-County properties after satisfaction of Mars’ indebtedness to Fifth Third Bank; provided, however, that such upside potential is limited to not more than $312,000.
5. The obligations by Mars and the Budevs under the Settlement Agreement shall be secured by, inter alia, the pledge of cash or marketable securities in an amount of not less than $312,000.00.
6. Upon approval of the Settlement, the Debtor’s estate shall deliver a general release to Fifth Third Bank; the Debtor’s estate shall deliver a conditional release to Mars and the Budevs, respectively, which release shall be conditioned upon their satisfaction and performance of all of their respective obligations under the Settlement. Fifth Third Bank will deliver comparable releases.
7. Mars and the Budevs will each deliver to Fifth Third Bank and the Debtor’s estate unconditional general releases upon approval of the settlement.
In evaluating the Settlement with Mars, the following criteria are applicable:
... most circuit courts that have considered the issue have adopted a uniform standard by which the bankruptcy judge or other trial officer should be governed in the hearing on a motion to approve a compromise. According to these cases, the court should consider: (a) the probability of success in the litigation; (b) the difficulties, if any, to he encountered in the matter of collection; (c) the complexity of the litigation involved, and the expense, inconvenience and delay necessarily attending it; (d) the paramount interest of the creditors and a proper deference to their reasonable views in the premises.
In other words, therefore, a compromise will be approved when it is both “fair and equitable” and in the best interests of the estate.
10 Collier on Bankruptcy § 9019.02 (15th Rev. ed.1996) (footnotes omitted)
The UCC in presenting the motion to approve the settlement with Mars, has made a persuasive showing in its memorandum and in oral argument that all of these criteria when properly evaluated work in favor of approval of the settlement. We approve the motion of the UCC for the reasons stated in its memorandum. While initially certain creditors objected to the settlement, • largely on grounds that adequate information had not been made available, that objection has been withdrawn.
The motion of the UCC to approve the settlement with Mars, Hari Budev, Chandu Budev, and the Fifth Third Bank is granted.
So Ordered. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492579/ | MEMORANDUM
JOHN C. MINAHAN, Jr., Bankruptcy Judge.
This matter is before the court upon a Motion by Sherman County and the Sherman County Sheriff (the “Sheriff’) to Set Aside a State Court Judgment of Amercement, and Resistance to the Motion by Attorney Michael Snyder.
During the pendency of this bankruptcy case, the debtors’ former counsel, Michael Snyder (“Snyder”), reduced his allowed claim for attorney fees to judgment in bankruptcy court. Snyder docketed the bankruptcy court judgment in state court, obtained a writ of execution, and attempted to levy upon the debtors’ property. The Sheriff failed to duly execute upon the writ and Snyder obtained a state court amercement judgment against the Sheriff. In this contested matter, the Sheriff and Sherman County seek to set aside the amercement judgment asserting that Snyder violated the Bankruptcy Code’s automatic stay provisions by transcribing the bankruptcy court judgment to state court, by attempting to levy on the debtors’ property, and by prosecuting the amercement action. I conclude that the automatic stay was not violated, and the Motion to Set Aside State Court Judgment is denied.
Findings of Fact
After this bankruptcy case was commenced, Snyder was employed to represent the debtors. He assisted in preparation of an amended Chapter 12 plan which was confirmed on January 13,1995.
In July of 1995, Snyder withdrew from representing the debtors. Snyder’s application for allowance of fees of $4,250.36 was sustained. The bankruptcy court entered a judgment in favor of Snyder on November 29,1995.
On December 13,1995, Snyder transferred the judgment of the bankruptcy court to the District Court of Sherman County, Nebraska. Snyder filed a praecipe and caused a writ of execution to be issued against the debtors’ property on December 14,1995. He subsequently caused the writ to be delivered to the Sheriff, James Kugler. On December 27, 1995, at the insistence of Snyder, the Sheriff attempted to levy on the debtors’ 1984 Kenworth Tractor, Model 1900, Red/ White, VIN # 1XKWD29XXES314748 (the “Tractor”). The Tractor was valued in the debtors’ schedules at $18,000.00, subject to a secured loan of $3,000.00. At the time of the attempted levy, the debtors were hauling *163grain with the Tractor. The Sheriff allowed the debtors to retain possession of the Tractor in order to finish hauling the grain. The debtors agreed to turn the Tractor over to the Sheriff on the next day, but failed to do so. The Sheriff subsequently was unable to locate the Tractor.
On January 29, 1996, this bankruptcy case was converted from Chapter 12 to Chapter 7. Because of the conversion to Chapter 7, the Sheriff returned the outstanding writ of execution unserved. After the bankruptcy case was converted to Chapter 7, Snyder made no attempt to levy upon property of the bankruptcy estate or property of the debtors. However, he did actively pursue remedies against the Sheriff.
On February 23, 1996, Snyder filed a motion in the District Court of Sherman County, Nebraska to amerce the Sheriff.1 On April 29, 1996, the district court entered a judgment of amercement in favor of Snyder and against the Sheriff in the amount of $4,250.35, plus costs and post-judgment interest.
Snyder proceeded to garnish the Sheriff’s bank account and the Sheriffs wages from his employer, Sherman County. Sherman County’s liability insurer, Scottsdale Insurance Company, paid the judgment of amercement. However, Scottsdale Insurance Company was reimbursed by Sherman County.
On February 5,1997, Sherman County and the Sheriff filed a motion in Bankruptcy Court seeking to set aside the state court judgment of amercement under the supremacy clause of the United States Constitution asserting that the judgment violates the automatic stay of 11 U.S.C. § 362. They further request this court to exercise its power under 11 U.S.C. § 105(a), its own contempt powers, and 11 U.S.C. § 362(h), to compel Snyder to refund the amounts received in satisfaction of the judgment of amercement to the Sheriff and Sherman County, and to pay their attorney fees and expenses.
Discussion
Sherman County and the Sheriff claim that the state court judgment should be set aside because Snyder’s activities constitute a violation of the automatic stay of 11 U.S.C. § 362. I conclude that the automatic stay was not violated and that the motion to set aside judgment should be denied.
In applying section 362 to the facts of this case, it is important to keep certain critical facts in mind:
1. Snyder held a judgment for attorney fees which accrued after the bankruptcy petition was filed. Thus, he asserted a post-petition claim.
2. The Chapter 12 plan was confirmed prior to the entry of judgment and prior to Snyder taking any collection action.
3. Snyder took no action against the debtors or against property of the bankruptcy estate after the Chapter 12 bankruptcy case was converted to a Chapter 7 case. His actions were limited to filing and prosecuting the amercement action and attempting to collect the amercement judgment from the Sheriff or the Sheriffs creditors.
Section 362(a) of the Bankruptcy Code distinguishes between the concepts of “property of the debtor” and “property of the bankruptcy estate.” With these distinctions in mind, I conclude that Snyder’s actions in docketing the bankruptcy judgment in state court and his actions of obtaining a writ of execution and attempting to levy on the Tractor did not violate the automatic stay.
Subsection 362(a)(1) prohibits the commencement or continuation of actions against the debtor, or to recover a claim against the debtor, that arise before the commencement of the bankruptcy case. Subsection 362(a)(2) enjoins the enforcement of a judgment obtained before the commencement of the case against property of the estate. Because Snyder’s claim for attorney fees arose, and the judgment was entered, after the commencement of the bankruptcy *164case, I conclude that subsections 362(a)(1) and (2) were not violated.
Subsections 362(a)(3) and (4) prohibit obtaining possession of property of the estate, exercising control over property of the estate, and creating, perfecting or enforcing any lien against property of the estate. Under 11 U.S.C. § 1227(b):
Except as otherwise provided in the plan or the order confirming the plan, the confirmation of a plan vests all of the property of the estate in the debtor.
Upon confirmation of the Chapter 12 plan, all property of the estate vested in the debtors. Such vesting of property of the bankruptcy estate occurred even though the bankruptcy estate, in theory, continues to exist after confirmation. Security Bank of Marshalltown, Iowa v. Neiman, 1 F.3d 687 (8th Cir. 1993). Furthermore, the order confirming the Chapter 12 plan explicitly provided that the Tractor would be property of the debtors. Because the Tractor did not constitute property of the bankruptcy estate at the time of Snyder’s attempt to levy, I conclude that sections 362(a)(3) and (a)(4) were not violated.
Subsections 362(a)(5) and (6) involve claims which arise before commencement of the bankruptcy case. Because Snyder’s claim arose post-petition, I conclude that his actions did not violate § 362(a)(5) or (6).
After the Chapter 12 bankruptcy case was converted to Chapter 7, Snyder took no action against the debtors, or against property of the bankruptcy estate. Snyder prosecuted an amercement action after the case was converted, however, I conclude that those activities did not violate the automatic stay. An amercement action is an action against a sheriff personally. It is a creature of statute that provides a remedy against the sheriff for failure to perform official duties. The amercement proceeding was not a suit against the debtors and it was not an action against property of the Chapter 7 bankruptcy estate. Accordingly, I conclude that Snyder’s actions in connection with the amercement proceeding did not violate the automatic stay. Therefore, there is no basis for setting aside the state court judgment.
In concluding that a debtor’s counsel is free to docket a bankruptcy court judgment for post-petition attorney fees in state court and to enforce the post-petition judgment against property of the debtor after confirmation of a Chapter 12 plan, I do not grant a broad license to counsel to actively pursue such remedies in situations other than those described in this case.
IT IS THEREFORE ORDERED, that the Motion to Set Aside Judgment of Amercement is denied.
. Under Neb.Rev.Stat. § 25-1545, “If any sheriff or other officer shall refuse or neglect to execute any writ of execution to him directed which has come to his hands; ... such sheriff ... shall ... be amerced in the amount of said debt, damages and costs, ... | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492580/ | ROBERT G. MOOREMAN, Bankruptcy Judge.
This matter is before the Court pursuant to Knutson Mortgage Corporation and Mark S. Bosco’s (“Knutson Mortgage” and “Bosco,” collectively, “Defendants”) Motion to Dismiss. A hearing was held June 3, 1997 after which the matter was taken under advisement. After due consideration of the pleadings, the record herein, and under the present posture of the case, the Court finds and concludes the following in making its decision.
1. Debtor filed a voluntary Chapter 13 Bankruptcy petition on January 2,19971 and listed 16213 South 35th Street, Phoenix, AZ 85044 as Debtor’s street address.
2. Debtor filed his original Schedules and Statement of Affairs in this case on January 13, 1997. The original Schedules listed no interest in real property, and did not list Knutson Mortgage as a creditor of the estate. Debtor did not list any other creditors in the original schedules, except for Arizona Central Credit Union VISA Dept, for a claim of $1,250.00 for credit card purchases through November 1996. Debtor’s total liability listed on all of the Schedules is $1,250.00.
3. Debtor failed to include a Social Security Number on the original petition, and the Chapter 13 Trustee requested that the Debt- or be required to amend the petition. The Court entered an order requiring the Debtor to file an amended petition.
4. Debtor filed an amended petition on January 24, 1997. The amended petition lists Debtor’s Social Security Number as 327-42-9703.
*1665. On April 18, 1997, Debtor filed an amended Schedule B, listing five promissory notes as assets totaling $214,673.00. Debtor indicated in the attachments to the amended Schedule B that the Debtor was not in possession of the promissory notes, but that any promissory notes executed by the Debtor must be listed as assets of the estate. The Debtor further indicates that he has attempted to contact Knutson Mortgage Company, GMAC Mortgage Corporation, Countrywide Home Loans, Associates Financial Services, and Bank One Mortgage Corporation and has requested that each of these entities return the promissory notes, but that the entities have refused to do so. The amended Summary of Schedules now indicates that Debtor has a total of $215,943.00 in assets which consist entirely of personal property assets. Debtor did not amend Schedule A to include any claimed interest in real property. As with the original Schedules, the amended Summary of the Schedules only shows creditor’s claims totaling $1,250.00, which is the entire amount of liabilities listed on the Summary.
6. Debtor filed the instant Adversary Complaint on April 18, 1997. Debtor’s Complaint is convoluted and rambling, and appears to be an attempt to utilize the Bankruptcy Court as a “Common Law Court” and to invoke the federal “Common Law” as a basis for relief. The first cause of action generally seeks to nullify the Proof of Claim filed by Mark S. Bosco on behalf of the Knutson Mortgage Corporation based on the allegation that the Proof of Claim does not comply with the official form or include the required documentation. The second cause of action seeks to nullify the pending trustee’s sale and declare that Knutson Mortgage is not a creditor of the Debtor and that the promissory note held by Knutson Mortgage is invalid because it does not contain the signature of the Debtor. The Debtor included as exhibits to the Adversary Complaint copies of Knutson Mortgage’s Proof of Claim and the Promissory Note (hereinafter the “Knutson Mortgage Promissory Note”), Deed of Trust, Multistate Adjustable Rate Note, and a Multistate Adjustable Rate Rider concerning the subject property, 16213 South 35th Street, Phoenix, Arizona 85044.
7. The Promissory Note, Deed of Trust and other documents attached to the Complaint identify the subject real property and appear to be executed and signed by the Debtor as a borrower.
8. Defendants filed the Motion to Dismiss on May 9, 1997. In the Motion to Dismiss, Defendants argue that this Court does not have jurisdiction over the subject matter of the Complaint because this is the second action filed by Debtor regarding his indebtedness to Knutson Mortgage within the last few months. The first action was filed by the Debtor pre-petition in the United States District Court for the District of Arizona, case number CIV96-2489-PHX-EHC. The Defendants included as an exhibit to their Motion to Dismiss the Adversary Complaint a copy of the Debtor’s Complaint filed in the District Court. The Defendants, Knutson and Bosco, filed a Motion to Dismiss the lawsuit filed in the District Court and the Honorable Earl H. Carroll granted the Motion to Dismiss, and on January 28, 1997 a take nothing judgment was entered against the Debtor. The Debtor then filed additional pleadings in the District Court which Judge Carroll treated as Motions for Reconsideration, which were also denied. The Defendants also indicated that the Debtor has filed an Application for Writ of Mandamus to the Ninth Circuit Court of Appeals and that the Application is currently under consideration by the Court of Appeals. The Defendants, in addition to their arguments of collateral estoppel and issue preclusion as a result of the District Court’s prior ruling, also argue that the Complaint should be dismissed under Fed.R.Bankr.P. 7012(b)(6) because the Complaint fails to state a claim upon which relief may be granted.
The Court finds and concludes that the Complaint filed by the Debtor in the District Court lawsuit, Case No. CIV962489-PHX-EHC, alleges the same conduct and causes of action against the Defendants as the Complaint filed in this Adversary proceeding. Judge Carroll Dismissed the District Court Complaint with prejudice for failure to state a claim and also denied the subsequent requests that the District Court *167determined to be motions for reconsideration. The Court finds and concludes that the issues have been fully litigated in the District Court and that the Debtor is attempting to re-litigate the matter. The principles of collateral estoppel and issue preclusion apply in this case and the Complaint can be dismissed on that basis alone.
The Court also finds and concludes, upon review of the Complaint, in addition to the collateral estoppel and issue preclusion previously identified, that the Debtor has failed to state a claim upon which relief may be granted and that the Complaint shall be dismissed under Fed.R.Bankr.P. 7012(b)(6).
Upon review of the Debtor’s original and amended Schedules and Statement of Affairs, and in light of today’s ruling on the dismissal of the Adversary Complaint and the District Court’s prior rulings, the Court finds and concludes that the Bankruptcy case is essentially an attempt to remove the voluntary liens on Debtor’s residence by way of the Debtor alleging that he never signed the documents creating the liens.2 The Debtor has indicated in the attachments to the amended Schedules that a number of Promissory Notes exist, including one with Knutson Mortgage, but that the Debtor has been unable to persuade the various note holders to return the notes, which he claims are assets of the Bankruptcy estate; Debtor also states in his Adversary Complaint that he has paid some $90,674 to Knutson Mortgage; Debtor has also included signed copies of the documents creating the secured liens and the signatures appear to be those of the Debtor. Based on the foregoing, this Court finds Debtor’s claims that he did not sign the Knutson Promissory Note, Deed of Trust, or other documents as not credible nor meritorious and that this Debtor, having failed in the District Court lawsuit, is attempting to abuse the Bankruptcy process in order to remove the voluntary liens without any legal authority to do so.
The Court notes, although not listed in Debtor’s Schedules, that considerable claims have been filed by both the Internal Revenue Service (“IRS”) and the Arizona Department of Revenue (“AZ DOR”). The Court also notes that the Debtor had been involved in Adversary proceedings with the IRS in Debt- or’s previous Bankruptcy case, No. 92-13577-PHX-GBN, and that the Debtor had lost on motions for summary judgment and/or motions to dismiss in each of the cases to determine the extent of liens or interest, dischargeability of debt, and attempted recovery of money. See Footnote 1. The Court finds and concludes that the Debtor, through his prior Bankruptcy case had knowledge of at least the IRS tax claims, but failed to list such elaims, disputed or otherwise, on either the original or amended Schedules. The IRS has filed a Proof of Claim in the instant case which asserts a total claim of $167,682.50 for taxes, consisting of a $157,682.50 secured claim and a $10,000.00 priority claim against the estate. The AZ DOR has filed an amended Proof of Claim which asserts a total claim of $16,380.85 for taxes, consisting of a $13,313.92 unsecured priority claim and a $3,066.93 general unsecured claim. The Court also notes that the Debtor’s Complaint alleges that Knutson Mortgage is attempting to unlawfully take Debtor’s property, but that the Debtor has not listed any real property in the original or amended Schedules.
All of the foregoing compels this Court to conclude that the Debtor lacked good faith in filing the instant Bankruptcy case, that the Debtor has filed incomplete Schedules, and that the Debtor has not exhibited any honest intention to reorganize his debts in a meaningful manner. Therefore, the Court finds and concludes, based on this record, that the case shall be dismissed for lack of good faith filing.
Accordingly,
IT IS ORDERED dismissing the Adversary Complaint for failure to state a claim upon which relief may be granted and because the matter has already been litigated in the District Court and is subject to an Application for a Writ of Mandamus to the Ninth Circuit Court of Appeals;
*168IT IS FURTHER ORDERED dismissing the entire Bankruptcy ease and all pending Adversary proceedings for lack of a good faith filing; and
IT IS FURTHER ORDERED that this is a final, appealable order hereon.
IT IS SO ORDERED.
. The Court notes that this is the second Chapter 13 Bankruptcy case filed by this Debtor. Debt- or's first Chapter 13 case, Number 92-13577-PHX-GBN, was filed November 13, 1992. The docket indicates that the Debtor filed a motion to dismiss and the court entered the order dismissing the case on May 31, 1995; the case was formally closed on May 7, 1996. A review of the docket of Debtor’s first Bankruptcy case indicates there were no adversary proceedings involving Knutson Mortgage, nor was Knutson Mortgage identified in any of the docket entries. However, the Court also notes that the docket indicates, as part of the Debtor’s first Bankruptcy case, that the Debtor was involved as a plaintiff in three adversary proceedings with the Internal Revenue Service. Adversary Case Nos. 93-00185 (to determine validity, priority, or extent of lien) 94-00759 (to recover money or property); and 94-00716 (to determine dischargeability of debt). In each of the three cases, the court granted summary judgment against the Debtor and/or dismissed the case. The Court takes judicial notice of the dockets relating to Debtor’s previous Bankruptcy case and the attendant Adversary proceedings.
. The Court notes that the Debtor has also just recently filed an Adversary Complaint against the Internal Revenue Service, Adv. Case No. 97-00339 (filed June 3, 1997), to determine the validity, priority, and extent of the IRS lien or interest in property. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492582/ | OPINION AND ORDER
JOHN J. THOMAS, Bankruptcy Judge.
This bankruptcy began under the Act of 1898 on March 29,1979.
Pending before this Court, to be addressed in this Opinion, are a Motion of Joseph F. and Caroline Enos for Leave to Intervene (Doc. # 808) in a certain litigation and a Motion for Issuance of Writ of Execution (Doc. # 810) to enforce execution of a judgment in that litigation.
This matter came to be heard on June 12, 1996. At that time, the parties, i.e., the Internal Revenue Service (“IRS”); the Trustee, Charles DeHart, III, Esquire (“Trustee”); and Joseph F. and Caroline Enos (“Enoses”), agreed that a Stipulation of Facts filed in 1984 could be utilized by the Court as findings of fact in support of the parties’ respective positions. Rather than summarize those stipulations of fact, attached as an Appendix to this Opinion is a copy of that Stipulation of Facts filed October 3,1984 to Document # 496.
The Enoses’ Motions specifically relate to an Opinion of my predecessor, the Honorable Thomas C. Gibbons, Bankruptcy Judge, issued July 5, 1985 and reported in In re Metropolitan Metals, Inc., 50 B.R. 685 (Bankr.M.D.Pa.1985).
In that Opinion, Judge Gibbons (1) denied the Trustee’s request to compel the IRS to satisfy their tax claims against the assets of Enoses prior to making claim against the assets of the bankrupt Metropolitan Metals, Inc.; and (2) allowed the estate of Metropolitan Metals, Inc. to be subrogated to the rights of the IRS against the Enoses to the extent that Metropolitan Metals, Inc. is required to pay the IRS.
That decision was subsequently appealed to the district court and affirmed on August 4,1986.
The IRS has pursued the Enoses for the various tax liabilities asserted by it together with interest and whatever penalties may have accrued. Enoses, on the other hand, are hopeful that the bankruptcy Trustee for Metropolitan Metals, Inc. will pay the IRS so as to reduce and/or possibly eliminate the obligation that the Enoses may have to the IRS. These current Motions to intervene and execute the judgment are part of Enos-es’ ongoing effort to compel the Trustee to make this payment. The Enoses rely on Federal Rule of Civil Procedure 71, which has specifically been incorporated into the Bankruptcy Rules by Federal Rule of Bankruptcy Procedure 7071.
Initially, as an Act case, the current Federal Rules of Bankruptcy Procedure may not apply. As we have previously indicated, the current Bankruptcy Rules are applicable to pending proceedings “except to the extent that in the opinion of the court their application in a pending proceeding would not be feasible or would work injustice, in which event the former procedure applies.” In re Blue Coal Corp., 166 B.R. 816, 819 (Bkrtcy.M.D.Pa.1993). Citing Order of the Supreme Court Adopting the Rules of Bankruptcy Procedure, April 25,1983.
The Motion to Intervene would normally come before this Court under Federal Rule of Bankruptcy Procedure 2018(a). That Rule provides that the Court may permit any interested entity to intervene generally or with respect to any specified matter. The Rule, however, limits its application to cases “under the Code.” The Advisory Committee Note to Federal Rule of Bankruptcy Procedure 1001 suggests that the “Code” refers to *251Public Law 95-598 (the Bankruptcy Reform Act of 1978). The Committee Note distinguishes references to the Bankruptcy Act of 1898 as being made through the term “Bankraptcy Act.”
Nevertheless, Rule 71 specifically authorizes a party, in whose favor an order is entered, to enforce that order as if he were a party. I find that Judge Gibbons’ Order of July 5, 1985, as amended and affirmed, can run in favor of the Enoses and, therefore, can be enforced by the Enoses.
If the IRS is being compelled to pursue the Enoses for their tax obligation covered by the levy referred to in the Opinion of July 5, 1985, then this Court will enjoin the Trustee from attempting such compulsion. That, however, is not this Court’s understanding of what is happening. The IRS has pursued the Enoses, but not at the demand or insistence of the Trustee or pursuant to the order of any court. There is simply no evidence that they are pursuing Joseph F. and Caroline Enos for any reason other than to liquidate the tax obligation owing the United States government.
According to Rule 71, “(w)hen an order is made in favor of a person who is not a party to the action, he may enforce obedience to the order by the same process as if he were a party____” While Rule 71 allows non-parties to enforce orders made in their favor, it can not be adopted by one to enforce an order in an action in which she has no standing to sue. Lasky v. Quinlan, 558 F.2d 1133 (2nd Cir.1977). J. Moore, 7 Moore’s Federal Practice P71.03 (1979). A party has standing only if the interest she seeks to vindicate is “arguably within the zone of interests to be protected or regulated by the ... constitutional guarantee in question.” Association of Data Processing Service Organizations, Inc. v. Camp, 397 U.S. 150, 153, 90 S.Ct. 827, 830, 25 L.Ed.2d 184, 188 (1970).
Moore v. Tangipahoa Parish School Board, 625 F.2d 33, 34 (5th Cir.1980).
While the Court has no hesitation in allowing the Enoses standing to intervene generally to enforce the rights they may have under Federal Rule of Bankruptcy Procedure 7071, I simply cannot find any evidence of a failure to comply with Judge Gibbons’ Opinion and, therefore, deny as unnecessary, the Enoses Motion to enforce,
APPENDIX
STIPULATION OF FACTS
NOW COME Plaintiff, Charles J. DeHart, III, Trustee in Bankruptcy for Metropolitan Metals, Inc., and Defendant, United States of America, by respective counsel, and stipulate that the following facts shall govern the court in the rendition of a decision and judgment in the above-captioned matter:
1. On March 29, 1979, Metropolitan Metals, Inc. (Metropolitan) filed a Petition for relief under the provisions of Chapter XI of the Bankruptcy Act, former 11 U.S.C.A. 701 et seq., in the United States Bankruptcy Court for the Middle District of Pennsylvania (the Court). On June 24,1981, an Order was entered by the Court adjudicating Metropolitan a bankrupt.
2. On June 26, 1981, Charles J. DeHart, III, who was the Court appointed receiver for Metropolitan in the aforesaid Chapter XI case, was appointed Trustee for Metropolitan and subsequently qualified as Trustee. The said Charles J. DeHart, III, as Trustee, is the Plaintiff in this proceeding.
3. Prior to August 15, 1978, and perhaps subsequent to that time, Metropolitan, engaged in a business relationship with Joseph Enos and Sons which was a business owned and operated by Joseph F. Enos (Enos). The business of Enos was situate in Taunton, Massachusetts. Both Metropolitan and Enos were engaged in the business of buying and selling various types of metals. The transactions between Metropolitan and Enos were substantial and, at one time, Metropolitan owed Enos in excess of $400,000.00.
4. Enos and his wife, Caroline, experienced some problems involving their federal income taxes for the tax years of 1970 through 1972 inclusive. The Internal Revenue Service (IRS) made assessments against Enos and his wife amounting to a sum in *252excess of $300,000.00. The date of the assessments was November 14,1977.
5. On August 15, 1978, the IRS, pursuant to the provisions of the Internal Revenue Code (26 U.S.C.A. § 6331), caused a Notice of Levy to be served upon Metropolitan on account of the taxes owed by Enos and his wife, as aforesaid. A copy of the Notice of Levy is attached hereto and marked Exhibit “A”. At the time of the levy, Metropolitan owed Enos a sum in excess of the tax obligation of Enos and his wife for which the levy aforesaid was made.
6. Some time in December, 1978, the IRS and Metropolitan, through its attorney, Bruce D. Foreman, entered into an agreement pursuant to which Metropolitan agreed to pay the IRS weekly sums of $1,500.00 to be applied to the tax liability of Enos and his wife for which the aforesaid levy was made. It was further agreed that the outstanding balance owed by Metropolitan to Enos at the time was $300,000.00. On December 15, 1978, Mr. Foreman directed a letter to the IRS confirming the understanding and acknowledging the amount of indebtedness of Metropolitan to Enos. A copy of the letter is attached hereto and marked Exhibit “B”. Pursuant to the agreement, Metropolitan paid the IRS a total of $8,985.00, all of which was paid prior to the date Metropolitan filed its petition under Chapter XI.
7.During the course of the bankruptcy proceedings of Metropolitan, the following proofs of claim were filed by the IRS having to do with the obligation of Metropolitan to the IRS:
Date Claim No. Claimant Amount Classification
3/02/81 134 IRS $232,427.35 Priority
5/19/82 173 IRS $248,710.95 Priority
8. Claim number 134 is in the amount of the taxes owed by Enos to the IRS on the date the proof of claim was filed and for which the Notice of Levy was served on Metropolitan. Claim number 134 was filed by the Internal Revenue Service as a priority claim pursuant to Section 64(a)(5) of the Bankruptcy Act based on the Notice of Levy aforesaid (Exhibit “A”) and the agreement of Metropolitan to pay the IRS (Exhibit “B”) and 31 U.S.C.A. § 191. Claim number 173 is an amendment to claim number 134.
9. Following the service of the Notice of Levy, the following amounts were paid to the Internal Revenue Service on account of the
delinquent taxes in addition to the sum referred to in paragraph 6:
7/10/79 $ 1,202.60
5/16/80 $18,856.77
6/03/80 $ 4,194.84
7/31/80 $ 4,194.84
9/02/80 $ 4,194.84
10/01/80 $ 4,194.84
11/04/80 $ 4,194.84
12/01/80 $ 4,194.84
1/07/81 $ 4,194.84
1/31/81 $ 4,194.84
4/15/81 $ 3,635.00
4/15/81 $ 641.00
2/25/82 $ 289.87
6/21/83 $35,983.36
8/25/83 $ 2,786.67
4/20/84 $ 1,915.74
The aforesaid payments were not made by Metropolitan Metals, Inc. or its Trustee.
10. The present amounts due the IRS for the delinquent taxes of Enos and for which *253the Notice of Levy aforesaid was made is computed as follows:
(a) 1971 taxes
(i) Principal amount due $ 55,150.82
(ii) Interest from Novem-
ber 14,1977 to
September 17,1984 $ 75,856.25
Total: $131,007.07
(b) 1972 taxes
(i) Principal amount due $ 83,760.03
(ii) Interest from Novem-
ber 14,1977 to
September 17,1984 $ 67,550.02
Total: $151,310.05
11. Proofs of claim in an amount approximating $1,727,000 have been filed by general unsecured creditors in the bankruptcy proceeding of Metropolitan. The aforesaid amount does not include an unsecured claim in the amount of $410,387.27 filed by Martin S. Roberts, the former President of Metropolitan. Proofs of claim approximating $543,000 have been filed by creditors claiming priority status in accordance with Section 64 of the Bankruptcy Act, former 11 U.S.C.A. § 104. The amount of the priority claims aforesaid does not include the claim of Defendant in the amount of $232,427.35 or a priority claim filed by Enos in the amount of $180,733.42.
12. Before a payment can be made to unsecured creditors from the estate of Metropolitan, claims of administration will have to be paid. Plaintiff estimates that the amount of such claims will approximate $40,-000 and will be entitled to priority in accordance with Section 64(a)(1) of the Bankruptcy Act, former 11 U.S.C.A. § 104.
13.Plaintiff has taken possession and control of all of the tangible assets of Metropolitan and has liquidated them. Following the payment of certain claims of administration which arose during the period of the Chapter 11 proceeding, funds remain in the estate of Metropolitan and under control of Plaintiff in an amount approximating $750,-000.00. The only remaining asset of the estate of Metropolitan is a claim against the estate of said Martin S. Roberts. Plaintiff is currently pursuing the claim; however, it is not possible at this time to determine whether the claim or any part thereof -will be collected.
14. Enos and/or his wife, Caroline, own certain real and personal property. Some of the property is subject to the lien of Defendant for the taxes for which the Notice of Levy was made upon Metropolitan as aforesaid. A description of the property, the identity of the owner, the mortgages or other encumbrances against the property and the value of the property, as testified to by the taxpayer, Joseph F. Enos, are reflected on Exhibit “C” which is attached hereto.
15. The above facts as set forth in paragraphs 1-14 are stipulated to by the parties hereto solely for the purpose of resolving the issue of whether the United States of America is entitled to share in the distribution of the proceeds generated from the liquidation of the assets of the bankrupt based on its priority claim under Section 64(a)(5) of the Bankruptcy Act or whether the United States of America can first be legally compelled to attempt to collect its claim from assets of Joseph F. Enos and Caroline Enos, his wife. The parties have not stipulated to these facts for any other purpose.
*254EXHIBIT A
[[Image here]]
*255EXHIBIT B
[[Image here]]
*256EXHIBIT C
18 Dana St. Celtideria Realty Three mortgages Approximately At time lien of IRS Taunton, MA Trust having balance of $400,000 entered property was [commercial $57-67,000. Lien owned by Joseph F. property] of IRS Enos and Caroline Enos and was conveyed to Celtideria Realty Trust subject to lien •i
$80,000 Mortgage in amount approximating $25,000. Lien of IRS Joseph F. and Caroline Enos 2. 730 Cohannet St. Taunton, MA [residence]
$30,000 Mortgage in amount approximat ing $2,000 Joseph F. Enos Cottage in Wareham, MA 3.
$40,000 Mortgage in amount approximating $17,000 Joseph F. and Caroline Enos 4. Apartment house containing two ‘ apartments in Taunton, MA
The owner, Joseph F. Enos & Sons is a Massachusetts business trust and is in the scrap metal business which is operated at the property referred to in 1 above. The value of the inventory and accounts receivable vary from time to time A. Machinery and Equipment - $90,000 B. Inventory - $75,000 C. Accounts Receivable - $40,000 $15,000 Joseph F. and Caroline Enos 58% ownership of Joseph F. Enos & Sons d/b/a Enos Metals 5.
*257Joseph F. Enos & Sons and Sone Alloy Company have a business relationship and during a 12-month period from November 1, 1981 to October 31, 1982 had gross sales of approximately $3,000,000 Remarks Uncertain None Joseph F. and Caroline Enos Value Encumbrances Owner Property 6. 51% ownership of Sone Alloy Company
Caroline Enos operates this company as an individual proprietor. The value of the company is based on the value of its coal inventory $10,000 None 7. Caroline Coal Co. Caroline Enos
None Caroline Enos 70 shares of American Telephone and Telegraph Company stock 00 | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492584/ | DECISION AND ORDER RE DISCHARGEABILITY OF DEBT
BURTON PERLMAN, Bankruptcy Judge.
In this Chapter 7 bankruptcy case, plaintiff Household Retail Services, Inc., filed a complaint to determine dischargeability of a debt, which it claims is owed it by debtor/ defendant Roman P. Wineher, Jr. The claim is made pursuant to 11 U.S.C. § 523(a)(6). The proceeding came on for trial at the conclusion of which we reserved decision in order that the parties might file memoranda supporting their positions.
We find the following facts. On January 29, 1994, defendant Roman P. Wineher, Jr. did two things. He purchased some furniture from Art Van Furniture, a furniture store at Westland, Michigan. His additional act was to open a credit account at that store, the lender on such credit account being the present plaintiff. As a result of his application, defendant got a credit card to be used only for purchases at Art Van. In connection with the opening of the credit account, defendant signed a Cardholder Agreement. This was a single page document. On the reverse side were two columns of closely written text. One of the paragraphs in that text had a heading: Security. It is because of this provision that plaintiff contends that it held a security interest in furniture purchases which defendant made from Art Van. Defendant, however, never read the material on the reverse side of the application. His attention was not directed to it and he was not informed that a security interest was claimed in items purchased from Art Van. Defendant then was married in October 1994. In connection with that event, additional purchases of furniture were made at Art Van so that defendant and his wife could start up their home. Subsequently, in December 1994, defendant’s wife became pregnant and was obliged to quit work. While defendant did make some payments to plaintiff on account of the Art Van furniture, the financial situation of the family deteriorated because of the loss of the wife’s income. Defendant and his wife, because of their straitened circumstances, were obliged to move in with relatives. When they moved, defendant had no place to store the furniture which they had purchased at Art Van, and so they sold it. They received some fifteen hundred dollars from the sale of the furniture.
The complaint in this proceeding is based upon § 523(a)(6) of the Bankruptcy Code, which reads:
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 for willful and malicious *288injury by the debtor to another entity or to the property of another entity.
11 U.S.C. § 523(a)(6).
Plaintiff contends that in these circumstances it is entitled to have its debt held to be nondischargeable because the sale of the furniture upon which plaintiff held a security interest was a conversion. To resolve the present controversy the court must determine whether the circumstances under which defendant sold furniture purchased from Art Van, were “willful and malicious.”
Plaintiff in its argument relies primarily upon Perkins v. Scharffe, 817 F.2d 392 (6th Cir.1987). In that ease, the court held that in order to establish that an act was willful and malicious under § 523(a)(6), the plaintiff must prove that debtor committed an intentional act which necessarily results in injury. Plaintiff contends that the facts before us satisfy the requirements of the definition. That is, defendant sold the property subject to the plaintiffs purchase money security interest, and this sale was a wrongful act without just cause or excuse which necessarily produced harm to plaintiff. Plaintiff depends upon the executed Cardholder Agreement signed by defendant as a basis for asserting that defendant knew or should have known that harm to plaintiff “was substantially certain” to occur. Defendant in his memorandum-in-chief says that the statutory requirement for willfulness is not met in the circumstances of this case. Those circumstances, says defendant, are that the evidence establishes that defendant had no knowledge of the security interest when he sold the furniture. Applying the Perkins standard, defendant says that the requirement that the act of which complaint is made be intentional is not met here, for intentional implies that the one charged with improper action did so with knowledge of the rights of the party harmed by the action.
As the parties observe, the Sixth Circuit interpreted § 523(a)(6) in Perkins v. Scharffe, 817 F.2d 392 (6th Cir.1987). In that decision, the court quoted from a well known treatise for support of its conclusion. The treatise has been revised in later editions than the one utilized by the court in Perkins, but the language in the current edition departs only slightly from that quoted in Perkins. It reads:
To fall within the exception of § 523(a)(6), the injury to an entity or property must have been willful and malicious. An injury to an entity or property may be a malicious injury within this provision if it was wrongful and without just cause or excuse, even in the absence of personal hatred, spite or ill-will.
The word “willful” means “deliberate or intentional,” referring to a deliberate and intentional act that necessarily leads to injury. Therefore, a wrongful act done intentionally, which necessarily produces harm or which has a substantial certainty of causing harm and is without just cause or excuse, may be willful and malicious injury.
4 Collier on Bankruptcy ¶ 523.12[1] (15th ed. rev.)1
The text then goes on to say:
Secured creditors whose collateral was disposed of by the debtor often assert nondischargeability claims under § 523(a)(6) on the theory that the security interest was willfully and maliciously converted. Transfers in breach of a security agreement may give rise to nondischargeable liability when the debtor’s conduct is knowing and certain or almost certain to cause financial harm. Unless the creditor can prove not only that the debtor knew of the security interest, but also that the debtor knew that a transfer of the property was wrongful, the debt should not be found nondischargeable.
Id.
We apply the law as thus stated to the facts of this case. Concededly, defendant sold collateral of plaintiff. That, however, is insufficient to establish a basis for denying discharge on grounds of § 523(a)(6). Here the evidence which we have found as fact establishes that defendant did not know that plain*289tiff held a security interest in the furniture he purchased from Art Van. Plaintiff urges, however, that he should have known, and that should be sufficient for purposes of § 523(a)(6). This Court cannot agree that in the circumstances before us this is valid. The evidence establishes that the security interest arose because of a provision in no way emphasized in a lengthy document presented to an applicant for credit.' No one told defendant about the claim of a security interest. So far as defendant was concerned, he was making application for a credit card, and it is common knowledge that credit card transactions do not commonly create security interests. There is no basis upon which a conclusion could be based that defendant knew or should have known of the security interest. We hold, therefore, that defendant’s act of selling furniture which he had purchased from Art Van does not constitute a willful and malicious act.
We find the issues in favor of defendant. The complaint is dismissed.
So Ordered.
. The Sixth Circuit in a later case, Vulcan Coals, Inc. v. Howard, 946 F.2d 1226, 1228-9 (6th Cir. 1991) reaffirmed the Perkins standard. *297PN1- Bankruptcy, Epstein, et al., § 7-28, p. 518 (1993). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492586/ | DECISION ON CROSS MOTIONS FOR SUMMARY JUDGMENT AS TO COUNT VI OF THE AMENDED COMPLAINT
WILLIAM C. HILLMAN, Bankruptcy Judge.
I. Introduction
Bank of New England Corporation (“BNEC”), the holding company for a variety of banking and non-banking subsidiaries,1 filed a petition under Chapter 7 of Title 11 on January 7, 1991. Dr. Ben S. Branch was elected as the Chapter 7 Trustee (the “Trustee”).
The Trustee commenced this proceeding objecting to the claim of SEI Corporation (“SEI”) and seeking a declaratory judgment as to the rights of the Trustee and certain defendants under a contract more particularly described below. SEI answered, offered affirmative defenses, and counterclaimed. Defendants Fleet Data Processing Corp. (“Fleet Data”) and Fleet Services Corporation (“Fleet Services”) (collectively “Fleet”) answered. The Trustee responded to the SEI counterclaim.
The Trustee’s amended complaint is in six counts, the first five of which relate to the SEI claim and are not implicated by the present motions. Count VI seeks a judgment declaring that, to the extent that the Trustee is liable to SEI, Fleet is required to indemnify him. The Trustee also seeks payment of his attorneys’ fees.
*406The Trustee moved for summary judgment against Fleet on Count VI of the Complaint.2 Fleet filed an opposition and a cross motion. I conducted a hearing and took the matter under advisement. The parties have filed a number of pre- and post-hearing memoranda of law.
Fed.R.Civ.P. 56(c) provides, in part, that: “The judgment sought shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.”
There are no factual disputes, leaving the sole inquiry before me whether either moving party is entitled to judgment as a matter of law.
II. Findings of Fact
On July 12, 1991, The Trustee and Fleet entered into an Agreement to Assume and Assign Software Agreements (the “Assignment Agreement”) in which Fleet agreed to assume certain software agreements and to pay BNEC $600,000. Section 2 of the Assignment Agreement provides that:
“Fleet agrees to assume full responsibility to the licensors and vendors under the Software Agreements for any and all payments due or which may become due from the Trustee, whether prior to or subsequent to the effective date of the assignment of the Software Agreements hereunder, and for any and all other obligations or responsibilities of the Trustee pursuant to the Software Agreements and to indemnify and hold harmless the Trustee from and against any and all claims, damages, liabilities, costs (including reasonable attorneys’ fees) or expenses resulting from or arising under the Software Agreements at any time from and after the effective dates of such Agreements.”3
The Assignment Agreement also contains a choice of law clause adopting the laws of the Commonwealth of Massachusetts and an integration clause both of which state as follows:
“7.3 Entire Agreement. This Agreement (including the Schedules) contains the entire agreement between the parties with respect to the transactions contemplated hereby and the subject matter hereof and supersedes all prior or contemporaneous negotiations, understandings and agreements, written or oral, with respect thereto.
7.4 Governing Law. This Agreement shall be governed by, and shall be construed and interpreted in accordance with, the internal laws of the Commonwealth of Massachusetts applicable to agreements made and to be performed wholly within such State, without giving effect to the conflict of laws principles thereof.”
On July 18, 1991, the Trustee filed a motion to approve the Assignment Agreement. I granted the motion on August 9, 1991.
Subsequent to the filing of motion to approve, Fleet decided that it would not assume the SEI agreement. On July 25, 1991, Fleet and the Trustee executed an amendment (the “Amendment”) making changes to the Assignment Agreement. First, the SEI Agreement was deleted from the definition of “Software Agreements” without a corresponding change in the consideration. Second, the Amendment modified the language of Section 2 quoted above by adding the words “and the SEI Agreement” after the words “Software Agreements” four times, so that it now reads (with the added words emphasized):
“Fleet agrees to assume full responsibility to the licensors and vendors under the
*407Software Agreements and the SEI Agreement for any and all payments due or which may become due from the Trustee, whether prior to or subsequent to the effective date of the assignment of the Software Agreements and the SEI Agreement hereunder, and for any and all other obligations or responsibilities of the Trustee pursuant to the Software Agreement and the SEI Agreement and to indemnify and hold harmless the Trustee from and against any and all claims, damages, liabilities, costs (including reasonable attorneys’ fees) or expenses resulting from or arising under the Software Agreements and the SEI Agreement at any time from and after the effective dates of such Agreements.”
The Trustee also determined that he would reject the SEI Agreement. To obtain the required authorization for the Amendment and rejection, on July 26, 1991 the Trustee filed a motion “to Amend Prior Motion for Approval of Assumption and Assignment of Certain Executory Contracts and to Reject Contract Which is Subject of Proposed Amendment” (the “Amendment Motion”). In support of his Amendment Motion, the Trustee stated:
“The Trustee believes that removal of the SEI Agreement from the list of Software Agreements to be assumed and assigned to Fleet, and the rejection of the SEI Agreement pursuant to Section 365(a) of the Code are necessary to carry out the intent of the parties to the Agreement and to secure the cooperation of Fleet in its implementation. The Trustee also believes that for this reason, because the consideration to be paid by Fleet will continue to be $600,000, because rejection of the SEI Agreement will eliminate the possibility of further liability in the future, and because Fleet has agreed in the Amendment to accept responsibility for any liability under the SEI Agreement preceding the rejection, the actions proposed in this Motion are in the best interest of the Debtor’s estate and its creditors and represent a prudent and proper exercise of business judgment.”
On October 29, 1991, I entered an order granting the Amendment Motion. Thereafter SEI filed a general unsecured claim (the “Claim”) seeking (1) $24,815.55 in damages for pre-petition services rendered under the SEI Agreement; (2) $250,000.00 for pre-petition services pursuant to alleged oral agreements between SEI and BNEC; and (3) $7,590,000.00 in damages resulting from rejection of the SEI Agreement, for a total of $7,864,815.55.
III. Discussion and Conclusions of Law
The Trustee contends that the language of the Amendment is sufficient to obligate Fleet to indemnify for all of the elements of the Claim, the greatest portion which is for rejection damages.
Fleet’s response attacks the Trustee’s position on two grounds. First, Fleet contends that it indemnified only the Trustee and not the estate. Second, Fleet contends that the Amendment does not obligate it to indemnify for rejection damages.
A. The Trustee as Distinct from the Estate
Fleet contends that the scope of the indemnification does not include any obligations of the estate given the use of the word Trustee, a term which is unambiguous. To read the word Trustee as encompassing the estate, claims Fleet, is to misread the contract.
In support of its argument, Fleet directs the Court to various provisions of the Bankruptcy Code which distinguish between a trustee and the estate. See 11 U.S.C. §§ 365(k)4, 541(a)5, § 3236. Fleet further emphasizes that the Trustee has certain fidu*408eiary duties for breach of which he can be sued on behalf of the estate or a creditor. See Lopez-Stubbe v. Rodriguez-Estrada (In re San Juan Hotel Corp.), 847 F.2d 931, 936-37 (1st Cir.1988); Connecticut General Life Ins. Co. v. Universal Ins. Co., 838 F.2d 612, 621-22 (1st Cir.1988). Fleet lastly contends that to read the term Trustee in the Assignment Agreement, as amended, to include the estate would be to render meaningless the above-cited statutory provisions in contravention of the well-established rules of statutory construction. See In re Wang Laboratories, Inc. 164 B.R. 401, 404 (Bankr.D.Mass.1994).
The Trustee disputes the applicability of the above-cited statutes to this proceeding and contends that the term. Trustee as used in the Assignment Agreement, as amended, unambiguously incorporates the estate. Whether this issue is considered a question of contract interpretation under Massachusetts law or a question of statutory construction under the Bankruptcy Code, I agree.
1. Contract Interpretation
Under Massachusetts law:
“[S]o long as the words of an agreement are plain and free from ambiguity, they must be construed in their ordinary and usual sense. In the search for the plain meaning, a court should consider ‘every phrase and clause ... [in light of] all the other phraseology contained in the instrument, which must be considered as a workable and harmonious means for carrying out and effectuating the intent of the parties.’ In short, ‘[t]he interpretation of an integrated agreement is directed to the meaning of the terms of the writing or writings in the light of circumstances of the transaction.’ ”
Boston Edison Co. v. Federal Energy Regulatory Commission, 856 F.2d 361, 365 (1st Cir.1988) (citing J.A. Sullivan Corp. v. Commonwealth, 397 Mass. 789, 494 N.E.2d 374, 378 (1986) and Thomas v. Christensen, 12 Mass.App.Ct. 169, 422 N.E.2d 472, 476 (1981)).
Based upon the foregoing, in order to determine whether the word Trustee as used in the Assignment Agreement, as amended, is free from ambiguity, I must look at the document in its entirety and consider the circumstances of the Assignment Agreement, as amended.
Fleet and the Trustee executed the Assignment Agreement, as amended. The Assignment Agreement, as amended, explained that the Trustee was assigning his right, title and interest in the Software Agreements to Fleet. As consideration, Fleet was to pay the Trustee $600,000. As further consideration, Fleet indemnified the Trustee for any of the Trustee’s obligations arising under the Software Agreements as of their effective dates.
An important starting point for reviewing this transaction is the Bankruptcy Code itself. The Code explains that when a debtor files a petition for relief, an estate is created. 11 U.S.C. § 541. The estate consists of all legal or equitable interest of the debtor. Id. The appointed trustee is the representative of the estate, 11 U.S.C. § 323, and may administer the property of the estate. 11 U.S.C. § 704. At no time, however, does a trastee personally accede to a debtor’s interest in or title to property of the estate.
Given this framework, it is inconceivable that the parties contemplated the word Trustee as used in the Assignment Agreement, as amended, to be limited to the Trustee personally. Although the Trustee was the proper party to assume and assign the Software Agreements, 11 U.S.C. § 365, he personally had no right, title or interest in the Software Agreements. The Summary of the Software Licenses and Related Agreements appended to the Assignment Agreement reflects that all of the agreements were between the Debtor and various third parties. The Trustee is not listed as a party to any of the Software Agreements.
Moreover, although the Assignment Agreement, as amended, stated that Fleet would pay the Trustee $600,000 for the Software Agreements, there is no suggestion those funds were paid to the Trustee personally. Lastly, because the Trustee was not appointed until 1991, it would have made no sense for Fleet to give indemnification from January of 1990 if that indemnification was to be limited only to the Trustee personally.
*409Based upon the use of the word Trustee in the Agreement, I conclude that the parties intended the word Trustee to be used interchangeably with the word estate. As such, the word is unambiguous. The alternate suggestion of its interpretation, that the word meant the Trustee personally, would render the Assignment Agreement, as amended, unenforceable: the Trustee had no personal interest in the Software Agreements and could not have accepted estate funds for personal use without violating the terms of his bond. Therefore, I hold that under Massachusetts law, the plain meaning of the word Trustee in the Assignment Agreement, as amended, includes the estate.
2. Statutory Construction
Even if one were to analyze the Assignment Agreement, as amended, solely as an issue arising under a proper reading of Title 11, the result would be the same. This is a principle of bankruptcy law which is now more than a century old:
“Actions against the receiver are in law actions against the receivership or the funds in the hands of the receiver, and his contracts, misfeasances, negligences, and liabilities are official, and not personal, and judgments against him as receiver are payable only from the funds in his hands.”
McNulta v. Lochridge, 141 U.S. 327, 332, 12 S.Ct. 11, 13, 35 L.Ed. 796 (1891).
This principle has been applied to bankruptcy trustees. See Valdes v. Feliciano, 267 F.2d 91, 94 (1st Cir.1959); McRanie v. Palmer, 2 F.R.D. 479, 481 (D.Miss.1942). There is nothing in the Bankruptcy Code provisions cited by Fleet, or in their legislative history, to indicate that Congress intended to change the McNulta rule.7 The Supreme Court
“has been reluctant to accept arguments that would interpret the [Bankruptcy] Code ... to effect a major change in preCode practice that is not the subject of at least some discussion in the legislative history.”
Dewsnup v. Timm, 502 U.S. 410, 419, 112 S.Ct. 773, 779, 116 L.Ed.2d 903 (1992).
Therefore, when Fleet assumed liability to the Trustee it was for the benefit of the estate and the distinction which Fleet seeks to make does not exist.
Of course, Fleet is correct is noting that a trustee who violates his or her duty as a fiduciary is hable for the harm caused, but that is not the issue here.
B. The Inclusion of Damages for Rejection in the Indemnity
In a second argument directed to the element of the claim involving damages for rejection, Fleet asks me to consider the provision of the Amendment Motion quoted above in construing the language of the Amendment itself.
Under the language of Section 2 as amended, Fleet assumes full responsibility for “any and all claims, damages, ‘liabilities, costs (including reasonable attorneys’ fees) or expenses resulting from or arising under ... the SEI agreement.” However, in the Amendment Motion, the Trustee urged me to authorize the Amendment in part “because Fleet has agreed in the Amendment to accept responsibility for any liability under the SEI Agreement preceding the rejection .... ” Fleet would have me look to that language of the Amendment Motion to explain away the otherwise totally inclusive “all claims” language of the Assignment Agreement as changed by the Amendment.8
*410To this argument, the Trustee responds that the terms of the indemnification agreement are clear and that the language of the Amended Motion constitutes inadmissible parole evidence.
The Trustee is correct. Under Massachusetts law, when a document contains the integration clause quoted above, there is a presumption that the document is a final and full expression of the parties’ agreement. Leisure Sports Inv. Corp. v. Riverside Enterprises Inc., 7 Mass.App.Ct. 489, 493, 388 N.E.2d 719 (1979). If an agreement is fully integrated, the parole evidence rule prohibits the introduction of extrinsic evidence of prior or contemporaneous written or oral agreements to vary or contradict the terms of the agreement. Kobayashi v. Orion Ventures, Inc., 42 Mass.App.Ct. 492, 496, 678 N.E.2d 180, 184 (1997).
Extrinsic evidence, however, may be introduced to explain ambiguous language. In that regard, the Massachusetts Appeals Court stated:
“[T]he language of a contract need not be ambiguous on its face in order that extrinsic evidence may be admitted. When the written agreement, as applied to the subject matter, is in any respect uncertain or equivocal in meaning, all the circumstances of the parties leading to its execution may be shown for the purpose of elucidating, but not contradicting or changing its terms. Expressions in our eases to the effect that evidence of circumstances can be admitted only after an ambiguity has been found on the face of the written instrument have reference to evidence offered to contradict the written terms.”
Keating v. Stadium Management Corp., 24 Mass.App.Ct. 246, 249, 508 N.E.2d 121, 123 (1987) (citations omitted), review denied 400 Mass. 1104, 511 N.E.2d 620 (1987) (quoted with approval in Boston Car Co., Inc. v. Acura Automobile Div., American Honda Motor Co., 971 F.2d 811, 815 (1st Cir.1992)).
Under this framework, I first turn to the Assignment Agreement, as amended, which contains an integration clause in paragraph 7.3. Neither party contends that the integration clause is invalid. As all of the pleadings appear to have been contemporaneous, I cannot consider the Amended Motion as evidence to alter or contradict the terms of the Assignment Agreement, as amended. Fleet asks me to consider the Amendment Motion to support its argument that the indemnification clause is restricted to damages arising up to the time of rejection. Such an interpretation would alter the terms of the Assignment Agreement, as amended, and under the parole evidence rule, I therefore cannot admit such evidence.
I next turn to whether the following language is uncertain or equivocal:
“... to indemnify and hold harmless the Trustee from and against any and all claims, damages, liabilities, costs (including reasonable attorneys’ fees) or expenses resulting from or arising under ... the SEI Agreement ...”
I have previously indicated that I consider “all” to be a universally encompassing term. In re Legal Data Systems, 135 B.R. 199, 201 (Bankr.D.Mass.1991). I now add to that conclusion the further opinion that “all claims” is neither uncertain nor equivocal. Because, I find no language in the above-quoted passage uncertain or equivocal, I need not look beyond the four corners of the Assignment Agreement, as amended.
As a result, I find that the claims indemnified against include the rejection damages.
C. Inclusion of Attorneys’Fees
The same reasoning which supports the previous conclusion leads inevitably to another: that the Trustee’s attorneys’ fees and expenses are included within the scope of the indemnity.
IV. Decision
Based upon the foregoing, Fleet’s cross motion for summary judgment will be denied. *411The Trustee’s motion for summary judgment will be granted as to Count VI.
A separate order will enter.
. See In re Bank of New England Corporation, 134 B.R. 450, 471 (Bankr.D.Mass.1991) (organizational chart).
. In support of his motion, the Trustee filed a Statement of Undisputed Material Facts Pursuant to Local Rule 56.1 of the United States District Court for the District of Massachusetts. While the District Court rule does not apply in this court, the statement is useful as summary of the record evidence upon the Trustee relies in his motion. See Fed. R. Bankr.P. 7056, which makes Fed.R.Civ.P. 56 applicable in adversary proceedings.
. One of the "Software Agreements” covered by the Assignment Agreement was a contract between BNEC and SEI titled a Trust 3000 Dedicated Service Agreement (the "SEI Agreement”) dated January 12, 1990.
. "Assignment by the trustee to an entity of a contract or lease assumed under this section relieves the trustee and the estate from any liability for any breach of such contract or lease occurring after such assignment.”
. "The commencement of a case under section 301, 302 or 303 of this title creates an estate.”
. "(a) The trustee in a case under this title is the representative of the estate.
"(b) The trustee in a case under this title has capacity to sue and be sued.”
. Although Fleet draws particular attention to 11 U.S.C. § 365(k), that section is not at issue in this case. Moreover, although the statute relieves both a trustee and the estate from liabilities under a lease following assignment, it is unclear that Congress intended to refer to the trustee personally as opposed to as the representative of the estate. Indeed the purpose of the statute is to change the common law rule that "[a] party subject to a contractually created obligation ordinarily cannot divest itself of liability by substituting another in its place without the consent of the party owed the duty.” See In re Washington Capital Aviation & Leasing, 156 B.R. 167, 175 (Bankr.E.D.Va.1993). It could be that the only reason to insert the word trustee in the statute was because if a party were to attempt to bring an action against the estate, the party would have to name the trustee.
. Fleet appears to make a veiled argument that the Trustee is judicially estopped from taking a position in his Motion for Summary Judgment which is contrary to the one taken in the Amended Motion. Because Fleet did not ask me to consider judicial estoppel and because it is not *410apparent that Fleet could prevail on such a claim, I decline to consider the argument. Federal Deposit Insurance Corporation v. Houde, 90 F.3d 600, 607 (1st Cir.1996). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492587/ | ORDER SUSTAINING TRUSTEE’S OBJECTION TO DEBTOR’S CLAIM OF HOMESTEAD EXEMPTION
GREGORY F. KISHEL, Bankruptcy Judge.
This Chapter 7 case came on before the Court for hearing on the Trustee’s objection to the Debtor’s claim of exemption in a lien against certain real estate. Trustee Sheridan J. Buckley appeared on behalf of the bankruptcy estate. The Debtor appeared personally, and by her attorney, S. Warren Gale. The Court received evidence, directed the submission of closing argument in writing, and took the matter under advisement after the record was completed. Upon the record thus made, the Court makes the following order.
The Debtor filed a voluntary petition for relief under Chapter 7 on July 19,1996. She filed her statements and schedules on July 25, 1996. On her Schedule A (“Real Property”), she listed an interest as “Owner” in real estate located at 983 Hammer Avenue in St. Paul, Minnesota. On Item 16 (“Alimony, Maintenance, Support and Property Settlements to which the debtor is ... entitled”) of her Schedule B (“Personal Property”), she disclosed another property interest, described as follows:
$45,000 Lien on homestead (2574 W. 89th St., Lot 7, Block 2, Keya Paha Ranch, First Subdivision, Dakota County, North-field, Minnesota) in divorce decree docketed on 1/31/96 in Rice County, Minnesota. Court file number: 66-F9-95-209.1
She stated the current market value of her interest in the latter asset as $45,000.00. In her Schedule C, she elected pursuant to 11 U.S.C. § 522(b)(2)(A) to use the exemptions afforded to judgment debtors under Minnesota state law, and claimed her interest in the “lien” as exempt.2
*462The Trustee timely objected to this claim of exemption. The record establishes the relevant facts as follows:
1. In June, 1978, the Debtor married Robert Mueller. Both spouses brought children and assets from prior marriages into this relationship.
2. In particular, the Debtor held at least $60,000.00 in cash proceeds from the sale of the marital dwelling from her next prior marriage.
3. The Debtor invested this sum in a house that she purchased and shared with Robert. The Muellers later sold that home, and reinvested the proceeds in one or more successor dwellings.
4. Ultimately, these funds, and others generated during their marriage, were applied to the purchase of the property at 2574 West 89th Street in Northfield.
5. Over its 17-year duration, the Muellers’ marriage was marked by frequent stress and contention. In the later years of the relationship, the spouses separated from time to time, for intervals that varied in length.
6. On February 27, 1994, the Debtor physically vacated the Northfield dwelling and moved into a mobile home in Kenyon, Minnesota. She moved the mobile home to Farmington, Minnesota later in 1994, and resided there until April 1, 1996. On that date, she purchased and moved into the property at 983 Hammer Avenue in St. Paul that she claimed as her homestead in her amended Schedule C.
7. The Debtor moved out of the North-field dwelling to separate herself from the emotional tumult of the environment there; she wished to concentrate on completing a community college nursing program, to make herself more employable. Robert initially opposed the separation, but then acquiesced. Until the Christmas holidays of 1994, the Muellers continued to see one another and to share their children’s company on a relatively amicable basis; they considered reconciliation, and frequently stayed together overnight in Northfield.
8. After a very antagonistic incident on Christmas Day, 1994, the Debtor resolved to end the formal relationship. She saw an attorney in January, 1995, and commenced proceedings for dissolution of the marriage.
9. In those proceedings, the court entered an order for temporary relief on April 5, 1995. Robert was awarded the temporary use and possession of the Northfield dwelling; the Debtor was awarded the same for the mobile home.
10. The dissolution proceedings went on for over a year, through a process of negotiation. Throughout, the Debtor considered pressing for a division of property under which she would be awarded the Northfield dwelling and would move back into it. Through her dissolution counsel, she suggested that prospect to Robert on one or more occasions.
11. Ultimately, however, the Muellers entered a Marital Termination Agreement under which Robert was awarded title to and possession of the Northfield dwelling.
12. That agreement was incorporated into a Judgment and Decree of Dissolution of Marriage, entered in the Minnesota State District Court for the Third Judicial District, Rice County, on January 31, 1996. Conclusion of Law 7 of that Judgment and Decree provides, in pertinent part:
7. Homestead. [Robert]- is awarded the entire right, title, interest and equity in and to the homestead of the parties, located in Rice County, Minnesota being legally described as:
Lot 7, Block 2, Keya Paha Ranch, First Subdivision, Rice County, Minnesota, according to the recorded plat thereof on file and of record in the office of the County Recorder, Rice County, Minnesota.
subject to the encumbrances thereon, which [Robert] shall pay according to their terms and hold [the Debtor] harmless therefrom, and subject further to a non-*463interest bearing lien in favor of [the Debt- or] on said real estate in the amount of $45,000. The lien shall be due and payable upon the occurrence of the first of the following events:
a. [Robert] moving from the residence;
b. The death of [Robert] or the parties’ daughter, Elizabeth;
c. [Robert’s] remarriage;
d. Elizabeth’s emancipation;
e. October 31,1998;
f. Failure of [Robert] to timely pay all mortgage, tax, insurance and utility payments on the homestead.
[The Debtor] shall execute a Quit Claim Deed in favor of [Robert]. At such time as [the Debtor’s lien is satisfied, [the Debtor] shall execute a Satisfaction of Marital Lien in recordable form, releasing any further interest in the homestead.
13. This provision reflected the parties’ recognition that the Debtor had infused substantial nonmarital property into the marital finances. To compensate her for that, Robert’s obligation to pay her the $45,000.00 was created and then was secured by the “dissolution hen” against the Northfield dwelling.3
14. The Debtor executed the Quit Claim Deed in favor of Robert that the Judgment and Decree required.
15. As of the Debtor’s bankruptcy filing, Robert still lived at the Northfield dwelling with Elizabeth, the Muellers’ minor daughter by their marriage. Elizabeth was still a student in high school and had not been emancipated.
16. When the Debtor negotiated terms for the purchase of her homestead at 983 Hammer Avenue, St. Paul, she and her sellers used a contract for deed as the financing vehicle. Under the terms of the one that they executed on April 1, 1996, the Debtor agreed to pay a down payment of $5,000.00 toward the purchase price of $80,000.00, with an “[a]dditional $45,000.00 down on or before November 1998.” The Debtor expected to use the property-division payment that Robert was to make under the judgment and decree as the source for the funds she would need to make the $45,000.00 payment.
17. When she entered the contract for deed, the Debtor did not execute any document to assign or pledge her right to the property-division payment to her sellers. She had not done so before she filed for bankruptcy.
18. Robert had not made any payment on the $45,000.00 obligation before the Debtor filed for bankruptcy.
When the Debtor claimed her interest in the dissolution hen against the Northfield dwelling as exempt, she cited Minn.Stat. § 510.07.4 The backdrop of this statute, of course, is the general provisions of the Minnesota homestead laws, Minn.Stat. §§ 510.01-510.02.5
The Trustee maintains that Minn.Stat. § 510.07 no longer protects the Debtor’s right to payment from Robert, or the security granted for it, from the claims of her creditors. He first posits that the “proceeds” of a former homestead contemplated *464by this statute are limited to cash in hand. Then, as he would have it, a “sale and conveyance” of the Debtor’s interest in the ex-emptible real estate took place in the consummation of the dissolution decree, and any resultant cash proceeds could retain their exempt character for only one year after that event. Because the Debtor’s legal right to a cash payment did not even mature within that year, the Trustee argues, it could not qualify for the exemption.
The Debtor’s counsel argues several aspects of Minnesota homestead law in response, but he mainly relies on In re Joy, 5 B.R. 681 (Bankr.D.Minn.1980) (Dim, J.). Joy involved core facts quite similar to those at bar; a debtor had left a marital homestead under the onus of a temporary order in dissolution proceedings, and his spouse had received temporary use and occupancy; in the final decree the spouse was awarded full right, title, and interest in the homestead, subject to a lien in favor of the debtor to secure a property-division award to him; and the debtor then went into bankruptcy, claiming the right to payment and the lien as exempt under Minn.Stat. § 510.07.
Joy is cited with some regularity by attorneys before this court. The decision, however, is more noteworthy for what it does not discuss, than for what it does. Much of its text is a recapitulation of the general purposes of the homestead exemption laws in Minnesota, and their function of fostering “community connections.”6 When it gets down to applying specific rules of law, however, Joy does not get much more focused than that.
Ultimately, Joy applies the same principles to the exemptibility of a post-dissolution right to payment secured by a lien against a former. marital homestead, as are applied under the statute to an ownership interest in real estate. With the governing rules conceived as such, then, parties vying over the exemptibility of such a property right must contend with the concepts of “occupancy,” as required by Minn.Stat. § 510.01, and “abandonment,” as governed by caselaw and Minn. Stat. § 510.07.7 The latter inquiry then implicates the de facto and de jure varieties of abandonment treated in recent caselaw out of this Court.8 Thus, the debtor in Joy prevailed on the theory that he had to be forgiven his failure to file the statutory notice of Minn.Stat. § 510.07; he had been “compelled by court order to leave and remain away” from the homestead and had been rendered “legally incapable of residing” in it. In turn, he was deemed not to have abandoned his right to claim a homestead exemption for the rights that traced back to his marital dwelling. The trustee’s objection had to be summarily overruled.
Even on a brief reading, Joy is unsatisfying. The decision finesses the strict cutoff of homestead exemption rights that is dictated by Minnesota state appellate court decisions *465issued both before9 and after10 it. It also expansively interprets the theory of the limited exceptions to the cutoff, in a way that does not track later decisions.11 Finally, it is not entirely consistent with its own chosen rationale; its focus on an enforced “leaving by operation of law” certainly accounts for its debtor’s physical abandonment, but it just does not logically speak to his failure to perform the simple ministerial act of filing the statutory notice.
There is, however, a deeper aspect of the decision that conclusively renders it infirm, especially in light of another ensuing development in the caselaw: it did not examine the basic nature of the asset in contention, or compare it to the type of asset to which the statute speaks on its face. Joy’s whole rationale is pinned on its unarticulated premise — that a secured right to payment granted as part of a marital property division equates to an interest in real property, or its proceeds.12 In Granse & Assoc., Inc. v. Kimm, 529 N.W.2d 6 (Minn.App.1995), rev. denied (Minn. April 27, 1995), the Minnesota Court of Appeals rejected this construction — and it did so on facts that were the same in all material respects as those presented here.
In Kimm, the trial court had ruled that a post-dissolution right to payment in marital property division, secured by a lien against a former marital homestead, was vulnerable to sheriffs levy. The Court of Appeals affirmed, making two key points. The first was that the asset in question was a vested, non-contingent personal property right, and not an interest in real estate; as such it was subject to levy of execution. 529 N.W.2d at 8.13 The obvious corollary to this holding was that a judgment debtor cannot use the homestead exemption laws to shelter such an asset from levy. The second was that a levy on such an asset is not an infringement on the homestead exemption rights of the ex-spouse who retains possession and title; a completed execution only substitutes the judgment creditor for the judgment debtor, as the payee whose rights would mature upon the occurrence of one of the contingencies specified in the dissolution decree. 529 N.W.2d at 9.
Kimm expressly rejects the notion that the homestead exemption statute affords any protection to the holder of a post-dissolution property division lien.14 It is an on-point ruling by a state appellate court whose main charge is to interpret the laws of its forum. In the larger scheme of federalism, this Court must defer to its holding. To the extent, then, that Joy built its result on the assumption that a secured right to payment in a marital property division equates to an ownership interest in real estate protectible as homestead, Kimm overrides it entirely. Joy is simply no longer good law for bankruptcy cases in Minnesota.
The Debtor’s alternative argument is that her right to payment from Robert is *466“proceeds” protected under Minn.Stat. § 510.07.15 This argument, as the Trustee points out, is met by the rationale set forth in In re Ehrich, 110 B.R. 424 (Bankr.D.Minn. 1990): “proceeds” are cash, and cash only, and are protected by the statute only to the extent actually received in-hand by a debtor within one year of a “sale.” See also Johnson v. Brajkovich, 229 Minn. 529, 40 N.W.2d 273, 275 (1950) (holding that cash proceeds from sale of homestead received in lump sum remained exempt during year after sale). The date of the “sale” in this case must be fixed as the date on which the dissolution decree was entered, January 31, 1996; that was when property rights effectively passed between the Muellers.16 The Debtor had not received any payment from Robert as of the date of the evidentiary hearing, which fell literally on the last day of the year following the “sale.” Absent early occurrence of one of the contingencies identified in the dissolution decree, the Debtor could not have forced payment from him before November 1, 1998. Because cash traceable to her interest in the marital dwelling was not to reach her within one year of the dissolution, and did not, her right to payment is not protectible as “proceeds” within the scope of Minn.Stat. § 510.07.17
The applicable law, then, supports only one result: the Debtor has no allowable exemption under Minnesota statute for her right to payment from Robert, the Trustee’s objection must be sustained, and the asset will be administered by him.18
IT IS THEREFORE DETERMINED AND ORDERED:
1. The Trustee’s objection is sustained.
2. The Debtor’s claim of exemption in a right to payment from Robert D. Mueller, in the sum of $45,000.00, and the lien against the following described real estate:
Lot 7, Block 2, Keya Paha Ranch, First Subdivision, Rice County, Minnesota, according to the recorded plat thereof on file and of record in the office of the County Recorder, Rice County, Minnesota.
which secures that right to payment, is disallowed.
. The identification of the county in the legal description here is apparently an error. All other exhibits in the record place this real estate in Rice County, Minnesota.
. In this original Schedule C, the Debtor did not claim an additional exemption in the real property at 983 Hammer Avenue, St. Paul. In amended schedules filed on January 31, 1997, she did. Under the Minnesota homestead exemption laws, *462dle Debtor is not barred per se from claiming a “double exemption" like this. O'Brien v. Johnson, 275 Minn. 305, 148 N.W.2d 357, 361 (1967).
. Robert was also obligated to pay the Debtor $15,000.00 in cash when the judgment and decree was entered. He did so. This right to payment having been satisfied, it is irrelevant to this case.
. Subject to an exception that does not apply here, this statute provides in pertinent part:
The owner may sell and convey the homestead without subjecting it, or the proceeds of such sale for the period of one year after sale, to any judgment or debt from which it was exempt in the owner's hands ...
. Subject to an exception that does not apply here, Minn.Stat. § 510.01 provides as follows:
The house owned and occupied by a debtor as the debtor's dwelling place, together with the land upon which it is situated to the amount of area and value hereinafter limited and defined, shall constitute the homestead of such debtor and the debtor’s family, and be exempt from seizure or sale under legal process on account of any debt not lawfully charged thereon in writing ...
MinnStat. § 510.02 then "limit[s] and define[s]” the amount of area and value of an exempt homestead. The details of its limitations and definition are not relevant to the dispute at bar.
. This facet of Joy was prompted, no doubt, by caselaw precedent’s exhortation to liberally construe the exemption in favor of the debtor — a frequent fixture of the Minnesota Supreme Court’s homestead decisions from earlier years. See, e.g., Northwestern Nat'l Bank v. Kroll, 306 N.W.2d 104, 105 (Minn.1981); Denzer v. Prendergast, 267 Minn. 212, 126 N.W.2d 440, 444 (1964); Application of Hickman, 222 Minn. 161, 23 N.W.2d 593, 597 (1946); Ryan v. Colburn, 185 Minn. 347, 241 N.W. 388, 389 (1932); Mulroy v. Sioux Falls Trust & Savings Bank, 165 Minn. 295, 206 N.W. 461, 462 (1925); Kiewert v. Anderson, 65 Minn. 491, 67 N.W. 1031, 1033 (1896).
. The abandonment provisions of Minn.Stat. § 510.07 fall later in the statute than that cited at n. 2 supra. They are as follows:
If the owner shall cease to occupy such homestead for more than six consecutive months the owner shall be deemed to have abandoned the same unless, within such period, the owner shall file with the county recorder of the county in which it is situated a notice, executed, witnessed, and acknowledged as in the case of a deed, describing the premises and claiming the same as the owner's homestead. In no case shall the exemption continue more than five years after such filing, unless during some part of the term the premises shall have been occupied as the actual dwelling place of the debtor or the debtor’s family.
.See, e.g., In re Kasden, 181 B.R. 390 (Bankr. D.Minn.1995), rev’d, 186 B.R. 667 (D.Minn. 1995), aff'd, 84 F.3d 1104 (8th Cir.1996); In re Thiesse, 170 B.R. 147 (Bankr.D.Minn.1994), re*465manded, 61 F.3d 631 (8th Cir.1995); In re Johnson, 207 B.R. 878 (Bankr.D.Minn.1997).
. First Nat'l Bank of Mankato v. Wilson, 234 Minn. 160, 47 N.W.2d 764 (1951).
. Muscala v. Wirtjes, 310 N.W.2d 696 (Minn. 1981); Joy v. Cooperative Oil Ass’n, 360 N.W.2d 363 (Minn.App.1984) (en banc), rev. denied (Minn. March 6, 1985).
. In Joy v. Cooperative Oil Assn, the Minnesota Court of Appeals declined to recognize a new exception in favor of a judgment debtor who had suffered a casualty loss of his homestead and vacated the property, but had not rebuilt and reoccupied it within the statutory year-long period. 360 N.W.2d at 365-366. In Kasden, tire District Court similarly held the scope of the exceptions to those recognized in Muscala, Wilson, and their predecessors, 196 B.R. at 670-671, and the Eighth Circuit agreed. 84 F.3d at 1105.
. Pul another way, the Joy court did not draw any distinction between the case where a debtor retains legal title — with all that may entail by way of a claim to retake possession and occupancy in the future — and that where the legal title is extinguished, in exchange for other, non-possessoiy rights of economic value.
. The opinion in Kimm does not qualify this observation with a recognition of the numerous protections from levy and execution given to various types of personalty under Minnesota statute. It did not really have to; there is no exemption statute in Minnesota that could construed to cover this sort of asset, at any stretch.
. It did so over a strong dissent, 529 N.W.2d at 9-11, but under an express disagreement with the theory of that dissent, 529 N.W.2d at 9. It is not without significance that the Minnesota Supreme Court was petitioned to review the ruling, but declined to do so.
. Both parties assume that the exchange of the Debtor's undivided one-half interest as joint tenant for a secured right to payment was a sale within die meaning of the statute. This conclusion is not prescribed on the face of the statute, or necessarily self-evident, but it is an appropriate one. The purpose of the statute apparently is to temporarily shelter value derived from an exempt homestead for reinvestment into a new one. O'Brien v. Johnson, 148 N.W.2d at 361. To promote this goal, the legislature probably did not want any judicial quibbling as to the form of the transaction which converts a protectible interest from a tangible one capable of personal occupation. Any liquidation for consideration of a different form, whether an open-market sale or any other type of exchange, perforce terminates the main statutory protection for an ownership interest in real estate — but it should also trigger the more limited statutory protection for proceeds.
. As noted in Ehrich, "sale” and "conveyance” may be distinct events under the statute. 110 B.R. at 428. Arguably, the "conveyance” here took place when the Debtor executed the quitclaim deed. The statute, however, triggers the one-year window only with the event of "sale.” Here, that event took place upon the entry of the decree, when the Muellers’ property rights were permanently reconfigured.
. The Debtor apparently incorporated her expectation of timely receiving the benefit of the property-division award into the structure of the financing for her new house. Her counsel argued that she might lose that house, her equity in it, and the benefit of her exemption to it, were she not to prevail on the Trustee's objection. Unfortunately, this prospect is irrelevant. The Debtor did not assign her right to payment to her vendors before she filed for bankruptcy; that right, then, entered the estate as an unencumbered asset, subject to the Trustee's administration to the extent not allowable to her as exempt.
. The Debtor testified that, shortly before the evidentiary hearing, she had assigned the right to payment to her vendors via a written instrument. The Trustee announced his intention to invoke 11 U.S.C. § 549(a) to attack this transfer, and presumably will do so in light of the present ruling. Absent a consensual unraveling of the transfer, this is a matter for an adversary proceeding. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492588/ | ORDER ON AMENDED MOTION FOR RELIEF FROM ORDER
JAMES E. YACOS, Chief Judge.
This chapter 7 bankruptcy case came before this Court on June 23, 1997 for a hearing on an Amended Motion for Relief from Order on Approval of Compromise. The Order in question approved a compromise of claims the trustee could have asserted against the First New Hampshire Bank. All parties present having been heard, the Court hereby dictates its findings and conclusions into the record and hereby rules as follows:
The Amended Motion for Relief from Order (Court Doc. 214) is hereby denied. The Compromise approved by the Order of March 19, 1996 will not be vacated inasmuch as the Court concludes on the basis of the entire record presented to it for decision that there was no fraud upon the Court that would justify that extraordinary remedy. Those documents in the record that are particularly pertinent to the Court’s determination are indicated in the listing attached as an Annex to this Order, although the Court has in fact reviewed the entire record presented as being relevant to its determination.
As I indicated during colloquy with counsel during the hearing, and as I’ve indicated throughout my career in this Court, the finality of sale orders and the finality of compromise orders is essential to the functioning of a bankruptcy court. I know particularly in bankruptcy that if you’re going to get reasonable compromises and you’re going to get reasonable prices for your assets you must adhere to the procedural mechanisms that allow anybody to complain before the hammer comes down, so to speak, or before the order is entered with regard to compromises, and if you do not speak, then forever hold your peace unless there is some extraordinary basis to get behind that finality policy. One such basis for getting beyond the finality policy is the “fraud on the Court” exception to both Rule 60 and to the finality policy that underlies Rule 60 as well as bankruptcy law generally. Fraud on the Court is explained in the general case law and in In re TriCran, Inc., 98 B.R. 609 (Bankr.D.Mass.1989), as involving some intentional deceiving of the Court and some intentional deflecting of the Court from knowing all the facts necessary to make an appropriate judicial decision on the matter before it.
In the present case, in my judgment, the facts are exactly the opposite. The Wadleigh Law Firm that is involved here explicitly put into the record the conflict questions. While perhaps not setting out all the detail that might have been appropriate, they explicitly took steps to assure that there would be an open hearing on that matter after the Court entered an ex parte Order on their retention application in October of 1995 prior the March 1996 compromise approval. They immediately sought and got the ex parte order vacated so there would be a hearing. That conduct hardly equates with a deep, dark, devious intent to defraud the Court and upset judicial machinery when the attorneys themselves spread the facts on the record. And even if the pleading itself was not complete in all details it would have certainly become complete when and if the Court had the hearing that ultimately was scheduled on the motion.
The Bank ironically, and they call it ironic and I think they are correct, also made sure that the facts of possible conflict were spread upon the record of this Court and now the Bank stands under this motion charged with participating in an attempt to defraud the Court. That is a low blow, in my judgment. To accuse this Bank of intentionally trying to *502defraud the Court when it itself spread on the record the conflict and raised the point about lack of ability to represent the estate in my judgment is completely unwarranted.
The Bank as a party to the settlement has a right to insist upon the finality policy of the bankruptcy laws and Rule 60 for that matter. As I’ve said for the reasons indicated above, the Court does not lightly upset sale or compromise orders.
The application for Wadleigh’s retention with regard to the trustee’s claim against First New Hampshire Bank was taken off this Court’s calendar for hearing, after the conflict questions had been raised, and attorney Gannon of the Wadleigh Law Finn elected not to proceed any further to seek retention as special counsel on that matter, did have the facts of conflict spread upon the records of this Court, but in a procedural context in which it was not required that the Court look at them or give any judicial attention to them until and if the issue was raised before the Court.
There was nothing that the Court could see that prevented Mr. Pearson, if he truly believed the compromise was not in the interest of this estate, to have objected prior to the March 28, 1996 hearing, either in person or by directing his counsel to do so, and if the counsel wouldn’t do it, to simply walk into this Courtroom and say “I object.” Neither this Court nor any Court would not hear a client and/or debtor in that context, particularly with regard to a lawsuit asset which normally does involve the debtor knowing more about it than a trustee does initially in any case. So the Court would give great weight to what the debtor says about the lawsuit. Mr. Pearson however did not appear at the compromise hearing nor did he appear at the hearing on the present motion.
The trustee did appear at the hearing on the compromise and the matter was presented to the Court as a reasonable settlement based on the lawsuit involved which had been pending without action since 1990 when it was filed pro se by Mr. Pearson. Neither Gannon or Pearson appeared at the hearing. The Wadleigh Law Firm had refused on the basis of conflict to represent him in any matter involving the Bradford Woods project because of their involvement with other parties to that transaction. The suit therefore had been pending at the time of the bankruptcy filing in 1992, and thereafter, without any action having been taken to pursue it.1 It was only in October of 1995 that the matter was first broached by Mr. Gannon’s application to be retained as special counsel to the trustee to pursue that litigation, in which he stated in that application that while he felt he had a conflict barring his appearing in actions against the Bank in that matter previously, that since the related Tamposi claims and counterclaims had been resolved he no longer felt that he had a conflict.
It may be that his judgment was faulty and that he did still have a conflict under professional ethics requirements but that isn’t controlling here and the fact of the matter is that when the issue was broached he backed away and when the issue was presented to the Court the only people the Court heard from was the trustee and Mr. Harwood for the Bank.
The record now shows that behind the scenes Mr. Pearson was pressing Mr. Gannon to get into the First New Hampshire litigation. To get something done. To get his bankruptcy case closed and to get in his famous words “a little more” than the $35,-000 that the trustee already had from Mr. Harwood’s client. So, Mr. Gannon, who was being beaten around the head and shoulders by Mr. Pearson for not doing anything with regard to the First New Hampshire Bank transaction, and then seeks to get into that and move it along, under his judgment that the Tamposi settlement removed any conflict problems, and then backs away when the Bank raises those conflict problems, and the Bank just negotiates a deal with the trustee in which it isn’t necessary to retain anybody for the trustee who himself is a lawyer, then Mr. Gannon is hit with this motion a year later accusing him of intending to defraud the Court and Mr. Pearson by taking the *503actions he did. Whatever else may be said about the supreme irony of this situation it clearly does not equate to intentional deceit or misrepresentation.
I cannot find from this record that there was any intent to defraud or deceive or mislead the Court in any of these circumstances. The first time that Mr. Gannon had any duty under the law to disclose any adverse interest under § 327 of the Bankruptcy Code and Rule 2014, since he was only a chapter 7 debtor’s attorney, was not when he filed the case but when the trustee, in 1994, after not being able to get anybody else to pursue a number of Mr. Pearson’s pending lawsuits, asked to have Mr. Gannon step in as special counsel at which time he then had to disclose the conflict, and in fact he did disclose it in the 1994 retention, and said he would represent the estate against the FDIC in other matters but would not represent the estate with regard to First New Hampshire Bank and the Bradford Woods matter.
There is some additional irony in this whole scenario. It is apparent from this record that Mr. Pearson for some number of years in this case was having Mr. Gannon represent him for free so to speak under Mr. Gannon’s statement that “money isn’t everything” and that they would deal with fees later and Mr. Pearson’s apparent belief that that meant never. That sad story is just that. A sad story of the deterioration between a client and an attorney but hardly rises to any intent to deceive on the part of Mr. Gannon with regard to the First New Hampshire Bank suit.
Even if I were to assume that there was some further duty of disclosure, notwithstanding the withdrawal of the request to be employed on the First New Hampshire Bank matter, I can not find from this record that Mr. Gannon and the Wadleigh Law Firm had any inkling, notice or any reason whatsoever to believe that Mr. Pearson on March 28, 1996 had some sort of claim against them that was being released by virtue of the boilerplate general release language included in the trustee’s settlement with the Bank, and that they were allowing that to happen without appraising the Court of the ramifications. I say that because Mr. Pearson from 1990 on knew that Mr. Tucker of the Wadleigh Law Firm was on the-board of directors of the financing arm of the Bank, which made a refinancing deal with the Tamposi group, after foreclosure, and that the Tamposi group ended up with the property again. I do not find it a bit credible that Mr. Pearson couldn’t put two and two together and see that he might be able to travel on that to some extent against the Bank, but on the other hand he needed Wadleigh to represent him and as it turned out for free mostly. And he made his own judgment as to how important that conflict was or wasn’t. I don’t think in my judgment of Mr. Pearson, as reflected from these voluminous memos and documents, that he was so soft hearted or such a naive person that he didn’t see that there might be something there but was willing to forget about it for other reasons which were sufficient for his own purposes.
It was not unusual in the 1980’s in the frenzy of the real estate boom that then existed that law firms were representing many different parties to many different real estate transactions. And as is reflected in the exhibits here, with regard to the Sam Tamposi deposition in one of those lawsuits, the parties would get together and sit down and talk about it and figure out that well, they could all object but they wanted to get the thing resolved, and that they’d have to go far away perhaps to get any effective, experienced lawyers that had no arguable conflicts, so that they would waive the conflicts, to get the thing tried. As that particular case indicates, Mr. Pearson was vitally interested in getting the deposition of Sam Tamposi taken to go on with that lawsuit.
The reality of that situation I think is reflected in Mr. Tucker’s involvement in the Bradford Woods project. On the face of it with all I have in any specifics he was involved in some fairly routine matters that an attorney of his nature dealing with real estate and title problems, and involved in refinancing for a foreclosing entity that ended up with the property, would be a fairly routine thing that would not necessarily raise any involvement in a deep and dark conspiracy to thwart Mr. Pearson and his interests. Again it may well be an ethics violation with *504regard to going ahead with such a matter. However, this Court is not required to pass upon all alleged ethics violations when it is not relevant to the matters before it. The simple fact of the matter is that what I have before me is a motion to vacate an Order of March 1996 on a motion not brought by Mr. Gannon, not brought the debtor, but brought by the Bank and the trustee which the Court acted upon in the context of absolute silence of the debtor in raising any such issues.
The other reality of the situation, that is not unknown to Courts, is that conflict disqualification issues can be raised to thwart litigation, as a tactical or strategic matter, and that therefore the Courts take with some grain of salt allegations of conflicts tardily raised after a party has suffered some initial defeats or is on the verge of its moment of truth in the litigation, i.e., a trial. The record indicates that one of the parties in the ease that had the disqualification motion discussed above said in effect “I won’t object to your qualification now but if this gets into heavy litigation, I’m going to move to disqualify you then.” And the state court judge gave that assertion the weight it deserved which was none. We have here a disqualification in effect. An issue raised indirectly, and tardily by Mr. Pearson with regard to the Bradford Woods matter, when the record shows that he knew about Mr. Tucker in 1990.
This record does not show that Mr. Pearson was not given appropriate disclosure as to Tucker’s involvement. It is not the burden of the law firm or respondents here, particularly the Bank, to refute the movant’s insinuation that there was much more involvement by Tucker and lack of disclosure. The motion asserts that there must have been much more involvement by Mr. Tucker but Mr. Pearson in his affidavit says nothing about what was or wasn’t disclosed to him, or what he did or didn’t know about Tucker’s involvement. In his affidavit seeking to have this Court find that there was an intentional fraud upon this Court, committed by officers of this Court, he gives no meaningful particulars on the key questions raised other than a eonelusionary reference to the pleadings that is artfully designed in my judgment to not be tagged for saying something specific. Mr. Pearson elected not to be present at the hearing to address numerous questions raised by his motion. Again, I don’t think it is the burden of the respondents to prove the case for the movant who is seeking the extraordinary remedy of vacating a Court Order on a compromise.
The rationale for finality in sales orders and compromise orders is not that the estate received the best possible deal out of the matter, or that the estate might not get more if the compromise or sale was vacated and other action was taken. If that were so, you would have no finality. You would have no encouragement for people to offer top prices and/or reasonable settlements. It has to be something more than that. So to say that the Bank got off easy, considering what might have come out of trial of the lawsuit, is easy for the movant to say but is not sufficient. I am persuaded by the trustee’s statement that he evaluated the lawsuit in terms of what his options were and that he was under the scrutiny of the one creditor who was going to get anything in pursuing the lawsuit, i.e., the Internal Revenue Service. They voiced no opposition to the settlement. The debtor voiced no opposition. Taking all those facts into account, he believed then and he believes today, that it was a reasonable settlement. I agree even though, as I say, I don’t have to make that factual determination in the absence of any evidence showing an intentional defrauding of the Court.
ANNEX
In re: John E. Pearson
Bk No. 92-11070
Date Document Exhibit/Pleading
5/24/90 Exhibit 8 to Court Letter to Sklar from Dan Muller
Doc. 215
*505Date Document Exhibit/Pleading
8/21/90 Exhibit E to Court Doc. 218 Letter to Gannon from John Pearson
8/23/90 Exhibit F to Court Doc. 218 Letter to Pearson from Robert Murphy
10/23/90 Exhibit 4 to Court Doc. 215 Letter to Gannon from John Pearson
11/26/90 Exhibit 5 to Court Doc. 215 Motion to Disqualify filed in Superior Court by Samuel Tamposi, Jr.
1/11/91 Exhibit G to Court Doc. 218 Letter to Pearson from William Gannon
9/21/94 Court Doc. No. 143 Application to Employ Special Counsel to Trustee filed by Victor Dahar and included statement regarding conflicts
1/10/95 Exhibit 12 to Court Doc. 215 Stipulated Settlement in Adv. Pro. No. 94-1077
6/29/95 Exhibit H to Court Doc. 218 Memo to Gannon from John Pearson
7/5/95 Exhibit I to Court Doc. 218 Letter to Gannon from John Pearson
7/18/95 Exhibit J to Court Doc. 218 Memo to Gannon from John Pearson
9/5/95 Exhibit L to Court Doc. 218 Memo to Cannon from John Pearson
10/12/95 Court Doc. No. 180 Motion for Permission to Appear as Special Counsel to the Trustee filed by Victor Dahar and included statement regarding conflicts
10/13/95 Exhibit M to Court Doc.218 Letter from Dahar to William Gannon
10/23/95 Exhibit N to Court Doc. 218 Memo to Gannon from John Pearson
10/25/95 Court Doc. No. 181 Motion to Vacate Order and For Hearing filed by Victor Dahar
10/26/95 Exhibit 14 to Court Doc. 215 Memo to Gannon from John Pearson
11/14/95 Court Doc. No.183 Response of First NH Mortgage Corp. and Hilco, Inc. To the Trustee’s Motion to Vacate Order and for Hearing
11/15/95 Court Doc. No.184 Motion for Permission to Withdraw Motion for Permission to Appear as Special Counsel to the Trustee
11/16/95 Exhibit 13 to Court Doc. 215 Memo to Cannon from John Pearson
3/11/96 Court Doc. No.187 Motion to Approve Compromise of Settlement and Release of Claims
3/15/96 Exhibit 0 to Court Doc. 218 Memo to Cannon from Harold Peterson
3/19/96 Exhibit 6 to Court Doc. 215 Memo to Cannon from Harold Peterson (confidential)
3/19/96 Exhibit P to Court Doc. 218 Memo to Cannon from John Pearson
3/20/96 Exhibit Q to Court Doc. 218 Memo to Cannon from John Pearson
3/21/96 Exhibit R to Court Doc. 218 Debtor’s Informational Response to Text of Motion to Approve Compromise filed by debtor
*506Date Document Exhibit/Pleading
3/21/96 Exhibit S to Court- Memo to Cannon from John Pearson Doc. 218
3/21/96 Exhibit U to Court Letter to Pearson from Cannon Doc. 218
11/27/96 Exhibit D to Court Memo to Cannon and Murphy from John Pearson Doc. 218
. The trustee prior to October 1995 was unable to obtain any other counsel to take the case on a contingent fee basis. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492589/ | MEMORANDUM
DAVID A. SCHOLL, Chief Judge.
THE CAROLINCH COMPANY (“the Debtor”), formerly a manufacturer of electroplating, filed a voluntary petition under Chapter 11 of the Bankruptcy Code on February 13, 1996. The Debtor remained in Chapter 11 for almost a year in attempting to reorganize in a manner that it could remain in business. However, prior to confirmation, it determined that these efforts to continue its business would be fruitless. The Debtor’s Second Modified Plan, ultimately confirmed on February 18, 1997, contemplated an orderly liquidation of the Debtor’s assets. On March 8, 1997, an auction was held in which all of the Debtor’s assets were sold, the proceeds of which total $207,485.68 and remain in an escrow account pending a determination by this court of the priority of the two competing secured creditors, the parties to the instant proceeding (“the Proceeding”), KATHARINA PALNIK (“the Plaintiff’) and the UNITED STATES OF AMERICA through its agency, the Internal Revenue Service (“the IRS”).
According to the Stipulation of Facts, which constitutes most of the record, the Plaintiff is a secured creditor of the Debtor with a proof of claim in the amount of approximately $600,000.00. This claim is the result of four separate loan agreements which the Debtor entered into with Bucks County Bank & Trust Company (“BC Bank”). These loans were in the respective amounts of $300,000.00 and $250,000.00, dated September 22, 1989; $550,000.00, dated December 4, 1991; and $100,000.00, dated April 14,1992.
The purpose of these loans was to provide the Debtor with operating capital, and the loans were secured by certain agreements whereby the Debtor granted to BC Bank a security interest in and a continuing lien upon basically all of its assets, including the proceeds of any sales of such items which were then owned or thereafter acquired by the Debtor.
The duly-perfected security interests of BC Bank became the property of CoreStates Bank, N.A. (“CoreStates”), as the BC Bank’s successor by merger. Subsequently, on April 29, 1986, the Plaintiff entered into an agreement whereby all of CoreStates’ rights in the collateral were assigned to the Plaintiff.
The Plaintiff is the mother of Robert Palnik (“Robert”), the president of the Debtor, which was at all times a family-owned business. In her brief testimony, the Plaintiff testified that her reason for purchasing CoreStates’ interest in the Debtor was that she believed that, if CoreStates were no longer involved with the Debtor, it would be able to continue doing business. This intended purpose was, of course, to be frustrated.
Prior to the Debtor’s bankruptcy petition, the IRS filed several notices of federal tax liens against the Debtor. Said liens were filed on June 27, 1991; March 31, 1992; March 30, 1993; October 18, 1993; October 14, 1994; and August 2, 1995. The secured claim held by the IRS is in the total amount of $271,675.15, and it arises from the Debt- or’s nonpayment of certain withholding taxes.
As it developed, the pivotal testimony at trial was adduced from Robert, who stated that only a small fraction of the assets which were sold in the liquidation sale were purchased on or after June 27, 1991, when the initial federal tax lien was filed. He further testified that the value of the items purchased on or after June 27, 1991, totaled approximately $12,000, with a range of error of no more than twenty (20%) percent. When asked how he was able to determine those which were purchased on or after June 27, 1991, from the list of assets sold, Robert responded that very few items had been purchased after that date, specifically only two computers and various small hand tools, because the work in which the Debtor was engaged from 1991 through the cessation of the Debtor’s operations did not require any substantial purchases of equipment or other assets.
*520In their briefs, the parties both emphasize their agreement that 26 U.S.C. §§ 6321 to 6323, interpreted by United States v. McDermott, 507 U.S. 447, 113 S.Ct. 1526, 123 L.Ed.2d 128 (1993), control the disposition of the Proceeding. Pursuant to 26 U.S.C. § 6321,
if any person hable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a hen in favor of the United States upon all property and rights to property, whether real or personal belonging to such person.
The parties do not dispute that the IRS has valid tax hens totaling $271,675.15 against the Debtor.
It cannot be disputed that the scope of the federal tax hen is broad. See, e.g., United States v. National Bank of Commerce, 472 U.S. 713, 719-20, 105 S.Ct. 2919, 2923-24, 86 L.Ed.2d 565 (1985); and In re Blackerby, 208 B.R. 136, 140-41 (Bankr.E.D.Pa.1997). However, the parties further agree that the concept of “the first in time is the first in right” applies and dictates that those hens which are filed first receive priority in being paid. See McDermott, supra, 507 U.S. at 449, 113 S.Ct. at 1527-28. Additionally, 26 U.S.C. § 6323(a) provides that “a federal tax hen shall not be valid ... against any holder of a security interest ... until notice thereof ... has been filed.” Thus, a federal tax hen normally does not exist until notice thereof has been filed in accordance with § 6323(f).
According to the Stipulation of Facts, the first two of the Debtor’s four loans and promissory notes were executed on September 22, 1989, while notice of the first federal tax hen was not filed until June 27, 1991. Thus, on the basis of both common law principles and statutory law, the Plaintiffs first two hens have priority over all of the IRS’s subsequent claims and these two hens easily exceed the total amount of the sale proceeds. However, the parties also agree that McDermott holds that, nevertheless, a non-governmental creditor’s hen is prior to that of the IRS only as to property which the taxpayer acquired prior to the imposition of the IRS’s hen. 507 U.S. at 452-54, 113 S.Ct. at 1529-31.
Applying these principles to the instant facts, the parties do not dispute that the IRS has priority, and is entitled to the sale proceeds, only to the extent of the value of secured property which the Debtor acquired after the IRS filed its initial tax hen notice on June 27, 1991. Thus, the parties have agreed, and we concur, that the Plaintiffs hens are valid against all liened property of the Debtor purchased prior to June 27, 1991.
The IRS asserts that it is entitled to at least $14,000.00, based upon its recollection of the testimony given by Robert. More specifically, the IRS contends that, because Robert estimated his margin of error to be twenty (20%) percent, the value of the post-June 27, 1991 assets could be a high as $40,000.00. The Plaintiff, meanwhile, contends that Robert testified that the proceeds from assets purchased on or after June 27, 1991, “total roughly $12,000.00.” The Plaintiff observes that, even with a margin of error of twenty (20%) percent, this testimony would entitled the IRS to, at most, $14,-400.00.
After carefully reviewing the tape of Robert’s June 11, 1997, hearing testimony, we agree with the Plaintiff that Robert did, in fact, testify that the value of the Debtor’s collateralized assets purchased after June 27, 1991, was estimated at $12,000.00. With respect to the IRS’s contention that it is entitled to an amount ranging from $14,000.00 to $40,000.00, we are unsure of how it could have ever arrived at the latter amount. Perhaps its contention reflects computation of twenty (20%) percent of the amount of the $207,485.68 proceeds from the liquidation sale. However, any such calculation would clearly be mathematically erroneous, as Robert made no reference to the proceeds of the asset sale in rendering his estimate.
Further, it ignores the fact that the twenty (20%) percent margin of error could work in either direction. Thus, applying the $12,-000.00 estimate of Robert, which is the only pertinent evidence of record, we deduce that the IRS could be entitled to a priority for a figure anywhere from a low of $9,600.00 to a maximum of $14,400.
*521We conclude that the IRS is entitled to $13,000.00 from the proceeds. Initially, we note that the testimony of Robert was unrebutted and unshaken by cross-examination. His valuation seems reasonable in light of his logical testimony that only two computers and various small and tools were purchased on or after June 27, 1991, because the jobs done by the Debtor from 1991 through the time when the Debtor ceased operations did not appear to require any large purchases. When asked to identify the purchase dates of randomly selected collaterized items upon cross-examination, Robert was easily and credibly able to do so.
We nevertheless are inclined to render our decision on the high side of Robert’s estimate in favor of the IRS, because we believe that Robert was naturally inclined to estimate the value of assets purchased on or after June 27, 1991, on the low side, in order to benefit his mother. On the other hand, we cannot stray far beyond the figure which Robert quoted because we assume that the IRS would have produced evidence to the contrary if he had been too far off the mark. Thus, we are unwilling to value the IRS’s entitlement at an amount in excess of $13,-000.00. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492590/ | ORDER AWARDING DAMAGES AGAINST INTERNAL REVENUE SERVICE
DUNCAN W. KEIR, Bankruptcy Judge.
Debtor filed a Motion to hold the Internal Revenue Service in Contempt for intentional violation of the automatic stay. The Internal Revenue Service appeared and defended raising two defenses. The first defense raised was that the Internal Revenue Service, as an agency of the United States of America, was protected by the Doctrine of Sovereign Immunity. As discussed by the court on the record at a hearing held on this matter on February 14, 1997, this ease is governed by 11 U.S.C. § 106 as amended by the Bankruptcy Reform Act of 1994. In those amendments, Congress abrogated sovereign immunity for the United States of America for certain actions including actions under 11 U.S.C. § 362. This abrogation was limited however to actions for actual, as opposed to punitive damages. Debtor conceded at the hearing that debtor was not entitled to proceed against the United States of America, Internal Revenue Service, for punitive damages.
The court finds that the United States of America, acting by legislation enacted by Congress and by the President abrogated sovereign immunity for the purposes of finding liability against the United States of America in actions brought by parties against the United States of America for violations of 11 U.S.C. § 362. As explained by the court in its remarks on the record, this action was brought for violation of the stay and hence is governed by 11 U.S.C. § 362(h).
The facts are not disputed. After the filing of the bankruptcy case but before the Internal Revenue Service had notice of the case, the Internal Revenue Service served a levy upon a banking institution and by that levy attached three bank accounts of the debtor. Further, the Internal Revenue Service received payment of the account balances by the financial institution through this levy thus depriving the debtor of the use of the funds in these accounts. Although the initial violation of 11 U.S.C. § 362(a) was unwitting, what happened next constituted an intentional violation of this statute. Upon learning of the Internal Revenue Service garnishment, debtor’s counsel contacted the agent of the Internal Revenue Service whose phone number was inscribed upon the notice of levy to the banking institution. That agent refused to return the funds levied upon post-petition, notwithstanding the clear violation which had occurred.
The court finds that there is no dispute of fact, the Internal Revenue Service having not disputed the facts in its post-hearing memorandum. The facts include that as a result of the Internal Revenue Service wrongful levy of the accounts, the debtor was unable to pay mortgage payments post-petition in this case. Because of the post-petition default, the mortgagee commenced a motion for relief from stay and *689incurred the sum of $450.00 in attorney’s fees to the mortgagee’s attorney which, under the terms of the mortgage contract are due and payable by the debtor. The debtor has also incurred the sum of approximately $750.00 in attorney’s fees to debtor’s attorney to defend that action and to bring the action before the court in this motion. Finally, the debtor incurred a charge of $75.00 by the banking institution for processing the Internal Revenue Service levies.
Under the authority of 11 U.S.C. § 362(h), and further under the Internal Revenue Service Code as discussed in the ease of Grewe v. United States (In re Grewe), 4 F.3d 299 (4th Cir.1993), the Internal Revenue Service is responsible for all of the consequential damages including the reasonable attorney’s fees as identified above. For this reason, it is this 5th day of March, 1997, by the United States Bankruptcy Court for the District of Maryland,
ORDERED, that the Internal Revenue Service shall pay to Susan Milto, the sum of $2,275.00 as actual damages for violation of the automatic stay; and the Internal Revenue Service, to the extent not already accomplished, shall immediately refund to Susan Milto all funds levied and collected after the date of petition in bankruptcy from accounts of Susan Milto. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492591/ | *704
AMENDED MEMORANDUM OPINION
DOUGLAS 0. TICE, Jr., Bankruptcy Judge.
Douglas E. Ballard requests the court to approve his application for retroactive employment as counsel for debtor along with a fee application and expense reimbursement in the respective amounts of $97,250.00 and $3,674.85. Both applications will be denied.
Findings of Fact
1
Debtor Tamojira, Inc., filed a chapter 11 bankruptcy petition in the United States Bankruptcy Court for the Western District of North Carolina on April 20, 1994. In that case, creditor Chesterfield County, Virginia, moved for relief from the automatic stay or, in the alternative, dismissal of the case for bad faith filing. After an evidentiary hearing, Bankruptcy Judge George Hodges found that debtor had filed the petition in bad faith and granted Chesterfield County’s motion by dismissing the ease.
After the North Carolina bankruptcy was dismissed by Judge Hodges (from which no appeal was taken), debtor’s principal, Joseph P. Pritchard, contacted attorney Douglas E. Ballard of Virginia Beach, Virginia, about debtor refiling for bankruptcy in the United States Bankruptcy Court for the Eastern District of Virginia. On December 13, 1994, debtor commenced the bankruptcy ease that is currently before this court by filing a chapter 11 petition which Ballard signed as attorney. At the time of filing, Ballard had not reasonably investigated the facts pertaining to the original case or the bankruptcy law controlling debtor’s ability to file another petition. Debtor filed the instant chapter 11 petition to stay a scheduled tax sale of a portion of its property.
In February 1995, after filing the new petition in this district, Ballard contacted B. VanDenburg Hall, who has asserted he is a specialist in tax law, concerning the validity of a real property tax sale of property owned by Tamojira in Chesterfield County Virginia. Ballard later obtained written authorization from Pritchard to hire Hall at a rate of $250 per hour. Hall concluded that the tax payments could be met through the rents and profits of the land, instead of Chesterfield County’s sale of the entire parcel.
On March 9, 1995, Chesterfield County moved for relief from the automatic stay so that the tax sale could proceed. Chesterfield County also moved for sanctions against Pritchard and Ballard based on debtor’s filing of the present chapter 11 case in bad faith. On March 30, 1995, this court granted Chesterfield County’s motion for relief from stay, holding that the county could auction debtor’s property in order to satisfy debtor’s outstanding real property tax liability. On July 7, 1995, the court entered an opinion and sanction order requiring Pritchard and Ballard jointly and severally to pay the sum of $2,857.59 to Chesterfield County. The court awarded this sanction based upon a finding that this bankruptcy case was filed in bad faith. The court determined as part of the sanctions award that Ballard “failed to conduct a reasonable investigation of the previously dismissed ease.” Memorandum Opinion, July 7,1995, p. 12.
The debtor’s attempts to reorganize under its second chapter 11 ease were minimal. Debtor never filed a disclosure statement. Although debtor filed a plan, Ballard conceded that the plan was inadequate and would have to be modified. This was never done.
Debtor had failed to propose a plan for over six months in the case in North Carolina, and the instant case has been nothing more than a continued attempt to delay Chesterfield County’s tax sale.
On July 7, 1995, Ballard filed an application for interim fees and expenses which requested a fee of $77,050.00 and expense reimbursement of $639.95. Attached to his fee application was an unsigned Application by debtor to employ Ballard as attorney.
On July 26, 1995, hearing was held on the United States Trustee’s motion to convert the ease to chapter 7 or alternatively to dismiss the case. In argument the trustee *705asked that the case be converted rather than dismissed because debtor had assets to be administered. At this hearing, Pritchard advised the court that Ballard was being dismissed as counsel. The court withheld converting the case to allow debtor a period of time to retain new counsel.
On August 25, 1995, Ballard filed the amended fee application, now under consideration, requesting a total fee of $97,250.00 and expense reimbursement of $3,674.85. Ballard’s amended fee application is incorporated as part of this opinion.
On August 25, 2995, Ballard filed an application for retroactive employment as counsel for debtor.
After debtor was unable to retain new counsel as directed by this court, the case was converted to a chapter 7 case on September 15,1995.
Discussion and Conclusions of Law
A. Retroactive Employment
No proper application to employ Ballard as debtor’s counsel was filed with the court until August 25,1995, after he had been dismissed by debtor’s principal Pritchard and when the case was on the verge of conversion to a chapter 7. An earlier application to employ was attached to Ballard’s initial fee request, filed on July 7, 1995. However, this application was incomplete in that it was not signed either by Ballard or by Pritchard. In a memorandum filed by Ballard on July 25, 1995, in response to an objection to his initial fee application, Ballard stated that he had mailed the employment application to his client on May 4, 1995, with written instructions for debtor to sign and send to the clerk of the bankruptcy court.
Ballard’s amended fee request filed on August 25,1995, reveals for the first time in this case (to the court’s recollection) that Pritchard, debtor’s president and sole shareholder, had personally guaranteed payment of Ballard’s fees in this case. Amended Application, p. 3, ¶ 5.
Under § 327(a) of the Bankruptcy Code a trustee or debtor-in-possession2 may employ an attorney or other professional after court approval as long as the attorney or professional does not hold an interest adverse to the estate, and the attorney or professional is a disinterested person. 11 U.S.C. § 327(a). Rule 2014(a) states that “[a]n order approving the employment of attorneys ... or other professionals pursuant to § 327 ... shall be made only on application of the trustee or committee.” Fed. R. Bankr.P.2014(a).
In the context of fee applications, the importance of obtaining prior approval for employment of an attorney or other professional pursuant to § 327 and Rule 2014(a) is made apparent in the application of § 330, which governs the awarding of fees and costs to attorneys and other professionals. Section 330 states:
[ajfter notice to the parties in interest and the United States Trustee and a hearing, and subject to sections 326, 328, and 329, the court may award to a trustee, an examiner, a professional person employed under section 327 or 1103-
(A) reasonable compensation for actual, necessary services rendered by the trustee, examiner, professional person, or attorney and by any paraprofessional person employed by any such person; and
(B) reimbursement for actual, necessary expenses.
11 U.S.C. § 330(a)(1) (emphasis added). When read together, §§ 330, 327 and Rule 2014(a) clearly require that in order for an attorney or other professional to be awarded fees or costs under § 330, the attorney or professional’s employment must have been previously approved by the bankruptcy court pursuant to § 327. See In re Tidewater Memorial Hosp., Inc., 110 B.R. 221, 225 (Bankr.E.D.Va.1989); In re Mork, 19 B.R. 947, 948-49 (Bankr.D.Minn.1982).
Under extraordinary circumstances, the court may award fees and costs to an attorney or professional whose employ*706ment was not previously approved by the court. See In re Tidewater Memorial Hosp., Inc., 110 B.R. at 225-26. In these limited circumstances, the employment of the attorney or professional is applied retroactively, by allowing the attorney or professional whose work has benefited the estate to be compensated. See In re Tidewater Memorial Hosp., Inc., 110 B.R. at 225 (emphasis added). In Tidewater Memorial Hospital, this court adopted a two part test for determining when retroactive employment can be authorized: (1) the professional satisfactorily explains the failure to obtain prior approval of employment, and (2) the professional meets the requirements set forth in § 327 and Rule 2014(a), aside from that of obtaining timely court appointment. In re Tidewater Memorial Hosp., Inc., 110 B.R. at 226. See also Mitchell v. American Appraisal Co. (In re Coast Trading Co.), 62 B.R. 664 (Bankr.D.Or.1986).
(1) Ballard’s explanation of failure to obtain prior approval of employment.
Ballard has stated in essence that he was too busy to file the application. He also argued at hearings that the Office of the United States Trustee has responsibility for obtaining formal approval of his employment. He even blamed Pritchard for not following his instructions to sign and forward the application to the court as instructed in Ballard’s letter of May 4,1995.
In my view Ballard’s stated reasons for failing to timely file an employment application are patently ridiculous and scarcely fulfill the first part of the court’s test for retroactive employment as applied in Tidewater Memorial Hosp., Inc., 110 B.R. at 226.
(2) Whether Ballard qualified for employment under § 327 and Rule 2014(a).
Ballard cannot meet this test either. The court has previously found that Ballard filed this case in bad faith, which I find in itself disqualifies him from a retroactive appointment.
More serious, however, is the fact that debtor’s principal Pritchard had personally guaranteed payment of Ballard’s fee, a fact not revealed until Ballard filed his amended fee request. This guaranty put Ballard in a conflict situation as between the debtor and Pritchard, and Ballard had a duty to reveal this conflict at the outset of his representation. See In re National Distribs. Warehouse Co., Inc., 148 B.R. 558, 561 (Bankr.E.D.Ark.1992); In re TMA Assocs., Ltd., 129 B.R. 643, 648 (Bankr.D.Colo.1991); In re Hathaway Ranch Partnership, 116 B.R. 208, 219 (Bankr.C.D.Cal.1990).
It is possible that had this conflict been revealed and explained at the outset of the case, the court could nevertheless have approved Ballard’s employment by having Ballard waive the guaranty. However, I find this conflict absolutely precludes Ballard’s retroactive employment as he cannot now meet the requirements of § 327.
B. Amended Fee Application
Although my denial of Ballard’s retroactive employment makes it unnecessary to consider his fee request, I will nevertheless consider the application on the merits. I conclude that he must be denied any compensation in this case.
Ballard attached to his amended request for fees and expenses a 33 page itemization of his time charges and expenses during the course of this case. He lists 489.25 hours for which he requests a fee of $97,250.00. This charge equates to an hourly rate of $198.77. The time entries are quite detailed and informative of how Ballard spent his time.
My review of Ballard’s entries reveals that at least 90-95% of his time involved Chesterfield County and its delinquent real property taxes against debtor’s property. Debtor is entitled to no compensation for these charges because, as the court previously ruled, in regard to this issue Ballard filed the case in bad faith. Counsel cannot expect to be compensated for services that were rendered in bad faith and which could not have benefitted the debtor’s estate. See Federal Deposit Ins. Corp. v. Grimm (In re Grimm), 156 B.R. 958, 959 (E.D.Va.1993). Moreover, since Ballard’s bad faith filing was the overwhelming predominant factor in this case, I find that he is not entitled to compensation for the relatively few services that were un*707related to the real property matter. These services were of no benefit to the estate either. Likewise, his request for reimbursement of expenses, which includes the $2,857.59 sanctions award, is denied.
Finally, as revealed in this and previous opinions in this ease, counsel throughout has demonstrated a lack of competency and judgment in the conduct of the ease. This is an additional basis to deny both retroactive employment and fee. See In re American Food Servs., Inc., 166 B.R. 64, 66 (Bankr.D.Md. 1994).3
A separate order was entered on December 26,1995.
. This opinion incorporates facts found by the court in opinions entered March 30, July 7, and September 18, 1995.
. Section 327(a) and Rule 2014(a) authorize the trustee to employ attorneys ór other professionais. A debtor-in-possession may also hire an attorney or other professional through § 1107(a) which grants to a debtor-in-possession the same rights, powers, and responsibilities given to a trustee. 11 U.S.C. § 1107(a).
. Even were the court inclined to consider allowing Ballard some fee, other adjustments to his charges would be required. Ballard’s hourly charge of almost $200.00 is much too high. The compensable services (if any) were not that difficult and Ballard's demonstrated lack of skill and knowledge in the conduct of the case cannot justify more than a rate of $135.00 per hour. This rate would be divided in half for Ballard’s significant charges for travel between Virginia Beach and Richmond. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492593/ | MEMORANDUM OPINION
DOUGLAS O. TICE, Jr., Bankruptcy Judge.
On May 7, 1997, the court held a hearing on an objection filed by NationsBank, N.A. to a claim against the bankruptcy estate which had been assigned by First American Bank of Virginia to John A. Andrews II.1 After *720the parties stipulated to the facts underlying this matter, the court heard oral argument from counsel and then took the matter under advisement. For the reasons set forth in this memorandum opinion, the court will overrule the objection in part and will sustain the objection in part.
Findings of Undisputed Fact and Procedural History
This particular claim asserted by John A. Andrews II against the bankruptcy estate arose from three judgments confessed by First American Bank of Virginia against the debtor (a Virginia resident) in the Circuit Court of Fairfax County, Virginia: (1) a judgment entered on May 10, 1991, in the principal amount of $1,275,000.00 (the “Guaranty Judgment”); (2) a judgment entered on September 13, 1991, in the principal amount of $500,000.00 (the “Line of Credit Judgment”); and (3) a judgment entered on September 19, 1991, in the principal amount of $137,333.36 (the “Lone Oak Judgment”).
In 1992, First American caused writs of fieri facias to be issued on each of the three judgments: (1) with regard to the Guaranty Judgment, one writ was delivered to the Sheriff of Fairfax County on May 6, 1992, with a return date of June 22, 1992; (2) with regard to the Line of Credit Judgment, thirteen writs were delivered to the Sheriff of Fairfax County, the last being on August 3, 1992, with a return date of October 26, 1992; and (3) with regard to the Lone Oak Judgment, two writs were delivered to the Sheriff of Fairfax County on May 11, 1992, with a return date of June 22,1992.
On October 17, 1992, the debtor filed this petition under Chapter 7 of the Bankruptcy Code. First American then filed a timely proof of claim, the rights to which were assigned to Andrews II in September 1993. The assets currently held by the Chapter 7 trustee include: (1) approximately $310,-000.00 in payments from Tarmac Mid-Atlantic, Inc. under a non-competition agreement with the debtor dated July 17,1989;2 and (2) approximately $300,000.00 from the post-petition settlement of a malpractice claim which arose prior to 1992 and which was asserted by the debtor against the law firm of Shaw Pittman Potts & Trowbridge in the Superior Court of the District of Columbia.3
Discussion and Conclusions of Law
Under the law of Virginia, a money judgment can be enforced by causing a writ of fieri facias to be issued by the clerk of the court and to be delivered to a “proper officer” of the court. United States v. Harkins Builders, Inc., 45 F.3d 830, 833 (4th Cir.1995) (citing Va.Code § 8.01-466). The writ commands the officer “to make money therein mentioned out of the goods and chattels of the person against whom the judgment is.” Id. (quoting Va.Code § 8.01-474). When property by its nature is incapable of being levied by the officer, a lien nonetheless is created upon delivery of the writ to the officer. Id. (citing Va.Code § 8.01-501). Though extending “throughout the limits of the Commonwealth,” Va.Code § 8.01-481, this lien attaches “only to the extent that the judgment debtor has a possessory interest in the intangible property subject to the writ.” International Fidelity Ins. Co. v. Ashland Lumber Co., 250 Va. 507, 463 S.E.2d 664, 666-67 (1995).
In this case, Andrews II contends that the writs of fieri facias issued pre-petition created a lien which has attached both to the payments from Tarmac and to the proceeds from the settlement with Shaw Pittman. This argument is grounded in Va.Code § 8.01-501, which in pertinent part provides:
Every writ of fieri facias shall ... be a lien from the time it is delivered to the sheriff ... to be executed, on all the personal estate of or to which the judgment debtor is, or may afterwards and on or before the return day of such writ become, possessed or entitled, in which, from its nature is not capable of being levied on____
*721Andrews II construes the term “personal estate” as encompassing “a debt payable in the future and ... all choses in action to which a debtor may be entitled.” In re Lamm, 47 B.R. 364, 367 (E.D.Va.1984). Insofar as both the debt owed by Tarmac and the claim against Shaw Pittman arose “on or before the return date” of the writs, Andrews II concludes that the funds which have flowed from these property interests of the debtor remain subject to his lien.
The question before this court, therefore, is whether the lien created by a writ of fieri facias under Va.Code § 8.01-501 attaches to a debt which will be paid in future installments and to a chose in action. While the dicta from Lamm appears to be precisely on point, the court thinks it important to make an independent inquiry into the Virginia case law upon which the district court relied. See United States Fire Ins. Co. v. Harris (In re Harris), 155 B.R. 135, 136 (Bankr.E.D.Va. 1993), aff'd, 162 B.R. 466 (E.D.Va.1994) (maintaining that, “[wjhile a district court’s ruling should be given deference, it is not necessarily controlling on this court under the stare decisis doctrine”); Gould v. Bowyer, 11 F.3d 82, 84 (7th Cir.1993) (holding that “[a] district court decision binds no judge in any other case, save to the extent that the doctrines of preclusion (not stare decisis) apply”); Carolina Clipper, Inc. v. Axe, 902 F.Supp. 680, 684 n. 3 (E.D.Va.1995) (noting that, “where a court does not squarely address the issue at hand, dictum should not be relied upon as dispositive on the issue as it was not the question before the court”).
The Payments from Tarmac
With regal’d to the payments from Tarmac, the court must consider whether a debtor’s “personal estate” under Va.Code § 8.01-501 includes a debt which, while in existence “on or before the return date,” will not be repaid until after the return date. The seminal decision on this issue is Boisseau v. Bass’ Adm’r, 100 Va. 207, 40 S.E. 647 (1902). In Boisseau, the Virginia Supreme Court of Appeals held that an insured does not have the requisite possessory interest in a life insurance policy which has no present market value and which is dependent for its continued existence on the insured’s voluntary payment of future premiums. In reaching this result, the court ruled: “When a debt has a present existence, although payable at some future day, it is subject to the lien of a fi. fa., and may be reached by garnishment or other appropriate proceeding; but the rule is otherwise where the debt rests upon a contingency that may or may not happen, and over which the court has no control.” Id., 100 Va. at 210, 40 S.E. 647.
In the case before this court, the debt owed by Tarmac to the debtor arose well before the return date of the writs on July 17, 1989 — the date on which the parties entered into the non-competition agreement. Having thoroughly inspected that agreement, the court finds that this $1,000,000.00 obligation was absolute. In other words, while made “in consideration for” the debtor’s promise not to compete, Tarmac’s financial covenant was not “contingent upon” the debt- or’s performance. Even if the debtor prematurely began to compete in contravention of the agreement, Tarmac remained bound to pay its quarterly installments in full until injunctive relief could be obtained or until the burden of proving a right of setoff could be carried.
NationsBank makes much of the fact that, aside from the first installment of $62,500.00, Tarmac did not have a duty to remit any funds to the debtor until after the return date of the writs had passed. NationsBank therefore maintains that, prior to filing his bankruptcy petition, the debtor became “possessed” of and “entitled” to only that single payment from Tarmac. The court, however, already has noted that the lien established under Va.Code § 8.01-501 attaches to a debt which is owed by a third party to the debtor and which arises prior to the return date of the writ, even though payment on that debt will not be received by the debtor until after the return date. Moreover, while it is true that the return date limits both the time in which a summons in garnishment might be issued as well as the life-span of the writ itself, NationsBank erroneously presumes that the return date similarly circumscribes the lien created by the writ.
*722Pursuant to Va.Code § 8.01-505, the lien which arises from a writ of fieri facias persists until
the right of the judgment creditor to enforce the judgment by execution or by action, or to extend the right by motion, ceases or is suspended by a forthcoming bond being given and forfeited or by other legal process. Furthermore, as to all such intangibles the lien shall cease upon the expiration of the following periods whichever is the longer: (i) one year from the return day of the execution pursuant to which the lien arose, or (ii) if the intangible is a debt due from, or claim upon, a third person in favor of the judgment debtor or the estate of such third person, one year from the final determination of the amount owed to the judgment debtor.
Since the court has no evidence that Tarmac ever disputed the amount owed under the non-competition agreement, the longer of the two periods in this case is one year from the return date of the writs. This translates as follows: (1) with regard to the Guaranty Judgment, the lien would have expired under Virginia law on June 22, 1993; (2) with regard to the Line of Credit Judgment, the hen would have expired under Virginia law on October 26, 1993; and (3) with regard to the Lone Oak Judgment, the lien would have expired under Virginia law on June 22, 1993.
The debtor’s filing of his bankruptcy petition on October 17, 1992, however, suspended such an operation of Virginia law. In Homeowner’s Fin. Corp. v. Pennington (In re Pennington), 47 B.R. 322, 327 (Bankr.E.D.Va.1985), the court held that, “if a creditor’s lien is extant under state law prior to commencement of the bankruptcy, the hen remains viable even if under the terms of the law creating the hen it would expire absent some action of the creditor.” A creditor in bankruptcy, therefore, is not “obliged to seek relief from the stay in order to seek a new writ of fieri facias to keep the hen in effect” post-petition.
The court therefore concludes (1) that the debtor’s “personal estate” included his right to the payments owed by Tarmac under the non-competition agreement; (2) that, under the standard set forth in Boisseau, the hen created by the pre-petition writs of fieri facias attached to this interest and to all the payments received from Tarmac prior to the lien’s extinction; and (3) that, pursuant to the decision in Pennington, the hen has not been terminated by the operation of Virginia law but instead has remained in effect throughout the course of the debtor’s bankruptcy case.4
The Claim Against Shaw Pittman
With regard to the malpractice claim against the Shaw Pittman law firm, the court must consider whether a debtor’s “personal estate” under Va.Code § 8.01-501 includes a chose in action which arose prior to the execution of a writ of fieri facias. Dicta in opinions from several federal courts in Virginia hint that this question should be answered in the affirmative. See Lamm, 47 B.R. at 367; Canfield v. Simpson (In re Jones), 47 B.R. 786, 788-89 (Bankr.E.D.Va. 1985); In re Dulaney, 29 B.R. 79, 82 (Bankr.W.D.Va.1982). In addition, a well-respected treatise on Virginia law states quite succinctly that “[t]he lien of a fieri facias includes all choses in action to which the debtor is entitled.” 8A Miehie’s Jurisprudence of Virginia and West Virginia Executions § 32 (1977).
All of these authorities directly or indirectly rely for their position on Evans v. Greenhow, 56 Va. (15 Gratt.) 153, 162 (1859), where the Virginia Supreme Court of Appeals ruled that a lien upon a chose in action could be acquired under the predecessor to Va.Code § 8.01-501. At least one federal court, however, has found cause to question the continuing vitality of this decision. In Eanes v. Shepherd, 33 B.R. 984 (W.D.Va.1983), rev’d on other grounds, 735 F.2d 1354 (4th Cir. 1984), the district court considered whether a debtor could exempt from the bankruptcy estate a personal injury cause of action. When the creditors contended that their writ *723of fieri facias had created a lien which attached to the debtor’s chose in action, the court noted that the theory was “necessarily premised upon the ground that Virginia Code § 8.01-501 is broad enough to include” such an interest. Id. at 988. The court then turned to Boisseau and noted that the Virginia Supreme Court of Appeals had “specifically excluded contingent claims as property subject to the lien under Va.Code § 8.01-501.” Id. The court thus concluded that the lien does not extend to contingent and unliquidated causes of action.
I can conceive of no other reasonable reading or construction of the language employed in Boisseau, and therefore, I must concur with the conclusion reached by the district court in Banes. This court holds, then, that the Virginia Supreme Court would consider Boisseau as having effectively overruled Evans to the extent that the debtor’s “personal estate” under Va.Code § 8.01-501 was deemed to encompass a chose in action. See Powell v. United States Fidelity & Guar. Co., 855 F.Supp. 858, 861 (E.D.Va.1994), aff'd, 88 F.3d 271 (4th Cir.1996) (noting that, when considering an issue of Virginia law, a federal court must ascertain the ruling which the Virginia Supreme Court would make on the same issue). Applying the holding to this case, the court finds that the lien held by Andrews II does not extend to the proceeds of the settlement reached between the Chapter 7 trustee and Shaw Pittman.
Conclusion
For the reasons set forth above, then, the court will enter a separate order (1) overruling NationsBank’s objection to the extent that Andrews II asserted a claim secured by a lien on the non-competition payments received from Tarmac and (2) sustaining NationsBank’s objection to the extent that Andrews II asserted a claim secured by a lien on the proceeds from the Chapter 7 trustee’s settlement with Shaw Pittman.
ORDER
On May 7, 1997, the court held a hearing on an objection filed by NationsBank, N.A. to a claim against the bankruptcy estate which had been assigned by First American Bank of Virginia to John A. Andrews II. After the parties stipulated to the facts underlying this matter, the court heard oral argument from counsel and then took the matter under advisement. For the reasons set forth in the memorandum opinion accompanying this order, the objection will be overruled in part and will be sustained in part.
IT IS THEREFORE ORDERED that the claim, assigned by First American' Bank of Virginia to John A. Andrews II, is secured by lien on the payments made by Tarmac Mid-Atlantic, Inc. under a non-competition agreement with the debtor dated July 17, 1989, and
IT IS FURTHER ORDERED that the claim, assigned by First American Bank of Virginia to John A. Andrews II, is not secured by hen on the proceeds from the post-petition settlement of a malpractice claim asserted by the debtor against the law firm of Shaw Pittman Potts & Trowbridge.
. In its objection filed on April 10, 1997, NationsBank had questioned both the amount of the claim and the classification of the claim as secured. On May 1, 1997, however, Andrews II amended the amount of his claim to conform with NationsBank's objection. In proposed findings of fact and conclusions of law submitted on June 6, 1997, NationsBank acknowledged that its objection to the amount has become moot and *720indicated that only its objection to the claim’s secured status remains outstanding.
. Under the non-competition agreement. Tarmac promised to pay the debtor $1,000,000.00 in quarterly installments of $62,500.00 plus interest at the rate of 10%. Only one installment was paid, however, prior to October 1992.
. The court approved this settlement in an order entered on April 2, 1997.
. This lien was perfected when the writs of fieri facias were delivered to the Sheriff of Fairfax County to be executed. In re Wilkinson, 196 B.R. 311, 319 (Bankr.E.D.Va.1996). Therefore, the interest of Andrews II in the Tarmac payments is superior to that of the Chapter 7 trustee as a hypothetical lien creditor under 11 U.S.C. § 544. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492594/ | MEMORANDUM OPINION
LETITIA Z. CLARK, Chief Judge.
The court has heard the Motion for Emergency Relief from Stay of Borokini Investment Corporation and Oluwafemi Iroh Against Punlabs Quality Products, Ltd. (Docket No. 8) and the Original Petition In Intervention (Docket No. 20) filed by Ebony Pharmaceutical Manufacturing, Inc. and National Commerce Corporation. After considering the pleadings, evidence, and arguments of counsel, the court makes the following Findings of Fact and Conclusions of Law, and will enter a separate Judgment wherein the automatic stay will lift. The intervention was allowed. To the extent any of the Findings of Fact herein are construed to be Conclusions of Law, they are hereby adopted as such. To the extent any of the Conclusions of Law herein are construed to be Findings of Fact, they are hereby adopted as such.
Findings of Fact
1. Punlabs Quality Products, Ltd, Debtor, filed its voluntary Chapter 11 petition on June 19, 1996 and currently operates a pharmaceutical manufacturing business that makes generic and over the counter drugs for various wholesale customers. (Docket No. 1; Testimony of Nwangwu).
2. The property made the subject of this motion is real property improved with a nonresidential commercial building located at 10960 Staneliff Road, Houston, Texas. The property was originally purchased by Ebony, in 1992 or 1993, at what was represented to be a purchase price of $436,000.00 and subsequently transferred to National Commerce Corporation, (“NCC”). The record is not clear as to how much has actually been paid toward the purchase price, nor the source of those funds. The only evidence on this subject, the testimony of Nwangwu, is neither complete nor credible. (Brief of Debtor In Opposition to Motion for Relief; Testimony of Nwangwu).
3. Debtor and National Commerce Corporation entered into a lease agreement for the property in June, 1994 for a ten year period at $1,000.00 per month. (Movants Exhibit No. 16).
4. In August, 1994, Borokini Investment Corporation, (“Borokini”), made a loan in the amount of $300,000.00 to Ebony Pharmaceutical Corporation, (“Ebony”), which was secured by a deed of trust on the real property owned by National Commerce Corporation. Debtor and Dr. Peter U. Nwangwu were guarantors of Borokini’s loan to Ebony. (Testimony of Iroh; Movant’s Exhibits 12-14).
5. As part of the loan agreement, Debtor signed a Subordination and Attornment Agreement for the benefit of Borokini where*725in the lease is subordinate to the liens of Borokini. (Movants’ Exhibit B; Debtor’s Exhibit 15).
6. Peter U. Nwangwu, a doctor of pharmacology, is the President of Debtor, NCC and Ebony. He appears to own 100% of the stock of each, but the record is not clear on this. Borokini Investment Corporation, Inc. is a corporation whose stock is solely owned by Oluwafemi Iroh who is also the President and Secretary of the corporation. (Testimony of Iroh).
7. Ebony defaulted on the loan made by Borokini and since August 1995, no monies have been paid to Movants. (Testimony of Iroh and Nwangwu). On March 5, 1996 Borokini foreclosed upon the property and as the highest bidder, at the sum of $200,000.00, was issued a Substitute Trustee’s Deed. (Movant’s Exhibit 1A). At the time of foreclosure, the amount owed on the original $300,000.00 loan was approximately $384,-143.97 in addition to other sums for unpaid property taxes owing by NCC. (Movants’ Exhibit 1A).
8. Debtor failed to vacate the premises and Movants filed a state court suit for forcible detainer, recovery of rents and recovery of premises. (Movants’ Exhibit 1). On April 25,1996, the Justice Court of Harris County, Precinct 5, Place 1 rendered an Order sustaining Movants’ request for forcible detainer and ordering Debtor to surrender the premises by May 1, 1996. This Order became a final judgment on May 25, 1996. (Movants’ Exhibit 2). Debtor’s bankruptcy was filed on June 19,1996. (Docket No. 1).
9. Ebony and NCC filed an Original Petition In Intervention (Docket No. 20) seeking to intervene in the Movants’ Motion for Relief from Stay. At the hearing on the Motion for Relief, the court orally allowed the intervention and participation of Ebony and NCC.
10. Movants filed the present motion on an emergency basis on grounds that Mr. Iroh is in severe financial distress and is in peril of losing his own family’s home to foreclosure as a result of his dependence on the quarterly interest income from the $300,000.00 loan and the anticipated repayment of the principal in August, 1996. (Movants’ Exhibits 4 through 8; Testimony of Iroh).
11. Debtor has yet to surrender the premises and has failed to pay property taxes since 1992 or to maintain insurance coverage as is required under the terms of the Deed of Trust. (Testimony of Iroh and Nwangwu; Movants’ Exhibits 8 through 10, and 14).
12. Iroh agreed to and made arrangements with taxing authorities to pay the taxes in installments. (Movants’ Exhibits 4 through 6, and 10). In May 1996, Iroh paid approximately $13,000.00 with approximately another $16,000.00 being owed. (Testimony of Iroh; Movants’ Exhibit 10).
13. Iroh was unable to make the second installment of approximately $16,000.00 for the taxes and as a result, a judgment for past due taxes was rendered against Movants. The property was ordered to be sold for unpaid taxes. (Movants’ Exhibits 8; Testimony of Iroh).
14. Nwangwu admitted that the taxes were not paid and that he had been served ■with the tax suit. He claims that he made specific arrangements with the taxing authorities to pay the taxes due; however, upon further examination, he admitted he had only given a proposed schedule of payments and planned to include them in a plan of reorganization. (Testimony of Nwangwu). The court did not find his testimony of intent to pay the taxes credible.
15. As to providing insurance coverage, Debtor has failed to maintain same and also refused to allow an inspection of the property by insurance representatives sent by Iroh. (Movants’ Exhibit 9; Testimony of Iroh). Although Nwangwu testified that the building is insured and that he gave the Certificate of Insurance to the United States Trustee, he failed to submit a copy of same into evidence. (Testimony of Nwangwu). Nwangwu was not a credible nor a forthcoming witness. The evidence before the court does not demonstrate insurance coverage on the property.
16. The court takes judicial notice of the Debtor’s bankruptcy petition and schedules and notes that assets are valued at $2.271 *726million and liabilities total $925,145.00. The assets are comprised of the value of the pharmaceutical licenses and certifications, office equipment, manufacturing equipment and accessories, and inventory and raw material. Schedule A, “Real Property”, contains no listings of any real property owned by the Debtor. (Schedule A, Docket No. 1). Schedule F, “Creditors Holding Unsecured Nonpriority Claims”, includes a contingent claim of $108,000 to NCC for accumulated rent on the building lease from January, 1995 to June, 1996. (Schedule F, Docket No. 1).
17. The court finds Iroh to be a credible witness. Iroh testified, without objection, that Nwangwu told him that Nwangwu “would tie up the property for years” in court. The court finds this an indication of bad faith on the part of Debtor in addressing Debtor’s failure to pay rent, and Ebony’s failure to pay interest on the loan. (Testimony of Iroh).
18. The court finds that the totality of the actions of Debtor, Ebony and NCC in connection with the subject property (not paying rent or property taxes, not maintaining insurance, failing to allow access in order to have the property insured, failing to vacate the premises and failing to pursue the appeal of the state court forcible detainer suit, among others) in addition to the statement by Nwangwu to Iroh of his intent to tie up the property for years is indicative of delay tactics and abuse of the bankruptcy process.
19. The court finds that the Debtor has not met its burden of proof as to its ability to reorganize. Although Nwangwu testified that there exist some viable contracts in addition to potential proposed contracts, the evidence reflects only three contracts which are presently in effect, those being with the Veterans Administration, Defense Personnel Support Center, and the City of Houston. There was no evidence as to any products sold to or income stream from these institutions or profits generated by Debtor. (Testimony of Nwangwu; Debtor’s Exhibits 15 through 20, 22 through 28).
20. The court finds that there was no evidence submitted by Debtor relating to the success of the present contracts nor of Debt- or’s being able to turn the potential contracts into reality. Dr. Nwangwu’s testimony was evasive and grounded in hopes rather than in any solid data.
21. Although Debtor believes the property is worth $500,000.00, Exhibit A to the tax judgment reflects the market value of the property ranging from $229,310.00 for tax year 1994 to $183,000.00 for tax years 1993 through 1995. (Testimony of Nwangwu; Movants’ Exhibit 8).
22. Dr. Nwangwu testified that adequate protection could be provided to Movants on the basis that Debtor owned enough assets to provide equity, and Debtor would make some form of periodic payments. (Testimony of Nwangwu). However, the court finds no equity (nor indeed title) in the property in Debtor, and Debtor failed to submit any evidence as to the source of income and/or the amount of any proposed payments.
23. The court finds that Movants have established the Debtor’s lack of equity in the property and Debtor has not sustained its burden of proof on all other issues. The automatic stay should be lifted, permitting Movants to pursue whatever remedies are available to them in any available forum.
Conclusions of Law
1. Pursuant to Bankruptcy Rule 2018(a), the court may permit any interested entity to intervene generally or with respect to any specified matter.
2. When a creditor seeks relief from stay in order to foreclose on property, the creditor has the burden of establishing the Debt- or’s lack of equity in the property. The Debtor has the burden of proof on all other issues, including adequate protection, and a necessity of property for an effective reorganization. Absent this evidence, the stay is lifted. 11 U.S.C. § 362(g); See Matter of Canal Place Ltd. Partnership, 921 F.2d 569 (5th Cir.1991); In re Boomgarden, 780 F.2d 657 (7th Cir.1985).
3. To be necessary to an effective reorganization, it is not enough that the property be essential if any reorganization is to be effected. Instead, the Debtor must show that a reorganization can actually be *727achieved within a reasonable period of time. In re Outlook/Century Ltd., 127 B.R. 650 (Bankr.N.D.Cal.1991).
4. The court concludes that the Movants have met their burden in showing that the Debtor has no equity in the property. Further, the Debtor has failed to demonstrate that an effective reorganization is possible.
5. The court concludes further that the Debtor has failed to demonstrate that there is adequate protection to be provided to these creditors.
Based on the foregoing, the court will enter a separate Judgment granting the Motion for Emergency Relief from Stay of Borokini Investment Corporation and Oluwafemi Iroh Against Punlabs Quality Products, Ltd. (Docket No. 8) and allowing Movants to pursue and exercise all of their rights and remedies against the collateral in any available forum.
JUDGMENT
The court has heard the Motion for Emergency Relief from Stay of Borokini Investment Corporation and Oluwafemi Iroh Against Punlabs Quality Products, Ltd. (Docket No. 8) and pursuant to this Court’s Findings of Fact and Conclusions of Law signed this same date, it is
ORDERED that the Motion for Emergency Relief from Stay of Borokini Investment Corporation and Oluwafemi Iroh Against Punlabs Quality Products, Ltd. (Docket No. 8) is granted and it is further
ORDERED that the stay is vacated to permit Borokini Investment Corporation and Oluwafemi Iroh to pursue and exercise all of their rights and remedies against the collateral in any available forum. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492596/ | MEMORANDUM DECISION
MARGARET DEE MeGARITY, Bankruptcy Judge.
I. INTRODUCTION
This matter came before the court upon a motion by the debtor, Came Elst, to avoid the lien on certain personal goods under 11 U.S.C. § 522(f)(1)(B). The secured creditor, Avco Financial Services, objected to the motion on the grounds that the claimed items were not “household goods” as defined in 11 U.S.C. § 522(f)(l)(B)(i), and the lien was not avoidable under that statute. The court held a preliminary hearing on Avco’s objection to the motion on March 4, 1997. At that time, the court took the matter under advisement, with the proviso that the court could schedule an evidentiary hearing if evidence appeared to be necessary. The parties agreed to that procedure. As discussed below, the court is satisfied that evidence is not necessary, as the ordinary use of the items in question is well within the court’s experience. The parties have not suggested that the debtor’s use is out of the ordinary. Thus, the court can determine as a matter of law whether the relevant items are household goods as that term is used in 11 U.S.C. § 522(f)(5)(l)(B)(i).
This court has jurisdiction over these parties pursuant to 28 U.S.C. § 1334. This is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(E).
II. FACTS
Avco Financial Services acquired as security for a loan extended to Ms. Elst a nonpossessory, nonpurchase-money security interest in certain items of Ms. Elst’s personal property, including a Vantara GT Bicycle and 35” Magnavox Television. Ms. Elst subsequently filed for bankruptcy protection under Chapter 7. During the pendency of the bankruptcy proceedings, Ms. Elst filed a motion to avoid the lien against the bicycle, television, and other items pursuant to 11 U.S.C. § 522(f)(1)(B). Avco filed an objection to the motion to avoid lien on the grounds that the debtor’s bicycle and television, which the debtor acknowledges is the second television *792set in the household, do not qualify as “household goods” under § 522(f)(l)(B)(i). Objections as to other items have been resolved by the parties.
III. ANALYSIS
The court believes this issue may appropriately be decided as a matter of law. There are no contested issues of fact; the inquiry is one of semantics and statutory construction of 11 U.S.C. § 522(f).
In order for Ms. Elst to successfully avoid the lien on her property, she must satisfy the criteria set forth in 11 U.S.C. § 522(f): (1) the interest in the property is encumbered by a nonpossessory, nonpurehase-money security interest; (2) the encumbered items of property are household furnishings, household goods, or appliances that are held primarily for the personal, family, or household use of the debtor or a dependent of the debtor; (8) the property is exempt; and (4) the lien impairs an exemption to which the debtor would have been entitled. In order to qualify as household goods, eligible items must be “held primarily for the personal, family, or household use of the debtor or a dependent of the debtor” within the meaning of 11 U.S.C. § 522(f)(l)(B)(i). Whether a bicycle or an extra television set, two very common items held by many debtors, qualify for lien avoidance has not been definitively determined in the Seventh Circuit.
The Fourth Circuit Court of Appeals has provided a thorough discussion of the definitions traditionally applied in similar cases and concludes that “ ‘household goods’ under section 522(f)[ (l)(B)(i) ] are those items of personal property that are typically found in or around the home and used by the debtor or his dependents to support and facilitate day-to-day living within the home, including maintenance and upkeep of the home itself.” In re McGreevy, 955 F.2d 957, 961-62 (4th Cir.1992).
The McGreevy court notes that bankruptcy courts have traditionally adhered to one of two different definitions of “household goods.” Id. at 959. The first and most restrictive definition focuses not only on the use of the items in question, but also upon the necessity of the goods to the debtor as he emerges from bankruptcy. This definition includes “only those goods that are found and used in or around the debtor’s home and that are necessary to a debtor’s fresh start after bankruptcy.” Id. (citing McTearnen v. Associates Financial Services Co. of Colorado, Inc., 54 B.R. 764, 765 (Bankr.D.Colo.1985) (bicycle not household good)). Some courts also require that the item be of limited resale value in order to be considered a “household good.” Id. at 959 n. 5 (citing Matter of Reid, 97 B.R. 472, 478 (Bankr.N.D.Ind.1988) (bicycle not household good)).
The second definition also focuses on use of the items and is more inclusive. This “proximity” definition includes “all goods typically found and used in or around the home, whether or not they would be considered strictly necessary to a debtor’s fresh start.” McGreevy, 955 F.2d at 960 (citing In re Miller, 65 B.R. 263, 265-66 (Bankr.W.D.Mo.1986) (television household good; bicycle not household good)). However, this “proximity” definition of household use actually has two branches. One requires that the items be used in and around the home, making proximity to the home during use by the debtor the only requirement for status as a household good. The other branch allows use away from the home. This latter branch includes “ ‘personal property that enables the debtor and his dependents to live in a usual convenient and comfortable manner or that has entertainment or recreational value ... even though it is used away from the residence or its curtilage.’” Id. at 960 n. 8 (quoting In re Bandy, 62 B.R. 437, 439 (Bankr.E.D.Cal.1986) (televisions household goods)); see also In re Courtney, 89 B.R. 15, 16 (Bankr.W.D.Tex.1988) (bicycles household goods); In re Ray, 83 B.R. 670, 673 (Bankr.E.D.Mo.1988) (bicycles household goods). The McGreevy court criticized cases allowing use away from the home because “Congress provided lien avoidance for ‘household goods,’ not for all ‘goods.’ ” McGreevy, 955 F.2d at 960 n. 8.
According to the Fourth Circuit, the “necessity” definition is underinclusive “because some goods are used to support and facilitate daily life within the home that are not strictly *793necessary to day-to-day living.” It found both branches of the “proximity” definition overinclusive; specifically, the focus only on proximity to the home was too broad “because some goods are found and used within the home that are not used to support and facilitate home life.” McGreevy, 955 F.2d at 961.
The McGreevy court preferred a determination, for purposes of § 522(f), that the goods are actually used to support and facilitate daily life within the house. There must be a “functional nexus between the good and the household.” Id. This court favors the nexus approach. This court is also of the view that a household good is one used in and around the home — not away from it. Application of the McGreevy test requires a determination of whether the items at issue are actually used to support and facilitate daily life within the house. Whether or not an item constitutes a household good “will necessarily depend in whole or in part upon the cultural environment of the debtor or the geographic location of the debtor’s household.” Id. at 962.
This court does not believe that the debtor’s bicycle facilitates and supports day-to-day living within the household. A bicycle may enhance the lifestyle of a debtor, much like hunting, fishing or camping equipment. Nevertheless, a bicycle is not used in the house and thus does not have a household purpose. Because the debtor’s bicycle does not qualify as a household good, § 522(f)(B)(i), it is not subject to lien avoidance.
Regarding the debtor’s television, the McGreevy court noted that an item need not be strictly necessary for daily living in order to qualify as a household good under this standard. See id. at 961. A bankruptcy court for the Eastern District of Tennessee followed the reasoning of McGreevy and determined that the debtor’s VCR was exempt because it was used for personal entertainment within the household, as opposed to professional or commercial use. In re French, 177 B.R. 568, 572 (Bankr.E.D.Tenn. 1995); see also Fraley v. Commercial Credit, 189 B.R. 398, 400 (W.D.Ky.1995) (stereo, aquarium and camcorder qualified as household goods even though not essential to survival). Similarly, the television facilitates and supports day-to-day living by providing entertainment for the debtor. Avco claims that because the debtor has another television set, the 35” Magnavox does not facilitate home life. Section 522(f)(1)(B) allows the debtor to avoid a nonpossessory, nonpurchase-money security interest in any household goods; i.e., any goods that fulfill a household purpose. The number of similar items is not necessarily determinative of whether or not the particular good is used to support and facilitate daily life within the home. The debtor’s television set, although a second one, presumably provides entertainment and enlightenment to the debtor, her family and guests in a different part of the residence from the first set. This makes it a household good subject to lien avoidance.
IV. CONCLUSION
As discussed above, this court adopts the definition of “household goods” utilized by the Fourth Circuit in In re McGreevy, 955 F.2d 957 (4th Cir.1992). Thus, household goods under § 522(f) are those items of personal property that are typically found in or around the home and used by the debtor or the debtor’s dependents to support and facilitate day-to-day living within the home, including maintenance and upkeep of the house itself. Because the debtor’s bicycle does not support and facilitate day-to-day living within the debtor’s home, it does not qualify as a household good under § 522(f), and is not subject to lien avoidance. Because the debt- or’s television set does support and facilitate daily living within the debtor’s home, it is a household good under § 522(f), and the creditor’s objection to avoidance of the security interest thereon will be overruled. A separate order consistent with this decision will be entered. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492597/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW
GEORGE L. PROCTOR, Bankruptcy Judge.
This proceeding came before the Court upon a complaint objecting to discharge pursuant to 11 U.S.C. §§ 727(a)(2) and (a)(4)(A) and seeking an exception to discharge pursuant to 11 U.S.C. § 523(a)(4). Trial was held on February 7, 1997, April 15,1997 and April 29, 1997. Upon the evidence presented, the Court enters the following Findings of Fact and Conclusions of Law:
FINDINGS OF FACT
1. Dudley D. Allen (Defendant) was a member of the Board of Directors of George Washington Life Insurance Company (GW) from 1982 to 1991. (Adv.Rec.17). Defendant performed attorney services for GW on its individual health and life insurance claims. (Id.).
2. On June 3, 1991, the Circuit Court of Kanawha County of West Virginia entered an Order appointing the Insurance Commissioner of the State of West Virginia, Hanley C. Clark (Plaintiff), Receiver and Liquidator of GW. (Adv. Rec. 17, Ex. 1).
3. On September 3, 1992, Plaintiff sued Defendant and other former directors of GW. (Adv.Rec.17). On July 29, 1993, Plaintiff filed an amended complaint, alleging, inter alia, that Defendant breached his fiduciary duties to GW (Count III), and committed professional negligence (Count IV). (Adv. Ree.17, Ex.2). A two-week trial was held in March and April 1995. (Adv.Rec.17). The Verdict Form framed the issues under Counts III and IV in the following format for the jury to decide:
Count III: Do you find by a preponderance of the evidence that any of the Defendants breached their fiduciary duty to George Washington Life Insurance Company (“GW Life”) by failing to exercise utmost good faith and loyalty in their dealings with GW Life?
Count IV: Do you find by a preponderance of the evidence that any of the Defendants deviated from the appropriate standard of care or were negligent in the performance of their professional services as attorneys for GW Life?
(Adv.Rec.25, Ex. A).
4. On Count III, the West Virginia District Court instructed the jurors as follows: “If you find that the defendants, as officers and directors, did not act in good faith and loyalty in their dealings with G.W. Life, then you may find that they breached their fiduciary duty.” (Adv. Rec. 17, Ex. 3, at 1984). The jurors were also told that: “The director’s duty of good faith forbids placing himself in the position where his individual interest clashes with his duty to the corporation.” (Id.).
5. On Count TV, the jurors were instructed to find that Defendant committed professional malpractice or negligence if: (i) Defendant did not perform services as an attorney for GW at the level required by the standard of care; (ii) Defendant violated any ethical rules that define the minimum level of professional conduct required by attorneys to *864their clients; or (iii) Defendant’s law partner was negligent in his performance of his duties to the corporation. (Id. at 1989-91).
6. The jury found Defendant liable on Counts III and IV and apportioned his fault at ten percent (10%). (Adv.Rec.25, Ex. A). On April 10, 1995, the jury entered a verdict and awarded $4,629,188 in damages on Count III, and $8,986,070 in damages on Count IV, totalling $13,615,258. (Id.). On July 7,1995, the West Virginia District Court reduced the total award of damages to $6,198,591.34, and entered a Final Judgment Order accordingly. (Adv.Ree.17, Ex.6). Although Defendant was found ten percent at fault on both the breach of fiduciary duty and professional negligence counts, he was held jointly and severally liable for the full amount of the judgment. (Id. at 6).
7. On September 26, 1995, the West Virginia District Court’s judgment was registered in the United States District Court of the Middle District of Florida. (Main Case Doc. 38).
8. On November 16, 1995, the Plaintiff moved the West Virginia District Court to order Defendant to liquidate and distribute a Merrill Lynch IRA valued at $2,778.87, and a Mass Mutual Variable Annuity Contract (“Mass Mutual IRA”) held in Defendant’s Individual Retirement Account valued at $142,068.74. (Main Case Doc. 38). On January 11, 1996, the West Virginia District Court granted the Motion. (Id.).
9. On February 1, 1996, Defendant filed his petition for relief under Chapter 7 of the Bankruptcy Code. (Main Case Doc. 1).
10. On March 21, 1996, Plaintiff filed an objection to Defendant’s claim of exemptions, and on June 3, 1996, objected to Defendant’s Amended claim of exemptions. (Main Case Docs. 11,18). The grounds of Plaintiffs objections were fraudulent conversion, certain funds were not property of the estate, and certain properties were not exempt (Main Case Doc. 37). Plaintiff also objected to the Mass Mutual IRA and the Merrill Lynch IRA on the additional ground that the West Virginia District Court ordered the Defendant to liquidate the IRAs and turn over the cash proceeds to Plaintiff; therefore, the IRAs were not property of the estate. (Main, Case Doc. 11).
11. This Court held a hearing on Plaintiffs objection to Defendant’s claim of exemptions on July 18 and 19, 1996, and subsequently ruled, inter alia, that the Mass Mutual IRA was exempt under Florida Statute § 222.14. (Def.’s Ex. 46^47; In re Allen, 203 B.R. 786 (Bankr.M.D.Fla.1996)).
12. On May 7, 1996, Plaintiff filed this proceeding objecting to Defendant’s discharge and to determine dischargeability of debt pursuant to 11 U.S.C. §§ 523(a)(4) and 727(a)(2)(A). (Adv.Rec.l). On October 3, 1996, the Court allowed Plaintiff to amend his complaint, adding Counts III and IV pursuant to 11 U.S.C. §§ 727(a)(2)(B) and (a)(4) respectively. (Adv.Rec.21).
13. Count I of the Amended Complaint alleges that Defendant’s discharge should be denied pursuant to 11 U.S.C. § 727(a)(2)(A) because he transferred property to his wife within a year of filing his petition with the intent to delay and defraud his creditors.
14. Count II of the Amended Complaint alleges that the West Virginia District Court Final Judgment in the amount of $6,189,-591.34 is nondischargeable pursuant to 11 U.S.C. § 523(a)(4) on the basis of collateral estoppel. Plaintiff and Defendant moved for summary judgment on Count II of the complaint. A hearing was held on November 13, 1996, and the Court denied both Motions for Summary Judgment. (Adv.Rec.35-36).
15. Count III of the Amended Complaint alleges that Defendant’s discharge should be denied pursuant to 11 U.S.C. § 727(a)(2)(B) because he transferred property after the filing of the petition with the intent to delay arid defraud his creditor.
16. Count IV of the Amended complaint alleges that pursuant to 11 U.S.C. § 727(a)(4)(A) Defendant knowingly and fraudulently failed to list his interest in a contingency fee agreement on Schedule B of his bankruptcy petition.
17. Trial was held or February 7, 1997, April 15,1997 and April 29,1997.
*865
The Mass Mutual Variable Annuity IRA Contract
18. Defendant is the annuitant, insured, owner and payee of the Mass Mutual IRA. (Def.’s Ex. 41). Defendant’s wife, Lenorah J. Allen (Mrs. Allen) is the primary beneficiary. (Id.). On November 19, 1995, while preparing for the hearing on Plaintiffs Motion for Turnover of the Merrill Lynch and Mass Mutual IRAs to be heard before the United States District Court in West Virginia, Defendant discovered that the original annuity contract had to be surrendered in order for Mrs. Allen to collect the death benefits provided in the contract. (Tr. 25-34).
19. That evening, Defendant gave an envelope to Mrs. Allen with the Mass Mutual IRA enclosed and asked her place it in the safety deposit box. (Id.). Mrs. Allen complied. (Id.). Defendant later argued before the West Virginia District Court that his wife has a possessory lien in the Mass Mutual IRA and could not be compelled to turn it over. (Id.). At this trial, Mrs. Allen testified that she would only turn over the IRA to Defendant under dire circumstances. (Tr. 169). Mrs. Allen states that the purpose of the IRA is to educate the couple’s son. (Id.).
Dudley D. Allen, P.A. Shares of Stock
20. From 1982 to 1995, Defendant was a partner with Wilbur & Allen, P.A. (Tr.36). On March 24,1995, the law firm of Dudley D. Allen, P.A., was formed. (Tr. 36). Currently, the law firms of John H. Wilbur, P.A. and Dudley D. Allen, P.A. are partners. (Tr. 38). When asked why separate law firms were established, Defendant responded that it was something he and his former partner, John H. Wilbur, wanted to do for a long time and recently had the opportunity to do so. (Tr. 250-51). Defendant assured the Court that his law firm was not established to affect the Plaintiffs claim or lawsuit because the Plaintiff has a claim against Defendant, not the firm. (Id.).
21. On January 2, 1986, Wilbur & Allen, P.A. sold their office furniture to Mrs. Allen. (Def.’s Ex. 1). The lease term was for four years, and Wilbur & Allen, P.A. was the primary obligor. (Id.) She sold, discarded, and leased back some of the furniture to the law firm. (Tr. 159). On April 24, 1995, Wilbur & Allen, P.A. sold its law books to Mrs. Allen, and then leased them back from her. (Def.’s Ex. 9,13). The equipment lease was amended and renewed on June 13, 1994, and on June 26, 1996. (Def.’s Ex. 7-8; Tr. 38-39)
22. On December 11, 1995, Mrs. Allen and Defendant entered into an agreement entitled “Assumption of Leases Obligations by P.A., Guaranty of Performance by Shareholder, Pledge of stock by Shareholder.” (Def.’s Ex. 14). Pursuant to this agreement, Mrs. Allen gave the Dudley D. Allen, P.A. permission to use the equipment, furniture and library books which she was leasing to Wilbur & Allen. (Id.). Dudley D. Allen, P.A. in turn agreed to pay and perform all obligations of Wilbur & Allen under the Leases. (Id.). Defendant, the sole shareholder of Dudley D. Allen, P.A., then guaranteed the performance of the law firm by delivering to Mrs. Allen his stock certificate for 100 shares of stock as security. (Id.). Mrs. Allen is allowed to keep the pledged stock as security for performance and guarantee until all obligations under the Leases have been fully performed. (Id.).
Continyency Fee Contract
23. On June 12, 1993, Williams & Miller, a law firm in Memphis, Tennessee, entered into a contingency fee contract with James T. Ray. (Pl.’s Ex. 19). James T. Ray is the Plaintiff in a personal injury action against CSX Transportation, Inc., a Jacksonville corporation. (Tr. 60).
24. Williams & Miller, in turn, retained Defendant as local counsel. (Pl.’s Ex. 19). At this time, Defendant was a partner with Wilbur & Allen, P.A., but the Wilbur & Allen, P.A.’s name was not printed on the contract, (Id.; Tr. 80-81).
25. The terms of the contingency fee contract was that Williams & Miller would receive thirty-three and one-third percent (33/é %) of the award recovered for the client, and Defendant receives one-third (]é) of the amount Williams & Miller receives. (Tr. 60-61).
*86626. On November 9, 1995, James T. Ray terminated Williams & Miller’s services, and hired a new firm to represent him in his suit against CSX. (Def.’s Ex. 20). The new law firm is Blalock, Blalock & Oros, P.C. (Blalock), a law firm located in Birmingham, Alabama. (Def.’s Ex 21). Defendant, on behalf of Dudley D. Allen, P.A., was rehired and continued as local counsel with Blalock, and adopted the same fee arrangement as with Williams & Miller. (Defs Ex. 24; Pl.’s Ex. 26). On February 2, 1996, Defendant, on Dudley D. Allen, P.A.’s behalf, signed an employment contract with James T. Ray, which was forward to him by the Blalock firm. (Def.’s Ex. 25).
27. On March 3, 1997, the Circuit Court in Duval County held a trial in the case of James T. Ray v. CSX transportation. (Tr. 140). Before, the jury rendered its verdict, the parties settled the case for a reported $590,000. (Tr. 140-41). Pursuant to the contingency fee contract with Blalock, Dudley D. Allen, P.A. is entitled to receive approximately $64,900. (Tr. 141).
28. Defendant did not list this fee agreement with Blalock and James T. Ray on Schedule B of his bankruptcy petition. (Def.’s Ex. 26). Defendant explained that he did not list this information on his schedule because he has no personal interest in the agreement. (Tr. 80). He further explained that Wilbur & Allen, P.A. initially had an interest in the fee agreement, and Dudley D. Allen, P.A. later has an interest in that fee agreement; however, Defendant at no time held an interest in the contingency fee contract individually. (Tr. 81). Also, Wilbur & Allen, P.A. advanced all the costs of the case, and any work he did was on behalf of either Wilbur & Allen, P.A. or Dudley D. Allen, P.A. (Tr. 107).
CONCLUSIONS OF LAW
The Court must determine whether to grant to Defendant’s discharge, and whether to except Plaintiffs debt from Defendant’s discharge. Plaintiff contends that this Court should deny Defendant’s discharge pursuant to 11 U.S.C. §§ 727(a)(2) and (a)(4)(A), which state, in relevant part, that:
(a) The court shall grant the debtor a discharge, unless—
(2) the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed'—
(A) property of the debtor, within one year before the date of the filing of the petition; or
(B) property of the estate, after the date of the filing of the petition;
(4) the debtor knowingly and fraudulently, in or in connection with the case—
(A) made false oath or accountf.]
11 U.S.C. §§ 727(a)(2), (4)(A) (1994).
Plaintiff also seeks an exception from Defendant’s discharge pursuant to 11 U.S.C. § 523(a)(4) on the basis of collateral estoppel. Section 523(a)(4) states, in relevant part, that: “A discharge under section 727 ... of this title does not discharge an individual debtor from any debt ... for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny[.]” 11 U.S.C. § 523(a)(4).
From the outset, the Court notes that the discharge provisions of the Bankruptcy Code are liberally construed in favor the debtor to achieve the congressional intent of giving the honest, but unfortunate debtor a fresh start in life. Bernstein v. Moran (In re Moran), 107 B.R. 359, 361 (Bankr.M.D.Fla.1989). Any other construction would be inconsistent with liberal spirit of the entire bankruptcy scheme. Id.; The Court will address each count of the complaint accordingly.
Count I — Section 727(a)(2)(A)
This Court has previously held that denial of a discharge under section 727(a)(2)(A) requires the objecting party to show:
1. That a transfer occurred;
*8672. That the property transferred was property of the debtor;
3. That the transfer was within one year of petition; and
4. That at the time of the transfer, the debtor possessed the requisite intent to hinder, delay or defraud a creditor.
In re Milam, 172 B.R. 371, 374 (Bankr. M.D.Fla.1994) (quoting I%In re More, 138 B.R. 102, 104 (Bankr.M.D.Fla.l992)J. The objector has the burden of proving by preponderance of the evidence that the four elements have been satisfied. Id.; Fed. R. Bankr.P. 4005.
First, is whether a transfer occurred. Plaintiff argues that two transfers occurred. First, Defendant transferred the Mass Mutual IRA to Mrs. Allen; and secondly, Defendant pledged his shares of stock in Dudley D. Allen, P.A. to Mrs. Allen. An issue exists as to whether Defendant’s act of giving the envelope to Mrs. Allen to place in a safety deposit was an actual transfer. The term “transfer” is defined as “every mode, direct or indirect, absolute or conditional,voluntary or involuntary, of disposing of or parting with property or with an interest in property, including retention of title as security interest and foreclosure of the debtor’s equity of redemption.” 11 U.S.C. § 101(54). The legislative history of section 101(54) teaches that “any transfer of an interest in property is a transfer, including a transfer of possession, custody, or control even if there is no transfer of title because possession, custody, and control are interests in property.” S.Rep. No. 95-989, 95th Cong.2d Sess. 27 (1978), U.S.Code Cong & Admin. News 1978, pp. 5787, 5813. In this proceeding, Defendant admits that he gave his wife a possessory lien in the Mass Mutual IRA. (Tr. 38-40). Also, Defendant pledged his shares of stock in the law firm to his wife. (Def.Ex. 44). Therefore, the element of transfer is satisfied as to the Mass Mutual IRA and Dudley D. Allen, P.A’s stock.
Secondly, is whether the items transferred were property of the Defendant. The record clearly shows that Defendant was the owner of the Mass Mutual IRA and the Dudley D. Allen, P.A.’s stock. (Def.’s Ex. 14, 44). Therefore, this element is also satisfied because the items claimed to be transferred are Defendant’s property.
Thirdly, the transfers must have taken place within one year before the filing of the bankruptcy petition. Defendant gave Mrs. Allen the Mass Mutual IRA on November 19, 1995, approximately three months before the bankruptcy petition was filed on February 1, 1996. (Tr. 2830). Defendant pledged his shares of stock in Dudley D. Allen, P.A. to Mrs. Allen on December 11, 1995, approximately two months before the date of the filing of the petition. (Def.’s Ex. 14). Therefore, this third element is also satisfied because both transfers took place less than a year from the petition date.
Finally, the Court examines whether, at the time of the transfers, Defendant possessed the requisite intent to hinder, delay or defraud his creditors. To satisfy the fourth element, there must be a showing of actual, not constructive, intent. Phillips v. Nipper (In re Nipper), 186 B.R. 284, 288 (Bankr.M.D.Fla.1995). Intent can be ascertained from the totality of the circumstances. Id. This Court has previously used the following “badges of fraud” to determine intent:
1. The lack or adequacy of consideration;
2. The family, friendship or close association between the parties;
3. The retention of possession, benefit or use of the property in question;
4. The financial condition of the party sought to be charged both before and after the transaction in question;
5. The existence or cumulative effect of a pattern or series of transactions or course of conduct after incurring of debt, onset of financial difficulties, or pendency or threat of suits by creditor; and
6. The general chronology of the events and transaction under inquiry.
Id. The Court will determine the intent of the Defendant at the time of each transfer by applying these indicia of fraud.
Mass Mutual IRA
The Court concludes that Defendant did not have the requisite intent to delay, *868hinder or defraud his creditors at the time he transferred the Mass Mutual IRA. Because Mrs. Allen is the primary beneficiary of the Mass Mutual IRA, the issue of consideration needed to take hold of the policy is irrelevant. As to second badge of fraud, Defendant and Mrs. Allen are husband and wife. Next, the third badge of fraud is in Defendant’s favor because Mrs. Allen has possession of the IRA, and has testified that she would only return it to Defendant under dire circumstances. She also stated that the IRA is for the benefit of education the couple’s son. Consequently, Defendant does not retain possession, benefit or use of the IRA. The fourth badge of fraud is in favor of Defendant because his financial condition has not improved since he surrendered the IRA to his wife. The fifth badge is in the Defendant’s favor because the IRA is exempt and creditors would not have access to it, and therefore, the cumulative effect of Defendant’s conduct is minimal. Finally, the general chronology of events indicates that Defendant turned over the IRA to his wife so that her interest, as the primary beneficiary, would become effective. Therefore, examining the totality of circumstances, Plaintiff has not shown that Defendant has actual intent to hinder, delay or defraud his creditors when he surrendered the IRA to his wife.
Moreover, the Court is of the impression that a transfer of an otherwise exempt asset should not be the basis of denying a debtor’s discharge. See T.R. Press v. Whitcomb (In re Whitcomb), 140 B.R. 396, 399 (Bankr.E.D.Va.1992). One of the goals of Chapter 7 is the liquidation of nonexempt assets by the Chapter 7 Trustee for the benefit of the debtor’s creditors. This Court has previously held that the Mass Mutual IRA is exempt under Florida Statute § 222.14. (Def.’s Ex. 46-47). Therefore, the Chapter 7 Trustee could not have obtained this IRA for the benefit of the creditors.
Shares of Stock in Dudley Allen, PA.
However, the Court concludes that the Defendant had the requisite intent to hinder, delay or defraud his creditor when he pledged the Dudley D. Allen, P.A.’s stock to his wife. With the first badge of fraud, there is consideration because Defendant pledged his shares of stock in Dudley D. Allen, P.A. as security for performance of all the obligations of leases the firm assumed. The second factor is in Plaintiffs favor. There is a close relationship between Defendant and transferee because Defendant and Mrs. Allen are husband and wife. The third badge of fraud is also in Plaintiffs favor because Mrs. Allen is not an attorney and Defendant retains ownership and control of the law firm. The fourth badge of fraud, however, is in Defendant’s favor because his financial condition has not changed since he pledged his shares of stock to his wife.
The fifth badge of fraud is in the Plaintiffs favor because the Dudley D. Allen, P.A.’s stock is encumbered. (PL’s Ex. 12, 16). On December 11, 1995, Mrs. Allen and Defendant entered into an agreement entitled “Assumption of Leases Obligations by P.A., Guaranty of Performance by Shareholder, Pledge of stock by Shareholder.” (Def.’s Ex. 14). Pursuant to this agreement, Mrs. Allen gave the Dudley D. Allen, P.A. permission to use the personal property and library books which she was leasing to Wilbur & Allen. (Id.). Dudley D. Allen, P.A. in turn agreed to pay and perform all obligations of Wilbur & Allen under the Leases. (Id.). Defendant, the sole shareholder of Dudley D. Allen, P.A., then guaranteed the performance of the law firm by delivering to Mrs. Allen his stock certificate for 100 shares of stock as security. (Id.). Mrs. Allen is allowed to keep the pledged stock as security for performance and guarantee until all obligations under the Leases have been fully performed. (Id.). Although the Chapter 7 Trustee can pursue Defendant’s interest in the shares of stock on behalf of the creditors, Mrs. Men’s interest in the shares of stock would first have to be satisfied. Therefore, the cumulative effect of Defendant’s course of conduct in the light of his onset of financial difficulties is great.
Finally, the general chronology of events and transaction under inquiry indicate that Plaintiff has obtained a $6,189,591.34 judgment against Defendant, and began execution on that judgment. Facing financial difficulties and wanting to protect non-exempt *869assets from his creditors, Defendant pledged his shares of stock as security for the firm’s performance of all the obligations of the Leases. Consequently, the firm’s receivables is subject to Mrs. Allen’s interest in the shares. After examining the totality of circumstances and having found four of the six badges in Plaintiffs favor, Plaintiff has shown that Defendant had the actual intent to hinder, delay or defraud his creditors when he pledged his shares of stock to Mrs. Allen within two months of the filing of his bankruptcy petition. Therefore, the Court concludes that Defendant’s discharge should be denied pursuant to 11 U.S.C. § 727(a)(2)(A).
Having decided that Defendant’s discharge should be denied pursuant to 11 U.S.C. § 727(a)(2)(A), the Court will not address the other counts of the complaint.
CONCLUSION
Plaintiff has shown by preponderance of the evidence that Defendant’s discharge should be denied pursuant to 11 U.S.C. § 727(a)(2)(A). The Court will enter a Judgment consistent with these Findings of Fact and Conclusions of Law.
JUDGMENT
This proceeding came before the Court upon a complaint objecting to Defendant’s discharge pursuant to 11 U.S.C. § 727(a)(2) and (a)(4)(A), and seeking an exception to Defendant’s discharge pursuant to 11 U.S.C. § 523(a)(4). The trial was held on February 7, 1997, April 15, 1997 and April 29, 1997. Upon Findings of Fact and Conclusions of Law separately entered, it is
ORDERED:
1. Judgment is entered in favor of the Plaintiff Hanley C. Clark, Commissioner of Insurance for the State of West Virginia, in his official capacity as Receiver of George Washington Life Insurance Company, and against Defendant Dudley D. Allen.
2. Plaintiff’s objection to Defendant’s discharge pursuant to 11 U.S.C. § 727(a)(2)(A) is sustained, and Defendant’s discharge is denied pursuant to 11 U.S.C. § 727(a)(2)(A). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492598/ | OPINION AND ORDER
JOHN J. THOMAS, Bankruptcy Judge.
On May 22, 1992, confronting a growing number of petitions not accompanied by the documentation required by 11 U.S.C. § 521(1), the Court and the Assistant United States Trustee for the district cooperated in a procedure, designed to expedite the movement of cases through the local bankruptcy system in the Wilkes-Barre Division of this district. In nominal compliance with the provisions of 11 U.S.C. §§ 707(a)(3), 1112(e), and 1307(c)(9), the Assistant United States Trustee filed a Motion for Entry of General Order Governing Dismissal of Cases and Imposition of Sanctions for Incomplete Filings, hereinafter “Standing Motion”. This Motion requests the dismissal of any case, theretofore unfiled, where the documents required by 11 U.S.C. § 521(1) were not timely filed.
*942In response to the “Standing Motion”, the Court issued a General Order Governing Dismissal of Cases and Imposition of Sanctions for Incomplete Filings, hereinafter “Standing Order”, which would grant the “Standing Motion” in the absence of the timely filed documents in, as yet, unfiled cases.
As if in some conscience-clearing deference to the due process rights of the “respondents,” the debtor who files a petition without the requisite schedules and statements is notified by the clerk of the existence of the “Standing Motion” and the “Standing Order” and is warned that dismissal will occur if the deficiencies are not corrected.
The process has, in fact, resulted in the movement of bankruptcy cases through the system and the “timely” dismissal of cases where supporting documents are not filed in accordance with 11 U.S.C. § 707(a)(3).1
Despite its effectiveness, or perhaps, because of it, the “Standing Motion” and the “Standing Order” have been challenged by a “Standing Objection” filed by chapter seven debtors, Bernard F. Herron, IV, and Albina P. Herron, Bankruptcy Case No. 5-96-00187, whose case was dismissed by this procedure.
The sarcasm associated with the use of the term “Standing Objection” has not escaped the Court and will provide the impetus to reexamine the propriety of the current procedure. 11 U.S.C. § 521(1) of the Bankruptcy Code requires a debtor to “(1) file a list of creditors, and unless the court orders otherwise, a schedule of assets and liabilities, a schedule of current income and current expenditures, and a statement of the debtor’s financial affairs.”
The failure to file these documents is addressed in 11 U.S.C. § 707(a)(3) of the Bankruptcy Code in the following manner:
(a) The court may dismiss a case under this chapter only after notice and a hearing and only for cause, including — ...
(3) failure of the debtor in a voluntary case to file, within fifteen days or such additional time as the court may allow after the filing of the petition commencing such case, the information required by paragraph (1) of section 521, but only on a motion by the United States trustee.
Congress has selected the United States Trustee as the designated monitor to insure compliance with the filing of 11 U.S.C. § 521(1) documents. The legislative history suggests an explanation in the following excerpt.
This amendment is intended to address a sense of growing frustration by members of the bankruptcy community, including some judges and trustees, that the amendments made in 1984 have not entirely fulfilled their promise in restoring balance in the area of consumer debt. Much of this frustration stems from the continuing high volume of chapter 7 filings by individuals. Due to demands on the courts’ time of other more complex cases under other chapters, they are frequently unable to devote the degree of time and attention to chapter 7 consumer cases which might otherwise be desirable. As a result, the impetus is on the trustee to assure that information required by the court to carry out its responsibilities is made available to it in a timely and efficient manner. (Emphasis ours.)
132 Cong. Rec. § 5613-03 (daily ed. May, 8, 1986) (statement of Sen. Hatch).
Moreover, the decision to exclude the Court from supervising the timely filing of documents is consistent with the use of the phrase “notice and a hearing.”
Notice and a hearing in bankruptcy parlance has a special meaning as set forth in 11 U.S.C. § 102(1):
In this title—
(1) “after notice and a hearing”, or a similar phrase—
(A) means after such notice as is appropriate in the particular circumstances, and such opportunity for a hearing as is appropriate in the particular circumstances; but
*943(B) authorizes an act without an actual hearing if such notice is given properly and if—
(i) such a hearing is not requested timely by a party in interest; or
(ii) there is insufficient time for a hearing to be commenced before such act must be done, and the court authorizes such act;
The legislative history explains that:
[A] hearing will not be necessary in every instance. If there is no objection to the proposed action, the action may go ahead without court action. This is a significant change from present law, which requires the affirmative approval of the bankruptcy judge for almost every action. The change will permit the bankruptcy judge to stay removed, from the administration of the bankruptcy or reorganization case, and to become involved only when there is a dispute about a proposed action, that is, only when there is an objection. (Emphasis ours.)
S.Rep. No. 95-989, at 27 (1978), reprinted in Bkr-L Ed, LEGISLATIVE HISTORY § 83:5 and H.R.Rep. No. 95-595, at 315 (1977), reprinted in Bkr-L Ed, LEGISLATIVE HISTORY § 82:1.
To lend emphasis to the congressional intent to extricate the Court from administration, the legislative history concerning 11 U.S.C. § 102 indicates,
the phrase “on request of a party in interest” or a similar phrase, is used in connection with an action that the court may take in various sections of the Code. The phrase is intended to restrict the court from acting sua sponte. Rules of bankruptcy procedure or court decisions will determine who is a party in interest for the particular purposes of the provision in question, but the court will not be permitted to act on its own. (Emphasis ours.)
124 Cong. Ree. § 17406 (daily ed. October 6, 1978) (statement of Sen. DeConcinini); 124 Cong. Rec. HI 1090 (daily ed. September 28, 1978) (statement of Rep. Edwards); H.R. Rep. 95-595 at 549 (1977).
Of course, a motion to dismiss pursuant to 11 U.S.C. § 707(a) is a contested matter which should be disposed of under Federal Rule of Bankruptcy Procedure 9014. Fed. R. Bankr.P. 1017(d), Bankruptcy Service, L.Ed. § 37:137. The motion should be served in accordance with Federal Rule of Bankruptcy Procedure 7004. Fed. R. Bankr.P. 9014. Moreover, motions filed under 11 U.S.C. § 707(a)(3) require not less than twenty days notice to the debtor, the trustee, all creditors and indenture trustees. Fed. R. Bankr.P.2002(a)(5).
Generally, the clerk’s internal procedure provides that a “Notice of Intent to Dismiss Petition” be filed, alerting the debtor that the case would be dismissed in the absence of an order granting an extension to file necessary documents. Even if I were to reaffirm this existing procedure, I could not do so without acknowledging that the “Standing Motion” to dismiss, has not been served on either the debtor or the interim trustee.
In its supporting brief, the United States Trustee argues that, even in the absence of a motion, the Court can, sua sponte, dismiss a case for failure to file required schedules and statements, citing, for authority, In re Orr, 170 B.R. 395, 398 (E.D.Mo.1994) and In re Greene, 127 B.R. 805, 807-08 (Bankr.N.D.Ohio 1991). The authority for such a position is grounded in 11 U.S.C. § 105(a), which provides:
(a) The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.
The second sentence of 11 U.S.C. § 105(a) was added to the Code by the bankruptcy amendments of 1986 in response to the decision in In re Gusam Restaurant Corp., 737 F.2d 274 (2d Cir.1984), which concluded that a bankruptcy administrator was not a party in interest with standing to initiate a dismissal request under 11 U.S.C. § 1112(b) as then set forth. See footnote 1. The United States Trustee System: Hearings on S1961 *944Before the Subcommittee on Courts of the Senate Committee on the Judiciary, 99th Cong. 109 (1986) U.S. District Judge Robert E. DeMaseio, Chairman of the Judicial Conference’s Committee on the Administration of the Bankruptcy System.
I find the amendment does not alter the provisions of 11 U.S.C. § 707(a)(3). If this was Congress’ intent, it would have done so with the same specificity utilized in subsection b of 11 U.S.C. § 707 wherein it is stated, “After notice and a hearing, the court, on its own motion or on a motion by the United States trustee.... ” Furthermore, our circuit’s position dictates that a statutory limitation on the ability of an entity to file a dismissal motion in bankruptcy should be enforced by the court where there is no contrary legislative history. In re Christian, 804 F.2d 46, 48 (3rd Cir.1986).
“Our individual appraisal of the wisdom or unwisdom of a particular course consciously selected by the Congress is to be put aside in the process of interpreting a statute. Once the- meaning of an enactment is discerned and its constitutionality determined, the judicial process comes to an end.” TVA v. Hill, 437 U.S. 153, 194, 98 S.Ct. 2279, 2301, 57 L.Ed.2d 117 (1978).
Indeed, it would be ironic if a section of the Bankruptcy Code, empowering the Court to issue orders necessary to carry out the provisions of the Code, was interpreted in such a manner as to contradict the specific codified mandate that 11 U.S.C. § 707(a)(3) motions could be filed only by the United States Trustee. I decline to fuel such absurdity. “If Congress has mistakenly disguised its actual intent by incorporating language pointing in a different direction, it is not up to us to rewrite the statute unless, perhaps, a literal reading produces a truly absurd result.” Napotnik v. Equibank & Parkvale Savings Ass’n, 679 F.2d 316, 321 (3rd Cir.1982).
The “Standing Objection” is sustained and the “Standing Order” of May 22, 1992 is nullified as to all pending and future cases.
. While this opinion focuses on the provisions of 11 U.S.C. § 707(a)(3), similar language can be found in 11 U.S.C. §§ 1112(e) and 1307(c)(9). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492600/ | OPINION AND ORDER1
JOHN J. THOMAS, Bankruptcy Judge.
The Debtors filed a Joint Motion to Quash Subpoena Duces Tecum directed to the custodian of records of the law firm of Fellheimer, Eichen, Braverman & Kaskey claiming that a certain internal Memorandum dated June 7, 1991 should not be subject to discovery because the document falls within the definition of a privileged document under both the attorney-client privilege and work-product privilege. The Plaintiffs position is succinctly summarized by the following premise. Regardless of whether the document falls within either of the two stated privileges, it nonetheless remains subject to discovery because it comports with the crime-fraud exception as recited in Clark v. United States, 289 U.S. 1, 53 S.Ct. 465, 77 L.Ed. 993 (1933). Furthermore, in rendering a decision as to whether or not the crime-fraud exception applies, this Court may conduct an in-camera review of the document as permitted by the dictates of United States v. Zolin, 491 U.S. 554, 109 S.Ct. 2619, 105 L.Ed.2d 469 (1989) and Haines v. Liggett Group, Inc., 975 F.2d 81 (3rd Cir.1992).
Following oral argument on the Motion to Quash and for Protective Order, the Court, by Order dated May 14, 1997, required the law firm of Fellheimer, Eichen, Braverman & Kaskey to turn the document over to the Court under seal. The Order further specified the Court would view the document, in-camera, to determine whether it fell within the work-product and/or attorney-client privilege. If the document failed to qualify under either of those privileges, the Court would order turnover of the document. Alternatively, if the document did qualify under either privilege, then the Court would consider whether the opponent of the privilege met its burden in convincing this Court to revisit the document and determine whether the crime-fraud exception applied.
The preliminary issue is whether the document falls within the . attorney-client privilege or the work-product doctrine. The Court finds that it falls within the work-product doctrine as that doctrine was described in the seminal case of Hickman v. Taylor, 4 F.R.D. 479 (E.D.Pa.1945), rev’d 153 F.2d 212 (3rd Cir.1945), cert. denied 327 U.S. 808, 66 S.Ct. 961, 90 L.Ed. 1032 (1946). Therefore, the document is not subject to disclosure under the discovery rules unless the Plaintiff can prove that the crime-fraud *9exception applies. A successful effort would lift the prohibition against discovery.
The burden placed on the opponent of the privilege is presented in Zolin, 491 U.S. at 572, 109 S.Ct. at 2630-31, which provides as follows:
In fashioning a standard for determining when in- camera review is appropriate, we begin with the observation that “in-camera inspection ... is a smaller intrusion upon the confidentiality of the attorney-client relationship than is public disclosure.” Fried, Too High a Price for Truth: The Exception to the Attorney-Client Privilege for Contemplated Crimes and Frauds, 64 N.C.L.Rev. 443, 467 (1986). We therefore conclude that a lesser evidentiary showing is needed to trigger in-camera review than is required ultimately to overcome the privilege. Ibid. The threshold we set, in other words, need not be a stringent one.
We think that the following standard strikes the correct balance. 3efore engaging in in-camera review to determine the applicability of the crime-fraud exception, “the judge should require a showing of a factual basis adequate to support a good faith belief by a reasonable person,” Caldwell v. District Court, 644 P.2d 26, 33 (Colo.1982), that in-camera review of the materials may reveal evidence to establish the claim that the crime-fraud exception applies.
“It is the purpose of the crime-fraud exception to the attorney-client privilege to assure that the ‘seal of secrecy,’ ibid., between lawyer and client does not extend to communications ‘made for the purpose of getting advice for the commission of a fraud’ or crime.” Zolin, 491 U.S. at 563, 109 S.Ct. at 2626, citing Clark v. United States, 289 U.S. 1, 15, 53 S.Ct. 465, 469, 77 L.Ed. 993 (1933) and O’Rourke v. Darbishire, [1920] A.C. 581,604 (P.C.).
The burden established by the Zolin court is not a stringent one and requires the Court to focus on possibilities rather than probabilities. Did the opponent of the privilege present a quantum of evidence to show a factual basis to support a good faith belief by a reasonable person that the in-eamera review of the materials may reveal evidence to establish that the claim of crime-fraud exception applies?
The Complaint involves allegations by the Plaintiff that the Defendants/Debtors made misrepresentations to the Plaintiff to obtain millions of dollars in unsecured loans. Additionally, Plaintiff alleges many transfers were made by the Defendants during the year prior to the filing of their bankruptcy petitions with the intention to hinder, delay and/or defraud the Plaintiff and other creditors. Plaintiff argues that the Debtors testified at a § 341 hearing that they did not seek bankruptcy counsel until July of 1991 when the Memorandum in question dated June of 1991 indicates otherwise. Furthermore, contemporaneous with the issuance of the Memorandum in question, the Debtors, in June of 1991, began transferring substantial funds through the time of the filing of the petition. In support of those arguments, the Bank directed our attention to numerous documents submitted by the Defendants/Debtors as exhibits in opposition to the Bank’s Motion for Summary Judgment. Undoubtedly, a review of the documents in support of the oral argument reflect the transfer of funds from certain of the Debtors’ individual accounts to other accounts held by the Debtors and others. While the Court cautions the parties that it draws no conclusions as to the propriety of the transfers, it has determined that a review of the documents in conjunction with the timing of the visit to the Debtors’ counsel and the date of the Memorandum are sufficient to meet the soft burden imposed by the Zolin court. As a result, the Court will revisit the document, in-camera, to determine whether the crime-fraud exception applies to the document.
Upon a second review of the June 1991 Memorandum, the Court finds that it is not a communication to aid in the purpose of getting advice or giving advice for the commission of a fraud or crime. Therefore, the Plaintiff has failed in its burden of establishing the crime-fraud exception to the work-product doctrine, and the Court will grant the Motion for Protective Order and Motion to Quash the Subpoena as it applies to the *10June 1991 Memorandum to the Morris and Elliot Wilkins files.
. Drafted with the assistance of Richard P. Rogers, Law Clerk. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492601/ | MEMORANDUM OF DECISION
(Motion to Avoid Judicial Lien)
PAUL MANNES, Chief Judge.
Before the court is a motion to avoid the judicial lien filed by the debtor on October 10, 1996. This case was reopened on debt- or’s motion for the purpose of allowing debt- or to file the motion.
On December 10, 1990, Donna D. Fox filed a bankruptcy case under Chapter 7. Debtor’s Schedule A-3 reflected an obligation to NCNB National Bank in the sum of $6,353.00, said sum being the amount due under a deficiency claim resulting from a sale following repossession of an automobile owned by debtor and her then spouse. Debtor was unaware that before the bankruptcy case was filed that the creditor had obtained a judgment against debtor and her husband that was recorded among the Land Records of Prince George’s County, Maryland. The judgment constituted a lien upon the interests of the debtor and her spouse in their residence located in Temple Hills, Prince George’s County, Maryland. MD. CTS. & JUD. PROC. CODE ANN. § 11h102 (1973).
Debtor’s schedules showed that she owned a one-third interest as a joint tenant in the house located in Temple Hills, Maryland. The house was said to be worth $130,000.00 and was subject to a deed of trust in the amount of $87,000.00. She valued her one-third interest at $14,333.00. Debtor claimed her entire interest in the property as exempt as a tenant by the entirety. Debtor cited the case of In re Ford, 3 B.R. 559 (BC Md.1980), aff'd 638 F.2d 14 (C.A.4 1981), as the legal *11basis supporting the exemption. Ford held that the debtor’s interest as a tenant by the entirety under Maryland law may be exempted from property of the estate pursuant to 11 U.S.C. § 522(b)(2)(B).
However, debtor misconceives the effect of her claimed exemption. In a ease arising under Virginia law, the Fourth Circuit pointed out:
Here, although Williams claimed an exemption for her $48,600 interest in the real estate, she exempted that interest only from the claims of her non-joint creditors, and not from the claims of her joint creditors. Williams specifically claimed that the statutory basis for her exemption was section 522(b)(2)(B). J.A. at 7. Section 522(b)(2)(B) provides that a debtor may exempt from the bankruptcy estate “any interest in property in which the debtor had, immediately before the commencement of the case, an interest as a tenant by the entirety.” However, such exemption may be taken only “to the extent that such interest as a tenant by the entirety ... is exempt from process under applicable non-bankruptcy law.” Id. Virginia law, which is the “applicable nonbankruptcy law” in this case, provides that property held by spouses as tenants by the entirety is exempt from individual (i.e., non-joint) creditors, but is not exempt from the claims of joint creditors. Vasilion v. Vasilion, 192 Va. 735, 66 S.E.2d 599, 602 (1951); Hausman v. Hausman, 233 Va. 1, 353 S.E.2d 710, 711 (1987).[FN4]
In re Williams, 104 F.3d 688, 689-90 (C.A.4 1997).
The debtor’s entireties exemption did not protect her interest from the claims of joint creditors. Chippenham Hospital, Inc. v. Bondurant, 716 F.2d 1057, 1059 (C.A.4 1983). NCNB’s judgment lien never impaired an exemption to which the debtor would have been entitled but for the existence of the lien. The Motion to Avoid Lien will be denied.
Debtor’s discharge was followed by a divorce. The granting of the absolute divorce terminated debtor’s marriage and thereupon severed the entireties tenancy. Bruce v. Dyer, 309 Md. 421, 428, 524 A.2d 777, 781 (1987).
An appropriate order will be entered.
. In this respect, Virginia law is identical to that in Maryland. As we observed in Sumy v. Schlossberg, 777 F.2d 921 (4th Cir.1985), with respect to the analogous Maryland law, [t]he proper interpretation of § 522(b)(2)(B) as it applies in Maryland is that "to the extent that such interest as a tenant by the entirety or joint tenant is exempt from process under applicable non-bankruptcy law” means “to the extent that there are only individual claims,” because entireties property is not exempt from process to satisfy joint claims in Maryland. A debtor does not lose all benefit of § 522(b)(2)(B) when joint creditors are present, but he does not benefit from it to the extent of joint claims. Id. at 928. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492603/ | ORDER DENYING MOTION AND AMENDED MOTION TO ALTER OR AMEND JUDGMENT1
JOHN T. FLANNAGAN, Bankruptcy Judge.
William R. Morgan and Janice J. Morgan have moved to alter or amend the Court’s *57June 13, 1997, decision that the Kansas Department of Revenue holds a nondischargeable, general unsecured claim for state income taxes.
The Morgans argue the Court has misapplied § 523(a)(1)(B), which excepts from discharge any tax debt with respect to which a required tax return was not filed:
(a) A discharge under section 727 ... of this title does not discharge an individual debtor from any debt—
(1) for a tax or customs duty—
(B) with respect to which a return, if required—
(i) was not filed____2
Because the Morgans filed Kansas income tax returns for 1983 and 1984, they claim to have satisfied this statute. Their premise is that the word “return” in § 523(a)(1)(B) does not mean “amended return.” They support this notion by pointing out that under the Internal Revenue Code, the filing of original income tax returns satisfies a taxpayer’s filing duty; therefore, the taxpayer has no obligation to file amended returns, the Morgans say. As far as it goes this may be so, but what is the taxpayer’s duty to the IRS when confronted by a Revenue Agent’s Report showing additional tax due? Is there not a duty to file an amended return? In any event, the statute under construction is a nondischargeability provision of the Bankruptcy Code, not a provision of the Internal Revenue Code. And the income tax returns in question are state returns, not federal returns.
Furthermore, the Morgans neglect to discuss the words “if required” in § 523(a)(1)(B) and the directive of Kan. Stat. Ann. § 79-3230(f) (1989). Under the Kansas statute, the “returns required” are “amended returns” accompanied by the Revenue Agent’s Report (“RAR”), not the original returns the Morgans admittedly filed for 1983 and 1984:
(f) Any taxpayer whose income has been adjusted by the federal internal revenue service is required to report such adjustments to the Kansas department of revenue by mail within 180 days of the date the federal adjustments are paid, agreed to or become final, whichever is earlier. Such adjustments shall be reported by filing an amended return for the applicable taxable year and a copy of the revenue agent’s report detailing such adjustments.3
Finally, the Morgans’ counsel says, “Nothing more would have been achieved by the Morgans filing an amended return and again forwarding another copy of the RAR to the KDOR.”4 But something more could have been achieved! Filing amended returns and forwarding the Revenue Agent’s Report would have notified the Department of Revenue of the adjustment and caused it to assess and commence proceedings to collect additional taxes within 180 days after receipt of the amended returns and the Agent’s Report. Although the IRS apparently sent the Revenue Agent’s Report to the Department at some point, the Morgans have not shown the Court that the Department has an established procedure for initiating the assessment of additional taxes upon receipt of that report, rather than upon receipt of the amended returns required by Kan. Stat. Ann. § 79-3230(f).
Accordingly, the Morgans’ Amended Motion to Alter or Amend the Court’s decision of June 13,1997, is denied.
. Plaintiff Kansas Department of Revenue appears by its attorney, J.D. Befort, Topeka, Kan*57sas. Debtors/defendants William R. and Janice J. Morgan appear by their attorney, Richard M. Beheler of Blackwell, Sanders, Matheny, Weary & Lombardi, P.C., Kansas City, Missouri.
.11U.S.C. § 523(a)(B)(i).
. Kan. Stat. Ann. § 79-3230© (1989) (emphasis added).
. Amended Motion of William R. Morgan and Janice J. Morgan to Alter or Amend Judgment filed June 24, 1997, at 5. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492606/ | ORDER DENYING MOTION TO DISMISS CASE
MARY DAVIES SCOTT, Bankruptcy Judge.
THIS CAUSE is before the Court upon the Trustee’s Motion to Dismiss, filed on May 5,1997. The Trustee seeks dismissal of this case for cause, pursuant to Bankruptcy Code section 707(a). Hearing on the motion was called on July 10, 1997, at which time the parties submitted a Joint Stipulation of Fact. Neither party offered any testimony or docu*337mentary evidence. The Court has before it only the stipulations of the parties. The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157(a), 1334. Moreover, this Court concludes that this is a “core proceeding” within the meaning of 28 U.S.C. § 157(b).
The parties stipulate that on July 26, 1996, approximately one year ago, the debtor filed a Chapter 7 case which she converted to Chapter 13 in December 1996. During that time, the clerk thrice established a time for the First Meeting of Creditors, 11 U.S.C. § 341(a)(1), but the debtor failed in each instance to appear at the meeting. A fourth meeting was set during the Chapter 13 case, but the debtor voluntarily dismissed the case prior to that meeting. While she did file a Chapter 13 plan, the debtor failed to do so within the time constraints of the Rule 3015(b), Federal Rules of Bankruptcy Procedure. The debtor voluntarily dismissed the case on April 18, 1997, but, within a few weeks, on May 23, 1997, filed the instant Chapter 7 proceeding. The debtor attended the section 341(a)(1) meeting as first scheduled in this second ease.
The Trustee seeks dismissal of this ease, pursuant to 11 U.S.C. § 707(a), on the basis that the petition was not filed in good faith as evidenced by the facts that the debt- or previously filed a bankruptcy case during which she failed to appear at three separate section 341(a) meetings, after conversion of her case untimely filed her chapter 13 plan, voluntarily dismissed the case, and, after only a one-month period of time, filed a Chapter 7 case. Section 707 of the Bankruptcy Code provides:
(a) The court may dismiss a case under this chapter only after notice and a hearing and only for cause, including—
(1) unreasonable delay by the debtor that is prejudicial to creditors;
(2) nonpayment of any fees or charges required under Chapter 123 of title 28; and
(3) failure of the debtor in a voluntary case to file, within fifteen days of such additional time as the court may allow after the filing of the petition commencing such case, the information required by paragraph (1) of section 521, but only on a motion by the United States trustee.
11 U.S.C. § 707(a). The “cause” factors listed under section 707(a) are non-exclusive as indicated by the language “including” in the statute. In re Zick, 931 F.2d 1124 (6th Cir.1991); In re Griffieth, 209 B.R. 823 (Bankr.N.D.N.Y.1996). This Court, and, indeed, the majority of courts, have ruled that lack of good faith in filing the Chapter 7 petition constitutes cause under section 707(a). See In re Cappuccetti, 172 B.R. 37 (Bankr.E.D.Ark.1994); Zick, 931 F.2d at 1126-27; In re Barnes, 158 B.R. 105 (Bankr.W.D.Tenn.1993). There are numerous factors which the courts utilize to determine whether a Chapter 7 case was filed in bad faith, including whether:
the debtor reduced the creditors to a single creditor in the months prior to filing the petition
the debtor made no life-style adjustments or continued living an expansive or lavish life-style
the debtor filed the case in response to a judgment pending litigation, or collection action; there is an intent to avoid a large, single debt
the debtor made no effort to repay debts the use of Chapter 7 is unfair
the debtor has sufficient resources to pay debts
the debtor is paying debts of insiders
the schedules inflate expenses to disguise financial well-being
the debtor transferred assets
the debtor is overutilizing the protections of the Code to the unconscionable detriment of creditors
the debtor employed a deliberate and persistent pattern of evading a single major creditor
the debtor failed to make candid and full disclosure
the debtor’s debts are modest in relation to assets and income
there are multiple bankruptcy filings or other procedural “gymnastics.”
*338See generally Zick, 931 F.2d 1124; Barnes, 158 B.R. 105; Hammonds, 139 B.R. 535 (Bankr.D.Colo.1992). It must also be noted that the fact that the debtor has filed previous cases does not alone permit a finding a bad faith Johnson v. Home State Bank, 501 U.S. 78, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991).
In the instant case, the Court has before it only the facts that the debtor previously filed a chapter 7 case, subsequently converted the case to chapter 13, and failed to attend numerous section 341(a) meetings as scheduled in the first ease. Of course, the fact that this case was filed closely upon the voluntary dismissal of the first ease may also be indicative of bad faith. However, there is no evidence of any of the other factors, described above. Indeed, the trustee has not even provided a copy of the debtor’s schedules as evidence. Unlike the situation in Chapter 13, where the Court file is before the Court under its independent obligation to determine good faith, the schedules are not here before the Court. Thus, the Court does not know whether the debtor filed this case seeking to thwart a particular creditor, whether the debtor lives a luxurious lifestyle inconsistent with Chapter 7 relief, or even the nature and amount of her debts. The only information is that, in a prior case, the debtor was lax in her duties imposed by the Bankruptcy Code and Rules. However, the evidence is that the debtor has timely complied with her duties in this case.
The stipulation of the parties is insufficient for the Court to determine as a matter of law that this case was filed in bad faith such that the Court cannot determine whether there is good cause for dismissal under section 707(a). In light of the insufficiency of the evidence, it is
ORDERED that the Trustee’s Motion to Dismiss, filed on May 5, 1997, is DENIED, without prejudice.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492607/ | ORDER
For the reasons stated on the record today, it is
ORDERED that
1. Mr. Washburne’s motion to stay is denied;
2. Mr. Washburne is ordered to produce to intervenors the Privileged Document Log and Identification of Individuals Named (collectively, the “Privilege Log”); and
3. This appeal is dismissed pursuant to the representation made by Mr. Washburne’s counsel at the conclusion of today’s hearing. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492609/ | DECISION AND ORDER
GERARDO A. CARLO, Bankruptcy Judge.
BACKGROUND
The debtors filed a petition under Chapter 13 of the Bankruptcy Code on September 9, 1994. Great Lakes Higher Education Corporation (“Great Lakes”) was a scheduled creditor and filed a timely proof of claim in the amount of $1,605.05, based on an unpaid student loan pertaining to plaintiff, Americo Martínez Colón. The debtors’ Chapter 13 plan was confirmed on February 21, 1995. The confirmed plan indicated that Great Lakes’ claim of $1,605.05 would be “[p]aid 100%”.
The debtors allege that Great Lakes codified the student loan as being “in default” on August 25, 1995. The Court finds from the affidavit of Jerry Fuller, the litigation specialist for Great Lakes, and from Great Lakes’ loan history report (dkt. # 27 and Exhibit D to dkt. #25, respectively) that Great Lakes codified the student loan as “defaulted” in their records on October 21, 1992. Great Lakes notified the debtor by letter on December 15, 1992, that the loans would go into default on January 14, 1993 (Exhibit G to dkt. # 25). The date that the debtor refers to, August 25, 1995, appears to be the date that he was notified by the United States Department of Education that their records indicated that he was in default on a federal student loan and therefore ineligible to receive federal student aid until his account was resolved. In any event, the Court finds that the default occurred and was noted as such pre-petition.
The debtor filed this adversary complaint on March 4, 1996, and amended the complaint on October 30, 1996 (dkt. # 28). The debtors claim that the defendants took illegal and unfair actions which resulted in the denial of plaintiff Americo Martínez Colon’s eligibility to receive a student grant to attend college. The debtors list five causes of action, but in actuality allege three causes of action and the remaining two paragraphs relate to damages. First, the debtors claim that the defendants willfully violated the automatic stay by taking actions to collect a pre-petition debt. Second, the debtors claim that the actions by defendants violated the confirmation order. Third, the debtors claim that the actions of the defendants are in violation of the anti-discrimination provisions of 11 U.S.C. § 525. The debtors request compensatory and punitive damages, as well as costs and attorney’s fees.
The defendants filed a motion to dismiss and legal memorandum in support of the motion (dkts. #39 and #40). The debtors opposed the motion to dismiss (dkt. #44). Great Lakes filed a reply (dkt. # 45).
DISCUSSION
The debtors allege that their confirmed plan provides for payment in full of Great Lakes’ claim. The debtors argue that notwithstanding, Great Lakes codified the debt- or’s loan in default, which resulted in the ineligibility of the debtor to receive future federal student aid. The debtors argue that this action violates the confirmation order and is an indirect form of coercing payment of the pre-petition debt, in violation of 11 U.S.C. § 362.
Because the default was codified pre-petition, the debtor’s complaints relate to the fact that Great Lakes did not remove the default notation upon the filing of this petition in bankruptcy or upon confirmation of the debtors’ plan. The Court also notes that Great Lakes only made the notation of default. The notice of ineligibility for student aid was not generated or sent by Great Lakes or Professional Recoveries Inc. Thus, the issue is whether Great Lakes violated the confirmation order or the automatic stay by failing to remove the default notation upon the bankruptcy fifing or upon the confirmation of the debtors’ plan.
*25The Court concludes that the failure of Great Lakes to remove the default notation, upon confirmation of the debtors’ plan did not violate the confirmation order. The debtors’ obligation to Great Lakes is a nondischargeable obligation. See 11 U.S.C. §§ 1328(a)(2) and 523(a)(8). Although the debtors proposed to pay Great Lake’s claim 100%, this proposal does not include the payment of interest, which continues to accrue during the life of the plan. Interest accruing over the life of the plan is nondischargeable. Thus, even a 100% plan cannot pay off a nondischargeable interest bearing student loan. See Leeper v. Pa. Higher Educ. Assistance Agency (PHEAA), 49 F.3d 98 (3rd Cir.1995) (interest accrues post-petition on nondischargeable student loan during Chapter 13 case); In re Shelbayah, 165 B.R. 332, 337 (Bankr.N.D.Ga.1994) (post-petition interest on nondischargeable student loan accrues during Chapter 13 bankruptcy and is not dischargeable); Ridder v. Great Lakes Higher Educ. Corp. (In re Ridder), 171 B.R. 345 (Bankr.W.D.Wis.1994) (post-petition interest on a nondischargeable student loan may be collected after bankruptcy concludes); Branch v. Unipac/Nebhelp (Matter of Branch), 175 B.R. 732, 735 (Bankr.D.Neb.1994); and In re Jordan, 146. B.R. 31 (D.Colo.1992). Because the debtors Chapter 13 plan cannot pay off the debt to Great Lakes, the Court concludes that the debtors’ confirmed plan fails to cure the debtor’s default with Great Lakes. Thus, the Court will deny the debtors’ request to hold Great Lakes liable for violation of the confirmation order.
The Court concludes that the failure of a higher education corporation to remove a default notation upon the filing of bankruptcy or the confirmation of the plan, does not violate the automatic stay of 11 U.S.C. § 362. The automatic stay provides protection against acts to collect a pre-petition debt. The denial of student aid to a bankruptcy student based on a pre-petition debt, does not violate the automatic stay. See In re Saunders, 105 B.R. 781 (Bankr.E.D.Pa.1989) (holding that actions of Higher Education Assistance Agency in denying debtor higher education grant pending notice, of bankruptcy discharge, did not constitute violation of automatic stay). In the present case, the Court concludes that Great Lakes did not make any post-petition attempt to collect the pre-petition debt. There was no demand or attempt to coerce payment. The Court concludes that Great Lakes’ refusal to remove the default notation was a communication that the debtor had an uncured default. Accordingly, the debtors’ request to have the Court hold Great Lakes liable for violation of the automatic stay of 11 U.S.C. § 362 will be denied.
The debtors allege that Great Lakes violated the anti-discrimination provisions of 11 U.S.C. § 525, by failing to adjust their records to take into account the provisions of the debtors’ Chapter 13 plan. The debtor argues that he was discriminated against solely on the basis of being a “bankruptcy student”, despite having cured the default through the confirmed plan. The debtors note that 20 U.S.C. § 1078-6(a)(l)(A) and § 1078-6(b) allow a non-bankruptcy student to cure or workout a default and obtain a new grant or aid, yet a student in bankruptcy attempting to cure a default through a confirmed plan, is denied a new grant or aid because of arrears or a default that they are attempting to cure under a Chapter 13 plan.
Great Lakes admits that 11 U.S.C. § 525(c) would have required them to make a loan or grant to debtor, however, they argue that 11 U.S.C. § 525(c) did not apply to petitions filed prior to October 22, 1994. Great Lakes argues that section 525(a), on the other hand, has never been interpreted to apply to financial assistance. Thus, they argue that there are no discrimination provisions under the Bankruptcy Code, that have been violated.
The Court concludes that 11 U.S.C. § 525(c) was added by the Bankruptcy Reform Act of 1994, which was enacted on October 22,1994. Pursuant to section 702 of the Act, unless otherwise provided in that section, the amendments are only applicable with respect to cases filed after the date of enactment. As section 702 of the Act does not indicate otherwise, the anti-discrimination provision of 11 U.S.C. § 525(c), only applies to cases filed after October 22, 1994. *26The petition in this case was filed on September 9, 1994. Accordingly, 11 U.S.C. § 525(c) is not applicable to this ease.
There are numerous cases arising under 11 U.S.C. § 525(a). These provide that it was permissible for educational financial aid institutions to refuse educational aid to debtors who sought bankruptcy relief but had not discharged their pre-existing educational loans. Courts have applied the same reasoning to grants and loans. See In re Elter, 95 B.R. 618 (Bankr.E.D.Wis.1989) (holding that 11 U.S.C. § 525(a) does not prohibit discrimination in the granting of credit for a student loan); In re Richardson, 27 B.R. 560 (E.D.Pa.1982) (holding that 11 U.S.C. § 525(a) does not preclude denial of guaranteed student loan for past loan-default); and In re Goldrich, 771 F.2d 28 (2nd Cir.1985) (holding that 11 U.S.C. § 525(a) does not apply to extensions of credit). Accordingly, the Court concludes that Great Lakes did not violate the anti-discrimination provisions of 11 U.S.C. § 525, by failing to eliminate the notation of default.
The Court concludes that the actions of Great Lakes Higher Education Corporation and Professional Recoveries, Inc. did not violate the automatic stay, the confirmation order or the anti-discrimination provisions of 11 U.S.C. § 525. Accordingly, the Court concludes that the debtors’ amended complaint fails to state a claim upon which relief can be granted. The defendants are entitled to judgment, as a matter of law.
ORDER
WHEREFORE IT IS ORDERED that the motion to dismiss filed by the defendants, Great Lakes Higher Education Corporation and Professional Recoveries Inc., is GRANTED. The adversary complaint shall be, and it hereby is, DISMISSED. The Clerk shall enter judgment accordingly.
The ten-day period for filing a motion to alter or amend this order, pursuant to Fed. R.Bankr.P. 9023, or to file a notice of appeal, pursuant to Fed.R.Bankr.P. 8002(a), shall commence to run upon notice of entry of this order.
SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492624/ | MEMORANDUM
JOHN C. MINAHAN, Jr., Bankruptcy Judge.
This Chapter 7 bankruptcy case presents the question of whether administrative claims arising and allowed in a previous Chapter 12 bankruptcy case are entitled to administrative priority under 11 U.S.C. § 507(a)(1).
The Chapter 7 trustee objects to such allowance of the Chapter 12 trustee’s claim asserting that the claim should be treated as unsecured because the services of the Chapter 12 trustee were rendered prior to the commencement of this Chapter 7 case. The objection is sustained.
I conclude that the Chapter 12 trustee’s claim is not entitled to administrative priority treatment in this Chapter 7 case. A similar question was before the Eighth Circuit Court of Appeals:
We therefore conclude that the phrase, “of the kind specified” in § 507(a)(1), limits first priority distribution under § 726 to claims which have qualified as administrative expense claims in that Chapter 7 proceeding.
See In re Larsen, 59 F.3d 783 at 786 (8th Cir.1995) (attorney fees incurred by a debtor in prior Chapter 11 and Chapter 12 bankruptcy proceedings are not entitled to administrative expense treatment in a subsequent Chapter 7 proceeding).
The claim of the Chapter 12 trustee did not qualify as administrative claims in this Chapter 7 case, but so qualified in debtors’ prior Chapter 12 case. The Chapter 12 trustee’s claim, therefore, does not qualify under § 507(a)(1) for administrative expense treatment in this Chapter 7 case. The objection is sustained.
IT IS THEREFORE ORDERED, that the Chapter 12 trustee’s Motion to Approve Administrative Claim and Request for Payment (Fil. # 17) is denied. The Chapter 12 trustee’s claim shall be treated and allowed as an unsecured claim.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492625/ | ORDER DENYING MOTION TO REOPEN TO ADD CREDITOR
DANA L. RASURE, Chief Judge.
On September 24,1997, Debtor’s Motion to Reopen To Add Creditor (the “Motion”) came before the Court for consideration. The Debtor, Caesar A. Cerrado, seeks to reopen his bankruptcy case pursuant to 11 U.S.C. § 350(b) in order to discharge a debt owed to a pre-petition unsecured creditor, Associates Commercial Corporation (“Associates”), in the amount of $21,799.00 (“the Associates Debt”), which was omitted from the Debtor’s scheduled debts. This is a core proceeding over which the Court has jurisdiction pursuant to 28 U.S.C. § 157(a) and (B)(2)(I).
Findings of fact:
The Court finds the following from the record in this case: The Debtor filed a voluntary petition for chapter 7 relief on June 19, 1996; the Debtor’s schedules and statement of financial affairs were filed on the same day. Omitted from the schedule of non-priority unsecured creditors was the Associates Debt, which the Debtor alleges is an unsecured debt in the amount of $21,799.00. Patrick J. Malloy, III, was appointed as the chapter 7 trustee (the “Trustee”). On July 24,1996, the Trustee convened and concluded the meeting of creditors pursuant to Section 341. The Trustee adopted the Debtor’s schedules as the inventory of the estate. There were no non-exempt assets that the Trustee deemed appropriate to liquidate, and on July 30,1996, the Trustee filed a report of no distribution. The Debtor received a discharge of his debts on October 18,1996. The ease was closed on May 21,1997.
Conclusions of law.
The decision to reopen a case is discretionary with the bankruptcy court. Kozman v. Herzig, 96 B.R. 264 (9th Cir. BAP 1989). Section 350(b) of the Bankruptcy Code governs the circumstances under which a case may be reopened. Section 350(b) states:
A ease may be reopened in the court in which such case was closed to administer assets, to accord relief to the debtor, or for other cause.
11 U.S.C. § 350(b) (emphasis added). The issue in this case is whether reopening the case to add an omitted creditor is necessary to accord relief to the Debtor. The Court conclúdes that reopening a “no-asset” chapter 7 case to add an omitted creditor has no effect on the dischargeability of such debt, and therefore reopening this case and permitting the Debtor to amend the schedules to add the Associates. Debt would not afford relief to this Debtor.
The scope of Debtor’s discharge is described in Section 727(b) of the Bankruptcy Code. Section 727(b) provides that all of a debtor’s pre-petition debts are discharged, except for those debts determined to be nondisehargeable in an adversary proceeding under Section 523(a)(2), (4) or (6) of the Bankruptcy Code1, and those debts that are *502presumed non-disehargeable under the remaining subsections of Section 523(a). Consequently, Section 727 does not specifically except unscheduled debts from discharge but refers to Section 523 to ascertain which debts are excepted from discharge.
At first glance, Section 523(a)(3) appears to except unscheduled debts from discharge, but a studied reading reveals that unscheduled debts are excepted from discharge only in certain circumstances. Section 523(a)(3) excepts from discharge a debt that is—
neither listed nor scheduled under section 521(1) of this title ... 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 filing for a determination of dischargeability of such debt ... 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) (emphasis added).2
Whether an unscheduled debt is discharged depends upon (1) the kind of debt and (2) whether notice was given to the creditor in time to allow the creditor to take advantage of the protections conferred to creditors in the Bankruptcy Code. In a case where a liquidation of non-exempt assets produces a fund for distribution to creditors who have allowed claims, a creditor who is not given notice in time to file its proof of claim is denied one of the essential benefits of the liquidation, a right to participate in the distribution. In a no-asset chapter 7 case, however, it is unnecessary to file a proof of claim because there will no liquidation or distribution. No claims bar date is set. Since there is no deadline for filing a proof of claim in a no-asset chapter 7 case, an unscheduled creditor is not deprived of the opportunity to timely file a proof of claim and suffers no prejudice.
If the omitted debt is of a kind that would require the creditor to timely file an adversary proceeding under Section 523(a)(2), (4), or (6), however, the failure to schedule the debt does result in prejudice to the creditor. 11 U.S.C. § 523(a)(3)(B). Unless the creditor had actual notice of the bankruptcy, it will have been deprived of the right to have the debts declared non-dischargeable by the Court.
In summary, in a no-asset chapter 7 case, unscheduled debts are not excepted from discharge by virtue of Section 523(a)(3) unless the debt would be non-dischargeable under one of the intentional tort exceptions contained in Section 523(a)(2), (4), or (6).3 Pursuant to Section 727(b), an unscheduled debt in a no-asset chapter 7 case is discharged unless the debt could have been found to be non-dischargeable under the intentional tort exceptions if the creditor had been given an opportunity to timely seek such relief. For these reasons, it is generally a useless exercise to reopen a case to schedule an unscheduled debt, because reopening affords no more relief to the debtor than the debtor already has obtained by virtue of the discharge under Section 727. See Judd v. Wolfe, 78 F.3d 110 (3d Cir.1996) (and cases collected therein); Stone v. Copian, 10 F.3d 285, 289 (5th Cir.1994); Beezley v. California Land Title Co., 994 F.2d 1433 (9th Cir.1993).
*503The case before this Court was a “no-asset” chapter 7 case. If the Associates Debt is not a debt that falls within the intentional tort non-dischargeability provisions, then the debt has been discharged under Section 727 by virtue of the Discharge of Debtor entered on October 18, 1996, and there is no need to reopen the case or amend the schedules. If the Associates Debt is a debt that is arguably non-dischargeable under Section 523(a)(2), (4) or (6), then it is not discharged, and reopening the case to add Associates as a creditor will not change that result.
Because reopening the case will not accord to the Debtor any relief that he has not already obtained by virtue of his Discharge, the Motion is denied.
IT IS SO ORDERED.
. Section 523(a)(2) generally excepts from discharge debts for money, property or services, or refinancing of credit obtained by false pretenses, false representation or actual fraud. Section *502523(a)(4) excepts from discharge debts that have arisen from fraud or defalcation while debtor was acting in a fiduciary capacity, and debts for embezzlement or larceny. Section 523(a)(6) excepts from discharge debts arising from willful and malicious injury by the debtor to an “entity" (which, as defined under Section 101(15) of the Bankruptcy Code, includes but is not limited to a person, estate, trust, governmental unit and the United States Trustee) or properly of such an “entity.”
. In order to determine whether or to what extent an unscheduled debt has been discharged, an adversary proceeding for determination of discharge under Section 523(a)(3) may be filed pursuant to Bankruptcy Rule 4007(b).
. In addition, debts that are presumed to be nondischargeable under Section 523(a)(1), (5), (7) through (14), (16) and (17), are not discharged, whether scheduled or unscheduled, unless the debtor files an adversary proceeding to prove otherwise. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492627/ | REASONS FOR ORDER
JERRY A. BROWN, Bankruptcy Judge.
This matter came before the court on May 27 and June 11,1997 as a hearing on: (1) the *566debtor’s motion to determine tax liability (PL 57); and (2) the debtor’s motion for rehearing of order denying motion to transfer funds deposited into the registry of the court to the debtor. (Pl. 53). At issue is whether the debtor should be relieved from paying interest and penalties on federal taxes owed.
I.Facts
1. Under contract with the State of Louisiana, the debtor operates-a residential rehabilitation facility for young persons. The Louisiana Department of Corrections and Department of Education funds the debtor’s facility.
2. In 1994, the debtor began to fall delinquent in the payment of its federal employment tax obligations.
3. All employers are required to make periodic deposits of their FICA and withholding taxes, with the frequency of the required deposits dependent upon how often they pay their employees and the size of the enterprise’s payroll. Deposits are to be made with any federally-insured bank. The business is given a supply of deposit coupons, which are to accompany the tax deposits and on which the taxpayer indicates the type of tax and the tax period to which the deposit should be credited. In the debtor’s case, the deposits are required to be made each time it makes a payroll, which is twice a month.
4. For 1994, the debtor did not make the required tax deposits for any of the four calendar quarters. (U.S. Ex. A-D). It filed its quarterly FICA and withholding tax returns (Form 941) timely for the first two quarters (U.S. Ex. A, B), but filed the third- and fourth-quarter Forms 941 and its annual federal unemployment tax return (Form 940) late. (U.S. Ex. C, D, M). It did not pay any of its employment taxes for 1994 on time. (U.S. Ex. A-D, M).
5. Because of the debtor’s delinquencies in filing returns, making tax deposits, and paying its employment tax obligations for 1994, the Internal Revenue Service (“IRS”), assessed penalties against the debtor. (U.S. Ex. A-D, M).
6. In March, 1995, the debtor’s delinquent tax accounts were assigned for collection to IRS Revenue Officer Diane Brown.
7. In her initial interview with the debtor, on March 24, 1995, Ms. Brown met with Robert Brinson, the debtor’s owner, director, and chief executive officer. Mr. Brinson stated that he had overall responsibility for all of the debtor’s functions, and described himself as “Director/Cook/Maintenance Man”. (U.S. Ex. P, pp. 1, 2; U.S. Ex. R).
8. Ms. Brown testified that in her first interview she stressed to Mr. Brinson the importance of the debtor keeping current with its ongoing tax obligations as they accrued and in making timely federal tax deposits. (U.S. Ex. P, p. 2). Ms. Brown stated that Mr. Brinson advised her that he had recently changed the office staff and reassumed primary management responsibility. She stated that she advised him of the importance of being paid up on his federal tax obligations, and that he realized the importance of doing so. (Id.) She also gave Mr. Brinson a deadline of April 3, 1995 within which to file the debtor’s employment tax returns for the end of 1994, which were then overdue, and for furnishing proof of the required tax deposits for the first quarter of 1995. (U.S. Ex. P, p. 2).
9. The debtor did not file the tax returns until June 29, 1995. (U.S. Ex. D, M). Other than the one deposit that had already been made by the time of the initial interview, the first-quarter tax deposits were never made. (U.S. Ex. E).
10. The debtor continued to fail to make its tax deposits and to pay its employment taxes on time during the remainder of 1995, although it did make several tax payments without designating where the payments should go. It was late in filing its Form 941 for the first quarter of 1995, and was late in filing its 1995 Form 940. The IRS assessed additional penalties for these delinquencies. (U.S. Ex. E-H, N).
11. In September, 1995, Mr. Brinson told Ms. Brown that the debtor would pay its delinquent tax obligations in full by November 20, and make interim payments before that time. (U.S. Ex. P, p. 7). It did not do so. (U.S. Ex. E, F, G, and P, p. 8).
12. In November, 1995 and January, 1996, Mr. Brinson stated that he realized the *567importance of keeping current on the ongoing tax obligations. (U.S. Ex. P, pp. 8, 11).
13. In February, 1996, the debtor engaged an accountant, Doyle Freeman, to represent it in its dealings with the IRS. Mr. Freeman stated that the business intended to obtain a bank loan to pay the entire outstanding tax debt. Ms. Brown gave the debtor a deadline of 30 days, or until March 7, 1996, within which to obtain the loan and pay the taxes. That deadline was not met. (U.S. Ex. P, pp. 11,12).
14. In March, 1996, a year after Ms. Brown’s first contact with Mr. Brinson and after numerous missed deadlines, the IRS took its first forced collection action, in the form of levies served on the debtor’s bank and on the State of Louisiana. (U.S. Ex. P, pp. 12-14).
15. During 1996, the debtor continued to fail to make adequate tax deposits or pay its taxes on time. (U.S. Ex. I-L). It filed two of its 1996 Forms 941 and its 1996 Form 940 late. (U.S. Ex. J, K, 0). The Form 940 was not filed until after the pending trial began. The IRS assessed penalties against the debt- or for failure to make its 1996 tax deposits, failure to pay its employment taxes timely, and failure to file timely returns. (U.S. Ex. I-L).
16. The IRS issued additional levies in June, July, and November, 1996 because of the debtor’s continuing delinquencies and missed deadlines. (U.S. Ex. P, pp. 22-25, 36-39).
17. In addition to the deposit, late filing, and late payment penalties assessed against the debtor, it had also been assessed with two penalties for tendering bad checks in attempted payment of its tax obligations. (U.S. Ex. B, E).
18. In August, 1996, Mr. Brinson wrote the IRS to request that the penalties and interest that had been assessed against the debtor be abated. (Dtr. Ex. 12).
19. The IRS responded to the request for abatement, by telling Mr. Brinson that interest could not be abated, and that he needed to submit a further -written request for abatement of the penalties, stating specifically which penalties and which tax periods were being addressed and what reasons the debtor had for requesting abatement. (U.S. Ex. P, p. 31).
20. Ms. Brown testified that the debtor never submitted any further request for abatement of any of the penalties.
21. The debtor filed its Chapter 11 petition on January 6, 1997. The instant motion to determine tax liability was filed on March 7,1997.
22. The debtor apparently does not contest the principal amount of tax that the IRS claims to be due, but only contests the amount of penalties and interest owing.
23. Prior to the trial in this matter, the IRS discovered that one $5,000 payment, made on or about July 14, 1995, had been improperly credited to an unrelated taxpayer. Ms. Gae Canal, an IRS manager for special proceedings, agreed that the $5,000 amount should be credited to the debtor, that any related penalties and interest should be abated, and that an amended proof of claim will be filed reflecting those additional credits.
24. The debtor should also be credited with an additional $180 tax payment due to a tax deposit that had been credited to another taxpayer because the debtor used a different taxpayer identification number on its payment. When the IRS corrected its records to reflect the payment, a transposition error occurred.
25. Other than the $5,000 payment made in July, 1995, and the $180 error, the debtor has not shown that it has paid any sums toward its tax obligations that the IRS has failed to credit to its account.
26. On some of the tax payment checks tendered by the debtor to the IRS, the debt- or designated the taxes to which the payments were to be applied. The IRS honored all such designations on checks made by the debtor.
27. Ms. Canal testified that even if some payment or credit made by the debtor had been applied to an incorrect tax or tax period, it would make no difference as to the debtor’s total liability for such interest. In*568terest accrues on all past-due tax obligations and on all penalties at the same rate.
28. Other than the relatively few tax deposits the debtor made, the IRS generally credited the debtor’s payments made during 1995 and 1996 to the oldest tax debts then outstanding.
29. Ms. Brown testified that she advised the debtor on several occasions of the difference between payment of current taxes and payment of past-due obligations.
30. The debtor was also aware of the manner, in which tax deposits were to be made and the manner in which designations are made when a taxpayer makes a tax deposit, as shown by the fact that it did make some of the required deposits. Despite that knowledge, it made far fewer than half of the deposits it should have made. (U.S. Ex. AL).
31. Even if the debtors 1995 and 1996 payments were now to be credited toward the then-current taxes, instead of toward the 1994 or early 1995 periods to which they have been credited, that change would create an underpayment for those 1994 and 1995 tax periods which the IRS credited with those payments.
II. Analysis
A. Motion to determine tax liability
1.Principal amount of taxes owed
The IRS has agreed to credit to the debtor the $5,000 payment made by the debtor that had been erroneously. credited to another taxpayer, and to correct the $180 error. The IRS’s first proof of claim was filed on March 25, 1997 in the total amount of $96,186.61. (Claim No. 16). The IRS has filed two amending proofs of claim since then. Proof of Claim No. 18, filed on June 24, 1997, reduced the total amount of taxes claimed to be owing to $89,613.70. (Claim No. 18). Proof of Claim No. 19, filed on August 12, 1997, reduced the total amount of taxes claimed to be owing to $79,051.00. (Claim No. 19). It is unclear to the court as to whether both credits were actually made because the secured claim of the IRS, reflecting FICA taxes for the period of 12/31/95, remained the same amount of $35,047.76 through all three proofs of claim. To the extent that the credits were not made, they will have to be made.
Other than these two credits, the debtor and the IRS appear to agree as to the principal amount of taxes owed, excluding interest and penalties.
2. Interest
Interest is due on any underpayment of tax. Such interest is merely compensation for the government’s loss of use of the money that should have been paid. It is not imposed to penalize the taxpayer. United States v. Childs, 266 U.S. 304, 45 S.Ct. 110, 69 L.Ed. 299 (1924); Suffness v. United States, 974 F.2d 608, 612 (5th Cir.1992); Bowman v. United States, 824 F.2d 528, 531 (6th Cir.1987); Vick v. Phinney, 414 F.2d 444, 448 (5th Cir.1969).
The debtor’s request for rebate of the interest may not be maintained.
3. Penalties
The debtor argues strenuously that the IRS used “illegal acts” to put the debtor “out of business”. (PL 111, Debtor’s Post-Trial Memorandum, p. 5). The court disagrees. The debtor’s argument is long on rhetoric, but short on evidence. Having, considered the credibility and demeanor of the witnesses, the court finds that the facts do not support the debtor’s assertion. To the contrary, the IRS worked with the debtor for some time before. taking any enforcement action, and permitted large amounts of overdue taxes to accrue before taking action. (See e.g. U.S. Ex. P, 40-42).
The debtor also failed to show that the IRS took any “illegal” actions in connection with its enforcement actions against the debtor.1 For example, the debtor in effect argues that the IRS had to file a notice of assessment before each levy, and that the IRS’s failure to do so each time was “illegal”. *569This is incorrect. An assessment is the formal entry of a tax debt on the books of the IRS. See 26 U.S.C. (“Internal Revenue Code” or “IRC”) § 6203. Notice of the assessment and demand for payment are required to be sent to the taxpayer’s last known address within 60 days after the assessment is made. 26 IRC § 6303. The IRS did assess the debtor on October 23, 1995, along with interest and a failure to deposit penalty. (U.S. Ex. F). This is the only notice of assessment required.
The debtor argues at length that the IRS was required to apply all payments it received, from whatever source, to the debtor’s tax obligations for the then-current tax period, rather than applying them to older obligations that were delinquent from earlier tax periods. The debtor refers to this as the FIFO, or first-in, first-out, issue.
The debtor makes much of the May 20, 1997 report of the Federal Tax Deposit Rules Issues Subgroup of the IRS Commissioner’s Advisory Group (“Subgroup Report”). (PI. Ill, Ex. B). The reliance is unwarranted. First, the Subgroup Report has not been made into law, and only represents its authors’ views as to what regulations or procedures the IRS should adopt regarding the application of tax deposits. Second, the FIFO problem under consideration in the Subgroup Report is the IRS’s practice of allocating deposits and assessing penalties with respect to tax deposits made within the quarter whose liability is at issue. It does not address issues concerning payments made in forms other than tax deposits, nor does it address the question of application of payments to previous quarters.
Penalties for failure to pay federal taxes timely, failure to file returns, and failure to make proper estimated tax deposits are to be imposed unless the taxpayer shows that the failure was “due to reasonable cause and not due to willful neglect”. 26 IRC §§ 6651, 6656.
Penalties for tendering bad checks are to be imposed unless the taxpayer shows that it tendered the check in good faith and with reasonable cause to believe that it would be paid upon presentment. IRC § 6657.
The taxpayer has the burden of showing reasonable cause to justify abatement of tax penalties. Chilingirian v. Commissioner, 918 F.2d 1251, 1255 (6th Cir.1990); In re Upton Printing Co., 186 B.R. 904, 905-06 (Bankr.E.D.La.1995). Reasonable cause sufficient to avoid these penalties “may be established if the taxpayer can make a satisfactory showing that it exercised ordinary business care and prudence in providing for payment of the taxes but nevertheless was either unable to pay or would have suffered an undue hardship if it had paid on the due date.” Id., at 905-06. The debtor’s financial difficulties do not provide reasonable cause for not assessing penalties for nonpayment of withholding taxes.. Id., 186 B.R. at 907.
The debtor has argued that some or all of its 1995 and 1996 payments should have been credited to the taxes that were due or coming due for the then-current tax quarter.
The problem with this argument is that the debtor generally failed to designate the taxes or tax periods to which the payments were to be credited. In the absence of a valid designation from the taxpayer regarding the taxes or tax periods to which collected funds should be applied, the IRS has the right to apply the funds as it sees fit. Wood v. United States, 808 F.2d 411, 416 (5th Cir.1987); Liddon v. United States, 448 F.2d 509, 513 (5th Cir.1971). The debtor was clearly aware of the manner in which tax payments could have been designated, as shown by the fact that a few of its payments were so designated.
The debtor’s reliance on In re Slater Corp., 190 B.R. 695 (Bankr.S.D.Fla.1995) is misplaced. Slater does not discuss the case law cited above which permits the IRS to apply however it wishes funds that have not been designated by the taxpayer. Further, in Slater, the debtor did not know the difference between payment of funds to current taxes as opposed to back taxes, with respect to assessment of penalties. In the pending case, the debtor understood the importance of making tax deposits, and knew (at least some of the time) of its right to designate tax payments.
*570Even if the debtor’s 1995 and 1996 payments were to be credited toward the then-current taxes instead of toward the 1994 or 1995 periods to which they have in fact been credited, that change would create an underpayment for those 1994 and 1995 tax periods which the IRS credited with those payments. If that were to occur, the IRS should be allowed to amend its claim herein to assert unpaid liabilities for those periods. See In re Slater Corp., 190 B.R. at 701 (Bankr.S.D.Fla.1995).
The debtor has not sustained its burden of proof with respect to any of the taxes, interest, or penalties claimed by the IRS, with the exception of the $5,000 payment made on or about July 14, 1995. The amounts claimed by the IRS are correct.
B. Motion for reconsideration of denial of turnover
Finally, the debtor requests reconsideration of the denial of its turnover motion. The court denied the turnover request because the debtor had declined to furnish adequate protection. The debtor has continued to fail to address the adequate protection issue. Under United States v. Whiting Pools, Inc., 462 U.S. 198, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983), adequate protection is a precondition to turnover of property in which a creditor has a security interest. The debt- or has still failed to address that point. Accordingly, the motion for rehearing will be denied.
An order will be entered in accordance with these reasons.
ORDER
For the reasons assigned in the foregoing reasons for order issued this date, accordingly,
IT IS ORDERED that the debtor’s motion to determine tax liability is DENIED.
IT IS FURTHER ORDERED that within 10 days the Internal Revenue Service is to file an amended proof of claim which corrects the misapplication of the $5,000 payment made by the debtor and the $180 payment resulting from transposition error or shall notify the court that this has already been done.
IT IS FURTHER ORDERED that the debtor’s motion for rehearing of order denying the motion to transfer funds deposited into the registry of the court to the debtor is DENIED.
. Any procedural questions about the IRS's collection activities are irrelevant to the issue before the court as to how much tax is owed. If the debtor has a complaint against the IRS for its collection procedures, its remedy lies elsewhere. See e.g. IRC §§ 7432,,7433. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492628/ | ORDER
MARY D. SCOTT, Bankruptcy Judge.
This bankruptcy case was filed on September 25, 1995, and a plan confirmed on July 10, 1996. Neither the disclosure statement nor the plan contain any notice or other indication that the debtors intended to pursue an action against the defendant in this adversary proceeding. On May 3, 1996, pri- or to the confirmation of the plan, but after the filing of the disclosure statement and plan, the debtors commenced this adversary proceeding seeking to recover a preference. The suit was filed against Sanwa Business Credit Corporation, the parent corporation of Sanwa Leasing Corporation. The substitution of parties was not effected until after the confirmation of the plan.
Jurisdiction of Issues in Confirmed Chapter 11 Cases
The Bankruptcy Code envisions very limited jurisdiction over a Chapter 11 case after confirmation of the plan. The purpose of post-confirmation jurisdiction is essentially and necessarily limited to protecting the order confirming the plan and preventing interference with the execution of the plan. A court retains jurisdiction over post-confirmation matters in a Chapter 11 case only to the extent provided in the plan. In re Johns-Manville Corp., 7 F.3d 32 (2d Cir.1993). Jurisdiction is further limited to those matters which will in fact affect the administration of the Chapter 11 plan. See generally In re Cary Metal Products, Inc., 152 B.R. 927 (Bankr.N.D.Ill.1993), aff'd, 158 B.R. 459 (N.D.Ill.1993), aff'd, 23 F.3d 159 (7th Cir.1994).
The retention of jurisdiction is governed not only by the Bankruptcy Code, but, in the Chapter 11 context, by the terms of the plan of reorganization.1 Indeed, the Bankruptcy court lacks subject matter jurisdiction over adversary proceedings commenced post-confirmation unless the plan expressly provides for retention of such jurisdiction. In re Johns-Manville, 7 F.3d 32 (2d Cir.1993).
Provisions of The Chapter 11 Plan
Article XVI of the plan governs jurisdiction: 2
Jurisdiction of the Court. The Court shall retain jurisdiction after confirmation of the plan: (a) to consider (and reconsider if appropriate) claims and objections thereto; (b) to fix expenses of administration and compensation therefor; (c) to hear and determine any dispute arising under or relating to the plan or arising under or relating to this Chapter 11 reorganization case pending on the date of confirmation of the plan; (d) to enforce all discharge provisions of the plan; (3) to make such orders and directions pursuant to 11 U.S.C. §§ 1127 and 1142 as may be necessary or appropriate; and (f) to hear all avoidance actions, fraudulent conveyances, or other matters involving claims or rights of the Debtors or their estate against cred*586itors or other interested parties specifically reserved by the Debtors under the plan.
(Emphasis added.) Under this provision of the plan, the Court retains jurisdiction of disputes relating to the case which were pending on the date of confirmation, Article XVI(c), which, it would appear, would include this adversary proceeding, and retains jurisdiction to hear avoidance actions which are specifically reserved in the plan, Article XVI(f).
While the defendants may be correct that section (f) of this article requires that matter be specifically reserved in the plan, and the plan does not specifically reserve this action, subsection (c) offers an alternative source of jurisdiction. Since that provision in fact provides for retention of jurisdiction of pending matters, this Court must determine whether this adversary proceeding was “pending” on the date of confirmation.
Parties to the Separate Adversary Proceeding
This adversary proceeding was commenced on May 3, 1996, by the filing of a complaint against “Sanwa Business Credit Corporation a/k/a Sanwa Leasing, Inc. a/k/a Sanwa General Equipment Leasing, Inc.” The defendant filed an answer on June 24, 1996, denying that it was known by any other name. The defendant asserted as affirmative defenses that it was not the proper party defendant and that it never conducted business with the plaintiffs. The plan was confirmed on July 10, 1996, two days before an amended complaint was filed adding a count for fraudulent conveyance, but retaining the same party defendant. An answer to the amended complaint was filed on August 6, 1996, asserting the same affirmative defenses. On August 26, 1996, the defendant filed a motion for an extension of pretrial deadlines established by the Court. In the motion, the defendant stated:
There is a defect in parties in this Adversary Proceeding. The plaintiffs have been repeatedly advised by counsel for Sanwa Business Credit Corporation, that Plaintiffs have sued the wrong corporation____
Reference to the Lease which is the subject of the business relationship of the Plaintiffs, and for which the alleged preferential payment was made would reflect that the Plaintiffs did business with Sanwa Business Leasing Corporation. Sanwa Leasing Corporation is not the same corporation as the within Defendant Sanwa Business Credit Corporation.
On the same date, the plaintiffs submitted a motion to amend and substitute parties. The motion indicated that, upon receiving proof that the businesses, Sanwa Business Credit Corporation and Sanwa Leasing Corporation were in fact separate corporate entities, plaintiffs would dismiss Sanwa Business Credit Corporation as a party defendant. Sanwa Leasing Corporation was served with a copy of the motion and all prior pleadings. Subsequently, the parties each signed and submitted for the Court’s consideration and signature a document entitled Agreed Order, which stated:
Plaintiffs, Authur Gallien and Wrenda Gal-lien, through their attorney, M. Randy Rice and the defendants, Sanwa Business Credit Corp. And Sanwa Leasing Corporation a/k/a Sanwa Leasing Corp., through. their attorneys, Platzer, Fineberg & Swergold hereby advise the Court that they have agreed to an amendment and substitution of the pleading to reflect the proper party in this ease....
2. That the names of Sanwa Business Credit Corp. And Sanwa Leasing, Inc. shall be corrected and substituted to be Sanwa Leasing Corporation a/k/a Sanwa Leasing Corp. and Sanwa Leasing Corporation a/k/a Sanwa Leasing Corp. shall become the defendant in this action.
3. That counsel for Sanwa Business Credit Corp. will also serve as counsel for Sanwa Leasing Corporation a/k/a Sanwa Leasing Corp. The effect of this agreement and Order of substitution of parties shall be that Sanwa Leasing Corporation a/k/a Sanwa Leasing Corp. shall become the properly served defendant to this action.
Since the plan provides for retention of jurisdiction of pending matters, this Court must determine whether the matter was pending, i.e., whether the “amendment and substitution of the pleading to reflect the proper party” relates back to the pre-confirmation *587date of the commencement of the action, May 3,1996.
Relation Back under Rule 7015
Rule 15(c), Federal Rules of Civil Procedure, incorporated by Rule 7015, provides in pertinent part:
Relation Back of Amendments. 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 pleading; 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)3 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.
Fed.R.Civ.Proe. 15(c)(2), (3).
(1) The amendment effects a change of the party or the naming of the party.
This element is liberally construed, Advanced Power Systems, Inc. v. Hi-Tech Systems, Inc., 801 F.Supp. 1450, 1456 & ns. 6 & 7 (E.D.Pa.1992), and permits not only correcting the name of a properly served party, but also permits “changing” a party, Fed. R.Civ.Proe. 15(c) (“An amendment ... relates back ... when the amendment changes the party or the naming of the party ____”)(emphasis added). “Changing” a party includes adding a party, dropping a party, substituting a party, changing the allegations of the capacity of a party, or merely correcting the name of a defendant who was properly served, i.e., correcting a misnomer. See generally Wright, Miller & Kane Federal Civil Practice and Procedure § 1498.
(2) The claim asserted against the new party arose out of the same conduct, transaction or occurrence as the previously named party.
There is no dispute as to this element. The plaintiffs did not make any new allegations in the proposed amendment. Rather, they merely seek to substitute the parties.
(3) The newly named party received notice of the suit, within 120 days of the filing of the complaint, such that it will not be prejudiced in maintaining defense on the merits.
The mere fact that there was some delay in the party being brought into the litigation or that it was not initially named does not create prejudice within the meaning of this rule. In re Convertible Rowing Exerciser Patent Litigation, 817 F.Supp. 434, 442 (D.Del.1993). Rather, the prejudice must effect a particular harm, such as denying the party an opportunity to participate in discovery or in the decision-making necessary to defend the action at trial. See id. In the instant case, no prejudice is shown. The substituted party was formally brought into the litigation in August 1996, ten months prior to the time this issue was even raised. Sanwa Leasing Corporation’s answer was virtually identical to that of the original defendant, Sanwa Business Credit Corporation. The defendant has been in the litigation during the majority .of its pendency, has participated in discovery, and has been the party-to formulate the defense and strategy. Accordingly, no prejudice exists in the substitution of parties.
(4) Within the 120 days of the filing of the complaint, the newly named party knew or should have known that the action would have been brought against it, but for the mistake concerning the identity of the proper party.
The requirement of notice is the “lynchpin” of any determination under rule 15(c) because it is “intimately connected with the policy of the statute of limitations,” the purpose of which is to protect defendants from claims of which no notice was given within a reasonable time. Advanced *588Power Systems, Inc. v. Hi-Tech Systems, Inc., 801 F.Supp. 1450, 1456 (E.D.Pa.1992). The notice need not be formal and may be imputed where there is an identity of interest. Id. at n. 10. Indeed, the notice is often imputed where the substitution or addition of parties regards related corporations, with similar names and whose attorneys are the same. See, e.g., George v. HEK America, Inc., 157 F.R.D. 489 (D.Colo.1994)(“simply adding entities that defendants themselves have pointed to as being related parties. Plaintiff has understandably had difficulty ascertaining which companies were in fact the entities with which he allegedly did business. Defendants acknowledged the possibility of confusion regarding the identity of various similarly named and ever-changing corporations ...”); Advanced Power Systems, 801 F.Supp. 1450; cf. In re Convertible Rowing Exerciser Patent Litigation, 817 F.Supp. 434 (D.Del.1993)(corporation could not be substituted for the named highly autonomous division with its own attorneys); Walton v. Waldron, 886 F.Supp. 981 (N.D.N.Y.1995)(informal notice through county attorney who represented original defendants and would represent additional defendants).
In the instant case, the new party had notice within the 120 days of the filing of the complaint as required by Rule 15(c).- Further, the defendant had constructive notice of not only the claim, but the pendency of the suit. The original party is the parent of the added party and is represented by the same counsel. The defendant itself points out that it was aware of the litigation in its August 26, 1996, motion in which it stated that it repeatedly advised plaintiff of the proper party to be sued. Finally, it is noteworthy that the defendant not only agreed to the substitution, characterizing the amendment as a correction and substitution, it in fact appears to have advocated the substitution.4
Conclusion
The substitution of the parties, effected on September 4, 1996, by an Agreed Order, relates back, pursuant to Rule 15(c), to the original date of the filing of the complaint, May 3, 1996. Inasmuch as the amendment relates back, as against this party defendant, Sanwa Leasing Corporation, on July 10, 1996, the matter was pending when the plan was confirmed. Since the matter was pending on the date of confirmation, and the plan provides for retention of jurisdiction of matters pending on that date, the Court has jurisdiction over this adversary proceeding.
ORDERED that the Court has jurisdiction over this proceeding. Trial shall be re-set by separate notice.
IT IS SO ORDERED.
. Although the debtor speaks to the intent of the plan, the intent of the plan, or the intent of the debtors’ in drafting the plan, is irrelevant.
. The plan also provides that
All rights pursuant to all sections of Bankruptcy Code including but not limited to, 11 U.S.C. § 522, 544, 545, 546, 547 and 548 and all other claims or causes of actions of the Debtors existing at the time of filing their Bankruptcy Petition are hereby preserved by the Debtors for the benefit of their creditors in existence at the time of filing, except as otherwise provided.... All proceeds generated from the prosecution or settlement of such Claims and/or causes of action shall first be applied against the reasonable fees and expenses associated with the prosecution and/or settlement of such claims and/or causes of action, and second, any remainder applied against the outstanding balance of the Unsecured Creditors.
Article XII. Although this provision provides generally for retention of rights of action, the more specific provision. Article XVI, requiring that the matter be pending or otherwise expressly disclosed, governs jurisdiction.
. Rule 4(m) requires that the summons and complaint be made upon a defendant within 120 days after the filing of the complaint.
. This same analysis applies to the notice requirements described in Harstad v. First American Bank, 39 F.3d 898 (8th Cir.1994), such that Sanwa Leasing Corporation clearly was on notice that the debtors would be asserting a claim against it. Sanwa Business Credit Corporation assertion from the beginning of the litigation that it was the incorrect party, and that its subsidiary, Sanwa Leasing Corporation was the proper party, is in marked contrast to its argument that there was “no way for Sanwa to discern the Debtor’s intent.” This fact, combined with the fact that defendant raised this issue for the first time nearly one year after confirmation and nine months after it became a party to the action, makes its arguments, at a minimum, rather disingenuous. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492629/ | MEMORANDUM OPINION
LIMBAUGH, District Judge.
This matter is before the Court on the appeal of plaintiff Central Hardware Co. from the final order of the United States Bankruptcy Court for the Eastern District of Missouri denying Central’s motion for summary judgment, granting defendant Walker-Williams Lumber Co.’s cross-motion for summary judgment, and dismissing Central’s complaint seeking avoidance under 11 U.S.C. § 547(b) of a wire transfer replacing an uncashed check issued to defendant Walker-Williams three (3) days prior to the wire transfer. This Court has appellate jurisdiction of this matter pursuant to 28 U.S.C. § 158(a). After careful consideration, for the *894reasons set forth below, the Court reverses the decision of the Bankruptcy Court and remands the ease to the Bankruptcy Court for the Eastern District of Missouri for further proceedings.
Procedural Background
Plaintiff Central brought this adversary proceeding under 11 U.S.C. § 547(b) to avoid as a preferential transfer a $129,612.22 wire transfer made to Walker-Williams four (4) days prior to the commencement of Central’s bankruptcy case. The wire transfer was initiated by Central to replace a check dated and presented to Walker-Williams three (3) days earlier. Both Central and Walker-Williams filed for summary judgment. Central contended that the wire transfer was an avoidable preferential transfer made within ninety (90) days of the filing of bankruptcy; i.e. made within the statutory prepetition period. 11 U.S.C. § 547(b). Walker-Williams contended that the wire transfer was a payment in the ordinary course of business and, therefore, not avoidable under 11 U.S.C. § 547(c)(2).
On April 24, 1996 a hearing was held by the Bankruptcy Judge on the parties’ cross-motions.1 After consideration of the parties’ pleadings, and submitted affidavits, the Bankruptcy Court denied Central’s motion for summary judgment, granted Walker-Williams’ cross-motion for summary judgment, and dismissed Central’s complaint to avoid and recover the $129,612.22 wire transfer finding that the transfer in question was made in the ordinary course of business with the provisions of § 547(c)(2).2
Issues on Appeal
1) Whether a wire transfer made by a debtor to a creditor, to replace a previously tendered check upon which the debtor has stopped payment, shortly before the debtor’s bankruptcy filing is a transfer made in the ordinary course of business and thus, not avoidable pursuant to 11 U.S.C. § 547(c)(2)?
2) Whether, based upon the record presented, the Bankruptcy Court properly granted summary judgment in favor of defendant Walker-Williams?
Applicable Standard of Review
On an appeal, the United States District Court may affirm, modify, or reverse a judgment, order, or decree of a bankruptcy judge, or remand to the bankruptcy court with instructions for further proceedings. This Court must affirm the decision of a bankruptcy court if it is supported by law and the facts contained in the record. In reviewing a bankruptcy court’s ruling, the bankruptcy court’s legal conclusions are reviewed de novo, while its findings of fact are reviewed under a “clearly erroneous” standard. In re Apex Oil, 884 F.2d 343, 348 (8th Cir.1989); Wegner v. Grunewaldt, 821 F.2d 1317, 1320 (8th Cir.1987); Pronto Enterprises v. United States, 188 B.R. 590, 591-92 (W.D.Mo.1995); Spackler v. Boatmen’s National Bank, 165 B.R. 267 (E.D.Mo.1993). Findings of fact shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of a bankruptcy court to judge the credibility of the witnesses. In re Apex Oil, at 348; In re Van Horne, 823 F.2d 1285, 1287 (8th Cir.1987); In re Martin, 761 F.2d 472, 474 (8th Cir.1985). Under Bankruptcy Rule 8013, findings of fact are clearly erroneous when they are not supported by substantial evidence, contrary to the clear preponderance of the evidence, or based on an erroneous view of the law. In re Cook, 72 B.R. 976 (W.D.Mo.1987). It is incumbent upon the reviewing court to review the entire evidentiary record because “[a] finding 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.” Lovett v. St. Johnsbury Trucking, 931 F.2d 494, 500 (8th Cir.1991) quoting United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 *895S.Ct. 525, 541-42, 92 L.Ed. 746 (1948); see also, In re Apex Oil, at 348.
A bankruptcy court’s interpretation of § 547(c)(2) in order to determine whether a payment is made in the ordinary course of business, and is not a recoverable preference transfer, is a factual analysis that may not be set aside unless clearly erroneous. In re U.SA. Inns of Eureka Springs, Arkansas, 9 F.3d 680, 685 (8th Cir.1993); In re Yurika Foods Corp., 888 F.2d 42, 45 (6th Cir.1989). Consequently, this Court may not set aside the Bankruptcy Court’s decision in this matter unless it is clearly erroneous.
The following is a recitation of the Bankruptcy Court’s findings of fact3:
1) For a period of over a year before the Debtor’s bankruptcy filing, Walker-Williams sold lumber products on credit to Central. Walker-Williams continued to supply product to the Debtor on almost a daily basis up to Central’s bankruptcy filing.
2) Shortly before the bankruptcy filing, Central sent Walker-Williams a check dated March 22, 1993 in the amount of $129,612.22 (the “Check”). This Cheek was in payment of certain outstanding invoices that Walker-Williams had issued to the Debtor for lumber products shipped to the Debtor by Walker-Williams.
3) On March 24, 1993, there were telephone conversations between representatives of the Debtor and Walker-Williams regarding the Debtor’s issuance of the Cheek and Walker-Williams receipt thereof. The only details of these conversations have been provided by John Hite, the President and CEO of Walker-Williams. Mr. Hite’s uncontroverted testimony is that the telephone calls were initiated for the purpose of determining Central’s intentions in light of the filing of bankruptcy by spirit.4 During the conversation, the representative of Central advised Walker-Williams that the Debtor was going to issue a wire transfer to replace, supercede, or supplant the Check.
4) On March 25, 1993, the Debtor stopped payment on the Cheek and issued a wire transfer to Walker-Williams in the amount of $129,612.22 (the ‘Wire Transfer”). The confirmation form for the wire transfer contains the note “stop payment ek #551003”, suggesting that the transfer and stop payment occurred contemporaneously.
5) There is no evidence that the Wire Transfer was solicited by Walker-Williams or that Walker-Williams threatened to terminate shipments of product or take any other collection action if it did not receive payment of the $129,612.22. Rather, it is the uncontroverted testimony of Mr. Hite and Mr. Gindville5 that the wire transfer was made solely on the Debtor’s initiative. During the time period in question, Walker-Williams was continuing to supply product on credit to the Debtor on almost a daily basis in accordance with the parties’ normal course of dealing.
6) It is undisputed that the amount of the Check and Wire Transfer was not unusual compared to other payments made to Walker-Williams by the Debtor during the several years preceding the bankruptcy filing.
7) It is undisputed that the timing of the Wire Transfer was consistent with the parties’ payment practices.
The Bankruptcy Court found that Walker-Williams had established the three (3) elements necessary to successfully invoke the ordinary course of business defense to a preferential transfer lawsuit. The Bankruptcy Court found that 1) the debt paid by the alleged preferential payment was incurred in the ordinary course of business between Central and Walker-Williams; 2) that the challenged payment was made in the ordinary course of business between Central and *896Walker-Williams; and 3) the challenged payment was made according to ordinary business terms.
In reaching this decision, the Bankruptcy Court held that a simple change in method of payment did not, in and of itself, take a transaction outside the ordinary course of business. It noted that “[w]hile the Court recognizes that the Debtor normally paid Walker-Williams by check, it also recognizes that the Debtor paid other creditors on several occasions by wire transfer in the one-year period prior to filing of the bankruptcy. Based on these facts, the court is satisfied that a wire transfer is sufficiently consistent with other business transactions between the parties and within the industry so as not to be outside the ordinary course of the parties’ businesses.” Bankruptcy Court’s Memorandum Opinion, pgs. 7-8. It further found that the replacement aspect of the Wire Transfer did not take the transaction outside of the ordinary course of business because, unlike certain caselaw cited by the Central, the subject check had not been dishonored prior to replacement. The Court opined that the present case differed from other cases because “[i]t was as if the Check had never been issued.” Bankruptcy Court’s Memorandum Opinion, pg. 8. The Bankruptcy Court also rested its conclusions significantly on its belief that no undue pressure by Walker-Williams had induced the replacement of the check by the wire transfer.
Finally, the Bankruptcy Court found that the challenged payment was made according to ordinary business terms because the evidence showed that wire transfers, although not the common method of payment in the industry, are occasionally used as a method of payment in the industry. The Court stated that “[tjhere was nothing unusual with regard to the size, timing, nature or form of the Wire Transfer to set it apart from other payments that are routinely made by retailers to suppliers in the industry.” Bankruptcy Court’s Memorandum Opinion, pg. 9.
Central does not appeal the issue of whether the transfer was a payment of a debt incurred in the ordinary course of business pursuant to 11 U.S.C. § 547(c)(2)(A). Only the second two elements of § 547(c)(2) are at issue in this appeal: S § 547(c)(2)(B) and (C).6 Furthermore, in the proceedings before the Bankruptcy Court, Central conceded $53,415.00 in new value was delivered after March 25,1993 and was not subject to Walker-Williams’ reclamation claim. Thus, Central seeks the recovery of only a net preference of $76,197.22.
Section 547(b) provides that transfers made by the debtor ninety (90) days prior to the filing of a bankruptcy petition may be avoided by the trustee in bankruptcy as a “preference”. However, a creditor who successfully asserts the “ordinary course of business” defense provided by § 547(c)(2) thwarts the trustee’s avoidance powers and retains the challenged payment.
Section 547(c)(2) provides in pertinent part:
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.
Section 547(c)(2) is intended to protect recurring, customary credit transactions that are incurred and paid in the ordinary course of business of the debtor and the debtor’s transferee. In re Keller Tool Corp. (Riske v. C.T.S. Systems), 151 B.R. 912, 914 (Bankr.E.D.Mo.1993).
“The legislative history indicates that the purpose of section 547(c)(2) is to ‘leave undisturbed normal financial relations, because [the section] does not detract from the general policy of the preference section to discourage unusual action by either the debtor or his creditors during the debtor’s slide into bankruptcy.’ The exception of *897section 547(e)(2) must be considered in the context of the principal goal of the preference section ‘to deter the race of diligence of creditors to dismember the debtor before bankruptcy furthers the second goal of the preference section — that of equality of distribution.’ ”
In re Jones Truck Lines, Inc., 196 B.R. 483, 493 (Bankr.W.D.Ark.1995) (citations omitted); In re Keller Tool Corp., at 914; see, Union Bank v. Wolas, 502 U.S. 151, 161, 112 S.Ct. 527, 533,116 L.Ed.2d 514 (1991); In re Gateway Pacific Corp., 205 B.R. 164, 167 (Bankr.E.D.Mo.1997).
In order to successfully establish an ordinary course of business defense, the transferee must prove by a preponderance of the evidence all three elements of § 547(c)(2). In re U.S.A. Inns of Eureka Springs, Arkansas, at 682. Furthermore, each element is distinct and must be proven independently of the other two. In the Matter of Midway Airlines, 69 F.3d 792, 798 (7th Cir.1995) citing In re U.S.A Inns of Eureka Springs, Arkansas, at 684.
Section 547(c)(2)(B)
Under § 547(c)(2)(B), the transferee must show that the debtor made the transfer in the ordinary course of business or financial affairs of the debtor and the transferee. The United States Court of Appeals for the Eighth Circuit has stated that “ ‘there is no precise legal test which can be applied’ in determining whether payments by the debtor during the 90-day period were ‘made in the ordinary course of business’; ‘rather th[e] court must engage in a “peculiarly factual” analysis.’ ” In re U.S.A Inns of Eureka Springs, Arkansas, at 682-83 quoting Lovett v. St. Johnsbury Trucking, at 497; see also, In re Gateway Pacific Corp., at 167; In re Jones Truck Lines, at 493-94.
The focus of § 547(c)(2)(B) is the past relationship between the debtor and the transferee creditor. “[T]he cornerstone of this element of a preference defense is that the creditor needs to demonstrate some consistency with other business transactions between the debtor and the creditor.” Lovett v. St. Johnsbury Trucking, at 497 quoting In re Magic Circle Energy Corp., 64 B.R. 269, 272 (Bankr.W.D.Okla.1986); see also, Jones Truck Lines, 83 F.3d 253, 257 (8th Cir.1996) (approving trial court’s instructions on § 547(c)(2)(B) as meeting requirements of Lovett, supra that court focus on past practices of debtor and transferee only). “Even if the debtor’s business transactions were irregular, they may be considered ‘ordinary’ for purposes of Section 547(c)(2) if those transactions were consistent with the course of dealings between the particular parties.” In Re Jones Truck Lines, 196 B.R. at 494 quoting Yurika Foods Corp., at 44.
Among the factors courts consider in determining whether transfers are ordinary in relation to past practices between the debtor and the transferee creditor are: 1) the length of time the parties were engaged in the transactions at issue; 2) whether the amount or form of tender differed from past practices; 3) whether the debtor or the creditor engaged in any unusual collection or payment activity; and 4) whether the creditor took advantage of the debtor’s deteriorating financial condition. In Re Grand Chevrolet, Inc., 25 F.3d 728, 732 (9th Cir.1994) citing In re Richardson, 94 B.R. 56, 60 (Bankr.E.D.Pa.1988).
In the present case, the analysis regarding § 547(c)(2)(B) focuses primarily on the form of tender; i.e. whether the transfer in question was made in a similar manner to transfers made prior to the preference period. The Bankruptcy Court, after determining that there had been no undue pressure exerted by Walker-Williams which precipitated the wire transfer, held that a change in the method of payment was insufficient grounds to render the payment outside the ordinary course exception. After reviewing the entire factual record, this Court finds that the Bankruptcy Court’s findings were clearly erroneous.
It was undisputed that Central and Walker-Williams had engaged in similar transactions for a number of years. The uncontroverted evidence was that out of 238 separate transfers from Central to Walker-Williams between January 1,1991 and March 29,1993 only one transfer had been changed from a check to a wire transfer — the switch being *898made four (4) days before filing for bankruptcy. All prior transfers had been made by check and no other checks had been replaced by a wire transfer.
The Bankruptcy Court focused on two factors: firstly, that there was no credible evidence that Walker-Williams engaged in any unusual collection activity during the preference period; and secondly, that the change in method of payment was not outside the ordinary course of business because Central had paid other creditors on several occasions by wire transfer in the one-year period prior to filing for bankruptcy.
Payments made in response to unusual debt collection practices by the creditor are outside of the scope of the ordinary course of business defense. In re Craig Oil, 785 F.2d 1563, 1566 (11th Cir.1986); In re Schwinn Bicycle, 205 B.R. 557, 572 (Bankr.N.D.Ill.1997); Jones Truck Lines, 196 B.R. at 494; In the Matter of Brown Transport Truckload, 161 B.R. 735, 739-40 (Bankr.N.D.Ga.1993). The Court agrees that there was no credible evidence to indicate that the replacement of the check with a wire transfer was in response to any undue or intense pressure from Walker-Williams to do so. Mr. Hite’s uneontroverted testimony was that he initiated contact with Central (upon learning of the bankruptcy filing by Central’s parent corporation, Spirit Holding) to simply find out what Central’s “intentions” were, and that the Central representative advised Mr. Hite that Central was going to replace the cheek with the wire transfer. Furthermore, the Court agrees that Mr. Eager’s affidavit7 fails to set forth facts as to the circumstances of the telephone conversation and/or the reasons behind the replacement of the check with a wire transfer. He merely speculates that the a check would be replaced by a wire transfer if a vendor refused to ship product unless such a change in payment method took place. Such a speculation fails in the face of the fact that Walker-Williams continued to ship product on credit on an almost daily basis.
However, the Bankruptcy Court erred in refusing to consider whether the wire transfer was in response to unusual “payment practice(s)”. In describing the ordinary course of business exception, Congress stated that:
“[i]ts purpose 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 the creditor during the debt- or’s slide into bankruptcy.”
H.R.Rep. No. 595, 95th Cong., 1st Sess. 373-74 (1977), reprinted in 1978 U.S.Code Cong. & Ad.News 5787, 6329 (emphasis added); see also Union Bank v. Wolas, 502 U.S. at 160, 112 S.Ct. at 532-33. It is clear that Congress’ intentions in formulating § 547(c)(2) was to protect those payments which do not result from “unusual” debt collection or payment practices. See, In re Craig Oil, at 1566; In the Matter of Brown Transport Truckload, at 739-40. Consequently, it is necessary to look at not only the creditor’s actions during the preference period, but also the debtor’s actions. In the present case, the uncontroverted evidence is that the replacement of the check by wire transfer was the result of Central’s initiative (a fact recognized by the Bankruptcy Court). Central had never paid Walker-Williams by wire transfer before, let alone, replaced a cheek with a wire transfer. There was simply no evidence that a payment by wire transfer was ever part of the practice between Central and Walker-Williams. All the evidence was that, except for the challenged payment, payments, were made by company check. Clearly, Central’s replacement of the check with a wire transfer was not consistent with the established past practices between the parties. See, In re Valley Steel Corp., 182 B.R. 728, 737 (Bankr.W.D.Va.1995). Accordingly, this Court finds that the replacement of the check by a wire transfer was not made in the ordinary course of business.
The Bankruptcy Court was particularly impressed with the holdings of the bankrupt*899cy courts in In re Matter of Brown Transport Truckload, supra and Sims Office Supply, Inc. v. Ka-D-Ka, Inc., 94 B.R. 744 (Bankr.M.D.Fla.1988). Both these courts opined that a change in the method of payment is not sufficient grounds, in and of itself, to remove a transfer from the ordinary course of business exception. See, Brown Transport Truckload, at 740 (“Simple changes in the amount of credit that a creditor is willing to extend to a debtor, and changes in method of payment by a debtor to a creditor are not enough to make the business relationship not ordinary. More drastic changes must be effected before payments are considered not to be ordinary.”); Sims Office Supply, at 749-50. In Sims, the challenged replacement payment was made more than a month prior to the filing of bankruptcy by the debtor. In Brown Transport Truckload, the debtor changed its method of payment prior to the commencement of the preference period, and continued to pay by the new method throughout the preference period. These cases are not an “eve of bankruptcy” case as is the instant one. Those cases are limited to their narrow facts and are inapposite to the facts presented in this ease.
The Bankruptcy Court further erred in focusing on the payment practices as between Central and other creditors in its application of § 547(c)(2)(B). Section 547(c)(2)(B) focuses on the past practices of the parties only. The “ordinary course of business” is established by the past practices of the debtor and the transferee creditor, not the past practices of either the debtor or the transferee with other parties. Jones Truck Lines, 83 F.3d. at 257 (In approving the lower court’s instructions as to § 547(c)(2)(B), the Eighth Circuit Court of Appeals held that the focus on the relationship between the debtor and creditor was proper and that “[the creditor’s] contention that the court should have focused the jury’s attention on [the debtor’s) late payments to other creditors and on (the creditor’s] acceptance of late payments from other debtors is wrong.”); In re U.S.A Inns of Eureka Springs, Arkansas, at 682; Lovett, at 497. The Bankruptcy Court clearly erred when it focused on Central’s payment by wire transfer to other creditors as proving that no change in method of payment occurred as between Central and Walker-Williams which took the challenged payment outside the ordinary course of business between these two parties.
Section 547(c)(2)(C)
Even if this Court were to find that the Bankruptcy Court had not erred in its factual findings and legal conclusions when it held that defendant Walker-Williams had established the second element required under § 547(c)(2), this Court finds that the defendant failed to meet its burden in establishing the third required element; i.e. § 547(c)(2)(C), that the payment was made according to “ordinary business terms”. The Bankruptcy Court’s finding that Walker-Williams had proven that the challenged payment was made according to ordinary business terms was clearly erroneous.
Under subsection § 547(c)(2)(C), the transferee must show that the challenged payment was made according to ordinary business terms. In re U.S. A Inns of Eureka Springs, Arkansas, at 683. The “ordinary business terms” test is an objective test which focuses upon the practices of the creditor’s competitors. The Eighth Circuit Court of Appeals, in concurring with the Seventh Circuit’s review and analysis of the proof necessary for a defendant creditor to carry its burden under subsection (c)(2)(C), described the proof necessary for the third element of the ordinary course of business defense as follows:
“What constitutes ‘ordinary business terms’ will vary widely from industry to industry ... Subsection (c)(2)(C) does not require a creditor to establish the existence of some uniform set of business terms within the industry in order to satisfy its burden. It requires evidence of a prevailing practice among similarly situated members of the industry facing the same or similar problems. The legislative history reveals only that the purpose of § 547(c)(2) is ‘discourage unusual action by either the debtor or his creditors during the debtor’s slide into bankruptcy.’ In light of the statute’s construction and its *900legislative history, we feel the focus of subsection (e)(2)(C) should be on whether the terms between the parties were particularly unusual in the relevant industry, and that evidence of a prevailing practice among similarly situated members of the industry facing the same or similar problems is sufficient to satisfy subsection (e)(2)(C)’s burden. We agree with the Seventh Circuit’s formulation [citing In re Matter of Tolona Pizza Products Corp., 3 F.3d 1029, 1033 (7th Cir.1993) ] that “ ‘ordinary 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, and that only dealings so idiosyncratic as to fall outside that broad range should be deemed extraordinary and therefore outside the scope of subsection (C).” ”
In re U.S.A. Inns of Eureka Springs, Arkansas, at 685 (legislative citation omitted); see also, In re Schwinn Bicycle Co., at 573; In re Jones Truck Lines, 196 B.R. at 495.
In the present ease, the Bankruptcy Court found that defendant Walker-Williams had carried its burden under § 547(c)(2)(C) because “[t]here was nothing unusual with regard to the size, timing, nature, or form of the Wire Transfer to set it apart from other payments that are routinely made by retailers to suppliers in the industry.” Bankruptcy Court’s Memorandum Opinion, pg. 9. This finding rested entirely on the affidavit of Mr. Gindville from which the Bankruptcy Court gleaned “... although payments are typically made by check, many retailers in the industry will, on occasion, make payments by wire transfer.” Bankruptcy Court’s Memorandum Opinion, pg. 9. This led the Bankruptcy Court to opine that “it is apparent that the Wire Transfer can in no sense be considered to be ‘so idiosyncratic as to fall outside that broad range’ of conduct and practice followed by parties similarly situated to Walker-Williams and Central.” Bankruptcy Court’s Memorandum Opinion, Pg- 9-
In his affidavit, Mr. Gindville attests that he has held (at the time of the affidavit— November 1995) the position of Secretary, Treasurer and Chief Financial Officer of Walker-Williams for five (5) years. He further attests that he has worked in the wholesale lumber distribution industry for approximately five (5) years. Gindville Affidavit, paragraphs 3 and 4. He attests that part of his responsibilities is “to know generally the payment terms that the competitors of Walker-Williams offer their customers.” He has gained this knowledge through conversation with ‘Walker-Williams sales personnel, with individuals in charge of credit and purchasing decisions as well as with customers and competitors of Walker-Williams.” Gindville Affidavit, paragraph 5. He further attests that through his membership with the Building Materials Manufacturers Credit group of the National Association of Credit Management he has “a good general knowledge of the credit and collection practices of numerous other companies engaged in the wholesale lumber distribution industry.” Gindville Affidavit, paragraph 7.
Finally, as to payment method, Mr. Gindville attests as follows:
“On occasion customers of Walker-Williams deviated from their standard payment procedure. Depending upon the circumstances creating the need for the deviation, this practice was acceptable to Walker-Williams and to other companies in the wholesale lumber products distribution industry.”
Gindville Affidavit, paragraph 18. With regard to the challenged payment method change, Mr. Gindville’s only remarks are as follows:
“On March 24, 1993, Walker-Williams received Central’s check number 551003 in the amount of $129,612.22 in payment of 19 invoices. This check was sent directly to our bank by Central as was the ordinary course of business between Central and Walker-Williams. Central’s account was credited with payment based upon receipt of the cheek.
On March 25, 19958 Walker-Williams received a wire transfer in the amount of *901$129,612.22 in payment of the cheek. Central stopped payment on check number 551003 at the time it sent the wire.”
Gindville Affidavit, paragraphs 18,19 and 20.
At the time of his affidavit, Mr. Gindville had been in the wholesale lumber distribution industry for only a few years, and evidently, his entire employment in the industry had been with the defendant. He speaks only of obtaining “general knowledge” of the credit and collection practices of other companies. He fails to identify even one of these other companies. In fact, nowhere in his affidavit does he identify any one of Walker-Williams’ competitors of which he has personal knowledge of their credit and collection practices. He attests only that under some unidentified circumstances, other customers of Walker-Williams have been allowed to “deviate” from their customary practice and that this “deviation” was also acceptable to other unidentified companies. Finally, he attests only that payment by check was the “ordinary course of business” between Central and Walker-Williams. Nowhere, does he attest that stopping payment on a check and replacing it with a wire transfer was the “ordinary course of business” between the parties. More importantly, nowhere does he attest that stopping payment on a check and replacing it with a wire transfer was the “ordinary course, of business” or a common occurrence with the other unidentified companies.
This type of vague generalized evidence is not the type that courts have found sufficient to meet the burden of establishing § 547(c)(2)(C). “A creditor’s evidence on the ‘ordinary business terms’ may not be vague and must be based on personal first-hand knowledge gained from exposure to the competitors’ collections practices during or near the preference period. General testimony by an employee of the defendant, unsupported by any specific data, is insufficient to prove ‘ordinary business terms’.” In re Schwinn Bicycle Co., at 573 (citations omitted). In In re U.S.A Inns of Eureka Springs, Arkansas, at 685, the defendant creditor’s Chairman of the Board, President, and Chief Financial Officer testified to the regular practice in the savings and loan industry to work with delinquent customers as long as a payment was forthcoming. He further testified that the Office of Thrift Supervision had directed the defendant to work with delinquent customers in a manner that conformed to industry-wide standards. Id., at 685. Finally, he testified that the manner in which the debtor plaintiff had paid the defendant was in accordance with the ordinary business terms in the savings and loan industry for the type of subject real estate trouble loan. Id., at 685. The appellate court felt that this specific and firsthand knowledge testimony was “sufficient evidence that United [defendant] was following the prevailing practice among similarly situated savings and loans with delinquent customers to satisfy (c)(2)(C)’s burden.” Id., at 685-86. In other cases, preference defendants have satisfied the § 547(c)(2)(C) burden by introducing evidence of its competitors’ receivable and collections practices, even the actual payment practices of its competitors’ customers (In re Schwinn Bicycle Co., at 573 citing In the Matter of Tolona Pizza Products Corp., at 1033; Solow v. Ogletree, Deakins, Nash, Smoak & Stewart, 180 B.R. 1009, 1016 (Bankr.N.D.Ill.1995); Luper v. Columbia Gas of Ohio, Inc., 91 F.3d 811, 814 (6th Cir.1996)); or have testified as to actual industry-related seminars or workshops they have attended which contributed to their personal knowledge of the prevailing practices among similarly situated members of the industry (In re Jones Truck Lines, 196 B.R. at 495).
It is clear that Section 547(c)(2)(C) requires objective specific evidence that the disputed payment is “ordinary” in relation to the prevailing standards in the creditor’s industry. As noted before “[i]t requires evidence of a prevailing practice among similarly situated members of the industry facing the same or similar problems.” In re U.S.A Inns of Eureka Springs, Arkansas, supra. Here there was no evidence as to the prevailing practice in the industry. Mr. Gindville only spoke of a “deviation”; he never explained what constituted the deviation. He never identified the circumstances under which such a “deviation” was acceptable to other companies. He never identified the other companies or gave any evidence as to *902their customary business practices. In short, he never presented any evidence that any other company or companies in the industry routinely, or even occasionally, had their customers replace a standard payment by check with a wire transfer. Accordingly, Walker-Williams produced no evidence sufficient to carry its burden under subsection (c)(2)(C). The Bankruptcy Court clearly erred by holding otherwise.
Standard under which the Bankruptcy Court adjudged the respective motions for summary Judgment
The Court has reviewed the entire record on appeal and finds that the Bankruptcy Court did not err in its review and analysis of the cross-motions for summary judgment. To find in favor of one party, and not the other, especially as regards cross-motions for summary judgment, does not inherently imply that the reviewing court failed to view the facts in a light most favorable to the unsuccessful party.
Accordingly,
It is this Court’s determination that defendant Walker-Williams failed to produce the evidence necessary to meet its burden under § 547(c)(2). The Bankruptcy Court clearly erred in finding that the challenged payment was made in the ordinary course of business or financial affairs of the debtor. The decision of the Bankruptcy Court will be reversed and appellant Central Hardware’s motion for summary judgment shall be granted, and appellee Walker-Williams’ motion for summary judgment denied. Appellant Central Hardware’s complaint to avoid and recover the March 22 (or 25, as the case may be), 1993 preferential transfer should be reinstated and granted. The case will be remanded for further proceedings consistent with this opinion.
. A transcript of this hearing has been filed with the Court and is a part of the appellate record.
. The Bankruptcy Judge made his ruling from the bench, and instructed counsel for Walker-Williams to provide him with an order and memorandum opinion. The final order issued by the Bankruptcy Court, on December 20, 1996, is a version of the memorandum opinion Walker-Williams’ counsel provided that the Bankruptcy Court modified to accord with the Bankruptcy Court’s impressions. Bankruptcy Court Order, dated December 20, 1996, pg. 2, n. 1.
. These factual findings are taken directly from the Bankruptcy Court’s December 20, 1996 final order.
. Although not technically a “finding of fact” as set forth by the Bankruptcy Court, it is important to note, as did the Bankruptcy Court, that Central’s parent corporation (Spirit Holding Co.) had filed a Chapter 11 petition on March 23, 1993; and that the telephone call inquiring about Central's intentions in light of Spirit’s bankruptcy filing had been initiated by Mr. Hite on behalf of Walker-Williams.
. At the time of the hearing, John Gindville was the Secretary, Treasurer and Chief Financial Officer of Walker-Williams.
. Inherent in formulating the disputed issues, is the fact that the parties do not dispute the preferential nature of the subject payment, and that the requirements of § 547(b) were satisfied.
. During the relevant time-period, James Eager was Central’s Vice-President of Finance and responsible for authorizing wire transfers.
. The affidavit uses the date "March 25, 1995”; however, the evidence is quite clear that the correct date is "March 25, 1993”. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492630/ | DECISION ON NONDISCHARGEABILITY PURSUANT TO 11 U.S.C. SECTION 523(a)(2)(B)
DOROTHY EISENBERG, Bankruptcy Judge.
The Town of Hempstead Federal Credit Union (“HEFC” or the “Plaintiff”), filed a complaint to determine the dischargeability of a debt in the amount of $15,889.06 pursuant to 11 U.S.C. Section 523(a)(2)(B). This Court held a trial on this adversary proceeding on September 30 and October 23, 1997. Upon consideration of the evidence presented by HEFC and Mr. and Mrs. Bruce (the “Bruces” or the “Debtors”), this Court finds that the Plaintiff’s debt is dischargeable based on the following findings of fact and conclusions of law.
FINDINGS OF FACT
Rudolph Bruce has been employed by Nassau County in the sewer maintenance department for the past thirteen yeai’s. Joan Bruce is a long-time employee of the U.S. Postal Service on a part-time basis. As an employee of Nassau County, Rudolph Bruce was eligible to apply for loans from HEFC, the Plaintiff herein.
In the past, Mr. Bruce had taken out personal loans from the Nassau County Federal Credit Union (“NCFCU”) from time to time in varying amounts to assist him during times of financial trouble. Mrs. Deborah D’Abbraccio, who was employed by the NCFCU during the time period from 1985 to 1995, interviewed Mr. Bruce for several of the loans and assisted in the processing of these loans. Mrs. Bruce was co-maker on several of the loans given by the NCFCU, and in connection with the loan approval process, TRW reports were run on Mrs. Bruce. In each instance, the TRW report reflected that Mrs. Bruce was indebted to the New York Metro Area Postal Credit Union (“Metro”) pursuant to a revolving credit agreement not to exceed $6,000. Mrs. Bruce had been indebted to Metro for the *940past twenty years, and generally carried a balance in excess of $5,000.
On August 24, 1994, the Debtors purchased a home located in Hempstead, N.Y. In connection with the purchase of then-home, the Debtors obtained financing by EAB Bank in the amount of $75,000, secured by a first mortgage on the premises. In order to obtain the financing by EAB, the Debtors filled out a Uniform Residential Loan Application upon which the Debtors were obligated to list all of their debts. Included in the list of debts was Mrs. Bruce’s obligation to Metro in the amount of $5,639. In connection with the mortgage, EAB had obtained TRW reports for Mr. Bruce and Mrs. Bruce, and the Metro obligation was listed on Mrs. Bruce’s report. As a result of the purchase of the home, the Debtors became obligated to make monthly mortgage payments in the amount of $955. Shortly after purchasing their home, the Debtors encountered difficulty in meeting their financial obligations, and as a result their credit card debt increased significantly. Within one year of obtaining the mortgage from EAB, Rudolph Bruce visited the loan office of HEFC and discussed his financial situation with Mrs. D’Abbraccio, who, after leaving NCFCU, became a manager for loans in the Plaintiffs lending department. Mrs. D’Abbraccio, who was familiar with Mr. Bruce due to her prior employment with NCFCU, suggested that he apply for a debt consolidation loan which would reduce his monthly obligations significantly. Although she had been the loan officer on several prior loans to Mr. Bruce, she denied being familiar with the facts contained in his prior loan applications as such information may have applied to the loan in question, which included information as to Mrs. Bruce, who cosigned the loans. This is not unreasonable in light of the large volume of loans Mrs. D’Abbraeeio processed during any given time period. Before the Debtors executed the loan documents, she reviewed the Debtors’ finances and assisted them with the necessary forms, including a Loanliner Application and Credit Agreement.
When reviewing loan applications, Mrs. D’Abbraccio was obligated to comply with lending guidelines promulgated by the Board of Directors of HEFC. Said guidelines must be approved by the National Credit Union Administration, which audits HEFC on a regular basis. Pursuant to the formula, the applicant’s monthly gross income is divided by the monthly debts, inclusive of the monthly payment of the loan being sought. If, as in the case of the Debtors, the applicant has a mortgage and a car loan, the debt to income ratio cannot exceed 40%. Initially, Mr. Bruce sought to obtain a debt consolidation loan based on his finances alone. On Item 7 of the Loanliner Application, Mr. Bruce was asked to list all of his debts excluding the debts he was seeking to consolidate. Mr. Bruce listed his mortgage and his debt due to NCFCU. Based on Mr. Bruce’s debt to income ratio, he was advised that he would need Mrs. Bruce to co-sign for the loan. Mr. Bruce was advised to return to the credit office with his wife, who was to bring a copy of her pay stub for purposes of income verification.
The Bruces returned to the credit office to see Ms. D’Abbraecio, and Mrs. Bruce had her pay stub in hand. Mrs. D’Abbraeeio reviewed Mrs. Bruce’s pay stub, which reflected, inter alia, the following on a biweekly basis:
—Gross income: $1,822.68
—Deductions
“A lot”: $600.00
UN W: $15.08
INS 3L: $5.60
VBP: $6.00
8UND: $38.75
L0588: $54.82
HP512: $58.90
—Net pay: $799.93
(Plaintiffs Exh. 8).
Mrs. Bruce was questioned whether her Loanliner Application revealed all of her debts and she indicated that it did. The Loanliner Application made no mention of her obligation to Metro. On Item 7 of the Loanliner Application, which required a listing of all debts, “see applicant” had been written across the lines. Therefore, Item 7 on Mrs. Bruce’s application was the same as Item 7 on Mr. Bruce’s application, and the Metro obligation was not disclosed as an *941additional debt held by Mrs. Bruce. Mrs. D’Abbraccio ran an Equifax credit search on both Mr. Bruce and Mrs. Bruce at the time the loan was made, which only revealed the credit card obligations Mr. Bruce was seeking to consolidate, as well as the other debts listed by the Debtors on their respective Loanliner Applications. The Equifax report did not list the continuing obligation Mrs. Bruce had to Metro. The Plaintiff made no further credit check of any other service.
The Bruces also filled out an Advance Request Voucher and Security Agreement dated September 26, 1995, at the time the loan was made. On the agreement, the Debtors were to list changes since the last advance. The Metro debt of approximately $400 per month was not listed on the agreement.
Mrs. Bruce had been indebted to Metro for twenty years. The Metro obligation had been revealed in prior loan applications and appeared on TRW reports obtained by other lenders.
At the time Mrs. D’Abbraecio processed the debt consolidation loan and reviewed Mrs. Bruce’s pay stub, she did not inquire as to the nature of the $600 deduction marked “alot” which was reflected on Mrs. Bruce’s pay stub, nor did she inquire as to whether Mrs. Bruce was paid on a weekly or biweekly basis. If Mrs. D’Abbraecio had attempted to discover the genesis of the $600 biweekly deductions for “alot”, she would have learned that approximately $200 of the deduction went towards payment of the Metro obligation. The remainder was applied in partial payment of the Debtors’ mortgage and for a savings plan.
Based on the financial information provided by the Debtors, and the Equifax credit report, the Plaintiff concluded that the Debtors’ debt to equity ratio was 38% which fell within the guidelines for approval that the Plaintiff was obligated to follow. Therefore, she authorized the loan. However, this debt to equity ratio was based on an incorrect analysis by the witness of Mrs. Bruce’s pay stub. First, Mrs. D’Abbraccio did not use the proper amount on the pay stub reflecting bi-weekly gross pay of $1,822.68. Mrs. D’Abbraccio’s testimony revealed that she incorrectly assumed that Mrs. Bruce’s pay was $556.14, which number was not under the “gross pay” column. If Mrs. D’Abbraccio had properly reviewed the pay stub, she would have seen that the amount of $556.14 was clearly not a statement of her gross pay, but was a component of her gross pay. (Plaintiffs Exh. 8). Further, Mrs. D’Abbraecio compounded her error by falsely assuming that Mrs. Bruce was paid on a weekly basis. Therefore, she took the incorrect amount of $556.14 multiplied this amount by 52, and divided this number by 12 to come up with a monthly gross pay of approximately $2,417 (PlaintifPs Exh. 6).
In fact, if the correct figures were used by the Plaintiff at the time the Debtors applied for the loan in question, the Plaintiff would have discovered that the Bruces’ debt to income ratio was 28% if the Metro obligation was not included, and 32% if the Metro obligation was included. Mrs. Bruce’s gross monthly income was $3,949, based on a biweekly income of $1,822, as reflected in her pay stub. When added to Mr. Bruce’s income, the Debtors’ monthly gross income amounted to $6,366. Upon dividing the Debtors’ monthly disclosed debt of $1,590 by the Debtors’ true gross monthly income, the Court arrives at a debt ratio equal to 28%. Even if the monthly obligation to Metro in the amount of $400 is added to the Debtor’s monthly debt of $1,590, the. debt ratio equals 32%, which is still well within the 40% guideline adopted by HEFC. Therefore, the Bruces would have qualified for the debt consolidation loan regardless of whether the obligation to Metro was included.1
*942The Bruces received their loan in the amount of $17,111.06, which was used to pay off credit card balances, resulting in a smaller monthly payment to debt service. On both the Loanliner Application and the Advance Request Voucher and Security Agreement, Mrs. Bruce provided her signature and made a representation that the information on the forms was true and accurate. Mrs. Bruce’s rationale for not listing the Metro debt on either form was that her pay stub reflected a deduction for the Metro loan, and that any credit report run on Mrs. Bruce would have revealed her obligation to Metro, as reflected in her TRW report.
The Bruces had never fallen in arrears on their obligations to the Nassau County Federal Credit Union, and Mrs. D’Abbraccio acknowledged that she had no reason to believe they were untrustworthy or deceptive people. There is no indication that the Bruces knowingly or intentionally failed to reveal to Mrs. D’Abbraceio the debt owed to Metro in an attempt to qualify for the loan, nor were the Bruces aware that HEFC used incorrect numbers when determining whether the Bruces qualified for the debt consolidation loan.
Shortly thereafter, the Bruces fell behind in their financial obligations, resulting in the filing of a petition for relief under Chapter 7 of the Bankruptcy Code on July 23, 1996. On January 31, 1997, the Plaintiff commenced this adversary proceeding, alleging that Mr. and Mrs. Bruce fraudulently induced the Plaintiff to loan the funds in question by failing to disclose Mrs. Bruce’s loan with Metro, and that the debt owed to the Plaintiff in the amount of $15,889.06 should be deemed non-dischargeable under Section 523(a)(2)(B) of the Bankruptcy Code. At the trial, the complaint as to Mr. Bruce was dismissed, leaving at issue whether (1) Mrs. Bruce’s failure to disclose the Metro loan was material to HEFC’s decision to grant the loan; (2) HEFC reasonably relied on Mrs. Bruce’s failure to disclose the Metro obligation in approving the loan; and (3) Mrs. Bruce intentionally failed to disclose her debt to Metro in order to induce HEFC to offer the debt consolidation loan.
DISCUSSION
In furtherance of the objectives of the bankruptcy laws to provide a fresh start to an honest but unfortunate debtor, all exceptions to discharge are to be strictly construed in favor of the debtor and against the creditor, who also bears the burden of proof First Am. Bank of N.Y. v. Bodenstein (In re Bodenstein), 168 B.R. 23, 27 (Bankr.E.D.N.Y.1994); Hudson Valley Water Resources Inc. v. Boice (In re Boice), 149 B.R. 40, 43 (Bankr.S.D.N.Y.1992); Horowitz Finance Corp. v. Hall (In re Hall), 109 B.R. 149, 153 (Bankr.W.D.Pa.1990). The burden of proof required to establish an exception to discharge under Section 523 of the Bankruptcy Code is a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 661, 112 L.Ed.2d 755 (1991). Where a plaintiff presents sufficient evidence to prove the non-dischargeability of the debt in question, the burden thereafter shifts to the debtor to provide evidence to rebut the plaintiff’s prima facie case. See Bodenstein, 168 B.R. at 28; Southwest Fin. Bank & Trust Co. v. Stratton (In re Stratton), 140 B.R. 720, 724-25 (Bankr.N.D.Ill.1992).
HEFC alleges that its debt should be deemed nondischargeable under Section 523(a)(2)(B) of the Bankruptcy Code, which provides in relevant part:
(a) A discharge under section 727 ... of this title does not discharge an individual debtor from any debt -
(2) for money, property, services, or an extension, renewal, or refinancing or credit, to the extent obtained by -
(B) use of a statement in writing -
(I) that is materially false;
(ii) respecting the debtor’s ... financial condition;
(iii) on which the creditor to whom the debtor is liable for such money, property or services reasonably relied; and
(iv) that the debtor caused to be made or published with intent to deceive.
*94311 U.S.C. Section 528(a)(2)(B). Each of the elements must be proven by the plaintiff in order to it to succeed under this section.
Based on the facts before the Court, it is undisputed that Mrs. Bruce’s signed Loanliner Applcation, which was submitted to HEFC in support of the applcation for the debt consoldation loan, constitutes a written statement respecting her financial condition. It is also clear that Mrs. Bruce’s Metro oblgation was not Isted in item 7 of the Loanliner Applcation regarding Mrs. Bruce’s debts. However, HEFC has failed to establsh that such omission was material or intentional.
A materialy false statement has been described as “one that contains an important or substantial untruth. The measuring stick of material falsity is whether the financial institution would have made the loan if the debtor’s true financial condition had been known.” In re Stratton, 140 B.R. at 722. If HEFC had used the proper calculations when determining Mrs. Bruce’s monthly gross pay, then the Bruces would have qualified for the debt consoldation loan even if the Metro oblgation was disclosed. Therefore, by HEFC’s own guidelnes, the omission of the Metro oblgation from the Loanliner Applcation would have made no difference in HEFC’s decision to grant the loan if the correct gross pay figures were utilized in HEFC’s calculations. As a result, this Court cannot find that the omission of the Metro oblgation was material in any respect.
The next element of the exception to discharge is whether HEFC reasonably reled on Mrs. Bruce’s financial statement contained in the Loanlner Applcation. See Field v. Mans, 516 U.S. 59,-, 116 S.Ct. 437, 442, 133 L.Ed.2d 351 (1995). The reasonableness of a creditor’s relance is determined by the facts pecular to each case. In a case involving a lending institution, this standard includes a comparison of the creditor’s actual conduct with the debtor and the industrywide practice. In re O’Connor, 149 B.R. 802, 809 (Bankr.E.D.Va.1993); In re Compton, 97 B.R. 970 (Bankr.N.D.Ind.1989). In this case, given that HEFC’s calculations were based on mistaken assumptions, any relance on said calculations were not reasonable by any standard.
HEFC did provide ample testimony that its lending practices fall within the guidelines mandated by the National Credit Union Administration. Mrs. D’Abbraccio reviewed the Debtors’ applcations and Mrs. Bruce’s pay stub to determine their debt ratio, and reviewed the Debtors’ Equifax reports to ensure that to the best of her knowledge, al debts were correctly disclosed. Further, Mrs. D’Abbraccio testified that she questioned the Debtors to make sure that no material information had been left off the applcations. However, HEFC incorrectly calculated the Debtors’ debt ratio at 33% based upon an erroneous conclusion that Mrs. Bruce was paid the amount of $556.14 on a weekly basis. HEFC’s analysis of the Debtors’ financial condition was flawed, and HEFC’s alegations that if the Metro debt was known and included in the calculations the debt ratio would have exceeded 40% is also inaccurate. In fact, when the actual gross income figures are calculated together with the Debtors’ oblgations inclusive of the debt to Metro, the Debtors’ debt ratio stil falls within the Plaintiff’s guidelines for granting the debt consoldation loan. Therefore, any actual relance on the omission of the Metro oblgation was not reasonable.
Finally, HEFC has failed to establsh by a preponderance of the evidence that Mrs. Bruce intentionally failed to disclose the Metro debt in order to obtain the debt eonsoldation loan. Intent to deceive may be gleaned from the surrounding circumstances and a demonstration of reckless disregard for the truth also satisfies the intent requirement. In re Stratton, 140 B.R. at 723 (other citations omitted). However, the circumstances surrounding this transaction al point to Mrs. Bruce’s lack of intent to defraud. Mrs. Bruce disclosed the Metro oblgation to EAB when she and her husband applied for a mortgage, and the loan applcation to EAB did not contain any omissions or misstatements. Prior credit cheeks by previous lenders also revealed the Metro debt which had been in existence for twenty years. The Loanliner Applcation did not contain any other misstatements which would indicate an *944intent to be untruthful. In addition, Mrs. Bruce testified that she was under the impression that she was only to list the loans to be consolidated and she believed that her pay stub accurately reflected her obligation to Metro. She was aware that the obligation had been listed on her TRW reports each time this search was used. She believed that this information would have been revealed to HEFC had they chosen to use TRW’s credit reporting service. She was not aware that HEFC used Equifax reports to verify financial information. Finally, rightly or wrongly, Mrs. Bruce believed that Mrs. D’Abbraccio was aware of the Metro obligation due to her prior employment at NCFCU where she had processed a number of loans for the Bruces and the Metro loan had been revealed consistently.
This Court found the Debtors to be credible witnesses and was not given any reason to doubt the veracity of their testimony. The Debtors’ credit history and prior dealings with Mrs. D’Abbraccio did not indicate that the Debtors were customarily untruthful or that they had failed to honor past obligations. Mrs. D’Abbraccio testified that she knew the Debtors to be truthful in the past, and that the Debtors generally remained current with their financial obligations. Based on the preponderance of evidence supporting a lack of fraudulent intent, the Court cannot find that Mrs. Bruce fraudulently or recklessly failed to disclose the Metro debt. Her failure to disclose the Metro obligation appears to have been an honest oversight by Mrs. Bruce or a misunderstanding as to what debts were to be listed on item 7 of her Loanliner Application, but clearly not an intentional effort to deceive.
In sum, HEFC has failed to sustain its burden of proof as to several of the elements of Section 523(a)(2)(B) of the Bankruptcy Code. The omission of an immaterial fact which would have no bearing, pro or con, upon the granting of a loan or incurring of a debt, precludes this Court from finding that the debt is nondisehargeable. In addition, there is no indication from the record before the Court that the Debtors intended to defraud the Plaintiff. This lack of evidence to support a finding of intent to defraud is in and of itself sufficient to grant the Debtors a discharge of this debt. Even if the Plaintiffs calculations were correct, and the additional debt owed to Metro brought the loan into a position of non-compliance with its lending practices, the debt would still be dischargeable based on the lack of evidence as to Mrs. Bruce’s intent to deceive pursuant to Section 523(a)(2)(B)(2)(iv) of the Bankruptcy Code. Therefore, the Court finds in favor of the Debtors.
CONCLUSION
1. The Court has jurisdiction over the subject matter and the parties to this core proceeding pursuant to 28 U.S.C. Section 1334 and Section 157(b)(2)(I).
2. HEFC has failed to establish by a preponderance of the evidence that Mrs. Bruce’s failure to list the Metro obligation on her Loanliner Application was a material omission because such failure to list the Metro obligation had no bearing on whether the Debtors qualified for the debt consolidation loan.
3. For the same reasons, HEFC has failed to establish any reasonable reliance on the omission of the Metro obligation.
4. HEFC has failed to establish by a preponderance of the evidence that Mrs. Bruce’s failure to list the Metro obligation on the Loanliner Application was intentional or constituted a reckless disregard for the truth.
5. Based on HEFC’s failure to establish a prima facie case under Section 523(a)(2)(B) of the Bankruptcy Code, the Debtors’ debt to HEFC in the amount of $15,889.06 is discharged. Settle an Order in accordance with this decision within ten (10) days hereof.
. The Court notes that at trial Mrs. D’Abbraccio realized her mistake in assuming that Mrs. Bruce . was paid on a weekly basis, and calculated that even if the mistake were corrected, the Bruce’s debt ratio would equal 39%, and therefore they would still qualify for the loan if the Metro obligation were not included. Mrs. D’Abbraccio also testified that if her mistake was corrected and the Metro obligation were included, the Debtors would not have qualified for the debt consolidation loan because their debt ratio would have exceeded 40%. However, it appears that her calculations are based on incorrect numbers because the Court’s calculations reveal that the Bruces' debt ratio would have fallen below 40% regardless of whether the Metro obligation were *942included. As Mrs. D’Abbraccio failed to go over her calculations step by step with the Court, it is impossible to determine the genesis of her errors. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492633/ | MEMORANDUM OF DECISION
JAMES H. WILLIAMS, Chief Judge.
Pending before the Court is the Complaint of Plaintiff, American General Finance, Inc. of Dover, Ohio (American General), seeking a finding of nondischargeability of the debt of the Defendants, John and Joann Philippi, under sections 523(a)(2)(A) and (B) of Title 11 of the United States Code. A trial was conducted and the matter was taken under advisement. For the reasons stated below, American General’s request for relief will be denied.
FACTS
On September 16, 1996, John and Joann Philippi applied for a loan from American General, stating it was their intent to pay taxes and consolidate debt with the proceeds of the loan. American General loaned Mr. and Mrs. Philippi $3,239.85 of which a net disbursement of $3,000.00 was given to them on September 18,1996. Mr. and Mrs. Philip-pi failed to make any payments on the loan *137and subsequently filed a petition for relief under Chapter 7 of Title 11 of the United States Code on January 9,1997.
American General filed a complaint on April 18, 1997, alleging that Mr. and Mrs. Philippi owed a balance of $4,131.32 which is nondischargeable pursuant to section 523(a)(2)(A) and (B) of Title 11 of the United States Code (Bankruptcy Code). The plaintiff maintains that Mr and Mrs. Philippi did not disclose on their loan application the extent of their debt obligations, thereby inducing American General to approve the loan. American General alleges that it reasonably relied to its detriment upon the written disclosure of debts by Mr. and Mrs. Philippi on their loan application.
The plaintiff presented testimony at trial that Mr. and Mrs. Philippi did not list debt obligations owing to Sears Roebuck & Co. and the Internal Revenue Service in the sum of $7,100.00 on their loan application. Furthermore, American General conducted a Fed.R.Bankr.P. 2004 examination of Mr. and Mrs. Philippi on April 11, 1997 in which Mr. and Mrs. Philippi admitted they had debt obligations which they failed to disclose on their loan application. A witness for American General testified that a list of creditors is provided on the back of the loan application and this list is referred to on the front of the application. The plaintiff further alleged that Mr. and Mrs. Philippi misstated the value of a 1989 Chevrolet Beretta at $4,500.00 when, in fact, the automobile was only worth a maximum of $1,000.00. The plaintiff, however, did not present for testimony the loan officer who took Mr. and Mrs. Philippi’s loan application and the witnesses for American General who did testify could not recall if the loan application was taken over the telephone or in person.
Mr. and Mrs. Philippi deny making a written disclosure of any debts on their loan application. Both Mr. and Mrs. Philippi testified under oath that they did not recali any other documents being attached to the loan application and deny ever seeing a list of creditors on the back of the loan application. Furthermore, Mr. and Mrs. Philippi deny placing a value of $4,500.00 on their automobile on the Loan application. Mr. and Mrs. Philippi also testified that American General knew they owed the Internal Revenue Service $5,900.00 and significant amounts of debt to other creditors, but still loaned them $3,239.85. There was also testimony by Mr. and Mrs. Philippi that the loan application was taken over the telephone and they were required to appear at American General only to sign the loan application because Mr. Phi-lippi had a prior working relationship with American General. No evidence has been presented to establish conclusively who, in fact, filled out the loan application.
DISCUSSION
The Court has jurisdiction in this proceeding 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 § 157(b)(2)(I). This Memorandum of Decision constitutes the Court’s findings of fact and conclusions of law pursuant to Rule 7052 of the Federal Rules of Bankruptcy Procedure.
Under section 523(a)(2)(A) and (B), a discharge under 11 U.S.C. § 727 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;
(B) use of a statement in writing—
(i) that is materially false;
(ii) respecting the debtor’s or an insider’s financial condition;
(in) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and
(iv) that the debtor caused to be made or published with intent to deceive;
1. Dischargeability under 11 U.S.C. § 523(a)(2)(A)
The United States Supreme Court has instructed that only “honest but unfortunate” debtors should be afforded a “fresh *138start” in bankruptcy. Grogan v. Garner, 498 U.S. 279, 287, 111 S.Ct. 654, 659, 112 L.Ed.2d 755 (1991). To except a debt from discharge under section 523(a)(2)(A), a creditor must prove (1) that the debtor obtained money, property, services, or an extension, renewal, or refinancing of credit, (2) through a material misrepresentation, (3) that the debtor knew said misrepresentation was false or that the misrepresentation was made with gross recklessness as to its truth, (4) that the debtor intended to deceive the creditor, (5) that the creditor justifiably relied on the false representation, and (6) that its reliance was the proximate cause of loss. Field v. Mans, 516 U.S. 59, 60-62, 116 S.Ct. 437, 439, 133 L.Ed.2d 351 (1995)(establishing that the proper standard is justifiable reliance rather than reasonable reliance); Longo v. McLaren (In re McLaren), 3 F.3d 958, 961 (6th Cir.1993) (citations omitted). The so-called fraudulent debt exception, as with others enumerated in section 523, is to be strictly construed in favor of the debtor. Gleason v. Thaw, 236 U.S. 558, 562, 35 S.Ct. 287, 289, 59 L.Ed. 717 (1915); Manufacturer’s Hanover Trust Co. v. Ward (In re Ward), 857 F.2d 1082, 1083 (6th Cir.1988). The creditor bears the burden of proof as to each of these elements by a preponderance of the evidence. Grogan v. Garner, 498 U.S. at 286, 111 S.Ct. at 659.
American General asserts that Mr. and Mrs. Philippi did not truthfully disclose the extent of their debt obligations on the loan application and never had the intent or ability to repay. American General, however, has presented inconclusive evidence to show that Mr. and Mrs. Philippi intended to deceive American General when failing to list all of their creditors on the loan application.
It is clear that Mr. and Mrs. Philippi did receive the $3,000.00 loan from American General and knew that this loan would have to be repaid with interest. However, an essential factor in determining if Mr. and Mrs. Philippi’s debt to American General is nondischargeable under section 523(a)(2)(A) of the Bankruptcy Code turns on whether the Philippis knew that they would not be able to repay the loan and intended to deceive American General.
Under section 523(a)(2)(A) of the Bankruptcy Code, American General must establish that Mr. and Mrs. Philippi acted with an intent to deceive. Coman v. Phillips (In re Phillips), 804 F.2d 930, 932 (6th Cir.1986) However, since debtors will rarely disclose any indication of deceitful conduct, proving intent to deceive may be inferred from an evaluation of the evidence as a whole. This includes consideration of circumstantial evidence. Germain Lincoln Mercury of Columbus, Inc. v. Begun (In re Begun), 136 B.R. 490, 496 (Bankr.S.D.Ohio 1992).
When applying these standards in this case, it is evident that American General has not met its burden in establishing, by a preponderance of the evidence, Mr. and Mrs. Philippi’s intent to deceive. American General did not present the testimony of the loan officer who took Mr. and Mrs. Philippi’s loan application to determine if there were material misrepresentations made by the Philippis concerning the number of their creditors or the value of the automobile. Mr. and Mrs. Philippi testified under oath that American General knew of their debts owed to. the Internal Revenue Service and to other creditors. In fact, the stated purpose for the loan listed on the loan application was for federal taxes and debt consolidation. Furthermore, both Mr. and Mrs. Philippi forcefully stated that they had never seen or filled out the back of the loan application which lists the creditors arid the assets which the applicant pledges as collateral for the loan. American General did riot provide evidence that Mr. and Mrs. Philippi filled out the loan application but merely that they signed it. In light of these factors, the Court concludes that Mr. and Mrs. Philippi had no intent to deceive American General.
Furthermore, American General has not established that it justifiably relied upon Mr. and Mrs. Philippi’s alleged false representations and that such reliance was the proximate cause of American General’s loss. In re Phillips, 804 F.2d at 932. After the United States Supreme Court announced its decision in Field v. Mans, supra, the Sixth Circuit’s standard for reviewing eases *139arising under 11 U.S.C. § 523(a)(2)(A) as announced in In re Phillips, was effectively changed in one regard — the required degree of reliance was received from reasonable to the less demanding standard of justifiable reliance. Blascak v. Sprague (In re Sprague), 205 B.R. 851, 862 (Bankr.N.D.Ohio 1997) Accordingly, a plaintiff has met the new standard of justifiably reliance if the plaintiff was justified in relying upon representations whose falsity, although ascertainable from some investigation, are nevertheless not ascertainable from a cursory glance or appearance to one of like knowledge and intelligence. Field v. Mans, 516 U.S. at 70-72, 116 S.Ct. at 444.
American General has not satisfied this standard. A cursory inspection of Mr. and Mrs. Philippi’s loan application would reveal that the purpose of the loan was to pay federal taxes and consolidate debts. A loan officer for American General should have realized that the Internal Revenue Service was not listed as a creditor on the loan application. This omission should have alerted American General to make a further investigation of Mr. and Mrs. Philippi’s credit history. Further, Mr. and Mrs. Philippi testified under oath that American General knew they owed the Internal Revenue Service $5,900.00 and significant amounts of other debt, yet loaned them $3,239.85. For the reasons outlined herein, American General was not justified in relying upon Mr. and Mrs. Philippi’s representations to the extent such were made. Based on these factors, the Court concludes that American General is not entitled to recovery under section 523(a)(2)(A) of the Bankruptcy Code.
2. Dischargeability under 11 U.S.C. § 523(a)(2)(B)
A successful cause of action under section 523(a)(2)(B) of the Bankruptcy Code requires a creditor’s reliance on a debtor’s written statement of his financial condition that is materially false and made with the intent to deceive. 11 U.S.C. § 523(a)(2)(B). The Court must take into account whether the debtor possessed an intent to deceive or acted with gross recklessness. Martin v. Bank of Germantown (In re Martin) 761 F.2d 1163, 1167 (6th Cir.1985). In this case, American General claims that Mr. and Mrs. Philippi’s loan application meets the requirements of section 523(a)(2)(B) because it did not include all of the debts that were known to Mr. and Mrs. Philippi at the time the application was made.
American General failed to prove this claim by a preponderance of the evidence. As found above, American General did not present the testimony of the loan officer who took Mr. and Mrs. Philippi’s loan application to determine if there were material misrepresentations made by the Philippis concerning their debt obligations or the value of their collateral. Mr. and Mrs. Philippi testified under oath that American General knew of the debts owed by them to the Internal Revenue Service and to other creditors. Furthermore, Mr. and Mrs. Philippi have forcefully stated that they neither saw nor filled out the back of the loan application which lists the loan applicant’s creditors and pledged collateral. In fact, a witness for American General could not recall if the loan application was taken in person or by telephone. Based on these factors, the Court concludes that Mr. and Mrs. Philippi did not intend to deceive American General. American General is not entitled to recovery under, section 523(a)(2)(B) of the Bankruptcy Code.
CONCLUSION
The Court- finds that American General has failed to meet its burden of proof under sections 523(a)(2)(A) and (B) of the Bankruptcy Code. The Court therefore concludes that American General’s prayer for relief must be DENIED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492636/ | MEMORANDUM OPINION
FRANK R. ALLEY, III, Bankruptcy Judge.
I. FACTS
Debtors own a 1993 Nissan automobile, which is security for a loan from Key Bank of Oregon. At the time of the petition the car had a value between $11,250 and $13,000 and the debt to Key Bank was $10,968.
Debtors filed a statement of intent pursuant to Code § 521(2)(A).1 The statement indicated their intention to retain the collateral, but to neither reaffirm nor redeem it. The parties agree that the Debtors have maintained current payments on the obligation to Key Bank, and are not otherwise in default. Key Bank has moved for an order terminating the autpmatic stay with respect to the vehicle, or, in the alternative, requiring the Debtors to either reaffirm their obligation to Key Bank, or redeem the collateral. Debtors wish to retain the collateral without taking either of these steps, and assert that they should be permitted to do so as long as they continue to perform under the terms of the contract. This procedure, while not explicitly recognized in the Code, is commonly referred to as “reinstatement”, the term that *207will be used in this memorandum. See In re Boodrow, 126 F.3d 48, 49 n. 6 (2nd Cir.1997). Debtors further assert that no cause exists for modifying the automatic stay. 11 U.S.C. § 362(d)(1).
II. DISCUSSION
Congress added § 521(2)(A) to the Bankruptcy Code in 1984. The section provides that
(A) Within thirty days after the date of the filing of the petition under chapter 7 of this title or on or before the date of the meeting of creditors, whichever is earlier, or within such additional time as the court, for cause, within such period fixes, the debtor shall file with the clerk a statement of his intention with respect to the retention or surrender of such property and, if applicable, specifying that such property is claimed as exempt, that the debtor intends to redeem such property, or that the debtor intends to reaffirm debts secured by such property;
[Emphasis added]
There is considerable disagreement between trial and appellate courts over whether this section limits debtors to the three options of surrender, reaffirmation, or redemption. See Lowry Federal Credit Union v. West, 882 F.2d 1543 (10th Cir.1989) (the direction under § 521 is mandatory, but redemption and reaffirmation are not exclusive; Bankruptcy Court has discretion to permit reinstatement); In re Edwards, 901 F.2d 1383 (7th Cir.1990) (debtor must either redeem collateral or reaffirm debt secured by collateral); In re Belanger, 962 F.2d 345 (4th Cir.1992) (allows reinstatement without redemption or reaffirmation); In re Taylor, 3 F.3d 1512 (11th Cir.1993) (debtor may not retain collateral without either redeeming the , property or reaffirming debt); In re Boodrow, 126 F.3d 43 (2nd Cir.1997) (permitting reinstatement).
After reviewing prior case law, the Court of Appeals for the Second Circuit found in Boodrow that the “plain” language of the statute arguably supported either interpretation. The court went on to hold that § 521 served primarily to require notice to secured creditors, and was not intended to restrict substantive options available to a debtor who wished to retain collateral securing a debt. The court further agreed with the view of the Bankruptcy Court that permitting reinstatement was “most consistent with balancing the ‘fresh start’ policy underlying the Code and the rights of the ... secured creditors.” Boodrow at 59 (citing In re Boodrow, 192 B.R. 57, 59 (Bankr.N.D.N.Y.1995)). The court noted that confining an individual Chapter 7 debtor to the choices of surrender, redemption or reaffirmation would severely interfere with the debtor’s ability to obtain a fresh start. Since redemption would require payment of a lump sum to the creditor, it is not a likely option for a Chapter 7 debtor. The only remaining choices would be to reaffirm the debt under whatever new terms the creditor required, or to surrender the property.
The Bankruptcy Appellate Panel of the Ninth Circuit has held that the debtor’s options may not be limited to redemption or reaffirmation. In re Mayton, 208 B.R. 61 (9th Cir. BAP 1997). In Mayton the court interprets § 521(2)(A) in light of subpara-graph (c), which states: “Nothing in subpara-graphs (a) and (b) of this paragraph shall alter the debtor’s or the trustee’s rights with regard to such property under this Title.” The court held that, while § 521(2) directs that a debtor give notice to the secured creditor of his intention, and to put that intention into effect, the section was not intended to undercut the debtor’s rights to a stay under § 362, or to give the secured creditor any greater, or debtor any fewer, rights than existed between the parties prior to the bankruptcy. “In light of the preservation of or continued existence of the debtor’s rights in these respects, the only logical basis for reconciling the conflicting elements of § 521(2) is to hold that it is essentially a notice statute.” Id. at 67.
I agree with the reasoning and conclusions of the courts in Boodrow and May-ton. The purpose of Code § 521(2) is to require the debtor to give early notice to secured creditors of what they can expect with respect to their collateral, and to provide them with a remedy if the debtor states an intention to reaffirm, redeem, or surren*208der, and thereafter fails or refuses to do so. However, the statute does not operate to extinguish other options permitted by state law or the parties’ contract.
Key Bank seeks relief from the automatic stay under Code § 362. When queried about what remedy Key Bank would pursue in State Court if the motion were allowed, counsel asserted that the failure to redeem or reaffirm in and of itself constituted a default under the parties’ contract. However, the contract itself contains no terms to that effect. Failure to comply with Code § 521 does not, by itself, give rise to any rights against the debtor who is otherwise not in default. Lowry Federal Credit Union v. West, 882 F.2d at 1546 (10th Cir.1989). It is conceded that the Debtors have equity in the vehicle. No cause exists under Code § 362(d)(1) to modify the stay.
In the alternative Key Bank asks that the Debtors be required to elect between redemption of the collateral or reaffirmation of the underlying debt. Since those options are not exclusive, and the purpose of Code § 521 is primarily to give notice of intention, such relief would be inappropriate.
An order consistent with the foregoing will be entered.
. Unless otherwise indicated, all statutory references are to the United States Bankruptcy code: 11 U.S.C. §§ 101 to 1330. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492637/ | ORDER GRANTING DEBTOR’S OBJECTION TO PROOF OF CLAIM OF OKLAHOMA EMPLOYMENT SECURITY COMMISSION
DANA L. RASURE, Chief Judge.
On April 22, 1997, Miguel Antonio and Carolyn Marie Carrillo (collectively, the “Debtors”) filed an Objection to Proof of Claim of Oklahoma Employment Security Commission (the “Objection”). On May 21, 1997, the Oklahoma Employment Security Commission (“OESC”) filed its Response to the Objection (the “Response”). On September 23, 1997, the Debtors filed their Brief in Support of the Objection. On September 25, 1997, a hearing on the Objection was held. Upon consideration of the pleadings, briefs, arguments of counsel and relevant legal authority, the Court finds as follows:
STATEMENT OF FACTS
On August 22, 1990, Debtors filed a Chapter 13 Petition in this Court in Case No. 90-02432-C (the “First Case”). OESC was a scheduled creditor and was listed on the official mailing matrix. On November 5, 1990, Debtors filed a Chapter 13 Plan. The terms of the Chapter 13 Plan provided that “[i]n order to share in any payment from the estate all creditors must file a proof of claim not later than December 18,1990.” On April 27,1991, more than four (4) months after the deadline to file claims had expired, OESC filed its proof of claim (the “First Proof of Claim”). On August 4, 1992, the Debtors filed their Second [Amended] Chapter 13 Plan, and on August 13, 1992, the Debtors filed their Third [Amended] Chapter 13 Plan. The Second and Third Plans each provided that “[c]reditors who fail to file a timely claim with the bankruptcy court clerk shall not receive any distribution under this plan unless otherwise ordered by the court.” On October 17, 1992, more than two (2) years after the First Case was commenced, the Court confirmed the Third Chapter 13 Plan (the “Confirmed Plan”). The Order Confirming Chapter 13 Plan provided that “all *214claims will be treated as set forth in the attached SCHEDULE OF PAYMENTS and that all claims which are not otherwise specifically classified in said SCHEDULE OF PAYMENTS are determined to be General Unsecured Claims in this case.” The Order also provided that “creditors who failed to file claims within the time set by the bankruptcy court clerk shall not receive any distribution under the plan.” OESC did not appeal the Order Confirming Chapter 13 Plan. On February 16, 1996, an Order Discharging Debtor After Completion of Chapter 13 Plan was filed in the First Case.
On December 16, 1996, Debtors filed a second Chapter 13 Petition in this Court in Case No. 96-05178-R (the “Second Case”). On April 17, 1997, OESC filed its proof of claim. In their Objection, Debtors contend that any claim of OESC was discharged on February 16, 1996. In its Response, OESC contends that its First Proof of Claim constituted a priority claim under Section 507(a)(8)(D) of the Bankruptcy Code and that because such claim was not “provided for” in the First Case, the claim was not discharged.
CONCLUSIONS OF LAW
“A properly filed proof of claim is prima facie evidence of the validity and amount of the claim.” In re Harrison, 987 F.2d 677, 680 (10th Cir.1993); see also Fed. R. Bankr.P. 3001(f). A party who objects to the claim must bring forward evidence equal in probative force to that underlying the proof of claim. See In re Simmons, 765 F.2d 547, 552 (5th Cir.1985). Only then is the ultimate burden of persuasion with the proponent of the proof of claim. See Harrison, 987 F.2d at 680. Therefore, it is OESC’s burden to prove that its claim was a priority claim that was not discharged in the First Case.1
OESC filed its First Proof of Claim more than four (4) months after the deadline. In determining whether untimely filed claims may be allowed, Sections 501 and 502 of the Bankruptcy Code and Bankruptcy Rule 3002 must be examined. Section 501 provides that a creditor may file a proof of claim. There is no requirement in Section 501 that a creditor must file a proof of claim. Section 502(a) provides for the allowance of claims or interests as follows:
A claim or interest, proof of which is filed under section 501 of this title, is deemed allowed, unless a party in interest ... objects.
11 U.S.C. § 502(a). Therefore, a creditor must file a proof of claim in order for a claim to be allowed. When Sections 501 and 502 are read together, it can be argued that filing a claim is not optional. Such a reading is supported by Rule 3002 which provides:
(a) Necessity for Filing. An unsecured creditor or an equity security holder must file a proof of claim or interest for the claim or interest to be allowed
* * :H * * sH
(c) Time for Filing. In a chapter 7 liquidation, chapter 12 family farmer’s debt adjustment, or chapter 13 individual’s debt adjustment ease, a proof of claim is timely filed if it is filed not later than 90 days after the first date set for the meeting of creditors called under § 341(a) of the Code, except as follows:
(1) A proof of claim filed by a governmental unit is timely filed if it is filed not later than 180 days after the date of the order for relief. On motion of a governmental unit before the expiration of such period and for cause shown, the court *215may extend the time for filing of a claim by the governmental unit.
Fed. R. Bankr.P. 3002 (emphasis added).
Because Rule 3002 mandates a time limit during which claims must be filed, but the Bankruptcy Code does not expressly impose such a limit, bankruptcy courts are divided on the issue of allowance of untimely filed claims. Some courts have disregarded Rule 3002’s limits and allowed untimely filed claims. At one end of the spectrum of cases is In re Hausladen, 146 B.R. 557 (Bankr.D.Minn.1992). In Hausladen, the court held that failure to file a claim within 90 days after the first date set for the meeting of the creditors as required by Rule 3002 was not fatal to the allowance of a Chapter 13 claim. The court reasoned that Rule 3002 was copied hastily from the former Bankruptcy Rule 3022 which mandated a time limit for filing claims, thereby causing a discrepancy between the Code and the Rules. The court concluded that Rule 3002 does not explicitly say, but only implies, that filing within the prescribed period is a prerequisite to allowance. Accordingly, the court held that because there was no express time bar in the Code or the Rules, the late claim should be allowed. Id. at 559.
The Hausladen decision has been criticized by several courts. The court in In re Zimmerman, 156 B.R. 192 (Bankr.D.Mich.1993), held that late claims in Chapter 13 cases should not be allowed, finding that Sections 501 and 502 and Rule 3002 must be read together. The court held that:
According to the Code, a prerequisite to being “deemed allowed” under § 502 is filing under § 501. Section 501 ... creates the substantive right to file a claim and identifies the parties holding that right. The merits of a claim will be analyzed under § 502 only if the claim meets § 501’s requirements. One procedural requirement § 501 contemplates is a time limit in which to file claims.... Section 501 is explicitly silent as to the time limits in which to file and the penalty, if any, for not filing within the given time period. This void is filled by [Bankruptcy Rule] 3002, which specifies the time frame for claim filing and requires that claims be filed in accordance with its provisions.
Id. at 195-96.
The Zimmerman court also noted that policy considerations support the finding that late claims should be disallowed under Section 502, concluding that Rule 3002(e) “is strictly construed as a statute of limitations since the purpose of such a claims bar date is ‘to provide the debtor and its creditors with finality’ and to ‘insure the swift distribution of the bankruptcy estate.’ ” Id. at 199, quoting In re Nohle, 93 B.R. 13, 15 (Bankr.N.D.N.Y.1988) (other citations omitted).
Other courts have reached the same conclusion as the Zimmerman court. For example, in In re Johnson, 156 B.R. 557 (Bankr.N.D.Ill.1993), the court determined that Rule 3002 gives effect to Section 501 and creates a procedural bar to filing. Id. at 559. See also United States v. Chavis (In re Chavis), 47 F.3d 818, 824 (6th Cir.1995) (all unsecured creditors, including the Internal Revenue Service, seeking payment under a Chapter 13 plan must file their claims on a timely basis); United States v. Clark, 166 B.R. 446, 448 (D.Utah 1993) (timely filing of claim is a condition precedent to allowance under Section 502); In re Parr, 165 B.R. 677, 681 (Bankr.N.D.Ala.1993) (untimely claims by creditors with notice of Chapter 13 debt- or’s bankruptcy and of bar date for filing proofs of claim were nullities, not deemed, allowed, and effectively disallowed);3 In re Wilson, 90 B.R. 491 (Bankr.N.D.Ala.1988).
*216The deadline for filing a proof of claim in the First Case was December 18, 1990. OESC filed its First Proof of Claim on April 27, 1991, clearly outside the 180-day time limit imposed upon governmental units by Rule 3002. Although there is no consensus in the case law as to whether an untimely claim should be allowed,' this Court follows the line of bankruptcy cases that hold that proofs of claim must be filed within the time limits set forth in Rule 3002, and if claims are not timely filed, they will be disallowed.4
The legislative history to Section 501 supports this conclusion. The House and Senate Reports provide:
[Section 501(a)] is permissive only, and does not require filing of a proof of claim by any creditor. It permits filing where some purpose would be served such as .... where there will be a distribution of assets to holders of allowed claims.... The Rules of Bankruptcy Procedure and practice under the law will guide creditors as to when filing is necessary and when it may be dispensed with. In general, however, unless a claim is listed in a chapter 9 or chapter 11 case and allowed as a result of the list, a proof of claim will be a prerequisite to the allowance for unsecured claims. The Rules of Bankruptcy Procedure will set the time limits, the form, and the procedure for filing, which will determine whether claims are timely or tardily filed.
H.R.Rep. No. 595, 95th Cong., 1st Sess. 351 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6307; S.Rep. No. 989, 95th Cong., 2d Sess. 61, reprinted in ' 1978 U.S.C.C.A.N. 5787, 5847.5
Furthermore, since the filing of the First Case in 1992, Section 502 was amended to specifically disallow late-filed proofs of claim in Chapter 11, 12, and 13 cases in order to reconcile the disparate decisions among the courts as to whether late filed claims are or are not allowed. As a result of the amendment in 1994, it became clear that untimely filed proofs of claim should not be allowed under Section 502.6
OESC asserts that its First Claim should have been allowed, even if untimely, because the Debtors did .not object. An initial reading of Section 502 would seem to support this contention. However, this Court has already determined that there is a procedural requirement imposed by Rule 3002 that mandates that a claim be filed within the time limits prescribed before a claim will be allowed under Section 502. The Confirmed Plan provided that claims filed after the deadline would not receive any payments. Because OESC did not meet this time limit, the First Claim was disallowed. The Debtors were not required to file an objection.
OESC relies on In re Escobedo, 28 F.3d 34 (7th Cir.1994), which holds that if a plan does not provide for a priority claim, the plan cannot be confirmed and has no res judicata effect as to'the omitted claim. Escobedo is distinguishable from this case, however, because the creditor in Escobedo had met the procedural requirement of Section 502 by timely filing its claim, which OESC did not do.
*217Even if the First Claim was not time barred, the record indicates that the First Claim would have been discharged in the First Case. Although OESC argues that it asserted a priority claim at all times, OESC had notice that its claim was not being treated as a priority claim in the Confirmed Plan. Throughout the two year confirmation process of the First Case, OESC received three Amended Chapter 13 Plans as well as notices of all the confirmation hearings. When a creditor receives notice about a bankruptcy proceeding, the creditor is under constructive or inquiry notice that its claim may be affected. In re Gregory, 705 F.2d 1118, 1123 (9th Cir.1983). OESC received ample notice that it was being treated as a general unsecured creditor, yet it never objected to the proposed plans.
Section 1327(a) of the Bankruptcy Code provides that:
The provisions of a confirmed plan bind the debtor and each creditor, whether or not the claim of such creditor is provided for by the plan, and whether or not such creditor has objected to, has accepted, or has rejected the plan.
11 U.S.C. § 1327(a). A confirmation order is res judicata as to all issues decided or which could have been decided at the hearing on confirmation. See In re Szostek, 886 F.2d 1405, 1408 (3d Cir.1989). OESC had the opportunity to object to confirmation, but failed to do so and allowed the Confirmed Plan to be entered. It cannot now collaterally attack its treatment as a general unsecured creditor in the Confirmed Plan. The Confirmed Plan is binding on OESC.
OESC claims that the Confirmed Plan could not have discharged its debt because OESC was not “provided for” pursuant to section 1328(a) which provides:
As soon as practicable after completion by the debtor of all payments under the plan ... the court shall grant the debtor a discharge of all debts provided for by the plan or disallowed under section 502 of this title ...
11 U.S.C. § 1328(a)(emphasis added).
Because the First Claim was untimely, it was disallowed under Section 502, and was therefore discharged by virtue of Section 1328(a). Even if this Court determined that the untimely claim could be allowed, however, OESC’s claim would have been discharged upon the completion of the Confirmed Plan in the First Case because it was deemed provided for by the Confirmed Plan as a general unsecured claim. Accordingly, OESC has no claim in the Second Case. Debtor’s Objection to Proof of Claim of OESC is GRANTED.
IT IS SO ORDERED.
. Paragraph 10 of the First Proof of Claim provides that: "[t]his claim is a general unsecured claim, except to the extent that the security interest, if any, described in paragraph 9 is sufficient to satisfy the claim [If priority is claimed, state the amount and basis thereof.]” (emphasis added). OESC’s first contention is that the First Proof of Claim was a "priority” claim. Debtors contend that the First Proof of Claim was a general unsecured claim. Section 507(a)(8)(D) of the Bankruptcy Code provides that employment taxes shall receive eighth priority in a bankruptcy proceeding. Although it is not evident from the proof of claim that OESC asserted a priority claim, the provisions of the Code cannot be ignored. Accordingly, the claim asserted by OESC was a priority claim.
. "Under the Bankruptcy Act, late claims were explicitly disallowed. Section 57(n) of the Act provided that ... '[cjlaims which are not filed within six months after the first date set for the first meeting of the creditors shall not be allowed....’ 11 U.S.C. § 93(n) (repealed Oct. 1, 1979). The old Bankruptcy Rule implemented this time bar. The Advisory Committee Note to Rule 13-302(e)(2) explains that the language ‘of subdivision (e) is adopted from § 57(n) of the Act and retains the time limits on the filing of claims established by the statutory provisions.' ” Hausladen, 146 B.R. at 559.
. The court also quoted legislative history providing that “unless a claim is listed in a chapter 9 or chapter 11 case and allowed as a result of the list, a proof of claim will be a prerequisite to allowance for unsecured claims, including priority claims and the unsecured portion of a claim *216asserted by the holder of a lien.” Parr, 165 B.R. at 681 (emphasis added) (citations omitted).
. This position is also supported by the United States Supreme Court decision in Pioneer Investment Services Co. v. Brunswick Associates Limited Partnership, 507 U.S. 380, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993), which holds that the only situation in which an untimely filed claim will be allowed is if there is a showing of excusable neglect on the creditor's part. There was no such showing of excusable neglect by OESC.
. Other courts have also examined the legislative history before deciding this issue. For example, in Zimmerman, the court determined, “[t]he legislative history of § 501 explicitly recognized that the task of setting time limits would fall to the Bankruptcy Rules and further envisioned those time limitations as constituting a bar to the filing of late claims.” Zimmerman, 156 B.R. at 197. The Wilson court also examined the legislative history and determined that "it is made clear that § 501 was drafted with the intention by Congress that .procedural matters — including when it would be permissible or impermissible for a creditor to file a proof of the creditor's claim — would govern a creditor's exercise of the permission given in § 501 that a creditor 'may file a proof of claim.’ " Wilson, 90 B.R. at 494.
.The amendment is not applicable to this case, however, since it was not in effect when the First Proof of Claim was filed. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492638/ | MEMORANDUM OPINION ON OBJECTION TO DISCHARGE AND COMPLAINT TO ESTABLISH NON-DIS-CHARGEABILITY OF DEBT
(Motion for Summary Judgment filed by the Defendant)
BENJAMIN COHEN, Bankruptcy Judge.
The matter subject to this Memorandum Opinion and accompanying Order is a Motion for Summary Judgment filed by John R. McAllister. A hearing was held on February 21, 1996. Wayne Wheeler, the attorney for the plaintiff, and Leo E. Costello, the attorney for the debtor, appeared. The matter was submitted on the record in the case; excerpts from the deposition of Mr. George Gould, the plaintiffs representative, with exhibits attached; the deposition of Mr. John R. McAllister; numerous exhibits offered by the parties; and the arguments and briefs of counsel.1 The debtor insists that there are *220no genuine issues as to the material facts involved in this case.
I. SUMMARY JUDGMENT FRAMEWORK
In Fitzpatrick v. City of Atlanta, 2 F.3d 1112, 1115 (11th Cir.1993) the Court of Appeals for the Eleventh Circuit explained the framework for deciding a summary judgment motion. Writing for the Court, Judge R. Lanier Anderson, III stated:
A. Introduction
Under Fed.R.Civ.P. 56(c), a moving party is entitled to summary judgment “if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.” The substantive law applicable to the case determines which facts are material. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986). “The district court should resolve all reasonable doubts about the facts in favor of the non-movant, and draw all justifiable inferences in his [or her] favor.” U.S. v. Four Parcels of Real Property, 941 F.2d 1428, 1437 (11th Cir.l991)(en bane)(internal quotation marks and citations omitted).
In Adickes v. [S.H.] Kress [& Co.], 398 U.S. 144, 90 S.Ct. 1598, 26 L.Ed.2d 142 (1970), the Supreme Court instructed the federal courts to employ a two-part framework of shifting burdens to determine whether, as regards a given material fact, there exists a genuine issue precluding summary judgment. The operation of this framework was modified significantly in Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The current framework is set out below.
B. Movant’s Initial Burden
The movant’s initial burden consists of a “responsibility [to] inform [ ] the ... court of the basis for its motion and [to] identify those portions of ‘the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any,’ which it believes demonstrate the absence of a genuine issue of material fact.” Id. at 323, 106 S.Ct. at 2553. The nature of this responsibility varies, however, depending on whether the legal issues, as to which the facts in question pertain, are ones on which the movant or the non-movant would bear the burden of proof at trial.
1. For Issues on Which Movant Would Bear Burden of Proof at Trial
As interpreted by this court sitting en banc, Celotex requires that for issues on which the movant would bear the burden of proof at trial, that party must show affirmatively the absence of a genuine issue of material fact: it must support its motion with credible evidence ... that would entitle it to a directed verdict if not controverted at trial. In other words, the moving party must show that, on all the essential elements of its case on which it bears the burden of proof at trial, no reasonable jury could find for the non-moving party. If the moving party makes such an affirmative showing, it is entitled to summary judgment unless the non-moving party, in response, come[s] forward with significant, probative evidence demonstrating *221the existence of a triable issue of fact. Four Parcels, 941 F.2d at 1438 (citations and internal quotation marks omitted;, emphasis in original).
2. For Issues on Which Non-Movant Would Bear Burden of Proof at Trial
For issues, however, on which the non-movant would bear the burden of proof at trial, the moving party is not required to support its motion with affidavits or other similar material negating the opponent’s claim in order to discharge this initial responsibility. Instead, the moving party simply may show [ ] — that is, point[ ] out to the district court — that there is an absence of evidence to support the non-moving party’s case. Alternatively, the moving party may support its motion for summary judgment with affirmative evidence demonstrating that the .non-moving party will be unable to prove its case at trial. Four Parcels, 941 F.2d at 1437-38 (citations, footnote, and internal quotation marks omitted; emphasis in original).
C. Non-Movant’s Responsibility Once Movant Satisfies Initial Burden
If the party moving for summary judgment fails to discharge the initial burden, then the motion must be denied and the court need not consider what, if any, showing the non-movarit has made. [Clark v.] Coats & Clark, 929 F.2d [604] at 608 [(11th Cir.1991)]. If, however, the movant carries the initial summary judgment burden in one of the ways discussed above, responsibility then devolves upon the non-movant to show the existence of a genuine issue as to the material fact.
1. For Issues on Which Movant Would Bear Burden of Proof at Trial
For issues on which the movant would bear the burden of proof at trial, the non-movant, in order to avoid summary judgment, must come forward with evidence sufficient to call into question the inference created by the movant’s evidence on the particular material fact. Only if after introduction of the non-movant’s evidence, the combined body of evidence presented by the two parties relevant to the material fact is still such that the movant would be entitled to a directed verdict at trial- — that is, such that no reasonable jury could find for the non-movant — should the movant be permitted to prevail without a full trial on ■the issues. Anderson, 477 U.S. at 249-50, 106 S.Ct. at 2511.
2. For Issues on Which Non-Movant Would Bear Burden of Proof at Trial
For issues on which the non-movant would bear the burden of proof at trial, the means of rebuttal available to the non-movant vary depending on whether the movant put on evidence affirmatively negating the material fact or instead demonstrated an absence of evidence on the issue. Where the movant did the former, then the non-movant must respond with evidence sufficient to withstand a directed verdict motion at trial on the material fact sought to be negated. Where the movant did the latter, the non-movant must respond in one of two ways. First, he or she may show that the record in fact contains supporting .evidence, sufficient to withstand a directed verdict motion, which was “overlooked or ignored” by the moving party, who has thus failed to meet, the initial burden of showing an absence of evidence. Celotex, 477 U.S. at 332, 106 S.Ct. at 2557 (Brennan, J., dissenting). Second, he or she may come forward with additional evidence sufficient to withstand a directed verdict motion at trial based on the alleged evidentiary deficiency. See Melissa L. NelMn, One 'Step Forward, Two Steps Back: Summary Judgment After Celotex, 40 Hastings L.J. 53, 82-83 (1988).
Fitzpatrick, 2 F.3d at 111 5-1117 (footnotes omitted).
II. UNDISPUTED OR UNCONTROVERTED FACTS
From September 1992 through the middle of 1994, the debtor and the plaintiff operated under a contract regarding the purchase and sale of used automobiles. Pursuant to that *222contract, the plaintiff advanced funds to the debtor for use by the debtor for the wholesale purchase of used automobiles. After the purchase of an automobile, the debtor was required under the contract to deliver the automobile’s title to the plaintiff. The debtor would then endeavor to resell the automobile for a profit.- When the debtor sold an automobile, he was required to reimburse the plaintiff, from the sale proceeds, the amount advanced by the plaintiff that allowed the wholesale purchase of the automobile. On reimbursement by the debtor from the proceeds of the sale of an automobile, the plaintiff was required to deliver the automobile’s title to the debtor who, in turn, was to deliver the title to the retail purchaser.
The debtor was also required under the contract to pay a specified sum each month to the plaintiff in lieu of interest on the unpaid principle balance of cumulative un-reimbursed funds advanced to the debtor. Over the course of their dealings, the unpaid principle balance of funds advanced to the debtor was as high as $150,000 and the monthly payment required of the debtor ranged from a low of $3,600 to a high of $4,800.
Until January 1, 1994, the contract between the debtor and the plaintiff was oral. On that date, the debtor, at the plaintiff’s behest, signed a document which purports to embody the terms of the oral contract and to grant the plaintiff a security interest in automobiles purchased by the debtor from funds advanced by the plaintiff.2
The controversy in this case centers around eight automobiles. Each of the automobiles was purchased by the debtor with funds advanced by the plaintiff. The plaintiff alleges that the automobiles were sold by the debtor to third parties but that the debtor did not reimburse the plaintiff from the sales. proceeds, as required by the contract, for the funds advanced to purchase those eight automobiles. The debtor freely admits that he sold six of the eight automobiles and did not reimburse the plaintiff from the proceeds of the sales. The debtor admits also that he did not deliver the titles to four of those six automobiles to the plaintiff when he purchased them at wholesale, also as is required under the contract. The debtor does allege, however, that he reimbursed the plaintiff for one of the automobiles in question and that he sold another automobile to an employee pursuant to an oral installment purchase contract but that the employee paid no portion of the purchase price. The debtor represents that the employee claims that the car was stolen and was wrecked.
At least five of the eight cars in question were sold by the debtor after January 1, 1994, the date the written memorandum was signed by the debtor. Only two of those cars were purchased by the debtor from funds advanced by the plaintiff after that same date.
The following is a description of each automobile in question as well as a synopsis of the debtor’s deposition testimony and interrogatory answers regarding each automobile:
1. 1990 Jaguar XKS — The debtor purchased the Jaguar at an automobile auction. When he received the title to the Jaguar from the auction he did not deliver that title to the plaintiff as required by the contract. The debtor sold the Jaguar for $20,000 on March 10,1994 and delivered the title directly to the purchaser. He did not inform the plaintiff that the car had been sold and did not reimburse the plaintiff from the proceeds.
2. 1993 Cadillac DeVille — The debtor purchased the Cadillac at an automobile auction. When the debtor received the title to the Cadillac from the auction he did not deliver that title to the plaintiff as required by the contract. The debtor sold the vehicle on February 23, 1994 for $21,200 and delivered the title directly to the purchaser. He did not inform the plaintiff that the car had been sold and did not reimburse the plaintiff from the proceeds.
*2233. 1978 Mercedes Roadster — The debtor sold the Mercedes on June 13, 1994 for approximately $9,000. The debtor did not inform the plaintiff that he had sold the car. He did not obtain the certificate of title to the car from the plaintiff before transferring the vehicle to the customer and did not reimburse the plaintiff from the proceeds.
4. 1970 Oldsmobile 442 — The debtor sold the Oldsmobile on February 11, 1994 for $9,000. The debtor did not inform the plaintiff that the car had been sold. He did not obtain the bill of sale from the plaintiff before he transferred the vehicle (the automobile was not a “titled” vehicle) and did not reimburse the plaintiff from the proceeds.
5. 1992 Crown Victoria LX — The debtor purchased the Crown Victoria at an automobile auction. When the debtor received the title to the Crown Victoria from the auction he did not deliver that title to the plaintiff as required by the contract. The debtor sold the Crown Victoria on February 23, 1994 for $12,450 and delivered the title directly to the purchaser. He did not inform the plaintiff that the car had been sold and did not reimburse the plaintiff from the proceeds.
6. 1991 BMW 325i — The debtor purchased the BMW at an automobile auction. When he received the title to the BMW from the auction he did not deliver that title to the plaintiff as required by the contract. The debtor sold the BMW for $15,000 on December 27, 1993 and delivered the title directly to the purchaser. He did not inform the plaintiff that the car had been sold and did not reimburse the plaintiff from the proceeds.
7. 1985 Subaru — The debtor claims that he paid the plaintiff $3,000 for the Subaru, which was the amount advanced to him by the plaintiff for it’s purchase, and that he obtained the title to the Subaru from the plaintiff.
8. 1984 Volkswagen — The debtor sold the Volkswagen, pursuant to an unsecured verbal installment sale contract, to one of his employees. The employee was to pay $2,000 for the car which was to be deducted over time from the employee’s pay checks. The employee claimed that the car was stolen from his home and wrecked. The employee never paid any portion of the pin-chase price. The debtor did not obtain the title from plaintiff before he transferred the vehicle.
III. CONTENTIONS AND LEGAL THEORIES REGARDING FRAUD, EMBEZZLEMENT AND CONVERSION
The plaintiff contends that the debtor’s failure to deliver titles and to reimburse the plaintiff from sales proceeds as required by the contract constitutes fraud, embezzlement and the willful and malicious conversion of its interests in the automobiles sold, as well as the proceeds of those automobiles, and that the debt created thereby is nondischargeable pursuant to 11 U.S.C. §§ 523(a)(4) and (6).3 The debtor’s motion for summary judgment is based solely on the contention that the agreement between the debtor and plaintiff was oral rather than in writing (contending that a writing is required by Ala.Code 1975, § 7-9-203(l)(a)), and that the plaintiff, consequently, had no valid security interest in either the automobiles or their proceeds and that no interest in either the automobiles or their proceeds could have been embezzled or converted by the debtor.
A. The Applicable Statute: Ala.Code 1975, § 7-9-203(l)(a)
Section 7-9-203(l)(a) of the Alabama Code provides that a security interest is not enforceable against a debtor or third parties with respect to collateral unless “the debtor has signed a security agreement which contains a description of the collateral....” Ala.Code 1975, § 7-9-203(l)(a).’ The often quoted “Official Comments” to that code section explain that the section is in the nature of a statute of frauds, so that an oral security agreement ordinarily accords the secured *224party no right to take possession of collateral or have the collateral sold to satisfy the debt:
The formal requisite of a writing stated in this section is not only a condition to the enforceability of a security interest against third parties, it is in the nature of a Statute of Frauds. Unless the secured party is in possession of the collateral, his security interest, absent a writing, which satisfies paragraph (l)(a), is not enforceable even against the debtor, and cannot be made so on any theory of equitable mortgage or the like. If he has advanced money, he is of course a creditor and, like any creditor, is entitled after judgment to appropriate process to enforce his claim against his debtor’s assets; he will not, however, have against his debtor the rights given a secured party by Part 5 of this Article on default.
Official Comments to Ala.Code 1975, § 7-9-203(l)(a), paragraph 5.
B.The Written Agreement
The agreement signed by the debt- or on January 1, 1994, satisfies the requirements of Ala.Code 1975, § 7-9-203(l)(a). The document explicitly uses the term “security agreement” with respect to any automobiles purchased by the debtor with funds advanced by the plaintiff and gives the plaintiff rights to inspect the automobiles and to take possession and sell the automobiles to satisfy debts owed under the contract in the event of the debtor’s default. The use of generic terms “automobiles” and “vehicles”, coupled with language which clearly indicates that the “automobiles” and ‘Vehicles” referred to are those purchased by the debtor with funds advanced by the plaintiff, meets the “description of the collateral” requirement of 7-9-203(l)(a) and was sufficient to create a security interest in any particular car purchased by debtor with the plaintiff’s money.4
C.Cars Purchased and Sold After January 1, 1994: The Cadillac and Jaguar
According to the deposition testimony of the plaintiff’s representative Mr. George Gould, only the Jaguar and the Cadillac were purchased fi*om funds advanced by the plaintiff after January 1, 1994. Since a valid written security agreement was signed by the debtor on January 1, 1994, the point raised by the debtor regarding the enforceability of the oral agreement between the parties is not germane to the Cadillac and the Jaguar and as the debtor’s motion is based solely on the contention that the parties’ agreement was oral rather than written, summary judgment must be denied to the extent that the plaintiffs complaint is based on the debtor’s sale of those automobiles, automobiles purchased from funds advanced by the plaintiff after January 1,199 J.
D.Cars Purchased Before January 1, 1994 and Sold After January 1, 1994: The Mercedes, Oldsmobile and Crown Victoria
Summary judgment must also be denied to the extent that the plaintiffs complaint is based on the debtor’s sale, after *225January 1, 199k, of automobiles purchased by the debtor with funds advanced by the plaintiff before January 1, 199k because the parties’ written agreement encompasses those automobiles. Únder the applicable portions of. Ala.Code 1975, § 7-9-203(1), a security agreement, is enforceable if (a) the debtor has signed a written security agreement, (b) value has been given by the secured party for the security interest and (c) the debtor has acquired rights in the collateral. Section 7 — 1 — 201(44)(b) of the Alabama Code provides that a person gives “value” for rights if he or she acquires them “[a]s security for or in total or partial satisfaction of a preexisting claim.” The debtor was, therefore, free to grant a valid security interest on January 1, 1994 to secure advances made by the plaintiff before that date. If the January 1, 1994 agreement was intended, in part, to accomplish that purpose, then the writing requirement of 7 — 9 — 203(1) (a) has been satisfied.
Both the language of the security agreement and the debtor’s deposition testimony strongly indicate that the agreement was intended not only to govern future business relations between the parties, but also to affirm and memorialize the agreement between the parties as to automobiles then in the debtor’s possession. The agreement was prepared by the plaintiff in the form of a letter to the debtor. In the first sentence, the agreement is referred to as an “Agreement with [the debtor] in writing pertaining to the pending operation involving the financing of automobiles for [the debtor].” The terms of the document appear to be identical to the oral agreement between the parties. In his deposition, the debtor identified the written agreement, and was asked the following question: “And at the time that you transferred these ears did you have knowledge or did you understand and recognize the terms and conditions of your agreement with [the plaintiff]?” The phrase “these cars” was used generally to describe all six of the cars which the debtor admits to having sold without reimbursing the plaintiff. In response to the question, the debtor answered “Yes,” tween the automobiles purchased before the agreement was signed and those purchased after the agreement was signed. Neither did the debtor suggest that automobiles purchased before he signed the agreement were not intended to be covered by the agreement or that the agreement was only intended to cover automobiles subsequently purchased by him with the plaintiffs money. A material question of fact, therefore, remains as to whether the security agreement was intended to grant a security interest in automobiles in the possession of the debtor on January 1, 199k to secure advances made by the plaintiff before that date.
E. Cars Purchased Before January 1, 1994 and Sold Before January 1, 1994: The BMW
Summary judgment must also be denied with regards to automobiles sold by the debtor before January 1, 199k. That category may include only the 1991 BMW 325i that was sold by the debtor on or around December 27, 1993, five days before the debtor signed the written security agreement. While section 7-9-203(l)(a) requires a security agreement to be in writing, it does not specify when the writing must be executed. When an issue is not specifically addressed by a provision of the Uniform Commercial Code, Section 7-1-103 of the Alabama Code contemplates that the issue will be decided in accordance with principles of common law and equity. “Unless displaced by the particular provisions of this title, the principles of law and equity, including the law merchant and the law relative to capacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, or other validating and invalidating cause shall supplement its provisions.” Ala.Code 1975, § 7-1-103. Under the common law of this state, as well as many other states, a writing signed subsequent to an oral agreement, which memorializes the terms of the oral agreement, satisfies the Statute of Frauds.5 “The object *226of the statute of frauds is to protect individuals from having parol agreements imposed on them against their consent; but it has been uniformly held not to defeat a parol contract which is afterwards evidenced by a writing signed by the party sought to be charged with it.” Levy v. Allen, 257 Ala. 326, 331, 58 So.2d 617, 622 (1951). The purpose of the statute of frauds is evidentiary. Id. All contracts are essentially oral; the writing is only a memorial of the oral contract designed to prevent future dispute regarding what was agreed upon. Therefore, a writing signed by a party subsequent to entering into a oral contract which acknowledges the existence and terms of the oral contract, is equally sufficient to prove the existence and terms of the contract as is a writing signed contemporaneously with the oral contract. As stated by the Alabama Supreme Court:
The object of the statute of frauds is to protect individuals from having parol agreements imposed on them against their consent; but it has been uniformly held not to defeat a parol contract which is afterwards evidenced by a writing signed by the party sought to be charged with it. It was said in Jenkins v. Harrison, supra: The purpose and object of the statute being no more than the requisition of written evidence of the substance of the contract, signed by the party to be charged, so that he may not be subjected to the mischief which could follow from mere oral evidence; the purpose and object, and the words of the statute, are all satisfied, whenever there exists, under the hand of the party sought to be charged, a written statement, containing, either expressly, or by necessary inference, all the terms of the agreement — that is to say, the names of the parties, the subject-matter of the contract, the consideration, and the promise, and leaving nothing open to future treaty. This, therefore, is sufficient to satisfy the statute; and provided this be found, no formality is required; nor does it signify at all what is the nature or character of the document containing such written statement — whether it be a letter written by the party to be charged to the person with whom he contracted, or to any other person, or a deed, or other legal instrument, or an answer to a bill, or an affidavit in chancery, in bankruptcy, or in lunacy.
After a contract has passed beyond negotiation or treaty — after the minds of the parties have met — after there has been reciprocal assent to all its terms — unless all the negotiations have been conducted in writing, there is, of necessity, a period of time, longer or shorter, when it rests wholly in parol — the period intervening between the conclusion of treaty, the mutual assent of the parties, and the reduction of the terms of the contract to writing. The writing is not the contract — it is no more or less than the evidence of it, which must exist, or the contract is without legal validity or efficiency, and this evidence may be supplied at any time after the contract is completed.
Levy v. Allen, 257 Ala. at 331-332, 58 So.2d at 622 (citations and internal quotation marks omitted).
Likewise, the avowed purpose of the writing requirement of 7-9-203(l)(a) is “evidentiary.” Official Comments to Ala.Code 1975, § 7-9-203(l)(a), paragraph 3. “The requirement of written record minimizes the possibility of future dispute as to the terms of a security agreement and as to what property stands as collateral for the obligation secured.” Id. Therefore, a written security agreement signed by the debtor in this case subsequent to creating an oral security agreement, which embodies the terms of the oral security agreement, fully serves the evidentiary purpose of 7-9-203(l)(a) and avoids the evils sought to be avoided by that statute. Accordingly, if the January 1, 1994 contract evinces the oral agreement between the parties regarding the BMW as it existed when the BMW was sold, then the writing require*227ment of 7-9-203(l)(a) will have been satisfied. The bare assertion by the debtor that, when the BMW was sold, the parties were operating pursuant to an oral security agreement does not preclude a finding that, as to the BMW, the January 1,1994 contract satisfies the writing requirement of 7-9-203(l)(a). The debtor has, therefore, failed to show that there remains no material issue of fact as to the BMW.
F. The Subaru
As indicated before, the debtor alleges that he paid the plaintiff for the Subaru. The copy of the plaintiff’s ledger sheet that is attached to. Mr. Gould’s discovery deposition, upon which the plaintiff recorded details of transactions with the debtor, indicates otherwise. Therefore, there remain material issues of fact as to whether the debtor has paid the plaintiff for the Subaru and, if not, whether the Subaru is covered by the parties’ ivritten security interest.'
G. The Volkswagen
Material issues of fact remain as to whether or not the Volkswagen is covered by the parties’ written security interest and, if so, whether the purported unsecured, installment “sale” of the automobile was contemplated or authorized under the parties’ agreement.
IV. FALSE OATH ALLEGATIONS
A. Paragraph Five of the Original Complaint
In the original complaint, the plaintiff alleged that the debtor testified falsely at his 11 U.S.C. § 341 first meeting of creditors. Specifically, according to paragraph 5 of the complaint, the debtor stated “that he sold all of the Plaintiffs ears with valid titles.” The plaintiff contends that the debtor’s statement is untrue.
In his answer to the plaintiffs complaint, the debtor stated:
Defendant admits testifying at the 341 Hearing under oath. However, Defendant denies that anything he said was untruthful. Defendant believed at the time of his testimony, and still believes today, that the automobiles about which was questioned, were sold with valid titles. Defendant denies that the automobiles were “Plaintiffs” cars. On the contrary, Defendant asserts that the automobiles were placed in Defendant’s possession to be sold to the general public. Upon sell to the general public, the automobiles belonged to the purchaser.
Answer, paragraph 6.
The transcript of the testimony given by the debtor at the section 341 meeting, a copy of which is attached to the plaintiffs Response to Summary Judgment, shows the following exchange between the debtor and the plaintiffs attorney:
Q. What has happened to the cars that were purchased with monies belonging to HOC, Inc.?
A. The cars have beep sold.
Q. And did you furnish a title to these cars to the purchasers?
A. I have to a majority of the cars. I think there’s one or two cars that don’t have titles.
Q. How did you obtain the title to these vehicles?
A. I got them from the people that had them.
Q. Well, did you secure the titles from . HOC that you had delivered to them?
A. Yes, except for one that I’m aware of. I don’t know of anything else.
Copy of Transcript of 341 Hearing, page 10, attached to plaintiffs Response to Summary Judgment.
At another point, the transcript indicates that the debtor was shown a list of vehicles and was asked if he gave each of the persons to whom he sold one of the cars on the list a “valid bill of sale or a certificate of title.” To that question, the debtor responded “Except for the ’78 Mercedes Roadster.” Id. at 13.
(1) The Mercedes
According to tho transcript of tho section 341 meeting, tho debtor did not make the statement described in paragraph 5 of the plaintiffs original complaint in relation to his sale of the Mercedes. To the contrary, the *228debtor admitted in his section 341 meeting testimony that he sold the Mercedes without giving the purchaser a certificate of title. That testimony therefore cannot form the basis for the denial of the debtor’s discharge under paragraph 5 of the original complaint and summary judgment should be granted in favor of the debtor.
(2)The Jaguar, Cadillac, Crown Victoria and BMW
The debtor testified in his deposition that, in contravention of his agreement with the plaintiff, he did not deliver the certificates of title to the Jaguar, Cadillac, Crown Victoria, and BMW to the plaintiff but, instead, delivered the certificates of title directly to the persons who purchased the cars from him. Mr. Gould admitted in his deposition testimony that, out of the eight automobiles that are involved in this case, he received certificates of title only to the Subaru and Volkswagen from the debtor.6 The plaintiff has neither offered proof to contradict the debtor’s testimony nor pointed to facts in the record that suggest that the debtor did not deliver valid certificates of title to the purchasers of the Jaguar, Cadillac, Crown Victoria, and BMW. Since, according to the debtor’s undisputed testimony, the purchasers of those vehicles received valid certificates of title from him, the testimony given by the debtor at the section Sfl meeting, described in paragraph 5 of the plaintiff’s original complaint, was not, as it may relate to the sale of those automobiles, false and cannot form the basis for the denial of the debtor’s discharge and summary judgment should be granted in favor of the debtor.
(3)The Oldsmobile
Because the Alabama statutes only require certificates of title for automobiles manufactured after 1974, there is no certificate of title for the Oldsmobile. Consequently, the debtor’s statement that he gave valid certificates of title to the purchasers of unspecified automobiles would have no application to the Oldsmobile. In addition, as a merchant involved in the sale of used automobiles, the debtor could, by bill of sale, effectively transfer ownership of the Oldsmobile to a third party purchaser without first procuring the bill of sale originally delivered by him to the plaintiff.7 The statement by the debtor that he gave a “valid” bill of sale to the purchaser of the Oldsmobile is not, therefore, necessarily false.- And, since the plaintiff has not offered proof to contradict the debtor’s testimony or pointed to facts in the record which suggest that the debtor did not deliver a “valid” bill of sale to the purchaser of the Oldsmobile, the Court must conclude that the debtor made no false statement of the nature described in paragraph 5 of the plaintiffs complaint relating to the Oldsmobile and summary judgment should be granted in favor of the debtor.
(4)The Subaru
In his deposition, the debtor testified that he paid the plaintiff for the Subaru and was given the title to the automobile by the plaintiff in return and that the Subaru is presently on the car lot where he is employed. The debtor’s testimony is bolstered by the fact that Mr. Gould could not produce the certificate of title to the vehicle when asked to do so at his deposition as well as the failure of the plaintiff to produce the certifi*229cate of title to the vehicle in response to the debtor’s motion for summary judgment. Nevertheless, because of the conflict between the debtor’s assertion that he paid for the automobile and Mr. Gould’s assertion that the debtor has not paid for the automobile, an issue of material fact remains as to the disposition of the Subaru which precludes summary judgment as to paragraph 5 of the plaintiffs complaint as it relates to that automobile.
(5j The Volkswagen
The debtor testified in his deposition that he allowed an employee to use the Volkswagen in return for the employee’s promise to pay for the car over time through deductions from his future paychecks. The debtor, according to his deposition, did not obtain a certificate of title or bill of sale from the plaintiff before “selling” the car to the employee. Other than those facts, nothing definitive can be determined regarding the sale of the Volkswagen from the record as it now stands. Mr. Gould testified in his deposition that he has the certificate of title to. the automobile but cannot locate it. The debt- or’s testimony can be interpreted in a manner that could lead to the conclusion that the plaintiff never had a certificate of title to the car. The debtor’s testimony can also be interpreted in a manner that could lead to the conclusion that he did not give his employee either a certificate of title or bill of sale for the car. Because the facts relating to the disposition of the Volkswagen are not apparent from the record and are disputed by the parties, summary judgment is inappropriate as to paragraph 5 of the plaintiffs complaint as it relates to that automobile.
(6) Summary as to Paragraph Five of the Original Complaint
In review, summary judgment will. be granted in favor of tbe debtor as to the allegations contained in Paragraph 5 of the complaint originally filed' in this adversary proceeding as those allegations relate to the Mercedes, Jaguar, Cadillac, .Crown Victoria, BMW and Oldsmobile. Summary judgment will, however, be denied as to the same allegations as they relate to the Subaru and the Volkswagen.
B. Paragraph Seventeen of the Amended Complaint
In paragraph 17 of the amended complaint, the plaintiff contends that the debtor made another false oath when he testified “that the bight identified vehicles were sold with the permission of the Plaintiff,” and “that hé had secured .permission from the Plaintiff to sell each of the eight identified vehicles.” In his answer to the plaintiff’s complaint, in addition to the language quoted above from paragraph 6 of the answer, the debtor stated:
Defendant admits that he “willfully and intentionally” sold automobiles in the routine course of his business. ' Defendant contends that Plaintiff placed automobiles in Defendant’s possession for the purpose of such sale. Defendant therefore denies that any sales were “without the consent and permission of the Plaintiff.” On the contrary, all sales were with, the consent and permission of Plaintiff.
Answer, paragraph 3.
The transcript of the testimony given by the debtor at his section 341 first meeting of creditors, a copy of which is attached to the plaintiffs Response to Summary Judgment, contains the following question asked by the plaintiffs attorney of the debtor. The question was general in nature, without reference to any particular car. It reads, “Did you sell these cars without their [referring to the plaintiff] permission?” To that question, the debtor responded: “No, they gave me permission to sell the cars.” Copy of Transcript of 341 Hearing, page 12, attached to plaintiffs Response to Summary Judgment [parenthetical added]. At another point in the meeting, the plaintiffs attorney asked the debtor about the eight cars. He asked, “And is it your testimony that you secured permission from HOC to sell each of those cars that your remember?” The debtor’s' response was “Yes.” Id. at 13.
The plaintiffs contention that the debtor made a false oath when the debtor testified that the cars were sold with the permission of the plaintiff and that the debtor had the plaintiffs permission to sell the ears is an unreasonable interpretation of the facts and has no foundation in the record before the *230Court. The agreement contemplated that the debtor would display the vehicles on his lot and sell them in the ordinary course of his business. Indeed, the reason the cars were to remain in the debtor’s possession under the agreement was so that he could sell them. The fact that the plaintiff expected the debtor to sell the ears is illustrated by Mr. Gould’s deposition testimony. That testimony reads in part:
Q. Now at the time that you furnished the money, you HOC, furnished the money for John to acquire the automobiles, you said that you knew that it was his intent to sell those vehicles to the general public, right?
A. Yes.
Q. That was a yes now. I want to be sure that she (court reporter) — she heard that right. That’s a yes, right?
A. That he was going to—
Q. That he was going to sell to the general public and to wholesalers too, if he could make a profit?
A. Yes.
Q. And you knew that that was the business that he was in at the time that you let him have the money, selling the automobiles?
A. Yes.
Q. And you had been down there and you knew that he was operating the business, didn’t you?
A. Yes.
Q. And that he was operating as a merchant in automobiles, seller of automobiles?
A. Yes.
Q. And you knew that it would be routine for him to sell the automobiles in the routine course of his business?
A. Yes.
Q. Did you ever go down there and see them on display, see the automobiles on display?
A. Certainly.
Q. Did you know at the time that you let him have the money that he was going to place them on display?
A. Yes.
Copy of Deposition of George C. Gould, pages 35-36, attached to‘debtor’s Motion for Summary Judgment.
The written agreement between the parties does not specifically require the debtor to obtain prior specific consent for each individual vehicle sale. Furthermore, there is no evidence that the debtor ever orally agreed to obtain prior specific consent for each individual vehicle sale, or that the plaintiff ever directed or requested the debtor to obtain prior specific consent from the plaintiff for each individual vehicle sale. Nothing in Mr. Gould’s deposition testimony would suggest that the plaintiff either anticipated or expected the debtor to contact the plaintiff prior to the sale of an individual car for the purpose of obtaining the plaintiff’s approval, or otherwise. To the contrary, under the agreement, the plaintiff, according to Mr. Gould’s testimony, did not expect to be informed of the sale of an automobile until after the sale when, or if, the debtor delivered the money to exchange for the title. That testimony reads in part:
Q. Well, as a practical matter when you’ve got a hot prospect you want to sell him right then, don’t you?
A. Yeah.
Q. You know that from the insurance business. You don’t say just hang on for a few days and I’ll be back with you if he’s ready to sign, do you?
A. Right.
Q. And if John did that in the routine course of his business he would get the sale made to the customer and get the title later, wouldn’t he, from you?
A. Yes.
Q. So that was a routine way of doing business and he had your permission to do that, didn’t he?
A. I’m not sure I followed that tract.
Q. All right. I’m a customer. I go in and I want to buy a car from John McAl-lister. He says sure, sign the application and all that, and we’ll get the financing all worked out. I drive off in the car and I’ve bought the car, right?
*231A. (The deponent indicated an affirmative response by nodding his head up and down.)
Q. And he sold it to me with your permission in that illustration, didn’t he?
A. Yes.
Q. Then he takes the contract to the bank, collects his money, puts the money in the bank. Comes to you and says, look, I’ve sold this one, I need to pay you off, right?
A. Yes.
Q. I need the title so I can send it in with the paperwork and that sort of thing.
A. Right.
Q. And then he writes you a cheek, takes the title to the bank or lending institution and they finish the paper work?
A. Right.
Q. But the actual sale to the customer was with your permission. The part that was not with your permission was his failure to get the title back from you, right?
A. Yes.
Copy of Deposition of George Gould, pages 52-54, attached to debtor’s Motion for Summary Judgment.
The debtor, according to Mr. Gould, had authority from the plaintiff to sell the vehicles purchased with money supplied by the plaintiff. Furthermore, Mr. Gould acknowledged that sales of automobiles by the debtor were accomplished with the plaintiffs “permission” even though the plaintiff was not notified of the sales before the sales had taken place. The debtor’s first meeting of creditors’ statements to the effect that he sold the cars with the plaintiffs permission were not, therefore, false and, consequently, summary judgment must be granted for the debtor as to the allegations contained in paragraph 17 of the amended complaint.
C. Paragraph Eighteen of the Amended Complaint
(1) Question 11 of the Statement. of Affairs
In paragraph 18 of the amended complaint, the plaintiff contends that the response made by the debtor to question 11 in his bankruptcy petition statement of affairs was false. Question. 11 asks the debtor to “List all financial accounts and instruments held in the name of the debtor or for the benefit of the debtor which were closed, sold, or otherwise transferred within one year immediately preceding the commencement of this ease.” In response to Question 11 the debtor marked the block which says “None” with an “X.” The plaintiff contends that the response is incomplete in that it “fail[s] to disclose the closed financial account....” Amended Complaint, Paragraph 18.
The only portion of the debtor’s answer which is applicable to the allegation made in paragraph 18 of the plaintiffs amended complaint is the general denial contained in paragraph 9 which states: “To the extent not already admitted, Defendant denies the remaining material averments of the complaint and demands strict proof thereof.” Answer, Paragraph 9. In the memorandum of law filed by the debtor in support of his summary judgment motion, the debtor responds to the plaintiff’s allegation. The memorandum reads in part:
Paragraph 18 alleges that as a part of the original petition, the debtor stated that he had closed no financial accounts within one year. This obviously refers to bank accounts. The debtor closed no such accounts.
Memorandum of Law in Support of Motion for Summary Judgment.
The statement, contained in the memorandum filed by the debtor’s attorney, that no financial accounts have been closed by the debtor within the year preceding bankruptcy is not supported either by affidavit or any of the testimony that has been submitted in connection with the summary judgment motion. The debtor’s deposition contains only the following brief reference to bank accounts. It reads:
Q. Did yoü have a checking account—
A. Yes.
Q. —on Distinctive Motors? Do you still have a cheeking account?
A. No.
Q. Where was the cheeking account?
A. First Commercial.
*232Q. Did you have it for the last two years before you filed your bankruptcy petition?
A. Yes.
Copy of Deposition of John R. McAllister, pages 11-12, attached to plaintiffs Response to Motion for Sanctions.
At the debtor’s first meeting of creditors, the debtor was also questioned briefly about his bank accounts and gave the following testimony on the subject. He stated:
Q. What banks did you deal with?
A. I banked with Compass Bank and First Commercial Bank.
Q. And what were those account names? What was the names of the account?
A. Distinctive Motor Cars.
Q. On both accounts?
A Uh-huh. And I had a personal cheeking account, John R. McAllister. And we had P.J.’s Pawn account at New Federal Savings and that was it.
Copy of Transcript of 341 Hearing, pages 15-16, attached to plaintiffs Response to Summary Judgment.
As is apparent from the quoted excerpts, the debtor did not testify in either his deposition or at his section 341 meeting of creditors that he did not close any bank accounts within the year preceding bankruptcy. In addition, no portion of the record before the Court supports an inference that the debtor did not knowingly and fraudulently give a false answer to question 11 in his statement of affairs. The debtor has, therefore, as to that portion of the complaint, failed under the standards enunciated in Fitzpatrick, to identify those portions of the pleadings, depositions, answers to interrogatories, and admissions on file which he believes demonstrates the absence of a genuine issue of material fact. Consequently, summary judgment must be denied as to the allegations contained in paragraph 18 of the plaintiffs complaint relating to the alleged false oath made by the debtor about his bank accounts.
(2) Question 16 of the Statement of Affairs
Aso, in paragraph 18 of the amended complaint, the plaintiff contends that the response made by debtor to question 16 in the statement of affairs was false. Question 16 asks the debtor to “list the names and addresses of all businesses in which the debtor was an officer, director, partner, or managing executive of a corporation, partnership, sole proprietorship, or was a self-employed professional within two years immediately preceding the commencement of this case, or in which the debtor owned 5 percent or more of the voting or equity securities within the two years immediately preceding the commencement of the case.” In response to Question 16, the debtor listed Distinctive Motor Cars, the name under which he conducted business with the plaintiff and “P.J.’s Pawn, Inc.” The plaintiff contends that the debtor’s response was incomplete in that he “failed to disclose business transactions with Dollar Rent-A-Car, Dr. William Taylor, KO Investments, and Keith Barker.” Amended Complaint, Paragraph 18.
Again, the only portion of the debtor’s answer which is applicable to those allegations is the general denial contained in paragraph 9. However, the debtor states the following in the memorandum of law filed in support of his summary judgment motion. That memorandum reads in part:
Paragraph 18b accuses the Defendant of stating that he had “only been in business with” one company. Plaintiff then equates borrowing money in the routine course of business as being “in business with” that company.
Memorandum of Law in Support of Motion for Summary Judgment.
The evidence before the Court demonstrates that the debtor operated only two businesses during the two year period before bankruptcy. These were Distinctive Motor Cars and P.J. Pawn, Inc. These businesses operated out of the same location and shared common facilities, furnishings, equipment, and employees. Dollar Rent-A-Car, Dr. William Taylor, KO Investments, and Keith Barker each did business with Distinctive Motor Cars, the same way that the plaintiff did business with Distinctive Motor Cars, by loaning money for the debtor to purchase used automobiles for resale. Neither the plaintiff nor Dollar Rent-A-Car, Dr. *233William Taylor, KO Investments, or Keith Barker has otherwise ever been in business with or been a business partner of the debtor in any sense. They are all creditors of the debtor, doing business as Distinctive Motor Cars, and nothing more.
Question 16 of the statement of affairs does not ask for the information that the plaintiff contends should have been supplied by the debtor in response to that question. Question 16 plainly asks a debtor to provide the name and address of any business operated as either a corporation, partnership or sole proprietor during the two years preceding bankruptcy. It does not ask a debtor to describe who he or she did business with during the same two year period.8 Therefore, the debtor’s failure to list Dollar Rent-A-Car, Dr. William Taylor, KO Investments, and Keith Barker specifically in response to Question 16, was appropriate and cannot be a “false oath” under 11 U.S.C. § 727(a)(4)(A) and summary judgment must be granted as to that allegation,9
V. FITZPATRICK REVISITED
A. Issues as to Which Summary Judgment is Improper
Genuine issues of material fact preclude summary judgment as to the following portions of the plaintiffs complaint:
1. Those portions of the plaintiffs original and amended complaints which are based on 11 U.S.C. § 523 and allege fraud, embezzlement and conversion.
2. The allegations based on 11 U.S.C. § 727 which are contained in paragraph 5 of the plaintiffs original complaint as they relate to the Subaru and the Volkswagen.
3. That portion of paragraph 18 of the plaintiffs amended complaint which is based on 11 U.S.C. § 727 and alleges a false oath by the debtor in his statement of affairs regarding bank accounts closed by him within a year of bankruptcy.
Relative to those portions of the plaintiffs complaint, the pleadings, depositions, exhibits, and memorandum submitted by the parties do not show an absence of evidence to support the plaintiffs case or that the plaintiff will be unable to prove a case at trial. The debtor’s motion for summary judgment must, therefor, be denied, to the extent it relates to those portions of the plaintiffs complaint.
B. Issues as to Which Summary Judgment is Proper
Summary judgment is proper as to the following portions of the plaintiffs complaint:
*234■ 1. The allegations based on 11 U.S.C. § 727 which are contained in paragraph 5 of the plaintiffs original complaint as they relate to the Mercedes, Jaguar, Cadillac, Crown Victoria, BMW and Oldsmobile.
2. The allegations based on 11 U.S.C. § 727 which are contained in paragraph 17 of the plaintiffs amended complaint.
3. That portion of paragraph 18 of the plaintiffs amended complaint which is based on 11 U.S.C. § 727 and alleges a false oath by the debtor in his statement of affairs regarding the businesses operated by him within two years preceding bankruptcy.
The debtor, as to those portions of the plaintiffs complaint, has informed the Court of the basis for his summary judgment motion and has identified those portions of the pleadings, depositions, exhibits, and memorandum submitted by the parties which demonstrate the absence of a genuine issue of material fact. The debtor has not only demonstrated to the Court that there is an absence of evidence to support the plaintiffs ease, but has also supported his motion with credible evidence, primarily the testimony contained in his deposition and the testimony of Mr. Gould, that would entitle him to a directed verdict if not controverted at trial.
The initial burden under Fitzpatrick v. City of Atlanta, 2 F.3d 1112, 1115 (11th Cir.1993) was satisfied by the debtor. The responsibility then fell on the plaintiff to show the existence of a genuine issue as to the material facts relative to those portions of its complaint. The plaintiff, however, has not shown or presented evidence sufficient to call into question the inferences created by the debtor’s evidence on any particular material fact. Furthermore, the plaintiff has not presented evidence sufficient to withstand a directed verdict motion at trial on the material facts negated by the debtor’s evidence; or shown that the record in this ease in fact contains evidence which supports its case, sufficient to withstand a directed verdict motion, which was overlooked or ignored by the debtor; or presented additional evidence sufficient to withstand a directed verdict motion at trial based on the evidentiary deficiency pointed out by the debtor. The plaintiff has, in short, not come forward with significant, probative evidence demonstrating the existence of a triable issue of fact and the combined body of evidence presented by the two parties relevant to the material facts is such that the debtor would be entitled to a directed verdict at trial as to those portions of the plaintiffs complaint.
The Court has considered all pleadings, depositions, exhibits, and memorandum submitted by the parties. Furthermore, the Court has resolved all reasonable doubts about the facts contained in those documents in favor of the plaintiff, and drawn all justifi- ■ able inferences from the facts contained in those documents in the plaintiff’s favor. Nevertheless, the Court finds that, as to the above portions of the plaintiff’s complaint, there are no genuine issues as to any material facts and that the debtor is entitled, under Fed.R.Civ.P. 56(c), to judgment as a matter of law.
VI. CONCLUSION
A separate order will be entered in accordance with this memorandum opinion.
ORDER DENYING IN PART AND GRANTING IN PART DEFENDANT’S MOTION FOR SUMMARY JUDGMENT
In conformity with and pursuant to the Memorandum Opinion entered contemporaneously herewith, it is ORDERED, ADJUDGED AND DECREED that:
1. The defendant’s Motion for Summary judgment is denied-as to the following portions of the plaintiff’s complaint:
a. Those portions of the plaintiffs original and amended complaints which are based on 11 U.S.C. § 523 and allege fraud, embezzlement and conversion.
b. The allegations based on 11 U.S.C. § 727 which are contained in paragraph 5 of the plaintiffs original complaint as they relate to the Subaru and the Volkswagen.
c. That portion of paragraph 18 of the plaintiffs amended complaint which is based on 11 U.S.C. § 727 and alleges a false oath by the debtor in his statement of *235affairs regarding bank accounts closed by him within a year of bankruptcy.
2.The defendant’s Motion for Summary judgment is granted as to the following portions of the plaintiff’s complaint:
a. The allegations based on 11 U.S.C. § 727 which are contained in paragraph 5 of the plaintiffs original complaint as they relate to the Mercedes, Jaguar, Cadillac, Crown Victoria, BMW and Oldsmobile.
b. The allegations based on 11 U.S.C. § 727 which are contained in paragraph 17 of the plaintiffs amended complaint.
c. That portion of paragraph 18 of the plaintiffs amended complaint which is based on 11 U.S.C. § 727 and alleges a false oath by the debtor in his statement of affairs regarding the businesses operated by him within two years preceding bankruptcy.
. In support of his summary judgment motion, the debtor directed the Court’s attention to: the plaintiffs complaint; the debtor’s answer- to the complaint; excerpts from the discovery deposition of Mr. George Gould; the ledger sheet al-tached to and referred to in the excerpt of Mr. Gould’s deposition; excerpts from the discovery deposition of Mr. McAllister; two written agreements that were attached to and referred to in Mr. McAllister’s discovery deposition; an affida*220vit and summary prepared by a legal assistant who works for Mr. Costello, the debtor’s attorney; and a memorandum of argument and law and "Statement of Undisputed Facts” prepared by Mr. Costello. The Court did not consider an affidavit and summary prepared by Mr. Costello's legal assistant and submitted by the Debtor. The affiant is neither a party to this proceeding nor a witness to facts relevant to the issues before the Court. She apparently has no personal knowledge of the facts and records from which she prepared her affidavit and summary and is therefore incompetent to testify regarding the matters contained therein. Federal Rule of Civil Procedure 56(e) requires that "Supporting affidavits shall be made on personal knowledge, shall set forth such facts as would be admissible in evidence, and shall show affirmatively that the affiant is competent to testify to the matters stated therein.”
In opposition to the debtor’s summary judgment motion, the plaintiff directed the Court’s attention to the debtor’s deposition testimony and the testimony given by the debtor at his first meeting of creditors held on July 20, 1995.
. A copy of the document is an exhibit to the Deposition of John R. McAllister which is attached to plaintiff’s Response to Motion for Sanctions. The Motion for Sanctions along with a Motion for Rule 11 Sanctions are pending before the Court. Those matters will be addressed separately at a later date.
. In both Ford Motor Credit Co. v. Owens, 807 F.2d 1556, 1559 (11th Cir.1987) and Chrysler Credit Corp. v. Rebhan, 842 F.2d 1257, 1264 (11th Cir.1988), the Eleventh Circuit Court of Appeals affirmed the decision of a lower court which held that a car dealer who obtained cars with money advanced by a secured creditor and disposed of the cars without remitting the proceeds of the car sales to the secured creditor in contravention of a floor plan security agreement was guilty of a willful and malicious conversion of the secured creditor’s interest in the cars.
. Coseo v. Alpena Savings Bank, 612 F.2d 276, 277 (6th Cir.l980)(description of collateral in security agreement between bank and automobile dealer as "all inventory financed through these transactions,” was sufficient to create security interest in individual vehicles); Chicago Limousine Serv., Inc. v. Hartigan Cadillac, Inc., 191 Ill.App.3d 886, 139 Ill.Dec. 1, 6, 548 N.E.2d 386, 391 (1989)(words in security agreement relating to new and used vehicles held for sale or lease, "all vehicles of like kinds or types now owned or hereafter acquired,” and "all additions and accessions thereto and all proceeds of such vehicles,” adequately described automobile inventory financed by secured party), rev'd on other grounds, 139 Ill.2d 216, 151 Ill.Dec. 342, 564 N.E.2d 797 (1990); Villa v. Alvarado State Bank, 611 S.W.2d 483 (Tex.Civ.App.l981)(description of collateral in security agreement as "All motor vehicles purchased from time to time by Debtor with proceeds of funds advanced by Bank. Such vehicles shall be inventory in hands of Debtor.” was sufficient to create security interest in any particular "motor vehicle” acquired or "purchased” by the debtor).
A description of personal property in a security agreement is sufficient "whether or not it is specific if it reasonably identifies what is described.” Ala.Code 1975, § 7-9-110. See Galleon Indus. Inc. v. Lewyn Mach. Co., 50 Ala.App. 334, 279 So.2d 137, 141 (1973)(description of collateral in security agreement as "equipment” was sufficient to create security interest in individual machine), cert. den., 291 Ala. 779, 279 So.2d 142 (1973).
. Weitnauer Trading Co., Ltd., v. Annis, 516 F.2d 878, 880 (2nd Cir.l975)(interpreting New York law); Busler v. D. & H. Manufacturing, Inc., 81 Ohio App.3d 385, 611 N.E.2d 352, 355 (1992); Lonnie Hayes & Sons Staves, Inc. v. Bourbon Cooperage Co., 777 S.W.2d 940, 942 (Ky.App. *2261989); Joiner v. Elrod, 716 S.W.2d 606, 609 (Tex.App.1986); Johnson v. Ogle, 120 Mont. 176, 181 P.2d 789, 791 (1947); Gordon v. Beck & Gregg Hardware Co., 74 Ga.App. 566, 40 S.E.2d 428, 432 (1946).
"A memorandum sufficient to satisfy the Statute may be made or signed at any time before or after the formation of the contract.” Restatement (Second) of Contracts § 136 (1981).
. Mr. Gould was asked in his deposition: "Did you ever have a title to any of these seven vehicles [excluding the Mercedes] that are listed in your lawsuit?” In response, Mr. Gould stated: "I had a title to the Subaru and to the '84 VW. I had a title to — well, the Mercedes we were talking about. And I had it marked down here on my ledger that I had a title to the ’70 Olds, but as I look at that, I see that it’s not a title, it’s a bill of sale." Copy of deposition of George C. Gould, page 32, attached to debtor's Motion for Summary Judgment.
The fact that the plaintiff never received the certificates of title to the Jaguar, Cadillac, Crown Victoria, and BMW from the debtor supports the debtor’s testimony that the purchasers of those vehicles received the certificates of titles from him.
. "Any entrusting of possession of goods to a merchant who deals in goods of that kind gives him power to transfer all rights of the entruster to a buyer in ordinary course of business.” Ala. Code 1975, § 7-2-403(2). "‘Entrusting’ includes any delivery and any acquiescence in retention of possession regardless of any condition expressed between the parties to the delivery or acquiescence and regardless of whether the procurement of the entrusting or the possessor's disposition of the goods have been such as to be larcenous under the criminal law.” Ala.Code 1975, § 7-2-403(3).
. A construction of Question 16 that would require a merchant debtor to list all entities with whom he or she did business would, in essence, require a listing of all of that debtor’s customers and creditors and would, in part, be redundant of the schedules of creditors that are otherwise required to be provided by a debtor with his bankruptcy petition. The expansive construction of Question 16 encouraged by the plaintiff is not authorized by the plain language of the question.
Nor is the information which the plaintiff contends is required by Question 16 generally essential to bankruptcy administration. The purpose of the official forms is to provide basic information regarding a debtor’s assets, liabilities and financial affairs. They are not intended to be made a comprehensive record or journal of the debtor’s business dealings. If it were otherwise, the petition filed by even a modest business person would be extensive. The first meeting of creditors and Bankruptcy Rule 2004 provide the means and opportunity for trustees and creditors to obtain information not strictly required by the official bankruptcy forms. Indeed, it appears that the debtor was questioned extensively about dealings with Dollar Rent-A-Car, Dr. William Taylor, KO Investments, and Keith Barker at the 341 hearing and in his deposition as well.
. Furthermore, much of the information that the plaintiff contends should have been supplied by the debtor was, in fact, supplied by the debtor, albeit in another part of his bankruptcy petition. Dr. William Taylor, KO Investments, and Keith Barker were each appropriately listed by the . debtor in Schedule F attached to his bankruptcy petition, entitled “Creditors Holding Unsecured Nonpriority Claims.”
And, finally, the plaintiff has pointed to no fact in the record which might suggest that the debt- or acted "knowingly and fraudulently” by not listing the names and addresses of Dollar Rent-A-Car, Dr. William Taylor, KO Investments, and Keith Barker specifically in response to Question 16. To the contrary, the fact that much of the same information was provided by the debtor elsewhere in his bankruptcy petition, when coupled with the fact that the debtor testified extensively about his relationship with those entities at his 341 meeting, strongly mitigates against any inference that the debtor was trying to hide his relationship with those entities from either the trustee or his creditors. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492639/ | ORDER OVERRULING TRUSTEE’S OBJECTION TO DEBTOR’S CLAIMED EXEMPTION TO WORKERS’ COMPENSATION CLAIM
STEVEN H. FRIEDMAN, Bankruptcy Judge.
This matter came before the Court on November 25, 1997, for consideration of the Chapter 7 Trustee’s objection to the Debtor’s claimed exemption of a workers’ compensation claim. Having considered the case law, the argument of counsel and for the reasons set forth below, the Court overrules the Trustee’s objection.
As of June 4, 1997, the date on which the Debtor’s Chapter 7 petition was filed, the Debtor held an outstanding claim for workers’ compensation benefits. The claim was contingent and unliquidated. The Debtor claimed this workers’ compensation claim as exempt under Florida Statute § 440.22 and 11 U.S.C. § 522(d)(10)(C). The Chapter 7 Trustee contends that because the claim was contingent and unliquidated at the time of the bankruptcy filing, the referenced statutory provisions do not apply.
Florida Statute § 440.22 provides:
No assignment, release, or commutation of compensation or benefits due or payable under this chapter except as provided by this chapter shall be valid, and such compensation and benefits shall be exempt from all claims of creditors, and from levy, execution and attachments or other remedy for recovery or collection of a debt, which may not be waived.
This Court, in In re Moore, 203 B.R. 802 (Bankr.S.D.Fla.1997), addressed an identical situation and determined that a Debtor’s claim or cause of action for workers’ compensation benefits does not constitute funds that are “due and payable” as contemplated by Florida Statute § 440.22. Since the issuance of the Moore decision, the Supreme Court of Florida has rendered its ruling in Broward v. Jacksonville Medical Center, 690 So.2d 589 (Fla.1997). In that ruling, Daniel Broward, a workers’ compensation claimant, received a lump sum settlement and deposited the proceeds in a savings account. The Supreme Court determined that the “due and payable” *266provision did not pertain to the entire statute, but rather, only to the first clause of the statute, and further determined that the statute was ambiguous. The Supreme Court then looked to the legislative intent behind workers’ compensation legislation, noting that the concept of precluding a creditor’s claim against a worker’s source of income while he or she is able to work, but permitting a creditor to reach a worker’s source of income while he or she is injured and unable to work, offends notions of justice and logic. The Supreme Court concluded that Florida Statute § 440.22 “applies to workers’ compensation benefits received by the beneficiary and deposited in a bank account, so long as the funds are traceable to the workers’ compensation benefits.” Id. at 592.
The Florida Supreme Court’s ruling does not directly affect this Court’s ruling in Moore. However, the ruling does lead this Court to consider whether the “due and payable” provision of § 440.22 should be as narrowly construed as it was in Moore. Based on the ruling in Broward, if this Court were to follow the Trustee’s argument and this Court’s earlier ruling in Moore, a debtor would be entitled to exempt his or her income attributable to wages, benefits awarded but not yet distributed to him or her, and benefits received and placed into a bank account. The only time that a debtor who becomes eligible for worker’s compensation could not exempt the proceeds from a worker’s compensation award would be when the debtor has filed a claim but has not yet received a determination of his or her entitlement to funds. This interpretation flies in the face of logic, as well as the purpose of the exemption provided for worker’s compensation beneficiaries.
As pointed out by the Supreme Court, “the workers’ compensation benefits provide a means of support for the employee and the employee’s family, essentially replacing the employee’s regular source of income.” Broward, 690 So.2d at 591. Disallowing a debt- or’s exemption because the workers’ compensation benefits have yet to be awarded denies a debtor the ability to support his or her family. Consequently, this Court recedes from its ruling in Moore and finds that workers’ compensation benefits that have been claimed but have not been awarded are protected by the exemption provided by Florida Statute § 440.22. Accordingly, it is
ORDERED that the Chapter 7 Trustee’s objection to the Debtor’s claim of exemption as to her worker’s compensation claim is overruled. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492640/ | MEMORANDUM OF DECISION
JAMES H. WILLIAMS, Bankruptcy Judge.
Before the Court are cross motions for summary judgment filed by Plaintiff, Josiah L. Mason, the Chapter 7 Trustee (Trustee), and Defendant, Associates Financial Services Corporation (Associates). The Trustee has brought this adversary complaint to determine that Associates does not have a hen on the items of real or personal property which are the subjects of this action. For the reasons stated below, Trustee’s motion will be GRANTED and Associate’s motion will be DENIED.
FACTS
The Trustee and Associates have stipulated to the following facts. The real estate which is the subject of this action is owned in fee simple by Muskingum Watershed Conservancy District (Muskingum). On April 1, 1983, Muskingum granted a cottage site lease on the real property to Anna Margaret Pryor. On March 24, 1986, Anna Margaret Pryor executed an assignment of the cottage site lease to the defendants, Joseph A. Pryor and Karen Sue Pryor (Debtors). On May 2, 1986, Anna Margaret Pryor executed a bill of sale to transfer the residential and appurtenant structures on the leased Land to the Debtors. The cottage site lease gave the Debtors the right to construct and maintain not more than one cottage on the leased premises which the Debtors, did, maintaining a cottage on the leased premises as their residence. Under the terms of the lease, the Debtors agreed to keep the cottage and leasehold interest free from liens except those approved by the Board of Directors of Muskingum.
On January 30,1996, the Debtors executed and delivered to Associates a loan agreement and real estate mortgage for $67,055.25 at a rate of 13.62% per annum. The mortgage was recorded in Ashland County. The Debtors defaulted on their loan to Associates on March 5,1996, and have remained in default. There was no UCC-1 financing statement or security agreement signed by the Debtors to Associates or filed with the Ashland County Recorder.
The lease was canceled by the Board of Directors of Muskingum on June 1, 1996. There is a present rent default of $1,571.00, a reinstatement fee owed of $250.00 and unpaid costs for lawn maintenance. The Debtors filed a petition for relief under Chapter 7 of Title 11 of the United States Code on November 13,1996.
DISCUSSION
The Court has jurisdiction in this adversary proceeding by virtue of 28 U.S.C. § 1334(b) of the United States Code 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)(E). This Memorandum of Decision constitutes the Court’s findings of fact and conclusions of law pursuant to Rule 7052 of the Federal Rules of Bankruptcy Procedure.
Standards on summary judgment under Rule 56 of the Federal Rules of Civil Procedure are made applicable to bankruptcy proceedings by Rule 7056 of the Federal Rules of Bankruptcy Procedure. Rule 56(c) provided for a grant of summary judgment as follows:
The judgment sought shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions *364on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.
The party seeking summary judgment bears the initial burden of asserting that the pleadings depositions, answers to interrogatories, admissions and affidavits establish the absence of a genuine issue of material fact. Celotex v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2552-53, 91 L.Ed.2d 265 (1986); Street v. J.C. Bradford & Co., 886 F.2d 1472, 1479 (6th Cir.1989). The ultimate burden of demonstrating the existence of a genuine issue of material fact, however, lies with the nonmoving party. Celotex Corp., 477 U.S. at 324, 106 S.Ct. at 2553. See also, First National Bank v. Cities Service Co., 391 U.S. 253, 288-89, 88 S.Ct. 1575, 1592-93, 20 L.Ed.2d 569 (1968).
When the moving party has carried its burden under Rule 56(c), its opponent: must do more than simply show that there is some metaphysical doubt as to the material facts.... In the language of the Rule, the nonmoving party must come forward with “specific facts showing that there is a genuine issue for trial.” F.R. Civ. Proc. 56(e) (emphasis added).... Where the record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there is no “genuine issue for trial.”
Matsushita Electric Industrial Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586-87, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986) (citations and footnotes omitted).
The fact that both parties have filed for summary judgment does not change the standard upon which the Court evaluates the motions. Taft Broadcasting Co. v. United States, 929 F.2d 240, 248 (6th Cir.1991); See also, Natural Resources Defense Council, Inc. v. Vygen Corp., 803 F.Supp. 97 (N.D.Ohio 1992). That both parties have filed motions for summary judgment does not mean that there is no factual dispute, because each motion asserts its own legal theories and facts in support of those theories. Begnaud v. White, 170 F.2d 323 (6th Cir.1948); James W. Moore, et al., 6 Moore’s Federal Practice ¶ 56.13 (2d. ed.1992). The Court will, therefore, consider each motion and its proof accordingly.
The issue before the Court is whether Associates has a valid perfected security interest in the cottage and other structures owned by the Debtors that are located on the real property. If the security interest is not perfected, the Trustee, standing in the shoes of a lien creditor, may avoid the security interest under the “strong-arm” powers of 11 U.S.C. § 544. Ohio law provides that an unperfected security interest is subordinate to the rights of a lien creditor. Ohio Rev. Code § 1309.20.
The Trustee correctly asserts that Associates does not have a lien on the real or personal property of the Debtors. With regard to the real property, Associates does not have a hen because the Debtors never owned the property; they are merely lessees. The property is owned in fee simple by Muskingum. Any effort by Associates to place a mortgage or the leasehold interest held by the Debtors was ineffective because of Muskingum’s fee simple ownership of the property. Associates, apparently in accord, does not address in its motion the possibility of possessing a hen on the real property. Upon these factors, the Court concludes that Associates does not have a hen on the real property owned in fee simple by Muskingum.
Furthermore, the Trustee asserts in his motion for summary judgment that Associates does not have a hen on the structures located on the property because of the failure of Associates to execute and perfect their security interest through the recording of a financing statement or a security agreement. The Trustee reasons that, according to the terms of the lease and the bill of sale, the cottage and any other structures on the property are the personal property of the Debtors and the proper means by which to perfect a security interest in personal property is through the filing of a UCC-1 financing statement or security agreement with the Ashland County Recorder. Since Associates did not execute or record a financing statement or security agreement, the Trustee urges that Associates does not have a valid *365lien on the cottage and other structures located on the property.
Associates, however, contends in its motion for summary judgment that it has a valid security interest in the cottage and other structures located on the property through the mortgage executed by the Debtors and recorded with the Ashland County Recorder. The Debtors received a loan in the amount of $67,055.25 at 13.62% per annum and granted Associates a mortgage in the cottage and other structures located on the property to secure the loan. Associates asserts that the mortgage was the equivalent of a security agreement and sufficiently described the interest conveyed to Associates as “residential and appurtenant structures” located "on the property. Ohio Rev.Code § 1309.01(A)(12), § 1309.08.
Associate’s argument fails because the lease between Muskingum and Anna Margaret Pryor, the assignor of the lease to the Debtors, was canceled by Muskingum on June 1, 1996, before the Debtors filed their petition for relief under Chapter 7 of Title 11 of the United States Code on November 13, 1996. Thus, even if Associates had a security interest which attached to the lease, the lease has been canceled by Muskingum and the security interest of Associates has terminated. The Court concludes that Associates does not have a valid security interest in the cottage or any other appurtenant structures located on the property.
Associates also contends that it perfected its security interest in the cottage and other appurtenant structures owned by the Debtors by filing its mortgage with the Ash-land County Recorder. Ohio Revised Code § 1309.38(A)(4) designates the proper place for Associates to perfect any security interest in the Debtors’ cottage:
(4) in all other eases, in the office of the secretary of state and, in addition, if the debtor has a place of business in only one county of this state, also in the office of the county recorder of such county, or if the debtor has no place of business in this state, but resides in the state, also in the office of the county recorder of the county in which he resides. O.R.C. 1309.38(A)(4).
Associates, however, only recorded its mortgage with the Ashland County Recorder and not with the office of the Secretary of the State of Ohio Associates contends that its filing with the Ashland County Recorder is sufficient because it served notice to subsequent creditors that the cottage had a prior perfected security interest. Associates cites to Ohio Revised Code § 1309.38(B) to support its position.
A filing which is made in good faith in an improper place or not in all of the places is nevertheless effective with regard to any collateral as to which the filing complied with the requirements of sections 1309.01 to 1309.50 of the Revised Code, and is also effective with regard to collateral covered by the financing statement against any person who has knowledge of the contents of such financing statement.
O.R.C. § 1309.38(B).
Associates, however, cannot benefit from this section which preserves the effectiveness of a filing as against a person who has knowledge of the contents of the financing statement. Section 544(a) of Title 11 of the United States Code expressly relieves the Chapter 7 Trustee from the effect of knowledge of any secured creditor’s interest. Gordon Square Pharmacy, Inc. v. Harris Wholesale Company (In re Gordon Square Pharmacy, Inc.), 138 B.R. 533, 535-36 (Bankr.N.D.Ohio 1992). Associates contends that its filing with only the Ashland County Recorder and not also with the office of the Secretary of the State of Ohio has not harmed subsequent creditors. Associates, however, has ignored the Chapter 7 Trustee. By statute, a Trustee in bankruptcy is not one “actual knowledge”, and in fact his powers are granted “without regard to any knowledge of the Trustee or of any creditor.” 11 U.S.C. § 544(a). Furthermore, in cases where dual filing of financing statements is required, the overwhelming weight of authority does not excuse the creditor from filing in both locations. Ledford v. Farmers State Bank & Trust Co. (In the Matter of Reier), 53 B.R. 395, 398 (Bankr.S.D.Ohio 1985).
Lastly, Associates has argued that equity compels this Court to grant summary *366judgment in its favor. However, because Associates is a party accustomed to dealing with the requirements of commercial law, the Court cannot be sympathetic to this argument. The Court must be mindful of interests beyond those represented here. “Efforts by courts to fashion equitable solutions to mitigate the hardship on particular creditors of literal applications of statutory filing requirements would have the detrimental effect of undermining the reliance placed upon them.” Bostwick-Braun Co. v. Owens, 634 F.Supp. 839, 841 (E.D.Wis.1986). The harm would be more serious than the occasional harshness resulting from strict enforcement. Uniroyal, Inc. v. Universal Tire & Auto Supply Co., 557 F.2d 22, 23 (1st Cir.1977).
CONCLUSION
With respect to Associates’ motion, putting the evidence in the light most favorable to the Trustee, the Court finds that Associates has failed to meet its burden. Accordingly, Associate’s motion for summary judgment must be DENIED. Summary judgment must be granted in favor of the Trustee. The uneontroverted facts demonstrate that the security interest of Associates in the cottage and other structures of the Debtors has been terminated, is unperfected, and is, therefore, subordinated to that of the Trustee pursuant to 11 U.S.C. § 544(a). Accordingly, the Trustee’s motion for summary judgment is GRANTED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492641/ | MEMORANDUM OPINION AND ORDER RE DEBTOR’S OBJECTION TO PROOF OF CLAIM FILED BY THE TENNESSEE DEPARTMENT OF REVENUE
G. HARVEY BOSWELL, Bankruptcy Judge.
The Court conducted a hearing on this matter on October 20,1997. Fed.R.BankR.P. 9014. Pursuant to 28 U.S.C. § 157(b)(2), this matter is a core proceeding. After reviewing the testimony from the hearing and the record as a whole, the Court makes the following findings of facts and conclusions of law. Fed.R.Bankr.P. 7052.
J. FINDINGS OF FACT
The facts of this case are largely undisputed. The debtor, Robert Young, Jr., (“Young”), is an OB/GYN who has practiced at the Union City Women’s Clinic for over thirty years. While engaging in his medical career, Young also invested in several food-related corporations in and around the Jackson area. The corporate entities Young invested in were T & Y Foods, Inc., Bags, Inc., Pacer Foods, Inc., and Jackson Restaurant Group, Inc. It is Young’s involvement with this last corporation, Jackson Restaurant Group, Inc., (“JRG”) which is the subject of the dispute before the Court today.
In 1994, Young held an interest in the Bonanza restaurant on Highland Avenue in Jackson. Although it had proven to be a profitable investment in previous years, Bonanza’s business began to drop off and Young decided to convert the buffet-style restaurant into some other type of business venture. At around the same time of making this decision, Young met an individual named Hutchison Utt (“Utt”), through a mutual friend while on vacation. Utt was one of the principle owners of a corporation known as Boston Hospitality Group, Inc., (“BHG”), which served as the franchising authority for a chain of restaurants called Boston Beanery Restaurant and Tavern (“Restaurant”). After discussing the possibilities of such restaurant in Jackson, Young and Utt entered into an agreement to convert the Bonanza into a Boston Beanery Restaurant. Utt brought in his business partner in BHG, Mike Audi, to participate in this conversion.
Utt, Audi, and Young formed Jackson Restaurant Group, Inc., and incorporated the venture in Ohio to do business as the Boston Beanery Restaurant and Tavern. According to the corporate charter of JRG, Young was the president, Utt was the vice-president and secretary and Audi was the vice-president and treasurer. The three, men invested in JRG as individuals. None of the other corporations the three were involved in invested in JRG. The conversion of Bonanza was completed in early 1995 and JRG opened Boston Beanery Restaurant and Tavern on April 4,1995.
Because none of Young’s other three corporations were involved in the full service restaurant industry, Young decided to take a hands-off approach to the management of Boston Beanery. Accordingly, JRG contracted with Utt and Audi’s Boston Hospitality Group, Inc., to manage and operate the new restaurant. BHG received 3% of the net income of the restaurant each month as a management fee and $800.00 each month as an accounting fee. Neither JRG nor Young had any control or responsibilities with regards to Boston Beanery. Utt and Audi were the sole individuals responsible for the management and operation of the new restaurant.
According to his uneontradicted testimony, Young did not have any authority to hire or fire employees at Boston Beanery. Young *368also testified that he did not have any responsibility for preparing or filing tax returns or for calculating sales tax for the restaurant or JRG. Young also did not have any check writing authority for either the restaurant or JRG. Young never signed any of the tax returns for the restaurant or JRG, nor did he ever see any of the returns filed by either entity.
Hugh Johns, Young’s General Manager for his other restaurant-related corporations, also appeared at the hearing. Johns testified that even though Young was more involved in the managing of his other investments, Young had no management involvement with Boston Beanery. Johns additionally testified that from time to time he would visit Boston Beanery and would discuss how business was going there. Johns would then relay this information to Young. Young did not, however, ever act on any of the information Johns gave to him. At all times, Young possessed a completely hands-off approach to Boston Beanery, trusting the management skills of BHG, Inc., and the business expertise of Utt and Audi. Without notifying Young, Utt and Audi closed Boston Beanery and left town sometime in 1996. Prior to this time, neither Utt nor Audi had informed Young that there was a problem with the state sales tax.
Young filed his chapter 11 bankruptcy petition on July 25, 1996. On March 2, 1997, the Tennessee Department of Revenue filed a proof of claim in the amount of $39,148.53 for pre-petition sales and use taxes for April, June, July, August, September, October, November, December of 1995 and January and February of 1996. TDR also alleged that Young had not filed tax returns for Boston Beanery for this same time period. According to Young’s uncontradicted testimony, this was the first knowledge Young had of the delinquency of Boston Beanery’s taxes.
Young filed an objection to TDR’s proof of claim on September 4, 1997, in which he asserted that he is not liable for the payment of taxes for Boston Beanery pursuant to T.C.A., § 67-1-1443. In their response to this objection, TDR alleged that it has authority to collect the delinquent taxes from Young under T.C.A. §§ 67-1-1438 and 67-6-517.
II. CONCLUSIONS OF LAW
T.C.A. § 67-1-1443 provides that:
(a) Any person required to collect, truthfully account for, and pay over any tax collected from customers of any taxpayer, who willfully fails to truthfully account for and pay over' any such tax collected, or who willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable for the total amount of the tax evaded, or not accounted for and paid over, along with penalties and interest.
(b) As used in this section:
(1) “Person” includes an officer or employee of a corporation, who as such officer or employee is under a duty to perform the act in respect of which the violation occurs: and
(2) “Willfully” is limited to material and informed participation in the diversion of such collected funds to a source other than to the state.
T.C.A. § 67-1-1443. Despite diligent efforts, this Court has been unable to find any Tennessee cases which discuss the scope, breadth and meaning of this statute. What the Court did find, however, was a plethora of cases which interpret an almost identical Internal Revenue Code section. Because there is no interpretation of the state statute and because the federal one is so similar, this Court elects to seek guidance from the cases interpreting I.R.C. § 6672 in deciding the case at bar.
Section 6672 of the Internal Revenue Code provides that:
(a) General Ride — 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 or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to á penalty equal to the total amount of the tax evaded, ...
*36926 U.S.C. § 6672(a). Section 6671 of the Internal Revenue Code defines “person” as used in § 6672 to mean “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.” 26 U.S.C. § 6671(b). The Sixth Circuit has had numerous opportunities to interpret these statutes and has consistently held that in order to determine whether or not someone can be held liable for unpaid taxes under § 6672, a court must first find that the person is one who is required to “collect, truthfully account for, and pay over” taxes for a certain entity. Gephart v. United States, 818 F.2d 469, 473 (6th Cir.1987) (per curiam); McGlothin v. United States, 720 F.2d 6, 8 (6th Cir.1983). In so holding, the Sixth Circuit has further held that the determination of whether or not someone is a “responsible person” under the statute is an extremely fact-specific inquiry:
[T]he test for determining the responsibility of a person under § 6672 is essentially a functional one, focusing upon the degree of influence and control which the person exercised over the financial affairs of the corporation and, specifically, disbursements of funds and the priority of payments to creditors ... Among the specific facts which courts have relied upon in determining whether individuals were persons responsible for the payment of Taxes withheld from the wages of employees are: (1) the duties of the officer as outlined by the corporate by-laws; (2) the ability of the individual to sign checks of the corporation; (3) the identity of the officers, directors, and shareholders of the corporation; (3) the identity of the individuals who hired and fired employees; (5) the identity of the individuals who were in control of the financial affairs of the corporation. More than one person can be a responsible officer of a corporation. Essentially, liability is predicated upon the éxistence of significant, as opposed to absolute, control of the corporation’s finances. It is basically a factual inquiry. Generally, such a person is one “with ultimate authority over expenditure of funds since such a person can fairly be said to be responsible for the corporation’s failure to pay over its taxes” or more explicitly, one who has “authority to direct payment of creditors.”
Gephart, 818 F.2d at 473 (6th Cir.1987) (per curiam) (citations omitted) (quoting Barrett v. United States, 217 Ct.Cl. 617, 580 F.2d 449, 452 (1978)).
Based on the factors cited by the Sixth Circuit it is patently clear that Young is not the person responsible for payment of the delinquent state sales taxes. Young did not have any authority to sign checks for the corporation. Young did not take any part in the hiring or firing of employees. According to the by-laws of JRG, Young was neither the secretary nor the treasurer. Young simply did not make any financial decisions for Boston Beanery Restaurant and Tavern. Additionally, Young did not ever prepare, sign or even see any of the tax returns for the restaurant.
There is further support for not holding Young responsible for Boston Beanery’s delinquent state sales taxes found in the case of Barrett v. United States, 217 Ct.Cl. 617, 580 F.2d 449 (1978). In Barrett, the court found that the plaintiff was not the person responsible for the payment of corporate payroll taxes under § 6672. Like the debtor in the ease at bar, Barrett was listed on the articles of incorporation as a director for a moving company she owned with her husband known as Barrett’s Transfer and Storage, Inc. Despite this designation as a director of the corporation, Barrett worked full time for the federal government while her husband “ran the company with an iron hand.” Id., 580 F.2d at 450. Barrett’s husband appointed officers at will, had final authority on hiring and firing employees, negotiated all contracts for the company, ordered supplies and dealt with all creditors. Despite his best efforts, however, Barrett’s husband turned out to be an ineffective manager. Soon, creditors and employees began to refuse checks signed by him and as a result, Barrett was given authority to write checks for the corporation. Id. at 451.
The check writing authority given to Barrett by her husband was not something Barrett could exercise any control over however. *370The proof presented at Barrett’s trial showed that Barrett was berated into signing checks by her husband. Although she was the one who physically signed the cheeks, it was her husband who was still making the decisions about to whom the money was going. Id. The court further found that Barrett had very little to do with the day-to-day running of the company:
Plaintiff had no responsibility for making up the payroll. She had no authority over payment of the salaries of company employees. Creditors did not ask for her when inquiring about being paid. She had no responsibility for the preparation of tax returns for the company, nor did she sign any returns. Plaintiff did not negotiate company contracts, bill customers, order supplies or hire and fire employees.
Id. at 453. Looking to factors similar to those cited by the Sixth Circuit in the Gep-hairt opinion, the court held that Barrett was not responsible for payment of the taxes. Barrett, 580 F.2d at 454.
Young’s involvement with the Boston Beanery is almost identical to the facts in Barrett. In fact, by virtue of signing checks, Barrett was more involved with her company than Young was with his. Young had nothing at all to do with the restaurant except a financial investment. The entire time Boston Beanery was open, Young was occupied on a full-time basis with his medical practice. Not only did he choose not to be involved with the management and operation of the restaurant, he also simply did not have the time.
By analogy to the Sixth Circuit’s interpretation of the federal tax statute, as well as the similarity to the Barrett case, this Court finds that Young is not the person the Tennessee Department of Revenue can look to for payment of the delinquent state sales taxes of Boston Beanery Restaurant and Tavern. As a result, the debtor’s objection to the proof of claim of the TDR will be sustained under T.C.A. § 67-1-1443 and the claim of TDR will be disallowed. An order will be entered in accordance therewith.
III. ORDER
It is therefore ORDERED that the debt- or’s Objection to the Proof of Claim filed by the Tennessee Department of Revenue is SUSTAINED. It is FURTHER ORDERED that the Tennessee Department of Revenue’s claim in the amount of $39,148.53 is disallowed.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492643/ | MEMORANDUM OF DECISION AND ORDER DENYING BENEFICIAL OKLAHOMA’S OBJECTION TO CLAIM OF EXEMPTION
RICHARD L. BOHANON, Bankruptcy J.
A creditor, Beneficial Oklahoma, Inc., has objected to debtors’ claim of exemption to a “second” television set. Since Oklahoma has “opted out” of the federal exemption scheme the issue turns on whether the television is exempt under state law. See 31 O.S. § l.B.
The debtors’ claim is made under 31 O.S. § 1.A.3 which allows an exemption for “[a]ll household and kitchen furniture held primarily for the personal, family or household use of such person or a dependent of such person.”
In interpreting and applying the Oklahoma exemption scheme in bankruptcy cases the federal courts have applied a judicial gloss saying that, in order for property to be exempt, it must be reasonably necessary for the maintenance of the debtors’ home. See eg. In re Davis, 134 B.R. 34 (Bankr.W.D.Okla.1991) and the cases cited.
In Davis Judge Lindsey thoroughly reviewed the cases interpreting the Oklahoma law and concluded that “[tjhis court knows of no reason why more than one television set should be held to be reasonably necessary to the maintenance of the household, and no evidence or contention has been offered in this case in favor of any such exemption.” Davis at 40. The decision makes it clear that neither party offered any evidence with regard to the issue.
In my view Davis improperly places the burden of proving reasonable necessity on the debtor when it states that no evidence was offered in favor of the exemption.
Rule 4003 Fed.R.Bankr.P. plainly states that “[i]n any hearing under this rule, the objecting party has the burden of proving that the exemptions are not properly claimed.” In this case, as in Davis, the objecting creditor offered no evidence of the lack of reasonable necessity for the debtors to retain the second television set.
I am unable to agree that a court by a rule of law can ipso facto determine that in all cases a second television set is never reasonably necessary for maintenance of the debtors’ home. It is foreseeable that there can be circumstances when no television set is reasonably necessary for particular debtors and, in other cases, that numerous sets could be necessary. This is particularly so in Oklahoma where there is no monetary limit on the debtors’ homestead and the necessity of more than one television could be different in cases of large homes with many living rooms, studies, dens, etc. The number of dependents also could present facts relevant to the particular case. Another factor could be the use of the television sets made by the debt*477ors and their dependents. The list of conceivably relevant issues is unlimited.
In sum, it is the burden of the objecting party to prove, as a matter of fact, that the second television set is not reasonably necessary for maintenance of the home in the particular case. This can only be accomplished by offering evidence to prove the point and here none was offered.
Accordingly, the objéetion to the claim of exemption brought by Beneficial Oklahoma, Inc. is denied. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492644/ | RULING AND ORDER ON PLAINTIFFS’ MOTION FOR SUMMARY JUDGMENT AS TO DEFENDANT ROBERT B.PALLAZO
ROBERT L. KRECHEVSKY, Bankruptcy Judge.
I.
The matter before the court is the plaintiffs’ motion for summary judgment on their complaint, which seeks to except from discharge a debt allegedly owed them by Robert B. Palazzo (“Robert”) and Janet I. Palazzo (“Janet”) (“the debtors”). The plaintiffs contend, under collateral estoppel principles, that a default entered by a Florida state court against Robert precludes him from asserting a defense to their claims and entitles them to judgment as to Robert.
II.
The plaintiffs, plenary guardians of Caroline Rossetter (“Rossetter”), an incapacitated person, in 1995 filed suit in a Florida court against Annette Hood, amending their action to include Robert on March 11, 1996. Maxwell Aff. ¶¶ I, 4. Hood, Janet’s sister and Robert’s sister-in-law, worked as Rossetter’s *484nurse. Plaintiff’s Exh. B at 34-35. The complaint alleged that Hood and Robert, knowing that Rossetter lacked the capacity to consent, fraudulently induced Rossetter to employ Robert to paint her two homes and to pay Robert for work that was substandard, over-priced, and/or not performed at all. Plaintiff’s Exh. C at ¶¶ 11 4-19. The complaint, which sought damages of $120,700 for fraud, fraudulent representation, and conversion, Id. at ¶¶ 6,14,21, was served on Robert on two occasions. Plaintiff’s Exh. C. Because Robert failed to answer their complaint, the plaintiffs moved for a default, which the Florida court entered on July 19, 1996. Plaintiffs Exh. D. The record does not indicate that the default was reduced to judgment.
The debtors filed their Chapter 7 petition on November 19, 1996. The plaintiffs, on March 7,1997, initiated the instant adversary proceeding by filing a complaint containing allegations that are essentially identical to those in the Florida complaint. Based on these allegations, the complaint seeks a determination that any debt Robert or Janet owes to Rossetter is nondischargeable pursuant to Bankruptcy Code § 523(a)(2) (fraud), 523(a)(4) (larceny, embezzlement, and fiduciary defalcation) and 523(a)(6) (willful and malicious injury).
The debtors’ answer, filed on May 6, 1997, generally denies the allegations in the complaint. Moreover, as special defenses the debtors assert that Rossetter was a competent person when she entered into the agreement with Robert, that she sought bids from other contractors and carefully reviewed these bids before awarding the work to Robert, and that the debtors “performed all of the work for which they were hired and carried out all of the terms of the agreement in a timely and workmanlike manner.” Answer at 2.
The plaintiffs, on October 1, 1997, filed a motion for summary judgment (the “Plaintiff’s Motion”), together with a Memorandum of Law (the “Plaintiff’s Memorandum”), a Statement of Undisputed Facts, an affidavit of one of their Florida attorneys, George W. Maxwell (the “Maxwell Affidavit”), and supporting exhibits. The plaintiffs’ motion rests on their argument that “the factual issues which underlie the Plaintiff’s [sic] complaint ... were conclusively determined” by a Florida court. Plaintiffs Motion at 2. The debtors filed an Objection to the plaintiffs’ motion on October 20, 1997, to which the plaintiffs replied on October 29, 1997. The debtors, on November 13,1997, filed a Statement of Material Facts and a Supplemental Objection.
III.
Fed.R.Civ.P. 56(e), made applicable in bankruptcy proceedings by Fed.R.Bankr.P. 7056, provides that summary judgment “shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” See Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265 (1986) (quoting Fed.R.Civ.P. 56(c)). A dispute concerning a material fact is considered genuine “if the evidence is such that a reasonable jury could return a verdict for the nonmoving party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986). The moving party has the burden of proving that no material facts are in dispute, and in considering such a motion, the court “must ‘resolve all ambiguities and draw all reasonable inferences in favor’ of the non-moving party....” Mikinberg v. Baltic S.S. Co., 988 F.2d 327, 330 (2d Cir.1993) (quoting Heyman v. Commerce and Indus. Ins. Co., 524 F.2d 1317, 1320 (2d Cir.1975)). The court in deciding a summary judgment motion, “ ‘cannot try issues of fact, but can only determine whether there are issues of fact to be tried.’ ” R.G. Group, Inc. v. Horn & Hardart Co., 751 F.2d 69, 77 (2d Cir.1984) (quoting Empire Electronics Co. v. United States, 311 F.2d 175, 179 (2d Cir.1962)) (emphasis in original).
IV.
In Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991), the Supreme Court established that “collateral estoppel principles do indeed apply in dis*485charge exception proceedings pursuant to § 523(a).” 498 U.S. at 285 n. 11, 111 S.Ct. at 658 n. 11, 112 L.Ed.2d at 763 n. 11. The ftdl faith and credit statute, 28 U.S.C. § 1738, provides that state judicial proceedings “shall have the same full faith and credit in every court within the United States .... as they have by law or usage in the courts of such State ... from which they are taken.” According to the Supreme court in Marrese v. American Academy of Orthopaedic Surgeons, 470 U.S. 373, 105 S.Ct. 1327, 84 L.Ed.2d 274 (1985), 28 U.S.C § 1738 “directs a federal court to refer to the preclusion law of the State in which judgment was rendered.” 470 U.S. at 380, 105 S.Ct. at 1331, 84 L.Ed.2d at 281. Because the default at issue here was entered by a Florida court, Florida’s rules for collateral estoppel govern the instant matter.
For collateral estoppel to apply under Florida state law, the parties must be identical, the issues must be identical, and the matter must have been fully litigated in a court of competent jurisdiction. See, e.g., Gayden v. Nourbakhsh (In re Nourbakhsh), 67 F.3d 798, 800 (9th Cir.1995). The first and second requirements need not be addressed here because the third is dispositive. Under Florida law, an issue has been fully litigated if it was decided by default judgment. Id. at 800-01; see, also Florida Municipal Self Insurers Fund v. Heuser (In re Heuser), 127 B.R. 895, 898 (Bankr.N.D.Fla. 1991); Fixel v. Marsowicz (In re Marsowicz), 120 B.R. 602, 604 (Bankr.S.D.Fla.1990); Maximus International Trading Corp. v. Arguez (In re Arguez), 134 B.R. 55, 58 (Bankr.S.D.Fla.1991). In the case at bar, although a Florida court entered a default against Robert, the plaintiffs did not obtain a judgment from a Florida court. In the absence of a Florida judgment, collateral estoppel principles do not apply.
The plaintiffs cite Fairway Golfview Homes, Inc. v. Kecskes (In re Kecskes), 136 B.R. 578, 583 (Bankr.S.D.Fla.1992), Johnson v. Keene (In re Keene), 135 B.R. 162, 168 (Bankr.S.D.Fla.1991), and Marsowicz, 120 B.R. at 602, as cases in which defaults were held to constitute, actual litigation under Florida law. Plaintiff’s Memorandum at '9-
11. However, in each of these cases the bankruptcy court gave preclusive effect to a prior state court default judgment, not to a , default without a judgment.
The court concludes that, because the plaintiffs did not obtain a default judgment from a Florida court, and because the application of collateral estoppel requires a default judgment, not simply a default, the plaintiffs are not entitled to summary judgment as to Robert.
The court denies the plaintiffs’ motion for summary judgment. It is
SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492645/ | MEMORANDUM OPINION1
JUDITH K. FITZGERALD, Bankruptcy Judge.
The matter before the court is the Motion for Payment of Administrative Expense filed on behalf of Van-American Insurance Company and Clarendon National Insurance Company. Van-American seeks administrative expense status of its claim for annual premiums for reclamation bonds.2 The premium obligation exists by virtue of an Annual Premium Agreement between Debtor and Van-American. See Memorandum in Support of Motion for Payment of Administrative Expense (hereafter “Movants’ Brief’) at Exhibit C. Van-American is the underwriter and Clarendon is named as the surety in the Reclamation Surety Bonds. Movants’ Brief at Exhibits A, B.3 The matter was submitted to the court on briefs, the issue having been raised at the plan confirmation hearing held on August 29,1997.
Debtor was’ engaged in coal mining in West Virginia. West Virginia law requires that mining operators post a bond to secure reclamation obligations. On April 28, 1993, Clarendon, as surety, issued reclamation surety bonds, one in the face amount of $67,000 to cover Debtor’s surface mining operations on 66.74 acres of land in Monongalia County, West Virginia, and another in the face amount of $38,000 to cover Debtor’s operations on 37.45 acres of land in the same county. Movants’ Brief at Exhibits A, B. In conjunction with the issuance of the surety bonds, Debtor and Van-American executed an Annual Premium Agreement by which Debtor agreed, inter alia, to pay Van-American a two percent annual premium on the anniversary of each bond until each was released. Movants’ Brief at Exhibit C.
This case was filed on November 19, 1996. In their brief, movants state that Debtor failed to pay the premiums on the two bonds for the 1996 and 1997 premium years (which commenced April 28 of each year). The motion seeks payment only for the 1997 premium which was invoiced to Debtor on or about April 5, 1997, for the one-year period commencing April 28, 1997. Thus, we address only the 1997 premium.4 The 1997 premium was a postpetition debt and if it represented an “actual, necessary cost” or expense of preserving the estate, it will be entitled to administrative expense status.
*502Debtor contends that the 1997 premium is not an administrative expense because movants knew Debtor did not need bonds because it had ceased mining and movants had been advised that Debtor was liquidating. This argument is without merit and misses the point. The bonds represent a joint and several obligation of Debtor (as principal) and Clarendon (as surety) to pay up to the amount of the bonds if Debtor fails to “faithfully perform all of the requirements ... of the Code of West Virginia....” Movants’ Brief at Exhibits A and B. West Virginia law requires the bond to be posted and states:
The period of liability for bond coverage begins- with the issuance of a permit and continues for the full term of the permit plus any additional period necessary to achieve compliance with the requirements in the reclamation plan of the permit.
W.Va.Code § 22-3-11. The liability on the bond is the surety’s and goes to the State of West Virginia.5 The liability for the premium is owed by Debtor to Van-American. That Debtor is statutorily required to perform reclamation6 does not make the payment of the premium to Van-American an actual and necessary expense of preserving this Debtor’s chapter 11 estate. The bond, required so that damage inflicted by mining will be corrected at no cost to taxpayers,7 remains in effect by operation of law until reclamation is performed, whether or not Debtor pays the premium to Van-American. The status of movants’ claim for payment of the bond premium turns on the parties’ obligation under the Annual Premium Agreement.
The Annual Premium Agreement is a prepetition contract between Debtor and Van-American and required Debtor to pay Van-American a premium. Movants argue that the Annual Premium Agreement is an executory contract. A contract is executory when substantial performance remains due by both parties, such that “the failure of either to complete performance would constitute a material breach excusing performance of the other”. In re Columbia Gas System, Inc. (Enterprise Energy Corp. v. U.S.), 50 F.3d 233, 239 (3d Cir.1995). Movants contend that Debtor’s obligation constitutes an executory contract because Debtor was obliged by its agreement with Van-American to comply with West Virginia statutes and regulations governing reclamation. Van-American asserts that its obligation to comply with West Virginia law governing sureties was a significant obligation. We find that the Annual Premium Agreement is not an executory contract. First, the Agreement contains no reference to Debtor’s obligation to comply with state law. It provides only for payment of the premium and posting of collateral in the amount of 25 percent of the face amount of the bond and states: “Other fees, conditions and charges, if applicable. N/A ”. Movants’ Brief at Exhibit C. If another contract .exists, it is not a matter of record.8 According to the record before us Debtor’s only obligation under the Annual Premium Agreement is to pay the annual premium to Van-American. Debtor’s reclamation obligations are owed to the State of West Virginia. Likewise, Van-American and Clarendon owe their obligations to comply with West Virginia surety law to West Virginia, not to Debtor. The bond was posted and *503is irrevocable and Van-Ameriean owes no farther performance to Debtor.
Furthermore, even if the obligations are as Van-Ameriean recites, when the only obligation under a contract is to pay money, the contract is not executory. See In re Oxford Royal Mushroom, Products, Inc., 45 B.R. 792, 794 (Bankr.E.D.Pa.1985), citing H. R.Rep. No. 95-595, 95th Cong., 1st Sess. 347 (1977), reprinted in 1978 U.S.Code Cong. & Admin. News 5787, 6303-04. The only obligation under the Annual Premium Agreement was Debtor’s to pay the premium. Accordingly, Van-American’s claim to administrative expense status fails under an executory contract theory.9
In the Matter of Jartran, Inc., 732 F.2d 584 (7th Cir.1984), is illustrative of the point. In Jartran, an agency committed to advertising space for Jartran before Jartran filed a chapter 11 petition. Jartran was to pay for the ads after they ran but filed its chapter 11 before the ads ran. The advertising agency’s claim for an administrative expense for the cost of the ads was denied because, even though Jartran enjoyed the benefit of the ads while it was a debtor-in-possession, no inducement by the debtor was necessary to trigger the advertising agency’s performance postpetition. In Jartran, as in the case before us, the liability for the advertising costs was incurred irrevocably prepetition. In the matter at bench the bonds were obtained prepetition and were irrevocable, regardless of whether Debtor paid the premium to Van-American in succeeding years.
[Wjhile [debtor] enjoyed the benefits ... the transaction out of which these benefits arose was completed before the petition was filed and nothing could have been done to further or cancel the transaction after the petition filing. Thus, the matter was outside the scope of § 503.
In the Matter of Jartran, Inc., 732 F.2d at 589.10 See also In re Mammoth Mart, Inc., 536 F.2d 950 (1st Cir.1976) (severance pay claims entitled to administrative priority to the extent that they accrued based on post-petition employment because nothing the employer could have done postpetition would have affected the amount of severance pay accrued prepetition); Denton & Anderson Co. v. Induction Heating Corp., 178 F.2d 841 (2d Cir.1949) (commissions not entitled to administrative priority when orders accepted prepetition were delivered and paid for post-petition and contract with debtor provided for payment of commission after orders were paid for). Cf. In re N.P. Mining Co., 124 B.R. 846 (Bankr.N.D.Ala.1990), reversed on other grounds, 963 F.2d 1449 (11th Cir.1992) (bond premiums for postpetition period of active mining were allowed as an administrative expense).
. This Memorandum Opinion constitutes the court’s findings of fact and conclusions of law.
. In its brief, but not the motion, Van-American argues that it is entitled to administrative expense priority for an amount up to $82,000 which it had to pay to the State of West Virginia in reclamation costs. The motion does not request payment for reclamation costs, only for unpaid premiums. Van-American must file an appropriate pleading in order to bring its reclamation cost claim properly before the court. Accordingly we will address only the status of the unpaid premiums.
. The caption of the motion refers to both companies but the motion is signed "Van American Insurance Company by Alan G. McGonigal, Of Counsel”. Letters from counsel to the Clerk of the Bankruptcy Court dated August 29, 1997, and September 11, 1997, state that he represents both companies. From the record before us, only Van-American has a claim to the premiums as the Annual Premium Agreement giving rise to the claim is between it and Debtor. Although the motion is silent on the point, Clarendon’s claim may be limited to the bond amount forfeited inasmuch as Clarendon is named as the surely on the Reclamation Surety Bonds and the brief raises the issue of a claim for the amount forfeited under the bonds. Movants’ Brief at IIA and Exhibits A, B. The motion before us is limited to the claim for premiums. The extent of either Van-American’s or Clarendon’s claim to the premiums as between themselves is not before us.
.The 1996 premium is a prepetition obligation that is not entitled to administrative priority inasmuch as it became due April 28, 1996, and the bankruptcy was filed on November 19, 1996. See Movants' Brief at Exhibit C.
. Debtor sold its equipment and abandoned its leases. The $38,000 bond was forfeited in its entirety by Van-American on April 3, 1997, and the $67,000 bond was forfeited on August 13, 1997. Pursuant to the $67,000 bond contract, however, the bond was adjusted and West Virginia was paid only $44,000 because a third party leased and began mining on part of the 66.74 parcel. Thus, the claim based on the bond forfeitures is for $82,000 ($38,000 plus $44,000). The forfeiture of the bonds in the matter before us does not affect the question of the status of the premium payments owed to Van-American.
. Section 22-3-11 of the West Virginia Code provides that obligations under a mining permit continue until reclamation is performed. See West Virginia Division of Environmental Protection v. Kingwood Coal Co., 490 S.E.2d 823, 826, n. 5 (W.Va.1997).
. See In re N.P. Mining Co., 124 B.R. 846 (Bankr.N.D.Ala.1990), reversed on other grounds, 963 F.2d 1449 (11th cir.1992).
. The Reclamation Surety Bonds create joint and several liabilities of Debtor and Clarendon. These, however, are owed to the State of West Virginia.
. Even if the contract was executory when the bankruptcy was filed, § 365 of the Bankruptcy Code provides that in a chapter 11 an executory contract may be assumed or rejected at any time before the plan is confirmed. The contract was not assumed either before or in the plan, inasmuch as this was a liquidating plan which was confirmed on August 29, 1997.
. The court in Jartran also noted that
the services performed ... after the filing of the petition, were significant and of value to Jartran. However, appellants do not allege that Jartran, after the filing of the petition, requested that appellants continue work on ads for which the closing date had passed. Nor is it claimed that Jartran had [post-petition obligations to prevent post-petition performance].
732 F.2d at 587. In the case at bar, Debtor had no obligation to prevent postpetition performance by the surety. The surety’s performance vis-a-vis Debtor was completed prepetition. Payment on the bond was an obligation the surety owed to the State of West Virginia. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492646/ | DECISION AND ORDER ON MOTION OF DEFENDANTS PARKWAY TRANSPORT, PARKWAY DISTRIBUTORS, INC. AND PARKWAY CUSTOM CARRIAGE, INC. FOR LEAVE TO FILE AMENDED ANSWER
LEIF M. CLARK, Bankruptcy Judge.
On June 15, 1997, this court conducted a hearing to consider the arguments of counsel on the motion of Defendants Parkway for leave to file their second amended answer. This decision and order disposes of that motion. For the reasons set out below, the court grants the motion to amend, insofar as it urges an amendment to the Defendants’ consent to the entry of final orders in this case (to the extent that the underlying causes of action are noncore in nature), but denies leave to amend to make a jury demand (or alternatively strikes such jury demand as untimely).
Procedural Background
The court’s resolution of this matter can only be understood against the procedural back-drop of this case. In 1994, Rocky and Sylvia Hunt filed a Chapter 7 bankruptcy case. Randolph N. Osherow was appointed trustee in that case. Later, the Hunts, together with their trustee in bankruptcy (Mr. Osherow), and their corporation, R.H'. Transport, filed a lawsuit in state court against various parties, including the Parkway defendants (we shall refer to them collectively as “Parkway”). In November 1996, R.H. Transport (we shall refer to them here as RH) filed its own Chapter 7 bankruptcy case, for which Mr. Johnny Thomas was appointed as trustee. RH promptly filed a notice of removal, bringing this action into the bankruptcy court. The notice of removal stated that the subject matter of the lawsuit was a “core proceeding” within the meaning of 28 U.S.C. § 157(b). No party contested this categorization within ten days, as is required by Rule 9027(e)(3) of the Federal Rules of Bankruptcy Procedure. See Fed.R.BankR.P. 9027(e)(3).
This second bankruptcy case was assigned to the docket of the Honorable Ronald B. King. Upon his receipt of the materials indicating the removal of the state court proceeding, he issued a show cause order as to why the matter should not be remanded to state court.. The show cause hearing was originally scheduled for December 2, 1996, but was continued to January 7,1997. In the meantime, January 1, 1997 was the effective date for a docket equalization reallocation, under which Judge King transferred 30% of the San Antonio ease filings (on a “blind draw” basis) to the undersigned judge.1 The January 7,1997 hearing date was thus before Judge Clark (the undersigned judge) rather than Judge King. This court does not take the view that a federal court has the unilateral responsibility or authority to “impose” remand. Instead, this court requires parties to timely raise the issue of remand in accordance with the bankruptcy rules, failing which the matter is simply placed on the court’s docket and tried as an ordinary adversary proceeding. The show cause order was thus dissolved. No party filed a motion for remand.2
*508At the January 7th hearing, this court ordered the procedural consolidation of the removed state court action with a then-pending bankruptcy action which had also been initiated by Mr. Osherow (seeking the recovery of an alleged fraudulent conveyance), and directed the parties to timely amend their pleadings to conform to federal rules of pleading. Parkway’s counsel was apprised of the schedule and timely filed an amended answer in conformity with the federal rules.
Plaintiffs, to be specific, filed a second amended complaint on January 17, 1997, in compliance with the schedule announced at the January 7,1997 hearing. On January 24, 1997, Parkway filed its first amended answer to this complaint. Among other things, Parkway expressly admitted the allegations contained in the first eleven paragraphs of that complaint, including an allegation by plaintiffs that the matter was a core proceeding under 28 U.S.C. § 157(b)(2)(B), (C), (H), (K), and/or (0). In addition, Parkway failed to set out a jury demand within this first amended answer.
Parkway evidently realized the error of its ways, and on February 5, 1997, filed what it denominated as its second amended answer. This time, Parkway did expressly deny the allegation that the actions urged against it were core proceedings, and affirmatively stated that it (Parkway) did not consent to the bankruptcy court’s entry of final orders or judgment. Parkway did not accompany this pleading with a motion for leave to file, however.3 Nor, for that matter, did Parkway incorporate into this answer any jury demand. However, on the same day, Parkway filed a motion to withdraw the reference, and in that pleading stated “Defendants are entitled to a jury trial on all issues.” Parkway added that it did not consent to the bankruptcy court’s conducting the jury trial. See 28 U.S.C. § 158(e).
Time passed. The parties pursued mediation, in an effort to resolve their disputes, and obtained an order from this court staying the scheduling order while they pursued this alternative route. The effort proved worthwhile, at least in part, as the parties entered into a settlement of all the disputes as between all of the parties — except for Parkway. The settlement was approved by this court on June 5,1997. On the same date, the court also ruled on the pending jury demand issue, stating that no timely jury demand had been made by Parkway.4 *509However, the court advised Parkway that it could always seek leave to amend and in that way attempt to fix its problems. RH’s trustee’s counsel promptly responded that it would want the opportunity to respond to any such request, and insisted that a deadline be imposed for further amendment, as no pretrial scheduling order had yet issued in the ease. The court accordingly set a deadline, which Parkway has met, this time accompanying its proposed amended answer with a motion for leave to file same, to which RH has responded in opposition.
Positions of the Parties
The amended answer raises no new factual issues or new defenses. It merely now urges a jury demand and also expressly includes Parkway’s challenge to the characterization of the ease as one falling within the core “jurisdiction” of this court and further urges its nonconsent to the entry of a final order by this court.5 Parkway alleges that leave to amend ought nonetheless be granted because (a) Rule 15(a) expressly provides that leave to amend ought to be freely granted, especially when there is no undue delay or prejudice to the other party demonstrated and (b) it is only by amendment that Parkway can successfully make its jury demand in a timely manner, given the prior ruling of the court on this issue, and further raise its challenge to the plaintiffs contention that this adversary proceeding (or more precisely, what is left of it after settlement of the remaining matters) is core. Parkway adds that it has been so grievously prejudiced by the inequities of its having relied to its detriment on its belief that Judge King would remand this case to state court and by its belief that Rule 81(c) would allow its state court jury demand to “ride through” into his proceeding, that simple justice demands that the court grant leave to amend. Parkway adds that it is a victim of technicalities, and that the court should look through form to the substance of what is going on — and Parkway brands that as a bald effort on the part of RH to deprive it of what it denominates as its otherwise clear entitlement to a jury trial in the district court.
RH (we use this rubric to refer to the RH estate, represented by its chapter 7 trustee, Mr. Thomas) responds that, while the general rule is indeed that motions to amend ought, in the usual case, to be granted (and acknowledges that the discretion of the trial court not to grant such motions is limited), this is not the usual ease. Here, no new facts are being, pleaded, nor are any new defenses being raised. The merits of the litigation are entirely unaffected by whether this amendment is or is not granted. Instead, this amendment is sought solely for the purpose of triggering the “last pleading” requirement of Rule 38(b), so that Parkway can .then make a jury demand which will be “timely.” That, says RH, is not a legitimate ground for amendment. To the contrary, it *510argues, courts have often denied motions for leave to amend in precisely such circumstances. RH adds that no injustice is visited on Parkway that. Parkway has not in fact brought on itself, and that Parkway in fact simply wants an exemption from the operation of the federal rules to cover its own mistakes. To do so, maintains RH, actually harms the plaintiff, which has elected this forum and otherwise followed the rules. Parkway, says RH, has had every opportunity to preserve its asserted entitlement to a jury trial, to urge its objections to the core jurisdiction assertion, and even to seek a remand of this case. That Parkway has failed to pursue these opportunities is certainly not the fault of RH, which prefers trial in this forum and has elected to seek a bench trial, in part because of the speed with which the matter can be reached in this forum as compared to the alternatives available.
Analysis
The general rule regarding motions to amend pleadings in federal court is one of liberality in favor of amendment, though the trial court does enjoy some limited discretion in denying such requests. See Fed.R.Civ.P. 15, Fed.R.Banxr.P. 7015: Dussouy v. Gulf Coast Inv. Corp., 660 F.2d 594, 598 (5th Cir.1981) (leave should be freely given in the absence of a “substantial reason to deny the leave to amend”). One ground for denying leave to amend is “futility of amendment.” Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 230, 9 L.Ed.2d 222 (1962).6
The Fifth Circuit has, on occasion, affirmed a trial court’s denial of a request for leave to amend on grounds of “futility.” For example, a party was not permitted to amend when the posture of the case was such that only parole evidence would be available to prove up the contentions to be pleaded in the amendment. Because parole evidence would not be admissible in that case (the trial court had properly found the contract in question to be unambiguous), amendment, said the court, would have been futile and was properly barred. Avatar Exploration, Inc. v. Chevron, U.S.A., Inc., 933 F.2d 314, 321 (5th Cir.1991). If a complaint as amended would still be subject to dismissal for failure to state a claim, that too would render amendment a futile act, justifying denying leave to amend. Addington v. Farmer’s Elevator Mutual Ins. Co., 650 F.2d 663, 667 (5th Cir.1981).
In the case at bar, Parkway does not seek leave to amend in order to urge a previously unasserted defensive theory, or new denials of facts, or the like. The merits of Parkway’s defenses are as fully presented by extant pleadings already on file, even without this latest amendment. So why is Parkway even trying to file an amended pleading, if not to urge some new set of facts, some new affirmative defense, some new denials?
Parkway candidly acknowledges but two reasons for its proposed amendment. Firstly, Parkway failed to timely demand a jury, and hopes, by this latest pleading, to trigger the “last pleading directed to the issue” (in this case, Parkway’s own pleading) language in Rule 38(b). Secondly, Parkway has in previous pleadings acceded to the plaintiffs’ characterization of this adversary matter as a “core proceeding,” and consented to this court’s adjudication to judgment. It now wants to challenge that characterization, and further wishes to withdraw its consent.
With regard to the first proffered reason for amendment, Parkway’s efforts must fail, as its amendment would be but a futile act. Indeed, even if amendment were permitted for the second proffered reason (to be dis*511cussed further infra), the resulting jury demand would nonetheless have to be stricken as untimely. The Fifth Circuit has spoken directly to this issue:
Rule 38(b) states that any party may demand a jury trial of any issue triable as of right by a jury by-serving upon the other parties a demand therefor in writing any time after the commencement of the action and not later than ten days after the service of the last pleading directed to such an issue — Assuming that a legal claim existed, the issue is whether the state sought a jury trial within ten days from the last complaint raising it as an issue. A complaint “raises an issue” only once within Rule 38(b)’s meaning when it introduces it for the first time. Amendments not introducing new issues will not give rise to a demand for a jury trial. Connecticut General Life Insurance Co. v. Breslin, 332 F.2d 928 (5th Cir.1964) (defendant’s amended answer did not raise issues materially different from those presented by the original answer and waiver of jury trial remained effective); Swofford v. B. & W., Inc., 34 F.R.D. 15 (S.D.Tex.1963) (where new jury issues are created by amendment a party may properly demand a jury trial, but an amendment which neither changes the nature of the case nor introduces new issues does not renew that right). The term “new issues” has been interpreted to mean new issues of fact and not new theories of recovery. See Jackson v. Airways Parking Co., 297 F.Supp. 1366 (D.Ga.1969). See also Trixler Brokerage Co. v. Ralston Purina Co., 505 F.2d 1045 (9th Cir.1974). The record in this case reveals that the plaintiffs’ amended complaints are restate-merits of their earlier pleadings and do not raise new issues which give rise to a demand for a jury trial.
Guajardo v. Estelle, 580 F.2d 748, 752-53 (5th Cir.1978) (emphasis added). The final sentence of the foregoing quote applies almost precisely to our facts: “[t]he record in this case reveals that the [defendants’] amended [answers] are restatements of their earlier pleadings and do not raise new issues which give rise to a demand for a jury trial.” Id. Nor is it relevant that Parkway is the defendant rather than the plaintiff. The Fifth Circuit in Breslin, cited in Guajardo above, there stated that “[t]he amended answer did not raise any issues which were in any material way different from those presented by the original answer. In such a case the waiver originally made remains effective and the subsequent demand is ineffective.” Connecticut Gen. Life Ins. Co. v. Breslin, 332 F.2d 928, 932 (5th Cir.1964). These are our facts. Parkway waived its jury demand pursuant to Rule 38(d) when it failed to make a timely demand in its earlier filed answer. An amended answer urged solely to rectify that waiver is not effective to cure the waiver.7 Any such amendment, urged for that purpose alone, would thus be futile. Alternatively, the demand would have to be stricken as ineffective even were the amendment allowed on other, independent grounds. Breslin, supra.
The second proffered justification for amendment, however, has greater force. The court must make a determination whether the matter to be tried is core or non-core, a finding that has a profound effect on the court’s ultimate disposition. If the matter be *512noncore, and a party refuses to consent, then this court will not enter a final judgment, but will instead submit a report and recommendation, to which the parties may object (and must do so in a timely manner), and which will then be forwarded to the district court for its consideration and the entry of judgment. 28 U.S.C. § 157(c)(1). If, on the other hand, the matter be core, then this court may enter judgment thereon, with or without the consent of the parties. See 28 U.S.C. § 157(b)(1). Section 157(b)(3) expressly permits this determination to be made either on the court’s own initiative or “on timely motion of a party.”
Section 157 of title 28 was designed to ameliorate the constitutional infirmities found to have been present in prior section 1471 of that tide. See Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 59, 102 S.Ct. 2858, 2865, 73 L.Ed.2d 598 (1982); see also 1 Norton Banxr. L. & Prao. 2d § 4:17, 4:19 (Clark Boardman Callaghan, 1997).8 Its provisions for consent are deemed important, in light of the fact that bankruptcy courts are not Article III tribunals. See Matter of Clay, 35 F.3d 190, 193 (5th Cir.1994). If those provisions are too narrowly constricted, such as by (for example) making consent irrevocable, the entire scheme is at least colorably threatened. Cf. Gomez v. United States, 490 U.S. 858, 109 S.Ct. 2237, 104 L.Ed.2d 923 (1989) (cautioning against tacit consent to magistrate judge’s conduct of jury voir dire).
The statute affirmatively imposes on the bankruptcy judge the responsibility to make the requisite determination whether a matter is core or noncore, implicating this consent issue. 28 U.S.C. § 157(b)(3). The court has, as of this date, not yet made that determination. Suppose this court were to rule that the defendant were prohibited, by amendment of its answer, from withdrawing its consent. Then suppose that, notwithstanding the assertions of the plaintiffs in their complaint, this court were to determine that the matters the subject of this adversary proceeding (or at least some portion of them) are, after all, noncore? Would we then be justified in holding Parkway to its “consent?” This court thinks not.9 Parkway’s second proffered justification for amending its complaint is accordingly well-taken.
Conclusion
For all of the foregoing reasons, the court concludes that the motion to amend filed by Parkway ought to be granted for the limited purpose of permitting Parkway to contest the core nature of these proceedings, and to affirmatively assert its withdrawal of its consent to the entry of judgment by this court in the event that the court ultimately determines these to be noncore proceedings. However, Parkway is not permitted to amend in order to make what the court finds would be an untimely jury demand. Any such demand as contained in the amended answer to be filed is herewith stricken.
So ORDERED.
. Prior to the docket allocation. Judge King had 80% of the San Antonio case filings, while Judge Clark (the undersigned judge) had 20% of the San Antonio filings and 100% of all El Paso filings. The docket equalization reallocation resulted in the transfer of virtually all El Paso cases to the Hon. Larry E. Kelly, and Judge Clark's assumption of 50% of the San Antonio case load, meaning that an additional 30% of the pending cases in San Antonio needed to be transferred to Judge Clark to accomplish the docket equalization.
. Though it may not be particularly relevant for the disposition of this matter, Parkway maintains that it was "lulled” into believing that this matter would be remanded by the tenor of Judgje King’s show cause order; otherwise, it would have filed a timely motion for remand. The court need not rule on the merits of this contention. It is enough to note that Parkway did not in fact file a *508timely motion for remand, and Parkway knew or should have known that the show cause matter was no longer pending before Judge King, but was instead pending before Judge Clark.
. Parkway evidently believed that it did not need a motion for leave to file, because this second amended answer was filed, within the time frame permitted by this court’s scheduling order.
. The court ruled, in essence, that Rule 81(c) of the Federal Rules of Civil Procedure was not applicable in bankruptcy cases. Rule 81(c) provides that a jury demand made in a state court proceeding is deemed effective in the action upon removal to the federal court. See Fed R.Civ.P. 81(c); see also Fed.R.Bankr.P. 9027(g) (derived from Rule 81(c) but containing no counterpart to that rule's "shelter” provision for jury demands). Because the rule was not made part of the bankruptcy rules, Parkway’s state court jury demand did not carry over into the removed action. Parkway would thus be bound to affirmatively re-urge its demand for a jury, and would have to do so consistent with the applicable rule. The court next adverted to Bankr.L.R. 9015, which expressly makes Rules 38 and 39 of the Federal Rules of Civil Procedure applicable to proceedings brought in bankruptcy cases in this district. Rule 38 in turn requires that a jury demand must be made within 10 days after the service of the last pleading directed to the issue upon which demand is based, and states that failure to make a timely demand constitutes a waiver by that party of trial by jury. See Fed. R-Civ.P. 38(b), (d). No jury demand was made in Parkway's first amended answer. Parkway’s second amended answer did not "count” because it was not accompanied by a motion for leave to file, as required by the federal rules. See Fed.R.Cw.P. 15(a); see also Fed.R.Bankr.P. 7015(a). In any event, the second amended answer also did not contain a jury demand. Instead, ruled the court, Parkway only obliquely made such a demand, but not within the adversary proceeding itself. Instead, it urged the demand primarily as a ground, within its motion addressed to the district court seeking withdrawal of the reference. A motion to withdraw the reference is an independent action, brought pursuant to section 157(d), seeking the district court’s exercise of its overall supervisory powers over bankruptcy matters, all of which are pending before a bankruptcy court only by virtue of the general order of reference. See 28 U.S.C. § 157(d). Such motions are not, therefore, brought to the attention of the court which has the duty to rule on either amendments or jury demands, the court to whom the case remains *509assigned for so long as the reference remains in place (and it remains in place until the district court rules on a motion to withdraw the reference, not simply until such time as the district court is presented with such a motion). See Fed. R.Bankr.P. 5011(c); cf. Orion Pictures, Corp. v. Showtime Networks, Inc. (In re Orion Pictures Corp.), 4 F.3d 1095, 1102 (2d Cir.1993) ("a district court also might decide that a case is unlikely to reach trial, that it will require protracted discovery and court oversight before trial, or that the jury demand is without merit, and therefore might conclude that the case at that time is best left in the bankruptcy court”). As such, a "demand” made in an independent motion to withdraw the reference, ruled the court, does not operate as an effective jury demand in the adversary proceeding itself, within the meaning of Rule 38(b). Therefore, no timely jury demand had been made by Parkway, concluded the court, and it would therefore be deemed waived pursuant to Rule 38(d).
. Parkway insists vociferously that, in staking out its position, it is merely asserting its rights, .as well as attempting to prevent having to endure an extra level of judicial consideration. It believes that, by demanding a jury, it is simply insisting on its Seventh Amendment rights. It further argues that, by refusing to consent to a jury trial in the bankruptcy court, Parkway is neither seeking delay nor .engaging in forum shopping, though of course its nonconsent would invariably require the matter to be tried in the district court, placing the case onto that court's busy trial calendar. Intended or not, then, Parkway’s position accomplishes both a change of forum and a delay in the trial of the matter. Parkway maintains that, by forcing the matter to trial in district court, they will avoid an extra ■ layer of appeal, reducing their costs.
. Other grounds include undue delay, or prejudice to the opposing party. Id. The use of the word "include” indicates a willingness on the part of the Court to accommodate as-yet-unforeseen situations in which the discretion of the trial court might justifiably be exercised, albeit with appropriate deference to assuring that the party moving for leave to amend is permitted its "day in court” on the merits of its complaint or defense. Id. see also Dussouy, supra. By the same token, however, "[i]t is appropriate for the court to consider judicial economy and the most expeditious way to dispose of the merits of the litigation.” Dussouy, 660 F.2d, at 599 (citing Zenith Radio v. Hazeltine Research, 401 U.S. 321, 329, 91 S.Ct. 795, 801, 28 L.Ed.2d 77, 87 (1971) and Summit Office Park v. United States Steel, 639 F.2d 1278, 1286 (5th Cir.1981) (Wisdom, J., dissenting)).
. Breslin points out that the party in that case failed to move for jury trial pursuant to Rule 39(b). That is the case here as well. However, this court would be far less likely to exercise the discretionary authority conferred in that rule to grant such a motion, because of the collateral impact that a jury demand would have in this case. Assuming, for the sake of discussion, án independent right to jury trial of the issues in this case (the sine qua non for presenting a Rule 39(b) motion to the court), Parkway has already indicated that it would also refuse to consent to the conduct of a jury trial by this court (notwithstanding Congress' express authorization for the conduct of such trials by the bankruptcy courts in section 157(e), enacted in 1994). See 28 U.S.C. § 157(e). By withholding consent while maintaining its jury demand, Parkway would force the trial of this matter into the district court, and onto the district court's busy trial docket. See Matter of Clay, 35 F.3d 190, 196 (5th Cir.1994). That might result in a delay of the trial of this matter; it would of a certainty assure that a different judge presided over the matter. With such collateral considerations in play, this court does not believe it particularly unfair to require litigants to cut square comers with respect to the preservation of their jury rights as provided in the federal mies. Nor does the court find it particularly unfair to presume counsel's familiarity with those mies.
. As discussed in greater detail in the Norton treatise, reasonable minds may differ over whether Congress actually succeeded. See id
. Indeed, the fact that a denial that a given matter is core, and the accompanying statement of consent or nonconsent, are expressly added to Rule 12 as made applicable in bankruptcy by Rule 7012 further supports our conclusion. See Fed.R.Bankr.P. 7012(b). In effect, Rule 7012(b) treats this denial almost like one of the defenses that might be urged against a complaint in a bankruptcy adversary proceeding. A party is traditionally permitted to amend a pleading to urge a "new defense.” While the denial that a matter is a core proceeding is not truly a defense (it neither contests the factual allegations in the complaint nor sets up an affirmative excuse from liability), its placement in the rules suggests that some latitude ought to be afforded the defendant before "deeming” it to have "consented.” Certainly, the rule as written lacks the affirmative “waiver” language that we noted with respect to the jury demand in Rule 38(d). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492647/ | DECISION AND '§ 707(b) ORDER DISMISSING THE CASE
ARTHUR N. VOTOLATO, Bankruptcy Judge.
Heard on November 5,1997, on the United States Trustee’s Motion to Dismiss this Chapter 7 case under 11 U.S.C. § 707(b), which provides:
After notice and a hearing, the court, on its own motion or on a motion by the United States Trustee, but not at the request or suggestion of any party in interest, may dismiss a case filed by an individual debtor under this chapter whose debts are primarily consumer debts if it finds that the granting of relief would be a substantial abuse of the provisions, of this chapter. There shall be a presumption in favor of granting the relief requested by the debt- or.
11 U.S.C. § 707(b).
The facts are as follows:
(1) The Debtor schedules monthly net income of $1,544. To arrive at this figure, however, she claims the following deductions: (a) $688, insurance; and (b) $1,422 for “other” alleged expenses which were cryptically labeled “RET, CU, RETLN, UNI12.” See Schedule I.
(2) At the hearing on the United States Trustee’s motion to dismiss, the Debtor testified that she did not know what the $688 insurance deduction was for, and no such item appears on her pay stub, so this item is disallowed, with prejudice. See United States Trustee’s Ex. 1. The Debtor also explained the cryptic notations for the deductions listed in Schedule I as follows: ,(a) “RET” is a mandatory retirement deduction of $62.43 per week; (b) “CU” is Credit Un*644ion and is a voluntary contribution of $20 per week for a Christmas club; (c) “RETLN” is a mandatory retirement loan payment of $40 per week; and (d) “UNI12” is a mandatory weekly deduction of $7.50 for union dues;
(3) Based on this information the Debtor has net monthly income of $3,095;1
(4) As scheduled, the Debtor’s monthly expenses are $1,468. See Schedule J;
(5) The Debtor testified that she lives in an apartment attached to her mother’s home and that she pays a “below market rent,” and no utilities. She also stated that she has additional expenses, not listed in schedule J,2 as follows: (a) child care, $30 per week; (b) religious education, $180 per month; and (c) $4,000 per year tuition for her daughter’s elementary education.
(6) Giving the Debtor credit for even the unscheduled expenses, she has net disposable income of $985 per month.3
(7) The total unsecured debt in this case is $32,503, all of which appears to be consumer debt. See Schedules E & F.
DISCUSSION
The United States Trustee contends that the Debtor’s ability to pay her debts out of future earnings, and her eligibility for Chapter 13 are factors to be considered among the totality of the circumstances in determining whether substantial abuse exists.
The Debtor argues that in enacting § 707(b), Congress did not intend to include ajfuture income test to determine substantial abuse, and that the Trustee has not overcome the statutory presumption in favor of the debtor. In this case, regardless of the Congressional intent, any such presumption is clearly rebutted, given the Debtor’s own figures in Schedules I and J, and the absence of any information as to the necessity or reasonableness of certain claimed expenses.
The Debtor also argues that we should not consider the actual expenses of this particular debtor, but rather what a hypothetical individual would pay for rent and related expenses were they not subsidized by a relative. The Debtor’s actual expenses are not disputed, and the fact that they are lower than the norm does not alter the level of scrutiny required under Section 707(b). See In re Lamanna, 210 B.R. 17 (Bankr.D.R.I.1997).4
In considering the issue of substantial abuse under § 707(b), this Court relies heavily upon the “totality of circumstances” concept, examining the facts in each case. See In re Haffner, 198 B.R. 646 (Bankr.D.R.I.1996); see also In re Krohn, 886 F.2d 123, 126 (6th Cir.1989); In re Snow, 185 B.R. 397, 401 (Bankr.D.Mass.1995); In re Mastromarino, 197 B.R. 171, 176 (Bankr.D.Me.1996), and we have adopted, for § 707(b) analysis purposes, the following language from Krohn:
Substantial abuse can be predicated upon either lack of honesty or want of need.
Among the factors to be considered in deciding whether a debtor is needy is his ability to repay his debts out of future earnings. That factor alone may be sufficient to warrant dismissal. For example, a court would not be justified in concluding that a debtor is needy and worthy of discharge, where his disposable income permits liquidation of his consumer debts with relative ease. Other factors relevant to *645need include Whether the debtor enjoys a stable source of future income, whether he is eligible for adjustment of his debts through Chapter 13 of the Bankruptcy Code, whether there are state remedies with the potential to ease his financial predicament, the degree of relief obtainable through private negotiations, and whether his expenses can be reduced significantly without depriving him of adequate food, clothing, shelter and other necessities.
886 F.2d at 126; see also Haffner, 198 B.R. at 648-49; Snow, 185 B.R. at 401. Here, without adjusting expense items that we believe are inflated, and allowing the Debtor the benefit of all of her alleged expenses, and notwithstanding that many of her monthly expenses do not appear in Schedule J, the Debtor is able to pay all of her unsecured debts with relative ease, and without sacrifice or hardship. With disposable income of $985 per month, all of the Debtor’s creditors would be paid in full in thirty-seven months.
Debtor’s counsel emphasizes the legislative history of the 1978 Code that “originally ... Congress explicitly rejected the notion that ability to fund a Chapter 13 Plan is a basis to deny Chapter 7 discharge.” (Debtor’s Mem. in Support of Obj. to Trustee’s Motion to Dismiss, at 1). Viewed in its best light, this argument is disingenuous. Section 707(b), which abrogated prior Congressional sentiment on the subject, was added to the Code in 1984, and it is the current legislative intent that is meaningful here. The legislative comment that is relevant to this discussion is that “if a debtor can meet his debts without difficulty as they come due, use of Chapter 7 would represent a substantial abuse.” S.Rep. No. 65, 98th Cong. 1st Sess. 43 (1983). That counsel ignores this does little to aid his cause.
Finally, the Debtor argues that she maintains a “bare bones” living style, and worries that her actual expenses may increase in the future, especially with regard to replacing a ten year old automobile. As for this concern, we can only restate our continuing recognition of the fact that financial .(and other) circumstances can and do change, and that, as always, this Court would be receptive to a motion to reconsider any order if, during the life of the Chapter 13 plan, payment or other terms should be modified, in either direction. See, e.g., 11 U.S.C. §§ 1328(b) and 1329.
Based on the entire record, the Motion to Dismiss is GRANTED, on the condition that the Order of Dismissal will become final in fifteen days unless the Debtor converts her ease to Chapter 13, with plan provisions substantially as discussed above.
Enter Judgment consistent with this order.
. We arrive at this figure by taking the total income from Schedule I ($1,544), plus the mystery insurance deduction of $688, plus inflated scheduled deductions of $1,422, minus actual deductions, according to the Debtor’s own testimony, of $559.
. We have heard not a word as to why the religious and private school education expenses were not disclosed until the hearing, and have concern that the omission was prompted by the knowledge that they are not allowable. See In re Granito, BAP No. RI 97-070, slip op. at 5-6 (Bankr.lst Cir. October 7, 1997)(discussing the different approaches to determine the reasonableness of educational expenses).
. Net monthly income of $3,095, minus $2,110 (scheduled expenses of $1,468, plus unscheduled expenses of $642.33).
. Debtor’s counsel also made two constitutional arguments which he customarily makes in these cases, for possible appellate purposes. We have consistently ruled that these arguments are without merit. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492649/ | ORDER GRANTING MOTION FOR PROTECTIVE ORDER
MARY D. SCOTT, Bankruptcy Judge.
THIS CAUSE is before the Court upon the plaintiffs Motion for a Protective Order and Other Relief, filed on October 10, 1997, and the debtor’s response and Cross-Motion to Compel, filed on November 17, 1997. Hearing on the motions was held on November 20, 1997, after which the parties submitted supplemental briefs.
This is an adversary proceeding filed in the bankruptcy court objecting to the dis-chargeability of a debt and objecting to the debtor’s discharge. The plaintiff asserts that the debtor fraudulently obtained money from her such that the debt owed to her, evidenced by a $249,000 Illinois state court judgment, is nondischargeable in this bankruptcy case pursuant to 11 U.S.C. § 523(a)(2)(A), (a)(4), (a)(6). Plaintiff also objects to the debtor’s discharge based upon false oath, failure to cooperate with the trustee, transferring property with the intent to hinder and delay creditors, failure to keep adequate books and records, failure to explain loss of assets, and disobeying lawful orders of court. See generally 11 U.S.C. § 727(a)(2), (a)(3), (a)(4)(A), (a)(4)(D), (a)(5), (a)(6). The defendant debtor filed a counterclaim requesting that the bankruptcy court enjoin plaintiff from “stalking” defendant’s family.1
Pursuant to the Federal Rules of Civil Procedure, applicable in this proceeding pursuant to Part VII of the Federal Rules of Bankruptcy Procedure, defendant noticed the deposition of plaintiff. Motions were filed and resolved with regard to that notice and the parties agreed that plaintiffs deposition would be taken át a certain time and place. Subsequent to this agreement, however, the debtor, personally and without his attorney’s knowledge, caused to be served two subpoenas upon the plaintiff.
The deposition was begun, and videotaped, at the agreed time. During the deposition numerous questions were asked which are now the subject of the instant discovery dispute. The questions included
• Have you had any cosmetic surgery with respect to your nose, eyes, a rib removed or breast enhancers?
• Have you been romantically involved with Kevin Flynn?
• Isn’t it true that the Court dismissed your case against Mr. Meyers because you failed to take the pregnancy test and you’d taken, the rather unusual step of filing suit against him before the baby was actually born?
• Have you been concerned about hair loss?.. .Excessive hair loss_What do you believe causes your excessive hair loss?
In addition, defendant asked questions purportedly related to the pending counterclaim, including questions regarding plaintiff contacts with defendant’s wife and son.
Based upon the actions of the debtor in serving subpoenas upon the plaintiff, and the nature of the questions posed at the deposition, the plaintiff requests that the Court prohibit the debtor from contacting the plaintiff; sanction the debtor for his abuse of the discovery process, seal the video-tape deposition and order that it not b¿ made available to the debtor personally, order the destruction of the original and all copies of the video tapes after the conclusion of the adversary proceeding. The debtor not only opposes the motion, but requests that the plaintiff be compelled to answer all of the questions posed during her deposition.
This is a bankruptcy proceeding. The counts of the complaint objecting to the dischargeability of debt regard the debtor’s actions in obtaining money from the plaintiff. The counts .of the complaint objecting to the debtor’s discharge raise issues regarding the debtor’s dealings with the bankruptcy court, his statements and schedules, and his dealings with the Chapter 7 trustee. The assertion that the questions recited above may in *739any respect lead to the discovery of admissible evidence regarding the intent elements under § 727(a) of the Bankruptcy Code, see Brief in Support of Defendant’s Response No. 97-4160, p. 3 (Bankr.E.D. Ark. filed Nov. 17, 1997), is absurd, and, like the questions themselves, patently offensive. Indeed, many of these questions do not even marginally relate to the debtor’s counterclaim.2 Accordingly, the plaintiff will not be required to respond to any of the questions certified in the transcript appended to debtor’s motion to compel.
Plaintiff requests a restraining order and sanctions for debtor’s actions in posing the questions and in serving, without any reason, two subpoenas upon the plaintiff. Although his actions causing the subpoenas to be served were done without his attorney’s knowledge or consent, and there was no reason for this action, he dénies that his actions were made with any intent to harass or made with any “coercive purpose.” The lengthy history of this ease, and the debtor’s recalci-' trance throughout the ease, is simply to the contrary.3
The Court has reviewed the pleadings, motions, briefs, and supplemental briefs of the parties, and finds that the plaintiff’s motion has merit. Although the Court does not expressly decide, at this juncture, a precise amount of sanctions to be paid by the debtor or that destruction of the video-tapes is required, it is
ORDERED: as follows:
1. The plaintiffs Motion for a Protective Order and Other Relief, filed on October 10, 1997, is Granted as follows:
A. The debtor is enjoined from personally contacting, or causing any other person, other than his attorneys, to contact, the plaintiff, Linda Bilandzic. All communication with the plaintiff shall be solely through counsel unless prior written permission is obtained from this Court.
B. Linda Bilandzic shall not be required to respond to the questions, or any questions. in a.similar vein, which are reproduced in the transcript appended to the debtor’s motion to compel.
C. At the conclusion of the video-taped deposition of Linda Bilandzic, the original and all copies of the video tapes shall be submitted to the Clerk of the U.S. Bankruptcy Court under seal. All counsel shall take steps to ensure that the debtor personally does not obtain a copy of the video-tape without prior written approval from the Court.
D. Counsel for plaintiff shall submit to the Court a statement of fees and expenses incurred in (1). prosecuting this motion, including investigation into debtor’s actions in serving the unwarranted subpoenas; and (2) time expended during the deposition in objecting to the questions, as reproduced in the transcript submitted to the Court. The Court will reserve ruling on sanctions pending coiiclusion of all discovery in this adversary proceeding.
2. The débtor’s Cross-Motion to Compel, filed on November 17, 1997, is DENIED.
IT IS SO ORDERED.
. There is currently pending a motion to dismiss the counterclaim.
. In the event that defendant can persuade the Court that it has jurisdiction over, or should retain jurisdiction of the request for relief in the counterclaim, this issue may again be raised at a later date.
. The Court is not required to disregard matters learned in prior, judicial hearings. Cf. United States v. Bernstein, 533 F.2d 775, 785 (2d Cir.1976), cert. denied, 429 U.S. 998, 97 S.Ct. 523, 50 L.Ed.2d 608 (1976); In re Grossman, 147 B.R. 903 (Bankr.N.D.Ill.1992). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492650/ | FINDINGS OF FACT, CONCLUSIONS OF LAW AND ORDER GRANTING DEFENDANT’S MOTION FOR SUMMARY JUDGMENT
NANCY C. DREHER, Bankruptcy Judge.
The above-entitled adversary proceeding came on for hearing before the undersigned on October 29', 1997 on the motion of the Debtor-Defendant, Dianna L. Deppe (“Defendant”), for summary judgment pursuant to Federal Rule' of Bankruptcy Procedure 7056. Appearances were as noted on the record. After carefully considering the arguments of counsel, the Court has determined that Defendant’s motion for summary judgment should be granted.
UNDISPUTED FACTS
For purposes of this motion, the relevant facts of the case are undisputed.
In July of 1992, the Defendant and her then husband, Mark Schaefer, borrowed the sum of $55,000.00 from Mark Schaefer’s parents, Edwin & Blanche Schaefer (“Plaintiffs”), to assist them in avoiding the cancellation of a contract for. deed on their home located at 3308 West 102nd Street, Blooming-ton, Minnesota. To memorialize this transaction, Mark Schaefer drafted a promissory note in which he and the Defendant promised to pay the Plaintiffs $55,000.00 plus interest at an annual rate of 9% until.the debt was repaid. The promissory note made no reference to, and did not purport to effect, a grant to the Plaintiffs of a mortgage on the homestead. Ultimately, the Defendant and Mark Schaefer made only one payment under the promissory note in the amount of $1,518.90.
On February 14, 1995, the marriage between the Defendant and Mark Schaefer was dissolved in Minnesota state court. Pursuant to the divorce decree, the Defendant was granted “all right, title, and interest, free and clear of any interest by [Mark Schaefer], in and to the homestead property located at 3308 West 102nd Street, Bloomington, Minnesota.” The divorce decree further provided that the Defendant “will be responsible for all debt in relation to the homestead, including the debt to [the Plaintiffs].... ” This award was subsequently amended to *745make the Defendant responsible for $58,-013.00 of the amount owed to the Plaintiffs, with Mark Schaefer responsible for $6,687.00. Although the divorce decree provided that the Defendant would be responsible for certain debt in relation to the homestead, neither the original divorce decree nor any one of the amended decrees1 imposed a lien against the homestead to secure the Defendant’s payment of the promissory note.
On May 16, 1996, the Defendant filed a petition for relief under Chapter 13 of the United States Bankruptcy Code. On Schedule C of her bankruptcy petition, the Defendant listed the full value of the homestead property as exempt under Minn.Stat. § 510.01. On Schedule F, she listed Plaintiffs’ claim as an unsecured nonpriority debt. On June 6,1996, the Plaintiffs filed a proof of unsecured claim in the amount of $76,915.90. On November 8, 1996, after the Plaintiffs filed an objection to the confirmation of the Defendant’s proposed Chapter 13 plan, the Defendant voluntarily converted her Chapter 13 case to Chapter 7. On February 11,1997, the Defendant was granted a discharge pursuant to 11 U.S.C. § 727.
On February 18, 1997, the Plaintiffs commenced the present adversary proceeding. In their complaint, the Plaintiffs seek a determination that their claim against the Defendant is secured by an equitable mortgage on the Defendant’s homestead, alleging that the Defendant and Mark Schaefer agreed to provide the Plaintiffs with a mortgage against the property to secure their debt under the promissory note. On March 21, 1997, the Defendant filed an answer to the Plaintiffs’ complaint, asserting various defenses to the Plaintiffs’ claim to an equitable mortgage. In particular, the Defendant asserts that an equitable mortgage cannot be created on the homestead because the Plaintiffs’ claim to such is based solely on an oral promise to deliver a mortgage in the future; i.e., there is no document purporting to provide Plaintiffs with security for payment of the personal debt.2 For the sole purpose of resolving the current motion, the parties have stipulated to the fact that Plaintiffs, Defendant and Mark Schaefer all intended that Defendant and Mark Schaefer would provide the Plaintiffs with a mortgage on the property at some time in the future.
CONCLUSIONS OF LAW
I. SummaRy Judgment Standaeds
Summary judgment is governed by Federal Rule of Civil Procedure 56, which is made applicable to this adversary proceeding by Bankruptcy Rule 7056. Federal Rule 56 provides:
The judgment sought shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.
Fed.R.CivP. 56(c). The moving party on summary judgment bears the initial burden of showing that there is an absence of evidence to support the nonmoving party’s case. Celotex Corp. v. Catrett, 477 U.S. 317, 325, 106 S.Ct. 2548, 2553-54, 91 L.Ed.2d 265 (1986). If the moving party is the plaintiff, it carries the additional burden of presenting evidence that establishes all elements of the claim. Id. at 324, 106 S.Ct. at 2553; United Mortg. Corp. v. Mathern (In re Mathern), 137 B.R. 311, 314 (Bankr.D.Minn.1992), aff'd, 141 B.R. 667 (D.Minn.1992). The burden *746then shifts to the nonmoving party to produce evidence that would support a finding in its favor. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250-52, 106 S.Ct. 2505, 2511-12, 91 L.Ed.2d 202 (1986). This responsive evidence must be probative, and must “do more than simply show that there is some metaphysical doubt as to the material fact.” Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986). Because the material facts of the present case are undisputed, there exists no genuine issue of material fact and all that remains to be determined is whether the Defendant is entitled to judgment as a matter of law.
II. The DefendaNt’s Motion for Summaey Judgment
The Plaintiffs in this case seek a determination that their claim against the Defendant is secured by a lien against the Defendant’s homestead in the form of an equitable mortgage.3 In response, the Defendant argues that, as a matter of law, an equitable mortgage cannot be created under the facts of this case because the claim to an equitable lien on the homestead is based solely on an alleged, and for purposes of this motion admitted, oral promise to subsequently deliver a written mortgage.
It is well accepted that Congress has left the matter of the creation of property interests in bankruptcy cases to be determined by applicable nonbankruptcy law. Cf. Butner v. United States, 440 U.S. 48, 54-55, 99 S.Ct. 914, 917-18, 59 L.Ed.2d 136 (1979) (stating that, under the Bankruptcy Act of 1898, Congress had generally left the determination of property rights in the assets of a bankrupt’s estate to state law). Thus, I look to Minnesota law to resolve the issue at hand.
The applicable statute is Minnesota’s homestead exemption statute which specifically provides that:
The house owned and occupied by a debtor as the debtor’s dwelling place, together with the land upon which it is situated to the amount of area and value hereinafter limited and defined, shall constitute the homestead of such debtor and the debtor’s family, and be exempt from seizure or sale under legal process on account of any debt not lawfully charged thereon in writing,
Minn.Stat. § 510.01 (1986) (emphasis added).-4 This statute has long been part of Minnesota jurisprudence.
In two early cases, the Minnesota Supreme Court imposed an equitable mortgage against a homestead under circumstances quite similar to the one at hand. In Irvine v. Armstrong, 31 Minn. 216, 17 N.W. 343 (1883), the plaintiff loaned money to defendants in order that they could refinance their homestead. The parties entered into a written agreement for the execution of a new mortgage to plaintiff,, which both husband and wife signed. Later, defendants refused to give such a mortgage, and instead they conveyed the property to a non-bona fide purchaser. Plaintiff sought specific performance of the agreement to provide the mortgage. The court, held that, damages being *747an inadequate remedy, the agreement would be enforced in equity. Later, in Hughes v. Mullaney, 92 Minn. 485,100 N.W. 217 (1904), the Minnesota Supreme Court imposed an equitable lien on the defendants’ homestead based solely on the defendants’ oral promise to deliver a mortgage to plaintiff after plaintiff advanced money to assist them in purchasing a new home. The trial court had found that it was the parties’ intention to create a loan transaction, to be secured by the property, rather than a gift. Relying once again on the rule that an oral agreement to provide security is not compensable in damages, the Minnesota Supreme Court imposed an equitable lien and allowed its foreclosure. In Soukup v. Wenisch, 163 Minn. 365, 204 N.W. 35 (1925), the court refused to impose a lien on real property purchased by the defendant with the plaintiffs money in the absence of a writing or proof that the parties had agreed to the furnishing of a mortgage, but the eourt distinguished cases such as Irvine and Mulla-ney where there was proof of an unfulfilled promise to give security. Thus, it appeared to continue the vitality of Irvine and Mulla-ney.
In 1905, one year after Mullaney was decided, the predecessor to current Minn.Stat. § 510.01 was amended by the addition of the words “not lawfully charged thereon in writing.” In a series of three cases which followed, the Minnesota court effectively overruled Mullaney, distinguished Irvine, explained Soukup and established the rule that under § 510.01 an oral promise to provide a mortgage upon a homestead is not enforceable through an equitable lien, regardless of the parties’ intent.
If there was room after Soukup for an argument that Irvine and Mullaney remained good law even after the 1905 amendment to Minn.Stat. § 510.01, it was virtually eliminated in Renville State Bank v. Lentz, 171 Minn. 431, 214 N.W. 467 (1927), a case decided on two years after Soukup. In Lentz, the husband borrowed money from the plaintiff, fraudulently promising to provide a mortgage on a homestead to be purr-chased by him and his spouse. He gave the plaintiff his promissory note, but later both he and the spouse refused to deliver a written mortgage. Defendants urged both the homestead statute, the predecessor to Minn. Stat. § 510.01, and the statute of frauds, the predecessor to Minn.Stat. § 513.04, in defense. Referring to the 1905 amendment to the homestead statute, the eourt held Mul-laney inapplicable because Mullaney was decided before the change in statutory language. The eourt determined that the husband’s oral promise to give a mortgage on the homestead would not be enforced in equity because the debt was not “lawfully charged thereon in writing” (Id. at 432, 214 N.W. 467) and found it unnecessary to address the question of whether the statute of frauds applied.5 Going further, the eourt held that while the “argument that the homestead exemption statute is not in derogation of the lien creating power of equity is correct,” that doctrine was applicable only in cases where a constructive trust should be imposed. “Here we have a very different case, and the effort is to subject the homestead to a lien in lieu of one actually promised contractually.... In the instant case, all we have is the violation of a promise to do something in the future. The statute prevents the artificial creation of a lien on a homestead merely to make good such an undertaking.” Id. at 433, 214 N.W. 467.
A few years later, in Kingery v. Kingery, 185 Minn. 467, 241 N.W. 583 (1932), the Minnesota Supréme Court dealt Irvine, Mul-laney, and any expansive reading of Soukup a further blow. In Kingery, plaintiff gave his mother money to allow her to refinance mortgages on her homestead based solely on her promise to give him a mortgage. She owned the land, but both parents were living on it at the time. Plaintiff sought the imposition of an equitable lien or, at the very least, subrogation to the position of the refinanced mortgagors. The court refused, holding that “the oral agreement by defendant to give *748plaintiff security on the homestead was wholly void” and equitable subrogation was therefore unavailable. Id. at 470, 241 N.W. 583. The court said:
That a loan made to enable the borrower to purchase or pay for a homestead does not give the lender a right to a lien upon the homestead, even if there is an oral agreement to give security thereon, is now settled by Soukup v. Wenisch ... and Renville State Bank v. Lentz, Jr., supra. One who advances money to another to be used for paying all or part of the purchase price of a homestead should stand in fully as favorable a light in equity as one who advances money to pay a mortgage on the homestead. Yet, under our homestead law, neither of them acquires any lien on the homestead, unless given by written mortgage or security executed by both husband and wife, if both are living.
Id. at 471, 241 N.W. 583.
Finally, in Hatlestad v. Mutual Trust Life Ins. Co., 197 Minn. 640, 268 N.W. 665 (1936), a .non-homestead case, the court limited Irvine to its facts. Irvine, the court held, was not a case involving an oral agreement for a mortgage, but was rather a case where the “specific performance awarded was of a complete, unambiguous written contract and not of an oral agreement.” Id. at 645, 268 N.W. 665.
All of this served as the backdrop for the Minnesota Supreme Court’s decision in Wright v. Wright, 311 N.W.2d 484 (Minn.1981), a case quite directly on point. In Wright, the son’s parents loaned the son and his then-spouse funds with which to purchase their homestead. A dissolution ensued and, as is the ease here, the wife received the-homestead and later refused the parents’ request for a mortgage. The court held that the parents were not entitled to immediate repayment of the loan, nor to an equitable lien against the property. The ease is distinguishable from the one at hand, in that the trial court had determined that the parents intended a gift, not a loan secured by the property. Nevertheless, the language of the decision is broad:
In its reliance on Minn.Stat. §§ 510.01 and 513.04 (1980) together with the decisions in Renville State Bank v. Lentz ... and Kingery v. Kingery ... the trial court held that no lien, either equitable or otherwise, may attach to homestead property without a written instrument evidencing the debt- or’s intent to grant such a lien.
[O]ur decision in Kingery v. Kingery ... firmly establishes the principle that a loan made to enable a borrower to purchase or pay for a homestead does not give the lender a right to a lien upon the homestead even if there is an oral agreement to give security thereupon.
Id. at 486-87. Accordingly, because, in the ease before this court, Plaintiffs’ claim to a mortgage on the Defendant’s homestead rests solely on an oral promise to furnish the same, it cannot, be sustained. This is true, even though currently the property is the homestead of only one of the two spouses.6
*749Plaintiffs cite Proulx v. Hirsch Bros., Inc., 219 Minn. 157, 155 N.W.2d 907 (Minn.1968) and Miller v. Anderson, 394 N.W.2d 279 (Minn.App.1986). These cases and many, many others deal with a different scenario, the well established principle that a court of equity may treat an instrument of conveyance that fails to create a valid mortgage as an equitable mortgage where it can be shown that the parties to the transaction intended it to create a mortgage. See e.g., First Nat’l Bank v. Ramier, 311 N.W.2d 502, 503 (Minn.1981); Ministers Life and Cos. Union v. Franklin Park Towers Corp., 307 Minn. 134, 239 N.W.2d 207, 210 (1976) (“The controlling legal principle ... is that a deed absolute in form is presumed to be, and will be treated as a conveyance unless both parties in fact intended a loan transaction with the deed as security only.”). Under this principle, therefore, an equitable mortgage may exist where a deed absolute on its face was in fact given as security. The test for the creation of an equitable mortgage is whether the parties intended to create a mortgage at the time of the transaction. Port Auth. v. Harstad, 531 N.W.2d 496, 499 (Minn.App.1995); Miller, 394 N.W.2d at 283; Ramier, 311 N.W.2d at 503; Ministers Life, 239 N.W.2d at 210; Proulx v. Hirsch Bros., Inc., 279 Minn, at 165, 155 N.W.2d 907 (1968).
But, intent by itself is insufficient to create an equitable mortgage in the absence of some form of written instrument of conveyance. The doctrine of equitable mortgage is completely inapplicable when there is no written document:
The inflexible rule ‘once a mortgage always a mortgage’ ... and the related doctrine that a deed absolute in form may be shown to be a mortgage, where such was in fact the intention of the parties ... are quite independent of statute [of frauds]. They permit an adjudication contrary to what the written forms, without adjudication, would require. They have no application to the question whether an agreement on the one hand to execute and on the other to accept a real estate mortgage in the future is to be enforced by specific performance or by an action for damages. Such cases [citations omitted] declaring a deed absolute in form to be in fact a mortgage are irrelevant for ... purposes [of determining the application of the statute of frauds].
Hatlestad, 197 Minn, at 640, 268 N.W. 665. Because the alleged mortgage in this case is based entirely on an oral agreement between the parties, the doctrine of equitable mortgage does not apply and the Plaintiffs are not entitled to an equitable mortgage against the Defendant’s homestead.7
In light of the foregoing analysis, I conclude that it is unnecessary to address the Defendant’s remaining arguments and that the Defendant is entitled to judgment as a matter of law. Accordingly, IT IS HEREBY ORDERED that the Defendant’s motion for summary judgment is GRANTED in all respects. Judgment will be entered in favor of Defendant and against Plaintiffs with each party to bear its or their own respective costs and attorneys fees.
LET JUDGMENT BE ENTERED ACCORDINGLY.
. The February 14, 1995 divorce decree was subsequently amended on March 13, 1995, May 31, 1995, and March 21, 1996.
. Defendant also asserted that: (1) it would be improper for the Court to impose an equitable mortgage in this case because the Defendant’s debt to the Plaintiffs has been discharged; (2) the Plaintiffs are estopped from arguing that they are entitled to an equitable mortgage; (3) even if the Plaintiffs are entitled to an equitable mortgage against the homestead property, such property is exempt and the equitable mortgage would therefore be avoidable by the Defendant as a "judicial lien” under 11 U.S.C. § 522(f)(1)(A); and, finally (4) even if the Plaintiffs are entitled to an equitable mortgage against the homestead property, the mortgage would be avoidable by the Defendant under the strong-arm provisions of §§ 522(g) & (h) and 544(a)(3). Because I have determined that the lack of a writing requires judgment for Defendant, I need not, and do not, address these issues.
. Plaintiffs do not claim that they are entitled to the imposition of a constructive trust, the grant of which would require a showing of unjust enrichment through fraud, duress, or similar means, none of which have been alleged. First Nat’l Bank v. Ramier, 311 N.W.2d 502, 504 (Minn.1981) (constructive trust not imposed where lender could have obtained a written security agreement and merely failed to do so); Wright v. Wright, 311 N.W.2d 484, 485 (Minn.1981) (constructive trust not available in absence of fraud, duress, etc.).
. Minnesota’s statute of frauds also provides that:
No estate or interest in lands, other than leases for a term not exceeding one year, nor any trust or power over or concerning lands, or in any manner relating thereto, shall hereinafter be created, granted, assigned, surrendered, or declared, unless by act or operation of law, or by deed or conveyance in writing, subscribed by the parties. creating, granting, assigning, surrendering, or declaring the same, or by their lawful agent thereunto authorized by writing—
Minn.Stat. § 513.04 (1990) (emphasis added). Since a mortgage on real property constitutes an "interest” in land, it falls within the purview of this statute of frauds and therefore must be in writing to be valid. Hatlestad v. Mutual Trust Life Ins. Co., 197 Minn. 640, 643, 268 N.W. 665 (1936).
. In Butler Bros. Co. v. Levin, 166 Minn. 158, 161, 207 N.W. 315 (Minn.1926), the court, in dicta, had appeared to apply the predecessor to Minn.Stat. § 513.04 to a case where one spouse had orally promised to provide a mortgage on a homestead in return for a loan. Lentz made no mention of Levin, a case which had been decided only one year earlier.
. Under Minnesota law, a party's conduct in reliance on an oral contract may constitute-sufficient part performance to avoid the operation of the statute of frauds under two different theories: the "fraud” theory and the "unequivocal reference” theory. Ehmke v. Hill, 236 Minn. 60, 68-69, 51 N.W.2d 811 (1952); Burke v. Fine, 236 Minn. 52, 55, 51 N.W.2d 818 (1952). If Minn. Stat. § 513.04 has application to this case, Plaintiffs are not entitled to specific performance of the oral mortgage contract under either of these two theories. In order for a parly’s performance under an oral contract to warrant enforcement of the contract under the "fraud” theoiy, the party’s performance "must have been performed in such a manner and by the rendering of services of such a nature or under such circumstances that the beneficiary cannot properly be compensated in damages.” Ehmke, 236 Minn, at 69, 51 N.W.2d 811. This lest has been held to be satisfied in cases where the party seeking enforcement of an oral agreement has performed "peculiarly personal services which are not subject to pecuniary measure” and "to such an extent that it would be a fraud on [the] part of the other party to set up its invalidity.” See id. at 70, 51 N.W.2d 811; Brown v. Hoag, 35 Minn. 373, 377, 29 N.W. 135 (1886). "The fact that the plaintiff does not get what he was to receive under the void agreement is not sufficient loss or injury to constitute fraud.” Happel v. Happel, 184 Minn. 377, 383, 238 N.W. 783 (1931). In this case, the Plaintiffs' loss does not reach the level of "unjust and irreparable injury” required under the “fraud” theoiy of part performance. Moreover, the Plaintiffs’ act of loaning funds to the Defendant and Mark Schaefer is not conduct that is "unequivocally referable” to the existence of an *749oral mortgage contract. Such payment just as easily evidences the existence of an unsecured loan agreement between the parties as it does an agreement to give security. It has long been the law, therefore, that "the mere payment of some money without more ... [is] not such part performance as to warrant specific performance.” Hecht v. Anthony, 204 Minn. 432, 437, 283 N.W. 753 (1939); Butler Bros. v. Levin, 166 Minn, at 162, 207 N.W. 315.
. To be distinguished is the assertion of a vendor’s lien, such as that dealt with in Hecht v. Anthony, 204 Minn. 432, 283 N.W. 753 (1939) (vendors lien enforced; defendants, vendees, were not owners of the property as their homestead when the oral agreement to grant a mortgage to the vendor was given.) | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8492651/ | ORDER DENYING MOTION OF JOEL C. HOLT FOR DETERMINATION OF IRS OBLIGATION AND STAY OF ANY IRS LEVY AND GRANTING MOTION TO DISMISS
DANA L. RASURE, Chief Judge.
On April 7, 1997, the Motion and Supporting Brief of Proactive Technologies, Inc. and Joel C. Holt for Determination of IRS Obligation, Stay of Any IRS Levy, and Request for Hearing (the “Motion”) came on for hearing. Debtor, Proactive Technologies, Inc. (“ProTech”), and Joel C. Holt (“Holt”) filed the Motion on January 24,1997. William W. O’Connor and Christine D. Little appeared on behalf of ProTech and.Holt. Timothy T. Trump appeared on behalf of Proactive Solutions, Inc. (“Solutions”). Laurence K. Williams appeared on behalf of the United States of America ex rel. Internal Revenue Service (the “Service”).
In the Motion, ProTech and Holt requested that the Court determine certain, tax liabilities, if any, and enjoin collection of the tax liabilities. At the hearing, the parties advised the Court that the issues between Pro-Tech. and the Service raised in the Motion had been settled. On April 21, 1997, an Order reflecting the agreement between Pro-Tech and the Service was entered herein. At the conclusion of the hearing, the Court took under advisement the remaining issues between Holt and the Service raised in the Motion. Upon consideration of the pleadings filed herein, the arguments of counsel, and the briefs submitted, the Court, pursuant to Federal Rule of Bankruptcy Procedure 7052, finds as follows:
*798STATEMENT OF FACTS
On June 10, 1994, ProTech acquired Solutions, a software development company1 (the “Acquisition”). As part of the Acquisition, a new ProTech board of directors was created. The newly-created ProTech board was to include two directors named by ProTech, two directors named by Solutions, and a fifth director to be agreed upon by the directors selected by ProTech and Solutions. Solutions selected its two directors, William S. Davis and Donald H. Mitchell, to be members of the ProTech board. ProTech selected Holt and Tom Manning to be members of the ProTech board. A fifth director was never selected to complete the board.
Disputes regarding management and expenditure of funds arose between the Pro-Tech directors named by Solutions and the •directors named by ProTech. In March 1995, Tom Manning resigned from the Pro-Tech board. On September 1, 1995, the remaining ProTech directors filed Voluntary Petitions for relief under Chapter 11 of the Bankruptcy Code on Behalf of ProTech, Solutions, and Keystone Laboratories, Inc., another ProTech subsidiary.
Subsequently, the disputes regarding management and the expenditure of funds were resolved and the ProTech directors entered into a settlement agreement (the “Settlement Agreement”). Pursuant to the Settlement Agreement, a small group of investors and employees became the owners of 'Solutions, and ProTech retained only a limited royalty interest in Solutions. The Settlement Agreement provided that Solutions would be responsible for its own debt and would hold ProTech harmless on such debts, including the $29,366.38 employment tax obligation which is the subject of the dispute between Holt and the Service.
On December 30, 1996, the Service sent a reminder to ProTech advising ProTech that it owed a Miscellaneous Penalty in the amount of $22,552.91 for 941 taxes accrued during the third quarter of 1995. As stated above, an Order reflecting that ProTech and the Service have settled this issue was entered herein on April 3, 1997. On January 13,1997, the Service issued a Final Notice to Holt indicating that the Service intended to levy against Holt’s assets to collect $22,-708.91 (including a prior balance of $22,-552.91 and interest of $156.00) for the tax period ending September 30,1995. The Service asserts that Holt incurred tax liabilities pursuant to 26 U.S.C. § 6672 in the amount of $22,552.91 as a result of the failure of Solutions to remit 941 employee withholding taxes for the tax period ending September 30,1995.
Holt asserts in the Motion that this Court has subject matter jurisdiction to determine the obligations of Holt with respect to Solutions’ failure to pay 941 taxes. On April 15, 1997, the Service filed United States’ Motion to Dismiss Motion of Joel C. Holt for Determination of IRS Obligation, Stay of Any Levy, and Request for Hearing (the “Motion to Dismiss”) and United States’ Brief in Support of Its Motion to Dismiss Motion of Joel C. Holt for Determination of IRS Obligation, Stay of Any Levy, and Request for Hearing. In the Motion to Dismiss, the Service asserts that this Court lacks subject matter jurisdiction of the issues raised in the Motion.
CONCLUSIONS OF LAW
The threshold issue is whether this Court has subject matter jurisdiction to (1) determine the tax liability of Holt, a non-debtor, pursuant to 26 U.S.C. § 6672 and (2) stay the collection of tax liability, if any, by the Service. Section 1334 of Title 28 of the United States Code grants the district courts 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). Section 157 of Title 28 of the United States Code provides that “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). See Turner v. Davis, Gillenwater & Lynch (In re Investment Bankers, Inc.), 4 F.3d 1556, 1564 (10th Cir.1993). Inasmuch as neither Holt nor the Service is a debtor before this Court, the issues raised herein are not issues “arising under” or “arising in” title 11. Accordingly, the appropriate inquiry to determine if subject matter jurisdiction exists in this Court is whether the issues *799raised in the Motion are “related to” a ease under title 11. ■ ■
The Service, a non-debtor, asserts that Holt, also a non-debtor, incurred liability as a responsible person pursuant to 26 U.S.C. § 6672 for failure to remit withholding taxes on behalf of Solutions, a Chapter 11 debtor. Section 6672(a) provides in part as follows:
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 or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax 'evaded, or not collected, or not accounted for and paid over.
26 U.S.C. § 6672(a). Section 6672(a) imposes liability on a person who (1) is responsible for paying the taxes, and (2) willfully fails to pay the taxes. Section 6672 imposes a one hundred percent penalty on persons responsible who fail to pay the tax. A “responsible person’s” liability under Section 6672, if any, is “entirely separate and distinct” from the corporate entity’s liability for failure to pay 941 taxes, even though the liability arises from failure to pay the same withholding taxes. See Quattrone Accountants, Inc. v. Internal Revenue Service, 895 F.2d 921, 926 (3d Cir.1990). Similarly, Holt’s liability as a responsible person, if any, is “entirely separate and distinct” from Solutions’ liability to the Service, even though the liability arises from failure to pay the same withholding taxes. Accordingly, the dispute between Holt and the Service is not “related to” the bankruptcy case and this Court does not have subject matter jurisdiction to determine Holt’s liability.
Holt cites Section 505(a)(1) of the Bankruptcy Code in support of his contention that the bankruptcy court has subject matter jurisdiction to determine his liability, if any, under 26 U.S.C. § 6672. Section 505(a)(1) provides as follows:
[T]he court may determine the amount or legality of any tax, any fine or penalty relating to a tax, or any addition to tax, whether or not previously assessed, whether or not paid, and whether or not contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction.
11 U.S.C. § 505(a)(1). The legislative history of Section 505 reveals that Congress enacted Section 505 to clarify the bankruptcy court’s jurisdiction with . respect to tax matters. Section 505 is not applicable to the issue before this Court. Rather, “Section 505 contemplates the normal situation where a tax liability issue in bankruptcy arises with respect to a debtor.” See Quattrone Accountants, Inc. v. Internal Revenue Service, 895 F.2d at 925. Thus, Section 505 does not grant jurisdiction to the bankruptcy court to determine tax liability of non-debtors.
In the Motion, Holt also requests that the Court issue' a “stay of any IRS Levy.” The Bankruptcy Court is prohibited by the Anti-Injunction Act from enjoining the Service from collecting the penalty from Holt. The Anti-Injunction Act provides that “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is the person against whom such tax was assessed.” 26 U.S.C. § 7421(a). The language of the Anti-Injunction Act is “specific and unequivocal.” See American Bicycle Association v. United States ex rel. Internal Revenue Service (In re American Bicycle Association), 895 F.2d 1277, 1280 (9th Cir.1990).
For the foregoing reasons, the Court concludes that it lacks subject matter jurisdiction of the issue of Holt’s tax liability pursuant to 26 U.S.C. § 6672, that Section 505 of the Bankruptcy Code does not grant the bankruptcy court subject matter jurisdiction, and that the Anti-Injunction Act precludes the bankruptcy court from enjoining the Service from collecting the tax. Accordingly, Holt’s Motion for Determination of IRS Obligation and Stay of Any IRS Levy is DENIED and the United States’ Motion to Dismiss is GRANTED.
IT IS SO ORDERED.
. Proactive Solutions, Inc. is the developer of a software program known as “SmartProject.” | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494780/ | OPINION REGARDING TRUSTEE’S OBJECTION TO DEBTOR’S CLAIMED EXEMPTION UNDER 11 U.S.C. § 522(d)(10)(C) and/or 11 U.S.C. § 522(d) (U)(E)
JAMES D. GREGG, Chief Judge.
I. ISSUE.
The Debtor claims an exemption in funds received as the result of a settlement of a worker’s compensation claim pursuant to 11 U.S.C. § 522(d)(10)(C) and (d)(ll)(E). The Trustee objects. The issue presented is whether the Debtor may properly exempt the funds received.
II. JURISDICTION.
This court has jurisdiction over this bankruptcy case. 28 U.S.C. § 1334. The bankruptcy case and all related proceedings have been referred to this court for decision. 28 U.S.C. § 157(a); L.R. 83.2 (W.D. Mich.). This is a core proceeding because it involves the allowance or disal-lowance of exemptions. 28 U.S.C. § 157(b)(2)(B). This opinion constitutes *220the court’s findings of fact and conclusions of law in accordance with Fed. R. Bankr.P. 7052.
III. FACTS AND PROCEDURAL HISTORY.
Two witnesses testified at an evidentiary hearing held on May 1, 2012. Hanh Hieu Dang, the “Debtor,” testified. His testimony was credible, and is accepted by the court. Michael W. Podein, “Attorney Po-dein,” the Debtor’s counsel in his worker’s compensation case, also testified. His testimony was also credible and was very helpful to the court.
The Debtor sustained a job related injury (loss of a finger and part of his hand) on February 16, 2011. (Tr. at 22.) The Debtor hired Attorney Podein to handle his worker’s compensation claim based on the injury.
On September 6, 2011, a redemption agreement was entered into by the Debtor, his employer and its insurance carrier, Zurich American Insurance Company (“Zurich”). (Trustee’s Exh. 2.) The agreement documented that the Debtor had received injuries, that a dispute existed, and that the parties settled the dispute for a lump sum payment of $193,143.60.
Also on September 6, 2011, a magistrate for the Michigan Department of Energy, Labor & Economic Growth, Workers’ Compensation Agency/Board of Magistrates, signed a Redemption Order approving the agreement and providing that $19,364.49 would be paid to Attorney Po-dein, $100 paid to the State of Michigan for fees, and the balance of $173,679.49 paid to the Debtor. (Trustee’s Exh. 3.)
Attorney Podein testified that the redemption order allocated 100% of the award to wages. However, in his opinion, he believed that 75% should be allocated to wages and 25% to medical expenses. (Tr. at 29.) He also testified, after reviewing his file, that he had determined that the Debtor would require, if he chose to obtain prosthetics, three separate prosthetic hands during his life expectancy at an approximate cost of $65,000 per hand. (Tr. at 30.)
Attorney Podein explained that the paperwork in worker’s compensation cases is not final until fifteen days after a hearing. The fifteen day appeal period in the Debt- or’s case began running on September 7, 2011. (Tr. at 11.) At 5:00 p.m. on the fifteenth day, the award becomes final and nonreviewable. Until then, each side has the right to attempt to revoke the settlement award. (Tr. at 11-12.) Typically, no money is disbursed during the fifteen day appeal period. (Tr. at 14.)
The Debtor filed his petition for relief under chapter 7 of the Bankruptcy Code on October 3, 2011. His son-in-law helped him prepare the papers with his attorney. (Tr. at 45.) He listed the value of his worker’s compensation claim as “unknown” upon the advice of his attorney. (Tr. at 46.) The Debtor listed his exemption to preserve the worker’s compensation settlement funds because he has no other income. (Tr. at 36-37.)
The Debtor personally checks his mailbox daily. (Tr. at 40.) The Debtor testified he received a check issued by Zurich in the mail on October 4, 2011. The check was dated September 23, 2011. (Trustee’s Exh. 1.) The check issued by Zurich to the Debtor contains two signatures, one computer generated and one personally handwritten. (Trustee’s Exh. 1.) The Debtor deposited the check in the amount of $173,679.49 from Zurich into his account on October 4, 2011. (Debtor’s Exh. B.) The Debtor’s bank placed a hold on the funds until October 14, 2011. (Debtor’s Exh. B.; Tr. at 43-44.) There was no evidence presented that the Debtor has *221expended any of the funds deposited. The court finds that the Debtor was entitled to receive the settlement funds on the date the bankruptcy was filed. The court further finds that the Debtor still has the lump sum redemption funds.
Attorney Podein testified that, in his experience, workers’ compensation insurance companies do not issue checks before the sixteenth day following the entry of a redemption agreement order. He knows that some of his other clients have waited as long as sixty days to receive a settlement check. (Tr. at 18.) Reiterating somewhat, the court finds that this Debtor also waited for the insurance company to process the release of the check and, as of the filing date, the Debtor had not yet received the check.
Debtor’s original schedules listed the value of his worker’s compensation claim as “unknown.” The Trustee objected. The Debtor amended his Schedule B to reflect the actual settlement amount of $178,679.49. The Debtor also amended Schedule C listing an exemption of all of the worker’s compensation funds under 11 U.S.C. § 522(d)(10)(C) and (d)(ll)(E). An evidentiary hearing was held on the Trustee’s objection on May 1, 2012. The court took the matter under advisement after the close of proofs.
IV. DISCUSSION.
11 U.S.C. § 522(d) provides, in pertinent part:
The following property may be exempted under subsection (b)(2) of this section:
(10) The debtor’s right to receive—
(C) a disability, illness, or unemployment benefit;
(11) The debtor’s right to receive, or property that is traceable to—
(E) a payment in compensation of loss of future earnings of the debtor ... to the extent reasonably necessary for the support of the debtor[.]
Exemptions are to be liberally construed in favor of a debtor and the burden of proof is on the objecting party to prove that the exemption is not validly claimed. Menninger v. Schramm (In re Schramm), 431 B.R. 397, 400 (6th Cir. BAP 2010); Fed. R. Bankr.P. 4003(c). Exemptions are determined as of the filing date. In re OBrien, 443 B.R. 117, 130 (Bankr.W.D.Mich.2011) (citing White v. Stump, 266 U.S. 310, 45 S.Ct. 103, 69 L.Ed. 301 (1924)).
Lump sum worker’s compensation awards may be exempted under 11 U.S.C. § 522(d)(10)(C) when the funds have not yet been received at the time the debtor files his petition for relief under the Bankruptcy Code. In re Williams, 181 B.R. 298 (Bankr.W.D.Mich.1995); see also Szybist v. Michael (In re Michael), 262 B.R. 296, 298 (Bankr.M.D.Penn.2001).
The Trustee asserts that the Debt- or’s receipt and deposit of his check the day after he filed his petition is a “suspicious coincidence.” He bases this assertion upon circumstantial evidence. There is nothing on the record to support the Trustee’s suspicions other than the date on the check. Therefore, the Trustee has failed to meet his burden of proof that the exemption is not validly claimed. Because the Debtor did not receive the settlement check until after he filed his petition on October 3, 2011, the funds are exempt.
Based upon the plain meaning of 11 U.S.C. § 522(d)(10)(C), which states that the “debtor’s right to receive ... a disabili*222ty, illness, or unemployment benefit” may be exempted, if the award is considered a disability benefit, the Debtor’s settlement funds of $173,679.49 are exempt. 11 U.S.C. § 522(d)(10)(C) (emphasis added). See also United States v. Ron Pair Enters.., Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 1030, 103 L.Ed.2d 290 (1989) (if a statute’s language is plain and unambiguous, it should be enforced in accordance with its terms).
However, if the award is considered as loss of future earnings, it is exempt under 11 U.S.C. § 522(d)(ll)(E). At the time the petition was filed, the Debtor had a right to receive the compensation for loss of future earnings.1
The Trustee principally relies upon the result in In re Williams, 181 B.R. 298 (Bankr.W.D.Mich.1995). In Williams, the debtors received the lump sum worker’s compensation award payment several years prior to filing the bankruptcy case. The debtors in Williams spent much of the award prepetition. There was no “right to receive” the benefit. It had already been received by the debtors in Williams. Also, in Williams, the funds were not traceable to the award.
V. CONCLUSION.
The Trustee’s objection to the Debtor’s exemption of the worker’s compensation award is overruled. The award is exempt under 11 U.S.C. § 522(d)(10)(C) and/or 11 U.S.C. § 522(d)(ll)(E).
A separate order shall be entered.
. Because of the specific facts in this case, the court need not explicitly determine whether the award constituted a disability benefit, a loss of future earnings, or a combination of both as opined by Attorney Podein. Regardless of characterization, the entire award is exempt. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494781/ | MEMORANDUM
SHELLEY D. RUCKER, Bankruptcy Judge.
The plaintiff First Tennessee Bank National Association (“Plaintiff’ or the “Bank”) brings this adversary proceeding against Raymond Sherman Hansen and Deborah Slaughter Hansen (“Defendants” or “Debtors”). This case involves the damages to the Debtors’ residence which served as the Bank’s collateral. There is no dispute that these damages which were significant were caused by Daniel Hixon who operated a methamphetamine lab in a storage room in the basement of the residence. Mr. Hixon, the father of the Debtors’ young grandson, had been invited to live in the basement apartment of the residence with his son after the death of the child’s mother.
The Bank asserts a claim of dismissal for cause pursuant to 11 U.S.C. § 1307(c) on the basis that the Debtors hid the damages until they could surrender the residence in their Chapter 13 plan. It also seeks a determination that the damages were the result of willful and malicious injury by the Debtors and are nondis-chargeable pursuant to 11 U.S.C. § 523(a)(6). It further seeks a declaration that the damages to the residence are *245post-petition debts that are not discharged by completion of the plan. In order to determine the merits of these claims, the court must consider when the damages occurred; whether the Debtors knew of the operation of the lab and its risks to the residence; and if they knew, whether they knowingly hid those damages from the Bank.
The Debtors have brought a counterclaim for conversion and willful destruction of the personal property against the Bank. See [Doc. No. 32-1, Amended Answer and Counterclaim], The Bank was required to remediate the residence in order to conduct a foreclosure sale. In the course of the remediation, some of the Debtors’ personal property left in the house was destroyed.
A trial was held in this proceeding on March 14, 2012. The court heard testimony and reviewed evidence presented by the parties. It has further reviewed the briefing filed by the parties, the pleadings at issue, and the applicable law. It concludes that: (1) the plan was not filed in bad faith nor was the confirmation obtained by fraud; (2) the damages to the residence, while substantial, are not the result of willful and malicious injury by the Debtors; and (3) the damages sustained by the Bank are pre-petition debts which may be satisfied through the Plan. With respect to the counterclaim, the Debtors have not demonstrated the value of their property after contamination or that their loss was caused by the Bank for their claim of conversion; therefore, this claim will be denied. The court makes the following findings of fact and conclusions of law in support of its ruling pursuant to Fed. R. Bankr.P. 7052.
I. Background
A. The Bank’s Claims
The Debtors executed and delivered to the Bank a balloon note in the original “principal amount of $476,012.00” in 2006. Trial Ex. 1. The note was secured by the Debtors’ residence, a custom built home located at 1007 E. Dallas Road, Chattanooga, Tennessee. Id. at ¶ 5. The security interest was evidenced by a deed of trust. Trial Ex. 2.
The Debtors filed their Chapter 13 voluntary bankruptcy petition on June 1, 2010. The Debtor’s original Chapter 13 plan proposed to pay the Bank $3215 per month in maintenance payments and monthly payments of $70 to be paid towards arrearage estimated by the Bank. Trial Ex. 3. The court never confirmed the Debtors’ first plan, and the Debtors filed an amended Chapter 13 plan on July 27, 2010. Trial Ex. 5. After the Bank filed its secured Proof of Claim in the amount of $463,183.96 on August 18, 2010 (Trial Ex. 4) and the Debtors received an appraisal of $475,000 on August 25, 2010 (Trial Ex. A), the Debtors submitted a second amended Chapter 13 plan on September 27, 2010. Trial Ex. 6. In this plan the Debtors proposed to surrender the residence, and they provided that the deficiency claim would be treated as an unsecured claim. Trial Ex. 6. The Bank filed a motion for relief from the automatic stay on October 5, 2010. [Bankr. Case No. 10-13181, Doc. No. 24]. The Bank did not allege any value for the house. See id. The 341 meeting on the September 27, 2010 plan was held on October 13, 2010. See [Bankr. Case No. 10-13181, Doc. Nos. 22, 26]. The Bank did not object to this treatment of the residence, and this court confirmed the amended plan on October 17, 2010. See [Bankr. Case No. 10-13181, Doc. No. 27].
The record contains no evidence that the Debtors represented anything about the value or condition of the house other than the value listed in their schedules. The *246court granted the Bank’s motion for relief from the automatic stay on November 3, 2010 on passive notice due to the fact that the Debtor did not object to the motion and the Bank did not withdraw its motion. [Bankr. Case No. 10-13181, Doc. Nos. 24, 29]. As of the filing of the Complaint in this proceeding, the Bank had not initiated foreclosure or eviction proceedings. The foreclosure has now been set for April 5, 2012.
The Debtors, their 19-year-old son, their 7-year-old grandson, Nalin, and the grandson’s father, Daniel Hixon, lived in the residence. Trial Testimony of Raymond Hansen (“R. Hansen Test.”), March 14, 2012 at 1:36 p.m.; 1:42 p.m. Mr. Hixon and his son occupied the bottom floor which contained an apartment and a cin-derblock storage room which the Debtors refer to as the “under garage”. Id. D. Hansen Test., March 14, 2012 at 3:13-3:14 p.m.; Hixon Test., March 14, 2012 at 12:05-12:07 p.m. The apartment had a separate entrance and an internal stairway that led to the main level where the Debtors and their teenage son lived. The stairway could be locked, but Mr. Hansen could access the basement when he “needed to” do so. R. Hansen Test., March 14, 2012 at 1:37 p.m.
The Debtors’ daughter suffered from drug abuse problems that led her to take her own life in 2008. R. Hansen Test., March 14, 2012 at 1:36-1:37 p.m. Mr. Hix-' on also suffered from abuse problems and had been convicted and served time for theft and aggravated assault. Id. R. Hansen Test., March 14, 2012 at 2:15-2:16 p.m. Trial Testimony of Daniel Hixon, deposition testimony submitted and read into record at trial (“Hixon Test.”), March 14, 2012 at 12:04 p.m. Upon his release in 2008, he lived with his parents, obtained employment, took regular drug tests and developed a loving relationship with his son, as testified to by the Debtors. R. Hansen Test, March 14, 2012 at 2:16-2:17 p.m.; Trial Testimony of Debbie Hansen (“D. Hansen Test.”), March 14, 2012 at 3:01-3:02 p.m. In May of 2009, after 10 months of what appeared to be exemplary behavior, the Debtors who had had temporary custody of Nalin during Mr. Hixon’s incarceration and subsequent release, invited Mr. Hixon to move into the apartment. R. Hansen Test, March 14, 2012 at 1:38 p.m.; 2:15-2:16; D. Hansen Test, March 14, 2012 at 3:01-3:03 p.m. Mr. Hix-on, who had been sleeping on the couch at his parents’ home, and seeing his son only on weekends, accepted their offer and moved into the Debtors’ home. Id. Hixon Test., March 14, 2012 at 12:05 p.m. He helped with yard work and repairs, and continued with his probation. D. Hansen Test, March 14, 2012 at 2:15-2:17 p.m.; Hixon Test., March 14, 2012 at 12:01-12:02 p.m.
The fortunes of the entire family took a turn for the worse in 2010. Mr. Hansen’s advertising business continued to suffer from a slow economy and the loss of clients. R. Hansen Test., March 14, 2012 at 1:39 p.m. Mr. Hixon lost his job. D. Hansen Test., March 14, 2012 at 3:23 p.m.; Hixon Test., March 14, 2012 at 12:01 p.m. In the summer of 2010, the Debtors filed for bankruptcy relief, anticipating that a Chapter 13 would give them time to sell their home and use the equity to pay off the plan. R. Hansen Test., March 14, 2012 at 1:39 p.m.
In August of 2010, the home was appraised for $475,000. See Trial Ex. A. The appraiser conducted a thorough inspection of the home, both inside and out, taking measurements in each room including the basement apartment. She found the home to be in good condition. Trial Testimony of Karey Haisten-Matlock, March 14, 2012 at 2:54-2:55 p.m. At trial she testified that *247she had not detected any strange odors in her inspection and that she would be “very shocked” to learn that a methamphetamine laboratory was located in the house. Id. at 2:55 p.m.
During that same period of time, in the summer of 2010, the Debtors had decided to build a more formal entrance to the apartment and were in the process of constructing a new wall adjacent to the “under garage” for that purpose. D. Hansen Test., March 14, 2012 at 3:13 p.m. The Debtors had contracted for carpentry work, the installment of sheet rock, and painting. Id. Hixon Test., March 14, 2012 at 12:08 p.m.
The Debtors had expected the appraisal to be substantially higher. Deciding that they had no equity in the house, they changed their plan in order to surrender the house and filed a second amended plan on September 27, 2010. Trial Ex. 6; R. Hansen Test., March 14, 2012 at 1:42 p.m. The Debtors began moving out in early October. On October 13, 2010 they attended the meeting of creditors. See [Bankr. Case No. 10-13181, Doc. Entry No. 26]; R. Hansen Test., March 14, 2012 at 2:14-2:15 p.m. The Bank did not object. Id. Since there were no objections, the second amended plan was confirmed without further hearing.
On Saturday, October 16, 2010, Mr. Hansen asked his grandson to go to the “under garage” to get some tape to use for packing boxes. D. Hansen Test., March 14, 2012 at 3:07 p.m.; R. Hansen Test., March 14, 2012 at 1:44 p.m. Nalin said his father would not allow him to go into the “under garage” room because of the fumes. D. Hansen Test., March 14, 2012 at 3:07 p.m.; Hixon Test., March 14, 2012 at 11:57 a.m. When Mr. Hansen asked about the fumes, Nalin said his father had been painting. D. Hansen Test., March 14, 2012 at 3:07 p.m.
Mr. Hansen then went to the “under garage” room to get the tape and upon entry into the room, found two bottles and a tube. R. Hansen Test., March 14, 2012 at 2:20-2:21 p.m.; D. Hansen Test., March 14, 2012 at 3:08 p.m.; Hixon Test., March 14, 2012 at 11:57 a.m. He returned upstairs to tell his wife what he had found. The Debtors then made arrangements for Na-lin to be taken to stay with his aunts and returned with Mr. Hixon’s parents. D. Hansen Test., March 14, 2012 at 3:08 p.m. The four confronted Mr. Hixon with their findings. Id. at 3:08-3:09 p.m. Mr. Hixon, when confronted with the question of whether he was operating a “meth lab,” denied it was “meth” but admitted he was making “speed”. R. Hansen Test., March 14, 2012 at 1:43-1:46 p.m.; D. Hansen Test, March 14, 2012 at 3:08-3:09 p.m.; Hixon Test, March 14, 2012 at 12:10-12:11 p.m. He expressed his regret at violating the Debtors’ trust, and he destroyed the lab equipment and removed it from the house. Hixon Test., March 14, 2012 at 12:10-12:11 p.m.
The Debtors continued their move out of the house in October apparently believing that the problem was solved. R. Hansen Test., March 14, 2012 at 1:44 p.m. They left Mr. Hixon and their grandson in the apartment due to their desire for their grandson to remain in his current elementary school until the end of the semester. R. Hansen Test., March 14, 2012, at 1:45-1:46 p.m. Mr. Hixon promised to finish cleaning the house and to finish the repairs the Debtors had requested. Id. at 1:46-1:47 p.m.
On November 8, 2010, the Debtors returned to remove some additional items from the residence. R. Hansen Test., March 14, 2012 at 1:47-1:48 p.m.; D. Hansen Test., March 14, 2012 at 3:10-3:11 p.m. While in the house, they noticed some blinds missing and some undercounter *248lighting removed. Trial Ex. 12; R. Hansen Test., March 14, 2012 at 1:46-1:48 p.m.; D. Hansen Test., March 14, 2012 at 3:11 p.m. They assumed Mr. Hixon had taken them. R. Hansen Test., March 14, 2012 at 1:46-1:48; D. Hansen Test., March 14, 2012 at 3:12 p.m.
Mr. Hansen called child protective services (“CPS”) and reported that he suspected that Mr. Hixon was doing “something unlawful” at the home where Nalin was living. R. Hansen Test, March 14, 2012 at 1:48-1:50 p.m. Mr. Hansen may have informed CPS that the Debtors had conducted “an intervention” with Mr. Hix-on. Id.
On November 9, 2010 a representative of CPS and two Chattanooga police officers went to the house. Trial Testimony of Officer Casey Cleveland (“Cleveland Test.”), March 14, 2012 at 10:35-10:36 a.m.; 10:44 a.m. Mr. Hixon met them outside. Id. at 10:37 a.m.; 10:44 a.m. Officer Cleveland testified that he smelled marijuana in the apartment, but he did not recall a chemical odor. Id. at 10:40 a.m.; 10:44 a.m.; 10:46 a.m. His narrative does not mention chemical odors. Trial Ex. 9; Cleveland Test., March 14, 2012 at 10:44 a.m. The case worker for CPS went into the house to check on the presence of food for Nalin. Cleveland Test., March 14, 2012 at 10:39 a.m. The worker checked the cabinets for food and when she opened the kitchen cabinets she found “large jars with a white liquid in them” that appeared to be components for making methamphetamine. Id. at 10:39 a.m. The police officer immediately evacuated the building and called the narcotics division. Id. Nalin was taken into protective custody.
When questioned by Detective Lancaster on the evening of November 9th, Mr. Hixon admitted to having “cooked” meth approximately 20 to 25 times over the past year. Trial Testimony of Detective Jeff Lancaster (“Lancaster Test.”), March 14, 2012 at 10:50 a.m. Mr. Hixon testified that after destroying the lab equipment for Mr. Hansen, he repurchased more. Hixon Test., March 14, 2012 at 11:58-11:59 a.m. He explained that he had carefully hidden his equipment in duffle bags and boxes made to look just like the rest of the storage area. Hixon Test., March 14, 2012 at 12:07 p.m.
Mr. Hixon is currently serving a ten-year sentence at the Whiteville Correctional Facility in Whiteville, TN for manufacturing methamphetamine and child neglect and abuse.
Following Mr. Hixon’s arrest, the residence was quarantined pursuant to state law. The notice indicated law enforcement authorities discovered a tier 3 laboratory engaged in the manufacture of methamphetamine in the “under garage” room. Trial Ex. 7. No one was allowed to inhabit the house until it was certified to be “Safe for Human Use.” Id. The lab that was confiscated included: marijuana, 18 gas generators, over 200 empty iodine bottles, approximately 54 filled iodine bottles, over 10,000 matches, beakers, ether, flasks, and sundry other items used in the production and distribution of illegal narcotics. See Complaint, ¶ 14; Trial Exs. 10, 11. Within a few days, the Bank received the Notice of the Quarantine of the residence in November of 2010. The Bank filed this adversary proceeding against the Debtors on December 22, 2010. See [Doc. No. 1].
Law enforcement authorities placed the residence under an “order of quarantine” “due to risk of human exposure to the byproducts, chemicals, odors, vapors and fumes associated with the manufacture of methamphetamine.” Complaint, ¶ 15. However, the level of odors associated with the house is in controversy. For example, the real estate appraiser, who inspected the home in August of 2010, did not notice *249a smell. Trial Testimony of Karey Hais-ten-Matloek, March 14, 2012 at 2:54-2:55 p.m. The Debtors also did not notice a smell. D. Hansen Test., March 14, 2012 at 3:10 p.m.; R. Hansen Test., March 14, 2012 at 1:46 p.m. Officer Cleveland testified that although he noticed the smell of marijuana, he did not notice the chemical smell associated with methamphetamine. Cleveland Test., March 14, 10:40 a.m.; 10:44 a.m.; 10:46 a.m.; Trial Ex. 9. In addition, Hixon testified about the “small operation” that he cooked and how the sheetrock smell associated with the construction was more pervasive than any smell of methamphetamine. Hixon Test., March 14, 2012 at 12:09 p.m.
Despite the lack of a “tell tale” odor, there was significant contamination. The heating and air conditioning system, the basement, all the rooms except the Master Bedroom and another bedroom on the main floor, and the attic — all had levels of methamphetamine which exceeded the Tennessee health based standard. Trial Ex. 14. Over the next year, the Bank expended significant funds in remediation costs and legal fees. Trial Ex. 22. Major portions of the house were gutted, leaving it only 59% complete. The most recent appraisal also takes a 41% deduction because of the “methamphetamine lab stigma”. Trial Ex. 21, pp. 16, 23. That appraisal indicates that the house is worth $100,000. Id.
Based on the tests that were conducted, the operation of the lab contaminated almost the entire structure. Many of the walls had to be removed, but not the Master Bedroom and another bedroom on the main level. Nor was the new wall that was built in the basement in the summer of 2010 so contaminated that it needed removal. Much of the flooring, the tile in some bathrooms and the entire heating and air conditioning system were removed.
The Bank’s evidence asks the court to infer from the Debtors’ experience with Mr. Hixon that they knew there was a meth lab operating and that their knowledge motivated them to surrender the house, hoping to get it into the Bank’s hands before the Bank discovered the damage. The Debtors contend that their decision to surrender the house had nothing to do with the existence of a lab or their suspicions about drug use or manufacturing by Mr. Hixon. Their decision to surrender the house was based on the August 2010 appraised value and the lack of equity to fund a 100% payoff to their creditors. Their decision to report their suspicions in November was based on their concerns for their grandson, not the fact that confirmation had been obtained. The court finds the Debtors to be credible witnesses and their explanations supported by the evidence and corroborated by the testimony of the other witnesses.
The Bank’s first asserted claim against the Debtors seeks dismissal of the Debtors’ bankruptcy case for cause pursuant to 11 U.S.C. § 1307(c). It asserts that the Debtors materially misrepresented the value and condition of the residence in their bankruptcy statements and schedules, and thereby perpetrated a fraud on the court and the Bank. It contends the Debtors allowed a methamphetamine laboratory to operate in their residence and hid such operations from the Bank. Complaint, ¶ 26. The Bank’s second cause of action asks this court to find the deficiency claim resulting from the contamination of the residence to be nondischargeable pursuant to 11 U.S.C. § 523(a)(6) and that the contamination was the result of willful and malicious injury caused by the Debtors. The third cause of action in the Complaint is a claim for the enforcement of the Bank’s note and deed of trust. Complaint, ¶ 39. The Bank also sought punitive damages in *250the amount of $250,000, as well as attorneys’ fees and costs in its Complaint. Id. at p. 9, ¶¶ 8, 9. It withdrew its request for punitive damages at trial. It now seeks a judgment of $344,809.62, which reflects the difference in the deficiency it would have had before contamination of the residence compared to the deficiency it now anticipates, plus the remediation costs and attorney fees through February 28, 2012. Trial Ex. 22.
Two remediation treatments were required to make the residence suitable for human habitation. Those costs were $45,873.16. The Bank has also incurred $35,797.50 in legal fees. Trial Exs. 21, 22.
B. The Debtors’ Counterclaim
The Debtors filed their answer to the Complaint on June 8, 2011. [Doc. No. 16, Answer (“Answer”) ]. In their Answer they filed a counterclaim against the Bank. At trial, Raymond Hansen testified that he contacted Steve Brown at ServPro after seeing ServPro’s van in the driveway of the residence when Mr. Brown was preparing his bid for the Bank. R. Hansen Test., March 14, 2012 at 1:52 p.m. On February 7, 2011 Mr. Hansen received email correspondence dated February 3, 2011 forwarded from Mr. Bible indicating that Mr. Brown would be doing the remediation. Id. at 1:58-2:00 p.m.; 2:05 p.m.; Trial Exs. 25, 4; Trial Ex. F. Mr. Brown told Mr. Hansen that ServPro’s bid had not actually been approved for First Tennessee Bank yet, but that he would get Mr. Hansen access to the house after he got clearance from the meth task force so that the Debtors could choose what personal property should be treated and removed. Trial Ex. F; R. Hansen Test., March 14, 2012 at 2:07-2:08 p.m. Mr. Hansen drove by the property in mid-February and saw that the house had been stripped and that there was no personal property present. Id. Upon further inquiry, Mr. Hansen heard from Mr. Brown that the Bank had instructed him to dispose of the personal property. Id.
At trial, Mr. Brown testified that he never made any agreement with the Debtors regarding providing them with an opportunity to see and retrieve personal property. Trial Testimony of Steve Brown (“Brown Test.”), March 14, 2012 at 11:19— 11:21 a.m.; 11:28-11:29 a.m.; 11:35 a.m. He did admit he had given the Debtors a bid to clean the property of between $8000 and $10,000. Id. at 11:19 a.m.; 11:27 a.m. The Debtors understood that the proposed price was just to bring the property outside. R. Hansen Test., March 14, 2012 at 1:54 p.m. The counsel for the Bank sent letters and emails to the Debtors’ counsel in December of 2010 and January and February of 2011 telling the Debtors they needed to hire their own hygienist to clean their property if they wanted it back. In these communications, the Bank acknowledged that it had no security interest or other interest in the Debtors’ personal property and that it would accept no responsibility for storage or cleaning of the property. The Banks also stated that it would assume that the Debtors were abandoning the property if they did not send the name of their cleaning service to the Bank. See Trial Ex. 25. The court does not find that the Bank ever gave the Debtors a specific date when the personal property would be removed. The Bank offered no evidence that it was under any obligation to remediate the house by any date certain. From the evidence, it appears that the Bank determined the timing of removal of the property and gave the authorization to Mr. Brown to proceed. The Debtors allege that to complete its remediation of the property, the Bank, through its agents, disposed of their personal possessions in defiance of their ownership *251rights. [Doc. No. 32-1, Amended Answer, Counterclaim, p. 5, ¶¶ 4-8].
The Debtors have provided an exhibit that itemizes all of the property they claimed was destroyed. See [Doc. No. 62-7, Ex. G]. The list includes various pieces of furniture, clothing, jewelry, and personal items such as a family Bible and photographs. The Debtors admit that they failed to hire their own environmental specialist to clean the property or to tell them whether it could be cleaned. They also testified about their numerous efforts to make arrangements with Mr. Brown to recover their personal property. They relied on the representations made by Mr. Brown that he would tell them before the property was destroyed. He now denies he made any agreement with the Debtors to preserve their property for any certain period of time. D. Hansen Test., March 14, 2012 at 3:28-3:29 p.m.; Brown Test., March 14, 2012 at 11:19-11:21 a.m.; 11:28-11:29 a.m.; 11:35 a.m. The Debtors admit that they were distracted in late 2010 and early 2011 by their efforts to regain custody of their grandson and that dealing with the issues involving their home was “secondary.” D. Hansen Test., March 14, 2012 at 3:28-3:30 p.m. Despite their distracted state, the court finds no evidence that the Debtors ever intended to abandon their personal property, only that they were having trouble finding the funds to pay for the remediation.
II. Jurisdiction
28 U.S.C. §§ 157 and 1334, as well as the general order of reference entered in this district provide this court with jurisdiction to hear and decide this adversary proceeding. The Plaintiffs action regarding the dischargeability of particular debts is a core proceeding. See 28 U.S.C. § 157(b)(2)(I), (J). With respect to any other causes of action, the parties have consented to jurisdiction. [Doc. No. 30, Scheduling Order],
III. Analysis
A. First Tennessee Bank’s Claims
1. Dismissal of Case for Cause Pursuant to 11 U.S.C. § 1307(c)
11 U.S.C. § 1307(c) states in part:
Except as provided in subsection (f) of this section, on request of a party in interest or the United States trustee and after notice and a hearing, the court may convert a case under this chapter to a case under chapter 7 of this title, or may dismiss a case under this chapter, whichever is in the best interests of creditors and the estate, for cause, ...
11 U.S.C. § 1307(c). The provision then contains a nonexclusive list of examples of “cause,” such as “material default by the debtor with respect to a term of a confirmed plan.” 11 U.S.C. § 1307(c)(6).
In 2002 the Sixth Circuit addressed the dismissal-for-cause provision of 11 U.S.C. § 1307(c), noting the following:
Despite the fact that there are no such reported decisions in this circuit, there is abundant authority for the notion that a bankruptcy court has the power to dismiss a Chapter 13 petition upon a finding that the debtor did not bring it in good faith. Most courts ascribe the basis for such a dismissal to 11 U.S.C. § 1307(c), which — although it does not expressly address good faith — permits a bankruptcy court to dismiss a Chapter 13 petition “for cause.” The key inquiry in such cases is whether the debtor is seeking to abuse the bankruptcy process.
In re Alt, 305 F.3d 413, 418-19 (6th Cir. 2002) (citing In re Banks, 267 F.3d 875, 876 (8th Cir.2001); In re Lilley, 91 F.3d *252491, 496 (3d Cir.1996); Eisen v. Curry (In re Eisen), 14 F.3d 469 (9th Cir.1994); Gier v. Farmers State Bank of Lucas (In re Gier), 986 F.2d 1326, 1329 (10th Cir.1993); In re Love, 957 F.2d 1350 (7th Cir.1992); 1 KEITH M. LUNDIN, CHAPTER 13 BANKRUPTCY § 5-2 (3d ed. 2000)); see also, Industrial Ins. Servs., Inc. v. Zick (In re Zick), 931 F.2d 1124, 1127 (6th Cir.1991) (noting that “[w]e are persuaded that there is good authority for the principle that lack of good faith is a valid basis of decision in a ‘for cause’ dismissal by a bankruptcy court”). In the Sixth Circuit consideration of whether good faith exists requires an examination of the “ ‘totality of the circumstances,’ ” including such factors as “ ‘the sincerity with which the debtor has petitioned for relief under Chapter 13’ ” and “ ‘the amount of payment offered by debtor as indicative of the debtor’s sincerity to repay the debt.’ ” In re Alt, 305 F.3d at 419 (quoting Society Nat’l Bank v. Barrett (In re Barrett), 964 F.2d 588, 591 (6th Cir.1992)). Other factors to consider include:
the nature of the debt; how the debt arose; the timing of the petition; whether the debt would be dischargeable in chapter 7; the debtor’s motive in filing; how the debtor’s actions affected creditors; the debtor’s treatment of creditors before and after the filing; and whether the debtor has been forthcoming with the court and creditors.
In re Grischkan, 320 B.R. 654, 659 (Bankr. N.D.Ohio 2005) (citing In re Alt, 305 F.3d at 419-20).
Good faith is further a “fact-specific” and “flexible determination.” In re Alt, 305 F.3d at 419. In In re Alt the Sixth Circuit explained that:
[w]here present, the factors set forth by this court in the plan confirmation context are properly considered as well.... However, given the more severe consequences, the law also recognizes that ‘the bankruptcy court should be more reluctant to dismiss a petition under Section 1307(c) for lack of good faith than to reject a plan for lack of good faith under Section 1325(a).
305 F.3d at 420 (quoting Love, 957 F.2d at 1356). The party seeking dismissal of the case bears the burden of demonstrating a lack of good faith by a preponderance of the evidence. In re Alt, 305 F.3d at 420; Sicherman v. Warner (In re Warner), No. 11-1032, 2011 WL 6140856, at *3 (Bankr. N.D.Ohio Dec. 9, 2011).
Factors pertaining to good faith in the plan confirmation context, which also might overlap with the Section 1307(c) good faith concept include:
(1) the amount of the proposed payments and the amount of the debtor’s surplus;
(2) the debtor’s employment history, ability to earn and likelihood of future increase in income;
(3) the probable or expected duration of the plan;
(4) the accuracy of the plan’s statements of the debts, expenses and percentage repayment of unsecured debt and whether any inaccuracies are an attempt to mislead the court;
(5) the extent of preferential treatment between classes of creditors;
(6) the extent to which secured claims are modified;
(7) the type of debt sought to be discharged and whether any such debt is nondischargeable in Chapter 7;
(8) the existence of special circumstances such as inordinate medical expenses;
(9) the frequency with which the debtor has sought relief under the Bankruptcy Reform Act;
*253(10) the motivation and sincerity of the debtor in seeking Chapter 13 relief;
(11) the burden which the plan’s administration would place upon the trustee; and,
(12) whether the debtor is attempting to abuse the spirit of the Bankruptcy Code.
In re Caldwell, 895 F.2d 1123, 1126-27 (6th Cir.1990); see also In re Griffith, 203 B.R. 422, 424 (Bankr.N.D.Ohio 1996).
The court concludes that the Bank has failed to sustain its burden of proving that the Debtors’ bankruptcy case should be dismissed for cause. There is no evidence in the record indicating that the Debtors did filed their second amended plan in bad faith. The record demonstrates that as of the date of the filing of the second amended plan and the subsequent 341 meeting, the Debtors were not aware of any methamphetamine contamination. The record is also clear that the first occasion on which the Debtors learned of Mr. Hixon’s illegal activities in the residence occurred on October 16, 2010. Both Mr. Hansen, Mrs. Hansen, and Mr. Hixon all described the “intervention” that took place on that date. The parties also all consistently testified that Mr. Hixon denied making methamphetamine, but admitted to making “speed,” and that Mr. Hixon agreed that he would dispose of all the drug-making paraphernalia at that time. Mr. Hixon testified that he did, in fact, dispose of the equipment. It was not until November 8, 2010 that the Debtors returned to the residence and had reason to suspect that Mr. Hixon was engaged in some inappropriate activity as evidenced by the removal of light fixtures and custom blinds from the residence. Mrs. Hansen sent an email that next afternoon indicating her concern that he was damaging the house by removing fixtures. Trial Ex. 12. On November 9th, the Debtors contacted CPS, and a CPS worker, along with Chattanooga police officers entered the house and arrested Mr. Hixon. There was no evidence at trial contradicting the Debtors’ version of the events at issue, nor is there any indication in the record that they had knowledge of the methamphetamine production in the residence prior to October 16, 2010 at the very earliest. The record also indicates that they believed that the problem had been solved until November 8, 2010. The Debtors’ claims of ignorance are supported by the testimony of the appraiser who inspected the property in August of 2010 and found no reason to believe that,there was any damage to the residence which would have affected the value.
With respect to the other factors to be considered in a good faith analysis, the Debtors are proposing in their Plan to pay all of their disposable income for five years. They are making substantial payments of $1465 a month. They proposed to give up the house and to allow a deficiency claim to the Bank. There is no evidence of inaccuracies or irregularities in the schedules or the Debtors’ conduct, other than the value provided for the residence. The court finds the value estimate was made in good faith, without knowledge of the damage which may have been caused by earlier “cooks” by Mr. Hixon. The court finds the Debtors’ testimony credible and their motivation for filing the Chapter 13 to be sincere and in good faith. The circumstances of the damage to the residence are unfortunate. However, the court does not find the Debtors’ filing to have been in bad faith, nor does it find the confirmation of the plan, without objection by the Bank at a time the Debtors were unaware of the extent of the damage, to be in bad faith. Based on the evidence at trial, the court concludes that the Bank has not demonstrated that the Debtors’ bankruptcy case should be dismissed for *254cause pursuant to 11 U.S.C. § 1307(c). This claim will therefore be DENIED.
2. Nondischargeability of Debt Pursuant to 11 U.S.C. § 523(a)(6)
11 U.S.C. § 1328 provides for discharge from debt unless excepted from discharge pursuant to 11 U.S.C. § 523. 11 U.S.C. § 1328(a)(2). 11 U.S.C. § 523(a)(6) states in relevant part:
A discharge under section ... 1328(b) of this title does not discharge an individual debtor from any debt — ...
(6) for willful and malicious injury by the debtor to another entity or to the property of another entity....
11 U.S.C. § 523(a)(6). The creditor must prove by a preponderance of the evidence that a debt is nondischargeable under 11 U.S.C. § 523. See Grogan v. Garner, 498 U.S. 279, 287, 111 S.Ct. 654, 659, 112 L.Ed.2d 755 (1991). Exceptions to discharge are narrowly construed in the debt- or’s favor. See Monsanto Co. v. Trantham (In re Trantham), 304 B.R. 298, 306 (6th Cir. BAP 2004). In this case the Plaintiff must demonstrate both willful and malicious behavior by a preponderance of the evidence at trial.
Whether a debt is dischargea-ble pursuant to 11 U.S.C. § 523(a)(6) is determined by analyzing federal law. See e.g., J & A Brelage, Inc. v. Jones (In re Jones), 276 B.R. 797, 800-01 (Bankr. N.D.Ohio 2001) (citing Call Federal Credit Union v. Sweeney (In re Sweeney), 264 B.R. 866, 870 (Bankr.W.D.Ky.2001); Hinze v. Robinson (In re Robinson), 242 B.R. 380, 388 (Bankr.N.D.Ohio 1999)). 11 U.S.C. § 523(a)(6) provides that a debt that is both willful and malicious is nondis-chargeable. See 11 U.S.C. § 523(a)(6). “[T]he judgment must be for an injury that is both willful and malicious. The absence of one creates a dischargeable debt.” Markowitz v. Campbell (In re Markowitz), 190 F.3d 455, 463 (6th Cir. 1999). The U.S. Supreme Court has addressed the meaning of “willful” within the context of § 523(a)(6). Kawaauhau v. Geiger, 523 U.S. 57, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998). As summarized by the Sixth Circuit:
[t]he Court held that “willful” means “voluntary,” “intentional,” or “deliberate.” As such, only acts done with the intent to cause injury — and not merely acts done intentionally- — can cause willful and malicious injury. The Court explained its holding by discussing the importance of context:
The word “willful” in (a)(6) modifies the word “injury,” indicating that non-dischargeability takes a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury. Had Congress meant to exempt debts resulting from unintentionally inflicted injuries, it might have described instead “willful acts that cause injury.” Or, Congress might have selected an additional word or words, i.e., “reckless” or “negligent,” to modify “injury.” Moreover, as the Eighth Circuit observed, the (a)(6) formulation triggers in the lawyer’s mind the category “intentional torts,” as distinguished from negligent or reckless torts. Intentional torts generally require that the actor intend “the consequences of an act,” not simply “the act itself.”
In re Markowitz, 190 F.3d at 464 (quoting Geiger, 523 U.S. at 61-62, 118 S.Ct. at 977). Following the lead of the Supreme Court in Geiger, the Sixth Circuit held that “unless ‘the actor desires to cause consequences of his act, or ... believes that the consequences are substantially certain to result from it,’ he has not committed a ‘willful and malicious injury’ as defined *255under § 523(a)(6).” In re Markowitz, 190 F.3d at 464.
In this case, there is no evidence that the Debtors ever manufactured drugs in the residence. There is no evidence that they ever directed, condoned or bene-fitted from Mr. Hixon’s activities. There is also no evidence that any of the Bank’s damages arose from any other activity other than the manufacture of methamphetamine. The only acts by the Debtors which could conceivably have been related to the damages were their decision to allow Mr. Hixon to reside in the residence with his son, their grandson, and then their decision to allow him to remain in the house after they moved out.
Proof of willful behavior must often be demonstrated through the use of circumstantial evidence. See In re Jones, 276 B.R. at 802. The bankruptcy court in In re Jones noted that “willful” behavior can “be indirectly established by the creditor demonstrating the existence of two facts: (1) the debtor knew of the creditor’s lien rights; and (2) the debtor knew that his conduct would cause injury to those rights.” Id. The proof in this case does not show that the Debtors knew that these decisions would cause injury to the residence. They only invited Mr. Hixon to live with them after ten months of exemplary behavior. They talked to his parole officer after he moved in within them, and the officer also indicated that Mr. Hixon was not violating any of the conditions of his parole. He was regularly being tested for drugs. He had a job. He was assisting the Debtors with yard work and maintenance on the residence, activities which preserved the value of the residence. Until October 16, 2010, there was no evidence that any nefarious activity was going on at the residence. When the lab was discovered, they took immediate and strong action to stop the activity. When they moved out after receiving the promise that Mr. Hixon had disposed of the lab, they left Mr. Hixon to finish repairs and to care for their grandson. The court does not believe that they would have left their grandson with Mr. Hixon had they believed that there was any dangerous activity occurring at the house. The court does not find that the act of bringing Mr. Hixon into the residence initially or the act of leaving him in the house with his son were acts taken with the intention of injuring the rights of the Bank.
As to the element of malice, a malicious injury occurs “when a person acts in conscious disregard of their duties or without just cause or excuse.” In re Jones, 276 B.R. at 803 (citing Gonzalez v. Moffitt (In re Moffitt), 254 B.R. 389, 396 (Bankr.N.D.Ohio 2000)). A finding of maliciousness does not require a determination of ill-will or specific intent. See In re Trantham, 304 B.R. at 308. However, malice requires the finding of a level of conduct beyond negligent or reckless behavior. West Michigan Community Bank v. Wierenga (In re Wierenga), 431 B.R. 180, 185 (Bankr.W.D.Mich.2010) (citation omitted); see also, JP Morgan Chase Bank, NA v. Algire (In re Algire), 430 B.R. 817, 823 (Bankr.S.D.Ohio 2010); Geiger, 523 U.S. at 64, 118 S.Ct. 974. A creditor may prove the element of maliciousness by demonstrating that “(1) the debtor has committed a wrongful act, (2) the debtor undertook the act intentionally, (3) the act necessarily causes injury, and (4) there is no just cause or excuse for the action.” In re Algire, 430 B.R. at 823 (citing Vulcan Coals, Inc. v. Howard, 946 F.2d 1226, 1228 (6th Cir.1991), abrogated on other grounds as explained in In re Slosberg, 225 B.R. 9,18 n. 10 (Bankr.D.Me. 1998)). As previously discussed, the court does not find that leaving Mr. Hixon in the residence was a wrongful act, undertaken *256intentionally to harm the Bank, without just cause or excuse. The Debtors’ perceptions of Mr. Hixon’s promises and his concern for his own son may have been mistaken, but those perceptions were based on months of conduct in which Mr. Hixon appeared to have been behaving in a legal and responsible manner. Further, Mr. Hixon managed to operate without detection by the Debtors, his parole officer and an appraiser who inspected the property.
In National Sign and Signal v. Livingston the district court explained that the § 523(a)(6) exception applies where the injury invades a creditor’s legal rights. 422 B.R. 645, 653 (W.D.Mieh.2009) (citing Steier v. Best (In re Best), 109 Fed.Appx. 1, 6 (6th Cir.2004)). The district court quoted the Sixth Circuit decision in In re Best noting:
Section 523(a)(6)’s term “willful ... means deliberate or intentional invasion of the legal rights of another, because the word ‘injury’ usually connotes legal injury (injuria) in the technical sense, not simply harm to a person.” The conduct “must be more culpable than that which is in reckless disregard of creditors’ economic interests and expectancies, as distinguished from ... legal rights. Moreover, knowledge that legal rights are being violated is insufficient to establish malice....
Livingston, 422 B.R. at 653 (quoting In re Best, 109 Fed.Appx. at 6). The court in Livingston noted that there are three elements that a creditor must demonstrate to state a claim under § 523(a)(6): “(1) the debtor’s conduct was willful and malicious, (2) it suffered an invasion of its legal rights or to the legal rights to its property, and (3) the invasion was caused by the debtor’s conduct.” 422 B.R. at 653 (citing CMEA Title Agency v. Little (In re Little), 335 B.R. 376, 383 (Bankr.N.D.Ohio 2005)). Even if the court were to determine that leaving Mr. Hixon in the house without the Debtors was reckless behavior given their suspicions, recklessness would not be sufficient for the court to find the required willfulness and malice.
The Bank argues that even an omission or a failure to act can constitute willful and malicious behavior. It relies on Petralia v. Jercich (In re Jercich) in support of its position. 238 F.3d 1202 (9th Cir.2001). In that case the Ninth Circuit found that an employer’s failure to pay his employee’s wages amounted to willful and malicious behavior that was excepted from discharge. Id. at 1208-09. The employer in that case decided to spend the employee’s wages on personal investments rather than pay the employee. Id. at 1204. The court does not find the facts in that case to be analogous to this case. In Petralia, the employer “willfully” chose not to pay the employee’s wages. Id. at 1207. In contrast, in Davis v. Vestal (In re Vestal) also cited by the Bank, the court concluded that a debtor’s failure to return voucher payments to which he was not entitled, where there was no evidence indicating the debtor was aware he was receiving payments to which he was not entitled, constituted a negligent omission and not willful and malicious behavior. 256 B.R. 326 (Bankr.M.D.Fla.2000). The court finds the Debtors’ failure to remove Mr. Hixon from the house in order to protect the residence to be, at most negligent, but not willful and malicious behavior.
In one case in this Circuit that bears some similarity to the issues present in this adversary proceeding, the bankruptcy court addressed whether the acts of the defendant debtors were willful and malicious where the debtors’ children and their friends damaged the plaintiff landlord’s property. O’Brien v. Sintobin (In re Sintobin), 253 B.R. 826 (Bankr.N.D.Ohio *2572000). In that case the debtors’ children and their friends caused $3,500 worth of damage to the plaintiffs rental property by spraypainting walls, knocking holes in walls, and tearing doors off of hinges. Id. at 829. The court first noted that nondis-chargeability pursuant to § 523(a)(6) requires willful and malicious behavior by the debtor. Id. at 830. The court explained:
under the plain meaning of § 523(a)(6), it must be the debtor who acts in both a willful and malicious manner in causing an injury to another entity or the property of another entity. As a result of this requirement, it has been universally held that a person’s willful and malicious actions cannot be imputed to another person for the purpose of holding that debt nondischargeable under § 523(a)(6). Moreover, this principle has been specifically applied so that willful and malicious actions undertaken by a child are not imputed to the child’s parents. Thus, parents who are merely negligent in supervising their children are still entitled to have any liability arising from such negligent supervision discharged in bankruptcy.
Notwithstanding this principle, there is no direct requirement under § 523(a)(6) that a debtor actually be the entity which physically occasions the actual damages to the person or property. Thus, any debtor who seeks or encourages another person to commit a willful and malicious act would not, for purposes of § 523(a)(6), be entitled to have any liability arising therefrom discharged in bankruptcy. Further, the types of encouragement which may lead to a finding of nondischargeability under § 523(a)(6) can range from overt encouragement to simply an omission, if such an omission was calculated by the debtor in a willful and malicious manner to cause injury.
Id. at 830 (citations omitted). In applying the described principles to the case before it, the court examined the relevant circumstantial evidence and concluded that the debt was nondischargeable, noting that: the children flagrantly damaged the plaintiffs property on numerous occasions; the debtors did not discipline the children seriously enough; the debtors failed to repair the damage or notify the plaintiff in violation of Ohio law; and the damage occurred when the relationship between the parties was unraveling. Id. at 831. The court found that the collective evidence, as well as the lack of debtors’ remorse and their “complete apathy” “both influenced and encouraged their children and their friends to commit acts of vandalism against the house, and that the end result was intended by the” debtors. Id.
The court concludes that the behavior of the Debtors is easily distinguished from the behavior of the debtors at issue in In re Sintobin. 253 B.R. 826. In that case the debtors and their landlord had a deteriorating relationship; the debtors’ children damaged the landlord’s property on several occasions and the debtors did not discipline them seriously enough; and the debtors failed to repair the property or notify the landlord in violation of state law. Id. at 831.
In contrast, in this case, the Debtors first had notice of Mr. Hixon’s behavior on October 16, 2010, after they filed their second amended plan on September 27, 2010 and after the 341 meeting held on October 13, 2010. [Bankr. Case No. 10-13181, Doc. Nos. 22, 23, 26]. At that time, Mr. Hixon vehemently denied making methamphetamine in the home, but rather confessed to creating “speed.” The Debtors testified that they did not understand that “speed” was another term for methamphetamine. Regardless of the type of *258drug being made, they required that the actions stop. They believed Mr. Hixon when he said he would dispose of the drug-manufacturing equipment and discontinue his drug operation. Mr. Hixon testified that he did until they moved out. There is no evidence to the contrary in the record.
It was not until the Debtors returned to the home on November 8, 2010 that they realized that Mr. Hixon was removing fixtures. They then surmised that he was pawning the fixtures to obtain drug money. The very next day, CPS and the Chattanooga Police Department raided the house and arrested Mr. Hixon. Even at the time they called, they had no actual knowledge that there had been drugs manufactured in the house for approximately a year or that the contamination would require over 50% of the house to be gutted. Even the professional cleaner thought the house was fit and failed the testing before the Bank employed a second cleaner and obtained the Certificate of Fitness almost a year after the remediation began. Trial Exs. 16,19, and 23.
The evidence in In re Sintobin, including such factors as the debtors’ lack of remorse when testifying at trial, suggested that the debtors were willful and malicious in encouraging their children to destroy the landlord’s property. 253 B.R. at 831. In this case there is no evidence that indicates the Debtors encouraged or supported Mr. Hixon’s activities in any way. To the contrary, they maintained the home and made efforts to ensure that the home was not stripped before the foreclosure. They did not deceive the Bank in their bankruptcy plans, nor did they understand there was any damage until after the police raided the home and discovered a the methamphetamine laboratory. There is no evidence that they were aware of the scope of the damage until the remediation testing was conducted.
The court concludes that the Bank has failed to sustain its burden of proof regarding evidence of the Debtors’ willful and malicious behavior. The evidence at trial did not indicate that the Debtors engaged in any conduct required for a finding of malice. See In re Wierenga, 431 B.R. at 185. The Bank’s request that the deficiency arising from the reduction in the value of the residence and the costs of remediation be determined to be nondis-chargeable debt pursuant to 11 U.S.C. § 523(a)(6) will be DENIED.
3. Enforcement of Deed of Trust
In its Complaint the Bank seeks enforcement of the Deed of Trust although it did not argue for any special relief related to this count at trial. It asserts that the Note on the loan to the Debtors secured by the home is “in default by reason of non-payment as well as other breaches of contract and said indebtedness has been accelerated and is presently due and payable in full” and that “the Defendants are not due any further credits or offsets and the Defendants are liable for all amounts due and owing.” Complaint, ¶¶ 36-37. It further asserts that it is entitled to recover its attorneys’ fees and costs in accordance with the Note and Deed of Trust.
The Balloon Note secured by the Collateral states the following:
(B) Default
If I do not pay the full amount of each monthly payment on the date it is due, I will be in default.
(C) Notice of Default
If I am in default, the Note Holder may send me a written notice telling me that if I do not pay the overdue amount by a certain date, the Note Holder may require me to pay immediately the full amount of Principal which has not been paid and all the interest that I owe on *259that amount. That date must be at least 30 days after the date on which the notice is mailed to me or delivered by other means.
(D) No Waiver By Note Holder
Even if, at a time when I am in default, the Note Holder does not require me to pay immediately in full as described above, the Note Holder will still have the right to do so if I am in default at a later time.
(E) Payment of Note Holder’s Costs and Expenses
If the Note Holder has required me to pay immediately in full as described above, the Note Holder will have the right to be paid back by me for all of its costs and expenses in enforcing this Note to the extent not prohibited by applicable law. Those expenses include, for example, reasonable attorneys’ fees.
[Doc. No. 1-2, p. 2, ¶ 6; Trial Exhibit 1], In addition, the Deed of Trust states:
Preservation, Maintenance and Protection of the Property; Inspections. Borrower shall not destroy, damage or impair the Property, allow the Property to deteriorate or commit waste on the Property. Whether or not Borrower is residing in the Property, Borrower shall maintain the Property in order to prevent the Property from deteriorating or decreasing in value due to its condition. Unless it is determined pursuant to Section 5 that repair or restoration is not economically feasible, Borrower shall promptly repair the Property if damaged to avoid further deterioration or damage. If insurance or condemnation proceeds are paid in connection with damage to, or the taking of, the Property, Borrower shall be responsible for repairing or restoring the Property only if Lender has released proceeds for such purposes. Lender may disburse proceeds for the repairs and restoration in a single payment or in a series of progress payments as the work is completed. If the insurance or condemnation proceeds are not sufficient to repair or restore the Property, Borrower is not relieved of Borrower’s obligation for the completion of such repair or restoration.
[Doc. No. 60-1, Trial Ex. 2].
The Bank contends that the Debtors breached the Deed of Trust by failing to notify it of the hazard to the value of the home and by failing to preserve the home’s value. However, as discussed supra, the evidence at trial indicates that the Debtors did not understand the scope of the damage until after November 9, 2010 when the police discovered the working methamphetamine lab. At that point, the court had granted the Bank’s motion for relief from the stay, and the court had confirmed the second amended bankruptcy plan. [Bankr. Case No. 10-13181, Doc. Nos. 27, 29]. Therefore, the court concludes that the Debtors did not know to inform the Bank of any damage to the residence prior to the Bank’s receiving relief from the automatic stay. In essence, the evidence indicates that the Debtors understood the magnitude of the damage at the same time the Bank did, upon receipt of the Notice of Quarantine from the State of Tennessee. The court finds no claim exists for failure to notify.
The court does find that the Debtors are responsible for the damages to the residence under the preservation provision. To the extent that the Bank is seeking to have its expenses for remediation and attorney’s fees and the loss of value due to the remediation and “meth lab stigma” allowed as part of its claim, the court will GRANT this claim and allow those damages as part of the Bank’s unsecured deficiency claim.
*2604. Post-Petition Claims for Remediation Costs and Attorneys’ Fees
The Bank also argued for the first time in its pretrial brief that its costs for remediating the home and its attorney’s fees are not dischargeable because they are unscheduled post-petition debts. In In re Cleveland the bankruptcy court addressed whether a post-petition proof of claim filed by a mortgage holder for escrow payments which accrued post-petition and which it had made for the debtor were dischargeable. 349 B.R. 522 (Bankr. E.D.Tenn.2006). In that case the plan did not provide for post-petition claims, as is the case in the Debtors’ plan. Id. at 527. The court needed to determine when the claim actually arose — post-petition as argued by the mortgage holder — or pre-petition. Id. at 528. It noted that courts have used three approaches when determining when a claim arises: “(1) the accrued state law claim approach; (2) the conduct approach; and (3) pre-petition relationship approach.” Id.
After reviewing the. case law adopting the three approaches, the bankruptcy court adopted the third approach, the pre-petition relationship/ “fair contemplation” approach. Id. at 531. It defined the question in the following way:
[a] claim is a pre-petition claim within the scope of § 101(5)(A) if there was a relationship, existing pre-petition, between the debtor and the creditor such that the creditor could fairly contemplate the possibility of a claim against the debtor’s bankruptcy estate at the time that the bankruptcy petition was filed.
Id.
The court then determined that because the mortgage holder always had a right to payment of the debtor’s escrow payments, its post-petition amounts were really based on a pre-petition right to payment. Id. The court found that “the escrow payments advanced by [the mortgage holder] after the Debtor commenced his bankruptcy case are, in fact, pre-petition obligations that matured post-petition, but nonetheless arose pre-petition such that they are covered within the definition of claim set forth in § 101(5)(A).” Id. at 533. It further determined that the claim was disallowed because the mortgage holder was bound by the terms of the confirmed plan which did not include the escrow payments. Id. at 534. The court also determined that “[a]doption of the ‘fairly contemplated test’ was the best way to balance the Code’s fresh start policy, on the one hand, .and its measured hostility to fraud, on the other.” Id. at 530.
In In re Huffy Corp. the court addressed “the proper characterization of [the plaintiffs] claim for indemnification against [the debtor] as a prepetition claim discharged in [the debtor’s] bankruptcy cases or a post-confirmation claim that is not discharged ...” In re Huffy Corp., 424 B.R. 295, 297 (Bankr.S.D.Ohio 2010). There, the plaintiffs claim was based on the pre-petition sale of a product that the debtor sold at one of the plaintiffs stores pursuant to a pre-petition agreement that included an indemnification provision. Id. The tort liability relating to the faulty manufacturing of the debtor’s product did not occur until post-petition, and the debt- or and the plaintiff did not receive notice of the injury until after confirmation of the debtor’s plan. Id. As in In re Cleveland, the court noted that the Sixth Circuit has not selected one of the approaches, and the court reviewed the three approaches to determining accrual of a claim. It determined that under any of the three approaches, the plaintiffs claim was a pre-petition claim. Id. at 305. The court found that the manufacturing and sale of the defective product, as well as the in*261demnification agreement all occurred pre-petition. It noted that “courts facing similar facts have almost universally held that a contractual right to indemnification is a prepetition contingent claim if the contract was executed before the bankruptcy filing.” Id. at 305.
The Debtors and the Bank had a prepet-ition relationship. The Bank is relying on the provisions of its deed of trust executed by the Debtors prepetition to require the Debtors to preserve the property. The Bank relies on the deed of trust to charge the Debtors for any expenses the Bank incurs if the Debtors fail to comply. Trial Ex. 2, p. 7, ¶¶ 7, 9 (deed of trust contemplates that any expenses of the Bank taken to protect its rights to preservation “shall become additional debt of Borrower secured by” the deed of trust). Therefore, the Bank contemplated that there was a risk of a substantial, if not complete, loss of its property. The deed of trust gives the Bank an option of not rebuilding if there is a determination that restoration is not economically feasible. Id. at ¶ 5. The claims arising from remediation were within the fair contemplation of the parties. Further, the court finds that the provision allowing the Bank to charge for its expenses is similar to the indemnification provisions which are almost “universally” held to be pre-petition claims. See In re Huffy Corp., 424 B.R. at 305. In this case, the contingent claim has matured and been liquidated.
Finally, because the court has found that the claim did not arise as a result of fraud or malicious or willful injury by the Debtors, the court need not consider whether the application of the fair contemplation test in this case fails to balance fairly the policies in favor of a fresh start against those of preventing fraud.
B. Debtors’ Counterclaims
The Debtors’ amended counterclaim seeks damages for conversion and destruction of property. Under Tennessee law:
[conversion is the appropriation of tangible property to a party’s own use in exclusion or defiance of the owner’s rights. Conversion is an intentional tort, and a party seeking to make out a prima facie case of conversion must prove (1) the appropriation of another’s property to one’s own use and benefit, (2) by the intentional exercise of dominion over it, (3) in defiance of the true owner’s rights.
Property may be converted in three ways. First, a person may personally dispossess another of tangible personalty. Second, a person may dispossess another of tangible property through the active use of an agent. Third, under certain circumstances, a person who played no direct part in dispossessing another of property, may nevertheless be liable for conversion for “receiving a chattel.”
H & M Enterprises, Inc. v. Murray, No. M1999-02073-COA-R3-CV, 2002 WL 598556, at *3 (Tenn.Ct.App. April 17, 2002) (citing Kinnard v. Shoney’s Inc., 100 F.Supp.2d 781, 797 (M.D.Tenn.2000); Mammoth Cave Prod. Credit Ass’n v. Oldham, 569 S.W.2d 833, 836 (Tenn.Ct.App. 1977)) (other citations omitted); see also, Hanna v. Sheflin, 275 S.W.3d 423, 427 (Tenn.Ct.App.2008). In Kinnard the court explained that “[i]n order to establish conversion, the plaintiffs must show that ‘the defendant ... had an intent to exercise dominion and control over the property that is in fact inconsistent with the plaintiffs’ rights, and did so.’ ” 100 F.Supp.2d at 797-98 (citing Oldham, 569 S.W.2d at 836).
The proof at trial demonstrated that the Bank repeatedly informed the Debtors, *262through their counsel, that they needed to make arrangements to have the personal property that they wanted to keep cleaned. The Bank had no legal right to release the property to the Debtors after the house and its contents had been quarantined. However, the Bank has failed to provide the court with any authority that it had the legal right to direct its agent to destroy the personal property. ServPro was retained by the Bank. Mr. Brown was the agent who worked with the Bank on this matter. Mr. Hansen testified that Mr. Brown told him he would let him know before anything was destroyed. Mr. Brown failed to do so. When Mr. Hansen confronted Mr. Brown about Mr. Brown’s promise, Mr. Brown responded that the Bank told him that there was no time to wait.
The Bank attempts to create its authority to direct the destruction of the personal property through a series of letters and emails. The letters from the Bank’s attorney to the Debtors’ attorney began in December of 2010. In that letter, the Bank acknowledges that it “does not have a security interest or ownership interest in any of [the Debtors’] personal property.” Trial Ex. 25 at 1. The Bank’s attorney further states that if he does not have the name of the party the Debtors selected to do the cleaning, he “will assume that [the Debtors are] abandoning it....” Id. In January, the Bank’s attorney wrote that the Bank denied that it would pay for any storage or testing of the personal property. He assumed that the property would be destroyed and stated that the Bank disavowed any responsibility for that destruction. Id. at p. 3. The final communication was sent on February 3, 2011 regarding how the Debtors should take steps to preserve any personal property contained in their residence. Id. at pp. 4-6. It did not give a specific date for the destruction of the personal property.
The Debtors did contact the individual whom the Bank instructed them to contact, Steve Brown with ServPro, in an attempt to coordinate retrieval of certain personal items. The Debtors had been in contact with Mr. Brown prior to this time. Mr. Hansen had spotted his van at the house when Mr. Brown was preparing his bid and had stayed in touch with him. They had been negotiating the cost of the remediation and had even discussed specific items for salvage. The Debtors admit they never reached an agreement with Mr. Brown, but Mr. Hansen believed that he would have an additional opportunity to do so before the final date for destruction was selected. There is no evidence that the Debtors gave any indication that they wanted to abandon the personal property, only that they were having trouble affording what Mr. Brown wanted to charge. At trial Mr. Hansen testified that the Bank had instructed Mr. Brown to dispose of the personal property. R. Hansen Test., March 14, 2012 at 2:07-2:08 p.m.
No witness from the Bank confirmed or denied this statement. The letter which the Debtors admit receiving, clearly did not make any promises with respect to the protection of the personal property and urged the Debtors to employ someone to clean the property that they wanted to keep. Trial Ex. 25. However, the letters also clearly indicate that the Bank did not have any right to the personal property and that it was aware that the Debtors wanted information about who was cleaning the property for the Bank so that they could contact him. Mr. Brown was certainly aware of the Debtors’ continued interest in their property, and he took his instructions from the Bank about proceeding.
The Debtors admit they never hired anyone to remediate the property *263and had only hoped that they could work something out with Mr. Brown. The Bank argues that this failure amounts to abandonment. The definition of abandonment is the “voluntary relinquishment [of property] by its owner or holder, with the intention of terminating his or her ownership, possession, and control, and without vesting ownership in any other person. 1 C.J.S., Abandonment § 1 (2011).” Jefferson County v. Smith, No. E2009-02674-COA-R3-CV, 2011 WL 3062010, at *11 (Tenn.Ct.App. July 26, 2011). The burden of proving abandonment is upon the party asserting it. The abandonment must be established by clear and unequivocal evidence of decisive and conclusive acts. Ja-coway v. Palmer, 753 S.W.2d 675, 679 (Tenn.Ct.App.1987). Here there was no intent and no “decisive and conclusive act” by the Debtors to abandon their personal property. It appears the Bank tired of waiting and instructed its agent to proceed with the cleaning and to destroy whatever needed to be destroyed to do so. This act was an intentional act in violation of the Debtors’ interest in the personal property for the Bank’s benefit. The court finds that the Debtors have proven the elements of conversion, but they must also prove their damages.
The Hansens seek the market or actual value of the property they allege was converted. At trial the evidence presented by the Debtors demonstrated a value of $6000 for the personal property that could be valued, although a substantial portion of the property destroyed had no market value, only significant personal value. Examples of these items included family photographs and memorabilia from their children’s early years. These values did not include any reduction for contamination.
To the extent that the items included draperies, wooden blinds or a comforter set, Mr. Brown testified that porous materials generally could not be cleaned. He also testified that some nonporous items like a pinball machine or a computer could be so contaminated internally as not to be salvageable. The Debtors offered no proof that the items on their list were capable of remediation or whether the cost of remediate exceeded the value of the items. To the extent that they were destroyed as a result of the contamination, the damages the Debtors sustained were not caused by the Bank’s conversion. It is the Debtors’ burden to prove their damages. See e.g., In re Clark, 206 B.R. 439, 441 (Bankr. W.D.Ky.1996) (citing 18 Am.Jur.2d CONVERSION § 2, pages 146-47 (2d ed. 1996)). Since they have not carried their burden as to the damages, the court will DENY the Debtors’ counterclaim.
IV. Conclusion
The Bank’s request for revocation of the confirmation order will be DENIED. The court finds that the Debtors were unaware of the operation of the methamphetamine lab in their residence and that their motivation to surrender the residence was not motivated by a desire to return it before the damage caused by the methamphetamine lab was discovered.
The court finds that there was significant damage done to the residence, but that it was not done by the Debtors. Further, the court finds there was no intention on the part of the Debtors to allow Mr. Hixon to injure the property; therefore, the Bank’s request to deny the discharge-ability of the losses caused by manufacture of methamphetamine in the residence will be DENIED.
The court finds that the Bank does have a claim for damages in the amount of $344,809.62, reduced by any amount which the Bank recovers in excess of $100,000 from the foreclosure sale. The Bank’s *264claim is a prepetition claim which may be filed in the Chapter 13 case and which may be discharged by completion of the Debtors’ plan.
Finally, the Bank authorized the destruction of the Debtors’ personal property, but the Debtors have failed to prove the value of that property after contamination. The Debtors’ counterclaim will be DENIED.
A separate order will enter. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494782/ | MEMORANDUM
JOHN C. COOK, Bankruptcy Judge.
This adversary proceeding is before the court on the parties’ cross-motions for summary judgment, regarding the plaintiffs assertion that certain severance payments made by the debtor to the defendant are avoidable as fraudulent transfers. The defendant’s motion also seeks summary judgment on the plaintiffs assertion that the payments are avoidable as preferential transfers. Having reviewed the motions, briefs, statements of undisputed material facts, stipulation of the parties, and plaintiffs affidavit, the court will grant the defendant’s motion and deny the plaintiffs motion.
I.
The record reveals the following undisputed material facts. The defendant was hired by the debtor as its Chief Executive Officer and President pursuant to an Employment, Confidentiality, Invention Assignment and Trade Secret Protection Agreement (the “Employment Agreement”) that was signed on October 24, 2008, by the defendant and the Chairman of the debtor’s Board of Members. Section 8(a) of the Employment Agreement provided for a base salary of $250,000 per year, and Section 4(b) of the Employment Agreement provided that, if the defendant was terminated without cause, he would be entitled to continue receiving his Base Salary for six months if he signed and complied with a release of the employer and did not apply for unemployment compensation:
If the Employment Period is terminated by the Company without Cause, Executive shall be entitled to continue to receive his Base Salary payable in regular installments as special severance payments (the “Severance Payments ”) for a period of six (6) months following the date of termination (the “Severance Period ”), if and only if Executive (i) has promptly, subject to applicable law, executed and delivered to the Company a general release of all claims against Parent, the Company, Parent’s other Subsidiaries and their respective directors, *266officers and affiliates containing such terms as are customary and commercially reasonable for such a general release provided in the context of an employee separating from an employer (provided that in any event such general release shall provide for a complete and unconditional release of all claims by Executive, including without limitation claims that are unknown or unsuspected) and such general release has become effective, and only so long as Executive has not revoked or breached the provisions of the general release or materially breached any of the provisions of Sections 5 through 11 herein and (ii) does not apply for unemployment compensation chargeable to the Company during the Severance Period.
The defendant also became a member of the limited liability company’s Board of Members in October 2008, after his employment had commenced.
On March 9, 2010, the debtor’s Board of Members notified the defendant that it was terminating him without cause, and the debtor and the defendant signed a Separation Agreement dated as of that date. Section 2(b) and (c) of that agreement provide in relevant part:
(b) Severance. In accordance with Section 4(b) of the Employment Agreement, but subject to the terms and conditions set forth in Section 2(c), beginning on the Separation Date and continuing as set forth below Executive shall be entitled to receive the following severance payments and other benefits (collectively, the “Severance Benefits”):
(i) An aggregate amount equal to $125,000 as special severance payments, which shall be payable in regular, ratable installments over a period of 6 months (the “Severance Period ”) commencing on the Separation Date in accordance with the normal payroll practices of Incentium as in effect on the Separation Date, but in no event less frequently than monthly.
(c) Conditions Regarding Severance Benefits. Executive shall be entitled to receive the Severance Benefits set forth herein during the Severance Period (A) if and only if (x) Executive has executed and delivered to the Company a general release in the form of Exhibit A attached hereto (the “Release ”), which Release shall be incorporated as if fully set forth herein, and (y) the Release has become effective and is no longer subject to revocation no later than on the 60th day immediately following the Separation Date, and (B) only so long as Executive has not (w) revoked or breached (including, without limitation, by bringing any Claim, as defined therein) the Release, (x) breached any provision of this Agreement, (y) materially breached any of the provisions of Sections 5 through 11 of the Employment Agreement or (z) applied for unemployment compensation chargeable to the Company during the Severance Period. Executive shall automatically forfeit all of his rights to Severance Payments in the event Executive fails to satisfy any of the conditions set forth in clause (A) or (B) of the immediately preceding sentence.
Section 11(b) of the Separation Agreement reads:
Complete Agreement. This Agreement and those agreements expressly referred to herein embody the complete agreement and understanding among the parties and supersede and preempt any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in *267any way (including, without limitation, all provisions of the Employment Agreement that become automatically terminated upon termination of the Employment Period). For the avoidance of doubt, this Agreement does not supersede, preempt, modify or terminate any of the Restrictive Covenants, except as specified in Section 4 above, nor does this Agreement supersede, preempt, modify or terminate the Motivus Holdings, LLC Indemnification Agreement entered into between Executive and Holdings on December 18, 2008.
The defendant has admitted, for the purposes of the present motions, that the debtor’s books and records reflect that it was insolvent from February 2010 forward.
The defendant did not render any benefit or service to the Debtor after the date of the Separation Agreement. The parties agree that the minimum amount of severance pay received between March 9, 2010, and September 17, 2010, was $104,810.36.1 The defendant also received vacation pay of $10,096.80, and the plaintiff also contends that the defendant received back pay totaling approximately $12,000.00.
On February 10, 2011, an involuntary petition for relief under chapter 7 of the Bankruptcy Code was filed against the debtor, and an order for relief was entered on March 8, 2011. On September 29, 2011, the plaintiff filed the complaint initiating this adversary proceeding, which seeks to avoid the Separation Agreement as a fraudulent obligation, and to avoid the severance payments as fraudulent transfers and as preferential transfers. On April 2, 2012, the parties filed cross-motions for summary judgment, which address the avoidability of the Separation Agreement and of the severance payments to the extent of $104,810.36.
II.
A party is entitled to summary judgment if “the movant shows that there is no genuine issue as to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Bankr.P. 7056; Fed.R.Civ.P. 56(a). When deciding a motion for summary judgment, the court will construe all reasonable inferences in favor of the non-moving party. Waeschle v. Dragovic, 576 F.3d 539, 543 (6th Cir.2009) (citing Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986)). Where the evidence would permit a reasonable jury to return a verdict for the non-moving party, a genuine issue of material fact exists and summary judgment must be denied. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
In the face of a summary judgment motion, the nonmoving party may not rest on its pleadings, but must come forward with some probative evidence to support its claim. Celotex v. Catrett, 477 U.S. 317, 325, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); 60 Ivy St. Corp. v. Alexander, 822 F.2d 1432, 1435 (6th Cir.1987) (holding that non-moving party must present “some significant probative evidence which makes it necessary to resolve the parties’ differing versions of the dispute at trial”). In the words of Rule 56(c)(1) of the Federal Rules of Civil Procedure, “[a] party asserting that a fact ... is genuinely disputed must support the assertion by ... citing to particular parts of materials in the record ... or ... showing that the materials cited do not establish the absence ... of a genuine dispute, or that an adverse party can*268not produce admissible evidence to support the fact.”
III.
A.
The plaintiff seeks recovery in this proceeding pursuant to § 548(a)(1)(B) of the Bankruptcy Code, which provides, in pertinent part:
The trustee may avoid any transfer (including any transfer to or for the benefit of an insider under an employment contract) of an interest of the debtor in property, or any obligation (including any obligation to or for the benefit of an insider under an employment contract) incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily—
(B)(i) received less than reasonably equivalent value in exchange for such transfer or obligation; and (ii) (I) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation;
(IV) made such transfer to or for the benefit of an insider, or incurred such obligation to or for the benefit of an insider, under an employment contract and not in the ordinary course of business.
The plaintiffs motion for summary judgment seeking to avoid the $104,810.36 in severance payments is predicated on clause (IV) of § 548(a)(l)(B)(ii), which does not require insolvency of the debtor at the time the relevant obligation was incurred or the transfer was made. In moving for summary judgment, the plaintiff seeks to avoid both the severance obligation in the Separation Agreement and the subsequent transfers of severance pay to the defendant. The defendant argues that the plaintiff cannot prevail under § 548(a)(1)(B)(ii)(IV) because (1) the severance obligation in the Separation Agreement was the same as the severance obligation set forth in the Employment Agreement and otherwise satisfied the reasonably equivalent value requirement in the statute, (2) the original severance obligation in the Employment Agreement cannot be avoided because the defendant was not an insider at the time the obligation was incurred, (3) the defendant was not an insider when the severance payments were made, and (4) the severance obligation was incurred and the severance payments were made in the debtor’s ordinary course of business. The defendant further argues that he is entitled to summary judgment under § 548 because (i) the plaintiff cannot avoid the original severance obligation, (ii) the subsequent transfers of severance pay to the defendant satisfied an unavoidable, antecedent debt of the debtor, and (iii) the plaintiff has no evidence that the transfers were not in exchange for reasonably equivalent value. Because it appears that the principal issue in this proceeding is whether the debtor’s severance pay obligation to the defendant can be avoided by the plaintiff, it is to that issue that the court first turns.
B.
The severance obligation can be found in both the original Employment Agreement and the subsequent Separation Agreement. Obviously, the severance obligation in the Employment Agreement is not avoidable under § 548 because the Employment Agreement was executed more than two years prior to the debtor’s *269bankruptcy filing.2 The plaintiff argues, however, that it is the severance obligation in the Separation Agreement, not the severance obligation in the Employment Agreement, that he is seeking to avoid under the provisions of § 548(a)(l)(B)(ii)(IV). His argument thus essentially ignores the severance obligation contained in the Employment Agreement.
Section 4(b) of the Employment Agreement provided for severance pay in the form of the continuation of the defendant’s Base Salary for six months if he signed and complied with a release of the employer and did not apply for unemployment compensation, and the defendant’s Base Pay was $250,000 per year so the six months of severance pay would total $125,000. Section 2(b)(i) of the Separation Agreement provided for severance pay of $125,000, payable in monthly installments over a six-month period, and Section 2(c) sets forth the same conditions to the defendant’s receipt of the severance benefits. Indeed, Section 2(b) of the Separation Agreement makes clear that the “Executive shall be entitled to receive the following severance payments and other benefits” “[i]n accordance with Section 4(b) of the Employment Agreement.” While the Separation Agreement supplemented Section 4(b) of the Employment Agreement, the latter was explicit regarding the defendant’s rights upon termination without cause, and the Separation Agreement effected no substantive change to those rights, at least insofar as severance pay is concerned. See Fanucchi & Limi Farms v. United Agri Prods., 414 F.3d 1075, 1081-85 (9th Cir.2005). Moreover, the section in the Separation Agreement entitled “Complete Agreement” provided that “[t]his Agreement and those agreements expressly referred to herein embody the complete agreement and understanding among the parties and supersede and preempt any prior understandings, agreements or representations by or among the parties written or oral, which may have related to the subject matter hereof in any way (including, without limitation, all provisions of the Employment Agreement that become automatically terminated upon termination of the Employment Period).” (Separation Agreement § 11(b) (emphasis added).) As noted, one of the agreements expressly referred to in Section 2(b) of Separation Agreement was the agreement for severance pay “in accordance with Section 4(b) of the Employment Agreement.” Thus, it does not appear that the severance obligation in the Employment Agreement was extinguished or changed by the Separation Agreement, but rather it was incorporated into it.3 Accordingly, the *270Separation Agreement did not create a new obligation that may be avoided under 11 U.S.C. § 548(a)(1)(B).
The facts in this proceeding differ markedly from the facts in TSIC, Inc. v. Thal-heimer (In re TSIC, Inc.), 428 B.R. 103 (Bankr.D.Del.2010), a case upon which the plaintiff places primary reliance. In TSIC, the defendant and the debtor had entered into an Employment Agreement providing that the defendant would receive $850,000 in base salary, a retirement package, and a severance package upon termination of the defendant’s employment regardless of cause. Within two years of the debtor’s bankruptcy filing, the debtor and defendant entered into a Settlement Agreement providing for the defendant to receive $1,775 million in severance, $3.9 million in SERP benefits, $300,000 in secretarial and office allowances, and up to $800,000 in reasonable attorneys fees in negotiating the Settlement Agreement. A condition of the Settlement Agreement was the defendant’s resignation and waiver of future claims against the debtor. The debtor in TSIC sought to avoid both the payment obligations set forth in the Settlement Agreement and the subsequent transfers of the payments to the defendant. In granting the trustee’s motion for summary judgment under the provisions of § 548(a)(l)(B)(ii)(IV), the court stated that avoidance of the underlying severance obligation was not time barred because the debtor’s obligation to pay the defendant arose on the date of the Settlement Agreement, which was within two years of the bankruptcy filing. The court held that the debtor could avoid the underlying severance obligation in the Settlement Agreement, “thereby effectively eliminating the debt.” Id. at 115. Moreover, the court said that, “[b]ecause no debt existed, Debt- or’s transfer of [the defendant’s] severance payment was for less than reasonably equivalent value” and thus the subsequent transfers to the defendant could be avoided. Id. The court concluded that the debt- or could avoid the severance obligation in the Settlement Agreement, which was not time-barred, even though there was a preexisting settlement obligation in the Employment Agreement, which was time-barred, because the severance obligation in the Settlement Agreement differed materially from the nondescript severance obligation in the Employment Agreement and the debtor did not otherwise receive reasonably equivalent value for the Settlement Agreement’s severance obligation. The court specifically noted that, “[although the Employment Agreement contemplated ‘severance payments’ and ‘SERP benefits,’ the details of these benefits were not finalized at the time the parties signed the Employment Argument [sic ].” Id. at 114. Such a circumstance is not present here. In this case, Section 4(b) of the Employment Agreement set forth in detail the parties’ rights upon termination and the severance obligation was not materially changed in the Separation Agreement but rather was incorporated into it.
Another case cited by the plaintiff in support of his motion for summary judg*271ment is Stanley v. U.S. Bank National Association (In re TransTexas Gas Corp.), 597 F.3d 298 (5th Cir.2010). The facts in that case are also distinguishable from the facts presented here. In TransTexas Gas Corp., the defendant was the former CEO of the debtor corporation. His original employment agreement provided that, if the debtor terminated the defendant without cause his severance payment would be $3 million, if he were terminated with cause his payment would be $1.5 million, and if he voluntarily resigned he would not receive any severance payment. Subsequently, the debtor’s board of directors hired a law firm to investigate allegations of wrongdoing by the defendant and the law firm’s report concluded that the defendant could be validly dismissed for cause. However, the report also stated that, if the defendant brought a lawsuit against the debtor contesting his termination, the result would be uncertain. Thereafter, and within two years of filing a chapter 11 bankruptcy petition, the debtor and defendant entered into a Separation Agreement wherein the debtor agreed to pay the defendant severance pay in the amount of $3 million if the defendant resigned. The defendant resigned and was paid $2,270,794.90 by the debtor before the payments ceased. During the ensuing chapter 11 case, the debtor obtained confirmation of a chapter 11 liquidating plan, and the liquidating trustee sought recovery under § 548 of the severance payments that the debtor made to the defendant. After a trial, the bankruptcy court found that the defendant’s departure was a voluntary resignation and that he was not entitled to any severance pay. On appeal, the district court disagreed and concluded that the defendant’s resignation was “part and parcel of the Separation Agreement, which created the right to severance pay if he resigned.” Id at 307. The district court nevertheless concluded that the debtor did not receive reasonably equivalent value for the $3 million severance obligation in the Separation Agreement and thus it agreed that the severance payments to the defendant were fraudulent transfers pursuant to § 548(a)(1)(B)(ii)(IV).
The appellate court affirmed the district court’s factual conclusion that the debtor did not receive reasonably equivalent value for the severance obligation in the Separation Agreement because, at the time that obligation was created, the debtor had evidence of good cause to terminate the defendant from his employment. The Fifth Circuit stated:
TransTexas did not receive reasonably equivalent value for providing [the defendant] greater compensation than required by the terms of the Employment Agreement. The district court agreed that even under the most favorable circumstances, [the defendant] could only have been entitled to $1.5 million under the Employment Agreement, basing that on the conclusion that there was good cause for terminating him.
Id at 307-08. The court concluded that the obligation in the Separation Agreement and the subsequent transfers to the defendant could be avoided under § 548(a)(l)(B)(ii)(IV). Notably, the Fifth Circuit stated that the issue before it was not the validity of the earlier Employment Agreement. Id at 306-07. Rather, the issue was whether the severance obligation created by the Separation Agreement was incurred in exchange for reasonably equivalent value. Because that obligation, created within two years of the bankruptcy filing, provided more to the defendant than was required by the terms of the original Employment Agreement, the court affirmed the district court’s conclusion that the debtor did not receive reasonably equivalent value for that new obligation. The court went on to say that, “[h]ad [the *272defendant] and the company not engaged in the transfer that has been declared fraudulent under Section 548, they may have agreed on a lesser amount that would represent a reasonable severance payment.” Id. at 310.
In the present proceeding, there was not a new, unreasonable severance obligation created in favor of an insider within two years of the debtor’s bankruptcy filing. Rather, the severance obligation in the Separation Agreement was the same severance obligation created by the original Employment Agreement and was part of the overall compensation package negotiated to hire the defendant as the debtor’s CEO. It is certainly not unusual for an employment contract designed to attract a high level executive to contain a severance obligation in the event that the executive is terminated without cause. The severance obligation in this proceeding, representing six months of the defendant’s regular salary, was created in the Employment Agreement on October 28, 2008, and, unlike the facts in TSIC and TransTexas Gas Corp., it was not changed to a different severance obligation within two years of the debtor’s bankruptcy filing that could be avoided on grounds that reasonably equivalent value was not received by the debtor. The severance obligation in this proceeding was created in the original Employment Agreement and it is not avoidable under the provisions of § 548(a)(1)(B)(ii)(IV).
It follows that the severance payments are not avoidable either. The transfers of severance pay to the defendant satisfied the prior, unavoidable severance obligation, so the debtor received “value” in exchange for the transfers. 11 U.S.C. § 548(d)(2)(A). Moreover, the plaintiff has not, in response to the defendant’s motion for summary judgment, offered any evidence that the value of the severance payments was not “reasonably equivalent” to the value of the severance obligation, which is an essential element of the plaintiffs case in chief. See In re Wilkinson, 196 Fed.Appx. 337, 341-43 (6th Cir.2006) (dollar-for-dollar reduction in debt to third party was reasonably equivalent value for the transfer). Accordingly, the defendant is entitled to summary judgment determining that the severance payments are not avoidable as constructively fraudulent transfers.
Because the undisputed material facts in this proceeding do not support the plaintiffs contention that the debtor failed to receive reasonably equivalent value in exchange for the severance payments, the defendant is entitled to summary judgment on the plaintiffs claims to avoid the transfers under both § 548(a)(1)(B)(ii)(I) and (IV). It is therefore unnecessary to consider the defendant’s other arguments that the defendant was not an insider at the time the transfers were made or that the transfers were in the ordinary course of the defendant’s business.
IV.
The defendant also seeks summary judgment on the plaintiffs cause of action for the avoidance of the severance payments as preferential transfers. In this regard, the defendant notes that the payments were not made within the 90-day period preceding the commencement of the debtor’s bankruptcy case, and asserts that the extended one-year preference look-back period does not apply because the defendant was not an insider at the times the payments were made. See 11 U.S.C. § 547(b)(4)(A), (B). The plaintiff responds that a transferee need not be an insider at the time the transfer was made, so long as he was an insider at the time the transfer is arranged, citing an early decision of this court in Jahn v. Economy Car Leasing, Inc. (In re Henderson), 96 B.R. 820, 824 *273(Bankr.E.D.Tenn.1989). That case did not resolve the insider issue presented here. In Economy Car Leasing, the court cited case law construing the preference statute as requiring “that insider status must be present at the time of the transfer, or at least at the time the transfer was arranged” Id. The court cited Chase Manhattan Bank, N.A. v. Dent (In re Trans Air, Inc.), 79 B.R. 947 (Bankr.S.D.Fla. 1987), and DeRosa v. Buildex Inc. (In re F & S Central Manufacturing Corp.), 53 B.R. 842 (Bankr.E.D.N.Y.1985), which held that insider status only had to exist at the time the transfer was arranged, but the court also cited McWilliams v. Gordon (In re Camp Rockhill, Inc.), 12 B.R. 829 (Bankr.E.D.Pa.1981), which held that insider status had to exist on the exact date of the challenged transfer. Economy Car Leasing, 96 B.R. at 824. It was not necessary to resolve the issue presented in those cases regarding the time insider status must exist, because the court found that the transferee in Economy Car Leasing was not an insider either at the time the transfers were arranged or at the times the transfers were made. Id. at 826.
Having now been presented with the precise issue of when insider status must exist for purposes of § 547(b)(4)(B), the court holds that the transferee must constitute an insider at the time the transfer was made, and that it is not enough that the transferee be an insider at the time the transfer was arranged. This holding is consistent with virtually all of the cases that have examined the issue in the last twenty years. Zucker v. Freeman (In re NetBank, Inc.), 424 B.R. 568, 571-72 (Bankr.M.D.Fla.2010). The court’s conclusion is based on a straightforward reading of the statute, which states that the extended preference period applies “if such creditor at the time of such transfer was an insider.” See, e.g., id.; Pummill v. McGivern (In re Am. Eagle Coatings, Inc.), 353 B.R. 656, 670 (Bankr.W.D.Mo. 2006). “The Supreme Court has made clear that statutes are to be construed according to their plain meaning unless to do so would be demonstrably at odds with Congressional intent or produce an absurd result.” Id. (citing Lamie v. U.S. Trustee, 540 U.S. 526, 534, 124 S.Ct. 1023, 157 L.Ed.2d 1024 (2004); United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989)).4
There is no genuine issue that the defendant was not an insider at the times the severance payments were made. Accordingly, the applicable preference reach-back period is 90 days, not one year. Because the payments were not made during the 90-day period preceding the commencement of the debtor’s bankruptcy case, the defendant is entitled to summary judgment on the plaintiffs preference cause of action.5
*274Y.
For the foregoing reasons, the court will enter an order granting the defendant’s motion for summary judgment and denying the plaintiffs motion. Because the foregoing analysis also disposes of the plaintiffs claims for the avoidance of any additional severance payments in addition to those to which the parties have stipulated, the court’s order will dismiss this adversary proceeding.
. The plaintiff asserts that the total amount of severance pay was in excess of $122,000, but seeks summary judgment only for the amount upon which the parties can agree.
. The defendant argues that he was not an insider when the Employment Agreement was signed, but that fact is immaterial since the Employment Agreement predated the bankruptcy filing by more than two years.
. The severance obligation in the Separation Agreement can be viewed either as an incorporation and continuation of the Employment Agreement's severance obligation or as a substitute obligation made in exchange for the severance obligation set forth in the Employment Agreement. Although it appears to the court that the language of the Separation Agreement incorporates and continues the severance obligation from the Employment Agreement, even viewing the obligation as a substituted obligation does not mean that the debtor failed to receive reasonably equivalent value for the exchange. Because the severance payment obligations under the two agreements were essentially identical, the value given in exchange for the severance obligation in the Separation Agreement was necessarily reasonably equivalent to the value of the severance obligation under the Employment Agreement. See Steinberg v. Johnson (In re Edward M. Johnson & Assocs., Inc.), 61 B.R. 801, 806 (Bankr.E.D.Tenn.1986) (transfer under stock purchase agreement having effect of relieving debtor of obligation to pay *270defendant preexisting salary obligation and bonus was exchange for reasonably equivalent value, noting that "the debtor's obligation to defendant under the employment agreement was discharged by the new undertaking set forth in the stock purchase agreement” and that stock purchase agreement "would embody all of what defendant was entitled to and expected to receive from the debtor corporation”), rev'd on other grounds sub nom. Newton v. Johnson (In re Edward M. Johnson & Assocs., Inc.), 845 F.2d 1395 (6th Cir.1988); see also Whitlock v. Max Goodman & Sons Realty, Inc. (In re Goodman Indus., Inc.), 21 B.R. 512, 520 (Bankr.D.Mass. 1982) (obligation under guaranty issued by debtor not avoidable absent proof of value of cross-guaranty of debt owed by debtor).
. The Supreme Court has also expressed a clear preference for bright-line approaches in preference proceedings. NetBank, 424 B.R. at 572 (referring to Barnhill v. Johnson, 503 U.S. 393, 112 S.Ct. 1386, 118 L.Ed.2d 39 (1992)). In Barnhill, the Court affirmed the Tenth Circuit's holding that a transfer by check is "made” at the time the check is honored, for purposes of 11 U.S.C. § 547(b), because "such a rule was consistent with the provisions of the Uniform Commercial Code (U.C.C.), was capable of easier proof, and was less subject to manipulation.” Barnhill, 503 U.S. at 396, 112 S.Ct. 1386.
. The plaintiff's response to the defendant’s cross-motion for summary judgment states an intention to file a motion for leave to amend the complaint to seek the avoidance of the transfer of vacation pay as a preference. Although no such motion has been filed to date, the vacation pay would not be avoidable for the same reason that the severance payments are not avoidable, i.e., because the payments were made prior to the applicable 90-day preference period. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494783/ | MEMORANDUM
SHELLEY D. RUCKER, Bankruptcy Judge.
Defendants F. Scott Leroy d/b/a LeRoy & Bickerstaff, F. Scott LeRoy; LeRoy & Bickerstaff, PLLC; LeRoy, Hurst & Bick-erstaff, PLLC (collectively “LeRoy Defendants”); and C. Kenneth Still, trustee (“Trustee”) move this court to dismiss the complaint of Plaintiff Nelson E. Bowers, II (“Bowers” or “Plaintiff”) in this adversary proceeding. [Doc. Nos. 32, 50].1 Richard L. Banks, Andrew B. Morgan, and Richard Banks and Assoc. P.C. (collectively the “Banks Defendants” and Steve A. McKenzie (“Debtor”) have not joined in the motion to dismiss. Plaintiff opposes the motions of the Trustee and the LeRoy Defendants.) [Doc. Nos. 39, 59].
The court has reviewed the briefing filed by the parties, the pleadings at issue, and the applicable law and makes the following findings of fact and conclusions of law pursuant to Fed. R. Bankr.P. 7052. Due to Bowers’ claims being identical to claims brought by his attorneys, Grant Konvalin-ka & Harrison, P.C. (“GKH”), against *276these same defendants in other adversary proceedings that this court has previously dismissed and for the reasons previously stated as discussed below, the court will DISMISS Plaintiffs claims against the Le-Roy Defendants and the Trustee on the basis of immunity. See [Adv. Proc. No. 11-1016, Doc. Nos. 68, 69; Adv. Proc. No. 11-1121, Doc. Nos. 14,15].
I. Background Facts
A. Summary of Related Litigation
The court has traveled this road several times before. It has summarized substantially similar facts involving these same parties in several other memoranda filed in both the main bankruptcy case and in separate adversary proceedings involving similar allegations. See e.g. [Adv. Proc. 11-1016, Doc. No. 68; Bankr. Case No. OS-16378, Doc. Nos. 1199, 1387; Adv. Proc. 11-1121, Doc. Nos. 14, 16]. Therefore, in the interest of conservation of judicial resources, the court will incorporate much of its findings of fact and legal analysis from these other rulings by reference as noted below.
The record reveals that Bowers filed his complaint (“Complaint”) on December 15, 2011. [Doc. No. 1]. The Complaint asserts that Bowers is a resident of Chattanooga, Tennessee. He was a business associate in a number of transactions with the Debt- or prepetition and was a 50% owner with the Debtor in a limited liability company, Cleveland Auto Mall, LLC (“CAM”), which owned acreage at Exit 20 on Interstate 75 in Cleveland, Tennessee.
Defendants Banks and Morgan are attorneys who are affiliated with defendant Richard Banks & Associates, P.C. Mr. Banks represented the Debtor, Steven McKenzie, in the Debtor’s main bankruptcy case. Defendant F. Scott LeRoy is also an attorney. He was formerly a general partner with the law firm of LeRoy & Bickerstaff. The Complaint asserts that Mr. LeRoy became a member of a professional limited liability company known as LeRoy & Bickerstaff, PLLC around July 28, 2010, and that the company is now called LeRoy, Hurst & Bickerstaff, PLLC. Defendant C. Kenneth Still is the trustee in the Debtor’s main bankruptcy ease. See Complaint, ¶¶ 1-4.
On November 20, 2008 a group of petitioning creditors filed an involuntary petition in bankruptcy against the Debtor in this court. See [Bankruptcy Case No. OS-16378, Doc. No. 1]. On December 10, 2008 the Debtor in his capacity as one of the two members of CAM executed a deed on behalf of CAM which conveyed 50 acres of real property to another limited liability company, Exit 20 Auto Mall, LLC. The Debtor had no ownership in Exit 20 Auto Mall, LLC; however, Bowers had an interest in Exit 20 Auto Mall, LLC. On December 20, 2008 the Debtor filed a Chapter 11 voluntary petition for bankruptcy, Bankruptcy Case No. 08-16987. On January 16, 2009 this court consolidated the two bankruptcy cases. [Bankruptcy Case No. 08-16378, Doc. No. 33]. The Debtor operated as a debtor-in-possession until a trustee was appointed.
The court appointed Mr. Still Chapter 11 trustee for the Debtor on February 20, 2009. [Bankruptcy Case No. 08-16378, Doc. No. 140]. The court converted the case to a Chapter 7 case on June 14, 2010, and Mr. Still continued as the Chapter 7 trustee. [Bankruptcy Case No. 08-16378, Doc. No. 789],
On April 3, 2009 the court granted the Trustee’s application to employ the law firm of Evans LeRoy & Hackett, PLLC as his local counsel. [Bankruptcy Case No. 08-16378, Doc. No. 238]. On July 1, 2010 this court granted the Trustee’s application to employ Mr. Banks as special litiga*277tion counsel to pursue action against Bowers among others. [Bankruptcy Case No. 08-16378, Doc. No. 806],
The Trustee brought two lawsuits against Bowers arising from the transactions between CAM and Exit 20 Auto Mall, LLC. In this adversary proceeding Bowers asserts that both lawsuits were maliciously prosecuted and abused process. The first lawsuit on which Bowers relies was filed against Bowers and others on August 5, 2010 by the Trustee. Adversary Proceeding 10-1407 (“50 Acre Lawsuit”). See [Adv. Proc. No. 10-1407, Doc. No. 1 (“50 Acre Complaint”) ]. Mr. LeRoy signed the 50 Acre Complaint on behalf of the Trustee.
The 50 Acre Complaint alleged five categories of claims against Bowers: 1) violation of the automatic stay; 2) avoidance of preferences; 3) avoidance of fraudulent transfers; 4) equitable subordination; and 5) claims against insiders. The 50 Acre Complaint alleged that Bowers assisted another defendant, GKH, to create an entity to receive property of the Debtor’s bankruptcy estate after the filing of the involuntary petition in bankruptcy in violation of the automatic stay pursuant to 11 U.S.C. § 362.
The factual allegations all relate to events surrounding the December 10, 2008 member interest transfer of fifty acres of real estate in Bradley County from CAM to Exit 20 Auto Mall, LLC. The Trustee brought all five claims against GKH, John Anderson, a partner at GKH, and Bowers.
The court has reviewed the alleged facts underlying the 50 Acre Complaint in several other opinions, and the court hereby incorporates its prior recitation of such facts by reference. See [Bankr. Case No. 08-16378, Doc. Nos. 1199, 1387]; [Adv. Proc. No. 11-1016, Doc. No. 68, pp. 3-6]; [Adv. Proc. No. 11-1121, Doc. No. 14, pp. 2-12; Doc. No. 16, pp. 5-14], The court hereby incorporates its factual findings relating to the 50 Acre Lawsuit as described in its memorandum pertaining to Adversary Proceeding Number 11-1016 (“50 Acre M7P Lawsuit”). See [Adv. Proc. No. 11-1016, Doc. No. 68].
The second lawsuit on which Bowers relies was one brought in Bradley County Chancery Court, on August 6, 2010, by the Trustee and the Debtor, Docket No. 2010-CV-251, against Bowers; Exit 20 Auto Mall, LLC; John Anderson; and GKH (“Malpractice Lawsuit”). See [Adv. Proc. No. 11-1121, Doc. No. 1-3, Ex. 1 (“Malpractice Complaint”) ].2 The Trustee and the Debtor asserted causes of action against Bowers and other defendants, including GKH, for breach of fiduciary duty, conflict of interest and civil conspiracy. Id. In addition, the Trustee brought a claim of assisting a fiduciary on committing a breach of duty against Bowers alone. This claim raised allegations of breach of fiduciary duty owed to the Debt- or as a business partner, as well as undue influence, fraud, and deceit. [Adv. Proc. No. 11-1121, Doc. No. 1-3, Malpractice Complaint, ¶¶ 36 — 42].
The Malpractice Complaint was resolved by an order of the Chancery Court finding that the Statute of Limitations had run on the claims for breach of fiduciary duty and conflicts of interest arising from the execution of the deed in December 2008. [Doc. No. 1-18, Order of Chancellor Bryant Entered January 26, 2011]. The remaining claims against Bowers and others were voluntarily dismissed by the Debtor and the Trustee. See [Doc. No. 1-21, Agreed *278Order Clarifying Court’s Order Entered January 26, 2011 and Resolving Two Pending Motions and Hearing Transcript from February 22, 2011]. GKH was the first defendant to bring a malicious prosecution case against the Trustee, the Debtor and their joint counsel, the Banks Defendants, based on the prosecution of the Malpractice Lawsuit, Adversary Proceeding No. 11-1121 (“GKH Malpractice M/P Lawsuit”). The court dismissed that action as to the Trustee on the basis that the Trustee had immunity in bringing the Malpractice Complaint. [Adv. Proc. No. 11-1121, Doc. Nos. 14,15]. Bowers now brings this adversary proceeding making the same allegations against the Trustee and his counsel.
This court has described the facts underpinning the Malpractice Complaint in several other memoranda. See [Bankr. Case No. 08-16378, Doc. No. 1199, pp. 1-5; Doc. No. 1387, pp. 2-8]; [Adv. Proc. No. 11-1121, Doc. No. 14, pp. 2-12; Doc. No. 16, pp. 5-14]. Bowers’ claims of malicious prosecution and abuse of process relating to the Malpractice Lawsuit are identical to the claims brought by GKH in Adversary Proceeding No. 11-1118 and the claims removed from state court by the Trustee in the GKH Malpractice M/P Lawsuit. Bowers alleges no additional basis for his tort claims arising from the Trustee’s prosecution of a claim for assisting a fiduciary in breaching a fiduciary duty. In addition, Bowers’ two tort claims are based on the same facts as the facts alleged by GKH against the Trustee in Adversary Proceeding No. 11-1118 and the GKH Malpractice M/P Lawsuit. Therefore, as this court has recounted the exact allegations that have led to Bowers’ claims against the Defendants on multiple occasions, the court will refrain from paraphrasing them here. The court hereby incorporates by reference its findings of fact made in these prior memoranda relating to the Debtor’s main bankruptcy case and to the GKH Malpractice M/P Lawsuit brought by GKH against the Trustee, the Debtor, and the Banks Defendants, Adversary Proceeding No. 11-1121. See [Bankr. Case No. 08-16378, Doc. No. 1199, pp. 1-5; Doc. No. 1387, pp. 2-8]; [Adv. Proc. No. 11-1121, Doc. No. 16, pp. 5-14; Doc. No. 14, pp. 2-12].
B. 50 Acre M/P Lawsuit Claims and Arguments
In the 50 Acre M/P Lawsuit, GKH brought claims of malicious prosecution and abuse of process against the Trustee and the LeRoy Defendants. [Adv. Proc. No. 11-1016, Doc. No. 1]. In asserting its claims, GKH alleged that the Trustee and the LeRoy Defendants failed properly and diligently to conduct an investigation into their claims against GKH. GKH alleged that the Trustee and the LeRoy Defendants brought the 50 Acre Lawsuit with malice and in an attempt to extort settlement proceeds from GKH. The Trustee and the LeRoy Defendants moved to dismiss the 50 Acre Lawsuit. [Adv. Proc. 11-1016, Doe. Nos. 41, 48]. In their briefs supporting the motions to dismiss, these defendants argued that the Bankruptcy Code preempted GKH’s claims; the 50 Acre Complaint did not contain sufficient allegations of fact to state claims for relief; and that service of the summons and complaint was insufficient. Id.
This court then ordered the parties to file supplemental briefing addressing the question of trustee immunity, including the specific cases of Kirk v. Hendon (In re Heinsohn), 231 B.R. 48 (Bankr.E.D.Tenn. 1999); Kirk v. Hendon (In re Heinsohn), 247 B.R. 237 (E.D.Tenn.2000); Honigman, Miller, Schwartz & Cohn v. Weitzman (In re DeLorean Motor Co.), 155 B.R. 521 (9th Cir. BAP 1993); and Lowenbraun v. Canary (In re Lowenbraun), 453 F.3d 314 *279(6th Cir.2006). [Adv. Proc. No. 11-1016, Doc. No. 60], The Trustee and the LeRoy Defendants filed the requested briefing addressing trustee immunity. [Adv. Proc. No. 11-1016, Doc. Nos. 62, 63]. GKH also filed supplemental briefing arguing that the Trustee and the LeRoy Defendants could not obtain the benefit of the doctrine of immunity due to their willful and deliberate acts of misconduct and for the reason their actions were ultra vires outside the scope of their authority. [Adv. Proc. No. 11-1016, Doc. No. 65]. In its memorandum issued along with the order granting the Trustee’s and LeRoy Defendants’ motions to dismiss, the court reviewed the issue of trustee immunity, the trustee’s duties under the Bankruptcy Code, the extension of trustee immunity to counsel for the trustee, whether the Trustee’s actions were beyond the scope of his authority or ultra vires, probable cause for the Trustee’s actions, and the defendants’ arguments pertaining to preemption, failure to state a claim, and improper service. [Adv. Proc. No. 11-1016, Doc. No. 68].
C. GKH Malpractice M/P Lawsuit Claims and Arguments
In the GKH Malpractice M/P Lawsuit GKH brought claims against the Trustee for malicious prosecution and abuse of process in Hamilton County Circuit Court. The GKH Malpractice M/P Complaint quoted extensively from the Malpractice Complaint and alleged that GKH and Bowers had both moved to dismiss the Malpractice Complaint. [Adv. Proc. No. 11-1121, Doc. No. 1-2], The GKH Malpractice M/P Complaint also quoted extensively from the hearing transcript of the hearing dismissing the 50 Acre Lawsuit. Id. GKH asserted in its GKH Malpractice M/P Complaint that the Trustee should have known he lacked probable cause for the Malpractice Lawsuit claims following the dismissal of the 50 Acre Lawsuit. Id. In its claims section GKH asserted that the Trustee brought the Malpractice Lawsuit with malice and in an attempt to extort settlement funds from GKH. It further asserted that the Trustee failed to conduct basic legal research relating to his claims. Id.
The Trustee removed the GKH Malpractice M/P Complaint to this court. [Adv. Proc. No. 11-1121, Doc. No. 1]. GKH moved to remand the GKH Malpractice M/P Lawsuit, and the Trustee moved to dismiss the claims against him. [Adv. Proc. No. 11-1121, Doc. Nos. 3, 5]. In his brief supporting his motion to dismiss, the Trustee argued that he is absolutely immune for his actions taken in filing the Malpractice Complaint. [Adv. Proc. No. 11-1121, Doc. No. 5]. The Trustee relied on many of the same cases that the court asked the parties to address in its order for supplemental briefing relating to the 50 Acre M/P Lawsuit. Id. The Trustee also argued that the GKH Malpractice M/P Complaint failed to state a claim and that GKH’s claims were preempted by the Bankruptcy Code. Id.
In response to the Trustee’s motion to dismiss, GKH argued that its allegations in the GKH Malpractice M/C Complaint and its companion bankruptcy adversary proceeding, Adversary Proceeding No. li-li 18, raised sufficient issues of fact in support of its claims for malicious prosecution and abuse of process to withstand a motion to dismiss. [Adv. Proc. No. 11-1118, Doc. No. 21; Adv. Proc. No. 11-1121, Doc. No. 8]. GKH also argued that the Trustee was not entitled to immunity based on his willful and deliberate acts of misconduct. It further asserted that the Trustee’s actions exceeded the scope of his authority and were thus ultra vires. Id. In making these arguments, GKH relied on many of the same cases it relied on for support of its opposition to the motions to *280dismiss the 50 Acre M/P Lawsuit, including Teton Millwork Sales v. Schlossberg, 311 Fed.Appx. 145, 2009 WL 323141 (10th Cir.2009); Leonard v. Vrooman, 383 F.2d 556 (9th Cir.1967); In re Markos Gurnee Partnership, 182 B.R. 211 (Bankr.N.D.Ill. 1995); and Ziegler v. Pitney, 139 F.2d 595 (2d Cir.1943). Compare [Adv. Proc. No. 11-1118, Doc. No. 21, pp. 37-42] and [Adv. Proc. No. 11-1016, Doc. No. 65, pp. 7-10].
In its opinion this court again addressed the doctrine of trustee immunity, a trustee’s duties under the Bankruptcy Code, the exceptions to the doctrine of trustee immunity, such as breach of fiduciary duty, ultra vires actions, balancing the interests of third parties, and not obtaining approval from this court to sue. [Adv. Proc. No. 11-1121, Doc. No. 14]. The court addressed many of the same cases that GKH relied upon in its opposition to the motion to dismiss the 50 Aere M/P Lawsuit. See id. at pp. 27-29. The court also addressed arguments pertaining to failure to state a claim and indicated that it would continue to decline to address preemption because it would constitute dicta. Id. at pp. 34-38.
D. Similarities Between Bowers’ Claims and Arguments and GKH’s Claims and Arguments Raised in the 50 Acre M/P Lawsuit and the GKH Malpractice M/P Lawsuit
In his Complaint Bowers alleges malicious prosecution and abuse of process claims against the Trustee for his role in prosecuting the 50 Acre Lawsuit and the Malpractice Lawsuit and against the Le-Roy Defendants for their role in prosecuting the 50 Acre Lawsuit. The Complaint quotes extensively from the Malpractice Complaint and discusses the facts pertaining to the dismissal of the 50 Acre Lawsuit. [Doc. No. 1]. It also quotes extensively from the hearing pertaining to the dismissal of the 50 Acre Lawsuit. The Complaint further discusses the Trustee’s failure to dismiss the Malpractice Lawsuit following the bankruptcy court’s dismissal of the 50 Acre Lawsuit. Bowers’ Complaint recounts the resolution of the Malpractice Lawsuit following the dismissal of the 50 Acre Lawsuit. Bowers asserts that the Trustee and the LeRoy Defendants lacked probable cause for their actions, in much the same way that GKH asserted lack of probable cause in the 50 Acre M/P Lawsuit and the GKH Malpractice M/P Lawsuit. Bowers alleges in his Complaint that the defendants failed to conduct research into the basic law behind their claims and brought such claims in an attempt to extort settlement proceeds from Bowers. Id. at pp. 23-24. These allegations mirror the allegations that GKH made against the Trustee and the LeRoy Defendants in the 50 Acre M/P Lawsuit and the GKH Malpractice M/P Lawsuit.
The LeRoy Defendants and the Trustee have moved to dismiss this adversary proceeding. [Doc. Nos. 32, 50]. In their motions to dismiss, these defendants raise the same arguments that were raised in their motions to dismiss the 50 Acre M/P Lawsuit and the GKH Malpractice M/P Complaint brought by GKH. In this motion the LeRoy Defendants outline the history of the various related adversary proceedings and motions in the main bankruptcy case, including the 50 Acre Lawsuit and the Malpractice Complaint. The LeRoy Defendants and the Trustee argue that they are immune from Bowers’ tort claims, his tort claims are preempted by the Bankruptcy Code, and that he fails to state a prima facie case for his two tort claims. [Doc. No. 33, p. 12], As the LeRoy Defendants note, “[t]hese factual and legal issues have all come up before....” Id. The Le-Roy Defendants and the Trustee again discuss the relevance of the cases the court ordered them to address in supplemental *281briefing in the 50 Acre M/P Lawsuit, including In re Heinsohn, 231 B.R. at 60-61; Allard v. Weitzman (In re DeLorean Motor Co.), 991 F.2d 1236 (6th Cir.1993), and In re Lowenbraun, 453 F.3d 314. [Doc. No. 33, p. 16]; [Adv. Proc. No. 11-1016, Doc. No. 60]. The Trustee and the LeRoy Defendants also address the scope of the Trustee’s duties and how the filing of the actions against Bowers was within the scope of those duties.
In his response to the LeRoy Defendants’ motion to dismiss, Bowers echoes the same arguments that GKH made in its opposition to motions to dismiss the 50 Acre M/P Lawsuit and the GKH Malpractice M/P Lawsuit. Compare [Doc. No. 39] with [Adv. Proc. No. 11-1016, Doc. Nos. 54, 65] and [Adv. Proc. No. 11-1121, Doc. No. 8]. This is not surprising as GKH represents Bowers in this adversary proceeding. Bowers argues that he has sufficiently pled his claims of malicious prosecution and abuse of process, but adds no new facts to those previously alleged by GKH about the Trustee’s and the LeRoy Defendants’ actions for the court to consider. As in prior filings by GKH, Bowers quotes extensively from other pleadings related to the various adversary proceedings. Bowers also argues that the Trustee’s and the LeRoy Defendant’s actions were ultra vires and again relies on cases already addressed by this court in its memoranda pertaining to the 50 Acre M/P Lawsuit and the GKH Malpractice M/P Lawsuit, including Teton Millwork Sales, 311 Fed.Appx. 145; Leonard, 383 F.2d 556; Ziegler, 139 F.2d 595; and In re Markos Gurnee Partnership, 182 B.R. 211. [Doc. No. 39, pp. 23-24], Bowers also addresses cases this court cited in its memorandum opinion dismissing the 50 Acre M/P Lawsuit. Id. at 28-29; [Adv. Proc. No. 11-1016, Doc. No. 68, pp. 22-24], Bowers further discusses the preemption argument that has been addressed by GKH. [Doc. No. 39, pp. 36-41].
II. Standard of Review
Federal Rule of Civil Procedure 12(b)(6) allows a party to move to dismiss a complaint for failure to state a claim upon which relief can be granted. Fed.R.Civ.P. 12(b)(6). In reviewing a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), a court must “treat as true all of the well-pleaded allegations of the complaint.” Bower v. Federal Express Corp., 96 F.3d 200, 203 (6th Cir.1996)). In addition, a court must construe all allegations in the light most favorable to the plaintiff. Bower, 96 F.3d at 203 (citing Sinay v. Lamson & Sessions, 948 F.2d 1037, 1039 (6th Cir.1991)).
The Supreme Court has explained “an accepted pleading standard” that “once a claim has been stated adequately, it may be supported by showing any set of facts consistent with the allegations in the complaint.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 1969, 167 L.Ed.2d 929 (2007). The complaint “ ‘must contain either direct or inferential allegations respecting all the material elements to sustain a recovery under some viable legal theory.’ ” In re DeLorean Motor Co., 991 F.2d at 1240 (quoting Scheid v. Fanny Farmer Candy Shops, Inc., 859 F.2d 434, 436 (6th Cir.1988)).
In Twombly the Supreme Court emphasized that:
[w]hile a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiffs obligation to provide the “grounds” of his “entitle[ment] to relief’ requires more than labels and conclusions, and a formulaic recitation' of the elements of a cause of action will not do, ... Factual allegations must be enough to raise a right to relief above the speculative lev*282el, on the assumption that all the allegations in the complaint are true (even if doubtful in fact).
127 S.Ct. at 1964-65 (citations omitted). See also, Papasan v. Allain, 478 U.S. 265, 286, 106 S.Ct. 2932, 92 L.Ed.2d 209 (1986) (noting that “[although for the purposes of this motion to dismiss we must take all the factual allegations in the complaint as true, we are not bound to accept as true a legal conclusion couched as a factual allegation”).
III. Analysis
This court has analyzed the issues raised in the motions to dismiss filed by the Trustee and the LeRoy Defendants in two other adversary proceedings in which a defendant in the case claimed the Trustee’s actions in filing and prosecuting the 50 Acre Lawsuit and the Malpractice Lawsuit were acts of malicious prosecution and abuse of process. See [Adv. Proc. No. 11-1016, Doc. No. 68, pp. 7-26; Adv. Proc. No. 11-1121, Doc. No. 14, pp. 13-38]. The 50 Acre M/P Lawsuit pertains to malicious prosecution and abuse of process claims against the Trustee and the LeRoy Defendants with respect to the 50 Acre Complaint. As it did in its memorandum granting the Trustee’s and the LeRoy Defendants’ motions to dismiss the 50 Acre M/P Lawsuit, the court finds that the Trustee has a duty to investigate the financial affairs of the Debtor and to take action to recover assets for the benefit of the estate. The pursuit of the claims in the 50 Acre Lawsuit against Bowers arise out of the same facts as the claims pursued against GKH and constitute actions taken within the scope of the Trustee’s duties. Although the Trustee was unsuccessful, because the prosecution of the lawsuit was within the scope of his duties, the Trustee is entitled to immunity. The court adopts the authorities cited and reasoning expressed in its memorandum opinion entered on August 12, 2011 in the 50 Acre M/P Lawsuit. [Adv. Proc. 11-1016, Doc. No. 68]; Grant, Konvalinka & Harrison, P.C. v. Banks et al. (In re McKenzie), No. 11-1016, 2011 WL 3585622, at *5-18 (Bankr.E.D.Tenn. Aug. 12, 2011). Based on that analysis, the court also finds that the LeRoy Defendants, as counsel for the Trustee, are also immune.
With respect to the Malpractice Lawsuit, the court finds that the Trustee was also acting within the scope of his duties in bringing that lawsuit against Bowers and is immune from liability for bringing that lawsuit. The court adopts the authorities cited and reasoning expressed in its memorandum opinion issued on March 30, 2012 [Adv. Proc. 11-1121, Doc. No. 14] in support of its finding in this case. See Grant, Konvalinka & Harrison, P.C. v. Banks et al. (In re McKenzie), No. 11-1121, 2012 WL 1116034, at *8-23 (Bankr.E.D.Tenn. Mar. 30, 2012).
In the Malpractice Lawsuit, the Debtor and the Trustee brought two counts against all of the defendants — conflicts of interest/breach of fiduciary duty was designated as Count I and civil conspiracy was designated as Count III. They also brought one count, not quoted in this Complaint, against only Bowers designated as Count II — Assisting a fiduciary in breaching his fiduciary duty. Count II was based on the same factual allegations as the other two counts. Since this count was not brought against GKH, the court has not addressed whether the prosecution of this claim is also subject to the Trustee’s defense of immunity.
In the Malpractice Lawsuit, the Debtor and the Trustee alleged that Bowers owed a fiduciary duty to the Debtor as a result of Bowers’ business relationships with the Debtor, in particular as a fellow member of CAM. [Doc. No. 1-2, Malpractice Com*283plaint, ¶ 37]. They also alleged that all of the defendants were the dominant parties in a confidential or fiduciary relationship with the Debtor and exercised undue influence in matters of his personal and business finances. Id. at ¶ 38. They allege that Bowers committed the tort of knowingly assisting a fiduciary in committing a breach in the manner described earlier in the Malpractice Complaint. Id at ¶39. Although the specific fiduciary was not named in that paragraph of the Malpractice Complaint, the context leads the court to conclude that the fiduciary was GKH based on Count I which does specifically allege that John Anderson and GKH owed a fiduciary duty to the Debtor as his personal legal counsel. Id at ¶ 29.
In the Malpractice Lawsuit, Bowers filed a Motion to Dismiss which addressed this count. Bowers first attacked this count on the basis that the Trustee’s pleading was insufficient because there were no specific allegations that Bowers knew that John Anderson or GKH owed a fiduciary duty to the Debtor and that Bowers knew that the John Anderson and GKH were breaching such a duty by their participation in the transaction. [Doc. No. 1-7, Memorandum in Support of Motion to Dismiss, pp. 9-10]. The second defense to this count was that the claim was barred by the statute of limitation. Relying on the case of Akins v. Edmondson, 207 S.W.3d 300, 308 (Tenn.Ct.App.2006), Bowers argued that the statute for aiding and abetting is the statute of limitations applicable to the underlying substantive wrong. Id. at pp. 10-11. The Chancellor dismissed the claims for breach of fiduciary duty and conflicts of interest arising out of the signing of a deed in December 2008 because these two causes of action have a one year statute of limitations. [Doc. No. 1-18, Order Entered January 26, 2011].
Bowers does not address each count of the Malpractice Lawsuit separately in his complaint, nor in his response to the Trustee’s Motion to Dismiss. The Trustee’s motion to dismiss does seek that the Trustee be dismissed from claims based on the Malpractice Lawsuit. The court has previously found that the Trustee is immune from liability for pursuit of those claims against GKH and Bowers. The court does not find that Count II against Bowers individually should be treated any differently. It arises from the same factual allegation as the other counts. It sought monetary damages. It appears to have been successfully defended based on a statute of limitations defense.
The court finds that the prosecution of this count is also within the scope of the Trustee’s duties and the Trustee is immune from liability for bringing the claim. See [Adv. Proc. No. 11-1121, Doc. No. 14, pp. 14-16]. As this court has already noted, “[a]pplying 11 U.S.C. §§ 704(a)(1), 704(a)(4), 1115, and 323(b), the court concludes that the Malpractice Lawsuit related directly to the Trustee’s statutory duties of collecting assets, pursuing property of the estate and investigating the Debtor’s financial affairs.” Id at p. 16. The Trustee’s attempt to augment the assets of the estate with damages from Bowers for tort violations falls within the scope of his duties. See e.g. Lawrence v. Jahn (In re Lawrence), 219 B.R. 786, 801 (E.D.Tenn.1998).
Further, to the extent that this count was dismissed based on the expiration of the statute of limitations, Bowers has failed to state a claim for malicious prosecution as there was no determination on the merits. As to this ruling, the court adopts the authorities cited and reasoning expressed in its memorandum dismissing the GKH Malpractice M/P Lawsuit. [Adv. Proc. 11-1121, Doc. No. 14, pp. 35-36],
*284With respect to Bowers’ arguments that the Trustee is not entitled to immunity because his actions were ultra vires, as this court noted, the standing to raise the ultra vires exception to the Barton doctrine requires the aggrieved party to be the owner of the property tortiously taken and requires a physical taking. See [Doc. No. 11-1121, Doc. No. 14, p. 28]. See also, In re DeLorean Motor Co., 991 F.2d at 1241 (explaining the Barton Doctrine). As the court explained with respect to GKH, Bowers “has never alleged that he owned the real property that the Trustee was trying to recover in the 50 Acre Lawsuit”; therefore, Bowers has no standing to complain about the Trustee’s allegedly ultra vires action in trying to recover the transfer of 50 acres for the benefit of the estate. Id. Further, even if the corporate veil of Exit 20 Auto Mall, LLC were pierced and Bowers were found to be the owner, there is no allegation that the Trustee ever seized or controlled that real property. The court hereby incorporates its legal analysis from its memoranda pertaining to the Trustee’s and the LeRoy Defendants’ motions to dismiss the 50 Acre M7P Lawsuit and the GKH Malpractice M/P Lawsuit. [Adv. Proc. No. 11-1016, Doc. No. 68, pp. 7-26; Adv. Proc. No. 11-1121, Doc. No. 14, pp. 18-38] and finds that the ultra vires exception to immunity is not applicable here.
The Plaintiff has failed to raise new arguments or issues that require further analysis. The court has reviewed Bowers’ opposition to the LeRoy Defendants’ and the Trustee’s motions to dismiss and concludes that it has adequately addressed all of Bowers’ other contentions in its prior opinions as cited above. Therefore, the court will decline to engage in further explication of its finding that the LeRoy Defendants and the Trustee are immune from Bowers’ claims. See [Adv. Proc. No. 11-1016, Doc. No. 68, pp. 7-26; Adv. Proc. No. 11-1121, Doc. No. 14, pp. 13-38]; In re Heinsohn, 231 B.R. at 50; In re Lowenbraun, 453 F.3d at 319; Matter of Linton, 136 F.3d 544 (7th Cir.1998). The claims of malicious prosecution and abuse of process against the Trustee and the LeRoy Defendants will be DISMISSED with prejudice.
IY. Conclusion
As explained supra, the court concludes that the LeRoy Defendants and the Trustee are entitled to immunity from further prosecution of this adversary proceeding against them. The Trustee and his counsel are protected by the doctrine of immunity. The Trustee’s and the LeRoy Defendants’ motions to dismiss will be GRANTED. Bowers’ claims against them will be DISMISSED with prejudice.
A separate order will enter.
SO ORDERED.
. All citations to docket entries pertain to docket entries for Adversary Proceeding 11-1169, unless otherwise noted.
. Bowers admits that the LeRoy Defendants were not involved in the Malpractice Lawsuit (see Doc. No. 1, p. 4, ¶ 14; Doc. No. 39, p. 3); therefore, the claims pertaining to the Malpractice Complaint are not brought against the LeRoy Defendants. | 01-04-2023 | 11-22-2022 |
Subsets and Splits
No community queries yet
The top public SQL queries from the community will appear here once available.